ACCA F3 Workbook - Mapit Accountancy

ACCA F3 - Financial Accounting

Workbook Questions & Answers

F3 Financial Accounting Full Course Q & A!

Lecture 1 - Introduction to Accounting


2

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are the 3 main characteristics of a sole trader?

Owner managedEmployeesLosses borne by owner

2. What are the negative aspects of being a sole trader?

Unlimited liabilityPersonal riskRely on owner

3. What are the positives of a partnership?

More resourcesPeople combine to work together

4. What are the 3 main characteristics of a limited company?

Business owned by shareholdersOnly lose amount investedManagers run the business

5. What are the positives of a limited company?

Limited LiabilityTax efficient

6. What are the main differences between a limited company and sole traders/partnerships?

Separate Legal entityProperty belongs to Co.Transferable shares


7.What is the purpose of Financial Accounts?

For external usersBased on standardsComparability

8. What is the IFRS Foundation, and what are its objectives?

What - International Financial Reporting Standards Foundation Supervises IASB GovernanceObjectives - Develop global standards Assist investors

9. What is the IASB

International Accounting Standards Board

10. What is the alternative to operating under IFRS?

National Standards

11. What are the two types of legal based regulations that countries can operate under?

Principles BasedRules Based


4

Lecture 2 - Sole Trader Financial Statements


5

Illustration 1Jim owns a very small business that he runs himself as a sole trader.

The following financial statements show his current position and results.

Statement of Financial PositionStatement of Financial Position

Non Current Assets 300

Inventory 150

Cash 50

500

Capital B/F 540

Add: Profit 30

Capital Introduced 0

Less: Drawings 70

500

Income StatementIncome Statement

Sales 500

Cost of Sales -300

Gross Profit 200

Expenses -170

Profit 30

The following then occurs:

1. Goods, that were originally purchased for $40, were sold for $50.2. More goods were purchased at a cost of $30.3. Rent was paid at a cost of $15.4. A non-current asset was purchased for $10.5. Capital of $20 was introduced by the Jim.6. Jim took $5 of drawings from the business.

How do these transactions affect the position and results of the business?


6

Solution

Statement of Financial Position

Statement of Financial Position

Movement

Non Current Assets 300 +10 (Note 4) 310

Inventory 150 -40 (Note 1)+30 (Note 2)

140

Cash 50 +50 (Note 1)-30 (Note 2)-15 (Note 3)-10 (Note 4)+20 (Note 5)-5 (Note 6)

60

500 510

Capital B/F 540 540

Add: Profit 30 I/S 25

Capital Introduced 0 +20 (Note 5) 20

Less: Drawings -70 -5 (Note 6) -75

500 510

Income StatementIncome Statement

Sales 500 +50 (Note 1) 550

Cost of Sales -300 -40 (Note 1) -340

Gross Profit 200 210

Expenses -170 -15 (Note 3) -185

Profit 30 25


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Note 1The inventory had cost $40 so must now be removed. The $40 will increase COS also on the Income Statement.The Cash received of $50 must increase the amount of cash. The sale of $50 must be recorded.

Note 2The goods purchased must be included in inventory $30.The cash paid of $30 must be shown in cash.

Note 3The rent paid of $15 is an expense so must be shown in the income statement.The cash paid will reduce cash by $15 on the Statement of Financial Position.

Note 4The purchase of an asset will increase assets by $10.The cash paid for it will reduce cash by $10.

Note 5The capital introduced will increase cash by $20.Capital introduced will also be increased by $20.

Note 6The drawings of $5 will decrease capital by that amount.Cash will also be decreased by $5.


8

Test Your KnowledgeIf you can’t answer all of the questions below without

looking at the answer then you need to do some more work on this area!1. What are the two main elements of a sole trader’s financial statements?

1. Income Statement2. Statement of Comprehensive Income 3. Statement of Financial Position4. Statement of Changes in Equity

A. 1 and 2 onlyB. 3 and 4 onlyC. 1 and 3 onlyD. 2 and 4 only

Solution: C

2. The Income statement is prepared on a(n) ...

1. Going concern basis2. Accruals basis3. Bi-annual basis4. Annual basis

A. 1 and 3 onlyB. 2 and 4 onlyC. 2 and 3 onlyD. 1 and 4 only

Solution: B

3. What is the accounting equation?

1. Assets=Capital + Liabilities2. Assets=Equity + Capital3. Assets=Equity - Liabilities4. Assets=Capital - Liabilities

Solution: A

4. What is the definition of an asset?

Solution: Resource controlled by entity from which future economic benefit is expected to flow to entity


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5. What is the definition of a liability?

Solution: A present obligation as a result of past events which result in an outflow of economic benefit.


10

Lecture 3 - Double Entry Bookkeeping


11

Illustration 1Jim decides to start a small business that he runs himself as a sole trader.

The following then occurs:1. Capital of $20,000 was introduced by the Jim.2. Goods were purchased for $3000 for resale.3. Sales of $4000 were made of goods that had cost $2500.4. Rent was paid at a cost of $700.5. A non-current asset was purchased for $10,000.6. Jim took $500 of drawings from the business.7. A customer returns goods to Jim that were purchased for $50.8. Jim returns unwanted purchases for which he had paid $80.9. Jim makes sales with advertised price of $100 at a discount of 10%.10.Jim Purchases goods worth $500 on credit.11.Jim pays for the $500 of goods and gets a 5% discount for early payment.

Show the ledger transactions and the trial balance for the above information.

Solution

Note DR CR

1 DR CASH 20,000

1 CR CAPITAL INTRODUCED 20,000

Being capital introduced by JimBeing capital introduced by JimBeing capital introduced by JimBeing capital introduced by Jim

2 DR PURCHASES 3,000

2 CR CASH 3,000

Being Purchases bought for cashBeing Purchases bought for cashBeing Purchases bought for cashBeing Purchases bought for cash

3 DR CASH 4,000

3 CR SALES 4,000

Being Sales of $4,000Being Sales of $4,000Being Sales of $4,000Being Sales of $4,000

4 DR RENT 700

4 CR CASH 700

Being Rent paid of $700Being Rent paid of $700Being Rent paid of $700Being Rent paid of $700

5 DR ASSET 10,000

5 CR CASH 10,000

Being Asset purchased for cashBeing Asset purchased for cashBeing Asset purchased for cashBeing Asset purchased for cash


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Note DR CR

6 DR DRAWINGS 500

6 CR CASH 500

Being drawings takenBeing drawings takenBeing drawings takenBeing drawings taken

7 DR SALES RETURNS 50

7 CR CASH 50

Being returns of goods soldBeing returns of goods soldBeing returns of goods soldBeing returns of goods sold

8 DR CASH 80

8 CR PURCHASE RETURNS 80

Being returns of goods purchasedBeing returns of goods purchasedBeing returns of goods purchasedBeing returns of goods purchased

9 DR CASH (100 X 90%) 90

9 CR SALES 90

Being sales at discounted valueBeing sales at discounted valueBeing sales at discounted valueBeing sales at discounted value

10 DR PURCHASES 500

10 CR PAYABLE 500

Being purchase of goods on creditBeing purchase of goods on creditBeing purchase of goods on creditBeing purchase of goods on credit

11 DR PAYABLES 475

11 CR CASH 475

11 DR PAYABLES 25

11 CR DISCOUNTS RECEIVED 25

Being discount on purchasesBeing discount on purchasesBeing discount on purchasesBeing discount on purchases


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CASHCASHCASHCASH

DRDR CRCR

Capital Introduced (Note 1) 20,000 Purchase of Goods (Note 2) 3,000

Sales (Note 3) 4,000 Rent Paid (Note 4) 700

Purchase Returns (Note 8) 80 Non Current Asset (Note 5) 10,000

Discounted Sales (Note 9) 90 Cash Drawings (Note 6) 500

Sales Returns (Note 7) 50

Payables Payment (Note 11) 475

Carried Forward 9,445

24,170 24,170

Brought Forward 9,445

CapitalCapitalCapitalCapital

DRDR CRCR

Capital Introduced (Note 1) 20,000


20,000 20,000



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PURCHASESPURCHASESPURCHASESPURCHASES

DRDR CRCR

Purchase of Goods (Note 2) 3,000

Purchases on Credit (Note 10) 500


3,500 3,500


SALESSALESSALESSALES

DRDR CRCR

Sales for Cash (Note 3) 4,000

Discounted Sales (Note 9) 90

Carried Forward 4090

4090 4090

Brought Forward 4090

RENTRENTRENTRENT

DRDR CRCR

Rent Paid (Note 4) 700

Carried Forward 700

700 700

Brought Forward 700


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ASSETASSETASSETASSET

DRDR CRCR

Purchase NCA (Note 5) 10,000


10,000 10,000


DRAWINGSDRAWINGSDRAWINGSDRAWINGS

DRDR CRCR

Cash Drawings (Note 6) 500

Carried Forward 500

500 500

Brought Forward 500

SALES RETURNSSALES RETURNSSALES RETURNSSALES RETURNS

DRDR CRCR

Cash for returned sales (Note 7) 50

Carried Forward 50

50 50

Brought Forward 50

PURCHASE RETURNSPURCHASE RETURNSPURCHASE RETURNSPURCHASE RETURNS

DRDR CRCR

Cash for purchase returns (note 8) 80

Carried Forward 80

80 80

Brought Forward 80


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PAYABLESPAYABLESPAYABLESPAYABLES

DRDR CRCR

Cash Paid (Note 11) 475 Purchases on Credit (Note 10) 500

Discount Received (Note 11) 25

Carried Forward 0

500 500

DISCOUNT RECEIVEDDISCOUNT RECEIVEDDISCOUNT RECEIVEDDISCOUNT RECEIVED

DRDR CRCR

Discount on Purchases (Note 11) 25

Carried Forward 25

25 25

Brought Forward 25


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Trial Balance for JimTrial Balance for JimTrial Balance for Jim

DR CR

Cash 9445

Capital 20,000

Purchases 3,500

Sales 4090

Rent 700

Non Current Assets 10,000

Drawings 500

Sales Returns 50

Purchase Returns 80

Discounts Received 25

24,195 24,195


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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. To increase, we..

1. Debit assets and expenses2. Credit assets and expenses3. Debit liabilities and income4. Credit liabilities and income

A. 1 and 3 onlyB. 2 and 4 onlyC. 2 and 3 only D. 1 and 4 only

Solution: D

2. For introducing capital, what is the double entry?

Solution: Dr Cash, Cr Capital

3. For purchasing goods, what is the double entry?

Solution: Dr Purchases, Cr Cash

4. For paying expenses, what is the double entry?

Solution: Dr Expense, Cr Cash

5. For purchasing an asset, what is the double entry?

Solution: Dr Asset, Cr Cash


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Lecture 4 - Inventory


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Illustration 1

ABC Co. has the following items in inventory:

i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy has meant that these goods will now sell for $42,000 with costs to sell of $2,500.

ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The manufacturer of the materials has just announced that from now on they will sell these materials to you at a lower price of $28,000 per tonne.

iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the customer of $60,000. New health and safety requirements mean that the plant will need to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.

At what value should each of the above be included in the inventory of ABC Co.

Solution

Goods at $40,000Goods at $40,000Goods at $40,000

Cost 40,000

Net Realisable Value ($42,000 - 2,500) 39,500

Use Lower so value at... 39,500

The value of inventory will be reduced by $500 and this will be written off to the income statement.The value of inventory will be reduced by $500 and this will be written off to the income statement.The value of inventory will be reduced by $500 and this will be written off to the income statement.

Materials at $30,000 per tonne

The fact that the manufacturer has changed the cost price is irrelevant.

The goods will be sold at a profit and thus will be valued at $30,000 per tonne cost.

Plant at $50,000Plant at $50,000Plant at $50,000

Cost 50,000

Net Realisable Value ($60,000 - 4,000) 56,000

Use Lower so value at... 50,000

The value of the inventory will remain at $50,000.The value of the inventory will remain at $50,000.The value of the inventory will remain at $50,000.


21

Illustration 2

Jane starts a business on 1st June and the following takes place:

I. 2nd June 10 units purchased at $10II.4th June 13 units purchased at $11III.8th June 20 units purchased at $9

20 units are sold on 10th June for $15 per unit.

Required

(a) Which of the following is the value of the closing inventory using the FIFO and AVCO methods.

1. FIFO $260, AVCO $190.162. FIFO $$255, AVCO $188.163. FIFO $213, AVCO $226.324. FIFO $218, AVCO $180.12

(b) Prepare and compare the income statement for the period under both FIFO and AVCO.


22

Solution

Total Units Purchased (10 + 13 + 20) 43

Units Sold 20

Inventory Remaining 23

FIFO $

10 Units on 2nd June (All Sold) 0

13 Units on 4th June (3 Remaining) (3 x 11) 33

20 Units on 8th June (All Remaining) (20 x 9) 180

Inventory Value under FIFOInventory Value under FIFO 213

AVCOAVCO

Total Units Purchased 43

Total Cost (10 x $10) + (13 x $11) + (20 x $9)

$423

Average Cost Per Unit (423 / 43) $9.84

Closing Stock Value under AVCO ($9.84 x 23) 226.32

Solution: 3 only


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FIFOFIFOFIFOFIFO

Sales (20 x $15) 300

Cost of Sales

Purchases (10 x $10) + (13 x $11) + (20 x $9) 423

Closing Inventory -213

210

Profit 90

AVCOAVCOAVCOAVCO

Sales (20 x $15) 300

Cost of Sales

Purchases (10 x $10) + (13 x $11) + (20 x $9) 423

Closing Inventory -226.32

196.68

Profit 103.32


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Illustration 3

Jane runs a business selling cushions.

At the start of the year she had 350 cushions in inventory at a cost of $5,000.

She purchased 1000 cushions in the year for $15,000 and at the year end had 400 left in inventory at cost of $6,000.

950 cushions were sold for $25 each.

Show how the journal entries, prepare the ledger accounts and calculate the Gross Profit for the year.

Solution

Journal DR CR

1 DR CASH 23,750

1 CR SALES 23,750

BEING SALES IN YEARBEING SALES IN YEARBEING SALES IN YEARBEING SALES IN YEAR

2 DR PURCHASES 15,000

2 CR CASH 15,000

BEING PURCHASES IN YEARBEING PURCHASES IN YEARBEING PURCHASES IN YEARBEING PURCHASES IN YEAR

3 DR INCOME STATEMENT (OP. INV) 5,000

3 CR INVENTORY 5,000

BEING REMOVAL OF OPENING INVENTORYBEING REMOVAL OF OPENING INVENTORYBEING REMOVAL OF OPENING INVENTORYBEING REMOVAL OF OPENING INVENTORY

4 DR INVENTORY 6,000

4 CR INCOME STATEMENT (CL. INV) 6,000

BEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTSBEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTSBEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTSBEING CLOSING INVENTORY BROUGHT INTO THE ACCOUNTS


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PURCHASESPURCHASESPURCHASESPURCHASES

DRDR CRCR

Cash Purchases in Year 15,000

Income Statement 15,000

15,000 15,000

SALESSALESSALESSALES

DRDR CRCR

Cash Sales 23,750


23,750 23,750

INVENTORYINVENTORYINVENTORYINVENTORY

DRDR CRCR

Balance B/F 5,000 Income Statement 5,000



11,000 11,000



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INCOME STATEMENTINCOME STATEMENTINCOME STATEMENTINCOME STATEMENT

DRDR CRCR

Purchases 15,000 Sales 23,750

Opening Inventory 5,000 Closing Inventory 6,000

Gross Profit C/F 9,750

29,750 29,750

Gross Profit B/F 9,750

Gross ProfitGross ProfitGross Profit

Sales 23,750

Cost of Sales

Opening Inventory 5,000

Purchases 15,000

Closing Inventory -6,000

14,000

Gross Profit 9,750


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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Inventory is held at the lower of ...

Solution: Cost and NRV

2. Define NRV?

Solution: Selling price less costs to complete and selling costs.

3. What are the three different cost methods that can be used to value inventory?

Solution: Unit Cost, FIFO, AVCO

4. How is the cost of sales calculated for inventory?

Solution: Opening inventory + purchases in yr - closing inventory

5. What are some of the disclosures which are required for inventory?

Solution: Raw materials, WIP, Finished goods, valuation methods


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Lecture 5 - Sales Tax


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Illustration 1

John sells the following goods to:

1. Jack at a tax inclusive price of $200.2. Jerry at a tax exclusive price of $500

How much sales tax is John collecting on behalf of the government? Tax rate = 20%.

1. $144.442. $1603. $125.554. $133.33

Solution - 4 only

$

Sales to Jack (Tax Inclusive) $200 x (20 / 120) 33.33

Sales to Cosmo (Tax Exclusive) $500 x (20 / 100) 100

Total Sales Tax Collected ($70 + $122.50) 133.33

Illustration 2

Jill purchases goods for $180,000 (including sales tax) and sells goods for $240,000 (including sales tax). A tax rate of 20% is applicable

What amount of tax is payable?

Solution

$

Sale of Goods (Includes Tax) $180,000 x (20 / 120) 30,000

Purchases of Goods (Includes Tax) $240,000 x (20 / 120)) 40,000

Total Payable ($40,000 - $30,000) 10,000


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Illustration 3

Net Sales Tax Total

$ $ $

Purchases (on credit) 100,000 20,000 120,000

Sales (on credit) 150,000 30,000 180,000

Record these transactions in ledger accounts.

Solution

DR CR

DR Purchases 100,000

DR Sales Tax 20,000

CR Receivables 120,000

DR Payables 180,000

CR Sales 150,000

CR Sales Tax 30,000


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Illustration 4

Jenny’s business is registered for sales tax purposes. During the quarter ending 31 December 2011, she made the following sales and purchases, all of which were subject to sales tax at 20%:

Sales $ Purchases $

Sales of Goods (Excludes Tax) 550 Purchase of Goods (Excludes Tax) 1,055

Sales of Goods (Includes Tax) 900 Purchase of Goods (Includes Tax) 720

Sales of Goods (Excludes Tax) 945 Purchase of Goods (Includes Tax) 420

Sales of Goods (Includes Tax) 660 Purchase of Goods (Includes Tax) 1,140

What is the balance on the sales tax account on 31 December 2011?

Solution

$

Sale of Goods (Excludes Tax) 550 x 20% 110

Sale of Goods (Includes Tax) 900 x (20 / 120) 150

Sale of Goods (Excludes Tax) 945 x 20% 189

Sale of Goods (Includes Tax) 660 x (20 / 120) 110

Total Sales Tax on Sales 559

Purchases of Goods (Excludes Tax) 1,055 x 20% 211

Purchases of Goods (Includes Tax) 720 x (20 / 120) 120

Purchases of Goods (Includes Tax) 420 x (20 / 120) 70

Purchases of Goods (Includes Tax) 1,140 x (20 / 120) 190

Total Sales Tax on Purchases 591

Total Receivable (591 - 559) 32


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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is Sales tax?

Solution: Government tax collected by the business.

2. The payment by the business to government is the net amount of...

Solution: Output tax collected less input tax paid

3. Sales tax is .... from sales on the income statement.

Solution: Excluded

4. How would you calculate tax if the sales price is tax inclusive?

Solution: eg. tax rate 20%, (20% / 120%) x item

5. How would you calculate tax if the sales price is tax exclusive?

Solution: eg. tax rate 20%, (20% x item)


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Lecture 6 - Accruals and Repayments


34

Illustration 1

Judy Garland’s business has an accounting year end of 31 March 2012. She rents a property at a rental cost of $2500 per quarter, payable in arrears.

During the year cash payments of rent have been as follows:

30 June (for quarter to 30 June 2011) $250028 September (for quarter to 30 September 2011) $25002 January (for quarter to 31 December 2011) $2500

The final payment due on 31 March 2012 for the quarter was not paid until 5 April 2012.

Show the ledger accounts required to record the above transactions.

Solution

Rental Expense AccountRental Expense AccountRental Expense AccountRental Expense Account

DR CR

30 June Cash 2500

28 September Cash 2500

2 January Cash 2500

Accrued Expense 2500 Income Statement 10,000

10000 10,000


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Illustration 2

Gene Kelly pays the rental expense on his factory in advance. He commences business on 1 June 2012 and on that date pays $2400 in respect of the first quarter’s rent. During the year, he also pays the following amounts:

3 September (in respect of quarter ended 30 November) $240025 November (in respect of quarter ended 28 February) $240020 February (in respect of quarter ended 31 May) $240021 May (in respect of first quarter of 2013) $2800

Show these transactions in the rental expense account.

Solution

Rental Expense AccountRental Expense AccountRental Expense AccountRental Expense Account

DR CR

1 June Cash 2400

3 September Cash 2400

25 November Cash 2400

20 February Cash 2400 Pre-Payment c/f 2800

21 May Cash 2800 Income Statement 9600

12400 12400

Illustration 3

On 1 April 2010, Liza Minelli owed $1,000 of the previous year’s gas. Liza made the following payments during the year ended 31 March 2011:

5 May $8005 August $2005 November $6005 February $1,200

At the 31 March 2011, Liza owed $400 of gas from the last part of the year.


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What is the gas charge to the I/S?

1. $2,000,2. $2,4003. $2,2004. $1,800

Solution - 3 only

Electricity Expense AccountElectricity Expense AccountElectricity Expense AccountElectricity Expense Account

DR CR

Accrual B/F 1,000

05 May 800

05 August 200

05 November 600

05 February 1,200

Accrual 400 Income Statement 2,200

3,200 3,200

Illustration 4

Ginger Rogers receives income from two properties as follows:

Property 1 Received Property 2 Received

$ $ $ $

QE 31/03/2011 1200 30/12/2010 2000 10/04/2011

QE 30/06/2011 1300 28/03/2011 2000 10/07/2011

QE 30/09/2011 1300 26/06/2011 2000 11/10/2011

QE 31/12/2011 1300 18/09/2011 2200 03/01/2012

QE 31/03/2012 1400 28/12/2012 2200 06/04/2012

QE 30/06/2012 1400 27/03/2011 2200 05/07/2012

What is Ginger’s rental income in the income statement for the year ended 31 March 2012?


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Solution

Rental Income Account (Unit 1)Rental Income Account (Unit 1)Rental Income Account (Unit 1)Rental Income Account (Unit 1)

DR CR

QE 30/06/2011 Pre-Paid 1,300

QE 30/09/2011 Cash 1,300

QE 31/12/2011 Cash 1,300

Prepayment QE 30/06/12 1,400 QE 31/03/2012 Cash 1,400

Income Statement 5,300 QE 30/06/2012 Cash 1,400

6,700 6,700

Rental Income Account (Unit 2)Rental Income Account (Unit 2)Rental Income Account (Unit 2)Rental Income Account (Unit 2)

DR CR

QE 30/09/04 Accrued 2,000

QE 31/03/2011 Cash 2,000

QE 30/06/2011 Cash 2,000

QE 30/09/2011 Cash 2,000

QE 31/12/2011 Cash 2,200

Income Statement 8,400 QE 31/03/2012 Accrued 2,200

10,400 10,400


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Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the purpose of accruals and prepayments?

Solution: To match the income/expense to the period of time they relate to.

2. Define accruals.

Solution: Expenses not paid by Y/E, income not received by Y/E

3. Define prepayments

Solution: Expenses paid now relating to next year, income received now relating to next year.


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Lecture 7 - Receivables and Bad Debt


40

Illustration 1

Daniel Evans & Co have a total of accounts receivable of $50,000 at their accounting year-end. Of these, it was discovered that Ms Konta (who owes $800) has disappeared, and another whose name is Mr Coupland (who owes $1,500) has been declared bankrupt.

Calculate the effect in the financial statements of writing off these irrecoverable debts.

1. Bad debt expense $2,300, Receivables $52,3002. Bad debt expense $1,500, Receivables $51,5003. Bad debt expense $1,500, Receivables $48,5004. Bad debt expense $2,300, Receivables $47,700

Solution - 4 only

DR CR

DR Bad Debt Expense (800 + 1,500) 2,300

CR Receivables 2,300

Effect on Financial StatementsEffect on Financial StatementsEffect on Financial Statements

Receivables (50,000 - 2,300) 47,700

Bad Debt Expense (I/S) 2,300


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Illustration 2Heather Watson had receivables of $3,000 at 30 June 2011. At that date she wrote off a debt from Goran Ivanisevic of $200. During the year, Heather made credit sales of $15,000 and received cash from customers of $10,000. She also received the $200 from Goran Ivanisevic that had already been written off in the year to 30 June 2011.

What is the final balance on the receivables account at 30 June 2011 and 2012?

Solution

$

Receivables 30 June 2011 3,000

Bad Debt Expense (I/S) -200

Revised Balance 30 June 2011 2,800

Sales in 2012 15,000

Cash Received 10,000

Balance 30 June 2012 7,800


42

Illustration 3

On the 31 May 2011 John Williams had receivables of $30,000. John estimated that 5% of customers were unlikely to pay their debts, therefore he wishes to make an allowance for this amount. During the year to 31 May 2012, John made credit sales of $250,000 and received cash from customers of $220,000. He still considered that 5% of these closing receivables would not be paid.

During the year to 31 May 2013, John had sales of $220,000 and collected $230,000 from his receivables. The 5% allowance for receivables still applies.

Calculate the allowance for receivables and irrecoverable debt expense, as well as closing balances of receivables for the years 2011, 2012 & 2013.

Solution

Receivables Allowance Net Charge (I/S)Movement on

Allowance

31 May 2011 30,000 1,500 28,500 -1,500

Sales 2012 250,000 DR Movement

Cash Received -220,000

31 May 2012 60,000 3,000 57,000 -1,500

Sales 2013 220,000 DR Movement

Cash Received -230,000

31 May 2013 50,000 2,500 47,500 500

CR Movement


43

Illustration 4

Shane Long has opening balances of $60,000 and $1,500 for his trade receivables and allowance for receivable accounts at 1 April 2010. During the year to 31 March 2011, there are credit sales of $100,000 and cash receivables totaling $95,000.

At 31 March 2011, Shane reviews his receivables and confirms that it is unlikely that he will receive debts totaling $1,000. From past experience, Shane uses an allowance of 5% for remaining receivables after writing off the irrecoverable debts.

What is the amount of Shane’s irrecoverable debt expense for the year to 31 March 2011? What are the effects on the income statement and statement of financial position?

Solution

Receivables Bad Debt Allowance 5%

Net Charge (I/S)Movement on Allowance +

Bad Debt

Jan 2006 60,000 1,500 58,500

Credit Sales 100,000

Cash Rec’d 95,000

31 Dec 2006 65,000 1,000 3,200 60,800 -1,700

DR Movement

Movement on ReceivablesMovement on ReceivablesMovement on ReceivablesMovement on ReceivablesMovement on Receivables 1,700

Bad Debt ExpenseBad Debt ExpenseBad Debt ExpenseBad Debt ExpenseBad Debt Expense 1,000

Total ChargeTotal ChargeTotal ChargeTotal ChargeTotal Charge 2,700


44

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Why would you allow sales on credit/

Solution: Increased sales, customer loyalty, new markets

2. What does the aged receivables analysis show?

Solution: List of debts outstanding

3. Why might some debt not be repaid?

Solution: Financial Difficulty, Disputes, Bankruptcy

4. Why might you wish to have credit limits?

Solution: To reduce risk and build trust

5. What are the steps required in calculating the allowance for receivables?

Solution: 1. Write off any bad debts2. Remove any specific allowances3. Calculate general allowances on remaining balance4. Has total allowance changed (general + specific?)5. Account for change


45

Lecture 8 - Non-Current Assets


46

Illustration 1

Mahesh Bhupathi started a painting business on 1 April 2010. In the year to 31 March 2011, he incurred costs which are summarised below.

Item $

Office 200,000

Legal fees relating to purchase of office

8,000

Cost of materials and labour to paint office

250

Paint brushes for business use

10,000

Delivery costs of brushes 50

Staff wages 45,000

What amounts should be capitalised as Land and buildings, and Paint Brushes?

Land & Buildings Paint Brushes

$ $

1 200,000 10,050

2 208,000 10,050

3 208,000 10,000

4 200,000 10,000


47

Solution - 2 only

Land & Buildings $

Office 200,000

Legal Fees 8,000

Painting not included -

Total 208,000

Paint Brushes $

Paint brushes for business use 10,000

Delivery cost of brushes 50

Wages (Paid each year) -

Total 10,050


48

Illustration 2

Charlotte has been running a creche since 1 July 2010. She has purchased the following items relating to this business:

1. A new microwave for the creche kitchen at a cost of $200 (purchased 5 May 2011)2. New tables for the creche at a cost of $600 (purchased 1 July 2011)

She depreciates the oven at 8% straight line and the tables at 20% reducing balance. a full year’s depreciation is charged in the year of purchase and none in the year of disposal.

What is the total depreciation charge for the year ended 30 September 2013?

Solution

TablesTablesTablesTables

Year O’Bal Dep’n Cl’Bal

2011 600 120 480

2012 480 96 384

2013 384 77 307

Microwave $

Cost at 5 May 2011 200

Dep’n 30 Sep 2012 (200 x 8%) 16

Dep’n 30 Sep 2013 (200 x 8%) 16

Total Depreciation (16 + 77) 93


49

Illustration 3

The following relates to the purchase of plant by Windsor Automotive:

$

Cost $20,000

Purchase Date 1 September 2010

Depreciation method Straight line pro rata

Residual value 2,000

Useful economic life 5

Review, 1 Sep 2011

New residual value 0

New Useful economic life 8

What is the total depreciation charge for the years ended 30 November 2010 and 2011?

Solution

$

Cost at 01 Sep 2010 20,000

Depreciation to date (20,000 - 2,000) / 5) x 3/12 -1125

Carrying Value 30 Nov 2010 18,875

New Depreciation (18,875 - 0) / 8 -2,360

Carrying Value 30 Nov 2011 16,515


50

Illustration 4

Grigor Dimitrov purchased a new tennis racquet for $1,000 on 1 January 2010. At that time, he believed that its useful economic life would be 10 years, with no residual value.

On 1 January 2012, Grigor changes his estimations. He believes that the racquet will be used for a further 10 years after which time it will have a second-hand value of $100.

What is the depreciation charge for the year ended 31 December 2013?

Solution

$

Cost at 01 Jan 2010 1,000

Depreciation to date (1,000 / 10) x 2 -200

Carrying Value 800

New Depreciation (800 - 100) / 10 70

Illustration 5

Mr Gall runs a construction company. On 1 January 2010, he purchased a fork-lift vehicle for $8,000. He depreciates it at 5% straight line on a monthly basis. A few years later, he decides to replace it with one which is of superior quality. He sells the forklift truck on 30 June 2012 for $7,500.

How much is charged to Mr Gall’s income statement for the year ended 31 December 2012?


51

Solution

$

Cost at 01 Jan 2010 8,000

Depreciation 31 Dec 2010 (8,000 x 5%) -400

Depreciation 31 Dec 2011 (8,000 x 5%) -400

Depreciation 30 June 2012 (8,000 x 5%) x 6/12 -200

Carrying Value 7,000

Sale Proceeds 7,500

Profit On Disposal 500

Depreciation in Year -200

Disposal AccountDisposal AccountDisposal AccountDisposal Account

DR CR

Asset at Cost 8,000 Accumulated Dep’n 1,000

Proceeds 7,500

Profit on Sale 500

8,500 8,500


52

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Define Non-Current Assets.

Solution:1. Asset to be used in business for greater than 1 yr.2. Tangible or intangible3. Used to generate a return4. Not liquid assets

2. Define Capital expenditure

Solution: Buying asset to use, or improving existing asset. Long term expenditure.

3. Subsequent expenditure. Capitalise if....

Solution: Asset improved i.e more income produced

4. The costs of purchasing exclude...

Solution: Repairs, renewals and repainting

5. Depreciation reflects...

Solution: Economic benefit generated by asset. Write off asset value against income generated by it over useful economic life.

6. What are the two different methods of calculating depreciation?

Solution: Straight line method, reducing balance method.


53

Lecture 9 - Non-Current Assets II


54

Illustration 1

Mary Poppins runs a business producing umbrellas. On 1 August 2011, she bought a machine for $3,000. She depreciates the machine using the straight line method at 10% per annum, and charges a full year of depreciation in the year of acquisition and none in the year of disposal.

The business has grown, and she now requires a faster machine. During July 2015, a salesman offers her a part exchange deal:

Part exchange allowance for original machine: $800

Balance to be paid for new machine: $5,000

Show the ledger entries for this transaction for the Y/E 31 July 2015

Solution

$

Cost at 01 August 2011 3,000

Depreciation 31 July 2012 3,000 x 10% -300



Depreciation 31 July 2015 None 0

Carrying Value 2100

Sale Proceeds Part Exchange 800

Loss On Disposal -1300

Depreciation in Year

Old Machine None

New Machine (800 + 5,000) x 10% 580


55

Disposal AccountDisposal AccountDisposal AccountDisposal Account

DR CR

Asset at Cost 3,000 Accumulated Dep’n 900

Proceeds 800

Loss on Sale 1300

3,000 3000


56

Illustration 2

John Boy has had a non current asset for several years which he bought for $300,000. The depreciation on the asset to date has been $50,000. He decides to revalue the asset and finds that it is now worth $350,000.

Show the journal entries to record the transaction.

$

Asset at cost 300,000

Depreciation to date -50,000


New Value 350,000

Revaluation Reserve 100,000

Journal Entries

DR CR

DR Acc Dep’n 50,000

DR Asset at Cost 50,000

CR Rev. Reserve 100,000

Illustration 3

Jamie owns a shoe factory. The premises were bought on 1 May 2003 for $600,000 and depreciated at 3% per annum straight line.

Jamie now wishes to revalue the factory premises to $900,000 on 1 May 2008 to reflect market value.

What is the balance on the revaluation reserve after this transaction?

1. $450,0002. $370,0003. $390,0004. $410,000


57

Solution - 3 only

$

Cost at 1 May 2003 600,000

Depreciation to 1 May 2008 (600,000 x 3%) x 5 -90,000


New Value 900,000

Revaluation Reserve (900,000 - 510,000) 390,000

Illustration 4

Charlie owns a shop in Smallville. He bought it 30 years ago for $150,000, depreciating it over 50 years. At the start of 2008 he decides to revalue the unit to $900,000. The shop has a remaining useful life of 20 years. A transfer is made in reserves for excess depreciation each year.

What is the balance on the revaluation reserve at the end of 2008?

Solution

$

Cost 30 yrs ago 150,000

Accumulated Dep’n (150,000 / 50) x 30 -90,000


New Value 900,000

Revaluation Reserve 840,000

Old Depreciation 150,000 / 50 3,000

New Depreciation 840,000 / 20 42,000

Transfer in Reserves DR Revaluation Reserve 39,000

CR Accumulated Profits 39,000

Closing Rev Reserve (840,000 - 39,000) 801,000


58

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. When disposing an asset using part exchange, how should you calculate the total

value of the new asset?

Solution: Part Exchange Allowance (PEA) + Cash Paid

2. Define the steps in a part exchange of an asset.

Solution:1. Record Cash2. Record PEA3. Remove Acc Dep’n4. Remove Asset

3. Why should assets be revalued?

Solution: Assets may appreciate or depreciate in value, and this must by reviewed periodically.

4. Where is a revaluation gain shown?

Solution: Statement of Other Comprehensive Income

5. What Disclosures are required for NCA’s?

Solution:1. Cost or Revaluation model?2. Dep’n method and UEL3. Reconciliation of CV4. Commitment to future purchases5. Revaluation


59

Lecture 10 - Preparing Final Accounts


60

Illustration 1

The trial balance of Welby is as follows:

Trial balance of Welby 30 June 2010

$ $

Capital Account 7,629

Drawings by proprietor 2,985

Purchases 36,505

Returns inwards 538

Returns outwards 1,860

Discounts 936 483

Credit Sales 48,262

Cash sales 15,151

Customs duty 5,880

Carriage inwards 1,465

Carriage outwards 881

Salesman’s commission 356

Salesman’s salary 1,985

Office salaries 3,604

Bank charges 490

Loan interest 225

Light and heat 1,327

Sundry expenses 1,050

Rent 1,658

Insurance 2,000

Printing and postage 1,052

Advertising 522


61

$ $

Irrecoverable debts 896

Allowance for receivables 219

Inventory 3,825

Receivables 5,380

Payables 3,706

Cash at bank 1,317

Cash in hand 40

New delivery van (less trade-in) 1,100

Motor expenses 493

Furniture and equipment:

Cost 4,000

Depreciation at 1 July 2009 1,200

Old delivery van:

Cost 1,000

Depreciation at 1 July 2009 500

Loan account at 5% (repayable in 10 years) 2,500

81,510 81,510

Notes:

1. Closing inventory is $4245. The balance on the Trial Balance is opening inventory.

2. Old delivery van was sold on 30 September 2009 and traded in against the cost of new van. The trade-in price was $700 and the cost of the new van was $1,800. No entries have been created for this transaction, apart from debiting $1,100 cash paid to the New delivery van account.

3. Straight line depreciation is provided on a monthly basis at the following rates per annum:

Motor vans, 25%Furniture and equipment, 10%

4. Allowance for Receivables = 5% of closing receivables

5. Accrual of $186 is required in respect of light and heat.


62

6. Rent due for QE 31 July 2010 of $450 was paid on 5 June 2010. Insurance for the year to 31 March 2011 of $840 was paid on 17 June 2010.

Prepare accounting entries for:

A. InventoryB. non-current assets and depreciationC. accrualsD. prepaymentsE. bad debt allowance and irrecoverable debts

Solution

A - Closing Inventory

DR CR

DR Cost of Sales 3,825

CR Inventory 3,825

Being Removal of Opening InventoryBeing Removal of Opening InventoryBeing Removal of Opening Inventory

DR Inventory 4,245

CR Cost of Sales 4,245

Being Closing Inventory Brought in Being Closing Inventory Brought in Being Closing Inventory Brought in

B - Non Current Assets

New Van Old Van Furniture Total

Cost 1,000 4,000 5,000

Additions 1,800 1,800

Disposals -1,000 -1,000

1,800 0 4,000 5,800

Dep’n to June 2010 0 500 1,200 1,700


63

New Van Old Van Furniture Total

Dep’n in Year 337.5 62.5 400 800

Disposals -562.5 -562.5

Total Dep’n 337.5 0 1,600 1,937.5

Carrying Value 1,462.5 0 2,400 3,862.5

Old Van Calculations

$

Cost 1,000

Depreciation to date -500

Depreciation in Year 1,000 x 25% x 3/12 -62.5

Carrying Value 437.5

Sale Proceeds 700

Profit on Sale of Van 262.5

New Van Calculations

$

Cost 1,800

Depreciation in Year 1,800 x 25% x 9/12 -337.5

Carrying Value 1,462.5


64

C & D - Light & Heat Accrual, Rent & Insurance prepeayment

Dr Cr $

Light & Heat Accrual 186

Light & heat expense 186

Current Liabilities 186

Rent Prepayment (1/3 x $450) 150

Insurance Prepayment (9/12 x $840) 630

E - Bad Debt and Irrecoverable Debt

Receivables Per TB 5,380

Allowance Required (5% x $5380) 269

Previous Allowance 219

Movement on Receivables 50

DR Bad Debt Expense 50

CR Allowance For Receivables 50

Irrecoverable debt ($896 + 50) 946


65

Illustration 2

Trial Balance, Wasp Ltd, 31 December 2011

$ $

Capital 320,500

Sales and purchases 120,000 200,000

Inventory at 1 January 2011 25,000

Returns 2,000 3,000

Wages 50,000

Rent 20,000

Motor expenses 5,000

Insurance 800

Irrecoverable debts 200

Allowance for receivables

1 January 2011 600

Discounts 900 1,500

Light and heat 3,500

Bank overdraft interest 80

Motor vehicles at cost 20,000

aggregate depreciation - 1 Jan 2011 8,750

Fixtures and fittings cost 30,000


Land 120,000

Receivables and payables 18,000 20,000

Bank 4,370

Buildings at cost 100,000


Drawings 22,000

Total 541,850 541,850


66

The following notes also apply:

1. Inventory was $40,000 at 31 December 2011.2. Rent was prepaid by $2,000 and light and heat owed was $500 at 31 December 2011.3. Land is to be revalued to $200,000 at 31 December 2011.4. At year end, Wasp Plc wish to write off a further debt of $100. They wish to retain the

allowance for receivables of 5% of the year end balance.5. Depreciation is as follows: A Building, 2% straight-line annually B Fixtures and fittings - straight line method, assuming a useful economic life of five years with no residual value. C Motor vehicles - 25% annually on a reducing balance basis.

A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.

Prepare an Income Statement for the Y/E 31 December 2011 and a statement of financial position at that date.

Solution


67

Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011

$ $

Sales 200,000

Returns in -2,000

198,000

Cost of Sales


Purchases 120,000

Returns out -3,000

142,000

Closing inventory -40,000

-140,000

Gross Profit 58,000

Sundry Income

Discount received 1,500

59,000

Expenses

Wages 50,000

Rent 20,000

Motor expenses 5,000

Insurance 800

Irrecoverable debts ($200 + $100) 300

Increase in Allowance for receivables (895(SOFP) - 600) 295

Discounts allowed 900

Light and heat ($3,500 + 500) 4,000

Bank interest 80

Depreciation

Buildings (W1) 2,000


68

Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011Wasp Plc Income statement Y/E 31 December 2011

Fixtures and Fittings (W1) 6,000

Motor vehichles (W1) 2,812.5

92,187.5 -92,187.5

Net loss -33,187.5

Other Comprehensive Income

Revaluation Gain ($200,000 - $120,000) 80,000

Total Comprehensive Income 46,812.5

Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011

$ $ $

Cost Dep’n NBV

Non-Current Assets

Land 200,000 - 200,000

Buildings 100,000 12,000 88,000

Fixtures & Fittings 30,000 24,000 6,000

Motor vehicles 20,000 11,562.5 8,437.5

350,000 47,562.5 302,437.5

Current Assets

Inventory 40,000

Receivables ($18,000 - $100) 17,900

Allowance for Receivables (17,900 x 5%) -895

17,005

Prepaid expenses (rent) 2,000

$ $

Bank 4,370


69

Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011Wasp Plc Statement of Financial Position Y/E 31 December 2011

$ $ $

Cost Dep’n NBV

Non-Current Assets

Land 200,000 - 200,000

Buildings 100,000 12,000 88,000

Fixtures & Fittings 30,000 24,000 6,000

Motor vehicles 20,000 11,562.5 8,437.5

350,000 47,562.5 302,437.5

Current Assets

Inventory 40,000

Receivables ($18,000 - $100) 17,900

Allowance for Receivables (17,900 x 5%) -895

17,005

Prepaid expenses (rent) 2,000

$ $

Bank 4,370


70

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the purpose of the trial balance?

Solution: To check Dr’s and Cr’s and to assist preparers.

2. However, the trial balance does not...

Solution: identify all errors or incorrect entries

3. State the adjustments required for closing inventory, depreciation, accruals and pre-payments.

Solution:

Closing Inventory - Dr Inventory, Cr COSDepreciation - Dr Depreciation Expense (I/S), Cr Acc, Depreciation (SFP)Accruals - Dr Expenses (I/S0, Cr Accruals (SFP)Prepayments - Dr Prepayments (SFP), Cr Expenses (I/S)

4. State the adjustments required for irrecoverable debt, and bad debt allowance (increase & decrease)

Solution:

Irrecoverable debt - Dr Irrecoverable debt (I/S), Cr Receivables (SFP)Bad debt allowance increase - Dr Bad debt expense (I/S), Cr Allowance (SFP)Bad debt allowance decrease - Dr Allowance (SFP), Cr Bad debt Expense (I/S)


71

Lecture 11 - Accounting Records


72

Illustration 1

The following sales invoices have been issued by Mr Jones in August:

Date Invoice Customer Ref. Sales

8 August 1100 Simpson A8 $480 (including sales tax)

10 August 1101 Burns B5 $1,000 (excluding sales tax)

Mr Jones is registered for sales tax, which is 20%.

Prepare the Sales Day Book and the relevant accounting entries.

Solution

Date Invoice Customer Ref. Gross Tax Net

8 July 1100 Simpson A8 480 80 400

10 July 1101 Burns B5 1,200 200 1,000

TotalsTotalsTotalsTotals 1680 280 1400

DR CR

DR Receivables Control A/CDR Receivables Control A/CDR Receivables Control A/CDR Receivables Control A/CDR Receivables Control A/C 1680

CR Sales TaxCR Sales TaxCR Sales TaxCR Sales TaxCR Sales Tax 280

CR SalesCR SalesCR SalesCR SalesCR Sales 1400


73

Illustration 2

Janet is a sole trader. At 1 December 2010 the following balances existed in the company’s records.

Dr Cr

$ $

Receivables ledger control account 27,000 500

Payables ledger control account 100 21,500

The following information is extracted from the December 2010 company records:

$

Credit sales 125,500

Cash sales 17,000

Credit purchases 38,500

Cash purchases 14,500

Credit sales returns 5,500

Credit purchase returns 1,500

Amounts received from credit customers 121,000

Dishonoured cheques 250

Amounts paid to credit suppliers 37,000

Cash discount allowed 1,500

Cash discount received 1,000

Irrecoverable debts written off 500

Increase in allowance for receivables 600

Interest charged to customers 700

Contra settlements 400


74

At 31 December the balances in the receivables and payables ledgers were as follows:

Dr Cr

$ $

Receivables ledger control account To be calculated 1,000

Payables ledger control account 100 To be calculated

Prepare the receivables ledger control account and payables ledger control account for the month of December 2011.

Solution

Receivables Control A/CReceivables Control A/CReceivables Control A/CReceivables Control A/C

DR CR

Balance B/F 27,000 Balance B/F 500

Credit Sales (SDB) 125,500 Sales Returns (SRDB) 5,500

Returned Cheques 250 Bank Receipts 121,000

Irrecoverable Debts 500

Interest Charged 700 Discounts Allowed 1,500

Contra 400

Balance C/F 1,000 Balance C/F 25,050

154,450 154,450

Payables Control A/CPayables Control A/CPayables Control A/CPayables Control A/C

DR CR

Balance B/F 100 Balance B/F 21,500

Bank Payments 37,000

Purchase Returns (PRDB)

1,500 Credit Purchases (PDB) 38,500

Discounts Received 1,000

Contra 400

Balance C/F 20,100 Balance C/F 100

60,100 60,100


75

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. List the documentation required for an accounting record.

Solution: Quotation, Purchase Order, Sales Order, Goods Delivery Note, Good Received Note, Purchase Invoice, Statement, Credit note

2. List the books of prime entry.

Solution: Sales day book, Purchases day book, Sales return day book,Purchases return day book, Cash book, Petty cash book, The journal

3. What is the purpose of the books of prime entry?

Solution: To record initial transactionsTo simplify ledgersForms basis for ledgersPeriodic totals to ledgers


76

Lecture 12 - Cashbook and Reconciliations


77

Illustration 1

The following is the cash receipts book of Lines Technology.

Date Detail Bank received

Discount ledger

Receivables Bank Interest

$ $ $ $

21/10/08 Headphones 12,000 800 12,000

21/10/08 Interest Acc 1 60 60

21/10/08 Amplifiers 20,000 20,000

21/10/08 Interest Acc 2 100 100

21/10/08 Microphones 10,000 500 10,000

42,160 1300 42,000 160

What are the accounting entries in the cashbook at the end of the day?

Solution

DR CR

DR Bank 42,160

CR Receivables Control A/C 42,160

CR Interest Income 160

Then discount is recordedThen discount is recordedThen discount is recorded

DR Discounts Allowed 1,300

CR Receivables Control A/C 1,300


78

Illustration 2Pinocchio runs a fast food outlet. Here are the following transactions for the day:

1. Closing Inventory of 250 litres of a fizzy drink which cost $3,0002. Depreciation on lease for outlet, which cost him $120,000 and is depreciated over 20

years.3. A regular customer to the outlet, Aladdin, has a tab of $450. However, he has recently

purchased a one-way trip to Arabia, and Pinocchio intends to write the debt off.4. On the last day of the year Pinocchio purchased tables and chairs for the outlet. They

cost $1,200, but the purchase has not been reflected in the accounts.

What journals should Pinocchio post?

Solution

DR CR

DR Closing Inventory (SFP) 3,000

CR Closing Inventory (COS) 3,000

Being the recording of the closing inventoryBeing the recording of the closing inventoryBeing the recording of the closing inventory

DR Depreciation (I/S) (120,000 / 20) 6,000

CR Accumulated Depreciation 6,000

Being Depreciation on the outlet leaseBeing Depreciation on the outlet leaseBeing Depreciation on the outlet lease

DR Irrecoverable Debt Expense 450

CR Receivables Control A/C 450

Being write-off of debt o/s from AladdinBeing write-off of debt o/s from AladdinBeing write-off of debt o/s from Aladdin

DR Fixtures & Fittings Cost 1,200

CR Cash 1,200

Being the purchase of tables and chairs for the outletBeing the purchase of tables and chairs for the outletBeing the purchase of tables and chairs for the outlet


79

Illustration 3Ms Williams operates as a sole trader. Currently, she has a receivables ledger control account balance of $344,240 and a receivables ledger balance of $352,268.

The following have been found:

1. Contra item of $3,000 has not been entered in the receivables ledger control account.2. Cheque from customer of $1,110 has been dishonoured. The correct double entry has

been recorded, but the their account has not been updated.3. A payment of $644 from a customer has incorrectly been entered in the accounts

receivables ledger as $466.4. Discounts allowed of $240 have not been entered in the control account.5. Cash received of $1,600 has been debited to the customer’s account in the accounts

receivable ledger.6. Total credit sales of $9,000 to an accountancy firm, Watkins have been posted correctly

to the ledger account but not recorded in the control account.

Correct the receivables ledger account and carry out a reconciliation of the Receivables Ledger.

Solution


DR CR

Balance B/F 344,240

Credit Sales (SDB) 9,000 Contra 3,000

Discounts Allowed 240

Balance C/F 350,000

353,240 353,240

Receivables Ledger ReconciliationReceivables Ledger ReconciliationReceivables Ledger ReconciliationReceivables Ledger Reconciliation

Balance Per Receivables LedgerBalance Per Receivables LedgerBalance Per Receivables Ledger 352,268

Dishonored ChequeDishonored ChequeDishonored Cheque 1,110

MispostingMispostingMisposting -178

Cash ReceivedCash ReceivedCash Received -3,200

Revised BalanceRevised BalanceRevised Balance 350,000


80

Illustration 4

Rafter received a statement from a supplier, Connors, for $15,000. Rafter’s payables ledger shows a balance due to Connors of $10,000. An investigation reveals the following:

1. Cash sent to Connors of $3,000 has not been received yet by Connors.2. Rafter received a discount of $50, but forgot to record this in the payables ledger.3. An invoice of $2,050 was sent by Connors but not yet received by Rafter.

What is the difference between Rafter and Connors records after taking these items into account?

Solution

Connors $ Rafter $

Balance Per Question 15,000 10,000

Cash in Transit -3,000

Discount Received -50

Invoice Not Received 2,050

Revised Balance 12,000 12,000

Difference 00


81

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the purpose of petty cash?

Solution: Small daily transactions eg. milk, travel

2. What controls are required for petty cash?

1. Safe/secure box2. Reliable person in charge3. Receipts for all expenses4. All signed5. Spot checks

3. What is the purpose of the journal?

Solution: To list other entries not placed through the bank for bookkeeping purposes.

4. What is the process of a reconciliation?

1. Start with relevant balance2. Post errors3. Match balances


82

Lecture 13 - Bank Reconciliations & Errors


83

Illustration 1

The following are records from the records of H Singh Bank Account:

Dr Cr

$ Chq no $

1 May Balance b/f 15,250 1 May Max 111 850

2 May Al 540 3 May Rent 112 250

11 May Bo 606 12 May Mia 113 550

13 May Dee 1,254 16 May Lee 114 100

20 May Gee 2,143 22 May Jo 115 546

23 May Cash sales 657 27 May Li 116 204

29 May Mo 200 31 May Balance c/f 18,150

20,650 20,650


84

Bank Statement - H Singh

Date Details Withdrawals Deposits Balance

$ $ $

1 May Balance b/f 16,000

2 May 109 450

2 May 110 500 15,050

3 May Deposit 200 15,250

5 May 111 850

5 May Bank charges 50 14,350


10 May Standing order (rates)

140 14,750

10 May 112 255 14,495


13 May 113 550 14,551

14 May Deposit 1,254 15,805

21 May Deposit 2,143 17,948


25 May 115 546 18,057

28 May 365923 305 17,752

31 May Balance c/f 17,752

(i) Prepare a bank reconciliation statement at 1 May

(ii) Adjust the cash book for May and prepare a bank reconciliation statement at 31 May.


85

Solution

$

Balance per bank statement 16,000

Less O/S cheques (450 + 500) -950

Add O/S lodgments 200

Balance Per Cash Book 15,250

Cash BookCash BookCash BookCash Book

DR CR

Balance B/F 18,150

Error - chq 112 (255 - 250) 5

Deposit Difference (655 - 657) 2

Rates S/O 140

Bank Charges 50

Revised Bal. c/f 17,953

18,150 18,150

Revised Bal B/F 17,953

Balance Per Bank StatementBalance Per Bank StatementBalance Per Bank Statement 17,752

Less O/S cheques (No. 114 & 116: 100 & 204)Less O/S cheques (No. 114 & 116: 100 & 204)Less O/S cheques (No. 114 & 116: 100 & 204) -304

Add O/S lodgmentsAdd O/S lodgmentsAdd O/S lodgments 200

Bank ErrorBank ErrorBank Error 305

Revised Balance Per Cash BookRevised Balance Per Cash BookRevised Balance Per Cash Book 17,953


86

Illustration 2Amy’s cashbook for September is as follows:

$ $

Receipts 1,540 Balance b/f 640

Balance c/f 440 Payments 1,340

1,980 1,980

All receipts are banked and payments made by cheque.

On investigation, you discover the following discrepancies:

1. Bank charges of $150 entered on the bank statement had not been entered in the cash book.

2. Cheques of $300 had not been presented to the bank for payment.3. A cheque of $30 had been entered as a receipt in the cash book instead of as a

payment.4. A cheque drawn for $8 had been entered in the cash book as $88.

What balance is shown on the bank statement on 31 September?

Solution

Cash BookCash BookCash BookCash Book

DR CR

Balance B/F 440

Adjustment Re. Chq 80 Bank Charges 150

Paid Cheque entered as receipt

60

Balance C/F 570

650 650

Revised Balance Per Cash BookRevised Balance Per Cash BookRevised Balance Per Cash Book -570

Add O/S chequesAdd O/S chequesAdd O/S cheques 300

Balance Per Bank StatementBalance Per Bank StatementBalance Per Bank Statement -270


87

Illustration 3Provide the journal to correct each of these errors:

1. Cash sale of $200 not recorded2. Rates expense of $700, paid in cash has been debited to the rent account in error.3. A non-current asset purchase of $500 on credit has been debited to the repairs expense

account rather than an asset account.4. A rent bill of $1,000 in cash has been debited to the rent account as $1,200 and a

casting error in the sales account has resulted in sales being overstated by $200.5. A cash sale of $87 has been recorded as $76.6. A cash sale of $100 has been debited to sales and credited to cash.

Solution

DR CR

1. Double entry was not entered1. Double entry was not entered1. Double entry was not entered

Double entry should have beenDouble entry should have beenDouble entry should have been

DR Cash 200

CR Sales 200

2. Double entry made was2. Double entry made was2. Double entry made was

DR Rent 700

CR Cash 700

Double entry should have beenDouble entry should have beenDouble entry should have been

DR Rates 700

CR Cash 700

CorrectionCorrectionCorrection

DR Rates 700

CR Rent 700


DR Repairs 500

CR Payables 500

Should have beenShould have beenShould have been

DR Non Current Asset 500

CR Payables 500


88

DR CR


DR Non Current Asset 500

CR Repairs 500


Dr Rent 1,200

CR Cash 1,000


DR Rent 1,000

CR Cash 1,000


CR Rent 200

DR Sales 200


DR Cash 76

CR Sales 76


DR Cash 87

CR Sales 87


DR Cash 11

CR Sales 11


DR Sales 100

CR Cash 100


DR Cash 100

CR Sales 100



89

DR CR

DR Cash 200

CR Sales 200


90

Illustration 4The debit side of a company’s trial balance totals $2,000 more than the credit side. Which of the following errors would account for the difference?

1. Petty cash balance of $2,000 has been omitted from trial balance.2. A receipt of $2,000 from receivables has been omitted from the records.3. $1,000 paid for plant maintenance as been correctly entered into the cashbook and

credited to the plant cost account.4. Discount received of $1,000 has been debited to the discount allowed account.

Solution

4.

Illustration 5The following errors were found in Pitt’s accounting records:

1. In recording the sale of a non-current asset, cash received of $35,000 was credited to the disposals account as $32,000.

2. An opening accrual of $400 has been omitted.3. Cash of $10,000 paid for plant repairs was correctly accounted for in the cash book but

was credited to the plant cost account.4. A cheque for $15,000 paid for the purchase of a machine was debited to the machinery

account as $51,000.

Which of the errors will require an entry to the suspense account to correct them?

Solution

All of them.


91

Illustration 6The following corrections have been posted by Jamelia:

1. Dr Suspense $2,000, Cr Rent $2,0002. Dr Payables $1,400, Cr Suspense $1,4003. Dr Loan interest $800, Cr Loan $8004. Dr Suspense $900, Cr Sundry income $9005. Dr Suspense $10,000, Cr Cash 10,000

Jamelia’s draft profit figure to the posting of these journals is $480,000.

What is the revised profit figure?

Solution

No Effect Increase Decrease $

Profit 480,000

Rent 2,000 2,000

Payables X

Loan 800 -800

Sundry Income 900 900

Cash X

Revised ProfitRevised ProfitRevised ProfitRevised Profit 482,100


92

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. List unrecorded items that can cause differences in a bank reconciliation.

Solution.1. Interest2. Charges3. Dishonoured cheques

2. Which items may cause a timing difference in a bank reconciliation?

Solution1. O/S cheques2. O/S Lodgements

3. Remember, Bank Drs & Crs are....

Solution: the opposite way around.

4. List the different types of error.

Solution:1. Omission2. Commission (wrong account)3. Principle (conceptually wrong)4. Compensating (one cancels the other)5. Transcription error6. Entry reversal (posted the wrong way around)


93

Lecture 14 - Incomplete Records


94

Illustration 1Trudy’s statement of financial position shows net assets of $10,000 at 31 May 2010. The statement financial position at 31 May 2011 shows net assets of $14,000. Trudy’s drawings for the year amounted to $2,000 and she did not introduce any further capital in that year.

What profit did Trudy make in the year to 31 May 2011?

1. $4,0002. $10,0003. $6,0004. $8,000

Solution - 3 only

Change in Net Assets = Capital Introduced + Profit for the year - Drawings for year

14,000 - 10,000 = 0 + Profit - 2,000Profit = 4,000 + 2,000 = 6,000

Illustration 2The opening receivables of Flintoff’s business are $20,000. There have been total receipts from customers of $35,000 of which $10,000 relates to cash sales and $25,000 relates to receipts from receivables. Discounts allowed in the year totalled $2,000 and closing receivables were $28,000.

What are total sales for the year?

Solution

ReceivablesReceivablesReceivablesReceivables

DR CR

Balance B/F 20,000 Bank 25,000

Discounts 2,000

Sales (Bal Fig.) 35,000

Balance C/F 28,000

55,000 55,000


95

Illustration 3The opening payables of Harmison’s business are $10,000. Total payments to suppliers during the year were $8,000. Discounts received were $400 and closing payments were $14,000.

What are total purchases for the year?

Solution

PayablesPayablesPayablesPayables

DR CR

Bank 8,000 Balance B/F 10,000

Discounts 400

Purchases (Bal Fig.) 12,400

Balance C/F 14,000

22,400 22,400


96

Illustration 4The following relates to J Johnson’s business:

$

1 January Electricity accrued 300

Rent Prepaid 400

Cash paid in the year Electricity 1,200

Rent 2,500

31 December Electricity accrued 400

Rent Prepaid 500

What are the income statement charges for electricity and rent for the year?

Solution

Electricity Rent

Accrued -300

Pre-Paid 400

Paid In Year 1,200 2,500

Accrued 400

Pre-Paid -500

1,300 2,400


97

Illustration 5On 1 June Road Runner’s bank account is overdrawn by $1,400. Payments in the year totaled $9,000 and on the 31 May the following year the closing balance is $2500 (positive).

What are the total receipts for the year?

Solution

BankBankBankBank

DR CR

Balance B/F 1,400

Receipts (Bal. Fig) 12,900 Payments 9,000

Balance C/F 2,500

12,900 12,900

Illustration 6On 1 September, J Chan’s business had a cash float of $1,000. During the year cash of $8,000 was banked, $1,500 paid out as drawings and wages of $2,000 were paid. On 31 August the following year the float was $1,200.

How much cash was received from customers for the year?

Solution

Cash in TillCash in TillCash in TillCash in Till

DR CR

Balance B/F 1,000 Bank 8,000

Receipts (Bal. Fig) 11,700 Drawings 1,500

Wages 2,000

Balance C/F 1,200

12,700 12,700


98

Illustration 7Peter O’Mahoney has sales of $3,000, He makes a margin of 20%.

What is the cost of sales figure?

Solution

$

Sales 3,000

Cost of Sales (Bal.) 2,400

Gross Profit (20% x 3,000) 600

Illustration 8Liz Jones has a cost of sales of $800 and a mark-up of 20%.

What is her sales figure?

Solution

$

Sales 960

Cost of Sales 800

Gross Profit (20% x 800) 160


99

Illustration 9Jamie can tell you the following with regard to his business:

Margin 20%

Opening Inventory $1,000

Closing Inventory $800

Purchases $3,000

Complete Jamie’s income statement with the above figures.

Solution

$ $

Sale (3,200/80 x 100) 4,000


Purchases 3,000

Closing Inventory -800

3,200

Gross Profit 800


100

Illustration 10Jo lost her entire inventory due to flooding. Her unsigned insurance policy is still in her possession. Jo has supplied you with the following information:

Mark up 25%

Sales $12,000

Opening inventory $2,500

Purchases $8,000

Prepare Jo’s Income Statement and show the journal to record closing inventory.

Solution

$ $

Sale (9,600 x 125%) 12,000


Purchases 8,000

Lost Inventory (Bal Fig) -900

-9,600

Gross Profit 2,400

DR CR

DR Income Statement Expense 900

CR Income Statement (COS) 900


101

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are the different ways in which incomplete records can be solved?

Solution:1. Use accounting equation2. Calculate opening capital3. Use margins/mark ups4. Use balancing figure5. Lost inventory method

2. Net Profit =...

SolutionCapital + Profit - Drawings

3. Opening Capital =....

SolutionOpening Assets - Opening Liabilities

4. Using Mark-ups & margins, Gross Profit =....

SolutionMargin: Sales x Margin%Mark-up: Sales x (Mk-up/(mk-up + 100))


102

Lecture 15 & 16 - Company Accounts


103

Statement of Financial Position Pro-Forma

YZ Group Statement of Financial Position as at 31 December 20X5YZ Group Statement of Financial Position as at 31 December 20X5YZ Group Statement of Financial Position as at 31 December 20X5

Assets

Non-Current Assets

Property Plant & Equipment X

Investments X

Intangibles X

X

Current Assets

Inventories X

Trade Receivables X

Cash & Cash Equivalents X

Total Assets X

X

Equity & Liabilities

Share Capital & Reserves

Retained Earnings X

Other Components of Equity X

Total Equity X

Non-Current Liabilities X

Long Term borrowings X

Deferred Tax X

Current Liabilities X

Trade Payables X

Short Term Borrowings X

Current Tax Payable X

Short Term Provisions X X

Total Equity & Liabilities X


104

Statement of Changes in Equity Pro-Forma

Share Capital

SharePremium

RevaluationReserve

RetainedEarnings

TotalEquity

$ $ $ $ $

Balance B/F X X X X X

Change in Accounting Policy/prior year error

(X) (X)

Restated Balance X X X X X

Dividends (X) (X)

Shares Issued X X X

Profit for the Period X X

Revaluation gain/loss X X

Transfer to Retained Earnings

(X) X -

Balance C/F X X X X X


105

Statement of Comprehensive Income Pro-Forma

$

Revenue X

Cost of Sales (X)

Gross Profit X

Distribution Costs (X)

Admin Expenses (X)

Profit from Operations X

Finance Cost (X)

Investment Income X

Profit Before Tax X

Income Tax Expense (X)

Profit For the Year X

Other Comprehensive Income

Gain/Loss on Revaluation X

Gain/Loss on Financial Instruments Through Comprehensive Income

X

Total Comprehensive Income for the Year X


106

Illustration 1

Clonard issues 100,000 30c shares at a price of $1.25 each.

Show this transaction using ledger accounts.

Solution

DR CR

Cash (100,000 x $1,75) 175,000

Share Capital (Nominal Value) 30,000

Share Premium Account (Bal.) 145,000

Illustration 2Turtleneck issues 2,000 40c shares at nominal value in 2010. In 2011, a rights issue of 1 for 4 at $0.80 is made. The offer is fully taken up.

What accounting entries are required for the rights issue?

DR CR

Cash (2,000 / 4) x 80c) 400

Share Capital (Nominal Value) (2000/4) x 40c 200

Share Premium Account (Bal.) 200


107

Illustration 3Cascarino, a limited liability company, has 30,000 25c shares in issue (each issued for $1.25) and makes a 1 for 4 bonus issue, capitalising the share premium account.

What are the balances on the share capital and share premium accounts after this transaction?

Share Capital Share Premium

$ $

1 7,500 30,000

2 7,500 28,125

3 9,375 30,000

4 9,375 28,125

Solution - 4 only

Number of Shares Issued (30,000 / 4) 7,500

DR CR

Share Premium Account (7,500 x 25c) 1,875

Share Capital 1,875

Share Capital (30,000 x 25c ) + 1,875Share Capital (30,000 x 25c ) + 1,875 9,375

Share Premium (30,000 x (1.25 - 25c) - 1,875)Share Premium (30,000 x (1.25 - 25c) - 1,875) 28,125


108

Illustration 4Glass is an incorporated company which needs to raise funds to purchase plant and machinery. On 1 April 2010 it issues $200,000 10% loan notes, redeemable in 5 years time. Interest is payable half yearly at the end of September and March.

What accounting entries are required for Y/E 31 December 2010? Show extracts from the statement of financial position.

Solution

DR CR

01 April 2010

Cash 200,000

Loan Notes 200,000

31 September 2010

Finance Cost (200,000 x 10% x 6/12) 10,000

Cash 10,000

31 December 2010

Finance Cost (200,000 x 10% x 3/12) 5,000

Interest Accrual 5,000


109

Illustration 5

Sebastian Philpott commenced trade on 1 January 2011 and estimates that the tax payable for the year ended 31 December 2011 is $200,000.

In August 2012, the accountant of Sebastian Philpott receives and pays tax of $210,000 for the year ended 31 December 2011. At 31 December 2012 he estimates that the company owes $220,000 for corporation tax in relation to the Y/E 31 December 2012.

Calculate the tax charge and income tax payable accounts for the years ended 31 December 2011 and 2012, and detail the amounts shown in the statement of financial position and income statement in both years.

Solution

DR CR

20X4 $ $

Income Statement Charge (Est. 20X4) 200,000

Corp Tax Provision (SFP) 200,000

20X5

Income Statement Charge (Est. 20X5) 220,000

Under Provision 20X4 to IS 10,000


20X4 20X5

Corp Tax Provision 200,000 220,000

Tax Expense I/S 200,000 230,000


110

Illustration 6

Kettle Ltd estimated last year’s tax charge to be $250,000. However, their tax advisor settled with the tax authorities at $220,000.

This year, Kettle Ltd estimate their tax bill to be $270,000, but they are confused as to how this should be reflected in the financial statements.

Calculate tax liability and tax charge to be shown in the statement of financial position and income statement for the current year.

Solution

$

Income Statement Charge (Est.) 270,000

Over Provision to IS -30,000

Income Statement Charge 240,000



111

Illustration 7Bottle, a company, has share capital as follows:

Ordinary share capital (25c shares) $100,000

10% irredeemable preference share capital $25,000

The company pays an interim dividend of 5c per share to its ordinary shareholders and pays the preference shareholders their fixed dividend. Before the year end the company declares a final dividend of 15c per share to its ordinary shareholders.

Calculate the amounts shown in the statement of changes in equity (SOCIE) and statement of financial position (SOFP) in relation to dividends for the year.

Solution

No. Ordinary Shares $100,000 / 25c 400,000

Ordinary Dividend 400,000 x 12.5c $20,000

Preference Dividend 20,000 x 10% $2,000

SOCI $22,000

15c Div not approved yet so not accounted for (SFP)15c Div not approved yet so not accounted for (SFP) Nil


112

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. List the Financial Statements that are included in IAS 1.

Solution:1. Statement of Financial Position2. Either Statement of Comprehensive Income or

Income Statement + Other Comp Income3. Statement of changes in Equity4. Statement of Cash Flows

2. What is included in the other components of equity balance of the statement of financial position?

Solution: Revaluation Reserve and General Reserve

3. What is the purpose of the Statement of Changes in Equity?

Solution: Summary of all changes in equity eg. Share issue, dividends paid

4. What are some of the headings that would be listed under the Income Statement?

Solution: Cost of Sales, Distribution Costs, Admin Costs

5. What are the different ways in which capital can be issued?

Solution: Issue at market value, Rights issue, Bonus/script issue


113

Lecture 17 - Accounting Standards


114

Illustration 1Dawn Ltd purchased a patent, with a useful economic life of twenty years for $50,000 on 1 January 2010.

Prepare extracts of the financial statements for the Y/E 31 December 2010.

Solution

I/SI/SI/S

$

Amortisation ($50,000 / 20) 2,500

Statement of Financial PositionStatement of Financial PositionStatement of Financial Position

Intangible Assets (50,000 - 2,500) 47,500

Illustration 2Which of the following should be classified as development?

1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found in the Arctic Circle is resistant to heat.

2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-equipment which will be more durable.

3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new

heat-resistant body-suit for humans.

Solution

2 & 4 are development


115

Illustration 3

Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:

Expense CostsExpense CostsExpense CostsExpense CostsExpense Costs

2005 2006 2007 2008

$ $ $ $

Revenue from other activities

500 700 800 800

Revenue from other widgets 500 700 900

Development costs -600 Show how the development costs should be treated if:

1. the costs do not qualify for capitalisation2. the costs do qualify for capitalisation.

Solution1. Expense Costs1. Expense Costs1. Expense Costs1. Expense Costs1. Expense Costs1. Expense Costs

2005 2006 2007 2008 Total


500 700 800 800 2800

Revenue from other widgets 500 700 900 2100

Development costs -600 -600

Net Profit/Loss -100 1200 1500 1700 4300

2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs2. Amortising Development Costs

2005 2006 2007 2008 Total


500 700 800 800 2800

Revenue from other widgets 500 700 900 2100

Development costs 0 -143 -200 -257 -600

Net Profit/Loss 500 1057 1300 1443 4300

Working for Costs 600 x 500/2100

600 x 700/2100

600 x 900/2100


116

Illustration 4Dolphin Ltd has developed a new material which will enhance its products. The costs incurred meet the capitalisation criteria and by 31 August 2011 Y/E $300,000 has been capitalised.

The new products are expected to generate revenue for six years from the date that commercial production begins on 1 September 2011.

What amount is charged to the income statement in the Y/E 31 August 2012?

Solution

$300,000 / 6 = 50,000

Illustration 5

Which of the following are adjusting events for Fishcakes Ltd? The year end is 30 June 2011 and the accounts are approved on 20 August 2011.

1. Sales of year-end inventory on 4 July 2011 at less than cost2. Issue of new ordinary shares on 10 July 2011.3. A fire in the warehouse occurred on 16 July 2011. All stock was destroyed.4. A major credit customer was declared bankrupt on 20 July 2011.5. All of the share capital of a rival, Haggis Ltd was acquired on 22 July 2011.6. On 4 August, $700,000 was received in respect of an insurance claim dated 13

February 2011.

Which of the following are adjusting events for Fishcakes Ltd?

Solution

1, 4 and 6.


117

Illustration 6Draft financial of the West Angleland Company are currently under review. The following points have been raised:

1. An ex-employee has started an action against the company for wrongful dismissal. The company’s legal team have stated that the ex-employee is not likely to succeed. The following estimates have been given by the lawyers relating to the case:

a. Legal costs (to be incurred whether the claim is successful or not) $12,000b. Settlement of claim if successful $30,000Total: $42,000

No provision has been made by the company in the financial statements.

2. The company has a policy of refunding the cost of any goods returned by customers, even though it is under no legal obligation to do so. This policy of making refunds is generally known. In the next year returns totalling $15,000 are expected to have been made.

3. A claim has been made against the company for injury suffered by a pedestrian in connection with building work by the company. Legal advisors have confirmed that the company will probably have to pay damages of $150,000 but that a counterclaim against the building subcontractors for $80,000 would probably be successful.

State with reasons what adjustments, if any, should be made by the company in the financial statements.

Solution

1. Provide for $12,000 but disclose note re. $42,000.2. Constructive obligation so provide for $15,000.3. Provide for $150,000 and disclose contingent asset $80,000.


118

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Under !AS 38, development can be capitalised if it is....

Solution: CORSET1. Commercially viable2. Overall profitable3. Resources to complete4. Separate project5. Expenditure ID’d6. Technically feasible

2. What is amortisation?

Solution: To write off an intangible asset over its UEL

3. List examples of a Non-adjusting event under IAS 10.

Solution: 1. Purchase/sale assets2. Fire in warehouse3. Share issue

4. List examples of an adjusting event under IAS 10.

Solution:1. Fraud/error discovery2. Doubtful debts3. Damaged inventory

5. What are the characteristics of a provision under IAS 37?

Solution: Present obligation as result of past event, probable outflow of economic benefit and a reliable estimate.


119

Lecture 18 - Accounting Standards II


120

Illustration 1

Jumble Ltd was incorporated 5 years ago and has depreciated vehicles using the reducing balance method at 25%. It now wishes to change this to allow a fairer presentation to the straight line method over a period of 8 years. In addition, certain freehold properties had not been depreciated during the first 3 years. The directors are now of the opinion that all property, plant and equipment should now be depreciated.

Are the proposals a change in accounting policy or a change in accounting estimate?

Solution

The change in Dep’n rate is an Accounting Estimate as the use of judgement has been made by the accountant.

The fact that we are now charging depreciationn on the property is a change in the measurement of an item in the financial statements and is therefore a change in Accounting Policy.


121

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are Accounting Policies (IAS 8)?

Solution: Principles, bases, conventions rules and practices applied by an entity in preparing and presenting financial statements.

2. Accounting Policies may change when it...

Solution: Is required by a a new IFRS, or if the change will result in a more relevant and reliable presentation financial statements.

3. What is an accounting estimate?

Solution: An accounting estimate is the method to arrive at an estimate of an asset or liability. These estimates by an accountant can include UEL, depreciation etc.

4. What are the characteristics of Revenue Recognition (IAS 18)?

Solution: Reliable Measure and probable flow of economic benefit.Sale of goods: transfer of risks and rewards of ownershipServices: recognise by stage of completion


122

Lecture 19 - Group Workings


123

Illustration 1

Almeria Murcia

Non Current Assets

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600

Ordinary Shares 160 100

Accumulated Profits 240 200

Equity 400 300

Non Current Liabilities 100 200

Current Liabilities 200 100

700 600

Additional Information

Almeria today acquired all the shares in Murcia for $300m.

The Fair Value of the NCI at acquisition was 0.

Required

Prepare the consolidated statement of financial position for the Almeria group


124

Pro-Forma

Working 1 - Group Structure

Almeria

Murcia

Date Acquired

Parent Share

NCI

Working 2 - Equity Table At Acquisition At Year End

Share Capital

Accumulated Profits

! ! ! !

Working 3 - Goodwill

Cost of Parent Investment

Fair Value of NCI at acquisition

Less net assets at acquisition (W2)

Goodwill


125

Working 4 - NCI

$


NCI% of Sub Post-Acq Profits

Value of NCI at Year End

Working 5 - Accumulated Profits

$

Parent’s Accumulated Profits

Add: Parent % of the subsidiary’s post acquisition profits


126

SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill

Tangible 100 100

Investment in Murcia 300

Current Assets

Inventory 40 200

Receivables 60 100

Cash 200 200

700 600



Non Controlling Interest

Equity 400 300


Current Liabilities 200 100

700 600


127

Solution

Working 1 - Group Structure

Almeria

↓100%

Murcia

Date Acquired TODAY

Parent Share 100%

NCI 0%

Working 2 - Equity Table At Acquisition At Year End

Share Capital 100 100


300 300

! ! ! !


Cost of Parent Investment 300

Fair Value of NCI 0

Less net assets at acquisition (W2) -300

Goodwill 0


128

Working 4 - NCI

$

Fair Value of NCI at acquisition 0

NCI% of Sub Post-Acq Profits 0

Value of NCI at Year End 0


$

Parent’s Accumulated Profits 240

Add: Parent % of the subsidiary’s post acquisition profits Nil

240


129

SFP for Almeria Group

Almeria Murcia Group

Non Current Assets

Goodwill None (W3) Nil

Tangible 100 100 100 + 100 200

Investment in Murcia 300 Cancel out Nil

Current Assets

Inventory 40 200 40 + 200 240

Receivables 60 100 60 +100 160

Cash 200 200 200 + 200 400

700 600 1000

Ordinary Shares 160 100 Parent 160

Accumulated Profits 240 200 W5 240

Non Controlling Interest W4 Nil

Equity 400 300 400

Non Current Liabilities 100 200 100 + 200 300

Current Liabilities 200 100 200 + 100 300

700 600 1000


130

Illustration 2

Ant Dec

Assets 500 500

Investment in Dec 350

850 500



Equity 350 300

Liabilities 500 200

850 500


Ant today acquired 160m of the 200m shares in Dec.

The Fair Value of the NCI was 60.

Required

Prepare the consolidated statement of financial position for the Ant group


131

Illustration 2 Pro-Forma

Working 1- Group Structure

↓

Date Acquired

Parent Share

NCI

Working 2- Equity Table

At Acquisition At Year End

Share Capital

Accumulated Profits


Cost of Parent Investment


Less net assets at acquisition (W2)

Goodwill


132

Working 4 - NCI

$


NCI% of Sub Post-Acq Profits

Value of NCI at Year End

! ! ! ! !Working 5 - Accumulated Profits

$

Parent’s Accumulated Profits

Add: Parent % of the subsidiary’s post acquisition profits


133

Statement of Financial Position for Ant Group

Ant Dec Group

Goodwill

Assets 500 500

Investment in Dec

350

850 500

Ordinary Shares

100 200

Accumulated Profits

250 100

NCI

Equity 350 300

Liabilities 500 200

850 500


134

Illustration 2 Solution


Ant

↓80%

Dec

Date Acquired TODAY

Parent Share 80%

NCI 20%

100%

Working 2- Equity Table




300 300





Goodwill 100


135

Working 4 - NCI

$


NCI% of Sub Post-Acq Profits 0


! ! ! ! !Working 5 - Accumulated Profits

$


Add: Parent % of the subsidiary’s post acquisition profits Nil

250


136

Statement of Financial Position for Ant Group

Ant Dec Group

Goodwill W3 100

Assets 500 500 500 + 500 1000

Investment in Dec

350 Cancelled in Goodwill W3

Nil

850 500 1110

Ordinary Shares

100 200 Parent Only 100

Accumulated Profits

250 100 W5 250

NCI W4 50

Equity 350 300 410

Liabilities 500 200 500 +200 700

850 500 1110


137

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Define the acquisition method under IFRS3.

Solution:1. Identify acquirer2. Determine acquisition date3. Recognise & measure assets & liabilities4. Measure goodwill/bargain purchase5. Calculate NCI

2. Net Assets =....

Solution: Share Capital + Reserves

3. What is goodwill?

Solution: An intangible assets, which is the excess value over net assets.

4. What is the NCI?

Solution: Non-Controlling Interest, the part the entity does not own.

5. What is included in reserves?

Solution: Accumulated profits of parents, share of sub’s profit


138

Lecture 20 - Group SFP


139

Illustration 1

Evan Dando

Assets 200 350

Investment in Dando 500

Current Assets 200 300

900 650

Ordinary Shares ($1) 200 200


Equity 450 300


Liabilities 170 150

900 650


Evan acquired 150m shares in Dando one year ago when the reserves of Dando were $40m.

The Fair Value of the NCI was 75 on the date of acquisition.

Required

Prepare the consolidated statement of financial position for the Evan group.


140

Solution


Evan

↓75%

Dando

Date Acquired 1 Year Ago

Parent Share 75%

NCI 25%

100%

Working 2 - Equity Table




240 300

! ! ! !


141





Goodwill 330

Working 4 - NCI

$


NCI% of Sub Post-Acq Profits (60 x 25%) 15



$


Add: Parent % of the subsidiary’s post acquisition profits (75% x 60m) 45

295


142

Statement of Financial Position for Evan Group

Evan Dando Group

Goodwill W3 330

Assets 200 350 200 + 350 550

Investment in Dando

500 Cancelled out in W3.

Nil

Current Assets 200 300 200 + 300 500

900 650 1380

Ordinary Shares ($1)

200 200 Parent Only 200

Accumulated Profits

250 100 W5 295

NCI W4 85

Equity 450 300 570

Non Current Liabilities

280 200 280 + 200 480

Liabilities 170 150 170 + 150 320

900 650 1380


143

Illustration 2Anton Ltd. purchased 75% of Brendon Ltd. 1 year ago when the share capital of Brendon were 500m and the reserves were 200m.

At the date of acquisition some plant had a fair value 50m above the value in the financial statements of Brendon.

The Non Current Assets of Anton and Brendon were 1000 and 500 respectively at the year end

By the year end, the reserves of Brendon were 300m.

Show the treatment for the Fair Value Adjustment.

Solution




Fair Value Adjustment 50 50

750 850

Anton Brendon Group

Non Current Assets 1,000 500 +50 1,550


144

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are Post-acquisition profits?

Solution: Profits made by subsidiary between the acquisition date and the reporting date.

2. What net assets may have to be adjusted at acquisition?

Solution: Land, property and plant.


145

Lecture 21 - More Adjustments


146

Illustration 1A Parent company has recorded an asset of $300 receivable with a subsidiary.

The subsidiary had recorded this as an liability payable of $300.

How should this be adjusted for on consolidation?

Solution

When cross casting assets & liabilities:

Less Payables $250 (DR)

Less Receivables $300 (CR)


147

Illustration 2Parent has been selling goods to subsidiary. The parent has recorded an asset of $500 receivable from the subsidiary.

The subsidiary has a balance of $500 recorded as a liability in payables.

How should this be treated on consolidation?

Solution

When cross casting assets & liabilities:

Less Payables $500 (DR)

Less Receivables $500 (CR)


148

Illustration 3Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.

I. Calculate the PURP.

II. Show the accounting treatment if the parent company is the seller.

III. Show the accounting treatment if the subsidiary company is the seller.

IV. Do parts I - III if the goods had been sold at a margin of 30%.

Solution (Mark-up)

Unsold Inventory Mark-up PURP

(400 x 3/4) = 300 25/125 60

Parent is seller

DR/CR Account $ $

DR Accumulated Profits (W5) to decrease 60

CR Inventory to decrease 60

Subsidiary is seller

DR/CR Account $ $

DR Accumulated Profits (W5) with parent share to decrease (60 x 80%)

48

DR NCI (W4) with subsidiary share to decrease 12



149

Solution (Margin)

Unsold Inventory Margin PURP

(400 x 3/4) = 300 30% 90

Parent is seller

DR/CR Account $ $

DR Accumulated Profits (W5) to decrease 90


Subsidiary is seller

DR/CR Account $ $

DR Accumulated Profits (W5) with parent share to decrease (90 x 80%)

72

DR NCI (W4) with subsidiary share to decrease 18



150

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What are inter company transactions?

Solution: Amounts owed between parent and subsidiary when selling to one another.

2. What is a PURP?

Solution: Provision for unrealised profit. Sales Between P & S, where no profit can be realised.


151

Lecture 22 - Statement of

Comprehensive Income


152

Illustration 1Argentina owns an 80% share of Messi which it purchased 6 months ago.

The information below relates to Messi at the date of acquisition.

The income statements for both are:

Argentina Messi

Revenue 8000 3000

Cost of Sales -4000 -1000


Operating Costs -1500 -1500

Finance Costs -1000 -200

Profit Before Tax 1500 300

Tax -700 -100

Profit for the year 800 200

Other information

I. Argentina sold goods to Messi after the acquisition at a margin of 40% and worth $100m. Half of these goods have been sold on by Messi by the year end.

II. The fair value of Messi’s net assets were equal to their book value at the date of acquisition, with the exception of some machinery which had a fair value of 200 above it’s book value.

Produce a consolidated Income Statement for the Argentina group.


153

Illustration 1 Solution


Argentina

↓80%

Messi

Date Acquired 6 Months Ago (Time apportionment)

Parent Share 80%

NCI 20%

100%

Working 2 - Inter Company

PURP

Unsold Inventory Margin PURP

(100 x 1/2) = 50 40% 20

As the Parent is seller

DR/CR Account $ $

DR Cost of sales to increase 20


Remember to remove the total amount of the sales also from sales and cost of sales

DR/CR Account $ $

DR Revenue to decrease 100

CR Cost of sales to decrease 100


154

Working 3 - Cost of Sales

$m

Parent 4000

Subsidiary (1,000 x 6/12) 500

Less Inter Company Sales -100

Plus the PURP 20

4420

Working 4 - NCI

$

NCI % of the subsidiary’s profits in question (200 x 6/12) x 20% 20

20


155

Income statement for Argentina Group

Argentina Messi 6 Mths Group

Revenue 8000 3000 1500 8000 + 1500 - 100 inter company sales 9400

Cost of Sales W4 -4420

Gross Profit 4000 2000 4980

Operating Costs -1500 -1500 -750 1500 + 750 -2250

Finance Costs -1000 -200 -100 1000 + 100 -1100

Profit Before Tax 1630

Tax -700 -100 -50 700 + 50 -750

Profit for the year 880

Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure)Attributable to Parent (Balancing Figure) 860

Attributable to NCI (W5)Attributable to NCI (W5)Attributable to NCI (W5)Attributable to NCI (W5)Attributable to NCI (W5) 20

880

! ! !


156

Illustration 2

3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of $400,000. Since that time Wars Ltd.has had the following results:

Year Profit

1 $200,000

2 $160,000

3 $30,000

Show the treatment of War Ltd. in the statement of financial position of Star Group and in the Income statement for year 3.

Solution

Investment In Associate (SFP)Investment In Associate (SFP)Investment In Associate (SFP)

Initial Investment 400,000

Parent Share of Post Acquisition Profit (200,000 + 160,000 + 30,000) x 25% 97,500

Investment in Associate 497,500

Income From Associate (Income Statement)Income From Associate (Income Statement)Income From Associate (Income Statement)

Parent share of Current Year Income (30,000 x 25%) 7,500

Income From Associate 7,500


157

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Income and Expenses ...

Solution: Fully cross cast, time apportion if sub acquired mid-year.

2. Inter company items...

Solution: Sales - Remove from Revenue/COSPURP - if sub is seller, adjust NCI. Add to COS

3. NCI Share of Group Profit includes...

Solution

NCI share of profit in Sub less any PURPS (if sub seller)


158

Lecture 23 - Statement of Cash Flows


159

Illustration 1The Statement of financial position of a business are:

20X8 20X7

$ $

Non-Current assets

Inventories 55,000 60,000

Receivables 250,000 160,000

Cash 70,000

375,000 220,000

Share capital 100,000 100,000

Reserves 75,000

175,000 100,000

Payables 200,000 120,000

375,000 220,000

Extracts from the income statement for 20X8 are:$ $

Sales revenue 1,000,000

Cost of sales

Purchases (no inventory) 565,000

Wages and salaries 200,000

-765,000

Administration

Purchases 80,000

Salaries 80,000

-160,000

Operating profit & retained profit for year 75,000


160


Payables consist of:

Payables LedgerPayables Ledger

20X8 20X7

$ $

Re non-current assets 50,000

Other 160,000 110,000

Wages accrued 10,000 10,000

Purchase invoices relating to the acquisition on non-current assets totaling $100,000 have been posted to the payables ledger during the year.

Calculate the net cash flow from operating activities using the direct method.

Solution

W1 - Receivables


DR CR

Balance B/F 160,000

Cash Receipts (Bal) 910,000

Sales Revenue 1,000,000

Balance C/F 250,000

1,160,000 1,160,000


161

W2 - Payables

Payables Control A/CPayables Control A/CPayables Control A/CPayables Control A/C

DR CR

Balance B/F 110,000

Cash Paid (Bal) 595,000

Purchases:

COS 565,000

Admin 80,000

Balance C/F 160,000

755,000 755,000

W3 - Wages

Wages Control A/CWages Control A/CWages Control A/CWages Control A/C

DR CR

Balance B/F 10,000

Cash Paid (Bal) 280,000

Purchases:

COS 200,000

Admin 80,000

Balance C/F 10,000

290,000 290,000


162

Calculation

$ $

Cash Sales (None - all on credit) 0

Cash From Debtors W1 910,000

Less:

Cash Purchases (None - all on credit) 0

Cash Paid to Suppliers W2 595,000

Cash Expenses W3 280,000

-875,000

Net Cash From OperationsNet Cash From OperationsNet Cash From Operations 35,000


163

Illustration 2Statement of financial position of Traveller at 31 May:

2011 2010

$m $m

Non-Current assets 100 80

Accumulated depreciation -20 -10

80 70

Current assets

Inventory 10 11

Trade Receivables 12 9

Dividend receivable 6 4

Cash 4 2

32 26

Total assets 112 96

Capital and reserves

Share Capital 20 12

Share premium 10 7

Revaluation reserve 21 1

Accumulated profits 28 23

79 43

Non-current liabilities

Loan 16 30

Current liabilities

Trade payables 5 12

Dividend payable 3 3


164

2011 2010

$m $m

Interest accrual 1 1

Tax 8 7

33 53

Total liabilities 112 96

Income Statement of Traveller 31 May 2011:

$m

Sales revenue 110

Cost of sales -71

Gross Profit 39

Operating expenses -25

Operating profit 14

Investment income - interest 3

Investment income -dividends 8

Finance charge -2

Income tax -7

Net profit for year 16

Operating expenses include a loss on disposal of non-current assets of $1 million.

During the year, plant which originally cost $3 million and with depreciation of $1 million was disposed of.

Calculate the cash generated from operations using the indirect method.


165

Solution

$m

Profit Before Tax 23

Finance Charge (Often accrued - not cash so add back)

2

Investment Income -11

Depreciation (Not Cash - add back) W1 11

Loss On Sale of NCA (Not Cash - exclude) 1

Operating cash flow before working capital changesOperating cash flow before working capital changesOperating cash flow before working capital changes 26

Decrease in Inventory 1

Increase in Receivables -3

Decrease in Payables - -7 -9

Cash Generated from OperationsCash Generated from OperationsCash Generated from Operations 17

W1 - Depreciation

Accumulated Dep’nAccumulated Dep’nAccumulated Dep’nAccumulated Dep’n

DR CR

Balance B/F 10

Disposals 1

Depreciation Chg. (Bal) 11

Balance C/F 20

21 21


166

Illustration 3

Identify and calculate interest payable, accumulated profits, dividend payable and income tax payable to be shown under the heading of “Cash flows from operating activities,” in Traveller’s statement of cash flows.

Solution

Interest PayableInterest PayableInterest PayableInterest Payable

DR CR

Balance B/F 1

Cash Paid (Bal) 2

Income Statement 2

Balance C/F 1

3 3

Accumulated ProfitsAccumulated ProfitsAccumulated ProfitsAccumulated Profits

DR CR

Balance B/F 23

Dividends (Bal) 11

Income Statement Profit 16

Balance C/F 28

39 39

Dividend PayableDividend PayableDividend PayableDividend Payable

DR CR

Balance B/F 3

Dividends Paid (Bal) 11

Dividend Declared (W2) 11

Balance C/F 3

14 14


167

Tax PayableTax PayableTax PayableTax Payable

DR CR

Balance B/F 7

Cash Paid (Bal) 6

Income Statement 7

Balance C/F 8

14 14


168

Illustration 4Calculate interest and dividends received for Traveller to be shown under the heading of “cash flow from investing activities.”

Solution

Interest receivable - $3 million.

Dividends ReceivableDividends ReceivableDividends ReceivableDividends Receivable

DR CR

Balance B/F 4

Cash Receipts (Bal) 6

Income Statement 8

Balance C/F 6

12 12


169

Illustration 5Calculate accumulated depreciation, PPE and the proceeds from the sale of plant to be shown under the heading of “Cash flows from investing activities” in Traveller’s statement of cash flows.

Solution

Accumulated Dep’nAccumulated Dep’nAccumulated Dep’nAccumulated Dep’n

DR CR

Balance B/F 10

Disposals 1

Depreciation Chg. (Bal) 11

Balance C/F 20

21 21

PPE @ CostPPE @ CostPPE @ CostPPE @ Cost

DR CR

Balance B/F 80

Disposals 3

Additions (Bal) 3

Revaluations 20

Balance C/F 100

103 103

DisposalsDisposalsDisposalsDisposals

DR CR

Accumulated Dep’n 1

Cost 3 Loss on Disposal 1

Proceeds (Bal) 1

3 3


170

Illustration 6

Calculate amounts to be shown under “cash flows from financing activities” to be shown in Traveller’s statement of cash flows.

Solution

Share Cap & PremiumShare Cap & PremiumShare Cap & PremiumShare Cap & Premium

DR CR

Balance B/F Share Cap 12

Balance B/F Share Prem 7

Shares Issued 11

Balance C/F Share Cap 20

Balance C/F Share Prem 10

30 30

W2 - Loan

LoanLoanLoanLoan

DR CR

Balance B/F 30

Repayments of Loans 14

Balance C/F 16

30 30


171

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. Describe the purpose of a Statement of Cash flows.

Solution:Looks at cash flows (not profit)Cash flows cannot be manipulatedMore information to users about expenditure and cash inflows

2. What are some of the downsides of a Statement of Cash Flows?

Solution:Uses historic informationIgnores future cash flows

3. What are the 3 main headings of a Statement of Cash Flows?

Solution: Cash from Operating ActivitiesCash from Investing ActivitiesCash from Financing Activities

4. What are the two methods of calculating cash generated from operations?

Solution: Direct and Indirect Method

5. What is included in cash from investing activities?

Solution: Interest received, Dividends received, Sale/purchase NCA

6. What is included in cash from financing activities?

Solution: Issue of shares, issue of loans


172

Lecture 24 - Interpretation of Financial Statements


173

Illustration 1

2011 2010

ASSETS $‘000 $‘000

Non Current Assets 1000 1000

Inventory 300 400

Receivables 200 300

Cash 300 200

1800 1900

LIABILITIES


Reserves 200 100

Long term Liabilities 700 900

Payables 100 100

Overdraft -

1800 1900

$‘000 $‘000

Revenue 1000 1200

COS 800 1100


Other Costs 100 90

Net Profit 100 10

All sales are made on credit.

Required:

Calculate the Inventory, Receivables and Payables days for Inter Ltd. in each of the 2 years as well as the current and quick ratios.


174

Solution

Item Working 2011 Working 2010

Inventory Period 300/800 x 365

137 400/1100 x 365

133

Collection Period 200/1000 x 365

73 300/1200 x 365

92

Payables Period 100/800 x 365

46 100/1100 x 365

33

Current Ratio 800/100 8 900/100 9

Quick Ratio 500/100 5 500/100 5


175

Illustration 2

X1 X2 X3

Non Current Assets 500 700 1000

Current Assets 150 200 300

650 900 1300

Ordinary Shares ($1) 300 300 300

Reserves 100 280 430

Loan Notes 150 200 300

Payables 100 120 270

650 900 1300

Revenue 3000 3500 4200

COS 2000 2400 3200


Admin Costs 300 350 400

Distribution Costs 200 250 300

PBIT 500 500 300

Interest 100 150 220

Tax 120 90 50

Profit After Tax 280 260 30

Dividends 100 110 30

Retained Earnings 180 150 0

Share Price $3.30 $4.00 $2.20


176

Using the information on the previous page calculate and comment on the following Ratios:

I. Return on Capital EmployedII. Return on EquityIII. Gross MarginIV. Net MarginV. Operating MarginVI. Revenue GrowthVII. GearingVIII. Interest CoverIX. Dividend CoverX. Dividend YieldXI. P/E Ratio


177

Solution

ROCE

X1 X2 X3

Equity + LT Liabilities

Shares 300 300 300


LT Loan Notes 150 200 300

Capital Employed 550 780 1030

Non Current Assets + Net Current Assets

Non Current Assets 500 700 1000

Net Current Assets (Current Assets - Current Liabilities)

(150 - 100) = 50 (200 - 120) = 80 (300 - 270) = 30


Total Assets - Current Liabilities

Total Assets 650 900 1300

Current Liabilities 100 120 270


PBIT 500 500 300

Return on Capital Employed

PBIT / Capital Employed

(500 / 550) = 90.91%

(500 / 780) = 64.10%

(300 / 1030) = 29.13%


178

X1 X2 X3

Return on Capital Employed (ROCE) 90.91% 64.10% 29.13%

In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROCE was 90.91%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.

In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.In year X2 the ROCE is 64.10%. This is a fall of 29.5% from the previous year indicating that the business in not able to make the same return on it’s assets that it has previously been able to do.

In the year X3 the ROCE is 29.13%. This is a fall of 54.55% indicating that there may be some serious underlying problems which are affecting the ability of the business to generate the return on capital previously generated.




ROE

X1 X2 X3


Ordinary Shares 300 300 300


Total 400 580 730

Return on Equity (PAT / Ord Shares + Reserves)

(280 / 400) = 70%

(260 / 580) = 44.8%

(30 / 730) = 4.1%

In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.In the first year the ROE was 70%. At first glance this would appear to be a good return, however without industry averages or prior period information we are unable to tell if this is the case.

In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.In year X2 the ROE is 44.8%. This is a fall of 36% from the previous year indicating that the business in not able to make the same return on the shareholders funds that it has previously been able to do.

In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.In the year X3 the ROE is 41%. This is a fall of 8.4% indicating that the business may be having difficulty generating the returns it was able to do previously.


179

Margins

X1 X2 X3

Revenue 3000 3500 4200


PAT 280 260 30

PBIT 500 500 300

Gross Margin (Gross Profit / Revenue) (1000 / 3000) = 33.33%

(1100 / 3500) = 31.42%

(1000 / 4200) = 23.89%

Net Margin (PAT / Revenue) (280 / 3000) = 9.3%

(260 / 3500) = 7.4%

(30 / 4200) = 0.7%

Operating Margin (PBIT / Revenue) (500 / 3000) = 16.66%

(500 / 3500) = 14.28%

(300 / 4200) = 7.1%

The Gross Margin is 33.33% in X1 and holds reasonably steady in X2 at 31.42%. However in X3 the Gross Margin falls to 23.89% indicating that the business has either had to cut prices to sell the greater volume it has, or the cost of it’s purchases have gone up.




The Net Margin is 9.3% in X1 but begins to fall in X2 with 7.4% achieved, before falling dramatically to 0.7% in X3. The main reason for this is the fall in Gross Profit as other costs have risen in line with expectations given the increase in sales. However another point to note is that interest costs have risen with the increase in long term loans. The extra interest costs have put pressure on the business.




The Operating Margin dropped slightly in X2 to 14.28% from 16.66% the previous year - a fall of almost 15%. In X3 the Operating Margin fell away to 7.1%, a decrease of over 50%. This is due to the decreasing Gross Margin achieved as well as rises in the other expenses.





180

Gearing

X1 X2 X3

Debt 150 200 300

Equity Number of Shares

300 300 300

Share Price 3.30 4 2.20

Market Value (300 x 3.30) = 990

(300 x 4) = 1200

(300 x 2.20) = 660

Gearing (Debt / Equity) (150 / 990) = 15%

(200 / 1200) = 16.66%

(300 / 660) = 45.45%

Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.Gearing levels in year X1 are 15%. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem excessive.

In year X2 gearing increases slightly to 16.66%, an increase of 11% from year X1. This is due to debt levels increasing to 200 from 150, although this is offset by the increase in the share price from $3.30 to $4.





In year X3 gearing increases dramatically to 45%, an increase of over 180%. This is due to debt levels rising to 300 from 200 and the share price dropping to $2.20 due to the deteriorating results of the business.






181

Interest Cover

X1 X2 X3

PBIT 500 500 300

Interest 100 150 220

Interest Cover (PBIT / Interest) (500 / 100) = 5 times

(500 / 150) = 3.33 times

(300 / 220) = 1.36 times

Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Interest coverage in year X1 is 5 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.

In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.In year X2 interest coverage falls to 3.33 times. This has occurred due to the interest charge increasing in the period while PBIT has remained constant.

In year X3 interest coverage has decreased again to 1.36 times. This is caused by the PBIT achieved decreasing to 300 combined with the increase in the interest charge to 220. The increase in interest is caused by the increase in the long term debt of the company as shown by the gearing ratios calculated above.




Dividend Cover

X1 X2 X3

PAT 280 260 30


Dividend Cover (PAT / Dividends) (280 / 100) = 2.8 times

(260 / 110) = 2.36 times

(30 / 30) = 1 time

Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.Dividend coverage in year X1 is 2.8 times. Without industry averages or prior year data we are unable to assess this level although at first glance it does not seem unreasonable.

In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.In year X2 dividend coverage falls to 2.36 times. This would not concern investors as although coverage has gone down slightly, the dividend paid this year is greater than last.

In year X3 dividend coverage has decreased to 1 time. This is caused by the decrease in profit achieved by the company restricting the level of dividend payable. This will be of concern to investors and their concern is reflected in the fall in the share price from $4 in year X2 to $2.20 in year X3.





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Dividend Yield

X1 X2 X3

Number of Shares (300 / 1) 300 300 300


Dividends Per Share (100 / 300) = 33c (110 / 300) = 36c (30 / 300) = 10c

Dividend Yield (Dividends Per Share / Share Price)

(33 / 330) = 10% (36 / 400) = 9% (10 / 220) = 4.5%

The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.The Dividend Yield is 10% in year X1. Whilst we do not have comparatives, this seems a reasonable return.

In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.In year X2 the Dividend Yield falls to 9%. This will not be overly concerning to investors as the increase in share price over the year will have more than made up for the slightly lower yield.

In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.In year X3 the Dividend Yield has fallen to 4.5% which is 50% lower than the previous year. This, combined with the fall in share price and reduced profitability will be a major concern to investors.

P/E Ratio

X1 X2 X3

Share Price $3.30 $4 $2.20


No. Ordinary Shares 300 300 300

EPS (280 / 300) = 93c (260 / 300) = 86c (30 / 300) = 10c

P/E Ratio (Share Price / EPS) (330 / 93) = 3.54 (400 / 86) = 4.65 (220 / 10) = 22

The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.The P/E Ratio in year X1 is 3.54. We do not have industry comparatives or prior year information with which to compare this.

In year X2 the P/E Ratio increases to 4.65. This indicates that the market expectations for this share have risen since X1 and that investors are now willing to pay 4.65 times what the business earns in a year to own the share.




In year X4 the P/E ratio has increased dramatically to 22. This is unusual as the earnings have decreased to 12% of the previous year. The share price has fallen to reflect this, but not by as much as would be expected. This may indicate that the market feels that the results in year X3 were perhaps a one-off and that next years results will improve.





183

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!1. What is the formula for Operating margin?

Solution: PBIT/Turnover

2. What is the formula for ROCE?

Solution: PBIT/Capital Employed

3. What is the formula for net asset turnover?

Solution: Sales Revenue/Capital Employed

4. What is the formula for the Current Ratio?

Solution: Current Assets/Current Liabilities

5. What is the formula for the quick ratio?

Solution: Current Assets - Inventory/Current Liabilities

6. What is the formula for the inventory period?

Solution: Ave/current inventory / COS

7. What is the formula for the collection period?

Solution: Ave/current Receivables / Credit Sales

8. What is the formula for Capital Gearing?

Solution: Debt/Equity

9. What is the formula for interest cover?

Solution: PBIT/Interest


184

10. What is the formula for the P/E ratio?

Solution: Share Price/EPS

11. What is the formula for EPS?

Solution: Earnings/No Ordinary Shares

12. What is the formula for Dividend Cover?

Solution: PAT/Dividends


185

Lecture 25 - The Framework


186

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!Which of the following are qualitative characteristics of useful financial information?

1. Relevance

2. Reliability

3. Comparability

4. Understandability

A. 2 and 3 only.

B. All of them

C. 1 and 2 only

D. 1 and 3 only

Solution: B

Which of the following are accounting principles?

1. Going Concern

2. Prudence

3. Comparability

4. Substance over form

A. 1 and 4 only

B. All of them

C. 2 and 3 only

D. 1, 2 and 4 only

Solution: D


187

Which of the following are advantages of using historical cost?

1. Simple method

2. Comparability

3. Measured at actual cost

4. No relation to true value

A. 1 and 2 only

B. 3 and 4 only

C. All of them

D. 1, 2 and 3 only

Solution D


188

Lecture 26 - Governance


189

Test Your KnowledgeIf you can’t answer all of the questions below without looking at the answer then you need to do some more work on this area!Which of the following are benefits of having a system of governance?

1. Attracts investment

2. Increases investor confidence

3. Monitors management

4. Enhanced controls

A. All of them

B. 1, 2 and 3 only

C. 1, 2 and 4 only

D. 2, 3 and 4 only

Solution: A

Which of the following are concepts of governance?

1. Fairness

2. Integrity

3. Transparency

4. Responsibility

A. 1, 3 and 4 only

B. 2 and 4 only

C. All of them

D. 1, 2 and 3 only

Solution: C


190

Which of the following are examples of external stakeholders?

1. Auditors

2. Employees

3. Investors

4. Management

A. All of them

B. 1, 3 and 4 only

C. 1 and 3 only

D. 1, 2 and 3 only

Solution: C


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Documents

ACCA F3 Workbook - Mapit Accountancy