Examiner's Report - FA2 PDF

Examiner’s report
FA2 Maintaining Financial Records

December 2011
General Comments
The following three questions were those with the lowest pass rates on the paper. The questions are reviewed in
this report to provide future candidates with an indication of the types of questions asked and guidance on
dealing with exam questions, and thus improve their preparation for the exam.
Sample Questions for Discussion
Example 1
When completing her extended trial balance for the year to 30 November 2011, which is in an eight column
format, Emma recorded the following post trial balance adjustments:
(1) depreciation charge $8,350

(2) accruals $1,854
(3) prepayments $1,120
What is the total value of the debit column for post trial balance adjustments?
A $5,376
B $11,324 Key
C $7,616
D $9,084
Thus question tested one of the most fundamental aspects of the syllabus – the application of the principle of
double entry. The reference to post trial balance adjustments meant that to obtain the correct answer, candidates
had to remember that any adjustment to the trial balance required both a debit entry and a credit entry.
Therefore, both the debit column and the credit column will have the same total value. This was found by simply
adding the value of each entry. The correct answer was therefore $11,324 (option B). It was a considerable
surprise that this answer was selected by only 15% of candidates.
All of the other options arose from combinations of entries which did not apply the double entry rule. Option D,
which was selected by 38% of candidates was the value of the charges to the income statement which arose
from the adjustments (the depreciation charge, plus the accrual, less the prepayment).
Option C most was the most popular choice, and was selected by 42% of candidates. This was very
disappointing, as this answer contained two errors: (1) attempting to calculate the charge to the income
statement; and (2) treating the accrual and prepayment incorrectly.
Example 2
Malik and Vasha are in partnership. The partnership agreement provides for interest on capital to be paid at
a rate of 11% per annum.
You have the following information:

Malik Vasha
$ $
Capital balance at 1 November 2010 38,500 47,800
Capital introduced on 1 April 2011 6,000 3,000
What is the total value of interest on capital for the year to 31 October 2011?
Examiner’s report – FA2 December 2011 1

A $9,905·50
B $10,483·00
C $9,493·00
D $10,070·50 Key
This question was a straightforward test of arithmetic. However, as with all questions, it was essential to read the
question carefully. As the additional capital was introduced on 1 April 2011, interest would only be paid for the
seven months of the financial year from that date. The correct answer was therefore:
Total value of opening capital $86,300

Interest for 1 year @ 11% $86,300 x 11% = $9,493.00
Total additional capital $9,000

Interest for 7 months @11% $9,000 x 11% x 7/12 = $ 577.50
Total interest $10,070.50
As only 20% of candidates selected the correct answer (D), it would appear that the vast majority did not read
the question carefully enough, and omitted the date on which the additional capital was introduced from their
calculations.
This view is supported by the fact that 54% of candidates included interest on the additional capital for the
whole year, and this selected option B.
Candidates who selected option A (8%), had at least recognised that interest was only due for part of the year.
However this answer only included interest on the additional capital for 5 months.
The most surprising observation is that 18% of candidates did not include any interest at all in respect of the
additional capital, and thus selected option C.
Example 3
Avak and Mila have been in partnership, sharing profits and losses equally. They have agreed to admit
Pavao to the partnership with effect from 1 November 2011. At that date, goodwill is valued at $21,000.
Future profits and losses will continue to be shared equally between the partners, and goodwill will not be
maintained in the partnership accounts.
Avak and Mila had the following capital account balances at 31 October 2011:
Avak Mila
$24,000 credit $18,000 credit
On the commencement of the new partnership, what is the balance on Avak’s capital account?
A $34,500
B $27,500 key
C $20,500
D $17,000

The December 2011 exam was the first exam under the new FA2 syllabus. The major addition to the syllabus in
comparison to T3 (change in partnership) was the subject of this question. If two key points about the treatment
of goodwill are understood, this topic should not pose too much difficulty:
- Goodwill is created with a debit entry in the goodwill account. The value is shared between the original
partners in the old profit sharing ratio, and the double entry is completed with credit entries in their
capital accounts;
- Goodwill is then charged to the new partners in the new profit sharing ratio, leading to debit entries in
their capital accounts and a credit entry in the goodwill account. The goodwill account will thus have a
nil balance.
As with any question, it is essential to read carefully and think about what has been asked. In this case the
balance on the capital account for one of the partners, after adjusting for goodwill, must be calculated.
The value of the goodwill is stated as $21,000. Profits are to be shared equally between the partners both before
(2 partners) and after (3 partners) the change. Therefore, the entries in the capital account are:
Credit $10,500 ($21,000 x 1/2 )
Debit $ 7,000 ($21,000 x 1/3 )
resulting in a net credit of $3,500.
As Avak’s balance, prior to the change, was $24,000, the balance after the change is $27,500.
The correct answer (B) was selected by fewer than 1 in 5 candidates (18%).
In 28% of answers, the value of the credit entry was reversed and no adjustment was made for the debit entry.
This led to option D ($17,000) being selected. Option C was selected by 14% of candidates who applied both
adjustments, but reversed the debit and credit entries, giving a result of $20,500 (option C).
The most common mistake, which was made by 40% of candidates was to omit the debit entry, leading to
choice A ($34,500) being selected.
Conclusion
Based on these three examples, there appear to be two key reasons why candidates selected incorrect answers.
The first is a lack of clarity about the key points of the topic, while the second is not reading the question with
sufficient care. These points have been made in previous reports on the T3 paper, so candidates preparing for
future sittings of FA2 are reminded that careful attention to these points will increase their chances of success.

Examiner’s report
June 2012
General Comments
The questions discussed below were selected as they were those for which the lowest proportion of candidates
selected the correct answer.
It is hoped that, by discussing the rationale behind both the correct and incorrect answers, candidates for future
sittings will be better informed and prepared.
Example 1
Which of the following statements is correct?
A Ledger accounts for individual suppliers should never be included in the general ledger
B The non-current asset register contains ledger accounts for non-current assets
C A credit balance on a ledger account should be reported in the statement of financial position
D Each ledger account balance should be reported only once in the final accounts Key
This question tested candidates’ knowledge of the nature and purpose of ledger accounts. It may be helpful to
outline the reason for each of the choices before explaining the reason for the correct choice.
In choice A, the key word is ‘never’. Although it is normal practice to maintain the accounts of individual
suppliers in a separate ledger, this is done for specific reasons. These reasons are that the control account which
is included in the general ledger will provide the total value of the liability to suppliers much more quickly than
would be the case if the balances in the individual accounts had to be totalled. A second reason is that
maintaining separate ledgers can assist in both avoiding and identifying bookkeeping errors. However, if there are
only a small number of suppliers, it may be more convenient to include the personal accounts within the general
ledger.
Those candidates who recognised the fact that the non-current asset register is a separate record and thus is not
part of the double entry system, nor does it include ledger accounts, would have quickly concluded that choice B
is incorrect.
A quick reflection on a typical trial balance would reveal that the sales account would contain a credit balance.
The fact that this is part of the calculation of profit and thus is reported in the income statement means that
choice C is incorrect.
Choice 4 is correct as it states a key issue when preparing final accounts. Each ledger account balance impacts
on a specific item of income, expenses, assets, liabilities or capital. Thus each will be reported only once in the
final accounts.
Examiner’s report – FA2 June 2012 1

Example 2
Which of the following statements is/are correct?

(1) No estimated values may be included in financial statements
(2) Financial statements will be misleading if the value of any item is misstated
A Neither 1 nor 2 Key

B Both 1 and 2
C 1 only
D 2 only
When attempting a question which requires a decision on whether or not a statement is correct, the most
successful approach is likely to be to consider each statement in turn – and to read the statement carefully.
As well as the process of preparing financial statements following the extraction of a trial balance, this question
focused on one of the theoretical outcomes included in the study guide – materiality. Those candidates who had
a clear understanding of the definition of materiality would have had little difficulty in making the correct decision
on each statement.
In the case of statement (1), it was important to recognise that a number of values included in financial
statements are estimated. The most obvious examples are accrued expenses and prepaid expenses.
Given that some values have to be estimated, the key point relating to materiality is that absolute accuracy is not
required. A minor error or an estimate based on incomplete information will not mean that financial statements
will be misleading. What renders the statements misleading is if they are materially misstated. As the definition
of ‘material’ is that the value would lead a user of financial statements to make a different decision, it follows
that values which are misstated – but not materially so – are not misleading.
Thus neither statement is correct.
Example 3
At 31 May 2012, Anit was owed $104,750 by his customers. He has decided to write off an irrecoverable debt
of $400. He estimates that his closing receivables allowance should be equivalent to 2% of the remaining
balances. His opening receivables allowance was $2,256.
What should be his receivables expense for the year ended 31 May 2012?
A $231 Key
B $569
C $561
D $169
Dealing with irrecoverable debts and the allowance for receivables is a topic with which candidates often exhibit
difficulties. The correct approach is based on several key points:
- An irrecoverable debt is ‘written off’ by a credit entry in the receivable account and a debit entry in the
receivables expense account. (In other words, the receivables balance is reduced and the charge against
profit is increased.)

- The movement in the receivables allowance is the difference between the existing allowance (which will
be the balance at the date of the last statement of financial position) and the allowance which is now
required (calculated on the basis given in the question).
- An increase in the allowance will give rise to a charge against profit, and a decrease in the allowance will
lead to a credit in the income statement.
- The total receivables expense is thus either:
the value of any irrecoverable balances written off
plus the increase in the allowance
OR
the value of any irrecoverable balances written off
less the decrease in the allowance
In this case, the calculation was:
Balance after write off $104,350 ($104,750 - $400)

Allowance at 2% $ 2,087 ie allowance required
Balance brought forward $ 2,256 ie allowance brought forward
Reduction in allowance $ 169 ie a credit in the income statement
Charge to income statement $400 - $169 = $231
Errors which led to the incorrect choice being selected were:
- Treating the movement in the allowance as a charge (choice B - $400 + $169 = $569)
- Omitting the value of the write-off, and treating the movement in the allowance as a charge (choice D -
$169)
- Calculating the allowance required on the balance on the receivable account before the write-off was
made. (choice C - $561)
Conclusion
It is interesting that the conclusion of this consideration of three questions from the June 2012 paper is exactly
the same as the conclusion recorded in the December 2011 report – as well as previous reports on the T3 paper.
This is that the two key reasons why incorrect choices are selected are:
a lack of clarity about the key points of the topic; and
not reading the question with sufficient care.
Candidates preparing for future sittings are encouraged to pay attention to these reasons in both their preparation
for future sittings and when taking the exam.

Examiner’s report
December 2012

General Comments
The purpose of this report is to assist candidates at future exam sittings so that they can avoid the mistakes
which are most often made by candidates. The means of doing this is to focus on three questions which were
correctly answered by the lowest number of candidates at the December 2012 sitting. Observations on how to
select the correct answer, and why the other choices are incorrect are made on each of these questions.
Example 1
Iona’s cash takings of $2,468 for 30 November were not banked until 4 December.
At 30 November, her bank balance was an overdraft of $1,573 and she had a balance of $44 in her petty cash
box.
What amount should be included in current assets in Iona’s statement of financial position at 30 November?
A $939
B $44
C $2,512
D $895
This question tested candidates’ ability to correctly classify assets and liabilities. The question also required
careful reading in order to avoid selecting the wrong option.
The key to obtaining the correct answer was to note that, at the date of the statement of financial position (30
November), the trader had three separate items which needed to be classified – cash takings, an overdraft and a
petty cash balance. Once this is clarified, it can be seen that the cash takings (£2,468) and the petty cash
balance ($44) are current assets and that the total value is $2,512 ($2,468 + $44). The bank overdraft is a
liability and, therefore, it is not part of current assets.
Option A was chosen by candidates who did not pay sufficient attention to the date on which the takings were
banked. If the takings had been banked on 30 November, the overdraft would have become a balance of cash at
bank of $895. When the petty cash balance of $44 is added, the result is $939. However, as the takings were
not banked by 30 November, the overdraft at that date remains and the takings were in the form of cash.
Option D was chosen by candidates who made the error discussed in the paragraph above and also omitted the
petty cash balance.
Option B was chosen by candidates who assumed that only the petty cash balance should be reported as a
current asset.
Example 2
Luka and Eden have been in partnership, sharing profits and losses equally.
Greg was admitted to the partnership on 1 December 2012. At that date Luka and Eden each had a credit
balance of $22,000 on their capital accounts.
It was agreed that:
(1) Goodwill, which would not be carried in the books of the new partnership, had a value of
$42,000
(2) Profits and losses in the new partnership would be shared between Luka, Eden and Greg in the
ratio 2:2:1
(3) Greg would introduce cash so that, immediately following his admission, the capital account
balances of all three partners were equal

How much cash was Greg required to introduce?
A $34,600
B $26,200
C $30,400
D $17,800
Those candidates with a good understanding of the principles of accounting for a change to a partnership were
able to successfully answer this question. The key knowledge that was required was that, on the admission of a
new partner, the asset of goodwill is created through a debit entry in the goodwill account. The double entry is
completed through credit entries in the capital accounts of the original partners. The value credited to each
partner’s capital account is calculated by dividing the goodwill in the old profit and loss sharing ratio. In this
case, the old ratio was an equal share ($21,000) to each partner.
If goodwill is not to be carried in the books of the new partnership, it follows that a credit entry is required in the
goodwill account to bring the balance on that account to nil. The double entry is completed through debit entries
in the capital accounts of the new partners, with the value of each entry being calculated by sharing the goodwill
in the new profit and loss sharing ratio. In this question the new profit and loss sharing ratio meant that the
following debit entries were required:
Luka 2/5 $16,800
Eden 2/5 $16,800
Greg 1/5 $8,400
These entries lead to capital balances as follows:

Luka $22,000 (Cr) + $21,000 (Cr) - $16,800 (Dr) = $26,200 (Cr)
Eden $22,000 (Cr) + $21,000 (Cr) - $16,800 (Dr) = $26,200 (Cr)
Greg $8,400 (Dr) = $ 8,400 (Dr)
Thus Greg must introduce $34,600 ($26,200 + $8,400) to bring his capital balance to a credit of $26,200.
Option B was selected by candidates who correctly calculated the closing balances on the capital accounts of
Luka and Eden, but omitted the debit entry for goodwill in Greg’s account. This can often arise when a candidate
calculates a value which is included in the options, but fails to realise that their calculation is incomplete.
A few candidates calculated the adjustments on the original partners’ accounts correctly, but swapped the debit
and credit entries leading to revised balances of $17,800. Once again, the inclusion of this value in the choices
meant that they stopped their calculation at that point.
One way of avoiding this is to ignore (or even cover up) the choices until the calculation has been completed.
Many candidates simply calculated the value of the debit entry required in Greg’s account ($8,400) and used
this in conjunction with the starting balance on each of Luka and Eden’s accounts to obtain a value of $30,400.

Example 3
According to IAS 2 Inventories, which of the following is an acceptable basis for calculating the value of
inventory?
A Always use the realisable value of each individual item

B Value all items at the most recent purchase price
C Value all items at the earliest purchase price
D Use the average cost of items purchased in the period
To successfully answer this question, candidates needed to have a good knowledge of the key principles used
when valuing inventory.
IAS 2 recognises two methods of valuation, first in, first out and weighted average. In the case of weighted
average, the two acceptable approaches are continuous weighted average and periodic weighted average. Choice
D describes periodic weighted average, and is thus the correct answer.
The inclusion of ‘realisable value’ in choice A caused a problem for candidates whose knowledge of the principles
was not sufficiently detailed. They did not appreciate that there is a difference between ‘net realisable value’ and
‘realisable value’. Moreover, net realisable value should only be used if this is lower than the cost value.
For those candidates who did not read the question carefully, choices B and C caused some problems. In this
case, B appeared to describe first in, first out and C appeared to describe last in, first out. Given that last in, first
out is specifically prohibited by IAS 2, choice C could be ruled out as incorrect.
However, the fact that these choices suggested that all items would have the same unit value meant that both
were incorrect. If the items in inventory had been bought at different dates and at different prices, then only the
most recently purchased items would be valued at the most recent purchase price.
Summary
The report on the June 2012 session noted that same observations have been made over a number of sittings.
These observations were that the two main reasons why candidates are not successful are:
a lack of clarity about the key points of the topic; and
not reading the question with sufficient care.
These observations remain valid following this session.

Examiner’s report
For CBE and Paper exams covering January to June 2013
General Comments
The purpose of writing an examiners’ report is to draw the attention of candidates at future sittings to the most
common mistakes that have led to candidates at selecting incorrect answers. This is done by focussing on a
small number of questions from each sitting. The expectation is that by reviewing the reports over a number of
sittings, future candidates will have a resource which equips them for success.
It is noticeable that the key issues that are identified in the three questions considered in this report are the same
issues that were referred to in the report on the December 2012 sitting. Moreover, that report specifically noted
that these issues had been referred to in the previous report (on the June 2012 sitting). It is worth explicitly
stating that these issues have, in fact, been referred to in every report I have written on the FA2 paper.
Candidates preparing for future sittings are urged to recognise the importance of thorough preparation prior to the
exam, as well as careful reading of the questions in the exam.
Example 1
Kina depreciates equipment using the straight line method over an asset’s useful life. On 1 June 2012 she
bought new equipment with a useful life of 5 years and paid the supplier $16,000. The invoice showed that the
total was made up as follows:
$
Equipment 12,600
Delivery 600
Installation 800
Maintenance for year to 31 May 2013 2,000
What is the total charge to Kina’s income statement for the year to 31 May 2013?
A $4,800
B $5,920
C $3,200
D $2,800
Selecting the correct answer in this question required clear understanding of the nature of capital expenditure and
revenue expenditure.
The question provided key information as follows:

the date on which the asset was bought (as this was the first day of the accounting period,
the question did not need to specify that depreciation should be charged for a full year).
various items of expenditure (requiring a clear understanding of the difference in treatment of capital
and revenue expenditure)
the basis on which depreciation is to be calculated (straight line)
and the figure which was to be calculated (the total charge to the income statement)
Examiner’s report – FA2 Jan-Jun 2013 1

Three facts were critical in selecting the correct option. The first was that capital expenditure includes all
amounts paid to bring an asset to the point where it can be used. (Thus, delivery and installation charges are
part of capital expenditure.) The second was that expenditure on items which are consumed in an accounting
period is revenue expenditure. (The statement that maintenance was for the year to 31 May 2013 provided an
indication that this expenditure related to a specific accounting period, which meant that it was revenue
expenditure.) The third was that the total charge to the income statement included both the depreciation charge
and any revenue expenditure.
Based on these three points, it can be seen that the installation was revenue expenditure and that the other three
items were capital.
Thus the total capital expenditure was $14,000. Given a five year useful life and straight line depreciation, the
depreciation charge was $2,800. To obtain the total charge to the income statement, the revenue expenditure of
$2,000 is added, giving a total of $4,800.
Those candidates who selected $2,800 (choice D) presumably understood the difference between capital and
revenue expenditure, but did not read the question carefully enough, leading to the maintenance charge being
omitted from the calculation.
The remaining 2 options were selected by candidates who were not thoroughly prepared and were unable to
correctly classify the items of expenditure. Those candidates who treated the maintenance as capital expenditure
selected $3,200 (choice C), while those who treated only the cost of the equipment ($12,600) as capital
expenditure selected $5,920 (choice B).
Example 2
At 1 May 2012 Ruka’s receivables allowance was $1,760. At 30 April 2013, the balance on her
trade receivables account was $99,550 and she decided to write off debts of $750 as
irrecoverable. She estimated that her receivables allowance at 30 April 2013 should be equivalent
to 2% of outstanding balances.
What amount should be charged to Ruka’s income statement for the year to 30 April 2013?
A $966
B $216
C $1,976
D $981
The topic of the receivables allowance, and particularly the movement in the allowance, is one which continues
to cause difficulty for candidates.
Once again, a good knowledge of the key points of the topic will assist in selecting the correct choice.
The key points here are:

the closing allowance is calculated after any irrecoverable debts have been written off;
the difference between the opening allowance and the closing allowance must be taken to the
income statement;
if the closing allowance is greater than the opening allowance, the difference will be a charge to the

income statement;
if the closing allowance is less than the opening allowance, the difference will be a credit to the
income statement;
the irrecoverable debt written off must also be charged to the income statement;
the closing allowance is deducted from the receivables balance (after any write off) and the result is
reported in the statement of financial position.
Those candidates who had a good understanding of these points and who read the question carefully selected the
correct choice, as follows:
Receivables balance $99,550

less Irrecoverable debt $ 750
Remaining balance $98,800 x 2%
= Closing allowance $1,976
less Opening allowance $1,760
= Increase (thus charge to income statement) $ 216
+ Irrecoverable debt $ 750
= Total charge to income statement $ 966
Where a candidate had selected the incorrect choice, the main reasons were as noted in the comments on
example 1.
One of the choices ($981) was the result if the closing allowance was calculated without first deducting the
irrecoverable debt.
The remaining two options both arose if the closing allowance was correctly calculated, but the need to include
the write off of the irrecoverable debt in the charge to the income statement was overlooked. These were the
closing allowance ($1,976), or the movement in the allowance ($216).
Example 3
When preparing a bank reconciliation at 31 March 2013, which of the following should be
included in the reconciliation between the balance on the bank statement and the
corrected balance on the general ledger?
(1) a cheque issued in January 2013, but not processed by the bank until 5 March 2013
(2) bank interest credited by the bank on 15 March 2013, but not yet recorded in the
general ledger
(3) a lodgement made on 30 March 2013 which appears on the bank statement on 2 April 2013

A 1, 2 and 3
B 2 and 3 only
C 3 only
D 1 only
A bank reconciliation is carried out by completing the following steps:

compare the entries in the general ledger with the entries on the bank statement, to highlight differences between
the two records;
for each difference, decide whether it is:
an error or omission in the general ledger
an error or omission on the bank statement
a timing difference
for each omission or error in the general ledger, a correcting entry needs to be made, resulting in a corrected
balance on the general ledger account
prepare the reconciliation between the balance on the bank statement and the corrected balance in the general
ledger.
Timing differences are those transactions which will be processed in one of the records before the date at which
the bank reconciliation is being prepared, and after that date in the other record. These will be reconciling items
between the bank statement balance and the corrected balance on the general ledger.
Any errors or omissions on the bank statement will also be dealt with in the reconciliation statement.
Applying these points to the three items in the question, the following can be noted:
Item (1) this was recorded in the general ledger in January 2013. While it took some time for the cheque to be
processed by the bank, it had been processed before the date of the reconciliation (31 March 2013). Therefore it
is not a timing difference and does not form part of the reconciliation (nor is any entry required in the general
ledger)
Item (2) this is an omission in the general ledger and a correcting entry is required. As this transaction will be
included in the corrected balance, it will not be included in the reconciliation.
Item (3) the lodgement will have been recorded in the general ledger on 30 March but, at 31 March, it has not
appeared on the bank statement. Consequently, it is a timing difference and must be included in the
reconciliation.
Thus, the correct choice is C.
Candidates who selected other choices which included either item (1) or items (1) and (3), either
did not have a sound grasp of the approach discussed above, or had not read the information
(specifically about dates) carefully enough.

Summary
The need to prepare thoroughly across the whole syllabus is paramount in exams such as FA2 which use
objective test questions. The use of objective test questions means that each paper will test all areas of the
syllabus.
A further feature of objective test questions is that those candidates who do not read the question very carefully
are highly likely to select incorrect answers as discussed in the examples above.
The two key pieces of advice for candidates preparing for future sittings have not changed for a number of
sittings. They remain:
prepare thoroughly across the full syllabus, ensuring that your preparation means that you fully understand the
key points of each syllabus area; and
read each question very carefully. It will have been carefully drafted and checked to make sure it is clear - and it
is not intended to ‘catch you out’. However, there will almost certainly be some key words or a key phrase which
must be taken into account in order to select the correct choice.

Examiner’s report
For CBE and Paper exams covering July to December 2013
General Comments
The intention of this report is that, when considered in conjunction with previous reports, candidates at future
sittings will have a resource which maximises their chance of success. The most effective way to use these
reports is to consider both the technical content of each question, and the approach to answering the question –
noting that different question types will require slightly different approaches.
In considering the technical content, candidates should make sure that they have a clear understanding of that
content. While not every candidate will use exactly the same approach, it is important to ensure that a logical
and sequential approach is applied, based on relevant technical knowledge.
Example 1
Amit buys machines, which he repairs and then sells. He has the following information about a machine which is
being repaired at 30 November:
Cost of machine $17,130
Cost of repairs to date $ 2,465
Cost of further repairs before sale $ 1,720
Expected sale proceeds $21,160
What is the inventory value of the machine in Amit’s statement of financial position at 30 November?
A $19,595
B $16,975
C $21,315
D $19,440
This question tested candidates’ ability to apply the key requirement of IAS 2 – that ‘inventories should be
measured at the lower of cost and net realisable value’. IAS2 goes on to provide definitions of both cost (‘all costs
…. incurred in bringing the inventories to their present location and condition’) and net realisable value
(‘estimated selling price … less the estimated costs of completion and the estimated costs necessary to make the
sale).
The definitions in the standard could be simplified as follows:

Cost = all costs that have been incurred up to the date of the statement of financial position
NRV = selling price less cost that will be incurred after the date of the statement of financial
position
Using the data in the question, costs of $17,130 and $2,465 have been incurred, so the cost of the machine is
$19,595.
The estimated selling price is $21,160 and estimated costs to be incurred are $1,720, so the net realisable
value is $19,440. As this is lower than cost, the machine should be valued at $19,440. Thus, the answer is D.
Candidates who selected A had correctly calculated cost, but did not apply the rule that this value should only be
used if it is less than net realisable value.
Examiner’s report – FA2 Jul-Dec 2013 1

Candidates who selected C did not recognise that only those costs which have already been incurred should be
included in the calculation of cost (as costs which have yet to be incurred were included), while those candidates
who selected B incorrectly included costs which have already been incurred in their calculation of net realisable
value
Example 2
A reconciliation between Ethan’s non-current asset register and his general ledger has identified an asset which is
recorded in the general ledger, but is not recorded in the non-current asset register.
Which of the following could explain this discrepancy?

(1) the ledger entries to record the sale of an asset have been completed, but the register has not been
updated
(2) no record was made when an asset was scrapped
A Both 1 and 2
B Neither 1 nor 2
C 1 only
D 2 only
When attempting a question of this type the best approach is, first to read and understand the introductory
information which sets the context, and then to consider each statement individually.
The introductory information tells us that an asset is in the general ledger, but not in the asset register. That
means that either:
an asset has been added to the general ledger, but not to the asset register; or
an asset has been removed from the asset register, but not from the general ledger
Statement 1 describes a situation in which an asset has been removed from the general ledger, but not from the
asset register, so it could NOT explain the discrepancy.
In the case of statement 2, the asset has not been removed from either the general ledger or the asset register.
This means that the two records agree, but both are wrong, so this statement could NOT explain the discrepancy.
Thus the correct answer is B.
Candidates who selected any of the incorrect choices appear to have misinterpreted some of the information and
/ or not thought carefully about what was communicated in the question.
This kind of question clearly illustrates the need for candidates to read the question carefully and to think
carefully and logically before choosing their answer.

Example 3
When Amir prepared his draft final accounts, he overstated an accrual by $690 and understated a prepayment
by $430.
What is the effect of these errors on Amir’s capital balance?

A An understatement of $260
B An understatement of $1,120
C An overstatement of $1,120
D An overstatement of $260
To answer this question correctly, candidates needed to be clear on how the capital balance is affected by both
an accrual and a prepayment. In essence, this meant applying the accounting equation correctly.
The accounting equation states: assets – liabilities = capital.
If each piece of information in the question is considered in turn and the necessary adjustment identified, the
answer can be worked out as follows.
First, an accrual has been overstated by $690. This means that the accrual needs to be reduced. An accrual is a
liability, so the impact of the overstatement was to understate capital by $690.
Second, a prepayment has been understated by $430. This means that the prepayment must be increased. A
prepayment is an asset, so assets, and thus capital, have been understated by $430.
If this is applied to the accounting equation, it follows that capital has been understated by $1,120, making B
the correct answer.
It seems reasonable to argue that those candidates who did not select B had not read the question carefully
enough, or did not deal with the information logically and sequentially.
Candidates who selected A dealt correctly with the overstatement of the accrual, but interpreted the impact of the
error in the prepayment as overstating capital.
By selecting C, candidates who selected dealt incorrectly with both errors, treating them both as leading to an
overstatement of capital.
In choice D, the error in the prepayment was correctly dealt with, but the error in the prepayment was treated as
leading to an overstatement of capital.
Summary
Based on the performance of candidates in these questions, it can be observed that there were two major reasons
for incorrect choices being made.
The first is that there was a lack of awareness / understanding of fundamental issues in the syllabus (eg valuation
of inventory and the accounting equation). The second is that the questions were not read carefully enough,
which led to confused thinking.

These are the two reasons which have been highlighted in reports for every previous sitting. Candidates preparing
for future sittings are strongly encouraged to ensure that they have developed a clear understanding of the key
points of each area of the syllabus and that they read carefully and think logically when attempting questions.

Examiner’s report
General Comments
Reports on previous sittings have emphasised the need for candidates to ensure that their preparation provided
them with a good grasp of the technical content of the whole syllabus. In terms of approach to the exam itself,
the need to think clearly, read the questions carefully and to adopt a logical and sequential approach to
answering questions has also been noted in previous reports.
It is encouraging to note that this advice has been taken by a number of candidates and that overall performance
has improved.
Unfortunately, not all candidates have taken the advice on board, leading to a number of incorrect answers. As
has been the case in previous reports, this report considers three sample questions from the exams in the period
under review in an attempt to provide guidance for candidates in future exams, so that they can avoid the most
common mistakes.
Example 1
For the year to 31 March 2014, Clare’s draft final accounts report a profit of $86,528. However $5,760 of
revenue expenditure was incorrectly classified as capital expenditure on equipment. Clare depreciates
equipment on a straight line basis over 6 years and charges a full year’s depreciation in the year of acquisition.
When the error is corrected, what is Clare’s revised profit?
A $91,328
B $80,768
C $92,288
D $81,728
This question was a test of candidates’ knowledge of the impact of incorrect classification of expenditure. In this
case, revenue expenditure has been incorrectly classified as capital expenditure. This means that:
assets have been overstated; and
expenses have been understated / profit has been overstated.
The next point to be considered is the value of the error. The majority of candidates answering this question did
not consider the value, and simply adjusted the profit by $5,760. In some cases this was correctly treated as an
increase in expenses, and thus a reduction in profit, with choice B being selected. In other cases, the adjustment
was incorrectly treated as a reduction in expenses, and this an increase in profit, with choice C being selected.
However, in both cases, these candidates did not think carefully enough about their answer.
If expenditure had been incorrectly classified as capital, there will have been a consequent overstatement of the
depreciation expense. To some extent, the question provided a prompt that consideration should be given to

depreciation, as it provided information on the depreciation policy. This information was only necessary because
an adjustment for depreciation was required.
The cost of the asset was $5,760. With a depreciation policy of 6 years straight line, the annual depreciation
charge is $960. This amount would have been included in the depreciation charge when the accounts were
drafted.
This means that the net adjustment is $5,760 - $960, or $4,800.
A small proportion of candidates calculated the net adjustment correctly, but treated it as a reduction in
expenses. Consequently, they selected choice A.
The correct answer was D ($81,728) – the reported profit of $86,528, less the net adjustment to expenses
($4,800).
Example 2
Which of the following correctly describe(s) why a business entity should maintain accounting records in double
entry format?
(1) this is a legal requirement

(2) to assist managers in exercising control
A both 1 and 2
B neither 1 nor 2
C 1 only
D 2 only
The most appropriate way to attempt a question in this format is to consider each of the statements in turn
before looking at the content of the choices.
In the case of statement 1, there is no legal requirement for unincorporated entities (sole traders and
partnerships) to maintain any accounting records at all, let alone double entry records. Indeed, many small
entities will simply maintain daybooks. While this is not best practice, it is common. Therefore statement 1 is not
correct.
A double entry system provides opportunities for checking the accuracy of accounting records through the
extraction of a trial balance and carrying out reconciliations (bank, receivables, payables, personal account to
supplier statement). These aspects assist managers in exercising control – for example ensuring that debts due to
the entity are collected. Thus, statement 2 is correct.
Therefore, the correct choice was D.
Example 3
The balance on the receivables control account in Luis’s general ledger was $17,547 and the total of the list of
balances from his receivables ledger was $17,427. The following errors were discovered:

(1) a payment of $673 from a customer was entered in the cash received daybook as $763
(2) a debit balance of $60 on a customer’s account was treated as a credit balance
What is the corrected balance on Luis’s receivables control account?
A $17,457
B $17,637
C $17,517
D $17,607
To calculate the corrected balance on the receivables control account, it is necessary to identify which of the
errors affect the general ledger.
The incorrect entry in the daybook will affect the general ledger as this will lead to the incorrect amount being
credited to the control account. (While it is not relevant in this question, this error will also affect the entries to
the receivables ledger, and thus the listing of the balances from that ledger.)
The incorrect treatment of the customer’s balance does not affect the general ledger – it will only affect the listing
of the balances.
Thus the correcting entry required in the control account is $90 (correct value of $673 compared to incorrect
entry of $763). As the credit entry to the control account has been overstated, a debit entry is needed to correct
it. The debit balance is therefore increased by $90 to $17,637 – choice B.
Candidates who selected choice A either treated the adjustment as a credit entry in the control account, or
incorrectly treated the balance on the control account as a credit balance.
Choice C was selected by candidates who also included a general ledger entry in respect of the error in listing the
balance. The value of the unnecessary adjustment was correctly calculated as $120 (credit) - $60 to remove the
incorrect balance and a further $60 to insert the correct balance.
Choice D was selected by candidates who only adjusted the general ledger balance in respect of the incorrect
balance, but the value was $60, not $120.
Summary
As noted at the outset of this report, overall candidate performance has improved. Notwithstanding this
improvement, the performance of candidates in the questions reviewed in this report suggests that while an
insufficient knowledge of the technical content of the syllabus continues to lead to incorrect choices, fewer
candidates are failing to read the question carefully. This is a positive sign and it is hoped that this improvement
in performance will continue.

Examiner’s report
General Comments
Examiner’s reports are produced to assist candidates to improve their exam performance. This is done by
considering sample questions and illustrating how the questions could be approached. This focus on a small
number of sample questions should not obscure the fact that candidates will maximise their chances of exam
success by studying the whole syllabus, practising as many questions as possible, reading questions carefully and
thinking clearly.
The questions considered in this report highlight the need for each of these elements to be incorporated into
preparation and exam technique.
Example 1
When the trial balance was extracted, a suspense account was created with a debit balance of $99. It was
then discovered that:
– a sales invoice for $90 was recorded twice in the sales day book; and
– a debit entry in a general ledger account was $89, but should have been $98.
When these errors are corrected, what is the revised balance on the suspense account?
A Nil
B $9 debit
C $90 debit
D $108 debit
To answer a question such as this each error needs to be considered separately. It is important to think
carefully to work out the effect of each error. Once the effect of the error has been clarified, it is more
straightforward to work out what correcting entry is needed.
If an invoice was recorded twice in the sales day book (or indeed, any day book), this means that the double
entry will have been made twice. Therefore, the trial balance will still balance (although, the balances on both
the sales account and the receivables control account will be overstated). Correcting this error therefore
requires a debit entry in the sales account and a credit entry in the receivables control account. Thus it does
not require an entry in the suspense account.
A debit entry of $89 instead of $98 means that the debit entries in the general ledger are understated by $9.
This will have contributed to an imbalance in the trial balance. In the affected account, a correcting entry of
$9 (debit) is required, with a corresponding entry of $9 (credit) in the suspense account.
The combined effect of the opening debit balance of $99 and the correcting credit entry of $9 mean that the
balance in the suspense will be revised to a debit balance of $90 (choice C).
Example 2
At 30 November, Ann had the following balances in her general ledger:
Short-term deposit account $12,750 debit
Bank current account $1,325 credit
She also had $2,862 in cash, which she lodged on 1 December.

What amount should be included in Ann’s current assets at 30 November?
A $12,750
B $1,537
C $15,612
D $14,287
This question focused on the definition of current assets, and specifically the treatment of a credit balance on
the bank current account.
The most effective approach was to consider the correct treatment of each item in turn.
When considering the credit balance on the bank current account, it was essential to note that a credit
balance should not be offset against a debit balance on another bank account. Thus the current account
should be included in current liabilities.
With regard to the cash lodged on 1 December, it was important to note that, at 30 November, this had not
been lodged. Therefore it was a cash balance at that date. It was only after the date at which the
reconciliation was prepared that the cash was lodged – and the overdraft was reduced.
Thus the correct treatment is:

Short term deposit current asset
Bank current account current liability
Cash current asset
Thus the total value of current assets is $15,612 ($12,750 plus $2,862) – choice C.
Example 3
Which of the following statements about a partnership agreement is/are correct?
(1) Every partnership must have a written partnership agreement

(2) Details of any bonuses to be paid to staff will be noted in the partnership agreement
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2
The most effective way to approach a question of this type is to consider each statement in turn and establish
whether or not it is correct.
Statement 1:
Clearly, before a partnership commences, the partners should agree on a number of key issues (for example. how
profits and losses will be shared and any salaries to be paid to partners).

It would be almost universally accepted that the agreed arrangements should be recorded in a written document,
as this will minimise the chances of a dispute in the future. However, it is not a legal requirement that the points
agreed between the partners should be in written format.
Essentially, this statement required candidates to differentiate between a specific requirement and a choice.
Recording the details of the partnership agreement may be highly recommended, but it is a choice that partners
are free to make.
Thus, statement 1 is NOT correct.
Statement 2:
The purpose of the partnership agreement is to record the arrangements that will govern the responsibilities and
entitlements of the partners of the entity, not the staff.
While any bonuses to be paid to staff will require agreement between the partners, the partnership agreement is
not the appropriate document in which to record detailed arrangements on this matter.
Thus statement 2 in NOT correct.
This means that the correct choice is D – neither 1 nor 2.
Summary
The above discussion of sample questions reinforces the points made in the introduction to this report (under
‘General comments’). These were that success is based on:
studying the whole syllabus (to ensure a good grasp of technical knowledge of all areas)
practising as many questions as possible (to ensure that the knowledge can be applied)
reading questions carefully (to ensure that the question is understood)
thinking clearly (to avoid confusion and mistakes)
What is interesting is that these points have been made in previous reports, so it may be useful to offer a further
observation, relating to attempting practice questions.
When reviewing answers to practice, it is not enough for candidates to select the correct choice. It is essential
that answers are analysed to ensure that it is clearly understood why a particular choice is the correct answer.
Indeed, and possibly more importantly, the reasons why the other choices are incorrect should also be clearly
understood. This will ensure that the underlying technical knowledge is reinforced – and will assist in selecting
the correct choice in any future questions on the same syllabus area.

Examiner’s report
General Comments
This report is provided to assist candidates in their preparation for taking the FA2 paper in future exam
periods.
It should be considered alongside reports for previous exam periods, so that candidates’ likelihood of
success is maximised.
Three questions of different types are considered in detail below. The comments on each question will
enable candidates to develop a clearer understanding of the requirements of the different types of
question which they are likely to experience.
In preparing for future exams, candidates are encouraged to consider the technical aspects of questions
and the logical approach which is required, so that knowledge is correctly applied to identify the
correct answer to each question.
Sample Questions
Example 1
Which of the following errors will be detected by extracting a trial balance?
(1) a supplier’s invoice for $639 was entered in the purchases day book as $369
(2) the total column of the analysed sales day book was overcast
A 1 only
B 2 only
C neither 1 nor 2
D both 1 and 2
This question tested candidates’ knowledge of double entry and their ability to apply their knowledge,
using a logical thought process.
The most effective approach is to focus on the requirement (which is presented in bold typeface) as a
first step.
By doing this it becomes clear that each error should be considered separately, and a decision made as
to whether or not the error will be detected by extracting a trial balance.
Error (1) relates to the entry made in a book of prime entry. In this case, although the entry in the
purchases day book is incorrect (due to a discrepancy between the source document and the daybook)
the debit and credit values posted to the general ledger will be the same. Therefore, the trial balance
will not reveal the error.
Error (2) also relates to the entries in a daybook. In this case, the overcasting of the total column will
mean that the value from this column (which is posted to debit side of the receivables control account
in the general ledger) will be different to the total value of the credit entries (posted from the individual

analysis columns to various general ledger accounts).
Consequently, this error will be detected by extracting a trial balance.
Based on this logical approach, the correct answer is choice B.
The fact that both errors relate to entries in daybooks may have been incorrectly interpreted by some
candidates as leading to the conclusion that both will have the same effect on the trial balance –
leading to either choice C or choice D being selected. Candidates needed to consider each error
separately in order to decide on the individual impacts on the trial balance. The key point is that it is
the nature of the error, not the accounting record in which it was made, that will determine the impact
on the trial balance.
Example 2
At the year end Luis had a balance of $143,800 on his trade receivables account, and a balance of
$1,974 on his receivables allowance account, which was brought forward from the previous year.
He has decided that a balance of $1,250 should be written off as irrecoverable, and that the
receivables allowance should be 2% of the remaining balances.
What is the receivables expense in his statement of profit or loss?
A $877
B $2,851
C $2,127
D $4,101
As in the previous example, the best starting point is the requirement – to calculate the receivables
expense. Once this has been clarified, it is easier to deal with the data provided.
The first step is to adjust the year end balance to obtain the value of receivables after the irrecoverable
balance is written off.
This is $143,800 - $1,250 = $142,550.
The second step is to calculate the value of the receivables allowance that is required at the year end.
This will be based on the revised value (calculated at step 1) and the percentage allowance.
This is $142,550 x 2% = $2,851.
The third step is to calculate the movement in the allowance from the end of the previous year to the
end of the current year.
This is an increase of $877 (current year $2,851 – previous year $1,974).

To complete the question, the fourth step is to calculate the receivables expense for the year. This is
the total of:
the movement in the allowance from the previous year to the current year; and
the value of the irrecoverable balance written off.
As the movement is an increase, the total expense is $877 plus $1,250 = $2,127 (choice C).
To obtain the correct answer, it was essential that candidates had a clear understanding of the
technical issues relating to the receivable allowance and the receivables expense, as set out in the four
steps above.
It was also essential to have read the requirement carefully to ensure that the correct value was
calculated. In addition, an effective approach is to complete the calculation before considering any of
the choices. This avoids
the error of selecting choices A or B – which are obtained part way through the calculation needed to
correctly answer the question.
Another point to note is that it also essential to differentiate between the treatment of an increase in
the allowance (as in this question) and the treatment of a reduction in the allowance – as follows:
as the receivables allowance is a credit balance, it follows that an increase in the allowance
requires a credit entry in the allowance account, and a debit entry in the receivables expense
account. In this case, the expense comprises two debit entries (the value written off PLUS the
increase in the allowance).
however, if the allowance needs to be reduced, a debit entry is required in the allowance
account, and a credit entry is required in the expense account. In this case both a debit entry
and a credit entry will be made in the expense account, and the expense in the statement of
profit or loss will be for the net amount of these entries.
Example 3
When preparing the bank reconciliation at 30 April, the balance on Yared’s bank account in his general
ledger was $2,524 (debit) and the balance on his bank statement was $4,578 (credit).
Yared had issued a cheque for $5,547, but he recorded the value as $4,557. Also other cheques, with
a total value of $5,744, had been issued but had not been processed by the bank.
The only other item to be dealt with is an outstanding lodgement.
What is the value of the outstanding lodgement?
A $4,680
B $3,690
C $8,788
D $2,700
Once again, it is good practice to read the requirement first. In this case, it will become apparent that

one item of data has not been provided. The question can then be answered by adopting the correct
approach to carrying out a bank reconciliation, which is:
- clarify whether each item of data provided in the question requires an entry to be made in the
bank account in the general ledger or if it will be a reconciling item;
- adjust the bank account in the general ledger to obtain the corrected bank balance; and
- prepare the reconciliation statement to confirm that the difference between the corrected bank
balance and the balance on the bank statement is explained by the reconciling items.
Taking this approach produces the following:
- the cheque incorrectly recorded requires an adjusting entry in the bank account in the general
ledger
- the adjusting entry is for $990, As the value recorded was understated, a credit entry is needed
- the corrected balance on the bank account in the general ledger is the combination of the
balance on the account, which is $2,524 (debit) and the correcting entry of $990 (credit) =
$1,534 (debit)
- as the error in the cheque is the only adjusting entry, the reconciled balance is $1,534 (debit)
- the reconciliation statement is:
Bank statement balance $4,578 credit on statement =cash at
bank
Outstanding cheques $5,744 debit entry on statement
Subtotal $1,166 overdrawn (credit on ledger
account)
Outstanding lodgement balancing figure debit on ledger account = cash
lodged
= Reconciled balance $1,534 debit on ledger account
Thus, the value of the outstanding lodgement is $2,700 (the debit entry required to reconcile the
overdrawn figure with the corrected ledger balance).
Summary
In the introduction to this report, reference was made to previous reports. It is worthwhile highlighting
that all of the previous reports have noted that two reasons tend to explain why candidates select
incorrect choices –
- a lack of awareness / understanding of fundamental issues in the syllabus; and

- question requirements not being read carefully enough, leading to confused thinking
Candidates preparing for future exams are encouraged to note the reasons and to ensure that their
preparation will ensure that a clear understanding of the key points of each area of the syllabus has
been developed and that, in the exam, they read the requirement carefully and adopt a logical
approach.

Examiner’s report
General Comments
Example 1
Which of the following is/are included in the IASB’s Conceptual Framework for Financial Reporting definition of
an asset?
(1) Resource controlled by the entity

(2) Resulting from a past event
(3) There is expected to be an outflow of future economic benefits
A 1 and 2 only
B 1 and 3 only
C 1, 2 and 3
D 2 and 3 only
This question is designed to test candidates’ knowledge of the elements of the financial statements. The question
focuses on the IASB’s Conceptual Framework for Financial Reporting definition of an asset. The framework
provides the following definition of an asset
‘A resource controlled by an entity, resulting from a past event, from which an inflow of economic benefit is
expected’.
Although this is a knowledge based question, one of the common mistakes candidates make on these types of
question is to misread some part of the question. You should take time to read the question carefully.
Statement 1 is correct being ‘Resource controlled by an entity’ this is included in the definition above.
Statement 2 is correct ‘Resulting from a past event’ as this is also included in the above definition.
Statement 3 is incorrect. Statement 3 refers to an ‘expected cash outflow’ this forms part of the definition of a
liability, not part of the definition of an asset. A number of candidates selected answers B or C indicating that
they thought statement 3 was correct. It seems likely that candidates misread the statement and assumed that it
was referring to an inflow rather than an outflow.

Example 2
Naomi received a supplier statement from John showing she owed John $56,438. This did not agree with John’s
account balance in Naomi’s payables ledger. The following discrepancies were identified:
(1) A cheque from Naomi for $4,243 had not been received by John
(2) Naomi had not received an invoice for $2,130 from John
What is the balance on John’s payables account in Naomi’s ledger after any corrections are made?
A $50,065
B $54,325
C $62,811
D $52,195
Candidates traditionally find reconciliation questions difficult. This question is testing candidates’ understanding
of how a supplier statement reconciliation is performed.
Naomi has received a statement of account from one of her suppliers, John. John’s accounts show that Naomi
owes him $56,438. Naomi’s ledger did not agree to this balance, so she had to investigate what those
differences related to.
Statement 1 refers to a cheque that Naomi has sent to John, but John has not yet received this cheque. Naomi
has already accounted for the fact that she has issued this cheque and has processed it through her ledgers,
therefore her balance would be $4,243 lower than John’s supplier statement. This is a timing difference that will
be corrected in John’s books once they process the payment.
Statement 2 Naomi had not received an invoice of $2,130. If Naomi had not received an invoice she should
accrue for this invoice and therefore Naomi’s books should be adjusted to include this balance. Once this accrual
has been made the difference will no longer exist.
As we are not told the balance in Naomi’s books we have to assume that these are the only differences. We are
starting with John’s balance and therefore the only adjustment we need to make is for the payment that Naomi
has sent to John, meaning that the correct answer to this question should be ($56,438 – $4,243) = $52,195
which is D.
Example 3
Alfred is registered for sales tax. He makes sales of $25,000 including sales tax and purchases goods for $7,000
excluding sales tax. The opening balance on the sales tax account was $500 credit. Sales tax is 20%.
What is the closing balance on the sales tax account?
A $3,600
B $3,000
C $2,267
D $3,267

When attempting sales tax questions, you must read the information carefully. Sales and purchases can be either
including or excluding sales tax, this is key to getting the calculations correct.
Sales tax is at 20%, and the sales figure of $25,000 includes sales tax. The $25,000 therefore represents 120%
of the underlying sales figure. To calculate the sales tax amount included in this transaction we must multiply the
sales tax inclusive figure by the tax rate divided by 100 plus the tax rate. In this question that would be
calculated as follows:
$25,000 x 20/120 = $4,167
This amount would credit the sales tax account so would be added to the opening balance of $500, making a
subtotal of $4,667.
The purchases are excluding sales tax therefore the sales tax would be calculated by taking 20% of the $7,000,
giving $1,400. This would be debited to the sales tax account, and would reduce the subtotal of $4,667 to
$3,267, therefore giving answer D.
Summary
The first is that there was a lack of awareness / understanding of fundamental issues in the syllabus (eg definition
of assets). The second is that the questions were not read carefully enough, which led to confused thinking, such
as miscalculation of sales tax amounts or selecting the incorrect theoretical answer.

Examiner’s report
General Comments
The intention of this report is that, when considered in conjunction with previous reports,
candidates at future sittings will have a resource which maximises their chance of success. The
most effective way to use these reports is to consider both the technical content of each question,
and the approach to answering the question – noting that different question types will require
slightly different approaches.
In considering the technical content, candidates should make sure that they have a clear
understanding of that content. While not every candidate will use exactly the same approach, it is
important to ensure that a logical and sequential approach is applied, based on relevant technical
knowledge.
Example 1
Gusto owns a grocery store and prepares accounts to 31 March each year. On 1 April 2015 he
purchased a new delivery van costing $5,000 to use in his business. He incorrectly recorded this
as maintenance expenses. Gusto has a policy of depreciating vehicles over 5 years and assumes
a nil residual value.
How will the correction of this error affect the profit for the year ended 31 March 2016?
A. Increase profits by $4,000

B. Increase profits by $5,000
C. Decrease profits by $1,000
D. Decrease profits by $4,000
This question is designed to test candidates’ knowledge of how errors should be corrected in the
financial statements. This specific example is testing the candidate’s knowledge of how the original
error should be corrected as well as any subsequent effects on other balances.
With this example, the cost of the asset has been taken to maintenance expenses in error, this will
need to be reversed and will therefore increase the profits by $5,000 and increase the asset cost in
the statement of financial position by the same amount. However, as the asset was not recorded
correctly, no depreciation will have been charged on the asset. Depreciation for this type of asset is
straight line over 5 years. As the asset has been held for the entire year a full years depreciation
will need to be charged, this amounts to $1000 ($5000/5). The depreciation will be charged to the
statement of profit or loss as an expense and will therefore reduce the profit for the year.
The net effect on the profit for the year ended 31 March 2016 would be an increase of $4000
($5000 increase, less the $1000 reduction). Therefore answer A is correct.
Examiner’s report – FA2 Jan - Jun 2016 1

Example 2
Rashid held the following inventory at 30 April 2016.

Units Cost per unit Selling price per unit Selling costs per unit
200 $13.50 $15.00 $2.50
What should be the closing inventory balance as at 30 April 2016?
A. $2,500
B. $3,000
C. $2,700
D. $3,200
This question is testing the candidates’ application of the principles in IAS 2 Inventory. IAS 2 states
that inventory should be measured at the lower of cost and net realisable value.
The cost of the inventory above is $13.50, this excludes the selling costs. The selling costs do not
form part of the cost of the inventory.
The selling costs should be deducted from the selling price to arrive at the net realisable value. The
net realisable value on this question is $12.50 ($15 selling price less the $2.50 selling cost), which
is lower than the original cost of the inventory, therefore this should be used to establish the
closing inventory balance. Rashid is holding 200 units of inventory which should be valued at
$12.50 each, giving a total value of $2,500. Therefore answer A is correct.
Example 3
Julie is preparing a reconciliation between her receivables control account and the receivables
ledger. The balance on the receivables control account is $67,240 and the total of the list of
balances in the receivables ledger is $54,568.
Which of the following would explain the difference?
A. A cash receipt of $12,672 from Gary has been correctly posted to the receivables control
account, but has not been included in Gary’s account in the receivables ledger.
B. An invoice to Karen of $12,672 has been omitted from the sales day book.
C. Discounts allowed of $6,336 have been included on the wrong side of the receivables control
account.
D. A contra with Mason of $6,336 has not been included in the receivables control account.
Candidates traditionally find reconciliation questions difficult. This example is testing the
understanding of the reconciliation of the receivables control account to the receivables ledger.
When attempting reconciliation questions, candidates must read the question carefully. Candidates
need to understand what the balances are on both the receivables control account and the list of
balances in the receivables ledger. It is important to carefully read through the scenarios in each of
the options to decide if they could explain the difference between the two balances.
Examiner’s report – FA2 Jan – Jun 2016 2

Statement A does not account for the difference as this would mean that the control account
balance would be lower than the list of balances in the receivables ledger, but here the receivables
control account is higher.
Statement B, omitting an invoice from the day book, would mean that the transaction is likely to me
eliminated from both the control account and the list of balances, so would not account for this
difference.
Statement C, is the correct answer, as showing the discounts on the wrong side of the control
account would cause the balance to be over inflated. Correcting this error would reduce the
balance by $12672, and would make it agree to the list of balances in the sales ledger control
account.
Statement D, is incorrect. Although the contra would reduce the receivables control account, it
would only account for half of the difference that we are looking for.
Summary
Based on the performance of candidates in these questions, it can be observed that there were
two major reasons for incorrect choices being made.
The first is that there is an apparent lack of awareness / understanding of fundamental issues in
the syllabus (eg the valuation of inventory and the treatment of depreciation). The second is that
the questions were not read carefully enough, such as miscalculation of the reconciliation of the
receivables.
These are the two reasons which have been highlighted in reports for every previous sitting.
Candidates preparing for future sittings are strongly encouraged to ensure that they have
developed a clear understanding of the key points of each area of the syllabus and that they read
carefully and think logically when attempting questions.
Examiner’s report – FA2 Jan – Jun 2016 3

Examiner’s report
General Comments
sittings will have a resource which maximises their chance of success. The most effective way to use the reports
is to consider both the technical content of each question, and the approach to answering the question – noting
that different question types will require slightly different approaches.
Example 1
At 31 December 20X6, Hamza had only two items in inventory. Data relating to the items are:
Item 1 Item 2
$ $
Purchase cost 3,524 4,158
Expenditure on improvements
before 31 December 20X6 220 588
after 31 December 20X6 80 660
Expected sales value 4,600 5,200
In accordance with IAS2 Inventories, what is the value of Hamza’s inventory at 31 December 20X6?
A $8,490
B $7,682
C $8,284
D$9,024
measured at the lower of cost and net realisable value’. IAS 2 goes on to provide definitions of both cost (‘all
costs incurred in bringing the inventories to their present location and condition’) and net realisable value
(‘estimated selling price less the estimated costs of completion and the estimated costs necessary to make the
sale).

position
Using the data in the question:

Item 1: Costs of $3,524 plus $220 have been incurred, leaving the total cost of the inventory at 31 December
20X6 at $3,744. The NRV of the inventory would be the selling price of $4,600 less the further cost to sell of
$80, leaving a NRV of $4,520. The cost is lower therefore inventory item 1 would be measured at $3,744.

Item 2: Costs of $4,158 plus $588 have been incurred, leaving the total cost of the inventory at 31 December
20X6 at $4,746. The NRV of the inventory would be the selling price of $5,200 less the further cost to sell of
$660, leaving a NRV of $4,540. The NRV is lower therefore inventory item 2 would be measured at $4,540.
Based on this, the total value of the inventory in Hamza’s books should be $8,284 (£3,744 + $4,540),
therefore answer C.
Candidates who selected A had correctly calculated cost, but did not apply the rule that this value should only be
used if it is less than net realisable value.
Candidates who selected B did not recognise that conversion costs should be included in the cost of the
inventory.
Candidates that selected answer D incorrectly included costs which had not yet been incurred in their calculation
of cost.
Example 2
In which of the following circumstances would a suspense account be required?
(1) When the trial balance was extracted, the totals of the debit and credit columns did not agree, and the
bookkeeper thinks he knows what has caused this
(2) A cash receipt was recorded in the cash received day book, but the bookkeeper does not know what the cash
was for
A Neither 1 nor 2
B 1 only
C 2 only
D Both 1 and 2
This question is testing the candidates’ knowledge of suspense accounts and when they should be used. In
general, a suspense account should be used when the original double entry didn’t balance or if the bookkeeper
does not know what the opposite side of the double entry is. A suspense account is a temporary solution until the
transaction or error can be investigated further.
Statement 1: if the trial balance does not balance, this indicates that there has been an error in the accounts and
the debits and credits do not agree, suggesting that at least one of the bookkeeping transactions did not balance
when originally posted. Therefore this would give rise to a suspense account.
Statement 2: as the bookkeeper does not know what the transaction if for, it cannot be posted to the correct
account, therefore a suspense account should be used until the cash receipt has been investigated.
Thus the correct answer is D.
Candidates who selected any of the incorrect choices appear to have misinterpreted some of the information and
/ or not thought carefully about how a suspense account should be used.
This kind of question clearly illustrates the need for candidates to read the question carefully and to think
carefully and logically before choosing their answer.

Example 3
Which of the following errors will be detected by extracting a trial balance?
A A cash receipt of $624 was recorded in the cash received daybook as $642
B An invoice issued to David Ellis was posted to Elliott Davis’s account
C The sales tax column of the sales day book was overcast by $99
D A credit note issued to a customer was recorded as an invoice
Errors that can be detected by a trial balance are those in which the double entry transactions did not balance. If
one of the totals in the books of prime entry (i.e. the sales day book) has been incorrectly cast, this would cause
the original double entry to be out of balance. Therefore this would be detected when extracting a trial balance,
thus answer C is the correct answer.
Transactions that have been incorrectly recorded in the books of prime entry would not cause an imbalance in
the trial balance as both sides of the double entry would have been incorrectly posted. Therefore answer A is
incorrect. Answer B does not relate to the double entry, this is referring to an invoice being posted to an incorrect
memorandum account, so is also incorrect. D is referring to the whole entry being treated incorrectly; this would
not cause an imbalance in the trial balance.
Summary
The first is that there were gaps in candidates’ knowledge caused by a lack of understanding of fundamental
issues in the syllabus (eg valuation of inventory and the use of suspense accounts). The second is that the
questions were not read carefully enough, which led to rushed or confused thinking.
These reasons have been highlighted in reports for every previous sitting. Candidates preparing for future sittings
are strongly encouraged to ensure that they have developed a clear understanding of the key points of each area
of the syllabus and that they read carefully and think logically when attempting questions.

Examiner’s report
General Comments
Sample Questions
Example 1
Irma has the following information about her inventory at 31 October:
Item Cost Expected selling price Expected selling costs
$ $ $
1 4,260 6,100 1,100
2 3,590 4,100 800
3 2,800 3,700 300
In accordance with IAS 2 Inventories, what is the value of Irma’s inventory at 31 October?
A $10,650
B $10,360
C $11,700
D $8,450
measured at the lower of cost and net realisable value’. IAS2 goes on to provide definitions of both cost (‘all costs
incurred in bringing the inventories to their present location and condition’) and net realisable value (‘estimated
selling price less the estimated costs of completion and the estimated costs necessary to make the sale).

position
Using the data in the question:

Item Cost Expected selling price Expected selling costs NRV
$ $ $ $
1 4,260 6,100 1,100 5,000
2 3,590 4,100 800 3,300
3 2,800 3,700 300 3,400
Examiner’s report – FA2 Jan-June 2017 1

Items 1 and 3 should be valued at their costs of $4,260 and $2,800 respectively, item 2 should be valued at its
NRV of $3,300. Therefore the correct answer is that Irma’s inventory should be valued at $10,360, so the
answer is option B.
Candidates who selected A had valued everything at cost, answer C values everything at NRV and answer D
deducts the selling costs from the original cost.
Example 2
Which of the following statements about depreciation is correct?
A The depreciation charge generates funds to replace non-current assets

B The value of each non-current asset should be written down to nil over its useful life
C Depreciation charges should ensure that non-current assets are reported at their anticipated sales value
D Only non-current assets which have a finite useful life should be depreciated
This question is testing the candidate’s knowledge of depreciation and the purpose of the depreciation charge.
IAS 16 requires depreciation to be charged to reflect the cost of the asset to the entity in the profit and loss
account over its useful life.
The correct answer is D, only non-current assets with a finite useful life should be depreciated.
A is incorrect as the depreciation charge does not create any cash resources, it is a non-cash expense. Answer B
is incorrect as the assets are not written down to nil over their useful lives, they should be written down to their
residual values. Answer C is incorrect as the carrying value of the assets does not reflect their anticipated sales
value in the statement of financial position.
Candidates who selected any of the incorrect choices appear to have misinterpreted some of the accounting
standard and/or not thought carefully about what depreciation should represent in the financial statements.
Example 3
In accordance with the IASB’s Conceptual Framework for Financial Reporting, which of the following is necessary
for accounting information to be relevant?
(1) It is free from bias

(2) It is capable of influencing the economic decisions of users
A Both 1 and 2
B Neither 1 nor 2
C 1 only
D 2 only
This question required candidates to have a comprehensive knowledge of the IASB’s Conceptual Framework for
Financial Reporting. Both of the statements appear in the conceptual framework, however the candidates needed
to recognise which related to the requirement for the information to be “relevant”.
Statement 1 is incorrect, as the characteristic of being “free from bias” is not associated with information being
relevant. It is associated with information being reliable.

Statement 2 is correct as information is deemed to be relevant if it is capable of influencing the economic
decisions of users.
Candidates who selected the answers A, B or C, either did not read the question correctly or did not possess
enough knowledge about the conceptual framework.
The correct answer is D.
Summary
The first is that there was a lack of awareness/understanding of fundamental issues in the syllabus (e.g. valuation
of inventory and the accounting equation). The second is that the questions were not read carefully enough,
which led to confused thinking.

Examiner's Report - FA2 PDF

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Originaltitel

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

Examiner's Report - FA2 PDF

Hochgeladen von

Copyright:

Verfügbare Formate

Examiner’s report

FA2 Maintaining Financial Records

Sample Questions for Discussion

(1) depreciation charge $8,350

You have the following information:

Examiner’s report – FA2 December 2011 1

Total value of opening capital $86,300

Total additional capital $9,000

Total interest $10,070.50

Examiner’s report – FA2 December 2011 2

Examiner’s report – FA2 December 2011 3

Sample Questions for Discussion

Which of the following statements is correct?

Examiner’s report – FA2 June 2012 1

Which of the following statements is/are correct?

A Neither 1 nor 2 Key

Thus neither statement is correct.

Examiner’s report – FA2 June 2012 2

In this case, the calculation was:

Balance after write off $104,350 ($104,750 - $400)

Charge to income statement $400 - $169 = $231

Errors which led to the incorrect choice being selected were:

Examiner’s report – FA2 June 2012 3

Examiner’s report – FA2 December 2012 1

These entries lead to capital balances as follows:

Examiner’s report – FA2 December 2012 2

A Always use the realisable value of each individual item

These observations remain valid following this session.

Examiner’s report – FA2 December 2012 3

Sample Questions for Discussion

The question provided key information as follows:

the basis on which depreciation is to be calculated (straight line)

Examiner’s report – FA2 Jan-Jun 2013 1

The key points here are:

Examiner’s report – FA2 Jan-Jun 2013 2

Receivables balance $99,550

= Closing allowance $1,976

less Opening allowance $1,760

= Increase (thus charge to income statement) $ 216

+ Irrecoverable debt $ 750

= Total charge to income statement $ 966

Examiner’s report – FA2 Jan-Jun 2013 3

A bank reconciliation is carried out by completing the following steps:

Thus, the correct choice is C.

Examiner’s report – FA2 Jan-Jun 2013 4

Examiner’s report – FA2 Jan-Jun 2013 5

Sample Questions for Discussion

The definitions in the standard could be simplified as follows:

Examiner’s report – FA2 Jul-Dec 2013 1

Which of the following could explain this discrepancy?

Thus the correct answer is B.

Examiner’s report – FA2 Jul-Dec 2013 2

What is the effect of these errors on Amir’s capital balance?

The accounting equation states: assets – liabilities = capital.

Examiner’s report – FA2 Jul-Dec 2013 3

Examiner’s report – FA2 Jul-Dec 2013 4

Sample Questions for Discussion

When the error is corrected, what is Clare’s revised profit?

Examiner’s report – FA2 Jan-Jun 2014 1

This means that the net adjustment is $5,760 - $960, or $4,800.

(1) this is a legal requirement

Therefore, the correct choice was D.