UNIVERSITY OF BRADFORD

FINANCIAL ACCOUNTING

MAN2907L
12 May 2010
2 hours

This is a CLOSED BOOK examination

There are TWO Sections

Section A is multiple choice. This is compulsory.

Mark your answer on the answer grid and return together with questions
No marks are deducted for wrong answers. (40% of marks)

SECTION B Answer any TWO questions from this sections. (60% of marks)

Non-programmable calculators without a long-term data memory are permitted.

SECTION A

This section of the paper is multiple choice. You should mark the attached grid with your
chosen answer (either A, B, C, or D). there is only one correct answer. No marks are deducted
for wrong answers.
The questions should be handed in togther with the answer grid.
1Which of the following four statements about accounting concepts or principles are
CORRECT?
2The money measurement concept is that items in accounts are initially measured at their
historical cost.
3In order to achieve comparability it may sometimes be necessary to override the prudence
concept.
4To facilitate comparisons between different entities it is helpful if accounting policies and
changes in them are disclosed.
5To comply with the law, the legal form of a transaction must always be reflected in financial
statements.
6i and iii
7i and iv
8iii only
9ii and iii

1Historical cost and current cost are possible measurement bases which could be used when
preparing financial statements.
Which of the following statements is CORRECT?
AHistorical cost is the most appropriate basis foe inter-company comparisons of performance
BCurrent cost values are not related to cash values
CA belance sheet prepared on the historical cost basis values all assets at the amount of cash
paid
DCurrent cost values will always be higher than historical cost values

1 Which of the following correctly state items which should be disclosed as the other
comprehensive income in the income statement required by IAS 1 Presentation of Financial
Statements?

2Surplus on revaluation of non-current assets.

3Proceeds of issue of shares, loan notes issued or repaid, retained profit for the period, loss
on inventory.
4Profit on ordinary activities, income tax expense, expectional items.
5Accumlated profits, reserves, issued share capital.

1What is the return on shareholders equity as a percentage, based on the following figures
extracted from a companys financial statements for the year ended 31 March 2010?
000
Belance sheet
Issued share capital

500

Revaluation reserve

200

Retained earnings

800

Non-current liabilities:
10% loan notes

1,000

Income statement
Operating profit

300

Finance cost

50

Tax

50

Profit after tax

200

A40.0%
B20.0%
C13.3%
D12.0%

1The analysis of a companys financial statements revealed that the number of days sales in
inventory was 80 days. The average for companies I the same industry was 35 days. Which
one of following is LEAST likely to account for the high level of 80 days?

AThe companys trade is seasonal

BPoor inventory control
CA large purchase was made just before the reporting date
DAn increase in companys sales in the three months before the reporting date

1Which of the following statements are COORECT?

iA statement of cash flows prepared using the direct method produces a different figure for
operating cash flow from that produced if the direct method is used.
iiA surplus on revaluation of a non-current asset will appear as a cash flow in a statement of
cash flows.
iiiThe proceeds from a right issue of shares will appear as a cash flow in a statement of cash
flows.

i only

ii only

iii only

None of the above

1The balance sheet of Omicron at 31 March 2009 and 2010 include the following:
2009

2010

Inventory
164,843
193,885
Payables
87,996
62,887
How should the changes in these values be reflected in the statement of cash flows for
the year to 31 March 2010?
Change in inventory as a... Change in payable as a
A

Cash inflow of 29.042 cash inflow of 25,109

Cash outflow of 29,042

Cash inflow of 29.042 cash outflow of 25,109

Cash outflow of 29,042

cash outflow of 25,109

cash inflow of 25,109

1At 1 January 2009 the share capital and share premium account of a company were as
follows:

Share capital: 300,000 ordinary shares of 25p each

75,000
Share premium account
200,000
During the year ended 31 December 2009 the following events took place:
iOn 1 July 2009 the company made a right issue of one shares for every five held, at 1.20 per
share.
iiOn 1 October 2009 the company made a bonus (capitalization) issue of one share for every
three in issue at that time, using the share premium account to do so.
What are the correct balances on the companys share capital and share premium
accounts at 31 December 2009?
A
B
C
D

Share capital
460,000
480,000
120,000
120,000

Share premium account

287,000
137,000
137,000
227,000

1Tiger, a limited liability company, own 70% of the shares in Lily. Tiger has payables of
244,000. Lily has payables of 40,000 of which 6,000 is owed to Tiger. Tiger has
receivables of 360,000 and Lily had receivables of 150,000.
What amounts should be recorded for consolidated receivables and payables in the group
accounts of Tiger?
A
B
C
D

Payables
278,000
194,600
284,000
290,000

Receivables
504,000
352,800
510,000
516,000

1 Meaty has a subsidiary Steak and an associated undertaking Chop. For the year ended 31
December 2009, the following balances were extracted from the accounts of the three
companies:
Meaty
Steak
Chop
000
000
000
Cost of Sales
315
185
65
During the year under review, sales by Meaty to Steak amounted to 100,000 on
which Meaty earned a gross profit margin of 25%. As at 31 December 2009,
40,000 worth of these goods was included in the closing stock of Steak.
What should the cost of sales appear in the consolidated income statement of the
Meaty group for the year ended 31 December 2009?

A400,000
B410,000
C465,000
D565,000
1 A company values its inventory using the first in, first out (FIFO) method. At 1
April 2009, the
company had 700 engines in inventory, valued at 190 each.
During the year ended 31 March, the following transaction took place:
2009
1 June
1 October

Purchased
Sold

2010
2 JanuaryPurchased
15 March Sold

500 engines
400 engines
300 engines
250 engines

at 220 each
for 160,000
at 230 each
for 125,000

What is the value of the companys closing inventory of engines at 31 March

2010?
A188,500
B195,500
C166,000
D106,000
1The closing inventory of Omega amounted to 284,000 at 31 March 2010, the
reporting date. This total includes two inventory lines about which the inventory
taken is uncertain.
i500 items which had cost 15 each and which were included at 7,500. These
items were found to have been defective at the reporting date. Remedial work after
the reporting date cost 1,800and they were then sold for 20 each. Selling
expenses were 400.
i100 items which had cost 10 each. After the reporting date they were sold for 28
each, with selling expenses of 150.
What figure should appear in Omegas balance sheet for inventory?
A283,650
B283,800
C283,950
D292,150
E When should an anticipated loss on a long-term construction contract be
recognised under the percentage of completion method according to IAS 11
Construction Contracts?
AOver life of contract
BWhen the outcome of the contract is certain
CWhen the contract is completed

DImmediately
14) In preparing the financial statements of a company, the following items have to
be considered:
iThe company offers a one year warranty to purchasers, undertaking to replace an
item if a defect occurs. Past experience suggests that claims under the warranty will
probably arise.
iiThe company has an action pending against it for damages for wonderful dismissal
of a director. The companys legal advisor considers it improbable that the action
will be successful.
iiiThe company has guaranteed the overdraft of a subsidiary. The subsidiary is
trading profitably and the probability of a liability arising is remote.
How should these items be reflected in the financial statements, if at all?
AAll three should be disclosed by note.
BA provision should be created for the best estimate of the liability in i, items ii
should be disclosed by note and item iii not disclosed at all.
CA provision should be created for the best estimate of the liability in i, and items ii
and iii should be disclosed by note.
DA provision should be created for the best estimate of the liability in i and ii and
item iii should be disclosed by note.
15) Which of these statements about research and development expenditure are
CORRECT?
i) If certain conditions are satisfied, research and development expenditure
must be capitalized.
ii)
One of the conditions to be satisfied if development expenditure is to
be capitalized is that the technical feasibility of the project is reasonably
assured.
Iii If capitalized, development expenditure must be amortized over a period not
exceeding five years.
Ai only
Bii only
Ci and ii
DAll of the above
16) Identification of exceptional items in the income statement assists.
Amanagement in determining an appropriate level of dividend to purpose to
shareholders
Bassessment of the sustainable level of profit to be expected in future years

Aassessment of how much creative accounting is being undertaken by the

company

Bestablishment of the proper amount of tax payable by the company

17) Snail has 10 million 1 issued ordinary shares. At 1 March 2010 Slug purchased
70% of Snail 1 ordinary shares for 8,000,000. At that date Snail had net
assets with a fair value of 8,750,000 and its share price was 1.20.
What was the total goodwill arising on acquisition at 1 March 2010?
A1,875,000
B1,000,000
C400,000
D100,000
18)
During period of general price inflation, what is the effect of using the
historical cost concept on the
value of a companys non current assets
and profits?
Non-current asset values Profit
AUnderstated
BUnderstated
COverstated
DOverstated

overstated
Understated
overstated
Understated

19)
Delta purchased a machine on 1 July 2009 for 40,000. The estimated scrap
value of the plant in tenyear time is estimated to be 4,000. Deltas policy is
to charge depreciation on the straight line basis, with a proportionate charge I
the period of acquition.
What should be depreciation charge for the machine be in Deltas accounting
period of twelve month to 30 September 2009?
A720
B600
C900
D675
20)
In the year to 31 May 2007 Epsilon recognized an increase of 125,000 in
the value of land and buildings. In the year to 31 May 2008, a further increase of
12,000 was recognized. During the year to 31 May 2009, the land and
buildings suffered an impairment of 30,000.
Based on the above information, what are the changes in value of retained
profits and shareholders fund over the three years?
Retained profits
AAn increase of 107,000
BAn increase of 137,000
CAn increase of 107,000
DNo change

Shareholders funds
an increase of 107,000
an increase of 107,000
no change
an increase of 107,000

SECTION B
Answer any two questions from this section. All questions carry equal
marks
Question One
Sense is a public listed company that acquired shareholding interests in Touch and
Sight some years ego. The summarized balance sheets for the three companies as
at 31 December 2009 are as follows:
Sense (000)
Non current assets
Property, plant & equipment
Investments at cost
400,000 shares in Touch
200,000 shares in Sight
Available-for-sale investments

Touch (000) Sight (000)

870

520

870

600
300
140
1910

55
575

nil
870

Total assets

350
120
210
680
2,590

220
80
180
480
1,055

300
60
170
530
1,400

Liabilities
Current liabilities
Non-current liabilities
Total liabilities
Net assets

(230)
(150)
(380)
2,210

(70)
(120)
(190)
865

(210)
(250)
(460)
940

Share capital
Retained earnings
Total equity

600
1610
2210

250
615
865

800
140
940

Current assets
Inventories
Trade receivables
Cash

Supplementary information:
1Details of the capital and retained earnings at the respective dates of acquisition were
follows:
Touch (000) Sight (000)
Share capital
50 pence ordinary shares
1 ordinary shares
Retained earnings

250
380

800
92

At the date of acquisition, the fair value of Touchs property, plant & equipment was
80,000 more than their book value. This has required additional depreciation charges
totalling 15,000 as at 31 December 2009

1The inventory of touch at 31 December 2009 includes goods supplied by Sense for
50,000 (at selling price from Sense). Sense adds a mark-up of 25% on cost when selling
goods to Touch.
1At 31 December 2009, Senses trade receivables included 4,000 owing by Touch, whose
trade payables included 3,000 owing to Sense. On investigation, the difference was found to
be resulting from cash ij transit.
1None of the companies have paid any dividends for many years.
Required
aPrepare the consolidated balance sheet of Sense Group as at 31 December 2009, at least
showing workings for the followings figures:
iGoodwill
iiInvestment in associate, if any;
iiiConsolidated retained earnings;
ivMinority interests
(80% marks)
aExplain why consolidated financial statements are useful to the users of financial statements
(as opposed to just the parent companys separate (entity) financial statements).
(20% of marks)
(Total 100% marks)

Question Two
A financial analyst of an investment fund is presented with the following
summarised accounts for Kingdom Mechanics Ltd (kingdome), a listed
conglomerate operating in the European Union.
Income statement for the year ended 30 September 2009
million
Revenue
320
Cost of sales
(200)
Gross profit
120
Selling & administrative expenses
70
Profit before interest and tax
50
Financial cost
(10)
Profit before tax
40
Tax expenses
(20)
Profit for the year
20
Balance sheet as at 30 September 2009
million
million
Non-current asssets
Current assets
Inventory
90
Trade debtors
50
Cash and bank
10
150
Total assets
450
Equity
2 ordianry shares
200
Reserves
60
260
Non-current liabilities
10% notes
100
Current liabilities
Trade creditors
60
Taxation
20
Dividends (for the year)
10
90
Total equity and liabilities
450
The ratio o values for Kingdom for year ended 30 September 2007 and 2008 as well
as the current average for the industry in which Kingdom operates are as follows:
Ratios
Kingdom
Indusry
Historical Data
Average
2007
2008
2009
Return on capital emplyed (%)
16.2
14.7
16.2
Gross profit percentage (%)
30.4
34.7
32.3
Operating profit percentage (%)
19.3
17.7
17.3
Quick/ Acid test ratio (times)
1.5
1.1
1.5

Debtors collection period (days)

Earning per share (pense)
Required

32.0
36.0

44.0
26.0

35.0
30.0

aCalculate each of the above ratios for Kingdom for the year ended 30 September
2009. State clearly the formulae used for each ratio.
(20% of
marks)
aBased on your calculation and the information available, write a brief report on the
financial performance and position of Kingdom.
(40% of
marks)

aDescribe how the closure of related party relationships and transactions required
by IAS 24 Related Party Disclosure might be useful to help the financial analyst
interpret the ratios:
(40% of marks)
(Total 100% marks)

Question Three
A manufacturer produces and sells LCD monitors at 1,500 each, including a
standard one year free warrnaty to all customers. The manufacturer has extended
the warranty to two year at nil cost for certain major customers and has insured
aganesst the cost of second year of the warranty. In other words, the claims made
under the extended warranty are made in the forst instance againest the
manufacturer and then the manufacturer in turn makes a counter claim agaiest the
insurance company.
Past experience has shown that 30% of the LCD monitors will be subject to the
warranty claims in the first year; specifically, 20% will have minor defects and 10%
will require major repair. The manufacturer further estimates that in the second
year of the warranty, 35% of the items sold will hae minor defects and 15% will
require major repair. The average cost for a major repair and a minor defect are
estimated to be 250 and 80 respectively.
Due to keen market competition, the manufacturer further promises to all
customers that there is a 105 discount. i.e. 150 off, on the purchase of a second
monitor within one year of the first purchase.
Assume that the following sales are on 30 June 2009 and any warranty claims and
second purchase discounts are made on 30 June in the year of claim.

Sales

Standard warranty Extended warranty

(units)
(units)
14,000
26,000

The management assumes a risk adjusted discount rate of 5%, based on the
companys weighted average cost of capital (WACC). The discount factors for this
rate are 0.9524 after one year and 0.9072 after two years.
Required
aIAS 37 Provisions, Contigent Liabilities and Contigent Assets sets out the principles
of accouting for these issues and clearifies when provisions should and should not
be made. Discuss the nature of provisions and the accounting requirments for
recognizing them according to IAS 37.
(30% of marks)
aDiscuss the nture of controversy over the following issues and how IAS 37
addresses them.
iFuture restructuring or reorganization costs;
iiEnviromental provisions;
iiiBig bath provisions
(30% of marks)

aShow with explanation the accounting treatments for the warranty provision and
the second purchase discount of the manufacturer under IAS 37 for the year ended
30 June 2009.
(40% of marks)
(Total 100% marks)

Question Four
Benchmark Limited (Benchmark) is a manufacturer and contractor of high quality
garden furniture and fixtures. Modest profits have been reported for several years,
and the company has been experiencing liquidity problems. New finance is not
likely due to the recent credit crunch. The board of Benchmark, however, feel
confident that Benchmark could continue successfully if they adopt smarter cash
and cost management.
In order to compete in a volatile market, Benchmark started developing a newly
formulated paint with excellent anti-virus and anti-corrosion primer. Development
cost incurred during the year was 500,000. Although the development is
technically feasible, the development process is quite complex. The management
estimates that millions of pounds are needed for its completion.
At 31 March 2010, only one contract has been taken on to dae. The contracted
commenced in April 2009 and is due to be completed on 30 August 2010. The
customers has agreed to pay 4,000,000 lpus agreed variations. As a result of
change in building regulations additional cost (as shown below) have been incurred.
The customer has agreed to these variations
Details of the contract are:
Basic contract value
4,000,000
Cost to date
2,032,000 (excluding agreed variations)
Agreed additional cost to date
298,000
Value of work certified
65% complete - 2,600,000 (and invoiced to
customers)
Expected costs to complete
983,000 (excluding any further variations)
The board applied IAS 2 Inventories, albeit inappropriately, to the valuation of the
above partially completed contract.
The draft accouts for the year to 31 March 2010 have recently been prepared. The
accounts indicate that there has been no improvement in profiability or liquidity.
One of the directors suggested capitalizing the 500,000 development cost in order
to report higher profits.
Required

aDiscuss the suggestion of the director on the capitalisation of the development

cost according to IAS 38 Intangible Assets.
(20% of marks)
aState and explain the basic rule to be applied to valuation of inventories as set out
in IAS 2, and discuss why contract work-in-process inventory should not be valued
on this basis.
(20% of marks)
aCalculate the value of the contract work-in-process inventory in accordance with
IAS 11 Construction Contracts.
(30% of
marks)
aDiscuss how measures of profitability and liquidity will be affected by adjusting the
accounts so that the contracts is valued in accordance with IAS 11. You should
identify and quantify, as far as possible, the specific accounting ratios that may be
affected by the adjustment.
(30% of marks)
(Total 100% marks)
Question Five
Worcester Limited (worcester), a limited liability company, is preparing its statement of cash
flows for the year ended 31 October 2009.
Belance sheet as at 31 October
2009
2008
000
000
Assets
Non-current assets
Long term investments
2,200
2,400
Property, plant & equipment at cost
3,610
2,040
Accumlated dereciation
(1,060)
(860)
4,750
3,580
Current assets
Inventory
2,100
1,750
Accounts receivable
1,600
1,800
Cash & cash equivalents
1,090
4,790
3,550
Total assets
9,540
7,130
Equity and liabilities
Shareholders equity
1 ordinary share capital
Retained earnings
Non-current liabilities
Long-term debt
Current liabilities
Bank overdraft
Trade payables
Interest payable
Income tax payable

1,750

1,350

3,410
5,160

1,380
2,730

2,100

1,550

1,250
250
780

470
1,180
150
1,050

Total equity and liabilities

2,280
9,540

2,850
7,130

Details from the income statement for the year ended 31 October 2009
000
Sales revenue
Gross profit
Gains on disposal of plant
Less:
Depreciation
Administration and selling expenses
Impairment loss on long term investments
Operating profit
Less: Net interest expenses
Profit before tax
Less: Income tax
Profit for the year
Supplementary information

42,400
5,400
50
5,450
(380)
(900)
(200)
(3970)
(200)
(3,770)
(650)
3120

1Included in the net interest expenses was interest income of 270 received during
the year. There were no amounts outstanding in respect of interest receivable as at
either year end.
1During the year ended 31 October 2009, Worcester declared and paid a dividend,
which was duly recorded in the statement of changes in equity. The remain item
found in the statement of changes in equity was a 90,000 prior year adjustment
relating to a credit sale invoice issued on 31 October 2008 which had been
inadvertantly omitted from the prior year accounts, and results in an increase in
equity at that date.
1During the year, the company sold plant realising a gain of 50,000 as recorded in
the income statement. The original cost of the disposed plant was 450,000.
Required
aPrepare a statement of cash flows for Worcester for the year ended 31 October
2009 in accordance with IAS 7 Statement of Cash Flows, using the indirect method
(start with profit before tax).
(60% of
marks)
aExplain the relevance of the information in a statement of cash flows to respective
users of financial statements.
(40% of
marks)
(Total 100%
marks)