FA

1208

The Association of Business Executives

Diploma

1.13FA

Financial Accounting

morning 2 December 2008

1 Time allowed: 3 hours.

2 SECTION A consists of one compulsory question.

3 Answer THREE questions from a choice of seven in SECTION B.

4 All questions carry 25 marks. Marks for subdivisions of questions are shown in brackets.

5 No books, dictionaries, notes or any other written materials are allowed in this examination.

6 Calculators, including scientific calculators, are allowed providing they are not programmable and cannot store or recall information. Electronic dictionaries and personal organisers are NOT allowed. All workings should be shown.

7 Candidates who break ABE regulations, or commit any misconduct, will be disqualied from the examinations.

8 Question papers must not be removed from the Examination Hall.

FA1208 ABE 2008 T/500/3691

FA1208 2

SECTION A

Question 1 is compulsory.

Q1 The trial balance of Zen enterprise for the year ended 30 September 2008 is as follows:

000s 000s Debits Credits Purchases 54,200 Revenue 93,700 Opening inventory (stock) 1 October 2007 3,700 Distribution expenses (note vi) 7,200 Administration expenses (note vii) 3,500 Dividends received from investment in Electra enterprise 80 Preference dividend paid 40 Ordinary dividend paid 90 Investment in Electra enterprise at cost 11,000 Trade receivables (debtors) 1,500 Trade payables (creditors) 1,650 Land and Property at valuation (note ii) 32,000 Plant and equipment at cost (note iii) 4,300 Plant and equipment accumulated depreciation as at 1 October 2007 1,120 Revaluation reserve 3,000 Retained earnings as at 1 October 2007 2,700 Ordinary share capital 1 shares 13,500 5% preference shares 1 800 6% Debentures (note iv) 5,000 Bank and cash 4,000 Bank interest paid 20 121,550 121,550 (Note that figures in the table above are in 000s.)

The following notes are applicable: (i) The inventory (stock) valuation as at 30 September 2008 is 3,900,000. (ii) The land and property is revalued annually. The last revaluation was 30 September

2007. As at 30 September 2008 the land and property has not increased in value above its book value of 32,000,000. The property, which was valued at 26,000,000 as at 30 September 2007, is estimated to have a useful life of 26 years as from 30 September 2007 and should be depreciated on a straight-line basis assuming no residual value. Depreciation is to be charged half to distribution expenses and half to administration expenses.

(iii) Plant and equipment is to be depreciated at 20% per annum on a reducing balance basis and charged half to distribution expenses and half to administration expenses.

(iv) The interest on debentures for the year has not been paid and must be accrued. (v) Tax for the year ended 30 September 2008 is chargeable at 30% of prots for the year

before receipt or payment of dividends. (vi) Included in distribution expenses is an amount of 120,000, which is a vehicle rental

payment relating to the period 1 July 2008 to 31 December 2008. (vii) Insurance amount due for the year, chargeable to administration expenses, has not

been paid or accounted for in the above trial balance as at 30 September 2008.

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Required:

Prepare the income statement (prot and loss account) for the year ended 30 September 2008 and the balance sheet as at that date for Zen enterprise in accordance with relevant International Accounting Standards (IASs). (25 marks)

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SECTION B

Answer THREE questions only. All questions carry equal marks.

Q2 On 1 October 2000, Box enterprise acquired 3 million of the 4 million issued shares of Vox enterprise. The retained earnings of Vox as at 1 October 2000, the date of acquisition, were 940,000 and the share premium 720,000. The draft balance sheets of the two enterprises as at 30 September 2008 were as follows:

Balance sheets as at 30 September 2008

Box Vox 000s 000s ASSETS Non-current assets: Land and buildings 12,620 6,540 Plant and equipment 1,720 80 Investment in Vox 5,500 19,840 6,620 Current assets: Inventory 530 110 Trade receivables 620 90 Bank and cash 10 20 1,160 220 TOTAL ASSETS 21,000 6,840 EQUITY AND LIABILITIES Equity: Ordinary 1 shares 13,700 4,000 Share premium 2,800 720 Retained earnings 1,740 1,320 18,240 6,040 Non-current liabilities: Loans 1,500 530 Current liabilities: Trade payables 760 120 Tax 500 150 1,260 270 TOTAL EQUITY AND LIABILITIES 21,000 6,840

(Note that figures in the table above are in 000s)

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The following information is also relevant:

(i) When Box bought the shares in Vox it also made a loan to Vox of 130,000. This loan is still outstanding.

(ii) A review of the consolidated goodwill has been carried out each year since acquisition and no impairment has occurred.

(iii) The fair value of Voxs land and buildings at the date of acquisition was 0.2 million and 1 million respectively in excess of the carrying values at that date. This fair value has not been incorporated into the balance sheet of Vox as at 30 September 2008 and there has been no further increase in fair value of the land and buildings since the acquisition date. The group policy is to depreciate property 2% per annum on a straight-line basis.

(iv) During the year ended 30 September 2008, Box sold goods to Vox for 1.3 million. Box adds a 25% mark-up on cost to all its sales. Goods with a transfer price of 155,000 were included in Voxs inventory as at 30 September 2008.

Required:

Prepare the consolidated balance sheet of the Box group as at 30 September 2008.(25 marks)

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Q3 The summarised balance sheets of three enterprises, X, Y and Z, in the same industry are shown below as at the year ended 30 September 2008.

X Y Z 000s 000s 000s ASSETS Non-current assets: Intangible assets 150 16 Tangible assets 1,329 873 870 1,479 873 886 Current assets 1,380 870 1,424 TOTAL ASSETS 2,859 1,743 2,310 EQUITY AND LIABILITIES Equity: Share capital 300 60 450 Revaluation reserve 120 Retained prots 1,584 1,275 1,056 2,004 1,335 1,506 Non-current liabilities 150 30 75 Current liabilities 705 378 729 TOTAL EQUITY AND LIABILITIES 2,859 1,743 2,310

The revenue and prot for the year ended 30 September 2008 for the three enterprises are as follows:

X Y Z 000s 000s 000s Revenue 3,150 2,250 2,625 Prot for the year after depreciation

and amortisation charges 423 291 222

The three enterprises have different accounting treatments for the intangible assets: X amortises at 10% per annum and Z at 20% per annum; Y has written off all its intangible assets of 60,000 against its operating prots for the year ended 30 September 2008. Intangible assets of all three enterprises were acquired on 1 October 2007 and the standard amortisation method of intangible assets in the industry is 10% per annum.

X revalued its tangible assets as at 1 October 2007, which gave rise to an extra depreciation charge of 6,000 at 30 September 2008 over and above the historical cost depreciation charge.

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Required:

(a) Appraise the nancial performance and position of each enterprise as far as the information mentioned above permits and after adjusting for the different accounting treatments. (15 marks)

(b) List the further information, about the three enterprises, that you would like to receive to help you in assessing the nancial performance and position of the enterprises. (10 marks)

(Total 25 marks)

Q4 An enterprise is seeking funds to expand and has asked you to advise the board of directors on the advantages and disadvantages of each of the following methods of nancing the expansion:

L Overdraft L Long-term loans L Leasing L Raising further equity capital

Required:

Write a report to advise the board of directors as requested above. (25 marks)

FA1208 8

Q5 Identify and explain, in accordance with relevant International Accounting Standards (IASs), the accounting entries to reect each of the following items in the nancial statements of Fox for the year ended 30 September 2008.

(a) Fox has spent 450,000 during the year ended 30 September 2008 on research aimed at increasing the life of its products. The research has not yet led to an increase in the life of its products. Fox has also spent 2 million on developing a new product A which it is estimated will go into production on 1 July 2009 and will produce sufcient prots to cover its costs. In addition, Fox capitalised 3 million at 30 September 2007 on the development of product B, which it estimated at that time would go into production on 1 March 2008. Fox has now found that product B is not viable as costs of production are excessive. (6 marks)

(b) Fox acquired a piece of machinery from Rats enterprise on 1 October 2007 under a lease agreement. The agreement was for a lease period of 5 years, requiring 5 annual rentals payable in advance of 10,500. The fair value of the machine, if purchased outright, is estimated to be 46,370 and the interest rate implicit in the lease is 6.625%. The only entries in the books of Fox at the year-end 30 September 2008 have been to credit cash and charge the rst rental payment of 10,500 to the income statement. Fox depreciates machinery over its useful life on a straight-line basis. (8 marks)

(c) Fox sells products under warranty. Past experience indicates that 85% of products sold will have no defects, 10% will have minor defects and 5% major defects. If minor defects occurred in all products sold, the cost of repairs would be 3 million and if major defects occurred in all products sold, the cost of repairs would be 17 million. Fox has recorded the full value of all products sold under warranty as part of revenue and made no allowance for the costs of any warranties. (7 marks)

(d) Fox sold products to Rex for 500,000 on 1 January 2008 and at the same time agreed to buy them back for 536,000 on 1 December 2008. Under the terms of the agreement of sale, Rex cannot sell the products on to anyone else and must on 1 December 2008 sell them back to Fox. As at 30 September 2008, Fox has recorded the 500,000 as revenue in its income statement. (4 marks)

(Total 25 marks)

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Q6 Within nancial accounting there is general agreement that there are twelve traditional accounting concepts. Four of these concepts are:

L Matching (accruals) L Going concern L Business entity L Prudence

Required:

Using suitable examples, explain in detail each of the four concepts above. (25 marks)

Q7 (a) Within the International Accounting Standards Boards Framework for the preparation and presentation of nancial statements, assets and liabilities are dened and criteria identied for their recognition.

Required:

Dene assets and liabilities and explain why these denitions are important in the preparation of an enterprises balance sheet and income statement. (12 marks)

(b) During the year ended 30 September 2008, Cat enterprise acquired 80% of the share capital of Mouse enterprise at a cost of 5 million. The fair value of Mouses net assets at the date of acquisition was 4 million giving rise to goodwill on consolidation of 1.8 million. As at 30 September 2008, the value of Cats goodwill was estimated at 2 million. The directors of Cat wish to incorporate both the consolidated goodwill of 1.8 million and Cats individual goodwill of 2 million in the balance sheet as at 30 September 2008.

Required:

Advise the directors of Cat on the treatment of goodwill in their nancial statements as at 30 September 2008. (8 marks)

(c) Cat has paid 1 million in interest costs in connection with the borrowing of funds during the year ended 30 September 2008. The directors of Cat wish to capitalise these borrowing costs.

Required:

Advise the directors of Cat on the treatment of the borrowing costs in their nancial statements as at 30 September 2008. (5 marks)

(Total 25 marks)

FA1208 10

Q8 The following information is available in respect of Zebra enterprise.

Income statement for the year ended 30 September 2008

000s Revenue 1,500 Cost of sales (879) Gross prot 621 Operating expenses (396) 225 Finance costs (30) Prot before tax 195 Tax (75) Prot after tax 120 Balance sheet as at year ended 30 September 2007 2008 000s 000s ASSETS Non-current assets 996 1140 Current assets 390 510 TOTAL ASSETS 1,386 1,650 EQUITY AND LIABILITIES Equity: Ordinary share capital 240 300 Share premium 60 Retained prots 576 696 816 1,056 Non-current liabilities 120 195 Current liabilities: Tax 90 75 Bank overdraft 15 Other 345 324 450 399 TOTAL EQUITY AND LIABILITIES 1,386 1,650

(Note that figures in the table above are in 000s.)

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The following notes are also relevant:

(1) As at 30 September 2008 the current assets of 510,000 include bank balance of 45,000.

(2) Depreciation charged as part of cost of sales for the year ended 30 September 2008 was 105,000.

(3) During the year ended 30 September 2008, a non-current asset with a carrying amount of 120,000 was sold at a loss of 36,000. The loss was charged as part of cost of sales.

Required:

(a) Prepare a cash ow statement for Zebra enterprise for the year ended 30 September 2008 in accordance with IAS 7 Cash Flow Statements. (Notes to the cash ow statement are not required.) (20 marks)

(b) Comment on the nancial position of Zebra as shown by the cash ow statement you have prepared. (5 marks)

(Total 25 marks)

End of Question Paper

FA1208 12

Diploma

Financial Accounting

Examiners Suggested Answers

Section A

Q1 Income statement for Zen enterprise for the year ended 30 September 2008

000s 000s Revenue 93,700 Opening inventory 3,700 Purchases 54,200 57,900 Closing inventory 3,900 54,000 Gross pro t 39,700 Dividends received 80 39,780 Distribution expenses (7,200-60 hire 7,958 prepayment + 500 property dep. + 318 P&E dep.) Administration expenses (3,500 + 80 insurance 4,398 accrual + 500 prop dep. + 318 P&E dep.) Interest on debentures (5,000 * 6%) 300 Bank interest 20 12,676 27,104 Tax (30% * (27,374-80)) 8,107 Pro t for the year 18,997

Extract from statement of changes in equity Ordinary dividend paid 90 Preference dividend paid 40 Retained earnings for the year 18,867

Depreciation calculations Property valuation 26,000,000 Useful life 26 years Depreciation 26,000,000/26 = 1,000,000 charged 500,000 to distribution and 500,000 to administration.

Plant and equipment at cost 4,300,000 Accumulated depreciation 1,120,000 Net book value 3,180,000 * 20% = 636,000 charge 318,000 to distribution and 318,000 to administration

[Turn over 13 FA1208

Balance sheet for Zen enterprise as at 30 September 2008

000s 000s 000s Cost or Depreciation NBV Valuation ASSETS Non-current assets Land and property 32,000 1,000 31,000 Plant and equipment 4,300 1,120 + 636 2,544 36,300 2,756 33,544 Investment in Electra 11,000 44,544 Current assets Inventory 3,900 Trade receivables 1,500 Payments in advance 60 Bank and cash 4,000 9,460 TOTAL ASSETS 54,004

EQUITY AND LIABILITIES Equity Ordinary share capital 1 13,500 Preference share capital 1 800 5% Revaluation reserve 3,000 Retained earnings (2,700 + 18,867) 21,567 38,867 Non-current liabilities Debentures 6% 5,000 Current liabilities Trade payables 1,650 Accrued insurance 80* Accrued interest 300 Taxation 8,107 10,137 TOTAL EQUITY AND LIABILITIES 54,004

* Due to a typographical error, the gure of 80,000 did not appear in the notes to the accounts. An appropriate allowance was made in marking the answer.

FA1208 14

Q2 Cost of control Minority interest 25% Paid (5,500-130) 5,370 Bought shares (75%) 3,000 1,000 Share premium 75% * 720 540 180 Retained earnings 75% * 940 705 235 Revaluation 75% * 1,200 900 300 5,145 Goodwill 225

Pre acquisition earnings 1320-940 380 Depreciation adjustment 1 million * 2% * 8 years 160 220 Allocated group 75% * 220 165 55 1,770

Consolidated balance sheet of Box group as at 30 September 2008

000s ASSETS Non-current assets Land and buildings (12,620 + 6,540 + 1,200-160) 20,200 Plant and equipment (1,720 + 80) 1,800 Goodwill 225 22,225 Current assets Inventory (530 + 110-31 unrealised pro t) 609 Trade receivables (620 + 90) 710 Bank and cash 30 1,349 TOTAL ASSETS 23,574 EQUITY AND LIABILITIES Equity Share capital 13,700 Share premium 2,800 Retained earnings (1,740-31up + 165) 1,874 Minority interest 1,770 20,144

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Non-current liabilities Loans (1,500 + 530-130 inter co. loan) 1,900 Current liabilities Trade payables (760 + 120) 880 Tax (500 + 150) 650 1,530 TOTAL EQUITY AND LIABILITIES 23,574

Q3 (a) Before calculating ratios for the three enterprises the difference in accounting treatments needs to be eliminated as follows:

X Y Z 000s 000s 000s Intangible assets 150 54 18 Tangible assets 1,329-120 873 870 revaluation + 6 excess dep = 1,215 Operating pro t 423 + 6 dep = 429 291 + 60 222 + 2 diff in (1/2) intangible wo amortisation = -6 amortisation = 345 224 Capital employed 2,154-114 = 2,040 1,365 + 54 = 1,419 1,581 + 2 = 1,583 RATIOS Pro t/sales 429/3,150 = 13.6% 345/2,250 = 15.3% 224/2,625 = 8.5% Sales/capital employed 3,150/2,040 = 1.54 2,250/1,419 = 1.59 2,625/1,583 = 1.66 Pro t/capital employed 429/2040 = 21% 345/1419 = 24.3% 224/1583 = 14.2% Sales/tangible assets 3,150/1,215 = 2.6 2,250/873 = 2.6 2,625/870 = 3.0 CA:CL 1,380/705 = 1.96 870/378 = 2.3 1,424/729 = 1.95 Gearing 150/2,040 = 7.4% 30/1,419 = 2.1% 75/1,583 = 4.7%

From the above ratios enterprise Y achieves the best return on capital employed due to a higher margin ration.

Enterprise Z achieves more volume than either X or Y but at a cost of lower margins.

Y is the most liquid of the three enterprises Y displays the lowest gearing

(b) Previous years balance sheets and income statements Cash ow statements Forecast budgets and cash ows, business plans Information in respect of quality of goods and services and other factors affecting

the assessment of goodwill in the business Industrial average ratios Stock market valuations

FA1208 16

Q4 To: Board of directors of X enterprise From: Date: Subject: Advantages and disadvantages of methods of funding expansion

Introduction This report identi es the advantages and disadvantages of four methods of raising nance to

fund a proposed expansion of your enterprise.

Overdraft

Advantages Disadvantages

Easy to arrange and relatively cheap. Security may be required.

Useful as a method of easing cash ow strains during peak periods.

Can be withdrawn by the bank at any time or may not be renewed when it is required in future.

Interest charges are only incurred whilst the facility is overdrawn and only the exact amount of funding required is utilised.

Banks may require management gures at regular intervals in order to monitor progress.

Long term loans

Advantages Disadvantages

Can be structured so that repayments can be met out of future income deriving from the expansion.

Security will generally be required which adds to the initial costs and puts the business at a degree of risk.

Cannot technically be withdrawn as long as the borrower honours all of the terms of the facility.

Management gures may be required at regular intervals.

Repayments can be structured to meet the needs of the business.

An agreed sum of money is lent and this may be more than is actually needed for the expansion.

Can be expensive for a small company.

Leasing

Advantages Disadvantages

Can be on-balance sheet - the nance lease - or off-balance sheet - the operating lease.

In an operating lease the bene t of any residual value in the asset is lost to the lessor (owner).

The period can match the life of the expansion assets.

Costs may be higher than those of a bank, but this may be outweighed by the absence of fees.

There are usually no set-up costsRepayments can be structured to suit the cash ow of the business.

Capital allowances are lost to the lessor but the rentals will usually be tax-deductible.

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Only the actual amount of cash is advanced - there are no surpluses on which charges accrue.

Early settlement of the facility is usually expensive.

Additional security is not often required.

The facility cannot be withdrawn whilst the enterprise honours its commitments.

Additional equity capital

Advantages Disadvantages

Can be a cheaper form of raising capital and dividends will only have to be paid when the enterprise can afford it.

A degree of control over the enterprise will be lost.

Capital is raised in the long-term.Possibility of takeover is increased when the shares are widely held.

Increasing the equity capital should increase the ability of the enterprise to borrow in the market.

Q5 (a) The 450,000 should be debited to the income statement as expenses during the year as it does not meet the criteria for capitalisation as no feasible product has been found.

The 2 million spent on product A can be capitalised, debit intangible assets, as it meets all criteria. Amortisation will commence, on a suitable basis, as from 1 July 2009.

The 3 million spent on product B, previously capitalised, must now be debited to the income statement, credit intangible assets, as it no longer meets the criteria for capitalisation.

Relevant standard is IAS 38.

(b) Relevant standard is IAS 17. Finance lease commencing 1 October 2007 as present value of total rentals is greater

than 90% of the fair value. Total interest in the lease is 5 10,500-46,370 = 6,130.

Liability atstart of period

Rental paidLiability

during periodInterest charge

6.625%

1.10.07 46,370 10,500 35,870 2,376

1.10.08 38,246 10,500 27,746 1,838

1.10.09 29,584 10,500 19,084 1,264

1.10.10 20,348 10,500 9,848 652

1.10.11 10,500 10,500

0 0

52,500 6,130

The asset is capitalised and the loan raised by debiting tangible non-current assets and crediting loans both with 46,370.

The asset is depreciated over 5 years and therefore 9,274 is debited to income statement and credited to depreciation provision.

The interest due for the year ended 1.1.08 of 2,376 is debited to income statement.

FAT1208 18

The loan raised for the fair value of the asset will be reduced by the principal payments made. In the year ended 30.9.08 the principal payment is 10,500 and therefore the loan will be reduced to 35,870 of which 8,124 will be payable in less than one year and 27,726 greater than one year. The interest payment of 2,376 will also need accruing at the year end.

(c) Fox needs to make a provision for the probable cost of warranties based on past experience as there is:

A present obligation as a result of an obligating event; A probable out ow; A reliable estimate.

Relevant standard is IAS 37. Estimate is 85% * 0 + 10% * 3m + 5% * 17m = 1.15m Debit income statement 1.15m provision for warranties. Credit warranty provision account.

(d) This is a sale and buy back agreement. The stock remains a current asset of Fox. Fox needs to raise a loan in its books 536,000 as at 1.1.08 by crediting loan less than

one year and debiting income statement. Interest due for the agreement is 36,000 of which 9/12ths is due as at 30.0.08 =

27,000. Thus debit 27,000 to income statement as at 30.9.08 and credit accruals.

Relevant standard is IAS 18.

Q6 (a) Matching:

Matching requires that revenue earned in a period be matched with related costs. The concept gives rise to accruals and prepayments in the balance sheet and

accounts for some of the difference between cash and pro t. The reasoning behind the concept is that pro t for the period should represent

fairly the earnings of the period covered matched with all costs. Matching requires us to move from receipts (receipts of cash or cheques in a

period) to revenue (recognised when goods pass to a customer not when the customer pays).

Matching requires us to move from payment (payment of cash or cheques for goods or services) to expenses (all expenses incurred by an enterprise during a period) irrespective of when they are paid for.

Example: telephone bill 200 paid January year 2 relating to previous quarter equals payment year 2 but expense year 1. An accrual is required of 200.

(b) Going concern:

Going concern infers that the business is carrying on steadily trading from year to year without reducing its operations.

Going concern directly in uences values placed on, for example, non-current assets such as plant and equipment. Going concern also allows for the principle of depreciation; if we depreciate an

item of plant over 10 years then we are assuming that the plant will have a useful life to the enterprise of 10 years. This assumption can only be made if we rst assume that the enterprise will continue for 10 years.

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(c) Business entity:

This states that the enterprise has an identity and existence distinct from its owner/s.

This contrasts with the legal position, particularly for a sole trader and partnership. The accountant can always speak of the enterprise owing the owner money e.g.

dividends, interest on capital within a partnership or borrowing money from the owner e.g. share capital, capital invested by a sole trader.

This concept also ensures that salaries etc. paid to owners are classi ed as expenses.

(d) Prudence or conservatism:

This refers to the accounting concept of recognising all possible losses but not anticipating possible gains.

However the accountant must NOT be overly pessimistic but free from bias. The IASB framework refers to prudence as the inclusion of a degree of caution

in the exercise of judgement needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

Examples could be stocks carried at cost or net realisable value whichever is the lower, or accounting for provisions such as provision for bad debts or provision for warranties.

Q7 (a) The IASBs framework de nes assets as a resource controlled by an enterprise as a result of past events and from which future economic bene ts are expected to ow to the enterprise.

The rst part of the de nition puts the emphasis on control rather than ownership. This is done so that the balance sheet re ects the substance of transactions rather than their legal form.

Common examples of this would be nance leased assets. The reference to past events prevents assets that may arise in the future from being

recognised early. The IASBs framework de nes liabilities as a present obligation of the enterprise

arising from past events, the settlement of which is expected to result in an out ow from the enterprise of resources embodying economic bene ts.

Obligations generally arise under a legally enforceable contract but can also arise where there is expectation by a third party of an enterprise assuming responsibility for costs where there is no legal requirement to do so. These are constructive obligations such as repairing or replacing faulty goods or incurring environmental costs.

(b) Whilst it is acceptable to value the goodwill of 1.8 million of the subsidiary on the basis described in the question and include it in the consolidated balance sheet, the same treatment cannot be afforded to Cats own goodwill.

The calculation may indeed give a realistic value of 2 million for Cats own goodwill but this is internal goodwill.

IFRS prohibit such internal goodwill appearing in the nancial statements. The main reason for this is the unreliability of the measurement.

The purchased goodwill in the acquisition is measured reliably at the point in time of purchase.

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(c) IAS 23 only permits the capitalisation of borrowing costs if they are directly attributable to the acquisition, construction or production of a qualifying asset.

A qualifying asset is one that takes a substantial amount of time to get ready for its intended use or sale. Examples of qualifying assets are long term construction contracts, ships or aircraft being built and inventory being matured such as wine or spirits.

In this case the interest payable appears to be on the borrowing of general funds and therefore cannot be capitalised.

Q8 (a) Zebra cash fl ow statement for the year ended 30.09.08

000s 000s Cash fl ow from operating activities Pro t before tax 195 Adjustments for: Depreciation of non-current assets 105 Loss on sale of non-current assets 36 Interest costs 30 366 Increase in current assets (510-45-390) (75)

Decrease in current liabilities (345-324) (21) Cash generated from operations 270 Interest paid (30) Tax paid (75 + 90-75) (90) Net cash fl ow from operating activities 150 Cash fl ow from investing activities Purchase of non-current assets (369) (1140-996 + 120 assets sold + 105 dep) Sale of non-current assets (120-36) 84 Net cash used in investing activities (285) Cash fl ow from fi nancing activities Issue of ordinary shares 120 (360-240 + 60 share premium) Issue of loans (195-120) 75 Net cash fl ow from fi nancing activities 195 Net increase in cash 60

Cash at beginning of period (15) Cash at end of period 45

(b) Zebra has expanded its non-current assets by 369,000 which has only partly been nanced from long term sources of equity 120,000 and loans 75,000.

The remaining nance has come from sale of non-current assets and the use of operating activities cash.

21 FA1208

Zebra after paying interest on loans and tax has improved its cash balance by 60,000 during the year.

The cash ow shows a comfortable position although the gearing has increased as follows;

30.09.07 30.09.08 Non-current liabilities/equity 120/816 = 14.7% 195/1,056=18.5%

This gearing is not too high.

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