ACCA Financial Reporting Paper F7 BPP Study Program for F7

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Financial Reporting (UK)

Fundamentals Level – Paper F7

Study Text Edition

June 2008

AH08 – F7 (UK)

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STUDY TEXT EDITION: JUNE 2008

Financial Reporting (UK)

Introduction

Welcome to the ACCA Home Study programme for Paper F7 Financial Reporting (UK). This programme provides a step by step guide through your study thus enabling you to study more effectively.

This programme will guide you through the June 2008 edition of the BPP Study Text. Make sure your Study Text has this date on the cover – if it does not, please contact BPP.

BPP's '3 steps to success'

This Home Study Programme follows BPP’s ‘3 steps to success’:

Work through the syllabus using the detailed study periods and the personal study planner. This step starts on page 1.

Use questions from the BPP Practice and Revision Kit to test your knowledge and exam technique. See page 37 for details of Step 2.

A full mock exam that is marked by the BPP Professional Education marking team. You can also think about enrolling on a BPP revision course to supplement your Home Study programme. See page 39 for details of this step.

Supporting you all the way

BPP prides itself on the level of support it offers to Home Study students. There are various ways in which we can help.

Technical and study support

The principal author for this paper is Mary Maclean. If you have any difficulty with your studies, you can get in touch with Mary or one of her team by emailing accaqueries@bpp.com. Alternatively, please telephone (0845 0751 100 for UK-based students or + 44 (0)20 8740 2338 from outside the UK). You can fax your query to + 44 (0)20 8740 2293 or write to the Home Study Administrators at

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STUDY TEXT EDITION: JUNE 2008

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BPP i-Pass support

To help us answer BPP i-Pass queries you might have quickly and effectively, please follow the steps below. (This procedure is necessary as question numbers change each time the CD is used.)

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E-mail the document, with details of your query, to accaqueries@bpp.com. If you make contact by phone, you will be asked to e-mail or post a copy of the document.

Course administration support

If you have any course administration issues, such as amending exam submission dates, then please call BPP Professional Education on 0845 0751 100 (UK only, local rate) or + 44 (0)20 8740 2338 if calling from outside the UK.

Study Guidance on MP3s and Learning to Learn Accountancy

Listen to BPP tutor guidance on your computer or MP3 player by downloading MP3 files from

www.bpp.com/acca/homestudy/mp3s

Whether you are about to start your studies or continuing them, BPP's Learning to Learn Accountancy will help you learn efficiently and effectively. It also provides essential guidance on dealing with your exam. If you would like to obtain a copy e-mail accaqueries@bpp.com with your details.

'Put it right'

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STUDY TEXT EDITION: JUNE 2008

STEP 1 – LEARN

Using the Home Study Programme

This Home Study Programme is made up of 24 Study Periods (see page 3). Each Study Period consists of the following elements.

Guidance through the Study Text

This provides you with important instructions on how to work through the BPP Study Text. You must follow the guidance in this table for time efficient study, as you will be told which areas of each chapter must be worked through in detail and which can be skimmed over. It contains key points, summarising the most vital areas of the Study Period. Try any examples in the Study Text as you go along.

Exam Guidance

This gives an introduction to each Study Period by explaining the emphasis that the examiner has placed on the topics to be covered on the basis of the pilot paper, past exams and discussions with BPP.

Introduction to the session

Here you are introduced to the subject and the main issues that you should understand when you have finished your study. You are also directed to the relevant BPP Learn Online or i-Learn module. Tips for using Learn Online can be found at www.bpp.com/acca/learnonline

and selecting FAQs.

The Big Picture

Revisit the Big Picture as directed to see how what you have studied fits into the overall

Question Practice

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Re-STUDY TEXT EDITION: JUNE 2008

Your Personal Study Planner

You will find a detailed Personal Study Planner on page 3 of this Home Study programme. This will help you plan the dates on which you will complete each study period and when to submit your course exams.

Progress Tests

Some of the Study Periods are 'Progress Tests' which you can use to assess the work you have done on a limited number of Study Periods. You should mark the tests yourself using the solutions at the end of this Study Programme.

Course Exams

You are required to submit two course exams which are incorporated into the

Learn stage of your studies (see PersonalStudyPlanner). You should send these exams to BPP Professional Education for marking. You will receive a detailed analysis of your performance, together with suggested solutions, which should help to improve your exam technique as well as pointing out strengths and weaknesses in your understanding. This feedback will be invaluable leading up to the 'Practise and Revise' and 'Final Rehearsal' steps in your study.

Exam Timetable

To help you plan your study time, you will receive separately an

Exam Timetable with recommended dates for submission of course exams. Should these dates prove impractical, please feel free to amend them to suit your own planned schedule. To gain the greatest benefit from the exams you must set aside a period of three hours and fifteen minutes during which you will have no interruptions.

BPP's i-Pass CD Rom

Your Home Study Course includes BPP's i-Pass CD-Rom. It enables you to attempt tests, making it an ideal practice and revision tool.

i-Pass has two modes (or three for F1, F2 and F3). The first one is 'Test as you learn'. This allows you to test yourself on the areas that you are studying at the time or a combination of different areas. Use the sliders to choose the number of questions to do to fit the time you have available.

The second mode provides exam practice by creating an exam containing questions selected at random from those within 'Test as you learn' for you to answer or, if appropriate to your paper, exam scenarios for you to attempt. Papers examined by Computer Based Exam (F1, F2 and F3) include a third mode, 'Final mock exam'.

The Final mock exam contains questions not included within 'Test as you learn'. Attempt this to check you're ready for the real thing.

Each mode gives you comprehensive feedback on the questions and your performance.

BPP's 'Big Picture'

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STUDY TEXT EDITION: JUNE 2008

Your Personal Study Planner

Use this schedule and your exam timetable to plan the dates on which you will complete each Study Period. The letters 'H' and 'M' tell you whether the topic is high or medium priority.

Detailed guidance and prioritisation of each Study Period begins on page 6. BIG PICTURE 1

Study

Period Topic Due Date

1 The conceptual framework

H

2 The regulatory framework

M

3 Presentation of published financial statements

H

4 Fixed assets H

5 Intangible assets H

6 Impairment of assets H

7 Reporting financial performance

H

8 Introduction to groups

M

9 The consolidated balance sheet

H

10 The consolidated profit and loss account

H

11 Accounting for associates

H

12 Progress Test 1 H

Study

Period Topic Due Date

13 Stocks and long-term contracts

H

14 Provisions, contingent liabilities and

contingent assets

H

15 Financial assets and liabilities

H

16 The legal versus the commercial view of accounting

H

17 Leasing H

18 Accounting for taxation

H

19 Earnings per share H

20 Analysing and interpreting financial statements

H

21 Limitations of financial statements and interpretation techniques

M

22 Statements of cash flows

H

23 Alternative models and practices/ Not-for profit entities

M

24 Progress Test 2 H

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STEP 1 - LEARN

Big Picture Diagram 1

Financial Reporting (F7)

Conceptual framework

Regulatory framework

Financial statements

Analysing and interpreting

financial statements

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STEP 1 - LEARN

Financial Reporting Summary

This is a broad syllabus dealing with all aspects of financial reporting. The format of the exam allows the examiner to test a large part of the syllabus at each sitting, and he will do so. He wants this paper to act as a good basis for your later studies in Paper 8.

The two main areas are preparation of financial statements for single companies and for groups. After looking at the conceptual and regulatory frameworks within which financial statements are prepared, we go on to deal with the profit and loss account and balance sheet formats and the application of financial reporting standards dealing with fixed assets, leases, provisions, tax and long-term contracts. The cash flow statement is another important topic. 25% of the exam is on group accounts, which appears under the ‘Business combinations’ section of the Big Picture Diagram. You have to be able to prepare a consolidated balance sheet and profit and loss account and deal correctly with an

associate.

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Study Period 1

High Priority

Examined: Pilot Paper

Step 1 Exam Guidance

This could form part of question 4 or 5, as in the pilot paper.

Step 5 The Big Picture

This session is reflected in the Conceptual framework part of the 'Big Picture' diagram.

Step 2 Introduction to the session

This chapter deals with the ASB Statement which is the conceptual underpinning to FRSs.

This is covered in i-Learn module ‘Framework for financial statements’.

Step 4 Question Practice

When you have finished the chapter do the Quick Quiz. If you have any problems, make sure you go back and re-read the chapter section.

i-Pass module 'The conceptual and regulatory frameworks'. Try question 1 in the Question Bank of the Study text.

Step 3 Guidance through the Study Text

The Statement will be referred to throughout the text and you should become familiar with its provisions and understand their relevance to financial reporting.

Make sure you know:

• The elements of financial statements

• The qualitative characteristics of financial statements

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Study Period 2

Medium Priority

Examined:

This will not be a major topic for your exam but could appear as part of questions 4 or 5.

This session is reflected in the Regulatory framework part of the 'Big Picture' diagram.

This section deals with the role and structure of the ASB and the standard-setting process.

See i-Learn module ‘Framework for financial statements’.

Step 4 Question Practice

i-Pass module 'The conceptual and regulatory frameworks'. Study Text Question Bank – Questions 2 and 3.

This Chapter gives you the background to the formulation of accounting standards. Make sure you know: • The difference between 'principles-based' and 'rules-based' systems of regulation.

• The role of the ASB

• The standard-setting process

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Study Period 3

High Priority

Examined: Pilot Paper

This chapter is vital and its contents will be tested in Questions 1 and 2.

This session is reflected in the Financial statements part of the 'Big Picture' diagram.

In this chapter we introduce the formats and requirements for published financial statements.

This is covered in i-Learn module ‘Framework for financial statements’.

Step 4 Question Practice

i-Pass module 'Published accounts and reporting performance'. Study Text Question Bank – Question 4.

This is an important chapter. You must know:

• The balance sheet and profit and loss account formats

• Items to be disclosed on the face of the balance sheet/ profit and loss account

You will have plenty of opportunity to practice using these formats as you go through the study text.

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Study Period 4

High Priority

Examined: Pilot Paper

Fixed assets are an important exam topic. You may get a whole question on this and it will certainly feature in Question 2, as in the pilot paper.

Step 2 Introduction to the session

This session deals with tangible fixed assets and related topics such as investment property and government grants.

This is covered in i-Learn module ‘Fixed assets’.

Step 4 Question Practice

i-Pass module 'Fixed assets'.

Study Text Question Bank – Question 6.

Step 3 Guidance through the Study Text

The most important part of this chapter is the coverage of FRS 15. Much of the treatment of fixed assets and depreciation should be revision from earlier papers. Government grants and investment properties may appear in the accounts preparation question. The key areas are:

• Cost of a fixed asset

• Revaluation and depreciation following revaluation • Disposals

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Study Period 5

High Priority

Examined: Pilot Paper

Intangible assets were regularly examined under the old syllabus and could appear in any of the paper.

Step 2 Introduction to the session

This session deals with intangible assets, including goodwill. This is covered in i-Learn module ‘Fixed assets’.

Step 3 Guidance through the Study Text

The major topic here is the criteria for recognition of an intangible asset. You must be able to apply the provisions of FRS 10 to brands, trademarks, patents and similar assets and apply SSAP 13 on research and development costs.

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Study Period 6

High Priority

Examined:

Impairment is most likely to be tested as part of Questions 1 or 2. It was tested as a whole question under the old syllabus in December 2005.

Step 2 Introduction to the session

This session deals with impairment of assets and the requirements of FRS11.

This is covered in i-Learn module ‘Fixed assets’.

Step 3 Guidance through the Study Text

This is not a particularly complex topic and the issues you must pay particular attention to in Chapter 6 are: • Definition of impairment. How to recognise that impairment has taken place.

• Cash generating units • Allocation of an impairment loss

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Study Period 7

High Priority

Examined:

This is important material for Question 2 in your exam. It could also appear in Questions 4 or 5.

This sessions deals with FRS 3, which is an important standard for accounts preparation.

This is covered in i-Learn module ‘Accounting standards’.

Step 4 Question Practice

i-Pass module 'Published accounts and reporting performance'. Study Text Question Bank – Question 5.

There are a lot of important issues covered in this chapter. You must be able to deal with: • Discontinued operations, and

• Prior period adjustments

You must be able to produce the FRS 3 statements: • Statement of total recognised gains and losses • Reconciliation of movements in shareholders' funds.

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Study Period 8

Medium Priority

Examined: Pilot Paper

The material in this chapter will not be tested as a topic, but is important background for the consolidation question. The pilot paper consolidation question tested students' understanding of what constituted a subsidiary.

This session is reflected in the Business combinations part of the 'Big Picture' diagram.

Step 2 Introduction to the session

In this session we introduce group accounts and look at the structure of a group.

This is covered in i-Learn module ‘Introduction to groups’.

i-Pass module 'Group accounts'.

Step 3 Guidance through the Study Text

The important issues here are:

• Definition of a subsidiary – based on 'control'

• Exclusion of a subsidiary from consolidation under FRS 2.

• Related parties – the examiner has stated that the related parties issue will be examined in the context of groups.

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Study Period 9

High Priority

Examined: Pilot Paper

Your exam will have a consolidation question. It could be a balance sheet, an income statement or possibly both. The pilot paper has a consolidated balance sheet.

Step 2 Introduction to the session

This session covers the consolidated balance sheet and all the necessary adjustments.

See i-Learn module ‘The consolidated balance sheet’.

Study Text Question Bank – Questions 8, 9, 10

Step 3 Guidance through the Study Text

This is a long chapter and is one of the most important chapter in the text. Make a note to come back and redo this chapter when you get to the end. You must be able to deal with goodwill on acquisition and calculate consolidated reserves, in addition to adjustments for:

• Unrealised profit • Fair value

• Intercompany transfers of assets • Intercompany debtors/ creditors/ loans

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Study Period 10

High Priority

Examined:

The consolidation question may involve a profit and loss account rather than a balance sheet. You must be able to do both.

Step 2 Introduction to the session

This session covers the preparation of the consolidated profit and loss account.

See i-Learn module ‘The consolidated profit and loss account’.

Study text Question Bank – Questions 11, 12, 13.

Step 3 Guidance through the Study Text

The main issues to learn from this chapter are:

• Treatment of a subsidiary acquired during the year – results will have to be split between pre-and post-acquisition. • Elimination of intercompany trading

• Calculation of minority interest – remember to include this when setting out the profit and loss account pro-forma

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Study Period 11

High Priority

Examined: Pilot Paper

Question 1 may have an associate. Question 1 in the pilot paper had a consolidated balance sheet with an associate.

This session covers the treatment of associates, which are accounted for using the equity method.

See i-Learn module ‘Accounting for associates’.

Step 4 Question Practice

i-Pass module 'Group accounts'. Study text Question Bank – Question 14.

The important points covered in this chapter are:

• The definition of an associate – based on 'significant influence'. • Calculation of 'investment in associate' in the balance sheet. • Treatment of results of associate in the profit and loss account. Note also possible adjustments for unrealised profit or impairment.

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Study Period 12

High Priority

Progress Test 1

In order to reinforce what you have learnt so far, answer the following questions. Try to answer them without referring to your Study Text or notes. The test should take you no longer than 30 minutes and covers Study Periods 1–11. Solutions are at the back of this Study Programme.

1 Deborah plc purchased the assets of a software business for a consideration of £1 million. The book values of the assets acquired (and fair values where appropriate) were as follows.

Book value Fair value

£'000 £'000

Plant and machinery 350

Trade marks 29 45

Purchased goodwill 60

Stock 290 310

Under FRS 10, what is the goodwill arising on this purchase? A £235,000

B £271,000 C £295,000 D £340,000

2 The accountant of Pami plc, a construction company, has for the purposes of internal management decision making, listed the costs and market values of the company's buildings as on 31 March 20X9 and the depreciation charges for the year ended on that date. These are as follows:

Market Dep'n

Cost value charges

£'000 £'000 £'000

Freehold office accommodation 2,000 2,000 20.0

Completed buildings held as investments

Leasehold – more than 50 years 2,250 3,250 22.5

Leasehold – more than 20 but less

than 50 years 1,750 2,550 17.5

Building constructed for warehousing 750 1,450 7.5

If the calculations for depreciation are used as the basis for the depreciation charge on buildings shown in the financial statements of the company for the year ended 31 March 20X9, what will be the depreciation charge in the financial statements?

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Study Period 12

High Priority

Progress Test 1 (con't)

Data for Questions 3 & 4

Bruce Ltd acquired all 200,000 of Sheila Ltd's ordinary shares. The consideration comprised 50p cash for each Sheila share and one Bruce share (market value 500p, nominal value 100p) for every two Sheila shares. Bruce did not previously own any of Sheila's equity.

Immediately before the combination, their summarised balance sheets were as follows.

Bruce Sheila

£'000 £'000

Sundry net assets (at fair value) 900 800

Share capital 500 200

Profit and loss account 400 600

900 800

3 What will be the value of Bruce Ltd's reserves and of the Bruce Group's consolidated reserves immediately after this business combination?

Bruce Ltd Bruce Group

A £400,000 £1,000,000

B £400,000 £1,200,000

C £800,000 £800,000

D £800,000 £1,000,000

4 What will be the value of the Bruce Group's consolidated sundry net assets and share capital? Sundry net assets Share capital

A £1,400,000 £500,000

B £1,400,000 £600,000

C £1,500,000 £700,000

D £1,500,000 £800,000

5 Using the following information what would the total recognised gains and losses be:

£

Reported profit after tax 753,000

Dividends paid 27,000

Temporary diminution in value of investment property 150,000

Upward revaluation of freehold land and buildings 68,000

Provision for losses on long term contracts 34,000

Amortisation of goodwill for the period 12,000

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Study Period 12

High Priority

6 The following details relate to a non-specialised property:

Carrying value £960,000

Depreciated historic cost £800,000

Recoverable amount £760,000

Existing use value £700,000

How would the revaluation loss be treated? Profit and Statement of total recognised loss account gains and losses

A £260,000 Nil B £40,000 £220,000 C £200,000 £60,000

D Nil £260,000

7 Nut Ltd occasionally makes sales to Shell Ltd, its subsidiary. It averages a 25% gross profit margin on such sales.

As at the group's balance sheet date, a consignment was en route to Shell from Nut at an invoiced cost of £24,000.

Which of the following consolidation adjustments should be posted in respect of this sale?

£'000 £'000

A Debit Consolidated reserves 6

Credit Consolidated stocks 6

B Debit Consolidated sales 24

Credit Consolidated cost of sales 18

C Debit Consolidated reserves 4

D Debit Consolidated sales 24

Credit Consolidated cost of sales 20

8 Which of the following would be included as a 'discontinued activity' for a company with a year end of 31 December 20X9 and whose financial statements were approved on 14 April 20Y0?

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Study Period 12

High Priority

9 Hedgehog Ltd has owned 100% of the issued share capital of Squirrel Ltd for many years. Hedgehog Ltd sells goods to Squirrel Ltd at cost plus 20%. The following information is available for the year:

Turnover – Hedgehog £460,000 – Squirrel Ltd £120,000

During the year Hedgehog Ltd sold goods to Squirrel Ltd for £60,000 of which £18,000 were still held in stock by Squirrel Ltd at the year end.

At what amount should turnover appear in the consolidated profit and loss account? A £520,000

B £530,000 C £538,000 D £562,000

10 Gerbil plc acquired 80,000 £1 ordinary shares in Bunny plc on 1 April 20X7 at a cost of £77,000. Bunny plc's reserves at that date were £50,000 and its issued ordinary share capital was £100,000.

At 31 March 20X8 Bunny plc's reserves were £40,000. The amount of the negative goodwill arising on consolidation is:

A £35,000 B £43,000 C £63,000 D £73,000

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Big Picture Diagram 2

Financial Reporting (F7)

Conceptual framework [1]

Regulatory framework [2]

Presentation of published financial

statements [3]

Fixed and intangible assets [4, 5,6]

Reporting financial performance [7]

Business combinations

Introduction to groups [8]

The consolidated balance sheet [7]

The consolidated profit and loss account

[10]

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Study Period 13

High Priority

Examined: Pilot Paper

Long-term contracts are more likely to be examined than stock Question 5 in the pilot paper is on a long-term contract.

This session is reflected in the Financial Statements part of the 'Big Picture' diagram.

Step 2 Introduction to the session

This session deals with stocks which were examined at lower level, and long-term contracts.

See i-Learn module ‘Accounting standards’.

i-Pass module 'Stocks and long-term contracts'. Study Text Question Bank – Questions 15 and 16.

Step 3 Guidance through the Study Text

The stock section of this chapter is mainly revision. The topic to concentrate on is long-term contracts. SSAP 9 looks complex to start with, but the main things you must be able to deal with are:

• Calculation of attributable profit • Treatment of a foreseeable loss

• Calculation of long-term contract balance (WIP) and debtors (amounts recoverable on contracts).

Just be very clear about these issues. Note that any amounts billed (invoiced) to the customer just become trade debtors.

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Study Period 14

High Priority

Examined:

This could be examined as part of Question 2 or as a whole Question 4 or 5.

This section covers the provisions of FRS 12, which regulates the use of provisions.

Step 4 Question Practice

i-Pass module 'Provisions and contingencies'; 'Financial instruments'.

This chapter covers a number of important issues:

• Why there was a need for FRS 12. The previous abuses of provisions. • Definitions of provision, liability, constructive obligation.

• Types of provisions, such as warranties, environmental damage. • Treatment of major overhauls and decommissioning costs. • Restructuring provisions

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Study Period 15

High Priority

Examined:

This is not a topic which will be examined in depth, but a financial investment may appear in Question 2 or as part of question 4 or 5.

Step 2 Introduction to the session

This session deals with FRSs 25, 26 and 29, which are complex standards dealing with financial instruments. However, we are only covering the simpler aspects.

i-Pass module 'Provisions and contingencies; Financial instruments'.

Step 3 Guidance through the Study Text

Do not get bogged down in this chapter. We try to explain these issues as simply as possible. Make sure you understand: • The distinction between liabilities and equity

• The treatment of compound financial instruments

• Measurement of financial instruments using amortised cost.

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Study Period 16

High Priority

Examined:

This is an important topic which could appear in Question 2, 4 or 5. It is important to be able to recognise this issue when it comes up.

In this session we look at 'substance over form' issues. This is an interesting topic which is relevant to a number of different areas.

See i-Learn module ‘The legal versus the commercial view of accounting’.

Step 4 Question Practice

i-Pass module 'Substance over form; Leases'. Study Text Question Bank – Questions 18, 19, 20.

The principle of 'substance over form' is laid down in FRS 5. It applies mainly to the following areas • Leasing – SSAP 21

• Definition of a subsidiary – FRS 2

• Sale and repurchase agreements/ consignment inventory

• Off-balance sheet finance – attempts by companies to keep loans off the balance sheet. Make sure you understand all of these issues.

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Study Period 17

High Priority

Examined: Pilot Paper

A finance lease often appears as part of an accounts preparation question, as in Question 2 in the pilot paper. Operating leases are examined less often but could come up.

Step 2 Introduction to the session

In this section we look at leasing which is a popular exam topic. See i-Learn module ‘The legal versus the commercial view of accounting’.

i-Pass module 'Substance over form; Leases'. Study Text Question Bank – Questions 21 and 23.

Step 3 Guidance through the Study Text

The main thing you have to learn from this chapter is how to calculate the finance charge and the current and long-term liability relating to a finance lease. In our examples we show you how the interest is calculated over the life of the lease. You will not be expected to do this in the exam. You will only have to calculate interest for one or two years.

Note the difference whether payments are made in advance or arrears and do not neglect operating leases.

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Study Period 18

High Priority

Examined: Pilot Paper

This does not tend to get examined in depth. You will definitely have to account for tax, probably including a transfer to/ from deferred tax in Question 2 – as in the pilot paper. It could also appear in Question 4 or 5.

Step 2 Introduction to the session

In this session we look at tax as it relates to the preparation of the financial statements.

See i-Learn module ‘Taxation’.

i-Pass module 'Taxation'.

Step 3 Guidance through the Study Text

This chapter deals with current tax and deferred tax. You must be clear what is meant by 'deferred tax' – an accounting adjustment, not a tax. If you understand the purpose of making these adjustments, you will find it much easier to deal with and you will be less likely to make mistakes.

In terms of current tax you must understand the composition of the balance sheet and income statement figures and know how to deal with under and overpayments relating to the previous year.

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Study Period 19

High Priority

Examined:

This could appear as Question 4 or 5, or it could be an issue in an interpretation of accounts question.

This session deals with Earning per share, which is an important shareholder's ratio.

See i-Learn module ‘Interpreting financial statements’.

Step 4 Question Practice

i-Pass module 'Earnings per share'. Study Text Question Bank – Question 25.

You will have covered basics EPs at a lower level but you should go through it again. Important issue for Paper 7 are: • Effect on EPs of bonus and rights issues

• Diluted EPs

Make sure you understand how to calculate whether convertible loans etc are dilutive or not.

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Study Period 20

High Priority

Examined: Pilot Paper

This is likely to be Question 3 in your exam, as it was in the pilot paper. Question 3 will be an interpretation question or a cash flow statement.

This session is reflected in the Analysing and interpreting financial statements part of the 'Big Picture' diagram.

Step 2 Introduction to the session

In this section we look at interpretation of accounts. See i-Learn module ‘Interpreting financial statements’.

i-Pass module 'Analysing and interpreting financial statements'. Study Text Question Bank – Question 26.

Step 3 Guidance through the Study Text

Make sure you know how to calculate all of the ratios them. However, you will not pass a question on this just by calculating lots of ratios. Bear in mind:

• You must know which ratios are relevant. Calculate those and not a load of other ones.

• It is not sufficient to say that a ratio has improved or declined. You must be able to suggest why. That is interpretation.

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Study Period 21

Medium Priority

Examined: Pilot Paper

This covers issues that are relevant to an interpretation of accounts Question 3. You are unlikely to get a full question on this.

Step 2 Introduction to the session

In this session we look at how financial statements and analyse based on them can be misleading.

See i-Learn module ‘Interpreting financial statements’.

i-Pass module 'Analysing and interpreting financial statements'. Study Text Question Bank – Question 27.

Step 3 Guidance through the Study Text

This chapter enhances your understanding of how financial statements should be viewed. Because, despite regulations and accounting standards, financial misrepresentation still takes place. There is not much technical content to absorb here, but you should be aware of these issues.

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Study Period 22

High Priority

Examined: Pilot Paper

Question 3 of your exam will be a cash flow statement or an interpretation of accounts question, so this is a key exam topic. You may get a question which combines both cash flow and interpretation.

Step 2 Introduction to the session

This session deals with cash flow statements, which you have covered at lower level.

See i-Learn module ‘Cash flow statements’.

i-Pass module 'Cash flow statements'. Study text Question Bank – Question 28.

Step 3 Guidance through the Study Text

This is one of the more straightforward topics in the syllabus and you should be able to score high marks on a cash flow statement. You should already know the basics; the more complex bits to be expected at F7 level are:

• Leases

• Asset revaluations • Share issues •

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Study Period 23

Medium Priority

Examined: Pilot Paper

These are not major topics but could feature in Questions 3, 4 or 5. Question 3 (c) in the pilot paper was a 5–mark question on not-for-profit organisations.

Step 2 Introduction to the session

In this session we look at the alternatives to historical cost accounting and at accounting for not-for-profit entities.

i-Pass module 'Alternative models; not-for-profit and public sector entities'.

Study text Question Bank – Questions 3(b) and 29.

Step 3 Guidance through the Study Text

This session covers Chapters 22 and 23 of the Study Text. You will not have complex calculations to do on CCA or CPP and you are only expected to have very general knowledge of issues relating to not-for-profit entities. The examiner has stated that Question 3 (c) in the pilot paper is typical of what he will ask.

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Study Period 24

High Priority

Progress Test 2

In order to reinforce what you have learnt so far, answer the following multiple choice questions without referring to your Study Text or notes. The test should take you no longer than 30 minutes. You will find the solutions are at the back of this Study Programme.

1 Every income measure has a particular capital maintenance concept associated with it. The concept associated with current cost accounting is most closely described as maintaining the:

A Current value of the original shareholders' investment B Capacity of the firm to replace its original assets C Capacity of the firm to continue its operations D Current value of the firm's assets

2 The following information relates to Pony Ltd at 31 December 20X2:

£

Debtors 90,000

Cash on deposit 8,000

Trade creditors 75,000

Bank overdraft 90,000

At the request of the company's bankers the company intends to take the following steps to reduce the overdraft:

(1) Stock with a book value of £7,500 will be disposed of at a loss of £2,500.

(2) Special cash discount terms of 10% will be offered, and debtors of book value £25,000 are expected to respond.

As a result of the above steps, the company's bankers agree to advance £50,000 by way of a loan, which will be applied immediately for the purchase of new machinery. This loan will be repayable by five equal annual instalments, the first of which falls due on 31 December 20X3.

If all the above transactions had taken place on 31 December 20X2, what would the revised quick, or acid test, ratio have been on that date?

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Study Period 24

High Priority

3 Furry plc entered into a finance lease in order to obtain the use of an asset from 1 January 20X8. The lease agreement requires Furry plc to make ten half-yearly payments of £13,000 each, commencing on 1 January 20X8. The asset could have been purchased on the open market for £100,000 on 1 January 20X8.

Furry plc calculates the allocation of interest over the lease term on a half-yearly basis. The interest rate implicit in the lease is 13% per annum. Assume that each half-yearly payment includes the interest that has accrued during the previous half year period.

On 31 December 20X8 the total obligation arising under finance leases falling due within one year is A £17,204

B £20,667 C £21,331 D £21,636

4 Gamal plc had the same 5 million ordinary shares in issue on both 1 April 20X1 and 31 March 20X2. On 1 April 20X1 the company issued 1 million £1 units of 12% convertible loan stock. Each unit of stock is convertible into 3 ordinary shares on 1 April 20X9 at the option of the holder. The following is an extract from Gamal plc's profit and loss account for the year ended 31 March 20X2:

£'000

Operating profit 413

Interest payable on 12% convertible loan stock (120)

Profit on ordinary activities before taxation 293

Taxation : Corporation tax at 33% (98)

195 What was the diluted earnings per share for the year ended 31 March 20X2?

A 2.44 pence

B 3.44 pence

C 3.90 pence

D 3.94 pence

5 The freehold land and buildings of Tabby plc were shown at a net book value of £305,000 at 31 December 20X3. This figure had risen to £400,000 at 31 December 20X4.

During 20X4 the buildings were depreciated by £45,000 and some of the freehold land was revalued at £83,000 higher than its net book value at 31 December 20X3.

Also in 20X4 some property was sold for £60,000, giving a profit of £7,000 over its net book value.

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Study Period 24

High Priority

6 Haider plc acquires a freehold building for cash by issuing for cash 200,000 £1 ordinary shares at a premium of £1 per share. In its cash flow statement this transaction would be stated as:

Inflow Outflow

A £400,000 £400,000 B £400,000 Nil

C Nil £400,000

D Nil Nil

7 Intangible fixed assets on the balance sheets of Teddy Limited were as follows:

20X1 20X0

£'000 £'000

Development costs 180 165

Amortisation (124) (83)

56 82

How would these movements be reflected in the cash flow statement for 20X1?

Reconciliation of operating

Capital expenditure profit to net cash inflow A Outflow of £15,000 Deduct £41,000 B Outflow of £15,000 Add back £41,000 C Outflow of £26,000 No effect

D Outflow of £26,000 Deduct £41,000

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Big Picture Diagram 3

Financial Reporting (F7)

Conceptual framework [1]

Regulatory framework [2]

Presentation of published financial

statements [3]

Fixed and intangible assets [4,5,6]

Reporting financial performance [7]

Stocks and long-term contracts [12]

Provisions and contingencies [13]

Financial assets and liabilities [14]

Legal versus commercial view of

accounting [15]

Leasing [16]

Accounting for taxation [17]

Earnings per share [18]

Cash flow statements [21]

[19]

Limitations of financial

statements and interpretation

techniques [20]

Alternative models and

practices [22]

Specialised, not for profit and

public sector entities [23]

Business combinations

Introduction to groups [8]

The consolidated balance sheet [9]

The consolidated profit and loss account

[10]

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STEP 2 – PRACTISE AND REVISE

For your revision phase, your Home Study Course includes the following.

(a) The NEW BPP Home Study Revision Skills Bank, which explains and demonstrates the key skills required to enable you to maximise your chances of exam success.

(b) The BPP Passcards, which give short summaries of the content of each chapter of the Study Text.

(c) The BPP Practice & Revision Kit, which contains exam standard questions and other useful practice questions. The Kit also contains a Question Plan which highlights the key questions to attempt to maximise your chances of exam success.

BPP Revision Cycle

Stage 1

Look at the Home Study Revision Skills Bank to get an insight into the main skills needed to pass your exam.

For a change, test yourself on i-Pass.

Look at the appropriate Passcard session to make sure you are aware of the full scope of the knowledge needed.

Stage 2

Stage 4

You should spend most of your time on this step. Do the suggested questions from the Revision Guidance in the Revision Kit and make sure you leave time to review your performance, both the contents and the timing. Think what you could do better next time and if you need to

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STEP 3 – THE FINAL REHEARSAL

Now that you have completed the ‘Practise and Revise’ phase of the programme, you should be ready for the ‘Final Rehearsal’.

We believe that the best way to prepare for an exam is to attempt a full mock exam under timed conditions.

You have already had some experience of this when you attempted Course Exam 2. It would be useful at this stage to revisit this exam, paying particular attention to the feedback you received, and perhaps attempt it again.

Your Final Rehearsal should be focused on perfecting exam technique. There are the three mock exams at the back of your Practice and Revision Kit. Try these under exam conditions and mark them using the comprehensive solutions included in the kit.

You might also be interested in BPP’s NEW Final Mock with online brief product. For an additional fee, you will be provided with:

• An exam-targeted mock exam

• Suggested solutions

• A password to access the online brief to the exam

If you can attend a BPP centre, you may be interested in booking onto a BPP Question Day. This one day course – normally held the week before the actual exam – gives you the opportunity to attempt mock exam questions under timed conditions, which will then be marked and returned to you with feedback on the same day.

Further details of these products can be found at www.bpp.com/acca/rehearsal

At this crucial final step, it is worthwhile emphasising some advice about exam technique which you must follow.

(1) Make full use of the reading time

(2) Decide in which order to tackle the questions

(3) Plan how you are going to use your time

(4) Read the questions and requirements carefully

(5) Answer the questions you are actually asked!

(6) DO NOT spend too long on any one question – remember 1.8 minutes per mark

(7) Make full use of the 3 hours' writing time – if you have time left at the end, check your work and complete any parts you may have missed.

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Solutions

Progress Test 1

1 C Goodwill is what is left after deducting the fair value of separable net assets acquired from the total consideration paid. In this case:

£'000 £'000

Consideration 1,000

Plant and machinery 350

Trade marks 45

Stock 310

705

Goodwill 295

Even though Deborah has bought an item of goodwill which had been purchased by the previous owners of the business, this goodwill can't be considered as a separable asset. Trade marks can, although intangible, because they can be sold without disposing of the business as a whole. This is not possible with goodwill.

2 B

£'000

Freehold office accommodation 20,000

Building constructed for warehousing 7,500 27,500 3 C

£'000

Cash 200,000 ×_50p ₁₀₀

Equity 2 100 000 , 200 × 100 Fair value of shares issued

2 500 000 , 200 × 500

Share premium 400

Reserves Bruce Bruce

Ltd Group

£'000 £'000

Bruce Ltd P & L account 400 400

Share premium account 400 400

800 800

Note that Sheila's profit and loss account balance is pre-acquisition.

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Solutions

Consolidated share capital

£'000

Bruce Ltd: before combination 500

Issued to Sheila's shareholders 100

600

Negative goodwill arising on consolidation

£'000

Investment at cost 600

Nominal value of shares acquired (200)

Reserves acquired (600)

Negative goodwill (200)

This is a simple question designed to remind you not to forget to adjust net assets and share capital before consolidation!

5 B (753,000 – 150,000 + 68,000).

6 B The fall in value from carrying value (£960,000) to depreciated HC (£800,000) of £160,000 is recognised in the STRGL. The additional fall in value from depreciated HC to recoverable amount of £40,000 is recognised in the P&L a/c. Finally, the difference between recoverable amount and EUV of £60,000 is also recognised in the STRGL

7 B The gross profit margin on Nut's sales to Shell is 25% and so £6,000

(25% × £24,000) unrealised profit has been recorded and must be eliminated.

In addition, only external sales should be recorded in the consolidated P & L account and so this intra-group sale must be ignored for consolidation purposes.

8 B The closure must be completed within 3 months of the balance sheet date.

9 A Turnover = 460 + 120 – 60 = 520

10 B

£

Cost 77,000

Net assets acquired 80% ×_£150,000 _(120,000)

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Solutions

Progress Test 2

1 C The capacity of the firm to continue its operations. 2 B (Loan) 10 (Debtors) 22.5 (Stock) 5 90 75 (Debtors) 25 8 90 + − − + − + = 147.5 73 = 0.50 3 C £

Open market value of asset 100,000

1.1.X8 instalment paid (13,000)

87,000

Interest to 30.6.X8 _6.5% _5,655

92,655

79,655

Interest to 31.12.X8 _6.5% _5,177

Balance at 31.12.X8 84,832

71,832

Interest to 30.6.X9 _6.5% _4,669

76,501

63,501

Balance at 31.12.X8 84,832

Balance at 31.12.X9 (before interest accrual) (63,501)

Amount due within one year _21,331

Payments due _{(13,000 x 2)} _26,000

Less interest _(4,669)

21,331

4 B Earnings

£'000

PAT 195

Interest saving 1,000 @ 12% × 67% 80

275

No of shares

Basic 5,000,000

On conversion 3,000,000

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Solutions

6 A FRS 1 states that a minimum of netting off should take place, hence both elements of the transaction are disclosed in the statement. The assumption here is that the shares were issued for cash and the cash used to buy the building.

The outflow is classified under 'Capital expenditure'.

The inflow is classified under 'Financing'.

7 B Development costs have risen from £165,000 to £180,000. This is classified as an outflow of capital expenditure.