Section A:The financial accounting process.
Chapter 1: The need to account
What is accounting?
Why write up accounts?
Chapter 2: Recording cash receipts and payments
The need to control cash
Controlling cash receipts and payments
How does keeping a Cash account allow the manager to control cash?
Recording cash receipts and payments by an individual
Balancing an account
A business Cash account
The procedure for entering cash transactions in the Cash account
Accounting for cash taken by the owner for personal use
Solutions to Interactive Questions
Progressive Questions
Chapter 3: The double entry bookkeeping
The need to analyse cash transactions
How do we obtain the analysis?
The effect of each cash transaction on assets, liabilities, income and expenditure
Analysis of transactions by posting to Ledger accounts
The operation of the double entry system
Sub-division of the Ledger
Solutions to Interactive Questions
Progressive Questions
Chapter 4: Obtaining information from the accounting system
Cross-referencing the double entry
Accuracy of accounting information
Checking whether every transaction has been posted
An illustration of posting from the Cash account to Ledger accounts
Solutions to Interactive Questions
Progressive Questions
Chapter 5: The Trial Balance
The total of the debits should equal the total of the credits
What is a Trial Balance?
How frequently should a Trial Balance be prepared?
Types of accounting error
Transposition errors
Does a balanced Trial balance prove absence of accounting error?
Accounting control procedures to prevent errors and fraud
Solutions to Interactive Questions
Progressive Questions
Chapter 6: Reporting performance and period-end position
Reporting performance using the Category Quadrants
Reporting performance using a Trading and Profit and Loss account
Using Category Quadrants to report the financial position of a business
Using a Balance Sheet to report the financial position of a business
The procedure for preparing a Trading and Profit and Loss account and Balance Sheet
Accounting for an unsold part of purchases
Accounting for depreciation of fixed assets
Solutions to Interactive Questions
Progressive Questions
Chapter 7: Period-end adjustments
The accounting procedures at the end of an accounting period
Period-end adjustments
Prepayments and accruals illustrated diagrammatically
Accounting for "opening" and "closing" stock
Accounting for goods removed for own use by the proprietor
Improvements top the appearance of financial statements
An introduction to accounting ratios
Solutions to Interactive Questions
Progressive Questions
Chapter 8: Subsidiary books of account
Introduction to credit transactions
The Sales Day Book
The Purchases Day Book
Returns Day Book
Trade Discount
The Journal
Petty Cash Book
Day Books with analysis columns
Value Added Tax - an introduction
Solutions to Interactive Questions
Progressive Questions
Chapter 9: Supporting accounts
Introduction to supporting accounts
Sales Returns account
Purchases Returns account
Drawings account
Provision for depreciation account
Provision for doubtful debts account
Adjusting a Provision for doubtful debts in subsequent years
Where the Provision account and Bad debts account are combined
A Provision for impairment
An account, its class and its balance
Sales made on "sale or return" basis
Solutions to Interactive Questions
Progressive Questions
Chapter 10: The Journal
The need for a journal
Transactions usually journalised
The style of presenting a journal entry
Composite journal entries
Journal entries for recording asset acquisitions and disposals
Journal entries for correction of errors and transfers
Journal entries for period-end adjustments
Journal entries for opening new books of accounts
Suspense account
Solutions to Interactive Questions
Progressive Questions
Chapter 11: Finalisation of accounts
What finalisation of accounts involves
Checking the accuracy of accounting balances
Period-end adjustments
Presentation of the financial statements
Further period-end adjustments
- Accounting for wages, salaries and pay sheet recoveries
- Accounting for insurance claim on loss of stock
Common examination difficulty
The extended Trial Balance
Solutions to Interactive Questions
Progressive Questions
Chapter 12: Accounting using spread sheets
Introduction
Format of a spreadsheet
Illustration of inputs and commands
Designing a financial report
Spreadsheet used for writing up a Cash account
What if analysis
Charting data
Accounting knowledge required to design a spreadsheet
Management reliance on spreadsheets
Conclusion
Solutions to Interactive Questions
Section B:Control over bank, debtors and creditors
Chapter 13: Bank account and bank reconciliation
The Bank account
Banking terminology
Two-column Cash Book
Accounting in the books of the bank
Bank Reconciliation statements
The three-column Cash Book
Reversal of discount allowed
Solutions to Interactive Questions
Progressive Questions
Chapter 14: Control accounts
Introduction to Control accounts
Benefits of writing up control accounts
Alternative ways of maintaining the Control accounts
Sources of information for a Sales Ledger Control account
The Sales Ledger Control account
Sources of information for a Purchases Ledger Control account
When a Control account balance fails to match the sum of individual balances
Control account for other assets
Solutions to Interactive Questions
Progressive Questions
Section C: Concerning non monetary assets
Chapter 15: Accounting for assets
Importance of distinguishing an asset from an expenditure
Setting uniform criteria - The Accounting Standards Board
The criteria for identifying an asset
Physical existence is not essential for recognition as an asset
How do we know when the asset recognition criteria has been satisfied?
Criteria for identifying an expense
Classification of an asset as a tangible fixed asset
Intangible fixed assets
Research and Development cost
What amount should be a fixed asset be shown at in the balance sheet?
Capitalisation of finance costs incurred before usage
Costs incurred on an asset subsequent to commencing usage
Accounting for capital grant
Solutions to Interactive Questions
Progressive Questions
Chapter 16: Depreciation of tangible fixed assets.
The asset value for inclusion in the balance sheet
What is depreciation?
Accounting for depreciation
Factors that cause a fixed asset to depreciate
Why should fixed assets be depreciated?
Measurement of depreciation
Methods of allocating depreciable amount to accounting periods
- The straight-line method
- The reducing balance method
- Sum of the years' digits method
- Machine hour rate
- Production unit method
- Depletion unit method
- Revaluation method
- Sinking Fund method
- Annuity method
Depreciation of an asset consisting of major components which have different economic lives
An alteration in the depreciation method
A revision of the estimated useful economic life
Depreciation of buildings
Depreciation of infrastructure assets by renewal accounting
The impairment review
Accounting for disposal of a fixed asset
Solutions to Interactive Questions
Progressive Questions
Chapter 17: Stock in trade
Significance of stock in accounting
Where a trader keeps track of the quantity and cost of goods
Why keeping track of quantity and cost of goods sold and unsold is difficult
The common methods of ascertaining quantities remaining unsold
- The perpetual inventory system
- Physical inventory
- Consistent profit margin system
The cost of stock in trade
The need to make cost flow assumptions
- First in First Out
- Last in First Out
- Average Cost
- Other IFO methods
- Base Stock method
- Standard Cost method
Reporting stock at cost or lower realisable value
Disclosures an entity is required to make in relation to stock
Solutions to Interactive Questions
Progressive Questions
Section D: Further aspects of financial reporting
Chapter 18: Liabilities, Provisions and Contingencies
Importance of distinguishing a liability from an income
What is a liability?
Accounting for a liability whose amount is definitely known
Provision for a liability of unknown amount or timing
Requirements relating to Provisions made in the accounts
Contingent liability
Accounting for contingent liabilities
Classifying Accrued liabilities, Provisions and Contingent Liabilities
The thresholds for determining whether probable, possible and remote
Contingent assets
Solutions to Interactive Questions
Progressive Questions
Chapter 19: Post Balance Sheet events
What are post balance sheet events?
Classification of post balance sheet events
Adjusting events
Non adjusting events
Disclosures required on non adjusting events
Window dressing
Solutions to Interactive Questions
Progressive Questions
Chapter 20: Accounting for Value Added Tax
What is Value Added Tax?
A VAT registered trader selling products liable to VAT
- Registration for VAT
- Accounting for output VAT on sales
- Accounting for input VAT on purchases
- Accounting for unsold stock of items purchases subject to VAT
- Accounting for fixed assets acquired subject to VAT
- The payment of VAT
- When a debt inclusive of VAT is written off
- Goods taken by a trader for own use
A trader not registered for VAT purposes
A trader dealing with items zero rated for VAT
Solutions to Interactive Questions
Progressive Questions
Chapter 21: Interpretation of financial statements
Importance of correct interpretation
The need to focus the interpretation
Accounting ratios as the tool for interpretation
The accounting ratios classified by source of information
- The balance sheet ratios
- The Profit and Loss account ratios
- The inter-statement ratios
Ratios grouped by area of focus
Accounting ratios should be used with caution
Component percentages and graphical representation
Solutions to Interactive Questions
Progressive Questions
Section E: Standardisation of accounting and conceptual framework
Chapter 22: The Accounting Standards
What are Accounting Standards?
The case for setting Accounting Standards
The case against setting Accounting Standards
The efforts at standardisation of accounting in UK prior to 1970
The recognition in the UK of the need for Accounting Standards
The Accounting Standards setting in the UK between 1970 and 1990
The Dearing Report
The Accounting standards setting process sin the UK since 1990
The extant Accounting Standards in the UK
Relevance of Accounting Standards to small business entities
Chapter 23: Accounting Concepts
Distinguishing accounting assumptions, working rules and conventions
The accounting assumptions
- The separate entity assumption
- The money measurement assumption
- The assumption that money is stable in value
- The going concern assumption
Working Rules
-The time interval of periodicity working rule
- The accruals and matching working rule
- The realisation working rule
- The historical cost working rule
- The valuation working rules
- The non aggregation working rule
Conventions
- The Materiality convention
- The Objectivity convention
- The Prudence convention
- The Consistency convention
- The substance over form convention
Accounting bases and accounting policies
Solutions to Interactive Questions
Progressive Questions
Chapter 24: Conveying accounting information
Financial Reports and Financial Statements
Stakeholders with a legitimate claim for information
- Identification of the stakeholders
- The main areas of stakeholder interest
- The information needs of stakeholders are not congruent
- Satisfying the investors' information needs predominates
Information to be included in financial statements
- Information of relevance to the areas of interest
- The qualitative characteristics of information in financial statements
The elements of financial statements
- The definition of elements
- Recognition of an element and its change
- Measurement of an element
- Presentation of financial information
Solutions to Interactive QuestionsProgressive Questions
Chapter 25: Revenue recognition
Revenue recognition
Relevance of accounting concepts to revenue recognition
The main approaches to revenue recognition
- The critical event approach
- The accretion approach
- The revenue allocation approach
Solutions to Interactive Questions
Progressive Questions
Section F: Accounting in different contexts
Chapter 26: Single entry and incomplete records (1)
The difference between single entry and incomplete records
What if the information is insufficient for preparing a Profit and Loss account?
Where information is adequate to set up a double entry system
Four points to remember when answering incomplete record questions
When ascertaining a missing information could prove a challenge
Solutions to Interactive Questions
Progressive Questions
Chapter 27: Single entry and incomplete records (2)
Where bank transactions are also involved
Finding missing information in incomplete records
The need for a bank reconciliation
Where transactions involved Value Added Tax
Solutions to Interactive Questions
Progressive Questions
Chapter 28: Accounting for non profit making concerns
Difference mainly in accounting terminology
Accounting for members fellowships - Clubs, Associations and Societies
- The accounting system
- Accounting for membership subscription
- Subscription Receivable account as a Debtors Control account
- Accounting for membership enrolment or joining fees
- Accounting for life membership fees
- Collections for a specified purpose
- Special Funds
- Trading activity of a non trading concern
Accounting for membership subscription on receipts basis
Solutions to Interactive Questions
Progressive Questions
Chapter 29: Manufacturing accounts
The need for a Manufacturing account
Prime cost of manufacture
The total cost of production
The cost of finished goods remaining unsold
- Cost centres to collect and control overheads
- The problem with Service Cost Centres
- Apportioning overheads
- Apportioning Service Department costs
- Absorption of factory overheads into the product
- Bases for absorption of overheads into the cost of the product
- Use of overhead adsorption rates
- Over/under absorption of overheads
How to deal with work-in-progress
Transfer of manufactured units at an amount in excess of cost
Accounting for royalties
Solutions to Interactive Questions
Progressive Questions
Section G: the control function
Chapter 30: Accounting systems and controls
Introduction to accounting systems
Accounting system for a business with only cash transactions
Accounting system for a business that has credit transactions
Accuracy of accounting records
Internal controls
Internal check
The Cash system
- Cheques received
- Cheque payments
- Bank reconciliation
Petty Cash system
Cash sales system
Sales and Purchases system
Wages system
Fixed assets system
Nominal Ledger system
Stock control system
Solutions to Interactive Questions
Progressive Questions
Chapter 31: Fixed assets - appraisal and financing
Introduction
Appraising the investment
- Payback method
- Annual Accounting Rate of Return
- Discounted Cash Flow
Financing of fixes asset acquisition
- Acquisition for cash or credit
- Hire purchase
- Finance Lease
Summary
Solutions to Interactive Questions
Progressive Questions
Chapter 32: Planning and control - budgeting
What are budgets?
Purposes of budgetary control
Responsibility for budget preparation and implementation
Budget preparation
The Sales Budget
The Functional Budgets
- The Production Budget
- The Direct Material Budget
- The Purchasing Budget
- The Direct Labour Budget
- The Production Overhead Budget
- The Production Cost Budget
- The Administrative and Selling Overhead Budget
- The Plant Utilisation Budget
he Capital Expenditure Budget
The Cash Budget
The Master Budget
Managing the Cash Budget
Flexible Budgets
Budgeting in the service sector
The Business Plan
Solutions to Interactive Questions
Progressive Questions
Chapter 33: Standard Costing and Variance analysis
Introduction - Budgetary control v Standard costing
Definition of Standard Costing
Purpose of Standard costing
The setting of standards
Types of standards
Procedure for fixing the Standard cost of a product
Calculation of variances - collection of data
Calculation of variances - concept
The Material cost variances
The Labour cost variances
The Overhead variances
Reasons for variances
Stock valuation
Sales variances
Summary
Solutions to Interactive Questions
Progressive Questions
Chapter 34: Short term decision making - Profit, Volume Cost analysis
Introduction
Marginal costing - a definition
Contribution - a definition
Semi-variable costs
Break-even analysis
Break-even charts
Alternative form of break - even chart
The use of break-even charts and analysis in decision making
Limitation of break-even analysis
Contributions per limiting factor
Choice between multiple products
Contribution accounting in other decision making situations
Acceptance of an order at a price below total cost
Discontinuance of a product line
Closure of a department or branch
Make or buy decisions
Solutions to Interactive Questions
Progressive Questions
Section H: Computerised accounting
Chapter 35: Computers in accounting
Introduction
Computerised Accounting Systems
Computerised Electronic Point of Sales Systems (EPOS)
- Purpose of the system
- The computer system
- Data files
- Input of sales data
- Edit checks
- Processing
- Input of purchases data
- Updating the Standard Data File
- Periodic stocktakes
Sales Ledger system
- Data files
- Input of data
- Edit checks
- Processing
- Reports
- Month end procedure and monthly reports
Sales Ledger integrated with sales invoicing and stock record
- Integration of Sales Ledger with sales invoicing and stock control
- Integration with Stock Control system
- Integration with Nominal Ledger
Purchase Ledger systems
- Data files
- Input of data
- Reports
- Month end procedure and monthly reports
- Nominal Ledger system
- Other entries in the Nominal Ledger System
- Nominal Ledger and Periodic Accounts
Solutions to Interactive Questions
Section I:Partnership accounting
Chapter 36: Partnership Accounts (1) - Appropriations
What is a partnership?
A partnership agreement
Legal framework of partnerships in the 20th Century
Legal framework of partnerships in the 21st Century
Partners' Capital and Current accounts
Appropriation of profit and charge against profit
Interest on partner's drawings
Accounting for interests on partners' drawings
A joint life policy on partners
Admission of a new partner
Solutions to Interactive Questions
Progressive Questions
Chapter 37: Partnership Accounts (2) - Unrecorded assets
Why assets may not be reported in the accounts at a fair value?
Why unrecorded assets should be adjusted for?
When should unrecorded assets be adjusted for?
When the fair value of asset is more than the book value
When an asset is not accounted for because payments for it have been expensed
When goodwill remains unrecorded
- What is goodwill?
- How to value goodwill?
- Why should unrecorded goodwill be adjusted for?
- How to adjust for goodwill?
- Gifting of goodwill
Death or retirement of a partner
Revaluation account
Solutions to Interactive Questions
Progressive Questions
Chapter 38: Partnership Accounts (3) - Dissolution and Conversion
Piecemeal disposal of a partnership business
Disposal of a partnership as a going concern
What is "purchase consideration"?
Purchase consideration received other than in cash
Calculation of purchase consideration
Opening the books of the acquiring company
- Accounting for acquisition of assets and liabilities for an agreed consideration
- Accounting for issue of shares to discharge purchase consideration
Converting the books of a partnership to those of a company
Solutions to Interactive Questions
Progressive Questions
Chapter 39: Accounting for joint ventures
What is a joint venture?
Each party to the venture accounts for his own activities
The joint venture operates its own bank account
The joint venture maintains its own books of account
International joint ventures
Solutions to Interactive Questions
Progressive Questions
Section J: Accounting for limited companies
Chapter 40: Companies (1) - An introduction
What is a Limited company?
A Limited Company is a body corporate
Perpetual succession
Incorporation of a company
Shareholders and their rights
The management of a company
Limitation of shareholders' liability
Private Limited companies and Public Limited companies
How can a shareholder sell his shares?
The law governing companies in the UK
Regulations governing companies in the UK
- The Accounting Standards
- The Stock Exchange Regulations
The advantages of being a company
The disadvantages of being a company
How a company raises finance
- Ordinary shares
- Preference shares
- Debentures
Accounting for shares
Accounting for debentures
Solutions to Interactive Questions
Progressive Questions
Chapter 41: Companies (2) - Shares and Debentures
Equity and long term finance
Procedure for a public issue of shares
Accounting for share issue when shares are issued at par
When shares are issued at a premium
When, faced with excess application, shares are allotted pro rata
Where shares are offered as a package deal
Forfeiture and re-issue of shares
Shares issued for a consideration other than cash
Bonus issue of shares
Rights issue of shares
Accounting for issue and service of debentures
- Accounting for debentures issued at par
- Accounting for debentures issued at a discount
- Accounting for repayment of debentures
Appraising the financing structure of a company
Solutions to Interactive Questions
Progressive Questions
Chapter 42: Companies (3) - Annual accounts for internal use
Annual accounts of a company
Directors' emoluments
Taxation of companies
Deferred tax
Dividends of a company
Reserves
Sinking Funds
Solutions to Interactive Questions
Progressive Questions
Chapter 43: Companies (4): Published financial statements
The legal requirements to publish company accounts
Terminology used in published financial statements
Format of presenting published financial statements
Contents of published financial statements
Statements of movement of tangible assets
All inclusive concept of performance reporting
Ordinary activity
Extraordinary item
Exceptional items
Prior Period Adjustment
Discontinued and acquired activity
Reporting assets at valuation
Additional primary statements
Interpreting company accounts
Solutions to Interactive Questions
Progressive Questions
Section K: Additional information vehicles
Chapter 44: Cash Flow statements
Cash flow projections for management purposes
Cash generation is as important as profit making
Why would profit not be matched by equal amount of cash?
Why publish a Cash Flow Statement?
To prepare a cash flow accrual adjustments have to be reversed
Preparation of a Cash Flow Statement
Uniform format for Cash Flow Statements
Cash Flow Statements of limited companies
Impact of asset disposals on cash flow
What is cash?
Management of liquid resources
Reconciliation with Net Debt
Why operating profit does not produce an equal amount as a cash inflow
Reconciliation of operating profit with cash flow from operating activity
Cash Flow Statement using the indirect method
Solutions to Interactive Questions
Progressive Questions
Chapter 45: More vehicles for communicating information
More vehicles for communicating information
Value Added Statement
- What is a Value Added Statement?
- Preparation of a Value Added Statement
- Dispute on treatment of some items in Value Added Statement
- The case for publishing Value Added Statements
Solutions to Interactive Questions
Progressive Questions
Chapter 46: Group accounts (1): Fully owned subsidiary
The combined position of two companies when one owns the other
Consolidation when the subsidiary issues shares at a premium
Goodwill on consolidation
Cancellation of inter-company indebtedness
Items in transit between companies in a group
Accounting for dividend proposed by a subsidiary
Elimination of "within group" unrealised profit
Consolidation of Profit and Loss accounts
- Cancellation of inter-company sales
- Amortisation of goodwill
- Elimination of unrealised profit
Freezing profit prior to acquisition
Fair valuation of subsidiary's assets at the point of acquisition
Solutions to Interactive Questions
Progressive Questions
Chapter 47: Group accounts (2) - partly owned subsidiary and associates
Partly owned subsidiary in a Consolidated Balance Sheet
Partly owned subsidiary in a Consolidated Profit and Loss account
An associate company
Solutions to Interactive Questions
Progressive Questions
Chapter 48: Inflation Accounting
Introduction
What is inflation?
Current Purchasing Power (CPP) accounting
Restating HCA accounting into CPP accounting
An appraisal of CPP accounting
Current Cost Accounting (CCA)
Step approach to preparing CCA account
Solutions to Interactive Questions
Progressive Questions
Answers to Progressive Questions
Exercises from past examination papers
Index