PAGE 1

AIM
To develop knowledge and understanding
of the techniques used to prepare financial
statements, including necessary underlying
records, and the interpretation of financial
statements for incorporated enterprises,
partnerships and sole traders.
OBJECTIVES
On completion of this paper candidates
should be able to:
describe the role and function of
external financial reports and identify
their users
explain the accounting concepts and
conventions used in preparing financial
statements
record and summarise accounting data
maintain records relating to non-current
asset acquisition and disposal
prepare basic financial statements for
sole traders, partnerships, incorporated
enterprises and simple groups
appraise financial performance and the
position of an organisation through the
calculation and review of basic ratios
demonstrate the skills expected in Part 1.
POSITION OF THE PAPER IN THE
OVERALL SYLLABUS
No prior knowledge is required before
commencing study for Paper 1.1.
The basic financial accounting in Paper 1.1
is developed in Paper 2.5 Financial
Reporting and Paper 3.6 Advanced
Corporate Reporting. Knowledge from
Preparing Financial Statements (INT)
aper 1.1
3.6 Advanced Corporate Reporting 3.1 Audit and Assurance Services
2.5 Financial Reporting
1.1 Preparing Financial Statements
2.6 Audit and Internal Review
Paper 1.1 provides the background to
Paper 2.6 Audit and Internal Review.
SYLLABUS CONTENT
Note: The extent to which accounting
standards are examinable is indicated half-
yearly in student accountant - in February
for the J une examination and in September
for the December examination.
1 General framework
(a) Types of business entity incorporated
entities, partnerships and sole traders.
(b) Forms of capital and capital
structures in incorporated entities.
(c) The roles of the International
Accounting Standards Board (IASB),
the Standards Advisory Council
(SAC) and the International Financial
Reporting Interpretations Committee
(IFRIC).
(d) Application of International Accounting
Standards (IASs) and International
Financial Reporting Standards (IFRSs)
to the preparation and presentation of
financial statements.
(e) The IASBs Framework for the
Preparation and Presentation of
Financial Statements (paragraphs 1
to 46 only).
2 Accounting concepts and principles
(a) Basic accounting concepts and
principles as stated in the IASBs
Framework for the Preparation and
Presentation of Financial Statements
and relevant International
Accounting Standards
(b) Other accounting concepts
(i) historical cost
(ii) money measurement
(iii) entity
(iv) dual aspect
3 Double-entry bookkeeping and
accounting systems
(a) Double-entry bookkeeping and
accounting systems
PAGE 1
Paper 1.1
PAGE 2
Preparing Financial Statements (INT) continued
(i) form and content of accounting
records (manual and computerised)
(ii) books of original entry, including
journals
(iii) accounts receivable and
accounts payable ledgers
(iv) cash book
(v) general ledger
(vi) trial balance
(vii) accruals, prepayments and
adjustments
(viii) asset registers
(ix) petty cash.
(b)Confirming and correcting mechanisms
(i) control accounts
(ii) bank reconciliations
(iii) suspense accounts and the
correction of errors.
(c) General principles of the operation of
a sales tax.
(d) Computerised accounting systems.
4 Accounting treatments
(a) Non-current assets, tangible and
intangible
(i) distinction between capital and
revenue expenditure
(ii) accounting for acquisitions and
disposals
(iii) depreciation definition,
reasons for and methods,
including straight line, reducing
balance and sum of digits
(iv)research and development
(v) elementary treatment of goodwill.
(b) Current assets
(i) inventory
(ii) accounts receivable, including
accounting for irrecoverable
debts and allowances for
receivables
(iii) cash.
(c) Current liabilities and accruals.
(d) Shareholders equity.
(e) Events after the balance sheet date.
(f) Contingencies.
5 Financial statements
(a) Objectives of financial statements.
(b) Users and their information needs.
(c) Key features of financial statements
(i) balance sheet
(ii) income statement
(iii) cash flow statement
(iv) notes to the financial statements
(examined to a limited extent
see d (iii) below).
(d) Preparation of financial statements for:
(i) sole traders, including incomplete
records techniques
(ii) partnerships
(iii) limited liability companies,
including income statements and
balance sheets for internal purposes
and for external purposes and
preparation of basic cash flow
statements for limited liability
companies (excluding group cash
flow statements), all in accordance
with International Accounting
Standards. The following notes
to the financial statements will be
examinable:
Statement of changes in equity
Non-current assets
Events after the balance sheet
date
Contingent liabilities and
contingent assets
Research and development
expenditure
(iv) groups of companies
preparation of a basic
consolidated balance sheet for a
company with one subsidiary.
6 Interpretation
(a) Ratio analysis of accounting
information and basic interpretation.
EXCLUDED TOPICS
The syllabus content outlines the areas for
assessment. No questions will be asked
on: clubs and societies, or goodwill arising
on change of personnel in partnerships.
KEY AREAS OF THE SYLLABUS
The objective of Paper 1.1, Preparing
Financial Statements, is to ensure that
candidates have the necessary basic
accounting knowledge and skill to progress
to the more advanced work of Paper 2.5
Financial Reporting. The two main skills
required are:
The ability to prepare basic financial
statements and the underlying accounting
records on which they are based.
An understanding of the principles on
which accounting is based.
PAGE 2
PAGE 3
Preparing Financial Statements (INT) continued
The key topic areas are as follows:
preparation of financial statements for
limited liability companies for internal
purposes or for publication
preparation of financial statements for
partnerships and sole traders (including
incomplete records)
basic group accounts consolidated
balance sheet for a company with one
subsidiary
basic bookkeeping and accounting
procedures
accounting conventions and concepts
interpretation of financial statements
cash flow statements
accounting standards (as listed in the
exam notes)
APPROACH TO EXAMINING THE SYLLABUS
The paper based examination is a three
hour paper constructed in two sections.
Both sections will draw from all parts of
the syllabus and will contain both
computational and non-computational
elements.
Number
of Marks
Section A: 25 compulsory multiple
choice questions (2 marks each) 50
Section B: 5 compulsory
questions (8 12 marks each) 50
100
Paper 1.1 can also be taken as a three
hour computer based examination.
ADDITIONAL INFORMATION
Candidates need to be aware that questions
involving knowledge of new examinable
regulations will not be set until at least six
months after the last day of the month in
which the regulation was issued.
The Study Guide provides more detailed
guidance on the syllabus. Examinable
documents are listed in the Exam Notes
section of the student accountant, in
February for the J une examination and in
September for the December examination.
RELEVANT TEXTS
There are a number of sources from which
you can obtain a series of materials written
for the ACCA examinations. These are
listed below:
ACCAs approved publishers:
BPP Professional Education
Contact number: +44(0)20 8740 2222
Website: www.bpp.com
Kaplan Publishing Foulks Lynch
Contact number: +44(0)118 989 0629
Website: www.kaplanfoulkslynch.com
Additional reading:
Accountancy Tuition Centre (ATC)
International

Contact number: +44(0)141 880 6469
Website: www.atc-global.com
International Financial Publishing (IFP)
Contact number: +44(0)148 322 5746
Website: www.ifpbooks.com
These publications are based on
international terminologies and
accounting standards.
Candidates may also find the following
texts useful. However, these publications
are based on UK terminology and
accounting standards.
Texts covering the whole syllabus:
F Wood and A Sangster Business
Accounting 1 (10th Edition) Pitman ISBN
0273681494(excluding chapters 21,
36, 37, 38, 40, 42, 43, 44, 45, 46, 48)
plus chapters 3, 8, 10, 11, 12, 13, 14,
16, 17, 18, 27, 28, and 29 of Business
Accounting 2 (10th Edition) Pitman ISBN
0273681494
Wider reading is also desirable, especially
regular study of relevant articles in ACCA's
monthly magazine student accountant.
PAGE 3
PAGE 4
Preparing Financial Statements (INT) continued
STUDY SESSIONS
1 Introduction to Accounting
(a) Define accounting recording,
analysing and summarising
transaction data.
(b) Explain types of business entity
(i) sole trader
(ii) partnership
(iii) limited liability company.
(c) Explain users of financial statements
and their information needs.
(d) Explain the main elements of
financial statements:
(i) balance sheet
(ii) income statement.
(e) Explain the purpose of each of the
main statements.
(f) Explain the nature, principles and
scope of accounting.
(g) Explain the regulatory system:
International Accounting
Standards Board (IASB), the
Standards Advisory Council (SAC)
and the International Financial
Reporting Interpretations
Committee (IFRIC).
(h) Explain the difference between
capital and revenue items.
2 Basic balance sheet and income
statement
(a)Explain how the balance sheet
equation and business entity
convention underlie the balance sheet.
(b)Define assets and liabilities.
(c) Explain how and why assets and
liabilities are disclosed in the
balance sheet.
(d) Draft a simple balance sheet in
vertical format.
(e) Explain the matching convention and
how it applies to revenue and expenses.
(f) Explain how and why revenue and
expenses are disclosed in the income
statement.
(g) Illustrate how the balance sheet and
income statement are interrelated.
(h) Draft a simple income statement in
vertical format.
(i) Explain the significance of gross
profit and gross profit as a
percentage of sales.
3 & 4 Bookkeeping Principles
(a) Identify the main data sources and
records in an accounting system.
(b) Explain the functions of each data
source and record.
(c) Explain the concept of double entry and
the duality concept.
(d) Outline the form of accounting records
in a typical manual system.
(e) Outline the form of accounting records
in a typical computerised system.
(f) Explain debit and credit.
(g) Distinguish between asset, liability,
revenue and expense accounts.
(h)Explain the meaning of the balance on
each type of account.
(i) Illustrate how to balance a ledger account.
(j) Record cash transactions in ledger
accounts.
(k) Record credit sale and purchase
transactions in ledger accounts.
(l) Explain the division of the ledger into
sections.
(m) Record credit sale and purchase
transactions using day books.
(n)Explain sales and purchases returns
and demonstrate their recording.
(o) Explain the general principles of the
operation of a sales tax and prepare the
consequent accounting entries.
(p) Explain the need for a record of petty
cash transactions.
(q) Illustrate the typical format of the petty
cash book.
(r) Explain the importance of using the
imprest system to control petty cash.
(s) Extract the ledger balances into a trial
balance.
(t) Prepare a simple income statement and
balance sheet from a trial balance.
(u) Explain and illustrate the process of
closing the ledger accounts in the
accounting records when the financial
statements have been completed.
PAGE 4
PAGE 5
5 The journal; ledger control accounts;
bank reconciliations
(a) Explain the uses of the journal.
(b) Illustrate the use of the journal and
the posting of journal entries into
ledger accounts.
(c) Explain the types of error which may
occur in bookkeeping systems,
identifying those which can and
those which cannot be detected by
preparing a trial balance.
(d) Illustrate the use of the journal in
correcting errors, including the use
of a suspense account.
(e) Prepare statements correcting profit
for errors discovered.
(f) Explain the nature and purpose of
control accounts for the accounts
receivable and accounts payable
ledgers.
(g) Explain how control accounts relate
to the double entry system.
(h) Construct and agree a ledger control
account from given information.
(i) Explain and prepare bank
reconciliation statements including
the need for entries in the cash book
when reconciling.
6 Computerised accounting systems
(a) Compare manual and computerised
accounting systems.
(b) Identify the advantages and
disadvantages of computerised
systems.
(c) Describe the main elements of a
computerised accounting system.
(d) Describe typical data processing work.
(e) Explain the use of integrated
accounting packages.
(f) Explain the nature and use of micro-
computers.
(g) Explain other business uses of
computers.
(h) Explain the nature and purpose of
spreadsheets.
(i) Explain the nature and purpose of
database systems.
7 The financial statements of a sole
trader 1: inventory, accruals and
prepayments
(a)Revise the format of the income
statement and balance sheet from
Sessions 1 and 2.
(b)Explain the need for adjustments
for inventory in preparing financial
statements.
(c) Illustrate income statements with
opening and closing inventory.
(d) Explain and demonstrate how
opening and closing inventory are
recorded in the inventory account.
(e) Discuss alternative methods of
valuing inventory.
(f) Explain IASB requirements for
inventories.
(g) Explain the use of continuous and
period end inventory records.
(h) Explain the need for adjustments for
accruals and prepayments in
preparing financial statements.
(i) Illustrate the process of adjusting for
accruals and prepayments in preparing
financial statements.
(j) Prepare financial statements for a sole
trader including adjustments for
inventory, accruals and prepayments.
(k) Explain and demonstrate how to
calculate the value of closing
inventory from given movements in
inventory levels, using FIFO (first in
first out) and AVCO (average cost).
8 The financial statements of a sole
trader 2: depreciation, irrecoverable
debts and allowances for receivables
(a)Revise the difference between non-
current assets and current assets.
(b) Define and explain the purpose of
depreciation.
(c) Explain the advantages and
disadvantages of the straight line,
reducing balance and sum of the digits
methods of depreciation and make
necessary calculations.
(d) Explain the relevance of consistency
and subjectivity in accounting for
depreciation.
(e) Explain and illustrate how
depreciation is presented in the
income statement and balance
sheet.
(f) Explain and illustrate how
depreciation expense and
accumulated depreciation are
recorded in ledger accounts.
(g) Explain the inevitability of
irrecoverable debts in most
businesses.
(h)Illustrate the bookkeeping entries to
Preparing Financial Statements (INT) continued
PAGE 5
PAGE 6
write off an irrecoverable debt and
the effect on the income statement
and balance sheet.
(i) Illustrate the bookkeeping entries to
record irrecoverable debts
recovered.
(j) Explain the difference between
writing off an irrecoverable debt
and making an allowance for
receivables.
(k) Explain and illustrate the bookkeeping
entries to create and adjust an
allowance for receivables.
(l) Illustrate how to include movements
in the allowance for receivables in
the income statement and how the
closing balance of the allowance
may appear in the balance sheet.
(m) Prepare a set of financial
statements for a sole trader from a
trial balance, after allowing for
accruals and prepayments,
depreciation, irrecoverable debts
and allowances for receivables.
9 & 10 Incomplete records
(a) Explain techniques used in incomplete
record situations:
(i) Calculation of opening capital
(ii) Use of ledger accounts to calculate
missing figures
(iii) Use of cash and/or bank summaries
(iv)Use of given gross profit percentage
to calculate missing figures.
(b) Explain and illustrate the calculation of
profit or loss as the difference between
opening and closing net assets.
11Revise all work to date
12 & 13 Partnership Accounts
(a) Define the circumstances creating a
partnership.
(b) Explain the advantages and
disadvantages of operating as a
partnership, compared with
operating as a sole trader or limited
liability company.
(c) Explain the typical contents of a
partnership agreement, including
profit-sharing terms.
(d) Explain the accounting differences
between partnerships and sole
traders:
(i) Capital accounts
(ii) Current accounts
(iii) Division of profits.
(e) Explain and illustrate how to record
partners shares of profits / losses
and their drawings in the accounting
records and financial statements.
(f) Explain and illustrate how to account
for guaranteed minimum profit
share.
(g) Explain and illustrate how to
account for interest on drawings.
(h) Draft the income statement,
including division of profit, and
balance sheet of a partnership from
a given trial balance.
Note: Goodwill arising on the
admission and retirement of partners,
amalgamation and dissolution are not
examinable. However, questions on
partnership income statements may
include the effect of the admission of
new partners and the retirement of
partners on the profit-sharing
arrangements.
14 Accounting concepts and conventions;
the IASBs Framework for the
Preparation and Presentation of
Financial Statements (the Framework)
and the IASB standard on the
presentation of financial statements
(a) Explain the need for an agreed
conceptual framework for financial
accounting.
(b) Explain the importance of the
following accounting conventions
(not mentioned in the Framework):
(i) Business entity
(ii) Money measurement
(iii) Duality
(iv) Historical cost
(v) Realisation
(vi)Time interval.
(c) Revise the users of financial
statements from Session 1.
(d) Explain the qualitative
characteristics of financial
statements as described in paras. 24
to 46 of the Framework (Revision
from Session 1).
(e) Explain the IASB requirements
relating to accounting policies.
PAGE 6
Preparing Financial Statements (INT) continued
PAGE 7
(f) Explain the advantages and
disadvantages of historical cost
accounting (HCA) in times of
changing prices.
(g) Explain in principle the main
alternatives to HCA:
(i) Current purchasing power
accounting (CPP)
(ii) Current cost accounting (CCA)
Note: computational questions on
CPP and CCA will not be set.
(h) Explain the IASB requirements
governing revenue recognition
15Accounting for limited liability
companies 1 basics
Note: The inclusion of an introductory
coverage of company accounts at this
point is to enable students to practise
the work so far on financial statements
using questions on limited liability
companies, and also to facilitate
understanding of reserves referred to in
the next Session.
(a) Explain the differences between a
sole trader and a limited liability
company.
(b) Explain the advantages and
disadvantages of operating as a
limited liability company rather than
as a sole trader.
(c) Explain the capital structure of a
limited liability company including:
(i) Authorised share capital
(ii) Issued share capital
(iii) Called up share capital
(iv) Paid up share capital
(v) Ordinary shares
(vi) Preference shares
(vii) Loan notes.
(d)Explain and illustrate the share
premium account
(e) Explain and illustrate the other
reserves which may appear in a
company balance sheet.
(f) Explain why the heading retained
earnings appears in a company
balance sheet.
(g) Explain and illustrate the recording
of dividends
(h)Explain the impact of income tax on
company profits and illustrate the
ledger account required to record it.
(i) Record income tax in the income
statement and balance sheet of a
company.
(j) Draft an income statement and
balance sheet for a company for
internal purposes.
16Recording and presentation of
transactions in non-current
assets; liabilities and provisions
(a) Explain and illustrate the ledger
entries to record the acquisition and
disposal of non-current assets, using
separate accounts for non-current
asset cost and accumulated
depreciation.
(b)Explain and illustrate the inclusion
of profits or losses on disposal in
the income statement.
(c) Explain and record the revaluation
of a non-current asset in ledger
accounts and in the balance sheet.
(d) Explain why, after an upward
revaluation, depreciation must be
based on the revised figure, and for
revalued assets sold, the consequent
transfer from revaluation reserve to
retained earnings as revaluation
surplus becomes realised.
(e) Make the adjustments necessary if
changes are made in the estimated
useful life and/or residual value of a
non-current asset.
(f) Explain and illustrate how non-
current asset balances and
movements are disclosed in
company financial statements.
(g) Explain the distinction between
current and non-current liabilities.
(h)Explain the difference between
liabilities and provisions.
(i) Explain the requirements of
International Accounting Standards
as regards current assets and current
liabilities.
17 Goodwill, Research and Development
(a) Define goodwill.
(b) Explain the factors leading to the
creation of non-purchased goodwill.
(c) Explain the difference between
purchased and non-purchased
Preparing Financial Statements (INT) continued
PAGE 7
PAGE 8
goodwill.
(d) Explain why non-purchased goodwill
is not normally recognised in
financial statements.
(e) Explain how purchased goodwill
arises and is reflected in financial
statements.
(f) Adjust the value of purchased
goodwill to reflect impairment.
(g) Define research and development.
(h) Classify expenditure as research or
development.
(i) Calculate amounts to be capitalised
as development expenditure from
given information.
(j) Disclose research and development
expenditure in the financial statements.
18Events after the Balance Sheet Date
and Contingencies
(a) Define an event after the balance
sheet date.
(b) Distinguish between adjusting and
non-adjusting events and explain the
methods of including them in
financial statements.
(c) Classify events as adjusting or non-
adjusting.
(d) Draft notes to company financial
statements including requisite details
of events after the balance sheet date.
(e) Define contingent liability and
contingent asset.
(f) Explain the different ways of
accounting for contingent liabilities
and contingent assets according to
their degree of probability.
(g) Draft notes to company financial
statements including requisite details
of contingent liabilities and
contingent assets.
19, 20 & 21 Accounting for Limited
Liability Companies 2 Advanced
(a) Revise the work of Session 15 and
the preparation of financial
statements for limited liability
companies for internal purposes
including the treatment of income
tax and dividends.
(b) Revise the work of Session 15 on
company capital structure, including
equity shares, preference shares and
loan notes.
(c) Outline the advantages and
disadvantages of raising finance by
borrowing rather than
by the issue of ordinary or preference
shares.
(d) Define and illustrate gearing (leverage).
(e) Define a bonus (capitalisation) issue
and its advantages and disadvantages.
(f) Record a bonus (capitalisation) issue in
ledger accounts and show the effect in
the balance sheet.
(g) Define a rights issue and its advantages
and disadvantages.
(h) Record a rights issue in ledger accounts
and show the effect in the balance sheet.
(i) Revise the definition of reserves and the
different types of reserves.
(j) Explain the need for regulation of
companies in accounting standards.
(k) Explain the requirements of International
Accounting Standards governing financial
statements (excluding group aspects):
(i) Presentation of Financial
Statements
(ii) Accounting policies, changes in
accounting estimates and errors
(iii) Non-current assets held for sale and
discontinued operations (basic
definitions and disclosure
requirements only)
(l) Explain and prepare the notes to
financial statements required for the
syllabus:
(i) Statement of changes in equity
(ii) Details of non-current assets
(iii) Details of events after the balance
sheet date
(iv)Details of contingent liabilities and
contingent assets
(v) Details of research and development
expenditure.
(m) Prepare financial statements for
publication complying with relevant
accounting standards as detailed above.
22 Revise all work to date
23Cash flow statements
(a) Explain the differences between
profit and cash flow.
(b) Explain the need for management to
control cash flow.
(c) Explain the value to users of
financial statements of a cash flow
statement.
(d) Explain the IASB requirements for
cash flow statements (excluding
PAGE 8
Preparing Financial Statements (INT) continued
PAGE 9
group aspects).
(e) Explain the inward and outward
flows of cash in a typical company.
(f) Calculate the figures needed for the
cash flow statement including
among others:
(i) Cash flows from operating
activities (indirect method)
(ii) Cash flows from investing
activities.
(g) Calculate cash flow from operating
activities using the direct method.
(h) Review of information to be derived
by users from the cash flow
statement (see also Sessions 26
27).
(i) Prepare cash flow statements from
given balance sheets with or without
an income statement.
24& 25 Basic consolidated accounts
(a) Define a parent company, subsidiary
company and group.
(b) Explain the IASB requirements
defining which companies must be
consolidated.
(c) Prepare a consolidated balance
sheet for a parent with one wholly-
owned subsidiary (no goodwill
arising).
(d)Explain how to calculate the
retained earnings balance for the
consolidated balance sheet.
(e) Explain how other reserves (share
premium account and revaluation
reserve) are dealt with on
consolidation.
(f) Introduce the concept of goodwill
on acquisition and illustrate the
effect on the consolidated balance
sheet.
(g) Adjust the value of goodwill on
aquisition to reflect impairment.
(h) Explain and illustrate a methodical
approach to calculating the
necessary figures for the
consolidated balance sheet.
(i) Introduce the concept of minority
interests in subsidiaries and illustrate
the effect on the consolidated
balance sheet.
(j) Explain and illustrate how the
calculation of the minority interest is
made.
26 & 27 Interpretation of Financial
Statements
(a) Revise users of financial statements
and their information needs.
(b) Explain the advantages and
disadvantages of interpretation
based on financial statements.
(c) Explain the factors forming the
environment in which the business
operates.
(d) Explain the uses of ratio analysis.
(e) Explain and calculate the main ratios
to be used in interpreting financial
statements to appraise:
(i) Profitability
(ii) Liquidity
(iii) Working capital efficiency
(iv) Financial risk
(v) Performance from an investors
point of view.
(f) Explain the working capital
cycle (or cash operating cycle)
(g) Explain normal levels of certain
ratios.
(h)Formulate comments on
movements in ratios between one
period and another or on
differences between ratios for
different businesses.
(i) Explain the factors which may
distort ratios, leading to unreliable
conclusions.
(j) Prepare and comment on a
comprehensive range of ratios for a
business.
28 Revision
Preparing Financial Statements (INT) continued
PAGE 9