Acca F7 Financial Reporting (INT) June 2015: Sample Note

ACCA F7
Financial Reporting (INT)

June 2015
Sample note
Accounting Practise Center (A.P.C)

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Lesco Group Limited, April 2016

All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording or
otherwise, without the prior written permission of Lesco Group
Limited.

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Recommendation of study:
Hello and welcome to our ACCA F7 study.
This paper is challenging before June2011 exam and after that examiner begins to set
easy questions.
So:
1, You should not deep into difficult questions if you want to pass this exam.
Make sure your basic accounting knowledge is ok in Chapter1 (brought forward from F3
study.)
2, A separate note for you is required because you can use that to copy the exam
questions answer from our tutors.
3, Practice many recent question is the key to success. In the video tutor has laid out
lots of past exam questions to you and if you practice them after the class and make
sure you do them right then you will be F7 expert. But in the exam and because its an
exam if you havent practiced recent past exam questions from examiner and even
though you are an expert you will still not be as speedy as the one who does. So:
4, We strongly recommend our online students to enroll in our Live Online Course
which tutor will practice more recent past exam questions with you and do more
summary.
If you want to enroll in our live online course and you can contact:
[email protected]
Best of luck in your coming exam.
Accounting Practise Center

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Content
Chapter1 Basis of accounting..........................................................................................................................5
1.1, Introduction to F7 ............................................................................................................................6
1.2, Basis of accounting ..........................................................................................................................7
1.3, How to prepare financial statements? ...........................................................................................12
Chapter2 Accounting Standards ...................................................................................................................40
IAS 2 Inventory ......................................................................................................................................41
IAS 8 Accounting policies, changes in accounting estimates and errors...............................................51
IAS10 events after the reporting period ...............................................................................................56
IAS 11 construction contract .................................................................................................................59
IAS 12 Income taxes ..............................................................................................................................65
IAS16 property, plant &equipment .......................................................................................................78
IAS 17 leases .........................................................................................................................................88
IAS 18 Revenue Recognition .................................................................................................................93
IAS 20 Government grants ....................................................................................................................95
IAS 23 borrowing costs..........................................................................................................................98
IAS 33 Earnings per Share ...................................................................................................................101
IAS 36 impairment of assets ...............................................................................................................109
IAS 37 provisions, contingent liabilities and contingent assets ..........................................................112
IAS 38 Intangible Assets ......................................................................................................................117
IAS 40 investment property ................................................................................................................122
IAS 41 Agriculture ...............................................................................................................................126
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations .............................................134
Financial Instrument (IAS32; IAS 39; IFRS 9; IFRS 7) ...........................................................................138
IFRS 13 Fair value measurement--------------------------------------------------------------------------------------140
Conceptual and regulatory framework ...............................................................................................150
Chapter3 Published Accounts .....................................................................................................................156
Chapter 4 Consolidated Financial Statements ............................................................................................159
Chapter 5 Statement of cash flow and Interpretation of financial statements ..........................................185

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Chapter1 Basis of accounting

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1.1, Introduction to F7
Knowledge:
More than 40% of knowledge you have learnt from F3. If your F3 is exempted, then we
strongly recommend you to have a go through the F3 lectures as well because lots of
knowledge from F3 is very practical in the real life and if you have a solid foundation of F3
then it makes it easier for your F7, F8, P2 and even P7 paper!
Exam Format:
Section A ALL TWENTY questions are compulsory and MUST be attempted40marks
Section B ALL THREE questions are compulsory and MUST be attempted-15;15;30marks
Examiner:
Steve Scott
Very experienced in examining financial reporting
Style of him:
Exam questions are consistent and even predictable. The key to pass this paper is to
attempt lots of past exam questions set by him together with reasonable techniques. Lots
of hard working students will score more than 70% in this paper.

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1.2, Basis of accounting
1.2.1, Different types of businesses
Sole trader
One person owns and runs the business.
The sole trader and the business are legally the same entity and therefore the sole trader
is personally liable for any business debts.
Partnership
Two or more persons owns and runs the business.
The partners and the business are legally the same entity and therefore the partners are
jointly liable for any business debts.
Limited liability Company

Shareholders and a number of appointed directors own and run the business.
A company is a legal entity in its own right, and therefore the shareholders only have
limited liability for any business debts.
1.2.2, Different Types of accounts
Management accounts
These are produced when a business wants them. They are produced for internal use
and will not, usually be seen by external people. Management accounts can be
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prepared using the companys own internal policies.
Financial accounts
These accounts are usually produced annually. They are based on historical
information and are rarely used internally. Financial accounts are used by external
users for several
Reasons:
-Investors
-Lenders
-Employees
-Government
-Public
Basic accounting equation: Asset=Liability + Equity
1, I put $20,000 cash into the business.
Dual Effect:
The business has cash of $20,000 (asset increases by $20,000)
The business owes me $20,000 (business owes me $20,000=capital)
Business entity:
Im separated from the business entity which means this is just accounting for the
business not for me!!
Accounting Equation:
Asset=Liability + Equity
100,000
cash
100,000
capital

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2, I purchased a Ferrari spots car for use within the business for $950,000.
Dual effects:
Cash (asset within the business) has decreased by $950,000
Car (asset within the business) has increased by $950,000
Business entity:
(950,000)
cash
950,000
asset
3, I borrow the debt from the bank for $3,500

Dual effects:
Cash (asset within the business) has increased by $3,500
Debt (liability within the business) has increased by $3,500
Business entity:
3,500
cash
3,500
debt

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Convert Dual effect into DR & CR

Principles:
1, DR must have a CR
2, the balance for DR&CR should equal
E.g.
1, I put $20,000 cash into the business.
DR cash
$20,000
CR: capital $20,000
2, I purchased a Ferrari spots car for use within the business for $950,000.
DR Non-current asset-Ferrari spots car $950,000
CR Cash
$950,000
3, I borrow the debt from the bank for $3,500.
DR Cash
$3,500
CR Liability $3,500
4, I sell computers to customer Paul for $56,000 in cash.
DR cash
CR Income
$56,000
$56,000
5, I purchase computers from supplier John for $45,000 in cash.

DR expense $45,000
CR cash
$45,000
6, I Withdraw $3,000 from the business for my own use
DR drawing $3,000
CR cash
$3,000

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*If I ask you, what is the performance and financial position of the business now from
the above transactions?
Statement of profit or loss and other comprehensive income for the year
ended XX
$
Sales revenue
56,000
Expense (45,000)
Profit (goes into retained earnings in SOFP)
11,000
Statement of financial position as at XX

$
Non-Current Assets
Spots car
950,000
Current Assets
Cash
(20,000-950,000+3,500+56,000-45,000-3,000)
Total Assets31, 500
Liability
Equity
Capital
Retained earnings (income-expense)
56,000-45,000
Drawings
Total liabilities and equity31, 500
(918,500)
3,500
20,000
11,000
(3,000)
Prove: Asset=Liability + Equity

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1.3, How to prepare financial statements?
1.3.1 Format of Financial Statements

1, single financial statements for limited liability companies
IAS1 Presentation of financial statements requires Limited Liability Company
should prepare its statement of profit or loss and other comprehensive income,
statement of financial position, statement of changes in equity and also statement of
cash flow (IAS 7 will be detailed in later study).
Examples of these financial statements for Johnson ltd:

Johnson ltd statement of profit or loss and other comprehensive income for the year
ended 31 DEC 2012:
Revenue
Cost of sales
Gross profit
Other income
Distribution costs
Administration expenses
Profit before interest and tax
Finance costs
Profit before tax
Income tax expense
Profit for the year(profit after tax)
$000
385,000
(188,000)
197,000
2,000
(38,500)
(37,700)
122,800
(8,000)
114,800
(53,000)
61,800
Other comprehensive income:

Gains on property revaluations
Total comprehensive income for the year
38,000
99,800

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Johnson ltd statement of financial position as at 31 DEC 2012:

Accounting Equation
Assets= liabilities + Equity
Financing Decision
(Capital Structure)
$000
Non-current assets
Property plant & equipment
Intangible assets
Current assets
Inventory
Trade receivables
Bank
200,000
187,999
387,999
88,432
97,455
13,400
199,287
587,286
Total assets
Equity and liabilities
Equity*
Share capital
Share premium
Revaluation reserve
Retained earnings
$000
50,000
50,000
38,000
220,497
358,497
Non-current liabilities
8% loan note
Redeemable
preference
shares
75,000
25,000
100,000
Current liabilities
Trade payables
Taxation
77,789
51,000
128,789
Total equity and liabilities

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587,286
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Johnson ltd statement of changes in equity for the year ended 31 DEC 2012:
Opening balance at 1 Jan 2012

Share issue
Gains/(losses) on revaluations
Profit for the year
Dividend paid/payable
Closing balance at 31 DEC
2012

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Share
capital
$000
0
50000
Share
premium
$000
0
50,000
Revaluation
reserve
$000
0
Retained
earnings
$000
158,697
Total
61,800
(0)
61,800
(0)
220,497
358,497
38000
50,000
50,000
38,000
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$000
158,697
100000
38000
1.3.2 Double bookkeeping (6 steps)

Statement of financial position & statement of profit or loss and other
comprehensive income
Step1:
Step2:
Step3:
Step4:
Step5:
Step6:
transaction and source document

books of prime entry
ledger & balance off the account
trial balance
year-end adjustment journal
FS (SOFP & SOCI)

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Q: [Jimmy] Jimmy starts his business on 1 NOV 2010.

1.11.2010 He invests $50,000 into a business.
2.11.2010 He purchases $5,000 worth of goods on credit from supplier Paul. Goods
delivery note is received from Paul together with sales invoice + remittance advice and he
attached to the purchase order form. Jimmys warehouse issued a goods received note
back to Paul.
3.11.2010 He sells half of the inventory for $6,000 cash to customer Chris.
4.11.2010 He issues a cheque to pay for the goods he received on credit.
5.11.2010 He pays his rent for April of $450 by cheque.
6.11.2010 He sells his remaining inventory for $6,000 on credit to customer David. Jimmy
sent the goods delivery note together with the sales order form, quotation, remittance
advice and invoice.
7.11.2010 He purchased goods on credit for $7,000 from supplier John. Goods delivery
note is received from John together with sales invoice + remittance advice and he attached
to the purchase order form. Jimmys warehouse issued a good
s received note back to John.
8.11.2010 He purchases a delivery van for $7,000 cash.
9.11.2010 he received $5600 of receivable balance from customer David and he also gives
him a discount of $400 for early payment.
10.11.2010 customer David returned the goods to Jimmy for gross amount of $3000, a
debit note received from Chris and a corresponding credit note is issued.
11.11.2010 Jimmy returned the goods to supplier John for the gross amount of $3500 and
a debit note has been sent and a credit note received.
12.11.2010 Jimmy received $100 from bank and then put it into the petty cash tin.
13.11.2010 Jimmy purchased stamps for $10 from the petty cash tin.
Required:
For the above transactions prepare:
1. Books of Prime Entry
2. The ledger accounts
3. The trial balance
4. The statement of profit or loss and other comprehensive income
5. The statement of financial position.
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Step 1, Source of documents

Quotation. A business makes a written offer to a customer to produce or deliver goods or
services for a certain amount of money.
Sales Order Note. A customer writes out or signs an order for goods or services he
requires.

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Purchase Order Note. A business orders from another business goods or services, such
as material
Supplies.
Goods received note. A list of goods that a business has received from a supplier. This is
usually prepared by the businesss own warehouse or goods receiving area.
Goods dispatched note. A list of goods that a business has sent out to a customer.

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Invoice. The invoice is a request for the customer to pay what he owes.
When a business sells goods or services on credit to a customer, it sends out an invoice. The
details on the invoice should match the details on the sales order.
When a business buys goods or services on credit it receives an invoice from the supplier.
The details on the invoice should match the details on the purchase order.

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Statement of account. A document sent out by a supplier to a customer listing all

invoices, credit notes and payments received from the customer showing how much the
customer still needs to pay for supplier.

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Debit note.
A document sent by a customer to a supplier in respect of goods returned or an
overpayment made. It is a formal request for the supplier to issue a credit note.
In simple words, for customer, please give me money.
Credit note.
A document sent by a supplier to a customer in respect of goods returned or overpayments
made by the customer. It is a negative invoice.
A creditnote is issued in various situations to correct a mistake, such as when:
(1) an invoice amount is overstated,
(2) correct discount rate is not applied,
(3) they do not meet the buyer's specifications and are returned.
In simple words, for supplier, Ill give you money.

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Remittance advice
A document sent to a supplier alongside any payment sent to them. It details which
invoices are being made.
In the real practice, the supplier sent you the invoice telling you how much you should pay
and after the payment you can send them back a remittance advice telling them about the
payment information:
Account Number:
Currency:
Invoice Number:
Invoice Amount:
Receipt. A written confirmation that money has been paid. This is usually in respect of cash
sales,
eg a till receipt from a cash register.
NOTE:
Data about sales transactions recorded in an accounting system comes from:
1, sales invoice
2, credit notes
3, payments by customers (cheque or remittance advice)
4, receipts (sellers copy) in cash sales
Data about purchase transactions recorded in an accounting system comes
from:
1, purchase invoice
2, credit note
3, payments to suppliers (cheque or remittance advice)
4, receipts (purchasers copy) in cash purchases

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Step 2, Books of prime entry
Main business transactions are summarized into books of prime entry for later posting to
the ledgers.
The common books of prime entry and the types of transaction recorded in them
are:
Sales Day Book (SDB)
Records credit sales to customers
Sales Returns Day Book (SRDB)
Records the return of credit sales
Purchases Day Book (PDB)
Records credit purchases from suppliers
Purchases Returns Day Book (PRDB)
Records the return of credit purchases
Cash Payments Book (CPB)
Records all payments made at the bank
Cash Receipts Book (CRB)
Records all receipts made at the bank
Petty Cash Book
Records all receipts and payments of cash in hand
Journal
Other transactions (Depreciation etc.)

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Sales day book

Date
Invoice no.
6.11.2010
Customer
Net Sales
Tax
Gross
David
6,000
Total
6,000
Sales Returns Day Book

Date
Credit note
10.11.2010
Customer
Net Sales
Tax
Gross
David
3,000
Total
3,000
Purchase day book

Date
Invoice no.
supplier
Net Sales
Tax
Gross
2.11.2010
Paul
5,000
7.11.2010
John
8,000
Total
13,000
Purchase Returns Day Book

Date
Credit note
11.11.2010
supplier
Net Sales
Tax
Gross
John
3,500
Total
3,500
Cash Receipt Book

Date
1.11.2010
Narrative
Capital
Bank
Receivab
Cash
les
sales
50,000
Capital
Discount
Allowed
50,000
investment
3.11.2010
Cash sales
6,000
7.11.2010
Settle
5,600
6,000
5,600
receivable
7.11.2010
Discount
400
allowed
Total
61,600
5,600
6,000
Cash payment Book

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50,000
400
Date
Narrative
Bank
Payables
4.1.2010
5,000
5,000
5.11.2010
450
8.11.2010
7,000
Total
12,450
Rent
450
7,000
5,000
450
Petty cash book

Receipt
100
Date
Cash
Postage
12.11.2010
Cash
received
13.11.2010
Stamps
10
10
Total
10
10

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Narrative
Van
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7,000
Step 3, Post to Ledger (copy from tutor)

Step 4, Trial Balance
DR
CR
Bank
Capital
Sales
Purchases
Payable
Rent
Van
Receivable
Petty cash
Stamps
Total
Step 5, Adjustment
Year-end inventory journal
2.11.2010
3.11.2010
6.11.2010
7.11.2010
Purchases
Sale(half)
Sale(half)
Purchases
$
5,000
(6,000)
(6,000)
8,000
1,000
DR inventory (closing-statement of financial position)

1,000
CR cost of sales (expenses-statement of profit or loss and other comprehensive
income) 1,000

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Step6, Financial statements

Jimmys statement of profit or loss and other comprehensive income for year
ended 30/11/2010
$
Sales
-Cost of sales
Opening inventory
+purchases
-closing inventory
Gross profit
Other income
-expenses
Rent
Stamps
Interest expense
Profit for the year

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1.3.3 Controlling the bookkeeping systems

Controlling the booking system
So before we actually prepare the financial statements we should be able to make sure
that the balances we extracted from each ledger account is correct.
In order to do so
1, we should reconcile the control account balance with the individual ledger account
balance.
2, we should reconcile the bank control account balance with the bank statement that
bank presents to us.
3, we should correct any errors in the balances as well.

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Control account reconciliations
So what if the individual supplier account balance is different from the total balance from
the payable control account?-so we reconcile the payables control account with the list
of payable balances
Scenario 1:
At 31 December 2011 Mary had a balance on the payables control account of $22,550.
The balance on their payables ledger was $20,650. The accountant found the following
discrepancies:
1. An invoice of $1,200 had been omitted from the control account.
2. The purchase day book total was overstated by $1,000.
3. Goods returned of $1,590 had not been recorded in the control account.
4. Discounts received of $10 had not been posted in the control account.
5. Contra entries of $500 need to be recorded in the control account.

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So what if the individual customers account balance is different from the total balance
from the receivable control account?- so we reconcile the receivable control account
with the list of receivable balances
Scenario 2:
Mary has a debit balance of $72,266 on the trade receivables control account, which
does not equal to the list of receivables balances figure of $70,659. The accountant
Jam found the following differences:
1. A contra of $7,296 with the trade payables control account was entered on the
wrong side of the trade receivables control account.
2. The sales day book was overcast by $2,500.
3. Discounts totaling $36,015 have been omitted from the control account.
4. A debt of $3,000 needs to written off and an allowance for receivables needs to be
adjusted to 2% of the remaining receivables balance.
5. A cash receipt for $20,000 has been omitted from the individual customers account.
6. A customer invoice of $3,500 was entered into the ledger account as $35,000.
Errors Summary:
1. Casting error in the day books.
2. Posting error.
3. A one sided contra.
4. An entry that has been made in the individual account but not in the control
accounts.
5. An entry being omitted from the control account.
Bank reconciliations
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In theory, the balance from the cash book posted into the cash at bank ledger should
be equal to the balance in the bank statement.
But in reality, these are quite different due to:
1, unrecorded differences: [appear in bank statement but not in cash book]
-BACS transfer: money transferred from other bank to our bank
-standing orders: money paid out from bank to supplier
-direct debits: money pay out from the bank
-dishonouredcheques: cheque rejected by bank(but has recorded in cash book)
-bank interest and bank charges. (bank paid for you and charged you but not
recorded in cash book)
2, timing difference:
-outstanding lodgment: we receive the cheque but we havent clear it in the bank
-unpresentedcheques: weve written off the cheque but supplier not clear it in the
bank
3, errors
After weve reconciled bank statement and cash book we can then extract the balance
from the cash book which is correct now to the trial balance in order to finally prepare
the financial statements.

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Scenarios of bank reconciliations:
Scenario1:
Jim prepared his cashbook for the month of Oct. 2012:
DR
Cash Book
CR
Date
Narrative
Date
Narrative
1 Oct.
3 Oct.
5 Oct.
12 Oct.
29 Oct.
Balance b/f
Cheque 345
Cheque 95464
Cheque 741
Cheque 6532
14,500
3,650
1,200
1,100
3,000
1 Oct.
1 Oct.
1 Oct.
1 Oct.
12 Oct.
12 Oct.
27 Oct.
27 Oct.
Cheque 1437
Cheque 1438
Cheque 1439
Cheque1440
Cheque 1441
Cheque 1442
Cheque 1443
Cheque 1444
450
600
750
150
250
350
395
165
27 Oct.
Cheque 1445
245
30 Oct.
Balance c/f
20,095
23,450
1 may
balance b/f 20,095

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23,450
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Jim received his bank statement on 26thOct 2012:
HSBC Bank
account number: 556233655
To: Jim
Date
2012
1 Oct.
4 Oct.
5 Oct.
8 Oct.
10 Oct.
11 Oct.
12 Oct.
14 Oct.
17 Oct.
18 Oct.
20 Oct.
20 Oct.
24 Oct.
Details
Opening balance
1473
1438
345
95464
Standing order- HP plc
1439
Direct debit-Dragon ltd
1441
BACS transfer
1442
741
Bank charges
D=Debit
Paid out
$
26 Oct. 2012
Paid in
$
450
600
3,650
1,200
750
750
750
250
3,500
350
1,100
500
C=Credit
So prepare the bank reconciliation for Jim and update the cash book.

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Balance
$
14,500C
14,050C
13,450C
17,100C
18,300C
17,550C
16,800C
16,050C
15,800C
19,300C
18,950C
20,050C
19,550C
Scenario2:
You have been asked to prepare a bank reconciliation as at 30 November 2012 for
Jonny. The cashbook has a credit balance of $2,400 and the bank statement at that
date has an overdrawn balance of $1,550.
Upon investigation you find the following differences:
1. A cheque issued by Jonny has been entered into the cash book twice for $459.
2. A direct debit of $225 has been taken from the account and not been entered into
the cash book.
3. There are unpresentedcheques totaling $5,840.
4. There are outstanding lodgements of $8,390.
5. A cheque receipt for $1,450 has been dishonoured by the bank.
6. Bank charges of $1,400 have been charged by the bank.
7. A BACS transfer of $6,196 has been received by the bank and not been accounted
for in the cash book.
8. He has entered cheque payment number 56882 into the cash book as $1,680, when
the correct amount is $1,860.
Required:
Correct the cash book with the above and prepare a bank reconciliation.

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Correcting errors
Introduction:
After the reconciliation process we can then come to trial balance.
Because we know that in order to prepare the financial statements we need to extract
balances from the account to the trial balance to check whether or not balances within
the trial balance are actually correct.
If the trial balance is presented to you with DR =CR but still it is not guaranteed that
balance within the trial balance is correct, i.e., maybe there are some mistakes within
the double entries.
If the trial balance is presented to you with DR = CR so this means that theres a
definitely a mistakes existing within the double entries. In this case the account cant
use this imbalance trial balance to prepare its financial statements but instead they
should firstly force the trial balance to balance using suspense account and then
correct the errors in it one by one.

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1, Trial Balance (DR=CR),

A: potential errors:
1, omission of whole transaction
2, commission
3, principle
4, original entry
5, reversal
6, compensating error
B: How to correct errors

1, what is the correct entry?
2, what was the wrong entry?
3, correct it!
Example: (Geoge Ltd)
The accountant of Geoge Ltd has found the following errors and prepare the journal
entries for him to correct each error:
1. A purchase of stationery for $500 cash has not been recorded in the ledger accounts.
2. Computer repairs worth $400 were posted on the debit side of the computer
equipment account.
3. Commission received of $60 was posted to the credit side of the discount received
account.
4. Cash paid of $5,500 for property maintenance has been entered into the property
maintenance account and cash account as $550.
5. A contra between the receivables control account and the payables control account
of $1,000 has been posted to both accounts on the wrong side.

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2, Trial Balance (DR=CR),

So a suspense account needs to be created
The suspense account has two functions:
Function1: force trial balance to balance
Bank
Capital
Purchases
Trade
payables
Sales
Insurance
Trade
receivebales
Computer
equipment
Rent
Petty cash
Total
DR
71,675
CR
Bank
Capital
Purchases
Trade
payables
Sales
Insurance
Trade
receivebales
Computer
equipment
Rent
Petty cash
Suspense
Total
65,000
18,000
14,000
26,000
75
12,000
3,000
150
70
104,950
105,000
DR
71,675
CR
65,000
18,000
14,000
26,000
75
12,000
3,000
150
70
50
105,000
105,000
Function2, if one side of the entry has nowhere to go

Accountant Cheung investigated why theres an imbalance between DR and CR balance
and found that the electricity purchased for $50 was credited to the bank account but
no other entry had been made.
Should:
DR electricity expense 50
CR Bank
30
Did:
DR suspense account 50
CR bank
50
Correct it:
DR electricity expense 50
CR suspense account 50

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Situations where trial balance doesnt balance implying errors occurred:

1,
2,
3,
4,
casting error
one sided posting error (double DR or CR)
Omission (trial balance error or single entry)
transposition error
And these four will lead to a suspense account being created.

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Example:
Lily has prepared her trial balance for the year ended 31 May 2012 that does not
balance. A suspense account was opened for the difference of $2,812 credit.
On further investigation the following issues were discovered:
And lily has asked you to prepare the journals to correct the following issues
and enter any relevant entries into the suspense account to clear it.
And secondly, her draft profit for the year ended 31 May 2012 before posting of the
journal corrections was $199,871 and she wonders whether after correcting the
following issues will have an impact on the profit figure?
1. A payment for stationery for cash of $440 was debited to the stationery account as
$780.
2. Discounts given to credit customers as a reward for early payment of $1,310 have
been recorded on the wrong side of the discounts allowed ledger account.
3. Commission received of $125 has been recorded as a debit in the commission
received account.
4. Rental income of $3,742 has only been recorded in the bank ledger account.
5. The debit side of the utilities ledger account has been undercast by $600.
6. Lily made cash drawings of $400 in the year; this has been recorded on the credit
side of the purchases account but correctly posted to the cash account.
7. A contra made between the trade payables and trade receivables control accounts of
$1,250 has been debited to both accounts.

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Chapter2 Accounting Standards

-IAS2 Inventory
-IAS8 accounting policies, changes in accounting estimates and errors
-IAS10 events after the reporting period
-IAS11 Construction Contracts
-IAS12 Income Taxes
-IAS16 property, plant & equipment
-IAS17 Leases
-IAS18 revenue recognition
-IAS20 Accounting for Government Grants and Disclosure of Government
Assistance
- IAS23 Borrowing Costs
-IAS32 Financial Instruments: Presentation
-IAS33 Earnings per Share
-IAS36 Impairment of Assets
-IAS37 provisions, contingent liabilities and contingent assets
-IAS38 Intangible Assets
-IAS39 Financial Instruments: Recognition and Measurement
-IAS40 Investment Property
-IFRS5 Non-Current Assets Held for Sale and Discontinued Operations
-IFRS7 Financial Instruments: Disclosures
-IFRS9 Financial Instruments
-conceptual and regulatory framework

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IAS 2 Inventory
1, initial recognition
How to establish the cost of inventory initially? (example1)
2, subsequent measurement
Basic idea: The lower of cost and net realizable value (prudence concept)
Cost: FIFO; Weighted average method (example2)
Net realizable value (example3)
3, where does it fit into the financial statements? (example 4)
Statement of financial position-closing inventory
Statement of profit or loss and other comprehensive income-cost of sales
Accruals concept (matching principle)-closing inventory adjustment
4, Disclosures

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1, Initial measurement
Inventory= quality X value
(Number of inventory purchased X historical cost)*
*Historical cost:
1, Cost of purchase: purchase price, import duties but excluding discounts
2, Cost of conversion relating to production (direct/variable overheads),
E.g. labor costs in factory; (but labor costs relating to marketing department is
not) machinery depreciation
3, other costs happened necessary to bring the inventory to its intended location and
condition.
E.g. Carriage inwards can be cost. But carriage outwards is expense
Example 1: Manny Co
Manny company buys the desk in order to sell to the customer. The purchase price for
the desk is $100. Import duty is $10. Discount of the desk is $10. Manny company is
charged by raw material provider of $10 for carriage inwards of the wood.
Also Manny company manufactures chairs at a production cost of $20 and the labor
cost to manufacture the chairs is $30.direct overheads relating to this is $5.
Required:
1, what is the cost of desk?
2, what is the cost of chairs?

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2, Subsequent Measurement (valuing closing inventory)

Inventory= quality X value
(Closing inventory X
(using FIFO, WAC))
Lower of cost and net realizable value

Aim: not to overstate the asset (inventory) figure, i.e. be prudent.
For statement of financial position, closing inventory will appear under

current assets and if theres more closing inventory then it will make
statement of financial position look better.
For statement of profit or loss and other comprehensive income, if theres
more closing inventory, then therell be less cost of sales then overstate the
profit.

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1, What is and?
Inventory
Cost
number
*1
5
*2
5
*3
3
*4
2
15
NRV
3
2
5
3
13
Lower of cost or NRV

3
2
3
2
10
No netting off.
-inventory 3, 4 have risen in value and it will be net off by inventory1,2
if we choose NRV=13.
-so we should choose 10.
2, Cost (Example 2 George Ltd)
FIFO:
What comes in first then goes out first;
Used for perish goods such as meat
Weighted Average Cost: used when inventory movement is unknown and
price is not consistent. Think about petrol
-periodic
-continuous
LIFO (banned): what comes in last then goes out first. Think about technology
companies. In USA, this is allowed.
3, Net realizable value (NRV) (Example 3 Jonny ltd)
=estimated selling price-estimated cost to sell
*Usually the cost should be less than the net realizable value because for
profitable companies, they sell the goods for profit (selling price>cost)
*But in some circumstances that the goods (inventory) may be obsolete or
damaged so they may be sold at a discount price which is less than cost.

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Example 2 George Ltd

George Ltd made the following purchases and sales in March.
Theres no opening inventories.
Purchases:
Date
3rd
12th
16th
22th
31st
Bottles
500
500
400
700
900
3,000
Unit cost
$4.00
$4.60
$4.75
$5.25
$5.40
Total
$2,000
$2,300
$1,900
#3,675
$4,860
$14,735
Bottles
300
400
300
700
1,700
Unit cost
$10.00
$10.00
$10.00
$10.00
Total
$3,000
$4,000
$3,000
$7,000
$17,000
Sales
Date
7th
13th
17th
29th
Required:
Prepare the statement of profit or loss and other comprehensive income extract for
George Ltd using:
*FIFO (first in, first out)
*Weighted Average cost (periodic method)
(continuous method)

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Example 3: Jonny Ltd

Jonny Ltd has the following items in their financial statements for the year ended 31
December 2014:
Inventory at 1 January 2014
$45,678
Purchases
$98,000
Inventory at 31 December 2014
$42,800
Closing inventory includes the following damaged items:

-
A fridge was purchased for $500. Due to fire damage the maximum it can be sold
for is $200 after a wax product costing $50 has been applied.
Four electronic pens costing $100 each were also damaged in the fire. They can be
sold for $20 each.
Required:
Calculate the cost of sales in the statement of profit or loss and other comprehensive
income for the year ended 31 December 2014.

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3, Where does inventory fit into?

Statement of financial position as at 31 DEC 2014 for Manny company:
Current assets
Inventory
$
8,990
Statement of profit or loss and other comprehensive income (extract) for the year
ended 31 DEC 2014 for Manny company:
$
$
Sales revenue
$78,559
Cost of sales
Opening inventory 8,009
Purchase
5,889
-closing inventory
(8,990)
(4,908)
Gross profit
73,651
[Example 4: How to record in journals for Manny company?]
[Accruals concept: we havent sold $8,990 of inventory at the end of the year so get
rid of it to match the revenue we earned of $78,559 with cost of sales $4908 in this
particular year.]

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4, disclosures
1, Accounting policy for inventories:
-FIFO?
-Weighted average method?
2, Carrying amount of any inventories at fair value less costs to sell (NRV).
3, Total carrying amount of inventories and each type of inventories:
$
Raw materials
1,000
Work in progress
2,000
Finished goods
1,000
Total
4,000

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[Q about inventory from published account]

Trial Balance : ($000)
DR
Equity shares of 50 cents each
Retained earnings (note (i))
Inventory (note)
Freehold property
Cost of sales
Revenue
CR
50,000
15,000
36,000
19,000
207,750
197,750
262,750
262,750
Note:
The inventory of Highwood was not counted until 4 April 2011 due to operational
reasons. At this date its value at cost was $36 million ($36,000,000) and this figure has
been used in the cost of sales calculation above.
Between the year end of 31 March 2011 and 4 April 2011, Highwood received a delivery
of goods at a cost of $2.7 million and made sales of $7.8 million at a mark-up on cost
of 30%.
Neither the goods delivered nor the sales made in this period were included in
Highwoods purchases (as part of cost of sales) or revenue in the above trial balance.

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[June 2008 Q4 Inventory]

4
(a) The IASBs Framework for the Preparation and Presentation of Financial Statements
requires financial statements to be prepared on the basis that they comply with certain
accounting concepts, underlying assumptions and (qualitative) characteristics. Five of
these are:
Matching/accruals
Substance over form
Prudence
Comparability
Materiality
Required:
Briefly explain the meaning of each of the above concepts/assumptions. (5 marks)
(b) For most entities, applying the appropriate concepts/assumptions in accounting for
inventories is an important element in preparing their financial statements.
Required:
Illustrate with examples how each of the concepts/assumptions in (a) may be applied
to accounting for inventory. (10 marks)
(15 marks)

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IAS 8 Accounting policies, changes in accounting

estimates and errors
If the company is going to use another accounting policy this year and find an error
relating to last years account then the company should adjust for this year and last
years financial statements. (retrospective adjusting)
If the company is going to use another accounting estimate this year and the company
should adjust for current year financial statements and future one. (prospective
adjusting)
But how to determine whether this is a change in accounting policy or estimate?
Well, if theres a change in
Measurement basis of the figure, e.g., value the inventory using FIFO but now
use weighted average method; use replacement cost rather than historic cost.
Recognition basis of the figure, e.g., recognize as an expense before but now for
asset(e.g. IAS 23 borrowing costs)
Presentation basis of the figure, e.g., recognize the depreciation expense into
cost of sales now rather than in administrative expenses before.
You are going to change in the accounting policy only if:
1, a change in laws / accounting standards and you are required to do so;
2, gives a fairer presentation to the users of FS.
And anything that is not changing the measurement, recognition or presentation of
figures are deemed to be a change in accounting estimate such as:
Allowance for receivables;
Useful life/ depreciation method of the non-current assets;
Warranty provision relating to return of goods from customers.
An error may happen if theres a
Misuse of the accounting standard last year;
Fraud happened last year;
Omit some figures in last years account.
Accounting Summary:
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Changes in accounting policy this year:

Assume it happens in last year as well and of course this year happens;
Adjust for last year closing retained earnings taken into account in the changes to be
brought forward in this years statement of changes in equity.
Material prior period errors found:
Correct last years material errors;
Adjust for last year closing retained earnings taken into account in the error effect to
be brought forward in this years statement of changes in equity.
Changes in accounting estimate:
Use the new one to continue the calculation.
Q Account Ltd (accounting policy and accounting estimate)

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1, Account Ltd charged interest expenses incurred from the construction of tangible
non-current assets to the income statement before but now it capitalizes the interest
as an addition to the cost of tangible non-current asset as per IAS 23 borrowing costs.
2, Account Ltd depreciate the machine using the reducing balance basis method at 30%
but now it use the new depreciation method over 10 years.
3, Account Ltd shows overhead expenses within cost of sales before but now it shows
under administrative expense.
4, Account Ltd has previously measured inventory at weighted average cost but now it
uses FIFO method.
Required:
Whether the above transactions are a change in accounting policy or accounting
estimate.
Q Martin Construction (change in accounting policy)

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Martin Construction incurs significant finance costs on its financing for the construction of
supermarkets. Its chosen accounting policy to date has been expense the finance costs as
incurred. The final accounts for the year ended 31 December 2012, and the 2013 draft
accounts, reflect this policy and show the following.

Finance costs
Profit before tax
Income tax expense
Profit after tax
Retained earnings B/F:
2013
$000
8,700
(2,500)
6,200
(1,900)
4,300
26,050
2012
$000
6,200
(1,750)
4,450
(1,400)
3,050
23,000
The directors of Martin Construction have now decided to change the accounting policy in
2013 to 54 capitalization of finance costs per IAS23. Martin Construction incurs no finance
costs other than those related to the construction of the supermarkets.
Martin Construction paid a dividend of $1m during the year ended 31 December 2013.
Required:
Show how the change in accounting policy will be reflected in the income statement and
statement of changes in equity for the year ended 31 December 2013.
Q JJK (prior period errors)

During the year 2013 JJK Ltd discovered certain items that had been included in
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inventory at 31 DEC 2012 at a value of $2.5m but they had been in fact sold before the
year end.
The income statement below for JJK for 2012 and 2013 are as follows:
2013
2012
Sales
52,100
48,300
Cost of sales
(33,500)
(30,200)
Gross profit
18,600
18,100
Tax expense
(4,600)
(4,300)
Profit after tax
14,000
13,800
The retained earnings at 1 Jan 2012 were $11.2million.

Required:
Show the 2013 income statement with comparative figures and the retained earnings
for each year.
Q Giant (changes in accounting estimate)

Giant Ltd has an asset which was purchased for $80,000 on 1 January 2005 when its
useful life was estimated to be ten years with a residual value of $10,000. A straight
line depreciation policy was selected. On 1 January 2011 the directors reviewed the
useful life of the asset and found that it had a remaining life of eight years.
Required:
Calculate the NBV as at 31 December 2011?

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IAS10 events after the reporting period
Time line:
YR start
YR end
Audit
report
signed
FS
authorized
to issue
This is the event happened between financial statement year end and the financial
statements are authorized to be issued to the shareholders to be discussed at the AGM
(annual general meeting).
They will be either adjusting events or non-adjusting events
Magical way to distinguish the adjusting events and non-adjusting events:
Is it because of this event then it will affect the figure as at the year end?
-Adjusting events
Change in judgments, estimate or assumptions after the year end.
E.g., 1, inventory sold at a loss? Change in assumptions that closing inventory should
be valued at the lower of cost and net realizable value (IAS 2);
2, Customers go bankruptcy so that recoverability of the receivable balance at the
year-end has been changed.
3, If company is involved in going concern problems after the year end and
because the financial statement should be prepared under going concern
basis and now this is changed.
-Non-adjusting events
Theres no link between financial statement figures at the year end and events after the
FS year end.
E.g., 1, fire destroyed the inventory after the year end (cants predict!)
2, dividends are declared after the year end or share issues after the year end
(no link between figures and events)

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Example: (Orange Ltd) (IAS 10 events after the reporting period)

John has asked you to identify the following events happened in orange Ltd of whether
theyre adjusting or non-adjusting events between the accounting year end of 31
December 2013 and 31 March 2014:
1. Major acquisition of a competitor announced on 17 January 2014.
2. Inventory is sold for a price significantly lower than the original cost on 5 January
2014.
3. The bankruptcy of a major customer on 9 February 2014.
4. A Major fire happened in a warehouse, destroying two thirds of the companys
inventory on 27 February 2014.
5. You discovered a material sales ledger fraud on 29 January 2014 that took place
throughout the financial year.
6. 100,000 ordinary shares issued on 1 March 2014.
7 Dividends were announced on 30 January 2014.

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[June2009 Q4 Waxwork]
(a) The objective of IAS 10 Events after the Reporting Period is to prescribe the
treatment of events that occur after an entity's reporting period has ended.
Required
Define the period to which IAS 10 relates and distinguish between adjusting and
non-adjusting events.
(5 marks)
(b)
Waxwork's current year end is 31 March 2009. Its financial statements were authorised
for issue by its directors on 6 May 2009 and the AGM (annual general meeting) will be
held on 3 June 2009. The following matters have been brought to your attention:
(i) On 12 April 2009 a fire completely destroyed the company's largest warehouse and
the inventory it contained. The carrying amounts of the warehouse and the inventory
were $10 million and $6 million respectively. It appears that the company has not
updated the value of its insurance cover and only expects to be able to recover a
maximum of $9 million from its insurers. Waxwork's trading operations have been
severely disrupted since the fire and it expects large trading losses for some time to
come.
(4 marks)
(ii) A single class of inventory held at another warehouse was valued at its cost of
$460,000 at 31 March 2009. In April 2009 70% of this inventory was sold for $280,000
on which Waxworks' sales staff earned a commission of 15% of the selling price.
(3 marks)
(iii) On 18 May 2009 the government announced tax changes which have the effect of
increasing Waxwork's deferred tax liability by $650,000 as at 31 March 2009.
(3 marks)
Required
Explain the required treatment of the items (i) to (iii) by Waxwork in its financial
statements for the year ended 31 March 2009.
Note: assume all items are material and are independent of each other. (10 marks as
indicated)
(Total =15 marks)

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IAS 11 construction contract
1, When youre trying to build this tower it may take you more than 1 year to finish.
After finishing off this tower and you may try to sell off to the client.
So before finishing off this tower will you keep it as a inventory?(IAS2)
The answer is no! Remember inventory is current asset which is less than 1 accounting
year.
2, Next question is because the contractor is building this tower so he may have to pay
for material, labor costs etc. So when is the cost being recognized?
The contractor can get the sales revenue only when after selling off this tower to client.
So before selling off this tower, the contractor gets no cash from the client. So does the
contractor recognize no revenue at all?
To answer this question:
According to Prudence concept, the sales revenue should be recognized after this
tower has been sold off to the client.
According to Accruals concept, the expenses relating to the building of the tower
should be matched with the revenue from the tower.
So one is contradict with another. But here in this case, Accruals concept wins.
3, But how much does the revenue and expenses should be recognized?
IAS 11 Construction Contract gives us the guidance.
4, Guidance by IAS 11 construction contract (Diagram)

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Mark up
Fixed Price or Mark up?
Profit=price (cost+mark up)-cost
Profit making contract?
Recognize loss in full
Outcome is certain?
Revenue=costs(no profit/loss)
yes
No
yes
No
yes
Recognize based on stage of
completion
5, Stage of completion
Sales basis method (work certified method):
work certified to date
contract price
Cost method:
costs incurred to date
total contract costs
6, exam approach: (big 5 steps) (mnemonic: PC IAS)

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Step1: Profit/loss of contract (outcome)

Revenue (contract price)
-Total costs
*cost to date
*cost to complete
Profit/loss
Step2: Stage of Completion

Last year & This year (if variation of work is included then revise this figure)
Step3: Income statement

Contract
Revenue
Revenue to date X stage of completion
-Revenue last year X stage of completion
Revenue this year=X
Cost of sales
Total costs X stage of completion=X
(X)
Gross profit
Revenue to date (include variation revenue?) X stage of completion
-cost of sales to date (include variation costs?) X stage of completion
Gross profit to date
-last years gross profit
-rectification costs
Step4: Amounts due from/ (to) customers

Costs to date
+gross profit to date /-(loss) to date
-progress billing
Amounts due from/(to) customers
Contract
X
X/(X)
(X)
X
Step5: Statement of financial position extract & I/S extract

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SOFP:
Current assets
Amounts due from customers
Receivables
Progress billing-cash received
Current liabilities
Amounts due to customers
I/S:
Revenue
-cost of sales
Gross profit/ (loss)
X
(x)
X

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Question: Tony [revenue and costs of construction contract recognised]

On 1 NOV 2013 Tony signs a contract to design and build a new golf course at a large
hotel in Malaysia for a fixed price of $2million. Tonys contracts stipulate that a 10%
premium will be paid for completion of the golf course by 31 May 2014.
Tony has noted the costs incurred as follows:
$
Design costs
150,000
Site leveling and preparation
320,000
Direct labor
200,000
Site supervision
30,000
Turf, sand and gravel
120,000
Depreciation of digger used in the project 10,000
Before the year end the client requires that the golf course should also include some
water jets and this will cost an extra $15,000 and Tony charges the client for $25,000.
Before the year end the client found that Tony has used the material wrongly to build
the golf course and so Tony will have to incur an extra $5,000 to that.
Before the year end, Tony expects the golf course will be completed by 30 April 2014
very probably.
So at 31 DEC 2013 what should the total contract revenue and costs be included?
Answer:
Contract revenue
Contract price
Incentive for early completion
Work variation (water jets-revenue)
Contract costs
Design costs
Site leveling and preparation
Direct labor
Site supervision
Turf, sand and gravel
Cost variation(water jets-costs)
Rectification costs(wrong material)

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$
2,000,000
200,000
25,000
2,225,000
$
150,000
320,000
200,000
30,000
10,000
15,000
5,000
730,000
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Question: (Mary J Ltd)

(Note: Mary J ltd has covered almost every aspects of IAS11 and theres no more exam questions that is more
complicated than this one.)
Mary J ltd is a construction company which specializes in building cafe bars.

There are particularly 3 cafe bars that Mary J ltd is building:
Duration
Commencement
Costs incurred to date
Costs to complete
Contract price
Progress billings
Cash received from customer
Mary A bar
$000
3 years
1year ago
200
200
600
40
36
Mary B bar
$000
3years
now
90
110
300
70
63
Mary C bar
$000
2years
now
600
200
750
630
400
Mary D bar
$000
2years
now
320
Unable to predict
800
0
0
The stage of completion in Mary A bar is calculated using work certified method (sales
basis method).
An independent surveyor certified the value of the work in progress as follows:
Last year: $300,000

This year: $400,000
The stage of completion in Mary B, Mary C and Mary D bar is calculated using cost
method.
Mary J ltd has been reviewing the Mary D bar is unsure about the future costs to
complete the Mary D bar and whether the Mary D bar will make a profit or a loss as
there are uncertainties surrounding the projects completion.
Last year Mary A bar agreed to a contract variation (for extra roof) that would involve
an additional fee of $5,000 with associated additional estimated costs of $2,000. In
this year, the cost includes $2,500 relating to the replacement of seats made from
material that had been incorrectly specified by the contractor.
Required:
Prepare the income statement extract and statement of financial position extract for
the above bars.

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Acca F7 Financial Reporting (INT) June 2015: Sample Note

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ACCA F7

Financial Reporting (INT)

Accounting Practise Center (A.P.C)

Lesco Group Limited, April 2016

Accounting Practise Center (A.P.C)

Accounting Practise Center (A.P.C)

Accounting Practise Center (A.P.C)

Chapter1 Basis of accounting

Accounting Practise Center (A.P.C)

Very experienced in examining financial reporting

Accounting Practise Center (A.P.C)

1.2, Basis of accounting

1.2.1, Different types of businesses

Limited liability Company

1.2.2, Different Types of accounts

prepared using the companys own internal policies.

Basic accounting equation: Asset=Liability + Equity

1, I put $20,000 cash into the business.

Accounting Practise Center (A.P.C)

3, I borrow the debt from the bank for $3,500

Accounting Practise Center (A.P.C)

Convert Dual effect into DR & CR

5, I purchase computers from supplier John for $45,000 in cash.

Accounting Practise Center (A.P.C)

Statement of financial position as at XX

Prove: Asset=Liability + Equity

Accounting Practise Center (A.P.C)

1.3, How to prepare financial statements?

1.3.1 Format of Financial Statements

Examples of these financial statements for Johnson ltd:

Other comprehensive income:

Accounting Practise Center (A.P.C)

Johnson ltd statement of financial position as at 31 DEC 2012:

Total equity and liabilities

Accounting Practise Center (A.P.C)

Opening balance at 1 Jan 2012

Accounting Practise Center (A.P.C)

1.3.2 Double bookkeeping (6 steps)

transaction and source document

Accounting Practise Center (A.P.C)

Q: [Jimmy] Jimmy starts his business on 1 NOV 2010.

Step 1, Source of documents

Accounting Practise Center (A.P.C)

Accounting Practise Center (A.P.C)

Accounting Practise Center (A.P.C)

Statement of account. A document sent out by a supplier to a customer listing all

Accounting Practise Center (A.P.C)

Accounting Practise Center (A.P.C)

Accounting Practise Center (A.P.C)

Step 2, Books of prime entry

Records credit sales to customers

Sales Returns Day Book (SRDB)

Records the return of credit sales

Purchases Day Book (PDB)

Records credit purchases from suppliers

Purchases Returns Day Book (PRDB)

Records the return of credit purchases

Cash Payments Book (CPB)

Records all payments made at the bank