Osborne Books Tutor Zone Financial Statements of Limited Companies Practice assessment 3 I m p o r t a n t n o t e t o t u t o r s In order to provide further practice in the type of questions that may have to be answered in the Assessment there are alternative questions for Tasks 1 & 2 and Task 6 provided at the end of this Assessment. Osborne Books Limited, 2016
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 Tasks 1 and 2 You have been asked to help prepare the financial statements of Kyle plc for the year ended 31 March 20-1. The company s trial balance as at 31 March 20-1 is shown below. Kyle plc Trial balance as at 31 March 20-1 Debit Credit 000 000 Share capital 70,000 Share premium 10,000 Revaluation reserve 15,000 Trade and other payables 9,372 Land & buildings cost 95,500 Land & buildings accumulated depreciation 11,640 Plant & equipment cost 50,000 Plant & equipment accumulated depreciation 24,400 Trade and other receivables 27,238 Accruals 1,450 Prepayments 2,220 7% bank loan repayable 20-9 30,000 Cash at bank 15,801 Retained earnings 7,580 Interest paid 1,750 Sales 152,473 Purchases 73,899 Distribution costs 23,922 Administrative expenses 21,056 Carriage in 2,340 Inventories as at 1 April 20-0 15,559 Tax 220 Dividends paid 2,850 332,135 332,135
p r a c t i c e a s s e s s m e n t 3 3 Further information The inventories at the close of business on 31 March 20-1 cost 9,197,000. On 11 April 20-1, goods included in this total at a value of 740,000 were found to be damaged and were sold for 590,000. Carriage inwards of 460,000 owing at 31 March 20-1 is to be provided for. At the end of the year the company carried out an impairment test on machinery which had a carrying amount of 12,500,000. At present it could be sold for 13,000,000 and would incur disposal costs of 1,400,000. The company estimate that the machine will generate cash flows with a net present value of 11,900,000 over the remainder of its useful life. No adjustment has been made in respect of the impairment test. Any impairment losses are apportioned equally between distribution costs and administration expenses. Land, which is non-depreciable, is included in the trial balance at a value of 34,200,000. This is to be revalued at 38,000,000 and this revaluation is to be included in the financial statements for the year ended 31 March 20-1. Interest on the bank loan for the last two months of the year has not been included in the accounts in the trial balance. The corporation tax balance of 220,000 included in the trial balance was the result of an overestimate of the tax liability for the previous year. The corporation tax charge in respect of the current year to 31 March 20-1 is estimated as 4,427,000. All the operations are continuing operations. Required (a) Draft the statement of profit or loss and other comprehensive income for Kyle plc for the year ended 31 March 20-1. (b) Draft the statement of changes in equity for Kyle plc for the year ended 31 March 20-1. (c) Draft the statement of financial position for Kyle plc as at 31 March 20-1. Kyle plc Statement of profit or loss and other comprehensive income for the year ended 31 March 20-1 Continuing operations 000 Revenue Cost of sales Gross profit Distribution costs Administration expenses Profit from operations Finance costs Profit before tax Tax Profit for the period from continuing operations Other comprehensive income for the year Total comprehensive income for the year
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 Kyle plc Statement of changes in equity for the year ended 31 March 20-1 Balance at 1 April 20-0 Changes in equity for the year Total comprehensive income Dividends Balance at 31 March 20-1 Share Share Revaluation Retained Total capital premium earnings equity 000 000 000 000 000
p r a c t i c e a s s e s s m e n t 3 5 Kyle plc Statement of financial position as at 31 March 20-1 000 Assets Non-current assets Current assets Total assets Equity and liabilities Equity Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities
6 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 Task 3 You are an Accounting Technician employed by Amato Accountants and are currently working on preparing the first years financial statements of Brompton Ltd, a hotel and spa chain, for the year ended 31 March 20-1. Matter 1 One of the hotels purchases a new printer costing 130.00 for the administration office which is expected to have a useful life of five years. The IASB s Conceptual Framework for Financial Reporting refers to preparers of the financial statements making judgements as to whether an item is material. (a) (b) Explain the term materiality and how it can impact on the users of financial statements. With reference to the materiality concept, explain how the purchase should be treated in the financial statements. Matter 2 You receive a phone call from a supplier of beauty products asking for financial information about Brompton Ltd who have requested to trade with them on credit. Identify the relevant fundamental principle in accordance with the AAT Code of Professional Ethics and explain the action that should be taken. Task 4 Trenchard Ltd is preparing the financial statements for the year ending 31 March 20-1. During April 20-1 the following information becomes available: An impairment review was carried out on a fleet of vehicles and it was found that an impairment loss of 40,000 had occurred. A proposed dividend totalling 2,000,000 was declared. Prepare brief notes explaining the following: (a) What is meant by an event after the reporting period according to IAS 10? (b) How will the impairment loss be treated in the financial statements in accordance with IAS 10? (c) How will the proposed dividend be treated in the financial statements in accordance with IAS 10?
p r a c t i c e a s s e s s m e n t 3 7 Task 5 (a) Amato plc acquires an asset with a fair value of 51,400 under a finance lease on 1 April 20-0. Four annual payments of 18,000 are paid on 31 March each year. The actuarial method is used to allocate the interest rate of 15% to the accounting periods over the term of the lease. What is the lease obligation at the end of the first year at 31 March 20-1? You may wish to use the following table to make the required calculations. Lease Interest Total Repayment After outstanding @ 15% on 31/03 repayment 1 (a) 25,690 (b) 33,400 (c) 38,410 (d) 41,110 (b) Amato plc purchases an item of machinery that will be used to produce a new product. The following costs are incurred. List price of machinery 280,000 Delivery cost 2,800 Installation cost 4,100 Pre-production testing 5,700 Start-up costs for introducing the new product 12,600 Warranty cost 8,200 Annual insurance 3,900 What are the total attributable costs which can be included in the cost of the machinery? (a) 286,900 (b) 292,600 (c) 305,200 (d) 313,400
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 (c) Percy s Plants Ltd provides plants and their continued care on a 12 month contract to business offices. The company prepares its financial statements to 31 March each year. During the year to 31 March 20-1, Percy s Plants entered into a 12 month contract to provide plants and their care in the reception of Arbery s Accountants. The contract was for 22,200 and commenced on 1 September 20-0. What is the amount of revenue, if any, which should be recognised in the financial statements for the year ending 31 March 20-1 in respect of the contract with Arbery s Accountants? (a) Nil (b) 11,100 (c) 12,950 (d) 22,200 (d) Buxton plc has held 30% of the ordinary share capital of Robin Ltd for three years and includes the investment under the heading of non-current assets using the equity method. How will Buxton value the investment in the statement of financial position? (a) (b) (c) (d) At the original price paid At the proportionate share of Robin Ltd net assets At the proportionate share of Robin Ltd net assets plus the original value of goodwill on acquisition At the proportionate share of Robin Ltd net assets plus the carrying value of goodwill (e) Retro plc purchased for its own use a factory on 1 March 20-1 for 750,000. The factory is depreciated over its estimated useful life of 40 years using the straight line method. At 1 March 20-5 the building is valued at 800,000 and the directors decide to incorporate this valuation into the books of account from this date. What is the amount to be transferred to the revaluation surplus? (a) 50,000 (b) 106,250 (c) 125,000 (d) 143,750
p r a c t i c e a s s e s s m e n t 3 9 Task 6 The Managing Director of Walker plc has asked you to prepare the consolidated statement of financial position for the group. Walker plc has one subsidiary undertaking, Quaver Ltd. The statement of financial position of the two companies as at 31 March 20-1 are set out below. Statements of financial position as at 31 March 20-1 Walker plc Quaver Ltd 000 000 Non-current assets Investment in Quaver Ltd 31,800 Property, plant and equipment 57,000 36,200 88,800 36,200 Current assets Inventories 26,145 12,466 Trade and other receivables 18,218 7,386 Cash and cash equivalents 3,347 259 47,710 20,111 Total assets 136,510 56,311 Equity and liabilities Equity Share capital 54,000 15,000 Share premium 14,000 5,200 Retained earnings 41,398 20,260 109,398 40,460 Non-current liabilities Long-term loans 15,000 8,400 Current liabilities Trade and other payables 8,995 5,276 Tax liabilities 3,117 2,175 12,112 7,451 Total liabilities 27,112 15,851 Total equity and liabilities 136,510 56,311
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 Further information The share capital of Quaver Ltd consists of ordinary shares of 1 each. Ownership of these shares carries voting rights in Quaver Ltd. There have been no changes to the balances of share capital and share premium during the year. Walker plc acquired 10,500,000 shares in Quaver Ltd on 1 April 20-0. At 1 April 20-0 the balance of retained earnings of Quaver Ltd was 12,600,000. On 1 December 20-0 Walker plc made an interest-free long-term loan of 3,000,000 to Quaver Ltd and classified it as part of its investment in Quaver Ltd. Quaver Ltd has classified the loan as a non-current liability in its financial statements. No loan repayments have been made. During the year Walker plc sold goods costing 600,000 to Quaver plc for 840,000. At 31 March 20-1 half of these goods were still included in the inventories of Quaver Ltd. The directors of Walker plc have concluded that goodwill has been impaired by 20% during the year. Required Draft the consolidated statement of financial position for Walker plc and its subsidiary undertaking as at 31 March 20-1 Goodwill 000 Consideration NCI at acquisition Net assets acquired Impairment Goodwill Non-controlling interest 000 Share capital attributable to NCI Share premium attributable to NCI Retained earnings attributable to NCI Non-controlling interest Retained earnings 000 Parent Inter-company adjustment Subsidiary attributable to Parent Impairment Group retained earnings
p r a c t i c e a s s e s s m e n t 3 1 1 Walker plc Consolidated statement of financial position as at 31 March 20-1 000 Assets Non-current assets Goodwill Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity and liabilities Equity Share capital Share premium Retained earnings Non-controlling interest Total equity Non-current liabilities Loan Current liabilities Trade and other payables Tax liabilities Total liabilities Total equity and liabilities
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 Task 7 You have been asked you to calculate ratios for Bradford Ltd in respect of its financial statements for the year ending 31 March 20-1 to assist your manager in his analysis of the company. Bradford Ltd s statement of profit or loss and statement of financial position are set out below. Bradford Ltd statement of profit or loss for the year ended 31 March 20-1 Continuing operations 000 Revenue 31,602 Cost of sales (17,730) Gross profit 13,872 Distribution costs (5,867) Administration expenses (3,913) Profit from operations 4,092 Finance costs (645) Profit before tax 3,447 Tax (718) Profit for the year 2,729
p r a c t i c e a s s e s s m e n t 3 1 3 Statement of financial position as at 31 March 20-1 000 Non-current assets Property, plant and equipment 43,422 Current assets Inventories 10,570 Trade and other receivables 3,781 Cash and cash equivalents 1,453 15,804 Total assets 59,226 Equity and liabilities Equity Share capital 18,000 Share premium 3,400 Retained earnings 26,845 Total equity 48,245 Non-current liabilities Bank loans 8,000 8,000 Current liabilities Trade and other payables 2,231 Tax liability 750 2,981 Total liabilities 10,981 Total equity and liabilities 59,226
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 (a) Identify the formulae that are used to calculate each of the following ratios. Return on shareholders funds Profit from operations / Total equity x 100 Profit from operations / Share capital Profit after tax / Total equity x 100 Profit after tax / (Total equity + Non-current liabilities) x 100 Acid test ratio Total assets / Total liabilities Current assets / Current liabilities (Total assets inventories) / Current liabilities (Current assets inventories) / Current liabilities Asset turnover (net assets) Revenue / Non-current assets Revenue / (Total assets Current liabilities) Profit from operations / Non-current assets Profit from operations / (Total assets Current liabilities) Gearing Non-current liabilities / (Total equity + Non-current liabilities) x 100 Total liabilities / Total equity x 100 Total liabilities / (Total equity + Non-current liabilities) x 100 Total equity / Non-current liabilities x 100 Interest cover Profit after tax / Finance costs Profit from operations / Finance costs Finance costs / Profit after tax Finance costs / Profit from operations
p r a c t i c e a s s e s s m e n t 3 1 5 (b) Calculate the following ratios (to the nearest one decimal place where appropriate). Return on shareholders funds % Acid test ratio :1 Asset turnover (net assets) times Gearing % Interest cover times Task 8 The directors of Ashanti Ltd have concerns about the liquidity and cash flow of the company following a significant reduction in the cash balances during the year. The company has invested in plant and machinery during the year. Ashanti Ltd is highly profitable and had no problem in raising the additional funds through a loan and issuing some shares. The directors have provided you with the following information for the past two years. 20-1 20-0 000 000 Bank balance (1,805) 630 Reconciliation of profit from operations to net cash flow (extract) 20-1 20-0 Increase in inventories (6,050) (4,508) Increase in trade receivables (3,300) (1,510) Decrease in trade payables (3,025) (1,650) Ratios 20-1 20-0 Current ratio 4.6:1 2.5:1 Quick (acid test) ratio 2.8:1 1.1:1 Trade receivables collection period 67 days 41 days Prepare notes for the directors that: (a) (b) Comment on the movements in working capital shown in the reconciliation of operating profit to net cash flow from operating activities extract between 20-0 and 20-1. Comment on the liquidity and use of resources based on the information provided and what this tells you about the company.
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 TA S K S 1 & 2 ( A LT E R N AT I V E ) You have been asked to prepare the statement of cash flow and statement of changes in equity for Amato Ltd for the year ended 31 March 20-1. The most recent statement of profit or loss and the statements of financial position of Amato Ltd for the past two years are set out below. Amato Ltd Statement of profit or loss for the year ended 31 March 20-1 Continuing operations 000 Revenue 61,298 Cost of sales (32,483) Gross profit 28,815 Dividends received 500 Loss on disposal of property, plant and equipment (679) Distribution costs (12,548) Administrative expenses (7,991) Profit from operations 8,097 Finance costs (250) Profit before tax 7,847 Tax (1,061) Profit for the period from continuing operations 6,786 Other comprehensive income for the year gain on revaluation 1,500 Total comprehensive income for the year
p r a c t i c e a s s e s s m e n t 3 1 7 Amato Ltd Statements of financial position as at 31 March 20-1 20-0 000 000 Non-current assets Property, plant and equipment 35,162 27,530 Current assets Inventories 10,870 9,638 Trade and other receivables 9,726 9,983 Cash and cash equivalents 0 217 20,596 19,838 Total assets 55,758 47,368 Equity and liabilities Equity Share capital 15,300 13,600 Share premium 5,100 4,300 Revaluation 2,500 1,000 Retained earnings 25,932 20,946 Total equity 48,832 39,846 Non-current liabilities Bank loans 2,160 2,420 2,160 2,420 Current liabilities Trade and other payables 3,474 3,932 Tax liability 1,078 1,170 Bank overdraft 214 0 4,766 5,102 Total liabilities 6,926 7,522 Total equity and liabilities 55,758 47,368
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 total depreciation charge for the year was 3,940,000. Property, plant and equipment costing 2,098,000 with accumulated depreciation of 1,250,000 was sold in the year. All sales and purchases were on credit. Other expenses were paid for in cash. A dividend of 1,800,000 was paid during the year. (a) Prepare a reconciliation of profit before tax to net cash from operating activities for Amato Ltd for the year ended 31 March 20-1. (b) Using the pro-forma in your answer booklet, prepare the statement of cash flows for Amato Ltd for the year ended 31 March 20-1. (c) Draft the statement of changes in equity for the year ended 31 March 20-1. Reconciliation of profit before tax to net cash from operating activities 000 Adjustments for: Cash generated from operations Net cash from operating activities
p r a c t i c e a s s e s s m e n t 3 1 9 Amato Ltd statement of cash flows for the year ended 31 March 20-1 Net cash from operating activities Investing activities 000 Net cash used in investing activities Financing activities Net cash from financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Amato Ltd Statement of changes in equity for the year ended 31 March 20-1 Balance at 1 April 20-0 Changes in equity for the year Total comprehensive income Dividends Share Share Revaluation Retained Total capital premium earnings equity 000 000 000 000 000 Balance at 31 March 20-1
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 TA S K 6 ( A LT E R N AT I V E ) Graff plc acquired 80% of the ordinary share capital of Wade Ltd on 1 April 20-0. The statements of profit or loss of the two companies for the year ended 31 March 20-1 is set out below. Statements of profit or loss for the year ended 31 March 20-1 Graff plc Wade Ltd 000 000 Continuing operations Revenue 65,383 18,064 Cost of sales (42,678) (7,586) Gross profit 22,705 10,478 Other income 2,200 Distribution costs (10,221) (4,481) Administrative expenses (6,772) (3,253) Profit from operations 7,912 2,744 Finance costs (800) (355) Profit before tax 7,112 2,389 Tax (1,435) (489) Profit for the period from continuing operations 5,677 1,900 Further information During the year Graff plc sold goods which had cost 2,580,000 to Wade Ltd for 3,300,000. A third of the goods that Graff plc had sold to Wade Ltd remained in the inventories of Wade Ltd. Wade Ltd paid dividends of 2,500,000 during the year. Required Draft a consolidated statement of profit or loss for Graff plc and its subsidiary for the year ended 31 March 20-1.
p r a c t i c e a s s e s s m e n t 3 2 1 Revenue 000 Graff Wade Total inter-company adjustment Consolidated revenue Cost of sales 000 Graff Wade Total inter-company adjustment Consolidated cost of sales Consolidated statement of profit or loss for the year ended 31 March 20-1 Continuing operations 000 Revenue Cost of sales Gross profit Other income Distribution costs Administration expenses Profit from operations Finance costs Profit before tax Tax Profit for the year Attributable to: Equity holders of the parent Non-controlling interest