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ACCA Paper F3

Financial Accounting

Class Notes

Up To 31-08-2016
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All rights reserved. No part of this publication may be reproduced, stored in a
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Contents
PAGE

INTRODUCTION TO THE PAPER 5

CHAPTER 1: INTRODUCTION TO FINANCIAL ACCOUNTING 7

CHAPTER 2: FINANCIAL STATEMENTS 15

CHAPTER 3: DOUBLE ENTRY BOOKKEEPING 23

CHAPTER 4: INVENTORY 47

CHAPTER 5: IRRECOVERABLE DEBTS AND ALLOWANCES 57

CHAPTER 6: NON-CURRENT ASSETS 69

CHAPTER 7: ACCRUALS AND PREPAYMENTS 85

CHAPTER 8: SALES TAX 95

CHAPTER 9: BOOKS OF PRIME ENTRY 101

CHAPTER 10: CONTROL ACCOUNT RECONCILIATIONS 117

CHAPTER 11: CORRECTION OF ERRORS AND SUSPENSE ACCOUNTS 125

CHAPTER 12: BANK RECONCILIATIONS 135

CHAPTER 13: INCOMPLETE RECORDS 145

CHAPTER 14: LIMITED COMPANY ACCOUNTS 155

CHAPTER 15: ACCOUNTING STANDARDS 171

CHAPTER 16: STATEMENTS OF CASH FLOW 179

CHAPTER 17: INTERPRETATION 197

CHAPTER 18: CONSOLIDATED FINANCIAL STATEMENTS 207

CHAPTER 19: CONCEPTUAL AND REGULATORY FRAMEWORK 225

APPENDIX - ANSWERS TO EXAMPLES AND SAMPLE EXAM QUESTIONS 233

ACCA STUDY GUIDE 307

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Introduction to the
paper

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IN T R O D U C T I O N T O T H E P A P E R

AIM OF THE PAPER


The aim of the paper is principally to develop a technical proficiency in the use of
double-entry accounting techniques, including the preparation of basic financial
statements. Secondly, the paper aims to provide a knowledge and understanding of
the underlying principles and concepts relating to financial accounting.

MAIN CAPABILITIES
On successful completion of this paper candidates should be able to:
A Explain the context and purpose of financial reporting
B Define the qualitative characteristics of financial information
C Demonstrate the use of double-entry and accounting systems
D Record transactions and events
E Prepare a trial balance (including identifying and correcting errors)
F Prepare basic statement of profit or loss and statement of financial position for
un-incorporated and incorporated entities
G Prepare simple statement of cash flow
H Prepare simple consolidated financial statements
I Interpretation of financial statements

FORMAT OF THE EXAM


This exam can be sat as a written or computer based exam.
The exam is 2 hours long with no reading time.
Section A will contain 35 two mark objective questions. Questions can be tested
as multiple choice, multiple response, multiple response matching, or number
entry.
Section B will contain 2 fifteen mark multi-task questions. These will test
consolidations and accounts preparation. The consolidation question could
include a small amount of interpretation and the accounts preparation question
could be set in the context of a sole trader or a limited company. Both
computational and non-computational questions.
All questions are compulsory.
Pass mark is 50%.

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Chapter 1

Introduction to
financial accounting

SYLLABUS CONTENT (as set by ACCA’s study guide)

A The context and purpose of financial reporting

1. The scope and purpose of financial statements for


external reporting
a) Define financial reporting – recording, analysing and summarising financial
data.
b) Identify and define types of business entity – sole trader, partnership, limited
liability company.
c) Recognise the legal differences between a sole trader, partnership and a limited
liability company.
d) Identify the advantages and disadvantages of operating as a limited liability
company, sole trader or partnership.

2. Users’ and stakeholders’ needs


a) Identify the users of financial statements and state and differentiate between
their information needs.

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C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L A C C O U N T I N G

3. The main elements of financial reports


a) Understand and identify the purpose of each of the main financial statements.

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CHAPTER CONTENTS

FINANCIAL ACCOUNTING ----------------------------------------------- 10


WHAT IS FINANCIAL ACCOUNTING? 10
TYPES OF BUSINESSES 10
ADVANTAGES & DISADVANTAGES OF INCORPORATION 11

TYPES OF ACCOUNTS AND THEIR USERS ----------------------------- 12

SAMPLE EXAM QUESTIONS --------------------------------------------- 13

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C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L A C C O U N T I N G

FINANCIAL ACCOUNTING

What is financial accounting?

Recording: Presenting:
Daybooks Statement of Profit or Loss
Ledgers Statement of Financial Position
Statement of Changes in Equity
Statement of Cash Flow

Types of businesses

Sole trader
Business characteristics –
Owned and run by an individual (hence ‘sole’ trader);
The sole trader and the business are legally the same entity;
Sole trader is personally liable for the business’s debts.

Partnership
Business characteristics –
Owned by two or more individuals (hence ‘partners’);
Run by the partners and/or appointed management;
The partners and the business are legally the same entity;
Partners are jointly and severally liable for all of the business’s debts.

Limited liability company


Business characteristics –
Owned by the shareholder(s);
Run by the director(s);
The company is a separate legal entity;
As a separate legal entity the company is liable for its debts.

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C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L A C C O U N T I N G

Advantages & disadvantages of incorporation


Incorporation refers to the process of registering a company within a given
jurisdiction and thereby forming a separate legal entity. Whilst there are a number
of advantages and disadvantages associated with incorporation, the key points are
detailed below.

Advantages:
Shareholders and officers of a limited company benefit from limited liability and do
not risk their personal assets (as long as the business is operated legally and within
the confines of applicable company law).
In contrast, the owners of an unincorporated entity risk their personal assets in the
event of business failure.

Disadvantages:
Disadvantages of forming a limited company include:
Statutory annual accounts must be filed on public record;
Financial penalties for late filing of accounts;
Limited companies are subject to corporation tax and must therefore file a
corporation tax return.

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TYPES OF ACCOUNTS AND THEIR USERS

For the purposes of internal control and decision making businesses may decide to
produce management accounts as well as financial accounts. The two types of
accounts are compared and contrasted below:

Management accounts Vs Financial accounts


Frequency

Legal requirement

Format

Users

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C H A P T E R 1 – I N T R O D U C T I O N T O F IN A N C I A L A C C O U N T I N G

SAMPLE EXAM QUESTIONS

1
Which of the following statements are TRUE of limited liability companies?
(1) The company’s exposure to debts and liability is limited.
(2) Financial statements must be produced.
(3) A company continues to exist regardless of the identity of its owners.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
(Dec 2011 – Pilot Paper)

2
Which one of the following statements is correct?
A A partnership is separate legal entity.
B A sole trader cannot employ staff.
C An incorporated entity is otherwise known as a ‘limited’ company.
D The owners of a limited company are otherwise known as the ‘directors’.

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Chapter 2

Financial statements

SYLLABUS CONTENT (as set by ACCA’s study guide)

A The context and purpose of financial reporting

3. The main elements of financial reports


a) Understand and identify the purpose of each of the main financial statements.
b) Define and identify assets, liabilities, equity, revenue and expenses.

C The use of double-entry and accounting systems

1. Double-entry book-keeping principles including the


maintenance of accounting records
c) Understand and apply the concept of double-entry accounting and the duality
concept.
d) Understand and apply the accounting equation.

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C H A P T E R 2 – F IN A N C I A L S T A T E M EN T S

F Preparing basic financial statements

2. Statement of Profit or Loss and Statement of Other


Comprehensive Income
b) Understand how accounting concepts apply to revenue and expenses.

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CHAPTER CONTENTS

STATEMENT OF PROFIT OR LOSS (SPL) ------------------------------- 18

STATEMENT OF FINANCIAL POSITION (SFP) ------------------------- 19

ACCOUNTING EQUATION ----------------------------------------------- 20


DUAL EFFECT 20

FUNDAMENTAL ACCOUNTING ASSUMPTIONS ------------------------ 21

SAMPLE EXAM QUESTIONS --------------------------------------------- 22

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C H A P T E R 2 – F IN A N C I A L S T A T E M EN T S

STATEMENT OF PROFIT OR LOSS (SPL)


The statement of profit or loss shows a summary of all income and expenses for a
financial period, typically covering twelve months.

Statement of Profit or Loss for the year ended 31 December 2012

$000 $000
Revenue 233,000
Less: Cost of sales
Opening inventory 12,332
Purchases 119,098
Carriage inwards 1,009
132,439
Closing inventory (13,777)
(118,662)
Gross Profit 114,338
Discounts received 5,111
Other income 4,000
123,449
Less: Expenses
Discounts allowed 3,444
Depreciation 10,710
Gas and electricity 14,122
Irrecoverable debts 7,134
Loan interest 4,000
Carriage outwards 5,666
Water rates 8,444
Advertising 15,000
Other expenses 3,142
(71,662)
Profit for the year 51,787

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STATEMENT OF FINANCIAL POSITION (SFP)


The statement of financial position details the assets, liabilities and capital of a
business at a particular point in time, and is therefore referred to as a ‘snapshot’ of
the business.

Statement of Financial Position as at 31 December 2012

Cost Accumulated Carrying


Depreciation Value
$000 $000 $000
Non–current assets
Property 150,000 (12,000) 138,000
Plant and machinery 45,000 (11,250) 33,750
Motor vehicles 26,000 (13,260) 12,740
221,000 (36,510) 184,490
Current assets
Inventory 13,777
Trade receivables 12,775
Prepayments 2,800
Cash at bank 3,400
32,752
Total assets 217,242

Capital
Opening capital 152,465
Profit 51,787
Drawings (35,900)
168,352
Non–current liabilities
Loan 20,000

Current liabilities
Trade payables 12,445
Accruals 16,445
28,890
Total capital and
liabilities 217,242
Note: The statement of changes in equity and the statement of cash flows
complete the full set of financial statements. These will be covered in
chapters 14 and 16 respectively.

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C H A P T E R 2 – F IN A N C I A L S T A T E M EN T S

ACCOUNTING EQUATION
The accounting equation is a simple expression of the fact that at any point in time
the assets of a business will be equal to its capital plus liabilities.

ASSETS = CAPITAL + LIABILITIES

Dual effect

Dual effect
Every business transaction has an equal and opposite effect.

Example 1
Terry is a sole trader and commences business on 1 July 2012. The following
transactions took place during his first week of trading:
1.7.2012 Terry put $20,000 cash into the business.
3.7.2012 Terry purchased a motor vehicle for use within the business for $9,500.
7.7.2012 Terry takes out a five-year loan from the bank for $5,000.

Required:
Show the accounting equation for Terry at the end of the week.

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FUNDAMENTAL ACCOUNTING ASSUMPTIONS


The following four assumptions underpin the preparation of financial statements:

Going concern
The accounts of a business are prepared on what is known as the going concern
basis, providing the business has both the intention and capability of operating for
the foreseeable future, assumed to be a year.
In the event that a business is deemed not to be a going concern then the accounts
will typically be prepared on a break-up basis.

Accruals
Financial statements are prepared on the accruals basis, meaning that income and
expenses are reported in the period to which they relate, regardless of when cash is
exchanged.

Consistency
Transactions of a similar nature should be accounted for in a consistent manner within
each accounting period, and from one year to the next.

Prudence
The prudence convention states that caution should be exercised when making
accounting judgements. It therefore follows that liabilities and losses should not be
understated, while assets and profits should not be overstated.
The application of prudence means that all losses whether actual or expected should
be recorded at once and in full, while profits are only recognised when they actually
arise.

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C H A P T E R 2 – F IN A N C I A L S T A T E M EN T S

SAMPLE EXAM QUESTIONS

1
Aubrey made a profit for the year of $345,687 and has closing net assets of
$435,195. During the financial year, capital of $60,000 was introduced which
consisted of $40,000 in cash and $20,000 in non-current assets. Drawings of $6,000
were taken out of the business each month.
What was the opening capital balance?
A $35,508
B $121,508
C $768,882
D $101,508

2
The accounting equation can be written as:
A Assets – liabilities = opening capital + profit + drawings
B Assets + liabilities + drawings = opening capital – profits
C Closing assets – closing liabilities – opening capital + drawings = profit
D Liabilities = assets – drawings + opening capital + profit

3
The profit of a business may be calculated by using which one of the
following formulae:
A Opening capital – drawings + capital introduced – closing capital
B Closing capital + drawings – capital introduced – opening capital
C Opening capital + drawings – capital introduced – closing capital
D Closing capital – drawings + capital introduced – opening capital

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Chapter 3

Double entry
bookkeeping

SYLLABUS CONTENT (as set by ACCA’s study guide)

C The use of double-entry and accounting systems

1. Double-entry book-keeping principles including the


maintenance of accounting records
f) Identify the main types of business transactions eg sales, purchases, payments,
receipts.

2. Ledger accounts, books of prime entry and journals


a) Identify the main types of ledger accounts and books of prime entry, and
understand their nature and function.
b) Understand and illustrate the uses of journals and the posting of journal entries
into ledger accounts.
c) Identify correct journals from given narrative.
d) Illustrate how to balance and close a ledger account.

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D Recording transactions and events

1. Sales and purchases


a) Record sale and purchase transactions in ledger accounts.

2. Cash
a) Record cash transactions in ledger accounts.

8. Receivables and payables


i) Illustrate how to include movements in the allowance for receivables in the
income statement and how the closing balance of the allowance should appear
in the statement of financial position.

E Preparing a trial balance

1. Trial balance
a) Identify the purpose of a trial balance.
b) Extract ledger balances into a trial balance.
c) Prepare extracts of an opening trial balance.

F Preparing basic financial statements

1. Statements of financial position


d) Prepare a statement of financial position or extracts as applicable from given
information using accounting treatments as stipulated within section D, E and
examinable documents.

2. Statement of profit or loss and other comprehensive


income
a) Prepare a statement of profit or loss and other comprehensive income or
extracts as applicable from given information using accounting treatments as
stipulated within section D, E and examinable documents.
f) Understand the interrelationship between the statement of financial position
and the statement of profit or loss and comprehensive income.

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CHAPTER CONTENTS

INTRODUCTION ---------------------------------------------------------- 26
LEDGER ACCOUNTS 26

SAMPLE EXAM QUESTIONS --------------------------------------------- 45

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C H A P T E R 3 – D O U B L E E N T R Y B O O K K E E P IN G

INTRODUCTION
Double entry bookkeeping refers to the recording of monetary transactions within
a financial accounting system.

Ledger accounts
The double entry system relies upon the use of ‘ledger accounts’, for which there are
four types. A separate ledger account is created for each type of asset, liability,
income and expense.
The following is an example of a ledger account -

Name of account
Debit (Dr) Eg Bank Credit (Cr)

Date Narrative $ Date Narrative $

The principles of ledger accounts are as follows:


Each transaction will affect at least two ledger accounts;
Total debits recorded must always equal total credits.
Whether to debit or credit a particular ledger account will depend if one wishes to
increase or decrease the balance.
The following table illustrates the rules that must be applied to each type of ledger
account:
Debit (Increasing) Credit (Increasing)

(Profit or Loss)
Expenses Liabilities (Financial Position)

Assets (Financial Position) Income (Profit or Loss)

Drawings (Financial Position) Capital (Financial Position)

NOTE: To decrease a ledger account the debits and credits will be reversed.

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Example 1
George commences business on 1 April 2012. The following transactions take place
in his first two weeks of trading.
1.4.2012 He invests $50,000 into a business.
2.4.2012 He purchases $5,000 worth of goods for re-sale on credit.
3.4.2012 He sells half of the goods for $6,000 cash.
4.4.2012 He issues a cheque to pay for the goods he received on credit.
5.4.2012 He pays his rent for April of $450 by cheque.
6.4.2012 He sells his remaining goods for $6,000 on credit.
7.4.2012 He purchased goods for re-sale on credit for $7,000.
8.4.2012 He purchases a delivery van for $7,000 cash.

Required:
For the first two weeks of trading prepare:
1. The journal entries (recording the dual effect) for each transaction
2. The ledger accounts
3. The trial balance
4. The statement of profit or loss
5. The statement of financial position.

Note: reference in the question to ‘cash’ should be interpreted as ‘cash at bank’ as


opposed to ‘cash in hand’.

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Example 1 Solution

Journal
1.4.2012

2.4.2012

3.4.2012

4.4.2012

5.4.2012

6.4.2012

7.4.2012

8.4.2012

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Example 1 Solution

Main Ledger

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Example 1 Solution

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Example 1 Solution

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Example 1 Solution

Trial balance

Account name Financial Statement $ $

Bank

Capital

Purchases

Trade payables

Sales

Rent

Trade receivables

Motor vehicles

Total

Closing inventory journal

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C H A P T ER 3 – D O U BL E EN T R Y B O O K K E E P IN G

Example 1 Solution

George Statement of Profit or Loss for the two weeks ended 14 April 2012
$ $
Sales

Less: Cost of sales

Opening inventory

Purchases

Closing inventory

Gross profit

Other income

Less: expenses

Rent

Profit for the year

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Example 1 Solution

George Statement of Financial Position as at 14 April 2012


Cost Accumulated Carrying
Depreciation Value
$ $ $
Non–current assets

Motor vehicles

Current assets

Inventory

Trade receivables

Cash at bank

Total assets

Capital

Capital introduced

Profit

Drawings

Non–current liabilities

Current liabilities

Trade payables

Total capital and liabilities

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Example 2
Tina starts business on 1 January 2012. The following transactions take place in her
first month of trading.
1.1.2012 She invests $65,000 into a business.
2.1.2012 She purchases $8,000 worth of goods for re-sale on credit.
7.1.2012 She sells a quarter of the goods for $4,000 cash.
8.1.2012 She issues a cheque to pay for half of the goods she received on
credit.
14.1.2012 She pays her insurance for January by issuing a cheque for $75.
15.1.2012 She sells her remaining goods for $12,000 on credit.
16.1.2012 She purchased goods for re-sale on credit for $10,000.
18.1.2012 She purchases some computer equipment for $3,000 cash.
20.1.2012 She pays her rent for January by cheque for $150.
21.1.2012 She sells half her goods for $10,000 cash.
25.1.2012 She withdraws $100 from the bank and put it into the petty cash tin
(this is cash in hand).
31.1.2012 She purchases some stationery worth $30 taking money from the
petty cash tin.

Required:
For the first month of trading prepare:
1. The journal entries (recording the dual effect) for each transaction.
2. The ledger accounts.
3. The trial balance.
4. The statement of profit or loss.
5. The statement of financial position.

Note: reference in the question to ‘cash’ should be interpreted as ‘cash at bank’ as


opposed to ‘cash in hand’.

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Example 2 Solution

Journal

1.1.2012

2.1.2012

7.1.2012

8.1.2012

14.1.2012

15.1.2012

16.1.2012

18.1.2012

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Example 2 Solution
20.1.2012

21.1.2012

25.1.2012

31.1.2012

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Main Ledger

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Example 2 Solution

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Example 2 Solution

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Example 2 Solution

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Example 2 Solution

Trial balance
Account name Financial Statement $ $

Bank

Capital

Purchases

Trade payables

Sales

Insurance

Trade receivables

Computer equipment

Rent

Petty cash

Stationery

Total

Closing inventory journal

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Example 2 Solution

Tina Statement of Profit or Loss for the month ended 31 January 2012
$ $
Sales

Less: Cost of sales

Opening inventory

Purchases

Closing inventory

Gross profit

Other income

Less: expenses

Insurance

Rent

Stationery

Profit for the year

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Example 2 Solution

Tina Statement of Financial Position as at 31 January 2012


Cost Accumulated Carrying
Depreciation Value
$ $ $
Non–current assets

Computer equipment

Current assets

Inventory

Trade receivables

Cash at bank

Petty cash

Total assets

Capital

Capital introduced

Profit

Drawings

Non–current liabilities

Current liabilities

Trade payables

Total capital and liabilities

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SAMPLE EXAM QUESTIONS

1
Which of the following will not result in a debit entry in the accounts
A Increase in expense
B Increase in revenue
C Decrease in liabilities
D Increase in assets

2
A credit balance on a ledger account indicates
A An asset or an expense
B A liability or an expense
C An amount owing to the organisation
D A liability or revenue

3
A trial balance should be extracted from the ledger accounts prior to preparing the
final accounts because
A It proves that the entries made in the ledger accounts are correct
B It shows where errors have been made
C It provides a summary of assets and liabilities
D It confirms that total debits recorded, equal total credits recorded.

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4
Bob used the following balances to prepare his accounts as at 30 April 2013.
DR CR
Receivables 6,000
Bank loan 3,000
Bank overdraft 2,500
Drawings 4,100
Capital 12,500
Revenue 22,000
Purchases 19,200
Rent 5,400
Bank interest 825
Heat and light 4,475
Totals 40,000 40,000
The business does not hold inventory. No further adjustments were required
What is Bob’s closing capital figure as at 30 April 2013?
A $12,500
B $8,400
C $16,300
D $500
(June 2013 – Exam Question)

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Chapter 4

Inventory

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

3. Inventory
a) Recognise the need for adjustments for inventory in preparing financial
statements.
b) Record opening and closing inventory.
c) Identify the alternative methods of valuing inventory.
d) Understand and apply the IASB requirements for valuing inventories.
e) Recognise which costs should be included in valuing inventories.
f) Understand the use of continuous and period end inventory records.
g) Calculate the value of closing inventory using FIFO (first in, first out) and AVCO
(average cost).
h) Understand the impact of accounting concepts on the valuation of inventory.
i) Identify the impact of inventory valuation methods on profit and on assets.

w w w . s t ud y i nt e r a c t i v e . o r g 47
CHAPTER 4 – INVENTORY

CHAPTER CONTENTS

INTRODUCTION ---------------------------------------------------------- 49

VALUING CLOSING INVENTORY --------------------------------------- 50


COST VS NET REALISABLE VALUE (NRV) 50
FIRST IN FIRST OUT (FIFO) 51
WEIGHTED AVERAGE COST (WAC) ALSO REFERRED TO AS ‘AVCO’ 51
LAST IN FIRST OUT (LIFO) 51

ACCOUNTING FOR CLOSING INVENTORY ----------------------------- 53


PERIOD END VS CONTINUOUS INVENTORY RECORDS 53
INVENTORY & THE ACCRUALS CONCEPT 53

SAMPLE EXAM QUESTIONS --------------------------------------------- 54

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INTRODUCTION

Definition
Inventory refers to goods purchased, or manufactured, for re-sale in the normal
course of business.

Year-end procedure
At the end of a financial period a company trading in goods would adhere to the
following steps:
1. Count all inventory held as at the financial reporting date;
2. Value closing inventory;
3. Account for inventory in the financial records.

w w w . s t ud y i nt e r a c t i v e . o r g 49
CHAPTER 4 – INVENTORY

VALUING CLOSING INVENTORY

Cost vs net realisable value (NRV)


IAS 2 is the accounting standard that gives detailed guidance on how to value closing
inventory.

Inventory must be valued at


the lower of:

Cost Net Realisable Value (NRV)

Note : Inventory should be valued on a line by line basis.

Example 1
Denzel runs a traditional sweet shop, having conducted a year-end inventory count
as at the 31 December 2011, he provides the following information:

Inventory Quantity Unit Cost Unit selling Unit selling


price costs

Bon Bons 520 $0.25 $0.45 $0

Spangles 640 $0.15 $0.2 $0.1

Cola Cubes 400 $0.1 $0.15 $0.02

Required:
Calculate the value of closing inventory as at 31 December 2011.

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Example 2
Radiance Co draft financial statements for the year ended 31 December 2012 show
the following balances:
Inventory at 1 January 2012 $45,678
Purchases $98,000
Inventory at 31 December 2012 $42,800
Closing inventory includes the following damaged items:
● A table purchased for $500. Due to fire damage the maximum it can be sold
for is $200 after a wax product costing $50 has been applied.
● Four chairs costing $100 each were also damaged in the fire. They can be sold
for $20 each.

Required:
Calculate the cost of sales for inclusion in the statement of profit or loss for 2012.

First in first out (FIFO)


Under the FIFO system:
The first items of inventory bought will be the first items sold;
Thus closing inventory will comprise the most recent items purchased!

Weighted average cost (WAC) also referred to as ‘AVCO’


Under the weighted average system there are two methods of calculation: periodic &
continuous.
Periodic method entails a simple unit average.
Continuous method entails the recalculation of the unit average following each
purchase!

Last in first out (LIFO)


Under International Accounting Standards this is not an acceptable method of
inventory valuation.

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CHAPTER 4 – INVENTORY

Example 3
Navigator Office Supplies made the following purchases of pens and sales in
January:
Purchases
Date Units $/unit
1 Jan Opening 500 2.40
12 Jan Purchases 200 2.50
16 Jan Sales 320 7.00
17 Jan Purchases 100 2.60

Required:

Calculate the value of closing inventory at the end of January, assuming:


FIFO method
Weighted Average Cost – Periodic method
Weighted Average Cost – Continuous method

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ACCOUNTING FOR CLOSING INVENTORY

Period end vs continuous inventory records

Period end
As demonstrated in Chapter 3:
Debit purchases (SPL) following each purchase of goods for re-sale.
At year end, count inventory, value inventory and record the following journal.

Dr Inventory (Asset) (Statement of financial position)


Cr Closing inventory (Cost of sales) (Statement of profit or loss)

The journal for opening inventory at the start of the next accounting period would
be to debit Opening Inventory (SPL) and credit Inventory (SFP).

Continuous
Some businesses may keep real-time records.
Following the purchase of goods for re-sale the debit would instead go to Inventory
(SFP) rather than Purchases (SPL) as seen above.
As each item of inventory is then sold the applicable cost to purchase/manufacture
that item is then allocated to cost of sales as per the following journal:

Dr Cost of sales (Statement of profit or loss)


Cr Inventory (Asset) (Statement of financial position)

Inventory & the accruals concept


Accounting for inventory demonstrates the application of the accruals concept.
Sales revenue is matched with the cost of goods sold during the period.

w w w . s t ud y i nt e r a c t i v e . o r g 53
CHAPTER 4 – INVENTORY

SAMPLE EXAM QUESTIONS

1
The inventory value for the financial statements of a Daletree Co for the year ended
31 December 2007 was based on an inventory count on 4 January 2008, which gave
a total value of $314,400.
Between the 31 December and 4 January 2008, the following transactions took place:
$
Purchases of goods 8,400
Sales of goods (value shown at cost) 9,600
Goods returned to supplier 1,000
What adjusted figure should be included in the financial statements for
inventories at 31 December 2007?
A $316,600
B $314,400
C $314,200
D $307,800

2
In preparing its financial statements for the current year, a company’s closing
inventory was understated by $50,000.
What will be effect of this error if it remains uncorrected?
A The current year’s profit will be overstated and next year’s profit will be
understated.
B The current year’s profit will be understated, but there will be no effect on next
year’s profit.
C The current year’s profit will be understated and next year’s profit will be
overstated.
D The current year’s profit will be overstated, but there will be no effect on next
year’s profit.

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3
Tamsin specialises in selling designer key rings. She provides the following
information as at the 31 December 2011 (financial year end) regarding her closing
inventory:
Key Ring Type Quantity Cost $ Selling Price $ Selling Costs
$
RT01 600 $0.5 $1.2 $0.6
ZX03 420 $1.2 $2 $0.9
WT76 710 $2 $3 $0.25

The value of inventory that should be reported in the


statement of financial position as at 31 December 2011 $
should be:

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CHAPTER 4 – INVENTORY

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Chapter 5

Irrecoverable debts
and allowances for
receivables

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

8. Receivables and payables


b) Identify the benefits and costs of offering credit facilities to customers.
c) Understand the purpose of an aged receivables analysis.
d) Understand the purpose of credit limits.
e) Prepare the book-keeping entries to write off an irrecoverable debt.
f) Record an irrecoverable debt recovered.
g) Identify the impact of irrecoverable debts on the income statement and on the
statement of financial position.
h) Prepare the book-keeping entries to create and adjust an allowance for
receivables.
i) Illustrate how to include movements in the allowance for receivables in the
income statement and how the closing balance of the allowance should appear
in the statement of financial position.
j) Account for contras between trade receivables and payables.
k) Prepare, reconcile and understand the purpose of supplier statements.

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C H A P T E R 5 – I R R E C O V E R A B L E D EB T S A N D A L L O W A N C E S

i) Classify items as current or non-current liabilities in the statement of financial


position.

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CHAPTER CONTENTS

INTRODUCTION ---------------------------------------------------------- 60

IRRECOVERABLE DEBTS ------------------------------------------------ 61


ACCOUNTING FOR IRRECOVERABLE DEBTS 61
RECOVERING IRRECOVERABLE DEBTS 61

ALLOWANCES FOR RECEIVABLES -------------------------------------- 63


ACCOUNTING FOR THE ALLOWANCE 63
SUBSEQUENT TREATMENT OF AN ALLOWANCE 65

SAMPLE EXAM QUESTIONS --------------------------------------------- 66

w w w . s t ud y i nt e r a c t i v e . o r g 59
C H A P T E R 5 – I R R E C O V E R A B L E D EB T S A N D A L L O W A N C E S

INTRODUCTION
Businesses often sell goods and services on credit. A credit sale arises when a
customer receives the goods/service, but pays at a later point in time.
Credit periods incentivise customers to make a purchase. Typically, the credit period
(length of time customer has before payment becomes due) is 30 days, however this
will vary.
It is the job of the credit control department within a business to ensure that overdue
trade receivables are collected.

Example aged receivables analysis as at 31 December 2011 -

Customer Total Current >1 month >2 months >3 months

TL Systems Co 1,750 1,200 550


AWR Waste Co 600 600
Enigma Solutions Co 4,300 4,300
Tate & Partners 2,310 770 770 770
Easy Copiers Co 500 500
Burtons Solicitors 1,100 1,100
Steptoe and Son 800 800

11,360 2,470 1,570 1,320 6,000

At the end of each financial period, the directors must consider whether the trade
receivables are collectible, and in accordance with prudence make any necessary
adjustments to the financial statements.

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IRRECOVERABLE DEBTS
Trade receivables may be deemed irrecoverable in the following circumstances:
Customer has fraudulently acquired goods on credit.
Customer has gone bankrupt.
Customer has disappeared.
In such instances it is unlikely that a company will receive payment and should
therefore write the debt off the statement of financial position as it no longer meets
the definition of an asset.

Accounting for irrecoverable debts


The journal entry to record an irrecoverable debt is:

Dr Irrecoverable debts (Statement of profit or loss)


Cr Trade receivables (Statement of financial position)

When a trade receivable balance is written off it is permanently removed from the
statement of financial position.

Recovering irrecoverable debts


If a debt that has previously been written off is subsequently paid by the customer,
then the journal entry to reflect this eventuality is:

Dr Bank (Statement of financial position)


Cr Irrecoverable debts (Statement of profit or loss)

The common mistake made by students is to credit trade receivables rather than
irrecoverable debts. By crediting irrecoverable debts the effect on profits arising from
the original write off is cancelled out.

w w w . s t ud y i nt e r a c t i v e . o r g 61
C H A P T E R 5 – I R R E C O V E R A B L E D EB T S A N D A L L O W A N C E S

Example 1
Barnstormer Co has a balance on trade receivables as at the year ended 30
September 2011 of $46,000.
Contained within trade receivables is a balance due from Speckled Hen Co amounting
to $6,000 which needs to be written off.
Just prior to the year end a customer by the name of Hobgoblin Co paid a debt
amounting to $8,000, that had been written off in the previous financial year.

Required:
Calculate the balance per the irrecoverable debts expense account in the statement
of profit or loss.

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ALLOWANCES FOR RECEIVABLES


Allowances are made for trade receivables which are deemed doubtful. A debt which
is doubtful has significant uncertainty surrounding its eventual collection.
Allowances for receivables are recorded in a separate ledger account within the
statement of financial position. The debit balance per trade receivables is then netted
down by the credit balance per allowances for receivables. Only the net balance
appears on the statement of financial position.

Accounting for the allowance

Journal to increase an allowance:


Dr Irrecoverable debts (Statement of profit or loss)
Cr Allowance for receivables (Statement of financial position)

Journal to decrease an allowance:


Dr Allowance for receivables (Statement of financial position)
Cr Irrecoverable debts (Statement of profit or loss)

There are two types of allowances for receivables:


o Specific allowance
o General allowance

Specific allowances are made with a view to a particular customer in mind and on the
basis of a long overdue invoice and/or information that has called into question the
recoverability of a given trade receivable.

A general allowance is made against all remaining trade receivables after accounting
for irrecoverable debts and specific allowances. General allowances are expressed
as a percentage, which will be based on prior years trading experience.

w w w . s t ud y i nt e r a c t i v e . o r g 63
C H A P T E R 5 – I R R E C O V E R A B L E D EB T S A N D A L L O W A N C E S

Example 2
Haven Bay Co has a balance per trade receivables at its financial year end amounting
to $46,000.
There was a general allowance brought forward from the previous financial year
amounting to $1,080. The directors would like to maintain a 2% general allowance
carried forward.

Required:
Calculate the balance per the irrecoverable debts expense account in the statement
of profit or loss.

Example 3
Doyles Co has a balance per trade receivables at its financial year end amounting to
$26,000, which is before accounting for irrecoverable debts of $2,000 and a further
$4,000 specific allowance.
There was a general allowance brought forward from the previous financial year
amounting to $600. The directors would like to maintain a 4% general allowance
carried forward.

Required:
Calculate the balance per the irrecoverable debts expense account in the statement
of profit or loss.

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Subsequent treatment of a specific allowance


There are two possible scenarios in relation to a specific allowance for trade
receivables brought forward (B/fwd) that would require accounting adjustments:

SPECIFIC ALLOWANCE FOR


TRADE RECEIVABLE B/FWD

Debt is paid Debt becomes irrecoverable

If the debt is paid during the financial year then account for the receipt of cash from
a credit customer by debiting bank and crediting trade receivables.
If the debt becomes irrecoverable then write the trade receivable off by debiting
irrecoverable debts and crediting trade receivables.
However, in both cases since the specific allowance is no longer needed, then don’t
forget to reverse the allowance!

Double entry to reverse the allowance:


Dr Allowances for receivables (Statement of financial position)
Cr Irrecoverable debts (Statement of profit or loss)

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C H A P T E R 5 – I R R E C O V E R A B L E D EB T S A N D A L L O W A N C E S

SAMPLE EXAM QUESTIONS

1
Carol has receivables of $598,600 at 30 November 2008. Her allowance for
receivables at 1 December 2007 was $12,460 and she wishes to change that to 2%
of receivables at 30 November 2008. On 29 November 2008 she receives $635 in
full settlement of a debt that she had written off in the year ended 30 November
2007.
What total amount should be recognised for receivables in the statement of
profit or loss for the year ended 30 November 2008?
A $488 credit
B $11,972 debit
C $1,123 credit
D $147 debit
(Dec 2008 – Exam Question)

2
Kieran has an allowance for receivables of $3,000 at 31 December 2007. During the
year $50 had been received in respect of a debt previously written off. An allowance
for receivables of $3,100 is to be carried down at 31 December 2008.
What is the irrecoverable debts figure for the year to 31 December 2008?
A $50 charge
B $150 charge
C $50 credit
D $150 credit

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3
At the year-end Dolphin Co had 100% allowances brought forward at the 1 January
2010 in respect of two customers, Arctic Co (owing $2,400) and Baltic Co (owing
$5,570).
Dolphin Co has been informed that during the 2010 financial year Arctic Co has gone
into liquidation and that they would only be receiving $500 of the debt outstanding.
Baltic Co has made a payment of $600 just before the year end, but the remainder
of the debt continues to be deemed doubtful.
What is the figure for irrecoverable debts to be included in Dolphin Co’s
statement of profit or loss for the year ended 31 December 2010?
A $1,100 credit
B $1,900 credit
C $1,100 debit
D $1,900 debit

w w w . s t ud y i nt e r a c t i v e . o r g 67
C H A P T E R 5 – I R R E C O V E R A B L E D EB T S A N D A L L O W A N C E S

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Chapter 6

Non-current assets

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

4. Tangible non-current assets


a) Define non-current assets.
b) Recognise the difference between current and non-current assets.
c) Explain the difference between capital and revenue items.
d) Classify expenditure as capital or revenue expenditure.
e) Prepare ledger entries to record the acquisition and disposal of non-current
assets.
f) Calculate and record profits or losses on disposal of non-current assets in the
statement of profit or loss including part exchange transactions.
g) Record the revaluation of a non-current asset in ledger accounts, the statement
of other comprehensive income and in the statement of financial position.
h) Calculate the profit or loss on disposal of a revalued asset.
i) Illustrate how non-current asset balances and movements are disclosed in
financial statements.
j) Explain the purpose and function of an asset register.

w w w . s t ud y i nt e r a c t i v e . o r g 69
CHAPTER 6 – NON-CURRENT ASSETS

5. Depreciation
a) Understand and explain the purpose of depreciation.
b) Calculate the charge for depreciation using straight line and reducing balance
methods.
c) Identify the circumstances where different methods of depreciation would be
appropriate.
d) Illustrate how depreciation expense and accumulated depreciation are recorded
in ledger accounts.
e) Calculate depreciation on a revalued non-current asset including the transfer of
excess depreciation between the revaluation reserve and retained earnings.
f) Calculate the adjustments to depreciation necessary if changes are made in the
estimated useful life and/or residual value of a non-current asset.
g) Record depreciation in the statement of profit or loss and statement of financial
position.

6. Intangible non-current assets and amortisation


a) Recognise the difference between tangible and intangible non-current assets.
b) Identify types of intangible assets.
c) Identify the definition and treatment of ‘research costs’ and ‘development costs’
in accordance with International Financial Reporting Standards.
d) Calculate amounts to be capitalised as development expenditure or to be
expensed from given information.
e) Explain the purpose of amortisation.
f) Calculate and account for the charge for amortisation.

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C H A P T ER 6 – N O N - C U R R EN T A S S E T S

CHAPTER CONTENTS

INTRODUCTION ---------------------------------------------------------- 72

TANGIBLE NON-CURRENT ASSETS ------------------------------------- 73


MEASUREMENT AT RECOGNITION 73
SUBSEQUENT COSTS 73
MEASUREMENT AFTER RECOGNITION 76
DEPRECIATION 76
REVALUATIONS 78
ACCOUNTING FOR A DISPOSAL 79

INTANGIBLE NON-CURRENT ASSETS ---------------------------------- 81


INTERNALLY GENERATED INTANGIBLES 81

SAMPLE EXAM QUESTIONS --------------------------------------------- 83

w w w . s t ud y i nt e r a c t i v e . o r g 71
CHAPTER 6 – NON-CURRENT ASSETS

INTRODUCTION
The cost of an item of property plant and equipment shall be recognised as an asset
if, and only if:
1. It is probable that future economic benefits associated with the item will flow
to the entity; and
2. The cost of the item can be reliably measured.
In order to be deemed a non-current asset it is expected that the business owns and
uses the item in order to generate income and it is expected that the asset is not
expected to be consumed or converted into cash in less than one year’s time.

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TANGIBLE NON-CURRENT ASSETS


By definition tangible non-current assets have physical substance. Typical categories
of tangible non-current asset include:
Land
Buildings
Plant and machinery
Motor vehicles
Computer equipment
Fixtures and fittings.

Measurement at recognition
An item of property, plant and equipment that qualifies for recognition as an asset
shall be measured at its cost

Elements of cost shall include:


o Purchase price
o Import duties
o Non-refundable purchase taxes
In addition to the above, any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in a manner
intended by management may also be capitalised.
Directly attributable costs include:
o Costs of site preparation
o Initial delivery and handling
o Installation and assembly costs
o Costs of initial testing
o Professional fees

Subsequent costs
Capital expenditure may also be subsequent expenditure that enhances the
performance of the asset, therefore increasing the economic benefits that asset
brings.
Expenditure in relation to maintaining the earning capacity of non-current assets
should be expensed in the statement of profit or loss.

w w w . s t ud y i nt e r a c t i v e . o r g 73
CHAPTER 6 – NON-CURRENT ASSETS

Example 1
Classify the following costs: Capital Expense
Purchase of a new motor vehicle
New coat of paint
Stereo system
Insurance
Roof rack
Purchase of tax disc
New tyre

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Example 2
Simtech Co purchases a printing machine that had a list price of $100,000 but was
offered a trade discount of 10%.
In addition to the list price Simtech Co also incurred the following charges:
$ $
Shipping & handling charges 2,500
Pre-production testing 10,000
Maintenance contract for three years 18,000
Site preparation costs
Electrical cabling costs 10,000
Floor reinforcing 5,000
In house labour costs 7,000
_______
22,000
Included in the electrical cabling costs is $3,000, which is as a result of Simtech Co
providing incorrect requirements for the asset.

Required:
What initial total cost should be recorded for the machine in the statement of financial
position?

w w w . s t ud y i nt e r a c t i v e . o r g 75
CHAPTER 6 – NON-CURRENT ASSETS

Measurement after recognition


Following recognition as an asset, each category of non-current asset shall either be
treated according to:
The cost model; or
The revaluation model.

Depreciation
Depreciation is the charge to the statement of profit or loss to reflect the consumption
of an asset in a period.
The journal entry for depreciation is:

Dr Depreciation expense (Statement of profit or loss)


Cr Accumulated depreciation (Statement of financial position)

In calculating the depreciation charge there are two methods that can be used:

Straight line depreciation


Depreciation is charged at a constant proportion over the life of the asset.
To calculate the depreciation charge the following formula may be required:

Depreciation per annum = Original cost – estimated residual value


Estimated useful Life

Alternatively the examiner may provide a percentage; the percentage should be


applied to the cost of the asset, given a policy of straight line depreciation.

Depreciation per annum = % x cost

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Reducing balance basis


This method of depreciation is generally used for assets that lose a greater proportion
of their value in the initial years of their life span.
A fixed percentage is charged against the carrying value on an annual basis.

Depreciation per annum = % x carrying value

Note:
Carrying value = Cost – Accumulated depreciation brought forward.

Example 3
Microspam Co purchased a building on 31 July 2011 for $150,000. The building has
an expected useful life of five years and a residual value of $20,000.

Required:
Calculate the depreciation charge for the year ended 31 December 2011 on the basis:
1. It is Microspam’s policy to depreciate on a straight-line basis with a full year’s
charge made in the year of acquisition and none in the year of disposal.
2. It is Microspam’s policy to depreciate on a straight-line basis with proportionate
depreciation in the year of purchase.

Example 4
Drisco Co purchased a motor vehicle for $25,000 on 1 October 2006.

Required:
Calculate the depreciation charges for each of the three years ended 31 December
on the basis:
1. It is Drisco’s policy to charge depreciation at 25% per annum on a reducing
balance basis, with a full years charge in the year of acquisition and none in the
year of disposal.
2. It is Drisco’s policy to charge depreciation at 25% per annum on a reducing
balance basis, with proportionate depreciation in the year of purchase.

w w w . s t ud y i nt e r a c t i v e . o r g 77
CHAPTER 6 – NON-CURRENT ASSETS

Revaluations
If the revaluation model is to be adopted, the following must be adhered to:
All assets within a given asset category (eg property) must follow the same
model.
Revaluations must be regular.
Subsequent depreciation must be based on the revalued amounts.
Gains from revaluations are not taken to the statement of profit or loss, as no
gain has been realised.
To account for a revaluation gain you must increase the asset value and create a
‘revaluation reserve’ which forms part of capital/equity.

Dr Asset cost (Statement of financial position)


Dr Accumulated depreciation (Statement of financial position)
Cr Revaluation reserve (Statement of financial position)

Example 5
Chris purchased a building at a cost of $45,000 on 1 January 1994 with a useful life
of 50 years. Chris’s policy is to depreciate buildings 2% per annum straight-line basis
with a full years charge in the year of acquisition and none in the year of disposal.
On 1 January 2009 the building had been valued by a qualified valuer, the valuation
given was $150,000. Chris would like to incorporate this valuation in the financial
statements for the year ended 31 December 2009.
Chris has stated that the useful life of the asset will remain at fifty years as of 1/1/94.
Required:
(a) Calculate the revaluation gain or loss to be shown in Chris’s financial statements
for the year to 31 December 2009.
(b) Complete the necessary journals and ledger accounts to record the revaluation.
(c) Calculate the depreciation charge for the year ended 31 December 2009.

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Accounting for a disposal


When a business disposes of an asset it is unlikely that the sale proceeds will agree
with the carrying value of the asset at the date of disposal, therefore a profit or loss
on disposal will arise.

● Step 1: Remove the cost


Dr Disposals
Cr Non-current asset cost

● Step 2: Remove the accumulated depreciation


Dr Non-current asset accumulated depreciation
Cr Disposals

● Step 3: Deal with the sale proceeds


Dr Bank (Cash proceeds)
Cr Disposals

● Alternative step 3: Part-exchange proceeds


Dr Asset cost
Cr Bank
Cr Disposals (with part-exchange allowance)

w w w . s t ud y i nt e r a c t i v e . o r g 79
CHAPTER 6 – NON-CURRENT ASSETS

Example 6
Mrs Kemp purchased a motor vehicle on 1 April 2007 costing $22,000 and depreciates
the asset 20% reducing balance basis with proportionate depreciation in the years of
purchase and disposal. Mrs Kemp sold the motor vehicle for $8,000 on 1 July 2009.
Mrs Kemp has a year-end of 31 December each year.

Required:
Show the journal entries to record the disposal and complete the disposals ledger
account.
Calculate the profit / loss arising on the disposal.

Example 7
Lesley bought a van costing $15,000 several years ago. On 1 March 2010 the van
was exchanged for the latest model.
At the date of exchange the old van’s carrying value was $3,400 and the dealership
gave a part-exchange allowance of $1,500. The new van has a list price of $18,000.

Required:
Show the journal entries to record the disposal and complete the disposals ledger
account.
Calculate the profit / loss arising on the disposal.

Example 8
On 1 January 2001 Peanut Co purchased a building for $300,000. The useful
economic life of the building was 50 years from the date of purchase.
On 1 January 2004 the building was re-valued to $500,000. The useful life of the
building was deemed to be 50 years from the date of valuation.
On 31 December 2007 the building was sold for $700,000.

Required:
Calculate the profit/loss on the disposal of the building.

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C H A P T ER 6 – N O N - C U R R EN T A S S E T S

INTANGIBLE NON-CURRENT ASSETS


In order to be classified as an intangible non-current asset as per IAS 38, intangible
assets should be:
Identifiable
Controlled by the entity
Non-monetary without physical substance
Expected to generate future economic benefits
The costs of the asset can be reliably measured.
Classes of intangible assets include:
Goodwill
Brand names
Licenses and franchises
Copyrights and patents

Internally generated intangibles


In order to remain competitive certain companies will engage in a process of research
and development in order to bring new products to market.
It is sometimes difficult to assess whether an internally generated intangible asset
qualifies for recognition, therefore the following criteria must be applied:

Research phase – no expectation of Always written off to the statement of


future economic benefits profit or loss as incurred.

Development phase – Must capitalise if 1. Technically feasible


meets six criteria and amortised once
2. Ability to use or sell
brought into production.
3. Probable that future economic
benefits to flow
4. Intention to complete
5. Resources available to complete
6. Costs can be reliably measured

Note: internally generated goodwill, brands, customer lists, and publishing titles
cannot be recognised as an intangible asset.

w w w . s t ud y i nt e r a c t i v e . o r g 81
CHAPTER 6 – NON-CURRENT ASSETS

Subsequent treatment
Intangible assets are amortised over their useful lives on a systematic basis. If it
has indefinite useful life it is reviewed for impairment instead.

Dr Amortisation expense (Statement of profit or loss)


Cr Accumulated amortisation (Statement of financial position)

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C H A P T ER 6 – N O N - C U R R EN T A S S E T S

SAMPLE EXAM QUESTIONS

1
Which of the following items should be disclosed in the notes to the financial
statements?
(1) Reconciliation of the carrying amounts of non-current assets at the beginning
and end of the period.
(2) Useful lives of assets or depreciation rates used.
(3) Increases in asset values as a result of revaluations in the period.
(4) Depreciation expense for the period.
A 1 and 2 only
B 1 and 3 only
C 2, 3 and 4 only
D 1, 2, 3 and 4
(Dec 2011 – Exam Question)

2
A company purchases a machine for $64,000. It has no residual value and an
expected useful life of eight years. It is depreciated using the straight line method
for two years when the company decides to change the depreciation method to
reducing balance at 30%.
The annual depreciation for the first year under the new method will be?
A $8,000
B $14,400
C $19,200
D $9,408

3
A company buys a machine on 31 August 2003 for $36,000. It has an expected life
of seven years and an estimated residual value of $2,400. On 30 June 2007 the
machine is disposed of for $12,000. The company’s year-end is 31 December. Its
accounting policy is to charge depreciation using the straight line method on a
proportionate basis.
Calculate the loss on disposal of the machine which will appear in the
statement of profit or loss for the year ended 31 December 2007.
A $4,286
B $4,800
C $5,600
D $9,600

w w w . s t ud y i nt e r a c t i v e . o r g 83
CHAPTER 6 – NON-CURRENT ASSETS

4
Which one of the following statements is correct with regard to intangible
assets:
A Goodwill and copyrights are always capitalised.
B Brands are never capitalised.
C Intangible assets have a finite life span.
D Amortisation is an application of the accruals concept.

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Chapter 7

Accruals and
prepayments

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

7. Accruals and prepayments


a) Understand how the matching concept applies to accruals and prepayments.
b) Identify and calculate the adjustments needed for accruals and prepayments in
preparing financial statements.
c) Illustrate the process of adjusting for accruals and prepayments in preparing
financial statements.
d) Prepare the journal entries and ledger entries for the creation of an accrual or
prepayment.
e) Understand and identify the impact on profit and net assets of accruals and
prepayments.

w w w . s t ud y i nt e r a c t i v e . o r g 85
C H A P T E R 7 – A C C R U A L S A N D P R E P A Y M EN T S

CHAPTER CONTENTS

INTRODUCTION ---------------------------------------------------------- 87

ACCRUED EXPENSES ---------------------------------------------------- 88

PREPAID EXPENSES ----------------------------------------------------- 89

ACCRUED INCOME ------------------------------------------------------- 90

DEFERRED INCOME ------------------------------------------------------ 91

SAMPLE EXAM QUESTIONS --------------------------------------------- 92

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C H A P T ER 7 – A C C R U A L S A N D P R E P A Y M EN T S

INTRODUCTION
Income and expenditure are recorded in the financial period in which cash is received
/ paid or in which an invoice is issued / received.
However, at the date the cash / invoices are recorded the bookkeeper does not
consider the financial period to which the transaction relates.
Therefore at the period end, it may be necessary to adjust the amount of income /
expenditure recorded in the statement of profit or loss so as to ensure the amounts
reported relate to the relevant financial period.

w w w . s t ud y i nt e r a c t i v e . o r g 87
C H A P T E R 7 – A C C R U A L S A N D P R E P A Y M EN T S

ACCRUED EXPENSES
An accrual is required in the event that a business has received goods or a service,
but has neither recorded an invoice or made payment in the relevant financial period.
The double entry journal to record an accrual is:

Dr Expense (Statement of profit or loss)


Cr Accruals (Statement of financial position)

Example 1
Fleetwood Designs Co incorporates on 1 February 2011. The business receives gas
bills quarterly in arrears. The company’s year end is the 31 December 2011. The
following bills were received and paid:
30 April 2011 $300
31 July 2011 $310
31 October 2011 $300
31 January 2012 $300

Required:
What is the amount for the gas expense to be shown in the statement of profit or
loss for the period ended 31 December 2011?

Example 2
Julia is a sole trader who has been in business for a number of years. At 1 March
2008 she had an accrual brought forward of $1,200 in relation to rent.
Rent is paid as follows:
7 April 2011 $1,500 (for the quarter ended 31 March 2011)
9 July 2011 $1,950 (for the quarter ended 30 June 2011)
6 October 2011 $2,250 (for the quarter ended 30 September 2011)
9 January 2012 $1,650 (for the quarter ended 31 December 2011)
9 April 2012 $1,650 (for the quarter ended 31 March 2012)

Required:
Prepare the rent ledger account showing the rent expense to be included in the
statement of profit or loss for the year ended 28 February 2012.

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C H A P T ER 7 – A C C R U A L S A N D P R E P A Y M EN T S

PREPAID EXPENSES
A prepayment arises when an expense is recorded in the accounts which relates to a
future accounting period.
The double entry journal to record a prepayment is:

Dr Prepayments (Statement of financial position)


Cr Expense (Statement of profit or loss)

Example 3
Mariah starts her business on 1 August 2011, and pays her insurance for the year to
31 July 2012 totaling $1,800. Her year-end is 31 December each year.

Required:
What is the amount for the insurance expense to be shown in the statement of profit
or loss for the year ended 31 December 2011?

Example 4
Continuing the previous example, on 1 August 2012 Mariah pays her insurance for
the year to 31 July 2013 totaling $2,200.

Required:
What is the amount for the insurance expense to be shown in the statement of profit
or loss for the year ended 31 December 2012?

w w w . s t ud y i nt e r a c t i v e . o r g 89
C H A P T E R 7 – A C C R U A L S A N D P R E P A Y M EN T S

ACCRUED INCOME
Accrued income arises when goods/services have been provided in an accounting
period, yet no income has been recorded.
The double entry journal to record accrued income is:

Dr Accrued income (Statement of financial position)


Cr Income (Statement of profit or loss)

Example 5
Jen has been sub-letting one of her properties to a tenant for many years. She
receives rent quarterly in arrears. At 30 November 2011 she had a balance of rent
in arrears of $27,600. The total amount of rent received during the year ended 30
November 2012 was $718,050. At 30 November 2012 there was still rent in arrears
of $31,800.

Required:
What is the amount of rental income to be shown in the statement of profit or loss
for the year ended 30 November 2012?

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C H A P T ER 7 – A C C R U A L S A N D P R E P A Y M EN T S

DEFERRED INCOME
Deferred income arises when income has been recorded, but the goods/service has
yet to be provided, which will take place during a future accounting period.
The double entry journal to record deferred income is:

Dr Income (Statement of profit or loss)


Cr Deferred income (Statement of financial position)

Example 6
Mandy receives rent quarterly in advance; her financial year-end is 30 April each
year. She has a balance on deferred income at 1 May 2009 of $200.
Rent is received as follows:
1 June 2009 $600 (covering the quarter ended 31 August 2009)
1 September 2009 $450 (covering the quarter ended 30 November 2009)
1 December 2009 $500 (covering the quarter ended 28 February 2010)
1 March 2010 $600 (covering the quarter ended 31 May 2010)

Required:
What is the amount of rental income to be shown in the statement of profit or loss
for the year ended 30 April 2010?

w w w . s t ud y i nt e r a c t i v e . o r g 91
C H A P T E R 7 – A C C R U A L S A N D P R E P A Y M EN T S

SAMPLE EXAM QUESTIONS

1
Joanna has prepared her draft accounts for the year ended 30 April 2008, and needs
to adjust them for the following items:
1. Rent of $10,500 was paid and recorded on the 2 January 2007 for the period 1
January to 31 December 2007. The landlord has advised that the annual rent
for 2008 will be $12,000 although it has not been invoiced or paid as yet.
2. Property and contents insurance is paid annually on 1 March. Joanna paid and
recorded $6,000 on 1 March 2008 for the year from 1 March 2008 to 28
February 2009.
What should the net effect on profit be in the draft accounts for the year
ended 30 April 2008 of adjusting for the above items?
A $1,000 decrease
B $1,500 increase
C $1,000 increase
D $1,500 decrease
(Jun 2008 – Exam Question)

2
Carlton Co has a financial year ended 30 June. The company is preparing accounts
for the year ended 30 June 2011. Carlton Co’s landlord charged rent for the year 1
April 2010 – 31 March 2011 of $1,800, but has increased the rent to $2,520 for the
following year to 31 March 2012.
The charge to Carlton Co’s statement of profit or loss for rent for the year
ended 30 June 2011 should be:
A $1,650
B $1,700
C $1,850
D $1,980

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C H A P T ER 7 – A C C R U A L S A N D P R E P A Y M EN T S

3
At 31 December 2005 the following require inclusion in the company’s financial
statements:
(1) On 1 January 2005 the company made a loan of $12,000 to an employee,
repayable on 1 January 2006, charging interest at 2% per year. On the due
date she repaid the loan and paid the whole of the interest due on the loan to
that date.
(2) The company paid annual insurance premium of $9,000 in 2005, covering the
year ending 31 August 2006.
(3) In January 2006 the company received rent from a tenant of $4,000, covering
the six months to 31 December 2005, which had not previously been invoiced.
For these items, what total figures should be included in the company’s
statement of financial position as at 31 December 2005?
A Current assets $10,000 Current liabilities $12,240
B Current assets $22,240 Current liabilities $nil
C Current assets $10,240 Current liabilities $nil
D Current assets $16,240 Current liabilities $6,000
(Dec 2011 – Pilot Paper)

w w w . s t ud y i nt e r a c t i v e . o r g 93
C H A P T E R 7 – A C C R U A L S A N D P R E P A Y M EN T S

94 ww w. stu dyi n t e ra cti v e . or g


Chapter 8

Sales tax

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

1. Sales and purchases


c) Understand the general principles of the operation of a sales tax.
d) Calculate sales tax on transactions and record the consequent accounting
entries.

w w w . s t ud y i nt e r a c t i v e . o r g 95
CHAPTER 8 – SALES TAX

CHAPTER CONTENTS

WHAT IS SALES TAX? --------------------------------------------------- 97


CALCULATING SALES TAX 97
ACCOUNTING FOR SALES TAX 98

SAMPLE EXAM QUESTIONS -------------------------------------------- 100

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C H A P T ER 8 – S A L ES T A X

WHAT IS SALES TAX?


Sales tax is a tax on the final consumer of a product, which is collected on behalf of
the tax authorities by sales tax registered businesses.
A business that is registered for sales tax charges sales tax on products/services it
sells and can recover sales tax it incurs on purchases.

Calculating sales tax


For a sales tax registered business:
Sales tax is applied at the prevailing rate;
Sales tax is added on top of the amount the business wishes to charge for its
goods or service.
Illustration:
Based on a sales tax rate of 20%, a business wishes to charge $2,000 (before sales
tax) for the sale of goods.

Gross Tax inclusive

Net $2,000 Tax exclusive

Tax Tax

Note: If a business offers a trade discount (see chapter 9) on the list price, the
discount should be deducted from the list price, before sales tax is applied.

w w w . s t ud y i nt e r a c t i v e . o r g 97
CHAPTER 8 – SALES TAX

Accounting for sales tax


A business issues a credit customer with the following sales invoice

Sales invoice:

Date Invoice No. Customer Net Sales Tax Gross


31-Dec 001 Hussain 500 75 575

Double entry to record sales invoice


Dr Trade receivables 575
Cr Sales 500
Cr Sales tax control account 75

The same business receives from a credit supplier the following purchase invoice:
Purchase invoice:
Date Invoice No. Supplier Net Sales Tax Gross
31-Dec 594 Sunil 200 30 230

Double entry to record purchase invoice


Dr Purchases 200
Dr Sales tax control account 30
Cr Trade payables 230

Based on the above two invoices, the net payment due to the government would
amount to $45.

Double entry for payment to tax authorities


Dr Sales tax control account 45
Cr Bank 45

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C H A P T ER 8 – S A L ES T A X

Example 1
A business sells goods on credit for a list price of $2,000 and gives a 5% trade
discount.
The business then purchases goods for cash from a supplier paying $1,150 inclusive
of sales tax. The business also pays $20 cash net of sales tax for stationery. The
rate of sales tax is 15%

Required:
Calculate the net sales tax payable in the sales tax control account.

w w w . s t ud y i nt e r a c t i v e . o r g 99
CHAPTER 8 – SALES TAX

SAMPLE EXAM QUESTIONS

1
The sales tax account in Salvador’s nominal ledger currently shows output tax and
input tax for the quarter at $64,515 and $38,222 respectively. A detailed review of
the account highlights the following:
A sales invoice for $4,200 inclusive of sales tax (at 20%) has not been
accounted for;
Sales tax of $1,750 on purchases has been posted to the credit of the sales tax
account.
The correct amount payable to the government should be:
A $29,093
B $24,893
C $23,493
D $22,093

2
Which of the following statements is incorrect in relation to sales tax?
A Goods and services may be exempt from sales tax.
B All businesses are subject to sales tax.
C Output tax arises on sales invoices and input tax arises on purchase invoices.
D The standard rate of sales tax will vary from country to country.

10 0 ww w. stu dyi n t e ra cti v e . or g


Chapter 9

Books of prime entry

SYLLABUS CONTENT (as set by ACCA’s study guide)

C The use of double-entry and accounting systems

1. Double-entry book-keeping principles including the


maintenance of accounting records
a) Identify and explain the function of the main data sources in an accounting
system.
b) Outline the contents and purpose of different types of business documentation,
including: quotation, sales order, purchase order, goods received note, goods
despatched note, invoice, statement, credit note, debit note, remittance advice,
receipt.

2. Ledger accounts, books of prime entry and journals


a) Identify the main types of ledger accounts and books of prime entry, and
understand their nature and function.

w w w . s t ud y i nt e r a c t i v e . o r g 10 1
CHAPTER 9 – BOOKS OF PRIME ENTRY

D Recording transactions and events

1. Sales and purchases


b) Understand and record sales and purchase returns.
e) Account for discounts allowed and discounts received.

8. Receivables and payables


j) Account for contras between trade receivables and payables.
k) Prepare, reconcile and understand the purpose of supplier statements.

E Preparing a trial balance

3. Control accounts and reconciliations


a) Understand the purpose of control accounts for accounts receivable and
accounts payable.
b) Understand how control accounts relate to the double-entry system.
c) Prepare ledger control accounts from given information.

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

CHAPTER CONTENTS

INTRODUCTION TO BOOKS OF PRIME ENTRY ----------------------- 104


SALES DAY BOOK 104
PURCHASES DAY BOOK 105
RETURNS DAY BOOKS 105
CASH RECEIPTS BOOK 109
CASH PAYMENTS BOOK 109
PETTY CASH BOOK 110
DISCOUNTS 111
CONTRAS 111

CONTROL ACCOUNTS --------------------------------------------------- 112

SAMPLE EXAM QUESTIONS -------------------------------------------- 114

w w w . s t ud y i nt e r a c t i v e . o r g 10 3
CHAPTER 9 – BOOKS OF PRIME ENTRY

INTRODUCTION TO BOOKS OF PRIME ENTRY


Business transactions are summarised in the books of prime entry for later posting
to the ledgers.
The common books of prime entry and the types of transaction recorded in them are:

Sales Day Book (SDB) Records credit sales to customers


Sales Returns Day Book (SRDB) Records the return of credit sales
Purchases Day Book (PDB) Records credit purchases from suppliers
Purchases Returns Day Book (PRDB) Records the return of credit purchases
Cash Payments Book (CPB) Records all payments made at the bank
Cash Receipts Book (CRB) Records all receipts made at the bank
Petty Cash Book Records all receipts and payments of
cash in hand
Journal Other transactions (depreciation etc)

Sales day book


Records credit sale transactions, which are later recorded to the trade receivables
ledger control account and the receivables ledger (individual customer accounts).

Date Invoice no. Customer Amount


01-Dec 1,596 Chris 287.50
02-Dec 1,597 Neil 345
05-Dec 1,598 Carly 115
07-Dec 1,599 Amy 57.50
TOTAL 805

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

Purchases day book


Records credit purchase transactions which are later recorded in the payables ledger
control account and the payables ledger (individual supplier accounts).

Date Invoice no. Supplier Amount


02-Dec 1,456 Paul 86.25
04-Dec 952 Joanne 184
05-Dec 632 Billy 57.50
06-Dec 1,1475 Ann 402.50
TOTAL 730.25

Returns day books


Sales Returns Day Book

Date Credit note Customer Amount


08-Dec 12 Chris 57.50

Purchase Returns Day Book


Date Credit note Supplier Amount
12-Dec 2500 Ann 115

w w w . s t ud y i nt e r a c t i v e . o r g 10 5
CHAPTER 9 – BOOKS OF PRIME ENTRY

Posting to the main and individual ledgers

Main Ledger
Dr Trade receivables control account Cr

Dr Trade payables control account Cr

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

Individual subsidiary ledgers

Accounts Receivable (Sales) Ledger

Dr Chris Cr Dr Neil Cr

Dr Carly Cr Dr Amy Cr

w w w . s t ud y i nt e r a c t i v e . o r g 10 7
CHAPTER 9 – BOOKS OF PRIME ENTRY

Accounts Payable (Purchase) Ledger

Dr Paul Cr Dr Joanne Cr

Dr Billy Cr Dr Ann Cr

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

Cash receipts book


This is one half of the cashbook; it records all receipts in the bank.

Bank
Cash Discount
Date Narrative Bank Receivables interest
sales Allowed
received
01-Dec Cash sales 1,000 1,000
Interest
05-Dec received 15 15
07-Dec Chris 217.50 217.50 12.50
08-Dec Neil 330 330 15
10-Dec Cash sales 1,500 1,500
TOTAL 3,062.50 547.50 2,500 15 27.50

Cash payments book


This is the other half of the cashbook; it records all payments out of the bank.

Discount
Date Narrative Bank Payables Wages Utilities
Received
01-Dec Wages 1,500 1,500
05-Dec Water rates 50 50
07-Dec Paul 80 80 6.25
08-Dec Joanne 170 170 14
10-Dec Electricity 70 70
TOTAL 1,870 250 1,500 120 20.25

w w w . s t ud y i nt e r a c t i v e . o r g 10 9
CHAPTER 9 – BOOKS OF PRIME ENTRY

Petty cash book


A separate cashbook is kept for petty cash.

Receipt Date Narrative Cash Postage Refreshments

100 01-Dec Bank


02-Dec Tea & coffee 5 5
03-Dec Stamps 10 10
04-Dec Biscuits 2 2
TOTAL 17 10 7

Imprest system
The ‘imprest system’ describes the maintenance of a fixed cash float balance.
Based on the figures per the above example and an imprest amount of $100
the following table illustrates the system.

IMPREST AMOUNT B/fwd 01.12.12 $100

02.12.12 Tea and coffee ($5)

03.12.12 Stamps ($10)

04.12.12 Biscuits ($2)

CASH BALANCE C/fwd 31.12.12 $83

The amount that would be transferred to petty cash at the start of the next month
will therefore be $17.

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

Discounts

Trade discounts
These are discounts that are pre-agreed at the point of sale. The ‘list price’ is
adjusted for the discount, and then invoiced.
No accounting adjustment is required in respect of this discount.

Early settlement discounts


Early settlement discounts relate to credit sales/purchases.

Discounts Allowed

Double entry
Dr Discounts Allowed
Cr Trade Receivables Control Account

Discounts Received

Double entry
Dr Trade Payables Control Account
Cr Discounts Received

Contras
Where another business is both a customer and a supplier the respective balances
per trade receivables and trade payables accounts may be netted off (contra) rather
than the two companies issuing one another payments.

Double entry
Dr Trade Payables Control Account
Cr Trade Receivables Control Account

w w w . s t ud y i nt e r a c t i v e . o r g 11 1
CHAPTER 9 – BOOKS OF PRIME ENTRY

CONTROL ACCOUNTS

Dr Receivables Ledger Control Account Cr


Narrative $ Narrative $
Balance b/f X Cash received X
Credit sales X Discount allowed X
Returned cheques X Sales returns X
Interest on overdue accounts X Contra with payables ledger X
Refunds given to customers X Irrecoverable debt w/off X

Balance c/f X

X X

Balance b/f X

Dr Payables Ledger Control Account Cr

Narrative $ Narrative $
Cash payments X Balance b/f X
Discount received X Credit purchases X
Purchase returns X Refunds received from suppliers X
Contra with receivables ledger X

Balance c/f X

X X

Balance b/f X

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

Example 1
Paris had the following balances on her payables / receivables for the financial year
ended 30 June 2012.
Sales made on credit $450,000
Cash sales $22,000
Credit purchases $300,000
Cash purchases $4,500
Sales returns $17,000
Purchase returns $14,000
Discounts allowed $11,000
Discounts received $12,000
Irrecoverable debts written off $2,500
Payments made to credit suppliers $263,100
Receipts from credit customers $438,580
Contra $17,500
Balance on trade payables control at 1 July 2011 $53,500
Balance on trade receivables control at 1 July 2011 $51,500
Balance on allowance for receivables at 1 July 2011 $3,400
The allowance for receivables is to be maintained @ 1.5% of the remaining
receivables balance.

Required:
Prepare the receivables and payables control accounts for the year ended 30 June
2012.

w w w . s t ud y i nt e r a c t i v e . o r g 11 3
CHAPTER 9 – BOOKS OF PRIME ENTRY

SAMPLE EXAM QUESTIONS

1
Luis sold goods to Pedro in May 2009 with a list price of $98,000. Luis allowed a
trade discount of 10%. Pedro returned goods with a list price of $3,000 on 31 May
and returned a further $5,000 of goods at list price on 6 June as they were found to
be unsuitable.
How much should Luis record in the sales returns account on 31 May?
A $2,700
B $3,000
C $8,000
D $7,200
(June 2009 – Exam Question)

2
Charles entered into the following transactions:
1. He sold goods on credit to Cody with a list price of $3,200. He allows a 10%
trade discount and a further 2% discount for payment within seven days. Cody
paid within two days.
2. He made a credit sale to Mary allowing a 5% trade discount on the list price of
$640.
3. He purchased goods for $600 and paid $590, receiving a discount for immediate
cash payment.
How much discount should be recorded in the Discount Allowed account as
a result of the above transactions?
A $57.60
B $10.00
C $352.00
D $409.60
(June 2008 – Exam Question)

3
Fred sells goods on credit to Keira for $2,400. $50 of these goods are defective and
Keira returns them to Fred.
What document would Keira issue to Fred?
A Invoice
B A request for a credit note
C Credit note
D A request for an invoice

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C H A P T ER 9 – B O O K S O F P R I M E E N T R Y

4
Simran uses the imprest method of accounting for petty cash. She counted the petty
cash and there was $66 in hand.
There were also the following petty cash vouchers:
$
Sundry purchases 22
Loan to sales manager 10
Purchas of staff drinks 19
Sundry sales receipts 47
What is Simran’s imprest amount?
A $164
B $50
C $62
D $70
(Dec 2009 – Exam Question)

5
The following information relates to Artex Co’s year ended 31 December 2011.
$
Cash received from credit customers 22,490
Contra with supplier 910
Increase in allowance for receivables 600
Trade receivables at 01.01.11 7,290
Trade receivables at 31.12.11 7,870
Discounts allowed 520
Discounts received 610
What figure for sales should be recorded in Artex Co’s statement of profit or
loss for the year ended 31 December 2011?
A $23,340
B $24,500
C $24,590
D $25,100

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CHAPTER 9 – BOOKS OF PRIME ENTRY

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Chapter 10

Control account
reconciliations

SYLLABUS CONTENT (as set by ACCA’s study guide)

E Preparing a trial balance

3. Control accounts and reconciliations


d) Perform control account reconciliations for accounts receivable and accounts
payable.
e) Identify errors which would be highlighted by performing a control account
reconciliation.
f) Identify and correct errors in control accounts and ledger accounts.

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C H A P T ER 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

CHAPTER CONTENTS

INTRODUCTION --------------------------------------------------------- 119

EXAMPLES --------------------------------------------------------------- 120

SAMPLE EXAM QUESTIONS -------------------------------------------- 122

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C H A P T E R 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

INTRODUCTION
At any one point in time, the balance per the trade receivables/payables control
account should agree to the sum total of the balances per the individual
customer/supplier ledger accounts.
If there is an imbalance then it must be investigated.
The main reasons as to why the balance per the control account would not agree to
the balance per the individual ledgers include:
Casting (addition) error in a book of prime entry (day book).
Posting errors.
A one sided contra.
An entry has been made in the control or individual account, but no reciprocal
entry made.

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C H A P T ER 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

EXAMPLES

Example 1
At the financial year-end 31 December 2007 Explorer Rain Wear had a balance on
the payables control account of $22,550. The balance on their payables ledger was
$20,650. The accountant found the following discrepancies:
1. An invoice of $1,200 had been omitted from the control account.
2. The purchase day book total was overstated by $1,000.
3. Goods returned of $1,590 had not been recorded in the control account.
4. Discounts received of $10 had not been posted in the control account.
5. Contra entries of $500 need to be recorded in the control account.
Required:
After adjusting for these errors, what is the adjusted control account balance and
adjusted list of balances?

Example 2
Benji has a debit balance of $72,266 on the trade receivables control account, which
does not agree with the list of receivables balances figure of $70,659. The accountant
found the following discrepancies:
1. A contra of $7,296 with the trade payables control account was entered on the
wrong side of the trade receivables control account.
2. The sales day book was overcast by $2,500.
3. Discounts allowed totaling $36,015 have been omitted from the control
account.
4. A debt of $3,000 needs to written off and an allowance for receivables needs to
be adjusted to 2% of the remaining receivables balance.
5. A cash receipt for $20,000 has been omitted from the individual customers
account.
6. A customer invoice of $3,500 was entered into the individuals ledger account
as $35,000.

Required:
Reconcile the control account to the list of receivables balances.

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C H A P T E R 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

Example 3 – Supplier statement reconciliation


Motor (UK) Co receives a supplier statement from Tyres Co. The balance on Tyres’s
account in the books of Motor (UK) Co shows an amount outstanding of $118,000.
However, according to the supplier statement it shows an amount outstanding of
$138,000.
The accountant has investigated into the difference and has found the following
issues:
1. Goods returned to the supplier worth $15,000 have not been reflected in the
supplier statement.
2. Discounts of $500 have been disallowed by Tyres Co.
3. Tyres Co has made an agreed contra entry of $5,000 with the amounts owed
by Motor (UK) Co. Motor (UK) Co has not recorded this entry in its books.
4. A payment made to Tyres Co of $9,500 has not been reflected in the supplier
statement.

Required:
What is the correct amount owed to Tyres Co after adjusting for the above issues?

Example 4
Michael’s receivables ledger control account does not agree with the list of receivables
balances.
Upon investigation Michael discovered the following errors:
1. The sales returns day book was under cast by $4,000.
2. A credit note has been entered into the sales returns day book as $530 instead
of $350.
3. An irrecoverable debt has only been written off in the individual customer
account.
4. A contra entry has only been entered into the control account.
5. The total of the discounts allowed column in the cash receipts book has been
overcast by $250.
6. The total of the receivables column in the cash receipts book has been entered
into the wrong side of the control account.

Required:
Which of the above errors would cause a difference between the control account
balance and the total of the list of receivables balances?

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C H A P T ER 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

SAMPLE EXAM QUESTIONS

1
Abigail’s receivables ledger control account does not agree with the total of the
receivables ledger balances. She discovers the following errors:
(1) The receivables column of the cash received daybook has been under-cast by
$300.
(2) A contra of $150 against the purchase ledger has only been entered in the
control account.
(3) A sales invoice of $454 has been entered into the sales daybook as $544.
Which of the above errors would cause a difference between the receivables
control account and the total of the receivables ledger?
A 2 and 3 only
B 1 and 3 only
C 1 and 2 only
D 1, 2 and 3 only
(June 2011 – Exam Question)

2
Steven’s receivables ledger control account does not agree with the total of the
receivables ledger. He discovered the following errors:
(1) A sales invoice has been entered into the sales day book as $895 rather than
$859.
(2) The receivables column of the cash received day book has been under-cast by
$600.
(3) A contra of $400 against the purchase ledger has only been entered in the
control account.
Which of the above errors would cause a difference between the receivables
control account and the total of the receivables ledger?
A 2 and 3 only
B 1 and 3 only
C 1 and 2 only
D 1, 2 and 3
(June 2009 – Exam Question)

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C H A P T E R 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

3
Which of the following errors should be identified by performing a
receivables control account reconciliation?
A A sales invoice of $500 has been omitted from the sales daybook.
B A sales return of $45 was entered as $54 in the sales returns daybook.
C Purchases of $72 were entered as sales returns in the sales returns daybook
and the individual account.
D The total of the sales daybook was miscast by $200.
(Dec 2008 – Exam Question)

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C H A P T ER 1 0 – C O N T R O L A C C O U N T R EC O N C IL I A T IO N S

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Chapter 11

Correction of errors
and suspense accounts

SYLLABUS CONTENT (as set by ACCA’s study guide)

E Preparing a trial balance

1. Trial balance
d) Identify and understand the limitations of a trial balance.

2. Correction of errors
a) Identify the types of error which may occur in book-keeping systems.
b) Identify errors which would be highlighted by the extraction of a trial balance.
c) Prepare journal entries to correct errors.
d) Calculate and understand the impact of errors on the income statement,
statement of comprehensive income and statement of financial position.

5. Suspense accounts
a) Understand the purpose of a suspense account.
b) Identify errors leading to the creation of a suspense account.
c) Record entries in a suspense account.
d) Make journal entries to clear a suspense account.

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

CHAPTER CONTENTS

TYPES OF ERROR ------------------------------------------------------- 127

CORRECTING ERRORS -------------------------------------------------- 128

SUSPENSE ACCOUNTS -------------------------------------------------- 129

ADJUSTMENTS TO PROFIT --------------------------------------------- 131

SAMPLE EXAM QUESTIONS -------------------------------------------- 132

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

TYPES OF ERROR
In Chapter 3 a trial balance was produced based on the ledger accounts created
during the financial period. The trial balance acts as a check ensuring that total debits
recorded in the accounts equal the total credits recorded.
There are a number of errors to be aware of that do not create an imbalance, and
would therefore not be detected when preparing a trial balance. They are as follows:
1. Omission of entire transaction

A transaction has not been recorded at all.

2. Commission

An item is entered to the correct side of the wrong account. Eg a rent invoice
is debited to light & heat in the SPL instead of rent expense.

3. Principle

An item is posted to the correct side of the wrong type of account. Eg a repairs
invoice is debited to computer equipment in the SFP rather than repairs and
maintenance expense in the SPL.

4. Reversal

The amounts recorded are correct, the accounts are correct, however the debits
and credits have been reversed.

5. Original entry

An incorrect amount is recorded, albeit to the correct ledger accounts. Eg Rent


paid for $1,000 is recorded as Dr Rent $100 Cr Bank $100.

6. Compensating error

Two unrelated errors of equal and opposite effect, such that total debits
recorded equal total credits recorded.

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

CORRECTING ERRORS
When correcting errors through a full double entry journal it is useful to consider the
following steps:

Step 1 – What did happen?

Step 2 – What should have happened?

Step 3 – What correction is required?

Example 1
The following errors were discovered:
1. A purchase of stationery for $500 cash has not been recorded in the ledger
accounts.
2. Computer repairs worth $400 were posted on the debit side of the computer
equipment account.
3. Commission received of $60 was posted to the credit side of the discount
received account.
4. Cash paid of $5,500 for property maintenance has been entered into the
property maintenance account and cash account as $550.
5. A contra between the receivables control account and the payables control
account of $1,000 has been posted to both accounts on the wrong side.

Required:
Prepare the journal entries to correct each error as well as describing the type of
error in each instance.

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

SUSPENSE ACCOUNTS
If there is an imbalance of the trial balance a temporary ledger account known as the
suspense account will be opened to force the trial balance to balance:

Account name DR $ CR $ Account name DR $ CR $

Bank 71,675 Bank 71,675

Capital 65,000 Capital 65,000

Purchases 18,000 Purchases 18,000

Trade Trade
payables 14,000 payables 14,000

Sales 26,000 Sales 26,000

Insurance 75 Insurance 75

Trade Trade
receivables 12,000 receivables 12,000

Computer 3,000 Computer 3,000


equipment equipment

Rent 150 Rent 150

Petty cash 70 Petty cash 70

Suspense 30

Total 104,970 105,000 Total 105,000 105,000

Errors that would cause a trial balance not to balance:


1. Casting (addition) error within a general ledger account

2. One-sided posting errors

3. Trial balance errors

4. Single entry

5. Transposition errors (on one side).

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

Example 2
After investigation into the imbalance of the trial balance (above) it was discovered
that stationery purchased for $30 was credited to the bank account but no other
entry had been made.

Required:
Record the journal entry to correct this error and clear the suspense account.

Example 3
Shayla has prepared her trial balance for the year ended 31 May 2010 that does not
balance. A suspense account was opened for the difference of $3,162 credit.
On further investigation the following issues were discovered:
1. A payment for stationery for cash of $440 was debited to the stationery account
as $780.
2. Discounts given to credit customers as a reward for early payment of $1,310
have been recorded on the wrong side of the discounts allowed ledger account.
3. Rental income of $3,742 has only been recorded in the bank ledger account.
4. Shayla made cash drawings of $400 in the year; this has been recorded on the
credit side of the purchases account but correctly posted to the cash account.
5. A contra made between the trade payables and trade receivables control
accounts of $1,250 has been debited to both accounts.

Required:
Prepare the journals to correct these issues and enter any relevant entries into the
suspense account to clear it.

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

ADJUSTMENTS TO PROFIT
To correct an error you posted a double entry journal as seen in the last example.
These journal debits and credits may result in a change in profit for the year,
depending on whether the journal effects a statement of profit or loss.

Dr SFP account No impact on profit for the


Cr SFP account year

Dr SPL account No impact on profit for the


Cr SPL account year

Dr SPL account Profit for the year will


Cr SFP account decrease

Dr SFP account Profit for the year will


Cr SPL account increase

Example 4
Continuing with the previous example, Shayla’s draft profit for the year ended 31
May 2010 prior to the posting of the journal corrections was $198,938.

Required:
Calculate the revised profit figure.

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

SAMPLE EXAM QUESTIONS

1
Samantha has extracted a trial balance and created a suspense account with a credit
balance of $759 to make it balance.
Samantha found the following:
1. A sales invoice for $4,569 has not been entered in the accounting records.
2. A payment of $1,512 has been posted correctly to the payables control account
but no other entry has been made.
3. A credit sale of $131 has only been credited to the sales account.
What is the remaining balance on the suspense account after these errors
have been corrected?
A $3,810 debit
B $2,140 credit
C $890 credit
D $622 debit
(Dec 2007 – Exam Question)

2
Pelle has a balance on his suspense account of $1,820 credit.
He discovered the following errors:
1. Sundry income of $1,750 has been recorded in the sundry income account of
$1,570.
2. Sales of $2,800 from the sales day book have been posted to the receivables
control account, but no other entry has been made.
3. The purchases daybook was under-cast by $950.
What is the balance on the suspense account after Pelle has corrected the
above errors?
A $4,800 CR
B $1,160 DR
C $210 DR
D $3,850 DR
(June 2011 – Exam Question)

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

3
Pam’s trial balance did not balance so she opened a suspense account with a balance
of $2,770 credit. When investigating the difference, she discovered the following
errors:
1. The sales day book was under-cast by $950.
2. A loss on disposal of a non-current asset of $5,600 has been recorded in the
sundry expense account as $6,500.
3. One page of transactions from the purchases day book with a total of $1,150
has been posted to the payables control account, but no other entry has been
made.
What is the balance on the suspense account after Pam has corrected the
above errors?
A $2,070
B $3,020
C $2,520
D $2,770
(Dec 2009 – Exam Question)

4
Which one of the following errors would lead to the creation of a suspense
account?
A Sales returns were credited to the purchase returns account and debited to
receivables
B The total of the sales daybook has been added incorrectly before being posted
to the ledger accounts.
C Discounts allowed have been dealt with correctly in the receivables account,
but debited to the purchases account.
D Purchases from the purchases daybook have been credited to sales and dealt
with correctly in the payables control account.
(June 2011 – Exam Question)

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C H A P T E R 1 1 – C O R R E C T I O N O F ER R O R S A N D S U S P EN S E A C C O U N T S

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Chapter 12

Bank reconciliations

SYLLABUS CONTENT (as set by ACCA’s study guide)

E Preparing a trial balance

4. Bank reconciliations
a) Understand the purpose of bank reconciliations.
b) Identify the main reasons for differences between the cash book and the bank
statement.
c) Correct cash book errors and/or omissions.
d) Prepare bank reconciliation statements.
e) Derive bank statement and cash book balances from given information.
f) Identify the bank balance to be reported in the final accounts.

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C H A P T E R 1 2 – B A N K R E C O N C IL IA T IO N S

CHAPTER CONTENTS

INTRODUCTION --------------------------------------------------------- 137

THE BANK’S PERSPECTIVE--------------------------------------------- 138

BANK RECONCILIATION ----------------------------------------------- 139


PROFORMA BANK RECONCILIATION 139

SAMPLE EXAM QUESTIONS -------------------------------------------- 142

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C H A P T ER 1 2 – B A N K R EC O N C IL IA T IO N S

INTRODUCTION
As at the company’s year-end (or month end in the case of management accounts)
the balance per the company’s bank statement must be agreed to the balance
showing in the financial statements.
In the event that the two do not agree, a reconciliation must be performed so as to
identify and explain any timing differences, as well as correcting any errors!
Advantages of preparing a bank reconciliation include:
Ensures that the cashbook is complete, entries have been accurately recorded
and are valid business transactions.
Performing regular bank reconciliations which are independently reviewed
reduces the risk of fraud within a business.

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C H A P T E R 1 2 – B A N K R E C O N C IL IA T IO N S

THE BANK’S PERSPECTIVE


The following illustration demonstrates the double entry within the bank’s own
accounts to record the receipt of $1,000 from a customer.

DR CR
Big Bank Co
Statement of Financial Position

CURRENT ASSETS
Cash deposits $1,000

CURRENT LIABILITIES
Customer deposit A/C $1,000

Therefore when a bank issues a statement to a customer, the information is


presented from its perspective, a CREDIT balance (as above) denotes that the bank
has a liability to its customer.
Within the customers own accounts, the introduction of cash into the business would
be recorded as follows:

DR CR
A Sole Trader Business
Statement of Financial Position

CURRENT ASSETS
Bank $1,000

CAPITAL
Capital introduced $1,000

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C H A P T ER 1 2 – B A N K R EC O N C IL IA T IO N S

BANK RECONCILIATION

$
Balance per bank statement (E.g. @ 31.12.11) X

Less: Un-presented cheques (X)

Add: Outstanding lodgements X

Balance per accounts (E.g. @ 31.12.11) X


Note: If the balance per the bank statement is overdrawn, then place brackets
surrounding the bank statement balance per the above working!

Timing differences
Un-presented cheques – once a cheque has been written out it is immediately
recorded in the accounting records, however it will not appear on the bank
statement until the cheque has cleared.
Outstanding lodgements – when the business receives cash and/or cheques it
will record the receipt in the accounting records. Once banked the
cash/cheques may still take a few days to clear, before appearing on a
statement.
Note: timing differences are not errors and do not require any adjustments to be
made to the bank ledger account.

Errors/omissions
Any errors/omissions will need to be adjusted for in the cash-book. Typically this will
include bank charges, direct debits, BACS payments, standing orders, miscellaneous
receipts and erroneous entries in the cashbook itself.
If in an exam question, the bank has made an error, then the statement balance
used as part of the reconciliation should be adjusted!

Reconciliation process
1. Tick off items per the bank statement that agree to entries per the cashbook
for the relevant financial period.
2. Summarise all timing differences and present using the reconciliation format as
described above.
3. Adjust for any errors in the cashbook and/or on the bank statement.

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C H A P T E R 1 2 – B A N K R E C O N C IL IA T IO N S

Example 1
Mary Kay has prepared her cashbook for the month of April 2010:
Dr Cash Book Cr
Date Narrative $ Date Narrative $
1 April Balance b/f 14,500 1 April Cheque 1437 450
3 April Cheque 345 3,650 1 April Cheque 1438 600
5 April Cheque 95464 1,200 1 April Cheque 1439 750
12 April Cheque 741 1,100 1 April Cheque 1440 150
29 April Cheque 6532 3,000 12 April Cheque 1441 250
12 April Cheque 1442 350
27 April Cheque 1443 395
27 April Cheque 1444 165
27 April Cheque 1445 245
30 April Balance c/f 20,095

23,450 23,450

1 May Balance b/f 20,095


Mary Kay received her bank statement on 01 May 2010:

High Street Bank Plc


54 The Bank,
London,
LL3 9WR
To: Mary Kay Account No. 34563244 30 April 2010

STATEMENT OF ACCOUNT
Date Details Paid out Paid in Balance
2010 $ $ $
1 April Opening balance 14,500 C
4 April 1437 450 14,050 C
5 April 1438 600 13,450 C
8 April 345 3,650 17,100 C
10 April 95464 1,200 18,300 C
11 April Standing order - L.S.F 750 17,550 C
12 April 1439 750 16,800 C
14 April Direct debit - D Gravity 750 16,050 C
17 April 1441 250 15,800 C
18 April BACS transfer 3,500 19,300 C
20 April 1442 350 18,950 C
20 April 741 1,100 20,050 C
24 April Bank charges 500 19,550 C

D = Debit C = Credit
Required:
Prepare for Mary Kay a bank reconciliation for the month of April and update the cash book
as necessary.

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Example 2
You have been asked to prepare a bank reconciliation as at 30 November 2009 for
Rose. The bank ledger account has a credit balance of $2,400 and the bank
statement at that date has an overdrawn balance of $1,550.
Upon investigation you find the following discrepancies:
1. A cheque issued by Rose has been entered into the cash book twice for $459.
2. A direct debit of $225 has been taken from the account and not been entered
into the cash book.
3. There are un-presented cheques totaling $5,840.
4. There are outstanding lodgements of $8,390.
5. A cheque receipt for $1,450 has been dishonoured by the bank.
6. Bank charges of $1,400 have been charged by the bank.
7. A BACS transfer of $6,196 has been received by the bank and not been
accounted for in the cash book.
8. She has entered cheque payment number 100600 into the cash book as $1,680,
when the correct amount is $1,860.

Required:
Prepare a bank reconciliation based on the above information as well as making any
necessary corrections to the bank ledger account.

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C H A P T E R 1 2 – B A N K R E C O N C IL IA T IO N S

SAMPLE EXAM QUESTIONS

1
Hudson Co’s bank statement shows a balance of $825 overdrawn.
The bank statement includes bank charges of $50, which have not been entered into
the cash book. There are un-presented cheques totalling $475 and deposits not yet
credited of $600. The bank statement incorrectly shows a direct debit of $160, which
belongs to another customer.
What figure for the bank balance should be shown in the statement of
financial position?
A $840 overdrawn.
B $790 overdrawn.
C $590 overdrawn
D $540 overdrawn

2
A company is preparing its accounts for the year ended 30 September 2011.
The cashbook balance as at the 30 September 2011 stands at $650 overdrawn. Un-
presented cheques at that date totalled $460, as well as outstanding lodgements of
$310.
Based on the above information, what should be the balance per the year
end bank statement as at 30 September 2011?
A $500 overdrawn
B $800 credit
C $500 credit
D $800 overdrawn

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C H A P T ER 1 2 – B A N K R EC O N C IL IA T IO N S

3
PMK Co are preparing their accounts for the year ended 31 March 2011. After having
ticked their cashbook to the bank statements the following omissions were
discovered:
(1) A standing order of $12 per month to a trade magazine had not been accounted
for, PMK have been subscribers throughout their financial year.
(2) A miscellaneous receipt has appeared on the bank statement for $400.
(3) A cheque payment for $110 has been dishonoured since the cheque had been
spoiled.
The balance per the cashbook at 31 March 2011, prior to accounting for the above
omissions stands at $700 (credit balance).
The balance per the cashbook after accounting for the above omissions
should be:
A $1,066 debit
B $334 credit
C $202 credit
D $1,002 credit

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C H A P T E R 1 2 – B A N K R E C O N C IL IA T IO N S

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Chapter 13

Incomplete records

SYLLABUS CONTENT (as set by ACCA’s study guide)

F Preparing basic financial statements

6. Incomplete records
a) Understand and apply techniques used in incomplete record situations:
i) Use of accounting equation
ii) Use of ledger accounts to calculate missing figures
iii) Use of cash and/or bank summaries
iv) Use of profit percentages to calculate missing figures

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CHAPTER 13 – INCOMPLETE RECORDS

CHAPTER CONTENTS

INTRODUCTION --------------------------------------------------------- 147

ACCOUNTING EQUATION ---------------------------------------------- 148

USING LEDGER ACCOUNTS -------------------------------------------- 149

PROFIT PERCENTAGES ------------------------------------------------- 151

COST OF LOST INVENTORY -------------------------------------------- 153

SAMPLE EXAM QUESTIONS -------------------------------------------- 154

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C H A P T ER 1 3 – I N C O M P L E T E R EC O R D S

INTRODUCTION
Incomplete records form an important area of the syllabus, since the ability to solve
such questions relies upon a thorough understanding of the double entry.
Exam questions will require students to ascertain a missing balance; such questions
will require students to use one of three techniques:
Accounting equation;
Ledger accounts;
Profit percentages.

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CHAPTER 13 – INCOMPLETE RECORDS

ACCOUNTING EQUATION
We saw in session 2 how the accounting equation is used to help us construct the
statement of financial position:

ASSETS = CAPITAL + LIABILITIES

Incomplete records questions will often ask students to calculate a figure contained
within owner’s capital.
Therefore, it is necessary to rearrange the accounting equation as follows:

ASSETS – LIABILITIES = CAPITAL

Assets minus liabilities are referred to as net assets:

Net Assets = Capital + Profit - Drawings


Or
Change in Net Assets = Capital Introduced + Profit – Drawings

Example 1
Mr Fraser’s statement of financial position at 31 December 2008 shows that the
business has net assets of $5,000. The statement of financial position at 31
December 2009 shows that the business has net assets of $8,000.
Mr Fraser’s drawings for the year amounted to $2,500 and he didn’t introduce any
further capital in the year.

Required:
Calculate the profit for the year ended 31 December 2009.

Example 2
Mrs Tang made a profit for the year of $50,000 and has closing net assets of
$250,000. During the year ended 31 March 2010 capital of $40,000 was introduced
in cash and drawings of $2,000 were taken out in cash each month.

Required:
Calculate the opening balance of net assets for Mrs Tang.

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C H A P T ER 1 3 – I N C O M P L E T E R EC O R D S

USING LEDGER ACCOUNTS


Another technique we can use is preparing ledger accounts to find missing figures
such as:

Ledger Account Possible Missing Figures

● Credit sales
Trade Receivables Control Account ● Money received from
credit customers

● Credit purchases
Trade Payables Control Account ● Money paid to credit
suppliers

● Money stolen
Cash at Bank
● Drawings

● Money stolen
Cash in Hand
● Drawings

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CHAPTER 13 – INCOMPLETE RECORDS

Example 3
Suppose that the opening balance on the trade receivables control account was
$30,000, there have been total receipts from customers of $55,000 of which $15,000
relates to cash sales and $40,000 relates to receipts from credit customers.
Discounts allowed in the year totalled $3,000 and the closing balance on the trade
receivables control account was $37,000.
Required:
What are the total sales for the year?

Example 4
The opening balance on the trade payables control account was $30,000. Payments
made to credit suppliers during the year were $33,000, discounts received are $4,000
and the closing balance on the trade payables control account was $26,000.

Required:
What was the credit purchases figure for the year?

Example 5
On 1 January 2009 the bank is overdrawn by $1,367, payments in the year totalled
$8,536 and on 31 December 2009 the closing balance was a credit balance at the
bank of $2,227.

Required:
What is the total receipts figure for the year?

Example 6
Scott has a cash float at the beginning of the year of $900. During the year cash of
$10,000 was banked, $1,000 was paid out for drawings and wages of $2,000 was
paid.
Scott decided to increase the float to $1,000 at the end of the year.

Required:
How much cash was received from customers during the year?

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C H A P T ER 1 3 – I N C O M P L E T E R EC O R D S

PROFIT PERCENTAGES
Although profit percentages may not form an examination question in their own right,
they may feature as part of questions stretching right across the syllabus. It is
therefore very important that students are comfortable with their application.

25% Mark Up 20% Margin

Sales 125% 100%

Cost of sales 100% 80%

Profit 25% 20%

Example 7 (Mark-Up)

60% 20% 15%

Sales 960

COS 600

Profit 105

Required:
Calculate the missing balances based on a ‘Mark-Up’.

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CHAPTER 13 – INCOMPLETE RECORDS

Example 8 (Margin)

10% 30% 25%

Sales 800

COS 630

Profit 80

Required:
Calculate the missing balances based on a ‘Margin’.

Example 9
Mark-up 10%
Sales $6,600
Opening inventory $300
Closing inventory $500

Required:
Complete a trading account from the above information.

Example 10
Margin 5%
Purchases $2,840
Opening inventory $800
Closing inventory $600

Required:
Complete a trading account from the above information.

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C H A P T ER 1 3 – I N C O M P L E T E R EC O R D S

COST OF LOST INVENTORY


With incomplete record questions, it is likely that inventory has been lost/destroyed
due to the infamous fire, theft or flood.
Closing inventory is subtracted within cost of sales because by definition, the
inventory has not been sold in the year.
Lost/destroyed inventory has also not been sold in the year and therefore also needs
subtracting within cost of sales.
Therefore, to work out the cost of lost/destroyed inventory, complete the trading
account from the information provided and simply leave a line for a deduction
regarding lost/destroyed inventory which will be the balancing figure.

Example 11
Margin 20%
Sales $100,000
Opening inventory $10,000
Closing inventory (after fire) $3,000
Purchases $82,000

Required:
Calculate the value of the inventory lost in the fire.

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CHAPTER 13 – INCOMPLETE RECORDS

SAMPLE EXAM QUESTIONS

1
In the year ended 31 December 2008 Vulcan Co, a retailer, had sales totalling
$4,200,000. The mark-up was 25% of cost. Inventories at 1 January 2008 had a
cost of $600,000 and at 31 December 2008 $680,000.
What was the total of the company’s purchases during the year ended 31
December 2008?
A $3,280,000
B $3,360,000
C $3,440,000
D $3,830,000

2
A sole trader introduced $100,000 of capital into his business during the year. He
took drawings of $35,000 and ended the year with closing net assets of $550,000.
At the start of the year he had opening net assets of $275,000
What was his profit for the year?
A $210,000
B $340,000
C $140,000
D $310,000

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Chapter 14

Limited company
accounts

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

10. Capital structure and finance costs


a) Understand the capital structure of a limited liability company including:
i) Ordinary shares
ii) Preference shares (redeemable and irredeemable)
iii) Loan notes
b) Record movements in the share capital and share premium accounts.
c) Identify and record the other reserves which may appear in the company
statement of financial position.
d) Define a bonus (capitalisation) issue and its advantages and disadvantages.
e) Define a rights issue and its advantages and disadvantages.
f) Record and show the effects of a bonus (capitalisation) issue in the statement
of financial position.
g) Record and show the effects of a rights issue in the statement of financial
position.

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

h) Record dividends in ledger accounts and the financial statements.


i) Calculate and record finance costs in ledger accounts and the financial
statements.
j) Identify the components of the statement of changes in equity.

F Preparing basic financial statements

1. Statements of financial position


b) Understand the nature of reserves.
c) Identify and report reserves in a company statement of financial position.
e) Understand why the heading retained earnings appears in a company statement
of financial position.

2. Statement of profit or loss and statement of other


comprehensive income
e) Record income tax in the statement of profit or loss of a company including the
under and over provision of tax in the prior year.

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

CHAPTER CONTENTS

LIMITED LIABILITY COMPANY ---------------------------------------- 158


LIMITED COMPANY FINANCIAL STATEMENTS 158

CAPITAL STRUCTURE --------------------------------------------------- 160


BONUS ISSUES 161
RIGHTS ISSUES 162

STATEMENT OF CHANGES IN EQUITY (SOCIE) ---------------------- 163

LOAN STOCK ------------------------------------------------------------ 164

TAXATION --------------------------------------------------------------- 165

PREPARATION OF LIMITED COMPANY FINANCIAL STATEMENTS - 166

SAMPLE EXAM QUESTIONS -------------------------------------------- 168

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

LIMITED LIABILITY COMPANY


This type of business is owned by shareholders and run by a board of appointed
directors. A company is a legal entity in its own right, and therefore the shareholders
only have limited liability for any business debts.

Limited company financial statements


The format of a limited company’s financial statements is slightly different to that of
a sole trader / partnership, but the principles are still the same. IAS 1 lays out the
proforma financial statements

Statement of profit or loss and other comprehensive income

Julius Co Statement of Profit or Loss for the year ended 31 December 2012
$000
Revenue 385,000
Cost of sales (188,000)
Gross profit 197,000
Other income 2,000
Distribution costs (38,500)
Administration expenses (37,700)
Profit before interest and tax 122,800
Finance costs (8,000)
Profit before tax 114,800
Income tax expense (53,000)
Profit for the year 61,800

Other comprehensive income:


Gains on property revaluations 38,000
Total comprehensive income for the year 99,800

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

Statement of financial position

Julius Co Statement of Financial Position as at 31 December 2012


$000 $000
Non-current assets

Property plant and equipment 200,000


Intangible assets 187,999
387,999
Current assets

Inventory 88,432
Trade receivables 97,455
Bank 13,400
199,287

Total assets 587,286

Equity and liabilities

Equity

Share capital 50,000


Share premium 50,000
Revaluation reserve 38,000
Retained earnings 220,497
358,497

Non-current liabilities

8% loan note 75,000


Redeemable preference shares 25,000
100,000

Current liabilities

Trade payables 77,789


Taxation 51,000
128,789

Total equity and liabilities 587,286

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

CAPITAL STRUCTURE
The main difference between sole trader/partnership and limited company financial
statements is the way owner’s capital is structured.
There are some key terms which require consideration.

Issued share capital


This is the nominal (par) value of shares issued to shareholders. Shares can be
issued at a price equal to or greater than the nominal (par) value.
The value of any shares issued over and above their par value is reflected in the
share premium account.

Ordinary and preference shares

Ordinary share capital Preference share capital


● Standard shares with no ● Preferred shares that usually
special rights or restrictions. carry no voting rights.
● Receive discretionary ● A ‘fixed’ dividend is paid (%
dividend determined by the of share par value) in priority
company’s directors. to ordinary shares.

Redeemable Irredeemable

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

Example 1
Big Boss Co issues 150,000 25c ordinary shares at par value.

Required:
Show the double entry journal to record the share issue.

Example 2
Big Boss Co issues a further 50,000 ordinary shares at $1.25 per share.

Required:
Show the double entry journal to record the share issue.

Example 3
Big Boss Co now issues 25,000 6% 2014 preference shares for 25c each. Big Boss
Co also decides to pay a dividend of 5c per share to ordinary shareholders.

Required:
(a) Show the journal entry to record the share issue.
(b) Calculate how much dividend will be payable at the year end and the journal
entries.

Bonus issues
A bonus issue is the issue of new shares to existing shareholders in the same
proportion as their existing holding (eg a 1 for 4 bonus issue).
Key is the fact that these shares are issued for free and no cash is received.
A bonus issue can be used by a company to restructure its equity and reserves.

Example 4
Banana Bread Co has issued ordinary share capital of 50,000 shares with a par value
of 50c each. Banana Bread Co has an opening balance on its share premium account
of $50,000.
On 1 January 2012 the company makes a 1 for 2 bonus issue to its existing
shareholders funded from the share premium account.

Required:
Show the double entry journal to account for the issue.

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

Rights issues
A rights issue is the issue of new shares to existing shareholders in the same
proportion to their existing holding at a price equal to or above its par value (usually
at a discount compared to its market value).
A rights issue may be used by a company to raise cash for the business.

Example 5
Continuing with the previous example, on 1 May 2012 Banana Bread Co made a 1
for 3 rights issue to existing shareholders for $1.50 per share when shares were
trading at $1.75 per share. The issue was fully subscribed.
On 31 December 2012 (Banana Bread Co’s year end) the directors decided to pay a
dividend of 5 cents per share to all ordinary shareholders.
Note: The opening balance on Banana Bread’s retained earnings was $100,000 and
profit for the year was $15,000.

Required:
(a) Show the double entry journal to account for the rights issue.
(b) Show the double entry for the dividend payment.

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

STATEMENT OF CHANGES IN EQUITY


As per IAS 1 a complete set of financial statements for the a limited company are
made up not only of the statement of financial position and statement of profit or
loss but also the statement of cash flow (Chapter 16) and the statement of changes
in equity.
A statement of changes in equity is a reconciliation of the movements between the
company’s opening and closing balances per its share capital and reserves.

Julius Co Statement of Changes in Equity for the year ended 31 December


2012

Share Share Revaluation Retained


capital premium reserve earnings Total
$000 $000 $000 $000 $000
Opening balance at 1
January 2012 25,000 0 188,697 251,697

Share issue 25,000 50,000 75,000

Gains/(losses) on
revaluations 38,000 38,000

Profit for the year 61,800 61,800

Dividend
paid/payable (30,000) (30,000)

Closing balance at 31
December 2012 50,000 50,000 38,000 220,497 358,497

Example 6

Required:
Using the information given and your answer to example 5, prepare the statement
of changes in equity for Banana Bread Co for the year ended 31 December 2012.

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

LOAN NOTES
To fund a company’s long term financing requirements the directors may choose to
issue debt finance by way of loan notes rather than issuing shares.
These loan notes may have a set nominal issue value which will be repaid by the
company at a specified time.
Interest will be payable to the loan note holder on the nominal value.
In the exam you may be asked to calculate the interest expense for the year to be
shown as finance costs in the statement of profit or loss.

Example 7
Moodle Co issues 30,000 $150 10% loan notes on 1 July 2012. Interest is paid
annually in arrears on the 30 June each year.
Required:
Assuming Moodle Co has a year end of 31 December 2012, what is the double entry
required to fully account for the loan notes?

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

TAXATION
All companies have to pay tax on taxable profits. The tax charge is normally
ESTIMATED at the end of the financial year and charged to the statement of
comprehensive income, and paid in the following year.
The double entry for taxation would be:

Dr Taxation expense (Statement of profit or loss)


Cr Taxation liability (Statement of financial position)

The double entry for when the tax is paid a few months later:

Dr Taxation liability (Statement of financial position)


Cr Bank (Statement of financial position)

Since the amount paid is likely to differ from the estimated tax charge originally
recognised, a balance will be left on the taxation liability account, which will represent
either an under or over provision of the tax charge in the previous year.

Example 8
The City Co estimated last year’s tax charge to be $250,000 at 31 December 2008.
On 1 October 2009, The City Co settled their income tax bill and paid cash to the tax
authorities of $255,000.
At 31 December 2009 The City Co estimated that this year’s income tax charge to be
$270,000.
Required:
Show how this should be accounted for in the books of The City Co, showing clearly
the journal entries required and the taxation liability account.

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

PREPARATION OF LIMITED COMPANY FINANCIAL


STATEMENTS

Example 9
The trial balance of Jewel Co at 31 March 2010 is as follows:
Dr Cr
$ $
Ordinary share capital (50c) 100,000
6% Irredeemable non-cumulative preference
shares ($1) 50,000
Retained earnings at 1 April 2009 234,666
10% Loan notes 100,000
Inventory at 1 April 2009 32,000
Trade receivables 45,987
Allowance for receivables 1 April 2009 5,987
Trade payables 39,945
Bank 73,958
Buildings cost 150,000
Plant and machinery carrying value 422,987
Loan note interest paid 5,000
Admin expenses 48,000
Distribution costs 49,000
Profit on disposal 1,000
Purchases 69,666
Revenue 365,000

Total 896,598 896,598

Notes:
1. Depreciation on buildings is to be charged at 2% straight line
2. Depreciation on plant and machinery is to be charged at 10% reducing balance
3. Closing inventory was valued at $28,990
4. A general allowance of 5% of receivables is to be maintained
5. Tax charge is estimated at $25,000
6. A final dividend of 15c per share has been declared before the year-end. The 6%
preference share dividend has not yet been paid.
7. The finance charge for the 10% loan notes needs to be accrued for.

Required:
Prepare the statement of profit or loss and the statement of financial position for Jewel
Co for the year ended 31 March 2010.

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

Example 10
The trial balance of Miranda Co at 31 December 2009 is as follows:
Dr Cr
$ $
Ordinary share capital ($1) 52,500
Share premium 18,000
Retained earnings at 1 January 2009 731,955
Revenue 193,500
Inventory at 1 January 2009 33,000
Trade receivables 130,867
Allowance for receivables 1 January 2009 2,250
Trade payables 61,680
Bank 19,427
Buildings cost 225,000
Accumulated depreciation 1 January 2009
- Buildings 36,000
- Plant 22,500
Plant cost 112,500
Land cost 450,000
Purchases 115,869
Administration costs 19,125
Distribution costs 12,597
Total 1,118,385 1,118,385

Notes:
1. Depreciation on buildings is to be charged at 2% straight line.
2. Depreciation on plant is to be charged at 25% reducing balance.
3. It was decided by Miranda Co’s directors to revalue the land at 31 December
2009. The directors took the opinion of a professional valuer who deemed the
property to have a current fair value of $600,000. The directors wish to
incorporate this valuation in its financial statements.
4. Closing inventory was valued at $31,869.
5. A general allowance of 3% of receivables is to be maintained (Round answer
to nearest $).
6. Tax charge is estimated at $4,832.
7. A final dividend of 10c per share has been declared before the year-end.

Required:
Prepare the statement of profit or loss and the statement of financial position for
Miranda Co for the year ended 31 December 2009.

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

SAMPLE EXAM QUESTIONS

1
The statement of financial position of Cartwright, a limited liability company, shows
closing retained earnings of $320,568. The income statement showed profit of
$79,285. Cartwright paid last year’s final dividend of $12,200 during the current year
and proposed a dividend of $13,500 at the year end. This had not been approved by
the shareholders at the end of the year.
What is the opening retained earnings balance?
A $241,283
B $387,653
C $254,783
D $253,483
(Dec 2010 – Exam Question)

2
The following extract is from the statement of profit or loss of Gearing Co for the year
ended 30 April 2010:
$
Profit before tax 68,000
Tax (32,000)
Profit for the year 36,000
In addition to the profit above:
1. Gearing Co paid a dividend of $21,000 during the year.
2. A gain on revaluation of land resulted in a surplus of $18,000 in the revaluation
reserve.
What total amount will be added to retained earnings at the end of the
financial year?
A $36,000
B $33,000
C $47,000
D $15,000
(June 2010 – Exam Question)

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C H A P T ER 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

3
At 30 June 2006 a company’s capital structure included the following items:
$
500,000 ordinary shares (50c par) 250,000
Share premium account 80,000
In the year ended 30 June 2007 the company made a rights issue of 1 share for every
5 held at $1.2 per share and this was taken up in full. Later in the year the company
made a bonus issue of 1 share for every 5 held, using the share premium account
for the purpose.
What was the company’s capital structure at 30 June 2007?
Ordinary Shares Share Premium
$ $
A 400,000 90,000
B 360,000 90,000
C 360,000 150,000
D 400,000 150,000

4
Which TWO items within the statement of financial position would change
immediately following an issue of redeemable preference shares?
1 Cash
2 Retained earnings
3 Finance cost
4 Equity
5 Long term debt

A 1 and 5
B 1 and 4
C 2 and 4
D 3 and 5
(June 2013 – Exam Question)

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C H A P T E R 1 4 – L IM I T E D C O M P A N Y A C C O U N T S

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Chapter 15

Accounting standards

SYLLABUS CONTENT (as set by ACCA’s study guide)

D Recording transactions and events

9. Provisions and contingencies


a) Understand the definition of ‘provision’, ‘contingent liability’ and ‘contingent
asset’.
b) Distinguish between and classify items as provisions, contingent liabilities or
contingent assets.
c) Identify and illustrate the different methods of accounting for provisions,
contingent liabilities and contingent assets.
d) Calculate provisions and changes in provisions.
e) Account for the movement in provisions.
f) Report provisions in the final accounts.

F Preparing basic financial statements

2. Statement of profit or loss and statement of other


comprehensive income
d) Disclose items of income and expenditure in the statement of profit or loss.

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C H A P T E R 1 5 – A C C O U N T IN G S T A N D A R D S

3. Disclosure notes
a) Explain the purpose of disclosure notes.
b) Draft the following disclosure notes:
i) Non-current assets including tangible and intangible assets
ii) Provisions
iii) Events after the reporting period
iv) Inventory

4. Events after the reporting report


a) Define an event after the reporting period in accordance with International
Financial Reporting Standards.
b) Classify events as adjusting or non-adjusting.

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C H A P T ER 1 5 – A C C O U N T IN G S T A N D A R D S

CHAPTER CONTENTS

IAS 37 PROVISIONS AND CONTINGENCIES ----------------------- 174


CONTINGENT LIABILITIES 174
CONTINGENT ASSETS 174

IAS 10 EVENTS AFTER THE REPORTING PERIOD------------------ 176

DISCLOSURE ---------------------------------------------------------- 177

SAMPLE EXAM QUESTIONS ------------------------------------------ 178

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C H A P T E R 1 5 – A C C O U N T IN G S T A N D A R D S

IAS 37 PROVISIONS AND CONTINGENCIES


A provision is a liability of uncertain timing or amount and shall only be recognised
in the accounts when all three of the following conditions are met:

1. A present obligation, legal or constructive, has arisen as a result of a past event.


2. It is probable that a transfer of resources embodying economic benefits will be
required to settle the obligation.
3. A reliable estimate of the amount of the obligation can be made.

The double entry to create a provision would be:

Dr Relevant expense a/c (Statement of profit or loss)


Cr Provision (Statement of financial position)

Contingent liabilities
A contingent liability is:
A possible obligation that arises from past events and existence will only be
confirmed by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity.
OR
A present obligation that arises from past events but fails criteria 2 or 3 (above)
for a provision.
Disclose in the notes to the financial statements unless a REMOTE possibility.

Contingent assets
A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence or one or more
uncertain future events not wholly within the control of the entity
An entity shall not recognise a contingent asset, but should be disclosed.

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C H A P T ER 1 5 – A C C O U N T IN G S T A N D A R D S

Example 1
Consider the following scenarios:
1. The directors of Charlotte Co would like to refurbish some of its retail stores in
the next accounting period. They estimate that this would cost $200,000 and
would like to provide for this amount in their year end financial statements.
2. Charlotte Co sells high fashion clothing and accessories and has an established
policy of allowing customers to return goods if customer finds the goods
unsuitable or they have a change of mind, even if they provide no receipt.
Charlotte Co has no legal obligation to do this. The directors have estimated
that sales returns next year would be $130,000 based on past trading
experience.
3. Charlotte Co is also being taken to court by a customer for injury due to one of
the products Charlotte Co sells. The customer is claiming damages of $75,000.
Charlotte Co’s solicitors are of the opinion that there is a 60% chance that the
company would have to settle the claim as the court case is in its final stages.

Required:
Discuss the accounting treatment of each scenario above.

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C H A P T E R 1 5 – A C C O U N T IN G S T A N D A R D S

IAS 10 EVENTS AFTER THE REPORTING PERIOD


An event after the reporting period is an event that occurs between the accounting
year end and the date on which the financial statements are authorised for issue.
We must consider which of these events causes us to ADJUST our financial
statements or not.

Adjusting events Non-adjusting events


Provide additional evidence of Events that have no impact on
conditions that existed at the the conditions at the
statement of financial position statement of financial position
date. date.
GOING CONCERN IS THE
ONLY EXCEPTION

Example 2
You have been asked by your manager to look into the following events that occurred
between the accounting year end of 31 December 2009 and 31 March 2010 when the
accounts were signed:
1. Major acquisition of a competitor announced on 15 January 2010.
2. The bankruptcy of a major customer on 8 February 2010.
3. Sale of inventory for a price significantly lower than the original cost on 3
January 2010.
4. Major fire in a warehouse, destroying two thirds of the company’s
inventory on 23 February 2010.
5. Dividends were declared on 31 January 2010.
6. 100,000 ordinary shares issued on 1 March 2010.
7. On 28 March the directors decided to cease trading by the end of the year.

Required:
For each event state whether it is an adjusting or non-adjusting event per IAS 10.

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C H A P T ER 1 5 – A C C O U N T IN G S T A N D A R D S

DISCLOSURE

Notes to the financial statement provide more detail for the users of the accounts
about the information contained within the primary financial statements.
Students are required to be familiar with the disclosure requirements associated with
the following accounting standards:
i) Non-current assets including tangible and intangible assets (IAS 16 & IAS
38)
ii) Provisions (IAS 37)
iii) Events after the reporting period (IAS 10)
iv) Inventory (IAS 2)

w w w . s t ud y i nt e r a c t i v e . o r g 17 7
C H A P T E R 1 5 – A C C O U N T IN G S T A N D A R D S

SAMPLE EXAM QUESTIONS

1
The following items have to be considered when finalising the financial statements of
G-Star Co, a limited liability company:
(1) The company gives warranties on its products. The company’s statistics show
that about 5% of sales give rise to a warranty claim.
(2) The company has guaranteed the overdraft of another company. The likelihood
of a liability arising under the guarantee is assessed as possible.
What is the correct action to be taken in the financial statement for these
items?
Item 1 Item 2
A Create a provision Disclose by note only
B Disclose by note only No action
C Create a provision Create a provision
D Disclose by note only Disclose by note only
(Dec 2011 – Pilot Paper)

2
A company has a year end 31 December 2011. The accounts were then signed on
the 4 April 2012. The following events took place between the year end and the date
of signing.
According to IAS 10 ‘Events After the Reporting Period’, which events should
have been adjusted for in the 2011 accounts?
(1) The directors decided on the 25 March 2012 to cease trading at the end of 2012.
(2) A legal dispute arising in 2011, previously not provided for, has been settled on
25 February 2012 resulting in the company being ordered to pay damages of
$3,000.
(3) After a successful year in 2011 the directors have decided that, based on the
2011 draft accounts, sufficient profits have arisen and declared a dividend on 1
January 2012.
A None of the above
B All of the above
C 1 & 2 only
D 2 & 3 only

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Chapter 16

Statements of cash
flow

SYLLABUS CONTENT (as set by ACCA’s study guide)

F Preparing basic financial statements

5. Statements of cash flows (excluding partnerships)


a) Differentiate between profit and cash flow.
b) Understand the need for management to control cash flow.
c) Recognise the benefits and drawbacks to users of the financial statements of a
statement of cash flows.
d) Classify the effect of transactions on cash flows.
e) Calculate the figures needed for the statement of cash flows including:
i) Cash flows from operating activities
ii) Cash flows from investing activities
iii) Cash flows from financing activities
f) Calculate the cash flow from operating activities using the indirect and direct
method.
g) Prepare statements of cash flows and extracts from statements of cash flows
from given information.

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CHAPTER 16 – STATEMENTS OF CASH FLOW

h) Identify the treatment of given transactions in a company’s statement of cash


flows.

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

CHAPTER CONTENTS

INTRODUCTION --------------------------------------------------------- 182


ADVANTAGES OF STATEMENTS OF CASH FLOW 182

STATEMENT OF CASH FLOW PROFORMA ----------------------------- 183

CASH FLOWS FROM OPERATING ACTIVITIES ----------------------- 186

ISOLATING CASH FLOWS ---------------------------------------------- 188

CASH FLOWS FROM INVESTING ACTIVITIES ------------------------ 189

CASH FLOWS FROM FINANCING ACTIVITIES------------------------ 191

IAS 7 --------------------------------------------------------------------- 193

SAMPLE EXAM QUESTIONS -------------------------------------------- 194

w w w . s t ud y i nt e r a c t i v e . o r g 18 1
CHAPTER 16 – STATEMENTS OF CASH FLOW

INTRODUCTION
The statement of cash flow is a primary financial statement and provides fundamental
information to the user of accounts. It highlights the key areas where a business has
generated and spent cash.
Good cash management ensures a business has sufficient cash to run its day to day
operations.

Advantages of statements of cash flow


Cash flow balances are a matter of fact and are not distorted by accounting
policies.
Cash flow balances are objective, unlike profit, which is subjective.
Users of financial statements can establish how the business has generated
cash.
Users can identify exactly how cash has been spent.
Users can assess the ability of the business to generate cash in the future.

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

STATEMENT OF CASH FLOW PROFORMA


Jonathan Co Statement of cash flows for the year ended 31 December 2011
$ $
Cash flows from operating activities
Profit before tax 44,400

Adjustments for non-cash items:


Depreciation / amortisation charge 17,600
Loss / (profit) on disposal of non-current assets (6,320)
Finance cost 2,000
Investment income (80)

(Increase)/decrease in inventory 2000


(Increase)/decrease in receivables (800)
Increase/(decrease) in payables 200

Cash generated from operations 59,000

Interest paid (1,900)


Taxation paid (17,850)

Net cash from operating activities 39,250

Cash flows from investing activities


Purchase of non-current assets (41,600)
Proceeds from the sale of non-current assets 27,320
Interest received 40
Dividends received 40

Net cash used in investing activities (14,200)

Cash flows from financing activities


Proceeds from the issue of share capital 10,000
Proceeds from long-term borrowings 3,000
Repayments of long term borrowings (25,000)
Dividends paid (20,000)

Net cash from financing activities (32,000)

Movement in cash and cash equivalents (6,950)


Cash and cash equivalents b/f 6,450
Cash and cash equivalents c/f (500)

w w w . s t ud y i nt e r a c t i v e . o r g 18 3
CHAPTER 16 – STATEMENTS OF CASH FLOW

Example 1
The accountant of Radiance Co, who needs your help to prepare the statement of
cash flows, provides the following information:

Radiance Co statement of financial position as at 31 December


2011 2010
$ $ $ $
Non-current
assets
Property plant and equipment cost 220,000 180,000
Property plant and equipment accum depreciation (92,000) (78,000)
128,000 102,000
Current assets

Inventory 17,000 12,000


Trade receivables 10,000 2,000
Government bonds 10,000 10,000
Bank 16,000 3,000
53,000 27,000

Total assets 181,000 129,000

Equity and liabilities

Equity
Share capital ($1) 65,000 45,000
Share premium 12,000 10,000
Retained earnings 68,000 24,000
145,000 79,000
Non-current liabilities

10% loan note 20,000 30,000

Current liabilities

Trade payables 13,000 19,000


Taxation 3,000 1,000
16,000 20,000

Total equity and liabilities 181,000 129,000

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

Radiance Co Statement of profit or loss (extract) for the year ended 31 December 2011
$
Profit before interest and tax 52,000
Finance costs (2,000)
Taxation expense (6,000)
Profit for the year 44,000

Required:
Prepare the statement of cash flows for Radiance Co for the year ended 31 December
2011.

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CHAPTER 16 – STATEMENTS OF CASH FLOW

CASH FLOWS FROM OPERATING ACTIVITIES


Cash generated from operating is the principal revenue-producing activities of the
business.
There are two methods of calculating cash from operations – the direct or indirect
method:

1. Direct method
This method is used when we are given information from the ledger accounts and not
just the financial statements.
$
Cash sales X
Cash received from credit customers X
Cash purchases (X)
Cash paid to credit suppliers (X)
Cash expenses (X)
Cash wages and salaries (X)

Cash generated from operations X

2. Indirect method
Where ledger information is not available, cash generated from operations can be
derived from the financial statements. This method is in the proforma above and is
more frequently tested.
$
Profit before tax X

Adjustments for non-cash items:


Depreciation / amortisation charge X
Loss / (profit) on disposal of non-current assets X/(X)
Finance cost X
Investment income (X)

(Increase)/decrease in inventory (X)/X


(Increase)/decrease in receivables (X)/X
Increase/(decrease) in payables X/(X)

Cash generated from operations X

Interest and tax paid would then be deducted from cash generated from operations
to find cash generated from operating activities.

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

Example 2
You have been provided with the following financial statement extracts for the year to
31 December 2011:

Statement of profit or loss (extract)


Depreciation (1,875)
Profit on disposal of non- 225
current assets
Profit before interest and 3,975
tax
Finance costs (450)
Taxation expense (1,050)
Profit for the year 2,475

Statement of financial position (extract)


2011 2010
Current Assets $ $
Inventory 5,100 5,700
Receivables 5,700 4,350

Current Liabilities
Payables 5,550 4,800

Required:
Calculate the cash generated from operations using the indirect method.

Example 3
The following information relates to Empress Co:
Cash sales $55,000
Cash received from customers $44,000
Cash purchases $33,000
Cash paid to suppliers $12,000
Cash expenses $11,000
Cash wages and salaries $20,000

Required:
Calculate the cash generated from operations using the direct method.

w w w . s t ud y i nt e r a c t i v e . o r g 18 7
CHAPTER 16 – STATEMENTS OF CASH FLOW

ISOLATING CASH FLOWS


You may be asked to calculate certain items from cash generated from operating
activities and find the true cash receipt/ payment. These could include:
Interest paid
Tax paid.
To find these figures it may be useful to use ledger accounts for interest and tax to
find the payment.

Example 4
A company reports the following amounts in its financial statements relating to
interest:
Finance costs charged to the statement of profit or loss $5,100
Interest accrual b/fwd $180
Interest accrual c/fwd $465

Required:
What interest did the company pay in the year?

Example 5
A company estimated its tax payable for the year ended 31 December 2011 is
$35,970. The company had estimated its tax payable for the year ended 31
December 2010 at $32,648. The tax charge reported in the statement of profit or
loss for the year to 31 December 2011 was $36,150.

Required:
What tax was paid in the year?

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

CASH FLOWS FROM INVESTING ACTIVITIES


Cash flows from investing activities are cash spent on non-current assets, and other
external investments such as shares in another business. But also proceeds from
the sale of and cash income from these investments.

Cash flows from investing activities


Purchase of non-current assets (X)
Proceeds from the sale of non-current assets X
Interest received X
Dividends received X

Net cash used in investing activities (X)

You may be asked to calculate certain items from cash used in investing activities
and find the true cash receipt/ payment. These could include:
Cash paid to acquire PPE (property plant and equipment) and other
investments.
Cash proceeds from disposals.
Interest/dividends received in cash.

Example 6
You have been provided with the following financial statement extracts for the year
to 31 December 2011:

Statement of profit or loss (extract) $


Depreciation 22,500
Loss on disposal of non-current assets 6,375

Statement of financial position (extract)


2011 2010
Non-current Assets $ $
Land, PP+E at cost 465,000 405,000
PP+E accumulated Dep’n (247,500) (283,500)

Equity
Revaluation reserve 30,000 0
PP+E costing $67,500 were disposed of during the year. Land was revalued during
the year.

Required:
Calculate the cash paid to acquire PPE and the proceeds from the disposal of PP+E
in the year.

w w w . s t ud y i nt e r a c t i v e . o r g 18 9
CHAPTER 16 – STATEMENTS OF CASH FLOW

Example 7
A company reports the following amounts in its financial statements relating to
interest income:
Interest income in the statement of profit or loss $2,340
Interest receivable b/fwd $18
Interest receivable c/fwd $645

Required:
Calculate the cash inflow regarding interest income.

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

CASH FLOWS FROM FINANCING ACTIVITIES


Cash flows from financing activities include the proceeds from the issue of shares and
long-term borrowings made or repaid.

Cash flows from financing activities


Proceeds from the issue of share capital X
Proceeds from long-term borrowings X
Repayments of long term borrowings (X)
Dividends paid (X)

Net cash from financing activities X

You may be asked to calculate certain items from cash from financing activities and
find the true cash receipt/ payment. These could include:
Cash proceeds from the issue of shares
Cash proceeds / repayments from long-term borrowings
Dividends paid in cash.

Key point!
Remember that a bonus issue of shares is for free, therefore cash is not involved.

Example 8
You have been provided with the following financial statement extracts for the year
to 31 December 2011:

Statement of financial position (extract)


2011 2010
Equity $ $
Share capital ($1) 180,000 150,000
Share premium 540,000 405,000

Required:
Calculate the cash proceeds from issuing shares during 2011.

w w w . s t ud y i nt e r a c t i v e . o r g 19 1
CHAPTER 16 – STATEMENTS OF CASH FLOW

Example 9
You have been provided with the following financial statement extracts for the year
to 31 December 2011:

Statement of financial position (extract)


2011 2010
Non-current Liabilities $ $
10% loan notes 0 300,000
8% loan notes 210,000 90,000

Required:
Calculate the cash paid/received relating to long-term borrowings in the year.

Example 10
You have been provided with the following financial statement extracts for the year
to 31 December 2011:

Statement of profit or loss (extract) $


Profit for the year 117,945

Statement of financial position (extract)


2011 2010
Equity $ $
Retained earnings 532,500 476,400

Required:
Calculate the dividend paid in 2011.

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

IAS 7
IAS 7 lays down the requirements of a statement of cash flow. It gives us a detailed
proforma and certain definitions:
Cash
Cash on hand and demand deposits. An example would be cash in the bank
less any overdraft.
Cash equivalents
Short term, highly liquid investments.
(These will be stated as current assets in statement of financial position).

w w w . s t ud y i nt e r a c t i v e . o r g 19 3
CHAPTER 16 – STATEMENTS OF CASH FLOW

SAMPLE EXAM QUESTIONS

1
The following extract is from the financial statements of Pompeii, a limited liability
company, at 31 October:
2010 2009
$000s $000s

Equity and liabilities


Share capital 120 80
Share premium 60 40
Retained earnings 85 68
265 188
Non current liabilities
Bank loan 100 150
365 338
What is the cash flow from financing activities to be disclosed in the
statement of cash flows for the year ended 31 October 2010?
A $60,000 inflow
B $10,000 inflow
C $110,000 inflow
D $27,000 inflow
(Dec 2010 – Exam Question)

2
Carter, a limited liability company, has non-current assets with a carrying value of
$2,500,000 on 1 December 2007.
During the year ended 30 November 2008, the following occurred:
Depreciation of $75,000 was charged to the income statement.
Land and buildings with a carrying value of $1,200,000 were re-valued to
$1,700,000.
An asset with a carrying value of $120,000 was disposed of for $150,000.
The carrying value of non-current assets at 30 November 2008 was $4,200,000.
What amount should be shown for the purchase of non-current assets in the
statement of cash flows for the year ended 30 November 2008?
A $1,395,000
B $1,895,000
C $1,425,000
D $195,000
(Dec 2008 – Exam Question)

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C H A P T ER 1 6 – S T A T E M E N T S O F C A S H F L O W

3
Amy is preparing a cash-flow statement for the year ended 31 March 2011 and is
using the indirect method to compute the cash flows from operating activities.
However, she is unclear how to determine the net cash-flow from the movement on
working capital based on the following balances:
2011 2010
$ $
Inventory 8,400 6,200
Trade receivables 6,100 7,300
Trade payables 4,000 2,200
The net cash inflow/outflow deriving from working capital should be?
A $2,800 inflow
B $800 inflow
C $800 outflow
D $2,800 outflow

4
In the year ended 31 May 2012, Galleon co purchased non-current assets with a cost
of $140,000, financing them partly with a loan of $120,000. Galleon Co also disposed
of non-current assets with a carrying value of $50,000 making a loss of $3,000. Cash
of $18,000 was received from the disposal of investments during the year.
What should be Galleon Co’s net cash from investing activities according to
IAS 7 Statement of cash flows?
A $45,000
B $75,000
C $69,000
D $48,000

w w w . s t ud y i nt e r a c t i v e . o r g 19 5
CHAPTER 16 – STATEMENTS OF CASH FLOW

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Chapter 17

Interpretation

SYLLABUS CONTENT (as set by ACCA’s study guide)

H Interpretation of financial statements

1. Importance and purpose of analysis of financial


statements
a) Describe how the interpretation and analysis of financial statements is used in
a business environment.
b) Explain the purpose of interpretation of ratios.

2. Ratios
a) Calculate key accounting ratios:
i) Profitability
ii) Liquidity
iii) Efficiency
iv) Position
b) Explain the inter-relationships between ratios.

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C H A P T E R 1 7 – I N T E R P R E T A T IO N

3. Analysis of financial statements


a) Calculate and interpret the relationship between the elements of the financial
statements with regard to profitability, liquidity, efficient use of resources and
financial position.
b) Draw valid conclusions from the information contained within the financial
statements and present these to the appropriate user of the financial
statements.

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C H A P T ER 1 7 – I N T E R P R E T A T IO N

CHAPTER CONTENTS

RATIO ANALYSIS ------------------------------------------------------- 200


PROFITABILITY 200
LIQUIDITY 200
EFFICIENCY 201
POSITION 201

SAMPLE EXAM QUESTIONS -------------------------------------------- 204

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C H A P T E R 1 7 – I N T E R P R E T A T IO N

RATIO ANALYSIS
The following ratio formulae need to be learned.

Profitability

1. Gross profit margin


Gross profit
× 100
Revenue

2. Operating profit margin


Operating profit
× 100
Revenue

3. Net profit (after tax) margin


Net profit
× 100
Revenue

4. Return on capital employed (ROCE)


Profit before interest and tax
 100
* Capital employed

* Capital Employed = Shareholders Funds + long term debt.

Liquidity

1. Current ratio
Current assets
Current liabilities

2. Quick ratio
Current assets - Inventory
Current liabilities

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C H A P T ER 1 7 – I N T E R P R E T A T IO N

Efficiency

1. Inventory days
Inventory
× 365
Cost of sales

2. Receivables days
Receivables
× 365
* Sales on credit

* total sales may be used instead.

3. Payables days
Payables
× 365
* Purchases on credit

* total purchases or cost of sales may be used instead.

4. Asset turnover
Revenue
Average total assets

Position

1. Gearing ratio
Debt
× 100
Capital employed

OR
Debt
× 100
Equity (shareholders funds)

2. Interest cover
Profit before interest and tax
Interest payable

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C H A P T E R 1 7 – I N T E R P R E T A T IO N

Example 1
Below are the summarised financial statements of Joe Co:

Statement of profit or loss for the year ended 31 December


2011 2010
$m $m

Sales 250 150


Cost of sales (190) (100)
Gross profit 60 50
Administrative expenses (30) (25)
Profit from operations 30 25
Finance costs (15) (5)
Profit before tax 15 20
Income tax expense (6) (5)
Profit after tax 9 15

Statement of financial position as at 31 December


2011 2010
$m $m $m $m
Non-current assets
Property, plant and
equipment 250 190
250 190
Current assets
Inventory 18 20
Receivables 14 18
Bank 10 50
42 88
Total assets 292 278

Equity and liabilities


Equity
Equity shares $1 each 100 100
Retained earnings 52 43
152 143
Non-current liabilities
Loan notes 100 100

Current liabilities
Payables 40 35
40 35
Total equity and liabilities 292 278

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C H A P T ER 1 7 – I N T E R P R E T A T IO N

Required:
Calculate the following ratios for 2011 and 2010:
a. Profitability;
b. Liquidity;
c. Efficiency; and
d. Position.

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C H A P T E R 1 7 – I N T E R P R E T A T IO N

SAMPLE EXAM QUESTIONS

1
The following extracts are from Hassan’s financial statements:
$
Profit before interest and tax 10,200
Interest (1,600)
Tax (3,300)
Profit after tax 5,300

Share capital 20,000


Reserves 15,600
35,600
Loan liability 6,900
42,500
What is Hassan’s return on capital employed?
A 15%
B 29%
C 24%
D 12%
(Dec 2011 – Pilot Paper)

2
Xena has the following working capital ratios:
2009 2008
Current ratio 1.2:1 1.5:1
Receivable days 75 days 50 days
Payable days 30 days 45 days
Inventory turnover 42 days 35 days
Which of the following statements are correct?
A Xena’s liquidity and working capital has improved in 2009.
B Xena is receiving cash from customers more quickly in 2009 than in 2008.
C Xena is suffering from a worsening liquidity position in 2009.
D Xena is taking longer to pay suppliers in 2009 than in 2008.
(Dec 2011 – Pilot Paper)

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C H A P T ER 1 7 – I N T E R P R E T A T IO N

3
The following extracts are from D&B Co’s financial statements as at the company’s
year-end:
$
Revenue 475
Cost of sales (342)
Gross profit 133
Expenses (59)
Finance cost (26)
Profit before tax 48
What is the interest cover ratio?
A 2.85
B 1.85
C 5.12
D 0.35
(June 2012 – Exam Question)

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C H A P T E R 1 7 – I N T E R P R E T A T IO N

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Chapter 18

Consolidated financial
statements

SYLLABUS CONTENT (as set by ACCA’s study guide)

G Preparing simple consolidated financial statements

1. Subsidiaries
a) Define and describe the following terms in the context of group accounting:
i) Parent
ii) Subsidiary
iii) Control
iv) Consolidated or group financial statements
v) Non-controlling interest
vi) Trade/simple investment
b) Identify subsidiaries within a group structure.
c) Describe the components of and prepare a consolidated statement of financial
position or extracts thereof including:
i) Fair value adjustments at acquisition on land and buildings (excluding
depreciation adjustments)

w w w . s t ud y i nt e r a c t i v e . o r g 20 7
C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

ii) Fair value of consideration transferred from cash and shares (excluding
deferred and contingent consideration)
iii) Elimination of inter-company trading balances (excluding cash and goods
in transit)
iv) Removal of unrealised profit arising on inter-company trading
v) Acquisition of subsidiaries part way through the financial year
d) Calculate goodwill (excluding impairment of goodwill) using the full goodwill
method only as follows:
Fair value of consideration X
Fair value of non-controlling interest X
Less fair value of net assets at acquisition (X)
___
Goodwill at acquisition X
___
e) Describe the components of and prepare a consolidated statement of profit or
loss or extracts thereof including:
i) Elimination of inter-company trading balances (excluding cash and goods
in transit)
ii) Removal of unrealised profit arising on inter-company trading
iii) Acquisition of subsidiaries part way through the financial year

2. Associates
a) Define and identify an associate and significant influence and identify the
situations where significant influence or participating interest exists.
b) Describe the key features of a parent associate relationship and be able to
identify an associate within a group structure.
c) Describe the principle of equity accounting.

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

CHAPTER CONTENTS

INTRODUCTION --------------------------------------------------------- 210


WHAT IS CONTROL? 211

CONSOLIDATED STATEMENT OF FINANCIAL POSITION------------ 212


KEY WORKINGS 213

CONSOLIDATION ADJUSTMENTS ------------------------------------- 216


INTRA-GROUP BALANCES 216
PROVISION FOR UNREALISED PROFIT (PUP) 216
FAIR VALUE ADJUSTMENTS 217

CALCULATING THE COST OF INVESTMENT --------------------------- 218


SHARE EXCHANGE 218

CONSOLIDATED STATEMENT OF PROFIT OR LOSS ------------------ 219

CONSOLIDATION ADJUSTMENTS ------------------------------------- 220


MID-YEAR ACQUISITION OF SUBSIDIARY 220
INTER-COMPANY TRADING 220
PUP ON INTER-COMPANY TRADING 221

ASSOCIATES ------------------------------------------------------------ 222

SAMPLE EXAM QUESTIONS -------------------------------------------- 223

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

INTRODUCTION
The following includes the key terms that run throughout the chapter.

Parent
An entity that has one or more subsidiaries.

Subsidiary
An entity controlled by another entity (the parent).

Control
The power to govern the financial and operating policies of an entity.

Non-controlling interest
Shareholding in the subsidiary that is not owned by the parent.

Associate
An entity that the parent has significant influence over.

Significant influence
The power to participate in the financial and operating policies of an entity.

Trade (simple) investment


An investment in shares in another entity that is neither deemed to be a subsidiary
or associate.

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

What is control?
Purchase of more than 50% of the ordinary voting shares.
The power of over 50% of the voting rights by virtue of an agreement with
other investors.
To govern the financial and operating policies of the entity under a statute or
an agreement.
To appoint or remove the majority of the members of the board of directors.
To cast the majority of votes at a meeting of the board of directors.
Where control exists the investee is defined as a subsidiary, and the parent
company must consolidate its results with the results of the subsidiary.

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

CONSOLIDATED STATEMENT OF FINANCIAL POSITION


XYZ Group Consolidated Statement of Financial Position as at 31 December
2011

$000 $000

Non current assets

Property, plant and equipment (100% P + S) X

Goodwill (W) X

Current assets

Inventory (100% P + S) X

Receivables (100% P + S) X

Bank & cash (100% P + S) X

Total assets X

Equity and liabilities

Equity

Share capital (Parent only) X

Retained earnings (W) X

Non-controlling interest (W) X

Non-current liabilities (100% P + S) X

Current liabilities (100% P + S) X

Total equity and liabilities X

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

Key workings
GROUP STRUCTURE

PARENT

SUBSIDIARY

Note the following: % investment held, NCI %, and acquisition date.

SUBSIDIARY NET ASSETS WORKING -

At statement of
At acquisition financial position

$ $

Share capital X X

Share premium X X

Retained earnings X X

Fair value adjustment X/(X) X/(X)

- (X)
PUP adjustment
(S sells to P)
X X

Used for Goodwill

The difference (post acquisition) goes to consolidated reserves & NCI

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

(W1) Goodwill
$
Investment at cost X
Fair value of NCI at acquisition X
X
Less: Fair value of net assets at acquisition (X)
Goodwill X

(W2) Non-controlling interest (NCI)


$
Fair value of NCI at acquisition X
NCI % post acquisition reserves of subsidiary X

Non-controlling interest X

(W3) Consolidated reserves


$
100% Parent at year end X
Group % post acquisition reserves of subsidiary X
Less: PUP adjustment (P sells to S) (X)

Group reserves X

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

Example 1
The following are the summarised statements of financial position as at 31 December
2011:
P S
$000 $000 $000 $000
Non-current assets
Property, plant and equipment 1,000 500
Investments 450 0
1,450 500

Current assets
Inventory 300 250
Trade receivables 200 150
Bank 300 200
800 600
Total assets 2,250 1,100

Equity and liabilities


Equity
Share capital ($1 each) 500 200
Retained earnings 650 400
1,150 600
Non-current liabilities
Loan notes 100 50

Current liabilities
Trade payables 1,000 450
Total equity and liabilities 2,250 1,100
The following notes are relevant:
1. P acquired 75% of S two years ago for $450,000 cash. At the date of
acquisition S retained earnings were $100,000.
2. The directors have deemed fair value of non-controlling interest at acquisition
to be $150,000

Required:
Prepare the consolidated statement of financial position for P group as at 31
December 2011.

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

CONSOLIDATION ADJUSTMENTS

Intra-group balances
Single entity concept dictates that on consolidation, the group accounts should only
show balances with parties outside the group.
In the event that intra group balances exist between parent and subsidiary then an
adjustment needs to be made in the group accounts in order to cancel the respective
balances.
The journal to cancel out the intra balances would be as follows:

Dr Group payables (Consolidated SFP)


Cr Group receivables (Consolidated SFP)

Provision for unrealised profit (PUP)


In the event that companies within a group have made sales to oneanother at a
profit, yet the goods remain within the group at the reporting date, this creates what
is known as ‘unrealised profit’.
Once again single entity concept dictates that ‘unrealised profit’ should be eliminated
on consolidation, since it is illogical to have made a profit on such a sale.

Key exam considerations


1. Determine the direction of the sale – did P sell to S or vice versa?
2. Determine the amount of sold inventory left within the group at the year-end.

Example 2
P sells $100,000 (selling price) worth of goods to S (an 80% subsidiary) at cost plus
25% (25% mark-up). S had not sold any of the goods outside the group by the end
of the year.

Required:
Calculate the PUP and show the double entry for this transaction.

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

Example 3
In the post acquisition period Sally’s sales to Polly were $50 million on which Sally
had made a margin of 5% on these sales. Of these goods, $7 million (at selling price
to Polly) were still in the inventory of Polly at its year-end of 30 September 2011.
Polly holds a controlling interest of 70% in Sally.

Required:
Calculate the PUP and show the double entry for this transaction.

Fair value adjustments


Fair value simply reflects ‘market value’. Any necessary adjustments to the
subsidiaries net assets should be made in the group accounts!

Fair value
The amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction.

Example 4
S has the following equity balances:
At 1 Jan 2011 At 31 Dec 2011
$000 $000
Equity ($1) share capital 300,000 300,000
Share premium 150,000 150,000
Retained earnings 100,000 160,000
550,000 610,000
P acquired 80% of the equity share capital of S on 1 January 2011 for an agreed cash
amount of $600 million.
At the date of acquisition the carrying values of S’s assets were approximately equal
to their book values with the exception of some land that has a market (fair) value
of $50 million but it is currently carried at $40 million in S’s financial statements.
The fair value of the non-controlling interest at acquisition is $200 million.

Required:
Calculate the goodwill arising on acquisition of S and show the required double entry
for the fair value adjustment.

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

CALCULATING THE COST OF INVESTMENT


In the exam there can be two ways that a parent could pay for its investment in the
subsidiary:
1. Purchase shares in subsidiary for cash
2. Purchase shares in subsidiary and give them our own (parent) shares in return
(known as a share exchange).

Share exchange
If the parent is giving shares to the subsidiary as a form of the purchase consideration
then we need to work out the value of the shares given to the subsidiary using the
following steps:
Step 1: Work out the number of shares acquired in the subsidiary.
Step 2: Calculate how many parent shares will be issued in return for the shares
acquired.
Step 3: Calculate the value of the parent shares by multiplying by the parent share
price at acquisition.

Example 5
On 1 March 2011 Placid acquired 80% of Salid’s equity shares in a share exchange
of 3 shares in Placid for every two shares in Salid. Salid has a total issued share
capital of $8,000 in $1 equity shares. The market price of Placid’s shares at the date
of acquisition was $3 per share.

Required:
Calculate the cost of investment in Salid to be used in calculating goodwill.

Example 6
On 1 September 2011 P acquired 6 million shares of a total of 8 million shares in S
for an immediate cash payment of $2.50 per share acquired and through a share
exchange of one share in P for every two shares in S. The market price of P’s shares
at the date of acquisition was $8 per share.

Required:
Calculate the cost of investment in S to be used in calculating goodwill.

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

Consolidated statement of profit or loss for the year ended 31 December 2011

Parent Subsidiary Consolidation Group


Adjustments
(post-acquisition
portion of year
only)

Revenue x x (x) x

Less: Cost of Sales (x) (x) x

PUP (note the (x) (x) --- (x)


direction of sale)

Gross Profit x x --- x

Other income x x x

Less: Distribution Costs (x) (x) --- (x)

Admin Expenses (x) (x) ---

Less: Finance Cost (x) (x) --- (x)

Profit before tax x x --- x

Less: Tax (x) (x) --- (x)

Profit for the year (PFY)* x x* --- x

Attributable to:

NCI (NCI % x PFY*) x

Equity holders of the (Remainder) x


parent x

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

CONSOLIDATION ADJUSTMENTS

Mid-year acquisition of subsidiary


We must only include the part of the subsidiary’s results that arose after acquisition,
ie whilst under the control of the parent. If the acquisition occurred in the middle of
the year, we should only include the second half of the subsidiary’s results for the
year.

Example 7
Pacify acquired 60% of the ordinary share capital of Scholar on 1 October 2011.
Revenue for the two companies for the year ended 30 November 2011 was
$2,200,000 and $600,000 respectively. Assume profits accrue evenly over the year.

Required:
Calculate group revenue for inclusion in the consolidated statement of profit or loss
for the year ended 30 November 2011.

Inter-company trading
This is a key topic; there are three ways that this could be tested:
(i) Parent sells to Sub, making an unrealised profit
(ii) Sub sells to Parent, making an unrealised profit
(iii) Parent or Sub sells to the other but all goods have been sold on to a third
party outside the group, ie they have been realised.
The first step is to show the inter-company sales revenue as a deduction in the
consolidation adjustments column; then immediately show cost of sales in the same
column, also as a deduction. Be very careful with use of brackets here, and the idea
is to reduce both sales revenue and cost of sales to the same extent.
The journal to cancel out the inter company sales on consolidation would be:

Dr Group sales (Consolidated SPL)


Cr Group cost of sales (Consolidated SPL)

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

PUP on inter-company trading


Once the PUP is calculated, show it as a deduction in the selling company’s column.
This ensures that the NCI suffers if the subsidiary sells to the parent.
Incidentally, if there is an inter-company sale but all goods have subsequently been
sold outside the group, ie nothing is in inventory at the year-end, only show inter-
company cancellation of revenue and cost of sales, but not PUP.

Example 8
Palm acquired 80% of Swift on 1 October 2011 for $10 million. The following
statements of profit or loss are available for both companies for the year ended 31
December 2011

Palm Swift

$000 $000

Sales 110,000 80,000

Cost of sales (50,000) (30,000)

Gross profit 60,000 50,000

Administrative expenses (20,000) (35,000)

Profit before tax 40,000 15,000

Income tax expense (10,000) (5,000)

Profit for the year 30,000 10,000

The following notes are relevant:


1. During the post-acquisition period Swift sold $5 million of goods to Palm at a
mark-up of 25% on cost. A quarter of these goods are in inventory at the
year-end.

Required:
Prepare the consolidated statement of profit or loss for the year ended 31 December
2011.

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

ASSOCIATES
An investment between 20-50% of the ordinary share capital of another entity is
deemed to give the investor significant influence.

RTL Co Tech Solutions Co

RTL Acquires 25% of the ordinary share


capital of Tech Solutions

In the above example Tech Solutions would be considered an Associate of RTL Co,
by virtue of RTL Co exercising significant influence.

Significant influence
In most cases significant influence is achieved by virtue of holding between 20-50%
of the voting rights, however it can also be attained through:
Representation on the board of directors;
Participation in policy making decisions;
Interchange of managerial personnel.

Accounting treatment
An associate should be equity accounted for.
Under the equity method, the investment in the associate is initially recognised at
cost in the group statement of financial position and the carrying amount is increased
or decreased to recognise the investor’s share of the profit or loss of the investee
after the date of acquisition.
The investors’ share of the profit or loss of the investee is recognised in the group
statement of comprehensive income, as a single line entry.

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C H A P T E R 1 8 – C O N S O L ID A T ED F I N A N C I A L S T A T E M EN T S

SAMPLE EXAM QUESTIONS

1
Venus Co acquired 75% of Mercury Co’s 100,000 $1 ordinary share capital on 1
November 2011. The consideration consisted of $2 cash per share and 1 share in
Venus for every share acquired in Mercury Co. Venus Co shares have a nominal
value of $1 and a fair value of $1.75. The fair value of the non-controlling interest
was $82,000 and the fair value of net assets acquired was $215,500.
What should be recorded as goodwill on acquisition of Venus Co in the
consolidated financial statements?
A $16,500
B $147,750
C $91,500
D $63,375
(Dec 2011 – Exam Question)

2
Gublis acquired 75% of the ordinary share capital of Almagro on the 1 March 2011.
Extract from the statement of comprehensive income for Gublis and Almagro for the
year ending 31 August 2011
Gublis Almagro
$000s $000s

Revenue 45,000 32,890


Cost of sales (23,535) (18,595)
Gross profit 21,465 14,295

Since acquisition of Almagro, Almagro has sold goods to Gublis for $2.3million. At
the 31 August 2011 a quarter of these goods are in inventory. Almagro makes a
mark-up of 25% on all goods sold.
What is the cost of sales figure for Gublis Group for the year ended 31 August
2011?
A $30,533
B $30,648
C $32,948
D $39,945

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C H A P T E R 1 8 – C O N S O L ID A T E D F I N A N C I A L S T A T E M EN T S

3
Which of the following investments of Coffee Co should be equity accounted
in the consolidated financial statements?
(1) 40% of the non-voting preference share capital in Tea Co.
(2) 18% of the ordinary share capital in Café Co with two of the five directors of
Coffee Co on the board of Café Co.
(3) 50% of the ordinary share capital of Choc Co, with five of the seven directors
of Coffee Co on the board of Choc Co.
A 1 and 2
B 2 only
C 1 and 3 only
D 2 and 3 only
(Dec 2011 – Exam Question)

4
Panther Co acquired 80% of the equity shares in Seal Co on 31 August 2012. The
income statements of Panther Co and Seal Co for the year ended 31 December 2012
showed:
Panther Co Seal Co
$ $
Revenue 100,000 62,000
Cost of sales 25,000 16,000
During October 2012, sales of $6,000 were made by Panther Co to Seal Co. None of
these items remained in inventory at the year end.
What is the consolidated revenue for Panther Group for the year ended 31
December 2012?
A $156,000
B $118,667
C $144,800
D $114,667
(June 2013 – Exam Question)

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Chapter 19

Conceptual and
regulatory framework

SYLLABUS CONTENT (as set by ACCA’s study guide)

A The context and purpose of financial reporting

1. The scope and purpose of financial statements for


external reporting
e) Understand the nature, principles and scope of financial reporting.

4. The regulatory framework


a) Understand the role of the regulatory system including the roles of the IFRS
Foundation (IFRSF), the International Accounting Standards Board (IASB), the
IFRS Advisory Council (IFRS AC) and the IFRS Interpretations Committee (IFRS
IC).
b) Understand the role of International Financial Reporting Standards.

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

5. Duties and responsibilities of those charged with


governance
a) Explain what is meant by governance specifically in the context of the
preparation of financial statements.
b) Describe the duties and responsibilities of directors and other parties covering
the preparation of the financial statements.

B The qualitative characteristics of financial information

1. The qualitative characteristics of financial information


a) Define, understand and apply qualitative characteristics:
i) Relevance
ii) Faithful representation
iii) Comparability
iv) Verifiability
v) Timeliness
vi) Understandability
b) Define understand and apply accounting concepts:
i) Materiality
ii) Substance over form
iii) Going concern
iv) Business entity concept
v) Accruals
vi) Fair presentation
vii) Consistency

C The use of double-entry and accounting systems

1. Double-entry book-keeping principles including the


maintenance of accounting records
e) Understand how the accounting system contributes to providing useful
accounting information and complies with organisational policies and deadlines.

F Preparing basic financial statements

2. Statement of profit or loss and statements of


comprehensive income
g) Identify items requiring separate disclosure on the face of the income
statement.

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

CHAPTER CONTENTS

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS -- 228

DUTIES AND RESPONSIBILITIES OF THOSE CHARGED WITH


GOVERNANCE ------------------------------------------------------ 229
ROLE OF DIRECTORS 229
ROLE OF EXTERNAL AUDITORS 229

THE ROLE OF IFRS ------------------------------------------------------ 230

THE REGULATORY FRAMEWORK -------------------------------------- 231

SAMPLE EXAM QUESTIONS -------------------------------------------- 232

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

QUALITATIVE CHARACTERISTICS OF FINANCIAL


STATEMENTS

Fundamental qualitative characteristics


Relevance –
Information in financial statements is relevant when it influences the economic
decisions of users. It can do that both by having a predictive value to help users
evaluate future events relating to an entity and by having a confirmatory value giving
users the ability to confirm past and present events.

Faithful representation –
Information should be faithfully represented and such information should be
complete (include all necessary information about economic phenomenon), neutral
(free from bias) and free from material error.

Enhancing qualitative characteristics


Comparability –
Users must be able to compare the financial statements of an entity over time so that
they can identify trends in its financial position and performance. Users must also be
able to compare the financial statements of different entities. Disclosure of
accounting policies is important for comparability.

Consistency –
Consistency permits valid comparisons between different accounting periods over
time.

Timeliness –
Information is available to decision-makers in time to be capable of influencing their
decisions.

Understandability –
Information should be presented in a way that is readily understandable by users
who have a reasonable knowledge of business and economic activities and accounting
and who are willing to study the information with reasonable diligence.

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

DUTIES AND RESPONSIBILITIES OF THOSE CHARGED


WITH GOVERNANCE
Corporate governance is the ‘system by which organisations are directed and
controlled’.
Corporate government is concerned with reducing the extent to which conflicts of
interest arise between the various stakeholder groups.

Role of directors
The directors are responsible for:
The preparation of the financial statements in accordance with applicable law
and relevant Accounting Standards;
Only approving financial statements if they are satisfied that they give a true
and fair view;
Selecting suitable accounting policies;
Making judgements and estimates that are reasonable and prudent;
Preparing the financial statements on a going concern basis unless it is
inappropriate to presume that the company will continue in business;
Keeping adequate accounting records;
Safeguarding the assets of the company;
Preventing and detecting fraud and other irregularities.

Role of external auditors


External auditors are appointed by the shareholders to report their opinion on the
truth and fairness of the financial statements.

IT IS NOT THE AUDITORS’ RESPONSIBILITY TO PREVENT ERRORS OR


FRAUD – IT IS THE DIRECTORS’ RESPONSIBILITY

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

THE ROLE OF IFRS


The IASB has developed a set of global financial reporting standards to support the
needs of the users of the financial statements. These are known as:
IAS – International accounting standards.
IFRS – International financial reporting standards.
The standards are a set of detailed rules giving guidance on how to account for
different types of transactions and events. For example IAS 2 details rules on how
to account for inventory and IAS 16 for non-current assets, both of which you have
already seen in this syllabus.

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

THE REGULATORY FRAMEWORK

IFRS F (IFRS Foundation)


The International Financial Reporting Standards Foundation, or IFRS
Foundation, is a non-profit accounting organization.
Its main objectives include the development and promotion of the International
Financial Reporting Standards (IFRSs) through the International Accounting
Standards Board (IASB), which it oversees.

IASB (International Accounting Standards Board)


The International Accounting Standards Board (IASB) is the independent,
accounting standard-setting body of the IFRS Foundation.
It is responsible for developing International Financial Reporting Standards and
promoting the use and application of these standards.

IFRS AC (IFRS Advisory Council)


The IFRS Advisory Council is the formal advisory body to the IASB and the Trustees
of the IFRS Foundation.
It consists of a wide range of representatives from groups that are affected by and
interested in the IASB’s work. These include investors, financial analysts and other
users of financial statements, as well as preparers, academics, auditors, regulators,
professional accounting bodies and standard-setters.

IFRS IC (IFRS Interpretations Committee)


The IFRS Interpretations Committee is the interpretative body of the IFRS
Foundation.
Its mandate is to review on a timely basis widespread accounting issues that have
arisen within the context of current International Financial Reporting Standards
(IFRSs). The work of the Interpretations Committee is aimed at reaching consensus
on the appropriate accounting treatment (IFRIC Interpretations) and providing
authoritative guidance on those issues.

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C H A P T E R 1 9 – C O N C E P T U A L A N D R EG U L A T O R Y F R A M EW O R K

SAMPLE EXAM QUESTIONS

1
The directors of Belgravia Capital Co wish to omit an item from the company’s
financial statements on the grounds that it is commercially sensitive. Information on
the item would influence the users of the information when making economic
decisions. According to IAS 1 Presentation of Financial Statements the item is said
to be:
A Neutral
B Prudent
C Material
D Substantial

2
The IASB’s Framework for the Preparation and Presentation of Financial Statements
gives qualitative characteristics that make financial information reliable.
Which of the following are examples of those qualitative characteristics?
(1) Accruals
(2) Faithful representation
(3) Going concern
(4) Neutrality
A 1 and 2
B 2 and 4
C 2 and 3
D 1 and 4

3
What is the principal duty of an external auditor?
A To give an opinion of the truth and fairness of the financial statements.
B To ensure that a company’s systems and controls are adequate to ensure the
reliability of the accounting records.
C To prevent fraud and errors.
D To discover all errors in the accounts.

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Appendix - answers to
examples and sample
exam questions

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CHAPTER 1: INTRO TO FINANCIAL ACCOUNTING

Answers to Chapter 1 Sample Exam Questions

Question 1
C

Question 2
C

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CHAPTER 2: FINANCIAL STATEMENTS

Answers to Chapter 2 Examples

Example 1

ASSETS = CAPITAL +LIABILITIES

1.7.2012 Cash 20,000 = 20,000

3.7.2012 Van 9,500


Cash (9,500)
0 = 0

7.7.2012 Cash 5,000 = 5,000

25,000 = 20,000 + 5,000

Answers to Chapter 2 Sample Exam Questions

Question 1
D

Question 2
C

Question 3
B

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CHAPTER 3: DOUBLE ENTRY BOOKKEEPING

Answers to Chapter 3 Examples

Example 1 – George

Journal

1.4.2012
Dr Bank a/c $50,000
Cr Capital a/c $50,000

2.4.2012
Dr Purchases a/c $5,000
Cr Trade Payables a/c $5,000

3.4.2012
Dr Cash a/c $6,000
Cr Sales a/c $6,000

4.4.2012
Dr Trade payables a/c $5,000
Cr Bank a/c $5,000

5.4.2012
Dr Rent expense a/c $450
Cr Bank a/c $450

6.4.2012
Dr Trade receivables a/c $6,000
Cr Sales a/c $6,000

7.4.2012
Dr Purchases a/c $7,000
Cr Trade payables a/c $7,000

8.4.2012

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Dr Motor vehicles a/c $7,000


Cr Cash a/c $7,000

Main Ledger

DR Bank / Cash a/c CR


$ $
1.4.2012 Capital 50,000 4.4.2012 Trade payables 5,000
3.4.2012 Sales 6,000 5.4.2012 Rent 450
8.4.2012 Motor vehicle 7,000

Balance c/f 43,550


56,000 56,000

Balance b/f 43,550

DR Capital a/c CR
$ $

Balance c/f 50,000 1.4.2012 Bank 50,000

Balance b/f 50,000

DR Purchases a/c CR
$ $
2.4.2012 Trade payables 5,000
7.4.2012 Trade payables 7,000 Ret’ profit 12,000

12,000 12,000

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DR Trade payables a/c CR


$ $

4.4.2012 Bank 5,000 2.4.2012 Purchases 5,000


Balance c/f 7,000 7.4.2012 Purchases 7,000

12,000 12,000

Balance b/f 7,000

DR Sales a/c CR
$ $
3.4.2012 Cash 6,000
Ret’ profit 12,000 6.4.2012 Trade receivables 6,000

12,000 12,000

DR Rent a/c CR
$ $
5.4.2012 Bank 450 Ret’ profit 450

DR Trade receivables a/c CR


$ $
6.4.2012 Sales 6,000 Balance c/f 6,000

Balance b/f 6,000

DR Motor vehicles a/c CR


$ $
8.4.2012 Cash 7,000 Balance c/f 7,000

Balance b/f 7,000

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Trial balance
DR CR
Account name Financial Statement $ $

Bank SFP 43,550

Capital SFP 50,000

Purchases SPL 12,000

Trade payables SFP 7,000

Sales SPL 12,000

Rent SPL 450

Trade receivables SFP 6,000

Motor vehicles SFP 7,000

69,000 69,000
Total

Closing Inventory Journal


Dr Inventory (SFP) 7,000
Cr Closing Inventory (SPL) 7,000

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George Statement of Profit or Loss for the two weeks ended 14 April 2012
$ $
Sales
12,000
Less: Cost of sales

Opening inventory 0

Purchases 12,000

Closing inventory -7,000


(5,000)

Gross profit 7,000

Other income 0

Less: expenses

Rent 450
(450)
Profit for the year 6,550

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George Statement of Financial Position as at 14 April 2012


Cost Accumulated Carrying
Depreciation Value
$ $ $
Non–current assets

Motor vehicles 7,000 0 7,000

Current assets

Inventory 7,000

Trade receivables 6,000

Cash at bank 43,550

56,550
Total assets 63,550

Capital

Opening capital 50,000

Profit 6,550

Drawings 0
56,550

Non–current liabilities 0

Current liabilities

Trade payables 7,000


7,000

Total capital and liabilities 63,550

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Example 2 (Tina)
Journal

1.1.2012
Dr Cash a/c $65,000
Cr Capital a/c $65,000

2.1.2012
Dr Purchases a/c $8,000
Cr Trade payables a/c $8,000

7.1.2012
Dr Cash a/c $4,000
Cr Sales a/c $4,000

8.1.2012
Dr Trade payables a/c $4,000
Cr Bank a/c $4,000

14.1.2012
Dr Insurance expense a/c $75
Cr Bank a/c $75

15.1.2012
Dr Trade receivables a/c $12,000
Cr Sales a/c $12,000

16.1.2012
Dr Purchases a/c $10,000
Cr Trade payables a/c $10,000

18.1.2012
Dr Computer equipment a/c $3,000
Cr Cash a/c $3,000

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20.1.2012
Dr Rent expense a/c $150
Cr Bank a/c $150

21.1.2012
Dr Cash a/c $10,000
Cr Sales a/c $10,000

25.1.2012
Dr Petty cash a/c $100
Cr Bank a/c $100

31.1.2012
Dr Stationery expense a/c $30
Cr Petty cash a/c $30

Main Ledger

DR Bank / Cash a/c CR


$ $
1.1.2012 Capital 65,000 8.1.2012 Trade payables 4,000
7.1.2012 Sales 4,000 14.1.2012 Insurance 75
21.1.2012 Sales 10,000 18.1.2012 Computer equipment 3,000
20.1.2012 Rent 150
25.1.2012 Petty cash 100

Balance c/f 71,675


79,000 79,000

Balance b/f 71,675

DR Capital a/c CR
$ $

Balance c/f 65,000 1.1.2012 Bank 65,000

Balance b/f 65,000

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DR Purchases a/c CR
$ $
2.1.2012 Trade payables 8,000
16.1.2012 Trade payables 10,000 Ret’ profit 18,000

18,000 18,000

DR Trade payables a/c CR


$ $

8.1.2012 Bank 4,000 2.1.2012 Purchases 8,000


Balance c/f 14,000 16.1.2012 Purchases 10,000

18,000 18,000

Balance b/f 14,000

DR Sales a/c CR
$ $
7.1.2012 Cash 4,000
Ret’ profit 26,000 15.1.2012 Trade receivables 12,000
21.1.2012 Cash 10,000

26,000 26,000

DR Insurance a/c CR
$ $
14.1.2012 Bank 75 Ret’ profit 75

DR Trade receivables a/c CR


$ $
15.1.2012 Sales 12,000 Balance c/f 12,000

Balance b/f 12,000

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DR Computer equipment CR
$ $
18.1.2012 Cash 3,000 Balance c/f 3,000

Balance b/f 3,000

DR Rent a/c CR
$ $
20.1.2012 Bank 150 Ret’ profit 150

DR Petty cash a/c CR


$ $
25.1.2012 Bank 100 31.1.2012 Stationery 30
Balance c/f 70

100 100
Balance b/f 70

DR Stationery a/c CR
$ $
31.1.2012 Petty cash 30 Ret’ profit 30

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Trial balance
DR CR
Account name Financial Statement $ $

Bank SFP 71,675

Capital SFP 65,000

Purchases SPL 18,000

Trade payables SFP 14,000

Sales SPL 26,000

Insurance SPL 75

Trade receivables SFP 12,000

Computer equipment SFP 3,000

Rent SPL 150

Petty cash SFP 70

Stationery SPL 30

Total 105,000 105,000

Closing Inventory Journal


Dr Inventory (SFP) 5,000
Cr Closing Inventory (SPL) 5,000

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Tina Statement of Profit or Loss for the month ended 31 January 2012
$ $
Sales 26,000

Less: Cost of sales

Opening inventory 0

Purchases 18,000

Closing inventory -5,000


(13,000)

Gross profit 13,000

Other income 0

Less: expenses

Insurance 75

Rent 150

Stationery 30

(255)
Profit for the year 12,745

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Tina Statement of Financial Position as at 31 January 2012


Cost Accumulated Carrying
Depreciation Value
$ $ $
Non–current assets

Computer equipment
3,000 0 3,000
Current assets

Inventory 5,000

Trade receivables 12,000

Cash at bank 71,675

Petty cash 70

88,745
Total assets 91,745

Capital

Opening capital 65,000

Profit 12,745

Drawings 0
77,745

Non–current liabilities 0

Current liabilities

Trade payables 14,000


14,000

Total capital and liabilities 91,745

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Answers to Chapter 3 Sample Exam Questions

Question 1
B

Question 2
D

Question 3
D

Question 4
C

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CHAPTER 4: INVENTORY

Answers to Chapter 4 Examples

Example 1 (Denzel)
Bon Bons – 520 x $0.25 = $130
Spangles – 640 x $0.1 = $64
Cola Cubes – 400 x $0.1 = $40
Total value of closing inventory - $234

Example 2 (Radiance Co)


$ $
Closing valuation 42,800

Less
Damaged inventory Table (500)
Chairs (400) (900)
Add NRV
Table (200 – 50) 150
Chairs 80 230

42,130

Cost of Sales

Opening inventory 45,678


Purchases 98,000
Closing inventory (42,130)
101,548

Example 3 (Navigator Office Supplies)


FIFO
Total purchases 800 pens
Total sales 320 pens
Closing inventory 480 pens

Valuation
100 pens @ $2.60 each $260
200 pens@ $2.50 each $500
180 pens @$2.40 each $432
= $1,192

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Weighted average cost


Periodic method

Average weighted cost per unit = $1,960 total cost


800 units

= $2.45

Closing inventory = 480 units x $2.45

= $1,176
Continuous method

Date Units Unit Value $ Total Value

Opening 500 $2.40 $1,200

12 Jan Purchase 200 $2.50 $500

Sub Total 700 $2.43 $1,700

16 Jan Sales (320)

Sub Total 380 $2.43 $923.40

17 Jan Purchase 100 $2.60 $260

Sub Total 480 $2.47 $1,183.40

Answers to Chapter 4 Sample Exam Questions

Question 1
A

Question 2
C

Question 3
$2,182

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CHAPTER 5: IRRECOVERABLE DEBTS AND ALLOWANCES

Answers to Chapter 5 Examples

Example 1 (Barnstormer Co)


The balance that would be showing in the statements of profit or loss would be a
credit balance for $2,000.

Example 2 (Doyles Co)


Balance per trade receivables $26,000
Less Irrecoverable debt ($2,000)
Less Specific allowance ($4,000)
$20,000
General allowance c/fwd 4% $800
General allowance b/fwd $600
Movement $200

Therefore balance per irrecoverable debts will amount to $6,200 debit.

Example 3 (Haven Bay Co)


Balance per trade receivables $46,000
General allowance c/fwd 2% $920
General allowance b/fwd $1,080
Movement $160

Therefore balance per irrecoverable debts will amount to $120 credit.

Answers to Chapter 5 Sample Exam Questions

Question 1
C

Question 2
A

Question 3
A

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CHAPTER 6: NON-CURRENT ASSETS

Answers to Chapter 6 Examples

Example 1
Capital Expense
Purchase of a motor vehicle √
New coat of paint √
Stereo system √
Insurance √
Roof rack √
Purchase of tax disc √
New tyre √

Example 2
Initial cost to capitalise of the machine:
$
List price 100,000
Trade discount (100,000 x 10%) (10,000)
Net cost 90,000
Shipping and handling 2,500
Initial testing 10,000
Cabling (10,000 – 3,000) 7,000
Floor reinforcing 5,000
In house labour costs 7,000
Total cost to capitalise as a non-current asset 121,500

Example 3 (Microspam Co)


i)
150,000 - 20,000 = $26,000 per annum
5
ii)
26,000 x 5/12 = $10,833

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Example 4 (Drisco Co)


(i) (ii)
$
Cost 25,000 Cost 25,000

Dep'n (25%*25,000) (6,250) Dep'n (25%*25,000*3/12) (1,563)

Carrying value
31.12.06 18,750 Carrying value 31.12.06 23,437

Dep'n (25% * 18,750) (4,688) Dep'n (25% * 23,437) (5,859)

Carrying value
31.12.07 14,062 Carrying value 31.12.07 17,578

Dep'n (25% * 14,062) (3,515) Dep'n (25% * 17,578) (4,394)

Carrying value
31.12.08 10,547 Carrying value 31.12.08 13,184
(i)

DR Cost CR
$ $
1.10.2006 Bank 25,000 Balance c/f 25,000

Balance b/f 25,000

Accumulated
DR depreciation CR
$ $
Balance c/f 6,250 31.12.2006 Dep’n (PL) 6,250

1.1.07 Balance b/f 6,250


Balance c/f 10,938 31.12.07 Dep’n (PL) 4,688
10,938 10,938

1.1.07 Balance b/f 10,938


Balance c/f 14,453 31.12.08 Dep’n (PL) 3,515
14,453 14,453
Balance b/f 14,453

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(ii)

DR Cost CR
$ $
1.10.2006 Bank 25,000 Balance c/f 25,000

Balance b/f 25,000

Accumulated
DR depreciation CR
$ $
Balance c/f 1,563 31.12.2006 Dep’n (PL) 1,563

1.1.07 Balance b/f 1,563


Balance c/f 7,422 31.12.07 Dep’n (PL) 5,859
7,422 7,422

1.1.07 Balance b/f 7,422


Balance c/f 11,816 31.12.08 Dep’n (PL) 4,394
11,816 11,816
Balance b/f 11,816

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Example 5 (Chris)
(i) $
Cost (1.01.1994) 45,000
Acc Dep’n (45,000*2%*15 years) (13,500)
Carrying value 1.01.2009 31,500

$
Valuation 150,000
Carrying value at 1.01.09 (31,500)
Revaluation gain 118,500

(ii)
Dr Cost $105,000
Dr Accumulated depreciation $13,500
Cr Revaluation reserve $118,500

DR Cost CR
$ $
1.1.2009 Cost b/f 45,000
Revaluation
1.1.2009 reserve 105,000 Balance c/f 150,000
150,000 150,000

Balance b/f 150,000

DR Accumulated depreciation CR

1.1.2009 Revaluation reserve 13,500 1.1.2009 Balance b/f 13,500

DR Revaluation reserve CR
$ $
1.1.2009 Cost 105,000
Balance c/f 118,500 1.1.2009 Acc Dep’n 13,500

118,500 118,500

Balance b/f 118,500


(iii)
Depreciation charge for y/e 31.12.09 = $150,000 /35 = $4,286

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Example 6 (Mrs Kemp)

$
Cost (1.04.2007) 22,000

Dep'n (20%*22,000*9/12) (3,300)

Carrying value 31.12.07 18,700

Dep'n (20% * 18,700) (3,740)

Carrying value 31.12.08 14,960

Dep'n ((20% * 14,960)/12)x2 (1,496)

Carrying value 01.07.09 13,464

DR Disposals a/c CR
$ $
1.07.09 Motor vehicle (cost) 22,000 1.07.09 Acc Dep’n 8,536
1.07.09 Bank 8,000

Re’ Profit
(Loss) 5,464

22,000 22,000

Example 7 (Lesley)
$

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Sale proceeds 1,500

Carrying value at 1.03.10 (3,400)

Loss on disposal (1,900)


Journal entries
Step 1
Dr Disposals $15,000
Cr Old Van (cost) $15,000

Step 2
Dr Acc Dep’n $11,600
Cr Disposals $11,600

Step 3
Dr New Van (cost) $18,000
Cr Bank $16,500
Cr Disposals (Part exchange allowance) $1,500

DR Disposals a/c CR
$ $
1.03.10 Old Van (cost) 15,000 1.03.10 Acc Dep’n 11,600
1.03.10 Part exchange allowance 1,500

PL (Loss) 1,900

15,000 15,000

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Example 8

CV at date of revaluation
$
Jan-01 Cost 300,000
Dec-03 Accumulated depreciation -18,000
(300,000 / 50 years x 3 years)
Dec-03 CV 282,000

Revaluation gain
$
Valuation 500,000
-
CV 282,000
Revaluation gain 218,000

Journal entry
Dr Building cost (500,000 – 300,000) $200,000
Dr Accumulated depreciation $18,000
Cr Revaluation reserve $218,000

CV at date of disposal
$
Jan-04 Valuation 500,000
Dec-07 Accumulated depreciation -40,000
(500,000 / 50 years x 4 years)
Dec-07 CV 460,000

Profit/loss on disposal
$
Proceeds 700,000
CV -460,000
Profit on disposal 240,000
The balance of the revaluation reserve would then be removed and credited to
retained earnings.

Answers to Chapter 6 Sample Exam Questions

Question 1
D

Question 2
B

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Question 3
C

Question 4
D

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CHAPTER 7: ACCRUALS AND PREPAYMENTS

Answers to Chapter 7 Examples

Example 1 (Fleetwood Designs Co)


Estimate of charges for Nov 09 and Dec 09 (using 31.10.11) gas bill:
=2/3 x $300
=$200

The entry needed would be:


Dr Gas expense $200
Cr Accruals $200

DR Gas expense a/c CR


$ $
30.04.11 Cash 300
31.07.11 Cash 310
31.10.11 Cash 300
31.12.11 Accrual 200 31.12.11 Expense for the 1,110
year to SPL

1,110 1,110

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Example 2 (Julia)
=2/3 x $1,650
=$1,100

The entry needed would be:


Dr Rent expense $1,100
Cr Accruals $1,100

DR Rent expense a/c CR


$ $
07.04.11 Cash 1,500 01.03.11 Accrual reverse 1,200
09.07.11 Cash 1,950
06.10.11 Cash 2,250
09.01.12 Cash 1,650
28.02.12 Accrual 1,100 28.02.12 Expense for the 7,250
year to SPL

8,450 8,450

Example 3 (Mariah)
Amount prepaid (1.1.12 to 31.07.12) = 7/12 x $1,800
= $1,050

The entry needed would be:


Dr Prepayments $1,050
Cr Insurance expense $1,050

DR Insurance expense a/c CR


$ $
01.08.11 Cash 1,800 31.12.11 Prepayment 1,050
31.12.11 Expense for the 750
year to SPL

1,800 1,800

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Example 4 (Mariah)
Amount prepaid (1.1.13 to 31.07.13) = 7/12 x $2,200
= $1,283

The entry needed would be:


Dr Prepayments $1,283
Cr Insurance expense $1,283

DR Insurance expense a/c CR


$ $
01.01.12 Prepayment b/f 1,050 31.12.12 Prepayment 1,283
01.08.12 Cash 2,200 31.12.12 Expense for the 1,967
year to SPL

3,250 3,250

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Example 5 (Jen)

DR Rental income a/c CR


$ $
01.12.11 Accr income rev’ 27,600 Cash 718,050
30.11.12 Income for the year 722250 30.11.12 Accrued income 31,800
to SPL

749,850 749,850

Example 6 (Mandy)
Income received in advance (May 2010) = 1/3 x $600
= $200

The entry needed would be:


Dr Rental income $200
Cr Deferred income $200

DR Rental income a/c CR


$ $
30.04.10 Deferred income 200 01.05.09 Deferred income 200
b/f
30.04.10 Income for the year 2,150 01.06.09 Cash 600
to SPL
01.09.09 Cash 450
01.12.09 Cash 500
01.03.10 Cash 600

2,350 2,350

Answers to Chapter 7 Sample Exam Questions

Question 1
C

Question 2
D

Question 3
B

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CHAPTER 8: SALES TAX

Answers to Chapter 8 Examples

Example 1
$
i) List price 2,000
Trade discount @ 5% (100)

Net amount 1,900


Sales tax @ 15% 285
Gross amount 2,185

$
ii) Net amount 1,000
Sales tax @ 15% 150
Gross amount 1,150

$
iii) Net amount 20
Sales tax @ 15% 3
Gross amount 23

Dr Sales tax control a/c Cr


$ $
Purchases 150 Sales 285
Stationery 3
Balance c/f 132

285 285

Balance b/f 132

Answers to Chapter 8 Sample Exam Questions

Question 1
C

Question 2
B

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CHAPTER 9: BOOKS OF PRIME ENTRY

Answers to Chapter 9 Examples

Example 1 (Paris)
DR Payables Ledger Control Account CR
$ $

Purchase returns 14,000 1.07.11 Balance b/f 53,500


Discounts received 12,000 Credit purchases 300,000
Payments 263,100
Contra 17,500

30.06.12 Balance c/f 46,900

353,500 353,500

1.07.12 Balance b/f 46,900

DR Receivables Ledger Control Account CR


$ $

1.07.11 Balance b/f 51,500 Sales returns 17,000


Credit sales 450,000 Discounts allowed 11,000
Irrecoverable debts 2,500
Cash received 438,580
Contra 17,500
30.06.12 Balance c/f 14,920

501,500 501,500

1.07.12 Balance b/f 14,920

Answers to Chapter 9 Sample Exam Questions

Question 1
A

Question 2
A

Question 3
B

Question 4
D

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Question 5
B

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CHAPTER 10: CONTROL ACCOUNT RECONCILIATIONS

Answers to Chapter 10 Examples

Example 1 (Explorer Rain Wear)

DR Payables Ledger Control Account CR


$ $

2. PDB casting error 1,000 31.12.07 Original balance b/f 22,550


3. Purchase returns 1,590 1. Invoice omitted 1,200
4. Discounts received 10
5. Contra 500

31.12.07 Amended balance c/f 20,650

23,750 23,750

1.01.08 Balance b/f 20,650

Balance per payables ledger (list) $ 20,650

Example 2 (Benji)

DR Receivables Ledger Control Account CR


$ $

Original balance b/f 72,266 1. Contra 14,592


2. SDB casting error 2,500
3. Discounts allowed 36,015
4. Irrecoverable debts 3,000

Amended balance c/f 16,159

72,266 72,266

Balance b/f 16,159

$
Original total of balances on receivables ledger 70,659
4. Irrecoverable debts (3,000)
5. Cash received from customers (20,000)
6. Invoice posting error (31,500)
Revised total of balances on receivables ledger 16,159

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Example 3 (Motor (UK) Co)


$
Original balance on Tyres Co’s account in Ford Motor 118,000
2. Discounts not allowed 500
3. Contra (5,000)

Revised balance on Dunlop Tyre Co account in Motor Co 113,500

$
Original balance per supplier statement from Tyre Co 138,000
1. Purchase returns (15,000)
4. Payment (9,500)

Correct amount owed by Motor Co to Tyre Co 113,500

Example 4 (Michael)
1. Yes, as casting error affects control account only.
2. No, as the error will affect both the control account and total list of receivables
balances.
3. Yes, as entry not posted in the control account.
4. Yes, as entry not posted in the list of individual receivables balances.
5. Yes, as casting error affects control account only.
6. Yes.

Answers to Chapter 10 Sample Exam Questions

Question 1
C

Question 2
A

Question 3
D

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CHAPTER 11: CORRECTION OF ERRORS AND SUSPENSE


ACCOUNTS

Answers to chapter 11 examples

Example 1

Entry recorded Should have been Correcting entry


$ $ $
1 Not recorded Dr Stationery expense 500 Dr Stationery expense 500
Cr Bank 500 Cr Bank 500

2 Dr Computer 400 Dr Computer repairs 400 Dr Computer repairs 400


equipment (NCA) expense expense
Cr Bank 400 Cr Bank 400 Cr Computer equipment 400
(NCA)

3 Dr Bank 60 Dr Bank 60 Dr Discounts received 60


Cr Discounts received 60 Cr Commission income 60 Cr Commission income 60

4 Dr Property 550 Dr Property 5,500 Dr Property 4,950


maintenance expense maintenance expense maintenance expense
Cr Bank 550 Cr Bank 5,500 Cr Bank 4,950

5 Dr Receivables Control 1,000 Dr Payables Control 1,000 Dr Payables Control 2,000


Account Account Account

Cr Payables Control 1,000 Cr Receivables Control 1,000 Cr Receivables Control 2,000


Account Account Account

Example 2
Dr Stationery expense $30
Cr Suspense a/c $30

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Example 3
DR Suspense Account CR
$ $
3. Stationery 340 Per TB 3,162
5. Discounts allowed 2,620
7.Rental income 3,742
10.Receivables Control 2,500 9. Drawings 800

6,582 6,582

Entry recorded Should have been Correcting entry


$ $ $
1 Dr Stationery expense 780 Dr Stationery expense 440 Dr Suspense a/c 340
Cr Bank 440 Cr Bank 440 Cr Stationery expense 340
Cr Suspense a/c 340

2 Dr Suspense a/c 2,620 Dr Discounts allowed 1,310 Dr Discounts allowed 2,620

Cr Receivables Control 1,310 Cr Receivables Control 1,310 Cr Suspense a/c 2,620


Account Account

Cr Discounts allowed 1,310


3 Dr Bank 3,742 Dr Bank 3,742 Dr Suspense a/c 3,742

Cr Suspense a/c 3,742 Cr Rental income 3,742 Cr Rental income 3,742

4 Dr Suspense a/c 800 Dr Drawings 400 Dr Drawings 400

Cr Bank 400 Cr Bank 400 Dr Purchases 400


Cr Purchases 400 Cr Suspense a/c 800

5 Dr Receivables Control 1,250 Dr Payables Control 1,250 Dr Suspense a/c 2,500


Account Account

Dr Payables Control 1,250 Cr Receivables Control 1,250 Cr Receivables Control 2,500


Account Account Account

Cr Suspense a/c 2,500

Example 4
Dr Cr
Draft profit 198,938
1. Stationery 340
2. Discounts allowed 2,620
3. Rental income 3,742
4. Purchases 400

4,203 204,203
Revised profit c/fwd 200,000

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Answers to Chapter 11 Sample Exam Questions

Question 1
D

Question 2
B

Question 3
B

Question 4
D

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CHAPTER 12: BANK RECONCILIATIONS

Answers to Chapter 12 Examples

Example 1 (Mary Kay)

DR Adjusted Cash Book CR


$ $
30.04.10 Balance b/f 20,095 11.04.10 Standing Order 750
18.04.10 BACS 3,500 14.04.10 Direct Debit 750
24.04.10 Bank Charges 500

30.04.10 Balance c/f 21,595

23,595 23,595

1.05.10 Balance b/f 21,595

Bank Reconciliation
$
Balance per bank statement 19,550

Less: Unpresented cheques 1440 (150)


1443 (395)
1444 (165)
1445 (245)

Add: Outstanding lodgements 6532 3,000

Balance per adjusted cash book 21,595

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Example 2 (Rose)

DR Adjusted Cash Book CR


$ $
1. Cheque error 459 30.11.09 Balance b/f 2,400
7. BACS 6,196 2. Direct Debit 225
5. Dishonoured 1,450
cheque
6. Bank charges 1,400
8. Cheque 100600 180

30.11.09 Balance c/f 1,000

6,655 6,655

1.12.09 Balance b/f 1,000

Bank Reconciliation
$
Balance per bank statement (1,550)

Less: Unpresented cheques (5,840)

Add: Outstanding lodgements 8,390

Balance per adjusted cash book 1,000

Answers to Chapter 12 Sample Exam Questions

Question 1
D

Question 2
A

Question 3
B

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CHAPTER 13: INCOMPLETE RECORDS

Answers to Chapter 13 Examples

Example 1

Change Capital Profit Drawings


in net introduced for the in period
assets year

3,000 = 0 + ? - 2,500

This can be written as:

3,000 - 0 + 2,500 = Profit

Profit = 5,500

Example 2

$
Opening capital (Bal fig) 184,000
Profit 50,000
Capital introduced 40,000
Drawings (2,000 x 12) (24,000)
Closing capital 250,000

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Example 3

DR Trade receivables control account CR


$ $
Balance b/f 30,000 Credit receipts 40,000
Credit sales (Bal 50,000 Discounts 3,000
Fig) allowed
Balance c/f 37,000

80,000 80,000

Credit sales 50,000


Cash sales 15,000
Total sales 65,000

Example 4

DR Trade payables control account CR


$ $
Payments 33,000 Balance b/f 30,000
Discounts 4,000
received
Balance c/f 26,000 Purchases(Bal 33,000
Fig)

63,000 63,000

Example 5

DR Bank CR
$ $
31/12/09 Receipts(Bal Fig) 12,130 01/01/09 Balance b/f 1,367
31/12/09 Payments 8,536
31/12/09 Balance c/f 2,227

12,130 12,130

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Example 6

DR Cash CR
$ $
Balance b/f 900 Banked 10,000
Drawings 1,000
Receipts(Bal 13,100 Wages 2,000
Fig)
Balance c/f 1,000

14,000 14,000

Example 7 (Mark-up)

60% 20% 15%


Sales 960 960 805

COS 600 800 700

Profit 360 160 105

Example 8 (Margin)

10% 30% 25%


Sales 800 900 320

COS 720 630 240

Profit 80 270 80

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Example 9

Sales 6,600 110%

Cost of sales

Opening inventory 300


Purchases (Balancing Figure) 6,200
Closing inventory -500
(6,000) 100%

Gross profit (6,600 / 110 x 10) 600 10%

Example 10

Sales (3,040 / 95 x 100) 3,200 100%

Cost of sales

Opening inventory 800


Purchases 2,840
Closing inventory -600
(3,040) 95%

Gross profit 160 5%

Example 11

Sales 100,000 100%

Cost of sales

Opening inventory 10,000


Purchases 82,000
Closing inventory -3,000
Inventory lost in fire (balancing figure) -9,000
(80,000) 80%

Gross profit (100,000 / 100 x 20) 20,000 20%

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Answers to Chapter 13 Sample Exam Questions

Question 1
C

Question 2
A

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CHAPTER 14: LIMITED COMPANY ACCOUNTS

Answers to Chapter 14 Examples

Example 1 (Big Boss Co)


Dr Bank $37,500
Cr Share capital $37,500

Example 2 (Big Boss Co)


Dr Bank $62,500
Cr Share capital $12,500
Cr Share premium $50,000

Example 3 (Big Boss Co)

i)
Dr Bank $6,250
Cr Redeemable preference shares $6,250

ii) Dividend payable:


Ordinary s/h = 200,000 shares x $0.05
= $10,000

Redeemable preference s/h = $6,250 x 6%


= $375

Journal entries:
Dr Finance cost $375
Cr Accrued redeemable preference shares $375

Dr Retained earnings $10,000


Cr Dividend payable $10,000

Example 4 (Banana Bread Co)


25,000 (50,000/2) bonus shares x $0.50 = $12,500
Dr Share premium $12,500
Cr Share capital $12,500

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Example 5 (Banana Bread Co)

i)
Total shares pre rights issue = 50,000+25,000
= 75,000 shares
Rights issue shares =75,000/3
=25,000
Dr Cash 37,500 (25,000 shares x $1.50)
Cr Share capital 12,500 (25,000 shares x $0.5)
Cr Share premium 25,000 (25,000 shares x $1.00)

ii)
Total shares post rights issue = 75,000+25,000
= 100,000 shares
Dividend = 100,000 shares x $0.05
= $5,000
Dr Retained earnings $5,000
Cr Dividend payable $5,000

iii)
Share capital = 50,000 (25,000 + 12,500 + 12,500)
Share premium = 62,500 (50,000 - 12,500 + 25,000)
Retained earnings = 110,000 (100,000 + 15,000 - 5,000)

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Example 6 (Banana Bread Co)


Share Share Retained
capital premium earnings

$ $ $
Bal b/f 1.01.09 25,000 50,000 100,000
Bonus issue 12,500 (12,500)
Rights issue 12,500 25,000
Profit for the year 15,000
Dividend payable (5,000)

Bal c/f 31.12.09 50,000 62,500 110,000

Example 7 (Moodle Co)


Dr Cash $4,500,000 (30,000 x $150)
Cr Loan notes $4,500,000
Interest to 31.12.12 = $4,500,000 x 10% x 6/12
= $225,000
Dr Finance cost $225,000
Cr Accrued interest $225,000

Example 8 (The City Co)

DR Taxation CR
$ $
1.10.09 Cash 255,000 1.01.09 Balance b/f 250,000

31.12.09 Under provision 5,000


to SPL

31.12.09 Balance c/f 270,000 31.12.09 Tax charge to 270,000


SPL

525,000 525,000

1.1.10 Balance b/f 270,000

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Example 9 (Jewel)
Journals
Dr Cr

1. Dr Depreciation charge (150,000 x 2%) 3,000


Cr Accumulated depreciation - Buildings
3,000

2. Dr Depreciation charge (422,987 x 10%) 42,299


Cr Accumulated depreciation – P & M 42,299

3. Dr Closing inventory (SFP) 28,990


Cr Closing inventory (SPL) 28,990

4. Dr Allowance for receivables Work 3,688


1
Cr Administration expenses 3,688

5. Dr Taxation expense 25,000


Cr Taxation liability 25,000

6. Dr Retained earnings 3,000


Cr Dividends payable (prefs) 3,000

7. Dr Retained earnings(100,000 / 0.5 x 15c)


30,000
Cr Dividends payable 30,000

8. Dr Loan interest (10,000 – 5,000) 5,000


Cr Loan interest accrual 5,000

Working 1
Allowance for receivables

01/04/09 b/f 5,987

31/03/07 Irrecoverable
debts
3,688

31/03/10 c/f (45,987 x


5%) 2,299

5,987 5,987

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Jewel Co
Statement of Profit or Loss
Year ended 31 March 2010
$
Revenue 365,000

Cost of sales (32,000 + 69666 – 28990) (72,676)

GROSS PROFIT 292,324

Distribution costs (49,000)

Administration expenses (48,000 + 3000 + 42,299 – 3688


- 1000) (88,611)

PROFIT FROM OPERATIONS 154,713

Finance costs (10,000)

PROFIT BEFORE TAX 144,713

Income tax (25,000)

PROFIT FOR THE PERIOD 119,713

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Jewel Co
Statement of financial position as at 31 March 2010
$ $
Non – current assets

Tangible assets (150,000 + 422,987 – 3,000 –


42,299) 527,688

Current assets

Inventory 28,990
Trade receivables (45,987 – 2,299) 43,688
Cash 73,958
146,636
Total assets 674,324

Equity and liabilities

Ordinary share capital 100,000


Preference share capital 50,000
Retained earnings (234,666 + 119,713 –
30,000 – 3,000 Pref Div) 321,379
471,379

Non – current liabilities

Loan notes 100,000

Current liabilities

Trade payables 39,945


Debenture accrual 5,000
Dividend payable 33,000
Taxation 25,000
102,945

Total liabilities 674,324

Ordinary Preference Revaluation Retained Total


Shares Shares Reserve Earnings
$ $ $ $ $
Balance @ 100,000 50,000 234,666 384,666
01/04/09

Profit for the year 119,713 119,713

Dividends: ord (30,000) (30,000)


pref (3,000) (3,000)
Shares issued

Revaluation

Balance @ 100,000 50,000 321,379 471,379


31/03/10

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Example 10 (Miranda)

Journals

1 Dr Depreciation charge (225,000 x 2%) $4,500


Cr Buildings accumulated dep'n $4,500

2 Dr Depreciation charge (112,500-22,500) x 25% $22,500


Cr Plant accumulated dep'n $22,500

3 Dr Land valuation (600,000 - 450,000) $150,000


Cr Revaluation reserve $150,000
NOTE: Land is never depreciated

4 Dr Inventory (SFP) $31,869


Cr Inventory (SPL) $31,869

5 Dr Irrecoverable debts (working 1) $1,676


Cr Allowance for receivables $1,676

6 Dr Taxation expense $4,832


Cr Taxation
liability $4,832

7 Dr Retained earnings (52,500 shares at 10c) $5,250


Cr Dividend payable $5,250

Working 1
Allowance for receivables

01.01.09 b/f 2,250

31.12.09 Irrecoverable 1,676


debts
31.12.09 c/f (130,867 x
3%) 3,926
3,926 3,926

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Miranda Limited
Statement of Profit or Loss
Year ended 31 December 2009
$
Revenue 193,500

Cost of sales (33,000 + 115,869 – 31,869) (117,000)

GROSS PROFIT 76,500

Distribution costs (12,597)

Administration expenses (19,125+4,500+22,500+1,676)


(47,801)

PROFIT FROM OPERATIONS 16,102

Finance costs (0)

PROFIT BEFORE TAX 16,102

Income tax (4,832)

PROFIT FOR THE PERIOD 11,270

Other comprehensive income:


Gain on revaluation 150,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 161,270

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Miranda Co
Statement of financial position as at 31 December 2009
$ $
Non – current assets

Tangible assets (600,000 + 225,000 - 36,000 -


4,500 + 112,500 - 22,500 - 22,500) 852,000

Current assets

Inventory 31,869
Trade receivables (130,867 – 3,926) 126,941
Bank 19,427
178,237
Total assets 1,030,237

Equity and liabilities

Ordinary share capital 52,500


Share premium 18,000
Retained earnings (731,955 + 11,270 – 5,250) 737,975
Revaluation reserve 150,000

958,475
Non – current liabilities 0

Current liabilities

Trade payables 61,680


Taxation 4,832
Dividend payable 5,250
71,762

Total liabilities 1,030,237

Ordinary Share Revaluation Retained Total


Shares Premium Reserve Earnings
$ $ $ $ $
Balance @ 52,500 18,000 0 731,955 802,455
01/01/2009

Profit for the year 11,270 11,270

Dividends (5,250) (5,250)

Shares issued 0 0

Revaluation 150,000 150,000

Balance @ 52,500 18,000 150,000 737,975 958,475


31/12/2009

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Answers to Chapter14 Sample Exam Questions

Question 1
D

Question 2
D

Question 3
B

Question 4
A

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CHAPTER 15: ACCOUNTING STANDARDS

Answers to Chapter 15 Examples

Example 1
1. The refurbishment is planned to commence in the following year, the issue here
is whether or not we should provide for this future expenditure.
It must not be provided for because it is not a present obligation. The directors
intend to refurbish the stores but they may choose not to in the following year.
Therefore it fails the first criteria to meet a provision.
2. Charlotte Co’s established policy allowing customers to return goods has
created a valid expectation from its customers. This in turn has created a
constructive obligation, therefore meeting the first criteria of a provision. It
also meets criteria 2 and 3 of a provision as $130,000 being the reliable
estimate and this is from past trading experience so it is probable that these
returns could happen.
3. The court case meets the criteria of a provision as it is a present legal obligation;
it is probable (60%) chance of settlement which can be reliably measured
($75,000).

Example 2
1. Non-adjusting – plans announced after the accounting year end.
2. Adjusting – indicates that the customer’s debt was irrecoverable at the
accounting year end 31 December 2009.
3. Adjusting – the sale of inventory at less than cost indicates that it should have
been valued at NRV in the accounts.
4. Non-adjusting (unless going concern issues raised).
6. Non-adjusting.
7. Non adjusting.

Answers to Chapter 15 Sample Exam Questions

Question 1
A

Question 2
C

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CHAPTER 16: STATEMENTS OF CASH FLOW

Answers to Chapter 16 Examples

Example 1
$ $
Cash flows from operating activities
Profit before tax (44,000+6,000) 50,000
Adjustments for non-cash items:
Finance costs 2,000
Depreciation (92,000 – 78,000) 14,000
(Profit) / loss on the disposal of a non current asset -

Working capital changes:


Increase in inventory (17,000 – 12,000) (5,000)
Increase in receivables (10,000 – 2,000) (8,000)
Decrease in payables (19,000 – 13,000) (6,000)

Cash generated from operations 47,000

Interest paid (2,000)


Taxation paid (working 1) (4,000)

Cash generated from operating activities 41,000

Cash flow from investing activities


Purchase of a non-current asset (220,000 – 180,000) (40,000)
Disposal of a non-current assets -
Interest received -
Dividends received -

Net cash used in investing activities (40,000)

Cash flow from financing activities

Proceeds from the issue of shares (65,000 – 45,000) + 22,000


(12,000 – 10,000)
Receipt of loans -
Repayment of loans (10,000)
Dividends paid -

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CASH FLOW FROM FINANCING ACTIVITIES 12,000

Movement in cash and cash equivalents in the year 13,000

Cash and cash equivalents at the beginning of the period


(10,000+3,000) 13,000

Cash and cash equivalents at the end of the period


(10,000+16,000) 26,000

Working 1 - Taxation
Dr Taxation Cr
$ $
Cash paid (Bal
fig) 4,000 Balance b/f 1,000

Balance c/f 3,000 To SPL 6,000

7,000 7,000

Example 2
Cash flows from operating activities $

Profit before tax (2,475+1,050) 3,525


Adjustments for non-cash items:
Depreciation 1,875
Profit on disposal (225)
Finance costs 450
Working capital changes:
Decrease in inventory (5,700 - 5,100) 600
Increase in receivables (5,700 - 4,350) (1,350)
Increase in payables (5,550 - 4,800) 750

Cash generated from operations 5,625

Interest paid (450)


Taxation paid (900)

Cash generated from operating activities 4,275

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

Example 3
Cash sales 55,000
Cash received from customers 44,000

Total cash received 99,000

Cash purchases 33,000


Cash paid to suppliers 12,000
Cash expenses 11,000
Cash wages and salaries 20,000

Total cash paid 76,000

Cash generated 23,000

Example 4
Dr Interest Cr
$ $
Cash paid (Bal
fig) 4,815 Accrual b/f 180

Accrual c/f 465 To SPL 5,100

5,280 5,280

Example 5
Dr Taxation Cr
$ $
Cash paid (Bal fig) 32,828 Balance b/f 32,648

Balance c/f 35,970 To SPL 36,150

68,798 68,798

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

Example 6
Dr PP+E cost Cr
$ $
Balance b/f 405,000 Disposal 67,500
Revaluation gain 30,000
Additions (Bal fig) 97,500 Balance c/f 465,000

532,500 532,500

Dr PP+E acc depn Cr


$ $
Disposals (Bal fig) 58,500 Balance b/f 283,500
Charge for year 22,500
Balance c/f 247,500

306,000 306,000

Dr Disposals Cr
$ $
Cost 67,500 Accum depn 58,500
Proceeds (Bal fig) 2,625
Loss 6,375

67,500 67,500

Example 7
Dr Interest receivable Cr
$ $
Balance b/f 18 Cash received (Bal fig) 1,713

To SPL 2,340 Balance c/f 645

2,358 2,358

There were no balances for dividends receivable in the year so the dividend in the
SPL must equal what was received of $4,470.

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

Example 8
Share
Dr capital Cr
$ $
Balance b/f 150,000

Balance c/f 180,000 Cash received (Bal fig) 30,000

180,000 180,000

Share
Dr premium Cr
$ $
Balance b/f 405,000

Balance c/f 540,000 Cash received (Bal fig) 135,000

540,000 540,000

Total cash received from share issues in 2009 (135,000+30,000) = $165,000

Example 9
Dr 10% loan notes Cr
$ $
Cash paid (bal fig) 300,000 Balance b/f 300,000

Balance c/f 0

300,000 300,000

Dr 8% loan notes Cr
$ $
Balance b/f 90,000

Balance c/f 210,000 Cash received (Bal fig) 120,000

210,000 210,000

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Example 10
$
Balance b/f 476,400

Profit for the year 117,945

Less: dividend paid (Bal fig) (61,845)

Balance c/f 532,500

Answers to Chapter 16 Sample Exam Questions

Question 1
B

Question 2
A

Question 3
B

Question 4
B

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CHAPTER 17: INTERPRETATION

Answers to Chapter 17 Examples

Example 1

Profitability
Gross profit margin
2011 2010
60 x 100 = 24% 50 x 100 = 33%
250 150
Operating profit margin
2011 2010
30 x 100 = 12% 25 x 100 = 17%
250 150
Net profit margin
2011 2010
9 x 100 = 4% 15 x 100 = 10%
250 150

ROCE
2011 2010
30 25 x 100 =
x 100 = 12% 10%
(152 + 100) (143 + 100)

Liquidity
Current ratio
2011 2010
42 = 1.05:1 88 = 2.5:1
40 35
Quick ratio
2011 2010
(42 - 18) = 0.6:1 (88 - 20) = 1.9:1
40 35

Efficiency
Inventory days
2011 2010
18 x 365 = 35 days 20 x 365 = 73 days
190 100

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Receivables days
2011 2010
14 x 365 = 20 days 20 x 365 = 49 days
250 150
Payables days
2011 2010
40 x 365 = 77 days 35 x 365 = 128 days
190 100
Asset turnover
2011 2009
No
250 = 0.88 comparative
(292 +278)/2 n/a

Position
Gearing
2011 2010
100 x 100 = 40% 100 x 100 = 41%
(152 + 100) (143 + 100)
Interest cover
2011 2010
30 = 2 times 25 = 5 times
15 5

Answers to Chapter 17 Sample Exam Questions

Question 1
C

Question 2
C

Question 3
A

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CHAPTER 18: CONSOLIDATED FINANCIAL STATEMENTS

Answers to Chapter 18 Examples

Example 1
P group consolidated statement of financial position as at 31 December 2011
$000 $000
Non-current assets
Property, plant and equipment (1,000 +
500) 1,500
Goodwill (W) 300
1,800

Current assets
Inventory (300 + 250) 550
Trade receivables (200 + 150) 350
Bank (300 + 200) 500
1,400
Total assets 3,200

Equity and liabilities


Equity
Share capital ($1 each) 500
Retained earnings (W) 875
1,375
Non-controlling interest (W) 225

Non-current liabilities
Loan notes (100 + 50) 150

Current liabilities
Trade payables (1,000 + 450) 1,450
Total equity and liabilities 3,200

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

Workings
Group Structure

PARENT

75%
2 years ago

SUBSIDIARY
NCI = 25%

Net assets list

At statement of
At acquisition financial position

$000 $000

Share capital 200 200

Retained earnings 100 400

300 600

Goodwill

Difference $300 (post acquisition) to consolidated reserves and NCI

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Goodwill
$000
Investment at cost 450
Fair value of NCI at acquisition 150
600
Less: Fair value of net assets at acquisition (300)
Goodwill at acquisition 300

Non-controlling interest (NCI)


$000
Fair value of NCI at acquisition 150
NCI % post acquisition reserves of subsidiary 75
(25% x $300)
NCI to CSFP 225

Consolidated reserves
$000
100% Parent at year end 650
Group % post acquisition reserves of subsidiary 225
(75% x $300)
Total to CSFP 875

Example 2
P makes profit, 100% inventory left
Price 100,000 125%

Cost (Bal fig) (80,000) 100%

PUP (100,000 / 125 x 25) 20,000 25%

Dr P Retained earnings (group reserves) $20,000


Cr Group inventory $20,000

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

Example 3
S makes profit, $7m inventory left
$m
Price 7 100%

Cost (Bal fig) (6.65) 95%

PUP ($7m x 5%) 0.35 5%

Dr S Retained earnings (sub net assets list @ CSFP) $0.35m


Cr Group inventory $0.35m

Example 4

S net assets list


At 1 Jan 2011 At 31 Dec 2011
$000 $000
Equity ($1) share capital 300,000 300,000
Share premium 150,000 150,000
Retained earnings 100,000 160,000
Fair value adjustment 10,000 10,000
($50m - $40m)
560,000 620,000

Double entry
Dr (Increase) Group PP+E $10m
Cr (Increase) S net assets $10m

Goodwill
$000
Investment at cost 600,000
Fair value of NCI at acquisition 200,000
800,000
Less: Fair value of net assets at acquisition (560,000)
Goodwill at acquisition 240,000

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

Example 5
1. Shares acquired = 8,000 x 80% acquired = 6,400 shares acquired in Salid.
2. Placid shared issued = 6,400 acquired / 2 x 3 = 9,600 shares issued.
3. Value of Placid’s shares issued = 9,600 x $3 = $28,800 cost of investment.

Example 6
1. Shares acquired = 6 million shares acquired in S.
2. P shared issued = 6 million acquired / 2 x 1 = 3 million shares P issued.
3. Value of P shares issued = 3 million x $8 = $24 million value of share exchange.
4. Cost of investment:
Cash (6 million x $2.50) $15 million
Share exchange (from above) $24 million
Total cost of investment $39 million

Example 7
Group revenue for the year ended 30 November 2011
$
Parent 2,200,000
Subsidiary ($600,000 / 12 x 2) 100,000
Group 2,300,000

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Example 8
Palm group statement of profit or loss for the year ended 31 December 2011

Workings:

Parent Subsidiary Adjustments Group

$000 $000 $000 $000

Revenue 110,000 20,000 (5,000) 125,000


(80,000 x 3/12) INTER-CO SALES

Less: Cost of Sales (50,000) (7,500) 5,000


(30,000 x 3/12) INTER-CO
PURCHASES

PUP (S sold to P) (250) --- (52,750)


Working

Gross Profit 60,000 12,250 --- 72,250

Less: Admin Expenses (20,000) (8,750) --- (28,750)


(35,000 x 3/12)

Profit before tax 40,000 3,500 --- 43,500

Less: Tax (10,000) (1,250) --- (11,250)


(5,000 x 3/12)

Profit for the year 30,000 2,250 --- 32,250

Attributable to:

NCI (20% x 2,250) 450

Equity holders of the (Bal fig) 31,800


parent 32,250

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Group Structure

PARENT

80%
1/10/2011 (3m before year end)

SUBSIDIARY
NCI = 20%

PUP
S makes profit, ¼ inventory left
$000
Price (5m x ¼) 1,250 125%

Cost (bal fig) (1,000) 100%

PUP (1,250 / 125 x 25) 250 25%

Add to S cost of sales in SPL

Answers to Chapter 18 Sample Exam Questions

Question 1
B

Question 2
B

Question 3
B

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A P P E N D I X - A N S W E R S T O E X A M P L E S A N D S A M P L E E X A M Q U E S T IO N S

CHAPTER 19: CONCEPTUAL AND REGULATORY


FRAMEWORK

Answers to Chapter 19 Sample Exam Questions

Question 1
C

Question 2
B

Question 3
A

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ACCA STUDY GUIDE

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A C C A S T U D Y G U ID E

ACCA STUDY GUIDE

Can I rely on these Class Notes to cover the syllabus?

The answer is YES!


Each chapter begins with the relevant extract from ACCA’s STUDY GUIDE.
To quote ACCA:

This is the main document that students, tuition providers and publishers
should use as the basis of their studies, instruction and materials.
Examinations will be based on the detail of the study guide which
comprehensively identifies what could be examined in any examination
sitting. The study guide is a precise reflection and breakdown of the
syllabus.

Below I have set out ACCA’s Study Guide in detail for you. To help you even more,
I have also cross-referenced the individual items to the relevant chapters in your
Notes.

The context and purpose of financial reporting

1. The scope and purpose of financial statements for


external reporting CHAPTERS 1 & 19

a) Define financial reporting – recording, analysing and summarising financial


data.
b) Identify and define types of business entity – sole trader, partnership, limited
liability company.
c) Recognise the legal differences between a sole trader, partnership and a limited
liability company.
d) Identify the advantages and disadvantages of operating as a limited liability
company, sole trader or partnership.
e) Understand the nature, principles and scope of financial reporting.

2. Users’ and stakeholders’ needs CHAPTER 1

a) Identify the users of financial statements and state and differentiate between
their information needs.

3. The main elements of financial reports cHAPTERS 1 & 2


a) Understand and identify the purpose of each of the main financial statements.
b) Define and identify assets, liabilities, equity, revenue and expenses.

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4. The regulatory framework CHAPTER 19

a) Understand the role of the regulatory system including the roles of the IFRS
Foundation (IFRSF), the International Accounting Standards Board (IASB), the
IFRS Advisory Council (IFRS AC) and the IFRS Interpretations Committee (IFRS
IC).
b) Understand the role of International Financial Reporting Standards.

5. Duties and responsibilities of those charged with


governance CHAPTER 19

a) Explain what is meant by governance specifically in the context of the


preparation of financial statements.
b) Describe the duties and responsibilities of directors and other parties covering
the preparation of the financial statements.

B The qualitative characteristics of financial information

1. The qualitative characteristics of financial information


CHAPTER 19

a) Define, understand and apply qualitative characteristics:


i) Relevance
ii) Faithful representation
iii) Comparability
iv) Verifiability
v) Timeliness
vi) Understandability
b) Define understand and apply accounting concepts:
i) Materiality
ii) Substance over form
iii) Going concern
iv) Business entity concept
v) Accruals
vi) Fair presentation
vii) Consistency

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A C C A S T U D Y G U ID E

C The use of double-entry and accounting systems

1. Double-entry book-keeping principles including the


maintenance of accounting records CHAPTERS 2, 3 & 9

a) Identify and explain the function of the main data sources in an accounting
system.
b) Outline the contents and purpose of different types of business documentation,
including: quotation, sales order, purchase order, goods received note, goods
despatched note, invoice, statement, credit note, debit note, remittance advice,
receipt.
c) Understand and apply the concept of double-entry accounting and the duality
concept.
d) Understand and apply the accounting equation.
e) Understand how the accounting system contributes to providing useful
accounting information and complies with organisational policies and deadlines.
f) Identify the main types of business transactions eg sales, purchases, payments,
receipts.

2. Ledger accounts, books of prime entry and journals


CHAPTERS 3 & 9

a) Identify the main types of ledger accounts and books of prime entry, and
understand their nature and function.
b) Understand and illustrate the uses of journals and the posting of journal entries
into ledger accounts.
c) Identify correct journals from given narrative.
d) Illustrate how to balance and close a ledger account.

D Recording transactions and events

1. Sales and purchases CHAPTERS 3, 8 & 9

a) Record sale and purchase transactions in ledger accounts.


b) Understand and record sales and purchase returns.
c) Understand the general principles of the operation of a sales tax.
d) Calculate sales tax on transactions and record the consequent accounting
entries.
e) Account for discounts allowed and discounts received.

2. Cash CHAPTERS 3 & 9

a) Record cash transactions in ledger accounts.


b) Understand the need for a record of petty cash transactions.

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A C C A S T U D Y G U ID E

3. Inventory CHAPTER 4

a) Recognise the need for adjustments for inventory in preparing financial


statements.
b) Record opening and closing inventory.
c) Identify the alternative methods of valuing inventory.
d) Understand and apply the IASB requirements for valuing inventories.
e) Recognise which costs should be included in valuing inventories.
f) Understand the use of continuous and period end inventory records.
g) Calculate the value of closing inventory using FIFO (first in, first out) and AVCO
(average cost).
h) Understand the impact of accounting concepts on the valuation of inventory.
i) Identify the impact of inventory valuation methods on profit and on assets.

4. Tangible non-current assets CHAPTER 6

a) Define non-current assets.


b) Recognise the difference between current and non-current assets.
c) Explain the difference between capital and revenue items.
d) Classify expenditure as capital or revenue expenditure.
e) Prepare ledger entries to record the acquisition and disposal of non-current
assets.
f) Calculate and record profits or losses on disposal of non-current assets in the
income statement including part exchange transactions.
g) Record the revaluation of a non-current asset in ledger accounts, the statement
of comprehensive income and in the statement of financial position.
h) Calculate the profit or loss on disposal of a revalued asset.
i) Illustrate how non-current asset balances and movements are disclosed in
financial statements.
j) Explain the purpose and function of an asset register.

5. Depreciation CHAPTER 6

a) Understand and explain the purpose of depreciation.


b) Calculate the charge for depreciation using straight line and reducing balance
methods.
c) Identify the circumstances where different methods of depreciation would be
appropriate.
d) Illustrate how depreciation expense and accumulated depreciation are recorded
in ledger accounts.
e) Calculate depreciation on a revalued non-current asset including the transfer of
excess depreciation between the revaluation reserve and retained earnings.
f) Calculate the adjustments to depreciation necessary if changes are made in the
estimated useful life and/or residual value of a non-current asset.
g) Record depreciation in the income statement and statement of financial
position.

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A C C A S T U D Y G U ID E

6. Intangible non-current assets and amortisation CHAPTER 6

a) Recognise the difference between tangible and intangible non-current assets.


b) Identify types of intangible assets.
c) Identify the definition and treatment of ‘research costs’ and ‘development costs’
in accordance with International Financial Reporting Standards.
d) Calculate amounts to be capitalised as development expenditure or to be
expensed from given information.
e) Explain the purpose of amortisation.
f) Calculate and account for the charge for amortisation.

7. Accruals and prepayments CHAPTER 7

a) Understand how the matching concept applies to accruals and prepayments.


b) Identify and calculate the adjustments needed for accruals and prepayments in
preparing financial statements.
c) Illustrate the process of adjusting for accruals and prepayments in preparing
financial statements.
d) Prepare the journal entries and ledger entries for the creation of an accrual or
prepayment.
e) Understand and identify the impact on profit and net assets of accruals and
prepayments.

8. Receivables and payables CHAPTER 5

a) Explain and identify examples of receivables and payables.


b) Identify the benefits and costs of offering credit facilities to customers.
c) Understand the purpose of an aged receivables analysis.
d) Understand the purpose of credit limits.
e) Prepare the book-keeping entries to write off an irrecoverable debt.
f) Record an irrecoverable debt recovered.
g) Identify the impact of irrecoverable debts on the income statement and on the
statement of financial position.
h) Prepare the book-keeping entries to create and adjust an allowance for
receivables.
i) Illustrate how to include movements in the allowance for receivables in the
income statement and how the closing balance of the allowance should appear
in the statement of financial position.
j) Account for contras between trade receivables and payables.
k) Prepare, reconcile and understand the purpose of supplier statements.
l) Classify items as current or non-current liabilities in the statement of financial
position.

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A C C A S T U D Y G U ID E

9. Provisions and contingencies CHAPTER 15

a) Understand the definition of ‘provision’, ‘contingent liability’ and ‘contingent


asset’.
b) Distinguish between and classify items as provisions, contingent liabilities or
contingent assets.
c) Identify and illustrate the different methods of accounting for provisions,
contingent liabilities and contingent assets.
d) Calculate provisions and changes in provisions.
e) Account for the movement in provisions.
f) Report provisions in the final accounts.

10. Capital structure and finance costs CHAPTER 14

a) Understand the capital structure of a limited liability company including:


i) Ordinary shares
ii) Preference shares (redeemable and irredeemable)
iii) Loan notes
b) Record movements in the share capital and share premium accounts.
c) Identify and record the other reserves which may appear in the company
statement of financial position.
d) Define a bonus (capitalisation) issue and its advantages and disadvantages.
e) Define a rights issue and its advantages and disadvantages.
f) Record and show the effects of a bonus (capitalisation) issue in the statement
of financial position.
g) Record and show the effects of a rights issue in the statement of financial
position.
h) Record dividends in ledger accounts and the financial statements.
i) Calculate and record finance costs in ledger accounts and the financial
statements.
j) Identify the components of the statement of changes in equity.

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A C C A S T U D Y G U ID E

E Preparing a trial balance

1. Trial balance CHAPTER 3 & 11

a) Identify the purpose of a trial balance.


b) Extract ledger balances into a trial balance.
c) Prepare extracts of an opening trial balance.
d) Identify and understand the limitations of a trial balance.

2. Correction of errors CHAPTER 11

a) Identify the types of error which may occur in book-keeping systems.


b) Identify errors which would be highlighted by the extraction of a trial balance.
c) Prepare journal entries to correct errors.
d) Calculate and understand the impact of errors on the income statement,
statement of comprehensive income and statement of financial position.

3. Control accounts and reconciliations CHAPTER 10

a) Understand the purpose of control accounts for accounts receivable and


accounts payable.
b) Understand how control accounts relate to the double-entry system.
c) Prepare ledger control accounts from given information.
d) Perform control account reconciliations for accounts receivable and accounts
payable.
e) Identify errors which would be highlighted by performing a control account
reconciliation.
f) Identify and correct errors in control accounts and ledger accounts.

4. Bank reconciliations CHAPTER 12

a) Understand the purpose of bank reconciliations.


b) Identify the main reasons for differences between the cash book and the bank
statement.
c) Correct cash book errors and/or omissions.
d) Prepare bank reconciliation statements.
e) Derive bank statement and cash book balances from given information.
f) Identify the bank balance to be reported in the final accounts.

5. Suspense accounts CHAPTER 11

a) Understand the purpose of a suspense account.


b) Identify errors leading to the creation of a suspense account.
c) Record entries in a suspense account.
d) Make journal entries to clear a suspense account.

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A C C A S T U D Y G U ID E

F Preparing basic financial statements

1. Statements of financial position CHAPTER 3 & 14

a) Recognise how the accounting equation, accounting treatments as stipulated


within section D, E and examinable documents and business entity convention
underlie the statement of financial position.
b) Understand the nature of reserves.
c) Identify and report reserves in a company statement of financial position.
d) Prepare a statement of financial position or extracts as applicable from given
information using accounting treatments as stipulated within section D, E and
examinable documents.
e) Understand why the heading retained earnings appears in a company statement
of financial position.

2. Statements of profit or loss and other comprehensive


income CHAPTERS 3, 14 & 19

a) Prepare a statement of profit or loss and comprehensive income or extracts as


applicable from given information using accounting treatments as stipulated
within section D, E and examinable documents.
b) Understand how accounting concepts apply to revenue and expenses.
c) Calculate revenue, cost of sales, gross profit, profit for the year, and total
comprehensive income from given information.
d) Disclose items of income and expenditure in the statement of profit or loss.
e) Record income tax in the statement of profit or loss of a company including the
under and over provision of tax in the prior year.
f) Understand the interrelationship between the statement of financial position,
and the statement of profit or loss and other comprehensive income.
g) Identify items requiring separate disclosure on the face of the statement of
profit or loss.

3. Disclosure notes CHAPTER 15

a) Explain the purpose of disclosure notes.


b) Draft the following disclosure notes:
i) Non-current assets including table and intangible assets
ii) Provisions
iii) Events after the reporting period
iv) Inventory

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A C C A S T U D Y G U ID E

4. Events after the reporting report CHAPTER 15

a) Define an event after the reporting period in accordance with International


Financial Reporting Standards.
b) Classify events as adjusting or non-adjusting.
c) Distinguish between how adjusting and non-adjusting events are reported in
the financial statements.

5. Statements of cash flows (excluding partnerships)


CHAPTER 16
a) Differentiate between profit and cash flow.
b) Understand the need for management to control cash flow.
c) Recognise the benefits and drawbacks to users of the financial statements of a
statement of cash flows.
d) Classify the effect of transactions on cash flows.
e) Calculate the figures needed for the statement of cash flows including:
i) Cash flows from operating activities
ii) Cash flows from investing activities
iii) Cash flows from financing activities
f) Calculate the cash flow from operating activities using the indirect and direct
method.
g) Prepare statements of cash flows and extracts from statements of cash flows
from given information.
h) Identify the treatment of given transactions in a company’s statement of cash
flows.

6. Incomplete records CHAPTER 13

a) Understand and apply techniques used in incomplete record situations:


i) Use of accounting equation
ii) Use of ledger accounts to calculate missing figures
iii) Use of cash and/or bank summaries
iv) Use of profit percentages to calculate missing figures

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A C C A S T U D Y G U ID E

G Preparing simple consolidated financial statements

1. Subsidiaries CHAPTER 18

a) Define and describe the following terms in the context of group accounting:
i) Parent
ii) Subsidiary
iii) Control
iv) Consolidated or group financial statements
v) Non-controlling interest
vi) Trade/simple investment
b) Identify subsidiaries within a group structure.
c) Describe the components of and prepare a consolidated statement of financial
position or extracts thereof including:
i) Fair value adjustments at acquisition on land and buildings (excluding
depreciation adjustments)
ii) Fair value of consideration transferred from cash and shares (excluding
deferred and contingent consideration)
iii) Elimination of inter-company trading balances (excluding cash and goods
in transit)
iv) Removal of unrealised profit arising on inter-company trading
v) Acquisition of subsidiaries part way through the financial year
d) Calculate goodwill (excluding impairment of goodwill) using the full goodwill
method only as follows:
Fair value of consideration X
Fair value of non-controlling interest X
Less fair value of net assets at acquisition (X)
___
Goodwill at acquisition X
___
e) Describe the components of and prepare a consolidated statement of profit or
loss and other comprehensive income or extracts thereof including:
i) Elimination of inter-company trading balances (excluding cash and goods
in transit)
ii) Removal of unrealised profit arising on inter-company trading
iii) Acquisition of subsidiaries part way through the financial year

2. Associates CHAPTER 18

a) Define and identify an associate and significant influence and identify the
situations where significant influence or participating interest exists.
b) Describe the key features of a parent associate relationship and be able to
identify an associate within a group structure.
c) Describe the principle of equity accounting.

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A C C A S T U D Y G U ID E

H Interpretation of financial statements

1. Importance and purpose of analysis of financial


statements CHAPTER 17

a) Describe how the interpretation and analysis of financial statements is used in


a business environment.
b) Explain the purpose of interpretation of ratios.

2. Ratios CHAPTER 17

a) Calculate key accounting ratios:


i) Profitability
ii) Liquidity
iii) Efficiency
iv) Position
b) Explain the inter-relationships between ratios.

3. Analysis of financial statements CHAPTER 17

a) Calculate and interpret the relationship between the elements of the financial
statements with regard to profitability, liquidity, efficient use of resources and
financial position.
b) Draw valid conclusions from the information contained within the financial
statements and present these to the appropriate user of the financial
statements.

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