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QCF

Unit Title: Financial Accounting


Learning Outcome:
1. Understand the framework of financial accounting.
Please note that the content of this Lecture Guide is listed in its recommended
teaching order, rather than in numerical order.

Assessment Criteria/Indicative Content:


1.1

1.2

Describe the scope, objectives and main users of financial accounting


information in accordance with the international framework of the International
Accounting Standards Board:

Describe the scope and objectives, i.e. the provision of useful information
for people about their resources. This could include cost of assets, loans
outstanding, income received, expenses consumed, etc.

Identify the main users of accounting information in accordance with the


IASBs framework document. The needs of users will vary depending on
the type of organisation and therefore students should consider the
following organisations: sole trader, partnership, private and public
company.

Identify the main and sub-characteristics of useful information to users:

Identify and explain the four main characteristics of useful information to


users, namely; relevance, reliability, understandability and comparability.

Identify and explain the sub-characteristics of the four main


characteristics.

Explain the twelve traditional accounting concepts and their relationship to


the framework characteristics going concern, accruals or matching,
realisation, consistency, prudence, business entity, duality, monetary
measurement, objectivity, historical cost, materiality, and separate
valuation. Be able to give an example of the use of each, for example the
matching principle requires expenses not consumed in the generation of
revenue to be treated as prepayments.

Distinguish between capital income and expenditure and revenue income


and expenditure.

Give examples of each of the above and state how they should be treated
in financial statements, e.g. as assets, liabilities, expenses or revenues.

Examiners tips:
The underpinning concepts and principles of accounting are fundamental to all topics
that follow, so make sure you understand these before moving on.

QCF
Unit Title: Financial Accounting
Learning Outcome:
1. Understand the framework of financial accounting.
Assessment Criteria/Indicative Content:
1.3

Describe the role and scope of external auditing and internal auditing in
business:

Describe the role and scope of external auditing in business.

Describe the role and scope of internal auditing in business.

Describe the relationship between external and internal auditing in the


context of business.

Identify and explain the differences between external and internal auditing
in business.

Identify the contents of an external audit report published in the annual


report of a business.

Identify the modifications that might be made to an external audit report


and the circumstances that give rise to them.

Examiners tips:
The importance of good auditing has surfaced as an important issue in the wake of
the collapse of large multinational corporations such as Enron and Worldcom and the
economic crisis of 2008.
Obtain several annual reports of companies these are generally freely available on
the Internet for such companies as Nestle, Shell, British Airways etc. or indeed any
large company with which you are familiar - and read the external audit report
contained in them.

QCF
Unit Title: Financial Accounting
Learning Outcome:
2. Know how to prepare and present the financial statements of companies in
accordance with internationally generally accepted accounting practice (IGAAP)
under International Financial Reporting Standards.
Assessment Criteria/Indicative Content:
2.1

Describe the external publication and the elements that make up the external
financial statements of a company:

Describe and know the format for the statement of comprehensive income
(trading and profit and loss account).

Describe and know the format for the statement of financial position
(balance sheet).

Describe and know the format for the statement of cash flows.

Describe briefly the scope and objectives of the directors report.

Describe the scope and objectives of corporate governance reports.

Understand and use the requirements of the following IASs:


o

IAS 1 Presentation of financial statements

IAS 8 Accounting policies, changes in accounting estimates and


errors

IAS 10 Events after the reporting period

IAS 33 earnings per share

IAS 24 related party transactions

Examiners tips:
Not only do students have to understand the rules of the above IASs but they need to
be able to apply them to given data and determine the effect on entries in the
financial statements. Students must make use of the summaries available of IASs
available on the Internet and in textbooks. Ask your tutor for access to these if you
have difficulty finding them. Students should also access actual company financial
statements. Again you will find several of these available on the web.

QCF
Unit Title: Financial Accounting
Learning Outcome:
2. Know how to prepare and present the financial statements of companies in
accordance with internationally generally accepted accounting practice (IGAAP)
under International Financial Reporting Standards.
Assessment Criteria/Indicative Content:
2.2

Explain the rules contained in International GAAP in relation to assets,


liabilities, income and expenses:

Explain and use the rules contained in International GAAP in relation to


assets:
o

IAS 2 Inventories

IAS 11 Construction contracts

IAS 16 Property, plant and equipment

IAS 17 leases

IAS 36 Impairment of assets

IAS 38 Intangible assets

IAS 40 Investment property

Explain and use the rules contained in International GAAP in relation to


liabilities, IAS 37 Provisions, contingent liabilities and contingent assets.

Explain and use the rules contained in International GAAP in relation to


income, IAS 18 Revenue.

Explain and use the rules contained in International GAAP in relation to


expenses:
o

IAS 12 Income taxes

IAS 20 Accounting for government grants and disclosure of


government assistance

IAS 23 Borrowing costs

Examiners tips:
See the examiners tips for the previous lecture.

QCF
Unit Title: Financial Accounting
Learning Outcome:
3. Know how to prepare Statements of Comprehensive Income, Statements of
Financial Position, Statements of Changes in Equity and Statements of Cash flows.
Assessment Criteria/Indicative Content:
3.1 Prepare Statements of Comprehensive Income for a given company from given
information in accordance with International GAAP:

From a given trial balance identify expenses and income balances and
insert into Statement of Comprehensive Income.

Adjust this Statement of Comprehensive Income for given further


additional information and period end adjustments in accordance with
International GAAP (the IASs to be covered are listed in lectures 3 and 4).

Examiners tips:
Students should use previous examination questions and those shown in the ABE
manual to ensure they have plenty of practice at preparing Statements of
Comprehensive Income. It is likely that every examination paper will require students
to demonstrate this preparation. If students have not previously studied Introduction
to Accounting at level 4 they are advised to work through that syllabus in relation to
the preparation of simple Income Statements.

QCF
Unit Title: Financial Accounting
Learning Outcome:
3. Know how to prepare Statements of Comprehensive Income, Statements of
Financial Position, Statements of Changes in Equity and Statements of Cash flows.
Assessment Criteria/Indicative Content:
3.2 Prepare Statements of Financial Position for a given company from given
information in accordance with International GAAP:

Identify from a given trial balance asset, liability and equity items and
insert them in a Statement of Financial Position.

Make adjustments to these items from given additional information and


the adjustments made via the Statement of Comprehensive Income in
accordance with International GAAP. The IASs required are listed in
lectures 3 and 4.

Balance the Statement of Financial Position.

Prepare Statements of Comprehensive Income and Statements of


Financial Position from the same trial balance information.

Examiners tips:
Students should use their worked examples from the previous lecture on preparation
of Statements of Comprehensive Income and then prepare the Statement of
Financial Position. If the Statement of Financial Position does not balance, then
check that all items from the trial balance have been inserted into one of the
statements and that all notes and additional adjustments have been dealt with in
accordance with double entry accounting rules.
Lots of practice of preparation of both statements is essential as questions in the
examination paper will require the preparation of either one or both statements.
Again, for students who have not studied this subject previously they are advised to
work through the simple examples contained in the Level 4 syllabus Introduction to
Accounting on the preparation of Statements of Financial position.

QCF
Unit Title: Financial Accounting
Learning Outcome:
3. Know how to prepare Statements of Comprehensive Income, Statements of
Financial Position, Statement of Changes in Equity and Statements of Cash Flows.
Assessment Criteria/Indicative Content:
3.3 Prepare Statements of Changes in Equity for a given company from given
information in accordance with International GAAP.
3.4 Prepare Statements of Cash Flows for a given company from given information in
accordance with International GAAP:

Calculate net cash flows from operating activities using both the indirect
and direct method in accordance with IAS 7 Statement of Cash Flows.

Describe the format of the Statement of Cash Flows in accordance with


IAS 7.

Prepare a Statement of Cash Flows from a given company Statement of


Financial position and Statement of Comprehensive Income and further
information in accordance with IAS 7.

Describe the difference between cash flow and funds flow.

Examiners tips:
Again it is essential that students practice the preparation of Statements of Cash
Flows. Students have most difficulty identifying cash amounts paid for taxation and
cash amounts paid for acquisition of non-current assets and cash received on the
disposal of non-current assets.
Remember that when shares are issued for cash during a period, these shares may
have been issued at a premium and therefore you will need to identify any changes
in the share premium account as well as the issued share capital account. Also
remember that the Statements of Comprehensive Income and Statements of
Financial Position are prepared on an accruals basis and you will need to undo
these accruals and prepayments to arrive at the change in cash flows.

QCF
Unit Title: Financial Accounting
Learning Outcome:
4. Know how to analyse and interpret financial statements for a range of users.
Assessment Criteria/Indicative Content:
4.1 Explain the meaning of performance, financial status and investor ratios:

Performance ratios should include return on capital employed, return on


shareholders funds, gross profit margin, net profit margin, expenses to
sales, and sales to capital employed (asset turnover ratio).

Financial status ratios should include liquidity ratio, acid test ratio, debtors
days, creditor days and inventory days.

Investor ratios should include gearing ratio (see lecture 12) and earnings
per share.

4.2 Calculate performance, financial and investment ratios as given above for an
enterprise.
4.3 Interpret the results of the analysis of financial ratios of performance, financial
status and investor ratios for users of financial statements:

Analyse and interpret, for users of financial information, the ratios


calculated for performance, financial status and investor ratios.

Explain the limitations of ratio analysis to users of the ratios.

Explain the impact of changing prices on financial statement ratios


(detailed calculations are not expected).

Identify possible methods of adjusting historical financial statements to


present more useful information to users, e.g. current cost accounting, fair
value accounting and current purchasing power. Detailed calculations will
not be required.

Examiners tips:
Ratios are often poorly calculated by students as they are unclear which figures form
the numerator and denominator of the ratio. Students must learn the formula for the
ratios before they attempt calculations and interpretation. Ratios are best
remembered by using the pyramid of ratios which is shown in the ABE Manual and

all good accounting texts.


Ratios must not just be calculated for the sake of it. They form an important part of
the interpretation of financial statements for users. Try (as a group of students or
individually) listing the main uses for and limitations of calculating ratios for a
business.
Another good method to commence the interpretation of a set of financial statements
is before calculating individual ratios to compare the current periods Statement of
Comprehensive Income and Statement of Financial Position with that of the previous
period and identify all the major changes. These changes will then help you when
trying to interpret the change in ratios.

QCF
Unit Title: Financial Accounting
Learning Outcome:
5. Know how to prepare and present consolidated financial statements in
accordance with IGAAP.
Assessment Criteria/Indicative Content:
5.1 Describe and explain the contents of IASs in relation to the preparation of
consolidated financial statements.

Describe the contents of IFRS 3 Business Combinations in summary form


as given in the IAS.

Describe the contents of IAS 27 Consolidated and Separate Financial


Statements in summary form as given in IAS.

Explain the concept of control in relation to a subsidiary and holding


entity.

Demonstrate the difference between ownership and control.

Explain the principles of consolidation for a single holding structure:


o

Understand the need to value the subsidiary at fair value.

Understand the need to identify the cost of control (goodwill) when


carrying out consolidations and explain what this goodwill is and
how it should be treated in consolidated accounts.

Understand the need to eliminate intergroup items, e.g. inventory


sales, loans, asset sales and dividends.

Understand the need to value the purchase consideration at fair


value.

Examiners tips:
At this stage students should be able to calculate the goodwill involved in simple
group purchases. For example:
H company purchased 75% of the equity of S paying 1m. The fair value of Hs
assets at the date of acquisition was 600,000. Goodwill is therefore 1,000,000
75% x 600,000 = 550,000.

QCF
Unit Title: Financial Accounting
Learning Outcome:
5. Know how to prepare and present consolidated financial statements in
accordance with IGAAP.
Assessment Criteria/Indicative Content:
5.2 Prepare consolidated financial statements for a holding company with one
subsidiary both at the acquisition date and for subsequent periods (Part 1).

Prepare Consolidated Statements of Financial Position for a holding


company with one subsidiary at the acquisition date:
o

Identify and calculate the fair value paid for the percentage holding.

Identify and calculate the goodwill inherent in the purchase.

Identify and calculate the non-controlling interest in the subsidiary at


the acquisition date.

Eliminate inter group balances including pre-acquisition reserves.

Prepare Consolidated Statements of Financial Position for a holding


company with one subsidiary subsequent to acquisition:
o

Identify and calculate post acquisition reserves available from the


subsidiary to the holding company.

Eliminate inter group balances.

Identify the treatment of consolidated goodwill subsequent to


purchase.

Prepare the consolidated statement.

Examiners tips:
Students find the preparation of consolidated statements difficult as the concept is
hard to grasp. Tutors should work through several simple consolidations with a group
of students and ensure that each student knows how each figure in the consolidated
balance sheet is derived. Students should then tackle further questions with
increased difficulty on their own. Tutors should mark these questions and clearly
explain to the student where errors were made and how they should be corrected.

QCF
Unit Title: Financial Accounting
Learning Outcome:
5. Know how to prepare and present consolidated financial statements in
accordance with IGAAP.
Assessment Criteria/Indicative Content:
5.2 Prepare consolidated financial statements for a holding enterprise with one
subsidiary both at the acquisition date and for subsequent periods (Part 2).

Prepare consolidated statements of comprehensive income for a holding


enterprise with one subsidiary both at the acquisition date and for
subsequent periods.
o

Calculate the group income for the given period.

Calculate the group expenses for the given period.

Calculate and eliminate pre-acquisition earnings.

Eliminate inter-group transactions.

Prepare the group statement of comprehensive income for the given


period.

Examiners tips:
The preparation of consolidated statements of comprehensive income is slightly
easier than that of consolidated statements of financial position but lots of practice is
still needed.

QCF
Unit Title: Financial Accounting
Learning Outcome:
6. Understand the capital structure and gearing of a business.
Assessment Criteria/Indicative Content:
6.1 Explain and appraise the various sources of finance available to businesses both
long-term and short-term:

Describe the long-term sources of finance available in the market place to


a business, including equity finance lease and loan.

Describe the short-term sources of finance available to a business,


including debt factoring, hire purchase, short-term loans, overdraft and
creditors.

Compare and contrast the effect on a business of financing long-term and


short-term.

Advise on the financing needs of a given business to interested parties.

Explain working capital and its management for the benefit of a business.

6.2 Explain the relationship between equity and debt within a business( i.e. the
gearing):

Calculate gearing ratios for a business.

Interpret gearing ratios for interested users.

6.3 Prepare financial statements of a business after changes in their financing:

Describe the issue of various types of shares and loans, e.g. premium
issue, bonus issue, rights issue and debentures.

Describe the redemption of shares and loans.

Prepare Statements of Financial Position after the issue and redemption


of shares and loans.

Examiners tips:
Form a tutor group of students and prepare a table showing the advantages and
disadvantages to a business of the various forms of finance available to them