Sample: Acca Foundations in Accountancy

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For Examinations to August 2015
STUDY SYSTEM
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ACCA
Paper F3 | FINANCIAL ACCOUNTING
Foundations in Accountancy
Paper FFA | FINANCIAL ACCOUNTING
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ACCA
FINANCIAL ACCOUNTING F3/FFA

STUDY SYSTEM
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For Examinations to August 2015
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Paper
F3/FFA
Contents
Page
introduction ...............................................................................................v
About this Study System ............................................................................v
Syllabus.....................................................................................................vi
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ACCA Study Guide ..................................................................................... xii
examination technique ........................................................................... xix

Sessions
Context of Financial Reporting .............................................. 1-1
Financial Statements ............................................................ 2-1
Accounting Systems ............................................................. 3-1
double-entry Bookkeeping Principles ................................... 4-1
Ledger Accounts ................................................................... 5-1
Credit transactions............................................................... 6-1
trial Balance......................................................................... 7-1
Accruals and Prepayments.................................................... 8-1
depreciation and disposals................................................... 9-1
10
Receivables and Payables ....................................................10-1
11
inventory ............................................................................11-1
12
Books of Prime entry and Control Accounts .........................12-1
13
Control Account Reconciliations...........................................13-1
14
Bank Reconciliations ...........................................................14-1
15
Suspense Accounts ..............................................................15-1
16
incomplete Records.............................................................16-1
17
Regulatory Framework ........................................................17-1
18
Conceptual Framework ........................................................18-1
19
iAS 1 Presentation of Financial Statements .........................19-1
20
Capital Structure and Finance Costs ....................................20-1
21
iAS 2 Inventories ................................................................21-1
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2014 DeVry/Becker Educational Development Corp. All rights reserved.
iii
Contents
Sessions
Page
iAS 18 Revenue ...................................................................22-1
23
iAS 16 Property, Plant and Equipment .................................23-1
24
iAS 38 Intangible Assets .....................................................24-1
25
iAS 37 Provisions, Contingent Liabilities and

Contingent Assets................................................................25-1
26
iAS 10 Events After the Reporting Period ............................26-1
27
iAS 7 Statement of Cash Flows ............................................27-1
28
Consolidated Financial Statements ......................................28-1
29
Further Consolidation Adjustments......................................29-1
30
interpretation of Financial Statements ................................30-1
31
Appendixextended trial Balance .......................................31-1
32
Glossary ..............................................................................32-1
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22
index ..................................................................................33-1
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33
iv
Introduction
ABOut tHiS Study SySteM

This Study System has been specifically written for the Association of Chartered Certified
Accountants' Papers F3 Financial Accounting in the ACCA Qualification, and FFA Foundations
of Financial Accounting of Foundations in Accounting.
It provides comprehensive coverage of the core syllabus areas and is designed to be used
both as a reference text and as an integral part of your studies to provide you with the
knowledge, skill and confidence to succeed in your ACCA Examinations.
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About the author: Phil Bradbury is ATC International's lead tutor in international financial
reporting and has more than 10 years' experience in delivering ACCA Exam-based training.
How to Use This Study System
You should start by reading through the syllabus, study guide and approach to examining
the syllabus provided in this introduction to familiarise yourself with the content of this
paper.
The sessions which follow include the following features:
Focus
These are the learning outcomes relevant to the session,

as published in the ACCA Study Guide.
Session Guidance
Tutor advice and strategies for approaching each session.
A diagram of the concepts and the relationships addressed

in each session.
definitions
Terms are defi ned as they are introduced and larger groupings of terms will
be set forth in a Terminology section.
illustrations
These are to be read as part of the text. Any solutions to numerical

Illustrations are provided.
exhibits
These extracts of external content are presented to reinforce concepts and

should be read as part of the text.
examples
These should be attempted using the pro forma solution provided (where
applicable).
Key Points
Attention is drawn to fundamental rules, underlying concepts and

principles.
exam Advice
These tutor comments relate the content to relevance in the examination.
Commentaries
These provide additional information to reinforce content.
Session Summary
A summary of the main points of each session.
Session Quiz
These quick questions are designed to test your knowledge of the technical
content. A reference to the answer is provided.
Study Question
Bank
A link to recommended practice questions contained in the Study Question

Bank. At a minimum, you should work through the priority questions
after studying each session. For additional practice, you can attempt the
remaining questions (where provided).
example Solutions
Answers to the Examples are presented at the end of each session.
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Visual Overview
Session 1
FOCUS
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Context of Financial
Reporting
This session covers the following content from the ACCA Study Guide.
A. The Context and Purpose of Financial Reporting
1. The scope and purpose of financial statements for external
reporting
a) Define financial reportingrecording, analysing and summarising
financial data.
b) Identify and define types of business entitysole trader, partnership,

limited liability company.
c) Recognise the legal differences between a sole trader, partnership and a

limited liability company.
d) Identify the advantages and disadvantages of operating as a limited

liability company, sole trader or partnership.
e) Understand the nature, principles and scope of financial reporting.
2. Users' and stakeholders' needs
a) Identify the users of financial statements and state and differentiate

between their information needs.
3. The main elements of financial reports
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a) Understand and identify the purpose of each of the main financial

statements.
Session 1 Guidance
Read the first two sections (s.1, s.2), which provide the definitions of terms and discuss the types
of entities.
Note that section 3 introduces you to the financial statements which are dealt with in the
F3/FFA syllabus.
Review section 4 and be able to identify financial statement users, including the information needs of
these users.
F3 Financial Accounting
Becker Professional Education | ACCA Study System
VISUAL OVERVIEW
Objective: To explain the purpose of financial reporting.
ENTITIES
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Sole Trader
Partnership
Limited Liability
Company
FINANCIAL REPORTING
BOOKKEEPING
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Summarise
FINANCIAL STATEMENTS
Meaning
Purpose
Interrelationship
USERS
Types of Users
Information Needs
1-1
Session 1 Context of Financial Reporting
1 Entities
Sole trader
("self-employed")
A person trading on his own. He
controls, manages and owns the

business.
Legally, the person and the
business are one and the same.
All financial risks are taken by
the sole trader and all of the sole
trader's assets are at risk.
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Simple
Partnership
("self-employed")
A business owned and run by two
Incorporated
("company")
A separate legal entity owned
Complex
by shareholders who appoint

directors (managers) to run it.
Is subject to statutory regulation
(e.g. Companies Acts).
1.1 Sole Trader
or more people with a common

view to making a profit.
Profits are usually shared
according to a written agreement.
1.1.1 Obligations to Keep Records
A sole trader needs to keep careful records to:
define personal transactions (e.g. taking goods from inventory

for own use); and
distinguish between and apportion business and private use of
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assets (e.g. if working from home or using own car for work
purposes).
1.1.2 Liabilities
A sole trader is completely liable for any debts or legal

compensation for which the business becomes liable. Without
adequate insurance a sole trader could lose everything.
1.1.3 Advantages
Almost complete control over how the business is run. A sole

trader can make decisions (as long as they are legal) without
interference.
Low administrative costs.
No legal requirements (apart from keeping records for tax
purposes).
1.1.4 Disadvantage
All personal assets are at risk if the business fails. Personal
bankruptcy can occur.
1-2
1.2
Partnership
1.2.1 Obligations
Same as for a sole trader.

1.2.2 Liabilities
Same as for a sole trader.

However, although profits may be shared unequally (by
agreement), liabilities which may arise are shared jointly.*
1.2.3 Advantages
1.2.4 Disadvantages
All personal assets of each partner are at risk if the business

fails. Personal bankruptcy can occur.
Decisions are taken jointly. Although the partnership
agreement may specify different levels of decision-making for
each partner, the decision-making process may be hampered
(e.g. in stalemate situations).
A partnership is a very risky type of business to get involved
in because of the potential for conflict, and the financial effect
which conflict between partners can have on the business.*
1.3
*A partner who owns

1% of the business
will still be responsible
for 100% of the
partnership's liability.
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Often more money can be raised to start the business and

more expertise and skills can be brought in if more than one
person is involved.
No legal requirements other than keeping records for tax
purposes.
The workload can be shared.
Limited Liability Company
*Partnership risk
may be reduced in
jurisdictions which
permit limited liability
partnerships (LLPs).
LLPs may have tax
advantages of a
partnership as well as
limiting liability.
1.3.1 Obligations
A limited liability company is accountable to its shareholders
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and must hold an annual general meeting (AGM). These

meetings must:
receive and approve annual reports (including financial
statements, names of the directors, details about the
shareholders, etc); and
appoint directors and auditors.
Companies are obliged to meet legal filing requirements (e.g.
filing annual reports) so that they are available for public
inspection.
A limited liability company will have at least one director who
will be considered an employee in most jurisdictions.*
*In the UK, a public

limited liability
company must also
have a "company
secretary".
1-3
1.3.2 Liabilities
A limited liability company is liable to tax on all profits.

Both directors and shareholders have limited liability. A
limited liability company is set up with a share capital which

determines the limit of a shareholder's liability.*
1.3.3 Advantage
1.3.4 Disadvantages
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Limited liability can usually protect directors, who act in good

faith, from legal actions brought against them.
Limited liability companies may have easier access to finance
and may attract a wider pool of industry experts.
*Shareholders who
have paid in full for the
shares issued to them
are not liable for any
more debts which the
company may accrue.
This is less risky for
someone putting
capital into a business
who is not then
involved in running it.
There is considerably more administration involved in running

a limited liability company than there is for a partnership or
sole trader.
Even with no other staff, the "owner" or director of the
company is considered to be an employee of the company.
This may have tax disadvantages for the company or the
individual.
A company cannot keep its business affairs private but must,
for example, hold an AGM and file annual reports.
2.1
Financial Reporting
Terminology
Financial reporting: collection, analysis, summarisation and

presentation of the financial performance of a business. It
comprises bookkeeping, accounting and reporting.
Bookkeeping: classification and recording of actual transactions
in monetary terms.
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Accounting: preparation of financial statements showing the

results of transactions and financial position in accordance with
established accounting concepts and principles.
Reporting: presentation of financial statements, along with
the disclosure of transactions and events, in accordance with a
financial reporting framework.
2.2
Bookkeeping
The purpose of bookkeeping is to record every financial

transaction. It can be divided into three types of activities:
1. Collecting and recording business transactions on a daily basis.
2. Collating and summarising recorded transactions on a
monthly basis.
3. Making adjustments at each year end to determine the
financial success or failure of the business.
1-4
Financial Statements
3.1
Meaning
A financial statement is any report summarising the financial

condition or financial results of a business on any date or for
any period.
3.1.1 Components of Financial Statements
Statement of financial position (also called balance
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sheet): a statement of assets and liabilities at a given point

in time.
Statement of comprehensive income: a summary of
transactions and events over a period of time. It includes:
a statement of profit or loss;* and
other comprehensive income (e.g. gains and losses).
Statement of changes in equity: a statement to explain
changes in equity over a period.
Statement of cash flows: a report on cash flow activities
classified between operating, investing and financing activities.
Accounting policies and explanatory notes: these are
usually included because the financial statements are often
too complex to understand without additional details.
*The statement of
profit or loss is widely
referred to as an
income statement or
profit and loss account.
3.1.2 Non-financial Statements
These may be included in a company's annual report alongside

the financial statements:*
Financial review (by management)
Chairman's statement
Directors' report
Employee reports
Five-year financial record
Analysis of commercial properties
Environmental reports
Value-added statements
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*The term "annual report" is generally used to mean the glossy,

colourful brochure published by companies to meet their statutory
obligations to report to shareholders. This usually includes far more
information (both financial and non-financial) than the financial
statements on which an independent auditor reports.
1-5
3.2
Purpose
To provide information about:
Financial position (e.g. solvency) Statement of financial position Bookkeeping is

Financial performance (e.g. profitability) Statement of
most relevant to
these statements
Cash flows Statement of cash flows
comprehensive income
Financial statements also show the results of management's
stewardship (i.e. management's accountability for the
resources entrusted to it).
To meet this objective of stewardship, financial statements
provide information about:*
Assets
Liabilities
Equity
*The financial
statement
terms are
Revenue and expenses
defined in Session 2.
Cash flows
3.3
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Interrelationship
STATEMENT OF
COMPREHENSIVE
INCOME
CHANGES IN
EQUITY
CLOSING
STATEMENT
OF FINANCIAL
POSITION
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OPENING
STATEMENT
OF FINANCIAL
POSITION
1-6
Users of Financial Statements
4.1 Types of Users

Financial statements are used by a diverse group of parties, both
inside and outside a business.
Internal users are owners, managers, employees and other

parties who are directly connected with a business.
External users are potential investors, banks, government
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agencies and other parties who are outside the business and
need financial information about the business for a diverse
number of reasons.
4.2 Information Needs

4.2.1 Internal Users
Users
Providers of capital are concerned

with the risk and return of
their investment. They need
information:
for decision-making (to buy,
hold or sell?); and
to assess the entity's ability to
pay interest or dividends.
Investors (owners) and

their advisers
Information Needs
To plan, make decisions and
control operational activities.

Financial analysis of the financial
statements may form part of a
"management review" (published
in an annual report).
Segmental information (e.g. by
geographical location and/or
products) is often required.
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Management (though
has less need for
published financial
information as major
user of management
accounts)
Employees and their

representatives (e.g.
union representatives)
Stability and profitability of
employers.
to provide
remuneration, retirement
benefits and employment
opportunities.
For collective bargaining of pay
deals, terms and conditions of
work etc.
Ability
1-7
4.2.2 External Users

Users
Information Needs
Prospective investors
Risks and returns (i.e. profitability and future
growth) of making an investment may be

assessed (by a financial analyst) on the basis of
published financial information.
Information used:
Suppliers (may have greater

interest if dependent on an
entity as a major customer)
Information used to determine:
Customers
to decide whether to extend loan facilities (e.g.

to finance expansion); and/or
to determine whether repayments (principal
and interest) will be repaid when due.
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Financial institutions (e.g. banks

and other lending companies)
whether amounts owed will be paid when due;

and/or
what prior claims the providers of finance have
on the entity's assets.
Continuance of supply of goods/services is
important for long-term involvement with, or

dependence on, the entity.
Government entities and their

agencies (e.g. tax authorities)
Allocation of resources and, therefore, activities
General public and media
of entity.
Information used to regulate activities, determine
taxation policies and as the basis for national
income and similar statistics.
Information used to measure the following:
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Environmental groups
1-8
contribution to local economy (e.g. number of

employees and patronage of local suppliers);
and/or
trends and recent developments in prosperity
and range of activities.
How the entity is working to keep the environment

"green" is increasingly reported in annual reports.
Session 1
Summary
A sole trader is self-employed.
A limited liability company is a separate legal entity which is managed by one or more
directors for the benefit of the shareholders.
Financial reporting includes:
A partnership is a business enterprise owned and managed for the mutual benefit of two or
more partners.
recording transactions ("bookkeeping");
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preparation of nancial statements ("accounting"); and

presentation of nancial statements ("reporting").
The main components of financial statements are the statements of:

nancial position (includes asset and liabilities);
comprehensive income (includes income and expenses);
changes in equity (if relevant, for transactions with investors); and

cash ows (i.e. cash in and out of the business).
Users of financial statements are internal (e.g. owners, managers and employees) and
external (e.g. potential investors, banks and customers).
Financial statement users have widely differentiated information needs.
Session 1 Quiz
Estimated time: 10 minutes
1. State THREE types of entities. (1)
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2. Give TWO advantages of operating as a sole trader. (1.1.3)

3. Give THREE disadvantages of operating as a partnership. (1.2.4)
4. Explain how the liability of shareholders of a limited liability company is limited. (1.3)
5. Distinguish between the terms bookkeeping, accounting and reporting. (2.1)

6. Name the FOUR statements which make up a set of financial statements. (3.1.1)
7. List TWO internal and THREE external users of financial information. (4.2)
Study Question Bank

Priority
Q1
Estimated Time
MCQs
Completed
12 minutes
1-9
Session 2
FOCUS
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Financial Statements
This session covers the following content from the ACCA Study Guide.
A. The Context and Purpose of Financial Reporting
3. The main elements of financial reports
b) Define and identify assets, liabilities, equity, revenue and expenses.
D. Recording Transactions and Events

4. Tangible non-current assets
a) Define non-current assets.
b) Recognise the difference between current and non-current assets.
c) Explain the difference between capital and revenue items.

d) Classify expenditure as capital or revenue expenditure.
8. Receivables and payables
l)
Classify items as current or non-current liabilities in the statement of

financial position.
F. Preparing Basic Financial Statements
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2. Statements of profit or loss and other comprehensive income

c) Calculate revenue, cost of sales, gross profit, profit for the year and total
comprehensive income from given information.
f) Understand the interrelationship between the statement of financial
position and statement of profit or loss and other comprehensive income.
Session 2 Guidance
Read this session thoroughly.

Highlight and learn any terms in the financial statements which are new to you.
Work through the Illustrations and Example 1.
Study carefully the pro forma financial statements in sections 1.3 and 2.2. Learning these formats will
help you with your later studies.
VISUAL OVERVIEW
Objective: To present and explain the statement of financial position and statement of
comprehensive income and their interrelationship.
STATEMENT OF
FINANCIAL POSITION
Description
Presentation
Pro Forma
Assets
Liabilities
Capital/Net Assets
STATEMENT OF
COMPREHENSIVE
INCOME
Description
Pro Forma
Trading Account
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"ACCOUNTS"
INTERRELATIONSHIP
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Between These
Statements
Capital Expenditure
v Revenue
Expenditure
2-1
Session 2 Financial Statements
Statement of Financial Position
Statement of financial positiona financial statement which

reports the assets, liabilities and equity of an entity as at a particular
date. Also called a statement of financial condition or balance sheet.*
1.1
Description
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The statement of financial position is a statement, at a

particular date, of the book value or carrying amount (i.e. the
amount which is carried in the books) of all of an entity's:*
assets (resources controlled);

liabilities (obligations owed); and
owners' capital or equity (the difference between assets and
liabilities).
The statement is usually presented in a vertical format and all
items recorded have a monetary value attributed to them.
1.2
Presentation
*There are many

definitions of "financial
position", some of
which refer to net
worth (or net assets).
Net worth is all assets
less all liabilities
as recorded in the
statement of financial
position. This has
nothing to do with the
value of the business.
*The statement of
financial position is
traditionally called a
balance sheet because
its elements must by
definition be equal, or
in balance.
To facilitate meaningful analysis, assets and liabilities are grouped

according to classifications which are generally accepted or legally
required. Comparability is an essential quality which makes
information useful to users.
IAS 1 Presentation of Financial Statements sets out minimum

requirements for all general purpose financial statements
presented in accordance with International Financial Reporting
Standards (IFRSs). IFRS requirements are detailed in Session 19.
1.3
Pro Forma Statement
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The following pro forma statement of financial position is suitable

for a sole trader.*
Points to note:
It is dated at the point in time at which it is stated.

Items are classified in general order of liquidity (i.e.
relative ease of conversion into cash). The accounts can be
organised from most liquid to least liquid or from least liquid
to most liquid (as shown in the following table).
The three main elements are:
assets, classified as current and non-current;
liabilities, classified as current and non-current; and
capital (also called equity).
*At this stage in your studies you should consider that the only real difference between the
financial statements of a sole trader and those of a company relates to capital. A company
is owned by shareholders and its capital is share capital. Whereas a sole trader can make
withdrawals ("drawings") at any time, a company must follow statutory procedures to make
distributions (i.e. pay "dividends") to shareholders. This is detailed in Session 20.
2-2
STATEMENT OF FINANCIAL POSITION AS AT

$
Cost
Depreciation
Intangible assets
Property, plant and equipment
ASSETS
Non-current assets
Trade and other receivables
Prepayments
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Non-current assetsfor
continuing use over more than
one year, not for resale.
Current assetsassets which

will be realised in the near future.
Current assets
Inventories
Comments/Discussion
Cash
Total assets
CAPITAL AND LIABILITIES

Capital and reserves
Capital b/fwd
Profit or (loss)
Drawings
Capitalrepresents the owner's

interest and equals "net
assets" (i.e. total assets total
liabilities) and includes owner's
contributions (e.g. cash) and
retained profit.
x
x
(x)
Capital c/fwd
Non-current liabilities
Long-term borrowings
Current liabilities
Accrued expenses
Operating overdrafts
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Trade and other payables
Total capital and liabilities
1.4
Profit or (loss)per statement

of comprehensive income.
Drawingsamounts (cash and
goods) withdrawn by proprietor
during year.
Non-current liabilities
obligations due for settlement
after more than 12 months.
Current liabilitiesobligations
expected to be settled in near
future.
Assets
Assetan economic resource controlled by an entity which is

expected to have future economic benefits and is the result of a past
financial transaction.
Although ownership generally confers control, an asset does
not have to be owned to be controlled.

A past financial transaction assigns a monetary value to a
resource.
Without a monetary
value, an asset
cannot be recognised
in a statement of
financial position.
2-3
1.4.1 Non-current Assets
Also called fixed assets, non-current assets are:

tangible (i.e. physical objects such as buildings, equipment,
vehicles); or
intangible (i.e. without physical substance, but possessing
rights to monetary values, such as trademarks).
Typically cost will be the monetary purchase price.
With few exceptions, such as land, assets become less
valuable over time. Wearing out of a tangible asset is called
depreciation (called amortisation for an intangible asset).
Non-current assets
are initially recorded
in the accounts at
cost.
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1.4.2 Investments
Usually shares in, or loans to, other entities.

May be classified as non-current (if held on a continuing basis)
or current.
Listed investments are those quoted on a recognised stock
exchange.
1.4.3 Current Assets
These are assets which will convert into

cash in the ordinary course of business.
Therefore, it is expected that they will be
held for less than one year.
They are usually listed in the statement of

financial position in the order in which they
can be turned into cash most easily (i.e.
increasing or decreasing liquidity order).
With respect to conversion into cash:
Cash
Receivables
Inventory
inventory takes the longest time;

receivables are fairly liquid and take less time; and
cash is cash.
1.4.4 Inventory
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The type of inventory held by a business will depend on the type

of business.
Type of Business
Types of Inventory
Retailer
Goods for resale
Manufacturer
Raw materials
Work in progress (WIP) such as halffinished cars on a production line
Finished goods (e.g. cars completed
but not yet distributed to garage
outlets)
Service industry
(e.g. accountancy)
WIP (e.g. labour and overheads for

accounting services not yet billed to
clients).
Inventory should be measured at the lower of:
cost (i.e. its purchase price or manufacturing cost); AND

net realisable value (estimated selling price less any further
costs incurred).
2-4
1.4.5 Receivables
"Receivable" is a general term for persons or entities which owe
the entity money.
For example, a customer which owes money for goods
purchased on credit terms is a trade receivable.

The amount carried in the statement of financial position
is after deducting any amount which is not expected to be
received (e.g. an allowance for "doubtful" debts).
1.4.6 Prepayments
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Prepayments are amounts paid on or before the end of the

reporting period which relate to a period after the reporting
period.
For example, rent paid in advance on 31 December 2013 for

January 2014 is a prepaid rent at 31 December 2013.
1.4.7 Cash
"Cash" refers to cash on hand (includes cheques as well as notes

and coins) and demand deposits with a bank (i.e. money with the
bank which can be obtained "on demand").
Small amounts of cash on hand may be termed "petty" cash.

If a bank account is "overdrawn" (i.e. more money is
withdrawn than is paid in) it is not an asset but a liability (i.e.

the bank account holder must pay more money in).
1.5 Liabilities
A liability is a financial obligation, or the cash outlay which must

be made at a specific time to satisfy the contractual terms of such
an obligation.
Liabilities imply legal responsibilities to other parties.

Liabilities are categorised by time as "current" and "noncurrent" (i.e. short and long term).
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1.5.1 Non-current Liabilities
Entities are frequently financed by credit obtained from
sources other than the owners (e.g. interest-bearing loans).

For example, a five-year loan received in 2012 which is due
to be totally repaid in 2017 will be a non-current liability
in 20122015 statements of financial position. (It will be
reclassified as current in the 2016 statement of financial
position.)
1.5.2 Current Liabilities
Current liabilities are amounts owed by the business falling due

for payment within one year of the end of the reporting period.
For example, amounts due to suppliers for goods purchased

on credit are trade payables.
2-5
1.5.3 Accrued Expenses

Accrued expenses are amounts which have not been invoiced to
the business at the end of the reporting period, but which are
known to be due.
For example, if telephone calls made in December 2013 are
not invoiced until 2014, the cost (or an estimate thereof) will
be accrued at 31 December 2013.
Accruals are the opposite of prepayments.
1.6
Capital/Net Assets
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This is the difference between total assets and total liabilities:

(Non-current assets + current assets) (non-current liabilities + current liabilities)
It amounts to the total investment in a business entity (i.e. a
proprietor's or shareholders' funds or capital) and is sometimes
called net worth.
Statement of Comprehensive Income
2.1
Description
2.1.1 Presentation
All items of income and expense recognised in a period must be

presented either:
in a single statement of comprehensive income; or

in two statements:
1. A statement of profit or loss ("income statement")

2. A statement of other comprehensive income.*
*The statement of
other comprehensive
income begins with
profit or loss for the
period.
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2.1.2 Statement of Profit or Loss
This statement comprises:
a trading account summarising trading transactions
(Revenue Cost of sales = Gross profit); and

an income and expenditure account (also called profit and
loss account) for all other items of income and expenditure
legitimately earned as a result of business activities.
It shows the profit or loss for the period after taking account of all
items of expenditure (including interest and taxation), excluding
components of other comprehensive income.
2-6
Statement of
profit or lossa
financial statement
summarising an
entity's financial
operations for a
specific period of time.
2.1.3 Other Comprehensive Income

Other comprehensive income consists of items of income and
expense which are not recognised in profit or loss.*
2.2
Pro Forma Statement of Comprehensive

Income
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A statement of comprehensive income for a sole trader, which

is not prescribed (e.g. in law), may be set out as follows.
(This is not the same format as for a limited company, which
is prescribed, for example, by Companies Acts and financial
reporting standards.)
*A surplus arising
on revaluation of
a property is not
recognised in profit
or loss because it is
not realised. This
is discussed in later
sessions.
STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED
$
Revenue
Less:
Cost of sales
Opening inventory
Add: Purchases
Less: Closing inventory
$
x
(x)
(x)
x
Cost of salesthe cost of goods

actually sold. The cost of goods
available for sale during the
period (i.e. opening inventory and
purchases) less the cost of goods
not sold (closing inventory).
Other operating income

income other than that derived
from trading activities (e.g.
interest/dividends/rental income).
Gross profit
Revenueincome is derived
from the main trading activities.
Other operating income

Less:
Expenses
Distribution costs
Administrative expenses
Expensescosts incurred
incidental to the direct costs of
goods sold.*
(x)
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Profit (or loss) for the year
Other comprehensive income:

Gains on property revaluation
Total comprehensive income

for the year
*Expenses may be classified "by function" (as shown here) or "by

nature". This is detailed later in Session 19.
2-7
2.3
Trading Account
There are two absolute profit measures, only one of which is

shown in the trading account.
1. Gross profitthis is calculated in the trading account and
is the excess of sales over the cost of goods sold during the
period.
2.3.1 Revenue
*Although the term in

"net profit" is widely
used to mean profit or
loss, it is not a term
used in IFRSs.
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2. Profit or lossthis is calculated in the profit and loss account

and is what remains after all other costs incurred in the period
have been deducted from the gross profit. The statement of
profit or loss is a formal presentation of the trading and profit
and loss accounts.*
Revenue (or turnover) reflects all sales made to customers in the

year, regardless of whether or not they have been paid for.
A sale is usually recognised as taking place when goods are

despatched (or services provided) to a customer.
Sales made to customers on credit which have not been
settled for cash at the end of the reporting period are shown
in the statement of financial position as trade receivables (i.e.
an asset).
2.3.2 Cost of Sales
This is the cost of goods actually sold. It includes all the costs
connected with the purchase and manufacture of goods.

Costs incurred are matched with revenues earned.
2.3.3 Closing Inventory
It is unusual for a business to have sold all its goods at any
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particular date. So in most cases there will be inventory in

hand at the end of a trading period ("closing" inventory).
At the end of the reporting period it will be counted and valued
(normally at cost). Closing inventory is a deduction in the
determination of cost of sales because it is not yet an expense
incurred in earning revenue. It is included as an asset in the
statement of financial position.
2.3.4 Gross Profit
This is the difference between revenue and cost of goods sold.

Gross profit margin, a common measure of a company's
profitability, is calculated as:
Gross Profit
Revenue
2-8
x 100
Illustration 1 Gross Profit

Calculation
Gilda starts a business selling shoes. During the first accounting period she:
(i) buys 100 pairs from a supplier for $30 each; and
(ii) sells 20 pairs for $62 each.
Solution
Gross profit has been realised to the extent which sales have been made
(i.e. on 20 pairs of shoes). This could be calculated as:
$
Less: Cost (20 $30)
Gross profit
1,240
(600)
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Turnover (20 $62)
640
(i.e. 20 [$62 $30])
However, this presentation only gives limited information about trading

performance. The trading account is more informative in showing:
Total purchases (100 $30 = $3,000)
Goods which remain unsold (i.e. inventory 80 $30 = $2,400).

Trading activities are presented as:
Revenue (20 pairs at $62 each)
1,240
Purchases (100 pairs at $30 each)
3,000
Less: Closing inventory (80 pairs at $30 each)
2,4001
600
640
Cost of sales (i.e. cost of goods sold)

Gross profit
1 Although
the cost of goods sold is determined in this way, a company does not present this
calculation in a published statement of profit or loss.
Illustration 2 Period 2 Gross Profit
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Continuing from Illustration 1, during the next accounting period Gilda:

(i) buys 20 pairs of shoes at $30 each; and
(ii) sells 90 pairs at $62 each.
Solution
Part of the current period's revenue will come from opening inventory.
$
Revenue (90 x $62)
Opening inventory (80 pairs, Illustration 1)

Purchases (20 x $30)
Goods available for sale
Less: Closing inventory (10 pairs1 at $30 each)
$
5,580
2,400
600
3,000
(300)
Cost of goods sold (90 pairs at $30)
2,700
Gross profit
2,8802
1 Closing
inventory in units = goods available for sale, but unsold = beginning inventory of
80 + purchases of 20 sales of 90 units = 10 units
2 Check:
90 ($62 30) = $2,880
2-9
Interrelationships
3.1
Statement of Financial Position and

Statement of Comprehensive Income
A statement of financial position may be described as a
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"snapshot" of the company's financial position on a given date.

A statement of comprehensive income unfolds a "movie" of
what has happened over the period.
Adjustments to an item in the statement of comprehensive
income usually have an effect on the statement of financial
position (and vice versa) because the two are interrelated.
Illustration 3 Sale of Goods
When goods are sold, a sale transaction will be booked which

increases revenue (in profit or loss). If the goods are paid for
immediately, there will be an increase in an assetcash. If the
goods are not paid for, the customer will owe the business the cash
creating a receivable (an asset).
3.2
Capital Expenditure v Revenue Expenditure
When items of expenditure are incurred a decision must be made

whether they have an effect on the statement of financial position
("capital expenditure") or profit or loss ("revenue expenditure").
3.2.1 Capital Expenditure
Capital expenditure is incurred in:
Acquiring property and equipment intended for long-term use
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(benefits future accounting periods).

Increasing the revenue-earning capacity of an existing noncurrent asset (by increasing efficiency or useful life).
Items of capital expenditure (except for the cost of land) will
ultimately be expensed to profit or loss (through a charge called
depreciation) as the asset is consumed through its use in the
business.
2-10
3.2.2 Revenue Expenditure

Revenue expenditures, commonly called operating expenditures,
are incurred in the daily running (operation) of the business.
Examples include:
buying or manufacturing goods which are sold and providing
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services;
selling and distributing goods;
administration costs; and
repairing long-term assets.
Revenue expenditures are charged to profit or loss immediately.
Thus, they are matched with the revenues of the accounting
period.
Example 1 Expenditure Classification
Classify the following items of expenditure as capital or revenue:
Solution
(a) $27,000 on a new car.
(b) $1,800 road tax incorporated in the

purchase price of car in (i).
(c) $10,000 on a second-hand delivery van.
(d) $12,000 on refurbishing van in (iii).
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(e) $1,000 monthly rental of a vehicle.
2-11
Summary
Statement of financial position
Elements include assets, liabilities and equity (capital).
It provides information on the resource structure of an entity (i.e. the major classes and
amounts of assets).
Assets are presented to help users assess the liquidity of available resources.
on a continuing basis for use are shown separately from current assets.
Assets held
income).
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It is a static statement prepared "as at" a specied date.

It does not show the value of a business.
Statement of comprehensive income
A single statement or two statements (i.e. prot or loss + other comprehensive
Other comprehensive income includes gains and losses not recognised in prot or loss
(e.g. a revaluation surplus).
Statement of profit or loss

The trading account shows gross prot for the accounting period.
Gross profit is sales (revenue) less cost of goods sold.
Revenue is recognised even though cash may have yet to be received.
Cost of goods sold is calculated as:
Opening inventory
Goods not sold
+ Purchases
Closing inventory
(x)
= Cost of goods sold
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"Prot or loss" is a descriptive term for the bottom line of this statement.
2-12
Session 2
Session 2 Quiz
1. Explain why assets and liabilities are grouped into classification. (1.2)
2. State the THREE main components of a statement of financial position. (1.3)
3. Define asset. (1.4)
4. State the amount at which a non-current asset is initially recorded in the accounts. (1.4.1)
5. Give THREE examples of inventory. (1.4.4)
7. Define liability. (1.5)
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6. True or false? A bank overdraft is an asset for a company. (1.4.7)

8. Explain what is meant by accrued expense. (1.5.3)
9. Distinguish between profit or loss and other comprehensive income. (2.1)

10. State how gross profit is calculated. (2.3.4)
11. Explain the difference between capital expenditure and revenue expenditure. (3.2)
Study Question Bank

Estimated Time
Completed
Priority
Q2
Jan Bartok
15 minutes
Q4
MCQs
25 minutes
Additional
Tomas Maxim
Sa
Q3
2-13
EXAMPLE SOLUTION
Solution 1Expenditure Classification
Capital.
(b)
Revenueroad tax is an annual running cost.
(c)
Capitalthat the asset acquired is second-hand is irrelevant.
(d)
Capitalrefurbish means renovate, which suggests that the

useful life of the existing asset is increased. In this case, the
expenditure may be incurred to bring the asset to use in the
business (certainly capital).
(e)
Revenuea rented asset is not owned.
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(a)
2-14
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NOTES
2-15
Index
B
Accounting ........................................1-4
conventions ....................................4-1
equation .........................................4-4
information .....................................3-2
policies ................................. 1-5, 19-20
records................................... 3-3, 16-2
systems .........................................3-2
Accounts
payable ...................................... 30-14
receivable ................................... 30-13
Accrual accounting............................ 18-5
Accrual basis.......................8-2, 18-5, 19-4
Accrued
expenses ........................................8-7
income ......................................... 8-12
Accumulated depreciation .................. 23-5
Accuracy ...........................................3-2
Acid-test ratio .................................. 30-9
Acquired goodwill ............................. 24-3
Acquisition method ........................... 28-4
Adjusting events .............................. 26-2
Adjustment to profit
statement .................................. 15-8
Advance payments ........................... 10-2
Advisory Council ............................... 17-3
Aged receivable analysis .................... 10-3
Aggregation ..................................... 19-5
Allowance for bad debts .................... 10-5
Amortisation .................................... 24-7
Analysis of financial statements .......... 30-2
Annual report.....................................1-5
Application of IFRS ........................... 17-6
Appreciating assets ........................... 9-13
Assets
cash...............................................2-5
contingent .................................... 25-2
current ......................................... 19-8
definition ...................................... 18-8
derecognition .............................. 23-12
disposals .............................. 9-10, 23-8
generation .................................... 24-4
intangible ..................................... 24-2
non-current ............................. 2-4, 9-2
recognition .................................. 24-3,
register ........................................ 3-11
revaluation ................................... 9-13
tangible ...................................... 19-12
turnover ..................................... 30-11
Associates ..................................... 29-12
Audit committees ............................. 17-8
Average cost (AVCO)......................... 21-5
Average payment period .................. 30-14
Bad debt recovery .......................... 10-13

Bad debts, See Irrecoverable debts
Balance sheet, See Statement of
financial position
Balance sheet equation .......................4-4
Balancing the accounts ........................5-7
Bank reconciliations .......................... 14-2
Bonus issue ..................................... 20-5
Bookkeeping ............................... 1-4, 5-2
Books of account ................................3-3
Books of prime entry......................... 12-2
Business Combinations (IFRS 3)......28-4, 29-2
Business entity concept .......................4-2
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Capital ..............................................2-6
component of equity ........................4-4
cost ........................................... 20-11
expenditure .......................... 2-10, 3-10
return on capital employed.............. 30-7
share ........................................... 20-4
Carrying amount ................................9-3
Cash
asset..............................................2-5
book .................................... 3-7, 12-10
conversion cycle .......................... 30-15
equivalents ................................... 27-4
flows ............................................ 27-5
transactions ....................................3-7
Casting error ................................... 13-4
Changes in equity .................... 19-18, 23-7
Changes in estimated life.....................9-9
Cheques ................................. 12-10, 14-3
Closing inventory................ 2-8, 11-3 , 29-8
Closing the books ............................. 5-12
Collection period ............................ 30-13
Commission .......................................7-4
Comparability ............................ 3-2, 18-7
Comparative information ................... 19-5
Compensating errors...........................7-4
Completeness ............................ 3-2, 18-7
Components
cost ............................................. 21-3
financial statements .........................1-5
Comprehensive income ............. 2-6, 28-16
Computerised systems .................... 12-22
Conceptual Framework for
Financial Reporting (2010) ........... 18-2
Consideration paid ............................ 29-3
Consistency ..................................... 19-6
Session 33 Index
Depreciation
accounting standards ................... 23-10
charges ...................................... 27-11
journal ....................................... 12-15
methods ............................... 9-3, 23-12
Derecognition ................................ 23-12
Development expenditure .................. 24-4
Direct
debits .......................................... 14-3
method ........................................ 27-7
Disclosure ....................................... 19-6
accounting policies ....................... 19-20
cash and cash equivalents
(IAS 7) .................................... 27-11
contingencies (IAS 37) ................... 25-9
dividends .................................... 19-20
events after the reporting
period (IAS 10)........................... 26-3
IAS 1 ......................................... 20-12
intangible assets (IAS 38) ............... 24-9
inventories (IAS 2)....................... 21-10
property, plant and equipment
(IAS 16) .............................. ....23-13
provisions (IAS 37) ........................ 25-9
revenue (IAS 18) ........................... 22-3
Discounts
allowed ..........................................6-3
received .........................................6-4
Dishonoured cheques ........................ 14-3
Disposals................................. 9-10, 23-8
Dividends ............................. 19-14, 20-11
cash flows .................................... 27-6
events after the reporting
period (IAS 10)........................... 26-5
preference shares .......................... 20-6
revenue........................................ 22-5
Double-entry bookkeeping, See Ledger
accounts
Drafting accounts ............................. 5-13
Duality concept ..................................4-3
Due process..................................... 17-4
Date of authorisation ........................ 26-2

Day books ....................................... 12-3
Debit
balance ..........................................5-7
direct ........................................... 14-3
entry (Dr) .......................................5-2
notes .............................................3-8
Debts.............................................. 10-3
Declared dividends ......................... 20-11
Decommissioning ............................. 23-3
Deferred income............................... 8-13
Depreciable amount .................. 9-3, 23-11
Depreciated replacement cost ............ 23-4
Economic resources .......................... 18-4

Efficiency ratios .............................. 30-11
Elements of financial statements ........ 18-8
Employees .........................................1-7
Entities .............................................1-2
Environmental groups .......................1-8
Equity
accounting equation .........................4-4
definition ...................................... 18-9
method ...................................... 29-12
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Consolidated
retained earnings......................... 28-17
statement of comprehensive
income ........................... 28-16, 29-11
statement of financial
position .............................. 28-7, 29-4
Consolidated and Separate
Financial Statements (IFRS 10) ..... 28-2
Constitution ..................................... 17-2
Contingent assets ............................. 25-2
Contingent liabilities ......................... 25-2
Control............................................ 28-3
Control account reconciliations ........... 13-2
Control accounts ..................... 12-19 , 13-2
Conversion cost ................................ 21-3
Corporate governance ....................... 17-7
Correcting errors .............................. 15-6
Cost
constraint ..................................... 18-8
finance ....................................... 20-13
formulae....................................... 21-4
goods sold .............................. 2-7, 11-7
model .......................................... 23-4
property, plant and equipment ......... 23-2
research and development .............. 24-5
structures ..................................... 16-5
Credit
balance ..........................................5-7
entry (Cr) .......................................5-2
facilities........................................ 10-2
limits ........................................... 10-4
notes .............................................3-8
transactions ....................................6-2
Cumulative shares ............................ 20-5
Current
assets .................................... 2-4, 19-8
liabilities ................................. 2-5, 19-9
ratio ............................................ 30-9
Customer
Discounts allowed ............................6-3
order .............................................3-5
33-1
Session 33 Index
G
Gains............................................... 9-13
Gearing ratio.................................. 30-16
General
allowances..................................... 10-7
ledger........................................... 12-2
purpose financial statements............... 17-2
Going concern
IAS 1............................................ 19-4
IAS 10.......................................... 26-4
Goods received...................................3-9
Goodwill
IFRS 3........................................... 28-8
intangible asset.............................. 24-2
Government agencies ..........................1-8
Gross profit.........................2-8, 16-5, 30-5
Group accounts................................. 28-2
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Errors
bank............................................. 14-4
control accounts.................... 12-19, 13-3
correction...................................... 15-4
detection.........................................7-3
supplier statements...................... 10-15
suspense accounts.......................... 15-2
Estimation........................................ 8-10
Events After the Reporting Period
(IAS 10)................................... ..26-2
Exception to consolidation.................. 28-4
Expense
accounts..........................................5-3
accrued.................................... 2-6, 8-7
capital.......................................... 2-10,
definition....................................... 18-9
development.................................. 24-7
documentation.................................3-6
inventory recognition.................... 21-10
prepaid...........................................8-4
revenue......................................... 2-10
Exposure draft.................................. 17-5
Extended trial balance.................. 7-5, 31-1
External users............................. 1-7, 30-2
Harmonisation.................................. 17-6
Hire purchases.................................. 10-2
IAS 1, See Presentation of Financial

Statements
IAS 2, See Inventories
IAS 7, See Statement of Cash Flows
IAS 10, See Events After the
Reporting Period
IAS 16, See Property, Plant and
Equipment
IAS 18, See Revenue
IAS 27, See Separate Financial Statements
IAS 37, See Provisions, Contingent
Liabilities and Contingent Assets
IAS 38, See Intangible Assets
IASB, See International Accounting
Standards Board
IASs, See International Accounting
Standards
IFRS, See International Financial
Reporting Standards
IFRS 3, See Business Combinations
IFRS 10, See Consolidated Financial
Statements
IFRS Advisory Council........................ 17-3
IFRS IC............................................ 17-3
IFRS Foundation................................ 17-2
Immaterial....................................... 17-6
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Fair presentation............................... 19-4

Fair value
adjustments................................... 29-2
definition................................ 22-2, 23-2
Faithful representation....................... 18-6
Finance costs.................................. 20-13
Financial
balance....................................... 30-17
performance.................................. 18-4
position................................... 2-2, 18-4
reporting.........................................1-2
Financial statements.............. 1-5, 2-2, 19-2
See also IAS 1, IAS 7
consolidated................................... 28-2
general purpose...................... 17-2, 18-4
separate........................................ 28-2
Financing activities................... 27-4, 27-12
First-in, first-out (FIFO)...................... 21-4
Fixed asset
register......................................... 9-15
turnover...................................... 30-12
Foreseeable future............................. 19-4
Function of expenditure method........ 19-15
33-2
Session 33 Index
L
Land and buildings............................. 23-4
Leases............................................. 10-2
Ledger accounts..................................5-2
Ledgers............................................ 12-3
Legal claims...................................... 25-4
Liability
accounting equation..........................4-4
accrued expenses.............................2-6
contingent.............................. 25-2, 25-8
current............................................2-5
definition....................................... 18-9
Limited accounting records................. 16-2
Limited liability company.............. 1-3, 20-2
Limited liability partnership (LLP)...........1-3
Line items........................................ 19-9
Liquid ratio....................................... 30-9
List of balances...................................5-9
LLP, See Limited liability partnership
Long-term asset turnover................. 30-12
Loss
impairment.................................... 23-2
statement of comprehensive
income.........................................2-8
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Impairment loss................................ 23-2

Impracticability................................. 19-6
Imprest system............................... 12-13
Income
accounts..........................................5-3
accrued......................................... 8-12
deferred........................................ 8-13
definition....................................... 18-8
Income statement...............................2-6
See also Comprehensive income
Income tax..................................... 19-16
Incomplete records............................ 16-2
Indirect method................................ 27-7
Information needs...............................1-7
Initial measurement........................... 23-3
Intangible Assets (IAS 38).................. 24-2
Intercompany trading........................ 29-4
Interest
income.......................................... 22-2
payable......................................... 10-2
receivable...................................... 10-2
Internal control........................... 3-3, 13-3
Internally generated goodwill.............. 24-3
International Accounting Standards
(IASs)........................................ 17-4
International Accounting Standards
Board (IASB)....................... 17-3, 18-2
International Financial Reporting
Standards (IFRSs).................. 2-2, 17-2
Interpretation
financial statements...................... ..30-2
IFRS............................................. 17-6
Interpretations Committee.................. 17-3
Intra-group sales............................... 28-6
Inventories (IAS 2)............................ 21-2
Inventory................................... 3-9, 11-2
records.......................................... 11-2
turnover...................................... 30-12
Investing activities............................ 27-4
Investments in associates................. 29-12
Irrecoverable debts............................ 10-4
Irredeemable shares.......................... 20-5
Issue of shares................................. 20-7
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Journal
book of prime entry...................... 12-15
entries.......................................... 16-4
Management.......................................1-7
Manual accounting system................ 12-21
Market value .................................... 20-5
Mark-up......................................... 16-11
Matching concept........................ 8-2, 19-4
Materiality................................. 18-6, 19-5
Measurement
inventory (IAS 2)..................... 11-2, 21-4
property, plant and equipment.......... 23-3
revenue......................................... 22-2
subsequent.................................... 23-4
Memorandum ledgers......................... 13-3
Mid-year acquisitions....................... 29-10
N
Nature of expenditure method........... 19-14
Net
assets..................................... 2-6, 16-2
profit...................................... 2-8, 30-6
realisable value (NRV)..................... 21-2
Neutrality......................................... 18-7
Nominal value................................... 20-5
Non-adjusting events......................... 26-2
Non-controlling interest.................... 28-13
Non-cumulative shares....................... 20-5
33-3
Session 33 Index
Non-current assets....................... 2-4, 9-2

Non-current liabilities...........................2-5
Non-financial statements......................1-5
Non-imprest system........................ 12-14
Notes to the financial statements....... 19-19
NRV, See Net realisable value
Prudence........................................ 18-10
Purchase cost................................... 21-3
Purchased goodwill............................ 24-3
Purchases.................................... 3-6, 6-2
day book................................. 3-6, 12-8
returns............................................6-5
Purpose financial statements............... 18-3

Objectivity........................................ 19-2
Offsetting......................................... 19-5
Omission.................................... 7-4, 13-4
Opening
inventory................................ 11-6, 29-8
trial balance.....................................7-5
Operating activities............................ 27-4
Orders...............................................3-5
Ordinary shares................................ 20-4
Organisational objectives......................3-2
Original entry......................................7-4
Other comprehensive income................2-7
Outstanding lodgements..................... 14-3
Overtrading.................................... 30-17
Qualitative characteristics................... 18-5

Quick ratio........................................ 30-9
Quotation...........................................3-5
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Paid-up shares.................................. 20-5

Part exchange................................... 9-11
Partnership.........................................1-3
Par value.......................................... 20-5
Payables.......................... 10-2, 10-14, 13-8
Percentage completion method............ 22-5
Period-end adjustments........................7-5
Petty cash book............................... 12-13
Position ratios................................. 30-16
Post-acquisition reserves........... 28-5, 28-11
Preference shares.............................. 20-4
Prepayments......................................8-4
Presentation of Financial
Statements (IAS 1)...................... 19-2
Prime entry
books............................................ 12-2
error...............................................7-4
Profit
accounting equation..........................4-4
gross..............................................2-8
net.................................................2-8
statement...................................... 15-8
unrealised...................................... 29-5
Profit or loss.......................................2-8
Profitability ratios.............................. 30-4
Prompt payment discounts,
See Settlement discounts
Property, Plant and Equipment
(IAS 16)................................... 23-2
Prospective investors...........................1-8
Provisions, Contingent Liabilities and
Contingent Assets (IAS 37)......... ..25-2
Ratio analysis................................... 30-2

R&D, See Research and development
Receipts......................................... 12-10
Receivables.........................2-5, 10-3, 13-5
Receivables ledger, See Sales ledger
Recognition...................................... 18-9
intangible asset.............................. 24-3
inventory expense........................ 21-10
property, plant and equipment.......... 23-3
provisions...................................... 25-3
revaluation gains............................ 9-13
Reconciliation
bank............................................. 14-1
control account............................... 13-2
supplier statements...................... 10-15
Records, See Accounting records
Recoverable amount.......................... 23-2
Redeemable shares............................ 20-5
Reducing balance method ....................9-6
Regulatory framework........................ 17-2
Relevance................................... 3-2, 18-6
Reliability................................... 3-2, 18-6
Remittance advice...............................3-8
Rendering services............................ 22-5
Repairs and maintenance.................... 23-4
Reporting entities.............................. 18-3
Reporting period, See Events After
the Reporting Period (IAS 10)
Research and development (R&D)........ 24-4
Reserves........................................ 20-10
Residual value.................. 23-2, 23-11, 24-8
Responsibility.................................... 19-2
Restatement..................................... 19-5
Retail method .................................. 21-3
Retained earnings............................ 20-11
consolidated................................. 28-17
equity.............................................4-4
transfer......................................... 23-7
Return on capital employed (ROCE)..... 30-7
Return on equity (ROE)...................... 30-8
Returns, See Sales returns
33-4
Session 33 Index
Revaluation........................ 2-7, 9-13, 23-4

model........................................... 23-4
reserve....................................... 28-13
surplus........................................ 20-10
Revenue (IAS 18).............................. 22-2
Revenue expenditure......................... 2-11
Rights issue............................... 20-5, 20-8
ROCE, See Return on capital employed
ROE, See Return on equity
Royalties.......................................... 22-2
T
T accounts..........................................5-5
Tangible non-current assets................ 3-10
Taxation
income........................................ 19-16
liabilities........................................ 10-2
sales........................................... 12-18
Timeliness.................................. 3-2, 18-8
Timing differences........................... 10-15
Trade accounts receivable............ 10-2, 12-6
Trade discounts...................................6-3
Trade-in allowance............................. 9-11
Trade
payables............................... 10-14, 13-8
receivables.................................... 13-5
Trading account...................................2-8
Transfer to retained earnings.............. 23-7
Transposition errors..................... 7-4, 13-4
Trial balance................................ 5-9, 7-2
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Sales
credit............................................. 6-2
day book....................................... 12-4
documentation.................................3-4
ledger........................................... 12-6
orders.............................................3-5
returns............................................6-5
revenue......................................... 22-2
tax............................................. 12-18
Scrip issue................................. 20-5, 20-8
Separate Financial
Statements (IAS 27).................... 28-2
Services........................................... 22-2
Settlement
contra-entry................................... 10-4
discounts.........................................6-3
Share
capital........................................... 20-4
premium............................ 20-10, 28-13
Shareholders
interests...................................... 19-13
liability............................................1-4
Short-term liquidity ratios................... 30-8
SIC, See Standards Interpretations
Committee
Significant influence......................... 29-12
SOCIE, See Statement of changes in equity
Sole trader.................................. 1-2, 2-2
Sources of finance............................. 20-3
Specific allowances............................ 10-7
Standard cost method........................ 21-3
Standards Interpretations Committee
(SIC).......................................... 17-4
Standing orders................................ 14-3
Statement of Cash Flows (IAS 7)......... 27-2
Statement of changes in equity
(SOCIE).............................. 1-5, 19-18
Statement of comprehensive
income......................... 1-5, 2-6, 19-13
Statement of financial
position.......................... 1-5, 2-2, 19-8
Stock-checking.................................. 11-2
Straight-line method.................... 9-3, 9-14
Striking a balance................................5-7
Sub-ledgers...................................... 13-3
Subsequent costs.............................. 23-4

Subsidiaries....................... 10-2, 28-2, 29-2
Substance over form.......................... 18-9
Suppliers............................................1-8
discounts received............................6-4
statements.................................. 10-15
Suspense accounts............................ 15-5
Uncertainty....................................... 25-8
Uncleared deposits............................ 14-3
Underlying assumption....................... 18-5
Understandability.............................. 18-5
Unpresented cheques......................... 14-3
Unrealised profit................................ 29-5
Useful life........................... 9-3, 9-9, 23-10
User-friendliness.................................3-2
Users of financial statements........ 1-7, 30-2
V
Valuation, See Measurement
Value added tax (VAT)...................... 12-18
Verifiability........................................18-9
Voting rights..................................... 20-6
Vouchers........................................ 12-13
W
Warranty provision............................ 25-5
Weighted average formula.................. 21-4
Winding up....................................... 20-4
Window dressing............................. 30-10
Working capital cycle....................... 30-15
Write-backs...................................... 10-8
Write-off debt................................... 10-4
33-5
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This ACCA Study System has been reviewed by ACCA's examining team and includes:
An introductory session containing the Syllabus and Study Guide and approach to examining the
syllabus to familiarise you with the content of this paper
t
Comprehensive coverage of the entire syllabus
t
Focus on learning outcomes
t
Visual overviews
t
Denitions of terms
t
Illustrations and exhibits
t
Examples with solutions
Sa
m
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Key points
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Exam advice
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Commentaries
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Session summaries
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End-of-session quizzes
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A bank of questions
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For Examinations to August 2015

Paper F3 | FINANCIAL ACCOUNTING

ATC International became a part of Becker

Becker Professional Education's ACCA Study Materials

FINANCIAL ACCOUNTING F3/FFA

For Examinations to August 2015

make copies of the Materials;

Exclusion of Damages: UNDER NO CIRCUMSTANCES AND UNDER NO LEGAL THEORY, TORT,

ACCA Study Guide ..................................................................................... xii

examination technique ........................................................................... xix

Context of Financial Reporting .............................................. 1-1

Financial Statements ............................................................ 2-1

Accounting Systems ............................................................. 3-1

double-entry Bookkeeping Principles ................................... 4-1

Ledger Accounts ................................................................... 5-1

Credit transactions............................................................... 6-1

trial Balance......................................................................... 7-1

Accruals and Prepayments.................................................... 8-1

depreciation and disposals................................................... 9-1

Receivables and Payables ....................................................10-1

Books of Prime entry and Control Accounts .........................12-1

Control Account Reconciliations...........................................13-1

Bank Reconciliations ...........................................................14-1

Suspense Accounts ..............................................................15-1

Regulatory Framework ........................................................17-1

Conceptual Framework ........................................................18-1

iAS 1 Presentation of Financial Statements .........................19-1

Capital Structure and Finance Costs ....................................20-1

iAS 2 Inventories ................................................................21-1

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iAS 16 Property, Plant and Equipment .................................23-1

iAS 38 Intangible Assets .....................................................24-1

iAS 37 Provisions, Contingent Liabilities and

iAS 10 Events After the Reporting Period ............................26-1

iAS 7 Statement of Cash Flows ............................................27-1

Consolidated Financial Statements ......................................28-1

Further Consolidation Adjustments......................................29-1

interpretation of Financial Statements ................................30-1

Appendixextended trial Balance .......................................31-1

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ABOut tHiS Study SySteM

How to Use This Study System

These are the learning outcomes relevant to the session,

Tutor advice and strategies for approaching each session.

A diagram of the concepts and the relationships addressed

These are to be read as part of the text. Any solutions to numerical

These extracts of external content are presented to reinforce concepts and

Attention is drawn to fundamental rules, underlying concepts and

These tutor comments relate the content to relevance in the examination.

These provide additional information to reinforce content.

A summary of the main points of each session.

A link to recommended practice questions contained in the Study Question

Answers to the Examples are presented at the end of each session.

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b) Identify and define types of business entitysole trader, partnership,

c) Recognise the legal differences between a sole trader, partnership and a

d) Identify the advantages and disadvantages of operating as a limited

a) Identify the users of financial statements and state and differentiate

a) Understand and identify the purpose of each of the main financial

Becker Professional Education | ACCA Study System

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