Financial Accounting and reporting study guide (PDF) (2024)

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FOUNDATION EXAMFINANCIAL ACCOUNTINGAND REPORTING

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S T U D Y G U I D EF o u n d a t i o n e x a mFinancial Accountingand Reporting

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iiSeventh edition 2017First edition 2010The publishers are grateful to the IASB for permission toreproduce extracts from the International FinancialISBN 9781 5097 0301 2Reporting Standards including all International AccountingStandards, SIC and IFRIC Interpretations (the Standards). Previous ISBN 9781 4727 3881 3The Standards together with their accompanyingBritish Library Cataloguing-in-Publication Datadocuments are issued by:A catalogue record for this bookis available from the British Library.The International Accounting Standards Board (IASB)30 Cannon Street, London, EC4M 6XH, United Kingdom.Email: [emailprotected] Web: www.ifrs.orgPublished by BPP Learning Media LtdDisclaimer: The IASB, the International Financial ReportingStandards (IFRS) Foundation, the authors and theAll rights reserved. No part of this publication maypublishers do not accept responsibility for any loss causedby acting or refraining from acting in reliance on the be reproduced or transmitted in any form or by anymaterial in this publication, whether such loss is caused by means or stored in any retrieval system, electronic,negligence or otherwise to the maximum extent permitted mechanical, photocopying, recording or otherwiseby law.without the prior permission of the publisher.Copyright © IFRS FoundationThe contents of this book are intended as a guideAll rights reserved. Reproduction and use rights are strictlyand not professional advice. Although every effortlimited. No part of this publication may be translated,has been made to ensure that the contents of thisreprinted or reproduced or utilised in any form either inbook are correct at the time of going to press, BPPwhole or in part or by any electronic, mechanical or othermeans, now known or hereafter invented, including Learning Media, the Editor and the Author make nophotocopying and recording, or in any information storage warranty that the information in this book is accurateand retrieval system, without prior permission in writingor complete and accept no liability for any loss orfrom the IFRS Foundation. Contact the IFRS Foundation fordamage suffered by any person acting or refrainingfurther details.from acting as a result of the material in this book.The IFRS Foundation logo, the IASB logo, the IFRS forSMEs logo, the “Hexagon Device”, “IFRS Foundation”,Every effort has been made to contact the copyright“eIFRS”, “IAS”, “IASB”, “IFRS for SMEs”, “IASs”, “IFRS”,holders of any material reproduced within this“IFRSs”, “International Accounting Standards” and“International Financial Reporting Standards”, “IFRIC” publication. If any have been inadvertently“SIC” and “IFRS Taxonomy” are Trade Marks of the IFRS overlooked, BPP Learning Media will be pleased toFoundation. make the appropriate credits in any subsequentreprints or editions.Further details of the Trade Marks including details ofcountries where the Trade Marks are registered orapplied for are available from the Licensor on request.We are grateful to CPA Australia for permission toreproduce the Learning Objectives, the copyrightof which is owned by CPA Australia.Printed in AustraliaThis book is printed on FSC accredited stockby an FSC accredited printer.©BPP Learning Media Ltd 2017

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FINANCIAL ACCOUNTING AND REPORTING | iiiFOUNDATION EXAMSInternational Education StandardsCPA Australia is a member of the International Federation of Accountants (IFAC). All foundation exameducation materials are developed in line with IFAC's International Education Standards. Thesestandards provide guidance in establishing the content of professional accounting educationprograms together with the associated assessment. The standards also assist in developing therequired passing standard for accounting education and competence of a professional accountant.The foundation exams provide you with the opportunity to demonstrate your competence in areasrequired for Associate membership of CPA Australia. By demonstrating this entry level knowledge youwill be well positioned to succeed at the CPA Program and ultimately attaining the CPA designation.YOU AND YOUR STUDY PLANThis Study Guide is designed to give you an understanding of what to expect in your exam as well ascovering the fundamentals that you need to know. Exams will be based on the contents of the currentStudy Guide. You will need to check My Online Learning to confirm which version you should usebased on your exam date.There are no specifically recommended hours of study. Each candidate brings their own level ofexperience and knowledge to the foundation exams. The number of study hours required is entirelydependent on your prior knowledge of the subject. You will need to develop your own study plan.Refer to Preparing for foundation exams on page viii.ADDITIONAL LEARNING SUPPORTIf you feel you have gaps in your knowledge after reviewing the Study Guide, there is a range ofoptional additional support to assist in your exam preparation. Additional learning support caters fordifferent learning styles and budgets.Please check the CPA Australia website for more information www.cpaaustralia.com.au/learningsupportSTANDARDS AND LEGISLATIONThe material in this Study Guide has been prepared based upon standards and legislation in effect asat 1 January 2017. Candidates are advised that they should confirm effective dates of standards andlegislation when using additional study resources. Exams are based on the learning objectivesoutlined within this Study Guide.

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iv | INTRODUCTIONCONTENTSPageINTRODUCTIONFoundation exams iiiModule features vPreparing for your foundation exam viiModule summary ixLearning objectives xiMODULE1 The financial reporting environment 12 The accounting theory 973 Financial statements 1474 Application of specific accounting standards 1955 Business combinations 2656 Analysis of financial statements 349Revision questions 387Answers to revision questions 411Before you begin questions: Answers and commentary 425Glossary of terms 443Formulae 453Index 457

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FINANCIAL ACCOUNTING AND REPORTING | vMODULE FEATURESEach module contains a number of helpful features to guide you through each topic.Learning Show the referenced CPA Australia learning objectives.objectivesTopic list Tells you what you will be studying in this module.Introduction Presents a general idea of what is covered in this module.Module summary Summarises the content of the module, helping to set the scene so that youdiagram can understand the bigger picture.Before you begin This is a small bank of questions to test any pre-existing knowledge that youmay have of the module content. If you get them all correct then you maybe able to reduce the time you need to spend on the particular module.There is a commentary section at the end of the Study Guide called Beforeyou begin: Answers and commentary.Section overview This summarises the key content of the particular section that you are aboutto start.Learning objective This box indicates the learning objective covered by the section orreference paragraph to which it relates.LO1.2Definition Definitions of important concepts. You really need to know and understandthese before the exam.Exam comments These highlight points that are likely to be particularly important or relevantto the exam. (Please note that this feature does not apply in everyexamfoundation exam Study Guide.)Worked example This is an illustration of a particular technique or concept with a solution orexplanation provided.Question This is a question that enables you to practise a technique or test yourunderstanding. You will find the solution at the end of the module.Checkpoint Review the key areas covered in the module.

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vi | INTRODUCTIONQuick revision A quick test of your knowledge of the main topics in this module.questionsThe quick revision questions are not a representation of the difficulty orstyle of questions which will be in the exam. They provide you with anopportunity to revise and assess your knowledge of the key conceptscovered in the materials so far. They are not a practice exam, but rather ameans to reflect on key concepts and not as the sole revision for the exam.Revision The revision questions are not a representation of the difficulty or style ofquestions questions which will be in the exam. They provide you with an opportunityto revise and assess your knowledge of the key concepts covered in thematerials so far. They are not a practice exam, but rather a means to reflecton key concepts and not as the sole revision for the exam.Case study This is a practical example or illustration, usually involving a real worldscenario.Formula to learn These are formulae or equations that you need to learn as you may need toapply them in the exam.Bold text Throughout the Study Guide you will see that some of the text is in boldtype. This is to add emphasis and to help you to grasp the key elementswithin a sentence and paragraph.

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FINANCIAL ACCOUNTING AND REPORTING | viiPREPARING FOR YOUR FOUNDATION EXAMSTUDY PLAN Review all the learning objectives thoroughly. Use the topic exam weightings listed at the end ofthe learning objectives to develop a study plan to ensure you provide yourself with enough time torevise each learning objective. Don't leave your study to the last minute. You may need more time to explore learning objectivesin greater detail than initially expected. Be confident that you understand each learning objective. If you find that you are still unsure afterreading the Study Guide, seek additional information from other resources such as text books,supplementary learning materials or tuition providers.STUDY TECHNIQUES In addition to being able to complete the revision and self-assessment questions in the StudyGuide, ensure you can apply the concepts of the learning objectives rather than just memorisingresponses. Some exams have formulae and discount tables available to candidates throughout the exams. MyOnline Learning lists the tools available for each exam. Check My Online Learning on a weekly basis to keep track of announcements or updates to theStudy Guide.TIPS FOR EXAMS Plan to arrive at the exam centre at least 15 minutes before your exam. Allow for possible delayswith public transport or traffic. You have three hours and fifteen minutes to complete the exam. As soon as you commence theexam your exam clock in the top right hand corner of the screen begins to count down. Watch yourtime carefully.ANSWERING MULTIPLE CHOICE QUESTIONSFoundation exams are a series of 100 multiple choice questions. Each question will contain fourpossible options.Step 1 Attempt every question. Read the question thoroughly. You may prefer to work out theanswer before looking at the options, or you may prefer to look at the options at thebeginning. Adopt the method that works best for you.Step 2 Read the four options and see if one matches your own answer. Be careful with numericalquestions, as some options are designed to match answers that incorporate commonerrors. Check that your calculation is correct. Have you followed the requirement exactly?Have you included every step of the calculation?Step 3 You may find that none of the options matches your answer. Re-read the question to ensure that you understand it and are answering therequirement. Eliminate any obviously wrong answers. Consider which of the remaining answers is the most likely to be correct and select theoption.

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viii | INTRODUCTIONStep 4 If you are still unsure, you can flag the question and continue to the next question. Somequestions will take you longer to answer than others. Try to reduce the average time perquestion, to allow yourself to revisit problem questions at the end of the exam.Revisit unanswered questions. A review tool is available at the end of the exam, whichallows you to Review Incomplete or Review Flagged questions. When you come back toa question after a break you often find you are able to answer it correctly straight away.You are not penalised for incorrect answers, so never leave a question unanswered!COMPUTER-BASED EXAM NAVIGATIONYour computer-based exam has the following functions: Navigation– You can select your answer by: clicking on the circle to the left of the option, or typing the lettercorresponding to the option.– To move through the exam, you use the 'Next' or 'Previous' buttons on the bottom of thescreen. The function of each button is selected by your mouse, or with a combination ofkeyboard keys. For example, you can select the 'Next' button by clicking it with the mouse, orby typing ALT + N.– The 'Next' button moves you from one screen to the next screen. If you wish to go back andview the screen you just viewed, click the 'Previous' button or type ALT + P.– There is also a 'Navigator' button on the bottom of the screen which allows you to click aheadto any question in the exam. This button can be accessed using your mouse or ALT + V.'Navigator' allows you to see a list of all questions and their status including'Incomplete'/'Complete' and 'Unseen'. Any questions you have flagged for review will also beshown in this view. Select for review– There is a flag in the upper right corner of your exam screen labelled 'Flag for Review'.Alternatively you can use ALT + F to flag a question. You mark an exam question to review at alater time by clicking on this flag. The flag will appear filled-in once it is selected. You may markany exam question for later review, whether you select an answer or not. Review Screen– After finishing the last exam question, you will see a review screen. This lists every examquestion. If you clicked the 'Flag for Review' flag on a question screen, that question appears onthe Review Screen marked with the flag filled in.– If you skipped any exam questions, these will be labelled as 'Incomplete' even if you did notselect them for review.– From the Review Screen you can choose to:1. review all of the questions in the exam by clicking 'Review All';2. individually select questions for review (click on the question number) or choose morequestions for review (click on the flags corresponding to the questions);3. review all questions marked as incomplete by clicking 'Review Incomplete';4. begin reviewing the selected review questions by clicking 'Review Flagged'; or5. exit by clicking 'End Review' – this will also end your exam.