NZ Scholarship Accounting cheat sheet

The New Zealand Conceptual Framework defines the objective of general purpose financial reporting as providing financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity.

An asset is 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. Control, not legal ownership, is decisive.

A liability is a present obligation of the entity to transfer an economic resource as a result of past events; the obligation must have no practical ability to avoid it.

Recognition requires both relevance and faithful representation: an item is recognised only if it meets the definition of an element and recognising it (with a measurement) provides useful information.

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

Measurement bases permitted: historical cost, fair value, value in use/fulfilment value, and current cost. Choice of base affects the pattern of profit recognition, not the underlying cash flows.

NZ IAS 1 requires a statement of financial position, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes; comparatives and going concern disclosure are mandatory.

Materiality is entity-specific: information is material if omitting or misstating it could influence decisions of primary users. Materiality affects both recognition and the level of disclosure, not just the size of a line item.

Revenue under NZ IFRS 15 is recognised when (or as) a performance obligation is satisfied by transferring a promised good or service to the customer, in an amount reflecting the consideration to which the entity expects to be entitled.

Double-entry rule: every transaction affects at least two accounts and total debits equal total credits. Debits increase assets and expenses; credits increase liabilities, equity and income.

The accounting equation, assets = liabilities + equity, must hold after every entry. Equity can be expanded to opening capital + profit + capital contributions − drawings.

Trial balance equality proves only arithmetic, not correctness: errors of omission, commission (wrong account of the same class), principle, original entry and complete reversal all preserve balance.

Suspense accounts absorb one-sided or unbalanced entries; the balance must be cleared before final statements, and clearing it usually changes profit.

Accrual basis: revenue is recognised when earned and expenses when incurred, regardless of cash timing. Adjusting entries for accruals, prepayments, depreciation and inventory are required at balance date.

Depreciation methods: straight line = (cost − residual)/useful life; diminishing value = carrying amount × rate; units of production = (cost − residual) × units used/total expected units.

Bank reconciliation: adjust the cash book for items the bank already recorded (direct credits, dishonoured cheques, bank charges, interest); adjust the bank statement for unpresented cheques and deposits in transit.

Inventory: perpetual records update cost of goods sold at each sale; periodic records derive cost of goods sold = opening inventory + purchases − closing inventory.

Control accounts reconcile to subsidiary ledgers (debtors, creditors, inventory); a difference indicates a posting error, a contra entry not recorded, or a misclassified item.

Gross profit = revenue − cost of goods sold. Profit from operations excludes financing costs and tax; profit for the year is after interest and tax.

Return on equity = profit attributable to owners / average ordinary shareholders' equity. DuPont decomposition: net profit margin × total asset turnover × equity multiplier (leverage).

Liquidity: current ratio = current assets / current liabilities; quick ratio excludes inventory and prepayments. A high current ratio built on slow inventory may hide liquidity stress.

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

Solvency: debt ratio = total liabilities / total assets; interest cover = profit before interest and tax / interest expense. Leverage raises ROE only when return on assets exceeds the after-tax cost of debt.

Cash flow quality: compare cash from operations with profit. Persistent divergence signals accrual build-up in receivables or inventory, or capitalised costs.

Statement of cash flows under NZ IAS 7 splits operating, investing and financing activities; interest and dividends paid may be classified as operating or financing if applied consistently.

Limitations of ratio analysis: different accounting policies (inventory cost formula, depreciation, revaluation, capitalisation of development costs) reduce comparability; ratios are point-in-time and ignore non-financial value drivers.

Contribution margin = sales − variable costs. Break-even units = fixed costs / contribution per unit; break-even sales = fixed costs / contribution margin ratio.

Target profit volume = (fixed costs + target profit) / contribution per unit. Margin of safety = (actual or budgeted sales − break-even sales) / actual sales.

Relevant costs are future, incremental and differ between alternatives. Sunk costs, allocated common fixed costs and committed costs are irrelevant to a special-order or make-or-buy decision.

Opportunity cost is the contribution forgone from the next best alternative use of a scarce resource; it must be included when capacity is constrained.

Absorption costing includes fixed production overhead in product cost; variable costing expenses it as a period cost. The profit difference equals the change in inventory units × fixed overhead per unit.

Overhead allocation: predetermined rate = budgeted overhead / budgeted activity base; applied overhead − actual overhead = under- or over-application, closed to cost of goods sold or prorated.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price; labour rate and efficiency variances follow the same structure.

A flexible budget restates costs for the actual activity level, isolating volume effects from price and efficiency effects; a static budget comparison mixes both.

Investment appraisal: NPV discounts cash flows at the cost of capital and is preferred; IRR is the rate giving zero NPV; payback ignores cash flows after the cut-off and the time value of money.