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Financial Reporting

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  • 1. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Financial Reporting Part 2 Paper 2.5 Study Text Edition July 2005 AH05 – 25 ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com © BPP Professional Education 2005 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 2. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com We want to help you pass. Your BPP team for Paper 2.5 Financial Reporting Mary Maclean Janice Ross Katy Hibbert We are here to answer the technical and study queries that you have as you progress through the course. We will always reply to you promptly. E-mail us on accaqueries@bpp.com or fax us on 020 8740 2293. Alternatively call us during working hours on 0845 0751 100 (UK only, local rate) or +44 (0)20 8740 2233 if calling from outside the UK, or leave a voice message on our overnight message service. ACCAÊéµê£ºshop.52acca.com Please help us to save both you and BPP time by giving us details of which paper ACCA²©¿Í£ºblog.52acca.com you are studying, which piece of material you are using, such as Study Text, Revision Kit or Passcards, and which page or question number you are looking at. Give us details of who you are and your work and home numbers. Tell us if there are any times we will not be able to reach you. If you have any course administration queries, such as amending exam submission dates, then please call 0845 0751 100 (UK only, local rate) or +44 (0)20 8740 2233 if calling from outside the UK. We look forward to seeing you progress through the course. ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 3. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Text Edition: July 2005 FINANCIAL REPORTING 1 Introduction This Home Study course will guide you through the July 2005 edition of the BPP Study Text. This June 2005 edition is for exams in December 2005 and June 2006. If your Study Text does not have that date on the back cover, please contact BPP. 2 Using the BPP Home Study (a) The Study Programme is made up of 23 Study Periods, which BPP has graded as high, medium or low priority, based upon guidance from ACCA and the examiners. Each Study Period consists of the following elements. (i) Exam Guidance This gives an introduction to each Study Period by explaining the emphasis that the examiner has placed on the topics to be covered on the basis of the pilot ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com paper, past exams and discussions with BPP authors and tutors. (ii) Guidance through the Study Text Here you are given important instructions on how to work through the BPP Study Text. You must follow the guidance in this table for time effective study, as you will be told which areas of each chapter must be worked through in detail and which can be skimmed over. The table contains essential points, summarising the most vital areas of the Study Period. (iii) Were you awake? These are brief questions on the essential points, designed to test whether you were concentrating. You MUST get these questions right! If not you'll need to go back and study the material again. There is space for you to add your own notes as you study the Text. (iv) Common Pitfalls To help your question practice and revision, we give you guidance on the most common mistakes made by students on key areas. (v) Learning Resource Centre For further help with study and revision, we refer you to the relevant sections on BPP's i-Pass CD-ROM and BPP's i-Learn CD-ROM. Each Study Period should take about 2½ hours. There is an overview of all Study Periods, on page (v), which can be used to set up a timetable. The annotated Study Programme will become a key document in your revision phase. (i) ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 4. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Text Edition: July 2005 (b) Some of the Study Periods are 'progress tests' which assess the work done on a limited number of Study Periods. You should mark the tests yourself using the solutions at the end of the Study Programme. (c) You also have two Course Examinations. These should be attempted at the point suggested within the Study Programme (they cover all preceding Study Periods) and sent to BPP for marking. You will receive a detailed analysis of your performance, together with suggested solutions, which should help your exam technique as well as pointing out strengths and weaknesses in your understanding. To help you plan your study time, BPP will send you separately an Exam Timetable with recommended dates for submission of the exams. Should these dates prove impractical, please feel free to amend them to suit your own planned schedule. However the date given for Course Exam 2 is the latest date by which we can guarantee to get the scripts back in time for the exams. To gain the greatest benefit from the exams, you must set aside a period of three hours during which you will have no interruptions. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com By submitting these exams, you will increase your chances of passing the real exams by 30%. (d) If you have any difficulty with your studies, e-mail us at accaqueries@bpp.com. Alternatively, please telephone, fax or write to the Customer Services Administrator at BPP who will pass your query to one of our authors and tutors. Please help us to save both your time and BPP time by giving us the following details about your query. • Paper name/number • Material reference and version (eg Study Text 2005, Revision Kit 2006) • Page or question number • A brief description of your query Remember to include your name, student number and a contact number if necessary. Please make your query as specific as possible. 3 BPP's i-Pass CD ROM Your home study course includes BPP's i-pass CD-Rom, which is designed to test knowledge and perfect exam technique. It enables you to attempt tests, making it an ideal revision tool. Paper 1.1 and 1.2 computer-based exams. BPP i-Pass for these two papers provides an exam-like environment with testing against the clock. Regular practice will ensure you're ready for the real thing. BPP i-Pass for 1.3 and Part 2 papers provides an opportunity to test and revise your knowledge of important syllabus areas. BPP i-Pass for Part 3 papers enable you to test and revise your knowledge - and your ability to apply this knowledge. (ii) ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 5. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Text Edition: July 2005 i-Pass queries To help us answer any BPP i-Pass queries you have quickly and effectively, please follow the steps below. (This procedure is necessary as questions appear in a different order each time the CD is used). Step 1. With the question you wish to query on-screen, push the Print Scrn (Print Screen) button on your keyboard (usually located to the right of the F12 key). This will copy the image of the question to your computer's 'clipboard'. Step 2. Start Microsoft Word. (You can do this while i-Pass is running – click on the start button, then select Microsoft word from the programs option.) Step 3. Paste the image from the clipboard into a new Word document. Do this by selecting Edit, Paste – or by using the Paste button on the Word toolbar. Step 4. Save the document with a meaningful name, eg iPass_Paper1.2_query.doc (or better still use the number referred to in Step 5 below in the document name, excluding the /s). Step 5. E-mail the document, with details of your query, to accaqueries@bpp.com. If you ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com make contact by phone, the person dealing with your query will ask you to e-mail or post a copy of the document to them. If possible, in the detail of your query please include the reference number that appears very faintly on-screen in the white area below the 'Exit' option - for example 02/CO/0134. 4 Learning to Learn Accountancy Whether you are about to start your studies or continuing them, BPP's Learning to Learn Accountancy will help you learn efficiently and effectively. It also provides essential guidance on dealing with your exam. If you did not request this when ordering your Home Study Course you should contact Customer Services on 0845 0751 100 (UK only, local rate) or +44 (0)20 8740 2233 if calling from outside the UK. (Only one copy per student – it can be used again and again throughout your course.) 5 Revising with the BPP Home Study Course For your revision phase, your Home Study Course includes the following. (a) The BPP Practice and Revision Kit, which contains past paper questions and other useful practice questions. The Kit also contains Revision Guidance which highlights the key questions to attempt to maximise your chances of exam success. (b) The Study Programme, where the Essential Points and Common Pitfalls will serve as a reminder of the work you did in each Study Programme. (c) The BPP Passcards, which give short summaries of the content of each chapter of the Text. Revision should not start until you have completed your second course examination. (iii) ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 6. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Text Edition: July 2005 6 Feedback The success of BPP's courses has been built on what you the students tell us. Towards the end of your course you will be sent a feedback form to complete and return. If you have any issues or ideas before you are given the form to complete, please contact the course administrator, on 0845 0751 100 (UK only, local rate) or +44(0)20 8740 2233 (overseas) or via e-mail at accaqueries@bpp.com. 7 Overview of Financial Reporting The paper aims to test your ability to: • Appraise and apply specified accounting concepts and theories to practical work place situations • Appraise and apply the regulatory framework of financial reporting • Prepare financial statements for different entities to comply with the specified ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com International Accounting Standards and other related pronouncements • Prepare group financial statements (excluding group cash flow statements) to include a single subsidiary and possibly an associated company or joint venture • Analyse, interpret and report on financial statements (including cash flow statements) and related information to a variety of user groups • Discuss and apply the requirements of other specified International Accounting Standards • Demonstrate the skills expected in Part 2 How to use your Study Text The cornerstone of your studies is the BPP Study Text. The front pages give essential guidance on how to use the Text and vital information on study skills. Before you go any further, look at the front pages of your Study Text. They are there to help. Step 1 Read the section: Help yourself study for your ACCA exams. Read and apply the study skills section. Consider your style of learning and try to develop a personal study plan. Step 2 Look at the syllabus, to see what you're up against. Step 3 Look at the topics that have been examined in the past, in our analysis of past papers. (iv) ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 7. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Text Edition: July 2005 STUDY PERIOD PLANNER Use this schedule and your exam timetable to plan the dates on which you will complete each study period. The letters 'H' ‘M’ and 'L' tell you whether the topic is high, medium or low priority. Detailed guidance and prioritisation of each study period begins overleaf. Study Topic Due Date Study Topic Due Date Period Period 1 Review of basic M 12 Progress Test 1 H accounting concepts and the regulatory 13 Hire purchasing and H framework Leasing 2 Companies Act H 14 Stocks and work in H requirements and progress accounting policies 15 Taxation in company M 3 Reporting financial H accounts performance – FRS3 16 Earnings per share H ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com 4 Theoretical aspects of L 17 Cash flow statements H accounting 18 Liabilities and H 5 Fixed assets: tangible H provisions; reporting assets the substance of 6 Fixed assets: H transactions intangible assets and 19 Share capital and M investments reserves; financial 7 Constitution of a M instruments group 20 Distributable profits M 8 Consolidated balance H and capital sheet: basic transactions principles 21 Related parties; M 9 Acquisition of H segmental subsidiaries information 10 Consolidated profit H 22 Interpretation of H and loss account financial statements 11 Associates and joint H 23 Progress Test 2 H ventures COURSE EXAM 1 COURSE EXAM 2 A practice exam covering Study Periods 1–12. A mock exam covering the whole syllabus. REVISION PHASE Your revision, using the questions and revision guidance in the BPP Passcards and the BPP Practice and Revision Kit, will begin when Course Exam 2 is complete. This should, at the latest, be four weeks before the final exam. (v) ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 8. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com APPROACHING FINANCIAL REPORTING Your examiner Steve Scott is an experienced ACCA examiner. He was the examiner for the forerunner of this paper – Accounting and Audit Practice. The examiner's approach is to achieve a broad coverage of the syllabus and avoid a focus on being able to succeed by learning a few topics better than others. So the question mix is therefore likely to comprise bigger questions and many smaller questions. His exam papers are practical and up to date. ACCA examinations in general, and Paper 2.5 in particular, tends to have a practical flavour and is inevitably topical and up to date. You should therefore be aware of the issues affecting the current financial reporting climate – mis-reporting of earnings, choice of accounting policies and estimation techniques, solvency problems, off balance sheet arrangements and inflated market prices. You will be expected to keep abreast of developments by reading financial and accounting press. Exam Format Number of marks ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Section A: One compulsory question 25 Section B: Choice of 3 from 4 questions (25 marks each) 75 100 The examination is a three hour paper in two sections. It will contain a mix of computational and discursive elements. Some questions will adopt a scenario/case study approach. The Section A compulsory question will be the preparation of group financial statements, and may include a small related discussion element. Computations will be designed to test an understanding of principles. At least one of the optional questions in Section B will be a conceptual/discursive question that may include a simple illustrative numerical element. An individual question may often involve elements that relate to different areas of the syllabus. For example a published financial statements question could include elements relating to several accounting standards. In scenario questions candidates may be expected to comment on management's chosen accounting treatment and determine a more appropriate one, based on circumstance described in the question. Another popular line of questioning is to link the impact of given transactions to accounting ratios or to discuss a given accounting treatment in relation to a conceptual framework. Questions on topic areas that are also included in Paper 1.1 will be examined at an appropriately greater depth in Paper 2.5. Some Accounting Standards are very detailed and complex, particularly recent ones. At Paper 2.5 candidates need to be aware of the principles and key elements of these Standards. You will also be expected to have an appreciation of the background need for an accounting standard and what reporting issues they address. Also you should be aware that questions involving knowledge of new examinable regulations will not be set until at least six months after the last day of the month in which the regulation was issued. The Study Text provides more detailed guidance on the syllabus. Examinable documents are listed in the 'Exam Notes' section of the Student Accountant, as well as on the ACCA website. Finally good luck with the course and please do not hesitate to contact BPP tutors for further study guidance or to resolve any technical problems. 1 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 9. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 1 Review of basic accounting concepts and the regulatory framework Priority = Medium Examined: 12/04, 6/05 Date due: Exam Guidance You need to be able to discuss the characteristics of useful accounting information, explain the regulatory system of accounting and discuss the notion of GAAP and a conceptual framework. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Exam focus point The December 2004 Exam had a discussion question on the ASB and the standard setting process. The June 2005 exam had a question on IFRS1. Guidance through the Study Text These topics are covered in Chapter 1 Review of basic accounting concepts, Chapter 2 The regulatory framework and Chapter 21 The ASB's Statement of Principles. Section Approach Essential points Chapter 1 1–8 The topics covered by this chapter are likely to • Conceptual framework constitute light direct testing in an exam. However, • Objectives of financial statements they provide the platform for later chapters. Read, • Elements of financial statements developing a sound awareness of the points • Recognition and measurement covered. Chapter 2 1–8 This is effectively another background chapter. • Regulatory bodies Read through it, highlight any key points you • ASB standards and development consider important/difficult to develop a general process awareness of the regulatory framework and little • Convergence and IFRS 1 GAAP. • FRSSE Convergence is now a major issue, with changes from 1 Jan 2005. Note IFRS 1 and the latest FRSSE Chapter 21 1 Read, highlight and develop grasp of chapter • Contents of the SoP chapters contents for future reference to syllabus topics. Try Questions 1, 2 & 25 in the Exam Question Bank of your Study Text 2 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 10. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 1 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. List the objectives of a conceptual framework. State the objectives of financial statements. List the steps in developing an accounting standard. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com What body develops international financial reporting standards? Common Pitfalls • Ignoring the importance of the Statement of Principles and not being able to link up to the principles in written questions where relevant • Forgetting to include basic concepts in written questions on other SSAPs or FRSs • Not understanding modern approach to prudence • Not learning the ASB standards setting process • Not ensuring that 'neutrality' is appropriately taken into consideration Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Framework for Test your knowledge BPP i-Pass * Financial Statements Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want this product, visit: www.bpp.com/acca 3 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 11. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 2 Companies Act requirements and accounting policies Priority = High Examined: Pilot Paper, 12/01, 6/02, 6/03 Date due: Exam Guidance You should be able to explain the legal background to limited companies and state the requirements regarding the preparation of annual accounts and the uses of prescribed formats. The examiner also expects you to be able to describe the content and effect of the main accounting provisions of company law and prepare accounts in accordance with prescribed formats. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Exam focus points Issues surrounding the choice of accounting policies and estimation techniques is particularly pertinent within the current financial reporting climate. The December 2001 paper sought a discussion of the circumstances when a company should change its accounting policies plus the accounting entries giving effect to a change in accounting policy. The June 2003 exam required candidates to assess whether a given scenario represented a change of accounting policy. Guidance through the Study Text These topics are covered in Chapter 3 Companies Act requirements and the format of accounts. Section Approach Essential points 1&2 Ensure you are aware of why SSAP 2 was withdrawn • Relegation of prudence and and replaced with FRS 18 and where it is different, consistency albeit subtly. • FRS 18 and SoP • Neutrality and true and fair 3 Read, highlight and summarise. • Interpretation • Override disclosures 4 This is basic knowledge which you must take on • Documents in accounts board. • Classification of companies 5 Review and learn formats. Unfortunately there is no • Formats and layout magic bullet you can use to acquire this very essential knowledge. Look at published accounts if it helps. 6 Again no need to learn these requirements. • Notes 7&8 Learn in overview only. Try Question 3 in the Exam Question Bank of your Study Text 4 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 12. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 2 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What is an accrual? How should tensions between accruals and prudence be resolved, applying the spirit of FRS 18? How might the concept of prudence be used albeit inappropriately, to smooth a company's earnings? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Give an example of: (a) Estimation technique (b) Measurement basis Common Pitfalls • Not learning the formats of the balance sheet and the profit and loss account • Not applying good exam technique by drawing proformas, dealing with the easy issues (marks) first. Grab the easy marks and build your confidence • Not being able to deal with a number of SSAPs or FRSs within an accounts preparation question • Not dealing properly with basics such as dividends, post balance sheet events, accounting policy changes • Lack of practice of accounts preparation questions under exam conditions • Not understanding the basic reasons for the various notes to the accounts Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Framework for Test your knowledge BPP i-Pass* Financial Statements Learn interactively BPP i-Learn/BPP Learn Online Module 1 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 5 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 13. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 3 FRS 3 – Reporting financial performance Priority = High Examined: Pilot Paper, 12/01, 6/02, 12/02, 6/03, 12/03 Date due: Exam Guidance In his guidance on the syllabus the examiner stated that students should be able to discuss the requirements of FRS 3, explain the problems associated with the definitions of extraordinary and exceptional items and discontinued activities. You may also be asked to prepare financial statements and disclosure notes in accordance with FRS 3. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Exam focus point An extremely popular exam topic which appears regularly in papers, particularly in respect of the structure of the profit and loss account, continuing and discontinued activities, STRGL, and reconciliation of movements in shareholder funds and note of historical profits and losses. The June 2003 and December 2003 accounts preparation questions included, a STRGL. Guidance through the Study Text These topics are covered in Chapter 9 Earnings per share and reporting financial performance. Section Approach Essential points 2 Read once quickly, highlighting key points. • Exceptional v extraordinary then go through it learning the FRS 3 format • Types of exceptionals and working through the questions carefully • P&L structure and thoroughly. • Discontinued activities • STRGL • Movement in shareholders funds • Historical profits and losses Try Question 6 in the Exam Question Bank of your Study Text 6 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 14. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 3 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Identify three categories of exceptional items that must be disclosed separately on the face of the profit and loss account. What statements, reconciliations and notes has FRS 3 introduced? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Give an example of an extraordinary item, if you can. Common Pitfalls • Unfamiliarity with relevant definitions and criteria for discontinued activities • Not knowing formats for the P&L and additional statements • Failure to understand the implication of a prior period adjustment • Not being able to identify exceptional items and lack of grasp of how these are disclosed in the P&L account • Mixing up the additional statements and having a lack of understanding what to disclose in each statement • Not being able to explain in a more discursive question the reasons for this standard Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* FRS 3 Learn interactively BPP i-Learn/BPP Learn Online Module 7 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 7 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 15. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 4 Theoretical aspects of accounting Priority = Low Examined: 6/03 Date due: Exam Guidance You should be able to explain the concepts of current purchasing power and current cost accounting (calculations based on these concepts are only examinable to a very basic level). The examiner also expects you to have a basic understanding of the following: • Comprehensive income • ACCAÊéµê£ºshop.52acca.com Fair value ACCA²©¿Í£ºblog.52acca.com These are current issues which could appear in a discussion question. Exam focus point The June 2003 paper required candidates to explain the problems that can be encountered when users rely on financial statements prepared under the historical cost convention for their information needs. The June 2003 exam also asked candidates to calculate the depreciation charge for the plant of a company (based on year-end values) and its balance sheet carrying values using three bases: historical cost, current purchasing power and current cost. Guidance through the Study Text These topics are covered in Chapter 20 Theoretical aspects of accounting. Section Approach Essential points 1 Read through fairly quickly, developing • Comprehensive income 2 sufficient awareness for a small question. • Fair value 3 Go through carefully. • CPP 4 Work through this section carefully. • CCA 5 Work through this section carefully. • Advantages and disadvantages of historical cost accounting Try Question 24 in the Exam Question Bank of your Study Text 8 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 16. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 4 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What does ‘comprehensive income’ refer to? State two situations in which ‘fair value’ is applied. What are the adjustments that need to be made to produce current cost accounts? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Explain why we still use historical cost accounting. Common Pitfalls • Spending too much time getting to grips with the numbers and calculations • Not being able to explain the differences between CPP, CCA and HCA • Not being able to state advantages and disadvantages of each Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Interpreting company Test your knowledge BPP i-Pass * accounts and Inflation accounting BPP's Learning to Learn Accountancy Improve your study skills book* * Included within your Home Study course If you want this product, visit: www.bpp.com/acca 9 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 17. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 5 Fixed assets: tangible assets Priority = High Examined: 12/04, 6/05 Date due: Exam Guidance As well as having a knowledge of the requirements of FRS 15, the examiner expects candidates to be able to describe alternative ways of treating capital based government grants received, apply the provisions of SSAP 4, distinguish the treatment of investment properties from other properties and explain the provisions of SSAP 19. Accounts preparation questions might include a revaluation and the depreciation; also how to account for gains and losses on disposal of revalued assets. These standards are likely to be incorporated as parts of bigger questions. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Exam focus point The June 2003 paper asked candidates to discuss whether a given company's policy for the treatment of government grants accorded with the ASB's Statement of Principles. The December 2003 exam had a 5 mark question on depreciation of plant. The December 2004 exam had part of a question (13 marks) on dealing with fixed asset transactions and the June 2005 paper had part of a question on self-constructed assets. Guidance through the Study Text These topics are covered in Chapter 4 Fixed assets: tangible assets. Sec. Approach Essential points 1 Read and understand statutory requirements. • Historic cost v alternative accounting rules • Uses of revaluation reserve 2 Read, highlight and annotate text. Work through • Finance costs questions carefully. You need to be able to deal • Self-constructed assets with basics such as self constructed assets and the • Subsequent expenditure rules for capitalisation of subsequent expenditure. • Depreciation 3 This is a key section. Read and work through the • Valuation basis questions and examples, especially Moggy Ltd and • Treatment of gains and losses Kevin Ltd which are very comprehensive. • Depreciation on revalued assets • Gains and losses on disposal 4 Read briskly, work through and understand the • Key term questions. You will need to identify an investment • Accounting treatment property and account for it correctly. 5 Work through example and questions quickly. • Treatment of capital based grants Try Question 4 in the Exam Question Bank of your Study Text 10 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 18. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 5 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. How should abnormal costs incurred In the process of producing a fixed asset be treated? If it is the policy to capitalise finance costs, when should this start? Define: (a) Recoverable amount (b) Net realisable value (c) Value in use ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Explain what you understand by an IGU. Explain how an impairment loss should be allocated. Common Pitfalls • Failure to apply the provisions of SSAP 19 to investment properties • Not having a solid knowledge of FRS 15 • Not knowing basics such as what expenses should be expensed or capitalised • Not being able to calculate depreciation on a revalued asset or correctly calculate the gain/loss on disposal of a fixed asset • Failure to deal properly with the revaluation and depreciaton of leased property. • Not being fully au fait with the indicators of impairment • Failure to distingush owner-occupied and investment properties and apply the correct accounting treatment Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Fixed assets and Test your knowledge BPP i-Pass* stock Learn interactively BPP i-Learn/BPP Learn Online Module 2 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 11 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 19. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 6 Fixed assets: intangible assets and investments Priority = High Examined: 12/03, 6/04 Date due: Exam Guidance In his guidance on the syllabus, the examiner stated that students needed to be able to explain the requirements of current accounting standards regarding goodwill and intangible assets, principally FRS 10. You need to understand the provisions of SSAP 13 on accounting for research and development. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Also be able to discuss the requirements of FRS 11 on the impairment of fixed assets and goodwill. FRS 11 has come up in the past as part of a discursive question, along with applications of the standard to specific scenarios. Exam focus point The December 2003 exam had a consolidated balance sheet question including negative goodwill. The June 2004 exam had a 25 mark question on FRS 10. Guidance through the Study Text These topics are covered in Chapter 5 Fixed assets: intangible assets and investments. Section Approach Essential points 1 Quick read will do. 2 Read and ensure you have a good go at • Criteria for capitalisation of development the questions. expenditure 3 Read highlight and annotate text. Make • Initial recognition 4 sure you work through the diagrams • Amortisation and impairment and questions. As mentioned above, this • Revaluation is a key area. • Negative goodwill 5 Another key section to be worked • Indicators of impairment through thoroughly. Ensure you are • Process of identifying new carrying value fully aware of the indicators of • IGUs impairment as well as being able to • Allocation of impairment loss allocate an impairment loss. 6 A brisk review is likely to suffice. Try Questions 5 & 6 in the Exam Question Bank of your Study Text 12 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 20. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 6 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Fill in the mnemonic: S E C T O R Identify three internally developed intangibles which might justify being capitalised. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com How should negative goodwill be treated? Common Pitfalls • Failure to address the key issues in a discursive question • Not knowing where to take an impairment through the accounts (eg P&L or reserves) • Not being able to apply FRS 11 to specific scenarios • Failure to understand the different implications between inherent, purchased goodwill, internally generated intangibles etc Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Fixed assets and stock Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 13 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 21. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 7 Constitution of a group Priority = Medium Examined: 6/03, 12/04 Date due: Exam Guidance The examiner expects you to be able to explain the requirements of the Companies Acts and FRS 2 regarding groups. Question 1 is likely to be a computational question, based on a set of trial balances, from which a set of group accounts must be prepared. There may be a small discursive element. Markers of past papers have intimated that they felt the mark schemes for group accounts ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com questions were a little on the generous side. So you need to be prepared for more marks being focused on the more complex areas of an answer. The smaller marks are of course still worth having in your challenge of clocking up at least fifty marks! Exam focus point Group accounting is an important area for Paper 2.5 as Question 1 will always be a groups question, therefore it is vital that you make sure you understand the basic principles before moving on. The June 2003 paper required candidates to suggest why reliance on the entity financial statements of a subsidiary may mislead a potential purchaser of the company. The December 2004 exam required an explanation of why consolidated accounts are useful to users. Guidance through the Study Text These topics are covered in Chapter 15 Constitution of a group. Section Approach Essential points 1 Read and ensure you understand the definitions because • Key terms they go to the heart of group accounts. 2 Read, learn and be ready to apply. This lends itself neatly • Mandatory v optional to a part question. exclusions 3 Ensure you remember and can apply the thresholds. • Size criteria 4 Read and summarise. • Typical package • Co-terminous APs 5 Although you will not get a group with more than a single subsidiary, work through and understand the various structure. You do not need to know these off pat, but they form the essential building blocks for successful study and completion of group accounting questions. Try Question 17 in the Exam Question Bank of your Study Text 14 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 22. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 7 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Are the expressions 'holding company' and 'parent undertaking' interchangeable for financial reporting purposes? Explain your response. Define 'control ' for group accounting purposes. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com List the five categories of circumstances whereby a subsidiary might be mandatorily or optionally excluded from consolidation. Common Pitfalls • Assuming a holding of > 50% of ordinary shares indicates dominant influence. This may not be the case if more than 1 class of share is in issue, each class having different voting rights attached. Control of the voting rights must be held. • Not being aware of when a subsidiary is mandatorily or optionally excluded from the preparation of group accounts • Overrunning on your time for the group accounts question. Build up speed so you can complete in good time and do justice to the other questions. Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Acquisition accounting – General Test your knowledge BPP i-Pass* principles and balance sheet Learn interactively BPP i-Learn/BPP Learn Online Module 2 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 15 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 23. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 8 Consolidated balance sheet: basic principles Priority: High Examined: 6/04, 6/05 Date due: Exam Guidance The examiner expects you to be able to prepare a consolidated balance sheet for a simple group, accounting for goodwill and minority interest as well as intra group transactions. In addition the examiner has stated that he will not set a question incorporating more than one subsidiary. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com It is not possible to 'rote learn' consolidation – you must ensure you understand the process involved. Exam focus points The first question on the paper always deals with group accounts and is most likely to include a consolidated balance sheet. The group accounts question in the June 2002 tested intra group transactions and unrealised profit in stock. The treatment of goodwill arising on consolidation was also tested. These aspects tend to recur in group accounts questions. The June 2003 paper required candidates to eliminate unearned profit in stocks and explain why it is necessary to eliminate unrealised profits when preparing group financial statements. June 2004 and June 2005 papers both had a compulsory consolidated balance sheet question. Guidance through the Study Text These topics are covered in Chapter 16 Consolidated balance sheet: basic principles. Section Approach Essential points 1–8 You need to develop a good grasp of the • Cancellation process basic principles of consolidation and this • Calculation of minority interest will involve you working through the • Goodwill arising on consolidation contents of this chapter methodically and • Pre vs post-acquisition profits diligently. Work through all the questions and examples until you have the key • Unrealised profit in stock learning points at your fingertips. • Unrealised profit on fixed asset transfers Try Question 18 in the Exam Question Bank of your Study Text 16 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 24. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 8 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What happens to the share capital of a subsidiary on consolidation? How do you calculate minority interests? Summarise the rules for accounting for goodwill arising on consolidation ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com An 80% owned subsidiary invoices its parent for goods provided at £1,500, original cost £1,000. At year end the parent has only sold half of these goods. What consolidation adjustments are required? Common Pitfalls • Not showing 100% of what you control • Ignoring the split between pre and post acquisition reserves • Forgetting to take group share only of 'net assets acquired' in the goodwill calculation • Forgetting to cancel out intercompany balances before consolidation • Skimming through the chapter! • Not attempting ALL questions Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Acquisition accounting – General Test your knowledge BPP i-Pass* principles and balance sheet Learn interactively BPP i-Learn/BPP Learn Online Module 3 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 17 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 25. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 9 Acquisition of subsidiaries Priority: High Examined: 6/02, 12/02, 6/03 Date due: Exam Guidance The examiner expects you to be able to show the effect on a consolidated balance sheet of an acquisition of a subsidiary during its accounting period and understand the basic principles and disclosure requirements as set out in FRS 7. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com The examiner has also stated that disposals will not be examined in group accounting. Exam focus points FRS 7 is very important and will be included in most consolidation questions. However, it is likely to be tested as part of a question rather than on its own. The group accounts question in the June 2002 exam included a fair value adjustment. The December 2002 and June 2003 papers involved an acquisition of a subsidiary part way through the year. This is a popular requirement favoured by examiners. The June 2005 exam asked for consolidated balance sheet extracts including a fair value adjustment. Guidance through the Study Text These topics are covered in Chapter 17 Acquisition of subsidiaries. Section Approach Essential points 1 Read through quickly and then work through • Identifying cut off for splitting example and question carefully. profits pre v post acquisition 2 Read and understand issues re dividends from • Treatment of pre-acquisition pre-acquisition profits. This is a dividend controversial area and you need to be aware • Theory v practice of the issues involved and what is current best practice. 3 FRS 7 is a key area and lends itself to both • Dealing with the major numerical and discussion questions. Ensure categories you understand the thinking behind the • Businesses held with view to standard. Complete the questions carefully. subsequent resale Try Questions 19 & 20 in the Exam Question Bank of your Study Text 18 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 26. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 9 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Explain how pre- and post acquisition profits of a subsidiary should be calculated. Explain how best practice relates to Companies Act requirements regarding the treatment dividends paid out of pre-acquisition profits. Describe what you understand by a fair value adjustment. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com State the FRS 7 guidance for how fair values should be assessed for the following categories of items. (a) Tangible fixed assets (b) Intangible assets (c) Closing stocks Common Pitfalls • Miscalculation of pre and post acquisition profits • Mistreatment of dividends paid out of pre acquisition profits • Not being able to deal with fair values at acquisition and post acquisition Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Acquisition accounting Test your knowledge BPP i-Pass* – General principles and fair values Learn interactively BPP i-Learn/BPP Learn Online Module 4 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 19 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 27. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 10 Consolidated profit and loss account Priority = High Examined: 12/04 Date due: Exam Guidance In his guidance on the syllabus the examiner stated that students needed to be able to prepare a consolidated profit and loss account for a simple group and show the effect on a consolidated profit and loss account of an acquisition of a subsidiary during an accounting period. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Look out for mid-year acquisitions when doing a consolidated profit and loss account as this was frequently examined under the old syllabus. Exam focus point An area which demonstrates your group accounting skills. Beware of mid year acquisitions which has come up frequently in the past. Note that merger accounting is no longer in the syllabus. The December 2004 exam had a compulsory consolidated profit and loss account question. Guidance through the Study Text These topics are covered in Chapter 18 The consolidated profit and loss account. Section Approach Essential points 1 You need to go through this chapter slowly and • Ensure you deal properly with meticulously and make sure that you have the inter-company transactions techniques totally buttoned down by working • Inter-company dividends through the questions and examples • Pre-acquisition profits Try Question 21 in the Exam Question Bank of your Study Text 20 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 28. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 10 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. A parent despatches and invoices a subsidiary for £1,000 worth of goods. The subsidiary has received these goods into stock but has not yet processed the invoice as at the year end. Given this limited information, how in principle should this be treated on consolidation? How should minority interests be treated. How should a proposed dividend by a partly owned subsidiary be treated on consolidation? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Explain the consolidation adjustments required where a partly owned subsidiary pays a preference dividend as well as an ordinary dividend. The parent only held say 20 per cent of the subsidiary's preference share capital. Common Pitfalls • Including pre acquisition profits of the subsidiary in retained profits on consolidation • Forgetting to amend the subsidiary's profit after tax for consolidation adjustments arising in the subsidiary when calculating the minority interest • Not correctly time apportioning the profits and minority interest with a mid year acquisition Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Acquisition Test your knowledge BPP i-Pass* accounting – Profit and loss accounts Learn interactively BPP i-Learn/BPP Learn Online Module 3 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 21 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 29. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 11 Associates and joint ventures Priority = High Examined: 6/04, 12/04 Date due: Exam Guidance The examiner expects you to be able to demonstrate the equity and gross equity method of accounting and the accounting treatment of associates and joint ventures as prescribed by the Companies Act and FRS 9. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Exam focus points In the past exams the preparation of a consolidated balance sheet including a joint venture or associate has been fairly common. The December 2002 accounts preparation question involved a JANE under FRS 9. The June 2004 exam asked candidates to explain the use of equity accounting. The December 2004 exam had a consolidated profit and loss for a group + associate. Guidance through the Study Text These topics are covered in Chapter 19 Associates and joint ventures. Section Approach Essential points 1 Read and understand key terms. • Equity accounting • Associate undertaking 2 Read and work through examples. Use the tables provided which show the different levels of interest that a reporting entity may have in other entities or arrangements and treatments in respect of different interests. Focus mainly on associates and joint ventures. 3 Read and annotate text. Work through examples and • Key terms questions. Remember that an associate is not a group • Equity method company, but it is such a significant investment that to show it at historical cost in the balance sheet and account for dividends only in the P&L account would not provide users of accounts with enough information about the investment. 4 Read and work though examples. • Key terms • Gross equity method 5 Read and note handy FRS 9 summary on disclosures. Try Questions 22 & 23 in the Exam Question Bank of your Study Text 22 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 30. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 11 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. How would you define an associate? Explain how the investment in an associate is calculated for balance sheet purposes. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com How should income from an associate be calculated for profit and loss account purposes? Common Pitfalls • Miscalculation of investment in associate • Failure to distinguish between a subsidiary and an associate or joint venture • Incorrect treatment of goodwill for an associate • Lack of understanding of the additional disclosure for a joint venture Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Associates and joint Test your knowledge BPP i-Pass* ventures Learn interactively BPP i-Learn/BPP Learn Online Module 5 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 23 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 31. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 12 Progress Test 1 Priority = High In order to reinforce what you have learnt so far, answer the following multiple choice questions without referring to your Study Text or notes. The test should take you no longer than 30 minutes. You will find the solutions at the back of this Study Programme. 1 Deborah plc purchased the assets of a software business for a consideration of £1 million. The book values of the assets acquired (and fair values where appropriate) were as follows. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Book value Fair value £'000 £'000 Plant and machinery 350 Trade marks 29 45 Purchased goodwill 60 Stock 290 310 Under FRS 10, what is the goodwill arising on this purchase? A £235,000 B £271,000 C £295,000 D £340,000 24 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 32. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 12 continued 2 The accountant of Pami plc, a construction company, has for the purposes of internal management decision making, listed the costs and market values of the company's buildings as on 31 March 20X9 and the depreciation charges for the year ended on that date. These are as follows: Market Dep'n Cost value charges £'000 £'000 £'000 Freehold office accommodation 2,000 2,000 20.0 Completed buildings held as investments Leasehold – more than 50 years 2,250 3,250 22.5 Leasehold – more than 20 but less than 50 years 1,750 2,550 17.5 Leasehold – less than 20 years 750 1,450 7.5 If the calculations for depreciation are used as the basis for the depreciation charge on ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com buildings shown in the financial statements of the company for the year ended 31 March 20X9, what will be the depreciation charge in the financial statements? A £20,000 B £27,500 C £42,500 D £67,500 Data for Questions 3 & 4 Bruce Ltd acquired all 200,000 of Sheila Ltd's ordinary shares. The consideration comprised 50p cash for each Sheila share and one Bruce share (market value 500p, nominal value 100p) for every two Sheila shares. Bruce did not previously own any of Sheila's equity. Immediately before the combination, their summarised balance sheets were as follows. Bruce Sheila £'000 £'000 Sundry net assets (at fair value) 900 800 Share capital 500 200 Profit and loss account 400 600 900 800 3 What will be the value of Bruce Ltd's reserves and of the Bruce Group's consolidated reserves immediately after this business combination? Bruce Ltd Bruce Group A £400,000 £1,000,000 B £400,000 £1,200,000 C £800,000 £800,000 D £800,000 £1,000,000 25 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 33. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 12 continued 4 What will be the value of the Bruce Group's consolidated sundry net assets and share capital? Sundry net assets Share capital A £1,400,000 £500,000 B £1,400,000 £600,000 C £1,500,000 £700,000 D £1,500,000 £800,000 5 Using the following information what would the total recognised gains and losses be: £ ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Reported profit after tax 753,000 Dividends paid and proposed 27,000 Temporary diminution in value of investment property 150,000 Upward revaluation of freehold land and buildings 68,000 Provision for losses on long term contracts 34,000 Amortisation of goodwill for the period 12,000 A £598,000 B £671,000 C £632,000 D £821,000 26 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 34. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 12 continued 6 Cheryl plc has the following shareholdings. • Goran Ltd: 20% of ordinary share capital held, no board representation • Herbert Ltd: 50% of ordinary share capital held, see below • Lisa Ltd: 100% of ordinary share capital held, full control of board The remaining 80% of Goran Ltd's share capital is held by Frodin Ltd, a company uncon- nected with Cheryl. The remaining 50% of Herbert Ltd's ordinary share capital is held by Darren plc, which is at loggerheads with Cheryl plc over the control of Herbert Ltd. Each shareholder is in a continuous struggle to buy the other's shareholding and each has appointed one of Herbert Ltd's three directors to exercise influence over the company. The third director is neutral. What is the status of each investment? ACCAÊéµê£ºshop.52acca.com Associated company ACCA²©¿Í£ºblog.52acca.com or joint venture Subsidiary company Neither (FRS 9 definition) (FRS 2 definition) A Goran & Herbert Lisa – B Herbert Lisa Goran C Goran Herbert & Lisa – D – Lisa Goran & Herbert 7 The following details relate to a non-specialised property: Carrying value £960,000 Depreciated historic cost £800,000 Recoverable amount £760,000 Existing use value £700,000 How would the revaluation loss be treated? Profit and Statement of total recognised loss account gains and losses A £260,000 Nil B £40,000 £220,000 C £200,000 £60,000 D Nil £260,000 27 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 35. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 12 continued 8 Nut Ltd occasionally makes sales to Shell Ltd, its subsidiary. It averages a 25% gross profit margin on such sales. As at the group's balance sheet date, a consignment was en route to Shell from Nut at an invoiced cost of £24,000. Which of the following consolidation adjustments should be posted in respect of this sale? £'000 £'000 A Debit Consolidated reserves 6 Credit Consolidated stocks 6 B Debit Consolidated sales 24 Credit Consolidated cost of sales 18 Credit Consolidated stocks 6 ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com C Debit Consolidated reserves 4 Credit Consolidated stocks 4 D Debit Consolidated sales 24 Credit Consolidated cost of sales 20 Credit Consolidated stocks 4 9 Which of the following would be included as a 'discontinued activity' for a company with a year end of 31 December 20X9 and whose financial statements were approved on 14 April 20Y0? (i) Closure of a business segment on 4 April 20Y0 (ii) Disposal of the company's European operations on 28 February 20Y0 A (i) only B (ii) only C (i) and (ii) D Neither 28 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 36. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 12 continued 10 An analysis of the reserves of Sarah Ltd, a private company, shows the following: £ Profits– realised 1,500,000 – unrealised 1,000,000 Losses – realised 300,000 – unrealised 400,000 What is the maximum amount that Sarah Ltd can legally distribute? A £1,800,000 B £1,500,000 C £1,200,000 D £800,000 ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com You will find the solutions to this test at the end of this Study Programme. If you answer more than 5 questions correctly, your performance is satisfactory; if you answer more than 7 correctly, you are doing very well. Once you have reviewed how you have performed, go back over the topics where you feel your understanding is poor. You are now ready to attempt the first course exam. These exams are designed to give you some question practice at an early stage in your studies to enable you to obtain feedback on exam technique. Don’t worry too much if you have to revert to the material when answering questions. Obviously it will be beneficial to attempt them without reference to your Study Text and notes, but it is the technique in producing answers that is the valuable element at this stage. Once you have completed your attempt send your solutions, together with the front sheet, to: Marking Department BPP Professional Education Aldine House Aldine Place 142 – 144 Uxbridge Road Shepherds Bush Green London W12 8AW 29 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 37. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 13 Hire purchase and leasing Priority = High Examined: 6/02, 12/03 Date due: Exam Guidance You should be able to explain and distinguish between credit sales, hire purchase agreements, finance leases and operating leases, and record the ledger entries for credit sales, hire purchase and operating leases. In addition, you may be required to outline the principles and disclosure provisions of SSAP 21 and record finance leases in the books of the lessee using simple numbers. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com In the current financial reporting climate it may be wise to understand how the various methods of lessee accounting impact on the profile of its reported profits Exam focus points SSAP 21 has been examined several times as a small part of an accounts preparation question. The main focus of your attention should be lessee accounting. Lessor accounting, would only be examined to a basic level. The June 2002 paper tested whether a lease should be treated as an operating lease or a finance lease. The December 2003 exam had part of a question on leasing for 5 marks. The June 2004 and December 2004 papers both had part of a question dealing with a finance lease. The June 2005 paper had a question that included a sale and repurchase agreement. Guidance through the Study Text These topics are covered in Chapter 6 Hire purchase and leasing. Section Approach Essential points 1-3 Read and annotate text. It is important to have a firm • Key terms grasp of the difference between an operating lease • Finance lease v operating and a finance lease. lease 4 Read and work through example. You must be able to • Apportionment methods calculate the finance charges for finance leases using • Disclosure requirements the sum of digits method as well as the actuarial method. 5 Read and summarise text. Do make sure that you • FRS 5, Sale and leaseback learn the disclosures. Try Question 7 in the Exam Question Bank of your Study Text 30 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 38. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 13 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Define a finance lease. Explain the interest rate implicit in a lease. Describe the sum of digits method for apportioning rental payments. What is the actuarial method? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com How do the various methods of apportioning instalments compare with each other in terms of their impact on reported profits? Common Pitfalls • Inability to calculate a finance charge • Lack of knowledge regarding disclosure requirements for the lessee • Not noticing whether payments are in advance or arrears • Taking the wrong number of interest bearing instalments when payments are in advance • Incorrectly including future interest in the obligations • Ignoring the disclosure requirements • Not attempting Question 6 Winger from the Pilot Paper Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 31 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 39. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 14 Stocks and work in progress Priority = High Examined: 6/04, 12/04 Date due: Exam Guidance The examiner expects you to be able to explain the key elements of SSAP 9 relating to stock and long term contracts, including the disclosure requirements, and calculate amounts to be shown in the financial statements regarding long term contracts. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Long-term contract accounting can be complex until you get the hang of it! Exam focus points Long term contracts is a popular exam topic; there was a fifteen mark question on this in the June 2002 paper. You may well be asked to provide the disclosures in respect of specific long term contract accounting balances. This may well be more challenging because you have to focus on specific parts of the accounting rather than being able to methodically crunch through the entire contract accounting process. Review all the balances involved and try to prepare yourself for what you would need to do if asked for any specific balance. The June 2004 and December 2004 exams both had questions on construction contracts. Guidance through the Study Text These topics are covered in Chapter 7 Stocks and work in progress. Section Approach Essential points 1 This is mainly revision so a brisk canter should suffice • Key terms • Cost v NRV 2 Read quickly to develop a feel but then make sure you • Ledger accounting work through the examples and questions so you can • Disclosures crack similar problems in an exam. Accounting for long term contracts is an area that lends itself to manipulation of earnings figures. In view of current market problems concerning the truth and fairness of corporate earnings, develop a good understanding of the various approaches. Try Question 8 in the Exam Question Bank of your Study Text 32 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 40. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 14 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. How should production overheads be treated in closing stock? Regarding the initial recognition of general overheads, how do the requirements of SSAP 9 differ from those specified by FRS 15? Define 'long-term' contract. How should finance costs connected with long-term contracts be treated? How should losses foreseen on a long-term contract be treated? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Explain how a credit balance on the 'amounts recoverable on contracts' account should be treated. (a) (b) Common Pitfalls • Inability to do basics such as apply lower of cost v NRV rules • Incorrect calculation of long term contract finnacial statement figures • Not accounting for foreseeable losses • Not understanding the set off rules for long term contracts • Inability to describe the different ways in which attributable profit may be measured • Ignoring the specific P&L and B/S disclosures • Ignorance of creative accounting scope with long-term contracts • Not being aware of current controversies in the USA stock markets over misrepresention of earnings and other creative accounting approaches Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Fixed assets and stocks Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 33 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 41. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 15 Taxation in company accounts Priority = Medium Examined: 12/01, 12/03, 6/05 Date due: Exam Guidance In his guidance on the syllabus the examiner stated that students need to be able to demonstrate and explain the effect of timing differences on accounting and taxable profits, you should be able to outline the requirements of FRS 19 relating to deferred tax. The examiner previously stated that any question on deferred tax will involve simple numbers and that deferred tax will be examined as part of a question rather than in its own right. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Generally it was examined within accounts preparation questions. The examiner also expects you to be able to outline the UK system of corporation tax. Therefore, you are also required to have a basic knowledge of FRS 16 on Current Tax and SSAP 5 on VAT. Exam focus point The treatment of tax credits on dividends received and withholding tax on interest received were tested as part of an account preparation question in the December 2001 paper. This paper also tested year-end entries dealing with the provision for corporation tax and deferred tax. The December 2003 exam had a part-question on deferred tax for 11 marks. The June 2005 Exam had a question including a deferred tax adjustment. Guidance through the Study Text These topics are covered in Chapter 8 Taxation in company accounts. Section Approach Essential points 1 This is important so read and understand • Key terms example properly. • Treatments of dividends in account 2 Only a basic knowledge required here, so a quick review should do. 3 A firm grasp of the basics is required here. • Key term Read and understand. • Full provision approach 4 The likely task you will be given in an exam • Transfers to/from deferred tax is to account for CT and deferred tax. Work • Under/over provisions through questions carefully. 5 Read and bear in mind in light of exam requirements. Try Question 9 in the Exam Question Bank of your Study Text 34 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 42. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 15 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What items must a company's profit and loss account disclose in respect of taxation? When must a company pay its CT liability? Give examples of items whose payment is subject to deduction of income tax. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com What is a permanent difference? Does FRS 19 make discounting mandatory? Is it the full provision method or the partial provision method that is prescribed by FRS 19? Common Pitfalls • Getting 'bogged down' in the detail of FRS 19 • Not understanding the difference between a permanent and temporary timing difference and its treatment • Not being able to show P&L and B/S disclosures for both current and deferred tax Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Taxation Learn interactively BPP i-Learn/BPP Learn Online Module 9 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 35 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 43. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 16 Earnings per share Priority = High Examined: 6/02, 6/03 Date due: Exam Guidance The examiner expects you to be able to: • Explain the need for a standard for EPS and its importance as a stock market indicator. • Describe the requirements of FRS 3 regarding the computation of EPS • Explain the implications of FRS 3 for the disclosure of EPS. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com • Describe the requirements of FRS 22 regarding EPS. Specifically the examiner expects you to be able to calculate a basic EPS (with bonus and rights issue) and calculate a diluted EPS with convertible debt, preference shares and options. Exam focus point The June 2002 paper required candidates to calculate the basic and diluted EPS for a company. The June 2003 paper required candidates to calculate basic EPS and fully dilated EPS and to advise a prospective investor of the significance of diluted EPS. FRS 22 is a new standard, so very examinable. Guidance through the Study Text These topics are covered in Section 1, Chapter 9 Earnings per share and reporting financial performance. Approach Essential points Work through the section paying particular attention to the effect on EPS of • Changes in changes in capital structure. capital When reading through these pages you should note that the rationale behind the accounting treatments is that we are trying to match the earnings for a period with the capital giving rise to those earnings. For example, an issue at full market price would hopefully have the effect of increasing earnings because of say additional investment in fixed assets. A bonus issue does not generate any funds and, therefore, will have no effect on earnings. Ensure you have a thorough understanding of the various calculations of EPS and the logic behind the calculations by working through the illustrative examples and questions. Work slowly through the sections that deal with diluted EPS. Again, work through the illustrative examples to ensure you understand the logic. 36 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 44. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 16 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Explain headline EPS. State the three categories of securities that give rise to diluted EPS. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com How does FRS 22 suggest that dilutive shares should be ranked? Common Pitfalls • Accounting incorrectly for a rights or bonus issue • Forgetting to adjust the comparative EPS for a rights or bonus issue • Not being aware of the circumstances that give rise to dilution. • Taking the earliest conversion for a convertible bond rather than the maximum dilution Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 37 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 45. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 17 Cash flow statements Priority = High Examined: 12/01, 6/03, 6/04, 12/04, 6/05 Date due: Exam Guidance The examiner has identified cash flow statements as one of his key areas of interest. He expects you to be able to prepare a cash flow statement, as prescribed by FRS 1 (Revised), for an individual company and interpret a cash flow statement for an individual company. The examiner has indicated that this topic could be linked with interpretation of financial ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com accounts. So please revisit the material covered here when you come to work through the session on interpretation of accounts. Exam focus points As a primary statement, it is highly examinable. A lot of it is a mechanical process and therefore a potentially good source of marks, and in an exam, also a potential source of giving you an injection of confidence Any question is likely to include two or three sub-parts linking the numbers you have arrived at with other parts of the syllabus. The December 2001 paper included a full twenty five mark question on preparation of a cash flow statement; clearly a good area for gaining marks. But be prepared for links to other parts of the syllabus. The June 2003 paper again tested cash flow statement preparation. The June 2004, December 2004 and June 2005 exams all had cash flow statements. Guidance through the Study Text These topics are covered in Chapter 10 Cash flow statements. Section Approach Essential points 1 Review and ensure that you are familiar with the standard • Key terms headings and what comes under each. • Standard headings • Items under headings 2 Work through carefully doing all examples and questions. • Preparation steps Do not overlook the direct method. • Direct method 3&4 ACCA likes you to have a holistic approach to financial • Cash v profit reporting so you must be able to recognise the meaning • Advantages and uses of cash flow statements • Practical issues Try Question 10 in the Exam Question Bank of your Study Text 38 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 46. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 17 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Define cash. Explain what you understand by the term liquid resources. Explain how VAT should be treated in a cash flow statement. How should exceptional items be treated under FRS 1? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Common Pitfalls • Unfamiliarity with the basic format and notes. You will lose marks if you deviate from the FRS 1 format and descriptions. • Not taking a logical approach. • Not setting up workings eg for fixed assets, tax and dividends. • Not understanding the difference between the direct and indirect methods. • Confusing adjustments and real cash flows • Errors in descriptions; you will lose marks as the examiner is very strict here. • Not dealing accurately with fixed asset transactions and issue of and redemption of shares/convertible loan stock • Having poor format knowledge eg putting purchases of fixed assets in financing. Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Cash flow statements Test your knowledge BPP i-Pass* FRS 1 Learn interactively BPP i-Learn/BPP Learn Online Module 8 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 39 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 47. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 18 Liabilities and provisions; reporting the substance of transactions Priority = High Examined: 6/03, 12/03, 6/04, 6/05 Date due: Exam Guidance An understanding of the requirements of FRS 12 is required. You also need to know FRS 21 – this is a new FRS, so highly examinable. The examiner also expects you to have a reasonably detailed knowledge of the specific provisions of FRS 5 and the concept of substance over form. You should be able to explain the ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com objectives of FRS 5 and discuss principal requirements of FRS 5. Regarding FRS 5, you need to be able to identify the substance of transactions, understand the concept of a quasi subsidiary and be able to deal numerically with consignment stock, sale and repurchase agreements and debt factoring. The impact on accounting ratios is also important. Again, you need to be able to see these topics within the context of the controversies in the USA over creative accounting. ACCA exams are very practical and related to the real world. Exam focus points FRS 12 has been examined within accounts preparation questions as well as by way of a discursive question. The diagram in the Study Text is likely to underpin any question the examiner is likely to set. FRS 5 has been examined, in preparation of accounts questions such as dealing with debt factoring. Also as more discursive questions. FRS 5 was tested in the December 2002 paper. The December 2002 paper asked for a discussion of creative accounting supported by examples. The December 2003 exam had a 25 mark question on FRS 12 and 9 marks for a part-question on events after the balance sheet date. The June 2004 and June 2005 exams had questions on provisions. Guidance through the Study Text These topics are covered in Chapter 11 Liabilities and provisions; reporting the substance of provisions. Sec. Approach Essential points 1 FRS 21 Events after the balance sheet date is a new FRS. Make sure you know • Treatment of it. dividends proposed 2 Make sure you understand the differences between provisions and contingent liabilities. 3 Very brief section. Read through quickly. 4–5 These sections deal with off balance sheet finance and substance over • Methods of form. Read, summarise and make sure you really understand the issues creative accounting involved, given all the controversy about corporate earnings in the USA. Try Question 11 in the Exam Question Bank of your Study Text 40 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 48. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 18 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What are the three FRS 12 conditions for recognising a provision as a liability? Define a constructive obligation. Explain what you understand by the following, highlighting their differences and/or similarities. (a) Liability (b) Accrual (Period 2) (c) Provision (d) Contingent liability ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com How would you advise the directors of a company who would like to provide for expenditure on major overhauls of its fixed assets over the intervening years between overhauls? What does FRS 12 say about the idea of setting up a provision for warranty costs? Loosco Limited, decided at a board meeting to carry out a major organisational restructuring to streamline the company. Per FRS 12, is it allowed to set up a provision for this? Common Pitfalls • Not being able to distinguish when to recognise or derecognise an asset or liability when dealing with FRS 5 • Forgetting the importance of recording the substance rather than legal form • Not understanding the difference between legal and constructive obligations • Not knowing whether a provision should be made and why Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 41 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 49. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 19 Share capital and reserves; financial instruments Priority = Medium Examined: 12/01, 6/02, 6/03 Date due: Exam Guidance FRS 25 Financial Instruments: Disclosure and Presentation and FRS 26 Financial Instruments: Measurement are new standards in this area. Make sure you understand the distinction between a financial liability and an equity instrument and pay close attention to preference shares. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Exam focus points The June 2003 paper linked the issue of share capital and loan notes to accounting ratios. In the June 2002 paper, candidates had to deal with the issue of a convertible loan note at a discount. There was also a bonus issue utilising revaluation reserve. The December 2001 accounts preparation question also included sub-parts dealing with: • Directors exercise of their share options • A fully subscribed rights issue. FRS 24 and FRS 25 have not yet been examined. Guidance through the Study Text These topics are covered in Chapter 12 Share capital and reserves; financial instruments. Sec. Approach Essential points 1 Go carefully through the definitions. Financial assets and liabilities. 2 Distinction between liabilities and equity is very important and the Classification of issue most likely to be examined. preference shares 3 Read through quickly. – 4 Make sure you know how to account for financial instruments. Work Distinction between through the examples carefully. interest received/paid and interest income/expense Try Question 12 in the Exam Question Bank of your Study Text Then attempt the questions in the Supplementary Question Bank 42 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 50. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 19 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What are the rules for distinguishing between a financial liability and an equity instrument? Describe how to account for divided payments to non-equity shareholders. Explain the following types of risk: ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com (a) Currency risk (b) Interest rate risk (c) Price risk (d) Credit risk Common Pitfalls • Spending too much time learning the detailed requirements of FRSses 25 and 26 – the examiner will mainly expect you to apply them • Not recording the correct interest charge in the P&L account and liability in the Balance Sheet when dealing with financial liabilities • Incorrectly treating financial liabilities as equity instruments • Not knowing how to deal with convertible debt Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 43 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 51. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 20 Distributable profits and capital transactions Priority = Medium Examined: Pilot Paper, 6/02, 6/03,12/04 Date due: Exam Guidance The examiner expects you to be able to discuss the rules relating to the distribution of profits, explain how shares may be redeemed and record the transactions involving the redemption of shares. You should also be able to explain how companies may purchase their own shares and record the transaction in the accounting records. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Finally, you need to be familiar with the ASB approach to revenue recognition and be able to apply it, given the practical relevance of this topic. Exam focus point Bearing in mind the problems relating to USA corporations overstating earnings, the examiner might be tempted to test your understanding of revenue recognition. The June 2003 exam required candidates to explain the implications that the ASB's Statement of Principles and the application of substance over form have on the recognition of income. Candidates were also required to provide examples of how this may conflict with traditional practice and some accounting standards. The June 2002 paper required candidates to deal with a bonus issue using a revaluation reserve. The December 2004 exam had a 12 mark question part dealing with a company repurchasing its shares. Guidance through the Study Text These topics are covered in Chapter 13 Distributable profits and capital transactions. Section Approach Essential points 1 Read these pages carefully. Attempt the question • Recognition approaches called Revenue Recognition. This was one of the • Problem areas examiners pilot paper questions. • Impact of current market climate 2 You should ensure you have a good grasp of the • Definition of distribution basics covered in this section. Make sure you • Public company restrictions have a good crack at the question. • Realised v distributable 3 Develop a good grasp of the double entry • Companies Act rules involved. A question on this topic would be very • Reason for altering structure mechanical. Try Question 13 and 14 in the Exam Question Bank of your Study Text 44 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 52. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 20 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. Name the four criteria underpinning the point of sale approach to revenue recognition. How does S 263(2), CA 1985, define distribution? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com What, in terms of S 25(2), CA 1985, are the three basic ways of reducing share capital? Common Pitfalls • Failure to distinguish between private and public companies when calculating available profits • Not knowing what to transfer to a capital redemption reserve • Not being able to discuss the different issues of revenue recognition and relate to the Statement of Principles • Not being able to discuss the advantages of companies being able to redeem shares • Not being aware of how this topic relates to the current business environment Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 45 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 53. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 21 Related parties; segmental information Priority = Medium Examined: 6/02, 6/04 Date due: Exam Guidance Related party transactions are very relevant in practice and in the exams you will need not only to be able to spot they have taken place but also discuss the impact on any interpretation of the accounts. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com The examiners guidance states that you should be able to discuss the usefulness and problems associated with segmental information, as well as prepare segmental reports per SSAP 25, and interpret them. Exam focus points You need to be able to make a good fist of any questions on SSAP 24 but it is likely to be part of a larger question rather than being a full question on its own. Nevertheless even a five mark question can contribute to delivering a pass! You should also have an understanding of the potential effect of related parties and be able to explain how a related party transaction can arise under FRS 8. The June 2002 paper included a small five mark question which required application of FRS 8. The June 2004 paper had a 6 mark question part on preparing a segmental report. Guidance through the Study Text These topics are covered in Chapter 14 Related parties; segmental information. Section Approach Essential points 1 Read carefully ensuring you are happy with the • Definitions objectives, definitions and various disclosure • Disclosable transactions requirements Use question 1 to strengthen your grasp of FRS 8. 2 Read this carefully and make sure you are happy with • Key terms the key terms. You must be asked to prepare or • Arguments for v against interpret segmental information. segmental reporting • Ability to interpret segmental information Try Questions 15 & 16 in the Exam Question Bank of your Study Text 46 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 54. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 21 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What, under FRS 8, comprises 'close family'? Give ten examples of related party transactions that need to be disclosed. ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Explain the two criteria for disclosing an analysis of segmental information. Also state the basis and conditions for omitting disclosure of segmental information. Common Pitfalls • Not being able to prepare segmental accounts • Failure to spot a related party within a scenario and state the relevant disclosures • Not being able to discuss the implications of any related party transactions when trying to interpret a set of accounts • Inability to understand and interpret segmental information Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 10 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 47 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 55. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 22 Interpretation of financial accounts Priority = High Examined: Pilot Paper, 6/02, 6/03, 12/03, 12/04 Date due: Exam Guidance The examiner expects you to be able to calculate useful financial ratios from group or individual company financial statements, discuss the implications of different accounting policies as well as realise the limitations of ratio analysis. Exam focus points ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Interpretation and report writing are popular exam topics. Concentrate on report writing skills and the interpretation rather than just the calculation of ratios. The June 2002 paper included a full twenty mark question on the interpretation of accounts of a potential target for acquisition. The June 2003 exam asked candidates to write a report analysing the operating performance and financial position for a company. It also asked candidates to calculate the dividend cover and explain its significance. The December 2003 exam had a 25 mark question on ratio analysis. The December 2004 exam had a part question on performance analysis. Guidance through the Study Text These topics are covered in Chapter 22 Interpretation of financial accounts. Sec. Approach Essential points 1 Read and absorb the holistic approach to this topic. Learn • User needs focus the basic ratios and then work through how these are • Other helpful information calculated for Earwigo plc. • Industry specific ratios • Holistic approach 2–6 Read these sections very carefully and understand the • Implications of financial potential explanations for the ratios calculated, so as to transactions on ratios v impact give you a sound starting point in your exams. of general business factors 7 Ensure you understand the impact of accounting policy • Impact of policy changes choices/changes. Also note the limitations of accounting • Limitations of ratios ratios. Then have a go at the question to reinforce your commercial awareness. 8 Any question in this area is likely to involve a report, so • Using a marks oriented format take the opportunity provide here to build up your report • Comments that stack up writing skills. • Writing skills Try Questions 26 & 27 in the Exam Question Bank of your Study Text 48 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 56. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 22 continued Were you awake? If you've been concentrating, you should be able to answer some key questions. What other pieces of information might be useful, in addition to a ratio analysis, to achieve a holistic approach to interpreting a set of accounts? What industry specific ratios might the following people consider as important in evaluating the success of their business? (a) Cinema manager (b) Football club chairman (c) Coal mine finance director What factors might cause a company's turnover to increase? ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Suggest some ways in which the current ratio could be manipulated. A listed company is experiencing trading difficulties. Identify the areas where a change of accounting policies or estimation techniques might, rightly or wrongly, assist its accounts to show a rosier, or perhaps misleading picture. List the limitations of ratio analysis. Common Pitfalls • Not being able to calculate key ratios • Ignoring that if a report is required, your answer must look like a report! • Not answering the question asked – tailor your answer to your audience • Not balancing your time between calculation and explanation • Making comments that are inconsistent with each other • Not understanding the business issues involved Any problems? Email accaqueries @bpp.com or phone us. Learning Resource Centre What do you want to do? How to do it! Reference Test your knowledge BPP i-Pass* Other standards Learn interactively BPP i-Learn/BPP Learn Online Module 11 Improve your study skills BPP's Learning to Learn Accountancy book* * Included within your Home Study course If you want any of these products, visit: www.bpp.com/acca 49 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 57. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 23 Progress Test 2 Priority = High Date due: In order to reinforce what you have learnt so far, answer the following multiple choice questions without referring to your Study Text or notes. The test should take you no longer than 30 minutes. You will find the solutions at the back of this Study Programme. 1 If a company operates in more than one geographical market or class of business, what ACCAÊéµê£ºshop.52acca.com analyses must be included in the notes to the profit and loss account to comply with the ACCA²©¿Í£ºblog.52acca.com Companies Act 1985? Turnover Profit/loss before taxation A By market and class By market only B By class only By market and class C By market and class Neither D By market only By class only 2 Hedgehog Ltd has owned 100% of the issued share capital of Squirrel Ltd for many years. Hedgehog Ltd sells goods to Squirrel Ltd at cost plus 20%. The following information is available for the year: Turnover – Hedgehog £460,000 – Squirrel Ltd £120,000 During the year Hedgehog Ltd sold goods to Squirrel Ltd for £60,000 of which £18,000 were still held in stock by Squirrel Ltd at the year end. At what amount should turnover appear in the consolidated profit and loss account? A £520,000 B £530,000 C £538,000 D £562,000 50 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 58. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 23 continued 3 Gerbil plc acquired 80,000 £1 ordinary shares in Bunny plc on 1 April 20X7 at a cost of £77,000. Bunny plc's reserves at that date were £50,000 and its issued ordinary share capital was £100,000. At 31 March 20X8 Bunny plc's reserves were £40,000. The amount of the negative goodwill arising on consolidation is: A £35,000 B £43,000 C £63,000 D £73,000 4 Every income measure has a particular capital maintenance concept associated with it. The ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com concept associated with current cost accounting is most closely described as maintaining the: A Current value of the original shareholders' investment B Capacity of the firm to replace its original assets C Capacity of the firm to continue its operations D Current value of the firm's assets 51 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 59. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 23 continued 5 The following information relates to Pony Ltd at 31 December 20X2: £ Debtors 90,000 Cash on deposit 8,000 Trade creditors 75,000 Bank overdraft 90,000 At the request of the company's bankers the company intends to take the following steps to reduce the overdraft: (1) Stock with a book value of £7,500 will be disposed of at a loss of £2,500. (2) Special cash discount terms of 10% will be offered, and debtors of book value £25,000 are expected to respond. As a result of the above steps, the company's bankers agree to advance £50,000 by way of ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com a loan, which will be applied immediately for the purchase of new machinery. This loan will be repayable by five equal annual instalments, the first of which falls due on 31 December 20X3. If all the above transactions had taken place on 31 December 20X2, what would the revised quick, or acid test, ratio have been on that date? A 0.48 B 0.50 C 0.51 D 0.53 6 Furry plc entered into a finance lease in order to obtain the use of an asset from 1 January 20X8. The lease agreement requires Furry plc to make ten half-yearly payments of £13,000 each, commencing on 1 January 20X8. The asset could have been purchased on the open market for £100,000 on 1 January 20X8. Furry plc calculates the allocation of interest over the lease term on a half-yearly basis using the sum of the digits method. Assume that each half-yearly payment includes the interest that has accrued during the previous half year period. On 31 December 20X8 the total obligation arising under finance leases falling due within one year is A £17,333 B £20,667 C £21,333 D £21,636 52 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 60. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 23 continued 7 Gamal plc had the same 5 million ordinary shares in issue on both 1 April 20X1 and 31 March 20X2. On 1 April 20X1 the company issued 1 million £1 units of 12% convertible loan stock. Each unit of stock is convertible into 3 ordinary shares on 1 April 20X9 at the option of the holder. The following is an extract from Gamal plc's profit and loss account for the year ended 31 March 20X2: £'000 Operating profit 413 Interest payable on 12% convertible loan stock (120) Profit on ordinary activities before taxation 293 Taxation : Corporation tax at 33% (98) Dividends 195 (55) Retained profit 140 ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com What was the diluted earnings per share for the year ended 31 March 20X2? A 2.44 pence B 3.44 pence C 3.90 pence D 3.94 pence 8 The freehold land and buildings of Tabby plc were shown at a net book value of £305,000 at 31 December 20X3. This figure had risen to £400,000 at 31 December 20X4. During 20X4 the buildings were depreciated by £45,000 and some of the freehold land was revalued at £83,000 higher than its net book value at 31 December 20X3. Also in 20X4 some property was sold for £60,000, giving a profit of £7,000 over its net book value. Finally a government grant of £20,000 was received on the purchase of a building. Company policy was to treat such government grants as deferred credits. What figure should be included for purchase of freehold land and buildings in Tabby plc's cash flow statement for the year ended 31 December 20X4? A £130,000 B £124,000 C £117,000 D £110,000 53 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 61. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 23 continued 9 Haider plc acquires a freehold building for cash by issuing for cash 200,000 £1 ordinary shares at a premium of £1 per share. In its cash flow statement this transaction would be stated as: Inflow Outflow A £400,000 £400,000 B £400,000 Nil C Nil £400,000 D Nil Nil 10 Intangible fixed assets on the balance sheets of Teddy Limited were as follows: ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com 20X0 20X9 £'000 £'000 Development costs 180 165 Amortisation (124) (83) 56 82 How would these movements be reflected in the cash flow statement for 20X0? Reconciliation of operating Capital expenditure profit to net cash inflow A Outflow of £15,000 Deduct £41,000 B Outflow of £15,000 Add back £41,000 C Outflow of £26,000 No effect D Outflow of £26,000 Deduct £41,000 You will find the solutions to this test at the end of this Study Programme. If you answer more than 5 questions correctly, your performance is satisfactory; if you answer more than 7 correctly, you are doing very well. Once you have reviewed how you have performed, go back over the topics where you feel your understanding is poor. 54 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 62. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Study Period 23 continued You are now ready to attempt the second course exam. These exams are designed to give you some question practice at an early stage in your studies to enable you to obtain feedback on exam technique. Don’t worry too much if you have to revert to the material when answering questions. Obviously it will be beneficial to attempt them without reference to your Study Text and notes, but it is the technique in producing answers that is the valuable element at this stage. Once you have completed your attempt send your solutions, together with the front sheet, to: Marking Department BPP Professional Education Aldine House Aldine Place 142 – 144 Uxbridge Road ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Shepherds Bush Green London W12 8AW 55 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 63. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Answers to Progress Test 1 1 C Goodwill is what is left after deducting the fair value of separable net assets acquired from the total consideration paid. In this case: £'000 £'000 Consideration 1,000 Plant and machinery 350 Trade marks 45 Stock 310 705 Goodwill 295 Even though Deborah has bought an item of goodwill which had been purchased by the previous owners of the business, this goodwill can't be considered as a separable asset. Trade marks can, although intangible, because they can be sold without ACCAÊéµê£ºshop.52acca.com disposing of the business as a whole. This is not possible with goodwill. ACCA²©¿Í£ºblog.52acca.com 2 B £'000 Freehold office accommodation 20,000 Leasehold less than 20 years 7,500 27,500 3 C £'000 Cash 200,000 × 50p 100 200,000 × 100 Equity 100 (2) 200,000 × 500 500 Fair value of shares issued 2 Share premium 400 Reserves Bruce Bruce Ltd Group £'000 £'000 Bruce Ltd P & L account 400 400 Share premium account 400 400 800 800 56 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 64. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Answers to Progress Test 1 continued 4 B Consolidated sundry net assets £'000 Bruce Ltd net assets before combination 900 Less cash paid to Sheila's shareholders (100) 800 Sheila's Ltd net assets 800 Negative goodwill (200) 1,400 Consolidated share capital £'000 Bruce Ltd: before combination 500 Issued to Sheila's shareholders 100 600 ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com Negative goodwill arising on consolidation £'000 Investment at cost 600 Nominal value of shares acquired (200) Reserves acquired (600) Negative goodwill (200) This is a simple question designed to remind you not to forget to adjust net assets and share capital before consolidation! 5 B (753,000 – 150,000 + 68,000). 6 B Cheryl does not control the composition of Herbert's board nor does it own more than half of Herbert's equity. However, it exercises significant influence over Herbert's affairs and the investment is for the long-term. Herbert should therefore be dealt with as joint venture, not as a subsidiary. Cheryl is prevented from exercising significant influence over Goran by the large shareholding of Frodin Ltd. This, and the absence of board representation, is enough to rebut the presumption that a 20% shareholding implies the power to exercise significant influence. Goran Ltd is therefore not an associated company. 7 B The fall in value from carrying value (£960,000) to depreciated HC (£800,000) of £160,000 is recognised in the STRGL. The additional fall in value from depreciated HC to recoverable amount of £40,000 is recognised in the P&L a/c. Finally, the difference between recoverable amount and EUV of £60,000 is also recognised in the STRGL 57 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 65. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Answers to Progress Test 1 continued 8 B The gross profit margin on Nut's sales to Shell is 25% and so £6,000 (25% × £24,000) unrealised profit has been recorded and must be eliminated. In addition, only external sales should be recorded in the consolidated P & L account and so this intra-group sale must be ignored for consolidation purposes. 9 B The closure must be completed within 3 months of the balance sheet date. 10 C A private company is permitted to distribute: £ Accumulated realised profits 1,500,000 Accumulated realised losses (300,000) ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com 1,200,000 CA'85 s263 58 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 66. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Answers to Progress Test 2 1 C 2 A Turnover = 460 + 120 – 60 = 520 3 B £ Cost 77,000 Net assets acquired 80% × £150,000 (120,000) (43,000) ACCAÊéµê£ºshop.52acca.com 4 C The capacity of the firm to continue its operations. ACCA²©¿Í£ºblog.52acca.com 90 + 8 − 25 (Debtors) 73 5 B = = 50 75 + 90 − 5 (Stock) − 22.5 (Debtors + 120 Loan) 147.5 6 C £ Interest - Payments 130,000 Fair value 100,000 30,000 9(9 + 1) S.O.D. = = 45 2 £ Payments within one year 26,000 Less future interest 7/45 x 30,000* 4,667 21,333 * The interest which will be paid in 20X1 which is not yet accrued as at 31.12.X0 59 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com
  • 67. ACCAѧϰÍø£ºwww.52acca.com ACCAÂÛ̳£ºbbs.52acca.com Answers to Progress Test 2 continued 7 B Earnings £'000 PAT 195 Interest saving 1,000 @ 12% × 67% 80 275 No of shares Basic 5,000,000 On conversion 3,000,000 8,000,000 275,000 FD EPS = = 3.44p 8,000,000 ACCAÊéµê£ºshop.52acca.com ACCA²©¿Í£ºblog.52acca.com 8 D Fixed Assets £'000 £'000 b/f 305 Depreciation 45 Revaluation 83 Sale (60-7) 53 β Addition 110 c/f 400 498 498 9 A FRS 1 states that a minimum of netting off should take place, hence both elements of the transaction are disclosed in the statement. The assumption here is that the shares were issued for cash and the cash used to buy the building. The outflow is classified under 'Capital expenditure'. The inflow is classified under 'Financing'. 10 B Development costs have risen from £165,000 to £180,000. This is classified as an outflow of capital expenditure. Amortisation of development costs £124,000 - £83,000 is a non cash expense in the profit and loss account and therefore must be added back. 60 ACCA Learning Web£ºen.52acca.com ACCA Forum£ºforum.52acca.com