Accounting Study Cards Aparana 2008

Question -- Accounting
Module 1
What are the characteristics of a company structure?
Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 1 of 222

Answer -- Accounting
Limited liability of owners (shareholders) to equity (share

capital) of company
Public accounts, audited

Module 1
What is financial accounting?

Legal obligation on directors & managers to report to

owners on how resources have been deployed during the
accounting period

Module 1
Who uses accounting information?

Internal (MEDS)
Directors Senior Executives
Managers Employees
External (PACTS)
Shareholders Analysts
Creditors Tax authorities
Public

Module 1
What is the Accounting Equation?

Assets = Owner’s Equity + Liabilities
OR
Assets – Liabilities = Owner’s Equity

Module 1
What is gross profit in a manufacturing company?

Sales LESS Cost of Sales

Module 2
What is the impact of different inventory valuation

methods (in rising prices)?

FIFO Income is higher

Higher taxes
Higher dividends
Closing inventory is higher
LIFO Lower profit
Good for tax minimization
AVERAGE Weighted average unit cost

Module 2
What are the FOUR methods of recognizing revenue?

1. *Shipping & invoicing

2. Time of sales order
3. Time of production, i.e., shipbuilding
4. Time of collection, i.e., installment plans

Module 2
What are the conditions necessary to recognize sales?

1. Principle revenue-producing service has been

performed
2. Costs to create revenue have occurred
3. Amount collectable can be estimated

Module 2
How do you calculate Cost of Goods (CoG’s)

[relationship between valuation & profit]?

Beginning inventory + purchases LESS ending

inventory = CoG’s
> Ending inventory valuation > profit

< Ending inventory valuation < profit

Module 2
What are the THREE different methods of calculating

depreciation?

1. Straight-line depreciation
= acquisition costs – est. residual value
est. useful life
2. Reducing balance depreciation

Scrap Value
 1 n (n = estimated life)
Costs
3. Consumption method -- based on running hours

Annual running hours
  Net cos t
Total running hours
Module 2
What are the THREE main “measurement of effort”

Conventions?

1. Matching convention: profit = matching the effort (costs)
with units shipped & invoiced (sales) during the period
2. Allocation convention: determine the consumption of
means of production; determine the value of closing WIP
(work-in-progress) and inventories of raw materials
3. Costs convention: historical/acquisition cost of different
means of production

Module 2
What are TWO “measurement of sales” conventions?

1. Realization convention: only products sold are

measured as sales
2. Accruals convention: cash does not have to be
received to create value

Module 2
What are the different profit measurements?

When are they used?

Gross profit (sales less CoG’s)  measures efficiency of

transformation
*Net profit before interest and taxes  managerial
efficiency
Net profit after interest and before taxes  assesses
financial structure

Module 2
What are some of the principle features of depreciation?

Allocation of cost of assets purchased in 1 accounting
period over the accounting periods in which they are used
Cost of production
Influences reported profit
The effect on cash position (lowers taxes, etc.)

Module 2
What is the difference between product & period costs?

Product costs = raw materials, direct labour, factory
overhead (cost of sales/closing inventory)
Period costs = selling, distribution, marketing, general
admin. (P+L accounts)

Module 2
How do you determine whether a cost should be

capitalized or written off?

Take a conservative approach!

Write off expenditure UNLESS
Clearly related to acquisition + asset could not be
made operational w/o costs (i.e., land & survey fees)

Module 3
What is ‘GEARING’ and how is it calculated? What is

the effect on ROI?

Gearing or Leverage is the relationship between

shareholders funding (OE) to loans
L / T debt

Total Assets
Healthy profits  better returns
Lower profits  lower ROI

Module 3
How are bad debt provisions calculated and accounted

for?

Consider  risks attached to each customer, severity of

pursuing, general economic environment, i.e., interest
rates
B/SH  debtors less provisions
P+L  charge for bad debts; topped up each year.

Module 3
Why would a company choose to lease vs. own assets?

A voice substantial outflow of cash

Spreads out cash flows
Can replace leased asset  no gain/loss
Maintenance costs covered
Lease payments are an allowable charge against profits
before tax.

Module 3
What is a revaluation reserve?

Entry in balance sheet (s/h equity) to indicate a

revaluation of land/property

Module 3
What is the difference between a Finance Lease and an

Operating Lease?

Finance lease  ownership reverts to lessee at end of

lease
On balance sheet  fixed assets & lease payments as
creditors
Interest charged to P+L, capital deducted from both
Operating lease  ownership remains with lesser
Not capitalized
Payments are expensed annually (capital + interest)

Module 4
How do you calculate cash flow from operating

activities?

= Profit + bad debt provision + depreciation 

Loss/Gain on sale
Less  in working capital

  Inventories  cash 
  Debtors  /creditors  cash 

Module 4
What are the EIGHT major categories of cash flow?
(Our Really Tall Cat Ate Everyone’s Meaty Food)

1) Operating activities
2) Returns on investment & servicing of finance
3) Taxation
4) Capital Investments
5) Acquisitions and disposals
6) Equity dividends paid to shareholders
7) Management of liquid resources
8) Financing

Module 5
What are the FIVE fundamental accounting concepts?

1) Going concern concept – a company will continue to do
business in future
2) Accruals – company doesn’t wait for money to change
hands before accounting for revenues & costs
3) Consistency –
4) Prudence – conservatism
5) Non-aggregation –

Module 5
How are consolidated or group financial statements

prepared?

Holding/Parent company must publish group P+L &
Balance Sheet but also its own Balance Sheet (not P+L)
Adds all assets and shows minority interests entries

Module 5
What is the distinction between the Companies Act

1985/89 and Accounting Standards?

1) Companies Act states that companies must disclose
certain information in a “True & Fair view of … GAAP”
2) Accounting Standards set controls on how the numbers
are to be compiled – must be disclosed.

Module 5
What THREE sets of rules constrain management when

constructing corporate financial statements?

1) Companies Acts/Legislation – government of country
2) Accounting standards – profession/regulations
3) Listing requirements – Stock Exchange Commissions
(SEC)

Module 5
What do auditors do?

Examine co. system of accounting
Compares of accounting statements to underlying records
Verifies of title/existence/value of assets
Verifies liabilities
Verifies that results of P+L are fairly stated
Confirm statutory regulations complied with and
accounting standards have been applied correctly (S C A
L P S)

Module 6 – Capital Structure Ratios
Times Interest Earned Ratio Calculation

Switches to the profit and loss account in order to

measure the gearing position and margin of safety in
relation to earnings

Module 6 – Liquidity Ratio
Current Ratio
(sometimes called Working Capital Ratio)

It is often stated as a rule of thumb that a 2 times current

ratio indicates a sound financial situation.

Module 6
Return on Capital Employed

Capital employed is usually defined as the total assets of a

company minus the current liabilities. Alternatively, one
can add together the owner’s equity and the long-term
loans and provisions.

Module 6 – Profitability Ratio
Return on Total Assets

Note that the whole balance sheet figure for total assets
(fixed assets plus current assets) has been selected for the
fraction

Module 6
What are the efficiency ratios?
(some times referred to as activity or turnover ratios)

Activity or turnover ratios
How effectively are costs managed?
1) Inventory Turnover
2) Average collection period
3) Fixed assets turnover
Measures company’s asset management

Module 6
Return on Owner’s Equity

Most important profitability ratio is the one that relates
the profit earned to the capital (contributed and
accumulated) of the ordinary shareholders of the
company.

Module 6 – Liquidity Ratio
Quick Ratio (also called ACID TEST)

The quick ratio therefore removes inventory from the

calculation, thus providing a more rigorous test of the
company’s ability to pay its maturing obligations.
One times or great is considered good

Module 6 – Profitability Ratio
Gross Profit Margin

The gross profit margin is the first critical measure of

profit an analyst or manager examines since a company
must earn significant gross margin if it is going to bear
the burden of other corporate overhead.

Module 6
What are the TWO different liquidity ratios?

1) Current Ratio
2) Quick Ratio (Acid Test)
Measures a company’s ability to meet its maturing short-

term obligations

Module 6 -- Profitability Ratios
Profit Margin


Module 6
What are the Capital Structure Ratios?

1) Fixed to Current Asset Ratio
2) Debt Ratio
3) Times Interest Earned Ratio
Examine percentage of company’s total assets that are

from shareholders (OE) and effect or risk on earnings

Module 6 – Efficiency Ratio
Inventory Turnover Ratio


Fixed Assets Turnover Ratio


Module 6
What are the SIX main Profitability Ratios?

Gross Profit Margin
Profit Margin
Return on Specific Assets
Return on Capital Employed
Return on Owner’s Equity
Profitability ratios give management an insight into a

company’s long-term survival.

Module 6 – Capital Structure Ratio
Fixed to Current Asset Ratio

This ratio highlights the fact that for every £1 invested

in current assets, a company has invested around £#.##
in fixed assets.

Debt Ratio & Debt/Equity Ratio

The debt ratios measures the proportion of assets that

are financed by debt.

Debt/Equity Ratio


Available to Equity Ratio


Average Collection Period Ratio -- Sometimes called

days sales outstanding

Represents the average length of time that a company
must wait after making a sale before receiving the cash.

Module 6 (part one)
What are the basic stock market ratios?

Earnings per share (EPS)
Price/Earnings Ratio (PE)

Module 6 (part two)
What are the basic stock market ratios?

Dividend Yield
Dividend Cover

Module 6 – Profitability Ratios

Whole balance sheet figure for total assets (fixed assets
plus current assets) is used
Module 6
What are the FOUR categories of Ratios?
1) Liquidity
2) Profitability
3) Capital Structure
a. Assets
b. Financing (gearing)
4) Efficiency
Module 7
What are the FOUR examples of off-balance sheet

transactions?
1) Quasi-subsidiaries
2) Consignment inventories
3) Sale/Repurchase agreements
4) Debt factoring
Module 7
When can merger accounting be used?
When…
1) Neither party is acquiring/acquired
2) Neither party dominates transaction
3) Relative size similar
4) Primarily equity share exchange
5) No one shareholder retains interest in future
performance of part of the combined entity
Module 7
What conditions could exist to capitalize development

expenses?
1) Clearly defined project

2) Expenses are separately identified
3) Outcome has certainty on technical feasibility and
ultimate commercial viability
4) Sales will be greater than costs
5) Adequate resources exist
Module 7
What are the key differences between merger &

acquisition accounting?
Acquisition accounting -- shows goodwill (asset), note
share premium
Merger accounting is more flexible – combined nature of
distributable reserves
Module 7
When is a joint (quasi-subsidiary) venture considered to

be consolidated?
1) Company is a lead partner & exercises a

dominant role
2) Can take back goods under beneficial terms
3) Share profit/loss/dividends unequally
Module 7
What is GOODWILL?
It is the difference between fair value of net assets

acquired in a corporate transaction and the price paid
for assets.
Module 7
How are BRANDS valued?
1) Historic cost – all costs spent developing and

maintaining brand can be capitalized (adjustment
to reserve)
2) Earnings method – multiplier  earnings
Module 8
What is the difference between job costing and process

costing?
Job – costs allocated to individual items; direct costs
(material & labour) & allocated overhead
Process – when identification of finished items is

impossible (oil refining); take all costs in accounting
period and divide by total quantify output during same
period
Module 8
What are the key differences between Financial &

Management Accounting?
Financial Management
 Backward looking, past  Forward looking, supports
performance mgmt decision-making
 Structured  Non-structured
 GAAP  No
 Compulsory  No
 $  $, Q
 Company as whole  Activities/departments
 Auditors  No
Module 9
What are the assumptions underlying cost-volume-

profit analysis?
All costs can be identified as Variable or Fixed
Costs behave the same

Sales price/unit is unchanged
Sales mix = budget
All production is sold
Module 9
What is contribution margin?
Sales = Fixed costs + Variable costs + Profit
Breakeven sales = Fixed costs + Variable costs
Contribution margin = Sales revenue - Variable
costs
Module 9
How do you calculate Break Even Point?
Module 9
What are controllable/uncontrollable costs?
Controllable  management has the ability to choose

whether or not to incur the costs; valid for a particular
manager as well (refers to the person, the manager or
foreman or supervisor, who can be held accountable for
the costs being measured)
Uncontrollable  not controllable in the short-term or
outside of the control of the immediate manager, e.g.,
plant insurance
Module 9
What are Standard Costs?
Budgeted cost for one cost item
Module 9
What are engineered & discretionary costs?
Engineering: unavoidable costs if company wants to
continue production
Discretionary: costs that need not be incurred (R&D,
maintenance)
Module 10
How can costs be allocated between joint products?

By-products?
1) Equal shares
2) Physical characteristics
3) Sales value at split
4) Ultimate net sales value  if further processing
By-products  all costs are to main product  sales

deducted from product costs before determining gross
margin
Module 10
How do you determine process costing for equivalent

units?
For each cost category
= Effort expended in this period to finish opening inventory

+ Units started & completed in period
+ Efforts expended on closing inventory
Module 10
What are some (SEVEN) of the typical activity bases

for Overhead (OH) costs?
1) Personnel – # of employ
2) Computing – hours, # reports
3) Machinery – machine hours
4) Buildings – space occupied
5) Power – machine hours, meter
6) Executive salaries – sales
7) Production schedule – # of differing products
Module 10
What is a joint product?

What is a by-product?
Joint product – must appear during the processes involved
in producing main product. If management has the option
of not allowing the second product to emerge from the
process the two products cannot be deemed to be joint.
By-product – is a joint product that has undesirable or low
value
Module 10
What is the STEP method of allocating OH?
Recognizes that support departments provide services to
other support departments
Choose highest OH department – allocate to other
departments (not including self)
Continue – ignoring already previously allocated
departments
Module 10
What is an equivalent unit?
In-process costing
Assessment of degree of completeness of one unit under
each major component of cost
Module 10
What happens when actual OH is > or < to budgeted

OH?
Difference  credited/debited to P+L under cost of goods

(CoG’s)
Module 10
What is a predetermined OH rate?
Because these overheads are not directly attributable to cost units
in the same manner as direct materials and direct labour where
the actual usage of resources can be tracked precisely,
accountants use a predetermined overhead rate with which to
spread overheads across the units of production.
Module 10
What is Activity Based Costing (ABC)?
ABC – activities rather than products, cause costs to be

incurred
Cost of products become goal (not just accounting
inventory valuations)
Different cost drivers
Embraces all OH
Reflects complexity of production/marketing
More accurate costs – better planning
Module 11
What is the decision-making process?
1) Define problem & list alternatives

2) Cost alternatives (just differences)
3) Assess qualitative factors
4) Make decision
Company wide point of Opportunity costs

view
Ignore sunk costs Ignore future costs that are
same for all alternatives
Module 11
What is the difference between absorption and variable

costing?
*When actual production  planned production
Module 11
Should we Process Further (more relevant to joint or

by-products)?
Ignore costs that are not relevant
Relevant - $ spent on further, additional $ gained from
revenue
Module 11
Considerations when faced with Special Sales Orders?
If price is > variable cost, then it contributes to Fixed
Costs
Demand for product
Future business from sale
Module 11
Considerations when closing down a unit?
Focus on contribution – coverage of fixed costs
Qualitative factors
One-time costs
Module 11
What are relevant costs?
Future costs – not sunk costs
Cash costs – not depreciation or write offs
Avoidable costs
Cost that differ among alternatives
Module 11
What is the impact on reported profit between

Absorption & Variable Costing?
Absorption costing values inventory higher  taxable

profits are higher
 if sales < production, profits 

sales > production, profits 
Preferred by most tax authorities. Companies don’t

always have a choice.
Module 12
What is Zero-Based Budgeting?
Management invites certain activities/centres to bid for
their scarce resources as if they were starting from ZERO
Organized into “packages of work” which can be
separated from each other
Ranked in order of top management priorities
Takes a high amount of effort to divide into costed
packages
May need to seek external opinions on definitions
Module 12
What are the perceived problems with budgeting?
1) Time taken
2) Lack of top management commitment
3) A form of punishment
4) Dictatorial control
5) Responsibilities blurred
6) Circumstances can change (moving goal post)
7) Budgeting rewards inefficiency
Module 12
What are reasons for budgeting?
1) Coordination
2) Planning
3) Motivation
4) Control
Module 12
How to devise a budget?
Sales budget Production budget

Direct materials budget Direct labour budget
- Purchases budget
- Purchases budget
- cash flow budget
Management OH budget Selling & Admin budget
Closing inventory budget Cash budget
Budget P+L Budget Balance Sheet
Module 13
What are the Sales Variances?
Module 13
What are the fixed Overhead Variances?
Module 13
What is Standard Cost?
Budgeted or expected cost for individual cost items (or of
a single unit of production)
= direct materials + direct labour + variable OH
Module 13
What are the Material Cost Variances?
Module 13
What are the Labour Cost Variances?
Module 14
How is Residual income calculated? Advantages?
Advantage: Residual income overcomes the dysfunctional element
of ROI by encouraging divisional managers to invest, provided the
expected returns exceed the imputed cost of capital. Interest rate can
change it!
Divisional controllable profit

Less Imputed interest
= %  net assets
RI
Module 14
How is divisional performance measured?
1) ROI – profits / net book value

2) ROI – profits / current replacement value
3) Assets depreciation  profits 

4) Subjective
Module 14
What are the FOUR types of divisions?
1) Cost centres
2) Revenue centres
3) Profit centres
4) Investment centers
Module 14
What are the advantages/disadvantages for divisions?
Advantages Disadvantages
Specialization Lack of Control
Size Cost
Motivation Internal Rivalries
Sharper Decisions
Career Mobility
Module 14
How are Transfer Prices determined? (between

divisions)
Market Price (best vs. objective)
Cost-based prices (if no market price)
Full cost (includes fixed costs)
Variable costs
Negotiated costs
Module 14
What are some additional issues for International

companies – between divisions?
1) Taxation
2) Repatriation of profits
Module 15
What about inflation?
Should be included
Not part of NPV
Not equal
Module 15
What is Risk Analysis?
Analyze variables in terms of probability of different
values
Module 15
What is the payoff/payback period?
Time taken to recover original investment. When will
you get your money back?
Ignores the opportunity cost of the capital invested vs.
discounted payback
Module 15
What is the difference between NPV & IRR?
NPV – absolute
IRR – Ratio
 Provides different results to compare
Module 15
What are the PV formulas?
(1i)
n
FV  PV
Or the reciprocal
FV
PV 
(1i)
n
Module 15
What are the steps in the Investment Process?
1) Search
2) Evaluate – strategic plan
– financial & qualitative analysis
3) Control – budgeting
Module 15
How do you determine the Cost of Capital?
Average cost of
Fixed interest loans
Fixed dividend shares
Residual equity shares
Retained earnings
USE optimum proportions as weight
Module 15
What are the KEY investment factors?
1) Capital investment – fixed & working capital

2) Operating cash flows – actual cash flow
(including taxation)
3) Investment life – physical / technical / marketing
4) Cost of Capital
Module 15
What is sensitivity analysis?
Building a model of project, change parameters & check
results
Determine critical factors & assess uncertainty / risk
Module 15
What is the Internal Rate of Return (IRR)?
IRR, sometimes called the Discounted Cash Flow Rate

of Return or Yield (DCF) or simply the Rate of Return.
= Cost of Capital – NPV = 0
See Appendix 15.2 for example.
Module 15
What is life cycle costing?
Gathers all revenues & costs associated with product over
its whole lifespan – to measure its ultimate profitability
Module 16
What are some of the shortcomings of current

management accounting practices?
Driven by financial accounting, e.g., inventory/profit
Direct labour   overhead allocation by direct labour
not valid
Computerized production control ’s variable/fixed costs
Overheads increasing relative to quality, design
Business more complex, wider product ranges, shorter
lifecycles
Global markets
Module 16
What are the THREE concepts of throughput

accounting?
Looking at situation from rate at which $ earned

through sales
1) Depreciation excluded from performance
- total factory costs (incl. Labour) + materials
2) Value is created when product sold
- not inventory valuation  profits
3) Profitability – rate at which cash is rec’d at bottleneck
point (limiting factor which restricts production in short-
term)
Module 16
What is Target Costing?
Focuses on target price based on customer perceived
value, then deduct desired profit margin to determine
target cost
Value engineering – improving processes to lower costs

Accounting Study Cards Aparana 2008

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting Study Cards Aparana 2008

Uploaded by

Copyright:

Available Formats

Question -- Accounting

What are the characteristics of a company structure?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 1 of 222

Limited liability of owners (shareholders) to equity (share

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 2 of 222

What is financial accounting?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 3 of 222

Legal obligation on directors & managers to report to

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 4 of 222

Who uses accounting information?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 5 of 222

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 6 of 222

What is the Accounting Equation?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 7 of 222

Assets = Owner’s Equity + Liabilities

Assets – Liabilities = Owner’s Equity

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 8 of 222

What is gross profit in a manufacturing company?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 9 of 222

Sales LESS Cost of Sales

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 10 of 222

What is the impact of different inventory valuation

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 11 of 222

FIFO Income is higher

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 12 of 222

What are the FOUR methods of recognizing revenue?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 13 of 222

1. *Shipping & invoicing

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 14 of 222

What are the conditions necessary to recognize sales?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 15 of 222

1. Principle revenue-producing service has been

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 16 of 222

How do you calculate Cost of Goods (CoG’s)

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 17 of 222

Beginning inventory + purchases LESS ending

> Ending inventory valuation > profit

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 18 of 222

What are the THREE different methods of calculating

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 19 of 222

2. Reducing balance depreciation

3. Consumption method -- based on running hours

What are the THREE main “measurement of effort”

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 21 of 222

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 22 of 222

What are TWO “measurement of sales” conventions?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 23 of 222

1. Realization convention: only products sold are

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 24 of 222

What are the different profit measurements?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 25 of 222

Gross profit (sales less CoG’s)  measures efficiency of

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 26 of 222

What are some of the principle features of depreciation?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 27 of 222

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 28 of 222

What is the difference between product & period costs?

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 29 of 222

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 30 of 222

How do you determine whether a cost should be

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 31 of 222

Take a conservative approach!

Author - Cynthia Enns, EBS MBA; edited by Irene Gelyk. 32 of 222