Ex PF3
Ex PF3
Ex PF3
ACCA Paper F3
Financial Accounting
For exams in 2010
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ExPress Notes
ACCA F3 Financial Accounting
Contents
About ExPress Notes
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Financial statements Objectives of financial reporting Sources of financial information Double entry bookkeeping: the debits and credits Tangible non-current assets Intangible non-current assets Inventory and purchases Receivables and payables Bank reconciliations Long term finance Accruals and prepayments Provisions and contingencies Sales tax Trial balances and correction of errors Suspense accounts Incomplete records Limited companies Statements of cash flow Partnership accounting Events after reporting date, errors and estimates
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ExPress Notes
ACCA F3 Financial Accounting
ExP classroom course students will also have access to various online support materials, including: The unique ExP & Me e-portal, which amongst other things allows view again of the classroom course that was actually attended. ExPand, our online learning tool and questions and answers database
Everybody in the World has free access to ACCAs own database of past exam questions, answers, syllabus, study guide and examiners commentaries on past sittings. This can be
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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
an invaluable resource. You can find links to the most useful pages of the ACCA database that are relevant to your study on ExPand at www.theexpgroup.com.
HowtogetthemostfromtheseExPressnotes
For people on a classroom course, this is how we recommend that you use the suite of learning materials that we provide. This depends where you are in terms of your exam preparation for each paper.
Your stage in study for each paper Prior to study, e.g. deciding which optional papers to take These ExPress notes ExP recommended course notes, or ExPedite notes Dont use yet ExP recommended exam kit Dont use yet ACCA online past exams
Skim through the ExPress notes to get a feel for whats in the syllabus, the size of the paper and how much it appeals to you. Work through each chapter of the ExPress notes in detail before you then work through your course notes. Dont try to feel that you have to understand everything just get an idea for what you are about to study. Dont make any annotations on the ExPress notes at this stage.
Have a quick look at the two most recent real ACCA exam papers to get a feel for examiners style. Dont use at this stage.
Work through in detail. Review each chapter after class at least once. Make sure that you understand each area reasonably well, but also make sure that you can recall key definitions, concepts, approaches to exam questions, mnemonics, etc.
Nobody passes an exam by what they have studied we pass exams by being efficient in being able to prove what we know. In other words, you need to have effectively input the knowledge and be effective in the output of what you know. Exam practice is key to this. Try to do at least one past exam question on the learning phase for each major chapter.
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ExPress Notes
Your stage in study for each paper Practice phase These ExPress notes ExP recommended course notes, or ExPedite notes Avoid reading through your notes again. Try to focus on doing past exam questions first and then go back to your course notes/ ExPress notes if theres something in an answer that you dont understand. ExP recommended exam kit This is your most important tool at this stage. You should aim to have worked through and understood at least two or three questions on each major area of the syllabus. You pass real exams by passing mock exams. Dont be tempted to fall into passive revision at this stage (e.g. reading notes or listening to CDs). Passive revision tends to be a waste of time. Dont touch it! ACCA online past exams ACCA F3 Financial Accounting
Work through the ExPress notes again, this time annotating to explain bits that you think are easy and be brave enough to cross out the bits that you are confident youll remember without reviewing them.
Download the two most recent real exam questions and answers. Read through the technical articles written by the examiner. Read through the two most recent examiners reports in detail. Read through some other older ones. Try to see if there are any recurring criticism he/ she makes. You must avoid these! Do a final review of the two most recent examiners reports for the paper you will be taking tomorrow.
Read through the ExPress notes in full. Highlight the bits that you think are important but you think you are most likely to forget.
Unless there are specific bits that you feel you must revise, avoid looking at your course notes. Give up on any areas that you still dont understand. Its too late now. Avoid looking at them in detail, especially if the notes are very big. It will scare you.
Read quickly through the full set of ExPress notes, focusing on areas youve highlighted, key workings, approaches to exam questions, etc.
Leave at home.
Leave at home.
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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Our ExPress notes fit into our portfolio of materials as follows:
ACCA F3 Financial Accounting
Notes
Provide a base understanding of the most important areas of the syllabus only.
Notes
Provide a comprehensive coverage of the syllabus and accompany our face to face professional exam courses
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Provide detailed coverage of particular technical areas and are used on our Professional Development and Executive Programmes.
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ExPress Notes
Chapter1
ACCA F3 Financial Accounting
FinancialStatements
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ExPress Notes
Astatementofcashflows,whichshowswherethecashandshorttermassetsverysimilar tocashcamefromandwentdoduringtheperiod.Incomeisntalwaysthesameascash,as wellseelater. Notestothefinancialstatements,whichgivefurtherdetailtoreaderswhowanttoknow morethanthesummarystory.
ACCA F3 Financial Accounting
StatementoffinancialpositionofSoleTraderXat30June20x1 ASSETS $ $ Noncurrentassets Licencetooperate 10,000 Landandbuildings 35,000 Officeequipment 20,000 Motorvehicles 30,000 Fixturesandfittings 10,000 105,000 Currentassets Inventory 20,000 Tradereceivables 13,000 Less:allowancefordoubtfulreceivables (1,000) 12,000 Prepayments 4,000 Cashatbank 3,000 Cashinhand 2,000 Totalassets 146,000 EQUITYANDLIABILITIES Capital Initialcapitalintroduced 30,000 Totalcumulativecomprehensiveincomeat1July20x0 85,700 Less:Cumulativewithdrawalsat1July20x0 (24,000) Totalequityat1July20x0 91,700 Totalcomprehensiveincomeinthecurrentperiod 16,000 Withdrawalsinthecurrentyear (8,000) Totalequityat30July20x1 99,700 Noncurrentliabilities Bankloans 32,000 Currentliabilities Bankoverdraft 3,300 Tradepayables 8,000 Accruals 3,000 Totalliabilities 46,300 Totalequityandliabilities 146,000
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ExPress Notes
Principalfeaturesofthestatementoffinancialposition: Itbalances,withthetotalassetsequallingequity(ieownersinterest)plusliabilities Eachsectionisconventionallywrittenintermsofincreasingliquidity NoncurrentassetsandliabilitiesareonesthatareexpectedtoremainontheSOFPnext year.Currentassetsandliabilitiesareexpectedtobeuseduporpaidwithinthecoming year. ASOFPmayberearrangedintoanumberofways.IAS1showsaSOFPasgivenabove: Totalassets=Equity+totalliabilities. Equallyvalidlytherefore: Totalassetstotalliabilities=Equity Giventhatequity=capital+cumulativeprofitcumulativewithdrawals,thentheequationcouldbe writteninanynumberofwayssuchas: Totalassetstotalliabilities=Capital+cumulativeprofitcumulativewithdrawals Or Cumulativeprofit=Totalassetstotalliabilitiescapital+cumulativewithdrawals. ThisissometimescalledtheaccountingequationandoftencomesupintheF3exam.Thetaskis todropinthefiguresthatyouknowandfindthemissingfigure,whateveritmightbe.
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ExPress Notes
Statementofcomprehensiveincomefortheyearended30June20x1 $ $ Salesrevenue 152,000 Costofsales Openinginventory 30,000 Purchasesofinventory 80,000 Deliverycostsinwards 10,000 Closinginventory (20,000) (100,000) Grossprofit 52,000 Sundryincome 3,000 Discountsreceived 2,000 57,000 Less:Expenses Deliverycostsoutwards 3,000 Depreciation 6,000 Discountsallowedtocustomers 1,000 Electricity 4,000 Irrecoverableanddoubtfuldebts 2,500 Mobilephones 500 Motorexpenses 2,500 Rent 9,000 Telephoneandinternet 1,500 Wagesandsalaries 12,000 (42,000) Profitfortheperiodbeforetax 14,000 Othercomprehensiveincome: Revaluationgainonproperty 2,000 Totalcomprehensiveincomeintheperiod 16,000 Youmayberequiredintheexamtocalculaterevenue,costofsales,grossprofitandtotal comprehensiveincomefromgivendata.
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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
KEYKNOWLEDGE Elementsoffinancialstatements
Therearefiveelementsoffinancialstatements,fromwhichallfinancialstatementsareproduced. ThesedefinitionsareveryusefulthroughoutyourACCAstudiesandcouldeasilybepartofa questioninpaperF3. Elementsofthestatementoffinancialposition: Anassetisaresourcethatiscontrolledbyanentityasaresultofpasteventsandfrom whichfutureeconomicbenefitsareexpectedtoflowtotheentity. Aliabilityisapresentobligationoftheentityarisingfrompastevents,thesettlementof whichisexpectedtoresultinanoutflowfromtheentityofresourcesembodyingeconomic benefits. Equityistheresidualinterestintheassetsoftheentityafterdeductingallitsliabilities. Dependingonthetypeofbusiness,thismaybecalledjustcapital(soletrader),partners currentaccount(partnership)orsharecapitalandreserves(foralimitedcompany).Fora limitedcompany,reservesshowthenetcumulativegainsabovecumulativelosses,lessall dividendspaid.Thisthereforeexplainsthedifferencebetweenwhatthenetassetswere whenthesharecapitalwasoriginallypaidinandwhatthenetassetsareatthereporting date. Elementsofthestatementofcomprehensiveincome: Incomeisanincreaseineconomicbenefitsduringtheaccountingperiodintheformof inflowsorenhancementsofassetsordecreasesofliabilitiesthatresultinincreasesin equity,otherthanthoserelatingtocontributionsfromequityparticipants.
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ExPress Notes
Anexpenseisadecreaseineconomicbenefitsduringtheaccountingperiodintheformof outflowsordepletionsofassetsorincurrenceofliabilitiesthatresultindecreasesinequity, otherthanthoserelatingtodistributionstoequityparticipants.
ACCA F3 Financial Accounting
Notethatincomeandexpenditurearedefinedeffectivelyasthereasonthatachangeinnetassets happened.
Anincreaseinnetassetsofabusinesswillcomefromamixtureofthesesources: Totalcomprehensiveincomemadeintheperiod(aprofitwillincreasenetassets) Newcapitalintroducedbytheowner(willalwaysincreasenetassets) Withdrawalsmadeintheperiod(willalwaysreducenetassets). Thisissometimescalledtheaccountingequationorthebusinessequation.Itisafrequentexam questionandcanbesummarised: Closingnetassets= Openingnetassets+totalcomprehensiveincomeintheperiod+new capitalintroducedintheperiodwithdrawalsintheperiod. Thisisalsoafrequentexamquestion,withsomefiguresgivenandtheothershavingtobededuced. Rememberthatnetassets=equity+liabilities,bydefinition.Sonetassetsmaybegivenina questionseparatelyasequityandliabilities.
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ExPress Notes
Soletraders,partnershipandlimitedcompaniesWelllookattheseinmoredetailineachchapter, butheresasummary: Soletrader Partnership Limitedcompany Numberofinvestors 1(thesoletrader!) Normallylimitedto Canbebetween1and about20 anunlimitedlarge number Mustproduce Yes Yes Yes accountsforthetax authority No Maybe,normallynot Yes Mustproduce accountstofilewith thecommercial register Oftenthenamesofthe MustendLtd(if Businessname Normallyjustthe originalpartners.Few privatelimited nameoftheowner tradingasthename legalformalities company)orplc(if ofthebusiness publiclimited company) Canoffersharestothe No No Yes,ifaplc.NoifLtd. public? EquitypartoftheSOFP Initialcapital Eachpartners Sharecapital capitalaccount Cumulative Reserves: Eachpartners profit (revaluation current reserve, Cumulative account(ie retained withdrawals earnings,etc). cumulative shareofprofit lesscumulative withdrawals)
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ExPress Notes
Chapter2
ACCA F3 Financial Accounting
Objectivesoffinancialreporting
Goingconcern
Accruals
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ExPress Notes
settled.Italsomeansmatchingcostsandassociatedrevenues. Consistency Itemsshouldbereportedthesamewaybetweenperiods,sothatits possibletomakemeaningfulcomparisonsbetweenyears.Similar transactionsmustbereportedthesamewaywithinthesame accountingperiod. Materialitymeanslargeenoughtoinfluencetheusersopiniononthe financialstatements.Immaterialinformationshouldnotbedisclosed,as itsadistraction.Materialinformationmustbepresentedaccurately andfairly. Irrelevantinformationisadistractionandshouldnotbepresented. Informationisuselessifitsnotconsideredtobereliable.Eganexternal valuationofpropertyismorereliablethanabiaseddirectorsvaluation. Itemsshouldbedescribedinaccordancewiththeirtruenature.Egan expenseforrepairsshouldnotbeclassifiedasresearchcosts,even thoughresearchcostsaremorefavourablyviewedbyinvestors. Itemsshouldbereportedinaccordancewiththeircommercial substance,ratherthantheirlegalform.Egifasaleismadeoncreditbut legaltitleremainswiththeselleruntilthegoodsarepaidfor,itshould stillberecordedasasale/purchaseatthetimeofthetransaction,since thisiswhentheobligationarises. Unbiasedneitherexcessivelyoptimisticnorexcessivelyprudent. Conservatism.ThisisnolongeracoreconceptinIFRSaccounting,but broadlylossesshouldberecognisedmorereadilythangains. Allinformationthatneedstobepresentedinordertogiveafullpicture hasbeenpresented. Financialstatementsthisperiodshouldbepresentedusingsimilar principlestopreviousyears,sothatvalidcomparisonsmaybemade. Companyaccountsshouldbecomparablewitheachother.Thismeans thatifacompanychangesitsaccountingpolicy,itmustrestateits previousyearsaccountsusingthenewaccountingpolicy,inorderto facilitatecomparisonbetweenyears. Informationshouldbepresentedinawaythatuserscanunderstand. Excessivecomplicationreducesusefulness. Seechapter1.Evenifthereisnoseparatelegalentity,aswithasole trader,thebusinessisstillconsideredtobeseparatetoitsownersfor accountingpurposes.
ACCA F3 Financial Accounting
Materiality
Relevance Reliability
Faithfulrepresentation
Substanceoverform
Neutrality Prudence
Completeness
Comparability
Understandability
Businessentityconcept
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ExPress Notes
KEYKNOWLEDGE Historicalaccounting
Accountingisderivedfromrecordinginformationabouttransactionsthathavehappened.This meansthatassetsarerecordedattheirhistoricalcost;iewhatthebusinesspaidforthem.Thishas theadvantageofbeingobjectiveandrelativelyeasy,buthasanumberofdisadvantages,including: Itcangiveoutofdateassetvaluationsforlonglivedassets Thiscanresultinanunrealisticallylowdepreciationcharge Profittrendscanbemisleading(egaprofitgrowthof10%peryearisntsoimpressiveasit firstseemsifinflationis12%peryear!) Wheretheressignificantinflationandinventoryisheldforalongtime,profitcanbe reportedsimplybymatchingtodaysrevenueswithyesterdayscosts. Therearesomelargeadvantagesofhistoricalcostaccounting,however;principallythefactthat peopleunderstanditanditisobjective. Duringperiodsofmodestinflation,theweaknessesofhistoricalcostaccountingaregenerally outweighedbyitsadvantages. Therearealternativesystemsofaccounting,suchasreplacementcostaccounting.Replacement costaccountingrecordsinventoriesintheSOFPandatthepointofsaleatthecostthatwouldbe incurredtoreplacethemtoday.Thishasmanyadvantagesbutiscomplicatedtoapplysoisnot commoninpractice.YouwillonlyhavetoapplyhistoricalcostaccountinginthepaperF3exam.
KEYKNOWLEDGE Regulationoffinancialreporting
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ExPress Notes
Itisamatterofnationalregulationwhichfinancialreportingstandardsanentitymustusewhen producingtheirfinancialreports.Largeplcswillhavetoreportunderamuchmoreextensive financialreportingframeworkthansoletraders. ThereareanumberofbodiesthatyouneedtobeawareofforthePaperF3exam.Theirrolesare givenbelow. IASCF:theInternationalAccounting Standards ThishasrecentlybeenrenamedtheIFRSFoundation.The Foundationismadeupoftrustees,whoappointthe membersofthebodiesbelow. TheIASBissuesInternationalFinancialReportingStandards andtheIFRSforSMEs.Itemploysapermanentstaffto draftnewaccountingstandardsandamendments considerednecessarytoextantaccountingstandards. ThishasrecentlybeenrenamedtheIFRSAdvisoryCouncil. Itismadeupofacrosssectionofadvisorsfromdifferent usergroups.ItadvisestheIASBontheIASBswork programme. ThishasrecentlybeenrenamedtheIFRSInterpretations Committee.Thisbodyisdesignedtorespondquicklywhere therearesignificantdifferencesininterpretationofan extantIFRS.Forexample,itissuedguidanceonhowto accountforloyaltyprogrammes,whereuserswere uncertaintofollowtheextantaccountingstandardon revenuerecognition,orprovisions.
IASB:InternationalAccounting StandardsBoard
SAC:StandardsAdvisoryCouncil
IFRIC:InternationalFinancial ReportingInterpretationsCommittee
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ExPress Notes
Chapter3
ACCA F3 Financial Accounting
Sourcesoffinancialinformation
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ExPress Notes
Salesorder Torecordanorderfromacustomer. SigningabookingformforanExPclassroom courseisasalesorderthatExPwillthen process. Torecordanorderplacedwithasupplier.It mayrequirepreauthorisationtobevalid. Torecordthatanorderforinventoryfor resalehasbeenreceived.Itwillnormally onlybeproducedoncethegoodshavebeen inspectedatthepointofdeliverytoensure thattheyarecorrectindescriptionand quality. Torecordthatanorderfromacustomerhas beensentout.
ACCA F3 Financial Accounting
Sales(revenue).
Goodsdespatched note
Invoice Statement
Creditnote
Debitnote
Remittanceadvice
Receipt
Sales(revenue)andpossibly alsoinventorymanagement, dependingonhowthe accountingsystemissetup. Arequestforpaymentfromasupplier.Sent Payables. bythesuppliertothecustomer. Doesnotgenerallyinstigateany Asummaryoftransactionsrecordedbya supplierwithacustomer,includingamounts recordingofatransaction, sincealltransactionsonthe receivedfromthecustomer.Sentbythe statementwillhavebeen suppliertothecustomer. recordedwhengoodswere ordered.Butusefulforcross checkingourrecordswiththe suppliersrecords. Acknowledgementfromasupplierthatthe Payables. customerhasoverpaidandisentitledeither toarefundorfreegoods/servicesinthe future. Receivables. Tocancelacreditnotethatpreviously existed,egifgoodswereordered,paidfor andthenreturnedtherewouldinitiallybea creditnote.Therefundmadewouldbe accompaniedwithadebitnote. Receivables. Normallyincludedwithaninvoice.A documentthatisincludedwiththepayment (egifpaidbycheque)withdetailsthatwill allowtherecipientofthefundstomatch thepaymenttothecustomersaccount. Issuedbythesupplierforgoods,to Receivables,payablesand acknowledgepaymentofadebt. purchases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Datasources/datacapture
KEYKNOWLEDGE Booksoforiginalentry
Cashreceivedintothebusinessbankaccount.
Cashpayments book
Cashpaidfromthebusinessbankaccount.
Pettycashbook
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2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Salesdaybook Salesoncredit.Notethatsalesimmediately settledincashwillberecordedineitherthe cashbook(ifpaiddirectlyintothebank account)orpettycashbook(ifreceivedin notesandcoins). Purchasesofinventoryforresaleoncredit. Notethatpurchasessettledimmediatelyin cashwillberecordedimmediatelyinthecash paymentsbookorpettycashbook. Anythingnotcoveredbyanyoftheother booksoforiginalentry. Salesrevenue.
ACCA F3 Financial Accounting
Purchasesday book
Purchasesofinventoryfor resale.
Journalbook
Booksoforiginalentrymayberecordedinpaperform,orusingaspreadsheet.
KEYKNOWLEDGE Computerisedsystems
Computerisedsystemsarecommonandcanbecheap.Theystillrequirerigoroussystemsfordata captureatthepointwhentransactionshappen,asthemaximgarbagein,garbageoutverymuch applies!Inputtoacomputerisedsystemwillnotlooklikeabookoforiginalentry,butwillrequire thesamedata.Softwaremaybemoreuserfriendly,forexampleaskinghowmuchcashwas spent?andwhatwasthisfor?,whilstthenofferingadropdownmenuofchoices.Thesoftware willstillpreparerecordsusingthesamemethodologyasthemanualrecordingsystemsabove. Advantagesofusingacomputerisedsysteminclude: Backupscanbemadeeasily Makesproducingperiodicfrequentaccountsmuchlesslaboriousthanamanualsystem Canbeuserfriendly Analysessalestaxesmoreeasilythanmanualsystems(seelater) CanbeusedtoquicklyproducelotsofreportssuchasVATreturnsandinterimmanagement accounts. Disadvantagesofacomputerisedsysteminclude: Cost Maynotbetailoredverywelltothebusinessownneeds Stillrequireseffectivedatacaptureandmaintenanceoftheunderlyingrecords.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Journalbook
KEYKNOWLEDGE Creditcontrolandmemorandumaccounts
KEYKNOWLEDGE Controllingpettycashtheimprestsystem
Ch 3 | 5
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Beforeanycashistakenoutofthecashbox(whichshouldbeguardedbyaverydiligentand ideallyslightlyfrighteningperson),thepersonclaimingthecashmustprovideareceiptand completeanexpensevoucher. Asanexpenserecordissubmitted,thesameamountofcashistakenoutofthebox. Undernocircumstancesisanybodyeverallowedtotakemoneyoutofthetinwithout completingapettycashvoucher.
ACCA F3 Financial Accounting
1,000.00 Openingbalance (21.12) 332;Supermarket (20.00) 333;TaxiforMD (430.00) 334;Stationeryshop (32.00) 335;Flowersfornewbaby (43.12) 336;Supermarket 453.76 Subtotal 546.24 Replenish 1,000.00 Subtotals 546.24 546.24 (64.24) (20.00) (430.00) (32.00) (43.12) (21.12) (20.00) (430.00) (32.00)
Ch 3 | 6
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter4
ACCA F3 Financial Accounting
Doubleentrybookkeeping:thedebits andcredits
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Sowhydebitsandcredits?
Imaginethatwecallassetsdebits,onlysothatpeoplewhospeakdifferentlanguagescan communicatemoreeffectivelywitheachother.Ifwenowsaythatwehaveanasset,ormoreofan assetbecauseyouvebeenpaidyoursalary.Thiswouldberecordedasrecogniseneworincreased assetofcash.Itsshorterjusttosaydebitcash. Theremustbeareasonforthisincreaseincash.Thereasonisthattheresbeensomeincome.This cantbeadebit,aswhatweretryingtodoisexplainwherethedebitcamefrom.Theexplanationis arbitrarilycalledacredit. Youmayhaveencounteredthewordsdebitandcreditinthecontextofyourbankstatement.This bringsdanger,sincethebankstatementisarecordfromtheirownrecords.Thismeansthatits upsidedown.Thiscancauseconfusion,soitsbestforthemomentifyoutrytounlearneverything youveevercometothinkofdebitsandcreditsasbeing.Thetruthistheoppositewayroundtothe waythatlaypeopleusetheterms.
KEYKNOWLEDGE Buildinguptherules
Herearethecoreconceptsthatyouneedtobehappywith: Anasset,oranincreaseinanasset,isadebit. Theoppositeofanassetisaliability.Theoppositeofadebitisacredit.Soaliabilityisa credit. Ifyouhavemoreassets(debitassets),theexplanationwillbetocreditincome. Soyoumayhavestartedtothinkdebitsgood,creditsbadoreventheotherwayround.Thatsnot thewaytolookatit.Neitherisgoodorbad.Adebitcanbeanasset,butitcanalsobeanexpense. Soitsnotcorrecttothinkofonebeinggoodandtheotherbad.Itssimplerthanthat. Heresatabletosummarisetherules.Reviewthisandthentrytoproduceisyourself,usingthe logicofexplainingmovementsinnetassetsandthingsbeingopposites(egaliabilityisacredit becauseanassetisadebit).
Ch 4 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Itwilltakeawhiletobecomefamiliarwiththissystem,justthewaythatittakesawhiletobecome familiarwithridingabicycle.Dontpanicitcomesanddontfeelpressuredtorushit.Theresnot muchintrinsicallytoactuallyunderstandhereitsjustataskandasystemthatbecomesreallyeasy withrepetition. Debitsmean Whathappenstonetassets: Anincreaseinassets Anincreaseinliabilities Andthereasonforthatincreaseinnetassets: Anitemofexpenditure Anitemofincome Ifyoureaskedtorecordatransaction,thefirststepistoidentifywhatassetsand/orliabilitiesarein question.Decideoneofthesefirst(itsofteneasiestatfirsttostartwithcashifitsacash transaction)anddecideifthisisadebitoracredit.Thenworkouttheexplanationwhy.Ifyouthink thattheresanewliability,thatmustbeacredittoliabilities.Thatmeansthattheexplanationmust beadebit,whichcouldbeeitheranasset(egifyouvejustgotsomecashinyourhandbecauseyou borrowedit),oranexpense(egifyoujustboughtdinneronyourcreditcard). Adecreaseinassets Anincreaseinliabilities Creditsmean
Ch 4 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter5
ACCA F3 Financial Accounting
Tangiblenoncurrentassets
KEYKNOWLEDGE Capitalandrevenueexpenditure
Ch 5 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Acquisitionofanoncurrentasset
KEYKNOWLEDGE Depreciation
Allassets,withthesoleexceptionoffreeholdland,wearoutovertime.Thismeansthatthetotal costofownershipoftheassetmustbematchedtotherevenuestreamthattheassetgenerates,or supports.Thisisdonebymakinganallowancefordepreciationandchargingdepreciation. Theaimofdepreciationistomatchthecostofusingtheassettotheincomestreamthatit generates.Itisnotaimedatanythingelsesuchasshowingtheassetatitscurrentmarketvaluein theSOFP. Thedepreciationmethodchosenforanassetshouldbethemethodthatmostcloselymatchesthe costoftheassettothepatternofrevenuethatitgenerates. TheSOFPwillshowtheassetatitsnetbookvalue(NBV).NBVisoriginalcostlesscumulative allowancefordepreciation. Method Annualdepreciationcalculated Examplewheresuitable as estimateofrevenuegenerated Straightline (Costestimatedresidual Officefurniture,oranything value)/expectedusefullife. thatdoesnotproduce materiallygreaterincomewhen itsnew.Thisisthemost commonlyusedmethodof depreciation. Reducingbalance(alsoknown NBVatstartoftheperiodx Motorvehiclesusedbyataxi asdiminishingbalance) annualdepreciation% company.Oldercarsgenerate lessnetrevenueastheybreak downmorethannewcarsand requiremoremaintenance. Whereanitemofmachinery Machinehourmethod (Costestimatedresidual hasanestimatedmaximum value)x(Machinehoursthis period/estimatedtotaluseable usefullife. hours)
Ch 5 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
KEYKNOWLEDGE Disposal
KEYKNOWLEDGE Revaluation
Ch 5 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Depreciationofrevaluedasset
KEYKNOWLEDGE Disposalofrevaluedasset
KEYKNOWLEDGE Disclosureofnoncurrentassets
Ch 5 | 4
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter6
ACCA F3 Financial Accounting
Intangiblenoncurrentassets
KEYKNOWLEDGE Researchanddevelopmentcosts
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ExPress Notes
KEYKNOWLEDGE Developmentcosts
DevelopmentisdefinedinIAS38astheapplicationofresearchfindingsorotherknowledgetoa planordesignfortheproductionofneworsubstantiallyimprovedmaterials,devices,products, processes,systemsorservicesbeforethestartofcommercialproductionoruse. Theaccountingtreatmentofdevelopmentcostsistorecognisethemasanintangiblenoncurrent assetiftheymeetthecriteriathatsuggestthattheywillbelikelytogenerateaprofitableincome streaminthefutureandcanbereliablyseparatelyidentifiedusingthemnemonicRATPIE: Resourcesareadequatetocompletetheproject Abilitytocomplete Technicallyfeasible Probableeconomicbenefit(ieexpectedtobeprofitable) Intendtocompletetheproject Expenditureontheprojectcanbeseparatelyrecorded. Adevelopmentcostassetcanincludethedepreciationonmachineryusedinthedevelopment project.Insteadofdepreciationbeingwrittenoffagainstprofit,itisassettothecostofthe qualifyingdevelopmentcostasset.
KEYKNOWLEDGE Writeoffperiod
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ExPress Notes
Chapter7
ACCA F3 Financial Accounting
Inventoryandpurchases
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ExPress Notes
goods,thenonlyaverysmallproportionofinventorypurchasedduringtheyearwouldremainin inventoryattheyearend.Inpracticalterms,journalstep2abovecouldberepeatedmany thousandsoftimesaseachindividualsalehappened. Tosimplifymatters,mostaccountingsystems(andallaccountingsystemsthatyoucanexpectto encounterintheF3exam)taketheshortcutofwritinginventorypurchasesoffimmediatelytocost ofsalesintheSOCI,thus: Singlestep:Inventoryispurchasedandtreatedasanexpense: DrCostofsales(purchasesexpense) $10,000 CrCash/payables $10,000 Attheendoftheperiod,anyinventorythatremainsinstockisthenvaluedinaccordancewithIAS2 (seebelow)andthisisliftedoutofcostofsalesandtreatedasanassetthatwillprobablybeusedup inthenextperiod: DrInventoryasset(SOFP) $800 CrCostofsales(closinginventory)(SOCI) $800 Atthestartofthenextperiod,thisinventoryassetisthentreatedasanexpense,sinceitsexpected thatitwillbeusedup(egbybeingsoldorscrapped)bytheendofthatperiodandsobecomingan expenseofthatperiod: DrCostofsales(openinginventory)(SOCI) $800 CrInventoryasset(SOFP) $800 Theeffectofthesejournalsistocreatethehopefullyfamiliarworkingforcalculatingcostofsales: Openinginventory 0 ExpenseinSOCI Add:Purchasesintheperiod 10,000 ExpenseinSOCI (800) ReductioninexpenseinSOCI Less:Closinginventory Costofsalesmade 9,200
Ch 7 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Valuinginventory
Thepurchasepriceofinventoryisnormallyfairlysimple.Itwillincludecostsnecessaryinorderto bringtheinventoryintosaleablecondition,soincluding: Costpaidtothesupplier Irrecoverabletaxes(egimportduties) Costsofdeliveryinwards(sometimescalledcarriageinwards). Whereinventoryisworkinprogressinamanufacturingprocessitwillalsoincludefaircostsof conversion(eglabourcosts,productionoverheadcosts). Recoverablesalestaxes,nonproductionadministrativecostsandoneoffcoststhatdonotadd anythingtotheinventorysvalue(egcostsofdeliverytothewronglocationandcostofbringingto therightlocation)wouldbeexcludedfromcostofsales,sincetheyareunnecessarytobringingthe inventorytosaleablecondition. Bywritinginventoryoffimmediatelytocostofsales,itispossibletokeepinventoryoutsidethe accountingsystem.Thissimplifiesmattersconsiderably.However,itdoesmeanthatattheendof eachperiod,inventorymustbephysicallycountedandvalued,inordertomakethenecessary adjustmentstoliftunsoldinventoryoutofcostofsales. Maximumvalue:lowerofcostandNRV Anassetisonlyanassetifitisexpectedtogenerateaninflowofbenefits.Thismeansthatif inventoryisexpectedtosellfornetproceedsbelowcost,themaximumvaluationofthatitemof inventoryintheSOFPwillbethenetamountthatitssaleisexpectedtogenerate(calleditsnet realisablevalueorNRV). Anycostsincurreduptothedateoftheaccountsmightbeincludedwithinthe determinationofcost. Anyrevenuesandfuturecoststobeincurredtoenablesalewillbeincludedwithinthe determinationofNRV. ThefinalvaluationforeachitemofinventorywillbethelowerofcostandNRV.Thishastobe estimatedonastocklinebystocklinebasis,sothatrealisedlossesonsomestockdonotmask unrealisedexpectedgainsonothers.
Ch 7 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter8
ACCA F3 Financial Accounting
Receivablesandpayables
Ch 8 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Irrecoverabledebts
KEYKNOWLEDGE Recoveryofdebtswrittenoff
Ifadebtisunexpectedlypaidhavingpreviouslybeenwrittenoff,itislikelythatthecashreceived willinitiallyberecordedinthecashreceivedbookasareceiptfromadebtor.Thismeansthatthe journaltorecordthecashwillbeautomaticallygeneratedthus: DrBank $800 CrReceivables $800 However,thebalanceisnolongerinreceivables,asitwaswrittenoff.Inorderforthejournalto work,itisthennecessarytoreinstatethebalancethatwaspreviouslywrittenoff.Thisisachangein accountingestimates,sincetheestimatelastperiodwastherewasnorealisticchanceofthedebt beingrecovered: DrReceivables $800 CrIrrecoverabledebtexpense $800. Thereisnoattempttochangethepreviousyearsfigures,whichincludeanexpenseforthewriteoff ofthedebt,sincethiswasafairestimateatthetime.Therewillbeanexpenserecordedforthe writeoffintheyearwhenitwaswrittenoffandacredittoprofitorlosswhenthecashwas received. Dependingonhowtheinitialcashreceipthasbeenrecorded,itmaybepossibletosimplifythe abovetwojournals,becausethereisadebitandcreditofthesameamounttoreceivables,thus: DrBank $800 CrIrrecoverabledebtexpense $800.
Ch 8 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Doubtfuldebts
Itislikelythatsomereceivableswillnotpay,eveniftheyhavenotyetbeenwrittenoff.The businesswillcontinuetochasethereceivablesforfullpaymentandmayeventuallyevensueforthe fullbalance.Theamountcannotbewrittenoutofdebtors,ascreditcontrolwillneedtherecordsof thedebtinfulltoknowhowmuchtochaseforpayment. However,ifitsestimatedthatthereisa20%chancethatadebtwillnotpay,itwouldfailtogivea trueandfairviewonthefaceoftheSOFPtoshowthefullamountasanasset.Thesolutionisto createanallowanceaccount,whichreducesthevalueofnetreceivablesonthefaceoftheSOFP withoutcorruptingtherecordsoftheactualdebtorbalancethatwillbeneededtotrytoobtain payment. Creating,orincreasing,anallowancewillreducenetassets.Thisthereforecreatesanexpense.The allowanceaccountitselfisaSOFPaccount,sojustlikeassetsandliabilitiesitwillremainonthe balancesheetuntilitisremoved.
KEYKNOWLEDGE Controlaccountreconciliations
Itispossiblethatanaccountingsystemwillmaintainmemorandumledgerswithindividualcustomer balancesoutsidethemainaccountingsystem.Thiscreatesduplicationofeffortandrecordkeeping, butprovidesacheckonaccuracyofthefigures.Thereceivablesaccountinthedoubleentrysystem isoftencalledthecontrolaccount,sinceitcontainsonlysummaryfiguresoflotsoftransactions, ratherthanlotsofdetailofindividualtransactions.Itmayalternativelybecalledthegeneralledger, ornominalledger.Thememorandumledgercardsareconfusingsometimesreferredtoasthe ledgers. Thedoubleentrysystemwillbekeptassimpleaspossible,withasfewfigurespostedtotheledger accounts(Taccounts)aspossible,sincethefewertransactionsthereare,thelessthechanceoferror andthelessinformationtoseekthroughinordertofinderrorswhentheyoccur.Forthisreason, theledgeraccountsarenormallyupdatedusingthetotalsfromthesalesdaybookandcashreceipts book,ratherthandetailsofindividualsales.
Ch 8 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Othercommonitemswithreceivables
Interestonoverduedebts Ifasaleagreementwithacustomerprovidesforarighttochargepenaltyinterestonanoverdue debt,thiswillincreasetheamountreceivable.Increasingareceivableincreasesnetassets,which thereforegeneratesasourceofincome.Itwillnormallyberecordedas: $x DrReceivables CrSundryincome(orperhapsfinanceincome) $x Discounts Therearetwotypesofdiscountthatyoumayencounter:tradediscountsandsettlementdiscounts. Tradediscountsarethosegiventocustomersatthepointofsale,perhapsbecausethecustomer buysinlargevolumesorisamemberofstaff.Thesediscountsarenotsubjecttoanyuncertaintyat thetimeofsaleitisknownforsurethatthecustomerwillneverpaythelistpriceofthegoodsor services. Theaccountingisthereforeverysimple:theyaresimplyignored.Thesaleisrecordedattheamount netofthetradediscount. Settlementdiscounts Asettlementdiscountisanincentiveforcustomerstopayyouearlierthantheyotherwisenaturally would.Forexample,adiscountof5%maybeofferedontheinvoicesenttocustomersifpaymentis receivedwithinsevendaysoftheinvoicebeingsent.Ifpaymentisnotreceivedwithinthatperiod, theofferofthediscountlapses. Settlementdiscountsareuncertainatthepointofsale.Theactualamountofthedebtisgrossof thesettlementdiscount,iebeforeitsdeduction,sincethisistheamountthatthecustomerwill eventuallybechasedforiftheydontpayearly. Ifthesettlementdiscountisallowedtothecustomer,thisissimilartothetreatmentofirrecoverable debts.Itissimplyadebtthatwearevoluntarilychoosingtowriteoffaspartiallyirrecoverable becauseofthecashflowadvantageofreceivingthecashquickly.Settlementdiscountsare sometimesalsocalledcashdiscountsforthisreason. Theterminologycanbeconfusinghere.
Ch 8 | 4
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Ch 8 | 5
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter9
ACCA F3 Financial Accounting
Bankreconciliations
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ExPress Notes
Reasonsfordifferences betweenbank accountandcashbook
Errors/omissions (requirecorrection)
Timingdifferences (noactionneeded)
Errors/omissionsby thecompanyitself
Errors/omissions bythebank
Errorscanbealmostinfinitelyvariedandcanbemadebyeitherthebankorthecompany.Iferrors aremadebythebank,thecompanywillneedtonotifythem,sothatthebankcancorrecttheir records.Iferrorsaremadebythecompany,thecompanywillneedtoamenditsownrecords,using thejournalbook. Typicalerrors/omissionsmadebythecompany: Mispostingofamounts,egrecordingacashpaymentof$45as$54 Omissionofcashpaymentsorreceipts Omissionofstandingordersprocessedbythebank(ieautomaticpaymentsofnonvariable amounts) Omissionofdirectdebitpaymentsprocessedbythebank(ieautomaticpaymentsof variableamounts) Omissionofbankcharges Processingerrors,egmiscastingmanuallymaintainedaccounts. Typicalerrors/omissionsmadebythebank(typicallymuchrarerthanthecompany): Incorrectcharges Processingpaymentsorreceiptsincorrectly.
Ch 9 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Typicaltimingdifferences: Paymentsmadeintothebanknotyetprocessed(unclearedlodgements) Chequesdrawnoronlinepaymentsorderednotyetprocessedbythebank. Awarningaboutterminology! Abankstatementwillrecordpositivedepositswiththebank asacredit,wherethecashbookwillrecordthemasdebit. Botharecorrect,asadebitisanasset.Ifthebankholdssome ofyourmoney,thatmeansthatthebankowesyoumoney ieyouarealiabilityofthebank.Sothebankstatementswill listyourbalanceasacredit.Bankstatementsarerunofffrom therecordsofthebank,notoftheclient.Hence,ourdebit correctlyequalstheircreditandviceversa.
Ch 9 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter10
ACCA F3 Financial Accounting
Longtermfinance
KEYKNOWLEDGE Longtermdebt
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ExPress Notes
KEYKNOWLEDGE Equity
Equityistheresidualinterestofallassetsafterdeductingallliabilities.Forasoletrader,equityis simplytermedproprietorsinterest.Inapartnership,itisthesumofeachpartnerscapitalaccount andeachpartnerscurrentaccount.Inthecaseofacompany,IFRSandnationalregulationoften requireagreateranalysisofeachcomponentofequity. Equityintotalisoftentermedshareholdersinterestorshareholdersfunds. Inalargelimitedliabilitycompany,equitymaycomprisethesumofthefollowing: Ordinarysharecapital Preferencesharecapital Reserves: o Sharepremiumaccount o Revaluationreserves o Otherreserves o Retainedearnings Companiesarerequiredtopresentanoteintheirfinancialstatementsthatreconcileeach componentofequityatthestartoftheyeartotheendoftheyear.Thisisanotherexpressionofthe accountingequationandbusinessequationfromchapter1.
Ch 10 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter11
ACCA F3 Financial Accounting
Accrualsandprepayments
Ch 11 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Accountingtreatmentattheyearend
Accruals Estimatethecostofgoodsorservicesusedby theyearendbutnotinvoiced.Thismightbe doneusingtypicallevelsofusage,ordoneafter theperiodendusinginvoicesthatcameinafter theperiodend,butbeforetheaccountsare prepared. Recognisethisasaliability,sincethereisan obligationtopaythischarge.Recognisingthe liabilityreducesnetassets,sogeneratesan associatedexpense: DrExpenseinSOCI(egelectricity) $x CrAccrualsinSOFP(liability) $x Prepayments Calculatetheamountoftheprepaymentfrom cashpaidbeforetheyearend.Determiningthe amountoftheprepaymentwillnormallybe easierthanestimatingtheamountofanaccrual, sincethereisanactualcashpaymentbeforethe periodendtobasethecalculationon. Recognisetheasset(therighttoreceivefuture benefits)attheperiodend.Doingthisincreases netassetssogeneratesasourceofincome.In reality,thissourceofincomewillbeareduction intheexpenserecognisedsofarfromposting cashpaymentsfromthecashbooktoexpenses. DrPrepaymentinSOFP(asset) $x
CrExpenseinSOCI(eginsurance) $x
KEYKNOWLEDGE Accountingtreatmentinthefollowingperiod
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ExPress Notes
Accruals Recognisethedischargeoftheliabilityinthe followingperiod.Thisincreasesnetassets,so createsacredittoexpenses.Thismeansthatas cashispaidthefollowingperiod,notallofitwill berecognisedasanexpenseinthatperiod,since anamountequivalenttotheopeningaccrualwill alreadyhavebeenreportedasanexpensethe previousyear.Reversingtheaccrualremoves anychanceofaccidentaldoublerecognitionof theexpense. DrAccrualsinSOFP(liability) $x Prepayments Recognisetheconsumptionoftheassetinthe followingperiod.Thisderecognisestheasset thatnolongerexists.Derecognisingtheasset reducesnetassets,sogeneratesanexpense. Thiswillbeanexpenseinperiod2ofthecash paymentnotrecognisedasanexpenseinperiod 1. DrExpenseinSOCI(eginsurance) $x CrPrepaymentinSOFP(asset) $x
ACCA F3 Financial Accounting
CrExpenseinSOCI(egelectricity) $x
Ch 11 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter12
ACCA F3 Financial Accounting
Provisionsandcontingencies
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ExPress Notes
Contingentliabilities Acontingentliabilityexistsinoneoftwosituations,whichareeither: Itisbelievedthatthereisprobablynoobligatingevent(<50%probability)butthechancesofthere beinganobligatingeventaremorethanremote(>5%probability),or Anobligationprobablyexists,butitissodifficulttoobtainanestimateofwhattheoutflowislikely tobethatanyestimatewouldbenomorereliablethanzero.Thissecondsituationisveryrare. Contingentliabilitiesaredisclosedinthenotestothefinancialstatementsbutarenotshownwith anyvalueontheSOFP. Contingentassets Acontingentassetisonewhereitisuncertainiftheasset(ierighttosomething)evenexists. Examplesareinsuranceclaimswhereitsuncertainiftheitembeingclaimedforiscoveredbythe policyatalloralotteryticketbeforethelotterydraw. ContingentassetsarenotshownasassetsintheSOFP,nordisclosedinthenotestothefinancial statements. Movementinprovisions Aprovisionisaliability.AswithanyitemontheSOFP,itwillremainontheSOFPuntilitisremoved. Ifaprovisionisincreasedduringtheperiod,theeffectwillbetoreduceprofitandnetassets: DrExpense(egforlegalcosts) $Increaseinprovision CrProvision $Increaseinprovision TheprovisioniscategorisedontheSOFPwithincurrentliabilitiesornoncurrentliabilities, dependinguponwhetheritisexpectedtobesettledwithin12monthsofthereportingdateor longer. Ifaprovisionisnolongerneeded,itwillbereversed.Thiswillreducetheprofiteffectofthecash paymentintheperiod.
Ch 12 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter13
ACCA F3 Financial Accounting
Salestaxes
Ch 13 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Locallawsvaryonhowpricesmustbequoted.Inmostcountries,theconventionappearstobethat pricesmustincludesalestaxunlesstheyspecifyotherwise.IntheUSA,itisnormalforpricestobe quotednetofsalestaxandthenthesalestaxisaddedatthepointofpurchase.Inanexam question,itsfirstimportanttoknowwhichwaythepriceshavebeenquoted. Ifabusinessisnotregisteredforsalestax,itdoesnotneedtochargesalestaxonitsoutputs,butit cannotrecoversalestaxonitsinputs. Ifabusinessisregisteredforsalestax,itmustchargesalestaxonitsoutputswhichitmustthenpay overtothegovernmentperiodically.Itrecoverssalestaxonitsinputsbynettingitoffthesalestax payable. Ledgeraccounting Purchasesandpayableswouldberecordedas: DrPurchases(SOCI,sonet) $135,000 CrCash/payables(SOFP,sogross) $162,000 =>DrSalestaxcontrolaccount(SOFP) $27,000 Thesalestaxcontrolatanypointwillshowtheamountduetoorfromthetaxauthorityforsales taxes. Salesandreceivableswouldberecordedas: CrSalesrevenue(SOCI,sonet) $178,000 DrCash/receivables(SOFP,sogross) $213,600 =>CrSalestaxcontrolaccount(SOFP) $35,600 Thisleavesanetbalanceonsalestaxcontrolof$8,600. Recoverableorirrecoverable? Someitemswillincludesalestaxesthatunderlocallawarenotrecoverable,asamatterofpublic policy.Thesemightincludebusinessentertainingexpensesorsalestaxoncars.IntheUKfor example,salestaxonvansisrecoverableforaregisteredbusiness,butsalestaxonpurchaseofa companycarisnot. Ifanitemincludesirrecoverablesalestax,itisincludedwithintherecognisedvalueoftheassetor expense.
Ch 13 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPedite Notes
Chapter14
ACCA F3 Financial Accounting
Trialbalancesandcorrectionoferrors
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ExPedite Notes
Thefactthatthetotaldebitsequalthetotalofthecreditsgivesusaconsiderableamountofcomfort thatthebookkeepinghasbeendoneaccurately. Ifthetotaldebitsdoesnotequaltotalcredits,itimpliesthaterrorshavebeenmadeintherecording oftransactions,theaddingupoftheTaccountsortheextractionofbalancesfromtheTaccounts intothetrialbalanceitself. Itdoesnotmeanthatnoerrorshavetakenplace.Thesetypesoferrorswillnotbepickedupina trialbalance: Errorsofomissionhavingtotallyignoredatransactionornecessaryadjustment Compensatingerrorstwoerrorshappeningtocanceleachotherout Errorsofprincipletreatinganexpenseasanasset,incomeasliability,orviceversa Errorsofcommissionrecordingthecorrectjournal,butatthewrongamount.
Ch 14 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPedite Notes
Overviewofstagesinpreparationoffinancialstatements
Recordtransactionsusing booksoforiginalentry
Totalledgersandproduce preliminarytrialbalance
Finaltrialbalance
Producefinancial statements
TransferprofitandlossT accounttoequity
Openingtrialbalancefor nextperiod
Ch 14 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPedite Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Correctionoferrors
Asprofessionalaccountants,muchtimeisspentdealingwithcorrectingerrorsfromdraftrecords preparedbylessexperiencedpeople.Knowinghowtocorrecterrorsisthereforeacriticalskillfora charteredcertifiedaccountant. Theeasiestapproachtotakeistotakethreestepsandresistthetemptationtotrytosimplifythem, asrushingintoasimplificationnormallyresultsinfurthercomplicationandapoortrailforanother persontoreviewtheworkthatyouvedone.Sotheapproachtotakeis: 1. Workoutwhathasbeendonetorecordatransactionandwritedownthejournalthathas beenrecorded,nomatterhowcrazyitmightbe. 2. Workoutwhatthejournalentryshouldhavebeen. 3. Comparetheresultsfromsteps1and2toworkoutacorrectingjournal.
Ch 14 | 4
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter15
ACCA F3 Financial Accounting
Suspenseaccounts
Ch 15 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Inordertohighlighttheproblem,asuspenseaccountiscreatedwhichwillfilltheholeinthetrial balance.Asuspenseaccountisanequityaccount,whichshouldbeeliminatedinfullbeforethe financialstatementsareproduced.Becauseasuspenseaccountmayariseduetomultipleerrors, someofwhichwillbeadebittosuspenseandsomeacredittosuspense,itreallyoughttobe eliminatedinfullandthisiswhatyoushouldexpecttohavetodointheexam.Inpractice,its normaltofindthatsuspenseaccountscanbecomeverysmall,whentheeffortinclearingthem becomesdisproportionatetothebenefit.Theyarethenoftenwrittenofftoprofitorlosstoclear themoncetheresidualfiguresbecometriviallysmall,asthechanceofadifferenceof$0.10being thenetoftwolargecompensatingerrorsisverysmall. Deliberatecreationofsuspenseaccounts Asuspenseaccountmaybeuseddeliberatelywhereatransactionhashappenedbutthebookkeeper isuncertainwhatitrelatesto.Byrecordingthetransactioninsuspense,itcanensurethatthe recordsareatleastpartiallycorrect,butcanthenbecorrectedfullywhentheinformationnecessary isknown.
Ch 15 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter16
ACCA F3 Financial Accounting
Incompleterecords
KEYKNOWLEDGE Marginandmarkup
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ExPress Notes
Markup Margin Salesrevenue 120% Salesrevenue 100% Costofsales 100% Costofsales 80% Grossprofit 20% Grossprofit 20% Withdrawalofinventoryforownuse Inasmallerbusiness,aproprietorislikelytowithdrawinventoryforhis/herownuse.Thisisa withdrawalfromthebusiness. Thepurchaseofinventorywillhavebeenwrittenofftopurchases,withincostofsales.However,if theinventoryistakenbytheproprietor,ithasnotbeensold.Acommonaccountingtreatmentand theonetouseinanyexamquestionisthereforetoremoveitfromcostofsales(atcost)anddebit towithdrawals.
Ch 16 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter17
ACCA F3 Financial Accounting
Limitedcompanies
Ch 17 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
The members...
...its creditors.
Taxation Withasoletraderorpartnership,taxationexpensedoesnotappearintheSOCI.Thisisbecausethe soletradersorpartnerstaxliabilitydependsonlotsofotherthings,suchasanyothersourcesof incomethattheymayhaveortaxdeductiblepersonalexpenses.Thebusinessisnotthecomplete storyoftheownerswealth,sothetaxliabilityofthatpersonfrombusinessearningscannotbe known. Withacompany,thetaxpositionisknown,sincethecompanyitselfwillhavealiabilityforcorporate incometax.Thismeansthatitispossibletomakeanestimateofwhattaxwillbedueonprofitfor theperiod.Thistax: Islikelytobeanestimateattheyearendasthereareoftenadjustmentstoaccounting profittoagreewiththetaxauthority,clarificationtobeobtainedonwhethercertain expensesaredeductible,ifanytaxlossescanbeoffsetagainstcurrentyearprofit,etc,and Islikelytobepaidsometimeaftertheperiodend,soisaliabilityintheSOFPattheperiod end.
KEYKNOWLEDGE Equity
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Componentof equity Ordinaryshare capital Whatitis Distributable?
ACCA F3 Financial Accounting
No
Preferenceshare capital
Recordsthenominalvalueofpreferencesharesissuedto No date.Preferencesharesnormallycarryafixeddividend buthavenovotingrights. Recordstheexcessovernominalvalueofconsideration receivedontheissueofshares. Recordscumulativerevaluationgainsonprofitabove historicalcost.Movementsonrevaluationreservewill bereportedinothercomprehensiveincomewithinthe statementofcomprehensiveincome Recordscumulativerecognisedprofit,lesscumulative dividendsreceived. SomeIFRSrequiresomegainsandlossestobereported inotherequity.Sometimescompaniesmaychooseto maintainaseparatecomponentofretainedearnings,or nationallawrequiresit,egsomenationallawsrequire that5%ofprofiteachyearistransferredtoanon distributableotherreserve. No
No
Retainedearnings
Yes
Otherreserves
Notethatcurrentmarketpriceofsharesisnotrelevanttoaccounting.Onlythevaluationof consideration(normallycash)receivedbythecompanyforissueofsharesisrelevanttotheSOFP.
Ch 17 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter18
ACCA F3 Financial Accounting
Statementsofcashflow
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Whatiscash?
IAS7presentsastatementofcashflowsusingbothcashandcashequivalents.Acashequivalentis ashortterm,highlyliquidshortterminvestmentthatisreadilyconvertibleintoaknownamountof cashandissubjecttoinsignificantriskofchangesinvalue.Tosomeextent,thisisasubjective definition.Intheexam,itwillbemadeclear. Cashandcashequivalentswillinclude: Notesandcoins Demanddepositsatabank Foreigncurrencydeposits(willnotbeinpaperF3) Governmentbondsveryclosetomaturitydate(willnotbeinpaperF3). Cashandcashequivalentswillexclude: Sharesinothercompanies Longdatedbonds. Ifacompanyusescashtobuyacashequivalent,itwillnotbereportedinthestatementofcash flowsasacashmovement. Ifacompanyusescashorcashequivalentstobuyshares,itwillbereportedinthestatementofcash flowsasacashoutflowoninvestingactivities. Profitvcashflow Wehaveseenalreadythattherearemanyitemswithinastatementofcomprehensiveincomethat donotrepresentamovementofcash. Themethodusedbymostcompaniestopresentastatementofcashflowsreconcilesoperating profit(earningsbeforeinterestandtaxation)tocashgeneratedfromoperations(iecashflowfrom coreoperations,beforebuyingorsellingnoncurrentassetsorraisingnewfinance). Ifatransactionorjournaladjustmentaffectsearningsbeforeinterestandtax,butdoesnotaffect cashfromoperations,thenitisadifference.Thatdifferencewillbepartofthereconciliation. Anumberofmultiplechoiceitemsislikelytofocusonthispartofpreparationofastatementofcash flowsundertheindirectmethod,soitsworthbeingabletodoinfull;evenifthiscouldnotbe requiredintheexamitself.
Ch 18 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE Directmethodorindirectmethod
ThecashgeneratedfromoperationsmaybepresentedunderIAS1usingtwoalternative presentations,bothofwhichreachthesamefigure,butbydifferentmeans. Thedirectmethodisshorterinpresentationbutoftenlongertocalculatethefiguresinanexam. $ $ 28,200 Cashreceivedfromcustomers Cashpaidtosuppliersandemployees (24,500) Cashgeneratedfromoperations 3,700 Interestpaid (140) Incometaxespaid (340) Netcashfromoperatingactivities 3,220 Cashflowsfrominvestingactivities Purchaseofproperty,plantandequipment (1,620) Proceedsfromsaleofequipment 120 Interestreceived 80 Dividendsreceived 190 Netcashusedininvestingactivities (1,230) Cashflowsfromfinancingactivities Proceedsfromissueofsharecapital 70 Proceedsfromlongtermborrowings 180 Dividendspaid (40) Netcashusedinfinancingactivities 210 Netincreaseincashandcashequivalents 2,200 Cashandcashequivalentsatthestartoftheperiod (1,450) Cashandcashequivalentsattheendoftheperiod 750
Ch 18 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Indirectmethod $ Profitbeforetax 3,105 Financecosts 150 Profitbeforeinterestandtax 2,995 Adjustmentsfor: Depreciation 370 Amortisation 100 Increaseininventories 65 Increaseinreceivables 330 Increaseinpayables (120) Cashgeneratedfromoperations Interestpaid Incometaxespaid Netcashfromoperatingactivities Cashflowsfrominvestingactivities (1,620) Purchaseofproperty,plantandequipment Proceedsfromsaleofequipment 120 Interestreceived 80 Dividendsreceived 190 Netcashusedininvestingactivities Cashflowsfromfinancingactivities Proceedsfromissueofsharecapital 70 Proceedsfromlongtermborrowings 180 Dividendspaid (40) Netcashusedinfinancingactivities Netincreaseincashandcashequivalents Cashandcashequivalentsatthestartoftheperiod Cashandcashequivalentsattheendoftheperiod
Ch 18 | 4
(1,230)
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Findingcashflowsusingdoubleentry AmultiplechoicequestionmayprovideyouwithinformationaboutitemsintheSOFPattheendof thisperiod,theendofthepreviousperiodandprovidefiguresfromtheSOCI.Youwouldthenbe requiredtofindthecashflowasthebalancingitem,usingTaccounts.Thisisexactlythesame techniqueasusedinincompleterecords. Techniquetouse Thetechniquehereisnothingnewtolearn;itisexactlythesameapproachasforincomplete records: Identifyanyasset/liabilityaccountsinthequestionwhereyouaregivenbothanopening andclosingbalance. WriteupaTaccountforthisaccount,includingallthedatathatyouaregiven. Balanceoffthisaccounttofindtheinformationthatyouarelookingfor,whichwillbethe cashpaidorreceivedrelatingtothatasset/liabilityintheperiod.
Ch 18 | 5
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter19
ACCA F3 Financial Accounting
Partnershipaccounting
Ch 19 | 1
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
Finaltrialbalance
Producefinancial statements
Openingtrialbalanceof nextperiod
KEYKNOWLEDGE Principalissuestounderstandinpartnerships
Ch 19 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
ACCA F3 Financial Accounting
KEYKNOWLEDGE PartnershipSOFPandequity
Theownershipofapartnershipissplitbetweeneachpartnerscapital,whichrecordseachpartners staticinvestmentinthefirmandisbasedontheirinitialcashintroducedandeachpartners currentaccount,whichrecordseachpartnersvariableinvestmentinthefirm.Intheory,each partnercouldwithdrawtheircurrentaccountinfullatanytime. Thismeansthatifthereare20partners,therewillbe40accountswithinequityinthegeneralledger andinthepresentationoftheSOFP.Intheexam,itslikelythatapartnershipwillcompriseonlytwo orthreepartners. $ $ Partnerscapitalaccounts MrRag 140,000 MrsTag 180,000 MissBobtail 26,000 Totalcapital 346,000 Partnerscurrentaccounts MrRag 90,000 MrsTag 72,000 MissBobtail (3,000) Totalcurrentaccounts 159,000 Totalequity 505,000 Legaltermsusedinpartnerships Therearecertainlegaltermsusedinpartnershipagreements.Inmostjurisdictions,thelawprovides defaulttermsofthepartnershipagreement.Generally,thepartnershipagreementvariestheterms ofthisagreementbutifthereisnospecificagreement,thelawsdefaultprovisionsapply. TheUKPartnershipAct1890isusedasanexemplarhere,butobviouslyfollowtheappropriate nationallaw!Intheexam,itislikelythatthetermsofapartnershipagreementwouldbecomplete.
Ch 19 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Term Whatitmeans PartnershipAct 1890defaultrule 5%annualsimple interestonloans.
ACCA F3 Financial Accounting
Interestonloans Anexpenseofthebusiness DrExpense(P/L)$x CrPartnerscurrenta/cs$x Salaries Anappropriationofprofit, ratherthananexpense DrAppropriationaccount$x CrPartnerscurrenta/cs$x Interestoncapital Anappropriationofprofit, ratherthananexpense DrAppropriationaccount$x CrPartnerscurrenta/cs$x Withdrawals/drawings Areductionininvestment. DrPartnerscurrentaccount$x CrCashorotherassettaken$x Interestonwithdrawals DrPartnerscurrentaccount$x CrAppropriationaccount$x
Ch 19 | 4
Nosalariesawarded toanypartner.
Nointereston capital.
Nointereston withdrawals
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Profitsharingratio Anappropriationofprofit. DrAppropriationaccount$x CrPartnerscurrentaccount$x Afterallpriorcallsonprofitaremade,the residualprofitissharedintheresidual profitsharingratiobetweeneachpartner. Mostpartnershipagreementsgiveahigher shareofprofittothemoreseniorpartners. Apartnershipagreementmayalso guaranteeapartneraminimumshareof profit. Anassetrepresentingthevalueofthe firmsname,etc.Normallynotkeptonthe SOFP,butoftenintroducedatatimeofa partnershipchange(seebelow). Partnersshare residualprofitsand lossesequally, regardlessof balanceoncapital account,etc.
ACCA F3 Financial Accounting
Goodwill Anasset
KEYKNOWLEDGE Guaranteedminimumprofitshare
Itspossiblethatapartnershipagreementmayguaranteeoneormoreofthepartnersaminimum profitshare.Thewaytodealwiththisis: Calculateprofitshareasnormal Checkthateachpartnersprofitshareisabovetheguaranteedminimum Ifthereisanyshortfallbetweenallocatedprofitshareandminimumprofitshare,transfer theshortfalltothepartnerwhoisguaranteedtheminimumprofitshare.Splitthe differencebetweentheotherpartnersintheprofitsharingratiobetweentheotherpartners whoseprofitshareisbeingreduced. Thereallocationbetweenpartnersisrecordedasatransferwithinthecurrentaccountsofeach partner.
Ch 19 | 5
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ACCA F3 Financial Accounting
KEYKNOWLEDGE Goodwill
Goodwillisthevalueofabusiness,otherthantheseparatevalueofitsindividualnetassets.Ina partnership,reputation,clientlist,motivatedstaffandbrandnamearealllikelytobepartof goodwill.Sincethesethingsariseasahappybyproductofsimplytrading,theydonothavean identifiableseparatecost(egnocashwaseverpaidspecificallytoacquirereputation). GoodwillgeneratedwithinabusinessisnotnormallyrecognisedasanassetontheSOFP,asits valuationistoosubjectivetobereliable.PartnershipsdontgenerallyhavetofollowIFRS,butIFRS prohibitsrecognitionofinternallygeneratedgoodwillonaSOFP.Mostpartnershipschooseto followthisrule. Calculationofgoodwill Therearemanywaystoestimategoodwill.Alargerpartnershipwilloftencontainprovisionsfor howgoodwillistobecalculated.Goodwillisthedifferencebetweenthebusinessasawholeand thevalueoftheidentifiableseparatenetassetsofthebusiness.Soitmaybecalculatedas: $000 Estimatedvalueofthebusinessasawhole 1,340 Less:Fairvalueofindividualnetasset (1,030) Valueofgoodwill 310 ThevalueofthebusinessasawholemaybeestimatedusingtheP/Eratioofsimilarbusinesses, oftenwithsomeadjustment.TheP/Eratioisameasureofconfidenceinabusiness,wherePisthe marketpriceofashareandEisthemostrecentearningspershare.AP/Eratioof12meansthatthe sharepriceiscurrently12timesthemostrecentearnings. Othermethodsmayexist,suchasthreetimesthemostrecentturnoverorsimilarmethods.Insome industries,thereareacceptedindustrybenchmarksforestimatinggoodwill.
Ch 19 | 6
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Chapter20
ACCA F3 Financial Accounting
Eventsafterreportingdate,errorsand estimates
KEYKNOWLEDGE Eventsafterthereportingdate
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ExPress Notes
Bankruptcyofamajorreceivable,asthereceivablewouldbealmostcertaintohavebeenin troubleattheperiodend. Saleofinventoryaftertheperiodendataloss. Resolutionofamatterrequiringaprovisionatthereportingdate,suchasalitigationin progressattheperiodend. Anymatterwhichcausesthecompanytonolongerbeagoingconcernaftertheperiodend willbeanadjustingevent,evenifitwouldnormallybeanonadjustingevent. Discoveryorfraudorerrorinthepreparationofthefinancialstatements.
ACCA F3 Financial Accounting
KEYKNOWLEDGE Errorsandestimates
IAS8AccountingPolicies,ChangesinAccountingEstimatesandErrors AccountingpoliciesarethedetailedapplicationsofIFRSthatacompanychoosestoapply. Examples: Howsimilartypesoftransactionsaregroupedandreportedtogether(egclassesofnon currentasset) Atwhatexactpointrevenueisrecognised Whatdeminimisfiguretousewhenrecognisingnoncurrentassets. Accountingestimatesarebestguessesnecessarilymadeinthepreparationofthefinancial statements,including: Expectedusefullivesofassets Residualvalueofassets Howmuchalawsuitislikelytocostthecompanytosettle Recoverablevalueofassetsforthepurposesofcalculatingimpairmentlosses Defaultratebyoverduereceivableswhendeterminingallowance. Accountingestimatesarebytheirnatureuncertainandunlikelytoprovetobeexactlywhat happens.
Ch 20 | 2
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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ExPress Notes
Correctionofaccountingestimatesisprospective.Thismeansthatanerrorinestimatein20x1is correctedin20x2,withnoattempttorestatethefiguresfor20x1. Accountingerrorsrelatetoerrorsinpreviousperiods.Theseareerrorsthatcouldreasonablyhave beenexpectedtohavebeencorrectedatthetimethatthepreviousperiodsfinancialstatements wereauthorisedforissue.Errorsdiscoveredbeforeissueofthecurrentyearsfinancialstatements willbecorrected,asallaccountingerrorsareadjustingeventsunderIAS10(seeabove). Correctionofaccountingerrorsisretrospective.Thismeansthatthepreviousyearsfinancial statementsarerestatedtothefiguresthattheyshouldhavebeen.Thecomparativefigureswillbe differenttowhatwaspreviouslyreportedsowillneedtobeheadedrestated.Anycumulative differencesatthestartoftheyearbetweenthepreviouslyreportedfiguresandtherestatedfigures willbetakentoequityatthestartofthecurrentperiod. Anycorrectionofanaccountingerrorwillonlybeiftheerrorismaterial(ielargeenoughto influenceusersopinions).Particulars,reasonandeffectofthecorrectionwillalsoneedtobegiven fullandfrankdisclosureinthenotestotheaccounts.
Ch 20 | 3
2010 This material is the copyright of the ExP Group. Individuals may reproduce this material if it is for their own private use. It is illegal for any individuals to reproduce this for commercial use or for companies to reproduce this material partially and/or in full by any means, be it printed, photocopied, on electronic devices or any other means of reproduction. All examples presented in these course materials are for information and educational purposes only and should not be applied to a specific real life situation without prior advice. Given the nature of information presented in these materials, and given that legislation may change at any time, The ExP Group will not be held liable for any information presented in these materials as to its application to any specific cases.
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