Acca f3 Financial Accounting (int) Study Text

4

1: Introduction to accounting   Part A  The context and purpose of financial reporting 

Study guide 

Intellectual level

A1 

The reasons for and objectives of financial reporting 

(a) 

Define financial reporting – recording, analysing and summarising financial 

data.

1

(b) 

Identify and define types of business entity – sole trader, partnership, 

limited liability company. 

1

(c) 

Recognise the legal differences between a sole trader, partnership and a 

limited liability company. 

1

(d) 

Identify the advantages and disadvantages of operating as a limited liability 

company, sole trader or partnership. 

1

(e) 

Understand the nature, principles and scope of financial reporting. 

1

A2

Users' and stakeholders' needs

(a) 

Identify the users of financial statements and state and differentiate between 

their information needs.

1

A3 

The main elements of financial reports 

(a) 

Understand and identify the purpose of each of the main financial 

statements.

1

(b) 

Define and identify assets, liabilities, equity, revenue and expense. 

1

Exam guide 

The exam consists of 10 1 mark and 40 2 mark MCQs. Any of the topics in this chapter could form the 

basis of a 1 or 2 mark question. 

Remember that all fifty questions are compulsory and will cover most of the syllabus. Therefore, do not 

neglect these introductory topics. Just because the exam is composed of MCQs, do not assume that it is 

easy (it's not). Also the format means that no method marks are available 

At the 2009 ACCA Teachers' Conference, the examiner reminded students that they need to study the full 

breadth of the syllabus. 

1 The purpose of financial reporting 

1.1 What is financial reporting? 

Financial reporting is a way of recording, analysing and summarising financial data. 

Financial data is the name given to the actual transactions carried out by a business eg sales of goods, 

purchases of goods, payment of expenses. 

These transactions are 

recorded in books of prime entry (which we will study in detail in 

Chapter 4

). 

The transactions are 

analysed in the books of prime entry and the totals are posted to the ledger accounts 

(see 

Chapter 5

). 

Finally, the transactions are 

summarised in the financial statements, which we will meet in section 5 of 

this chapter (and will study in detail in 

Chapter 6

). 

FAST FORWARD

Exam focus 

point

---

Part A  The context and purpose of financial reporting 

  1:  Introduction to accounting

5

Question

Financial reporting 

Financial reporting means the financial statements produced only by a large quoted company. 

Is this statement correct? 

A Yes 

B No 

Answer

The correct answer is B. Financial reporting is carried out by all businesses, no matter what their size or 

structure.

2 Types of business entity 

2.1 What is a business? 

Businesses of whatever size or nature exist to make a 

profit.

There are a number of different ways of looking at a business. Some ideas are listed below. 

 

A business is a 

commercial or industrial concern which exists to deal in the manufacture, re-sale 

or supply of goods and services. 

 

A business is an 

organisation which uses economic resources to create goods or services which 

customers will buy. 

 

A business is an 

organisation providing jobs for people. 

 

A business invests 

money in resources (for example: buildings, machinery, employees) in order to 

make even more money for its owners. 

This last definition introduces the important idea of profit. Businesses vary from very small businesses (the 

local shopkeeper or plumber) to very large ones (ICI, IKEA, Corus). However all of them want to earn profits. 

Profit is the excess of revenue (income) over expenditure. When expenditure exceeds revenue, the 

business is running at a loss. 

One of the jobs of an accountant is to measure revenue and expenditure, and so profit. It is not such a 

straightforward problem as it may seem and in later chapters we will look at some of the theoretical and 

practical difficulties involved. 

2.2 Types of business entity

There are three main types of business entity. 

 Sole 

traders 

 Partnerships 

 

Limited liability companies 

Sole traders are people who work for themselves. Examples include the local shopkeeper, a plumber and a 

hairdresser. The term sole trader refers to the 

ownership of the business, sole traders can have employees. 

Partnerships occur when 

two or more people decide to run a business together. Examples include an 

accountancy practice, a medical practice and a legal practice. 

Limited liability companies are incorporated to take advantage of 'limited liability' for their owners 

(shareholders). This means that, while sole traders and partners are 

personally responsible for the 

Key term 

FAST FORWARD

---