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FinancialStatements ofLimitedCompaniesPractice assessment 3

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I m p o r t a n t n o t e t o t u t o r sIn order to provide further practice in the type of questions that may have to be answered in theAssessment there are alternative questions for Tasks 1 & 2 and Task 6 provided at the end of thisAssessment.

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Tasks 1 and 2 You have been asked to help prepare the financial statements of Kyle plc for the year ended 31 March 20-1. The company’s trial balance as at 31 March 20-1 is shown below.

Kyle plcTrial balance as at 31 March 20-1

Debit Credit£000 £000

Share capital 70,000Share premium 10,000Revaluation reserve 15,000Trade and other payables 9,372Land & buildings – cost 95,500 Land & buildings – accumulated depreciation 11,640Plant & equipment – cost 50,000 Plant & equipment – accumulated depreciation 24,400Trade and other receivables 27,238 Accruals 1,450Prepayments 2,220 7% bank loan repayable 20-9 30,000Cash at bank 15,801 Retained earnings 7,580Interest paid 1,750 Sales 152,473Purchases 73,899 Distribution costs 23,922 Administrative expenses 21,056 Carriage in 2,340 Inventories as at 1 April 20-0 15,559 Tax 220Dividends paid 2,850

332,135 332,135

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Further information• The inventories at the close of business on 31 March 20-1 cost £9,197,000. On 11 April 20-1,

goods included in this total at a value of £740,000 were found to be damaged and were sold for£590,000.

• Carriage inwards of £460,000 owing at 31 March 20-1 is to be provided for.• At the end of the year the company carried out an impairment test on machinery which had a

carrying amount of £12,500,000. At present it could be sold for £13,000,000 and would incurdisposal costs of £1,400,000. The company estimate that the machine will generate cash flows witha net present value of £11,900,000 over the remainder of its useful life. No adjustment has beenmade in respect of the impairment test. Any impairment losses are apportioned equally betweendistribution costs and administration expenses.

• Land, which is non-depreciable, is included in the trial balance at a value of £34,200,000. This isto be revalued at £38,000,000 and this revaluation is to be included in the financial statements forthe year ended 31 March 20-1.

• Interest on the bank loan for the last two months of the year has not been included in the accountsin the trial balance.

• The corporation tax balance of £220,000 included in the trial balance was the result of an over-estimate of the tax liability for the previous year. The corporation tax charge in respect of thecurrent year to 31 March 20-1 is estimated as £4,427,000.

• All the operations are continuing operations.Required(a) Draft the statement of profit or loss and other comprehensive income for Kyle plc for the year ended

31 March 20-1.(b) Draft the statement of changes in equity for Kyle plc for the year ended 31 March 20-1.(c) Draft the statement of financial position for Kyle plc as at 31 March 20-1.

Kyle plcStatement of profit or loss and other comprehensive income for the year ended 31 March 20-1

Continuing operations £000Revenue Cost of sales Gross profit Distribution costs Administration expenses Profit from operations Finance costs Profit before tax Tax Profit for the period from continuing operations Other comprehensive income for the year Total comprehensive income for the year

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Kyle plcStatement of changes in equity for the year ended 31 March 20-1

Share Share Revaluation Retained Total capital premium earnings equity £000 £000 £000 £000 £000Balance at 1 April 20-0 Changes in equity for the year Total comprehensive income Dividends Balance at 31 March 20-1

Kyle plcStatement of financial position as at 31 March 20-1

£000Assets Non-current assets Current assets Total assets Equity and liabilities Equity Total equity Non-current liabilities Current liabilities Total liabilities Total equity and liabilities

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Task 3You are an Accounting Technician employed by Amato Accountants and are currently working on preparingthe first years financial statements of Brompton Ltd, a hotel and spa chain, for the year ended 31 March20-1.

Matter 1One of the hotels purchases a new printer costing £130.00 for the administration office which is expectedto have a useful life of five years. The IASB’s Conceptual Framework for Financial Reporting refers topreparers of the financial statements making judgements as to whether an item is material.(a) Explain the term materiality and how it can impact on the users of financial statements.(b) With reference to the materiality concept, explain how the purchase should be treated in the

financial statements.

Matter 2You receive a phone call from a supplier of beauty products asking for financial information aboutBrompton Ltd who have requested to trade with them on credit. Identify the relevant fundamental principle in accordance with the AAT Code of Professional Ethics andexplain the action that should be taken.

Task 4Trenchard Ltd is preparing the financial statements for the year ending 31 March 20-1. During April 20-1the following information becomes available:• An impairment review was carried out on a fleet of vehicles and it was found that an impairment

loss of £40,000 had occurred. • A proposed dividend totalling £2,000,000 was declared.

Prepare brief notes explaining the following:(a) What is meant by an event after the reporting period according to IAS 10?(b) How will the impairment loss be treated in the financial statements in accordance with IAS 10?(c) How will the proposed dividend be treated in the financial statements in accordance with IAS 10?

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Task 5(a) Amato plc acquires an asset with a fair value of £51,400 under a finance lease on 1 April 20-0. Four

annual payments of £18,000 are paid on 31 March each year. The actuarial method is used toallocate the interest rate of 15% to the accounting periods over the term of the lease. What is the lease obligation at the end of the first year at 31 March 20-1?You may wish to use the following table to make the required calculations.

Lease Interest Total Repayment After outstanding @ 15% on 31/03 repayment

1

(a) £25,690(b) £33,400(c) £38,410(d) £41,110

(b) Amato plc purchases an item of machinery that will be used to produce a new product. Thefollowing costs are incurred.

£List price of machinery 280,000Delivery cost 2,800Installation cost 4,100Pre-production testing 5,700Start-up costs for introducing the new product 12,600Warranty cost 8,200Annual insurance 3,900

What are the total attributable costs which can be included in the cost of the machinery?

(a) £286,900 (b) £292,600 (c) £305,200 (d) £313,400

(c) Percy’s Plants Ltd provides plants and their continued care on a 12 month contract to businessoffices. The company prepares its financial statements to 31 March each year.During the year to 31 March 20-1, Percy’s Plants entered into a 12 month contract to provide plantsand their care in the reception of Arbery’s Accountants. The contract was for £22,200 andcommenced on 1 September 20-0.What is the amount of revenue, if any, which should be recognised in the financial statements forthe year ending 31 March 20-1 in respect of the contract with Arbery’s Accountants?

(a) Nil (b) £11,100 (c) £12,950 (d) £22,200

(d) Buxton plc has held 30% of the ordinary share capital of Robin Ltd for three years and includes theinvestment under the heading of non-current assets using the equity method. How will Buxton value the investment in the statement of financial position?

(a) At the original price paid(b) At the proportionate share of Robin Ltd net assets(c) At the proportionate share of Robin Ltd net assets plus the original value of

goodwill on acquisition (d) At the proportionate share of Robin Ltd net assets plus the carrying value

of goodwill

(e) Retro plc purchased for its own use a factory on 1 March 20-1 for £750,000. The factory isdepreciated over its estimated useful life of 40 years using the straight line method. At 1 March 20-5 the building is valued at £800,000 and the directors decide to incorporate this valuation intothe books of account from this date. What is the amount to be transferred to the revaluation surplus?

(a) £50,000 (b) £106,250 (c) £125,000 (d) £143,750

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Task 6The Managing Director of Walker plc has asked you to prepare the consolidated statement of financialposition for the group. Walker plc has one subsidiary undertaking, Quaver Ltd. The statement of financialposition of the two companies as at 31 March 20-1 are set out below.Statements of financial position as at 31 March 20-1

Walker plc Quaver Ltd£000 £000

Non-current assets Investment in Quaver Ltd 31,800 Property, plant and equipment 57,000 36,200

88,800 36,200Current assets Inventories 26,145 12,466Trade and other receivables 18,218 7,386Cash and cash equivalents 3,347 259

47,710 20,111Total assets 136,510 56,311

Equity and liabilities Equity Share capital 54,000 15,000Share premium 14,000 5,200Retained earnings 41,398 20,260

109,398 40,460

Non-current liabilities Long-term loans 15,000 8,400

Current liabilities Trade and other payables 8,995 5,276 Tax liabilities 3,117 2,175

12,112 7,451Total liabilities 27,112 15,851

Total equity and liabilities 136,510 56,311

Further information• The share capital of Quaver Ltd consists of ordinary shares of £1 each. Ownership of these shares

carries voting rights in Quaver Ltd. There have been no changes to the balances of share capitaland share premium during the year.

• Walker plc acquired 10,500,000 shares in Quaver Ltd on 1 April 20-0.• At 1 April 20-0 the balance of retained earnings of Quaver Ltd was £12,600,000.• On 1 December 20-0 Walker plc made an interest-free long-term loan of £3,000,000 to Quaver Ltd

and classified it as part of its investment in Quaver Ltd. Quaver Ltd has classified the loan as anon-current liability in its financial statements. No loan repayments have been made.

• During the year Walker plc sold goods costing £600,000 to Quaver plc for £840,000. At 31 March20-1 half of these goods were still included in the inventories of Quaver Ltd.

• The directors of Walker plc have concluded that goodwill has been impaired by 20% during theyear.

RequiredDraft the consolidated statement of financial position for Walker plc and its subsidiary undertaking as at31 March 20-1

Goodwill £000ConsiderationNCI at acquisitionNet assets acquiredImpairment Goodwill

Non-controlling interest £000Share capital attributable to NCI Share premium attributable to NCI Retained earnings attributable to NCI Non-controlling interest

Retained earnings £000Parent Inter-company adjustment Subsidiary – attributable to Parent ImpairmentGroup retained earnings

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Walker plcConsolidated statement of financial position as at 31 March 20-1

£000AssetsNon-current assetsGoodwillProperty, plant and equipment

Current assetsInventories Trade and other receivables Cash and cash equivalents

Total assetsEquity and liabilitiesEquityShare capitalShare premiumRetained earningsNon-controlling interestTotal equityNon-current liabilitiesLoan Current liabilitiesTrade and other payables Tax liabilities

Total liabilitiesTotal equity and liabilities

Task 7You have been asked you to calculate ratios for Bradford Ltd in respect of its financial statements for theyear ending 31 March 20-1 to assist your manager in his analysis of the company. Bradford Ltd’s statement of profit or loss and statement of financial position are set out below.

Bradford Ltd statement of profit or loss for the year ended 31 March 20-1

Continuing operations £000Revenue 31,602Cost of sales (17,730)Gross profit 13,872Distribution costs (5,867)Administration expenses (3,913)Profit from operations 4,092Finance costs (645)Profit before tax 3,447Tax (718)Profit for the year 2,729

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Statement of financial position as at 31 March 20-1

£000Non-current assets Property, plant and equipment 43,422 Current assets Inventories 10,570Trade and other receivables 3,781Cash and cash equivalents 1,453 15,804Total assets 59,226Equity and liabilities Equity Share capital 18,000Share premium 3,400Retained earnings 26,845Total equity 48,245Non-current liabilities Bank loans 8,000 8,000Current liabilities Trade and other payables 2,231Tax liability 750 2,981Total liabilities 10,981Total equity and liabilities 59,226

(a) Identify the formulae that are used to calculate each of the following ratios.

Return on shareholders’ funds

Profit from operations / Total equity x 100Profit from operations / Share capitalProfit after tax / Total equity x 100Profit after tax / (Total equity + Non-current liabilities) x 100

Acid test ratio

Total assets / Total liabilitiesCurrent assets / Current liabilities(Total assets – inventories) / Current liabilities(Current assets – inventories) / Current liabilities

Asset turnover (net assets)

Revenue / Non-current assetsRevenue / (Total assets – Current liabilities)Profit from operations / Non-current assetsProfit from operations / (Total assets – Current liabilities)

Gearing

Non-current liabilities / (Total equity + Non-current liabilities) x 100Total liabilities / Total equity x 100Total liabilities / (Total equity + Non-current liabilities) x 100Total equity / Non-current liabilities x 100

Interest cover

Profit after tax / Finance costsProfit from operations / Finance costsFinance costs / Profit after taxFinance costs / Profit from operations

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Task 8The directors of Ashanti Ltd have concerns about the liquidity and cash flow of the company following asignificant reduction in the cash balances during the year. The company has invested in plant andmachinery during the year. Ashanti Ltd is highly profitable and had no problem in raising the additionalfunds through a loan and issuing some shares. The directors have provided you with the following information for the past two years.

20-1 20-0 £000 £000Bank balance (1,805) 630

Reconciliation of profit from operations to net cash flow (extract) 20-1 20-0Increase in inventories (6,050) (4,508)Increase in trade receivables (3,300) (1,510)Decrease in trade payables (3,025) (1,650)

Ratios 20-1 20-0Current ratio 4.6:1 2.5:1Quick (acid test) ratio 2.8:1 1.1:1Trade receivables collection period 67 days 41 days

Prepare notes for the directors that:(a) Comment on the movements in working capital shown in the reconciliation of operating profit to net

cash flow from operating activities extract between 20-0 and 20-1.(b) Comment on the liquidity and use of resources based on the information provided and what this

tells you about the company.

(b) Calculate the following ratios (to the nearest one decimal place where appropriate).

Return on shareholders’ funds %Acid test ratio :1Asset turnover (net assets) timesGearing %Interest cover times

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TASKS 1 & 2 ( ALTERNAT IVE )

You have been asked to prepare the statement of cash flow and statement of changes in equity for AmatoLtd for the year ended 31 March 20-1.The most recent statement of profit or loss and the statements of financial position of Amato Ltd for thepast two years are set out below.

Amato LtdStatement of profit or loss for the year ended 31 March 20-1

Continuing operations £000Revenue 61,298Cost of sales (32,483)Gross profit 28,815Dividends received 500Loss on disposal of property, plant and equipment (679)Distribution costs (12,548)Administrative expenses (7,991)Profit from operations 8,097Finance costs (250)Profit before tax 7,847Tax (1,061)Profit for the period from continuing operations 6,786Other comprehensive income for the year – gain on revaluation 1,500Total comprehensive income for the year

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Amato LtdStatements of financial position as at 31 March

20-1 20-0£000 £000

Non-current assets Property, plant and equipment 35,162 27,530

Current assets Inventories 10,870 9,638Trade and other receivables 9,726 9,983Cash and cash equivalents 0 217

20,596 19,838Total assets 55,758 47,368Equity and liabilities Equity Share capital 15,300 13,600Share premium 5,100 4,300Revaluation 2,500 1,000Retained earnings 25,932 20,946Total equity 48,832 39,846Non-current liabilities Bank loans 2,160 2,420

2,160 2,420Current liabilities Trade and other payables 3,474 3,932Tax liability 1,078 1,170Bank overdraft 214 0

4,766 5,102Total liabilities 6,926 7,522Total equity and liabilities 55,758 47,368

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Further information• The total depreciation charge for the year was £3,940,000.• Property, plant and equipment costing £2,098,000 with accumulated depreciation of £1,250,000

was sold in the year.• All sales and purchases were on credit. Other expenses were paid for in cash.• A dividend of £1,800,000 was paid during the year.

(a) Prepare a reconciliation of profit before tax to net cash from operating activities for Amato Ltd forthe year ended 31 March 20-1.

(b) Using the pro-forma in your answer booklet, prepare the statement of cash flows for Amato Ltd forthe year ended 31 March 20-1.

(c) Draft the statement of changes in equity for the year ended 31 March 20-1.

Reconciliation of profit before tax to net cash from operating activities

£000 Adjustments for:

Cash generated from operations Net cash from operating activities

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Amato Ltd statement of cash flows for the year ended 31 March 20-1

£000Net cash from operating activities Investing activities Net cash used in investing activities Financing activities Net cash from financing activities Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

Amato LtdStatement of changes in equity for the year ended 31 March 20-1

Share Share Revaluation Retained Total capital premium earnings equity £000 £000 £000 £000 £000Balance at 1 April 20-0 Changes in equity for the year Total comprehensive income Dividends Balance at 31 March 20-1

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TASK 6 ( ALTERNAT IVE )

Graff plc acquired 80% of the ordinary share capital of Wade Ltd on 1 April 20-0.The statements of profit or loss of the two companies for the year ended 31 March 20-1 is set out below.

Statements of profit or loss for the year ended 31 March 20-1

Graff plc Wade Ltd£000 £000

Continuing operations Revenue 65,383 18,064Cost of sales (42,678) (7,586)Gross profit 22,705 10,478Other income 2,200 Distribution costs (10,221) (4,481)Administrative expenses (6,772) (3,253)Profit from operations 7,912 2,744Finance costs (800) (355)Profit before tax 7,112 2,389Tax (1,435) (489)Profit for the period from continuing operations 5,677 1,900

Further information• During the year Graff plc sold goods which had cost £2,580,000 to Wade Ltd for £3,300,000. A third

of the goods that Graff plc had sold to Wade Ltd remained in the inventories of Wade Ltd.• Wade Ltd paid dividends of £2,500,000 during the year.

Required Draft a consolidated statement of profit or loss for Graff plc and its subsidiary for the year ended 31 March20-1.

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Revenue £000GraffWadeTotal inter-company adjustment Consolidated revenue

Cost of sales £000GraffWadeTotal inter-company adjustment Consolidated cost of sales

Consolidated statement of profit or loss for the year ended 31 March 20-1

Continuing operations £000Revenue Cost of salesGross profitOther income Distribution costs Administration expenses Profit from operationsFinance costs Profit before taxTax Profit for the yearAttributable to:Equity holders of the parent Non-controlling interest