CMA (Cost & Management Accountancy) Foundation: Fundamentals of Financial and Cost Accounting Flashcards

24 sample cards from the Foundation: Fundamentals of Financial and Cost Accounting deck

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

1. How is accrued income (income earned but not received) treated in final accounts?

   It is ADDED to the relevant income in the Profit & Loss Account (credit side) and shown on the ASSETS side of the Balance Sheet.

2. How is income received in advance (unearned income) treated in final accounts?

   It is DEDUCTED from the relevant income in the Profit & Loss Account and shown on the LIABILITIES side of the Balance Sheet.

3. Distinguish between a Provision and a Reserve.

   A Provision is a charge against profit made for a known liability or expected loss whose amount cannot be determined precisely (e.g., provision for doubtful debts); it is created even if there is no profit. A Reserve is an appropriation of profit set aside to strengthen the financial position (e.g., general reserve); it is created only out of profits.

4. Distinguish a Capital Reserve from a Revenue Reserve.

   A Capital Reserve is created out of capital profits (e.g., profit on sale of fixed assets, premium on issue of shares) and is generally not available for dividend distribution. A Revenue Reserve is created out of normal trading (revenue) profits and is available for distribution as dividend.

5. What is a Secret Reserve and how can it be created?

   A Secret (hidden) Reserve is a reserve not disclosed in the Balance Sheet, making the financial position appear weaker than it actually is. It can be created by undervaluing assets, overvaluing liabilities, excessive depreciation, or omitting some assets.

6. What does a Balance Sheet of a sole proprietor show, and on what basis are assets usually arranged?

   It is a statement of the financial position showing assets, liabilities and capital on a particular date. Assets and liabilities are arranged either in order of liquidity (most liquid first) or order of permanence (most permanent first).

7. In the order of permanence, list the typical sequence of assets on a sole proprietor's Balance Sheet.

   Goodwill, Land & Buildings, Plant & Machinery, Furniture & Fixtures, Investments, Closing Stock, Sundry Debtors, Bills Receivable, Cash at Bank, and Cash in Hand.

8. Define a Bank Reconciliation Statement (BRS) and state its purpose.

   A BRS is a statement prepared to reconcile and explain the differences between the bank balance shown by the Cash Book and the balance shown by the Pass Book (bank statement) on a particular date, identifying the causes of disagreement.

9. Give three common reasons why the Cash Book balance and Pass Book balance differ.

   1) Cheques issued but not yet presented for payment, 2) Cheques deposited but not yet cleared/credited, 3) Bank charges, interest, or direct debits/credits recorded by the bank but not yet in the Cash Book.

10. When starting a BRS from a favourable (Dr) Cash Book balance, how is a cheque issued but not yet presented treated?

    A cheque issued but not yet presented is ADDED to the Cash Book balance, because the bank has not yet reduced the balance (so the Pass Book shows a higher balance than the Cash Book).

11. Define Depreciation and name three of its main causes.

    Depreciation is the gradual and permanent reduction in the book value of a fixed asset due to use, passage of time, or obsolescence. Causes include: wear and tear from use, efflux (passage) of time, obsolescence, depletion, and accidents.

12. State the Straight Line Method (SLM) formula for annual depreciation.

    $$\text{Depreciation} = \frac{\text{Cost} - \text{Scrap (Residual) Value}}{\text{Useful Life (years)}}$$ The depreciation amount remains the same every year.

13. State the formula for the rate of depreciation under the Straight Line Method.

    $$\text{Rate of Depreciation} = \frac{\text{Cost} - \text{Scrap Value}}{\text{Useful Life} \times \text{Cost}} \times 100$$ expressed as a percentage of original cost.

14. How is depreciation calculated under the Written Down Value (WDV) / Diminishing Balance Method?

    A fixed percentage rate is applied each year to the reducing book value (opening balance) of the asset: $$\text{Depreciation} = \text{Book Value at start of year} \times \text{Rate}\%$$ so the amount decreases every year.

15. Compare the Straight Line Method and the Written Down Value Method on the amount of depreciation and book value at end of life.

    SLM charges a constant amount each year and can reduce the asset to zero (or scrap) at the end of its life. WDV charges a decreasing amount each year (higher in early years) and the book value never becomes exactly zero. SLM applies the rate to cost; WDV applies it to the reducing balance.

16. What is a Bill of Exchange? Name its three parties.

    A Bill of Exchange is an unconditional written order signed by the maker, directing a person to pay a certain sum of money on a fixed/determinable future date to a specified person or bearer. Three parties: Drawer (maker/creditor), Drawee (the one ordered to pay/debtor), and Payee (the one to receive payment).

17. What do the terms "discounting a bill" and "days of grace" mean?

    Discounting a bill means the holder gets it encashed from the bank before its due date by accepting a deduction (the bank's discount/interest). Days of grace are the 3 extra days added to the nominal due date of a time bill to arrive at the legal date of maturity.

18. What is meant by retiring a bill, and dishonour of a bill?

    Retiring a bill means the drawee/acceptor pays it before the due date and is allowed a cash discount (rebate) for early payment. Dishonour of a bill means the acceptor fails to pay it on the due date; the original entry is reversed and noting charges (if any) are added to the amount due.

19. What is a Consignment, and who are the consignor and consignee?

    A consignment is the dispatch of goods by their owner to an agent to be sold on the owner's behalf and risk. The Consignor is the owner who sends the goods (principal); the Consignee is the agent who receives and sells the goods and earns commission.

20. What is the difference between Ordinary (Sales) Commission and Del Credere Commission in consignment?

    Ordinary commission is paid to the consignee on total sales as remuneration for selling the goods. Del credere commission is an additional commission paid to the consignee for bearing the risk of bad debts, making the consignee responsible for collecting payment from credit customers.

21. How is the value of unsold (closing) stock on consignment calculated?

    It is valued at cost to the consignor plus a proportionate share of non-recurring (direct) expenses incurred up to the point the goods reach the consignee's godown — i.e., proportionate consignor's expenses and consignee's non-recurring expenses, applied to the unsold quantity.

22. What is a Joint Venture, and how does it differ from a partnership?

    A Joint Venture is a temporary business arrangement between two or more parties (co-venturers) to carry out a specific venture/project and share profits and losses, after which it terminates. Unlike a partnership, it is for a specific, limited project, has no firm name as a going concern, and ends on completion of the venture.

23. When separate books are kept for a Joint Venture, name the three principal accounts opened.

    1) Joint Venture Account (to ascertain profit or loss of the venture), 2) Joint Bank Account (to record cash transactions), and 3) Co-venturers' Personal (Capital) Accounts (to record each party's contributions and shares).

24. Under the Memorandum Joint Venture Account method, how is each co-venturer's own profit recorded?

    Each co-venturer keeps only one account: "Joint Venture with [other co-venturer]" Account. A Memorandum Joint Venture Account is prepared (not part of double entry) to compute total venture profit/loss; each party records only its own share of profit by debiting the personal Joint Venture account and crediting Profit & Loss Account.

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Foundation: Fundamentals of Financial and Cost Accounting flashcards FAQ