CPA Foundation Level
Financial Accounting flashcards
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Which qualitative characteristics of useful financial information are fundamental, and which are enhancing?
Fundamental: relevance and faithful representation. Enhancing: comparability, verifiability, timeliness and understandability. Information must have both fundamental characteristics to be useful; the enhancing ones make useful information more useful.
What is the accounting equation, and why does double entry keep it in balance?
Assets = Capital + Liabilities. Every transaction is recorded as a debit and an equal credit, so whatever it does to one side it does to the other, or it moves value between items on the same side.
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 carrying amount at the start of the year. The charge falls each year, so it suits assets that give most of their benefit early.
At what amount is inventory measured under IAS 2?
At the lower of cost and net realisable value, compared item by item (or for groups of similar items), never for the inventory as a whole. Net realisable value = estimated selling price - estimated costs of completion - estimated costs to sell.
Why might the cash book balance and the bank statement balance disagree?
Timing differences: unpresented cheques, and deposits not yet credited by the bank. Items the business has not yet entered: bank charges, interest, standing orders, direct debits, direct credits and dishonoured cheques. Errors, in the cash book or by the bank. Update the cash book for the second group, then reconcile the corrected balance to the statement using the first.
Where partners have no agreement on the point, what do the default rules of the Partnership Act, 2012 provide on profit sharing, salaries, interest on capital and interest on drawings?
Profits and losses are shared equally. No partner is entitled to a salary. No interest is allowed on capital. No interest is charged on drawings. Each of these applies only unless the partners have agreed otherwise.
What is the difference between a bonus issue and a rights issue?
Bonus issue: free shares to existing shareholders in proportion to their holdings, paid for out of reserves. No cash comes in. Debit reserves (often share premium), credit share capital. Rights issue: new shares offered to existing shareholders in proportion to their holdings, usually below market price, for cash. Debit cash, credit share capital and share premium.
When must a provision be recognised under IAS 37?
When all three conditions hold: 1. a present obligation, legal or constructive, arising from a past event; 2. an outflow of resources to settle it is probable; 3. the amount can be estimated reliably. If any one fails there is no provision: at most a contingent liability, disclosed in the notes unless the outflow is remote.
How are the current ratio and the quick (acid test) ratio calculated, and why do they differ?
Current ratio = current assets / current liabilities. Quick ratio = (current assets - inventory) / current liabilities. The quick ratio leaves inventory out because it is the least liquid current asset: it has to be sold, and the customer has to pay, before it becomes cash.
What are the three headings of a statement of cash flows under IAS 7, with an example of each?
Operating activities: the main revenue-producing activities, such as cash from customers and cash paid to suppliers and employees. Investing activities: buying and selling long-term assets, such as purchases of property, plant and equipment. Financing activities: changes in the entity's equity and borrowings, such as share issues, loans raised or repaid and dividends paid.
What is the going concern basis of preparing financial statements?
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What does the accruals (matching) concept require?
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How does the Conceptual Framework define an asset and a liability?
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When is information material?
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In Kenya, which body regulates the accountancy profession, and under which Act?
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What is the difference between capital and revenue expenditure?
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Which balances normally sit on the debit side of a trial balance, and which on the credit side?
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What are the books of prime entry?
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Which errors leave the trial balance still in agreement?
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What is a suspense account, and how is it cleared?
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What goes on each side of a receivables (sales ledger) control account?
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Why do businesses keep control accounts?
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How is a customer's cheque that the bank dishonours recorded?
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How is the gain or loss on disposal of a non-current asset worked out?
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Which costs make up the initial cost of property, plant and equipment under IAS 16?
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Where is a gain on revaluing property recognised?
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When prices are rising, how do FIFO and weighted average cost compare?
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Which costs are included in the cost of inventory under IAS 2, and which are left out?
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How do an accrued expense and a prepaid expense affect the financial statements?
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What is the difference between writing off an irrecoverable debt and keeping an allowance for receivables?
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How is cost of sales calculated?
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Where do carriage inwards and carriage outwards go in the statement of profit or loss?
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How is a sole trader's closing capital worked out?
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What does a partnership appropriation account show?
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What is the difference between fixed and fluctuating partners' capital accounts?
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A new partner is admitted and no goodwill account is to be kept. How is goodwill dealt with?
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On the dissolution of a partnership, what does the realisation account record?
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What is share premium, and can it be paid out as a dividend?
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How do preference shares differ from ordinary shares?
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What does the statement of changes in equity show?
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How is a dividend declared after the reporting date treated?
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What is prime cost, and how does a manufacturing account build up to the cost of goods manufactured?
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When goods move from the factory at cost plus a mark-up, why is a provision for unrealised profit needed?
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What is the difference between a receipts and payments account and an income and expenditure account?
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What is the accumulated fund of a not-for-profit organisation?
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How are subscriptions in arrears and subscriptions in advance treated at the year end?
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With incomplete records, how is profit found from opening and closing net assets?
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What is the difference between mark-up and margin, and how do you convert one to the other?
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How are receivables days, payables days and inventory days calculated?
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What does gearing measure, and why does high gearing matter to shareholders?
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Which standards do public sector entities in Kenya report under, and who prescribes them?
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