I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

516

 

(c) MARCIA 

BLANE 

STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X2 

 

Cost 

Depreciation 

 Carrying 

value 

 

 $ 

 $ 

 $ 

Non-current assets 

 

 

Fixtures and fittings 

 42,200

 6,200 

 36,000 

Motor vehicles 

 45,730

 24,438 

 21,292 

 

 87,930

 30,638 

 57,292 

Current assets 

 

 

Inventory 

20,250 

 

Receivables 

 41,000 

 

Prepayments 

 450 

 

Cash in hand 

   2,802 

 

 

 

   64,502 

 

 

 121,794 

Capital 

 

 

 

Balance b/f 

 

 

 26,100 

Profit for year (balancing figure) 

 

 

 68,959 

 

 

 

 95,059 

Less drawings (27,585 + 800) 

 

 

 28,385 

 

 

 

 66,674 

Current liabilities 

 

 

 

Payables 

 

 34,500 

 

Accruals 

 

 520 

 

Bank overdraft 

 

 20,100 

 

 

 

 

   55,120 

 

 

 

 121,794 

Proof of profit for the year figure 

Revenue  

487,550 

Cost of sales (18,460 + 379,590 – 800 – 20,250) 

 377,000 

 

 110,550 

Discounts received 

 1,200 

Expenses  

 

   (6,100 + 3,250 +10,750 +9,475 + 520 – 450 + 13,146) 

 42,791 

Profit for the year 

 68,959 

68 

A 

Remember the business equation: P = I + D – C

i

 

69 

D 

(318,000 + 412,000 – 214,000) – (612,000 × 75%) = 57,000  

70 D 

 

    Total  

  

Ordinary 

 

   Sales to  

 

 

sales 

 

sales  

 

Harry 

 

 

 $      

 

 $      

 

$      

Cost of sales 

 

 342,000 

 

 334,700 

 

 7,300 

Mark-up: 

 

 

 

10% on cost 

 

 730 

 

 – 

 

 730 

20% on sales (= 25% on cost) 

 

   83,675 

 

   83,675 

 

           

Sales 

 

 426,405 

 

 418,375 

 

 8,030 

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PRACTICE ANSWER BANK 

 

517 

71 B   

 

 $     

 

 $     

Non-current assets 

 

 

 51,300 

Inventory 

 

 

 7,770 

Receivables   

 

 

  5,565 

 

 

 

 64,635 

Less 

 

 

Payables 

 

 3,994 

 

Overdraft 

 

 3,537 

 

Rent accrual 

 

    500 

 

 

 

 

 (8,031) 

Closing capital 

 

  

56,604 

72 

B 

Purchases were payments made plus increase in suppliers' balances 

ie $141,324 + ($16,812 – $15,264)  = $142,872 

 $ 

Thus cost of sales 

Opening inventory 

6,359 

 Purchases  

142,872 

 149,231 

 

Less closing inventory 

    (4,919) 

 

 144,312 

73 

B 

Dividends appear in the statement of changes in equity. 

74 D   

75 

C 

Dividends are not included the statement of changes in equity until they are declared.  

76 

B 

Number of shares = 45,000/0.5   

= 90,000 

Number of bonus shares issued    

= 90,000/3 × 2 = 60,000 

Nominal value of bonus shares issued 

= 60,000 × 0.5 = 30,000 

Therefore: 

Share capital = 45 + 30  = $75,000 

 

 

Share premium = 60 – 30 = $30,000 

77 

A 

IAS 1 does require that some items must appear on the face of the statement of financial 

position; however, it allows companies to choose whether they present a combined 

statement of profit or loss and other comprehensive income or separate statement of profit 

or loss and statement of other comprehensive income.  

78 

C 

Gains on property revaluations are shown in the 'other comprehensive income' section of 

the statement of profit or loss and other comprehensive income. They are also shown in 

the statement of changes in equity as the movement on the revaluation surplus. Dividends 

paid and a bonus issue of shares are shown in the statement of changes in equity.  

79 

B 

There is no requirement in IAS 16 for the directors to disclose how certain they are that 

the valuation won't change in the next five years. 

 

80 (a) $139,948 

(b) $49,260 

(c) $49,750 

(d) A   

The overdraft is a current liability and must not be deducted from any cash balances; the 

bank loan is a non-current liability as it is not due for payment for more than 12 months 

from the reporting date. 

(e) 

A  

'Profit' on revaluation must be credited to a revaluation surplus, not to retained earnings          

for the year. 

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             PRACTICE ANSWER BANK 

 

518

 

(f) 

$44,260 

 

 

$ 

 

Profit before tax 

 

49,260 

 

Tax 

  (5,000) 

 

Retained earnings for the year 

 44,260 

Remember that dividends and transfers to reserves are part of the statement of changes in 

equity. 

81 B  Non-adjusting 

events. 

82 

A 

The fraud is an adjusting event, as it took place during the year to 30 June, although it 

was not discovered until after the year end. The loan stock issue is a non-adjusting event 

but due to its materiality should be disclosed in the notes. 

83 

A 

1 is an adjusting event, as it provides evidence of a condition that existed at the reporting 

date – ie that the customer's debt was irrecoverable. The debt should be written off, and 

therefore net profit is reduced by $150,000. (2) is non-adjusting, as it does not affect the 

situation at the reporting date and therefore has no impact on profit at the reporting date. 

This event should simply be disclosed in the financial statements.  

84 

B 

Depreciation charges should have been added, not deducted. 

85  

 

(a) FLAIL 

CO 

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X1 

 

 

$      

 

$      

Cash flows from operating activities  

 

 

Cash received from customers ($29,400 – $900) 

 

28,500 

 

Cash paid to suppliers ($19,500 – $2,550) 

 

 (16,950) 

 

Cash paid to and on behalf of employees ($10,500 – $750) 

 

 (9,750) 

 

Interest paid 

 

(2,100) 

 

Interest received 

 

       75 

 

Net cash flows from operating activities 

 

 

(225) 

Investing activities  

 

 

Purchase of non-current assets 

 

 

 (21,000) 

 

 

$      

 

$      

Financing activities

 

 

 

Issue of shares 

 

35,000 

 

Proceeds from medium-term loan 

 

21,000 

 

Repayment of medium-term loan 

 

 (5,250) 

 

Net cash flows from financing activities 

 

 

50,750 

Net increase in cash and cash equivalents 

 

 

29,525 

Cash and cash equivalents at 1 January 20X1 

 

 

         – 

Cash and cash equivalents at 31 December 20X1 

 

 

29,525 

Note that the dividend is only proposed and so there is no related cash flow in 20X1. 

(b) 

D 

Items 1 and 3 do not involve movements of cash. 

86 

B 

An increase in a bank loan will be classified under financing cash flows. A loss on the sale 

of a non-current asset will be added back to net profit to calculate operating cash flows 

using the indirect method.  

87 

B 

Both investments are subsidiaries. In 1, Barracuda has more than 50% of the voting 

rights, as it owns more than 50% of the ordinary shares. In 2, Barracuda has the ability to 

control Major, as it can appoint more than half the board of directors of Major Inc. 

88 

D 

None of the statements are correct. A 50% investment will usually mean that an 

investment is a subsidiary, however, if it can be shown that the investor does not have 

control over the investee company, it will not be classified as a subsidiary. Consolidated 

accounts are prepared to represent the substance and not the legal form of the 

relationship between parent and subsidiary. An associate is an entity in which an investor 

has significant influence.  

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PRACTICE ANSWER BANK 

 

519 

89 

C 

Delta's share of profit after tax should be included as a single amount in the consolidated 

statement of profit or loss. 

90 

C 

Current assets (250 + 100 – 6)  

 

91 C 

 

 $'000 

Consideration transferred 

 300 

Fair value of non-controlling interest at acquisition 

  100 

 

 400 

Less net assets acquired (200 + 36) 

 (236) 

 

 

 

164 

92 C 

 

 $'000 

Consideration transferred 

 500 

Fair value of non-controlling interest  

  125 

 

 625 

Less net assets acquired  

 (450) 

 

 

 

175 

93 B 

 

 $'000 

Vaynor Co 

 90 

Weeton Co (40 + 10) 

 50 

Yarlet Co (70 – 30) 

   40 

 

 180 

94 B 

 

 

$      

Spring 

 

200,000 

Summer 

 

160,000 

 

 

360,000 

Less intra-group sales 

 

(16,000) 

Add provision for unrealised profit (16,000 – 10,000) 

 

    6,000 

 

 

350,000 

95 

D 

Reduce revenue by intra-group sales of $40,000. 

96 

A 

Reduce consolidated profit by provision for unrealised profit. 

20,000 × 

25

125

 = $4,000 

97 C 

 

 

Sanderstead 

Co 

 

Croydon 

  Co 

Adj 

Consol 

 

$ 

$ 

$ 

$ 

Revenue 

 

600,000 

 

300,000 

 

(20,000) 

 

880,000 

Cost of sales 

 

(400,000) 

 

(200,000) 

 

20,000 

 

(580,000) 

Gross profit 

 

 

 

 

300,000 

98 

A 

Example: suppose the entity purchases inventory worth $300,000: 

 

                            Current ratio      Quick ratio

 

Before  

1,500

1,000

 =  1.5   

400

1,000

 =  0.4 

After  

1,800

1,300

 =  1.4   

400

1,300

 =  0.3 

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             PRACTICE ANSWER BANK 

 

520

 

99 

B 

Calculate the ratios relating to the new product: 

Operating profit margin: 

 

120

1,600

 = 7.5% (less than existing margin of 10%) 

ROCE:  

120

500

 = 24% (greater than existing ROCE of 20%) 

Existing ROCE is 10% × 2 = 20%. 

100  

(a) JESSICA 

GROUP 

CONSOLIDATED STATEMENT OF PROFIT OR LOSS  

FOR THE YEAR ENDED 31 DECEMBER 20X7 

 

 

$m 

Revenue (7,500 + 3,000 – 5) 

  

10,495 

Cost of sales (4,000 + 1,600 – 5 + 1) 

 5,596 

Gross profit 

  

4,899 

Operating expenses (2,000 + 500) 

  

2,500 

Profit before taxation 

  

2,399 

Income taxes (300 + 120) 

   420 

Profit for the year 

  

1,979 

 

 

Intra-group trading 

 

Selling price 

 5

 

Cost 

 3

 

Profit 

 2

 

Unrealised 50%  2m = 1m 

 

 

 

NCI share = 25%  1m = 0.25m 

 

(b) 

Profit attributable to: 

 

$m 

  Owners of the parent (bal. fig.) 

1,484.5 

  Non-controlling interest ((25%  1,979) – 0.25) 

  

   494.5 

 

  

1,979.0 

(c) 

B 

Current ratio = current assets/current liabilities. If the ratio is less than 1, it could 

 

mean  that the company is unable to pay its debts on time.  

Therefore 1 is incorrect, because the ratio has gone up and is now above 1, it 

means the company is more likely to be able to pay its debts on time compared 

with before when the ratio was less than 1. 2 is correct, as an increase in revenue 

caused by an increase in price (as opposed to a change in volume) will lead to a 

larger receivables balance, hence a larger current assets balance compared to 

current liabilities. 3 is incorrect, as a higher supplier costs will result in a larger 

current liabilities balance, while current assets remain the same.  

(d) 

A 

Control is the main factor to be taken into account when considering a parent-

 

subsidiary relationship. Control is deemed to exist if an investor owns more than 

 

50% of the ordinary  shares. Significant influence is used to decide whether an 

 

investment is an associate. 

 

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521 

 

 

Bibliography

 

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INDEX 

 

522

 

 

 

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BIBLIOGRAPHY 

 

523 

Bibliography 

International Financial Reporting Standards 

IFRS Foundation (2016) IFRS [Online]. Available at: http://eifrs.ifrs.org [Accessed October 2017]. 

UK Law 

Companies Act (2006) London: Stationery Office. 

www.nationalarchives.gov.uk/doc/open-government-licence/version/3/ 

Contains public sector information licensed under the Open Government Licence v3. 

Conceptual Framework 

IFRS Foundation (2018) Conceptual Framework for Financial Reporting 2018 [Online]. Available at: 

https://shop.ifrs.org [Accessed October 2018] 

 

 

 

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BIBLIOGRAPHY 

 

524

 

 

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525 

 

 

Index

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INDEX 

 

526

 

 

 

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INDEX 

 

 

527 

Note: Key Terms and their references are given in bold. 

A

ccounting records, 330 

Accruals, 182 

Accruals basis, 34 

Acid test ratio, 470 

Adjusting event, 376 

Aged receivables analysis, 210 

Allowance for receivables, 213 

Amortisation, 172 

Amortisation of development costs, 173 

Asset, 13, 171 

Asset register, 161 

Asset turnover, 464 

Associate, 410 

Authorised (or nominal) capital, 330 

AVCO (average cost), 118 

 

B

alancing ledger accounts, 91 

Bank charges, 264 

Bank interest, 264 

Bank reconciliation, 264 

Bank statements, 53 

Bonus (capitalisation) issues, 338 

Books of prime entry, 49 

Business entity concept, 6, 63 

 

C

alled-up capital, 331 

Capital, 63 

Capital expenditure, 135 

Capital income, 136 

Capital transactions, 136 

Carriage inwards, 110 

Carriage outwards, 110 

Carrying amount, 138 

Cash, 384 

Cash and cash equivalents, 384 

Cash book, 52 

Cash cycle, 469 

Cash discount, 240 

Cash discounts allowed, 241, 242, 243 

Cash discounts received, 241 

Cash equivalents, 384 

Cash flow accounting 

advantages, 396 

Cash flow information 

benefits, 383 

Cash flows, 384 

Comparability, 37 

Compensating errors, 93, 276, 278 

Conceptual Framework for Financial Reporting, 

33 

Consistency, 38 

Consolidated financial statements, 408 

Contingent asset, 202 

Contingent liability, 201 

Continuous inventory records, 116 

Contra entries, 252 

Contract, 365 

Control, 408 

Control account, 238, 255 

Correction of errors, 80 

Cost, 138 

Credit, 71 

Credit note, 48 

Creditors, 73 

Cumulative weighted average costing, 121 

Current asset, 350 

Current liability, 350 

Current ratio, 470 

Current replacement cost, 116 

Customer, 365 

 

D

ebit, 71 

Debit note, 48 

Debt ratio, 466 

Depreciable amount, 141, 172 

Depreciation, 141, 162 

reducing balance method, 144 

straight line method, 143 

Development, 171 

Direct method, 385 

Disclosures, 347 

Discount, 239 

Dividends, 336, 378 

Double entry bookkeeping, 70 

Doubtful debt, 213 

Drawings, 64 

Duty of care, 12 

 

E

fficiency ratios, 471 

Entity concept, 38 

Equity, 14 

Equity method, 410 

Errors, 80 

Error of commission, 276, 277, 281 

Error of omission, 276, 277, 281 

Error of principle, 93, 276, 277 

Error of transposition, 276, 277 

Events after the reporting period, 376 

Expected value approach, 200 

Expenses, 15 

 

F

air value, 138 

Fair value of net assets, 425 

Faithful representation, 36 

FIFO (first in, first out), 118, 125 

Financial accounts, 9 

Financial analysis, 459 

Financing activities, 384, 385 

Fixed production overheads, 124 

Framework for the preparation and presentation 

of Financial Statements, 10, 13 

G

earing ratio, 467 

General ledger, 61 

Going concern, 33 

Goods destroyed, 300 

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INDEX 

 

 

528

 

Goods received notes, 48 

Goods written off, 111 

Goodwill, 421 

Governance, 12 

Gross profit margin, 299, 465 

Group, 408 

 

H

istorical cost, 116 

 

I

AS 1 Presentation of financial statements, 

387 

IAS 2 Inventories, 117 

IAS 27 Separate financial statements, 408 

IAS 28 Investments in associates, 408 

IAS 38 Intangible assets, 171 

IFRS 3 Business combinations, 408 

IFRS 10 Consolidated financial statements, 

408 

IFRS 15 Revenue from Contracts with 

Customers, 364 

IFRS Advisory Council, 22 

IFRS Foundation, 22 

IFRSs, 23 

Impairment of development costs, 174 

Income, 15, 365 

Income tax, 353 

Incomplete records, 292 

Indirect method (cash flows), 386 

Input sales tax, 227 

Intangible asset, 171 

Interest cover, 467 

International Accounting Standards Board 

(IASB), 21 

Inventories, 123, 162 

costs of conversion, 124 

costs of purchase, 124 

Inventory destroyed, 302 

Inventory turnover period, 471 

Investing activities, 384, 385 

Invoice, 47 

Irrecoverable (or 'bad') debt, 211 

Issued capital, 331 

 

J

ournal, 49, 78 

Journal entries, 278 

 

L

edger accounts, 60 

Leverage, 467 

Liability, 14, 66, 198 

LIFO (last in, first out), 118, 125 

Limited liability, 5, 329 

Limited liability companies, 5, 7 

Liquidity, 466, 468, 469, 470 

Loan stock bonds, 333 

Long-term solvency, 466 

 

M

anagement (or cost) accounting, 9 

Market value of shares, 333 

Mark-up, 299 

Materiality, 36 

 

N

et profit margin, 465 

Net realisable value, 111, 116, 123, 127 

Nominal ledger, 61 

Non-adjusting event, 377 

Non-controlling interest, 408, 428 

Non-current assets, 135 

disposal, 154 

Normal capacity, 124 

 

O

mission of a transaction, 93 

Operating activities, 384 

Operating cycle, 350 

Ordinary shares, 332 

Output sales tax, 227 

 

P

aid-up capital, 331 

Par value, 330 

Parent, 408 

Partnerships, 5 

Payable, 66 

Payables control account, 238 

Payables ledger, 83 

PBIT, profit before interest and tax, 462 

Performance obligation, 365 

Petty cash book, 54 

Power, 408 

Preference shares, 331 

Prepayments, 182 

Profit, 5 

Profit analysis, 465 

Profit margin, 464 

Profit or loss account, 94 

Profitability, 462 

Property, plant and equipment, 138 

Provisions, 198, 200, 338 

Prudence, 35 

Purchase day book, 50 

Purchase order, 46 

Purchase returns day book, 51 

 

Q

uick ratio, 470 

 

R

eceivable, 67 

Receivables collection period, 471 

Receivables control account, 238 

Receivables ledger, 82 

Recognition of property, plant and equipment, 

138 

Reconciling items, 248 

Relevance, 35 

Reporting period, 348 

Research, 171 

Research and development, 171 

Reserve, 334, 338 

Residual value, 141 

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INDEX 

 

529 

Return on capital employed (ROCE), 462 

Return on equity (ROE), 463 

Revaluation of non-current assets, 150 

Revaluation surplus, 336 

Revenue, 365 

Revenue expenditure, 135 

Revenue income, 136 

Rights issues, 339 

 

S

ales day book, 49 

Sales order, 47 

Sales returns day book, 51 

Sales tax, 226 

Secondary ratios, 464 

Settlement discount, 240 

Share premium account, 335 

Shareholders, 7 

Short-term solvency, 468 

Significant influence, 410 

Sole traders, 5 

Standard cost, 125 

Standard-setting process, 23 

Statement of changes in equity, 355 

Statement of financial position, 13 

Statement of profit or loss, 15 

Stolen goods, 300 

Subsidiary, 408 

Substance over form, 37 

Supplier statement reconciliations, 247 

Suspense account, 280, 282 

 

T

-accounts, 62 

Taxation, 353 

Time differences, 264 

Timeliness, 38 

Trade accounts receivable, 67 

Trade discount, 239, 240 

Trade investment, 408 

Transaction price, 365 

Transposition error, 256, 281 

Trend analysis, 459 

Trial balance, 90 

Two column cash book, 303 

 

U

nderstandability, 38 

Unlimited liability, 329 

Unpresented cheques, 265, 268 

Unrealised profits (PUP), 432 

Useful life, 141, 172 

Users of accounting information, 10 

 

V

ariable production overheads, 124 

VAT, 228 

Verifiability, 37 

 

W

eighted average cost, 125 

Working capital, 351 

 

 

 

 

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INDEX 

 

 

530

 

 

 

 

 

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NOTES 

 

 

 

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NOTES 

 

 

 

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FOUNDATIONS IN ACCOUNTANCY/ACCA FINANCIAL ACCOUNTING FFA/FA 

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