116 Accounting A2 Level (Theory and Practice)

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116 Accounting A2 Level (Theory and Practice) by Muhammad Nauman Malik

The globalized frame work of Cambridge International Advanced Level, in practice over 125 countries, has led to the introduction of an international format and layout for all its syllabuses. With a thorough discussion of the basic double entry principles for the beginners, the ‘A2 Accounting – Theory & Practice’ is also useful for those who have some knowledge.

The strengths and weaknesses of accounting practices are reinforced by a set of Review Questions at the end of each chapter, enabling the students to put, what is learnt, into practice. These Questions have been developed by the author and are not taken from past exam papers and Accounting A2 Level Theory and Practice Books.

This book is completely revised and updated to fully comply with the new CIE Advanced Level Accounting syllabus for 2016-18. Five new chapters have been included in the book in view of the new syllabus.

These topics include ’Auditing and stewardship of limited companies’, ‘Consignment Accounting, Joint Ventures’, ‘Activity based costing’ and ‘Computerized accounts’.

In addition, topics like ‘manufacturing accounts’, ‘non-profit organization have been shifted from ‘AS Accounting – theory and practice’ to this book. New material on overhead costing is also added to the topic ‘standard costing’. As syllabus contents relating to topics like ‘ratios’ and ‘Accounting standards’ have been reduced in new syllabus so these topics have been rewritten accordingly. Solutions to odd numbered questions are given in the appendix at the end of the book.

In addition solutions to even numbered questions are available in a separate manual. Teachers using “A2 Accounting – Theory & Practice” as a text book, may get the manual by applying officially on a school letterhead. Providing the students with a solid foundation in the “Why” as well as the “How” of accounting concepts, the emphasis is put on understanding rather than mere cramming.

A brief list of learning objectives at the beginning of each chapter will assist the readers to determine the things they should understand while going through the chapter.

Hence, checking back may help them to identify weak areas which still need thorough review. Constructive criticism and suggestions to make the subsequent editions more useful would be appreciated and thankfully acknowledged.

Table of Contents
  1. Preface
  2. Chapter 1 Accounting for Non Profit Organisations
    1. Comparison Between Profit and Non- Profit Making Organizations accounting a Level Theory and Practice Book
    2. Incomes and Expenses of Non Profit Organizations
    3. Incomes of Non Profit Organizations
    4. Expenses of Non Profit Organizations
    5. Some Peculiar Terms of Non Profit Organizations
    6. Life Membership Fee
    7. Legacy
    8. Gift
    9. Grants and Donations
    10. Accounting By Non Profit Organizations
    11. Receipts and Payments Account
    12. Income and Expenditure Account
    13. Trading Account
    14. Income and Expenses on Same Head
    15. Accounting for Subscriptions
    16. Preparation of Financial Statements
    17. Review Questions
  3. Chapter 2 Sale of Business
    1. Reasons of Selling a Business
    2. Realization Account
    3. Accounting Treatment on Sale of Business
    4. Assets on Dissolution
    5. Goodwill on Dissolution
    6. Liabilities on Dissolution
    7. Expenses on Dissolution
    8. Profit (loss) on Realization Account
    9. Partners’ Loans Accounts on Dissolution
    10. Current Account Balances on Dissolution
    11. Cash or Bank Balance on Dissolution
    12. Partners’ Capital Accounts on Dissolution
    13. Sale of Business to a Company
    14. Review Questions
  4. Chapter 3 Business Purchase and Merger
    1. Purchased Goodwill
    2. Internally Developed Goodwill
    3. Personal Goodwill
    4. the Opposite of Paying for Goodwill (NEGATIVE Goodwill)
    5. Accounting for Negative Goodwill
    6. Difference Between the Purchase of a Business and the Purchase of Assets
    7. Components of Purchase Consideration
    8. Assets Taken Over
    9. Liabilities Taken Over
    10. Dissolution Expenses
    11. Accounting Treatment of Amalgamation of Businesses
    12. Distinction Between Amalgamation and Purchase of Business
    13. Amalgamation of Businesses
    14. Reasons for Amalgamation
    15. Accounting Procedure
    16. Goodwill on Amalgamation
    17. Conversion of Partnership Into Company
    18. Payment for Purchase of Business – Purchase Consideration
    19. Entries to Record the Purchase of Business
    20. Cash and Bank Balances of Partnerships on Purchase
    21. Return on Investment
    22. Review Questions
  5. Chapter 4 Company Financial Statements
    1. The Need for Companies
    2. Sources of Finance for a Company
    3. Types of Shares
    4. Ordinary Shares
    5. Preference Shares
    6. Debentures
    7. Convertible Loan Stock
    8. Published Accounts of Limited Companies
    9. Role of IAS 1 in Preparation of Accounts
    10. Accounting Concepts Applied in Preparation of Accounts
    11. Structure and Content of Financial Statements
    12. Reporting Period
    13. Income Statement
    14. Statement of Financial Position (BALANCE Sheet)
    15. Assets
    16. Liabilities
    17. Net Current Assets
    18. Equity
    19. Notes to the Financial Statements
    20. Statement of Changes in Equity
    21. Dividends on Ordinary Shares
    22. IAS Rules for Ordinary Dividends
    23. Why Company Accounts Are Published?
    24. Limitations of Published Company Accounts
    25. Financial Statements in CIE Exams
    26. Reserves
    27. Difference Between Provisions and Reserves
    28. Directors’ Report
    29. Review Questions
    30. Accounting A Level Theory and Practice Book
  6. Chapter 5 Issue of Shares & Debentures
    1. Prices of a Share
    2. Par Value
    3. Issue Price
    4. Book Value
    5. Market Value
    6. Selling Shares to the General Public
    7. Issue of Shares At Par
    8. Issue of Shares At Premium (at a Price More Than Face Value)
    9. Rights Issue
    10. Advantages of Rights Issue
    11. Disadvantages of Rights Issue
    12. Bonus or Scrip Issue
    13. Reasons for Bonus Issue
    14. Effect on Earnings Per Share (EPS)
    15. Advantages of Bonus Issue
    16. Disadvantages of Bonus Issue
    17. Difference Between Rights and Bonus Issue
    18. Issue of Loans and Debentures
    19. Issue of Debentures At Par
    20. Issue of Debentures At Premium (at a Price More Than Face Value)
    21. Issue of Debentures At Discount (at a Price Below Face Value)
    22. Review Questions
    23. Accounting a Level Theory and Practice Book
  7. Chapter 6 Statement of Cash Flows
    1. Classifications of Cash Flows – An Example
    2. Cash and Cash Equivalents
    3. Cash
    4. Cash Equivalents
    5. Bank Overdrafts
    6. Preparation of a Statement of Cash Flows
    7. Cash Flow From Operating Activities
    8. Importance of Cash Flow From Operating Activities
    9. Calculation of Cash Flow From Operating Activities
    10. Cash From Operating Activities in Direct Method
    11. Cash From Operating Activities in Indirect Method
    12. Calculation of Operating Profit
    13. Investing Activities
    14. Financing Activities
    15. Cash Flow At a Glance
    16. Uses of a Statement of Cash Flows
    17. Limitations of a Statement of Cash Flows
    18. Users of Statement of Cash Flows
    19. Disclosure of Non Cash Activities
    20. Statement of Cash Flows for Businesses Other Than Limited Companies
    21. Review Questions
    22. Accounting a Level Theory and Practice Book
  8. Chapter 7 International Accounting Standards
    1. IAS 1 Presentation of Financial Statements
    2. IAS 2 Inventories
    3. IAS 7 Statement of Cash Flows
    4. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
    5. IAS 10 Events After the Reporting Period
    6. IAS 16 Property, Plant, and Equipment
    7. IAS 36 Impairment of Assets
    8. IAS 37 Provisions, Contingent Liabilities and Contingent Assets
    9. IAS 38 Intangible Assets
    10. 7 Ethics Relating to the Practice of Accounting
    11. Review Questions
    12. Accounting a Level Theory and Practice Book
  9. Chapter 8 Auditing and Stewardship of Limited Companies
    1. Role of Directors
    2. Role of Auditors
    3. Preparation and Rendering of Auditors’ Report
    4. Types of Opinion
    5. Understand the Entity’s Environment
    6. What is Not Expected From Auditors
    7. Difference Between the Duties of Management and Auditors
    8. True and Fair View in Financial Statements
    9. Accounting a Level Theory and Practice Book
  10. Chapter 9 Ratio Analysis
    1. Financial Ratios
    2. Analysis of Ratios
    3. Comparing One Year With Another (Trend or Time Series Analysis)
    4. Comparing One Business With Another Business (Cross-Sectional Analysis)
    5. Demonstration of Ratios
    6. Ratios in Advanced Level Syllabus
    7. Working Capital Cycle
    8. Net Working Assets to Sales (revenue)
    9. Earnings Per Share
    10. Price-Earnings (P/E) Ratio
    11. Dividend Per Share
    12. Dividend Yield Ratio
    13. Dividend Cover
    14. Income Gearing
    15. Gearing
    16. Uses of Ratio Analysis
    17. Limitations of Ratio Analysis
    18. Users of Financial Ratios
    19. Review Questions
    20. Accounting a Level Theory and Practice Book
  11. Chapter 10 Joint Venture Accounts
    1. Features of Joint Ventures
    2. Objectives of Joint Ventures
    3. Examples of Joint Ventures:
    4. Partnerships and Joint Ventures Compared
    5. Difference Between Consignment and Joint Ventures
    6. Accounting for Joint Ventures
    7. Review Questions
  12. Chapter 11 Consignment Accounts
    1. Characteristics of Consignment
    2. Difference Between Consignment and Sale
    3. Terms Used in Consignment Accounts
    4. Consignor
    5. Consignee
    6. Goods Sent on Consignment
    7. Proforma Invoice
    8. Expenses on Consignment
    9. Commission
    10. Losses on Consignment
    11. Normal Loss
    12. Abnormal Loss
    13. Account Sales
    14. Advance Payments By Consignee
    15. Valuation of Inventory
    16. Return of Goods By the Consignee
    17. Accounts Prepared By Consignor
    18. Consignment Account
    19. Consignee’s Account
    20. Consignment of Goods At Invoice Price (at Cost Plus Profit)
    21. Review Questions
    22. Accounting a Level Theory and Practice Book
  13. Chapter 12 Manufacturing Accounts
    1. the Prime Cost Section
    2. Raw Materials Cost
    3. Direct Labour Cost
    4. Direct Expenses
    5. Factory (PRODUCTION) Overheads
    6. Manufacturing Accounts for Separate Products
    7. Purpose of Manufacturing Accounts
    8. Trading Section
    9. Profit and Loss Section
    10. Statement of Financial Position
    11. Inventories in a Manufacturing Business
    12. Factory (MANUFACTURING) Profit
    13. Benefits of Transferring Goods At Production Cost Plus Factory Profit
    14. Drawbacks of Transferring Goods to Trading Account At Market Price
    15. Accounting Treatment
    16. Provision for Unrealised Profit
    17. Review Questions
    18. Accounting a Level Theory and Practice Book
  14. Chapter 13 Activity Based Costing
    1. Costing Issues in Conventional Costing
    2. Application of Activity Based Costing
    3. Difference Between Conventional and Activity Based Costing
    4. Terms Frequently Used in Activity Based Costing
    5. Activity
    6. Resource
    7. Cost Drivers
    8. Hierarchy of Activities
    9. Unit (output) Level Activities
    10. Batch Level Activities
    11. Product (Product Sustaining) Level Activities
    12. Facility (Facility Sustaining) Level Costs
    13. Customer Level Activities
    14. Examples of Cost Drivers
    15. Benefits of Activity Based Costing
    16. Limitations of Activity Based Costing
    17. Steps for Implementing Activity Based Costing
    18. Role of Activity Based Costing in Non-Manufacturing Sector
    19. Review Questions
  15. Chapter 14 Standard Costing
    1. Types of Standards
    2. Advantages of Standard Costing
    3. Limitations of Standard Costing
    4. Setting Standard Costs
    5. Setting Standards for Direct Materials
    6. Setting Direct Labour Cost
    7. Variance Analysis
    8. Total ‘DIRECT Material Cost Variance’
    9. Material Price Variance
    10. Material Usage Variance
    11. Symbols Used for Calculating Direct Material Variances
    12. When Material Purchased is Different From Materials Used
    13. Typical Causes of Material Variances
    14. Total ‘DIRECT Labour Cost Variance’
    15. Labour Rate Variance’
    16. Labour Efficiency Variance
    17. Symbols Used for Calculating Direct Labour Variances
    18. Standard Hours
    19. Typical Causes of Labour Variances
    20. Variable Overhead Variances
    21. Variable Overhead Expenditure Variance
    22. Variable Overhead Efficiency Variance
    23. Typical Causes of Variable Overhead Variances
    24. Total Fixed Overheads Variance
    25. Peculiar Nature of Fixed Overhead Variances
    26. Fixed Overhead Expenditure (spending) Variance
    27. Fixed Overhead Volume Variance
    28. Fixed Overhead Efficiency Variance
    29. Fixed Overhead Capacity Variance
    30. Typical Causes of Fixed Overhead Variances
    31. Sales Variances
    32. Sales Price Variance
    33. Sales Volume Variances
    34. Quantity Variance
    35. Typical Causes of Sales Variances
    36. Fixed Budget
    37. Flexible Budget
    38. Steps for Preparing a Flexible Budget
    39. Reconciliation of Budgeted and Actual Profits
    40. Review Questions
  16. Chapter 15 Budgeting and Budgetary Control
    1. 15 Difference Between Budgets and Budgetary Control
    2. Difference Between Standard Costs and Budgets
    3. Advantages of Preparing Budgets From Standard Costs
    4. Difference Between Forecasting and Budgeting
    5. Purposes of Budget
    6. Advantages of Budgetary Control System
    7. Limitations of Budgetary Control System
    8. Stages in the Budgetary Planning Process
    9. Effects of Principal Budget Factors on the Preparation of Budgets
    10. Behavioural Aspects of Budgetary Control System
    11. Budget Period
    12. Sales Budget
    13. Factors Considered for Preparing Sales Budget
    14. Steps for Preparing a Sales Budget
    15. Production Budget
    16. Factors Considered for Preparing Production Budget
    17. Steps of Preparing a Production Budget
    18. Purchases Budget
    19. Purchase Budget for Trading Firms
    20. Steps of Preparing a Purchases Budget for a Trading Business
    21. Purchase Budget for Manufacturing Firms
    22. Steps of Preparing a Purchases Budget for a Manufacturing Business
    23. Direct Labour Budget
    24. Steps of Preparing a Labour Budget
    25. Trade Receivables Budget
    26. Trade Payables Budget
    27. Advantages of Using a Trade Payables Budget
    28. Cash Budget
    29. Steps for Preparing a Cash Budget
    30. Sections of a Cash Budget
    31. Differences Between a Cash Budget and a Statement of Cash Flows
    32. Uses of a Cash Budget
    33. Actions to Avoid Cash Shortages
    34. Master Budget
    35. Budgeted Income Statement
    36. Budgeted Statement of Financial Position
    37. Review Questions
  17. Chapter 16 Capital Investment Appraisal
    1. Reasons for Making Capital Investment Decisions
    2. Steps in the Capital Investment Appraisal Decisions
    3. Methods for Capital Investment Appraisal
    4. Accounting Rate of Return
    5. Advantages of Accounting Rate of Return
    6. Disadvantages of Accounting Rate of Return
    7. Payback Period
    8. Payback Period With Even Cash Flows
    9. Payback Period With Uneven Cash Flows
    10. Advantages of Payback
    11. Disadvantages of Payback
    12. Time Value of Money
    13. Compound Interest
    14. Present Value
    15. Cost of Capital
    16. Discounted Payback Period Rule
    17. Net Present Value
    18. Calculation of Net Present Value
    19. Selection of Project
    20. Advantages of Net Present Value
    21. Disadvantages of Net Present Value
    22. Internal Rate of Return
    23. Which Rate is Better?
    24. Calculation of IRR
    25. Advantages of Internal Rate of Return
    26. Disadvantages of Internal Rate of Return
    27. NPV and IRR, Which is Better?
    28. Why NPV is Preferred?
    29. Sunk Cost
    30. Relevant Costs
    31. Non Financial Factors Involved in Capital Investment Decisions
    32. Sensitivity Analysis
    33. Present Value Table
    34. Review Questions
  18. Chapter 17 Computerised Accounting Systems
    1. Difference Between Hardware & Software
    2. Advantages and Disadvantages of Computerised Accounting
    3. Advantages of Computerised Accounting
    4. Disadvantages of Computerised Accounting
    5. Differences Between Manual and Computerised Accounting
    6. Users of Computerised Accounting
    7. Transition of Manual to Computerised Accounting
    8. Integrality of Data During Transfer to and in Computerized accounts
  19. Solutions to Odd Numbered Questions
    1. Chapter 1
    2. Chapter 2
    3. Chapter 3
    4. Chapter 4
    5. Chapter 5
    6. Chapter 6
    7. Chapter 7
    8. Chapter 9
    9. Chapter 10
    10. Chapter 11
    11. Chapter 12
    12. Chapter 13
    13. Chapter 14
    14. Chapter 15
    15. Chapter 16
  20. Key to Even Numbered Questions
  21. Index
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