Accounting Qualification Model answers

Technician/Level 4 Diploma (QCF) Drafting financial statements (DFS)

December 2009 Note: The model answers may, in parts, be longer than would be expected of candidates in the exam. The fuller version is given for teaching purposes.

Section 1
Part A Task 1.1
Journal entries Inventory (SFP/(BS)) Inventory (IS) Prepayment Administrative expenses 128 128 Dr 000 4,987 4,987 Cr 000

Distribution costs Accruals

66 66

Interest Interest payable

560 560

Taxation Taxation payable

980 980

W1 W2 W3

Prepayment 3/12 x 512,000 = 128,000 Accrual 2/3 x 99,000 = 66,000 Interest 14,000,000 x 8% x 0.5 = 560,000

Task 1.2 (a)

Martin Ltd Income statement for the year ended 31 October 2009 ) Continuing operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Tax Profit for the period from continuing operations attributable to equity holders 000 46,433) (32,032) 14,401) (2,516) (3,316) 8,569) (1,120) 7,449) (980) 6,469)

W1

Sales Less returns in

46,777) (344) 46,433)

W2

Opening inventories Purchases Less returns out Less closing inventories

4,466) 32,776) (223) 32,553) 37,019) (4,987) 32,032)

W3

Distribution costs Accrual

2,450) 66) 2,516) 3,444) (128) 3,316) 560) 560) 1,120)

W4

Administrative expenses Prepayment

W5

Finance costs Accrual

Task 1.2 (b)

Statement of financial position(balance sheet) as at 31 October 2009 000) Non-current assets Property, plant and equipment Current assets Inventories Trade and other receivables Cash and cash equivalents 18,100)

4,987) 2,362) 9,654) 17,003) 35,103)

Total assets Current liabilities Trade and other payables Tax payable

(2,119) (980) (3,099) 13,904)

Net current assets Non-current liabilities Bank loans Total liabilities Net assets Equity Share capital Retained earnings Total equity

(14,000) (17,099) 18,004)

9,000) 9,004) 18,004)

W1

Property, plant and equipment cost Property, plant and equipment acc depreciation

39,880) (21,780) 18,100) 2,234) 128) 2,362) 1,347) 146) 560) 66) 2,119) 3,465) 6,469) (540) (390) 9,004)

W2

Trade and other receivables Prepayment

W3

Trade and other payables Accruals Interest Distribution costs

W4

Retained earnings From income statement Final dividend for year ended 31 October 2008 Interim dividend for year ended 31 October 2009

Task 1.3
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(a) (b) (c)

The principal issues are the timing of recognition of assets, the determination of their carrying amounts, and the depreciation charges to be recognised in relation to them. Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7] the future economic benefits associated with the asset will flow to the enterprise; and the cost of the asset can be measured reliably. This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

Part B Task 1.4

Wells plc: Consolidated statement of financial position (balance sheet) as at 31 October 2009 000) Non-current assets Intangible - Goodwill Property, plant and equipment W1 W2 1,119) 70,236) 71,355) Current assets Inventories Trade and other receivables Cash and cash equivalents

W3

18,102) 7,755) 1,587) 27,444) 98,799)

Total assets Current liabilities Trade and other payables Tax liabilities

W4

(9,072) (2,240) (11,312) 16,132)

Net current assets Non-current liabilities Long-term loans Total liabilities Net assets Equity Share capital Share premium Retained earnings Equity attributable to equity holders of the parent Non-controlling (minority) interest Total equity

(18,000) (29,312) 69,487)

W5

28,000) 7,000) 27,904) 62,904) 6,583) 69,487)

W6

W1 Goodwill Attributable to holding company 6,000) 3,000) 4,500)

W5 Retained earnings

W6 Non-controlling interest (Minority interest)

Share capital Share premium Revaluation Post acquisition Pre acquisition

8,000 4,000 6,000 2,988 5,344 26,332

2,000 1,000 1,500 2,241) 747 1,336 2,241) 6,583

4,008) 17,508) 19,000) 1,492) (373) 1,119) (373)

Consideration Goodwill Less impairment

Holding company - Retained earnings

26,036) 27,904)

W2 Property, plant and equipment Wells plc Wilkie Ltd Revaluation 44,352) 19,884) 6,000) 70,236) W3 Trade and other receivables Wells plc Wilkie Ltd Inter-company debt 6,756) 2,249) (1,250) 7,755) W4 Trade and other payables Wells plc Wilkie Ltd Inter-company debt (8,877) (1,445) 1,250) (9,072)

Task 1.5
(a) Why is confidentiality necessary? Obligation to keep clients information secret/private/secure/confidential.

(b)

To prevent information from falling into the hands of those who do not have a right to such information such as competitors, investors or friends.

Examples of how confidentiality is assured: Not disclosing information to those who do not have a right to access such information Not discussing client affairs with those outside the company who do not have a right to such information

Keeping information secure Being aware of who is able to receive the appropriate level of secure information

Part C Task 1.6

Adlington Ltd Reconciliation of profit from operations to net cash from operating activities for year ended 31 October 2009 000) Profit from operations Adjustments for depreciation Gain on disposal of property, plant and equipment Operating cash flows before movements in working capital Decrease/(Increase) in inventories Decrease/(Increase) in trade receivables (Decrease)/Increase in trade payables Cash generated by operations Tax paid Interest paid Net cash from operating activities 6,825) 4,398) (455) 10,768) (1,638) 91) (546) 8,675) (658) (595) 7,422)

Task 1.7
Statement of cash flows for year ended 31 October 2009 000 Net cash from operating activities Investing activities Proceeds on disposal of property, plant and equipment Purchases of property, plant and equipment Net cash used in investing activities Financing activities New bank loans raised Proceeds of share issue Net cash from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 5,000) 3,000) 8,000) 7,422)

W1 W2

797) (14,483) (13,686)

1,736)

(1,286)

450)

W1 NBV Add Profit 342) 455) 797)

W2 PPE at start Less depreciation Less book value of sold assets Add Purchases PPE at end 22,246) (4,398) (342) 14,483) 31,989) )

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Section 2
Task 2.1
From: To: Date: Subject: aatstudent@dfsexam lm1000@warmmail.com 2 December 2009 Re: Accounting ratios

As requested I have looked into the financial situation of Lewis Ltd. The ratio calculations are shown in the table below followed by a summary of performance against the industry averages. Finally I have given my advice with reasons as to what you should do with your investment. Gearing Debt Equity Interest cover Profit from operations Interest paid Current ratio Current assets Current liabilities Acid test Current assets - Inventory Current liabilities Trade receivable days Trade receivable x 365 Sales Trade payable days Trade payable x 365 Cost of sales (c) 12,000 13,537 88.65%

2,780 840 3.3 time s

5,207 2,686

1.94

:1

1,946 2,686

0.72

:1

365 x

1,946 27,800

25.6

days

365 x

1,276 14,178

32.9

days

Comment on the relative performance Industry averages 65.00% 6 times 1.6:1 0.9:1 33 days 36 days Hoy Ltd 88.65% 3.3% 1.94% 0.72% 25.6% 32.9%

Gearing Interest cover Current ratio Acid test Trade receivable days Trade payable days

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The current ratio and trade receivable days are better than the industry average but the other four ratios all show worse results than the industry average. The company has a higher gearing ratio and lower interest cover than the average, which may give problems when applying for loans, and the acid test shows a lack of liquid assets whilst at the same time paying their creditors quicker than the industry average. (d) A conclusion advising Louise whether or not to continue with her investment

I would advise you not to continue with the investment since only the current ratio and trade receivable days are better than the industry averages whilst liquidity is worse and any investment would be risky considering the gearing ratio and the fact that Hoy Ltd is unable to cover debts without inventory.

Task 2.2
(a) The elements that appear in financial statements according to the Framework for the Preparation and Presentation of Financial Statements are: Income Expenses Assets Liabilities Equity (b) The elements that appear in the balance sheet of a company in accordance with the definitions in the Framework for the Preparation and Presentation of Financial Statements are: (i) (ii) (iii) An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in the outflow from the entity of resources embodying economic benefits. Equity is the residual interest in the assets of the entity after deducting all its liabilities.

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