F3.Ffa Exam Report.j18

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Examiner’s report

FA/FFA papers
For CBE exams covering September 2017 to June 2018

General Comments

There were two sections to the examination paper and all of the questions were compulsory.
Section A consisted of 35 multiple choice questions (two marks each) which covered a broad
range of syllabus topics. Section B had two longer questions (15 marks each) testing the
candidates’ understanding and application of financial accounting skills in more depth.

The following paragraphs report on each section and focus on some of the key learning points.

Section A

It was pleasing to see that the majority of candidates attempted all of the questions. Candidates
preparing for the next examination of FA/FFA are advised to work through the sample questions
discussed here and to carefully review how each of the correct answers were derived. The
following three questions are reviewed with the aim of giving future candidates an indication of the
types of questions asked, guidance on dealing with exam questions and to provide a technical
debrief on the topics covered by the specific questions selected.

Sample Questions for Discussion

Example 1

M Co’s trial balance does not agree and therefore a suspense account with a debit balance of
$3,000 has been opened.

Which of the following errors could explain this difference?

A A receipt of $3,000 from a credit customer has been credited to the


payables control account instead of the receivables control account
B The interest received account of $1,500 has been omitted from the trial
balance

C Equipment repairs of $3,000 have been incorrectly capitalised as part of


plant and equipment

D A $1,500 bank balance has been shown in the trial balance as an


overdraft of $1,500

This question tests a candidates understanding of the errors that may occur in financial statements
and whether an impact on the suspense account will arise.

Option C is an error of principle where M Co has incorrectly capitalised an expense by performing


the following double entry:

Examiner’s report – FA/FFA September 2017-June 2018 1


Dr Plant and equipment $3,000
Cr Bank $3,000

As an equal debit and credit entry has been performed there will be no impact on the suspense
account. M Co can correct this error of principle by debiting equipment repairs and crediting plant
and equipment.

Option A is an error of commission where M Co has completed the following double entry in error:

Dr Bank $3,000
Cr Payables control account $3,000

The credit entry should have been recorded within the receivables control account. Again, this
error will not impact the suspense account. M Co can fix the error by debiting payables control
account and crediting receivables control account.

Option B is an error of omission where the account is omitted from the trial balance entirely.
Interest received is a credit balance and for the trial balance to balance a suspense account on the
credit side would be required, not the debit side.

Option D will impact the suspense account as a positive bank balance (debit) has incorrectly been
recorded as an overdraft (credit) on the trial balance. This will result in debits being understated by
$1,500 and credits being overstated by $1,500. The error will have resulted in a debit entry to the
suspense account of $3,000 in order for the trial balance to balance.

Therefore, the correct answer is D.

Example 2

On 1 October 20X6, N Co had 400,000 25c ordinary shares in issue. On 1 January 20X7, there
was a rights issue of one for five at $1.50. The entry in the share premium account was omitted in
error and as a result the trial balance at 30 September 20X7 did not agree.

What balance would have been entered in the suspense account when it was opened?

A $400,000 Dr
B $400,000 Cr
C $100,000 Dr
D $100,000 Cr

This question tests a candidate’s ability to record a share issue in the financial statements. To
identify the amount that would have been recorded in the suspense account it would be useful to
consider how the share issue would have been recorded in the financial statements in full.

Examiner’s report – FA/FFA September 2017-June 2018 2


On 1 January 20X7 the rights issue would have resulted in a further 80,000 shares being issued
(400,000 ordinary shares x 1/5) and would generate cash of $120,000 (80,000 x $1.50). On this
date the share issue should have been recorded as follows:

Dr Bank $120,000
Cr Share capital (80,000 x 25c) $20,000
Cr Share premium (40,000 x (1.50 – 0.25)) $100,000

Therefore, the answer is D as it is a credit to share premium that has been omitted from the
financial statements.

Distractors A & B arise where the 400,000 shares are mistaken as a monetary amount of
$400,000. If this were the case, the number of shares in issue would have been 1,600,000
($400,000 / 25c) which in turn would result in 320,000 new shares being issued under the rights
(1,600,000 x 1/5). The share premium arising would have been $400,000 (320,000 x ($1.50 –
0.25)).

Example 3

D Co’s year-end balance on the receivables control account does not agree to the total of the list of
receivables ledger balances of $560,000. The following errors have been identified:

(1) An irrecoverable receivable balance of $30,000 has been correctly written off in the
receivables control account but no adjustment has been made in the relevant customer’s
account in the receivables ledger

(2) Early settlement discounts of $12,500, which were not expected to be taken at the time the
invoice was raised, have been omitted from both the receivables control account and the
receivables ledger balances

What was the balance on the receivables control account AFTER the errors were corrected?

A $505,000
B $530,000
C $542,500
D $517,500

The receivables control account and the list of receivables should agree. To correctly answer this
question, candidates need to use the relevant information given about the list of receivables
reconciliation. The irrecoverable receivable has not been adjusted in the list of balances so will
need to be taken into account in the reconciliation. The early settlement discount was not
expected to be taken at the time the invoice was raised and therefore, the sale and receivable
would have been recorded at the gross amount in accordance with IFRS 15 Revenue from
Contracts with Customers. The correct adjustment for this discount when taken would be to Dr

Examiner’s report – FA/FFA September 2017-June 2018 3


Revenue $12,500 Cr Receivables control account $12,500. The total list of receivables would also
need to be adjusted.

Reconciliation back to the receivable control account balance:

$
Total list of receivables ledger balances 560,000
Irrecoverable debt write off (30,000)
Settlement discounts (12,500)
Adjusted receivables 517,500

Therefore the correct answer is D.

Section B

Section B type questions will test the preparation of basic financial statements (including
Statements of cash flows) for single entities (single companies or sole traders) and simple
consolidated financial statements. It can also include some basic accounts interpretation aspects.
The standard of answers in section B was generally good and the majority of candidates attempted
both questions. The following comments explain how candidates might be able to improve their
performance in the exam.

Comments on the exams:

Single entity questions:

Candidates should ensure that they have a good understanding of double entry book-keeping and
how an adjustment made in the statement of profit or loss might impact elsewhere (for example in
the statement of financial position). The following comments may be of assistance when preparing
the required statement for a single entity:

 Read the requirement first to determine the statement that you have been asked to
prepare.
 Carefully read through the trial balance and decide what should be included in your
required statement (i.e. have you been asked to prepare a statement of profit or loss or a
statement of financial position). Remember not everything given in a trial balance will need
to be used for the statement you are being asked to prepare.
 Adjustments or calculations may be required to arrive at a figure for the financial statements
you are being asked to prepare or asked as a separate task within the question.
 Select the correct format and title for the statement of profit or loss or statement of financial
position in accordance with IAS 1.
 Attempt all parts of the question.

 Common adjustments for depreciation are required in these questions. Ensure that you are
able to calculate depreciation using both the straight line and reducing balance methods
and adopt the correct method relevant to the information in your question.

Examiner’s report – FA/FFA September 2017-June 2018 4


Basic consolidation questions:

A thorough understanding of consolidation techniques is also required, including the calculation of


key figures such as goodwill, non-controlling interests and consolidated retained earnings. When
preparing consolidated financial statements candidates should:

 Carefully read through the information provided.


 Select the correct title i.e. “consolidated statement of financial position at (date)” or
“consolidated statement of profit or loss for (date)”.
 You are expected to know how to calculate net assets, goodwill and non-controlling
interest. You may be asked to select both headings and figures to complete a working or
identify the correct formula. Ensure you practice theses workings and know what should be
added and/or deducted to arrive at the correct figure. Add the assets and liabilities of the
parent and subsidiary together on a line-by-line basis. Do not time apportion the figures if it
has been a mid-year acquisition as the statement of financial position must show 100% of
the assets and liabilities that the parent controls.
 Add income and expenses of the parent and subsidiary together on a line-by-line basis
however time apportion profit or loss items where relevant.ie the subsidiary has been
acquired during the current financial year
 Record the equity share capital (and share premium) of the parent only.
 The group share of the subsidiary’s post-acquisition profit is calculated and added to group
retained earnings. Be extra careful when there is a mid-year acquisition of a subsidiary as
you will need to time apportion the profit for the year to determine the post-acquisition
amount.
 Ensure when calculating unrealised profit that you correctly apply mark-up or margin
dependent upon information relevant to your question.

Candidates should read the question carefully and follow the instructions contained therein. For
example, some questions will tell you to use $’000 or $m. Others will give you instructions to
ignore brackets or signs when entering negative numbers. Note also that where a pro-forma
answer shows headings such as “Less: cost of sales”, that no minus sign or brackets should be put
round the figure as the heading already indicates that the figure is negative. In questions requiring
the preparation of statements of cash flows, all figures should be entered as positive and there are
drop down lists for candidates to indicate whether the figure is positive or negative.

Conclusion

Both the FA and FFA exam require candidates to have a thorough understanding of financial
accounting techniques and the capability of preparing financial statements for both single and
group entities. Candidates are advised to engage with practise questions and to know the formats
of financial statements. In the exam you should ensure you answer/attempt all questions in the
time available.

Examiner’s report – FA/FFA September 2017-June 2018 5

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