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MCQs 1Which one of the following does not apply to the preparation of financial accounts?(a) They are prepared annually.(b) They provide a summary of the outcome of financial transactions.(c) They are prepared mainly for external users of accounting information.(d) They are prepared to show the detailed costs of manufacturing and trading
(d) They are prepared to show the detailed costs of manufacturing and trading
MCQs 2Which of the following are not part of the income statement (profit
and loss account)?
(a) Sales
(b) Gross profit
(c) Debtors
(d) Rent
(c) Debtors
MCQs 3Which of the following are not part of the balance sheet?
(a) Prepayments
(b) Short-term loans
(c) Interest
(d) Creditors
(c) Interest
MCQs 4Which of the following is not part of the statement of movements on
capital?
(a) Capital at the start of the period
(b) Fixed assets
(c) Net profit earned in the period
(d) Capital at the end of the period
(b) Fixed assets
Accounts for Limited Companies
Company accounts preparation in the UK is governed by the
Companies Act 2006
Companies issue shares to shareholders who enjoy limited liability
There are two classes of limited liability company in the UK
(a) Private companies
(b) Public companies
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Statement of Changes in Equity
Reserves
There are two types of reserves: capital reserves and revenue reserves
The difference between these is that capital reserves may not be
distributed as dividends. Examples of capital reserves are share
premium and revaluation reserves
Since the increase in value is based on a professional valuation and
has not been realised by a sale, the increase in value (or profit) cannot
be distributed to shareholders.
Revenue reserves are
(a) Accumulated and undistributed profits of a company
(b) Amounts that cannot be distributed as dividends
(c) Amounts set aside out of profits to replace revenue items
(d) Amounts set aside out of profits for a specific purpose
MCQs 6
(a) Accumulated and undistributed profits of a company
Which one of the following would you expect to find in the appropriation account of a limited company, for the current year?
(a) Ordinary dividend proposed during the previous year, but paid in the current year(b) Ordinary dividend proposed during the current year, but paid in the following year(c) Directors’ fees(d) Auditors’ fees
MCQs 7
(a) Ordinary dividend proposed during the previous year, but paid in the current year
The record of how the profit or loss of a company has been allocated
to distributions and reserves is found in the?
(a) Capital account
(b) Profit and loss account
(c) Reserves account
(d) Statement of changes in equity
MCQs 9
(d) Statement of changes in equity
Revenue reserve would decrease if a company?
(a) Sets aside profits to pay future dividends
(b) Transfers amounts into ‘general reserves’
(c) Issues shares at a premium
(d) Pays dividend
MCQs 11
(d) Pays dividend
Retained Earnings
These are profits earned by the company and not appropriated by
dividends, taxation or transfer to another reserve account
This reserve generally increases from year to year, as most
companies do not distribute all their profits as dividends
If a loss is made in one particular year, a dividend can still be paid
from previous years' retained earnings
Which one of the following does not form part of the equity capital of
a limited company?
(a) Debenture
(b) Share premium
(c) Revaluation reserve
(d) Ordinary share capital
MCQs 15
(a) Debenture
30
MCQs 17
Decrease Decrease
35
The Manufacturing Account
So far we have worked with trading accounts of the form:
This is perfectly satisfactory for a retail organisation that purchases and resells goods.
A manufacturing company will need further details for the cost of manufacturing its products and these details can be set out in the form of manufacturing account.
Definitions
• Direct costs are those which can be attributed to a particular unit of production and will normally include raw materials, productive wages and other expenses capable of direct identification with production. These three are often called direct materials, direct wagesand direct expenses.
• Indirect expenses are production expenses which cannot be attributed to a particular unit of production. They are often called manufacturing or works overheads and will include such items as factory power, plant repairs and so on.
• Prime cost is the total of direct expenses.
• Factory cost or works cost is prime cost plus a share of the factory indirect expenses.
Stocks in Manufacturing Organisations
The manufacturing process will involve three stages: Stage 1. The acquisition of raw materials Stage 2. The modification or processing of those materials, with the
addition of labour and other expenses Stage 3. The production of finished goods
There could be four types of inventories on the balance sheet of manufacturing organization Raw materials Work in progress (partly finished goods) Finished goods Bought-in goods
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MCQs 20
294,000
43
Cash Flow Statement
• The statement of cash flows is to highlight the major activities that directly and indirectly impact cash flows and hence affect the overall cash balance
• The purpose of the statement of cash flow is to report a firm’s cash inflows and outflows, during a period of time, divided into three categories are Operating, Investing, and Financing Activities
• The cash flow statement may be presented using either a “direct” method or an “indirect” method
• The only difference between the direct and indirect methods of presentation concerns the reporting of operating activities; the investing and financing activity sections would be identical under each method
Operating Activities (Indirect Method)
• Direct method is not include in the syllabus of CIMA C02
• Following steps are used to calculate cash flow from operating activities under the indirect method :
Start with operating profit
Add non-cash expenses, such as depreciation and amortization and loss on disposal of non-current assets (capital loss)
Less profit disposal of non-current assets (capital gains)
Continued
Changes in working capital excluding short term borrowing (note payable and like nature) and cash equivalents (working Capital is current assets and current liabilities)
Inflow of cash is any decrease in non-current asset item or any increase in an current liability
Outflow of cash is any increase in non-current asset item or any decrease in a current liability
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Net cash from operating activities
We now need to calculate the cash from operating activities by
deducting the following items from cash generated from operations:
(a) Interest paid;
(b) Tax paid;
Investing Activities
Investing activities generally involve Non Current Assets which are long term investment and fixed assets
Investing activities generate cash inflows and outflows related to acquiring or disposing of non-current assets such as property, plant, and equipment, long-term investments, and loans to another entity (bonds & debenture)
Financing Activities
When there is a change in the balance of a non-current liability
account or a capital stock account or cash dividends are paid, the
related cash flow must be recorded in the financing activities section
Financing activities involve dividend, short term borrowing (Not
Payable and like nature) and Long term Liabilities
The Cash Section
This section determines the ending balance in cash by adding the total
of the net cash flows from the Operating, Investing and Financing
sections to the beginning balance of cash from the balance sheet
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Ratio Analysis
Measure relationships between resources and financial flows
Ratios also allow for better comparison through time or between companies
A ratio is simply a comparison of one figure with another
Ratios can be classified into various groupings, according to the type of information they convey. The main groupings are as follows
o Profitability (performance) ratios
o Liquidity (solvency) ratios
o Efficiency (use of assets) ratios
o Capital structure (gearing) ratios
The following income statement and balance sheet will be used to illustrate the calculation of accounting ratios
Profitability Ratio
• These are also known as performance ratios
• They compare profit at different levels with other figures, and are often presented as percentages
• Assess profits relative to amount of resources used
Gross Profit Margin
Gross Profit Mark-up:
Operating Profit Margin Return on Capital Ratios
Gross Profit Margin
This ratio (also known as the gross profit to sales revenue ratio) is calculated by
Return on Capital Ratios
The ratio can be calculated in several different ways, according to the information required of it, and depending on what is meant by the two terms ‘capital employed’ and ‘returns’
In these Learning Materials, two methods of calculating the return on capital are discussed – the return on total capital employed (ROCE) and the return on equity (ROE)
Capital employed can consist of total capital employed (equity + non-current liabilities)
Liquidity Ratios
Assess ability to cover current obligations
These are also known as solvency ratios, as they refer to the ability of the business to pay its payables in the short term
There are two main liquidity ratios:
The Current Ratio The Quick Ratio
Current Ratios
This is also known as the working capital ratio, as it is based on working capital or net current assets
70
Activity /Turnover Ratios / Efficiency ratios
• Assess amount of activity relative to amount of resources used
• These are also referred to as use of assets ratios. They measure the efficiency of the management of assets, both non-current and current
Asset Turnover
Total Capital Employed (Capital Turnover)
Non-current assets (non-current asset turnover)
Inventories days
Receivables days
Payables Days
Total Working Capital Ratio
Asset Turnover
These ratios compare the assets with the sales revenue (turnover) that they have earned
Inventories days
Inventories may be analyzed by calculating the ratio of inventories to cost of sales, and then multiplying by the number of days in a year to give inventories days
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Receivables days
This is a measure of the average time taken by customers to settle their debts
Total Working Capital Ratio
This measures the total length of time for which working capital is tied up in inventories, receivables and payables, before becoming available for use
It is the total of the number of inventories days, receivables days, less payables days
Leverage Ratios or Capital structure ratios
Different firms have different methods of financing their activities.
Some rely mainly on the issue of share capital and the retention of
profits; others rely heavily on loan finance; most have a combination
of the two.
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The gearing ratio (or leverage ratio)
Gearing is a measure of the relationship between the amount of finance provided by external parties (e.g. debentures) to the total capital employed
An alternative method of calculating gearing is known as the debt equity ratio
Interest cover
Connected to the gearing ratio is a measure of the number of times that the profit is able to “cover” the fixed interest due on long-term loans. It provides lenders with an idea of the level of security for the payment
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