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REVISION QUESTION BANK – FINANCIAL REPORTING (F7) Question IASCF Historically financial reporting throughout the world has differed widely The International Accounting Standards Committee Foundation (IASCF) is committed to developing, in the public interest, a single set of high quality, understandable and enforceable global accounting standards that require transparent and comparable information in general purpose financial statements The various pronouncements of the IASCF are sometimes collectively referred to as International Financial Reporting Standards (IFRS) GAAP Required: (a) Describe the functions of the various internal bodies of the IASCF, and how the IASCF interrelates with other national standard setters (10 marks) (b) Describe the IASCF’s standard setting process including how standards are produced, enforced and occasionally supplemented (10 marks) (c) Comment on whether you feel the move to date towards global accounting standards has been successful (5 marks) (25 marks) Question SUBSTANCE OVER FORM The overriding requirement of a company’s financial statements is that they should represent faithfully the underlying transactions and other events that have occurred To achieve this transactions have to be accounted for in terms of their “substance” or economic reality rather than their legal form This principle is included in the IASBs “Framework for the Preparation and Presentation of Financial Statements”, and is also used in many standards, in particular IAS 17 “Leases” and IAS 18 “Revenue” Required: (a) Describe why it is important that substance rather than legal form is used to account for transactions, and describe how financial statements can be adversely affected if the substance of transactions is not recorded (5 marks) (b) Describe, using an example, how the following features may indicate that the substance of a transaction is different from its legal form: (i) (ii) (iii) (c) separation of ownership from beneficial use; the linking of transactions including the use of option clauses; when an asset is sold at a price that differs to its fair value (9 marks) On April 2007 Forest had an inventory of cut seasoning timber which had cost $12 million two years ago Due to shortages of this quality of timber its value at April 2007 had risen to $20 million It will be a further three years before this timber is sold to a manufacturer of high-class furniture On April 2007 Forest entered into an arrangement to sell Barret Bank the timber for $15 million Forest has an option to buy back the timber at any time within the next three years at a cost of $15 million plus accumulated interest at 2% per annum above the base rate This will be charged from the date of the original sale The base rate for the period of the transactions is expected to be 8% Forest intends to buy back the timber on 31 March 2010 and sell it the same day for an expected price of $25 million Note: Ignore any storage costs and capitalisation of interest that may relate to inventories FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Required: Assuming the above transactions take place as expected, prepare extracts to reflect the transactions in the statement of comprehensive income for the years to 31 March 2008, 2009 and 2010 and the statement of financial position (ignore cash) at those year ends: (i) (ii) if Forest treated the transactions in their legal form; and if the substance of the transactions is recorded Comment briefly on your answer to (c) above (11 marks) (25 marks) Question ATKINS The principle of recording the substance or economic reality of transactions rather than their legal form lies at the heart of the Framework for Preparation and Presentation of Financial Statements’ (Framework) and several International Accounting Standards The development of this principle was partly in reaction to a minority of public interest companies entering into certain complex transactions These transactions sometimes led to accusations that company directors were involved in “creative accounting” Required: (a) (b) (i) Explain, with relevant examples, what is generally meant by the term “creative accounting”; (5 marks) (ii) Explain why it is important to record the substance rather than the legal form of transactions and describe the features that may indicate that the substance of a transaction is different from its legal form (5 marks) (i) Atkins’s operations involve selling cars to the public through a chain of retail car showrooms It buys most of its new vehicles directly from the manufacturer on the following terms: – Atkins will pay the manufacturer for the cars on the date they are sold to a customer or six months after they are delivered to its showrooms whichever is the sooner – The price paid will be 80% of the retail list price as set by the manufacturer at the date that the goods are delivered – Atkins will pay the manufacturer 1·5% per month (of the cost price to Atkins) as a “display charge” until the goods are paid for – Atkins may return the cars to the manufacturer any time up until the date the cars are due to be paid for Atkins will incur the freight cost of any such returns Atkins has never taken advantage of this right of return – The manufacturer can recall the cars or request them to be transferred to another retailer any time up until the time they are paid for by Atkins REVISION QUESTION BANK – FINANCIAL REPORTING (F7) Required: Discuss which party bears the risks and rewards in the above arrangement and come to a conclusion on how the transactions should be treated by each party (6 marks) (ii) Atkins bought five identical plots of development land for $2 million in 2005 On October 2007 Atkins sold three of the plots of land to an investment company, Landbank, for a total of $2·4 million This price was based on 75% of the fair market value of $3·2 million as determined by an independent surveyor at the date of sale The terms of the sale contained two clauses: – Atkins can re-purchase the plots of land for the full fair value of $3·2 million (the value determined at the date of sale) any time until 30 September 2010; and – On October 2010, Landbank has the option to require Atkins to repurchase the properties for $3·2 million You may assume that Landbank seeks a return on its investments of 10% per annum Required: Discuss the substance of the above transactions; and (3 marks) Prepare extracts of the statement of comprehensive income and statement of financial position (ignore cash) of Atkins for the year to 30 September 2008: – if the plots of land are considered as sold to Landbank; and (2 marks) – reflecting the substance of the above transactions (4 marks) (25 marks) Question PETERLEE (a) The IASB’s Framework for the preparation and presentation of financial statements (Framework) sets out the concepts that underlie the preparation and presentation of financial statements that external users are likely to rely on when making economic decisions about an entity Required: Explain the purpose and authrioritative status of the Framework (b) (5 marks) Of particular importance within the Framework are the definitions and recognition criteria for assets and liabilities Required: Define assets and liabilities and explain the important aspects of their definitions Explain why these definitions are of particular importance to the preparation of an entity’s statement of financial position and statement of comprehensive income (8 marks) FINANCIAL REPORTING (F7) – REVISION QUESTION BANK (c) Peterlee is preparing its financial statements for the year ended 31 March 2008 The following items have been brought to your attention: (i) Peterlee acquired the entire share capital of Trantor during the year The acquisition was achieved through a share exchange The terms of the exchange were based on the relative values of the two companies obtained by capitalising the companies’ estimated future cash flows When the fair value of Trantor’s identifiable net assets was deducted from the value of the company as a whole, its goodwill was calculated at $2·5 million A similar exercise valued the goodwill of Peterlee at $4 million The directors wish to incorporate both the goodwill values in the companies’ consolidated financial statements (4 marks) (ii) During the year Peterlee acquired an iron ore mine at a cost of $6 million In addition, when all the ore has been extracted (estimated in 10 years time) the company will face estimated costs for landscaping the area affected by the mining that have a present value of $2 million These costs would still have to be incurred even if no further ore was extracted The directors have proposed that an accrual of $200,000 per year for the next ten years should be made for the landscaping (4 marks) (iii) On April 2007 Peterlee issued an 8% $5 million convertible loan at par The loan is convertible in three years time to ordinary shares or redeemable at par in cash The directors decided to issue a convertible loan because a non-convertible loan would have required an interest rate of 10% The directors intend to show the loan at $5 million under non-current liabilities The following discount rates are available: Year Year Year 8% 0·93 0·86 0·79 10% 0·91 0·83 0·75 (4 marks) Required: Describe (and quantify where possible) how Peterlee should treat the items in (i) to (iii) in its financial statements for the year ended 31 March 2008 commenting on the directors’ views where appropriate The mark allocation is shown against each of the three items above (25 marks) REVISION QUESTION BANK – FINANCIAL REPORTING (F7) Question FRESNO Fresno Group are preparing their financial statements for the year ended 31 January 2008 However the financial accountant of Fresno Group had difficulty in preparing the full statements and approached you for help The financial accountant has furnished you with the following information: (i) Profit or loss extract for the year ended 31 January 2008 – Fresno group Operating profit – continuing operations Profit on sale of property in continuing operations $ million 290 10 Profit before taxation Tax 300 (90) Profit after taxation 210 Dividends for the year amounted to $15 million The financial accountant has not yet made any necessary provision for discontinued operations (However, you may assume that the taxation provision incorporated the effects of any provision for discontinued operations.) (ii) The shareholders’ funds at the beginning of the financial year were as follows: Share capital – $1 ordinary shares Share premium Revaluation surplus Accumulated profits $ million 350 55 215 775 _ 1,395 _ (iii) Fresno Group regularly revalues its non-current assets and at 31 January 2008, a revaluation surplus of $375 million needs to be recognised During the financial year, a property had been sold on which a revaluation surplus of $54 million had been included in the revaluation surplus Further if the company had charged depreciation on a historical cost basis rather than the revalued amounts, the depreciation charge in the profit or loss for non-current assets would have been $7 million The current year’s charge for depreciation was $16 million (iv) In order to facilitate the purchase of subsidiaries, the company had issued $1 ordinary shares of nominal value $150 million and share premium of $450 million The premium had been taken to the statutory reserve All subsidiaries are currently 100% owned by the group (v) During the financial year to 31 January 2008, the company had discontinued the operations of a wholly owned subsidiary, Reno It had also made a decision to close down the operations of another wholly owned subsidiary, Dodge, in the next financial period the company has estimated the costs of the two closures as $68m $45m was for Reno and $23m for Dodge The directors had drawn up detailed formal plans for the closure of Dodge by the year-end but had not made this information available to the public FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Required: Prepare the statement of comprehensive income To include other comprehensive income, and the statement of changes in equity for the Fresno Group for the year ending 31 January 2008 in accordance with IAS (10 marks) Question DELTOID The following statement of financial position has been extracted from the draft financial statements of Deltoid for the year to 31 March 2008: Statement of financial position as at 31 March 2008 Non-current assets Property, plant and equipment Current assets Inventory Trade accounts receivable Bank $000 3,850 2,450 250 Total assets Equity and liabilities Capital and reserves: Ordinary shares of 50 cents each Reserves Share premium Revaluation surplus Accumulated profits b/f at April 2007 Profit after tax for year to 31 March 2008 Non-current liabilities Environmental provision (note (iv)) 6% Convertible loan note (note (iii)) Current liabilities Trade accounts payable Taxation Total equity and liabilities $000 12,110 6,550 _ 18,660 _ 2,000 2,500 2,000 1,000 3,000 4,500 _ 10,500 1,200 3,000 _ 2,820 1,140 _ 4,200 3,960 _ 18,660 _ The following additional information is available: (i) The financial statements include an item of plant based on its treatment in the company’s management accounts where plant is depreciated on a machine hour use basis The details of this item of plant are: Cost (1 April 2006) Estimated residual value Estimated machine hour life Measured usage in year to: 31 March 2007 31 March 2008 $250,000 $50,000 8,000 2,000 800 REVISION QUESTION BANK – FINANCIAL REPORTING (F7) In the financial statements the company policy is that plant and machinery should be written off at 20% per annum on the reducing balance basis (ii) The statement of comprehensive income includes a charge of $150,000 being the first two of ten payments of $75,000 each in respect of a five-year lease of an item of plant The payments were made on April 2007 and October 2007 The fair value of this plant at the date it was leased was $600,000 Information obtained from the finance department confirms that this is a finance lease and an appropriate periodic rate of interest is 10% per annum Deltoid has treated the lease as an operating lease in the above financial statements The company depreciates plant used under finance leases on a straight-line basis over the life of the lease (iii) On April 2007 Deltoid issued a $3 million 6% convertible loan note at par The loan note is redeemable at a premium of 10% on 31 March 2011 or it may be converted into ordinary shares on the basis of 50 shares for each $100 of loan note at the option of the holder The interest (coupon) rate for an equivalent loan note without the conversion rights would have been 10% In the draft financial statements Deltoid has paid and charged interest of $180,000 and shown the loan note at $3 million in the statement of financial position The present value of $1 receivable at the end of each year, based on discount rates of 6% and 10% can be taken as: End of year (iv) 6% 0·94 0·89 0·84 0·79 10% 0·91 0·83 0·75 0·68 The draft financial statements contain an accumulating provision for the cost of restoring (landscaping) the site of a quarry that is being operated by Deltoid The result of an environmental audit has concluded that the provision has been calculated on the wrong basis and is materially underprovided A firm of environmental consultants has summarised the required revision: Charge against profits – year to 31 March 2008 Liability – at 31 March 2008 Current provision $000 180 1,200 Required provision $000 245 2,150 The directors consider that the incorrect original estimate constitutes a prior period error (v) Deltoid made a for bonus issue of shares on March 2008 utilising the revaluation surplus This has not yet been recorded in the above financial statements (vi) The directors of Deltoid declared a final dividend that will give a dividend yield of 4% to the ordinary shareholders, the dividend was declared on 29th March 2008 This is to be based on the current market price of Deltoid’s shares of $2·00 each The bonus shares in note (v) will rank for the final dividend No interim dividends have been paid during the year Required: (a) Redraft the statement of financial position of Deltoid as at 31 March 2008 making appropriate adjustments for the items in (i) to (vi) above (20 marks) Note: work to the nearest $000 and show separately your working for the accumulated profits included in the statement of financial position FINANCIAL REPORTING (F7) – REVISION QUESTION BANK (b) Calculate the basic and diluted earnings per share for Deltoid for the year to 31 March 2008 Assume a tax rate of 25% and that only the actual loan interest paid is available for tax relief Ignore deferred tax (5 marks) (25 marks) Question ALLGONE The following trial balance relates to Allgone at 31 March 2008: $000 Sales revenue (note (i)) Purchases 127,850 Operating expenses 12,400 Loan interest paid 2,400 Preference dividend 1,000 Land and buildings – at valuation (note (ii)) 130,000 Plant and equipment – cost 84,300 Software – cost April 2005 10,000 Stock market investments – valuation April 2007 (note (iii)) 12,000 Depreciation April 2007 – plant and equipment Depreciation April 2007 – software Extraordinary item (note (iv)) 32,000 Trade receivables 23,000 Inventory – April 2007 19,450 Bank Trade payables Ordinary shares of 25c each 10% Preference shares 12% Loan note (issued July 2007) Deferred tax Revaluation surplus (relating to land and buildings and the investments) Accumulated profits – April 2007 –––––––– 454,400 –––––––– The following notes are relevant: (i) $000 236,200 24,300 6,000 350 15,200 60,000 20,000 40,000 3,000 45,000 4,350 –––––––– 454,400 –––––––– Sales include $8 million for goods sold in March 2008 for cash to Funders, a merchant bank The cost of these goods was $6 million Funders has the option to require Allgone to repurchase these goods within one month of the year-end at their original selling price plus a facilitating fee of $250,000 The inventory at 31 March 2008 was counted at a cost value of $8·5 million This includes $500,000 of slow moving inventory that is expected to be sold for a net $300,000 REVISION QUESTION BANK – FINANCIAL REPORTING (F7) (ii) Non-current assets: On April 2007 Allgone revalued its land and buildings The details are: Land Building Cost Valuation April 2002 April 2007 $000 $000 20,000 25,000 80,000 105,000 The building had an estimated life of 40 years when it was acquired and this has not changed as a result of the revaluation Depreciation is on a straight-line basis The surplus on the revaluation has been added to the revaluation reserve, but no other movements on the revaluation reserve have been recorded Plant and equipment is depreciated at 20% per annum on the reducing balance basis Software is depreciated by the sum of the digits method over a 5-year life (iii) The investment represents 7·5% of the ordinary share capital of Wondaworld Allgone has classed the investments as Available For Sale in accordance with IAS 39 Financial Instruments: Recognition and Measurement Changes in value are included in revaluation reserve which at April 2007 contained a surplus of $5 million for previous revaluations of the investments The stock market price of Wondaworld’s ordinary shares was $2·50 each on April 2007 and by 31 March 2008 this had fallen to $2·25 (iv) The extraordinary item is a loss incurred due to a fraud relating to the company’s investments A senior employee of the company, who left in January 2008, had diverted investment funds into his private bank account The fraud was discovered by the employee’s replacement in April 2008 It is unlikely that any of the funds will be recovered Allgone has now implemented tighter procedures to prevent such a fraud recurring The company has been advised that this loss will not qualify for any tax relief (v) The directors have estimated the provision for income tax for the year to 31 March 2008 at $11·3 million The deferred tax provision at 31 March 2008 is to be adjusted to reflect the tax base of the company’s net assets being $16 million less than their carrying values The rate of income tax is 30% The movement on deferred tax should be charged to profit or loss (vi) The directors declared a final ordinary dividend of 3c per share on 25 March 2008 Required: In accordance with International Accounting Standards and International Financial Reporting Standards as far as the information permits, prepare: (a) the statement of comprehensive income of Allgone for the year to 31 March 2008; and (9 marks) (b) the Statement of Changes in Equity for the year to 31 March 2008; and (c) a statement of financial position as at 31 March 2008 (4 marks) (12 marks) Notes to the financial statements are not required (25 marks) FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Question TINTAGEL Reproduced below is the draft statement of financial position of Tintagel, a public listed company, as at 31 March 2008 Non-current assets (note (i)) Freehold property Plant Investment property at April 2007 (note (ii)) Current Assets Inventory (note (iii)) Trade receivables and prepayments Bank Total assets $000 126,000 110,000 15,000 ––––––– 251,000 60,400 31,200 13,800 ––––––– Equity and liabilities Capital and Reserves: Ordinary shares of 25c each Reserves: Share premium Accumulated profits – April 2007 – Year to 31 March 2008 Suspense account (note (vi)) Total equity and liabilities (i) 105,400 ––––––– 356,400 ––––––– 150,000 10,000 52,500 47,500 ––––––– Non-current liabilities Deferred tax – at April 2007 (note (v)) Current liabilities Trade payables (note (iii)) Provision for plant overhaul (note (iv)) Taxation $000 110,000 ––––––– 260,000 18,700 47,400 12,000 4,200 ––––––– 63,600 14,100 ––––––– 356,400 ––––––– The statement of comprehensive income has been charged with $3·2 million being the first of four equal annual rental payments for an item of excavating plant This first payment was made on April 2007 Tintagel has been advised that this is a finance lease with an implicit interest rate of 10% per annum The plant had a fair value of $11·2 million at the inception of the lease None of the non-current assets have been depreciated for the current year The freehold property should be depreciated at 2% on its cost of $130 million, the leased plant is depreciated at 25% per annum on a straight-line basis and the non-leased plant is depreciated at 20% on the reducing balance basis (ii) 10 Tintagel adopts the fair value model for its investment property Its value at 31 March 2008 has been assessed by a qualified surveyor at $12·4 million FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Ledger account listings at 31 March 2008 Ordinary shares of $1 each Share premium Retained earnings – April 2007 Profit before interest and tax – year to 31 March 2008 Revaluation surplus 8% Loan notes Trade payables Accrued loan interest Taxation Land and buildings at valuation Plant at cost Buildings – accumulated depreciation 31 March 2008 Plant – accumulated depreciation 31 March 2008 Investments at cost Trade receivables Inventory – 31 March 2008 Bank Investment income Loan interest Ordinary dividend Dr $ 1,100 62,300 84,600 8,200 50,400 43,300 1,700 26,100 ––––––– 277,700 ––––––– Cr $ 50,000 8,000 70,300 17,900 18,000 39,800 26,700 300 6,800 37,600 1,900 400 ––––––– 277,700 ––––––– Notes (i) There were no disposals of land and buildings during the year The increase in the revaluation surplus was entirely due to the revaluation of the company’s land (ii) Plant with a net book value of $12,000 (cost $23,500) was sold during the year for $7,800 The loss on sale has been included in the profit before interest and tax (iii) Investments with a cost of $8,700 were sold during the year for $11,000 The profit has been included in the profit before interest and tax There were no further purchases of investments (iv) On 10 October 2007 a bonus issue of for 10 ordinary shares was made utilising the share premium account The remainder of the increase in ordinary shares was due to an issue for cash on 30 October 2007 (v) The balance on the taxation account is after settlement of the provision made for the year to 31 March 2007 A provision for the current year has not yet been made Required: From the above information, prepare a statement of cash flows using the indirect method for Planter in accordance with IAS “Statement of cash flows” for the year to 31 March 2008 (25 marks) 68 REVISION QUESTION BANK – FINANCIAL REPORTING (F7) Question 47 BIGWOOD Bigwood, a public company, is a high street retailer that sells clothing and food The managing director is very disappointed with the current year’s results The company expanded its operations and commissioned a famous designer to restyle its clothing products This has led to increased sales in both retail lines, yet overall profits are down Details of the financial statements for the two years to 30 September 2008 are shown below Statements of comprehensive income 30 September 2008 $000 $000 Revenue – clothing 16,000 – food 7,000 23,000 –––––– Cost of sales – clothing 14,500 – food 4,750 (19,250) –––––– –––––– Gross profit 3,750 Other operating expenses (2,750) –––––– Operating profit 1,000 Interest expense (300) –––––– Profit before tax 700 Income tax expense (250) –––––– Profit for period 450 –––––– 30 September 2007 $000 $000 15,600 4,000 19,600 –––––– 12,700 3,000 (15,700) –––––– –––––– 3,900 (1,900) –––––– 2,000 (80) –––––– 1,920 (520) –––––– 1,400 –––––– Extract from Changes in Equity:year to 30 September 2008 year to 30 September 2007 $000 $000 Retained profit b/f 1,900 1,100 Profit for the period 450 1,400 Dividends paid (600) (600) –––––– –––––– Retained profit c/f 1,750 1,900 –––––– –––––– 69 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Statements of financial position as at: 30 September 2008 $000 $000 Property, plant and equipment at cost 17,000 Accumulated depreciation (5,000) –––––– 12,000 Current Assets Inventory – clothing 2,700 – food 200 Trade receivables 100 Bank nil 3,000 –––––– –––––– Total assets 15,000 –––––– Equity and liabilities Issued ordinary capital ($1 shares) 5,000 Share premium 1,000 Retained earnings 1,750 –––––– 7,750 Non-current liabilities Long-term loans 3,000 Current liabilities Bank overdraft 930 Trade payables 3,100 Current tax payable 220 4,250 –––––– –––––– 15,000 –––––– 30 September 2007 $000 $000 9,500 (3,000) –––––– 6,500 1,360 140 50 450 –––––– 2,000 –––––– 8,500 –––––– 3,000 nil 1,900 –––––– 4,900 1,000 nil 2,150 450 –––––– 2,600 –––––– 8,500 –––––– Note: the directors have signalled their intention to maintain annual dividends at $600,000 for the foreseeable future The following information is relevant: (i) The increase in property, plant and equipment was due to the acquisition of five new stores and the refurbishment of some existing stores during the year The carrying value of fixtures scrapped at the refurbished stores was $1.2 million; they had originally cost $3 million Bigwood received no scrap proceeds from the fixtures, but did incur costs of $50,000 to remove and dispose of them The losses on the refurbishment have been charged to operating expenses Depreciation is charged to cost of sales apportioned in relation to floor area (see below) (ii) The floor sales areas (in square metres) were: 30 September 2008 30 September 2007 48,000 35,000 6,000 5,000 –––––– –––––– 54,000 40,000 –––––– –––––– The share price of Bigwood averaged $6·00 during the year to 30 September 2007, but was only $3·00 at 30 September 2008 Clothing Food (iii) 70 REVISION QUESTION BANK – FINANCIAL REPORTING (F7) (iv) The following ratios have been calculated: Return on capital employed Net assets turnover Gross profit margin – clothing – food Net profit (after tax) margin Current ratio Inventory holding period – clothing – food Accounts payable period Gearing Interest cover 2008 9·3% 2·1 times 2007 33·9% 3·3 times 9·4% 32·1% 2·0% 0·71:1 18·6% 25% 7·1% 0·77:1 68 days 15 days 59 days 28% 3·3 times 39 days 17 days 50 days 17% 25 times Required: (a) Prepare, using the indirect method, a statement of cash flows for Bigwood for the year to 30 September 2008 (12 marks) (b) Write a report analysing the financial performance and financial position of Bigwood for the two years ended 30 September 2008 (13 marks) Your report should utilise the above ratios and the information in your statement of cash flows It should refer to the relative performance of the clothing and food sales and be supported by any further ratios you consider appropriate (25 marks) 71 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Question 48 CASINO (a) Casino is a publicly listed company Details of its statements of financial position as at 31 March 2008 and 2007 are shown below together with other relevant information: Statements of financial position at 31 March 2008 Non-current Assets (note (i)) $m $m Property, plant and equipment 880 Intangible assets 400 ––––– 1,280 Current assets Inventory 350 Trade receivables 808 Interest receivable Short term deposits 32 Bank 15 1,210 ––––– ––––– Total assets 2,490 ––––– Share Capital and Reserves Ordinary Shares of $1 each 300 Reserves Share premium 60 Revaluation surplus 112 Retained earnings 1,098 1,270 ––––– ––––– 1,570 Non-current liabilities 12% loan note nil 8% variable rate loan note 160 Deferred tax 90 250 ––––– Current liabilities Trade payables 530 Bank overdraft 125 Taxation 15 ––––– 670 ––––– Total equity and liabilities 2,490 ––––– 72 31 March 2007 $m $m 760 510 ––––– 1,270 420 372 120 75 ––––– 990 ––––– 2,260 ––––– 200 nil 45 1,165 ––––– 150 nil 75 ––––– 515 nil 110 ––––– 1,210 ––––– 1,410 225 625 ––––– 2,260 ––––– REVISION QUESTION BANK – FINANCIAL REPORTING (F7) The following supporting information is available: (i) Details relating to the non-current assets are: Property, plant and equipment at: Land and buildings Plant 31 March 2008 31 March 2007 Cost/ Carrying Cost/ Carrying Valuation Depreciation value Valuation Depreciation value $m $m $m $m $m $m 600 12 588 500 80 420 440 148 292 445 105 340 –––– –––– 880 760 –––– –––– Casino revalued the carrying value of its land and buildings by an increase of $70 million on April 2007 On 31 March 2008 Casino transferred $3 million from the revaluation surplus to retained earnings representing the realisation of the revaluation surplus due to the depreciation of buildings During the year Casino acquired new plant at a cost of $60 million and sold some old plant for $15 million at a loss of $12 million There were no acquisitions or disposals of intangible assets (ii) The following extract is from the draft statement of comprehensive income for the year to 31 March 2008: Operating loss Interest receivable Finance costs Loss before tax Income tax repayment claim Deferred tax charge Loss for the period $m 14 (15) –––– The finance costs are made up of: Interest expenses Penalty cost for early redemption of fixed rate loan Issue costs of variable rate loan (iii) The short term deposits meet the definition of cash equivalents (iv) Dividends of $25 million were paid during the year $m (32) 12 (24) –––– (44) (1) –––– (45) –––– (16) (6) (2) –––– (24) –––– Required: As far as the information permits, prepare a statement of cash flows for Casino for the year to 31 March 2008 in accordance with IAS “Cash Flow Statements” (20 marks) 73 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK (b) In recent years many analysts have commented on a growing disillusionment with the usefulness and reliability of the information contained in some companies’ statement of comprehensive income Required: Discuss the extent to which a company’s statement of cash flows may be more useful and reliable than its statement of comprehensive income (5 marks) (25 marks) Question 49 TABBA The following draft financial statements relate to Tabba, a private company Statements of financial position as at: 30 September 2008 $000 $000 Tangible non-current assets (note (ii)) 10,600 Current assets Inventories 2,550 Trade receivables 3,100 Insurance claim (note (iii)) 1,500 Cash and bank 850 8,000 –––––– –––––– Total assets 18,600 –––––– Equity and liabilities Share capital ($1 each) 6,000 Reserves: Revaluation (note (ii)) nil Retained earnings 2,550 2,550 –––––– –––––– 8,550 Non-current liabilities Finance lease obligations (note (ii)) 2,000 6% loan notes 800 10% loan notes nil Deferred tax 200 Government grants (note (ii)) 1,400 4,400 –––––– Current liabilities Bank overdraft nil Trade payables 4,050 Government grants (note (ii)) 600 Finance lease obligations (note (ii)) 900 Current tax payable 100 5,650 –––––– –––––– Total equity and liabilities 18,600 –––––– 74 30 September 2007 $000 $000 15,800 1,850 2,600 1,200 nil –––––– 5,650 –––––– 21,450 –––––– 6,000 1,600 850 –––––– 1,700 nil 4,000 500 900 2,450 –––––– 8,450 7,100 –––––– 550 2,950 400 800 1,200 –––––– 5,900 –––––– 21,450 –––––– REVISION QUESTION BANK – FINANCIAL REPORTING (F7) The following information is relevant: (i) Statement of comprehensive income extract for the year ended 30 September 2008: $000 270 (260) 40 ––––– 50 50 ––––– 100 ––––– Operating profit before interest and tax Interest expense Interest receivable Profit before tax Net income tax credit Profit for the period Note: the interest expense includes finance lease interest (ii) The details of the tangible non-current assets are: Cost At 30 September 2007 At 30 September 2008 $000 20,200 16,000 Accumulated depreciation $000 4,400 5,400 Carrying value $000 15,800 10,600 During the year Tabba sold its factory for its fair value $12 million and agreed to rent it back, under an operating lease, for a period of five years at $1 million per annum At the date of sale it had a carrying value of $7·4 million based on a previous revaluation of $8·6 million less depreciation of $1·2 million since the revaluation The profit on the sale of the factory has been included in operating profit The surplus on the revaluation reserve related entirely to the factory No other disposals of non-current assets were made during the year Plant acquired under finance leases during the year was $1·5 million Other purchases of plant during the year qualified for government grants of $950,000 Amortisation of government grants has been credited to cost of sales (iii) The insurance claim relates to flood damage to the company’s inventories which occurred in September 2007 The original estimate has been revised during the year after negotiations with the insurance company The claim is expected to be settled in the near future Required: (a) Prepare a statement of cash flows using the indirect method for Tabba in accordance with IAS Statement of cash flows for the year ended 30 September 2008 (17 marks) (b) Using the information in the question and your statement of cash flows, comment on the change in the financial position of Tabba during the year ended 30 September 2008 (8 marks) Note: you are not required to calculate any ratios (25 marks) 75 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Question 50 BOSTON Shown below are the summarised financial statements for Boston, a publicly listed company, for the years ended 31 March 2007 and 2008, together with some segment information analysed by class of business for the year ended 31 March 2008 only: Statements of comprehensive income: Revenue Cost of sales (note (i)) Gross profit Operating expenses Segment result Unallocated corporate expenses Carpeting Hotels $m 90 (30) ––– 60 (25) ––– 35 ––– $m 130 (95) ––– 35 (15) ––– 20 ––– Carpeting Hotels $m 40 40 ––– 80 $m 140 40 ––– 180 4 51 House building $m 280 (168) ––– 112 (32) ––– 80 ––– Profit from operations Finance costs Profit before tax Income tax expense Profit for the period Statements of financial position: Tangible non-current assets Current assets Segment assets Unallocated bank balance House building $m 200 75 ––– 275 Consolidated total assets Ordinary share capital Share premium Retained earnings Segment current liabilities – tax – other Unallocated loans Unallocated bank overdraft Consolidated equity and total liabilities 76 12 53 Total Total 31 March 31 March 2006 2005 $m $m 500 450 (293) (260) ––– ––– 207 190 (72) (60) ––– ––– 135 130 (60) ––– 75 (10) ––– 65 (25) ––– 40 ––– (50) ––– 80 (5) ––– 75 (30) ––– 45 ––– Total Total 31 March 31 March 2006 2005 $m $m 380 332 155 130 ––– ––– 535 462 15 nil ––– ––– 550 462 ––– ––– 100 80 20 nil 232 192 ––– ––– 352 272 25 30 108 115 65 40 nil ––– ––– 550 462 ––– ––– REVISION QUESTION BANK – FINANCIAL REPORTING (F7) The following notes are relevant (i) Depreciation for the year to 31 March 2008 was $35 million During the year a hotel with a carrying amount of $40 million was sold at a loss of $12 million Depreciation and the loss on the sale of non-current assets are charged to cost of sales There were no other non-current asset disposals As part of the company’s overall acquisition of new non-current assets, the hotel segment acquired $104 million of new hotels during the year (ii) The above figures are based on historical cost values The fair values of the segment net assets are: at 31 March 2007 at 31 March 2008 (iii) Hotels $m 150 240 House building $m 250 265 The following ratios (which can be taken to be correct) have been calculated based on the overall group results: Year ended: 31 March 2008 Return on capital employed 18·0% Gross profit margin 41·4% Operating profit margin 15% Net assets turnover 1·2 times Current ratio 1·3:1 Gearing 15·6% (iv) Carpeting $m 80 97 31 March 2007 25·6% 42·2% 17·8% 1·4 times 0·9:1 12·8% The following segment ratios (which can be taken to be correct) have been calculated for the year ended 31 March 2008 only: Segment return on net assets Segment asset turnover (times) Gross profit margin Net profit margin Current ratio (excluding bank) Carpeting 48·6% 1·3 66·7% 38·9% 5:1 Hotels 16·7% 1·1 26·9% 15·4% 0·7:1 House building 38·1% 1·3 40% 28·6% 1·2:1 Required: (a) Prepare a statement of cash flows for Boston for the year ended 31 March 2008 (10 marks) Note: you are not required to show separate segmental cash flows or any disclosure notes (b) Using the ratios provided, write a report to the Board of Boston analysing the company’s financial performance and position for the year ended 31 March 2008 (15 marks) Your answer should make reference to your statement of cash flows and the segmental information and consider the implication of the fair value information (25 marks) 77 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Question 51 NIAGARA Extracts of Niagara’s consolidated statement of comprehensive income for the year to 31 March 2008 are: Sales Cost of sales Gross profit Other operating expenses Operating profit Income from associated companies Interest payable Impairment of non-current assets Profit before tax Taxation Profit after tax Non-controlling interest Profit attributable to shareholders of Niagara $000 36,000 (21,000) –––––––– 15,000 (6,200) –––––––– 8,800 1,500 (800) (4,000) –––––––– 5,500 (2,800) –––––––– 2,700 –––––––– 115 2,585 The impairment of non-current assets attracted tax relief of $1 million which has been included in the tax charge Niagara paid an interim ordinary dividend of 3c per share in June 2007 and declared a final dividend on 25 March 2008 of 6c per share The issued share capital of Niagara on April 2007 was: Ordinary shares of 25c each 8% Preference shares $3 million $1 million The preference shares are non-redeemable The company also had in issue $2 million 7% convertible loan stock dated 2010 The loan stock will be redeemed at par in 2010 or converted to ordinary shares on the basis of 40 new shares for each $100 of loan stock at the option of the stockholders Niagara’s income tax rate is 30% There are also in existence directors’ share warrants (issued in 2006) which entitle the directors to receive 750,000 new shares in total in 2010 at no cost to the directors The following share issues took place during the year to 31 March 2008: July 2007; a rights issue of new share at $1·50 for every shares held The market price of Niagara’s shares the day before the rights was $2·40 October 2007; an issue of $1 million 6% non-redeemable preference shares at par Both issues were fully subscribed Niagara’s basic earnings per share in the year to 31 March 2007 was correctly disclosed as 24c 78 REVISION QUESTION BANK – FINANCIAL REPORTING (F7) Required: Calculate for Niagara for the year to 31 March 2008: (i) the dividend cover and explain its significance; (3 marks) (ii) the basic earnings per share including the comparative; (4 marks) (iii) the fully diluted earnings per share (ignore comparative); and advise a prospective investor of the significance of the diluted earnings per share figure (6 marks) (13 marks) Question 52 SAVOIR (a) The issued share capital of Savoir, a publicly listed company, at 31 March 2005 was $10 million Its shares are denominated at 25 cents each Savoir’s earnings attributable to its ordinary shareholders for the year ended 31 March 2005 were also $10 million, giving an earnings per share of 25 cents Year ended 31 March 2006 On July 2005 Savoir issued eight million ordinary shares at full market value On January 2006 a bonus issue of one new ordinary share for every four ordinary shares held was made Earnings attributable to ordinary shareholders for the year ended 31 March 2006 were $13,800,000 Year ended 31 March 2007 On October 2006 Savoir made a rights issue of shares of two new ordinary shares at a price of $1·00 each for every five ordinary shares held The offer was fully subscribed The market price of Savoir’s ordinary shares immediately prior to the offer was $2·40 each Earnings attributable to ordinary shareholders for the year ended 31 March 2007 were $19,500,000 Required: Calculate Savoir’s earnings per share for the years ended 31 March 2006 and 2007 including comparative figures (9 marks) (b) On April 2007 Savoir issued $20 million 8% convertible loan stock at par The terms of conversion (on April 2010) are that for every $100 of loan stock, 50 ordinary shares will be issued at the option of loan stockholders Alternatively the loan stock will be redeemed at par for cash Also on April 2007 the directors of Savoir were awarded share options on 12 million ordinary shares exercisable from April 2010 at $1·50 per share The average market value of Savoir’s ordinary shares for the year ended 31 March 2008 was $2·50 each The income tax rate is 25% Earnings attributable to ordinary shareholders for the year ended 31 March 2008 were $25,200,000 The share options have been correctly recorded in the statement of comprehensive income Required: Calculate Savoir’s basic and diluted earnings per share for the year ended 31 March 2008 (comparative figures are not required) You may assume that both the convertible loan stock and the directors’ options are dilutive (4 marks) (13 marks) 79 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK Question 53 UPDATE Most companies prepare their financial statements under the historical cost convention In times of rising prices it has been said that without modification such financial statements can be misleading Required: (i) Explain the problems that can be encountered when users rely on financial statements prepared under the historical cost convention for their information needs (6 marks) Note: your answer should consider problems with the statement of comprehensive income and the statement of financial position (ii) Update has been considering the effect of alternative methods of preparing their financial statements As an example they picked an item of plant that they acquired from Suppliers on April 2005 at a cost of $250,000 The following details have been obtained: – the company policy is to depreciate plant at 20% per annum on the reducing balance basis – the movement in the retail price index has been: April 2005 April 2006 April 2007 31 March 2008 – 180 202 206 216 Suppliers’ price catalogue at 31 March 2008 shows an item of similar plant at a cost of $320,000 On reading the specification it appears that the new model can produce 480 units per hour whereas the model owned by Update can only produce 420 units per hour Required: Calculate for Update the depreciation charge for the plant for the year to 31 March 2008 (based on year end values) and its statement of financial position carrying value on that date using: – – – the historical cost basis; a current purchasing power basis; and a current cost basis (6 marks) (12 marks) 80 REVISION QUESTION BANK – FINANCIAL REPORTING (F7) Question 54 DERWENT I Derwent, a publicly listed company, made the following share capital transaction on October 2007 (i) the purchase and immediate cancellation of five million of its own ordinary shares Derwent paid $1·75 per share in an open market purchase These shares had originally been issued at par Derwent is registered in a country that permits a company to purchase and immediately cancel its own share capital In order to protect creditors the nominal value of the redeemed share capital must be replaced by a new issue of shares or by a transfer from accumulated profits to a capital reserve Any premium paid on the redemption of shares must be charged to retained profits (ii) Derwent’s share capital and reserves at 30 September 2007 were: Ordinary shares of 25c each fully paid Retained profits $000 25,000 55,000 –––––– 80,000 –––––– On January 2008 Derwent paid an interim dividend of 3c per share and on June 2008 it paid a further dividend of 5c per share Derwent’s profit after tax for the year to 30 September 2008 was $12 million Required: (i) Prepare extracts from Derwent’s statement of financial position for share capital and reserves at 30 September 2008; calculate the dividends paid for the year to 30 September 2008 (8 marks) (ii) State the advantages of companies being able to purchase and then cancel their own shares (4 marks) (12 marks) 81 FINANCIAL REPORTING (F7) – REVISION QUESTION BANK 82 ... However the financial accountant of Fresno Group had difficulty in preparing the full statements and approached you for help The financial accountant has furnished you with the following information:... charge of $150,000 being the first two of ten payments of $75 ,000 each in respect of a five-year lease of an item of plant The payments were made on April 20 07 and October 20 07 The fair value of this... draft statement of comprehensive income for the year to 31 March 2008 showed profit (after tax) of $180,000 In the financial statements for 20 07 the profit before any adjustments in respect of
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