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S T U D Y PAPER F1 ACCOUNTANT IN BUSINESS In this edition approved by ACCA x We discuss the best strategies for studying for ACCA exams x We highlight the most important elements in the syllabus and the key skills you will need x We signpost how each chapter links to the syllabus and the study guide x We provide lots of exam focus points demonstrating what the examiner will want you to do x We emphasise key points in regular fast forward summaries x We test your knowledge of what you've studied in quick quizzes x We examine your understanding in our exam question bank x We reference all the important topics in our full index BPP's i-Learn and i-Pass products also support this paper. FOR EXAMS IN DECEMBER 2009 AND JUNE 2010 T E X T First edition 2007 Third edition June 2009 ISBN 9780 7517 6361 4 (Previous ISBN 9780 7517 4720 1) British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd BPP House, Aldine Place London W12 8AA www.bpp.com/learningmedia Printed in the United Kingdom All our rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media Ltd. We are grateful to the Association of Chartered Certified Accountants for permission to reproduce past examination questions. The suggested solutions in the exam answer bank have been prepared by BPP Learning Media Ltd, except where otherwise stated. Your learning materials, published by BPP Learning Media Ltd, are printed on paper sourced from sustainable, managed forests. © BPP Learning Media Ltd 2009 ii Contents Page Introduction How the BPP ACCA-approved Study Text can help you pass Studying F1 The exam paper v vii ix Part A Business organisational structure, governance and management 1a 1b 2 3 4 5 Business organisation and structure – structure and strategy Business organisation and structure – departments and functions Information technology and systems Influences on organisational culture Ethical considerations Corporate governance and social responsibility 3 27 51 65 85 99 Part B Key environmental influences 6 7 The macro-economic environment The business environment 121 149 Part C History and role of accounting 8 The role of accounting 181 Part D Specific functions of accounting and internal financial control 9 10 Control, security and audit Identifying and preventing fraud 215 241 Part E Leading and managing individuals and teams 11 12 13 Leading and managing people Individuals, groups and teams Motivating individuals and groups 261 287 307 Part F Recruiting and developing effective employees 14 15 16 17 18 Personal effectiveness and communication Recruitment and selection Diversity and equal opportunities Training and development Performance appraisal Exam question bank Exam answer bank Index 327 351 375 385 405 421 427 433 Review form and free prize draw Contents iii A note about copyright Dear Customer What does the little © mean and why does it matter? Your market-leading BPP books, course materials and e-learning materials do not write and update themselves. People write them: on their own behalf or as employees of an organisation that invests in this activity. Copyright law protects their livelihoods. It does so by creating rights over the use of the content. Breach of copyright is a form of theft – as well as being a criminal offence in some jurisdictions, it is potentially a serious breach of professional ethics. With current technology, things might seem a bit hazy but, basically, without the express permission of BPP Learning Media: x Photocopying our materials is a breach of copyright x Scanning, ripcasting or conversion of our digital materials into different file formats, uploading them to facebook or emailing them to your friends is a breach of copyright You can, of course, sell your books, in the form in which you have bought them – once you have finished with them. (Is this fair to your fellow students? We update for a reason.) But the e-products are sold on a single user licence basis: we do not supply ‘unlock’ codes to people who have bought them second-hand. And what about outside the UK? BPP Learning Media strives to make our materials available at prices students can afford by local printing arrangements, pricing policies and partnerships which are clearly listed on our website. A tiny minority ignore this and indulge in criminal activity by illegally photocopying our material or supporting organisations that do. If they act illegally and unethically in one area, can you really trust them? iv How the BPP ACCA-approved Study Text can help you pass – AND help you with your Practical Experience Requirement! NEW FEATURE – the PER alert! Before you can qualify as an ACCA member, you do not only have to pass all your exams but also fulfil a three year practical experience requirement (PER). To help you to recognise areas of the syllabus that you might be able to apply in the workplace to achieve different performance objectives, we have introduced the ‘PER alert’ feature. You will find this feature throughout the Study Text to remind you that what you are learning to pass your ACCA exams is equally useful to the fulfilment of the PER requirement. Tackling studying Studying can be a daunting prospect, particularly when you have lots of other commitments. The different features of the text, the purposes of which are explained fully on the Chapter features page, will help you whilst studying and improve your chances of exam success. Developing exam awareness Our Texts are completely focused on helping you pass your exam. Our advice on Studying F1 outlines the content of the paper and the necessary skills the examiner expects you to demonstrate. Exam focus points are included within the chapters to provide information about skills that you will need in the exam and reminders of important points within the specific subject areas. Using the Syllabus and Study Guide You can find the syllabus, Study Guide and other useful resources for F1 on the ACCA web site: www.accaglobal.com/students/study_exams/qualifications/acca_choose/acca/fundamentals/ab The Study Text covers all aspects of the syllabus to ensure you are as fully prepared for the exam as possible. Testing what you can do Testing yourself helps you develop the skills you need to pass the exam and also confirms that you can recall what you have learnt. We include Exam-style Questions – lots of them - both within chapters and in the Exam Question Bank, as well as Quick Quizzes at the end of each chapter to test your knowledge of the chapter content. Introduction v Chapter features Each chapter contains a number of helpful features to guide you through each topic. Topic list Topic list Syllabus reference Tells you what you will be studying in this chapter and the relevant section numbers, together with the ACCA syllabus references. Introduction Puts the chapter content in the context of the syllabus as a whole. Study Guide Links the chapter content with ACCA guidance. Exam Guide Highlights how examinable the chapter content is likely to be and the ways in which it could be examined. FAST FORWARD Summarises the content of main chapter headings, allowing you to preview and review each section easily. Examples Demonstrate how to apply key knowledge and techniques. Key terms Definitions of important concepts that can often earn you easy marks in exams. Exam focus points Provide information about skills you will need in the exam and reminders of important points within the specific subject area. Formula to learn Formulae that are not given in the exam but which have to be learnt. This is a new feature that gives you a useful indication of syllabus areas that closely relate to performance objectives in your PER. vi Introduction Question Give you essential practice of techniques covered in the chapter. Case Study Provide real world examples of theories and techniques. Chapter Roundup A full list of the Fast Forwards included in the chapter, providing an easy source of review. Quick Quiz A quick test of your knowledge of the main topics in the chapter. Exam Question Bank Found at the back of the Study Text with more comprehensive chapter questions. Studying F1 1 What the paper is about The overall aim of the Accountant in Business syllabus is to introduce accountancy firmly in its context as a central business function. This encompasses: x x x x x x Business structure and management Environmental analysis and influences Accounting and its relationship with other business functions Regulation and the accounting profession Audit and internal control People management issues The six broad areas of the syllabus are not given specific weightings, indicating that questions on the examination paper could be drawn from any source. The syllabus areas are as follows. 2 x Business organisation structure, governance and management How the organisation is structured and governed. You will study organisational concepts, the influence of organisational culture and the role of IT and the importance of effective information systems. Ethics, governance and social responsibility are also important here. x Key environmental influences It is important to understand the macro-economic environment within which a business operates. The PEST framework provides a useful way to analyse direct environmental influences. x History and role of accounting The purpose of the accounting function merits specific consideration in this syllabus and this section provides a theoretical basis for the detailed analysis of the accounting function which follows. x Specific functions of accounting and internal financial control This section of the syllabus examines the detailed aspects of accounting systems in a typical organisation, internal financial control and audit. This function plans and monitors business performance, and also has a key role to play in detecting and preventing fraud. x Leading and managing individuals and teams It is important to understand how the management and motivation of staff aligns with wider organisational objectives. This section of the syllabus explores both theoretical and practical aspects of what is generally termed 'people management'. x Recruiting and developing effective employees The recruitment and development of employees is another important organisational activity. Ensuring that employees develop constructive relationships and work effectively is a way of making sure that they contribute towards organisational objectives. What's required This exam tests two intellectual levels in its questions: knowledge and comprehension, and application and analysis. You will need to be familiar with the basic models and theories associated with organisations, business functions and people management, and be able to apply these basic ideas to questions where ideas are explored. There are several broad question types: x x x x 'True or false' for one mark Multiple choice questions with 'choose one answer from four options' for two marks Multiple choice questions with 'choose one answer from three options' for one mark Multiple choice questions with 'choose one answer from two options' for one mark Despite the fact that the questions are all short ones carrying only one or two marks, it is still possible for higher skills of comprehension to be tested. Introduction vii Note also that exam questions will not include country-specific questions. There will also be no negative questions such as 'which of the following is not…?' However, the examiner has stated that these types of questions are useful for revision purposes and so these types of questions are included in our materials. 3 How to pass Cover the whole syllabus The exam consists of 40 two mark questions and 10 one mark questions. With 50 questions at his disposal, the examiner has plenty of scope to test all major areas of the syllabus. For this reason it is not advisable to study the syllabus selectively, as the format of the exam enables all topics to be tested in some way. The pass mark for F1 is 50%. Practise, practise and practise again! We cannot emphasise enough the importance of practising questions throughout your studies. Make sure that you attempt the questions within the Study Text chapters, the quick quizzes at the end of each chapter and the questions in the question bank at the back of the Text. When you are revising for the exam you should practise more questions using the Practice and Revision Kit. The i-Pass CD contains further questions for extra practice. viii Introduction The exam paper Format of the paper 40 two mark questions 10 one mark questions Number of marks 80 10 90 Time allowed: 2 hours Pass mark: 50% Guidance The syllabus is assessed by a two-hour paper or computed-based examination. There will be either eight or nine questions on each of the generic syllabus areas in every examination. Questions will test knowledge and some comprehension or application of this knowledge. The examinations will consist of 40 two mark questions and 10 one mark questions. The detailed syllabus is shown on page x and the ACCA's study guide is shown at the beginning of each chapter. The ACCA's website is a useful source of other information relating to the F1 exam. For example, the examiner writes a report on how students have performed after each exam sitting. Visit the 'exam paper resources' section on www.accaglobal.com/students/study_exams/ Introduction ix Detailed syllabus A Business organisation structure, governance and management 1 2 3 4 5 6 7 8 B Key environmental influences and constraints on business and accounting 1 2 3 4 5 C 5 Introduction Leadership, management and supervision Individual and group behaviour in business organisations Team formation, development and management Motivating individuals and groups Recruiting and developing effective employees 1 2 3 4 x Accounting and finance functions within business Internal and external auditing and their functions Internal financial control and security within business organisations Fraud and fraudulent behaviour and their prevention in business. Leading and managing individuals and teams 1 2 3 4 F The history and function of accounting in business Law and regulation governing accounting Financial systems, procedures and IT applications The relationship between accounting and other business functions Specific functions of accounting and internal financial control 1 2 3 4 E Political and legal factors Macro-economic factors Social and demographic factors Technological factors Competitive factors History and role of accounting in business 1 2 3 4 D The business organisation and its structure The formal and informal business organisation Organisational culture in business Stakeholders of business organisations Information technology and information systems in business Committees in the business organisation Business ethics and ethical behaviour Governance and social responsibility in business Recruitment and selection, managing diversity, and equal opportunity. Techniques for improving personal effectiveness at work and their benefits Features of effective communication Training, development, and learning in the maintenance and improvement of business performance Review and appraisal of individual performance P A R T A Business organisational structure, governance and management 1 2 Business organisation and structure – structure and strategy Topic list 1 Types of organisation 2 Organisational structure 3 Levels of strategy in the organisation Syllabus reference A1 (a) A1 (b)(f) A1 (d) Introduction Organisations develop out of the need to co-ordinate work, but this can be achieved in different ways. In this chapter we identify the different types of organisation (Section 1). There are various influences upon organisational structure (Section 2). Most firms have some sort of organisation hierarchy reflecting the levels of strategy-making (Section 3). We can see the strategic apex (eg Board of Directors) at the top, through ranks of middle managers to the operating core where the work is done. 3 Study guide Intellectual level A1 The business organisation and its structure (a) Identify the different types of organisation: (i) Commercial (ii) Not-for-profit (iii) Public sector (iv) Non-governmental organisations (v) Cooperatives (b) Describe the different ways in which organisations may be structured: entrepreneurial, functional, matrix, divisional, departmental, by geographical area and by product. 1 (d) Explain the characteristics of the strategic, tactical and operational levels in the organisation in the context of the Anthony hierarchy. 1 (f) Explain basic organisational structure concepts: 1 (i) Separation of direction and management (ii) Span of control and scalar chain (iii) Tall and flat organisations 1 Exam guide This chapter lays the foundation for an understanding of what organisations are, what they do and how they do it. Organisational structure concepts (Section 2) represent a higher level of knowledge. According to the Study Guide you must be able to apply knowledge to exam questions. 1a: Business organisation and structure ~ Part A Business organisational structure, governance and management 4 – structure and strategy 1 Types of organisation 1.1 What all organisations have in common Key term An organisation is: 'a social arrangement which pursues collective goals, which controls its own performance and which has a boundary separating it from its environment'. Here are some examples of organisations. x x x A multinational car manufacturer (eg Ford) An accountancy firm (eg Ernst and Young) A charity (eg Oxfam) x x x A local authority A trade union (eg Unison) An army The common characteristics of organisations are as follows. (a) Organisations are preoccupied with performance, and meeting or improving their standards. (b) (c) Organisations contain formal, documented systems and procedures which enable them to control what they do. Different people do different things, or specialise in one activity. (d) They pursue a variety of objectives and goals. (e) Most organisations obtain inputs (eg materials), and process them into outputs (eg for others to buy). 1.2 Why do organisations exist? Organisations can achieve results which individuals cannot achieve by themselves. (a) Organisations overcome people's individual limitations, whether physical or intellectual. (b) Organisations enable people to specialise in what they do best. (c) Organisations save time, because people can work together or do two aspects of a different task at the same time. Organisations accumulate and share knowledge. (d) (e) Organisations enable synergy: by bringing together two individuals their combined output will exceed their output if they continued working separately. In brief, organisations enable people to be more productive. 1.3 How organisations differ The common elements of organisations were described in paragraph 1.1, but organisations also differ in many ways. Here are some possible differences. (a) (b) (c) (d) (e) Ownership Some organisations are owned by private owners or shareholders. These are private sector organisations. Public sector organisations are owned by the government. Control Some organisations are controlled by the owners themselves but many are controlled by people working on their behalf. Some are indirectly controlled by government-sponsored regulators. Activity What organisations actually do can vary enormously. They could be manufacturing organisations, for example, or they could be a healthcare service. Profit or non-profit orientation Some businesses exist to make a profit. Others, for example the army, are not profit orientated. Legal status Organisations may be limited companies or partnerships. Part A Business organisational structure, governance and management ~ 1a: Business organisation and structure – structure and strategy 5 (f) (g) (h) Size The business may be a small family business or a multinational corporation. Sources of finance Business can raise finance by borrowing from banks or government funding or issuing shares. Technology Businesses have varying degrees of technology use. For example, computer firms will have high use of technology but a corner shop will have very low use. 1.4 What the organisation does Organisations do many different types of work. Here are some examples. Industry Activity Agriculture Producing and processing food Manufacturing Acquiring raw materials and, by the application of labour and technology, turning them into a product (eg a car) Extractive/raw materials Extracting and refining raw materials (eg mining) Energy Converting one resource (eg coal) into another (eg electricity) Retailing/distribution Delivering goods to the end consumer Intellectual production Producing intellectual property eg software, publishing, films, music etc Service industries These include retailing, distribution, transport, banking, various business services (eg accountancy, advertising) and public services such as education, medicine 1.5 Profit vs non-profit orientation An important difference in the list above is between profit orientated ('commercial') and non profit orientated organisations. The basic difference in outlook is expressed in the diagram below. Note the distinction between primary and secondary goals. A primary goal is the most important: the other goals support it. 1.6 Private vs public sector Key terms Private sector: organisations not owned or run by central or local government, or government agencies Public sector: organisation owned or run by central or local government or government agencies 1a: Business organisation and structure ~ Part A Business organisational structure, governance and management 6 – structure and strategy 1.7 Private sector businesses A business organisation exists to make a profit. In other words, the costs of its activities should be less than the revenues it earns from providing goods or services. Profits are not incidental to its activities but the driving factor. Business organisations come in all different shapes and sizes, and there is a choice of legal structure. 1.7.1 Legal status Someone setting up a business can choose to go into business alone, take on one or more partners who also share the profits of the business, or set up a limited company. 1.7.2 Limited companies Key terms A limited company has a separate legal personality from its owners (shareholders). The shareholders cannot normally be sued for the debts of the business unless they have given some personal guarantee. Their risk is generally restricted to the amount that they have invested in the company when buying the shares. This is called limited liability. Whereas sole traderships and partnerships are normally small business, limited company status is used for businesses of any size. The ownership and control of a limited company are legally separate even though they may be vested in the same individual or individuals. (a) Shareholders are the owners but have limited rights, as shareholders, over the day to day running of the company. They provide capital and receive a return. Shareholders could be large institutional investors (such as insurance companies and pension funds), private individuals, or employees. (b) Directors are appointed by shareholders to run the company. In the UK, the board of directors controls management and staff, and is accountable to the shareholders, but it has responsibilities towards both groups – owners and employees alike. (c) (i) Executive directors participate in the daily operations of the organisation. (ii) Non-executive directors are invited to join in an advisory capacity, usually to bring their particular skills or experience to the discussions of the board to exercise some overall guidance. Operational management usually consists of career managers who are recruited to operate the business, and are accountable to the board. 1.7.3 Types of limited company In the UK, limited companies come in two types: private limited companies (eg X Limited) and public limited companies (eg X plc). They differ as follows. (a) Number of shareholders. Most private companies are owned by only a small number of shareholders. Public companies generally are owned by a wider proportion of the investing public. (b) Transferability of shares. Shares in public companies can be offered to the general public. In practice this means that they can be traded on a stock exchange. Shares in private companies, on the other hand, are rarely transferable without the consent of the shareholders. (c) Directors as shareholders. The directors of a private limited company are more likely to hold a substantial portion of the company's shares than the directors of a public company. Part A Business organisational structure, governance and management ~ 1a: Business organisation and structure – structure and strategy 7 (d) Source of capital (i) A private company's share capital will normally be provided from three sources. – – – (ii) The founder or promoter Business associates of the founder or employer Venture capitalists A public company's share capital, in addition, can be raised from the public directly, or through institutional investors, using recognised markets. Many companies start in a small way, often as family businesses which operate as private companies, then grow to the point where they become public companies and can invite investors to subscribe for shares. The new capital thus made available enables the firm to expand its activities and achieve the advantages of large scale operation. 1.7.4 Advantages and disadvantages of limited companies Advantages x x x x x x More money available for investment. Reduces risk for investors thanks to limited liability. Separate legal personality. A company can own property, make contracts etc. Ownership is legally separate from control. Investors need not get involved in operations. No restrictions on size. Some companies have millions of shareholders. Flexibility. Capital and enterprise can be brought together. Disadvantages x Legal compliance costs. Because of limited liability, the financial statements of most limited companies have to be audited, and then published for shareholders. x Shareholders have little practical power, other than to sell their shares to a new group of managers, although they can vote to sack the directors. 1.7.5 Co-operative societies and mutual associations Co-operatives are businesses owned by their workers or customers, who share the profits. Here are some of the features they have in common. x x x x Open membership Democratic control (one member, one vote) Distribution of the surplus in proportion to purchases Promotion of education. Case Study A major example of a co-operative in the UK is the Co-operative Retail Store network. In addition there is the Co-operative Wholesale Society and the Co-operative Bank. Another example is the John Lewis Partnership. Mutual associations are similar to co-operatives in that they are 'owned' by their members rather than outside investors. (a) (b) Some financial companies used to be mutual associations. However, building societies in the UK such as the Abbey National and the Halifax converted from being mutual associations to being banks. The Nationwide Building Society has held out against this, so far citing the lower interest rates it can offer to borrowers. Credit unions are examples of mutual associations. They are financial institutions owned and controlled by their members. 1a: Business organisation and structure ~ Part A Business organisational structure, governance and management 8 – structure and strategy Question Legal form Florence Nightingale runs a successful and growing small business as a sole trader. She wishes to expand the business and has her eyes on Scutari Ltd, a small private limited company in the same line. After the acquisition, she runs the two businesses as if they were one operation making no distinction between them. What is the legal form of the business she is running? Answer This is quite a tricky question. For example, if suppliers have contracts with Scutari Ltd, the contract is with the company, and Florence is not legally liable for the company's debts. If their contracts are with Florence, then they are dealing with her personally. Florence has to make a choice. (a) (b) (c) She can run the entire business as a sole trader, in which case Scutari Ltd's assets must be transferred to her She can run her entire business as a limited company, in which case she would contribute the assets of her business as capital to the company She can ensure that the two business are legally distinct in their assets, liabilities, income and expenditure. 1.8 The public sector The public sector comprises all organisations owned and run by the government and local government. Here are some examples. x x The armed forces Most schools and universities x Government departments Public sector organisations have a variety of objectives. x x The Benefits Agency administers part of the social security system. The Post Office makes a profit from mail services, although it does have a social function too. 1.8.1 Key characteristics of the public sector (a) Accountability, ultimately, to Parliament (b) Funding. The public sector can obtain funds in three main ways. (i) (ii) (iii) Raising taxes Making charges (eg for prescriptions) Borrowing (c) Demand for services. There is a relationship between the price charged for something and the 'demand'. In the public sector demand for many services is practically limitless. (d) Limited resources. Despite the potentially huge demand for public services, constraints on government expenditure mean that resources are limited and that demand cannot always be met. 1.8.2 Advantages (a) Fairness. The public sector can ensure that everyone has access to health services. (b) Filling the gaps left by the private sector, by providing public goods such as streetlighting. (c) Public interest. Governments once believed the public interest was best served if the state ran certain services. Economies of scale. Costs can be spread if everything is centralised. (d) Part A Business organisational structure, governance and management ~ 1a: Business organisation and structure – structure and strategy 9
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