ACCA F3 China Slidesv2

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FIA FFA/ACCA F3
Financial Accounting
For exams from February 2014

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Key to icons
Syllabus
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Question to consider
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Technical content
Real world example

Local example
Diagram
Answer
Key concept
Past exam question
Tackling the exam
Answer to past exam

question
Summary
Case study
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Syllabus
The context and purpose of financial reporting
The qualitative characteristics of financial information
The use of double entry and accounting systems
Recording transactions and events
Preparing a trial balance
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F Preparing basic financial statements

G Preparing simple consolidated financial statements
H Interpretation of financial statements
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Exam format
Exam format
70
2 questions for 15 marks each
30
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35 questions for 2 marks each
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Total
Two hour exam all questions are compulsory.
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100
Tackling multiple choice questions 1
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The MCQs in your exam contain four possible answers, you

have to choose the option that best answers the question.
The three incorrect options are called distractors, these are
included to test your understanding of the syllabus.
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The following slides detail how best to avoid the common

pitfalls that most students fall into.
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Steps to follow when attempting MCQs:
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Step 1: Skim read all MCQs and identify what appear to be

the easier questions.
Step 2: Attempt each question:
Start with the easier questions
Read the question thoroughly
Try to work out the answer before looking at the options
OR you may prefer to look at the options at the beginning
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Step 3: Read the four options and see if one matches your
own answer.
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Be careful with numerical questions as the distractors are

designed to match answers that incorporate common errors.
Check your calculation is correct.
Have you followed the requirement exactly?
Have you included every stage calculation?
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Step 4: What to do if your answer does not match the

options?
Re-read the question to ensure that you understand it and
are answering the requirement
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Eliminate any obviously wrong answers
Consider which of the remaining answers is the most likely

to be correct and select the option
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Step 5: If you are still unsure make a note and continue to

the next question
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Step 6: Revisit unanswered questions. When you come back

to a question after a break you often find you are able to
answer it correctly straight away.
If you are still unsure have a guess. You are not penalised for
incorrect answers, so never leave a question unanswered!
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After extensive question practice and revision of MCQs you

may find that you recognise a question when you sit the
exam.
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Be aware that the detail and/or requirement may be different.

If the question seems familiar read the requirement and
options carefully do not assume that it is identical.
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Chapter 8
Inventory
Cost of goods sold

Accounting for opening and
closing inventories
Counting inventories
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Valuing inventories
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IAS 2
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Syllabus learning outcomes 1
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Recognise the need for adjustments for inventory in

preparing financial statements.
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Record opening and closing inventory.
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Identify the alternative methods of valuing inventory.
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Understand and apply the IASB requirements for valuing

inventories.
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Recognise which costs should be included in valuing

inventories.
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Calculate the value of closing inventory using 'first in, first

out' and 'average cost'.
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Understand the use of continuous and period end

inventory records.
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Understand the impact of accounting concepts on the

valuation of inventory.
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Identify the impact of inventory valuation methods on profit

and on assets.
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Overview
Accounting adjustments
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Inventory
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Valuation
Cost
Net realisable value
Methods of estimating cost
FIFO
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AVCO
Effects on profit
Cost of goods sold 1

Formula for the cost of goods sold
Opening inventory value
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Add: purchases (or production costs)
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Less: closing inventory value

Cost of goods sold
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(X)
X

Carriage inwards
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Cost paid by purchaser of having goods transported to his

business
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Added to cost of purchases
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Carriage outwards
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Cost to the seller, paid by the seller, of having goods

transported to customer
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Is a selling and distribution expense
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Accounting for opening and closing inventories 1

Entries during the year
$ amount bought
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DEBIT Purchases
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During the year, purchases are recorded by the following

entry.
CREDIT
Cash or payables
$ amount bought
The inventory account is not touched at all.
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Entries at year-end
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The first thing to do is to transfer the purchases account

balance to the statement of profit or loss:
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DEBIT Statement of profit or loss

CREDIT
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Purchases
$ total purchases
$ total purchases
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The balance on the inventory account is still the opening

inventory balance. This must also be transferred to the
statement of profit or loss:
DEBIT Statement of profit or loss
Inventory
$ opening inventory
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CREDIT
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$ opening inventory
DEBIT Inventory
$ closing inventory
Statement of profit or loss
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CREDIT
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The exact reverse entry is made for the closing inventory

(which will be next years opening inventory):
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$ closing inventory
Counting inventories 1
Counting inventories
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In order to make the entry for the closing inventory, we

need to know what is held at the year-end. We find this out
not from the accounting records, but by going into the
warehouse and actually counting the boxes on the shelves.
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Counting inventories 2
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Some businesses keep detailed records of inventory

coming in and going out, so as not to have to count
everything on the last day of the year. These records are
not part of the double entry system.
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Valuing inventories 1
Valuation
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Inventories must be valued at the lower of:

Cost
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Net realisable value (NRV)
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Can use per IAS 2:
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Cost
FIFO (First In Last Out)
Average cost
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LIFO (Last In First Out) is not permitted
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NRV
Less:
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Expected selling price
costs to get items ready for sale

selling costs
(X)
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(X)
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Inventory forms a major part of the assets of some

companies.
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So the value placed on the inventory can make a big

difference to the profit or loss reported.
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Valuing inventories in China
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In the 3rd quarter of 2012, the Youngor Group Co had

inventory valued at CNY 24 billion.
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IAS 2
IAS 2
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Inventories should be measured at the lower of cost and

net realisable value the comparison between the two
should ideally be made separately for each item
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Cost is the cost incurred in the normal course of business

in bringing the product to its present location and
condition, including production overheads and costs of
conversion
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IAS 2 (contd)
IAS 2
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Inventory can include raw materials, work in progress,

finished goods, goods purchased for resale
FIFO and average cost are allowed
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LIFO is not allowed
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IAS 2 (contd)
Inventories are assets:
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Held for sale in the ordinary course of business

In the process of production for such sale; or
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In the form of materials or supplies to be consumed in the

production process or in the rendering of services
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IAS 2 (contd)
Net realisable value is the estimated selling price:
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In the ordinary course of business less the estimated costs

of completion and the estimated costs necessary to make
the sale
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Tackling the exam
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Understanding IAS 2 is a very important and you will be

expected to apply it in the exam.
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Lecture example 1
(1) Labour costs
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According to IAS 2: Inventories, which of the following

should not be included in determining the cost of the
inventories of an entity?
(2) Transport costs to deliver goods to customers
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(3) Administrative overheads
(4) Depreciation on factory machine
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Lecture example 1 (contd)

B 1 only
C 2 and 3 only
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D 2, 3, and 4 only
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A All four items
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Answer to lecture example 1

C
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Transport costs to deliver goods to customers are an

example of carriage outwards and should not be included.
Administrative overheads do not relate to production and
cannot therefore be included.
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The depreciation of the factory machine is a production

overhead and should be included.
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Lecture example 2
Selling price
Costs incurred to date
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Jessie is trying to value her inventory. She has the

following information available:
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Cost of work to complete item

Selling costs per item
$
35
20
12
1
Required
What is the net realisable value of Jessie's inventory?
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Net realisable value is:

Estimated selling price
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Less: costs of completion
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Less: selling costs
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$
35
(12)
(1)
22
Lecture example 3
Date
Units purchased
Cost per unit
300
$10.85
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10 January
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On 1 January 20X7 a company held 200 units of finished

goods valued at $10 each. During January the following
transactions took place:
20 January
350
$11.50
25 January
250
$13.00
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Date
14 January
21 January
Units purchased
Cost per unit
280
$18.00
400
$18.00
80
$18.00
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28 January
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Sales during January were as follows:
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Required
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Determine the valuation of closing inventories and cost of

sales using:
FIFO
(b)
Weighted average cost
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(a)
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(a) Closing inventories (FIFO)
Opening
inventories
Sales
14 Jan
21 Jan
26 Jan
10 Jan
20 Jan
25 Jan
300
350
250
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200
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Purchases
(200)
Nil
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(80)
(220)
Nil
(180)
(80)
90
250
@ $11.50
@ $13.00
= $1,035
= $3,250
$4,285
Cost of sales (FIFO)
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Answer to lecture example 3 (contd)
$
2,000
Purchases
10,530
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Opening inventories (200 $10)
Less: closing inventories
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12,530
(4,285)
8,245

(b) Closing inventories and cost of sales (AVCO)
Cost
$
Total
Cost
$
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Units
Average
Unit Cost
$
1.1.X2
b/f
200
10.00
2,000
10.1.X2
Purchase
300
500
10.85
3,255
5,255
14.1.X2
Sales
20.1.X2
Purchase
21.1.X2
Sales
25.1.X2
Purchase
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(W1) 10.51
28.1.X2
Sale
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(280)
220
350
570
11.50
(400)
170
250
420
(80)
13.00
10.51
(W2) 11.12
11.12
(W3) 12.24
12.24
(2,943)
2,312
Cost of
Sales
$
2,943
4,025
6,337
(4,448)
1,889
4,448
3,250
5,139
(979)
979

$5,255/500 = $10.51
(W2)
$6,337/570 = $11.12
(W3)
$5,139/420 = $12.24
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(W1)
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Chapter summary 1
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1 Introduction
Inventories can be a significant figure in an entitys
accounts and will impact both the profit figure and the net
asset position. It is important therefore that it is recorded
correctly.
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Chapter summary 2
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2 Accounting adjustment
As seen in chapter 6 the statement of profit or loss
matches the sales revenue earned in a period with the
cost of sales incurred to generate that revenue. There
are therefore two inventory adjustments: the opening
inventory adjustment and the closing inventory
adjustment.
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Chapter summary 3
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3 Valuation
Inventories should be valued at the lower of cost and
net realisable value.
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Chapter summary 4
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4 Cost
The cost of inventory includes the cost of purchase,
costs of conversion and any other costs necessary
to bring the inventory to its present location and
condition.
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Chapter summary 5
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5 Net realisable value (NRV)

Net realisable value is the estimated selling price less
the costs to completion and any selling and
distribution costs.
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Chapter summary 6
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6 Theoretical methods of estimating cost

Methods available to estimate the cost of inventories are
first in, first out (FIFO) and average cost. Under FIFO
the inventories held at the year end are the most recent
purchases but under average cost the cost of all
inventories purchased during the year is weighted to
produce an average figure.
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Chapter summary 7
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7 Valuation effects on profit

In times of rising prices, using FIFO will mean the
financial statements show higher inventory values and
higher profits.
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Chapter 9
Capital and revenue expenditure
Tangible non current

assets
Depreciation
IAS 16
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Non-current asset disposals

Revaluations
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Disclosure
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Define non-current assets and recognise the difference

between current and non-current assets.
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Explain the difference between capital and revenue items

and classify expenditure accordingly.
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Prepare ledger entries to record the acquisition, disposal,

depreciation and accumulated depreciation of noncurrent
assets.
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Calculate and record profits or losses on disposal of noncurrent assets in the statement of profit or loss.
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Record the revaluation of a non-current asset and

calculate its subsequent depreciation and profit or loss on
disposal.
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Illustrate how non-current asset balances and movements

are disclosed in company financial statements.
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Explain the purpose and function of an asset register.
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Understand and explain the purpose of depreciation.
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Calculate the charge for depreciation using the straight line

and reducing methods, identifying when each is
appropriate.
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Calculate the adjustments to depreciation necessary if

changes are made in the estimated useful life and/or
residual value of a non-current asset.
Record depreciation in the statement of profit or loss and
statement of financial position.
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Overview
Capital versus revenue
expenditure
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Cost
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Tangible non-current
assets
Revaluations
Straight line
method
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Depreciation
Disposals
Reducing balance
method
Capital and revenue expenditure 1

What is capital expenditure?
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Capital expenditure results in the acquisition of non-current

assets, or an increase in their earning capacity.
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Capital and revenue expenditure 2

What is revenue expenditure?
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Revenue expenditure is incurred for the purpose of trade

or to maintain the existing earning capacity of the noncurrent assets.
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Tackling the exam
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It is highly likely that some questions in your exam will focus

on the distinction between capital and revenue expenditure.
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IAS 16
IAS 16
Components of cost
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Initial measurement at cost
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Purchase price (incl import duties, excl trade discount,

recoverable sales tax)
Initial estimate of dismantling and restoration costs
Directly attributable costs, eg site preparation, delivery
and handling costs installation, assembly costs, testing
and professional fees
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Tackling the exam
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Exam focus point:

Only staff costs arising directly from the construction or acquisition of the
asset can be capitalised as part of the cost of the asset.
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The costs of training staff to use a new asset cannot be capitalised

because it is not probable that economic benefits will be generated from
training the staff as we cant guarantee that those staff will stay and use
the asset. The costs of training staff should be expensed.
Watch out for this in your exam!
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IAS 16 (contd)
Subsequent expenditure
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added to carrying amount if improves condition

beyond previous performance
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Repairs and maintenance costs are expensed.
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Specimen exam question
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Specimen exam answer
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Depreciation 1
Depreciation accruals concept
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Is a process of spreading the original cost of a non-current

asset over the accounting periods in which its benefit will
be felt
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Depreciation 2
Straight line
depn = cost RV
useful life
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Reducing balance
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Two methods
depn = cost RB%
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Depreciation 3
DEBIT
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The double entry for depreciation is as follows:

Depreciation expense (SPL)
Accumulated depreciation (SOFP)
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CREDIT
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Depreciation 4
Change in expected life
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If after a period of an assets life it is realised that the

original useful life has been changed, then the
depreciation charge needs to be adjusted.
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The revised charge from that date becomes:

CV at revised date
Remaining useful life
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Tackling the exam
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Exam focus point:
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If an exam question gives you the purchase date of a noncurrent asset which is part way through an accounting
period, you should generally assume that depreciation
should be calculated in this way as a part year amount,
unless the question states otherwise.
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Non-current asset disposals 1

Disposal
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On disposal of an asset a profit or loss will arise depending

on whether disposal proceeds are greater or less than the
carrying value of the asset.
If proceeds > CV = profit
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If proceeds < CV = loss
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Eliminate cost
DEBIT
Disposals
Non-current assets
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CREDIT
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Double entry for a disposal
Eliminate accumulated depreciation

DEBIT
CREDIT
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Provision for depreciation

Disposals
DEBIT
Cash
CREDIT
Disposals
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Account for sales proceeds
or if part exchange deal
Non-current assets
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DEBIT
CREDIT
Disposals
with part exchange value
Transfer balance on disposals account to the statement of

profit or loss
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Revaluations 1
Keeping asset at cost
Revaluing to fair value
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IAS 16 allows a choice between
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Fair value may give fairer view on business.
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Revaluations 2
Accounting for a revaluation
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A revaluation is recorded as follows:

DEBIT
Non-current asset
DEBIT
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(revalued amount less original cost)
Accumulated depreciation
(total depreciation to date)

CREDIT
Revaluation surplus
(revalued amount less carrying value)
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Disclosure
Disclosure
With regard to disclosure, a proforma non-current asset note is shown here.
Cost or valuation
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At January 20X7
Revaluation surplus
Additions in year
Disposals in year
At 31 December 20X7
Depreciation
At 1 January 20X7
Charge for year
Eliminated on disposals
At 31 December 20X7
Carrying value
At 31 December 20X7
At 1 January 20X7
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$ 000
Land and
buildings
$ 000
Plan and
equipment
$ 000
160
20
50
(45)
185
100
20
30
(15)
135
60
20
(30)
50
30
7
(3)
34
20
5
25
10
2
(3)
9
151
130
110
80
41
50
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Total
Tackling the exam 1
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Exam focus point:
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There was a question on revaluations in the December 2012

exam. This asked for the depreciation charge and balance
on the revaluation reserve at the end of the financial year,
following a revaluation at the beginning of the year.
The examiner commented that this was one of the questions
with the lowest pass rates that session. Students correctly
calculated the balance on the revaluation reserve but failed
to identify the correct depreciation charge for the year.
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Tackling the exam 2
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As the revaluation took place at the beginning of the year, a

whole years depreciation had to be calculated using the
revalued amount over the remaining useful economic life.
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The remaining useful life needed to be calculated by working

out the original depreciation charge and comparing this to
the accumulated depreciation brought forward to find out
how long the asset had been held.
Students who answered the question wrongly had used the
original useful economic life rather than the remaining useful
economic life figure.
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Lecture example 1
Required
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What examples of tangible non-current assets can you

identify?
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(a) Land and buildings
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Examples include:
(b) Plant and equipment
(c) Motor vehicles
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(d) Furniture and fittings, computers
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Lecture example 2
On 10 December 20X7 an entity bought a machine.
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The breakdown on the invoice showed:
Cost of machine
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Delivery costs
One-year maintenance contract
20,000
200
900
21,100
Further installation costs of $500 were also incurred.
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Required
A $20,000
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B $20,700
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At what amount should the machine be capitalised in the

entity's records?
C $20,200
D $21,600
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B
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The cost capitalised should include the purchase price

($20,000) plus all directly attributable costs (delivery and
installation).
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The cost of the maintenance contract should be shown as

an expense in the statement of profit or loss.
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Lecture example 3
Required
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A business buys a machine for $2,500. It is expected to

have a useful life of three years after which time it will have
a scrap value of $250.
(b)
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(a) Calculate the annual depreciation charge.

Calculate the cost, accumulated depreciation and net
book value (NBV) for each year of the asset's life.
Note: NBV = cost accumulated depreciation to date.
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2,500 250
3 years
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Depreciation charge=
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Straight line method:
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= $750 per
annum
750
1,750
2,500
1,500
1,000
2,500
2,250
250
2,500
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NBV
Cost
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Year
Accumulated
depreciation
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Graphical representation
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250
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NBV
$
2,500
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Year
Lecture example 4
Required
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A business buys a machine costing $6,000. The depreciation

rate is 40% on a reducing balance basis.
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Calculate depreciation expense, accumulated depreciation

and net book value of the asset for the first three years.
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2
3
Accd
depn
NBV
40%
2,400
2,400
3,600
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Depn
expense
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Year
Depn
rate
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40%
1,440
3,840
2,160
40%
864
4,704
1,296

Graphical representation
NBV
2,160
1,296
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3,600
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$
6,000
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Year
Lecture example 5
Required
(a)
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Using the information in Lecture example 3, show:

The journal entry which would have been written at
the end of the first year.
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(b) The treatment of depreciation for all years in the

relevant ledger accounts.
(c) The relevant statement of profit or loss and
statement
of financial position extracts for each year.
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Journal entry
Depreciation expense
Accumulated depreciation
Debit
Credit
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(a)
750
750
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Being annual depreciation charged on machine
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(b) Accounting for depreciation:
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Machine (SOFP)
$
Bal b/d
2,500 Bal c/d
2,500
2,500
2,500
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Cash
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2,500
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Depreciation expense (SPL)

$
750 Year 1 SPL

750 Year 2 SPL
750 Year 3 SPL
Sa
m
Year 1 Accumulated depn

BPP LEARNING MEDIA
$
750
750
750
Bal c/d
750 Year 1 Depreciation expense

1,500 Year 2 Bal b/d
1,500
2,250
Year 3 Bal b/d
2,250
Sa
m
Bal c/d
Bal c/d
pl
e
BPP LEARNING MEDIA
$
750
750
750
1,500
1,500
750
2,250

Statement of profit or loss (extracts):
Year 2
Year 3
pl
e
Year 1
Expenses
Depreciation
750
750
750
Sa
m
Statement of financial position (extracts):

Cost
$
Accumulated
Depreciation
$
Net Book
Value
$
(Year 1) Machine
2,500
(750)
1,750
(Year 2) Machine
2,500
(1,500)
1,000
(Year 3) Machine
2,500
(2,250)
250
BPP LEARNING MEDIA
Lecture example 6
Required
pl
e
The machine costing $6,000 in Lecture example 4 is sold

in year 3 for $3,000. No depreciation is charged in the year
of disposal.
Sa
m
(a) Calculate the profit or loss on disposal of the machine.

(b) Complete the ledger accounts to show how the
disposal would be accounted for.
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(a)
Sales proceeds
3,000
(2,160)
Sa
m
NBV at end of year 2
pl
e
BPP LEARNING MEDIA
840

(b)
$
6,000
(a) Disposal account
Sa
m
Bal b/d
pl
e
Machine (SOFP)
$
6,000
(b) Disposal account
BPP LEARNING MEDIA
$
3,840
Bal b/d
$
3,840
(c) Cash
(b) Accumulated depn
Sa
m
(a) Machine
Balance = profit
on disposal
(SPL)
$
6,000
840
pl
e
Disposal account (SPL)
BPP LEARNING MEDIA
6,840
$
3,000
3,840
6,840
Lecture example 7
Required
pl
e
Assume in Lecture example 6 that instead of cash

proceeds of $3,000, there is a part exchange allowance of
$3,000 on a replacement machine costing $10,000.
Sa
m
(a)
Calculate the profit or loss on disposal of the
machine.
(b)
Calculate the amount of cash paid for the new
machine.
(c) Complete the ledger accounts to show both the
disposal and the acquisition.
BPP LEARNING MEDIA
pl
e
(a) The profit on disposal is still $840, the only difference is

that the proceeds were not received in cash, but in the
form of a part exchange allowance.
Sa
m
(b) Cash paid for the new machine is $7,000 ($10,000

$3,000)
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$
6,000
(a) Disposal account
Sa
m
Bal b/d
pl
e
Old machine (SOFP)

$
6,000
(b) Disposal account
BPP LEARNING MEDIA
$
3,840
Bal b/d
$
3,840
Bal c/d
Sa
m
$
(c) Disposal account 3,000
Cash
7,000
10,000
Bal b/d
10,000
pl
e
New machine (SOFP)
BPP LEARNING MEDIA
$
10,000
10,000
$
6,000 (c) New machine (part
840
exchange)
6,840 (b) Accumulated
depreciation
Sa
m
(a) Machine
Profit disposal (SPL)
pl
e
Disposal account (SPL)
BPP LEARNING MEDIA
$
3,000
3,840
6,840
Lecture example 8
Required
pl
e
A building costing $100,000 on which depreciation of

$20,000 has been charged is to be revalued to $150,000.
Show the double entry to record the revaluation and

make the postings to the ledger accounts.
(b)
if
What would be the depreciation charge for the year

the building has a remaining useful life of 40 years?
Sa
m
(a)
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(a) The double entry is
pl
e
Dr Non-current asset building (150 100) 50,000

Dr Accumulated depreciation building
Sa
m
Cr Revaluation reserve ()
BPP LEARNING MEDIA
20,000
70,000
pl
e
Building (SOFP)
$
Bal b/d
100,000
50,000 Bal c/d
Sa
m
Revaluation reserve
150,000
150,000
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150,000
150,000

Revaluation reserve
pl
e
20,000 Bal b/d
$
20,000
Sa
m
Revaluation reserve (SOFP)

$
Building
Revaluation reserve
50,000
70,000 Accumulated
depreciation
20,000
70,000
70,000
Bal b/d
BPP LEARNING MEDIA
70,000

(b) Depreciation charge is
Sa
m
pl
e
$150,000 / 40 years = $3,750
BPP LEARNING MEDIA
Lecture example 9
1.1.X1 Asset cost $40,000
pl
e
Estimated useful life five years

No residual value
Sa
m
1.1.X3 Total useful life revised to four years.

Required
Calculate the depreciation charge, accumulated

depreciation and NBV for each year of the asset's life (year
end 31 December).
BPP LEARNING MEDIA

Review of useful life:
Depreciation Accumulated
charge
depreciation
$
$
40,000/5
20X2
40,000/5
24,000/2
24,000/2
20X3
20X4
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NBV
$
8,000
8,000
32,000
8,000
16,000
24,000
12,000
28,000
12,000
12,000
40,000
40,000
Sa
m
20X1
pl
e
Year
Lecture example 10
1.1.X1
Asset cost $40,000
pl
e
Residual value $1,500

Useful life five years
Depreciation: 25% reducing balance

Change depreciation method to straight line
Sa
m
1.1.X3
Required
Calculate the depreciation charge, accumulated

depreciation and NBV for each year of the assets life (year
ended 31 December).
BPP LEARNING MEDIA

Change in method of depreciation:
20X2
20X3
20X4
20X5
40,000 25%
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NBV
$
10,000
10,000
30,000
30,000 25%
7,500
17,500
22,500
(22,500-1,500)/3
7,000
24,500
15,500
7,000
31,500
8,500
7,000
38,500
38,500
1,500
Sa
m
20X1
pl
e
Depn Accumulated
charge depreciation
$
$
Chapter summary 1
Sa
m
pl
e
1 Introduction
Expenditure on non-current assets is often significant
and it is important therefore that it is accounted for
appropriately.
BPP LEARNING MEDIA
Chapter summary 2
Sa
m
pl
e
2 Non-current assets
Capital expenditure results in a non-current asset
being shown on the statement of financial position.
Revenue expenditure, such as repairs and maintenance,
is shown as an expense in the statement of profit or loss.
Tangible non-current assets should initially be recorded
at cost. This includes the purchase price of the item
plus any directly attributable costs to bring the item
to its intended location and ready to use.
BPP LEARNING MEDIA
Chapter summary 3
Sa
m
pl
e
3 Depreciation
Depreciation is an expense charged in relation to the
asset each year to reflect the using up of the asset. Land
usually has an unlimited useful life and so is not
depreciated.
BPP LEARNING MEDIA
Chapter summary 4
Sa
m
pl
e
4 Methods of depreciation
Depreciation is usually calculated on a straight line or
reducing balance basis.
BPP LEARNING MEDIA
Chapter summary 5
Sa
m
pl
e
5 Straight line method

This method is suitable for assets which are used up
evenly during their life time. The depreciation expense is
the same each year.
BPP LEARNING MEDIA
Chapter summary 6
Sa
m
pl
e
6 Reducing balance method

This method is suitable for assets which generate more
revenue in the earlier years of their life. The depreciation
expense is higher in the initial years.
BPP LEARNING MEDIA
Chapter summary 7
Sa
m
pl
e
7 Accounting for depreciation

Depreciation is recorded by way of a journal entry. The
expense is recorded as a debit entry and reduces profit.
The credit is made to the accumulated depreciation
account and reduces the carrying value of the asset in
the statement of financial position.
BPP LEARNING MEDIA
Chapter summary 8
Sa
m
pl
e
8 Disposal of non-current assets

On disposal of a non-current asset the sales proceeds
are compared to the net book value of the asset in order
to calculate the profit or loss on disposal. Where an
asset is given in part exchange for another asset, the
part exchange allowance takes the place of the sales
proceeds.
BPP LEARNING MEDIA
Chapter summary 9
Sa
m
pl
e
9 Revaluations
An entity may choose to revalue its assets rather than
hold them at cost this is a choice of accounting
policy. Where an entity revalues, it must revalue all
assets in the same class and the depreciation charge
is based on the revalued amount.
BPP LEARNING MEDIA
Chapter summary 10
Sa
m
pl
e
10 Depreciation revisited
If an entity changes the method of depreciation used
from straight line to reducing balance (or vice versa) or
revises the useful life of an asset it should write off the
assets net book value using the revised method or useful
life.
BPP LEARNING MEDIA

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pl

For exams from February 2014

Real world example

Past exam question

Tackling the exam

Answer to past exam

The qualitative characteristics of financial information

The use of double entry and accounting systems

Recording transactions and events

Preparing a trial balance

F Preparing basic financial statements

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2 questions for 15 marks each

35 questions for 2 marks each

Two hour exam all questions are compulsory.

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Tackling multiple choice questions 1

The MCQs in your exam contain four possible answers, you

The following slides detail how best to avoid the common

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Tackling multiple choice questions 2

Steps to follow when attempting MCQs:

Step 1: Skim read all MCQs and identify what appear to be

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Tackling multiple choice questions 3

Be careful with numerical questions as the distractors are

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Tackling multiple choice questions 4

Step 4: What to do if your answer does not match the

Eliminate any obviously wrong answers

Consider which of the remaining answers is the most likely

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Tackling multiple choice questions 5

Step 5: If you are still unsure make a note and continue to

Step 6: Revisit unanswered questions. When you come back

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Tackling multiple choice questions 6

After extensive question practice and revision of MCQs you

Be aware that the detail and/or requirement may be different.

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Cost of goods sold

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Syllabus learning outcomes 1

Recognise the need for adjustments for inventory in

Record opening and closing inventory.

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Syllabus learning outcomes 2

Understand and apply the IASB requirements for valuing

Recognise which costs should be included in valuing

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Syllabus learning outcomes 3

Calculate the value of closing inventory using 'first in, first

Understand the use of continuous and period end

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Syllabus learning outcomes 4

Understand the impact of accounting concepts on the

Identify the impact of inventory valuation methods on profit

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Net realisable value

Methods of estimating cost

Cost of goods sold 1

Add: purchases (or production costs)

Less: closing inventory value

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