Financial and management accounting
This domain tests double-entry bookkeeping, the preparation of IFRS-based financial statements (as notified by SECP under the Companies Act 2017) and the interpretation of those statements through ratios. It also draws the line between external financial reporting and internal management reporting.
Core concepts
- Framework: accounting equation Assets = Liabilities + Equity; accrual basis and matching; going concern and prudence.
- Revenue (IFRS 15): identify the contract, identify performance obligations, determine the transaction price, allocate it, and recognise revenue when each obligation is satisfied (at a point in time or over time).
- Adjustments: accruals and prepayments; depreciation under IAS 16 (cost or revaluation model, useful life, residual value); inventory under IAS 2 at the lower of cost and net realisable value, with reversals capped at original cost; allowances for doubtful debts.
- Cash flow statement (IAS 7): operating (indirect method starts with profit before tax, adds back non-cash items, adjusts for working capital), investing, financing. Interest paid may be classified as operating or financing but must be consistent.
- Ratios: liquidity (current, quick), efficiency (inventory days, receivable days, payable days), gearing, profitability, and ROCE = EBIT ÷ capital employed.
Worked example
Profit before tax 500; depreciation 80; receivables increased 60; payables decreased 30; tax paid 90; capital expenditure 150. Operating cash flow = 500 + 80 − 60 − 30 = 490, then less tax paid 90 = 400. Investing outflow = 150. Net cash movement before financing = +250. The logic: reverse non-cash charges, then reverse the cash effect of working capital movements - a rise in receivables consumes cash.
Traps that cost marks
Adding an increase in receivables instead of deducting it; placing capital expenditure in operating activities; forgetting tax paid; reversing depreciation in the direct method; reporting inventory above NRV because cost was higher.