PIPFA Financial Accounting Syllabus

What is the Garner v Murray rule on partnership dissolution?

If a partner's capital account is in deficit and that partner is insolvent (cannot pay), the deficiency is borne by the solvent partners in the ratio of their LAST AGREED CAPITALS (not the profit-sharing ratio).

Distinguish between shares issued at par, at a premium, and at a discount.

At par: issue price = face value. At a premium: issue price > face value (excess credited to share premium/securities premium). At a discount: issue price < face value (discount on issue of shares).

What is a debenture?

A written acknowledgement of debt issued by a company, usually carrying a fixed rate of interest and repayable on a fixed date; debenture holders are creditors, not owners, of the company.

State the key differences between a share and a debenture.

A shareholder is an owner receiving dividends (variable, paid from profits); a debenture holder is a creditor receiving interest (fixed, a charge against profit). Debentures are usually secured and repayable; shares represent permanent capital and rank last on winding up.

What is a bonus issue (capitalisation issue)?

An issue of free additional shares to existing shareholders in proportion to their holdings, funded by capitalising reserves (e.g. retained earnings, share premium). No cash is received by the company.

What is a rights issue?

An offer of new shares to existing shareholders in proportion to their current holdings, usually at a price below market value, giving them the pre-emptive right to maintain their proportional ownership. Cash is received by the company.

Compare a bonus issue and a rights issue.

Bonus issue: free shares, no cash inflow, reserves are capitalised. Rights issue: shares offered at a (discounted) price, brings in cash, raises new capital. Both are offered pro-rata to existing shareholders.

What is the Statement of Financial Position (balance sheet)?

A statement showing an entity's assets, liabilities and equity at a specific date, reflecting the accounting equation Assets = Liabilities + Equity (financial position at a point in time).

How are assets classified in a Statement of Financial Position?

As non-current assets (e.g. property, plant & equipment, intangibles, long-term investments) and current assets (e.g. inventories, trade receivables, cash and cash equivalents).

What distinguishes a current liability from a non-current liability?

A current liability is expected to be settled within 12 months (or the operating cycle), e.g. trade payables; a non-current liability is due after more than 12 months, e.g. long-term loans/debentures.

What is the Statement of Comprehensive Income?

A statement reporting an entity's financial performance for a period, comprising profit or loss for the period plus 'other comprehensive income' (items not recognised in profit or loss, e.g. revaluation surplus), giving total comprehensive income.

Give two examples of items reported in 'Other Comprehensive Income'.

Revaluation surplus on property, plant and equipment (IAS 16); remeasurement gains/losses on defined benefit plans; gains/losses on certain financial assets measured at fair value through OCI; foreign currency translation differences.

What is the Statement of Changes in Equity?

A statement reconciling the opening and closing balances of each component of equity, showing total comprehensive income for the period, transactions with owners (issues, dividends), and transfers between reserves.

What three sections make up the Statement of Cash Flows (IAS 7)?

Operating activities, Investing activities, and Financing activities.

What are 'operating activities' in a cash flow statement?

The principal revenue-producing activities of the entity and other activities that are not investing or financing, e.g. cash from customers, cash paid to suppliers and employees, and tax paid.

Under the indirect method, how is cash from operating activities calculated?

Start with profit before tax, add back non-cash expenses (e.g. depreciation, amortisation) and non-operating items (e.g. interest, loss on disposal), adjust for changes in working capital (inventory, receivables, payables), then deduct interest and tax paid.

What are 'investing activities' in a cash flow statement?

The acquisition and disposal of long-term assets and other investments not included in cash equivalents, e.g. purchase/sale of property, plant and equipment, and purchase/sale of investments.

What are 'financing activities' in a cash flow statement?

Activities that change the size and composition of the entity's equity and borrowings, e.g. proceeds from issuing shares or debentures, repayment of loans, and payment of dividends.

How is an item of property, plant and equipment initially measured under IAS 16?

At cost, comprising purchase price (including import duties and non-refundable taxes, net of trade discounts), directly attributable costs of bringing it to working condition, and the initial estimate of dismantling/restoration costs.

What are the two recognition criteria for an item of PP&E under IAS 16?

(1) It is probable that future economic benefits associated with the item will flow to the entity, and (2) the cost of the item can be measured reliably.

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

The Cost model (cost less accumulated depreciation and accumulated impairment losses) and the Revaluation model (fair value at revaluation date less subsequent accumulated depreciation and impairment).

Define depreciation per IAS 16.

The systematic allocation of the depreciable amount of an asset over its useful life (depreciable amount = cost - residual value).

State the formula for the straight-line method of depreciation.

Depreciation per year = (Cost - Residual value) / Useful life in years. This charges an equal amount each year.

State the formula for the reducing (diminishing) balance method of depreciation.

Depreciation = Carrying amount at start of year x fixed depreciation rate (%). The charge decreases each year as the carrying amount falls.

Compare the straight-line and reducing-balance depreciation methods.

Straight-line gives an equal charge each year (suits assets used evenly). Reducing-balance gives a higher charge in early years and lower later (suits assets that lose value or efficiency faster early, e.g. vehicles, machinery).

How is a revaluation surplus on PP&E accounted for under IAS 16?

An increase on revaluation is credited to a revaluation surplus in equity (through other comprehensive income), unless it reverses a previous decrease recognised in profit or loss, which is recognised in profit or loss to that extent.

How is a revaluation decrease (deficit) treated under IAS 16?

It is recognised in profit or loss, except to the extent it reverses a previously recognised revaluation surplus on the same asset, in which case it is debited to the revaluation surplus (through OCI).

How is the gain or loss on disposal of a non-current asset calculated?

Gain/Loss on disposal = Net disposal proceeds - Carrying amount (cost less accumulated depreciation) at the date of disposal. It is recognised in profit or loss.

How are inventories measured under IAS 2?

At the lower of cost and net realisable value (NRV).

What is 'net realisable value' (NRV) under IAS 2?

The estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

What cost formulas for inventory are permitted by IAS 2, and which is prohibited?

FIFO (First-In, First-Out) and Weighted Average Cost are permitted. LIFO (Last-In, First-Out) is NOT permitted under IAS 2.

What is a provision (allowance) for doubtful debts and how is it created?

An estimate of trade receivables that may not be collected. It is created by debiting the expense (irrecoverable/doubtful debts in profit or loss) and crediting the allowance for doubtful debts, which is offset against trade receivables in the statement of financial position to show net receivables.