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ABE Level 6 Diploma 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 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.

1.2

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.

ABE Level 6 Diploma 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.

ABE Level 6 Diploma 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 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

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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.

ABE Level 6 Diploma 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 o o o o o 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 o 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.

ABE Level 6 Diploma 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.

ABE Level 6 Diploma 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.

ABE Level 6 Diploma 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.

ABE Level 6 Diploma 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.

ABE Level 6 Diploma 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 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.

ABE Level 6 Diploma 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 o 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.

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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.

ABE Level 6 Diploma 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 o o o 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.

ABE Level 6 Diploma 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