The University of Birmingham College of Social Sciences Birmingham Business School Department of Accounting and Finance Accounting Theory

(07 !7"# $%ample &td Introduction

Example Ltd is a question which requires students to prepare, using the same basic transactional data, financial statements on the following bases of accounting: historical cost, current purchasing power, replacement cost, real terms, cash flow, deprival value and current cost. The question has been designed to aid revision of these different bases of accounting which were covered in weeks !" of the module. The requirements listed should be attempted in the order in which the# appear. $nswers to Example Ltd should be handed in for marking in the lecture on the %onda# following the end of the module revision week scheduled for week &.

'asic transactional data

Example Ltd was incorporated on ( )anuar# on which date the compan# issued &*,*** +( ordinar# shares at par for cash. ,n the same da# it drew down a + *,*** long!term loan at an interest rate of (*- per annum, the interest being pa#able on the last da# of the financial #ear, .( /ecember. Immediatel# upon incorporation, the compan# purchased freehold land for + *,***, plant and equipment 0including buildings1 for +2*,*** and opening inventor# of + 3,***, all for cash. /uring the financial #ear, revenues averaged + *,*** per month, purchases averaged +(*,*** per month and other expenses +",*** per month. 4ustomers settled their accounts and suppliers were paid one month in arrears. ,ther expenses were settled in the month in which the# arose. ,n .( /ecember, the compan# paid the loan interest due and closing inventor# was valued at +.3,***. The compan# uses straight line depreciation for all plant and equipment 0including buildings1 and estimates that the# have a useful economic life of (* #ears with no residual value. The compan# operates in a region of high unemplo#ment and hence benefits from a special government subsid# to encourage emplo#ment which effectivel# waives the compan#5s liabilit# to corporation tax for a three #ear period.

6istorical cost accounting 064$1

(. 4alculate the amount of cash and cash equivalents as at .( /ecember. . 7repare an income statement for the #ear ended .( /ecember and a balance sheet as at that date. .. 8tate and explain the capital maintenance concept emplo#ed.

4urrent purchasing power accounting 0477$1

%ovements in the 97I were as follows: ( )anuar# 97I (** .* )une (*: .* 8eptember (*; .( /ecember ((

4losing inventor# was purchased at average on .* 8eptember. (. 7repare a balance sheet as at .( /ecember 0in which retained earnings are the balancing figure1. . 7repare an income statement for the #ear ended .( /ecember 0in which the monetar# gain or loss is the balancing figure1. .. 7rove the monetar# gain or loss arising. <8tudents ma# wish, first of all, to assume that the loan interest was paid on .* )une. If so, provide calculations to reconcile these numbers to the actual position, i.e. pa#ment on .( /ecember. Explain the reason for the difference between the numbers.= 2. 8tate and explain the capital maintenance concept emplo#ed.

9eplacement cost accounting 094$1

%ovements in the relevant price indices were as follows: ( )anuar# Land 7lant and equipment Inventor# 97I (** (** (** (** .* )une (* .3 ((* (( (*: .* 8eptember ! ! ((& (*; .( /ecember (*3 ( * ( 2 ((

4losing inventor# was purchased at average on .* 8eptember. The compan# uses average replacement cost in the income statement and considers that all holding gains are not distributable. (. 7repare an income statement for the #ear ended .( /ecember and a balance sheet as at that date. . 7rovide an anal#sis of all holding gains b# asset t#pe distinguishing between realised and unrealised holding gains. 6ighlight the treatment of backlog depreciation. .. 8tate and explain the capital maintenance concept emplo#ed.

9eal terms accounting 09T$1

%ovements on the relevant price indices were as follows: ( )anuar# Land 7lant and equipment Inventor# 97I (** (** (** (** .* )une (* .3 ((* (( (*: .* 8eptember ! ! ((& (*; .( /ecember (*3 ( * ( 2 ((

4losing inventor# was purchased at average on .* 8eptember. The compan# uses average replacement cost in the income statement and considers that all real holding gains are distributable. (. 7repare a balance sheet as at .( /ecember 0in which the figure for retained earnings is a balancing figure1. . 7repare an income statement for the #ear ended .( /ecember. .. 7rovide an anal#sis of all real holding gains b# asset t#pe distinguishing between realised and unrealised holding gains. 6ighlight the treatment of backlog depreciation. 2. 8tate and explain the capital maintenance concept used.

4ash flow reporting 04>91

Land and inventor# are readil# realisable assets and plant and equipment is not readil# realisable. The relevant net realisable values as at .( /ecember were: land ! + ,3**? plant and equipment @ ;,3**? inventor# ! +..,***. (. 7repare a statement of cash flow for the #ear ending .( /ecember. <$ssume that the initial purchase of inventor# is an operating cash flow.=

. 7repare a statement of financial position 0balance sheet1 as at .( /ecember 0in which retained earnings is the balancing figure1. .. 7repare a statement of realisable income 0income statement1 for the #ear ending .( /ecember. 2. 7repare a statement of changes in financial position for the #ear ended .( /ecember. 3. 8tate and explain the capital maintenance concept emplo#ed.

/eprival value accounting 0/A$1

Relevant data as at 31 December are as follows:

7resent value + Land 7lant and equipment Inventor# 3,*** 3 ,:** :,;**

9eplacement cost + (,*** .., ** .:,"&*

Bet realisable value + ,3** ;,3** ..,***

$ssume that all holding gains are distributable. (. 7repare a balance sheet as at .( /ecember 0in which retained earnings is a balancing figure1. . 7repare an income statement for the #ear ended .( /ecember. .. 8tate and explain the capital maintenance concept emplo#ed.

4urrent cost accounting 044$1

%ovements on the relevant price indices have been as follows: ( )anuar# Land 7lant and equipment Inventor# %onetar# working capital (** (** (** (** .* )une (* .3 ((* (( (*: .* 8eptember ! ! ((& (*; .( /ecember (*3 ( * ( 2 ((

(. 4alculate the current cost operating adCustments, assuming cash is included in monetar# working capital. . 7repare a balance sheet as at .( /ecember. .. 4alculate the gearing adCustment, assuming that the opening balance sheet is alread# stated in current cost terms. 2. 7repare the income statement for the #ear ended .( /ecember. 3. 9edraft the balance sheet for the #ear ended .( /ecember. :. 7rovide a detailed anal#sis of the current cost reserve. ". Explain the capital maintenance concept used.