SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 (a) WORKINGS CONSOLIDATION SCHEDULE Memo GH

Silver Ltd: Ordinary share capital (60:10) Preference shares (40:60) Capital surplus: At acquisition (60:40) Post acquisition (60:40) (1,070,000 900,000) Fair value building (60:40) Income surplus: At acquisition Contingent liability Post acquisition (1,890,500 800,000 + 120,000) Unrealized profit on equip (60:40) Gold Ltd: Capital surplus Income surplus Depn adj. re equip. 20%*6/12*50,000 Cost of investment in Silver Ltd: Ordinary shares Preference shares Wood Ltd: Ordinary shares capital (80:20) Capital surplus at acqn (80:20) Capital surplus post acqn (80:20) Income surplus At acquisition (80:20) Post acquisition (70:30) (1,331,260 200,000) Cost of investment in Wood Ltd Ordinary shares Totals Impairment loss Negative goodwill transferred to income statement Consolidated balances (142,000) 2,000,000 350,000 900,000 170,000 100,000 800,000 (120,000) 1,210,500 (50,000) 1,583,000 3,450,500 5,000 (2,400,000) (140,000) 1,600,000 200,000 100,000 200,000 1,131,260 (1,200,000) (192,000) 50,000 (400,000) 2,860,452 1,765,00 (1,200,000) 400,000 2,860,452 1,765,00 0 5,058,058 (50,000) 40,000 5,408,058 (2,400,000) (140,000) 1,280,000 160,000 160,000 320,000 40,000 20,000 80,000 40,000 226,252 905,008 Goodwill Silver Ltd.
Goodwill Wood Ltd GH Non Controlling Interest GH

GH
1,200,000 140,000 540,000 60,000 480,000 (72,000)

Capital Surplus GH

Cons. I/S GH

800,000 210,000 360,000 68,000 40,000 320,000 (48,000) 484,200 (20,000) 1,583,00 0 726,300 (30,000) 3,450,000 5,000 102,000

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010

WORKINGS CONSOLIDATION SCHEDULE BALANCE SHEET Balance sheets as at 31st December, 2009 Gold Ltd Silver Ltd Wood Ltd GH GH GH
Assets Non-current Assets Property, plant & equipment Long term investments Goodwill Current Assets Stocks Accounts receivable Cash & bank balances Total Assets Liabilities and Owners Equity Current Liabilities Accounts payables Sundry payables Accruals Long-term Loans Owners Equity Stated capital Capital surplus Income surplus Non controlling interest Total Liabilities & Owners Equity 4,383,500 3,740,000 8,123,500 1,284,400 1,000,100 249,000 2,533,500 10,657,000 4,897,000 4,897,000 1,216,000 582,100 155,300 1,953,400 6,850,400 3,474,600 3,474,600 555,860 428,100 128,060 1,112,020 4,586,620

Adjust. GH
56,250 (3,740,000)

Cons. B.S GH
12,811,350 12,811,350 142,000 3,056,260 1,950,300 592,360 5,598,920 18,552,270

(60,000) 60,000

1,033,000 672,000 332,000 2,037,000 536,500

553,450 427,500 134,950 1,115,900 424,000

510,000 343,940 140,420 994,360 361,000

2,096,450 1,443,440 607,370 4,147,260 1,321,500

3,050,000 1,583,000 3,450,500 _________ 8,083,500 10,657,000

2,350,000 1,070,000 1,890,500 ________ 5,310,500 6,850,400

1,600,000 300,000 1,331,260 ________ 3,231,260 4,586,620

(1,188,000)

3,050,000 1,765,000 5,408,058 2,860,452 13,083,510 18,552,270

(i)

Property plant & equipment comprised: Gold Ltd GH Buildings 1,181,000 Plant & equipment 1,588,100 Furniture & fittings 977,400 4,383,500

Silver Ltd GH 2,770,000 1,641,000 486,000 4,897,000

Wood Ltd GH 1,568,000 1,440,000 462,600 3,474,600 Wood Ltd GH 1,600,000 2

(ii)

The stated capital of the companies is made up of: Gold Ltd Silver Ltd GH GH Ordinary shares 2,800,000 2,000,000 Preference shares 250,000 350,000

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 3,050,000 2,350,000 1,600,000 Consolidated balance sheet of Gold Ltd and its subsidiaries as at 31st December, 2009 GH Assets Non-current Assets Property, plant & equipment Goodwill Current Assets Stocks Accounts receivable Cash & bank balances Total Assets Liabilities and Equity Current Liabilities Trade creditors Sundry creditors Accruals Non-current Liabilities Long-term Loans Equity attributable to equity holders of the parent Stated capital Capital surplus Income surplus Non controlling interest Total Liabilities and Equity Notes (i) Property, plant & equipment comprised Buildings Plant & equipment Furniture & fittings (ii) (iii) Stated Capital Ordinary shares Preference shares 12,811,350 142,000 12,953,350 3,056,260 1,950,300 592,360 5,598,920 _________ 18,552,270

2,096,450 11,443,440 607,370 4,147,260 1,321,500 3,050,000 1,765,000 5,408,058 10,223,058 2,860,452 18,552,270

6,156,000 4,729,350 1,926,000 12,811,350 2,800,000 250,000 3,050,000

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 (b) The existence of significant influence by an investor is usually evidence in one or more of the following ways: a. b. c. d. e. representation on the board of directors or equivalent governing body of the investee; participation in policy-making process, including participation in decisions about dividends or other distributions; material transactions between the investor and the investee; interchange of managerial personnel; or provision of essential technical information.

QUESTION 2 (a) Operating profit: Sales (500,000 x 5.2) Cost of sales: Purchases (200,000 x 3.2) (360,000 x 3.4) Closing stock (60,000 x 3.4) Operating profit Holding Gain: CPP purchases Historical cost purchases Realized Holding Gain: CPP cost of sales Historical cost of sales Unrealized Holding Gain: CPP closing stock Historical cost of C/I stock Historical Cost 2,600,000 640,000 1,224,000 1,864,000 (204,000) 1,660,000 940,000 Factor 115/107.5 115/100 115/105 115/105 CPP 2,781,395 736,000 1,340,571 2,076,571 (223,429) 1,853,142 928,253

2,076,571 (1,864,000) 212,571 1,853,142 (1,660,000) 193,142 223,429 (204,000) 19,429

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 (b) Any three (3) Reasons for HC Differences about the method of recognizing inflation in the accounts. Differences about the choice of appropriate indexes Deflate current monetary values. Transactions with third parties who are extreme to the business are done on historical cost basis. Current cost and current purchasing power methods are not popular because they lack verifiability of records. Historical cost method is currently the only method acceptable to tax authorities. Categories of Employee Benefits (i) Short-term employee benefits, eg wages, salaries, SSF, paid annual leave, paid sick leave, bonuses, medical care, etc. Post employment benefits, eg pension, life insurance, post employment medical care. Other long-term employee benefits, eg sabbatical leave, long-service awards. Terminal benfits

Defined contribution Plans post employment benefit plans under which an enterprise pays fixed contributions into a separate entity or separate fund and will have no legal or contractual obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to employee service in the current and prior periods. Defined Benefit Plants retirement benefit plans under which amounts to be paid as retirement benefits are determined by reference to an actuarial formula usually based on employees earnings and years of service.

(ii)

(c)

a. Amortised Cost It is the amount at which the financial liability or (asset) is measured at initial recognition minus principal repayments, plus or minus the cumulative amortization of any difference between that initial amount and the maturity amount, and minus any write-down for impairment or uncollectability. Effective Interest Rate It is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount. b. Working Year Amortised cost at beginning at year end 20,000 21,600 23,520 Income statement charge (20%) 4,000 4,320 4,704 Interest payment (2,400) (2,400) (2,400) Amortised cost at end of year 21,600 23,520 (25,824) 5

2008 2009 2010

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 Income statement for the year ended Finance charge Balance sheet as at 31/12/ Financial liability QUESTION 3 a) Amount Receivable by Boafo Sales Proceeds Freehold property Equipment Inventories Distribution Classic Bank (Overdraft) Tax Authorities Debenture stocks Available for unsecured creditors Analysed as to Classic Bank (O/D) Sundry payables (206,000 22,000) GH 28,000 102,000 20,000 150,000 28,000 22,000 24,000 31/12/08 4,000 2008 21,600 31/12/09 4,320 2009 23,520

74,000 76,000

6,000 184,000 190,000

Dividend payout 76,000/190,000 = 40% or 40 pesewas in a GH Total amount receivable by Boafo Debenture Unsecured credit (40% of 120,000) b) 24,000 48,000 72,000

Statement of Financial Position after Reconstruction Non Current Assets GH Freehold property 34,000 Equipment 180,000 214,000 Inventory Cash Total Assets Stated capital Capital surplus (34,000 10,000) Sundry payables (206,000 120,000) Bank overdraft 60,000 70,000 344,000 200,000 24,000 224,000 86,000 34,000 6

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 344,000 Workings Shareholding in the reconstruction entity Number Boafo Conversion of Debenture stocks Conversion of trade credit New subscription Existing Shareholders 1/5 x 200,000 c) Numerical Comparison Proposal 1 Cash received Available funds for investment Total investible funds 24,000 66,000 70,000 160,000 40,000 200,000 GH 72,000 70,000 142,000 24,000 66,000 70,000 160,000 40,000 200,000 GH

Annual Investment Income = 15% of 142,000 = GH21,300 Proposal 2 % of shareholding in Business = 160,000 shares / 200,000 shares = 80% Annual earnings = 80% of annual profit = 80% of GH27,000 = GH21,600 Proposal 2 seems more advantageous d) On liquidation, the bank receives [GH28,000 + (40% of GH6,000)] = GH30,400. Under reconstructed business, the bank would be owed GH34,000. The bank is likely to support the scheme.

QUESTION 4 a) Quantitative Factors i. Profitability Even though Relax Ltd achieved a lower GP% than the industry, is eventually made a higher NP % than the industry. It is likely that the marketing and distribution expenses and other direct cost of sales are uncontrollable for Relax Ltd due to external factors. However, Relax Ltd is able to control its own administrative cost and is what accounted for the higher NP%. The lower ROCE is worrisome but can be improved with increased managerial vigilance. ii. Liquidity Relax Ltd performed better in terms of the current ratio in relation to the industry but rather poorly in terms of its quick ratio. It is likely that a lot of stocks are becoming obsolete and their patronage is on the decline in the market. This is supported by the fact that stock-turn over is much slower than the industry. The best option is for Relax Ltd to reengineer its operations with the view to introducing new products and also venturing into new markets.

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 iii. Efficiency Relax Ltd collects its sales much slower than the industry but pays its creditors much faster than the industry. It means that Relax Ltd is giving interest-free loan to its creditors but is prefinancing the operations of its debtors. This is not a good policy and calls for a renegotiation with its trading partners inorder to improve the present situation. iv. Gearing Relax ltd is unduly geared. With the present 40% debt, credit providers can easily worry the company with threats of liquidation. This may be the reason why they have been able to secure a comfortable cover for interest on their loans such that there is nothing to pay as dividend to shareholders. Relax Ltd must take steps to either pay off some of the debt or convert some of it to equity in order the condition of shareholders. b) Qualitative Factors i. Relax Lt must watch out for unethical business conduct and avoid worsening its own problems. ii. Resignations of top management staff is not good enough as it sends the wrong signals. If managers cannot relate to the Managing Director (MD), the MD must leave in the overall interest of the company. c) Conclusion Inspite of the difficulties the company may be going through as well as the genuine concerns of Mr. Abu, calling for a mass dismissal of all management staff may not be the solution to the problem. Management should rather be fed with alternative strategies as will greatly improve the fortunes of the company. Factors that distort the application of financial ratios: Information Problems The fare information is often outdated, so if the information is not timely where would be problem of interpretation. Historical cost information may be inappropriate information for the derision for which the analysis is being made. Analysis of accounting information only identities symthoms not causes and this is of limited use. Effects of price changes make comparisons difficult unless adjustments are made. Impact of changes in technology on the price of assets, the likely return and the future market. Impact of a changing environment on the result reflected in the accounting information. Potential effects of changes in accounting policies on the reported results. Problems associated with establishing a normal . year to compare other years with. Selection of industry norms and the usefulness of norms based on averages. Different firms have different financial and business risk, structure and returns. 8

Comparison problems

Inter-firm companies problems

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 QUESTION 5 VENTUM LTD Bronze Ltd Valuation of shares using Net Assets Basis. This method is adopted in valuing shares when there is an intention to liquidate or use as a security to support the order basis of valuation. The share price = Net Assets available to ordinary shareholders Number of ordinary shares issued Based on the following basis, the Net Assets per share of Bronze Ltd is calculated as follows: Assets Free hold land & building Plant & machinery Motor vehicles Patent - 12000/10% Inventory Trade receivable Bank balance Less Liabilities: Debentures Tax payable Trade payable Accrued expenses Net assets available to ordinary shares Net assert per share 218,000 = 0.22 1,000,000 GH000 GH000 610,000 288,000 340,000 120,000 500,000 380,000 120,000 1,858,000

1,220,000 120,000 240,000 60,000 1,640,000 218,000

Discounted cash flow Using the DCF method in valuing shares looks at the profitability of the company. The price per share is the present value of future cash flow discounted at appropriate cost of capital to arrive at the present value. Price per share = Present value No of shares issued Pre-Tax Profit 550,000 650,000 880,000 1,200,000 1,400,000 Depreciation 45,000 55,000 60,000 85,000 90,000 Cash Flow 595,000 705,000 940,000 1,285,000 1,490,000 9

Discounted present value Years 2011 2012 2013 2014 2015

SOLUTION ADVANCED FINANCIAL REPORTING MAY 2010 DCF 0.909 0.826 0.751 0.683 0.621 PV 540,855 582,330 705,940 877,655 925,290 3,632,070 Price per share 3,632,020 1,000,000 = 3.63

Price Earnings Ratio Basis The price earnings ratio is used to value unquoted security on the basis of its profitability. The method is MV = P/E Ratio x EPS Since Bronze Ltd is unquoted, it is expected to pay a lower price for it shares as against similar quoted company (80% x 8) = 6.4 times. The EPS of bronze Ltd is calculated as following using the laters earnings. Alternatively, a candidate can also use average historical or projected earnings. PAT GH325,000 1,000,000 = 0.325

MV = 6.4 x 0.325 = 2.08 Dividend Yield Basis The dividend yield basis is suitable for small holding valuation since the investor cannot influence retention policy. The price per share = DPS/D Yield The dividend yield of the unquoted company is expected to be higher than that of quoted company because of higher risk. Therefore for the dividend yield of Bronze Ltd it would be adjusted by addition 20% of 10% as risk premium. Bronze Ltd (10 + 2) = 12% The dividend per share of Bronze Ltd is (180,000/1,000,000 = 0.18 :. MV = 0.18 = 1.50 0.12

10