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Notes

ACCA Paper F3 (FIA Paper FFA) Financial Accounting
For exams in 2013

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ACCA F3 Financial Accounting

ExPress Notes

Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. Financial statements Objectives of financial reporting Sources of financial information Double entry bookkeeping: the debits and credits Tangible non-current assets Intangible non-current assets Inventory and purchases Receivables and payables Bank reconciliations Long term finance Accruals and prepayments Provisions and contingencies Sales tax Trial balances and correction of errors Suspense accounts Incomplete records Limited companies Statements of cash flow Consolidated financial statements Events after reporting date, errors and estimates Interpretation of financial statements

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ACCA F3 Financial Accounting

ExPress Notes

START About ExPress Notes
We are very pleased that you have downloaded a copy of our ExPress notes for this paper. We expect that you are keen to get on with the job in hand, so we will keep the introduction brief. First, we would like to draw your attention to the terms and conditions of usage. It’s a condition of printing these notes that you agree to the terms and conditions of usage. These are available to view at www.theexpgroup.com. Essentially, we want to help people get through their exams. If you are a student for the ACCA exams and you are using these notes for yourself only, you will have no problems complying with our fair use policy. You will however need to get our written permission in advance if you want to use these notes as part of a training programme that you are delivering. WARNING! These notes are not designed to cover everything in the syllabus! They are designed to help you assimilate and understand the most important areas for the exam as quickly as possible. If you study from these notes only, you will not have covered everything that is in the ACCA syllabus and study guide for this paper. Components of an effective study system On ExP classroom courses, we provide people with the following learning materials: • • • • The ExPress notes for that paper The ExP recommended course notes / essential text or the ExPedite classroom course notes where we have published our own course notes for that paper The ExP recommended exam kit for that paper. In addition, we will recommend a study text / complete text from one of the ACCA official publishers, but we do not necessarily give this as part of a classroom course, as we think that it can sometimes slow people down and reduce the time that they are able to spend practising past questions.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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Exam practice is key to this. Don’t use at this stage.com . Work through each chapter of the ExPress notes in detail before you then work through your course notes. deciding which optional papers to take These ExPress notes ExP recommended course notes. concepts. but also make sure that you can recall key definitions. Individuals may reproduce this material if it is for their own private study use only. study guide and examiner’s commentaries on past sittings. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www. Make sure that you understand each area reasonably well. This depends where you are in terms of your exam preparation for each paper. In other words. No liability for damage arising from use of these notes will be accepted by the ExP Group. Review each chapter after class at least once. the “size” of the paper and how much it appeals to you. answers. Refer to our full terms and conditions of use. Try to do at least one past exam question on the learning phase for each major chapter.g. Nobody passes an exam by what they have studied – we pass exams by being efficient in being able to prove what we know. At the start of the learning phase Work through in detail. mnemonics. or ExPedite notes Don’t use yet ExP recommended exam kit Don’t use yet ACCA online past exams Skim through the ExPress notes to get a feel for what’s in the syllabus. you need to have effectively input the knowledge and be effective in the output of what you know. Your stage in study for each paper Prior to study.com. Don’t try to feel that you have to understand everything – just get an idea for what you are about to study. Don’t make any annotations on the ExPress notes at this stage. e. Page | 4 © 2013 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Have a quick look at the two most recent real ACCA exam papers to get a feel for examiner’s style. syllabus. Always obtain expert advice on any specific issue. This can be an invaluable resource. theexpgroup. How to get the most from these ExPress notes For people on a classroom course.ACCA F3 Financial Accounting ExPress Notes Everybody in the World has free access to ACCA’s own database of past exam questions. Reproduction by any means for any other purpose is prohibited.theexpgroup. this is how we recommend that you use the suite of learning materials that we provide. etc. approaches to exam questions.

avoid looking at your course notes. It will scare you. key workings. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident you’ll remember without reviewing them. theexpgroup.com . Unless there are specific bits that you feel you must revise.g. Read quickly through the full set of ExPress notes. You pass real exams by passing mock exams. Give up on any areas that you still don’t understand. Passive revision tends to be a waste of time. Don’t be tempted to fall into “passive” revision at this stage (e. Refer to our full terms and conditions of use. Highlight the bits that you think are important but you think you are most likely to forget. You must avoid these! Do a final review of the two most recent examiner’s reports for the paper you will be taking tomorrow. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. No liability for damage arising from use of these notes will be accepted by the ExP Group. It’s too late now. Page | 5 © 2013 The ExP Group. approaches to exam questions. Always obtain expert advice on any specific issue.ACCA F3 Financial Accounting ExPress Notes Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes. Individuals may reproduce this material if it is for their own private study use only. At the door of the exam room before you go in. Read through the technical articles written by the examiner. focusing on areas you’ve highlighted. or ExPedite notes Avoid reading through your notes again. Read through some other older ones. Download the two most recent real exam questions and answers. Leave at home. Try to see if there are any recurring criticism he/ she makes. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if there’s something in an answer that you don’t understand. Don’t touch it! ACCA online past exams Work through the ExPress notes again. Avoid looking at them in detail. especially if the notes are very big. Read through the two most recent examiner’s reports in detail. etc. ExP recommended exam kit This is your most important tool at this stage. The night before the real exam Read through the ExPress notes in full. Leave at home. reading notes or listening to CDs).

Reproduction by any means for any other purpose is prohibited. expertise covers all areas of financial training ranging from introductory financial awareness courses for non financial staff to high level corporate finance and banking courses for senior executives.com and for any specific enquiries please contact us at info@theexpgroup. START About The ExP Group Born with a desire to be the leading supplier of business training services. Full details about us can be found at www. These course materials are for educational purposes only and so are necessarily simplified and summarised. Notes Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses Notes Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes. Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions. theexpgroup. Individuals may reproduce this material if it is for their own private study use only. Our clients range from multinational household corporate names. our portfolio of Page | 6 © 2013 The ExP Group.theexpgroup. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue.com.com where you will be able to access additional free resources to help you in your studies. through local companies to individuals furthering themselves through studying for one of the various professional exams or professional development courses. As well as courses for ACCA and other professional qualifications.com . No liability for damage arising from use of these notes will be accepted by the ExP Group. the ExP Group delivers courses through either one of its permanent centres or onsite at a variety of locations around the world. To maximise your chances of success in the exam we recommend you visit www.theexpgroup.ACCA F3 Financial Accounting ExPress Notes Our ExPress notes fit into our portfolio of materials as follows: Notes Provide a base understanding of the most important areas of the syllabus only.

but generally much more frequently for management control within the business. Reproduction by any means for any other purpose is prohibited. generally called a balance sheet. • Page | 7 © 2013 The ExP Group. A set of financial statements will need to be produced at least annually for presentation to external stakeholders. The statement of financial position is a snapshot of the assets and liabilities of a business at a moment in time. theexpgroup.ACCA F3 Financial Accounting ExPress Notes Chapter 1 Financial Statements START The Big Picture Financial statements (more colloquially called accounts) are a crucial part of managing a business and reporting to shareholders. Always obtain expert advice on any specific issue. often referred to as profit and loss account. A statement of comprehensive income. This lists all the assets and liabilities of the business plus the equity of the business (which explains where the assets and liabilities came from). A set of financial statements is produced periodically (often once a year for smaller businesses but as frequently as the users want them). Frequent and accurate financial statements can add a great deal to the efficient running of a business. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. A full set of financial statements for a limited company comprises a number of statements: • A statement of financial position. This shows all the gains and losses that the business has experienced in the period. No liability for damage arising from use of these notes will be accepted by the ExP Group.com . Individuals may reproduce this material if it is for their own private study use only. The statement of comprehensive income is a record of what happened over a period to the net assets of a business.

No liability for damage arising from use of these notes will be accepted by the ExP Group. as we’ll see later.000 3. Individuals may reproduce this material if it is for their own private study use only.000 Current assets Inventory Trade receivables Less: allowance for doubtful receivables 13. These course materials are for educational purposes only and so are necessarily simplified and summarised.ACCA F3 Financial Accounting ExPress Notes • • A statement of cash flows.000 Page | 8 © 2013 The ExP Group. Reproduction by any means for any other purpose is prohibited.com .000 105. which give further detail to readers who want to know more than the summary story.000 10.000) 12. Refer to our full terms and conditions of use.000 2. Always obtain expert advice on any specific issue.000 30.000 Total assets 146. which shows where the cash and short-term assets very similar to cash came from and went do during the period.000 Prepayments Cash at bank Cash in hand 4.000 20. Income isn’t always the same as cash.000 35.000 (1.000 20. theexpgroup. Notes to the financial statements. Statement of financial position of Sole Trader X at 30 June 20x1 ASSETS $ $ Non-current assets Licence to operate Land and buildings Office equipment Motor vehicles Fixtures and fittings 10.

700 16.300 Total equity and liabilities 146.e.000 (8.000 3.com .000 85. Page | 9 © 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only.000 Principal features of the statement of financial position: • • • It balances.700 30. Refer to our full terms and conditions of use.000 Current liabilities Bank overdraft Trade payables Accruals Total liabilities 3. Always obtain expert advice on any specific issue. owner’s interest) plus liabilities Each section is conventionally written in terms of increasing liquidity Non-current assets and liabilities are ones that are expected to remain on the SOFP next year. theexpgroup. Current assets and liabilities are expected to be used up or paid within the coming year.ACCA F3 Financial Accounting ExPress Notes EQUITY AND LIABILITIES Capital Initial capital introduced Total cumulative comprehensive income at 1 July 20x0 Less: Cumulative withdrawals at 1 July 20x0 Total equity at 1 July 20x0 Total comprehensive income in the current period Withdrawals in the current year Total equity at 30 July 20x1 (24. with the total assets equaling equity (i.700 Non-current liabilities Bank loans 32.000) 91.300 8. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group.000 46.000) 99. Reproduction by any means for any other purpose is prohibited.

then the equation could be written in any number of ways such as: Total assets – total liabilities = Capital + cumulative profit – cumulative withdrawals Or Cumulative profit = Total assets – total liabilities – capital + cumulative withdrawals.000) (100. These course materials are for educational purposes only and so are necessarily simplified and summarised. theexpgroup. Statement of comprehensive income for the year ended 30 June 20x1 $ $ Sales revenue 152. Reproduction by any means for any other purpose is prohibited.com . Refer to our full terms and conditions of use.000 80. IAS 1 shows a SOFP as given above: Total assets = Equity + total liabilities. whatever it might be. Always obtain expert advice on any specific issue. This is sometimes called the “accounting equation” and often comes up in the F3 exam.000 10. No liability for damage arising from use of these notes will be accepted by the ExP Group.000) Gross profit 52. Individuals may reproduce this material if it is for their own private study use only.000 Cost of sales Opening inventory Purchases of inventory Delivery costs inwards Closing inventory 30.000 (20. The task is to drop in the figures that you know and find the missing figure.000 Page | 10 © 2013 The ExP Group. Equally validly therefore: Total assets – total liabilities = Equity Given that equity = capital + cumulative profit – cumulative withdrawals.ACCA F3 Financial Accounting ExPress Notes A SOFP may be rearranged into a number of ways.

000 4.000 6. These course materials are for educational purposes only and so are necessarily simplified and summarised.000 1.000 2. Refer to our full terms and conditions of use. gross profit and total comprehensive income from given data.com . Page | 11 © 2013 The ExP Group.ACCA F3 Financial Accounting ExPress Notes Sundry income Discounts received 3. theexpgroup. cost of sales.500 500 2.000 2. Always obtain expert advice on any specific issue.000 1. Individuals may reproduce this material if it is for their own private study use only.000) Profit for the period before tax 14.500 12. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited.500 9.000 57.000 16.000 Less: Expenses Delivery costs outwards Depreciation Discounts allowed to customers Electricity Irrecoverable and doubtful debts Mobile phones Motor expenses Rent Telephone and internet Wages and salaries 3.000 Other comprehensive income: Revaluation gain on property Total comprehensive income in the period 2.000 You may be required in the exam to calculate revenue.000 (42.

less all dividends paid. the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. it is necessary for one-off items to be disclosed separately in the financial statements if they are very large or arise from an unusual. Individuals may reproduce this material if it is for their own private study use only. partners’ current account (partnership) or share capital and reserves (for a limited company). A liability is a present obligation of the entity arising from past events. this may be called just capital (sole trader). These course materials are for educational purposes only and so are necessarily simplified and summarised. from which all financial statements are produced. often non-recurring. source. Equity is the residual interest in the assets of the entity after deducting all its liabilities. or business relocation costs. For a limited company. Typical examples might be write-off of an unusually large debt as irrecoverable. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. Depending on the type of business. KEY KNOWLEDGE Elements of financial statements There are five elements of financial statements. This therefore explains the difference between what the net assets were when the share capital was originally paid in and what the net assets are at the reporting date. reserves show the net cumulative gains above cumulative losses. No liability for damage arising from use of these notes will be accepted by the ExP Group.com .ACCA F3 Financial Accounting ExPress Notes Unusual items Sometimes. These definitions are very useful throughout your ACCA studies and could easily be part of a question in paper F3. theexpgroup. Disclosing it separately allows readers of the accounts a more in-depth understanding of what the business is doing. Refer to our full terms and conditions of use. • • Page | 12 © 2013 The ExP Group. Elements of the statement of financial position: • An asset is a resource that is controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.

This is sometimes called the accounting equation or the business equation. Refer to our full terms and conditions of use.com .ACCA F3 Financial Accounting ExPress Notes Elements of the statement of comprehensive income: • Income is an increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity. Reproduction by any means for any other purpose is prohibited. Page | 13 © 2013 The ExP Group. Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group. other than those relating to contributions from equity participants. These course materials are for educational purposes only and so are necessarily simplified and summarised. An expense is a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence of liabilities that result in decreases in equity. KEY KNOWLEDGE Relationship between the statements: the business equation An increase in net assets of a business will come from a mixture of these sources: • • • Total comprehensive income made in the period (a profit will increase net assets) New capital introduced by the owner (will always increase net assets) Withdrawals made in the period (will always reduce net assets). Individuals may reproduce this material if it is for their own private study use only. with some figures given and the others having to be deduced. This is also a frequent exam question. It is a frequent exam question and can be summarized: Closing net assets = Opening net assets + total comprehensive income in the period + new capital introduced in the period – withdrawals in the period. other than those relating to distributions to equity participants. theexpgroup. • Note that income and expenditure are defined effectively as the reason that a change in net assets happened.

• Share capital Page | 14 © 2013 The ExP Group. No if Ltd. personal transactions will be ignored. there is a distinction between personal income/ expenses and business income/ expenses. The accounts will largely be maintained so that the sole trader can report business profits to the tax authority.We’ll look at these in more detail in each chapter. Personal expenditure such as personal holidays is not deductible against tax! The accountant will therefore only record transactions that are considered to be legitimate business transactions. Sole traders and limited companies . So net assets may be given in a question separately as equity and liabilities. These course materials are for educational purposes only and so are necessarily simplified and summarised. In smaller businesses. but here’s a summary: Sole trader Number of investors 1 (the sole trader!) Limited company Can be between 1 and an unlimited large number Yes Must produce accounts for the tax authority Must produce accounts to file with the commercial register Business name Yes No Yes Normally just the name of the owner “trading as” the name of the business No • Initial capital • Can offer shares to the public? Equity part of the Must end Ltd (if private limited company) or plc (if public limited company) Yes. Individuals may reproduce this material if it is for their own private study use only. if a plc. by definition.com .ACCA F3 Financial Accounting ExPress Notes Remember that net assets = equity + liabilities. Refer to our full terms and conditions of use. theexpgroup. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue. but the business has never been set up formally to be a separate legal identity). Reproduction by any means for any other purpose is prohibited. one of the first steps when producing accounting records for clients is to separate the business transactions from the personal. Separate accounting entity Even with a sole trader (a person who runs a business on their own. as the latter will not be recorded anywhere.

ACCA F3 Financial Accounting ExPress Notes SOFP • • Cumulative profit Cumulative withdrawals • Reserves: (revaluation reserve. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised.com . Refer to our full terms and conditions of use. Individuals may reproduce this material if it is for their own private study use only. retained earnings. etc). Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 15 © 2013 The ExP Group.

theexpgroup. Reproduction by any means for any other purpose is prohibited. though the investor is the most significant user. summarising it and presenting it in a useful form to a wide range of different users. it must exhibit a number of characteristics. Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. For financial information to be useful. Refer to our full terms and conditions of use.ACCA F3 Financial Accounting ExPress Notes Chapter 2 Objectives of financial reporting START The Big Picture Financial reporting is the business of collecting financial information. Always obtain expert advice on any specific issue. It’s important to understand what these are because you may be asked for a definition of them in the exam.com . Financial statements are aimed at giving useful information to a wide range of different users. analysing. Page | 16 © 2013 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Different users will have different objectives and therefore slightly different needs.

Irrelevant information is a distraction and should not be presented. as it’s a distraction.g. an expense for repairs should not be classified as research costs. so that it’s possible to make meaningful comparisons between years. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue.g.g. It also means matching costs and associated revenues. Similar transactions must be reported the same way within the same accounting period. A key concept covered in chapter [x]. but broadly losses should be recognised more readily Going concern Accruals Consistency Materiality Relevance Reliability Faithful representation Substance over form Neutrality Prudence Page | 17 © 2013 The ExP Group. an external valuation of property is more reliable than a biased director’s valuation. This means that assets will not have to be sold in a hurry. since this is when the obligation arises. The business is expected to trade into the foreseeable future. Reproduction by any means for any other purpose is prohibited. Immaterial information should not be disclosed. Individuals may reproduce this material if it is for their own private study use only. This is no longer a core concept in IFRS accounting. Material information must be presented accurately and fairly. E. rather than their legal form. Unbiased – neither excessively optimistic nor excessively prudent. loans repayable within six months are classified as current rather than non-current. Items should be reported the same way between periods.ACCA F3 Financial Accounting ExPress Notes Qualitative characteristic Fair presentation Our definition Items are described in accordance with their true nature. not necessarily when the cash was settled. Items should be described in accordance with their true nature. it should still be recorded as a sale/ purchase at the time of the transaction. For example. No liability for damage arising from use of these notes will be accepted by the ExP Group. E. It means recording transactions in the period when they happened. Conservatism. Materiality means large enough to influence the user’s opinion on the financial statements. which would be likely to result in significant impairments in value. E. even though research costs are more favourably viewed by investors. Information is useless if it’s not considered to be reliable. Refer to our full terms and conditions of use.com . Items should be reported in accordance with their commercial substance. if a sale is made on credit but legal title remains with the seller until the goods are paid for.

KEY KNOWLEDGE Historical accounting Accounting is derived from recording information about transactions that have happened. Individuals may reproduce this material if it is for their own private study use only. Company accounts should be comparable with each other. However. in order to facilitate comparison between years. it’s not possible to deliver all of these desirable characteristics. it must restate its previous years’ accounts using the new accounting policy. so that valid comparisons may be made. an investor is principally interested in future profits. a profit growth of 10% per year isn’t so impressive as it first seems if inflation is 12% per year!) Page | 18 © 2013 The ExP Group. even though it is less relevant. so historical information is given. Understandability Business entity concept Sometimes. as with a sole trader. Completeness Comparability All information that needs to be presented in order to give a full picture has been presented. i. including: • • • It can give out of date asset valuations for long-lived assets This can result in an unrealistically low depreciation charge Profit trends can be misleading (e. Refer to our full terms and conditions of use. Information should be presented in a way that users can understand. No liability for damage arising from use of these notes will be accepted by the ExP Group.g. This has the advantage of being objective and relatively easy. the business is still considered to be separate to its owners for accounting purposes. For example. theexpgroup. Reproduction by any means for any other purpose is prohibited. Even if there is no separate legal entity. what the business paid for them.ACCA F3 Financial Accounting ExPress Notes than gains. This means that assets are recorded at their historical cost.e. See chapter 1. Excessive complication reduces usefulness. but has a number of disadvantages. This means that if a company changes its accounting policy. Always obtain expert advice on any specific issue. estimates of future profit are unreliable. so this is what is relevant to them. Financial statements this period should be presented using similar principles to previous years.com . These course materials are for educational purposes only and so are necessarily simplified and summarised.

Page | 19 © 2013 The ExP Group. KEY KNOWLEDGE Regulation of financial reporting Some entities have to report under regulated accounting standards. Their roles are given below. Replacement cost accounting records inventories in the SOFP and at the point of sale at the cost that would be incurred to replace them today.com . principally the fact that people understand it and it is objective. Reproduction by any means for any other purpose is prohibited. profit can be reported simply by matching today’s revenues with yesterday’s costs. You will only have to apply historical cost accounting in the paper F3 exam. Large plc’s will have to report under a much more extensive financial reporting framework than sole traders. There are a number of bodies that you need to be aware of for the Paper F3 exam. such as replacement cost accounting. Refer to our full terms and conditions of use. Individuals may reproduce this material if it is for their own private study use only. Different countries may have their own systems of GAAP (generally accepted accounting practice) or may follow International Financial Reporting Standards (IFRS) or IFRS for SMEs (SME means smaller and medium sized enterprises). however. Always obtain expert advice on any specific issue. This has many advantages but is complicated to apply so is not common in practice. theexpgroup. There are alternative systems of accounting. the weaknesses of historical cost accounting are generally outweighed by its advantages. During periods of modest inflation.ACCA F3 Financial Accounting ExPress Notes • Where there’s significant inflation and inventory is held for a long time. No liability for damage arising from use of these notes will be accepted by the ExP Group. There are some large advantages of historical cost accounting. These course materials are for educational purposes only and so are necessarily simplified and summarised. It is a matter of national regulation which financial reporting standards an entity must use when producing their financial reports.

This has recently been renamed the IFRS Advisory Council. it issued guidance on how to account for loyalty programmes. No liability for damage arising from use of these notes will be accepted by the ExP Group. or provisions. It employs a permanent staff to draft new accounting standards and amendments considered necessary to extant accounting standards. The Foundation is made up of trustees. This has recently been renamed the IFRS Interpretations Committee. This body is designed to respond quickly where there are significant differences in interpretation of an extant IFRS. For example. It is made up of a cross section of advisors from different user groups. theexpgroup. Always obtain expert advice on any specific issue.ACCA F3 Financial Accounting ExPress Notes IASCF: the International Accounting Standards IASB: International Accounting Standards Board This has recently been renamed the IFRS Foundation. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. where users were uncertain to follow the extant accounting standard on revenue recognition. who appoint the members of the bodies below. SAC: Standards Advisory Council IFRIC: International Financial Reporting Interpretations Committee Page | 20 © 2013 The ExP Group. It advises the IASB on the IASB’s work programme. These course materials are for educational purposes only and so are necessarily simplified and summarised. The IASB issues International Financial Reporting Standards and the IFRS for SMEs.com . Refer to our full terms and conditions of use.

These course materials are for educational purposes only and so are necessarily simplified and summarised. which may be a fully manual (paper based) system or may be maintained using software.com . This data is then analysed. Individuals may reproduce this material if it is for their own private study use only. categorised and recorded in the accounting system itself. Reproduction by any means for any other purpose is prohibited. For an accounting system to work well. No liability for damage arising from use of these notes will be accepted by the ExP Group.ACCA F3 Financial Accounting ExPress Notes Chapter 3 Sources of financial information START The Big Picture The accounting system must naturally be fed with raw source data. theexpgroup. The F3 syllabus requires you to be able to define the following: Page | 21 © 2013 The ExP Group. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. Both use the same system of double entry bookkeeping that we will see later on. A key step is therefore ensuring that the right stationery and documentation is in place. it must be simple to operate and be capable of being fed by non-specialist staff.

Normally included with an invoice. Receivables. Nowhere. Always obtain expert advice on any specific issue. Sales order Often feeds the accounting information on. there has been no transaction to record. A document that is included with the Receivables. Does not generally instigate any recording of a transaction. Goods despatched note Invoice Statement Sales (revenue) and possibly also inventory management. Refer to our full terms and conditions of use. Payables.. To record an order placed with a supplier. normally of inventory for resale. Purchases of inventory for resale and payables. Signing a booking form for an ExP classroom course is a sales order that ExP will then process. Sales (revenue).com . theexpgroup.. The refund made would be accompanied with a debit note. To record an order from a customer. A request for payment from a supplier. Page | 22 © 2013 The ExP Group. paid for and then returned there would initially be a credit note. e. To cancel a credit note that previously existed.ACCA F3 Financial Accounting ExPress Notes Document Quotation Purpose To give a potential customer an indication of what a product or service would be likely to cost.g. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. To record that an order for inventory for resale has been received. But useful for cross-checking our records with the supplier’s records. Individuals may reproduce this material if it is for their own private study use only. Payables. Reproduction by any means for any other purpose is prohibited. Purchase order Goods received note Purchases. since all transactions on the statement will have been recorded when goods were ordered. It may be a binding quote or just an indicative quote. Sent by the supplier to the customer. Sent by the supplier to the customer. It will normally only be produced once the goods have been inspected at the point of delivery to ensure that they are correct in description and quality. Credit note Debit note Remittance advice Acknowledgement from a supplier that the customer has overpaid and is entitled either to a refund or free goods/ services in the future. To record that an order from a customer has been sent out.. it’s still at the state of being a prospective transaction. depending on how the accounting system is set up. It may require preauthorisation to be valid. A summary of transactions recorded by a supplier with a customer. if goods were ordered. At this stage. including amounts received from the customer.

com . theexpgroup. Reproduction by any means for any other purpose is prohibited. From this source data. The accountant is often not physically present at the time that transactions happen. the accounting records can then be produced each period. They may be written up by the accountant.ACCA F3 Financial Accounting ExPress Notes Receipt payment (e. Individuals may reproduce this material if it is for their own private study use only. it is essential that the source data is captured immediately. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised.g. In very simple accounting systems for sole traders (e.g. if paid by cheque) with details that will allow the recipient of the funds to match the payment to the customer’s account. so it is essential that there are simple and fool proof systems to ensure a complete and accurate record of business transactions. to acknowledge payment of a debt. receipt for cash purchase of some building materials and the accounting system. or by a semi-trained member of staff within the client’s business. a self-employed builder) it may involve the proprietor keeping pocket books to record things like quotes given and a shoe box used to collect receipts for business expenses. Refer to our full terms and conditions of use. Page | 23 © 2013 The ExP Group. Receivables. these will be the bridge between the raw data (e. This does not necessarily mean immediately writing up the books.g. payables and purchases. KEY KNOWLEDGE Books of original entry Alternatively called books of prime entry. KEY KNOWLEDGE Data sources / data capture When a business transaction happens. but it does involve some record being made of the transaction happening. No liability for damage arising from use of these notes will be accepted by the ExP Group. Issued by the supplier for goods.

Often. No liability for damage arising from use of these notes will be accepted by the ExP Group. Cash in and out of the balance of cash held in notes and coins by the business (normally small). or using a spreadsheet.g. Individuals may reproduce this material if it is for their own private study use only. Data typically used to feed: All sorts of things! Anything that may generate cash for the business. Sales revenue. in which “period 13” adjustments like depreciation and bad debts are recorded. this is the book maintained by the accountant. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. Anything not covered by any of the other books of original entry. Purchases of inventory for Note that purchases settled immediately in resale. Page | 24 © 2013 The ExP Group.com . Note that sales immediately settled in cash will be recorded in either the cash book (if paid directly into the bank account) or petty cash book (if received in notes and coins). Friday cakes for staff!) and sundry income.ACCA F3 Financial Accounting ExPress Notes The most commonly used books of original entry are: Book of original entry: Cash in book Used to record data on: Cash received into the business bank account. Sales on credit. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use. Sales day book Purchases day book Purchases of inventory for resale on credit. Journal book Books of original entry may be recorded in paper form. cash will be recorded immediately in the cash payments book or petty cash book. small expenses (e. This is often controlled using the imprest system (see later). Always obtain expert advice on any specific issue. Cash payments book Petty cash book Cash paid from the business bank account. All sorts of things! Anything that results in cash being paid out of the business. Typically.

there are often restrictions on who can access the journal book. for example asking “how much cash was spent?” and “what was this for?”. Often. In a computerised system. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Page | 25 © 2013 The ExP Group. but will require the same data. Advantages of using a computerised system include: • • • • • Back ups can be made easily Makes producing periodic frequent accounts much less laborious than a manual system Can be user-friendly Analyses sales taxes more easily than manual systems (see later) Can be used to quickly produce lots of reports such as VAT returns and interim management accounts. whilst then offering a drop down menu of choices. Disadvantages of a computerised system include: • • • Cost May not be tailored very well to the business own needs Still requires effective data capture and maintenance of the underlying records. They still require rigorous systems for data capture at the point when transactions happen.com . Individuals may reproduce this material if it is for their own private study use only. Software may be more user friendly.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Computerised systems Computerised systems are common and can be cheap. Reproduction by any means for any other purpose is prohibited. it includes adjustments and correction of errors and omissions in the other books of original entry. Always obtain expert advice on any specific issue. garbage out” very much applies! Input to a computerised system will not look like a book of original entry. KEY KNOWLEDGE Journal book The journal book is the book of original entry that captures transactions not covered by other books of original entry. Refer to our full terms and conditions of use. theexpgroup. as the maxim “garbage in. The software will still prepare records using the same methodology as the manual recording systems above.

with an explanation of the reason. These course materials are for educational purposes only and so are necessarily simplified and summarised. the same amount of cash is taken out of the box. Refer to our full terms and conditions of use. e. $1. Individuals may reproduce this material if it is for their own private study use only. As an expense record is submitted. KEY KNOWLEDGE Controlling petty cash – the imprest system Cash balances are prone to error. it is likely that an accounting system will maintain separate records of individual records of customer and supplier balances.com . We’ll see an example of it after tackling double entry bookkeeping. theft and poor record keeping.g. Reproduction by any means for any other purpose is prohibited. • • Page | 26 © 2013 The ExP Group. double entry system) and in a simple accounting system may be kept using a simple card index box.ACCA F3 Financial Accounting ExPress Notes The journal book records double entry records (see later). theexpgroup.e. the person claiming the cash must provide a receipt and complete an expense voucher. This is outside the general ledger (i. Under no circumstances is anybody ever allowed to take money out of the tin without completing a petty cash voucher. No liability for damage arising from use of these notes will be accepted by the ExP Group. KEY KNOWLEDGE Credit control and memorandum accounts In parallel with (and thus duplication of) the main accounting system. Each supplier or customer will have a supplier or customer code and individual record of transactions with them.000 • Before any cash is taken out of the cash box (which should be guarded by a very diligent and ideally slightly frightening person). The imprest system has these features: The cash box has a pre-set limit of maximum cash that it ever contains. Always obtain expert advice on any specific issue. but provides useful information for credit control and a check on the accuracy of data input. This duplicates effort and increases costs. A way to ensure that any cash payments out of the petty cash box are recorded is to use the imprest system.

00) Note that any time the cash is replenished.24) (20.24 (43. Flowers for new baby 336.00) (43.000. Taxi for MD 334. more cash is withdrawn from the bank to replenish the sum up to the $1.00) (430.12) (21.00) (430. the expense vouchers are taken out of the petty cash box and stored somewhere safe. Refer to our full terms and conditions of use.000.com .00 (21.000 limit. Supermarket 333.12) (20.00) (32. When cash reaches a low level. The expense vouchers are then exchanged for the replenishment cash. probably with the accounts department. Reproduction by any means for any other purpose is prohibited.000.00) (430.00) 1.12) 453. theexpgroup.00 Subtotals 546. Stationery shop 335. No liability for damage arising from use of these notes will be accepted by the ExP Group.12) (20.24 (64. These course materials are for educational purposes only and so are necessarily simplified and summarised. which will look like this: PETTY CASH BOOK Reason for cash movement Cash in/ out From bank Staff food & drink Date Voucher # Travel Stationery Other 01/03/2010 03/03/2010 12/03/2010 23/03/2010 25/03/2010 27/03/2010 31/03/2010 31/03/2010 1. Page | 27 © 2013 The ExP Group.ACCA F3 Financial Accounting ExPress Notes The result of this is that at any point in time. These movements in petty cash can then be summarised in a petty cash book each period.00) (32.76 546.24 Opening balance 332. Supermarket Subtotal Replenish 546. Always obtain expert advice on any specific issue. Individuals may reproduce this material if it is for their own private study use only. The accounts department will then use the totals to record the totals in the accounting system each period.00) (32. the sum of cash plus the expense vouchers will always equal the pre-set limit of $1.

Reproduction by any means for any other purpose is prohibited. If there is a change in an asset.e. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. there must be an explanation for why it changed. you have more assets because you’ve recognised a revaluation gain. more expenditure).e.ACCA F3 Financial Accounting ExPress Notes Chapter 4 Double entry bookkeeping: the debits and credits START The Big Picture The starting point for double entry bookkeeping is to think about assets and liabilities. These course materials are for educational purposes only and so are necessarily simplified and summarised. Page | 28 © 2013 The ExP Group.com . you have more cash because you have lottery income. you have less cash because you spent money on lunch (i. theexpgroup. If you buy lunch. Refer to our full terms and conditions of use. If you decide that the home you own is worth more. Always obtain expert advice on any specific issue. net assets. i. • • • If you win the lottery.

The explanation is arbitrarily called a credit. If we now say that we have an asset. there is an equal and opposite transaction. It’s shorter just to say “debit cash”. The key word in double entry is because. If you have more assets (debit assets). or more of an asset because you’ve been paid your salary. You may have encountered the words debit and credit in the context of your bank statement. We think that this is needlessly confusing. theexpgroup. or an increase in an asset. Individuals may reproduce this material if it is for their own private study use only. the explanation will be to credit income. as what we’re trying to do is explain where the debit came from. KEY KNOWLEDGE So why debits and credits? Imagine that we call assets “debits”. since the bank statement is a record from their own records. The reason is that there’s been some income. This can’t be a debit. The truth is the opposite way round to the way that lay people use the terms. only so that people who speak different languages can communicate more effectively with each other. So a liability is a credit. Always obtain expert advice on any specific issue.com . Reproduction by any means for any other purpose is prohibited. There must be a reason for this increase in cash. The opposite of an asset is a liability.ACCA F3 Financial Accounting ExPress Notes Many textbooks explain double entry bookkeeping in the framework of double entry meaning that for each transaction. This brings danger. Refer to our full terms and conditions of use. KEY KNOWLEDGE Building up the rules Here are the core concepts that you need to be happy with: • • • An asset. This means that it’s upside down. This would be recorded as “recognise new or increased asset of cash”. The opposite of a debit is a credit. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 29 © 2013 The ExP Group. is a debit. This can cause confusion. so it’s best for the moment if you try to unlearn everything you’ve ever come to think of debits and credits as being.

com . Page | 30 © 2013 The ExP Group. There’s not much intrinsically to actually understand here – it’s just a task and a system that becomes really easy with repetition. but it can also be an expense. or an expense (e. if you just bought dinner on your credit card). credits bad” or even the other way round.g.g. Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. A debit can be an asset. These course materials are for educational purposes only and so are necessarily simplified and summarised. If you think that there’s a new liability. It’s simpler than that. Refer to our full terms and conditions of use.ACCA F3 Financial Accounting ExPress Notes So you may have started to think “debits good. Debits mean Credits mean What happens to net assets: An increase in assets An increase in liabilities A decrease in assets An increase in liabilities And the reason for that increase in net assets: An item of expenditure An item of income If you’re asked to record a transaction. Reproduction by any means for any other purpose is prohibited. theexpgroup. That’s not the way to look at it.g. Review this and then try to produce is yourself. So it’s not correct to think of one being good and the other bad. which could be either an asset (e. Then work out the explanation why. using the logic of explaining movements in net assets and things being opposites (e. a liability is a credit because an asset is a debit). that must be a credit to liabilities. Always obtain expert advice on any specific issue. if you’ve just got some cash in your hand because you borrowed it). Don’t panic – it comes and don’t feel pressured to rush it. the first step is to identify what assets and/ or liabilities are in question. Decide one of these first (it’s often easiest at first to start with cash if it’s a cash transaction) and decide if this is a debit or a credit. just the way that it takes a while to become familiar with riding a bicycle. It will take a while to become familiar with this system. Neither is good or bad. That means that the explanation must be a debit. Here’s a table to summarise the rules.

ACCA F3 Financial Accounting ExPress Notes Chapter 5 Tangible non-current assets START The Big Picture An asset is a resource controlled by an entity that is expected to give inflow of benefits. Individuals may reproduce this material if it is for their own private study use only.com . No liability for damage arising from use of these notes will be accepted by the ExP Group. Many assets will have a period of expected benefit over more than one period. Page | 31 © 2013 The ExP Group. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. These are non-current assets. These course materials are for educational purposes only and so are necessarily simplified and summarised. or an increase in the earning capacity of an existing asset. Revenue expenditure means money paid to maintain the existing earning capacity of an existing asset. KEY KNOWLEDGE Capital and revenue expenditure In slang terms. theexpgroup. Always obtain expert advice on any specific issue. capital expenditure means any cash paid to acquire assets that will result in the acquisition of a new asset.

since it has nothing to do with share capital/ equity or sales revenue! They are commonly used terms. These course materials are for educational purposes only and so are necessarily simplified and summarised. as long as those costs are expected to last more than a year. NBV is original cost less cumulative allowance for depreciation. KEY KNOWLEDGE Depreciation All assets.ACCA F3 Financial Accounting ExPress Notes The terminology is very confusing here. KEY KNOWLEDGE Acquisition of a non-current asset The cost of a non-current asset that will initially be recognised will be all the costs necessarily incurred in bringing the asset into its initial working condition.com . The SOFP will show the asset at its net book value (NBV). It is not aimed at anything else such as showing the asset at its current market value in the SOFP. wear out over time. Individuals may reproduce this material if it is for their own private study use only. theexpgroup. Any recoverable taxes will be excluded. or anything that does not produce materially greater income when it’s new. Example where suitable estimate of revenue generated Office furniture. Method Straight line Annual depreciation calculated as (Cost – estimated residual value)/ expected useful life. This is done by making an allowance for depreciation and charging depreciation. with the sole exception of freehold land. No liability for damage arising from use of these notes will be accepted by the ExP Group. This means that the total cost of ownership of the asset must be matched to the revenue stream that the asset generates. Page | 32 © 2013 The ExP Group. Always obtain expert advice on any specific issue. or supports. The aim of depreciation is to match the cost of using the asset to the income stream that it generates. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. This is the most commonly used method of depreciation. however inaccurately. The depreciation method chosen for an asset should be the method that most closely matches the cost of the asset to the pattern of revenue that it generates.

Dr Depreciation expense (SOCI) Cr Allowance for depreciation (SOFP) $x $x KEY KNOWLEDGE Disposal When an asset is eventually disposed. Where an item of machinery has an estimated maximum useful life.com . it will generally be sold for some cash. The allowance for depreciation is maintained as a separate account rather than crediting the asset account itself. Individuals may reproduce this material if it is for their own private study use only. A gain or loss will arise on this simultaneous recognition and derecognition. This is because the original historical cost of assets often needs to be extracted quickly to allow for preparation of non-current asset disclosure notes (see below). Page | 33 © 2013 The ExP Group. Refer to our full terms and conditions of use. Older cars generate less net revenue as they break down more than new cars and require more maintenance. Ledger accounting Depreciation is charged each year by creating an expense and an allowance for depreciation account. If sales proceeds > NBV then a profit on disposal will be recognised If sales proceeds < NBV then a loss on disposal will be recognised. No liability for damage arising from use of these notes will be accepted by the ExP Group. theexpgroup.ACCA F3 Financial Accounting ExPress Notes Reducing balance (also known as diminishing balance) NBV at start of the period x annual depreciation % Machine hour method (Cost – estimated residual value) x (Machine hours this period/ estimated total useable hours) Motor vehicles used by a taxi company. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. This means that a new asset will be recognised in the SOFP (the cash) and another will be derecognised (the NBV of the asset).

just as depreciation is. Page | 34 © 2013 The ExP Group. revalued amount (a revaluation downwards is an impairment. KEY KNOWLEDGE Depreciation of revalued asset A revalued asset will still need to be depreciated. a gain or loss will arise as normal. a profit or loss on disposal is a correction to the estimated figures each year for depreciation. This means that this is reported in profit or loss. but is possible. revaluations are made to assets that have increased in value.ACCA F3 Financial Accounting ExPress Notes In effect. Depreciation expense and allowance for depreciation will therefore increase. No liability for damage arising from use of these notes will be accepted by the ExP Group. The depreciation charged must be on the higher. Refer to our full terms and conditions of use. revalued amount. Depreciation must also be based on the new. This is not required. which is unlikely to feature in the F3 exam). all similar assets must be revalued and the valuations must be kept up to date. The gain or loss will be the difference between the new revalued amount and the net book value immediately prior to the revaluation.com . KEY KNOWLEDGE Disposal of revalued asset On disposal of a revalued asset. Always obtain expert advice on any specific issue. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only. Once an asset has been revalued. KEY KNOWLEDGE Revaluation Sometimes.

These course materials are for educational purposes only and so are necessarily simplified and summarised. as above. KEY KNOWLEDGE Disclosure of non-current assets Non-current assets are generally disclosed on the face of the SOFP at their net book value. but with a breakdown in the notes to the financial statements that provide details of cost and allowance for depreciation. No liability for damage arising from use of these notes will be accepted by the ExP Group.ACCA F3 Financial Accounting ExPress Notes If there is any remaining revaluation surplus in revaluation relating to the disposed asset. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. Page | 35 © 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. it is normal to transfer this from revaluation reserve to retained earnings. Always obtain expert advice on any specific issue. theexpgroup.com .

Often this is intellectual property rights or a licence to undertake some activity. These course materials are for educational purposes only and so are necessarily simplified and summarised. The key issues in recognition of an intangible non-current asset therefore tend to be whether the asset is truly controlled by the entity and whether it is likely to generate an inflow of benefit.com . Costs that result in something that the entity cannot be reasonably sure of controlling into the future must be written off as an expense. it is necessary to prove that there is sufficient certainty of a future inflow of benefits to categorise this as an asset rather than an expense. As with tangible assets. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. Individuals may reproduce this material if it is for their own private study use only. theexpgroup. KEY KNOWLEDGE Research and development costs An asset is a resource controlled by an entity that is expected to generate an inflow of benefit to the entity.ACCA F3 Financial Accounting ExPress Notes Chapter 6 Intangible non-current assets START The Big Picture An intangible asset is an asset with no physical substance. No liability for damage arising from use of these notes will be accepted by the ExP Group. Page | 36 © 2013 The ExP Group.

theexpgroup. processes. KEY KNOWLEDGE Development costs Development is defined in IAS 38 as “the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials. Instead of depreciation being written off against profit. It is also difficult to patent (i. These course materials are for educational purposes only and so are necessarily simplified and summarised. Research costs are costs incurred in the early stages of a development project. The accounting treatment required for research costs is to write them off immediately in profit or loss.ACCA F3 Financial Accounting ExPress Notes Most research and development fails to produce a commercially viable product. The key issue here is that it is not reasonably certain that expenditure will generate a viable income stream in the future. it is asset to the cost of the qualifying development cost asset. products. expected to be profitable) Intend to complete the project Expenditure on the project can be separately recorded. A development cost asset can include the depreciation on machinery used in the development project. Page | 37 © 2013 The ExP Group. restrict commercial use of) knowledge until it has reached a relatively advanced stage. It is defined in IAS 38 as is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. systems or services before the start of commercial production or use”. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue.e.com . The accounting treatment of development costs is to recognise them as an intangible noncurrent asset if they meet the criteria that suggest that they will be likely to generate a profitable income stream in the future and can be reliably separately identified using the mnemonic RAT PIE: • • • • • • Resources are adequate to complete the project Ability to complete Technically feasible Probable economic benefit (i.e. Individuals may reproduce this material if it is for their own private study use only. devices.

For this reason. Page | 38 © 2013 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use. As with tangible non-current assets. theexpgroup. amortisation is often chosen to be by the reducing balance method of amortisation rather than straight line. Development projects such as drugs patents tend to generate their greatest revenues in the early years of their commercial life. Reproduction by any means for any other purpose is prohibited. the aim is to match the pattern of cost to the pattern of benefit that the intangible asset generates.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Write-off period Intangible assets are written off over the period during which they generate benefits. No liability for damage arising from use of these notes will be accepted by the ExP Group.com .

using illustrative numbers: Step 1: Inventory is purchased: Dr Inventory asset (SOFP) Cr Cash/ payables $10.com . Strictly speaking therefore the correct accounting treatment for inventory would be.ACCA F3 Financial Accounting ExPress Notes Chapter 7 Inventory and purchases START The Big Picture For most businesses. since the inventory is expected to give an inflow of benefit to the entity and the entity controls it. When inventory is purchased. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. which is expected to be sold (or possibly thrown away or stolen!) by the end of the accounting period.000 Step 2: Inventory is sold: Dr Cost of sales (SOCI) Cr Inventory asset (SOFP) $12 $12 Page | 39 © 2013 The ExP Group. it creates an asset. theexpgroup. inventory will be a very short lived asset. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use.000 $10.

Refer to our full terms and conditions of use. To simplify matters.g.com . Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. theexpgroup. In practical terms. this could create practical problems. journal step 2 above could be repeated many thousands of times as each individual sale happened. this inventory asset is then treated as an expense. Reproduction by any means for any other purpose is prohibited.200 Expense in SOCI Expense in SOCI Reduction in expense in SOCI Page | 40 © 2013 The ExP Group. by being sold or scrapped) by the end of that period and so becoming an expense of that period: Dr Cost of sales (opening inventory) (SOCI)$800 Cr Inventory asset (SOFP) $800 The effect of these journals is to create the hopefully familiar working for calculating cost of sales: Opening inventory Add: Purchases in the period Less: Closing inventory Cost of sales made 0 10. If the retailer deals with fast moving consumer goods.000 Cr Cash/ payables $10.ACCA F3 Financial Accounting ExPress Notes For a retailer. since it’s expected that it will be used up (e. any inventory that remains in stock is then valued in accordance with IAS 2 (see below) and this is lifted out of cost of sales and treated as an asset that will probably be used up in the next period: Dr Inventory asset (SOFP) $800 Cr Cost of sales (closing inventory) (SOCI)$800 At the start of the next period. thus: Single step: Inventory is purchased and treated as an ex pense: Dr Cost of sales (purchases expense) $10. most accounting systems (and all accounting systems that you can expect to encounter in the F3 exam) take the shortcut of writing inventory purchases off immediately to cost of sales in the SOCI. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue.000 (800) 9.000 At the end of the period. since each time an item of inventory is sold it would be necessary to identify the historical cost of that specific item of inventory and charge it to cost of sales (step 2 above). then only a very small proportion of inventory purchased during the year would remain in inventory at the year end. or perishable goods.

ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Valuing inventory The purchase price of inventory is normally fairly simple. Any revenues and future costs to be incurred to enable sale will be included within the determination of NRV. costs of delivery to the wrong location and cost of bringing to the right location) would be excluded from cost of sales. Recoverable sales taxes. so including: • • • Cost paid to the supplier Irrecoverable taxes (e. it is possible to keep inventory outside the accounting system. Where inventory is work-in-progress in a manufacturing process it will also include fair costs of conversion (e. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use. so that realised losses on some stock do not mask unrealised expected gains on others. import duties) Costs of delivery inwards (sometimes called carriage inwards). This simplifies matters considerably.g.g. It will include costs necessary in order to bring the inventory into saleable condition. it does mean that at the end of each period. inventory must be physically counted and valued. Maximum value: lower of cost and NRV An asset is only an asset if it is expected to generate an inflow of benefits. the maximum valuation of that item of inventory in the SOFP will be the net amount that its sale is expected to generate (called its net realisable value or NRV). non-production administrative costs and one-off costs that do not add anything to the inventory’s value (e. Individuals may reproduce this material if it is for their own private study use only. This means that if inventory is expected to sell for net proceeds below cost. Always obtain expert advice on any specific issue. • • Any costs incurred up to the date of the accounts might be included within the determination of cost.com . The final valuation for each item of inventory will be the lower of cost and NRV. These course materials are for educational purposes only and so are necessarily simplified and summarised. theexpgroup. in order to make the necessary adjustments to lift unsold inventory out of cost of sales. labour costs.g. This has to be estimated on a stock line by stock line basis. Page | 41 © 2013 The ExP Group. However. No liability for damage arising from use of these notes will be accepted by the ExP Group. since they are unnecessary to bringing the inventory to saleable condition. By writing inventory off immediately to cost of sales. production overhead costs).

Individuals may reproduce this material if it is for their own private study use only. These are doubtful debts. The SOFP of the receivables cannot exceed the neutral estimate of how much cash is actually expected to be received. it cannot be shown as an asset. Remember that an asset is a resource that is expected to give an inflow of benefits. Always obtain expert advice on any specific issue. some will also look like they may not pay (perhaps by being a month overdue for payment). These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. Logically therefore if a receivable is not expected to pay. theexpgroup. This means that some will become irrecoverable. Refer to our full terms and conditions of use.ACCA F3 Financial Accounting ExPress Notes Chapter 8 Receivables and payables START The Big Picture We have already looked at how credit sales are often made to encourage sales.com . Page | 42 © 2013 The ExP Group. Before being written off as irrecoverable. The problem with extending credit is that not all receivables will pay.

These course materials are for educational purposes only and so are necessarily simplified and summarised. which is normally called irrecoverable debts expense. In order for the journal to work. as it was written off. This means that the journal to record the cash will be automatically generated thus: Dr Bank Cr Receivables $800 $800 However. it is likely that the cash received will initially be recorded in the cash received book as a receipt from a debtor. it is then necessary to reinstate the balance that was previously written off. This is a change in accounting estimates. since the estimate last period was there was no realistic chance of the debt being recovered: Dr Receivables $800 $800. Cr Irrecoverable debt expense Page | 43 © 2013 The ExP Group. Refer to our full terms and conditions of use.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Irrecoverable debts If a debt is not going to pay. Removing an asset reduces net assets and so generates an expense. No liability for damage arising from use of these notes will be accepted by the ExP Group. theexpgroup. Always obtain expert advice on any specific issue.com . hence: Dr Irrecoverable debts expense Cr Receivables $x $x KEY KNOWLEDGE Recovery of debts written off If a debt is unexpectedly paid having previously been written off. Reproduction by any means for any other purpose is prohibited. the balance is no longer in receivables. then it must be written out of the accounting records as the receivable is no longer an asset. Individuals may reproduce this material if it is for their own private study use only. for example if a person has died bankrupt.

it may be possible to simplify the above two journals. Refer to our full terms and conditions of use. The amount cannot be written out of debtors. Individuals may reproduce this material if it is for their own private study use only. The allowance account itself is a SOFP account. theexpgroup. which reduces the value of net receivables on the face of the SOFP without corrupting the records of the actual debtor balance that will be needed to try to obtain payment. it would fail to give a true and fair view on the face of the SOFP to show the full amount as an asset. so just like assets and liabilities it will remain on the balance sheet until it is removed. thus: Dr Bank Cr Irrecoverable debt expense $800 $800. because there is a debit and credit of the same amount to receivables. an allowance will reduce net assets. This therefore creates an expense. Always obtain expert advice on any specific issue. since this was a fair estimate at the time. even if they have not yet been written off. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. There will be an expense recorded for the write off in the year when it was written off and a credit to profit or loss when the cash was received. or increasing. if it’s estimated that there is a 20% chance that a debt will not pay. However. KEY KNOWLEDGE Doubtful debts It is likely that some receivables will not pay. as credit control will need the records of the debt in full to know how much to chase for payment.com . The solution is to create an allowance account. Page | 44 © 2013 The ExP Group.ACCA F3 Financial Accounting ExPress Notes There is no attempt to change the previous year’s figures. which include an expense for the write off of the debt. Creating. The business will continue to chase the receivables for full payment and may eventually even sue for the full balance. Depending on how the initial cash receipt has been recorded.

Always obtain expert advice on any specific issue. theexpgroup. Individuals may reproduce this material if it is for their own private study use only. the ledger accounts are normally updated using the totals from the sales day book and cash receipts book. For this reason. Increasing a receivable increases net assets. or nominal ledger. It may alternatively be called the general ledger. KEY KNOWLEDGE Other common items with receivables Interest on overdue debts If a sale agreement with a customer provides for a right to charge penalty interest on an overdue debt. since it contains only summary figures of lots of transactions. the less the chance of error and the less information to seek through in order to find errors when they occur. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. perhaps because the customer buys in large volumes or is a member of staff.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Control account reconciliations It is possible that an accounting system will maintain memorandum ledgers with individual customer balances outside the main accounting system. but provides a check on accuracy of the figures. rather than lots of detail of individual transactions. These discounts are Page | 45 © 2013 The ExP Group. Trade discounts are those given to customers at the point of sale. rather than details of individual sales. It will normally be recorded as: Dr Receivables Cr Sundry income (or perhaps finance income) $x $x Discounts There are two types of discount that you may encounter: trade discounts and settlement discounts. This creates duplication of effort and record keeping. which therefore generates a source of income. this will increase the amount receivable. The double entry system will be kept as simple as possible. with as few figures posted to the ledger accounts (T accounts) as possible. Refer to our full terms and conditions of use. The memorandum ledger cards are confusing sometimes referred to as the “ledgers”.com . The receivables account in the double entry system is often called the “control account”. Reproduction by any means for any other purpose is prohibited. since the fewer transactions there are.

this is similar to the treatment of irrecoverable debts.ACCA F3 Financial Accounting ExPress Notes not subject to any uncertainty at the time of sale – it is known for sure that the customer will never pay the list price of the goods or services. No liability for damage arising from use of these notes will be accepted by the ExP Group. i.com . The terminology can be confusing here. Always obtain expert advice on any specific issue. before its deduction. since this is the amount that the customer will eventually be chased for if they don’t pay early. The accounting is therefore very simple: they are simply ignored. They are therefore partial forgiveness of debts that we owe to other people. For example. It is simply a debt that we are voluntarily choosing to write off as partially irrecoverable because of the cash flow advantage of receiving the cash quickly. Page | 46 © 2013 The ExP Group. If the settlement discount is allowed to the customer. the offer of the discount lapses. Settlement discounts are uncertain at the point of sale. Discounts allowed are settlement discounts that we allow to customers. They are therefore an expense in our books. If payment is not received within that period. The actual amount of the debt is gross of the settlement discount. Settlement discounts A settlement discount is an incentive for customers to pay you earlier than they otherwise naturally would. The sale is recorded at the amount net of the trade discount. a discount of 5% may be offered on the invoice sent to customers if payment is received within seven days of the invoice being sent. Reproduction by any means for any other purpose is prohibited. They are therefore partial write off of debts receivable by us.e. Discounts received are settlement discounts that our suppliers allow to us. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised. They are therefore a source of income in our books. Settlement discounts are sometimes also called cash discounts for this reason. Refer to our full terms and conditions of use. Individuals may reproduce this material if it is for their own private study use only.

This independent record keeping is a powerful check on the accuracy of a business’s accounting records. such as accounts that are used to hold client money. Reproduction by any means for any other purpose is prohibited. it is likely that each transaction on the bank statements will be manually compared to the transactions on the cash book. it is likely that the bank’s transactions will be downloaded in a raw data file (such as a . theexpgroup. Individuals may reproduce this material if it is for their own private study use only. Banks.com . In larger businesses that use a computerised accounting system. This will then leave only items that don’t agree. No liability for damage arising from use of these notes will be accepted by the ExP Group. The accounting software will then match transactions and run off a report of differences. provide bank statements that record all the transactions that they have recorded in the same bank account.ACCA F3 Financial Accounting ExPress Notes Chapter 9 Bank reconciliations START The Big Picture The cash book will record payments in and out of the bank account. In a small company scenario. These course materials are for educational purposes only and so are necessarily simplified and summarised. In some regulated scenarios. it is a professional requirement to reconcile the accounting records to the bank statements at least once a month. It is a good accounting practice to reconcile the bank accounts frequently. Refer to our full terms and conditions of use.csv file) and will then be run through the accounting software. Page | 47 © 2013 The ExP Group. Always obtain expert advice on any specific issue. ticking off matching transactions. of course.

miscasting manually maintained accounts. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group.com . using the journal book. the company will need to notify them.e.ACCA F3 Financial Accounting ExPress Notes To reconcile is to satisfactorily explain a difference between two numbers or records. Individuals may reproduce this material if it is for their own private study use only. the company will need to amend its own records. theexpgroup. recording a cash payment of $45 as $54 Omission of cash payments or receipts Omission of standing orders processed by the bank (i. Typical errors/ omissions made by the company: • • • • • • Misposting of amounts. automatic payments of nonvariable amounts) Omission of “direct debit” payments processed by the bank (i.g. e. so that the bank can correct their records. Reasons for differences between bank account and cash book Errors/ omissions (require correction) Timing differences (no action needed) Errors/ omissions by the company itself Errors/omissions by the bank Errors can be almost infinitely varied and can be made by either the bank or the company.e. If errors are made by the company. automatic payments of variable amounts) Omission of bank charges Processing errors. Refer to our full terms and conditions of use.g. Reproduction by any means for any other purpose is prohibited. Page | 48 © 2013 The ExP Group. e. If errors are made by the bank.

that means that the bank owes you money – i. Individuals may reproduce this material if it is for their own private study use only.e. Always obtain expert advice on any specific issue. theexpgroup.ACCA F3 Financial Accounting ExPress Notes Typical errors/ omissions made by the bank (typically much rarer than the company): • • Incorrect charges Processing payments or receipts incorrectly.com . Reproduction by any means for any other purpose is prohibited. Hence. No liability for damage arising from use of these notes will be accepted by the ExP Group. So the bank statements will list your balance as a credit. Typical timing differences: • • Payments made into the bank not yet processed (“uncleared lodgements”) Cheques drawn or online payments ordered not yet processed by the bank. A warning about terminology! A bank statement will record positive deposits with the bank as a credit. not of the client. as a debit is an asset. where the cash book will record them as debit. These course materials are for educational purposes only and so are necessarily simplified and summarised. Bank statements are run off from the records of the bank. our debit correctly equals their credit and vice versa. Refer to our full terms and conditions of use. Page | 49 © 2013 The ExP Group. you are a liability of the bank. Both are correct. If the bank holds some of your money.

Always obtain expert advice on any specific issue. or by providers of loan finance. Reproduction by any means for any other purpose is prohibited. KEY KNOWLEDGE Long term debt Debt is a liability. Individuals may reproduce this material if it is for their own private study use only. The last category simply therefore pays interest into perpetuity without ever repaying Page | 50 © 2013 The ExP Group. or from other investors who buy loan notes (also called bonds. It may be paid into the business by owners. theexpgroup. Capital is normally only repaid to owners if the owners choose to close down a solvent business. securities or commercial paper). The business has no obligation to pay back ordinary share capital while the business is a going concern. These course materials are for educational purposes only and so are necessarily simplified and summarised. Long-term debt may be funds raised from banks.ACCA F3 Financial Accounting ExPress Notes Chapter 10 Long term finance START The Big Picture Long-term finance means cash used to operate the business over the long-term. The former is capital and the latter is debt. No liability for damage arising from use of these notes will be accepted by the ExP Group. Refer to our full terms and conditions of use. meaning it’s an obligation of the business. on a fixed date or exceptionally irredeemable debt. Debt generally incurs an interest charge and may be redeemable (meaning repayable) over a period of time.com .

This is another expression of the accounting equation and business equation from chapter 1. IFRS and national regulation often require a greater analysis of each component of equity. the cash received will be credited to a loan liability account. Individuals may reproduce this material if it is for their own private study use only. equity may comprise the sum of the following: Ordinary share capital Preference share capital Reserves: o Share premium account o Revaluation reserves o Other reserves o Retained earnings Companies are required to present a note in their financial statements that reconcile each component of equity at the start of the year to the end of the year. Equity in total is often termed shareholders’ interest or shareholders’ funds. Loan notes are often tradable. On the issue of a loan. In a large limited liability company. For a sole trader. and then only rarely. • • • Page | 51 © 2013 The ExP Group.com . as the obligation to pay interest only arises as time passes. Any loan principal due for repayment within the current year is a current liability. equity is simply termed proprietor’s interest. theexpgroup. No liability is recorded for expected future interest. KEY KNOWLEDGE Equity Equity is the residual interest of all assets after deducting all liabilities. In a partnership.ACCA F3 Financial Accounting ExPress Notes the loan principle. These course materials are for educational purposes only and so are necessarily simplified and summarised. it is the sum of each partner’s capital account and each partner’s current account. Always obtain expert advice on any specific issue. It is only ever issued by governments. No liability for damage arising from use of these notes will be accepted by the ExP Group. Refer to our full terms and conditions of use. meaning that the original buyer can get their cash back before redemption by selling the loan note to somebody else for its market value on that day. any debt due for repayment after more than one year is a non-current liability. Reproduction by any means for any other purpose is prohibited. In the case of a company.

Recognising transactions as they are incurred. Reproduction by any means for any other purpose is prohibited. Examples: • Insurance paid in advance for a year’s insurance cover.ACCA F3 Financial Accounting ExPress Notes Chapter 11 Accruals and prepayments START The Big Picture One of the fundamental assumptions of accounting that we saw in chapter 1 was the accruals concept. Always obtain expert advice on any specific issue. not necessarily when the cash is paid. but that cash payment gives a right to receive benefits beyond the current period end. since all expenses incurred in the period will be matched to all revenues earned. Often. depreciation and the cost of sales working both do this. This also has the effect of ensuring that a profit calculation for a period will hopefully show a sustainable profit. so an estimate of expense incurred by the year-end will need to be made. These course materials are for educational purposes only and so are necessarily simplified and summarised. an invoice hasn’t yet been received. Accruals Where an expense has been incurred. even if the expense hasn’t yet been paid. This means that there is an asset at the period end. Examples: • • Estimated water and electricity used Estimated telephone charges for a Prepayments Where an amount has been paid in advance. Individuals may reproduce this material if it is for their own private study use only. Page | 52 © 2013 The ExP Group. since there is a right to receive future benefits. For example. There are two aspects to the accruals concept: • • Matching costs to the associated revenues.com . No liability for damage arising from use of these notes will be accepted by the ExP Group. This means there is a liability at the period end. Refer to our full terms and conditions of use. but it’s not yet been paid. theexpgroup.

electricity) Cr Accruals in SOFP (liability) $x Dr Prepayment in SOFP (asset) $x Cr Expense in SOCI (e.g. Refer to our full terms and conditions of use. or done after the period end using invoices that came in after the period end. Determining the amount of the prepayment will normally be easier than estimating the amount of an accrual. Always obtain expert advice on any specific issue.g.g. theexpgroup.ACCA F3 Financial Accounting ExPress Notes traditional landline telephone at a month end. Reproduction by any means for any other purpose is prohibited. since there is an obligation to pay this charge. KEY KNOWLEDGE Accounting treatment in the following period In the following period. it’s reasonable to assume at the start of the period that the prepayment asset will be used up (e. These course materials are for educational purposes only and so are necessarily simplified and summarised. this source of income will be a reduction in the expense recognised so far from posting cash payments from the cash book to expenses. Recognise the asset (the right to receive future benefits) at the period end. the benefit of insurance received) or the liability will be settled by payment of cash. This might be done using typical levels of usage. Doing this increases net assets so generates a source of income. insurance) Prepayments Calculate the amount of the prepayment from cash paid before the year-end. • Prepaid balances on pay-as-you-go mobile telephones.com . This is often done Page | 53 © 2013 The ExP Group. Recognise this as a liability. since there is an actual cash payment before the period end to base the calculation on. but before the accounts are prepared. Recognising the liability reduces net assets. It’s therefore normal at the start of the year to anticipate this by reversing the accrual liability or prepayment asset through profit. No liability for damage arising from use of these notes will be accepted by the ExP Group. In reality. so generates an associated expense: Dr Expense in SOCI (e. KEY KNOWLEDGE Accounting treatment at the year end Accruals Estimate the cost of goods or services used by the year end but not invoiced. Individuals may reproduce this material if it is for their own private study use only.

It must be done. so creates a credit to expenses. No liability for damage arising from use of these notes will be accepted by the ExP Group.g.ACCA F3 Financial Accounting ExPress Notes at the beginning of the following period. Refer to our full terms and conditions of use. Dr Expense in SOCI (e. This derecognises the asset that no longer exists. Individuals may reproduce this material if it is for their own private study use only. This means that as cash is paid the following period. so it can be done anytime that the company likes. electricity) Prepayments Recognise the consumption of the asset in the following period. as otherwise redundant assets and liabilities will be shown on the SOFP forever! Accruals Recognise the discharge of the liability in the following period. Always obtain expert advice on any specific issue. This increases net assets. however. not all of it will be recognised as an expense in that period. Dr Accruals in SOFP (liability) $x Cr Expense in SOCI (e. It’s a manual adjustment through the journal book. since an amount equivalent to the opening accrual will already have been reported as an expense the previous year. This will be an expense in period 2 of the cash payment not recognised as an expense in period 1. insurance) Cr Prepayment in SOFP (asset) $x Page | 54 © 2013 The ExP Group. Derecognising the asset reduces net assets.com . so generates an expense. theexpgroup. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised.g. Reversing the accrual removes any chance of accidental double recognition of the expense. but it could be done at the end of the period in some companies.

Individuals may reproduce this material if it is for their own private study use only. Accruals may be a form of provision. theexpgroup. A provision is simply a liability of uncertain timing or amount. if there is no firm data on which to base the estimate of the amount expected to be paid. Reproduction by any means for any other purpose is prohibited. and A reliable (which in practice means meaningful) estimate of the outflow can be made.ACCA F3 Financial Accounting ExPress Notes Chapter 12 Provisions and contingencies START The Big Picture A liability is defined in IFRS as being: • • • An obligation at the period end (i. Always obtain expert advice on any specific issue. and Where an outflow of benefit is expected to arise from that obligation. lawsuit) this will be the single most probable outcome. For a one-off liability (e. A provision is valued at the neutral best estimate of what the business expects to pay to settle the obligation. something that is impossible to avoid – not just an intention to do something). These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. For a recurring series of similar liabilities (e.g.g.com . lots of goods sold under warranty) it will be the weighted average of outcomes. Page | 55 © 2013 The ExP Group.e. No liability for damage arising from use of these notes will be accepted by the ExP Group.

ACCA F3 Financial Accounting ExPress Notes Contingent liabilities A contingent liability exists in one of two situations. As with any item on the SOFP. theexpgroup. or An obligation probably exists.com .e. This second situation is very rare. it will remain on the SOFP until it is removed. depending upon whether it is expected to be settled within 12 months of the reporting date or longer. These course materials are for educational purposes only and so are necessarily simplified and summarised. the effect will be to reduce profit and net assets: Dr Expense (e. it will be reversed. Refer to our full terms and conditions of use. nor disclosed in the notes to the financial statements. No liability for damage arising from use of these notes will be accepted by the ExP Group. Individuals may reproduce this material if it is for their own private study use only. Page | 56 © 2013 The ExP Group. but it is so difficult to obtain an estimate of what the outflow is likely to be that any estimate would be no more reliable than zero. If a provision is increased during the period. Examples are insurance claims where it’s uncertain if the item being claimed for is covered by the policy at all or a lottery ticket before the lottery draw. This will reduce the profit effect of the cash payment in the period.g. for legal costs) Cr Provision $ Increase in provision $ Increase in provision The provision is categorised on the SOFP within current liabilities or non-current liabilities. Contingent assets are not shown as assets in the SOFP. Reproduction by any means for any other purpose is prohibited. Movement in provisions A provision is a liability. If a provision is no longer needed. right to something) even exists. which are either: It is believed that there is probably no obligating event (<50% probability) but the chances of there being an obligating event are more than remote (>5% probability). Contingent assets A contingent asset is one where it is uncertain if the asset (i. Contingent liabilities are disclosed in the notes to the financial statements but are not shown with any value on the SOFP. Always obtain expert advice on any specific issue.

we may often be unaware of what sales taxes we are suffering. The rules vary considerably between countries. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. but typically businesses are required to register for sales tax if their expected turnover exceeds a certain limit. the amount of the sales tax itself and thus the amount excluding the sales tax (“net”). Always obtain expert advice on any specific issue. Businesses that are not registered for sales tax simply record purchases and sales at whatever cash they pay or receive. No liability for damage arising from use of these notes will be accepted by the ExP Group. such as Value Added Tax (“VAT”) are a common feature of business. As people who are not registered for sales tax. Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised.ACCA F3 Financial Accounting ExPress Notes Chapter 13 Sales taxes START The Big Picture Sales taxes. Page | 57 © 2013 The ExP Group. Businesses that must register for sales tax have an additional complication in their accounting system.com . they must very accurately maintain records of sales taxes that they have been required to charge on their sales (their “output tax”) and the tax that they have paid on their purchases of goods and services (their “input tax”). theexpgroup. In order to comply with the law. though receipts will normally provide a breakdown of the amount inclusive of the sales tax (“gross”).

600 This leaves a net balance on sales tax control of $8.000 $27. If a business is registered for sales tax.000 $213. It recovers sales tax on its inputs by netting it off the sales tax payable. it is normal for prices to be quoted net of sales tax and then the sales tax is added at the point of purchase. These course materials are for educational purposes only and so are necessarily simplified and summarised.000 $162. it must charge sales tax on its outputs which it must then pay over to the government periodically. Refer to our full terms and conditions of use. but it cannot recover sales tax on its inputs. Page | 58 © 2013 The ExP Group. the convention appears to be that prices must include sales tax unless they specify otherwise.600. theexpgroup. In an exam question.000 The sales tax control at any point will show the amount due to or from the tax authority for sales taxes. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group.ACCA F3 Financial Accounting ExPress Notes Local laws vary on how prices must be quoted. Individuals may reproduce this material if it is for their own private study use only. In the USA. Sales and receivables would be recorded as: Cr Sales revenue (SOCI. If a business is not registered for sales tax. so gross) = > Cr Sales tax control account (SOFP) $178. so gross) = > Dr Sales tax control account (SOFP) $135. In most countries. it’s first important to know which way the prices have been quoted.com . Ledger accounting Purchases and payables would be recorded as: Dr Purchases (SOCI. so net) Cr Cash/ payables (SOFP. it does not need to charge sales tax on its outputs. Always obtain expert advice on any specific issue.600 $35. so net) Dr Cash/ receivables (SOFP.

ACCA F3 Financial Accounting ExPress Notes Recoverable or irrecoverable? Some items will include sales taxes that under local law are not recoverable. theexpgroup.com . In the UK for example. as a matter of public policy. These course materials are for educational purposes only and so are necessarily simplified and summarised. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. If an item includes irrecoverable sales tax. sales tax on vans is recoverable for a registered business. Reproduction by any means for any other purpose is prohibited. but sales tax on purchase of a company car is not. Page | 59 © 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. it is included within the recognised value of the asset or expense. These might include business entertaining expenses or sales tax on cars.

ACCA F3 Financial Accounting ExPress Notes Chapter 14 Trial balances and correction of errors START The Big Picture In chapter 4. Always obtain expert advice on any specific issue.000 Cr Page | 60 © 2013 The ExP Group. Refer to our full terms and conditions of use.140 16.140 15. we prepared simple records of a sole trader and listed all the balances on their accounts at the end of the period. Reproduction by any means for any other purpose is prohibited.com . No liability for damage arising from use of these notes will be accepted by the ExP Group. This was a preliminary trial balance. Individuals may reproduce this material if it is for their own private study use only. Dr Cash Capital Purchases Payables Sales income Staff costs 50 3.000 2. These course materials are for educational purposes only and so are necessarily simplified and summarised.040 4. theexpgroup.

These course materials are for educational purposes only and so are necessarily simplified and summarised. These types of errors will not be picked up in a trial balance: • • • • Errors of omission – having totally ignored a transaction or necessary adjustment Compensating errors – two errors happening to cancel each other out Errors of principle – treating an expense as an asset. it implies that errors have been made in the recording of transactions.ACCA F3 Financial Accounting ExPress Notes Non-current assets Telephone Receivables Withdrawals 540 60 1.240 150 Totals 21. It does not mean that no errors have taken place. Refer to our full terms and conditions of use. If the total debits does not equal total credits. Page | 61 © 2013 The ExP Group.com . but at the wrong amount. Individuals may reproduce this material if it is for their own private study use only. theexpgroup. the adding up of the T accounts or the extraction of balances from the T accounts into the trial balance itself. or vice versa Errors of commission – recording the correct journal.180 21. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited. income as liability.180 The fact that the total debits equal the total of the credits gives us a considerable amount of comfort that the bookkeeping has been done accurately. Always obtain expert advice on any specific issue.

Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only.ACCA F3 Financial Accounting ExPress Notes Overview of stages in preparation of financial statements Record transactions using books of original entry Periodically total books of original entry and post totals to ledger accounts Total ledgers and produce preliminary trial balance Use journal book for corrections and "period 13" adjustments ❶ Final trial balance Produce financial statements Reset income and expenditure accounts to zero by transferring balacnes to profit and loss account Transfer profit and loss T account to equity Opening trial balance for next period Page | 62 © 2013 The ExP Group.com . Refer to our full terms and conditions of use. These course materials are for educational purposes only and so are necessarily simplified and summarised. theexpgroup. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue.

ACCA F3 Financial Accounting

ExPress Notes

KEY KNOWLEDGE Correction of errors
As professional accountants, much time is spent dealing with correcting errors from draft records prepared by less experienced people. Knowing how to correct errors is therefore a critical skill for a chartered certified accountant. The easiest approach to take is to take three steps and resist the temptation to try to simplify them, as rushing into a simplification normally results in further complication and a poor trail for another person to review the work that you’ve done. So the approach to take is: 1. Work out what has been done to record a transaction and write down the journal that has been recorded, no matter how crazy it might be. 2. Work out what the journal entry should have been. 3. Compare the results from steps 1 and 2 to work out a correcting journal.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

theexpgroup.com

ACCA F3 Financial Accounting

ExPress Notes

Chapter 15

Suspense accounts

START The Big Picture
We saw in previous chapters that if all is working well with an accounting system, the total of the debits will equal the total of the credits when a trial balance is presented. Errors may occur that will result in total debits not being equal to total credits. This may arise in many situations, including: • • • One sided journal (e.g. Dr Cash $100 only) Posting both sides of a journal on the debit or credit side (e.g. Dr Receivables $80, Dr Sales $80) Recording different amounts on the debit and credit sides (e.g. Dr Payables $230, Cr Cash $320).

If a trial balance is produced frequently, it will be possible to spot these errors while they are recent enough to have a good chance of finding them.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ACCA F3 Financial Accounting

ExPress Notes

In order to highlight the problem, a suspense account is created which will fill the hole in the trial balance. A suspense account is an equity account, which should be eliminated in full before the financial statements are produced. Because a suspense account may arise due to multiple errors, some of which will be a debit to suspense and some a credit to suspense, it really ought to be eliminated in full and this is what you should expect to have to do in the exam. In practice, it’s normal to find that suspense accounts can become very small, when the effort in clearing them becomes disproportionate to the benefit. They are then often written off to profit or loss to clear them once the residual figures become trivially small, as the chance of a difference of $0.10 being the net of two large compensating errors is very small.

Deliberate creation of suspense accounts A suspense account may be used deliberately where a transaction has happened but the bookkeeper is uncertain what it relates to. By recording the transaction in suspense, it can ensure that the records are at least partially correct, but can then be corrected fully when the information necessary is known.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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Page | 66 © 2013 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use.ACCA F3 Financial Accounting ExPress Notes Chapter 16 Incomplete records START The Big Picture It’s common for smaller businesses not to maintain perfect systems for capturing data that can then be used to produce the financial statements.com . Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group. The key techniques to answer exam questions on this are: • • • Cost structures of mark-up and margin Use of T accounts to find missing figures Use of the accounting equation/ business equation to find missing figures such as profit (this was covered in chapter 1). In some situations as well. such as losses due to theft of inventory. Reproduction by any means for any other purpose is prohibited. it’s common to have to construct financial information to find missing information about transactions that don’t get recorded in the system because of their nature. theexpgroup. Individuals may reproduce this material if it is for their own private study use only.

The purchase of inventory will have been written off to purchases. These course materials are for educational purposes only and so are necessarily simplified and summarised. This is a withdrawal from the business.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Margin and mark-up There is a terminology distinction here that is important: Mark-up means that you start with the cost of a sale. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. of which a specified % will be gross profit. However. then add the mark-up % to determine sales price. Page | 67 © 2013 The ExP Group. Margin means that you start with the sales price. it has not been sold. A common accounting treatment and the one to use in any exam question is therefore to remove it from cost of sales (at cost) and debit to withdrawals. Mark-up Margin Sales revenue Cost of sales Gross profit 120% 100% 20% Sales revenue Cost of sales Gross profit 100% 80% 20% Withdrawal of inventory for own use In a smaller business. if the inventory is taken by the proprietor. theexpgroup. Individuals may reproduce this material if it is for their own private study use only. a proprietor is likely to withdraw inventory for his/ her own use.com . Always obtain expert advice on any specific issue. within cost of sales. Refer to our full terms and conditions of use.

Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited. Refer to our full terms and conditions of use. theexpgroup. Always obtain expert advice on any specific issue. A sole trader. or traditional unlimited partnership.ACCA F3 Financial Accounting ExPress Notes Chapter 17 Limited companies START The Big Picture Separate legal identity A sole trader is a different entity to his/ her business as far as accountants are concerned. but not as far as the law is concerned. is a risky form of enterprise as if it goes bankrupt. These course materials are for educational purposes only and so are necessarily simplified and summarised. since a company has a legal identity of its own. Page | 68 © 2013 The ExP Group. being an artificial legal person. The business debts of a sole trader are indistinguishable from that person’s general debts in the event that the business goes insolvent.com . This can be a different story with a company. the trustee in bankruptcy can seek to recover personal assets to make up the shortfall.

clarification to be obtained on whether certain expenses are deductible.. such as any other sources of income that they may have or tax deductible personal expenses.. . taxation expense does not appear in the SOCI.. The business is not the complete story of the owner’s wealth.com .. Refer to our full terms and conditions of use. This means that it is possible to make an estimate of what tax will be due on profit for the period... Individuals may reproduce this material if it is for their own private study use only. This is developed in greater detail in paper F4 GLO. • Page | 69 © 2013 The ExP Group.its creditors. The members. These course materials are for educational purposes only and so are necessarily simplified and summarised. Taxation With a sole trader. so is a liability in the SOFP at the period end.. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue. ... Reproduction by any means for any other purpose is prohibited.. This is because the sole trader’s tax liability depends on lots of other things.. the tax position is known. This tax: • Is likely to be an estimate at the year-end as there are often adjustments to accounting profit to agree with the tax authority..ACCA F3 Financial Accounting ExPress Notes Note that limited liability does not mean that the liability of the company to its creditors is limited! It means that the liability of the members to the company is limited. and Is likely to be paid some time after the period end. since the company itself will have a liability for corporate income tax.the limited company. theexpgroup.enjoy limited liability to. With a company.which has unlimited liability to... . etc.. so the tax liability of that person from business earnings cannot be known... . if any tax losses can be offset against current year profit...

Other comprehensive income (e. Ordinary shares generally have only a discretionary dividend and come with voting rights. less cumulative dividends received. Distributable? No No No No Retained earnings Other reserves Yes Partially. some national laws require that 5% of profit each year is transferred to a non-distributable other reserve. Companies are regulated in law by what dividend they can pay and which reserves dividends can be paid from. Records cumulative revaluation gains on profit above historical cost. Records the excess over nominal value of consideration received on the issue of shares. Retained earnings are the cumulative of recognised profit (not total comprehensive income) less cumulative dividends paid. Always obtain expert advice on any specific issue. Wise to treat as nondistributable. e. or national law requires it. Refer to our full terms and conditions of use. Basically. Page | 70 © 2013 The ExP Group. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Sometimes companies may choose to maintain a separate component of retained earnings. Component of equity Ordinary share capital Preference share capital Share premium account Revaluation reserve What it is Records the nominal value of the shares issued to date. Records the nominal value of preference shares issued to date. revaluation gains) are transferred to revaluation reserve. dividends can only be paid out of retained earnings.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE Equity The equity section of the SOFP of a limited company will look different to that of a sole trader. See the statement of changes in equity in chapter 10 for an example of this. Some IFRS require some gains and losses to be reported in “other equity”. Movements on revaluation reserve will be reported in other comprehensive income within the statement of comprehensive income Records cumulative recognised profit.com .g. theexpgroup. This was outlined in chapter 10. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only. Preference shares normally carry a fixed dividend but have no voting rights.g.

Individuals may reproduce this material if it is for their own private study use only. Only the valuation of consideration (normally cash) received by the company for issue of shares is relevant to the SOFP.com . Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. theexpgroup. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. Page | 71 © 2013 The ExP Group.ACCA F3 Financial Accounting ExPress Notes Note that current market price of shares is not relevant to accounting. These course materials are for educational purposes only and so are necessarily simplified and summarised.

Predicting liquidity problems – when companies run out of cash. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. it is useful to provide investors with analysed information about cash flows.Smaller investors in particular are likely to find cash flows easier to understand than total comprehensive income. Reproduction by any means for any other purpose is prohibited. Business valuation – a common method of valuing businesses is to work out the net present value of cash flows. Refer to our full terms and conditions of use.com . This gives the following benefits: Understandability . Page | 72 © 2013 The ExP Group.g. by making sales on excessively generous credit terms) then this needs to be made clear to readers. but for F3 you need to know that cash flow information feeds into this common type of valuation. This is covered in other ACCA papers. Always obtain expert advice on any specific issue.ACCA F3 Financial Accounting ExPress Notes Chapter 18 Statement of cash flows START The Big Picture Purpose of a statement of cash flows In addition to information about profit and other comprehensive income. If a business is reporting profits but not collecting cash (e. they are often in serious trouble and may go out of business. theexpgroup.

it will be made clear. this is a subjective definition. A cash equivalent is a short-term. If a company uses cash or cash equivalents to buy shares. To some extent. These course materials are for educational purposes only and so are necessarily simplified and summarised. it will be reported in the statement of cash flows as a cash outflow on investing activities. cash flow from core operations.e. Profit vs. That difference will be part of the reconciliation. Cash and cash equivalents will exclude: • • Shares in other companies Long-dated bonds.ACCA F3 Financial Accounting ExPress Notes KEY KNOWLEDGE What is cash? IAS 7 presents a statement of cash flows using both cash and cash equivalents. The method used by most companies to present a statement of cash flows reconciles operating profit (earnings before interest and taxation) to cash generated from operations (i. cash flow We have seen already that there are many items within a statement of comprehensive income that do not represent a movement of cash. before buying or selling non-current assets or raising new finance). If a company uses cash to buy a cash equivalent. Page | 73 © 2013 The ExP Group. If a transaction or journal adjustment affects earnings before interest and tax. theexpgroup. Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. highly liquid short-term investment that is readily convertible into a known amount of cash and is subject to insignificant risk of changes in value. Always obtain expert advice on any specific issue. but does not affect cash from operations. In the exam. Refer to our full terms and conditions of use. then it is a difference. it will not be reported in the statement of cash flows as a cash movement. Reproduction by any means for any other purpose is prohibited.com . Cash and cash equivalents will include: • • • • Notes and coins Demand deposits at a bank Foreign currency deposits (will not be in paper F3) Government bonds very close to maturity date (will not be in paper F3).

KEY KNOWLEDGE Direct method or indirect method The cash generated from operations may be presented under IAS 1 using two alternative presentations. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group. both of which reach the same figure.ACCA F3 Financial Accounting ExPress Notes A number of multiple choice items is likely to focus on this part of preparation of a statement of cash flows under the indirect method. so it’s worth being able to do in full.500) 3. but by different means. Individuals may reproduce this material if it is for their own private study use only.700 (140) (340) Net cash from operating activities 3. theexpgroup. Always obtain expert advice on any specific issue. These course materials are for educational purposes only and so are necessarily simplified and summarised.200 (24. $ Cash received from customers Cash paid to suppliers and employees Cash generated from operations Interest paid Income taxes paid $ 28. Reproduction by any means for any other purpose is prohibited. The direct method is shorter in presentation but often longer to calculate the figures in an exam. even if this could not be required in the exam itself. plant and equipment Proceeds from sale of equipment Interest received Dividends received (1.220 Cash flows from investing activities Purchase of property.com .620) 120 80 190 Net cash used in investing activities (1.230) Page | 74 © 2013 The ExP Group.

Always obtain expert advice on any specific issue.450) 750 210 Indirect method $ Profit before tax Finance costs Profit before interest and tax 3. These course materials are for educational purposes only and so are necessarily simplified and summarised.com . theexpgroup.200 (1.ACCA F3 Financial Accounting ExPress Notes Cash flows from financing activities Proceeds from issue of share capital Proceeds from long-term borrowings Dividends paid (40) 70 180 Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period 2.700 (140) (340) Page | 75 © 2013 The ExP Group.995 $ Adjustments for: Depreciation Amortisation Increase in inventories Increase in receivables Increase in payables 370 100 65 330 (120) Cash generated from operations Interest paid Income taxes paid 3.105 150 2. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group.

No liability for damage arising from use of these notes will be accepted by the ExP Group. This is exactly the same technique as used in incomplete records. Refer to our full terms and conditions of use. it is exactly the same approach as for incomplete records: Page | 76 © 2013 The ExP Group. the end of the previous period and provide figures from the SOCI.200 (1.450) 750 210 Finding cash flows using double entry A multiple choice question may provide you with information about items in the SOFP at the end of this period.620) 120 80 190 Net cash used in investing activities (1. theexpgroup.230) Cash flows from financing activities Proceeds from issue of share capital Proceeds from long-term borrowings Dividends paid (40) 70 180 Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period 2. Technique to use The technique here is nothing new to learn. These course materials are for educational purposes only and so are necessarily simplified and summarised. plant and equipment Proceeds from sale of equipment Interest received Dividends received (1. Individuals may reproduce this material if it is for their own private study use only.ACCA F3 Financial Accounting ExPress Notes Net cash from operating activities 3. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited.220 Cash flows from investing activities Purchase of property.com . You would then be required to find the cash flow as the balancing item. using T accounts.

Write up a T account for this account. No liability for damage arising from use of these notes will be accepted by the ExP Group. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only. Page | 77 © 2013 The ExP Group. Refer to our full terms and conditions of use. Balance off this account to find the information that you are looking for.ACCA F3 Financial Accounting ExPress Notes • • • Identify any asset/ liability accounts in the question where you are given both an opening and closing balance. including all the data that you are given. which will be the cash paid or received relating to that asset/ liability in the period. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised.com .

Individuals may reproduce this material if it is for their own private study use only. Page | 78 © 2013 The ExP Group. No liability for damage arising from use of these notes will be accepted by the ExP Group. trade investment) Associate Little or none Significant influence.com . These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. which is a simplified form of consolidation.e.ACCA F3 Financial Accounting ExPress Notes Chapter 19 Consolidated financial statements START The Big Picture There are three possible levels of investment that one company may have in another: Type of investment Level of influence Accounting treatment in group financial statements Available for sale asset (i. normally by holding between 20% and 50% of the voting shares Historical cost or market value “Equity accounting”. theexpgroup. Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue.

liabilities and profits that their company has controlled.e.com .: Page | 79 © 2013 The ExP Group. plus goodwill and non-controlling interests.ACCA F3 Financial Accounting ExPress Notes Subsidiary Control. Individuals may reproduce this material if it is for their own private study use only. liabilities. Investors Parent Group Subsidiary Consolidation is the process of replacing the single figure for “investment in subsidiary” in the individual financial statements of the parent with more useful information about what assets. Investors in the parent company. which presents the financial statements of all entities under the parent company’s control as if it were one single entity. Subsidiary Companies often trade through a group of companies. income and expenditure the parent company controls via its investment. Legally. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. will be interested to see all the assets. This might be due to acquisition of other pre-existing companies or by setting up separate legal entities to ring-fence business risks. each company exists separately and must produce separate (“individual” or “entity”) financial statements. These course materials are for educational purposes only and so are necessarily simplified and summarised. theexpgroup. Reproduction by any means for any other purpose is prohibited. i. This is achieved by the process of consolidation. normally by holding >50% of the voting shares Line-by-line consolidation of all items under parent’s control. No liability for damage arising from use of these notes will be accepted by the ExP Group. however.

the non-controlling interest (CR NCI) and recognise goodwill as a balancing. Key definitions Parent Associate Control The power to control the financial and operating policies of another Page | 80 © 2013 The ExP Group. the liabilities (Cr Payables. Consideration transferred to buy subsidiary (as shown in the parent company’s individual accounts) Non-controlling interests’ share of the net assets of the subsidiary. Individuals may reproduce this material if it is for their own private study use only. etc). Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. Reproduction by any means for any other purpose is prohibited. Goodwill arising on acquisition (premium paid to acquire the subsidiary). controls the subsidiaries and has a significant interest in associates. A company in which the parent has significant influence. theexpgroup.com . These course materials are for educational purposes only and so are necessarily simplified and summarised.ACCA F3 Financial Accounting ExPress Notes Net assets in the subsidiary’s financial statements (i. The entity at the top of the group structure. What group accounting is trying to do Subsidiary Any entity that is controlled by another entity. item (normally DR Goodwill). though there is no minimum shareholding. equity or capital plus reserves) at the acquisition date. normally by having more than 50% of the voting power. Consolidation is basically a double entry to derecognise the carrying value of the investment (Cr Investment in subsidiary) and recognise the individual assets (Dr PP&E.e. but not control nor joint control (as with a joint venture). residual. No liability for damage arising from use of these notes will be accepted by the ExP Group. etc).

Individuals may reproduce this material if it is for their own private study use only. For example. The premium paid by the parent to acquire its interest in a subsidiary or associate. this is used to work out the net assets on the date of acquiring control of a company (as part of the goodwill working) and to work out post-acquisition growth in a subsidiary’s assets (i. this is the same as capital and reserves of any company at any date in time. (W1) Establish the group structure P Date of acquisition 80% This indicates that P owns 80% of the ordinary shares of S and when they were acquired. In group accounting. No liability for damage arising from use of these notes will be accepted by the ExP Group. The parent company’s reserves. theexpgroup. The share of the net assets and gains of a subsidiary that is not owned by the parent. so as to obtain benefit from its activities. post-acquisition profit). Significant influence Equity The power to participate in the financial and operating policies of another entity. By definition. Reproduction by any means for any other purpose is prohibited. S (W2) Goodwill IFRS 3 Revised introduced an accounting policy choice when accounting for goodwill on acquisition. Always obtain expert advice on any specific issue. It can either be calculated on a full ("fair value") basis or a proportionate ("net") basis. we very frequently use the capital + reserves = net assets. joint ventures and associates. These course materials are for educational purposes only and so are necessarily simplified and summarised. plus the post-acquisition retained gains of all subsidiaries. The cumulative gains made under the control of the parent. Formerly called minority interest. Equity is defined in the Framework document as assets less liabilities.com .ACCA F3 Financial Accounting ExPress Notes entity. Only full goodwill method is relevant for F3 examination. Group reserves Non-controlling interest Goodwill The mechanics of consolidation The best approach to consolidation is to use a set of standard workings.e. Refer to our full terms and conditions of use. so as to obtain benefit from its activities. Page | 81 © 2013 The ExP Group.

theexpgroup. share exchange. Page | 82 © 2013 The ExP Group. Reproduction by any means for any other purpose is prohibited.ACCA F3 Financial Accounting ExPress Notes Purchase consideration paid by parent (i.com . Refer to our full terms and conditions of use. Calculation of cost of investment The cost of acquisition includes the following elements: • cash paid • fair value of any other consideration i. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only.e fair value paid by parent) NCI value at acquisition Fair value of net assets at acquisition Goodwill (W3) Group reserves Parent Sub (% × post-acq reserves) Retained earnings X X –––– X –––– X X (X) ___ X Other reserves X X –––– X –––– (W4) Non-controlling interests NCI value at acquisition NCI value of post acquisition reserves NCI value at reporting date X X ___ X Fair Values To ensure that an accurate figure is calculated for goodwill: • the consideration paid for a subsidiary must be accounted for at fair value • the subsidiary’s identifiable assets and liabilities acquired must be accounted for at their fair values. Always obtain expert advice on any specific issue. No liability for damage arising from use of these notes will be accepted by the ExP Group.e.

the parent recognises in the group accounts the identifiable assets acquired and liabilities assumed of the subsidiary. Page | 83 © 2013 The ExP Group. Fair value of net assets of subsidiary At acquisition. Reproduction by any means for any other purpose is prohibited. Individuals may reproduce this material if it is for their own private study use only. If inter-company trading is done at a profit it should be eliminated on consolidation for all items traded and still held in inventory at the year end. Adjustments will be required to subsidiary’s accounts if the carrying values do not reflect fair value. Always obtain expert advice on any specific issue. They are to be measured at their fair value as at the date of acquisition. Most common adjustment in the exam will relate to land and buildings and it will ignore depreciation. Intra-group trading P and S may trade with each.ACCA F3 Financial Accounting ExPress Notes Share exchange Often the parent company will issue shares in its own company in return for the shares acquired in the subsidiary. If this is done on a credit basis one company will have a receivable and the other a payable at the year end. No liability for damage arising from use of these notes will be accepted by the ExP Group. These amounts must be cancelled on consolidation. These course materials are for educational purposes only and so are necessarily simplified and summarised. Adjustments for unrealised profit in inventory The following steps should be considered when adjusting for unrealised profits: (1) Determine the value of intra-group purchases still held in inventory at year end. since only assets and liabilities outside the group will appear on consolidated statement of financial position. Refer to our full terms and conditions of use.com . theexpgroup. The share price at acquisition should be used to record the cost of the shares at fair value.

Reproduction by any means for any other purpose is prohibited.year acquisition If the subsidiary is acquired part way into the year. Always obtain expert advice on any specific issue. Principles of consolidated statement of comprehensive income The principles used to prepare the group statement of financial position are equally applicable when preparing group income statement and summarised below: Group statement of financial position Cross casting Basic rule: all assets and liabilities are fully cross cast Group income statement Comment Basic rule: all income and expenses are fully cross cast Intercompany items Inter-company current account Inter-company sales and purchases are Subsidiary results need to be time apportioned if it was acquired part way into the year. Unless otherwise stated. theexpgroup. These course materials are for educational purposes only and so are necessarily simplified and summarised.com . Page | 84 © 2013 The ExP Group. (3) Always make the adjustments in the books of the seller. Refer to our full terms and conditions of use. the net assets at the date of acquisition must be determined. Mid. Individuals may reproduce this material if it is for their own private study use only.ACCA F3 Financial Accounting ExPress Notes (2) Use markup or margin to calculate the profit earned by the selling company. No liability for damage arising from use of these notes will be accepted by the ExP Group. the calculation is based on the assumption that subsidiary’s profits accrue evenly over the year.

Reproduction by any means for any other purpose is prohibited. Always obtain expert advice on any specific issue. If the subsidiary is the seller the NCI is charged The PURP consolidation adjustment will reduce profits. No liability for damage arising from use of these notes will be accepted by the ExP Group. Same principles apply with intercompany interest. Refer to our full terms and conditions of use.com . theexpgroup. Individuals may reproduce this material if it is for their own private study use only. The PURP will reduce both inventory and equity. If the subsidiary is the seller the NCI is charged Page | 85 © 2013 The ExP Group. Same principle applies for intercompany loans excluded.ACCA F3 Financial Accounting ExPress Notes balances are excluded. Provision for unrealized profit Group statement of financial position Group income statement Comment For all unsold inventory at year end at a transfer price between group companies. These course materials are for educational purposes only and so are necessarily simplified and summarised. The extra expense in respect of PURP is included in COS.

ACCA F3 Financial Accounting

ExPress Notes

NCI

The NCI in the subsidiary’s net assets will reflect fair value adjustments on assets and PURPs (where the subsidiary is the seller).

The NCI in the subsidiary’s profit will reflect fair value adjustments, and PURPs (where the subsidiary is the seller) and.

By showing the profit of the subsidiary that is attributable to NCI, the group SOCI can show as a balancing figure the total group profit that are attributable to equity holders.

Associate
IAS 28 Investments in Associates defines an associate as an entity over which the investor has significant influence and that is neither a subsidiary nor an interest in joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Significant influence is assumed with a shareholding of 20% to 50%, but other factors may be taken into account, such as: • • • • • Representation on the investee’s board of directors Evidence that the investee company is used to accepting the investor as having significant influence Whether the investee is part of the supply chain of the investor Sharing key personnel Sharing key information.

Under these circumstances the parent cannot consolidate each item of the investee’s assets, liabilities, income and gains, since the parent does not have control of them. Equity accounting is a method of accounting whereby the investment is initially recorded at cost and adjusted thereafter for the post-acquisition change in the investor’s share of net assets of the associate.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ACCA F3 Financial Accounting

ExPress Notes

Consolidated statement of financial position will include one line within non-current assets “investment in associate” that will reflects group share of the assets and liabilities of the associate. Consolidated income statement will include one line “share of profits from associates” that reflects group share of the associate’s profit after tax. Note: in order to equity account, the parent company must already be producing consolidated financial statements (i.e. it must already have at least one subsidiary). Trading with the associate The associate is considered to be outside the group and therefore only unrealised profit in inventory and dividends are adjusted for.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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ACCA F3 Financial Accounting

ExPress Notes

Chapter 20

Events after reporting date, errors and estimates

KEY KNOWLEDGE Events after the reporting date
Events after the reporting date are ones that happen between the financial year end and when the financial statements are authorised for issue. They are colloquially referred to by most people as “post balance sheet events”. All material events after the reporting date must be disclosed and explained in the notes to the financial statements. An adjusting event is one that gives further information on conditions that existed at the reporting date. The figures in the financial statements are amended to incorporate the latest available information.

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© 2013 The ExP Group. Individuals may reproduce this material if it is for their own private study use only. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. Always obtain expert advice on any specific issue. Refer to our full terms and conditions of use. No liability for damage arising from use of these notes will be accepted by the ExP Group.

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Changes in Accounting Estimates and Errors Accounting policies are the detailed applications of IFRS that a company chooses to apply. Examples: • • • How similar types of transactions are grouped and reported together (e. These course materials are for educational purposes only and so are necessarily simplified and summarised. Refer to our full terms and conditions of use. Discovery or fraud or error in the preparation of the financial statements. such as a litigation in progress at the period end. Resolution of a matter requiring a provision at the reporting date. Any matter which causes the company to no longer be a going concern after the period end will be an adjusting event. Individuals may reproduce this material if it is for their own private study use only. including: • • • Expected useful lives of assets Residual value of assets How much a lawsuit is likely to cost the company to settle Page | 89 © 2013 The ExP Group. even if it would normally be a non-adjusting event. as the receivable would be almost certain to have been in trouble at the period end. but would be disclosed in the notes to the accounts only include: • • Issue of new shares Declaration of a dividend after the reporting date. Sale of inventory after the period end at a loss. Accounting estimates are best guesses necessarily made in the preparation of the financial statements. KEY KNOWLEDGE Errors and estimates IAS 8 Accounting Policies. No liability for damage arising from use of these notes will be accepted by the ExP Group. • Examples of events that would be non-adjusting. Reproduction by any means for any other purpose is prohibited.g.ACCA F3 Financial Accounting ExPress Notes Examples of adjusting events according to IAS 10 Events After the Reporting Period include: • • • • Bankruptcy of a major receivable. theexpgroup.com . classes of non-current asset) At what exact point revenue is recognised What de minimis figure to use when recognising non-current assets. Always obtain expert advice on any specific issue.

Refer to our full terms and conditions of use. Errors discovered before issue of the current year’s financial statements will be corrected. No liability for damage arising from use of these notes will be accepted by the ExP Group. Any cumulative differences at the start of the year between the previously reported figures and the restated figures will be taken to equity at the start of the current period. Accounting errors relate to errors in previous periods. large enough to influence users’ opinions). Any correction of an accounting error will only be if the error is material (i.ACCA F3 Financial Accounting ExPress Notes • • Recoverable value of assets for the purposes of calculating impairment losses Default rate by overdue receivables when determining allowance. Particulars. Correction of accounting errors is retrospective. Reproduction by any means for any other purpose is prohibited. These are errors that could reasonably have been expected to have been corrected at the time that the previous period’s financial statements were authorised for issue. theexpgroup. as all accounting errors are adjusting events under IAS 10 (see above). This means that the previous year’s financial statements are restated to the figures that they should have been. Individuals may reproduce this material if it is for their own private study use only. These course materials are for educational purposes only and so are necessarily simplified and summarised. reason and effect of the correction will also need to be given full and frank disclosure in the notes to the accounts. Correction of accounting estimates is prospective. This means that an error in estimate in 20x1 is corrected in 20x2. The comparative figures will be different to what was previously reported so will need to be headed “restated”. Always obtain expert advice on any specific issue.e. with no attempt to restate the figures for 20x1. Accounting estimates are by their nature uncertain and unlikely to prove to be exactly what happens. Page | 90 © 2013 The ExP Group.com .

com . For F3 exam purposes calculating a series of ratios and explain their interrelationship is a must. Reproduction by any means for any other purpose is prohibited. No liability for damage arising from use of these notes will be accepted by the ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. theexpgroup. Individuals may reproduce this material if it is for their own private study use only. Page | 91 © 2013 The ExP Group. Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue.ACCA F3 Financial Accounting ExPress Notes Chapter 21 Interpretation of financial statements START The Big Picture Financial statements on their own are of limited use and therefore in order to gain additional useful information from them ratio analysis is used.

Refer to our full terms and conditions of use. Always obtain expert advice on any specific issue. theexpgroup.com .ACCA F3 Financial Accounting ExPress Notes Interpretation of financial statements Profitability Liquidity and efficiency Gearing Investor ratios Profitability Typical ratios to measure relative profitability include: Gross margin Gross profit Revenue Profit before interest and tax Revenue Profit before interest and tax Equity + interest bearing debt Revenue Equity + interest bearing debt Net margin Return on capital employed (ROCE) Asset turnover Page | 92 © 2013 The ExP Group. These course materials are for educational purposes only and so are necessarily simplified and summarised. Individuals may reproduce this material if it is for their own private study use only. No liability for damage arising from use of these notes will be accepted by the ExP Group. Reproduction by any means for any other purpose is prohibited.

ACCA F3 Financial Accounting ExPress Notes Liquidity and efficiency If a business runs out of cash and cannot refinance in a hurry. Individuals may reproduce this material if it is for their own private study use only. Current ratio Current assets Current liabilities Current assets. it goes out of business. except inventory Current liabilities Average inventory x 365 Purchases/COS Average receivables x 365 Credit sales Average payables x 365 Credit purchases Quick ratio (“Acid test”). Inventory days Receivables collection period Payables payment period Gearing This is of considerable topical relevance at the moment. No liability for damage arising from use of these notes will be accepted by the ExP Group.com . theexpgroup. Always obtain expert advice on any specific issue. It’s possible for companies to focus excessively on profitability at the expense of liquidity management. These course materials are for educational purposes only and so are necessarily simplified and summarised. Reproduction by any means for any other purpose is prohibited. as many companies are criticized for having taken on excessive amounts of debt. which they felt were cheap at the time. Debt/ equity Interest bearing debt Capital + reserves Profit before interest and tax Interest expense Interest cover Page | 93 © 2013 The ExP Group. Refer to our full terms and conditions of use. this has provided a high amount of interest to pay off as revenues have fallen. However.

i.ACCA F3 Financial Accounting ExPress Notes Investor ratios These largely give an indication of the risk to investors of putting money into the company. the greater the return investors will want. Individuals may reproduce this material if it is for their own private study use only. Refer to our full terms and conditions of use. theexpgroup.e. Dividend cover Profit before ordinary dividend Ordinary dividend Dividend Market price of shares Market price of shares Earnings per share Dividend yield Price/ earnings ratio (end of ExPress Notes) Page | 94 © 2013 The ExP Group. Always obtain expert advice on any specific issue. Reproduction by any means for any other purpose is prohibited. These course materials are for educational purposes only and so are necessarily simplified and summarised. what is the chance that the money may not come back to them? As the greater the risk of investing in a business.com . No liability for damage arising from use of these notes will be accepted by the ExP Group. it is important to look at profitability ratios against the backdrop of investor returns as well.