REVISION LECTURE

INTRO TO ACCOUNTING A

Revision Areas• Be able to prepare and explain:

– trial balance & balance sheet– profit and loss account– cash flow statement– selection of accounting ratios

• Be able to explain:– the importance of cash– methods of working capital control– the use and users of accounting ratios– fundamental accounting concepts

Discussion Qs

• What do balance sheets/profit and loss accounts/cash flow statements show?– See p. 7 & p. 12 of blue lecture handout (unit A)– Note importance of cash - businesses fail

through lack of cash, profit is not the same as cash (can make profit but still run out of money)

– Need all 3 financial statements for balanced view of business

• Working capital control– working capital is cash tied up in day-to-day

operations of the business (= net current assets) - remember cash outlay in NPV questions?

– important to keep to minimum in order to free up cash for investment/reduce borrowings

– can keep stocks low, get debtors to pay quickly, delay payment of creditors

– note problems e.g. stockouts, loss of goodwill

• Users of accounting information– management (require frequent info, not

necessarily all financial, future-looking - hence management accounting is different to financial accounting!)

– shareholders/lenders - interested in returns on investment (dividends/interest), going-concern e.g. financial risk (gearing), cash

– government - for taxation, policy research

– suppliers - going-concern/credit risk, cash

• Fundamental accounting concepts– accruals– prudence– consistency– going-concern– substance over form

Book-Keeping Areas

• Depreciation

• Sale of fixed assets

• Bad and doubtful debts

• Prepayments and accruals

• Missing figures (sales/purchases) - ‘T’ accounts useful but not mandatory

• Bank reconciliations

Depreciation• Need to be able to calculate both straight-line

and reducing balance depreciation

• Net book value is original cost less ACCUMULATED depreciation

• Balance sheet shows assets at NBV

• Profit and loss account shows depreciation FOR THAT PERIOD ONLY

• Cash flow statement adds back depreciation in reconciliation as it is a non-cash item

Disposal of Fixed Assets

• Remove from balance sheet

• Profit and loss account shows profit/loss on disposal = (cash + trade-in allowance) - NBV

• Cash flow statement shows cash received from sale

Bad and doubtful debts

• Irrecoverable (bad) debts - write-off (i.e. remove from debtors balance, cost to P&L)

• Possibly irrecoverable (doubtful) debts - provide for (create provision in balance sheet, difference between this year’s and last year’s provision is cost/credit in P&L)

Missing Figures• Remember - cash received from debtors is NOT

the same as sales, and cash paid to suppliers is NOT the same as purchases. These figures are often missing.

• Need to work out the correct figures using opening and closing debtors/creditors figures, and cash receipts/payments.

• May also need to use information on sales margins/mark-ups - mark-up is % on COST, margin is % on SALE

Bank Reconciliations

• Cash balance in accounts comes from accounting records

• Can check to bank statement - some differences are acceptable, others reveal errors

• Acceptable differences are cheques that haven’t yet cleared (whether payments in or out)

Questions to Practise

• All past exam questions

• Qs 4, 5, 8, 9, 10, 11, 12, and 13 from yellow tutorial exercises

• Daphne Ltd, Basil Brush and Chippendale lecture examples, in blue lecture handouts

Additional Resources

Can be found on AccountingWeb via: http://www.accountingweb.co.uk/dunn/index.html

• ‘Keep the money working’

• Case study: Interpretation of Accounting Statements

• Depreciation - Methods of Accounting

• Fundamental to the Subject