FI32ST14 (RICOH)_Layout 15/08/2013 18:02 Page About BPP Learning Media 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 FFA FINANCIAL ACCOUNTING PAPER F3 FINANCIAL ACCOUNTING This Interactive Text provides the only study material for FIA FFA Financial Accounting and ACCA Paper F3 Financial Accounting which has been comprehensively reviewed by the Examiner This unique review guarantees appropriate depth and breadth of content and comprehensive syllabus coverage In addition to Examiner-reviewed material you get: n Chapter activities to test your understanding of the topics covered n Key terms extracted from the text and highlighted in ‘key term’ boxes n Exam focus points highlighting ways in which topics might be examined n A question and answer bank prepared by BPP Learning Media authors n Icons to highlight activities, key terms, PER alerts and quick quizzes n Regular fast forward summaries emphasising the key points in each chapter FFA FINANCIAL ACCOUNTING PAPER F3 FINANCIAL ACCOUNTING BPP Learning Media is the sole ACCA Platinum Approved Learning Partner - content FIA & ACCA FIA &ACCA FFA FINANCIAL ACCOUNTING ACCA PAPER F3 FINANCIAL ACCOUNTING INTERACTIVE TEXT For more details about this or any other BPP Learning Media products, please call our customer services team on 0845 0751 100 (within the UK) or +44 (0)20 8740 2211 (from overseas), email learningmedia@bpp.com or visit our website www.bpp.com/learningmedia INTERACTIVE TEXT At BPP Learning Media, we specialise in helping people pass professional exams Your exam success is our business FOR EXAMS FROM FEBRUARY 2014 TO AUGUST 2015 SEPTEMBER 2013 UK £25.00 BPP House, Aldine Place, London W12 8AA Tel: 0845 0751 100 (for orders within the UK) Tel: +44 (0)20 8740 2211 Fax: +44 (0)20 8740 1184 www.bpp.com/learningmedia FIA FOR EXAMS FROM FEBRUARY 2014 TO AUGUST 2015 FFA PAPER F3 FINANCIAL ACCOUNTING BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for FIA and ACCA qualifications In this, the only FFA/F3 study text to be reviewed by the examiner:  We highlight the most important elements in the syllabus and the key skills you will need  We signpost how each chapter links to the syllabus and the study guide  We provide lots of exam focus points demonstrating what the examiner will want you to  We emphasise key points in regular fast forward summaries  We test your knowledge of what you’ve studied in quick quizzes  We examine your understanding in our exam question bank  We reference all the important topics in our full index BPP’s Practice & Revision Kit and i-Pass products also support this paper Note FIA FFA and ACCA Paper F3 are examined under the same syllabus and study guide FOR EXAMS FROM FEBRUARY 2014 TO AUGUST 2015 I N T E R A C T I V E T E X T FFA/F3 FINANCIAL ACCOUNTING First edition March 2011 Third edition September 2013 ISBN 9781 4453 7027 Previous ISBN 9781 4453 9966 eISBN 9781 4453 7062 A note about copyright British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library What does the little © mean and why does it matter? Published by BPP Learning Media Ltd BPP House, Aldine Place 142-144 Uxbridge Road London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom by Ricoh Ricoh House Ullswater Crescent Coulsdon CR5 2HR Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources All 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 exam answer bank have been prepared by BPP Learning Media Ltd © BPP Learning Media Ltd 2013 ii Dear Customer Your market-leading BPP books, course materials and e-learning 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:  Photocopying our materials is a breach of copyright  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 You can, of course, sell your books, in the form in which you have bought them – once you have finished with them (Is this fair to your fellow students? 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CONTENTS Contents Page Introduction Helping you to pass – the ONLY FFA/F3 study text reviewed by the examiner! v Chapter features vi Studying FFA/F3 vii The Computer Based Examination xx Tackling Multiple Choice Questions xxi 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 87 Part D Recording transactions and events 10 11 12 13 Sales tax 105 Inventory 115 Tangible non-current assets 141 Intangible non-current assets 177 Accruals and prepayments 189 Irrecoverable debts and allowances 203 Provisions and contingencies 219 Part E Preparing a trial balance 14 15 16 17 Control accounts 233 Bank reconciliations 255 Correction of errors 267 Preparation of financial statements for sole traders 281 Part F Preparing basic financial statements 18 19 20 21 22 Incomplete records 295 Introduction to company accounting 319 Preparation of financial statements for companies 337 Events after the reporting period 365 Statements of cash flows 371 Part G Preparing simple consolidated financial statements 23 24 25 Introduction to consolidated financial statements 391 The consolidated statement of financial position 405 The consolidated statement of profit or loss and other comprehensive income 431 Part H Interpretation of financial statements 26 Interpretation of financial statements 447 Exam question bank 475 Exam answer bank 503 Index 515 Review form iii FFA/F3 FINANCIAL ACCOUNTING iv INTRODUCTION Helping you to pass – the ONLY FFA/F3 study text reviewed by the examiner! BPP Learning Media – the sole Platinum Approved Learning Partner content As ACCA’s sole Platinum Approved Learning Partner – content, BPP Learning Media gives you the unique opportunity to use examiner-reviewed study materials for exams from February 2014 to August 2015 By incorporating the examiner’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 not only have to 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 FIA 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 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 Texts are completely focused on helping you pass your exam Our advice on Studying FFA/F3 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 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 Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content v FFA/F3 FINANCIAL ACCOUNTING Chapter features Each chapter contains a number of helpful features to guide you through each topic vi 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 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 Tell 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 Exam Question Bank Found at the back of the Interactive Text with more examstyle chapter questions Cross referenced for easy navigation INTRODUCTION Studying FFA/F3 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 FFA/F3 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 Text very carefully and not skip any of it (b) Learning is an active process Do all the questions as you work through the 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 Exam Question Bank, checking your answers carefully against the Exam 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 and Revision Kit, iPass and Passcards What FFA/F3 is about Paper FFA/F3 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 upon in papers F7 and P2 vii FFA/F3 FINANCIAL ACCOUNTING Approach to examining the syllabus Paper FFA/F3 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 xx for frequently asked questions about computer based examinations.) The written examination is structured as follows: Section A Section B 35 compulsory multiple choice 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 INTRODUCTION Syllabus and Study guide ix INDEX Goods written off, 119 Goodwill, 409 Governance, 12 Gross profit margin, 303, 455 Group, 396 Market value of shares, 325 Mark-up, 303 Materiality, 35 Historical cost, 124 Net realisable value, 119, 124, 131, 135 Nominal ledger, 61 Non-controlling interest, 396, 416 Non-current assets, 143 disposal, 162 Normal capacity, 132 IAS Presentation of financial statements, 377 IAS 18 Revenue, 355 IAS Inventories, 125, 137 IAS 27 Consolidated and separate financial statements, 395 IAS 28 Investments in associates, 395 IAS 38 Intangible assets, 179 IFRS Business combinations, 395 IFRS Advisory Council (formerly SAC), 22 IFRS Foundation (formerly IASCF), 22 IFRSs, 23 Impairment of development costs, 182 Income, 15 Income and expense account, 92 Income tax, 344 Incomplete records, 296 Indirect method (cash flows), 376 Input sales tax, 107 Intangible asset, 179 Interest, 356 Interest cover, 457 International Accounting Standards Board (IASB), 21 International Financial Reporting Standards (IFRSs), 21 Inventories, 131 Inventory, 170 Inventory destroyed, 306 Inventory turnover period, 461 Investing activities, 373, 374 Invoice, 47 Irrecoverable debt, 205 Issued capital, 323 Journal, 49, 78 Journal entries, 270 L edger accounts, 60 Leverage, 457 Liability, 14, 66, 220 LIFO, 133 LIFO (last in, first out), 127, 133 Limited liability, 5, 321 Limited liability companies, 5, Liquidity, 456, 458, 459, 460 Loan stock bonds, 325 Long-term solvency, 456 Management (or cost) accounting, 516 Net profit margin, 455 O mission of a transaction, 91 Operating activities, 373, 374 Operating cycle, 342 Ordinary shares, 324 Output sales tax, 107 Paid-up capital, 323 Par value, 322 Parent, 396 Partnerships, Payable, 66 Payables control account, 234 Payables ledger, 82 PBIT, profit before interest and tax, 452 Petty cash book, 53 Preference shares, 323 Prepayments, 190 Profit, Profit analysis, 455 Profit margin, 454 Profitability, 452 Property, plant and equipment, 146 Provision, 220 Provisions, 330 Purchase day book, 50 Purchase order, 46 Purchase returns day book, 51 Quick ratio, 460 Receivable, 66 Receivables collection period, 461 Receivables control account, 234 Receivables ledger, 82 Recognition of property, plant and equipment, 146 Reconciling items, 241 Relevance, 35 Reporting period, 340 Research, 179 Research and development, 179 Reserve, 326, 330 Residual value, 149 Return on capital employed (ROCE), 452 Return on equity (ROE), 453 Revaluation of non-current assets, 158 INDEX Revaluation surplus, 328 Revenue, 356 Revenue expenditure, 143 Revenue income, 144 Rights issues, 331 Royalties, 356 Sales day book, 49 Sales order, 46 Sales returns day book, 50 Sales tax, 106 Secondary ratios, 454 Settlement discount, 236 Share premium account, 327 Shareholders, Short-term solvency, 458 Significant influence, 397 Sole traders, Standard cost, 133 Standard setting process, 23 Statement of changes in equity, 346 Statement of financial position, 13 Statement of profit or loss, 15 Stolen goods, 304 Subsidiary, 396 Substance over form, 36 Supplier statement reconciliations, 240 Suspense account, 272, 273, 274 'T' accounts, 62 Taxation, 344 Time differences, 256 Timeliness, 37 Trade accounts receivable, 66 Trade discount, 235, 236 Trade investment, 396 Transposition error, 249, 273 Trend analysis, 449 Trial balance, 88 Two column cash book, 307 U nderstandability, 37 Unlimited liability, 321 Unpresented cheques, 261 Unrealised profits (PUP), 420 Useful life, 149, 180 Users of accounting information, 10 V ariable production overheads, 132 VAT, 107 Verifiability, 37 Weighted Average Cost, 133 Working capital, 342 Wrong account, 91 517 INDEX 518 NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES NOTES F3/FFA – FINANCIAL ACCOUNTING (9/13) Review form Name: Address: How have you used this Interactive Text? (Tick one box only) During the past six months you recall seeing/receiving any of the following? (Tick as many boxes as are relevant) Distance learning (book only) Our advertisement in ACCA Student Accountant On a course: college As a tutor Our advertisement in Teach Accounting With 'correspondence' package Other advertisement Other Why did you decide to purchase this Interactive Text? (Tick one box only) Have used BPP Texts in the past ACCA email BPP email Our website www.bpp.com Recommendation by friend/colleague Recommendation by a lecturer at college Saw advertising Other Which (if any) aspects of our advertising you find useful? (Tick as many boxes as are relevant) Prices and publication dates of new editions Which BPP products have you used? Text Our brochure Kit i-Pass Information on Interactive Text content Passcards Facility to order books off-the-page None of the above Your ratings, comments and suggestions would be appreciated on the following areas Very useful Useful Not useful Good Adequate Poor Introductory section (How to use this Interactive Text) Key terms Examples Questions and answers Fast forwards Quick quizzes Exam alerts Exam Question Bank Exam Answer Bank Index Structure and presentation Icons Excellent Overall opinion of this Interactive Text Do you intend to continue using BPP products? Yes No Please note any further comments and suggestions/errors on the reverse of this page The BPP author of this edition can be emailed at janiceross@bpp.com Please return this form to: Barry Walsh, FIA Range Manager, BPP Learning Media, FREEPOST, London, W12 8BR F3/FFA FINANCIAL ACCOUNTING Review form (continued) Please note any further comments and suggestions/errors below ... Syllabus and Study guide ix FFA /F3 FINANCIAL ACCOUNTING x INTRODUCTION xi FFA /F3 FINANCIAL ACCOUNTING xii INTRODUCTION xiii FFA /F3 FINANCIAL ACCOUNTING xiv INTRODUCTION xv FFA /F3 FINANCIAL ACCOUNTING. ..FFA PAPER F3 FINANCIAL ACCOUNTING BPP Learning Media is the sole ACCA Platinum Approved Learning Partner – content for FIA and ACCA qualifications In this, the only FFA /F3 study text to be reviewed... 515 Review form iii FFA /F3 FINANCIAL ACCOUNTING iv INTRODUCTION Helping you to pass – the ONLY FFA /F3 study text reviewed by the examiner! BPP Learning Media – the sole Platinum