1.1 C The role of the IASB is to develop and publish International Financial Reporting Standards.

1.2 B A sole trader does not have any shareholders. The accounts are unlikely to be of interest to a
financial analyst, they are more usually interested in the accounts of public companies.
1.3 B (2) is the IASB’s Conceptual framework description of the purpose of financial statements. (1) is
false - although the shareholder needs to know the future prospects, he also needs to know that
the current position of the company is secure. Similarly the supplier needs to know the future
prospects to ensure that he will be paid.
1.4 A (2) is incorrect – shareholders are only liable for the debts of the business up to the amount they
have invested in shares, whereas sole traders are liable for all of the debts of the business.
1.5 B Corporate governance is the system by which companies and other entities are directed and
controlled.
1.6 A The responsibility of the financial statements rests with the directors, whether or not those
financial statements are audited. Some of the duties of directors are statutory duties, laid down in
law, including the duty to act within their powers, promote the success of the company and
exercise reasonable skill and care.
1.7 D Providing information regarding the financial position and performance of a business are primary
objectives of financial statements. All classes of users require information for decision making.
1.8 A This information is needed by lenders.
1.9 D (1) is incorrect, the presentation or classification can be changed if there is a significant change
in the nature of operations, if an IFRS requires it or if a review of the accounts indicates a more
appropriate presentation. (3) is incorrect. Companies should never make provisions in order to
boost profits in more difficult times, provisions should only be made in accordance with IAS 37.
1.10 C Unless a partnership is a limited liability partnership, the partners’ individual exposure to debt is
not limited because the partnership is not a separate legal entity from the partners themselves.
Financial records must be maintained by a partnership, but there is no requirement to make
them publicly available unless the partnership is a limited liability partnership.
1.11 C A is the definition of a liability, B is the definition of an asset and D is the definition of income
according to the Conceptual framework.
1.12 C All three statements are true.
1.13 D The IFRS Advisory Council is a forum for the IASB to consult with the outside world. The IASB
produces IFRSs and is overseen by the IFRS Foundation.
1.14 B The role of the IASB is to develop and publish international financial reporting standards.
2 The qualitative characteristics of financial information
2.1 D The business entity concept.
2.2 C The accruals concept.
2.3 C The materiality concept.
2.4 C Information has the quality of faithful representation when it is complete, neutral and free from
material error.
2.5 D Consistency. To maintain consistency, the presentation and classification of items in the financial
statements should stay the same from one period to the next, unless a change is required by an
IFRS or unless there is a significant change in the nature of operations or a review of the
accounts indicates a more appropriate presentation.
2.6 D Relevance and faithful representation.
FFA/F3 FINANCIAL ACCOUNTING
176
2.7 C The prudence concept does not require the understating of assets or the overstating of liabilities.
2.8 A (a) Materiality concerns whether an item in the financial statements can influence users
decisions.
(b) Substance over form means that the commercial effect should be recognised not the strict
legal form.
2.9 D None of these statements are correct.
2.10 D Comparability, verifiability, timeliness, understandability.
2.11 D The accruals concept is not a qualitative characteristic of financial information. It is implied by
the going concern concept.
3 Double entry bookkeeping I
3.1 C Assets - liabilities = opening capital + profits - drawings
Therefore, assets - liabilities - opening capital + drawings = profit
3.2 B Closing capital – opening capital = increase (I) in net assets. This means that option B is
equivalent to:
P = I + D – Ci
This is the correct form of the business equation.
3.3 D I = P + Ci – D
= $(72,500 + 8,000 – 2,200)
= $78,300
Therefore, closing net assets = $(101,700 + 78,300) = $180,000.
3.4 B I = P + Ci – D
= $(35,400 – 6,000 + 10,200)
= $39,600
Therefore, opening capital = opening net assets = $(95,100 – 39,600) = $55,500.
3.5 B The selling price is not relevant to this adjustment.
3.6 C This will mean less cash coming into the bank.
3.7 A Increase in net assets = Capital introduced + profit – drawings
184,000 – 128,000 = 50,000 + profit – 48,000
Profit = 56,000 – 50,000 + 48,000
= $54,000
3.8 C Dr Purchases $400
Dr Trade Payables $250
Cr Cash $650
A payment is a credit to the cash account. The payment to J Bloggs is a cash purchase and so
the double entry is Dr Purchases, Cr Cash. Remember that the purchase from J Doe has already
been recorded as Dr Purchases, Cr Trade Payables, so the payment of cash to clear the invoice
should now be recorded as Dr Trade Payables, Cr Cash.

3.9 A Dr Receivables $150

Dr Sales Returns $300
Cr Sales $150
Cr Cash $300
The double entry for the sale of goods on credit is Dr Receivables, Cr Sales $150. The return of
goods previously sold for cash is Dr Sales Returns, Cr Cash $300.
3.10 A A debit note is sent to a supplier with a return of goods. A debit note is in effect a request for a
credit note.
3.11 B The journal, cash book and sales day book are books of prime entry.
3.12 C Debit notes sent to suppliers are recorded in the purchase returns day book.
3.13 D Balance carried down from previous period shows debits exceed credits and so it is a debit
balance brought down for the new period.
3.14 B The opening balance on the ledger is $14,000 CR, this is the amount that would have appeared
in the trial balance at 1 October 20X0.
3.15 B Discounts allowed are recorded in the cash book. Credit notes received are to do with returned
purchases (not sales). Trade discounts are not recorded, as they are deducted on the sales
invoices and only the net sale is recorded.
3.16 C A debit records an increase in assets or a decrease in liabilities. A credit records an increase in
liabilities and/or capital. Therefore only C is true.
3.17 D Remember that only credit purchases are listed in the purchases daybook.
4 Double entry bookkeeping II
4.1 A $544
SALES DAY BOOK
20X9 $
1 May P Dixon 160
4 May M Maguire 80
5 May M Donald 304
544
4.2 B $823
PURCHASES BOOK
20X9 $
2 May A Clarke (W1) 323
4 May D Daley 400
6 May G Perkins 100
823
W1 $380 ×
85
100
= $323
4.3 C Dr Purchases $450
Dr Trade Payables $250
Cr Purchase Returns $700
The purchase of goods on credit is recorded as Dr Purchases, Cr Trade payables $450. The
return of goods which were purchased on credit is recorded as Dr Trade Payables, Cr Purchase
Returns, combining both entries gives the answer above.
FFA/F3 FINANCIAL ACCOUNTING
178
4.4 B Dr Cash
Cr Sales
Cr Trade Receivables
Cash received is a debit to the cash account. The cash received from R Singh is offset against the trade
receivable balance due from R Singh: Dr Cash, Cr Trade Receivables. The cash received from S Kalu is a
cash sale: Dr Cash, Cr Sales.
4.5 D Remember the receivables account is a memorandum account.
4.6 D When cash is received by a business, a debit entry is made in the cashbook. A receipt of cash
decreases an overdraft and increases a bank balance.
4.7 C
TRADE PAYABLES ACCOUNT
$$
Cash at bank 100,750 Balance b/d 250,225
Balance c/d 474,485 Purchases 325,010
575,235 575,235
4.8 C Credit sales = $80,000 – $10,000 + $9,000 = $79,000.
4.9 C A is incorrect as the debits and credits don’t equal each other, B is incorrect as the debits and
credits are the wrong way round and D are incorrect as the credit purchase has been ignored.
4.10 C You are recording the transaction in Steel Co’s books – Steel Co is the seller, so the double entry
is Dr receivables, Cr sales $250.
4.11 A $22,000
$$
Sales 40,000
Returns inwards (2,000)
38,000
Opening inventory 3,000
Purchases 20,000
Returns outwards (4,000)
Closing inventory (3,000)
(16,000)
Gross profit 22,000
4.12 A The receivables allowance is deducted from trade receivables and the net figure of $71,192
($75,943 – $4,751) is reported in the statement of financial position.
4.13 B Assets are represented by debit balances.
4.14 C The two balances must be separately disclosed.
4.15 D The debits are as follows:
$
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets 63,960
Receivables 31,746
Cash at bank 1,783
284,931
4.16 A (5,754 + 11,745 + 150)
ANSWERS
179
5 Sales tax
5.1 D A, B and C could all be reasons why the output tax does not equal 20% of sales. D is incorrect as
it makes no difference whether the customer is registered for sales tax or not.
5.2 B SALES TAX CONTROL ACCOUNT
$$
b/d 4,540
Purchases ($64,000 15%) 9,600 Sales ($109,250 15%/115%) 14,250
Cash 11,910 c/d 2,720
21,510 21,510
5.3 D Dr Purchases $575 and Cr Payables $575.
Alana is not registered for sales tax purposes and therefore cannot reclaim the input sales tax of
$75.
5.4 C The sales tax account is a personal account with the tax authorities.
5.5 D
$
Assets
Opening cash 1,000
Cash received $(1,000 + 200 sales tax) 1,200
Closing cash 2,200
Inventory $(800 – 400) 400
2,600
Liabilities
Opening liabilities –
Sales tax payable $(200 – 160) 40
Purchase inventory $(800 + 160 sales tax) 960
Closing liabilities 1,000
Capital
Opening capital 1,000
Profit on sale of inventory $(1,000 – 400) 600
Closing capital 1,600
5.6 A Receivables and payables include sales tax where applicable.
5.7 B The sales tax element of the invoices will go to the sales tax account in the statement of financial
position.
5.8 B
$
Output sales tax $27,612.50 ×
17.5
117.5
4,112.50
Input sales tax $18,000 ×
17.5
100
3,150.00
Balance on sales tax a/c (credit) 962.50
FFA/F3 FINANCIAL ACCOUNTING
180
6 Inventory
6.1 A 950,000 – 11,750 + 1,500 + (14,950 × 100/115) = $952,750
6.2 C Carriage outwards and storage are distribution costs.
6.3 A
$
Original value 284,700
Coats – Cost 400 × $80 (32,000)
– NRV ($75 × 95%) × 400 28,500
281,200
At 31 January 20X3 the skirts were correctly valued at costs incurred to date of $20 per skirt
which was lower than the NRV of $22. Therefore no adjustment required.
6.4 A
$
50 @ $190 9,500
500 @ $220 110,000
300 @ $230 69,000
188,500
6.5 C Statement 1) inventory should be valued at the lower of cost and NRV not the higher
Statement 2) production overheads based on a normal level of production should be included
6.6 D
$
Inventory check balance 483,700
Less: goods from suppliers (38,400)
Add: goods sold 14,800
Less: goods returned (400)
Add: goods returned to supplier 1,800
461,500
6.7 C If closing inventory is understated, cost of sales will be overstated. Next year opening inventory
will be understated and cost of sales will be understated.
6.8 A
$$
Original balance 386,400
Item 1) Cost (18,000)
NRV 15,000 – 800 14,200
Write down (3,800)
Inventory value 382,600
6.9 C
$
Inventory count, 4 January 20X2 527,300
Purchases since end of year (7,900)
Cost of sales since end of year (15,000 × 60%) 9,000
Purchase returns since end of year 800
Inventory at 31 December 20X1 529,200
6.10 A Trade discounts should be deducted but not settlement discounts. IAS 2 does not allow the use
of LIFO. Production overheads are part of the costs of conversion of finished goods and do form
part of the valuation.
ANSWERS
181
6.11 B
$
Original inventory valuation 41,875
Cost of damaged items (1,960)
NRV of damaged items (1,200 – 360) 840
40,755
6.12 B
Net Lower of
Cost realisable value cost & NRV Units Value
$$$$
Basic 6 8 6 200 1,200
Super 9 8 8 250 2,000
Luxury 18 10 10 150 1,500
4,700
6.13 C
6.14 C
6.15 C
$
116,400
Line 1: (400 $3) – $200 1,000
Line 2: (200 $35) – $300 – $1,200 5,500
122,900
6.16 A $
Inventory count value 836,200
Less: purchases (8,600)
Add: sales (14,000 × 70/100) 9,800
Add: goods returned 700
Inventory figure 838,100
6.17 B The cost of materials used should be based on opening and closing valuations of inventory at
AVCO.
$
Opening inventory 56,200
Purchases 136,500
192,700
Less: Closing inventory (59,800)
Cost of materials used 132,900
6.18 C Continuous inventory in theory should remove the need for physical inventory counts, but in
practice periodic counts are needed to ensure that the recorded quantities of inventory match the
physical quantities that are held (and, for example, there have not been significant losses of
inventory due to theft).
7 Tangible non-current assets I
7.1 A It is never B as funds are not set aside, nor C, this is revaluation, nor D – depreciation has
nothing to do with the wearing out of assets, depreciation is an application of the matching
concept and allocates the cost of the asset over the accounting periods expected to benefit from
its use.