FEBNM common mistakes
FEBNM · Understand the traps and how to avoid them.
Treating the income statement and the statement of financial position as independent outputs, so a journal entry posted to the wrong account or the wrong period is never traced back through the accounting equation to check that assets equal liabilities plus equity.
Candidates learn each statement in isolation and practise them as separate topics, so they never build the habit of reconciling the two. Under exam time pressure the double-entry check is the first step dropped, and small imbalances then propagate into every later calculation in the question.
What to do instead
After every adjusting entry, write the equation A = L + E and state which two sides move and by how much. Practise ten closing-type questions where you must produce both statements from one trial balance and prove the balance before moving on. Build a personal checklist: accruals, prepayments, depreciation, inventory write-down, tax provision, then re-prove the equation.
Applying the wrong inventory costing method or forgetting that in a period of rising prices FIFO and weighted average give different gross profit, cost of goods sold, and closing inventory, then carrying the same figure into both the income statement and the statement of financial position.
Candidates memorise the mechanics of each method but not the direction of the effect. They also mix up the periodic and perpetual treatments, and they forget that the closing inventory figure is simultaneously a cost of sales deduction and a current asset.
What to do instead
Build a small numerical table for each method showing opening inventory, purchases, cost of goods sold, and closing inventory, and run it under both rising and falling prices. Note explicitly that closing inventory appears twice and must agree. Practise questions that ask only for the direction of the effect, not the number, to lock in the reasoning.
Computing variances correctly in isolation but failing to interpret them, for example labelling a favourable material price variance as good without noting it may reflect lower-quality purchases that then drive an adverse material usage variance or a fall in sales volume.
Variance questions are drilled as arithmetic, so candidates treat each variance as a standalone answer. They rarely link price, usage, labour efficiency, and sales variances into a coherent operational story, and they miss that a favourable variance can signal a bad decision.
What to do instead
For every variance question, write one sentence per variance naming a plausible operational cause and one sentence linking it to at least one other variance. Practise a fixed set of paired explanations: cheap material causing excess usage and rework; rushed production causing labour efficiency gains but quality losses; bulk purchase discounts causing storage and holding cost increases.
Ignoring relevant costing rules and including sunk costs, apportioned fixed overhead, or interest and depreciation in a short-term decision such as accept-or-reject a special order, make-or-buy, or shutdown, and treating opportunity cost as zero when a scarce resource is used.
Candidates default to full absorption cost figures because those are the numbers printed in the question. Sunk costs feel relevant because they are large, and apportioned overheads feel relevant because they appear in the cost card. Opportunity cost is invisible on the page, so it is omitted.
What to do instead
Before calculating, list every cost in the question and mark it relevant or not relevant with a one-word reason: future and incremental, or past, committed, apportioned, or notional. Always ask what the scarce resource would otherwise earn. Practise three decision types with a capacity constraint so the opportunity cost term becomes automatic.
Applying the wrong discounting convention in investment appraisal, mixing nominal cash flows with a real discount rate (or vice versa), using the accounting rate of return as if it were a discounted measure, and forgetting the tax timing and working capital release in the final year.
Candidates learn each technique separately and then meet a question that requires one consistent set of assumptions. The real-versus-nominal rule is easy to state and easy to break under pressure, and the terminal-year working capital recovery is routinely dropped because it is a non-cash flow.
What to do instead
Write a standard layout before calculating: year zero outlay and working capital, operating cash flows, tax on cash flows with a stated lag, working capital recovery, and scrap or residual value. State at the top whether flows are nominal or real and match the rate. Never present accounting rate of return alongside net present value as if they were interchangeable.
Confusing cost of capital inputs, using the coupon rate instead of the yield or market-implied cost of debt, ignoring the tax shield on debt, and using book value weights rather than market value weights in the weighted average cost of capital.
Coupon rate is the most visible number in a bond question, so it is used by default. Book weights are given in the balance sheet extract, while market values require an extra step that candidates skip. The tax shield is a one-line adjustment that is easy to forget.
What to do instead
Memorise the definition of each component: cost of equity from the capital asset pricing model or dividend growth, cost of debt as the post-tax yield to maturity, and weights at market value. Practise a question where coupon and yield differ and where book and market weights differ, so you see the size of the error you are avoiding.
Mixing up elasticity, incidence, and the direction of shifts, for example assuming a price rise always raises revenue, or confusing a movement along a demand curve with a shift in the curve caused by a change in income or a substitute's price.
The vocabulary is intuitive in everyday speech but precise in economics. Candidates answer from intuition rather than from the definition, and they do not connect elasticity to total revenue, which is the examinable consequence.
What to do instead
Learn one rule cold: if demand is elastic, a price rise reduces total revenue; if inelastic, it raises it. For every shift question, name the determinant that changed and state which curve moves. Draw the two-curve diagram from memory five times and annotate it with the determinant labels.
Missing the procedural conditions that make a transaction or decision legally effective, such as whether a resolution needs an ordinary or special majority, whether a director's conflict must be declared and to whom, or whether an agent had actual, implied, or apparent authority.
Candidates study the substantive rule but skip the procedural step, and procedural facts are usually buried in the narrative rather than highlighted. The authority categories sound similar, so they are collapsed into one.
What to do instead
For each topic, write a two-column table: the rule, and the procedure required to invoke it. Include the majority threshold, the timing, the recipient of any notice, and the consequence of non-compliance. For agency, memorise one example of each authority type and the fact that apparent authority requires a representation by the principal.
Computing taxable profit without adjusting accounting profit for disallowable expenditure and non-taxable income, and confusing allowances with deductions, or treating an accounting provision as automatically deductible.
Candidates treat the tax computation as a copy of the income statement. The distinction between a capital allowance and a revenue deduction is technical, and provisions are deductible only when the tax rules permit, which is a separate test from the accounting recognition criteria.
What to do instead
Start every computation from accounting profit and build a reconciliation schedule with three columns: item, add back, deduct. List the standard disallowables and non-taxables in your notes. Practise questions where a provision is added back in full in year one and deducted when paid, so the timing difference is visible.
Treating audit evidence as sufficient when it is only appropriate, or vice versa, and answering a risk question by naming a risk without linking it to the specific assertion and the specific audit procedure that responds to it.
Candidates learn the assertions and the procedures as separate lists and never join them. Sufficiency and appropriateness are defined together but tested separately, and under time pressure the assertion link is the step that is skipped.
What to do instead
For every risk, write three lines: the account and assertion at risk, the reason from the scenario, and one procedure that would detect misstatement for that assertion. Practise classifying evidence by source and nature so the sufficiency versus appropriateness distinction becomes automatic.
Describing a governance or strategy concept generically instead of applying it to the scenario, for example recommending a code provision without identifying which board committee, which independence criterion, or which stakeholder interest is engaged.
Candidates memorise definitions and then reproduce them, because application requires rereading the scenario and selecting facts. Under time pressure generic prose feels safer, but it earns no application marks and often contradicts the scenario's stated facts.
What to do instead
Adopt a fixed application pattern: quote the relevant fact from the scenario, name the principle or framework, state the consequence, and give one specific action with an owner. Practise writing answers where every sentence contains a fact from the scenario, and delete any sentence that would be true of any company.