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CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION SAMPLE MULTIPLE CHOICE QUESTIONS – JUNE 2009 Paper T6 (INT) Drafting Financial Statements Section A only All questions are compulsory Note: Section B of the actual exam paper will contain three written questions FOR FREE CAT & ACCA RESOURCES VISIT: http://kaka-pakistani.blogspot.com

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Page 1: t6 Past Year Papers

Certified ACCounting teChniCiAn exAminAtion

SAmple multiple ChoiCe queStionS – June 2009

Paper T6 (INT) Drafting Financial Statements

Section A onlyAll questions are compulsory

Note: Section B of the actual exam paper will contain three written questions

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the following questions are typical of those that will appear in Section A of the examination paper from June 2009 onwards. there will be a total of ten questions in section A.

All questions in Section A will be worth two marks each.

1 Aye and Bee are in partnership sharing profits and losses in the ratio 3:2 respectively. The partners’ capital and current account balances at the beginning of the year were as follows:

Aye Bee $ $ Current accounts 7,500CR 2,100CR Capital accounts 12,000CR 9,000CR The partnership made a profit of $100,000 for the year. Aye’s drawings were $9,200, and Bee’s were $7,320.

What should Aye’s current account balance be at the end of the year?

A $67,500

B $58,300

C $76,700 d $16,700

(2 marks)

2 At 1 May 2009 Tibor purchased six million of Kinnot’s ten million $1 ordinary shares for $6,000,000. At that date Kinnot had net assets with a fair value of $8,450,000 and its share price was $1.10. It is group policy to value the non-controlling interest at the fair value of the subsidiary’s identifiable net assets using the market value of the shares at acquistion.

What is the total goodwill on acquisition of Kinnot?

A $930,000

B $2,450,000

C $1,550,000

d $1,950,000 (2 marks)

3 Which of the following four statements are correct?

A If all the conditions specified in IAS 38 Intangible assets are met, the directors can chose whether to capitalise the development expenditure or not.

B Amortisation of capitalised development expenditure will appear as an item in a company’s statement of changes in equity.

C Capitalised development costs are shown in the statement of financial position as non-current assets.

d Capitalised development expenditure must be amortised over a period not exceeding five years.

(2 marks)

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4 According to iAS i presentation of financial Statements, which of the following items could appear in the statement of changes in equity:

(1) total comprehensive income for the year (2) dividends (3) loss on sale of investments. (4) issue of share capital

A 1, 2 and 4 only

B 1, 3 and 4 only

C 1 and 3 only

d 1, 2, 3 and 4 (2 marks)

5 A property company received cash for rent totalling $628,950 in the year ended 31 May 2009. Figures for rent in advance and in arrears at the beginning and end of the year were:

31 May 2008 31 May 2009 $ $ Rent received in advance 76,950 66,525 Rent in arrears (all subsequently received) 31,725 36,300

What amount should appear in the company’s income statement for the year ended 31 may 2009 for rental income?

A $613,950

B $634,800

C $623,100

d $643,950 (2 marks)

6 According to iAS 10 events after the reporting period, which of the above material events which occurred after the reporting date, require an adjustment to the figures in the financial statements?

(1) An issue of shares to finance expansion. (2) A fire destroying some of the company’s inventory (the company’s going concern status is not affected). (3) Sale for less than cost of some old inventory held at the reporting date (4) the bankruptcy of a major customer, with a substantial debt outstanding at the reporting date.

A 3 and 4 only

B 1, 2 and 3

C 2 and 3 only

d 2 and 4 only (2 marks)

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7 Which of the following statements are correct?

(1) the money measurement concept is that only items capable of being measured in monetary terms can be recognised in financial statements.

(2) materiality means that only physical assets are recognised in the financial statements.(3) in times of rising prices, the use of historical cost accounting tends to understate assets and overstate

profits.

A 1 only

B 2 only

C None of the statements

d 3 only (2 marks)

8 When calculating a company’s gearing ratio which of the following factors would cause it to fall?

(1) A rights issue of ordinary shares. (2) An issue of loan notes. (3) An upward revaluation of non-current assets.

A 1 only

B 1 and 2

C 2 and 3

d 1 and 3 (2 marks)

9 Steve and Paul are in partnership and share profits equally. Steve receives an annual salary $30,250 and interest on capital is paid at 5% per year.

At 1 June 2008 their capital balances were:

$ Steve 150,000 Paul 75,000

On 1 December 2008 Paul introduced a further $75,000 capital, and Steve’s salary was discontinued. The partnership profit for the year ended 31 May 2009 was $228,250.

What was Steve’s total profit share for the year ended 31 may 2009?

A $100,000

B $99,000

C $122,625

d $105,625 (2 marks)

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10 At 31 May 2008 Stoneacre’s capital structure was as follows:

$ Ordinary share capital (1,000,000 shares of 25c each) 250,000 Share premium account 200,000

In the year ended 31 May 2009 Stoneacre made a rights issue of 1 share for every 2 held at $1 per share and this was taken up in full.

Later in the year Stoneacre made a bonus issue of 1 share for every 10 held, using the share premium account for the purpose.

What was the company’s capital structure at 31 may 2009?

Ordinary share capital Share premium account $ $ A 387,500 187,500

B 412,500 537,500

C 387,500 550,000

d 400,000 550,000 (2 marks)

end of Sample questions

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Answers

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Sample multiple Choice question paper t6 (int) Answersdrafting financial Statements

1 B $ Opening balance 7,500 Profit share (100,000 x 3/5) 60,000 Drawings (9,200) Closing current account balance 58,300

2 d $ Consideration transferred 6,000,000 Fair value of non-controlling interest 4,000,000 x $1.10 4,400,000 10,400,000 Less fair value of net assets at acquistion (8,450,000) Goodwill = 1,950,000

3 C

4 A

5 d 628,950 + (76,950 – 31,725) – (66,525 – 36,300) = 643,950

6 A

7 A

8 d

9 C Steve Paul $ $ $ Profit 228,250 Salary (30,250 x ½) 15,125 (15,125) Interest on capital (150,000 x 5%) 7,500 (7,500) (75,000 x 5% x ½) 1,875 (150,000 x 5% x ½) 3,750 (5,625) Profit share 100,000 100,000 200,000 Total profit share 122,625 105,625

10 B Share capital Share premium $ $ Opening balance 250,000 200,000 Rights issue (1,000,000 x 1/2 x 25c) 125,000 (1,000,000 x 1/2 x 75c) 375,000 Bonus issue (1,500,000 x 1/10 x 25c) 37,500 (1,500,000 x 1/10 x 25c) (37,500) Total 412,500 537,500

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6(INT) June 2004 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

Marks1 (a) (i) Sondaw

Income Statement for the year ended 31 May 2004 0·5

$000Revenue 5,876 0·5Cost of sales (W1) (3,072) 5·0

––––––Gross profit 2,804 0·5Distribution costs (W1) (492) 3·0Administrative expenses (W1) (763) 6·0

––––––Profit from operations 1,549 0·5Finance cost (30) 0·5

––––––Profit before tax 1,519 0·5Tax (250) 0·5

––––––Net profit for the period 1,269 0·5

–––––––––––––––––

Total 18·0–––––

(ii) SondawBalance sheet as at 31 May 2004 0·5

Assets $000Non-current assets

Property, plant and equipment (W2) 3,193 3·0

Current assetsInventory 800 0·5Trade and other receivables ($438 – $38 – $20 + $6) 386 2·5Cash 50 1,236 1·0

––––––Total assets 4,429

––––––––––––Equity and liabilitiesCapital and reserves$1 Ordinary shares 1,500 1·0Accumulated profits ($280 + $1,269) 1,549 1·0

––––––3,049

Non-current liabilities5% loan notes 600 0·5

Current liabilitiesTrade and other payables ($500 + $10 + $20) 530 3·5Taxation 250 780 0·5

–––––– ––––––Total equity and liabilities 4,429

–––––––––––––––––

Total 14–––––

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MarksWorkings Cost of Sales Distribution Costs Administrative

Expenses1 $000 $000 $000

Opening inventory 1,200General expenses (10:40:50) 60 240 300Heat and light (50:30:20) 45 27 18Marketing and advertising ($248 – $6) 242Wages ($490 + $10) (60:30:10) 300 150 50Purchases 2,200Discounts received (150)Closing inventory (800)Bad debt expense 38Allowance for bad and doubtful debts (($438 – $38) x 5%) 20Depreciation – buildings (50:20:30) 125 50 75Depreciation – motor vehicles 25Depreciation – plant and equipment 92Audit fee 20

–––––– –––– ––––3,072 492 763

–––––– –––– –––––––––– –––– ––––

2 Non current assets ($000) Total PropertyBuildings Vehicles Plant & Equip Plant & Equip

$ $ $ $Cost 5,000 160 700 5,860Depreciation b/f (2,000) (60) (240) (2,300)Current year’s depreciation:

Buildings $5000 x 5% (250) 1,(250)Motor vehicles ($160 – $60) x 25% (25) 1,1(25)Plant & equipment ($700 – $240) x 20% (92) 1,1(92)

–––––– –––– –––– ––––––2,750 75 368 3,193–––––– –––– –––– –––––––––––– –––– –––– ––––––

(b) The purpose of depreciation is to spread the cost of an asset, less its residual value, over its productive (economic) life. 1·0

When deciding the method of calculating depreciation the following factors are relevant:

Pattern of usage – If the main value from the asset is obtained during its earliest years then it might be 1·0appropriate to use reducing balance.

Life of the asset – The time period in which wear and tear, obsolescence or depletion takes place. 1·0–––––

Total 3·0––––––––––

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Marks2 Nobrie

Cash flow statement for the year ended 31 May 2004 0·5$000 $000

Cash flows from operating activitiesNet profit before tax 41,738 0·5Adjustments for:

Depreciation 5,862 0·5Investment income (146) 0·5Interest paid 1,177 0·5Profit on equipment disposal (1,540) 1·5

–––––––Operating profit before working capital changes 47,091

Increase in inventory (866) 1·5Increase in receivables (5,684) 1·5Decrease in payables (3,625) 1·5

–––––––Cash generated from operations 36,916

Interest received 146 0·5Interest paid (1,177) 0·5Tax paid (9,191) 2·0

–––––––Net cash from operating activities 26,694 1·0

Cash flows from investing activitiesPurchase of property, plant and equipment (28,048) 4·0Proceeds from sale of equipment 3,053 1·0

–––––––Net cash used in investing activities (24,995) 1·0

Cash flows from financing activitiesProceeds from issue of share capital 7,450 2·0Repayment of long term borrowing (6,244) 1·0

–––––––Net cash used in financing activities 1,206 0·5

–––––––Net increase in cash and cash equivalents 2,905 1·0Cash and cash equivalents at the beginning of period (4,749) 1·0

–––––––Cash and cash equivalents at end of period (1,844) 1·0

–––––––––––––– –––––Total 25·0

––––––––––Examiner’s noteIAS 7 allows interest paid to be an operating cash flow or a financing cash flow. Interest received can be an operating cash flowor an investing cash flow.

Workings1 Taxation

$000 $000Paid (Balancing figure) 9,191 Balance b/f 7,323Balance c/f 7,989 Income statement 9,857

––––––– –––––––17,180 17,180––––––– –––––––––––––– –––––––

2 $000Disposal of assets

Proceeds 3,053Less NBV (Balancing figure) (1,513)

––––––Profit on sale 1,540

––––––––––––

3 Non-current Asset NBV

$000 $000B/fwd 88,466 Depreciation 5,862Revaluation 8,272 Disposal NBV (W2) 1,513Additions (Balancing figure) 28,048 C/Fwd 117,411

–––––––– ––––––––124,786 124,786–––––––– –––––––––––––––– ––––––––

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Marks3 Partnership profit statement for the year ended 31 May 2004

3 months to 9 months to Total31 August 2003 31 May 2004

$000 $000 $000Unadjusted profit 200,000 600,000 800,000 1·0Bad debt written off (25,000 ) – (25,000) 1·0Loan interest (W1) – (18,000) (18,000) 1·0

–––––––– –––––––– ––––––––175,000 582,000 757,000–––––––– –––––––– –––––––––––––––– –––––––– ––––––––

Division of ProfitAngela 4/7 100,000 4/10 232,800 332,800 1·0Brenda 2/7 50,000 3/10 174,600 224,600 1·0Christine 1/7 25,000 – 25,000 0·5Hannah – 3/10 174,600 174,600 0·5

–––––––– –––––––– –––––––– ––––175,000 582,000 757,000 6·0–––––––– –––––––– –––––––– –––––––––––– –––––––– ––––––––

Capital accountsMarks Marks

Pre 31/8/03 Angela Brenda Christine Hannah Angela Brenda Christine Hannah$ $ $ $ $ $ $ $

G’dwill 2:1 467,667 233,333 – – 1·0 Balance b/f 500,000 260,000 330,000 –Loan a/c – – 480,000 – 0·5 G’will 4:2:1 400,000 200,000 100,000 – 1·5Balance c/d 633,333 326,667 – – F Prop 4:2:1 200,000 100,000 50,000 – 1·5

–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––1,100,000 560,000 480,000 – 1,100,000 560,000 480,000 ––––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– –––––––––––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––

Post 31/8/03G’dwill 4:3:3 280,000 210,000 – 210,000 1·5 Balances b/d 633,333 326,667 – –Bal c/f 820,000 350,000 – 250,000 Cash – capital – – – 250,000 0·5

Cash – g’dwill – – – 210,000 0·5G’dwill 466,667 233,333 – – 1·0

–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––1,100,000 560,000 – 460,000 1,100,000 560,000 – 460,000–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– –––––––––––––––––– –––––––– –––––––– –––––––– –––– –––––––––– –––––––– –––––––– –––––––– ––––

3·0 5·0–––– ––––

Current accountsMarks Marks

Pre 31/8/03 Angela Brenda Christine Hannah Angela Brenda Christine Hannah$ $ $ $ $ $ $ $

Drawings 20,000 110,000 35,000 – 1·5 Bal b/f 60,000 40,000 10,000 –Bal c/d 140,000 80,000 – – Profit to 31/8/03 100,000 50,000 25,000 – 1·5

–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––160,000 90,000 35,000 – 160,000 90,000 35,000 –

–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– –––––––––––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––

Post 31/8/03Drawings 40,000 40,000 – 30,000 1·5 Bal b/d 140,000 80,000 – –Bal c/f 332,800 214,600 – 144,600 Profit to 31/5/04 232,800 174,600 – 174,600 1·5

–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––372,800 254,600 – 174,600 372,800 254,600 – 174,600

–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– –––––––––––––––––– –––––––– –––––––– –––––––– –––– –––––––––– –––––––– –––––––– –––––––– ––––3·0 3·0–––– ––––

Working(W1) Interest on Christine’s loan

Closing capital $480,000Interest at 5% for 9/12 = $18,000

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4 (a) 2003 2004

Gross profit percentage Gross profit x 100 4,600 x 100 = 23·00% 4,950 x 100 = 19·04%–––––––––– ––––––– –––––––

Sales 20,000 26,000

Net profit percentage Net profit x 100 2,140 x 100 = 10·70% 2,180 x 100 = 8·38%––––––––––– ––––––– –––––––Sales revenue 20,000 26,000

Return on equity Net Profit x 100 2,140 x 100 = 19·24% 2,180 x 100 = 16·39%–––––––––– ––––––– –––––––

Equity 11,120 13,300

Inventory turnover Cost of goods sold 15,400 = 2·57 times 21,050 = 3·14 times–––––––––––––––– –––––––– –––––––

Inventory 6,000 6,700

Quick ratio Current assets – inventory 4,520 = 1·41 :1 7,700 = 1·83 :1––––––––––––––––––––– ––––––– –––––––

Current liabilities 3,200 4,200

Receivables collection period Receivables x 365 4,400 x 365 = 80·30 days 6,740 x 365 = 94·62 days––––––––– ––––––– –––––––

Sales 20,000 26,000

Marking Scheme1/2 mark for correctly stating the formula and 1/2 mark for each correct ratio

(b) Relevant comments could include:– It is difficult to judge the success of the expansion over such a short period of time.– The profitability ratios have deteriorated.– The reduction in the gross profit percentage could be due to difficult trading conditions or that the selling prices have

been lowered to generate sales.– The deterioration in the net profit percentage is partly due to the reduced gross profits.– The rate of inventory turnover has improved which might suggest that profitability in the future will improve.– The quick ratio has improved, this is partly due to the increase in cash which may indicate that not all the cash raised

from issuing the debentures has been invested.– The receivables collection period has increased which may indicate poor credit control, or longer credit terms being

offered to customers, or increased sales due to the success of the expansion.

Marking scheme1 mark for each relevant comment up to a maximum of 7 marks.

(c) Some of the factors Egriff should consider when deciding whether to raise finance by loan notes rather than issuing moreshares:

1 Loan notes pay a fixed level of interest. Therefore, the company will find budgeting for the cash flows straight-forward.

2 Loan note holders are non-current creditors of the company and therefore do not control the company, unlikeshareholders who own the company and will be able to vote on issues affecting the company.

3 If company profits fall then share dividends do not have to be paid. However, the interest on loan notes will still haveto be paid regardless of the level of profit.

4 Shareholders will often expect dividend payments to grow over time, therefore increasing the costs to the company.

5 If the company was to be wound up then loan note holders would rank higher than ordinary shareholders.

Marking scheme1 mark for each relevant comment up to a maximum of 4 marks.

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 7 JUNE 2004

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Pape

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The Association of Chartered Certified Accountants

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ALL FOUR questions are compulsory and MUST be attempted

1 You have been provided with the following trial balance as at 31 May 2004 for a limited liability company calledSondaw.

Dr Cr$000 $000

Bank 50Inventory at 1 June 2003 1,200General expenses 600Heating and lighting 90Marketing and advertising expenses 248Wages 490Buildings at cost 5,000Motor vehicles at cost 160Plant and equipment at cost 700Accumulated profits at 1 June 2003 280Trade receivables 438Purchases 2,200Loan note interest paid 305% Loan note 600Revenue 5,876Discounts received 150Trade payables 500$1 Ordinary Shares 1,500Accumulated depreciation at 1 June 2003

Buildings 2,000Motor vehicles 60Plant and equipment 240

––––––– –––––––11,206 11,206––––––– –––––––

The following notes are relevant:

1 Inventory at 31 May 2004 was valued at $800,000.2 Marketing and advertising expenses include $6,000 paid in advance for a marketing campaign which will begin

in June 2004. Marketing and advertising expenses should be allocated to administrative expenses.3 There are wages outstanding of $10,000 for the year ended 31 May 2004.4 A customer ceased trading owing the company $38,000; the debt is not expected to be recovered.5 An allowance for doubtful debts is to be established amounting to 5% of trade receivables.6 Depreciation is to be provided for as follows:

(i) buildings at 5% per annum on their original cost, allocated 50% to cost of sales, 20% to distribution costsand 30% to administrative expenses.

(ii) motor vehicles at 25% per annum of their written down value, allocated to distribution costs. (iii) plant and equipment at 20% per annum of their written down value, allocated to cost of sales.

7 No dividends have been paid or declared.8 Income tax of $250,000 is to be provided for the year.9 The audit fee is estimated to be $20,000.10 The expenses listed below should be apportioned as follows:

Cost of Distribution Administrative Sales Costs Expenses

General expenses 10% 40% 50%Heating and lighting 50% 30% 20%Wages and salaries 60% 30% 10%

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Required:

(a) Prepare the following financial statements for the year ended 31 May 2004 for Sondaw in accordance withIAS 1 Presentation of Financial Statements:

(i) An income statement; (18 marks)

(ii) A balance sheet. (14 marks)

You are advised to show workings where appropriate.

(b) Briefly explain the purpose of providing for depreciation and identify the factors to be taken into accountwhen deciding on which depreciation method to use. (3 marks)

(35 marks)

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2 You have been given the following information relating to a limited liability company called Nobrie.This company is preparing its financial statements for the year ended 31 May 2004.

NobrieIncome statement for the year ended 31 May 2004

$000Revenue 66,600Cost of sales (13,785)

–––––––Gross profit 52,815Distribution costs (7,530)Administrative expenses (2,516)

–––––––Profit from operations 42,769Investment income 146 Finance cost (1,177)

–––––––Profit before tax 41,738Tax (9,857)

–––––––Net profit for the period 31,881Accumulated profits brought forward at 1 June 2003 28,063

–––––––Accumulated profits carried forward at 31 May 2004 59,944

–––––––

NobrieBalance Sheets as at 31 May

2004 2003Assets $000 $000 $000 $000Non-current assetsCost 144,844 114,785Accumulated depreciation (27,433) (26,319)

–––––––– ––––––––117,411 88,466

Current AssetsInventory 24,931 24,065Trade receivables 18,922 13,238Cash 3,689 47,542 2,224 39,527

––––––– –––––––– ––––––– –––––––Total assets 164,953 127,993

–––––––– –––––––

Equity and liabilitiesCapital and reservesOrdinary share capital 27,000 23,331Share premium 14,569 10,788Revaluation reserve 15,395 7,123Accumulated profits 59,944 116,908 28,063 69,305

––––––– –––––––Non-current liabilities6% loan note 17,824 24,068

Current LiabilitiesBank overdraft 5,533 6,973Trade payables 16,699 20,324Taxation 7,989 30,221 7,323 34,620

––––––– –––––––– ––––––– –––––––Total equity and liabilities 164,953 127,993

–––––––– –––––––

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Additional information

(i) During the year ended 31 May 2004, the company sold a piece of equipment for $3,053,000, realising a profitof $1,540,000. There were no other disposals of non-current assets during the year.

(ii) Profit from operations is stated after charging depreciation of $5,862,000.

(iii) There were no amounts outstanding in respect of interest payable or receivable as at 31 May 2003 or 2004.

(iv) There were no dividends paid or declared during the year.

Required:

Prepare a cash flow statement for Nobrie for the year ended 31 May 2004 in accordance with IAS 7 Cash FlowStatements.

(25 marks)

3 Angela, Brenda and Christine are in a partnership and share profits and losses in the ratio 4:2:1. They prepare theiraccounts to 31 May each year. At 1 June 2003 their capital and current accounts showed the following balances:

Capital accounts Current accounts$ $

Angela 500,000 60,000 Brenda 260,000 40,000 Christine 330,000 10,000

On 31 August 2003 Christine decided to leave the partnership due to ill health. Hannah joined the partnership on 1 September 2003 and introduced $250,000 as capital and also paid $210,000 for a 30% share of the goodwill.Goodwill, which is not to be reported in the balance sheet, is agreed to be worth $700,000. After Hannah’s admissionto the partnership it was agreed the profits and losses would be shared as follows:

Angela 40%Brenda 30%Hannah 30%

Before calculating the amount Christine is entitled to when she leaves the partnership the following adjustments needto be taken into account:

(a) The net profit for the partnership for the year ended 31 May 2004 was $800,000 before allowing for items (b)and (c) below. It was agreed that the profit accrued evenly throughout the year.

(b) A bad debt of $25,000 relating to a sale made in June 2003 is to be written off for the year ended 31 May2004.

(c) Christine has decided to leave her final agreed capital balance in the partnership as a loan and receive interestat a rate of 5% per annum up to the year end. The loan interest was paid to her on 31 May 2004.

(d) The partnership’s freehold property is to be revalued upwards by $350,000 and it is agreed that the freeholdproperty will be carried at the revalued amount in the balance sheet.

(e) The partners’ drawings during the year were:

$Angela 60,000 ($20,000 before 31 August 2003 and the remainder afterwards)Brenda 50,000 ($10,000 before 31 August 2003 and the remainder afterwards)Christine 35,000 (All before 31 August 2003)Hannah 30,000 (All after 31 August 2003)

Required:

Prepare a statement showing the final profit for the year ended 31 May 2004 and the share attributable to eachpartner, together with the capital and current accounts for all four partners.

(20 marks)

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4 The financial statements of Egriff, a company limited by liability, for the years ended 31 May 2003 and 31 May 2004are summarised below.

Income statements for the years ended31 May 2003 31 May 2004

$000 $000 $000 $000Revenue 20,000 26,000Cost of sales (15,400) (21,050)

––––––– –––––––Gross profit 4,600 4,950

Expenses:Administrative (800) (900)Selling and distribution (1,550) (1,565)Depreciation (110) (200)Loan note interest – (105)

––––––– –––––––(2,460) (2,770)

––––––– –––––––Net profit 2,140 2,180

––––––– –––––––––––––– –––––––

Balance sheets as at31 May 2003 31 May 2004

$000 $000 $000 $000Non current assetsAt cost 4,600 5,600Accumulated depreciation (800) (1,000)

––––––– 3,800 ––––––– 4,600

Current assetsInventory 6,000 6,700Receivables 4,400 6,740Bank 120 960

––––––– 10,520 ––––––– 14,400––––––– –––––––14,320 19,000––––––– –––––––––––––– –––––––

Capital and reservesIssued share capital 8,000 8,000Accumulated profit 3,120 5,300

––––––– –––––––11,120 13,300

Non-current liabilities7% Loan notes – 1,500

Current liabilities 3,200 4,200––––––– –––––––14,320 19,000––––––– –––––––––––––– –––––––

Additional Information

During 2003 Egriff issued loan notes of $1,500,000 at 7% per annum to fund the expansion of the business. Theadditional cash was received on 1 June 2003.

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Required:

(a) Calculate the following ratios for Egriff for both years.

Gross profit percentageNet profit percentageReturn on equityInventory turnoverQuick ratioReceivables collection period

State the formulas used for calculating the ratios. (9 marks)

(b) Comment on the success of the business expansion as indicated by the ratios you have calculated in part(a). (7 marks)

(c) Briefly explain the factors Egriff should consider in deciding whether to raise finance by issuing loan notesrather than issuing more shares. (4 marks)

(20 marks)

End of Question Paper

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Answers

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11

ACCA Certified Accounting Technician Examination – Paper T6(INT) December 2004 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

1 (a) Guyridge Marks Workings ($)Income statement for the year ended 31 October 2004 0·5

$ $ $Sales revenue (W1) 395,000 3·0Opening inventory 25,000 0·5Purchases (W2) 195,000 2·0Carriage inwards 4,500 0·5

––––––––224,500

Less closing inventory (37,000) 0·5––––––––

Cost of goods sold (187,500) 0·5––––––––

Gross profit 207,500 0·5ExpensesVehicle running expenses 13,500 0·5Insurance 8,000 1·5 (5,000 + 4,000 – 1,000)

Heating and lighting 6,250 1·5 (7,000 – 3,000 + 2,250)

Telephone 3,500 0·5Advertising 4,250 1·5 (2,250 + 2,000)Rent and rates 14,000 1·5 (15,000 – 1,000)Office supplies 1,250 0·5Depreciation for: Vehicles 6,000 1·0

Equipment 12,000 18,000 1·0––––––

Bad debts 15,000 0·5Discounts allowed 5,000 0·5

––––––––(88,750)

––––––––Net profit before appropriation 118,750 0·5Interest on drawings: Kevin 2,000 0·5

David 1,000 3,000 0·5–––––––– ––––––––

121,750Interest on capital: Kevin 8,000 0·5

David 5,000 (13,000) 0·5________ ________

108,750––––––––––––––––

Share of Profit: Kevin 2/3

72,500 1·0David 1/

336,250 1·0

––––––––108,750–––––––– –––––––––––

23––––––

(b) Current AccountsKevin

$ $Drawings 60,000 Balance b/f 23,000 1·0Interest on drawings 2,000 Interest on capital 8,000 1·0Balance c/f 41,500 Share of profit 72,500 0·5

–––––––– ––––––––103,500 103,500–––––––– –––––––––––––––– ––––––––

David$ $

Drawings 30,000 Balance b/f 21,000 1·0Interest on drawings 1,000 Interest on capital 5,000 1·0Balance c/f 31,250 Share of profit 36,250 0·5

––––––– –––––––62,250 62,250––––––– –––––––––––––– ––––––– –––

5·0––––––

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12

Marks(c) Guyridge

Balance Sheet as at 31 October 2004 0·5Cost Provision for Net Book

Depreciation Value$ $ $

Non-current assetsVehicles 32,000 14,000 18,000 1·0Equipment 60,000 24,000 36,000 1·0

––––––– ––––––– ––––––––92,000 38,000 54,000 1·0––––––– –––––––––––––– –––––––

Current AssetsInventory 37,000 0·5Trade receivables (W1) 55,000 0·5Prepayments 1,000 1·0Bank (W3) 68,000 161,000 3·0

––––––– ––––––––215,000––––––––––––––––

Partners’ capital accountsKevin 80,000 0·5David 50,000 130,000 0·5

–––––––Partners’ current accountsKevin 41,500 0·5David 31,250 72,750 0·5

––––––– ––––––––202,750

Current liabilitiesTrade payables (W2) 10,000 0·5Accruals 2,250 12,250 1·0

––––––– ––––––––215,000–––––––– –––––––––––

12––––––

AllocationWorkings of marksW1 Trade Receivables Control Account

$ $Receivables b/f 80,000 Bad debts 15,000 0·5 + 0·5Sales (bal. fig) 395,000 Settlement discounts 5,000 0·5 + 0·5

Bank 400,000 0·5Receivables c/f 55,000 0·5

–––––––– ––––––––475,000 475,000–––––––– –––––––––––––––– ––––––––

W2 Trade Payables Control Account$ $

Bank 200,000 Trade payables b/f 15,000 0·5 + 0·5Payables c/f 10,000 Purchases (bal. fig) 195,000 0·5 + 0·5

–––––––– ––––––––210,000 210,000–––––––– –––––––––––––––– ––––––––

W3 Bank$ $

Balance b/f 10,000 Trade payables control 200,000 0·5 + 0·5Receivables control 400,000 Drawings: Kevin 60,000) 0·5 + 0·5

David 30,000)Carriage inwards 4,500)Vehicle expenses 13,500)Insurance 5,000)Heating and lighting 7,000) 1Telephone 3,500)Advertising 2,250)Rent and rates 15,000)Office supplies 1,250)Balance c/f 68,000

–––––––– ––––––––410,000 410,000–––––––– –––––––––––––––– ––––––––

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Marks2 (a) Goodwill on acquisition of Bury $000 $000

Cost of investment 24,000 0·5Share capital ($30,000 x 70%) 21,000 0·5General reserve ($500,000 x 70%) 350 1·0Accumulated profits ($1,500,000 x 70%) 1,050 (22,400) 1·0

––––––– –––––––1,600

–––––––––––––––––

Total 3––––––

(i) Black 0·5Consolidated income statement for the year ended 31 October 2004

$000 Workings ($000)Sales revenue 323,200 2·0 245,000 + 95,000 – 16,800

Cost of sales (176,640) 2·5 140,000 + 52,000 – 16,800 + 1,440*–––––––––

Gross Profit 146,560Distribution costs (22,000) 0·5Administrative expenses (68,000) 0·5Goodwill impairment (160) 1·0 (960 – 800)

–––––––––Profit before tax 56,400Income tax expense (18,250) 0·5

–––––––––Profit after tax 38,150Minority interest (4,500) 2·0 30% x 15,000

–––––––––Net profit for the period 33,650 0·5

––––––––– –––––––––––––Total 10·0

––––––––

(ii) Black MarksConsolidated Balance Sheet as at 31 October 2004 0·5

Assets $000 $000Non-current assetsIntangible – goodwill 800 2·0Property, plant and equipment 150,000 0·5 (110,000 + 40,000)

––––––––150,800

Current assetsInventory, at cost 15,810 1·5 (13,360 + 3,890 – 1,440*)Trade receivables 12,420 2·5 (14,640 + 6,280 – 7,000** – 1,500***)Bank 6,070 34,300 0·5 (3,500 + 2,570)

–––––––– ––––––––Total assets 185,100

––––––––––––––––Equity and liabilitiesCapital and Reserves$1 Ordinary shares 100,000 0·5General reserves 9,550 1·5 (9,200 + ((1,000 – 500) x 70%)Accumulated profits (W1) 30,506 3·0Minority interest 12,084 1·0 (30% x 40,280)

––––––––152,140

Current liabilitiesTrade payables 9,960 2·0 (9,000 + 2,460 – 1,500***)Dividends payable to Minority

Interests 3,000 1·0 (10,000 – 7,000)Dividends 20,000 32,960 0·5

–––––––– ––––––––Total equity and liabilities 185,100

–––––––– ––––––––––––17·0––––––––

Notes:* Exclusion of unrealised profit held in inventory ($1,440,000)** Exclusion of the intragroup dividends from trade receivables ($7,000,000)*** Intracompany indebtedness

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Working Paper

W1 Accumulated profits as at 31 October 2004

$000 $000Black balance sheet 27,300Less unrealised profit (1,440)Bury:Retained profits 9,280Pre-acquisition reserves (1,500)

–––––––7,780

Group share (70% x $7,780,000) 5,446Less cumulative goodwill impairment as at 31 October 2004 (800) (1600 – (960 – 160))

–––––––30,506––––––––––––––

Marks

3 (a) Dividend per shareDividend for the year 10,000

=20 cents per share 1·5––––––––––––––––––––––– ––––––––Number of shares in issue 50,000

Dividend coverProfit after tax for ord sh’holders 11,150

=1·1 times 1·5–––––––––––––––––––––––––––– –––––––Dividend 10,000

Earnings per shareNet Profit after tax 11,150

=22 cents 1·5––––––––––––––––––––––– ––––––––No. of ordinary shares 50,000

Price earnings ratioPrice per share 150

=6·7 1·5–––––––––––––––––––– –––––Earnings per share 22·3

Debt/equity ratioDebt 1,000

=3% 1·5–––––––– –––––––Equity 32,520

Interest coverProfit before interest and taxation 12,715

=254 times 1·5––––––––––––––––––––––––––––– –––––––Interest 50

____Total marks 9

––––––––

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(b) (i) & (ii)

Notes on Tressven’s ratios

Ratio Tressven Hilladay Comment on the ratio calculated

Dividend per share 20c 10c The level of dividend per share available to Tressvenshareholders is double that available to Hilladay. Thismay suggest a generous level of dividend which willplease shareholders in the short term.

Dividend cover 1·1 5 The level of dividend does not appear to be justified bythe available profit. It also suggests that this level ofdividend may not be sustainable in the future.

Earnings per share 22c 20c The EPS for Tressven is similar to Hilladay’s EPS.However, Hilladay has retained half its earnings forfuture investment. This is not the case for Tressvenand would suggest profit levels may stagnate.

Price earnings ratio 6·7 13·4 A comparison of the PE ratio suggests that investorsare keener to invest in Hilladay than Tressven. This maybe because of concerns regarding the future profitability ofTressven.

Debt/equity ratio 3% 15% The gearing ratio for Tressven seems low in comparisonwith Hilladay. It may be that Tressven is not borrowingsufficiently to invest in the future of the company.Alternatively Hilladay may have high borrowings.

Interest cover 254 100 Tressven can comfortably afford to meet its interestcharges, so can Hilladay. This suggests that Tressvencould afford to increase its borrowing to invest.

There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the informationavailable. Other comments, if appropriate, will also be given credit.1 mark for making a relevant comment about each ratio up to 6 marks.

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4 (a) The main purposes of the ‘Framework for the Preparation and Presentation of Financial Statements’ are:

(i) To provide a framework for the future development of international accounting standards and the review of existing ones.

(ii) To inform interested parties (e.g. national standard setting bodies) of the approach taken by the IASB in formulatingstandards.

(iii) To provide guidance to practitioners when applying international accounting standards.

(iv) To provide a basis for reducing the number of alternative accounting treatments permitted by international accountingstandards and thereby promoting harmonisation of regulations, accounting standards and procedures.

(v) To assist auditors in forming an opinion as to whether financial statements conform with international accountingstandards.

(vi) To assist the users of financial statements when interpreting the information.

(1 mark for each reason up to a maximum of 5 marks)

(b) User Group Information needs

Current (and future) investors They need to assess the financial performance of the organisation to understandthe level of risk and the returns provided by their investment.Key information requirements: ability to generate cash, level of profitability, anddividends.

Lenders They need information on the ability of the organisation to repay loans and anyinterest.Key information: profitability, ability to manage working capital (liquidity), currentlevel of borrowing, value of assets.

Customers Customers that are dependent on the organisation for significant levels ofbusiness or are considering placing long term contracts will need to knowwhether it will stay in business or not.Key information requirements: ability to generate cash, and profitability.

Suppliers (and trade creditors) They will want to know whether the organisation will stay in business andwhether they will be paid.Key information requirements: ability to generate cash, and profitability.

Marking scheme1/

2mark for identifying the user group and up to 2 marks for stating their information requirements. Maximum of 10 marks.

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 6 DECEMBER 2004

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

Pape

r T6

(IN

T)

The Association of Chartered Certified Accountants

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ALL FOUR questions are compulsory and MUST be attempted

1 Kevin and David are in partnership together and trade under the name Guyridge. They have just completed theirsecond year of trading and have asked for your help in preparing their final accounts for the year ended 31 October2004.

The business has expanded rapidly. Consequently, the partners have not had time to maintain the accounting recordsproperly. However, they are able to provide you with the following information.

At 1 November 2003 the business had the following balances:Dr Cr$ $

Capital accounts: Kevin 80,000David 50,000

Current accounts: Kevin 23,000David 21,000

Vehicles at cost 32,000Equipment at cost 60,000Provisions for depreciation

Vehicles 8,000Equipment 12,000

Prepayments:Advertising 2,000Insurance 4,000

Accruals:Heating and lighting 3,000Rent and rates 1,000

Cash at bank 10,000Inventory 25,000Trade payables 15,000Trade receivables 80,000

–––––––– ––––––––213,000 213,000–––––––– –––––––––––––––– ––––––––

The business also made payments during the year for the following:$

Carriage inwards 4,500Vehicle running expenses 13,500Insurance 5,000Heating and lighting 7,000Telephone 3,500Advertising 2,250Rent and rates 15,000Office supplies 1,250Suppliers 200,000

––––––––252,000––––––––––––––––

Additional Information– Inventory as at 31 October 2004 was valued at $37,000.– The business owed $10,000 to suppliers as at 31 October 2004.– Insurance of $1,000 was paid in advance at 31 October 2004.– During the year bad debts of $15,000 were written off.– Interest on capital account balances is to be allowed at 10%.– Receipts from customers were $400,000 and there was $55,000 outstanding from customers at 31 October 2004.– Settlement discounts of $5,000 were given to customers.– Invoices totalling $2,250 relating to heating and lighting were unpaid at 31 October 2004.– Depreciation on vehicles is to be provided at 25% of their written down value.

2

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– Depreciation on equipment is to be provided at 20% on it’s original cost.– Cash drawings during the year were: Kevin $60,000; David $30,000.– Interest on drawings is to be charged as follows: Kevin $2,000; David $1,000.– Kevin and David have an agreement to share the profits in the ratio 2:1.

Required

Prepare the following statements for the partnership:

(a) the income statement and appropriation account for the year ended 31 October 2004; (23 marks)

(b) the partners’ current accounts for the year ended 31 October 2004; and (5 marks)

(c) the balance sheet as at 31 October 2004. (12 marks)

(You are advised to show any necessary supporting workings)

(40 marks)

3 [P.T.O.

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2 The following are the financial statements relating to Black, a limited liability company, and its subsidiary companyBury.

Income statements for the year ended 31 October 2004Black Bury$000 $000

Sales revenue 245,000 95,000Cost of sales (140,000) (52,000)

––––––––– –––––––––Gross profit 105,000 43,000Distribution costs (12,000) (10,000)Administrative expenses (55,000) (13,000)

––––––––– –––––––––Profit from operations 38,000 20,000Dividend income from Bury 7,000 –

––––––––– –––––––––Profit before tax 45,000 20,000Tax (13,250) (5,000)

––––––––– –––––––––Net profit for the period 31,750 15,000

––––––––– –––––––––––––––––– –––––––––

Balance Sheets as at 31 October 2004Black Bury

$000 $000 $000 $000AssetsNon-current assetsProperty, plant and equipment 110,000 40,000Investments:

21,000,000 $1 ordinary shares in Bury at cost 24,000 ––––––––– ––––––––134,000 40,000

Current assetsInventory, at cost 13,360 3,890Trade receivables and dividend receivable 14,640 6,280Bank 3,500 31,500 2,570 12,740

–––––––– –––––––– –––––––– ––––––––Total assets 165,500 52,740

–––––––– ––––––––––––––– –––––––

Equity and liabilitiesCapital and Reserves$1 Ordinary shares 100,000 30,000General reserve 9,200 1,000Accumulated profits 27,300 9,280

–––––––– ––––––––136,500 40,280

Current liabilitiesPayables 9,000 2,460Dividend 20,000 29,000 10,000 12,460

–––––––– –––––––– –––––––– ––––––––Total equity and liabilities 165,500 52,740

–––––––– –––––––––––––––– ––––––––

4

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The following information is also available:

(a) Black purchased its $1 ordinary shares in Bury on 1 November 1999. At that date the balance on Bury’s generalreserve was $0·5 million and the balance of accumulated profits was $1·5 million.

(b) At 1 November 2003 the goodwill arising from the acquisition of Bury was valued at $960,000. Black’simpairment review of this goodwill at 31 October 2004 valued it at $800,000.

(c) During the year ended 31 October 2004 Black sold goods which originally cost $12 million to Bury. Blackinvoiced Bury at cost plus 40%. Bury still has 30% of these goods in inventory at 31 October 2004.

(d) Bury owed Black $1·5 million at 31 October 2004 for some of the goods Black supplied during the year.

Required:

(a) Calculate the goodwill arising on the acquisition of Bury. (3 marks)

(b) Prepare the following financial statements for Black:

(i) the consolidated income statement for the year ended 31 October 2004; (10 marks)

(ii) the consolidated balance sheet as at 31 October 2004. (17 marks)

Disclosure notes are not required.

(30 marks)

5 [P.T.O.

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3 Nicola is thinking of investing in a limited liability company called Tressven. She has asked for your help to calculatesome of the ratios she needs to decide whether or not to invest. She has given you the summarised financialstatements of Tressven which are shown below:

TressvenIncome statement for the year ended 31 October 2004

$000Sales revenue 23,420Cost of sales (8,245)

––––––––Gross profit 15,175Expenses (2,460)

––––––––Profit from operations 12,715Finance cost (50)

––––––––Profit before tax 12,665Income tax expense (1,515)

––––––––Net profit for the period 11,150

––––––––––––––––

TressvenBalance sheet as at 31 October 2004

$000 $000AssetsNon-current assets 31,000

Current assetsInventory 1,450Trade receivables 2,500Cash 50 4,000

–––––– –––––––Total assets 35,000

––––––––––––––

Equity and liabilitiesCapital and Reserves$0·50 Ordinary Shares 25,000Reserves 7,520

–––––––32,520

Current liabilitiesTrade payables 860Tax 620 1,480

––––––Loan notes 1,000

–––––––Total equity and liabilities 35,000

––––––––––––––

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Additional information

(i) During the year Tressven paid dividends of $10 million.

(ii) The market share price for Tressven is $1·50.

(iii) Tressven’s main competitor is a company called Hilladay which has the following ratios:

Dividend per share 10 centsDividend cover 5 timesEarnings per share (EPS) 20 centsPrice earnings ratio 13·4Debt/equity ratio 15%Interest cover 100 times

Required:

(a) Calculate the following ratios for Tressven:

(i) Dividend per share;(ii) Dividend cover;(iii) Earnings per share (EPS);(iv) Price earnings ratio (PE ratio);(v) Debt/equity ratio;(vi) Interest cover.

Show all workings (9 marks)

(b) Prepare notes for Nicola that comment on the ratios you have calculated. Use the ratios for Hilladay as acomparator. (6 marks)

(15 marks)

4 Required:

(a) Explain the main purposes of the International Accounting Standards Board’s ‘Framework for the Preparationand Presentation of Financial Statements’. (5 marks)

(b) Identify any four user groups of financial statements and explain what information they are likely to wantfrom them. (10 marks)

(15 marks)

End of Question Paper

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6(INT) June 2005 Answers andDrafting Financial Statements (International Stream) Marking Scheme

Marks Workings1 (a) (i) Adnett $000

Income statement for the year ended 31 May 2005 1·0

$000Revenue 3,485 1·0 (3,500 – 15)Cost of sales (W1) (2,715) 5·0

––––––Gross profit 770Distribution costs (W1) (153) 1·5Administrative expenses (W1) (331) 4·5

––––––Profit from operations 286Finance cost (58) 0·5 (580 x 10%)

––––––Profit before tax 228Tax (70) 0·5

––––––Net profit for the period 158 1·0

–––––––––––– –––––15·0––––––––––

(ii) AdnettBalance sheet as at 31 May 2005 1

$000 $000Assets Non-current assets (W2)Property, plant and equipment 1,773 4Goodwill 68 1·0

––––––1,841

Current assetsInventory 560 0·5Trade receivables 660 1·0 (700 – 40)Bank 147 1,367 0·5

–––––– ––––––Total assets 3,208

––––––––––––

Equity and liabilitiesCapital and reserves$1 Ordinary shares (W3) 1,080 1·5Share premium account (W3) 40 1·5General reserve 70 1·0 (35 + 35)Retained earnings 238 2·0 (115 + 158 – 35)

––––––1,428

Non-current liabilities10% Loan notes 580 0·5

Current liabilitiesTrade payables 1,030 0·5Income tax 70 0·5Wages accrual 42 1·0Loan notes interest 58 1,200 0·5

–––––– ––––––Total equity and liabilities 3,208

–––––––––––– –––––17·0––––––––––

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Workings1 Cost of Distribution Administrative

Sales Cost Expenses$000 $000 $000

Opening inventory 515Discounts allowed 70Discounts received (80)Heating and lighting (40:20:40) 108 54 108Administrative expenses 60Wages and salaries ($250 + $42) (50:25:25) 146 73 73Purchases ($2,170 + $35 – $17) (11/2 marks) 2,188Carriage inwards 105Closing inventory (1/2 mark) (560)Increase in allowance for doubtful debts 10Goodwill impairment 17Depreciation – buildings (25:50:25) 13 26 13Depreciation – plant 200Director’s remuneration 60

–––––– –––– ––––2,715 153 331

–––––– –––– –––––––––– –––– ––––(5 marks) (1·5 marks) (4·5 marks)

2 Non-current assets TotalProperty, Plant

Goodwill Land Buildings Plant & Equipment$000 $000 $000 $000 $000

Cost 85 345 1,040 1,200 2,585Depreciation b/f – – (160) (400) (560)Current year’s depreciation/amortisation:

Goodwill write-down (17)Buildings $1,040 x 5% (52) (52)Plant ($1,200 – $400) x 25% (200) (200)

––– –––– –––– –––– ––––––68 345 828 600 1,773

––– –––– –––– –––– ––––––––– –––– –––– –––– ––––––

3 Share Capital ReconciliationShare Capital Share Premium

$000 $000Opening balance 800 200Issued on purchase of business 100 20

––––– –––––Shares ranking for dividend 900 220Bonus issue 900 x 1/5 180 (180)

––––– –––––Closing balance 1,080 40

––––– –––––––––– –––––

(b) The accounting treatment for goodwill as required by IFRS 3

At the date of acquisition the acquirer recognises goodwill as an intangible asset. On an ongoing basis goodwill is measuredat cost and is assessed for impairment in accordance with IAS 36 at least annually. When a recoverable amount write-downis required that write-down is taken through the income statement in the period in which it is identified.

3 marks

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Marks2 (a) Prepared in accordance with IAS7

SnowdropCash flow statement for the year ended 31 May 2005 1

$’000s $’000sCash flows from operating activitiesNet profit before tax 1,032 1Adjustments for:

Depreciation 700 1Loss on sale of tangible non-current assets 20 1Interest 10 0·5

––––––Operating profit before working capital changes 1,762

Increase in inventory (80) 1Increase in receivables (130) 1Increase in payables 85 1

––––––Cash generated from operations 1,637

Interest paid (10) 0·5Tax paid (145) 2Dividends paid (270) 1

––––––Net cash from operating activities 1,212

Cash flow from investing activitiesPurchase of non-current assets (2,800) 2·5Receipts from sales of tangible non-current assets 180 1

Cash flows from financing activitiesProceeds from issue of share capital 1,280 1Repayment of long term borrowing (100) 1

––––––1,180 1

––––––Net increase/(decrease) in cash and cash equivalents (228) 1Cash and cash equivalents at the beginning of period 170 0·5

––––––Cash and cash equivalents at end of period (58) 1

––––––––––––

Note–––––

Dividends paid and interest paid may be shown in either operating activities or financing activities. 20––––––––––

WorkingsNon-current assets

$000 $000Balance b/f 2,700 Depreciation 700New non-current assets (bal) 2,800 Disposals 200

Balance c/f 4,600–––––– –––––––5,500 5,500

–––––– ––––––––––––– –––––––

Tax$000 $000

Tax paid (balancing figure) 145 Balance b/f 145Balance c/f 180 Income statement 180

–––––– –––––––325 325

–––––– ––––––––––––– –––––––

(b) Comment on the financial position of Snowdrop as shown by the cash flow statement

There has been a net outflow of cash $228,000 which has left the company with an overdraft of $58,000.There was significant expenditure on non-current assets of $2,800,000 during the year. This should help improveoperational efficiency and future profitability.Additional ordinary shares were issued which resulted in a cash inflow of $1,280,000. This will result in future cash outflows in the form of dividends.Long term loans of $100,000 were repaid which will reduce interest payments in future.There has been an increase in receivables of $130,000 which may mean customers are taking longer to pay andconsequently having an adverse impact on cash flows.

1·5 marks for each relevant comment which is adequately explained up to a maximum of 6 marks.

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(c) Briefly state some of the ways in which a company could manipulate the year end cash position.

(i) Offering short term incentives to customers to increase sales.(ii) Reducing the selling price to increase sales.(iii) Cutting expenses.(iv) Disposing of assets.(v) Delaying payments to credit suppliers.(vi) Encouraging customers to pay early by offering discounts. (vii) Resourcing effective debt collection procedures.

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

Marks3 (a) (i) Capital accounts immediately before sole traders merge

A. Little’s Capital Account$000 $000

Balance c/f 205 Balance b/f 160Revaluation 10Goodwill 35

–––– ––––205 205–––– –––––––– ––––

2

B. Sutton’s Capital Account$000 $000

Revaluation (70 – 55) 15 Balance b/f 79 2Balance c/f 89 Goodwill 25

–––– ––––104 104–––– –––––––– ––––

(ii) Little Sutton’s Capital AccountsA. Little B. Sutton A. Little B. Sutton$000 $000 $000 $000

Goodwill w/off (2:1) 40 20 Transfer: Sole traders 205 89 3Balances c/f 165 69

–––– ––– –––– –––205 89 205 89–––– ––– –––– ––––––– ––– –––– –––

(iii) Little SuttonBalance sheet as at 1 June 2005

$000 $000AssetsNon-current assetsFreehold property 120 0·5Plant and equipment 80 0·5

––––200

Current assetsInventory 27 0·5Trade receivables 18 0·5Bank and cash 23 68 0·5

––– ––––Total assets 268

––––––––

Capital and liabilitiesCapital AccountsA. Little 165 0·5B. Sutton 69 0·5

––––234

Current liabilitiesTrade payables 34 0·5

––––Total capital and liabilities 268

–––––––– –––––4

––––––––––

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(b) Briefly state two advantages and two disadvantages of A Little and B Sutton becoming partners rather than continuing assole traders.

Advantages– Risks are spread between the partners– They may be able to specialise in a particular activity within the business.– They may find it easier to raise finance for the business.– They can pool their network of contactsDisadvantages– They may find working together a problem.– Their individual freedom for decision making might be limited.– They now have to share any profits.

1 mark for each advantage or disadvantage up to a maximum of 4 marks.

Marks4 (a) (i) Return on capital employed* Net Profit before Interest & tax x 100 25 x 100 =13·9% 1·5

–––––––––––––––––––––––––– ––––Capital employed 180

(ii) Gross profit percentage Gross Profit x 100 60 x 100 =37·5% 1·5––––––––––– ––––

Revenue 160

(iii) Net profit percentage* Net Profit before interest and tax x 100 25 x 100 =15·6% 1·5–––––––––––––––––––––––––––– ––––

Revenue 160

(iv) Quick/Acid test ratio Current Assets – Inventory :1 75 – 45 :1 = 0·67 :1 1·5–––––––––––––––––––––– ––––––

Current liabilities 45

(v) Receivables collection period Receivables x 365 25 x 365 = 57 days 1·5––––––––––– ––––

Revenue 160

(vi) Earnings per share Profits on ordinary activities after tax 10 = 10 cents 1·5––––––––––––––––––––––––––––––– ––––

No. of ordinary shares in issue 100

* Alternative definitions are also acceptable––––9·0––––––––

(b) Brief Report

To: From: A CAT Student

Date June 2005

Subject: Financial Appraisal of F. Raser Using Accounting Ratios

Introduction

The purpose of this report is to analyse the financial performance of F. Raser over the last three years using accounting ratios.The report specifically comments on the following ratios:

– Return on capital employed;– Gross profit percentage;– Net profit percentage;– Quick/acid test ratio;– Receivables collection period; and– Earnings per share

The report also highlights what other information would be useful to help interpret the ratios.

Return on capital employed

The return on capital employed has declined over the last three years from 16·2% to 13·9% and is now well below theindustry average (16·2%). This should be a cause for concern to the board of directors because if investors can obtain ahigher return elsewhere then they may withdraw their investment. Alternatively they may seek to change the managementboard. It would be helpful to have more information on the market in which F. Raser operates e.g. is the market growing ordeclining, are there many buyers and sellers or just a few.

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Gross profit percentage

The gross profit percentage has risen over the period from 30·4% to 37·5%. Clearly the company has either

(i) increased the selling price of its goods, e.g. perhaps it is able to sell at a premium because of perceptions regarding thequality of the goods sold.

(ii) reduced the cost of its supplies. Possibly changing suppliers or obtaining greater discounts as sales volume hasincreased.

It would be useful to know what the company is selling and the volume of sales analysed by product and year.

Net profit percentage

The net profit percentage has declined over the period from 19·3% to 15·6% and is significantly below the industry averageof 17·3%. This is worrying considering the increase in the gross profit percentage over the same period. The decline in thenet profit percentage suggests that the costs may not be tightly controlled within the company. More detailed information onexpenditure during the period would be helpful in identifying the reasons for the decline in profitability.

Quick (or acid test) ratio

The quick ratio has also declined significantly during the period from 1·5 to 0·67 suggesting the company may beexperiencing liquidity problems. This view is also supported when the ratio is compared to the industry average which is overdouble that of F. Raser. The level of inventory may be a concern as it is tying up cash. More information on the type ofinventory and the level of inventory turnover would be useful.

Receivables collection period

The time taken to collect debts has increased over the period from 32 days to 57 days. This seems very high when comparedto the industry average debt collection period of just 35 days. The ratio suggests that there is little control over debt collection.In addition, the lengthening of the collection period means it is more likely that some debts will not be paid by customers.The poor control over debt collection will be a factor contributing to the adverse liquidity situation of the company.

Earnings per share

The earnings per share deteriorated over the period from 18c per share to 10c per share. This level of EPS is also significantlybelow the industry average and it is likely to discourage potential investors from investing in the company and may not besufficient to keep existing shareholders.

Conclusion

Although the company has managed to increase its gross profit over the period, this has not resulted in a similar increase innet profit. In summary the ratios indicate poor internal control of costs and poor management of working capital. The returnon capital employed and the EPS ratios are unlikely to be sufficiently attractive to potential investors or to existingshareholders.

Marking scheme

1 mark for each relevant comment up to a maximum of 10 marks. 1 mark for report format.

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 6 JUNE 2005

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

The Association of Chartered Certified Accountants

Pape

r T6

(IN

T)

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ALL FOUR questions are compulsory and MUST be attempted

1 The trial balance of Adnett, a limited liability company, at 31 May 2005 was as follows:

Dr Cr$000 $000

Revenue 3,500Discounts received 80Discounts allowed 70Bank balance 147Buildings at cost 1,040Buildings, accumulated depreciation, 1 June 2004 160Plant at cost 1,200Plant, accumulated depreciation, 1 June 2004 400Land at cost 345Purchases 2,170Returns inwards 15Returns outwards 17Heating and lighting 270Administrative expenses 60Trade payables 1,030Trade receivables 700Carriage inwards 105Wages and salaries 25010% Loan notes 580General reserve 35Allowance for doubtful debts, at 1 June 2004 30Director’s remuneration 60Retained earnings at 1 June 2004 115$1 Ordinary shares 800Inventory at 1 June 2004 515Share premium account 200

–––––– ––––––6,947 6,947

–––––– –––––––––––– ––––––

Additional information as at 31 May 2005

(i) Closing inventory has been counted and is valued at $560,000.(ii) There are wages and salaries to be paid of $42,000.(iii) Loan note interest has not been paid during the year.(iv) The allowance for doubtful debts is to be increased to $40,000.(v) Plant is depreciated at 25% per annum using the reducing balance method. The entire charge is to be allocated

to cost of sales.(vi) Buildings are depreciated at 5% per annum on their original cost, allocated 25% to cost of sales, 50% to

distribution costs and 25% to administrative expenses.(vii) On 1 August 2004 Adnett purchased and absorbed another business as a going concern. Adnett paid $85,000

for goodwill and $35,000 for the business’ inventory. The purchase was paid for by the issue of 100,000ordinary shares. This transaction has not yet been recorded in the books of Adnett. At 31 May 2005 the fairvalue of the goodwill was $68,000.

(viii) During May 2005 a bonus (or scrip) issue of one for five was made to ordinary shareholders. This has not beenentered into the books. The share premium account is to be used for this purpose.

(ix) No dividends have been paid or declared.(x) The directors have agreed a transfer of $35,000 to the general reserve from profits for the period.(xi) Tax has been calculated as $70,000 for the year.

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(xii) The expenses listed below should be apportioned as indicated:

Cost of Distribution AdministrativeSales Costs Expenses

Discounts allowed and received – – 100%Heating and lighting 40% 20% 40%Wages and salaries 50% 25% 25%Goodwill impairment – – 100%

Required:

(a) Prepare, for external use, the following financial statements for Adnett in accordance with IAS 1 Presentationof Financial Statements:

(i) the income statement for the year ended 31 May 2005; and (15 marks)

(ii) the balance sheet as at 31 May 2005 (17 marks)

(Notes to the financial statements are not required)

(b) Briefly explain the accounting treatment for purchased goodwill. (3 marks)

(35 marks)

3 [P.T.O.

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2 The following information has been extracted from the draft financial statements of Snowdrop, a limited liabilitycompany.

SnowdropBalance Sheets as at 31 May

2005 2004$000 $000 $000 $000

AssetsNon-current assets 4,600 2,700

Current assetsInventory 580 500Trade receivables 360 230Bank 0 940 170 900

–––– ––––––– –––– –––––––Total assets 5,540 3,600

––––––– –––––––––––––– –––––––

Equity and liabilitiesCapital and reserves

Ordinary share capital 3,500 2,370Share premium 300 150Retained earnings 1,052 470

––––––– –––––––4,852 2,990

Non-current liabilities10% Loan note (redeemable 31 May 2005) 0 100

Current liabilitiesTrade payables 450 365Taxation 180 145Bank overdraft 58 688 0 510

–––– ––––––– –––– –––––––Total equity and liabilities 5,540 3,600

––––––– –––––––––––––– –––––––

Additional Information(i) The income statement for the year ended 31 May 2005 shows the following:

$000Operating profit 1,042Interest payable (10)

––––––Profit before taxation 1,032Taxation (180)

––––––Profit for financial year 852

––––––

(ii) During the year dividends paid were $270,000.

(iii) Profit before taxation had been arrived at after charging $700,000 for depreciation on non-current assets.

(iv) During the year non-current assets with a net book value of $200,000 were sold for $180,000.

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Required:

(a) Prepare a cash flow statement for Snowdrop for the year ended 31 May 2005 in accordance with IAS 7‘Cash Flow Statements’, using the indirect method. (20 marks)

(b) Comment on the financial position of Snowdrop as shown by the cash flow statement you have prepared.(6 marks)

(c) Briefly state some of the ways in which companies could manipulate their year end cash position.(4 marks)

(30 marks)

5 [P.T.O.

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3 A. Little and B. Sutton were two sole traders in the same line of business. On 1 June 2005 they decided to mergetheir businesses to form a partnership called Little Sutton. It was agreed that the profits from the partnership shouldbe split between A. Little and B. Sutton in the ratio 2:1.

The balance sheets for the two sole traders were as follows:

Balance Sheets as at 31 May 2005

A. Little B. Sutton$000 $000 $000 $000

AssetsNon-currentFreehold property 110 –Plant and equipment 25 70

–––– –––135 70

Current assetsInventory 15 12Trade receivables 10 8Bank and cash 15 40 8 28

––– –––– ––– –––Total assets 175 98

–––– ––––––– –––

Capital and liabilitiesProprietors’ CapitalA. Little 160B. Sutton 79

Current liabilitiesTrade payables 15 19

–––– –––Total capital and liabilities 175 98

–––– ––––––– –––

Additional information not included in the balance sheets above:

(i) The freehold property was revalued at $120,000 on 31 May 2005.(ii) The plant and equipment which originally belonged to B. Sutton was revalued to $55,000 on 31 May 2005.(iii) Goodwill is agreed at 31 May 2005 to be $35,000 for A. Little and $25,000 for B. Sutton. Goodwill is not to

be carried in the partnership balance sheet.(iv) All assets and liabilities are taken over by the partnership.

Required:

(a) Prepare the:

(i) capital accounts of A. Little and B. Sutton as at 31 May 2005 prior to the formation of the partnership.(4 marks)

(ii) partners’ capital accounts as in the new partnership as at 1 June 2005. (3 marks)

(iii) opening balance sheet for the Little Sutton partnership. (4 marks)

(b) Briefly state two advantages and two disadvantages of A. Little and B. Sutton becoming partners rather thancontinuing as sole traders. (4 marks)

(15 marks)

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This is a blank page.Question 4 begins on page 8.

7 [P.T.O.

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4 You are presented with the following summarised accounts for F. Raser, a limited liability company.

F. RaserIncome statement for the year ended 31 May 2005

$000Revenue 160Cost of sales (100)

–––––Gross profit 60Distribution & administrative expenses (35)

–––––Profit from operations 25Finance cost (5)

–––––Profit before tax 20Tax expense (10)

–––––Net profit for the period 10

––––––––––

F. RaserBalance sheet as at 31 May 2005

$000 $000AssetsNon-current assets 150Current assetsInventory 45Trade receivables 25Cash and bank 5 75

––– ––––Total Assets 225

––––––––Equity and liabilitiesCapital and reserves$1 Ordinary shares 100Reserves 30

––––130

Non-current liabilities10% loan notes 50

Current liabilitiesTrade payables 30Taxation 10Dividends (for the year) 5 45

––– ––––Total equity and liabilities 225

––––––––

The ratio values for F. Raser for 2003 and 2004 as well as the current average ratio values for the industry sector inwhich F. Raser operates are as follows:

Ratio Historical Data Industry Average2003 2004 2005

Return on capital employed (%) 16·2 14·7 16·2Gross profit percentage (%) 30·4 34·7 32·3Net profit percentage (%) 19·3 17·7 17·3Quick/Acid test ratio 1·5 1·1 1·5Receivables collection period (days) 32·0 44·0 35·0Earnings per share (cents) 18·0 13·0 15·0

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Required:

(a) Calculate the following ratios for F. Raser for the year ended 31 May 2005. State clearly the formulae usedfor each ratio.

(i) Return on capital employed(ii) Gross profit percentage(iii) Net profit percentage(iv) Quick/Acid test ratio(v) Receivables collection period(vi) Earnings per share (9 marks)

(b) Using the additional information given and the ratios you calculated in part (a), write a brief report on thefinancial performance of F. Raser. Indicate in your report what additional information might be useful to helpinterpret the ratios. (11 marks)

(20 marks)

End of Question Paper

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Answers

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11

ACCA Certified Accounting Technician Examination – Paper T6(INT) December 2005 Answers andDrafting Financial Statements (International Stream) Marking Scheme

Marks Workings1 (a) Wisaron

Income Statement and Appropriation Account for the year ended 31 October 2005 0·5

$ $Sales revenue 302,200 0·5Less Returns inwards (3,600) 0·5

––––––––298,600

Opening inventory 23,500 0·5Add Purchases 214,400 1·0 ($215,300 – $900)Carriage inwards 1,150 0·5

––––––––239,050

Less closing inventory 19,000 0·5––––––––

Cost of goods sold (220,050) 0·5––––––––

Gross Profit 78,550 0·5ExpensesSelling expenses 17,500 0·5Rent 12,000 1·0 ($13,000 – $1,000)General expenses 1,900 0·5Insurance 800 0·5Motor vehicle expenses 6,000 0·5Discounts allowed 1,340 0·5Wages 9,490 1·0 ($9,090 + $400)Depreciation

– Motor vehicles 2,500 1·5 (($16,000 – $6,000) x 25%)– Fixtures and fittings 800 1·0 ($8,000 x 10%)

Loan interest 200 1·0 (($5,000 x 8%) x 0·5)Bank charges 75 0·5Irrecoverable debts 400 0·5Increase in allowance for receivables 565 (53,570) 1·5 (($25,700 – $400) x 5%) – $700

–––––––– ––––––––Net profit 24,980 0·5Interest on drawings: Lewis 270 0·5

Aaron 210 480 0·5–––––––– ––––––––

25,460Salary: Aaron (8,500) 1·0

––––––––16,960

––––––––––––––––Share of profit: Lewis 3/5 10,176 0·5

Aaron 2/5 6,784 0·5–––––––– ––––––––

16,960–––––––––––––––– –––––

19·0–––––

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Marks Workings(b) Current Accounts

Lewis

$ $Drawings 6,500 Balance b/f 2,560 0·5 + 0·5Goods 900 Loan interest 200 1 + 1Interest on drawings 270 Share of profit 10,176 0·5 + 0·5Balance c/f 5,266

––––––– –––––––12,936 12,936––––––– –––––––––––––– –––––––

Aaron

$ $Drawings 5,600 Balance b/f 1,370 0·5 + 0·5Interest on drawings 210 Salary 8,500 0·5 + 1Balance c/f 10,844 Share of profit 6,784 0 + 0·5

––––––– –––––––16,654 16,654––––––– –––––––––––––– ––––––– –––

7–––

(c) WisaronBalance sheet as at 31 October 2005 0·5

Accumulated NetCost Depreciation Book

ValueAssets $ $ $Non-current assetsMotor vehicles 16,000 8,500 7,500 1·0Fixtures and fittings 8,000 3,800 4,200 1·0

––––––– ––––––– –––––––24,000 12,300 11,700 1·0––––––– –––––––––––––– –––––––

Current assetsInventory 19,000 0·5Trade receivables 25,300 1·0 ($25,700 – $400)Allowance for receivables (1,265) 24,035 1·0 ($25,300 x 5%)

–––––––Prepayment (rent) 1,000 1·0Bank 1,375 45,410 1·0 ($1,450 – $75)

––––––– –––––––Total assets 57,110 0·5

––––––––––––––Partners’ capital accountsLewis 7,000 1·0 ($12,000 – $5,000)Aaron 6,000 13,000 0·5

–––––––Partners’ current accountsLewis 5,266 0·5Aaron 10,844 16,110 0·5

–––––––Non-current liabilitiesLoan from Lewis 5,000 1·0

Current LiabilitiesPayables 22,600 0·5Accruals (wages) 400 23,000 1·0

––––––– –––––––Total capital and liabilities 57,110 0·5

–––––––––––––– –––14–––

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Workings Marks$000 $000 $m

2 (a) Goodwill on acquisitionCost of investment 660,000 1Share Capital 480,000 (80% x 600) 1Reserves 76,000 (80% x 95) 1Revaluation of land 56,000 (80% x 70) 1

–––––––– (612,000)–––––––– –––

Goodwill 48,000 4–––––––– –––––––––––

(b) SpyderConsolidated Balance Sheet as at 31 October 2005

Assets $000 $000Non-current assets

Land and buildings 663,000 (W1) 2Plant 505,000 (285 + 220) 0·5

––––––––––1,168,000

Current assetsInventory 597,000 (357 + 252 – 12) 1·5Trade receivables 626,000 (525 + 126 – 25) 1·5Bank 188,000 1,411,000 (158 + 30) 0·5

–––––––––– ––––––––––Total assets 2,579,000

––––––––––––––––––––Equity and liabilitiesCapital and reserves

$1 Ordinary shares 1,500,000 1Reserves 613,600 (W2) 3·5Minority Interest 176,400 (W3) 3

––––––––––2,290,000

Current liabilitiesPayables 289,000 (220 + 94 – 25) 1·5

––––––––––Total equity and liabilities 2,579,000

–––––––––––––––––––– –––15–––

WorkingsW1 Land and Buildings $000 $000 Analysis of marks

Spyder 315,000 0·5Phly: Book value 278,000 0·5

: Revaluation of land on acquisition 70,000 1–––––––– –––

348,000 2–––––––– –––663,000––––––––––––––––

W2 ReservesSpyder balance 580,000 0·5Reserves of Phly (80% x $212 million) 169,600 1Pre acquisition reserves (80% x $95 million) (76,000) 1Less Goodwill (48,000) 0·5Profit on purchases from Spyder (12,000) 0·5

––––––––(136,000)–––––––– –––

Reserves 613,600 3·5–––––––– –––––––––––

W3 Minority InterestShare Capital (20% x $600 million) 120,000 1Revaluation (20% x $70 million) 14,000 1Reserves (20% x $212 million) 42,400 1

–––––––– –––Minority Interest 176,400 3

–––––––– –––––––––––

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(c) Inter-company trading and consolidation

The companies within a group are separate legal entities and therefore may treat other companies within the group the sameas any other customers. For example, in this question, Phly has purchased goods from Spyder.

The accounts of Spyder will show a profit earned on sales to Phly and similarly Phly’s balance sheet will include inventory atthe cost purchased from Spyder. There are two accounting issues that need to be addressed when preparing the groupaccounts:

(i) Although Spyder has made a profit on the goods it has sold to Phly, the group has not made a sale, or any profit, untilan outside customer buys the goods from Phly.

(ii) Any purchases that remain unsold by Phly at the end of the year will be included in Phly’s inventory. Their balance sheetvalue will be their cost to Phly, which is not the same as to the group.

The only profits to be recognised should be those made by the group in providing goods to third parties. Inventory in theconsolidated balance sheet should also be valued at the cost to the group. Thus, the $12 million of Spyder’s profit in Phly’sclosing inventory is unrealised from the group’s perspective and is eliminated in full upon consolidation.

There may also be receivables and payables within a group. In these circumstances these internal balances are cancelled.For example in this question Phly is indebted to Spyder for $25 million. Therefore Phly has a payable on its balance sheet of$25 million and Spyder has a receivable of $25 million on its balance sheet. When the accounts are consolidated the twobalances are cancelled.

Marking schemeUp to 3 marks for identifying the issue of unrealised profit on inventory, explaining how they are treated on consolidation andusing an example from the question.Up to 3 marks for identifying the issue of internal receivables and payables, explaining how they are treated on consolidationand using an example from the question.

3 (a) Ratio Formulae Aber Cromby

Gross profit percentageGross Profit

x 1001,100

x 100 = 20·0%2,160

x 100 = 30·0%–––––––––– –––––– ––––––Sales 5,500 7,200

Return on capital employed*Profit before int. & tax

x 100490

x 100 = 11·8%475

x 100 = 6·3%––––––––––––––––––– –––––– ––––––Capital Employed 4,155 7,520

Earnings per shareNet Profit after tax 275

= 9·2 cents280

= 4·0 cents–––––––––––––––––––– –––––– ––––––No. of ordinary shares 3,000 7,000

Marking scheme1 mark for each ratio (6 marks)* Alternative ratio definitions and calculations may be acceptable.

(b) Ratio Aber Cromby CommentGross profit percentage 20% 30% Cromby has been able to achieve a significantly higher gross profit

percentage than Aber. This may be due to a number of factors; forexample, Cromby may be operating at the luxury (branded) end of theleisurewear market, consequently it may be able to charge itscustomers a premium price for its goods. Cromby may also be ableto obtain good discounts from its suppliers for bulk purchases.Alternatively, Aber may have expensive suppliers, with high costsassociated with carriage inwards.

Return on capital employed 11·8% 6·3% Aber’s return on capital employed is nearly double that of Cromby.This might suggest that Aber is managed more efficiently thanCromby. Certainly Aber’s return represents a reasonable return whencompared to current market borrowing rates. However, moreinformation is needed; for example are the property assets of bothbusinesses correctly valued?

Earnings per share 9·2c 4·0c Aber has a higher EPS than Cromby and from a shareholder’sperspective, Aber would be considered a better investment.It would be useful to have the previous year’s EPS figures so that anytrends could be identified.

There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the informationavailable. Other comments, if appropriate, will also be given credit.1 mark for each relevant comment up to 9 marks.

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(c) Limitations of ratio analysis:

1 The accounting information used to prepare the ratios may be out of date.2 Usually the information presented in the published accounts is summarised, making a detailed analysis impossible.3 Price changes over time make year on year comparisons difficult.4 Changes in accounting policies from year to year may produce misleading ratios.5 Different businesses use different accounting policies. This may make direct comparisons difficult.

Marking scheme1 mark for each limitation that is explained up to 5 marks (other examples may be given).

4 (a) (i) Going Concern Concept

The going concern concept implies that the business will continue in operational existence for the foreseeable future,and that there is no intention to put the company into liquidation or make drastic cutbacks to the scale of operation.This concept has a major influence on the assumptions made when evaluating particular items in the balance sheet.For example assets are not normally shown at net realisable value because they are expected to be kept in the businessfor future use.

2 marks

(ii) Accruals Concept

The accruals concept requires that revenue and costs are recognised as they are earned or incurred, not when the moneyis received or paid. They must be matched with one another so far as their relationship can be established or justifiablyassumed and dealt with in the income statement of the period to which they relate.

2 marks

(iii) Reliablity

Accounting information must be reliable if it is to be useful. In accounting terms this means the information should befree from material error and bias. The user must be able to depend on it being a faithful representation.

2 marks

(iv) Understandability

Users of financial statements must be able to understand them. However, it is assumed they have some business,economic and accounting knowledge and they are able to apply themselves to study the information provided properly.The complex matters of financial statements should not be left out simply because of their difficulty, if it is relevantinformation.

2 marks

(b) The arguments for having accounting standards

– Accounting standards restrict the number of choices in the methods used to prepare financial statements and thereforereduce the risk of creative accounting. This should help the users of accounts to compare the financial performance ofdifferent organisations.

– Companies are obliged to disclose the accounting policies they have used in the preparation of accounts. This shouldhelp the users of accounts better understand the information presented.

– Accounting standards should increase the credibility of accounts by increasing uniformity of accounting treatmentbetween companies.

– Accounting standards require companies to disclose information which they might not want to disclose if the standardsdid not exist.

– Accounting standards provide a focal point for discussion about accounting practice.

The arguments against having accounting standards

– Sometimes the accounting method advocated may not be appropriate in some particular circumstances or for certaintypes of organisation.

– Accounting standards may be overly prescriptive, reducing flexibility and the opportunity for accountants to use theirprofessional judgement.

– Standards may be too general, resulting in a lack of clear guidance in some situations.

– If standards contain too many detailed rules, there is a danger that preparers will develop creative accounting techniquesthat technically adhere to the rules but conflict with the overall aims and principles behind financial statements.

– Accounting standards may have been drafted as a consequence of a particular pressure group.

– Some accounting standards can be expensive to comply with.

Marking scheme: 1 mark for each relevant point up to 7 marks.

15

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 5 DECEMBER 2005

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

The Association of Chartered Certified Accountants

Pape

r T6

(IN

T)

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ALL FOUR questions are compulsory and MUST be attempted

1 Lewis and Aaron are in partnership trading as Wisaron. The trial balance for Wisaron as at 31 October 2005 was asfollows:

Dr Cr$ $

Purchases 215,300Selling expenses 17,500Carriage inwards 1,150Returns inwards 3,600Rent 13,000Sales revenue 302,200Bank 1,450General expenses 1,900Trade payables 22,600Current accounts at 1 November 2004 – Lewis 2,560

– Aaron 1,370Trade receivables 25,700Insurance 800Inventory at 1 November 2004 23,500Motor vehicle expenses 6,000Allowance for receivables at 1 November 2004 700Settlement discounts allowed 1,340Wages 9,090Drawings – Lewis 6,500

– Aaron 5,600Capital accounts at 1 November 2004 – Lewis 12,000

– Aaron 6,000Motor vehicles, at cost 16,000Fixtures and fittings, at cost 8,000Accumulated depreciation at 1 November 2004:

– Motor vehicles 6,000– Fixtures and fittings 3,000

–––––––– ––––––––356,430 356,430–––––––– –––––––––––––––– ––––––––

The following additional information as at 31 October 2005 is available:

1 Lewis and Aaron share profits and losses in the ratio 3:2 respectively.2 Lewis has taken some goods for his own use during the year to the value of $900, but this has not yet been

recorded in the accounts.3 Interest on drawings for the year is $270 for Lewis and $210 for Aaron.4 Aaron is entitled to a salary of $8,500 per annum before profits are shared.5 On 1 May 2005 it was agreed that $5,000 should be transferred from Lewis’ capital account to a loan account

bearing 8% interest per annum. However, no entries have yet been recorded in the accounts for the transfer.6 Rent of $1,000 has been paid in advance.7 Inventory was valued at $19,000.8 Bank charges of $75 have not been entered into the accounts.9 There are outstanding wages of $400.10 Debts of $400 are to be written off and the allowance for receivables to be adjusted, based on past events to the

equivalent of 5% of the remaining trade receivables.11 Depreciation is to be provided for as follows:

– Motor vehicles at 25% using the reducing balance method.– Fixtures and fittings at 10% using the straight line method.

2

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Required:

Prepare the following statements for the partnership:

(a) the income statement and appropriation account for the year ended 31 October 2005. (19 marks)

(b) the partners’ current accounts for the year ended 31 October 2005; and (7 marks)

(c) the balance sheet as at 31 October 2005. (14 marks)

(40 marks)

3 [P.T.O.

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2 The draft balance sheets of Spyder, a limited liability company and its subsidiary company Phly at 31 October 2005are as follows:

Spyder PhlyAssets $000 $000 $000 $000Non-current assets

Tangible assets:Land and buildings 315,000 278,000Plant 285,000 220,000

–––––––––– ––––––––600,000 498,000

Investment:Shares in Phly at cost 660,000

Current assetsInventory 357,000 252,000Trade receivables 525,000 126,000Bank 158,000 1,040,000 30,000 408,000

–––––––––– –––––––––– –––––––– ––––––––Total assets 2,300,000 906,000

–––––––––– –––––––––––––––––– ––––––––Equity and liabilitiesCapital and reserves

$1 Ordinary shares 1,500,000 600,000Reserves 580,000 212,000

–––––––––– ––––––––2,080,000 812,000

Current liabilitiesPayables 220,000 94,000

–––––––––– ––––––––Total equity and liabilities 2,300,000 906,000

–––––––––– –––––––––––––––––– ––––––––

The following information is also available:

(1) Spyder purchased 480 million shares in Phly some years ago, when Phly had a credit balance of $95 million inreserves. All the purchased goodwill has now been written off.

(2) At the date of acquisition the freehold land of Phly was revalued at $70 million in excess of its book value. Therevaluation was not recorded in the accounts of Phly.

(3) Phly’s inventory includes goods purchased from Spyder at a price that includes a profit to Spyder of $12 million.

(4) At 31 October 2005 Phly owes Spyder $25 million for goods purchased during the year.

Required:

(a) Calculate the goodwill on acquisition. (4 marks)

(b) Prepare the consolidated balance sheet for Spyder as at 31 October 2005. (15 marks)(show clearly any workings)

(c) Explain the accounting treatment of intra-group trading and inter-company balances when preparingconsolidated accounts. Use the transactions between Spyder and Phly to illustrate your answer. (6 marks)

(25 marks)

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This is a blank page.Question 3 begins on page 6.

5 [P.T.O.

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3 Aber and Cromby are two retail businesses trading in the leisurewear market. Your manager has asked you to reviewthe performance of both businesses from the financial statements which are provided below.

Income Statementsfor the year ended 31 October 2005

Aber Cromby$000 $000

Revenue 5,500 7,200Cost of sales (4,400) (5,040)

–––––– ––––––Gross profit 1,100 2,160Expenses (610) (1,685)

–––––– ––––––Profit from operations 490 475Finance cost (15) (15)

–––––– ––––––Profit before tax 475 460Income tax expense (200) (180)

–––––– ––––––Net profit for the period 275 280

–––––– –––––––––––– ––––––

Balance sheetsas at 31 October 2005

Aber CrombyAssets $000 $000Non-current assets 3,750 7,200Current assetsInventory 125 360Trade receivables 500 190Cash 30 655 0 550

––––– –––––– –––– ––––––Total assets 4,405 7,750

–––––– –––––––––––– ––––––Equity and liabilitiesCapital and Reserves$1 Ordinary Shares 3,000 7,000Reserves 1,080 410

–––––– ––––––4,080 7,410

Non-current liabilitiesLoan notes 75 110

Current liabilitiesTrade payables 200 205Overdraft 0 5Tax 50 250 20 230

––––– –––––– –––– ––––––Total equity and liabilities 4,405 7,750

–––––– –––––––––––– ––––––

6

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Required:

(a) Calculate the following ratios for BOTH Aber and Cromby.

(i) Gross profit percentage;(ii) Return on capital employed;(iii) Earnings per share.

(Show all workings) (6 marks)

(b) Comment on the performance of the businesses as indicated by each of the ratios you have calculated inpart (a). (9 marks)

(c) Explain the limitations of using ratios as a basis for analysing business performance. (5 marks)

(20 marks)

4 (a) Required:

Explain the following accounting terms:

(i) Going concern concept;(ii) Accruals concept;(iii) Reliability;(iv) Understandability. (8 marks)

(b) State the arguments for and against having accounting standards as a basis for preparing financialstatements. (7 marks)

(15 marks)

End of Question Paper

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6(INT) June 2006 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

1 (a) Calculation of profit before interest and tax.Retained Earnings

Marks$000 $000

Taxation 80 Bal. at 1 June 2005 130 1Dividends 100 Profit before interest

and tax (Bal. fig) 370 1Loan note interest 6 0·5Bal. at 31 May 2006 314 0·5

–––– –––– –––500 500 3–––– –––– ––––––– ––––

(b) Prepared in accordance with IAS 7Hadrian

Cash flow statement for the year ended 31 May 2006 0·5$000 $000

Cash flows from operating activitiesNet profit before tax 364 1Adjustments for:

Depreciation 300 1Profit on sale of tangible non-current assets (20) 1Interest 6 0·5

––––Operating profit before working capital changes 650

Increase in inventory (110) 1Increase in receivables (120) 1Decrease in payables (30) 1

––––Cash generated from operations 390

Interest paid (6) 0·5Tax paid (60) 1·5Dividends paid (100) (166) 1

–––– ––––Net cash from operating activities 224Cash flow from investing activities

Purchase of non-current assets (880) 2·5Receipts from sale of tangible non-current assets 100 1·5

––––Net cash used in investing activities (780)

Cash flows from financing activitiesProceeds from issue of share capital 550 1·5Repayment of long term borrowing (60) 1·5

––––Net cash from financing activities 490 1

––––Net decrease in cash and cash equivalents (66) 1Cash and cash equivalents at the beginning of period 70 0·5

––––Cash and cash equivalents at end of period 4 0·5

–––––––– –––20–––

Note

Interest paid and dividends paid may be shown in either operating activities or financing activities.

Workings

Non-current assets$000 $000

Balance b/f 1,500 Depreciation 300New non-current assets (bal) 880 Disposals 80

Balance c/f 2,000–––––– ––––––2,380 2,380

–––––– –––––––––––– ––––––

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(c) (i) Return on capital employed* Profit before int. & tax x 100 370 x 100 = 15%––––––––––––––––––– ––––––

Capital employed 2,414

(ii) Quick ratio Current Assets – Inventory :1 274 :1 = 1·4 : 1–––––––––––––––––––––– ––––––

Current liabilities 200

(iii) Receivables collection period# Receivables x 365 270 x 365 = 123 Days–––––––––––– ––––––Sales revenue 800

(iv) Earnings per share Profits on ordinary act. after tax 284 = 14 cents–––––––––––––––––––––––––––– ––––––

No. of ordinary shares 2,000

* Alternative ratio definitions and calculations may be acceptable.# Average receivables may be used in ratio definition and calculation.

Marking scheme: 0·5 for each correct formula and 1 mark for each correct ratio.

(d) Comments on the cash flow statement

Cash in the business has decreased by $66,000 and the changes in working capital suggest a squeeze on liquidity i.e.receivables and inventory have increased over the period and at the same time payables have decreased. However, cash fromoperations is positive and Hadrian is able to pay interest and tax which are key items.

During the year Hadrian has:

– repaid $60,000 of long term loans which will reduce future year’s interest payments– purchased non-current assets worth $880,000 which may improve future efficiency and therefore profitability– issued 500,000 shares at a 10% premium

Comments on ratios

Return on capital employedThe return on capital employed appears to be good when compared with the industry average. However, this may bemisleading if the company’s non-current assets are under valued.

Quick ratioThe low quick ratio in comparison with the industry average confirms the analysis from the cash flow statement that liquiditymay be a problem for this company.

Receivables collection periodThe long receivables collection period suggests the company may be having problems collecting its debts. This long debtcollection period will be having an adverse impact on the company’s liquidity. In addition, the longer the collection period,the less likely the debts will be recovered.

Earnings per shareThe earnings per share is just slightly lower than the industry average. This may not necessarily be a cause for concern, asthe company issued shares in 2006 which will have reduced the EPS. The success of the share issue suggests that investorsfind this company an attractive investment. The investment by the company, in new assets, is likely to result in a higher EPSin the future.

Marking Scheme: 1 mark for each relevant comment up to a maximum of 11 marks.

10

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Marks Workings2 (a) Paul and Barry

Income statement and appropriation account for the year ended 31 May 2006 0·5

$ $Sales revenue 568,000 0·5Less returns inwards (5,100) 0·5

––––––––562,900

Opening inventory 39,200 0·5Add Purchases 375,150 1·0 ($375,600 – $450)

––––––––414,350

Less closing inventory (32,000) 0·5––––––––

Cost of goods sold (382,350) 0·5––––––––

Gross profit 180,550 0·5ExpensesRent 18,760 0·5Selling expenses 55,600 0·5General expenses 4,280 1·0 ($3,680 + $600)Wages 18,000 0·5Depreciation

– Motor vehicles 4,200 1·5 (($30,000 – $9,000) x 20%)– Fixtures and fittings 2,100 1·0 ($14,000 x 15%)

Insurance 640 1·0 ($1,540 – $900)Motor vehicle expenses 9,300 0·5Discounts allowed 8,900 0·5Bad debts 1,100 0·5Increase in allowance for receivables 220 (123,100) 1·5 (($47,500 – $1,100) x 5%) – $2,100

–––––––– ––––––––Net profit before appropriation 57,450Interest on drawings: Paul 420 0·5

Barry 180 600 0·5–––––––– ––––––––

58,050Salary: Paul (15,000) 0·5

––––––––43,050

––––––––––––––––Share of profit: Paul 2/3 28,700 0·5

Barry 1/3 14,350 0·5–––––––– ––––––––

43,050–––––––––––––––– ––––

16·0––––

(b)Current Accounts

Paul

$ $Drawings 16,000 Bal b/f 3,570 0·5 + 0Interest on drawings 420 Salary 15,000 0·5 + 0·5Balance c/f 30,850 Share of profit 28,700 0 + 0·5

––––––– –––––––47,270 47,270––––––– –––––––––––––– –––––––

Barry

$ $Drawings 11,000 Bal b/f 2,190 0·5 + 0Goods 450 Share of profit 14,350 0·5 + 0·5Interest on drawings 180 0·5Balance c/f 4,910

––––––– –––––––16,540 16,540––––––– –––––––––––––– ––––––– –––

4–––

11

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(c) Marks WorkingsPaul and Barry 0·5

Balance sheet as at 31 May 2006Accumulated Net

Cost Depreciation BookValue

$ $ $Non-current assetsMotor vehicles 30,000 13,200 16,800 1·0Fixtures and fittings 14,000 9,100 4,900 1·0

––––––– ––––––– ––––––––44,000 22,300 21,700 0·5––––––– –––––––––––––– –––––––

Current assetsInventory 32,000 0·5Trade receivables 46,400 1·0 ($47,500 – $1,100)Allowance for receivables (2,320) 44,080 1·0 ($46,400 x 5%)

–––––––Prepayment (insurance) 900 0·5Bank 13,980 90,960 0·5

––––––– ––––––––112,660––––––––––––––––

Partners’ capital accountsPaul 20,000 0·5Barry 15,000 35,000 0·5

–––––––Partners’ current accountsPaul 30,850 0·5Barry 4,910 35,760 0·5

––––––– ––––––––70,760

Current LiabilitiesTrade payables 41,300 0·5Accruals (general expenses) 600 41,900 0·5

––––––– ––––––––112,660 0·5–––––––––––––––– ––––

10·0––––

3 (a) Goodwill on acquisition of Workings ($000)Everpool $000 $000Cost of investment 3,500 0·5Share capital (75% of $4,000,000) (3,000) 1Pre-acquisition reserves (75% of $200,000) (150) (3,150) 1

–––––– ––––––Goodwill on acquisition 350 0·5

–––––––––––– –––3

–––

(b) LivertonConsolidated income statement for the year ended 31 May 2006

$000Sales revenue 8,800 1·5 (6,400 + 2,600 – 200)Cost of sales (5,004) 2·5 (3,700 + 1,450 – 200 + (60% x 90))

––––––Gross profit 3,796Distribution costs (1,590) 0·5Administrative expenses (1,020) 0·5Goodwill impairment (70) 1 (200 – 130)

––––––Profit before tax 1,116Income tax expense (480) 0·5

––––––Profit for the period 636

––––––Attributable to:Equity holders of the parent 571 0·5Minority interest 65 1 (260 x 25%)

––––––636

–––––– –––8

–––

12

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(c) Associates

An associate is defined as an entity over which an investor has significant influence and that is neither a subsidiary nor ajoint venture of the investor. Significant influence is the power to participate in the financial and operating policy decisions ofthe investee. If an investor holds between 20% and 50% of the voting power of the investee then the investor will usuallyhave significant influence over the investee, unless it can be clearly demonstrated this is not the case.

The existence of significant influence might also be demonstrated in one or more of the following ways:(a) Representative of the investor on the board of directors.(b) Participation in the policy making process.(c) Material transactions between investee and investor.(d) Interchange of management personnel.(e) Provision of essential technical information.

Marking scheme: 1 mark for each point up to a maximum of 4 marks for a good answer.

4 (a) Adjusting events – These are events that provide evidence of a condition that existed at the balance sheet.

IAS 10 requires that the amounts recognised in the financial statements be adjusted to take account of an adjusting event.The standard also requires that disclosures be up-dated in the light of new information that relate to a condition that existedat the balance sheet date.

Non-adjusting event – These are events that are indicative of conditions that arose after the balance sheet date.

IAS 10 prohibits the adjustment of amounts recognised in the financial statements to reflect non-adjusting events after thebalance sheet date. However, if a non-adjusting event is material and its non-disclosure could influence the decisions of usersthen an entity should disclose the following:

(a) the nature of the event

(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.

Marking scheme: up to 2 marks for defining each type of event and how they should be treated (maximum 4 marks).

(b) (i) Receivables that were thought to be good at the balance sheet date will not now be paid. – Adjusting event

(ii) Jilton Newl has announced a bid to take over another company. – Non adjusting event

(iii) Some material errors have been discovered which show the financial statements are incorrect. – Adjusting event

(iv) The factory workforce at Jilton Newl has started strike action for an indefinite length of time. – Non adjusting event

Marking scheme: 1 mark for each correct answer (maximum 4 marks)

(c) Contingent liability

IAS 37 defines a contingent liability as:

A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or

A present obligation that arises from past events but is not recognised because:

– It is not probable that a transfer of economic benefits will be required to settle the obligation; or

– The amount of the obligation cannot be measured with sufficient reliability

Contingent liabilities should not be recognised in the financial statements but they should be disclosed unless the possibilityof any liability is remote. The required disclosures are:

– A brief description of the nature of the contingent liability

– An estimate of its financial effect

– An indication of the uncertainties that exist

– The possibility of any reimbursement

Marking scheme: up to 1·5 marks for defining a contingent liability and up to 2 marks for the accounting treatment.

Contingent asset

IAS 37 defines a contingent asset as:

A possible asset that arises from past events and whose existence will be confirmed by the occurrence, or non-occurrence,of one or more uncertain future events not wholly within the entity’s control.

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A contingent asset must not be recognised. Only when the realisation of the related economic benefit is virtually certain shouldrecognition take place. At that point the asset is no longer a contingent asset.

A contingent asset is disclosed where an inflow of economic benefit is probable.

Marking scheme: up to 1·5 marks for defining a contingent asset and up to 2 marks for the accounting treatment.

14

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 5 JUNE 2006

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

The Association of Chartered Certified Accountants

Pape

r T6

(IN

T)

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Page 77: t6 Past Year Papers

ALL FOUR questions are compulsory and MUST be attempted

1 The balance sheet of Hadrian, a limited liability company, as at 31 May 2006 is provided below together withcomparative figures for the previous year.

HadrianBalance Sheets as at 31 May

2006 2005$000 $000 $000 $000

AssetsNon-current assets 2,000 1,500Current assetsInventory 340 230Trade receivables 270 150Bank 4 614 70 450

––––– –––––– ––––– ––––––2,614 1,950

–––––– –––––––––––– ––––––Equity and liabilitiesCapital and reservesOrdinary share capital (shares of $1) 2,000 1,500Share premium 100 50Retained earnings 314 130

–––––– ––––––2,414 1,680

Non-current liabilities10% Loan note – 60Current liabilitiesTrade payables 120 150Taxation 80 200 60 210

––––– –––––– ––––– ––––––Total equity and liabilities 2,614 1,950

–––––– –––––––––––– ––––––

Additional Information

(i) Interest paid was $6,000 during the year ended 31 May 2006.

(ii) There was no over or under provision of tax for the year ended 31 May 2005.

(iii) Dividends paid were $100,000 during the year ended 31 May 2006.

(iv) Depreciation of $300,000 was charged for the year ended 31 May 2006.

(v) Non-current assets with a net book value of $80,000 were sold at a profit of $20,000 during the year ended31 May 2006.

Required:

(a) Calculate the profit before interest and tax of Hadrian for the year ended 31 May 2006. (3 marks)

(b) Prepare a cash flow statement for Hadrian for the year ended 31 May 2006 in accordance with IAS 7 – CashFlow Statements, using the indirect method. (20 marks)

2

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Further Information

(i) Sales revenue for the year ended 31 May 2006 was $800,000.

(ii) The latest average ratios for the industry in which Hadrian operates are as follows:

Return on capital employed 10%

Quick ratio 2:1

Receivables collection period 80 days

Earnings per share 15 cents

(c) Calculate the following ratios for Hadrian for the year ended 31 May 2006 ONLY:

(i) Return on capital employed;(ii) Quick ratio;(iii) Receivables collection period;(iv) Earnings per share.

State the formula used for each ratio. (6 marks)

(d) Using information from your cash flow statement, the industry ratios and the ratios you have calculated in(c), comment on the financial performance of Hadrian. (11 marks)

(40 marks)

3 [P.T.O.

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2 Paul and Barry are in a business partnership. Their trial balance as at 31 May 2006 is given below: Dr Cr$ $

Sales revenue 568,000Returns inwards 5,100Purchases 375,600Rent 18,760Selling expenses 55,600General expenses 3,680Allowance for receivables at 1 June 2005 2,100Bank 13,980Wages 18,000Trade payables 41,300Current accounts at 1 June 2005 – Paul 3,570Current accounts at 1 June 2005 – Barry 2,190Motor vehicles, at cost 30,000Fixtures and fittings, at cost 14,000Accumulated depreciation at 1 June 2005:Accumulated depreciation – Motor vehicles 9,000Accumulated depreciation – Fixtures and fittings 7,000Insurance 1,540Inventory at 1 June 2005 39,200Motor vehicle expenses 9,300Trade receivables 47,500Discounts allowed 8,900Drawings – Paul 16,000Drawings – Barry 11,000Capital accounts at 1 June 2005 – Paul 20,000Capital accounts at 1 June 2005 – Barry 15,000

–––––––– ––––––––668,160 668,160–––––––– –––––––––––––––– ––––––––

The following additional information as at 31 May 2006 is available:

1 Paul and Barry share profits and losses in the ratio 2:1 respectively.2 Inventory was valued at $32,000.3 During the year, Barry has taken some goods for his own use to the value of $450, but this has not yet been

recorded in the accounting records.4 Interest on drawings for the year were $420 for Paul and $180 for Barry.5 Paul is entitled to a salary of $15,000 per annum before profits are shared.6 Insurance of $900 has been paid in advance.7 Depreciation is to be provided for as follows:

– Motor vehicles at 20% using the reducing balance method– Fixtures and fittings at 15% using the straight line method

8 There are outstanding general expenses of $600.9 Debts of $1,100 are to be written off and the allowance for receivables is to be adjusted to the equivalent of 5%

of the remaining trade receivables, based on past experience.

Required:

Prepare the following statements for the partnership:

(a) the income statement and appropriation account for the year ended 31 May 2006. (16 marks)

(b) the partners’ current accounts for the year ended 31 May 2006; and (4 marks)

(c) the balance sheet as at 31 May 2006. (10 marks)

(30 marks)

4

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3 The summarised income statements of two companies, Liverton and Everpool, for the year ended 31 May 2006 areprovided below. Liverton acquired 3,000,000 ordinary shares in Everpool for $3,500,000 on 1 June 2004. At thattime, the retained earnings of Everpool were $200,000.

Income statements for the year ended 31 May 2006Liverton Everpool$000 $000

Sales revenue 6,400 2,600Cost of sales (3,700) (1,450)

–––––– ––––––Gross profit 2,700 1,150Distribution costs (1,100) (490)Administrative expenses (700) (320)

–––––– ––––––Profit from operations 900 340Dividends received from Everpool 150 –

–––––– ––––––Profit before tax 1,050 340Tax (400) (80)

–––––– ––––––Net profit for the period 650 260

–––––– –––––––––––– ––––––

The following information is also available:

(i) Everpool’s total share capital consists of 4,000,000 ordinary shares of $1 each.

(ii) At 31 May 2005 Liverton had valued the goodwill arising from the acquisition of Everpool at $200,000. Animpairment review of this goodwill at 31 May 2006 valued it at $130,000.

(iii) During the year ended 31 May 2006 Liverton sold goods costing $110,000 to Everpool for $200,000. At 31 May 2006, 60% of these goods remained in Everpool’s inventory.

Required:

(a) Calculate the goodwill arising on the acquisition of Everpool. (3 marks)

(b) Prepare the consolidated income statement for Liverton for the year ended 31 May 2006. (8 marks)

(c) Explain the criteria that should be met for a company to be accounted for as an associate company.(4 marks)

(15 marks)

5 [P.T.O.

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4 (a) Define an adjusting event after the balance sheet date and a non-adjusting event after the balance sheet dateand state how each should be accounted for. (4 marks)

(b) Jilton Newl is a large manufacturing company. After the date of the balance sheet, but prior to the financialstatements being authorised for issue, the following material events occurred:

(i) It was discovered that a receivables balance existing at the balance sheet date will not now be received.

(ii) Jilton Newl has announced a bid to take over another company.

(iii) Some material errors have been discovered which show the financial statements are incorrect.

(iv) The factory workforce at Jilton Newl has started strike action for an indefinite length of time.

Required:

For each of the events described above, state if they should be treated as an adjusting or non-adjusting eventafter the balance sheet date. (4 marks)

(c) Define a ‘contingent liability’ and a ‘contingent asset’, and explain how each should be treated in thefinancial statements. (7 marks)

(15 marks)

End of Question Paper

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6(INT) December 2006 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

Marks1 (a) Tonson

Income statement for the year ended 31 October 2006 0·5$000 $000

Sales revenue 5,780 0·5Less returns inward (95) 1·0

––––––5,685

Opening inventory 350 0·5Add purchases 3,570 0·5

––––––3,920

Less closing inventory (275 – 25) (250) 1·0––––––

Cost of sales (3,670)––––––2,015

Discounts received 50 1·0––––––

Gross profit 2,065 0·5General expenses 60 0·5Insurance 75 0·5Marketing expenses (W1) 45 1·5Wages and salaries (W2) 715 1·5Energy expenses 66 0·5Telephone 80 0·5Property expenses 100 0·5Loan note interest 33 0·5Receivables expense (W3) 155 1·5Depreciation: Buildings 75 1·5

Motor vehicles 32 1·5Furniture and equipment 240 1·5

––––––(1,676)––––––

Net profit before taxation 389Tax (150) 0·5

––––––Net profit for the period 239

––––––––––––

Total 18·0

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Marks(b) Tonson

Balance sheet as at 31 October 2006 0·5Cost/ Accumulated Net Book

Assets Valuation Depreciation ValueNon-current assets $000 $000 $000Land 740 0 740 0·5Buildings 1,800 0 1,800 0·5Furniture and equipment (W4) 1,200 660 540 1·0Motor vehicles (W5) 240 112 128 1·0

–––––– –––––– ––––––3,980 772 3,208 0·5

–––––– –––––––––––– ––––––

Current assetsInventory 250 1·0Trade receivables 900 0·5Less allowance (45) 855 1·0

––––––Prepayments 5 1·0Cash in hand 15 1,125 0·5

–––––– ––––––Total assets 4,333 0·5

––––––––––––

Equity and liabilitiesCapital and reserves$1 Ordinary shares ($1,800 + $180) 1,980 1.0Share premium account ($200 – $180) 20 1.0Revaluation reserve (W6) 735 1·5Retained earnings ($315 + $239) 554 1·0

––––––3,289

Non-current liabilities7% Loan notes 470 1·0

Current liabilitiesTrade payables 290 0·5Tax 150 0·5Accruals 40 1·0Bank overdraft 94 574 1·0

–––––– ––––––Total equity and liabilities 4,333

––––––––––––

Total 17.0

Working Papers

W1 Marketing expenses$ $

Balance as per TB 50,000 Income statement 45,000Prepayment c/f 5,000

––––––– –––––––50,000 50,000––––––– –––––––––––––– –––––––

W2 Wages and Salaries$ $

Balance as per TB 675,000 Income statement 715,000Wages accrued c/f 40,000

–––––––– ––––––––715,000 715,000–––––––– –––––––––––––––– ––––––––

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MarksW3 Receivables Expense

$ $Balance as per TB 150,000 Income statement 155,000Allowance for receivables 5,000

–––––––– ––––––––155,000 155,000–––––––– –––––––––––––––– ––––––––

Allowance for receivables$ $

Balance c/f 45,000 Balance as per TB 40,000Bad debts 5,000

––––––– –––––––45,000 45,000––––––– –––––––––––––– –––––––

W4 Furniture and Equipment Accumulated Depreciation$ $

Balance c/f 660,000 Balance as per TB 420,000Inc. Statem’t (20% of $1,200,000) 240,000

–––––––– ––––––––660,000 660,000–––––––– –––––––––––––––– ––––––––

W5 Motor Vehicles Accumulated Depreciation$ $

Balance c/f 112,000 Balance as per TB 80,000Inc. Statem’t20% of ($240,000 – $80,000) 32,000

–––––––– ––––––––112,000 112,000–––––––– –––––––––––––––– ––––––––

W6 Revaluation Reserve

Depreciation on buildings for the year is calculated as $1,500,000 x 5% = $75,000Therefore the net book value of the buildings is $1,065,000 at the end of the year, i.e. $1,500,000 – $360,000 – $75,000.When the buildings are revalued at the end of the year a revaluation reserve is created of$735,000. i.e. $1,800,000 – $1,065,000 = $735,000.

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Marks2 (a) Prepared in accordance with IAS 7

H MarathonCash flow statement for the year ended 31 October 2006 0·5

$000 $000Cash flows from operating activitiesNet profit before tax 10,889 1Adjustments for

Depreciation 6,784 1Interest received (101) 0·5Interest paid 1,749 0·5Profit on equipment disposal (1,806) 1

––––––––Operating profit before working capital changes 17,515

Decrease in inventory 3,015 0·5Decrease in receivables 3,034 0·5Decrease in payables (270) 0·5

–––––––Cash generated from operations 23,294

Interest received 101 0·5Interest paid (1,749) 0·5Tax paid (W4) (2,395) 2

––––––––Net cash from operating activities 19,251

Cash flows from investing activitiesPurchase of property, plant and equipment (W1 to W3) (7,671) 3Proceeds from sale of equipment 5,667 1Dividends paid (3,697) 1

––––––––Net cash used in investing activities (5,701)

––––––––Cash flows from financing activities

Proceeds from issues of share capital 4,231 1Repayment of long term borrowing (16,889) 1

––––––––Net cash used in financing activities (12,658)

––––––––Net increase in cash and cash equivalents 892 1Cash and cash equivalents at the beginning of the period (4,806) 1

––––––––Cash and cash equivalents at the end of the period (3,914)

––––––––––––––––Total 18

Examiner’s noteIAS 7 allows interest paid to be an operating cash flow or a financing cash flow. Interest received can be an operating cash flow or an investing cash flow. Dividends paid can be shown as cash flows from investing activities or cash flows from financing activities.

Workings (all in $000):

W1 Non-current assets at cost W2 Accumulated depreciation

B/f 124,252 Disposal 5,296 On dis- b/f 25,629Reval’n 6,525 posals 1,435 Charge 6,784Additions 7,671 c/f 133,152 c/f 30,978

–––––––– –––––––– ––––––– –––––––138,448 138,448 32,413 32,413–––––––– –––––––– ––––––– ––––––––––––––– –––––––– ––––––– –––––––

W3 Non-current assets disposal a/c W4 Taxation

Cost 5,296 Acc dep 1,435 Paid 2,395 B/f 1,926Profit 1,806 Cash 5,667 C/f 2,101 Inc. stat. 2,570

–––––––– –––––––– ––––––– –––––––7,102 7,102 4,496 4,496

–––––––– –––––––– ––––––– ––––––––––––––– –––––––– ––––––– –––––––

Note: the entries in italics in these t-accounts are the ‘balancing figures’.

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MarksAlternative workings:

Additions of non-current assets: Non-current assets NBV

Opening net book value 98,623 B/forward 98,623 Disposals 3,861Disposals (5,667 – 1,806) (3,861) Revaluation 6,525 Depr'tion 6,784Depreciation (6,784) Add’ns (bal) 7,671 C/f 102,174

–––––––– ––––––––Revaluation (12,554 – 6,029) 6,525 112,819 112,819–––––––– –––––––– –––––––––––––––– ––––––––94,503Additions (Balancing figure) 7,671

––––––––Closing net book value 102,174

––––––––––––––––

(b) Over the period there was a net cash inflow to the business of $892,000. (1 mark)

The company purchased non-current assets of $7,671,000. The purchase of new non-current assets may help operational efficiency and therefore improve future cash flows. (2 marks)

The company was able to generate additional cash by selling non-current assets for $5,667,000. (1 mark)

Loan notes of $16,889,000 were redeemed, this will reduce interest payments in the future. (2 marks)

Inventory levels were reduced by $3,015,000. This might indicate the company has adoptedbetter inventory control procedures which should have a positive impact on future cash flows. (2 marks)

Receivables were reduced by $3,034,000 and there was a small decrease in payables. These changes may indicate better cash flow management procedures being adopted by the company. (2 marks)

Marking scheme – Other relevant comments may be acceptable. Maximum of 8 marks

(c) Cash flow statements may be more useful than profit statements for the following reasons:

Cash flow statements help users understand where the company has generated its cash and how it has been applied during the period.

Cash flow statements are more objective than profit statements as they cannot be manipulatedby choosing more favourable accounting policies.

Cash flow statements provide a useful insight into the changes in the structure of working capital.

Cash flow statements enable users to establish whether the company is able to repay its debts.

Marking scheme – Up to 4 marks for relevant comments

3 (i) Partners’ AccountsNyfe Ork Poon Nyfe Ork Poon

$ $ $ $ $ $Realisation a/c 9,000 Capital a/cs 45,000 30,000 15,000 1Cash 56,255 38,453 12,802 Current a/cs 9,750 7,450 6,300 2

Realisation a/c 1,505 1,003 502 1––––––– ––––––– ––––––– ––––––– ––––––– –––––––56,255 38,453 21,802 56,255 38,453 21,802––––––– ––––––– ––––––– ––––––– ––––––– –––––––––––––– ––––––– ––––––– ––––––– ––––––– –––––––

Total 4

(ii) Realisation Account$ $

Furniture & fittings (NBV) 50,000 Loan a/c 18,000 0·5 0·5Motor vehicles (NBV) 35,000 Payables 26,500 0·5 0·5Inventory 25,000 0·5Receivables 42,000 0·5Cash and bank: Cash and bank:

Loan 18,000 Furniture and fittings 48,800 0·5 0·5Payables 25,440 Motor vehicles 29,500 0·5 0·5Dissolution expenses 1,000 Inventory 27,750 0·5 0·5

Profit on realisation: Nyfe 3/6 1,505 Receivables 39,900 1 0·5Ork 2/6 1,003 Poon (motor vehicle) 9,000 1 0·5Poon 1/6 502 1

–––––––– ––––––––199,450 199,450 Total 10–––––––– –––––––––––––––– ––––––––

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Marks(iii) Cash and bank

$ $Balance 6,000 Realisation A/c: 0·5Realisation a/c Loan 18,000 0·5Furniture and fittings 48,800 Payables 25,440 0·5 0·5Motor vehicles 29,500 Dissolution expenses 1,000 0·5 1Inventory 27,750 Partners a/c: Nyfe 56,255 0·5 0·5Receivables 39,900 Ork 38,453 0·5 0·5

Poon 12,802 0·5–––––––– ––––––––151,950 151,950–––––––– –––––––––––––––– ––––––––

Total 6

4 (a) Binky SmokeyGross profit percentage Gross profit x 100 129 x 100 = 45·4 % 154 x 100 = 50·5 %

–––––––––– –––– ––––Sales 284 305

Net profit percentage Net profit x 100 61 x 100 = 21·5 % 47 x 100 = 15·4 %–––––––––– –––– ––––

Sales 284 305

Asset Turnover ratio Sales x 100 284 x100 = 110·1 % 305 x 100 = 63·9 %–––––––––––––– –––– ––––Capital employed 258 477

Current ratio Current assets 201 = 1·1 :1 383 = 1·2 :1––––––––––––––– –––– ––––Current liabilities 188 325

Quick ratio Current assets – inventory 110 = 0·6 :1 90 = 0·3 :1–––––––––––––––––––––– –––– ––––

Current liabilities 188 325

Rec’bles collection period Receivables x 365 46 x 365 = 59·1 days 75 x 365 = 89·8 days–––––––––– –––– ––––

Sales 284 305

Marking Scheme1/2 mark for correctly stating the formula and 1/2 mark for each correct ratio

(b) Relevant comments could include:– Smokey has a higher gross profit percentage than Binky. Smokey may have a cheaper supplier

than Binky or benefit from discounts. Alternatively, its market position or geographical location may enable the company to charge a premium.

– The net profit percentage for Smokey is significantly lower than Binky suggesting that Smokey is not controlling its expenses as tightly as Binky.

– Binky is able to obtain a significantly higher level of sales from its assets, suggesting the company is being run more efficiently.

– The current ratios indicate that both companies have sufficient current assets to meet their currentliabilities. However, the quick ratios reveal a more worrying picture.

– The quick ratios for both companies are less than 1. Smokey has a very low quick ratio of 0·3 and may not be able to pay its debts as they become due. The very high inventory levels may indicatepoor inventory control, it might be that some of the inventory is unsellable.

– The receivables collection period for Smokey is significantly higher than Binky. This will obviously be contributing to the company’s adverse liquidity position. Action is required to improve the debt collection procedures.

– Overall Binky appears to be the better company to invest in, from the information given.

Marking scheme1 mark for each relevant comment up to a maximum of 6 marks.

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 4 DECEMBER 2006

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

The Association of Chartered Certified Accountants

Pape

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ALL FOUR questions are compulsory and MUST be attempted

1 The following information has been extracted from the books of Tonson, a limited liability company, as at 31 October2006.

Dr Cr$000 $000

Cash 15Insurance 75Inventory at 1 November 2005 350General expenses 60Energy expenses 66Marketing expenses 50Wages and salaries 675Discounts received 50Share premium account 200Retained earnings at 1 November 2005 315Allowance for receivables at 1 November 2005 40Sales revenue 5,780Telephone expenses 80Property expenses 100Bank 94Returns inward 95Trade payables 290Loan note interest 33Trade receivables 900Purchases 3,5707% Loan notes 470Bad debts 150$1 Ordinary shares 1,800Accumulated depreciation at 1 November 2005

Buildings 360Motor Vehicles 80Furniture and equipment 420

Land at cost 740Buildings at cost 1,500Motor vehicles at cost 240Furniture and equipment at cost 1,200

–––––– ––––––9,899 9,899

–––––– –––––––––––– ––––––

You have also been provided with the following information:

1 Inventory at 31 October 2006 was valued at $275,000 based on its original cost. However, $45,000 of thisinventory has been in the warehouse for over two years and the directors have agreed to sell it in November 2006for a cash price of $20,000.

2 The marketing expenses include $5,000 which relates to November 2006.3 Based on past experience the allowance for receivables is to be increased to 5% of trade receivables.4 There are wages and salaries outstanding of $40,000 for the year ended 31 October 2006.5 Buildings are depreciated at 5% of cost. At 31 October 2006 the buildings were professionally valued at

$1,800,000 and the directors wish this valuation to be incorporated into the accounts.6 Depreciation is to be charged as follows:

(i) Motor vehicles at 20% of written down value.(ii) Furniture and equipment at 20% of cost.

7 No dividends have been paid or declared.8 Tax of $150,000 is to be provided for the year.9 During October 2006 a bonus (or scrip) issue of one for ten was made to ordinary shareholders. This has not

been entered into the books. The share premium account was used for this purpose.

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Required:

Prepare the following statements, FOR INTERNAL USE:

(a) the income statement for the year ended 31 October 2006; and (18 marks)

(b) the balance sheet as at 31 October 2006 (17 marks)

(35 marks)

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2 You have been given the following information relating to H Marathon, a limited liability company. The company ispreparing its cash flow statement for the year ended 31 October 2006

H MarathonIncome statement for the year ended 31 October 2006 $000Revenue 54,577Cost of sales (27,128)

––––––––Gross profit 27,449Distribution costs (9,146)Administrative expenses (5,766)

––––––––Profit from operations 12,537Interest received 101Finance cost (1,749)

––––––––Profit before tax 10,889Taxation (2,570)

––––––––Profit for the period 8,319

––––––––––––––––

Balance sheets as at 31 October 2006 2005Assets $000 $000Non-current assets

Cost 133,152 124,252Accumulated depreciation (30,978) (25,629)

–––––––– ––––––––102,174 98,623–––––––– ––––––––

Current assetsInventory 26,350 29,365Trade receivables 13,412 16,446Bank 2,955 3,036

–––––––– ––––––––42,717 48,847

–––––––– ––––––––

Total assets 144,891 147,470–––––––– –––––––––––––––– ––––––––

Equity and liabilitiesCapital and reserves

Ordinary share capital 23,576 21,082Share premium 11,982 10,245Revaluation reserve 12,554 6,029Retained earnings 58,532 53,910

–––––––– ––––––––106,644 91,266–––––––– ––––––––

Non-current liabilities7% loan notes 5,743 22,632

–––––––– ––––––––Current liabilities

Bank overdraft 6,869 7,842Trade payables 23,534 23,804Taxation 2,101 1,926

–––––––– ––––––––32,504 33,572

–––––––– ––––––––

Total equity and liabilities 144,891 147,470–––––––– –––––––––––––––– ––––––––

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Additional Information(i) During the year dividends paid were $3,697,000.(ii) There were no amounts outstanding in respect of interest payable or receivable as at either year end.(iii) Operating profit is stated after charging depreciation of $6,784,000.(iv) During the year, the company sold equipment for $5,667,000 realising a profit of $1,806,000. This equipment

had never been revalued, and there were no other disposals of non-current assets during the year.(v) The only revaluation of non-current assets was that of a piece of freehold land.

Required:

(a) Prepare a cash flow statement for H Marathon for the year ended 31 October 2006 in accordance with IAS 7 – Cash Flow Statements, using the indirect method. (18 marks)

(b) Comment on the financial performance and position of H Marathon as shown by the cash flow statement youhave prepared.

(8 marks)

(c) Why are cash flow statements sometimes considered more useful than profit statements? (4 marks)

(30 marks)

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3 Nyfe, Ork and Poon decide to dissolve their partnership on 1 December 2006 after being in business for many years.The balance sheet of the partnership as at 30 November 2006 was as follows:

Nyfe, Ork and PoonBalance sheet as at 30 November 2006

AssetsNon-current assets $ $Furniture and fittings 50,000Motor vehicles 35,000

––––––––85,000

Current assetsInventory 25,000Receivables 42,000Bank 6,000 73,000

–––––––– ––––––––Total assets 158,000

––––––––––––––––

Capital and liabilitiesPartners’ capital accountsNyfe 45,000Ork 30,000Poon 15,000

––––––––90,000

Partners’ current accountsNyfe 9,750Ork 7,450Poon 6,300

––––––––23,500

Loan 18,000Current LiabilitiesPayables 26,500

––––––––Total capital and liabilities 158,000

––––––––––––––––

Additional Information(a) The partnership agreement states that Nife, Ork and Poon share profits and losses in the ratio 3:2:1(b) The furniture and fittings were sold for $48,800.(c) Only $39,900 of outstanding receivables were recovered.(d) The payables were settled for $25,440.(e) It was agreed between the partners that Poon could take a motor vehicle at a valuation of $9,000 in addition to

his share of the profit. The motor vehicle had a net book value of $8,000. The other motor vehicles were soldfor $29,500.

(f) The inventory was sold for $27,750.(g) The loan was repaid in full on 1 December 2006.(h) There were no outstanding interest payments on the loan.(i) Expenses incurred in dissolving the partnership were $1,000.

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Required:

Prepare the following accounts on dissolution:

(i) Partners’ accounts (4 marks)

(ii) Realisation account (10 marks)

(iii) Cash and bank account (6 marks)

(20 marks)

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4 Two companies Binky and Smokey trade in the same market. Their financial statements for the year ended 31 October2006 are summarised below:

Income statements for the year ended 31 October 2006Binky Smokey

$000 $000 $000 $000Sales revenue 284 305Cost of sales (155) (151)

–––– ––––Gross profit 129 154Expenses:

Administrative (24) (37)Selling and distribution (35) (53)Depreciation (9) (12)Loan note interest – (5)

–––– ––––(68) (107)

–––– ––––Net profit 61 47

–––– –––––––– ––––

Balance sheets as at 31 October 2006Binky Smokey

Assets $000 $000 $000 $000Non-current assetsAt cost 320 515Accumulated depreciation (75) (96)

–––– ––––245 419

Current assetsInventory 91 293Receivables 46 75Bank 64 201 15 383

–––– –––– –––– ––––Total assets 446 802

–––– –––––––– ––––

Equity and liabilitiesShare capital and reserves

Share capital 150 250Retained earnings 108 177

10% Loan note – 50Current liabilities 188 325

–––– ––––Total equity and liabilities 446 802

–––– –––––––– ––––

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Required:

(a) Calculate the following ratios for Binky and Smokey:

(State the formulas used for calculating the ratios)

Profitability ratios:Gross profit percentageNet profit percentage Asset turnover ratio

Liquidity ratios:Current ratioQuick ratio (acid test ratio)Receivables collection period (9 marks)

(b) Compare and comment on the performance of the companies as indicated by the ratios you have calculatedin part (a). (6 marks)

(15 marks)

End of Question Paper

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6(INT) June 2007 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

Marks1 (a) Goodwill on acquisition of Tricepts $000 $000

Cost of investment 24,000 1Share capital ($25 million x 80%) 20,000 1Retained earnings ($2 million x 80%) 1,600 (21,600) 1

––––––– –––––––Goodwill 2,400

–––––––––––––– –––Total 3

–––

(b) (i) BiceptsConsolidated income statement for the year ended 31 May 2007 0·5

$000 Workings ($000)Sales revenue 197,000 1·5 135,000 + 74,000 – 12,000

Cost of sales (89,000) 2·5 70,000 + 30,000 – 12,000 + 1,000*––––––––

Gross Profit 108,000Distribution costs (13,700) 0·5Administrative expenses (26,784) 0·5Goodwill impairment (600) 1·5 2,400 – 1,800

––––––––Net profit before interest and tax 66,916Interest payable (12) 1·0 16 – 4

––––––––Profit before tax 66,904Income tax expense (19,000) 0·5

––––––––Profit for the year 47,904

––––––––––––––––Attributable to:Equity holders of the parent 43,704Minority interest 4,200 1·5 20% x 21,000

––––––––47,904

–––––––––––––––– ––––Total 10·0

––––

(ii) BiceptsConsolidated Balance Sheet as at 31 May 2007 0·5

Assets $000 $000Non-current assetsIntangible – goodwill 1,800 1·0 (2,400 – 600)

Property, plant and equipment 119,050 0·5 (80,000 + 39,050)––––––––120,850

Current assetsInventory 14,128 1·5 (10,630 + 4,498 – 1,000*)

Receivables 22,486 3·5 (18,460 + 12,230 – 6,400** – 1,800*** – 4****)

Bank 4,744 41,358 0·5 (3,400 + 1,344)––––––– ––––––––

Total assets 162,208––––––––––––––––

Equity and liabilitiesCapital and Reserves$1 Ordinary shares 70,000 0·5Retained earnings (W1) 46,340 4·0Minority interest 8,000 1·5 (20% x 40,000)

––––––––124,340

Current liabilitiesPayables 6,118 2·5 (6,000 + 1,922 – 1,800*** – 4****)

Tax 18,000 0·5Dividends payable to Minority Interests 1,600 1·0Dividends 12,000 37,718 0·5

–––––––8% Loan Notes 150 1·0 (200 – 50)

––––––––Total equity and liabilities 162,208

–––––––––––––––– ––––Total 19·0

––––

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MarksNotes:* Exclusion of unrealised profit held in inventory ($1,000,000)** Exclusion of the intragroup dividends from receivables ($6,400,000)*** Intragroup indebtedness ($1,800,000)**** Exclusion of intragroup interest ($4,000)

Workings

W1 Retained earnings as at 31 May 2007$000 $000

Bicepts Balance Sheet 37,540 0·5Less unrealised profit (1,000) 1Tricepts :Retained earnings 15,000Pre-acquisition reserves (2,000)

–––––––13,000

Group share (80% x $13,000,000) 10,400 2Less goodwill written off as at 31 May 2007 (600) 0·5

–––––––46,340–––––––––––––– –––

4–––

(c) When one company sells goods to another company within the same group an identical amount is shown in the sales figureof the first company and in the cost of sales of the second. However, as far as the group is concerned there has not been anexternal sale. Therefore, on consolidation the amount of the inter-company trade must be eliminated from sales and purchases(cost of sales).

If there are unrealised profits on inter-company trading these also need to be excluded from the figures for the group profits.This is achieved by calculating and then deducting the amount of unrealised profit from unsold inventory at the year end.

Similarly, if non-current assets have been sold at profit between companies in a group then the profit element has to beeliminated.

Any receivables/payables balances outstanding between the two companies at the year end are cancelled on consolidation toavoid producing a misleading balance sheet.

Marking Scheme: Up to a total of 3 marks

2 (a) J Moor’s accounts Marks(i) Revaluation account

$ $Inventory – loss 500 Goodwill 12,000 1·0 + 0·5Capital account 16,500 Property – profit 5,000 0·5 + 1·0

––––––– –––––––17,000 17,000––––––– –––––––––––––– –––––––

(ii) Capital account

$ $Balance c/f to new business 56,000 Balance b/f 35,000 0·5 + 0·5

Dodd’s loan 4,500 1·0Profit on revaluation 16,500 0·5

––––––– –––––––56,000 56,000––––––– –––––––––––––– –––––––

P Croft’s accounts(i) Revaluation account

$ $Plant and machinery – loss 1,500 Goodwill 9,000 1·0 + 0·5Capital account 7,500 0·5

–––––– ––––––9,000 9,000

–––––– –––––––––––– ––––––

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Marks(ii) Capital account

$ $Motor vehicle 7,000 Balance b/f 23,300 1·0 + 0·5Balance c/f to new business 23,800 Profit on revaluation 7,500 0·5 + 0·5

––––––– –––––––30,800 30,800––––––– –––––––––––––– –––––––

Total 10

(b) Marks WorkingsMoorcroft

Balance sheet as at 31 May 2007Assets $ $Non-current assetsProperty 30,000 1Plant and machinery 28,500 1 ($14,000 + $14,500)

–––––––58,500

Current assetsInventory 8,500 1 ($4,500 + $4,000)Trade receivables 2,800 1Cash at bank 4,000 15,300 1

––––––– –––––––Total assets 73,800

––––––––––––––

Capital and liabilitiesCapital accountsJ Moor 42,000 2 W1P Croft 16,800 2 W1

–––––––58,800

Current liabilitiesTrade payables 15,000 1

–––––––Total capital and liabilities 73,800

––––––––––––––Total 10

Working 1 MarksPartners’ Capital accounts

Moor Croft Moor Croft$ $ $ $

Goodwill written off Balance b/f from 2:1 x $21,000 14,000 7,000 old business 56,000 23,800 1·0 + 1·0 + 0·5 + 0·5Balance c/f 42,000 16,800 0·5 + 0·5

––––––– ––––––– ––––––– –––––––56,000 23,800 56,000 23,800––––––– ––––––– ––––––– –––––––––––––– ––––––– ––––––– –––––––

(c) Goodwill is calculated as the difference between the value of the whole business as a going concern and the value of thetangible and other identifiable intangible assets less any liabilities. Therefore, goodwill is a balancing item rather than an itemthat is objectively valued. (up to 2 marks)

Goodwill needs to be recalculated when a partner joins a partnership business for the following reasons.A new partner that joins a business is entitled to share in the future growth of all the partnership assets. Their entitlementarises because they make a payment to enter the partnership, or the existing partners consider they will enhance the futureprofitability of the firm. However, the new partner’s entitlement is to share in the future growth of the business not its pastgrowth.Any goodwill which has already been built up by the existing partners needs to be credited to them. (up to 3 marks)

Total 5 marks

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Marks3 (a) (i)

Gross profit percentageGross profit

x 10095

x 100 = 25·3% 1––––––––– –––Revenue 375

(ii)Net profit percentage*

Net profit from operationsx 100

50 x 100 = 13·3% 1–––––––––––––––––––––– –––

Revenue 375

(iii)Current ratio

Current assetsx 100

133 :1 = 1·3:1 1–––––––––––––– –––

Current liabilities 103

(iv)Acid test (Quick) ratio

Current assets – inventory:1

133 – 96:1 = 0·4:1 1–––––––––––––––––––––– ––––––––

Current liabilities 103

(v)Receivables collection period

Trade receivablesx 365

34 x 365 = 33·1 days 1––––––––––––– ––––

Sales 375* Could also be profit for the period. Total 5

(b) Comments on the performance of Acoms

Gross ProfitGross profit percentage has reduced from the previous year by 27%. This might indicate increased competition in the marketand that selling prices have been discounted. Alternatively the cost of purchases may have increased significantly. Thesituation is particularly worrying because this ratio is now below the industry average.

Net ProfitThe net profit percentage has also deteriorated on the previous year and is below the industry average. This suggests that thecontrol of costs needs to be improved if the company is to remain competitive.

Current RatioThe current ratio has deteriorated slightly on the previous year but is simliar to the industry average. The business hassufficient current assets to cover its current liabilities. However, the composition of the current assets is heavily weighted withinventory. The company may have problems converting inventory to cash if it is required quickly.

Acid TestThe acid test ratio gives a better indication of liquidity than the current ratio. This ratio is 0·4:1 and has fallen significantlybelow the industry average. This ratio suggests the company may be experiencing some liquidity problems. The currentinventory levels might also indicate the business is having some trading problems.

Receivables collection periodThe receivables collection period has more than doubled since the previous year and is 13 days longer than the industryaverage. The business may be giving customers more credit in order to sell more inventory. Alternatively the receivablescollection procedures may need to be tightened up, which would help to improve the business’ liquidity situation.

Marking scheme: Maximum of 10 marks.

(c) Main limitations of ratio analysis

– Inflation may distort comparisons of ratios over time.– Different accounting policies may distort intercompany comparisons.– The ratios are only as good as the financial information on which they are based.– The accounting information used to prepare the ratios may be out of date.– Changes in accounting policies from year to year may produce misleading ratios.– Usually the information presented in the published accounts is summarised, making a detailed analysis impossible.– Using industry averages as a basis for comparison can be misleading as they are the average of the ratios from a number

of companies.

Marking scheme 1 mark for each relevant comment up to a maximum of 5 marks

4 (a) (i) The role of the IASC Foundation is to oversee the IASB and related bodies and to raise the funds needed.

(ii) The role of the IASB is to develop and issue global accounting standards.

(iii) The role of IFRIC is to provide timely guidance on the application of IFRSs where unsatisfactory interpretations exist ornew processes arise.

(iv) The role of SAC is to provide a formal forum where the IASB can consult individuals, and representatives of organisationsaffected by its work.

Marking scheme: 1 mark for briefly explaining each role up to a maximum of 4 marks.

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(b) The qualitative characteristics of financial information are the characteristics that make the information useful and determinewhether, when and how it is presented in financial statements so that the information they give is useful to users for assessingthe financial position, performance and financial adaptability of the business.

(1) Relevance

Information is considered to be relevant if it has the ability to influence the economic decisions of users and is providedin time to influence those decisions.

(2) Reliability

Information is reliable if:

(a) it can be depended upon by users to represent faithfully what it either purports to represent or is reasonablyexpected to represent and therefore reflects the substance of the transactions and other events that have takenplace.

(b) it is free from deliberate or systematic bias and material error, and is complete; and

(c) in its preparation under conditions of uncertainty, a degree of caution has been applied in exercising the necessaryjudgements.

(3) Comparability

Information is comparable if it enables users to determine and evaluate similarities in, and differences between, thenature and effects of transactions and other events over time and across different businesses.

(4) Understandability

Information is understandable if its significance can be appreciated by users that have a reasonable knowledge ofbusiness and economic activities and accounting and a willingness to study with reasonable diligence the informationprovided.

Marking scheme: 1/2 a mark for identifying and 2 marks for explaining the characteristic. Maximum of 10 marks.

(c) The main problems with historical cost accounting are:

(i) Non-current assets values are unrealistic

The value of non-current assets shown on the balance sheet may be unrealistic if presented at their historical cost. Forexample, property assets have a tendency to appreciate over time, hence the value on the balance sheet becomesunderstated.

To overcome this problem a business may periodically revalue its assets.

(ii) Potential capital reduction

Distributions made out of profit based on the historical cost basis may result in a reduction of capital in real terms.Depreciation is regarded as a proxy for the contribution non-current assets have made to the business over theaccounting period. A criticism of depreciation based on historical cost is that it may not adequately reflect the value ofthe asset’s contribution during the year. This inadequacy is partly overcome by periodically revaluing the assets.

(iii) Holding gains on inventory are included in profit

Closing inventory, during a period of rising prices, will tend to have a higher value than goods purchased in earlierperiods (i.e. inventory appreciation). Therefore, the gross profit will be overstated because the closing inventory isdeducted from the opening inventory plus purchases. However, when the inventory is eventually sold it will probablycost more to replace.

(iv) Comparisons over time are unrealistic

Measuring the growth or the success of a business over time can be difficult during periods of inflation. For example,comparing the current profitability of a company with its performance ten years later would be meaningless withoutattempting to adjust the figures for inflation.

Examiner’s note: reference to Current Purchasing Power Accounting (CPP) and Current Cost Accounting (CCA) should be givendue credit.

Marking Scheme: 1 mark per relevant point up to a maximum of 6 marks.

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Drafting FinancialStatements(International Stream)

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

ADVANCED LEVEL

MONDAY 4 JUNE 2007

QUESTION PAPER

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examinationhall

The Association of Chartered Certified Accountants

Pape

r T6

(IN

T)

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ALL FOUR questions are compulsory and MUST be attempted

1 You are provided with the following financial statements for Bicepts, a limited liability company, and its subsidiaryTricepts:

Income statements for the year ended 31 May 2007Bicepts Tricepts $000 $000

Sales Revenue 135,000 74,000Cost of sales (70,000) (30,000)

–––––––– ––––––––Gross profit 65,000 44,000Distribution costs (7,500) (6,200)Administrative expenses (19,000) (7,784)

–––––––– ––––––––Profit from operations 38,500 30,016Income from Tricepts: Loan note Interest 4 –

Dividends 6,400 –Interest payable – (16)

–––––––– ––––––––Profit before tax 44,904 30,000Income tax expense (10,000) (9,000)

–––––––– ––––––––Profit for the period 34,904 21,000

–––––––– –––––––––––––––– ––––––––

Balance Sheets as at 31 May 2007Bicepts Tricepts

Assets $000 $000 $000 $000Non-current assetsProperty, plant and equipment 80,000 39,050Investments:$1 ordinary shares in Tricepts at cost 24,000 –Tricepts loan notes 50 –

–––––––– –––––––104,050 39,050

Current assetsInventory 10,630 4,498Receivables 18,460 12,230Bank 3,400 32,490 1,344 18,072

––––––– –––––––– ––––––– –––––––Total assets 136,540 57,122

–––––––– ––––––––––––––– –––––––

Equity and liabilitiesCapital and Reserves$1 Ordinary shares 70,000 25,000Retained earnings 37,540 15,000

–––––––– –––––––107,540 40,000

Current liabilitiesPayables 6,000 1,922Tax 11,000 7,000Dividends payable 12,000 29,000 8,000 16,922

––––––– –––––––8% Loan note – 200

–––––––– –––––––Total equity and liabilities 136,540 57,122

–––––––– ––––––––––––––– –––––––

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The following information is also available:

(i) Bicepts purchased 80% of the $1 ordinary shares in Tricepts on 1 June 2006. At that date Tricepts’ retainedearnings were $2,000,000.

(ii) Bicepts’ annual impairment review of goodwill on acquisition of Tricepts valued it at $1,800,000 at 31 May2007.

(iii) During the year ended 31 May 2007 Bicepts sold goods which originally cost $8,000,000 to Tricepts for$12,000,000. Tricepts still had 25% of these goods in inventory at 31 May 2007.

(iv) Tricepts owed Bicepts $1,800,000 at 31 May 2007 for some of the goods Bicepts supplied during the year.

(v) Bicepts owns $50,000 of Tricepts’ loan notes. The interest is paid annually in arrears at 31 May. Interest for theyear ended 31 May 2007 is included in Tricepts’ payables. Bicepts has also included the interest in itsreceivables.

(vi) All dividends were declared, but not paid prior to the year end.

Required:

(a) Calculate the goodwill arising on the acquisition of Tricepts. (3 marks)

(b) Prepare the following financial statements for Bicepts:

(i) the consolidated income statement for the year ended 31 May 2007. (10 marks)

(ii) the consolidated balance sheet as at 31 May 2007.

Note: A working should be included for the retained earnings. Disclosure notes are not required.(19 marks)

(c) Explain the accounting treatment of intra-group trading in consolidated accounts. (3 marks)

(35 marks)

3 [P.T.O.

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2 J Moor and P Croft have been trading independently as sole traders. They have decided to form a partnership calledMoorcroft from their existing businesses. The future profit sharing ratio in the new business will be 2:1 to J Moor andP Croft respectively.

The balance sheets of the sole trader businesses at the date of the formation of the partnership were as follows:

Balance sheets as at 31 May 2007J Moor P Croft

AssetsNon-current $ $ $ $Property 25,000 –Plant and machinery 14,000 16,000Motor vehicle – 7,000

––––––– –––––––39,000 23,000

Current assetsInventory 5,000 4,000Trade receivables 1,500 1,300Cash at bank 1,000 7,500 3,000 8,300

––––––– ––––––– ––––––– –––––––Total assets 46,500 31,300

––––––– –––––––––––––– –––––––

Capital and liabilitiesCapital accountsMoor 35,000 –Croft – 23,300Current liabilitiesTrade payables 7,000 8,000Loan from Dodd 4,500 –

––––––– –––––––Total capital and liabilities 46,500 31,300

––––––– –––––––––––––– –––––––

Additional information

At the date of formation of the partnership:(i) the property belonging to J Moor was revalued at $30,000.(ii) the motor vehicle was retained by P Croft and not transferred to Moorcroft.(iii) J Moor’s inventory was revalued at $4,500.(iv) the plant and machinery belonging to P Croft was revalued at $14,500. (v) J Moor agreed to take personal responsibility for the loan from Dodd.(vi) goodwill was agreed to be $12,000 for J Moor and $9,000 for P Croft.(vii) all the trade payables and trade receivables were taken over by Moorcroft at their book values.

Required:

(a) Prepare the following accounts for both J Moor and P Croft as they would appear on the closing of their soletrader businesses:

(i) Revaluation accounts; (5 marks)

(ii) Capital accounts. (5 marks)

(b) Prepare the balance sheet of Moorcroft immediately following the formation of the partnership.

Note: goodwill is not carried in the balance sheet.(10 marks)

(c) Explain briefly how partnership goodwill is calculated and why it needs to be recalculated when a newpartner joins a partnership. (5 marks)

(25 marks)

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This is a blank page.Question 3 begins on page 6.

5 [P.T.O.

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3 Acoms is a small business with limited liability. Its summarised financial results are given below:

AcomsIncome statement for the year ended 31 May 2007

$000Revenue 375Cost of sales (280)

––––Gross profit 95Distribution & administrative expenses (45)

––––Profit from operations 50Finance costs (5)

––––Profit before tax 45Income tax expense (15)

––––Profit for the period 30

––––––––

AcomsBalance sheet as at 31 May 2007

$000 $000AssetsNon-current assets 410Current assetsInventory 96Trade receivables 34Cash and bank 3 133

––––– –––––Total assets 543

––––––––––

Equity and liabilitiesCapital and reserves$1 Ordinary shares 300Retained earnings 90

–––––390

Current liabilitiesTrade payables 88Taxation 15 103

–––––Non-current liabilities10% Loan notes 50

–––––Total equity and liabilities 543

––––––––––

Additional InformationThe following are ratios for Acoms for the year to 31 May 2006 and the industry average ratios for 2007:

Acoms Industry AverageRatio 2006 2007Gross profit percentage (%) 34·7 30·0Net profit percentage (%) 17·7 20·0Current ratio 1·5 1·5Acid test (Quick) ratio 1·1 1·0Receivables collection period (days) 16·0 20·0

6

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Required:

(a) Calculate the following ratios for Acoms for the year ended 31 May 2007. State clearly the formula used foreach ratio.

(i) Gross profit percentage(ii) Net profit percentage(iii) Current ratio(iv) Acid test (Quick) ratio(v) Receivables collection period (5 marks)

(b) Use the information given and the ratios you calculated in part (a) to comment on the performance of Acoms.(10 marks)

(c) State five limitations of ratio analysis. (5 marks)

(20 marks)

4 Required:

(a) State the role of each of the following bodies:

(i) International Accounting Standards Committee Foundation(ii) International Accounting Standards Board (IASB)(iii) International Financial Reporting Interpretations Committee (IFRIC)(iv) Standards Advisory Council (SAC) (4 marks)

(b) Identify and explain the four qualitative characteristics of financial information that are currently included inthe IASB’s Framework for the Preparation and Presentation of Financial Statements. (10 marks)

(c) Discuss the problems with using historical cost accounting during a period of rising prices and explain howthese problems may be overcome. (6 marks)

(20 marks)

End of Question Paper

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6 (INT) December 2007 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

Marks Workings1 (a) (i) Malright $000

Income statement for the year ended 31 October 2007 0·5$000

Revenue 1,765 1·0 (1,800 – 35)Cost of sales (W1) (1,343) 4·0

––––––Gross profit 422Distribution costs (W1) (80) 1·5Administrative expenses (W1) (192) 4·5

––––––Profit from operations 150Finance cost (5) 1·0

––––––Profit before tax 145Tax (45) 1·0

––––––Profit for the period 100 0·5

–––––––––––– ––––14·0––––

(ii) MalrightBalance sheet as at 31 October 2007 0·5

$000 $000AssetsNon-current assetsProperty, plant and equipment (W2) 966 3·5Current assetsInventory 75 0·5Trade receivables 304 379 1·0 (320 – 16)

–––– ––––––Total assets 1,345 0·5

––––––––––––

Equity and liabilitiesCapital and reserves$1 Ordinary shares 650 0·5Share premium account 80 0·5Retained earnings 200 2·0 (130 + 100 – 30)

––––––930

Non-current liabilities10% Loan notes 50 1·0Current liabilitiesBank overdraft 50 1·0Trade payables 250 0·5Current tax 45 1·0Energy expenses accrual 15 1·0Loan notes interest 5 365 1·0

–––– ––––––Total equity and liabilities 1,345 0·5

–––––––––––– ––––15·0––––

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WorkingsW1 Cost of Distribution Administrative

Sales Cost Expenses$000 $000 $000

Purchases 1,105Discounts received (90) (1 mark)Wages (40:25:35) 72 45 63Energy expenses ($105 + $15) (40:20:40) 48 24 48Opening inventory 160Administrative expenses 80Increase in allowance for receivables ((320 x 0·05) – 10) 6 (1 mark)Director’s remuneration 70Closing inventory (75) (1 mark)Depreciation – buildings (30:30:40) 11 11 15Depreciation – plant 22

–––––– ––– ––––1,343 80 192

–––––– ––– –––––––––– ––– ––––(4 marks) (1·5 marks) (4·5 marks)

W2 Non-current assets TotalProperty, Plant

Land Buildings Plant & Equipment$000 $000 $000 $000

Cost 235 740 220 1,195Accumulated depreciation b/f – (60) (110) (170)Current year’s depreciation:

Buildings $740 x 5% (37) (37)Plant ($220 – $110) x 20% (22) (22)

–––– –––– ––– ––––235 643 88 966–––– –––– ––– –––––––– –––– ––– ––––

(0·5 mark) (1·5 marks) (1·5 marks) (3·5 marks)

(b) Accounting ratios for Malright

(i) Quick ratioCurrent assets – inventory

:1 =379 – 75

= 0·83:1–––––––––––––––––––––– ––––––––(acid test ratio) Current liabilities 365

(ii) Interest coverProfit before interest and tax

=150

= 30 times–––––––––––––––––––––––– ––––Interest 5

(iii) Earnings per shareProfit after tax

=100

= 15·4 cents–––––––––––––––––– ––––No of ordinary shares 650

(iv) Price earnings ratioCurrent share price per share

=130

= 8·4–––––––––––––––––––––––– –––––Earnings per share 15·4

Marking scheme: A total of 6 marks – 0·5 mark for stating the correct formula and 1 mark for the correct ratio.

2 (a) Appropriation Account for the year ended 31 October 2007 Marks$ $

Net profit 134,904 0·5Less partners’ salaries

Alan 30,000 )Bob 35,000 ) 1Colin 28,000 (93,000) )

–––––––Less interest on capital

Alan 4,000 )Bob 3,500 ) 1Colin 3,000 (10,500) )

––––––– ––––––––Net profit available for appropriation 31,404

––––––––––––––––Alan 3/6 15,702 0·5Bob 2/6 10,468 0·5Colin 1/6 5,234 0·5

–––––––– ––––31,404 4

–––––––– ––––––––––––

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(b) Partners’ Current Accounts MarksAlan Bob Colin Alan Bob Colin

$ $ $ $ $ $Bal b/f – – 1,600 Bal /b/f 2,800 1,200 – 1 + 1Drawings 22,000 17,000 25,000 Int on cap 4,000 3,500 3,000 1 + 1Capital a/c 30,502 Salaries 30,000 35,000 28,000 1 + 1Bal c/f 33,168 9,634 Profit 15,702 10,468 5,234 1 + 1

––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––52,502 50,168 36,234 52,502 50,168 36,234 8––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––––––––– ––––––– ––––––– ––––––– ––––––– –––––––

(c) Partners’ Capital AccountsAlan Bob Colin Alan Bob Colin

$ $ $ $ $ $Goodwill 28,800 43,200 Bal b/f 40,000 35,000 30,000 1 + 1Loan a/c 109,502 Cash 15,000 15,000 1 + 1Bal c/f 47,200 14,800 Revaluation a/c 3,000 2,000 1,000 1 + 2

Goodwill: 3:2:1 36,000 24,000 12,000 1Current a/c 30,502 1

–––––––– ––––––– ––––––– –––––––– ––––––– ––––––– –––––109,502 76,000 58,000 109,502 76,000 58,000 9–––––––– ––––––– ––––––– –––––––– ––––––– ––––––– –––––

Working for RevaluationsBook Value Revalued amount Change

$ $ $Property 120,000 136,000 16,000Equipment and machinery 40,000 35,000 (5,000)Inventory 22,000 18,000 (4,000)Receivables 18,000 17,000 (1,000)

––––––Net Change 6,000

––––––––––––New valuations apportioned to each partnerAlan 3/6 3,000Bob 2/6 2,000Colin 1/6 1,000

––––––6,000

––––––––––––

(d) Advantages of operating as a partnership:

(i) Business risk is spread amongst more people.(ii) Individual partners may be able to specialise in particular activities within the business.(iii) Access to a larger pool of capital.

Disadvantages of operating as a partnership:

(i) Disputes might arise between the partners.(ii) Decision making may take longer if all partners have to be consulted.

Marking scheme: 1 mark for each relevant point up to a maximum of 4 marks

Workings Marks3 (a) Goodwill on acquisition $000 $000 $000

Cost of investment 3,345 0·5Share capital 2,800 1Retained earnings 42 (2,842) (70% x 60) 1·5

–––––– –––Goodwill 503 3

–––––– –––––––––

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(b) Prestend Workings MarksConsolidated Balance Sheet as at 31 October 2007 0·5

Assets $000 $000 $000Non-current assets

Property, plant and equipment 7,500 (4,200 + 3,300) 0·5

Current assetsInventory 2,280 (1,500 + 800 – 20) 1·5Trade receivables 2,520 (1,800 + 750 – 30) 1·5Bank 950 5,750 (600 + 350) 0·5

–––––– –––––––Total assets 13,250

––––––––––––––Equity and liabilitiesCapital and reserves

$1 Ordinary shares 9,000 1Retained earnings 100 (W1) 4·5Minority Interest 1,260 (W2) 2

–––––––10,360

Current liabilitiesPayables 1,390 (1,220 + 200 – 30) 1·5Tax 1,500 (700 + 800) 0·5

–––––––Total equity and liabilities 13,250

–––––––––––––– –––14

–––

WorkingsW1 Retained earnings

Prestend balance 525 0·5Retained earnings of Northon (70% x $200,000) 140 1Pre acquisition reserves (70% x $60,000) (42) 1Less Goodwill (503) 1Unrealised profit on purchases from Prestend (20) (565) 1

––––– ––––––– –––Reserves 100 4·5

––––––– ––––––––––

W2 Minority InterestShare Capital (30% x $4,000,000) 1,200 1Retained earnings (30% x $200,000) 60 1

––––––– ––Minority Interest 1,260 2

––––––– –––––––––

(c) The existence of significant influence might be demonstrated where there is:

(a) A holding of 20% or more of the shares in the investee company, but less than 50%.(b) Participation in the policy making process of the investee company.(c) Material transactions between the two companies.(d) An interchange of management personnel beween the companies.(e) The provision of essential technical information by the investor company.(f) A representative of the investor company on the board of directors of the investee company.

Marking scheme: 1 mark for each circumstance up to a maximum of 3 marks.

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4 (a) Prepared in accordance with IAS 7 MarksGeofost

Cash flow statement for the year ended 31 October 2007$000 $000

Cash flows from operating activitiesNet profit before tax 15,000 0·5Adjustments for:

Depreciation 4,658 1Finance cost 730 0·5Profit on disposal of non-current assets (720) 1

–––––––Operating profit before working capital changes 19,668

Decrease in inventory 6,075 1Increase in receivables (1,863) 1Increase in payables 3,178 1

–––––––Cash generated from operations 27,058

Interest paid (100 – 120 + 730) (710) 1·5Tax paid (W1) (4,090) 1

–––––––Net cash from operating activities 22,258

Cash flows from investing activitiesPayments to acquire property, plant & equipment (24,340) 1Proceeds from sale of property, plant & equipment 2,694 0·5

–––––––Net cash used in investing activities (21,646)

Cash flows from financing activitiesProceeds from issue of share capital 1,869 1Repayment of long term borrowing (2,300) 1Dividend paid (1,486) 1

–––––––Net cash used in financing activities (1,917)

–––––––Net increase (decrease) in cash and cash equivalents (1,305) 0·5Cash and cash equivalents at the beginning of period 634 0·5

–––––––Cash and cash equivalents at end of period (671)

–––––––––––––– –––14

–––

Examiner’s noteIAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow.

Workings (all in $000):W1 Taxation

Paid 4,090 B/f 2,760C/f 3,020 Income statement 4,350

–––––– ––––––7,110 7,110

–––––– –––––––––––– ––––––

Note: The ‘Paid’ entry is the ‘balancing figure’.

(b) Over the period there was a net cash outflow from the business of $1,305,000.

The company purchased non-current assets of $24,340,000. The purchase of new non-current assets may help the futureoperational efficiency of the business and therefore improve future cash flows.

The company generated additional cash by selling non-current assets for $2,694,000 which yielded a profit on their NBV of$720,000.

Loan notes of $2,300,000 were repaid, this will reduce interest payments in the future. However, the bank overdraft hasincreased by $801,000. This will inevitably increase the cost of finance from the bank.

Inventory levels were reduced by $6,075,000. This had a positive impact on the cash flow of the business.

Receivables have increased by $1,863,000. This might suggest increased sales or that debt collection arrangements needtightening up.

The payables increase is good for cash flow but potentially may lead to problems with suppliers if the company does not staywithin agreed credit terms. Payables have almost doubled and the company may find they are no longer given credit.

Marking scheme – Other relevant comments may be acceptable. Maximum of 6 marks

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Certified Accounting Technician Examination Advanced Level

Time allowedReading and planning: 15 minutesWriting: 3 hours

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.

This question paper must not be removed from the examination hall.

Pape

r T6

(IN

T)

Drafting Financial Statements(International Stream)

Monday 3 December 2007

The Association of Chartered Certified Accountants

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Page 118: t6 Past Year Papers

ALL FOUR questions are compulsory and MUST be attempted

1 You are presented with the following trial balance of Malright, a limited liability company, at 31 October 2007:

Dr Cr$000 $000

Buildings at cost 740Buildings, accumulated depreciation, 1 November 2006 60Plant at cost 220Plant, accumulated depreciation, 1 November 2006 110Land at cost 235Bank balance 50Revenue 1,800Purchases 1,105Discounts received 90Returns inwards 35Wages 180Energy expenses 105Inventory at 1 November 2006 160Trade payables 250Trade receivables 320Administrative expenses 80Allowance for receivables, at 1 November 2006 10Director’s remuneration 70Retained earnings at 1 November 2006 13010% Loan notes 50Dividend paid 30$1 Ordinary shares 650Share premium account 80

–––––– ––––––3,280 3,280

–––––– –––––––––––– ––––––

Additional information as at 31 October 2007:

(i) Closing inventory has been counted and is valued at $75,000.(ii) The items listed below should be apportioned as indicated:

Cost of Distribution AdministrativeSales Costs Expenses

Discounts received – – 100%Energy expenses 40% 20% 40%Wages 40% 25% 35%Director’s remuneration – – 100%

(iii) An invoice of $15,000 for energy expenses for October 2007 has not been received.(iv) Loan note interest has not been paid for the year.(v) The allowance for receivables is to be increased to 5% of trade receivables.(vi) Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to be allocated

to cost of sales.(vii) Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost of sales, 30% to

distribution costs and 40% to administrative expenses.(viii) Tax has been calculated as $45,000 for the year.(ix) The current share price of Malright is $1·30 per share.

2

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Required:

(a) Prepare the following financial statements for Malright in accordance with IAS 1 Presentation of FinancialStatements:

(i) the income statement for the year ended 31 October 2007; and (14 marks)

(ii) the balance sheet as at 31 October 2007. (15 marks)

Note: notes to the financial statements are not required. Round all figures to the nearest thousand dollars

(b) Calculate the following accounting ratios for Malright:

(i) Quick ratio (acid test ratio);(ii) Interest cover;(iii) Earnings per share;(iv) Price earnings ratio.

Note: show ratio formulas and workings. (6 marks)

(35 marks)

3 [P.T.O.

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Page 120: t6 Past Year Papers

2 Alan, Bob and Colin have been successfully trading as ABC partnership for several years. Due to ill health Alan hasdecided to retire from the partnership as from 31 October 2007.

You have been provided with the following information:

(i) Alan, Bob and Colin shared profits in the ratio 3:2:1.

(ii) The partnership made a profit for the year ended 31 October 2007 of $134,904.

(iii) Alan has agreed that if there was a credit balance on his capital account at 31 October 2007 it can be transferredinto a loan to the partnership.

(iv) The partnership agreement allows for the following salaries per annum: Alan $30,000, Bob $35,000 and Colin$28,000.

(v) During the year cash drawings were as follows: Alan $22,000, Bob $17,000 and Colin $25,000. No interestis charged on drawings.

(vi) At 1 November 2006 Alan and Bob had credit balances on their current accounts of $2,800 and $1,200respectively, Colin had a debit balance of $1,600.

(vii) Interest on capital is to be paid at a rate of 10% on the balance at 1 November 2006 on capital accounts. On1 November 2006, the partners had credit capital account balances as follows: Alan: $40,000, Bob $35,000and Colin $30,000.

(viii) On the retirement of Alan, both Bob and Colin invested a further $15,000 each into the business and agreed anew profit-sharing ratio:Bob 2/5Colin 3/5

(ix) The assets of the partnership were revalued at 31 October 2007 for the purpose of Alan’s retirement.The book values and the revalued amounts are as follows.

Book Value Revalued amount$ $

Property 120,000 136,000Equipment and machinery 40,000 35,000Inventory 22,000 18,000Receivables 18,000 17,000

The revalued amounts are to remain in the books of the new partnership.

(x) Goodwill is not carried on the balance sheet. However, at 31 October 2007 the goodwill in the partnership wasvalued at $72,000. Any adjustments for goodwill are to be made through the partners’ capital accounts.

Required:

(a) Prepare an appropriation account for the partnership for the year ended 31 October 2007. (4 marks)

(b) Prepare the partners’ current accounts for the year ended 31 October 2007. (8 marks)

(c) Prepare the partners’ capital accounts for the year ended 31 October 2007 showing the adjustments thatneed to be made on the retirement of Alan from the partnership. (9 marks)

(d) State the advantages and disadvantages of operating as a partnership rather than as a sole proprietor.(4 marks)

(25 marks)

4

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3 Prestend is the parent company of Northon. The following are the balance sheets for both companies as at 31 October2007.

Prestend NorthonAssets $000 $000 $000 $000Non-current assets

Property, plant and equipment 4,200 3,300Investments:Shares in Northon at cost 3,345

Current assetsInventory 1,500 800Receivables 1,800 750Bank 600 3,900 350 1,900

––––– ––––––– –––– ––––––Total assets 11,445 5,200

––––––– ––––––––––––– ––––––

Equity and liabilitiesCapital and reserves

$1 Ordinary shares 9,000 4,000Retained earnings 525 200

––––––– ––––––9,525 4,200

Current liabilitiesPayables 1,220 200Tax 700 800

––––––– ––––––Total equity and liabilities 11,445 5,200

––––––– ––––––––––––– ––––––

The following information is also available:

(i) Prestend purchased 2,800,000 shares in Northon some years ago when Northon had retained earnings of$60,000. Goodwill on acquisition has been fully written off as impaired in prior years.

(ii) During the year Prestend sold goods with an invoice value of $240,000 to Northon. These goods were invoicedat cost plus 20%. Half of the goods are still in Northon’s inventory at the year end.

(iii) Northon owes Prestend $30,000 at 31 October 2007 for goods it purchased during the year.

Required:

(a) Calculate the goodwill on acquisition. (3 marks)

(b) Prepare the consolidated balance sheet for the Prestend group as at 31 0ctober 2007.

Note: a working should be included for group retained earnings. Disclosure notes are not required.(14 marks)

(c) A company that owns less than 50% of the shares of another company will regard it as an ‘associate’ if it isable to exert ‘significant influence’. Identify three circumstances that might demonstrate ‘significantinfluence’. (3 marks)

(20 marks)

5 [P.T.O.

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4 Geofost, a limited liability company is preparing its cashflow statement for the year ended 31 October 2007. You havebeen presented with the following information.

GeofostIncome statement for the year ended 31 October 2007 $000Profit from operations 15,730Finance cost (730)

–––––––Profit before tax 15,000Taxation (4,350)

–––––––Profit for the period 10,650

––––––––––––––

Balance sheets as at 31 October 2007 2006Assets $000 $000Non-current assets 44,282 26,574

Current assetsInventory 3,560 9,635Trade receivables 6,405 4,542Cash 559 10,524 1,063 15,240

–––––– ––––––– ––––––– –––––––Total assets 54,806 41,814

––––––– –––––––––––––– –––––––

Equity and liabilitiesCapital and reserves

Ordinary share capital 16,000 15,000Share premium account 3,365 2,496Retained earnings 15,629 6,465

––––––– –––––––34,994 23,961

Non-current liabilities9% loan notes 8,000 10,300

Current liabilitiesBank overdraft 1,230 429Trade payables 7,442 4,264Interest payable 120 100Taxation 3,020 11,812 2,760 7,553

–––––– ––––––– ––––––– –––––––Total equity and liabilities 54,806 41,814

––––––– –––––––––––––– –––––––

Additional information(i) During the year dividends paid were $1,486,000.

(ii) Summary schedule of changes to non-current assets during 2007:

Accumulated Net bookCost depreciation value

$’000 $’000 $’000Balance b/f 33,218 6,644 26,574Additions 24,340 24,340Disposals (2,964) (990) (1,974)Depreciation 4,658 (4,658)

––––––– ––––––– –––––––Balance c/f 54,594 10,312 44,282

––––––– ––––––– –––––––––––––– ––––––– –––––––

(iii) The total proceeds from the disposal of non-current assets were $2,694,000.

6

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Page 123: t6 Past Year Papers

Required:

(a) Prepare a cash flow statement for Geofost for the year ended 31 October 2007 in accordance with IAS 7 –Cash Flow Statements, using the indirect method. (14 marks)

(b) Comment on the financial performance and position of Geofost as shown by the cash flow statement youhave prepared. (6 marks)

(20 marks)

End of Question Paper

7

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Page 124: t6 Past Year Papers

Answers

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ACCA Certified Accounting Technician Examination – Paper T6 (INT) June 2008 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

1 (a) Steven, Stephanie and Michael Marks Workings ($)Income statement for the year ended 31 May 2008 0·5

$ $ $Sales revenue (W1) 513,500 3Opening inventory 35,000 0·5Purchases (W2) 266,000 2Carriage inwards 7,500 0·5

––––––––––308,500

Less closing inventory (23,000) 0·5––––––––––

Cost of goods sold (285,500)–––––––––

Gross profit 228,000 0·5ExpensesVehicle running expenses 20,400 0·5Insurance 7,000 1 (8,000 – 1,000)

Energy 10,100 1·5 (10,000 – 2,500 + 2,600)

Telephone 5,750 0·5Advertising 3,150 0·5Rent 24,000 1 (20,000 + 4,000)

Stationery 1,400 0·5Depreciation for: Vehicles 5,600 1

Equipment 20,000 25,600 1–––––––––

Bad debts 17,000 0·5Discounts allowed 8,000 0·5

–––––––––(122,400)

–––––––––Net profit before appropriation 105,600 Interest on drawings: Steven 1,500 0·5

Stephanie 1,000 0·5Michael 500 3,000 0·5

––––––––– –––––––––108,600

Interest on capital: Steven (5,000) 0·5Stephanie (5,000) 0·5Michael (2,500) (12,500) 0·5

––––––––– –––––––––96,100

––––––––––––––––––Share of Profit: Steven 38,440 1

Stephanie 38,440 1Michael 19,220 1

–––––––––96,100

–––––––––––––––––– –––22––––––

13

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(b) Current Accounts MarksSteven

$ $Drawings 60,000 Balance b/f 23,000 0·5Interest on drawings 1,500 Interest on capital 5,000 1Balance c/f 4,940 Share of profit 38,440 0·5

––––––– –––––––66,440 66,440––––––– –––––––––––––– –––––––

Stephanie

$ $Drawings 45,000 Balance b/f 21,000 0·5Interest on drawings 1,000 Interest on capital 5,000 1Balance c/f 18,440 Share of profit 38,440 0·5

––––––– –––––––64,440 64,440––––––– –––––––––––––– –––––––

Michael

$ $Drawings 25,000 Balance b/f 18,000 0·5Interest on drawings 500 Interest on capital 2,500 1Balance c/f 14,220 Share of profit 19,220 0·5

––––––– –––––––39,720 39,720––––––– –––––––––––––– ––––––– –––

6––––––

(c) Steven, Stephanie and MichaelStatement of financial position as at 31 May 2008 0·5

Cost Accumulated Net Book Depreciation Value

$ $ $Non-current assetsVehicles 40,000 17,600 22,400 1Equipment 80,000 36,000 44,000 1

–––––––– –––––––– ––––––––120,000 53,600 66,400–––––––– –––––––––––––––– ––––––––

Current AssetsInventory 23,000 0·5Trade receivables 50,000 0·5Prepayments 1,000 1Bank (W3) 38,800 112,800 3

–––––––– ––––––––Total assets 179,200

––––––––––––––––Partners’ capital accountsSteven 50,000 0·5Stephanie 50,000 0·5Michael 25,000 125,000 0·5

––––––––Partners’ current accountsSteven 4,940 0·5Stephanie 18,440 0·5Michael 14,220 37,600 0·5

–––––––– ––––––––162,600

Current liabilitiesTrade payables 14,000 0·5Accruals 2,600 16,600 1

–––––––– –––––––– –––Total equity and liabilities 179,200 12

–––––––– ––––––––––– –––

14

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Page 127: t6 Past Year Papers

Workings Allocationof marks

W1 Trade Receivables Control Account

$ $Receivables b/f 61,500 Bad debts 17,000 0·5 + 0·5Credit Sales (bal fig) 513,500 Settlement discounts 8,000 0·5 + 0·5

Bank 500,000 0·5Receivables c/f 50,000 0·5

–––––––– ––––––––575,000 575,000–––––––– –––––––––––––––– ––––––––

W2 Trade Payables Control Account

$ $Bank 270,000 Trade payables b/f 18,000 0·5 + 0·5Payables c/f 14,000 Purchases (bal fig) 266,000 0·5 + 0·5

–––––––– ––––––––284,000 284,000–––––––– –––––––––––––––– ––––––––

W3 Bank

$ $Balance b/f 15,000 Trade payables control 270,000 0·5 + 0·5Receivables control 500,000 Drawings: Steven 60,000 ⎫

Stephanie 45,000 ⎬ 0·5 + 0·5Michael 25,000 ⎭

Other Payments 76,200 1Balance c/f 38,800

–––––––– ––––––––515,000 515,000–––––––– –––––––––––––––– ––––––––

2 (a) Prepared in accordance with IAS7Marks

TraffoldStatement of cash flows for the year ended 31 May 2008 0·5

$000 $000Cash flows from operating activitiesNet profit before tax 4,899 1Adjustments for:

Depreciation 2,487 1Interest received (57) 0·5Interest paid 794 0·5Profit on equipment disposal (66) 1

–––––––Operating profit before working capital changes 8,057

Increase in inventory (1,940) 0·5Decrease in receivables 2,450 0·5Increase in payables 554 0·5

–––––––Cash generated from operations 9,121

Interest received 57 0·5Interest paid (794) 0·5Tax paid (W2) (1,665) 2

–––––––Net cash from operating activities 6,719

Cash flows from investing activitiesPurchase of property, plant and equipment (W1) (9,262) 3Proceeds from sale of equipment 766 1

–––––––Net cash used in investing activities (8,496)

15

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MarksCash flows from financing activities

Proceeds from issue of share capital 5,467 1Repayment of long term borrowing (2,091) 1Dividends paid (1,540) 1

–––––––Net cash used in financing activities 1,836

–––––––Net increase in cash and cash equivalents 59 1Cash and cash equivalents at the beginning of period 536 1

–––––––Cash and cash equivalents at end of period 595

–––––––––––––– –––18––––––

Examiner’s noteIAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow. Interest received can bean operating cash flow or an investing cash flow.

Workings (all in $000):

W1 Additions of non-current assets: Marks or Non-current assets NBV

Opening net book value 41,016 B/forward 41,016 Disposals 700Disposals (766 – 66) (700) 1 Revaluation 3,362 Depr’tion 2,487Depreciation (2,487) 0·5 Add’ns (bal) 9,262 C/f 50,453

––––––– –––––––Revaluation (7,454 – 4,092) 3,362 1 53,640 53,640

––––––– ––––––– –––––––41,191

_______ _______

Additions (Balancing figure) 9,262 0·5–––––––

Closing net book value 50,453––––––––––––––

W2 Taxation or Taxation

Bal b/f 1,296 0·5 Paid 1,665 B/f 1,296Income statement 1,570 0·5 C/f 1,201 Inc state 1,570

––––––– –––––––Tax paid (1,665) 1 2,866 2,866

––––––– ––––––– –––––––––––––– –––––––Closing balance 1,201

––––––––––––––

Note: the entries in italics in these t-accounts are the ‘balancing figures’.

(b) Comments could be: Indicative marks

Over the period there was a net cash inflow to the business of $59,000. The bank balance increased from $536,000 to $595,000. (0·5 mark)

The company was able to generate additional cash by selling some equipment for $766,000. (0·5 mark)

Loan notes of $2,091,000 were repaid, this will reduce interest payments in the future and thereforehelp the cash flow situation of the company. (2 marks)

Inventory levels have increased by $1,940,000. This might indicate the company is experiencing sometrading difficulties. Alternatively it could be that the company is taking advantage of some short term supplier discounts and purchasing inventory. (2 marks)

Receivables have decreased by $2,450,000. This could indicate that sales have fallen, alternatively it could be that the company has taken action to improve its credit control arrangements. (2 marks)

The company purchased non-current assets of $8,262,000. The purchase of new non-current assetsmay help improve operational efficiency, reduce costs and therefore improve future cash flows. (2 marks)

4,000,000 additional shares were issued during the year generating a cash inflow of $5,467,000. (1 mark)

Marking scheme – Answers above indicate the types of comments that could be made. Other relevant comments areacceptable. Maximum of 7 marks available.

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3 (a) Marks Workings ($000)

Goodwill on acquisition of Derwent$000 $000

Cost of investment 4,750 1Share capital (80% of $5,000,000) 4,000 1Pre-acquisition reserves (80% of $500,000) 400 (4,400) 1

–––––– –––––––Goodwill on acquisition 350

–––––––––––––– –––Total 3

––––––

(b) KeswickConsolidated income statement for the year ended 31 May 2008 0·5

$000Sales revenue 10,100 1·5 8,400 + 3,200 – 1,500Cost of sales (4,950) 2·5 4,600 + 1,700 – 1500 + (30% x 500)*

–––––––Gross Profit 5,150Distribution costs (2,010) 0·5Administrative expenses (1,350) 0·5Goodwill impairment (80) 1 250 – 170

–––––––Profit before tax 1,710Income tax expense (740) 0·5

–––––––Profit after tax 970

––––––––––––––Attributable to:Shareholders of Keswick 890 1·5Minority interest 80 1·5 400 x 20%

–––––––970

–––––––––––––––––

Total 10––––––

* Unrealised profit

(c) Any two of the following:

(i) The parent has an agreement with other investors which gives it control over more than 50% of the voting rights.

(ii) The parent under an agreement or by statute has power to govern the financial and operating policies of the entity.

(iii) The parent has the power to appoint or remove a majority of members of the board of directors.

(iv) The parent has the power to cast the majority of votes at meetings of boards of directors.

Marking scheme: 1 mark for each, up to max of 2 marks

17

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4 (a) Any 6 ratios: 2008 2007

Gross profit 946 470 Gross profit percentage –––––––––– x 100 ––––– x 100 = 50·2% ––––– x 100 = 40·9%

Sales 1,886 1,150

Net profit 249 64Net profit percentage –––––––––– x 100 ––––– x 100 = 13·2% ––––– x 100 = 5·6%

Sales 1,886 1,150

Current assets 405 515Current ratio ––––––––––––––– ––––– = 1·0 : 1 ––––– = 2·6:1

Current liabilities 387 195

Current assets – inventory 165 385Quick ratio ––––––––––––––––––––– ––––– = 0·4 : 1 ––––– = 2·0:1

Current liabilities 387 195

Loans 650 150Gearing ––––––––––––––– x 100 ––––– x 100 = 91% ––––– x 100 = 21·4%

Ord Share cap 718 700& reserves

Receivables 165 85Rec’bles collection period ––––––––––– x 365 ––––– x 365 = 31·9 days ––––– x 365 = 27·0 days

Sales 1,886 1,150

Cost of sales 940 680Inventory turnover ––––––––––––––– ––––– = 3·9 times ––––– = 5·2 times

Closing inventory 240 130

or:

Closing inventory 240 130Inventory turnover ––––––––––––––– x 365 ––––– x 365 = 93·2 days ––––– x 365 = 69·8 days

Cost of sales 940 680

Payables 187 145Payables period ––––––––––– x 365 ––––– x 365 72·6 days ––––– x 365 = 77·8 days

cost of sales* 940 680

PBIT 412 132Return on capital emp. ––––––––––––– x 100 ––––– x 100 = 30% ––––– x 100 = 15·5%

S.Cap + Res + 1,368 850Non curr lia.

* a proxy for purchases

Marking SchemeThe above ratios are indicative of the ones a candidate could produce. 1/2 should be awarded for each ratio calculatedcorrectly and 1/2 for stating the correct formula, a maximum of 9 marks.

(b) Relevant comments could include:Gross Profit Percentage – Gross profit percentage has increased significantly. This may be because Quadrop has obtainedbetter discounts from its suppliers. Alternatively, its market position or location may be allowing it to charge its customerspremium prices.

Net Profit Percentage – Net profit has improved as a percentage of sales, but not by the same increase in the gross profitpercentage. It may be that extra expenses, e.g. in marketing, are being incurred to generate the higher level of sales.

Current Ratio – The current ratio has fallen. The company may be suffering from liquidity problems and may not be able tomake payments as they fall due. The financial statements show that cash balances have fallen from a $300,000 surplus toan overdraft of $120,000.

Quick Ratio – Quadrop’s quick ratio has deteriorated from the previous year and is worryingly low. The business clearly hascash flow problems.

Gearing – There has been a significant increase in the gearing of the company. It has taken on additional loans presumablyto finance the additional non-current and intangible assets.

Receivables collection period – This has increased from the previous year by nearly five days. The slower collection ofreceivables will be contributing to the poor liquidity situation.

Inventory turnover – The inventory turnover ratio has fallen suggesting that there may be some inventory control problems.Alternatively the company may be changing the mix/type of goods it sells resulting in different turnover ratios.

Payables – The payables period has decreased from 77·8 days to 72·6 days which suggests it is paying suppliers morequickly. This will have an adverse impact on the cash flow position, unless discounts are being received for early payment.

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Return on capital employed – The business has improved its ROCE from 15·5%–30% despite taking out more long termloans. This level of return to shareholders should be acceptable and attractive to any prospective shareholders.

Marking scheme 1 mark for each relevant comment up to a maximum of 8 marks.

(c) The nature of Quadrop’s businessIndustry average ratiosThe general economic conditions that existThe size of Quadrop in comparison to its competitors

Marking scheme: 1 mark for each piece of information up to a maximum of 3 marks

19

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Page 132: t6 Past Year Papers

Certified Accounting Technician Examination Advanced Level

Time allowedReading and planning: 15 minutesWriting: 3 hours

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.

This question paper must not be removed from the examination hall.

Pape

r T6

(IN

T)

Drafting Financial Statements(International Stream)

Monday 2 June 2008

The Association of Chartered Certified Accountants

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Page 133: t6 Past Year Papers

ALL FOUR questions are compulsory and MUST be attempted

1 Steven, Stephanie and Michael are in partnership. They have asked you to prepare their accounts for the year ended31 May 2008. Unfortunately the partners have not maintained full accounting records. However, they know thatduring the year they made the following payments:

$Suppliers 270,000Energy 10,000Vehicle running expenses 20,400Insurance 8,000Carriage inwards 7,500Advertising 3,150Rent 20,000Telephone 5,750Stationery 1,400

––––––––346,200––––––––––––––––

The following balances at 1 June 2007 are available:

Dr Cr$ $

Capital accounts: Steven 50,000Stephanie 50,000Michael 25,000

Current accounts: Steven 23,000Stephanie 21,000Michael 18,000

Cash at bank 15,000Inventory 35,000Trade payables 18,000Trade receivables 61,500Vehicles at cost 40,000Equipment at cost 80,000Accumulated depreciation

Vehicles 12,000Equipment 16,000

Accrual for energy 2,500Prepayment for rent 4,000

–––––––– ––––––––235,500 235,500–––––––– –––––––––––––––– ––––––––

Additional Information(i) $14,000 was owed to suppliers as at 31 May 2008.(ii) Insurance of $1,000 was paid in advance at 31 May 2008.(iii) Receipts from customers were $500,000 and there was $50,000 outstanding from credit customers at 31 May

2008.(iv) During the year bad debts of $17,000 were written off.(v) Settlement discounts of $8,000 were given to credit customers.(vi) An invoice for $2,600 relating to energy expenses was unpaid at 31 May 2008.(vii) Inventory as at 31 May 2008 was valued at $23,000.(viii) Cash drawings during the year were: Steven $60,000; Stephanie $45,000; Michael $25,000.(ix) Depreciation on vehicles is to be provided at 20% of written down value.(x) Depreciation on equipment is to be provided at 25% on original cost.(xi) Interest on drawings is to be charged as follows: Steven $1,500; Stephanie $1,000; Michael $500.

2

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(xii) Interest on capital account balances is to be allowed at 10%.(xiii) Steven, Stephanie and Michael have an agreement to share profits in the ratio 2:2:1.

Required:

Prepare the following for the partnership:

(a) the income statement and appropriation account for the year ended 31 May 2008; (22 marks)

(b) the partners’ current accounts for the year ended 31 May 2008; and (6 marks)

(c) the statement of financial position as at 31 May 2008. (12 marks)

(40 marks)

3 [P.T.O.

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2 Traffold, a limited liability company, is preparing its statement of cash flows for the year ended 31 May 2008.

TraffoldStatements of financial position as at 31 May 2008 2007Assets $000 $000Non-current assets

Cost 65,251 53,525Accumulated depreciation (14,798) (12,509)

–––––––– ––––––––50,453 41,016

–––––––– ––––––––Current assets

Inventory 16,503 14,563Trade receivables 6,214 8,664Bank 595 536

–––––––– ––––––––23,312 23,763

–––––––– ––––––––Total assets 73,765 64,779

–––––––– –––––––––––––––– ––––––––

Equity and liabilitiesCapital and reserves

$1 Ordinary share capital 21,000 17,000Share premium 7,892 6,425Revaluation reserve 7,454 4,092Retained earnings 19,979 18,190

–––––––– ––––––––56,325 45,707

–––––––– ––––––––Non-current liabilities

9% loan notes 6,734 8,825 –––––––– ––––––––

Current liabilitiesTrade payables 9,505 8,951Taxation 1,201 1,296

–––––––– ––––––––10,706 10,247

–––––––– ––––––––Total equity and liabilities 73,765 64,779

–––––––– –––––––––––––––– ––––––––

TraffoldIncome statement for the year ended 31 May 2008 $000Sales revenue 28,775Cost of sales (14,821)

––––––––Gross profit 13,954Distribution costs (4,908)Administrative expenses (3,410)

––––––––Profit from operations 5,636Interest received 57Finance cost (794)

––––––––Profit before tax 4,899Taxation (1,570)

––––––––Profit for the period 3,329

––––––––––––––––

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Additional information

(i) Dividends paid during the year were $1,540,000.(ii) There were no amounts outstanding in respect of interest payable or receivable as at either year end.(iii) Total depreciation for the year was $2,487,000.(iv) The only revaluation of non-current assets was of a piece of freehold land.(v) During the year, the company sold equipment for $766,000 realising a profit of $66,000.

Required:

(a) Prepare a statement of cash flows for Traffold for the year ended 31 May 2008 in accordance with IAS 7 –Statement of Cash Flows, using the indirect method. (18 marks)

(b) Comment on the financial position of Traffold as shown by the statement of cash flows you have prepared.(7 marks)

(25 marks)

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3 Derwent is a limited liability company with a total share capital of 5,000,000 ordinary shares of $1 each. On 1 June 2005, Keswick acquired 80% of the ordinary shares in Derwent for $4,750,000. At that time, Derwent hadreserves of $500,000.

The summarised draft income statements of Keswick and Derwent for the year ended 31 May 2008 are providedbelow.

Income statements for the year ended 31 May 2008

Keswick Derwent$000 $000

Sales revenue 8,400 3,200Cost of sales (4,600) (1,700)

––––––– –––––––Gross profit 3,800 1,500Distribution costs (1,500) (510)Administrative costs (900) (450)

––––––– –––––––Profit from operations 1,400 540Dividend received from Derwent 200 –

––––––– –––––––Profit before tax 1,600 540Tax (600) (140)

––––––– –––––––Profit for the period 1,000 400

––––––– –––––––––––––– –––––––

Additional information

(i) During the year ended 31 May 2008 Keswick sold goods costing $1,000,000 to Derwent for $1,500,000. At31 May 2008, 30% of these goods remained in Derwent’s inventory.

(ii) At 31 May 2007 Keswick valued the goodwill arising from the acquisition of Derwent at $250,000. Animpairment review of this goodwill at 31 May 2008 valued it at $170,000.

Required:

(a) Calculate the goodwill arising on the acquisition of Derwent on 1 June 2005. (3 marks)

(b) Prepare the consolidated income statement for Keswick for the year ended 31 May 2008. (10 marks)

(c) Identify two circumstances when a company owning 50% or less of the shares of an entity will still bedeemed to have control of the entity. (2 marks)

(15 marks)

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This is a blank page.Question 4 starts on page 8.

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4 Janet owns some shares in a company. She has received the most recent financial statements that the company hasproduced, which are shown below. You have agreed to prepare an analysis of the financial performance and liquidityof the company for her.

QuadropIncome statements for the year ended 31 May

2008 2007$000 $000 $000 $000

Sales revenue 1,886 1,150Cost of sales (940) (680)

–––––– ––––––Gross profit 946 470Administration costs (349) (223)Distribution costs (185) (115)Interest payable (68) (13)

–––––– ––––––(602) (351)

–––––– ––––––Profit before tax 344 119Taxation (95) (55)

–––––– ––––––Profit for period 249 64

–––––– –––––––––––– ––––––

Statements of financial position as at 31 May2008 2007

Assets $000 $000 $000 $000Non-current assetsProperty, Plant & Equipment 950 530Intangibles 400 1,350 – 530

–––––– ––––––

Current assetsInventory 240 130Receivables 165 85Bank – 405 300 515

–––––– –––––– –––––– ––––––Total assets 1,755 1,045

–––––– –––––––––––– ––––––

Equity and liabilitiesEquityShare capital and reservesOrdinary share capital 400 400Share premium 150 150Revaluation reserve 50 50Retained earnings 118 100

–––––– ––––––Total equity 718 700

LiabilitiesNon-current liabilitiesLoans 650 150Current liabilitiesPayables 187 145Taxation 80 50Overdraft 120 387 – 195

–––––– –––––– –––––– ––––––Total equity and liabilities 1,755 1,045

–––––– –––––––––––– ––––––

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Required:

(a) Calculate six accounting ratios for 2007 and 2008, which could be used to analyse the financial performanceand liquidity of Quadrop. State the formulas used for calculating the ratios. (9 marks)

(b) Using the ratios you have calculated in part (a), comment on the performance and liquidity of Quadrop.(8 marks)

(c) What additional information about Quadrop would help you to interpret the ratios? (3 marks)

(20 marks)

End of Question Paper

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Answers

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ACCA Certified Accounting Technician Examination – Paper T6 (INT) December 2008 AnswersDrafting Financial Statements (International Stream) and Marking Scheme

Marks1 (a) Screeth

Statement of comprehensive income for the year ended 31 October 2008 0·5$000

Revenue 9,261 1·5 ($9,427 – $166)Cost of sales (W1) (6,770) 3·5

––––––Gross profit 2,491Distribution costs (W1) (955) 3·0Administrative expenses (W1) (1,228) 5·0Finance costs (58) 0·5

––––––Profit before tax 250 0·5Income tax expense (120) 0·5

––––––Profit for the year 130 0·5

––––––Other comprehensive income:Gains on property revaluation 1,267 1·0 ($3,150 – $1,883)

––––––Total comprehensive income for the year 1,397 0·5

–––––––––––– ––––17·0––––––––

(b) Screeth Statement of financial position as at 31 October 2008 0·5

Assets $000 $000Non-current assetsProperty, plant and equipment (W3) 4,960 4·5Current assetsInventory 480 0·5Trade receivables 1,615 1·5 ($1,700 – $85)Prepayments 10 1·0Cash in hand 27 2,132 0·5

–––––– ––––––Total assets 7,092 0·5

––––––––––––Equity and LiabilitiesCapital and reserves$1 Ordinary shares 2,850 0·5Share premium account 350 0·5Revaluation reserve 1,267 1·0Retained earnings ($875 + $130 – $200) 805 2·5

––––––5,272

Non-current liabilities7% Loan notes 822 1·0Current liabilitiesTrade payables 507 0·5Tax 120 0·5Accruals 60 1·0Bank overdraft 311 1·0

––––––Total liabilities 998

––––––Total equity and liabilities 7,092 0·5

–––––––––––– ––––18·0––––––––

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MarksWorkingsW1 Cost of Distribution Administrative

Sales Cost Expenses$000 $000 $000

Distribution costs 250Administrative expenses 126Salaries (1,180 + 60) (25:35:40) 310 434 496Discounts received (1 mark) (88)Property expenses (20:30:50) 58 87 145Insurance (130 – 10) (20:40:40) 24 48 48Purchases 6,248Opening inventory 610Depreciation – buildings 132 (W2) (0:50:50) 66 66Depreciation – motor vehicles (W2) 70Depreciation – furniture and equipment (W2) 160Closing inventory (1 mark) (480)Receivables expense (W4) (1 mark) 275

–––––– –––– ––––––6,770 955 1,228

–––––– –––– –––––––––––– –––– ––––––(3·5 marks) (3 marks) (5 marks)

W2 Depreciation on non-current assetsMotor Furniture

Buildings vehicles & equipment$000 $000 $000

Cost 2,640 420 800Depreciation b/f (625) (140) (335)Current year’s depreciation:

Buildings 2,640 x 5% (132)Motor vehicles (420 – 140) x 25% (70)Furniture and equipment 800 x 20% (160)

–––––– –––– ––––1,883 210 305

–––––– –––– –––––––––– –––– ––––

W3 Non-current assets as at 31 October 2008 $000Land (from TB) 1,295 0·5Buildings revalued at 31 October 2008 3,150 1·0Motor vehicles (W2) 210 1·5Furniture and equipment (W2) 305 1·5

–––––– ––––Total Property, Plant & Equipment 4,960 4·5

–––––– –––––––––– ––––

Working PapersW4 Receivables Expense

$ $Balance as per TB 260,000 Income statement 275,000Allowance for receivables 15,000

–––––––– ––––––––275,000 275,000–––––––– –––––––––––––––– ––––––––

Allowance for Receivables

$ $Balance c/f ($1,700,000 x 5%) 85,000 Balance as per TB 70,000

Receivables expenses 15,000––––––– –––––––85,000 85,000––––––– –––––––––––––– –––––––

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Marks Workings ($000)2 (a) Goodwill on acquisition of Bruce

$000 $000Cost of investment 8,800 1·0Share capital ($9,260,000 x 70%) 6,482 1·0Retained earnings ($750,000 x 70%) 525 (7,007) 1·0

–––––– ––––––Parent’s goodwill 1,793Non-controlling interest’s goodwill 600 1·0

––––––Total goodwill 2,393

–––––––––––– ––––Total 4·0

––––––––

(b) (i) WallaceConsolidated income statement for the year ended 31 October 2008

$000Revenue 72,400 1·0 50,000 + 27,400 – 5,000Cost of sales (33,200) 2·0 26,000 + 11,000 – 5,000 + 1,200*

––––––––Gross profit 39,200Distribution costs (5,000) 0·5Administrative expenses (9,792) 0·5 7,000 + 2,792Finance costs (2) 1·0 8 – 6

––––––––Profit before tax 24,406Income tax expense (6,800) 0·5 3,700 + 3,100

––––––––Profit for the year 17,606

––––––––––––––––Profit attributable to:

Owners of the parent 15,506 0·5Non-controlling interest 2,100 2·0 30% x (8,200 – 1,200)

––––––––17,606

–––––––––––––––– ––––Total 8·0

––––––––

(ii) WallaceConsolidated statement of financial position as at 31 October 2008

Assets $000 $000Non-current assetsTangible assets, net book value 44,895 0·5 (30,000 + 14,895)Intangible – goodwill 2,393 0·5

–––––––47,288

Current assetsInventory, at cost 4,365 1·5 (3,900 + 1,665 – 1,200*)Receivables 10,774 3·5 (6,850 + 4,530 – 600** – 6***)Cash and cash equivalents 1,762 16,901 0·5 (1,260 + 502)

––––––– –––––––Total assets 64,189

––––––––––––––Equity and LiabilitiesCapital and Reserves$1 Ordinary shares 26,000 1·0Retained earnings (W1) 16,945 3·0

–––––––42,945

Non-controlling interest (W2) 4,803 3·0–––––––

Total equity 47,748Non-current liabilities10% Loan note 20 1·0 (80 – 60)Current liabilitiesPayables 9,839 2·5 (6,645 + 3,800 – 600** – 6***)Tax 6,582 1·0 4,080 + 2,502

–––––––Total current liabilities 16,421

–––––––Total equity and liabilities 64,189

–––––––––––––– ––––Total 18·0

––––––––

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MarksNotes:* Exclusion of unrealised profit held in inventory (($5,000,000 – $3,000,000) x 60% = $1,200,000)** Intra-company indebtedness ($600,000)*** Exclusion of intragroup interest ($6,000)

WorkingsW1 Retained earnings as at 31 October 2008

$000 $000Wallace as per statement of financial position 14,145 0·5Bruce:Retained earnings 5,950Pre-acquisition reserves (750)Unrealised profit (1,200)

––––––4,000

Group share (70% x $4,000) 2,800 2·5–––––––16,945–––––––––––––– ––––

3·0––––––––

W2 Non-controlling interest as at 31 October 2008$000

Net assets of Bruce at 31 October 2008 15,210 0·5Less unrealised profit (1,200) 0·5

–––––––14,010–––––––

Non-controlling interest share (30% x $14,010) 4,203 1·0Goodwill attributable to non-controlling interest 600 1·0

––––––– ––––Total non-controlling interest 4,803 3·0

––––––– ––––––––

3 (a) Realisation Account$ $

Property 100,000 Loan a/c 10,000 0·5 0·5Furniture & fittings (NBV) 30,000 Payables 32,520 0·5 0·5Motor vehicles (NBV) 20,000 0·5Inventory 20,000 0·5Receivables 49,000 0·5Cash and bank: Cash and bank:

Loan 10,000 Property 110,000 0·5 0·5Payables 29,350 Furniture and fittings 26,800 0·5 0·5Dissolution expenses 2,100 Motor vehicles 22,300 0·5 0·5

Profit on realisation: Melanie 1–2 4,360 Inventory 21,650 1·0 0·5Vicky 1–4 2,180 Receivables 45,900 1·0 0·5Lucy 1–4 2,180 0·5

–––––––– –––––––– ––––269,170 269,170 Total 10·0–––––––– –––––––– –––––––––––– –––––––– ––––

(b) Cash and Bank$ $

Balance b/f 5,000 Realisation A/c:Realisation a/c Loan 10,000 0·5Property 110,000 Payables 29,350 0·5 0·5Furniture and fittings 26,800 Dissolution expenses 2,100 0·5 1·0Motor vehicles 22,300 Partners a/c: Melanie 92,040 0·5 0·5Inventory 21,650 Vicky 40,680 0·5 0·5Receivables 45,900 Lucy 57,480 0·5 0·5

–––––––– –––––––– ––––231,650 231,650 Total 6·0–––––––– –––––––– –––––––––––– –––––––– ––––

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Marks(c) Partners’ Accounts

Melanie Vicky Lucy Melanie Vicky Lucy$ $ $ $ $ $

Cash 92,040 40,680 57,480 Capital a/cs 80,000 30,000 50,000 2·0Current a/cs 7,680 8,500 5,300 1·0Realisation a/c 4,360 2,180 2,180 1·0

––––––– ––––––– ––––––– ––––––– ––––––– –––––––92,040 40,680 57,480 92,040 40,680 57,480––––––– ––––––– ––––––– ––––––– ––––––– –––––––––––––– ––––––– ––––––– ––––––– ––––––– ––––––– ––––

Total 4·0––––––––

4 (a) Ratio Formula Campbell Giddens Calculation Ratio Calculation Ratio

Current ratioCurrent assets

:1303

4·3:1274

1·8:1–––––––––––––– –––– ––––Current liabilities 70 151

Quick ratioCurrent assets – inventory

:1165

2·4:1107

0·7:1–––––––––––––––––––––– –––– ––––Current liabilities 70 151

Rec’bles collection periodReceivables

x 36569

x 365 42 days98

x 365 53 days–––––––––– –––– ––––Sales 596 678

Return on capital employedPBIT

x 10099

x 100 18·3%32

x 100 3·1%––––––––––––––––––––––––– –––– –––––S. Cap + Res + Non curr lia. 540 1,049

Gross profit percentageGross profit

x 100202

x 100 33·9%152

x 100 22·4%–––––––––– –––– ––––Sales 596 678

Net profit percentageNet profit

x 10099

x 100 16·6%24

x 100 3·5%–––––––– –––– ––––Sales 596 678

Marking scheme: 1/2 mark for correctly stating the formula and 1/2 mark for each correct ratio

(b) Relevant comments could include:

– The current ratios indicate that both companies have sufficient current assets to meet their current liabilities. Campbell’scurrent ratio is very healthy due mainly to the relatively lower level of liabilities.

– The quick ratio shows that Giddens may have some liquidity problems; it is less than 1:1 and therefore the companymay not be able to pay its debts as they become due. The high level of payables relative to current assets may indicatesome difficulty in paying suppliers. Giddens’ bank balance when compared to Campbell’s is also low.

– The receivables collection period for Giddens is longer than for Campbell. This may indicate poor credit control inGiddens and may have an adverse effect on company liquidity.

– Campbell is making a very good return on capital employed (18%) compared to Giddens (3·1%). Campbell should bean attractive investment to potential investors with this level of return.

– Campbell has a higher gross profit percentage than Giddens. It may be that Campbell is able to source its supplies morecheaply than Giddens or benefit from discounts. Alternatively, it may have some other advantage such as its locationwhich enables it to charge higher prices.

– The net profit percentage for Giddens is very low compared with Campbell, suggesting that it is not controlling itsexpenses as carefully as it should.

Marking scheme1 mark for each relevant comment up to a maximum of 6 marks.

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Certified Accounting Technician Examination Advanced Level

Time allowedReading and planning: 15 minutesWriting: 3 hours

ALL FOUR questions are compulsory and MUST be attempted.

Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may be annotated. You must NOT write in your answer booklet untilinstructed by the supervisor.

This question paper must not be removed from the examination hall.

Pape

r T6

(IN

T)

Drafting Financial Statements(International Stream)

Monday 1 December 2008

The Association of Chartered Certified Accountants

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ALL FOUR questions are compulsory and MUST be attempted

1 Screeth is a limited liability company with the following trial balance as at 31 October 2008.

Dr Cr$000 $000

Distribution costs 250Administrative expenses 126Salaries 1,180Discounts received 88Sales 9,427Property expenses 290Returns inward 166Cash 27Insurance 130Purchases 6,248Inventory at 1 November 2007 610Bank 311Loan note interest 58Share premium account 350Retained earnings at 1 November 2007 875Allowance for receivables at 1 November 2007 70Trade payables 507Trade receivables 1,7007% Loan notes 822Receivables expense 260$1 Ordinary shares 2,850Dividends paid: Final for year ended 31 October 2007 200Land at cost 1,295Buildings at cost 2,640Motor vehicles at cost 420Furniture and equipment at cost 800Accumulated depreciation at 1 November 2007

Buildings 625Motor vehicles 140Furniture and equipment 335

––––––– –––––––16,400 16,400––––––– –––––––––––––– –––––––

Further information relating to Screeth:

1 The insurance includes $10,000 which relates to November 2008.2 Buildings are depreciated at 5% of cost. Building depreciation during the year is allocated 50% to distribution

costs and 50% to administrative expenses.3 At 31 October 2008 the buildings were professionally valued at $3,150,000 and the directors wish this

valuation to be incorporated into the accounts.4 Depreciation is to be charged as follows:

(i) Motor vehicles at 25% of written down value, allocated to distribution costs(ii) Furniture and equipment at 20% of cost, allocated to administrative expenses.

5 Inventory at 31 October 2008 was valued at $480,000 based on its original cost.6 Based on past experience the allowance for receivables is to be increased to 5% of trade receivables and allocated

to administrative expenses.7 There are salaries outstanding of $60,000 for the year ended 31 October 2008.

2

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8 The items listed below should be apportioned as indicated:Cost of Distribution AdministrativeSales Costs Expenses

Property expenses 20% 30% 50%Insurance 20% 40% 40%Salaries 25% 35% 40%Discounts received 100%

9 Tax of $120,000 is to be provided for the year.

Required:

Prepare, the following financial statements for Screeth:

(a) the statement of comprehensive income for the year ended 31 October 2008. (17 marks)

(b) the statement of financial position as at 31 October 2008. (18 marks)

(35 marks)

3 [P.T.O.

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2 You are presented with the following information for Wallace, a limited liability company, and its subsidiary Bruce:

Income statements for the year ended 31 October 2008Wallace Bruce$000 $000

Revenue 50,000 27,400Cost of sales (26,000) (11,000)

–––––––– ––––––––Gross profit 24,000 16,400Distribution costs (2,700) (2,300)Administrative expenses (7,000) (2,792)Finance costs – (8)Income from Bruce: Loan note interest 6 –

Dividends 2,100 ––––––––– ––––––––

Profit before tax 16,406 11,300Income tax expense (3,700) (3,100)

–––––––– ––––––––Profit for the year 12,706 8,200

–––––––– –––––––––––––––– ––––––––

Statements of financial position as at 31 October 2008Wallace Bruce

Assets $000 $000 $000 $000Non-current assetsTangible assets 30,000 14,895Investments:

$1 ordinary shares in Bruce at cost 8,800 –Bruce loan notes 60 –

––––––– –––––––38,860 14,895

Current assetsInventory, at cost 3,900 1,665Receivables 6,850 4,530Cash and cash equivalents 1,260 12,010 502 6,697

––––––– ––––––– ––––––– –––––––Total assets 50,870 21,592

––––––– –––––––––––––– –––––––Equity and liabilitiesCapital and Reserves$1 Ordinary shares 26,000 9,260Retained earnings 14,145 5,950

––––––– –––––––Total equity 40,145 15,210

Non-current liabilities10% Loan note – 80Current liabilitiesPayables 6,645 3,800Tax 4,080 2,502Total liabilities ––––––– 10,725 ––––––– 6,302

––––––– –––––––Total equity and liabilities 50,870 21,592

––––––– –––––––––––––– –––––––

The following information is also available:

(i) Wallace purchased 70% of the $1 ordinary shares in Bruce on 1 November 2007. At that date Bruce’s retainedearnings were $750,000.

(ii) It is group policy to value the non-controlling interest at fair value. For this purpose, the fair value of the goodwillattributable to the non-controlling interest of Bruce is $600,000. Consolidated goodwill was not impaired at 31 October 2008.

4

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(iii) Wallace owns $60,000 of Bruce’s loan notes. The interest is paid annually in arrears. Interest for the year ended31 October 2008 is included in Bruce’s payables. Wallace has also accrued the interest in its receivables.

(iv) During the year ended 31 October 2008 Bruce sold goods which originally cost $3,000,000 to Wallace for$5,000,000. Wallace has only been able to sell 40% of these goods by 31 October 2008.

(v) At 31 October 2008 Wallace owed Bruce $600,000 for some of the goods that Bruce supplied during the year.

(vi) All Bruce’s dividends were paid in the financial year ended 31 October 2008.

Required:

(a) Calculate the goodwill arising on the acquisition of Bruce as at 1 November 2007. (4 marks)

(b) Prepare the following financial statements for Wallace:

(i) the consolidated income statement for the year ended 31 October 2008; (8 marks)

(ii) the consolidated statement of financial position as at 31 October 2008.

Note: A working should be included for the retained earnings. Disclosure notes are not required. (18 marks)

(30 marks)

5 [P.T.O.

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3 Melanie, Vicky and Lucy have had a business partnership for a number of years and share profits and losses in theratio 2:1:1. The partnership was dissolved on 1 December 2008. The statement of financial position for thepartnership as at 30 November 2008 was as follows:

Melanie, Vicky and LucyStatement of financial position as at 30 November 2008

Assets $ $Non-current assetsProperty 100,000Furniture and fittings 30,000Motor vehicles 20,000

––––––––150,000

Current assetsInventory 20,000Receivables 49,000Bank 5,000 74,000

–––––––– ––––––––Total assets 224,000

––––––––––––––––Capital and liabilitiesPartners’ capital accountsMelanie 80,000Vicky 30,000Lucy 50,000

––––––––160,000

Partners’ current accountsMelanie 7,680Vicky 8,500Lucy 5,300

––––––––21,480

Non-current liabilitiesLoan 10,000

Current liabilitiesPayables 32,520

––––––––Total capital and liabilities 224,000

––––––––––––––––

Additional information

(a) The property was sold for $110,000 and the furniture and fittings were sold for $26,800.(b) The motor vehicles were all sold for $22,300.(c) Only $45,900 of outstanding receivables were recovered.(d) The payables were settled for $29,350.(e) The inventory was sold for $21,650.(f) The loan was repaid in full on 1 December 2008.(g) There were no outstanding interest payments on the loan.(h) There were expenses incurred in dissolving the partnership of $2,100.

6

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Required:

Prepare the following accounts on dissolution:

(a) Realisation account. (10 marks)

(b) Cash and bank account. (6 marks)

(c) Partners’ accounts. (4 marks)

(20 marks)

7 [P.T.O.

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4 An investor is considering the purchase of shares in either Campbell or Giddens. Both companies are in the same lineof business and their accounts are summarised below:

Statements of financial position as at 31 October 2008Campbell Giddens

Assets $000 $000 $000 $000Non-current assetsAt cost 420 1,070Accumulated depreciation (113) (144)

––––– ––––––307 926

Current assetsInventory 138 167Receivables 69 98Cash and cash equivalents 96 303 9 274

––––– ––––– –––––– ––––––610 1,200

––––– ––––––––––– ––––––Equity and liabilitiesShare capital and reservesShare capital 370 900Retained earnings 170 69

––––– ––––––540 969

Non-current liabilities10% Loan note – 80

Current liabilitiesTrade payables 60 120Interest payable – 1Income tax 10 70 30 151

––––– ––––– –––––– ––––––Total equity and liabilities 610 1,200

––––– ––––––––––– ––––––

Income statements for the year ended 31 October 2008Campbell Giddens

$000 $000 $000 $000Sales revenue 596 678Cost of sales (394) (526)

––––– ––––––Gross profit 202 152Expenses:

Administrative (36) (45)Selling and distribution (53) (56)Depreciation (14) (19)Loan note interest – (8)

––––– ––––––(103) (128)

––––– ––––––Net profit 99 24

––––– ––––––––––– ––––––

8

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Required:

(a) Calculate the following six ratios for both companies, clearly showing the ratio formulae and figures used.

(i) Current ratio;(ii) Quick ratio (acid test ratio);(iii) Receivables collection period;(iv) Return on capital employed;(v) Gross profit percentage;(vi) Net profit percentage. (9 marks)

(b) Prepare, for the investor, comments on the performance and position of Campbell and Giddens using theratios calculated in part (a). (6 marks)

(15 marks)

End of Question Paper

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