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

24 sample cards from the Financial Accounting and Reporting deck

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

1. 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).

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

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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).

16. 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.

17. 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).

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

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

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

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