ACCA F3 2012 Notes

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ACCA Paper F3
(FIA Paper FFA)

For exams in 2012
Financial Accounting
fo .th rf e re ex e p fu gr ll ou se p t .co m
Notes
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ExPress Notes

ACCA F3 Financial Accounting
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. Financial statements
3
7
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
17.
Limited companies
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18.
Statements of cash flow Consolidated financial statements Events after reporting date, errors and estimates Interpretation of financial statements
19.
20.
21.
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2012 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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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. Its 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:
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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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START About ExPress Notes
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Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
How to get the most from these ExPress notes
For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.
Your stage in study for each paper Prior to study, e.g. deciding which optional papers to take These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet
At the start of the learning phase
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ACCA online past exams Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Work through in detail. Review each chapter after class at least once. Dont make any annotations on the ExPress notes at this stage. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc. Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! ACCA online past exams ACCA F3 Financial Accounting
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At the door of the exam room before you go in.
The night before the real exam
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Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow. Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget. Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc. Avoid looking at them in detail, especially if the notes are very big. It will scare you. Leave at home. Leave at home.
Download the two most recent real exam questions and answers.
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ExPress Notes
Our ExPress notes fit into our portfolio of materials as follows:
Provide a base understanding of the most important areas of the syllabus only.
To maximise your chances of success in the exam we recommend you visit www.theexpgroup.com where you will be able to access additional free resources to help you in your studies.
START About The ExP Group
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As well as courses for ACCA and other professional qualifications, our portfolio of
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. Our expert team has worked with many different audiences around the world ranging from graduate recruits through to senior board level positions. Full details about us can be found at www.theexpgroup.com and for any specific enquiries please contact us at info@theexpgroup.com.
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Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
Notes
Notes
Notes
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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. A set of financial statements will need to be produced at least annually for presentation to external stakeholders, but generally much more frequently for management control within the business.
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A set of financial statements is produced periodically (often once a year for smaller businesses but as frequently as the users want them). A full set of financial statements for a limited company comprises a number of statements:
Frequent and accurate financial statements can add a great deal to the efficient running of a business.
A statement of financial position, generally called a balance sheet. 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). The statement of financial position is a snapshot of the assets and liabilities of a business at a moment in time. A statement of comprehensive income, often referred to as profit and loss account. This shows all the gains and losses that the business has experienced in the period. The statement of comprehensive income is a record of what happened over a period to the net assets of a business.
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A statement of cash flows, which shows where the cash and short-term assets very similar to cash came from and went do during the period. Income isnt always the same as cash, as well see later. Notes to the financial statements, which give further detail to readers who want to know more than the summary story.
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
Current assets Inventory
Less: allowance for doubtful receivables
Trade receivables
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Prepayments Cash at bank Cash in hand
Total assets
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$ $ 10,000 35,000 20,000 30,000 10,000 105,000 20,000 13,000 (1,000) 12,000 4,000 3,000 2,000 146,000
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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 30,000 85,700
Total comprehensive income in the current period Withdrawals in the current year Total equity at 30 July 20x1
Non-current liabilities Bank loans
Current liabilities Bank overdraft Trade payables Accruals Total liabilities
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Total equity and liabilities
Principal features of the statement of financial position:
It balances, with the total assets equaling equity (i.e. owners 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. Current assets and liabilities are expected to be used up or paid within the coming year.
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(24,000) 91,700 16,000 (8,000) 99,700 32,000 3,300 8,000 3,000 46,300 146,000
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A SOFP may be rearranged into a number of ways. IAS 1 shows a SOFP as given above: Total assets = Equity + total liabilities.
Equally validly therefore:

Total assets total liabilities = Equity
Given that equity = capital + cumulative profit cumulative withdrawals, 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.
This is sometimes called the accounting equation and often comes up in the F3 exam. The task is to drop in the figures that you know and find the missing figure, whatever it might be.
Statement of comprehensive income for the year ended 30 June 20x1
Sales revenue
Cost of sales
Opening inventory
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Purchases of inventory Delivery costs inwards Closing inventory
Gross profit
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$ $ 152,000 30,000 80,000 10,000 (20,000) (100,000) 52,000
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Sundry income Discounts received 3,000 2,000 57,000
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
Profit for the period before tax
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Other comprehensive income:
Revaluation gain on property Total comprehensive income in the period
You may be required in the exam to calculate revenue, cost of sales, gross profit and total comprehensive income from given data.
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3,000 6,000 1,000 4,000 2,500 500 2,500 9,000 1,500 12,000 (42,000) 14,000 2,000 16,000
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Unusual items Sometimes, 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, often non-recurring, source. Typical examples might be write-off of an unusually large debt as irrecoverable, or business relocation costs. Disclosing it separately allows readers of the accounts a more in-depth understanding of what the business is doing.
KEY KNOWLEDGE Elements of financial statements
There are five elements of financial statements, from which all financial statements are produced. These definitions are very useful throughout your ACCA studies and could easily be part of a question in paper F3.
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. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
Equity is the residual interest in the assets of the entity after deducting all its liabilities. Depending on the type of business, this may be called just capital (sole trader), partners current account (partnership) or share capital and reserves (for a limited company). For a limited company, reserves show the net cumulative gains above cumulative losses, less all dividends paid. 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.
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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, other than those relating to contributions from equity participants. 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, other than those relating to distributions to equity participants.
Note that income and expenditure are defined effectively as the reason that a change in net assets happened.
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:
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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).
This is sometimes called the accounting equation or the business equation. It is a frequent exam question and can be summarized:
Closing net assets =
This is also a frequent exam question, with some figures given and the others having to be deduced.
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Opening net assets + total comprehensive income in the period + new capital introduced in the period withdrawals in the period.
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ExPress Notes
Remember that net assets = equity + liabilities, by definition. So net assets may be given in a question separately as equity and liabilities.
Separate accounting entity
Even with a sole trader (a person who runs a business on their own, but the business has never been set up formally to be a separate legal identity), 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. 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; personal transactions will be ignored. In smaller businesses, one of the first steps when producing accounting records for clients is to separate the business transactions from the personal, as the latter will not be recorded anywhere.
Sole traders and limited companies - Well look at these in more detail in each chapter, but heres a summary: Sole trader Limited company
Number of investors
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Must produce accounts to file with the commercial register Business name
Must produce accounts for the tax authority
Can offer shares to the public? Equity part of the
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1 (the sole trader!) Can be between 1 and an unlimited large number Yes Yes No Yes Normally just the name of the owner trading as the name of the business No Initial capital Must end Ltd (if private limited company) or plc (if public limited company) Yes, if a plc. No if Ltd. Share capital
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SOFP Cumulative profit Cumulative withdrawals
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Reserves: (revaluation reserve, retained earnings, etc).
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Chapter 2
Objectives of financial reporting
START The Big Picture
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Financial reporting is the business of collecting financial information, analysing, summarising it and presenting it in a useful form to a wide range of different users. Different users will have different objectives and therefore slightly different needs. Financial statements are aimed at giving useful information to a wide range of different users, though the investor is the most significant user.
For financial information to be useful, it must exhibit a number of characteristics. Its important to understand what these are because you may be asked for a definition of them in the exam.
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ExPress Notes
Qualitative characteristic Fair presentation Our definition Items are described in accordance with their true nature. For example, loans repayable within six months are classified as current rather than non-current.
Going concern
Accruals
Consistency
Materiality
Relevance Reliability
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Neutrality Prudence
Faithful representation
Substance over form
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The business is expected to trade into the foreseeable future. This means that assets will not have to be sold in a hurry, which would be likely to result in significant impairments in value. A key concept covered in chapter [x]. It means recording transactions in the period when they happened; not necessarily when the cash was settled. It also means matching costs and associated revenues. Items should be reported the same way between periods, so that its possible to make meaningful comparisons between years. Similar transactions must be reported the same way within the same accounting period. Materiality means large enough to influence the users opinion on the financial statements. Immaterial information should not be disclosed, as its a distraction. Material information must be presented accurately and fairly. Irrelevant information is a distraction and should not be presented. Information is useless if its not considered to be reliable. E.g. an external valuation of property is more reliable than a biased directors valuation. Items should be described in accordance with their true nature. E.g. an expense for repairs should not be classified as research costs, even though research costs are more favourably viewed by investors. Items should be reported in accordance with their commercial substance, rather than their legal form. E.g. if a sale is made on credit but legal title remains with the seller until the goods are paid for, it should still be recorded as a sale/ purchase at the time of the transaction, since this is when the obligation arises. Unbiased neither excessively optimistic nor excessively prudent. Conservatism. This is no longer a core concept in IFRS accounting, but broadly losses should be recognised more readily
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ExPress Notes
than gains. Completeness Comparability All information that needs to be presented in order to give a full picture has been presented.
Understandability
Business entity concept
Sometimes, its not possible to deliver all of these desirable characteristics. For example, an investor is principally interested in future profits, so this is what is relevant to them. However, estimates of future profit are unreliable, so historical information is given, even though it is less relevant.
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KEY KNOWLEDGE Historical accounting
Accounting is derived from recording information about transactions that have happened. This means that assets are recorded at their historical cost; i.e. what the business paid for them. This has the advantage of being objective and relatively easy, but has a number of disadvantages, 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.g. a profit growth of 10% per year isnt so impressive as it first seems if inflation is 12% per year!)
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Information should be presented in a way that users can understand. Excessive complication reduces usefulness. See chapter 1. Even if there is no separate legal entity, as with a sole trader, the business is still considered to be separate to its owners for accounting purposes.
Financial statements this period should be presented using similar principles to previous years, so that valid comparisons may be made. Company accounts should be comparable with each other. This means that if a company changes its accounting policy, it must restate its previous years accounts using the new accounting policy, in order to facilitate comparison between years.
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Where theres significant inflation and inventory is held for a long time, profit can be reported simply by matching todays revenues with yesterdays costs.
During periods of modest inflation, the weaknesses of historical cost accounting are generally outweighed by its advantages.
There are alternative systems of accounting, such as replacement cost accounting. 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. This has many advantages but is complicated to apply so is not common in practice. You will only have to apply historical cost accounting in the paper F3 exam.
KEY KNOWLEDGE Regulation of financial reporting
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It is a matter of national regulation which financial reporting standards an entity must use when producing their financial reports. Large plcs 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. Their roles are given below.
Some entities have to report under regulated accounting standards. 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).
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There are some large advantages of historical cost accounting, however; principally the fact that people understand it and it is objective.
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IASCF: the International Accounting Standards IASB: International Accounting Standards Board This has recently been renamed the IFRS Foundation. The Foundation is made up of trustees, who appoint the members of the bodies below. The IASB issues International Financial Reporting Standards and the IFRS for SMEs. It employs a permanent staff to draft new accounting standards and amendments considered necessary to extant accounting standards. This has recently been renamed the IFRS Advisory Council. It is made up of a cross section of advisors from different user groups. It advises the IASB on the IASBs work programme.
SAC: Standards Advisory Council
IFRIC: International Financial Reporting Interpretations Committee
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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 issued guidance on how to account for loyalty programmes, where users were uncertain to follow the extant accounting standard on revenue recognition, or provisions.
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Vi si t

(FIA Paper FFA)

Objectives of financial reporting Sources of financial information

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

START About ExPress Notes

ACCA F3 Financial Accounting

How to get the most from these ExPress notes

At the start of the learning phase

At the door of the exam room before you go in.

The night before the real exam

START About The ExP Group

START The Big Picture

Statement of financial position of Sole Trader X at 30 June 20x1

Land and buildings Office equipment Motor vehicles

Fixtures and fittings

Current assets Inventory

Less: allowance for doubtful receivables

Prepayments Cash at bank Cash in hand

Non-current liabilities Bank loans

Current liabilities Bank overdraft Trade payables Accruals Total liabilities

Total equity and liabilities

Principal features of the statement of financial position:

ACCA F3 Financial Accounting

Equally validly therefore:

Cumulative profit = Total assets total liabilities capital + cumulative withdrawals.

Statement of comprehensive income for the year ended 30 June 20x1

Purchases of inventory Delivery costs inwards Closing inventory

Delivery costs outwards Depreciation

Discounts allowed to customers Electricity

Irrecoverable and doubtful debts Mobile phones Motor expenses Rent

Telephone and internet Wages and salaries

Profit for the period before tax

Other comprehensive income:

Revaluation gain on property Total comprehensive income in the period

KEY KNOWLEDGE Elements of financial statements

Elements of the statement of financial position:

KEY KNOWLEDGE Relationship between the statements: the business equation

Closing net assets =

ACCA F3 Financial Accounting

Separate accounting entity

Must produce accounts for the tax authority

Can offer shares to the public? Equity part of the

Reserves: (revaluation reserve, retained earnings, etc).

Objectives of financial reporting

START The Big Picture

Substance over form

Business entity concept

KEY KNOWLEDGE Historical accounting

KEY KNOWLEDGE Regulation of financial reporting

SAC: Standards Advisory Council

IFRIC: International Financial Reporting Interpretations Committee

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