CIMA Certificate Level Paper C2 Fundamentals of Financial Accounting Name Telephone Email.

CIMA Certificate Level Paper C2

Fundamentals of Financial Accounting

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CIMA syllabus progression

Paper C2 FFA

Paper F1 Financial Operations

Paper F2 Financial Management

Syllabus

• Conceptual & regulatory framework (20%)

• Accounting systems (20%)

• Control of accounting systems (15%)

• Preparation of accounts (45%)

Computer Based Assessment

50 objective test questions – 100 marks50 objective test questions – 100 marks

Time allowed – 2 hours

Pass mark – 50%

Chapter 1

The nature and objective of accounting

notes reference - page 13

Introduction

What is accounting?What is accounting?

Recording, analysing & summarising information ……

Who requires this information?

Lecture example 1

• Managers• Owners/shareholders• Providers of finance• Inland Revenue/C&E• Suppliers• Financial Analysts• Government

Financial Records

Maintained for all commercial transactions

Must be complete, accurate and valid

BOOKKEEPING

Types of Business – profit making

• Sole trader

• Companies

• Partnership

Separate identity concept

A business is considered separate from owner

Limited liability company has separate legal identity

Chapter 2

An introduction to final accounts

Lecture example 1

House 200,000

Car 10,000

Cash 5,000

215,000

Mortgage (180,000)

Car loan (5,000)

Credit card (5,000)

(190,000)

ASSETSASSETS

LIABILITIESLIABILITIES

$ $ $ ASSETSNon-current assets

Land and buildings 100,000Office equipment 50,000Motor vehicles 30,000Furniture and fixtures 20,000

200,000Current assets

Inventories 50,000Trade receivables 30,000Less: allowance for doubtful debts (2,000)

28,000Prepayments 5,000Cash in hand and at bank 7,000

90,000Total assets 290,000

The Balance Sheet (SOFP)

$ $ $ CAPITAL AND LIABILITIESCapital

Capital 170,000Profit 45,000Less: drawings (25,000)

190,000Non-current liabilities

Bank loans 40,000

Current liabilitiesBank overdraft 16,000Trade payables 40,000Accruals 4,000

60,000Total capital and liabilities 290,000

The Balance Sheet (SOFP)

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

Income statement for the year ended 31 December 20X1:

Sales 200,000Less: Cost of sales

Opening inventories 40,000Purchases 110,000Carriage inwards 20,000

170,000Closing inventories (50,000)

(120,000)Gross profit 80,000

….continued on next slide

The Income Statement

Trading account

Gross profit (from previous slide) 80,000Sundry income 5,000Discounts receivable 3,000

88,000Less: Expenses

Rent 11,000Carriage outwards 4,000Telephone 1,000Electricity 2,000Wages and salaries 9,000Depreciation 7,000Bad and doubtful debts 3,000Motor expenses 5,000Discounts allowable 1,000

(43,000)Profit for the period 45,000

The Income Statement (cont’d)

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

Balance Sheet & Income Statement

Balance sheet – worth of business at a point in timeBalance sheet – worth of business at a point in time

Income statement –trading activities over periodIncome statement –trading activities over period

Chapter 3

Sources, records and the books of prime entry

Maintaining Records

There are a number and variety of transactions

Sales SalesPurchases PurchasesWagesStationeryAcquisition of non-current

CASH CREDIT

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 Produce useful information

e.g. monthly sales total

Financial Statements The formal and accepted formatfor a company to report

Main books of prime entry

• Cash book• Sales (Receivables)

Day Book• Purchases (Payables)

Day Book• Petty Cash Book• Journal

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

Cash Book Receipts

Date Narrative Total

Capital

Receivables

2.1.X6

5.1.X6

6.1.X6

F. Bloggs

J. Spalding

J.Smith

4,700 4,000 500 200

Cash Book Payments

Purchases

Payables

Drawings

6.1.X6

8.1.X6

Manley & Co.

Petty Cash

Digby Co

1,000 1,000

1,400 1,000 350 50

Sales Day Book

Date Customer $

3.1.X6

5.1.X6

J.Spalding

G.McGregor

TOTAL 600

Lists all sales made on CREDIT

Purchases Day Book

Date Supplier $

1.1.X6

4.1.X6

Tewson Co

Manley and Co

TOTAL 750

Lists all purchases made on CREDIT

Petty Cash Book

Date Narrative

Stationery

Travel

6.1.X6

Cheque

cashed

50 7.1.X6

City Stationers

8.1.X6

F.Bloggs

Metro Fare 2 2

12 10 2

Receipts Payments

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

Journal

Certain transactions do not fit in the main books:

Period end adjustments

Correction of errors

Memorandum Ledgers

Can you identify how much Mr Spalding owes you from thefollowing invoices?

Or how much you owe to Tewson & Co.?

Memorandum Ledgers

Sales (Receivables) ledger

• Shows the total outstanding from each credit customer (receivable)

• Useful for credit control

Purchases (Payables) ledger

• Shows total due to each credit supplier (payable)

• Useful for cash flow

A business has to keep separate ledgers so that it can keep track of individual credit customers and suppliers

Chapter 4

Ledger accounting and double entry

Introduction

Categorise transactions in BOPE

Summarise information in nominal ledger

Dual Effect

Any transaction that takes place alwaysaffects 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?

Cash Capital

Ledger accounts

Which side of T- account should entry go?

DEBIT CREDIT

reditsC

General rules

xpenses

rawings apital

iabilities

Ledger accounts

The amounts are recorded in T- accounts

Each item in the I/S and B/S has an accountEach item in the I/S and B/S has an account

Dr CAPITAL Cr Dr CASH Cr

6,000 6,000

Ledger accounting

A sole trader purchases goods on credit for $400

Which 2 accounts are affected?

Dr PURCHASES Cr Dr PAYABLES Cr

400 400

Lecture example 1

CreditTransaction

LoanCashBorrow money from the bank

CashPayablesPay cash to a payable

ReceivablesCashReceive cash from a receivable

CashHeat & lightPay electricity bill

PayablesPurchasesPurchases on credit

CashPurchasesPurchases for cash

Sales ReceivablesSales on credit

SalesCashSales for cash

Lecture example 2 - Douglas part (a)

$ $Capital 5,000Sales 2,100

Rent 500Electricity 200Car 1,000Drawings 300

Capital

$ $Cash 5,000

Payables

Purchases 2,000

Lecture example 2(a) continued

Purchases

Payables 2,000

Cash 500

Electricity

Cash 200

Lecture example 2(a) continued

Drawings

Cash 300

Receivables

Sales 1,750

Cash 1,000

Rec. 1,750Cash 2,100

Step 2: Balance off the lower side

Step 3: Complete the double entry

Lecture e.g. 3: Balancing off the accounts

Sales 500

Purchases 300

Telephone 50

How much cash do we have left?How much cash do we have left?

Let’s see this in T-account termsStep 1: Fill in highest total on both sides

1000 1000

c/d 650

b/d 650

Lecture example 2 - Douglas part (b)

RentElectricityCarDrawingsbal c/d

$ $Capital 5,000Sales 2,100

500200

1,000300

bal b/d 5,100

7,100 7,100

Capital

$ $Cash 5,000

bal b/d

5,000 5,000

bal c/d 5,000

Lecture example 2(b) continued

Payables

Purchases 2,000

2,0002,000

bal b/d 2,000

bal c/d 2,000

Purchases

Payables 2,000 bal c/d 2,000

2,0002,000

bal b/d 2,000

Cash 500 bal c/d 500

500500

bal b/d 500

Electricity

200200

bal b/d 200

Lecture example 2(b) continued

bal c/d 1,000

1,0001,000

bal b/d 1,000

Cash 1,000

Drawings

300300

bal b/d 300

Receivables

Sales 1,750 bal c/d 1,750

1,7501,750

bal b/d 1,750

bal c/d 3,850 Rec. 1,750

3,8503,850

bal b/d 3,850

Cash 2,100

Chapter 5

From trial balance to financial statements

Example – Miss Smith

Account Debit

Credit

Cash 720

Capital 500

Sales 2,200

Purchases 1,100

Furniture 500

Electricity 120

Telephone 60

Drawings 200

Total 2,700 2,700

Errors in the trial balance

• Error of Commission C

Omission O

Principle P

Compensating C

Original Entry O

Reversing R

Ch4 - Lecture example 2 - Douglas part (c)

CapitalCash

PayablesPurchases

CarElectricity

Drawings

Account

ReceivablesSales

Trial BalanceDebit

500200

Credit

2,0002,000

10,850 10,850

The closing inventory/stock adjustment

Asset of the business

Dr Inventory (B/S)

COS must match salesRemove unsold inventory from COS

Cr Inventory (IS)

Lecture example 1 – closing inventory adj.

(20 x $30) 600

(50 x $20) 1,000

(30 left @ $20)(600)

Cost of sales:PurchasesLess: Closing inventories

Gross profit

The income statement …..

…..is part of the double entry system

Rec 1,000

Rec 2,000

Rec 1,500I/S 4,500

Sales I/SSales 4,500

…..all income and expense accounts aretransferred to the I/S T-account.

4,500 4,500

Ch4 - Lecture example 2 - Douglas part (d)

Income Statement

Ch4 - Lecture example 2(d) continued

bal c/d 3,850 Rec. 1,750

3,8503,850

bal b/d 3,850

Cash 2,100

Purchases

2,0002,000

bal b/d 2,000

500500

bal b/d 500

Electricity

200200

bal b/d 200

I/Statement 3,850

Income statement

Sales 3,850

bal c/d 3,850 Rec 1,750

3,8503,850

bal b/d 3,850

Cash 2,100

Purchases

2,0002,000

bal b/d 2,000

500500

bal b/d 500

Electricity

200200

bal b/d 200

I/statement 3,850

I/Statement 2,000

Income Statement

Sales 3,850Purchases 2,000

bal c/d 3,850 Rec 1,750

3,8503,850

bal b/d 3,850

Cash 2,100

Purchases

2,0002,000

bal b/d 2,000

500500

bal b/d 500

Electricity

200200

bal b/d 200

I/Statement 3,850

I/Statement 2,000

I/St’ment 200I/St’ment 500

Income Statement

Closing inv. 250Gross profit c/d 2,100

Gross profit b/d 2,100

Sales 3,850Purchases 2,000

Rent 500Electricity 200Net profit c/d 1,400

Net profit b/d 1,400

4,100 4,100

2,100 2,100

b/d 4,500

Balance Sheet…..

…..is not part of double entry system

Sales 1,000

Sales 2,000

Sales 1,500

Receivables

c/d 4,500

…all assets and liabilities are not transferredThey are only listed in the balance sheet

4,500 4,500

Ch4 - Lecture example 2 - Douglas part (e)

Douglas: Income Statement for the month of January$$

Sales 3,850Less Cost of SalesPurchases 2,000Less Closing Invent. (250)

(1,750)

Gross Profit 2,100Less Expenses:RentElectricity

500200

1,400Net Profit

Ch4 - Lecture example 2(e) continuedDouglas: Balance Sheet as at 31 January $$Non-Current assetMotor Vehicle

Current AssetsInventory

Total Assets

PayablesCurrent Liabilities

ReceivablesCash

CapitalProfitDrawings

1,750 250

5,1007,100

1,400(300)

Proprietor’s Interest

Income statement and Drawings…..

…are cleared to the capital account at the end of the period

Purchases 500

Rent 100

Phone 100

Sales 1,000I/S

Cash 200

Drawings

Cash 4,000

CapitalCapital 300

I/S 300

Capital 200

Drawings 2001,000 1,000

200 200

4,300 4,300

c/d 4,100

b/d 4,100

Ch4 - Lecture example 2 - Douglas part (f)

Profit and drawings are cleared to the capitalaccount at the end of the period

Capital

$ $bal c/d 5,000 Cash 5,000

5,000 5,000

bal b/d 5,000

Ch4 - Lecture example 2(f) continued

Drawings

$ $Cash 300 bal c/d 300

300 300

bal b/d 300

Income statement

2,0002,100

2,100500200

PurchasesGross profit c/d

3,850250

SalesClosing Inv

4,100 4,100

Gross profit b/dRentElectricity

1,400Net profit c/d

2,100 2,100

1,400Net profit b/dCapital a/c 1,400

Capital

$ $bal c/d 5,000 Cash 5,000

5,000 5,000

bal b/d 5,000

Net profit 1,400

Drawings

$ $Cash 300 bal c/d 300

300 300

bal b/d 300

$ $ Income Statement

2,0002,100

2,100500200

PurchasesGross profit c/d

3,850250

SalesClosing inv.

4,100 4,100Gross profit b/dRent

Electricity1,400Net profit c/d2,100 2,100

1,400Net profit b/dCapital a/c 1,400

Capital a/c 300

Capital

$ $bal c/d 5,000 Cash 5,000

5,000 5,000

bal b/d 5,000

Net profit 1,400

6,4006,400

bal c/d 6,100

Drawings 300

bal b/d 6,100

Chapter 6

The accounting equation

ASSETS LIABILITIES=

ASSETS PROPRIETOR’S INTEREST

= PAYABLES+

Capital +-Profit

Drawings

ASSETS - PAYABLES PROPRIETOR’S INTEREST

+ - +Drawings PayablesAssets = Capital Profit

Using Douglas Example

$1,000 = $5,000 + $1,400 - $300 + $2,000

$1,750

$5,100

$8,100

+ - +Drawings PayablesASSETS = Capital Profit

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

Rearranging the accounting equation

Assets = (Capital + Profit – Drawings) + Payables

Assets - Payables = Capital + Profit – Drawings

Net Assets Proprietor’s interest=

The business equation

Change in net assets = Change in Capital + Profit – Drawings

1 March Net Assets

31 March Net Assets

11,700Increase = 5,700

Additional capital introduced = 4,000. Profit = ?

The business equation

Increase in capital

Profit

Less: Drawings

Rearranging the business equation:

Profit = increase in net assets – increase in capital + drawings

End of day 1 - what to do now…

1.Course notes review

Course CompanionCourse Companion

2. Question practice

3. Study text review

• Reinforce today’s learning • Develop question skills

CIMA Certificate Level Paper C2 Fundamentals of Financial Accounting Name Telephone Email.

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