CIMA - C2 Fundamentals of Financial Accounting
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x Introduction
Moving on...
However you study, when you are ready to embark on the practice and revision phase of the BPP Learning Media
Effective Study Package, you should still refer back to this Study Text, both as a source of reference (you should
find the index particularly helpful for this) and as a way to review (the Fast forwards, Assessment focus points,
Chapter roundups and Quick quizzes help you here).
And remember to keep careful hold of this Study Text – you will find it invaluable in your work.
More advice on Study Skills can be found in BPP Learning Media's Learning to Learn Accountancy book.
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Introduction xi
Learning outcomes and Syllabus
Paper C2 Fundamentals of Financial Accounting
This is an introduction to financial accounting and assumes no prior knowledge of the subject. It deals with the
recording of accounting transactions and the preparation of accounting statements for single entities. The basic
concepts of accounting are dealt with and the student will be expected to understand the limitations of financial
accounts in attempting to meet the needs of all users. An understanding of the different approaches to asset
valuation and the resulting influence on profit management is required.
There is an introduction to the regulatory framework that determines published accounts requirements and a basic
introduction to the role of accounting standards. An awareness of published accounts is required but students will
not be asked to prepare accounts in a published accounts format. No knowledge of any specific accounting
standard is required. There will be an introduction to accounting systems and their control.
Although the emphasis is on the basic methods and techniques of the subject, students will be expected to develop
a critical approach by asking why the methods and techniques are used and in what circumstances they are
appropriate.
This syllabus addresses the fundamentals of the subject and recognises that some terms and definitions vary from
one area of the world to another. As a result students can use accepted alternative names to those that appear in
this syllabus and be aware of alternative accounting formats. For example International Accounting Standard 1
(IAS 1) uses Income Statement instead of Profit and Loss Account and Non-current assets instead of Fixed Assets.
Others include inventories, receivables and payables. All of these are acceptable for use in answers in this paper
but it will be expected that they are applied consistently. Similarly, IAS 1 provides illustrations of accounting
formats that are used widely in published accounts and are acceptable in this paper.
Learning aims
This syllabus aims to test the student's ability to:
• Explain the conceptual and regulatory framework of accounting
• Explain the nature of accounting systems and understand the control of such systems
• Prepare and interpret accounts for a single entity
• Interpret simple ratios
Assessment
The assessment is computer-based lasting 120 minutes and comprises 50 compulsory questions, each with one or
more parts.
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xii Introduction
Learning outcomes and syllabus content
C2A Conceptual and regulatory framework – 20%
Learning outcomes
On completion of their studies students should be able to:
(i) Identify the various user groups which need accounting information and the qualitative characteristics of
financial statements
(ii) Explain the function of, and difference between, financial and management accounting systems
(iii) Identify the underlying assumptions, policies and changes in accounting estimates
(iv) Explain and distinguish capital and revenue, cash and profit, income and expenditure, assets and liabilities
(v) Identify the difference between tangible and intangible assets
(vi) Explain the historical cost convention
(vii) Identify the basic methods of valuing assets on current cost, fair value and value in use bases and their
impact on profit measures and statement of financial position values
(viii) Explain the influence of legislation (eg Companies Acts, EC directives) and accounting standards on the
production of published accounting information for organisations
Syllabus content Covered in chapter
1 Users of accounts and the objectives and the quantitative characteristics of
financial statements; functions of financial and management accounts;
purpose of accounting statements; stewardship; the accounting equation
1, 2, 22, 23
2 Underlying assumptions; policies; changes in accounting estimates; capital
and revenue; cash and profit; income, expenditure, assets and liabilities
2, 3, 7
3 Tangible and intangible assets 2
4 Historical cost convention 7
5 Methods of asset valuation and their implications for profit measurement
and the statement of financial position
7
6 The regulatory influence of company law and accounting standards; items
in formats for published accounts
3, 18, 22
C2B Accounting systems – 20%
Learning outcomes
On completion of their studies students should be able to:
(i) Explain the purpose of accounting records and their role in the accounting system
(ii) Prepare cash and bank accounts and bank reconciliation statements
(iii) Prepare petty cash statements under an imprest system
(iv) Prepare accounts for sales and purchases including personal accounts and control accounts
(v) Identify the necessity for financial accounting codes and construct a simple coding system
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Introduction xiii
(vi) Prepare nominal ledger accounts, prepare journal entries and a trial balance
(vii) Prepare accounts for indirect taxes
(viii) Prepare accounts for payroll
Syllabus content Covered in chapter
1 The accounting system and accounting records 4
2 Ledger accounts; double entry bookkeeping 5
3 Preparation of accounts for cash and bank; bank reconciliations; imprest
system for petty cash
4, 5, 12
4 Accounting for sales and purchases including personal accounts and control
accounts
4, 5, 13
5 Financial accounting codes and their uses 4
6 Nominal ledger accounting; journal entries 5
7 Trial balance 6
8 Accounting for indirect taxes (eg VAT) 14
9 Accounting for payroll 15
C2C Control of accounting systems – 15%
Learning outcomes
On completion of their studies students should be able to:
(i) Identify the requirements for external audit and the basic processes undertaken
(ii) Explain the purpose and basic procedures of internal audit
(iii) Explain the meaning of fair presentation
(iv) Explain the need for financial controls
(v) Explain the purpose of audit checks and audit trails
(vi) Explain the nature of errors and to be able to make accounting entries for them
(vii) Explain the nature of fraud and basic ideas of fraud prevention
Syllabus content Covered in chapter
1 External audit and the meaning of fair presentation 23
2 Internal audit 23
3 Financial controls; audit checks on financial controls; audit trails 23
4 Errors and fraud 16, 23
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xiv Introduction
C2D Preparation of accounts for single entitites – 45%
Learning outcomes
On completion of their studies students should be able to:
(i) Prepare accounts using accruals and prepayments
(ii) Explain the difference between bad debts and allowances for receivables
(iii) Prepare accounts for bad debts and allowances for receivables
(iv) Calculate the methods of depreciation
(v) Prepare accounts using each method of depreciation and for impairment values
(vi) Prepare a non-current asset register
(vii) Prepare accounts for inventories
(viii) Prepare income statements, statements of changes in equity and statements of financial position from trial
balance
(ix) Prepare manufacturing accounts
(x) Prepare income and expenditure accounts
(xi) Prepare accounts from incomplete records
(xii) Interpret basic ratios
(xiii) Prepare cash flow statements
Syllabus content Covered in chapter
1 Adjustments to the trial balance: accruals and prepayments 8, 17
2 Bad debts and allowances for receivables 10
3 Accounting treatment for depreciation (straight line, reducing balance and
revaluation methods) and impairment
9
4 Non-current asset register 9
5 Accounting for inventories (excluding construction contracts); methods of
inventory measurement (FIFO, LIFO and average cost)
11
6 Income statements and statements of financial position from trial balance:
statement of changes in equity
6, 18
7 Manufacturing accounts 21
8 Income and expenditure accounts 20
9 Production of accounting statements from incomplete data 19
10 Ratios: return on capital employed; gross and net profit margins; asset
turnover; trade receivables collection period and trade payables payment
period; current and quick ratios; inventory turnover; gearing
25
11 Statements of cash flows 24
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Introduction xv
The assessment
Format of computer-based assessment (CBA)
The CBA will not be divided into sections. There will be a total of fifty objective test questions and you will need to
answer ALL of them in the time allowed, 2 hours.
Frequently asked questions about CBA
Q
What are the main advantages of CBA?
A • Assessments can be offered on a continuing basis rather than at six-monthly intervals
• Instant feedback is provided for candidates by displaying their results on the computer screen
Q
Where can I take CBA?
A
• CBA must be taken at a 'CIMA Accredited CBA Centre'. For further information on CBA, you can
email CIMA at cba@cimaglobal.com.
Q
How does CBA work?
A • Questions are displayed on a monitor
• Candidates enter their answers directly onto a computer
• Candidates have 2 hours to complete the Fundamentals of Financial Accounting examination
• The computer automatically marks the candidate's answers when the candidate has completed the
examination
• Candidates are provided with some indicative feedback on areas of weakness if the candidate is
unsuccessful
Q
What sort of questions can I expect to find in CBA?
Your assessment will consist entirely of a number of different types of objective test question. Here are some
possible examples.
• MCQs. Read through the information on page (xvii) about MCQs and how to tackle them.
• Data entry. This type of OT requires you to provide figures such as the correct figure for payables in a
statement of financial position.
• Multiple response. These questions provide you with a number of options and you have to identify those
which fulfil certain criteria.
This text provides you with plenty of opportunities to practise these various question types. You will find OTs
within each chapter in the text and the Quick quizzes at the end of each chapter are full of them. The Question
Bank contains more than one hundred and twenty objective test questions similar to the ones that you are likely to
meet in your CBA.
Further information relating to OTs is given on page (xviii).
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xvi Introduction
The Practice and Revision Kit for this paper was published in December 2009 and is full of OTs, providing you
with vital revision opportunities for the fundamental techniques and skills you will require in the assessment.
BPP Learning Media’s MCQ Cards were published in February 2010 and provide you with 100 MCQs to practice
on, covering the whole syllabus.
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Introduction xvii
Tackling multiple choice questions
In a multiple choice question on your paper, you are given how many incorrect options?
A Two
B Three
C Four
D Five
The correct answer is B.
The MCQs in your assessment contain four possible answers. You have to choose the option that best answers
the question. The three incorrect options are called distracters. There is a skill in answering MCQs quickly and
correctly. By practising MCQs you can develop this skill, giving you a better chance of passing the exam.
You may wish to follow the approach outlined below, or you may prefer to adapt it.
Step 1 Skim read all the MCQs and identify what appear to be the easier questions.
Step 2 Attempt each question – starting with the easier questions identified in Step 1. Read the question
thoroughly. You may prefer to work out the answer before looking at the options, or you may prefer
to look at the options at the beginning. Adopt the method that works best for you.
Step 3 Read the four options and see if one matches your own answer. Be careful with numerical
questions, as the distracters are designed to match answers that incorporate common errors. Check
that your calculation is correct. Have you followed the requirement exactly? Have you included every
stage of the calculation?
Step 4 You may find that none of the options matches your answer.
• Re-read the question to ensure that you understand it and are answering the requirement.
• Eliminate any obviously wrong answers.
• Consider which of the remaining answers is the most likely to be correct and select the
option.
Step 5 If you are still unsure make a note and continue to the next question.
Step 6 Revisit unanswered questions. When you come back to a question after a break you often find you
are able to answer it correctly straight away. If you are still unsure have a guess. You are not
penalised for incorrect answers, so never leave a question unanswered!
Assessment focus. After extensive practice and revision of MCQs, you may find that you recognise a question
when you sit the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar
read the requirement and options carefully – do not assume that it is identical.
BPP Learning Media's i-Pass for this paper provides you with plenty of opportunity for further practice of MCQs.
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xviii Introduction
Tackling objective test questions
Of the total marks available for the paper, objective test questions (OTs) comprise 20/50 per cent. Questions will be
worth between 2 to 4 marks.
What is an objective test question?
An OT is made up of some form of stimulus, usually a question, and a requirement to do something.
(a) Multiple choice questions
(b) Filling in blanks or completing a sentence
(c) Listing items, in any order or a specified order such as rank order
(d) Stating a definition
(e) Identifying a key issue, term, figure or item
(f) Calculating a specific figure
(g) Completing gaps in a set of data where the relevant numbers can be calculated from the information given
(h) Identifying points/zones/ranges/areas on graphs or diagrams, labelling graphs or filling in lines on a graph
(i) Matching items or statements
(j) Stating whether statements are true or false
(k) Writing brief (in a specified number of words) explanations
(l) Deleting incorrect items
(m) Choosing right words from a number of options
(n) Complete an equation, or define what the symbols used in an equation mean
OT questions in CIMA assessment
CIMA has offered the following guidance about OT questions in the assessment.
• Credit may be given for workings where you are asked to calculate a specific figure.
• If you exceed a specified limit on the number of words you can use in an answer, you will not be awarded
any marks.
Examples of OTs are included within each chapter, in the quick quizzes at the end of each chapter and in the
objective test question bank.
BPP Learning Media's i-Pass for this paper provides you with plenty of opportunity for further practice of OTs.
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Introduction xix
International terminology
Your Fundamentals of Financial Accounting assessment will use international accounting terms and this text is
written in international accounting terms.
It is a good idea to start now getting used to these terms. Following the recent changes in terminology due to the
revision of IAS 1, we give a list of UK terms with their international equivalents.
UK term International term
Profit and loss account Income statement (statement of comprehensive income)
Profit and loss reserve (in balance sheet) Accumulated profits
Balance sheet Statement of financial position
Turnover Revenue
Debtor account Account receivable
Debtors (eg debtors have increased) Receivables
Debtor Customer
Creditor account Account payable
Creditors (eg creditors have increased) Payables
Creditor Supplier
Debtors control account Receivables control account
Creditors control account Payables control account
Stock Inventory
Fixed asset Non-current asset (generally). Tangible fixed assets are also referred to
as ‘property, plant and equipment’.
Long term liability Non-current liability
Provision (eg for depreciation) Allowance (you will sometimes see ‘provision’ used too).
Nominal ledger General ledger
VAT Sales tax
Debentures Loan notes
Preference shares/dividends Preferred shares/dividends
Cash flow statement Statement of cash flows
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