Students

Practice makes perfect!

The three financial reporting papers requireactive learning. Practice makes perfect and makes passing these exams much more likely.

This article considers the three financial reporting papers and asks what you, the student, can do to be successful in your preparation for each of the papers in this series:

● As you would expect, the Foundation paper requires a basic knowledge and understanding of financial statements.

● The Professional Level 1 paper requires a knowledge of more complex financial reporting issues, including consolidation.

● The final Professional Level 2 paper requires detailed knowledge, understanding and critical evaluation skills of all the accounting standards detailed on the syllabus.

The Foundation paper

The Foundation paper may initially appear quite straightforward as it is simply composed of 25 objective test questions. On the law of averages, someone with no knowledge would score around 25%, so some students may believe they can easily pass with a low level of knowledge. However, the multiple choice questions are designed to test not only basic knowledge but also understanding, so the level of preparation required is quite significant.

In recent papers, students have been asked to complete tasks such as calculating a profit or loss on disposal, with the calculations requiring: a knowledge of the method of depreciation; an understanding of how it is calculated; and the intricacies of full year or pro rata. Then, and only then, can a student correctly calculate the profit/ loss on disposal.

A further example might be in relation to cash flow, where a student may be asked the amount of cash outflow for additions to non-current assets. This would involve a more detailed understanding of how to derive the additions from the opening and closing balance, and details of disposals and depreciation. This does not just involve following a process, but applying your knowledge of the process to work backwards to reach the correct answer.

With objective test questions such as these, students need to prepare in detail, just as they would for a paper with longer questions – perhaps even more so, as it is not possible to gain partial credit for objective test questions. Don’t just memorise the content, practise questions in all areas of the syllabus.

Key takeaways

1. It’s not just about learning the material; it is about understanding. 2. The best way to build understanding is by attempting practice questions. 3. There is no partial credit for method marks so your knowledge and understanding must be secure.

What can you do to be successful in your preparation for each of the three financial reporting papers?

Professional Level 1

Professional Level 1 represents a progression from the Foundation paper and assumes that the core concepts of double entry and preparation of financial statements are secure. All the questions are compulsory so students must cover all the syllabus.

Time management becomes important as there is a lot to do in the given time. Two key areas which students must master are: preparation of company financial statements from a trial balance with adjustments; and preparation of consolidated financial statements. Students should be confident in the content of all the financial statements; namely, the statement of profit or loss, the statement of financial position, the statement of changes in equity, and the cash flow statement.

For the question on the presentation of individual company financial statements, the adjustments may test knowledge of the correct accounting treatment for inventory, grants, depreciation, accruals and prepayments, and doubtful debts among others.

● Timed conditions: Practising the completion of clear, accurate workings and the presentation of the financial statements under timed conditions is the best way of achieving success in these questions. They are process driven, so repetition of these processes as part of your exam preparation is critical.

● Completion of practice consolidation questions: This will enable students to build up their skills and their ability to complete these questions under time pressure. Cash flow statements are a largely numerical

process and with practice students can become very adept at preparing this financial statement. The more times that students can repeat and refine these processes, the more skilled the student will become.

● Exam preparation: Question practice is essential. Find a couple of hours to set aside. Start with a blank sheet and attempt the question. You will be slow at first and each time you make an error you will learn from it. Don’t repeat this error. The next time you attempt a question it will be slightly faster, and you will make a different error. Don’t give up. It is better to make these errors at home before the exam. Each time you attempt a question you will improve your speed and make fewer mistakes. This is essential if you hope to pass Professional Level 1.

There are other elements within the paper covering accounting standards, but these can be learned separately and are not too challenging at this level.

Key takeaways

1. Attempt practice questions which involve preparing financial statements from a trial balance with adjustments under timed conditions.

2. Practise consolidation questions under timed conditions.

3. Make flashcards or similar summaries of the key points of other accounting standards.

Professional Level 2

The Professional Level 2 exam builds on both Professional Level 1 and the Foundation level. If your foundations are shaky, then you will need to fill any gaps in your knowledge.

Hopefully, by the time you reach Professional Level 2 you are confident with the preparation of individual and consolidated financial statements, leaving you time to learn some of the additional complications that may be tested at this level.

The examiner assumes you know how to prepare a straightforward set of consolidated financial statements so may now include more testing calculations, such as disposals of group companies, deferred consideration and impairment of goodwill.

● Critically evaluating accounting treatments: This ability will also be required. It involves more than just completing the calculations, but rather an understanding of why this is the preferred accounting treatment. This requires students to think about the reason for the calculations and how it fits with the Conceptual Framework.

● More challenging standards: More challenging standards will be tested, including share-based payments, deferred taxation, foreign currency and financial instruments, to name but a few. These standards are conceptually more difficult. It is important that as you work through the course, you summarise each standard with the key points listed.

● Exam preparation: Write in your own words what the key requirements of each standard are and then attempt questions on the standard. Try to note down scenarios that can be used in an exam question. Each time you attempt a question, make a note of the scenario that the examiner used so that next time you face a similar scenario you will know how to proceed. It may seem that the examiner continually examines a standard in a different way but there are a limited number of types of scenarios that can be used for each standard. As you work through the material you will start to see commonalities in the questions, and this is a sign that you are starting to master the subject area.

At each stage students must continually practise questions, and this is the key to success.

Key takeaways

1. For each standard, note the objective of the standard and the key requirements. Practise questions relating to the standard and note the scenario and how it needs to be dealt with under the accounting standard.

2. Practise writing critical evaluation of accounting standards, reflecting on the reasons for the accounting treatment and how it fits into the conceptual framework.

3. Keep your learning active. Attempting to answer questions is the best method to learn the subject material.

The need for active preparation

Financial accounting is challenging. The progression through the three papers requires a cumulative acquisition of knowledge and understanding of the preparation of financial statements, starting from basic identification and summary of transactions, through more complicated group structures to complex accounting standards.

At each stage, students must continually practise questions, and this is the key to success in this subject area. Reading questions and then reading the solutions is not enough. You must start with a blank page and attempt a question under timed conditions to replicate the exam situation.

If you can’t do a question under these conditions, then keep practising until you can and then you will be rewarded by success in your exams. Good luck!