CHAPTER (1)

Accounting Concepts and Framework

Applications and underlying Assumptions of Accounting Concepts

(ALL IAS or IFRS based on one or more of these concepts)

1. Going Concern Concept

Continuing in operation for the foreseeable future.

Financial Statements (FS) are prepared on going concern basic unless
management intends to liquidate the entity or to cease trading.

2. Accrual (or) Matching Concepts

Items are recognized as Assets, Liabilities, Equity, Income and Expenses.

All income must be match with related expenses.
Financial Statements are prepared using the accrual basis of accounting
except for Cash Flow information.

3. Prudent Concept

Assets and Income are never overstated.

Expenses and Liabilities are never understated.
The concept is more favorable than accrual concepts.

4. Consistency Concept

The presentation and classification of items in the Financial Statements

should stay the same from one period to the next. (It is assumed that
accounting policies are consistent from one period to another.
But there are two exceptions;
a. Significant changes in the nature of the operations or more appropriate
presentation in the Financial Statements.
b. A change in the presentation is required by an IAS or IFRS.

The qualitative characteristics of financial reporting under the

International Accounting Standards Board (IASB) Framework

The three qualitative characteristics are the attributes that make financial
information useful to user.

Relevance information is relevant for its users. It is material enough to make

decisions.
Comparability financial statements can be compared with previous years. Any
other reasonable responses are acceptable.

Faithful representation financial information must be based on

transactions and must be neutral, complete and free from errors.

IAS 1 Presentation of Financial Statements

The four primary statements included in the Financial Statements;

i. Statement of Financial Position (Balance Sheet)

ii. Statement of Profit or Loss and Other Comprehensive Income (Previously
name as Trading, Profit and Loss Accounts and also called Income Statement)
iii. Statement of Changes in Equity (Profit & Loss Appropriation Accounts)
iv. Statement of Cash Flow (Cash Flow Statement)

The element of Financial Statements

The Conceptual Framework lays out these elements as follows;

Measurement of Financial Position in Statements of Financial Position

Measurement of Financial performance in Statements of Profit or Loss and
Other Comprehensive Income

Assets A resource controlled by an entity as a result of past events

and from which future economic benefits are expected to flow to the
entity.
Property owned by a person or company, regarded as having value and available to meet
debts, commitments, or legacies.

An asset is an item of economic value that is expected to yield a benefit to the owning entity
in future periods. If expenditure is instead consumed within the current period, it is classified
as an expense.

Liability A present obligation of the entity arising from past events,

the settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits.
A liability is a company's financial debt or obligations that arise during the course of its
business operations. Liabilities are settled over time through the transfer of economic benefits
including money, goods or services.

Obligations of a company or organization; Amounts owed to lenders and suppliers. Liabilities

often have the word "payable" in the account title. Liabilities also include amounts received in
advance for a future sale or for a future service to be performed.

Equity The residual interest in the assets of the entity after

deducting of its liabilities.
Equity is the net amount of funds invested in a business by its owners, plus any retained
earnings. It is also calculated as the difference between the total of all recorded assets and
liabilities on an entity's balance sheet.
 Income Increase in economic benefits during the accounting period in
the form of inflows or enhancement of assets or decrease of liabilities
that result in increase in equity, other than those relating to
contribution from equity participants. Revenue and gains are included
in the definition of income.
Income is the earnings gained from the provision of services or goods, or from the use of
assets. A decrease in an obligation is also considered income, plus any appreciation on their
investments, and interest income on any bonds they may own.

Expenses Decrease in economic benefits during the accounting

period in the form of outflows or depletions of assets or incurrences of
liabilities that result in decrease in equity, other than those relating to
distribution to equity participants.
An expense is the reduction in value of an asset as it is used to generate revenue. If the
underlying asset is to be used over a long period of time, the expense takes the form of
depreciation, and is charged ratably over the useful life of the asset. If the expense is for an
immediately consumed item, such as a salary, then it is usually charged to expense as
incurred. If expenditure is for a minor amount that may not be consumed for a long period of
time, it is usually charged to expense at once, to eliminate the accounting staff time that
would otherwise be required to track it as an asset.

How financial statements contribute towards meeting the needs

(interest) of different stakeholders and users
A business has many different stakeholders. The following stakeholders would be
interested (needed) in the financial statements of business.

Owners They are interested investment will be to insure the business is

making a (Directors) profit and is financially stable.

Managers They want to ensure there are going to meet their targets. They
will be required to monitor income and expenditure and compare
with budget.

Suppliers They will want to be sure that the business is financially sound
before deciding whether to supply them with goods and services.

Customers They are interested in financial statements to assess the

availability of products and services in the future. (They will be
interested to ensure the business will continue so they can meet
the customers obligations.)

Employees They are interested in financial statements to assess the stability

of their jobs and future opportunities within organization. (They
 will be interested in the position of the company for their job
security and future wage rises.)

Governments They will want to know for taxations.

Investors They are interested in financial statements to assess the risk,

return and growth of their investment. (If The Company requires
investment those the accounts will show potential investors how
they are performing and the financial position of the business.)

Competitors They will want to see if the business is performing well and they
also be interested in the market share of their competitors.

Local community If the business employs a lot of people from the local
community, or if they will support to the local community then the
community will want the business to continue trading in the
future.

Trade associations They will compare business with others of the same trade
to give an over-view of the trade and calculate statistics.

Trade unions They will have a vested interest in the employees. They will want
to ensure that the business is treating employees fairly.

Provider of external finance They will include banks which allow the company
to operate an overdraft, or provides longer-term finance by
granting a loan. The bank wants ensure that the company is able
to keep up interest payments, and eventually to repay the
amounts advanced.

Types of business organizations

Sole traders

A sole trader has sole responsibility for the business.

Advantages Disadvantages

a. Can work employ as staff a. Sole responsibility for all debts

b. Can take on as much work as required b. Sick days means no pay
c. Sole responsibility for all profit and losses c. Potentially long hours
d. Can make all the business decisions
e. Easy to set up

Advantages of sole trading include that:

youre the boss

you keep all the profits

 start-up costs are low

you have maximum privacy

establishing and operating your business is simple

its easy to change your legal structure later if circumstances change

You can easily wind up your business.

Disadvantages of sole trading include that:

you have unlimited liability for debts as theres no legal distinction between private
and business assets

your capacity to raise capital is limited

all the responsibility for making day-to-day business decisions is yours

retaining high-caliber employees can be difficult

it can be hard to take holidays

youre taxed as a single person

The life of the business is limited.

Partnerships

A partnership consists of two of more people (2 20 partners) decide to operate

with together. Partners can invest financially in the business as well as investing
their skills.

Advantages Disadvantages

a. More skills a. Share profits

b. Take on more work b. Potential disagreements
c. Easy to set up c. Consultations required when making
decisions
d. Financial injection through
Capital investment

Advantages of a partnership include that:

two heads (or more) are better than one

your business is easy to establish and start-up costs are low

more capital is available for the business

youll have greater borrowing capacity

 high-caliber employees can be made partners

there is opportunity for income splitting, an advantage of particular importance due

to resultant tax savings

partners business affairs are private

there is limited external regulation

Its easy to change your legal structure later if circumstances change.

Disadvantages of a partnership include that:

the liability of the partners for the debts of the business is unlimited

each partner is jointly and severally liable for the partnerships debts; that is, each
partner is liable for their share of the partnership debts as well as being liable for all
the debts

there is a risk of disagreements and friction among partners and management

each partner is an agent of the partnership and is liable for actions by other
partners

If partners join or leave, you will probably have to value all the partnership assets
and this can be costly.

Private limited company (Ltd)

Shares are allocated to shareholders that normally have a personal interest in the
business.

Advantages

a. Security
b. Separate legal entity
c. Only one director is needed
d. Liable for business debts up to the amount of the money invested in business

Disadvantages

a. Financial reporting strict deadlines

b. Follow certain rules and regulations in terms of filling the accounts
c. Financial statements need to be compiled in accordance with accounting
standards
d. High penalties if failing to comply with legislation
Advantages and Disadvantages of Private Limited Companies (LTD)

Advantages

Member's liability is restricted to Disadvantages

the amount of shares they own.
They have limited liability Audited annual returns and accounts
have to be made to the Registrar of
Additional capital can easily be Companies. All these documents are
raised by selling shares available for public inspection

The company can continue to A private limited company id more

trade even if one of its members expensive and time consuming to set up
dies than a sole trader or partnership

Shares can be bought and sold Professional help will be needed to set up
with director's approval a private limited company

The private company has a There is separation of ownership and

separate legal existence from that control which means that the owners no
of its owners. It can own property longer make all the decisions
and sue and be sued
There are limited opportunities for
This type of organization has a economies of scale
much higher business status than
a sole trader

Public limited company (Plc.)

They can offer shares on a stock exchange, which is how a large ownership base
can be established.

Advantages

a. Limited liability so investor potentially only loses what they have invested
b. Business can generate financial investment though issue of shares

Disadvantages

a. Potentially many shareholders a. Minimum share capital is required

Public Limited company

Limited companies which can sell share on the stock exchange are Public Limited
companies. These companies usually write PLC after their names. Minimum value of
shares to be issued (in UK) is 50,000.

Advantages

There is limited liability for the shareholders.

 The business has separate legal entity. There is continuity even if any of the
shareholders die.

These businesses can raise large capital sum as there is no limit to the number of
shareholders.

The shares of the business are freely transferable providing more liquidity to its
shareholders.

Disadvantages

There are a lot of legal formalities required for forming a public limited company.
It is costly and time consuming.

In order to protect the interest of the ordinary investor there are strict controls
and regulations to comply. These companies have to publish their accounts.

The original owners may lose control.

Public Limited companies are huge in size and may face management problems
such as slow decision making and industrial relations problems.

Franchise

A franchise is invested in a business that already exists.

Advantages Disadvantages

a. Minimum amount of set-up a. Can be expensive to buy a

franchise
b. Business name already exists b. Have to abide by rules of the
franchise
c. Support network

Introduction to ethical behavior in accounting practices

The Accountant will abide the following five majors ethical principles:

1. Integrity
Integrity is to be straightforward and honest in all professional and business
relationships.

2. Objectivity
To not allow bias, conflict of interest or undue influence of others to override
professional or business judgments, and having the resolve to ensure those
judgments are ethical.
3. Professional competence and due care
To maintain professional knowledge and skill at the level required to ensure that
a client or employer receives competent professional service based on current
developments in practice, legislation and techniques, and act diligently and in
accordance with applicable professional standards.

4. Confidentiality
To respect the confidentiality of information acquired as a result of professional
and business relationships and, therefore, not disclose any such information to
third parties without proper and specific authority, unless there is a legal,
professional, or ethical right or duty to disclose, nor use the information for the
personal advantage of the professional accountant or third parties.

5. Professional behavior
To comply with relevant laws and regulations and avoid any conduct that
discredits the profession.
 CHAPTER (2)
Valuation of Inventories

IAS 2 Inventories

Inventories are valued at the lower of cost and realizable value.

Costs

Purchase Cost, Conversion Cost and other costs incurred in bringing the inventory
to its present location and condition. ( as Purchase Direct Expenses )

Net Realizable Value (NRV)

NRV = Saleable Value Further expenses needed before completion of sale

Inventory counting (Stocktaking) and the Accounts Closing Date (Balance Sheet
Date)

All but the very smallest of trading business need to physically check that the
stocks their records tell them are held in stock actually exist. The process of doing
so is called stocktaking.

1. Inventory Valuation; when physical stock taken occur after the actual year
end

31 March 2017 9 April 2017

(Account closed Date) ---------Adjust to ---------- (Physical Stocktaking

Date)

Inventory value at 9 April 2017 xxx

Inventory movements (31.3.2017~ 9.4.2017)

(-) Purchase (xxx)

(+) Purchase Returns xxx

(+) Sales (convert to Cost) xxx

 (-) Sales Returns (convert to Cost) (xxx)

(+) Goods Drawings xxx

Inventory value at 31 March 2017 xxx

2. Inventory Valuation; when physical stock taken occur before the actual year
end

1 March 2017 31 March 2017

(Opening Stock Date) Adjust to (Closing Stock Date)

Inventory value at 1 March 2017 xxx

Inventory movements (1.3.2017 ~ 31.3.2017)

(+) Purchase xxx

(-) Purchase Returns (xxx)

(-) Sales (Convert to Cost) (xxx)

(+) Sale Returns (Convert to Cost) xxx

(-) Goods Drawings xxx

Inventory value at 31 March 2017 xxx

Issue Pricing

(1) First-In-First-Out Method (FIFO Method)

(2) Last-In-First-Out Method (LIFO Method)

(3) Weighted Average Cost (AVCO Method)

(1) Perpetual Weighed Average Cost basic

Total Amount
Average Price=
TotalQuantity

(Average Price)
(Valuation)

(2)Period (Monthly) Weighted Average Cost Basic

 Opening Iventory Amount + Purchase of Inventory Amount
Weighted Average Price=
Opening Iventory Quantity + Purchase of Iventory Quantity

=$.......per unit

Calculation of Inventory Losses (Different between Inventory Ledger and Physical

Inventory)

/ Destroyed by Fire/ Damage of Flood)

Opening Inventory xxx

(+) Purchases of Inventory xxx

(-) Sales of Inventory (Convert to Cost) (xxx)

Closing Inventory (as per books) xxx

(+/-)

Closing Inventory (as per Physical/ as per Physical good condition) (xxx)

Inventory Losses xxx

Question 2.1

Using the following data, produce a trading account and calculate the closing
inventory valuation using: a. FIFO b. LIFO c. AVCO
(a) The calculation of the closing inventory valuation using FIFO Method

(b) Calculation of the closing inventory using LIFO Method.

(c ) The Calculation of the inventory valuation using Perpetual Method.

Opening Iventory Amount + Purchase of Inventory Amount

Weighted Average Price=
Opening Iventory Quantity + Purchase of Iventory Quantity
 $ 2,000+ $ 6,450
= 100 Units +300 Units

$ 8,450
= 400 Units

= $ 21.13 per unit

31 May 20x6 Closing Inventory value = 50 units x $ 21.13 per unit

= $ 1,056.5

Question 2.2

The following information relates to Trolley Co., Ltd, which makes three sizes
of trolley called the Gem, the Middy and the Max. During the year, the following
trolleys were produced and sold.

Manufactured Sold Selling Price

Units Units $

Gem 5,000 4,500 300

Middy 8,000 7,900 600

Max 4,000 3,750 1,000

Each trolley uses the following quantities of materials and overhead:

Material A @ Material B @ Material C @

$ 25 per kg $ 10 per kg $ 100 per kg

Gem 2.0 0.5 0.5

Middy 3.0 2.0 1.0

Max 4.0 4.0 2.0

Gem department Middy department Max department

$ $ $

Fixed overhead cost 20,000 30,000 40,000

Variable overhead cost 20,000 45,000 60,000

Total overhead 40,000 75,000 100,000

Direct labour hours 500 1,500 2,500

Machine hours 500 1,000 5,000

The total quantities of materials purchased during the year were:

Material A @ Material B @ Material C @

$ 25 per kg $ 10 per kg $100 per kg

55,000 36,000 20,000

a. Calculate the materials cost for each type of trolley.

b. Calculate the overhead absorption rate for each type of trolley.
c. Calculate the standard cost of each type of trolley in closing inventory and
hence the total closing inventory valuation for finished trolleys for inclusion in
the accounts.
d. Calculate the value of raw materials in closing inventory.
e. Produce the trading account and hence calculate the gross profit for the year.

(a)