CIMA Certificate Level Paper C2
Fundamentals of Financial Accounting
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Slide 2
Course Administration
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the class; please ensure that the information you give
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Slide 3
Facilities
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Slide 4
Classroom Tuition and Home Study
• Classroom tuition
– Key areas of the syllabus
• Home study
– NEW Course Companion
– Homestudy is vital for:
• Reinforcing your knowledge
• Practising your skills
• CIMA forum – www.bpp.com/cimaforum
• Helpline for queries
Slide 5
Pass Assurance
• Attend all days of the course
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• If you fail the CBA you can attend another
certificate course for that paper free of
charge at any BPP centre
Slide 6
Deadline for CBAs
• If you wish to sit managerial papers in May
2010 you must have passed all CBAs by 1st
March 2010.
• If you wish to sit managerial papers in
November 2010 you must have passed all
CBAs by 1st September 2010.
Slide 7
CIMA syllabus progression
Paper C2 FFA
Paper F1 Financial Operations
Paper F2 Financial Management
Slide 8
Syllabus
•
•
•
•
Conceptual & regulatory framework
Accounting systems
Control of accounting systems
Preparation of accounts
Slide 9
(20%)
(20%)
(15%)
(45%)
Computer Based Assessment
50 objective test questions – 100 marks
Time allowed – 2 hours
Pass mark – 50%
Slide 10
Chapter 1
The nature and objective of
accounting
Introduction
What is accounting?
Recording, analysing &
summarising information ……
Who requires this information?
Slide 12
notes reference - page 13
Lecture example 1
•
•
•
•
•
•
•
Managers
Owners/shareholders
Providers of finance
Inland Revenue/C&E
Suppliers
Financial Analysts
Government
Slide 13
notes reference - page 13
Financial Records
Maintained for all commercial transactions
Must be complete, accurate and valid
BOOKKEEPING
Slide 14
notes reference - page 14
Types of Business – profit making
• Sole trader
• Partnership
• Companies
Slide 15
notes reference - page 14
Separate identity concept
A business is considered separate from owner
Limited liability company has separate legal
identity
Slide 16
notes reference - page 15
Chapter 2
An introduction to final
accounts
Lecture example 1
OWN
House
Car
Cash
OWE
Mortgage
Car loan
Credit card
Slide 18
200,000
10,000
5,000
215,000
(180,000)
(5,000)
(5,000)
(190,000)
notes reference - page 19
ASSETS
LIABILITIES
The Balance Sheet (SOFP)
$
ASSETS
Non-current assets
Land and buildings
Office equipment
Motor vehicles
Furniture and fixtures
$
$
100,000
50,000
30,000
20,000
200,000
Current assets
Inventories
Trade receivables
Less: allowance for doubtful debts
50,000
30,000
(2,000)
Prepayments
Cash in hand and at bank
90,000
290,000
Total assets
Slide 19
28,000
5,000
7,000
notes reference - page 20
The Balance Sheet (SOFP)
$
CAPITAL AND LIABILITIES
Capital
Capital
Profit
Less: drawings
$
$
170,000
45,000
(25,000)
190,000
Non-current liabilities
Bank loans
40,000
Current liabilities
Bank overdraft
Trade payables
Accruals
16,000
40,000
4,000
Total capital and liabilities
Slide 20
notes reference - page 20
60,000
290,000
Key Features
• Always date a balance sheet
• Non-current assets – long-term
• Current assets – not non-current assets!
• Capital – what the business owes the owner
• Don’t include nil value items
• Balance sheet = snapshot of the business
Slide 21
notes reference - page 20
The Income Statement
Income statement for the year ended 31 December 20X1:
$
$
Sales
Less: Cost of sales
Opening inventories
Purchases
Carriage inwards
Closing inventories
200,000
40,000
110,000
20,000
170,000
(50,000)
(120,000)
80,000
Gross profit
….continued on next slide
Slide 22
Trading
account
notes reference - page 22
The Income Statement (cont’d)
$
Gross profit (from previous slide)
Sundry income
Discounts receivable
Less: Expenses
Rent
Carriage outwards
Telephone
Electricity
Wages and salaries
Depreciation
Bad and doubtful debts
Motor expenses
Discounts allowable
11,000
4,000
1,000
2,000
9,000
7,000
3,000
5,000
1,000
(43,000)
45,000
Profit for the period
Slide 23
$
80,000
5,000
3,000
88,000
notes reference - page 22
Key features
• Headed up with accounting period
• Top part (down to gross profit) is trading
account
• Sundry income includes items like bank
interest
• Do not include nil value items
• Income statement = video of the period
Slide 24
notes reference - page 22
Balance Sheet & Income Statement
Balance sheet –
worth of business at a point in time
Income statement –
trading activities over period
Slide 25
notes reference - page 23
Chapter 3
Sources, records and
the books of prime entry
Maintaining Records
There are a number and variety of transactions
Slide 27
CASH
CREDIT
Sales
Purchases
Wages
Stationery
Acquisition of non-current
Sales
Purchases
notes reference - page 27
Flow of information
Assorted Transactions
A business has lots of detailed
data on a day to day basis
Categorised
Grouping together of similar
transactions e.g. wages payments
Summarised
Financial Statements
Slide 28
Produce useful information
e.g. monthly sales total
The formal and accepted format
for a company to report
notes reference - page 27
Main books of prime entry
• Cash book
• Sales (Receivables)
Day Book
• Purchases (Payables)
Day Book
• Petty Cash Book
• Journal
Slide 29
notes reference - page 28
Cash Book
• Records receipts and
payments into and out
of the bank.
• Often assumed to be
two books
• Very important record
of company’s cash
flow position
Slide 30
notes reference - page 28
Cash Book Receipts
Date
Narrative
Total
$
Capital
$
2.1.X6
5.1.X6
6.1.X6
F. Bloggs
J. Spalding
J.Smith
4,000
200
500
4,000
4,700
4,000
Slide 31
Sales
$
Receivables
$
200
500
notes reference - page 28
500
200
Cash Book Payments
Date
Narrative
Total
$
6.1.X6
6.1.X6
8.1.X6
Slide 32
Manley & Co.
Petty Cash
Digby Co
Purchases
$
Van
$
350
50
1,000
1,000
1,400
1,000
Rent
$
Payables
$
Petty
Cash
$
350
50
notes reference - page 28
350
50
Drawings
$
Sales Day Book
Lists all sales made on CREDIT
Date
Customer
3.1.X6
5.1.X6
J.Spalding
G.McGregor
$
200
400
TOTAL
Slide 33
notes reference - page 29
600
Purchases Day Book
Lists all purchases made on CREDIT
Date
Supplier
1.1.X6
4.1.X6
Tewson Co
Manley and Co
TOTAL
Slide 34
$
notes reference - page 29
400
350
750
Petty Cash Book
Receipts
Payments
Date
Narrative
6.1.X6
Cheque
cashed
Total
$
50
Date
Narrative
Total
$
Stationery
$
7.1.X6
City
Stationers
10
10
8.1.X6
F.Bloggs
Metro Fare
2
12
Slide 35
notes reference - page 29
Travel
$
2
10
2
Imprest System
•Pre-set limit say $50
•Voucher is filled in when money is taken
•At any time, vouchers + cash = $50
•The petty cash book is filled in from the vouchers
•The amount used to restore the pre-set limit =
money spent
Slide 36
notes reference - page 29
Journal
Certain transactions do not fit in the main books:
Correction of
errors
Period end
adjustments
Slide 37
notes reference - page 30
Memorandum Ledgers
Can you identify how much Mr Spalding owes you from the
following invoices?
Or how much you owe to Tewson & Co.?
Slide 38
notes reference - page 30
Memorandum Ledgers
A business has to keep separate ledgers so that it can keep
track of individual credit customers and suppliers
Sales (Receivables)
ledger
• Shows the total
outstanding from each
credit customer
(receivable)
• Useful for credit control
Slide 39
Purchases (Payables)
ledger
• Shows total due to each
credit supplier (payable)
• Useful for cash flow
notes reference - page 30
Chapter 4
Ledger accounting and
double entry
Introduction
Categorise transactions in BOPE
then
Summarise information in nominal ledger
Slide 41
notes reference - page 35
Dual Effect
Any transaction that takes place always
affects 2 items in the accounts.
E.g. A sole trader pays $6,000 into the
business bank account
The items in the accounts affected are?
Capital
Cash
Slide 42
notes reference - page 35
Ledger accounts
Which side of T- account should entry go?
DEBIT
Slide 43
CREDIT
notes reference - page 35
General rules
Debits
Credits
Expenses
L iabilities
A ssets
Income
Drawings
Capital
Slide 44
notes reference - page 36
Ledger accounts
The amounts are recorded in T- accounts
Each item in the I/S and B/S has an account
Dr
CAPITAL
Cr
6,000
Slide 45
Dr
6,000
notes reference - page 36
CASH
Cr
Ledger accounting
A sole trader purchases goods on credit for $400
Which 2 accounts are affected?
Dr
Slide 46
PURCHASES
400
Cr
Dr
notes reference - page 36
PAYABLES
Cr
400
Lecture example 1
Transaction
Debit
Credit
Sales for cash
Cash
Sales
Sales on credit
Receivables
Sales
Purchases for cash
Purchases
Cash
Purchases on credit
Purchases
Payables
Pay electricity bill
Heat & light
Cash
Receive cash from a receivable
Cash
Receivables
Pay cash to a payable
Payables
Cash
Borrow money from the bank
Cash
Loan
Slide 47
notes reference - page 36
Lecture example 2 - Douglas part (a)
Cash
Capital
Sales
$
5,000 Rent
2,100 Electricity
Car
Drawings
Capital
$
Cash
Slide 48
notes reference - page 38
$
500
200
1,000
300
$
5,000
Lecture example 2(a) continued
Payables
$
$
Purchases 2,000
Purchases
$
Payables 2,000
$
Electricity
$
200
$
Rent
Cash
Slide 49
$
500
$
Cash
notes reference - page 38
Lecture example 2(a) continued
Car
Cash
$
1,000
Sales
Receivables
$
1,750
Slide 50
$
Cash
Drawings
$
300
$
Sales
$
$
Rec.
Cash
notes reference - page 38
$
1,750
2,100
Lecture e.g. 3: Balancing off the accounts
Sales
Sales
Cash
500 Purchases 300
500 Telephone 50
c/d
b/d
1000
650
650
1000
Let’s see this in T-account terms
Step 1: Fill in highest total on both sides
Step
Balance
How2:much
cashoffdothe
welower
haveside
left?
Step 3: Complete
the double entry
$650
Slide 51
notes reference - page 42
Lecture example 2 - Douglas part (b)
Cash
Capital
Sales
$
5,000
2,100
Rent
Electricity
Car
Drawings
bal c/d
7,100
bal b/d
$
500
200
1,000
300
5,100
7,100
5,100
Capital
bal c/d
Slide 52
$
5,000
5,000
Cash
$
5,000
5,000
bal b/d
5,000
notes reference - page 38
Lecture example 2(b) continued
Payables
bal c/d
$
$
2,000 Purchases 2,000
2,000
2,000
bal b/d
Cash
bal b/d
Slide 53
2,000
Rent
$
500 bal c/d
$
500
500
500
500
Purchases
$
Payables 2,000 bal c/d
2,000
bal b/d
Cash
bal b/d
notes reference - page 38
$
2,000
2,000
2,000
Electricity
$
200 bal c/d
$
200
200
200
200
Lecture example 2(b) continued
Car
Cash
$
1,000 bal c/d
$
1,000
1,000
1,000
bal b/d
1,000
Sales
Receivables
$
1,750 bal c/d
$
1,750
1,750
1,750
bal b/d
Cash
bal b/d
bal c/d
1,750
Drawings
$
300 bal c/d
$
300
300
300
300
Sales
$
3,850 Rec.
Cash
$
1,750
2,100
3,850
3,850
bal b/d
Slide 54
notes reference - page 38
3,850
Chapter 5
From trial balance to
financial statements
Example – Miss Smith
Account
Debit
$
Cash
720
Capital
500
Sales
2,200
Purchases
1,100
Furniture
500
Electricity
120
Telephone
60
Drawings
200
Total
Slide 56
Credit
$
notes reference - page 47
2,700
2,700
Errors in the trial balance
• Error of
Commission
Omission
Principle
Compensating
Original Entry
Reversing
Slide 57
C
O
P
C
O
R
notes reference - page 47
Ch4 - Lecture example 2 - Douglas part (c)
Trial Balance
Account
Cash
Capital
Payables
Purchases
Rent
Electricity
Car
Drawings
Receivables
Sales
Debit
5,100
5,000
2,000
2,000
500
200
1,000
300
1,750
3,850
10,850
Slide 58
Credit
notes reference - page 38
10,850
The closing inventory/stock adjustment
Stock
Asset of the business
COS must match sales
Remove unsold inventory from COS
Dr Inventory (B/S)
Slide 59
Cr Inventory (IS)
notes reference - page 49
Lecture example 1 – closing inventory adj.
Sales (20 x $30)
600
Cost of sales:
Purchases (50 x $20)
Less: Closing inventories
(30 left @ $20)
Gross profit
Slide 60
1,000
(600)
(400)
200
notes reference - page 49
The income statement …..
…..is part of the double entry system
Sales
I/S 4,500
4,500
Rec
Rec
Rec
I/S
1,000
2,000
1,500
4,500
Sales 4,500
…..all income and expense accounts are
transferred to the I/S T-account.
Slide 61
notes reference - page 50
Ch4 - Lecture example 2 - Douglas part (d)
Income Statement
Slide 62
notes reference - page 38
Ch4 - Lecture example 2(d) continued
bal c/d
Sales
$
3,850 Rec.
Cash
$
1,750
2,100
3,850
3,850
I/Statement 3,850
Cash
bal b/d
Slide 63
bal b/d
2,000
bal b/d
$
2,000
2,000
2,000
3,850
Rent
$
500 bal c/d
$
500
500
500
500
Purchases
$
Payables 2,000 bal c/d
Cash
bal b/d
notes reference - page 38
Electricity
$
200 bal c/d
$
200
200
200
200
Ch4 - Lecture example 2(d) continued
Income statement
Sales
Slide 64
notes reference - page 38
3,850
Ch4 - Lecture example 2(d) continued
bal c/d
Sales
$
3,850 Rec
Cash
$
1,750
2,100
3,850
3,850
I/statement 3,850
Cash
bal b/d
Slide 65
bal b/d
2,000
bal b/d
$
2,000
2,000
2,000 I/Statement 2,000
3,850
Rent
$
500 bal c/d
$
500
500
500
500
Purchases
$
Payables 2,000 bal c/d
Cash
bal b/d
notes reference - page 38
Electricity
$
200 bal c/d
$
200
200
200
200
Ch4 - Lecture example 2(d) continued
Income Statement
Purchases
Slide 66
2,000
Sales
notes reference - page 38
3,850
Ch4 - Lecture example 2(d) continued
bal c/d
Sales
$
3,850 Rec
Cash
$
1,750
2,100
3,850
3,850
I/Statement 3,850
Cash
bal b/d
Slide 67
bal b/d
Purchases
$
Payables 2,000 bal c/d
2,000
bal b/d
$
2,000
2,000
2,000 I/Statement 2,000
3,850
Rent
$
500 bal c/d
$
500
500
500
500
I/St’ment 500
Cash
bal b/d
notes reference - page 38
Electricity
$
200 bal c/d
$
200
200
200
200
I/St’ment 200
Ch4 - Lecture example 2(d) continued
Income Statement
Purchases
2,000
Gross profit c/d 2,100
Rent
Electricity
Net profit c/d
Sales
Closing inv.
4,100
4,100
500
200
1,400
Gross profit b/d 2,100
2,100
2,100
Net profit b/d
Slide 68
3,850
250
notes reference - page 38
1,400
Balance Sheet…..
…..is not part of double entry system
Receivables
Sales 1,000
Sales 2,000
Sales 1,500
4,500
b/d
c/d
4,500
4,500
4,500
…all assets and liabilities are not transferred
They are only listed in the balance sheet
Slide 69
notes reference - page 50
Ch4 - Lecture example 2 - Douglas part (e)
Douglas: Income Statement for the month of January
$
$
Sales
3,850
Less Cost of Sales
Purchases
2,000
Less Closing Invent.
(250)
(1,750)
Gross Profit
Less Expenses:
Rent
Electricity
2,100
500
200
(700)
1,400
Net Profit
Slide 70
notes reference - page 38
Ch4 - Lecture example 2(e) continued
Douglas: Balance Sheet as at 31 January
Non-Current asset
Motor Vehicle
Current Assets
Inventory
Receivables
Cash
Total Assets
Proprietor’s Interest
Capital
Profit
Drawings
$
$
1,000
250
1,750
5,100
7,100
8,100
5,000
1,400
(300)
6,100
Current Liabilities
Payables
2,000
8,100
Slide 71
notes reference - page 38
Income statement and Drawings…..
…are cleared to the capital account at the end of the period
Drawings
I/S
Purchases 500 Sales
Rent
100
Phone
100
Capital
300
1,000
1,000
Cash
200 Capital
200
200
200
Capital
1,000
Drawings 200 Cash 4,000
c/d
4,100 I/S
300
4,300
b/d
Slide 72
notes reference - page 50
4,300
4,100
Ch4 - Lecture example 2 - Douglas part (f)
Profit and drawings are cleared to the capital
account at the end of the period
Capital
bal c/d
$
5,000
Cash
5,000
5,000
bal b/d
Slide 73
$
5,000
notes reference - page 38
5,000
Ch4 - Lecture example 2(f) continued
Purchases
Gross profit c/d
Rent
Electricity
Net profit c/d
Capital a/c
Income statement
$
2,000
Sales
2,100
Closing Inv
4,100
500
Gross profit b/d
200
1,400
2,100
1,400
Net profit b/d
$
3,850
250
4,100
2,100
2,100
1,400
Drawings
Cash
bal b/d
Slide 74
$
300
300
300
bal c/d
notes reference - page 38
$
300
300
Ch4 - Lecture example 2(f) continued
Capital
bal c/d
$
5,000
Cash
5,000
Slide 75
$
5,000
5,000
bal b/d
5,000
Net profit
1,400
notes reference - page 38
Ch4 - Lecture example 2(f) continued
Purchases
Gross profit c/d
Rent
Electricity
Net profit c/d
Capital a/c
Income Statement
$
2,000
Sales
2,100
Closing inv.
4,100
500
Gross profit b/d
200
1,400
2,100
1,400
Net profit b/d
$
3,850
250
4,100
2,100
2,100
1,400
Drawings
Cash
bal b/d
Slide 76
$
300
300
300
bal c/d
Capital a/c
notes reference - page 38
$
300
300
300
Ch4 - Lecture example 2(f) continued
Capital
bal c/d
$
5,000
Cash
5,000
Drawings
300
bal c/d
6,100
5,000
bal b/d
5,000
Net profit
1,400
6,400
6,400
bal b/d
Slide 77
$
5,000
notes reference - page 38
6,100
Chapter 6
The accounting
equation
The accounting equation
ASSETS
ASSETS
=
LIABILITIES
ASSETS
=
PROPRIETOR’S
+ PAYABLES
INTEREST
- PAYABLES
=
PROPRIETOR’S
INTEREST
Capital
Slide 79
+
Profit
notes reference - page 57
Drawings
The accounting equation
Assets
Slide 80
=
Capital
+
Profit
-
notes reference - page 58
Drawings
+ Payables
Using Douglas Example
ASSETS =
$1,000
$250
$1,750
$5,100
$8,100
Slide 81
=
Capital
$5,000
+
Profit
-
Drawings
+
$1,400
-
$300
notes reference - page 58
+ Payables
+
$2,000
Practical definitions
• Assets
– Something valuable an entity owns
• Liabilities
– Owed to someone else
• Capital as liability
– Money owed to the proprietor
• Drawings
– Taken out of business by its owner
Slide 82
notes reference - page 60
Rearranging the accounting equation
Assets = (Capital + Profit – Drawings) + Payables
or
Assets - Payables
Net Assets
Slide 83
= Capital + Profit – Drawings
=
Proprietor’s interest
notes reference - page 58
The business equation
Change in net assets = Change in Capital + Profit – Drawings
1 March Net Assets
=
6,000
31 March Net Assets
= 11,700
Increase = 5,700
Additional capital introduced = 4,000. Profit = ?
Slide 84
notes reference - page 58
The business equation
Increase in capital
Profit
4,000
2,000
Less: Drawings
(300)
5,700
Rearranging the business equation:
Profit = increase in net assets – increase in capital + drawings
Slide 85
notes reference - page 58
End of day 1 - what to do now…
• Reinforce today’s learning
• Develop question skills
Course Companion
1.Course
notes review
Slide 86
2. Question
practice
3. Study text
review