1. Accounting – Revision For Mid Term Exam
Academic Year
Dr. Clive Vlieland-Boddy

2. IFRS Vs GAAP Started as a EU standard. Now world wide except USA
USA will eventually concede and accept.
Strength gained after failures of WorldCom and Enron.
Makes international comparison simpler.
Accounts are founded on the same basis worldwide.

3. Self Regulatory Vs Statutory
Precise rules Vs shared principles
A book of rules Vs laid out principles.

4. Stakeholders Any party interested in the financial statements.
Include:
Shareholders
Governments
Public
Employees
Customers
Suppliers
Lenders

5. Stakeholders

6. Double Entry Bookkeeping

7. Name of Account
Debit
Credit

8. Debits
Assets
Bank Receipts
Expenditures
Losses

9. Credits Liabilities Bank Payments Shareholders Funds Incomes (Sales)‏
Profits

10. Accounting Concepts Going Concern Matching or Accruals Consistency
Prudence

11. Revision of Understanding Financial Statements
Professor Clive Vlieland-Boddy
FCA FCCA MBA PhD
EU 2009

12. The Balance Sheet

13. Assets Have to have a value
Either Current or Non Current ( either < or > 12 months.
Should be shown at actual cost but can be revalued

14. Current Assets
Short term business assets < 12 months to covert to cash.
Examples: Accounts Receivable, Inventories, WIP and Sundry Prepaiments

15. What are Current Assets?
Current assets include cash and those assets that are expected to be converted to cash or used up within one year, or an operating cycle, whichever is longer.
Current Assets
include
Cash
Inventories
Marketable Securities
Prepaid Expenses
Accounts Receivable
Other Short Term Assets
Current assets include cash and those assets that are expected to be converted to cash or used up within one year, or an operating cycle, whichever is longer. Short-term securities, receivables, inventories and prepaid expenses are all classified as current assets.

16. Uncollectible Accounts – Bad Debts
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If a company makes credit sales to customers, some accounts inevitably will turn out to be uncollectible.
If a company makes credit sales to customers, some accounts inevitably will turn out to be uncollectible.
PAST DUE

17. Prepaid Expenses and Other Current Assets
L 1
Expenses that have been paid in the current fiscal period but will not be subtracted from revenue until a subsequent fiscal period.
Examples:
Insurance
Rent
Prepaid Expenses require adjusting entries
Assets are decreased
Expenses are increased
Prepaid expenses are expenses that have been paid in the current fiscal period but will not be subtracted from revenue until a subsequent fiscal period.

18. Non Current Assets (Fixed Assets)
Tangible
Intangible
Investments

19. Tangible Assets that can be seen and touched
Purchased to enable the business to function
Examples: Cars, Vans, Planes, Boats & Plant & Equipment

20. Intangible Invisible Non Current Assets
Examples: Patents, Trade Marks, Know How, Brand Names and Goodwill

21. Investments
Investments in companies for long term benefit. Normally to control supply chain or extend monopoly.

22. Liabilities Represent a responsibility which will have to be settled.
Either Current or Non Current ( either < or > 12 months

23. Current Liabilities Short term liabilities < 12 months
Examples: Accounts Payable, Tax, Dividends Payable & Accrued Expenses

24. Non Current Liabilities
Long term liabilities > 12 months
Examples: Loans, Mortgages & Deferred Tax

25. Shareholders Funds
Represents the monies that the owners have invested in the business.
Is a liability of the business to those investors.
Shares and retained profits

26. Does it Balance?
Assets = Liabilities + Shareholders funds

27. The Income Statement

28. Sales ( Revenues )

29. What represents a sale? We have looked at revenue recognition
When is a transaction treated as a sale?
Vital we must match income with expenditure.
Vital we are consistent.

30. Cost of Sales

31. What makes up Cost of Goods Sold?
We need to match what has been sold to the real costs of those sales.
What has been sold has been consumed.
We normally look at:
Opening Inventories
Add Purchases made in the period
Then subtract closing inventories

32. Specific Identification
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When a unit is sold, the specific cost of the unit sold is added to cost of goods sold.
When a unit is sold, the specific cost of the unit sold is added to cost of goods sold.

33. First-In, First-Out (FIFO)
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Costs of Goods Sold
Oldest Costs
Ending Inventory
Recent Costs
The First-in, First-out (FIFO) method assigns the oldest costs to cost of goods sold and the recent costs to ending inventory.

34. Last-In, First-Out Method (LIFO)
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Costs of Goods Sold
Recent Costs
Recent Costs
Ending Inventory
Oldest Costs
Last-in, Last-out (LIFO) method assigns recent costs to cost of goods sold and the oldest costs to the ending inventory.

35. The Impact of Changing Costs
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In periods of rising costs, LIFO results in lower ending inventory and higher cost of goods sold than FIFO.
In periods of rising costs, LIFO results in lower ending inventory and higher cost of goods sold than FIFO.

36. Inventory Accounting System Alternatives
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Inventory Accounting System Alternatives
Periodic Inventory System
Perpetual Inventory System
Cost of goods sold is determined at the end of the fiscal period.
Cost of goods sold is determined each time inventory is sold.
Alternative inventory accounting methods include the periodic inventory system that determines cost of goods sold at the end of the fiscal period; and the perpetual inventory system that determines cost of goods sold each time inventory is sold.

37. Inventory Accounts Product available to be sold Merchandise Inventory
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Product available to be sold
Merchandise Inventory
Retail Firm
Used to produce products
Finished Goods Inventory
Raw Materials Inventory
Work in Process Inventory
Manufacturing Firm
Inventory accounts for retail firms are usually called merchandise inventory while inventory accounts for manufacturing firms could include finished goods, raw materials and work-in-process inventories. Finished Goods Inventory represents products which are ready for sale to customers. Raw materials inventory consists of items purchased by the organization that will be incorporated into a finished product for sale. Work in process inventory consists of products that have entered the manufacturing process but are not 100% complete or in a finished state to be sold to customers.
Partially completed products

38. Lower of Cost or Net Realisable Value
Inventory must be reported at realisable value when it is lower than cost.
Defined as current replacement cost (not sales price).
Consistent with the conservatism principle.
Can be applied three ways:
(1) separately to each individual item.
(2) to broad categories of inventory.
(3) to the whole inventory.
Inventory must be reported at market value on the balance sheet when the market value is lower than cost which is consistent with the conservatism principle. Market is defined as current replacement cost (not sales price). Lower of cost or market can be applied three ways: (1) applied separately to each individual inventory item, (2) applied to broad categories of inventory, or (3) applied to the whole inventory.

39. This gives us the total cost of what has been sold.

40. Gross Profit or Margin

41. By subtracting the cost of goods sold from sales we arrive at the gross profit/margin

42. Trading Statement Sales 160,000 Less Cost of Sales
Opening Inventories ,000
Add Purchases ,000
Less Closing Inventories -18,000
Cost of goods Sold ,000
Gross Profit/Margin ,000

43. Gross Profit % Sales – Cost of Sales = GP % (Margin)
Very important ratio

44. Overheads, EBIT & Beyond

45. Overheads Expenses consumed in the period
We may need to adjust what is incurred to what is actually consumed!

46. Overheads Normally grouped under a few principal headings.
Examples: Sales and Marketing, General Admin and Depreciation

47. Incurred Vs Consumed
We may well incur expenses but we need to evaluate these.
We should only show what has actually been consumed.
Example: We may have received invoice for telephone or insurance but for what period do those represent?
They can easily be for the previous or next accounting period.
We need to adjust these

48. The Matching Concept

50. Revenue Vs Capital Expenditure

51. Capital Expenditure
Companies buy items to sell on to customers but might also acquire for its own use.
Take a computer retailer. It will buy computers to sell to customers but may also keep some for its own use.
Again we return to what has been consumed?

52. Capital Expenditure Represents a NON CURRENT asset.
It is an expense but expected to last more than 12 months.
Example:
Microsoft develops a new version of windows over 12 months at a cost of $100m. It then expects to sell the new version over the following 2 years generating revenues of $150m per year.

53. MS Development Expenditure

54. Non Current Liabilities
Balance Sheet End Accounting Period Income Statement Accounting Period 1
Current Assets
Non Current Assets
Expenditure Incurred on Development $100m
Current Liabilities
Non Current Liabilities
Equity
Sales Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Expenditure Incurred on Development $100m EBIT

55. Balance Sheet End Accounting Period 2 Income Statement Accounting Period
Current Assets Non Current Assets Expenditure Incurred on Development 100m Less: consumed part (50%) -50m Current Liabilities Non Current Liabilities Equity
Sales New Ver 150m Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Consumed R & D 50m EBIT

56. Non Current Liabilities
Balance Sheet End Accounting Period Income Statement Accounting Period 3
Current Assets
Non Current Assets
Expenditure Incurred on Development m
Less: consumed part (100%) m
Current Liabilities
Non Current Liabilities
Equity
Sales New Ver 150m Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Less Consumed R & D 50m EBIT

57. What is Actually Consumed

58. Question? What is left? Consumption means we have eaten it all.
What we have not eaten remains and is shown on the Balance Sheet.
Example:
A company making Orange juice may well purchase many tons of oranges. It will crust these to extract the juice. At the end of an accounting period it way well have sold 1000’s of gallons but may also have some still in their warehouse as well as tons of un crushed oranges.

59. Matching Vs Prudence

60. Meaningful Results
We need to balance the aim of a meaningful result by applying the matching and prudence concepts.
Yes be cautious but don’t destroy the real picture.
And remember … try to be consistent!

61. Questions

62. Question 1 What is Historic Cost?: Answer:
The current value
The future value
The Original Cost
All of the above
Answer:
c. It represents the price originally paid.

63. Question 2 What do you understand by Shareholders Funds: Answer: c.
Monies invested in the company by the shareholders.
Accumulated retained profits.
All of the above
Answer: c.

64. Question 3 What are debtors?: Answer: b. Accounts Receivable
Accounts Payable
Bad Debts
All of the above
Answer:
b. Accounts Receivable

65. Question 4 What are accounting policies? Answer: d. All of the above
A summary of the ways management have prepared the financial statements.
Require subjective judgement.
Should normally follow industry standards
All of the above
Answer:
d. All of the above

66. Question 5 What is capital expenditure: Answer: d. All of the above
Results in a Non Current Asset
Is expenditure that is expected to last for more than 12 months..
All of the above
Answer:
d. All of the above

67. Question 6 What is Deferred Tax?: Answer:
Tax that has to be paid to the government within 12 months
Tax that is never going to be paid
Tax that will be payable in the future but more than 12 months away.
Is shown as a Non Current liability.
C and d are correct
Answer:
e. It is both delayed by 12 months and therefore shown as a Non Current Liability.

68. Question 7 What are retained Earnings: Answer:
Profits distributed to shareholders
Profits not distributed to shareholders
Belongs to the shareholders
B and c are correct
Answer:
d. They represent profits generated by the company and they belong to the owners.

69. Question 8 What is Gross Profit/Margin: Answer: f. EBIT
Sales Less the cost of sales
Represents the gross margin made by the company from its day to day trading.
Is a very useful % to evaluate management control
Represents the profits made from buying and selling goods.
B.C D and E
Answer: f.

70. Question 9 What are Ordinary or Common Shares?. Answer:
Represents the owners of the company.
They rank behind all other investors for payment.
50 + % controls the company.
All of the above
Answer:
d. All of the above

71. Question 10 What is Net Book Value: Answer: d.
The value of the Current Assets
The value of the Non Current Assets
Represents the original cost less the total depreciation to date
B and C are correct
Answer: d.

72. Question 11 What is a contingency? Answer: d.
An event less than 50% likely to happen.
Has a possible financial outcome
Should be noted in the financial statements but not included in the accounts.
All above are correct
Answer: d.

73. Question 12 Do you trust the report of the auditors?: Answer:
May be!
Possibly!
Definitely
What stupid question.
Answer:
well we all learn…………………

74. Question 13 What is Treasury Stock?: Answer: d.
The amount of shares repurchased by the company
Is shown under shareholders funds
Represents the total amount actually paid for the shares repurchased.
All the above are correct.
Answer: d.

75. Question 14 What is an Extraordinary Item. ?: Answer: d.
An item unlikely to happen again.
If shown before EBIT would distort the trend data.
Is shown after EBIT
All the above are correct.
Answer: d.

76. Question 15
What do you understand by fair value accounting (Mark to Market)?:
Replaces original historic cost with current value.
Is permitted by IFRS.
Was totally misused by Enron
All the above are correct.
Answer: d.