Examiner's report, Study notes of Financial Accounting

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Examiner’s report

FA1 Recording Financial Transactions

For CBE and Paper exams covering July to

December 2018

The examining team share their observations from the marking process to

highlight strengths and weaknesses in candidates’ performance, and to offer

constructive advice for future candidates.

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. As an exam which is solely made up of multiple choice questions, candidates should never leave any questions unanswered; if unsure candidates should proceed by elimination and go for any answer they have narrowed down as correct. Sample questions for discussion Example 1 Anne’s payables control account shows a credit balance of $35,000. The total of the individual suppliers’ balances in the payables ledger is $40,000. Which of the following is the reason for the difference? A A purchase invoice of $5,000 has been omitted from the purchase day book B The total of the purchase day book has been overcast by $5, C A purchase return of $5,000 has been omitted from the control account D A sales invoice of $5,000 has been credited to an individual supplier’s account What does this test?  The reconciliation of the control account to the total of the list of the individual accounts. What is the correct answer?  The correct answer is D  This question tests the difference between the payables control account – which is made up of the totals from the books of prime entry and the payables ledger which is made up of the total from the individual supplier accounts.

 With this question, it is important to identify which account is affected, is it the control account or the list of individual supplier accounts. Candidates need understand how the process works.  A purchase invoice is entered into the purchase day book; from there it is recorded in the individual supplier account, then at the end of the day the total of the purchase day book is posted to the payables control account.  In this question, the payables control account is $5,000 lower than the total of the individual balances so if we look at options.  Option A – if an invoice was omitted from the purchase day book, it would not be recorded in either the individual’s account or the control account so both would be wrong by the same amount.  Option B – if the purchase day book is overcast then the amount on the control account would be more that the total of the individual accounts, as it was lower we could rule this one out.  Option C – a purchase return has been omitted from the control account, again if this was the case it would make the balance on the control account more instead of less than the total of the individual accounts, so this could also be ruled out.  Option D – this was a sales invoice that had been incorrectly posted to an individual’s payable account instead of correctly going to a receivables account and this would therefore cause the individual payable account to be overstated and would result in $5, more than the control account. This was therefore the correct answer. Example 2 On 4 June, Matthew received $3,000 cash from a credit customer and $360 from a cash sale. Matthew is registered for sales tax at 20%. What amount of sales tax should be recorded in the cash book on 4 June? A $ B $ C $ D $ What does this test?  The point at when a company records the sales tax on a transaction What is the correct answer?  The correct answer is B  If the transaction is a credit sale – the first time it is recorded in the books of prime entry is when the invoice is entered into the sales day book, at this point the sales tax will be recorded, and not when the cash is received from the credit customer.

 If the transaction is a cash sale – the first time it is recorded in the books of prime entry is when the cash is received and entered into the cash book, at this point the sales tax will be recorded.  So when Matthew receives the $3,000 from the credit customer the sales tax is not recorded in the cash book as it would have already been accounted for in the sales day book.  When Matthew receives the $360 from the cash sale, the sales tax will need to be recorded in the cash book. The amount received will be inclusive of the sales tax so the amount of sales tax to record in the cash book will be $360 x 20/120 = $60 shown in option B. Example 3 The following information relates to Ravi’s sales for the year: Cash sales $56, Credit sales $72, Cash received from credit customers $61, Credit notes issued to credit customers $3, Prompt payment discounts taken by credit customers $1, Ravi does not maintain a separate sales returns account. What amount should be included for sales in the trial balance? A $126, B $187, C $124, D $129, What does this test?  The transactions which affect the sales account in the trial balance. What is the correct answer?  The correct answer is C The entries for the above transactions are as follows:  Cash sales DR Cash CR Sales  Credit Sales DR Receivables CR Sales  Cash received from credit customers

DR Cash CR Receivables  Credit notes issued to credit customers DR Sales CR Receivables  Settlement discounts given to credit customers DR Sales CR Receivables  So the entries that would go to the sales account and therefore make up the sales figure in the trial balance are the cash sales plus the credit sales less the credit notes and the prompt payment discounts, therefore $56,500 + $ 72,800 - $3,200 - $1,900 = $124,200. Example 4 The columns of Simeon’s trial balance did not agree and a suspense account was created. The following errors were identified: Error 1 $36,750 paid as wages was correctly recorded in the cash book but had been debited to the wages account as $37, Error 2 Drawings of $14, 500 had been debited to the wages account. When the errors are corrected, which would require an entry in the suspense account? A 1 only B 2 only C Both 1 and 2 D Neither 1 and 2 What does this test?  The errors which affect the trial balance and those which do not What is the correct answer?  The correct answer is A  If the trial balance does not balance then a suspense account is created. This will happen when there is a mismatch of debits and credits.  Error 1: the double entry is correct in that the cash account has been credited and wages debited but because these are different amounts, then there will be a mismatch and the trial balance will not balance, this means when the error is corrected, a suspense account will be required.  Error 2: the wrong account has been debited here but the correct amount was used therefore there is no mismatch between the debits and credits and therefore the trial balance will still balance hence no suspense account is required when the error is corrected. Summary

Based on the performance of candidates in these questions, it can be observed that the questions that are more knowledge based score much higher than those requiring application. Candidates appear to struggle with applying their knowledge to the given scenarios or do not read the questions carefully enough, so the wrong options are chosen. As noted in previous comments the best way for candidates to prepare for future sittings is to ensure that they have developed a clear understanding of the key points of each area of the syllabus and that they read the questions carefully and think logically when attempting them.