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B291 Financial accounting

Assessment Booklet
November 2011 Presentation (11K)

Copyright 2011 The Open University 3.1

WEB 02746 6

Contents
1 2 Assessment on B291 The interactive computer-marked assessments 2.1 Practical information 2.1.1 About iCMAs 2.1.2 The practice iCMA 2.1.3 Submitting your iCMAs 2.2 iCMA 41 2.3 iCMA 42 2.4 iCMA 43 Tutor-marked assignments (TMAs) 3.1 Practical information 3.1.1 What your tutor looks for in an assignment 3.1.2 Word limits 3.1.3 Referencing 3.1.4 Plagiarism 3.1.5 Submitting your TMAs 3.1.6 Late submission of TMAs 3.1.7 Learning from feedback 3.2 TMA 01 3.3 TMA 02 The examination 4.1 The examination paper 4.2 Examination preparation B291 Specimen examination paper B291 Specimen answer guidance 4
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Assessment Booklet

1 Assessment on B291
There are two components to B291 assessment, as follows. 1 Continuous assessment. This consists of two tutor-marked assignments (often referred to as TMAs) and three interactive computer-marked assessments (iCMAs). The combined marks from these components form the overall continuous assessment score (OCAS). The examination. The marks from this component form the overall examinable score (OES).

In order to pass the module, you must obtain at least 40% in each of these two components. If you fail your OCAS, you will be required to retake the module. If, however, you pass your OCAS but fail the examination, you will be allowed to retake the examination, provided that you obtain at least 15% in the exam (OES). Candidates who fail their second attempt at the examination will be required to retake the module.

Continuous assessment iCMA 41 TMA 01 iCMA 42 TMA 02 iCMA 43

Cut-off date 15 November 2011 13 December 2011 10 January 2012 21 February 2012 13 March 2012

% OCAS 4 30 8 50 8 Total: 100 Fail if less than 40%

Exam Three hour unseen paper

Date In the period 2327 April 2012

% OES 100 Total: 100 Fail if less than 40%

2 The interactive computer-marked assessments

2 The interactive computer


marked assessments

2.1 Practical information


2.1.1 About iCMAs
The interactive computer-marked assessment (iCMA) is a form of computer-based test, designed to assess your progress and understanding up to particular pre-dened points during your study of the module. It is part of the continuous assessment component of B291. There are four iCMAs for B291, which are described below. There is a practice iCMA and three others. The last three are numbered 41, 42 and 43. These numbers refer to The Open Universitys internal numbering system, and you do not need to worry about this. iCMAs 41, 42 and 43 count towards your overall mark for the module, but each has a different weighting, as shown in the table in the previous section. The practice iCMA and iCMA 41 will be made available to students as soon as the module commences. Each subsequent iCMA will be available immediately after the cut-off date for the previous one. Marks and feedback for each iCMA should be available to you within a day or two of the cut-off date.

2.1.2

The practice iCMA

The purpose of the practice iCMA is to familiarise you with the question formats that typically appear in an iCMA and to provide you with practice in answering different types of questions. If you have studied B190 Introduction to bookkeeping and accounting, then you will already be familiar with iCMAs. The practice iCMA does not count towards your overall mark for this module.

2.1.3

Submitting your iCMAs

You must submit each iCMA by the cut-off date advised in the Study Calendar. It is not possible to defer completion of an iCMA. If you cannot complete it by the specied date, please contact your tutor as soon as possible. You will often nd that the need to complete an iCMA prompts you to keep up to date with your studies, as you will need to have reached a pre-dened point to have covered the material which will be tested. As you will also need to complete TMAs during your studies, it is very important that you do not fall behind. Contact your tutor if you feel that you are falling behind. Please note that in accordance with the different weighting given to each iCMA, iCMA 41 will have fewer questions than iCMAs 42 and 43. All iCMAs can be found on the B291 website under Assessment resources.

2.2 iCMA 41
This is the rst assessed iCMA and will test the material covered in Unit 1. It must be completed by 15 November 2011.

Assessment Booklet

2.3 iCMA 42
This is the second assessed iCMA and will test the materials covered in Units 2 and 3. It must be completed by 10 January 2012.

2.4 iCMA 43
This is the third assessed iCMA and will test the material covered in Units 4, 5 and 6. It must be completed by 13 March 2012.

3 Tutor-marked assignments (TMAs)

3 Tutor-marked assignments
(TMAs)

Assignments are key instruments of learning. Each assignment you undertake is designed to help you develop and integrate your learning from this module. Assignments require you to think about some of the key concepts in B291 and build your own framework of understanding about them. Assignments are the primary way by which you and your tutor communicate. The assessment process enables one to one conversations to take place between you and your tutor. If you need assistance to get started, you can consult your tutor. (You should also participate in the discussions on the tutor group forum, as a lot of discussion about this module will take place there.) Talking with your tutor will help you to plan and complete your assignments and also help you to check your understanding of what is required. It is important to note that your tutor will not tell you the answers but will comment (by telephone, e-mail or through the tutor group forum) on your ideas and suggestions. This exchange of ideas will be useful in providing guidance in your future study in this module. Completed assignments also provide an opportunity for your tutor to comment on the quality of your written work and the way in which you have presented the material as well as awarding a mark. Your mark in each assignment will give you a benchmark for how well you are doing in this module. It is rewarding to do well and you should strive to do as well as you can. However, if you do not get a good mark, take it as an opportunity to learn what went wrong rather than seeing it as a disaster. Most people learn more from mistakes than from doing well all the time. If you do not understand why you got the mark you did, you are entitled to go back to your tutor and ask for a further explanation.

3.1 Practical information


3.1.1 What your tutor looks for in an assignment
This assessment booklet presents the purpose and requirements of each assignment in detail. You should refer to this booklet before starting each assignment and contact your tutor if there are problems or if there is anything that you do not understand. There are several general points your tutor will be looking for when marking your assignments, namely, that you have:
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read and understood the question being asked and followed the guidance provided appreciated and understood the content of the material covered in the relevant unit applied academic concepts from the relevant B291 module material been able to collect and present relevant information to answer the questions asked in the assignment word-processed your assignment and submitted it using the eTMA system.

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Your tutor will also be looking at the clarity and rigour with which you have assembled your ideas and presented your arguments. Good writing is a key skill for business, so being able to express yourself clearly and succinctly is important. Working at improving your skills in arguing a case is worth doing not only because it will help you gain higher marks, but also because the struggle to write well will also help you learn the ideas presented in this module.

3.1.2

Word limits

There will be word limits set for the TMAs (or parts thereof) in this module, and for good reasons. When you are writing material for colleagues or customers, they will want it to be concise and focused on the task in hand. They do not want to waste time reading irrelevant material. Therefore, it is essential to learn the discipline of expressing yourself as clearly and briey as possible. You will nd details of these limits provided in the TMAs themselves. You will lose ve per cent of your marks if you exceed the specied word limit by more than ten per cent. If your TMA is excessively long, that is, more than 500 words over the limit, then your tutor is allowed to stop marking it after the point where it reaches the word limit. You will not lose marks for being under the word limit unless you are signicantly below it. In this case the likelihood is that you will not have answered the question in sufcient depth or detail and this will be reected in your mark. While references will not be included in the word count, any diagrams, tables and any appendices may or may not be included in the word count, depending on the specic instructions given. You need to take care in how you use them, because, if they comprise materials that you should have included in the written part of your assignment, then marks may be deducted for excessive length.

3.1.3

Referencing

When producing an assignment, any other assessed piece of work or something that is going to be viewed and/or used by others, it is important to include complete and accurate references because: l your references show that you have read around the subject
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your academic argument will be stronger if it is supported by evidence from other peoples research others will be able to nd and use the same sources that informed your work, which in turn allows them to check the validity and authenticity of your work, as well as developing and enhancing their own understanding of the subject.

If you use other peoples work to construct your answers and do not include appropriate references, then you will be passing off other peoples work as your own, and so be guilty of plagiarism. As you progress through your academic career, it is important to develop your study skills and understand when, where and what you need to reference. It is equally important to develop an understanding of what you do not need to reference (e.g., your own thoughts and ideas, and anything that constitutes common knowledge).

3 Tutor-marked assignments (TMAs)

In B291 we use the Harvard referencing style and this is what we expect you to use. The name of the author appears in brackets in the text, together with the year of publication, for example (Smith, 1986). Where there are only two authors, both names should be given in the text. If there are more than two authors only the rst name should appear followed by et al. (meaning and others). If you are using a direct quotation from a work, you also need to enclose the direct quotation in inverted commas, and include a page reference to the cited work (e.g., Smith, 1986, p. 1123). References to books These should be written as follows: Name(s) of author(s), initials of author(s), year of publication (in brackets), book title (in italics), edition number (if appropriate), serial editor (if appropriate), place of publication, publisher and page number(s). Example: Elliott, J. and Elliott, B. (2009) Financial Accounting and Reporting (13th edn), Harlow, Essex, Pearson Education Limited. If you are referring to an edited work, you need to use the following format. Straughan, R. (1985) Why act on Kohlbergs moral judgments? in Modgil, S. and Modgil, C. (eds), Lawrence Kohlberg: Consensus and Controversy, Philadelphia, Falmer Press (pp. 14961). References to articles in journals These should be written as follows: Name(s) of author(s), initials of author(s), year of publication (in brackets), title of the article (in quotation marks), journal name (in italics), volume and part/issue number (in bold), and page number(s) of the article. Example: Chandler, R. and Edwards, J.R. (1996) Recurring issues in auditing: back to the future?, Accounting, Auditing and Accountability Journal, 9(2), 429. References to websites These should be written as follows: Author, item title (in italic, or in plain text in inverted commas), year of publication if available (in brackets), web address, date of last update (if appropriate), date of access. Again, your TMA should include the short reference (e.g., BBC News, 2010).

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Example: West London Friends of the Earth, Tax-free Aviation [online], www.wlfoet5.demon.co.uk/airtransport/economics/taxfree.htm (Accessed 8 September 2007). References to module materials These should be written as follows: The B291 module team, the date (the year your presentation of the module began), the unit and the session. Again, your TMA should include the short reference (e.g., B291, Unit 1). The reference list should be placed at the end of your assignment under the heading References. For more information about how to reference correctly, please visit http://learn.open.ac.uk/mod/oucontent/view.php?id=372454. You can also nd useful information about plagiarism and referencing on the Library website. You will nd that variations appear in referencing style, even when the Harvard system is being used. However, the most important thing to remember is that you should be consistent and should provide as much relevant information as you can.

3.1.4

Plagiarism

If you submit an assignment that contains work that is not your own, without indicating this to the marker (i.e., acknowledging your sources), you are committing plagiarism and this is an offence. This might occur in an assignment when:
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using a choice phrase or sentence that you have come across copying word for word directly from a text paraphrasing the words from a text very closely using text downloaded from the Internet borrowing statistics or assembled facts from another person or source copying or downloading gures, photographs, pictures or diagrams without acknowledging your sources copying from the notes or essays of a fellow student copying from your own notes, or a text, tutorial, video or lecture, that contain direct quotations.

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Although you are encouraged to show the results of your reading by referring to and quoting from works on your subject, copying from such sources without acknowledgement is deemed to be plagiarism and will not be accepted by the University. Such poor academic practice may occur owing to inexperience, so you should read the Developing Good Academic Practices on the B291 website under Assessment resources. Where plagiarised material is included in assignments, tutors are likely to notice the shifts in style and may be aware of the source. Seek their advice on this early in your study of this module. The

3 Tutor-marked assignments (TMAs)

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University also uses plagiarism detection software which it applies to electronic assignments as well as scanned or re-typed assignments. The temptation to plagiarise may arise from lack of self-condence or from a lack of understanding about the aims of the assessment and about what is required of you. Assignments provide a vehicle for assessing your performance during your module and contribute to your overall module result. However, they also assist you in understanding your subject and aid your learning on the module. When you attempt to use the ideas and terms in this module independently, you learn more thoroughly and develop your own writing style. You are likely to perform better in examinations if you have learned how to write your own answers to questions in assignments. By submitting work that is not your own, you are denying yourself the benet of this valuable learning strategy. Copying the work of others would be counterproductive to your goal of understanding the module work and to real achievement. Most students will not wish to take such a negative approach to studying, and the University does not tolerate it. You are encouraged to collaborate with others in studying, but submitting work copied from or written jointly with others is not acceptable, unless collaboration is required in the particular assignment. Therefore you will be asked to acknowledge a statement to conrm that all assessment work you have submitted is your own and that you have not cheated. Submitting work that has been done by someone else and persistent borrowing of other peoples work without citation are obvious instances of plagiarism and are regarded as cheating. Copying answers from social networking sites is cheating. Paying for work from other sources and submitting it as your own is also cheating. It is intellectually dishonest to cheat. It gives one student an unfair advantage over others. Passing on your assignments to others, with the knowledge that another student may plagiarise the assignment will also lead to a penalty. If a case of plagiarism is proven, this is a serious offence and The Open University disciplinary procedures will be followed, as described under the Student Regulations SA 1.6 and SD 7.2. To check that students are working in a fair and academically appropriate manner, The Open University is currently using two types of text-matching software to detect potential cases of plagiarism in work that is submitted for assessment. These are as listed below.
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CopyCatch, which compares work submitted by one student with assignments submitted by all other students on the same module (as well as previous presentations of the module, where appropriate). It can also be used to compare each students assignments with the module materials and other commonly used or provided references. The main use of CopyCatch is to check for cases of collusion. Turnitin, which carries out the equivalent of an Internet search, looking for matches between the text included in a piece of work submitted by a student with all forms of information and

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resources publicly available on the Internet. The main use of Turnitin is to check for cases of direct copying, cut and paste and/ or not properly referencing various types of source materials. When using these systems, The Open University will not submit any personal details about you to either of them, although it is likely your work will have your PI number on it from which you can be identied. Furthermore, your work will not be stored on any external system and so will not be accessible to anyone outside The Open University. For each assignment submitted to Turnitin, an originality report is produced showing the percentage of text that matches specic websites. Copycatch produces similarity reports for matched pairs of scripts. These reports will be made available to the B291 Module Team and in some cases they may decide to take the matter further. This may result in some further guidance about academic conduct and support to prevent any further incidents, or, if more serious, may result in further action being taken. Depending on the questions being asked and the format of the submitted answer, some level of matching between scripts and with other sources is expected. For example, you may have used information obtained from other sites and/or scientic papers as a direct quote to support your answer or illustrate a particular point (making sure that you have referenced this in the appropriate and expected manner). Likewise, you will probably use terms and phrases, which can be described as common knowledge within your particular subject area and level of study, which do not need to be referenced, but are likely to arise in a similar format on a number of websites and other students answers. The B291 Module Team will take all such matters into account when reviewing each of the reports and deciding whether a student has plagiarised. For more information about plagiarism policy at The Open University, you should refer to the Universitys Assessment Handbook which is available on the module website or the student policy page on the OU website.

3.1.5

Submitting your TMAs

In this module you will submit your TMAs via the eTMA system which is available on StudentHome. You should note that you can only submit one le for each TMA. (If you submit a second le it will overwrite the rst one.) This may mean that you need to zip les together. You must ensure that your submission contains all of your TMA, that you are submitting the correct version of your TMA, and that it is in the right le format. If you submit a wrong le, or an unreadable le, you will not be allowed to submit another version after the cut-off date. Your le must be no bigger than 5MB in size. If it exceeds this size, you will not be able to submit it. You can either zip the le to reduce its size, or reduce the size by, for example, converting image les to a different format.

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The eTMA system will accept any le format, but this does not mean that your tutor will be able to open your le. For this reason, unless your module materials advise otherwise, you should submit in a le format which is compatible with Microsoft Word 972003. In practice, this means a le with a le extension of .doc or .rtf. If you are using a more recent version of Microsoft Word (e.g., Word 2007, Windows Vista), you will need to save your le in compatibility mode as the default le format is .docx which cannot be read by previous versions of Word. To do this, use Save As and choose Word 972003 as the le type. For more information about submitting TMAs, refer to the Assessment Handbook which is available on the B291 website. The cut-off date given in your Study Calendar is the last date by which each assignment should arrive. We strongly advise you not to leave submission of your TMAs until the last minute, and preferably to submit at least three days before the cut-off date. You should keep a copy of each assignment you submit, and also keep the submission receipt that will be sent to you when your TMA has reached the eTMA system. Remember that electronic submission is not immediate and it is your responsibility to make sure that your TMA arrives at the University on or before the cut-off date. You must make sure that your assignment is submitted, and arrives, before midday (UK local time) on the cut-off date. This means starting the submission process well before that time. However, there is a 12 hour grace period so any TMAs received by midnight on the cut-off date will still be accepted.

3.1.6

Late submission of TMAs

Illness or some other good reason may leave you unable to submit a TMA to arrive by the cut-off date. Please remember that late submission is not a right: you must obtain permission in advance. For some assignments late submission is not permitted at all. If there are good reasons why you cannot meet a TMA cut-off date, take the appropriate action as explained below.
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If you decide not to submit the assignment at all, warn your tutor, before the cut-off date, not to expect it from you. If you want permission to submit the assignment late, explain your reasons to your tutor before the cut-off date. Late submission will be allowed only if your tutor agrees that you have a genuine reason, that it is in your interest to submit late rather than proceed with current work, and that it is still acceptable to record a score for your work. An extension of more than seven days will be authorised only in exceptional circumstances, and your tutor will not agree to an extension of more than 21 days. If you want to submit an assignment more than 21 days late, you must obtain permission through Learner Support in your regional or national centre, having rst discussed the situation with your tutor.

Occasionally, when it is too late to record a score that can contribute to your continuous assessment score, your tutor may still think it useful for your assignment to be marked so that you have the benet of teaching comments.

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Permission to submit a TMA more than seven days after the cut-off date will not usually be granted for more than one TMA in a 30 point module. So that scores can be recorded and documentation prepared at the end of each module, no extension to the cut-off date will normally be allowed for a modules nal assignment. In exceptional circumstances, and depending on the last cut-off date, an extension may be possible, though discretion for permitting it is much more limited than for other TMAs. If you think that your circumstances are exceptional, ask your tutor as soon as possible whether an extension can be granted.

3.1.7

Learning from feedback

Although the marks are very important in determining your grade, the main purpose of assignments is to help you to learn about the issues in the module. This means that we have a number of expectations about what feedback your tutor will offer you. First, we expect your tutor to return your assignments promptly and within 14 days of the TMA cut-off date. Second, we expect the tutor to offer you detailed commentary on your answer, which includes commenting on good points and correcting errors and omissions; helping you to see what you might have left out (perhaps because you have not fully utilised the word limit); suggesting better ways to discuss material because you have exceeded the word limit or because the material is not relevant; making constructive criticism; directing you to the relevant module material; and commenting on how well you have communicated your ideas. Finally, we expect your tutor to give you an overview of your performance on each assignment which offers you a summary of its strengths and weaknesses, and gives advice on how to improve for your next assignment in a friendly and supportive manner. As you may imagine, it takes your tutor a considerable amount of time to do this well, so you will get the most benet if you allow yourself time to go through your assignment when you get it back and look at what your tutor has said, as well as the mark. In that way you gain the maximum benet from both your effort and your tutors effort and, hopefully, as a result, your marks will improve.

3.2 TMA 01 Cut-off date: 13 December 2011


Please note that you should not attempt TMA 01 until you have completed Units 1 and 2.

Question 1 (50 marks)


Since 1968, Dracula Limited has traded in Doncaster, South Yorkshire as a manufacturer of fancy-dress and theatrical costumes. It produces a wide range of general theatrical costumes, but its fancy-dress costumes are more specialised in that it manufactures

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chiey vampire and bat costumes. The rm employs a large number of local people in the Doncaster area, and sources most of its raw materials for costume manufacture from textile rms in the north of England. It sells its costumes to fancy-dress shops and theatres locally and in London, but also exports its fancy-dress costumes to the USA, especially the state of Louisiana. Its main business rival is Goth Limited, a rm of similar size, which operates in the south-east of England. Dracula Limiteds four directors, Mr Lugosi, Mr Lee, Mr Langella and Mr Oldman, own 80 per cent of the shares in equal proportions, with the remaining 20 per cent being owned in equal proportions by Mr Harker, Mr Blade, Mr Van Helsing, Ms Buffy and Mr Stoker. In the current economic recession, the business has not been doing very well and has made a small loss for its two most recent accounting periods, with its US exports being affected more adversely than other sales. However, Mr Lugosi, the managing director, has managed to convince the companys bank that, based on the success of lms such as the Batman and Twilight series and the television series True Blood, business is likely to get better, and that it is now a suitable time to expand the range of fancy-dress costumes that the company manufactures into wolf, maenad, elf and fairy costumes. The bank has therefore agreed to lend Dracula Limited 4 million, repayable in full in ten years time at an annual interest rate of 5 per cent. This 4 million will be classed as a long-term loan, and the inux of this amount of cash will exactly double the value of the net assets and capital shown in the most recent balance sheet. The money will be used to buy additional machinery, hire additional staff and provide extra working capital. The companys factory premises in Doncaster have been used as security for the loan. The other three directors are very surprised that Mr Lugosi has been so successful in convincing the bank to make such a loan to the company, and are concerned as to how this might be viewed by the companys stakeholders. Word has spread very rapidly in the local business community of Mr Lugosis success in obtaining the loan. Dracula Limited makes its full, audited nancial statements available for each accounting period on its website. The company also regularly supplies local schools with costumes for school plays free of charge and makes substantial annual donations to a local charity dedicated to the preservation of a rare species of bat, which inhabits caves in woodlands a few miles distant from the companys factory premises. (a) Assume that you are the nancial accountant for Dracula Limited and prepare a report for the directors, identifying the stakeholders who would have an interest in the companys nancial performance and explaining how their interests might be affected by the company acquiring the loan. (30 marks)

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(b) Explain, by reference to the qualitative characteristics that determine the usefulness of information in nancial statements, how disclosing the loan in the nancial statements of Dracula Ltd, where it will appear in the balance sheet as a long-term liability (that is, one that lasts for more than one year), fulls the requirement for information to be useful. (20 marks) (Total 50 marks) Guidance notes for TMA 01 Question 1 Your answer to Question 1 should not exceed 2,000 words in total. This limit includes all material you wish to include in your answer, other than any list of references to academic material(s). The above mark allocation indicates how you should allocate your word count between the parts of the question.

Question 2 (30 marks)


Jim owns and manages a small business, which provides an ofce design service, as well as buying and selling ofce furniture. Jim is a sole trader who manages all aspects of the business. Jim balances the business accounts at the end of each month. On 1 June, the balances on his accounts were as follows.
Account name Capital Equipment Van Bank Receivables control Payables control 12,000 7,851 3,000 4,600 16,599 20,050 Debit/credit Credit Debit Debit Debit Debit Credit

On 1 June, the debit balances on the receivables ledger were as follows.


Receivables ledger accounts Sunil Ltd K. Peters Richards plc 2,400 3,600 10,599

On 1 June, the credit balances on the payables ledger were as follows.


Payables ledger accounts Tim Jones Evans Ltd DBC Ltd 5,800 9,000 5,250

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During June, the following transactions took place.


Date Amount, as entered in cash book 450 2,400 800 3,600 5,800 5,000 10,500 425 825 97 8,800 5,200 480 Transaction

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Jim buys a camera to use in the business Receives payment from Sunil Ltd Receives a credit note from Evans Ltd for damaged chairs Receives payment from K. Peters Pays in full the amount outstanding on the account of Tim Jones Receives cash from Richards plc in part settlement of amount outstanding Invoices Ted Turner for design services now completed to Teds satisfaction Pays cash on delivery to Smiths for two desk and chair sets, taking up 15% discount for prompt payment Buys a sofa and chair set from Tim Jones, agreeing 30 days credit terms Pays telephone bill immediately on receipt, taking up 3% discount for prompt payment Pays in full the amount outstanding on the account of Evans Ltd Pays DBC Ltd Issues a credit note to Ted Turner to correct an error on the invoice issued on 15 June to Ted Turner

(a) Set out Jims nominal ledger accounts and the receivables and payables ledger accounts at 1 June. (5 marks) (b) Post the June transactions and balance the nominal ledger accounts and the receivables and payables ledger accounts. Assume that the cash book and the day books are posted daily. (20 marks) (c) Present the trial balance at 1 July. (5 marks) (Total 30 marks)

Question 3 (20 marks)


On 1 January 2008, a young artist called Michelangelo signed a contract with a charity named Art Angels, which supports young artists to do large projects. The agreement requires Michelangelo to paint a night sky with stars, and a day sky with cherubs and roses on the inside of the enormous dome of the building where Art Angels is housed, and stipulates a 36 month contract with a total sales value of 300,000. Michelangelo expects to spend 25 per cent of this amount on painting materials and the rent of scaffolding, spread out evenly over the 36 months. As he is rather short of cash, he receives an advance of 25,000 when signing the contract. He will receive another 25,000 at the end of the year if he has completed one third of the dome, then 50,000 at the end of the second year if he has completed two thirds of the dome, and the remaining 200,000 at the end of the third year if he has completed painting the whole dome.

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(a) Calculate Michelangelos prot or loss at the end of each year on a cash basis and on an accruals basis, assuming that Michelangelos expectations regarding his expenses were correct and that the expenses had been paid for in cash, and assuming that he recognises revenues as he earns them in accordance with the contract. (6 marks) (b) How does Michelangelo account for the difference between cash receipts and revenues in his accruals-based nancial statements at the end of each year? (2 marks) (c) It may seem unfair that Michelangelo will receive most of the money for the contract at the end of the three years. Explain, in no more than 200 words, what reasons Art Angels may have had to stipulate these conditions. (4 marks) (d) Explain, using accounting concepts and principles, why Michelangelo should not recognise the 300,000 as revenue: (i) at the date of signing the contract (ii) at the end of the three year period. (8 marks) (Total 20 marks)

3.3 TMA 02 Cut-off date: 21 February 2012


Please note that you should not attempt TMA 02 until you have completed Units 15.

Question 1 (10 marks)


Jean-Dominiques payslip for August 2011 is as follows.
Employee name: Jean-Dominique Paoli
August 2011
Basic salary 2,500 Income tax National Insurance Pension (employee) Student loan Union Total deductions NET PAY Employer National Insurance Pension (employer) Year to date Basic salary 12,500 Income tax National Insurance Employer National Insurance Employee pension Employer pension Student loan Union 750 250 55 25 10 1,090 1,410 250 100 3,750 1,250 1,250 275 500 125 50

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(a) Write up the journal entry to record Jean-Dominiques salary for August 2011. (6 marks) (b) Explain in less than 200 words what National Insurance is, who pays it and why. (4 marks) (Total 10 marks)

Question 2 (50 marks)


Sam Cooper is a sole trader, running a business that manufactures and sells a range of oor coverings to business and domestic customers. Sams nancial year end is at 31 March.
Nominal ledger closing balances at 31 March 2012 Capital 11% loan (repayable in 10 years) Land at cost Property at cost Depreciation on property Plant and equipment at cost Depreciation on plant and equipment Motor vehicles at cost Depreciation on motor vehicles Inventory as at 1 April 2011 Payables Bank (overdraft) Sales Purchases Maintenance and cleaning Heating and lighting Insurance Salaries and wages Administration expenses Advertising Distribution costs Suspense account (credit balance) Allowance for receivables Receivables 2,176,500 4,200,000 2,500,000 4,000,000 480,000 2,600,000 772,000 70,000 30,000 375,000 790,000 28,000 8,576,000 5,616,000 180,000 130,000 99,000 625,000 70,000 25,000 18,000 25,500 55,000 ?

Further information regarding post-trial balance adjustments is as follows. At the end of December 2011, Sams bookkeeper left Sams employment and a replacement did not start until 1 April 2012. After the closing trial balance (above) had been prepared, the new bookkeeper discovered a number of errors and omissions. 1 Sams policy is to use a FIFO method of inventory valuation. From January to March 2012, however, some errors have crept into the valuation process, resulting in a closing inventory valuation at 31 March 2012 of 300,000. The inventory needs to be revalued.

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Purchases in the three months were as follows. All items were the same, but the purchase price varied.
Month of purchase January 2012 February 2012 March 2012 Units 10 20 10 Unit price () 15,000 16,000 17,000

Of the 40 items purchased, 25 were sold and closing inventory comprises 15 items. On further investigation of the suspense account in the trial balance above, the bookkeeper discovered the following: l cash expenses of 12,500 had been posted to the suspense account, of which amount, 50 per cent was the cash payment of an advertising invoice while the remainder comprised cash payments for ofce stationery a cash receipt of 38,000 had been posted to the suspense account this represented the disposal proceeds from selling equipment purchased on 1 April 2010 at a cost of 50,000. The bookkeepers other post-trial balance reconciliations showed that: l an invoice for 15,000 for maintenance costs for April and May 2012 has been paid and included in the gure for maintenance costs in the trial balance l an invoice for fuel costs (used by delivery vans) of 10,000 for the three months to March 2012 remains unpaid and has not been recorded in the nominal ledger. Sam depreciates non-current assets as follows: l property at 2 per cent on cost of 4,000,000 on a straight-line basis l plant and equipment at 10 per cent on a straight-line basis
l l

5 6

motor vehicles at 25 per cent on reducing balance basis. There are no non-current assets that have a residual value. No depreciation for the year ended 2012 has been entered into the accounting records. A full years depreciation is charged in the year of acquisition and disposal. A full years loan interest is to be accrued. No heat and lighting costs for the month of March 2012 have been recorded in the accounting records. The next quarters charge for heat and lighting is expected to be 27,000. Sam has been advised to write off immediately a trade receivable of 13,500 and to make an allowance for irrecoverable receivables of 5 per cent of the outstanding receivables at the year end. Sam has approved both these transactions but no entries have been made in the nominal ledger accounts.

(a) Using the list of closing balances as at 31 March 2012, prepare a trial balance and identify the closing balance of the ledger account which has been omitted from the list of closing balances. (7 marks)

3 Tutor-marked assignments (TMAs)

21

(b) Using the trial balance prepared in (a) and the further information provided about the necessary post-trial balance adjustments, prepare an income statement for Sam Cooper for the year ended 31 March 2012, and a balance sheet as at that date. (43 marks) (Total 50 marks)

Question 3 (25 marks)


At the end of 2011, the following information is available for Topsanahs business.
2010 Non-current assets at valuation Inventory Cash at bank Cash in hand Receivables Payables Accruals (rent) Prepayments (rates) 55,000 182,000 16,750 1,120 290,200 123,400 1,200 3,450 2011 50,000 182,500 51,150 2,500 287,340 128,475 1,450 2,300

Cash movements during 2011 Cash received from customers Cash paid for sundry expenses Cash paid to suppliers 23,340 17,250 22,230

Bank movements during 2011 Received from customers Bank loan Cash withdrawn from the bank Paid to suppliers Paid for rent Paid for rates Drawings Sundry expenses 877,800 10,000 22,000 650,520 40,000 38,750 40,000 62,130

(a) Draw up a pro-forma combined cash and bank account, receivables and payables control accounts and all other T-accounts as required for Topsanah for the year ended 31 December 2011. (10 marks) (b) Prepare Topsanahs income statement for the period ended 31 December 2011. (7 marks)

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(c)

Prepare Topsanahs balance sheet as at 31 December 2011. (8 marks) (Total 25 marks)

Question 4 (15 marks)


Dev, Ida and Lin have been operating a business as a partnership in the UK for several years. From 1 January 2012, Mo will join the partnership. He will pay a capital contribution of 160,000 of which 30,000 represents payment for a one fourth share in the goodwill of the business. The balance sheet as at 31 December 2011 was as follows.
Dev, Ida and Lin Partnership
Balance sheet as at 31 December 2011
ASSETS Non-current assets Property Plant and machinery Fixtures and ttings Current assets Inventory Receivables Bank Total assets CAPITAL AND LIABILITIES Capital Partners accounts Liabilities Payables Total capital and liabilities 80,000 880,000 800,000 80,000 120,000 30,000 230,000 880,000 500,000 100,000 50,000 650,000

At 31 December 2011 the balances on the partners capital and current accounts and the prot sharing ratios were as follows.
Partners accounts Dev (psr 3/6) Ida (psr 2/6) Lin (psr 1/6) Capital 300,000 200,000 100,000 600,000 Current 100,000 50,000 50,000 200,000 Total 400,000 250,000 150,000 800,000

Before Mo joins the partnership, Dev, Ida and Lin decide to revalue the partnerships non-current assets. Property, plant and machinery, and xtures and ttings were revalued at 620,000, 110,000 and 70,000 respectively. From 1 January 2012, the prots will be equally shared among the four partners.

3 Tutor-marked assignments (TMAs)

23

(a) Prepare a balance sheet for the new partnership as at 1 January 2012 where goodwill has been capitalised. Show the balances on the partners capital and current accounts and all the necessary workings and T-accounts you use to obtain the necessary gures. (7 marks) (b) Prepare a balance sheet for the new partnership as at 1 January 2012 where goodwill has not been capitalised. Show the balances on the partners capital and current accounts and all the necessary workings and T-accounts you use in the process. (6 marks) (c) Why might Dev, Ida and Lin prefer not to capitalise goodwill? (2 marks) (Total 15 marks)

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Assessment Booklet

4 The examination
You will receive notication of the exact examination date via StudentHome about three months prior to the examination. For this presentation of B291, the examination will take place in the period 2327 April 2012.

4.1 The examination paper


The B291 examination comprises one unseen, three hour paper. As you will see from the following specimen paper, the examination consists of four questions each carrying 25 per cent of the marks. You should allocate about 4045 minutes to each question and you should attempt all four questions. You can answer the questions in any order. Read each question carefully before you attempt an answer and make sure that you answer what is asked.

4.2 Examination preparation


The following specimen examination paper (SEP) is provided to give you an idea of the format of the real examination paper which you will take, and of the possible format and type of questions you will encounter. Your tutor will provide advice in due course on how to use the SEP to the best effect.

B291/SEP

25

B291/Specimen

Module Examination 20XX


FINANCIAL ACCOUNTING

Date: Time allowed: 3 hours Time:

This paper contains FOUR questions. You should attempt ALL these questions. Each question carries 25% of the marks. Write your answers (including diagrams and illustrations), in pen, in the answer book provided. If you need more space than that provided you should obtain an extra answer book from the invigilator. The use of non-programmable calculators is permitted in the examination. In questions that require calculations, credit will be given for showing your workings.

At the end of the examination Check that you have written your personal identier and examination number on each answer book used. Failure to do so will mean that your work cannot be identified. Put all your used answer books together with your signed desk record on top. Fasten them in the top left corner with the round paper fastener. Attach this question paper to the back of the answer books with the at paper clip.

This specimen paper is representative of the kinds of questions which will be set. The range of questions in the actual examination will be drawn from all the examinable components of the module the study units.

Copyright 2011 The Open University

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Question 1 (a) Discuss the impact that differences in legal form has on the presentation of an entitys income statement and balance sheet, especially for the latter in terms of presentation of capital. (12 marks) (b) Why is it essential for accountants to know about concepts of business law? Discuss with reference to contract, tort, employment and agency law. For tort, refer to any case law that you deem relevant. (13 marks) (Total: 25 marks) Question 2 Below is a trial balance for Dino and Dinah Ltd extracted from the accounts on 31 December 2010.
Trial balance as at 31 December Debit 000 Sales Rental income Opening inventory Purchases Debenture interest expense for the 6 months to 30 June Administrative expenses Administrative salaries Distribution costs Manufacturing salaries Carriage inwards Property costs Non-current assets at cost: Freehold property and plant Equipment Intangible assets Non-current assets: depreciation Equipment Receivables Allowance for receivables Payables Bank Ordinary shares issued 10% Irredeemable preference shares Retained earnings 8% debentures Total 609,400 1,200 9,600 2,400 12,200 50,000 609,400 20,500 200 20,000 8,000 200,000 24,000 5,700 75,000 250,000 2,000 10,000 5,500 7,500 3,500 1,200 3,300 Credit 000 500,000 7,000

The following information is relevant for the preparation of the nancial statements. 1 2 Closing inventory is 50,555,000. Depreciation on equipment is ten per cent annually on a straight-line basis.

B291/SEP

27

The allocation of expenditure between administrative and


distribution costs should be as follows.

Allocation of costs Property costs Depreciation Distribution 40% 50% Administrative 60%
50%

5 6 7

8 9

An impairment review has revealed that 700,000 should be written off intangible assets. The charge is to be made to administrative expenses. Irrecoverable receivables amount to 1,800,000. The accountant decides to increase the allowance for receivables to 2,000,000. Corporate income tax is estimated to be 60,000,000 for the year. The eight per cent debentures are repayable in 15 years time. Interest is paid twice a year in equal instalments. The second instalment has not yet been paid. Dividends on the preference shares are payable at the end of the year, but have not yet been paid as at 31 December. Ordinary dividends of 1,920,000 are proposed.

(a) Write up the journal entries for the end of year adjustments. (7 marks) (b) Prepare the income statement. (7 marks) (c) Prepare the balance sheet. (7 marks) (d) Show the note for property, plant and equipment. (2 marks) (e) Show the statement of changes in equity. (2 marks) (Total: 25 marks) Question 3 The extracts of the income statement, statement of changes in equity, and balance sheet for Terence Keynes Upholstery Ltd are presented below. Terence Keynes Upholstery Ltd
Income statement for the year ended 31 December 2009 000 Sales revenue 80,800 (44,000) Cost of sales 36,800 Gross prot (2,700) Distribution costs (12,100) Administrative expenses 22,000 Operating prot (500) Loss on disposal of non-current assets 21,500 Prot before interest and tax (1,600) Finance costs 100 Interest received 20,000 Prot before tax (10,000) Corporate income tax 10,000 Prot for the year

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Terence Keynes Upholstery Ltd


Statement of changes in equity for the year ended 31 December 2009 000 Balance brought forward Prot for the year Issue of share capital Dividends paid Balance carried down 21,500 10,000 2,500 (5,000) 29,000

Terence Keynes Upholstery Ltd


Balance sheets as at 31 December: 000 Non-current assets Property, plant and equipment (at cost) Accumulated depreciation Current assets Inventories Receivables Cash and cash equivalents Total assets Equity capital and liabilities: Equity Share capital Ordinary shares of 1 each Retained earnings Non-current liabilities Long-term bank loans 10% debentures Current liabilities Bank overdraft Payables Taxation Total equity and liabilities 0 33,000 10,000 43,000 87,000 1,200 29,000 8,000 38,200 72,700 10,000 5,000 15,000 10,000 3,000 13,000 20,000 9,000 29,000 17,500 4,000 21,500 35,000 28,400 1,600 65,000 87,000 25,000 22,400 0 47,400 72,700 54,000 (32,000) 22,000 53,300 (28,000) 25,300 2009 000 000 2008 000

B291/SEP

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The following information is relevant.


1
During the year a non-current asset that had originally cost 2,200,000 was sold for 1,000,000. Accumulated depreciation on the disposal amounted to 700,000. A non-current asset was bought during the year.

(a) Prepare a reconciliation of prot before tax to net cash generated from operations for the year ended 31 December 2009. (6 marks) (b) Prepare a cash ow statement for the year ended 31 December 2009 in IAS 7 format. (11 marks) (c) Explain why a cash ow statement provides useful information in addition to an income statement and a balance sheet. Refer in your answer to the bases of accounting. (4 marks) (d) Give two additional reasons why a cash ow statement provides useful information which the balance sheet and the prot and loss statement do not directly provide. Refer in your answer to the sources and uses of funds, and to the operating and other activities of a business. (4 marks) (Total: 25 marks) Question 4 (a) Explain the role of non-executive directors in the corporate governance of a large, publicly traded company. (8 marks) (b) Briey describe three threats that could impair compliance with a professional code of ethics by a professionally qualied accountant. Illustrate at least one of these threats by constructing a hypothetical accounting situation. (6 marks) (c) Critically discuss the advantages and disadvantages of all UK companies adopting international accounting standards. (11 marks) (Total: 25 marks) [END OF QUESTION PAPER]

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B291 Specimen answer guidance Question 1


(a) The answer here would need to include reference to the following.
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There are ve main legal forms one nds in business contexts sole traders, partnerships (including LLPs), companies, unincorporated associations and trusts. This module has dealt mostly with sole traders, partnerships and companies (both private and plcs). (3 marks) Differences in legal form impact in two ways: (i) in terms of the regulations applicable; and (ii) in respect of the inherent difference in the type of business, often most evident in its capital structure. (i) Sole traders and partnerships are not governed by regulation on the presentation of items in their income statements and balance sheets in the same way that companies are. Sole traders and partnerships can use almost any form of presentation they choose, though most would adhere to generally accepted accounting principles (GAAP) to ensure that what they produce would be acceptable for taxation purposes. Companies must adhere in the UK to the requirements of the Companies Act 2006 and FRSs and, if they are listed on a stock exchage, to IFRSs and IASs, as to format and presentation of the income statement and balance sheets. Many larger non-listed companies may choose to comply voluntarily with IFRSs and IASs. Groups of companies would prepare group (consolidated) accounts in addition to those for individual companies. (ii) The nature of a business form is often most evident in the way it raises, creates and retains capital to carry on business. This generates inherent differences, especially in the nature of balance sheets, as there are different types of capital. Sole traders and partnerships raise capital by investing personal moneys and/or raising loan nance and generating prots once they have become successfully established. Companies may raise capital by issuing shares, possibly of different kinds (and may/may not have a share premium account), and loan capital, as well as internally generated prots. Only companies can issue shares. By looking at the capital structure of an entity as disclosed on its balance sheet, it is usually possible to determine its legal form. (9 marks)

(b) Business law of various kinds comprises the context in which accountants operate. The answer should refer to the following.
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Contract law. Firms make contracts all the time in furtherance of their business, so an understanding of contract law is important. Contract law is applicable

Answer Guidance

31

internationally, though specic rules will differ from country to country. It is obvious that business deals have nancial effects, as this is how businesses make prots. Accountants will therefore need to know how to deal with the nancial outcomes of contracts. Things such as when payment is due, when title to goods passes to a customer, a clients liability in terms of warranty for defective goods, etc., are all likely to have been specically dealt with in business contracts and have the potential to affect nancial statements. Tort law. The aspect of tort that most concerns business is that of negligence. Negligence often has nancial implications for businesses. For example, in the outcome (actual and potential) of a court case and accountants need to be able to deal with them. Also, in their role as advisers or auditors, accountants may themselves be charged with negligence. There is a considerable body of case law related to the aspect of auditor negligence, of which you would be expected to show knowledge (e.g., Ultramares Corporation v Touche, Hedley Byrne & Co Ltd v Heller and Partners, Anns v Merton London Borough Council, Scott Group v McFarlane, Caparo Industries plc v Dickman, and South Pacic Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd). Employment law. This is also important in terms of accounting, as accountants will need to know how to deal with the nancial consequences of various aspects of it, such as income tax, national insurance, statutory sick pay, etc., in a set of nancial reports. Some of this is very specialised, but students could give examples of accounting for salaries and wages, as this is included in Unit 3. Accountants may also themselves be employers, so they will be affected too by the wider aspects of employment law, such as the duties of an employer and employee, wrongful and unfair dismissal, redundancy and all the various laws and regulations which govern all aspects of employment, for example, on health and safety and discrimination. Agency law. The agency relationship exists between a director and his/company and a partner and his/her partnership. Accountants in their roles as auditors would audit nancial statements in which directors, for example, account to stakeholders for resources entrusted to them, for their actions and decisions. Accountants therefore need to know how such a relationship is regulated by law. An agency relationship also exists between an accountant or tax consultant when acting on behalf of a client with HMRC, so accountants themselves often act as agents. (13 marks) (3 marks each for discussion of contract, employment and agency law
and 4 marks for tort.)
(Total: 25 marks)

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Question 2
(a) Journal entries 1
Date: 31 December 2010 Inventory (balance sheet) Inventory (income and expense account) Recording closing inventory Debit 000 50,555 50,555 Credit 000

2
Date: 31 December 2010 Administrative expenses (50% 6 2,400) Distribution costs (50% 6 2,400) Accumulated depreciation on equipment 2,400 Recording the distribution of depreciation expenses Debit 000 1,200 1,200 2,400 2,400 Credit 000

3
Date: 31 December 2010 Administrative expenses (3,300 6 60%) Distribution costs (3,300 6 40%) Property costs 3,300 Recording the distribution of property costs Debit 000 1,980 1,320 3,300 3,300 Credit 000

4
Date: 31 December 2010 Administrative expenses Intangible assets Recording impairment of intangible assets Debit 000 700 700 Credit 000

5
Date: 31 December 2010 Administrative expenses Receivables Allowance for irrecoverable receivables (2,000 200) 3,600 Recording receivables written off and increase in allowance Debit 000 3,600 1,800 1,800 3,600 Credit 000

Answer Guidance

33

6
Date: 31 December 2010 Corporation income tax expense (income statement) Corporation income tax payable (balance sheet) Recording estimated tax expense and tax payable Debit 000 60,000 60,000 Credit 000

7
Date: 31 December 2010 Debenture interest expense Retained earnings (preference dividend) Accruals Debit 000 2,000 240 2,240 Credit 000

Recording accrued interest expense and accrued preference dividend

(7 marks) (b) Income statement


Income statement Dino and Dinah Ltd for the period ended 31 December 2010 000 Sales revenue Cost of sales (W1) Gross prot Other operating income (rental income) Distribution costs (W2) Administrative expenses (W3) Operating prot Finance costs (debenture interest expense) Prot before tax Corporate income tax expense Prot for the year W1: Cost of sales Opening inventory Purchases Manufacturing salaries Carriage inwards Less: Closing inventory Cost of goods sold W2: Distribution costs Distribution costs Depreciation expense (24,000 6 10%) 6 50% Property costs (3,300 6 40%) 500,000 (279,145) 220,855 7,000 (10,020) (22,980) 194,855 (4,000) 190,855 (60,000) 130,855 000 75,000 250,000 3,500 1,200 329,700 (50,555) 279,145 000 7,500 1,200 1,320 10,020

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Assessment Booklet

W3: Administrative expenses Administrative expenses Administrative salaries Irrecoverable receivables Increase in allowance for receivables Impairment of intangible asset Depreciation expense (24,000 6 10%) 6 50% Property costs (3,300 6 60%)

000 10,000 5,500 1,800 1,800 700 1,200 1,980 22,980

(7 marks) (c) Balance sheet


Balance sheet Dino and Dinah Ltd as at 31 December 2010 000 Non-current assets: Property, plant and equipment Intangible assets Current assets: Inventory Receivables (W4) Cash and cash equivalents Total assets Equity and liabilities: Equity Share capital: Ordinary shares Share capital: Irredeemable preference shares
Reserves: Retained earnings Liabilities: Non-current liabilities Long-term borrowings: 8% debentures Current liabilities Payables Corporate income tax payable Accruals (debenture interest payable and preference dividend payable) Total equity and liabilities W4: Net receivables Opening receivables Less: Irrecoverable receivables Allowance for receivables 20,500 (1,800) (2,000) 16,700 20,000 60,000 2,240 82,240 287,055 50,000 9,600 2,400
142,815
154,815 50,555 16,700 1,200 68,455 287,055 213,600 5,000 218,600 000

(7 marks)

Answer Guidance

35

(d) PPE note


Tangible non-current assets note Cost at 1 January 2010 Additions Disposals at 31 December 2010 Accumulated depreciation at 1 January 2010 Charge for the period Disposals at 31 December 2010 Carrying amount at 1 January 2010 at 31 December 2010 200,000 200,000 16,000 13,600 216,000 213,600 10,400 10,400 8,000 2,400 8,000 2,400 200,000 24,000 224,000 200,000 24,000 224,000 Property 000 Equipment 000 Total 000

(2 marks) (e) Statement of changes in equity


Statement of changes in equity for Dino and Dinah Ltd for the year ended 31 December 2010 Ordinary shares 000 Balance as at 1 January 2010 Prior period adjustment Restated balance Preference dividend Transfer to retained earnings Balance as at 31 December 2010 9,600 2,400 9,600 2,400 12,200 (240) 130,855 142,815 24,200 (240) 130,855 154,815 9,600 Preference shares 000 2,400 Retained earnings 000 12,200 Total equity 000 24,200

Note: Ordinary dividend proposed: 1,920,000. (2 marks) (Total: 25 marks)

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Assessment Booklet

Question 3
(a) Terence Keynes Upholstery Ltd Reconciliation of prot before tax to net cash generated from operating activities for the year ended 31 December 2009 000 Prot before tax Add: Net nance cost (1,600 100) Loss on disposal of non-current asset Depreciation (W1) Less: Add: Increase in inventories (35,000 25,000) Increase in receivables (28,400 22,400) Increase in payables (33,000 29,000) Net cash generated from operating activities 20,000 1,500 500 4,700 (10,000) (6,000) 4,000 14,700

W1: PPE accumulated depreciation 000 Depn on disposal Balance c/d 700 Balance b/d 32,000 Depreciation for 2009 32,700 000 28,000 4,700 32,700

(6 marks)
(b) Terence Keynes Upholstery Ltd Cash ow statement for the year ended 31 December 2009 (IAS 7 format) 000 Cash ow from operating activities Cash generated from operations Less: Taxation paid (W2) Net cash from operating activities Cash ows from investing activities Less: Payments made to acquire non-current assets (W3) Receipts from the sale of non-current assets Interest received Net cash from investing activities Cash ows from nancing activities Issue of ordinary shares (20,000 17,500) Less: Dividends paid Issue of debentures (5,000 3,000) Less: Interest paid (nance costs) Net cash used in nancing activities Net change in cash and cash equivalents Cash and cash equivalents brought forward (bank overdraft) Cash and cash equivalents carried forward 2,500 (5,000) 2,000 (1,600) (2,100) 2,800 (1,200) 1,600 (2,900) 1,000 100 (1,800) 14,700 (8,000) 6,700 000

Answer Guidance

37

W2: Taxation 000 Taxation paid Balance c/d 8,000 Balance b/d 10,000 Charge for 2010 18,000 W3: PPE at cost 000 Balance b/d Cost of additions 53,300 Cost of disposal 2,900 Balance c/d 56,200 000 2,200 54,000 56,200 000 8,000 10,000 18,000

(11 marks) (c) The balance sheet and income statement are prepared on an accrual accounting basis. The accruals basis of accounting requires judgements to be made with respect to the allocation of revenues and expenses to accounting periods. Therefore, prot and cash ow may tell two different stories. Prots can more easily be manipulated. Cash, however, is not affected by the exercise of an accounting judgement. It is objectively veriable. The cash ow statement reports the results of business activities in cash terms. Cash ows are amounts of cash moving in and out of the business. They are easy to measure and they require no judgements or estimates. Because of the judgements that are necessary under accrual accounting, businesses can be protable (according to the prot and loss statement), show retained earnings (in the balance sheet) and still become insolvent when, owing to mismanagement of cash, they are unable to service their debt. (4 marks) (d) Cash ow relating to operating activities is dened as the net cash ow from the trading activities. Trading or operating activities should normally generate enough cash for running a business. Cash ows from investing activities show cash has been spent to invest in new non-current assets which are supposed to maintain the operating capacity of the business or to allow it to grow. Alternatively, such cash ows show cash generated when non-current assets have been disposed of. Cash ows from nancing activities show how nancing has been raised and dividends have been paid. The cash ow statement shows how the funds coming into the business have been used, for example, whether the money has been used to purchase inventories, raw materials, invested in short-term or long-term investments, or non-current assets. The cash ow statement also shows if the money has come from operating prots, returns on investments in shares or other securities, selling non-current assets, issuing debentures or share capital. (4 marks) (Total: 25 marks)

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Assessment Booklet

Question 4
(a) Non-executive directors are not involved in the day to day management of a business. However, they play a vital role in the corporate governance of a publicly traded company. They provide an internal, impartial monitoring and oversight of the functioning of executive directors. Some of the prominent roles that non-executive directors play are explained below. (i) Nominations committee. The appointment of new directors is an important function. Usually the nominations committee is chaired by a non-executive director. The committee identies the skills and knowledge required at the board level and recommends people with suitable skills and knowledge for appointment to the board of directors. (ii) Remuneration committee. Remuneration of directors and senior managers is a key part of the corporate governance as it helps attract, appoint and retain good executives. Usually a remuneration committee comprises non-executive directors only, to ensure the independent determination and review of performance and remuneration of executive directors. (iii) Internal audit and control. Non-executive directors usually play an important role in the internal audit committee. Non-executive directors are thus expected to monitor the integrity of nancial statements, review and monitor the effectiveness of internal control systems and to review and monitor the external auditors independence. (2 marks for introduction and 2 marks for each main point.) (8 marks) (b) IFAC identies ve potential threats that could impair compliance with a professional code of ethics. These are self-interest threat, self-review threat, familiarity threat, intimidation threat and advocacy threat. Self-interest threat is when a nancial or other interest will inappropriately inuence the judgement of a professional accountant in his/her role as an accountant. This could be compromising his/her objectivity or integrity, for example. Self-review threat occurs when a previous judgement needs to be reviewed by the same accountant who made that earlier judgement. Familiarity threat occurs when, because of a close relationship, a professional accountant compromises objectivity or integrity or any other fundamental principle of professional ethics. Intimidation threat occurs when an accountant is coerced into acting inappropriately through fear, for example, of losing his/her job. Advocacy threat occurs when an accountant is faced with promoting a particular position when this is inappropriate, for example, if the accountant is acting as an auditor for a client.

Answer Guidance

39

Example Suppose an accountant nds during the audit process that a company, the books of which he/she is auditing, has not written off as irrecoverable a substantial amount of receivables which is unlikely to be received. Further suppose that the chief executive ofcer of the company concerned and the auditing accountant have been close friends for a long time. In this situation, one could argue that a familiarity threat is present as the relationship between the accountant and the chief executive ofcer may impair the objective view about the treatment of irrecoverable amount. (1 mark for each threat and 1 for a relevant example.) (6 marks) (c) Advantages l IFRSs enhance comparability and consistency in preparation of company nancial statements (and across all countries if adopted worldwide).
l

Comparable and generally understood nancial statements facilitate (better) relationships with customers, suppliers and ofcial bodies (e.g., tax authorities) and across national borders if adopted by all countries. IFRSs give credibility to nancial statements to stakeholders, for example, decrease investor uncertainty and reduce risk associated with uncertainty. IFRSs improve quality of communication to shareholders and nance providers. IFRSs are accepted as a nancial reporting framework for companies seeking admission to almost all stock exchanges worldwide. They are likely to increase market efciency and possibly minimise/reduce cost of capital. IFRSs eliminate barriers to cross-border trading in securities, by ensuring that nancial statements are more transparent. IFRSs are costly to adopt. They are hard to regulate, as not all smaller companies (in the UK at least) require an independent audit. Not all issues dealt with are applicable to smaller companies, so for them there would be varying degrees of regulation overload. Standards may be too detailed in some respects, but not in others. Comparison, especially with other companies elsewhere in the world adopting IFRS, may be compromised/vitiated by translation/cultural issues. Not all accounting terms mean exactly the same thing in different languages, which may be tied to different cultures which deal with issues in a fundamentally unique way (e.g., extraordinary losses/gains are not allowed under IFRSs, but would be under UK FRSs). (11 marks) (1 mark for each relevant point.) (Total: 25 marks)

Disadvantages
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