Accounting A2 Level Theory and Practice Book

750.00

Book Code : 116
Number of Pages : 326
Author : M. Nauman Malik
Language : English
Publishers : Read and Write Publications

 

Categories: ,

Description

TABLE OF CONTENTS
PREFACE ……………………………………………………………………………………………………………………… 3
CHAPTER 1 ACCOUNTING FOR NON PROFIT ORGANISATIONS ……………………………………………….. 12
1.1 COMPARISON BETWEEN PROFIT AND NON- PROFIT MAKING ORGANIZATIONS …………………………………… 12 Accounting A Level Theory And Practice Book
1.2 INCOMES AND EXPENSES OF NON PROFIT ORGANIZATIONS …………………………………………………………. 12
1.2.1 Incomes of Non Profit Organizations ……………………………………………………………… 12
1.2.2 Expenses of Non Profit organizations …………………………………………………………….. 12
1.3 SOME PECULIAR TERMS OF NON PROFIT ORGANIZATIONS ………………………………………………………….. 12
1.3.1 Life Membership fee ……………………………………………………………………………………. 13
1.3.2 Legacy ……………………………………………………………………………………………………….. 13
1.3.3 Gift ……………………………………………………………………………………………………………. 13
1.3.4 Grants and Donations ………………………………………………………………………………….. 13
1.4 ACCOUNTING BY NON PROFIT ORGANIZATIONS ………………………………………………………………………. 13
1.4.1 Receipts and Payments Account ……………………………………………………………………. 13
1.4.2 Income and Expenditure Account ………………………………………………………………….. 14
1.4.3 Trading Account ………………………………………………………………………………………….. 14
1.4.4 Income and Expenses on Same Head …………………………………………………………….. 14
1.4.5 Accounting for Subscriptions ………………………………………………………………………… 15
1.5 PREPARATION OF FINANCIAL STATEMENTS …………………………………………………………………………….. 16
REVIEW QUESTIONS………………………………………………………………………………………………………………… 17
CHAPTER 2 SALE OF BUSINESS ………………………………………………………………………………………….. 22
2.1 REASONS OF SELLING A BUSINESS ………………………………………………………………………………………. 22
2.2 REALIZATION ACCOUNT ………………………………………………………………………………………………….. 22
2.3 ACCOUNTING TREATMENT ON SALE OF BUSINESS …………………………………………………………………….. 22
2.3.1 Assets on Dissolution …………………………………………………………………………………… 22
2.3.2 Goodwill on Dissolution ……………………………………………………………………………….. 23
2.3.3 Liabilities on Dissolution ………………………………………………………………………………. 23
2.3.4 Expenses on Dissolution ………………………………………………………………………………. 24
2.3.5 Profit (loss) on Realization Account ……………………………………………………………….. 24
2.3.6 Partners’ Loans Accounts on Dissolution ………………………………………………………… 24
2.3.7 Current Account Balances on Dissolution ……………………………………………………….. 24
2.3.8 Cash or Bank Balance on Dissolution ……………………………………………………………… 24
2.3.9 Partners’ Capital Accounts on Dissolution ………………………………………………………. 25
2.4 SALE OF BUSINESS TO A COMPANY ……………………………………………………………………………………… 25
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 30
CHAPTER 3 BUSINESS PURCHASE AND MERGER …………………………………………………………………… 35
3.1 PURCHASED GOODWILL ………………………………………………………………………………………………….. 35
3.2 INTERNALLY DEVELOPED GOODWILL ……………………………………………………………………………………. 36
3.3 PERSONAL GOODWILL ……………………………………………………………………………………………………. 36
3.4 THE OPPOSITE OF PAYING FOR GOODWILL (NEGATIVE GOODWILL) ……………………………………………….. 36
3.4.1 Accounting for Negative Goodwill …………………………………………………………………. 37
3.5 DIFFERENCE BETWEEN THE PURCHASE OF A BUSINESS AND THE PURCHASE OF ASSETS …………………………. 37
3.6 COMPONENTS OF PURCHASE CONSIDERATION ……………………………………………………………………….. 37
3.6.1 Assets Taken Over ……………………………………………………………………………………….. 37
3.6.2 Liabilities Taken Over …………………………………………………………………………………… 38
3.7 DISSOLUTION EXPENSES …………………………………………………………………………………………………. 38
3.8 ACCOUNTING TREATMENT OF AMALGAMATION OF BUSINESSES ……………………………………………………. 38
3.9 DISTINCTION BETWEEN AMALGAMATION AND PURCHASE OF BUSINESS …………………………………………… 38
3.10 AMALGAMATION OF BUSINESSES ……………………………………………………………………………………….. 38
3.10.1 Reasons for Amalgamation …………………………………………………………………………… 38
3.10.2 Accounting Procedure………………………………………………………………………………….. 38
3.10.3 Goodwill on Amalgamation ………………………………………………………………………….. 39
3.11 CONVERSION OF PARTNERSHIP INTO COMPANY ………………………………………………………………………. 39
3.12 PAYMENT FOR PURCHASE OF BUSINESS – PURCHASE CONSIDERATION …………………………………………….. 40
3.13 ENTRIES TO RECORD THE PURCHASE OF BUSINESS ……………………………………………………………………. 40
3.14 CASH AND BANK BALANCES OF PARTNERSHIPS ON PURCHASE ……………………………………………………… 41
3.15 RETURN ON INVESTMENT ………………………………………………………………………………………………… 41
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 43
CHAPTER 4 COMPANY FINANCIAL STATEMENTS …………………………………………………………………… 49
4.1 THE NEED FOR COMPANIES………………………………………………………………………………………………. 49
4.2 SOURCES OF FINANCE FOR A COMPANY ……………………………………………………………………………….. 49
4.3 TYPES OF SHARES …………………………………………………………………………………………………………. 49
4.3.1 Ordinary Shares ………………………………………………………………………………………….. 49
4.3.2 Preference Shares ……………………………………………………………………………………….. 50
4.4 DEBENTURES ………………………………………………………………………………………………………………. 50
4.5 CONVERTIBLE LOAN STOCK ……………………………………………………………………………………………… 51
4.6 PUBLISHED ACCOUNTS OF LIMITED COMPANIES ……………………………………………………………………… 51
4.6.1 Role of IAS 1 in Preparation of Accounts ………………………………………………………… 51
4.6.2 Accounting Concepts Applied in Preparation of Accounts ………………………………… 52
4.6.3 Structure and Content of Financial Statements ……………………………………………….. 52
4.6.4 Reporting Period …………………………………………………………………………………………. 52
4.7 INCOME STATEMENT ……………………………………………………………………………………………………… 52
4.8 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET) …………………………………………………………….. 53
4.8.1 Assets ………………………………………………………………………………………………………… 54
4.8.2 Liabilities ……………………………………………………………………………………………………. 54
4.8.3 Net Current Assets ………………………………………………………………………………………. 55
4.8.4 Equity ………………………………………………………………………………………………………… 55
4.9 NOTES TO THE FINANCIAL STATEMENTS ………………………………………………………………………………… 55
4.10 STATEMENT OF CHANGES IN EQUITY ……………………………………………………………………………………. 55
4.11 DIVIDENDS ON ORDINARY SHARES ……………………………………………………………………………………… 55
4.11.1 IAS rules for Ordinary dividends ……………………………………………………………………. 56
4.12 WHY COMPANY ACCOUNTS ARE PUBLISHED? ………………………………………………………………………… 56
4.13 LIMITATIONS OF PUBLISHED COMPANY ACCOUNTS …………………………………………………………………… 56
4.14 FINANCIAL STATEMENTS IN CIE EXAMS ………………………………………………………………………………… 56
4.15 RESERVES ………………………………………………………………………………………………………………….. 59
4.16 DIFFERENCE BETWEEN PROVISIONS AND RESERVES ………………………………………………………………….. 60
4.17 DIRECTORS’ REPORT ……………………………………………………………………………………………………… 60
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 61
CHAPTER 5 ISSUE OF SHARES & DEBENTURES ……………………………………………………………………… 67
5.1 PRICES OF A SHARE ……………………………………………………………………………………………………….. 67
5.1.1 Par Value ……………………………………………………………………………………………………. 67
5.1.2 Issue Price ………………………………………………………………………………………………….. 67
5.1.3 Book Value …………………………………………………………………………………………………. 67
5.1.4 Market Value ……………………………………………………………………………………………… 67
5.2 SELLING SHARES TO THE GENERAL PUBLIC …………………………………………………………………………….. 67
5.2.1 Issue of Shares at Par …………………………………………………………………………………… 68
5.2.2 Issue of Shares at Premium (at a price more than face value) …………………………… 68
5.3 RIGHTS ISSUE ……………………………………………………………………………………………………………… 68
5.3.1 Advantages of Rights Issue …………………………………………………………………………… 69
5.3.2 Disadvantages of Rights Issue ……………………………………………………………………….. 69
5.4 BONUS OR SCRIP ISSUE …………………………………………………………………………………………………… 69
5.4.1 Reasons for Bonus Issue ………………………………………………………………………………. 69
5.4.2 Effect on Earnings per Share (EPS) …………………………………………………………………. 70
5.4.3 Advantages of Bonus Issue …………………………………………………………………………… 70
5.4.4 Disadvantages of Bonus Issue ……………………………………………………………………….. 71
5.5 DIFFERENCE BETWEEN RIGHTS AND BONUS ISSUE ……………………………………………………………………. 71
5.6 ISSUE OF LOANS AND DEBENTURES …………………………………………………………………………………….. 72
5.6.1 Issue of Debentures at Par ……………………………………………………………………………. 72
5.6.2 Issue of Debentures at Premium (at a Price more than Face Value) …………………… 73
5.6.3 Issue of Debentures at Discount (at a Price below Face Value)………………………….. 73
REVIEW QUESTIONS………………………………………………………………………………………………………………… 74
CHAPTER 6 STATEMENT OF CASH FLOWS ……………………………………………………………………………. 77
6.1 CLASSIFICATIONS OF CASH FLOWS – AN EXAMPLE…………………………………………………………………….. 77
6.2 CASH AND CASH EQUIVALENTS …………………………………………………………………………………………. 78
6.2.1 Cash …………………………………………………………………………………………………………… 78
6.2.2 Cash Equivalents …………………………………………………………………………………………. 78
6.2.3 Bank Overdrafts ………………………………………………………………………………………….. 78
6.3 PREPARATION OF A STATEMENT OF CASH FLOWS ……………………………………………………………………… 78
6.4 CASH FLOW FROM OPERATING ACTIVITIES…………………………………………………………………………….. 78
6.4.1 Importance of Cash Flow from Operating Activities …………………………………………. 78
6.5 CALCULATION OF CASH FLOW FROM OPERATING ACTIVITIES ……………………………………………………….. 78
6.5.1 Cash from Operating Activities in Direct Method …………………………………………….. 78
6.5.2 Cash from Operating Activities in Indirect Method ………………………………………….. 79
6.6 CALCULATION OF OPERATING PROFIT ………………………………………………………………………………….. 81
6.7 INVESTING ACTIVITIES ……………………………………………………………………………………………………. 81
6.8 FINANCING ACTIVITIES …………………………………………………………………………………………………… 82
6.9 CASH FLOW AT A GLANCE ……………………………………………………………………………………………….. 82
6.10 USES OF A STATEMENT OF CASH FLOWS ………………………………………………………………………………… 85
6.11 LIMITATIONS OF A STATEMENT OF CASH FLOWS ……………………………………………………………………….. 85
6.12 USERS OF STATEMENT OF CASH FLOWS ………………………………………………………………………………… 85
6.13 DISCLOSURE OF NON CASH ACTIVITIES ………………………………………………………………………………… 86
6.14 STATEMENT OF CASH FLOWS FOR BUSINESSES OTHER THAN LIMITED COMPANIES ………………………………. 86
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 87
CHAPTER 7 INTERNATIONAL ACCOUNTING STANDARDS ……………………………………………………….. 98
IAS 1 PRESENTATION OF FINANCIAL STATEMENTS ……………………………………………………………………………. 99
IAS 2 INVENTORIES ………………………………………………………………………………………………………………. 99
IAS 7 STATEMENT OF CASH FLOWS ………………………………………………………………………………………….. 101
IAS 8 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS ………………………………….. 101
IAS 10 EVENTS AFTER THE REPORTING PERIOD ……………………………………………………………………………… 103
IAS 16 PROPERTY, PLANT, AND EQUIPMENT…………………………………………………………………………………. 104
IAS 36 IMPAIRMENT OF ASSETS ……………………………………………………………………………………………….. 105
IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS ……………………………………………….. 106
IAS 38 INTANGIBLE ASSETS …………………………………………………………………………………………………….. 108
7.41 ETHICS RELATING TO THE PRACTICE OF ACCOUNTING ……………………………………………………………… 109
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 111
CHAPTER 8 AUDITING AND STEWARDSHIP OF LIMITED COMPANIES ……………………………………… 115
8.1 ROLE OF DIRECTORS ……………………………………………………………………………………………………. 115
8.2 ROLE OF AUDITORS ……………………………………………………………………………………………………… 117
8.3 PREPARATION AND RENDERING OF AUDITORS’ REPORT ……………………………………………………………. 118
8.3.1 Types of opinion………………………………………………………………………………………… 118
8.3.2 Understand the Entity’s Environment ………………………………………………………….. 118
8.4 WHAT IS NOT EXPECTED FROM AUDITORS……………………………………………………………………………. 118
8.5 DIFFERENCE BETWEEN THE DUTIES OF MANAGEMENT AND AUDITORS …………………………………………. 119
8.6 TRUE AND FAIR VIEW IN FINANCIAL STATEMENTS …………………………………………………………………… 119
CHAPTER 9 RATIO ANALYSIS ……………………………………………………………………………………………. 121
9.1 FINANCIAL RATIOS ………………………………………………………………………………………………………. 121
9.2 ANALYSIS OF RATIOS ……………………………………………………………………………………………………. 121
9.2.1 Comparing one Year with Another (Trend or Time Series Analysis) ………………….. 121
9.2.2 Comparing one Business with another Business (Cross-Sectional Analysis) ………. 122
9.3 DEMONSTRATION OF RATIOS ………………………………………………………………………………………….. 122
9.4 RATIOS IN ADVANCED LEVEL SYLLABUS ………………………………………………………………………………. 122
9.4.1 Working Capital Cycle ………………………………………………………………………………… 122
9.4.2 Net Working Assets to Sales (revenue) …………………………………………………………. 122
9.4.3 Earnings per Share …………………………………………………………………………………….. 123
9.4.4 Price-Earnings (P/E) ratio ……………………………………………………………………………. 123
9.4.5 Dividend per Share…………………………………………………………………………………….. 124
9.4.6 Dividend yield ratio ……………………………………………………………………………………. 124
9.4.7 Dividend Cover ………………………………………………………………………………………….. 124
9.4.8 Income Gearing …………………………………………………………………………………………. 125
9.4.9 Gearing …………………………………………………………………………………………………….. 125
9.5 USES OF RATIO ANALYSIS ………………………………………………………………………………………………. 127
9.6 LIMITATIONS OF RATIO ANALYSIS ……………………………………………………………………………………… 127
9.7 USERS OF FINANCIAL RATIOS ………………………………………………………………………………………….. 127
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 129
CHAPTER 10 JOINT VENTURE ACCOUNTS ……………………………………………………………………………. 133
10.1 FEATURES OF JOINT VENTURES ………………………………………………………………………………………… 133
10.2 OBJECTIVES OF JOINT VENTURES ……………………………………………………………………………………… 133
10.3 EXAMPLES OF JOINT VENTURES: ………………………………………………………………………………………. 133
10.4 PARTNERSHIPS AND JOINT VENTURES COMPARED ………………………………………………………………….. 134
10.5 DIFFERENCE BETWEEN CONSIGNMENT AND JOINT VENTURES …………………………………………………….. 134
10.6 ACCOUNTING FOR JOINT VENTURES ………………………………………………………………………………….. 135
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 139
CHAPTER 11 CONSIGNMENT ACCOUNTS …………………………………………………………………………….. 142
11.1 CHARACTERISTICS OF CONSIGNMENT ………………………………………………………………………………… 142
11.2 DIFFERENCE BETWEEN CONSIGNMENT AND SALE …………………………………………………………………… 143
11.3 TERMS USED IN CONSIGNMENT ACCOUNTS …………………………………………………………………………. 143
11.3.1 Consignor …………………………………………………………………………………………………. 143
11.3.2 Consignee …………………………………………………………………………………………………. 143
11.4 GOODS SENT ON CONSIGNMENT………………………………………………………………………………………. 144
11.5 PROFORMA INVOICE ……………………………………………………………………………………………………. 144
11.6 EXPENSES ON CONSIGNMENT …………………………………………………………………………………………. 144
11.6.1 Commission ………………………………………………………………………………………………. 144
11.7 LOSSES ON CONSIGNMENT …………………………………………………………………………………………….. 145
11.7.1 Normal Loss ……………………………………………………………………………………………… 145
11.7.2 Abnormal Loss …………………………………………………………………………………………… 145
11.8 ACCOUNT SALES ………………………………………………………………………………………………………… 146
11.9 ADVANCE PAYMENTS BY CONSIGNEE …………………………………………………………………………………. 146
11.10 VALUATION OF INVENTORY …………………………………………………………………………………………….. 146
11.11 RETURN OF GOODS BY THE CONSIGNEE ………………………………………………………………………………. 147
11.12 ACCOUNTS PREPARED BY CONSIGNOR ………………………………………………………………………………… 147
11.12.1 Consignment Account ………………………………………………………………………………… 147
11.12.2 Consignee’s Account ………………………………………………………………………………….. 147
11.12.3 Consignment of goods at invoice price (at cost plus profit) …………………………….. 148
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 151
CHAPTER 12 MANUFACTURING ACCOUNTS …………………………………………………………………….. 156
12.1 THE PRIME COST SECTION …………………………………………………………………………………………….. 156
12.1.1 Raw Materials Cost ……………………………………………………………………………………. 156
12.1.2 Direct Labour Cost …………………………………………………………………………………….. 156
12.1.3 Direct expenses …………………………………………………………………………………………. 156
12.2 FACTORY (PRODUCTION) OVERHEADS ……………………………………………………………………………….. 157
12.3 MANUFACTURING ACCOUNTS FOR SEPARATE PRODUCTS ………………………………………………………….. 158
12.4 PURPOSE OF MANUFACTURING ACCOUNTS …………………………………………………………………………. 158
12.5 TRADING SECTION ………………………………………………………………………………………………………. 158
12.6 PROFIT AND LOSS SECTION …………………………………………………………………………………………….. 158
12.7 STATEMENT OF FINANCIAL POSITION ………………………………………………………………………………….. 158
12.7.1 Inventories in a Manufacturing Business ………………………………………………………. 159
12.8 FACTORY (MANUFACTURING) PROFIT ………………………………………………………………………………… 163
12.8.1 Benefits of Transferring Goods at Production Cost plus Factory Profit. …………….. 163
12.8.2 Drawbacks of Transferring Goods to Trading Account at Market Price …………….. 163
12.8.3 Accounting Treatment ……………………………………………………………………………….. 164
12.9 PROVISION FOR UNREALISED PROFIT …………………………………………………………………………………. 164
REVIEW QUESTIONS………………………………………………………………………………………………………………. 166
CHAPTER 13 ACTIVITY BASED COSTING ………………………………………………………………………………. 170
13.1 COSTING ISSUES IN CONVENTIONAL COSTING ………………………………………………………………………. 171
13.2 APPLICATION OF ACTIVITY BASED COSTING………………………………………………………………………….. 171
13.3 DIFFERENCE BETWEEN CONVENTIONAL (AND ACTIVITY BASED COSTING ………………………………………… 172
13.4 TERMS FREQUENTLY USED IN ACTIVITY BASED COSTING …………………………………………………………… 172
13.4.1 Activity …………………………………………………………………………………………………….. 173
13.4.2 Resource ………………………………………………………………………………………………….. 173
13.4.3 Cost Drivers ………………………………………………………………………………………………. 173
13.5 HIERARCHY OF ACTIVITIES ……………………………………………………………………………………………… 173
13.5.1 Unit (output) Level Activities ………………………………………………………………………. 173
13.5.2 Batch Level Activities …………………………………………………………………………………. 173
13.5.3 Product (Product Sustaining) Level Activities ………………………………………………… 173
13.5.4 Facility (Facility Sustaining) Level Costs ………………………………………………………… 174
13.5.5 Customer Level Activities ……………………………………………………………………………. 174
13.6 EXAMPLES OF COST DRIVERS ………………………………………………………………………………………….. 174
13.7 BENEFITS OF ACTIVITY BASED COSTING ……………………………………………………………………………… 175
13.8 LIMITATIONS OF ACTIVITY BASED COSTING ………………………………………………………………………….. 175
13.9 STEPS FOR IMPLEMENTING ACTIVITY BASED COSTING ……………………………………………………………… 175
13.10 ROLE OF ACTIVITY BASED COSTING IN NON-MANUFACTURING SECTOR ………………………………………….. 180
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 180
CHAPTER 14 STANDARD COSTING ……………………………………………………………………………………… 187
14.1 TYPES OF STANDARDS…………………………………………………………………………………………………… 187
14.2 ADVANTAGES OF STANDARD COSTING ……………………………………………………………………………….. 188
14.3 LIMITATIONS OF STANDARD COSTING…………………………………………………………………………………. 188
14.4 SETTING STANDARD COSTS …………………………………………………………………………………………….. 188
14.4.1 Setting Standards for Direct Materials………………………………………………………….. 189
14.4.2 Setting Direct Labour Cost ………………………………………………………………………….. 189
14.5 VARIANCE ANALYSIS …………………………………………………………………………………………………….. 189
14.6 TOTAL ‘DIRECT MATERIAL COST VARIANCE’ …………………………………………………………………………. 189
14.6.1 Material Price Variance ………………………………………………………………………………. 190
14.6.2 Material Usage Variance …………………………………………………………………………….. 190
14.6.3 Symbols used for Calculating Direct Material Variances …………………………………. 191
14.6.4 When material purchased is different from materials used …………………………….. 192
14.6.5 Typical Causes of Material Variances ……………………………………………………………. 193
14.7 TOTAL ‘DIRECT LABOUR COST VARIANCE’ ……………………………………………………………………………. 194
14.7.1 Labour Rate Variance’ ………………………………………………………………………………… 194
14.7.2 Labour Efficiency Variance ………………………………………………………………………….. 194
14.7.3 Symbols used for Calculating Direct Labour Variances ……………………………………. 195
14.7.4 Standard Hours …………………………………………………………………………………………. 195
14.7.5 Typical Causes of Labour Variances ……………………………………………………………… 196
14.8 VARIABLE OVERHEAD VARIANCES …………………………………………………………………………………….. 197
14.8.1 Variable Overhead Expenditure Variance ……………………………………………………… 197
14.8.2 Variable Overhead Efficiency Variance …………………………………………………………. 198
14.8.3 Typical Causes of Variable Overhead Variances …………………………………………….. 198
14.9 TOTAL FIXED OVERHEADS VARIANCE …………………………………………………………………………………. 199
14.9.1 Peculiar nature of Fixed Overhead Variances ………………………………………………… 200
14.9.2 Fixed overhead expenditure (spending) variance …………………………………………… 200
14.9.3 Fixed Overhead Volume Variance ………………………………………………………………… 200
14.9.4 Fixed Overhead Efficiency Variance ……………………………………………………………… 201
14.9.5 Fixed Overhead Capacity Variance ………………………………………………………………. 201
14.9.6 Typical Causes of Fixed Overhead Variances …………………………………………………. 204
14.10 SALES VARIANCES ……………………………………………………………………………………………………….. 204
14.10.1 Sales Price Variance …………………………………………………………………………………… 205
14.10.2 Sales Volume Variances ……………………………………………………………………………… 205
14.10.3 Quantity Variance ……………………………………………………………………………………… 205
14.10.4 Typical Causes of Sales Variances ………………………………………………………………… 207
14.11 FIXED BUDGET …………………………………………………………………………………………………………… 207
14.12 FLEXIBLE BUDGET ……………………………………………………………………………………………………….. 207
14.12.1 Steps for preparing a flexible budget ……………………………………………………………. 208
14.13 RECONCILIATION OF BUDGETED AND ACTUAL PROFITS …………………………………………………………….. 210
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 211
CHAPTER 15 BUDGETING AND BUDGETARY CONTROL ………………………………………………………….. 219
15.1 DIFFERENCE BETWEEN BUDGETS AND BUDGETARY CONTROL …………………………………………………….. 219
15.2 DIFFERENCE BETWEEN STANDARD COSTS AND BUDGETS ………………………………………………………….. 219
15.3 ADVANTAGES OF PREPARING BUDGETS FROM STANDARD COSTS …………………………………………………. 220
15.4 DIFFERENCE BETWEEN FORECASTING AND BUDGETING ……………………………………………………………. 220
15.5 PURPOSES OF BUDGET …………………………………………………………………………………………………. 220
15.6 ADVANTAGES OF BUDGETARY CONTROL SYSTEM ……………………………………………………………………. 221
15.7 LIMITATIONS OF BUDGETARY CONTROL SYSTEM …………………………………………………………………….. 221
15.8 STAGES IN THE BUDGETARY PLANNING PROCESS ……………………………………………………………………. 221
15.9 EFFECTS OF PRINCIPAL BUDGET FACTORS ON THE PREPARATION OF BUDGETS ………………………………….. 222
15.10 BEHAVIOURAL ASPECTS OF BUDGETARY CONTROL SYSTEM ……………………………………………………….. 222
15.11 BUDGET PERIOD ………………………………………………………………………………………………………… 223
15.12 SALES BUDGET …………………………………………………………………………………………………………… 223
15.12.1 Factors Considered For Preparing Sales Budget …………………………………………….. 223
15.12.2 Steps for Preparing a Sales Budget ………………………………………………………………. 224
15.13 PRODUCTION BUDGET………………………………………………………………………………………………….. 224
15.13.1 Factors Considered for Preparing Production Budget …………………………………….. 224
15.13.2 Steps of Preparing a Production Budget ……………………………………………………….. 225
15.14 PURCHASES BUDGET ……………………………………………………………………………………………………. 225
15.14.1 Purchase Budget for Trading Firms ………………………………………………………………. 226
15.14.2 Steps of Preparing a Purchases Budget for a Trading Business ………………………… 226
15.14.3 Purchase Budget for Manufacturing Firms ……………………………………………………. 226
15.15.4 Steps of Preparing a Purchases Budget for a Manufacturing Business ……………… 227
15.15 DIRECT LABOUR BUDGET ………………………………………………………………………………………………. 228
15.15.1 Steps of Preparing a Labour Budget …………………………………………………………….. 228
15.16 TRADE RECEIVABLES BUDGET ………………………………………………………………………………………….. 229
15.17 TRADE PAYABLES BUDGET ……………………………………………………………………………………………… 230
15.17.1 Advantages of using a Trade Payables Budget ………………………………………………. 230
15.18 CASH BUDGET …………………………………………………………………………………………………………… 231
15.18.1 Steps for Preparing a Cash Budget ……………………………………………………………….. 231
15.18.2 Sections of a Cash Budget …………………………………………………………………………… 231
15.18.3 Differences between a Cash Budget and a Statement of cash flows …………………. 231
15.18.4 Uses of a Cash Budget ………………………………………………………………………………… 231
15.18.5 Actions to Avoid Cash Shortages …………………………………………………………………. 232
15.19 MASTER BUDGET ……………………………………………………………………………………………………….. 234
15.19.1 Budgeted Income Statement ………………………………………………………………………. 234
15.19.2 Budgeted Statement of financial position …………………………………………………….. 234
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 238
CHAPTER 16 CAPITAL INVESTMENT APPRAISAL ……………………………………………………………………. 245
16.1 REASONS FOR MAKING CAPITAL INVESTMENT DECISIONS ………………………………………………………….. 245
16.2 STEPS IN THE CAPITAL INVESTMENT APPRAISAL DECISIONS ……………………………………………………….. 245
16.3 METHODS FOR CAPITAL INVESTMENT APPRAISAL …………………………………………………………………… 246
16.4 ACCOUNTING RATE OF RETURN ……………………………………………………………………………………….. 246
16.4.1 Advantages of Accounting Rate of Return …………………………………………………….. 248
16.4.2 Disadvantages of Accounting Rate of Return ………………………………………………… 248
16.5 PAYBACK PERIOD ………………………………………………………………………………………………………… 248
16.5.1 Payback Period with Even Cash Flows ………………………………………………………….. 248
16.5.2 Payback Period with Uneven Cash Flows ………………………………………………………. 248
16.5.3 Advantages of Payback ………………………………………………………………………………. 250
16.5.4 Disadvantages of Payback …………………………………………………………………………… 250
16.6 TIME VALUE OF MONEY ……………………………………………………………………………………………….. 250
16.7 COMPOUND INTEREST ………………………………………………………………………………………………….. 251
16.8 PRESENT VALUE …………………………………………………………………………………………………………. 251
16.9 COST OF CAPITAL ……………………………………………………………………………………………………….. 252
16.10 DISCOUNTED PAYBACK PERIOD RULE ………………………………………………………………………………… 253
16.11 NET PRESENT VALUE ……………………………………………………………………………………………………. 253
16.11.1 Calculation of Net Present Value …………………………………………………………………. 254
16.11.2 Selection of Project ……………………………………………………………………………………. 254
16.11.3 Advantages of Net Present Value ………………………………………………………………… 255
16.11.4 Disadvantages of Net Present Value …………………………………………………………….. 255
16.12 INTERNAL RATE OF RETURN ……………………………………………………………………………………………. 255
16.12.1 Which Rate is Better? ………………………………………………………………………………… 256
16.12.2 Calculation of IRR ………………………………………………………………………………………. 256
16.12.3 Advantages of Internal Rate of Return …………………………………………………………. 257
16.12.4 Disadvantages of Internal Rate of Return ……………………………………………………… 257
16.13 NPV AND IRR, WHICH IS BETTER? …………………………………………………………………………………… 258
16.14 WHY NPV IS PREFERRED? …………………………………………………………………………………………….. 258
16.15 SUNK COST ………………………………………………………………………………………………………………. 258
16.16 RELEVANT COSTS ……………………………………………………………………………………………………….. 258
16.17 NON FINANCIAL FACTORS INVOLVED IN CAPITAL INVESTMENT DECISIONS ………………………………………. 259
16.18 SENSITIVITY ANALYSIS …………………………………………………………………………………………………… 259
16.19 PRESENT VALUE TABLE …………………………………………………………………………………………………. 259
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 261
CHAPTER 17 COMPUTERISED ACCOUNTING SYSTEMS ………………………………………………………….. 268
17.1 DIFFERENCE BETWEEN HARDWARE & SOFTWARE ………………………………………………………………….. 268
17.2 ADVANTAGES AND DISADVANTAGES OF COMPUTERISED ACCOUNTING ………………………………………………. 269
17.2.1 Advantages of Computerised Accounting ……………………………………………………… 269
17.2.2 Disadvantages of Computerised Accounting …………………………………………………. 270
17.3 DIFFERENCES BETWEEN MANUAL AND COMPUTERISED ACCOUNTING …………………………………………… 271
17.4 USERS OF COMPUTERISED ACCOUNTING …………………………………………………………………………….. 272
17.5 TRANSITION OF MANUAL TO COMPUTERISED ACCOUNTING ………………………………………………………. 272
17.6 INTEGRALITY OF DATA DURING TRANSFER TO AND IN COMPUTERIZED ACCOUNTS……………………………………….. 274
SOLUTIONS TO ODD NUMBERED QUESTIONS ………………………………………………………………………….. 276
CHAPTER 1 ……………………………………………………………………………………………………………………………. 276
CHAPTER 2 ……………………………………………………………………………………………………………………………. 278
CHAPTER 3 ……………………………………………………………………………………………………………………………. 280
CHAPTER 4 ……………………………………………………………………………………………………………………………. 282
CHAPTER 5 ……………………………………………………………………………………………………………………………. 285
CHAPTER 6 ……………………………………………………………………………………………………………………………. 286
CHAPTER 7 ……………………………………………………………………………………………………………………………. 289
CHAPTER 9 ……………………………………………………………………………………………………………………………. 290
CHAPTER 10 ………………………………………………………………………………………………………………………….. 292
CHAPTER 11 ………………………………………………………………………………………………………………………….. 294
CHAPTER 12 ………………………………………………………………………………………………………………………….. 297
CHAPTER 13 ………………………………………………………………………………………………………………………….. 299
CHAPTER 14 ………………………………………………………………………………………………………………………….. 303
CHAPTER 15 ………………………………………………………………………………………………………………………….. 309
CHAPTER 16 ………………………………………………………………………………………………………………………….. 312
KEY TO EVEN NUMBERED QUESTIONS ……………………………………………………………………………………. 317
INDEX ………………………………………………………………………………………………………………….. 324
Accounting A Level Theory And Practice Book

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