Contents

Contents

Introduction............................................................................................................ 1
The study of accounting................................................................................................. 1
Aims of the course......................................................................................................... 2
Learning outcomes ........................................................................................................ 2
Essential reading ........................................................................................................... 2
Further reading.............................................................................................................. 3
Online study resources................................................................................................... 3
Structure of the subject guide ........................................................................................ 5
How to use the subject guide......................................................................................... 5
Examination advice........................................................................................................ 7
List of abbreviations used in this subject guide ............................................................. 10
Chapter 1: Accounting in context ......................................................................... 13
Aims .......................................................................................................................... 13
Learning outcomes ..................................................................................................... 13
Essential reading ......................................................................................................... 13
Introduction ................................................................................................................ 13
What is accounting? .................................................................................................... 14
Accounting theory and practice.................................................................................... 17
Accounting information and its uses ............................................................................ 17
Financial accounting .................................................................................................... 18
Management accounting ............................................................................................. 19
Summary..................................................................................................................... 19
Reminder of your learning outcomes ............................................................................ 20
Sample examination question ...................................................................................... 20
Section 1: Financial accounting ............................................................................ 21
Chapter 2: Fundamentals of financial accounting................................................ 23
Aims .......................................................................................................................... 23
Learning outcomes ..................................................................................................... 23
Essential reading ......................................................................................................... 23
Introduction ................................................................................................................ 23
An introduction to the financial statements .................................................................. 24
Accounting characteristics and concepts, bases and policies ......................................... 33
Summary..................................................................................................................... 35
Reminder of your learning outcomes ............................................................................ 36
Sample examination questions..................................................................................... 36
Chapter 3: Data processing .................................................................................. 37
Aims ........................................................................................................................... 37
Learning outcomes ...................................................................................................... 37
Essential reading ......................................................................................................... 37
Introduction ................................................................................................................ 37
One transaction: two effects ........................................................................................ 38

Recording transactions: books of prime entry ............................................................... 40

Double-entry book-keeping ......................................................................................... 44
Trial balance ................................................................................................................ 52

AC1025 Principles of accounting

Getting it right: internal control.................................................................................... 55

Summary..................................................................................................................... 57
Reminder of your learning outcomes ............................................................................ 57
Sample examination question ...................................................................................... 57
Chapter 4: Preparing financial statements 1........................................................ 59
Aims .......................................................................................................................... 59
Learning outcomes ...................................................................................................... 59
Essential reading ......................................................................................................... 59
Introduction ................................................................................................................ 59
Inventory, purchases and sales ..................................................................................... 60
Accruals and prepayments ........................................................................................... 64
Bad and doubtful debts ............................................................................................... 66
Depreciation of non-current assets............................................................................... 70
Disposal of non-current assets ..................................................................................... 74
Revaluation of land and buildings ................................................................................ 76
Summary..................................................................................................................... 77
Reminder of your learning outcomes ............................................................................ 77
Sample examination questions..................................................................................... 78
Chapter 5: Preparing financial statements 2........................................................ 79
Aims .......................................................................................................................... 79
Learning outcomes ...................................................................................................... 79
Essential reading ......................................................................................................... 79
Introduction ................................................................................................................ 79
Preparing the statement of financial position and income statement............................. 80
Incomplete information................................................................................................ 90
Summary................................................................................................................... 100
Reminder of your learning outcomes .......................................................................... 100
Sample examination question .................................................................................... 100
Chapter 6: Preparing financial statements 3...................................................... 103
Aims ........................................................................................................................ 103
Learning outcomes .................................................................................................... 103
Essential reading ....................................................................................................... 103
Introduction .............................................................................................................. 103
Different formats for different purposes...................................................................... 104
Preparing company accounts ..................................................................................... 108
Preparing the cash flow statement ............................................................................. 113
Summary................................................................................................................... 120
Reminder of your learning outcomes .......................................................................... 121
Sample examination questions................................................................................... 121
Chapter 7: Using and understanding financial statements ................................ 127
Aims ........................................................................................................................ 127
Learning outcomes .................................................................................................... 127
Essential reading ....................................................................................................... 127
Introduction .............................................................................................................. 127
Ratio analysis ............................................................................................................ 128

Writing a report......................................................................................................... 141

Summary................................................................................................................... 142
Reminder of your learning outcomes .......................................................................... 142
Sample examination question .................................................................................... 143

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Contents

Section 2: Management accounting ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

145
Chapter 8: Fundamentals of management accounting ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
147
Aims ........................................................................................................................
147
Learning outcomes ....................................................................................................
147
Essential reading .......................................................................................................
147
Introduction ..............................................................................................................
147
Planning and coordination .........................................................................................
148
Control, communication and motivation.....................................................................
149
Information for decision-making ................................................................................
150
Summary...................................................................................................................
150
Reminder of your learning outcomes ..........................................................................
151
Chapter 9: Cost accounting ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
153
Aims ........................................................................................................................
153
Learning outcomes ....................................................................................................
153
Essential reading .......................................................................................................
153
Introduction ..............................................................................................................
153
Understanding costs ..................................................................................................
154
Inventory valuation - marginal costing.......................................................................
157
Inventory valuation - full costing ...............................................................................
157
Effects of different inventory valuation methods .........................................................
162
Summary...................................................................................................................
164
Reminder of your learning outcomes ..........................................................................
165
Sample examination questions...................................................................................
166
Chapter 10: Making decisions 1 ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
169
Aims ........................................................................................................................
169

Learning outcomes ....................................................................................................

169
Essential reading .......................................................................................................
169
Introduction ..............................................................................................................
169
Cost-volume-profit analysis........................................................................................
170
Relevant costs ...........................................................................................................
174
Limiting factors..........................................................................................................
177
Summary...................................................................................................................
178
Reminder of your learning outcomes ..........................................................................
179
Sample examination questions...................................................................................
179
Chapter 11: Making decisions 2 ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
183
Aims .........................................................................................................................
183
Learning outcomes ....................................................................................................
183
Essential reading .......................................................................................................
183
Introduction ..............................................................................................................
183
Capital investments ...................................................................................................
184
Payback period ..........................................................................................................
184
Accounting Rate of Return (ARR) ...............................................................................
188
Summary...................................................................................................................
189
Reminder of your learning outcomes ..........................................................................
190
Sample examination question ....................................................................................
190
Chapter 12: Making decisions 3 ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,
191
Aims ........................................................................................................................
191
Learning outcomes ....................................................................................................
191
Essential reading ....................................................................................................... 191

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AC1025 Principles of accounting

Introduction .............................................................................................................. 191

Discounted cash flow techniques ............................................................................... 192
Summary................................................................................................................... 200
Reminder of your learning outcomes .......................................................................... 200
Sample examination questions................................................................................... 201
Chapter 13: Planning for the future ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 203
Aims ........................................................................................................................ 203
Learning outcomes .................................................................................................... 203
Essential reading ....................................................................................................... 203
Introduction .............................................................................................................. 203
Goals and objectives.................................................................................................. 204
Budgets and forecasts ............................................................................................... 205
Working capital management .................................................................................... 209
Summary................................................................................................................... 211
Reminder of your learning outcomes .......................................................................... 212
Sample examination question .................................................................................... 212
Chapter 14: Budgets for control,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 213
Aims ......................................................................................................................... 213
Learning outcomes .................................................................................................... 213
Essential reading ....................................................................................................... 213
Introduction .............................................................................................................. 213
Standard costs........................................................................................................... 214
Behavioural effects of using budgets .......................................................................... 215
Variance analysis - an introduction ............................................................................ 216
Summary................................................................................................................... 225
Reminder of your learning outcomes .......................................................................... 225
Sample examination question .................................................................................... 226
Appendix 1: Suggested solutions to selected Activities and
Sample examination questions ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 227
Chapter 2.................................................................................................................. 227
Chapter 3.................................................................................................................. 229
Chapter 4.................................................................................................................. 232
Chapter 5.................................................................................................................. 235
Chapter 6.................................................................................................................. 245
Chapter 7.................................................................................................................. 258
Chapter 8.................................................................................................................. 259
Chapter 9.................................................................................................................. 260
Chapter 10................................................................................................................ 263
Chapter 11................................................................................................................ 266
Chapter 12................................................................................................................ 267
Chapter 13................................................................................................................ 272
Chapter 14................................................................................................................ 276
Appendix 2: Sample examination papers ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 279
Before you start......................................................................................................... 279
Sample examination paper 1 ..................................................................................... 280

Extracts from compound interest tables...................................................................... 289

Sample examination paper 2 ..................................................................................... 290
Appendix 3: Example of 8-column accounting paper,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, 301

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