ACCA/ FIA Financial Accounting Paper FFA/F3 Integrated Course Notes 2014 ISBN: 9781472722508FFA (F3) Financial Accounting Study Programme Page Introduction tothe paper and the course. 4 Skis bank 15 41. Initoduetion to accounting 45 2 The regulatory framework... ' 87 3 The qualitative characterstic of nancial information. 6 4 Sources, records and books of prime enty 75 5 Ledger accounts and double entry. 89 6 From ‘ral balance to financial statements ey (Checkpoint 1 113 7 Sales tax. 116 8 Inventory 108 9 Tangible noncurent assets. 137 10 Intangile non-current assets 161 114_Accruals and prepayments, 169 Checkpoint 2 185 12. rrecoverable debts and allowances. 187 13 Provisions and contingencies. 208 14 Control accounts. 213 Checkpoint 3 237 18 Bank reconciliations. 29 46 Correction of errors. 249 17 Preparation of financial statements for sole traders 259 18 Incomplete records 267 Checkpoint & 218 418° Iniroduction to company accounting 281 20. Preparation of financial statements for companies, 301 21 Events after the reporting period 325 22. Statements of cash ows. 329 Checkpoint 5 M5 23 Introduction to consolidated financial stalements.. 347 24 The consolidated statement of nancial positon 365 25 The consolidated statement of profit or loss and other comprehensive income, 389 26 Interpretation of financial statements 403 Checkpoint 6 a2 27 Answers to Lecture Examples wo 2B 28 Appendix A: Chapter summaries, rn ABD You should plan ost your CBE within the next coupe of weeks whilst the knowledge from tis course is stl fresh in your mind. In preparation use the Learning Media Practice & Revision Ki and ‘Pass to esl yourself on as many questions as you can, revising from the Course Notes and Passcards ary areas of 2 sylabus thal cause you problems.INTRODUCTION Introduction to FFA Financial Accounting Paper name The ACCA F3 Financial Accounting paper and the FIA FFA Financial Accounting paper are effectively one and the same. They have an identical syllabus and students siting either qualification wil sit an identical exam. All references to FFA wihin these course nates relate to the Financlal Accounting sylabus and exam regardless as to whether you are siting the FIA FFA Financial Accounting paper or the ACCA F3 Financial Accounting paper. Overall of the syllabus To develop knowledge and understanding of he undethng pines and concepts ean to financial accounting and technical proficiency in the use of double-entry accounting techniques including the preparation ofbasc franca stalament, The syllabus The broad sylabus headings ae: The context and purpose of financial reporting The qualtatve characteristics of financial information The use of double entry and accounting systems Recorcing transactions and events Preparing atrial balance Proparig basic financial statements Preparing simple consolidated financial statements Interoretation of financial statements Zonmoom> Main capabilities (On successful completion ofthis paper, cancidates should be able to: ‘© Explain the context and purpose of financial reporting ‘© Define the qualiative characteristics of nancial information Demonstrate the use af double enty and accounting systems. Record transactions and events Prepare a trial balance (including identifying and correcting erors) Prepare basic financial stalements for incorporated and unincorporated entities Prepare simple consolidated fnancial statements Interoret financial statementsINTRODUCTION Links with other papers Fra | This paper isthe fnal paper inthe financial accounting pillar ofthe Foundations in Accountancy qualification and the fist paper inthe financial accountng pillar ofthe ACCA qualification, Assessment methods and format of the exam The syllabus is assessed by a two hour paper-based or computer-based examination Questions will assess all parts ofthe sylabus and wil test knowledge and some comprehension or application of this knowledge. ‘The examination wil consist of two sections, Section A wll contin 35 two mark objective test questions. Section B wil contain 2fiteen mark mutitask questions, testing consoldations and accounts preparation. The consoldation question could include a small amount of interpretation andthe accounts preparation question could be set in the context of @ sole trader or a lmited company. Section A: 35 objective test questions (2 marks each) 70 isk questions (15 marks each) 30INTRODUCTION Study Programme Aims Achieving the FFA Study Guide Outcomes a The context and purpose of financial reporting "M1 _The scope and purpose of nani slalements for exleralreporing Chapter 1 (AZ _Usors' and stakeholders’ needs Chapter t 'RS_The main ements of franca reports Chapter [Ad The regulatory framework Chapter? [AS Die and responsbiles of those charged wih govemance Chapter BH The qualitative characteristics of financial information Bt_The qualtatve characteris of francial information Chapter’ | The use of double entry and accounting systems Ct_Doubleenty Bookkeeping pines including the maintenance of accounting ecards | Chapters 4 & 5 ©2_Ledgeraccouns, books of prime enty and joumals Chapters 485 A Recording transactions and events D1 Sales and purchases, Chapters 4, 5,7 & 14 D2_Cash Chapters 485 D3_ Inventory Chapter 8 (D4 Tangible non-curent assets Chapter 9 DS_ Depreciation Chapter 9 Dé Inangiblenon-curret assets and amortisation Chapter 10 D7_Accruals and prepayments ‘Chapter 11 DB Receivables and payables Chapter 12 D9. Provisions and contingencies Chapter 13 10 Capita structure and fnance costs Chapters 19 & 20| Preparing a trial balance INTRODUCTION Et Trial balance ‘Chapter 6 E2_Coredion of eros Chapter 16 Conta accounts and econdlatons Chapter 14 EA Bark recondlatons Chapter 15 ES Suspense accounis Chapter 16 a Preparing basic financial statements Fi_Slatemens of franca positon Chapters 17 & 20 F2__Slatomenis of profi orloss and aher comprehensive income Chapters 17 & 20 F3_ Disclosure noles Chapter 20 F4_ Evens afr the reporting pored Chapter 24 F5__Slatemenis of cash flows (excluding parneshps) Chapter 22 F6_ Incomplete records Chapter 18 Bh eesans ple consolidated financial statements Gt Subsidiaries Chapters 23-25 G2_ Associates Chapter 23 a Interpretation of financial statements H1_Importance and purpose of analysis of nancial statements Chapter 26 H2_ Ratios Chapter 26 H3_ Analysis of francial statements Chapter 26INTRODUCTION Analysis of the pilot paper Please note that past exam papers will not be published. The analysis of the Piot Paper should therefore be Used as @ guide to both the areas that ll be examined anc the mix between narrative and computational questions. Section A - 35 x 2 mark questions (70 marks) The context and purpose of financial reporting ‘The scope and purpose of financial statements fr extemal reporting 4 Users’ and stakeholders’ needs The main elements of nancial reports The regulatory framework Dulies and respansiblites of those charged with governance The qualitative characteristics of financial information “The qualitative characteristics of financial information 2 The use of double entry and accounting systems Double entry bookkeeping principles including the maintenance of accounting records Ledger accounts, books of prime entry and journals Recording transactions and events Sales and purchases 2 Cash 2 Inventory 2 [2 Tangible non-curent assets and deprecation é Intangible non-curent assets and amortisation 2 ‘Accruals and propayments @ Receivables and payables 2 Provisions and contingencies 2 Capital siacture and nance costs 2INTRODUCTION Proparing a trial ba Tral balance Comecton of rors [2 Control accounts and reconciliations é Bank reconliations| 2 Suspense accounts 2 Preparing basic financial statements ‘Statements of nancial positon a Statements of profi or loss and other comprehensive income Disclosure nates 2 Events after the reporting period 2 ‘Statements of cash flows (excluding partnerships) 2 Incomplete records 4 Preparing simple consolidated financial statements Subsidiaries ‘Associates Interpretation of financial statements Importance and purpose of analysis of nancial statements 2 Ratios 2 | 2 ‘Analysis offirancal statements Total number of marks xe |eINTRODUCTION Section A - 2 x 15 mark questions (30 marks) The context and purpose of financial reporting The scope and purpose of financial statements fr extemal reporting Users’ and stakeholders’ needs The main elements offnancial repors The regulatory framework Dies and responsbiles of those charged with governance The qualitative characteristics of financial information| The qualitative characteristics of financial information The use of double entry and accounting systems Double entry bookkeeping principles indluding the maintenance of accountng records Ledger accounts, books of prime entry and journals Recording transactions and events ‘Sales and purchases Cash Inventory Tangible non-curent assets and depreciation Intangible non-current assets and amortisation ‘Acorvals and prepayments Receivables and payables Provisions and contingencies Capital siructure and finance costsINTRODUCTION Proparing a trial ba Tral balance Correction of errs Control accounts and reconciliations Bank reconciliations Suspense accounis Preparing basic financial statements ‘Statements of nancial positon a Statements of profi or loss and other comprehensive income Disclosure nates Events after the reporting period ‘Statements of cash flows (excluding partnerships) Incomplete records Preparing simple consolidated financial statements Subsidiaries ramen ‘Associates Interpretation of financial statements Importance and purpose of analysis of nancial statements Ratios ‘Analysis offirancal statements Total number of marks «| 6 " BpINTRODUCTIONSkills bank This section explains and demonstrates the Key skils required to enable you to maximise your chance of exam success. Knowledge of the syllabus is insufficient on its own. Through question practice you will develop a set of skills that will enable you to pass this paper. 8B4SKILLS BANK Our analyss of the examiner's comments on past exams, together with our experience of preparing students for this type of exam, suggests that fo pass this exam you will need to develop a number of key skills. This skis bank is based on the skis required to st the computer-based exam. However, the skis required for the paper-based exam are very similar. [teaming and ‘understanding the syllabus g) content Tacking multi-task as ETacking objective fest questions 5SKILLS BANK Skill 1 - Learning and understanding the syllabus content 4 What do I need to know to attempt the paper? ‘This exam has a broad sylabus that will be tested in Sect A by 25 objective test questions worth 2 marks ‘each (including multiple choice questions and other means such as data entry type questions) and in Section B by 2 multitask questions worth 15 marks each (on consolidations and accounts preparation). As all the questions are compulsory you need a broad and yet quite detailed knowledge of the syllabus as well as an understanding of varity of eleulatns to apply the thay. The type ofkrouledge that you have to acquit ncudes te flowing Practical application - 9. preparing nancial stalaments or an iniviual company ora group}; caculaton of numbers toe included in fe nancial statements; identhng eros and correcting them; producing figures o 90 ino a statement of cash fous; rato calculation and interpretation, ‘Theoretical nowiedge- how accounts ftogether and ther key components; the purpose and oles of the regulatory does; the underjing concepts and assumptions that govern accounts preparation In this section we will look at approaches that you can take to help you learn the key elements of the knowledge inthe sys. 2 Practical application Practical aplication requires you todo wo main ings: 4 Understandthe principles behind tpi and be abet explain them and 2. Apply your understanding to generate financial statements or figures that may be included in a set of accounts, In this way you shoul be in @ good poston to answer most questons. Thay wil ether ask you to calculate @ number fom some information provided, oto se the numerical infomation provided to demonstrate your knowledge of the topic in some way. You should ensure that you read the requirement carefully for these ‘questions; further tips on question approach will be covered under skills 3 and 4, Principle For example, inthe Plt Paper, 028 asks Gareth, a sales tax registered trader, purchased a conpurer for use in his’ business. The invoice for the Conputer showed the following coats related to the purchase. Seagate 0 Radi tional wR 25 Delivery 7 Tnintenance (oe 3 Tova Tiles eo 07S 72 B) tor mich saoaid on i BPP 16SKILLS BANK Note that to find the corret figure you need to understand both the principle behind what can be included in the cost of@ non-current asset and what effect the sales tax may have onthe cost of the asset tobe included in the accounts ‘Application: ‘Another question type is Q18 from the Plot Paper: he total of the list of balances in Valley's payables Ledger was $438,900 at 30 dune 20X6. This balance did not agree with Valley's ‘payables ledger control account balance. The following erzore wer eiecovered| (2) contra ontey of $980 was recorded in the payables ledge control account, but not in the payables ledger (2) The total of the purchase returns daybook was urdercast by 51,000 (3) An invoice for $4,344 vas posted to the supplier's account as 54,434 what amount should Valley report in its statement of financial position as accounts payable at 30 June 20x6? A $436,830 § Z| ts s428,o10 i S|) tc $433,790 Bl fo $437,830 & This question requires you to have a goad understanding of haw to account for credit purchase transactions and the way contol accounts work in order to be able to answer it Therefore you need to ensure that you understand the context ofthe princiles of what you are learning and are able to apply them to numerical examples. To do this you should consider: Detail -for practical application ofthe topics covered in the sylabus, you must know the rules for each area and. Understand where they have been derived from. By reviewing the overview atthe beginning and the summary at the end ofthe relevant chapter in your course notes before altempting questions, you should be able to pick up the key points. ‘Application ~ this is where question practice is Key. The more practice you have in working through the ‘questions, the more confident you will become on using and applying the theory. 3 Theory You wil also have to answer native questions about theory ‘You can expect questions about 1, Fact—e.. what are the rules and requirements ofthe accounting standards? What are the similarities and diferences between sole traders, partnerships and companies? 2. Application. how are the accounting concepts applied to diferent areas ofthe sylabus? "7 BPPx A] SKILLS BANK Fact: {2m he Pot Paper ilsttes how knowledge of fact mht ested: Which of the following explains the iaprest aysten of operating ' petty cash? Ta Rogular eauat anounts of cash are trans at intervals naiatain = fixed float Weekly expenditure cannot excead a set anount, ALL expenditure out of the petty cash must be properly authorised Fact This quason is tesing you ona specie act bere you ned to know whel en imprest sytem I. You need to ‘make sure you have a good breadth of knowledge ofthe F3 syllabus, Application: {1 from the Pilot Paper isa good example of how you might have to apply your knowledge ina practical situation: [Which of the following calculates a sole trader's net profit for period? A Closing net = drawings + capital introduced ~ opening B Closing net assets ~ drawings - capital introduced ~ opening pet assets | tc closing net assets ~ dravings ~ capital introduced ~ opening Z| }> closing net assets ~ drawings + capital introduced ~ opening “Tis ype af quesion is about applying the theory ta there station This can soem bic thre ar no numbers involved ~ the key here isto think of some simple numbers for opening net assets, capital introduced, net prof and drawings and then rearrange the equation to dent the correct answer, For example: s Opening net assets 2,000 Capital introduced | 1500 Net profit 800 Drawings (249) Closing net assets We therefore have: (Closing net assets = opening net assets + capital introduced + net profit drawings and rearranging this gives: Net profit= Closing net assets + drawings capita introduced ~ opening net assets (Check this using your numbers: £800 = 4,060 + 240 - 1,500-2,000 ¥” BPP 8 red into petty cash amount of expenditure is reimbursed at intervals toSKILLS BANK ‘There are various ways to buildup this level of knowledge. Here are some suggestions: Read Passcards Geta colleague or regularly friend to set you quizzes Practice as many questions as possible Use annotated Produce a list of your overviews as common mistakes and summaries from each review tt before doing chapter (or annotate question practice! Your own) 7 Leam the contont ofthe syllabus actively by: 1. Reviewing the annotated overviews foreach chapter — these are availabe in Appendix A of the Course Notes 2. Practising as many questions as possible, moving from using your nates fo completing them without any help 3, Using the study text/re-ecorded lectures in your leaming plan to help only on areas you're struggling with and fil in gaps in your background knowledge 19(4 Pe uet uCuig \¢ SKILLS BANK Itis important that you use your time wisely in the exam to gain maximum marks. Time management 1B Whatyou SHOULD NOT do Panic! You have to hous to answer 35 objective test question (woth 2 marks each) in Seton A and 2 mal ‘task questions (worth 15 marks each) in Section 8, This equates to 1.2 minutes a mark. This means that you have approximately 2.4 minutes to answer each objective test question and 18 minutes to answer each multi- task question. In total, you should complete Section A in 84 minutes and Section B in 36 minutes. For many auestons you wil gt the answer steght away and so you ae likely to have abt mor tim to tink about some of the oer. Therefore dont worry about your timing on each incu queston, jst Keep track over afew 9.5) Z What you SHOULD do iis important starthe exam postive Firstly: Make a note of the finishing time for each of Sections A and B Section A (85 objective test questions) should take approximately 84 minutes, Make a note of what ime you should finish Section A a, ‘Section B (2 mult-task questions) should take approximately 36 minutes, Make a note of what time you should finish Section A at and more spectcally te fishing time for each ofthe 2 muti-task questions. Secondly: Work through questions systematically Start at question 1 and begin answering from there working through questions inorder. Ifyou find a question that you dont know the answer to and want to come back to it ata then put an answer in for the moment, make a note of it and go onto the next question. If you take the paper based exam, this ‘means you wor' fil ou your answer shee! incorrectly by having lfl a gap onthe sheet. ‘Try not to jump around questions otherwise you may leave some unanswered by the end. Then: Check your paper before the end of the exam Having answered allo the questons you should look through your answers to make sure 1. You are happy withthe options selected; and 2. Youhave answered al questions It you have taken this logical and systematic approach you should have given yourself the best chance of doing wel in the exam. BPP 20SKILLS BANK Practical advice for computer based exams STEP STEP STEP STEP Before the exam Make sure that you are registered with the ACCA and that your exam centre has your exam booking. This is important because you can nat sit the exam if you are nota registered student ‘and you need your student card as identification onthe day of your exam. Practice atleast one mack exam using the computer so that you are familiar wth navigating through questions and not being ble fo annotate the question paper. At the beginning of the exam You want to make the start ofthe exam as stress free as possible so make sure that you have the folowing avalabe: ‘Photo identification and your student number — your ACCA student card is idea fortis + Paper supplied by your exam centre, pens and a calculator ‘+ _Detais of which exam you ae planning to sit Starting the exam To start the exam you will ned todo the folowing ‘© Login - enter your ACCA student number and your date of birth ~ make sure that you have both to hand + Select the exam - the system will ask you which exam you want to do and then you - that selection ‘Instructions ~ the next three scraens are instructions — read these carefully so that you ‘know what you have to do to complete the exam ‘+ Launch the exam — please don't click his screen uni you have been advised to by your Invigllator AND you are ready because this starts the exam and starts the timer. ‘Answering the questions ‘The exam will stat at question +. You can progress through the questions by clicking bout you can also go back by clicking — you must do this otherwise as soon as you click to move to the nex! question your entry willbe lost and you will have to re-enter Ifyou cick and have not submitted your answer to a question then you wil get 2 reminder ~ clicking on the reminder does not submit your answer ~ you must go bback and re-enter your answer and then = Ifyou are unsure of an answer then just put an answer infor now, make a note of it, and revisit lator a cone oO iSKILLS BANK ‘You can see that itis very important to submit your answers as you go and to keep track of what you have done, Itis probably a good idea therefore to use your pad of paper todo two things: 1, Make any notes you want to help you answer the questions; and 2, Koop a record ofthe status of each question For example: Question Status 1 v 2 2 3 v 4 x Where means that the question has been answered and lam reasonably confident ofthe answer. ‘2 means that the question has been answered but | want to check the answer X means thatthe question has not been answered and I need to go back to it It would be most ecient to set this up atthe beginning ofthe exam. In this way you will have a tally of which {questions realy need to be checked over atthe end ofthe exam and itreduces the chances thal you wil leave a {question unanswered, STEP WD iste rrte manos ose sey rv al rae ao tv td an trowel oy ub wel ci ajay aren yas At the end of the exam time You have two ways of navigating the questions: 41. Clicking to work back through the questions one by ane; or 2. Using the drop down menu wich shows all the questions 1-37 (questions 1 to 36 being the objective test questions in Section A; questions 96 and 37 being the 2 multitask questions) indicating whether an answer has been submitted or not; clicking on the ‘question number wil take you directly to that question Remember that if you choose to change a previously submitted answer you must - the new one otherwise your original answer willbe retained instead!SKILLS BANK STEP | closing your exam session WD oreeyou re sist na you a hp wih or nvr eu ave i ihe am tan yuh cope tpn loch your etm ssaon fate ay ato you ga ton beings yr eam cnt 4, Let the time on the on screen clock run down to zero and the exam session will end automatically; oF 2, Click - you will bo asked to at this stage since you have no proof of your result! Your inigilator will ask you to two copies an¢ wil instruct you to once these hhave been printed of. You have now finished your exam, Final tips on timing + Make use ofthe paper to make notes oro workout the answers to questions ‘© Ifyou finda particulary cifiult question or along caleulation, move on and come back tot later in the remaining tie - itis important that you do nol run out of me leaving easier questions later in the Paper unanswered ‘= Koop an oye on the clock so that you can pace yoursetf - you will be given a 15 minute waming 15 rminutes prior tothe end ofthe 2 hour exam session ‘= Be well prepared for the exam day so that you can concentrate on doing the exam rather than the administration around it ‘© Getto your exam venue in plenty of ime so that you are relaxed when you get into the exam room, 2B one OQSKILLS BANK Skill 3 - Tackling objective test questions Technique for multiple choice questions ‘These are questions where ane ofthe four options is corect Narrative questions ‘41 What to do if you know the answer to the question It you know the answer to narrative question you should 1. Read the requirement 2 Locate the correct answer 3. Check the other answers 4. Read the requirement again to ensure you're answering the correct question 5. Confirm that you have the corect answer This systematic check will ensure that you do not throw away marks when you really do know the answer. 2What to do if more than one answer appears plausible Sometimes more than ane option can seem to answer the question. In this case you have to firstly ensure you've read the requirement carefully, as questions may be phrased in ways thal are not what you're expecting Ityou stl I identity more than one likely option, select the “most correct” answer. The approach adopled above is useful here too but this time you have to think through the alternatives a bit more For example, Q12 on the Pilot Paper ask: x This is testing your understanding of interpretation ofinancial statements. At ist sight, it may be tricky to Which of the following statements is TRUE? Ratios based on historical data can predict the future performance of + fap entity An entity's management will aot assess an entity's performance using 1 financial ratios ‘The analysis of financial statements using ration provides useful information when compared with previous performance or industry averages ‘The interpretation of an entity's financial scatenente using ratios | is only useful for potential investors identity the corect answer as each options quite long and there seems tobe more than one plausible answer. Here are STEP BPP some steps to flow: Read the requirement carefully Here we need to select the statement whichis true’ and because ofthe verb ‘is, only one statement can be tue. In another question, we might be asked which statement is false’ and the verb ‘are could have been used, implying that we need to select more than one option. ‘Therefore itis crucial to analyse the requirement careful before looking a the answer,SKILLS BANK STEP | Read each option carefully and eliminate any obviously wrong answers WED | ity tony oon at ret ry ony i about is who ratios are prepared for and what their purpose, Statement (2) s clearly incorect because one of he Key purposes of rato analysis is to assess an entity's performance. Equally statement () incorrect because there are many users of francial statements 80 ratio analysis 's notonly usefult investors, tis usfulto al users. STEP | assess the remaining answers (ED te row nest conser nin of satret 1) and statement (9) scones we consider sttornt (1) eros based on historical esta are used fo assess past performance ard are not pcessrly cate of wrat might happenin the flr tue perfomance woud be Bator assesed using forecast ater han hstorcal ala, Therefore statement (1) fincoect “This eaves use wih sateen (2)- 1 be Ue aos must be conpare o othe als (eg fr years, nds average) which makes his statement coe STEP Read the question ag; CED | ray ve su erst einer te big son or wa answering the correct question. The queston coud easly have asked: “Which o he following sfatementssincorret” which would have led us oa diferent answer! ‘This systematic approach helps you to break a question down and work through to find the correct answer logically Numerical questions Inthe exam, you will be asked to calculate numbers based on some information provided. If tis a mutiple choice question rather than a data entry question the temptation may be to look atthe options fst, and then “it ‘your calculatons to the one you thnk is most likely. This could lead you to answering the question incorrectly, ‘especial if you have not read the requirement careful For example, it would be easy to pick up the wrong answer in Q28 ofthe Plot Paper: the following bank reconciliation statement hae been prepazed by ccountant « i 5 Overdrafe per bank statement 3,660 Less: Unpzesented cheques 3,160 5,300 Add: Outatanding lodgenenta 16, 630 Cast at bank 25,330 {wnat should be the correct balance per the cash book? 521,390 balance at bank as stated 511,390 balance at bank 83,670 balance at bank 53,610 overdrawnSKILLS BANK Because unpresenled chaques are normaly deducted an oustanding lodgemens are normaly added, i would be easy to conclude tal the above bank reconciliation is correct. Ths would make us pick te fst option ‘without performing our own independent check. However, on more careful reading, we can see it has been prepared by a trainee accountant and so might well contain errors. We need to look at the wording and the signs ‘very carefully - because the opening balance per the bank statement is an overdratt, it should be in brackets. Unpresented cheques should also be in brackets (increasing the overdraft) and outstanding lodgements should be positive (ecucng the overraf leaving us with a corect postive balance pe the cash book of $3,670 (opon 2) STEP WD trannies ay tat ot nerd tt bean ig Sresyouc ence nomad we weg aeteoe iaet asked! Hore it would be easy to miss that the bank reconciliation had been prepared by a trainee accountant and was therefore likely fo contain errors. Students who has missed this would have picked the fist option, STEP | chink about which proforma or formula may be relevant DD Tincvnettera prema oral may be necessary lp you cla your answer. Here he bank reconelition proforma lean. Calculate your answer from scratch (writing out your workings) (ED one yore cain wat ne questions asking you sou eau your ansver fom serach using the relovant proforma or formula whore apoicable. Write down your workings ~ you ul be less lily to make a mistake then ard also, you fn that your answer coos net match ane cf he ops, yaucan come back ard check your werkings for ers, Ignore the options given, as you may arive at an answer that matches an option but is not hat is required by the question. ‘Again, the frst option is very enticing as il stands out as an easy choice, STEP | match your answer (ED ones ye cata your ensue using prefer oma where rv), mah itt the pons. I youve worked caretuly and answered the question, the matching option wil be avalebe. If no opton matches your cacuaton, read the requirement fo ensure you've "ndersioed what you have tod, In ths stvaton helps you wre down your cakuatons so that you can go back and check each inual number for errs. Ifyou stil can nd the arsver, you may want o guess he answer, make a ot ofthe quaston rumba and lum tt altho ond en you can udge how much fhe tine remaining you can spend on BPP 26SKILLS BANK What to do if you still don’t know the answer (numerical and narrative questions)... Ityou have been through the above 4 steps and can't idently a preferred answer then you have lo guess! Bl What you SHOULD NOT do Two main things o avoid: 1, Waste excessive time - time spent dithering over a single question could leave you wit insufficient ime. forthe rest ofthe paper. 2. Notanswering this is common yet serious err even ityou make @ wild guess you start with a 25% chance of success. Your chance of geting the 2 marks if you dot ofr an answers zero! © What you SHOULD do Having used the step by step approaches above to narow down your possible answers, go withthe one that feels rght. And move on, It you have a flash of inspiration later inthe exam go back and revisit but only if you are sure Technique for other types of question in computer based exam 1 Data entry ‘You may be asked to calculate @ numerical igure which you then have to enter into @ boxin the exam, The only permitted characters for numerical ancwers are: = Numbers ‘+ One ful stop as a decimal point if required ‘+ One minus symbol atthe front ofthe igure if the answer is negative. No ather characters, including commas, are accepted. Be very careful to follow these stct rues otherwise there isa sk that an othervise correct answer might be marked incor fr example you insert a comma to denote thousands. For these questions you can use steps 1 to 3 above in How to Approach Numerical Questions, a one OQSKILLS BANK ‘This can be ilustrated wih the Pilot Paper Q4: nnie {g 9 sole trader who does not keep full accounting records. The {following deraits relate to her transactions with credit customazs and uppliers for the year ended 30 June 20X6. 5 Trade receivables, 1 daly 205 130, 000 ‘Trade payables, 1 duly 20x5 60,000 Cash received From custoner= 086, 400 Cash pald be suppliers 302, 809, Discounts allowed 7,400 Discounts received 2,960 Contra between payables and receivables Ledger 2, 000 Trade receivables, 30 Gune 20K6 Tei, 000 Trade payables, 30 June 20K6 24,000 Wat figure should appear in Annie's statement of profit or loss for the [year ended 30 June 20x6 for purchas STEP WD recente oe tr pote pn le tot oe Ths ges ange ue ai be ae fe te ete ‘ust jr low both eaneee paae STEP | think about which proforma or formula may be relevant DZD Fret relat roma ste tae payable acout STEP | calculate your answer from scratch (writing out your workings) (GD setup a tae payaties account om iz of pape ard wrk do the questo ra by Ine exacting the Balances which are relevant io rade payables being very call o put them on the corect sie of your T account Remember that creis increase lables and debis decrease bites. For a ibity account ike his one, the balance brovght down should be on tho righ ana te balance cared down shuld be onthe lt ‘Once you've posted all the relevant numbers, il inthe total of whichever side adds tothe higher ‘number (should be the debit side) and find the missing figure onthe other se (should be on the rod side as purchases increase payables) which wil present purchases. STEP | enter your answer LD reponse ito tne ox, at suet you do ot nee $ or commas BPP 28SKILLS BANK 2 Select more than one option ‘These questons are very similar to narrative multiple choice questions and the approach required is effectively the same, Using Q5 from the Pot Paper: 2 the total of the debit column and the total of the credit column of a trial balance not to agrt Which TWO of the following errors would cat A cheque received fron a custoner was credited to cash and correctly recognised in receivables A transposition error was made when entering a sales invoice ins sales day book the A purchase of non-current assets was omitted from the accounting records Rent received was included in the trial balance as a debit balance Read the requirement carefully Here we need to select two erors which would cause the tral balance not to balance, We are therefore looking for one sided entes o entries of ferent amounts STEP | Read each option carefully and eliminate any obviously wrong answers WD Feecpion2isconect erase the double eis posed fom teil oth sas day bok andes an voce was eleed incorrect, te tll woul be wrong but he same runt would be debited to ade rcevables and credited lo revenue Heefre te Lal balance would sill balance. Option 3 is also incorrect because no debit or credit has been entered forthe purchase of non- ‘current assets, This means thatthe tral balance would sil balance, STEP | assess the remaining answers ED exposes ot stration opions 1 and 4 mus e cect Opn 1 coet because the cheque received has deen ceded lo cash and carecty recognised in resivates ie, redid to rocaivables this means that 2 cedis have boon posted ard no debit causing the tal Balance not bees, Ontion 4is correct because rent recoved is income and income is a credit balance but it has incorrecly been lsted as a debit balance in the tal balance. Again this would cause the til balance not o balance STEP | Read the question ag (GD Frat, we stout eed te requirement betas submit te queston to ensure we ae ansverng the correct question. We ned o make sure that we tok onthe 2 option that would cause th al balance nolo Balance option 1 and). 29 one OQx imi SKILLS BANK 3 "True or false’’yes or no’ ‘Some questions required you to enter an answer by each statement -elther ‘tue or false o yes or no “The approach is very similar othe above approach but you just need fo enter an answer foreach of the statements inthe queston, Effecvely you need to merge Steps 2 and 32s illustrated by Q9 from the Pilot Paper: Are the following #1 seements true or fale : Te [False 7B statenent of cash flows prepared using the divest method produces 2 differen: figure co net cash from operating activities from shat produced if the indirect method is used Rights iasues of shares do not feature in a statenent of cash flows 1 surplus on revaluation of @ aonvcurrent aswel Wi] not appear as an item in a statement of cash flows A profit on the sale of a non-current asset will ' appear as an iten under cash floks from investing activities in a statement of cash flows Read the requirement carefully WD | teste csectaen ning tr tn nc ei true or false, To answer this question well, ou need to know the proforma for the statement of cash fow, wu Read each option carefully and select your answer for each statement Statement 1 is false because both the direct methad and indirect method will produce the same ‘net cashflow from operating activites. Statement 2is false because a rights issue is a share issue at below market value but cash wil sti be received and recorded in the fnancing section ofthe cash flow. Siatoment 3 is true because the double enty for a revaluation is to increase the non-current ‘asset and racord the revaluation gain in other comprehensive income so hare is no cash effect. Statement 4 is false because the proceeds nat the praft an disposal should be recorded in investing activites (the profit on disposal is removed as an adjustment inthe operating actives section under the indirect method), STEP n again... Read the que: WED) str ss erat wim sbi son ss wa nsw the correct question, We ned to make sr ht we have slected We orale for echo hed statementsSKILLS BANK fF Practice keeping track ofthe questions you have answered when doing questions from the Practice and Revision Kit 2. Always check your answers through (f you would have time inthe exam) before looking at the solutions inthe back ofthe book Practice as many objective test questions as possible. 4, Ifyou don't know the answer toa queston — dont just goto the answer atthe back or just quess—use the step by step approach descrived above. 4 BPPSKILLS BANK rg In Section B ofthe exam, there will be two 15 mark multitask questions on the following two areas: ‘© Consolidation (this could include a small amount on interpretation) ‘= Accounts preparation (this could be se in the context ofa sole trader or a limited company and could Include a statement of cash flow). ‘The technique required for each of these questions dtfers sight. The examples below are based on the computer-based exam but the sls fo the paper-based exam would be simi. 1 Consolidat Consolidated statement of profit or loss and other comprehensive income The technique required here is best ilustrated using he frst question in Secton B of the Plat Paper: Keswick Co acquired 808 of the share capital ef Derwent Co on 1 June 20X5 The sunmarised draft statements of profit or loss far Kewewick Co and Derwent Co for the year end of 21 May 20X6 are shown below: : Reawick Co | Derwent Co | 37000 $7000 Revenue 2,400 3,200 Tess: Cost of sales 7, 600 1, 700 Gross profit 3,800 7, 500 Tees: Distribution caste 1, 500 510 “‘aininistrative coats 700 350 Profit before tax 1, 600 340 Teas? Tax 600 740 Profit of the year 1, 000 400 During the year Keswick Co gold goods costing $1,000,000 to Derwent Co for $1,500,000. At 31 May 20K6, 308 of these gocds remained in Derwent Co's t inventory.SKILLS BANK fea 9 oe Wi eae Use the information above to complete the following financial statement: 37000 Tees: Coat of sales Gross profit Toss: Distribution cose Administrative coats Peotic before tax Leas: Tax Profle of che year ‘atteinatable to: Equity owners of Keawick Co Non-controlling interest ask 2 0 of 4 marks Doss each of the following factors illustrate the existence of a parent ~ subsidiary relationship? Yes We 508 of all shares and debt being held by an investor 100 of the equity shares being held by an lnvestor Non ntrolling interes: Conteol Significant influence Greater chan SY ef preference shares and debt being hold by an investor Greater chan 508 of the Pi by an investor ‘erence shares being bald Here we wil focus on the skils required to answer Task 1 because Task 2s essentially identical to an objective test question (ue or flse"'yes or no! so to answer Task 2, you need to apply Skill 3 above, ‘These are the steps required to answer Task f: STEP | Read the requirement and work out time ‘Here Task 1 requires us to complete the consolidated statement of profit or loss for the Keswick Co group. Based on 1.2 minutes a mark, we have 13 minutes to complete it.SKILLS BANK STEP STEP STEP Draw up the group structure ‘On a piece of paper, daw up the group structure noting: ‘= %eowned (nere 60%) = Date of acquisition (1 June 20X5) ‘= Pre-acquiston reserves if given (not given here} ‘Try and identfy the year end from the question to ascertain whether there has been a mid-year acquisiion. Here the year end of 31 Mary 20X6 is given in the opening paragraph so the ‘subsidiary was acquired atthe start ofthe year (no proaling willbe required). Identify any consolidation adjustments required Here, asa result of the inragroup trading, 2 adjustments are required 4. Conceintragroup revenue and cost of sales of $1.5 2. Cancel unrealised proft on goods et in inventory atthe yearend by increasing cost of sales by $150,000 (90% x [1.5m - $m) Make a note ofthese on a piece of paper. Complete the consolidation ‘Make sure you complete any blank box (whether lt relales to words or numbers), Where there is ‘a dropdown option, select the correct answer. Where there is no dropdown option, calculate the required number then enter your answer (being careful here to show your answer in thousands, and not to use any commas), ‘The technique when working down your consolidation isto: Add the parent and 100% of the subsidiay’s income and expenses line by line, remembering to post your consolidation adjustments from Step 3 (ft had been a ‘consolidated slatement of financial position you would do the same for assets and lbilties) + Complete any workings required (here, non-controing interest [NCI] is calculated as the subsiciary's proftfor the year multiplied by the NCI percentage of 20%) Consolidated statement of financial position ‘There was no consolidated statement of financial poston inthe Pot Paper. However, this is one inthe bank of extra multitask questions provided by the ACCA: BPPSKILLS BANK £ background fon 1 January 20K3 Gasta Co acquired 75% of the share capital of Brica co for $1,380,000. The rotained earnings of Erica Co at that date were $480,000. Erica Co's share capital hae remained unchanged eince the acquisition, ‘The following draft statenents of financial position for the two companies have been prepared at 31 December 20X9. 1 | Retained earnings 2,040 et ' 4,040 1,660 |) 1 | tiabsiieies 1,840 70 dt 1 |torar equity and liabilities 5,880 2,400 ' ‘The non-controlling interest (NCI) was valued at $450,000 as at 1 January 20x3. ask 1 0 of 4.5 marks complete the following to determine the goodwill arising on acquisition. ‘caption 7000 Value of investment at acquisition Tnvestmant in Erica Go held by Gasta Co Total value of Investment al acquisition (A) ta at acquisition Faiz value of Erica Co's net a: Equity share capizal Total fair value of Erica Go's not assets at acquisition @ Goodwill at acquisition expressed as a formulax imi SKILLS BANK Sask 2 0 of 3 marks | Are each of the following statements relating to consolidation correct? vee Ne {| fhe process of consolidation results in @ | single separate legal ent: Goodwill 1s recalculated using the most recent fair values at each reporting period and NGI will always Feature within the consolidated financial stavenents mask 3 0 of 1.5 marke {Select the formula which correctly calculates NCI as at 31 December 20%9, An accordance with IFRS 10 Consolidated Financial Statenents A. Fair value of NCI at acquisition + 25% of post acuisizion profits of net assets at 31 Decenber 20%9 Fair value of NCI at acquisition + 25% of retained earnings as at a1 Decenber 20x3 Sask 4 0 of 6 marke ‘calculate the following figures which will be reported in Gasts consolidated statement of financial position as ‘at 31 December 20x9. 51000 Investment Other assets Share capital Retained earnings Liabilities ‘As this question contains more tasks thatthe consolidated statement of profit orloss question above, you need to thnk of tas a seres of numerical objective test questions and follow the approach adopted in Skil 3 for data entry objective test questions. You should approach each task one at atime as if each one were a separate question. The same basic technique can be applied to each task: STEP | Read the requirement carefully eee BPP 36STEP STEP STEP SKILLS BANK Think about which proforma or formula may be relevant Fist you need to craw up the group structure: + % owned there 75%) + Dato of acquston (1 Janvary 203) + Pre-acquision reserves given ($480,000. In Task 1, you wll need the proforma for goodwil: Fair value of consideration x Fair value of non-controling interest x Less: Fair valve of net assets at acquston Share capital x ‘Share premium x Retained earnings at acqusiton x Other reserves at aoquisiton x Fair value adjustments at acquisition x fi} x ‘As Task 2, is wien, there is no proforma, You need to read each statement carefully thinking about whether itis tue or nat In Task 3, ou need the proforma for non-controling interest: NCI at acquisition (rom goodwill working) [NCI share of post acan reserves rom reserves working x NCI %k) Iie In Task 4, member thatthe investment cancels on consoldation. For the asses and lables, You will ned to together he parent and 100% ofthe subsidiary, For etaned earings, you wl need the retained earings working: Parent Subsidiary Per question x x Provision for unrealised prof (seers column) o oo Pre-acquisition retained earnings 0, A Group share of post acq'n red earings: Subsidy (A x te) Calculate your answer from scratch (writing out your workings) ‘Ona pieve of paper, using the proformas above, work ou your answers @ task at atime, Enter your answer For each task, having completed the relevant working (tf applicable), enter your answer. If there 's a dropdown menu, select the correct option. If itis a yesino’ question, cick on the corect answer, If there is no dropdown menu, typ in your answer, remembering that tits a number, there should be no § or comma. 37 cane BPP 9SKILLS BANK 2 Accounts preparai Statement of financial position (SOFP) and statement of profit or loss and other comprehensive income (SPLOCI) ‘Your approach to these questions needs to remain flexible as the tasks, requirements and content wil vary from siting to siting “To succeed inthis type of question, you must know: ‘+ The proformas fora statement of financial positon and statement of profit or loss (and other comprehensive income) ‘+ The calulations and joumals required for year end adjustments, ‘The spectfc technique required is bestlustrated wit the second question from Section B ofthe Pilot Paper: | Background Swairight, a Limited Liability company, has an accounting year end of 31 October. "the accouncant is preparing the financial statements as at 32 October 20X7, A trial balance has been prepared track 2 0 of « marke {bo each of the following items belong on the statenent of financial position (SOFP) as at 31 October 20x77 ' Be eR Belong on : SOFP ae at 31 Geteber 20X7 e000 000 Buildings at cost 740 Buildings accumulated dopreciasion at 1 Noverber 20K6 60 Plant at cost 220 Plant accunulated depreciation at 1 November 20x6 320 Bank balance 70 Reverse 7, 800 Net purchases 140 Inventory at 1 Novenber 20K6 Teo Cask 2 Trade payables 250 Trade receivables 320 “Mininistrative expensce 325 for receivables at 2 i 20x6 Retained earnings at 1 November 20x6 130 Equity shares, $1 ais Shave peeniun account wo t 2,925 2,925SKILLS BANK Sask 2 0 of 3 marke Sthe allowance for receivables is to be increased to St of trade [receivables. The allowance for receivables is treated as an administrative f expense. ‘ane year end journal for allowance for receivables is given below. Prepare the double entry by selecting the correct option for each row. Trade receivable Rdninistrative expenses ‘Ailewance for receivables ! the anount included in the statement of profit or loss after the allowance ask 3 0 of 5 marks Plant is depreciated at 20% per annum using the reducing balance method fond buildings are depreciated at 94 per annum on their original cost. Depreciation is treated aa a coat of sales expense. ‘The year end journal for buildings and plant depreciation is given below. Using the information above, prepare the double entry by selecting the correct option for each row. Rdninistrative expenses Cost of sales Buildings cost Plant coat Buildings sccumalated depreciation Plant accunulaed depreciation calculate the depreciation charge for the below for the year ended 31 {october 2087. Use the information sbove £0 help you: [od [4] mask 4 0 of 1.5 marks Buildings s| oo 00 Span s| Closing inventory has been counted and is valved at 975,000. Ignoring the depreciation charge calculated earlier, what is the cost ofSKILLS BANK rask 5 n invoice of $15,000 for energy costs relating to the quar: [Novenher 20x7 was received on 2 December 20X7. Enezgy coste administrative expenses complete the following statenents he amount to be posted within the year end adjustment double entry above "000. ‘As there are quite afew tasks involved here, the best way to think i his is as 5 objective test questions rather than‘ long 15 mark question, ‘You should approach each task one ata time, However, the general approach for each ofthese tasks isthe same as for data enty objective test questions (Skil 3) STEP | Read the requirement carefully (QD wae ne equamen vt reasing te niomaton inte sear, The equament aay given nbd STEP | think about which proforma or formula may be relevant we In Task 1, you need tobe thinking of your statement of nancial poston proforma (asses, liabites, equity), Also watch ou for dates ~ any figures with the star ofthe year date (1 November 20X6) wl not ve in the statement of financial postion as tis prepared atthe yearend date (31 October 20X7}. In Task 2, you will need the folowing proforma forthe allowance for receivables (the journal being prepared from the movement ‘Alowance bé (gen in Tesk 1) x Movement (olancng gure) x ‘Allowance cd (calculate) x In Task 3, ou need to think about the formula for depreciation ‘© Reducing balance method = Depreciation rate (%) x net book value ‘© Straight line method = [(Cost- residual value) useful fe] or (cost ~ residual valu) x Se] In Task 4, you need the formula for cos of sales: Opening inventory x Purchases x hosing inventory ~ x In Task 5, there is no formula but you need to nate the year end (31 October 20X7), when the bill was received ie. after the year end (2 December 20X7), how many months ofthe bill relate tothe current year and therefore how much oft should be accrued for For ll of th tasks requifing joumals, to help you work out which account fo debit and which to radi, think of DEAD CLIC: BPP 40SKILLS BANK Debits Credits {increase} (increase) Exenses Liabities Assets Income Drawingsidividends Captal {and credits wil decrease these) {ond debits wil decrease these) STEP | calculate your answer from scratch (writing out your workings) Fin your proformastformulae above and generate any required journals), STEP | Enter your answer TED | Few Cs sory nossa come aor the eden nou ein your answer, remembering that isa number, there shouldbe no $ of comma, Statement of cash flow “There was no statement of cash fw question inthe Pill Paper. However, one was included in he extra bank ‘of mlt-ask questions provi by the ACCA: ‘the following information relates to Guotrost, a limited Liability \ company, for the year ended 31 Ostober 20X7 \uxtracts from the statenent of profit or 1 | october 20x7 8 for the year ended 31 ' ‘$7000 rT cane BPP 9SKILLS BANK { statement of financial position as at 31 october : : 20K zone! : $000 e000 it Non-current aasecs 4,282 2,578 Current easels Thventory 3,560 9,635 Receivables €,405 552 i] caan 2,085 ro |! : 32,010 ws,20 | | Botal assets 56,202 aan |! 1 |Bquity and liabilities : t[___capleal and reserves : t[__srainazy shave capiear 19,368 T7498 {| __ Retained earnings Tals east 36, 480 25,56 Non-curzent Liabilities toa 3,000 75,300 Curent Uabilities Bank overdrafe 1230 a9 t[__ trade payables 7,52 ee [taxation 3,020 2,70 | : ia Tit ' | Fetal equity and abilities 56,292 ai 614 : { Acaitional information: : 12) Depreciation expense for the year was 94,658,000 : (2) Assets with a car: profit of $720,000 Hing value of $1,974,000 were disposed of at a Complete the cash flow statement of cash flows for the year ended 31SKILLS BANK ftatement of cash flows for the year ended 31 October 20x7 Gash flows from operating activiti Rajustnents Depreciation Profit on disposal of non-current inventory ‘Receivables Payables Tax paid Net cash from operating activities ‘Cash flows from investing activities Payments te acquire non-eurrent assets Peocesda from sale of non-curvent assets Net cash fom investing activities Cash flows from financing activities ‘Proceeds from issue of share capital Repaynens of leans Not cach fron financing activitics Not movenent in cash and cash equivalents Cash and Gash equivalence at beginning of period Read the requirement carefully Here we are required to complete the statement of cash fows of Geofost forthe year ended 31 (October 20X7. STEI mo Read through the scen: need ‘The general ules that an itm lives in both the statement of financial position (SOFP) and the statement of profit or lss (SPL), you need a working, io to identify which workings you think you might Here, you need a working for propery, plant and equipment because i Ives in both the SOFP and the SPL (depreciation). You wil alsa need a working forthe profit on disposal ofthe assets to find the sales proceeds to posto the statement of cash laws. Finally we can see that tax lives in both the SOFP and SPL so it needs @ working, ‘Setup your workings ona piece of paper. 4“ one OQSKILLS BANK STEP STEP Work down the cash flow proforma, filling it in, completing a working first where necessary ‘Work down your proforma tine by ln, filing in the blank boxes by either: *= Selecting an option from the dropdown menu; or ‘= Typing in the relevant number (remember to exclude $ and commas and rounding your ‘answer in thousands). Where @ working is required (see Step 2 above), you must complete the working on paper, finding the figure for entry into the cash low as a balancing figure before selectnglentering the answer ‘Think carefuly whether each number represens a cash inflow or outflow. Enter your answer If there is @ dropdown menu, select the comect answer. If there is no dropdown menu, type in your answer, remembering that its a number, there shouldbe no $ of comma Deere BPP Practice all the mulitask questions from the Plot Paper and the Extra Bank of MTQs and as many as possible from the Pracice and Revision Kit making sure you attempt a good ‘spread across the syllabus areas (ie. groups - consolidated SOFP and SPL; accounts preparation - SOFP, SPL and cash flow). ‘Adopt the steps recommended above, remembering where there are many tasks, to teat them as a group of objective est questions but being careful not fo averun on time. Rework any questions that you struggle wih,Introduction to accounting Syllabus Guide Detailed Outcomes Having studied this chapter you will be able to: Define financial reporting and understand the nature, principles and scope of nancial reporting Identity and define the diferent business entities of sole trader, partnership and limited lability company and recognise the legal dferences between them, Identity the advantages and disadvantages of operating a each of te thre types of business ety Identity th use of financial statements and state and diferente between thir information needs. Understand and ident the purpose ofeach ofthe main nancial statements Define and identity assets, abit, equity, revenue and expenses. Explain whatis meant by governance specifica inthe contxt af the preparation of fancil statements Describe the duties and responsbbilies of directors and other parties covering the preparation of financial statements Exam Context This chapter introduces the subject of accounting. Questions on this area wil ros likely focus on the diferent characteristics ofthe three types of business ent: sole trader, partnership and limited lability company.4: INTRODUCTION TO ACCOUNTING Overview Statement of profit or loss Financial statements ‘Statement of financial position of financial information Teo LT) Types of busi ness entities — | Sole trader | Partnership | | Limited liability | company Concept of separate entity