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S T U D Y PAPER F3 T E FINANCIAL ACCOUNTING X (INTERNATIONAL) T In this edition, approved by ACCA x We ddiscuss the bbest strategies for studying for ACCA exams x We hhighlight the mmost important elements in the syllabus and the kkey skills you will need x We ssignpost how each chapter links to the syllabus and the study guide x We pprovide lots of eexam focus points demonstrating what the examiner will want you to do x We eemphasise key points in regular ffast forward summaries xThiNganHang.comWe ttest your knowledge of what you've studied in qquick quizzes x We eexamine your understanding in our eexam question bank x We rreference all the important topics in our ffull index BPP's i-Learn and i-Pass products also support this paper. FOR EXAMS IN DECEMBER 2009 AND JUNE 2010 ThiNganHang.com
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First edition 2007 Third edition June 2009 ISBN 9780 7517 6364 5 (Previous ISBN 9870 7517 4723 2) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in BPP Learning Media Ltd any form or by any means, electronic, mechanical, BPP House, Aldine Place photocopying, recording or otherwise, without the prior London W12 8AA written permission of BPP Learning Media Ltd. www.bpp.com/learningmedia We are grateful to the Association of Chartered Certified Printed in Great Britain Accountants for permission to reproduce past examination questions. The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, unless where otherwise stated. Your learning materials, published by BPPLearning Media Ltd, are printed on papersourced from sustainable, managed forests.ThiNganHang.com © BPP Learning Media Ltd 2009 ii ThiNganHang.com
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Contents Page Introduction How the BPP ACCA-approved Study Text can help you pass ....................................................................... v Studying F3 ................................................................................................................................................ vii The exam paper..........................................................................................................................................viii Part A The context and purpose of financial reporting 1 Introduction to accounting .................................................................................................................. 3 2 The regulatory framework.................................................................................................................. 13 Part B The qualitative characteristics of financial information and the fundamental bases of accounting 3 Accounting conventions .................................................................................................................... 25 Part C The use of double entry and accounting systems 4 Sources, records and books of prime entry....................................................................................... 57 5 Ledger accounts and double entry..................................................................................................... 71 6 From trial balance to financial statements ......................................................................................... 99 Part D Recording transactions and events 7 Sales tax .......................................................................................................................................... 117 8 Inventory ......................................................................................................................................... 125 9 Tangible non-current assets ............................................................................................................ 149 10 Intangible non-current assets .......................................................................................................... 183 11 Accruals and prepayments............................................................................................................... 191 12 Irrecoverable debts and allowances................................................................................................. 205 13 Provisions and contingencies .......................................................................................................... 221 Part E Preparing a trial balance 14 Control accounts.............................................................................................................................. 231 15 Bank reconciliations......................................................................................................................... 253 16 Correction of errors ......................................................................................................................... 265 17 Preparation of financial statements for sole traders ........................................................................ 279 Part F Preparing basic financial statements 18 Incomplete records.......................................................................................................................... 293 19 Partnerships .................................................................................................................................... 323 20 Introduction to company accounting ............................................................................................... 339 ThiNganHang.com21 Preparation of financial statements for companies.......................................................................... 359 22 Events after the reporting period ..................................................................................................... 381 23 Statements of cash flows................................................................................................................. 387 Part G Miscellaneous topics 24 Information technology.................................................................................................................... 405 Exam question bank................................................................................. 419 Exam answer bank................................................................................... 433 Index........................................................................................................ 437 Review form and free prize draw Contents iii ThiNganHang.com
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A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: x Photocopying our materials is a breach of copyright x Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your fellow students? We update for a reason.) But the e-products are sold on a single user licence basis: we do not supply ‘unlock’ codes to people who have bought them second-hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them? ThiNganHang.com iv ThiNganHang.com
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How the BPP ACCA-approved Study Text can help you pass – AND help you with your Practical Experience Requirement! NEW FEATURE – the PER alert! Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying F3 outlines the content of the paper, the necessary skills the examiner expects you to demonstrate and any brought forward knowledge you are expected to have. Exam focus points are included within the chapters to provide information about skills that you will need in the exam and reminders of important points within the specific subject areas. Using the Syllabus and Study Guide You can find the syllabus, Study Guide and other useful resources for F3 on the ACCA web site: www.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/fundamentals. The Study Text covers all aspects of the syllabus to ensure you are as fully prepared for the exam as possible. ThiNganHang.comTesting what you can doTesting yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Exam-style Questions – lots of them - both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v ThiNganHang.com
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Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Tells you what you will be studying in this chapter and the Topic list Syllabusreference relevant section numbers, together with the ACCA syllabus references. Introduction Puts the chapter content in the context of the syllabus as a whole. Study Guide Links the chapter content with ACCA guidance. Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. Summarises the content of main chapter headings, FAST FORWARD allowing you to preview and review each section easily. Examples Demonstrate how to apply key knowledge and techniques. Definitions of important concepts that can often earn you Key terms easy marks in exams. Provide information about skills you will need in the exam Exam focus points and reminders of important points within the specific subject area. Formulae that are not given in the exam but which have to Formula to learn be learnt. This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your PER. Question Give you essential practice of techniques covered in the chapter. Case Study Provide real world examples of theories and techniques. ThiNganHang.comChapter Roundup A full list of the Fast Forwards included in the chapterproviding an easy source of review. , Quick Quiz A quick test of your knowledge of the main topics in the chapter. Exam Question Bank Found at the back of the Study Text with more comprehensive chapter questions. vi Introduction ThiNganHang.com
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Studying F3 As the name suggests, this paper examines basic financial accounting topics and is fundamental for all financial accountants. The examiner for this paper is Nicola Ventress. She is a member of the ICAEW and an experienced accounting and financial reporting author and tutor. 1 What F3 is about Paper F3 aims to develop your knowledge and understanding of the underlying principles, concepts and regulations relating to financial accounting. You will need to demonstrate technical proficiency in the use of double entry techniques, including the preparation of basic financial statements for sole traders, partnerships and limited liability companies. The skills you learn at F3 will be built upon in papers F7 and P2. 2 What skills are required? You are expected to demonstrate Level 1 skills throughout the syllabus. This means that you need to show 'knowledge and comprehension'. It is not sufficient to merely know the subject, you need to understand it and show that you understand. Therefore you will need to not only know an accounting standard but also show how to use it in practice. Double entry bookkeeping is a basic skill that you will need throughout all the financial accounting papers. Therefore it is essential that you master it at this stage or you will find the higher papers very difficult to understand. For paper F3, you also need to be able to prepare basic financial statements. Once again, your basic knowledge from paper F3 will be built upon in papers F7 and P2. Therefore you must understand the basics of preparing financial statements now. 3 How to improve your chances of passing Examiners have repeatedly emphasised that students must know the whole syllabus. This is particularly important for paper F3, as all fifty questions are compulsory and the examiner aims to cover most of the syllabus. If you miss out a syllabus area, you will severely limit your chances of passing the exam. Above all you must practise questions. The text gives you some exam style questions but you really need a large question bank to practise on as given in BPP's Practice and Revision Kit. Do keep to the timing specified. The exam is 2 hours for 90 marks, which means 1.3 minutes per mark or just over 2.5 minutes for a 2 mark question. In the exam question bank we suggest that you allow 1 minute for a 1 mark question and 2 minutes for a 2 mark question. ThiNganHang.com Introduction vii ThiNganHang.com
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The exam paper The exam is a two-hour paper. There will be fifty questions and they are all compulsory. The format of the paper based Pilot Paper is 50 MCQs, 40 being 2 mark questions and 10 being 1 mark questions. The examiner has confirmed that this will be the format for future exams. All exams are marked by computer and so no marks will be given for workings. Analysis of pilot paper Number of marks 40 2 mark compulsory MCQs 80 10 1 mark compulsory MCQs 10 90 Computer based exam You can also sit the exam as a computer based assessment. Feedback from students implies that the 40 2 mark questions are divided approximately 50:50 between MCQs and data entry style questions. Data entry style questions may require you to enter the answer to a calculation or words to complete a sentence and are very similar to the non-MCQ style questions found in the Quick Quizzes. Technical articles There have been a number of technical articles on exams in recent editions of Student Accountant. Fundamental Knowledge, 7 February 2008 (why all the questions in Fundamentals level exams are compulsory) Be Prepared – multiple choice questions, 7 July 2008 (practical guidance on how to maximise marks in MCQs) Computer-based exams put to the test, 19 August 2008. ThiNganHang.com viii Introduction ThiNganHang.com
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Introduction to accounting Topic list Syllabus reference 1 The purpose of financial reporting A1(a) 2 Types of business entity A1(b) – (d) 3 Nature, principles and scope of financial reporting A1(e) 4 Users' and stakeholders' needs A2(a) 5 The main elements of financial reports A3(a) – (b) Introduction We will begin by looking at the aim of Paper F3, as laid out in ACCA's syllabus and Study Guide and discussed already in the introductory pages to this text (if you haven't read through the introductory pages, do so now – the information in there is extremely important). 'Aim of Paper F3 ThiNganHang.comand concepts relating to financial accounting and technical proficiencyin the use of double-entry accounting techniques including thepreparation of basic financial statements.'To develop knowledge and understanding of the underlying principles Before you learn how to prepare financial reports, it is important to understand why they are prepared. Sections 1 – 3 of this chapter introduce some basic ideas about financial reports and give an indication of their purpose. You will also be introduced to the functions which accountants carry out: financial accounting and management accounting. These functions will be developed in detail in your later studies for the ACCA qualification. Section 4 identifies the main users of financial statements and their needs. Finally, in Section 5, we will look at the main financial statements: the statement of financial position and the income statement; as well as the main elements of assets, liabilities, equity, revenue and expense. 3 ThiNganHang.com
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Study guide Intellectual level A1 The reasons for and objectives of financial reporting (a) Define financial reporting – recording, analysing and summarising financial 1 data. (b) Identify and define types of business entity – sole trader, partnership, 1 limited liability company. (c) Recognise the legal differences between a sole trader, partnership and a 1 limited liability company. (d) Identify the advantages and disadvantages of operating as a limited liability 1 company, sole trader or partnership. (e) Understand the nature, principles and scope of financial reporting. 1 A2 Users' and stakeholders' needs (a) Identify the users of financial statements and state and differentiate between 1 their information needs. A3 The main elements of financial reports (a) Understand and identify the purpose of each of the main financial 1 statements. (b) Define and identify assets, liabilities, equity, revenue and expense. 1 Exam guide The exam consists of 10 1 mark and 40 2 mark MCQs. Any of the topics in this chapter could form the basis of a 1 or 2 mark question. Remember that all fifty questions are compulsory and will cover most of the syllabus. Therefore, do not neglect these introductory topics. Just because the exam is composed of MCQs, do not assume that it is easy (it's not). Also the format means that no method marks are available Exam focus point At the 2009 ACCA Teachers' Conference, the examiner reminded students that they need to study the full breadth of the syllabus. 1 The purpose of financial reporting 1.1 What is financial reporting? FAST FORWARD ThiNganHang.comFinancial dataFinancial reportingis the name given to the actual transactions carried out by a business eg sales of goods,is a way of recording, analysing and summarising financial data. purchases of goods, payment of expenses. These transactions are recorded in books of prime entry (which we will study in detail in Chapter 4). The transactions are analysed in the books of prime entry and the totals are posted to the ledger accounts (see Chapter 5). Finally, the transactions are summarised in the financial statements, which we will meet in section 5 of this chapter (and will study in detail in Chapter 6). 4 1: Introduction to accounting ~ Part A The context and purpose of financial reporting ThiNganHang.com
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Question Financial reporting Financial reporting means the financial statements produced only by a large quoted company. Is this statement correct? A Yes B No Answer The correct answer is B. Financial reporting is carried out by all businesses, no matter what their size or structure. 2 Types of business entity 2.1 What is a business? FAST FORWARD Businesses of whatever size or nature exist to make a profit. There are a number of different ways of looking at a business. Some ideas are listed below. x A business is a commercial or industrial concern which exists to deal in the manufacture, re-sale or supply of goods and services. x A business is an organisation which uses economic resources to create goods or services which customers will buy. x A business is an organisation providing jobs for people. x A business invests money in resources (for example: buildings, machinery, employees) in order to make even more money for its owners. This last definition introduces the important idea of profit. Businesses vary from very small businesses (the local shopkeeper or plumber) to very large ones (ICI, IKEA, Corus). However all of them want to earn profits. Key term Profit is the excess of revenue (income) over expenditure. When expenditure exceeds revenue, the business is running at a loss. One of the jobs of an accountant is to measure revenue and expenditure, and so profit. It is not such a straightforward problem as it may seem and in later chapters we will look at some of the theoretical and practical difficulties involved. ThiNganHang.com2.2 Types of business entity There are three main types of business entity. x Sole traders x Partnerships x Limited liability companies Sole traders are people who work for themselves. Examples include the local shopkeeper, a plumber and a hairdresser. The term sole trader refers to the ownership of the business, sole traders can have employees. Partnerships occur when two or more people decide to run a business together. Examples include an accountancy practice, a medical practice and a legal practice. Limited liability companies are incorporated to take advantage of 'limited liability' for their owners (shareholders). This means that, while sole traders and partners are personally responsible for the Part A The context and purpose of financial reporting ~ 1: Introduction to accounting 5 ThiNganHang.com
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amounts owed by their businesses, the shareholders of a limited liability company are only responsible for the amount to be paid for their shares. Limited liability companies are dealt with in more detail in Chapter 20. In law sole traders and partnerships are not separate entities from their owners. However, a limited liability company is legally a separate entity from its owners and it can issue contracts in the company’s name. For accounting purposes, all three entities are treated as separate from their owners. This is called the business entity concept. We will see the practical consequence in Chapter 5. 2.3 Advantages of trading as a limited liability company (a) Limited liability makes investment less risky than investing in a sole trader or partnership. However, lenders to a small company may ask for a shareholder's personal guarantee to secure any loans. (b) It is easier to raise finance because of limited liability and there is no limit on the number of shareholders. (c) A limited liability company has a separate legal identity from its shareholders. So a company continues to exist regardless of the identity of its owners. In contrast, a partnership ceases, and a new one starts, whenever a partner joins or leaves the partnership. (d) There are tax advantages to being a limited liability company. The company is taxed as a separate entity from its owners and the tax rate on companies may be lower than the tax rate for individuals. (e) It is relatively easy to transfer shares from one owner to another. In contrast, it may be difficult to find someone to buy a sole trader's business or to buy a share in a partnership. 2.4 Disadvantages of trading as a limited liability company (a) Limited liability companies have to publish annual financial statements. This means that anyone (including competitors) can see how well (or badly) they are doing. In contrast, sole traders and partnerships do not have to publish their financial statements. (b) Limited liability company financial statements have to comply with legal and accounting requirements. In particular the financial statements have to comply with accounting standards. Sole traders and partnerships may comply with accounting standards, but are not compelled to do so. (c) The financial statements of larger limited liability companies have to be audited. This means that the statements are subject to an independent review to ensure that they comply with legal requirements and accounting standards. This can be inconvenient, time consuming and expensive. (d) Share issues are regulated by law. For example, it is difficult to reduce share capital. Sole traders and partnership can increase or decrease capital as and when the owners wish. 3 Nature, principles and scope of financial reporting FAST FORWARD ThiNganHang.comxYou should be able to distinguish the following:Financial accounting x Management accounting You may have a wide understanding of what accounting and financial reporting is about. Your job may be in one area or type of accounting, but you must understand the breadth of work which an accountant undertakes. 3.1 Financial accounting So far in this chapter we have dealt with financial accounts. Financial accounting is mainly a method of reporting the results and financial position of a business. It is not primarily concerned with providing information towards the more efficient running of the business. Although financial accounts are of interest 6 1: Introduction to accounting ~ Part A The context and purpose of financial reporting ThiNganHang.com
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to management, their principal function is to satisfy the information needs of persons not involved in running the business. They provide historical information. 3.2 Management accounting The information needs of management go far beyond those of other account users. Managers have the responsibility of planning and controlling the resources of the business. Therefore they need much more detailed information. They also need to plan for the future (eg budgets, which predict future revenue and expenditure). Key term Management (or cost) accounting is a management information system which analyses data to provide information as a basis for managerial action. The concern of a management accountant is to present accounting information in the form most helpful to management. You need to understand this distinction between management accounting and financial accounting. Question Accountants They say that America is run by lawyers and Britain is run by accountants, but what do accountants do in your organisation or country? Before moving on to the next section, think of any accountants you know and the kind of jobs they do. 4 Users' and stakeholders' needs 4.1 The need for financial statements FAST FORWARD There are various groups of people who need information about the activities of a business. Why do businesses need to produce financial statements? If a business is being run efficiently, why should it have to go through all the bother of accounting procedures in order to produce financial information? The International Accounting Standards Board states in its document Framework for the preparation and presentation of financial statements (which we will examine in detail later in this Study Text): 'The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.' In other words, a business should produce information about its activities because there are various ThiNganHang.comgroups of people who want or need to know that information. This sounds rather vague: to make it clearer,we will study the classes of people who need information about a business. We need also to think aboutwhat information in particular is of interest to the members of each class. Large businesses are of interest to a greater variety of people and so we will consider the case of a large public company, whose shares can be purchased and sold on a stock exchange. 4.2 Users of financial statements and accounting information The following people are likely to be interested in financial information about a large company with listed shares. (a) Managers of the company appointed by the company's owners to supervise the day-to-day activities of the company. They need information about the company's financial situation as it is Part A The context and purpose of financial reporting ~ 1: Introduction to accounting 7 ThiNganHang.com
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currently and as it is expected to be in the future. This is to enable them to manage the business efficiently and to make effective decisions. (b) Shareholders of the company, ie the company's owners, want to assess how well the management is performing. They want to know how profitable the company's operations are and how much profit they can afford to withdraw from the business for their own use. (c) Trade contacts include suppliers who provide goods to the company on credit and customers who purchase the goods or services provided by the company. Suppliers want to know about the company's ability to pay its debts; customers need to know that the company is a secure source of supply and is in no danger of having to close down. (d) Providers of finance to the company might include a bank which allows the company to operate an overdraft, or provides longer-term finance by granting a loan. The bank wants to ensure that the company is able to keep up interest payments, and eventually to repay the amounts advanced. (e) The taxation authorities want to know about business profits in order to assess the tax payable by the company, including sales taxes. (f) Employees of the company should have a right to information about the company's financial situation, because their future careers and the size of their wages and salaries depend on it. (g) Financial analysts and advisers need information for their clients or audience. For example, stockbrokers need information to advise investors; credit agencies want information to advise potential suppliers of goods to the company; and journalists need information for their reading public. (h) Government and their agencies are interested in the allocation of resources and therefore in the activities of business entities. They also require information in order to provide a basis for national statistics. (i) The public. Entities affect members of the public in a variety of ways. For example, they may make a substantial contribution to a local economy by providing employment and using local suppliers. Another important factor is the effect of an entity on the environment, for example as regards pollution. Accounting information is summarised in financial statements to satisfy the information needs of these different groups. Not all will be equally satisfied. 4.3 Needs of different users Managers of a business need the most information, to help them make their planning and control decisions. They obviously have 'special' access to information about the business, because they are able to demand whatever internally produced statements they require. When managers want a large amount of information about the costs and profitability of individual products, or different parts of their business, they can obtain it through a system of cost and management accounting. Question Information for managers ThiNganHang.comWhich of the following statements is particularly useful for managers?AB Financial statements for the last financial yearTax records for the past five years C Budgets for the coming financial year D Bank statements for the past year Answer The correct answer is C. Managers need to look forward and make plans to keep the business profitable. Therefore the most useful information for them would be the budgets for the coming financial year. 8 1: Introduction to accounting ~ Part A The context and purpose of financial reporting ThiNganHang.com
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In addition to management information, financial statements are prepared (and perhaps published) for the benefit of other user groups, which may demand certain information. (a) The national laws of a country may provide for the provision of some accounting information for shareholders and the public. (b) National taxation authorities will receive the information they need to make tax assessments. (c) A bank might demand a forecast of a company's expected future cash flows as a pre-condition of granting an overdraft. (d) The International Accounting Standards Board (IASB) has been responsible for issuing International Financial Reporting Standards (IFRSs and IASs) and these require companies to publish certain additional information. Accountants, as members of professional bodies, are placed under a strong obligation to ensure that company financial statements conform to the requirements of IFRS/IAS. (e) Some companies provide, voluntarily, specially prepared financial information for issue to their employees. These statements are known as 'employee reports'. Exam focus The needs of users can easily be examined by means of a MCQ. For example, you could be given a list of point types of information and asked which user group would be most interested in this information. 5 The main elements of financial reports FAST FORWARD The principle financial statements of a business are the statement of financial position and the income statement. 5.1 Statement of financial position Key term The statement of financial position is simply a list of all the assets owned and all the liabilities owed by a business as at a particular date. It is a snapshot of the financial position of the business at a particular moment. Monetary amounts are attributed to each of the assets and liabilities. 5.1.1 Assets Key term An asset is something valuable which a business owns or has the use of. Examples of assets are factories, office buildings, warehouses, delivery vans, lorries, plant and machinery, computer equipment, office furniture, cash and goods held in store awaiting sale to customers. Some assets are held and used in operations for a long time. An office building is occupied by administrative staff for years; similarly, a machine has a productive life of many years before it wears out. Other assets are held for only a short time. The owner of a newsagent shop, for example, has to sell his ThiNganHang.comnewspapers on the same day that he gets them. The more quickly a business can sell the goods it has instore, the more profit it is likely to make; provided, of course, that the goods are sold at a higher price thanwhat it cost the business to acquire them. 5.1.2 Liabilities Key term A liability is something which is owed to somebody else. 'Liabilities' is the accounting term for the debts of a business. Examples of liabilities are amounts owed to a supplier for goods bought on credit, amounts owed to a bank (or other lender), a bank overdraft and amounts owed to tax authorities (eg in respect of sales tax). Some liabilities are due to be repaid fairly quickly eg suppliers. Other liabilities may take some years to repay (eg a bank loan). Part A The context and purpose of financial reporting ~ 1: Introduction to accounting 9 ThiNganHang.com
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5.1.3 Capital or equity The amounts invested in a business by the owner are amounts that the business owes to the owner. This is a special kind of liability, called capital. In a limited liability company, capital usually takes form of shares. Share capital is also known as equity. 5.1.4 Form of statement of financial position A statement of financial position used to be called a balance sheet. The former name is apt because assets will always be equal to liabilities plus capital (or equity). A very simple statement of financial position for a sole trader is shown below. A TRADER STATEMENT OF FINANCIAL POSITION AS AT 30 APRIL 20X7 $ $ Assets Plant and machinery 55,000 Inventory 5,000 Receivables (from customers) 1,500 Bank 500 7,000 Total assets 62,000 Capital Balance brought forward 25,000 Profit for the year 10,400 Balance carried forward 35,400 Liabilities Bank loan 25,000 Payables (to suppliers) 1,600 Total capital plus liabilities 62,000 We will be looking at a statement of financial position in a lot more detail later in this Study Text. This example is given simply to illustrate what a statement of financial position looks like. 5.2 Income statement Key term An income statement is a record of revenue generated and expenditure incurred over a given period. The statement shows whether the business has had more revenue than expenditure (a profit) or vice versa (loss). 5.2.1 Revenue and expenses Revenue is the income for a period. The expenses are the costs of running the business for the same ThiNganHang.com5.2.2 Form of income statementperiod. The period chosen will depend on the purpose for which the statement is produced. The income statement which forms part of the published annual financial statements of a limited liability company will usually be for the period of a year, commencing from the date of the previous year's statements. On the other hand, management might want to keep a closer eye on a company's profitability by making up quarterly or monthly statements. A simple income statement for a sole trader is shown on the next page. 10 1: Introduction to accounting ~ Part A The context and purpose of financial reporting ThiNganHang.com
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A TRADER INCOME STATEMENT FOR THE YEAR ENDED 30 APRIL 20X7 $ Revenue 150,000 Cost of sales 75,000 Gross profit 75,000 Other expenses 64,600 Net profit 10,400 Once again, this example is given purely for illustrative purposes. We will be dealing with an income statement in detail later in this Study Text. 5.3 Purpose of financial statements Both the statement of financial position and the income statement are summaries of accumulated data. For example, the income statement shows a figure for revenue earned from selling goods to customers. This is the total amount of revenue earned from all the individual sales made during the period. One of the jobs of an accountant is to devise methods of recording such individual transactions, so as to produce summarised financial statements from them. The statement of financial position and the income statement form the basis of the financial statements of most businesses. For limited liability companies, other information by way of statements and notes may be required by national legislation and/or accounting standards, for example a statement of comprehensive income and a statement of cash flows. These are considered in detail later in this Study Text. Question Accounting information The financial statements of a limited liability company will consist solely of the statement of financial position and income statement. Is this statement correct? A True B False Answer The correct answer is B. As shown above other statements, such as a statement of cash flows, are usually needed. One of the competences you require to fulfil performance objective 4 of the PER is the ability to prioritise ThiNganHang.comand plan your work to meet objectives, managing conflicting pressures and making best use of time and resources. In the course of your F3 studies, you will be demonstrating this competence. Part A The context and purpose of financial reporting ~ 1: Introduction to accounting 11 ThiNganHang.com
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