Flashcards in Accounting Past Papers Deck (54)
Identify three accounting concepts/principles that are applied when preparing financial statements.
Business Entity also known as Accounting Entity Concept.
Accruals Concept and the Matching Principle.
Dual Aspect Concept.
Explain what Business Entity )also known as Accounting Entity Concept) is.
The owner and the business are considered as two different persons, distinct from each other.
Transactions are recorded from the point of view of the business and not the owner. As such, any amount invested by the owner in the business is considered as a liability by the business.
Also, only those transactions that concern the business are recorded.
Explain what Accruals Concept and the Matching Principle is.
According to the Accruals concept, when calculating the profit of a given period, revenues earned in that period need to be matched against expenses incurred for that same period. This is done irrespective of amount received as revenue or amount paid for the expenses.
According to the matching principle, when calculating profit, revenues need to be matched against those expenses incurred to earn the revenues.
Explain what the Dual Aspect Concept is.
This concept takes into account the two aspects of a accounting represented on one side by the assets of the business and on the other by the claims against those assets.
This duality is also explained by the accounting equation as follows:
Assets = Capital + Liabilities
Explain the purpose of the bank reconciliation.
A bank reconciliation is a process performed by a company to ensure that the company's records (check register, general ledger account, balance sheet, etc.) are correct and that the bank's records are also correct.
Explain fully the findings of the bank reconciliation will have on the financial statements.
As mentioned above, performing a bank reconciliation is necessary for the accuracy of the accounting records and for the company's financial statements.
Bank reconciliations are also associated with a company's internal controls over cash.
If the bank reconciliation is performed by someone other than the authorized check signers and record keepers, the company has improved its internal control over cash.
Define the term 'contribution'.
Contribution is the amount of earnings remaining after all direct costs have been subtracted from revenue.
This remainder is the amount available to pay for any fixed costs that a business incurs during a reporting period. Any excess of contribution over fixed costs equals the profit earned.
How do you calculate the contribution margin?
Contribution Margin = Sales - Variable Costs
How do you calculate the break-even point in UNITS?
Fixed Cost / (Sales Price - Variable Cost)
How do you calculate the break-even point for REVENUE?
Break-even point (units) X Sales Price
Explain the term 'margin of safety'.
Margin of safety is a principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value.
In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk.
How do you calculate the margin of safety in UNITS terms?
Margin of Safety = Total budgeted or actual sales − Break even sales.
How do you calculate the margin of safety in PERCENTAGE terms?
Margin of Safety / Actual Sales X 100
Outline and explain the assumptions of the break-even analysis.
(1) All costs can be categorized as fixed or variable costs.
(2) Total fixed costs remain unchanged for all output levels.
(3) Total variable costs fluctuate proportionately with output level resulting in no change in per unit variable cost.
(4) Sale price per unit remains the same for each output level.
(5) Costs and revenue behave in a linear fashion within a relevant range.
(6) No factor other than sales volume can affect costs and sales revenue.
(7) The analysis relates to businesses producing one product only or a constant product mix.
(8) The technology, production methods and efficiency remain unchanged.
(9) There are no inventories at start or at end of the accounting period or inventory levels are expected to remain constant.
What's the definition of an asset?
“a resource controlled by the entity as a result of past
events and from which future economic benefits are
expected to flow to the entity”
What are liabilities?
“a present obligation of the entity arising from past
events, the settlement of which is expected to result in
an outflow from the entity of resources”
What is Capital/Equity/Ownership Interest?
“the residual interest in the assets of the entity after deducting all its liabilities”
the amount(s) invested by the owner(s) of the entity
(amounts owed to owners)
“decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants”
Define Income / Revenue / Gains?
“increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants”
Distinguish between variable costs and fixed costs.
A variable cost is one which varies directly with changes in the level of activity, over a defined period of time.
A fixed cost is one which is not affected by changes in the level of activity, over a defined period of time.
Semi-variable = fixed + variable.
Step cost = fixed cost increases by steps.
What are Sunk Costs?
Costs created by a decision made in the past and cannot be changed by any future decisions.
Sunk Costs are irrelevant costs
(not all irrelevant costs are sunk costs)
Distinguish between relevant and irrelevant costs and revenues.
Relevant Costs / Revenues
future costs / revenues that will be changed by a decision
Irrelevant Costs / Revenues
will not be affected by a decision
Example: Going to Glasgow to watch the football and do some shopping.
Do I take my own car or go by train?
Relevant costs – fuel for car, car parking
Irrelevant costs – car tax, car insurance
What are examples of fixed costs?
Salary paid to a supervisor.
Advertising in the trade journals.
Business rates paid to the local authority.
Depreciation of machinery calculated on the straight-line basis.
What are Period and Product Costs?
for profit measurement and stock valuation
identified with goods purchased / produced for sale (include direct & indirect production costs)
not included in the inventory valuation and are treated as expenses in the period in which they are incurred
How do you calculate the gross profit?
Sales - Cost of Goods Sold
How do you calculate the selling price for a unit?
(Total fixed costs + Total variable costs) / Total units produced
How do you calculate the net profit?
Total Revenue -Total Expenses = Net Profit
Distinguish between marginal costing and fixed costing.
Marginal costing is a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production, e.g., materials, labor, direct expenses and variable overheads.
Fixed overheads are excluded in cases where production varies because it may give misleading results. The technique is useful in manufacturing industries with varying levels of output.
The practice of charging all costs both variable and fixed to operations, products or processes is termed as absorption costing. (Fixed Costing)
Distinguish between Financial Accounting and Managerial Accounting.
Aggregation. Financial accounting reports on the results of an entire business. Managerial accounting almost always reports at a more detailed level, such as profits by product, product line, customer, and geographic region.
Financial accounting reports on the profitability (and therefore the efficiency) of a business, whereas managerial accounting reports on specifically what is causing problems and how to fix them.