Module 1
What are the characteristics of a company structure?
Limited liability of owners (shareholders) to equity (share
capital) of company
Public accounts, audited
Module 1
What is financial accounting?
Legal obligation on directors & managers to report to
owners on how resources have been deployed during the
accounting period
Module 1
Who uses accounting information?
Internal (MEDS)
Directors
Managers
External (PACTS)
Shareholders
Creditors
Public
Senior Executives
Employees
Analysts
Tax authorities
Module 1
What is the Accounting Equation?
Assets = Owner’s Equity + Liabilities
OR
Assets – Liabilities = Owner’s Equity
Module 1
What is gross profit in a manufacturing company?
Sales LESS Cost of Sales
Module 2
What is the impact of different inventory valuation
methods (in rising prices)?
FIFO
LIFO
AVERAGE
Income is higher
Higher taxes
Higher dividends
Closing inventory is higher
Lower profit
Good for tax minimization
Weighted average unit cost
Module 2
What are the FOUR methods of recognizing revenue?
1.
2.
3.
4.
*Shipping & invoicing
Time of sales order
Time of production, i.e., shipbuilding
Time of collection, i.e., installment plans
Module 2
What are the conditions necessary to recognize sales?
1. Principle revenue-producing service has been
performed
2. Costs to create revenue have occurred
3. Amount collectable can be estimated
Module 2
How do you calculate Cost of Goods (CoG’s)
[relationship between valuation & profit]?
Beginning inventory + purchases LESS ending inventory
= CoG’s
> Ending inventory valuation > profit
< Ending inventory valuation < profit
Module 2
What are the THREE different methods of calculating
depreciation?
1. Straight-line depreciation
= acquisition costs – est. residual value
est. useful life
2. Reducing balance depreciation
 1 n
Scrap Value
Costs
(n = estimated life)
3. Consumption method -- based on running hours

Annual running hours
 Net cos t
Total running hours
Module 2
What are the THREE main “measurement of effort”
Conventions?
1. Matching convention: profit = matching the effort (costs)
with units shipped & invoiced (sales) during the period
2. Allocation convention: determine the consumption of
means of production; determine the value of closing WIP
(work-in-progress) and inventories of raw materials
3. Costs convention: historical/acquisition cost of different
means of production
Module 2
What are TWO “measurement of sales” conventions?
1. Realization convention: only products sold are
measured as sales
2. Accruals convention: cash does not have to be
received to create value
Module 2
What are the different profit measurements?
When are they used?
Gross profit (sales less CoG’s)  measures efficiency of
transformation
*Net profit before interest and taxes  managerial
efficiency
Net profit after interest and before taxes  assesses
financial structure
Module 2
What are some of the principle features of depreciation?
Allocation of cost of assets purchased in 1 accounting
period over the accounting periods in which they are used
Cost of production
Influences reported profit
The effect on cash position (lowers taxes, etc.)
Module 2
What is the difference between product & period costs?
Product costs = raw materials, direct labour, factory
overhead (cost of sales/closing inventory)
Period costs = selling, distribution, marketing, general
admin. (P+L accounts)
Module 2
How do you determine whether a cost should be
capitalized or written off?
Take a conservative approach!
Write off expenditure UNLESS
Clearly related to acquisition + asset could not be made
operational w/o costs (i.e., land & survey fees)
Module 3
What is ‘GEARING’ and how is it calculated? What is
the effect on ROI?
Gearing or Leverage is the relationship between
shareholders funding (OE) to loans
L / T debt

Total Assets
Healthy profits  better returns
Lower profits  lower ROI
Module 3
How are bad debt provisions calculated and accounted
for?
Consider  risks attached to each customer, severity of
pursuing, general economic environment, i.e., interest rates
B/SH  debtors less provisions
P+L  charge for bad debts; topped up each year.
Module 3
Why would a company choose to lease vs. own assets?
A voice substantial outflow of cash
Spreads out cash flows
Can replace leased asset  no gain/loss
Maintenance costs covered
Lease payments are an allowable charge against profits
before tax.
Module 3
What is a revaluation reserve?
Entry in balance sheet (s/h equity) to indicate a revaluation
of land/property
Module 3
What is the difference between a Finance Lease and an
Operating Lease?
Finance lease  ownership reverts to lessee at end of lease
On balance sheet  fixed assets & lease payments as
creditors
Interest charged to P+L, capital deducted from both
Operating lease  ownership remains with lesser
Not capitalized
Payments are expensed annually (capital + interest)
Module 4
How do you calculate cash flow from operating activities?
= Profit + bad debt provision + depreciation 
Loss/Gain on sale
Less  in working capital
  Inventories  cash 
  Debtors  /creditors  cash 
Module 4
What are the EIGHT major categories of cash flow?
(Our Really Tall Cat Ate Everyone’s Meaty Food)
1)
2)
3)
4)
5)
6)
7)
8)
Operating activities
Returns on investment & servicing of finance
Taxation
Capital Investments
Acquisitions and disposals
Equity dividends paid to shareholders
Management of liquid resources
Financing
Module 5
What are the FIVE fundamental accounting concepts?
1) Going concern concept – a company will continue to do
business in future
2) Accruals – company doesn’t wait for money to change
hands before accounting for revenues & costs
3) Consistency –
4) Prudence – conservatism
5) Non-aggregation –
Module 5
How are consolidated or group financial statements
prepared?
Holding/Parent company must publish group P+L &
Balance Sheet but also its own Balance Sheet (not P+L)
Adds all assets and shows minority interests entries
Module 5
What is the distinction between the Companies Act
1985/89 and Accounting Standards?
1) Companies Act states that companies must disclose certain
information in a “True & Fair view of … GAAP”
2) Accounting Standards set controls on how the numbers are
to be compiled – must be disclosed.
Module 5
What THREE sets of rules constrain management when
constructing corporate financial statements?
1) Companies Acts/Legislation – government of country
2) Accounting standards – profession/regulations
3) Listing requirements – Stock Exchange Commissions (SEC)
Module 5
What do auditors do?
Examine co. system of accounting
Compares of accounting statements to underlying records
Verifies of title/existence/value of assets
Verifies liabilities
Verifies that results of P+L are fairly stated
Confirm statutory regulations complied with and accounting
standards have been applied correctly (S C A L P S)
Module 6 – Capital Structure Ratios
Times Interest Earned Ratio Calculation
Switches to the profit and loss account in order to measure
the gearing position and margin of safety in relation to
earnings
Module 6 – Liquidity Ratio
Current Ratio
(sometimes called Working Capital Ratio)
It is often stated as a rule of thumb that a 2 times current
ratio indicates a sound financial situation.
Module 6
Return on Capital Employed
Capital employed is usually defined as the total assets of a
company minus the current liabilities. Alternatively, one can
add together the owner’s equity and the long-term loans and
provisions.
Module 6 – Profitability Ratio
Return on Total Assets
Note that the whole balance sheet figure for total assets
(fixed assets plus current assets) has been selected for the
fraction
Module 6
What are the efficiency ratios?
(some times referred to as activity or turnover ratios)
Activity or turnover ratios
How effectively are costs managed?
1) Inventory Turnover
2) Average collection period
3) Fixed assets turnover
Measures company’s asset management
Module 6
Return on Owner’s Equity
Most important profitability ratio is the one that relates the
profit earned to the capital (contributed and accumulated)
of the ordinary shareholders of the company.
Module 6 – Liquidity Ratio
Quick Ratio (also called ACID TEST)
The quick ratio therefore removes inventory from the
calculation, thus providing a more rigorous test of the
company’s ability to pay its maturing obligations.
One times or great is considered good
Module 6 – Profitability Ratio
Gross Profit Margin
The gross profit margin is the first critical measure of profit
an analyst or manager examines since a company must earn
significant gross margin if it is going to bear the burden of
other corporate overhead.
Module 6
What are the TWO different liquidity ratios?
1) Current Ratio
2) Quick Ratio (Acid Test)
Measures a company’s ability to meet its maturing shortterm obligations
Module 6 -- Profitability Ratios
Profit Margin
Module 6
What are the Capital Structure Ratios?
1) Fixed to Current Asset Ratio
2) Debt Ratio
3) Times Interest Earned Ratio
Examine percentage of company’s total assets that are from
shareholders (OE) and effect or risk on earnings
Module 6 – Efficiency Ratio
Inventory Turnover Ratio
Module 6 – Efficiency Ratio
Fixed Assets Turnover Ratio
Module 6
What are the SIX main Profitability Ratios?
Gross Profit Margin
Profit Margin
Return on Total Assets
Return on Specific Assets
Return on Capital Employed
Return on Owner’s Equity
Profitability ratios give management an insight into a
company’s long-term survival.
Module 6 – Capital Structure Ratio
Fixed to Current Asset Ratio
This ratio highlights the fact that for every £1 invested in
current assets, a company has invested around £#.## in
fixed assets.
Module 6 – Capital Structure Ratios
Debt Ratio & Debt/Equity Ratio
The debt ratios measures the proportion of assets that are
financed by debt.
Module 6 – Capital Structure Ratios
Debt/Equity Ratio
Module 6 – Capital Structure Ratios
Available to Equity Ratio
Module 6 – Efficiency Ratio
Average Collection Period Ratio -- Sometimes called days
sales outstanding
Represents the average length of time that a company must
wait after making a sale before receiving the cash.
Module 6 (part one)
What are the basic stock market ratios?
Earnings per share (EPS)
Price/Earnings Ratio (PE)
Module 6 (part two)
What are the basic stock market ratios?
Dividend Yield
Dividend Cover
Module 6 – Profitability Ratios
Return on Total Assets
Whole balance sheet figure for total assets (fixed assets plus
current assets) is used
Module 6
What are the FOUR categories of Ratios?
1) Liquidity
2) Profitability
3) Capital Structure
a. Assets
b. Financing (gearing)
4) Efficiency
Module 7
What are the FOUR examples of off-balance sheet
transactions?
1)
2)
3)
4)
Quasi-subsidiaries
Consignment inventories
Sale/Repurchase agreements
Debt factoring
Module 7
When can merger accounting be used?
When…
1) Neither party is acquiring/acquired
2) Neither party dominates transaction
3) Relative size similar
4) Primarily equity share exchange
5) No one shareholder retains interest in future
performance of part of the combined entity
Module 7
What conditions could exist to capitalize development
expenses?
1) Clearly defined project
2) Expenses are separately identified
3) Outcome has certainty on technical feasibility and
ultimate commercial viability
4) Sales will be greater than costs
5) Adequate resources exist
Module 7
What are the key differences between merger &
acquisition accounting?
Acquisition accounting -- shows goodwill (asset), note share
premium
Merger accounting is more flexible – combined nature of
distributable reserves
Module 7
When is a joint (quasi-subsidiary) venture considered to
be consolidated?
1) Company is a lead partner & exercises a dominant
role
2) Can take back goods under beneficial terms
3) Share profit/loss/dividends unequally
Module 7
What is GOODWILL?
It is the difference between fair value of net assets
acquired in a corporate transaction and the price paid for
assets.
Module 7
How are BRANDS valued?
1) Historic cost – all costs spent developing and
maintaining brand can be capitalized (adjustment to
reserve)
2) Earnings method – multiplier  earnings
Module 8
What is the difference between job costing and process
costing?
Job – costs allocated to individual items; direct costs
(material & labour) & allocated overhead
Process – when identification of finished items is impossible
(oil refining); take all costs in accounting period and divide
by total quantify output during same period
Module 8
What are the key differences between Financial &
Management Accounting?
Financial
Management
 Backward looking, past
performance
 Structured
 GAAP
 Compulsory
 $
 Company as whole
 Auditors
 Forward looking, supports
mgmt decision-making
 Non-structured
 No
 No
 $, Q
 Activities/departments
 No
Module 9
What are the assumptions underlying cost-volume-profit
analysis?
All costs can be identified as Variable or Fixed
Costs behave the same
Sales price/unit is unchanged
Sales mix = budget
All production is sold
Module 9
What is contribution margin?
Sales = Fixed costs + Variable costs + Profit
Breakeven sales = Fixed costs + Variable costs
Contribution margin = Sales revenue - Variable costs
Module 9
How do you calculate Break Even Point?
Module 9
What are controllable/uncontrollable costs?
Controllable  management has the ability to choose
whether or not to incur the costs; valid for a particular
manager as well (refers to the person, the manager or
foreman or supervisor, who can be held accountable for the
costs being measured)
Uncontrollable  not controllable in the short-term or
outside of the control of the immediate manager, e.g., plant
insurance
Module 9
What are Standard Costs?
Budgeted cost for one cost item
Module 9
What are engineered & discretionary costs?
Engineering: unavoidable costs if company wants to
continue production
Discretionary: costs that need not be incurred (R&D,
maintenance)
Module 10
How can costs be allocated between joint products?
By-products?
1)
2)
3)
4)
Equal shares
Physical characteristics
Sales value at split
Ultimate net sales value  if further processing
By-products  all costs are to main product  sales deducted
from product costs before determining gross margin
Module 10
How do you determine process costing for equivalent
units?
For each cost category
= Effort expended in this period to finish opening inventory
+ Units started & completed in period
+ Efforts expended on closing inventory
Module 10
What are some (SEVEN) of the typical activity bases for
Overhead (OH) costs?
1)
2)
3)
4)
5)
6)
7)
Personnel – # of employ
Computing – hours, # reports
Machinery – machine hours
Buildings – space occupied
Power – machine hours, meter
Executive salaries – sales
Production schedule – # of differing products
Module 10
What is a joint product?
What is a by-product?
Joint product – must appear during the processes involved
in producing main product. If management has the option
of not allowing the second product to emerge from the
process the two products cannot be deemed to be joint.
By-product – is a joint product that has undesirable or low
value
Module 10
What is the STEP method of allocating OH?
Recognizes that support departments provide services to
other support departments
Choose highest OH department – allocate to other
departments (not including self)
Continue – ignoring already previously allocated
departments
Module 10
What is an equivalent unit?
In-process costing
Assessment of degree of completeness of one unit under
each major component of cost
Module 10
What happens when actual OH is > or < to budgeted
OH?
Difference  credited/debited to P+L under cost of goods
(CoG’s)
Module 10
What is a predetermined OH rate?
Because these overheads are not directly attributable to cost units in
the same manner as direct materials and direct labour where the
actual usage of resources can be tracked precisely, accountants use a
predetermined overhead rate with which to spread overheads across the
units of production.
Module 10
What is Activity Based Costing (ABC)?
ABC – activities rather than products, cause costs to be
incurred
Cost of products become goal (not just accounting
inventory valuations)
Different cost drivers
Embraces all OH
Reflects complexity of production/marketing
More accurate costs – better planning
Module 11
What is the decision-making process?
1) Define problem & list alternatives
2) Cost alternatives (just differences)
3) Assess qualitative factors
4) Make decision
Company wide point of
view
Ignore sunk costs
Opportunity costs
Ignore future costs that are
same for all alternatives
Module 11
What is the difference between absorption and variable
costing?
*
*When actual production  planned production
Module 11
Should we Process Further (more relevant to joint or byproducts)?
Ignore costs that are not relevant
Relevant - $ spent on further, additional $ gained from
revenue
Module 11
Considerations when faced with Special Sales Orders?
If price is > variable cost, then it contributes to Fixed Costs
Demand for product
Future business from sale
Module 11
Considerations when closing down a unit?
Focus on contribution – coverage of fixed costs
Qualitative factors
One-time costs
Module 11
What are relevant costs?
Future costs – not sunk costs
Cash costs – not depreciation or write offs
Avoidable costs
Cost that differ among alternatives
Module 11
What is the impact on reported profit between
Absorption & Variable Costing?
Absorption costing values inventory higher  taxable
profits are higher
 if sales < production, profits 
sales > production, profits 
Preferred by most tax authorities. Companies don’t
always have a choice.
Module 12
What is Zero-Based Budgeting?
Management invites certain activities/centres to bid for
their scarce resources as if they were starting from ZERO
Organized into “packages of work” which can be separated
from each other
Ranked in order of top management priorities
Takes a high amount of effort to divide into costed
packages
May need to seek external opinions on definitions
Module 12
What are the perceived problems with budgeting?
1)
2)
3)
4)
5)
6)
7)
Time taken
Lack of top management commitment
A form of punishment
Dictatorial control
Responsibilities blurred
Circumstances can change (moving goal post)
Budgeting rewards inefficiency
Module 12
What are reasons for budgeting?
1)
2)
3)
4)
Coordination
Planning
Motivation
Control
Module 12
How to devise a budget?
Sales budget
Direct materials budget
- Purchases budget
- Purchases budget
- cash flow budget
Management OH budget
Closing inventory budget
Budget P+L
Production budget
Direct labour budget
Selling & Admin budget
Cash budget
Budget Balance Sheet
Module 13
What are the Sales Variances?
Module 13
What are the fixed Overhead Variances?
Module 13
What is Standard Cost?
Budgeted or expected cost for individual cost items (or of a
single unit of production)
= direct materials + direct labour + variable OH
Module 13
What are the Material Cost Variances?
Module 13
What are the Labour Cost Variances?
Module 14
How is Residual income calculated? Advantages?
Advantage: Residual income overcomes the dysfunctional element
of ROI by encouraging divisional managers to invest, provided the
expected returns exceed the imputed cost of capital. Interest rate can
change it!
Divisional controllable profit
Less Imputed interest
= %  net assets
RI
Module 14
How is divisional performance measured?
1) ROI – profits / net book value
2) ROI – profits / current replacement value
3) Assets depreciation  profits 
4) Subjective
Module 14
What are the FOUR types of divisions?
1)
2)
3)
4)
Cost centres
Revenue centres
Profit centres
Investment centers
Module 14
What are the advantages/disadvantages for divisions?
Advantages
Disadvantages
Specialization
Size
Motivation
Sharper Decisions
Career Mobility
Lack of Control
Cost
Internal Rivalries
Module 14
How are Transfer Prices determined? (between divisions)
Market Price (best vs. objective)
Cost-based prices (if no market price)
Full cost (includes fixed costs)
Variable costs
Negotiated costs
Module 14
What are some additional issues for International
companies – between divisions?
1) Taxation
2) Repatriation of profits
Module 15
What about inflation?
Should be included
Not part of NPV
Not equal
Module 15
What is Risk Analysis?
Analyze variables in terms of probability of different values
Module 15
What is the payoff/payback period?
Time taken to recover original investment. When will you
get your money back?
Ignores the opportunity cost of the capital invested vs.
discounted payback
Module 15
What is the difference between NPV & IRR?
NPV – absolute
IRR – Ratio
 Provides different results to compare
Module 15
What are the PV formulas?
FV  PV
(1i)
Or the reciprocal
PV 
FV
(1i)
n
n
Module 15
What are the steps in the Investment Process?
1) Search
2) Evaluate
3) Control
– strategic plan
– financial & qualitative analysis
– budgeting
Module 15
How do you determine the Cost of Capital?
Average cost of
Fixed interest loans
Fixed dividend shares
Residual equity shares
Retained earnings
USE optimum proportions as weight
Module 15
What are the KEY investment factors?
1) Capital investment – fixed & working capital
2) Operating cash flows – actual cash flow (including
taxation)
3) Investment life – physical / technical / marketing
4) Cost of Capital
Module 15
What is sensitivity analysis?
Building a model of project, change parameters & check
results
Determine critical factors & assess uncertainty / risk
Module 15
What is the Internal Rate of Return (IRR)?
IRR, sometimes called the Discounted Cash Flow Rate of
Return or Yield (DCF) or simply the Rate of Return.
= Cost of Capital – NPV = 0
See Appendix 15.2 for example.
Module 15
What is life cycle costing?
Gathers all revenues & costs associated with product over
its whole lifespan – to measure its ultimate profitability
Module 16
What are some of the shortcomings of current
management accounting practices?
Driven by financial accounting, e.g., inventory/profit
Direct labour   overhead allocation by direct labour not
valid
Computerized production control ’s variable/fixed costs
Overheads increasing relative to quality, design
Business more complex, wider product ranges, shorter
lifecycles
Global markets
Module 16
What are the THREE concepts of throughput
accounting?
Looking at situation from rate at which $ earned through
sales
1) Depreciation excluded from performance
- total factory costs (incl. Labour) + materials
2) Value is created when product sold
- not inventory valuation  profits
3) Profitability – rate at which cash is rec’d at bottleneck point
(limiting factor which restricts production in short-term)
Module 16
What is Target Costing?
Focuses on target price based on customer perceived value,
then deduct desired profit margin to determine target cost
Value engineering – improving processes to lower costs