FA2

Overstatement & Understatement of inventories

1) If closing inventory is undervalued net profit & net assets are understated 2) If both purchases and closing inventory are overstated by the same amount, net income is not affected. 3) If opening inventory is understated:Net income is overstated. ** Note: Inventory should be valued at the lower of cost & net realisable value.

In a period of rising raw materials prices the following points are true

1. Closing inventory values will be higher using AVCO than Periodic Weighted Costs. 2. Closing inventory valued will be higher using FIFO rather than LIFO 3. Under FIFO, production costs would be lower than under LIFO 4. In a period of falling raw material prices the opposite will occur.

The conceptual framework of accounting

1. GOING CONCERN: the assumption that the business will continue functioning in the foreseeable future. 2. ACCRUALS: income and expenses should be matched on a time basis, not just when cash is received or paid. 3. CONSISTENCY: financial statements should be drawn up using the same approaches each year. 4. DOUBLE ENTRY: every transaction has matching Debit and Credit entries in the bookkeeping system. 5. BUSINESS ENTITY: accounting records record the transactions of the business entity, not the transactions of its owners. 6. MATERIALITY: an item is material if its misstatement could alter the economic decisions of user of the financial statements. 7. HISTORICAL COST: transactions are recorded at their historical cost. PRUDENCE: Do not overestimate amount of revenues recognised or underestimate the amount of expense.

Qualitative Characteristics of Accounting

1. RELEVANCE: financial information is regarded as relevant if it is capable of influencing the decisions of users. 2. FAITHFUL REPRESENTATION: financial information must be complete, neutral and free from error otherwise it will mislead users of the financial statements. 3. COMPARABILITY: financial information should be capable of being compared over time and with similar information about other entities. 4. VERIFIABILITY: the accounting information should be capable of being verified through auditing procedures. 5. TIMELINESS: information should be provided quickly enough to be of use in decision-making. 6. UNDERSTANDABILITY: information should be presented in a way that makes it understandable to users.

Gross profit Margin to find sales

A gross profit percentage is always defined to the Sales Value. Gross Profit x 100 is the usual formula to find GP Margin ------------- Net sales To find sales. You will be given the amount of Cost of sales & Gross profit Margin percentage. 1) Gross profit = Cost of sales x Gross Profit margin ---------------------------------------- 100 - Gross profit Margin 2) a. Sales = Cost of sales x 100 -------------------------- 100-GP Margin OR Sales = GP + COS

Mark up to find cost

A mark-up is always defined with respect to Cost of Sales. You will be given amount of sales and mark up percentage. 1) Gross profit = sales x mark up ------------------- 100 + mark up 2) a. Cost of Sales = sales x 100 ------------------ 100 + mark up OR b. COS = Sales - GP

IAS 16 Property, Plant and Equipment

An item of property, plant and equipment should initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use. IAS 16 permits two accounting models: ๏ Cost model. The asset is carried at cost less accumulated depreciation and impairment. ๏ Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably.

Accounting equation (4)

Assets = Capital Introduced + Retained profit in previous period + Retained profit in current period - Drawings + Liabilities

Accounting equation (5)

Assets = Capital introduced in previous period + Capital Introduced in current period + Profit retained in previous periods + Profit earned in current period - Drawings in current period + Liabilities

Accounting equation

Assets = Opening Capital + Capital Introduced + Profit - Drawings + Liabilities

Accounting equation (1)

Assets = Capital + Liabilities

Accounting equation (2)

Assets = Capital Introduced + Retained Profits + Liabilities

Accounting equation (3)

Assets = Capital introduced + (Earned profits - Drawings) + Liabilities

Depreciation - Reducing balance method

Calculates the annual depreciation charge as a fixed percentage of the Net Book Value of the asset, as at the end of the previous period. With reducing balance method the annual charge for depreciation is higher in the earlier years and lower in later years.

Accounting equations (Capital)

Capital = Net assets Capital = Asset - Liabilities Capital = Opening Capital + Capital Introduced + Profit - Drawings

Depreciation - Straight Line Method

Cost of asset - Residual Value / expected useful life The total depreciable amt is charged equal installments to each accounting period, it is often convenient to state that depreciation is charged at the rate of X% per annum on the cost of assets. NB: exam question will make it clear whether depreciation will be charged only for the period since it was purchased or for the full yr, as many business ignore the niceties of part-year depreciation and will charge full year.

When value of purchases is unknown

Cost of goods sold x Plus: Closing inventory x Less: Opening inventory (x) -------- Purchases x ======= OR Payments to Payables x Plus: Closing balance of payables x Less: Opening Balance of payables ( x ) --------- Purchases x ========

adjustment to amount of the allowance for receivables if a LOWER ALLOWANCE IS NEEDED

DEBIT Allowance for receivables CREDIT Receivables expense with the amount of the decrease **NOTE: Allowance for receivables has no effect whatsoever on sales tax.

Interest on drawings

DEBIT Partners current a/c CREDIT Appropriation a/c

Double entry for PREPAYMENT

DEBIT Prepayment (statement of financial position - asset) CREDIT Expense account (statement of profit or loss)

Allowance for receivables: to open up an allowance account

DEBIT Receivables expense CREDIT Allowance for receivables NOTE: Allowance for Receivables if it is going to the statement of profit and loss take the DIFFERENCE. If it is going to the statement of financial position deduct the newly calculated allowance from the newly calculated receivable balance.

adjustment to amount of the allowance for receivables if a HIGHER ALLOWANCE IS REQUIRED

DEBIT Receivables expense CREDIT Allowance for receivables with the amount of the increase. **NOTE: Allowance for receivables has no effect whatsoever on sales tax.

Irrecoverable debts & sales tax

DEBIT Sales Tax A/c 17.50 DEBIT Receivables expense 100.00 CREDIT Total Receivables a/c 117.50

Double entry for ACCRUAL

DEBIT expense a/c (statement of profit or loss) CREDIT Accruals (statement of financial position - liability)

Purchases are introduced to the statement of profit & loss by means of the double entry

DEBIT statement of profit or loss xx CREDIT Purchases account xx

Depreciation double entry

Depreciation charge for the period is as follows DEBIT Depreciation exp (in the statement of profit or loss) CREDIT Accumulated Depreciation (in the statement of financial position)

Disposal of non current asset

Disposal of NCA coz they are capital item being sold, the profit/loss on the sale will be a CAPITAL GAIN/LOSS. Cost of asset 25,000 Less: Accumulated Depreciation (9,000 NBV @ date of disposal 16,000 Sale Price (less any cost in making the sale) 17,500 Less: NBV 16,000 PROFIT ON DISPOSAL 1,500 PROFIT ON DISPOSAL goes to P/L as other income added to gross profit. LOSS ON DISPOSAL goes to P/L as an expense

Inventory Valuation Methods

FIFO (First in First Out) items issued are used in the order in the order in which they are received from suppliers. CONTINUOUS OR CUMULATIVE WEIGHTED AVERAGE PRICING METHOD. A new weighted average is calculated whenever a new delivery of materials into store is received. To find the new issuing price per unit take Total Inventory value / Balance of inventory PERIODIC WEIGHTED AVERAGE: Calculates the average cost of units received including opening inventory where applicable. Cost of opening stock + Total Cost of receipts ----------------------------------------------------- (over) Units of opening inventory + Total Units Received

Accounting for inventory destroyed, stolen or otherwise lost

If goods were NOT INSURED the business must bear the loss DEBIT Statement of profit or loss (expense) CREDIT Statement of profit or loss (calculation of gross profit) If goods were INSURED the business will not suffer a loss DEBIT Insurance claim account (Rcvb a/c) CREDIT Statement of Profit or Loss (calculation of gross profit) DEBIT Cash Credit Insurance claim a/c

IAS 2 Inventories

Inventories must be stated at the lower of cost & net realisable value. Net realisable value is the estimated selling price in the ordinary Course of business, less the estimated cost of completion & the estimated costs necessary to make the sale.

Carriage outwards

Is selling & distribution expense in the statement of profit or loss. It is therefore a cost which is DEDUCTED from gross profit in order to calculate net profit.

Irrecoverable debts recovered AFTER the end of financial period

Is treated as SUNDRY INCOME in the statement of profit & Loss. DEBIT Bank Account CREDIT Sundry Income - irrecoverable debt recovered

Irrecoverable debts written-off

Open-tuition DEBIT Irrecoverable debts a/c xx CREDIT Receivables Control a/c xx BPP 2015-2016 DEBIT Receivables expense a/c xx CREDIT Total Receivables a/c xx

Cash received from customers

Opening Bal of Receivables x Add: Credit sales during the period x ------- Total Money owed by customers x Less: Closing Bal of Receivables ( x ) ------- Equals: Cash rcvd during the period x =======

Partnership current account

Opening Capital goes to partners accounts CURRENT ACCOUNT: for each partner is maintained to record a range of items on a continuous basis: > Other personal benefits (Credited) > to credit salaries (Credited) > Interest on capital (credited) > share of profits (credited) > drawings (debited) > interest on drawings (debited) It is merely an extension of his capital a/c i'ts balance representing further funds invested by the partner in the firm.

cost of sales (cost of goods sold)

Opening Inventory value xx ADD: Cost of purchases (net of returns) xx Carriage in ** LESS: Closing inventory value ( xx ) **Carriage in(wards) is added to the cost of purchases in the P/L & therefore enters into the calculation of gross profit. *** Carriage out(wards) is selling & distribution exp in the P/L. It is therefore a cost which is deducted from gross profit in order to calculate net profit.

Profit

Profit = Closing Capital - Opening Capital - Capital Introduced + Drawings P=(C-O-I) + D ------------------------------------------------------------------------ Profit = Asset - Liability - Opening Capital + Drawings P = A - l - O + D

The Business equation

Profit in current period = Increase/decrease in net assets in current period ** + Drawings in current period - Capital introduced in current period ** Increase/decrease in assets -increase decrease in liabilities

Credit sales during the period

Pymts rcvd from rcvbls x Add: Closing Bal of rcvbls x Less: Opening Bal of rcvbls ( x ) -------- Credit sales during the period x =======

Cash sales during a period

Receipt Banked x ADD: Exp & Drawings paid out of cash till in cash x ADD: Any Cash stolen x ADD: Closing balance of cash in hand x LESS: Opening Balance of cash in hand (x) --------- CASH SALES X ========

IAS 18 Revenue

Revenue should be measured at the fair value of the consideration received or receivable. Recognition of revenue can occur when: ๏ It is probable that any future economic benefit associated with the item of revenue will flow to the entity, and ๏ The amount of revenue can be measured with reliability

IAS 1 Presentation of Financial Statements

Sets out the basis for presentation of how general purpose financial statements should be presented.

Irrecoverable debts recovered BEFORE the end of financial period

Simply reverse the entry for write-off; DEBIT Receivables Control A/c xx CREDIT Receivables Expense xx & then record the payment the normal way.

Important facts on depreciation

The Non-current assets accounts are UNAFFECTED by depreciation At the end of the EXPECTED LIFE, the asset is fully depreciated to its RESIDUAL VALUE. If is is continued to be used by the business it will not be depreciated any further. (unless its estimated residual value is reduced) The book of prime entry from which postings are made relating to purchase, sales & depreciation of Non-Current Assets is the JOURNAL.

Carriage inwards

Transport costs of bringing goods/materials into the factory ADDED to the cost of PURCHASES in the statement of profit or loss & therefore enters into the calculation of gross profit.

share of residual profits/losses

after allowing any interest & salaries, partners share remaining profits/losses according to their profit ratio. To calculate RESIDUAL profit: DEDUCT: Salary ADD: Interest on drawings DEDUCT: Interest on capital ------------------------------ EQUAL RESIDUAL PROFIT TO BE SHARED ============================== To calculate the profit a specific partner is entitled to re-add the interest on capital only for that specific partner.

Net Realisable Value (NRV)

is the selling price less any costs still to be incurred in getting the inventory ready to sell & selling it. * Inventory should be valued at the lower of cost & NRV Finding correct inventory value in the final accounts Cost of closing inventory Less: (Cost of damaged items) Less: (Cost to repair items for sale) Add: New selling price

Goodwill

represents the value of the partnership not represented by its tangible assets 1) When goodwill is created DEBIT Goodwill account CREDIT Capital account with value shared between the old partners in the old profit sharing ratio. 2) When goodwill is charged to the new partners in the new profit sharing ratio DEBIT Capital a/c CREDIT Good will a/c good will then have a zero balance.

Appropriation of net profit

the sharing of profit is detailed in an appropriation a/c Interest on a loan a/c represents an exp charged against profit, whereas INTEREST ON CAPITAL is an appropriation of profit. Loan interest must therefore be deducted before arriving at the figure of net profit available for appropriation

Partnership agreement

will not specify the maximum amount that a partner can loan to the business. does not need to be in written form. Even if it is advisable for any future dispute that may arise. will likely include salaries to be paid to partners. will likely include proportion in which residual profit will be shared amongst partners. Will not include detailed roles of each partner. Will not detail level of drawings each partner could take.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

๏ Provision: - a liability of uncertain timing or amount. ๏ Liability: - present obligation as a result of past events - settlement is expected to result in an outflow of resources (payment) A contingent liability is a possible obligation arising from past events that depends on a future event. For example, damages that might have to be paid are contingent on the findings of a court. Similarly, a contingent asset arises from past events but which is dependent on future events. For example, the amount of damages won can depend on the outcome of a court case.