Cambridge International AS & A Level Accounting: every topic, by paper

What is the double-entry principle?

Every transaction has two equal and opposite effects: one account is debited and another credited with the same amount.

What is the accounting equation?

Assets = Capital + Liabilities (or Assets − Liabilities = Capital).

Which side of the account increases an asset?

The debit side.

What is the going concern concept?

The assumption that a business will continue to operate for the foreseeable future.

What is the accruals (matching) concept?

Income and expenses are recorded in the period they relate to, not when cash is received or paid.

What is the prudence concept?

Not overstating assets or income, nor understating liabilities or expenses.

What is an accrued expense?

An expense relating to the current period that has not yet been paid.

What is a prepaid expense?

An expense paid in advance for a later period.

How is an accrued expense shown in the financial statements?

Added to the expense in the income statement and shown as a current liability.

What is depreciation?

The allocation of the cost of a non-current asset over its useful life.

Give three causes of depreciation.

Wear and tear, passage of time, obsolescence and depletion.

How is straight-line depreciation calculated?

(Cost − residual value) ÷ useful life.

What rule does IAS 2 set for valuing inventory?

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

What is net realisable value (NRV)?

The estimated selling price minus the costs to complete and sell the item.

What is FIFO?

First in, first out: goods issued are assumed to be the oldest, so closing inventory is valued at the most recent prices.

What is a control account?

A summary account that checks the accuracy of a ledger, e.g. the sales ledger.

Where do the totals in a sales ledger control account come from?

Books of prime entry: sales journal, sales returns journal, cash book and general journal.

Name three items on the debit side of a sales ledger control account.

Opening balance, credit sales, dishonoured cheques and interest charged.

What is a suspense account?

A temporary account used to make the trial balance agree until errors are found.

What is an error of omission?

A transaction completely left out of the books.

What is an error of commission?

An entry made in the wrong account of the same type, e.g. the wrong customer's account.

What does an income statement show?

The revenue, cost of sales, expenses and profit for a period.

What does a statement of financial position show?

Assets, liabilities and capital at a particular date.

How is gross profit calculated?

Revenue − cost of sales.

What is a partnership?

A business owned by two or more people who share the profits and risks.

What is a partnership agreement?

A document setting out the terms of the partnership, such as profit-sharing ratio, salaries, interest on capital and drawings.

What happens if there is no partnership agreement (under the UK Partnership Act 1890)?

Profits are shared equally, no interest on capital or salaries, no interest on drawings, and 5% interest on partners' loans.

What is ratio analysis?

Comparing figures in financial statements to judge profitability, liquidity, efficiency and investment performance.

How is the gross margin calculated?

(Gross profit ÷ revenue) × 100.

How is the profit margin calculated?

(Profit for the year ÷ revenue) × 100.

What is a direct cost?

A cost that can be traced directly to a product, e.g. raw materials and production labour.

What is an indirect cost (overhead)?

A cost that cannot be traced to a single product, e.g. factory rent.

What is prime cost?

Direct materials + direct labour + direct expenses.

What is a limited company?

A business that is a separate legal entity from its owners, the shareholders, who have limited liability.

What is the difference between ordinary and preference shares?

Ordinary shares carry votes and variable dividends; preference shares get a fixed dividend paid before ordinary dividends, usually without votes.

What is share premium?

The amount received above the nominal value when shares are issued; a capital reserve.

What does a statement of cash flows show?

The cash inflows and outflows during a period, grouped into operating, investing and financing activities (IAS 7).

Why is a statement of cash flows useful?

It shows how cash was generated and used, which profit alone does not reveal, and helps assess liquidity.

What are the three sections of a statement of cash flows?

Operating activities, investing activities and financing activities.

What is ratio analysis?

Comparing figures in financial statements to judge profitability, liquidity, efficiency and investment performance.

How is the gross margin calculated?

(Gross profit ÷ revenue) × 100.

How is the profit margin calculated?

(Profit for the year ÷ revenue) × 100.

What is a direct cost?

A cost that can be traced directly to a product, e.g. raw materials and production labour.

What is an indirect cost (overhead)?

A cost that cannot be traced to a single product, e.g. factory rent.

What is prime cost?

Direct materials + direct labour + direct expenses.

What is a budget?

A financial plan for a future period, expressed in money or quantities.

Give three benefits of budgeting.

Planning, coordination between departments, control through comparison with actual, and motivation through targets.

What is the principal budget factor?

The factor that limits activity, often sales demand, which must be budgeted first.

What is capital investment appraisal?

Evaluating whether a long-term investment in non-current assets is worthwhile.

What is the payback period?

The time taken for net cash inflows to repay the initial investment.

A project costs $90,000 and generates $30,000, $40,000 and $50,000 in years 1–3. What is payback?

After 2 years $70,000 is recovered; $20,000 more is needed from year 3's $50,000: 2 + 0.4 = 2.4 years.