Financial Accounting Fundamentals (FAFN)

Syllabus overview

This is an introduction to financial accounting and assumes no prior knowledge of the subject. It deals with the recording of accounting transactions and the preparation of accounting statements for single entities. The basic concepts of accounting are dealt with, and the student will be expected to understand the limitations of financial accounts in attempting to meet the needs of all users. An understanding of the different approaches to asset valuation and the resulting influence on profit measurement is required.

There is an introduction to the regulatory framework that determines published accounts requirements and a basic introduction to the role of accounting standards. An awareness of published accounts is required, but students will not be asked to prepare accounts in a published accounting format. No knowledge of any specific accounting standard is required. There will be an introduction to accounting systems and their control.

Although the emphasis is on the basic methods and techniques of the subject, students will be expected to develop a critical approach by asking why the methods and techniques are used and in what circumstances they are appropriate.

This syllabus addresses the fundamentals of the subject and recognises that some terms and definitions vary from one area of the world to another. As a result, students can use accepted alternative names to those that appear in this syllabus and be aware of alternative accounting formats. For example, International Accounting Standard 1 (IAS 1) uses income statement instead of profit and loss account and non-current assets instead of fixed assets. Others include inventories, receivables and payables. All of these are acceptable for use in answers in this paper, but it will be expected that they are applied consistently. Similarly, IAS 1 provides illustrations of accounting formats that are used widely in published accounts and are acceptable in this paper.

This syllabus aims to test the student’s ability to:

• explain the conceptual and regulatory framework of accounting;

• explain the nature of accounting systems and understand the control of such systems;

• prepare accounts for a single entity.

There will be a written paper of three hours. Section A will use objective testing and will account for 50% of the marks. Section B will be compulsory for 30% of the marks and section C will offer a choice of one question from two for 20% of the marks.

On completion of their studies students should be able to:

• identify the various user groups which need accounting information and the characteristics of such information necessary to meet their objectives;

• explain the function of and differences between financial and management accounting systems;

• identify and explain the fundamental accounting concepts, bases and policies;

• explain the concepts of capital and revenue, cash and profit, income and expenditure and assets and liabilities;

• explain the historical cost convention;

• identify the basic methods of valuing assets on current cost, market value and economic value bases, and demonstrate their impact on profit measures and balance sheet values;

• explain the influence of legislation (for example, Companies Acts) and accounting standards on the production of published accounting information for organisations.

Syllabus content

• Users of accounts and the objectives of financial statements; functions of financial and management accounts; purpose of accounting statements; stewardship; the accounting equation.

• Fundamental accounting concepts, bases and policies; capital and revenue; cash and profit; income, expenditure, assets and liabilities.

• Historical cost convention.

• Methods of asset valuation and their implications for profit measurement and the balance sheet.

• The regulatory influence of company law and accounting standards; items in formats for published accounts.

1(ii) Accounting systems – 20%

Learning outcomes

On completion of their studies students should be able to:

• explain the purpose of accounting records and their role in the accounting system;

• prepare cash and bank accounts; prepare bank reconciliation statements;

• prepare petty cash statements under an imprest system;

• prepare accounts for sales and purchases, including personal accounts and control accounts;

• identify the necessity for financial accounting codes and construct a simple coding system;

• prepare nominal ledger accounts; prepare journal entries; prepare a trial balance;

• prepare accounts for indirect taxes (for example, VAT);

• prepare accounts for payroll.

• The accounting system and accounting records.

• Ledger accounts; double-entry bookkeeping.

• Preparation of accounts for cash and bank; bank reconciliations; imprest system for petty cash.

• Accounting for sales and purchases, including personal accounts and control accounts.

• Financial accounting codes and their uses.

• Nominal ledger accounting; journal entries.

• Trial balance.

• Accounting for indirect taxes (for example, VAT).

• Accounting for payroll.

On completion of their studies students should be able to:

• identify the requirements for external audit and the basic processes undertaken;

• explain the purpose and basic procedures of internal audit;

• explain the meaning of true and fair view;

• explain the need for financial controls;

• explain the purpose of audit checks and audit trails;

• explain the nature of errors, and be able to make accounting entries for them;

• explain the nature of fraud and basic ideas of prevention.

• The purpose of external audit and the meaning of true and fair view.

• Internal audit.

• Financial controls; audit checks on financial controls; audit trails.

• Errors or fraud.

On completion of their studies students should be able to:

• prepare accounts using accruals and prepayments;

• explain the difference between and prepare accounts for bad debts and provisions for doubtful debts;

• explain and calculate the methods of depreciation, including straight line, reducing balance and revaluation, and prepare accounts using each method;

• prepare a fixed asset register;

• explain, calculate and prepare accounts for stock;

• prepare trading accounts, profit and loss accounts, appropriations of profit and balance sheets from trial balance;

• prepare manufacturing accounts;

• prepare income and expenditure accounts;

• prepare accounts from incomplete records;

• calculate and explain basic ratios;

• prepare cash-flow statements.

• Adjustments to the trial balance; accruals and prepayments.

• Bad debts and provision for doubtful debts.

• Accounting treatment for depreciation (straight line, reducing balance and revaluation methods).

• Fixed asset register.

• Accounting for stocks (excluding long-term contract work in progress); methods of stock valuation (FIFO, LIFO and average cost).

• Trading, profit and loss accounts and balance sheets from trial balance; accounting for the appropriations of profit.

• Manufacturing accounts.

• Income and expenditure accounts.

• Production of accounting statements from incomplete data.

• Ratios: return on capital employed; gross and net profit margins; asset turnover; debtors collection and creditors time to pay; current and quick ratios; stock turnover; gearing.

• Cash-flow statements.