Institute of Financial Accountants (IFA) Qualifications Financial Accounting and Reporting Syllabus

How is an allowance for receivables created or increased, and how does it appear in the financial statements?

Increase: Dr Irrecoverable debts expense, Cr Allowance for receivables. Only the movement goes to profit or loss; the full allowance is netted off receivables in the statement of financial position.

How is a decrease in the allowance for receivables recorded?

Dr Allowance for receivables, Cr Irrecoverable debts expense (a credit/reduction in the expense).

What is the IAS 2 rule for valuing inventory?

Inventory is measured at the lower of cost and net realisable value (NRV), where $\text{NRV} = \text{estimated selling price} - \text{costs to complete} - \text{costs to sell}$.

Compare FIFO and AVCO methods of inventory valuation.

FIFO (first-in, first-out): assumes earliest purchases are sold first, so closing inventory is valued at most recent prices. AVCO (weighted average): values issues and inventory at a weighted average cost. LIFO is not permitted under IAS 2.

What effect does overstating closing inventory have on profit?

It reduces cost of sales and therefore overstates profit for the period (and overstates current assets). The reverse applies the following year.

Give the cost of sales formula.

$$\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} - \text{Closing inventory}$$

What are the main headings, in order, of a statement of profit or loss?

Revenue, cost of sales, gross profit, other income, distribution/administrative expenses, finance costs, profit before tax, tax, profit for the year.

How are gross profit and net (operating) profit distinguished?

Gross profit = revenue − cost of sales. Net/operating profit = gross profit + other income − operating expenses (before finance costs and tax).

Distinguish current from non-current assets in the statement of financial position.

Current assets are expected to be realised within 12 months or the operating cycle (inventory, receivables, cash). Non-current assets are held long term (PPE, intangibles, investments).

What is the purpose of a receivables (sales ledger) control account?

It summarises total transactions with trade receivables, giving the total receivables figure for the financial statements and acting as a check against the list of individual sales ledger balances.

List the typical entries on each side of the receivables control account.

Debit (increases): opening balance, credit sales, dishonoured cheques, interest charged. Credit (decreases): cash received, discounts allowed, sales returns, irrecoverable debts, contra with payables.

List the typical entries on each side of the payables (purchases ledger) control account.

Credit (increases): opening balance, credit purchases. Debit (decreases): cash paid, discounts received, purchase returns, contra with receivables.

What is a contra entry between the receivables and payables control accounts?

When a party is both a customer and supplier, the smaller balance is offset. Dr Payables control, Cr Receivables control. It reduces both balances.

What is the purpose of a bank reconciliation statement?

To reconcile the balance on the cash book with the balance per the bank statement, identifying timing differences and errors so the correct bank figure is reported.

Name common reconciling items between the cash book and the bank statement.

Unpresented (outstanding) cheques, outstanding/uncleared lodgements, bank charges and interest, direct debits/standing orders, dishonoured cheques, and errors. Items not yet in the cash book are adjusted in the cash book first.

How do you reconcile from the bank statement balance to the cash book balance?

Start with the bank statement balance, deduct unpresented cheques, add outstanding lodgements (and adjust for any bank errors) to arrive at the corrected cash book balance.

What is recorded in the sales tax (VAT) control account?

Credit: output VAT on sales. Debit: input VAT on purchases. The balance is the net amount payable to (credit balance) or recoverable from (debit balance) the tax authority.

How is the VAT payable to HMRC calculated?

$$\text{VAT payable} = \text{Output VAT (on sales)} - \text{Input VAT (on purchases)}$$ A net credit balance is owed to HMRC; a net debit balance is a refund due.

For a standard UK VAT rate of 20%, how do you extract VAT from a gross (VAT-inclusive) amount?

$$\text{VAT} = \text{Gross} \times \frac{20}{120} = \text{Gross} \times \frac{1}{6}$$

What is a suspense account and when is it used?

A temporary account opened to make the trial balance balance when an error causes a difference, or to hold an item whose correct treatment is uncertain. It is cleared once errors are corrected and must have a nil balance afterwards.

Which types of error require a suspense account for correction?

Only errors that cause the trial balance to disagree — e.g. one-sided entries, transposition errors on one side, and incorrect additions (casting errors). Errors that still balance (omission, commission, principle, reversal, compensating) do not.

In a partnership, what is the difference between a capital account and a current account?

The capital account records fixed long-term capital contributions. The current account records ongoing items: share of profit, salaries, interest on capital, drawings and interest on drawings.

What is an appropriation account in partnership accounts?

It shows how net profit is divided among partners after adjustments for partners' salaries, interest on capital, interest on drawings, and the residual profit-sharing ratio.

What is goodwill in a partnership and when is it adjusted?

Goodwill is the excess of a business's value over its net identifiable assets. It is typically adjusted on a change in partnership (admission, retirement, or change in profit-sharing ratio), shared in the old ratio and removed in the new ratio.

What are the components of equity in a limited company's statement of financial position?

Share capital (ordinary/preference), share premium, revaluation surplus, retained earnings, and other reserves. Together they make up total equity.

Distinguish share capital from share premium.

Share capital is the nominal (par) value of shares issued. Share premium is the excess of issue price over nominal value. A $£1$ share issued at $£1.50$ gives $£1$ to share capital and $£0.50$ to share premium.

What is a bonus (scrip) issue versus a rights issue?

A bonus issue gives free shares to existing shareholders from reserves (no cash raised). A rights issue offers new shares to existing shareholders for cash, usually at a discount to market price.

In incomplete records, how is missing profit found using the net assets method?

$$\text{Profit} = (\text{Closing capital} - \text{Opening capital}) + \text{Drawings} - \text{Capital introduced}$$

How is credit sales derived from a receivables control account in incomplete records?

$$\text{Credit sales} = \text{Closing receivables} + \text{Cash received from customers} - \text{Opening receivables}$$ (adjusted for items such as irrecoverable debts and returns).

How can total purchases be estimated using a margin or markup when records are incomplete?

Use the gross profit relationship: with markup on cost, $\text{Cost of sales} = \frac{\text{Sales}}{1 + \text{markup}}$; with margin on sales, $\text{Cost of sales} = \text{Sales} \times (1 - \text{margin})$. Then $\text{Purchases} = \text{Cost of sales} + \text{Closing inventory} - \text{Opening inventory}$.

In a not-for-profit club, what replaces the statement of profit or loss and the capital account?

The income and expenditure account (showing surplus or deficit) replaces the profit or loss account, and the accumulated fund replaces capital.

What is the difference between a receipts and payments account and an income and expenditure account?

A receipts and payments account is a summary of the cash book (cash basis). An income and expenditure account is prepared on the accruals basis, showing income and expenses for the period regardless of cash flow.

How is the subscriptions income for a club calculated for the income and expenditure account?

Start with subscriptions received, add subscriptions owing at year end (and in advance at start), and deduct subscriptions owing at start (and in advance at year end) to get the accruals-based figure.

What are the components of a complete set of financial statements under IAS 1?

Statement of financial position, statement of profit or loss and other comprehensive income, statement of changes in equity, statement of cash flows, and notes (with accounting policies). A comparative period is also required.

What underlying assumption and key concepts does IAS 1 require in preparing financial statements?

The going concern assumption and the accruals basis; plus consistency of presentation, materiality and aggregation, and no offsetting of assets/liabilities or income/expenses unless permitted.

How does IAS 16 require an item of property, plant and equipment to be measured initially?

At cost, comprising purchase price (after trade discounts) plus directly attributable costs of bringing the asset to working condition (delivery, installation, testing) and any dismantling/restoration provision.

What are the two measurement models permitted by IAS 16 after initial recognition?

The cost model (cost − accumulated depreciation − impairment) and the revaluation model (fair value at revaluation date − subsequent depreciation − impairment), applied to a whole class of assets.

Under IAS 38, what criteria must be met to recognise an intangible asset?

It must be identifiable, controlled by the entity, expected to generate future economic benefits, and its cost reliably measurable. Internally generated goodwill, brands and research cannot be capitalised.

Under IAS 38, how are research and development costs treated?

Research costs are always expensed. Development costs must be capitalised once the PIRATE criteria are met: Probable future benefits, Intention to complete, Resources adequate, Ability to use/sell, Technically feasible, Expenditure reliably measured.

State the five-step model for revenue recognition under IFRS 15.

1) Identify the contract; 2) Identify the performance obligations; 3) Determine the transaction price; 4) Allocate the transaction price to the obligations; 5) Recognise revenue when (or as) each performance obligation is satisfied.

Under IFRS 15, when is revenue recognised over time rather than at a point in time?

Over time if: the customer simultaneously receives and consumes the benefits as the entity performs; or the entity creates/enhances an asset the customer controls; or the asset has no alternative use and the entity has an enforceable right to payment for work done to date. Otherwise, at a point in time when control transfers.

What is the difference between the direct and indirect methods in a statement of cash flows (IAS 7)?

Both produce the same operating cash flow. The direct method lists gross cash receipts and payments. The indirect method starts with profit before tax and adjusts for non-cash items and changes in working capital.

What are the three classifications of cash flows under IAS 7?

Operating activities (main revenue-producing activities), investing activities (acquisition/disposal of non-current assets and investments), and financing activities (changes in equity and borrowings).

Under the indirect method, how is depreciation treated when reconciling profit to operating cash flow?

Depreciation is added back to profit before tax because it is a non-cash expense that reduced profit but did not involve a cash outflow.

In the indirect method, how do changes in inventory, receivables and payables affect operating cash flow?

An increase in inventory or receivables decreases cash flow; a decrease increases it. An increase in payables increases cash flow; a decrease decreases it (working capital adjustment).

Under IAS 37, what three conditions must be met to recognise a provision?

1) A present obligation (legal or constructive) from a past event; 2) it is probable an outflow of economic benefits will be required; 3) the amount can be estimated reliably.

Under IAS 37, distinguish a provision, a contingent liability and a contingent asset.

Provision: recognised liability of uncertain timing/amount. Contingent liability: possible obligation or unprobable/unmeasurable obligation — disclosed only. Contingent asset: possible asset from past events — disclosed if probable, recognised only when virtually certain.

Under IAS 10, distinguish adjusting from non-adjusting events after the reporting period.

Adjusting events provide evidence of conditions existing at the reporting date (adjust the financial statements). Non-adjusting events arise after the reporting date (disclose only, if material). Both must occur before the financial statements are authorised for issue.

Give an example of an adjusting and a non-adjusting event under IAS 10.

Adjusting: settlement of a court case confirming a year-end obligation, or insolvency of a customer existing at year end. Non-adjusting: a fire destroying inventory after year end, or a dividend declared after the reporting date.

Distinguish capital expenditure from revenue expenditure.

Capital expenditure acquires or improves non-current assets and is capitalised in the statement of financial position. Revenue expenditure is the day-to-day running cost charged to profit or loss in the period incurred.

What is the going concern concept and why does it matter?

The assumption that the entity will continue to operate for the foreseeable future (at least 12 months). It justifies valuing assets at cost rather than break-up (forced-sale) value; if not appropriate, a different basis must be used.

How is the carrying amount of a non-current asset defined?

$$\text{Carrying amount} = \text{Cost (or revalued amount)} - \text{Accumulated depreciation} - \text{Accumulated impairment losses}$$