ICAP CAF cheat sheet

The objective of general purpose financial reporting is 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.

Fundamental qualitative characteristics are relevance and faithful representation; enhancing characteristics are comparability, verifiability, timeliness and understandability.

Under the accrual basis, the effects of transactions and other events are recognised when they occur, not when cash is received or paid; the going concern assumption supports this treatment.

An asset is a present economic resource controlled by the entity as a result of past events; a liability is a present obligation to transfer an economic resource; equity is the residual interest.

The accounting equation is Assets = Liabilities + Equity, and every transaction changes at least two elements while keeping the equation in balance.

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

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

An item is recognised when it meets the definition of an element and recognition provides relevant and faithfully representative information, subject to the cost constraint.

Income tax is charged under the Income Tax Ordinance, 2001 on the taxable income of a person for a tax year at the rates specified in the First Schedule.

An individual is resident in Pakistan for a tax year if present in Pakistan for 183 days or more, or for 120 days or more and 365 days in the preceding four tax years.

Salary income includes pay, wages, allowances, perquisites and benefits received from employment and is generally taxed on a receipt basis.

Business expenses are deductible if incurred wholly and exclusively for the purpose of business; personal expenses, capital expenditure, income tax and fines are generally inadmissible.

A registered person charges output sales tax on taxable supplies and may deduct input tax on taxable purchases and services, subject to documentary and legal conditions.

A withholding tax agent must deduct or collect tax from specified payments, deposit it with the tax authority and provide the prescribed certificate to the taxpayer.

The normal tax year runs from 1 July to 30 June; the Commissioner may allow a special tax year ending on another date.

Late filing of a return, non-payment of tax and failure to deduct withholding tax attract penalties, default surcharge or disallowance under the Ordinance.

Fixed costs remain constant in total over a relevant range; variable costs change in total with activity but are constant per unit within the relevant range.

High-low method: variable cost per unit = (highest total cost − lowest total cost) ÷ (highest activity − lowest activity); fixed cost = total cost − (variable cost per unit × activity).

Contribution = sales − variable costs; breakeven units = fixed costs ÷ contribution per unit; breakeven revenue = fixed costs ÷ contribution-to-sales ratio.

Margin of safety = actual sales − breakeven sales; margin of safety ratio = margin of safety ÷ actual sales.

Overhead absorption rate = budgeted overhead ÷ budgeted activity base; over- or under-absorption = absorbed overhead − actual overhead.

Economic order quantity = √(2DO ÷ H), where D is annual demand, O is order cost per order and H is holding cost per unit per year.

Relevant costs are future, incremental cash flows that differ between alternatives; sunk costs, committed costs and arbitrary allocations are excluded.

Material price variance = (standard price − actual price) × actual quantity; material usage variance = (standard quantity − actual quantity) × standard price.

A valid contract requires offer, acceptance, consideration, intention to create legal relations, capacity and a lawful object; defects may make a contract void or voidable.

Consideration must be real and lawful and may move from the promisee or another person; it need not be adequate but must be sufficient in law.

In a partnership, every partner is an agent of the firm for acts in the ordinary course of business, and partners generally have unlimited liability for firm debts.

Under sale of goods law, risk generally passes with property unless the parties agree otherwise; the seller must have the right to sell the goods.

Caveat emptor means the buyer takes goods subject to defects unless the seller gave an express condition or warranty or a statutory exception applies.

A holder in due course takes a negotiable instrument in good faith, for value, before maturity and without notice of defects, and obtains better title than the transferor.

An agent acting within actual or apparent authority binds the principal; the principal must disclose the agency when contracting with third parties if the agent is undisclosed.

A suit is barred after the period prescribed by the Limitation Act; a written acknowledgment of liability can start a fresh limitation period.

IAS 16 requires property, plant and equipment to be measured initially at cost and subsequently either under the cost model or the revaluation model, with depreciation over useful life.

IFRS 15 five-step model: identify the contract, identify performance obligations, determine the transaction price, allocate the price and recognise revenue when control transfers.

A financial asset is measured at amortised cost only if the business model is to hold it to collect contractual cash flows and those cash flows are solely payments of principal and interest.

IAS 36 impairment: recoverable amount is the higher of fair value less costs of disposal and value in use; an impairment loss is recognised when carrying amount exceeds recoverable amount.

IAS 37 recognises a provision when a present obligation from a past event is probable and can be reliably estimated; a contingent liability is not recognised.

Deferred tax is recognised on temporary differences between accounting carrying amounts and tax bases, using tax rates expected to apply when the difference reverses.

IFRS 16 requires a lessee to recognise a right-of-use asset and a lease liability at the present value of lease payments, then depreciate the asset and recognise interest.

Consolidation is required when a parent controls a subsidiary; the parent consolidates assets, liabilities, income and expenses line by line and recognises non-controlling interests.

Current ratio = current assets ÷ current liabilities; quick ratio = (current assets − inventory − prepayments) ÷ current liabilities.

Gross profit margin = gross profit ÷ revenue; net profit margin = net profit ÷ revenue; both are expressed as percentages.

Return on capital employed = EBIT ÷ capital employed, where capital employed is usually total assets minus current liabilities.

Inventory turnover = cost of goods sold ÷ average inventory; receivables collection period = trade receivables ÷ credit sales × 365 days.

Debt-to-equity ratio = total debt ÷ total equity; interest cover = EBIT ÷ finance cost.

Net present value discounts all project cash flows at the cost of capital; a project is acceptable if NPV is positive and IRR exceeds the cost of capital.

Payback period ignores the time value of money and cash flows after payback; accounting rate of return uses accounting profit rather than cash flow.

DuPont analysis: return on equity = net profit margin × total asset turnover × equity multiplier.

A company is a separate legal person from its members and directors, has perpetual succession and generally limits members' liability to unpaid share capital.

Incorporation requires a memorandum, articles, name reservation and registered office particulars; the certificate of incorporation confirms the company's existence.

A private company restricts share transfers, limits members to 50 excluding employees and prohibits any invitation to the public to subscribe for its securities.

A public company must have at least three directors; a private company must have at least two directors, and directors owe fiduciary and care duties to the company.

An annual general meeting must be held each year, and a Pakistani company must hold it within 120 days of the close of its financial year.

Dividends may be paid only out of profits available for distribution, not out of capital, and must comply with the Companies Act and the company's articles.

The auditor is appointed by members at the annual general meeting; a casual vacancy may be filled by the directors if the articles permit.

Winding up may be members' voluntary, creditors' voluntary or compulsory by the court; a liquidator realises assets and distributes proceeds in statutory order.

The auditor's objective is to obtain reasonable assurance that the financial statements are free from material misstatement, whether due to fraud or error, and to express an opinion.

Audit risk = inherent risk × control risk × detection risk; detection risk is controlled by the nature, timing and extent of audit procedures.

Risk assessment procedures include inquiries of management, analytical procedures and observation and inspection to understand the entity and its environment.

Audit evidence must be sufficient in quantity and appropriate in relevance and reliability; externally obtained evidence is generally more reliable than internally generated evidence.

Internal control has five components: control environment, risk assessment, control activities, information and communication, and monitoring.

Tests of controls evaluate operating effectiveness; substantive procedures include tests of details and substantive analytical procedures to detect material misstatements.

Audit opinions are unmodified, qualified, adverse or a disclaimer; qualification is used when misstatements are material but not pervasive.

Going concern: the auditor evaluates management's assessment covering at least 12 months and considers whether a material uncertainty exists.