How to Pass Paper 3.7

08/11/2005

LCA’s Steve Lumby helps you get through what is always the biggest hurdle to becoming ACCA qualified

First the bad news. The pass rate on 3.7 has consistently been around 10% below the pass rate on the other two Final Level core papers. Furthermore, the pass rate for 3.7 never even achieves 50%. This means that the average candidate fails the paper.

Given this information, I cannot help but make the following observation. There is something wrong here.

Either the problem lies with the nature of the 3.7 syllabus and/or how it is being examined or the problem is with the ACCA exam structure which is allowing too many candidates to reach Level 3, who do not have the ability to pass Level 3. At the final stage of professional exams, the normal expectation would be that around two-thirds of candidates should pass. The fact that well under half pass 3.7 does not look good for the ACCA.

Despite the foregoing comments, the good news is that you do not have to know very much in order to pass 3.7… but you do have to know something!

There was a comment made to the Pass Talkback Line - published in the 08.2005 edition - that almost encapsulates the problem of lack of basic knowledge. The candidate complained that Question 1 in the 3.7 exam for June 2005 required an analysis of ‘Free Cash Flows’ and they didn’t know what was meant by that term.

This level of ignorance, (from what is presumably a serious final level candidate), beggars belief given that virtually every 3.7 exam over the last several sittings have contained questions involving free cash flow - including a question in June 2000 which simply said: ‘What is Free Cash Flow?’. (Given that this particular candidate then when on to say that ‘I have since found out that free cash flow is a new name for NPV…..’ this does not auger too well for their next re-sit attempt either!).

So, what do you need to do to pass Paper 3.7? Here are some tips:

o Look intelligently at past examination questions - not the answers - over, say, the last 5 or 6 sittings to see what areas of the syllabus the examiner appears interested in examining. This comment particularly applies to the Section A questions. Don’t let your tutor do this for you - do it yourself and really get to know the exam.

o Once you have identified the ‘core’ areas of the syllabus, start to get to know the basic bits of these areas. Let me give one example by way of illustration. Suppose that you identify that ‘project appraisal’ is frequently examined - either of a domestic project or an overseas project, and either using NPV or APV.

Therefore set about knowing how to:

 Sort out relevant from irrelevant project cash flows
 Calculate after tax cash flows, including the question of how many capital allowances to calculate and whether or not a balancing charge or allowance should be included
 How to handle inflation, including do I use a real cash flow and real discount rate approach or money cash flow and money discount rate approach, how to identify/calculate real and money cash flows and real and money discount rates.
 How to handle working capital
 How to forecast future exchange rates, (for and FDI), using PPPT
 Know when you should use the WACC and when you should use a risk-adjusted WACC as the NPV discount rate
 Know how to calculate a ‘base-case discount rate’ for an APV analysis.
 Know how to calculate the PV of the 'standard' APV financing side-effects: finance issue costs, tax-relief on interest and the benefits of a cheap loan.

o Get to grips with the management of your time in the exam. The first thing here is to recognise the fundamental difference between Section A questions and Section B questions. With each Section B question that you answer, you have 25 minutes to say and do what you can and so answer the question.

However, with Section A questions your task is not to answer the 40 mark question in the 65 minutes available. Instead, your task is to do enough in 65 minutes to pick up 20+ marks, (a passing percentage). Similarly with the 30 mark question, you have 55 minutes to do enough to pick up 15+ marks. Candidates continually complain that the Section A questions cannot be completed in the time available. However this complaint misses the key point: the Section A questions are not designed to be completed in the time available - they are designed so that a reasonably able candidate can pick up a passing percentage of the marks in the time available.

• The other important point concerning time management is the management of your time within the 55 and 65 minute framework of the Section A questions. In this respect discursive questions should be allocated 1 minute for each mark they are assigned and the balance of the available time should then be devoted to getting as far as you can with the numerical parts of the question.

If Question 1 from December 2004 is used to illustrate this point, (look it up for yourself), then of the 65 minutes available, eight minutes should have been allocated to answering part (a) – a discussion question - and nine minutes allocated to writing the ‘report’ in part (b) in which you are asked to discuss ‘other financial and non-financial factors, including real options’. That then leaves you [65 – 17 =] 48 minutes to get as far as you can with the APV analysis.

• Perhaps there is one final piece of advice worth giving. I believe that candidates spend far too much time looking at the answers to questions, and far too little time looking at the questions themselves. Thus they become expert in auditing answers - and so forget the fact that in the exam, you don’t get the answers to audit - you get the questions to answer. The message here is simple. When looking at the examiner’s answers, it is not important to understand every little bit of the answer, so don’t go through the answers word by word, line by line, as some students do - just make sure that you understand the 3 or 4 main points made in answer to a discursive question and you understand the general approach used to putting together the numerical analysis.

Relax - remember you don’t have to get 100% of the marks to pass the paper!

Steve Lumby is a lecturer at London College of Accountancy

Story posted by Alex Miller