Accounting Graded Unit Three

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Why is depreciation not an allowable expense?
Depreciation is Subjective, decided by the company, this is used to write of the cost of an asset over its useful life, a company could manipulate this to lower the tax charge for the year, this is why it is not an allowable expense.
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Why are Capital Allowances an allowable expense?
Defined by statute and the finance act, all companies have a set regime to follow so can not be manipulated, used to influence company spending.
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What can be held in the main pool for capital allowances? What is the WDA?
The main pool will hold cars with a rating over 75g/km and less than 130g/km, it also hold plant and machinery purchases. The written down allowance is 18%.
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When is plant and machinery considered to be capital expenditure?
When the asset provides an active function rather than a passive function.
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What are bonus shares and when should they be issued?
Bonus shares should be issued when there are reserves which have been classed as non returnable to shareholders, such as general reserve, share premium and retained earnings.
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What sources of long term finance are available to a company?
Ordinary Share Capital, Preference Share Capital, Bank loans (Including finance lease & mortgages) and dividends
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What are the ten steps when issuing shares?
Invitation to apply, Application & Payments received, vetting and share allocation, refund of applications, deposits held for allocation, allotment balance received, transfer to share capital and prem., 1st Call, Money for 1st call, Transfer to share
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What effect does a bonus share issue have on the financial statements?
The reserves are reduced (Debited) with the share capital increased (Credited).
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What can be held in the special rate pool? What rate is the WDA?
Cars 130g/km or greater, integral features of a building such as water features. The WRITTEN DOWN ALLOWANCE (WDA) is 8%
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What is AIA?
AIA is the annual investment allowance, this is a capital allowance which allows a company to claim 100% of the cost of plant and machinery purchases, up to £200,000 as a tax deductible expense, this is set through the finance act each year.
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What is FYA
FYA is known as First Year Allowance, this is a capital allowance which enables a company to claim expenditure on cars less than 75g/km and other energy efficient purchases back in full as a tax deductible expense.
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Explain how capital allowances do not follow a tax year?
If a company has an extended period of accounts or contracted period (less than 12 months), the capital allowances can be contracted or extended to cover the reporting period, so the company is able to make full use of the applicable capital allownce
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What are the five criteria for acquisition accounting?
One must dominate the other, one must be the acquirer and one the acquired, subsidiary operate separately under jurisdiction of the parent, non controlling interest becomes passive, payments offered can be cash or equity to existing shareholders.
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What accounting entries would be made when undertaking acquisition accounting?
Goodwill - Difference between the net assets and liabilities and what is paid. The non controlling interest needs to calculated - there share of the business, adjustments for land revaluation and any intra company transfers of stock and cash.
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Describe ordinary shares for long term finance
Generate cash for the business, receive variable dividends, generally have voting rights, no requirement to pay dividends - normally paid annually, investors may loose investment if company goes into liquidation, own some of the business
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Describe Preference shares for long term finance
Own some of the business, receive dividends, do not normally have voting rights, when dividends paid they are at a fixed rate, no requirement to pay dividends, normally paid annually sometimes with an interim payment, priority for reimbursement.
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Describe long term loans for long term finance
Normally bank loan, finance lease or commercial mortgage, allow a company to purchase something specific, normally fixed rate, can sometimes be variable, normally paid bi-annually or yearly, finance cost element of the payment are an expense.
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Describe Dividends for long term finance
Long term loan issued by a company, repaid by a certain date, finance costs are paid yearly which is mandatory before dividends, can be secured on assets of a company.
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Describe the concept 'Going Concern'
Assumed the business will continue trading in the foreseeable future unless there is evidence to the contrary. (Assets valued at cost and depreciated, rather than what they can be sold for).
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Describe the concept 'Accruals'
Known as the matching concept, expenses and income are included when they are earned or incurred, not when paid or received. (Sales are recorded when invoice is raised, not when the balance is paid)
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Describe the concept 'Prudence'
Financial statements should be prepared conservatively, profits should not be over or under stated. Expected losses should be recognised immediately, with potential gains shown when received.
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Describe the concept 'Materiality'
If something is so small that it would not influence of affect the users of financial statements, or the interpretation to the financial statements, then it can be omitted (Paper clips omitted from a stock take, or £500 missing from £1.5 million)
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Describe the concept 'Objectivity'
There should be no personal bias involved when preparing financial statements, two people produce them, they should match. Third party experts should be used when determining liabilities and provisions (HR specialist for provision for redundancy)
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Describe the concept 'Money Measurement"
Everything should be recorded in money term, it must have a cash value (Staff can not be included as an asset, as they have no monetary value)
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Describe the concept 'Realisation'
This is an application of the matching concept, revenue is only recognised when the legal title has been transferred for goods or services.
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Describe the concept 'Separate Determination'
Assets and Liabilities cannot be offset against each other, they should be valued and listed separately. Two legal cases outstanding, any loss or gain should not be offset against each other.
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Other cards in this set

Card 2

Front

Why are Capital Allowances an allowable expense?

Back

Defined by statute and the finance act, all companies have a set regime to follow so can not be manipulated, used to influence company spending.

Card 3

Front

What can be held in the main pool for capital allowances? What is the WDA?

Back

Preview of the front of card 3

Card 4

Front

When is plant and machinery considered to be capital expenditure?

Back

Preview of the front of card 4

Card 5

Front

What are bonus shares and when should they be issued?

Back

Preview of the front of card 5
View more cards

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