Osborne Books Tutor Zone. Financial statements. Practice assessment 2

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1 Osborne Books Tutor Zone Financial statements Practice assessment 2 Osborne Books Limited, 2013

2 2 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Task 1 You have been asked to help prepare the Statement of Cash Flows and Statement of Changes in equity for Dovey Ltd for the year ended 31 March 20X1. The most recent Statement of Profit or Loss and Statements of Financial Position for the company are set out below. Dovey Ltd Statement of Profit or Loss for the year ended 31 March 20X1 000 Continuing operations Revenue 94,000 Cost of sales 70,300 Gross profit 23,700 Gain on disposal of property, plant and equipment 453 Distribution costs 8,720 Administrative expenses 13,640 Profit from operations 1,793 Finance costs 1,140 Profit before tax 653 Tax 845 Profit/Loss for the year from continuing operations 192

3 p r a c t i c e a s s e s s m e n t 2 3 Dovey Ltd Statements of Financial Position as at 31 March 20X1 20X Assets Non-current assets Property, plant and equipment 7,314 6,855 Current assets Inventories 3,793 3,621 Trade receivables 6,159 5,056 Cash and cash equivalents ,952 9,124 Total assets 17,266 15,979 EQUITY AND LIABILITIES Equity Share capital 2,500 1,800 Share premium Retained earnings 7,486 7,763 Total equity 10,586 10,023 Non-current liabilities Bank loans 1,000 1,200 1,000 1,200 Current liabilities Trade payables 4,579 4,026 Tax liabilities Bank overdraft ,680 4,756 Total liabilities 6,680 5,956 Total equity and liabilities 17,266 15,979 Further information: The total depreciation charge for the year was 1,139,000. Property, plant and equipment costing 435,000 with accumulated depreciation of 257,000 was sold in the year. All sales and purchases were on credit. Other expenses were paid for in cash. A dividend of 85,000 was paid during the year. Prepare a reconciliation of profit from operations to net cash from operating activities for Dovey Ltd for the year ended 31 March 20X1. Use the layout shown on the next page. Prepare the statement of cash flows for Dovey Ltd for the year ended 31 March 20X1. Use the layout shown on page 5.

4 4 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Note: You do not need to use the workings to achieve full marks on the task, but data in the workings will be considered if you make errors in the pro-forma. (You will be asked to draft a Statement of Changes in Equity in Task 2 using the same data.) Dovey Ltd Reconciliation of profit from operations to net cash from operating activities 000 Profit from operations Adjustments for: Cash generated by operations Net cash used in/from operating activities

5 p r a c t i c e a s s e s s m e n t 2 5 Dovey Ltd Statement of Cash Flows for the year ended 31 March 20X1 000 Net cash used in/from operating activities Investing activities Net cash used in investing activities Financing activities Net cash from financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Workings: Proceeds on disposal of property, plant and equipment 000 Proceeds = Purchases of property, plant and equipment 000 Total property, plant and equipment additions =

6 6 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Task 2 This task is a continuation of the scenario in Task 1. The same data is used, to which please refer. You have been asked to prepare the Statement of Changes in Equity for Dovey Ltd for the year ended 31 March 20X1. Draft the Statement of Changes in Equity for Dovey Ltd for the year ended 31 March 20X1. Dovey Ltd Statement of Changes in Equity for the year ended 31 March 20X1 Balance at start of the year Changes in equity for the year Profit for the year Dividends Issue of share capital Balance at end of the year Share Other Retained Total Capital Reserves Earnings Equity

7 p r a c t i c e a s s e s s m e n t 2 7 Task 3 The IASB s Concepual Framework for Financial Reporting identifies the fundamental qualitative characteristics that make financial information useful as being relevance and faithful representation. Explain what is meant by each of these two fundamental qualitative characteristics. Relevance Faithful representation The IASB s Conceptual Framework for Financial Reporting identifies four enhancing qualititive characteristics. State these four characteristics and briefly explain how they help users of financial statements

8 8 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Task 4 The directors of Wentworth plc are reviewing the accounting treatment for their liabilities under IAS 37, Provisions, Contingent Liabilities and Contingent Assets. Prepare brief notes for the directors of Wentworth plc to answer the following points: State how IAS 37 defines provisions contingent liabilities Provisions Contingent liabilities Explain for provisions and contingent liabilities the accounting treatment, if any, in the year end financial statements. Provisions Contingent liabilities

9 p r a c t i c e a s s e s s m e n t 2 9 Task 5 This task consists of one true/false question and five multiple-choice questions. Under IAS 17, Leases, in allocating the finance charge to periods during the lease term, a lessee may use some form of approximation to simplify the calculation: True False A business holds three distinct types of inventory in its warehouse at the end of its financial year. These are valued as follows: Inventory FIFO LIFO NRV (cost) (cost) Type X 6,800 6,600 10,400 Type Y 3,900 4,100 6,500 Type Z 5,200 5,000 4,900 Total 15,900 15,700 21,800 To comply with IAS 2, Inventories, indicate the value at which the inventory should be stated in the financial statements. 15,400 15,600 (c) 15,700 (d) 15,900

10 1 0 f i n a n c i a l s t a t e m e n t s t u t o r z o n e (c) IAS 38, Intangible Assets, gives three key elements of an intangible asset. Which one of the following is not one of the three key elements? Reliability Identifiability (c) Control (d) Future economic benefits (d) Wychwood Limited has unpaid tax from its ordinary activities of 40,000 for the year ended 31 March 20X1. In accordance with IAS 12, Income Taxes, where is this recognised in the year end financial statements? In the Statement of Profit or Loss only (c) In the Statement of Profit or Loss and Other Comprehensive Income and as a non-current liability in the Statement of Financial Position In the Statement of Profit or Loss and Other Comprehensive Income and as a current liability in the Statement of Financial Position (d) As a current liability in the Statement of Financial Position only (e) In accordance with IAS 36, Impairment of Assets, impairment occurs when: The recoverable amount is higher than the asset s carrying amount The value in use is higher than the asset s fair value less costs of disposal (c) The recoverable amount is less than the asset s carrying amount (d) The value in use is less than the asset s fair value less costs of disposal

11 p r a c t i c e a s s e s s m e n t (f) Crossway Ltd purchased an item of plant for 170,000 on 1 January 20X1. The useful life was anticipated as being 6 years and the residual value was estimated as 50,000. Crossway Ltd depreciates plant on a straight-line basis. The residual value was still considered to be 50,000 at 1 January 20X4, but the remaining useful life was reassessed to be 5 years. Under IAS 16, Property, plant and equipment, what is the depreciation charge for the item of plant for the current year to 31 December 20X4? 12,000 15,000 (c) 20,000 (d) 22,000

12 1 2 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Task 6 Malvern Plc acquired 60% of the issued share capital and voting rights of Wells Ltd on 1 April 20X0 for 500,000. At that date Wells Ltd had issued share capital of 500,000 and retained earnings of 200,000. Extracts from the Statements of Financial Position for the two companies one year later at 31 March 20X1 are as follows: Malvern Plc Wells Ltd Assets Investment in Wells Ltd 500 Property, plant and equipment 1, Current assets Total assets 2,540 1,020 Equity and liabilities Equity Share capital 1, Retained earnings Total equity 1, Non-current liabilities Current liabilities Total liabilities Total equity and liabilities 2,540 1,020 Further information: Included within the current assets of Malvern Plc and in the current liabilities of Wells Ltd is an intercompany transaction for 25,000 that took place in early March 20X1. Malvern Plc has decided non-controlling interest will be valued at their proportionate share of net assets.

13 p r a c t i c e a s s e s s m e n t Draft the consolidated Statement of Financial Position for Malvern Plc and its subsidiary undertaking as at 31 March 20X1. Use the layout shown below. Malvern Plc Consolidated Statement of Financial Position as at 31 March 20X1 000 ASSETS Non-current assets Goodwill Property, plant and equipment Current assets Inventories Trade receivables Cash and cash equivalents Total assets EQUITY AND LIABILITIES Equity Share capital Share premium Retained earnings Non-controlling interest Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities

14 1 4 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Workings: Goodwill 000 Goodwill = Non-controlling interest (NCI) 000 Non-controlling interest = Retained earnings 000 Retained earnings =

15 p r a c t i c e a s s e s s m e n t Croome Plc acquired 75% of the issued share capital of Court Ltd on 1 April 20X0. Extracts from their Statements of Profit or Loss for the year ended 31 March 20X1 are shown below: Croome Plc Court Ltd Continuing operations Revenue 24,200 8,600 Cost of sales 15,600 4,900 Gross profit 8,600 3,700 Other income dividend from Court Ltd 250 Distribution costs 3,500 1,200 Administrative expenses 2, Profit before tax 2,750 1,600 Further information: During the year Court Ltd sold goods which had cost 60,000 to Croome Plc for 90,000. Twothirds of these goods still remain in inventory at the end of the year. Draft the consolidated Statement of Profit or Loss for Croome Plc and its subsidiary undertaking up to and including the profit before tax line for the year ended 31 March 20X1. Use the layout shown below. Croome Plc Consolidated Statement of Profit or Loss for the year ended 31 March 20X1 000 Continuing operations Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax

16 1 6 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Workings: Revenue 000 Parent Subsidiary Total inter-company adjustment* Revenue = * enter 0 if no adjustment needed Cost of sales 000 Parent Subsidiary Total inter-company adjustment* Cost of sales = * enter 0 if no adjustment needed

17 p r a c t i c e a s s e s s m e n t Task 7 You have been asked to calculate ratios for Albany Ltd in respect of its financial statements for the year ending 31 March 20X1 to assist your manager in her analysis of the company. Albany Ltd s Statement of Profit or Loss and Statement of Financial Position are set out below. Albany Ltd Statement of Profit or Loss for the year ended 31 March 20X1 20X1 000 Continuing operations Revenue 40,600 Cost of sales 21,458 Gross profit 19,142 Distribution costs 6,376 Administrative expenses 7,592 Profit from operations 5,174 Finance costs 1,043 Profit before tax 4,131 Tax 754 Profit for the period from continuing operations 3,377

18 1 8 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Albany Ltd Statement of Financial Position as at 31 March 20X1 20X1 000 ASSETS Non-current assets Property, plant and equipment 65,043 Current assets Inventories 3,857 Trade receivables 5,175 Cash and cash equivalents 1,342 10,374 Total assets 75,417 EQUITY AND LIABILITIES Equity Share capital 50,000 Retained earnings 12,045 Total equity 62,045 Non-current liabilities Bank loans 10,075 10,075 Current liabilities Trade payables 2,543 Tax liability 754 3,297 Total liabilities 13,372 Total equity and liabilities 75,417 Using the form on the next page: State the formulas that are used to calculate each of the following ratios: (1) Gross profit percentage (2) Current ratio (3) Asset turnover (net assets) (4) Inventory holding period (days) (5) Trade receivables collection period (days) Calculate the above ratios (to the nearest one decimal place)

19 p r a c t i c e a s s e s s m e n t Ratio Formula Calculation of ratio for Albany Ltd (1) Gross profit percentage (2) Current ratio (3) Asset turnover (net assets) (4) Inventory holding period (days) (5) Trade receivables collection period (days)

20 2 0 f i n a n c i a l s t a t e m e n t s t u t o r z o n e Task 8 Amy Devenish is a shareholder in Charlbury Ltd and has asked you to assist her in assessing the effectiveness of the management of the company in using its resources. You have calculated the following ratios in respect of Charlbury Ltd s financial statements for the last two years to assist you in your analysis. 20X1 20X0 Gross profit percentage 37.0% 40.0% Operating profit percentage 9.0% 8.5% Return on shareholders funds 14.0% 13.5% Gearing 24.3% 28.6% Interest cover 10.3 times 8.2 times Prepare a report to Amy that includes: A comment on the relative performance of the company for the two years based on the ratios calculated and what this tells you about the company. REPORT To: From: Subject: Date: Amy Devenish AAT student Shareholding in Charlbury Ltd Today if required, continue on next page

21 p r a c t i c e a s s e s s m e n t Advise, with reasons based on the ratios you have calculated, on whether or not Amy should maintain her investment in the company.

Financial Statements of Limited Companies

Osborne Books Tutor Zone Financial Statements of Limited Companies Practice assessment 3 I m p o r t a n t n o t e t o t u t o r s In order to provide further practice in the type of questions that may