Answers

Part 1 Examination – Paper 1.1(INT)

Preparing Financial Statements (International Stream) Answers

Section B
1 (a) Net cash flow from operating activities – direct method
$000 $000
Cash receipts from customers 12,800
Cash paid to suppliers 4,940
Cash paid to employees 2,820
Cash paid for expenses 2,270
10,030

Net cash flow from operating activities 2,770

(b) Net cash flow from operating activities – indirect method

Net profit before taxation 2,370
Adjustment for:
Depreciation 880
Operating profit before working capital changes 3,250
Increase in inventories (370)
Decrease in receivables 280
Decrease in payables (390)
Net cash from operating activities 2,770

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2 (a) Plant and equipment – cost
2001 $ 2001 $
1 April Balance 840,000 10 Dec Transfer disposal 100,000
2002
1 Oct Cash 180,000 31 Mar Balance 920,000
1,020,000 1,020,000

Plant and equipment – depreciation

2001 $ 2001 $
10 Dec Transfer – disposal 60,000 1 April Balance 370,000
2002 2002
31 Mar Balance 393,000 31 March Income statement 83,000
(74,000 + 9,000)
453,000 453,000

Plant and equipment – disposal

2001 $ 2001 $
10 Dec Transfer – cost 100,000 10 Dec Transfer
– depreciation 60,000
2002 Cash 45,000
31 Mar Income statement 5,000
105,000 105,000

(b) Addax
Cash flow statement for the year ended 31 March 2002 (extracts)
$
Cash flow from operating activities
Net profit before taxation
Adjustments for:
Depreciation 83,000
Profit on sale of plant (5,000)
Cash flows from investing activities
Purchase of plant (180,000)
Proceeds of sale of plant 45,000

3 Alpaca
Balance Sheet as at 30 April 2002
$ $
ASSETS
Non-current assets: cost 1,000,000
accumulated depreciation 330,000 670,000
Current assets:
Stocks 450,000
Receivables 670,000
Cash at bank 114,000
1,234,000
1,904,000
EQUITY AND LIABILITIES
Capital and reserves
Issued capital 500,000
Share premium 50,000
Accumulated profits (working) 964,000
1,514,000
Non-current liabilities
10% Loan notes 200,000
Current liabilities
Payables 180,000
Interest accrued 10,000 190,000
1,904,000

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 Working for accumulated profits
$ $
Balance at 30 April 2001 818,000
Sales revenue 4,006,000
Purchases 2,120,000
Expenses 1,640,000
Opening inventories 410,000
Closing inventories 450,000
Interest payable 20,000
Depreciation 100,000
Bad debts written off 20,000
4,310,000 5,274,000
4,310,000
Balance at 30 April 2002 964,000

4 (a) Going concern

The going concern assumption means that financial statements are prepared on the basis that the business will continue for
the foreseeable future.
The application of the concept is relevant to many items in the financial statements.
(i) Inventory is valued on the basis that it will be disposed of in sales in the normal course of business rather than in a
forced bulk sale.
(ii) Non-current assets are valued at cost less depreciation rather than their immediate sale value.
(iii) Non-current liabilities are distinguished from current liabilities in assessing a company’s liquidity position.

(b) Accruals
The accruals concept is that income and expenses are recognised in the period to which they relate and not in the period in
which they are paid.
The relevance of the concept is that profit or loss figures would be meaningless if the inclusion of items of income or expense
depended on whether they had been received or paid.

(c) Substance over form

Substance over form means that if the real nature and effect of a transaction differ from its legal form, the real nature and
effect should be recognised instead of the legal form, unless legislation prohibits this.
The relevance of the concept is that its application improves the usefulness of the financial statements by preventing certain
creative accounting practices.

(d) Historical cost

The historical cost convention is that assets are recorded at their initial cost and are not subsequently revalued upwards, and
liabilities valued at the amount initially received in exchange for the obligation.
The relevance of the convention is that figures remain objectively based on verifiable figures, but in times of high inflation
historical cost can become a dubious convention to follow.

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5 (a)
Year ended
31 March 2001 31 March 2002
(i) Return on capital employed
500/2,550 19·6%
550/3,900 14·1%

(ii) Return on owners’ equity

400/1,550 25·8%
350/1,900 18·4%

(iii) Current ratio

1,010/430 2·35:1
1,380/1,480 0·93:1

(iv) Inventory turnover

2,300/300 7·67 times
3,000/500 6·0 times
(full credit given for correct answer in days)

(v) Payables’ days

1,380/1,800 x 365 77 days
1,400/3,200 x 365 160 days

(b) Comment
All ratios show a marked deterioration in 2002 compared with 2001.
Return on capital employed (ROCE) and return on owners’ equity (ROOE) are at reasonable levels in 2002, but are
considerably below the levels in 2001. A possible cause is the decline in the gross profit percentage caused by reducing prices
to increase sales.
ROOE shows a return in excess of ROCE in both years, and well in excess of the interest payable on the loan, showing that
the shareholders are continuing to benefit from the gearing effect of the loan.
The current ratio is seriously reduced to a potentially dangerous level. The consequence is the slowness in paying suppliers,
which must be eroding suppliers’ goodwill, evidenced by the increase in creditors’ days from 77 days to 160.
In effect, suppliers’ money is being used to finance the very heavy purchasing of non-current assets.
The inventory turnover ratio has declined, indicating a possible slowing of activity. The decline could be caused simply by a
large purchase of goods just before the balance sheet date.

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Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream) Marking scheme

Available and Maximum

1 (a) 1 mark per item 4

(b) 1 mark per item 5

Agreement of totals 1
10

Available Maximum
2 (a) 1/ mark per entry 12 x 1/2 6 5
2

(b) 1 mark per item 4 x 1 4 4

10 9

3 Accumulated depreciation 1 1
Receivables 1 1
Issued capital 1 1
Share premium 1 1
Interest accrued 1 1
5 5
Layout and style 2 2
7 7
Accumulated profits working
1/ mark per item
2 41/2 4
111/ 2 11

4 1(a) Definition 2
Relevance 1 3

1(b) Definition 1
Relevance 1 2

1(c) Definition 2
Relevance 1 3

1(d) Historical Definition 1

Relevance 1 2
10

5 (a) 1 mark per ratio 5 x 1 5

(b) 1 mark per comment 5 x 1 5

10

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