ACCA FA cheat sheet

Financial statements report financial position, financial performance and cash flows in a way that is useful to a wide range of users making economic decisions.

The Conceptual Framework's objective is to provide information useful to existing and potential investors, lenders and other creditors in deciding whether to provide resources to the entity.

Five elements: asset (present economic resource controlled from past events), liability (present obligation to transfer an economic resource), equity (residual interest), income and expenses.

A complete set of financial statements under IAS 1 comprises: statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows and notes.

Users and their needs: investors (risk and return), lenders (repayment and interest), employees (job security and pay), suppliers (creditworthiness), government (tax and statistics), public (local impact).

Stewardship: financial reporting enables users to assess how efficiently and effectively management has discharged its responsibility for the entity's resources.

Regulatory sources: IFRS Standards issued by the IASB (international) and the Conceptual Framework; national company law sets preparation, filing and audit requirements.

Key limitations: historical cost emphasis, reliance on estimates and judgements, exclusion of non-financial and forward-looking information, and aggregation of diverse items.

Two fundamental characteristics: relevance and faithful representation; information must satisfy both to be useful.

Relevance: capable of making a difference in users' decisions, through predictive value, confirmatory value, or both; materiality is an entity-specific aspect of relevance.

Faithful representation requires the depiction to be complete, neutral and free from error, and to reflect the substance of the transaction rather than only its legal form.

Four enhancing characteristics: comparability, verifiability, timeliness and understandability; they cannot make irrelevant or unfaithful information useful.

Prudence is exercising caution under uncertainty so that assets and income are not overstated and liabilities and expenses are not understated; it supports neutrality.

Comparability requires consistency of accounting policies over time and disclosure of policies and of changes in them, and enables comparison with other entities.

Verifiability: different knowledgeable and independent observers could reach consensus that a depiction is a faithful representation.

Constraint on useful information: the cost of providing it must be justified by the benefits of users receiving it (cost-benefit trade-off).

Materiality decision rule: information is material if omitting or misstating it could reasonably be expected to influence decisions of primary users; it is assessed in context, not by a single fixed threshold.

Dual effect: every transaction affects at least two accounts and total debits always equal total credits, preserving the accounting equation.

DEAD CLIC: debits increase expenses, assets and drawings; credits increase liabilities, income and capital; the reverse decreases each.

Books of prime entry: sales day book, purchase day book, sales returns day book, purchase returns day book, cash book, petty cash book and the general journal.

The general journal records non-routine items such as corrections of errors, adjustments, opening entries and asset disposals, and requires a narrative for each entry.

Ledgers: the general (nominal) ledger holds all T-accounts and control accounts; the receivables and payables ledgers are memorandum records supporting the control accounts.

Credit sale entries: Dr Receivables, Cr Sales; and Dr Cost of sales, Cr Inventory for the cost of goods sold.

Sales tax: output tax on sales is a liability, input tax on purchases is an asset/recoverable; only the net amount is payable to, or recoverable from, the tax authority.

Trade discounts are deducted before recording and never posted separately; settlement (cash) discounts are recorded when the customer takes them.

Accounting equation: Assets = Liabilities + Equity; expanded: Assets = Liabilities + Capital + Income - Expenses - Drawings.

Accrued expense: Dr Expense, Cr Accruals; prepaid expense: Dr Prepayments, Cr Expense - both apply the accruals (matching) concept.

Depreciation is the systematic allocation of the depreciable amount (cost less residual value) over the useful life, not a valuation of the asset.

Straight line: (Cost - residual value) / useful life. Reducing balance: carrying amount x fixed percentage each year.

Inventory (IAS 2): measured at the lower of cost and net realisable value; cost includes purchase price, import duties, transport and conversion costs, and excludes abnormal waste.

Capital expenditure is included in the asset's cost; revenue expenditure is expensed. Asset cost includes purchase price, directly attributable costs and initial estimate of dismantling/restoration obligations.

Irrecoverable debts: Dr Irrecoverable debts expense, Cr Receivables; an allowance for receivables is a reduction of receivables in the statement of financial position.

Revaluation: an increase is credited to other comprehensive income as a revaluation surplus; a decrease is expensed unless it reverses a previous surplus on the same asset.

Provisions are recognised only where there is a present obligation from a past event, a probable outflow of economic benefits and a reliable estimate can be made.

Events after the reporting period: adjusting events provide evidence of conditions existing at the year end and require adjustment; non-adjusting events are disclosed only.

A trial balance lists every ledger balance in debit and credit columns at a date; agreement confirms only arithmetic equality of debits and credits, not freedom from error.

Errors that do not affect trial balance agreement: error of omission, error of commission, error of principle, error of original entry, compensating errors and complete reversal of entries.

Errors that do affect trial balance agreement: one-sided (single) entry, transposition and addition errors, and recording the same side twice.

A suspense account holds the difference on an unbalanced trial balance; it is cleared by journal corrections and should be nil before financial statements are finalised.

Correction of an error affecting profit is posted to the relevant expense/income account; corrections not affecting profit go to statement of financial position accounts.

Bank reconciliation: adjust the cash book for items known only from the bank statement (bank charges, interest, dishonoured cheques, standing orders) and adjust the statement for unpresented cheques and lodgements not yet credited.

Payables ledger reconciliation compares supplier statements with the payables ledger; differences arise from timing, errors and omissions.

A trial balance extracted before adjustments omits accruals, prepayments, depreciation, irrecoverable debts and closing inventory, all of which require year-end journals.

Statement of profit or loss structure: Revenue - Cost of sales = Gross profit; - operating expenses = Operating profit; - finance costs + finance income = Profit before tax; - tax = Profit for the year.

Cost of sales = Opening inventory + Purchases (plus carriage inwards and other direct costs) - Closing inventory.

Statement of financial position: Non-current assets + Current assets = Equity + Non-current liabilities + Current liabilities.

Statement of changes in equity: Opening balance + shares issued + profit for the year - dividends paid = Closing balance.

Retained earnings closing balance = Opening retained earnings + profit for the year attributable to owners - dividends declared/paid.

Current/non-current decision rule: an asset or liability is current if it is expected to be realised or settled within twelve months or within the normal operating cycle.

Statement of cash flows (IAS 7) classifies cash flows as operating, investing and financing activities.

Property, plant and equipment note: Cost b/f + additions - disposals at cost = cost c/f; accumulated depreciation b/f + charge - depreciation on disposals = accumulated depreciation c/f.

Control (IFRS 10) exists where the investor has power over the investee, exposure or rights to variable returns, and the ability to use power to affect those returns.

A subsidiary is consolidated line by line: add parent and subsidiary assets, liabilities, income and expenses, then eliminate intra-group balances and transactions.

Goodwill = consideration transferred + NCI + fair value of previously held interest - fair value of identifiable net assets acquired.

NCI may be measured at fair value (full goodwill method) or at the proportionate share of the subsidiary's identifiable net assets (partial goodwill).

Group retained earnings = parent's retained earnings + parent's share of the subsidiary's post-acquisition retained earnings - parent's share of goodwill impairment to date.

Only post-acquisition profits and reserves of the subsidiary are consolidated; pre-acquisition reserves are eliminated against the cost of investment.

Intra-group sales and purchases are eliminated in full; unrealised profit on goods still held in inventory is removed from group inventory and group profit.

An associate (significant influence, normally 20%-50% of voting rights) is accounted for using the equity method, not consolidated line by line.

Consolidated statement of financial position: the investment in subsidiaries and in associates is replaced by goodwill and the equity-accounted investment respectively.

Return on capital employed = PBIT / (equity + non-current liabilities) x 100%; measures profit generated per unit of long-term capital.

Gross profit margin = Gross profit / Revenue; operating profit margin = Operating profit / Revenue.

Current ratio = Current assets / Current liabilities; quick (acid test) ratio = (Current assets - Inventory) / Current liabilities.

Inventory days = Inventory / Cost of sales x 365; receivables days = Trade receivables / Revenue x 365; payables days = Trade payables / Purchases (or cost of sales) x 365.

Working capital cycle = Inventory days + Receivables days - Payables days; a shorter cycle reduces financing needs.

Gearing = Debt / (Debt + Equity), or Debt / Equity; interest cover = PBIT / Finance cost.

Asset turnover = Revenue / Total assets; dividend cover = Profit after tax / Dividends; dividend payout = Dividends / Profit after tax.

Ratios are limited by historical cost information, differing accounting policies, inflation, and by ignoring qualitative and non-financial factors.