[MichelleJ]

Thank you so much. You are the BEST

[MichelleJ]

Thank you very much!!!

1. Operating expenses are those expenses that are not used in producing the goods but they are used in running the business such as office rent etc

2. Other expenses are those expenses that are used in producing the goods but they are not used in running the business such as delivery costs to customers?

3. Operating income are all those incomes that are received directly from the revenue from sales of the goods that are used in running the business such as interest received?

4. Other income are all those income that are coming apart from the revenue from sales of the goods such as rental received?

5. Dividends are paid from the Net Profit balance but showed in the statement of changes in equity?

Are they all correct?

[MichelleJ]

Can we say that since directors are the owners or among the list of shareholders of the company then they are a separate legal entity. Because limited liability company is a separate legal entity which means shareholders are different from the management but directors here are the actual shareholders so can they or cannot they should be part of company’s decisions making in shareholders meeting?

Secondly how can the director decide their own pay as part of the shareholders voting for their own salaries, i don’t get this too!

[MichelleJ]

Could you please explain this.
You said in your previous reply that directors of large or small companies are salaried employees of the company even though they might be owning the shares ownership in the business?

Is it also true that directors are part of the management who runs the business on daily basis are seperate from the owners who are shareholders – because if they own the shares in the company then they are actually among the shareholders – are not they?

Is it also true that to find out the fraud of the directors who also owns the shares should be scrutinized by veil of incorporation which means we have to deemed directors seperate from the management – and therefore considering business as separate legal entity from their directors?

[MichelleJ]

Please also explain what is veil of incorporation and what does it mean by lifting it for what purpose?

[MichelleJ]

You are saying that directors of large or small companies are salaried employees of the company even though they might be owning the shares ownership in the business?

Is it also true that directors are part of the management who runs the business on daily basis are seperate from the owners who are shareholders – because if they own the shares in the company then they are actually among the shareholders – are not they?

Is it also true that to find out the fraud of the directors who also owns the shares should be scrutinized by veil of incorporation which means we have to deemed directors seperate from the management – and therefore considering business as separate legal entity from their directors?

[MichelleJ]

I couldn’t get that…

Sales = 100,000
less: cost = 40,000
Gross profit = 60,000
less: operating expenses = 20,000
add: operating income = 5000
Profit before interest and tax = 45,000
less: interest costs = 5000
Profit before tax = 40,000
less: Tax costs = 10,000
Profit after tax = 30,000

I got few questions related to this example.

1. Is it correct that the operating expenses of ($20,000) includes all the other expenses that are used to run the business which are basically all the expenses that were spent in the production of the goods?

2. Is it correct that the operating income ($5000) includes all the other incomes that are used to run the business activities which are basically all the incomes earned other than the sales revenue of the business?

3. Is it also correct that dividend is paid from the Profit for the year of ($30,000) which will give us the balance of our net profit for the period. For example, a business declared to pay $10,000 to shareholders so we need to deduct this balance from our Profit for the year less dividend paid to get the net profit of $20,000 which will go to the retained earnings?

4. What stage of dividend is when we need to deduct or report the dividend balance on our financial statements and dividend is only reported in the notes to income statement, Is that true?

[MichelleJ]

1. Reversal entry is made to transfer balances from one account to another to reduce the accrual (liability) and expense it to Telephone Account?

2. Similarly we make reversal entry to transfer balances from one account to another to reduce the prepayment (asset) and expense it to Insurance Account?

3. Do we make reversal entries in all 4 adjustments?

4. Once we transfer the balances from one account to another then any expense incurred during the period will be recorded by the bookkeeper making this entry:

DR Telephone expense
CR Cash

5. The reversal entry will reduce the standing balances on prepayment and accrual accounts to zero – which means now we have no balance?

Sorry to ask again but ARE they correct?

[MichelleJ]

Relating to question (2).

Matching concept is when the revenues and their related expenses are recorded in the same accounting period in which they occur.

We recognize the revenues and their related expenses as soon as they occur which follows the same approach as accrual accounting.

Accrual accounting is unlike cash accounting where we record the transaction when the cash is received or paid.

All correct? Is that all we need to learn about them?

[MichelleJ]

Please correct me here.

Question #1
Invoice receive = Prepayment
Invoice not receive = Payable

Question #2
In prepayment we will have already received and paid the bill.

Question #3
In prepayment (we pay in advance):
We used the services AFTER we actually paid for them but we pay them before the year-end – so it is like a receiveable.

Question #4
Invoice receive = Receivable
Invoice not receive = Accrual

Question #5
In accrual we will NOT have received and paid the bill.

Question #6
In accruals (we pay later)
We used the services BEFORE we actually paid for them but we pay them after the year-end – so it is like a payable.

All correct?

[MichelleJ]

In accruals we estimate the expense for the period because we have not received the bill BUT what happened in prepayment?

Is it true in prepayment we paid the money in advance but we did not sent the bill?

If we sent the bill we have account receivable but if we did not sent the bill we have prepayment?

[MichelleJ]

Sorry to ask again.

Sport Co question (december 2017) ask us to calculate the ROI for the two divisions but the examiner has used controllable profit to measure the performance of the division even though you confirmed when I asked you above that net profit (final profit) must be used to measure the performance of the division?

Could u please tell me WHY?

Similarly in other questions too where the examiner is using controllable profit for ROI irrespective whether we have to measure the performance of divison or manager.

[MichelleJ]

Could you please respond to my questions above. I would be glad.

[MichelleJ]

Sorry I did a mistake in my previous question. This is what I wanted to ask.

1) We cannot say which is the controllable profit by simply looking at the profit statement given in the question until we have additional information and we use that to take only costs controlled by manager and remove all the costs controlled by the head office. (correct?)

2) ROI is calculated for the performance of the division like thereof:

ROI = Net Profit / Investment x 100

[MichelleJ]

Thanks for your previous answer. That was helpful 🙂

Could you please comment on below too.

1) You said in lecture that (probable / possible / remote) is relevant when the accidents occur after the year-end but how it does reconcile with IAS 10 events after the reporting period?

2) We record provision when something happened before the year-end according to IAS 37 but if something happened after year-end then IAS 10 events after the reporting period will apply?

3) Could you please explain the meaning of probable in accounting?

[MichelleJ]

Sorry I am little confused here. Please correct my few points…

1) Is there a difference when u say recognize it as receiveable instead of contingent asset?

2) When the court case has ended in our favour we record it as receivable whereas the contingent asset would be when the court case has not started yet?

3) IF contingent asset is virtually certain then we record it as receivable in normal way as current assets. BUT if it is probable then we disclose it as contingent asset in current assets?

4) IF contingent liability is probable then we record it as contingent liability in liability section in SOFP. BUT in case of possible we disclose it as provision.

5) There is no case when contingent liability is virtually certain (correct?)

Thanks 🙂

[MichelleJ]

I know that events after the reporting period refer to events that occur between the date of the SOFP and the date on which the financial statements become final.

I know that adjusting events are those events that provide additional evidence about the estimation of amount at the SOFP date BUT what does ‘additional evidence’ really mean here? Please explain.

[MichelleJ]

I was referring to throughput key factor analysis.

When material is limited = we measure how much throughput return we lose on each kilo because we have shortage of material kgs available and we cannot make all the units of that product. So we need to calculate throughput return per kilo in $.

When labour is limited = we measure how much throughput return we lose on each hour because we have shortage of labour hours available and we cannot make all the units of that product. So we need to calculate throughput return per hour in $.

LIKE THIS:
Products = A / B
Throughput return = $10,000 / $12,000
Material kilos = 2000 kg / 3000 kg
Throughput return per kilo = $5 / $4
Ranking = 1st / 2nd

[MichelleJ]

Maybe I didn’t clear what I mean. If an item such as interest, cost, capital etc is debited or credited what does it imply?

For eg interest is debited or credited into your account.

For eg COGS is debited or credited into income statement.

For eg Capital is debited or credited into balance sheet

I know its not relevant to this paper but it is relevant to other paper. I did ask because I couldn’t understand them

[MichelleJ]

Thanks for your answer.

Please also explain what does debited and credited mean in simple words?

When some item is debited or credited what does it really mean. Please give me an example?

[MichelleJ]

Sir please answer my these two questions too:

1) Could you state what does “nominal” really mean in accounting?

2) Do banks normally calculate the compound interest in the same way using compound interest formula as we’re told in the lecture?

Thanks for your understanding:)

[MichelleJ]

Yes, I did watch it. But i have few questions in my mind like:

1) Nominal interest rate is the annual rate which is quoted by banks BUT the interest actually earned on deposit is different from nominal annual interest because the compounding effect causing the actual interest to be higher and it is called effective annual rate (i.e. APR). Is this correct?

2) Is it also true that nominal is an annual interest rate without compounding but effective interest rate is monthly/quarterly/daily etc.

3) Could you state what does “nominal” really mean?

[MichelleJ]

There is two MCQ in the specimen exam which confused me related to my previous query above!

Q1) Section 122 insolvency act 1986 specifically provides a distinct ground for applying to have a company wound up on the ground that it is just and equitable to do so.

Which of the following parties may petition to have a company compulsorily wound up under that provision?

a) Shareholders of the company
b) Creditors of the company
c) Debentureholders of the company
d) The secretary of state

Q2) Which of the following cannot petition for the compulsorily winding up of a company on the grounds of insolvency under 122 insolvency act 1986?

a) The board of directors
b) The members of the company
c) The company’s creditors
d) The secretary of state

You can find this specimen exam using this link https://www.accaglobal.com/us/en/student/exam-support-resources/fundamentals-exams-study-resources/f4/lw-specimen-exams/eng-specimen-exam.html

[MichelleJ]

Much THANKS.

[Author]

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