Financial Accounting Midterm Review Flashcards

A comprehensive set of vocabulary flashcards covering accounting standards (IAS/IFRS), financial statement calculations, and asset recognition rules based on the midterm CBT transcript.

Cost of sales

Purchases plus carriage inwards adjusted for opening and closing inventory.

Carriage inwards

A cost that must be included when calculating the cost of sales.

Carriage outwards

A cost that is included in distribution and selling costs rather than the cost of sales.

Increase in inventories (Indirect Method)

A cash outflow that reduces cash flow in the cash flow statement because more cash has been spent to acquire inventory.

Revenue recognition (Sale or return)

A sale can only be recognised once the return period has expired.

Capital expenditure

Costs that result in improvements or represent major replacements and are recognized as an addition to the carrying amount of an asset.

Revenue expenditure

Costs for routine servicing, repair, and maintenance that are not capitalised.

Direct method (IAS 7)

A method of presenting cash generated from operating activities that shows major classes of gross receipts and payments.

IAS 23 Borrowing Costs

Standard stating that borrowing costs may be capitalised if they are directly attributable to the acquisition, construction, or production of a qualifying asset.

Intangible asset recognition criteria

Requires that economic benefits are expected to flow in the future from the ownership of the asset and its cost can be measured reliably.

Depreciation (Straight line method)

Calculated as $(\text{Cost} - \text{Residual Value}) \times \frac{1}{\text{Estimated Useful Economic Life}}$.

Statement of Cash Flows

A statement illustrating cash inflows and outflows analysed under different headings to arrive at the change in cash position between years.

Fair value of intangible assets

Ideally obtained using observable prices or data to provide credibility and evidence for the valuation.

Retained earnings

The profit that has not been paid out as dividends or transferred to any other reserve, representing what the company retains within the business.

Cash equivalents

Short-term, highly liquid investments; any cash flow due over three months away is not considered a cash equivalent.

Internally generated intangible asset identification

The ability to separately identify expenditure on internal development projects is crucial for recognition; if it cannot be separated, it cannot be capitalised.

Revenue (IAS 18)

Arises from ordinary activities such as the sale of goods or services; it excludes borrowings, amounts contributed by shareholders, and gains like asset sales or dividends.

Retrospective capitalisation

The prohibited practice of capitalising previous expenditure on a project once it is officially recognised as an intangible asset.

Impairment loss

A reduction in the value of an asset that is recognised as an expense.

Sales Revenue formula

$\text{Sales revenue} = \text{Gross profit} + \text{Cost of sales}$.

Goodwill characteristics

It is difficult to separate from the whole business, its value is highly subjective, and its value may fluctuate over time.

Internally generated goodwill

Cannot be recognised as an asset because it would be valued on a subjective basis and cannot be measured reliably.

Internal indication of impairment

A signal from within the firm that an asset needs impairment testing, such as the asset becoming idle.

External indications of impairment

Factors outside the firm such as a decline in market value, adverse technological or legal changes, or net assets exceeding market capitalisation.

IAS 36 Impairment of Assets

Standard requiring that all intangible assets must be tested for impairment annually.

Loss on disposal

Calculated as the difference between the sale proceeds and the carrying amount of the asset at the date of sale.

VAT (Value Added Tax) in Revenue

VAT is the property of the Inland Revenue rather than the company and is excluded from the amount credited to the Sales Account.

Cash receipts from customers (Direct method)

Calculated as $\text{Sales} - \text{Closing receivables} + \text{Opening receivables}$.

IAS 7

The accounting standard for Cash flow statements.

IAS 20

The accounting standard for Accounting for Government Grants.

IAS 40

The accounting standard for Investment Property.

IFRS 15

The accounting standard for Revenue with contracts from customers.

Net sales revenue

$\text{Sales} - \text{(Sales returns and allowance)} - \text{Sales discount}$.