Paper 6 (GBR) Drafting Financial Statements

To understand and apply the techniques used to prepare year-end financial statements of partnerships and limited companies which comply with legislation and accounting standards, and to interpret financial statements and the relationships between their elements using ratio analysis.

On completion of this paper, candidates should be able to:

• draft partnership and limited company financial statements from the appropriate information to comply with relevant legislation and accounting standards
• correctly identify and implement adjustments and identify unusual issues, referring such issues and any unresolved discrepancies to an appropriate person
• understand the importance of an organisation’s procedures and policies, including confidentiality procedures
• prepare and interpret a limited company cash flow statement 
• identify the general purpose of limited company financial statements
• identify the elements of limited company financial statements and the relationship between them
• interpret the relationship between the elements of financial statements using ratio analysis drawing valid conclusions and presenting interpretations and conclusions to the appropriate people.

A thorough knowledge of Paper 1, Recording Financial Transactions and Paper 3, Maintaining Financial Records, is required for Paper 6.

(a) General purpose of financial statements, users and their needs

(b) Financial statements and their relationship 

(i ) profit and loss account

(ii) balance sheet

(iii) interaction of the profit and loss account and balance sheet

(c) Elements of financial statements and their interaction

(i) assets

(ii) liabilities

(iii) ownership interest

(iv) gains

(v) losses

(vi) contributions from owners

(vii) distributions to owners

(d) Conceptual framework

(i ) Statement of Principles

(ii) accounting concepts and policies

(e) Regulatory framework

(i) standard-setting process

(ii) relevant accounting standards

(iii) legal framework and obligations of directors

(iv) statutory format of accounts and disclosure requirements

(f) Notes to the financial statements.

Only the following notes to the financial statements will be examinable:

– statement of movements in reserves

– fixed assets

– disclosure of exceptional items

– post balance sheet events

– contingent liabilities and contingent assets

– research and development expenditure

(g) Business organisation

(i) structure

(ii) procedures and policies

(a) Preparation of partnership and limited company

financial statements from a trial balance, including adjustments where appropriate for:

(i) accruals and prepayments

(ii) corporation tax

(iii) dividends

(iv) depreciation

(v) bad and doubtful debts

(vi) closing stocks

(vii) issue of share capital

(viii) revaluation of assets

(ix) provisions

(x) admission and retirement of partners

(b) Taxation

(i) presentation of corporation tax

(c) Fixed assets

(i ) distinction between capital and revenue expenditure

(ii) accounting for acquisition and disposal of assets

(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

(d) Current assets

(i) stock

(ii) debtors, including accounting for bad and doubtful debts

(iii) cash

(e) Current liabilities and accruals

(f) Shareholders’ equity

(g) Post balance sheet events

(h) Contingencies

(i ) Reporting financial performance, including the statement of total recognised gains and losses

(a) Preparation of a single company cash flow statement

(b) Notes to the cash flow statement

(c) Interpretation of a cash flow statement

(a) Ratio analysis

(i) profitability

(ii) liquidity

(iii) efficient use of resources

(iv) investor

(v) financial position

(b) Identification of unusual issues or trends

(c) Presentation of reports targeted at the user and drawing appropriate conclusions

(a) Groups of companies – preparation of basic consolidated financial statements for a simple group

(i) consolidated balance sheet

(ii) consolidated profit and loss account

(b) Overview of distinction between a subsidiary and an associate

The following topics are specifically excluded from Paper 6:

detailed or computational questions on deferred tax or discounting of provisions

group cash flow statements

joint ventures

long-term contracts

foreign currency, segmental reporting, impairment of assets, retirement benefits, derivatives and capital instruments

merger accounting.

The two main skills required for Paper 6, Drafting Financial  Statements 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. 

The key topic areas are as follows:

• preparation of financial statements for partnerships and limited companies
• basic group accounts – consolidated balance sheet and profit and loss account for a simple group
• elements of financial statements and the interaction between the elements
• accounting conventions and concepts
• interpretation of financial statements
• cash flow statements.

The examination is a three-hour written paper. The paper consists of four compulsory questions.

Question 1 30 to 40 marks

Question 2 25 to 30 marks

Question 3 15 to 20 marks

Question 4 15 to 20 marks

Total 100 marks

Accounting standards will not be examined until six months after they have been published. The cut off date for the June examination is 30 November preceding the June examination. The cut off date for the December examination is 31 May preceding the December examination.

There are a number of sources from which you can obtain a series of materials written for ACCA CAT examinations.

Candidates may also find the following texts useful:

Wood, Frank and Sangster, Alan. Business Accounting 2 (8th edition, FT Pitman Publishing) (This covers much more than is required for this syllabus, but has a useful approach to consolidation.)

Black, Geoff, Students Guide to Accounting and Financial Reporting Standards (8th Edition, FT Prentice Hall)

Wider reading is also desirable, especially regular study of relevant articles in ACCA’s student accountant magazine.

(a) Explain the need for, and objectives of, financial statements

(b) Identify the users of financial statements and their particular interests in the statements

(c) Discuss how the accounting systems of an organisation are affected by its roles, organisational structure, its administrative systems and procedures and the nature of its business transactions

(d) Describe and explain the following elements of the financial statements and their interaction:

(i) assets

(ii) liabilities

(iii) ownership interest

(iv) gains

(v) losses

(vi) contributions from owners

(e) Identify the three stages of recognising elements for inclusion in financial statements

(a) Discuss the nature and purpose of a conceptual framework

(b) Explain the potential benefits and drawbacks of an agreed conceptual framework  

(c) Explain the role and general issues covered by the Statement of Principles

(d) Identify and explain the qualitative characteristics of financial information

(e) Discuss and apply accounting concepts and policies

(f) Discuss the shortcomings of historical cost accounting and how they might be overcome

(a) Explain the legal framework and obligations of directors

(b) Explain the standard setting process and the role of the:

(i) Financial Reporting Council

(ii) Accounting Standards Board

(iii) Urgent Issues Task Force

(iv) Financial Reporting Review Panel

(a) Distinguish between capital and revenue expenditure

(b) Explain, calculate and demonstrate the inclusion of the profit or loss on disposal in the profit and loss account

(c) Account for the revaluation of fixed assets

(d) Account for gains and losses on the disposal of revalued assets

(e) Account for depreciation – definition, reasons and methods, including straight line, reducing balance and sum of digits

(f) Account for changes in the useful economic life or residual value of assets

(g) Explain how fixed asset balances and movements are disclosed in the financial statements

(a) Identify the key features of a partnership 

(b) Outline the advantages and disadvantages of operating as a partnership, compared with operating as a sole trader or limited company

(c) Outline the conventional methods of dividing profit and maintaining equity between partners

(d) Draft an appropriation account for a partnership

(e) Distinguish between partners' capital and current accounts

(f) Record the partners' share of profits and losses and their drawings in the ledger accounts

(g) Record introductions and withdrawals in the ledger accounts

(h) Draft the trading and profit and loss account and appropriation account and the balance sheet for a partnership from a trial balance incorporating period end adjustments including:

(i) accruals and prepayments

(ii) depreciation

(iii) bad and doubtful debts

(iv) closing stock 

(i ) Explain why a revaluation is required after an admission, a change in the profit sharing ratio or a retirement

(j ) Revalue the partnership after such a change and calculate the goodwill

(k) Make appropriate entries in the ledger accounts

(l ) Draft the partnership balance sheet after a change in the partnership

(m) Draft the partnership balance sheet after a merger of two sole traders

(n) Account for the dissolution of a partnership

(o) Prepare final accounts from incomplete records

(a) Prepare the financial statements for a limited company from a trial balance, including adjustments for items including:

(i) corporation tax

(ii) dividends

(iii) depreciation

(iv) bad and doubtful debts

(v) closing stock

(vi) share capital

(vii) accruals and prepayments

(viii) revaluation of assets

(ix) provisions

(b) Prepare a statement of total recognised gains and losses

(c) Prepare the following notes to the financial statements:

(i ) statement of movements in reserves

(ii) fixed assets

(iii) exceptional items

(iv) post balance sheet events

(v) contingent liabilities and contingent assets

(vi) research and development expenditure

(d) Distinguish between extraordinary and exceptional items, including their accounting treatment and disclosure requirements

(e) Derive missing figures from incomplete records

(a) State the requirements of the Companies Act regarding:

(i ) the duty to prepare annual accounts

(ii) the form and content of prescribed formats

(b) Prepare the financial statements of limited companies in accordance with the prescribed formats and relevant accounting standards.

(c) Discuss relevant accounting standards and be able to apply them

(a) Define current tax

(b) Account for current tax on the profits of companies (a detailed knowledge of deferred tax is not required)

(c) Draft appropriate disclosure in the published statements.

(a) Define and calculate goodwill

(b) Distinguish between purchased and internally generated goodwill

(c) Explain and apply the accounting treatment for both types of goodwill

(d) Explain and apply the requirements of Accounting Standards for Research and Development

(a) Distinguish between issued and authorised share capital and between called up and paid up share capital

(b) Distinguish between ordinary and preference shares

(c) Account for a share issue

(d) Explain the share premium account

(e) Define and account for a bonus issue

(f) Define and account for a rights issue

(g) Outline the advantages and disadvantages of a rights issue and a bonus issue

(h) Distinguish between the market value and nominal value of a share

(i ) Explain why companies will be concerned with the value of their shares 

(j ) Define and account for debentures

(k) Explain the advantages and disadvantages of raising finance by issuing debentures rather than issuing ordinary or preference shares

(a) Define a post balance sheet event

(b) Distinguish between adjusting and non-adjusting post balance sheet events

(c) Account for each category of post balance sheet event in the financial statements

(d) Define a provision, contingent liability and contingent asset

(e) Understand the general recognition principle

(f) Account for provisions, contingent liabilities and contingent assets

(a) Explain the need for a cash flow statement

(b) Prepare a cash flow statement including relevant notes for a single company in accordance with accounting standards

(c) Appraise the usefulness of, and interpret the information in a cash flow statement

(a) Describe and be able to identify the general characteristics of a parent company, investment, subsidiary and associated undertaking 

(b) Describe the concept of a group and the objective of consolidated financial statements

(c) Describe the circumstances and reasoning for subsidiaries to be excluded from consolidated financial statements

(d) Prepare a consolidated profit and loss account and balance sheet for a simple group including adjustments for pre and post acquisition profits, minority interests and consolidated goodwill

(e) Explain why intra-group transactions should be eliminated on consolidation

(f) Account for the effects (in the profit and loss account and balance sheet) of intra-group trading and other transactions including:

(i ) Unrealised profits in stock and fixed assets

(ii) Intra-group loans and interest and other intra-group charges

(a) Calculate the following ratios:

(i) profitability

(ii) liquidity

(iii) efficiency

(iv) investor

(v) financial

(b) Analyse and interpret the ratios to give an assessment of a company’s performance in comparison with:

(i) a company’s previous period’s financial statements

(ii) another similar company for the same period

(ii) industry average ratios

(c) Identify and discuss the limitations of ratio analysis

(d) Prepare a financial analysis report of a company in a suitable format