ACCA paper f3 FIA diploma in accounting and business study text

Contents Page Chapter 1 Introduction to financial reporting 1 Chapter 4 Recording basic transactions and balancing the Chapter 5 Returns, discounts and sales tax 71 Chapter 7 Non-curren

ACCA Paper F3

and FIA Diploma in Accounting and

Business Financial Accounting (FA/FFA)

Study Text

Contents

Page Chapter 1 Introduction to financial reporting 1

Chapter 4 Recording basic transactions and balancing the

Chapter 5 Returns, discounts and sales tax 71

Chapter 7 Non-current assets: acquisition and depreciation 121

Chapter 8 Non-current assets: disposal and revaluation 143

Chapter 12 Payables, provisions and contingent liabilities 209

Chapter 13 Capital structure and finance costs 221

Chapter 14 Control account reconciliations 243

Chapter 16 The trial balance, errors and suspense accounts 271

Chapter 17 Preparing basic financial statements 291

Chapter 20 Interpretation of financial statements 381

Chapter 21 Consolidated statement of financial position 405

Chapter 22 Consolidated statement of profit or loss and

Chapter 24 PRACTICE ANSWERS 515

Paper Introduction

This document references IFRS® Standards and IAS® Standards, which are authored by the International Accounting Standards Board (the Board), and published in the 2016 IFRS Standards Red Book

chapter

Introduction

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Paper introduction

Paper background The aim of ACCA Paper F3, Financial Accounting, FIA Diploma in Accounting and Business, Financial Accounting, is to develop knowledge and understanding of the underlying principles and concepts relating to financial accounting and technical proficiency in the use of double-entry accounting techniques including the preparation of basic financial statements

Objectives of the syllabus

Core areas of the syllabus

• Explain the context and purpose of financial reporting

• Define the qualitative characteristics of financial information

• Demonstrate the use of double entry and accounting systems

• Record transactions and events

• Prepare a trial balance (including identifying and correcting errors)

• Prepare basic financial statements for incorporated and unincorporated entities

• Prepare simple consolidated financial statements

• Interpretation of financial statements

• The context and purpose of financial reporting

• The qualitative characteristics of financial information

• The use of double entry and accounting systems

• Recording transactions and events

• Preparing a trial balance

• Preparing basic financial statements

• Preparing simple consolidated statements

• Interpretation of financial statements

Syllabus objectives

We have reproduced the ACCA's syllabus below, showing where the objectives are explored within this book Within the chapters, we have broken down the extensive information found in the syllabus into easily digestible and relevant sections, called Content Objectives These correspond to the objectives at the beginning of each chapter

Syllabus learning objective Chapter

(a) Define financial reporting – recording, analysing

and summarising financial data.[k]

1

(b) Identify and define types of business entity – sole

trader, partnership, limited liability company.[k]

1

(c) Recognise the legal differences between a sole

trader, partnership and a limited liability company

[k]

1

(d) Identify the advantages and disadvantages of

operating as a limited liability company, sole trader or partnership.[k]

1

(e) Understand the nature, principles and scope of

financial reporting.[k]

1

2 Users’ and stakeholders’ needs

(a) Identify the users of financial statements and state

and differentiate between their information needs.[k]

1

3 The main elements of financial reports

(a) Understand and identify the purpose of each of

the main financial statements.[k]

1

(b) Define and identify assets, liabilities, equity,

revenue and expenses.[k]

1

4 The regulatory framework

(a) Understand the role of the regulatory system

including the roles of the IFRS® Foundation (the Foundation), the International Accounting

Standards Board (The Board), the IFRS Advisory Council (IFRS AC) and the IFRS Interpretations Committee (IFRIC®).[k]

2

(b) Understand the role of International Financial

Reporting Standards (IFRS Standards®).[k]

2

5 Duties and responsibilities of those charged with

(a) Explain what is meant by governance specifically

in the context of the preparation of financial statements.[k]

(b) Describe the duties and responsibilities of directors and other parties covering the preparation of the financial statements.[k]

B THE QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION

1 The qualitative characteristics of financial information

(a) Define, understand and apply qualitative characteristics:[k]

1

(i) Relevance(ii) Faithful representation(iii) Comparability

(iv) Verifiability(v) Timeliness(vi) Understandability(b) Define, understand and apply accounting concepts

1

(i) Materiality(ii) Substance over form(iii) Going concern(iv) Business entity concept(v) Accruals

(vi) Fair presentation(vii) Consistency

C THE USE OF DOUBLE ENTRY AND ACCOUNTING

SYSTEMS

1 Double entry bookkeeping principles including the

maintenance of accounting records

(a) Identify and explain the function of the main data

sources in an accounting system.[k]

3

(b) Outline the contents and purpose of different types

of business documentation, including: quotation, sales order, purchase order, goods received note, goods despatched note, invoice, statement, credit note, debit note, remittance advice, receipt.[k]

3

(c) Understand and apply the concept of double entry

accounting and the duality concept.[k]

3

(d) Understand and apply the accounting equation.[s] 3

(e) Understand how the accounting system

contributes to providing useful accounting information and complies with organisational policies and deadlines.[k]

1, 3

(f) Identify the main types of business transactions,

e.g sales, purchases, payments, receipts.[k]

3

2 Ledger accounts, books of prime entry and

journals

(a) Identify the main types of ledger accounts and

books of prime entry, and understand their nature and function.[k]

3

(b) Understand and illustrate the uses of journals and

the posting of journal entries into ledger accounts

[s]

4

(c) Identify correct journals from given narrative.[s] 3

(d) Illustrate how to balance and close a ledger

account.[s]

4

D RECORDING TRANSACTIONS AND EVENTS

1 Sales and purchases (a) Record sale and purchase transactions in ledger accounts.[s]

transactions.[k]

3

3 Inventory (a) Recognise the need for adjustments for inventory

in preparing financial statements.[k]

(i) Identify the impact of inventory valuation methods

on profit and on assets.[s]

6

4 Tangible non-current assets

(b) Recognise the difference between current and

(e) Prepare ledger entries to record the acquisition

and disposal of non-current assets.[s]

7

(f) Calculate and record profits or losses on disposal

of non-current assets in the statement of profit or loss, including part exchange transactions [s]

7

(g) Record the revaluation of a non-current asset in

ledger accounts, the statement of profit or loss and other comprehensive income and in the statement of financial position.[s]

7

(h) Calculate the profit or loss on disposal of a

revalued asset.[s]

8

(i) Illustrate how non-current asset balances and

movements are disclosed in financial statements

(b) Calculate the charge for depreciation using

straight line and reducing balance methods.[s]

7

(c) Identify the circumstances where different

methods of depreciation would be appropriate.[k]

7

(d) Illustrate how depreciation expense and

accumulated depreciation are recorded in ledger accounts.[s]

7

(e) Calculate depreciation on a revalued non-current

asset including the transfer of excess depreciation between the revaluation surplus and retained earnings.[s]

8

(f) Calculate the adjustments to depreciation

necessary if changes are made in the estimated useful life and/or residual value of a non-current asset.[s]

7

(g) Record depreciation in the statement of profit or loss and statement of financial position.[s]

7

6 Intangible non-current assets and amortisation(a) Recognise the difference between tangible and intangible non-current assets.[k]

9

(c) Identify the definition and treatment of ‘research costs’ and ‘development costs’ in accordance with International Financial Reporting Standards

[k]

9

(d) Calculate amounts to be capitalised as development expenditure or to be expensed from given information.[s]

9

(f) Calculate and account for the charge for amortisation.[s]

9

7 Accruals and prepayments (a) Understand how the matching concept applies to accruals and prepayments.[k]

10

(b) Identify and calculate the adjustments needed for accruals and prepayments in preparing financial statements.[s]

10

(c) Illustrate the process of adjusting for accruals and prepayments

in preparing financial statements.[s]

(g) Identify the impact of irrecoverable debts on the

statement of profit or loss and on the statement of financial position.[s]

11

(h) Prepare the bookkeeping entries to create and

adjust an allowance for receivables.[s]

11

(i) Illustrate how to include movements in the

allowance for receivables in the statement of profit

or loss and how the closing balance of the allowance should appear in the statement of financial position.[s]

(l) Classify items as current or non-current liabilities

in the statement of financial position.[s]

1

9 Provisions and contingencies

(a) Understand the definition of ‘provision’,

‘contingent liability’ and ‘contingent asset’.[k]

12

(b) Distinguish between and classify items as

provisions, contingent liabilities or contingent assets.[k]

12

(c) Identify and illustrate the different methods of

accounting for provisions, contingent liabilities and contingent assets.[k]

12

(d) Calculate provisions and changes in provisions.[s] 12

(e) Account for the movement in provisions.[s] 12

(f) Report provisions in the final accounts.[s] 12

10 Capital structure and finance costs

(a) Understand the capital structure of a limited

liability company including: [k]

13

(i) ordinary shares(ii) preference shares (redeemable and irredeemable)

(iii) loan notes

(b) Record movements in the share capital and share

premium accounts.[s]

13

(c) Identify and record the other reserves which may

appear in the company statement of financial position.[s]

13

(d) Define a bonus (capitalisation) issue and its advantages and disadvantages.[k]

balance.[k]

16

2 Correction of errors (a) Identify the types of error which may occur in bookkeeping systems.[k]

16

3 Control accounts and reconciliations (a) Understand the purpose of control accounts for accounts receivable and accounts payable.[k]

(d) Perform control account reconciliations for

accounts receivable and accounts payable.[s]

14

(e) Identify errors which would be highlighted by

performing a control account reconciliation.[k]

(a) Understand the purpose of bank reconciliations.[k] 15

(b) Identify the main reasons for differences between

the cash book and the bank statement.[k]

15

(c) Correct cash book errors and/or omissions.[s] 15

(d) Prepare bank reconciliation statements.[s] 15

(e) Derive bank statement and cash book balances

from given information.[s]

(a) Understand the purpose of a suspense account.[k] 16

(b) Identify errors leading to the creation of a

suspense account.[k]

16

(c) Record entries in a suspense account.[s] 16

(d) Make journal entries to clear a suspense account

[s]

16

F PREPARING BASIC FINANCIAL STATEMENTS

1 Statements of financial position

(a) Recognise how the accounting equation,

accounting treatments (as stipulated within sections D, E and examinable documents) and business entity convention underlie the statement

of financial position.[k]

3, 17

(c) Identify and report reserves in a company

statement of financial position.[s]

17

(d) Prepare statement of financial position or extracts

as applicable from given information using accounting treatments as stipulated within sections D, E and examinable documents.[s]

17

(e) Understand why the heading retained earnings

appears in a company statement of financial position.[k]

13 & 17

2 Statement of profit or loss and other comprehensive income

(a) Prepare a statement of profit or loss and other comprehensive income or extracts as applicable from given information using accounting

treatments as stipulated within sections D, E and examinable documents.[s]

(b) Draft the following disclosure notes.[s]

(i) Non-current assets including tangible and intangible assets

5 Statement of cash flow (excluding partnerships)

(a) Differentiate between profit and cash flow.[k] 19

(b) Understand the need for management to control

cash flow.[k]

19

(c) Recognise the benefits and drawbacks to users of

the financial statements of a statement of cash flows.[k]

19

(d) Classify the effect of transactions on cash flows.[s] 19

(e) Calculate the figures needed for the statement of

cash flows including:[s]

19

(i) cash flows from operating activities(ii) cash flows from investing activities(iii) cash flows from financing activities

(f) Calculate the cash flow from operating activities

using the indirect and direct method.[s]

19

(g) Prepare statement of cash flows and extracts

from statements of cash flows from given information.[s]

19

(h) Identify the treatment of given transactions in a

company’s statement of cash flows.[k]

19

6 Incomplete records

(a) Understand and apply techniques used in

incomplete record situations:[s]

18

(i) use of accounting equation(ii) use of ledger accounts to calculate missing figures

(iii) use of cash and/or bank summaries(iv) use of profit percentages to calculate missing figures

G PREPARING SIMPLE CONSOLIDATED FINANCIAL STATEMENTS

1 Subsidiaries (a) Define and describe the following terms in the context of group accounting.[k]

21

(i) Parent(ii) Subsidiary(iii) Control(iv) Consolidated or group financial statements(v) Non-controlling interest

(vi) Trade/simple investment(b) Identify subsidiaries within a group structure.[k] 21(c) Describe the components of and prepare a

consolidated statement of financial position or extracts thereof including.[s]

21

(i) Fair value adjustments at acquisition on land and buildings (excluding depreciation adjustments)(ii) Fair value of consideration transferred from cash and shares (excluding deferred and contingent consideration)

(iii) Elimination of intra-group trading balances (excluding cash and goods in transit)(iv) Removal of unrealised profit arising on intra-group trading

(v) acquisition of subsidiaries part way through the financial year

(d) Calculate goodwill (excluding impairment of goodwill) using the full goodwill method only as follows:[s]

21

Fair value of non-controlling interest X Less fair value of net assets at

22

(i) Elimination of intra-group trading balances (excluding cash and goods in transit)

(ii) Removal of unrealised profit arising on intra-group trading

(iii) Acquisition of subsidiaries part way through the financial year

2 Associates

(a) Define and identify an associate and significant

influence and identify the situations where significant influence or participating interest exists.[k]

22

(b) Describe the key features of a parent-associate

relationship and be able to identify an associate within a group structure.[k]

22

(c) Describe the principle of equity accounting.[k] 22

H INTERPRETATION OF FINANCIAL STATEMENTS

1  Importance and purpose of analysis of financial

statements

(a) Describe how the interpretation and analysis of

financial statements is used in a business environment.[k]

3  Analysis of financial statements

(a) Calculate and interpret the relationship between

the elements of the financial statements with regard to profitability, liquidity, efficient use of resources and financial position.[s]

20

(b) Draw valid conclusions from the information

contained within the financial statements and present these to the appropriate user of the financial statements.[s]

20

The superscript numbers in square brackets indicate the intellectual depth at which the subject area could be assessed within the examination Level 1 (knowledge and comprehension) broadly equates with the Knowledge module, Level 2 (application and analysis) with the Skills module and Level

3 (synthesis and evaluation) to the Professional level However, lower level skills can continue to be assessed as you progress through each module and level

The examination

Examination format The syllabus is assessed by either a two-hour paper-based or computerbased examination Questions will assess all parts of the syllabus and will contain both computational and non-computational elements:

Examination tips Spend the first few minutes of the examination reading the paper

Divide the time you spend on questions in proportion to the marks on offer One suggestion for this exam is to allocate 2 minutes to each mark

available

Objective test questions: Read the questions carefully and work through any calculations required If you don't know the answer, eliminate those options you know are incorrect and see if the answer becomes more obvious

Guess your final answer rather than leave it blank if necessary

The longer 15-mark questions will test consolidations and accounts preparation Make sure you practice preparing full financial statements

There are lots of questions to practice in this text

Number of marks Thirty five 2-mark objective test questions 70

Total time allowed: 2 hours

Computer-based examination (CBE) – Tips

Be sure you understand how to use the software before you start the exam If

in doubt, ask the assessment centre staff to explain it to you

Questions are displayed on the screen and answers are entered using

keyboard and mouse At the end of the exam, you are given a certificate

showing the result you have achieved

The CBE exam will not only examine multiple choice questions but could

include questions that require data entry or a multiple response

Do not attempt a CBE until you have completed all study material relating

to it Do not skip any of the material in the syllabus

Read each question very carefully

Double-check your answer before committing yourself to it

Answer every question – if you do not know an answer, you don't lose

anything by guessing Think carefully before you guess

With an objective test question, it may be possible to eliminate first those

answers that you know are wrong Then choose the most appropriate

answer from those that are left

Remember that only one answer to an objective test question can be

right After you have eliminated the ones that you know to be wrong, if you

are still unsure, guess But only do so after you have double-checked that

you have only eliminated answers that are definitely wrong

Don't panic if you realise you've answered a question incorrectly Try to

remain calm, continue to apply examination technique and answer all

questions required within the time available

Study skills and revision guidance

This section aims to give guidance on how to study for your ACCA exams

and to give ideas on how to improve your existing study techniques

Preparing to study

Set your objectives

Before starting to study decide what you want to achieve – the type of pass

you wish to obtain This will decide the level of commitment and time you

need to dedicate to your studies

Devise a study plan Determine which times of the week you will study

Split these times into sessions of at least one hour for study of new material Any shorter periods could be used for revision or practice

Put the times you plan to study onto a study plan for the weeks from now until the exam and set yourself targets for each period of study – in your sessions make sure you cover the course, course assignments and revision

If you are studying for more than one paper at a time, try to vary your subjects

as this can help you to keep interested and see subjects as part of wider knowledge

When working through your course, compare your progress with your plan and, if necessary, re-plan your work (perhaps including extra sessions) or, if you are ahead, do some extra revision/practice questions

Effective studying

Active reading You are not expected to learn the text by rote, rather, you must understand what you are reading and be able to use it to pass the exam and develop good practice A good technique to use is SQ3Rs – Survey, Question, Read, Recall, Review:

You may also find it helpful to re-read the chapter to try to see the topic(s) it deals with as a whole

(1) Survey the chapter – look at the headings and read the introduction, summary and objectives, so as to get an overview of what the chapter deals with

(2) Question – whilst undertaking the survey, ask yourself the questions that you hope the chapter will answer for you

(3) Read through the chapter thoroughly, answering the questions and making sure you can meet the objectives Attempt the exercises and activities in the text, and work through all the examples

(4) Recall – at the end of each section and at the end of the chapter, try to recall the main ideas of the section/chapter without referring to the text This is best done after a short break of a couple of minutes after the reading stage

(5) Review – check that your recall notes are correct

Note-taking

Taking notes is a useful way of learning, but do not simply copy out the text

The notes must:

Trying to summarise a chapter without referring to the text can be a useful

way of determining which areas you know and which you don't

Three ways of taking notes:

Summarise the key points of a chapter

Make linear notes – a list of headings, divided up with subheadings listing

the key points If you use linear notes, you can use different colours to

highlight key points and keep topic areas together Use plenty of space to

make your notes easy to use

Try a diagrammatic form – the most common of which is a mind-map To

make a mind-map, put the main heading in the centre of the paper and put a

circle around it Then draw short lines radiating from this to the main

sub-headings, which again have circles around them Then continue the process

from the sub-headings to sub-sub-headings, advantages, disadvantages,

etc

Highlighting and underlining

You may find it useful to underline or highlight key points in your study text –

but do be selective You may also wish to make notes in the margins

Revision

The best approach to revision is to revise the course as you work through it

Also try to leave four to six weeks before the exam for final revision Make

sure you cover the whole syllabus and pay special attention to those areas

where your knowledge is weak Here are some recommendations:

Read through the text and your notes again and condense your notes

into key phrases It may help to put key revision points onto index cards to

look at when you have a few minutes to spare

• be in your own words