Advanced Financial Accounting - Accounting · PDF fileThe following multiple choice question...

Advanced Financial Accounting 2nd Year Examination

August 2014

Exam Paper, Solutions & Examiner’s Comments

Advanced Financial Accounting August 2014 2nd

Year Paper

2

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should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us.

Alternative answers will be marked on their own merits.

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particularly the case where discursive answers are involved.

This publication is copyright 2014 and may not be reproduced without permission of Accounting

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© Accounting Technicians Ireland, 2014.


Year Paper

3 A2014 Advanced Financial Accounting (AFA )

Accounting Technicians Ireland

2nd

Year Examination: Autumn 2014

Paper: Advanced Financial Accounting

Monday 11th

August 2014 - 2.30 p.m. to 5.30 p.m.

INSTRUCTIONS TO CANDIDATES

PLEASE READ CAREFULLY

Candidates must indicate clearly whether they are answering the paper in accordance with the

law and practice of Northern Ireland or the Republic of Ireland.

In this examination paper the €/£ symbol may be understood and used by candidates in

Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland

to indicate the Euro.

Answer ALL THREE questions in Section A and TWO of the THREE questions in Section B. If

more than TWO questions are answered in Section B, then only the first TWO questions, in the

order filed, will be corrected.

Candidates should allocate their time carefully.

All workings should be shown.

All figures should be labelled, as appropriate, e.g. €’s, £’s, units etc.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

Note: This paper uses the language of International Accounting Standards (I.A.S). Examinees are

permitted to use either I.A.S or Financial Reporting Standards (F.R.S) terminology when

preparing financial statements but the use of the language of the International Accounting

Standards (e.g. Receivables rather than Debtors) is preferred.


Year Paper


SECTION A

Answer ALL THREE Questions in this Section

QUESTION 1 (Compulsory)

(a) Discuss the following principles in the context of IAS 1, Presentation of Financial

Statements;

(i) Accruals

(ii) Going Concern

(iii) Materiality and aggregation

(iv) Consistency

8 marks

(b) The “Conceptual Framework” identifies “comparability”, “verifiability”, “timeliness” and

“understandability” as attributes that enhance the qualitative characteristics of useful

financial information. Write a brief note on any two of these attributes.

8 marks

(c) According to the “Conceptual Framework”, which users should the preparers of financial

reports, aim to provide useful information for?

4 marks

Total: 20 marks


The following multiple choice question consists of TEN parts, each of which is followed by FOUR

possible answers. There is ONLY ONE right answer in each part.

Each part carries 1 ½ marks.

Requirement

Indicate the right answer to each of the following ten parts.

Total: 15 marks

Candidates should answer this question by ticking the appropriate boxes on the special answer sheet

which is contained within the answer booklet.

1. Drawings, by a partner in a partnership, made during the year should be:

(a) included as an expense in the partnership Statement of Profit and Loss.

(b) included as revenue in the partnership Statement of Profit and Loss.

(c) credited to the current account of the partner concerned.

(d) debited to the current account of the partner concerned.

2. Where a partnership exists and there is no partnership agreement, then;

(a) the partners share profits equally.

(b) the partners share profits in proportion to the balances on their capital accounts.

(c) the partners share profits equally and interest of 5% is paid per annum on capital

balances.

(d) the partners share profits in proportion to their combined capital and current account

balances.

Question 2 is continued overleaf


Year Paper


QUESTION 2 (Cont’d)

3. With regard to IAS 16 (Property plant and equipment), which of these statements are true?

(a) If an item of property, plant and equipment is re-valued, the entire class of property

plant and equipment to which it belongs must be re-valued.

(b) An item of property plant and equipment cannot be re-valued unless it is greater than

two years old.

(c) If an item of property plant and equipment is re-valued, depreciation continues to be

calculated on the original cost of the asset.

(d) If an item of property plant and equipment is re-valued, there is no obligation to re-

value any other asset within the same class of property plant and equipment.

4. In accordance with IAS 2 “inventories”, which of the following costs cannot be included as part

of the cost of inventory;

(a) variable overheads.

(b) import duties.

(c) fixed overheads.

(d) general administrative costs.

5. In January 2013, ABC Ltd purchased a new machine for €/£280,000. Delivery costs of €/£3,000

were incurred and the cost of insuring the machine for the year to 31 December 2013 was

€/£3,500. How much of the above expenditure may ABC Ltd capitalise in its Statement of

Financial Position?

.

(a) €/£280,000

(b) €/£286,500

(c) €/£283,000

(d) €/£283,500

6. According to IAS 17 “Leases”, which of the following statements is true?

(a) A finance lease is a lease that has a minimum period of over five years.

(b) A finance lease transfers substantially all the risks and rewards of ownership to the

lessee.

(c) A finance lease transfers substantially all the risks and rewards of ownership to the

lessor.

(d) A finance lease is a lease which has the ability to continue for a secondary period at a

rent greater than the market rent.

7. In accordance with IAS 20 “Government Grants”, a grant should not be recognised in the

financial statements until:

(a) the conditions for its receipt have been more or less complied with.

(b) the conditions for its receipt have been complied with and there is reasonable

assurance that the grant will be received.

(c) the grant has been received.

(d) the expenditure to which the grant relates, has been incurred.



Year Paper



8. In accordance with IAS 10 “Events after the Reporting period” which of the following statements

is correct:

(a) An adjusting event is an event which confirms conditions that existed at the reporting

period end date.

(b) An adjusting event relates to conditions that did not exist at the reporting period end

date but developed afterwards.

(c) An adjusting event requires an adjustment to the notes to the financial statements only.

(d) An adjusting event requires an adjustment to prior year financial statements.

9. An unqualified audit report, as issued by an external auditor is;

(a) saying with certainty that the financial statements are accurate.

(b) saying that the financial statements do not give a true and fair view.

(c) saying with certainty that the financial statements are not accurate.

(d) saying that the financial statements give a true and fair view.

10. ABA Plc makes a gross profit margin on sales/revenue of 17%. If the company’s gross profit for

the year ended 31 December 2013 was €/£399,500, what was its sales/revenue for the year?

(a) €/£67,915

(b) €/£2,350,000

(c) €/£2,749,500

(d) €/£459,000


Year Paper



The following are extracts from the Financial Statements of Flying Fashion Limited, a Fashion

retailer:

Statement of Comprehensive Income for the year ended 31 December 2013

Statement of Profit or Loss

Year ended 31/12/13

Year ended 31/12/12

€/£’000

€/£’000

€/£’000

€/£’000

Revenue

9,600

8,400

Less Cost of Sales:

Opening Inventory 1,200 1,400

Purchases 7,800 4,800

Less Closing Inventory (1,400) (1,200)

Cost of Sales (7,600) (5,000)

Gross Profit

2,000

3,400

Less Expenses (1,200) (1,400)

Net Profit 800 2,000

Statement of Financial Position

as at 31 Deecember 2013 2013

€/£’000

2013

€/£’000

2012

€/£’000

2012

€/£’000

Non Current Assets 1,400 1,500

Current Assets

Inventory 1,400 1,200

Receivables 720 480

Cash 480 2,600 520 2,200

Total Assets

Equity and Liabilities

Equity and Reserves

4,000 3,700

Ordinary Share Capital (€1 ordinary shares) 1,500 1,500

Reserves 1,020 860

2,520 2,360

Non Current Liabilities

Long-Term Debt 400 100

Current Liabilities

Payables 600 900

Bank Overdraft 480 340

1,080 1,240

Total Equity and Liabilities 4,000 3,700



Year Paper



The average ratios for companies within the fashion retail industry are as follows:

Current ratio 1.9 : 1

Acid test ratio 0.9 : 1

Net profit margin 6%

Return on Capital Employed (ROCE) 25%

Receivable’s days 45 days

Payable’s days 38 days

Gearing ratio 60%

Inventory Turnover 4.4 times

EPS 75 cent

DPS 25 cent

Requirement

(a) Prepare a ratio analysis for Flying Fashion Limited, comparing company performance over the

two year period and against average for the industry. Comment on results obtained.

Note; your analysis should include ratios on profitability, return on capital employed, liquidity,

working capital, and gearing.

10 marks

(b) Assuming the shares held were €/£1 ordinary shares and the company declared a dividend in 2013

of €/£300,000 and in 2012 of €/£ 500,000, calculate, the EPS and DPS for the company and

comment on its performance from a shareholders view point.

8 marks

(c) Ratio analysis is a valuable tool for the user of financial statements. Nonetheless, the technique

does have limitations and shortcomings. Discuss three such limitations.

5 marks

Presentation: 2 marks

Total: 25 marks


Year Paper


SECTION B

Answer TWO of the THREE questions in this Section

QUESTION 4

You have been asked to help with the financial statements of XXX Ltd. for the year ended 31 March

2013. A draft trial balance as at 31st March 2013 is shown below.

€/£’000 €/£’000

Sales 50,332

Purchases 29,778

PPE – cost 59,088

PPE – accumulated depreciation 25,486

Inventories 1st April 2012 7,865

Interest 200

Accruals 426

Distribution costs 8,985

Administrative expenses 7,039

Retained earnings 23,457

Trade receivables 9,045

Cash at bank 182

8% Bank loan repayable 2018 5,000

Share capital 10,000

Share premium 5,000

Trade payables 2,481

122,182 122,182

The following further information is available:

1. The share capital of the company consists of ordinary shares with a nominal value of €/£1

each.

2. No dividends are to be paid for the current year.

3. The sales figure in the trial balance includes sales made on credit for April 2013 amounting to

€/£3,147,000.

4. The inventories at the close of business on 31st March 2013 cost €/£8,407,000. Included in

this figure are inventories that cost €/£480,000, but which can be sold for only €/£180,000.

5. Transport costs of €/£157,000 relating to March 2013 are not included in the trial balance as

the invoice was received after the year-end.

6. Interest on the bank loan for the last six months of the year has not been included in the trial

balance.

7. The corporation tax charge for the year has been calculated as €/£235,000.

Requirement:

(a) Prepare the Statement of Comprehensive Income of XXX Ltd. for the year ended 31st March

2013.

7 marks

(b) Prepare the Statement of Financial Position as at 31 March 2013.

7 marks

(c) Prepare the Statement of Changes in Equity for the year ended 31 March 2013.

4 marks


Total: 20 marks


Year Paper


QUESTION 5

ABC Plc.

Statement of Comprehensive income for the year ended 31st December 2013


€/£’000

Revenue 5,400

Cost of sales 4,276

Gross Profit 1,124

Distribution costs

Administration costs(including depreciation)

Operating Profit before taxation

(276)

(500)

348

Taxation (124)

Profit after taxation 224

ABC Plc

Statement of Financial Position as at 31st December 2013

2013 2012

Assets

€/£ '000 €/£ '000

Non-Current Assets

Tangible Assets 3,260 2,840

Current Assets

Inventory 900 800

Receivables 450 300

Cash 30

1,380 1,100

Total Assets


Equity and Reserves

Share Capital

Share Premium account

Profit and Loss Account

4,640

1,602

100

768

3,940

1,300

50

640

2,470 1,990

Non- Current Liabilities

10% debentures 400 300

Current Liabilities

Trade Payables

1,500

1,400

Taxation

Bank Overdraft

270

1,770

190

60

1,650

Total Equity and Liabilities 4,640 3,940



Year Paper



Additional information:

Fixed assets with a cost of €/£110,000 and accumulated depreciation of €/£40,000 were sold

during the year for €/£60,000. There were no other disposals of fixed assets during the year.

New debentures were issued on 1 January 2013.

Dividends of €/£ 96,000 were paid during the year.

Requirement:

(a) Prepare a cash flow statement for the year ended 31st December 2013, in accordance with

applicable accounting standards.

10 marks

(b) Comment on the key issues highlighted by the Cash Flow statement that will assist the

directors of ABC Plc in having a greater understanding of the movement of cash in the

company.

8 marks


Total: 20 marks

QUESTION 6

(a) On 1st January 2013, Green Ltd., a company that prepares financial statements to 31

st

December each year, buys a machine at a cost of €/£46,300. The useful life of the machine is

estimated at four years with a residual value of €/£6,000.

Requirement:

Calculate depreciation charges for each of the four years using:

(i) The straight-line method;

(ii) The reducing balance method (at a rate of 40%);

8 marks

(b) Blue Ltd. prepares financial statements to 31st May each year. On 31st May 2011, the

company acquired buildings for €/£400,000. The buildings were re-valued at €/£450,000 on

31st May 2012 and at €/£500,000 on 31

st May 2013.

Red Ltd, prepares financial statements to 30th June each year. On 30th

June 2011, the

company acquired buildings for €/£600,000. The buildings were re-valued at €/£660,000 on

30th

June 2012 and at €/£620,000 on 30th

June 2013.

Requirement:

Assuming that both companies use the revaluation model, prepare journals to show how each of the

above revaluations should be treated in the financial statements in accordance with IAS 16 and explain

how each revaluation should be presented in the financial statements in accordance with IAS 1.

10 marks


Total: 20 marks


Year Paper


2nd Year Examination: August 2014

Advanced Financial Accounting

Suggested Solutions

and Examiner’s Comments

Students please note: These are suggested solutions only; alternative answers may also be deemed to

be correct and will be marked on their own merits.

Statistical Analysis – By Question

Question No. 1 2 3 4 5 6

Average Mark (%) 50% 71% 37% 63% 51% 66%

Nos. Attempting 188 188 188 167 125 81

Statistical Analysis - Overall

Pass Rate 76%

Average Mark 54%

Range of Marks Nos. of Students

0-39 32

40-49 13

50-59 74

60-69 50

70 and over 19

Total No. Sitting Exam 188

Total Absent 52

Total Approved Absent 10

Total No. Applied for Exam 250

General Comments:

GENERAL COMMENTS ON THE PAPER AS A WHOLE

In general the standard of answering was good with some students achieving very high marks. There

were a number of cases where students did not answer all questions in Section A but did answer three

rather than two questions in Section B. In these cases, students lost valuable marks. Even an attempt at

the third question in Section A could yield a better result that completing a third question in Section B.


Year Paper


Examiner’s Comments on Question One

Solution One

Part A

IAS 1 sets down a number of principles that govern the preparation and presentation of Financial

Statements. These principles include Accruals, Going Concern, Materiality and Aggregation and

Consistency.

Accruals

The accruals concept provides that income and expenditure should be recognised in the financial

statements of the financial year to which they relate, rather than in the year in which they are paid. On

this basis, for example, rent and other expenses owing at the year- end date should be included as

expenses in the Income Statement for the year in question and as accruals/ liabilities in the Statement

of Financial Position, notwithstanding that the amounts involved may not be paid until the subsequent

year. Likewise, amounts paid in the current year that relate to future financial periods should not be

included as expenses in the current years Income statement but instead carried forward as prepayments

in the Statement of Financial Position and expensed in future years as appropriate.

Going Concern

The “Going Concern” concept provides that readers of financial statements are entitled to assume

unless it is explicitly stated otherwise, that the reporting entity will continue in business for the

foreseeable future (i.e. at least the next twelve months) and that the financial statements in question

have been prepared on this basis. If management intend to liquidate the entity or if there is no realistic

alternative but to do so, then the financial statements should be prepared on a “break – up“ basis.

Where material uncertainties exist or cast doubt over the going concern assumption, then under IAS 1,

these should be disclosed in the financial statements.

Materiality and Aggregation

Information is material to the financial statements if its omission or misstatement could influence the

economic decisions of users. Information can be material in terms of its size in relation to the financial

statements as a whole or an item could be material by its nature. IAS 1 provides that each material

class of similar items must be presented separately in the financial statements. Dissimilar items can

only be aggregated if they are individually immaterial. For example, sales invoices are aggregated in

the Income Statement and included as a line item “Revenue”. However revenue is not aggregated with

expenditure.

Consistency

IAS 1 requires that the presentation and classification of items in the financial statements should be the

same from one period to the next, unless a change is justified by a change in circumstance or by a new

IFRS. This is to ensure comparability of financial statements from one period to the next. If the

presentation of financial statements were allowed to change on a regular basis or if the classification of

elements were allowed to change then, the comparability of financial statements would be significantly

reduced.

This question was reasonably well answered with most students achieving close to

or above the pass mark.

Marks

Allocated

2

2

2

2


Year Paper


Solution One (Cont’d)

Part B

Comparability

Verifiability

Timeliness

Understandability

Comparability

Comparability of financial information is important for its users. Examining an entity’s financial

statements for one accounting year gives only a certain amount of insight into the financial

performance and position of the entity. By comparing financial information of an entity over time, one

can assess trends and by comparing financial information against industry standards, one can

benchmark performance against competitors.

Comparability both in presentation and calculation can be achieved by being consistent in the use of

accounting policies over time. Where new policies are introduced by for example, the introduction of a

new accounting standard, consistency and comparability can be achieved by properly disclosing the

change in the accounting policy and outlining the effect of the change.

Verifiability

Verifiability can be achieved when two or more independent and knowledgeable observers can reach a

concensus on the treatment and measurement of an economic transaction. In these circumstances the

economic transactios is regarded as being faithfully represented. For example, if financial information

is independently verified by external auditors, this increases the degree to which it is regarded as

faithfully represented and hence increases the usefulness of the reported information.

Timeliness

If information is to be useful, it must be provided in a timely manner. If information is out of date, it is

less likely to be useful to a user’s decision making. This may not always be the case however as

historical data can be used to identify trends which provide useful informnation for predicting future

outcomes and accordingly aid decision- making.

Understandability.

When information is classified, characterised, and presented clearly and concisely it is more likely to

be understandable to users with a reasonable knowledge of business, economic activity and accounting

and who are prepared to study the information. The “Conceptual Framework” accepts that preparers of

financial statements can assume that users have this reasonable information.

Part C

The conceptual Framework considers that the purpose of financial reporting is to provide financial

information about the entity to

Investors (existing and potential)

Lenders and

Other creditors.

Marks

Allocated

4 marks

for each of

the two

attributes

covered

2

1

1


Year Paper


Examiner’s Comments on Question Two

Solution Two

Marks

Allocated

[1] (d)

1.5

marks

each

[2] (a)

[3] (a)

[4] (d)

[5] (c)

[6] (b)

[7] (b)

[8] (a)

[9] (d)

[10] (b)

Part 5 workings:

280,000 +3,000 delivery costs.

Part 10 workings:

399,500/17*100 = 2,350,000

Examiner’s Comments on Question Three

In general, this question was answered very well answered.

Students tended to score either strongly or quite poorly in this question. A number of

students did not attempt part ( c ) which lost them valuable attempt marks as this

part did not necessarily require hugely technical knowledge but rather an

understanding of ratios and why they are only one of a number of assessment

techniques which management can rely on.


Year Paper


Solution Three

Part A

Flying Fashion Limited.

Industry Marks

Allocated

2013 2013

2012 2012

Average

Liquidity

Current ratio =2600/1080 2.41 :1

=2200/1240 1.77:1

1.9 :1

Acid test ratio =(2600-1400)/1080 1.11:1

=(2200-1200)/1240 0.81:1

0.9:1 1

Profitability

Net profit margin =800/9600 8%

=2000/8400 24%

6% 1

ROCE * =800/2920 27%

=2000/2460 81%

25% 1

Activity

Receivables days =(720/9600)*365 27 days

=(480/8400)*365 21 days

45 days

Payables days =(600/7800)*365 28 days

=(900/4800)*365 68 days

38 days 2

Inventory turnover =7600/((1200+1400)/2) 5.8 times

=5000/((1400+1200)/2) 3.8 times

4.4 times

Gearing

Gearing ratio =400/(400+2520) 14%

=100/(2360+100) 4%

60% 1

Shareholder Ratio

EPS** =800/1500 * 53 cent

=2000/1500 133 cent

75 cent PART B - 2

DPS =300/1500 20 cent

=500/1500 33 cent

25 cent PART B - 2

* *EPS is calculated as earnings available to equity shareholders divided by the number of equity shares in issue. Earnings available to equity shareholders

is calculated as net profit after deducting interest, tax and preference dividends. Where net profit after interest and tax is not available, net prfit before interest and tax

should be used.


Year Paper


Solution Three (Cont’d)

Comments

Liquidity Ratios were below the benchmarks in 2012 but the company seems to have tackled this

and they are now above the industry averages of 1.9:1 and 0.9:1 for the Current ratio and Acid test

ratio respectively. This may be as a result of higher sales and corresponding higher debtors and

stocks. In this regard, however a current ratio in excess of 2:1 and an Acid test ratio in excess of

1.1 would be considered excessive and indicative of perhaps poor credit control and/or inefficient

inventory control.

The company’s Profitability, as measured by the net profit margin and ROCE, is above the

industry averages of 6% and 25% respectively in both years but the dramatic decreases from 24%

to 8% and from 81% to 27% for the net profit margin and ROCE respectively are very worrying

and need to be addressed. The Gross profit margin has fallen by over 50% from 2012 to 2013

which explains most of the reduction in net profit. This may be due to an increase in the prices

charged by suppliers or a reduction in sales prices charged by the company in order to compete

with high street retailers.

In terms of Working capital Activity, it is taking the company longer in 2013 to collect from its

debtors but the figure for both years is comfortably below the industry average (of 45 days). The

increase of 6 days in 2013 may show that the company has given more credit to customers or is

not controlling collection of debts as effectively as before.

The company is paying creditors much more promptly in 2013 (28 days as opposed to 68 days).

This may be interpreted as a healthy sign as it reflects improved liquidity and capability to avail of

discounts for prompt payment. However the company should ensure that it continues to avail of

the full credit period available from each major supplier- generally 30 days.

In 2012 the company was a net recipient of credit (about 47 days), however, in 2013 the

company’s Debtor’s and Creditor’s days are very similar.

The company’s stock turnover has improved from 3.8 to 5.8 times. In 2012 it was below the

industry average of 4.4 but is now above it

The Gearing of the company has increased by almost ten percentage points but it is still

comfortably below a level that may be considered risky by shareholders (such as the industry

average of 60%).

Conclusion:

Overall the company is performing reasonably well. Its liquidity has improved and is above the

industry average but may be approaching levels which suggest working capital inefficiencies. Its

profitability is above the industry average but has fallen quite dramatically between 2012 and 2013.

The company needs to investigate its falling profit and higher stock levels to ensure continued growth

and profitability in the future. At present the gearing level of the company is lower than the industry

average and this allows flexibility for the company to raise funds should it need to do so.

Part B

See table above for EPS and DPS calculation.

Both EPS and DPS have declined over the year and were below industry average for 2013. This is in

line with the reduced net profit in 2013. As discussed above, if concerns regarding the gross profit

margin is successfully addressed, this should substantially feed through to the net profit at the end of

the year and in turn to the EPS calculation. A stronger EPS will also increase the capacity to improve

annual dividends and consequently the DBS, although there will be other factors influencing the level

of dividend pay – out such as cash reserves/requirements and future capital financing requirements.

Marks

Allocated

4 marks

for the

discussion of

the results

obtained.

2 marks

for

presentation

4 marks

for the

discussion of

performance

from a

shareholders

view point.


Year Paper


Solution Three (Cont’d)

Part C

Limitations include:

Different accounting policies between businesses make company comparisons difficult.

The Statement of Financial Position is a snap shop picture at a point in time. It may not

represent the financial position throughout the year, particularly in the case of a seasonal

business.

Inflation or deflation may hamper the comparison of ratios over a number of years.

In conglomerate situations, it may be more meaningful to look at ratios for individual areas

of the business rather than the conglomerate as a whole.

Ratio analysis may not capture developments in areas such as customer loyalty, skill and

loyalty of staff, and market competition which could have significant future impact on

business performance.

Examiner’s Comments on Question Four

This was a relatively straightforward question but surprisingly, many students were

unfamiliar with the format for the Statement of Changes in Equity and as a result

lost “easy” marks.

Marks

Allocated

1 mark

for each

of 3

limitations

Additional

2 marks

available

for relevant

discussion

of the

limitations.


Year Paper


Solution Four

Marks Allocated

XXX Ltd

Statement of Comprehensive Income for the year ended 31st March 2013


2013 2013 2012

€/£ '000 €/£ '000

Revenue

47,185

1

Cost of sales

29,536

1

Gross Profit

17,649

Distribution costs 9,142

1

Admin expenses 7,039 16,181

1

Profit from operations

1,468

Finance Costs

400

1

Profit before tax

1,068

Taxation

235

1

Profit for the year

833

1

Statement of Financial Position as at 31st March 2013

2013 2013 2012

Assets €/£ '000 €/£ '000

Non-current assets

PPE

33,602

1

Current Assets

Inventories 8,107

½ mark

Trade Receivables 5,898

1

Cash at bank 182 14,187

½ mark

Total Assets

47,789


Year Paper


Solution Four (Cont’d)

Marks Allocated


Equity and Reserves

Ordinary share capital

10,000

Share premium account

5,000

Retained earnings

24,290

1

39,290

Liabilities

Non-current liabilities

Bank loans

5,000

½ mark

Current liabilities

Trade payables

2,481

1

Accruals

783

1

Taxation

235

3,499

½ mark

Total Equity and

Liabilities

47,789

Statement of Changes in Equity for the year to 31st March 2013

Share Other Retained Total

Cap Reserves Earnings Equity

Balance at 31st March 2012 10000 5000 23457 38457 Share Cap - 1

Valuation gain

Other Res – 1

Profit for the period

833 833 Retained Earn - 1

Dividend paid

Total Equity - 1

Balance at 31st March 2013 10000 5000 24290 39290

Workings

Presentation and

format - 2

1 Revenue 50,332 - 3,147 (sales cut off adjustment)

2 Cost of Sales 7865+29778-8107

Closing Inventory 8407-300

3 Distribution costs 8985+157


Year Paper


Solution Four (Cont’d)

Marks Allocated

4 Finance costs 200 + 200 accrual

5 Trade Receivables 9045-3147 (sales cut off adjustment)

6 Accruals 200 int.+157 transport + T.B. fig. 426

Examiner’s Comments on Question Five

Solution Five

Part A

ABC Plc Marks

Allocated

Statement of Cash Flow for the year ended 31 December 2013

€/£ €/£ €/£

Cash Flow from Operating Activities

½ mark

Operating Profit Wkg. 1

388

Loss on sales of non current assets Wkg 2

10

1

398

Working Capital Changes

(Increase)/decrease in Inventories

-100

½ mark each

(Increase)/decrease in trade receivables

-150

(total 1. 5 )

Increase/(decrease) in trade payables

100 -150

Cash generated from operations

248

Interest paid Wkg.3

-40

1

Taxation paid Wkg. 4

-44

1

Net cash flow from operating activities

164

Cash Flow from Investing Activities

Payments to acquire plant Wkg.5

-490

1

Receipts from sale of plant

60

1

Net cash flow from investing activities

-430

In general students scored well in this question. Some students were challenged by

section (b)- while they were familiar with the format and methodology of a cash-

flow statement, they found it difficult to discuss the key points it highlighted.


Year Paper


Solution Five (Cont’d)

Marks

Allocated

€/£ €/£ €/£

Cash Flow from Financing Activities

Issue of 10% debenture loan

100

½ mark

Issue of ord. share cap. (incl share prem)

352

½ mark

Dividends Paid Wkg.6

-96

1

Net cash flow from financing activities

356

Net Increase/(decrease) in cash and cash

equivalents

90

Cash & Cash equivalents at the beginning of the

period

-60 1

Cash & Cash equivalents at the end of the period

30

Presentation -

2

Workings

1. Profit before interest, tax and dividends;

€/£

Profit before tax

348

Add back 10% interest on debentures

40

Profit before interest, tax and dividends

388

2.. Loss on sale of fixed assets

Sales proceeds – Net book value

60-70

-10

3.. Interest paid

No opening or closing accruals

Amt paid = 400 *10%

40

4.. Tax paid

190 + 124 -270

44


Year Paper


Solution Five (Cont’d)

5. Fixed Assets acquired

3260-(2840-70)

490

6. Dividends Paid

No opening or closing accrual

96

Part B

While the company reported a profit before tax for the year of €348,000, the net cash actually

generated from its core operating activities was €248,000. This is because certain items charged in

arriving at net profit, such as loss on disposal of fixed assets, do not involve the movement of cash and

also because there was a net investment in working capital during the year which absorbed cash of

€150,000.

Cash generated from operating activities was not sufficient to completely fund capital investment

during the year and both shareholder and debenture holder financing was raised. In this regard the

company should assess future capital funding requirements and the availability and cost of such

funding in the light of future capital investment objectives and dividend/interest pay out projections. It

may be appropriate for the company to reconsider its high dividend pay- out policy particularly in the

short term, given the other demands on its’ scarce cash resources. In 2013, the company’s net cash

position improved by €90,000. However the prospect for continued improvement in the cash position

depends on future capital investment and the financing of same, the cost of funding existing and future

finance sources, as well as the net cash generated or absorbed by the core operating business of the

company.

Examiner’s Comments on Question Six

This proved to be a high – scoring question for a lot of students who attempted it.

Just one point to note: some students seemed to mistake journal entries for “T

accounts” and so lost valuable marks.

8 marks

for the

discussion of

the key

issues

highlighted.


Year Paper


Solution Six

Part A

1. The straight-line method Marks

Allocated

The machines depreciable amount is: €/£

Cost

46,300

Less residual value

6,000 4

40,300

Using the straight line method of depreciation the charge is

€10,075 per annum (40,300/4)

2. The diminishing balance method (at a rate of 40%)

Year Carrying Depreciation Carrying

amount b/f @40% amount c/f

2013 46,300 18,520 27,780 4

2014 27,780 11,112 16,668

2015 16,668 6,667 10,001

2016 10,001 4,000 6,000

Part B

Blue Ltd

31st May 2012

The €/£50,000 revaluation increase on 31st May 2012 should be debited to buildings and credited

direct to a revaluation gain account. The revaluation gain account will be shown in the Statement of

Changes in Equity and will be included under Equity and Reserves in the Statement of Financial

Position. For disclosure purposes, the revaluation gain will also be included as Other Comprehensive

Income in the Statement of Comprehensive Income.

Journal

Dr Buildings €/£50,000

Cr Revaluation Reserve Account

Gain on property revaluation €/£50,000

Being revaluation gain on buildings.

3


Year Paper


Solution Six (Cont’d)

31st May 2013

The €/£50,000 revaluation increase on 31st May 2013 should be debited to buildings and credited

direct to a revaluation gain account. The revaluation gain account will be shown in the Statement of

Changes in Equity and will be included under Equity and Reserves in the Statement of Financial

Position. For disclosure purposes, the revaluation gain will also be included as Other Comprehensive

Income in the Statement of Comprehensive Income.

Journal


Cr Revaluation Reserve Account

Gain on Property revaluation €/£50,000


Red Ltd.

30th

June 2012

The €/£60,000 revaluation increase on 30 June 2012 should be debited to buildings and credited direct

to a revaluation gain account. The revaluation gain account will be shown in the Statement of Changes

in Equity and will be included under Equity and Reserves in the Statement of Financial Position. For

disclosure purposes, the revaluation gain will also be included as Other Comprehensive Income in the

Statement of Comprehensive Income.

Journal


Cr Revaluation Reserve A/C

Gain on Property Revaluation €/£60,000


Marks

Allocated

2

3


Year Paper


30th

June 2013

The €/£40,000 revaluation decrease on 30th

June 2013 should be debited to the revaluation reserve

account as it reverses €/£40,000 of the previous revaluation gain.

Journal

Dr Revaluation Reserve Account–

Loss on revaluation €/£40,000

Cr Buildings €/£40,000

Being loss on revaluation.

Marks

Allocated

2

Presentation -

2

Advanced Financial Accounting - Accounting · PDF fileThe following multiple choice question...

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