Copyright Reserved Serial No Institute of Certified Management Accountants of Sri Lanka Operational Level November 2018 Examination Examination Date : 10 th November 2018 Number of Pages : 10 Examination Time: 9. 30 a : m. 12. 30 p : m. Number of Questions: 05 Instructions to Candidates 1. Time allowed is three (3) hours. 2. Total: 100 Marks. 3. Answer all questions. 4. Candidates are allowed to use non-programmable calculators. 5. The answers should be in English Language. Part I Subject Subject Code Advanced Financial Accounting and Finance (AFF / OL 2-202) Question No. 01 (40 Marks) For questions 1 to 20, select the most appropriate answer from the given answers under,, & for each question and write only the letter [i.e. or or or ] relating to the most appropriate answer against the question number, in the answer booklet. (1) Which of the followings describe comparability? I. Similar items should be treated in the same way from one period to the other II. Information must have a predictive and or confirmatory value III. Similar items within a single set of financial statements should be given similar accounting treatment IV. The non-cash effects of transactions should be reflected in the financial statements for the accounting period in which they occur and not in the period where any cash involved is received or paid. I and II II and III I and III III and IV (2) Which of the following is NOT true regarding the IASB s Conceptual framework for financial reporting? It is an accounting standard that companies have to comply with It replaced the original framework It encourages companies to present information faithfully It gives a framework to be followed in all circumstances when preparing and presenting a set of financial statements. Institute of Certified Management Accountants of Sri Lanka 1
(3) In accordance with LKAS 1 - Presentation of financial statements, which of the following MUST be disclosed on the face of the statement of profit or loss and other comprehensive income rather than by way of a note? Depreciation Finance Costs Other operating income Dividends paid (4) Which of the following is true concerning the statement of changes in equity? It includes other comprehensive income It does not include revaluation income It only reports all released profits and losses All of the above (5) Which THREE of the following costs can be included in the total cost of producing an asset by a company for its own use? I. Interest on capital borrowed to finance production of the asset II. Directly attributable labor costs III. A reasonable proportion of indirect costs IV. Ongoing maintenance charges for the asset V. Depreciation charges for the asset I, II & III I, II & IV II, III & IV II, III & V (6) A freehold property originally costing Rs.250, 000 has accumulated depreciation of Rs.50, 000 to date. The asset is to be revalued to Rs.280, 000. Which set of double entry is required to record the revaluation? Debit. Property at cost Rs.80,000 and Credit. Revaluation surplus Rs.80,000 Debit. Accumulated depreciation Rs.50,000 and Credit. Revaluation surplus Rs.50,000 Debit. Revaluation surplus Rs.80,000, Credit. Accumulated depreciation Rs.50,000 and Credit. Property at cost Rs.30,000 Debit. Accumulated depreciation Rs.50,000, Debit. Property at cost Rs.30,000 and Credit. Revaluation surplus Rs.80,000 (7) Which of the following would be an Internal Indicator of impairment of a machine, as per LKAS 36-Impairment of assets? The machine is fully depreciated The operating performance of the machine has declined The market value of the machine has fallen significantly Three have been significant changes in the technology environment affecting the business in which the machine is used. (8) The following values relate to a non-current assets: I. Carrying amount Rs. 20,000 II. Realizable value Rs. 18,000 Institute of Certified Management Accountants of Sri Lanka 2
III. Value in use Rs. 22,000 IV. Replacement costs Rs. 50,000 What is the recoverable amount of the asset? Rs. 18,000 Rs. 20,000 Rs. 22,000 Rs. 50,000 (9) Company PQR closed one of its division 12 months ago. It has yet to dispose of one remaining machine. The carrying amount of the machine at the data when business ceased was Rs.650, 000. It was depreciated at 25% on a straight line basis. The company PQR has been advised that the fair value of the machine is Rs.620, 000 and expects to incur additional costs of Rs.20, 000 in making the sale. The company has found a probable buyer but the sale will not be completed before year end. At what amount should the machine be shown in the year-end financial statements of the company PQR? Rs. 487,500 Rs. 600,000 Rs. 620,000 Rs. 650,000 (10) A company s statement of profit or loss and other comprehensive income showed a profit before tax of Rs.1, 500,000. After the year end and before the financial statements were authorized for issue, the following events took place. I. A customer who owed Rs.80, 000 at the year-end went bankrupt. II. The value of an investment held at the year-end fell by Rs.45, 000. III. Inventory valued at cost of Rs.140, 000 in the statement of financial position was sold for Rs.120, 000. IV. Asset with a carrying amount at the year-end of Rs.120, 000 were unexpectedly seized by the local government. What is the company s profit after making the necessary adjustments for these events? Rs. 1,235,000/- Rs. 1,355,000/- Rs. 1,400,000/- Rs. 1,500,000/- (11) A statement of cash flows shows the increase or decrease in cash and cash equivalents in the period. Which ONE of the following items is not included in this movement? Bank Overdraft Cash at Bank Current assets investments readily convertible into known amount of cash and which can be sold without disrupting the company s business Equity Investment Institute of Certified Management Accountants of Sri Lanka 3
(12) Which one of the items below would NOT appear in the statement of cash flows? Repayment of a Bank loan Cash receipts from customers Dividend paid to preference shareholders in the year The statement of profit or loss and other comprehensive income charge for taxation for the current year (13) Which of the following is NOT an indicator of impairment under LKAS 36-Impairment of Assets? An increase interest rates which increases the discount rate an entity uses. The estimated net realisable value of inventory has been reduced due to fire damage although this value is greater than its carrying amount. Advances in the technological environment in which an asset is employed have an adverse impact on its future use. The carrying amount of an entity s net assets is lower than the entity s number of shares in issue multiplied by its share price. (14) The carrying values of a cash generating unit of Bernard & Company are given below. Rs. Property plant and equipment 170,000 Allocated Goodwill 60,000 Product Patent 30,000 Net current assets (at Net realizable value) 50,000 ----------- 310,000 ====== As a result of adverse publicity, Bernard has a recoverable amount of only Rs.200, 000. What would be the value of Bernard property, plant and equipment after the allocation of the impairment loss? Rs. 127,500 Rs. 150,000 Rs. 136,000 Rs. 109,678 (15) Delta Company decides to offer a 2% early settlement discount that half of all customers take up. They pay in 1 month instead of the usual 2 months. Delta Co pays 10% per annum for its overdraft facility. What impact will this have? Cash operating cycle Reported Profits Reduce Increase Unaffected Increase Reduce Reduce Unaffected Reduce (16) Which of the following events which occur after the reporting date of a company but before the financial statements are authorized for issues are classified as adjusting events in accordance with the LKAS 10-Events after the reporting period? Institute of Certified Management Accountants of Sri Lanka 4
I. The destruction of a factory by fire II. The determination of the sale proceeds of an item of machinery sold before the year end III. The discovery of a fraud which had occurred during the year IV. A change in tax rate announced after the reporting date, but affecting the current tax liability I and II only II and III only III and IV only I and IV only (17) Dexon s finance director is checking some of the financial estimates involved. In accordance with LKAS 37, if the reporting entity is presently obliged to transfer economic benefit to another party, the occurrence is probable but the amount cannot be measured with sufficient reliability, this should give rise to: A provision A contingent liability A long term liability A contingent Asset (18) Apex is developing a new product and expects to be able to capitalize the costs. Which one of the following would preclude capitalization of the costs? Development of the product is not yet complete. No patent has yet been registered in respect of the product. No sales contracts have yet been signed in relation to the product. It has not been possible to reliably allocate costs to development of the product. (19) Which of the following relate to finance leases as opposed to operating leases? (i) Maintained and insured by the lessor (ii) Asset appears on statement of financial position of lessee (iii) Equipment leased for a shorter period than its expected useful life ii only i and ii only ii and iii only i and iii only (20) KT Company needs to purchase 1,600 kgs of raw materials M each year. There is a standing charge of Rs.25 per order. Purchase price is Rs.10 per kg and it costs KT 20% of purchase price to store one unit for a year. What is the annual inventory related cost at the economic order quantity? Rs. 400 Rs.16,320 Rs.16,345 Rs.16,400 (20 2 Marks = Total 40 Marks) End of Part I Institute of Certified Management Accountants of Sri Lanka 5
Part II Question No. 02 (15 Marks) Alpha a limited liability company has the following trial balance at 31 March 2018. Debit Rs. '000 Cash at bank 1,400 Fixed deposit 2,000 Inventory as at 1 st April 2017 1,800 Administrative Expenses 2,492 Distribution costs 950 Non-current assets at cost: Buildings 14,000 Plant and equipment 1,600 Motor vehicles 820 Credit Rs. '000 Suspense 1,200 Accumulated depreciation as at 1 st April 2017 Building 4,000 Plant and equipment 600 Motor vehicles 140 Retained Earnings 2,560 Trade Receivables 1,790 Purchases 6,348 Dividend paid 500 Sales Revenue 13,760 Trade Payables 3,890 Accrued expenses 1,050 General Reserves 1500 Rs.10/- Ordinary Shares 5000 Total 33,700 33,700 Additional information provided: a. Inventory at 31 March 2018 was valued at Rs. 1,200,000. While doing the inventory count, errors in the previous year's inventory count were discovered. The inventory brought forward at the beginning of the year should have been Rs.1, 600,000, not Rs.1, 800,000 as above. b. Interest received on fixed deposit amounting to Rs.200, 000 have been credited to suspense account. c. A customer has gone bankrupt owing Rs.90, 000. This debt is not expected to be recovered and an adjustment should be made. An allowance for receivables of 5% is to be set up. d. Depreciation is to be provided as follows. (i) Buildings at 5% straight line, charged to administrative expenses (ii) Plant and equipment at 20% on the reducing balance basis, charged to cost of sales (iii) Motor vehicles at 25% on the reducing balance basis, charged to distribution costs. Institute of Certified Management Accountants of Sri Lanka 6
e. 100,000 new ordinary shares were issued at Rs.10 on 1 March 2018. The proceeds have been left in a suspense account. f. No final dividend is being proposed. You are required to prepare the following financial statements for the purpose of publication. Statement of profit or loss and other comprehensive income for year ended 31 March 2018. (04 Marks) Statement of changes in equity for the year ended 31 March 2018 (03 Marks) Statement of financial position as at 31 March 2018. (08 Marks) All statements are to be prepared in accordance with the requirements of Sri Lanka Accounting standards. Ignore taxation. (Total 15 Marks) Question No. 03 (15 Marks) The following information has been extracted from the draft financial statements of Sam, a limited Liability Company. Sam Statement of Financial Position as at 31 st March 2018 2017 Rs. '000 Rs. '000 Rs. '000 Rs. '000 Non-current Assets 5,100 3,900 Current Assets Inventory 1,150 1,020 Trade Receivables 1,010 795 Bank - 520 2,160 2,335 7,260 6,235 Total Assets Equity and Liabilities Ordinary Shares 4,000 3,400 General Reserves 300 150 Retained Earnings 940 590 5,240 4,140 Non-Current Liabilities 10% Debentures Redeemable 31 st March 2018-400 Current Liabilities Trade Payables Taxation Bank Overdraft 1,550 210 260 2,020 1,515 180-1,695 Total Equity and Liabilities 7,260 6,235 Institute of Certified Management Accountants of Sri Lanka 7
Additional Information 1. The statement of profit and loss for the year ended 31st March 2018 shows the following. Rs. 000 Operating Profit 1,170 Interest Payable (40) Profit Before Taxation 1,130 Taxation (230) Profit after Taxation 900 2. Profit before taxation had been arrived at after charging Rs.850, 000 for depreciation on non- current assets. 3. During the year a non-current-asset with a net book value of Rs.750, 000 were sold for Rs.550, 000. 4. During the year Dividends paid were Rs.400, 000. You are required to: Prepare the statement of cash flow for Sam for the year ended 31 st March 2018 in accordance with LKAS 7 Statement of cash flows, using indirect method. (10 Marks) (Please note that the above marks include marks for correct classification of the relevant item under the correct activities, such as operating, investing and financing.) With respect to LKAS 2 on Inventories: 1. What are the THREE types of Inventories identified and described by the LKAS 2( 03 Marks) 2. A furniture store purchase 20 chairs for Rs.1, 000 and then 30 chairs for Rs.2, 000. At the end of the accounting period the furniture store have sold 10 chairs. Calculate the cost of closing Inventory using the following cost formula. (i) Weighted Average (ii) FIFO (02 marks) (Total 15 Marks) Question No. 04 (15 Marks) Carlton Co plans to buy a machine costing Rs.450, 000 which will last for four years and then be sold for Rs.10, 000. Net cash flows before tax are expected to be as follows: Year 1 Year 2 Year 3 Year 4 Rs. Rs. Rs. Rs. Net cash flows 150,000 190,000 225,000 110,000 Carlton Co has a target return on capital employed of 20%. Depreciation is charged on a straight-line basis over the life of an asset. You are required to: 1. Calculate the before tax-return on capital employed (accounting rate of return) based on the average investment and comment on your findings (05 Marks) 2. Discuss the strengths and weaknesses of internal rate of return in appraising capital investments. (05 Marks) Institute of Certified Management Accountants of Sri Lanka 8
Define the following terms as per LKAS 23 Borrowing Costs and give ONE example: i. Borrowing costs ii. Qualifying asset (05 Marks) (Total 15 Marks) Question No. 05 (15 Marks) Extract from the recent financial statements of Pico Co are as follows: Statement of Profit or Loss (Extracts) 2018 2017 Rs.000 Rs. 000 Revenue 21,700 15,500 Cost of sales (13,000) (9,300) Gross Profit 8,700 6,200 Administration expenses (1,750) (1,500) Profit before interest and tax 6,950 4,700 Interest (380) (50) Profit before tax 6,570 4,650 Statement of Financial Position (Extracts) 2018 2017 Rs.000 Rs.000 Rs.000 Rs.000 Non-current assets 7,550 7,200 Current Assets: Inventory 4,200 1,800 Trade Receivables 5,300 2,600 Cash 200 1,200 9,700 5,600 Total Assets 17,250 12,800 Current Liabilities: Trade Payables 4,000 2,200 Overdraft 1,400 250 5,400 2,450 All sales were on credit terms. Pico Co has no long-term debts. Credit purchases in each year were 95% of cost of sales. Institute of Certified Management Accountants of Sri Lanka 9
Current sector averages are as follows: Days Inventory Days 90 Receivables Days 60 Payable Days 80 You are required to: 1. Calculate the following ratios for each of year and comment on your findings. (i) Inventory days (ii) Receivable days (iii) Payable Days (3 Marks for computation and 3 Marks for valid comments = Total 6 marks) 2. Calculate the length of the cash operating cycle (working capital cycle) for each year and explain its significance (2 Marks for computations and 2 Marks for valid comments = Total 4 marks) b) Define the following terms as stated in LKAS 38: Intangible Assets (i) Intangible assets (ii) Monitory assets (iii) Amortization (iv) Carrying amount (v) Useful life (1 Mark * 5 =05 Marks) (Total 15 Marks) End of Part II End of Question Paper Institute of Certified Management Accountants of Sri Lanka 10