Examiner s General Comments

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1 Examiner s General Comments This was the second paper of the new syllabus using the new question paper format. The overall result was generally very pleasing with a good standard of answer being produced by many candidates. The overall average mark and pass rate were slightly down from May 2005 but were still very good. There was evidence of a number of well prepared candidates with a wide range of knowledge, able to tackle most of the sub-questions in question 1 and 2 and prepare good answers to one of the optional questions. There were however still candidates who struggled to gain a quarter of the marks. Time allocation seemed to be a problem for some candidates, with evidence of rushed answers to either question 1 or question 2. Some candidates may have used more time on the optional question and not spent sufficient time on the shorter sub-questions. This was evidenced by the lack of workings and questions requiring some calculation being left out to save time. Question 1 is 50 marks and should be given approximately 50% of the time. Question 1 was generally well done, with a few candidates scoring full marks. Most candidates provided workings for the three and four mark questions, but a number did not. If workings are not given no marks can be awarded for wrong answers using the correct principle. As on the May 2005 paper question 2 included one question from each of sections A and B of the syllabus and two questions from each of sections C and D. Question 2 will continue to include questions from all sections of the syllabus. This question was generally not as well done as the other questions on the paper although a few candidates did achieve full marks. Some candidates were obviously ill prepared for coupon rate and yield to maturity and many did not know what the four principal qualitative characteristics of financial information were. Question 3 required the preparation of an income statement, a statement of changes in equity and a balance sheet with some adjustments. This question was expected by candidates and most of those attempting this question were well prepared, resulting in good marks being achieved. Question 4 required the calculation of trade receivables days outstanding and a cash budget. Part (b) was well done by those attempting this question with some excellent answers and a number of candidates scoring full marks. However very few were able to calculate the forecast trade receivables in part (a). The following provides guidance to candidates preparing for future examinations and has been prepared with that in mind. It therefore may give the impression that there were few good marks and few passes as all the main errors have been listed for each question. It must be remembered though that not all candidates made the errors listed and that overall there was a good result for this paper. The Chartered Institute of Management Accountants Page 1

2 SECTION A Question 1.1 The following measures relate to a non-current asset: (i) Net book value $20,000 (ii) Net realisable value $18,000 (iii) Value in use $22,000 (iv) Replacement cost $50,000 The recoverable amount of the asset is A $18,000 B $20,000 C $22,000 D $50,000 The answer is C Question 1.2 Which ONE of the following would be regarded as a related party of BS? A B C D BX, a customer of BS. The president of the BS Board, who is also the chief executive officer of another entity, BU, that supplies goods to BS. BQ, a supplier of BS. BY, BS s main banker. The answer is B The Chartered Institute of Management Accountants Page 2

3 Question 1.3 Which ONE of the following would be regarded as a change of accounting policy under IAS 8 Accounting policies, changes in accounting estimates and errors? A B C D An entity changes its method of depreciation of machinery from straight line to reducing balance. An entity has started capitalising borrowing costs for assets under the alternative treatment allowed by IAS 23 Borrowing costs. The borrowing costs previously had been charged to income statement. An entity changes its method of calculating the provision for warranty claims on its products sold. An entity disclosed a contingent liability for a legal claim in the previous year s accounts. In the current year, a provision has been made for the same legal claim. The answer is B Question 1.4 An entity s working capital financing policy is to finance working capital using short-term financing to fund all the fluctuating current assets as well as some of the permanent part of the current assets. The above policy is an example of A B C D an aggressive policy. a conservative policy. a short-term policy. a moderate policy. The answer is A The Chartered Institute of Management Accountants Page 3

4 Question 1.5 An item of machinery leased under a five year finance lease on 1 October 2003 had a fair value of $51,900 at date of purchase. The lease payments were $12,000 per year, payable in arrears. If the sum of digits method is used to apportion interest to accounting periods, calculate the finance cost for the year ended 30 September Lease payments (5 x 12) = Fair value Finance cost Sum of digits (5 x 6)/2 = 15 Year 2 digit = 4 Finance charge = 8,100 x 4/15 = Examiners comment: a significant proportion of candidates correctly calculated the finance charge for each year, but then selected the wrong figure for the answer. (3 marks) $ 60,000 51,900 8,100 2,160 Question 1.6 At 30 September 2005, BY had the following balances, with comparatives: Balance Sheet extracts: As at 30 September $000 $000 Non-current tangible assets Property, plant and equipment Equity and reserves Property, plant and equipment revaluation reserve The income statement for the year ended 30 September 2005 included: Gain on disposal of an item of equipment $10,000 Depreciation charge for the year $40,000 Notes to the accounts: Equipment disposed of had cost $90,000. The proceeds received on disposal were $15,000. Calculate the property, plant and equipment purchases that BY would show in its cash flow statement for the year ended 30 September 2005, as required by IAS 7 Cash flow statements. (4 marks) $000 Balance b/fwd 180 Revaluation (30-10) 20 Disposal (15-10) (5) Depreciation (40) 155 Balance c/fwd (260) Purchases 105 Examiners comment: Many candidates were unable to work backwards The Chartered Institute of Management Accountants Page 4

5 to calculate the purchases figure. The most common error was the inability to calculate the net book value of the assets disposed of during the year, and correctly adjust for this. Question 1.7 BC, a small entity, purchased its only non-current tangible asset on 1 October The asset cost $900,000, all of which qualified for tax depreciation. BC s asset qualified for an accelerated first year tax allowance of 50%. The second and subsequent years qualified for tax depreciation at 25% per year on the reducing balance method. BC s accounting depreciation policy is to depreciate the asset over its useful economic life of five years, assuming a residual value of $50,000. Assume that BC pays tax on its income at the rate of 30%. Calculate BC s deferred tax balance required in the balance sheet as at 30 September 2005 according to IAS 12 Income taxes. Accounting depreciation = cost - residual value = $900,000 - $50,000 = $850, ,000/5 = $170,000 per year 2004/5 Accounting figures $000 Cost 900 Depreciation (2 years) (340) Carrying value 560 (4 marks) Tax base $ Cost 900,000 First year allowance 50% = 450, ,000 October % 112,500 Tax base 337, /5 Timing difference $000 Carrying value Tax base Deferred tax Tax = x 30% Required deferred tax provision $66,750 Examiners comment: more candidates seemed to be prepared for a deferred tax question this time, with many correct answers. However there was still a significant number of candidates who displayed only a basic grasp of the principles of deferred tax. The Chartered Institute of Management Accountants Page 5

6 Question 1.8 The setting of International Accounting Standards is carried out by co-operation between a number of committees and boards, which include: (i) (ii) (iii) International Accounting Standards Committee Foundation (IASC Foundation) Standards Advisory Council (SAC) International Financial Reporting Interpretations Committee (IFRIC) Which of the above reports to, or advises, the International Accounting Standards Board (IASB)? Reports to: Advises: A (i) and (iii) (ii) B (i) and (ii) (iii) C (iii) (ii) D (ii) (i) The answer is C Question 1.9 Country B has a corporate income tax system that treats capital gains/losses separately from trading profits/losses. Capital gains/losses cannot be offset against trading profits/losses. All losses can be carried forward indefinitely, but cannot be carried back to previous years. Trading profits and capital gains are both taxed at 20%. BD had no brought forward losses on 1 October BD s results for 2003 to 2005 were as follows: Trading profit/(loss) Capital gains/(loss) $000 $000 Year to September (100) Year to September 2004 (120) 0 Year to September Calculate BD s corporate income tax due for each of the years ended 30 September 2003 to (3 marks) Trading profit/ (loss) $000 Taxable $000 Capital gain (loss) $000 Taxable $000 Tax $ / (100) x 20% = /4 (120) / = = = 60 x 20% = 12 Examiners comment: a number of candidates ignored the instruction given in the question that capital losses could not be offset against trading profits, and hence should be carried The Chartered Institute of Management Accountants Page 6

7 forward against future capital gains The Chartered Institute of Management Accountants Page 7

8 Question 1.10 Which ONE of the following would require a provision to be created by BW at its balance sheet date of 31 October 2005? A B C D The government introduced new laws on data protection which come into force on 1 January BW s directors have agreed that this will require a large number of staff to be retrained. At 31 October 2005, the directors were waiting on a report they had commissioned that would identify the actual training requirements. At the balance sheet date, BW is negotiating with its insurance provider about the amount of an insurance claim that it had filed. On 20 November 2005, the insurance provider agreed to pay $200,000. BW makes refunds to customers for any goods returned within 30 days of sale, and has done so for many years. A customer is suing BW for damages alleged to have been caused by BW s product. BW is contesting the claim and, at 31 October 2005, the directors have been advised by BW s legal advisers it is very unlikely to lose the case. The answer is C Question 1.11 IAS 18 Revenue recognition defines when revenue may be recognised on the sale of goods. List FOUR of the five conditions that IAS 18 requires to be met for income to be recognised. (4 marks) Any four of the following five: (i) The significant risks and rewards of ownership of the goods have been transferred to the buyer; (ii) The entity selling does not retain any continuing influence or control over the goods; (iii) revenue can be measured reliably; (iv) it is reasonably certain that the buyer will pay for the goods; (v) the costs to the selling entity can be measured reliably. Examiners comment: Answers were typically too brief, e.g. the amount can be measured. Candidates needed to state which amount they were referring to (e.g. revenue) and include the word reliably for a full mark for this point. The Chartered Institute of Management Accountants Page 8

9 Question 1.12 Country OS has a value added tax (VAT) system where VAT is charged on all goods and services. Registered VAT entities are allowed to recover input VAT paid on their purchases. VAT operates at different levels in OS: Standard rate 10% Luxury rate 20% Zero rate 0% During the last VAT period, an entity, BZ, purchased materials and services costing $100,000, excluding VAT. All materials and services were at standard rate VAT. BZ converted the materials into two products Z and L; product Z is zero rated and product L is luxury rated for VAT purposes. During the VAT period, BZ made the following sales, excluding VAT: $ Z 60,000 L 120,000 At the end of the period, BZ paid the net VAT due to the tax authorities. Assuming BZ had no other VAT-related transactions, how much VAT did BZ pay? The answer is BZ paid VAT = $14,000 Input VAT = 100 x 10% = 10 Out put VAT = (60 x 0%) + (120 x 20%) = 24 VAT due = = 14 VAT paid = $14,000 The Chartered Institute of Management Accountants Page 9

10 Question 1.13 At 1 October 2004, BK had the following balance: Accrued interest payable $12,000 credit During the year ended 30 September 2005, BK charged interest payable of $41,000 to its income statement. The closing balance on accrued interest payable account at 30 September 2005 was $15,000 credit. How much interest paid should BK show on its cash flow statement for the year ended 30 September 2005? A $38,000 B $41,000 C $44,000 D $53,000 $000 Income statement 41 Add balance b/fwd Less balance c/fwd The answer is A Question 1.14 If an external auditor does not agree with the directors treatment of a material item in the accounts, the first action they should take is to A B C D give a qualified opinion of the financial statements. give an unqualified opinion of the financial statements. force the directors to change the treatment of the item in the accounts. persuade the directors to change the treatment of the item in the accounts. The answer is D The Chartered Institute of Management Accountants Page 10

11 Question 1.15 BL started a contract on 1 November The contract was scheduled to run for two years and has a sales value of $40 million. At 31 October 2005, the following details were obtained from BL s records: $m Costs incurred to date 16 Estimated costs to completion 18 Percentage complete at 31 October % Applying IAS 11 Construction contracts, how much revenue and profit should BL recognise in its income statement for the year ended 31 October 2005? $m Total revenue 40 Total cost = 34 Profit 6 Recognise Revenue (40 x 45%) $18m Profit (6 x 45%) $2 7m Question 1.16 An entity sells furniture and adds a sales tax to the selling price of all products sold. A customer purchasing furniture from the entity has to pay the cost of the furniture plus the sales tax. The customer therefore bears the cost of the sales tax. This is referred to as A B C D formal incidence. indirect incidence. effective incidence. direct incidence. The answer is C The Chartered Institute of Management Accountants Page 11

12 Question 1.17 BN is a listed entity and has the following balances included on its opening balance sheet: $000 Equity and reserves: Equity shares, $1 shares, fully paid 750 Share premium 250 Retained earnings 500 1,500 BN reacquired 100,000 of its shares and classified them as treasury shares. BN still held the treasury shares at the year end. How should BN classify the treasury shares on its closing balance sheet in accordance with IAS 32 Financial instruments disclosure and presentation? A B C D As a non-current asset investment. As a deduction from equity. As a current asset investment. As a non-current liability. The answer is B Question 1.18 BE has been offering 60 day payment terms to its customers, but now wants to improve its cash flow. BE is proposing to offer a 1 5% discount for payment within 20 days. Assume a 365 day year and an invoice value of $1,000. What is the effective annual interest rate that BE will incur for this action? s = x (1 + r) n 1,000 = 985 (1 + r) 365/ r = (1,000/985) r = r = 14 8% (4 marks) Examiners comment: Very few candidates used the correct formula for this, and if they did, the figures used were often incorrect. The Chartered Institute of Management Accountants Page 12

13 Question 1.19 BM has a taxable profit of $30,000 and receives a tax assessment of $3,000. BV has a taxable profit of $60,000 and receives a tax assessment of $7,500. BM and BV are resident in the same tax jurisdiction. This tax could be said to be A B C D a progressive tax. a regressive tax. a direct tax. a proportional tax. The answer is A Question 1.20 IAS 1 Presentation of financial statements requires some of the items to be disclosed on the face of the financial statements and others to be disclosed in the notes. (i) (ii) (iii) (iv) (v) Depreciation Revenue Closing inventory Finance cost Dividends Which TWO of the above have to be shown on the face of the income statement, rather than in the notes: A B C D (i) and (iv) (iii) and (v) (ii) and (iii) (ii) and (iv) The answer is D The Chartered Institute of Management Accountants Page 13

14 SECTION B Question Two (a) Required: (i) Explain the difference between tax avoidance and tax evasion. (ii) Briefly explain the methods that governments can use to reduce tax avoidance and tax evasion. (3 marks) (Total for sub-question (a) = 5 marks) Rationale Tests candidates ability to explain the difference in principle between tax avoidance and tax evasion and the methods that can be used to reduce them at a national level. Tests learning outcome A (vi). Suggested Approach Explain the meaning of tax avoidance and tax evasion, highlighting the difference between them. Identify and explain three methods that can be used to reduce either or both avoidance and evasion. Marking Guide Marks Explain tax avoidance 1 Explain tax evasion 1 Description of method reducing opportunity 1 Description of method increasing perceived risk/penalties 1 Description of method changing social attitudes 1 Examiner s Comments Most candidates were able to explain the meaning of avoidance and evasion with fewer highlighting the difference between them. Some candidates gave odd examples of tax avoidance, such as claiming capital allowances or claiming loss relief. These are not examples of tax avoidance, they are proper application of the tax legislation and are not loopholes. Several candidates stated that giving double tax relief on overseas profits was a means of preventing tax avoidance, which is incorrect. Many candidates did not give enough examples or sufficient detail within the examples to earn full marks Common Errors Not highlighting the difference between tax evasion and tax avoidance Giving insufficient number of methods to score three marks Giving several examples of the same method, for example an efficient system of auditing tax returns and visits to entities to check their tax returns. The Chartered Institute of Management Accountants Page 14

15 Question Two (b) BF manufactures a range of domestic appliances. Due to past delays in suppliers providing goods, BF has had to hold an inventory of raw materials, in order that the production could continue to operate smoothly. Due to recent improvements in supplier reliability, BF is re-examining its inventory holding policies and recalculating economic order quantities (EOQ). Item Z costs BF $10 00 per unit Expected annual production usage is 65,000 units Procurement costs (cost of placing and processing one order) are $25 00 The cost of holding one unit for one year has been calculated as $3 00 The supplier of item Z has informed BF that if the order was 2,000 units or more at one time, a 2% discount would be given on the price of the goods. Required: (i) Calculate the EOQ for item Z before the quantity discount. (ii) Advise BF if it should increase the order size of item Z so as to qualify for the 2% discount. (3 marks) (Total for sub-question (b) = 5 marks) Rationale Tests candidates ability to calculate economic order quantities and whether or not a discount offered by a supplier is worth seeking for the entity detailed in the question. Tests learning outcome D (vii). Suggested Approach Use the formula from the question paper formulae sheet and calculate the EOQ. Calculate total cost of the calculated EOQ and then calculate the total cost using the discount order level of 2,000. Compare the two total costs to see if there is any benefit in increasing the order size. Advise BF whether to increase the order size or not Marking Guide Marks Calculate the EOQ 2 Calculate the cost of seeking the discount (or not) and advise accordingly 3 Examiner s Comments The Chartered Institute of Management Accountants Page 15

16 Almost every candidate correctly calculated the Economic Order Quantity. In calculating the likely extra cost / savings of increasing the order quantity to take advantage of the discount, almost all candidates omitted to calculate (or even consider) the increased stock holding cost. When the holding cost was included the unit cost was frequently excluded. Very few candidates were able to correctly calculate the saving and advise accordingly. Most candidates advised not to accept the discount. Other candidates tried to advise BF without any calculation at all. Common Errors In part (ii): Trying to recalculate the reorder quantity including the discount using the formula. Only calculating and considering one or maximum two of the three items of cost. Usually the saving on the unit cost and ordering cost, occasionally the saving on ordering cost less increase in holding cost. The Chartered Institute of Management Accountants Page 16

17 Question Two (c) BJ is an entity that provides a range of facilities for holidaymakers and travellers. At 1 October 2004 these included: a short haul airline operating within Europe; and a travel agency specialising in arranging holidays to more exotic destinations, such as Hawaii and Fiji. BJ s airline operation has made significant losses for the last two years. On 31 January 2005, the directors of BJ decided that, due to a significant increase in competition on short haul flights within Europe, BJ would close all of its airline operations and dispose of its fleet of aircraft. All flights for holiday makers and travellers who had already booked seats would be provided by third party airlines. All operations ceased on 31 May On 31 July 2005, BJ sold its fleet of aircraft and associated non-current assets for $500 million, the carrying value at that date was $750 million. At the balance sheet date, BJ were still in negotiation with some employees regarding severance payments. BJ has estimated that in the financial period October 2005 to September 2006, they will agree a settlement of $20 million compensation. The closure of the airline operation caused BJ to carry out a major restructuring of the entire entity. The restructuring has been agreed by the directors and active steps have been taken to implement it. The cost of restructuring to be incurred in year 2005/2006 is estimated at $10 million. Required: Explain how BJ should report the events described above and quantify any amounts required to be included in its financial statements for the year ended 30 September (Detailed disclosure notes are not required.) (Total for sub-question (c) = 5 marks) Rationale Tests candidates ability to explain the reporting of various events occurring to an entityand how these may be included in its year-end financial statements. Tests learning outcomes C (iii) and (v). The Chartered Institute of Management Accountants Page 17

18 Suggested Approach Take each of the items in turn and explain its impact on the financial statements, quantifying any effects on the income statement and balance sheet. The items are: disposal of the airline operation and its assets employee severance payments restructuring costs Marking Guide Identifying loss on closure as discontinued with correct income statement figures Identifying a provision for severance payments with correct income statement and balance sheet entries Identifying a provision for restructuring costs and its treatment as a continuing activity Marks 2 1½ 1½ Examiner s Comments This part had a very poor average mark. Many candidates did not explain and quantify as required in the question. As regards the closure of the airline business, candidates should note that this ceased before the year end, and all assets were disposed of before that date. Many candidates said that the loss on disposal should be shown in the Balance Sheet! Candidates should note that the assets should have already been removed from the ledger accounts and hence no adjustments would be needed to the balance sheet at all. The loss on disposal should appear in the income statement, and is an actual loss not an impairment loss, as many candidates stated it was. Very few candidates identified the closure of the airline business as discontinued operations, and almost none considered the status of the restructuring costs. Candidates also failed to realise that making a provision has two effects - a charge to the income statement as well as a liability on the balance sheet. Many candidates said that a provision was required in the balance sheet. The restructuring is allowed under IAS 37 as it is committed. Many candidates said it was not allowed, of those correctly allowing the provision very few identified it as a continuing activities item. Common Errors Not identifying the disposal as a discontinued activity. Saying that the disposal would be shown in the balance sheet Not stating that the loss should be shown in the income statement Saying that the receipt from the disposal should be shown as revenue in the income statement or even worse in the balance sheet! Correctly identifying a provision for severance payments but not quantifying the amount. Few answers actually said that a the $20 million should be shown as an expense in the income statement. Saying that the provision should be shown in the balance sheet without any reference to the income statement. Saying that restructuring was an expense next year and should not be included Classifying the restructuring provision as discontinuing The Chartered Institute of Management Accountants Page 18

19 Question Two (d) The International Accounting Standards Board s (IASB s) Framework for the preparation and presentation of financial statements (Framework) identifies four principal qualitative characteristics of financial information. Required: Identify and explain EACH of the FOUR principal qualitative characteristics of financial information listed in the IASB s Framework. (Total for sub-question (d) = 5 marks) Rationale Tests candidates ability to identify and explain the four principal qualitative characteristics of the IASB s Framework. Tests learning outcome B (iv). Suggested Approach Specify the four characteristics and then explain each one Marking Guide Marks Understandability 1 Relevance 1 Reliability 2 Comparability 1 Examiner s Comments Candidates failed to include enough detail in their answers. Many answers identified a characteristic and then the explanation added nothing to it, for example Relevance, information needs to be relevant. Common Errors Not identifying the characteristics, instead identifying other parts of the framework, for example identifying the elements of financial statements or the underlying assumptions, accruals and going concern. Not explaining each characteristic The Chartered Institute of Management Accountants Page 19

20 Question Two (e) BI owns a building which it uses as its offices, warehouse and garage. The land is carried as a separate non-current tangible asset in the balance sheet. BI has a policy of regularly revaluing its non-current tangible assets. The original cost of the building in October 2002 was $1,000,000; it was assumed to have a remaining useful life of 20 years at that date, with no residual value. The building was revalued on 30 September 2004 by a professional valuer at $1,800,000. BI also owns a brand name which it acquired 1 October 2000 for $500,000. The brand name is being amortised over 10 years. The economic climate had deteriorated during 2005, causing BI to carry out an impairment review of its assets at 30 September BI s building was valued at a market value of $1,500,000 on 30 September 2005 by an independent valuer. A brand specialist valued BI s brand name at market value of $200,000 on the same date. BI s management accountant calculated that the brand name s value in use at 30 September 2005 was $150,000. Required: Explain how BI should report the events described above and quantify any amounts required to be included in its financial statements for the year ended 30 September (Total for sub-question (e) = 5 marks) Rationale Tests candidates ability to explain the reporting of various events occurring to an entity and how these may be included in its year-end financial statements. Tests learning outcomes C (iii) and (v). Suggested Approach Prepare workings for the building to calculate the amounts of depreciation and any gains/losses on revaluation each year. Prepare workings for the brand name to calculate the amounts of amortisation and any losses on impairment. Explain how the figures calculated should be reported in BI s financial statements. Marking Guide Marks Calculation and explanation of the building treatment 3 Calculation and explanation of the brand name treatment 2 The Chartered Institute of Management Accountants Page 20

21 Question Two (e) continued Examiner s Comments Most candidates made a better attempt at the buildings part of the question than the brand name. The main error with buildings for a large number of candidates was not depreciating for enough years before revaluing. Despite the question saying that the brand name was acquired for $ 500,000 many candidates insisted on classifying it as internally generated. A significant number of candidates stated that the brand name should be classed as goodwill (which would only apply if its value was not readily ascertainable), and could not be shown in the financial statements. Many candidates did not understand the requirements in IAS 36 regarding the value of the asset, which is the higher of market value or value in use. Most candidates valued the brand at the lower figure if they did not classify it as internally generated or as goodwill. Many candidates stated that the reduction in value should be deducted from the Revaluation Reserve account, which would only occur if the brand had previously been revalued upwards (which it had not). Common Errors Buildings: Depreciating the buildings for only one year prior to the first revaluation, instead of two years. Not reducing the 20 year useful life correctly when recalculating depreciation after revaluation The main errors involved the brand name: Not amortising the brand name for the correct number of years Incorrectly revaluing the brand name at $150,000 rather than its market value of $200,000. Stating that the reduction in value should be deducted from the Revaluation Reserve account. Not amortising the brand name at all Question Two (f) BH purchased a bond with a face value of $1,000 on 1 June 2003 for $850. The bond has a coupon rate of 7%. BH intends holding the bond to its maturity on 31 May 2008 when it will repay its face value. Required: (i) Explain the difference between the coupon rate of a security and its yield to maturity. (ii) Calculate the bond s yield to maturity. (3 marks) (Total for sub-question (f) = 5 marks) Rationale The Chartered Institute of Management Accountants Page 21

22 Tests candidates ability to explain the difference between the coupon rate of a security and its yield to maturity and to calculate the bond s yield to maturity. Tests learning outcome D (viii). Suggested Approach Define coupon rate and yield to maturity and highlight the difference between them. Calculate the yield to maturity using the discounted annual rate of return at which the present value of future interest payments and the redemption value equal the current market value. The present values can be looked up in the tables attached to the examination paper. Marking Guide Marks Explaining the difference between the coupon rate and yield to 2 redemption Calculating the yield to redemption 3 Examiner s Comments Many candidates were unable to explain the terms coupon rate and yield to maturity satisfactorily. The vast majority of candidates were unable to calculate the yield to maturity. Very few candidates even got the formula correct. Common Errors Incorrectly identifying the coupon rate as related to the purchase price Identifying the yield to maturity as the cash received on redemption, totally ignoring all the interest payments. Using totally inappropriate formulae. The Chartered Institute of Management Accountants Page 22

23 SECTION C Question Three Prepare the income statement and a statement of changes in equity for BG for the year to 30 September 2005 and a balance sheet at that date, in a form suitable for presentation to the shareholders and in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are NOT required, but all workings must be clearly shown. All workings should be to the nearest $000. DO NOT prepare a statement of accounting policies. (Total for question 3 = 20 marks) Rationale Tests candidates ability to prepare an income statement, balance sheet and a statement of changes in equity in a form suitable for publication, and in accordance with International Financial Reporting Standards, based upon the trial balance of a given entity. Tests learning outcomes A (viii) and C (i). Suggested Approach Read the question carefully and then using the additional information provided and the trial balance figures, prepare workings to: 1. calculate depreciation of equipment and fixtures for the year and cumulative 2. calculate the cost of sales 3. calculate tax charge and outstanding balances. 4. calculate the effect of writing back the provision Prepare the income statement using IAS 1 format. Prepare workings to calculate the balances on reserves and retained earnings Prepare the statement of changes in equity Prepare the balance sheet using IAS 1 format Marking Guide Marks Preparing the income statement using correct format 8 Preparing the balance sheet using correct format 7.5 Preparing the statement of changes in equity using correct format 2 Marks available for format and correct headings 2.5 The Chartered Institute of Management Accountants Page 23

24 Examiner s Comments This question was generally very well done by candidates, many obtaining near full marks. Very few gained full marks as very few candidates could correctly deal with the release of the provision. Many candidates are still following the old UK format, including the dividend paid as a deduction from the income statement. The IFRS requirement is to show the dividend as a movement in the statement of changes in equity, not as a deduction from the income statement which should end with the profit for the year after tax. In the Balance Sheet, many candidates included the available for sale investments as current assets. While this may appear logical (and indeed they may be sold within 12 months, as may other non-current assets), they are nevertheless held as investments either until the cash is required or the investments have risen in value to a point where a sale is regarded as a wise course of action. Deferred tax and current tax were often wrongly calculated, and both included in either current liabilities or non-current liabilities. Deferred tax is non-current while current tax is a current liability. The statement of changes in equity was usually quite well done except that several candidates had problems identifying the correct balances brought forward, quite a few students showed the equity shares issued during the year! Common Errors In the Income Statement, many candidates failed to realise that, for an office cleaning service, the cost of cleaning materials consumed was part of Cost of Sales. Adjusting for the closing inventory, which had already been adjusted in the trial balance. Incorrectly calculating the finance cost as being for a half year, rather than the full year cost of $15,000. Calculating a full year s interest on the 10% bonds and adding it to the interest already paid to give finance cost. Deducting the dividends paid in the Income Statement Including dividends paid as a current liability Adding the retained profit brought forward to the income statement Including the available for sale investments as current assets in the Balance Sheet. Deferred tax and current tax were often wrongly calculated, and both included in either current liabilities or non-current liabilities. Including depreciation as part of administration or distribution expenses when the question specified cost of sales Omitting revaluation increase in the revaluation reserve movement Not showing equity shares and share premium as brought forward in the statement of changes in equity. Not showing the provision as a credit to income statement Showing the provision on the balance sheet or in the statement of changes in equity The Chartered Institute of Management Accountants Page 24

25 Question Four Required: (a) Calculate BB s in-house training course trade receivables days outstanding (i) according to the forecast at 31 December 2005; (ii) according to the projected figures at 30 June 2006, assuming the revenue and cash flow budgets are implemented. (5 marks) Rationale Tests candidates ability to calculate trade receivable days and forecast days outstanding. Tests learning outcome D (i). Suggested Approach Calculate the trade receivables days outstanding based on the estimated figures given. Calculate the sales forecast for the period and the forecast cash receipts. Calculate the forecast balance for trade receivables on 30 June Calculate the forecast trade receivables days outstanding at 30 June Marking Guide Marks Calculation of projected balance 3 Calculation of trade receivables 31 December Calculation of trade receivables 30 June Examiner s Comments Part (i) was well done with most candidates getting the mark available. Few candidates were able to calculate the forecast balance at 30 June although some managed to calculate the sales for the period. Common Errors Not attempting to calculate a forecast balance, but using budgeted receipts instead. Deducting receipts from the balance at 31 December and using that figure without adding on revenue. Dividing by half of the turnover figure instead of the annual figure. The Chartered Institute of Management Accountants Page 25

26 Question Four Required: (b) Prepare BB s cash budget for the first six months of 2006 (January to June). (10 marks) Rationale Tests candidates ability to prepare a cash budget based upon forecast income statement and balance sheets of a given entity. Tests learning outcomes D (ii). Suggested Approach Prepare workings to calculate short course income and the cash receipts from short courses. Prepare a six month cash flow statement separating cash inflows and cash outflows. Marking Guide Marks Workings of short course income 3 Calculation and compilation of cash budget 6 Format and layout of cash budget 1 Examiner s Comments This section was very well done by most candidates attempting the question. The main problem was with short course income calculation and remembering to include the cash balance brought forward. Common Errors Applying different split to short course income receipts than 1/3 and 2/3 given in question. Not including cash balance brought forward Missing some January figures out, such as materials and short course income The Chartered Institute of Management Accountants Page 26

27 Question Four Required: (c) Advise BB of any actions it can take to make sufficient funds available to purchase the new technology as budgeted in May (5 marks) (Total for question 4 = 20 marks) Rationale Tests candidates ability to advise the entity of actions it might take to have sufficient funds available to make a major purchase of equipment. Tests learning outcomes D (iii). Suggested Approach Identify the shortfall of cash available and then make sensible suggestions as to how extra cash could be generated or raised in other ways. Marking Guide Marks Advising the entity of actions it might take 5 Examiner s Comments Most candidates were able to identify the obvious solutions of increasing the overdraft or raising a loan. However the better candidates also included other suggestions and the consequences of the actions, eg extra interest payments. Many students gave insufficient detail for the marks on offer, often giving two/three word answers such as increase overdraft or get a loan. While correct these are insufficient to obtain full marks. Common Errors Not identifying enough options for five marks Not giving sufficient detail for each option The Chartered Institute of Management Accountants Page 27

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