Accounting AS Level Theory and Practice

980.00

Book Code : 115
Number of Pages : 435
Author : M. Nauman Malik
Language : English
Publishers : Read and Write Publications

 

Categories: ,

Description

TABLE OF CONTENTS
PREFACE 
CHAPTER 1 BOOKKEEPING AND ACCOUNTING
1.1 BRANCHES OF ACCOUNTING ………………………………………………………………………………………………… 16
1.2 ACCOUNTING EQUATION ……………………………………………………………………………………………………. 16
1.2.1 Assets 17
1.2.2 Liabilities 17
1.2.3 Equity 17
1.2.4 Drawings 17
1.3 TRANSACTION ………………………………………………………………………………………………………………… 17
1.3.1 Cash Transactions 17
1.3.2 Credit Transactions 17
1.4 BALANCE SHEET (STATEMENT OF FINANCIAL POSITION) ………………………………………………………………… 19
1.4 .1 Balance Sheet (Vertical Style) 19
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 21
CHAPTER 2 ACCOUNTING FOR ASSETS, LIABILITIES AND CAPITAL 
2.1 EVOLUTION OF BOOK KEEPING …………………………………………………………………………………………….. 25
2.2 RULES OF DEBIT AND CREDIT ……………………………………………………………………………………………….. 25
2.3 LEDGER ………………………………………………………………………………………………………………………… 26
2.4 ACCOUNT ……………………………………………………………………………………………………………………… 26
2.4.1 “T” Account 26
2.5 DOUBLE-ENTRY RELATING TO ASSETS AND LIABILITIES …………………………………………………………………… 27
2.5.1 EXAMPLE 27
2.6 BALANCING OF AN ACCOUNT ……………………………………………………………………………………………….. 28
2.6.1 When should accounts be balanced? 30
2.7 TRIAL BALANCE ……………………………………………………………………………………………………………….. 31
2.7.1 Uses of a Trial Balance 31
2.7.2 Why is it Necessary for a Trial Balance to ‘Balance’? 31
2.7.3 Trial Balance – An aid to Financial Statements 32
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 33
CHAPTER 3 ACCOUNTING FOR INVENTORIES
3.1 INVENTORY OF GOODS ………………………………………………………………………………………………………. 35
3.2 BOOKKEEPING FOR INVENTORY OF GOODS ……………………………………………………………………………….. 35
3.3 PURCHASES ……………………………………………………………………………………………………………………. 35
3.3.1 Cash Purchases 35
3.3.2 Credit Purchases 36
3.4 SALES…………………………………………………………………………………………………………………………… 36
3.4.1 Cash Sales 36
3.4.2 Credit Sales 36
3.5 PURCHASES RETURNS (RETURN OUTWARDS) …………………………………………………………………………….. 37
3.6 SALES RETURNS (RETURNS INWARDS) …………………………………………………………………………………….. 37
3.7 TRADING SECTION OF INCOME STATEMENT ………………………………………………………………………………. 38
3.8 CLOSING OF INCOMES AND EXPENSES ……………………………………………………………………………………… 38
3.9 CLOSING INVENTORY …………………………………………………………………………………………………………. 39
3.10 OPENING INVENTORY ………………………………………………………………………………………………………… 40
3.11 CALCULATION OF PROFITS FOR SERVICE BUSINESSES …………………………………………………………………….. 40
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 41
CHAPTER 4 ACCOUNTING FOR INCOMES AND EXPENSES
4.1 INCOMES ………………………………………………………………………………………………………………………. 44
4.2 EXPENSES ……………………………………………………………………………………………………………………… 44
4.3 DOUBLE-ENTRY FOR EXPENSES AND INCOMES (REVENUES) …………………………………………………………….. 44
4.4 BOOKKEEPING FOR INCOMES AND EXPENSES …………………………………………………………………………….. 45
4.5 CALCULATION OF PROFIT FOR THE YEAR …………………………………………………………………………………… 46
4.6 CLOSING OF INCOMES AND EXPENSES ……………………………………………………………………………………… 46
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 48
CHAPTER 5 FINANCIAL STATEMENTS-AN INTRODUCTION
5.1 NEED FOR INCOME STATEMENT …………………………………………………………………………………………….. 50
5.2 USES OF INCOME STATEMENT ………………………………………………………………………………………………. 50
5.3 CARRIAGE INWARDS …………………………………………………………………………………………………………. 50
5.4 CARRIAGE OUTWARDS ………………………………………………………………………………………………………. 50
5.5 INCOME STATEMENT AND BALANCE SHEET-AN IMPORTANT CONSIDERATION …………………………………………. 51
5.6 ACCOUNTING PERIOD ……………………………………………………………………………………………………….. 51
5.7 DRAWINGS ……………………………………………………………………………………………………………………. 51
5.8 ASSETS …………………………………………………………………………………………………………………………. 51
5.8.1 Non-Current Assets 52
5.8.2 Current Assets 52
5.9 LIABILITIES …………………………………………………………………………………………………………………….. 52
5.9.1 Current Liabilities 52
5.9.2 Non-Current Liabilities 52
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 56
CHAPTER 6 BOOKS OF ORIGINAL ENTRY & DIVISION OF LEDGER
6.1 ADVANTAGES OF MAINTAINING BOOKS OF ORIGINAL ENTRY ………………………………………………………….. 62
6.2 COMPONENTS OF BOOKS OF ORIGINAL ENTRY …………………………………………………………………………… 62
6.3 SALES JOURNAL ………………………………………………………………………………………………………………. 62
6.3.1 Posting from the Sales Journal to the Ledger 63
6.3.2 Trade Discount 63
6.3.3 Sales on Credit Card 64
6.4 PURCHASES JOURNAL ………………………………………………………………………………………………………… 64
6.4.1 Posting from the Purchases Journal to the Ledger 64
6.5 RETURN INWARDS JOURNAL ………………………………………………………………………………………………… 65
6.5.1 Posting from the Returns Inwards Journal to the Ledger 65
6.6 RETURN OUTWARDS JOURNAL ……………………………………………………………………………………………… 66
6.6.1 Posting from the Returns Outwards Journal to the Ledger 66
6.7 GENERAL JOURNAL …………………………………………………………………………………………………………… 67
6.7.1 Posting from the General Journal to the Ledger 68
6.8 CASH BOOK …………………………………………………………………………………………………………………… 68
6.8.1 Two Column Cash Book 68
6.8.2 Cash Discounts 69
6.8.3 Three Column Cash Book 69
6.8.4 Nature of Discounts Columns 69
6.8.5 Folio Columns 70
6.8.6 Contra Entries 70
6.8.7 Balancing of Cash and Bank Columns 70
6.8.8 Cash Book in Recent Times 70
6.9 PERSONAL LEDGERS ………………………………………………………………………………………………………….. 71
6.10 CASH BOOK …………………………………………………………………………………………………………………… 71
6.11 GENERAL LEDGER …………………………………………………………………………………………………………….. 72
6.12 PRIVATE LEDGER ……………………………………………………………………………………………………………… 72
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 73
CHAPTER 7 BANK RECONCILIATION STATEMENTS
7.1 REASONS FOR DIFFERENCE BETWEEN BANK STATEMENT AND CASH BOOK BALANCE………………………………… 76
7.1.1 Items in the Bank Statement but not in the Cash Book 76
7.1.2 Items in the Cash Book but not in the Bank Statement 76
7.2 BANK RECONCILIATION STATEMENT ……………………………………………………………………………………….. 77
7.3 STEPS FOR PREPARING A BANK RECONCILIATION STATEMENT …………………………………………………………… 77
7.4 USES OF BANK RECONCILIATION STATEMENT……………………………………………………………………………… 80
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 82
CHAPTER 8 BAD DEBTS AND PROVISION FOR DOUBTFUL DEBTS 
8.1 BAD DEBTS ……………………………………………………………………………………………………………………. 86
8.2 DOUBTFUL DEBTS…………………………………………………………………………………………………………….. 86
8.3 PROVISION FOR DOUBTFUL DEBTS …………………………………………………………………………………………. 86
8.3.1 General Provision for Doubtful Debts 86
8.3.2 Specific Provision for Doubtful Debts 87
8.3.3 Calculation of Provision for Doubtful Debts 87
8.3.4 Treatment of Provision in Financial Statements 87
8.4 AGEING SCHEDULE …………………………………………………………………………………………………………… 88
8.5 BAD DEBTS RECOVERY ……………………………………………………………………………………………………….. 89
8.6 CASH DISCOUNTS ALLOWED AND PROVISION FOR DISCOUNTS ALLOWED ……………………………………………. 89
8.6.1 Benefits of Offering Cash Discounts 89
8.6.2 Recording of Provision for Discounts Allowed in Journal 90
8.7 WHY PROVISIONS ARE MADE FOR BAD DEBTS AND DISCOUNTS ALLOWED …………………………………………… 90
8.8 SALIENT POINTS TO NOTE …………………………………………………………………………………………………… 90
REVIEW QUESTIONS ………………………………………………………………………………………………………………… 92
CHAPTER 9 ACCOUNTING FOR NON-CURRENT ASSET
9.1 DEPRECIATION ………………………………………………………………………………………………………………… 94
9.2 AMORTIZATION AND DEPLETION……………………………………………………………………………………………. 94
9.3 EFFECTS ON CASH FLOWS …………………………………………………………………………………………………… 94
9.4 RELATIONSHIP WITH MARKET VALUE………………………………………………………………………………………. 94
9.5 CAUSES FOR DEPRECIATION …………………………………………………………………………………………………. 94
9.6 FACTORS FOR CALCULATING DEPRECIATION ………………………………………………………………………………. 95
9.6.1 The Original Cost of Asset 95
9.6.2 The Estimated Useful Economic Life 95
9.6.3 The Approximate Residual Value 95
9.7 CHARACTERISTICS OF DEPRECIATION ………………………………………………………………………………………. 95
9.8 WHY DEPRECIATION IS PROVIDED FOR? ……………………………………………………………………………………. 95
9.9 METHODS FOR CALCULATING DEPRECIATION …………………………………………………………………………….. 95
9.9.1 Revaluation Method 96
9.9.2 Straight Line Method or Original Cost Method 96
9.9.3 Reducing Balance Method 97
9.10 ANNUAL DEPRECIATION UNDER REDUCING BALANCE & STRAIGHT LINE METHODS …………………………………. 98
9.11 DISTINCTIVE FEATURES OF STRAIGHT LINE AND REDUCING BALANCE METHOD ……………………………………… 98
9.12 CHOICE OF A METHOD ………………………………………………………………………………………………………. 99
9.13 DIFFERENCE BETWEEN DEPRECIATION AND PROVISION FOR DEPRECIATION ………………………………………….. 99
9.14 DEPRECIATION POLICIES ……………………………………………………………………………………………………… 99
9.15 DEPRECIATION ACCOUNTING ……………………………………………………………………………………………….. 99
9.16 DEPRECIATION AND ACCOUNTING CONCEPTS …………………………………………………………………………… 101
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 103
CHAPTER 10 ACCOUNTING CONCEPTS AND CONVENTIONS
10.1 CONVENTIONS AND CONCEPTS – AN IMPLICATION …………………………………………………………………….. 106
10.2 DUAL ASPECT (DUALITY) CONCEPT ………………………………………………………………………………………. 106
10.3 BUSINESS ENTITY CONCEPT ……………………………………………………………………………………………….. 106
10.4 PRUDENCE CONCEPT ………………………………………………………………………………………………………. 107
10.5 CONSISTENCY CONCEPT ……………………………………………………………………………………………………. 107
10.6 MATERIALITY CONCEPT ……………………………………………………………………………………………………. 108
10.7 REALISATION CONCEPT …………………………………………………………………………………………………….. 108
10.8 ACCRUAL CONCEPT…………………………………………………………………………………………………………. 108
10.9 MATCHING CONCEPT ………………………………………………………………………………………………………. 108
10.10 SUBSTANCE OVER FORM …………………………………………………………………………………………………… 109
10.11 OBJECTIVITY …………………………………………………………………………………………………………………. 109
10.12 MONEY MEASUREMENT CONCEPT ………………………………………………………………………………………. 109
10.13 HISTORICAL COST CONCEPT ………………………………………………………………………………………………. 109
10.14 GOING CONCERN CONCEPT ……………………………………………………………………………………………….. 110
10.15 REVALUATION OF ASSETS ………………………………………………………………………………………………….. 110
10.16 A CRITICAL REVIEW OF ACCOUNTING CONVENTIONS ………………………………………………………………….. 110
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 111
CHAPTER 11 CAPITAL AND REVENUE 
11.1 TREATMENT OF CAPITAL AND REVENUE ITEMS IN FINANCIAL STATEMENT …………………………………………… 113
11.2 DISTINCTION BETWEEN CAPITAL AND REVENUE EXPENDITURES………………………………………………………. 113
11.2.1 Expenditures for Acquisition of a Non-current asset 113
11.2.2 Expenditures for Improving Efficiency /Capacity of a Non-current asset 113
11.2.3 Expenditure at the Initiation of Business 114
11.2.4 Expenditure on Extension of Business 114
11.2.5 Expenditures to Increase the Useful Life of an Asset 114
11.2.6 Expenditures of Abnormal Amounts 114
11.3 APPLICATION OF MATERIALITY CONCEPT ………………………………………………………………………………… 114
11.4 DIFFERENCE BETWEEN CAPITAL AND REVENUE RECEIPTS ……………………………………………………………… 114
11.4.1 Revenue Receipts 114
11.4.2 Capital Receipts 114
11.5 EFFECTS OF WRONG TREATMENT OF CAPITAL AND REVENUE ITEMS ………………………………………………… 115
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 117
CHAPTER 12 CORRECTION OF ERRORS AND SUSPENSE ACCOUNT
12.1 TYPES OF ERRORS …………………………………………………………………………………………………………… 118
12.1.1 Errors Not Affecting Agreement of Trial Balance 118
12.1.2 Errors Affecting Agreement of Trial Balance 120
12.2 SUSPENSE ACCOUNT ……………………………………………………………………………………………………….. 120
12.3 EFFECT ON PROFIT OF CORRECTING ERRORS ……………………………………………………………………………. 122
12.4 EFFECTS ON BALANCE SHEET OF CORRECTING ERRORS ………………………………………………………………… 122
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 123
CHAPTER 13 CONTROL ACCOUNTS
13.1 CONTROL ACCOUNTS IN CAMBRIDGE A LEVEL SYLLABUS ………………………………………………………………. 128
13.2 THE FORMAT OF SALES LEDGER AND PURCHASE LEDGER CONTROL ACCOUNTS ……………………………………. 128
13.3 HOW CONTROL ACCOUNTS ARE PREPARED? …………………………………………………………………………… 129
13.4 CONTRA ENTRY ……………………………………………………………………………………………………………… 130
13.5 TWO BALANCES OF CONTROL ACCOUNTS……………………………………………………………………………….. 131
13.5.1 Reasons for Having Two Balances of a Control Account 131
13.5.2 Treatment of Two Balances in the Balance Sheet 131
13.6 CORRECTION OF ERRORS IN CONTROL ACCOUNTS ……………………………………………………………………… 133
13.7 ADVANTAGES AND USES OF CONTROL ACCOUNTS ……………………………………………………………………… 136
13.8 LIMITATIONS (DISADVANTAGES) OF PREPARING CONTROL ACCOUNTS ………………………………………………. 136
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 137
CHAPTER 14 FINANCIAL STATEMENTS WITH ADJUSTMENTS
14.1 CASH AND ACCRUAL BASIS OF ACCOUNTING ……………………………………………………………………………. 142
14.2 NEED FOR ADJUSTMENTS ………………………………………………………………………………………………….. 142
14.3 TYPES OF ADJUSTMENTS …………………………………………………………………………………………………… 142
14.4 INVENTORY AT YEAR END ………………………………………………………………………………………………….. 143
14.4.1 Closing Inventory in Trial Balance 143
14.5 DRAWINGS OF GOODS FOR OWNER’S PERSONAL USE ………………………………………………………………… 143
14.6 ACCRUED EXPENSES ………………………………………………………………………………………………………… 143
14.7 ACCRUED INCOMES ………………………………………………………………………………………………………… 144
14.8 PREPAID EXPENSES (OTHER RECEIVABLES) ………………………………………………………………………………. 144
14.9 PRE-RECEIVED /DEFERRED INCOMES …………………………………………………………………………………….. 145
14.10 TREATMENT OF OPENING ACCRUALS OR PREPAYMENTS ………………………………………………………………. 145
14.11 DEPRECIATION ………………………………………………………………………………………………………………. 146
14.11.1 Methods of Depreciation 146
14.11.2 Depreciation Policies 146
14.11.3 Recording of Depreciation 146
14.12 BAD DEBTS ………………………………………………………………………………………………………………….. 147
14.12.1 Bad Debts written off (included in the trial balance) 147
14.12.2 Bad Debts to be written off (given as an adjustment) 147
14.13 PROVISION FOR DOUBTFUL DEBTS ……………………………………………………………………………………….. 147
14.14 ADJUSTING MORE THAN TWO ACCOUNTS ………………………………………………………………………………. 148
14.15 CALCULATION OF PROFITS FOR SERVICE BUSINESSES …………………………………………………………………… 150
14.16 USERS OF FINANCIAL STATEMENTS ……………………………………………………………………………………….. 150
14.17 LIMITATIONS OF FINANCIAL STATEMENTS ………………………………………………………………………………… 150
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 152
CHAPTER 15 ACCOUNTS FROM INCOMPLETE RECORDS
15.1 THE REASONS FOR INCOMPLETE RECORDS ………………………………………………………………………………. 160
15.2 NEED FOR PREPARING FINANCIAL STATEMENT FROM INCOMPLETE RECORDS ………………………………………. 160
15.3 CALCULATING PROFITS AND LOSSES FROM CHANGES IN CAPITAL/NET ASSETS …………………………………….. 160
15.3.1 Statement of Affairs 161
15.3.2 Statement of Profit or Loss 161
15.4 PREPARATION OF FINANCIAL STATEMENTS FROM INCOMPLETE RECORDS …………………………………………… 162
15.4.1 Calculation of Opening capital through Statement of Affairs 162
15.4.2 Preparation of Cash/Bank Account 162
15.4.3 Calculation of Total Sales 162
15.4.4 Calculation of Total Purchases 163
15.4.5 Calculation of Incomes/Expenses to be shown in Income Statement 164
15.4.6 Calculation of Non-Cash Expenses 166
15.5 MARK-UP AND MARGIN ………………………………………………………………………………………………….. 166
15.5.1 Use of Mark up and Margin to calculate Missing Items in Trading Section 167
15.5.2 Conversion of Mark-up into Margin 169
15.5.3 Conversion of Margin into Mark-up 170
15.6 CALCULATION OF GOODS LOST BY THEFT OR FIRE ……………………………………………………………………… 170
15.7 PREPARING BALANCE SHEET FROM INCOMPLETE RECORDS …………………………………………………………… 172
15.8 INVENTORY COUNT AND THE BALANCE SHEET DATE …………………………………………………………………… 172
15.9 DISADVANTAGES OR DEFECTS OF ACCOUNTS PREPARED FROM INCOMPLETE RECORDS …………………………… 173
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 174
CHAPTER 16 FINANCIAL STATEMENTS OF PARTNERSHIPS
16.1 CHARACTERISTICS OF PARTNERSHIP ……………………………………………………………………………………… 182
16.2 ADVANTAGES AND DISADVANTAGES OF THE PARTNERSHIP ……………………………………………………………. 183
16.3 PARTNERSHIP AGREEMENT ……………………………………………………………………………………………….. 183
16.3.1 Contents of Partnership Deed 183
16.4 PROVISIONS OF PARTNERSHIP ACT 1890 WHEN NO PARTNERSHIP AGREEMENT EXISTS ………………………… 184
16.5 FINANCIAL STATEMENTS OF A PARTNERSHIP ……………………………………………………………………………. 184
16.5.1 Appropriations of profit 184
16.5.2 Balance Sheet of Partnerships 186
16.6 ACCOUNTING RECORDS FOR PARTNERS …………………………………………………………………………………. 186
16.6.1 Partners’ Capital Accounts 186
16.6.2 Drawings Accounts 187
16.6.3 Partners’ Loan Account 188
16.7 CALCULATION OF INTEREST ON CAPITAL …………………………………………………………………………………. 189
16.8 CALCULATION OF INTEREST ON DRAWINGS ……………………………………………………………………………… 189
16.9 PARTNER’S GUARANTEED SHARE IN PROFIT …………………………………………………………………………….. 189
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 193
CHAPTER 17 CHANGES IN PARTNERSHIPS
17.1 ADMISSION OF A NEW PARTNER …………………………………………………………………………………………. 199
17.2 RETIREMENT OR DEATH OF AN EXISTING PARTNER …………………………………………………………………….. 199
17.2.1 Final Settlement of Retired or Deceased Partner’s Capital 200
17.3 CHANGES IN PROFIT-SHARING ARRANGEMENTS ……………………………………………………………………….. 200
17.4 APPORTIONMENT OF PROFITS …………………………………………………………………………………………….. 200
17.5 ADJUSTMENTS FOR GOODWILL …………………………………………………………………………………………… 202
17.5.1 Types of Goodwill 202
17.5.2 Factors Affecting Value of Goodwill 202
17.5.3 Valuation of Inherent Goodwill 203
17.5.4 Why Goodwill is accounted for in Partnership? 204
17.5.5 Accounting Treatment of Goodwill 204
Case 1 A Goodwill Account is Opened and Retained 204
Case 2 A goodwill Account is Opened and then Written Off 205
17.5.6 Change in Goodwill 206
17.6 REVALUATION ON PARTNERSHIP CHANGE ………………………………………………………………………………. 206
17.6.1 Opening of a Revaluation Account 207
17.6.2 Profit or Loss on Revaluation 207
17.6.3 Revaluation of Non-Current Assets with Provision for Depreciation 209
17.6.4 Revaluation and the Accounting Conventions 211
17.6.5 Values to Remain Unaltered in Books 211
17.7 CAPITAL IN PROFIT AND LOSS SHARING RATIOS ………………………………………………………………………… 215
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 216
CHAPTER 18 DISSOLUTION OF PARTNERSHIPS 
18.1 REASONS OF DISSOLVING A BUSINESS …………………………………………………………………………………… 224
18.2 REALISATION ACCOUNT ……………………………………………………………………………………………………. 224
18.3 ACCOUNTING TREATMENT ON DISSOLUTION …………………………………………………………………………… 224
18.3.1 Assets on Dissolution 225
18.3.2 Goodwill on Dissolution 225
18.3.3 Liabilities on Dissolution 225
18.3.4 Expenses on Dissolution 226
18.3.5 Profit (loss) on Realisation Account 226
18.3.6 Partners’ Loans Accounts on Dissolution 226
18.3.7 Current Account Balances on Dissolution 226
18.3.8 Cash or Bank Balance on Dissolution 226
18.3.9 Partners’ Capital Accounts on Dissolution 227
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 229
CHAPTER 19 FINANCIAL STATEMENTS OF COMPANIES
19.1 THE NEED FOR COMPANIES ……………………………………………………………………………………………….. 232
19.2 CHOICE BETWEEN A PARTNERSHIP AND A LIMITED COMPANY ………………………………………………………… 232
19.3 ADVANTAGES AND DISADVANTAGES OF FORMING A LIMITED COMPANY ……………………………………………. 233
19.3.1 Advantages of a Limited Company 233
19.3.2 Disadvantages of Forming a Limited Company 234
19.4 SOURCES OF FINANCE FOR A COMPANY …………………………………………………………………………………. 235
19.5 TYPES OF SHARES …………………………………………………………………………………………………………… 235
19.5.1 Ordinary Shares 235
19.5.2 Preference Shares 235
19.6 DEBENTURES ………………………………………………………………………………………………………………… 236
19.7 TYPES OF PREFERENCE SHARES …………………………………………………………………………………………… 236
19.7.1 Participating Preference Shares 236
19.7.2 Non-Participating Preference Shares 236
19.7.3 Cumulative Preference Shares 236
19.7.4 Non-Cumulative Preference Shares 237
19.8 FORMS OF CAPITAL …………………………………………………………………………………………………………. 237
19.8.1 Authorised Share Capital 237
19.8.2 Issued Share Capital 237
19.8.3 Called Up Share Capital 238
19.8.4 Paid Up Capital 238
19.9 FINANCIAL STATEMENTS OF LIMITED COMPANIES ………………………………………………………………………. 238
19.10 STATEMENT OF CHANGES IN EQUITY …………………………………………………………………………………….. 239
19.11 EQUITY DIVIDENDS ON ORDINARY SHARES ……………………………………………………………………………… 239
19.11.1 IAS rules for Equity Dividends 239
19.11.2 Transfer to General Reserve 239
19.12 SHAREHOLDERS’ EQUITY …………………………………………………………………………………………………… 239
19.13 RESERVES ……………………………………………………………………………………………………………………. 239
19.13.1 Capital Reserves 239
19.13.2 Revenue Reserves 240
19.14 FINANCIAL STATEMENTS IN CIE EXAMS ………………………………………………………………………………….. 241
19.15 A COMPARISON OF FINANCIAL STATEMENTS OF BUSINESS ORGANISATIONS ………………………………………… 242
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 243
CHAPTER 20 ISSUE OF SHARES & DEBENTURES
20.1 PRICES OF A SHARE …………………………………………………………………………………………………………. 248
20.1.1 Par Value 248
20.1.2 Issue Price 248
20.1.3 Book Value 248
20.1.4 Market Value 248
20.2 SELLING SHARES TO THE GENERAL PUBLIC ………………………………………………………………………………. 248
20.2.1 Issue of Shares at Par 249
20.2.2 Issue of Shares at Premium (at a price more than face value) 249
20.3 RIGHTS ISSUE ……………………………………………………………………………………………………………….. 249
20.3.1 Advantages of Rights Issue 250
20.3.2 Disadvantages of Rights Issue 250
20.4 BONUS OR SCRIP ISSUE…………………………………………………………………………………………………….. 250
20.4.1 Reasons for Bonus Issue 250
20.4.2 Effect on Earnings per Share (EPS) 251
20.4.3 Advantages of Bonus Issue 251
20.4.4 Disadvantages of Bonus Issue 252
20.5 DIFFERENCE BETWEEN RIGHTS AND BONUS ISSUE ……………………………………………………………………… 252
20.6 ISSUE OF LOANS AND DEBENTURES ………………………………………………………………………………………. 253
20.6.1 Issue of Debentures at Par 253
20.6.2 Issue of Debentures at Premium (at a Price more than Face Value) 254
20.6.3 Issue of Debentures at Discount (at a Price below Face Value) 254
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 255
CHAPTER 21 RATIO ANALYSIS
21.1 FINANCIAL RATIOS ………………………………………………………………………………………………………….. 259
21.2 ANALYSIS OF RATIOS ……………………………………………………………………………………………………….. 259
21.2.1 Comparing one Year with Another (Trend or Time Series Analysis) 259
21.2.2 Comparing one Business with another Business (Cross-Sectional Analysis) 260
21.2.3 Rule of Thumb 260
21.3 DEMONSTRATION OF RATIOS ……………………………………………………………………………………………… 260
21.4 PROFITABILITY RATIOS ……………………………………………………………………………………………………… 260
21.4.1 Gross Profit Ratio 260
21.4.2 Profit for the year Ratio 261
21.4.3 Operating Expenses Ratio 261
21.4.4 Return on Assets 262
21.4.5 Return on Capital Employed (ROCE) 262
21.4.6 Return on Equity 262
21.5 ACTIVITY RATIOS ……………………………………………………………………………………………………………. 263
21.5.1 Inventory Turnover Ratio 263
21.5.2 Trade Receivables’ Collection Period 263
21.5.3 Trade payables’ Payment Period 264
21.5.4 Non-Current Asset Turnover 264
21.6 LIQUIDITY RATIOS …………………………………………………………………………………………………………… 265
21.6.1 Current Ratio 265
21.6.2 Liquid Ratio 265
21.7 USES OF RATIO ANALYSIS ………………………………………………………………………………………………….. 266
21.8 LIMITATIONS OF RATIO ANALYSIS …………………………………………………………………………………………. 266
21.9 USERS OF FINANCIAL RATIOS ………………………………………………………………………………………………. 266
21.10 PREPARATION OF FINANCIAL STATEMENTS WITH THE HELP OF RATIOS ……………………………………………….. 268
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 271
CHAPTER 22 STATEMENT OF CASH FLOWS
22.1 CLASSIFICATIONS OF CASH FLOWS – AN EXAMPLE ……………………………………………………………………… 276
22.2 CASH AND CASH EQUIVALENTS …………………………………………………………………………………………… 277
22.2.1 Cash 277
22.2.2 Cash Equivalents 277
22.2.3 Bank Overdrafts 277
22.3 PREPARATION OF A STATEMENT OF CASH FLOWS ………………………………………………………………………. 277
22.4 CASH FLOW FROM OPERATING ACTIVITIES ……………………………………………………………………………… 277
22.4.1 Importance of Cash Flow from Operating Activities 277
22.5 CALCULATION OF CASH FLOW FROM OPERATING ACTIVITIES ………………………………………………………… 277
22.5.1 Cash from Operating Activities in Direct Method 277
22.5.2 Cash from Operating Activities in Indirect Method 277
22.6 INVESTING ACTIVITIES ……………………………………………………………………………………………………… 280
22.7 FINANCING ACTIVITIES …………………………………………………………………………………………………….. 280
22.8 CASH FLOW AT A GLANCE …………………………………………………………………………………………………. 281
22.9 USES OF A STATEMENT OF CASH FLOWS …………………………………………………………………………………. 283
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 285
CHAPTER 23 COST ACCOUNTING – AN INTRODUCTION
23.1 DIFFERENCE BETWEEN COST AND EXPENSE ……………………………………………………………………………… 289
23.2 COST CLASSIFICATION BY CHANGES IN ACTIVITY…………………………………………………………………………. 290
23.2.1 Fixed Cost 290
23.2.2 Variable Costs 290
23.2.3 Mixed Costs 290
23.2.4 Step Costs 291
23.3 COST CLASSIFICATION BY TRACEABILITY ………………………………………………………………………………….. 291
23.3.1 Direct Costs Error! Bookmark not defined. 291
23.3.2 Indirect Costs 291
23.3.3 Sunk Costs 291
23.4 DIRECT LABOUR COST ……………………………………………………………………………………………………… 291
23.5 INDIRECT LABOUR COST …………………………………………………………………………………………………… 291
23.6 LABOUR COST AND TIMEKEEPING ………………………………………………………………………………………… 292
23.6.1 Clock Card (Time Card) 292
23.6.2 Time Sheets 292
23.6.3 Wage Sheet 292
23.7 CALCULATION OF LABOUR COST ………………………………………………………………………………………….. 292
23.7.1 Piece Work Wage System 292
23.7.2 Time Wage System (Pay on Time Basis) 293
23.8 OVERTIME …………………………………………………………………………………………………………………… 294
23.9 INCENTIVE SCHEMES AND BONUS PLANS ……………………………………………………………………………….. 294
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 296
CHAPTER 24 INVENTORY VALUATION – FURTHER ISSUES
24.1 INVENTORY VALUATION METHODS ………………………………………………………………………………………. 300
24.1.1 First in First out (FIFO) 300
24.1.2 Last in First out (LIFO) 301
24.1.3 Weighted Average Cost (AVCO) 301
24.2 RELATIONSHIP OF INVENTORY VALUATION METHODS WITH PHYSICAL FLOW OF GOODS …………………………. 302
24.3 BASES OF INVENTORY VALUATION ………………………………………………………………………………………… 302
24.4 ROLE OF ACCOUNTING CONCEPTS IN INVENTORY VALUATION ………………………………………………………… 302
24.5 SEPARATE VALUATION OF INVENTORY ITEMS ……………………………………………………………………………. 303
24.6 CALCULATION OF COST OF WORK IN PROCESS ………………………………………………………………………….. 303
24.7 EFFECTS OF ERRORS IN VALUING INVENTORY …………………………………………………………………………… 303
24.8 GOODS ON SALE OR RETURN ……………………………………………………………………………………………… 303
24.8.1 Goods Sent to Customers on Sale or Return (Approval) Basis 303
24.8.2 Goods Received on Sale or Return (Approval) Basis 303
24.9 SYSTEMS OF INVENTORY ACCOUNTING ………………………………………………………………………………….. 304
24.9.1 Periodic Inventory System 304
24.9.2 Perpetual Inventory System 304
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 307
CHAPTER 25 ABSORPTION COSTING
25.1 ABSORPTION COSTING …………………………………………………………………………………………………….. 309
25.2 CALCULATION OF TOTAL PRODUCTION COST ……………………………………………………………………………. 310
25.3 FEATURES OF ABSORPTION COSTING …………………………………………………………………………………….. 311
25.4 ABSORPTION COSTING IN PRICE SETTING ……………………………………………………………………………….. 311
25.5 COST CENTER ……………………………………………………………………………………………………………….. 312
25.5.1 Production Cost Centers 312
25.5.2 Service Cost Centers 312
25.6 COST UNIT …………………………………………………………………………………………………………………… 312
25.7 ALLOCATION OF PRODUCTION OVERHEADS …………………………………………………………………………….. 313
25.8 APPORTIONMENT OF PRODUCTION OVERHEADS ………………………………………………………………………. 313
25.9 ALLOTMENT OF SERVICE DEPARTMENT COSTS TO PRODUCTION DEPARTMENTS …………………………………… 313
25.9.1 Production Cost Centers 313
25.9.2 Service Cost Centers 314
25.9.3 Allotment of Non-Reciprocal Services 314
25.9.4 Allotment of Reciprocal Services 315
25.10 CALCULATION OF OVERHEAD ABSORPTION RATES ……………………………………………………………………… 317
25.10.1 Actual Vs Predetermined Absorption Rate 317
25.10.2 Advantages of using Predetermined Overhead Absorption Rates 317
25.10.3 Choosing the Appropriate Absorption Base 320
25.10.4 Single (Factory wide) Overhead Absorption Rate 320
25.10.5 Departmental Overhead Absorption Rate 320
25.11 ABSORPTION OF OVERHEADS ……………………………………………………………………………………………… 320
25.12 OVER/UNDER ABSORBED OVERHEADS ………………………………………………………………………………….. 320
25.12.1 Over-Absorbed Overheads 321
25.12.2 Under-Absorbed Overheads 321
25.13 COSTING SYSTEMS/METHODS ……………………………………………………………………………………………. 321
25.13.1 Specific Order Costing 321
25.13.2 Continuous Costing 322
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 323
CHAPTER 26 MARGINAL COSTING
26.1 MARGINAL COST ……………………………………………………………………………………………………………. 329
26.2 MARGINAL COSTING ……………………………………………………………………………………………………….. 330
26.3 THE PRINCIPLES OF MARGINAL COSTING ……………………………………………………………………………….. 330
26.4 ADVANTAGES AND DISADVANTAGES OF MARGINAL COSTING TECHNIQUE …………………………………………. 330
26.4.1 Advantages 330
26.4.2 Disadvantages of Marginal Costing Technique 330
26.5 THE USES OF MARGINAL COSTING……………………………………………………………………………………….. 331
26.6 CONTRIBUTION ……………………………………………………………………………………………………………… 331
26.7 BREAK EVEN ANALYSIS …………………………………………………………………………………………………….. 331
26.7.1 Break-Even Point 331
26.7.2 Break-Even Point in Sales ($) Value 332
26.7.3 Target Profits 332
26.7.4 Break Even Chart 333
26.7.5 Assumptions and Limitations of Break Even Analysis 334
26.7.6 Significance of Break Even Analysis 335
26.8 MARGIN OF SAFETY ………………………………………………………………………………………………………… 335
26.9 PROFIT-VOLUME CHART …………………………………………………………………………………………………… 336
26.9.1 How to Increase Contribution Ratio 337
26.10 INCOME STATEMENTS UNDER MARGINAL COSTING AND ABSORPTION COSTING ………………………………….. 337
26.10.1 Profits of Marginal Costing and Absorption Costing 339
26.10.2 Difference between Marginal and Absorption Costing 339
26.11 SHORT TERM DECISION MAKING …………………………………………………………………………………………. 340
26.12 MAKE OR BUY DECISION ………………………………………………………………………………………………….. 340
26.12.1 Qualitative Factors for Make or Buy Decision 341
26.13 SPECIAL ORDER TO USE UP SPARE CAPACITY …………………………………………………………………………… 342
26.13.1 Acceptance of Order with Negative Contribution 343
26.13.2 Conditions for accepting Order below Normal Price 343
26.13.3 Considerations for accepting order below Normal Price 344
26.13.4 Consequences of Acceptance of Order below Normal Price 344
26.14 ABANDONMENT OF A PRODUCT LINE/DEPARTMENT ………………………………………………………………….. 344
26.14.1 Factors to be Considered before Closure of a Department 345
26.15 LIMITING FACTOR …………………………………………………………………………………………………………… 345
26.15.1 Examples of Limiting Factors 345
26.15.2 Reducing the Effects of Limiting Factors 346
26.15.3 Decision- Making Process to Reduce Effects of a Limiting Factor 346
REVIEW QUESTIONS ………………………………………………………………………………………………………………. 349
CHAPTER 27 ACCOUNTING & BUSINESS PLANNING 359
27.1 DIFFERENCE BETWEEN BUDGETS AND BUDGETARY CONTROL ………………………………………………………… 359
27.2 PURPOSES OF BUDGET …………………………………………………………………………………………………….. 359
27.3 ADVANTAGES OF BUDGETARY CONTROL SYSTEM ………………………………………………………………………. 360
27.4 LIMITATIONS OF BUDGETARY CONTROL SYSTEM ……………………………………………………………………….. 360
27.5 STAGES IN THE BUDGETARY PLANNING PROCESS ………………………………………………………………………. 360
27.6 EFFECTS OF PRINCIPAL BUDGET FACTORS ON THE PREPARATION OF BUDGETS …………………………………….. 361
27.7 BEHAVIOURAL ASPECTS OF BUDGETARY CONTROL SYSTEM …………………………………………………………… 361
SOLUTIONS TO ODD NUMBERED QUESTIONS
CHAPTER 1 ……………………………………………………………………………………………………………………………. 363
CHAPTER 2 ……………………………………………………………………………………………………………………………. 364
CHAPTER 3 ……………………………………………………………………………………………………………………………. 366
CHAPTER 4 ……………………………………………………………………………………………………………………………. 368
CHAPTER 5 ……………………………………………………………………………………………………………………………. 370
CHAPTER 6 ……………………………………………………………………………………………………………………………. 372
CHAPTER 7 ……………………………………………………………………………………………………………………………. 375
CHAPTER 8 ……………………………………………………………………………………………………………………………. 376
CHAPTER 9 ……………………………………………………………………………………………………………………………. 377
CHAPTER 10 ………………………………………………………………………………………………………………………….. 380
CHAPTER 11 ………………………………………………………………………………………………………………………….. 380
CHAPTER 12 ………………………………………………………………………………………………………………………….. 381
CHAPTER 13 ………………………………………………………………………………………………………………………….. 383
CHAPTER 14 ………………………………………………………………………………………………………………………….. 385
CHAPTER 15 ………………………………………………………………………………………………………………………….. 389
CHAPTER 16 ………………………………………………………………………………………………………………………….. 393
CHAPTER 17 ………………………………………………………………………………………………………………………….. 396
CHAPTER 18 ………………………………………………………………………………………………………………………….. 400
CHAPTER 19 ………………………………………………………………………………………………………………………….. 401
CHAPTER 20 ………………………………………………………………………………………………………………………….. 404
CHAPTER 21 ………………………………………………………………………………………………………………………….. 406
CHAPTER 22 ………………………………………………………………………………………………………………………….. 409
CHAPTER 23 ………………………………………………………………………………………………………………………….. 410
CHAPTER 24 ………………………………………………………………………………………………………………………….. 412
CHAPTER 25 ………………………………………………………………………………………………………………………….. 413
CHAPTER 26 ………………………………………………………………………………………………………………………….. 416
KEY TO EVEN NUMBERED QUESTIONS 422
INDEX 430

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