GCE A/L Accounting cheat sheet

Objective of general purpose financial reporting: provide financial information about the reporting entity useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

Fundamental qualitative characteristics: relevance (predictive value, confirmatory value, materiality) and faithful representation (complete, neutral, free from error). Enhancing characteristics: comparability, verifiability, timeliness, understandability.

Elements: asset = present economic resource controlled by the entity as a result of past events; liability = present obligation to transfer an economic resource as a result of past events; equity = residual interest in assets after deducting liabilities.

Recognition criteria (2018 Framework): recognition is appropriate if it gives users useful information - relevant and faithfully represented; cost constraint applies.

Measurement bases: historical cost and current value (fair value, value in use/fulfilment value, current cost).

Going concern: financial statements prepared assuming the entity will continue in operation for the foreseeable future unless liquidation or cessation is intended.

Accrual basis: effects of transactions recognised when they occur, not when cash is received or paid.

Materiality: information is material if omitting or misstating it could influence decisions of primary users; materiality is entity-specific.

Prudence is exercised alongside neutrality: it supports, and does not contradict, faithful representation.

IASB issues IFRS; the Conceptual Framework underpins standards but is not itself a standard and overrides nothing in a specific standard.

IAS 1 requires a complete set of financial statements: statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, and notes including accounting policies.

IAS 1: fair presentation, going concern, accrual basis, materiality and aggregation, offsetting prohibited unless required or permitted, comparative information required.

IAS 8: changes in accounting policy applied retrospectively; changes in accounting estimate applied prospectively; prior period errors corrected retrospectively.

IAS 10: adjusting events after the reporting period provide evidence of conditions existing at the end date; non-adjusting events are disclosed if material.

IAS 37: provision recognised when a present obligation exists, outflow is probable and the amount can be reliably estimated; contingent liabilities are disclosed, not recognised.

IAS 2: inventory measured at the lower of cost and net realisable value; cost includes purchase, conversion and other costs to bring inventory to its present location and condition.

IAS 7: cash flows classified as operating, investing and financing; interest and dividends paid/received have policy choices that must be applied consistently.

Sole trader: capital account = opening capital + capital introduced + net profit − drawings − net loss.

Partnership: profit shared per profit-sharing ratio; appropriation account shows interest on capital, salary, interest on drawings, residual share.

Limited company: statement of financial position presents share capital, share premium, retained earnings and other reserves separately from liabilities.

Cost of sales = opening inventory + purchases + carriage inwards − returns outwards − closing inventory.

Gross profit = revenue − cost of sales; profit for the year = gross profit + other income − expenses.

Statement of changes in equity: opening balance + profit for the year + other comprehensive income + share issues − dividends = closing balance.

Closing entries transfer revenue and expense balances to the income summary, then to capital or retained earnings; drawings are closed to capital.

Working capital = current assets − current liabilities; it is presented as a sub-total, not as a separate statement element.

Straight-line depreciation = (cost − residual value) / useful life; reducing balance = carrying amount × rate.

IAS 16 cost model: asset at cost less accumulated depreciation and impairment; revaluation model: fair value at revaluation date less subsequent depreciation and impairment.

Revaluation surplus on an upward revaluation is recognised in other comprehensive income and accumulated in equity; a decrease reverses a prior surplus in OCI first, then goes to profit or loss.

Depreciation on a revalued asset is based on the revalued carrying amount over the remaining useful life; the excess over historical-cost depreciation may be transferred from revaluation surplus to retained earnings.

Disposal: profit or loss on disposal = proceeds − carrying amount at disposal date; record depreciation up to the disposal date first.

Asset register and general ledger control account must agree; the difference is written off or investigated as an error.

IAS 16: depreciation begins when the asset is available for use and ceases at the earlier of classification as held for sale or derecognition.

IAS 23: borrowing costs directly attributable to a qualifying asset are capitalised; other borrowing costs are expensed.

Sales ledger control: opening debit balances + credit sales − cash received − discounts allowed − returns inwards − irrecoverable debts = closing debit balances.

Purchase ledger control: opening credit balances + credit purchases − payments − discounts received − returns outwards = closing credit balances.

Bank reconciliation: adjusted bank statement balance = bank statement balance + lodgements not yet credited − unpresented cheques ± bank errors.

Adjusted cash book balance = cash book balance − bank charges/standing orders/direct debits + direct credits/interest received ± errors in cash book.

Suspense account is opened only when the trial balance does not agree; it is cleared when the errors are corrected.

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

Errors affecting trial balance agreement: one-sided entry, addition error in one account, transposition of figures in one entry, entry on the wrong side of one account.

Correction of a prior period error is retrospective; correction of a current period error is made in the current ledger accounts.

Irrecoverable debts are written off to profit or loss; a doubtful debts allowance is created/adjusted through profit or loss and netted against receivables.

Statement of affairs: assets at values less liabilities = capital at a given date; capital = opening capital + capital introduced + profit − drawings.

Profit from incomplete records = closing capital + drawings − capital introduced − opening capital.

Missing figure technique: use control accounts or the accounting equation to derive sales, purchases, cash received or closing inventory.

Mark-up = gross profit / cost of sales × 100%; margin = gross profit / sales × 100%; margin = mark-up / (100% + mark-up).

Cost of sales = sales / (1 + mark-up) when mark-up is known; sales = cost of sales × (1 + mark-up).

Cash and bank summary: opening balance + receipts − payments = closing balance; use it to find missing receipts or payments.

Inventory destroyed by fire: estimate cost of lost inventory = opening inventory + purchases − cost of sales − inventory salvaged.

Use the accounting equation A = C + L to test derived figures; any residual is the missing item.

Goodwill on admission: new partner pays for share of goodwill; existing partners credited in old profit-sharing ratio, new partner debited with their share.

Revaluation on admission: increase/decrease in asset values is credited/debited to old partners in old ratio before the new partner is admitted.

Sacrificing ratio = old ratio − new ratio; the incoming partner's share is acquired from sacrificing partners.

Retirement: revalue assets, credit goodwill to retiring partner, settle the retiring partner's current/capital account; remaining partners share the retiring partner's goodwill in their gaining ratio.

Gaining ratio = new ratio − old ratio; used to allocate the retiring partner's goodwill to continuing partners.

Dissolution: realisation account records proceeds and expenses; profit or loss on realisation is shared in the profit-sharing ratio.

Order of settlement on dissolution: external liabilities, partners' loans, partners' capital; any deficiency is borne by partners per agreement.

Interest on capital is an appropriation of profit, not an expense; it is calculated on opening capital unless the agreement states otherwise.

Partners' current accounts record appropriations, drawings and interest; capital accounts record permanent capital unless the fixed capital method is not used.

Share issue: debit bank with proceeds; credit share capital with nominal value; credit share premium with excess over nominal value.

Rights issue: proceeds split between share capital (nominal) and share premium; bonus issue uses reserves and creates no new cash.

Debentures: nominal value recorded as a non-current liability; discount on issue may be amortised; interest is a finance cost in profit or loss.

Reserves: share premium, revaluation surplus and general reserves are capital reserves; retained earnings is a revenue reserve and is distributable.

Dividends are recognised when declared/approved; interim dividends paid are deducted in the statement of changes in equity.

Statement of financial position order: non-current assets, current assets, equity, non-current liabilities, current liabilities.

Share capital disclosure: number and class of shares authorised and issued, nominal value, and rights attaching to each class.

Finance cost of debentures = nominal value × coupon rate; issue discount or premium affects the effective interest, not the coupon cash paid.

A company cannot pay dividends out of capital; distributable profits are the accumulated realised profits less accumulated realised losses.

Cost classification by nature: direct materials, direct labour, direct expenses, production overheads; by behaviour: fixed, variable, semi-variable, stepped fixed.

Prime cost = direct materials + direct labour + direct expenses; production cost = prime cost + production overheads.

High-low method: variable cost per unit = (cost at high activity − cost at low activity) / (high activity − low activity); fixed cost = total cost − variable cost.

Overhead absorption rate = budgeted overheads / budgeted activity level (labour hours, machine hours or units).

Over/under absorption = actual overheads − absorbed overheads; over-absorbed if absorbed exceeds actual.

EOQ = square root of (2 × annual demand × order cost / holding cost per unit per year).

Re-order level = maximum usage × maximum lead time; minimum level = re-order level − (average usage × average lead time).

Marginal costing: contribution = sales − variable costs; profit = contribution − fixed costs.

Absorption costing values inventory at full production cost; marginal costing values inventory at variable production cost only.

Production budget = sales budget + closing inventory − opening inventory (in units).

Materials purchases budget = materials required for production + closing inventory − opening inventory.

Cash budget includes only cash receipts and payments; depreciation, bad debts written off and accruals are excluded.

Cash budget closing balance = opening balance + total receipts − total payments; a negative balance indicates a financing need.

Flexible budget is prepared for the actual activity level; a fixed budget is prepared for one planned level.

Zero-based budgeting builds each budget from zero; incremental budgeting adjusts the prior period's budget.

Principal budget factor (limiting factor) determines the order in which budgets are prepared - usually sales demand.

Budgeted overhead absorption rate uses budgeted figures; variances compare actual with flexed budget.

Material price variance = (standard price − actual price) × actual quantity purchased; material usage variance = (standard quantity for actual output − actual quantity used) × standard price.

Labour rate variance = (standard rate − actual rate) × actual hours paid; labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.

Variable overhead expenditure variance = actual hours × (standard rate − actual rate); efficiency variance follows labour efficiency.

Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead; volume variance = (budgeted hours − standard hours for actual output) × standard rate.

Sales price variance = (actual price − standard price) × actual units sold; sales volume profit variance = (actual units − budgeted units) × standard profit per unit.

Relevant costs are future, incremental cash flows; sunk costs, committed costs and apportioned fixed overheads are not relevant.

Opportunity cost is the contribution forgone from the next best alternative and is included in decision making.

Make-or-buy: compare variable cost of making plus opportunity cost with the buy price; fixed costs are relevant only if avoidable.

Limiting factor: rank products by contribution per unit of scarce resource, then allocate the resource in rank order.

Profitability: gross margin = gross profit / revenue; operating margin = operating profit / revenue; ROCE = operating profit / capital employed.

Liquidity: current ratio = current assets / current liabilities; quick ratio = (current assets − inventory) / current liabilities.

Efficiency: inventory turnover = cost of sales / average inventory; receivables collection period = receivables / credit sales × 365; payables period = payables / credit purchases × 365.

Gearing: debt / (debt + equity) or debt / equity; interest cover = operating profit / finance cost.

Investor ratios: EPS = profit attributable to ordinary shareholders / weighted average ordinary shares; dividend cover = profit / dividends; dividend yield = dividend per share / market price.

IAS 7 operating cash flow (indirect): profit before tax + depreciation + finance cost − increase in inventory − increase in receivables + increase in payables − tax and interest paid.

Investing activities: purchase and sale of non-current assets and investments; financing activities: share issues, loans, debenture issues, dividends paid.

Limitations of ratio analysis: historical cost, different accounting policies, inflation, seasonal factors, and lack of comparable industry data.

Cash and cash equivalents: short-term, highly liquid investments with original maturity of three months or less, subject to insignificant risk of change in value.

Operating activities may be presented by the direct method (major classes of cash receipts and payments) or the indirect method (profit adjusted for non-cash items and working capital changes).

Depreciation, amortisation, impairment losses and gains/losses on disposal are added back or deducted in the indirect method because they are non-cash.

Interest paid and dividends paid may be classified as operating or financing; interest and dividends received as operating or investing - applied consistently.

Tax paid is usually an operating cash flow; it is derived from the tax charge adjusted for opening and closing tax liabilities.

Purchase of non-current assets is derived from the movement in cost, adjusted for revaluations and disposals, not from the closing balance alone.

Proceeds from disposal = carrying amount of asset disposed + profit on disposal (or − loss on disposal).

Dividends paid = opening retained earnings + profit for the year − closing retained earnings, adjusted for transfers to reserves.

Reconciliation of cash and cash equivalents: opening balance + net cash flows = closing balance, disclosed in the notes.