Examiner’s report

FA/FFA Financial Accounting

September 2019 – August 2020

The examining team share their observations from the marking process to highlight strengths and
weaknesses in candidates’ performance, and to offer constructive advice for future candidates.

General comments

The examination is divided into two parts, both of which are compulsory. Section A consists of 35
objective test (OT) questions worth two marks each and covers a broad range of syllabus topics.
The OT questions can take the form of multiple choice, multiple response, number entry or multiple
response matching. Students should ensure they use the practice tests available on the ACCA
website, so they are familiar with all the different styles of OT questions. You are not asked to insert
text but may be asked to identify the correct text.

Section B consists of two multi-task questions (15 marks each) testing the candidates’ understanding
and application of financial accounting skills in more depth.

The following paragraphs report on each section of the examination and use some illustrative
examples to demonstrate the type of questions candidates are expected to be able to answer.

Comments about section A performance

The following questions are taken from section A of the exam

Example 1 – Multiple choice

DEF Limited prepared its financial statements with a reporting date of 31 March 20X3. On 27 May
20X3 the financial statements were authorised for issue to the shareholders.

Which of the following are adjusting events in accordance with IAS 10 Events after the
Reporting Period?

(1) The notification on 2 April 20X3 that a customer owing $10m at 31 March 20X3 had
gone into liquidation

(2) A fire on 10 May 20X3, which destroyed a substantial amount of inventory

(3) The discovery on 11 May 20X3 of a material fraud in the payroll department that had
overstated salaries for the year ended 31 March 20X3. The fraudulent activity had
been going on for 18 months

(4) The settlement of a legal action against DEF Limited on 31 May 20X3; a provision of
$12m had been made at 31 March 20X3, and the case was settled for $15m

Examiner’s report –FFA Sept 19 to Aug 20 1

Choices:

1. 1, 2 and 3
2. 1 and 3 only
3. 1, 3 and 4
4. 2 and 4 only

The correct choice is number 2 – 1 and 3 only.

This is an example of a multiple-choice style question where several scenarios are to be considered
before determining the overall outcome. Candidates were required to apply their knowledge of
adjusting events per IAS 10 to four scenarios. In order to select the right choice, candidates are
advised to look at each scenario in turn to determine if an adjustment should be made.

Events 1 and 3 both occur after the reporting date and provide additional evidence of conditions that
existed at the reporting date. In event 1, the conditions that cause the customer to go into liquidation
were likely to have been there for some time. Event 3 has caused a misstatement in the financial
statements. The fraud has been happening for 18 months and now it has been discovered DEF
Limited will need to adjust both the current (and previous) years’ financial statements.

Event 2 is a non-adjusting event as the conditions (fire) occurred after the reporting date. This
event should be disclosed as it is likely to be material (substantial amount of inventory).

Event 4 is not considered to be an event after the reporting period per IAS 10. The legal case was
settled on 31 May 20X3 which was AFTER the accounts were authorised for issue.

Example 2 – Number entry

Lloyd counted his inventory on 30 December 20X1 and valued it at $24,000. On the last day of
trading (31 December 20X1) he ordered inventory worth $2,400 to be delivered on 1 January 20X2
and made a cash sale at cost price of $500 of inventory.

What is the value of closing inventory to be shown in Lloyd's financial statements at 31

December 20X1?

The correct closing inventory balance should be $23,500 ($24,000 - $500).

On this question type, candidates are advised to ensure that they correctly type their answer into the
number entry box in the format required.

The figure of $24,000 needed to be adjusted to find the balance to include in the financial statements
at the reporting date. A common mistake made by candidates in this question was to adjust for the
order of inventory of $2,400. The order was made on 31 December 20X1 but there is no purchase
Examiner’s report – FFA Sept 19 to Aug 20 2
invoice and the goods have not been received and therefore an adjustment was not required. The
cash sale of inventory will be adjusted for as the goods have been sold for cash and are no longer
part of Lloyd’s inventory at 31 December 20X1.

Example 3 – Multiple response

The following are extracts from the financial statements of Holdsteady Co for the year ended 31
December 20X7:
20X7 20X8
$ $
Current assets:
Inventory 13,600 10,700
Trade receivables 11,200 7,100
Cash - 6,000

Current liabilities:
Bank overdraft 4,200 -
Trade payables 16,400 12,800

Which TWO of the following statements are correct based on the financial information
presented?

1. The cash position is improving partly due to Holdsteady Co paying creditors later in 20X7

2. Holdsteady Co may be experiencing rapid growth which is causing it to run out of working
capital

3. The liquidity of Holdsteady Co has shown improvement in 20X7

4. Holdsteady Co has a net cash outflow of $10,200 in 20X7

The correct answers are 2 and 4.

This is an example of a multiple response question where candidates are required to select two
correct options from a choice of four. To answer this type of question, candidates are advised to
consider all of the options in turn so that any incorrect responses can be eliminated.

Option 2 is considered to be correct as there is a significant increase in inventory, trade receivables

and trade payables and a positive cash balance has been turned into an overdraft. These factors
indicate that a company is growing and using short-term finance (overdraft) to assist the trading
activities. Option 4 is correct because Holdsteady Co has depleted its cash at bank balance resulting
in an outflow of $6,000 and spent an additional $4,200 using the overdraft facility. Therefore, the
cash outflow in the year is $10,200 (-$4200 - $6,000).

Examiner’s report – FFA Sept 19 to Aug 20 3

Option 1 and 3 are not correct and it is worth considering why this may be the case when you are
selecting your options. Option 1 is clearly incorrect as the cash position has not improved.
Holdsteady Co no longer has cash at bank and is using an overdraft. Option 3 is incorrect, and this
can be confirmed using a current ratio calculation. Remember, the current ratio is calculated by
dividing current assets by current liabilities. There is a current ratio of 1.20:1 ($24,800/20,600) in
20X7 and 1.86:1 ($23,800/$12,800) in 20X6. This calculation confirms that liquidity has not
improved.

Example 4 – Multiple response

Nonyong produced the following information concerning its expenses for the year ended 31
December 20X6.

Expense Balance at Cash paid Statement of

1 January 20X6 profit or loss
$ $ $
Stationery 3,000 accrual 12,000 10,000
Rent payable 8,000 prepayment 29,000 35,000
Service agreements payable 500 accrual 14,000 13,000
Telephone 1,000 prepayment 8,500 11,000

Which TWO of the above will be included as liabilities in the statement of financial position
at the year end?

1. Stationery
2. Rent payable
3. Service agreements payable
4. Telephone

The correct answers are 1 and 4.

In this question type it is advised that you work through all options to make sure you are happy with
your final choice. Each correct choice was worth 1 mark. You can use a ledger account working or
a list to help determine the closing position on these transaction types.

To begin, the opening accrual or prepayment would need to be reversed (removed from the
statement of financial position and included in the relevant expense account). You can then include
the remaining information in your expense workings and the balancing figure will be the closing
accrual or prepayment. Workings for stationery in both formats are below:

Examiner’s report – FFA Sept 19 to Aug 20 4

1. Stationery expense

List working: $
B/f accrual (3,000)
Cash paid 12,000
Balancing figure = closing accrual 1,000
Statement or profit or loss 10,000

Stationery Expense
$ $
Cash paid 12,000 Opening accrual 3,000
Statement of profit or loss 10,000
Closing accrual (bal) 1,000
13,000 13,000
Opening accrual 1,500

2. Rent payable:

List working: $
B/f prepayment 8,000
Cash paid 29,000
Balancing figure = closing prepayment (2,000)
Statement or profit or loss 35,000

3. Service agreements payable:

List working: $
B/f accrual (500)
Cash paid 14,000
Balancing figure = closing prepayment (500)
Statement or profit or loss 13,000

4. Telephone expense:

List working: $
B/f prepayment 1,000
Cash paid 8,500
Balancing figure = closing accrual 1,500

Stationery and Telephone expenses have closing accruals which would be included as current
liabilities in the statement of financial position. Rent payable and Service agreements payable both
have closing prepayments which would be included as current assets in the statement of financial
position.

Examiner’s report – FFA Sept 19 to Aug 20 5

Example 5 – Multiple choice

The receivables ledger control account of a business showed a closing balance for the year of
$420,000, which did not agree with the total of the list of individual receivables ledger balances at
the year end. Subsequent checks revealed the following:

(1) The sales day book had been overcast by $15,000

(2) A debit balance that had been extracted from the sales ledger of $10,000 had been
incorrectly recorded in the list of balances as a credit balance

What was the total of the list of individual receivables ledger balances before the errors were
discovered?

Choices:

1. $425,000
2. $385,000
3. $395,000
4. $415,000

The correct choice is 2 $385,000

This is a typical question style for the syllabus area of errors. To correctly answer this question,
candidates are advised to record all of the information that they have from the question and work
backwards to find the missing balance. One such way of doing this is as follows:

1. The correct balance on the receivables ledger control account after the error will be:

$
Closing balance 420,000
Sales day book overcast (15,000)
Corrected balance 405,000

2. The opening total on the list of balances can now be found by taking the corrected receivables
ledger control balance and working backwards with the remaining information:

$
Opening total (balancing figure) 385,000
Debit balance incorrectly treated as credit (20,000)
Corrected balance (from above) 405,000

Examiner’s report – FFA Sept 19 to Aug 20 6

Example 6 – Number entry

Principal Co has a financial year end of 30 June. The following information is available:

20X7 20X6
$ $
Loan notes 700,000 490,000
Ordinary $1 shares 500,000 200,000
Share premium 450,000 -

A rights issue took place during the year on the basis of three shares for every two held on 1 July
20X6, at a price of $2.50.

What is the net cash inflow from financing activities for the year ended 30 June 20X7?

The net cash inflow from financing activities for the year ended 30 June 20X7 is $960,000

This was a relatively straightforward question covering IAS 7 Statement of Cash flows. To answer
this question, candidates were required to consider the movement in the financing activities of
Principal Co.

There has been a change in the loan balance in the year of $210,000 ($700,000 – 490,000). The
loan balance increased indicating that there was a cash inflow following a new loan agreement.

There has also been a rights issue of shares in the year. A rights issue occurs when shares are sold
at a favourable price. A cash inflow of $750,000 has arisen as a result of this issue. This inflow can
be calculated in one of two ways:

1. The movement on the share capital and share premium accounts can be taken into consideration
($500,000 - $200,000) + ($450,000 - 0) = $750,000.

2. Alternatively the cash from the rights issue can be calculated as 200,000 opening shares × 3/2 ×
$2.50 = $750,000.

Therefore, the cash inflow from financing activities is ($210,000 + $750,000) = $960,000.

Examiner’s report – FFA Sept 19 to Aug 20 7

Comments about Section B performance

In this section candidates are required to provide answers which test their understanding and ability
to draft financial statements. Candidates may be required to prepare financial statements for a single
entity or for a group of companies. There may also be some element of ratio
calculation/interpretation. You may not always be required to prepare the full financial statement and
may instead be asked to complete a partial statement. In this situation there will be additional
elements to the question.

Candidates will be required to prepare the financial statements using a variety of number entry, pull
down menus and multiple response matching. It is vital that candidates familiarise themselves with
the computer-based exam format for section B using the specimen exam (and extra multi-task
questions) and practice tests that are available via the ACCA website.

The following comments explain how candidates might be able to improve their performance in future
when producing the different types of financial statement:

Single entity financial statements

It is advised that you become familiar with the presentation of the financial statements as per IAS 1
Presentation of Financial Statements. You will not be asked to insert text to construct a statement of
profit or loss or statement of financial position but you may be required to determine the correct
position of a ledger balance within the financial statements or maybe identify the correct titles of the
financial statements. For example, a statement of profit or loss is ‘for the year ended’ and not ‘as at’
a point in time.

Always carefully read through the information in the question and answer what is being asked. For
example, on the specimen paper, question 37, task 1 has the following question:

Do each of the following items belong on the statement of financial position (SOFP) as at 31
October 20X7?

To answer this task, you are given a trial balance and have the option of selecting Yes or No from a
drop-down list. Buildings at cost would require you to select yes, whereas Buildings accumulated
depreciation at 1 November 20X6 would require you to select no as this is the opening accumulated
depreciation and not the accumulated amount at 31 October 20X7.

Remember, not everything given in a trial balance will be needed and you will need to be familiar
with the relevant double entries for transactions as this may be a specific requirement within the
question. Typically, you will need to calculate the depreciation on some of the assets, perhaps using
two different depreciation methods.

This question style really focusses on your understanding of accounts preparation and the double
entry system so numerous practice questions are essential.

Examiner’s report – FFA Sept 19 to Aug 20 8

Statement of Cash flows

You may be required to prepare a statement of cash flow using both number entry and drop-down
lists. It is important that you know the format of a statement of cash flow as you may be required to
select appropriate headings. For each cash flow identified you may be required to identify if you need
to ‘add’ or ‘subtract’ the amount calculated so ensure you have sufficiently prepared for this.

Below are some important areas of cash flow preparation to remember:

• Do not get the cash flows ‘back to front’ – make sure you identify movements between this year
and last year correctly.
• Know how to calculate the tax and dividends paid during the year (dividends are not always given
in the question).
• Be careful with the impact of a profit (or loss) on disposal. Profits/(losses) on disposal are non-
cash items and need to be adjusted in operating activities. The cash received on disposal should
be shown as a cash inflow under investing activities and the carrying amount of the disposed
asset must be removed from property, plant and equipment (generally, one asset disposal will
have 3 effects in the statement of cash flow).

Consolidated financial statements

When preparing the consolidated financial statements, you may also be required to identify the
appropriate heading for the relevant financial statement from a drop-down list. Just like the
preparation of single entity financial statements, candidates may not be required to prepare the entire
statement. In addition, there may be aspects of this question that require you to demonstrate your
knowledge of groups from the relevant International Financial Reporting Standards (IFRS), for
example the definition of control.

If you are dealing with a consolidation you may be asked to calculate goodwill and then complete
certain aspects of the statement of financial position or the statement of profit or loss. This may be
in the form of calculating a relevant balance, or by selecting the appropriate formula from a drop-
down list that would enable a balance to be determined.

Below are some important areas of consolidation statement of financial position preparation to
remember:

• The assets and the liabilities of the parent and the subsidiary are added together in full on a line-
by-line basis (do not use proportional consolidation).
• The investment in the subsidiary (shown in the statement of financial position of the holding
company) is replaced with the goodwill figure e.g. investments are nil (unless any other, external
investments exist).
• The share capital and share premium balances are not added together; only the balances related
to the parent are used in the consolidation.

Examiner’s report – FFA Sept 19 to Aug 20 9

• The group share of the subsidiary’s profit is calculated and added to the groups retained
earnings.

Below are some important areas of consolidation statement of profit or loss preparation to remember:

• The revenue and expenses are added together on a line by line basis in full (with the subsidiary
results being time apportioned if control was acquired mid-year).
• Eliminate intra-group sales and purchases (usually through cost of sales).
• Eliminate unrealised profit held in closing inventory (in statement of financial position and as part
of cost of sales) relating to intra-group trading
• Ensure you know how to calculate the profit attributable to the controlling and the non-controlling
interests in the company.

Conclusion

It is imperative that candidates study and prepare well for all topics in the syllabus and not just select
a few. Candidates must bear in mind that questions in the examination will include questions from
all topics of the syllabus. Equipping themselves with adequate knowledge of all topics will certainly
maximise and improve the performance of candidates in future examinations. Thus, candidates are
advised to plan their revision timetable so that they have sufficient time to revise all the topics in the
syllabus. Candidates are also reminded to try and attempt all questions.

Examiner’s report – FFA Sept 19 to Aug 20 10