A Level Accounting (A2) formulas and key facts

Financial accounting

Preparation of financial statements

• Goodwill created: credit the old partners in the old profit-sharing ratio. Goodwill written off: debit the partners in the new ratio.
• A revaluation profit or loss is shared by the old partners in the old profit-sharing ratio.
• Dissolution: the realisation account is debited with the carrying amounts of the assets and the costs of dissolution, and credited with the sale proceeds; the balance is shared in the profit-sharing ratio.
• Accumulated fund = assets − liabilities of the club. Closing fund = opening fund + surplus (or − deficit).
• Subscriptions income for the year = cash received − opening arrears + opening in advance + closing arrears − closing in advance.
• Prime cost = direct materials + direct labour + direct expenses. Cost of production = prime cost + factory overheads + opening work in progress − closing work in progress.
• Provision for unrealised profit = closing inventory of finished goods at transfer price × mark-up % ÷ (100 + mark-up %).

Regulatory and ethical considerations

• IAS 2: inventory is valued at the lower of cost and net realisable value. FIFO and AVCO are allowed; LIFO is not.
• IAS 8: a change of accounting policy is applied retrospectively; a change of estimate (for example useful life) is applied from now on; material errors of earlier years are corrected retrospectively.
• IAS 10: an adjusting event gives evidence of a condition that existed at the year end, so the figures are changed. A non-adjusting event is disclosed in a note if it is material.
• IAS 16 and IAS 36: an asset is impaired when its carrying amount is more than its recoverable amount. Recoverable amount = the higher of fair value less costs of disposal and value in use.
• IAS 37: a provision is recognised when there is a present obligation, an outflow is probable and the amount can be estimated reliably. A contingent liability is only disclosed in a note.
• IAS 38: inherent (internally generated) goodwill is not recognised as an asset. Only purchased goodwill is shown in the statement of financial position, as an intangible non-current asset.
• An unqualified audit report says the statements give a true and fair view. A qualified report means the auditor has a reservation.

Business acquisition and merger

• Net assets taken over = assets taken over − liabilities taken over, all at agreed values.
• Goodwill = purchase consideration − fair value of the net assets taken over.
• Shares issued as consideration are valued at the issue price: nominal value goes to share capital and the excess goes to share premium.
• Seller’s books: debit the realisation account with the assets at carrying amount; credit it with the liabilities taken over and the purchase consideration. The balance goes to the owners’ capital accounts.
• Sole traders forming a partnership: each owner’s opening capital = the agreed value of the net assets (and goodwill) brought in.
• If goodwill is not kept in the new partnership’s books, it is written off against the partners’ capital accounts in the new profit-sharing ratio.
• Assets not taken over, often the bank balance, stay with the seller and are left out of the calculation.

Computerised accounting systems

• Transfer at a clear cut-off date, usually a period end, after the manual books have been balanced and checked.
• After the transfer, print a trial balance from the new system and agree it with the closing manual trial balance.
• Agree the totals of the customer and supplier accounts with the control account balances, and the inventory records with a physical count.
• Parallel running: keep the manual and the computerised systems together for a period and compare the results.
• Passwords and access levels limit who can enter or change data; an audit trail records who did what and when.
• Take regular back-ups and store a copy away from the premises.
• Keep the manual records until the new system has been checked.

Analysis and communication of accounting information

• Working capital cycle (days) = inventory turnover (days) + trade receivables turnover (days) − trade payables turnover (days).
• Net working assets to revenue = (inventories + trade receivables − trade payables) ÷ revenue × 100. Cash is left out.
• Interest cover = profit from operations ÷ interest payable, in times.
• Gearing = non-current liabilities ÷ (issued ordinary share capital + all reserves + non-current liabilities) × 100.
• Earnings per share = profit for the year ÷ number of issued ordinary shares. Price/earnings ratio = market price per share ÷ earnings per share.
• Dividend per share = total ordinary dividend ÷ number of issued ordinary shares. Dividend yield = dividend per share ÷ market price per share × 100.
• Dividend cover = profit for the year ÷ total ordinary dividend, in times.

Cost and management accounting

Activity based costing (ABC)

• Cost driver: the factor that causes the cost of an activity to change, for example the number of set-ups or purchase orders.
• Cost driver rate = total overhead in the cost pool ÷ total number of cost driver units.
• Overhead charged to a product = cost driver rate × number of driver units the product uses, added up for every activity.
• Overhead per unit = overhead charged to the product ÷ number of units made.
• Total cost per unit = direct materials + direct labour + overhead per unit; selling price = total cost + profit mark-up.
• Total overheads are the same under ABC and absorption costing; only the share charged to each product changes.
• Low-volume, complex products usually cost more under ABC; high-volume, simple products usually cost less.

Standard costing

• Direct material price variance = (standard price − actual price) × actual quantity. Usage variance = (standard quantity for actual output − actual quantity) × standard price.
• Direct labour rate variance = (standard rate − actual rate) × actual hours. Efficiency variance = (standard hours for actual output − actual hours) × standard rate.
• Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead.
• Fixed overhead volume variance = (actual output − budgeted output) × standard fixed overhead per unit.
• Capacity variance = (actual hours − budgeted hours) × fixed overhead rate per hour. Efficiency variance = (standard hours for actual output − actual hours) × fixed overhead rate per hour. Together they equal the volume variance.
• Sales price variance = (actual price − standard price) × actual units sold. Sales volume variance = (actual units sold − budgeted units) × standard profit per unit.
• With the formulas written this way, a positive answer is favourable and a negative answer is adverse.

Budgeting and budgetary control

• Production budget (units) = budgeted sales + closing inventory of finished goods − opening inventory of finished goods.
• Materials used = production units × material per unit. Purchases budget = materials used + closing inventory of materials − opening inventory of materials.
• Labour budget = production units × labour hours per unit × rate per hour.
• Closing trade receivables = opening trade receivables + credit sales − cash received − discounts allowed.
• A cash budget shows cash in the month it is received or paid. Depreciation and other non-cash items are left out.
• Flexed budget: variable costs and revenue change in proportion to output; fixed costs stay the same.
• Spreadsheets recalculate quickly and allow “what if” tests, but an error in one formula or input runs through every linked figure.

Investment appraisal

• Payback period = the time taken for the net cash inflows to repay the initial cost. Part year = amount still needed ÷ net cash flow of that year × 12 months.
• ARR = average annual profit ÷ average investment × 100. Average investment = (initial cost + residual value) ÷ 2.
• NPV = total present value of the net cash inflows − initial cost. Present value = net cash flow × discount factor.
• Accept a project if its NPV is positive; between projects, choose the higher NPV.
• IRR = lower rate + [NPV at lower rate ÷ (NPV at lower rate − NPV at higher rate)] × (higher rate − lower rate). A negative NPV is subtracted, so its size is added.
• Accept a project if its IRR is higher than the cost of capital.
• If NPV and IRR rank projects differently, follow NPV.