Teacher's delivery guide, - Pearson qualifications

Pearson LCCI Level 4 Certifi cate in Financial Accounting

(ASE20101)

TEACHER’S DELIVERY GUIDE

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Pearson LCCI Level 4 Certificate in Financial Accounting (ASE20101):Teacher’s Delivery Guide

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Pearson Education LimitedEdinburgh GateHarlow CM20 2JEUnited KingdomTel: +44 (0)1279 623623Web: www.pearson.com/uk

First published 2016

© Pearson Education Limited 2016

Compiled from:Selected material written by Sally Sturman (Introduction and Chapters 1, 2, 3, 4, 7) with Chapters 1, 3 and 7 revised by Mike SeagroveSeries consultant: Steve Jakubowski

All questions for Chapter 1 and 2, Questions 4.5 to 4.9, 5.10 and 7.6 were created by Eileen Roddy

Questions 4.1 to 4.4, 6.1 to 6.5, and 7.1 to 7.4 fromAccounting and Finance: An IntroductionSeventh editionEddie McLaney and Peter AtrillISBN: 978-1-292-01256-8© Pearson Education Limited 2014 (print and electronic)

Questions 5.3 to 5.9 fromFrank Wood’s Business Accounting 1Twelfth editionFrank Wood and Alan SangsterISBN: 978-0-273-78918-8© Pearson Education Limited 2002, 2007, 2008, 2012

Questions 6.6 to 6.7 and 7.5 fromFinancial and Management Accounting Sixth editionPauline WeetmanISBN: 978-0-273-78921-5© Pearson Education Limited 2013 (print and electronic)

Questions 6.8 to 6.17 fromFrank Wood’s Business Accounting 2Twelfth editionFrank Wood and Alan SangsterISBN: 978-0-273-76779-4© Pearson Education Limited 2002, 2007, 2008, 2012

Questions 3.1 to 3.10 by Steve Jakubowski

The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Saffron House, 6-10 Kirby Street, London EC1N 8TS.

ISBN: 978-1-784-48900-7

Typeset in Charter ITC 9.5/12.5 pt by Fakenham Prepress Solutions, Fakenham, Norfolk NR21 8NN

Pearson Education Limited is not responsible for the content of any external internet sites. It is essential for tutors to preview each website before using it in class so as to ensure that the URL is still accurate, relevant and appropriate. We suggest that tutors bookmark useful websites and consider enabling students to access them through the school/college intranet.

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Contents

Introduction v

1 What’s new 1

2 Delivery guidance 3

3 Scheme of work 5

4 Preparing learners for external assessment 21

5 Exam command words 25

6 Practice exercises 27

7 Further reading and resource suggestions 67

8 IAS glossary 69

iii

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v

Introduction

Welcome to the Teacher’s Delivery Guide for Pearson LCCI Level 4 Certifi cate in Financial Accounting (ASE20101). We are delighted that you are interested in teaching this qualifi cation, and have provided this free resource – written by teachers – to support your delivery of the specifi cation. It was created to support both new and existing LCCI teachers and is based on the content of the latest specifi cations.

LCCI qualifi cations (set up originally by the London Chamber of Commerce and Industry) have an established reputation dating back to 1887, when the fi rst exams were set in Bombay (now Mumbai). In 2011 this qualifi cation suite became par t of the Pearson portfolio, which also includes academic qualifi cations (e.g. GCSE and GCE Level) and vocational qualifi cations (e.g. BTEC). Now, these qualifi cations are off ered in over 90 countries and over 250,000 LCCI exams are taken annually by learners all over the globe.

Some of the key features and benefi ts of the new fi nance and quantitative qualifi ca-tions include:

● Comprehensive support – Each qualification in the new suite is supported by a free Teacher’s Delivery Guide; marketing materials to help you recruit learners; and past papers with mark schemes as well as full examiner reports following each exam.

● Professional body recognition – We have received a number of exemptions from Professional Bodies such as ACCA, CIMA and ICAEW. For more information, please visit the Progression area within the Pearson website (qualifications.pearson.com/lcci).

● Higher body recognition – UCAS points are due to be confirmed on the new LCCI Level 3 titles in 2016, so look on the website for details.

● Employer recognition – LCCI qualifications have a long history of being sought after by local employers, particularly in some countries where the brand is regarded as the market-leading finance qualification.

● 100% external assessment – All the exams are set and marked by Pearson, which gives the qualification credibility amongst external stakeholders (like employers, Higher Education) and means you can be confident of the standards of the qualifi-cation. These qualifications will also follow the same awarding process as general (academic) qualifications, and grade boundaries will be set for each exam and published after the exam has been set, to ensure that standards remain consistent over time.

● Mapped to International Accounting Standards (IAS) – This will ensure learners understand the accounting practices that countries are increasingly adopting.

● Clear specification and exam format – The specification is laid out in a more concise format, and the mark scheme clearly outlines how mark allocation works and is consistent between the levels and qualifications.

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Pearson LCCI Level 4 Certificate in Financial Accounting (ASE20101): Teacher’s Delivery Guide

vi

● Assessment objectives – These detail all the different ways that content may be assessed in the exam. For example, listing ‘depreciation’ under assessment objective 1 (memo-rise) may require learners to recall or state methods of depreciation, whilst for assess-ment objective 2 (perform procedures) learners may be required to demonstrate using methods of depreciation, and so on.

It is essential that you familiarise yourself with the full requirements of the specification through close reading of the document. This guide is purely for support purposes and is not designed to be a substitute for the specification itself.

Below is an overview of the different features to be included in the delivery guide including:

● What’s new – provides a useful summary of key changes between the old and the new specification, as well as highlighting the key aspects of the new course.

● Delivery guidance – provides suggestions on how to plan and teach the new LCCI suite of qualifications.

● Scheme of work – contains a table illustrating how to deliver the qualifications within the Guided Learning Hours (GLH) with ideas for possible activities and resources to use with learners.

● Preparing learners for external assessment – guidance on how to help prepare learners for the external assessment in the new LCCI qualifications.

● Command words – a list of the key command words and their definitions used in the sample assessment material.

● Practice exercises – questions for you to use with learners to develop their skills, which are additional to the questions provided in the student textbook.

● Further reading and resource suggestions – suggestions of further printed and online resources that you may find beneficial when delivering the new LCCI qualification.

● IAS glossary – detailing the key IAS terminology used in the new suite.

We hope you find this guide of use when teaching.We encourage you to check the Pearson website (qualifications.pearson.com/lcci)

and search for this qualification to download a range of free learner resources and further support for your delivery of this qualification.

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1

Chapter 1What’s new

Background and context

The Pearson LCCI Level 4 Certifi cate in Financial Accounting (ASE20101) is a single unit qualifi cation which is part of the redeveloped suite of LCCI Finance and Accounting quali-fi cations. It builds upon candidates ability to prepare and interpret fi nancial accounting statements in accordance with IAS accounting standards and the accounting framework. It develops candidates’ understanding of the conceptual aspects of fi nancial accounting. This qualifi cation is suitable for people who intend to work in a senior accounting role or extend their studies.

It is ideal for students looking to progress on the path to becoming a fully qualifi ed accountant and gives access to professional accounting qualifi cations. It is also recognised as an ACCA accredited programme.

Emphasis has been placed on preparation of fi nancial statements for di� erent organisa-tions at the level required in a professional environment.

The new syllabus has been divided into fi ve sections:

● The regulatory framework and governance responsibilities

● Accounting systems

● The principles of financial statements for single entities, partnerships and groups

● Financial statements

● The analysis of business performance using financial statements.

These have been subdivided into subject content and ‘what the students need to learn’.Specifi c detail is provided on each topic to facilitate smooth delivery. Teachers should

concentrate on, and deliver, the knowledge, skills and understanding outlined in the ‘what students need to learn’ section of the specifi cation to enable full understanding of the unit.

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3

Chapter 2Delivery guidance

This new suite of LCCI fi nance and accounting qualifi cations aims to prepare learners for the accounting profession. Qualifi cations range from Level 1 to Level 4 covering aspects of manual and computerised bookkeeping, accounts and statistics. Levels 1–3 are aimed at learners aged 16+. Level 4 is aimed at learners who are 18+ and already in th e workplace.

As these are vocational qualifi cations, it is imperative that you use a variety of delivery methods to engage learners and ensure they develop the appropriate knowledge, under-standing and skills, which will help them to be successful in their future careers.

Planning:

● Prior to recruiting learners onto the course, it is important to establish what qualifica-tion level they are already working at and that they have the sufficient motivation and interest in accounting to enable them to be successful. Their previous academic history and prior qualifications will help you to determine this.

● The minimum age of learners in the specification should be used as a guide for recruit-ment, rather than as a compulsory requirement.

● It is essential that you read the whole specification to familiarise yourself with its requirements.

● If you are already experienced in delivering LCCI finance and quantitative qualifica-tions, it is worth familiarising yourself with the differences between the old and new specification, which is also summarised in the ‘What’s new’ section of the delivery guide.

● It is important to plan sufficient time to deliver the whole course. The Guided Learning Hours (GLH) for each qualification provides an indication of how long is needed to deliver the course in its entirety. The example Scheme of Work provides you with a suggestion of how to plan the time over the course.

Delivery:

● Visit the website qualifications.pearson.com/lcci and search for this qualification to find supporting resources to use with your learners.

● Use International Accounting Standards (IAS) terminology with learners from the outset of the course. A glossary is included in the qualification specification, in this guide and on the qualification website that you can give to learners.

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4

● Recap the previous session at the start of each lesson. This will provide an opportunity to monitor learner progress and encourage questions.

● Develop each new topic from simple to complex incorporating realistic examples.

● In order to engage learners you should incorporate a variety of delivery methods which allow for different learning styles. For example, pair and group work. It is recommended that you have a maximum group size of three as learners do not get enough chance to speak in large groups.

● Change the pace of the lesson by breaking things up a bit, i.e. different activities, timed tasks and different materials.

● Let the students make mistakes. They need to. We all learn best through making mistakes.

● It’s a good idea to let learners check their answers with each other before feeding back to you.

● Use practice exercises to develop learners’ skills. These could be class based or set as a homework assignment.

● You should encourage learners to complete additional tasks – for example, exercises from suitable textbooks, real-life scenarios from business and financial pages in newspapers or from websites to help contextualise the content for learners.

● At the end of each topic you can incorporate, into your teaching, a mini test to help consolidate learning.

It is important that you ensure learners’ understanding over time and encourage learners to develop good study skills from the beginning of the course. It will make it easier when it comes to revision.

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5

Chapter 3Scheme of work

Level 4 Financial Accounting

This scheme of work is intended to be an example and not prescriptive. It is provided to help you make the most of your planning time. You can adjust the session order to suit your circumstances and customise it by adding your own activities/lesson ideas to the ‘Activities’ column. There are opportunities to add subject matter individual to your students, e.g. consolidation sessions. Note that the order of unit content given here may not be the same as in the qualifi cation specifi cation.

Learners’ skills will be developed to enable them to perform accounting procedures in the workplace. The scheme of work allows lots of practice tasks which should be as near as possible to the tasks required at this level in the workplace.

The scheme of work has been written to introduce topics slowly before consolidating all areas ready for examination.

Guided learning hours: 130 Number of lessons: 52 Duration of lessons: 2.5 hours

Lesson Unit content ActivitiesSuggested resource checklist

1

Unit introduction ● Teacher presentation (approx. 10 minutes) to introduce the unit: outline the nature of the key topics and terms and assessment verbs. Outline the method of assessment in this unit

● Ice breaker: this could consist of a getting-to-know-you or team-working activity depending on the structure and size of the group

● Group discussion: to assess any prior experience/learning/knowledge

● Teacher presentation: an introduction to the external regulatory framework, international standard-setting bodies and their influence on the accounting function; other regulatory bodies including the role of the professional associations and the stock exchange; the influence of company law on accounting practices. Implications for the professional accountant

● Student activity: small group discussion, case studies on code of ethics and feedback to other groups

● Teacher led discussion: to review lesson and ensure understanding

Specification

Interactive whiteboard

Ice breaker activities

Access to the internet

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1 The Regulatory Framework and Governance Responsibilities

1.1 The principles applied when undertaking accounting responsibilities in business

2

Accounting concepts, the IFRS framework and standard setting bodies

1.1a, b, c, d, e, f, g

1.2h

● Teacher presentation: (approx. 10 minutes) to review previous session

● Teacher led activity: the functions and responsibilities of corporate governance; corporate codes of governance e.g. The UK Corporate Governance Code 2014; the influence of stakeholders on corporate governance

● Student activity: research and prepare notes, individually or in pairs, on how financial statements meet the needs of stakeholders and other users, the principles incorporated into the IFAC Code Of Ethics for Professional Accountants and the fundamental characteristics of sound accounting practice. Present and discuss findings with the rest of the group

● Teacher activity: direct students towards valuable research areas and provide ongoing support

● Teacher led discussion: discuss the case studies to review lesson and ensure understanding


Case studies

Textbooks

Access to the internet

1.2 The role of financial audits and the regulatory system governing financial reporting

3

The purpose and responsibilities of the financial audit

1.2a, b, c, d, e, f, g


● Teacher presentation: lead discussion of the purpose of audits and the responsibilities of the external auditor including the need for independence. Introduce the research activity

● Student activity: research and prepare notes, individually or in pairs, on the implication of not submitting the required (audited) financial statements to the relevant statutory bodies, the impact of risk and fraud on the external auditor. Explain the circumstances which will impact on the final audit opinion and the implications for a business and its shareholders. Present and discuss findings with the rest of the group




Case studies

Textbooks

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Chapter 3 Scheme of work

7


4

The purpose and responsibilities of the financial audit (continued)

1.2a, b, c, d, e, f, g


● Teacher led activity: provide (real life) case studies involving the auditing process of a variety of organisations and the issues discussed in session 3

● Student activity: research and prepare notes, individually or in pairs, on the case studies supplied by the teacher. Present and discuss findings with the rest of the group




Case studies

Textbooks

5

The purpose and responsibilities of the framework relating to financial reporting

1.2h, i, j, k


● Teacher presentation: explanation of the conceptual framework, the International Financial Reporting Standards (IFRS) and their purpose, the globalisation of accounting and the preparation and presentation of financial statements in relation to the framework. Introduce research activity

● Student activity: researching, individually or in pairs, the roles of the IASB, the IFRS Advisory Council and the IFRS Interpretations Committee and finding real-life examples of their work. Present results to the rest of the group


● Teacher led discussion: (approx. 10 minutes) to review lesson and ensure understanding


Case studies (optional)

Task sheets and answers (optional)

Textbook

2 Accounting Systems

2.1 The recording of regular transactions and necessary adjustments for the year end

6

Making adjustments and recording changes

1.2m

2.1a, b, c


● Teacher presentation: review and reinforcement by explanation and demonstration of the day-to-day recording of receivables, payables, cash and stock purchases

● Student activity: complete, individually or in pairs, tasks involving the day-to-day recording of receivables, payables, bank, cash and stock purchases

● Teacher activity: to provide support and solutions/feedback to activities



Example documents (optional)


Textbook

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7

Making adjustments and recording changes (continued)

2.1a, b, c


● Teacher presentation: explanation and demonstration of the adjustments needed for year-end accounts preparation (accruals/prepayments/stock valuation)

● Student activity: complete, individually or in pairs, tasks involving the day-to-day recording of adjustments needed for year-end accounts preparation (accruals/prepayments/stock valuation)





Textbook

3 The Principles of Financial Statements for Single Entities, Partnerships and Groups

3.1 the accounting treatment of tangible and intangible non-current assets

3.2 account for depreciation

8

Tangible non-current assets – acquisitions, disposals and revaluations

3.1a, b

3.2a


● Teacher demonstration: introduce and demonstrate the idea of tangible non-current assets and the issues of acquisitions, disposals and revaluations. Set students the tasks of researching the main provisions of IAS 16 (Property, Plant and Equipment)

● Student activity: complete, individually or in pairs, tasks involving the recording of acquisitions, disposals and revaluation of tangible non-current assets. Research IAS 16 on the internet





Textbook

Internet access

9

Tangible non-current assets – depreciation and impairment

3.1a, d


● Teacher demonstration: introduce and demonstrate the concept of depreciation and impairment of tangible non-current assets as laid out in IAS 36 (Impairment of Assets). Set students tasks involving depreciation and impairment

● Student activity: complete, individually or in pairs, tasks involving the application of depreciation and impairment





Textbook

Internet access

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10

Intangible non-current assets – goodwill, research and development

3.1c


● Teacher demonstration: introduce and demonstrate the idea of intangible assets like goodwill and research and development as laid out in IAS 38. Set students tasks involving researching IAS 38 and applying its findings to case studies

● Student activity: complete, individually or in pairs, tasks involving the researching of IAS 38 and applying its findings to case studies





Textbook

Internet access

11

Consolidation

3.1a, b, c, d

3.2a


● Teacher demonstration: introduce a series of case studies that review the issues covered by IAS 16 (Property, Plant and Equipment), IAS 36 (Impairment of Assets) and IAS 38 (Intangible Assets)

● Student activity: complete, individually or in pairs, tasks involving tangible and intangible non-current assets





Textbook

Internet access

3.3 The treatment of provisions, contingent liabilities and contingent assets

3.4 The treatment of events after the reporting date

12

Provisions, contingent liabilities and contingent assets – definitions and differences

3.3a, b


● Teacher demonstration: introduce IAS 37 (Provisions, Contingent liabilities and Contingent Assets) and show how it defines provisions, contingent assets and contingent liabilities. Set tasks involving the identification of each of these categories in a series of case studies and explanation of why

● Student activity: complete, individually or in pairs, tasks involving the identification of provisions, contingent assets and contingent liabilities in a series of case studies





Textbook

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13

Provision, contingent liabilities and contingent assets – the accounting treatment

3.3a, b


● Teacher demonstration: explain the implications of IAS 37 on the accounting treatment of provisions, contingent assets and contingent liabilities. Set tasks involving the identification of each of these categories in a series of case studies and explanation of why

● Student activity: complete, individually or in pairs, tasks involving the treatment of provisions, contingent assets and contingent liabilities and explanation of why





Textbook

14

Adjusting and non-adjusting events

3.4a, b


● Teacher demonstration: introduce and explain the concept of adjusting events and non-adjusting events and the disclosure requirements under IAS 10 (Events after the Reporting Period)

● Student activity: complete, individually or in pairs, tasks involving classification of items as adjusting and non-adjusting events and deciding on the appropriate treatment to give them






Textbook

3.5 Accounting policies

3.6 Revenue recognition

15

Changes in accounting policies and accounting estimates

3.5a, b, c


● Teacher activity: Explain the purpose, importance and implications of accounting policies. Explain the main aspects covered by ISA 8 (Accounting Policies, Changes in Accounting Estimates and Errors) in respect of accounting policies and estimates. Explanation and demonstration of how IAS 8 requires organisations to handle changes in accounting policies and estimates. Introduce case studies

● Student activity: research IAS 8, individually or in pairs, and present findings to the rest of the group. Complete case studies involving application of the requirements of IAS 8

● Teacher activity: to provide support and collate solutions/feedback to activities





Textbook

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16

Revenue recognition for goods and services

3.6a, b


● Teacher demonstration: introduce the principles of revenue recognition under IAS 18 (Revenue) and demonstrate how to apply them

● Student activity: complete, individually or in pairs, tasks involving the application of the principles of revenue recognition






Textbook

17

Consolidation

3.3a, b

3.4a, b

3.5a, b, c

3.6a, b


● Teacher demonstration: introduce case studies that cover the issues covered by IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors), IAS 10 (Events after the Reporting Period), ISA 18 (Revenue) and IAS 37 (Provisions, Contingent Liabilities and Contingent Assets)

● Student activity: complete, individually or in pairs, the case studies covering IAS 8, IAS 10, IAS 18 and IAS 37. Present findings to the group






Textbook

Internet access

3.7 The accounting treatment of shares and dividends

18

Ordinary shares preference shares and dividends

3.7a, c


● Teacher presentation: explanation of how the equity of a limited company is different to other organisations including share capital and reserves, types of shares and dividends. Introduce case studies taken from published accounts

● Student activity: complete, individually or in pairs, the case studies involving real-life examples of published accounts




Provide access to published accounts


Textbook

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19

First share issue, market value, bonus issue and rights issues

3.7b


● Teacher presentation: explanation and demonstration of the practicalities and accounting treatment of different types of share issue including first, bonus and rights issues

● Student activity: complete, individually or in pairs, exercises involving different types of share issue.

● Teacher activity: to provide support and solutions/feedback to activities.

● Teacher led discussion: (approx. 10 minutes) to review lesson and ensure understanding.


Published financial statements

Answers to tasks

Textbook

4 Financial Statements

4.1 Prepare the main financial statements for single entities and partnerships

20

Main financial statements – sole traders

4.1a, b, c, d


● Teacher presentation: review and reinforcement of the stages involved in the preparation of financial statements of a sole trader including the importance of IAS 1 (Presentation of Financial Statements); accounting for accruals, prepayments, depreciation and irrecoverable debts in the financial statements of a sole trader

● Student activity: complete, individually or in pairs, tasks involving the preparation of the financial statements of a sole trader including adjustments for accruals and prepayments, depreciation and irrecoverable debts

● Teacher activity: to provide support and solutions/feedback to activities.




Textbook

21

Main financial statements – partnerships

4.1b, c, d


● Teacher presentation: an explanation of partnerships as a type of business organisation; the legal basis of partnerships; the purpose of a deed of partnership in relation to capital contribution, drawings and profit distribution

● Student activity: complete, individually or in pairs, tasks involving the preparation of the financial statements of a partnership including the appropriation of profit and capital/current accounts





Textbook

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22

Incomplete records

4.1g

● Teacher presentation: (approx. 10 minutes) feedback from progress test

● Teacher presentation: review and reinforcement of the purpose and function of control accounts in identifying incomplete financial records

● Student activity: complete individually or in pairs a series of tasks which require students to prepare control accounts from a set of financial records in order to prepare financial statements


● Teacher led discussion: to review lesson and ensure understanding; to summarise the main reasons for incomplete financial records and how such deficiencies may be addressed



Textbook

23

Consolidation

4.1a, b, c, d, g


● Teacher presentation: introduce tasks involving the preparation of financial statements from both a trial balance with supporting notes and incomplete records

● Student activity: complete, individually or in pairs, tasks involving the preparation of financial statements from both a trial balance with supporting notes and incomplete records





Textbook

24

Financial statements for limited companies – statement of profit and loss

4.1d


● Teacher presentation: explain and demonstrate the implications of IAS 1 on the layout of the income statement and its constituent parts; the additional information contained within the statement of comprehensive income

● Student activity: complete, individually or in pairs, tasks involving the preparation of income statement for a limited company





Textbook

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25

Financial statements for limited companies – statement of financial position

4.1c


● Teacher presentation: explanation and demonstration of the preparation of the statement of financial position and statement of changes to equity for a limited company

● Student activity: complete, individually or in pairs, tasks involving the preparation of the statement of financial position and statement of changes to equity for a limited company





Textbook

26

Financial statements for limited companies – overview and disclosure notes

4.1f


● Teacher presentation: explanation and demonstration of the preparation of the financial statements for a limited company. Discussion of the purpose of disclosure notes in financial statements

● Student activity: complete, individually or in pairs, tasks involving the preparation of the financial statements for a limited company. Participate in discussion about disclosure notes





Textbook

27

Consolidation

4.1c, d, f


● Teacher presentation: introduce tasks involving the preparation of income statements and SOFPs for a limited company

● Student activity: complete, individually or in pairs, tasks involving the preparation of income statements and SOFPs for a limited company





Textbook

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15


28

Statement of cash flows – introduction

4.1e


● Teacher presentation: explain and demonstrate the requirements of IAS 7 (Statement of Cash Flows) in relation to the layout and preparation of cash flow statements using the income statements and SOFPs for the beginning and end of a period

● Student activity: complete, individually or in pairs, tasks involving the clearance of the suspense account and the statement of adjustment to profit





Textbook

29

Statement of cash flows – disposals and other adjustments

4.1e


● Teacher presentation: explain and demonstrate the construction of a statement of cash flows when accounting for the disposal of non-current assets and other adjustments

● Student activity: complete, individually or in pairs, tasks involving the construction of a statement of cash flows when accounting for the disposal of tangible non-current assets and other adjustments





Textbook

30

Clearance of suspense account and adjustment of profit

4.1h


● Teacher presentation: explain the purpose of the suspense account and demonstrate the clearance of the suspense account and the statement of adjustment to profit for the year

● Student activity: complete, individually or in pairs, tasks involving the clearance of the suspense account and the statement of adjustment to profit





Textbook

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31

Consolidation

4.1e, h


● Teacher presentation: introduce tasks involving the preparation of statements of cash flow and the clearance of the suspense account with adjustment of profit

● Student activity: complete, individually or in pairs, of tasks involving the preparation of statements of cash flow and the clearance of the suspense account with adjustment to profit for the year





Textbook

4.2 Prepare consolidated financial statements

32

Consolidated statements – introduction to business combinations

4.2a

● Teacher presentation: (approx. 10 minutes) to review previous session.

● Teacher presentation: provide examples of business relationships to identify the characteristics of parents, subsidiaries and associates; explain the business case for different types of business groupings; Explain the requirements of IFRS 10 (Consolidated Financial Statements) with a demonstration of a consolidated SOFP for straightforward consolidations

● Student activity: complete, individually or in pairs, tasks involving preparation of SOFPs for simple consolidations





Textbook

33

Consolidated statements of financial position – goodwill and non-controlling interests

4.2b, c, d, f


● Teacher demonstration: explanation and demonstration of preparing SOFPs involving goodwill and non-controlling interests

● Student activity: complete, individually or in pairs, tasks involving preparation of SOFPs involving goodwill and non-controlling interests





Textbook

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34

Consolidated statements of financial position – inter-company transactions

4.2e


● Teacher demonstration: explanation and demonstration of preparing SOFPs involving inter-company transactions and inventory adjustments

● Student activity: complete, individually or in pairs, tasks involving preparation of SOFPs involving inter-company transactions and inventory adjustments





Textbook

35

Consolidated statements of financial position – acquisitions and impairment of goodwill

4.2d, e


● Teacher presentation: explanation and demonstration of preparing SOFPs involving acquisitions and the impairment of goodwill after acquisition

● Student activity: complete, individually or in pairs, tasks involving preparation of SOFPs involving acquisitions and the impairment of goodwill after acquisition





Textbook

36

Consolidation statements of profit and loss – at and after acquisition

4.2e


● Teacher demonstration: explanation and demonstration of the preparation of SOPLs at and after acquisition, including inter-company transactions

● Student activity: complete, individually or in pairs, tasks involving preparation of SOFPs involving the preparation of income statements at and after acquisition, including inter-company transactions





Textbook

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37–38

Consolidation tasks – an overview

4.2a, b, c, d, e, f

● Teacher presentation: (approx. 10 minutes) to review previous session, introduce case studies covering all aspects of consolidated financial statements

● Student activity: complete, individually or in pairs, tasks involving preparation of SOFPs and income statements at and after acquisition, including goodwill, non-controlling interests and inter-group transactions





Textbook

5 The Analysis of Business Performance Using Financial Statements

5.1 The measurement of business performance

5.2 The analysis of financial statements

39

Measuring business performance – profitability and liquidity ratios

5.1a, b, c

5.2a


● Teacher presentation: explain why it is important to measure business performance in relation to the business and its stakeholders; the purpose and functions of performance ratios in relation to liquidity, financial performance and measures of efficiency and effectiveness

● Student activity: complete, individually or in pairs, tasks involving the calculation of efficiency, profitability and liquidity ratios for single entities and partnership and and prepare a short analysis of their findings and the implications for the businesses





Textbook

40

Measuring business performance – efficiency and investor ratios

5.2a


● Teacher presentation: explain and demonstrate efficiency and investor ratios

● Student activity: complete, individually or in pairs, tasks involving the calculation of efficiency and investor ratios for single entities and partnerships and and prepare a short analysis of their findings and the implications for business strategy moving forward





Textbook

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41

Measuring business performance – interpretation and limitations

5.2a, b, c


● Teacher presentation: Explain and demonstrate how to interpret accounting ratios as well as the limitations and drawbacks of using accounting ratios

● Student activity: complete, individually or in pairs, comparative case studies involving the interpretation of the accounting ratios and identifying the drawbacks of those ratios





Textbook

42–43

Consolidation tasks

5.1a, b, c

5.2a, b, c


● Teacher presentation: to introduce case studies involving the calculation and interpretation of all of the performance ratios

● Student activity: complete, individually or in pairs, case studies involving the calculation of all the accounting ratios and present a short business case in support of a strategy for addressing deficiencies in business performance

● Teacher activity: ensure student tasks are correct and provide ongoing support




Textbook

Review, revision and exam preparation

44

Revision tasks ● Teacher presentation: (approx. 10 minutes) to review previous session

● Teacher activity: review areas of revision requested by students in preparation for final exams. Provide example activities for areas needing more work

● Student activity: working, individually or in pairs, on revision activities

● Teacher activity: ensure student tasks are correct and provide ongoing support




Textbook

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45

Revision tasks ● Teacher presentation: (approx. 10 minutes) to review previous session

● Teacher activity: review areas of revision requested by students in preparation for final exams. Provide example activities for areas needing more work

● Student activity: working, individually or in pairs, on revision activities





Textbook

46

Exam techniques and study skills

● Teacher presentation: effective studying: read, recall, revise, note taking, summarise and practice

● Teacher activity: review areas of revision in preparation for final exams. Provide practice tasks past exam questions





Textbook

47–51

MOCK EXAMINATIONS

● Teacher activity: respond to student request for revision tasks. Support student activity

● Student activity: Workshop – practice tasks working individually in preparation for exams. Practice exam papers where possible



Textbook

52 EXAMINATION

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Chapter 4Preparing learners for external assessment

Learners will expect preparation for examinations and assessment and this should be included in the delivery of the course. However your main focus must be on the eff ective learning of the full breadth and depth of the curriculum indicated by the specifi cation and example scheme of work provided for each qualifi cation.

It is important that you encourage learners to develop their study skills from the beginning of the course as this will assist in their revision later in the course.

At the beginning of the course you will lead in the incorporation of assessment/revision based activities. As the course progresses learners should be able to take a greater responsi-bility for their own revision. This should be encouraged.

Each qualifi cation specifi cation has details about when assessment is available. To gain access to the assessment, learners have to be entered by the entry deadline. Please refer to the exam timetable and Operations Guide for Centres on the website. It is important to enter learners for the examination when they are ready, and not just at the fi rst available assessment window.

The specifi cation also details the expected characteristics of those working at either pass or distinction grade (merit falls between the two, although it is not explicitly defi ned). This is worth examining, as it will help you to identify which target grade your learners are likely to be aiming for. Crucially, the assessment objectives in the specifi cation illustrate all the diff erent ways that content may be tested in the exam. It is important that you familiarise yourself with them, so you can help learners prepare.

The following guidance is provided to help you prepare your learners for external assessment. It is subdivided to distinguish between teacher-led, learner-led activities and examination techniques.

Examples of teacher-led activities:

● Explain the principles of assessment at induction so that learners have an understanding of the assessment process.

● Explain the rubric of the exam paper to your learners.

● Use practice exercises to develop learners’ skills. This could be class based or set as a homework assignment.

● You should encourage learners to complete additional tasks – for example, exercises from suitable textbooks, real-life scenarios from business and financial pages in newspapers or from websites to help contextualise the content for learners.

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22

● Introducing assessment as early as possible in the course will help develop confidence in learners.

● Use sample assessment materials as mock exams with learners, so they can practise their exam technique and time management skills. Over the lifespan of the specification, past papers along with accompanying mark schemes and examiner reports will become avail-able, which can also assist with practice.

● Help familiarise learners with the range of questions they may face in the exam by going through the different question types in the sample assessment material. The specifica-tions contain guidance on the typical command words used.

● The examination papers will include topics taken from any part of the specification. You should not assume that all papers will be the same as the sample assessment provided.

● In order to engage learners, use a variety of delivery methods to help learners prepare for the exam – for example, mock exams, pair and group work, and setting homework/assignments to test learners’ understanding throughout the course.

● At the end of each topic you can incorporate, into your teaching, a mini test to help consolidate learning.

● Clearly explain where your learners can make improvements.

● Recap the previous session at the start of each lesson as this will provide an opportunity to monitor learner progress and encourage questions.

Examples of learner-led activities:

● Advise your learners how to put together a revision timetable to help plan their time and study in preparation for the exam. This should include regular breaks and achiev-able targets (e.g. coverage of a particular area of content). Making a revision timetable not only reflects a disciplined nature of studying but also makes the learner prepare beforehand.

● Learners could revise in a variety of ways, including completing practice exercises, creating revision notes/cards, and reading relevant reference materials to broaden their understanding (e.g. textbooks and the internet).

● Through undertaking practice tests, it should be possible to identify learners’ weaker areas of understanding. This will allow them to focus their personal revision and self-study on those areas.

● Help the learner identify subject topics which are not fully understood.

● You should encourage your learners to:

– Give themselves enough time to study. – Organise a study space. – Plan a revision timetable. – Use diagrams: even in a financial environment these can be helpful. – Practice on old exam papers (where available). – Explain answers to others. – Take regular breaks during revision. – Make summary notes – making notes is by far the best way to memorise lots of infor-

mation.

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Chapter 4 Preparing learners for external assessment

23

● Advise learners of any special requirements for the examination, e.g. non-programmable calculator, identification requirements and any change in venue.

Examination techniques for learners

Tell your learners to:

● Allow themselves plenty of time to get to the venue before the exam starts.

● Read the examination paper fully before starting.

● Identify the questions they can answer with the most ease, and answer those first.

● Be aware that the marks allocated to each question provide an indication of the time required to complete it. Do not spend too much time on any one question.

● Be aware of the amount of time left.

● Aim to answer all questions on the paper even if some are left incomplete.

● Allow time at the end of the examination to check work.

● Be sure they answer the question as it is written, and not what they hoped it would be.

For more study skill advice and activities that you can download and give to your learners, visit the website qualifications.pearson.com/lcci and search for this qualification.

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25

Chapter 5Exam command words

Below is a list of the command words that will be used in the exam. It is worth taking time with your learners to make sure they understand the definition and what is expected of them for each command word to help improve their exam technique.

Assess Give careful consideration to all factors or events that apply and identify which are the most important orrelevant. Make a judgement on the relative importance of things, and come to a conclusion where needed.

Calculate Obtain a numerical answer, showing relevant working. If the answer has a unit, this should be included. This can include using a formulae to calculate a numerical answer.

Complete This requires the completion of a table or structure. This may include a calculation which will then be required to fill the incomplete table/structure

Define Give the meaning of a term or phrase.

Describe To give an account of something. Statements in the response need to be developed as they are often linked but do not need to include a justification or reason. Requires a sequence or order.

Discuss Identify the issue/situation/problem/argument that is being assessed within the question. Explore all aspects of an issue/situation/problem/argument. Investigate the issue/situation etc. by reasoning or argument. Make a judgement and come to a conclusion where needed.

Explain An explanation requires an identification of a point linked with justification/reasoning. If the question is more than 2 marks, then extra marks are for each additional justification/reasoning point made.

Evaluate This will involve reviewing information and then bringing it together to form a conclusion, drawing on evidence including strengths, weaknesses, alternative actions, relevant data or information. A supported judgement/decision will be reached in relation to its context.

Give a reason Provide examples, justifications and/or reasons.

Identify This requires information to be selected from a range of possibilities, list or given stimulus. One mark per item.

Prepare This will involve arranging financial information into an appropriate format.

Recommend Use analysis of data to evaluate options and make a justified advisory decision. Instruction ‘with justification’ should be included with the question.

State Require recall/understanding of one or more pieces of information.

27

Chapter 6Practice exercises

Please note: these exercises are intended for use in the classroom to embed knowledge, and are not a replacement for exam preparation. To best prepare learners for examinations, please refer to the Sample Assessment Materials and Past Papers, which can be found on the Pearson website (qualifi cations.pearson.com/lcci)

Chapter 1

1.1 Prepare a summary of what is included in Parts A, B and C of the IFAC Code of Ethics for Professional Accountants.

1.2 Explain the fundamental principles you would expect to fi nd in a corporate code of governance.

1.3 What is the diff erence between an executive and non-executive director?

1.4 Explain the ‘materiality convention’ when applied to the preparation of fi nancial statements.

1.5 What are four important qualities that should govern accounting information?

Chapter 2

2.1 Detail three of the responsibilities of the external auditor.

2.2 What are the responsibilities of the directors in the audit activity?

2.3 Identify the fundamental diff erences between the company’s accountant and the company’s external auditor?

2.4 Explain the accruals convention and the impact it has on cash, bank and profi t balances in the accounts.

2.5 Explain the principles-based approach to standard with reference to (i) the advice provided by the IFRS and (ii) the role of the external audit function.

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Chapter 3

3.1 Explain the accounting treatment of $5,000 in unpaid wages still to be paid to employees at the end of the accounting period when the financial statements are being prepared.

3.2 Explain the accounting treatment of a ‘prepayment’

3.3 Explain the process of recording purchases of stock made by a business on credit terms with its suppliers.

3.4 Explain the bookkeeping treatment of an irrecoverable bad debt.

3.5 Explain the accounting treatment of a sales discount of $20 given to a customer for paying in cash for goods priced at $250 within an agreed time period.

3.6 Show the relevant Dr and Cr entries for the sale of a good to a customer who has used a credit card to finance the purchase (on the assumption that the seller pays a commission to the credit card company)

3.7 Show the formula for calculating the cost of sales when there is both an opening and closing value to the inventory.

3.8 How is the prudence convention applied in valuation of the inventory as required under IAS 2 (Inventories)?

3.9 Why does the LIFO inventory valuation method result in a higher inventory valuation than the FIFO valuation method for the same inventory level?

3.10 Identify the three categories which make up the inventory.

Chapter 4

4.1 Critically appraise the following statements:(a) ‘Equity only increases or decreases as a result of the owners putting more cash

into the business or taking some out.’(b) ‘An accrued expense is one that relates to next year.’(c) ‘Unless we depreciate this asset we shall be unable to provide for its replacement.’(d) ‘There is no point in depreciating the factory building. It is appreciating in value

each year.’

4.2 Singh Enterprises, which started business on 1 January 20X0, has a reporting period to 31 December and uses the straight-line method of depreciation. On 1 January 20X0 the business bought a machine for $10,000. The machine had an expected useful life of four years and an estimated residual value of $2,000. On 1 January 20X1 the business bought another machine for $15,000. This machine had an expected useful life of five years and an estimated residual value of $2,500. On 31 December 20X2 the business sold the first machine bought for $3,000.

Required:Show the relevant income statement extracts and statement of financial position extracts for the years 20X0, 20X1 and 20X2.

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Chapter 6 Practice exercises

29

4.3 The owner of a business is confused and comes to you for help. The financial state-ments for the business, prepared by an accountant, for the last reporting period revealed a profit of $50,000. However, during the reporting period the bank balance declined by $30,000. What reasons might explain this apparent discrepancy?

4.4 Fill in the values (a) to (f) in the following table on the assumption that there were no opening balances involved.

Relating to period At end of period

Paid/Received Expense/revenue for period

Prepaid Accruals/deferred revenues

$ $ $ $

Rent payable 10,000 (a) 1,000Rates and insurance 5,000 (b) 1,000General expenses (c) 6,000 1,000Interest payable on

borrowings

3,000

2,500

(d)Salaries (e) 9,000 3,000Rent receivable (f) 1,500 1,500

4.5 What are the differences between a provision, a contingent liability and a contingent asset?

4.6 Define the differences between a post accounting publication adjusting and non-adjusting event.

4.7 Define a non-current asset, an intangible non-current asset, a class of non-current assets and amortisation of this class of asset.

4.8 What are three characteristics of a preference share and of a debenture?

4.9 With reference to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) identify three items that may require changes to their original estimated value.

Chapter 5

5.1 Return to question 5.4 in the student textbook and prepare a statement of financial position as at 31 December 20X2.

5.2 Return to Review Question 5.5 in the student textbook and prepare a statement of financial position as at 30 June 20X2.

5.3 A. Bell started in business on 1 July 20X2, with $60,000 capital in cash. During the first year he kept very few records of his transactions.

The assets and liabilities of the business at 30 June 20X3 were:

$Freehold premises 80,000Mortgage on the premises 40,000Inventory 28,000Trade receivables 1,600Cash and bank balances 3,800Trade payables 6,200

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30

During the year, Bell withdrew $12,000 cash for his personal use but he also paid $4,000 received from the sale of his private car into the business bank account.

Required:From the above information, prepare a statement of financial position showing the financial position of the business at 30 June 20X3 and indicating the profit for the year.

5.4 Black, Brown and Cook are partners. They share profits and losses in the ratios of 2/9, 1/3 and 4/9 respectively.

For the year ending 31 July 20X2, their capital accounts remained fixed at the following amounts:

$Black 60,000Brown 40,000Cook 20,000

They have agreed to give each other 6 per cent interest per annum on their capital accounts.

In addition to the above, partnership salaries of $30,000 for Brown and $18,000 for Cook are to be charged.

The profit for the year of the partnership, before taking any of the above into account was $111,000. You are required to draw up the appropriation account of the partnership for the year ending 31 July 20X2.

5.5 I. Skip and U. Jump sell toys. Their individual investments in the business on 1 January 20X4 were: Skip $80,000, Jump $40,000.

For the year to 31 December 20X4, the profit for the year was $30,000 and the partners’ drawings were: Skip $8,000, Jump $9,000.

For 20X4 (their first year), the partners agreed to share profits and losses equally, but they decided that from 1 January 20X5:

(i) The partners should be entitled to annual salaries of: Skip $10,000; Jump $14,000.

(ii) Interest should be allowed on capital at 7 per cent per annum.(iii) The profit remaining should be shared equally (as should losses).

Drawings

Profit for the year Skip Jumpbefore dealing

with partners’ items$ $ $

20X5 38,000 13,000 17,00020X6 29,000 12,000 20,000

Required:Prepare the profit and loss appropriation accounts and the partners’ current accounts for the three years.

5.6 Draw up a profit and loss appropriation account for the year ending 31 December 20X3 and statement of financial position extract at that date, from the following:

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(i) Profits for the year $111,100.(ii) Interest to be charged on capitals: Blair $3,000; Short $2,000; Steel $1,500.(iii) Interest to be charged on drawings: Blair $400; Short $300; Steel $200.(iv) Salaries to be credited: Short $20,000; Steel $25,000.(v) Profits to be shared: Blair 70%; Short 20%; Steel 10%.(vi) Current accounts: balances b/d Blair $18,600; Short $9,460; Steel $8,200.(vii) Capital accounts: balances b/d Blair $100,000; Short $50,000; Steel $25,000.(viii) Drawings: Blair $39,000; Short $27,100; Steel $16,800.

5.7 Frame and French are in partnership sharing profits and losses in the ratio 3:2. The following is their trial balance as at 30 September 20X2.

Dr Cr$ $

Buildings (cost $210,000) 160,000Fixtures at cost 8,200Provision for depreciation: Fixtures 4,200Trade receivables 61,400Trade payables 26,590Cash at bank 6,130Inventory at 30 September 20X1 62,740Revenue 363,111Purchases 210,000Carriage outwards 3,410Discounts allowed 620Loan interest: P. Prince 3,900Office expenses 4,760Salaries and wages 57,809Irrecoverable debts 1,632Allowance for doubtful debts 1,400Loan from P. Prince 65,000Capitals: Frame 100,000Capitals: French 75,000Current accounts: Frame 4,100Current accounts: French 1,200Drawings: Frame 31,800Drawings: French 28,200

640,601 640,601

Required:Prepare an income statement and profit and loss appropriation account for the year ending 30 September 20X2, and a statement of financial position as at that date.

(a) Inventory, 30 September 20X2, $74,210.(b) Expenses to be accrued: Office Expenses $215; Wages $720.(c) Depreciate fixtures 15 per cent on reducing balance basis, buildings $5,000.(d) Reduce provision for doubtful debts to $1,250.(e) Partnership salary: $30,000 to Frame. Not yet entered.(f) Interest on drawings: Frame $900; French $600.(g) Interest on capital account balances at 5 per cent.

5.8 The statements of financial position of A. Vantuira, a sole trader, for two successive

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years are shown below. You are required to draw up a statement of cash flows for the year ending 31 December 20X2 using the IAS 7 layout.

Statements of financial position at 31 December

$ $ $ $Non-current assetsLand and premises 140,000 (1) 138,000Plant and equipment 22,000 (2)

Plant and equipment 26,000 (3)

162,000 164,000

Current assetsInventory 9,000 7,000Trade receivables 18,000 13,000Bank – 8,000

27,000 28,000Total assets 189,000 192,000

Equity

General reserve 137,000 151,000Retained profits 42,000 26,000

179,000 177,000Drawings 28,000 24,000

151,000 153,000Non-current liabilitiesLoan repayable Dec 20X4 25,000Current liabilitiesTrade payables 21,000 14,000Bank overdraft 17,000

38,000 39,000Total equity and liabilities 189,000 192,000

Notes:(1) Original cost $160,000(2) Original cost $24,000(3) Original cost $30,000

5.9 From the following details you are to draft a statement of cash flows for D. Duncan for the year ending 31 December 20X1, using the IAS 7 layout.

D. DuncanIncome Statement for the year ending 31 December 20X1

$Gross profit 45,110 (1)

ExpensesMotor expenses (1,940)Wages (17,200)Irrecoverable debts (520)Increased allowance for doubtful debts (200)

continued

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Other operating expenses (830)Depreciation (vehicle) (1,800)Profit for the year 22,620Other income 620 (2)

Total income for the year 23,240

(1) Includes discounts received of $410(2) Profit on sale of company vehicle

Statement of Financial Position at 31 December 20X1

$ $ $ $Non-current assetsCompany vehicles 10,100 (1) 5,100 (2)

Current assetsInventory 18,600 24,000Trade receivables 8,200 (3) 13,000 (4)

Bank 410 72027,210 32,620

Total assets 37,310 36,720

EquityOwner’s capital 17,210 21,410Profit for the year 21,200 23,240

38,410 44,650Drawings 28,000 22,630

21,410 22,020

Non-current liabilitiesLoan (J Fry) 10,000 7,500

Current liabilitiesTrade payables 5,900 7,200

Total equity and liabilities 37,310 36,720

Notes:(1) After deducting depreciation of $5,300(2) After deducting depreciation of $3,100(3) Trade receivables 20X0 $8,800 – allowance of $600(4) Trade receivables 20X1 $7,700 – allowance of $800Additional Note: A van was sold for $3,830 during 20X1. No new vans were purchased.

5.10 What are the labels of and definitions of four of the different errors found in accounts?

Chapter 6

6.1 Why might the directors of a company engage in creative accounting?

6.2 Can you identify the kind of expenses where the directors make estimates or choices in the ways described?

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6.3 What would be the effect on the profits and total assets of a business of incorrectly capitalising expenses?

6.4 What do you think are the main qualitative characteristics that information contained in a management commentary should possess?

6.5 Why do you think Stock Exchange listed companies are required to disclose more information about their business than other companies?

6.6 P plc pays cash of $6m for an investment in net assets of S Ltd having a net book value (equal to fair value) of $6m. Explain how this transaction will affect the balance sheet of P plc as the parent company and explain how it will affect the group balance sheet of P Group plc, whose only subsidiary is S Ltd.

6.7 P pays cash of $8m for an investment in net assets of S Ltd having a net book value (equal to fair value) of $6m. Explain how this transaction will affect the statement of financial position of P plc as the parent company and explain how it will affect the group statement of financial position of P Group plc, whose only subsidiary is S Ltd.

6.8 Draw up a consolidated statement of financial position from the following statements of financial position which were drawn up as soon as Papai Ltd had acquired control of Sonny Jim Ltd.

Papai Statement of Financial Position

$Investment in Sonny Jim Ltd: 80,000 Ordinary $1 shares 80,000Non-current assets 74,000Inventory 45,000Trade receivables 26,000Bank 25,000

250,000Share capital – Ordinary $1 shares 250,000

Sonny Jim Statement of Financial Position

$Non-current assets 49,000Inventory 24,000Trade receivables 4,000Bank 3,000


6.9 Parent Ltd acquires 75% of the shares in Siblings Together Ltd. Statements of financial position are then drafted immediately. You are to draw up the consolidated statement of financial position.

Parent Statement of Financial Position

$Investment in Siblings Together Ltd: 15,000 Ordinary $1 shares 25,000Non-current assets 80,000Inventory 18,000Trade receivables 24,000Bank 3,000

150,000Share capital – Ordinary shares of 25c each 150,000

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Siblings Together Statement of Financial Position

$Non-current assets 14,000Inventory 3,000Trade receivables 1,000Bank 2,000


6.10 Parents United Ltd acquires 95% of the shares of Son and Friends Ltd. The following statements of financial position are then drafted. You are to draw up the consolidated statement of financial position. Any gain from a bargain purchase is to be eliminated by adjusting the noncurrent assets acquired.

Parent United Statement of Financial Position

$Investment in Son and Friends Ltd: 12,160 Ordinary $1 shares 13,200Non-current assets 39,000Inventory 15,600Trade receivables 10,200Bank 2,000


Son and Friends Statement of Financial Position

$Non-current assets 9,600Inventory 4,300Trade receivables 1,700Bank 400


6.11 Pa Ltd buys 100% of the shares of Son Ltd on 31 December 20X1. The statements of financial position of the two companies on 31 December 20X2 are as shown. You are to draw up a consolidated statement of financial position as at 31 December 20X2.

Pa Statement of Financial Position as at 31 December 20X2

$ $Investment in subsidiary: 50,000 shares bought 31.12.20X1 70,000Non-current assets 84,000Current assets 38,000

192,000Share capital 90,000Retained profits As at 31.12.20X1 8,000 Add profit for 20X2 46,000

102,000192,000

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Pa Statement of Financial Position as at 31 December 20X2

$ $Non-current assets 61,000Current assets 13,000


24,00074,000

6.12 Pa and Ma Ltd bought 60% of the shares of Son and Daughter Ltd on 31 March 20X3. The statements of financial position of the two companies on 31 March 20X4 are as follows. You are to draw up a consolidated statement of financial position as at 31 March 20X4. The amounts shown in the statements of financial position are a correct reflection of the fair values.

Pa and Ma Statement of Financial Position as at 31 March 20X4

$ $Investment in Son and Daughter Ltd: 60,000 shares bought 31.3.20X3 64,000Non-current assets 190,000Current assets 46,000


70,000General reserve 30,000

300,000

Son and Daughter Statement of Financial Position as at 31 March 20X4


133,000Share capital 100,000Retained profits As at 31.3.20X3 16,000 Add profit for 20X4 (3,000)

13,000General reserve (unchanged since 20X0) 20,000

133,000

6.13 Prepare a consolidated statement of financial position from the following details as at 31 March 20X2.

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Pa and Ma Statement of Financial Position as at 31 March 20X4

$ $Non-current assetsInvestment in subsidiary: 50,000 shares bought 31.3.20X1 105,000Other non-current assets 140,000

245,000Inventory 26,000Trade receivables 30,000Bank 4,000

60,000305,000

Trade payables (3,000)302,000

Share capital 200,000Retained profits As at 31.3.20X1 45,000 Profit for 20X2 50,000


302,000

Subsidiary Statement of Financial Position as at 31 March 20X2

$ $Non-current assets 104,000Inventory 19,000Trade receivables 14,000Bank 6,000

143,000Current liabilities: Trade payables (7,000)

136,000Share capital 50,000Retained profits As at 31.3.20X1 35,000 Profit for 20X2 51,000

86,000136,000

During the year, Parent sold goods which had cost $1,100 to Subsidiary for $1,800. None of these goods had been sold by the date of the statement of financial position.

At the date of the statement of financial position Parent owes Subsidiary $2,000.

Note: In all these review questions, unless otherwise indicated, assume that (a) the share capital of all the companies comprises ordinary $1 shares; and (b) all values shown are fair values.

6.14 From the following statements of financial position, you are to draft a consolidated statement of financial position for the group of Parent Ltd and its two subsidiaries, Sub 1 and Sub 2.

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Parent Ltd Statement of Financial Position as at 31 December 20X3

$ $Non-current assetsInvestment in Sub 1: 45,000 shares bought 31.12.20X2 115,000Other non-current assets 495,000Current assets 125,000

735,000Share capital 500,000Retained profits: As at 31.12.20X2 75,000 Add Profit for 20X3 110,000


735,000

Sub 1 Ltd Statement of Financial Position as at 31 December 20X3

$ $Non-current assetsInvestment in Sub 2: 7,000 shares bought 31.12.20X2 30,000Other non-current assets 110,000Current assets 25,000


115,000165,000

Sub 2 Ltd Statement of Financial Position as at 31 December 20X3



8,00018,000

6.15 On 1 April 20X0, Machinery Limited bought 80% of the ordinary share capital of Components Limited. On 1 April 20X2, Machinery Limited was itself taken over by Sales Limited who purchased 75% of the ordinary shares in Machinery Limited.

The statements of financial position of the three companies at 31 October 20X4 prepared for internal use showed the following position:

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Sales Ltd Machinery Ltd Components Ltd$ $ $ $ $ $

Non-current assets Freehold land at cost 89,000 30,000 65,000 Buildings at cost 100,000 120,000 40,000 Less Accumulated depreciation (36,000) (40,000) (16,400)

64,000 80,000 23,600 Plant and equipment at cost 102,900 170,000 92,000 Less Accumulated depreciation (69,900) (86,000) (48,200)

33,000 84,000 43,800186,000 194,000 132,400

Investments Shares in Machinery at cost 120,000 Shares in Components at cost 128,000

306,000 322,000 132,400Current assets Inventory 108,500 75,500 68,400 Trade receivables 196,700 124,800 83,500 Cash at bank 40,200 – 25,400

345,400 200,300 177,300Total assets 651,400 522,300 309,700Current liabilities Trade payables 240,000 200,700 71,200 Bank overdraft – 69,400 – Corporation tax 57,400

(297,400)47,200

(317,300)24,500

(95,700)Net assets 354,000 205,000 214,000

Ordinary shares 200,000 120,000 100,00010% preference shares – – 40,000Revenue reserves 154,000 85,000 74,000

354,000 205,000 214,000

Additional information:(a) All ordinary shares are $1 each, fully paid.(b) Preference shares in Components Ltd are 50c each fully paid.(c) All creditors are payable within one year.(d) Items purchased by Machinery Ltd from Components Ltd and remaining in

inventory at 31 October 20X4 amounted to $25,000. The profit element is 20% of selling price for Components Ltd.

(e) Depreciation policy of the group is to provide for:(i) buildings – at the rate of 2% on cost each year;(ii) plant and equipment – at the rate of 10% on cost each year including full

provision in the year of acquisition.These policies are applied by all members of the group.Included in the plant and equipment of Components Ltd is a machine purchased from the manufacturers, Machinery Ltd, on 1 January 20X3 for $10,000. Machinery Ltd recorded a profit of $2,000 on the sale of the machine.

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(f) Intra-group balances are included in accounts receivable and accounts payable respectively and are as follows:

$Sales Ltd Accounts payable – Machinery Ltd 45,600

– Components Ltd 28,900Machinery Ltd Accounts receivable – Sales Ltd 56,900Components Ltd Accounts receivable – Sales Ltd 28,900

(g) A cheque drawn by Sales Ltd for $11,300 on 28 October 20X4 was received by Machinery Ltd on 3 November 20X4.

(h) At 1 April 20X0, reserves in Machinery Ltd were $28,000 and in Components Ltd $20,000. At 1 April 20X2 the figures were $40,000 and $60,000 respectively.

Required:Prepare a group statement of financial position at 31 October 20X4 for Sales Ltd and its subsidiaries complying, so far as the information will allow, with the accounting requirements of international accounting standards.

(Association of Chartered Certified Accountants)

Note: Unless otherwise indicated, assume that the share capital of all the companies in these review questions comprises ordinary $1 shares.

6.16 The following information relates to the Brodick group of companies for the year to 30 April 2013:

Brodick plc Lamlash Ltd Corrie Ltd$000 $000 $000

Revenue 1,100 500 130Cost of sales (630) (300) (70)Gross profit 470 200 60Administrative expenses (105) (150) (20)Dividend received from Lamlash Ltd 24 – –Dividend received from Corrie Ltd 6 – –Profit before tax 395 50 40Taxation (65) (10) (20)Profit for the year 330 40 20

Additional information:(a) The issued share capital of the group was as follows: Brodick plc: 5,000,000 ordinary shares of $1 each; Lamlash Ltd: 1,000,000 ordinary shares of $1 each; and Corrie Ltd: 400,000 ordinary shares of $1 each.(b) Brodick plc purchased 80% of the issued share capital of Lamlash Ltd in 2006. At

that time, the retained profits of Lamlash amounted to $56,000.(c) Brodick plc purchased 60% of the issued share capital of Corrie Ltd in 2010. At

that time, the retained profits of Corrie amounted to $20,000.

Required:In so far as the information permits, prepare the Brodick group of companies’ consoli-dated income statement for the year ending 30 April 2013 in accordance with IFRSs.

Note: Notes to the income statement are not required, but you should append a statement showing the make-up of the ‘profits for the year’, and your workings should be submitted.

(Association of Accounting Technicians)

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6.17 You are presented with the following summarised information for Norbreck plc and its subsidiary, Bispham Ltd:

Income Statements for the year ending 30 September 20X3

Norbreck plc$000

Bispham Ltd$000

Revenue 1,700 450Cost of sales (920) (75)Gross profit 780 375Administration expenses (300) (175)Income from shares in group company 120 –Profit before taxation 600 200Taxation (30) (20)Profit for the year 570 180

Statements of Financial Position at 30 September 20X3

Norbreck plc Bispham Ltd$000 $000

Non-current tangible assets 1,280 440Investments: Shares in group company 400 –

1,680 440Current assets Inventory 300 250 Trade receivables 280 150 Cash at bank and in hand 40 10

620 410Total assets 2,300 850Current liabilities Trade payables (80) (160) Other payables, taxation and social security (160) (70)

(240) (230)Non-current liabilities Deferred taxation (460) (20) Total liabilities (700) (250) Net assets 1,600 600

Equity Called-up share capital (ordinary shares of $1 each) 900 400 Reserves (including retained profits) 700 200

1,600 600

Additional information:(a) Norbreck plc acquired 80% of the shares in Bispham Ltd on 1 October 20X0.

Bispham’s retained profits balance as at that date was $10,000.(b) During the year, Norbreck paid dividends of $360,000 and Bispham paid

dividends of $150,000.

Required:Prepare Bispham plc’s consolidated income statement for the year ending 30 September 20X3 and a consolidated statement of financial position as at that date.

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Note: Formal notes to the account are not required, although detailed workings should be submitted with your answer. You should also append to the consolidated income statement your calculation of earnings per share and a statement showing the make-up of ‘retained profits carried forward’.

(Association of Accounting Technicians)

Chapter 7

7.1 Amsterdam Ltd and Berlin Ltd are both engaged in retailing, but they seem to take a different approach to it according to the following information:

Ratio Amsterdam Ltd Berlin Ltd

Return on capital employed (ROCE) 20% 17%Receivable days 63 days 21 daysPayable days 50 days 45 daysGross profit margin 40% 15%Operating profit margin 10% 10%Average inventories turnover period 52 days 25 days

Required:Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal service and one of them on competitive prices, which do you think is which and why?

7.2 Conday and Co. Ltd has been in operation for three years and produces antique repro-duction furniture for the export market. The most recent set of financial statements for the business is set out as follows:

Statement of financial position as at 30 November$000

ASSETSNon-current assetsProperty, plant and equipment (cost less depreciation)Land and buildings 228Plant and machinery 762

990Current assetsInventories 600Trade receivables 820

1,420Total assets 2,410EQUITY AND LIABILITIESEquityOrdinary shares of $1 each 700Retained earnings 365

1,065

continued

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Non-current liabilitiesBorrowings – 9% loan notes (Note 1) 200Current liabilitiesTrade payables 665Taxation 48Short-term borrowings (all bank overdraft) 432

1,145Total equity and liabilities 2,410

Income statement for the year ended 30 November$000

Revenue 2,600Cost of sales (1,620)Gross profit 980Selling and distribution expenses (Note 2) (408)Administration expenses (194)Operating profit 378Finance expenses (58)Profit before taxation 320Taxation (95)Profit for the year 225

Notes:1 The loan notes are secured on the land and buildings.2 Selling and distribution expenses include $170,000 in respect of bad debts.3 A dividend of $160,000 was paid on the ordinary shares during the year.4 The directors have invited an investor to take up a new issue of ordinary shares in

the business at $6.40 each making a total investment of $200,000. The directors wish to use the funds to finance a programme of further expansion.

Required:(a) Analyse the financial position and performance of the business and comment on

any features that you consider significant.(b) State, with reasons, whether or not the investor should invest in the business on

the terms outlined.

7.3 Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 20X2 and 20X3 are as follows:

Income statements for the year ended 30 June20X2 20X3$000 $000

Revenue 1,180 1,200Cost of sales (680) (750)Gross profit 500 450Operating expenses (200) (208)Depreciation (66) (75)Operating profit 234 167Interest (–) (8)Profit before taxation 234 159Taxation (80) (48)Profit for the year 154 111

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Statements of financial position as at 30 June20X2 20X3$000 $000

ASSETSNon-current assetsProperty, plant and equipment 702 687Current assetsInventories 148 236Trade receivables 102 156Cash 3 4

253 396Total assets 955 1,083EQUITY AND LIABILITIESEquityOrdinary share capital ($1 shares, fully paid) 500 500Retained earnings 256 295

756 795Non-current liabilitiesBorrowings – bank loan – 50Current liabilitiesTrade payables 60 76Other payables and accruals 18 16Taxation 40 24Short-term borrowings (all bank overdraft) 81 122

199 238Total equity and liabilities 955 1,083

Dividends were paid on ordinary shares of $70,000 and $72,000 in respect of 20X2 and 20X3, respectively.

Required:(a) Calculate the following financial ratios for both 20X2 and 20X3 (using year-end

figures for statement of financial position items):1 return on capital employed2 operating profit margin3 gross profit margin4 current ratio5 acid test ratio6 settlement period for trade receivables7 settlement period for trade payables8 inventories turnover period.

(b) Comment on the performance of Threads Limited from the viewpoint of a business considering supplying a substantial amount of goods to Threads Limited on usual trade credit terms.

7.4 Genesis Ltd was incorporated three years ago and has grown rapidly since then. The rapid rate of growth has created problems for the business, which the directors have found difficult to deal with. Recently, a firm of management consultants has been asked to help the directors to overcome these problems. In a preliminary report to the board of directors, the management consultants state: ‘Most of the difficulties faced by the business are symptoms of an underlying problem of overtrading.’ The most recent financial statements of the business are set out below.

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Statement of financial position as at 31 October$000 $000

ASSETSNon-current assetsProperty, plant and equipmentLand and buildings at cost 530Accumulated depreciation (88) 442Fixtures and fittings at cost 168Accumulated depreciation (52) 116Motor vans at cost 118Accumulated depreciation (54) 64

622Current assetsInventories 128Trade receivables 104

232Total assets 854EQUITY AND LIABILITIESEquityOrdinary $0.50 shares 60General reserve 50Retained earnings 74

184Non-current liabilitiesBorrowings – 10% loan notes (secured) 120Current liabilitiesTrade payables 184Taxation 8Short-term borrowings (all bank overdraft) 358

550Total equity and liabilities 854

Income statement for the year ended 31 October$000 $000

Revenue 1,640Cost of sales Opening inventories 116 Purchases 1,260

1,376 Closing inventories (128) (1,248)Gross profit 392Selling and distribution expenses (204)Administration expenses (92)Operating profit 96Interest payable (44)Profit before taxation 52Taxation (16)Profit for the year 36

All purchases and sales were on credit.A dividend was paid during the year on ordinary shares of $4,000.

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Required:(a) Calculate and discuss five financial ratios that might be used to establish whether the

business is overtrading. Do these five ratios suggest that the business is overtrading?(b) State the ways in which a business may overcome the problem of overtrading.

7.5 The following financial statements relate to Hope plc:

Income statement (profit and loss account) for the year ended 30 June Year 4

$000s $000sRevenue 6,200Cost of sales (2,750)Gross profit 3,450Administration and selling expenses (2,194)Operating profit 1,256Debenture interest (84)Profit before taxation 1,172Taxation (480)Profit for equity holder 692

The directors have recommended a dividend of 36.7 cents per share in respect of Year 4, to be paid following approval at the next annual general meeting.

Statement of financial position (balance sheet) as at 30 June Year 4

$000s $000sNon-current (fixed assets) net of depreciation 1,750Current assets: Inventory 620 Trade receivables (debtors) 1,540 Cash 200Total current assets 2,360Total assets 4,110Current liabilities: Trade payables (creditors) (300) Other creditors and accruals (940)Total current liabilities (1,240)Non-current liabilities 6% debentures (1,400)Total liabilities (2,640)Net assets 1,470Share capital and reserves Issued share capital: 900,000 ordinary shares of 50c nominal value 450 Retained earnings 1,020

1,470

Required:(a) Calculate ratios which measure:

(i) liquidity and the use of working capital;(ii) management performance; and(iii) gearing.

(b) Explain how each ratio would help in understanding the financial position and results of the company.

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(c) The market price is currently 1,100 cents per share. Calculate ratios which are useful to investors.

7.6 List five limitations of ratios.

Answers to practice exercises

Chapter 1

1.1 Part A: General Application of the Code and fundamental principles. Part B. Professional Accountants in Public Practice. Part C: Professional Accountants in Business.

1.2 Leadership, effectiveness, accountability, transparency, challenging, rigorous.

1.3 Non-executive director: advisory with a scrutiny function. Executive: operational; manage the organisation.

1.4 Report everything that is important i.e. an item or event is material (and should therefore be disclosed) if knowledge of the event or item might reasonably influence the investment decisions of the users of the financial statements.

1.5 Relevance, faithful representation, comparability, verifiability, timeliness, understandability.

Chapter 2

2.1 (i) To report whether, in their opinion, the financial statements show a true and fair view of the financial performance and position of the business. (ii) To scrutinise the financial statements. (iii) To undertake sampling checks on company accounting systems and internal control procedures to evaluate their robustness.

2.2 The Directors are responsible to the shareholders who elect the auditors. Hence the Directors should agree to any reasonable request by the auditors regarding access to information regarding the control procedures, accounting systems and the prepa-ration of financial statements which are submitted to the auditors.

2.3 The company accountant is responsible for advising on the accounting systems and internal accounting controls that need to be put in place to ensure that all financial transactions are recorded; to operate in line with the professional code of ethics and accounting conventions when preparing financial statement. The reporting line is to the Board of Directors either directly or via the relevant director responsible for the finance function. The external auditor provide shareholders with an independent opinion of the truth and fairness of the financial statements provided by the company accountant and presented to the external auditor by the Directors.

2.4 The accruals convention recognises revenue and matches it with the expenses that generated that revenue. Unlike other systems of accounting, which recognise

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revenue and expenses in the order in which they are received, the accrual accounting convention ignores the function of time and only considers what expenses have generated what payments, even if those payments have still to be made. This method allows the current cash inflows/outflows to give a more accurate picture of a company’s current financial position. Hence, a reported end of period financial loss under a cash-based accounting system could be reported as a profit under an accruals accounting system if there are outstanding payments still to be made to the business in respect of previous expenditure commitments.

2.5 Principles-based accounting is based upon a set of key objectives are set out to ensure good reporting. Common examples are provided as guidance and explain the objectives. Although some rules are unavoidable, the guidelines or rules set are not meant to be used for every situation. The fundamental advantage of principles-based accounting is that its broad guidelines can be practical for a variety of circumstances. Precise requirements can sometimes compel managers to manipulate the statements to fit what is compulsory. The IFRS system of accounting requires financial statements to be presented fairly and this can be achieved by complying with the applicable IFRS standards. The external audit function provides an ‘opinion’ on these financial state-ments and it can be difficult for auditors to enter into a dispute with the Directors of the company if there are two different alternatives (but both acceptable in terms of their ‘fairness’). Hence a company could produce different accounting statements for a specific period of time. In the end the auditors may conclude that a ‘qualified audit’ opinion is in order where the auditor and Directors were in disagreement.

Chapter 3

3.1 The ‘Wages’ section under the ‘Expenses’ section of the income statement will include the amount in wages already paid plus the $5,000 outstanding. The amount outstanding ($5,000) represents an outstanding liability at the end of the year and will be included in the current liabilities section of the statement of financial position in the category ‘other payables’.

3.2 A prepaid expense will appear as a current asset in the statement of financial position. In the next reporting period, the prepayment will cease to be an asset and will become an expense in the income statement of that period.

3.3 Enter the purchase in the purchases day book (a book of original entry); post the entries in the purchases day book to the individual accounts of the suppliers in the CR column of the payables ledger; aggregate all credit purchases at the end of month and post to the purchase account in the General Leger in the DR column.

3.4 Credit the debtor’s account to cancel the asset and increase the expense account by debiting it into the irrecoverable debts account.

3.5 Cash is increased by $230; asset of trade receivables is decreased by $230; asset of trade receivable is decreased by $20 (After the cash was paid there remained a balance of $20. As the account has been paid, this asset must now be cancelled); Expense of discounts allowed increased by $20.

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3.6 Sales of items via credit cards (Dr: credit card company; Cr Sales); Receipt of money from credit card company (Dr: Bank; Cr: Credit card company); Commission charged by credit card company (Dr: selling expenses; Cr Credit card company).

3.7 Cost of sales = Opening inventory + purchases made over the year – closing inventory

3.8 The prudence convention requires that inventories be valued at the lower of cost and net realisable value. Under IAS 2, the cost of inventories should normally be deter-mined by FIFO or AVCO since the LIFO valuation method produces a higher inventory valuation than the other two methods.

3.9 LIFO assumes that the most recent additions to the inventory (and therefore the most expensive) will be used first leaving the less expensive items in the inventory to be valued; whereas under the FIFO the assumption is made that the earliest additions to the stock are used first leaving the most expensive inventory items as part of the valuation. Hence LIFO produces a higher inventory value than FIFO.

3.10 Raw materials to be used in production; work-in-progress; finished goods.

Chapter 4

4.1 Comments(a) Equity does increase as a result of the owners introducing more cash into the

business, but it will also increase as a result of introducing other assets (for example, a motor car) and by the business generating revenue by trading. Similarly, equity decreases not only as a result of withdrawals of cash by owners but also by withdrawals of other assets (for example, inventories for the owners’ personal use) and through trading expenses being incurred. Generally speaking, equity will alter more as a result of trading activities than for any other reason.

(b) An accrued expense is not one that relates to next year. It is one that needs to be matched with the revenue of the reporting period under review, but that has yet to be met in terms of cash payment. As such, it will appear on the statement of financial position as a current liability.

(c) The purpose of depreciation is not to provide for asset replacement. It is an attempt to allocate the cost, or fair value, of the asset (less any residual value) over its useful life. Depreciation provides a measure of the amount of a non-current asset that has been consumed during a period. This amount is then charged as an expense for the period. Depreciation is a book entry (the outlay of cash occurs when the asset is purchased) and does not normally entail setting aside a separate amount of cash for asset replacement. Even if this were done, there would be no guarantee that sufficient funds would be available at the end of the asset’s life for its replacement. Factors such as inflation and technological change may mean that the replacement cost is higher than the original cost of the asset.

(d) In the short term, the current value of a non-current asset may exceed its original cost. However, nearly all non-current assets wear out over time through being used to generate wealth. This will be the case for buildings. Thus, some measure of depreciation is needed to reflect the fact that the asset is being consumed.

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Some businesses revalue their buildings upwards where the current value is significantly higher than the original cost. Where this occurs, the depreciation charge should be based on the revalued amount, which will lead to higher depre-ciation charges.

4.3 The existence of profit and downward movement in cash may be for various reasons, which include the following:

● the purchase for cash during the period of assets (for example, motor cars and inventories) which were not all consumed during the period and are therefore not having as great an effect on expenses as they are on cash;

● the payment of an outstanding liability (for example, borrowings), which will have an effect on cash but not on expenses in the income statement;

● the withdrawal of cash by the owners from the equity invested, which will not have an effect on the expenses in the income statement;

● the generation of revenue on credit where the cash has yet to be received. This will increase the sales revenue for the period but will not have a beneficial effect on the cash balance until a later time.

4.4 Missing values:(a) Rent payable – expense for period $9,000(b) Rates and insurance – expense for period $6,000(c) General expenses – paid in period $7,000(d) Interest (on borrowings) payable – prepaid $500(e) Salaries – paid in period $6,000(f) Rent receivable – received during period $3,000

4.5 A provision is defined as a liability (something owed) which has an uncertain amount and uncertain due date. This is like our doubtful debts where we know from experience that some receivables will probably not be paid, but we do not know when or by whom.

A contingent liability is a possible obligation (debt of the company) arising from previous events or uncertain future events outside the firm’s control, or a present event with an obligation attached to past events which cannot easily be quantified and is unlikely to be required (these events are often attached to legal cases yet to be, or unable to be, settled).

A contingent asset is a possible benefit that arises from past events which rely on additional activities partly outside the company’s control and so only equating to a future possibility (again they could be subject to legal cases).

As we have noted, provisions will be found in our statements to the accounts and impact on profits. Contingent liabilities, however, should only be disclosed in notes to the accounts and in the case of contingent assets, only when the economic reward is probable.

4.6 IAS 10 (Events after the Reporting Period) considers the issue of when we can make adjustments to the published accounts and authorised accounts as new information arises – it states that we can adjust between the period of publication and authori-sation but only in the case of adjusting events.

Adjusting events include events that have occurred up to the date of the published statement and that will impact on the information in the accounts, e.g. liability in a court case, discovery of a fraud or error, incorrect valuation on assets.

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Non-adjusting events arise after the date of the statement and therefore are not present at the time and, if material (important for accuracy), should be included in notes to the accounts and their impact estimated (e.g. an imminent restructure of the organisation, a major asset disposal).

4.7 Here we are guided by one of the standards IAS 38 (Intangible Assets) which defines the asset type and its treatment. A non-current asset, unlike a current asset, is held for more than a year and used to help make profits.

Our non-current assets fall into two categories: tangible and intangible. Tangible assets can be touched and include land, buildings, equipment and fixtures.

A non-current intangible asset is held for a longer period, has no physical substance and an example would be a patent, trademark or logo. Intangible means cannot be touched; however they still have a value in the statement of financial position (one of our accounting published statements). Intangible assets will also have ‘useful’ lives in terms of making profits for the company. The items, like patents, which may have a seven-year life need to be amortised (this is similar to depreciation in principle). Amortisation uses straight-line depreciation with no residual value: e.g. if our patent was valued at $70,000 with seven years’ life, $10,000 must be written off each year as an expense.

4.8 Key characteristics of a preference share:

● the shares are part of shareholders’ capital and are above ordinary shares in a pay out situation;

● they have a fixed rate of dividend paid if dividends are paid;

● they do not generally have a vote due to the reduced risk taken by the shareholders.

Key characteristics of a debenture:

● they are a long-term loan generally with a fixed period for redemption;

● the loan is subdivided into smaller portions (loan notes) and traded on the bond markets;

● they have a fixed rate of interest which must be paid each year.

4.9 Select three from any of the following and describe in full:

● Doubtful debts – the provision made for debts that may not be paid, where we know the probability as a proportion of total revenue, but not the debtor’s name, the actual amount and the timing of the failure to pay.

● Obsolescence of inventory – this is where our inventories may become unaccept-able for the market and may need to be removed from the inventory and scrapped.

● The fair value of financial assets or financial liabilities is the price that would be received to sell an asset or be paid to transfer a debt in an orderly transaction between market participants.

● The useful lives of depreciable assets are the estimated periods over which a non-current asset will be used by the firm in contributing to making future profits from the date of acquisition.

● Warranty obligations – any changes that may occur in terms of warranties attached to transactions that have been previously agreed.

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Chapter 5

5.1B Cork

Statement of Financial Position at 31 December 20X2

$ $Non-current assetsPremises 95,600Motor vehicles 17,200

112,800

Current assetsInventory 15,600Trade receivables 26,800Cash and cash equivalents 17,000

59,400Total assets 172,200

EquityOwner’s capital 131,070Profit for the year 31,930

163,070Drawings 8,400

154,600LiabilitiesTrade payables 17,600

Total equity and liabilities 172,200

5.2G Foot

Statement of Financial Position at 30 June 20X2

$ $Non-current assetsBuildings 84,800Fixtures 2,000Vans 16,000

102,800Current assetsInventory 18,000Trade receivables 31,200Bank 15,000


EquityOwner’s capital 114,000Profit for the year 65,600Drawings 28,600

151,000

LiabilitiesTrade payables 16,000Total equity and liabilities 167,000

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5.3A. Bell

Statement of Financial Position 30 June 20X3

$ $Non-current assetsPremises 80,000Current assetsInventory 28,000Trade receivables 1,600Cash and cash equivalents 3,800


EquityOwner’s capital 64,000Profit for the year 15,200Drawings 12,000

67,200

LiabilitiesNon-current liabilitiesMortgage 40,000Current liabilitiesTrade payables 6,200Total equity and liabilities 113,400

5.4Black, Brown and Cook

Appropriation Account for the year ending 31 July 20X2

Profit for the year b/d 111,000Less Salaries: Brown 30,000Less Salaries: Cook 18,000 48,000Interest on capitals: Black 3,600Interest on capitals: Brown 2,400Interest on capitals: Cook 1,200 7,200 55,200Balance of profits 55,800Shared: Black 2/9 12,400Shared: Brown 1/3 18,600Shared: Cook 4/9 24,800 55,800

5.5I. Skip and U. Jump

Profit and Loss Appropriation Account 20X4

Profit for the year 30,000Profit shared I. Skip 15,000

U. Jump 15,000 30,000

Profit and Loss Appropriation Account 20X5Profit for the year 38,000Salaries I. Skip 10,000

U. Jump 14,000Interest on capital I. Skip 5,600

U. Jump 2,800Profit shared I. Skip 2,800

U. Jump 2,80038,000

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Profit and Loss Appropriation Account 20X6

Profit for the year 29,000Salaries I. Skip 10,000

U. Jump 14,000Interest on capital I. Skip 5,600

U. Jump 2,800Loss shared I. Skip (1,700)

U. Jump (1,700)29,000

Current account – I. Skip Current Account – U. Jump

20X4 20X4 20X4 20X4Drawings 8,000 Profit share 15,000 Drawings 9,000 Profit share 15,000Bal c/d 7,000 Bal c/d 6,000

15,000 15,000 15,000 15,00020X5 20X5 20X5 20X5Drawings 13,000 Bal b/d 7,000 Drawings 17,000 Bal b/d 6,000Bal c/d 12,400 Salary 10,000 Bal c/d 8,600 Salary 14,000

Interest on Interest oncapital 5,600 capital 2,800Profit share 2,800 Profit share 2,800

25,400 25,400 25,600 25,60020X6 20X6 20X6 20X6Loss share 1,700 Bal b/d 12,400 Loss share 1,700 Bal b/d 8,600Drawings 12,000 Salary 10,000 Drawings 20,000 Salary 14,000Bal c/d 14,300 Interest on Bal c/d 3,700 Interest on

capital 5,600 capital 2,80028,000 28,000 25,400 25,400

20X7 20X7Bal b/d 14,300 Bal b/d 3,700

5.6Blair, Short and Steel

Appropriation Account for the year ending 31 December 20X3Profit for the year b/d 111,100Add Interest on drawings: Blair 400

Short 300Steel 200 900

112,000Less Interest on capitals: Blair 3,000

Short 2,000Steel 1,500 6,500

Salaries: Short 20,000Steel 25,000 45,000 51,500

Balance of profits 60,500Shared: Blair 70% 42,350Shared: Short 20% 12,100Shared: Steel 10% 6,050 60,500

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Statement of Financial Position as at 31 December 20X3 (extracts)

Capital Accounts: Blair 100,000Capital Accounts: Short 50,000Capital Accounts: Steel 25,000 175,000Current Accounts: Blair Short SteelBalances 1.1.20X3 18,600 9,460 8,200Add Interest on capital 3,000 2,000 1,500Add Salaries 20,000 25,000Add Share of profits 42,350 12,100 6,050

63,950 43,560 40,750Less Interest on drawings 400 300 200Less Drawings 39,000 27,100 16,800

24,550 16,160 23,750 64,460

5.7Frame and French

Income Statement and Appropriation Account for the year ending 30 September 20X2

$ $Revenue 363,111Cost of goods (198,530)Gross profit 164,581Reduction in allowance for doubtful debt 150

164,731ExpensesSalaries and wages (58,529)Office expenses (4,975)Carriage outwards (3,410)Discounts allowed (620)Irrecoverable debts (1,632)Interest on loan (3,900)Depreciation (5,600)Profit for the year 86,065

Interest on drawingsFrame 900French 600

1,50087,656

Interest on capitalFrame 5,000French 3,750

(8,750)78,815

SalaryFrame (30,000)

48,815

Profit share (3:2)Frame (60%) 29,289French (40%) 19,526

48,815

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Frame and FrenchStatement of Financial Position at 30 September 20X2

$ $Non-current assetsBuildings 155,000Fixtures 3,400

158,400 (1)

Current assetsInventory 74,210Trade receivables 60,150 (2)

Cash and cash equivalents 6,130140,490

Total assets 298,890

EquityPartner’s capital 189,050 (3)

Profit for the year 48,815Drawings 61,500

176,365

LiabilitiesNon-current liabilitiesLoan 65,000Current liabilitiesTrade payables and other payables (4) 57,525Total equity and liabilities 298,890

Notes(1) Taking into account depreciation(2) Less allowance for doubtful debts of $1,250(3) Capital accounts (Frame $100,000; French $75,000) PLUS Current accounts (Frame $4,100; French

$1,200) PLUS Interest on capital (Frame $5,000; French $3,750) LESS Drawings (Frame $31,800; French $28,200) LESS Interest on drawings (Frame $900; French $600)

(4) Other payables includes accrual of $30,000: salary to Frame yet to be paid.

5.8A. Vantuira

Statement of Cash Flows for the year ending 31 December 20X2Operating activitiesProfit from operations 26,000Adjustments for: Depreciation 4,000Operating cash flows before movements in working capital 30,000 Decrease in inventory 2,000 Decrease in accounts receivable 5,000 Decrease in accounts payable (7,000)

–Cash generated by operations 30,000 Tax paid – Interest paid – –Net cash from operating activities 30,000

continued

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Investing activities Payments to acquire tangible non-current assets (6,000)Net cash used in investing activities (6,000)Financing activities Loan received 25,000 Drawings (24,000)Net cash from financing activities 1,000Net increase in cash and cash equivalents 25,000Cash and cash equivalents at beginning of year (17,000)

8,000Cash and cash equivalents at end of year Bank balances and cash 8,000

5.9D. Duncan

Statement of Cash Flows for the year ending 31 December 20X1Operating activitiesProfit from operations 23,240Adjustments for Depreciation 1,800 Profit on sale of tangible non-current asset (620) Increase in allowance for doubtful debts 200

1,380Operating cash flows before movements in working capital 24,620 Increase in inventory (5,400) Decrease in trade receivables (8,800 − 7,700) 1,100 Increase in trade payables 1,300

(3,000)Cash generated by operations 21,620 Tax paid – Interest paid – –Net cash from operating activities 21,620Investing activities Receipts from sale of tangible non-current assets 3,820Net cash from investing activities 3,820Financing activities Loan repaid to J. Fry (2,500) Drawings (22,630)Net cash used in financing activities (25,130)Net increase in cash and cash equivalents 310Cash and cash equivalents at beginning of year 410

720Cash and cash equivalents at end of year Bank balances and cash 720

5.10 Any four of the following:(a) Errors of omission – where an entry is missed from the accounts, here the trial

balance will still balance.(b) Errors of commission – where the error is entered into the wrong account

(e.g. sales to G. Green posted to A. Green’s account). The trial balance will still balance.

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(c) Errors of principle – where an error is put into the wrong class of account (e.g. a van purchased as a non-current asset is treated as a short-term expense).

(d) Compensating errors – here the errors cancel each other out (e.g. if the sales account was added at $5 too much and then the purchases were also $5 too much).

(e) Errors of original entry – where the double entry is correct but the original figure used is wrong.

(f) Reversal of entries – where the correct figure has been input to the correct accounts but into the wrong side of the account.

(g) Transposition errors – where the sequence of numbers entered is incorrectly entered (e.g. $120 entered as $102), the numerical difference is generally divisible by the number 9 (a simple test used to check for this type of error).

Chapter 6

6.1 There are many reasons including: ● to get around restrictions (for example, to report sufficient profit to pay a

dividend); ● to avoid government action (for example, the taxation of profits); ● to hide poor management decisions; ● to achieve sales revenue or profit targets, thereby ensuring that performance

bonuses are paid to the directors; ● to attract new share capital or long-term borrowing by showing an apparently

healthy financial position; and ● to satisfy the demands of major investors concerning levels of return.

6.2 These include certain expenses, such as: ● depreciation of property, plant and equipment; ● amortisation of intangible assets, such as goodwill; ● inventories (cost of sales); and ● allowances for trade receivables.

6.3 Both would be artificially inflated. Reported profits would increase because expenses would be reduced. Total assets would be increased because the expenses would be incorrectly treated as non-current assets.

6.4 To be useful, the information should exhibit the characteristics for accounting infor-mation in general. Thus the information should be relevant, faithfully represented, comparable, verifiable, timely and understandable. The fact that we are often dealing with narrative information does not alter the need for these characteristics to be present.

6.5 Various arguments can be made in favour of greater accountability from such companies. As their shares are frequently traded, greater transparency concerning their business operations should help investors to make more informed decisions. Share prices may, therefore, be set in a more efficient manner, which can contribute towards the smooth functioning of capital markets. In addition, Stock Exchange listed companies tend to be larger, have more economic power and have more stake-holders than other companies. Their impact on the economy and society as a whole, therefore, tends to be greater. This, in turn, creates an obligation for them to account more fully for their operations and actions.

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6.8

Consolidated Statement of Financial Position $Non-current assets 123,000Inventory 69,000Trade receivables 30,000Bank 28,000

250,000

Share capital 250,000

6.9

Consolidated Statement of Financial Position $Goodwill 10,000Non-current assets 94,000Inventory 21,000Trade receivables 25,000Bank 5,000

155,000

Share capital 150,000Non-controlling interest 5,000

155,000

6.10

Consolidated Statement of Financial Position $Non-current assets [39,000 + 9,600] 48,600Inventory 19,900Trade receivables 11,900Bank 2,400

82,800

Share capital 80,000Reserves 2,000Non-controlling interest [5% of 16,000] 800

82,800

6.11

Consolidated Statement of Financial Position as at 31 December 20X2 $Goodwill 12,000Non-current assets 145,000Current assets 51,000

208,000

Share capital 90,000Retained profits (102,000 + 16,000) 118,000

208,000

6.12

Consolidated Statement of Financial Position as at 31 March 20X4Non-current assets 302,000Current assets 67,000

369,000

continued

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Share capital 200,000Retained profits [70,000 + 17,600 − (60% of 3,000 = 1,800)] 85,800General reserve 30,000Non-controlling interest (40,000 + 8,000 + 5,200) 53,200

369,000

Elimination of gain from a bargain purchase of 17,600 by Pa and Ma recognising the gain in profit or loss.

6.13

Consolidated Statement of Financial Position as at 31 March 20X2 $Goodwill 20,000Non-current assets 244,000Current assetsInventory (26,000 + 19,000 − 700) 44,300Trade receivables (30,000 + 14,000 − 2,000) 42,000Bank 10,000 96,300Total assets 360,300Current liabilitiesTrade payables (3,000 + 7,000 − 2,000) 8,000Net assets 352,300

EquityShare capital 200,000Retained profits (95,000 − 700 + 51,000) 145,300General reserve 7,000

352,300

Chapter 7

7.1 Amsterdam Ltd and Berlin LtdThe ratios for Amsterdam Ltd and Berlin Ltd reveal that the average settlement period for trade receivables for Amsterdam Ltd is three times that for Berlin Ltd. Berlin Ltd is therefore much quicker in collecting amounts outstanding from customers. On the other hand, there is not much difference between the two businesses in the time taken to pay trade payables.

It is interesting to compare the difference in the trade receivables and payables settlement periods for each business. As Amsterdam Ltd allows an average of 63 days’ credit to its customers, yet pays suppliers within 50 days, it will require greater investment in working capital than Berlin Ltd, which allows an average of only 21 days to its customers but takes 45 days to pay its suppliers.

Amsterdam Ltd has a much higher gross profit margin than Berlin Ltd. However, the operating profit margin for the two businesses is identical. This suggests that Amsterdam Ltd has much higher overheads (as a percentage of sales revenue) than Berlin Ltd. The average inventories turnover period for Amsterdam Ltd is more than twice that of Berlin Ltd. This may be due to the fact that Amsterdam Ltd maintains a wider range of inventories in an attempt to meet customer requirements. The evidence therefore suggests that Amsterdam Ltd is the business that prides itself on personal

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service. The higher average settlement period for trade receivables is consistent with a more relaxed attitude to credit collection (thereby maintaining customer goodwill) and the high overheads are consistent with incurring the additional costs of satisfying customers’ requirements. Amsterdam Ltd’s high inventories levels are consistent with maintaining a wide range of inventories, with the aim of satisfying a range of customer needs.

Berlin Ltd has the characteristics of a more price-competitive business. Its gross profit margin is much lower than that of Amsterdam Ltd, that is, a much lower gross profit for each $1 of sales revenue. However, overheads have been kept low, the effect being that the operating profit margin is the same as Amsterdam Ltd’s. The low average inventories turnover period and average settlement period for trade receiv-ables are consistent with a business that wishes to minimise investment in current assets, thereby reducing costs.

7.2 Conday and Co. Ltd(a) Return on capital employed

Operating profitEquity + long term borrowings

× 100%

378

1,265 × 100% 29.9%

Gross profit margin

Gross profitSales revenue

× 100%

980

2,600 × 100% 37.7%

Operating profit margin

Operating profitSales revenue

× 100%

378

2,600 × 100% 14.5%

Inventories turnover period

Inventories heldCost of sales

× 365 days

600

1,620 × 365 days 135 days

The above ratios reveal that Conday and Co. Ltd is profitable. In particular, the ROCE ratio seem to be high in relation to the returns achieved by more secure forms of investment such as government securities. However, whether this level of return is sufficient in relation to the risks involved is difficult to judge from the information available.

The settlement period for trade receivables seems very high, which may be due to the nature of the business. However, this high ratio, combined with the fact that the irrecoverable debts of the business account for more than 6 per cent

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of total sales revenue, suggests that some tightening of credit control procedures may be required. The inventories turnover figure also seems high. The business is carrying more than four months’ inventories. This may indicate a need also to improve inventories control procedures. At present, the business has a large bank overdraft and so major improvements in inventories control and credit control procedures may have a significant effect on both the liquidity and the profitability of the business.

Given the high level of bank borrowing, it is difficult to understand why such a high proportion of the profit for the year was distributed in the form of dividend. This is not a very prudent policy.

(b) Though the business is profitable, there are some doubts as to the quality of its management. The business has high levels of inventories and trade receiv-ables and a large overdraft. It is possible that better management would not have allowed this situation to arise. It is also possible that better management of existing assets would remove the need for external sources of funds for expansion. It is interesting to speculate how $200,000 received from the issue of shares might be used by the managers. Would it be used to finance even higher levels of inventories and trade receivables without there being a corresponding increase in sales revenue?

The share price of $6.40 is much higher than the net asset value of the shares. At present, the net assets (assets less liabilities) have a statement of financial position value of $1,065,000 and there are 700,000 shares in issue. This gives a net asset value per share of $1.52. To justify paying $6.40, the investor would have to be convinced the business would generate high profits in the future.

7.3 Threads Ltd(a)

20X2 20X3ROCE 237/756 = 31.0% 167/845 = 19.8%

Operating profit margin 234/1180 = 19.8% 167/1200 = 13.9%

Gross profit margin 500/1180 = 42.4% 450/1200 = 37.5%

Current ratio 253/199 = 1.3:1 396/238 = 1.7:1

Acid test ratio 105/199 = 0.5:1 160/238 = 0.7:1

Settlement – trade receivables 102/1180 × 365 = 32 days 156/1200 × 365 = 47 days

Settlement – trade payables 60/680*× 365 = 32 days 76/750*× 365 = 37 days

Inventories turnover 148/680× 365 = 79 days 236/750× 365 = 115 days

* The credit purchases figure is not available, so the cost of sales figure has been used. This only provides a rough approximation of the settlement period for trade payables.

(b) A supplier seeking to sell a substantial amount of goods to the business will be concerned with both liquidity and longer-term viability (where there is a continuing relationship) as measured by profitability ratios. The supplier will also be interested in the average time taken by the business to pay its current suppliers.

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● The liquidity ratios reveal an apparent improvement over the two years. However, for a manufacturing business, the liquidity ratios seem low and the supplier may feel some concern. The increase in inventories over the period has led to a greater improvement in the current ratio than in the liquid (acid test) ratio. The improvement in the acid test ratio has not been very great and some concern over the business’s liquidity position must remain.

● The average settlement period for credit customers (trade receivables) has increased substantially in 20X3. This may be a deliberate policy. However, if this is the case, the effect of a more liberal credit policy has not proved to be very successful as there has only been a slight increase in sales revenue in 20X3. The credit period increase may be due, on the other hand, to other factors such as poor credit control or particular customers experiencing financial difficulties. The effect of this change in the trade receivables ratio should be carefully noted by the supplier as the increase in trade receivables outstanding seems to be partly financed by an increase in the average settle-ment period for trade payables.

● The inventories’ turnover period has increased significantly in 20X3. This might be due to inventories building in anticipation of future sales revenue. However, it might indicate that certain products are not selling as well as expected and are therefore remaining in inventories.

● The gross profit margin and operating profit margins are both lower in 20X3. Lower margins have, in turn, led to a lower return on capital employed. The lower operating profit margins, the increase in the average credit period allowed to trade receivables and the increase in the inventories turnover period may suggest that the business has a product range that is becoming obsolete and therefore more difficult to sell. It might, however, also suggest a more competitive business environment.

The ratios calculated above do not indicate any serious problems for the business. However, it is clear that 20X3 proved to be a more difficult year than 20X2. Things may well improve in the future though. At this point, however, the supplier would be well advised to be cautious in its dealings with the business. Certainly, the supplier should not rely too heavily on Threads Ltd for future sales revenue.

7.4 Genesis Ltd(a)

Current ratio = 232550

= 0.42:1

Acid test ratio = 104550

= 0.19:1

Inventories turnover period = 128

1,248 × 365= 37 days

Average settlement period for trade receivables = 104

1,640 × 365 = 23 days

Average settlement period for trade payables = 184

1,260 × 365 = 53 days

It is difficult to make a judgement about such matters with no equivalent ratios for past periods, other businesses or the business’s own plans, but there is some

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evidence that this business is, in fact, overtrading. Both of the liquidity ratios look weak. The acid test ratio should probably be around 1:1. Customers are paying more than twice as quickly as suppliers are being paid. This suggests that pressure may be being applied to the former to pay quickly, perhaps with adverse results. It may also imply that payments to suppliers are being delayed because of a lack of available finance.

(b) Overtrading must be dealt with either by increasing the level of funding to match the level of activity, or by reducing the level of activity to match the funds available. The latter option may result in a reduction in operating profit in the short term but may be necessary to ensure long-term survival.

7.5 (a) Hope plc(i) Liquidity

Hope plc

Ratio Definition in words Workings Result

Current ratio Current assets:Current liabilities 2,360:1,240 1.90:1

Acid test (Current assets – Inventory(stock)): Current liabilities

(2,360 − 620):1,240 1.40:1

(a) 50,000 × 25c = $12,500; 50,000 × $0.75 = $37,500.(b) Transfer $25,000 from reserves to share capital.(c) 80,000 × $3 = $240,000; 80,000 × 25c = $20,000; 80,000 × $2.75 = $220,000.

(ii) Analysis of management performance

Hope plc


Return on shareholders’ equity

Profit after taxShare capital + Reserves

× 100%692

1,470 × 100 47.1%

Return on capital employed

Profit before interest and taxTotal assets − Current liabilities

× 100%1,2562,870

× 100 43.8%

Net profit on sales Profit before interest and taxesSales

× 1001,2566,200

× 100 20.3%

Gross profit percentage

Gross profitSales

× 1003,4506,200

× 100 55.6%

(iii) Gearing (leverage)

Hope plc


Interest cover Profit before interest and taxInterest

1,25684 15.0 times

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(c) Investor ratios

Hope plc


Earnings per share Profit after for ordinary shareholdersNumber of ordinary shares

692900 76.9 pence

Dividend yield Dividend per shareShare price

× 100%36.7

1,100× 100% 3.34%

7.6 Detail the following:

● quality of financial ratios

● inflation

● the restricted view given by ratios

● the basis for comparison

● ratios relating to the statement of financial position.

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Chapter 7Further reading and resource suggestions

All aspects of the above topics covered in this unit can be found in the following texts. Be aware of any new editions of these books released by their publishers.

(Note that the books listed here may not exclusively use IAS terminology, so please ensure students are given the glossary available from this qualifi cation’s website at qualifi cations.pearson.com)

● International Financial Reporting Standards IFRS 2015 (Blue Book)ISBN: 978-1909704602 IFRS Foundation; 1 edition (5 Dec 2014)

● Alan Sangster, Frank Wood (2012) Frank Wood’s Business Accounting Volume 212th EditionISBN: 978-0273767923 Financial Times/Prentice Hall

● Robert Kemp, Jeffrey Waybright (2014) Financial Accounting, Global Edition3rd EditionISBN: 978-1292019543

● BPP Learning Media Financial Statements Level 4ISBN: 9781472709066

● David Alexander and Prof Christopher Nobes Financial Accounting: An International IntroductionISBN: 978-0273773436 Pearson

Helpful websites

● www.icaew.comWorld leading professional membership organisation.Provide their members with knowledge and guidance based on the highest ethical and technical standards.

● www.ifac.org/ethicsThe International Ethics Standards Board for Accountants® (IESBA®, the Ethics Board) is an independent standard-setting body that serves the public interest by setting robust, internationally appropriate ethics standards, including auditor independence require-ments, for professional accountants worldwide.

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● www.iasplus.comWebsite for global accounting news.

● http://catalogue.pearsoned.co.uk/educator/discipline/Accounting-Taxation/ 91094450.pageKeep up to date with teaching tips, products and news.

● http://www.bized.co.uk/learn/index.htmAimed at the business student but lots of examples and hints specifically for accounting studies.A learning and teaching education resource for business and economic studies including lessons plans and learning activities.

● http://www.accountingweb.co.uk/Aimed at accountants in practice. Useful for keeping up to date with practical matter.A virtual community for accountancy professionals. Services include biweekly newswire, online news, questions and answers, accountant and corporate advisors directory.

● http://www.tutor2u.net/Includes free resources and revision notes for students and teachers of economics, business, and politics.

● http://accountancystudents.co.uk/Accountancy Students is an accounting community with free resources for those studying with professional accounting bodies.

● http://www.accaglobal.com/uk/en/student.htmlSupport specifically for ACCA students. This section provides information, advice and resources including syllabuses, study guides, past exam papers and more.

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Appendix 1Glossary of International Accounting Standards terminology

The following is a glossary of the comparison between the International Accounting Standards (IAS) terminology and the UK GAAP (Generally Accepted Accounting Practice in the UK) terminology. IAS terminology is used in the content of the LCCI fi nancial and quanti-tative suite of qualifi cations but not all terms are present in all levels of the qualifi cations.

Centres should be aware that these terms are also referred to as International Financial Reporting Standards (IFRS) in certain contexts within the industry, however the defi nitions and meaning remain the same.

IAS terminology Previously used UK GAAP terminology

Financial statements Final accounts

Statement of profit or loss and other comprehensive income

Trading and profit and loss account

Revenue Sales

Raw materials/ordinary goods purchased Purchases

Cost of sales Cost of goods sold

Inventory Stock

Work in progress Work in progress

Gross profit Gross profit

Other operating expenses Sundry expenses

Allowance for doubtful debt Provision for doubtful debt

Other operating income Sundry income

Investment revenues/finance income Interest receivable

Finance costs Interest payable

Profit for the year Net profit

Retained earnings Profit/loss balance

Statement of changes in equity(limited companies)

Appropriation account

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Statement of financial position Balance sheet

Non-current assets Fixed assets

Property Land and buildings

Plant and equipment Plant and equipment

Investment property Investments

Intangible assets Goodwill, etc.

Current assets Current assets

Inventory Stock

Trade receivables Debtors

Other receivables Prepayments

Bank and cash Bank and cash

Current liabilities Current liabilities/creditors: amounts due within 12 months

Trade payables Creditors

Other payables Accruals

Bank overdraft and loans Loans repayable within 12 months

Non-current liabilities Long-term liabilities/creditors: amounts falling due after 12 months

Bank (and other) loans Loans repayable after 12 months

Capital or equity Capital

Share capital Share capital

Statement of cash flows Cash flow statement

Other terms

Inventory count Stock take

Carrying value Net book value

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A dedicated delivery guide to support with the teaching of Pearson LCCI Level 4 Certificate in Financial Accounting (ASE20101) and provide comprehensive coverage, containing Pearson content from our world-renowned authors, and industry leading case studies and articles.

This resource has been designed to align to the Pearson LCCI Level 4 Certificate in Financial Accounting (ASE20101) specification and is based on the International Accounting Standards (IAS).

To learn more about our LCCI qualifications, please visit qualifications.pearson.com/lcci

www.pearson-books.com

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Teacher's delivery guide, - Pearson qualifications

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