ACCA f3 financial accounting study text 2016 2017

BPP Learning Media is dedicated to supporting aspiring business professionals with top-quality learning material as they study for demanding professional exams, often whilst working full time BPP Learning Media’s commitment to student success is shown by our record of quality, innovation and market leadership in paper-based and e-learning materials BPP Learning Media’s study materials are written by professionally qualified specialists who know from personal experience the importance of top-quality materials for exam success In addition to ACCA examining team reviewed material you get: Interactive Text • Chapter activities to test your understanding of the topics covered • Key terms extracted from the text and highlighted in ‘key term’ boxes • Exam focus points highlighting ways in which topics might be examined • A question and answer bank prepared by BPP Learning Media authors • Icons to highlight activities, key terms, PER alerts and quick quizzes • Regular fast forward summaries emphasising the key points in each chapter Financial Accounting Foundations in Accountancy FFA / ACCA Paper F3 Financial Accounting This Interactive Text for Foundations in Accountancy FFA Financial Accounting and ACCA Paper F3 Financial Accounting has been comprehensively reviewed by the ACCA examining team This review guarantees appropriate depth and breadth of content and comprehensive syllabus coverage Foundations in Accountancy FFA /ACCA F3 ACCA approved content provider ACCA APPROVED CONTENT PROVIDER ACCA Approved Interactive Text Contact us Feburary 2016 £25.00 FI32ST16 (RICOH).indd 1-3 For exams from September 2016 to 31 August 2017 BPP House 142-144 Uxbridge Road London W12 8AA United Kingdom T 0845 075 1100 (UK) T +44 (0)20 8740 2211 (Overseas) E Learningmedia@bpp.com bpp.com/learningmedia Foundations in Accountancy FFA / ACCA Paper F3 Financial Accounting Free access to our Exam Success site Look inside For exams from September 2016 to 31 August 2017 02/02/2016 10:45 ACCA APPROVED CONTENT PROVIDER As the first accredited publisher of ACCA materials, BPP Learning Media has set the benchmark for producing exceptional study materials for students and tutors alike Our Study Texts, Practice & Revision Kits and i-Passes (for exams on demand) are reviewed by the ACCA examining team and are written by our in-house authors with industry and teaching experience who understand what is required for exam success EXAM SUCCESS SITE To help maximise your chances of succeeding in your exams, we’ve put together a suite of exclusive ACCA resources Our Exam Success site provides you with access to a free digital version of this publication, as well as extra resources designed to focus your efforts on exams and study methods To access the Exam Success site, please email learningmedia@bpp.com with the subject line “Access to Exam Success site - eBook”, including your order reference number and the name of the book you’ve bought (ie ACCA F5 Study Text) for your access code Once you have received your code, please follow the instructions below: To access the BPP ACCA Exam Success site for this material please go to: www.bpp.com/ExamSuccessSite n Create a user account if you don’t already have one Make sure you reply to the confirmation email n Log in using your registered username and password Select the paper you wish to access n Enter the code you received when prompted You will only have to this once for each paper you are studying Foundations in Accountancy FFA ACCA Paper F3 Financial Accounting BPP Learning Media is an ACCA Approved Content Provider for the Foundations in Accountancy qualification This means we work closely with ACCA to ensure this Interactive Text contains the information you need to pass your exam In this Interactive Text, which has been reviewed by the ACCA examination team, we:  Highlight the most important elements in the syllabus and the key skills you need  Signpost how each chapter links to the syllabus and the study guide  Provide lots of exam focus points demonstrating what the examination team will want you to  Emphasise key points in regular fast forward summaries  Test your knowledge in quick quizzes  Examine your understanding in our practice question bank  Reference all the important topics in our full index BPP’s Practice & Revision Kit also supports this paper FOR EXAMS FROM SEPTEMBER 2016 TO 31 AUGUST 2017 I N T E R A C T I V E T E X T F3/FFA FINANCIAL ACCOUNTING First edition March 2011 Fifth edition January 2016 A note about copyright Dear Customer ISBN 9781 4727 4590 (Previous ISBN 9781 4727 3525 6) e-ISBN 9781 4727 4631 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Your market-leading BPP books, course materials and elearning materials not write and update themselves People write them on their own behalf or as employees of an organisation that invests in this activity Copyright law protects their livelihoods It does so by creating rights over the use of the content Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: Printed in the United Kingdom by Ricoh UK Limited  Photocopying our materials is a breach of copyright Unit Wells Place Merstham RH1 3LG  Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or e-mailing them to your friends is a breach of copyright Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources All our rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions The suggested solutions in the practice answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated BPP Learning Media is grateful to the IASB for permission to reproduce extracts from the International Financial Reporting Standards including all International Accounting Standards, SIC and IFRIC Interpretations (the Standards) The Standards together with their accompanying documents are issued by: The International Accounting Standards Board (IASB) 30 Cannon Street, London, EC4M 6XH, United Kingdom Email: info@ifrs.org Web: www.ifrs.org Disclaimer: The IASB, the International Financial Reporting Standards (IFRS) Foundation, the authors and the publishers not accept responsibility for any loss caused by acting or refraining from acting in reliance on the material in this publication, whether such loss is caused by negligence or otherwise to the maximum extent permitted by law © BPP Learning Media Ltd 2016 ii What does the little © mean and why does it matter? 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Copyright © IFRS Foundation All rights reserved Reproduction and use rights are strictly limited No part of this publication may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the IFRS Foundation Contact the IFRS Foundation for further details The IFRS Foundation logo, the IASB logo, the IFRS for SMEs logo, the “Hexagon Device”, “IFRS Foundation”, “eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”, “IFRSs”, “International Accounting Standards” and “International Financial Reporting Standards”, “IFRIC” “SIC” and “IFRS Taxonomy” are Trade Marks of the IFRS Foundation Further details of the Trade Marks including details of countries where the Trade Marks are registered or applied for are available from the Licensor on request CONTENTS Contents Page Introduction Helping you to pass v Chapter features vi Studying F3/FFA vii The Computer Based Examination xxiii Tackling Multiple Choice Questions xxiv Part A The context and purpose of financial reporting Introduction to accounting The regulatory framework 19 Part B The qualitative characteristics of financial information The qualitative characteristics of financial information 31 Part C The use of double entry and accounting systems Sources, records and books of prime entry 45 Ledger accounts and double entry 59 From trial balance to financial statements 89 Part D Recording transactions and events 10 11 12 13 Inventory 107 Tangible non-current assets 133 Intangible non-current assets 169 Accruals and prepayments 181 Provisions and contingencies 195 Irrecoverable debts and allowances 207 Sales tax 223 Part E Preparing a trial balance 14 15 16 Control accounts 235 Bank reconciliations 257 Correction of errors 271 Part F Preparing basic financial statements 17 18 19 20 21 22 Incomplete records 287 Preparation of financial statements for sole traders 311 Introduction to company accounting 323 Preparation of financial statements for companies 341 Events after the reporting period 369 Statements of cash flows 375 Part G Preparing simple consolidated financial statements 23 24 25 Introduction to consolidated financial statements 397 The consolidated statement of financial position 411 The consolidated statement of profit or loss 437 Part H Interpretation of financial statements 26 Interpretation of financial statements 451 Practice question bank 479 Practice answer bank 505 Index 517 Review form iii F3/FFA FINANCIAL ACCOUNTING iv INTRODUCTION Helping you to pass BPP Learning Media – ACCA Approved Content Provider As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use study materials reviewed by the ACCA examination team By incorporating the examination team's comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning Media Interactive Text provides excellent, ACCA-approved support for your studies The PER alert! To become a Certified Accounting Technician or qualify as an ACCA member, you have to not only pass all your exams but also fulfil a practical experience requirement (PER) To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the 'PER alert' feature You will find this feature throughout the Interactive Text to remind you that what you are learning in order to pass your Foundations in Accountancy and ACCA exams is equally useful to the fulfilment of the PER requirement Your achievement of the PER should be recorded in your online My Experience record Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments The different features of the Interactive Text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success Developing exam awareness Our Interactive Texts are completely focused on helping you pass your exam Our advice on Studying F3/FFA outlines the content of the paper and the recommended approach to studying Exam focus points are included within the chapters to highlight when and how specific topics might be examined Using the Syllabus and Study Guide You can find the syllabus and study guide on page ix – xxii of this Interactive Text Testing what you can Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt We include Questions – lots of them – both within chapters and in the Practice Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content v F3/FFA FINANCIAL ACCOUNTING Chapter features Each chapter contains a number of helpful features to guide you through each topic Topic list Tells you what you will be studying in this chapter and the relevant section numbers, together with the ACCA syllabus references Introduction Puts the chapter content in the context of the syllabus as a whole Study Guide Links the chapter content with ACCA guidance Fast Forward Demonstrates how to apply key knowledge and techniques EXAMPLE vi Summarises the content of main chapter headings, allowing you to preview and review each section easily Key Term Definitions of important concepts that can often earn you easy marks in exams Exam Focus Point Tells you how specific topics may be examined Formula Formulae which have to be learnt PER Alert This feature gives you a useful indication of syllabus areas that closely relate to performance objectives in your Practical Experience Requirement (PER) Question Gives you essential practice of techniques covered in the chapter Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review Quick Quiz A quick test of your knowledge of the main topics in the chapter Practice Question Bank Found at the back of the Interactive Text with more examstyle chapter questions Cross referenced for easy navigation INTRODUCTION Studying F3/FFA How to Use this Interactive Text Aim of this Interactive Text To provide the knowledge and practice to help you succeed in the examination for Paper F3/FFA Financial Accounting To pass the examination you need a thorough understanding in all areas covered by the syllabus and teaching guide Recommended approach (a) To pass you need to be able to answer questions on everything specified by the syllabus and teaching guide Read the Interactive Text very carefully and not skip any of it (b) Learning is an active process Do all the questions as you work through the Interactive Text so you can be sure you really understand what you have read (c) After you have covered the material in the Interactive Text, work through the Practice Question Bank, checking your answers carefully against the Practice Answer Bank (d) Before you take the exam, check that you still remember the material using the following quick revision plan (i) Read through the chapter topic list at the beginning of each chapter Are there any gaps in your knowledge? If so, study the section again (ii) Read and learn the key terms (iii) Look at the exam focus points These show the ways in which topics might be examined (iv) Read the chapter roundups, which are a summary of the fast forwards in each chapter (v) Do the quick quizzes again If you know what you're doing, they shouldn't take long This approach is only a suggestion You or your college may well adapt it to suit your needs Remember this is a practical course (a) Try to relate the material to your experience in the workplace or any other work experience you may have had (b) Try to make as many links as you can to other papers at the Introductory and Intermediate levels For practice and revision use BPP Learning Media's Practice & Revision Kit and Passcards vii F3/FFA FINANCIAL ACCOUNTING What F3/FFA is about Paper F3/FFA aims to develop your knowledge and understanding of the underlying principles, concepts and regulations relating to financial accounting You will need to demonstrate technical proficiency in the use of double entry techniques, including the preparation of basic financial statements for incorporated and unincorporated entities, as well as simple consolidated financial statements for group incorporated entities You also need to be able to conduct a basic interpretation of financial statements If you plan to progress through the ACCA qualification, the skills you learn at F3 will be built on in Papers F7 and P2 Approach to examining the syllabus Paper F3/FFA is a two-hour paper It can be taken as a written paper or a computer based examination The questions in the computer based examination are objective test questions – multiple choice, number entry and multiple response (See page xxiii for frequently asked questions about computer based examinations.) Both the written and computer based examinations are structured as follows Section A Section B 35 compulsory objective test questions of two marks each compulsory multi-task questions of fifteen marks each Number of marks 70 30 100 Multi-task questions are a series of short questions relating to one scenario These short questions can take a number of formats, eg drop down lists, multiple choice, number entry and multiple response In paper exams, multi-task questions will require longer answers and workings need to be shown to ensure that an error is only penalised once viii PRACTICE ANSWER BANK 100 (a) JESSICA GROUP CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X7 Revenue (7,500 + 3,000 – 5) Cost of sales (4,000 + 1,600 – + 1) Gross profit Operating expenses (2,000 + 500) Profit before taxation Income taxes (300 + 120) Profit for the year Intra-group trading Selling price Cost Profit Unrealised 50%  2m = 1m $m 10,495 5,596 4,899 2,500 2,399 420 1,979 NCI share = 25%  1m = 0.25m (b) (c) Profit attributable to: Owners of the parent (bal fig.) Non-controlling interest ((25%  1979) – 0.25) B 1,484.5 494.5 1,979.0 Current ratio = current assets/current liabilities If the ratio is less than 1, it could mean that the company is unable to pay its debts on time Therefore is incorrect, because the ratio has gone up and is now above 1, it means the company is more likely to be able to pay its debts on time compared with before when the ratio was less than is correct, as an increase in revenue caused by an increase in price (as opposed to a change in volume) will lead to a larger receivables balance, hence a larger current assets balance compared to current liabilities is incorrect, as a higher supplier costs will result in a larger current liabilities balance, while current assets remain the same (d) 514 A Control is the main factor to be taken into account when considering a parentsubsidiary relationship Control is deemed to exist if an investor owns more than 50% of the ordinary shares Significant influence is used to decide whether an investment is an associate Index 515 INDEX 516 INDEX Accounting records, 326 Accruals, 182 Accruals basis, 34 Acid test ratio, 464 Adjusting event, 370 Advantages of cash flow accounting, 390 Aged receivables analysis, 208 Allowance for receivables, 211 Amortisation, 172 Amortisation of development costs, 173 Asset, 13 Asset register, 161 Asset turnover, 458 Associate, 404 Authorised (or nominal) capital, 327 AVCO (average cost), 118 Balancing ledger accounts, 91 Bank charges, 258 Bank interest, 258 Bank reconciliation, 258 Bank statements, 53 Benefits, 377 Bonus (capitalisation) issues, 334 Books of prime entry, 49 Business entity concept, 6, 63 C alled-up capital, 327 Capital, 63 Capital expenditure, 135 Capital income, 136 Capital transactions, 136 Carriage inwards, 110 Carriage outwards, 110 Carrying amount, 138 Cash, 378 Cash, 378 Cash and cash equivalents, 378 Cash book, 52 Cash cycle, 463 Cash discount, 238 Cash discounts allowed, 239 Cash discounts received, 238 Cash equivalents, 378 Cash flow information benefits, 377 Cash flows, 378 Comparability, 37 Compensating errors, 93, 272, 274 Consistency, 38 Consolidated financial statements, 402 Contingent asset, 200 Contingent liability, 199 Continuous inventory records, 116 Contra entries, 247 Control, 401 Control account, 236, 250 Correction of errors, 80 Cost, 138 Credit, 71 Credit note, 48 Creditors, 73 Cumulative weighted average costing, 121 Current asset, 346 Current liability, 346 Current ratio, 464 Current replacement cost, 116 Debit, 71 Debit note, 48 Debt ratio, 460 Depreciable amount, 141, 172 Depreciable assets, 141 Depreciation, 141, 161 reducing balance method, 144 straight line method, 143 Depreciation methods, 142 Development, 171 Direct method, 379 Disclosures, 343 Discount, 237 Dividends, 332, 360, 372 Double entry bookkeeping, 70 Doubtful debt, 211 Drawings, 64 Duty of care, 12 Efficiency ratios, 465 Entity concept, 39 Equity, 14 Equity method, 404 Error of commission, 272, 273, 277 Error of omission, 272, 273, 277 Error of principle, 93, 272, 273 Error of transposition, 272, 273 Errors, 80 Events after the reporting period, 370 Expected value approach, 198 Expenses, 15 F air presentation, 38 Fair value, 138, 360 Fair value of net assets, 419 Faithful representation, 36 FIFO (first in, first out), 118, 125 Financial accounts, Financial analysis, 453 Financing activities, 378, 379 Fixed production overheads, 124 Framework for the preparation and presentation of Financial Statements, 10 Gearing ratio, 461 General ledger, 61 Going concern, 33 Goods destroyed, 296 517 INDEX Goods received notes, 48 Goods written off, 111 Goodwill, 415 Governance, 12 Gross profit margin, 295, 459 Group, 402 Historical cost, 116 IAS Presentation of financial statements, 381 IAS Inventories, 117 IAS 18 Revenue, 360 IAS 27 Separate financial statements, 401 IAS 28 Investments in associates, 401 IAS 38 Intangible assets, 171 IFRS Advisory Council, 22 IFRS Foundation, 21 IFRS Business combinations, 401 IFRSs, 23 Impairment of development costs, 174 Income, 15 Income tax, 349 Incomplete records, 288 Indirect method (cash flows), 380 Input sales tax, 225 Intangible asset, 171 Interest, 360 Interest cover, 461 International Accounting Standards Board (IASB), 21 Inventories, 123, 161 costs of conversion, 124 costs of purchase, 124 Inventory destroyed, 298 Inventory turnover period, 465 Investing activities, 378, 379 Invoice, 47 Irrecoverable (or 'bad') debt, 209 Issued capital, 327 Journal, 49, 78 Journal entries, 274 Ledger accounts, 60 Leverage, 461 Liability, 14, 66, 196 LIFO (last in, first out), 118, 125 Limited liability, 5, 325 Limited liability companies, 5, Liquidity, 460, 462, 463, 464 Loan stock bonds, 330 Long-term solvency, 460 Management (or cost) accounting, Market value of shares, 329 Mark-up, 295 Materiality, 35 518 N et profit margin, 459 Net realisable value, 111, 116, 123, 127 Nominal ledger, 61 Non-adjusting event, 371 Non-controlling interest, 402, 422 Non-current assets, 135 disposal, 154 Normal capacity, 124 Omission of a transaction, 93 Operating activities, 378 Operating cycle, 346 Ordinary shares, 329 Output sales tax, 225 Paid-up capital, 327 Par value, 326 Parent, 402 Partnerships, Payable, 66 Payables control account, 236 Payables ledger, 83 PBIT, profit before interest and tax, 456 Petty cash book, 54 Power, 401 Preference shares, 327 Prepayments, 182 Profit, Profit analysis, 459 Profit margin, 458 Profit or loss account, 94 Profitability, 456 Property, plant and equipment, 138 Provisions, 196, 198, 334 Purchase day book, 50 Purchase order, 46 Purchase returns day book, 51 Quick ratio, 464 Receivable, 67 Receivables collection period, 465 Receivables control account, 236 Receivables ledger, 82 Recognition of property, plant and equipment, 138 Reconciling items, 243 Relevance, 35 Reporting period, 344 Research, 171 Research and development, 171 Reserve, 330, 334 Residual value, 141 Return on capital employed (ROCE), 456 Return on equity (ROE), 457 Revaluation of non-current assets, 150 Revaluation surplus, 332 INDEX Revenue, 360 Revenue expenditure, 135 Revenue income, 136 Rights issues, 336 Royalties, 360 Sales day book, 49 Sales order, 47 Sales returns day book, 51 Sales tax, 224 Secondary ratios, 458 Settlement discount, 238 Share premium account, 331 Shareholders, Short-term solvency, 462 Significant influence, 404 Sole traders, Standard cost, 125 Standard-setting process, 23 Statement of changes in equity, 350 Statement of financial position, 13 Statement of profit or loss, 15 Stolen goods, 296 Subsidiary, 402 Substance over form, 37 Supplier statement reconciliations, 242 Suspense account, 276, 278 T-accounts, 62 Taxation, 349 Time differences, 258 Timeliness, 37 Trade accounts receivable, 67 Trade discount, 237, 238 Trade investment, 402 Transposition error, 251, 277 Trend analysis, 453 Trial balance, 90 Two column cash book, 299 U nderstandability, 38 Unlimited liability, 325 Unpresented cheques, 259, 262 Unrealised profits (PUP), 426 Useful life, 141, 172 Users of accounting information, 10 V ariable production overheads, 124 VAT, 226 Verifiability, 37 Weighted average cost, 125 Working capital, 347 519 INDEX 520 NOTES NOTES NOTES NOTES NOTES NOTES FFA FOUNDATIONS OF FINANCIAL ACCOUNTING (01/16) Review form Name: Address: During the past six months you recall seeing/receiving any of the following? 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Syllabus and Study Guide ix F3/ FFA FINANCIAL ACCOUNTING x INTRODUCTION xi F3/ FFA FINANCIAL ACCOUNTING xii INTRODUCTION xiii F3/ FFA FINANCIAL ACCOUNTING xiv INTRODUCTION xv F3/ FFA FINANCIAL ACCOUNTING. .. FINANCIAL ACCOUNTING xvi INTRODUCTION xvii F3/ FFA FINANCIAL ACCOUNTING xviii INTRODUCTION xix F3/ FFA FINANCIAL ACCOUNTING xx INTRODUCTION xxi F3/ FFA FINANCIAL ACCOUNTING xxii INTRODUCTION The Computer... vii F3/ FFA FINANCIAL ACCOUNTING What F3/ FFA is about Paper F3/ FFA aims to develop your knowledge and understanding of the underlying principles, concepts and regulations relating to financial accounting