Accounting
The Accounting domain tests advanced application and critical evaluation across financial reporting, management accounting, and the conceptual framework. You must justify treatments, interpret financial information, and evaluate decisions in unfamiliar contexts.
Conceptual and reporting foundations
- The NZ Conceptual Framework defines assets, liabilities, income, and expenses; recognition requires probability of future economic benefits and reliable measurement.
- Measurement bases include historical cost, fair value, and present value. NZ IAS 16 permits cost or revaluation for property, plant and equipment; revaluation gains go to other comprehensive income and accumulate in a revaluation surplus, with deferred tax.
- NZ IAS 7 classifies cash flows as operating, investing, or financing. Interest paid may be operating or financing; dividends paid are financing; dividends received are investing or operating.
Financial statement analysis
- Company equity includes share capital, retained earnings, and reserves. Revaluations increase equity but not profit.
- Ratio analysis must interpret profitability, liquidity, efficiency, and solvency using consistent definitions. Consider averages, trends, and the effect of accounting policies.
Management accounting
- Relevant costing includes only future incremental cash flows. Exclude sunk costs and allocated fixed overheads unless they change.
- CVP analysis separates fixed and variable costs to find break-even and margin of safety.
Worked example
A firm has spare capacity. A one-off order offers 500 units at $60. Variable cost is $35/unit; fixed overhead absorption is $15/unit; extra setup costs $4,000. Relevant revenue = $30,000. Relevant costs = variable $17,500 + setup $4,000 = $21,500. Relevant profit = $8,500, so accept. If the capacity could instead generate $10,000 contribution from regular sales, include that opportunity cost: $8,500 − $10,000 = −$1,500, so reject. Allocated fixed overhead is irrelevant because it does not change.
Traps
- Including sunk costs or allocated fixed costs in relevant costing.
- Ignoring opportunity cost when capacity is scarce.
- Misclassifying interest paid or dividends in the cash flow statement.
- Forgetting deferred tax on revaluation and the extra depreciation that follows.
- Calculating ratios without interpreting causes, trends, or policy effects.