Tag: ICAI

ICAI Financial Accounting notes with PDF downloads.

  • IAS 38 Intangible Assets Study Text

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  • IAS 37 Provisions, Contingent liabilities, Contingent assets Study Text

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  • IAS 36 Impairment of Assets Study Text

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  • IAS 33 Earnings per share Study Text

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  • IAS 23 Borrowing Costs Study Text

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  • IAS 17 Leases Study Text

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  • IAS 12 Income Taxes Study Text

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  • High/Low and Linear Regression Analysis

    High/Low and Linear Regression Analysis


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    High/Low and Linear Regression Analysis Overview

    The total costs associated with a business are the SUM of fixed costs and variable costs i,e. the total cost is semi-variable in nature.

    • Total costs can be divided into fixed costs /variable cost per unit of output.
      Formula for total costs:

    Y=a+bx

    where:
    y= total cost in a period
    a= the fixed costs in the period
    b= the variable cost per unit of output or unit of activity
    x= the number of output or the volume of activity in the period.

    Constructing Total cost function

    High/Low and Linear Regression Analysis


    Methods for constructing Total cost function

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    The total cost function can be used to estimate costs associated with different levels of activities. Its useful for forecasting and decision making.

    There are two methods for constructing the total cost function equation.

    1. High/Low Analysis.
    2. Linear Regression Analysis.

    High/Low and Linear Regression Analysis



    High/Low Analysis

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    High/Low analysis;

    can be used to estimate fixed costs and variable costs per unit, whenever:

    • figures available for total costs at two different level of output.
    • it can be used that fixed costs are same and variable cost per unit is constant at both levels of activity.
    • the different between the total costs at high level and low level of output is entirely variable cost.

    The following circumstances are to be considered:

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    When No Change

    Step 1: Take activity level and cost for:

    • Highest level
    • Lowest level

    Step 2: Calculate variable cost per unit (b) as:

    difference in total cost (highest minus lowest) divide by difference in no. of units (highest minus lowest).

    Step 3: Now for fixed cost (a) put the variable cost per unit into one of the cost expressions (mostly high level).

    Step 4: Construct total cost function for any activity level:
    Total cost=a+bx

    For Example:

    Step 1
    Highest level 7,000 (units) costs $38,800
    Lowest level 4,500 (units) costs $30,400

    Step 2: Difference
    Therefore: variable cost per unit= 8400/2500 = $ 3.36

    Step 3: Cost expressions: Total cost of 7,000 units

    Fixed cost + variable cost= 38,800
    Fixed cost + 7,000 x 3.36= 38,800
    Fixed cost + 23,520= 38,800
    Fixed cost=38,800–23,520=15,280

    Step 4: Construct total cost function
    Total cost=a+bx= 15,280+ 3.36x

    A step change in fixed costs as money value And the amount is known

    Step 1: Take activity level and cost for:

    • Highest level
    • Lowest level

    Step 2: Make adjustment for the step in fixed cost:

    • add the step in fixed cost in lower level; or
    • deduct it from higher level

    Now calculate variable cost per unit (b) as:

    difference in total cost (highest minus lowest) divide by difference in no. of units (highest minus lowest).

    Step 3: Now for fixed cost (a) put the variable cost per unit into one of the cost expressions (mostly high level).

    Step 4: Construct total cost function for any activity level:
    Total cost=a+bx

    For Example:

    Step 1

    Highest level 7,000 (units) costs $ 38,800
    Lowest level 4,500 (units) costs $ 30,400

    Step 2: Make an adjustment for step in fixed cost. For example fixed costs increase by $3,000 when the activity level exceeds or equals 10,000 units.

    Add the increase in cost in lowest activity level.

    Therefore: variable cost per unit= 5400/2500 = $ 2.16

    Step 3: Cost expressions: Total cost of 7,000 units
    Fixed cost + variable cost= 38,800
    Fixed cost + 7,000 x 2.16= 38,800
    Fixed cost + 15,120= 38,800
    Fixed cost=38,800–15,120=23,680

    Step 4: Construct total cost function (un-adjusted levels):

    • Above 10,000 units

    Total cost=a+bx= 23,680+ 2.16x

    • Below 10,000 units

    Total cost=a+bx=(23,680-3,000)+2.16x
    Total cost=a+bx= 20,680+2.16x

    A step change in fixed costs is given as a Percentage amount

    When there is a percentage change after a particular level, this means there are TWO levels which share same fixed cost.

    Step 1: Take activity level and cost for (3 levels):

    • Highest level
    • Middle level
    • Lowest level

    Step 2: Choose the pair which is on the same side as the step.

    Now calculate variable cost per unit (b) as:

    difference in total cost divide by difference in no. of units.

    Step 3: Now for fixed cost (a) put the variable cost per unit into one of the cost expressions (mostly high level).

    Step 4: Construct total cost function for any activity level:

    Total cost=a+bx

    For Example:

    Step 1

    • Highest level 7,000 (units) costs $ 38,800
    • Middle level 5,500 (units) costs $ 35,000
    • Lowest level 4,500 (units) costs $ 30,400

    Step 2: Pair with same percentage change. (assume a 10% increase in fixed costs when the activity level exceeds or equals 5,500 units)

    • Highest level 7,000 (units) costs $ 38,800
    • Middle level 5,500 (units) costs $ 35,000

    Therefore: variable cost per unit= 3800/1500 = $ 2.53

    Step 3: Cost expressions: Total cost of 7,000 units
    Fixed cost + variable cost= 38,800
    Fixed cost + 7,000 x 2.53= 38,800
    Fixed cost + 17,710= 38,800
    Fixed cost=38,800–17,710=21,090
    Step 4: Construct total cost function (un-adjusted levels):

    • Above 5,500 units

    Total cost=a+bx= 21,090+ 2.53x

    • Below 5,500 units

    Total cost=a+bx=(21,090 x 100/110)+2.53x
    Total cost=a+bx= 19,173+2.53x

    A step change in variable costs (is given as a Percentage/money amount)

    • When there is a step change in variable cost per unit as money value the same approach is needed as for a step change in fixed cost. (above)
    • When the change in variable cost per unit is given as a percentage amount, then variable cost(s) per unit should be calculated for TWO levels:
      • variable cost per unit used above change ; and
      • variable cost per unit used below change.

    High/Low and Linear Regression Analysis



    Linear Regression Analysis

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    In summary, linear regression is a better technique then high/low analysis because;

    • it is more reliable ; and
    • it’s reliability can be measured.

    Formula:

    Line of best fit (y=a+bx) can be constructed by calculating values for “a” and “b” using:

    a = ∑y – b∑x
           n       n
    b= ∑xy – ∑x ∑y
        n∑x2 – (∑x)2

    where:

    x = units
    y = costs

    Enter the values into the line of best fit (y=a+bx) and solve for b and then a .

    The following table should be used for calculating values of “x” and “y”

    Table

    X Y X2 XY
  • Introduction to Cost and Management Accounting

    Introduction to Cost and Management Accounting


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    Classification of cost Overview

    Introduction to cost and management accounting

    • Cost Accounting (classification of cost in cost accounting)
      • ​Cost Accounting involves the calculation and measurement of the resources used by a business in undertaking its various activities and is concerned with identifying cost of various things ( i.e. gathering data about cost of ‘products’ or ‘services’ and ‘cost of activities’).
    • Management Accounting (cost classification in management accounting)
      • Management accounting  includes cost accounting as one of its discipline but is wider in scope.
      • Management accounting provides information to management that helps it to run the business:
      1. it provides detailed financial information so that they plan and control the activities or operation for which they are responsible.
      2. this information helps managers to make other decisions i,e. planning, controlling and taking one-off decisions.

    ALL organizations needs to know:

    • how much it costs to make the products or provide its services.
    • to make sure product/services is sold at a Profit.
    • to control the entity.
    • to measure to what extent it is achieving its objectives.
    • to plan expenditure for future.

    Introduction to Costs


    Types of organizations

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    Manufacturing organizations

    Types of costing systems they use:


    Service organizations

    Types of costing systems they use:

    • Standard costing.
    • Job costing.


    Key Terminology

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    Cost object

    Any activity for which a separate measurement of costs is needed.

    For Example

    • cost of a department.
    • cost of a project.


    Cost unit

    A unit of product or service for which costs are determined.

    For Example

    • cost of A car.
    • cost of bread items.
    • cost of An item.


    Unit cost

    The cost incurred by a company to produce + store + sell one unit of a particular product.
    Unit cost includes ALL fixed and variable costs involved in production.

    Types of Cost Classification

    Classification of Cost by Type

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    Material costs

    Material costs are the costs of any material items purchased with the intention of using them in fairly short term future.

    For example

    • Raw material that go into the production process.
    • Cost of stationary, cartridges replacement.


    Labour costs

    • Labour costs are the employees remuneration costs paid by the entity and includes;
      • wages and salaries of part-time workers, bonuses, pension contribution etc.


    Other expenses

    • That costs which are not Material/ Labour costs and includes;
      • cost of services provided by external suppliers, telephone cost, rental costs, depreciation charges.

    Classification of Cost by Function

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    Production costs

    The costs that are incurred in manufacturing finished products up to the time goods are completed.

    Includes:

    • Material costs: of raw materials and components used in production.
    • Labour costs: of all employees working for the manufacturing function.
      Other Expenses.


    Non-Production costs

    Includes:

    Administrative costs

    Cost of providing administrative services to entity, usually includes;

    • Salaries to staff in administration.
    • Cost of office space (rent)
    • Other expense incurred for administration only.

    Selling and Distribution costs

    The costs incurred in marketing and selling good or services to customers and costs of delivering the goods.

    The costs of after-sales services such as customer support services are usually included in these costs.

    They usually include;

    • Salaries to staff in selling and distribution.
    • Advertising costs and other marketing costs
    • Operating costs for delivery vehicles such as fuel costs and repairs.
    • Other costs incurred for selling and distribution department.

    Finance costs

    These are the costs that are involved in financing the organization, e.g : Loan interest Bank O/D

    • They are generally included in administration costs ; or
    • alternatively finance costs might be excluded from cost accounting system.

    * Some costs might be partly production, partly administration and selling & distribution e,g: salaries of managing director, building rental costs.
    In such case costs are divided/ apportioned between function s on fair basis.

    Cost classification by Nature

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    Direct costs

    Costs that can be traced in FULL to a cost unit i,e. A direct cost can be attributed in its entirety to the cost of an item that is being produced.

    The following are direct costs:

    Direct Material

    All the materials that are used directly in manufacturing a product or providing service.

    Direct materials includes both raw materials and components.

    Direct Labour

    These are specific costs associated with labour-time spent directly on production of goods or services.

    Direct Expenses

    Expenses that can be attributed directly in full to a cost unit i,e. that have been incurred in full in making a unit of product/service .

    * In manufacturing type organization direct expenses are not common.


    Indirect costs (overheads)

    • An indirect cost (overhead cost) is any cost that is not a direct costs.
    • Indirect costs cannot be attributed directly and full to a cost unit.
    • Indirect costs include production overheads and non-production overheads. Each of these might include the following:

    Indirect Material

    Indirect material are any materials that are used/consumed that cannot be attributed in full to the item. They are treated as overhead costs, maybe classified as production overheads, administration overheads, selling and distribution overheads.

    For e.g. indirect production material includes some items of cleaning materials and any materials used by staff not engaged in production.

    Indirect Labour

    They mainly consists of the costs of indirect labour employees (who do not work directly on items that are produced) but may be necessary so that production takes place.

    All employees in administration and marketing department including management are indirect labour.

    Indirect Expenses

    Many costs incurred cannot be directly linked to cost units e.g. Rental costs of factory.

    In manufacturing company all costs of administration and selling & distribution are treated as indirect overheads.

    Product Cost

    • Product cost include the prime cost Plus production overhead.
    • Product cost are associated with goods that are produced or purchased for resale.
    • They are inventory and only expensed out when sold.

    Period Cost

    • The costs that do not contribute towards the value of inventory.
    • These are expensed in the period in which they occur.

    Cost Behavior

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    Cost Behavior definition:

    • Cost behavior refers to the way in which costs changes as volume of the activity changes.
    • As a general rule, total costs are expected to increase as volume of activity rises.
    • Understanding of cost behavior helps to;
      • forecast/plan what costs ought to be.
      • compare actual cost with budgeted.

    Cost Classification by behaviour;

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    Fixed costs

    These costs remain fixed/same in total during a period no matter how many units are produced and regardless the volume or scale of a activity.

    However, the cost per unit falls because the cost is being spread over a greater number of units.

    Semi-Variable cost

    • A semi-variable cost is a cost that is partly fixed and partly variable.
    • It is often assumed that total costs of an activity are mixed.

    Stepped cost

    • A cost which is fixed within a limited range of activity and goes up or down in steps when the volume of activity rises above or falls below certain levels.


    Variable costs

    • These costs increase usually by the same amount for each additional unit of product or service provided.
    • The variable cost of a cost unit is also called marginal cost of unit.
    • This means that total variable costs increase in direct proportion to the volume of output or activity.
    • The cost per unit remains fixed . However, total cost increase as more units are made.
  • IAS 17 Leases – Summary with Examples – PDF

    IAS 17 Leases – Summary with Examples – PDF


    IAS Standards

    IAS 2 Inventories       

    IAS 7 Statements of cash flows

    IAS 7 Statement of cash flows  – Revisited

    IAS 8 Accounting policies, changes in accounting estimates, and errors

    IAS 10 Events after the reporting period       

    IAS 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    IAS 24 Related party disclosures

    IAS 27 Consolidated and separate financial statements        

    IAS 28 Investments in associates and joint ventures 

    IAS 32 Financial instruments: presentation  

    IAS 33 Earnings per share

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis

    IAS 17 Leases Overview

    IAS 17 full text prescribe, for lessees and lessors, the appropriate accounting policies and IAS 17 disclosures to apply in relation to finance and operating leases.

    Understanding IAS 17 Leases


    IAS 17

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    Key IAS 17 Leases Definition

    • Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. The type of lease is identified at the date of inception.
    • Interest rate implicit in lease: That makes present value of lease payment and UN-guaranteed value equal to fair value and ( any ) initial direct costs of lessor.
    • Economic and Useful life:
      • Economic life is the total life of an asset excepted to be economically usable by one or more users.
      • Useful life is the Period over which an asset is expected to be available for use by an entity.
    • Residual Value: this may be Guaranteed or UN-guaranteed ;
      • Guaranteed: A guarantee made to a lessor by a party unrelated to lessor that the value of an asset at the end of lease will be at least a specified amount.
      • UN-Guaranteed: is that portion of residual value of asset, the realization of which is not assured by a party related to the lessor.
    • Lease Receipts and Payments: The term lease Payments refer to the payments that a lessee expects to make over a lease term or the Receipts that a lessor expects over the economic life of the asset. Payment by a lessee to lessor during a lease term may comprises of ;
      • fixed payments (less) any lease incentives.
      • variable lease payments.
      • purchase option price.
      • payment of penalties for terminating the lease.
    • Lease Classification:
      • Finance lease where it transfers substantially all the risks and rewards incidental to ownership.
      • Operating lease where it does not transfers substantially all the risk and rewards incidental to ownership.

    The following IAS 17 guide explains the IAS 17 standard with IAS 17 journal entries.

    Accounting for IAS 17 Finance Lease


    Finance Lease

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    For Lessee

    • In Finance Lease substantially all the risks and rewards of ownership are transferred to Lessee by Lessor.
    • Records assets and liabilities in financial statements (at LOWER of; Fair value and Present value) of Lease payments;

    Asset Debit
    Finance Lease Credit

    • Charge Initial direct costs to Asset.

    Subsequent Measurement:

    • Apportion lease payments; as finance charge and reduction in liability;

    Finance charge Debit
    Finance lease Debit
    Cash/Bank Credit

    • Depreciate the Asset.

    Dep. Expense Debit
    Acc. depreciation Credit


    For Lessor

    • In finance lease the lessor does not record the leased asset in its financial statements ,as its has transferred the risks and reward. Instead, he records the amount as Receivable.
    • Receivable is described as :
      • Net investment(N.I) = Present valve of Gross investment or;
      • Net investment (N.I) = Fair value + Initial direct cost.

    Subsequent Measurement:

    • Record payments received during the year by making;

    Cash/Bank Debit
    Net Investment Credit

    • Record finance income, adding a period return to the N.I and other side as income in P/L:

    Net Investment Debit
    Finance Income Credit

    Accounting for IAS 17 Operating Lease


    Operating Lease

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    For Lessee

    • The lessee does not records the leased asset in its financial statements.
    • Instead, Lessee records the Rental Payments as EXPENSE on straight line basis over the lease term.


    For Lessor

    • The lessor records the leased asset in its financial statement, as he has not transferred the risk and reward of ownership.
    • At commencement the lessor adds initial direct costs incurred by lessor.

    Subsequent measurement:

    • Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
    • Account for any impairment loss.
    • Records Rental Income on a straight-line basis over lease term.

    Accounting for Manufacturer Dealer LESSOR


    Manufacturer Dealer LESSOR

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    • A manufacturer or dealer often offers to customers to the choice of either buying or leasing an asset.
    • As these are Lessors, therefore lessors accounting treatment are applied.

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    Finance Lease

    A finance lease gives rise to two types of income:

    1. Profit or loss (difference between sales and cost)
    2. Finance income.

    Initial Measurement

    • Record Sales as:

    Lease receivable Debit
    Sales Credit (lower of fair value or Present of Lease payments)

    • Record cost of Sales:
      Cost Debit
      Inventory (Asset) Credit
    • Transfer Present value of UN-Guaranteed value of Net Investment:

    Lease Receivable Debit
    Inventory (Asset) Credit

    • Expense-out initial direct costs:

    Income Statement Debit
    Cash/Bank Credit

    • Record finance income subsequently


    Initial Measurement

    • Does not Record Sales.
    • Record Asset:

    Asset Debit
    Inventory Credit

    • Record depreciation
    • Record impairment
    • Record Rental income

    Sale and Lease Back (Finance Lease)


    Sale and Lease Back

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    For Lessee

    Sale of Asset

    1. Remove the asset from Financial Statements.
    2. Defer and amortize any Surplus/Gain over lease term.
    3. If loss , then immediately recognize.

    Lease back of Asset

    1. Recognize asset under finance lease.
    2. Create an obligation under finance lease.
    3. Depreciate Asset and amortize liability subsequently.


    For Lessor

    Purchase of Asset

    1. Does not records the asset.
    2. As the asset is not transferred physically nor risk and reward are.

    Leased the Asset

    1. Record Lessee as Receivable.
    2. Record Lease receipts during the period.
    3. Record Finance Income.

    Sale and Lease Back (Operating Lease)


    Sale and Lease Back

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    For Lessee

    Sale of Asset

    1. Remove asset from financial statements.
    2. Record Gain/Loss, where;
      1. sale at fair value: gain/loss is recognized immediately on disposal.
      2. sale at less than fair value: gain/loss is recognized immediately on disposal (if lease payments are not compensated at below market price). If NOT so,any loss is deferred over expected use of asset.
      3. sale at more than fair value:
      • normal gain/loss (Fair value – carrying amount) is recognized immediately.
      • excess profit (actual sale – fair value) is deferred and amortized over expected use of asset.

    Lease Back of Asset

    • Record normal Rental payments as Expense.


    For Lessor

    Purchase of Asset

    • The lessor records the leased asset in its financial statement.

    Subsequent measurement:

    • Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
    • Account for any impairment loss.

    Lease Back of Asset

    • At commencement the lessor add initial direct costs incurred by lessor.
    • Records Rental Income on a straight-line basis over lease term.

    IAS 17 pdf (IAS 17 download)

    The above IAS 17 summary is the most simplified. Moreover, Click here to Download IAS 17 leases pdf

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