CIMA C02 Fundamental of Financial Accounting

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Fixed assets are long-term or relatively permanent assets, such as equipment, machinery, buildings, and land. Other descriptive titles for fixed assets are Property, Plant and Equipment (PP&E)

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Fixed Assets

They exist physically and thus, are tangible assets

They are owned and used by the company in its normal operations

They are not offered for sale as part of normal operations

Classifying Costs

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Normal and ordinary repairs and maintenance

REVENUE EXPENDITURES

CAPITAL EXPENDITURES

Additions, improvements, and extraordinary repairs

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Depreciation is a non-cash expense

Depreciation

The term depreciation is used with reference to tangible non-current assets because the permanent and gradual fall in book value of fixed asset

Expired cost of an asset is called depreciation

Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systemic manner

The book value or carrying value (cost less accumulated depreciation) of a plant asset may differ significantly from its market value

Factors in computing depreciation:

Cost Useful life Salvage value

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Methods of Depreciation

Straight Line Method =

Unit of Production Method =

Reducing Balance MethodUnder this method the asset is depreciated at fixed percentage calculated on the book value of the asset which is diminished year after year on account of depreciation

Depreciation = Rate * Net book value

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Depreciation in the year of acquisition

Non-current assets are acquired at various dates throughout the year

Strictly speaking, if the asset has been owned for only part of a year, only

that proportion of the annual depreciation should be accounted for. This

is known as depreciation on an ‘actual time bases‘. Conversely, when the

asset is sold, only a proportion of the final year‘s depreciation should be

charged

However, it is common for small organisations to charge a full year‘s

depreciation in the year of acquisition, irrespective of the date of

purchase, and to charge none in the year of disposal

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Accounting for the Disposal of a Non-Current Asset

At the end of the asset‘s life a comparison is made of the difference between the carrying amount of the asset at the date of its disposal and the proceeds received (if any)

The difference is referred to as the profit or loss arising on the disposal of the asset

There are three step approach to making disposal entries

Step 1. Remove cost from the books and transfer to the disposal account

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Step 2. Remove the accumulated depreciation from the books and transfer to the disposal account

Step 3. Record the cash proceeds

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MCQs 1

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MCQs 2

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MCQs 3

1,200 Capital loss

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MCQs 4

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MCQs 5

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MCQs 6

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MCQs 7

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44,000

MCQs 8

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Inventory

Inventory is tangible goods held for resale in the normal course of business

or that will be used in producing goods (manufacturer) for sale

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Cost Flow Assumptions

FIFO

The first-in, first-out inventory costing method is based on the assumption

that the first items received were the first items sold

In other words, items in the beginning inventory or the oldest items are

assumed to be sold first

The most recent inventory purchased is assumed to remain in ending

inventory

Continued

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Cost Flow Assumptions

LIFO

The last-in, first-out inventory costing method is based on the assumption

that the last items received were the first items sold

In other words, the most recent purchases are assumed to be sold first

and the old goods remain in inventory. However, the assumed flow of

goods can differ from the actual physical flow

During inflationary times, recent costs are higher than old costs, resulting

in higher cost of goods sold, lower net income, and lower income taxes

Continued

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Cost Flow Assumptions

Average or Weighted Average

The weighted-average inventory costing method uses a weighted-average

cost per inventory unit in assigning cost to units sold and to inventory

A weighted-average is recalculated at the time of each purchase

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Impact of Cost Flow Assumptions

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MCQs 9

60

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(b) A higher profit and a higher closing inventories value

MCQs 10

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(b) Rs. 26,000

MCQs 11

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(c) Equipment used in the manufacturing are sold

MCQs 12

Due to the timing difference, omissions and errors made by the bank

or the firm itself.

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Bank Reconciliation Statement

Bank reconciliation statements can be used to explain the reasons for

the differences and to identify errors and omissions in both documents, so

that corrections can be made as soon as possible.

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These are cheques that have been received and debited in the customer’s

cashbook, but for one reason or another, have not been credited to his account

by the bank at the time of preparing the bank statement

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Reasons for differences

Uncredited items Check deposited (for receipts) but not collected by bank

They are cheques issued by the firm that have not yet been presented to its bank

for payment.

Unpresented cheques

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Standing ordersThey are standing instructions from the firm to the bank to make regular payments

Direct debitsThey are payments made directly through the bank

Bank chargesThey are charges made by the bank to the company for banking services used

They are cheques deposited but subsequently returned by the bank due

to the failure of the drawer to pay.

Dishonoured cheques

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Credit transfers / direct credits

They are money received from customers directly through the banking system

Interest allowed by the bank

They are interest received for deposits or fixed deposits

Cash Book (bank column only)

Debit represents an increase Credit represents an decrease

Bank Statement

Dr Cr Balance

(representsdecrease)

(representsincrease)

(representsthe amountowned to the clients)

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Nature of the Cash Book and Bank Statement

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Steps for Bank Reconciliation Statement

Steps 1: Check the bank statement and the cash book to identify the items

which have been omitted.

Steps 2:

Update the cash book with any omissions and errors made by the firm

itself.e.g. Credit transfers (debit cash book)

Bank interest (debit cash book) Standing orders / direct debits (credit cash book) Bank charges (credit cash book) Dishonoured cheques (credit cash book)

Steps 3:Prepare the bank reconciliation statement

Cash book(Bank column)1996 $Dec 1 Bal b/f 2800 3 W Lee 1000 10 T Cheung 2000 30 S Sin 1400

1996 $Dec 8 K Wong 1600 20 C Kwok 700 29 M Tang 100 31 Bal c/f 4800

7200 7200Bank Statement

1996 Dr Cr Balance $ $Dec 1 Balance 2800

3 Cheque deposit 1000 3800 8 Cheque 76343 1600 2200 10 Cheque deposit 2000 4200 11 Dishonoured cheque 2000 2200 11 Service charges 30 2170 12 Autopay-rent 250 1920 20 Cheque 76344 700 1220 31 Bank interest 50 1270 31 Credit transfer-commission received 300 1570 31 Balance 1570

Uncrediteditems

Unpresented cheque

Bank charges

Direct debit

Question:

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Cash Book (Bank Column)1996 $ 1996 $

31 Commission Rec. 30031 Bank Interest 50

5,150

Dec 31 Balance b/f 4,800 Dec 31 T. Cheung –

Dishonoured cheque 2,000

31 Bank charges 3031 Rent 25031 Balance c/f 2870

5,150

Answer:

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Bank Reconciliation Statement as at 31 Dec 1996$

Corrected balance in hand as per Cash BookUnpresented cheques 100

Bank deposits not yet entered on Bank Statement 1400

Balance in hand as per Bank Statement

2870

1570

Add

Less2970

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