Chartered Global Management Accountant (CGMA) Financial Pillar: Financial Reporting and Taxation Flashcards

24 sample cards from the Financial Pillar: Financial Reporting and Taxation deck

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

1. In a consolidated statement of financial position, how is the parent's investment in the subsidiary treated?

   It is eliminated against the parent's share of the subsidiary's equity at acquisition; the difference gives rise to goodwill. 100% of the subsidiary's assets and liabilities are added line-by-line.

2. How are intra-group balances and unrealized profit on intra-group inventory treated in consolidation?

   Intra-group receivables/payables are eliminated in full. Unrealized profit on inventory still held within the group is eliminated, reducing inventory and the selling company's profit.

3. In the consolidated statement of profit or loss, how much of a subsidiary's revenue and expenses is included?

   100% of the subsidiary's revenue and expenses (line-by-line), with intra-group transactions eliminated. Profit is then split between owners of the parent and the non-controlling interest.

4. How is profit for the year split at the bottom of the consolidated statement of profit or loss?

   Into profit attributable to owners of the parent and profit attributable to the non-controlling interest (NCI's share of the subsidiary's post-acquisition profit).

5. How is an associate defined under IAS 28, and what level of holding usually indicates it?

   An associate is an entity over which the investor has significant influence (power to participate in financial/operating policy decisions but not control), usually indicated by holding 20% to 50% of voting rights.

6. Under the equity method (IAS 28), how is an investment in an associate initially and subsequently measured?

   Initially at cost; subsequently increased/decreased by the investor's share of the associate's post-acquisition profit or loss and OCI, and reduced by dividends received from the associate.

7. In the consolidated statement of profit or loss, how is the share of an associate's results presented under the equity method?

   As a single line: 'Share of profit of associate' (the investor's percentage of the associate's profit after tax), not line-by-line consolidation.

8. Under IAS 7, what are the three classifications of cash flows in the statement of cash flows?

   Operating activities, Investing activities, and Financing activities.

9. Under the indirect method (IAS 7), how is profit before tax adjusted to derive cash from operations?

   Add back non-cash expenses (e.g., depreciation, amortization) and finance costs, adjust for non-operating items, then adjust for changes in working capital (inventory, receivables, payables).

10. State the formulas for the current ratio and the quick (acid-test) ratio.

    $$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$ $$\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

11. State the formulas for gross profit margin and operating (net) profit margin.

    $$\text{Gross margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\%$$ $$\text{Operating margin} = \frac{\text{Operating profit}}{\text{Revenue}} \times 100\%$$

12. State the formula for Return on Capital Employed (ROCE).

    $$\text{ROCE} = \frac{\text{Operating profit (PBIT)}}{\text{Capital employed}} \times 100\%$$ where capital employed = total equity + non-current liabilities (or total assets − current liabilities).

13. State the formula for the gearing ratio (debt-to-equity basis) and what it measures.

    $$\text{Gearing} = \frac{\text{Debt}}{\text{Equity}} \times 100\% \quad \text{or} \quad \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \times 100\%$$ It measures financial leverage/risk—the proportion of financing from debt versus equity.

14. State the formula for inventory holding period (inventory days).

    $$\text{Inventory days} = \frac{\text{Average inventory}}{\text{Cost of sales}} \times 365$$

15. State the formula for the interest cover ratio.

    $$\text{Interest cover} = \frac{\text{Profit before interest and tax (PBIT)}}{\text{Finance costs (interest)}}$$

16. List three key limitations of ratio analysis when interpreting financial statements.

    Ratios use historical data and may not predict the future; differing accounting policies/estimates reduce comparability; they ignore non-financial factors; and they can be distorted by inflation, seasonality, or window dressing at the year-end.

17. What is the distinction between a direct tax and an indirect tax?

    A direct tax is levied directly on income, profits, or wealth of the person who bears it (e.g., corporate income tax). An indirect tax is levied on consumption/transactions and collected via an intermediary (e.g., VAT/sales tax), with the burden passed to the final consumer.

18. Distinguish between tax avoidance and tax evasion.

    Tax avoidance is the legal arrangement of affairs to minimize tax liability within the law. Tax evasion is the illegal non-payment or underpayment of tax (e.g., concealing income), which is a criminal offense.

19. What is the difference between the marginal tax rate and the effective (average) tax rate?

    The marginal rate is the tax rate applied to the next dollar of income (the top bracket rate). The effective rate is total tax divided by total taxable income, expressed as $$\text{Effective rate} = \frac{\text{Total tax paid}}{\text{Taxable income}} \times 100\%$$.

20. How is corporate income tax (taxable profit) generally derived from accounting profit?

    Accounting profit is adjusted by adding back disallowable expenses, removing non-taxable income, and substituting tax depreciation (capital allowances) for accounting depreciation to arrive at taxable profit, to which the tax rate is applied.

21. What is the difference between a permanent difference and a temporary difference in tax (IAS 12)?

    A permanent difference never reverses (e.g., non-deductible fines) and does not create deferred tax. A temporary difference arises from timing differences between carrying amount and tax base, reversing in future periods and giving rise to deferred tax.

22. How does Value Added Tax (VAT) operate as an indirect tax?

    VAT is charged on the value added at each stage of production/distribution. A registered business charges output VAT on sales and reclaims input VAT on purchases, remitting the net (output − input) to the tax authority; the final consumer bears the cost.

23. What is the difference between zero-rated and exempt supplies for VAT purposes?

    Zero-rated supplies are taxable at 0%, so the trader can reclaim input VAT. Exempt supplies are outside the VAT charge and the trader cannot reclaim related input VAT.

24. What are employment taxes and how are they typically collected?

    Taxes on employee earnings such as income tax (withheld via PAYE/withholding) and social security/payroll contributions paid by both employee and employer, collected at source by the employer and remitted to the tax authority.

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