FINANCIAL REPORTING AND ANALYSIS
Time allowed: 24 hours.
Time to spend on your assessment: 3 hours
Maximum word count for assessment: 3000 words
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The paper consists of SIX questions.
THREE in Section A
THREE in Section B
Candidates must answer THREE questions.
At least ONE question from each Section, and one additional question from either Section
Each question carries 33 marks.
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SECTION A – Candidates must answer at least one question
Epping Ltd. is a listed company based in Essex County. The company prepares its financial statements as at 31 December each year. The following trial balance is for the period ending 31 December 2019:
|Wages for distribution staff||146|
|Inventory as at 1 January 2019||50|
|Debenture interest paid||45|
|Office heating and lighting||20|
|Administrative staff salaries||40|
|Vehicle running costs||150|
|Proceeds from disposal of delivery vehicle||25|
|Retained earnings at 1 January 2019||450|
|Repairs to machinery||60|
|Administration office rent||65|
|Ordinary shares at £1||1,600|
|Machinery at cost||1,100|
|Accumulated depreciation for machinery at 1 Jan. 2019||370|
|Warehouse premises at cost||1,550|
|Accumulated depreciation for warehouse premises at 1 Jan. 2019||200|
|Computers at cost||600|
|Accumulated depreciation for computers at 1 Jan. 2019||120|
|Delivery vehicles at cost||480|
|Accumulated depreciation for delivery vehicles at 1 Jan. 2019||150|
The following information is also to be considered:
- The computers are used solely for administration work.
- A stock count performed on 31 December 2019 revealed that the closing inventory had a value of £60,000.
- The directors of Epping Ltd. revalued the warehouse premises on 31 December 2019 to £1,800,000 after charging depreciation for the year.
- Epping Ltd. uses the following depreciation policies:
- Depreciation of machinery: 12% straight-line method.
- Depreciation of warehouse premises: 4% straight-line method.
- Depreciation of computers: 18% straight-line method.
- Depreciation of delivery vehicles: 20% reducing balance method.
- Epping Ltd. purchased an item of machinery on 1 March 2019 for £32,000. This transaction was erroneously included in the repairs for machinery account and has not yet been corrected. Note: The company’s policy is to charge full year’s depreciation on its assets in the year of acquisition.
- The disposal of delivery vehicle included in the trial balance pertains to a vehicle that was originally bought for £65,000. This delivery vehicle had been depreciated by £35,000. None of these amounts have been accounted for in the books of Epping Ltd.
Prepare the following financial statements for Epping Ltd. for the year ended 31 December 2019 in accordance with IAS 1, Preparation of Financial Statements. Show all workings.
- A statement of comprehensive income for the year ending 31 December 2019.
- A statement of changes in equity for the year ending 31 December 2019.
- A statement of financial position as at 31 December 2019.
[TOTAL: 33 MARKS]
END OF QUESTION ONE
The statements of comprehensive income for the year ending 31 December 2019 and the statements of financial position at 31 December 2019 of Parker Ltd and Spencer Ltd are as follows:
|Statements of comprehensive income at 31 December 2019
|Cost of sales||490,000||63,000|
|Dividends received from Spencer||3,500||—|
|Profit before tax||172,000||24,000|
|Income tax expense||15,500||6,500|
|Profit for the period||156,500||17,500|
|Statements of financial position at 31 December 2019
|Investment in Spencer Ltd||92,500||—|
|Current account – Spencer Ltd||11,500||—|
|EQUITY AND LIABILITIES|
|Capital and reserves|
|Common shares of £1 each||98,000||40,000|
|Current account – Parker Ltd||—||11,500|
|Total equity and liabilities||495,000||150,500|
- Parker Ltd acquired 75% of the shares in Spencer Ltd on 1 January 2015 when Spencer Ltd’s retained earnings were £30,000 and the balance on Spencer’s general reserve was £8,000.
- In the consolidated statement of financial position, non-controlling interests are measured as the proportionate share of the subsidiary’s net assets.
- During the year Parker sold Spencer goods for £9,000 plus a mark-up of one-third. Half of these goods were still in inventory at the end of the year.
- Prepare a consolidated statement of comprehensive income for the year ending on 31 December 2019 and a consolidated statement of financial position as at 31 December 2019. Show all your workings and clearly state any assumptions you make.
- Explain joint control, joint operations and joint ventures under IFRS 11 Joint Arrangements.
[TOTAL: 33 MARKS]
END OF QUESTION TWO
The financial statements of Cup plc as at 31 December 2019 (with comparatives for 2018) are as follows:
Statement of comprehensive income (extract) for the year to 31 December 2019
|Profit before taxation||162,000|
|Profit for the year||147,000|
Statement of financial position as at 31 December 2019
|Property, plant and equipment at cost||670||600|
|Less: Accumulated depreciation||437||233||350||250|
|Investments at cost||45||66|
|Less: Provision for doubtful receivables||55||490||12||192|
|Cash on 10-day deposit||–||90|
|Cash at bank and in hand||–||1,058||105||632|
|Ordinary Share capital||540||340|
|Preference Share Capital||30||30|
|Amount owing re property, plant & equip||20||–|
|Corporation tax payable||15||52|
- Equipment bought in February 2017 for £40,000 was sold, in April 2019, for £20,000. The company depreciates equipment at 15% per annum on cost with a full charge in the year of acquisition and none in the year of disposal.
- Non-current asset investments which had originally cost £21,000 were sold during the year for £30,000.
- Dividends received during the year were £30,000.
- Dividends totaling £80,000 were paid during the year.
- In March 2019, the company issued 200,000 £1 ordinary shares at a premium of 15p per share.
- The cash on 10-day deposit ranks as a cash equivalent.
- Prepare a cash flow statement for Cup plc for the year ended 31 December 2019 in accordance with the requirements of IAS 7 Cash Flow Statements, (using the indirect method).
- Explain why we do adjustments for depreciation and a loss made on disposal of a non-current asset when it comes to calculating the net cash flow from operating activities.
[TOTAL: 33 MARKS]
END OF SECTION A
SECTION B – Candidates must answer at least one question.
IAS 38 Intangible Assets prescribes the accounting treatment for intangible assets that are not dealt with in another standard. This standard also specifies the criteria for recognition of an intangible asset.
- Explain the recognition criteria of an intangible asset.
- Explain the subsequent accounting treatment of intangible assets that satisfy the recognition criteria of IAS 38.
- Explain the distinctive features of Research expenditure and Development expenditures and the accounting treatment for Research and Development expenditures under IAS 38.
[TOTAL: 33 MARKS]
With reference to IAS 2, Inventories:
- Define the term “inventories”.
- Explain how to determine the cost of inventories at their initial recognition.
- Define the term “net realisable value”.
- Explain the reasons for which inventories should be measured at the lower of cost and net realisable value.
[TOTAL: 33 MARKS]
Ratio analysis is a widely used technique for evaluating the financial performance of companies for purposes of making investment decisions. It aids investors in making comparisons of one accounting period with another for the same business entity or to compare one business entity with another. However, it is subject to a number of limitations and caution should therefore be exercised when basing economic decisions upon the result of ratio analysis.
- Discuss the most commonly used ratios for the purpose of financial analysis. Use examples where necessary to illustrate your
- Discuss the limitations of ratios in analysing financial performance.
[TOTAL: 33 MARKS]
END OF SECTION B
END OF QUESTION PAPER
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