Paper T6 (Int) Drafting Financial Statements: Sample Multiple Choice Questions - June 2009

Certified Accounting Technician examination
Sample multiple choice questions June 2009
Paper T6 (INT) Drafting Financial Statements

Section A only All questions are compulsory Note: Section B of the actual exam paper will contain three written questions
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The following questions are typical of those that will appear in Section A of the examination paper from June 2009 onwards. There will be a total of ten questions in section A. All questions in Section A will be worth two marks each.
Aye and Bee are in partnership sharing profits and losses in the ratio 3:2 respectively. The partners capital and current account balances at the beginning of the year were as follows: Current accounts Capital accounts Aye $ 7,500CR 12,000CR Bee $ 2,100CR 9,000CR
The partnership made a profit of $100,000 for the year. Ayes drawings were $9,200, and Bees were $7,320. What should Ayes current account balance be at the end of the year? A $67,500 B $58,300 C $76,700 D $16,700 (2 marks)
At 1 May 2009 Tibor purchased six million of Kinnots ten million $1 ordinary shares for $6,000,000. At that date Kinnot had net assets with a fair value of $8,450,000 and its share price was $1.10. It is group policy to value the non-controlling interest at the fair value of the subsidiarys identifiable net assets using the market value of the shares at acquistion. What is the total goodwill on acquisition of Kinnot? A $930,000 B $2,450,000
C $1,550,000 D $1,950,000 (2 marks)
Which of the following four statements are correct? A B C D If all the conditions specified in IAS 38 Intangible assets are met, the directors can chose whether to capitalise the development expenditure or not. Amortisation of capitalised development expenditure will appear as an item in a companys statement of changes in equity. Capitalised development costs are shown in the statement of financial position as non-current assets. Capitalised development expenditure must be amortised over a period not exceeding five years. (2 marks)
According to IAS I Presentation of Financial Statements, which of the following items could appear in the statement of changes in equity: (1) (2) (3) (4) Total comprehensive income for the year Dividends Loss on sale of investments. Issue of share capital
A 1, 2 and 4 only B 1, 3 and 4 only C 1 and 3 only (2 marks)
D 1, 2, 3 and 4
A property company received cash for rent totalling $628,950 in the year ended 31 May 2009. Figures for rent in advance and in arrears at the beginning and end of the year were: Rent received in advance Rent in arrears (all subsequently received) 31 May 2008 $ 76,950 31,725 3 1 May 2009 $ 66,525 36,300
What amount should appear in the companys income statement for the year ended 31 May 2009 for rental income? A $613,950 B $634,800 C $623,100 (2 marks)
D $643,950
According to IAS 10 Events after the Reporting Period, which of the above material events which occurred after the reporting date, require an adjustment to the figures in the financial statements? (1) An issue of shares to finance expansion. (2) A fire destroying some of the companys inventory (the companys going concern status is not affected). (3) Sale for less than cost of some old inventory held at the reporting date (4) The bankruptcy of a major customer, with a substantial debt outstanding at the reporting date. A 3 and 4 only B 1, 2 and 3 C 2 and 3 only (2 marks)
D 2 and 4 only
Which of the following statements are correct? (1) The money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements. (2) Materiality means that only physical assets are recognised in the financial statements. (3) In times of rising prices, the use of historical cost accounting tends to understate assets and overstate profits.
A 1 only B 2 only C None of the statements (2 marks)
D 3 only
When calculating a companys gearing ratio which of the following factors would cause it to fall? (1) A rights issue of ordinary shares. (2) An issue of loan notes. (3) An upward revaluation of non-current assets. A 1 only B 1 and 2 C 2 and 3 (2 marks)
D 1 and 3
Steve and Paul are in partnership and share profits equally. Steve receives an annual salary $30,250 and interest on capital is paid at 5% per year. At 1 June 2008 their capital balances were: $ Steve 150,000 Paul 75,000 On 1 December 2008 Paul introduced a further $75,000 capital, and Steves salary was discontinued. The partnership profit for the year ended 31 May 2009 was $228,250. What was Steves total profit share for the year ended 31 May 2009? A $100,000 B $99,000 C $122,625 (2 marks)
D $105,625
10 At 31 May 2008 Stoneacres capital structure was as follows: Ordinary share capital (1,000,000 shares of 25c each) Share premium account $ 250,000 200,000
In the year ended 31 May 2009 Stoneacre made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full. Later in the year Stoneacre made a bonus issue of 1 share for every 10 held, using the share premium account for the purpose. What was the companys capital structure at 31 May 2009? Share premium account $ 187,500 537,500 550,000 (2 marks)
Ordinary share capital $ A 387,500 B C 412,500 387,500
D 400,000 550,000
End of Sample Questions
Answers
Sample Multiple Choice Question Paper T6 (INT) Drafting Financial Statements 1 B Opening balance Profit share (100,000 x 3/5) Drawings Closing current account balance
Answers
$ 7,500 60,000 (9,200) 58,300
2 D Consideration transferred Fair value of non-controlling interest 4,000,000 x $1.10 Less fair value of net assets at acquistion Goodwill = 3 4 5 6 7 8 C A
$ 6,000,000 4,400,000 10,400,000 (8,450,000) 1,950,000
D 628,950 + (76,950 31,725) (66,525 36,300) = 643,950 A A D
9 C Steve Paul $ $ Profit Salary (30,250 x ) 15,125 Interest on capital (150,000 x 5%) 7,500 (75,000 x 5% x ) 1,875 (150,000 x 5% x ) 3,750 Profit share 100,000 100,000 Total profit share 122,625 105,625 10 B Share capital $ Opening balance 250,000 Rights issue (1,000,000 x 1/2 x 25c) 125,000 (1,000,000 x 1/2 x 75c) Bonus issue (1,500,000 x 1/10 x 25c) 37,500 (1,500,000 x 1/10 x 25c) Total 412,500
$ 228,250 (15,125) (7,500) (5,625) 200,000
Share premium $ 200,000 375,000 (37,500) 537,500
Answers
4JINTIX Paper 6INT
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream)
June 2004 Answers and Marking Scheme Marks
4JINTAA Paper 6INT
(a)
(i)
Sondaw Income Statement for the year ended 31 May 2004 Revenue Cost of sales (W1) Gross profit Distribution costs (W1) Administrative expenses (W1) Profit from operations Finance cost Profit before tax Tax Net profit for the period $000 5,876 (3,072) 2,804 (492) (763) 1,549 (30) 1,519 (250) 1,269 Total
05 05 50 05 30 60 05 05 05 05 05 180
(ii)
Sondaw Balance sheet as at 31 May 2004 Assets Non-current assets Property, plant and equipment (W2) Current assets Inventory Trade and other receivables ($438 $38 $20 + $6) Cash Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Accumulated profits ($280 + $1,269) 800 386 50 $000 3,193
05
30 05 25 10
1,236 4,429
1,500 1,549 3,049 600 530 250
10 10
Non-current liabilities 5% loan notes Current liabilities Trade and other payables ($500 + $10 + $20) Taxation Total equity and liabilities
05 35 05
780 4,429 Total
14
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4JINTAA Paper 6INT
Marks Workings 1 Cost of Sales Distribution Costs $000 240 27 150 Administrative Expenses $000 300 18 242 50
$000 Opening inventory 1,200 General expenses (10:40:50) 60 Heat and light (50:30:20) 45 Marketing and advertising ($248 $6) Wages ($490 + $10) (60:30:10) 300 Purchases 2,200 Discounts received (150) Closing inventory (800) Bad debt expense Allowance for bad and doubtful debts (($438 $38) x 5%) Depreciation buildings (50:20:30) 125 Depreciation motor vehicles Depreciation plant and equipment 92 Audit fee 3,072 Non current assets ($000) Buildings $ 5,000 (2,000) (250)
50 25 492 Vehicles $ 160 (60)
38 20 75
20 763 Plant & Equip $ 700 (240) Total Property Plant & Equip $ 5,860 (2,300) 1,(250) 1,1(25) 1,1(92) 3,193
Cost Depreciation b/f Current years depreciation: Buildings $5000 x 5% Motor vehicles ($160 $60) x 25% Plant & equipment ($700 $240) x 20%
(25) 2,750 75 (92) 368
(b)
The purpose of depreciation is to spread the cost of an asset, less its residual value, over its productive (economic) life. When deciding the method of calculating depreciation the following factors are relevant: Pattern of usage If the main value from the asset is obtained during its earliest years then it might be appropriate to use reducing balance. Life of the asset The time period in which wear and tear, obsolescence or depletion takes place. Total
10
10 10 30
4JINTAB Paper 6INT
Marks 2 Nobrie Cash flow statement for the year ended 31 May 2004 $000 Cash flows from operating activities Net profit before tax 41,738 Adjustments for: Depreciation 5,862 Investment income (146) Interest paid 1,177 Profit on equipment disposal (1,540) Operating profit before working capital changes 47,091 Increase in inventory (866) Increase in receivables (5,684) Decrease in payables (3,625) Cash generated from operations 36,916 Interest received 146 Interest paid (1,177) Tax paid (9,191) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Repayment of long term borrowing Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period (28,048) 3,053 (24,995) 05 $000 05 05 05 05 15
15 15 15
05 05 20 26,694 10 40 10 10
7,450 (6,244) 1,206 2,905 (4,749) (1,844) Total
20 10 05 10 10 10 250
Examiners note IAS 7 allows interest paid to be an operating cash flow or a financing cash flow. Interest received can be an operating cash flow or an investing cash flow. Workings 1 Paid (Balancing figure) Balance c/f Taxation $000 9,191 7,989 17,180 $000 Disposal of assets Proceeds Less NBV (Balancing figure) Profit on sale 3 B/fwd Revaluation Additions (Balancing figure) 3,053 (1,513) 1,540 Non-current Asset NBV $000 88,466 8,272 28,048 124,786 Depreciation Disposal NBV (W2) C/Fwd $000 5,862 1,513 117,411 124,786 Balance b/f Income statement $000 7,323 9,857 17,180
4JINTAC Paper 6INT
Marks 3 Partnership profit statement for the year ended 31 May 2004 3 months to 9 months to 31 August 2003 31 May 2004 $000 $000 200,000 600,000 (25,000 ) (18,000) 175,000 582,000 4/7 2/7 1/7 100,000 50,000 25,000 175,000 4/10 3/10 3/10 232,800 174,600 174,600 582,000 Total $000 800,000 (25,000) (18,000) 757,000 332,800 224,600 25,000 174,600 757,000
Unadjusted profit Bad debt written off Loan interest (W1)
10 10 10
Division of Profit Angela Brenda Christine Hannah
10 10 05 05 60
Capital accounts Marks Pre 31/8/03 Angela $ Gdwill 2:1 467,667 Loan a/c Balance c/d 633,333 1,100,000 Post 31/8/03 Gdwill 4:3:3 Bal c/f Brenda $ 233,333 326,667 560,000 Christine Hannah $ $ 480,000 480,000 210,000 250,000 Angela $ 10 Balance b/f 500,000 05 Gwill 4:2:1 400,000 F Prop 4:2:1 200,000 1,100,000 15 Balances b/d Cash capital Cash gdwill Gdwill 633,333 466,667 1,100,000 Brenda $ 260,000 200,000 100,000 560,000 Christine Hannah $ $ 330,000 100,000 50,000 480,000 Marks
15 15
280,000 210,000 820,000 350,000
1,100,000 560,000 460,000 30 Current accounts
326,667 250,000 210,000 233,333 560,000 460,000
05 05 10 50 Marks
Marks Pre 31/8/03 Drawings Bal c/d Angela $ 20,000 140,000 160,000 Brenda $ 110,000 80,000 90,000 Christine Hannah $ $ 35,000 35,000 Angela $ 15 Bal b/f 60,000 Profit to 31/8/03 100,000 160,000 Brenda $ 40,000 50,000 90,000 Christine Hannah $ $ 10,000 25,000 35,000
15
Post 31/8/03 Drawings 40,000 Bal c/f 332,800 372,800
40,000 30,000 15 Bal b/d 140,000 80,000 214,600 144,600 Profit to 31/5/04 232,800 174,600 174,600 254,600 174,600 372,800 254,600 174,600 30
15 30
Working (W1) Interest on Christines loan Closing capital $480,000 Interest at 5% for 9/12 = $18,000
4JINTAD Paper 6INT
(a) Gross profit percentage Gross profit x 100 Sales Net profit x 100 Sales revenue Net Profit x 100 Equity Cost of goods sold Inventory Current assets inventory Current liabilities 4,600 x 100 = 20,000 2,140 x 100 = 20,000 2,140 x 100 = 11,120 15,400 6,000 4,520 3,200 =
2003 2300% 4,950 x 100 26,000 2,180 x 100 26,000 2,180 x 100 13,300 21,050 6,700 7,700 4,200 6,740 x 365 26,000 =
2004 1904%
Net profit percentage
1070%
838%
Return on equity
1924%
1639%
Inventory turnover
257 times
314 times
Quick ratio
141 :1
183 :1
Receivables collection period Receivables x 365 Sales Marking Scheme 1/ mark for correctly stating the formula and 2 (b)
1/
4,400 x 365 = 20,000
8030 days
9462 days
mark for each correct ratio
Relevant comments could include: It is difficult to judge the success of the expansion over such a short period of time. The profitability ratios have deteriorated. The reduction in the gross profit percentage could be due to difficult trading conditions or that the selling prices have been lowered to generate sales. The deterioration in the net profit percentage is partly due to the reduced gross profits. The rate of inventory turnover has improved which might suggest that profitability in the future will improve. The quick ratio has improved, this is partly due to the increase in cash which may indicate that not all the cash raised from issuing the debentures has been invested. The receivables collection period has increased which may indicate poor credit control, or longer credit terms being offered to customers, or increased sales due to the success of the expansion. Marking scheme 1 mark for each relevant comment up to a maximum of 7 marks.
(c)
Some of the factors Egriff should consider when deciding whether to raise finance by loan notes rather than issuing more shares: 1 2 3 4 5 Loan notes pay a fixed level of interest. Therefore, the company will find budgeting for the cash flows straight-forward. Loan note holders are non-current creditors of the company and therefore do not control the company, unlike shareholders who own the company and will be able to vote on issues affecting the company. If company profits fall then share dividends do not have to be paid. However, the interest on loan notes will still have to be paid regardless of the level of profit. Shareholders will often expect dividend payments to grow over time, therefore increasing the costs to the company. If the company was to be wound up then loan note holders would rank higher than ordinary shareholders.
Marking scheme 1 mark for each relevant comment up to a maximum of 4 marks.
Drafting Financial Statements

(International Stream)
ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 7 JUNE 2004
QUESTION PAPER Time allowed 3 hours ALL FOUR questions are compulsory and MUST be answered
The Association of Chartered Certified Accountants

Paper T6(INT)
4JGIRLAA Paper 6IRL
ALL FOUR questions are compulsory and MUST be attempted 1 You have been provided with the following trial balance as at 31 May 2004 for a limited liability company called Sondaw. Dr $000 50 1,200 600 90 248 490 5,000 160 700 438 2,200 30 600 5,876 150 500 1,500 2,000 60 240 11,206 Cr $000
Bank Inventory at 1 June 2003 General expenses Heating and lighting Marketing and advertising expenses Wages Buildings at cost Motor vehicles at cost Plant and equipment at cost Accumulated profits at 1 June 2003 Trade receivables Purchases Loan note interest paid 5% Loan note Revenue Discounts received Trade payables $1 Ordinary Shares Accumulated depreciation at 1 June 2003 Buildings Motor vehicles Plant and equipment
280
11,206
The following notes are relevant: 1 2 Inventory at 31 May 2004 was valued at $800,000. Marketing and advertising expenses include $6,000 paid in advance for a marketing campaign which will begin in June 2004. Marketing and advertising expenses should be allocated to administrative expenses. 3 There are wages outstanding of $10,000 for the year ended 31 May 2004. 4 A customer ceased trading owing the company $38,000; the debt is not expected to be recovered. 5 An allowance for doubtful debts is to be established amounting to 5% of trade receivables. 6 Depreciation is to be provided for as follows: (i) buildings at 5% per annum on their original cost, allocated 50% to cost of sales, 20% to distribution costs and 30% to administrative expenses. (ii) motor vehicles at 25% per annum of their written down value, allocated to distribution costs. (iii) plant and equipment at 20% per annum of their written down value, allocated to cost of sales. 7 No dividends have been paid or declared. 8 Income tax of $250,000 is to be provided for the year. 9 The audit fee is estimated to be $20,000. 10 The expenses listed below should be apportioned as follows: Cost of Sales 10% 50% 60% Distribution Costs 40% 30% 30% Administrative Expenses 50% 20% 10%
General expenses Heating and lighting Wages and salaries
4JIRLAA Paper 6IRL
Required: (a) Prepare the following financial statements for the year ended 31 May 2004 for Sondaw in accordance with IAS 1 Presentation of Financial Statements: (i) (ii) An income statement; A balance sheet. (18 marks) (14 marks)
You are advised to show workings where appropriate. (b) Briefly explain the purpose of providing for depreciation and identify the factors to be taken into account when deciding on which depreciation method to use. (3 marks) (35 marks)
[P.T.O.
4JINTAB Paper 6INT
You have been given the following information relating to a limited liability company called Nobrie. This company is preparing its financial statements for the year ended 31 May 2004. Nobrie Income statement for the year ended 31 May 2004 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Investment income Finance cost Profit before tax Tax Net profit for the period Accumulated profits brought forward at 1 June 2003 Accumulated profits carried forward at 31 May 2004 Nobrie Balance Sheets as at 31 May 2004 Assets Non-current assets Cost Accumulated depreciation $000 $000 144,844 (27,433) 117,411 24,931 18,922 3,689 24,065 13,238 2,224 $000 2003 $000 114,785 (26,319) 88,466 $000 66,600 (13,785) 52,815 (7,530) (2,516) 42,769 146 (1,177) 41,738 (9,857) 31,881 28,063 59,944
Current Assets Inventory Trade receivables Cash Total assets Equity and liabilities Capital and reserves Ordinary share capital Share premium Revaluation reserve Accumulated profits Non-current liabilities 6% loan note Current Liabilities Bank overdraft Trade payables Taxation Total equity and liabilities
47,542 164,953
39,527 127,993
27,000 14,569 15,395 59,944
116,908
23,331 10,788 7,123 28,063
69,305
17,824 5,533 16,699 7,989 6,973 20,324 7,323
24,068
30,221 164,953
34,620 127,993
4JINTAB Paper 6INT
Additional information (i) During the year ended 31 May 2004, the company sold a piece of equipment for $3,053,000, realising a profit of $1,540,000. There were no other disposals of non-current assets during the year.
(ii) Profit from operations is stated after charging depreciation of $5,862,000. (iii) There were no amounts outstanding in respect of interest payable or receivable as at 31 May 2003 or 2004. (iv) There were no dividends paid or declared during the year. Required: Prepare a cash flow statement for Nobrie for the year ended 31 May 2004 in accordance with IAS 7 Cash Flow Statements. (25 marks)
4JINTAC Paper 6INT
Angela, Brenda and Christine are in a partnership and share profits and losses in the ratio 4:2:1. They prepare their accounts to 31 May each year. At 1 June 2003 their capital and current accounts showed the following balances: Capital accounts $ 500,000 260,000 330,000 Current accounts $ 60,000 40,000 10,000
Angela Brenda Christine
On 31 August 2003 Christine decided to leave the partnership due to ill health. Hannah joined the partnership on 1 September 2003 and introduced $250,000 as capital and also paid $210,000 for a 30% share of the goodwill. Goodwill, which is not to be reported in the balance sheet, is agreed to be worth $700,000. After Hannahs admission to the partnership it was agreed the profits and losses would be shared as follows: Angela Brenda Hannah 40% 30% 30%
Before calculating the amount Christine is entitled to when she leaves the partnership the following adjustments need to be taken into account: (a) The net profit for the partnership for the year ended 31 May 2004 was $800,000 before allowing for items (b) and (c) below. It was agreed that the profit accrued evenly throughout the year. (b) A bad debt of $25,000 relating to a sale made in June 2003 is to be written off for the year ended 31 May 2004. (c) Christine has decided to leave her final agreed capital balance in the partnership as a loan and receive interest at a rate of 5% per annum up to the year end. The loan interest was paid to her on 31 May 2004. (d) The partnerships freehold property is to be revalued upwards by $350,000 and it is agreed that the freehold property will be carried at the revalued amount in the balance sheet. (e) The partners drawings during the year were: Angela Brenda Christine Hannah Required: Prepare a statement showing the final profit for the year ended 31 May 2004 and the share attributable to each partner, together with the capital and current accounts for all four partners. (20 marks) $ 60,000 50,000 35,000 30,000 ($20,000 before 31 August 2003 and the remainder afterwards) ($10,000 before 31 August 2003 and the remainder afterwards) (All before 31 August 2003) (All after 31 August 2003)
[P.T.O.
4JINTAD Paper 6INT
The financial statements of Egriff, a company limited by liability, for the years ended 31 May 2003 and 31 May 2004 are summarised below. Income statements for the years ended 31 May 2003 31 May 2004 $000 $000 $000 $000 20,000 26,000 (15,400) (21,050) 4,600 4,950 (800) (1,550) (110) (2,460) 2,140 Balance sheets as at 31 May 2003 $000 $000 Non current assets At cost Accumulated depreciation Current assets Inventory Receivables Bank 4,600 (800) 6,000 4,400 120 31 May 2004 $000 $000 5,600 (1,000) 6,700 6,740 960 (900) (1,565) (200) (105) (2,770) 2,180
Revenue Cost of sales Gross profit Expenses: Administrative Selling and distribution Depreciation Loan note interest
Net profit
3,800
4,600
10,520 14,320 8,000 3,120 11,120 3,200 14,320
14,400 19,000 8,000 5,300 13,300 1,500 4,200 19,000
Capital and reserves Issued share capital Accumulated profit
Non-current liabilities 7% Loan notes Current liabilities
Additional Information During 2003 Egriff issued loan notes of $1,500,000 at 7% per annum to fund the expansion of the business. The additional cash was received on 1 June 2003.
4JINTAD Paper 6INT
Required: (a) Calculate the following ratios for Egriff for both years. Gross profit percentage Net profit percentage Return on equity Inventory turnover Quick ratio Receivables collection period State the formulas used for calculating the ratios. (9 marks)
(b) Comment on the success of the business expansion as indicated by the ratios you have calculated in part (a). (7 marks) (c) Briefly explain the factors Egriff should consider in deciding whether to raise finance by issuing loan notes rather than issuing more shares. (4 marks) (20 marks)
End of Question Paper
Answers
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream) 1 (a) Guyridge Income statement for the year ended 31 October 2004 $ Sales revenue (W1) Opening inventory Purchases (W2) Carriage inwards Less closing inventory Cost of goods sold Gross profit Expenses Vehicle running expenses Insurance Heating and lighting Telephone Advertising Rent and rates Office supplies Depreciation for: Vehicles Equipment Bad debts Discounts allowed $ 25,000 195,000 4,500 224,500 (37,000) (187,500) 207,500 13,500 8,000 6,250 3,500 4,250 14,000 1,250 6,000 12,000 18,000 15,000 5,000 (88,750) 118,750 2,000 1,000 8,000 5,000 ________ 3,000 121,750 (13,000) ________ 108,750 72,500 36,250 108,750 $ 395,000
December 2004 Answers and Marking Scheme Marks Workings ($) 05 30 05 20 05 05 05 05 05 15 15 05 15 15 05 10 10 05 05
(5,000 + 4,000 1,000) (7,000 3,000 + 2,250) (2,250 + 2,000) (15,000 1,000)
Net profit before appropriation Interest on drawings: Kevin David Interest on capital: Kevin David
05 05 05 05 05
Share of Profit: Kevin 2/3 1 David /3
10 10 23
(b)
Current Accounts Kevin Drawings Interest on drawings Balance c/f $ 60,000 2,000 41,500 103,500 David Drawings Interest on drawings Balance c/f $ 30,000 1,000 31,250 62,250 Balance b/f Interest on capital Share of profit $ 21,000 5,000 36,250 62,250 10 10 05 50 Balance b/f Interest on capital Share of profit $ 23,000 8,000 72,500 103,500 10 10 05
Marks (c) Guyridge Balance Sheet as at 31 October 2004 Cost Provision for Net Book Depreciation Value $ $ $ Non-current assets Vehicles Equipment 32,000 60,000 92,000 14,000 24,000 38,000 37,000 55,000 1,000 68,000 18,000 36,000 54,000 05
10 10 10 05 05 10 30
Current Assets Inventory Trade receivables (W1) Prepayments Bank (W3)
161,000 215,000
Partners capital accounts Kevin David Partners current accounts Kevin David Current liabilities Trade payables (W2) Accruals
80,000 50,000 41,500 31,250
130,000
05 05 05 05
72,750 202,750
10,000 2,250
12,250 215,000
05 10 12 Allocation of marks
Workings W1 Receivables b/f Sales (bal. fig)
W2 Bank Payables c/f
W3 Balance b/f Receivables control
Trade Receivables Control Account $ 80,000 Bad debts 395,000 Settlement discounts Bank Receivables c/f 475,000 Trade Payables Control Account $ 200,000 Trade payables b/f 10,000 Purchases (bal. fig) 210,000 Bank $ 10,000 Trade payables control 400,000 Drawings: Kevin David Carriage inwards Vehicle expenses Insurance Heating and lighting Telephone Advertising Rent and rates Office supplies Balance c/f 410,000
$ 15,000 5,000 400,000 55,000 475,000 $ 15,000 195,000 210,000 $ 200,000 60,000) 30,000) 4,500) 13,500) 5,000) 7,000) 3,500) 2,250) 15,000) 1,250) 68,000 410,000
05 + 05 05 + 05 05 05
05 + 05 05 + 05
05 + 05 05 + 05
Marks 2 (a) Goodwill on acquisition of Bury Cost of investment Share capital ($30,000 x 70%) General reserve ($500,000 x 70%) Accumulated profits ($1,500,000 x 70%) $000 21,000 350 1,050 $000 24,000 05 05 10 10
(22,400) 1,600 Total
(i)
Black 05 Consolidated income statement for the year ended 31 October 2004 $000 Workings ($000) Sales revenue 323,200 20 245,000 + 95,000 16,800 Cost of sales (176,640) 25 140,000 + 52,000 16,800 + 1,440* Gross Profit 146,560 Distribution costs (22,000) 05 Administrative expenses (68,000) 05 Goodwill impairment (160) 10 (960 800) Profit before tax 56,400 Income tax expense (18,250) 05 Profit after tax 38,150 Minority interest (4,500) 20 30% x 15,000 Net profit for the period 33,650 05 Total 100 Black Marks Consolidated Balance Sheet as at 31 October 2004 05 Assets $000 $000 Non-current assets Intangible goodwill 800 20 Property, plant and equipment 150,000 05 (110,000 + 40,000) 150,800 Current assets Inventory, at cost 15,810 15 (13,360 + 3,890 1,440*) Trade receivables 12,420 25 (14,640 + 6,280 7,000** 1,500***) Bank 6,070 34,300 05 (3,500 + 2,570) Total assets 185,100 Equity and liabilities Capital and Reserves $1 Ordinary shares 100,000 05 General reserves 9,550 15 (9,200 + ((1,000 500) x 70%) Accumulated profits (W1) 30,506 30 Minority interest 12,084 10 (30% x 40,280) 152,140 Current liabilities Trade payables 9,960 20 (9,000 + 2,460 1,500***) Dividends payable to Minority Interests 3,000 10 (10,000 7,000) Dividends 20,000 32,960 05 Total equity and liabilities 185,100 170 Notes: * Exclusion of unrealised profit held in inventory ($1,440,000) ** Exclusion of the intragroup dividends from trade receivables ($7,000,000) *** Intracompany indebtedness
(ii)
Working Paper W1 Accumulated profits as at 31 October 2004 $000 Black balance sheet Less unrealised profit Bury: Retained profits Pre-acquisition reserves $000 27,300 (1,440)
9,280 (1,500) 7,780 5,446 (800) 30,506 (1600 (960 160))
Group share (70% x $7,780,000) Less cumulative goodwill impairment as at 31 October 2004
Marks 3 (a) Dividend per share Dividend for the year Number of shares in issue Profit after tax for ord shholders Dividend Net Profit after tax No. of ordinary shares Price per share Earnings per share Debt Equity Profit before interest and taxation Interest 10,000 = 20 cents per share 50,000 11,150 = 11 times 10,000 11,150 = 22 cents 50,000 150 = 67 223 1,000 = 3% 32,520 12,715 = 254 times 50 15
Dividend cover
15
Earnings per share
15
Price earnings ratio
15
Debt/equity ratio
15
Interest cover
15
Total marks
____ 9
(b)
(i) & (ii) Notes on Tressvens ratios Ratio Dividend per share Tressven 20c Hilladay 10c Comment on the ratio calculated The level of dividend per share available to Tressven shareholders is double that available to Hilladay. This may suggest a generous level of dividend which will please shareholders in the short term. The level of dividend does not appear to be justified by the available profit. It also suggests that this level of dividend may not be sustainable in the future. The EPS for Tressven is similar to Hilladays EPS. However, Hilladay has retained half its earnings for future investment. This is not the case for Tressven and would suggest profit levels may stagnate. A comparison of the PE ratio suggests that investors are keener to invest in Hilladay than Tressven. This may be because of concerns regarding the future profitability of Tressven. The gearing ratio for Tressven seems low in comparison with Hilladay. It may be that Tressven is not borrowing sufficiently to invest in the future of the company. Alternatively Hilladay may have high borrowings. Tressven can comfortably afford to meet its interest charges, so can Hilladay. This suggests that Tressven could afford to increase its borrowing to invest.
Dividend cover
11
Earnings per share
22c
20c
Price earnings ratio
67
134
Debt/equity ratio
3%
15%
Interest cover
254
100
There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the information available. Other comments, if appropriate, will also be given credit. 1 mark for making a relevant comment about each ratio up to 6 marks.
(a)
The main purposes of the Framework for the Preparation and Presentation of Financial Statements are: (i) (ii) To provide a framework for the future development of international accounting standards and the review of existing ones. To inform interested parties (e.g. national standard setting bodies) of the approach taken by the IASB in formulating standards.
(iii) To provide guidance to practitioners when applying international accounting standards. (iv) To provide a basis for reducing the number of alternative accounting treatments permitted by international accounting standards and thereby promoting harmonisation of regulations, accounting standards and procedures. (v) To assist auditors in forming an opinion as to whether financial statements conform with international accounting standards.
(vi) To assist the users of financial statements when interpreting the information. (1 mark for each reason up to a maximum of 5 marks) (b) User Group Current (and future) investors Information needs They need to assess the financial performance of the organisation to understand the level of risk and the returns provided by their investment. Key information requirements: ability to generate cash, level of profitability, and dividends. They need information on the ability of the organisation to repay loans and any interest. Key information: profitability, ability to manage working capital (liquidity), current level of borrowing, value of assets. Customers that are dependent on the organisation for significant levels of business or are considering placing long term contracts will need to know whether it will stay in business or not. Key information requirements: ability to generate cash, and profitability. They will want to know whether the organisation will stay in business and whether they will be paid. Key information requirements: ability to generate cash, and profitability.
Lenders
Customers
Suppliers (and trade creditors)
Marking scheme 1 /2 mark for identifying the user group and up to 2 marks for stating their information requirements. Maximum of 10 marks.

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION ADVANCED LEVEL MONDAY 6 DECEMBER 2004
Do not open this paper until instructed by the supervisor This question paper must not be removed from the examination hall

Paper T6(INT)
ALL FOUR questions are compulsory and MUST be attempted 1 Kevin and David are in partnership together and trade under the name Guyridge. They have just completed their second year of trading and have asked for your help in preparing their final accounts for the year ended 31 October 2004. The business has expanded rapidly. Consequently, the partners have not had time to maintain the accounting records properly. However, they are able to provide you with the following information. At 1 November 2003 the business had the following balances: Dr $ Capital accounts: Kevin David Current accounts: Kevin David Vehicles at cost 32,000 Equipment at cost 60,000 Provisions for depreciation Vehicles Equipment Prepayments: Advertising 2,000 Insurance 4,000 Accruals: Heating and lighting Rent and rates Cash at bank 10,000 Inventory 25,000 Trade payables Trade receivables 80,000 213,000 The business also made payments during the year for the following: $ Carriage inwards 4,500 Vehicle running expenses 13,500 Insurance 5,000 Heating and lighting 7,000 Telephone 3,500 Advertising 2,250 Rent and rates 15,000 Office supplies 1,250 Suppliers 200,000 252,000 Additional Information Inventory as at 31 October 2004 was valued at $37,000. The business owed $10,000 to suppliers as at 31 October 2004. Insurance of $1,000 was paid in advance at 31 October 2004. During the year bad debts of $15,000 were written off. Interest on capital account balances is to be allowed at 10%. Receipts from customers were $400,000 and there was $55,000 outstanding from customers at 31 October 2004. Settlement discounts of $5,000 were given to customers. Invoices totalling $2,250 relating to heating and lighting were unpaid at 31 October 2004. Depreciation on vehicles is to be provided at 25% of their written down value. 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com Cr $ 80,000 50,000 23,000 21,000
8,000 12,000
3,000 1,000
15,000 213,000
Depreciation on equipment is to be provided at 20% on its original cost. Cash drawings during the year were: Kevin $60,000; David $30,000. Interest on drawings is to be charged as follows: Kevin $2,000; David $1,000. Kevin and David have an agreement to share the profits in the ratio 2:1.
Required Prepare the following statements for the partnership: (a) the income statement and appropriation account for the year ended 31 October 2004; (b) the partners current accounts for the year ended 31 October 2004; and (c) the balance sheet as at 31 October 2004. (You are advised to show any necessary supporting workings) (40 marks) (23 marks) (5 marks) (12 marks)
[P.T.O.
The following are the financial statements relating to Black, a limited liability company, and its subsidiary company Bury. Income statements for the year ended 31 October 2004 Black $000 Sales revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Dividend income from Bury Profit before tax Tax Net profit for the period 245,000 (140,000) 105,000 (12,000) (55,000) 38,000 7,000 45,000 (13,250) 31,750 Balance Sheets as at 31 October 2004 Black $000 Assets Non-current assets Property, plant and equipment Investments: 21,000,000 $1 ordinary shares in Bury at cost Current assets Inventory, at cost Trade receivables and dividend receivable Bank Total assets Equity and liabilities Capital and Reserves $1 Ordinary shares General reserve Accumulated profits Current liabilities Payables Dividend Total equity and liabilities Bury $000 95,000 (52,000) 43,000 (10,000) (13,000) 20,000 20,000 (5,000) 15,000 Bury $000 $000 $000
110,000 24,000 134,000 13,360 14,640 3,500 3,890 6,280 2,570
40,000 40,000
31,500 165,500
12,740 52,740
100,000 9,200 27,300 136,500 9,000 20,000 2,460 10,000
30,000 1,000 9,280 40,280
29,000 165,500
12,460 52,740
The following information is also available: (a) Black purchased its $1 ordinary shares in Bury on 1 November 1999. At that date the balance on Burys general reserve was $05 million and the balance of accumulated profits was $15 million. (b) At 1 November 2003 the goodwill arising from the acquisition of Bury was valued at $960,000. Blacks impairment review of this goodwill at 31 October 2004 valued it at $800,000. (c) During the year ended 31 October 2004 Black sold goods which originally cost $12 million to Bury. Black invoiced Bury at cost plus 40%. Bury still has 30% of these goods in inventory at 31 October 2004. (d) Bury owed Black $15 million at 31 October 2004 for some of the goods Black supplied during the year. Required: (a) Calculate the goodwill arising on the acquisition of Bury. (b) Prepare the following financial statements for Black: (i) the consolidated income statement for the year ended 31 October 2004; (10 marks) (17 marks) (3 marks)
(ii) the consolidated balance sheet as at 31 October 2004. Disclosure notes are not required.
(30 marks)
[P.T.O.
Nicola is thinking of investing in a limited liability company called Tressven. She has asked for your help to calculate some of the ratios she needs to decide whether or not to invest. She has given you the summarised financial statements of Tressven which are shown below: Tressven Income statement for the year ended 31 October 2004 $000 Sales revenue 23,420 Cost of sales (8,245) Gross profit 15,175 Expenses (2,460) Profit from operations 12,715 Finance cost (50) Profit before tax 12,665 Income tax expense (1,515) Net profit for the period 11,150 Tressven Balance sheet as at 31 October 2004 $000 $000 Assets Non-current assets Current assets Inventory Trade receivables Cash Total assets Equity and liabilities Capital and Reserves $050 Ordinary Shares Reserves Current liabilities Trade payables Tax Loan notes Total equity and liabilities 1,450 2,500 50 31,000
4,000 35,000
25,000 7,520 32,520 860 620
1,480 1,000 35,000
Additional information (i) During the year Tressven paid dividends of $10 million.
(ii) The market share price for Tressven is $150. (iii) Tressvens main competitor is a company called Hilladay which has the following ratios: Dividend per share Dividend cover Earnings per share (EPS) Price earnings ratio Debt/equity ratio Interest cover Required: (a) Calculate the following ratios for Tressven: (i) (ii) (iii) (iv) (v) (vi) Dividend per share; Dividend cover; Earnings per share (EPS); Price earnings ratio (PE ratio); Debt/equity ratio; Interest cover. Show all workings (9 marks) 10 cents 5 times 20 cents 134 15% 100 times
(b) Prepare notes for Nicola that comment on the ratios you have calculated. Use the ratios for Hilladay as a comparator. (6 marks) (15 marks)
Required: (a) Explain the main purposes of the International Accounting Standards Boards Framework for the Preparation and Presentation of Financial Statements. (5 marks) (b) Identify any four user groups of financial statements and explain what information they are likely to want from them. (10 marks) (15 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream) Marks 1 (a) (i) Adnett Income statement for the year ended 31 May 2005 Revenue Cost of sales (W1) Gross profit Distribution costs (W1) Administrative expenses (W1) Profit from operations Finance cost Profit before tax Tax Net profit for the period $000 3,485 (2,715) 770 (153) (331) 286 (58) 228 (70) 158 10 10 50 15 45 05 05 10 150 1 $000
June 2005 Answers and Marking Scheme Workings $000
(3,500 15)
(580 x 10%)
(ii)
Adnett Balance sheet as at 31 May 2005 $000 Assets Non-current assets (W2) Property, plant and equipment Goodwill
1,773 68 1,841 560 660 147
4 10
Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares (W3) Share premium account (W3) General reserve Retained earnings Non-current liabilities 10% Loan notes Current liabilities Trade payables Income tax Wages accrual Loan notes interest Total equity and liabilities
1,367 3,208
05 10 05
(700 40)
1,080 40 70 238 1,428 580 1,030 70 42 58
15 15 10 20
(35 + 35) (115 + 158 35)
05 05 05 10 05 170
1,200 3,208
Workings 1
Opening inventory Discounts allowed Discounts received Heating and lighting (40:20:40) Administrative expenses Wages and salaries ($250 + $42) (50:25:25) Purchases ($2,170 + $35 $17) (11/2 marks) Carriage inwards Closing inventory (1/2 mark) Increase in allowance for doubtful debts Goodwill impairment Depreciation buildings (25:50:25) Depreciation plant Directors remuneration
Cost of Sales $000 515
Distribution Cost $000
Administrative Expenses $000 70 (80) 108 60 73
108 146 2,188 105 (560)
54 73
13 200
26 153 (15 marks)
10 17 13 60 331 (45 marks) Total Property, Plant Plant & Equipment $000 $000 1,200 2,585 (400) (560)
2,715 (5 marks)
Non-current assets Goodwill $000 85 (17) (52) 68 Share Capital $000 800 100 900 180 1,080 345 828 Land $000 345 Buildings $000 1,040 (160)
Cost Depreciation b/f Current years depreciation/amortisation: Goodwill write-down Buildings $1,040 x 5% Plant ($1,200 $400) x 25%
(200) 600
(52) (200) 1,773
Share Capital Reconciliation Share Premium $000 200 20 220 (180) 40
Opening balance Issued on purchase of business Shares ranking for dividend Bonus issue 900 x 1/5 Closing balance (b)
The accounting treatment for goodwill as required by IFRS 3 At the date of acquisition the acquirer recognises goodwill as an intangible asset. On an ongoing basis goodwill is measured at cost and is assessed for impairment in accordance with IAS 36 at least annually. When a recoverable amount write-down is required that write-down is taken through the income statement in the period in which it is identified. 3 marks
Marks 2 (a) Prepared in accordance with IAS7 Snowdrop Cash flow statement for the year ended 31 May 2005 $000s Cash flows from operating activities Net profit before tax Adjustments for: Depreciation Loss on sale of tangible non-current assets Interest Operating profit before working capital changes Increase in inventory Increase in receivables Increase in payables Cash generated from operations Interest paid Tax paid Dividends paid Net cash from operating activities Cash flow from investing activities Purchase of non-current assets Receipts from sales of tangible non-current assets Cash flows from financing activities Proceeds from issue of share capital Repayment of long term borrowing 1,280 (100) 1,180 (228) 170 (58) 1,032 700 20 10 1,762 (80) (130) 85 1,637 (10) (145) (270) 1,212 (2,800) 180 25 1 1 1 1 1 05 1 20 $000s 1 1 1 05 1
1 1 1 05 2 1
Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period Note
Dividends paid and interest paid may be shown in either operating activities or financing activities. Workings Non-current assets $000 2,700 Depreciation 2,800 Disposals Balance c/f 5,500 Tax Tax paid (balancing figure) Balance c/f $000 145 180 325 Balance b/f Income statement $000 145 180 325 $000 700 200 4,600 5,500
Balance b/f New non-current assets (bal)
(b)
Comment on the financial position of Snowdrop as shown by the cash flow statement There has been a net outflow of cash $228,000 which has left the company with an overdraft of $58,000. There was significant expenditure on non-current assets of $2,800,000 during the year. This should help improve operational efficiency and future profitability. Additional ordinary shares were issued which resulted in a cash inflow of $1,280,000. This will result in future cash outflows in the form of dividends. Long term loans of $100,000 were repaid which will reduce interest payments in future. There has been an increase in receivables of $130,000 which may mean customers are taking longer to pay and consequently having an adverse impact on cash flows. 15 marks for each relevant comment which is adequately explained up to a maximum of 6 marks.
(c)
Briefly state some of the ways in which a company could manipulate the year end cash position. (i) (ii) (iii) (iv) (v) (vi) (vii) Offering short term incentives to customers to increase sales. Reducing the selling price to increase sales. Cutting expenses. Disposing of assets. Delaying payments to credit suppliers. Encouraging customers to pay early by offering discounts. Resourcing effective debt collection procedures.
1 mark for each relevant comment up to a maximum of 4 marks.
Marks 3 (a) (i) Capital accounts immediately before sole traders merge A. Littles Capital Account $000 205 Balance b/f Revaluation Goodwill 205 B. Suttons Capital Account $000 15 Balance b/f 89 Goodwill 104 Little Suttons Capital Accounts A. Little B. Sutton A. Little $000 $000 $000 40 20 Transfer: Sole traders 205 165 69 205 89 205 Little Sutton Balance sheet as at 1 June 2005 $000 Assets Non-current assets Freehold property Plant and equipment Current assets Inventory Trade receivables Bank and cash Total assets Capital and liabilities Capital Accounts A. Little B. Sutton Current liabilities Trade payables Total capital and liabilities $000 $000 160 10 35 205 2 $000 79 25 104 B. Sutton $000 89 89
Balance c/f
Revaluation (70 55) Balance c/f
(ii)
Goodwill w/off (2:1) Balances c/f
(iii)
120 80 200 27 18 23
05 05
68 268
05 05 05
165 69 234 34 268
05 05
05 4
(b)
Briefly state two advantages and two disadvantages of A Little and B Sutton becoming partners rather than continuing as sole traders. Advantages Risks are spread between the partners They may be able to specialise in a particular activity within the business. They may find it easier to raise finance for the business. They can pool their network of contacts Disadvantages They may find working together a problem. Their individual freedom for decision making might be limited. They now have to share any profits. 1 mark for each advantage or disadvantage up to a maximum of 4 marks.
(a)
(i)
Return on capital employed* Net Profit before Interest & tax Capital employed Gross profit percentage Gross Profit Revenue Net Profit before interest and tax Revenue Current Assets Inventory Current liabilities Receivables Revenue
x 100
25 x 100 =139% 180 60 x 100 =375% 160 25 x 100 =156% 160 75 45 :1 45 = 067 :1
Marks 15
(ii)
x 100
15
(iii) Net profit percentage*
x 100
15
(iv) Quick/Acid test ratio
:1
15
(v)
Receivables collection period
x 365
25 x 365 = 160 10 100 =
57 days
15
(vi) Earnings per share
Profits on ordinary activities after tax No. of ordinary shares in issue
10 cents
15
* Alternative definitions are also acceptable
90
(b)
Brief Report To: From: A CAT Student Date June 2005 Subject: Financial Appraisal of F. Raser Using Accounting Ratios Introduction The purpose of this report is to analyse the financial performance of F. Raser over the last three years using accounting ratios. The report specifically comments on the following ratios: Return on capital employed; Gross profit percentage; Net profit percentage; Quick/acid test ratio; Receivables collection period; and Earnings per share
The report also highlights what other information would be useful to help interpret the ratios. Return on capital employed The return on capital employed has declined over the last three years from 162% to 139% and is now well below the industry average (162%). This should be a cause for concern to the board of directors because if investors can obtain a higher return elsewhere then they may withdraw their investment. Alternatively they may seek to change the management board. It would be helpful to have more information on the market in which F. Raser operates e.g. is the market growing or declining, are there many buyers and sellers or just a few.
Gross profit percentage The gross profit percentage has risen over the period from 304% to 375%. Clearly the company has either (i) (ii) increased the selling price of its goods, e.g. perhaps it is able to sell at a premium because of perceptions regarding the quality of the goods sold. reduced the cost of its supplies. Possibly changing suppliers or obtaining greater discounts as sales volume has increased.
It would be useful to know what the company is selling and the volume of sales analysed by product and year. Net profit percentage The net profit percentage has declined over the period from 193% to 156% and is significantly below the industry average of 173%. This is worrying considering the increase in the gross profit percentage over the same period. The decline in the net profit percentage suggests that the costs may not be tightly controlled within the company. More detailed information on expenditure during the period would be helpful in identifying the reasons for the decline in profitability. Quick (or acid test) ratio The quick ratio has also declined significantly during the period from 15 to 067 suggesting the company may be experiencing liquidity problems. This view is also supported when the ratio is compared to the industry average which is over double that of F. Raser. The level of inventory may be a concern as it is tying up cash. More information on the type of inventory and the level of inventory turnover would be useful. Receivables collection period The time taken to collect debts has increased over the period from 32 days to 57 days. This seems very high when compared to the industry average debt collection period of just 35 days. The ratio suggests that there is little control over debt collection. In addition, the lengthening of the collection period means it is more likely that some debts will not be paid by customers. The poor control over debt collection will be a factor contributing to the adverse liquidity situation of the company. Earnings per share The earnings per share deteriorated over the period from 18c per share to 10c per share. This level of EPS is also significantly below the industry average and it is likely to discourage potential investors from investing in the company and may not be sufficient to keep existing shareholders. Conclusion Although the company has managed to increase its gross profit over the period, this has not resulted in a similar increase in net profit. In summary the ratios indicate poor internal control of costs and poor management of working capital. The return on capital employed and the EPS ratios are unlikely to be sufficiently attractive to potential investors or to existing shareholders. Marking scheme 1 mark for each relevant comment up to a maximum of 10 marks. 1 mark for report format.


Paper T6(INT)
ALL FOUR questions are compulsory and MUST be attempted 1 The trial balance of Adnett, a limited liability company, at 31 May 2005 was as follows: Dr $000 Revenue Discounts received Discounts allowed Bank balance Buildings at cost Buildings, accumulated depreciation, 1 June 2004 Plant at cost Plant, accumulated depreciation, 1 June 2004 Land at cost Purchases Returns inwards Returns outwards Heating and lighting Administrative expenses Trade payables Trade receivables Carriage inwards Wages and salaries 10% Loan notes General reserve Allowance for doubtful debts, at 1 June 2004 Directors remuneration Retained earnings at 1 June 2004 $1 Ordinary shares Inventory at 1 June 2004 Share premium account Cr $000 3,500 80
70 147 1,040 160 1,200 400 345 2,170 15 17 270 60 1,030 700 105 250 580 35 30 60 115 800 515 6,947 200 6,947
Additional information as at 31 May 2005 (i) (ii) (iii) (iv) (v) Closing inventory has been counted and is valued at $560,000. There are wages and salaries to be paid of $42,000. Loan note interest has not been paid during the year. The allowance for doubtful debts is to be increased to $40,000. Plant is depreciated at 25% per annum using the reducing balance method. The entire charge is to be allocated to cost of sales. (vi) Buildings are depreciated at 5% per annum on their original cost, allocated 25% to cost of sales, 50% to distribution costs and 25% to administrative expenses. (vii) On 1 August 2004 Adnett purchased and absorbed another business as a going concern. Adnett paid $85,000 for goodwill and $35,000 for the business inventory. The purchase was paid for by the issue of 100,000 ordinary shares. This transaction has not yet been recorded in the books of Adnett. At 31 May 2005 the fair value of the goodwill was $68,000. (viii) During May 2005 a bonus (or scrip) issue of one for five was made to ordinary shareholders. This has not been entered into the books. The share premium account is to be used for this purpose. (ix) No dividends have been paid or declared. (x) The directors have agreed a transfer of $35,000 to the general reserve from profits for the period. (xi) Tax has been calculated as $70,000 for the year.
(xii) The expenses listed below should be apportioned as indicated: Cost of Sales 40% 50% Distribution Costs 20% 25% Administrative Expenses 100% 40% 25% 100%
Discounts allowed and received Heating and lighting Wages and salaries Goodwill impairment Required:
(a) Prepare, for external use, the following financial statements for Adnett in accordance with IAS 1 Presentation of Financial Statements: (i) the income statement for the year ended 31 May 2005; and (15 marks) (17 marks)
(ii) the balance sheet as at 31 May 2005 (Notes to the financial statements are not required) (b) Briefly explain the accounting treatment for purchased goodwill.
(3 marks) (35 marks)
[P.T.O.
The following information has been extracted from the draft financial statements of Snowdrop, a limited liability company. Snowdrop Balance Sheets as at 31 May 2005 $000 $000 Assets Non-current assets Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Capital and reserves Ordinary share capital Share premium Retained earnings 580 360 0 4,600 500 230 170
2004 $000 $000 2,700
940 5,540
900 3,600
3,500 300 1,052 4,852 0 450 180 58 365 145 0
2,370 150 470 2,990 100
Non-current liabilities 10% Loan note (redeemable 31 May 2005) Current liabilities Trade payables Taxation Bank overdraft Total equity and liabilities
688 5,540
510 3,600
Additional Information (i) The income statement for the year ended 31 May 2005 shows the following: Operating profit Interest payable Profit before taxation Taxation Profit for financial year $000 1,042 (10) 1,032 (180) 852
(ii) During the year dividends paid were $270,000. (iii) Profit before taxation had been arrived at after charging $700,000 for depreciation on non-current assets. (iv) During the year non-current assets with a net book value of $200,000 were sold for $180,000.
Required: (a) Prepare a cash flow statement for Snowdrop for the year ended 31 May 2005 in accordance with IAS 7 Cash Flow Statements, using the indirect method. (20 marks) (b) Comment on the financial position of Snowdrop as shown by the cash flow statement you have prepared. (6 marks) (c) Briefly state some of the ways in which companies could manipulate their year end cash position. (4 marks) (30 marks)
[P.T.O.
A. Little and B. Sutton were two sole traders in the same line of business. On 1 June 2005 they decided to merge their businesses to form a partnership called Little Sutton. It was agreed that the profits from the partnership should be split between A. Little and B. Sutton in the ratio 2:1. The balance sheets for the two sole traders were as follows: Balance Sheets as at 31 May 2005 A. Little $000 Assets Non-current Freehold property Plant and equipment Current assets Inventory Trade receivables Bank and cash Total assets Capital and liabilities Proprietors Capital A. Little B. Sutton Current liabilities Trade payables Total capital and liabilities $000 $000 B. Sutton $000
110 25 135 15 10 15 12 8 8
70 70
40 175
28 98
160 79 15 175 19 98
Additional information not included in the balance sheets above: (i) The freehold property was revalued at $120,000 on 31 May 2005. (ii) The plant and equipment which originally belonged to B. Sutton was revalued to $55,000 on 31 May 2005. (iii) Goodwill is agreed at 31 May 2005 to be $35,000 for A. Little and $25,000 for B. Sutton. Goodwill is not to be carried in the partnership balance sheet. (iv) All assets and liabilities are taken over by the partnership. Required: (a) Prepare the: (i) capital accounts of A. Little and B. Sutton as at 31 May 2005 prior to the formation of the partnership. (4 marks) (3 marks) (4 marks)
(ii) partners capital accounts as in the new partnership as at 1 June 2005. (iii) opening balance sheet for the Little Sutton partnership.
(b) Briefly state two advantages and two disadvantages of A. Little and B. Sutton becoming partners rather than continuing as sole traders. (4 marks) (15 marks)
This is a blank page. Question 4 begins on page 8.
[P.T.O.
You are presented with the following summarised accounts for F. Raser, a limited liability company. F. Raser Income statement for the year ended 31 May 2005 Revenue Cost of sales Gross profit Distribution & administrative expenses Profit from operations Finance cost Profit before tax Tax expense Net profit for the period $000 160 (100) 60 (35) 25 (5) 20 (10) 10
F. Raser Balance sheet as at 31 May 2005 $000 Assets Non-current assets Current assets Inventory Trade receivables Cash and bank Total Assets Equity and liabilities Capital and reserves $1 Ordinary shares Reserves Non-current liabilities 10% loan notes Current liabilities Trade payables Taxation Dividends (for the year) Total equity and liabilities 30 10 5
$000 150
45 25 5
75 225
100 30 130 50
45 225
The ratio values for F. Raser for 2003 and 2004 as well as the current average ratio values for the industry sector in which F. Raser operates are as follows: Ratio Return on capital employed (%) Gross profit percentage (%) Net profit percentage (%) Quick/Acid test ratio Receivables collection period (days) Earnings per share (cents) Historical Data 2003 2004 162 147 304 347 193 177 15 11 320 440 180 130 Industry Average 2005 162 323 173 15 350 150
Required: (a) Calculate the following ratios for F. Raser for the year ended 31 May 2005. State clearly the formulae used for each ratio. (i) (ii) (iii) (iv) (v) (vi) Return on capital employed Gross profit percentage Net profit percentage Quick/Acid test ratio Receivables collection period Earnings per share
(9 marks)
(b) Using the additional information given and the ratios you calculated in part (a), write a brief report on the financial performance of F. Raser. Indicate in your report what additional information might be useful to help interpret the ratios. (11 marks) (20 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream) Marks 1 (a) Wisaron Income Statement and Appropriation Account for the year ended 31 October 2005 $ Sales revenue Less Returns inwards Opening inventory Add Purchases Carriage inwards Less closing inventory Cost of goods sold Gross Profit Expenses Selling expenses Rent General expenses Insurance Motor vehicle expenses Discounts allowed Wages Depreciation Motor vehicles Fixtures and fittings Loan interest Bank charges Irrecoverable debts Increase in allowance for receivables Net profit Interest on drawings: Lewis Aaron Salary: Aaron 23,500 214,400 1,150 239,050 19,000 (220,050) 78,550 17,500 12,000 1,900 800 6,000 1,340 9,490 2,500 800 200 75 400 565 270 210
December 2005 Answers and Marking Scheme Workings
05 $ 302,200 (3,600) 298,600 05 05 05 10 05 05 05 05 05 10 05 05 05 05 10 15 10 10 05 05 15 05 05 05 10
($215,300 $900)
($13,000 $1,000)
($9,090 + $400) (($16,000 $6,000) x 25%) ($8,000 x 10%) (($5,000 x 8%) x 05)
(53,570) 24,980 480 25,460 (8,500) 16,960 16,960
(($25,700 $400) x 5%) $700
Share of profit:
Lewis 3/5 Aaron 2/5
10,176 6,784
05 05 190
Marks (b) Current Accounts Lewis Drawings Goods Interest on drawings Balance c/f $ 6,500 900 270 5,266 12,936 Aaron Drawings Interest on drawings Balance c/f $ 5,600 210 10,844 16,654 Balance b/f Salary Share of profit $ 1,370 05 + 05 8,500 05 + 1 6,784 0 + 05 16,654 7 Balance b/f Loan interest Share of profit $ 2,560 05 + 05 200 1+1 10,176 05 + 05 12,936
Workings
(c)
Wisaron Balance sheet as at 31 October 2005 Accumulated Cost Depreciation Assets Non-current assets Motor vehicles Fixtures and fittings $ 16,000 8,000 24,000 $ 8,500 3,800 12,300 19,000 25,300 (1,265) 24,035 1,000 1,375
05 Net Book Value $ 7,500 4,200 11,700 10 10 10 05 10 10 45,410 57,110 10 10 05 10 05 05 05 10 05 10 05 14 ($12,000 $5,000)
Current assets Inventory Trade receivables Allowance for receivables Prepayment (rent) Bank Total assets Partners capital accounts Lewis Aaron Partners current accounts Lewis Aaron Non-current liabilities Loan from Lewis Current Liabilities Payables Accruals (wages) Total capital and liabilities
($25,700 $400) ($25,300 x 5%) ($1,450 $75)
7,000 6,000 5,266 10,844
13,000
16,110 5,000
22,600 400
23,000 57,110
$000 2 (a) Goodwill on acquisition Cost of investment Share Capital Reserves Revaluation of land Goodwill (b) Spyder Consolidated Balance Sheet as at 31 October 2005 Assets $000 Non-current assets Land and buildings Plant Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Reserves Minority Interest Current liabilities Payables Total equity and liabilities
$000 660,000
Workings $m
Marks
480,000 76,000 56,000
(80% x 600) (80% x 95) (80% x 70) (612,000) 48,000
1 1 1 1 4
$000 663,000 505,000 1,168,000 (W1) (285 + 220) 2 05
597,000 626,000 188,000
1,411,000 2,579,000
(357 + 252 12) 15 (525 + 126 25) 15 (158 + 30) 05
1,500,000 613,600 176,400 2,290,000 289,000 2,579,000
(W2) (W3)
1 35 3
(220 + 94 25)
15 15
Workings W1 Land and Buildings Spyder Phly: Book value : Revaluation of land on acquisition
$000 278,000 70,000
$000 315,000
348,000 663,000 W2 Reserves Spyder balance Reserves of Phly (80% x $212 million) Pre acquisition reserves (80% x $95 million) Less Goodwill Profit on purchases from Spyder 580,000 169,600 (76,000) (48,000) (12,000) (136,000) 613,600 120,000 14,000 42,400 176,400
Analysis of marks 05 05 1 2
05 1 1 05 05 35 1 1 1 3
Reserves W3 Minority Interest Share Capital (20% x $600 million) Revaluation (20% x $70 million) Reserves (20% x $212 million) Minority Interest
(c)
Inter-company trading and consolidation The companies within a group are separate legal entities and therefore may treat other companies within the group the same as any other customers. For example, in this question, Phly has purchased goods from Spyder. The accounts of Spyder will show a profit earned on sales to Phly and similarly Phlys balance sheet will include inventory at the cost purchased from Spyder. There are two accounting issues that need to be addressed when preparing the group accounts: (i) (ii) Although Spyder has made a profit on the goods it has sold to Phly, the group has not made a sale, or any profit, until an outside customer buys the goods from Phly. Any purchases that remain unsold by Phly at the end of the year will be included in Phlys inventory. Their balance sheet value will be their cost to Phly, which is not the same as to the group.
The only profits to be recognised should be those made by the group in providing goods to third parties. Inventory in the consolidated balance sheet should also be valued at the cost to the group. Thus, the $12 million of Spyders profit in Phlys closing inventory is unrealised from the groups perspective and is eliminated in full upon consolidation. There may also be receivables and payables within a group. In these circumstances these internal balances are cancelled. For example in this question Phly is indebted to Spyder for $25 million. Therefore Phly has a payable on its balance sheet of $25 million and Spyder has a receivable of $25 million on its balance sheet. When the accounts are consolidated the two balances are cancelled. Marking scheme Up to 3 marks for identifying the issue of unrealised profit on inventory, explaining how they are treated on consolidation and using an example from the question. Up to 3 marks for identifying the issue of internal receivables and payables, explaining how they are treated on consolidation and using an example from the question.
(a)
Ratio Gross profit percentage
Formulae Gross Profit Sales
x 100
Aber 1,100 x 100 = 200% 5,500 490 x 100 = 118% 4,155 275 3,000
Cromby 2,160 x 100 = 300% 7,200 475 x 100 = 63% 7,520 = 40 cents
Profit before int. & tax Return on capital employed* x 100 Capital Employed Earnings per share Net Profit after tax No. of ordinary shares
280 = 92 cents 7,000
Marking scheme 1 mark for each ratio (6 marks) * Alternative ratio definitions and calculations may be acceptable. (b) Ratio Gross profit percentage Aber 20% Cromby 30% Comment Cromby has been able to achieve a significantly higher gross profit percentage than Aber. This may be due to a number of factors; for example, Cromby may be operating at the luxury (branded) end of the leisurewear market, consequently it may be able to charge its customers a premium price for its goods. Cromby may also be able to obtain good discounts from its suppliers for bulk purchases. Alternatively, Aber may have expensive suppliers, with high costs associated with carriage inwards. Abers return on capital employed is nearly double that of Cromby. This might suggest that Aber is managed more efficiently than Cromby. Certainly Abers return represents a reasonable return when compared to current market borrowing rates. However, more information is needed; for example are the property assets of both businesses correctly valued? Aber has a higher EPS than Cromby and from a shareholders perspective, Aber would be considered a better investment. It would be useful to have the previous years EPS figures so that any trends could be identified.
Return on capital employed
118%
63%
Earnings per share
92c
40c
There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the information available. Other comments, if appropriate, will also be given credit. 1 mark for each relevant comment up to 9 marks.
(c)
Limitations of ratio analysis: 1 2 3 4 5 The accounting information used to prepare the ratios may be out of date. Usually the information presented in the published accounts is summarised, making a detailed analysis impossible. Price changes over time make year on year comparisons difficult. Changes in accounting policies from year to year may produce misleading ratios. Different businesses use different accounting policies. This may make direct comparisons difficult.
Marking scheme 1 mark for each limitation that is explained up to 5 marks (other examples may be given).
(a)
(i)
Going Concern Concept The going concern concept implies that the business will continue in operational existence for the foreseeable future, and that there is no intention to put the company into liquidation or make drastic cutbacks to the scale of operation. This concept has a major influence on the assumptions made when evaluating particular items in the balance sheet. For example assets are not normally shown at net realisable value because they are expected to be kept in the business for future use. 2 marks
(ii)
Accruals Concept The accruals concept requires that revenue and costs are recognised as they are earned or incurred, not when the money is received or paid. They must be matched with one another so far as their relationship can be established or justifiably assumed and dealt with in the income statement of the period to which they relate. 2 marks
(iii) Reliablity Accounting information must be reliable if it is to be useful. In accounting terms this means the information should be free from material error and bias. The user must be able to depend on it being a faithful representation. 2 marks (iv) Understandability Users of financial statements must be able to understand them. However, it is assumed they have some business, economic and accounting knowledge and they are able to apply themselves to study the information provided properly. The complex matters of financial statements should not be left out simply because of their difficulty, if it is relevant information. 2 marks (b) The arguments for having accounting standards Accounting standards restrict the number of choices in the methods used to prepare financial statements and therefore reduce the risk of creative accounting. This should help the users of accounts to compare the financial performance of different organisations. Companies are obliged to disclose the accounting policies they have used in the preparation of accounts. This should help the users of accounts better understand the information presented. Accounting standards should increase the credibility of accounts by increasing uniformity of accounting treatment between companies. Accounting standards require companies to disclose information which they might not want to disclose if the standards did not exist. Accounting standards provide a focal point for discussion about accounting practice.
The arguments against having accounting standards Sometimes the accounting method advocated may not be appropriate in some particular circumstances or for certain types of organisation. Accounting standards may be overly prescriptive, reducing flexibility and the opportunity for accountants to use their professional judgement. Standards may be too general, resulting in a lack of clear guidance in some situations. If standards contain too many detailed rules, there is a danger that preparers will develop creative accounting techniques that technically adhere to the rules but conflict with the overall aims and principles behind financial statements. Accounting standards may have been drafted as a consequence of a particular pressure group. Some accounting standards can be expensive to comply with.
Marking scheme: 1 mark for each relevant point up to 7 marks.


Paper T6(INT)
ALL FOUR questions are compulsory and MUST be attempted 1 Lewis and Aaron are in partnership trading as Wisaron. The trial balance for Wisaron as at 31 October 2005 was as follows: Dr $ 215,300 17,500 1,150 3,600 13,000 1,450 1,900 22,600 2,560 1,370 25,700 800 23,500 6,000 700 1,340 9,090 6,500 5,600 12,000 6,000 16,000 8,000 6,000 3,000 356,430 Cr $
Purchases Selling expenses Carriage inwards Returns inwards Rent Sales revenue Bank General expenses Trade payables Current accounts at 1 November 2004 Lewis Aaron Trade receivables Insurance Inventory at 1 November 2004 Motor vehicle expenses Allowance for receivables at 1 November 2004 Settlement discounts allowed Wages Drawings Lewis Aaron Capital accounts at 1 November 2004 Lewis Aaron Motor vehicles, at cost Fixtures and fittings, at cost Accumulated depreciation at 1 November 2004: Motor vehicles Fixtures and fittings
302,200
356,430 The following additional information as at 31 October 2005 is available: 1 2
Lewis and Aaron share profits and losses in the ratio 3:2 respectively. Lewis has taken some goods for his own use during the year to the value of $900, but this has not yet been recorded in the accounts. 3 Interest on drawings for the year is $270 for Lewis and $210 for Aaron. 4 Aaron is entitled to a salary of $8,500 per annum before profits are shared. 5 On 1 May 2005 it was agreed that $5,000 should be transferred from Lewis capital account to a loan account bearing 8% interest per annum. However, no entries have yet been recorded in the accounts for the transfer. 6 Rent of $1,000 has been paid in advance. 7 Inventory was valued at $19,000. 8 Bank charges of $75 have not been entered into the accounts. 9 There are outstanding wages of $400. 10 Debts of $400 are to be written off and the allowance for receivables to be adjusted, based on past events to the equivalent of 5% of the remaining trade receivables. 11 Depreciation is to be provided for as follows: Motor vehicles at 25% using the reducing balance method. Fixtures and fittings at 10% using the straight line method.
Required: Prepare the following statements for the partnership: (a) the income statement and appropriation account for the year ended 31 October 2005. (b) the partners current accounts for the year ended 31 October 2005; and (c) the balance sheet as at 31 October 2005. (19 marks) (7 marks) (14 marks) (40 marks)
[P.T.O.
The draft balance sheets of Spyder, a limited liability company and its subsidiary company Phly at 31 October 2005 are as follows: Spyder Assets Non-current assets Tangible assets: Land and buildings Plant Investment: Shares in Phly at cost Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Reserves Current liabilities Payables Total equity and liabilities The following information is also available: (1) Spyder purchased 480 million shares in Phly some years ago, when Phly had a credit balance of $95 million in reserves. All the purchased goodwill has now been written off. (2) At the date of acquisition the freehold land of Phly was revalued at $70 million in excess of its book value. The revaluation was not recorded in the accounts of Phly. (3) Phlys inventory includes goods purchased from Spyder at a price that includes a profit to Spyder of $12 million. (4) At 31 October 2005 Phly owes Spyder $25 million for goods purchased during the year. Required: (a) Calculate the goodwill on acquisition. (b) Prepare the consolidated balance sheet for Spyder as at 31 October 2005. (show clearly any workings) (4 marks) (15 marks) $000 $000 $000 Phly $000
315,000 285,000 600,000 660,000 357,000 525,000 158,000 252,000 126,000 30,000
278,000 220,000 498,000
1,040,000 2,300,000
408,000 906,000
1,500,000 580,000 2,080,000 220,000 2,300,000
600,000 212,000 812,000 94,000 906,000
(c) Explain the accounting treatment of intra-group trading and inter-company balances when preparing consolidated accounts. Use the transactions between Spyder and Phly to illustrate your answer. (6 marks) (25 marks)
[P.T.O.
Aber and Cromby are two retail businesses trading in the leisurewear market. Your manager has asked you to review the performance of both businesses from the financial statements which are provided below. Income Statements for the year ended 31 October 2005 Aber $000 5,500 (4,400) 1,100 (610) 490 (15) 475 (200) 275 Balance sheets as at 31 October 2005 Assets Non-current assets Current assets Inventory Trade receivables Cash Total assets Equity and liabilities Capital and Reserves $1 Ordinary Shares Reserves Non-current liabilities Loan notes Current liabilities Trade payables Overdraft Tax Total equity and liabilities 200 0 50 Aber $000 3,750 125 500 30 360 190 0 Cromby $000 7,200
Revenue Cost of sales Gross profit Expenses Profit from operations Finance cost Profit before tax Income tax expense Net profit for the period
Cromby $000 7,200 (5,040) 2,160 (1,685) 475 (15) 460 (180) 280
655 4,405
550 7,750
3,000 1,080 4,080 75 205 5 20
7,000 410 7,410 110
250 4,405
230 7,750
Required: (a) Calculate the following ratios for BOTH Aber and Cromby. (i) Gross profit percentage; (ii) Return on capital employed; (iii) Earnings per share. (Show all workings) (6 marks)
(b) Comment on the performance of the businesses as indicated by each of the ratios you have calculated in part (a). (9 marks) (c) Explain the limitations of using ratios as a basis for analysing business performance. (5 marks) (20 marks)
(a) Required: Explain the following accounting terms: (i) (ii) (iii) (iv) Going concern concept; Accruals concept; Reliability; Understandability.
(8 marks)
(b) State the arguments for and against having accounting standards as a basis for preparing financial statements. (7 marks) (15 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream) 1 (a) Calculation of profit before interest and tax. Retained Earnings Marks Taxation Dividends Loan note interest Bal. at 31 May 2006 $000 80 100 6 314 500 Bal. at 1 June 2005 Profit before interest and tax (Bal. fig) $000 130 370 500 1 1 05 05 3
June 2006 Answers and Marking Scheme
(b)
Prepared in accordance with IAS 7 Hadrian Cash flow statement for the year ended 31 May 2006 $000 Cash flows from operating activities Net profit before tax 364 Adjustments for: Depreciation 300 Profit on sale of tangible non-current assets (20) Interest 6 Operating profit before working capital changes 650 Increase in inventory (110) Increase in receivables (120) Decrease in payables (30) Cash generated from operations Interest paid (6) Tax paid (60) Dividends paid (100) Net cash from operating activities Cash flow from investing activities Purchase of non-current assets (880) Receipts from sale of tangible non-current assets 100 Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital 550 Repayment of long term borrowing (60) Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period 05 $000 1 1 1 05 1 1 1 390 05 15 1
(166) 224
25 15 (780) 15 15 490 (66) 70 4 1 1 05 05 20
Note Interest paid and dividends paid may be shown in either operating activities or financing activities. Workings Non-current assets $000 1,500 Depreciation 880 Disposals Balance c/f 2,380 $000 300 80 2,000 2,380
Balance b/f New non-current assets (bal)
(c)
(i)
Return on capital employed*
Profit before int. & tax Capital employed Current Assets Inventory Current liabilities Receivables Sales revenue
x 100
370 2,414 274 200 270 800 284 2,000
x 100 =
15%
(ii)
Quick ratio
:1
:1
14 : 1
(iii) Receivables collection period#
x 365
x 365 = 123 Days
(iv) Earnings per share
Profits on ordinary act. after tax No. of ordinary shares
= 14 cents
* Alternative ratio definitions and calculations may be acceptable. Average receivables may be used in ratio definition and calculation.
Marking scheme: 05 for each correct formula and 1 mark for each correct ratio. (d) Comments on the cash flow statement Cash in the business has decreased by $66,000 and the changes in working capital suggest a squeeze on liquidity i.e. receivables and inventory have increased over the period and at the same time payables have decreased. However, cash from operations is positive and Hadrian is able to pay interest and tax which are key items. During the year Hadrian has: repaid $60,000 of long term loans which will reduce future years interest payments purchased non-current assets worth $880,000 which may improve future efficiency and therefore profitability issued 500,000 shares at a 10% premium
Comments on ratios Return on capital employed The return on capital employed appears to be good when compared with the industry average. However, this may be misleading if the companys non-current assets are under valued. Quick ratio The low quick ratio in comparison with the industry average confirms the analysis from the cash flow statement that liquidity may be a problem for this company. Receivables collection period The long receivables collection period suggests the company may be having problems collecting its debts. This long debt collection period will be having an adverse impact on the companys liquidity. In addition, the longer the collection period, the less likely the debts will be recovered. Earnings per share The earnings per share is just slightly lower than the industry average. This may not necessarily be a cause for concern, as the company issued shares in 2006 which will have reduced the EPS. The success of the share issue suggests that investors find this company an attractive investment. The investment by the company, in new assets, is likely to result in a higher EPS in the future. Marking Scheme: 1 mark for each relevant comment up to a maximum of 11 marks.
Marks Workings 2 (a) Paul and Barry Income statement and appropriation account for the year ended 31 May 2006 $ Sales revenue Less returns inwards Opening inventory Add Purchases Less closing inventory Cost of goods sold Gross profit Expenses Rent Selling expenses General expenses Wages Depreciation Motor vehicles Fixtures and fittings Insurance Motor vehicle expenses Discounts allowed Bad debts Increase in allowance for receivables Net profit before appropriation Interest on drawings: Paul Barry Salary: Paul 39,200 375,150 414,350 (32,000) (382,350) 180,550 18,760 55,600 4,280 18,000 4,200 2,100 640 9,300 8,900 1,100 220 420 180 $ 568,000 (5,100) 562,900
05 05 05 05 10 ($375,600 $450) 05 05 05 05 05 10 ($3,680 + $600) 05 15 10 10 05 05 05 15 05 05 05 (($30,000 $9,000) x 20%) ($14,000 x 15%) ($1,540 $900)
(123,100) 57,450 600 58,050 (15,000) 43,050 43,050
(($47,500 $1,100) x 5%) $2,100
Share of profit: Paul 2/3 Barry 1/3
28,700 14,350
05 05 160
(b) Current Accounts Paul Drawings Interest on drawings Balance c/f $ 16,000 420 30,850 47,270 Barry Drawings Goods Interest on drawings Balance c/f $ 11,000 450 180 4,910 16,540 Bal b/f Share of profit $ 2,190 14,350 16,540 05 + 0 05 + 05 05 Bal b/f Salary Share of profit $ 3,570 15,000 28,700 47,270 05 + 0 05 + 05 0 + 05
(c) Paul and Barry Balance sheet as at 31 May 2006 Accumulated Cost Depreciation $ Non-current assets Motor vehicles Fixtures and fittings 30,000 14,000 44,000 $ 13,200 9,100 22,300 32,000 46,400 (2,320) 44,080 900 13,980 90,960 112,660
Marks Workings 05 Net Book Value $ 16,800 4,900 21,700 10 10 05 05 10 ($47,500 $1,100) 10 ($46,400 x 5%) 05 05
Current assets Inventory Trade receivables Allowance for receivables Prepayment (insurance) Bank
Partners capital accounts Paul Barry Partners current accounts Paul Barry Current Liabilities Trade payables Accruals (general expenses)
20,000 15,000 30,850 4,910
35,000
05 05 05 05
35,760 70,760
41,300 600
41,900 112,660
05 05 05 100
(a)
Goodwill on acquisition of Everpool Cost of investment Share capital (75% of $4,000,000) Pre-acquisition reserves (75% of $200,000) Goodwill on acquisition
Workings ($000) $000 (3,000) (150) $000 3,500 (3,150) 350 05 1 1 05 3
(b)
Liverton Consolidated income statement for the year ended 31 May 2006 $000 Sales revenue 8,800 Cost of sales (5,004) Gross profit 3,796 Distribution costs (1,590) Administrative expenses (1,020) Goodwill impairment (70) Profit before tax 1,116 Income tax expense (480) Profit for the period 636 Attributable to: Equity holders of the parent 571 Minority interest 65 636
15 (6,400 + 2,600 200) 25 (3,700 + 1,450 200 + (60% x 90)) 05 05 1 (200 130) 05
05 1 (260 x 25%) 8
(c)
Associates An associate is defined as an entity over which an investor has significant influence and that is neither a subsidiary nor a joint venture of the investor. Significant influence is the power to participate in the financial and operating policy decisions of the investee. If an investor holds between 20% and 50% of the voting power of the investee then the investor will usually have significant influence over the investee, unless it can be clearly demonstrated this is not the case. The (a) (b) (c) (d) (e) existence of significant influence might also be demonstrated in one or more of the following ways: Representative of the investor on the board of directors. Participation in the policy making process. Material transactions between investee and investor. Interchange of management personnel. Provision of essential technical information.
Marking scheme: 1 mark for each point up to a maximum of 4 marks for a good answer.
(a)
Adjusting events These are events that provide evidence of a condition that existed at the balance sheet. IAS 10 requires that the amounts recognised in the financial statements be adjusted to take account of an adjusting event. The standard also requires that disclosures be up-dated in the light of new information that relate to a condition that existed at the balance sheet date. Non-adjusting event These are events that are indicative of conditions that arose after the balance sheet date. IAS 10 prohibits the adjustment of amounts recognised in the financial statements to reflect non-adjusting events after the balance sheet date. However, if a non-adjusting event is material and its non-disclosure could influence the decisions of users then an entity should disclose the following: (a) (b) the nature of the event an estimate of its financial effect, or a statement that such an estimate cannot be made.
Marking scheme: up to 2 marks for defining each type of event and how they should be treated (maximum 4 marks). (b) (i) (ii) Receivables that were thought to be good at the balance sheet date will not now be paid. Adjusting event Jilton Newl has announced a bid to take over another company. Non adjusting event
(iii) Some material errors have been discovered which show the financial statements are incorrect. Adjusting event (iv) The factory workforce at Jilton Newl has started strike action for an indefinite length of time. Non adjusting event Marking scheme: 1 mark for each correct answer (maximum 4 marks) (c) Contingent liability IAS 37 defines a contingent liability as: A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity; or A present obligation that arises from past events but is not recognised because: It is not probable that a transfer of economic benefits will be required to settle the obligation; or The amount of the obligation cannot be measured with sufficient reliability
Contingent liabilities should not be recognised in the financial statements but they should be disclosed unless the possibility of any liability is remote. The required disclosures are: A brief description of the nature of the contingent liability An estimate of its financial effect An indication of the uncertainties that exist The possibility of any reimbursement
Marking scheme: up to 15 marks for defining a contingent liability and up to 2 marks for the accounting treatment. Contingent asset IAS 37 defines a contingent asset as: A possible asset that arises from past events and whose existence will be confirmed by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the entitys control.
A contingent asset must not be recognised. Only when the realisation of the related economic benefit is virtually certain should recognition take place. At that point the asset is no longer a contingent asset. A contingent asset is disclosed where an inflow of economic benefit is probable. Marking scheme: up to 15 marks for defining a contingent asset and up to 2 marks for the accounting treatment.


Paper T6(INT)
ALL FOUR questions are compulsory and MUST be attempted 1 The balance sheet of Hadrian, a limited liability company, as at 31 May 2006 is provided below together with comparative figures for the previous year. Hadrian Balance Sheets as at 31 May 2006 2005 $000 $000 $000 $000 Assets Non-current assets 2,000 1,500 Current assets Inventory 340 230 Trade receivables 270 150 Bank 4 614 70 450 2,614 1,950 Equity and liabilities Capital and reserves Ordinary share capital (shares of $1) 2,000 1,500 Share premium 100 50 Retained earnings 314 130 2,414 1,680 Non-current liabilities 10% Loan note 60 Current liabilities Trade payables 120 150 Taxation 80 200 60 210 Total equity and liabilities 2,614 1,950 Additional Information (i) Interest paid was $6,000 during the year ended 31 May 2006.
(ii) There was no over or under provision of tax for the year ended 31 May 2005. (iii) Dividends paid were $100,000 during the year ended 31 May 2006. (iv) Depreciation of $300,000 was charged for the year ended 31 May 2006. (v) Non-current assets with a net book value of $80,000 were sold at a profit of $20,000 during the year ended 31 May 2006. Required: (a) Calculate the profit before interest and tax of Hadrian for the year ended 31 May 2006. (3 marks)
(b) Prepare a cash flow statement for Hadrian for the year ended 31 May 2006 in accordance with IAS 7 Cash Flow Statements, using the indirect method. (20 marks)
Further Information (i) Sales revenue for the year ended 31 May 2006 was $800,000.
(ii) The latest average ratios for the industry in which Hadrian operates are as follows: Return on capital employed Quick ratio Receivables collection period Earnings per share 10% 2:1 80 days 15 cents
(c) Calculate the following ratios for Hadrian for the year ended 31 May 2006 ONLY: (i) (ii) (iii) (iv) Return on capital employed; Quick ratio; Receivables collection period; Earnings per share. (6 marks)
State the formula used for each ratio.
(d) Using information from your cash flow statement, the industry ratios and the ratios you have calculated in (c), comment on the financial performance of Hadrian. (11 marks) (40 marks)
[P.T.O.
Paul and Barry are in a business partnership. Their trial balance as at 31 May 2006 is given below: Dr Cr $ $ Sales revenue 568,000 Returns inwards 5,100 Purchases 375,600 Rent 18,760 Selling expenses 55,600 General expenses 3,680 Allowance for receivables at 1 June 2005 2,100 Bank 13,980 Wages 18,000 Trade payables 41,300 Current accounts at 1 June 2005 Paul 3,570 Current accounts at 1 June 2005 Barry 2,190 Motor vehicles, at cost 30,000 Fixtures and fittings, at cost 14,000 Accumulated depreciation at 1 June 2005: Accumulated depreciation Motor vehicles 9,000 Accumulated depreciation Fixtures and fittings 7,000 Insurance 1,540 Inventory at 1 June 2005 39,200 Motor vehicle expenses 9,300 Trade receivables 47,500 Discounts allowed 8,900 Drawings Paul 16,000 Drawings Barry 11,000 Capital accounts at 1 June 2005 Paul 20,000 Capital accounts at 1 June 2005 Barry 15,000 668,160 668,160 The following additional information as at 31 May 2006 is available: 1 2 3 4 5 6 7 Paul and Barry share profits and losses in the ratio 2:1 respectively. Inventory was valued at $32,000. During the year, Barry has taken some goods for his own use to the value of $450, but this has not yet been recorded in the accounting records. Interest on drawings for the year were $420 for Paul and $180 for Barry. Paul is entitled to a salary of $15,000 per annum before profits are shared. Insurance of $900 has been paid in advance. Depreciation is to be provided for as follows: Motor vehicles at 20% using the reducing balance method Fixtures and fittings at 15% using the straight line method There are outstanding general expenses of $600. Debts of $1,100 are to be written off and the allowance for receivables is to be adjusted to the equivalent of 5% of the remaining trade receivables, based on past experience.
8 9
Required: Prepare the following statements for the partnership: (a) the income statement and appropriation account for the year ended 31 May 2006. (b) the partners current accounts for the year ended 31 May 2006; and (c) the balance sheet as at 31 May 2006. (16 marks) (4 marks) (10 marks) (30 marks) 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com
The summarised income statements of two companies, Liverton and Everpool, for the year ended 31 May 2006 are provided below. Liverton acquired 3,000,000 ordinary shares in Everpool for $3,500,000 on 1 June 2004. At that time, the retained earnings of Everpool were $200,000. Income statements for the year ended 31 May 2006 Liverton $000 Sales revenue 6,400 Cost of sales (3,700) Gross profit 2,700 Distribution costs (1,100) Administrative expenses (700) Profit from operations 900 Dividends received from Everpool 150 Profit before tax 1,050 Tax (400) Net profit for the period 650 The following information is also available: (i) Everpools total share capital consists of 4,000,000 ordinary shares of $1 each. Everpool $000 2,600 (1,450) 1,150 (490) (320) 340 340 (80) 260
(ii) At 31 May 2005 Liverton had valued the goodwill arising from the acquisition of Everpool at $200,000. An impairment review of this goodwill at 31 May 2006 valued it at $130,000. (iii) During the year ended 31 May 2006 Liverton sold goods costing $110,000 to Everpool for $200,000. At 31 May 2006, 60% of these goods remained in Everpools inventory. Required: (a) Calculate the goodwill arising on the acquisition of Everpool. (b) Prepare the consolidated income statement for Liverton for the year ended 31 May 2006. (3 marks) (8 marks)
(c) Explain the criteria that should be met for a company to be accounted for as an associate company. (4 marks) (15 marks)
[P.T.O.
(a) Define an adjusting event after the balance sheet date and a non-adjusting event after the balance sheet date and state how each should be accounted for. (4 marks) (b) Jilton Newl is a large manufacturing company. After the date of the balance sheet, but prior to the financial statements being authorised for issue, the following material events occurred: (i) It was discovered that a receivables balance existing at the balance sheet date will not now be received.
(ii) Jilton Newl has announced a bid to take over another company. (iii) Some material errors have been discovered which show the financial statements are incorrect. (iv) The factory workforce at Jilton Newl has started strike action for an indefinite length of time. Required: For each of the events described above, state if they should be treated as an adjusting or non-adjusting event after the balance sheet date. (4 marks) (c) Define a contingent liability and a contingent asset, and explain how each should be treated in the financial statements. (7 marks) (15 marks)
Answers
6DINTIX Paper T6INT
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream)
December 2006 Answers and Marking Scheme Marks
6DINTAA Paper T6INT
(a)
Tonson Income statement for the year ended 31 October 2006 $000 Sales revenue Less returns inward Opening inventory Add purchases Less closing inventory (275 25) Cost of sales Discounts received Gross profit General expenses Insurance Marketing expenses (W1) Wages and salaries (W2) Energy expenses Telephone Property expenses Loan note interest Receivables expense (W3) Depreciation: Buildings Motor vehicles Furniture and equipment 60 75 45 715 66 80 100 33 155 75 32 240 350 3,570 3,920 (250)
05 $000 5,780 (95) 5,685 05 10 05 05 10 (3,670) 2,015 50 2,065
10 05 05 05 15 15 05 05 05 05 15 15 15 15
Net profit before taxation Tax Net profit for the period
(1,676) 389 (150) 239 Total
05
180
Marks
6DINTAA Paper T6INT
(b)
Tonson Balance sheet as at 31 October 2006 Cost/ Accumulated Assets Valuation Depreciation Non-current assets $000 $000 Land 740 0 Buildings 1,800 0 Furniture and equipment (W4) 1,200 660 Motor vehicles (W5) 240 112 3,980 772 Current assets Inventory Trade receivables Less allowance Prepayments Cash in hand Total assets Equity and liabilities Capital and reserves $1 Ordinary shares ($1,800 + $180) Share premium account ($200 $180) Revaluation reserve (W6) Retained earnings ($315 + $239) 250 900 (45) 855 5 15
05 Net Book Value $000 740 1,800 540 128 3,208
05 05 10 10 05
10 05 10 1,125 4,333 10 05 05
1,980 20 735 554 3,289 470 290 150 40 94
1.0 1.0 15 10
Non-current liabilities 7% Loan notes Current liabilities Trade payables Tax Accruals Bank overdraft Total equity and liabilities
10 05 05 10 10
574 4,333 Total
17.0
Working Papers W1 Balance as per TB Marketing expenses $ 50,000 Income statement Prepayment c/f 50,000 Wages and Salaries $ 675,000 Income statement 40,000 715,000 $ 45,000 5,000 50,000 $ 715,000 715,000
W2 Balance as per TB Wages accrued c/f
Marks
6DINTAA Paper T6INT
W3 Balance as per TB Allowance for receivables
Receivables Expense $ 150,000 Income statement 5,000 155,000 Allowance for receivables $ 45,000 Balance as per TB Bad debts 45,000
$ 155,000 155,000 $ 40,000 5,000 45,000 $ 420,000 240,000 660,000 $ 80,000 32,000 112,000
Balance c/f
W4 Balance c/f
Furniture and Equipment Accumulated Depreciation $ 660,000 Balance as per TB Inc. Statemt (20% of $1,200,000) 660,000 Motor Vehicles Accumulated Depreciation $ 112,000 Balance as per TB Inc. Statemt 20% of ($240,000 $80,000) 112,000
W5 Balance c/f
W6 Revaluation Reserve Depreciation on buildings for the year is calculated as $1,500,000 x 5% = $75,000 Therefore the net book value of the buildings is $1,065,000 at the end of the year, i.e. $1,500,000 $360,000 $75,000. When the buildings are revalued at the end of the year a revaluation reserve is created of $735,000. i.e. $1,800,000 $1,065,000 = $735,000.
Marks
6DINTAB Paper T6INT
(a)
Prepared in accordance with IAS 7 H Marathon Cash flow statement for the year ended 31 October 2006 $000 Cash flows from operating activities Net profit before tax 10,889 Adjustments for Depreciation 6,784 Interest received (101) Interest paid 1,749 Profit on equipment disposal (1,806) Operating profit before working capital changes 17,515 Decrease in inventory 3,015 Decrease in receivables 3,034 Decrease in payables (270) Cash generated from operations 23,294 Interest received 101 Interest paid (1,749) Tax paid (W4) (2,395) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W1 to W3) (7,671) Proceeds from sale of equipment 5,667 Dividends paid (3,697) Net cash used in investing activities Cash flows from financing activities Proceeds from issues of share capital Repayment of long term borrowing Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 4,231 (16,889) (12,658) 892 (4,806) (3,914) Total 05 $000 1 1 05 05 1 05 05 05 05 05 2 19,251 3 1 1 (5,701) 1 1
1 1
18
Examiners note IAS 7 allows interest paid to be an operating cash flow or a financing cash flow. Interest received can be an operating cash flow or an investing cash flow. Dividends paid can be shown as cash flows from investing activities or cash flows from financing activities. Workings (all in $000): W1 B/f Revaln Additions Non-current assets at cost 124,252 6,525 7,671 138,448 Disposal c/f 5,296 133,152 138,448 W4 Paid C/f W2 On disposals c/f Accumulated depreciation b/f Charge 25,629 6,784 32,413
1,435 30,978 32,413
W3 Cost Profit
Non-current assets disposal a/c 5,296 1,806 7,102 Acc dep Cash 1,435 5,667 7,102
Taxation 2,395 2,101 4,496 B/f Inc. stat. 1,926 2,570 4,496
Note: the entries in italics in these t-accounts are the balancing figures.
Marks
6DINTAB Paper T6INT
Alternative workings: Additions of non-current assets: Opening net book value Disposals (5,667 1,806) Depreciation Revaluation (12,554 6,029) Additions (Balancing figure) Closing net book value 98,623 (3,861) (6,784) 6,525 94,503 7,671 102,174 Non-current assets NBV B/forward 98,623 Revaluation 6,525 Addns (bal) 7,671 112,819 Disposals 3,861 Depr'tion 6,784 C/f 102,174 112,819
(b)
Over the period there was a net cash inflow to the business of $892,000. The company purchased non-current assets of $7,671,000. The purchase of new non-current assets may help operational efficiency and therefore improve future cash flows. The company was able to generate additional cash by selling non-current assets for $5,667,000. Loan notes of $16,889,000 were redeemed, this will reduce interest payments in the future. Inventory levels were reduced by $3,015,000. This might indicate the company has adopted better inventory control procedures which should have a positive impact on future cash flows. Receivables were reduced by $3,034,000 and there was a small decrease in payables. These changes may indicate better cash flow management procedures being adopted by the company. Marking scheme Other relevant comments may be acceptable. Maximum of 8 marks
(1 mark) (2 marks) (1 mark) (2 marks) (2 marks) (2 marks)
(c)
Cash flow statements may be more useful than profit statements for the following reasons: Cash flow statements help users understand where the company has generated its cash and how it has been applied during the period. Cash flow statements are more objective than profit statements as they cannot be manipulated by choosing more favourable accounting policies. Cash flow statements provide a useful insight into the changes in the structure of working capital. Cash flow statements enable users to establish whether the company is able to repay its debts. Marking scheme Up to 4 marks for relevant comments
6DINTAC Paper T6INT
(i) Nyfe $ Realisation a/c Cash 56,255 56,255 (ii) Furniture & fittings (NBV) Motor vehicles (NBV) Inventory Receivables Cash and bank: Loan Payables Dissolution expenses Profit on realisation: Nyfe 3/6 Ork 2/6 Poon 1/6 Ork $ 38,453 38,453
Partners Accounts Poon $ 9,000 Capital a/cs 12,802 Current a/cs Realisation a/c 21,802
Nyfe $ 45,000 9,750 1,505 56,255
Ork $ 30,000 7,450 1,003 38,453
Poon $ 15,000 6,300 502 21,802 Total
1 2 1
Realisation Account $ 50,000 Loan a/c 35,000 Payables 25,000 42,000 Cash and bank: 18,000 Furniture and fittings 25,440 Motor vehicles 1,000 Inventory 1,505 Receivables 1,003 Poon (motor vehicle) 502 199,450
$ 18,000 26,500
05 05 05 05 05 05 05 1 1 1 Total
05 05
48,800 29,500 27,750 39,900 9,000 199,450
05 05 05 05 05 10
Marks
6DINTAC Paper T6INT
(iii) Balance Realisation a/c Furniture and fittings Motor vehicles Inventory Receivables
Cash and bank $ 6,000 48,800 29,500 27,750 39,900 151,950 $ Realisation A/c: Loan Payables Dissolution expenses Partners a/c: Nyfe Ork Poon 05 18,000 25,440 1,000 56,255 38,453 12,802 151,950 05 05 05 05 05 05 1 05 05 05
Total
6DINTAD Paper T6INT
(a) Gross profit percentage Gross profit x 100 Sales Net profit x 100 Sales Sales x 100 Capital employed Current assets Current liabilities Current assets inventory Current liabilities Receivables x 365 Sales 129 x 100 284 61 x 100 284 284 x100 258 201 188 110 188 46 x 365 284 =
Binky 454 %
154 x 100 305 47 x 100 305 305 x 100 477 383 325 90 325 75 x 365 305
Smokey 505 %
215
154
Asset Turnover ratio
1101 %
639
Current ratio
11
:1
12
:1
Quick ratio
06
:1
03
:1
Recbles collection period
591
days
898
days
1/ 2
Marking Scheme mark for correctly stating the formula and 1/2 mark for each correct ratio
(b)
Relevant comments could include: Smokey has a higher gross profit percentage than Binky. Smokey may have a cheaper supplier than Binky or benefit from discounts. Alternatively, its market position or geographical location may enable the company to charge a premium. The net profit percentage for Smokey is significantly lower than Binky suggesting that Smokey is not controlling its expenses as tightly as Binky. Binky is able to obtain a significantly higher level of sales from its assets, suggesting the company is being run more efficiently. The current ratios indicate that both companies have sufficient current assets to meet their current liabilities. However, the quick ratios reveal a more worrying picture. The quick ratios for both companies are less than 1. Smokey has a very low quick ratio of 03 and may not be able to pay its debts as they become due. The very high inventory levels may indicate poor inventory control, it might be that some of the inventory is unsellable. The receivables collection period for Smokey is significantly higher than Binky. This will obviously be contributing to the companys adverse liquidity position. Action is required to improve the debt collection procedures. Overall Binky appears to be the better company to invest in, from the information given.


Paper T6(INT)
6DINTPA Paper T6INT
ALL FOUR questions are compulsory and MUST be attempted 1 The following information has been extracted from the books of Tonson, a limited liability company, as at 31 October 2006. Dr $000 15 75 350 60 66 50 675 Cr $000
6DINTAA Paper T6INT
Cash Insurance Inventory at 1 November 2005 General expenses Energy expenses Marketing expenses Wages and salaries Discounts received Share premium account Retained earnings at 1 November 2005 Allowance for receivables at 1 November 2005 Sales revenue Telephone expenses Property expenses Bank Returns inward Trade payables Loan note interest Trade receivables Purchases 7% Loan notes Bad debts $1 Ordinary shares Accumulated depreciation at 1 November 2005 Buildings Motor Vehicles Furniture and equipment Land at cost Buildings at cost Motor vehicles at cost Furniture and equipment at cost
50 200 315 40 5,780 80 100 94 95 290 33 900 3,570 470 150 1,800 360 80 420 740 1,500 240 1,200 9,899
9,899
You have also been provided with the following information: 1 Inventory at 31 October 2006 was valued at $275,000 based on its original cost. However, $45,000 of this inventory has been in the warehouse for over two years and the directors have agreed to sell it in November 2006 for a cash price of $20,000. The marketing expenses include $5,000 which relates to November 2006. Based on past experience the allowance for receivables is to be increased to 5% of trade receivables. There are wages and salaries outstanding of $40,000 for the year ended 31 October 2006. Buildings are depreciated at 5% of cost. At 31 October 2006 the buildings were professionally valued at $1,800,000 and the directors wish this valuation to be incorporated into the accounts. Depreciation is to be charged as follows: (i) Motor vehicles at 20% of written down value. (ii) Furniture and equipment at 20% of cost. No dividends have been paid or declared. Tax of $150,000 is to be provided for the year. During October 2006 a bonus (or scrip) issue of one for ten was made to ordinary shareholders. This has not been entered into the books. The share premium account was used for this purpose. 2 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com
2 3 4 5 6
7 8 9
6DINTAA Paper T6INT
Required: Prepare the following statements, FOR INTERNAL USE: (a) the income statement for the year ended 31 October 2006; and (b) the balance sheet as at 31 October 2006 (18 marks) (17 marks) (35 marks)
[P.T.O.
6DINTAB Paper T6INT
You have been given the following information relating to H Marathon, a limited liability company. The company is preparing its cash flow statement for the year ended 31 October 2006 H Marathon Income statement for the year ended 31 October 2006 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Interest received Finance cost Profit before tax Taxation Profit for the period $000 54,577 (27,128) 27,449 (9,146) (5,766) 12,537 101 (1,749) 10,889 (2,570) 8,319 2006 $000 133,152 (30,978) 102,174 26,350 13,412 2,955 42,717 144,891 2005 $000 124,252 (25,629) 98,623 29,365 16,446 3,036 48,847 147,470
Balance sheets as at 31 October Assets Non-current assets Cost Accumulated depreciation
Current assets Inventory Trade receivables Bank
Total assets Equity and liabilities Capital and reserves Ordinary share capital Share premium Revaluation reserve Retained earnings
23,576 11,982 12,554 58,532 106,644 5,743 6,869 23,534 2,101 32,504 144,891
21,082 10,245 6,029 53,910 91,266 22,632 7,842 23,804 1,926 33,572 147,470
Non-current liabilities 7% loan notes Current liabilities Bank overdraft Trade payables Taxation
Total equity and liabilities
Additional Information (i) During the year dividends paid were $3,697,000. (ii) There were no amounts outstanding in respect of interest payable or receivable as at either year end. (iii) Operating profit is stated after charging depreciation of $6,784,000. (iv) During the year, the company sold equipment for $5,667,000 realising a profit of $1,806,000. This equipment had never been revalued, and there were no other disposals of non-current assets during the year. (v) The only revaluation of non-current assets was that of a piece of freehold land. Required: (a) Prepare a cash flow statement for H Marathon for the year ended 31 October 2006 in accordance with IAS 7 Cash Flow Statements, using the indirect method. (18 marks) (b) Comment on the financial performance and position of H Marathon as shown by the cash flow statement you have prepared. (8 marks) (c) Why are cash flow statements sometimes considered more useful than profit statements? (4 marks) (30 marks)
6DINTAB Paper T6INT
[P.T.O.
6DINTAC Paper T6INT
Nyfe, Ork and Poon decide to dissolve their partnership on 1 December 2006 after being in business for many years. The balance sheet of the partnership as at 30 November 2006 was as follows: Nyfe, Ork and Poon Balance sheet as at 30 November 2006 Assets Non-current assets Furniture and fittings Motor vehicles Current assets Inventory Receivables Bank Total assets Capital and liabilities Partners capital accounts Nyfe Ork Poon Partners current accounts Nyfe Ork Poon Loan Current Liabilities Payables Total capital and liabilities $ $ 50,000 35,000 85,000
25,000 42,000 6,000
73,000 158,000
45,000 30,000 15,000 90,000 9,750 7,450 6,300 23,500 18,000 26,500 158,000
Additional Information (a) The partnership agreement states that Nife, Ork and Poon share profits and losses in the ratio 3:2:1 (b) The furniture and fittings were sold for $48,800. (c) Only $39,900 of outstanding receivables were recovered. (d) The payables were settled for $25,440. (e) It was agreed between the partners that Poon could take a motor vehicle at a valuation of $9,000 in addition to his share of the profit. The motor vehicle had a net book value of $8,000. The other motor vehicles were sold for $29,500. (f) The inventory was sold for $27,750. (g) The loan was repaid in full on 1 December 2006. (h) There were no outstanding interest payments on the loan. (i) Expenses incurred in dissolving the partnership were $1,000.
6DINTAC Paper T6INT
Required: Prepare the following accounts on dissolution: (i) Partners accounts (4 marks) (10 marks) (6 marks) (20 marks)
(ii) Realisation account (iii) Cash and bank account
[P.T.O.
6DINTAD Paper T6INT
Two companies Binky and Smokey trade in the same market. Their financial statements for the year ended 31 October 2006 are summarised below: Income statements for the year ended 31 October 2006 Binky $000 Sales revenue Cost of sales Gross profit Expenses: Administrative Selling and distribution Depreciation Loan note interest $000 284 (155) 129 $000 Smokey $000 305 (151) 154
(24) (35) (9) (68) 61 Binky
(37) (53) (12) (5) (107) 47 Smokey $000 $000 515 (96) 245 419 293 75 15
Net profit Balance sheets as at 31 October 2006 Assets Non-current assets At cost Accumulated depreciation $000 320 (75)
$000
Current assets Inventory Receivables Bank Total assets Equity and liabilities Share capital and reserves Share capital Retained earnings 10% Loan note Current liabilities Total equity and liabilities
91 46 64
201 446
383 802
150 108 188 446
250 177 50 325 802
6DINTAD Paper T6INT
Required: (a) Calculate the following ratios for Binky and Smokey: (State the formulas used for calculating the ratios) Profitability ratios: Gross profit percentage Net profit percentage Asset turnover ratio Liquidity ratios: Current ratio Quick ratio (acid test ratio) Receivables collection period
(9 marks)
(b) Compare and comment on the performance of the companies as indicated by the ratios you have calculated in part (a). (6 marks) (15 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6(INT) Drafting Financial Statements (International Stream) Marks 1 (a) Goodwill on acquisition of Tricepts Cost of investment Share capital ($25 million x 80%) Retained earnings ($2 million x 80%) Goodwill $000 20,000 1,600 $000 24,000 (21,600) 2,400 Total 1 1 1 3
June 2007 Answers and Marking Scheme
(b)
(i)
Bicepts Consolidated income statement for the year ended 31 May 2007 05 $000 Workings ($000) Sales revenue 197,000 15 135,000 + 74,000 12,000 Cost of sales (89,000) 25 70,000 + 30,000 12,000 + 1,000* Gross Profit 108,000 Distribution costs (13,700) 05 Administrative expenses (26,784) 05 Goodwill impairment (600) 15 2,400 1,800 Net profit before interest and tax 66,916 Interest payable (12) 10 16 4 Profit before tax 66,904 Income tax expense (19,000) 05 Profit for the year 47,904 Attributable to: Equity holders of the parent 43,704 Minority interest 4,200 15 20% x 21,000 47,904 Total 100 Bicepts Consolidated Balance Sheet as at 31 May 2007 Assets $000 $000 Non-current assets Intangible goodwill 1,800 Property, plant and equipment 119,050 120,850 Current assets Inventory Receivables Bank Total assets Equity and liabilities Capital and Reserves $1 Ordinary shares Retained earnings (W1) Minority interest Current liabilities Payables Tax Dividends payable to Minority Interests Dividends 8% Loan Notes Total equity and liabilities 14,128 22,486 4,744 05
(ii)
10 05
(2,400 600) (80,000 + 39,050)
41,358 162,208
15 35 05
(10,630 + 4,498 1,000*) (18,460 + 12,230 6,400** 1,800*** 4****) (3,400 + 1,344)
70,000 46,340 8,000 124,340 6,118 18,000 1,600 12,000
05 40 15
(20% x 40,000)
37,718
25 05 10 05
(6,000 + 1,922 1,800*** 4****)
150 10 162,208 Total 190
(200 50)
Marks Notes: * Exclusion of unrealised profit held in inventory ($1,000,000) ** Exclusion of the intragroup dividends from receivables ($6,400,000) *** Intragroup indebtedness ($1,800,000) **** Exclusion of intragroup interest ($4,000) Workings W1 Retained earnings as at 31 May 2007 $000 Bicepts Balance Sheet Less unrealised profit Tricepts : Retained earnings Pre-acquisition reserves $000 37,540 (1,000) 05 1
15,000 (2,000) 13,000 10,400 (600) 46,340 2 05 4
Group share (80% x $13,000,000) Less goodwill written off as at 31 May 2007
(c)
When one company sells goods to another company within the same group an identical amount is shown in the sales figure of the first company and in the cost of sales of the second. However, as far as the group is concerned there has not been an external sale. Therefore, on consolidation the amount of the inter-company trade must be eliminated from sales and purchases (cost of sales). If there are unrealised profits on inter-company trading these also need to be excluded from the figures for the group profits. This is achieved by calculating and then deducting the amount of unrealised profit from unsold inventory at the year end. Similarly, if non-current assets have been sold at profit between companies in a group then the profit element has to be eliminated. Any receivables/payables balances outstanding between the two companies at the year end are cancelled on consolidation to avoid producing a misleading balance sheet. Marking Scheme: Up to a total of 3 marks
(a)
J Moors accounts (i) Inventory loss Capital account
Marks Revaluation account $ 500 16,500 17,000 $ 56,000 56,000 Goodwill Property profit $ 12,000 5,000 17,000 $ 35,000 4,500 16,500 56,000 10 + 05 05 + 10
(ii) Balance c/f to new business
Capital account Balance b/f Dodds loan Profit on revaluation 05 + 05 10 05
P Crofts accounts (i) Plant and machinery loss Capital account
Revaluation account $ 1,500 7,500 9,000 Goodwill $ 9,000 9,000 10 + 05 05
Marks (ii) Motor vehicle Balance c/f to new business Capital account $ 7,000 23,800 30,800 Balance b/f Profit on revaluation $ 23,300 7,500 30,800 10 + 05 05 + 05
Total (b) Moorcroft Balance sheet as at 31 May 2007 $ Marks Workings
10
Assets Non-current assets Property Plant and machinery Current assets Inventory Trade receivables Cash at bank Total assets Capital and liabilities Capital accounts J Moor P Croft Current liabilities Trade payables
$ 30,000 28,500 58,500 1 1
($14,000 + $14,500)
8,500 2,800 4,000
15,300 73,800
1 1 1
($4,500 + $4,000)
42,000 16,800 58,800 15,000 73,800
2 2
W1 W1
Total capital and liabilities
Total 10 Working 1 Partners Capital accounts Moor $ Goodwill written off 2:1 x $21,000 Balance c/f 14,000 42,000 56,000 Croft $ 7,000 16,800 23,800 Balance b/f from old business Moor $ 56,000 56,000 Croft $ 23,800 23,800 10 + 10 + 05 + 05 05 + 05 Marks
(c)
Goodwill is calculated as the difference between the value of the whole business as a going concern and the value of the tangible and other identifiable intangible assets less any liabilities. Therefore, goodwill is a balancing item rather than an item that is objectively valued. (up to 2 marks) Goodwill needs to be recalculated when a partner joins a partnership business for the following reasons. A new partner that joins a business is entitled to share in the future growth of all the partnership assets. Their entitlement arises because they make a payment to enter the partnership, or the existing partners consider they will enhance the future profitability of the firm. However, the new partners entitlement is to share in the future growth of the business not its past growth. Any goodwill which has already been built up by the existing partners needs to be credited to them. (up to 3 marks) Total 5 marks
Marks 3 (a) (i) Gross profit percentage Gross profit Revenue x 100 95 375 50 375 133 103 x 100 = 253% 1
(ii)
Net profit percentage*
Net profit from operations x 100 Revenue Current assets Current liabilities x 100
x 100
133%
(iii)
Current ratio
:1
13:1
(iv)
Acid test (Quick) ratio
Current assets inventory :1 Current liabilities x 365
133 96 :1 103 34 375 x 365
04:1
(v)
Receivables collection period
Trade receivables Sales * Could also be profit for the period.
331 days Total
1 5
(b)
Comments on the performance of Acoms Gross Profit Gross profit percentage has reduced from the previous year by 27%. This might indicate increased competition in the market and that selling prices have been discounted. Alternatively the cost of purchases may have increased significantly. The situation is particularly worrying because this ratio is now below the industry average. Net Profit The net profit percentage has also deteriorated on the previous year and is below the industry average. This suggests that the control of costs needs to be improved if the company is to remain competitive. Current Ratio The current ratio has deteriorated slightly on the previous year but is simliar to the industry average. The business has sufficient current assets to cover its current liabilities. However, the composition of the current assets is heavily weighted with inventory. The company may have problems converting inventory to cash if it is required quickly. Acid Test The acid test ratio gives a better indication of liquidity than the current ratio. This ratio is 04:1 and has fallen significantly below the industry average. This ratio suggests the company may be experiencing some liquidity problems. The current inventory levels might also indicate the business is having some trading problems. Receivables collection period The receivables collection period has more than doubled since the previous year and is 13 days longer than the industry average. The business may be giving customers more credit in order to sell more inventory. Alternatively the receivables collection procedures may need to be tightened up, which would help to improve the business liquidity situation. Marking scheme: Maximum of 10 marks.
(c)
Main limitations of ratio analysis Inflation may distort comparisons of ratios over time. Different accounting policies may distort intercompany comparisons. The ratios are only as good as the financial information on which they are based. The accounting information used to prepare the ratios may be out of date. Changes in accounting policies from year to year may produce misleading ratios. Usually the information presented in the published accounts is summarised, making a detailed analysis impossible. Using industry averages as a basis for comparison can be misleading as they are the average of the ratios from a number of companies.
Marking scheme 1 mark for each relevant comment up to a maximum of 5 marks
(a)
(i) (ii)
The role of the IASC Foundation is to oversee the IASB and related bodies and to raise the funds needed. The role of the IASB is to develop and issue global accounting standards.
(iii) The role of IFRIC is to provide timely guidance on the application of IFRSs where unsatisfactory interpretations exist or new processes arise. (iv) The role of SAC is to provide a formal forum where the IASB can consult individuals, and representatives of organisations affected by its work. Marking scheme: 1 mark for briefly explaining each role up to a maximum of 4 marks.
(b)
The qualitative characteristics of financial information are the characteristics that make the information useful and determine whether, when and how it is presented in financial statements so that the information they give is useful to users for assessing the financial position, performance and financial adaptability of the business. (1) Relevance Information is considered to be relevant if it has the ability to influence the economic decisions of users and is provided in time to influence those decisions. (2) Reliability Information is reliable if: (a) it can be depended upon by users to represent faithfully what it either purports to represent or is reasonably expected to represent and therefore reflects the substance of the transactions and other events that have taken place. it is free from deliberate or systematic bias and material error, and is complete; and in its preparation under conditions of uncertainty, a degree of caution has been applied in exercising the necessary judgements.
(b) (c)
(3) Comparability Information is comparable if it enables users to determine and evaluate similarities in, and differences between, the nature and effects of transactions and other events over time and across different businesses. (4) Understandability Information is understandable if its significance can be appreciated by users that have a reasonable knowledge of business and economic activities and accounting and a willingness to study with reasonable diligence the information provided. Marking scheme: 1/2 a mark for identifying and 2 marks for explaining the characteristic. Maximum of 10 marks. (c) The main problems with historical cost accounting are: (i) Non-current assets values are unrealistic The value of non-current assets shown on the balance sheet may be unrealistic if presented at their historical cost. For example, property assets have a tendency to appreciate over time, hence the value on the balance sheet becomes understated. To overcome this problem a business may periodically revalue its assets. (ii) Potential capital reduction Distributions made out of profit based on the historical cost basis may result in a reduction of capital in real terms. Depreciation is regarded as a proxy for the contribution non-current assets have made to the business over the accounting period. A criticism of depreciation based on historical cost is that it may not adequately reflect the value of the assets contribution during the year. This inadequacy is partly overcome by periodically revaluing the assets. (iii) Holding gains on inventory are included in profit Closing inventory, during a period of rising prices, will tend to have a higher value than goods purchased in earlier periods (i.e. inventory appreciation). Therefore, the gross profit will be overstated because the closing inventory is deducted from the opening inventory plus purchases. However, when the inventory is eventually sold it will probably cost more to replace. (iv) Comparisons over time are unrealistic Measuring the growth or the success of a business over time can be difficult during periods of inflation. For example, comparing the current profitability of a company with its performance ten years later would be meaningless without attempting to adjust the figures for inflation. Examiners note: reference to Current Purchasing Power Accounting (CPP) and Current Cost Accounting (CCA) should be given due credit. Marking Scheme: 1 mark per relevant point up to a maximum of 6 marks.


Paper T6(INT)
ALL FOUR questions are compulsory and MUST be attempted 1 You are provided with the following financial statements for Bicepts, a limited liability company, and its subsidiary Tricepts: Income statements for the year ended 31 May 2007 Bicepts $000 Sales Revenue 135,000 Cost of sales (70,000) Gross profit 65,000 Distribution costs (7,500) Administrative expenses (19,000) Profit from operations 38,500 Income from Tricepts: Loan note Interest 4 Dividends 6,400 Interest payable Profit before tax 44,904 Income tax expense (10,000) Profit for the period 34,904 Balance Sheets as at 31 May 2007 Bicepts $000 $000 80,000 24,000 50 104,050 10,630 18,460 3,400 4,498 12,230 1,344 Tricepts $000 74,000 (30,000) 44,000 (6,200) (7,784) 30,016 (16) 30,000 (9,000) 21,000 Tricepts $000 $000 39,050 39,050
Assets Non-current assets Property, plant and equipment Investments: $1 ordinary shares in Tricepts at cost Tricepts loan notes Current assets Inventory Receivables Bank Total assets Equity and liabilities Capital and Reserves $1 Ordinary shares Retained earnings Current liabilities Payables Tax Dividends payable 8% Loan note Total equity and liabilities
32,490 136,540
18,072 57,122
70,000 37,540 107,540 6,000 11,000 12,000 1,922 7,000 8,000
25,000 15,000 40,000
29,000 136,540
16,922 200 57,122
The following information is also available: (i) Bicepts purchased 80% of the $1 ordinary shares in Tricepts on 1 June 2006. At that date Tricepts retained earnings were $2,000,000.
(ii) Bicepts annual impairment review of goodwill on acquisition of Tricepts valued it at $1,800,000 at 31 May 2007. (iii) During the year ended 31 May 2007 Bicepts sold goods which originally cost $8,000,000 to Tricepts for $12,000,000. Tricepts still had 25% of these goods in inventory at 31 May 2007. (iv) Tricepts owed Bicepts $1,800,000 at 31 May 2007 for some of the goods Bicepts supplied during the year. (v) Bicepts owns $50,000 of Tricepts loan notes. The interest is paid annually in arrears at 31 May. Interest for the year ended 31 May 2007 is included in Tricepts payables. Bicepts has also included the interest in its receivables. (vi) All dividends were declared, but not paid prior to the year end. Required: (a) Calculate the goodwill arising on the acquisition of Tricepts. (b) Prepare the following financial statements for Bicepts: (i) the consolidated income statement for the year ended 31 May 2007. (10 marks) (3 marks)
(ii) the consolidated balance sheet as at 31 May 2007. Note: A working should be included for the retained earnings. Disclosure notes are not required. (19 marks) (c) Explain the accounting treatment of intra-group trading in consolidated accounts. (3 marks) (35 marks)
[P.T.O.
J Moor and P Croft have been trading independently as sole traders. They have decided to form a partnership called Moorcroft from their existing businesses. The future profit sharing ratio in the new business will be 2:1 to J Moor and P Croft respectively. The balance sheets of the sole trader businesses at the date of the formation of the partnership were as follows: Balance sheets as at 31 May 2007 J Moor Assets Non-current Property Plant and machinery Motor vehicle Current assets Inventory Trade receivables Cash at bank Total assets Capital and liabilities Capital accounts Moor Croft Current liabilities Trade payables Loan from Dodd Total capital and liabilities Additional information At the date of formation of the partnership: (i) the property belonging to J Moor was revalued at $30,000. (ii) the motor vehicle was retained by P Croft and not transferred to Moorcroft. (iii) J Moors inventory was revalued at $4,500. (iv) the plant and machinery belonging to P Croft was revalued at $14,500. (v) J Moor agreed to take personal responsibility for the loan from Dodd. (vi) goodwill was agreed to be $12,000 for J Moor and $9,000 for P Croft. (vii) all the trade payables and trade receivables were taken over by Moorcroft at their book values. Required: (a) Prepare the following accounts for both J Moor and P Croft as they would appear on the closing of their sole trader businesses: (i) Revaluation accounts; (5 marks) (5 marks) $ $ 25,000 14,000 39,000 $ P Croft $ 16,000 7,000 23,000 4,000 1,300 3,000
5,000 1,500 1,000
7,500 46,500
8,300 31,300
35,000 7,000 4,500 46,500
23,300 8,000 31,300
(ii) Capital accounts. (b) Prepare the balance sheet of Moorcroft immediately following the formation of the partnership. Note: goodwill is not carried in the balance sheet.
(10 marks) (c) Explain briefly how partnership goodwill is calculated and why it needs to be recalculated when a new partner joins a partnership. (5 marks) (25 marks) 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com
[P.T.O.
Acoms is a small business with limited liability. Its summarised financial results are given below: Acoms Income statement for the year ended 31 May 2007 $000 Revenue 375 Cost of sales (280) Gross profit 95 Distribution & administrative expenses (45) Profit from operations 50 Finance costs (5) Profit before tax 45 Income tax expense (15) Profit for the period 30 Acoms Balance sheet as at 31 May 2007 $000 Assets Non-current assets Current assets Inventory Trade receivables Cash and bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Retained earnings Current liabilities Trade payables Taxation Non-current liabilities 10% Loan notes Total equity and liabilities $000 410 96 34 3
133 543
300 90 390 88 15
103 50 543
Additional Information The following are ratios for Acoms for the year to 31 May 2006 and the industry average ratios for 2007: Ratio Gross profit percentage (%) Net profit percentage (%) Current ratio Acid test (Quick) ratio Receivables collection period (days) Acoms 2006 347 177 15 11 160 Industry Average 2007 300 200 15 10 200
Required: (a) Calculate the following ratios for Acoms for the year ended 31 May 2007. State clearly the formula used for each ratio. (i) (ii) (iii) (iv) (v) Gross profit percentage Net profit percentage Current ratio Acid test (Quick) ratio Receivables collection period
(5 marks)
(b) Use the information given and the ratios you calculated in part (a) to comment on the performance of Acoms. (10 marks) (c) State five limitations of ratio analysis. (5 marks) (20 marks)
Required: (a) State the role of each of the following bodies: (i) (ii) (iii) (iv) International Accounting Standards Committee Foundation International Accounting Standards Board (IASB) International Financial Reporting Interpretations Committee (IFRIC) Standards Advisory Council (SAC)
(4 marks)
(b) Identify and explain the four qualitative characteristics of financial information that are currently included in the IASBs Framework for the Preparation and Presentation of Financial Statements. (10 marks) (c) Discuss the problems with using historical cost accounting during a period of rising prices and explain how these problems may be overcome. (6 marks) (20 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6 (INT) Drafting Financial Statements (International Stream)
December 2007 Answers and Marking Scheme Marks Workings $000 05 $000 1,765 (1,343) 422 (80) (192) 150 (5) 145 (45) 100 10 40 15 45 10 10 05 140 05 $000 (1,800 35)
(a)
(i)
Malright Income statement for the year ended 31 October 2007 Revenue Cost of sales (W1) Gross profit Distribution costs (W1) Administrative expenses (W1) Profit from operations Finance cost Profit before tax Tax Profit for the period
(ii)
Malright Balance sheet as at 31 October 2007 $000 Assets Non-current assets Property, plant and equipment (W2) Current assets Inventory Trade receivables Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Share premium account Retained earnings Non-current liabilities 10% Loan notes Current liabilities Bank overdraft Trade payables Current tax Energy expenses accrual Loan notes interest Total equity and liabilities
966 75 304
35 05 10 05
379 1,345
(320 16)
650 80 200 930 50 50 250 45 15 5
05 05 20
(130 + 100 30)
10 10 05 10 10 10 05 150
365 1,345
Workings W1
Purchases Discounts received Wages (40:25:35) 72 45 Energy expenses ($105 + $15) (40:20:40) 48 24 Opening inventory 160 Administrative expenses Increase in allowance for receivables ((320 x 005) 10) Directors remuneration Closing inventory (75) Depreciation buildings (30:30:40) 11 11 Depreciation plant 22 1,343 80 (4 marks) (15 marks) W2 Non-current assets Land $000 235 Buildings $000 740 (60) (37) 235 (05 mark) 643 (15 marks) Plant $000 220 (110)
Cost of Sales $000 1,105
Distribution Cost $000
Administrative Expenses $000 (90) 63 48 80 6 70 15 (1 mark)
(1 mark) (1 mark)
192 (45 marks) Total Property, Plant & Equipment $000 1,195 (170)
Cost Accumulated depreciation b/f Current years depreciation: Buildings $740 x 5% Plant ($220 $110) x 20%
(37) (22) (22) 88 966 (15 marks) (35 marks)
(b)
Accounting ratios for Malright (i) Quick ratio (acid test ratio) Interest cover Current assets inventory :1 Current liabilities Profit before interest and tax Interest Profit after tax No of ordinary shares Current share price per share Earnings per share 379 75 = 365 = 150 5 100 650 130 154 = 083:1
(ii)
30 times
(iii) Earnings per share
154 cents
(iv) Price earnings ratio
84
Marking scheme: A total of 6 marks 05 mark for stating the correct formula and 1 mark for the correct ratio.
(a)
Appropriation Account for the year ended 31 October 2007 $ Net profit Less partners salaries Alan Bob Colin Less interest on capital Alan Bob Colin Net profit available for appropriation Alan Bob Colin 3/6 2/6 1/6 $ 134,904 ) ) ) ) ) )
Marks 05
30,000 35,000 28,000 4,000 3,500 3,000
(93,000)
(10,500) 31,404 15,702 10,468 5,234 31,404
05 05 05 4
(b)
Partners Current Accounts Alan $ Bal b/f Drawings 22,000 Capital a/c 30,502 Bal c/f 52,502 Partners Capital Accounts Alan $ Goodwill Loan a/c 109,502 Bal c/f 109,502 Working for Revaluations
Marks Bob $ 17,000 33,168 50,168 Colin $ 1,600 25,000 9,634 36,234 Alan $ 2,800 4,000 30,000 15,702 52,502 Bob $ 1,200 3,500 35,000 10,468 50,168 Colin $ 3,000 28,000 5,234 36,234
Bal /b/f Int on cap Salaries Profit
1+1 1+1 1+1 1+1 8
(c)
Bob $ 28,800 47,200 76,000
Colin $ 43,200 14,800 58,000 Book Value $ 120,000 40,000 22,000 18,000
Bal b/f Cash Revaluation a/c Goodwill: 3:2:1 Current a/c
Alan $ 40,000 3,000 36,000 30,502 109,502
Bob $ 35,000 15,000 2,000 24,000 76,000
Colin $ 30,000 15,000 1,000 12,000 58,000
1+1 1+1 1+2 1 1 9
Property Equipment and machinery Inventory Receivables Net Change
Revalued amount $ 136,000 35,000 18,000 17,000
Change $ 16,000 (5,000) (4,000) (1,000) 6,000 3,000 2,000 1,000 6,000
New valuations apportioned to each partner Alan 3/6 Bob 2/6 Colin 1/6
(d)
Advantages of operating as a partnership: (i) Business risk is spread amongst more people. (ii) Individual partners may be able to specialise in particular activities within the business. (iii) Access to a larger pool of capital. Disadvantages of operating as a partnership: (i) (ii) Disputes might arise between the partners. Decision making may take longer if all partners have to be consulted.
Marking scheme: 1 mark for each relevant point up to a maximum of 4 marks
(a)
Goodwill on acquisition Cost of investment Share capital Retained earnings Goodwill
$000 2,800 42
$000 3,345 (2,842) 503
Workings $000
Marks 05 1 15 3
(70% x 60)
(b)
Prestend Consolidated Balance Sheet as at 31 October 2007 Assets $000 Non-current assets Property, plant and equipment Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Retained earnings Minority Interest Current liabilities Payables Tax Total equity and liabilities
Workings $000 7,500 $000 (4,200 + 3,300)
Marks 05
05
2,280 2,520 950
5,750 13,250
(1,500 + 800 20) (1,800 + 750 30) (600 + 350)
15 15 05
9,000 100 1,260 10,360 1,390 1,500 13,250
(W1) (W2)
1 45 2
(1,220 + 200 30) (700 + 800)
15 05 14
Workings W1 Retained earnings Prestend balance Retained earnings of Northon (70% x $200,000) Pre acquisition reserves (70% x $60,000) Less Goodwill Unrealised profit on purchases from Prestend Reserves W2 Minority Interest Share Capital (30% x $4,000,000) Retained earnings (30% x $200,000) Minority Interest (c)
525 140 (42) (503) (20)
(565) 100 1,200 60 1,260
05 1 1 1 1 45 1 1 2
The existence of significant influence might be demonstrated where there is: (a) (b) (c) (d) (e) (f) A holding of 20% or more of the shares in the investee company, but less than 50%. Participation in the policy making process of the investee company. Material transactions between the two companies. An interchange of management personnel beween the companies. The provision of essential technical information by the investor company. A representative of the investor company on the board of directors of the investee company.
Marking scheme: 1 mark for each circumstance up to a maximum of 3 marks.
(a)
Prepared in accordance with IAS 7 Geofost Cash flow statement for the year ended 31 October 2007 $000 Cash flows from operating activities Net profit before tax Adjustments for: Depreciation Finance cost Profit on disposal of non-current assets Operating profit before working capital changes Decrease in inventory Increase in receivables Increase in payables Cash generated from operations Interest paid (100 120 + 730) Tax paid (W1) Net cash from operating activities Cash flows from investing activities Payments to acquire property, plant & equipment Proceeds from sale of property, plant & equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital Repayment of long term borrowing Dividend paid Net cash used in financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period 15,000 4,658 730 (720) 19,668 6,075 (1,863) 3,178 27,058 (710) (4,090) 22,258 (24,340) 2,694 (21,646) 1,869 (2,300) (1,486) (1,917) (1,305) 634 (671) $000
Marks
05 1 05 1 1 1 1 15 1
1 05
1 1 1
05 05 14
Examiners note IAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow. Workings (all in $000): W1 Taxation Paid C/f 4,090 3,020 7,110 B/f Income statement 2,760 4,350 7,110
Note: The Paid entry is the balancing figure. (b) Over the period there was a net cash outflow from the business of $1,305,000. The company purchased non-current assets of $24,340,000. The purchase of new non-current assets may help the future operational efficiency of the business and therefore improve future cash flows. The company generated additional cash by selling non-current assets for $2,694,000 which yielded a profit on their NBV of $720,000. Loan notes of $2,300,000 were repaid, this will reduce interest payments in the future. However, the bank overdraft has increased by $801,000. This will inevitably increase the cost of finance from the bank. Inventory levels were reduced by $6,075,000. This had a positive impact on the cash flow of the business. Receivables have increased by $1,863,000. This might suggest increased sales or that debt collection arrangements need tightening up. The payables increase is good for cash flow but potentially may lead to problems with suppliers if the company does not stay within agreed credit terms. Payables have almost doubled and the company may find they are no longer given credit. Marking scheme Other relevant comments may be acceptable. Maximum of 6 marks
Certified Accounting Technician Examination Advanced Level
Drafting Financial Statements (International Stream)

Monday 3 December 2007
Time allowed Reading and planning: Writing:
15 minutes 3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor. During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet until instructed by the supervisor. This question paper must not be removed from the examination hall.
Paper T6 (INT)
ALL FOUR questions are compulsory and MUST be attempted 1 You are presented with the following trial balance of Malright, a limited liability company, at 31 October 2007: Dr $000 740 220 110 235 50 1,800 1,105 90 35 180 105 160 250 320 80 10 70 130 50 30 650 80 3,280 Cr $000 60
Buildings at cost Buildings, accumulated depreciation, 1 November 2006 Plant at cost Plant, accumulated depreciation, 1 November 2006 Land at cost Bank balance Revenue Purchases Discounts received Returns inwards Wages Energy expenses Inventory at 1 November 2006 Trade payables Trade receivables Administrative expenses Allowance for receivables, at 1 November 2006 Directors remuneration Retained earnings at 1 November 2006 10% Loan notes Dividend paid $1 Ordinary shares Share premium account
3,280
Additional information as at 31 October 2007: (i) (ii) Closing inventory has been counted and is valued at $75,000. The items listed below should be apportioned as indicated: Cost of Distribution Administrative Sales Costs Expenses Discounts received 100% Energy expenses 40% 20% 40% Wages 40% 25% 35% Directors remuneration 100% An invoice of $15,000 for energy expenses for October 2007 has not been received. Loan note interest has not been paid for the year. The allowance for receivables is to be increased to 5% of trade receivables. Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to be allocated to cost of sales. Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost of sales, 30% to distribution costs and 40% to administrative expenses. Tax has been calculated as $45,000 for the year. The current share price of Malright is $130 per share.
(iii) (iv) (v) (vi) (vii) (viii) (ix)
Required: (a) Prepare the following financial statements for Malright in accordance with IAS 1 Presentation of Financial Statements: (i) the income statement for the year ended 31 October 2007; and (14 marks) (15 marks)
(ii) the balance sheet as at 31 October 2007.
Note: notes to the financial statements are not required. Round all figures to the nearest thousand dollars (b) Calculate the following accounting ratios for Malright: (i) (ii) (iii) (iv) Quick ratio (acid test ratio); Interest cover; Earnings per share; Price earnings ratio. (6 marks) (35 marks)
Note: show ratio formulas and workings.
[P.T.O.
Alan, Bob and Colin have been successfully trading as ABC partnership for several years. Due to ill health Alan has decided to retire from the partnership as from 31 October 2007. You have been provided with the following information: (i) (ii) Alan, Bob and Colin shared profits in the ratio 3:2:1. The partnership made a profit for the year ended 31 October 2007 of $134,904.
(iii) Alan has agreed that if there was a credit balance on his capital account at 31 October 2007 it can be transferred into a loan to the partnership. (iv) The partnership agreement allows for the following salaries per annum: Alan $30,000, Bob $35,000 and Colin $28,000. (v) During the year cash drawings were as follows: Alan $22,000, Bob $17,000 and Colin $25,000. No interest is charged on drawings.
(vi) At 1 November 2006 Alan and Bob had credit balances on their current accounts of $2,800 and $1,200 respectively, Colin had a debit balance of $1,600. (vii) Interest on capital is to be paid at a rate of 10% on the balance at 1 November 2006 on capital accounts. On 1 November 2006, the partners had credit capital account balances as follows: Alan: $40,000, Bob $35,000 and Colin $30,000. (viii) On the retirement of Alan, both Bob and Colin invested a further $15,000 each into the business and agreed a new profit-sharing ratio: Bob 2/5 Colin 3/5 (ix) The assets of the partnership were revalued at 31 October 2007 for the purpose of Alans retirement. The book values and the revalued amounts are as follows. Book Value $ 120,000 40,000 22,000 18,000 Revalued amount $ 136,000 35,000 18,000 17,000
Property Equipment and machinery Inventory Receivables
The revalued amounts are to remain in the books of the new partnership. (x) Goodwill is not carried on the balance sheet. However, at 31 October 2007 the goodwill in the partnership was valued at $72,000. Any adjustments for goodwill are to be made through the partners capital accounts.
Required: (a) Prepare an appropriation account for the partnership for the year ended 31 October 2007. (b) Prepare the partners current accounts for the year ended 31 October 2007. (4 marks) (8 marks)
(c) Prepare the partners capital accounts for the year ended 31 October 2007 showing the adjustments that need to be made on the retirement of Alan from the partnership. (9 marks) (d) State the advantages and disadvantages of operating as a partnership rather than as a sole proprietor. (4 marks) (25 marks)
Prestend is the parent company of Northon. The following are the balance sheets for both companies as at 31 October 2007. Assets Non-current assets Property, plant and equipment Investments: Shares in Northon at cost Current assets Inventory Receivables Bank Total assets Equity and liabilities Capital and reserves $1 Ordinary shares Retained earnings Current liabilities Payables Tax Total equity and liabilities The following information is also available: (i) Prestend purchased 2,800,000 shares in Northon some years ago when Northon had retained earnings of $60,000. Goodwill on acquisition has been fully written off as impaired in prior years. Prestend $000 $000 4,200 3,345 1,500 1,800 600 800 750 350 Northon $000 $000 3,300
3,900 11,445
1,900 5,200
9,000 525 9,525 1,220 700 11,445
4,000 200 4,200 200 800 5,200
(ii) During the year Prestend sold goods with an invoice value of $240,000 to Northon. These goods were invoiced at cost plus 20%. Half of the goods are still in Northons inventory at the year end. (iii) Northon owes Prestend $30,000 at 31 October 2007 for goods it purchased during the year. Required: (a) Calculate the goodwill on acquisition. (b) Prepare the consolidated balance sheet for the Prestend group as at 31 0ctober 2007. Note: a working should be included for group retained earnings. Disclosure notes are not required. (14 marks) (c) A company that owns less than 50% of the shares of another company will regard it as an associate if it is able to exert significant influence. Identify three circumstances that might demonstrate significant influence. (3 marks) (20 marks) (3 marks)
[P.T.O.
Geofost, a limited liability company is preparing its cashflow statement for the year ended 31 October 2007. You have been presented with the following information. Geofost Income statement for the year ended 31 October 2007 Profit from operations Finance cost Profit before tax Taxation Profit for the period Balance sheets as at 31 October Assets Non-current assets Current assets Inventory Trade receivables Cash Total assets Equity and liabilities Capital and reserves Ordinary share capital Share premium account Retained earnings Non-current liabilities 9% loan notes Current liabilities Bank overdraft Trade payables Interest payable Taxation Total equity and liabilities Additional information (i) During the year dividends paid were $1,486,000. (ii) Summary schedule of changes to non-current assets during 2007: Cost $000 33,218 24,340 (2,964) 54,594 Accumulated depreciation $000 6,644 (990) 4,658 10,312 Net book value $000 26,574 24,340 (1,974) (4,658) 44,282 1,230 7,442 120 3,020 3,560 6,405 559 2007 $000 44,282 9,635 4,542 1,063 $000 15,730 (730) 15,000 (4,350) 10,650 2006 $000 26,574
10,524 54,806
15,240 41,814
16,000 3,365 15,629 34,994 8,000 429 4,264 100 2,760
15,000 2,496 6,465 23,961 10,300
11,812 54,806
7,553 41,814
Balance b/f Additions Disposals Depreciation Balance c/f
(iii) The total proceeds from the disposal of non-current assets were $2,694,000.
Required: (a) Prepare a cash flow statement for Geofost for the year ended 31 October 2007 in accordance with IAS 7 Cash Flow Statements, using the indirect method. (14 marks) (b) Comment on the financial performance and position of Geofost as shown by the cash flow statement you have prepared. (6 marks) (20 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6 (INT) Drafting Financial Statements (International Stream) 1 (a) Steven, Stephanie and Michael Income statement for the year ended 31 May 2008 $ Sales revenue (W1) Opening inventory Purchases (W2) Carriage inwards Less closing inventory Cost of goods sold Gross profit Expenses Vehicle running expenses Insurance Energy Telephone Advertising Rent Stationery Depreciation for: Vehicles Equipment Bad debts Discounts allowed $ 35,000 266,000 7,500 308,500 (23,000) $ 513,500
June 2008 Answers and Marking Scheme Marks Workings ($) 05 3 05 2 05 05 (285,500) 228,000
05 05 1 15 05 05 1 05 1 1 05 05
20,400 7,000 10,100 5,750 3,150 24,000 1,400 5,600 20,000 25,600 17,000 8,000
(8,000 1,000) (10,000 2,500 + 2,600)
(20,000 + 4,000)
Net profit before appropriation Interest on drawings: Steven Stephanie Michael Interest on capital: Steven Stephanie Michael
(122,400) 105,600 05 05 05 05 05 05
1,500 1,000 500 (5,000) (5,000) (2,500)
3,000 108,600
Share of Profit: Steven Stephanie Michael
(12,500) 96,100 38,440 38,440 19,220 96,100
1 1 1 22
(b)
Current Accounts Steven Drawings Interest on drawings Balance c/f $ 60,000 1,500 4,940 66,440 Balance b/f Interest on capital Share of profit $ 23,000 5,000 38,440 66,440
Marks
05 1 05
Stephanie Drawings Interest on drawings Balance c/f $ 45,000 1,000 18,440 64,440 Balance b/f Interest on capital Share of profit $ 21,000 5,000 38,440 64,440 05 1 05
Michael Drawings Interest on drawings Balance c/f $ 25,000 500 14,220 39,720 Balance b/f Interest on capital Share of profit $ 18,000 2,500 19,220 39,720 05 1 05 6
(c)
Steven, Stephanie and Michael Statement of financial position as at 31 May 2008 Cost $ Non-current assets Vehicles Equipment 40,000 80,000 120,000 Accumulated Depreciation $ 17,600 36,000 53,600 23,000 50,000 1,000 38,800 Net Book Value $ 22,400 44,000 66,400
05
1 1
Current Assets Inventory Trade receivables Prepayments Bank (W3) Total assets Partners capital accounts Steven Stephanie Michael Partners current accounts Steven Stephanie Michael Current liabilities Trade payables Accruals Total equity and liabilities
112,800 179,200
05 05 1 3
50,000 50,000 25,000 4,940 18,440 14,220 14,000 2,600
125,000
05 05 05 05 05 05
37,600 162,600
16,600 179,200
05 1 12
Workings W1 Receivables b/f Credit Sales (bal fig) Trade Receivables Control Account $ 61,500 513,500 575,000 W2 Bank Payables c/f Bad debts Settlement discounts Bank Receivables c/f $ 17,000 8,000 500,000 50,000 575,000
Allocation of marks
05 + 05 05 + 05 05 05
Trade Payables Control Account $ 270,000 14,000 284,000 Trade payables b/f Purchases (bal fig) $ 18,000 266,000 284,000 05 + 05 05 + 05
W3 Balance b/f Receivables control $ 15,000 500,000
Bank Trade payables control Drawings: Steven Stephanie Michael Other Payments Balance c/f $ 270,000 60,000 45,000 25,000 76,200 38,800 515,000 05 + 05
05 + 05
1
515,000
(a)
Prepared in accordance with IAS7 Marks Traffold Statement of cash flows for the year ended 31 May 2008 $000 Cash flows from operating activities Net profit before tax Adjustments for: Depreciation Interest received Interest paid Profit on equipment disposal Operating profit before working capital changes Increase in inventory Decrease in receivables Increase in payables Cash generated from operations Interest received Interest paid Tax paid (W2) Net cash from operating activities Cash flows from investing activities Purchase of property, plant and equipment (W1) Proceeds from sale of equipment Net cash used in investing activities (9,262) 766 4,899 2,487 (57) 794 (66) 8,057 (1,940) 2,450 554 9,121 57 (794) (1,665) 6,719 3 1 (8,496) $000 1 1 05 05 1 05 05 05 05 05 2 05
Marks Cash flows from financing activities Proceeds from issue of share capital Repayment of long term borrowing Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of period Cash and cash equivalents at end of period 5,467 (2,091) (1,540) 1,836 59 536 595 1 1 1
1 1 18
Examiners note IAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow. Interest received can be an operating cash flow or an investing cash flow. Workings (all in $000): W1 Additions of non-current assets: Opening net book value Disposals (766 66) Depreciation Revaluation (7,454 4,092) Additions (Balancing figure) Closing net book value W2 Taxation Bal b/f Income statement Tax paid Closing balance 1,296 1,570 (1,665) 1,201 05 05 1 Marks or B/forward Revaluation Addns (bal) Non-current assets NBV 41,016 3,362 9,262 53,640 _______ Disposals Deprtion C/f 700 2,487 50,453 53,640 _______
41,016 (700) 1 (2,487) 05 3,362 41,191 9,262 50,453 1 05
or Paid C/f 1,665 1,201 2,866
Taxation B/f Inc state 1,296 1,570 2,866
Note: the entries in italics in these t-accounts are the balancing figures. (b) Comments could be: Over the period there was a net cash inflow to the business of $59,000. The bank balance increased from $536,000 to $595,000. The company was able to generate additional cash by selling some equipment for $766,000. Loan notes of $2,091,000 were repaid, this will reduce interest payments in the future and therefore help the cash flow situation of the company. Inventory levels have increased by $1,940,000. This might indicate the company is experiencing some trading difficulties. Alternatively it could be that the company is taking advantage of some short term supplier discounts and purchasing inventory. Receivables have decreased by $2,450,000. This could indicate that sales have fallen, alternatively it could be that the company has taken action to improve its credit control arrangements. The company purchased non-current assets of $8,262,000. The purchase of new non-current assets may help improve operational efficiency, reduce costs and therefore improve future cash flows. 4,000,000 additional shares were issued during the year generating a cash inflow of $5,467,000. Indicative marks (05 mark) (05 mark) (2 marks)
(2 marks) (2 marks) (2 marks) (1 mark)
Marking scheme Answers above indicate the types of comments that could be made. Other relevant comments are acceptable. Maximum of 7 marks available.
(a) Goodwill on acquisition of Derwent $000 Cost of investment Share capital (80% of $5,000,000) Pre-acquisition reserves (80% of $500,000) Goodwill on acquisition 4,000 400 $000 4,750 (4,400) 350 Total
Marks
Workings ($000)
1 1 1 3 05 15 25 05 05 1 05
8,400 + 3,200 1,500 4,600 + 1,700 1500 + (30% x 500)*
(b)
Keswick Consolidated income statement for the year ended 31 May 2008 Sales revenue Cost of sales Gross Profit Distribution costs Administrative expenses Goodwill impairment Profit before tax Income tax expense Profit after tax Attributable to: Shareholders of Keswick Minority interest $000 10,100 (4,950) 5,150 (2,010) (1,350) (80) 1,710 (740) 970 890 80 970 Total
250 170
15 15
400 x 20%
10
* Unrealised profit (c) Any two of the following: (i) (ii) The parent has an agreement with other investors which gives it control over more than 50% of the voting rights. The parent under an agreement or by statute has power to govern the financial and operating policies of the entity.
(iii) The parent has the power to appoint or remove a majority of members of the board of directors. (iv) The parent has the power to cast the majority of votes at meetings of boards of directors. Marking scheme: 1 mark for each, up to max of 2 marks
(a)
Any 6 ratios: Gross profit Sales Net profit Sales Current assets Current liabilities Current assets inventory Current liabilities Loans x 100 Ord Share cap & reserves Receivables Sales Cost of sales Closing inventory x 365 x 100 946 1,886 249 1,886 405 387 165 387 650 718 165 1,886 940 240 x 100 x 100 =
2008 502% 470 1,150 64 1,150 515 195 385 195 150 700 85 1,150 680 130 x 100 =
2007 409%
Gross profit percentage
x 100
x 100
132%
x 100 =
56%
Current ratio
10 : 1
26 : 1
Quick ratio
04 : 1
20 : 1
Gearing
91%
x 100 =
214%
Recbles collection period
x 365
319 days
x 365 =
270 days
Inventory turnover or: Inventory turnover
39 times
52 times
Closing inventory x 365 Cost of sales Payables cost of sales* x 365
240 940 187 940 412 1,368
x 365
932 days
130 680 145 680 132 850
x 365 =
698 days
Payables period
x 365
726 days
x 365 =
778 days
Return on capital emp.
PBIT x 100 S.Cap + Res + Non curr lia.
x 100
30%
x 100 =
155%
* a proxy for purchases Marking Scheme The above ratios are indicative of the ones a candidate could produce. 1/2 should be awarded for each ratio calculated correctly and 1/2 for stating the correct formula, a maximum of 9 marks. (b) Relevant comments could include: Gross Profit Percentage Gross profit percentage has increased significantly. This may be because Quadrop has obtained better discounts from its suppliers. Alternatively, its market position or location may be allowing it to charge its customers premium prices. Net Profit Percentage Net profit has improved as a percentage of sales, but not by the same increase in the gross profit percentage. It may be that extra expenses, e.g. in marketing, are being incurred to generate the higher level of sales. Current Ratio The current ratio has fallen. The company may be suffering from liquidity problems and may not be able to make payments as they fall due. The financial statements show that cash balances have fallen from a $300,000 surplus to an overdraft of $120,000. Quick Ratio Quadrops quick ratio has deteriorated from the previous year and is worryingly low. The business clearly has cash flow problems. Gearing There has been a significant increase in the gearing of the company. It has taken on additional loans presumably to finance the additional non-current and intangible assets. Receivables collection period This has increased from the previous year by nearly five days. The slower collection of receivables will be contributing to the poor liquidity situation. Inventory turnover The inventory turnover ratio has fallen suggesting that there may be some inventory control problems. Alternatively the company may be changing the mix/type of goods it sells resulting in different turnover ratios. Payables The payables period has decreased from 778 days to 726 days which suggests it is paying suppliers more quickly. This will have an adverse impact on the cash flow position, unless discounts are being received for early payment.
Return on capital employed The business has improved its ROCE from 155%30% despite taking out more long term loans. This level of return to shareholders should be acceptable and attractive to any prospective shareholders. Marking scheme 1 mark for each relevant comment up to a maximum of 8 marks. (c) The nature of Quadrops business Industry average ratios The general economic conditions that exist The size of Quadrop in comparison to its competitors Marking scheme: 1 mark for each piece of information up to a maximum of 3 marks

Monday 2 June 2008
15 minutes 3 hours
Paper T6 (INT)
ALL FOUR questions are compulsory and MUST be attempted 1 Steven, Stephanie and Michael are in partnership. They have asked you to prepare their accounts for the year ended 31 May 2008. Unfortunately the partners have not maintained full accounting records. However, they know that during the year they made the following payments: Suppliers Energy Vehicle running expenses Insurance Carriage inwards Advertising Rent Telephone Stationery $ 270,000 10,000 20,400 8,000 7,500 3,150 20,000 5,750 1,400 346,200
The following balances at 1 June 2007 are available: Dr $ Capital accounts: Steven Stephanie Michael Current accounts: Steven Stephanie Michael Cash at bank Inventory Trade payables Trade receivables Vehicles at cost Equipment at cost Accumulated depreciation Vehicles Equipment Accrual for energy Prepayment for rent Cr $ 50,000 50,000 25,000 23,000 21,000 18,000
15,000 35,000 18,000 61,500 40,000 80,000 12,000 16,000 2,500 4,000 235,500 235,500
Additional Information (i) $14,000 was owed to suppliers as at 31 May 2008. (ii) Insurance of $1,000 was paid in advance at 31 May 2008. (iii) Receipts from customers were $500,000 and there was $50,000 outstanding from credit customers at 31 May 2008. (iv) During the year bad debts of $17,000 were written off. (v) Settlement discounts of $8,000 were given to credit customers. (vi) An invoice for $2,600 relating to energy expenses was unpaid at 31 May 2008. (vii) Inventory as at 31 May 2008 was valued at $23,000. (viii) Cash drawings during the year were: Steven $60,000; Stephanie $45,000; Michael $25,000. (ix) Depreciation on vehicles is to be provided at 20% of written down value. (x) Depreciation on equipment is to be provided at 25% on original cost. (xi) Interest on drawings is to be charged as follows: Steven $1,500; Stephanie $1,000; Michael $500.
(xii) Interest on capital account balances is to be allowed at 10%. (xiii) Steven, Stephanie and Michael have an agreement to share profits in the ratio 2:2:1. Required: Prepare the following for the partnership: (a) the income statement and appropriation account for the year ended 31 May 2008; (b) the partners current accounts for the year ended 31 May 2008; and (c) the statement of financial position as at 31 May 2008. (22 marks) (6 marks) (12 marks) (40 marks)
[P.T.O.
Traffold, a limited liability company, is preparing its statement of cash flows for the year ended 31 May 2008. Traffold Statements of financial position as at 31 May Assets Non-current assets Cost Accumulated depreciation 2008 $000 65,251 (14,798) 50,453 16,503 6,214 595 23,312 73,765 2007 $000 53,525 (12,509) 41,016 14,563 8,664 536 23,763 64,779
Current assets Inventory Trade receivables Bank
Total assets Equity and liabilities Capital and reserves $1 Ordinary share capital Share premium Revaluation reserve Retained earnings
21,000 7,892 7,454 19,979 56,325 6,734 9,505 1,201 10,706 73,765
17,000 6,425 4,092 18,190 45,707 8,825 8,951 1,296 10,247 64,779 $000 28,775 (14,821) 13,954 (4,908) (3,410) 5,636 57 (794) 4,899 (1,570) 3,329
Non-current liabilities 9% loan notes Current liabilities Trade payables Taxation
Total equity and liabilities Traffold Income statement for the year ended 31 May 2008 Sales revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Interest received Finance cost Profit before tax Taxation Profit for the period
Additional information (i) (ii) (iii) (iv) (v) Dividends paid during the year were $1,540,000. There were no amounts outstanding in respect of interest payable or receivable as at either year end. Total depreciation for the year was $2,487,000. The only revaluation of non-current assets was of a piece of freehold land. During the year, the company sold equipment for $766,000 realising a profit of $66,000.
Required: (a) Prepare a statement of cash flows for Traffold for the year ended 31 May 2008 in accordance with IAS 7 Statement of Cash Flows, using the indirect method. (18 marks) (b) Comment on the financial position of Traffold as shown by the statement of cash flows you have prepared. (7 marks) (25 marks)
[P.T.O.
Derwent is a limited liability company with a total share capital of 5,000,000 ordinary shares of $1 each. On 1 June 2005, Keswick acquired 80% of the ordinary shares in Derwent for $4,750,000. At that time, Derwent had reserves of $500,000. The summarised draft income statements of Keswick and Derwent for the year ended 31 May 2008 are provided below. Income statements for the year ended 31 May 2008 Keswick $000 8,400 (4,600) 3,800 (1,500) (900) 1,400 200 1,600 (600) 1,000 Derwent $000 3,200 (1,700) 1,500 (510) (450) 540 540 (140) 400
Sales revenue Cost of sales Gross profit Distribution costs Administrative costs Profit from operations Dividend received from Derwent Profit before tax Tax Profit for the period Additional information (i)
During the year ended 31 May 2008 Keswick sold goods costing $1,000,000 to Derwent for $1,500,000. At 31 May 2008, 30% of these goods remained in Derwents inventory.
(ii) At 31 May 2007 Keswick valued the goodwill arising from the acquisition of Derwent at $250,000. An impairment review of this goodwill at 31 May 2008 valued it at $170,000. Required: (a) Calculate the goodwill arising on the acquisition of Derwent on 1 June 2005. (b) Prepare the consolidated income statement for Keswick for the year ended 31 May 2008. (3 marks) (10 marks)
(c) Identify two circumstances when a company owning 50% or less of the shares of an entity will still be deemed to have control of the entity. (2 marks) (15 marks)
This is a blank page. Question 4 starts on page 8.
[P.T.O.
Janet owns some shares in a company. She has received the most recent financial statements that the company has produced, which are shown below. You have agreed to prepare an analysis of the financial performance and liquidity of the company for her. Quadrop Income statements for the year ended 31 May 2008 $000 Sales revenue Cost of sales Gross profit Administration costs Distribution costs Interest payable (349) (185) (68) $000 1,886 (940) 946 $000 2007 $000 1,150 (680) 470
Profit before tax Taxation Profit for period Statements of financial position as at 31 May 2008 Assets Non-current assets Property, Plant & Equipment Intangibles Current assets Inventory Receivables Bank Total assets Equity and liabilities Equity Share capital and reserves Ordinary share capital Share premium Revaluation reserve Retained earnings Total equity Liabilities Non-current liabilities Loans Current liabilities Payables Taxation Overdraft Total equity and liabilities $000 950 400 240 165
(602) 344 (95) 249
(223) (115) (13)
(351) 119 (55) 64 2007
$000
$000 530 130 85 300
$000
1,350
530
405 1,755
515 1,045
400 150 50 118 718
400 150 50 100 700
650 187 80 120 145 50
150
387 1,755
195 1,045
Required: (a) Calculate six accounting ratios for 2007 and 2008, which could be used to analyse the financial performance and liquidity of Quadrop. State the formulas used for calculating the ratios. (9 marks) (b) Using the ratios you have calculated in part (a), comment on the performance and liquidity of Quadrop. (8 marks) (c) What additional information about Quadrop would help you to interpret the ratios? (3 marks) (20 marks)
Answers
ACCA Certified Accounting Technician Examination Paper T6 (INT) Drafting Financial Statements (International Stream)
December 2008 Answers and Marking Scheme Marks
(a)
Screeth Statement of comprehensive income for the year ended 31 October 2008 Revenue Cost of sales (W1) Gross profit Distribution costs (W1) Administrative expenses (W1) Finance costs Profit before tax Income tax expense Profit for the year Other comprehensive income: Gains on property revaluation Total comprehensive income for the year $000 9,261 (6,770) 2,491 (955) (1,228) (58) 250 (120) 130
05 15 ($9,427 $166) 35 30 50 05 05 05 05
1,267 10 ($3,150 $1,883) 1,397 05 170
(b)
Assets Non-current assets Property, plant and equipment (W3) Current assets Inventory Trade receivables Prepayments Cash in hand Total assets
Screeth Statement of financial position as at 31 October 2008 $000
05 $000 4,960 45 05 15 ($1,700 $85) 10 05 05
480 1,615 10 27
2,132 7,092
Equity and Liabilities Capital and reserves $1 Ordinary shares Share premium account Revaluation reserve Retained earnings ($875 + $130 $200) Non-current liabilities 7% Loan notes Current liabilities Trade payables Tax Accruals Bank overdraft Total liabilities Total equity and liabilities
2,850 350 1,267 805 5,272 822 507 120 60 311
05 05 10 25
10 05 05 10 10
998 7,092 05 180
Marks Workings W1 Cost of Sales $000 Distribution Administrative Cost Expenses $000 $000 250 126 434 496 (88) 87 145 48 48
Distribution costs Administrative expenses Salaries (1,180 + 60) (25:35:40) Discounts received (1 mark) Property expenses (20:30:50) Insurance (130 10) (20:40:40) Purchases Opening inventory Depreciation buildings 132 (W2) (0:50:50) Depreciation motor vehicles (W2) Depreciation furniture and equipment (W2) Closing inventory (1 mark) Receivables expense (W4) (1 mark)
310 58 24 6,248 610
66 70 (480) 955 (3 marks) Motor vehicles $000 420 (140)
66 160 275 1,228 (5 marks) Furniture & equipment $000 800 (335)
6,770 (35 marks)
W2 Depreciation on non-current assets Buildings $000 2,640 (625) (132) (70) 1,883 210 (160) 305 $000 1,295 05 3,150 10 210 15 305 15 4,960 45
Cost Depreciation b/f Current years depreciation: Buildings 2,640 x 5% Motor vehicles (420 140) x 25% Furniture and equipment 800 x 20%
W3 Non-current assets as at 31 October 2008 Land (from TB) Buildings revalued at 31 October 2008 Motor vehicles (W2) Furniture and equipment (W2) Total Property, Plant & Equipment Working Papers W4 Balance as per TB Allowance for receivables
Receivables Expense $ 260,000 15,000 275,000 Income statement $ 275,000 275,000 $ 70,000 15,000 85,000
Allowance for Receivables $ Balance c/f ($1,700,000 x 5%) 85,000 85,000 Balance as per TB Receivables expenses
Marks Workings ($000) 2 (a) Goodwill on acquisition of Bruce $000 Cost of investment Share capital ($9,260,000 x 70%) Retained earnings ($750,000 x 70%) Parents goodwill Non-controlling interests goodwill Total goodwill 6,482 525 $000 8,800 10 10 10
(7,007) 1,793 600 10 2,393 Total 40
(b)
(i)
Wallace Consolidated income statement for the year ended 31 October 2008 $000 Revenue 72,400 10 Cost of sales (33,200) 20 Gross profit 39,200 Distribution costs (5,000) 05 Administrative expenses (9,792) 05 Finance costs (2) 10 Profit before tax 24,406 Income tax expense (6,800) 05 Profit for the year 17,606 Profit attributable to: Owners of the parent 15,506 05 Non-controlling interest 2,100 20 17,606 Total 80 Wallace Consolidated statement of financial position as at 31 October 2008 Assets $000 $000 Non-current assets Tangible assets, net book value 44,895 05 Intangible goodwill 2,393 05 47,288 Current assets Inventory, at cost 4,365 15 Receivables 10,774 35 Cash and cash equivalents 1,762 16,901 05 Total assets 64,189 Equity and Liabilities Capital and Reserves $1 Ordinary shares 26,000 10 Retained earnings (W1) 16,945 30 42,945 Non-controlling interest (W2) 4,803 30 Total equity 47,748 Non-current liabilities 10% Loan note 20 10 Current liabilities Payables 9,839 25 Tax 6,582 10 Total current liabilities 16,421 Total equity and liabilities 64,189 Total 180
50,000 + 27,400 5,000 26,000 + 11,000 5,000 + 1,200*
7,000 + 2,792 86 3,700 + 3,100
30% x (8,200 1,200)
(ii)
(30,000 + 14,895)
(3,900 + 1,665 1,200*) (6,850 + 4,530 600** 6***) (1,260 + 502)
(80 60) (6,645 + 3,800 600** 6***) 4,080 + 2,502
Marks Notes: * Exclusion of unrealised profit held in inventory (($5,000,000 $3,000,000) x 60% = $1,200,000) ** Intra-company indebtedness ($600,000) *** Exclusion of intragroup interest ($6,000) Workings W1 Retained earnings as at 31 October 2008 $000 Wallace as per statement of financial position Bruce: Retained earnings Pre-acquisition reserves Unrealised profit Group share (70% x $4,000) $000 14,145 05
5,950 (750) (1,200) 4,000 2,800 16,945 25 30
W2 Non-controlling interest as at 31 October 2008 Net assets of Bruce at 31 October 2008 Less unrealised profit $000 15,210 (1,200) 14,010 4,203 600 4,803 05 05
Non-controlling interest share (30% x $14,010) Goodwill attributable to non-controlling interest Total non-controlling interest
10 10 30
(a) Property Furniture & fittings (NBV) Motor vehicles (NBV) Inventory Receivables Cash and bank: Loan Payables Dissolution expenses 1 Profit on realisation: Melanie 2 1 Vicky 4 1 Lucy 4
Realisation Account $ 100,000 Loan a/c 30,000 Payables 20,000 20,000 49,000 Cash and bank: 10,000 Property 29,350 Furniture and fittings 2,100 Motor vehicles 4,360 Inventory 2,180 Receivables 2,180 269,170 Cash and Bank $ 5,000 Realisation A/c: Loan 110,000 Payables 26,800 Dissolution expenses 22,300 Partners a/c: Melanie 21,650 Vicky 45,900 Lucy 231,650
$ 10,000 32,520
05 05 05 05 05 05 05 05 10 10 05 Total
05 05
110,000 26,800 22,300 21,650 45,900 269,170
05 05 05 05 05 100
(b) Balance b/f Realisation a/c Property Furniture and fittings Motor vehicles Inventory Receivables
$ 10,000 29,350 2,100 92,040 40,680 57,480 231,650 05 05 10 05 05 05 60
05 05 05 05 05 Total
Marks (c) Melanie $ 92,040 92,040 Vicky $ 40,680 40,680 Partners Accounts Lucy $ 57,480 Capital a/cs Current a/cs Realisation a/c 57,480 Melanie $ 80,000 7,680 4,360 92,040 Vicky $ 30,000 8,500 2,180 40,680 Lucy $ 50,000 5,300 2,180 57,480 Total
Cash
20 10 10 40
(a)
Ratio Current ratio
Formula :1 :1 x 365 x 100 x 100 x 100
Current assets Current liabilities Current assets inventory Quick ratio Current liabilities Receivables Recbles collection period Sales PBIT Return on capital employed S. Cap + Res + Non curr lia. Gross profit Gross profit percentage Sales Net profit Net profit percentage Sales
Campbell Giddens Calculation Ratio Calculation Ratio 303 274 43:1 18:1 70 151 165 107 24:1 07:1 70 151 69 98 x 365 42 days x 365 53 days 596 678 99 32 x 100 183% x 100 31% 540 1,049 202 152 x 100 339% x 100 224% 596 678 99 24 x 100 166% x 100 35% 596 678
Marking scheme: 1/2 mark for correctly stating the formula and 1/2 mark for each correct ratio (b) Relevant comments could include: The current ratios indicate that both companies have sufficient current assets to meet their current liabilities. Campbells current ratio is very healthy due mainly to the relatively lower level of liabilities. The quick ratio shows that Giddens may have some liquidity problems; it is less than 1:1 and therefore the company may not be able to pay its debts as they become due. The high level of payables relative to current assets may indicate some difficulty in paying suppliers. Giddens bank balance when compared to Campbells is also low. The receivables collection period for Giddens is longer than for Campbell. This may indicate poor credit control in Giddens and may have an adverse effect on company liquidity. Campbell is making a very good return on capital employed (18%) compared to Giddens (31%). Campbell should be an attractive investment to potential investors with this level of return. Campbell has a higher gross profit percentage than Giddens. It may be that Campbell is able to source its supplies more cheaply than Giddens or benefit from discounts. Alternatively, it may have some other advantage such as its location which enables it to charge higher prices. The net profit percentage for Giddens is very low compared with Campbell, suggesting that it is not controlling its expenses as carefully as it should.

Monday 1 December 2008
15 minutes 3 hours
Paper T6 (INT)
ALL FOUR questions are compulsory and MUST be attempted 1 Screeth is a limited liability company with the following trial balance as at 31 October 2008. Dr $000 250 126 1,180 Cr $000
Distribution costs Administrative expenses Salaries Discounts received Sales Property expenses Returns inward Cash Insurance Purchases Inventory at 1 November 2007 Bank Loan note interest Share premium account Retained earnings at 1 November 2007 Allowance for receivables at 1 November 2007 Trade payables Trade receivables 7% Loan notes Receivables expense $1 Ordinary shares Dividends paid: Final for year ended 31 October 2007 Land at cost Buildings at cost Motor vehicles at cost Furniture and equipment at cost Accumulated depreciation at 1 November 2007 Buildings Motor vehicles Furniture and equipment
88 9,427 290 166 27 130 6,248 610 311 58 350 875 70 507 1,700 822 260 2,850 200 1,295 2,640 420 800 625 140 335 16,400
16,400
Further information relating to Screeth: 1 2 3 4 The insurance includes $10,000 which relates to November 2008. Buildings are depreciated at 5% of cost. Building depreciation during the year is allocated 50% to distribution costs and 50% to administrative expenses. At 31 October 2008 the buildings were professionally valued at $3,150,000 and the directors wish this valuation to be incorporated into the accounts. Depreciation is to be charged as follows: (i) Motor vehicles at 25% of written down value, allocated to distribution costs (ii) Furniture and equipment at 20% of cost, allocated to administrative expenses. Inventory at 31 October 2008 was valued at $480,000 based on its original cost. Based on past experience the allowance for receivables is to be increased to 5% of trade receivables and allocated to administrative expenses. There are salaries outstanding of $60,000 for the year ended 31 October 2008.
5 6 7
The items listed below should be apportioned as indicated: Cost of Sales Property expenses 20% Insurance 20% Salaries 25% Discounts received Tax of $120,000 is to be provided for the year.
Distribution Costs 30% 40% 35%
Administrative Expenses 50% 40% 40% 100%
Required: Prepare, the following financial statements for Screeth: (a) the statement of comprehensive income for the year ended 31 October 2008. (b) the statement of financial position as at 31 October 2008. (17 marks) (18 marks) (35 marks)
[P.T.O.
You are presented with the following information for Wallace, a limited liability company, and its subsidiary Bruce: Income statements for the year ended 31 October 2008 Wallace $000 Revenue 50,000 Cost of sales (26,000) Gross profit 24,000 Distribution costs (2,700) Administrative expenses (7,000) Finance costs Income from Bruce: Loan note interest 6 Dividends 2,100 Profit before tax 16,406 Income tax expense (3,700) Profit for the year 12,706 Statements of financial position as at 31 October 2008 Wallace $000 $000 30,000 8,800 60 38,860 3,900 6,850 1,260 1,665 4,530 502 Bruce $000 27,400 (11,000) 16,400 (2,300) (2,792) (8) 11,300 (3,100) 8,200 Bruce $000 $000 14,895 14,895
Assets Non-current assets Tangible assets Investments: $1 ordinary shares in Bruce at cost Bruce loan notes Current assets Inventory, at cost Receivables Cash and cash equivalents Total assets Equity and liabilities Capital and Reserves $1 Ordinary shares Retained earnings Total equity Non-current liabilities 10% Loan note Current liabilities Payables Tax Total liabilities Total equity and liabilities
12,010 50,870
6,697 21,592
26,000 14,145 40,145
9,260 5,950 15,210
6,645 4,080 3,800 2,502
80
10,725 50,870
6,302 21,592
The following information is also available: (i) Wallace purchased 70% of the $1 ordinary shares in Bruce on 1 November 2007. At that date Bruces retained earnings were $750,000.
(ii) It is group policy to value the non-controlling interest at fair value. For this purpose, the fair value of the goodwill attributable to the non-controlling interest of Bruce is $600,000. Consolidated goodwill was not impaired at 31 October 2008. 4 FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com
(iii) Wallace owns $60,000 of Bruces loan notes. The interest is paid annually in arrears. Interest for the year ended 31 October 2008 is included in Bruces payables. Wallace has also accrued the interest in its receivables. (iv) During the year ended 31 October 2008 Bruce sold goods which originally cost $3,000,000 to Wallace for $5,000,000. Wallace has only been able to sell 40% of these goods by 31 October 2008. (v) At 31 October 2008 Wallace owed Bruce $600,000 for some of the goods that Bruce supplied during the year. (vi) All Bruces dividends were paid in the financial year ended 31 October 2008. Required: (a) Calculate the goodwill arising on the acquisition of Bruce as at 1 November 2007. (b) Prepare the following financial statements for Wallace: (i) the consolidated income statement for the year ended 31 October 2008; (8 marks) (4 marks)
(ii) the consolidated statement of financial position as at 31 October 2008. Note: A working should be included for the retained earnings. Disclosure notes are not required. (18 marks) (30 marks)
[P.T.O.
Melanie, Vicky and Lucy have had a business partnership for a number of years and share profits and losses in the ratio 2:1:1. The partnership was dissolved on 1 December 2008. The statement of financial position for the partnership as at 30 November 2008 was as follows: Melanie, Vicky and Lucy Statement of financial position as at 30 November 2008 $
Assets Non-current assets Property Furniture and fittings Motor vehicles Current assets Inventory Receivables Bank Total assets
$ 100,000 30,000 20,000 150,000
20,000 49,000 5,000
74,000 224,000
Capital and liabilities Partners capital accounts Melanie Vicky Lucy Partners current accounts Melanie Vicky Lucy Non-current liabilities Loan Current liabilities Payables Total capital and liabilities Additional information (a) (b) (c) (d) (e) (f) (g) (h)
80,000 30,000 50,000 160,000 7,680 8,500 5,300 21,480 10,000
32,520 224,000
The property was sold for $110,000 and the furniture and fittings were sold for $26,800. The motor vehicles were all sold for $22,300. Only $45,900 of outstanding receivables were recovered. The payables were settled for $29,350. The inventory was sold for $21,650. The loan was repaid in full on 1 December 2008. There were no outstanding interest payments on the loan. There were expenses incurred in dissolving the partnership of $2,100.
Required: Prepare the following accounts on dissolution: (a) Realisation account. (b) Cash and bank account. (c) Partners accounts. (10 marks) (6 marks) (4 marks) (20 marks)
[P.T.O.
An investor is considering the purchase of shares in either Campbell or Giddens. Both companies are in the same line of business and their accounts are summarised below: Statements of financial position as at 31 October 2008 Assets Non-current assets At cost Accumulated depreciation Current assets Inventory Receivables Cash and cash equivalents Campbell $000 $000 420 (113) 307 138 69 96 167 98 9 Giddens $000 $000 1,070 (144) 926
303 610
274 1,200
Equity and liabilities Share capital and reserves Share capital Retained earnings
370 170 540
900 69 969
Non-current liabilities 10% Loan note Current liabilities Trade payables Interest payable Income tax Total equity and liabilities Income statements for the year ended 31 October 2008
80
60 10
70 610
120 1 30
151 1,200
Sales revenue Cost of sales Gross profit Expenses: Administrative Selling and distribution Depreciation Loan note interest
Campbell $000 $000 596 (394) 202 (36) (53) (14) (103) 99
Giddens $000 $000 678 (526) 152 (45) (56) (19) (8) (128) 24
Net profit
Required: (a) Calculate the following six ratios for both companies, clearly showing the ratio formulae and figures used. (i) (ii) (iii) (iv) (v) (vi) Current ratio; Quick ratio (acid test ratio); Receivables collection period; Return on capital employed; Gross profit percentage; Net profit percentage.
(9 marks)
(b) Prepare, for the investor, comments on the performance and position of Campbell and Giddens using the ratios calculated in part (a). (6 marks) (15 marks)

Paper T6 (Int) Drafting Financial Statements: Sample Multiple Choice Questions - June 2009

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Paper T6 (Int) Drafting Financial Statements: Sample Multiple Choice Questions - June 2009

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Certified Accounting Technician examination

Sample multiple choice questions June 2009

Paper T6 (INT) Drafting Financial Statements

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C $1,550,000 D $1,950,000 (2 marks)

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A 1, 2 and 4 only B 1, 3 and 4 only C 1 and 3 only (2 marks)

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A 1 only B 2 only C None of the statements (2 marks)

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Ordinary share capital $ A 387,500 B C 412,500 387,500

End of Sample Questions

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$ 7,500 60,000 (9,200) 58,300

$ 6,000,000 4,400,000 10,400,000 (8,450,000) 1,950,000

D 628,950 + (76,950 31,725) (66,525 36,300) = 643,950 A A D

$ 228,250 (15,125) (7,500) (5,625) 200,000

Share premium $ 200,000 375,000 (37,500) 537,500

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4JINTIX Paper 6INT

June 2004 Answers and Marking Scheme Marks

4JINTAA Paper 6INT

1,500 1,549 3,049 600 530 250

780 4,429 Total

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4JINTAA Paper 6INT

50 25 492 Vehicles $ 160 (60)

(25) 2,750 75 (92) 368

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4JINTAB Paper 6INT

7,450 (6,244) 1,206 2,905 (4,749) (1,844) Total

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4JINTAC Paper 6INT

Unadjusted profit Bad debt written off Loan interest (W1)

Division of Profit Angela Brenda Christine Hannah

280,000 210,000 820,000 350,000

1,100,000 560,000 460,000 30 Current accounts

326,667 250,000 210,000 233,333 560,000 460,000

Post 31/8/03 Drawings 40,000 Bal c/f 332,800 372,800

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4JINTAD Paper 6INT

Net profit percentage

4,400 x 365 = 20,000

mark for each correct ratio

Marking scheme 1 mark for each relevant comment up to a maximum of 4 marks.

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Drafting Financial Statements

The Association of Chartered Certified Accountants

4JGIRLAA Paper 6IRL

General expenses Heating and lighting Wages and salaries

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4JIRLAA Paper 6IRL

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4JINTAB Paper 6INT

27,000 14,569 15,395 59,944

23,331 10,788 7,123 28,063

17,824 5,533 16,699 7,989 6,973 20,324 7,323

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