The Examiner's Answers F1 - Financial Operations

Transcription

1 The Examiner's Answers F1 - Financial Operations Some of the answers that follow are fuller and more comprehensive than would be expected from a well-prepared candidate. They have been written in this way to aid teaching, study and revision for tutors and candidates alike. SECTION A Answer to Question One 1.1 C 1.2 B 1.3 Under the OECD model an entity will have residence in the country of its effective management. 1.4 Cost $15 Excise duty $3 $18 VAT 15% $2.7 Duty $3 VAT $2.7 $5.7 x 2,000 = 11,400 Answer = D 1.5 C 1.6 A 1.7 D Financial Operations 1

2 1.8 Cost 185 Acquired: Equity shares 150 Share premium 15 Retained earnings (22) Fair value adjustment 10 Goodwill $ Cost 25,000 Share of profit for the year to 31 March x 30% = 1,950 26,950 Less dividend received 3.5 x 30% = Investment (1,050) 25, $33,000 x 25/125 x 50% = 3,300 2 Financial Operations

3 SECTION B Answer to Question Two (a) (i) 31 March 2010 Tax depreciation $500,000 x 50% = $250,000 Tax written down value = $250,000 FG s corporate income tax due 31 March 2011 Profit $192,000 Add depreciation $100,000 Less tax depreciation ($250,000x25%) Taxable profits Tax at 25% ($62,500) $229,500 $57,375 (ii) Deferred tax balance at 31 March 2011: Carrying Value Tax base Cost Year to 31 March 2010 (100) (250) Year to 31 March 2011 (100) (62.5) At 31 March 2010: $400,000 - $250,000 = $150,000 At 31 March 2011: $300,000 - $187,500 = $112,500 $38,000 Tax at 25% = $9,500 Credit to income statement of $9,500 (b) (i) A capital gain is a gain made when an asset not covered by income tax rules, is disposed of. E.g. Gains on disposal of investments and non-current assets. 1the selling price. Some tax authorities allow an element of inflation to be used to adjust the purchase price (indexation) and thus reduce tax. Capital gains tax seeks to tax capital gains. Financial Operations 3

4 (ii) Sale proceeds 1,000 Tax allowable costs 6 Net proceeds 994 Cost of land Purchase price 850 Surveyor s fees 5 Legal fees 8 Clearance Profit on disposal 116 Capital gains tax at 25% 29 (c) (i) Underlying tax is tax on the profits out of which of an overseas entity has paid a dividend to its holding entity. E.g. A subsidiary or associated entity pays a dividend out of its taxed profits. The underlying tax is the tax on its profits. (ii) After tax profits Before tax profits 650 Tax (130) After tax profits 520 Gross Dividend Net dividend 156 After tax of 20% 156/0.8 = 195 Underlying tax is 195/520 x 130 = (d) The possible advantages of having principle-based accounting standards include: It will be harder to construct ways of avoiding the detailed requirements of individual standards. For example, a prescriptive standard may set out specific values that should be used when applying a standard. If an actual value is specified it may be possible for some entities to construct various means of avoiding the application of that requirement. Whereas if the standard sets out general principles it is much harder to avoid the standard s requirements as a principle will apply no matter what value is put on it. A prescriptive standard would require a certain treatment to be used, regardless of the situation, which could lead to similar items being treated the same way even if the circumstances are very different. Principle based standards will require a standard to be applied using professional judgment, which can help ensure that the correct application is used. Principles-based GAAP should ensure that the spirit of the regulations is adhered to, whereas the prescriptive system is more likely to lead to the letter of the law being followed rather than the spirit. IFRSs are principle-based standards. 4 Financial Operations

5 (e) (i) (ii) The Framework states that the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. The underlying assumptions in the Framework are going concern and accruals basis of accounting. Going concern Financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Any intention to liquidate or significantly reduce the scale of its operations would require the accounts to be prepared on a different basis and this basis would have to be disclosed. Accruals basis of accounting Financial statements are prepared on the accruals basis of accounting where the effects of transactions are recognised when they occur and are recorded and reported in the accounting periods to which they relate, irrespective of cash flows arising from these transactions. (f) According to CIMA s Code of ethics for professional accountants CX is in a position where she may be compromising her integrity and objectivity. Integrity This principle imposes an obligation to be truthful and honest on the accountant. A professional accountant should not be associated with reports and other information where she/he believe that the information contains misleading statements. This seems to be the case with the revised forecasts, CX believes that the revised forecasts are grossly overstated. Objectivity A professional accountant should not allow conflict of interest or undue influence of others to override professional or business judgements or to compromise their professional judgements. The management board are overriding CX s professional and business judgement as they are imposing their assumptions on the forecast profits. The possible options for CX in this situation would be: (i) To refuse to remain associated with the forecasts and disassociate herself from them as much as possible. (ii) To consider reporting the situation to appropriate authorities possibly after taking legal advice. (iii) To consider resignation of her post as a professional accountant. Financial Operations 5

6 SECTION C Answer to Question Three MN - Statement of comprehensive income for the year ended 31 March 2011 Continuing Operations Revenue ( ) 1,040 Cost of sales W3 (553) Gross Profit 487 Administrative expenses W3 (120) Distribution costs W3 (80) (200) Profit from operations 287 Finance cost W5 (12) Profit before tax 275 Income tax expense W4 (72) Profit for the period from continuing operations 203 Discontinued Operations Loss for the period from discontinued operations W2 (189) Profit for the period 14 MN Statement of Financial Position at 31 March 2011 Non-current assets Property, plant and equipment W1 1,823 Current assets Inventory 65 Trade receivables 101 Non-current assets classified as held for sale Total assets W ,165 Equity and liabilities Equity Share capital 600 Share premium 200 Retained earnings 761 Total equity 1,561 Non-current liabilities Long term borrowings 300 Deferred tax 78 Total non-current liabilities 378 Current liabilities Trade payables 51 Tax payable 67 Bank overdraft 14 Provision for warranty W6 82 Interest payable W5 12 Total current liabilities Total equity and liabilities 226 2,165 6 Financial Operations

7 MN Statement of changes in equity for the year ended 31 March 2011 Equity Share Accumulated Total shares Premium Profits Balance at 1 April ,577 Statement of comprehensive income for year Dividend paid.. (30) (30) Balance at 31 March ,561 Workings (All figures in ) (W1) Depreciation Buildings Continuing Discontinued Balance b/fwd Year 5% 35 2 Total depreciation NBV Plant and equipment Balance b/fwd cost Balance b/fwd deprec NBV Year 20% 20 5 NBV c/f Land 1, Total P, P&E c/f 1, W2) Discontinued Activity NCA Available for sale Net book Impairment Revised book value Value Balance c/f Income Statement Revenue 80 Cost of sales (130+7) (137) Gross loss (57) Administrative expenses (40) Distribution costs (90) Loss before tax (187) Income tax credit 10 (177) Impairment of assets (12) Loss for the period (189) Financial Operations 7

8 (W3) Cost of Administration Distribution sales Trial balance Less discontinued (130) (40) (90) Depreciation buildings W1 35 Depreciation plant and 20 equipment W1 Increase in warranty provision W6 6.. Totals (W4) (W5) Tax Year 67 Discontinued - tax credit add back Decrease in deferred tax (83-78) (5) 72 Interest Years loan interest (300 x 4%) 12 (W6) Warranty Expected Values 190 x 10%= x 15%= 3 80 x 75%= 60 Bal c/f 82 Bal b/f 76 Charge for year 6 8 Financial Operations

9 Answer to Question Four (a) OP Statement of Cashflows for the year ended 31 March 2011 Cash flows from operating activities Profit before taxation 1,089 Adjustments for: Legal claim provision 40 Depreciation (W1) 42 Development expenditure amortisation (W6) 15 Brand name impairment 10 Finance cost 15 Loss on disposal of non-current tangible asset (W2) Operating profit before working capital changes 1,217 Decrease in inventory 4 Increase in trade receivables (70) Increase in trade payables 55 (11) Cash generated from operations 1,206 Interest paid (W3) (25) Income taxes paid (W4) (280) (305) Net cash from operating activities 901 Cash flows from investing activities Purchase of property, plant and equipment (W8) (432) Proceeds from sale of equipment (W2) 5 Development expenditure (W6) (10) Net cash used in investing activities (437) Cash flows from financing activities Proceeds from issue of share capital (W7) 300 Repayment of long term borrowings (150) Equity dividends paid* (W5) (580) Net cash used in financing activities Net increase in cash and cash equivalents (430) 34 Cash and cash equivalents at 1 April Cash and cash equivalents at 31 March * this could also be shown as an operating cash flow Financial Operations 9

10 Workings W1 Depreciation for the year Plant and equipment 25 Buildings W2 Cash received on disposal of property plant and equipment Net book value 11 Loss on disposal 6 Cash received 5 W3 Interest Paid Balance B/F 20 SoCI Balance C/F 10 Paid 25 W4 Income Taxes paid Balance b/f corporate income tax deferred tax Income statement Balance c/f corporate income tax deferred tax Tax paid 280 W5 Dividends Paid Retained earnings Balance b/f 423 Profit for year 809 1,232 Retained earnings Balance c/f 652 Dividends paid 580 W6 Development expenditure paid Balance b/f 65 Amortised in year (15) 50 Balance c/f 60 New expenditure 10 W7 Proceeds from issue of share capital Shares 200 Share premium 100 Received Financial Operations

11 W8 Non-current asset acquisitions Land Balance b/f 320 Impairment (65) 255 Balance c/f 426 Acquired in year 171 Buildings Balance b/f 610 Balance c/f 840 Acquired in year 230 Plant and equipment Balance b/f 180 Disposal (45) 135 Balance c/f 166 Acquired in year 31 Total acquired in year 432 Part (b) Finance Lease Workings $ Fair value 248,610 Interest 29,833 Payment (44,000) Bal 31 Mar ,443 Interest 28,133 Payment (44,000) 218,576 Non-current liability Current liability = 218, ,443 = 15,867 Depreciation = 248,610 x 10% = 24,861 Non-current assets = 248,610 24,861 = 223,749 Interest 29,833 Finance Lease Statement of Comprehensive Income: Depreciation Interest Statement of Financial Position: Non-current assets Non-current liability Current liability 15.9 Statement of Cashflows: Added back to cash flows from operating activities: Depreciation Interest Investment Activities: Finance lease payments Financial Operations 11