Notes - The ExP Group

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Notes

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ACCA Paper F3 GE

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(FIA Paper FFA)

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Financial Accounting

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ExPress Notes ACCA F3 Financial Accounting

Financial statements

7

2.

Objectives of financial reporting

16

3.

Sources of financial information

21

4.

Double entry bookkeeping: the debits and credits

28

5.

Tangible non-current assets

6.

Intangible non-current assets

7.

Inventory and purchases

8.

Receivables and payables

9.

Bank reconciliations

10.

Long term finance

11.

Accruals and prepayments

12.

Provisions and contingencies

55

13.

Sales tax

57

14.

Trial balances and correction of errors

60

15.

Suspense accounts

64

16.

Incomplete records

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66

17.

Limited companies

68

18.

Statements of cash flow

72

Consolidated financial statements

78

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39

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42 47 50 52

Events after reporting date, errors and estimates

88

Interpretation of financial statements

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21.

36

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20.

31

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19.

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About ExPress Notes

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Contents

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© 2014 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ExPress Notes

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ACCA F3 Financial Accounting

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START About ExPress Notes

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We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief.

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First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy.

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You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering.

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WARNING! These notes are not designed to cover everything in the syllabus!

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They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system

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The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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On ExP classroom courses, we provide people with the following learning materials:

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ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows “view again” of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database

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How to get the most from these ExPress notes

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Everybody in the World has free access to ACCA’s own database of past exam questions, answers, syllabus, study guide and examiner’s commentaries on past sittings. This can be an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.

ExP recommended course notes, or ExPedite notes

Prior to study, e.g. deciding which optional papers to take

Skim through the ExPress notes to get a feel for what’s in the syllabus, the “size” of the paper and how much it appeals to you.

Don’t use yet

At the start of the learning phase

Work through each chapter of the ExPress notes in detail before you then work through your course notes.

Work through in detail. Review each chapter after class at least once.

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Don’t make any annotations on the ExPress notes at this stage.

ACCA online past exams

Don’t use yet

Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style.

W AT Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.

Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this.

Don’t use at this stage.

Try to do at least one past exam question on the learning phase for each major chapter.

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Don’t try to feel that you have to understand everything – just get an idea for what you are about to study.

ExP recommended exam kit

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These ExPress notes

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Your stage in study for each paper

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For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.

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These ExPress notes

ExP recommended course notes, or ExPedite notes

ExP recommended exam kit

ACCA online past exams

Practice phase

Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them.

Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand.

This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Don’t be tempted to fall into “passive” revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time.

Download the two most recent real exam questions and answers.

At the door of the exam room before you go in.

Read quickly through the full set of ExPress notes, focusing on areas you’ve highlighted, key workings, approaches to exam questions, etc.

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Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.

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The night before the real exam

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Your stage in study for each paper

Read through the technical articles written by the examiner. Read through the two most recent examiner’s reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these!

Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still don’t understand. It’s too late now.

Don’t touch it!

Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow.

Avoid looking at them in detail, especially if the notes are very big. It will scare you.

Leave at home.

Leave at home.


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Notes

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Our ExPress notes fit into our portfolio of materials as follows:

Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.

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Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses

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Provide a base understanding of the most important areas of the syllabus only.

Notes

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Notes

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To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.

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START About The ExP Group

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Born with a desire to be the leading supplier of business training services, the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. Our clients range from multinational household corporate names, through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses.

As well as courses for ACCA and other professional qualifications, our portfolio of

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expertise covers all areas of financial training ranging from introductory financial awareness courses for non financial staff to high level corporate finance and banking courses for senior executives.

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Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions.

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Full details about us can be found at www.theexpgroup.com and for any specific enquiries please contact us at [email protected].

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Chapter 1

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Financial Statements

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START The Big Picture

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Financial statements (more colloquially called accounts) are a crucial part of managing a business and reporting to shareholders. A set of financial statements will need to be produced at least annually for presentation to external stakeholders, but generally much more frequently for management control within the business.

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Frequent and accurate financial statements can add a great deal to the efficient running of a business.

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A statement of financial position, generally called a balance sheet. This lists all the assets and liabilities of the business plus the equity of the business (which explains where the assets and liabilities came from). The statement of financial position is a snapshot of the assets and liabilities of a business at a moment in time. A statement of comprehensive income, often referred to as profit and loss account. This shows all the gains and losses that the business has experienced in the period. The statement of comprehensive income is a record of what happened over a period to the net assets of a business.

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A set of financial statements is produced periodically (often once a year for smaller businesses but as frequently as the users want them). A full set of financial statements for a limited company comprises a number of statements:

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A statement of cash flows, which shows where the cash and short-term assets very similar to cash came from and went do during the period. Income isn’t always the same as cash, as we’ll see later. Notes to the financial statements, which give further detail to readers who want to know more than the summary story.

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Non-current assets Licence to operate

10,000

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Land and buildings

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Office equipment

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Motor vehicles

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Fixtures and fittings

Current assets Inventory

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Trade receivables

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Less: allowance for doubtful receivables

35,000 20,000 30,000

10,000 105,000

20,000 13,000 (1,000) 12,000 4,000 3,000 2,000

146,000

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Cash in hand

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Cash at bank

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Prepayments

$

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ASSETS

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Statement of financial position of Sole Trader X at 30 June 20x1

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Total assets

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EQUITY AND LIABILITIES

Initial capital introduced

30,000

(24,000) 91,700

Total comprehensive income in the current period

16,000

Withdrawals in the current year

(8,000)

Total equity at 30 July 20x1

99,700

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Total equity at 1 July 20x0

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Less: Cumulative withdrawals at 1 July 20x0

85,700

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Total cumulative comprehensive income at 1 July 20x0

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Capital

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Non-current liabilities

32,000

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Bank loans

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Current liabilities Bank overdraft

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Trade payables Accruals

8,000 3,000 46,300

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Total liabilities

3,300

146,000

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Total equity and liabilities

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Principal features of the statement of financial position:

It balances, with the total assets equaling equity (i.e. owner’s interest) plus liabilities Each section is conventionally written in terms of increasing liquidity Non-current assets and liabilities are ones that are expected to remain on the SOFP next year. Current assets and liabilities are expected to be used up or paid within the coming year.

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A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above:

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Total assets = Equity + total liabilities.

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Equally validly therefore: Total assets – total liabilities = Equity

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Given that equity = capital + cumulative profit – cumulative withdrawals, then the equation could be written in any number of ways such as:

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Total assets – total liabilities = Capital + cumulative profit – cumulative withdrawals

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Or

Cumulative profit = Total assets – total liabilities – capital + cumulative withdrawals.

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This is sometimes called the “accounting equation” and often comes up in the F3 exam. The task is to drop in the figures that you know and find the missing figure, whatever it might be.

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Statement of comprehensive income for the year ended 30 June 20x1

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152,000

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Sales revenue

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Opening inventory

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Cost of sales

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Purchases of inventory

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Delivery costs inwards

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Closing inventory

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Gross profit

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30,000 80,000 10,000 (20,000) (100,000) 52,000


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ExPress Notes 3,000

Discounts received

2,000

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Sundry income

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ACCA F3 Financial Accounting

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57,000

6,000

Discounts allowed to customers

1,000

Electricity

4,000

Irrecoverable and doubtful debts

2,500

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Depreciation

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3,000

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Delivery costs outwards

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Less: Expenses

500

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Mobile phones

2,500

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Motor expenses

9,000

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Rent Telephone and internet

1,500

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Wages and salaries

(42,000) 14,000

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Profit for the period before tax

12,000

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Other comprehensive income:

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Revaluation gain on property

16,000

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Total comprehensive income in the period

2,000

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You may be required in the exam to calculate revenue, cost of sales, gross profit and total comprehensive income from given data.

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Unusual items

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Sometimes, it is necessary for one-off items to be disclosed separately in the financial statements if they are very large or arise from an unusual, often non-recurring, source. Typical examples might be write-off of an unusually large debt as irrecoverable, or business relocation costs. Disclosing it separately allows readers of the accounts a more in-depth understanding of what the business is doing.

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KEY KNOWLEDGE Elements of financial statements

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There are five elements of financial statements, from which all financial statements are produced. These definitions are very useful throughout your ACCA studies and could easily be part of a question in paper F3.

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Elements of the statement of financial position: An asset is a resource that is controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

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A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

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Equity is the residual interest in the assets of the entity after deducting all its liabilities. Depending on the type of business, this may be called just capital (sole trader), partners’ current account (partnership) or share capital and reserves (for a limited company). For a limited company, reserves show the net cumulative gains above cumulative losses, less all dividends paid. This therefore explains the difference between what the net assets were when the share capital was originally paid in and what the net assets are at the reporting date.

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Elements of the statement of comprehensive income: Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

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An expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

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Note that income and expenditure are defined effectively as the reason that a change in net assets happened.

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KEY KNOWLEDGE Relationship between the statements: the business equation An increase in net assets of a business will come from a mixture of these sources:

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Total comprehensive income made in the period (a profit will increase net assets) New capital introduced by the owner (will always increase net assets) Withdrawals made in the period (will always reduce net assets).

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This is sometimes called the accounting equation or the business equation. It is a frequent exam question and can be summarized:

Opening net assets + total comprehensive income in the period + new capital introduced in the period – withdrawals in the period.

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Closing net assets =

This is also a frequent exam question, with some figures given and the others having to be deduced.

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Remember that net assets = equity + liabilities, by definition. So net assets may be given in a question separately as equity and liabilities.

Separate accounting entity

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Even with a sole trader (a person who runs a business on their own, but the business has never been set up formally to be a separate legal identity), there is a distinction between personal income/ expenses and business income/ expenses. The accounts will largely be maintained so that the sole trader can report business profits to the tax authority. Personal expenditure such as personal holidays is not deductible against tax! The accountant will therefore only record transactions that are considered to be legitimate business transactions; personal transactions will be ignored. In smaller businesses, one of the first steps when producing accounting records for clients is to separate the business transactions from the personal, as the latter will not be recorded anywhere.

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Sole trader

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Sole traders and limited companies - We’ll look at these in more detail in each chapter, but here’s a summary: Limited company

1 (the sole trader!)

Can be between 1 and an unlimited large number

Must produce accounts for the tax authority

Yes

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Yes

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Must produce accounts to file with the commercial register

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Number of investors

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Business name

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Can offer shares to the public? Equity part of the

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Normally just the name of the owner “trading as” the name of the business

Must end Ltd (if private limited company) or plc (if public limited company) Yes, if a plc. No if Ltd.

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Initial capital

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Share capital

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Reserves: (revaluation reserve, retained earnings, etc).

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Cumulative profit Cumulative withdrawals

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SOFP

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Notes - The ExP Group

Notes - The ExP Group

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