Suggested Study Notes ACCA F3 Paper Suggested Study Notes for F3 ACCA Examinations REVIEW OF SOME KEY FUNDALMENTALS

1 Accounting Matrix
Debit

Trial Balance A

Credit

Assets

Liabilities L (+Capital) C

Expenses E $ < totals must equal >

Gains $

Comparing assets and liabilities, this statement is called the balance sheet. Comparing expenses and gains, this statement is called the profit & loss account. Follow the rule of double entry on any transaction. Buy a car for cash: Debt asset / credit bank Buy stationary on credit: Debit expense (stationary) and credit creditor (name of supplier) When you pay the supplier, you debit creditor account and credit bank account. Pay wages: Debit wages and credit bank. Make a sale on credit: Debit debtor (customer) and credit sales. Make a cash sale : Debit bank and credit sales. 2 Know all accounting concepts and fundamentals terminology. E.G. Going concern Normal assumptions that entity will continue for next 12mths. If not, then assets would then need to reviewed, show at "breakup value". Include all material items. If excluded, this could influence the decision on the users viewpoint of the financial statements Entries to reflect when they are incurred as opposed recorded or paid. Financial statement then report costs/revenues in the correct period. Supports the matching concept. Exercise caution. Ensure all costs and liabilities are correctly stated. If loss foreseen, it should be accounted for and provision made.

Materiality

Accruals

Prudence

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Suggested Study Notes ACCA F3 Paper 2 Typical entries Ensure you know if A, E, L, G, C for each ledger account. This determines the accounting treatment and where the ledger account is shown and disclosed. Company XP Limited Trial Balance Year ending 31 December 20xx Debit $ Sales Discounts Received Discounts Allowed Opening Stock p&l Closing Stock p&l Purchases Carriage Inwards Carriage Outwards Salaries Rent Rates Insurance Selling commission Bad Debts Bad Debts recovered Sundry Income Depreciation of equipment Equipment - cost Accumulated Depreciation - Equipment Investments Stock Debtors Bad Debts Provision Bank Deposit Bank overdraft Creditors Bank Loan Preference Shares Ordinary Share Capital Reserves - Opening Credit $ 190000 G 200 G E E 6000 G E E E E E E E E E 1000 G 3000 G E A 6000 L A A A 1500 L A 15000 L 3000 L 37000 L 100000 C 100 C C 362800

KEY

50 5000 60000 2000 4000 40000 10000 1000 3000 3800 3000

<used for cost of sales <used for cost of sales <used for cost of sales <used for cost of sales

Net total = p&l figure = $65,350 profit credits > debits

3000 30000 10000 6000 15000 5000

< PROVISION

< PROVISION

161950 362800

Loss b/f

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Suggested Study Notes ACCA F3 Paper 4 Be familiar of entries in a sales & purchase account Sales Account Bank - cash sales Debtor - T Murphy (credit note issued) 2000 Debtor - T Murphy Debtor - J Smith 190000 192000 192000 100000 62000 30000

Profit & Loss a/c

Purchases Account Creditor - S Pierce Creditor - B Hoey Bank - cash purchase 35000 20000 5300 Creditor - S Pierce (credit note received) 300

Profit & Loss A/c 60300

60000 60300

5 The system for looking after petty cash is also known as an imprest system. Keep a pre-determined float and use vouchers to track costs and analysis. The expense total is refunded later to reinstate the float or imprest amount. 6 Understand sales tax or VAT (value added tax) Assume all cash transactions: DR Sell $1000 goods + 23% VAT Sales Bank VAT Purchase $600 goods inclusive of 23% VAT Purchases Bank VAT 488 x 23% 488 600 112 1000 1230 230 CR

Therefore the net VAT due is $118 (230-112). When paid the entry will be: VAT Bank www.citycolleges.ie Page 3 of 11 118 118

Suggested Study Notes ACCA F3 Paper 7 Learn the gross profit / (Loss) statement Sales Less: Cost of Sales Opening Stock Purchases Carriage Inwards Less: Closing Stock Gross Profit 5,000 60,000 2,000 (6,000) 190,000

(61,000) 129,000

Questions can be given to work out the missing entry. Follow the format to solve. Note that carriage outwards (freight costs for selling and shipping goods out to customers) is not part of this format. Carriage inwards is the freight cost for buying goods for resale, so part of cost of sales.

8 Stock valuation IAS2 states that inventory should be valued at the lower of cost and net realisable value (NRV) In stock item 1 item 2 item 3
cost sales value NRV Stock Value

30 20 10 60

50 18 20 88

45 17 9 71

30 17 9 56 = Ans.

$56 is the answer and follows the rule. So if accounts are prepared using the wrong valuation, the auditor must adjust and ensure a provision is made to reflect the stock value per IAS2.

Important to know the methods of stock valuation. FIFO LIFO Weighted Average first in first out last in last out (latest prices will value stock) (older prices will value stock)

weighted average based on the stock inventory balance

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Suggested Study Notes ACCA F3 Paper 9 Depreciation Method of writing off the cost of tangible fixed assets (or non current assets) to the profit and loss account. Example: Motor car purchased for 30,000 Expected life 3 yrs Residual value expected in year 3 is 3,000 What is the depreciation charge? Ans: 30,000 less 3000 = 27,000. Divide by 3 = 9000 per annum

If at end of year 2 the car was sold for 10,200, what is the profit / (loss) on disposal ?

Disposal A/c - Motor Car Motor - cost 30000 Bank Accum. Deprec. Profit & Loss a/c 30000 10200 18000 9k x 2 1800 loss to P&L 30000

Note: Net book value (NBV) of car in yr 2 is 12,000 (30k less 18k) Check Ans: 10,200 less 12,000 = 1,800 loss. Extract Trial Balance: Debit Disposal of Motor Vehicle 1800 Credit

Review period of accounting and dates. If purchased or sold mid year, then you will need to time apportion values. Ensure you know different methods: Straight line Reducing balance

If an asset is revalued, depreciation is calculated on the revalued amount. (IAS 16) Depreciation is a non cash item. Relevant to cash flow statement, where always added back. www.citycolleges.ie Page 5 of 11

Suggested Study Notes ACCA F3 Paper 10 Accruals You use electricity for your business. You know the cost will be about 500 per year. You never got a bill until year 3 for 1600. Show the entries and p&l and balance sheet extracts. (assume all entries happen at end of year) Debit yr1 Light & Heat Accruals Light & Heat Accruals Light & Heat Bank Accruals Light & Heat 500 500 500 500 1600 1600 1000 1000 Pay bill reverse accrual Credit

yr2

yr3

P&L Extracts: Yr 1 Yr 2 Yr 3 Balance Sheets Extracts: Yr 1 yr 2 Yr 3 Accruals Accruals Accruals 500 1000 0 Light & Heat Light & Heat Light & Heat 500 500 600

i.e. 1600 less 1500

Ensure you know accounting for prepaids also. Prepaids are an asset and shown under current assets.

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Suggested Study Notes ACCA F3 Paper 11 Know the entries for bad debts Bad Debts Account Increase in bad debts prov. Debtors (bad debts written off) 500 Profit & Loss 2500 3000 shown in the P&L A/c

3000

3000

Bad Debts Provision (BDP) Bal b/f Bad Debts Increase Bal c/f 1500 1500 Bal b/f

shown in B/S, under debtors 1000 500

1500 1500

Bad Debts Recovered Bank Profit & Loss Account 1000

shown in the P&L A/c 1000

1000

1000

Where a trade debtor will not pay or you assume the debt is doubtful to be received, you can 1) clear the account be writing off the ledger balance or 2) leave the ledger balance put make a provision in another account - called BDP above. The BDP a/c can be general say 10% of the debtors total or specific to individual debtors. Any movement in the BDP a/c is shown in the bad debts account in the P&L account. Where a debt was written off (ledger balance = 0) and later received. We setup a new account called bad debts recovered. The entry goes straight there and shown separately in the p&l. This account highlights the fact that it was recovered after a decision was made to write off. www.citycolleges.ie Page 7 of 11

Suggested Study Notes ACCA F3 Paper 12 Bank Reconciliation Statement Understand format and what are debit and credit balances for the ledger and the bank.

Balance per ledger Less: bank charges not posted

(15,000) Cr (100)

credit balance in ledger=overdraft Incl adj needed to our books

Revised ledger balance

(15,100)

Balancer per bank statement at 31/12/xx Add: outstanding lodgements Less: outstanding cheques
(also called unpresented cheques)

(10,000) Dr 2,000

If Cr bal. then no brackets. Any adj here are normally timing. Delay in making lodgement or payee going to bank an presenting the cheque to their bank.

chq no. 00501 00502 00505

2,100 1,000 4,000

(7,100)

(15,100) Typically the bank is normally right and our books would need to be adjusted for omissions etc. Rarely will the bank be wrong, if so, you show the error under the bank statement line noting it is an bank error and due to be reversed in the future. NB: Dr for bank statement = overdraft Cr for bank statement = in funds, you have money => => Our books = Cr balance Our books = Dr balance

In any bank reconciliation, important to check if opening balances agree. If not you may need to follow though this reconciliation first, so you can then finish the closing reconciliation. Some entries may still be outstanding and so you will need to c/f again on your closing reconciliation.

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Suggested Study Notes ACCA F3 Paper 13 Share Capital - a few key points: New shares Debit Bank and Credit Share capital Issue of new shares Asking existing shareholder for money in exchange of some discount of the market value. Price paid over the par value of the shares Receive $5 for 1 share of 50c each. entry: Debit bank $5 Credit share premium $4.5 Credit share capital $.50 Bonus Issue No cashflow involved. Moving other reserves to share capital. No dilution of existing shareholders. Sometimes known as "free shares". However, as everyone gets them on the same basis, the market value adjusts per share to reflect the change.

Rights Issue

Share Premium

Important to understand terminology and accounting entries.

14 Cashflow Statement Understand format. To show cashflow movements only, thus explain the bank movement. If you buy an asset this is a use or application of funds, so deduct. Increase in debtors (an asset), is therefore deducted as a working capital adjustment. An increase in creditors (a liability), gives you extra funds. You are getting more credit. So you add to working capital adjustment. The opposite is true for both debtors and creditors. Depreciation and the disposal account is not a cashflow item, so you add back. (if profit on disposal you deduct, if loss on disposal you deduct) Do "T accounts" for the following balance sheet accounts to get the cash flow item for: Purchase of fixed assets (non current assets) Taxation paid Dividends paid => => => Fixed Assets Account Taxation Account Dividends Account

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Suggested Study Notes ACCA F3 Paper 15 Consolidation IAS27

Own over 50% or deemed to have control of an entity. You then consolidate results. Understand the adjustments for the combined entity: 1) Inter-trading 2) Inter-trade debts 3) Remove unrealised profit from inter-trading and: Calculation of goodwill Calculation of non controlling interest (NCI) => => =>
Consol adj P&L Consol adj B/S Consol adj P&L & B/S

Review acquisition date as you may need to apportion the profit figures in various workings. In a combined entity the holding company share capital is always stated in the consolidated balance sheet. Add 100% of the subsidiary P&L results, you then deal with the non controlling interest share of profits at the end. Important to understand mark-up and margin. As you may need to work out the unrealised profit element for the stock adjustment. Mark-up is on cost Margin on sales 500 over 1000 = 50% mark-up 500 over 1500 = 33% margin

Note same profit figure so question can be phrased in may ways. sales purchase Profit 1,500 (1,000) 500 33% 100% 67% 33%

Note relationship of the profit between sales and purchase (cost). Equity Accounting IAS 28 Investment in associate companies Owing 20% or more and not more than 50% (i.e. control) P&L: Add group share of profit and loss. B/S: Cost of investment plus group share of profit (profit after tax) If investment in a company is less than 20%, there is no consolidation of that company. Show investment in the balance sheet at cost / fair value.
E.& O. E.

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Suggested Study Notes ACCA F3 Paper

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