Association of Chartered Certified Accountants (ACCA) Financial Accounting (FA) Syllabus

What is an accrual (accrued expense) and how is it treated?

An expense incurred in the period but not yet paid or invoiced. It is added to the expense in profit or loss and shown as a current liability (accruals) in the statement of financial position.

What is a prepayment and how is it treated?

An expense paid in advance relating to a future period. It is deducted from the expense in profit or loss and shown as a current asset (prepayments) in the statement of financial position.

What is the journal entry to record a closing accrued expense?

Dr Expense (statement of profit or loss), Cr Accruals (liability). This increases the expense and recognises the amount owed.

Define property, plant and equipment (PPE) under IAS 16.

Tangible items held for use in the production or supply of goods/services, for rental, or for administrative purposes, and expected to be used during more than one period.

What is included in the initial cost of an item of PPE under IAS 16?

Purchase price (less trade discounts), import duties and non-refundable taxes, plus directly attributable costs of bringing the asset to working condition and location (delivery, installation, site preparation, testing) and the initial estimate of dismantling/restoration costs.

State the straight-line depreciation formula.

$$\text{Annual depreciation} = \frac{\text{Cost} - \text{Residual value}}{\text{Useful life}}$$

State the reducing (declining) balance depreciation formula.

$$\text{Depreciation charge} = \text{Carrying amount at start of year} \times \text{depreciation rate \%}$$ where carrying amount = cost − accumulated depreciation.

How is the carrying amount of a non-current asset calculated?

$$\text{Carrying amount} = \text{Cost (or revalued amount)} - \text{Accumulated depreciation} - \text{Accumulated impairment losses}$$

How is the profit or loss on disposal of a non-current asset calculated?

$$\text{Profit/(loss) on disposal} = \text{Sale proceeds} - \text{Carrying amount at disposal}$$ A positive figure is a profit (gain), a negative figure is a loss.

Under IAS 38, when can an intangible asset be recognised?

When it is identifiable, controlled by the entity, expected to generate future economic benefits, and its cost can be measured reliably.

How are research costs and development costs treated under IAS 38?

Research costs are expensed as incurred. Development costs must be capitalised as an intangible asset if the PIRATE/criteria are met (probable future benefits, intention and ability to complete and use/sell, technical feasibility, resources available, expenditure measurable).

At what amount is inventory measured under IAS 2?

At the lower of cost and net realisable value (NRV), where $$\text{NRV} = \text{estimated selling price} - \text{estimated costs to complete} - \text{estimated selling costs}$$

Which inventory cost formulas are permitted under IAS 2, and which is prohibited?

FIFO (first-in, first-out) and weighted average cost are permitted. LIFO (last-in, first-out) is prohibited.

What is the double entry to record an irrecoverable (bad) debt written off?

Dr Irrecoverable debts expense, Cr Trade receivables. The receivable is removed and the loss charged to profit or loss.

How is a movement in the allowance for receivables treated in profit or loss?

Only the increase or decrease in the allowance is charged/credited to the irrecoverable debts expense. An increase is a Dr to expense (Cr allowance); a decrease is a Cr to expense (Dr allowance).

Under IAS 37, what three conditions must be met to recognise a provision?

There is a present obligation (legal or constructive) from a past event, it is probable that an outflow of economic benefits will be required to settle it, and a reliable estimate of the amount can be made.

How are a contingent liability and a contingent asset treated under IAS 37?

A contingent liability is disclosed (not recognised) unless the outflow is remote, in which case it is ignored. A contingent asset is disclosed only if an inflow is probable, and recognised only when virtually certain.

Distinguish a provision from a contingent liability under IAS 37.

A provision is recognised in the financial statements (present obligation, probable outflow, reliable estimate). A contingent liability is a possible obligation, or a present obligation that is not probable or not reliably measurable — it is only disclosed.

What is the purpose of a bank reconciliation?

To reconcile the balance per the cash book with the balance per the bank statement, identifying timing differences (unpresented cheques, outstanding lodgements) and errors/items needing correction in the cash book (bank charges, interest, direct debits, dishonoured cheques).

In a bank reconciliation, how are unpresented cheques and outstanding (uncleared) lodgements treated?

Start from the balance per bank statement: subtract unpresented cheques (cheques paid but not yet cleared) and add outstanding lodgements (deposits not yet credited) to arrive at the corrected cash book balance.

Which bank reconciliation items require adjustment in the cash book rather than the reconciliation?

Items the business did not know about: bank charges, interest, standing orders/direct debits, dishonoured cheques, and bank errors are corrected in the cash book; timing differences appear on the reconciliation statement.

What is the purpose of a receivables (sales) ledger control account reconciliation?

To agree the total of the individual balances on the sales ledger with the balance on the receivables control account in the general ledger, helping detect errors in either the control account or the individual ledgers.

List typical debit entries in the receivables control account.

Opening debit balance, credit sales, dishonoured cheques, and interest charged to customers. Refunds to customers are also debited.

List typical credit entries in the receivables control account.

Cash/cheques received from customers, discounts allowed, sales returns, irrecoverable debts written off, and contras with the payables ledger.

What is a suspense account and when is it used?

A temporary account used to make the trial balance agree when there is an unidentified difference, or to post one side of a transaction whose correct treatment is not yet known. It must be cleared to zero before final statements are prepared.

How are errors corrected and a suspense account cleared?

By journal entries. Errors that unbalanced the trial balance are corrected against the suspense account; once all one-sided errors are corrected, the suspense account balance reduces to nil.

What does the statement of profit or loss and other comprehensive income show?

It reports income and expenses for the period. Profit or loss section shows revenue less expenses giving profit for the year; OCI shows items not recognised in profit or loss (e.g. revaluation surpluses on PPE under IAS 16), giving total comprehensive income.

How is gross profit calculated in the statement of profit or loss?

$$\text{Gross profit} = \text{Revenue} - \text{Cost of sales}$$ where $\text{Cost of sales} = \text{Opening inventory} + \text{Purchases} - \text{Closing inventory}$.

Give an example of an item presented in Other Comprehensive Income (OCI).

A revaluation surplus (gain) on property, plant and equipment under IAS 16. (Other examples include certain remeasurements; these may or may not be reclassified to profit or loss later.)

What does the statement of financial position present, and what is its basic structure?

It shows the entity's financial position at a point in time: assets (non-current and current), liabilities (current and non-current) and equity, with $\text{Assets} = \text{Equity} + \text{Liabilities}$.

Distinguish current assets from non-current assets.

Current assets are expected to be realised, sold or consumed within the normal operating cycle or 12 months (e.g. inventory, receivables, cash). Non-current assets are held for use over more than one period (e.g. PPE, intangibles, long-term investments).

What are the three sections of the statement of cash flows under IAS 7?

Cash flows from operating activities, investing activities, and financing activities.

Under the indirect method, how does the operating activities section begin?

It starts with profit before tax and adjusts for non-cash items (e.g. add back depreciation, amortisation, loss on disposal) and for changes in working capital (inventory, receivables, payables), then deducts interest and tax paid.

In the statement of cash flows, an increase in inventory or receivables has what effect on operating cash flow?

An increase in inventory or receivables is a use of cash, so it is deducted. An increase in payables is a source of cash, so it is added (and vice versa for decreases).

What are 'incomplete records' and a common technique used to deal with them?

Accounting situations where full double-entry records are not kept. Techniques include using the accounting equation, control accounts to derive missing figures (e.g. credit sales or purchases), and margin/mark-up calculations to find missing sales, purchases or inventory.

Distinguish between mark-up and gross profit margin.

Mark-up is gross profit expressed as a percentage of cost: $\frac{\text{Gross profit}}{\text{Cost of sales}}$. Margin is gross profit as a percentage of sales: $\frac{\text{Gross profit}}{\text{Revenue}}$.

In incomplete records, how is the capital (net assets) approach used to find profit?

$$\text{Profit} = \text{Closing capital} - \text{Opening capital} + \text{Drawings} - \text{Capital introduced}$$ using the change in net assets over the period.

What defines a parent–subsidiary relationship requiring consolidation under IFRS 10?

Control: the parent has power over the investee, exposure to variable returns, and the ability to use its power to affect those returns. Control is usually presumed when the parent holds more than 50% of the voting rights.

How is goodwill on acquisition calculated in a consolidation?

$$\text{Goodwill} = (\text{Consideration transferred} + \text{NCI at acquisition}) - \text{Fair value of net assets acquired at acquisition}$$

What is the non-controlling interest (NCI) in group accounts?

The equity in a subsidiary not attributable, directly or indirectly, to the parent. It represents the share of the subsidiary's net assets and profit owned by outside shareholders, shown within equity in the consolidated statement of financial position.

How is revenue treated for intra-group sales in the consolidated statement of profit or loss?

Intra-group sales and purchases are eliminated in full from group revenue and cost of sales, so only transactions with parties outside the group are shown.

What is an associate and which method is used to account for it?

An entity over which the investor has significant influence (but not control), normally a 20%–50% holding of voting rights. It is accounted for using the equity method.

Under the equity method, how is the investment in an associate measured in the consolidated statement of financial position?

$$\text{Carrying amount} = \text{Cost of investment} + \text{Group share of post-acquisition profits/reserves} - \text{impairment}$$ (less any dividends received from the associate).

How is an associate's result shown in the consolidated statement of profit or loss?

As a single line: the group's share of the associate's profit (or loss) for the period. The associate's individual income and expenses are not added line by line.

What does significant influence mean, and how does it differ from control?

Significant influence is the power to participate in financial and operating policy decisions but not to control them (associate, equity method). Control is the power to direct the relevant activities to affect returns (subsidiary, full consolidation).

State the current ratio and quick (acid-test) ratio formulas.

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$ $$\text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

What is the gearing ratio and what does it measure?

It measures financial risk from borrowing. A common form is $$\text{Gearing} = \frac{\text{Debt}}{\text{Debt} + \text{Equity}} \quad\text{or}\quad \frac{\text{Debt}}{\text{Equity}}$$ Higher gearing means greater reliance on debt financing and higher financial risk.

State the formula for Return on Capital Employed (ROCE).

$$\text{ROCE} = \frac{\text{Profit before interest and tax (operating profit)}}{\text{Capital employed}} \times 100\%$$ where capital employed = total equity + non-current liabilities (or total assets − current liabilities).

State the inventory holding period and the receivables collection period formulas.

$$\text{Inventory days} = \frac{\text{Inventory}}{\text{Cost of sales}} \times 365$$ $$\text{Receivables days} = \frac{\text{Trade receivables}}{\text{Credit sales}} \times 365$$

State the gross profit margin and net (operating) profit margin formulas.

$$\text{Gross margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\%$$ $$\text{Operating margin} = \frac{\text{Operating profit}}{\text{Revenue}} \times 100\%$$