CCP Foundation Level
Principles of Accounting flashcards
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What is the accounting equation, and how does borrowing cash affect it?
Assets = Liabilities + Equity. Double entry records every transaction as a debit and an equal credit, so the equation stays in balance. Borrowed cash raises both sides: the cash received is an asset and the loan is a liability, by the same amount.
What are the six qualitative characteristics of useful financial information?
Relevance: capable of making a difference to users' decisions. Faithful representation: complete, neutral and free from error. Comparability: can be compared across periods and entities. Verifiability: independent observers could agree it is faithfully represented. Timeliness: available in time to influence decisions. Understandability: clear to users with a reasonable knowledge of business.
How is depreciation worked out under the straight-line and reducing balance methods?
Straight line: (cost - residual value) / useful life. The same charge every year. Reducing balance: a fixed percentage x the asset's carrying value. The charge is highest in the early years and falls over time. Either way, depreciation matches the asset's cost against the periods that benefit from its use.
What is the difference between an accrual and a prepayment at the year-end?
Accrual: an expense incurred in the period but not yet paid or invoiced. It is added to the expense and shown as a liability. Prepayment: an expense already paid but relating to a future period. It is deducted from the expense and carried forward as an asset.
How is a bank reconciliation statement laid out?
Balance per bank statement + deposits not yet credited by the bank - cheques issued but not yet presented +/- bank errors, if any = balance per cash book. Items on the statement not yet in the cash book, such as bank charges, are first posted to the cash book itself.
Which six types of error leave the trial balance still balancing?
1. Omission: the transaction is left out entirely. 2. Commission: right type of account, wrong specific account. 3. Principle: wrong class of account, such as capital treated as revenue. 4. Original entry: right accounts, wrong amount on both sides. 5. Compensating errors: two errors cancel out. 6. Complete reversal: right accounts and amount, debit and credit swapped.
Where partners have no agreement on the point, what do the default rules of the Partnership Act provide?
Profits and losses are shared equally. No partner is entitled to a salary or to interest on capital. No interest is charged on drawings. Each applies only unless the partners have expressly agreed otherwise.
What is the double entry when a company issues shares at a premium?
Debit cash with the full amount received. Credit share capital with the nominal (par) value of the shares. Credit the share premium reserve with the excess over nominal value. The premium is never credited to share capital or to income. Example: 100,000 shares of KES 10 issued at KES 15 give cash KES 1,500,000, share capital KES 1,000,000 and share premium KES 500,000.
What is the difference between prime cost and production cost?
Prime cost = direct materials + direct labour + direct expenses: the costs traced directly to the product. Production cost = prime cost + factory overheads, such as factory rent, supervisors' salaries and machinery depreciation.
How are the current ratio and the quick (acid-test) ratio calculated?
Current ratio = current assets / current liabilities. Quick ratio = (current assets - inventory) / current liabilities. Both are liquidity ratios: they measure the ability to meet short-term obligations.
What are the five elements of accounting statements?
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What do lenders, suppliers and KRA each want from a business's financial statements?
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What is the going concern concept?
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What does the prudence concept require?
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What is the business entity concept?
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How do the accrual and matching concepts differ?
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What are the five fundamental ethical principles accountants observe?
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What are the six steps of the accounting cycle, in order?
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Which side records an increase in each type of account?
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What does each book of original entry record?
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How does the imprest system for petty cash work?
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What does a balancing trial balance prove, and what does it not?
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How does the statement of financial performance differ from the statement of financial position?
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What are the five components of a computerised accounting system?
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Give the main advantages and challenges of computerised accounting.
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How is a profit or loss on disposal found, and what counts as the proceeds?
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How is the PPE movement schedule built?
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What is the difference between a bad debt written off and a provision for doubtful debts?
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What reaches profit when the provision for doubtful debts changes?
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How is a bad debt recovered treated?
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What is the difference between a provision and a reserve?
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How is the closing balance of a sales ledger control account built up?
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What is a suspense account for?
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Which internal controls reduce both error and fraud?
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How are cost of sales, gross profit and net profit worked out for a sole trader?
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How is a sole trader's closing capital worked out?
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How is a partnership appropriation account laid out?
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Why does each partner have both a capital account and a current account?
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What happens on the admission, retirement and dissolution of a partnership?
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What are allotment, calls and forfeiture of shares?
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What makes up a complete set of published financial statements?
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Why is a provision for unrealised profit needed in manufacturing accounts?
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How does a receipts and payments account differ from an income and expenditure account?
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How is subscriptions income for the year worked out from cash received?
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How is profit found from opening and closing statements of affairs?
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What are working capital and the cash operating cycle?
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What do cross-sectional, trend and common-size analysis each compare?
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How do the direct and indirect methods of the statement of cash flows differ?
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What do commitment accounting and fund accounting do in the public sector?
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What roles do the Auditor-General and the Public Accounts Committee play?
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What is a statement of affairs, and what part does it play in an incomplete records question?
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Where a trader's sales or purchases figures are missing, how are they reconstructed?
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Opening assets are KES 700,000 and liabilities KES 250,000; closing assets are KES 860,000 and liabilities KES 290,000. Drawings were KES 90,000 and KES 30,000 of capital was introduced. What is the profit?
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A trader borrowed KES 100,000 during the year and still owes all of it; the cash is in her bank balance. How does the loan enter her closing statement of affairs?
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What is electronic data processing in accounting, and which manual steps does it automate?
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How do accounting packages range from a small business up to a large organisation?
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What are the current trends in computerised accounting, including those that matter in Kenya?
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How do a two-column cash book, a three-column cash book and a cash journal differ?
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What makes the cash book differ from the bank statement, and which differences stay in the reconciliation rather than the cash book?
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What does a control account check, and why is it said to do the same job as a bank reconciliation?
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Which kinds of error does the trial balance reveal?
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Why does the trial balance not reveal an error of omission, and how might one come to light?
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On a sole trader's statement of financial position, at what value are non-current assets shown, and what makes up current assets and current liabilities?
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A trader has sales of KES 1,200,000, opening inventory of KES 90,000, purchases of KES 750,000, closing inventory of KES 110,000 and operating expenses of KES 260,000. What is net profit?
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What are direct materials, direct labour and direct expenses in a manufacturing account?
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How does a manufacturing account get from raw materials to the production cost of goods completed?
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What does a manufacturer's transfer price above production cost reflect, and which part of the resulting manufacturing profit is unrealised?
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What four features set a not-for-profit organisation apart from a trading business?
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What is the accumulated fund of a not-for-profit organisation, and what changes it?
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How is a receipts and payments account converted into an income and expenditure account?
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On which four points does a public sector entity differ from a private sector one?
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How do cash and accrual accounting differ in the public sector, and why is accrual gaining ground?
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What roles do the National Treasury and accounting officers play in public finance?
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