ACCA FA flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Objective of financial reporting

To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Asset definition

A present economic resource controlled by the entity as a result of past events; an economic resource is a right that has the potential to produce economic benefits for the entity.

Liability definition

A present obligation of the entity to transfer an economic resource as a result of past events; the obligation is a duty or responsibility the entity has no practical ability to avoid.

Going concern assumption

Financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future, with neither the intention nor the necessity to liquidate or materially curtail its operations.

Relevance

Information is relevant if it is capable of making a difference in users' decisions, having predictive value, confirmatory value, or both; materiality is an entity-specific aspect of relevance.

Faithful representation

Information faithfully represents economic phenomena when it is complete, neutral and free from error, depicting the substance of the transaction or event rather than merely its legal form.

Prudence

The exercise of caution when making judgements under conditions of uncertainty, so that assets and income are not overstated and liabilities and expenses are not understated; prudence supports neutrality.

Enhancing qualitative characteristics

Comparability, verifiability, timeliness and understandability; they increase the usefulness of information that is already relevant and faithfully represented, but cannot make poor information useful.

Dual effect

Every transaction affects at least two accounts, with total debits always equalling total credits, so that the accounting equation remains in balance after each transaction is recorded.

DEAD CLIC

A mnemonic for debit entries: expenses, assets and drawings are increased by debits; liabilities, income and capital are increased by credits. Debits decrease the opposite categories.

Books of prime entry

The first records of transactions: sales, purchases and returns day books, the cash book, the petty cash book and the general journal, from which entries are posted to the ledger.

Output and input tax

Output tax is charged on sales and is a liability to the tax authority; input tax is suffered on purchases and is recoverable. Only the net difference is paid or reclaimed.

Accrual

An expense relating to the period that has been incurred but not yet invoiced or paid; recorded by debiting the expense and crediting an accrual, increasing expenses and liabilities.

Prepayment

An amount paid in one period that relates to a later period; recorded by debiting a prepayment and crediting the expense, reducing the expense and creating a current asset.

Straight-line depreciation

The annual charge equals cost less residual value, divided by the useful life in years; it allocates the depreciable amount evenly over the asset's expected life.

Inventory measurement (IAS 2)

Inventory is measured at the lower of cost and net realisable value, where net realisable value is the estimated selling price less estimated costs of completion and costs to sell.

Purpose of a trial balance

A list of all ledger balances at a given date, split into debit and credit columns, used to check that total debits equal total credits before financial statements are prepared.

Error of principle

A transaction recorded in the wrong class of account, for example capital expenditure treated as revenue expenditure; double entry is complete so the trial balance still agrees.

Compensating error

Two or more errors that cancel each other out, such as overstating one account and understating another by the same amount, so the trial balance still balances.

Suspense account

A temporary account opened for the difference when a trial balance does not agree; it is cleared by correcting the errors found and should have a nil balance before final accounts are prepared.

Cost of sales formula

Opening inventory plus purchases and other direct costs, less closing inventory; it is deducted from revenue to arrive at gross profit in the statement of profit or loss.

Gross profit

Revenue less cost of sales. The gross profit margin is gross profit divided by revenue, expressed as a percentage, and shows trading profitability before operating costs are deducted.

Closing retained earnings

Opening retained earnings plus profit for the year attributable to owners, less dividends paid or declared; it is presented within equity in the statement of financial position.

Current liability criterion

An obligation is current when it is expected to be settled in the normal operating cycle, is held mainly for trading, or is due to be settled within twelve months after the reporting date.

Control (IFRS 10)

An investor controls an investee when it has power over the investee, exposure or rights to variable returns from its involvement, and the ability to use that power to affect the returns.

Goodwill on consolidation

Consideration transferred plus non-controlling interest plus fair value of any previously held interest, less the fair value of identifiable net assets acquired; tested annually for impairment, not amortised.

Non-controlling interest

The portion of a subsidiary's profit and net assets attributable to shareholders other than the parent; measured either at fair value or at the proportionate share of identifiable net assets.

Unrealised profit in inventory

Profit on goods sold between group companies that remain in closing inventory at the year end; it is eliminated from group profit and inventory so only external profits are reported.

Return on capital employed

Operating profit (PBIT) divided by capital employed, usually equity plus non-current liabilities, expressed as a percentage; it measures how efficiently long-term capital generates profit.

Current ratio

Current assets divided by current liabilities; a liquidity measure showing how many times short-term obligations could be covered by current assets, though an acceptable level varies by industry.

Gearing

Debt divided by debt plus equity, or debt divided by equity, expressed as a percentage; it shows the proportion of finance provided by lenders and indicates financial risk.

Inventory holding period

Closing inventory divided by cost of sales, multiplied by 365; it shows the average number of days inventory is held before sale and forms part of the working capital cycle.