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QUESTIONS

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FA/FFA : F INANCIAL ACCOUNTING

MULTIPLE CHOICE QUESTIONS

REGULATORY FRAMEWORK

1 Which of the following explanations of prudence most closely follows that in IASB’s

Framework for the Preparation and Presentation of Financial Statements?

A The application of a degree of caution in exercising judgement under conditions of

uncertainty

B Revenue and profits are not recognised until realised, and provision is made for all

known liabilities

C All legislation and accounting standards have been complied with

D Understatement of assets or gains and overstatement of liabilities or losses

2 The accounting basis or convention which, in times of rising prices, tends to understate asset

values and overstate profit is the:

A going concern basis

B prudence convention

C realisation convention

D historical cost convention


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LECTURER RESOURCE PACK – QUESTIONS

DOUBLE ENTRY BOOKKEEPING

3 Which of the following items appear on the same side of the trial balance?

A Capital and Sales

B Purchases and discounts received

C Motor expenses and Loan account

D Accrued income and accumulated depreciation

4 Andy has started a business and transferred his computer, worth £1,500 into the business.

What are the accounting entries to record this?

A Dr Capital Cr Computer equipment

B Dr Computer equipment Cr Capital

C Dr Computer equipment Cr Drawings

D Dr Drawings Cr Computer equipment

5 Sara has the following information regarding her credit sales from the sales day book.

Total sales including sales tax $54,000

Sales excluding sales tax $45,000

Sales tax $9,000

How would she record the entries in the ledger accounts?

A Dr Sales tax $9,000

Dr Sales $54,000

Cr Receivables control account $45,000

B Dr Receivables control account $54,000

Dr Sales tax $9,000

Cr Sales $45,000

C Dr Sales tax $54,000

Dr Sales £45,000

Cr Receivables control account $9,000

D Dr Receivables control account $54,000

Cr Sales tax $9,000

Cr Sales $45,000

6 The correct entry for recording discounts given to customers, in the main ledger is:

A Dr Discounts allowed Cr Receivables control account

B Dr Receivables control account Cr Discounts allowed

C Dr Receivables control account Cr Discounts received

D Dr Discounts received Cr Receivables control account


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7 Farah started the month with an overdrawn balance of $1,750 per the bank statement.

What is the balance per the bank account after the following transactions in November?

1 Farah withdraws $225 per month to cover living expenses.

2 A settlement discount of $20 is taken by Farah on a purchase of $650.

3 An amount of $500 is received from a credit customer.

4 Bankings of $1,300 from petty cash.

A $805 credit

B $805 debit

C $2695 credit

D $825 debit


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SALES TAX

8 Donna is registered for sales tax. During June, she sells goods with a tax exclusive price of

$750 to Kay on credit. As Kay is buying a large quantity of goods, Donna reduces the price by

5%. She also offers a discount of another 2% if Kay pays within 10 days. Kay does not pay

within the 10 days.

If sales tax is charged at 20%, what amount should Donna charge on this transaction?

A $142.50

B $150.00

C $ 147.15

D $139.65

9 At 1 March 20X5 Lauren owed the tax authorities $27,338. During the month of March, she

recorded the following transactions:

• Sales of $750,000 inclusive of 20% sales tax.

• Purchases of $450,000 exclusive of sales tax.

What is the balance on Lauren’s sales tax account at the end of March?

A $60,000

B $62,338

C $35,000

D $7,662

10 If sales (including sales tax) amounted to $26,612.50, and purchases (excluding sales tax)

amounted to $15,000, the balance on the sales tax account, assuming all items are subject to

tax at 20%, would be:

A $1,435.42

B $2,822.50

C $2,322.50

D $3,887.08

11 In the quarter ended 30 June 20X2, Chandler had taxable sales, net of sales tax, of $90,000and taxable purchases, net of sales tax, of $72,000.

If the rate of sales tax is 10%, how much sales tax is due?

A $3,000

B $10,800

C $1,800

D $7,200


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12 A summary of the transactions of Bilko, who is registered for sales tax at 10%, shows the

following for the month of January 20X9.

• Outputs $60,000 (exclusive of tax)

• Inputs $40,500 (inclusive of tax)

At the beginning of the period Bilko owed $3,500 to the tax authorities, and during the periodhe has paid $2,200 to them.

At the end of the period the amount owing to the tax authorities is:

A $3,618

B $3,186

C $5,450

D $3,250


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INVENTORY

13 The closing inventory of Epsilon amounted to $284,000 at 30 September 20X4, the

statement of financial position date. This total includes two inventory lines about which the

inventory taker is uncertain.

(1) 500 items which had cost $15 each and which were included at $7,500. These itemswere found to have been defective at the statement of financial position date. Remedial

work after the statement of financial position date cost $1,800 and they were then sold

for $20 each. Selling expenses were $400.

(2) 100 items which had cost $10 each. After the statement of financial position date they

were sold for $8 each, with selling expenses of $150.

What figure should appear in Epsilon's statement of financial position for inventory?

A $283,650

B $283,800

C $292,150

D $283,950

14 According to IAS 2 Inventories, which of the following costs should be included in valuing the

inventories of a manufacturing company?

(1) Carriage inwards

(2) Carriage outwards

(3) Depreciation of factory plant

(4) General administrative overheads

A All four items

B (1), (2) and (4) only

C (2) and (3) only

D (1) and (3) only

15 On 31 December 20X3 the inventory of V was completely destroyed by fire.

The following information is available:

(1) Inventory at 1 December 20X3 at cost $28,400

(2) Purchases for December 20X3 $49,600

(3) Sales for December 20X3 $64,800

(4) Standard gross profit percentage on sales revenue 30%

Based on this information, which of the following is the amount of inventory destroyed?

A $45,360

B $32,640

C $40,971

D $19,440


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16 MJ sell three products – Small, Medium and Large. The following information was available

at the year end:

Small Medium Large

$ per unit $ per unit $ per unit

Original cost 5 10 15

Estimated selling price 8 13 18

Selling and distribution costs 2 4 6

units units units

Units in inventory 250 100 150

The value of inventory at the year end should be:

A $4,500

B $3,950

C $4,200

D $2,700


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NON-CURRENT ASSETS

17 A non-current asset was disposed of for $2,200 during the last accounting year. It had been

purchased exactly three years earlier for $5,000, with an expected residual value of $500,

and had been depreciated using the reducing balance basis, at 20% per annum.

What was the profit or loss on disposal?

A $360 loss

B $150 loss

C $104 loss

D $200 profit

18 Beta purchased some plant and equipment on 1 July 20X3 for $40,000. The scrap value of

the plant in ten years' time was estimated to be $4,000. Beta's policy is to charge

depreciation on the straight line basis, with a proportionate charge in the year of

acquisition.

What should be the depreciation charge for the plant in Beta's accounting period of twelve

months to 30 September 20X3?

A $720

B $600

C $900

D $675

19 A car was purchased by T for $12,000 on 1 April 20X1 and has been depreciated at 20% each

year straight line, assuming no residual value.

The accounting policy is to charge a full year’s depreciation in the year of purchase and no

depreciation in the year of sale. The car was traded in for a replacement vehicle on 1 August

20X4 for an agreed trade-in value of $5,000.

What was the profit or loss on the disposal of the vehicle for the year ended 31 December

20X4?

A Loss $2,200

B Loss $1,400

C Loss $200

D Profit $200


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20 A company’s plant and machinery ledger account for the year ended 30 September 20X2

was as follows:

Plant and machinery – cost

20X1 $ 20X2 $

1 October: Balance 381,200 1 June: Disposal account – cost

of asset sold 36,000

1 December: Cash – addition 18,000 30 September: Balance 363,200

––––––– –––––––

399,200 399,200

––––––– –––––––

The company’s policy is to charge depreciation at 20% per year on the straight line basis, with

proportionate depreciation in years of purchase and sale.

What is the depreciation charge for the year ended 30 September 20X2?

A $74,440

B $84,040

C $72,640

D $76,840

21 Bianca bought an asset on 1st January 20X6 for $335,000. She has depreciated it at 25%

using the straight line method. On 1st January 20X9, Bianca revalued the asset to $450,000.

What double entry should Bianca post to record the revaluation?

A Dr Non-current assets cost $115,000

Dr Accumulated depreciation $251,250

Cr Revaluation reserve $366,250

B Dr Non-current assets cost $450,000

Dr Accumulated depreciation $251,250

Cr Revaluation reserve $701,250

C Dr Revaluation reserve $586,250 Cr Non-current assets cost $335,000

Cr Accumulated depreciation $251,250

D Dr Revaluation reserve $450,000 Cr Non-current assets cost $335,000

Cr Accumulated depreciation $115,000


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ACCRUALS AND PREPAYMENTS

22 In the year to 31 December 20X8 H had cash receipts in respect of rental income of $49,200.

The amounts of rent received in advance and due in arrears were as follows:

31 Dec 20X8 31 Dec 20X7

$ $

Rent received in advance 2,400 2,600

Rent due in arrears 1,800 1,400

What figure for rental income should be recorded in the statement of profit or loss for the

year ended 31 December 20X8?

A $48,600

B $49,000

C $49,400

D $49,800

23 Rent paid on 1 October 20X2 for the year to 30 September 20X3 was $12,000, and rent paid

on 1 October 20X3 for the year to 30 September 20X4 was $16,000.

What figure for rent expense should be shown in the statement of profit or loss for the year

ended 31 December 20X3?

A $12,000

B $16,000

C $13,000

D $15,000

24 A company has sublet part of its offices and in the year ended 30 November 20X3 the rent

receivable was:

Until 30 June 20X3 $8,400 per year

From 1 July 20X3 $12,000 per year

Rent was paid quarterly in advance on 1 January, April, July, and October each year.

What amounts should appear in the company’s financial statements for the year ended

30 November 20X3?

Statement of profit or loss Statement of

rent receivable Financial Position

A $9,900 $2,000 in sundry payables

B $9,900 $1,000 in sundry payables

C $10,200 $1,000 in sundry payables

D $9,900 $2,000 in sundry receivables


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25 A business compiling its accounts for the year to 31 January each year pays rent quarterly in

advance on 1 January, 1 April, 1 July and 1 October each year.

After remaining unchanged for some years, the rent was increased from $24,000 per year to

$30,000 per year as from 1 July 20X3.

Which of the following figures is the rent expense which should appear in the statement of

profit or loss for the year ended 31 January 20X4?

A $27,500

B $29,500

C $28,000

D $29,000


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RECEIVABLES

26 The following receivables ledger control account has been prepared by a trainee accountant:

20X3 $ 20X3 $

1 Jan Balance 284,680 31 Dec Cash received from 179,790

31 Dec Credit sales 189,120 credit customers

Discounts allowed 3,660 Contras * 800

Irrecoverable debts

written off

1,800

Sales returns 4,920 Balance 303,590

––––––– –––––––

484,180 484,180

––––––– –––––––

* = Contras against amounts owing by company in payables ledger

What should the closing balance on the account be when the errors in it are corrected?

A $290,150

B $286,430

C $282,830

D $284,430

27 The following control account has been prepared by a trainee accountant:

Receivables ledger control account

$ $Opening balance 308,600 Cash received from credit

customers 147,200

Credit sales 154,200 Discounts allowed to credit

customers 1,400

Cash sales 88,100 Interest charged on overdue

accounts 2,400

Irrecoverable debts written off 4,900

Contras against credit balances

in purchase ledger 4,600

Allowance for receivables 2,800

Closing balance 396,800 ––––––– –––––––

555,500 555,500

––––––– –––––––

What should the closing balance be when all the errors made in preparing the receivables

ledger control account have been corrected?

A $395,200

B $304,300

C $307,100

D $309,500


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28 At 30 September 20X2 a company’s allowance for receivables amounted to $38,000, which

was five per cent of the receivables at that date.

At 30 September 20X3 receivables totalled $868,500. It was decided to write off $28,500 of

debts as irrecoverable and, based on past experience, to keep the allowance for receivables at

five per cent of receivables.

What is the charge in the statement of profit or loss for the year ended 30 September 20X3 in

respect of the total of Irrecoverable debts and the allowance for receivables?

A $42,000

B $33,925

C $70,500

D $32,500

29 The allowance for receivables in the accounts of B at 31 October 20X1 was $9,000. During

the year ended 31 October 20X2, Irrecoverable debts of $5,000 were written off.

Receivables balances at 31 October 20X2 were $120,000 and, based on past experience, the

company wishes to set the allowance at 5% of receivables.

What is the total charge for Irrecoverable debts and the allowance for receivables in the

statement of profit or loss for the year ended 31 October 20X2?

A $2,000

B $3,000

C $5,000

D $8,000


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PAYABLES

30 Ally’s payables ledger control account has a balance carried down at 31 October 20X8 of

$36,900 debit.

During October, credit purchases were $74,800, payments made to suppliers were $68,900,

purchase returns were $4,700 and contra’s with the receivables ledger control account were$520.

The opening balance was:

A $54,020

B $36,220

C $52,980

D $34,240

31 During an accounting period, the entries in a payables ledger control account were:

Purchases $215,000

Bank $235,000

Returns $2,200

Contra receivables ledger account $3,000

Debit balances $800

Balance b/d $65,000

What was the balance on the payables ledger control account at the end of the accounting

period?

A $79,000B $76,000

C $39,000

D $43,400

32 Which of the following best describes the entries that are made using the purchase day book

totals at the end of each month?

A Debit purchases with total net purchases, credit payables ledger control with total gross

purchases and debit sales tax account with total sales tax

B Debit purchases with total gross purchases, credit payables ledger control with total netpurchases and credit sales tax account with total sales tax

C Debit payables ledger control with total net purchases, debit sales tax account with total

sales tax and credit purchases with total gross purchases

D Debit payables ledger control with total gross purchases, credit purchases with total net

purchases and credit sales tax account with total sales tax


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CAPITAL STRUCTURE

33 At 30 June 20X2 a company’s capital structure was as follows:

$

Ordinary share capital

500,000 shares of 25c each 125,000

Share premium account 100,000

In the year ended 30 June 20X3 the company made a rights issue of 1 share for every 2 held at

$1 per share and this was taken up in full. Later in the year the company made a bonus issue

of 1 share for every 5 held, using the share premium account for the purpose.

What was the company’s capital structure at 30 June 20X3?

Ordinary share capital Share premium account

$ $

A 450,000 25,000

B 225,000 250,000

C 225,000 325,000

D 212,500 262,500

34 The correct ledger entries needed to record the issue of 200,000 $1 shares at a premium of

30c, and paid for by cheque, in full, would be:

A Debit share capital account $200,000

Credit share premium account $60,000

Credit bank account $140,000

B Debit bank account $260,000

Credit share capital account $200,000

Credit share premium account $60,000

C Debit share capital account $200,000

Debit share premium account $60,000

Credit bank account $260,000

D Debit bank account $200,000

Debit share premium account $60,000

Credit share capital account $260,000


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35 At 1 November 20X6, Ollie, a limited liability company, was structured as follows:

$

Ordinary shares of 50c 100,000

Share premium 30,000

On 10 January 20X7, in order to raise finance for expansion, there was a 1 for 4 rights issue at$1.20. The issue was fully taken up.

What is the balance on the share premium account after the above transaction?

A $10,000

B $65,000

C $20,000

D $35,000

36 Holly, a limited liability company, has an under provision of $4,300 on its tax liability account

at 31 October 20X8 before accounting for that year’s tax charge.

It estimates tax on profits for the year to be $69,780.

What amounts should be shown in the financial statements for the year ended 31 October

20X8 in respect of tax?

Statement of profit or loss Statement of financial position

A $69,780 tax charge $74,080 tax payable

B $69,780 tax charge $64,480 tax payable

C $74,080 tax charge $69,780 tax payable

D $64,480 tax charge $69,780 tax payable


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BANK RECONCILIATIONS

37 In reconciling a business' cash book with the bank statement, which of the following items

could require a subsequent entry in the cash book?

(1) Cheques presented after the date of the bank statement.(2) A cheque from a customer which was dishonoured.

(3) An error by the bank.

(4) Bank charges.

(5) Deposits credited after the date of the bank statement.

(6) Standing order payment entered in the bank statement.

A (2), (3), (4) and (6) only

B (1), (2), (5) and (6) only

C (2), (4) and (6) only

D (1), (3) and (5) only

38 The following bank reconciliation statement has been prepared for Omega by a junior clerk:

$

Overdraft per bank statement 68,100

Add: Deposits not credited 141,200

–––––––

209,300

Less: Outstanding cheques 41,800 –––––––

Overdraft per cash book 167,500

–––––––

Which of the following should be the correct balance per the cash book?

A $167,500 overdrawn as stated

B $31,300 overdrawn

C $31,300 cash at bank

D $114,900 overdrawn


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39 The following differences have been identified when comparing the cash book with the bank

statements of a business:

(i) Bank interest received $40, had not been entered in the cashbook

(ii) A BACS receipt of $6,200 and $460 from two customers has not been entered in the

cashbook

(iii) A receipt for $650 has been recorded in the cashbook as $750

(iv) Cheques drawn for $3,940 entered in the cashbook are not showing on the bank

statement.

Which of the following need to be adjusted in the cash book?

A (i) and (ii) only

B (iv) only

C (I), (ii), (iii)

D All of the above

40 The bank statement has been compared with the cash book and the following differences

identified:

1 Cheques totalling £1,629 paid into the bank at the end of the month are not showing on

the bank statement.

2 Bank interest paid of £106 was not entered in the cash book.

3 A cheque for £350 written on 2 June has been incorrectly entered in the cash book at

2 May

4 A receipt from a customer of £1,645 has cleared the bank but has not been entered inthe cash book.

Which of the following need to be adjusted in the cash book?

A 2, 3 and 4

B 1 only

C 1 and 2

D All of the above


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THE TRIAL BALANCE AND ERRORS

41 A trial balance has been extracted and a suspense account opened. One error relates to the

mis-posting of an amount of $200, being discounts received from suppliers. This was

recorded on the wrong side of the discounts account.

What will be the correcting journal entry?

A Debit Discounts account $200, Credit Suspense account $200

B Debit Suspense account $200, Credit Discounts account $200

C Debit Discounts account $400, Credit Suspense account $400

D Debit Suspense account $400, Credit Discounts account $400

42 Collin has extracted the following balances from the ledger accounts for his business:

$

Plant and machinery 95,000

Property 135,000

Inventory 6,400

Payables 3,600

Receivables 2,850

Bank overdraft 970

Loan 45,000

Capital 100,000

Drawings 32,000

Sales 362,000

Purchases 156,000

Purchase returns 2,200

Discounts allowed ?

Discounts received 3,500

Sundry expenses 82,500

He has forgotten to extract the balance from the discounts allowed account. What is the

balance?

A $4,020

B $7,520

C $5,580

D $3,120


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43 Lizzie has recorded a banks payment of £880 for repairs to the company van. The correct

entry was made to the bank account but no other entries were made. What would be the

journal to correct this error?

A Dr Van account Cr Repairs account

B Dr Repairs account Cr Bank account

C Dr Repairs account Cr Suspense account

D Dr Repairs account Cr Van account

44 Dizzie recorded an amount of £3,175 for rent and rates. Both the rent and rates account and

the bank account were debited. What would be the journal to correct this error?

A Dr Suspense $3,175 Cr Bank $3,175

B Dr Suspense $6,350 Cr Bank $6,350

C Dr Bank $3,175 Cr Rent and rates $3,175

D Dr Rent and rates $6,350 Cr Bank $6,350

45 Weedens trial balance at 31 October 20X9 does not agree, with the credit side totalling

$1,610 less than the debit side. During November, the following errors were discovered:

• The debit side of the purchases account for October had been overcast by $150.

• Rent payable of $240 had been debited to the rent receivable account.

• The allowance for receivables, which increased by $240, had been recorded in the

allowance for receivables account as a decrease.

Following the correction of these errors, the balance on the suspense account would be:A $260

B $740

C $980

D $320


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PREPARING BASIC FINANCIAL STATEMENTS

46 A business has compiled the following information for the year ended 31 October 20X2:

$

Opening inventory 386,200

Purchases 989,000

Closing inventory 422,700

The gross profit as a percentage of sales is always 40%

Based on these figures, what is the sales revenue for the year?

A $1,333,500

B $1,587,500

C $2,381,250

D The sales revenue figure cannot be calculated from this information

47 From the following information calculate the value of purchases:

$

Opening payables 142,600

Cash paid to suppliers 542,300

Discounts received 13,200

Goods returned 27,500

Closing payables 137,800

A $302,600

B $506,400

C $523,200

D $578,200

48 The following information is relevant to Wimbledon:

$



Purchases 299,000

Expenses 114,400

Carriage in 3,500

Carriage out 7,700

Depreciation 40,000

What is the cost of sales?

A $ 297,840

B $ 294,340

C $ 298,540

D $ 302,040


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INCOMPLETE RECORDS

49 Luke sells office equipment. He buys a photocopier for £900.

(a) What would the selling price be, excluding sales tax, if a 40% mark-up was applied?

£

(b) What would the selling price be, excluding sales tax, if the sales margin was 40%?

£

50 You are given the following information about a sole trader called Chiron as at 31 January

20X5:

The value of assets and liabilities were

• Non-current assets at cost £10,000

•

Trade receivables £2,000• Loan £7,500

• Closing capital (at 31 January 20X5) £3,500

There were no other assets or liabilities

(a) Calculate the amount of accumulated depreciation at the year end 31 January 20X5

£

(b) Chiron sells goods at a mark up of 25%. What would be the gross profit on a sales price

of £11,000?

£

51 You are given the following information about a sole trader called Percy as at 31 March

20X2:

The value of assets and liabilities were

• Non-current assets at carrying value £14,000

• Bank £2,500

• Trade payables £10,300

•

Opening capital (at 1 April 20X1) £3,700• Drawings for the year £1,500

There were no other assets or liabilities.

(a) Calculate the profit for the year ended 31 March 20X2.

£


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52 The following information is available about the transactions of Rascal, a sole trader who

does not keep proper accounting records:

$



Purchases 840,000

Gross profit margin 30%

Based on this information, what is Rascal’s sales revenue for the year?

A $580,300

B $255,300

C $1,106,300

D $248,700

53 You are given the following incomplete and incorrect extract from the statement of profit orloss of a company that trades at a mark up of 25% on cost:

$ $

Sales 185,250

Less: Cost of goods sold


Purchases 147,058

Closing inventory X

–––––––

(X)

–––––––

Gross profit X

Having discovered that the sales figure should have been $195,230 and that carriage inwards

of $1,500 and sales returns of $1,230 have been omitted, the closing inventory should be:

A $38,800

B $6,143

C $46,305

D $9,143


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GROUP ACCOUNTS

Data for Questions

Pike acquired 75% of the ordinary share capital of Neal on 1 January 20X9 when Neal had retained

earnings of $1,000,000. Also on 1 January 20X9, Pike purchased a 30% interest in the ordinary share

capital of Whittington when Whittington had retained earnings of $296,000. It is Pike’s policy tocalculate and account for goodwill using the full goodwill method. At the date of acquisition of Neal,

the fair value of the non-controlling interest in Neal was $500,000. The summarised statements of

financial position for each company for the year ended 31 December 20X9 were as follows:

Pike Neal Whittington

$000 $000 $000

Non-current assets

Property plant and equipment 1,918 1,960 1,680

Investment in Neal 2,610 – –

Investment in Whittington 448 – –

4,976 1,960 1,680Current assets

Inventory 760 1,280 380

Receivables 380 620 200

Cash 70 116 92

Total assets 6,186 3,976 2,352

Equity and liabilities

$1 ordinary shares 2,240 1,000 1,120

Retained earnings 2,946 1,884 896

5,186 2,884 2,016

Current liabilities

Payables 800 960 272

Taxation 200 132 64

6,186 3,976 2,352

An impairment test at the year-end identified that goodwill for Neal was unimpaired.

54 What is the total tangible non-current assets amount to be shown in the consolidated

statement of financial position?

A $3,878,000

B $5,558,000

C $4,382,000

D $4,326,000

55 What is the amount to be shown in the consolidated statement of financial position for the

investment in the associate?

A $448,000

B $180,000

C $628,000

D $604,800


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56 What is the goodwill amount to be shown in the consolidated statement of financial

position?

A $Nil

B $1,110,000

C $1,610,000

D $610,000

57 What is the total assets amount to be shown in the consolidated statement of financial

position?

A $8,214,000

B $8,842,000

C $7,732,000

D $8,662,000

58 What is the total group retained earnings amount to be shown in the consolidated

statement of financial position?

A $3,789,000

B $3,609,000

C $2,946,000

D $3,740,800


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STATEMENTS OF CASH FLOWS

59 In relation to statements of cash flows, which, if any, of the following statements are

correct?

1 The direct method of calculating net cash from operating activities leads to a different

figure from that produced by the indirect method, but this is balanced elsewhere in thecash flow statement.

2 A company making high profits must necessarily have a net cash inflow from operating

activities.

3 Profits and losses on disposals of non-current assets appear as items under cash flows

from investing activities in the cash flow statement or a note to it.

A Statement 1 only

B Statement 2 only

C Statement 3 only

D None of the statements

60 The profits of GL were $63,400. This was after charging depreciation of $2,700.

During the year, receivables decreased by $600, inventories increased by $2,500 and trade

payables increased by $900. Non-current asset purchases during the year amounted to

$17,300 and there was a loss on disposal of non-current assets of $3,000.

What was the increase in cash balances during the year?

A $40,800

B $46,800

C $50,800

D $52,800

61 Which of the following is not shown in the statement of cash flows?

A Cash flows from investing activities

B Cash flows from financing activities

C Cash flows from profits of the business

D Cash flows from operating activities


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62 A draft statement of cash flows contains the following:

$m

Profit before tax 279

Proceeds from a disposal of a NCA 80

Decrease in inventories (26)

Increase in receivables 65

Increase in payables 15

––––

Net cash inflow from operating activities 413

––––

Which of the following corrections needs to be made to the calculations?

1 Proceeds from a disposal of a NCA needs to be removed from this section.

2 Decrease in inventories should be added, not deducted.

3 Increase in receivables should be deducted, not added.

4 Increase in payables should be added, not deducted.

A 1,2 and 3

B 1 and 4

C 1 only

D 2 and 3

63 Logic is producing its statement of cash flows for the year ended 31 December 20X8. The

accountant has identified the following balances in the financial statements:

$

Loans redeemed 82,000

Dividends paid 185,000

Increase in share capital 55,000

Bonus issue made 25,000

What is the net cash flow from investing activities?

A ($133,000)

B ($212,000)

C ($187,000)

D $80,000


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INTERPRETATION OF FINANCIAL STATEMENTS

64 A company’s capital employed at 31 December 20X2 is as follows:

$m

Ordinary share capital 380

Retained earnings 120

––––

500

8% Loan notes 100

––––

600

––––

The company’s statement of profit or loss the year ended 31 December 20X2 is as follows:

$m

Operating profit 40

Interest paid (8)

–––

32

Taxation (10)

–––

22

–––

Dividends declared in the year were $10 million, leaving a retained profit was $12 million.

What is the return on equity shareholders’ capital employed, using closing capital figures?

A 4.4%

B 2.4%

C 3.7%

D 5.8%

65 A company has the following current assets and liabilities at 31 October 20X8:

$000

Current assets: Inventory 970

Receivables 380Bank 40

–––––

1,390

–––––

Current liabilities: Payables 420

When measured against accepted ‘norms’, the company can be said to have:

A a high current ratio and an ideal acid test ratio

B an ideal current ratio and a low acid test ratio

C a high current ratio and a low acid test ratio

D ideal current and acid test ratios


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66 A business has the following capital and long-term liabilities:

31.10.X8 31.10.X9

$m $m

12% loan notes 20 40

Issued share capital 15 30

Share premium 3 18

Retained profits 22 12

At 31 October 20X9, its gearing ratio, compared to that at 31 October 20X8, has:

A risen, resulting in greater risk for shareholders

B risen, resulting in greater security for shareholders

C fallen, resulting in greater security for shareholders

D remained the same

67 The annual sales revenue of an enterprise is $235,000 including sales tax at 17.5 per cent.Half of the sales are on credit terms; half are cash sales. The receivables in the statement of

financial position are $23,500.

What is the average receivables collection period (to the nearest day)?

A 37 days

B 43 days

C 73 days

D 86 days


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68 The draft statement of financial position of B at 31 March 20X3 is set out below.

$000 $000

Non-current assets 450

Current assets

Inventory 65

Receivables 110

Prepayments 30

––––

205

––––

Total assets 655

––––

Capital and reserves

Issued capital 400

Retained earnings 100 ––––

500

Non-current liabilities

Loan 75

Current liabilities

Payables 30

Short-term borrowings (note 1) 50

––––

80

––––

655

––––

Note 1: The short-term borrowings were raised on 30 September 20X2.

What is the gearing of the company?

A 13 per cent

B 16 per cent

C 20 per cent

D 24 per cent


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69 An enterprise has the following trading account for the year ending 31 May 20X8:

$ $

Sales revenue 45,000


Purchases 26,500

––––––

30,500

Less: Closing inventory (6,000)

–––––– 24,500

––––––

Gross profit 20,500

––––––

Its inventory turnover rate for the year is:

A 4.9 times

B 5.3 times

C 7.5 times

D 9 times

70 The gearing ratio is often calculated as:

A Long-term loans as a percentage of total share capital and reserves

B Current and long-term debt as a percentage of total assets less current liabilities

C Total share capital and reserves as a percentage of long-term loans

D Total share capital and reserves as a percentage of total equity plus total liabilities


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RECORDING, HANDLING AND SUMMARISING ACCOUNTING DATA

BOOKKEEPING

71 JANE GRIGSON

Jane Grigson is a sole trader who keeps her own accounting records. She records invoices sentout to customers in a sales journal, any returns from customers in a returns inwards book and

cash transactions in cash received and cash paid books.

Below are the entries in Jane’s books of prime entry for the week commencing 8 June 20X2.

Sales Journal

Date Customer Total

$

8 June PK 423

9 June HS 1,410

9 June RD Contractors 89312 June HS 940

––––––

$3,666

––––––

Returns Journal

Date Customer Total

$

12 June PK 141

––––

Cash received book

Date Narrative Total Discounts Receivables Other

Allowed Ledger

$ $ $ $

8 June Cash sale 250 250

9 June HS 140 20 140

10 June Cash sale 90 90

11 June RD Contractors 475 475

11 June HS 680 48 680

––––– ––––– ––––– –––––

1,635 68 1,295 340

––––– ––––– ––––– –––––

Required:

(a) Post the entries in the journals shown to the relevant accounts in the general ledger

and the receivables ledger (do not balance off the accounts); (8 marks)

(b) Explain why the discounts allowed column, receivables ledger column and other

column do not cross-cast to equal the total column in the cash received book.(2 marks)

(Total: 10 marks)


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72 RBD

The ledger of RBD included the following ledger balances:

1 June 31 May

20X1 20X2

$ $Rents receivable: payments in advance 463 517

Rent payable: prepayments 1,246 1,509

accruals 315 382

Payables 5,258 4,720

Allowance for discounts on payables 106 94

During the year ended 31 May 20X2 the following transactions had been carried out:

$

Rents received by cheque 4,058

Rent paid by cheque 10,296Accounts payable paid by cheque 75,181

Discounts received from payables 1,043

Purchases on credit to be derived

Required:

Post and balance the appropriate accounts for the year ended 31 May 20X2, deriving the

transfer entries to the statement of profit or loss where applicable. (10 marks)


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73 MICHAEL ROBERTSON

Michael Robertson is a sole trader whose accounts you have prepared for the last two years.

Michael has recently attended a two day course entitled ‘Finance for non-accountants’ where

he began to learn the fundamentals of double entry bookkeeping as well as to gain a greater

understanding of his financial statements.

Since his return from this course Michael has spent some time looking at last year’s accounts

and he is rather confused about some areas.

Michael’s queries are as follows:

(1) “On the course that I have just attended two types of expenditure were mentioned,

capital expenditure and revenue expenditure. If revenue is income how can it also be

used to describe a type of expenditure?”

(2) “Looking at the trial balance I am concerned that trade payables, which are bad news,

and profit, which is good news, are both credit balances. How can this be so?”

(3) “I notice that some of my expense accounts have opening balances on them, somedebits and some credits. Surely these should have been written off to profit or loss last

year so that the account can be started afresh this year.”

(4) “One of the credit entries in the statement of profit or loss is entitled ‘Allowance for

receivables’. This must surely be a mistake as credits in the statement of profit or loss

are income or profits.”

(5) “I have come across entries in both customer and supplier accounts called contras.

What are these, expense or income?”

Required:

Answer each of these questions in terms that Michael will be able to understand. (10 marks)


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ERROR CORRECTION AND SUSPENSE ACCOUNTS

74 UPRIGHT

The draft final accounts of Upright for the year ended 31 October 20X5 show a net profit of

$48,200.

The list of account balances still has a difference for which a suspense account has been

opened. The suspense account appears in Upright’s statement of financial position as a debit

balance of $1,175.

In the course of subsequent checking, the following errors and omissions were found:

(i) At 1 November 20X4 insurance of $1,305 has been prepaid, but the figure had not been

brought down on the insurance account as an opening balance.

(ii) A vehicle held as a non-current asset, which had originally cost $22,000, was sold for

$6,000. At 1 November 20X4, depreciation of $17,600 had been charged on the vehicle.

The $6,000 proceeds of sale had been credited to the revenue account, and no other

entries had been made.

(iii) Depreciation on vehicles had been calculated at 20% (straight line basis) on the balance

on the vehicles cost account. The charge for the year now needs to be adjusted for the

effect of item (ii) above.

(iv) At 31 October 20X5, insurance of $1,500 paid in advance had not been allowed for in

the insurance account.

(v) The credit side of the rent receivable account had been undercast by $400.

(vi) A credit purchase of $360 had been correctly entered into the purchases day book (list

of purchase invoices) but had been entered as $630 on the credit side of the supplier’s

account in the accounts payable ledger. Upright does not maintain an accounts payableledger control account in the general ledger.

When these errors had been corrected, the suspense account balanced.

Required:

(a) Prepare a statement showing the effect on Upright’s profit of the correction of these

errors. (12 marks)

(b) Show the suspense account as it would appear in Upright’s records. (6 marks)

(Total: 18 marks)


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75 VB

VB, a chemical company, extracted a trial balance from its ledgers on 30 April 20X0 and found

that the sum of the debit balances did not equal the sum of the credit balances. A suspense

account was opened and used to record the difference. VB does not use control accounts for

its customer and supplier accounts.

The company carried out an investigation into the cause of the difference and found the

following:

(1) Cash sales of $246 had been debited to the sales returns account and the cash book.

(2) An invoice to a customer for $1,249 had been posted to the customer’s account as

$1,294.

(3) Bank charges of $37 had not been entered in the cash book.

(4) A transposition error occurred such that an additional $45 had been included in the sum

posted to the purchases account from a supplier’s invoice.

(5) A contra entry of $129 had been debited to the customer account and credited to thesupplier account.

(6) An invoice for rent for the six month period ending 30 September 20X0 amounting to

$13,500 had not been entered in the ledgers and remained unpaid on 30 April 20X0.

(7) A carriage invoice of $52 had been debited to carriage outwards but it related to the

purchase of goods from a supplier of the company.

(8) A irrecoverable of $40 which should have been written off had been forgotten and

remained as a balance on the customer’s account.

Required:

Show the journal entries necessary to correct each of the above (including a narrative).

(10 marks)


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76 YTZ

When the trial balance of YTZ was extracted on 30 June 20X2 it showed the following totals:

Dr Cr

$ $

103,457 102,113At the time a suspense account was opened to record the difference but investigation has now

followed and the following facts have emerged:

(1) An invoice for travel expenses of $132 was entered in the travel expenses account as

$123, although correctly entered in the creditor’s account.

(2) The returns outwards book was undercast on one page by $100.

(3) An electricity bill for $154 that had not been recorded or accrued for was discovered.

(4) Discounts received of $1,870 had not been entered in the payables ledger control

account.

(5) The bank statement that has recently been received showed an amount of interest onthe overdraft of $28 which has not been recorded in the ledgers.

(6) A small item of machinery costing $1,450 was charged to the repairs account.

Depreciation is charged on machinery at the rate of 20% per annum on cost.

(7) Discounts allowed of $30 were not recorded in the cash received book.

(8) A settlement by contra entry of $3,200 was only recorded in the payables ledger control

account.

(9) Bank charges of $23 had been correctly entered in the expense account but not in the

cash book.

Required:

(a) Clear the suspense account balance by correcting each of the errors detailed above;

(5 marks)

(b) Prepare a statement of adjusted profit showing the original profit of $97,499 and the

net profit after correcting the items above. (5 marks)

(Total: 10 marks)


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77 WT

The trial balance for WT was extracted at 30 June 20X2. After preparation of the draft

statement of profit or loss, it was found that the debit balances did not equal the credit

balances and a suspense account was set up until the differences could be investigated.

Since that date a number of errors have been found in the ledgers and a number of items are

still to be accounted for:

(1) A piece of machinery was purchased on credit at the end of June 20X2 for $2,000 but no

details have yet been entered into the ledger accounts. Machinery is depreciated at 20%

on cost with a full year’s depreciation in the year of purchase.

(2) A vehicle used in the business was disposed of during June for $1,400. It originally cost

$8,000 and the depreciation accumulated up to the date of sale was $5,000. The only

entries to have been made regarding this disposal were to debit the bank account and

credit the revenue account with the sale proceeds.

(3) During June $200 was received from an old customer of WT. All of this customer’s debts

had been written off in the previous year when his business folded.

(4) It has been discovered that items worth $4,278 have been completely omitted from the

closing inventory figure in the accounts.

(5) It has been discovered that rent of $125 that had been prepaid at 30 June 20X1 was not

brought down as the opening balance on the rent account.

(6) Purchases on credit totalling $3,261 have been correctly debited to the purchases

account, but the credit entry to the payables ledger control account was $3,621.

(7) A standing order for professional fees of $140 in June has been omitted from the cash

book as it was only discovered when checking the bank statement.

(8) A cash sale of $175 has been included in the sales account twice.

Required:

Prepare journal entries, with narratives, to correct these errors and omissions. (10 marks)


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INVENTORY VALUATION

78 MR G

On 1 January Mr G started a small business buying and selling a special yarn. He invested his

savings of $40,000 in the business and, during the next six months, the following transactions

occurred:

Yarn purchases Yarn sales

Date of Total Date of Total

receipt Quantity cost despatch Quantity value

Boxes $ Boxes $

13 January 200 7,200 10 February 500 25,000

8 February 400 15,200

11 March 600 24,000 20 April 600 27,000

12 April 400 14,000

15 June 500 14,000 25 June 400 15,200The yarn is stored in premises Mr G has rented and the closing inventory of yarn, counted on

30 June, was 500 boxes.

Required:

Calculate the value of the material issues during the six month period, and the value of the

closing inventory at the end of June, using the following methods of pricing:

(a) first-in-first-out; (10 marks)

(b) weighted average (calculation to two decimal places only). (10 marks)

(Total: 20 marks)


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RECEIVABLES

79 ALLOWANCE FOR RECEIVABLES

You are given the following balances at 1 January 20X1:

Receivables $10,000Allowance for receivables $400

You ascertain the following information:

$

Sales for the year 20X1 (all on credit) 100,000

Sales returns for the year 20X1 1,000

Receipts from customers during 20X1 90,000

Irrecoverable debts written off during 20X1 500

Discounts allowed during 20X1 400

At the end of 20X1 the allowance for receivables is required to be the equivalent of 5% ofreceivables, after making a specific allowance for a debt of $200 from a customer who has

gone bankrupt.

$

Sales for the year 20X2 (90% on credit) 100,000

Sales returns for the year 20X2 (90% relating to credit customers) 2,000

Receipts from credit customers during 20X2 95,000

Receivables balances settled by contra against payable balances during 20X2 3,000

Irrecoverable debts written off during 20X2 (including 50% of the debt due from

the customer who had gone bankrupt, the other 50% having been received in

cash during 20X2) 1,500Discounts allowed during 20X2 500

At the end of 20X2 the allowance for receivables is still required to be the equivalent of 5% of

the receivables.

Required:

Write up the receivables and allowance for receivables accounts for 20X1 and 20X2, bringing

down the balances at the end of each year and showing in those accounts the double entry

for each item. (10 marks)


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APPLICATIONS OF ACCOUNTING CONVENTIONS

80 STATEMENT OF FINANCIAL POSITION VALUES

The managing director of a company has recently returned from a conference on the

techniques of business valuation.

She has now realised that the accounts prepared by the company for publication probably

understate the value of the company by

(1) the exclusion of goodwill

(2) the valuation of non-current assets at cost, and

(3) the treatment of the costs of research.

She has asked you to draft a report stating why the accounting treatment of these items

understates the value of the company.

Required:

Draft an appropriate report, making reference to accounting concepts where applicable.

(10 marks)


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81 ACCOUNTING TERMS

Explain clearly the following accounting terms in a manner which an intelligent non-

accountant could understand in the context of a profit-orientated organisation:

(a) expense

(b) asset

(c) prudence

(d) objectivity.

(10 marks)


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82 MARKETING SERVICES

Your client has received the following invoice, and has come to you for advice.

‘From: Marketing Services

Due for our services for the three months 1 October to 31 December 20X2.

$

Agreed monthly fee for general advice

three months at $1,000 per month 3,000

Supply of new colour photocopier on 1.10.X2 with

five year guarantee, for use by your marketing department 10,000

Deposit paid by us on your behalf for television advertising

time in February 20X3 5,000

Full cost of advertising campaign in newspaper, from

1 November to 30 November 20X2 50,000

Payable in total by 31.1.X3.’

Required:

Write a letter to your client setting out how each of the four items on the invoice will affect

the expenses figure for the accounting year ended 31 December 20X2. You should explain

your treatment, and justify it by reference to accounting conventions. (10 marks)


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83 CAPITAL MAINTENANCE

Explain the following terms, illustrating your answer, wherever possible, with examples:

(a) capital maintenance;

(b) goodwill;

(c) fair value;

(d) research and development costs.

(10 marks)


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PREPARING FINANCIAL STATEMENTS

INCOMPLETE RECORDS

84 ERNIE

Ernie is a building contractor, doing repair work for local householders. His wife keeps some

accounting records but not on a double-entry basis.

The assets and liabilities of the business at 30 June 20X7 were as follows:

$

Assets

Plant and equipment: cost 12,600

Depreciation to date 5,800

Motor vehicle: cost 9,000

Depreciation to date 6,500

Inventory of materials 14,160

Receivables 9,490

One quarter's rent of premises paid in advance to 30 September 20X7 750

Insurance paid in advance to 31 December 20X7 700

Bank balance 1,860

Cash in hand 230

Liabilities

Trade payables 3,460

Telephone account payable 210

Electricity payable 180


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His cash and bank transactions for the year from 1 July 20X7 to 30 June 20X8 were as follows:

Cash and Bank summary

Receipts Cash Bank Payments Cash Bank

$ $ $ $

Opening balances 230 1,860 Suppliers 83,990Receipts from customers 52,640 150,880 Rent of premises 3,600

Loan received 10,000 Insurance (to 31.12.X8) 1,600

Proceeds of sale of

vehicle held at beginning

of year 3,000

Purchase of plant and

equipment

8,400

Cash paid into bank 24,040 Purchase of new vehicle 12,800

Cash withdrawn from

bank 48,260

Telephone

860

Closing balance 2,100 Electricity 890

Wages of repair staff 68,200Miscellaneous expenses 1,280

Amounts drawn by Ernie

for personal use 8,000 29,800

Refund to customer 400

Cash paid into bank 24,040

Cash withdrawn from

bank 48,260

Closing balance 890

––––––– ––––––– ––––––– –––––––

101,130 191,880 101,130 191,880 ––––––– ––––––– ––––––– –––––––

The following further information is available.

(1) Plant and equipment is to be depreciated at 25% per annum on the reducing balance

with a full year's charge in the year of purchase.

(2) The new motor vehicle was purchased on 1 January 20X8. Ernie's policy for vehicles is

to charge depreciation at 25% per annum on the straight line basis, with a proportionate

charge in the year of purchase but none in the year of sale.

(3) The rent of the premises was increased by 20% from 1 October 20X7.

(4) The loan of $10,000 was obtained from Ernie's brother on 1 April 20X8. It carriesinterest at 10% per annum, payable on 30 September and 31 March.

(5) At 30 June 20X8, Ernie owed the following amounts:

$

Suppliers 4,090

Telephone 240

Electricity 220

Miscellaneous expenses 490


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(6) At 30 June 20X8, amounts due from customers totalled $10,860. Of this amount, Ernie

considered that debts totalling $1,280 were irrecoverable and should be written off.

(7) Inventory of materials at 30 June was $12,170.

(8) Ernie agreed to pay his wife $5,000 for her assistance with his office work during the

year. This amount was actually paid in August 20X8.

Required:

Prepare Ernie's statement of profit or loss for the year ended 30 June 20X8 and his

statement of financial position as at that date. (24 marks)


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85 CART

Cart has just completed his first year of trading, for which he did not keep proper accounting

records. The following information is available.

(1) A summary of his bank statements reveals:

Receipts Payments

$ $

Capital introduced 20,000

Cash banked 26,250

Motor vehicle 18,000

Computer 2,000

Telephone 800

Stationery 2,500

Personal expenses 850

Purchases 19,500

(2) He banked his takings periodically after paying for wages of $700 and sundry expenses

of $850.

(3) Depreciation is to be provided on the motor vehicle at 20% straight line basis and on the

computer at 25% straight line basis.

(4) At 31 December 20X2, other assets and liabilities were as follows:

Inventory $400

Receivables $970

Payables $1,095

Accrual for telephone expense $40Cash in hand $80

(5) Cart has estimated that his gross profit percentage was 30% of sales revenue.

Required:

Prepare the statement of profit or loss for the year ended 31 December 20X2 and the

statement of financial position statement of financial position as at that date. All workings

must be clearly shown. (10 marks)


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COMPANY FINANCIAL STATEMENTS

86 RULERS

On 31 December 20X2 the accounting records of Rulers, a limited liability company, contained

the following balances.

$000

$1 ordinary shares 500

$1 10% irredeemable preference shares 100

Share premium 200

Retained earnings – 1 January 20X2 455

Land 200

Plant and machinery – cost 550

– depreciation 1 January 20X2 250

Revenue 3,500

Cost of sales 2,100

Inventory 600

Receivables 550

Bank (debit balance) 350

Operating expenses 400

Management expenses 280

Selling expenses 220

10% Loan notes 100

Payables 200

Irrecoverable debts 5

Allowance for receivables 1 January 20X2 6

Interest received 7

Discounts allowed 8

Ordinary shares dividend 55

The following notes need additionally to be taken into account.

(a) Bank charges $2,000 and a standing order receipt of $50,000 from a customer have

been omitted.

(b) The allowance for receivables is required to be the equivalent of 1% of receivables.

(c) Loan note interest needs to be provided for.

(d) The preference dividend was declared in December 20X2.

(e) The ordinary shares dividend of $55,000 was proposed in December 20X1, declared in

February 20X2 and paid in March 20X2. A final ordinary dividend of 14c per share isproposed.

(f) Depreciation on plant and machinery is to be allowed at 20% on the reducing balance

method. 10% of this depreciation relates to general management and 5% to selling.

(g) The land is to be revalued upwards by $30,000.

(h) A tax provision of $150,000 is required.

Required:

Prepare a statement of profit or loss, a statement of changes in equity and a statement of

financial position to comply with the requirements of IAS 1 Presentation of Financial

Statements. (20 marks)(ACCA Accounting Dec 90 adapted)


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87 ELLIS ISLAND

The trial balance extract of Ellis Island, a limited liability company, for the year ended

31 December 20X3 was as follows.

$000 $000

Revenue 1,920

Purchases 1,152

Advertising expenses 73

Audit fee 9

Irrecoverable debt expenses 21

Inventory at 1 January 20X3 25

Administration salaries 76

Sales persons’ salaries 44

Manufacturing wages 87

Hire of plant 15

Interim dividend declared and paid 14Premises – depreciation expense 33

Plant – depreciation expense 66

Motor vehicles – depreciation expense 22

10% loan notes 200

Loan note interest paid 10

Additional information:

(i) Inventory as at 31 December 20X3 was valued at $29,000.

(ii) The income tax expense for the year was estimated to be $57,000.

(iii) A final dividend of $28,000 has been proposed but not yet recorded in the accounts.

Required:

Prepare a statement of profit or loss for Ellis Island for the year ended 31 December 20X3,

classifying expenses by function (the 'cost of sales' method), which meets the requirements

of IAS 1. Show any additional information that must be disclosed.

All workings must be clearly shown. (15 marks)


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88 MOORFOOT

Moorfoot, a limited liability company, operates a chain of wholesale grocery outlets. Its first

account balances at 30 June 20X8 was as follows:

$000 $000

Revenue 13,600

Purchases 8,100

Inventory 1 July 20X7 1,530

Distribution costs 1,460

Administrative expenses 1,590

Interest on loan notes 50

Dividends declared and paid:

Final for year ended 30 June 20X7 480

Interim for year ended 30 June 20X8 360

Land at cost 1,510

Buildings – Cost 8,300

– Accumulated depreciation at 30 June 20X7 1,020

Warehouse and office equipment

– Cost 1,800

– Accumulated depreciation at 30 June 20X7 290

Motor vehicles

– Cost 1,680

– Accumulated depreciation at 30 June 20X7 620

Trade receivables 810

Allowance for receivables 18

Cash at bank 140

Trade payables 820

10% loan notes (issued 20W5 and to be redeemed 20Y0) 1,000

Called up share capital – Ordinary shares of 25c each 1,200


Retained earnings 30 June 20X7 6,772

–––––– ––––––

27,810 27,810

–––––– ––––––The following additional information is available:

(1) Closing inventory was $1,660,000.

(2) Trade balances totalling $6,000 are to be written off and the allowance for receivables

increased to $30,000. It is the company's practice to include the charge for

Irrecoverable debts and the allowance for receivables in administrative expenses in the

statement of profit or loss.


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(3) Accruals and prepayments at the year-end were:

Prepayments Accruals

$000 $000

Distribution costs 60 120

Administrative expenses 70 190

Interest on loan notes – 50

(4) In early July 20X8 the company received invoices for credit purchases totalling $18,000

for goods delivered before 30 June. These invoices have not been included in the

accounts payable at 30 June 20X8.

It was also found that credit sales invoices totalling $7,000 for goods delivered to

customers before 30 June 20X8 had mistakenly been dated in July 20X8 and thus

excluded from sales for the year and from accounts receivable at the year end.

The goods received had been included in the year-end inventory figure given at (1)

above, and the goods sold had been excluded from it. No adjustment to the inventory

figure is therefore required.(5) Depreciation should be provided as follows:

Land Nil

Buildings 2 per cent per year on cost

Warehouse and office equipment 15 per cent per year on cost

Motor vehicles 25 per cent per year on cost

All depreciation is to be divided equally between distribution costs and administrative

expenses.

Required:

Prepare the company's statement of profit or loss for the year ended 30 June 20X8, and

statement of financial position as at that date, complying as far as possible with the

requirements of IAS 1 Presentation of Financial Statements. Ignore taxation. Notes to the

financial statements are not required. (24 marks)


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89 LOMOND

Lomond, a limited liability company, is engaged in a number of research and development

projects. Its accounting policy as regards research and development complies with the

requirements of IAS 38 Intangible assets. At 30 June 20X8, the following information is

available:

Project A Development completed 30 June 20X5. Total expenditure $200,000, being

amortised over five years on the straight line basis in accordance with the

company's standard policy. The balance on the project account at 30 June 20X7

was $120,000.

Project B A development project commenced 1 July 20X5. Expenditure in the years ended

30 June 20X6 and 30 June 20X7 totalled $175,000, which was recognised as an

asset at 30 June 20X7. During the year ended 30 June 20X8, it became clear that

a competitor had launched a superior product and the project was abandoned.

Further development expenditure in the year ended 30 June 20X8 amounted to

$55,000.

Project C Development commenced 1 October 20X6 and not yet completed. Expenditure

to date:

Year ended 30 June 20X7: $85,000


All expenditure on Project C meets the criteria for capitalisation in IAS 38.

Project D In addition, research project D commenced on 1 July 20X7. Expenditure to date

(all research):


Required:

(a) State the conditions which must be met if development expenditure is to be

recognised as an intangible asset. (6 marks)

(b) Calculate the amounts which should appear in the company's statement of profit or

loss statement and statement of financial position for research and development for

the year ended 30 June 20X8. (7 marks)

(c) Show the notes which IAS 38 requires in the financial statements for the year giving

supporting figures for the items in the statement of profit or loss and statement of

financial position. (7 marks)

(Total: 20 marks)


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90 IAS 10 EVENTS AFTER THE REPORTING PERIOD

IAS 10 Events after the reporting period defines the treatment to be given to events arising

after the reporting date but before the financial statements are authorised for issue outside

the enterprise.

Required:

(a) How does IAS 10 distinguish between events after the reporting period which should

be adjusted in financial statements and those which should be disclosed by note only?

(4 marks)

(b) Consider each of the following four events after the reporting date.

(i) The company made an issue of 100,000 shares which raised $180,000 shortly

after the statement of financial position date.

(ii) Judgement was issued shortly after the reporting date in respect of a legal

action brought against the company for breach of contract. As a result the

company was ordered to pay costs and damages totalling $50,000. No provisionhad been made for this possible expense. The breach of contract occurred

before the statement of financial position date.

(iii) Inventory items included in the accounts at cost $28,000 were subsequently

sold for $18,000.

(iv) A factory in use at the reporting date and valued at $250,000 was completely

destroyed by fire. Only half of the value was covered by insurance. The

insurance company has agreed to pay $125,000 under the company's policy.

If you think the event requires adjustment, show exactly how items in the accounts

should be changed to allow for the event.

If you think the event does not require adjustment, write a suitable disclosure note,

including such details as you think fit. (16 marks)

(Total: 20 marks)


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CONSOLIDATED ACCOUNTS

91 PIXIE AND DIXIE

On 1 October 20X9, Pixie acquired 37,500 ordinary shares in Dixie. At the date of acquisition,

the retained earnings of Dixie amounted to $30,000. The acquisition of shares was financed by

the immediate payment of $10,000 cash together with the issue by Pixie of one share for each

Dixie share acquired. At 1 October 20X9, the fair value of a Pixie share was $2. At 31 December

20X9, only the payment of cash had been accounted for.

At the date of acquisition, the fair value of the non-controlling interest in Dixie was $20,000.

The statements of financial position of the two companies at 31 December 20X9 were as

follows:

Pixie Dixie

$ $

Non-current assets 210,000 110,600

Current assets 113,100 43,400Investment in Dixie 10,000

––––––– –––––––

333,100 154,000

––––––– –––––––

Ordinary share capital @ $1 100,000 50,000

Retained earnings 157,000 38,000

Sundry payables 76,100 66,000

––––––– –––––––

333,100 154,000

––––––– –––––––

Required:

Prepare the consolidated statement of financial position of Pixie and its subsidiary as at

31 December 20X9. (15 marks)


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INTERPRETING/USING FINANCIAL STATEMENTS


92 SH

You are presented with the following information relating to SH, a limited liability company:

Statement of profit or loss for the year ended June 20X6

$000

Gross profit 980

Trading expenses 475

Depreciation 255

–––––

Net profit 250

–––––

Dividends declared and paid during the year 80

–––––

Statement of financial position at 30 June 20X6

20X5 20X6

$000 $000 $000 $000

Non-current assets at cost 3,000 3,500

Less: Accumulated depreciation 2,100 2,300

––––– –––––

Net book value 900 1,200

Current assets

Inventories 825 1,175

Receivables 5,200 5,065

Bank and cash 2,350 2,160

––––– –––––

8,375 8,400

––––– –––––

9,275 9,600

––––– –––––


Ordinary shares of $1 each 2,800 3,200

Share premium – 400

Retained earnings 1,400 1,570

––––– –––––

4,200 5,170

Current liabilities

Payables 5,075 4,430

––––– –––––

9,275 9,600

––––– –––––


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During the year ended 30 June 20X6, non-current assets which had cost $230,000 were sold

for $145,000. The loss on this disposal has been included in trading expenses in the statement

of profit or loss.

Required:

Produce a statement of cash flows using the indirect method of presentation for the yearended 30 June 20X6. (15 marks)


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93 AMS

AMS, a limited liability company, made a gross profit of $239,000 in the year to 31 August

20X8. Expenses amounted to $159,000 which included interest of $30,000 payable on a long-

term loan, depreciation on plant of $50,000, and depreciation on premises of $25,000. Income

tax in profit or loss was $10,000 and dividends paid in the year were $45,000.

The statements of financial position of AMS at 31 August 20X8 and 20X7 were as follows:

20X8 20X7

$000 $000 $000 $000

Non-current assets

Premises 1,200 1,170

Plant and machinery 800 700

––––– –––––

2,000 1,870

Current assets

Inventory 450 550

Receivables 700 680

Bank and cash 300 1,450 – 1,230

––––– ––––– ––––– –––––

3,450 3,100

––––– –––––


Ordinary shares of $1 each 1,800 1,300

Share premium 400 300

Retained earnings 392 367

––––– –––––

2,592 1,967


Loan notes 200 400

Current liabilities

Payables 648 681

Income tax 10 12

Bank overdraft – 658 40 733

––––– ––––– ––––– –––––

3,450 3,100 ––––– –––––

During the year ended 31 August 20X8, plant which had cost $85,000 was sold at a loss of

$10,000. The sale proceeds were $50,000. The loss was recognised in profit or loss as part of

expenses $159,000.

Required:

Prepare a statement of cash flows for the year ended 31 August 20X8, using the indirect

method of presentation. (15 marks)


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94 ADDAX

The following balances appeared in the statement of financial position of Addax, a limited

liability company, at 31 March 20X2.

$

Plant and equipment – cost 840,000Accumulated depreciation 370,000

In the year ended 31 March 20X3 the following transactions took place:

(1) Plant which had cost $100,000 with a written down value of $40,000 was sold for

$45,000 on 10 December.

(2) New plant was purchased for $180,000 on 1 October 20X2.

It is the policy of the company to charge depreciation at 10% per year on the straight

line basis with a proportionate charge in the year of acquisition and no charge in the

year of sale. None of the plant was over ten years old at 31 March 20X2.

Required:

(a) Prepare ledger accounts recording the above transactions. A cash account is NOT

required. (5 marks)

(b) List the items which should appear in Addax’s cash flow statement for the year ended

31 March 20X3 based on these transactions and using the indirect method, including

the headings under which they should appear.

Note: The headings from IAS 7 are to be used. (4 marks)

(Total: 9 marks)


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RATIO ANALYSIS

95 MBC

The following figures have been extracted from the published accounts of MBC, a limited

liability company, at 31 October 20X5.

$m

Ordinary share capital 30

Share premium 3

Reserves 5

––––

38

6% loan notes 10

––––

48

––––

The net profit (after tax of $1m) for the year to 31 October 20X5, was $4m and dividends paid

amounted to $0.5m. The company is considering raising a further $10m in the next financial

year to finance research and development.

Required:

(a)

State the formula for, and calculate, the company’s gearing ratio at 31 October 20X5.

(2 marks)

(b) State the formula for, and calculate, the company’s return on capital employed (ROCE)

at 31 October 20X5. (3 marks)

(c) Discuss the different effects on gearing and ROCE of raising the additional $10m by the

issue of shares or by the issue of loan notes. (5 marks)

(Total: 10 marks)


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96 PETER JACKSON

Peter Jackson is a sole trader who has recently prepared his accounts for the year ended

31 May 20X2. Peter also prepared some ratios and statistics in order to analyse those

accounts.

Unfortunately Peter has now mislaid the accounts and all that is remaining is the schedule of

ratios.

Gross profit mark-up on cost 50%

Net profit/capital employed 30%

Net profit margin 10% of revenue

Opening inventory at selling price 73 days, based on revenue

Closing inventory at selling price 109.5 days, based on revenue

Current assets: current liabilities 2.9:1

Receivables payment period 45 days

Payables payment period 60 days

Peter can remember that his revenue for the year totalled $300,000.

Required:

Prepare Peter’s statement of profit or loss for the year ended 31 May 20X2 and his

statement of financial position at that date in as much detail as is possible from the above

information. (15 marks)


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COMPREHENSIVE EXAMPLE

97 TYR

TYR, a limited liability company, produced the following trial balance at 31 October 20X7:

Dr Cr$000 $000

Share capital 1,000

Reserves 425

12% Loan notes, repayable 20X0 250

Land at valuation 495

Premises at cost 350

– depreciation to 1 November 20X6 20

Plant and machinery at cost 220

– depreciation to 1 November 20X6 30

Patents and trade marks 200

Inventory at 1 November 20X6 210

Receivables 875

Cash in hand 12

Payables 318

Bank 85

Administration expenses 264

Selling and distribution expenses 292

Dividends paid 20

Loan note interest 15

Revenue 2,569

Purchases 1,745

Carriage inwards 15

Carriage outwards 18

Returns outwards 34

––––– –––––

4,731 4,731

––––– –––––

The following additional information at 31 October 20X7 is available:

(1) A physical inventory check reveals inventory at cost of $194,000.

(2) Prepaid administration expenses amount to $12,000 and prepaid selling and delivery

expenses amount to $28,000. Accrued administration expenses amount to $17,000.

(3) During October 20X7 goods were sold on a ‘sale or return’ basis, with the final date for

return being 25 November. The sale has been recorded as normal in the sales journal

and customers’ accounts and the goods have been excluded from the inventory count.

The goods cost $7,000 and had a selling price of $12,000.

(4) The land is to be revalued at $550,000.

(5) The share capital account comprises 200,000 5% irredeemable preference shares of$1 each with the balance made up of 50c ordinary shares.


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(6) The reserves account comprises of share premium of $100,000, revaluation reserve of

$135,000 with the balance representing retained earnings.

(7) The premises are to be depreciated at 4% per annum straight line.

The plant machinery is to be depreciated at 10% per annum straight line.

(8) Income tax of $40,000 is to be provided for the year.(9) The dividends account represents payment in respect of the current year of a half-year’s

preference dividend and an interim ordinary dividend. A final dividend of 5c per share is

proposed for the current year.

Required:

(a) Prepare a statement of profit or loss for the year ended 31 October 20X7. (10 marks)

(b) Prepare a statement of financial position at 31 October 20X7. (10 marks)

(c) Given the following ratios for the previous year, calculate the comparable ratios for

the current year and comment on your results. Suggest reasons for any changes in the

ratios between the two years.

(i) Gross profit mark up 50%

(ii) Net profit percentage 3% (using net profit before tax)

(iii) Current ratio 2.4:1

(iv) Acid test ratio 1.8:1 (10 marks)

(Total: 30 marks)


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ANSWERS


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MULTIPLE CHOICE QUESTIONS

REGULATORY FRAMEWORK

1 A

The correct answer is A. The IASB Framework states: 'Prudence is the inclusion of a degree of

caution in the exercise of the judgements needed in making the estimates required under

conditions of uncertainty, such that assets or income are not over-stated and liabilities and

expenses are not understated'.

2 D

The historical cost convention is unreliable when the rate of inflation is high, and can be very

misleading when non-current assets are held for a long time, such that their historical cost is

far lower than their current value. When the prices of land and buildings rise over time, the

historical cost convention is probably inappropriate for the valuation of land and buildings that

an enterprise has owned for many years.


7/26/2019 F7 Aug 2016


LECTURER RESOURCE PACK – ANSWERS

DOUBLE ENTRY BOOKKEEPING

3 A

4 B

5 D

6 A

7 B

Bank account

$ $

Customer receipt 500 Balance b/d 1,750

Petty cash 1,300 Drawings 225

Balance c/d 805 Purchases 630

––––– –––––

2,605 2,605

––––– –––––


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SALES TAX

8 D

Price of goods $750.00

Less: 5% trade discount ($37.50)

––––––––

$712.50

Sales tax $139.65

($712.50 – 2%) × 20%

9 B

Sales tax account

$ $

Input tax 90,000 Balance b/d 27,338

(450,000 × 20%) Output tax(750,000 × 20/120)

125,000

Balance c/d 62,338

––––––– –––––––

152,338 152,338

––––––– –––––––

10 A

Sales tax account

$ $

Input tax

(15,000 × 20%)

3,000.00 Output tax

(26,612.50 × 20/120)

4,435.42

Balance c/d 1,435.42

––––––– –––––––

4,435.42 4,435.42

––––––– –––––––

11 C

($90,000 – $72,000) × 10% = $1,800


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12 A

Sales tax account

$ $

Bank

Input tax

(40,500 × 10/110)

2,200

3,682

Balance b/d

Output tax

(60,000 × 10%)

3,500

6,000

Balance c/d 3,618

–––––– ––––––

9,500 9,500

–––––– ––––––


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INVENTORY

13 A

Inventory should be valued at the lower of cost and net realisable value.

The net realisable value of item 1:$

Sale value: (500 × $20) 10,000

Remedial work (1,800)

Selling expenses (400)

–––––

Net realisable value 7,800

–––––

This is higher than cost, therefore the item should be valued at cost in the statement of

financial position.

The net realisable value of item 2 is (100 × $8) – $150 = $650. This is $350 lower than the cost

of the inventory ($1,000), so the inventory must be reduced in value by $350 to its net

realisable value.

$

Starting value of inventory 284,000

Item 1 – No change

Item 2 (350) Reduce to net realisable value

–––––––

Adjusted inventory value 283,650

–––––––

14 D

Carriage outward is a selling expense. General administrative overheads are not part of the

cost of production.

15 B

Gross profit = 30% of sales, therefore cost of sales = 70% of sales.

Cost of sales = 70% × $64,800 = $45,360.

$


Purchases 49,600

–––––––

78,000

Cost of sales (45,360)

–––––––

Lost inventory 32,640

–––––––


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16 B

Taking the lower of cost vs net realisable value for each line of inventory is as follows:

Small 250 units × $5 = $1,250

Medium 100 units × $9 = $900

Large 150 units × $12 = $1,800

Total = $3,950


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NON-CURRENT ASSETS

17 A

Disposal account

$ $

Asset at cost 5,000 Accumulated depreciation 2,440

Bank 2,200

Loss on disposal 360

(balancing figure)

––––– –––––

5,000 5,000

––––– –––––

Asset carrying value = $5,000 × 80% × 80% × 80% = $2,560.

Therefore accumulated depreciation = $5,000 – $2,560 = $2,440.

18 C

Annual depreciation =10

$4,000 –$40,000 = $3,600

Depreciation for the period July – September 20X3 (3 months) = 3/12 × $3,600 = $900.

19 D

Accumulated depreciation at the time of disposal = 3 years × 20% × $12,000 = $7,200.

Carrying value at time of disposal = $12,000 – $7,200 = $4,800.

Trade-in value of asset disposed of = $5,000.

Profit on disposal = $5,000 – $4,800 = $200.

20 D

Plant and machinery held throughout the year =

Opening balance – Assets disposed of in the year =

$381,200 – $36,000 = $345,200.

Depreciation charge

$

Assets held all year 20% × $345,200 69,040

Assets bought on 1 Dec 10/12 × 20% × $18,000 3,000

Assets disposed of 8/12 × 20% × $36,000 4,800

––––––

76,840

––––––

21 A


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ACCRUALS AND PREPAYMENTS

22 D

$

Rental income receipts 49,200

Received in advance in 20X7, for 20X8 2,600

––––––

51,800

Received in advance in 20X8, for 20X9 (2,400)

––––––

49,400

Received in 20X8, relating to 20X7 (1,400)

––––––

48,000

Rent due for 20X8, in arrears and not yet received 1,800 ––––––

Rental income for the year to 31 December 20X8 49,800

––––––

23 C

$

1 January – 30 September: (9/12 × $12,000) 9,000

1 October – 31 December: (2/12 × $16,000) 4,000

––––––

13,000

––––––

24 B

(7/12 × $8,400) + (5/12 × $12,000) = $9,900

$1,000 (1/3 × (3/12 × $12,000)) paid in advance in sundry payables

The rent received in advance is treated as a liability.

25 A

Rent expense for the year: $

1 February – 30 June: (5/12 × $24,000) 10,000

1 July – 31 January: (7/12 × $30,000) 17,500

––––––

27,500

––––––


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RECEIVABLES

26 C


20X3 $ 20X3 $

1 Jan Balance b/d 284,680 31 Dec Cash 179,790

31 Dec Credit sales 189,120 Contras 800

Discounts allowed 3,660

Irrecoverable debts 1,800

Sales returns 4,920

Balance c/d 282,830

––––––– –––––––

473,800 473,800

––––––– –––––––

20X41 Jan Balance b/d 282,830

27 C


$ $

Opening balance 308,600 Cash 147,200

Credit sales 154,200 Discounts allowed 1,400

Interest charged 2,400 Irrecoverable debts 4,900

Contras 4,600

Closing balance 307,100

––––––– –––––––

465,200 465,200

––––––– –––––––

28 D

$28,500 + ((5% × ($868,500 – $28,500)) – $38,000) = $32,500

29 A

The total charge is the actual amount of Irrecoverable debts written off plus the increase in

the allowance for receivables, or minus the decrease in the allowance.

$

Allowance at end of year (5% of $120,000) 6,000

Allowance at start of year 9,000

–––––

Decrease in allowance (3,000)

Irrecoverable debts written off 5,000

–––––

Charge to profit or loss 2,000 –––––


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PAYABLES

30 B

Payables ledger control account

$ $

Payments to suppliers 68,900 Balance b/d 36,220

Purchase returns 4,700 Credit purchases 74,800

Contra 520

Balance c/d 36,900

––––––– –––––––

111,020 111,020

––––––– –––––––

31 C

Payables ledger control account$ $

Payments to suppliers 235,000 Balance b/d 65,000

Purchase returns 2,200 Credit purchases 215,000

Contra 3,000

Debit balances 800

Balance c/d 39,000

––––––– –––––––

280,000 280,000

––––––– –––––––

32 A


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CAPITAL STRUCTURE

33 B

Ordinary share

capital

Share

premium

$ $

At 30 June 20X2 125,000 100,000

Rights issue (75c premium on (62,500 × 4) shares) 62,500 187,500

––––––– –––––––

187,500 287,500

1 for 5 bonus issue 37,500 (37,500)

––––––– –––––––

At 30 June 20X3 225,000 250,000

––––––– –––––––

34 B

Issued share capital and reserves are credit balances in the nominal ledger accounts (since

capital balances are credit balances). The money raised is 200,000 × $1.30 = $260,000, of

which $200,000 is share capital (nominal value) and $60,000 is share premium.

35 B

$100,000/$0.50 = 200,000 shares

200,000/4 = 50,000 shares × $0.70 = $35,000

Balance on share premium account b/d $30,000 + $35,000 = $65,000

36 C


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BANK RECONCILIATIONS

37 C

Items shown in the bank statement that should subsequently be recorded in the cash book are

items that the business does not learn about until it receives the bank statement. These

include bank charges, dishonoured cheques and standing orders and direct debit payments.

38 C

$

Overdraft per bank statement (68,100)

Outstanding cheque payments (41,800)

–––––––

(109,900)

Deposits not yet credited by bank 141,200

–––––––

Balance per cash book 31,300

–––––––

39 C

40 A


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THE TRIAL BALANCE AND ERRORS

41 D

Discounts received should be recorded as:

Debit PayablesCredit Discounts received.

Here, the discount has been debited instead of credited, so that the balance in the discounts

received account is 2 × $200 = $400 too low. To correct, we must:

Credit Discounts received $400

Therefore Debit Suspense account $400.

42 B

Total debits = $509,750

Total credits = $517,270

Therefore discounts allowed = $7,520 debit balance

43 C

44 B

45 C

Suspense account$ $

Purchases 150 Opening balance 1,610

Allowance for receivables 480

Closing balance 980

–––––– ––––––

1,610 1,610

–––––– ––––––


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PREPARING BASIC FINANCIAL STATEMENTS

46 B

$


Purchases 989,000

––––––––

1,375,200

Closing inventory (422,700)

––––––––

Cost of sales = 60% of sales revenue 952,500

––––––––

Gross profit = 40% of sales revenue

Sales = $952,500 × 100/60 = 1,587,500

47 D

Payables

$ $

Bank 542,300 Opening balance b/d 142,600

Discounts received 13,200 Purchases (balance) 578,200

Purchase returns 27,500

Closing balance c/d 137,800

––––––– –––––––

720,800 720,800

––––––– –––––––

Opening balance b/d 137,800

48 A

$


Purchases

Carriage inwards

299,000

3,500

Closing inventory (18,160)

––––––––Cost of sales 297,840

––––––––


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INCOMPLETE RECORDS

49 Using mark up

$900 × 140% = $1,260

Using margin

$900 × 60% = $540

50 Accumulated depreciation is $1,000

10,000 + 2,000 – 7,500 – 3,500 = $1,000

The gross profit would be:

11,000 × 25/125 = $2,200

51 The profit is $4,000

Assets 16,500 – Liabilities $10,300 = Capital $3,700 + Profit $4,000 – Drawings $1,500

52 A

Cost of sales = 75,000 + 840,000 – 86,000 = 829,000 × 70% = $580,300

53 D

$ $

Sales (195,230 – 1,230) 194,000

Opening inventory 15,785Purchases

Carriage inwards

147,058

1,500

Closing inventory Bal (9,143)

––––––––

Cost of sales (194,000 × 100/125) 155,200


7/26/2019 F7 Aug 2016



GROUP ACCOUNTS

54 A

Tangible non-current assets = $1,918,000 + $1,960,000 = $3,878,000

Note: We do not include the Associates assets and liabilities in the line-by-line consolidation ofthe group statement of financial position.

55 C

Cost of investment $448,000

Post-acquisition reserves

30% × ($896,000 – $296,000) $180,000

––––––––

Investment in associate $628,000

––––––––

56 B

Cost of Investment $2,610,000

Fair value of NCI at acquisition $500,000

Less: Fair value of net assets at acquisition $(2,000,000)

–––––––––

$1,110,000

–––––––––

57 BNon-current assets

Goodwill (per Q56) $1,110,000

Tangible – property plant and equip (per Q54) $3,878,000

Investment in associate (per Q55) $628,000

–––––––––

$5,616,000

Current assets

Inventory (760,000 + 1,280,000) $2,040,000

Receivables (380,000 + 620,000) $1,000,000

Cash (70,000 + 116,000) $186,000

–––––––––

$8,842,000

–––––––––


7/26/2019 F7 Aug 2016



58 A

Retained earnings of Pike $2,946,000

Post acquisition retained earnings:

75% × ($1,884,000 – $1,000,000) $663,000

30% × ($896,000 – $296,000) $180,000

–––––––––

$3,789,000

–––––––––

Note: Additional working for information only:

Non-controlling interest:

NCI at acquisition $500,000

NCI share of post-acquisition earnings of Neal

25% × ($1,884,000 – $1,000,000) $221,000

–––––––––$721,000

–––––––––


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59 D

Statement 1 is incorrect: net cash from operating activities is the same, whichever method of

presentation is used.

Statement 2 is incorrect. Companies with high profits can be cash-negative, due to high

spending on new non-current assets and/or a large build-up of net current assets.

Statement 3 is incorrect. Profits and losses on non-current asset disposals are shown in the

section of the cash flow statement that reconciles the net profit before taxation to the net

cash from operating activities.

60 C

$000

Profit for the year 63,400

Depreciation 2,700Non-current asset purchases (17,300)

Loss on disposal 3,000

Increase in inventories (2,500)

Decrease in receivables 600

Increase in trade payables 900

––––––

Net cash inflow 50,800

––––––

61 C

62 A

63 B

$

Loans redeemed (82,000)

Dividends paid (185,000)

Increase in share capital 55,000

––––––––(212,000)

––––––––


7/26/2019 F7 Aug 2016



INTERPRETATION OF FINANCIAL STATEMENTS

64 A

Profit after tax = $22 million

Equity shareholders' funds = $500 millionReturn on equity shareholders' capital employed = 22/500 = 0.044 or 4.4%.

65 A

Accepted 'norms' are 2.0 for the 'ideal' current ratio and 1.0 for the 'ideal' acid test ratio or

quick ratio. However, these 'ideal' ratios are only a rough guide, since 'norms' vary greatly

between companies in different industries. In this question, the current ratio is (1,390/420)

3.3 times and the acid test ratio is [(380 + 40)/420) 1.0 times. The current ratio is therefore

high and the acid test ratio is 'ideal'.

66 A

Gearing is usually measured as the ratio of long-term debt to equity (shareholders capital and

reserves).

At 31.10.X8, gearing was 20/(15 + 3 + 22) × 100% = 50%.

At 31.10.X9, gearing was 40/(30 + 18 + 12) × 100% = 66.7%.

Gearing has therefore risen. Higher gearing increases the financial risk for the shareholders.

67 C

This is possibly a confusing question, because the average receivables collection period (indays) can be calculated in different ways. Strictly, the average receivables collection period

should be calculated as (receivables including sales tax/credit sales including sales tax) × 365.

This would give (23,500/50% of 235,000) × 365 = 73 days.

In practice, the average receivables collection period might be calculated as (receivables

including sales tax/total sales revenue including sales tax) × 365. This is because information is

not always available about the division of total sales revenue between cash sales and credit

sales. In this question, the average receivables collection period would then be

(23,500/235,000) × 365 = 37 days.

Even more often in practice, it is usual to measure the average receivables collection period

approximately as (total receivables including sales tax/total sales revenue excluding sales tax)× 365 days. This measurement is often used by stock market analysts, who can extract these

figures easily from the published financial statements of a company. In this question, the

average receivables collection period would then be (23,500/(235,000/1.175)) × 365 days =

43 days.

This means that answers A, B and C could all be correct. However, given the information in the

question, you are probably expected to compare like with like, i.e. receivables including sales

tax should be compared with revenue from credit sales including sales tax.


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68 C

When you are asked to calculate a gearing ratio, you ought to be given information about the

basis on which the ratio is calculated, because there are different ways of measuring gearing.

In particular, gearing might be measured as the percentage ratio of long-term debt to total

share capital and reserves. Alternatively, gearing could be measured as the percentage ratio of

(long-term debt plus some short-term loans) to share capital and reserves.

In this question, the problem is deciding what to do about the short-term borrowings of

$50,000, which the enterprise has apparently had the benefit of for only the second half of the

year.

(1) If gearing is measured as long-term debt to share capital and reserves, the ratio would

be (75/500) × 100% = 15%. This is not an option in the question.

(2) If gearing is measured as (long-term debt plus short-term borrowings) to share capital

and reserves, the ratio would be ((75 + 50)/500) × 100% = 25%. This is not an option in

the question.

(3) It might be assumed that since the short-term borrowings have only been in place forone half of the year, just one half of it ($25,000) should be included in debt, together

with the long-term debt of $75,000. This would give a gearing percentage of ((75 + (1/2

× 50))/500) × 100%. = 20%. This is an option in the question.

Although it is possibly not the best way of measuring gearing, it is the most plausible of the

four available answers.

69 A

Average inventory = $(4,000 + 6,000)/2 = $5,000.

Inventory turnover rate = Cost of sales/average inventory = $24,500/$5,000 = 4.9 times.

70 A

There are different ways of measuring gearing. In particular, gearing might be measured as the

percentage ratio of long-term debt to total share capital and reserves. Alternatively, gearing

could be measured as the percentage ratio of long-term debt plus short-term debt to total

capital and reserves. In a gearing ratio, the figure above the line is always debt, never capital

and reserves. Answer A is a correct definition.


7/26/2019 F7 Aug 2016



RECORDING, HANDLING AND SUMMARISING ACCOUNTING DATA

BOOKKEEPING

71 JANE GRIGSON

(a) General ledger

Sales account

$

12 June SDB

12 June CRB

$

3,666

340


12 June SDB

$

3,666

12 June RIB

12 June CRB12 June CRB discounts

allowed

$

141

1,295

68

Returns inwards account

12 June RIB

$

141

$

Cash account

12 June CRB

$

1,635

$

Discounts allowed account

12 June CRB

$

68

$

Receivables ledger

PK

8 June SDB

$

423

12 June RIB

$

141

HS

9 June SDB

12 June SDB

$1,410

940

9 June CRB

9 June CRB discount

11 June CRB

11 June CRB discount

$140

20

680

48

RD Contractors

9 June SDB

$

893 11 June CRB

$

475


7/26/2019 F7 Aug 2016



(b) The discounts allowed column in the cash received book is a memorandum column only

and should not be included in the cross-casting of the totals.

The discounts allowed total is included in the cash book as a reminder to put through

the double entry for discounts allowed which is

Dr Discounts allowed

Cr Receivables ledger control


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72 RBD

Rents receivable

20X2 $

31 May Profit or loss 4,00431 May Bal c/f 517

–––––

4,521

–––––

20X1 $

1 June Bal b/f 463

20X2

31 May Bank 4,058

–––––

4,521

–––––

Rent payable

20X1 $

1 June Bal b/f 1,246

20X2

31 May Bank – rent 10,296

31 May Bal c/f 382

––––––

11,924

––––––

20X1 $

1 June Bal b/f 315

20X2

31 May Profit or loss 10,100

31 May Bal c/f 1,509

––––––

11,924

––––––

Payables

20X2 $

31 May Bank 75,181

31 May Discounts received 1,043

31 May Bal c/f 4,720

––––––

80,944

––––––

20X1 $

1 June Bal b/f 5,258

20X2

31 May Profit or loss – purchases 75,686

––––––

80,944

––––––

Allowance for discounts receivable

20X1 $

1 June Bal b/f 106

––––

106

––––

20X2 $

31 May Profit or loss 1231 May Bal c/f 94

––––

106

––––


7/26/2019 F7 Aug 2016



Tutorial note:

In this example the discounts received during the year of $1,043 have been debited to the

payables account and credited to discounts received, the only entry in the allowance for

discounts account being the decrease in allowance required of $12 being debited to profit or

loss.

An alternative treatment would be to credit the allowance for discounts received account with

$1,043 giving a net transfer to profit or loss from that account of $1,031.


7/26/2019 F7 Aug 2016



73 MICHAEL ROBERTSON

(1) Business expenditure is categorised into capital expenditure and revenue expenditure.

Capital expenditure is expenditure on non-current assets or on major improvements to

non-current assets which improve their earning capacity. Capital expenditure is not

charged to profit or loss as an expense but is capitalised in the statement of financial

position and written off over a number of years in the form of depreciation.

Revenue expenditure is expenditure incurred either for the purposes of continuing the

trade of the business or in order to maintain the existing capacity of the non-current

assets of the business. Revenue expenditure is the expenditure necessary to run the

business from day to day and is charged to profit or loss in the period to which it relates.

(2) Trade payables and profits are both credit balances on the trial balance because they

are both liabilities of the business. Trade payables are amounts owed to outside

suppliers. The profit that the business has made is the amount owed to the owner of the

business. Therefore the profit figure is effectively the amount that is owed back to you

just as the trade payables figure is the amount owed to suppliers.

(3) Opening balances on expense accounts are quite common and are due to eitherprepayments or accruals at the end of the previous accounting period.

If there is an opening debit balance on an expense account this means that at the end of

the previous accounting period an amount of that expense was paid that in fact

belonged to this accounting period. Therefore it is brought forward as the opening

balance on the account.

If there is an opening credit balance on the account then this means that at the end of

the previous accounting period an accrual was made for an item of expense that had

been incurred but which had not yet been paid. When the accrued amount is paid in this

accounting period it will not be charged to profit or loss in that period as it is effectively

cancelled by the credit balance brought forward.(4) A credit entry in the statement of profit or loss from the Allowance for Receivables

account is quite valid. It indicates that there has been a decrease in the allowance

necessary for receivables for the period.

(5) Contra entries are neither expense nor income; they are simply a method of settling

amounts due to suppliers and from customers.

In some instances a supplier may also be a customer and therefore you will owe him

money and he will owe you money. The simplest way to settle such a debt is to net off

the amounts that you owe each other and then only the difference will be paid to or by

you. This is what is known as a contra.


7/26/2019 F7 Aug 2016



ERROR CORRECTION AND SUSPENSE ACCOUNTS

74 UPRIGHT

Key answer tips

Not all errors have an impact on the suspense account balance. The errors that affect the

suspense account are those that will result in the total of debit balances and the total of credit

balances being different. Errors or omissions that maintain equal debits and credits do not

affect the suspense account balance.

Upright, year ended 31 October 20X5

(a) Adjustments to profit

+−

$ $

Profit per draft accounts 48,200

(i) Insurance: opening balance omitted 1,305

(ii) Profit on sale of vehicle 1,600

Reduction in sales revenue figure 6,000

(iii) Depreciation:

Reduction 20% × $22,000 4,400

(iv) Insurance paid in advance omitted 1,500

(v) Rent receivable understated 400

–––––– ––––––

56,100 7,305

(7,305) ––––––

––––––

Revised profit 48,795

––––––

(b)

Suspense account

$ $

Opening balance 1,175 (i) Insurance account(opening balance

omitted)

1,305

(v) Rent receivable 400

(vi) Purchase ledger account 270

––––– –––––

1,575 1,575

––––– –––––


7/26/2019 F7 Aug 2016



Tutorial notes:

(1) Item (i). The opening balance of the prepayment has been omitted. As a result, it has not

been charged against the profit for the period. The adjustment to correct the error will

therefore reduce profit. Since a debit balance has been omitted, the suspense account is

affected. The correction is to enter the opening prepayment balance in the suspense

account, debit Insurance, credit Suspense account.

(2) Item (ii). The profit on the disposal of the non-current asset is the sale proceeds ($6,000)

minus the carrying value of the asset at the time of disposal ($22,000 – $17,600) $4,400.

The profit on disposal is therefore $1,600. The profit has been omitted from the

statement of profit or loss. However, the sale proceeds of $6,000 have been treated as

revenue, which is incorrect. The $6,000 is not revenue, but instead goes into the

calculation of the profit on disposal of the asset. Although the disposal has not been

entered in the accounts, the omission has not put total debits and total credits out ofbalance, so the suspense account is not affected.

(3) Item (iii). The accounts have not recorded the disposal of the asset, which means that

depreciation has been charged on the asset (20% × $22,000 = $4,400). The question

states that we have to make a correction for this, which involves removing the

depreciation charge and adjusting profit accordingly.

(4) Item (iv). A prepayment to carry forward has been omitted. This will reduce the total

insurance expense for the year, and so profit must be adjusted upwards. The omission

does not affect the suspense account.

(5) Item (v). Rent receivable has been understated and so should be increased. As it is

income, the adjustment will add to profit. The total credits have been undercast, so totaldebits and credits differ and the suspense account is affected. To decide which side of

the suspense account needs to show the $400, think in terms of the double entry nature

of the correction. The correction should be credit Rent receivable balance, and so debit

Suspense account.

(6) Item (vi). The error does not affect profit, because it relates to amounts owed, not

revenue or expenses. However, the purchase has been recorded as $630 in the payables

account. Since the company does not maintain an accounts payable ledger control

account, the individual payables accounts are part of the double entry system, and the

total credits have been over-stated by $630 – $360 = $270. Since this puts total debits

and total credits out of balance, the suspense account is affected. The requiredcorrection is to reduce the payables balance, i.e. debit Payables account, credit Suspense

account.


7/26/2019 F7 Aug 2016



75 VB

Dr Cr

$ $

(1) Suspense (2 × 246) 492

Sales returns 246

Sales 246

Being the correction of the posting of cash sales to sales returns.

(2) Suspense (1,294 − 1,249) 45

Customer 45

Being the correction of a transposition error in a customer’s account.

(3) Bank charges 37

Bank 37

Being the recording of bank charges omitted from the cash book.

(4) Suspense 45

Purchases 45

Being the correction of a posting error.

(5) Supplier (2 × 129) 258

Customer 258

Being correction of a misposting of a contra entry.

(6) Rent (13,500/6) 2,250

Accruals 2,250

Being correction of the omission of the rent bill in the ledgers.

(7) Carriage inwards 52


Being correction of the misposting of a carriage invoice.

(8) Irrecoverable debts 40

Customer 40

Being write off of an irrecoverable debt.


7/26/2019 F7 Aug 2016



76 YTZ

(a) Suspense account

Receivables ledger control

Cash – bank charges

$

3,200

23

–––––

3,223

–––––

Trial balance difference

(103,457 − 102,113)

Travel expenses

Payables ledger control

$

1,344

9

1,870

–––––

3,223

–––––

(b)

$

Draft net profit 97,499

Travel expenses (9)

Returns outwards undercast 100

Electricity accrued expense (154)

Overdraft interest (28)

Machinery incorrectly charged to repairs 1,450

Depreciation on machinery (20% × 1,450) (290)

Discounts allowed (30)

––––––

Adjusted profit 98,538

––––––

Workings

(W1) The journal entries for the errors are as follows:

$ $

(1) Travel expenses 9

Suspense 9

(2) Payables ledger control 100

Returns outwards/purchases returns 100

(3) Electricity 154

Accruals 154

(4) Payables ledger control 1,870

Suspense 1,870

(5) Interest payable 28

Bank 28

(6) Machinery at cost 1,450

Machinery repairs 1,450

Depreciation charge (20% × 1,450) 290

Allowances for depreciation 290

(7) Discount allowed 30

Receivables ledger control 30

(8) Suspense 3,200

Receivables ledger control 3,200

(9) Suspense 23

Bank 23


7/26/2019 F7 Aug 2016



77 WT

Dr Cr

$ $

(1) Machinery at cost 2,000

Payables 2,000

Statement of profit or loss – depreciation 400

Accumulated depreciation – machinery 400

Being the recording of the purchase and depreciation of an item of machinery.

(2) Disposals 8,000

Non-current asset at cost 8,000

Accumulated depreciation 5,000

Disposals 5,000

Revenue 1,400

Disposals 1,400Statement of profit or loss – loss on disposal

1,600

Disposals 1,600

This can be summarised as:

Revenue 1,400

Accumulated depreciation – vehicles 5,000

Statement of profit or loss – loss on disposal 1,600

Vehicles at cost 8,000

Being the correct recording of the disposal of a vehicle.

(3) Bank 200



Statement of profit or loss – irrecoverable debt recovered 200

This can be summarised as:

Bank 200

Statement of profit or loss 200

Being the recording of the receipt of cash from a previously written off debt.

(4) Closing inventory 4,278

Statement of profit or loss – cost of sales 4,278

Being the inclusion of inventory previously omitted in error.

(5) Statement of profit or loss – rent 125

Suspense 125

Being the recording of the prepaid rent from 30 June 20X1 omitted as an opening

balance on the rent account.


7/26/2019 F7 Aug 2016



(6) Payables ledger control 360

Suspense 360

Being the correction of a transposition error in payables ledger control account.

(7) Statement of profit or loss – professional fees 140

Bank 140Being the recording of a standing order omitted from the cash book.

(8) Revenue 175

Suspense 175

Being the correction of a cash sale mistakenly posted twice to the sales account.


7/26/2019 F7 Aug 2016



INVENTORY VALUATION

78 MR G

Tutorial notes:

(1) As the examiner has asked for the value of material issues it is necessary to present a

stores ledger account or equivalent working i.e., had we only been asked to value

inventory it would have been possible to take a short cut first-in-first-out.

(2) Care must be taken to record the transaction in date order. In the question the issue on

10 February appears on the line above the receipt on 8 February. Read the question

carefully.

(3) The book figures show a closing inventory of 600 units whereas the physical count

showed 500 units. The conventional way to deal with this loss in the stores ledgeraccount is to treat it as an issue on the last day of the month/period being recorded

(i.e. on the date of the physical count).

(4) When preparing the stores ledger it is recommended that the balances are listed in

chronological order so as to be able to apply the appropriate assumption.


7/26/2019 F7 Aug 2016



Calculation of value of issues for the six months and value of closing inventory at the end of

June

(a) First-in-first-out (FIFO)

Date

13 Jan

8 Feb

10 Feb

11 Mar

12 Apr

20 Apr

15 Jun

25 Jun

30 Jun

Receipts

$

200 @ 36 = 7,200

400 @ 38 = 15,200

600 @ 40 = 24,000

400 @ 35 = 14,000

500 @ 28 = 14,000

Value of issues

$

200 @ 36

300 @ 38 = 18,600

100 @ 38

500 @ 40 = 23,800

100 @ 40

300 @ 35 = 14,500

––––––

56,900

––––––

Inventory loss

100 @ 35 = 3,500

––––––

Balance

$

200 @ 36 = 7,200

200 @ 36

400 @ 38 = 22,400

100 @ 38 = 3,800

100 @ 38

600 @ 40 = 27,800

100 @ 38

600 @ 40

400 @ 35 = 41,800

100 @ 40

400 @ 35 = 18,000

100 @ 40

400 @ 35

500 @ 28 = 32,000

100 @ 35

500 @ 28 = 17,500

500 @ 28 = 14,000

Value of closing inventory $14,000

–––––––


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(b) Weighted average

Date

13 Jan

8 Feb

10 Feb

11 Mar

12 Apr

20 Apr

15 Jun

25 Jun

30 Jun

Receipts

$

200 @ 36 = 7,200

400 @ 38 = 15,200

600 @ 40 = 24,000

400 @ 35 = 14,000

500 @ 28 = 14,000

Value of issues

$

500 @ 37.33 = 18,665

600 @ 37.94 = 22,764

400 @ 32.97 = 13,188

––––––

54,617

––––––

Inventory loss

100 @ 32.97 = 3,297

–––––

Balance

$

200 @ 36 = 7,200

600 @ 37.33 = 22,400

100 @ 37.33 = 3,735

700 @ 39.62 = 27,735

1,100 @ 37.94 = 41,735

500 @ 37.94 = 18,971

1,000 @ 32.97 = 32,971

600 @ 32.97 = 19,783

500 @ 32.97 = 16,486

Value of closing inventory $16,486

–––––––

Tutorial note:

(1) Price is recalculated at time of each new receipt, e.g.

8 Feb: Price =400+200

15,200+7,200

11 Mar: Price =600+100

24,000+3,735

(2) Because the figures are not exact under weighted average, care needs to be taken to

ensure that the balance after an issue and the value of the issue add up to the balance

before the issue. This should happen automatically if one calculates the value of the

issue and deducts this from the old inventory balance to arrive at the new inventory

balance.


7/26/2019 F7 Aug 2016



Workings

Calculation of unit purchase prices

13 January200

7,200 = $36

8 February400

15,200 = $38

11 March600

24,000 = $4

12 April400

14,000 = $35

15 June500

14,000 = $28


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RECEIVABLES

79 ALLOWANCE FOR RECEIVABLES

Receivables

$ $

1.1.20X1 Balance b/d 10,000 Sales returns 1,000

Sales 100,000 Bank 90,000


Discounts allowed 400

31.12.20X1 Balance c/d 18,100

––––––– –––––––

110,000 110,000

––––––– –––––––

1.1.20X2 Balance c/d 18,100 Sales returns 1,800Sales 90,000 Bank 95,000

Payables 3,000


Discounts allowed 500

31.12.20X2 Balance c/d 6,300

––––––– –––––––

108,100 108,100

––––––– –––––––

1.1.20X3 Balance b/d 6,300

Allowance for receivables

$ $

31.12.20X2 Balance c/d 1.1.20X1 Balance b/d 400

Specific 200 Irrecoverable debts 695

General

5% ×

(18,100 – 200) 895

––––– –––––

1,095 1,095 ––––– –––––

Irrecoverable

debts

780 1.1.20X2 Balance b/d 1,095

31.12.20X2 Balance c/d

(5% × 6,300) 315

––––– –––––

1,095 1,095

––––– –––––


7/26/2019 F7 Aug 2016



APPLICATIONS OF ACCOUNTING CONVENTIONS

80 STATEMENT OF FINANCIAL POSITION VALUES

REPORT

To: Managing directorFrom: Accountant

Date: X-X-20XX

Subject: Statement of financial position valuations

The historical cost accounting convention does not produce a statement of financial position

which will show the value of the business, as the following three points will illustrate.

(i) Goodwill

Goodwill has been defined as the difference between the value of the business and the

aggregate of the fair values of its separable net assets. Every business is worth more (or

maybe less) than the value of its individual net assets and this type of goodwill is known

as inherent goodwill (or non-purchased goodwill). It arises because of many factors such

as the business having a good reputation for providing quality goods and services, and

employing skilled and motivated staff. These factors have no direct relationship with

cost and therefore inherent goodwill is subjective to value. Given the absence of a

money measurement or an objective basis for valuation it is not prudent to record

inherent goodwill in the accounts, and IAS 38 Intangible Assets in fact forbids it.

(ii) The valuation of non-current assets at cost

Under the historical cost accounting convention, inflation and changing prices are

ignored and assets are recorded at cost. This has the advantage of being relatively

objective as it is usually certain what the asset cost to buy or construct. However, ininflationary times this can lead to statement of financial position values, say for land and

buildings, being very out of date and understated.

If assets were recorded on the statement of financial position at their ‘value’, the

calculation of the amounts presented in the statement of financial position would be

less objective than it is under the historical cost convention. In effect, recording assets

at their fair values is what current cost accounting advocates, and it can be argued that

such a statement of financial position would be useful to some users of accounts.

(iii) Research

The revenue expenditure on research must be written off to profit or loss in the year of

expenditure.

By its very nature research is concerned with original scientific or technical investigation

to discover new knowledge, whether or not this is actually directed at a particular

objective, e.g., a cure for cancer, nuclear fusion etc. It is virtually impossible to place an

objective value on the benefits research may bring given its preliminary nature. It is not

probable that the research will generate any future economic benefits, one of the

conditions of an item being classified as an asset. So research expenditure must be

recognised as an expense in the period in which it is incurred.


7/26/2019 F7 Aug 2016



81 ACCOUNTING TERMS

(a) An expense is a resource of the business that has been used up either through the

passage of time or by actual use. For example, the payment of an insurance premium

for a year’s cover in advance creates an asset to the business; i.e., insurance cover for a

year. This asset expires over time so that by the accounting year end some of the asset

will be an expense of that year and the rest will be carried forward as an asset(prepayment) and will be an expense next year.

(b) An asset is one of the elements presented in the statement of financial position, as

opposed to being classified as an expense in profit or loss. An asset is a resource:

• under the control of an entity as a result of past events

• from which future economic benefits are expected to flow to the entity.

Because it is expected to generate these future benefits, it is carried forward and

written off over the period(s) expected to benefit from the resource.

(c) In preparing financial statements, estimates have to be made to arrive at figures for

inclusion in them. For example, an allowance for receivables may be required, inevitably

without knowledge of the exact figure needed. Prudence demands that in such

conditions of uncertainty, judgement should be used so that assets and gains are not

overstated, and liabilities and losses are not understated.

(d) Objectivity means that the accounting information has been presented under strict rules

that can only be interpreted in one way. Therefore if two different accountants were to

deal with the same transaction they would record the transaction in the same way and

at the same value. For example under the historical cost convention, assets are

recorded at their original cost. As original cost can be precisely defined, the resultant

value placed upon the asset is objective.


7/26/2019 F7 Aug 2016



82 MARKETING SERVICES

AN Accountant

Address

Date X-X-20XX

Dear Client

Invoice from Marketing Services

I set out how each item on the above invoice is likely to affect the amount recorded as

expenses in the accounts for the period ended 31 December 20X2.

General advice $3,000

This item is clearly an expense for the current year. The services were received in each of

months falling wholly in the accounting period and no future benefits from them can be

reliably estimated. The fee must therefore be recognised as an expense in the period.

Photocopier $10,000

The photocopier should be treated as a non-current asset of your business because it will beused in the business over a number of accounting periods and generate economic benefits in

each. An annual depreciation charge should spread the cost of the asset (less its estimated

resale value) over the accounting periods in which it will be used. Therefore, part of the cost

will be an expense of the business in the current accounting period.

You need to estimate for how long you intend to use the asset. An estimate then needs to be

made of the resale value. This will depend in part on how long you expect to use the asset.

Finally, a depreciation method needs to be decided which fairly reflects the use of the asset

between accounting periods. The straight line and the reducing balance methods are the most

common.

Assuming that you intend to keep the asset for the 5 year guarantee period, the estimatedresale value is nil and you use the straight-line method, the annual depreciation charge will be

$2,000. As the asset has been in use for 3 months of the current accounting period, a charge of

$500 should be recognised.

Advertising deposit $5,000

As the advertising will not take place until the next accounting period, it should be recognised

as an expense in that period. The cost should be carried forward as a prepayment in the

December 20X2 statement of financial position. There would be no expense recorded in the

current accounting period.

Advertising campaign $50,000

The advertising has been completed in the current accounting period and it is not possible to

estimate reliably any benefits wholly attributable to it which will arise in future accounting

periods. The full amount of the expenditure should be recognised as an expense in the 20X2

accounting period.

Do not hesitate to contact me if there are any points that you wish me to clarify.

SIGNATURE


7/26/2019 F7 Aug 2016



83 CAPITAL MAINTENANCE

(a) Capital maintenance

Investors allocate capital to a business in the expectation that the business will protect

(i.e. maintain) the value of that capital and in addition generate a return in the form of a

profit. So the conventional measure of 'profit' for any period is the amount by which the

business' capital has increased over the period. A business cannot be regarded asearning a profit until its capital has been maintained.

There are two definitions of the 'capital' which must be maintained:

• financial capital, which is the money amount of capital at the beginning of the

period. So if a business' net assets (= capital) is $100 at the start of the period and

$120 at the end, it has earned a profit of $20 after maintaining the $100. (A

variant approach is to adjust the opening capital by inflation as measured by a

retail prices index; if inflation was 5% over the period, the capital to be

maintained is $100 × 1.05 = $105, so the profit is only $15.)

• physical capital, which is the operating capacity of the business. If the business

operates in a sector with rapidly falling non-current asset costs, it might be that atthe end of the period, 10% less financial capital is needed to maintain the same

physical capacity as at the start of the period. On this measure the capital to be

maintained is $100 less 10% thereof, so $90; profit is then $30.

(b) Goodwill

Goodwill is the word used to cover the assets of a business which are not individually

identifiable, such as a skilled workforce and a reputation for excellent customer service.

However, there is obviously a difficulty in measuring the goodwill within a business at

any particular time, and, indeed, the inclusion of non-purchased goodwill in financial

statements is not permitted by accounting regulation.

A value for it can, however, be reliably estimated when a business changes hands. The

value paid for the business over and above the value of its net identifiable assets is themeasure of goodwill, and should be included as an intangible asset in the financial

statements.

(c) Fair value

Fair value is the amount for which an asset could be exchanged, or a liability settled,

between knowledgeable, willing parties in an arm's length transaction. Market value is

therefore often an asset's fair value.

Fair value is used as the measure of a number of items in a statement of financial

position (such as property, plant and equipment and financial assets) as an alternative

to historical cost. The rationale is that fair value is a 'today's' value, which is more

relevant to users of financial statements than a historical value.

(d) Research and development costs

For a business to progress, it needs to invest in research and development. Research is

the term used to cover blue sky investigation of possibilities; it is therefore not possible

to estimate reliably any future economic benefits which will be generated from it.

Research costs should be recognised as an expense in the statement of profit or loss in

the year in which they are incurred.

Development is the application of research or other findings to a plan to develop new or

improved products. etc. A business would not move a project from the research phase

to the development phase if it did not expect to earn future economic benefits in excess

of future costs. So, subject to being able to demonstrate those future net benefits, the

business should classify development expenditure as an asset and amortise it over theexpected life of the new or improved products, etc.


7/26/2019 F7 Aug 2016



PREPARING FINANCIAL STATEMENTS

INCOMPLETE RECORDS

84 ERNIE

Key answer tips

The examiner's report commented that the calculations for sales and purchases were often

poorly done. If you fell down in these areas remember for the future that these two

calculations, broadly as in this question, feature in almost all incomplete records questions.

Ernie

Statement of profit or loss for the year ended 30 June 20X8$ $

Revenue (W1) 204,490

Less: Cost of sales


Purchases (W2) 84,620

––––––

98,780

Less: Closing inventory 12,170

––––––

(86,610)

Wages (68,200)

–––––––

Gross profit 49,680

Salaries 5,000

Rent (750 + (3 × 750 × 120%) 3,450

Telephone (860 + 240 − 210) 890

Electricity (890 + 220 − 180) 930

Insurance (700 + (1,600 × 50%) 1,500Miscellaneous expenses (1,280 + 490) 1,770


Depreciation: plant (25% × (12,600 – 5,800 + 8,400)) 3,800

motor van (½ × 25% × 12,800) 1,600

Profit on sale of van (3,000 – (9,000 – 6,500)) (500)

Loan interest 250

––––––

19,970

––––––

Net profit for year to date 29,710 ––––––


7/26/2019 F7 Aug 2016



Ernie

Statement of financial position as at 30 June 20X8

Cost Accumulated Carrying

depreciation value

$ $ $

Non-current assets

Plant and equipment (dep'n 5,800 + 3,800) 21,000 9,600 11,400

Motor vans 12,800 1,600 11,200

–––––– –––––– ––––––

33,800 11,200 22,600

–––––– ––––––

Current assets

Inventory 12,170

Trade receivables 9,580

Prepayments (750 × 120%) + (1,600 × 50%) 1,700Cash in hand 890

––––––

24,340

––––––

46,940

––––––

Capital at 30 June 20X7 (W3) 32,640

Add: Net profit for year to date 29,710

––––––

62,350

Less: Drawings (8,000 + 29,800) 37,800

––––––

24,550


Loan 10,000

Current liabilities

Payables: Trade 4,090

Sundry (5,000 + 240 + 220 + 490 + 250) 6,200

Overdraft 2,100

––––––

12,390

––––––

46,940

––––––


7/26/2019 F7 Aug 2016



Workings

(W1) Sales

Sales total account

$ $

Opening receivables 9,490 Received from customers

Refund to customer 400 Cash 52,640

Sales (balancing figure) 204,490 Bank 150,880


Closing receivables

(10,860 – 1,280) 9,580

––––––– –––––––

214,380 214,380

––––––– –––––––

Tutorial note: The irrecoverable debt written off is an expense, not a reduction in sales. It

must therefore be included in the calculation of total sales.

(W2) Purchases

Purchases total account

$ $

Paid to suppliers 83,990 Opening payables 3,460

Closing payables 4,090 Purchases (balancing figure) 84,620

–––––– ––––––

88,080 88,080 –––––– ––––––

(W3) Capital at 30 June 20X7

$ $

Assets

Plant and machinery (12,600 – 5,800) 6,800

Motor van (9,000 – 6,500) 2,500

Inventory of materials 14,160

Receivables 9,490

Rent in advance 750

Insurance in advance 700

Cash at bank 1,860

Cash in hand 230

––––––

36,490

Less: Liabilities

Payables 3,460

Telephone 210

Electricity 180

–––––

3,850

––––––

32,640

––––––


7/26/2019 F7 Aug 2016



85 CART

Workings

$

Opening inventory 0

Purchases (19,500 paid + 1,095 payable) 20,595 ––––––

20,595

Closing inventory 400

––––––

Cost of sales 20,195

Gross profit (20,195 × 30/(100 – 30)) 8,655

––––––

Sales revenue 28,850

––––––

Note: Gross profit = 30% of sales. So cost of sales = 70% of sales and gross profit = 30/70 of

cost of sales.

Cash at bank $

Receipts

Capital 20,000

Cash from sales 26,250

––––––

46,250

Less: Payments (18,000 + 2,000 + 800 + 2,500 + 850 + 19,500) 43,650

––––––Cash at bank 2,600

––––––

Cart

Statement of profit or loss for the year ended 31 December 20X2

$

Revenue (W) 28,850

Cost of sales (W) 20,195

––––––

Gross profit 8,655Wages (700)

Stationery (2,500)

Telephone expenses (800 + 40 accrual) (840)

Sundry expenses (850)

Depreciation: computer (25% of 2,000) (500)

Depreciation: motor vehicles (20% of 18,000) (3,600)

––––––

Loss for the period (335)

––––––


7/26/2019 F7 Aug 2016



Statement of financial position as at 31 December 20X2

Non-current assets Cost Accum.

dep'n

Carrying

value

$ $ $

Motor vehicles 18,000 3,600 14,400

Computer 2,000 500 1,500

–––––– –––––– ––––––

20,000 4,100 15,900

–––––– ––––––

Current assets

Inventory 400

Receivables 970

Cash at bank and in hand (2,600 at bank + 80 in hand) 2,680

––––––

4,050 ––––––

Total assets 19,950

––––––

Initial capital 20,000

Loss for the period (335)

Drawings (850)

––––––

Owner's capital 18,815

Current liabilities

Payables 1,095Accrual 40

––––––

1,135

––––––

19,950

––––––


7/26/2019 F7 Aug 2016



COMPANY FINANCIAL STATEMENTS

86 RULERS


Note $000 $000

Revenue 3,500 Cost of sales (W1) (2,551)

–––––

Gross profit 949

Distribution costs (W1) 223

Administrative expenses (W1) 300

–––– (523)

Interest receivable 7

Interest payable (100 × 10%) (10)

–––– (3)

–––––

Profit before tax 1 423Income tax expense (150)

–––––

Profit for year 273

–––––

Statement of financial position as at 31 December 20X2

Note Cost Depn.

Non-current assets $000 $000 $000

Tangible assets 2 470

Current assets

Inventory 600

Receivables (W2) 495 Cash at bank (W3) 398

–––––

1,493

–––––

1,963

–––––


Ordinary $1 shares 500

10% Irredeemable preference shares 100

Share premium account 200

Revaluation reserve 30Retained earnings 663

–––––

1,493


10% Loan notes 100

Current liabilities

Payables and accruals (200 + 10) 210

Preference dividend payable 10

Income tax 150 370

––––– –––––

1,963 –––––


7/26/2019 F7 Aug 2016



Statement of changes in equity year ended 31 December 20X2

Ordinary

shares

Irredeemable

preference

shares

Share

premium

Revaluation

reserve

Accumulated

profit

Total

$000 $000 $000 $000 $000 $000

Balances at

31 December

20X1

500 100 200 455 1,255

Surplus on

revaluation of

land

30 30

Profit for year 273 273

Dividends

Preference (10) (10)

Ordinary (55) (55)

–––– –––– –––– –––– –––– –––––

500 100 200 30 663 1,493

–––– –––– –––– –––– –––– –––––

Notes to the financial statements

(1) Profit on ordinary activities before taxation.

This is stated after charging $000

Depreciation 60

(2) Tangible non-current assets Plant and

Land machinery Total $000 $000 $000

Cost

At 1 January 20X2 200 550 750

Revaluation 30 30

–––– –––– ––––

At 31 December 20X2 230 550 780

–––– –––– ––––

Depreciation

At 1 January 20X2 250 250

Charge for the year 60 60

–––– ––––

310 310

–––– ––––

Carrying value at

31 December 20X2 230 240 470

–––– –––– ––––

31 December 20X1 200 300 500

–––– –––– ––––

(3) An ordinary dividend of 14c per share ($70,000) is proposed.


7/26/2019 F7 Aug 2016



Workings

(W1) Cost analysis

Cost of sales Dist. Admin

$000 $000 $000

Cost of sales 2,100

Operating expenses 400

Management exp. 280

Selling exp. 220

Irrecoverable debts (W2) 4

Depreciation (550 − 250) × 20% = 60 51 3 6

Bank charges 2

Discounts allowed 8

––––– ––––– –––––

2,551 223 300

––––– ––––– –––––(W2)

Allowance for receivables account

$

Irrecoverable debts (bal fig) 1,000

Balance c/d ((550 – 50) × 1%) 5,000

–––––

6,000

–––––

$

Balance b/d 6,000

–––––

6,000

–––––

Irrecoverable debts account

$

Balance b/d 5,000

–––––

5,000

–––––

$

Allowance for receivables 1,000

Profit or loss 4,000

–––––

5,000

–––––

$

Receivables 550,000 – 50,000 500,000

Less: allowance 5,000

–––––––

495,000

–––––––


7/26/2019 F7 Aug 2016



(W3)

Cash book

$

Balance b/d 350,000

Standing order 50,000

–––––––

400,000

–––––––

$

Bank charges 2,000

Balance c/d 398,000

–––––––

400,000

–––––––

Tutorial note:

The dates in respect of dividends are important:

(a) the date the dividend is proposed: no accounting entry, because there is not yet a

commitment to pay the dividend

(b) the date the dividend is declared (directors usually declare interim dividends, but final

dividends declared by shareholders in general meeting): an accrual entered in the

accounts, because there is now a commitment to pay the dividend. So a current liability

in the statement of financial position and a deduction in the statement of changes in

equity.

(c) the date the dividend paid: the accrual is cleared by the payment.


7/26/2019 F7 Aug 2016



87 ELLIS ISLAND

It is assumed that the cost of the premises is an administration expense and that the cost of

the motor vehicles and the irrecoverable debt expense are distribution expenses.

Workings

Cost of sales $000Opening inventory 25

Purchases 1,152

–––––

1,177

Closing inventory (29)

–––––

1,148

Manufacturing wages 87

Hire of plant 15

Depreciation of plant 66

–––––

1,316

–––––

Distribution costs $000

Sales persons’ salaries 44

Advertising expenses 73

Depreciation of motor vehicles 22

Irrecoverable debt expense 21

––––

160

––––

Administrative expenses $000

Administration salaries 76

Depreciation of premises 33

Audit fee 9

––––

118

––––

Finance cost

Although only $10,000 in interest has been paid, it is assumed that the loan notes have been

in issue for the full year, and the annual interest charge will be 10% of $200,000 = $20,000.

Staff costs in total = (in $000) 87 + 44 + 76 = 207.


7/26/2019 F7 Aug 2016




$000

Revenue 1,920

Cost of sales (1,316)

–––––

Gross profit 604

Distribution costs (160)

Administrative expenses (118)

–––––

Profit from operations 326

Finance cost (20)

–––––

Profit before tax 306

Income tax expense (57)

–––––Net profit for the period 249

–––––

Information to be disclosed

Nature of expenses

Depreciation of plant $66,000

Depreciation of premises $33,000

Depreciation of motor vehicles $22,000

Staff costs $207,000

Notes: Dividends

(1) Dividends are presented in the statement of changes in equity, not as an expense in

profit or loss. Disclosure must be made of:

• the total declared in the year, i.e. $14,000

• the total proposed at the year end, i.e. $28,000.

(2) Disclosure must also be made of the amount of dividends per share, but this is not

possible as the question does not state how many shares of the company are in issue.


7/26/2019 F7 Aug 2016



88 MOORFOOT

Statement of profit or loss for the year ended 30 June 20X8

$000

Sales revenue (13,600 + 7) 13,607

Cost of sales (W1) (7,988)

––––––

Gross profit 5,619

Distribution costs (W1) (1,948)

Administrative expenses (W1) (2,156)

––––––

Profit from operations 1,515

Finance costs (100)

––––––

Net profit for the period 1,415

––––––

Statement of financial position as at 30 June 20X8

$000 $000

Non-current assets (W2)

Land 1,510

Buildings 7,114

Warehouse and office equipment 1,240

Motor vehicles 640

––––––

10,504

Current assets

Inventory 1,660

Trade receivables (810−

(6 + 30) + 7) 781Prepayments (60 + 70) 130

Cash 140

–––––– 2,711

–––––––

13,215

–––––––


Called up share capital 1,200


Retained earnings (6,772 + 1,415 − 480 − 360) 7,347

–––––– 11,017Non-current liabilities

10% loan notes 1,000

Current liabilities

Trade payables (820 + 18) 838*

Accruals (120 + 190 + 50) 360*

–––––– 1,198

–––––––

13,215

–––––––

*Alternatively these items may be shown as:

Trade payables 820Accruals (360 + 18) 378


7/26/2019 F7 Aug 2016



Workings

(W1) Statement of profit or loss headings

Cost Distrib'n Admin

of sales costs expenses

$000 $000 $000

Purchases (8,100 + 18) 8,118

Inventory 1 July 20X7 1,530

Distribution costs (1,460 + 120 − 60) 1,520

Administrative expenses (1,590 + 190 − 70) 1,710


Increase in allowance for receivables 12

Depreciation

Buildings 2% × 8,300 83 83

Equipment 15% × 1,800 135 135

Vehicles 25% × 1,680 210 210Inventory 30 June 20X8 (1,660)

––––– ––––– –––––

7,988 1,948 2,156

––––– ––––– –––––

(W2) Non-current assets

Warehouse

and office Motor

Land Buildings equipment vehicles

$000 $000 $000 $000

Per list of account balances

Cost 1,510 8,300 1,800 1,680

Accumulated depreciation b/f – (1,020) (290) (620)

Depreciation for year – (166) (270) (420)

––––– ––––– ––––– –––––

1,510 7,114 1,240 640

––––– ––––– ––––– –––––


7/26/2019 F7 Aug 2016



89 LOMOND

(a) An enterprise must be able to demonstrate all of the following:

(i) The technical feasibility of completing the project so that it will be available for

use or sale.

(ii) The intention to complete the project and use or sell the result.

(iii) Its ability to use or sell the product.

(iv) The ability of the product to generate future economic benefits.

(v) The availability of adequate technical, financial and other resources to use or sell

the product.

(vi) The ability to measure the expenditure attributable to the project reliability

during its development.

Note: Broadly, these points are worded as they appear in IAS 38. Answers using your

own words to express them are obviously acceptable.

(b)

IS SoFP

$ $

Project A

Amortisation of development cost ($200,000/5) 40,000

Statement of financial position ($120,000 – $40,000) 80,000

Project B

Expenditure written off ($175,000 + $55,000) 230,000 Nil

Project CDevelopment expenditure to date Nil 255,000

Project D

Research expenditure (cannot be capitalised) 80,000 Nil

––––––– –––––––

350,000 335,000

––––––– –––––––

(c) Disclosure requirements

(i) Total research and development expenditure recognised as an expense was

$350,000 analysed as follows:$

Expenditure during the year 135,000

Amortised or written off from deferred expenditure 215,000

–––––––

350,000

–––––––


7/26/2019 F7 Aug 2016



Tutorial note:

Total expenditure in the year = $55,000 on Project B and $80,000 on Project D. Amortised or

written off = $40,000 on Project A and $175,000 on Project B.

(ii) Movements on unamortised development costs

$

Balance at 1 July 20X7 (120 + 175 + 85) 380,000

Expenditure recognised as an asset in current year 225,000

–––––––

605,000

Amortised during year (40,000)

Expenditure on abandoned project written off (230,000)

–––––––

Balance at 30 June 20X8 335,000

–––––––

Tutorial note:

Total expenditure recognised as an asset in the current year = $55,000 on Project B plus

$170,000 on Project C.


7/26/2019 F7 Aug 2016



90 IAS 10 EVENTS AFTER THE REPORTING PERIOD

(a) Events after the reporting period should be adjusted in the financial statements if they

provide additional evidence to assist with the estimation of amounts relating to

conditions existing at the reporting date.

Events after the reporting period which do not affect conditions at the reporting date

should be disclosed by note if they are of such importance that non-disclosure would

affect the ability of users of the financial statements to make proper evaluations and

decisions.

(b) (i) (Disclosure by note)

The company issued 100,000 50c ordinary shares at $1.80 per share on [date].

The purpose of the issue was to [explanation].

(ii) (Adjusted in financial statements)

The $50,000 should be included as an expense in the calculation of operating

profit, with disclosure of the details by note. The $50,000 will also appear in the

statement of financial position as a current liability.

(iii) (Adjusted in financial statements)

Assuming that the loss in value is not due damage occurring after the reporting

date, the inventory at the statement of financial position date should be reduced

by $10,000, thus reducing operating profit and the statement of financial position

inventory figure by this amount.

(iv) (Disclosure by note)

A fire on 1 February 20X6 completely destroyed one of the company's factories

valued at $250,000. Half of this sum was covered by insurance and the insurance

company has agreed to pay $125,000 under the policy.


7/26/2019 F7 Aug 2016



CONSOLIDATED ACCOUNTS

91 PIXIE AND DIXIE

Pixie and its subsidiary

Consolidated statement of financial position as at 31 December 20X9$

Assets

Non-current assets

Intangible – goodwill (W3) 25,000

Other (210 + 110.6) 320,600

–––––––

345,600

Current assets (113.1 + 43.4) 156,500

–––––––

502,100

–––––––

Equity and liabilities

Issued share capital (100,000 + 37,500(W3)) 137,500

Share premium (W3) 37,500

Retained earnings (W5) 163,000

–––––––

338,000

NCI (W4) 22,000

–––––––Total equity 360,000

Current liabilities (76.1 + 66) 142,100

–––––––

502,100

–––––––

Workings

(W1) Group structure – shareholdings in Dixie

Ordinary

Group 75%Non-controlling interest 25%

–––––

100%

–––––


7/26/2019 F7 Aug 2016



(W2) Net assets of Dixie

At

Acquisition

date

At

reporting

date

$ $

Share capital 50,000 50,000Retained earnings 30,000 38,000

––––––– –––––––

80,000 88,000

––––––– –––––––

(W3) Goodwill

$

Cost of investment in Dixie:

Cash 10,000

Fair value of shares issued 37,500 × $2 75,000

(share capital 37,500 × $1 = $37,500)

(share premium 37,500 × $1 = $37,500) –––––––

85,000

Fair value of NCI in Dixie at acquisition 20,000

–––––––

105,000

Less: Net assets at acquisition (W2) (80,000)

–––––––

Goodwill at acquisition 25,000

–––––––(W4) Non-controlling interest

$

Fair value of NCI in Dixie at acquisition 20,000

NCI share of post-acquisition retained

earnings: 25% × (88,000 – 80,000)(W2)

2,000

–––––––

22,000

–––––––

(W3) Group retained earnings

$

Pixie: Retained earnings (given) 157,000

Dixie: 75% × (88,000 − 80,000)(W2) 6,000

–––––––

163,000

–––––––


7/26/2019 F7 Aug 2016



INTERPRETING/USING FINANCIAL STATEMENTS


92 SH

SH – Cash flow statement for year ended 30 June 20X6

$000 $000

Cash flows from operating activities

Net profit 250

Adjustments for:

Depreciation 255

Loss on sale of non-current assets (W) 30

––––

Operating profit before working capital changes 535

Increase in inventories (350)Decrease in receivables 135

Decrease in payables (645)

––––

Net cash used in operating activities (325)

Cash flows from investing activities

Purchase of property, plant and equipment

(3,500 – (3,000 – 230)) (730)

Proceeds of sale 145

––––

Net cash used in investing activities (585)

Cash flows from financing activities

Proceeds from issuance of share capital (3,200 + 400 – 2,800) 800

Dividends paid (80)

––––

Net cash from financing activities 720

–––––

Net decrease in cash and equivalent balances (190)Cash and equivalent balances at 1 July 20X5 2,350

–––––

Cash and equivalent balances at 30 June 20X6 2,160

–––––


7/26/2019 F7 Aug 2016



Working

$000

Calculation of profit/loss on disposal

Accumulated depreciation at 30 June 20X6 2,300

Less: Charge for the year (255)

–––––

2,045

Accumulated depreciation at 30 June 20X5 (2,100)

–––––

Therefore, cumulative depreciation relating to disposal (55)

–––––

Proceeds 145

CV (230 – 55) 175

–––––

Therefore, loss on disposal (30) –––––


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93 AMS

AMS – Statement of cash flows for the year ended 31 August 20X8

$000 $000

Cash flows from operating activities

Net profit (W1) 80Adjustments for:

Depreciation (50 + 25) 75

Loss on sale of plant 10

Interest expense 30

––––

Operating profit before working capital changes 195

Decrease in inventory 100

Increase in receivables (20)

Decrease in payables (33)

––––

Cash generated from operations 242

Interest paid (30)

Income taxes paid (12 + 10 – 10) (12)

––––

Net cash from operating activities 200


Purchase of non-current assets (W3) (265)

Proceeds of sale of plant 50

––––Net cash used in investing activities (215)

Cash flows from financing activities

Proceeds from issuance of share capital (W2) 600

Repayment of loan notes (200)

Dividends paid (45)

Net cash from financing activities –––– 355

––––

Net increase in cash and equivalents for the year 340

Cash and equivalents at 1 September 20X7 (40)

––––

Cash and equivalents at 31 August 20X8 300

––––


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Workings

(W1)

$000

Gross profit 239

Expenses (159)

––––

80

––––

(W2) Issue of ordinary shares

$000

20X7 Ordinary shares

Share premium

1,300

300

–––––

1,600

–––––20X8 Ordinary shares

Share premium

1,800

400

–––––

2,200

–––––

Therefore proceeds of fresh issue 600

–––––

(W3) Tangible non-current assets

$000 $00020X8 NVB 2,000

20X7 NVB 1,870

–––––

Increase in CV 130

Add back: Depreciation 75

Disposal at cost 85

Less: depreciation (25)

––––

60

–––––Additions in the year 265

–––––


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94 ADDAX

(a)

Plant and equipment – cost

20X2 $ 20X2 $

1 April Opening balance 840,000 10 Dec Disposal account 100,0001 Oct Cash (purchase) 180,000

20X3

31 Mar Closing balance 920,000

–––––––– ––––––––

1,020,000 1,020,000

–––––––– ––––––––

Plant and equipment – depreciation

20X2 $ 20X2 $

10 Dec Disposal account 60,000 1 April Opening balance 370,000

20X3 20X331 Mar Closing balance 393,000 31 Mar Profit or loss 83,000

––––––– –––––––

453,000 453,000

––––––– –––––––

Depreciation charge for the year = 10% of (840,000 – 100,000) + (6/12 × 10% of

180,000) = 74,000 + 9,000 = 83,000.

Plant and equipment – disposal

20X2 $ 20X2 $

10 Dec Plant and equipment – cost 100,000

10 Dec Plant andequipment –

depreciation 60,000

Cash 45,000

20X3

31 Mar Profit or loss 5,000

––––––– –––––––

105,000 105,000

––––––– –––––––

The transfer to profit or loss on 31 March is the profit on the disposal of the plant.

(b)Cash flow statement for the year ended 31 March 20X3 (extracts)

Cash flow from operating activities $

Net profit before taxation

Adjustments for:

Depreciation 83,000

Profit on sale of plant (5,000)


Purchase of plant (180,000)Proceeds from sale of plant 45,000


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RATIO ANALYSIS

95 MBC

(a) Gearing ratio = 100%×

debttotal+ reserves and capital Share

debtTotal

= 100%×48

10

= 20.8%

Alternatively the gearing ratio can be calculated as:

= 100%×reserves and capital Share

debt Total

= 100%×

38

10

= 26.3%

(b) Return on capital employed = 100%×2)employed(W capital Average

(W1)tax and interest before Profit

= 100%×46.25

5.6

= 12.1%

An alternative method of calculating ROCE is:

100%×employed capital Closing

tax and interest before Profit = 11.7%=100%×485.6

Tutorial note:

Wherever possible use average figures for capital employed, because this will give a more

representative picture than using year-end figures.

(c) If shares are issued to raise the additional $10 million of finance, then there will be no

additional interest cost in future years. However the purpose of the raising of the

finance is to fund research and development. This means that it is unlikely that there

will be any increase in profit in the following year or even the next few years.

If profit remains at the same level and the funds are raised by issuing additional share

capital, then the gearing ratio and ROCE are likely to appear as follows:

Gearing = 100%×capital Total

debt Total

= 100%×

58

10

= 17.2%


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ROCE = 100%×employed capital Average

tax and interest before Profit

=( )

100%×/258+48

5.6

= 100%×53

5.6

= 10.6%

If the additional finance is raised by the issue of further loan notes, then there are two

matters to consider. Firstly, the gearing will increase as the proportion of debt finance in

the capital structure increases. Secondly, the profit after tax will decrease as additional

interest is payable on the additional debt finance, but this does not affect ROCE which is

calculated by reference to profit before interest and tax.

The likely effect on gearing can be illustrated:

Gearing = 100%×capitalTotal

debtTotal

= 100%×58

20

= 34.5%

Workings

(W1) Profit before interest and tax

$m

Net profit 4.0

Add: Tax 1.0

Add: Interest (10 × 6%) 0.6

–––

5.6

–––

(W2) Average capital employed:

$m

Closing capital employed 48.0

Opening capital employed (48 – (4 – 0.5)) 44.5

Average capital employed = $46.25m=2

44.5+48

Note: This answer is fuller than could be expected from a candidate for ten marks,

but it provides useful tutorial material.


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96 PETER JACKSON

Statement of profit or loss for the year ended 31 May 20X2

$ $

Sales 300,000

Opening inventory (W3) 40,000Purchases (bal fig) 220,000

–––––––

260,000

Less: Closing inventory (W4) 60,000

–––––––

Cost of sales (W2) 200,000

–––––––

Gross profit 100,000

Less: Expenses (bal fig) 70,000

–––––––

Net profit (10% × 300) 30,000

–––––––

Statement of financial position as at 31 May 20X2

$ $

Non-current assets (bal fig) 31,288

Current assets

Inventory 60,000

Receivables (W7) 36,986

Cash (bal fig) 7,890 –––––––

(W9) 104,876

Payables (W8) (36,164)

–––––––

68,712

–––––––

Capital employed 30,000 × 30100 100,000

–––––––

Financed by

Opening capital (bal fig) 70,000

Net profit 30,000

–––––––

100,000

–––––––


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Workings

(W1) The first step in this question is to set out a simple proforma statement of profit or loss

and statement of financial position so that you can see which figures you need to

calculate.

(W2) Cost of sales – Profit mark-up on cost is 50%

Sales $300,000

Cost of sales 300,000 × 150100 $200,000

(W3) Opening inventory 300,000 × 36573 $60,000

This is at selling price so cost of opening inventory is $60,000 × 150100 = $40,000.

(W4) Closing inventory 300,000 × 3655.109 $90,000

At cost 90,000 × 150100 $60,000

(W5) After calculating the cost of sales (W2), opening inventory (W3) and closing inventory

(W4) the purchases figure can be filled in as the balancing figure.

You are given the net profit margin as a percentage of sales therefore the expenses are

also a balancing figure.

(W6) In the statement of financial position you already know the amount of closing inventory

and both receivables and payables can be calculated using the payment days given.

Current assets to current liabilities can then be calculated and cash filled in as the

balancing figure.

Finally, you are told the ratio of net profit to capital employed and as net profit is known

capital employed can be calculated and non-current assets slotted in as the final

balancing figure.

(W7) Receivables (based upon sales) 300,000 × 36545 $36,986

(W8) Payables (based upon purchases) 220,000 × 36560 $36,164

(W9) Current assets: current liabilities is 2.9

Current assets = 36,164 × 2.9 = $104,876


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COMPREHENSIVE EXAMPLE

97 TYR

(a) Statement of profit or loss for the year ended 31 October 20X7

$000 $000Revenue (2,569 – 12) 2,557

Less: Cost of sales

Opening inventory 210

Purchases (1,745 + 15 – 34) 1,726

Closing inventory (194 + 7) (201)

–––––

1,735

–––––

Gross profit 822

Less Expenses

Administration (264 – 12 + 17) 269

Selling and distribution (292 – 28) 264

Loan note interest (W2) 30


Depreciation (W1) 36

–––––

(617)

–––––

Net profit before tax 205

Income tax expense (40)

–––––

Net profit for the year 165

–––––


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(b) Statement of financial position as at 31 October 20X7

Cost Accumulated

depreciation

$000 $000 $000

Non-current assets

Land (495 + 55) 550 – 550Premises (350; 20 + 14) 350 34 316

Plant and equipment (220;30 + 22) 220 52 168

Patents and trade marks 200 – 200

––––– ––––– –––––

1,320 86 1,234

Current assets ––––– –––––

Inventory (194 + 7) 201

Receivables (875 – 12) 863

Prepayment (12 + 28) 40

Cash 12

–––––

1,116

–––––

2,350

–––––


1,600,000 Ordinary 50c shares 800

200,000 5% $1 Irredeemable preference shares 200

–––––

1,000

Share premium 100

Revaluation reserve (135 + 55) 190

Retained earnings ((425 – 100 – 135) + 165 – 20 – 5) 330

–––––

1,620


12% Loan notes 250

Current liabilities

Payables 318

Bank overdraft 85Accruals (17 + 15 (W2)) 32

Income tax 40

Preference dividend (5% × 200 × 1/2) 5

–––––

480

–––––

2,350

–––––

Note: A final ordinary dividend of 5c per share ($80,000) is proposed.


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Workings

(W1) Depreciation

$000

Premises 4% × $350 = 14

Plant and machinery 10 % × $220 22

––––

36

––––

(W2) Loan note interest

$250,000 @ 12% = $30,000

$15,000 paid, so accrual for $15,000 is needed.

(c) (i) Gross profit mark up = 47.4%=1,735

822=

salesofCost

profit Gross

Gross profit mark up has fallen slightly from last year’s 50%. This may be due to:

• Increased competition preventing the ‘passing on’ of supplier’s price

increases;

• A policy of price restriction (or even reduction) to try to increase market

share;

• A lack of control in the purchasing department which resulted in purchases

being at higher prices.

(ii) Net profit percentage = 8%=

2,557

205=

sales

profit net

Net profit percentage has risen from last year’s 3%. Given the fall in mark up, this

must be due to reduced expenses. This could be due to:

• Improved control over expenses

• Gains from economies of scale as the organisation expanded

(iii) Current ratio =

Current assets : current liabilities

= 1,116 : 480

= 2.3 : 1

This is slightly below last year’s 2.4:1. This could be because there are improved

controls over inventory, leading to lower levels of inventory.

(iv) Acid test ratio

Current assets – inventory : current liabilities

= (1,116 – 201) 915 : 480

= 1.9 : 1

This has increased slightly from last year’s figure, and probably indicates an

increase in receivables and cash compared to last year.


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