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CHAT SESSION WITH ACCA F7 TUTOR

What are the 4 ratios one must not miss in its analysis?
ACCA Tutor: only one ratio which really MUST be shown - ROCE

Can you tell how do I comment on dividend yield?

ACCA Tutor: It's an investor ratio - people - the global investor, may be interested in the cent
return per dollar invested

What is the gearing ratio formula?

ACCA Tutor: Long term loans / capital employed or long term loans / Equity

For profitability ratios, do we comment on both the gross profit margin and net profit
margin? If so, how? They somehow interlink with each other, right?
ACCA Tutor: I think one would be enough. The difference could be where expenses are out of
control - so GP would be / may be static, but net profit has fallen

If let’s say I would want to comment on Gross Profit margin, what would I comment on?
ACCA Tutor: Your comment would be on the movement - last year it was 20% this year it's
18% - that's a fall of ten %. Could be for any number of reasons - discounts offered, price war,
competition, rise in purchase cost which we have been unable to pass on ....

What’s the first approach in front of a ratio analysis question?

ACCA Tutor: Decide who you are writing to - if it's eg a bank, they will be interested in interest
cover and profitability and security. If it's a potential investor, they could be interested in
dividend cover, dividend yield, assets per share and similar.

What is meant by window dressing & creative accounts and what is the difference?
ACCA Tutor: window dressing is defined as "entering into, or not entering into, a transaction
purely with the intention of distorting the view shown by the fin stats" Creative accounting is
one example of window dressing

What is a contingent consideration?

ACCA Tutor: Its consideration which MAY become payable upon the outcome of some
substantially uncertain future event

So in the calculation of goodwill, for that contingent consideration, do we take the fair value
amount or the actual amount to be paid?
ACCA Tutor: If so, I'm not convinced that the BPP answer is correct. My understanding is that,
on the determination of the contingency, an adjustment should be made in the gq calculation.

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BPP have treated it differently. There is soon to be an upload of MY answers to the June 2010
exam - and I've treated it the same as BPP - but reluctantly!

Contingent consideration that change value at the date of acq call for a revision of goodwill
but after the date of acq, no revision of goodwill is made it is expensed in the i/s?
ACCA Tutor: yes, there should be a review to determine whether fair values were correctly
stated - the anniversary review but it won't happen (probably) in F7

How do we know when an adjusting event occurs?

ACCA Tutor: does it affect a condition or situation which EXISTED at the accounting date? If it
does, then it's an adjuster

So if let say a fire broke out and destroy 60% of the inventory for re-sale in late November
when the Y/E is 30 June, is it an adjusting event?
ACCA Tutor: No, not unless the fire was before the year end - in which case the stock would
not have been there to be counted. Basically, no, it's a non-adjuster ....unless going concern is
now in doubt

So, that means an adjusting event must exist before year end?
ACCA Tutor: No, it relates to a condition or situation which DID exist at the BS date

In the case where Subsidiary sells to Parents goods, the sales, COS, RE and Inv will be
adjusted... So if Associates sells to Parents, there is no adjustment except for RE right?
ACCA Tutor: and investment in Assoc

Will we have another chat session somewhere in late November?

ACCA Tutor: Yes, I believe that it's scheduled

Abbreviations such as Ret ears, assoc and others I’ve seen on the videos can also be used in
the exam?
ACCA Tutor: yes

How do you get your balance sheets to balance, is there another way round to cross check
ACCA Tutor: Don't bother! If they balance - it still doesn't mean you've got it right

Why equity accounting for associate?

ACCA Tutor: Because that's the rule, assocs are equity accounted to reflect significant
influence, but not control

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Impairment of goodwill in the calculation of investment in associate is it charged in full?

ACCA Tutor: Yes

How is depreciation accounted for in purchases cots in construction contract property,

should only the residual value accounted for and depreciation accounted as foreseeable
loss?
ACCA Tutor: as a part of the costs to date and part of the overall costs of the contract. There
will shortly be MY answer to the June exam dealing with const contracts on the site.
Depreciation should not be ignored.

What about the framework? How to deal with this chapter of the syllabus, should we need
to learn the IAS one by one?
ACCA Tutor: Learn it? It's possibly a part of a bigger question - I personally don't see it as a
major part or even a full question. Maybe you could bring in to a report - q 3 - the definition of
an asset, liability, revenue or expense. I don't believe that it's necessary to learn all the IASs
one by one. They may all (if in the syllabus - be asked indirectly for example, you may be asked
to deal with depreciation, revenue, leases, earnings per share ...... within a bigger question -
even q1. even at P2 level, you are not expected to KNOW all the IAS, IFRS by heart. But a good
understanding cannot be but a good thing

When we say freehold land and building and there is a revaluation and no further
information do we follow ias 40 or 16?
ACCA Tutor: No, follow IAS 16, unless Steve Scott makes it clear that it's an investment
property. Dep expense if there are no instructions in the question do we add it to admin
expense. Steve Scott NORMALLY says "Depreciation is to be included in (e.g.) cost of sales". If
he gives no guidance - use your loaf. If it's manufacturing plant depreciation, include in cos. If
it's motor vehicles, possibly include in Selling and distribution

Are there items that are considered investment property by definition? I mean you know it
is investment property implicitly?
ACCA Tutor: No, he'll have to tell you

I have studied all BPP F7 book, heard all your lectures, now revising. Haven’t revised
consolidation and cashflow statement yet, I feel I can’t remember them is this normal
ACCA Tutor: yes - but there's still 7 weeks to go. Listen to the audios again, and then get into
question practice

I'm still revising may be when I reach consolidation I d have more q

ACCA Tutor: account for the divs. Start with subsid. Dr Ret ears, Credit payables. Then record
parents receivable - their share of the subsid div Credit ret ears, dr receivables. Then cancel

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the p receivable against the element of the S payable then record the P payable Dr ret ears
and credit payables

What is DEPS and how is it calculated

ACCA Tutor: Diluted earnings per share - check out the audio lectures - or even the course
notes as to how to calculate it

In consolidation- group reserves, when the subsidiary makes profit after reporting date,
there is no treatment. But when it makes a loss, we have to apply the parent's acq
percentage and treat it. Why?
ACCA Tutor: The adjustment you are thinking of - I believe - is in calculating the reserves as at
date of acquisition. There was a post-acq loss. Therefore, we need to add the post acq loss to
the retained earnings today to find out what the reserves were as at acqn date

If a parent sells good to the sub and the Sub also sells goods to the parent. What are the
adjustments here?
ACCA Tutor: Whichever company has recognised the profit, make the adjustment in those
books. If it's a TNCA transfer, you'll need also to adjust for the "extra" depreciation which will
have been charged by the buying company

What is the formula of gearing and ROCE because I saw different calculations?
ACCA Tutor: It's normally profit before interest and tax / total assets less current liabilities (ie
capital employed)

If A sells to P, Which workings would be affected eg. Inv. in assoc. or retained earnings or ..?
ACCA Tutor: Ret ears and therefore also investment in Assoc. Again, I always put the full pup
through the Assoc, even when the assoc is buying.

Do we have to study statement of changes in equity, is it required for the exam

ACCA Tutor: yes - it may be asked. He sometimes says that it's not required, sometimes he
asks for it

On the statement of cash flow, dividend paid is treated as operating activity. However I saw
where it was also treated as a financing activity, which is the correct treatment????
ACCA Tutor: They are both allowed alternatives (same as with dividends received) I ALWAYS
treat divs paid as operating

How to do goodwill calculation adjustments in case of groups?

ACCA Tutor: In brief goodwill (parent's share) = consideration paid - net assets of subsidiary at
date of acquisition (fair value of sub's net assets)

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