fac1601-exam-pack

Contents Study & Exam Pack for FAC1601 © 2014 ...................................................................................................... 1 CHAPTER 1: INTRODUCTION ......................................................................................................................... 4 FINANCIAL STATEMENTS OF A PARTNERSHIP .............................................................................................. 7 STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME .............................................. 7 OCTOBER-NOVEMBER 2011....................................................................................................................11 B. PARTNERSHIPS ........................................................................................................................................18 STATEMENT OF CHANGES IN EQUITY .........................................................................................................18 OCTOBER-NOVEMBER 2010....................................................................................................................18 MAY-JUNE 2012 ......................................................................................................................................22 MAY-JUNE 2011 ......................................................................................................................................28 Classification of Components .................................................................................................................29 Rationale - Why the balance sheet always balances? ............................................................................30 Purpose & Importance ............................................................................................................................31 MAY- JUNE 2011 .....................................................................................................................................32 OCTOBER-NOVEMBER 2012....................................................................................................................39 CHAPTER THREE : PARTNERSHIP CHANGES AND LIQUIDATION ................................................................. 45 MAY-JUNE 2011 ......................................................................................................................................49 OCTOBER TO NOVEMBER 2012 ..............................................................................................................51 NOVEMBER 2010 ....................................................................................................................................56 CHAPTER 4: FINAL ACCOUNTS OF A CLOSE CORPORATION .......................................................................62 MAY –JUNE 2011 QUESTION 3 ................................................................................................................68 OCTOBER-NOVEMBER 2011 QUESTION 3...............................................................................................70 OCTOBER – NOVEMBER 2011 ................................................................................................................72 OCTOBER-NOVEMBER 2012....................................................................................................................78 CHAPTER 4 ..................................................................................................................................................82 STATEMENT OF CASH FLOWS .....................................................................................................................82 MAY-JUNE 2010 ......................................................................................................................................82 MAY JUNE 2010 .......................................................................................................................................84 OCTOBER-NOVEMBER 2010....................................................................................................................86 Downloaded by tevin smarts () lOMoARcPSD| 3 OCTOBER- NOVEMBER 2010 ...................................................................................................................87 MAY-JUNE 2011 ......................................................................................................................................89 OCTOBER- NOVEMBER 2011 ...................................................................................................................91 OCTOBER-NOVEMBER 2012....................................................................................................................94 MAY-JUNE 2012 ......................................................................................................................................98 CHAPTER 6 INTRODUCTION TO COMPANY ACCOUNTS............................................................................ 100 MAY-JUNE 2010 .................................................................................................................................... 100 MAY – JUNE 2010 .................................................................................................................................. 101 CHAPTER 7: BRANCH ACCOUNTS .............................................................................................................. 104 MAY-JUNE 2010 .................................................................................................................................... 104 OCTOBER-NOVEMBER 2012.................................................................................................................. 107 CHAPTER 8: INTERPRETATION OF FINAL ACCOUNTS ................................................................................ 110 OCTOBER-NOVEMBER 2010 QUESTION 5............................................................................................. 110 OCTOBER – NOVEMBER 2010 ............................................................................................................... 111 OCTOBER-NOVEMBER 2012.................................................................................................................. 112 CHAPTER 8: TIME VALUE OF MONEY ........................................................................................................ 114 OCTOBER-NOVEMBER 2011.................................................................................................................. 114 SOLUTION .................................................................................................................................................. 115 OCTOBER – NOVEMBER 2011 ................................................................................................................... 115 Downloaded by tevin smarts () lOMoARcPSD| 4 CHAPTER 1: INTRODUCTION This study guide provides brief notes on the topics covered in FAC1601. The topics covered include the following:  Preparation of Financial Statements of Partnerships;  Changes in the ownership structure of Partnerships;  Liquidation of Partnerships;  Financial Statements of Close Corporations;  Introduction to Company Accounts;  Statement of Cash Flows;  Analysis and Interpretation of Financial Statements;  Branches;  Time value of money. Financial Accounting This course mainly covers the Financial Accounting side of broad Accounting. The two main branches of Accounting are Financial Accounting and Management Accounting. Management Accounting is mainly used for internal purposes whilst Financial Accounting is mainly produced for external purposes. Users of Financial Statements In this course, focus will mainly be based on the preparation of Financial Statements. These are supposed to be prepared in terms of International Financial Reporting Standards (IFRSs) as set out by the International Accounting Standards Board (IASB), of which the South African Institute of Chartered Accountancy is a member. IFRs are the generally accepted accounting practices by Accountants throughout the whole world. The final accounts which shall be the main focus are prepared in terms of International Accounting Standards (IAS) 1. These accounts are prepared for various users who have differing needs. Examples of users and their needs are as follows: 1. Investors: to assess the profitability of the entity in order to make a decision on whether to invest or divest from the entity. 2. Management: to evaluate their performance as guardians of the owners wealth and sometimes to measure their rewards where there are performance based bonuses. 3. Employees: to gauge the security of their jobs and assess the ability of the entity to pay. The profitability of the firm can also be used as a basis for collective bargaining. 4. Government: to assess tax and the general economy and to compile national statistics. 5. Financial analysts: to make informed conclusions on their analysis. 6. Banks: to assess the ability to repay loans and overdrafts and to measure their likely liquidity positions as businesses are the major providers of money to banks through their deposits. Downloaded by tevin smarts () lOMoARcPSD| 5 7. Creditors and Loan Financiers: to assess the ability of the entity to repay loans. 8. Media: to make informed reports. 9. Customers: to assess the entity`s ability to provide services and goods. 10. Suppliers: to assess the ability of the firm to pay for goods and services and to assess the continuity of relationships. 11. General Public: to see what the firm is spending on social responsibility. Qualities of Accounting Information Financial information should always meet the following characteristics: 1. Relevance: Financial information should be relevant or required by the intended user to aid him/ her to make the required decision. Unnecessary information should be eliminated. 2. Completeness: the information should be enough in terms of accounting standards and enough to aid the decision at hand to avoid bad decisions being made from incomplete information. 3. Accuracy: information should be accurate enough for it`s purpose to prevent damaging consequences. 4. Timeliness: accounting information should always be made in time, otherwise if provided late, it might not be of any help for the decision at hand. 5. Channel of communication: the appropriate channel of communication should be used when conveying accounting information. 6. Reliability: the information should inspire confidence in the users. There should be no doubt on the truthfulness of the information conveyed. 7. Cost/ benefit analysis: the cost of obtaining the information should be reasonable as compared to the benefit to be derived from the information, otherwise it will be useless to provide the information unless for example, it is a requirement of law or it concerns an issue of social responsibility. Concepts of Accounting Accounts are prepared based on what are known as the concepts of Accounting. Some of them are summarized as follows: 1. Fair presentation: the accounts should as far as possible be presented in a reasonable and reliable manner. 2. Going concern: the accounts are prepared assuming that the entity will continue operating in the foreseeable future, that is, in the short run, the business will not be closed. 3. Accrual basis of accounting/ matching concept: the accounts are periodically prepared, meaning only expenses and incomes for the period under consideration should be included in profit statements. Any accruals should be brought into account or added and prepayments should be eliminated or subtracted when preparing financial statements. 4. Materiality concept: accounting information should only be included or disclosed if their exclusion will impair the decision of users of the financial statements. 5. Frequency of reporting/ periodicity concept: there should be a clear reporting cycle