Foundation level Accounting Concepts and Principles

1 Foundation level Accounting Concepts and Principles 2012 STUDY MANUAL ii Third edition 2012 First edition 2010 ISBN 9781 4453 8009 4 Previous ISBN 9780 7517 8148 9 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Published by BPP Learning Media Ltd All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means or stored in any retrieval system, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. We are grateful to CPA Australia for permission to reproduce the Learning Objectives, the copyright of which is owned by CPA Australia. Printed in Australia BPP Learning Media Ltd 2012 iiiWelcome to the next step in your career CPA Program Today s CPA Program is a globally recognised education program available around the world.

2 All candidates of CPA Australia are required to attain a predetermined level of technical competence before the CPA designation can be awarded. The CPA Program Foundation level is designed to provide you with an opportunity to demonstrate knowledge and skills in the core areas of Accounting , business and finance. A pass for each exam is based on a determination of the minimum level of knowledge and skills that candidates must acquire to have a good chance at success in the professional level of the CPA Program. In 2012 you have more opportunities to sit Foundation level exams, allowing you to progress through to the professional level of the CPA Program at your own pace. The material in this study manual has been prepared based upon standards and legislation in effect as at 1 September 2011.

3 Candidates are advised that they should confirm effective dates of standards or legislation when using additional study resources. Exams for 2012 will be based on the content of this study manual. Additional Learning Support A range of quality learning products will be available in the market for you to purchase to further aid your core study program and preparation for exams. These products will appeal to candidates looking to invest in additional resources other than those provided in this study manual. More information is available on CPA Australia s website You will also be able to source face-to-face and online tuition for CPA Program Foundation level exams from registered tuition providers. The tuition provided by these registered parties is based on current CPA Program Foundation level learning objectives.

4 A list of current registered providers can be found on CPA Australia s website. If you are interested you will need to liaise directly with the chosen provider to purchase and enrol in your tuition program. iv Introduction v Contents Page Introduction Welcome to CPA Australia iii Chapter features vi Chapter summary viii Answering multiple choice questions x Learning objectives xi Chapter 1 Introduction to Accounting 1 2 The regulatory framework 25 3 The conceptual framework of Accounting 43 4 Accounting standards and Concepts 59 5 Elements of financial statements and their recognition criteria 91 6 Alternative methods of valuation 115 7 Alternative theories of Accounting 131 8 Reporting and disclosure of performance 147 9 Efficiency in capital markets and company reporting 161 RReevviissiioonn qquueessttiioonnss 118833 AAnnsswweerrss ttoo rreevviissiioonn qquueessttiioonnss 119933 BBeeffoorree

5 Yyoouu bbeeggiinn qquueessttiioonnss:: aannsswweerrss aanndd ccoommmmeennttaarryy 220033 GGlloossssaarryy ooff tteerrmmss 221133 IInnddeexx 222211 Accounting Concepts and Principles vi Chapter features Each chapter contains a number of helpful features to guide you through each topic. Learning objectives Show the referenced CPA Australia learning objectives. Topic list Tells you what you will be studying in this chapter. Introduction Presents a general idea of what is covered in this chapter. Chapter summary diagram Summarises the content of the chapter, helping to set the scene so that you can gain the bigger picture. Before you begin This is a small bank of questions to test any pre-existing knowledge that you may have of the chapter content.

6 If you get them all correct then you may be able to reduce the time you need to spend on the particular chapter. There is a commentary section at the end of the Study Manual called Before you begin: answers and commentary. Section overview This summarises the key content of the particular section that you are about to start. Learning objective reference This box indicates the learning objective covered by the section or paragraph to which it relates. Definition Definitions of important Concepts . You really need to know and understand these before the exam. Exam comments These highlight points that are likely to be particularly important or relevant to the exam. (Please note that this feature does not apply in every Foundation level study manual.)

7 Worked example This is an illustration of a particular technique or concept with a solution or explanation provided. Question This is a question that enables you to practise a technique or test your understanding. You will find the solution at the end of the chapter. Key chapter points Review the key areas covered in the chapter. LO Introduction viiQuick revision questions A quick test of your knowledge of the main topics in this chapter. The quick revision questions are not a representation of the difficulty of the questions which will be in the examination. The quick revision multiple choice questions (MCQs) provide you with an opportunity to revise and assess your knowledge of the key Concepts covered in the materials so far. Use these questions as a means to reflect on key Concepts and not as the sole revision for the examination.

8 Revision questions The revision questions are not a representation of the difficulty of the questions which will be in the examination. The revision MCQs provide you with an opportunity to revise and assess your knowledge of the key Concepts covered in the materials so far. Use these questions as a means to reflect on key Concepts and not as the sole revision for the examination. Case study This is a practical example or illustration, usually involving a real world scenario. Formula to learn These are formulae or equations that you need to learn as you may need to apply them in the exam. Bold text Throughout the Study Manual you will see that some of the text is in bold type. This is to add emphasis and to help you to grasp the key elements within a sentence and paragraph.

9 Accounting Concepts and Principles viii Chapter summary This summary provides a snapshot of each of the chapters, to help you to put the syllabus as a whole and the Study Manual itself into perspective. CChhaapptteerr 11 IInnttrroodduuccttiioonn ttoo aaccccoouunnttiinngg The basic reasons for the development of Accounting , and the needs of the key stakeholders, are discussed here. You will see that Accounting is an essential attribute of any well-organised business. CChhaapptteerr 22 TThhee rreegguullaattoorryy ffrraammeewwoorrkk The different sources of regulation of Accounting are considered here including national legislation, Stock Exchange requirements and both local and International Financial Reporting Standards (IFRS).

10 In particular, you will become aware of the importance of the International Accounting Standards Board (IASB) and the International Financial Reporting Standards (IFRS) that it issues. CChhaapptteerr 33 TThhee ccoonncceeppttuuaall ffrraammeewwoorrkk ooff aaccccoouunnttiinngg The idea of a conceptual framework for financial reporting is considered in general but there is a specific focus on the IASB's Conceptual Framework for Financial Reporting (Conceptual Framework) which is the basis upon which all IFRS are prepared. CChhaapptteerr 44 AAccccoouunnttiinngg ssttaannddaarrddss aanndd ccoonncceeppttss You will consider here the role and purpose of Accounting standards, the process of preparing new Accounting standards and the Concepts that underlie the preparation of both Accounting standards and financial statements.