1121 theory

Topic 1 BDA/inventory
Time period assumptions: firm would find it desirable to report their
financial statements more frequently therefore the economic life could be
divided into artificial time periods.
Why are adjusting entries required?
The purpose of balance day adjustment is to recognise revenue and
expenses in the relevant Period.
Compare and contrast the purposes of adjusting entries, closing entries
and reversing entries
The purpose of closing entry is to transfer profit and loss to owners equity
account, produce a zero balance in each of the temporary account. P/L
summary is another temporary account to which revenue and cost
incurred in the period are closed, also it helps avoid excessive details in
the capital account.
The purpose of reversing entries : to prevent double counting entries,
usually occurs on the first day of the new period on the general journal.
Define term inventory
Held for sale in the ordinary course of business
In the process of production
In the form of materials or supplies to be consumed in the production
process or in the rendering service
Trade discount vs settlement discount

Trade discount is a reduction in suggested list price granted to certain customers.

Trade discount is not recorded in the accounts but appears as a deduction from the list
price shown on the invoice. Settlement discount is an incentive offered to the buyer to
induce early payment of an amount outstanding from a credit sale.
What are the disadvantages of the perpetual and period inventory system?
Disadvantages of perpetual inventory systems:
Costly to implement
Huge record keeping
Increased monitoring
False reliability
Disadvantages of periodic inventory systems:
Requires physical stocktake to measure profit
Do not maintain records of inventory movements
Cannot identify stock gain or stock loss
NRV
Is the estimated selling price in the ordinary course of business less
the estimated cost of completion and the estimated costs necessary
to make the sale.
Cost of inventory
Including the cost of purchase, the cost of converting the goods into a position ready
for sale and other costs incurred in bringing the inventory to the current location and
condition.
Difference between allowance method and direct write off, which is preferable
Although the direct write-off method seems more objective, it is more
likely to violate the matching principle (all cost and expenses incurred in
generating revenues be identified with those revenues period by
period).So, if sales are made just before the accounting period, the

expense for bad debt will not be recognized when the period will be over.
As a result, your expenses will be understated and the expenses for the
next period will be overstated. If you are accounting big numbers, which
will really overstate the stock price. Therefore, direct write-off method is
not generally accepted accounting principle.

What is the purpose of depreciation

Depreciation is the allocation of the cost of an asset to expense over its
useful life in a rational and systematic manner and represents the future
economic benefit that has been used in the period.

Topic 2
Liabilities
definition of liability
A present obligation to another party
Legally enforceable
Equitable obligation
Constructive obligation
Topic 3 Company reporting
different equity accounts required in the different form of business structure
Sole trader: control by one person, easy to form, easy to dissolve and cheap to form
Partnership: relationship that subsists between persons carrying on business in
common with a view to profit.
Adv: pool of resources both capital and labour
Relatively cheap and easy to form
Minimal government regulation
DIS: joint and several liability/unlimited liability/limited life/mutual agency/difficualt
to transfer ownership
Company: a company is a legal entity or artificial separate and distinct from its
owners.
Difference between revenue reserve and capital reserve
Reserves are basically revenue and capital in nature
Revenue reserve: a revenue reserve is created by transferring profits from the
retained earning account. Example could be general reserve.
Capital reserve: Contributions to the capital reserve account can be made from
government subsidies, donated funds, or can be set aside from the firm's or
municipality's regular revenue-generating operations.

Purpose of application , bank trust and calls

Application : to record receipt of application amount received
Bank trust: company put money they receive from the application
into this account, in order to refund investors easily in the future.
Calls: a final payment required to pay by the investor
When do dividends become liabilities
On the declaration date Dr retained earning
Cr dividend payable
Topic 4 Statement of Cash Flows
Explain the nature of items that would be included in the financing section of the
statement of cash flows. Provide an example to support your answer.
Financing section relate to changing the size and composition of the financial structure of
the entity, including equity, and borrowings not falling within the definition of cash. Relate
predominately to the Non current liability and Equity section of the Statement of Financial Position
but consider current loans
Cash inflows :

 Issue of shares or other equity instrument of the entity

Borrowing funds through issue of secured and unsecured loans
Cash outflows :
Repayment of loans
Payment of dividends
Share buybacks

Investing activities are the acquisition and disposal of long-term

assets and other investments not included in cash and cash
equivalents.
Operating activities: relate to the principle revenue-producing
activities of the entity, cash effects of transactions that create
income and expense
Non cash activities has to be disclosed in note to the cash flow
statement such as issue of shares to purchase assets, conversion of
bonds into shares etc.

Topic 6 ratio analysis

Current ratio
Liquidity ratios
Measure the short term ability of an entity to pay its debt when
they fall due and meet unexpected need for cash, important to
bankers suppliers and other short-term creditors. 2.96: 1 means for
every dollar of current liabilities, Bikes R US has 2.96 of current
assets. Maybe indicate a high level of inventory and may have lots
of account receivables.
Acid test ratio
Measure of an entitys immediate short term liquidity; exclude
inventory and prepayments which are the least liquid current
assets.
Receivable turnover
The larger the better and suggest more account receivables can be
turned into cash. Measure the effectiveness of credit sale policies
and the number of times.
Inventory turnover
Profitability
Profit margin
Is a measure of the percentage of each dollar of sales that results in
profit, and the ability to obtain debt and equity financing. High
volume entities usually have low profit margins.
Asset turnover
Measure how efficiently an entity uses its assets to generate sales.
The result demonstrate how much profit can be generated from per
dollar of asset and it vary between industries.
ROA
Measure overall profitability with the investment in assets, measure
how much profit is generated for the carrying amount of total
assets.
ROE
It measures profitability from the shareholders point of view. The
result would means how much dollar of profit was generated from

per dollar of equity. A substantially higher ROE would indicate that

the entity is making use of the leverage. the entity would earn more
on lending the fund than the cost of borrowing it.
Gross profit margin
Measure the percentage of each dollar of sale result in gross profit
Gearings
Debit to total assets ratio
The higher the ratio the greater the leverage the firm has. Measure
the percentage of total assets provided by creditors.
Topic 7 Non-current assets
Cost of a PPE asset does not include expenditure such as yearly
maintance, motor vehicle expenses, insurance for the PPE these
expenditures are treated as expense when they incurred.
Which items are included in the cost of a non current asset such as
equipment
The cost of equipment consists of the cash purchase price, freight charges
and insurance during the transit paid by the purchaser, also includes
expenditures such as testing, assembling and installing.
What is meant by impairment
A PPE asset with a carrying amount in excess of the recoverable amount
is impaired