CIMA BA3 Flashcards

It will appear under the heading Cash Flows from Financing Activities.

It will not appear because there has been no cash received.

It will not appear because there is no cash received – the shares are issued free.

The direct method shows the actual amount of cash received and cash paid in respect of operations.

The indirect method starts with the profit before tax and adjusts it to result in the cash generated.

* Proceeds from the issue of shares
* Long term borrowings made or repaid

Cash spent acquiring non-current assets
Cash received from the sale of non-current assets
Income from investments

Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities

Research costs should be expensed in the Income Statement.

Revenue reserves are profits that have been earned (and retained) by the company – retained earnings and general reserve.
They represent amounts owing to shareholders that can be paid out as dividend.

The share premium account records the excess of the amount of cash received from the issue of shares over the nominal (par) value of the shares.

A bonus issue of shares is an issue of new shares to existing shareholders in proportion to their existing shareholdings, free of charge. No cash is received.

A rights issue is an offer of new shares to existing shareholders in proportion to their existing shareholdings.

Ordinary shares have voting rights – preference shares usually do not.
The dividend on ordinary shares is recommended by the directors – preference shares carry a fixed dividend.
The ordinary dividend is paid out of profits left after the preference dividend has been paid.

The Statement of Changes in Equity shows the reasons for the changes in share capital and reserves during the accounting period.

The gross margin is the gross profit expressed as a percentage of the sales.

A mark-up is the gross profit expressed as a percentage of the cost of sales.

The Statement of Comprehensive Income is the same as the Statement of Profit or Loss but with the addition of any surplus on revaluation.
(For later exams there are other differences, but the above is the only relevant one for this exam.).

An overdraft is a negative balance at the bank (i.e. the company owes money to the bank).

A debit balance on a bank statement means that the company is overdrawn.

An uncleared lodgement is a receipt that has been entered in the cash book but has not yet appeared on the bank statement.

An outstanding cheque is one that has been entered in the cash book but has not yet appeared on the bank statement.

The bank reconciliation is done to check the accuracy of the entries in the cash book (and the accuracy of the bank statement).

The general ledger contains all the accounts necessary to produce the financial statements. The double entry is made between these accounts.

A refund is a repayment of cash previously paid. It can occur for various reasons – e.g. the customer overpaid by mistake; the customer returned goods for which they had already paid.

A credit note is a ‚negative invoice‘ and is prepared by the supplier to cancel a previous invoice (or part of an invoice) because of goods having been returned or because of an overcharge on the invoice.

The residual value of an asset is the estimated disposal value at the end of its useful life.

A reducing amount of depreciation is charged each year (a fixed percentage of the net book value).

Depreciation is used to reflect the cost of using a non-current asset. It matches the cost of using the assets to the revenues generated by the asset over its useful life.

The depreciation charge is the same each year – the cost is spread over the expected useful life.

Buildings will be depreciated because they have a limited useful life.
Land will not normally be depreciated because it has an unlimited life.

The non-current asset register is a record of the non-current assets held by the business. It is for internal control purposes and is not part of the double entry bookkeeping.

Tangible assets can be touched (have a physical substance) e.g. machines, buildings, motor vehicles.
Intangible assets cannot be touched (do not have a physical substance) e.g. goodwill, development expenditure.

Revenue expenditure refers to expenses of running the business (will appear on the Income Statement).

Capital expenditure refers to the purchase of non-current assets and expenditure that enhances the asset (will appear on the Statement of Financial Position).

The allowance for receivables is made to recognise the possibility that some of the receivables might not be received (because they are doubtful).

An irrecoverable debt is an amount owing to the business that will not be received.

Prepaid income is income for the next year that has been received in the current year.

Accrued income is income for this year that has not been received by the year end.

A prepaid expense occurs when some of the next years expense has been paid in the current year.

The net selling price is the selling price excluding sales tax.

The gross selling price is the selling price including sales tax.

Output tax is the tax charged on sales.

Input tax is the tax charged on purchases.

Sales tax is a form of indirect taxation.

FIFO (first in first out)
AVCO (average cost_
Unit cost (actual cost)

Net realisable value is the expected selling price less any expected future costs there will be before sale.

Inventory is valued at the lower of cost and net realisable value (NRV).

A trial balance checks that for every debit entry made, there has been an equal credit entry.

Debit receivables
Credit sales

Debit purchases
Credit payables

An increase in capital will be a credit entry in the capital account.

An increase in income will be a credit entry in the income account.

An increase in a liability will be a credit entry in the liability account.

Drawings will be a debit entry in the drawings account.

An increase in an asset is a debit entry in the asset account.

An increase in an expense is a debit entry in the expense account.

Net assets = total assets – total liabilities

The increase in net assets = capital introduced + profit – drawings

Non-current assets are assets acquired on a long-term basis, not held for resale in the normal course of trading.

Current assets are assets which are expected to be realised in the normal course of trading.

Current liabilities are liabilities payable within 12 months of the reporting date.

Non-current liabilities are liabilities payable more than 12 months after the reporting date.

Drawings is anything taken from the business by a sole trader, whatever he/she chooses to call it.

Capital is the amount due to the owner(s) of the business.

The business is treated as separate from its owners.

The gross profit is the sales revenue less the cost of goods sold.

A liability is an item owed by the business.

An asset is an item owned by the business.

The revenues, expenses and profit or loss of the business – the financial performance of the business over a period of time.

The assets, liabilities and capital of the business – the financial position of the business at one point in time.

* Management
* Investors and potential investors
* Employees
* Lenders
* Government agencies
* Suppliers
* Customers
* Competitors
* The public

A sole trader is a business owned and operated by one person