Lecture notes Advanced accounting

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Principles of accounting D. Leiwy AC1025 2015 Undergraduate study in Economics, Management, Finance and the Social Sciences This is an extract from a subject guide for an undergraduate course offered as part of the University of London International Programmes in Economics, Management, Finance and the Social Sciences. Materials for these programmes are developed by academics at the London School of Economics and Political Science (LSE). For more information, see: www.londoninternational.ac.ukThis guide was prepared for the University of London International Programmes by: Danny Leiwy, Department of Accounting, The London School of Economics and Political Science. It draws on material in the previously published editions of the guide by: Dr Jennifer Ireland, formerly of the Department of Accounting and Finance, The London School of Economics and Political Science. This is one of a series of subject guides published by the University. We regret that due to pressure of work the authors are unable to enter into any correspondence relating to, or aris- ing from, the guide. If you have any comments on this subject guide, favourable or unfavour- able, please use the form at the back of this guide. University of London International Programmes Publications Office Stewart House 32 Russell Square London WC1B 5DN United Kingdom www.londoninternational.ac.uk Published by: University of London © University of London 2015 The University of London asserts copyright over all material in this subject guide except where otherwise indicated. All rights reserved. No part of this work may be reproduced in any form, or by any means, without permission in writing from the publisher. We make every effort to respect copyright. If you think we have inadvertently used your copyright material, please let us know.Contents Contents Chapter 1: Introduction .......................................................................................... 1 1.1 Route map to the subject guide ............................................................................... 1 1.2 Introduction to the study of accounting .................................................................... 1 1.3 Syllabus ................................................................................................................... 3 1.4 Aims of the course ................................................................................................... 3 1.5 Learning outcomes for the course ............................................................................ 4 1.6 Overview of learning resources ................................................................................ 4 1.7 Examination advice.................................................................................................. 8 1.8 Overview of the Introduction.................................................................................. 10 1.9 List of abbreviations used in this subject guide ....................................................... 11 Section 1: Financial accounting ............................................................................ 13 Chapter 2: Accounting in context ......................................................................... 15 2.1 Introduction .......................................................................................................... 15 2.2 What is accounting? .............................................................................................. 16 2.3 Accounting theory and practice .............................................................................. 19 2.4 Accounting information and its uses ....................................................................... 20 2.5 Financial accounting .............................................................................................. 20 2.6 Management accounting ....................................................................................... 21 2.7 Overview of chapter .............................................................................................. 21 2.8 Reminder of learning outcomes.............................................................................. 22 2.9 Test your knowledge and understanding ................................................................ 22 Chapter 3: Income statement and Statement of financial position ..................... 23 3.1 Introduction .......................................................................................................... 23 3.2 The structure of a private sector business ............................................................... 24 3.3 An introduction to the financial statements ............................................................ 25 3.4 Accounting characteristics and concepts, bases and policies .................................... 33 3.5 Overview of chapter .............................................................................................. 36 3.6 Reminder of learning outcomes.............................................................................. 36 3.7 Test your knowledge and understanding ................................................................ 36 Chapter 4: Double-entry book-keeping ................................................................ 37 4.1 Introduction .......................................................................................................... 37 4.2 One transaction: two effects .................................................................................. 38 4.3 Recording transactions: books of prime entry ......................................................... 40 4.4 Double-entry book-keeping ................................................................................... 44 4.5 Trial balance .......................................................................................................... 49 4.6 Overview of chapter .............................................................................................. 52 4.7 Reminder of learning outcomes.............................................................................. 52 4.8 Test your knowledge and understanding ................................................................ 53 Chapter 5: Accounting adjustments 1 .................................................................. 55 5.1 Introduction .......................................................................................................... 55 5.2 Inventory, purchases and sales ............................................................................... 56 5.3 Accruals and prepayments ..................................................................................... 61 5.4 Bad and doubtful debts ......................................................................................... 64 5.5 Overview of chapter .............................................................................................. 67 iAC1025 Principles of accounting 5.6 Reminder of learning outcomes.............................................................................. 68 5.7 Test your knowledge and understanding ................................................................ 68 Chapter 6: Accounting adjustments 2 .................................................................. 71 6.1 Introduction .......................................................................................................... 71 6.2 Depreciation of non-current assets ......................................................................... 72 6.3 Disposal of non-current assets ............................................................................... 76 6.4 Revaluation of land and buildings .......................................................................... 78 6.5 Overview of chapter .............................................................................................. 80 6.6 Reminder of learning outcomes.............................................................................. 81 6.7 Test your knowledge and understanding ................................................................ 81 Chapter 7: Equity, capital and dividends .............................................................. 83 7.1 Introduction .......................................................................................................... 83 7.2 Different formats for different purposes .................................................................. 84 7.3 Preparing company accounts ................................................................................. 88 7.4 Overview of chapter .............................................................................................. 92 7.5 Reminder of learning outcomes.............................................................................. 92 7.6 Test your knowledge and understanding ................................................................ 92 Chapter 8: Preparing financial statements ........................................................... 95 8.1 Introduction .......................................................................................................... 95 8.2 Preparing the statement of financial position and income statement ....................... 96 8.3 Overview of chapter ............................................................................................ 105 8.4 Reminder of learning outcomes............................................................................ 105 8.5 Test your knowledge and understanding .............................................................. 105 Chapter 9: Incomplete records and missing information ................................... 109 9.1 Introduction ........................................................................................................ 109 9.2 Incomplete information ........................................................................................ 109 9.3 Overview of chapter ............................................................................................ 115 9.4 Reminder of learning outcomes............................................................................ 115 9.5 Test your knowledge and understanding .............................................................. 115 Chapter 10: Internal control ............................................................................... 119 10.1 Introduction ...................................................................................................... 119 10.2 Getting it right: internal control .......................................................................... 119 10.3 Bank reconciliations........................................................................................... 125 10.4 Trial balance ...................................................................................................... 127 10.5 Overview of chapter .......................................................................................... 130 10.6 Reminder of learning outcomes.......................................................................... 130 10.7 Test your knowledge and understanding ............................................................ 130 Chapter 11: Cash flow statements ..................................................................... 133 11.1 Introduction ...................................................................................................... 133 11.2 Preparing the cash flow statement ..................................................................... 133 11.3 Overview of chapter content .............................................................................. 142 11.4 Reminder of learning outcomes.......................................................................... 142 11.5 Test your knowledge and understanding ............................................................ 142 Chapter 12: Using and understanding financial statements .............................. 147 12.1 Introduction ...................................................................................................... 147 12.2 Ratio analysis .................................................................................................... 148 12.3 Writing a report ................................................................................................. 161 12.4 Overview of chapter .......................................................................................... 162 12.5 Reminder of learning outcomes.......................................................................... 162 12.6 Test your knowledge and understanding ............................................................ 162 iiContents Section 2: Management accounting ................................................................... 165 Chapter 13: Introduction to management accounting ....................................... 167 13.1 Introduction ...................................................................................................... 167 13.2 Planning and coordination ................................................................................. 168 13.3 Control, communication and motivation ............................................................. 169 13.4 Information for decision-making ........................................................................ 170 13.5 Overview of chapter .......................................................................................... 171 13.6 Reminder of learning outcomes.......................................................................... 171 13.7 Test your knowledge and understanding ............................................................ 171 Chapter 14: Absorption costing versus marginal costing .................................. 173 14.1 Introduction ...................................................................................................... 173 14.2 Understanding costs .......................................................................................... 174 14.3 Inventory valuation – marginal costing ............................................................... 176 14.4 Inventory valuation – full costing ....................................................................... 177 14.5 Effects of different inventory valuation methods ................................................. 182 14.6 Overview of chapter .......................................................................................... 184 14.7 Reminder of learning outcomes.......................................................................... 185 14.8 Test your knowledge and understanding ............................................................ 185 Chapter 15: Contribution, CVP analysis and the optimal use of scarce resources ................................................................................................. 187 15.1 Introduction ...................................................................................................... 187 15.2 Cost-volume-profit analysis ................................................................................ 188 15.3 Relevant costs ................................................................................................... 192 15.4 Limiting factors .................................................................................................. 195 15.5 Overview of chapter .......................................................................................... 197 15.6 Reminder of learning outcomes.......................................................................... 197 15.7 Test your knowledge and understanding ............................................................ 198 Chapter 16: Planning for the future: budgeting and cash forecasting .............. 201 16.1 Introduction ...................................................................................................... 201 16.2 Goals and objectives .......................................................................................... 202 16.3 Budgets and forecasts ....................................................................................... 203 16.4 Working capital management ............................................................................ 207 16.5 Overview of chapter .......................................................................................... 209 16.6 Reminder of learning outcomes.......................................................................... 209 16.7 Test your knowledge and understanding ............................................................ 210 Chapter 17: Budgets for control: standard costing and variance analysis ......... 213 17.1 Introduction ...................................................................................................... 213 17.2 Standard costs ................................................................................................... 214 17.3 Variance analysis – an introduction .................................................................... 215 17.4 Overview of chapter .......................................................................................... 224 17.5 Reminder of learning outcomes.......................................................................... 224 17.6 Test your knowledge and understanding ............................................................ 224 Chapter 18: Capital investment appraisal 1 ....................................................... 227 18.1 Introduction ...................................................................................................... 227 18.2 Capital investments ........................................................................................... 228 18.3 Payback period .................................................................................................. 228 18.4 Accounting Rate of Return (ARR) ....................................................................... 232 18.5 Overview of chapter .......................................................................................... 233 18.6 Reminder of learning outcomes.......................................................................... 234 18.7 Test your knowledge and understanding ............................................................ 234 iiiAC1025 Principles of accounting Chapter 19: Capital investment appraisal 2 ....................................................... 235 19.1 Introduction ...................................................................................................... 235 19.2 Discounted cash flow techniques ....................................................................... 236 19.3 Overview of chapter .......................................................................................... 244 19.4 Reminder of learning outcomes.......................................................................... 245 19.5 Test your knowledge and understanding ............................................................ 245 Chapter 20: Revision .......................................................................................... 247 20.1 Introduction ...................................................................................................... 247 20.2 Examination and preparation techniques ............................................................ 247 20.3 Summary ........................................................................................................... 248 Appendix 1: Suggested solutions to selected Activities and Sample examination questions .......................................................................... 251 Chapter 2 .................................................................................................................. 251 Chapter 3 .................................................................................................................. 251 Chapter 4 .................................................................................................................. 253 Chapter 5 .................................................................................................................. 257 Chapter 6 .................................................................................................................. 260 Chapter 7 .................................................................................................................. 261 Chapter 8 .................................................................................................................. 265 Chapter 9 .................................................................................................................. 272 Chapter 10 ................................................................................................................ 281 Chapter 11 ................................................................................................................ 285 Chapter 12 ................................................................................................................ 293 Chapter 13 ................................................................................................................ 296 Chapter 14 ................................................................................................................ 296 Chapter 15 ................................................................................................................ 300 Chapter 16 ................................................................................................................ 304 Chapter 17 ................................................................................................................ 309 Chapter 18 ................................................................................................................ 313 Chapter 19 ................................................................................................................ 314 Appendix 2: Sample examination papers ........................................................... 321 Before you start ......................................................................................................... 321 Sample examination paper 1 ..................................................................................... 322 Sample examination paper 2 ..................................................................................... 331 Extracts from compound interest tables ...................................................................... 342 Appendix 3: Example of 8-column accounting paper ........................................ 343 ivChapter 1: Introduction Chapter 1: Introduction This subject guide has been written for those of you who are studying AC1025 Principles of accounting. The course is intended as a broad introduction to the subject, both for non-specialist students, and as a foundation for further study in the area. 1.1 Route map to the subject guide This subject guide is divided into 20 chapters which, with the exception of the Introduction, are organised in two sections: Chapter 1 is a general introduction to the subject and the course. Chapters 2–12 form Section 1 on Financial accounting. This section distinguishes between financial accounting and management accounting; introduces and explains financial accounting concepts and conventions; and provides a grounding in double-entry book-keeping and the preparation of basic financial statements. This section also enables you to analyse and interpret the information contained in these financial statements, and to explain their limitations, with reference to underlying theories and principles. Although a grounding in double-entry book- keeping is provided, you should note that it is possible to prepare basic financial statements from both structured and unstructured information without making use of this technique; double-entry book-keeping is used by businesses to record financial transactions as they occur, but if this data is already provided then it can be directly manipulated for financial reporting purposes. This section corresponds to Section 1 of the syllabus for this course. Chapters 13–19 form Section 2 on Management accounting. This section introduces a range of management accounting applications and techniques for planning, decision-making and control. These techniques are supported by discussion of the underlying theories and principles; and the emphasis is placed on the ability to interpret and critique their use. This section corresponds to Section 2 of the syllabus for this course. Chapter 20 gives some revision advice. Finally, suggested solutions to some of the exercises and Sample examination questions set in the chapters are provided in Appendix 1. In Appendix 2 you will find two Sample examination papers and extracts from interest (discount factor) tables. Examiners’ commentaries relating to the 2014 examination papers can be found on the VLE. 1.2 Introduction to the study of accounting From the outside, accounting can appear to be a purely practical subject. It would be very easy to focus on just the applications of techniques and procedures. However, accounting is more than just a set of calculations; unless we can understand and interpret the figures we produce, the calculations are pointless Accounting provides information for a wide variety of different users and purposes, and its practices can only be properly understood and assessed in relation to the economic and social environment in which they are applied. Therefore there are four aspects to this subject: 1AC1025 Principles of accounting 1. Techniques for recording, calculating, classifying and reporting of accounting information. 2. Legal and institutional background associated with accounting information. 3. Economic and administrative problems which the information is required to solve. 4. Interpretation of reports prepared using point 1 in the light of points 2 and 3. The accounting information referred to in point 1 above need not be financial, although for our purposes in this course it will almost always be. The problems referred to in point 3 above are largely concerned with the planning of, and control over, the use of economic resources. They are also concerned with the measurement of income and of various kinds of value changes. In order to properly interpret accounting information as in point 4 above, and apply it to the problems in point 3, we need to understand the theory and principles which underlie the techniques in point 1. The study of accounting is traditionally divided into two parts according to the types of users of the accounting information. Financial accounting is primarily concerned with the needs of users outside the business (or other organisation). Therefore it relates to the external control and management of resources (for example, by shareholders of the company in which they have invested their funds, or by banks making loans). A key part of financial accounting is reporting the performance and position of the business to these external users, via the financial statements. The form and content of financial statements is usually highly regulated. In contrast, management accounting is concerned with the needs of users inside the business. Therefore it relates to the internal control and management of resources (for example, by the directors, management or employees of a company). Management accounting statements may be more detailed than those prepared for external users, and do not normally need to meet any legal requirements. Countries around the world organise their economic and financial activities in different ways so, inevitably, legal requirements, regulations and administrative procedures also vary across countries. The syllabus for this course is based on the system pertaining to the UK; however, the amount of institutional material that you need to know is kept to a minimum. Even though the material in this subject guide is based on the system in the UK, accounting rules and guidelines around the world are becoming more similar (converging) as a result of International Financial Reporting Standards (IFRSs) which are complied with by large companies in most countries. This is part of a general drive to harmonise international accounting practices. It is important to note that knowledge of the following is not part of the syllabus: UK Statements of Standard Accounting Practice (SSAPs), Financial Reporting Standards (FRSs), and of International Accounting Standards (IASs) and International Financial Reporting Standards (IRFSs). 2Chapter 1: Introduction 1.3 Syllabus This course is designed to introduce you to accounting and financial management. Traditionally concerned with measuring, recording and reporting financial transactions and events, modern accounting provides a broad range of information for a wide variety of users. Financial accounting and reporting is primarily concerned with the needs of users outside the business, such as shareholders, regulators and creditors. In contrast, management accounting and financial management is concerned with the needs of users who are internal to the business, such as directors, managers, and employees. The course is arranged in two sections. The first section introduces and explains financial accounting concepts and conventions, and provides a grounding in double-entry bookkeeping and the preparation of the primary financial statements. The second section introduces a range of applications and techniques for planning, decision-making and control. Section 1 Financial accounting Accounting harmonisation and International Financial Reporting Standards. Accounting concepts and conventions: their nature, purposes and limitations. How to prepare and interpret financial statements: ‘Statement of Financial Position’, income statement and statement of cash flows. Analysis and interpretation of financial statements. Section 2 Management accounting and financial management Cost behaviour, marginal and total absorption costing for inventory. Cost- volume-profit analysis. Introduction to budgetary planning and control, including standard costs, targets, and variance analysis. Making capital investment decisions. 1.3.1 Changes to the syllabus The material covered in this subject guide reflects the syllabus for the year 2015–2016. The field of accounting changes regularly, and there may be updates to the syllabus for this course that are not included in this subject guide. Any such updates will be posted on the VLE. It is essential that you check the VLE at the beginning of each academic year (September) for new material and changes to the syllabus. Any additional material posted on the VLE will be examinable. 1.4 Aims of the course The aims of the course are to: • introduce you to the principles underlying accounting • enable you to apply, interpret and explain key accounting techniques • provide a broad understanding of the theory and practice of financial and management accounting. The course is intended both for non-specialist students, and as a foundation for further study in the area. 3AC1025 Principles of accounting 1.5 Learning outcomes for the course At the end of this course, and having completed the Essential reading and Activities, you should be able to: • distinguish between different uses of accounting information and relate these uses to the needs of different groups of users • explain the limitations of such statements and their analysis • categorise cost behaviour, and prepare and contrast inventory valuations under different costing methods • describe the budgeting process and discuss the use of budgets in planning and control • explain, discuss and apply relevant techniques to aid internal users in decision-making. 1.6 Overview of learning resources 1.6.1 The subject guide This subject guide is intended to supplement, not replace, the Essential reading indicated. The guide relies on the Recommended textbook (Leiwy and Perks, 2013) to provide the theoretical grounding for the material and for many definitions, examples and explanations. The subject guide: • provides a framework for your study of the subject using the recommended text • contains aims and learning outcomes for each topic, and references to the Essential reading • acts as a pointer to the most important issues dealt with in the reading • provides additional explanations where appropriate • contains additional worked examples, exercises for you to work through yourself, and Sample examination questions. It is important to attempt all of the exercises and to ensure that you take the time to fully understand the material covered in each chapter of the subject guide. You should complete this Introduction first of all, before progressing to the other sections of the subject guide. Thereafter, you are strongly advised to attempt the work relating to Financial accounting (Section 1) in the order in which it is presented in the subject guide. However, you may progress 1 1 It is important to to Section 2 (Management accounting) before attempting Chapter 12. study Chapters 2–12 on Although it is also important to attempt the work relating to management financial accounting in accounting in the general order in which it is presented in the subject the subject guide before guide, Chapters 13 and 14 may be attempted (in that order) at any time starting the material after you have completed Chapter 8. on management accounting, because you It is also possible to leave Chapters 5 to 8 and return to them at a later will need to understand date, if double entry is causing you problems. both terminology from the financial accounting It is essential to have a good understanding of the underlying principles material, and the of financial accounting before moving onwards as the steps which way that financial culminate in the preparation (and interpretation) of financial statements statements fit together, are cumulative. However, you may find that the work on management in order to understand accounting falls more readily into separate, albeit related, topics. In all of the material on management particular, Chapters 18 and 19, on long-term decision-making techniques, accounting. may be attempted separately from Chapters 15 to 17, on the use of budgets for planning and control. 4Chapter 1: Introduction Unless indicated otherwise, the order in which you should tackle the work specified in each chapter is as follows: 1. Read the chapter Aims and Learning outcomes, and the Introduction, to appreciate what material will be covered in the chapter, and what you are expected to achieve by the end of it. Bear these in mind as you work through the chapter. 2. Read through the specified Essential reading (Leiwy and Perks, 2013) to acquire an initial understanding of the text. 3. Work through the material in the subject guide chapter. Pay particular attention to the examples provided, as they contain materials that are either complementary to the textbook, or otherwise important to ensure you gain a full understanding of the material. 4. As you are working through the material in the subject guide chapter, attempt each Activity at the appropriate point. You may need to refer back to relevant parts of the specified reading in Leiwy and Perks (2013) in order to do so. Solutions for numerical Activities are provided in Appendix 1 of the subject guide. 5. Make notes from the specified reading and the subject guide chapter for future reference. If you struggled with any of the exercises, try to ensure that your notes will help you to avoid the same problems when you review the chapter at a later date. 6. Your knowledge and understanding will be reinforced if you also tackle the questions at the end of the corresponding Leiwy and Perks (2013) chapter(s). If you find you are having difficulties, you should work through the subject guide material again before returning to the questions. 7. Check that you have achieved the learning outcomes before moving on to the next chapter of the subject guide. 8. Where provided, prepare (note form) solutions for the Sample examination questions given at the end of the subject guide chapters and keep your note solutions for future reference. Sample examination questions may be more difficult than the exercises in the body of the chapter, and require more thought. They are set at examination level, so you should make sure that you can answer them when you are preparing for the examination. Therefore you should write a full answer to each question when you are revising the chapter, once you have already completed a large part of the course. When you finish each full answer, look back at your first attempt in note form, which you should have kept. Hopefully, you will find that completing your study of the whole course has thrown more light on what you want to say in each answer. Of course, be sure not to wander off the point When you have completed all of Chapters 1–19 in the subject guide, including the Activities and the Sample examination questions at the end of each chapter, you will be ready to read the revision advice and Chapter 20 and attempt the two Sample examination papers. Before you do, make sure that you have read the Examiners’ commentaries, the examination information in the Handbook, and the examination advice below. 1.6.2 Essential reading Leiwy, D. and R. Perks Accounting: understanding and practice. (Maidenhead: McGraw-Hill, 2013) fourth edition ISBN 9780077139131. You are strongly advised to buy this textbook, which is referred to in every chapter of this subject guide and has many examples and both self-testing 5AC1025 Principles of accounting and assessment questions closely related to this course. The textbook also has a companion website: www.mcgraw-hill.co.uk/textbooks/leiwy Detailed reading references in this subject guide refer to the edition of the set textbook listed above. New editions of this textbook may have been published by the time you study this course. You can use a more recent edition; use the detailed chapter and section headings and the index to identify relevant readings. Also check the virtual learning environment (VLE) regularly for updated guidance on readings. 1.6.3 Further reading Please note that as long as you read the Essential reading you are then free to read around the subject area in any text, paper or online resource. You will need to support your learning by reading as widely as possible and by thinking about how these principles apply in the real world. To help you read extensively, you have free access to the VLE and University of London Online Library (see below). Accounting is an evolving and, at times, controversial subject. You are encouraged to stay informed of the current issues in accounting. These issues are often reported in the press, so you may do this by reading the financial pages of a quality daily, or weekly, newspaper. In addition, specialist publications that are worth reading on a regular basis include: economia, the official monthly journal of the Institute of Chartered Accountants in England and Wales (ICAEW); Accountancy, formerly the official monthly journal of the ICAEW; and Accountancy Age which is available online at www.accountancyage.com. Journals of other professional accountancy bodies in the UK and elsewhere are also suitable. Press, comment and other information can also be found at: www.accountingweb.co.uk/ In recent times, accounting for pensions and financial instruments have been regular features in the UK news. Your country may have very different accounting issues. You may not be able to understand all the technical details, but you should try to understand the main arguments. Who do you think is right, and why? What may be the real motivations behind the arguments? How do the policy-makers respond? What are the causes of accounting scandals that occur? What do you think can be done to prevent these scandals, and why? Reference books Nobes, C. The Penguin dictionary of accounting. (London: Penguin Books, 2006) second edition ISBN 9780141025254. Owen, G. and J. Law A dictionary of accounting. (Oxford: Oxford Paperbacks, 2010) fourth edition ISBN 9780199563050. These (or any similar) dictionaries of accounting provide a quick source of reference for any new terms you meet in this course. You may find a dictionary particularly useful when you approach this course for the first time, as accounting terminology can sometimes cause unnecessary confusion. You should be aware that precise terminology, particularly with respect to financial reporting terms, may differ from one country to another. If you do not have a dictionary of accounting, you should be able to find the information you need in Leiwy and Perks (2013) which includes a comprehensive glossary (pp.470–75). 1.6.4 Online study resources In addition to the subject guide and the Essential reading, it is crucial that 6Chapter 1: Introduction you take advantage of the study resources that are available online for this course, including the VLE and the Online Library. You can access the VLE, the Online Library and your University of London email account via the Student Portal at: http://my.londoninternational.ac.uk You should have received your login details for the Student Portal with your official offer, which was emailed to the address that you gave on your application form. You have probably already logged in to the Student Portal in order to register. As soon as you registered, you will automatically have been granted access to the VLE, Online Library and your fully functional University of London email account. If you forget your login details, please click on the ‘Forgotten your password’ link on the login page. The VLE The VLE, which complements this subject guide, has been designed to enhance your learning experience, providing additional support and a sense of community. It forms an important part of your study experience with the University of London and you should access it regularly. The VLE provides a range of resources for EMFSS courses: • Self-testing activities: Doing these allows you to test your own understanding of subject material. • Electronic study materials: The printed materials that you receive from the University of London are available to download, including updated reading lists and references. • Past examination papers and Examiners’ commentaries: These provide advice on how each examination question might best be answered. • A student discussion forum: This is an open space for you to discuss interests and experiences, seek support from your peers, work collaboratively to solve problems and discuss subject material. • Videos: There are recorded academic introductions to the subject, interviews and debates and, for some courses, audio-visual tutorials and conclusions. • Recorded lectures: For some courses, where appropriate, the sessions from previous years’ Study Weekends have been recorded and made available. • Study skills: Expert advice on preparing for examinations and developing your digital literacy skills. • Feedback forms. Some of these resources are available for certain courses only, but we are expanding our provision all the time and you should check the VLE regularly for updates. Making use of the Online Library The Online Library contains a huge array of journal articles and other resources to help you read widely and extensively. To access the majority of resources via the Online Library you will either need to use your University of London Student Portal login details, or you will be required to register and use an Athens login: http://tinyurl.com/ollathens 7AC1025 Principles of accounting The easiest way to locate relevant content and journal articles in the Online Library is to use the Summon search engine. If you are having trouble finding an article listed in a reading list, try removing any punctuation from the title, such as single quotation marks, question marks and colons. For further advice, please see the online help pages: www.external.shl.lon.ac.uk/summon/about.php 1.7 Examination advice Important: the information and advice given here are based on the examination structure used at the time this guide was written. Please note that subject guides may be used for several years. Because of this we strongly advise you to always check both the current Regulations for relevant information about the examination, and the VLE where you should be advised of any forthcoming changes. You should also carefully check the rubric/instructions on the paper you actually sit and follow those instructions. The assessment for this course is by examination. The examination is three hours and 15 minutes long, which includes 15 minutes’ reading time. The examination paper is divided into sections and you are required to answer certain questions from each section. Each question you answer carries a mark allocation of 25 marks and there are 100 marks available in total. The compulsory Question 1 comprises of four questions, of which three are allocated six marks each, and one question is worth seven marks. You should divide your time in the examination between the questions according to the number of marks. A good student who has completed all their work and who is sitting an examination at an appropriate level for their abilities, should achieve a pass mark or better in the examination. However, some of you will find that, despite your hard work, ability and preparation, you fail. This is usually because marks are thrown away needlessly, through poor examination technique. Examination technique can be learnt and practised. Here are a few tips that may help you to achieve the mark you deserve: • Do not panic Take a few moments to pause and collect your thoughts before you start. This will help you to make the best use of your time, rather than rushing in without thinking about what you are doing. Also, try not to pay attention to other students around you. This applies just as much to time spent waiting outside the room where you will take the examination, as it does during the examination. • Read the instructions on the front of the examination paper. Make sure you understand which, and how many, questions you should answer. If you need to choose between questions, read their requirements first so that you know which areas they are examining before you make your choice. • You do not have to answer the questions in the order in which they appear in the examination paper. It is likely that there will be some topics about which you will feel more confident, and some which you find more difficult. You may decide to tackle the questions you feel most confident about first, so that you can spend your remaining time on the more difficult questions. • Read the question and the requirements carefully. You must answer the question you have actually been asked, not what you might like 8Chapter 1: Introduction to have been asked. You must also try to answer every part of the question. This is particularly important for discussion questions. It is very easy to read a question and assume it is asking you to repeat everything you know about a particular topic. This is rarely the case You must apply your knowledge to answer the specific question at hand. Remember, this is an examination for people, not parrots. • Read the question and the requirement again You should find yourself referring back to the requirement from time to time as you prepare your answer, especially with a discussion question. Sometimes it is a good idea to underline parts of the question to remind yourself what you need to do. Words in the requirement such as ‘explain’ are asking you to justify your answer or describe the underlying theory; whereas words like ‘discuss’ are asking you to present all the sides of an argument, or points in favour and against the use of a particular technique. If you are asked to prepare a report, or a set of financial statements, then make sure that your answer is in the appropriate format. If you are asked to recommend a course of action, or to comment on your answer, remember to do so. • Pay attention to the time. You should divide your time between the questions (and between parts of questions) according to the number of marks available. You cannot expect to pass if you do not attempt the required number of questions in each section. Spending too long on any one question means you will be losing important marks on another. You will usually pick up more marks by moving on to a new question when the time is up, than by desperately trying to finish a question you have not completed and which you may be struggling with. You can return to these questions later if you have any spare time after you have attempted the rest of the examination. • If your balance sheet does not balance in the examination, it does not matter. You may have made any number of small mistakes. Trying to find the error could mean you run out of time, and lose out on marks available in other questions. When the time you have allocated for your answer runs out, you should move on to the next question (or part of question). You will still be awarded marks for the parts of your answer which are correct. • Questions may have several parts to them; for example, a numerical calculation, followed by a discussion. Always leave enough time for the discussion parts of questions. Where a question is divided into different parts, you should split your time between those different parts according to the mark allocation. Marks are often lost because students use up all of their time to calculate the numbers, and ignore the discussion. Sometimes you can answer the discussion part of a question before you answer the numerical part, in which case it can be a good idea to answer the discussion part first. • When performing calculations, you must show all your workings and state any necessary assumptions that you make. If you do not show how you arrived at your numerical solutions and you have made a mistake, the Examiners will not be able to award you any marks for the bits you have done correctly. Your workings may be quite rough, so it is a good idea to cross-reference them to your solutions so that the Examiners can easily find them. Finally, remember that in accounting, practice is everything. Try to attempt the Sample examination paper, or past examination papers, under examination conditions. Put away all your books and time yourself. Try to 9AC1025 Principles of accounting work by yourself in a quiet place where you will not be disturbed. This is especially important if you are not used to sitting three-hour examinations, as the experience itself can be quite stressful. This may seem like a lot to take in now, but if you follow this advice you will have the best chance of doing well in this course. Take things one step at a time, and you should find that the subject is much less daunting than you might think Remember, it is important to check the VLE for: • up-to-date information on examination and assessment arrangements for this course • where available, past examination papers and Examiners’ commentaries for the course which give advice on how each question might best be answered. 1.7.1 Examination materials When you sit the examination, apart from the question paper and booklet to write your answers in, you will be provided with the following materials: • Extracts from compound interest tables. You will be provided with a one page extract from these tables (which is included in Appendix 2 at the end of the Sample examination papers). • Eight-column accounting paper. An example of what this looks like is given at the end of the subject guide. We suggest that you might like to remove this page from the subject guide and make photocopies of it to practise on. You can also buy pads of accounting paper at a commercial stationery shop. You do not have to use this paper in the examination, but many students find it very useful for questions such as those requiring the preparation of income statements, cash flow statements, budgets and investment appraisal calculations. A hand-held calculator may be used when answering questions on this paper, but it must not be pre-programmed or able to display graphics, text or algebraic equations. The make and type of your machine must be clearly stated on the front cover of the answer book. 1.7.2 Changes to the syllabus The material covered in this subject guide reflects the syllabus for the year 2015–2016. The field of accounting changes regularly, and there may be updates to the syllabus for this course that are not included in this subject guide. Any such updates will be posted on the VLE. It is essential that you check the VLE at the beginning of each academic year (September) for new material and changes to the syllabus. Any additional material posted on the VLE will be examinable. 1.8 Overview of the Introduction Now that you have read this Introduction, and looked at the Essential reading (Leiwy and Perks, 2013), you should have an overview of accounting as a subject. You should also understand how to use this subject guide to help you with the material in this course. The best approach to studying accounting is to be as organised as possible. Make yourself a timetable and stick to it. Try to keep up with the work, and study the subject regularly so that you do not forget topics as you go 10Chapter 1: Introduction along. Many people enjoy the logic behind accounting techniques and you should find that ideas and concepts make more sense as you continue through the course. I hope that you enjoy accounting and I am sure that you will find many uses for it in the future. Good luck 1.9 List of abbreviations used in this subject guide ABC Activity-based costing a/c Account ARR Accounting rate of return AVCO Average cost b/d Brought down (from the previous period) b/f Brought forward (from the previous period) (Note: these last two abbreviations are sometimes used interchangeably) BEP Break-even point BS Balance sheet or Statement of Financial Position c/d Carried down (to the next period) c/f Carried forward (to the next period) (Note: these last two abbreviations are sometimes used interchangeably) CFS Cash flow statement Cr Credit C-V-P Cost-volume-profit analysis DF Discount factor Dr Debit EBIT Earnings before interest and tax EPS Earnings per share F Favourable (variance) FIFO First-in, first-out FRS Financial Reporting Standard (accounting standards issued by the UK ASB) GAAP Generally accepted accounting principles HCA Historic cost accounting IAS International Accounting Standard IFRS International Financial Reporting Standard IRR Internal rate of return IS Income statement (formerly known as a profit and loss account (P&L account)) LIFO Last-in, first-out Ltd Limited company (these companies are usually referred to as ‘private’ companies; however, ‘private’ may also be used more generally to mean ‘not listed on a stock exchange’) MC Marginal costing NBV Net book value NPV Net present value NTV Net terminal value 11AC1025 Principles of accounting p.a. Per annum (that is, each year) PBIT Profit before interest and tax P/E Price/earnings ratio P&L Profit and loss account (now more commonly referred to as an ‘income statement’) plc Public limited company (this is usually referred to as a ‘public’ company; however, sometimes ‘public’ is used to mean something more, namely ‘listed on a stock exchange’ and some, but not all, public limited companies are listed on a stock exchange) ROCE Return on capital employed ROE Return on shareholders’ equity RPI Retail price index (in some countries, this is termed the Consumer Price Index – CPI) SOCE Statement of changes in equity S of FP Statement of financial position (formerly known as a balance sheet) SSAP Statement of Standard Accounting Practice (this is the name given to UK accounting standards created before 1990) TAC Total absorption costing TB Trial balance U Unfavourable or adverse (variance) WAC Weighted average cost WIP Work-in-progress 12Section 1: Financial accounting Section 1: Financial accounting 13AC1025 Principles of accounting Notes 14

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