Financial Statements of Limited Companies

Transcription

1 Osborne Books Tutor Zone Financial Statements of Limited Companies Chapter activities Osborne Books Limited, 2016

2 2 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 1 Purpose of financial statements 1.1 Which one of the following statements is the accounting equation? equity = assets + liabilities assets liabilities = equity (c) assets + profit = equity (d) liabilities + profit = equity 1.2 You are to fill in the missing figures for the following businesses: Assets Liabilities Equity Business A 50,500 17, Business B 64, ,600 Business C... 25,750 40,680 Business D 93, ,140

3 c h a p t e r a c t i v i t i e s The accounting equation of a business is as follows: Assets 2,000 Liabilities 1,200 = Equity 800 The business subsequently makes two transactions: (1) it purchases inventories for 250 cash, and (2) it sells the inventories purchased in (1) on credit for 350 Required: (c) (d) (e) Explain what each of the terms assets, liabilities and equity means. Explain the effect of each of the two transactions on the elements in the statement of financial position. State the accounting equation for the business after the two transactions have taken place. Draft a simple statement of profit or loss for the two transactions. Give an example of a user who might be interested in a statement of profit or loss. Describe one type of decision which might be made by the user based on information in the statement of profit or loss.

4 4 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 1.4 Define the terms income and expenses in accordance with the definitions in the Conceptual Framework for Financial Reporting. INCOME EXPENSES Explain what is meant by profits or losses. PROFITS OR LOSSES

5 c h a p t e r a c t i v i t i e s The Conceptual Framework for Financial Reporting identifies two fundamental qualitative characteristics and four enhancing qualitative characteristics that identify the types of information likely to be most useful to users of financial statements for making decisions. State the two fundamental qualitative characteristics identified by the Conceptual Framework for Financial Reporting. 1 2 Explain what is meant by each of these fundamental qualitative characteristics. (c) State the four enhancing qualitative characteristics identified by the Conceptual Framework for Financial Reporting

6 6 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 1.6 Write in the accounting concept which relates to each of the statements below. Statement Accounting concept The financial statements do not include the personal assets and liabilities of those who play a part in owning or running the entity The statement of profit or loss shows the amount of expense that should have been incurred (c) (d) The financial statements are prepared on the basis that there is no intention to reduce significantly the size of the entity Low-cost non-current assets are charged as expenses in the statement of profit or loss 1.7 Mark has just been appointed as a trainee accountant in an accounting practice. Mark has been studying accounting for two years, but this is his first employment in this sector. He is provided with a tax guide and asked to complete some tax computations of which he has no practical experience. Explain which fundamental principle in accordance with the AAT Code of Professional Ethics may be threatened by this situation and suggest actions that may be taken to minimise any threats. 1.8 You are working in an accounting practice and in the process of preparing a new client s financial statements. The client wishes to expand in the near future and will need to apply for a loan. The client requests that you present a favourable liquidity position in the financial statements in order to obtain the financing required and states there will be a cash bonus for you on completion. Which threat to fundamental principles of professional ethics arises from this situation?

7 c h a p t e r a c t i v i t i e s 7 2 Introduction to limited company financial statements Blank photocopiable pro-formas in the format used in AAT Assessments of the statement of profit or loss and other comprehensive income and the statement of financial position, are included in the Appendix of Financial Statements of Limited Companies Tutorial it is advisable to enlarge them to full A4 size. Blank workings sheets are also included in the Appendix. Pro-formas and workings sheets are also available to download from Show whether the following statements about a public limited company are true or false. Statement True False The issued share capital is over 50,000 There must be a minimum of one member (shareholder) (c) There must be at least two directors (d) The company must raise capital from the public on the Stock Exchange or similar markets (e) The Articles of Association provide the constitution of the company

8 8 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 2.2 Which one of the following investments in a company receives a return on the investment that may vary with the profits of the company? Ordinary shares Preference shares (c) Debentures (d) Long-term loans 2.3 A new company issues 500,000 ordinary shares of 25p each at a premium of 20 per cent. What amount will be shown as the total of the equity section of the company s statement of financial position? 600, ,000 (c) 25,000 (d) 150,000

9 c h a p t e r a c t i v i t i e s What type of reserves are (1) retained earnings, and (2) revaluation reserve? Both revenue reserves Both capital reserves (c) (1) Revenue reserve (2) Capital reserve (d) (1) Capital reserve (2) Revenue reserve 2.5 Distinguish between: Intangible non-current assets. Tangible non-current assets. Give an example of each. 2.6 What does total equity comprise on a company statement of financial position? Ordinary share capital, plus share premium Ordinary share capital, plus capital and revenue reserves (c) (d) Ordinary share capital, plus capital and revenue reserves, plus non-current liabilities Ordinary share capital, plus capital and revenue reserves, plus non-current liabilities, plus current liabilities

10 1 0 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 2.7 Trevaunance plc prepares its financial statements to 31 March each year. At 31 March 20-5 its trial balance was as follows: Administrative expenses 184 Share capital 600 Trade and other receivables 356 Cash and cash equivalents 102 Share premium 150 Distribution costs 238 Plant and equipment at cost 1,200 Accumulated depreciation on plant and equipment 450 Retained earnings at 1 April Purchases 1,053 Inventories at 1 April Trade and other payables 256 Revenue 1,725 Dividends paid 80 3,435 3,435 Further information: Inventories at 31 March 20-5 cost 237,000. The corporation tax charge for the year has been calculated as 75,000. Depreciation on plant and equipment has already been provided for in the list of balances above and allocated to distribution costs and administrative expenses accordingly. Required: Prepare the financial statements of Trevaunance plc for the year ended 31 March 20-5.

11 c h a p t e r a c t i v i t i e s Sidbury Ltd prepares its financial statements to 31 December each year. At 31 December 20-2 its trial balance was as follows: Share capital 2,100 Land at cost 1,420 Plant and equipment at cost 600 Accumulated depreciation on plant and equipment at 1 January Purchases 1,900 Revenue 3,280 Distribution costs 440 Administrative expenses 300 Prepayments 50 Accruals 40 Allowance for doubtful debts at 1 January Finance costs 80 Trade receivables 270 Trade payables 170 Retained earnings at 1 January Inventories at 1 January Cash and cash equivalents 270 Dividends paid 250 6,010 6,010 Further information: The allowance for doubtful debts is to be increased by 20,000 Inventories at 31 December 20-2 cost 480,000 Depreciation on plant and equipment is to be charged at the rate of 20 per cent per annum on cost and allocated equally between distribution costs and administrative expenses The corporation tax charge for the year has been calculated as 120,000 Required: Prepare the financial statements of Sidbury Ltd for the year to 31 December 20-2.

12 1 2 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 3 Published financial statements of limited companies Blank photocopiable pro-formas in the format used in AAT Assessments of the statement of profit or loss and other comprehensive income and the statement of financial position, are included in the Appendix of Financial Statements of Limited Companies Tutorial it is advisable to enlarge them to full A4 size. Blank workings sheets are also included in the Appendix. Pro-formas and workings sheets are also available to download from According to IAS 1 Presentation of Financial Statements, what is the objective of financial statements? Complete the following sentence: The objective of financial statements is to 3.2 The directors of Presingold plc, a recently-formed trading company, seek your guidance on the following issues: What items do we have to show on the face of the statement of profit or loss and other comprehensive income? How should we analyse our expenses for the statement of profit or loss and other comprehensive income?

13 c h a p t e r a c t i v i t i e s During its financial year ended 31 March 20-1, Sepulveda Ltd pays an interim ordinary dividend of 22,000. In April 20-1 the company proposes a final dividend for the financial year ended 31 March 20-1 of 35,000. What amount will be shown for dividends in the statement of changes in equity for the year ended 31 March 20-1? 22,000 35,000 (c) 57,000 (d) 13, According to IAS 1, Presentation of Financial Statements, How are current assets defined? How are current liabilities defined? Current assets are: Current liabilities are:

14 1 4 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 3.5 Which of the following is included under the heading for Total liabilities in a statement of financial position? 1 Revaluation reserve. 2 Bank overdraft. 3 Share premium. 4 Long-term loan. 5 Tax liability. 6 Proposed dividends. 1, 2 and 3 4, 5 and 6 (c) 2, 4 and 6 (d) 2, 4 and Which of the following does not involve a cash flow? 1 A rights issue of shares. 2 The repayment of debentures. 3 Taking out a bank loan. 4 A bonus issue of shares. 1 1 and 2 (c) 2 and 3 (d) 4

15 c h a p t e r a c t i v i t i e s You have been assigned to assist in the preparation of the financial statements of McTaggart Ltd for the year ended 30 April You have been provided with an extract from the extended trial balance of McTaggart Ltd on 30 April 20-4 (set out on the next page). You have been given the following further information: Depreciation has been calculated on the non-current assets of the business and has already been entered on a monthly basis into the distribution costs and administrative expenses ledger balances as shown on the extended trial balance. The corporation tax charge for the year has been calculated as 1,113,000. Interest on the non-current loan has not been paid for the last month of the year; the interest charge for April 20-4 amounts to 26,000. All of the operations are continuing operations. Required: Draft the statement of profit or loss for McTaggart Ltd for the year ended 30 April Draft the statement of financial position for McTaggart Ltd as at 30 April 20-4.

16 1 6 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e EXTENDED TRIAL BALANCE (extract) name: McTaggart Ltd date: 30 April 20-4 Description Statement of Statement of profit or loss financial position Dr Cr Dr Cr Trade and other payables 1,891 Retained earnings (at 1 May 20-3) 2,159 Dividends paid* 240 Land and buildings cost 3,964 Plant and equipment cost 3,871 Trade and other receivables 2,191 Interest paid 166 Revenue 15,373 Accruals 145 Allowance for doubtful debts 85 Distribution costs 2,033 Administrative expenses 1,562 Inventories 2,034 4,731 4,731 Cash and cash equivalents 1,086 Non-current loan 2,750 Returns inwards 95 Returns outwards 157 Buildings accumulated depreciation 872 Plant and equipment accumulated dep n 2,013 Share capital 3,000 Purchases 11,166 Prepayments 37 Profit 2,965 2,965 20,261 20,261 15,880 15,880 *deducted from profit

17 c h a p t e r a c t i v i t i e s You have been assigned to assist in the preparation of the financial statements of Goonvrea Limited for the year ended 31 March The trial balance of the company as at 31 March 20-6 is set out below. Goonvrea Limited Trial balance as at 31 March 20-6 Debit Credit Share capital 4,000 Interest paid 86 Trade and other receivables 1,945 Dividends paid 300 Bank loan repayable ,750 Distribution costs 1,075 Administrative expenses 3,519 Revenue 11,473 Retained earnings at 1 April Cash and cash equivalents 236 Accruals 47 Prepayments 68 Share premium 1,000 Land cost 2,500 Buildings cost 1,010 Plant and equipment cost 3,600 Buildings accumulated depreciation 335 Plant and equipment accumulated depreciation 1,520 Inventories at 1 April ,422 Trade and other payables 1,507 Purchases 6,417 22,178 22,178

18 1 8 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e Further information: The inventories at the close of business on 31 March 20-6 cost 1,539,000. The corporation tax charge for the year has been calculated as 80,000. The land has been revalued by professional valuers at 2,750,000. The revaluation is to be included in the financial statements for the year ended 31 March All of the operations are continuing operations. Required: Draft the statement of profit or loss and other comprehensive income for Goonvrea Limited for the year ended 31 March Draft the statement of financial position for Goonvrea Limited as at 31 March 20-6.

19 c h a p t e r a c t i v i t i e s You have been assigned to assist in the preparation of the financial statements of Typeset Limited for the year ended 31 March You have been provided with the trial balance of Typeset Limited as at 31 March Debit Credit Trade and other receivables 3,100 Cash and cash equivalents 216 Interest paid 58 Retained earnings at 1 April ,953 Allowance for doubtful debts 37 Distribution costs 3,567 Administrative expenses 3,079 Revenue 19,257 Land cost 2,075 Buildings cost 2,077 Plant and equipment cost 3,935 Inventories at 1 April ,921 Purchases 10,649 Dividends paid 250 Trade and other payables 1,763 Buildings accumulated depreciation 383 Plant and equipment accumulated depreciation 1,884 Ordinary share capital 5,000 Share premium 1,200 Non-current loan 1,450 32,927 32,927

20 2 0 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e Further information: The inventories at the close of business on 31 March 20-4 cost 4,187,000. Depreciation has been calculated on a monthly basis on all of the non-current assets of the business and has already been entered into the distribution costs and administrative expenses balances as shown on the trial balance. The corporation tax charge for the year has been calculated as 493,000. The allowance for doubtful debts is to be maintained at 2 per cent of trade receivables. Credit purchases relating to April 20-4 amounting to 265,000 had been entered incorrectly into the accounts in March Interest on long-term loan has been paid for six months of the year. No adjustment has been made for the interest due for the final six months of the year. Interest is charged on the loan at a rate of 8 per cent per annum. The land has been revalued by professional valuers at 3,500,000. The revaluation is to be included in the financial statements for the year ended 31 March All of the operations are continuing operations. Required: Draft the statement of profit or loss and other comprehensive income for Typeset Limited for the year ended 31 March Draft the statement of changes in equity for Typeset Limited for the year ended 31 March (c) Draft the statement of financial position for Typeset Limited as at 31 March 20-4.

21 c h a p t e r a c t i v i t i e s Accounting for assets 4.1 Under IAS 16 Property, Plant and Equipment, which of the following costs can be included on initial recognition of property, plant and equipment? 1 Costs of site preparation. 2 Administration costs. 3 Start-up costs of a new section of the business. 4 Costs of testing the asset. 1 and 2 2 and 3 (c) 3 and 4 (d) 1 and According to IAS 36 Impairment of Assets, the loss on impairment of an asset is calculated by taking into account the carrying amount of the asset and its recoverable amount. (c) Explain what is meant by the carrying amount and recoverable amount of an asset. How is the loss on impairment of an asset calculated? How is the loss on impairment treated in the financial statements?

22 2 2 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 4.3 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 16,000 18,000 17, ,000 16,000 15, ,000 17,000 20, ,000 15,000 19,000 Which of the above assets is impaired according to IAS 36 Impairment of Assets? 1 2 (c) 1 and 3 (d) 2 and Prepare brief notes for a company board meeting to answer the following points for the directors: (c) Explain the term inventories as defined by IAS 2 Inventories. State which costs should be included when measuring the value of inventories. State which costs should NOT be included when measuring the value of inventories.

23 c h a p t e r a c t i v i t i e s 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 A 8,300 8,000 12,200 Type B 10,500 10,700 10,200 Type C 12,300 12,000 14,500 Total 31,100 30,700 36,900 To comply with IAS 2 Inventories, at what value should the inventory be stated in the financial statements? 30,800 31,100 (c) 30,700 (d) 30, Travis Ltd is a company which purchases goods for resale. The directors of the company would like you to clarify the accounting treatment of inventories. What are inventories in Travis Ltd? How are inventories measured? What is included in the cost of inventories? Note: your answer should refer to the relevant international financial reporting standard.

24 2 4 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 4.7 You have been approached by Samuel Taylor, who runs a trading company, Tayloriana Limited for help with the year end financial statements. He employs a bookkeeper who has produced an extended trial balance for the company as at 31 March Samuel is negotiating to merge his company with Coleridge Limited, which operates in the same area of activity as his own. The directors of Coleridge Limited would like to see the latest profit figures of Samuel's business. You have been asked to assist in the preparation of a statement of comprehensive income for the year ended 31 March Samuel Taylor has given you the following information from Tayloriana Limited: 1 Inventories have been counted on 31 March The cost of the inventories calculated on a first in, first out basis is 49,300. The selling price of the inventories is estimated at 65, After the year-end, one of the trade receivables, whose year-end balance was 2,500 went into liquidation. The liquidator has stated that there are no assets available to pay claimants. No provision for this bad (irrecoverable) debt has been made in the financial statements and the balance is still included in year-end trade receivables figure. Task Explain to Samuel Taylor the appropriate accounting treatment of the above items by reference to applicable accounting standards. 4.8 Prepare briefing notes for a company board meeting dealing with the following matters: How a revaluation surplus could arise. The recommendation of one of the directors is to lease assets as he says that this means that the assets can be kept off the statement of financial position. Comment on this recommendation. 4.9 Elizabeth Ogier is the Managing Director and major shareholder of Ogier Perfumes Limited, a wholesale perfume business. She has asked you to assist in the preparation of the year-end financial statements of the company. The inventories at the close of business on 30 September 20-9 were valued at cost at 49,477. However, included in this balance were some items which had cost 8,200 but it is estimated that they could now be sold for only 4,800. The purchases figure includes items to the value of 2,000 which Elizabeth took for personal use and for gifts to friends. Task Draft a letter to Ms Ogier justifying any adjustments you have made to: the inventories valuation on 30 September 20-9 the balances in the trial balance as a result of her taking items from the company for personal use or for gifts to friends Your explanation should make reference, where relevant, to accounting concepts and applicable international financial reporting standards.

25 c h a p t e r a c t i v i t i e s IAS 1 Presentation of Financial Statements, requires the disclosure of accounting policies in the notes to the financial statements. Explain why the disclosure of accounting policies is useful to users of financial statements. Illustrate your answer with reference to: (c) Depreciation. Research and development. Inventories.

26 2 6 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 5 Accounting for liabilities and the statement of profit or loss 5.1 With reference to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, you are to: Define a provision and explain the accounting treatment, if any, in the year-end financial statements. Define a contingent liability and explain the accounting treatment, if any, in the year-end financial statements. 5.2 A business prepares its financial statements to 31 December each year. The following events took place after 31 December but before the date on which the financial statements were authorised for issue: 1 A major customer who owes money to the company at the end of the financial year is declared bankrupt. 2 A major purchase of non-current assets has been made. Which of the above is likely to be classified as an adjusting event under IAS 10 Events after the Reporting Period? 1 only 2 only (c) 1 and 2 (d) Neither 1 nor 2

27 c h a p t e r a c t i v i t i e s Travis Ltd is a company which purchases goods for resale. The directors of the company would like you to clarify when they should recognise revenue arising from the sale of goods. What is revenue in Travis Ltd? How should it be measured? When should revenue be recognised? Note: your answer should refer to the relevant international financial reporting standard. 5.4 Following your preparation of the statement of profit or loss and other comprehensive income and statement of financial position of Deskover Limited, you have had a meeting with the directors at which certain other matters were raised. One of the customers of Deskover Limited has been having cashflow problems. The account balance at the end of the year was 186,000. Against this there was a specific provision of 93,000. One month after the year-end, the directors received a letter from the liquidators of the customer stating that the business had gone into liquidation. The liquidators have stated that there will be no assets available to meet any of the amounts due to the unsecured claimants. Task State whether any adjustments need to be made to the financial statements of Deskover Limited as a result of the liquidation of the customer. Set out any adjustment required in the form of a journal entry and justify the accounting treatment by reference to applicable international financial reporting standards. 5.5 You have been asked to help prepare the financial statements of Brecked plc for the year ended 31 March Legal proceedings have been started against Brecked plc because of faulty products supplied to a customer. The company s lawyers advise that it is probable that the entity will be found liable for damages of 250,000. Task 1 Make any necessary journal entry in respect of the above information. The date and narrative are not required. Task 2 Explain your treatment of the probable damages arising from the legal proceedings. Refer, where relevant, to international financial reporting standards.

28 2 8 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 6 Statement of cash flows A blank photocopiable pro-forma in the format used in AAT Assessments of the statement of cash flows, is included in the Appendix of Financial Statements of Limited Companies Tutorial it is advisable to enlarge it to full A4 size. Blank workings sheets are also included in the Appendix. Pro-formas and workings sheets are also available to download from Olson Ltd has a profit before tax of 40,000 for the year, and finance costs are 5,000. The statement of profit or loss and the statement of financial position show the following: Depreciation charge 15,000 Decrease in inventories 4,000 Increase in trade and other receivables 6,000 Decrease in trade and other payables 3,000 What is the cash generated by operations for the year? 64,000 inflow 65,000 inflow (c) 61,000 inflow (d) 55,000 inflow

29 c h a p t e r a c t i v i t i e s Herrera Ltd has a loss before tax of 22,000 for the year and the statement of profit or loss and the statement of financial position show the following: Depreciation charge 6,000 Finance costs 2,000 Increase in inventories 5,000 Decrease in trade and other receivables 3,000 Increase in trade and other payables 4,000 What is the cash generated by operations for the year? 2,000 outflow 16,000 outflow (c) 12,000 outflow (d) 14,000 outflow

30 3 0 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 6.3 You have been asked to help prepare the statement of cash flows and statement of changes in equity for Westlake Ltd for the year ended 31 March The most recent statement of profit or loss and statement of financial position (with comparatives for the previous year) of Westlake Ltd are set out below. Westlake Ltd Statement of profit or loss for the year ended 31 March Continuing operations Revenue 22,000 Cost of sales 13,400 Gross profit 8,600 Dividends received 50 Loss on disposal of property, plant and equipment 20 Distribution costs 3,380 Administrative expenses 4,050 Profit from operations 1,200 Finance costs 83 Profit before tax 1,117 Tax 204 Profit for the year from continuing operations 913

31 c h a p t e r a c t i v i t i e s 3 1 Westlake Ltd Statement of financial position as at 31 March Assets Non-current assets Property, plant and equipment 10,155 8,670 Current assets Inventories 2,745 2,320 Trade and other receivables 2,120 1,950 Cash and cash equivalents ,865 4,317 Total assets 15,020 12,987 EQUITY AND LIABILITIES Equity Share capital 6,000 5,000 Share premium 1,250 1,000 Retained earnings 5,533 4,895 Total equity 12,783 10,895 Non-current liabilities Bank loans Current liabilities Trade and other payables 1,076 1,154 Tax liability Bank overdraft ,387 1,492 Total liabilities 2,237 2,092 Total equity and liabilities 15,020 12,987 Further information: The total depreciation charge for the year was 1,755,000. Property, plant and equipment costing 356,000 with accumulated depreciation of 247,000 was sold in the year. All sales and purchases were on credit. Other expenses were paid for in cash. A dividend of 275,000 was paid during the year. (c) Prepare a reconciliation of profit before tax to net cash from operating activities for Westlake Ltd for the year ended 31 March Prepare the statement of cash flows for Westlake Ltd for the year ended 31 March Draft the statement of changes in equity for Westlake Ltd for the year ended 31 March 20-1.

32 3 2 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 6.4 You have been asked to prepare a statement of cash flows for Stringberg Limited for the year ended 31 March The financial statements of Stringberg Limited are set out below. Stringberg Limited Statement of profit or loss for the year ended 31 March 20-4 Continuing operations 000 Revenue 9,047 Cost of sales 4,939 Gross profit 4,108 Profit on the disposal of non-current assets 93 Distribution costs 1,013 Administrative expenses 722 Profit from operations 2,466 Finance costs 243 Profit before tax 2,223 Tax 509 Profit for the year from continuing operations 1,714

33 c h a p t e r a c t i v i t i e s 3 3 Stringberg Limited Statement of financial position as at 31 March ASSETS Non-current assets 5,366 4,075 Current assets Inventories 3,016 2,284 Trade and other receivables 1,508 1,394 Cash and cash equivalents 23 4,547 3,678 Total assets 9,913 7,753 Equity Share capital 2,500 1,900 Share premium 400 Retained earnings 1, Total equity 4,574 2,490 Non-current liabilities Long-term loans 3,038 3,324 Current liabilities Trade and other payables 1,792 1,310 Tax liability Bank overdraft 137 2,301 1,939 Total liabilities 5,339 5,263 Total equity and liabilities 9,913 7,753 Further information: A dividend of 630,000 was paid during the year. A non-current asset costing 363,000 with accumulated depreciation of 173,000 was disposed during the year. The total depreciation charge for the year was 505,000. All revenue sales and purchases were on credit. Other expenses were paid for in cash. Required: Task 1 Prepare the reconciliation of profit before tax to net cash from operating activities for Stringberg Limited for the year ended 31 March Task 2 Prepare the statement of cash flows for Stringberg Limited for the year ended 31 March 20-4, in accordance with the requirements of IAS 7.

34 3 4 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 7 Interpretation of financial statements 7.1 A limited company has the following statement of profit or loss: 000 Continuing operations Revenue 350 Cost of sales 190 Gross profit 160 Distribution costs 40 Administrative expenses 65 Profit from operations 55 Finance costs 12 Profit before tax 43 Tax 6 Profit for the year from continuing operations 37 State the formula that is used to calculate each of the following ratios: (1) Gross profit percentage (2) Administrative expenses/revenue percentage (3) Operating profit percentage (4) Interest cover Calculate the above ratios (to the nearest one decimal place).

35 c h a p t e r a c t i v i t i e s The following information is taken from the statement of financial position of a limited company. 000 Inventories 175 Trade receivables 210 Bank overdraft 35 Trade payables 190 Non-current liabilities 355 Share capital 600 Retained earnings 145 Further information: Revenue for year 3,110 Cost of sales for year 2,045 State the formula that is used to calculate each of the following ratios: (1) Current ratio (2) Acid test (quick) ratio (3) Inventory turnover (4) Inventory holding period (5) Trade receivables collection period (6) Trade payables payment period (7) Gearing Calculate the above ratios (to the nearest one decimal place).

36 3 6 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 7.3 The following information is taken from the financial statements of a limited company. 000 Revenue 2,340 Profit from operations 160 Profit after tax 125 Non-current assets 720 Total assets 1,010 Share capital ( 1 ordinary shares) 500 Retained earnings 250 Non-current liabilities 190 Current liabilities 70 State the formula that is used to calculate each of the following ratios: (1) Return on capital employed (2) Operating profit percentage (3) Shareholders funds (4) Asset turnover (net assets) (5) Asset turnover (non-current assets) Calculate the above ratios (to the nearest one decimal place). 7.4 Which one of the following is the calculation of the working capital cycle? Inventory days receivable days + payable days Inventory days + receivable days payable days (c) Inventory days + receivable days + payable days (d) Receivable days inventory days + payable days

37 c h a p t e r a c t i v i t i e s Michael Beacham has been asked to lend money to Goodall Limited for a period of three years. He employed a financial adviser to advise him whether to make a loan to the company. The financial adviser has obtained the financial statements of the company for the past two years, calculated some ratios and found the industry averages. However, she was unable to complete her report. Michael has asked you to analyse the ratios and to advise him on whether he should make a loan to Goodall Limited. The ratios are set out below Industry average Gearing 40% 37% 29% Interest cover Acid test (quick) ratio Return on shareholders funds 9% 13% 19% Required: Write a report for Michael Beacham that includes the following: (c) (d) An explanation of the meaning of each ratio. A comment on Goodall Limited s financial position and the financial performance of the company as shown by the ratios. A statement of how the financial position and performance have changed over the two years, and how they compare with the industry average. A conclusion on whether Michael should lend money to Goodall Limited; base your conclusion only on the ratios calculated and the analysis performed.

38 3 8 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 7.6 Terry Paine is deciding whether to lend some money to Russell Limited. He has asked you to comment on the financial position of the company. The financial statements of Russell Limited are set out below. Russell Limited Statements of profit or loss for the year ended 31 July Continuing operations Revenue 7,702 6,826 Cost of sales 4,004 3,550 Gross profit 3,698 3,276 Distribution costs 1,564 1,474 Administrative expenses 1, Profit from operations 1, Finance costs Profit before tax 1, Tax Profit for the year from continuing operations Russell Limited Statements of financial position as at 31 July ASSETS Non-current assets 8,744 8,682 Current assets Inventories 2,314 1,432 Trade and other receivables 938 1,056 Cash and cash equivalents ,326 2,602 Total assets 12,070 11,284 EQUITY AND LIABILITIES Equity Share capital 2,000 2,000 Retained earnings 7,424 6,984 Total equity 9,424 8,984 Non-current liabilities 1,200 1,000 Current liabilities Trade payables 1,194 1,116 Tax liability ,446 1,300 Total liabilities 2,646 2,300 Total equity and liabilities 12,070 11,284

39 c h a p t e r a c t i v i t i e s 3 9 Required: Prepare a report for Terry Paine that includes the following: (c) (d) (e) A calculation of the following ratios of Russell Limited for each of the two years: Current ratio Acid test (quick) ratio Gearing Interest cover An explanation of the meaning of each ratio. A comment on the financial position of Russell Limited as shown by the ratios. A comment on the way the financial position has changed over the two years covered by the financial statements. A conclusion on whether Terry Paine should lend money to Russell Limited. Base your conclusion only on the ratios calculated and analysis performed.

40 4 0 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 7.7 Botticelli Limited is a trading company that sells carpets to retail outlets. The shareholders of Botticelli Limited have some questions about the profitability and liquidity of the company. The statement of profit or loss and statement of financial position are set out below and on the next page. Botticelli Limited statement of profit or loss for the year ended 31 December Continuing operations Revenue 2,963 1,736 Cost of sales 1, Gross profit 1, Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Tax Profit for the year from continuing operations

41 c h a p t e r a c t i v i t i e s 4 1 Botticelli Limited statement of financial position as at 31 December ASSETS Non-current assets 2,800 1,013 Current assets Inventories Trade receivables Cash and cash equivalents Total assets 3,663 1,937 EQUITY AND LIABILITIES Equity Share capital Share premium 250 Retained earnings 1,321 1,076 Total equity 1,971 1,276 Non-current liabilities Bank loans Current liabilities Trade payables Tax liability Bank overdraft Total liabilities 1, Total equity and liabilities 3,663 1,937 Required: Prepare a report to the shareholders about the profitability and liquidity of Botticelli Ltd for the two years 20-5 and Your report should include: Calculation of the following ratios for the two years: return on capital employed gross profit percentage operating profit percentage current ratio acid test (quick) ratio Comments on the changes in the ratios from 20-5 to 20-6.

42 4 2 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 8 Consolidated financial statements Blank photocopiable pro-formas in the format used in AAT Assessments of the consolidated statement of profit or loss, and the consolidated statement of financial position, are included in the Appendix of Financial Statements of Limited Companies Tutorial it is advisable to enlarge them to full A4 size. Blank workings sheets are also included in the Appendix. Pro-formas and workings sheets are also available to download from Hyde plc invested 400,000 in 240,000 ordinary shares of 1 each in Park Limited. At the date of acquisition the equity of Park Limited comprised 400,000 in share capital and 160,000 in retained earnings. What is the value of goodwill at the date of acquisition? 64, ,000 (c) 160,000 (d) 400, At 31 March 20-1 the equity of Gate Limited comprises 200,000 in share capital and 120,000 in retained earnings. The parent company, Alder plc, currently owns 150,000 of 1 ordinary shares in Gate Limited. What is the value of the non-controlling interest at 31 March 20-1? 30,000 50,000 (c) 240,000 (d) 80,000

43 c h a p t e r a c t i v i t i e s Clerk plc owns 80% of the ordinary shares in Well Limited. Revenue for the year ended 31 March 20-1 is: Clerk 400,000, Well 150,000. The revenue of Clerk plc includes goods sold to Well Limited for 15,000. All of these goods still remain in the inventory of Well Limited at the end of the year. What is the value for revenue that will be shown in the consolidated statement of profit or loss for Clerk plc and its subsidiary undertaking for the year ended 31 March 20-1? 550, ,000 (c) 565,000 (d) 515,000

44 4 4 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 8.4 The Finance Director of Wood plc has asked you to prepare the draft consolidated statement of profit or loss for the group. The company has one subsidiary undertaking, Plank Limited. The statements of profit or loss for the two companies, prepared for internal purposes, for the year ended 31 March 20-1 are set out below. Statements of profit or loss for the year ended 31 March 20-1 Wood plc Plank Limited Continuing operations Revenue 31,600 10,800 Cost of sales 17,000 5,600 Gross profit 14,600 5,200 Distribution costs 3,600 1,300 Administrative expenses 3,000 1,160 Dividends received from Plank Limited 600 Profit from operations 8,600 2,740 Finance costs 1, Profit before tax 7,000 2,500 Tax 2, Profit for the year from continuing operations 4,760 1,760 Further information: Wood plc acquired 75% of the issued share capital and voting rights of Plank Limited on 1 April During the year Plank Limited sold goods which had cost 600,000 to Wood plc for 1,000,000. All of the goods had been sold by Wood plc by the end of the year. Dividends paid during the year were: Wood plc, 1,500,000 Plank Limited, 800,000 There were no impairment losses on goodwill during the year. Required: Draft a consolidated statement of profit or loss for Wood plc and its subsidiary undertaking for the year ended 31 March 20-1.

45 c h a p t e r a c t i v i t i e s You have been asked to assist in the preparation of the consolidated financial statements of the Jake Group. Set out below are the statements of financial position of Jake Limited and Dinos Limited as at 30 September 20-1: Statements of financial position as at 30 September 20-1 Jake Ltd Dinos Ltd ASSETS Non-current assets 18,104 6,802 Investment in Dinos Limited 5,000 Current assets 4,852 2,395 Total assets 27,956 9,197 EQUITY AND LIABILITIES Equity Share capital 5,000 1,000 Share premium 3, Retained earnings 13,080 6,250 Total equity 21,080 7,650 Non-current liabilities Long-term loan 4,500 1,000 Current liabilities 2, Total liabilities 6,876 1,547 Total equity and liabilities 27,956 9,197 Further information: The share capital of both Jake Limited and Dinos Limited consists of ordinary shares of 1 each. There have been no changes to the balances of share capital and share premium during the year. No dividends were paid by Dinos Limited during the year. Jake Limited acquired 600,000 of the issued share capital and voting rights of Dinos Limited on 30 September At 30 September 20-0 the retained earnings of Dinos Limited were 5,450,000. The fair value of the non-current assets of Dinos Limited at 30 September 20-0 was 3,652,000 as compared with their carrying amount of 3,052,000. The revaluation has not been reflected in the books of Dinos Limited (ignore any depreciation implications). For the year to 30 September 20-1, Jake Limited has written off ten per cent of the goodwill on the acquisition of Dinos Limited as an impairment loss. Jake Limited has decided non-controlling interest will be valued at their proportionate share of net assets. Required: You are to prepare the consolidated statement of financial position of Jake Limited and its subsidiary undertaking as at 30 September 20-1.

46 4 6 f i n a n c i a l s t a t e m e n t s o f l i m i t e d c o m p a n i e s t u t o r z o n e 8.6 Moor Plc acquired 75% of the issued share capital and voting rights of Gate Ltd on 1 April 20-0 for 375,000. At that date Gate Ltd had issued share capital of 300,000 and retained earnings of 120,000. Extracts from the statements of financial position for the two companies one year later at 31 March 20-1 are as follows: Moor Plc Gate Ltd Assets Investment in Gate Ltd 375 Non-current assets Current assets Total assets 1, Equity and liabilities Equity Share capital Retained earnings Total equity 1, Non-current liabilities Current liabilities Total liabilities Total equity and liabilities 1, Further information: Included within the current assets of Moor Plc and in the current liabilities of Gate Ltd is an inter-company transaction for 20,000 that took place in early March Moor Plc has decided non-controlling interest will be valued at their proportionate share of net assets. Draft the consolidated statement of financial position for Moor Plc and its subsidiary undertaking as at 31 March 20-1.

47 c h a p t e r a c t i v i t i e s 4 7 West Plc acquired 60% of the issued share capital and voting rights of Minster Ltd on 1 April Extracts from their statements of profit or loss for the year ended 31 March 20-1 are shown below: West Plc Minster Ltd Continuing operations Revenue 5,200 2,400 Cost of sales 2,400 1,500 Gross profit 2, Other income dividend from Minster Ltd 100 Distribution costs and administrative expenses 1, Profit before tax 1, Additional data: During the year Minster Ltd sold goods which had cost 60,000 to West Plc for 80,000. Onequarter of these goods still remain in inventory at the end of the year. Draft the consolidated statement of profit or loss for West Plc and its subsidiary undertaking up to and including the profit before tax line for the year ended 31 March 20-1.