Financial accounting

1. CIMA C02 Fundamental of
Financial Accounting
1

2. 2

3.  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)
3
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

4. Classifying Costs
4

5. Normal and ordinary
repairs and maintenance
REVENUE
EXPENDITURES
CAPITAL
EXPENDITURES
Additions,
improvements, and
extraordinary repairs
5

6. 6

7. 7

8. 8
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

9. 9
Methods of Depreciation
Straight Line Method =
Unit of Production Method =
Reducing Balance Method
Under 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

10. 10

11. 11

12. 12
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

13. 13
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

14. 14
Step 2. Remove the accumulated depreciation from the books and transfer to
the disposal account
Step 3. Record the cash proceeds

15. 15
MCQs 1

16. 16
MCQs 2

17. 17
MCQs 3
1,200 Capital loss

18. 18
MCQs 4

19. 19
MCQs 5

20. 20
MCQs 6

21. 21
MCQs 7

22. 22
44,000
MCQs 8

23. 23
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

24. 24

25. 25

26. 26
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

27. 27
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

28. 28
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

29. 29
Impact of Cost Flow Assumptions

30. 30
MCQs 9
60

31. 31
(b) A higher profit and a higher closing inventories value
MCQs 10

32. 32
(b) Rs. 26,000
MCQs 11

33. 33
(c) Equipment used in the manufacturing are sold
MCQs 12

34.  Due to the timing difference, omissions and errors made by the bank
or the firm itself.
34
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.

35. 35

36.  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
36
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

37. 37
Standing orders
They are standing instructions from the firm to the bank to make regular
payments
Direct debits
They are payments made directly through the bank
Bank charges
They 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

38. 38
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

39. Cash Book (bank column only)
Debit represents an increase Credit represents an decrease
Bank Statement
Dr Cr Balance
(represents
decrease)
(represents
increase)
(represents
the amount
owned to
the clients)
39
Nature of the Cash Book and Bank Statement

40. 40
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

41. 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 7200
Bank 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
Uncredited
items
Unpresented cheque
Bank charges
Direct debit
Question:
41

42. Cash Book (Bank Column)
1996 $ 1996 $
31 Commission Rec. 300
31 Bank Interest 50
5,150
Dec 31 Balance b/f 4,800 Dec 31 T. Cheung –
Dishonoured cheque 2,000
31 Bank charges 30
31 Rent 250
31 Balance c/f 2870
5,150
Answer:
42

43. Bank Reconciliation Statement as at 31 Dec 1996
$
Corrected balance in hand as per Cash Book
Unpresented cheques 100
Bank deposits not yet entered on Bank Statement 1400
Balance in hand as per Bank Statement
2870
1570
Add
Less
2970
43