Presentation Transcript

1. FIA FFA/ACCA F3

   Financial Accounting For exams from February 2014
2. Key to icons
3. Syllabus A The context and purpose of financial reporting B The qualitative characteristics of financial information C The use of double entry and accounting systems D Recording transactions and events E Preparing a trial balance F Preparing basic financial statements G Preparing simple consolidated financial statements H Interpretation of financial statements
4. Exam format Exam format 35 questions for 2 marks each 70 2 questions for 15 marks each 30 Total 100 Two hour exam – all questions are compulsory.
5. Tackling multiple choice questions 1 The MCQs in your exam contain four possible answers, you have to choose the option that best answers the question. The three incorrect options are called distractors, these are included to test your understanding of the syllabus. The following slides detail how best to avoid the common pitfalls that most students fall into.
6. Tackling multiple choice questions 2 Steps to follow when attempting MCQs: Step 1: Skim read all MCQs and identify what appear to be the easier questions. Step 2: Attempt each question: Start with the easier questions Read the question thoroughly Try to work out the answer before looking at the options OR you may prefer to look at the options at the beginning
7. Tackling multiple choice questions 3 Step 3: Read the four options and see if one matches your own answer. Be careful with numerical questions as the distractors are designed to match answers that incorporate common errors. Check your calculation is correct. Have you followed the requirement exactly? Have you included every stage calculation?
8. Tackling multiple choice questions 4 Step 4: What to do if your answer does not match the options? Re-read the question to ensure that you understand it and are answering the requirement Eliminate any obviously wrong answers Consider which of the remaining answers is the most likely to be correct and select the option
9. Tackling multiple choice questions 5 Step 5: If you are still unsure make a note and continue to the next question Step 6: Revisit unanswered questions. When you come back to a question after a break you often find you are able to answer it correctly straight away. If you are still unsure have a guess. You are not penalised for incorrect answers, so never leave a question unanswered!
10. Tackling multiple choice questions 6 After extensive question practice and revision of MCQs you may find that you recognise a question when you sit the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar read the requirement and options carefully – do not assume that it is identical.
11. Chapter 8Inventory Cost of goods sold Accounting for opening and closing inventories Counting inventories Valuing inventories IAS 2
12. Syllabus learning outcomes 1 Recognise the need for adjustments for inventory in preparing financial statements. Record opening and closing inventory.
13. Syllabus learning outcomes 2 Identify the alternative methods of valuing inventory. Understand and apply the IASB requirements for valuing inventories. Recognise which costs should be included in valuing inventories.
14. Syllabus learning outcomes 3 Calculate the value of closing inventory using 'first in, first out' and 'average cost'. Understand the use of continuous and period end inventory records.
15. Syllabus learning outcomes 4 Understand the impact of accounting concepts on the valuation of inventory. Identify the impact of inventory valuation methods on profit and on assets.
16. Overview Accounting adjustments Inventory Valuation Effects on profit Cost Net realisable value Methods of estimating cost FIFO AVCO
17. Cost of goods sold 1 Formula for the cost of goods sold $ Opening inventory value X Add: purchases (or production costs) X X Less: closing inventory value (X) Cost of goods sold X
18. Cost of goods sold 2 Carriage inwards Cost paid by purchaser of having goods transported to his business Added to cost of purchases
19. Cost of goods sold 3 Carriage outwards Cost to the seller, paid by the seller, of having goods transported to customer Is a selling and distribution expense
20. Accounting for opening and closing inventories 1 Entries during the year During the year, purchases are recorded by the following entry. DEBIT Purchases $ amount bought CREDIT Cash or payables $ amount bought The inventory account is not touched at all.
21. Accounting for opening and closing inventories 2 Entries at year-end The first thing to do is to transfer the purchases account balance to the statement of profit or loss: DEBIT Statement of profit or loss $ total purchases CREDIT Purchases $ total purchases
22. Accounting for opening and closing inventories 3 The balance on the inventory account is still the opening inventory balance. This must also be transferred to the statement of profit or loss: DEBIT Statement of profit or loss $ opening inventory CREDIT Inventory $ opening inventory
23. Accounting for opening and closing inventories 4 The exact reverse entry is made for the closing inventory (which will be next year’s opening inventory): DEBIT Inventory $ closing inventory CREDIT Statement of profit or loss $ closing inventory
24. Counting inventories 1 Counting inventories In order to make the entry for the closing inventory, we need to know what is held at the year-end. We find this out not from the accounting records, but by going into the warehouse and actually counting the boxes on the shelves.
25. Counting inventories 2 Some businesses keep detailed records of inventory coming in and going out, so as not to have to count everything on the last day of the year. These records are not part of the double entry system.
26. Valuing inventories 1 Valuation Inventories must be valued at the lower of: Cost Net realisable value (NRV)
27. Valuing inventories 2 Cost Can use per IAS 2: FIFO (First In Last Out) Average cost LIFO (Last In First Out) is not permitted
28. Valuing inventories 3 NRV Expected selling price X Less: costs to get items ready for sale (X) selling costs (X) X
29. Valuing inventories 4 Inventory forms a major part of the assets of some companies. So the value placed on the inventory can make a big difference to the profit or loss reported.
30. Valuing inventories in China In the 3rd quarter of 2012, the Youngor Group Co had inventory valued at CNY 24 billion.
31. IAS 2 IAS 2 Inventories should be measured at the lower of cost and net realisable value – the comparison between the two should ideally be made separately for each item Cost is the cost incurred in the normal course of business in bringing the product to its present location and condition, including production overheads and costs of conversion
32. IAS 2 (cont’d) IAS 2 Inventory can include raw materials, work in progress, finished goods, goods purchased for resale FIFO and average cost are allowed LIFO is not allowed
33. IAS 2 (cont’d) Inventories are assets: Held for sale in the ordinary course of business In the process of production for such sale; or In the form of materials or supplies to be consumed in the production process or in the rendering of services
34. IAS 2 (cont’d) Net realisable value is the estimated selling price: In the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale
35. Tackling the exam Understanding IAS 2 is a very important and you will be expected to apply it in the exam.
36. Lecture example 1 According to IAS 2: Inventories, which of the following should not be included in determining the cost of the inventories of an entity? (1) Labour costs (2) Transport costs to deliver goods to customers (3) Administrative overheads (4) Depreciation on factory machine
37. Lecture example 1 (cont’d) A All four items B 1 only C 2 and 3 only D 2, 3, and 4 only
38. Answer to lecture example 1 C Transport costs to deliver goods to customers are an example of carriage outwards and should not be included. Administrative overheads do not relate to production and cannot therefore be included. The depreciation of the factory machine is a production overhead and should be included.
39. Lecture example 2 Jessie is trying to value her inventory. She has the following information available: $ Selling price 35 Costs incurred to date 20 Cost of work to complete item 12 Selling costs per item 1 Required What is the net realisable value of Jessie's inventory?
40. Answer to lecture example 2
41. Lecture example 3 On 1 January 20X7 a company held 200 units of finished goods valued at $10 each. During January the following transactions took place:
42. Lecture example 3 (cont’d) Sales during January were as follows:
43. Lecture example 3 (cont’d) Required Determine the valuation of closing inventories and cost of sales using: (a) FIFO (b) Weighted average cost
44. Answer to lecture example 3 $4,285
45. Answer to lecture example 3 (cont’d)
46. Answer to lecture example 3 (cont’d)
47. Answer to lecture example 3 (cont’d) (W1) $5,255/500 = $10.51 (W2) $6,337/570 = $11.12 (W3) $5,139/420 = $12.24
48. Chapter summary 1 1 Introduction Inventories can be a significant figure in an entity’s accounts and will impact both the profit figure and the net asset position. It is important therefore that it is recorded correctly.
49. Chapter summary 2 2 Accounting adjustment As seen in chapter 6 the statement of profit or loss matches the sales revenue earned in a period with the cost of sales incurred to generate that revenue. There are therefore two inventory adjustments: the opening inventory adjustment and the closing inventory adjustment.
50. Chapter summary 3 3 Valuation Inventories should be valued at the lower of cost and net realisable value.
51. Chapter summary 4 4Cost The cost of inventory includes the cost of purchase, costs of conversion and any other costs necessary to bring the inventory to its present location and condition.
52. Chapter summary 5 5Net realisable value (NRV) Net realisable value is the estimated selling price less the costs to completion and any selling and distribution costs.
53. Chapter summary 6 6 Theoretical methods of estimating cost Methods available to estimate the cost of inventories are first in, first out (FIFO) and average cost. Under FIFO the inventories held at the year end are the most recent purchases but under average cost the cost of all inventories purchased during the year is weighted to produce an average figure.
54. Chapter summary 7 7Valuation effects on profit In times of rising prices, using FIFO will mean the financial statements show higher inventory values and higher profits.
55. Chapter 9Tangible non current assets Capital and revenue expenditure IAS 16 Depreciation Non-current asset disposals Revaluations Disclosure
56. Syllabus learning outcomes 1 Define non-current assets and recognise the difference between current and non-current assets. Explain the difference between capital and revenue items and classify expenditure accordingly.
57. Syllabus learning outcomes 2 Prepare ledger entries to record the acquisition, disposal, depreciation and accumulated depreciation of noncurrent assets. Calculate and record profits or losses on disposal of non-current assets in the statement of profit or loss.
58. Syllabus learning outcomes 3 Record the revaluation of a non-current asset and calculate its subsequent depreciation and profit or loss on disposal.
59. Syllabus learning outcomes 4 Illustrate how non-current asset balances and movements are disclosed in company financial statements.
60. Syllabus learning outcomes 5 Explain the purpose and function of an asset register.
61. Syllabus learning outcomes 6 Understand and explain the purpose of depreciation. Calculate the charge for depreciation using the straight line and reducing methods, identifying when each is appropriate. Calculate the adjustments to depreciation necessary if changes are made in the estimated useful life and/or residual value of a non-current asset. Record depreciation in the statement of profit or loss and statement of financial position.
62. Overview Capital versus revenue expenditure Cost Tangible non-current assets Revaluations Depreciation Disposals Straight line method Reducing balance method
63. Capital and revenue expenditure 1 What is capital expenditure? Capital expenditure results in the acquisition of non-current assets, or an increase in their earning capacity.
64. Capital and revenue expenditure 2 What is revenue expenditure? Revenue expenditure is incurred for the purpose of trade or to maintain the existing earning capacity of the non-current assets.
65. Tackling the exam It is highly likely that some questions in your exam will focus on the distinction between capital and revenue expenditure.
66. IAS 16 IAS 16 Initial measurement – at cost Components of cost — Purchase price (incl import duties, excl trade discount, recoverable sales tax) — Initial estimate of dismantling and restoration costs — Directly attributable costs, eg site preparation, delivery and handling costs installation, assembly costs, testing and professional fees
67. Tackling the exam Exam focus point: Only staff costs arising directly from the construction or acquisition of the asset can be capitalised as part of the cost of the asset. The costs of training staff to use a new asset cannot be capitalised because it is not probable that economic benefits will be generated from training the staff as we can’t guarantee that those staff will stay and use the asset. The costs of training staff should be expensed. Watch out for this in your exam!
68. IAS 16 (cont’d) Subsequent expenditure — added to carrying amount if improves condition beyond previous performance Repairs and maintenance costs are expensed.
69. Specimen exam question
70. Specimen exam answer
71. Depreciation 1 Depreciation – accruals concept Is a process of spreading the original cost of a non-current asset over the accounting periods in which its benefit will be felt
72. Depreciation 2 Two methods Straight line dep’n = Reducing balance dep’n = cost × RB%
73. Depreciation 3 The double entry for depreciation is as follows: DEBIT Depreciation expense (SPL) CREDIT Accumulated depreciation (SOFP)
74. Depreciation 4 Change in expected life If after a period of an asset’s life it is realised that the original useful life has been changed, then the depreciation charge needs to be adjusted. The revised charge from that date becomes: CV at revised date Remaining useful life
75. Tackling the exam Exam focus point: If an exam question gives you the purchase date of a non-current asset which is part way through an accounting period, you should generally assume that depreciation should be calculated in this way as a ‘part year’ amount, unless the question states otherwise.
76. Non-current asset disposals 1 Disposal On disposal of an asset a profit or loss will arise depending on whether disposal proceeds are greater or less than the carrying value of the asset. If proceeds > CV = profit If proceeds < CV = loss
77. Non-current asset disposals 2 Double entry for a disposal Eliminate cost DEBIT Disposals CREDIT Non-current assets Eliminate accumulated depreciation DEBIT Provision for depreciation CREDIT Disposals
78. Non-current asset disposals 3 Account for sales proceeds DEBIT Cash CREDIT Disposals or if part exchange deal DEBIT Non-current assets CREDIT Disposals with part exchange value Transfer balance on disposals account to the statement of profit or loss
79. Revaluations 1 IAS 16 allows a choice between Keeping asset at cost Revaluing to fair value Fair value may give fairer view on business.
80. Revaluations 2 Accounting for a revaluation A revaluation is recorded as follows: DEBIT Non-current asset (revalued amount less original cost) DEBIT Accumulated depreciation (total depreciation to date) CREDIT Revaluation surplus (revalued amount less carrying value)
81. Disclosure Disclosure With regard to disclosure, a proforma non-current asset note is shown here.
82. Tackling the exam 1 Exam focus point: There was a question on revaluations in the December 2012 exam. This asked for the depreciation charge and balance on the revaluation reserve at the end of the financial year, following a revaluation at the beginning of the year. The examiner commented that this was one of the questions with the lowest pass rates that session. Students correctly calculated the balance on the revaluation reserve but failed to identify the correct depreciation charge for the year.
83. Tackling the exam 2 As the revaluation took place at the beginning of the year, a whole year’s depreciation had to be calculated using the revalued amount over the remaining useful economic life. The remaining useful life needed to be calculated by working out the original depreciation charge and comparing this to the accumulated depreciation brought forward to find out how long the asset had been held. Students who answered the question wrongly had used the original useful economic life rather than the remaining useful economic life figure.
84. Lecture example 1 Required What examples of tangible non-current assets can you identify?
85. Answer to lecture example 1 Examples include: (a) Land and buildings (b) Plant and equipment (c) Motor vehicles (d) Furniture and fittings, computers
86. Lecture example 2 On 10 December 20X7 an entity bought a machine. The breakdown on the invoice showed: $ Cost of machine 20,000 Delivery costs 200 One-year maintenance contract 900 21,100 Further installation costs of $500 were also incurred.
87. Lecture example 2 (cont’d) Required At what amount should the machine be capitalised in the entity's records? A $20,000 B $20,700 C $20,200 D $21,600
88. Answer to lecture example 2 B The cost capitalised should include the purchase price ($20,000) plus all directly attributable costs (delivery and installation). The cost of the maintenance contract should be shown as an expense in the statement of profit or loss.
89. Lecture example 3 A business buys a machine for $2,500. It is expected to have a useful life of three years after which time it will have a scrap value of $250. Required (a) Calculate the annual depreciation charge. (b) Calculate the cost, accumulated depreciation and net book value (NBV) for each year of the asset's life. Note: NBV = cost – accumulated depreciation to date.
90. 2,500 ─250 = $750 per annum 3 years Answer to lecture example 3 Straight line method: Depreciation charge=
91. Answer to lecture example 3 (cont’d)
92. Graphical representation NBV $ 2,500 250 Year 0 3 Answer to lecture example 3 (cont’d)
93. Lecture example 4 A business buys a machine costing $6,000. The depreciation rate is 40% on a reducing balance basis. Required Calculate depreciation expense, accumulated depreciation and net book value of the asset for the first three years.
94. Answer to lecture example 4
95. NBV $ 6,000 3,600 2,160 1,296 Year 1 2 3 4 5 Answer to lecture example 4 (cont’d) Graphical representation
96. Lecture example 5 Required Using the information in Lecture example 3, show: (a) The journal entry which would have been written at the end of the first year. (b) The treatment of depreciation for all years in the relevant ledger accounts. (c) The relevant statement of profit or loss and statement of financial position extracts for each year.
97. Answer to lecture example 5 (a) Journal entry Debit Credit $ $ Depreciation expense 750 Accumulated depreciation 750 Being annual depreciation charged on machine
98. Answer to lecture example 5 (cont’d) Accounting for depreciation:
99. Answer to lecture example 5 (cont’d)
100. Answer to lecture example 5 (cont’d)
101. Answer to lecture example 5 (cont’d) Statement of profit or loss (extracts): Year 1 Year 2 Year 3 $ $ $ Expenses Depreciation 750 750 750 Statement of financial position (extracts): Cost Accumulated Net Book Depreciation Value $ $ $ (Year 1) Machine 2,500 (750) 1,750 (Year 2) Machine 2,500 (1,500) 1,000 (Year 3) Machine 2,500 (2,250) 250
102. Lecture example 6 The machine costing $6,000 in Lecture example 4 is sold in year 3 for $3,000. No depreciation is charged in the year of disposal. Required (a) Calculate the profit or loss on disposal of the machine. (b) Complete the ledger accounts to show how the disposal would be accounted for.
103. Answer to lecture example 6 (a) $ Sales proceeds 3,000 NBV at end of year 2 (2,160) 840
104. Answer to lecture example 6 (cont’d) (b)
105. Answer to lecture example 6 (cont’d)
106. Lecture example 7 Assume in Lecture example 6 that instead of cash proceeds of $3,000, there is a part exchange allowance of $3,000 on a replacement machine costing $10,000. Required (a) Calculate the profit or loss on disposal of the machine. (b) Calculate the amount of cash paid for the new machine. (c) Complete the ledger accounts to show both the disposal and the acquisition.
107. Answer to lecture example 7 The profit on disposal is still $840, the only difference is that the proceeds were not received in cash, but in the form of a part exchange allowance. Cash paid for the new machine is $7,000 ($10,000 – $3,000)
108. Answer to lecture example 7 (cont’d)
109. Answer to lecture example 7 (cont’d)
110. Answer to lecture example 7 (cont’d)
111. Lecture example 8 A building costing $100,000 on which depreciation of $20,000 has been charged is to be revalued to $150,000. Required (a) Show the double entry to record the revaluation and make the postings to the ledger accounts. (b) What would be the depreciation charge for the year if the building has a remaining useful life of 40 years?
112. Answer to lecture example 8 (a) The double entry is $ $ Dr Non-current asset – building (150 – 100) 50,000 Dr Accumulated depreciation – building 20,000 Cr Revaluation reserve (β) 70,000
113. Answer to lecture example 8 (cont’d)
114. Answer to lecture example 8 (cont’d)
115. Answer to lecture example 8 (cont’d) (b) Depreciation charge is $150,000 / 40 years = $3,750
116. Lecture example 9 1.1.X1 Asset cost $40,000 Estimated useful life five years No residual value 1.1.X3 Total useful life revised to four years. Required Calculate the depreciation charge, accumulated depreciation and NBV for each year of the asset's life (year end 31 December).
117. Answer to lecture example 9
118. Lecture example 10 1.1.X1 Asset cost $40,000 Residual value $1,500 Useful life five years Depreciation: 25% reducing balance 1.1.X3 Change depreciation method to straight line Required Calculate the depreciation charge, accumulated depreciation and NBV for each year of the asset’s life (year ended 31 December).
119. Answer to lecture example 10
120. Chapter summary 1 1 Introduction Expenditure on non-current assets is often significant and it is important therefore that it is accounted for appropriately.
121. Chapter summary 2 2 Non-current assets Capital expenditure results in a non-current asset being shown on the statement of financial position. Revenue expenditure, such as repairs and maintenance, is shown as an expense in the statement of profit or loss. Tangible non-current assets should initially be recorded at cost. This includes the purchase price of the item plus any directly attributable costs to bring the item to its intended location and ready to use.
122. Chapter summary 3 3 Depreciation Depreciation is an expense charged in relation to the asset each year to reflect the using up of the asset. Land usually has an unlimited useful life and so is not depreciated.
123. Chapter summary 4 4Methods of depreciation Depreciation is usually calculated on a straight line or reducing balance basis.
124. Chapter summary 5 5Straight line method This method is suitable for assets which are used up evenly during their life time. The depreciation expense is the same each year.
125. Chapter summary 6 6 Reducing balance method This method is suitable for assets which generate more revenue in the earlier years of their life. The depreciation expense is higher in the initial years.
126. Chapter summary 7 7 Accounting for depreciation Depreciation is recorded by way of a journal entry. The expense is recorded as a debit entry and reduces profit. The credit is made to the accumulated depreciation account and reduces the carrying value of the asset in the statement of financial position.
127. Chapter summary 8 8 Disposal of non-current assets On disposal of a non-current asset the sales proceeds are compared to the net book value of the asset in order to calculate the profit or loss on disposal. Where an asset is given in part exchange for another asset, the part exchange allowance takes the place of the sales proceeds.
128. Chapter summary 9 9Revaluations An entity may choose to revalue its assets rather than hold them at cost – this is a choice of accounting policy. Where an entity revalues, it must revalue all assets in the same class and the depreciation charge is based on the revalued amount.
129. Chapter summary 10 10Depreciation revisited If an entity changes the method of depreciation used from straight line to reducing balance (or vice versa) or revises the useful life of an asset it should write off the asset’s net book value using the revised method or useful life.