Presentation on theme: "Accounting – Revision For Mid Term Exam"— Presentation transcript:
1 Accounting – Revision For Mid Term Exam Academic YearDr. 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 principlesA book of rules Vs laid out principles.
4 Stakeholders Any party interested in the financial statements. Include:ShareholdersGovernmentsPublicEmployeesCustomersSuppliersLenders
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 AssetsShort 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 AssetsincludeCashInventoriesMarketable SecuritiesPrepaid ExpensesAccounts ReceivableOther Short Term AssetsCurrent 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 L O 5If 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 1Expenses that have been paid in the current fiscal period but will not be subtracted from revenue until a subsequent fiscal period.Examples:InsuranceRentPrepaid Expenses require adjusting entriesAssets are decreasedExpenses are increasedPrepaid 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) TangibleIntangibleInvestments
19 Tangible Assets that can be seen and touched Purchased to enable the business to functionExamples: Cars, Vans, Planes, Boats & Plant & Equipment
20 Intangible Invisible Non Current Assets Examples: Patents, Trade Marks, Know How, Brand Names and Goodwill
21 InvestmentsInvestments 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 monthsExamples: Loans, Mortgages & Deferred Tax
25 Shareholders FundsRepresents 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
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 InventoriesAdd Purchases made in the periodThen subtract closing inventories
32 Specific Identification L O 8When 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) L O 8Costs of Goods SoldOldest CostsEnding InventoryRecent CostsThe 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) L O 8Costs of Goods SoldRecent CostsRecent CostsEnding InventoryOldest CostsLast-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 L O 8In 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 L O 8Inventory Accounting System AlternativesPeriodic Inventory SystemPerpetual Inventory SystemCost 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 L O 8Product available to be soldMerchandise InventoryRetail FirmUsed to produce productsFinished Goods InventoryRaw Materials InventoryWork in Process InventoryManufacturing FirmInventory 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.
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 ConsumedWe 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
51 Capital ExpenditureCompanies 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.
54 Non Current Liabilities Balance Sheet End Accounting Period Income Statement Accounting Period 1Current AssetsNon Current AssetsExpenditure Incurred on Development $100mCurrent LiabilitiesNon Current LiabilitiesEquitySales 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 EquitySales 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 3Current AssetsNon Current AssetsExpenditure Incurred on Development mLess: consumed part (100%) mCurrent LiabilitiesNon Current LiabilitiesEquitySales New Ver 150m Less Cost of Sales Opening Inventories Add Purchases Less: Closing Inventories Gross Profit Deduct Overheads Less Consumed R & D 50m EBIT
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.
60 Meaningful ResultsWe 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!
62 Question 1 What is Historic Cost?: Answer: The current valueThe future valueThe Original CostAll of the aboveAnswer: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 aboveAnswer:c.
64 Question 3 What are debtors?: Answer: b. Accounts Receivable Accounts PayableBad DebtsAll of the aboveAnswer: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 standardsAll of the aboveAnswer:d. All of the above
66 Question 5 What is capital expenditure: Answer: d. All of the above Results in a Non Current AssetIs expenditure that is expected to last for more than 12 months..All of the aboveAnswer:d. All of the above
67 Question 6 What is Deferred Tax?: Answer: Tax that has to be paid to the government within 12 monthsTax that is never going to be paidTax that will be payable in the future but more than 12 months away.Is shown as a Non Current liability.C and d are correctAnswer: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 shareholdersProfits not distributed to shareholdersBelongs to the shareholdersB and c are correctAnswer: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 salesRepresents the gross margin made by the company from its day to day trading.Is a very useful % to evaluate management controlRepresents the profits made from buying and selling goods.B.C D and EAnswer: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 aboveAnswer:d. All of the above
71 Question 10 What is Net Book Value: Answer: d. The value of the Current AssetsThe value of the Non Current AssetsRepresents the original cost less the total depreciation to dateB and C are correctAnswer:d.
72 Question 11 What is a contingency? Answer: d. An event less than 50% likely to happen.Has a possible financial outcomeShould be noted in the financial statements but not included in the accounts.All above are correctAnswer:d.
73 Question 12 Do you trust the report of the auditors?: Answer: May be!Possibly!DefinitelyWhat stupid question.Answer:well we all learn…………………
74 Question 13 What is Treasury Stock?: Answer: d. The amount of shares repurchased by the companyIs shown under shareholders fundsRepresents 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 EBITAll the above are correct.Answer:d.
76 Question 15What 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 EnronAll the above are correct.Answer:d.