Osborne Books Tutor Zone. Financial statements. Practice assessment 1

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1 Osborne Books Tutor Zone Financial statements Practice assessment 1 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 financial statements of Avery Ltd for the year ended 31 March 20X1. The company s trial balance as at 31 March 20X1 and further information is shown below. Avery Ltd Trial balance as at 31 March 20X1 Debit Credit Share capital 40,000 Revaluation reserve at 1 April 20X0 5,000 Trade and other payables 10,456 Land and buildings value/cost 40,000 accumulated depreciation at 1 April 20X0 1,200 Plant and equipment cost 16,000 accumulated depreciation at 1 April 20X0 7,000 Trade and other receivables 13,641 Accruals 57 4% bank loans repayable 20X9 10,000 Cash and cash equivalents 5,102 Retained earnings at 1 April 20X0 2,640 Interest paid 400 Sales revenue 83,926 Purchases 52,342 Distribution costs 10,847 Administrative expenses 12,961 Inventories at 1 April 20X0 7,986 Dividends paid 1, , ,279 Further information: The inventories at the close of business on 31 March 20X1 cost 6,304,000. Land, which is not depreciated, is included in the trial balance at a value of 30,000,000. It is to be revalued at 35,000,000 and this revaluation is to be included in the financial statements for the year ended 31 March 20X1. Depreciation is to be provided for the year to 31 March 20X1 as follows: Buildings 2% per annum Straight-line basis Plant and equipment 25% per annum Reducing (diminishing) balance basis

3 p r a c t i c e a s s e s s m e n t 1 3 Depreciation is to be apportioned as follows: Cost of sales 50 Distribution costs 20 Administrative expenses 30 Trade receivables include a debt of 25,000 which is to be written off. Irrecoverable debts are to be classified as administrative expenses. Distribution costs of 32,000 owing at 31 March 20X1 are to be provided for. The corporation tax charge for the year has been calculated as 652,000. All of the operations are continuing operations. Required: (a) Draft the Statement of Profit or Loss and Other Comprehensive Income for Avery Ltd for the year ended 31 March 20X1. (b) Draft the Statement of Changes in Equity for Avery Ltd for the year ended 31 March 20X1. 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 Financial Position in Task 2 using the same data.) (a) Avery Ltd Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 March 20X1 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Tax Profit for the year from continuing operations Other comprehensive income for the year Total comprehensive income for the year

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 Workings: Cost of sales Cost of sales = Distribution costs Distribution costs = Administrative expenses Administrative expenses = (b) Avery Ltd Statement of Changes in Equity for the year ended 31 March 20X1 Share Other Retained Total Capital Reserves Earnings Equity Balance at 1 April 20X0 Changes in equity for 20X1 Total comprehensive income Dividends Issue of share capital Balance at 31 March 20X1

5 p r a c t i c e a s s e s s m e n t 1 5 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 Financial Position for Avery Ltd as at 31 March 20X1. Draft the Statement of Financial Position for Avery Ltd as at 31 March 20X1. Avery Ltd Statement of Financial Position as at 31 March 20X1 ASSETS Non-current assets Current assets Total assets EQUITY AND LIABILITIES Equity Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities

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 Workings: Property, plant and equipment Property, plant and equipment = Trade and other receivables Trade and other receivables = Trade and other payables Trade and other payables = Retained earnings Retained earnings = Revaluation reserve Revaluation reserve =

7 p r a c t i c e a s s e s s m e n t 1 7 Task 3 (a) List the five elements that appear in financial statements according to the م ف ء ف مك 属.ه ى مز فىك ف ىء ن (b) Define the three elements that appear in the Statement of Financial Position in accordance with.ه ى مز فىك ف ىء ن 属 م ف ء ف مك the definitions in the

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 م ذ The directors of Cedar plc are reviewing the accounting treatment for their assets under IAS 16. م ى ل ف ف ذ Prepare brief notes for the directors of Cedar plc to answer the following questions: (a) What are the principal issues in the accounting treatment of property, plant and equipment? (b) When should items of property, plant and equipment be recognised as assets? (c) Which costs should be included on initial recognition of property, plant and equipment?

9 p r a c t i c e a s s e s s m e n t 1 9 Task 5 This task consists of one true/false question and five multiple-choice questions. (a) With reference to IAS 7, ء و ف ن م م ف س 属, a decrease in trade payables will have a negative impact on cash flow in the calculation of net cash flow from operating activities. True False (b) 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) ط ط ط Type A 14,200 12,800 18,300 Type B 9,100 9,900 8,500 Type C 17,300 16,800 25,600 Total 40,600 39,500 52,400 To comply with IAS 2,, مى م ة indicate the value at which the inventory should be stated in the financial statements? (a) 39,500 (b) 40,000 (c) 40,600 (d) 52,400

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) Which of the following events which took place after the end of the financial year but before the date on which the financial statements were authorised for issue is classified as non-adjusting events under IAS 10, Events after the Reporting Period? 1 a major purchase of assets 2 a trade receivable has become insolvent 3 a fire has caused a loss of production capacity 4 the net realisable value of inventories falls below cost price. (a) 1 and 3 (b) None of them (c) 2 and 4 (d) All of them (d) A business has four assets which the directors wish to test for impairment: Asset Carrying amount Fair value, less Value in use costs of disposal 1 6,000 7,000 8, ,000 8,000 9, ,000 10,000 14, ,000 14,000 12,000 Which of the above assets is impaired according to IAS 36 Impairment of Assets? (a) 1 (b) 2 (c) 1 and 3 (d) 2 and 4

11 p r a c t i c e a s s e s s m e n t (e) A company is involved in a long court case under which it is being sued for substantial damages. At the end of its financial year, the company s lawyers advise that it is possible it may lose the case. In accordance with IAS 37, مه ى ل ف مى ى ىقفىج مه ى ى ى ذ, م ء the possible future outflow should be: (a) Recognised in the financial statements as a contingent liability (b) (c) Only disclosed as a contingent liability in a note to the financial statements Neither recognised in the financial statements nor disclosed as a note (d) Recognised in the financial statements as a contingent asset (f) A company has purchased a new machine with the following expenditure: ط Invoice price of the machine 28,500 Delivery costs 800 Cost of testing the machine 1,200 General overhead costs 1,500 Total 32,000 Under IAS 16, ل ف ف ذ م ذ, م ى what cost will the company include in property, plant and equipment? (a) 28,500 (b) 29,300 (c) 30,500 (d) 32,000

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 The Managing Director of Golden plc has asked you to prepare the Statement of Financial Position for the group. Golden plc has one subsidiary undertaking, Mile Ltd. The Statements of Financial Position of the two companies as at 31 March 20X1 are set out below. Statements of Financial Position as at 31 March 20X1 Golden plc Mile Ltd Assets Investment in Mile Ltd 20,000 Property, plant and equipment 45,100 27,300 Current assets 12,600 8,500 Total assets 77,700 35,800 Equity and liabilities Equity Share capital 40,000 10,000 Share premium 6,000 2,000 Retained earnings 7,500 8,000 Total equity 53,500 20,000 Non-current liabilities 10,500 8,000 Current liabilities 13,700 7,800 Total liabilities 24,200 15,800 Total equity and liabilities 77,700 35,800 Further information: The share capital of Mile Ltd consists of ordinary shares of 1 each. Ownership of these shares carries voting rights in Mile Ltd. There have been no changes to the balances of share capital and share premium during the year. No dividends were paid or proposed by Mile Ltd during the year. Golden plc acquired 8,000,000 shares in Mile Ltd on 1 April 20X0. On 1 April 20X0 the balance of retained earnings of Mile Ltd was 6,400,000. The fair value of the non-current assets of Mile Ltd at 1 April 20X0 was 26,200,000. The carrying amount of the non-current assets at 1 April 20X0 was 24,700,000. The revaluation has not been recorded in the books of Mile Ltd (ignore any effect on the depreciation for the year). Included in current assets for Golden plc and in current liabilities for Mile Ltd is an inter-company transaction for 200,000 that took place in early March 20X1. The directors of Golden plc have concluded that goodwill has been impaired by 15% during the year. Golden plc has decided non-controlling interests 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 Golden plc and its subsidiary undertaking as at 31 March 20X1. Note: You don t 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. Golden plc Consolidated Statement of Financial Position as at 31 March 20X1 ASSETS Non-current assets Goodwill Property, plant and equipment Current assets 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 Goodwill = Non-controlling interest (NCI) Non-controlling interest = Retained earnings Retained earnings =

15 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 Martin Ltd in respect of its financial statements for the year ending 31 March 20X1 to assist your manager in her analysis of the company. Martin Ltd s Statement of Profit or Loss and Statement of Financial Position are set out below. Martin Ltd Statement of Profit or Loss for the year ended 31 March 20X1 20X1 Continuing operations Revenue 22,400 Cost of sales 12,320 Gross profit 10,080 Distribution costs 5,950 Administrative expenses 2,562 Profit from operations 1,568 Finance costs 273 Profit before tax 1,295 Tax 342 Profit for the period from continuing operations 953

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 Martin Ltd Statement of Financial Position as at 31 March 20X1 20X1 ASSETS Non-current assets Property, plant and equipment 13,350 Current assets Inventories 1,823 Trade receivables 2,762 Cash and cash equivalents 595 5,180 Total assets 18,530 EQUITY AND LIABILITIES Equity Share capital 10,000 Retained earnings 4,378 Total equity 14,378 Non-current liabilities Bank loans 1,700 1,700 Current liabilities Trade payables 2,110 Tax liability 342 2,452 Total liabilities 4,152 Total equity and liabilities 18,530 Using the form on the next page: (a) State the formulas that are used to calculate each of the following ratios: (1) Profit from operations percentage (2) Return on capital employed (3) Acid test (quick) ratio (4) Inventory holding period (days) (5) Trade payables payment period (days) (b) Calculate the above ratios (to the nearest one decimal place)

17 p r a c t i c e a s s e s s m e n t Ratio (a) Formula (b) Calculation of ratio for Martin Ltd (1) Profit from operations percentage (2) Return on capital employed (3) Acid test (quick) ratio (4) Inventory holding period (days) (5) Trade payables payment period (days)

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 Task 8 Riona Aitken is a shareholder in Wentworth Ltd and has asked you to assist her in assessing the level of profitability and the level of risk of maintaining her investment in the company. You have calculated the following ratios in respect of Wentworth Ltd s financial statements for the last two years to assist you in your analysis. 20X1 20X0 Gross profit percentage 36.0% 38.0% Profit from operations percentage 8.5% 10.0% Return on shareholders funds 10.1% 11.2% Gearing 37.3% 24.1% Interest cover 3.3 times 11.6 times Prepare a report to Riona that includes: (a) 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: Riona Aitken AAT student Shareholding in Wentworth Ltd Today مهف م م ى ك لم ى م نى

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

Osborne Books Tutor Zone. Financial statements. Practice assessment 2

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