Association of Accounting Technicians (AAT) Financial Accounting: Preparing Financial Statements (Level 3) Flashcards

24 sample cards from the Financial Accounting: Preparing Financial Statements (Level 3) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Rent of £12,000 per year is paid, but £3,000 relates to next year. What expense and SFP figure result?

   Statement of profit or loss expense $= £12{,}000 - £3{,}000 = £9{,}000$. The £3,000 prepayment is shown as a current asset in the SFP.

2. What is the difference between an irrecoverable debt and a doubtful debt?

   An irrecoverable (bad) debt is one known to be uncollectible and is written off entirely. A doubtful debt is one that may not be collected, against which an allowance is made while the receivable remains in the books.

3. What is the double entry to write off an irrecoverable debt?

   Dr Irrecoverable debts expense; Cr Trade receivables (or the customer's account). The debt is removed from receivables.

4. How do you record an increase in the allowance for doubtful debts?

   Dr Irrecoverable debts/Allowance adjustment expense; Cr Allowance for doubtful debts. Only the movement (change) in the allowance is charged to the statement of profit or loss.

5. How is the allowance for doubtful debts presented in the statement of financial position?

   It is deducted from trade receivables to show the net amount expected to be recovered: $$\text{Net receivables} = \text{Trade receivables} - \text{Allowance for doubtful debts}$$

6. At what amount should inventory be valued at the year end under IAS 2?

   At the lower of cost and net realisable value (NRV), applied on an item-by-item basis.

7. Define net realisable value (NRV).

   $$\text{NRV} = \text{Estimated selling price} - \text{Costs to complete} - \text{Costs to sell}$$

8. Which costs are included in the 'cost' of inventory under IAS 2?

   Cost of purchase (including import duties and carriage in, net of trade discounts) plus costs of conversion (direct labour and attributable production overheads) needed to bring inventory to its present location and condition.

9. Compare the FIFO and AVCO inventory valuation methods.

   FIFO (First In, First Out) assumes the earliest purchases are sold first, so closing inventory is valued at the most recent prices. AVCO (weighted average cost) values issues and closing inventory at a weighted average cost recalculated as purchases occur.

10. What is the effect on profit of overstating closing inventory?

    Overstating closing inventory understates cost of sales and therefore overstates gross and net profit for the period (and overstates current assets in the SFP).

11. What are the typical columns of an extended trial balance (ETB)?

    Ledger balances (trial balance), Adjustments (debit/credit), Statement of profit or loss (debit/credit) and Statement of financial position (debit/credit). Each ledger balance is extended into the appropriate final columns.

12. On the extended trial balance, where is the net profit figure entered to balance the statement of profit or loss columns?

    Net profit is the balancing figure: it is entered on the debit side of the P/L columns (to balance them) and correspondingly on the credit side of the SFP columns (increasing capital).

13. Give the formulae for cost of sales and gross profit for a sole trader.

    $$\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} - \text{Closing inventory}$$ $$\text{Gross profit} = \text{Sales revenue} - \text{Cost of sales}$$

14. How is profit for the year (net profit) calculated in a sole trader's statement of profit or loss?

    $$\text{Profit for the year} = \text{Gross profit} + \text{Other income} - \text{Expenses}$$

15. State the structure of the statement of financial position (the accounting equation form used for a sole trader).

    $$\text{Non-current assets} + \text{Net current assets} - \text{Non-current liabilities} = \text{Capital}$$ where Capital = Opening capital + Profit − Drawings.

16. How is closing capital for a sole trader calculated in the SFP?

    $$\text{Closing capital} = \text{Opening capital} + \text{Capital introduced} + \text{Profit for the year} - \text{Drawings}$$

17. In incomplete records, how can profit be found using the net assets (statement of affairs) method?

    $$\text{Profit} = \text{Closing net assets} - \text{Opening net assets} + \text{Drawings} - \text{Capital introduced}$$

18. How are credit sales for the period derived from the sales ledger (receivables) control account in incomplete records?

    $$\text{Credit sales} = \text{Closing receivables} + \text{Cash received from customers} - \text{Opening receivables}$$ (adjusting for irrecoverable debts and discounts as needed).

19. How are credit purchases derived from the purchases ledger (payables) control account in incomplete records?

    $$\text{Credit purchases} = \text{Closing payables} + \text{Payments to suppliers} - \text{Opening payables}$$

20. Using a margin, if sales are £50,000 and the gross profit margin is 40%, what are gross profit and cost of sales?

    Gross profit $= 0.40 \times £50{,}000 = £20{,}000$. Cost of sales $= £50{,}000 - £20{,}000 = £30{,}000$.

21. Distinguish gross profit margin from mark-up.

    Margin expresses gross profit as a percentage of sales ($\frac{\text{GP}}{\text{Sales}}$); mark-up expresses gross profit as a percentage of cost ($\frac{\text{GP}}{\text{Cost of sales}}$).

22. Cost of sales is £40,000 and goods carry a mark-up of 25%. What are the sales figure and gross profit?

    Gross profit $= 0.25 \times £40{,}000 = £10{,}000$. Sales $= £40{,}000 + £10{,}000 = £50{,}000$.

23. What is an appropriation account in partnership accounts and what does it show?

    It shows how the partnership profit is divided among partners: profit is adjusted for interest on capital, interest on drawings, and partners' salaries, with the residual profit shared in the profit-sharing ratio.

24. What is the purpose of a partner's current account, and how does it differ from the capital account?

    The current account records the partner's share of profits, salaries, interest on capital, less drawings and interest on drawings (a fluctuating balance). The (fixed) capital account records capital introduced/withdrawn. Both appear in the SFP capital section.

What this deck covers

Financial Accounting: Preparing Financial Statements (Level 3) flashcards FAQ