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Financial Reporting and Analysis
Time allowed: 3 hours and 15 minutes (including reading time) Do not open this examination paper until the presiding officer or an invigilator tells you to. You must not take this paper out of the examination room.
This examination paper is divided into two sections. Each question on this paper carries 25 marks. You must answer the compulsory question in Section A. Section B contains five questions. You must attempt three questions only from Section B.
© ICSA, 2010
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376 Depreciation 556 Distribution.272 1.260 6. You are the company secretary of Highbury plc (‘Highbury’) and the summarised draft accounts prepared for the year to 31 March 2010 contained the following information: Statement of comprehensive income for the year ended 31 March 2010 £000 Revenue 12. plant and machinery at cost less depreciation Goodwill at cost Quoted investments at cost Current assets Inventories Trade receivables Cash at bank and in hand 2009 £000 2.770 7.800 2.761 357 520 200 320 180 140 Statement of financial position at 31 March 2010 £000 Non-current assets Land.834 Equity and liabilities Called up share capital (£1 shares) Retained earnings Non-current liabilities Provision for deferred taxation Current liabilities Bank overdraft Trade payables Corporation tax (continued) © ICSA.280 4.452 564 1.757 1.757 1.307 Directors’ emoluments 400 Finance charge 72 Profit on ordinary activities before tax 1.800 1.545 170 2.272 983 210 1. selling and marketing costs 3.226 4.951 1.834 1.647 340 2.452 1. buildings.678 5.193 5.569 3. 2010 Page 2 of 10 .756 400 2.182 440 2.156 1.187 Taxation 350 Profit for the year 837 Dividends paid 180 Retained profit for the year 657 2009 £000 10.296 Profit on sale of investments surplus to requirements 602 12.260 10.026 1.Section A (Compulsory question) 1.369 1.279 7.898 Cost of goods sold 7.490 2.701 26 3.987 2.
2010 Page 3 of 10 .000. Required Prepare a report for the board of directors of Highbury on the company’s financial progress during the year to 31 March 2010 and on its financial position at that date based on the information provided above.000 included acquisition of plant and machinery worth £700. (25 marks) © ICSA.000 and inventories worth £360.400.In April 2009. return on investment. The purchase price of £1.000. a local competitor trading with a turnover of £2.000 per annum. asset utilisation. You should support your analysis with relevant accounting ratios covering: profit margins. Highbury added to its existing operations by acquiring the business assets of Wheatsheaf Ltd. and short-term liquidity.
100 Profit after tax 2.279 Attributable to: Equity holders of the parent company 1.455 Net operating expenses -10.045 Finance costs -666 Profit before tax 5. The summarised statements of comprehensive income and financial position of the Sturton group of companies (‘the Sturton group’) for 2009 were as follows: Statement of comprehensive income for the year ending 31 December 2009 2009 £000 Revenue 61.379 Taxation -3.Section B (Answer three questions from this section) 2.45.345 Cost of sales .890 Gross profit 15.593 Minority interest 686 (continued) © ICSA.190 Share of operating profits of associated company 780 Operating profit 6. 2010 Page 4 of 10 .
290 3.863 13.400 Depreciation 3.708 746 3. (ii) Taxation Corporation tax charge for the year Provision for deferred taxation Associated company 2.300 2.040 567 6.991 540 3.400 1.443 1.590 3.100 (continued) © ICSA.020 3. plant and equipment was disposed of at carrying value.893 4.625 4.250 800 575 4.688 79 333 3.712 16.267 5.468 2.054 3. 2010 Page 5 of 10 .464 16.503 13.396 556 2.054 1. plant and equipment Balance at 1 January 2009 Additions Charge for the year Surplus on revaluation Disposals Balance at 31 December 2009 Carrying value at 31 December 2009 Cost 6.511 3.454 3.896 2.Statement of financial position at 31 March 2009 2009 £000 Assets Non-current assets Property.250 940 7.555 714 6.295 -1.009 1.006 825 3.867 Property.040 1.845 666 5.346 345 1.955 888 8.488 Equity Parent company shareholders’ equity Share capital Other reserves Retained earnings Minority interest Total equity Non-current liabilities Long-term borrowings Deferred taxation Current liabilities Trade and other payables Short-term borrowings Taxation 1.488 You are provided with the following additional information: (i) Property. plant and equipment Goodwill at cost Investments in associated company Current assets Inventories Trade receivables Cash and cash equivalents 2008 £000 5.344 4.562 211 -1.531 2.796 8.111 8.831 4.
selling and marketing costs Operating profit Dividend from Woodman Ltd Profit for the period £000 31.130 8. above.759 Statement of financial position at 31 March 2010 Assets Tangible non-current assets Freehold property Plant and equipment at cost Less: Accumulated depreciation Intangible non-current assets Goodwill Research and development Current assets Inventories Other current assets less liabilities Equity Ordinary share capital (£1 ordinary shares) Retained earnings at 1 April 2009 Retained earnings for the year to 31 March 2010 Notes (iii) 9.200 £000 £000 15.000 6.040 5.759 25. prepare a memorandum explaining to the board the main financial developments at the Sturton group during 2009.511 £000 50.100 1.800 1.600 (b) 3.250 1. 2010 Page 6 of 10 .559 200 5.041 5. (18 marks) Based on the content of the cash flow statement prepared under (a). Statement of comprehensive income for the year ending 31 March 2010 Notes Revenue Cost of sales Provision for closure costs Distribution.400 5.000 2.799 17.Required (a) Prepare a consolidated statement of cash flows of the Sturton group for the year ended 31 December 2009 using the ‘indirect method’ in accordance with IAS 7 ‘Statement of Cash Flows’. (7 marks) (Total: 25 marks) The following draft accounts have been prepared in respect of Priory plc (‘Priory’) for the year to 31 March 2010.800 17. (i) (ii) 45.720 3.000 3.929 25.799 (iv) (v) (vi) (continued) © ICSA.
The figure contained in the accounts is the provision for expected losses between 1 April 2010 and 30 September 2010 together with the estimated costs associated with the closure.170 1.000. Trinity Ltd. (ii) (iv) (v) (vi) The cost and net realisable value of the company’s inventories. This was incurred to develop a new product which came on to the market on 1 April 2009. analysed in categories of similar items. 2010 Page 7 of 10 . At 31 March 2010. It has been decided to use this figure in the accounts in order to show a fairer view of the financial position of the company. through representation on the board of directors.100 1.000 incurred during the year to 31 March 2010 in the endeavour to invent a new design for one of Priory’s leading products. on 1 April 2009.000. (i) On 2 March 2010.400. are as follows: Category A B C Cost £000 800 1.350. the directors of Priory made the decision to close down a lossmaking division with effect from 30 September 2010.970 (continued) © ICSA.000. is able to exercise a significant influence over the financial and operating policies of that company.The following further information is provided in respect of the items indicated by Notes (i) – (vi) above. The directors are convinced that this will result in the creation of an improved design in due course. The purchase consideration was £9. Priory acquired 25% of the ordinary share capital of Woodman Ltd on 1 April 2009 and.000 and was satisfied by the issue of 3 million ordinary shares of £1 each in Priory. This amount represents goodwill arising on the acquisition of the tangible and intangible assets of a local business. The balance is made up of the following: Development expenditure brought forward on 1 April 2009 of £1. It is estimated that the new product will prove highly profitable for a period of nine years from that date. The goodwill is estimated to be worth £1. The profit made by Woodman Ltd in the year to 31 March 2010 amounted to £1. No entry has been made in the above accounts of Priory in respect of the acquisition. the closure decision remained confidential.280 Net selling price £000 660 2.000 on 31 March 2010. Research expenditure of £370.000.000. (iii) Priory’s freehold property was professionally revalued on 31 March 2010 at £22.010.
Assume all figures to be material. The directors plan to include this amount as sales revenue for 2009. Assume there were no differences between the purchase price and fair value of the net assets of Woodman Ltd at the acquisition date. for £50. Dundee’s Chief Accountan t believes that the company should always take the most prudent approach when valuing assets for inclusion in the accounts. in order to comply with the relevant accounting standards. and the finance director of Dundee is not sure which figure should be used when preparing the accounts. The directors are unsure whether the machine should be treated as an asset in the accounts. an advance payment of £3 million for the supply of services over the next three years.000. You should base your advice on the underlying assumptions and qualitative characteristics contained in the IASB’s ‘Framework for the preparation and presentation of financial statements’. 2010 Page 8 of 10 . 4. Calculations to the nearest £000. which would cost up to £1. but tell the directors that they should expect to lose the case. (Total: 25 marks) The following issues have arisen in relation to the accounts of Dundee plc (‘Dundee’) for the year ending 31 December 2009: (i) Dundee received from a customer. (ii) and (iv). (ii) (iii) (iv) (v) Required Advise the directors of Dundee how to deal with the above five issues in the accounts for the year ended 31 December 2009. in January 2010. (25 marks) © ICSA. Dundee owns a machine with a carrying value of £50. An action has been brought against Dundee for negligence during 2009. Dundee’s lawyers have been instructed to vigorously defend the action. to comply with standard accounting practice so far as the available information permits. On 31 December 2009 the property is expected to be worth £16 million.5 million. A court decision is not expected for at least a year. (9 marks) Prepare the accounts of Priory for the year ended 31 March 2010 revised. It would cost Dundee £62. The directors have discovered that the machine could be sold to a South American company.Required (a) Explain the required treatment of items (i). (16 marks) (b) Notes: Ignore taxation. A property was purchased at the beginning of 2009 for £10 million. as appropriate. above.000 at 31 December 2009 which is now obsolete. during December 2009.000 to transport the machine to South America.
990 2. (a) Trace the evolution of stand-alone environmental reports and explain why this development has occurred. each company needs to acquire a fleet of new lorries which will cost £998. The lease contract provides for an initial payment of £200.600.800 840 350 3.000.990 To put into effect plans for expansion. in total. whereas the directors of Park have decided to account for it as a finance lease. The forecast operating profits of Tracey and Park for 2010 are £594. Each lorry is expected to have a useful life of five years and. 2010 Page 9 of 10 . (12 marks) Outline the activities involved in an environmental audit. This amount is before lease rental charges (if any) and depreciation of £400.5.000 on the non-current assets owned at 31 December 2009. Tracey Ltd (‘Tracey’) and Park Ltd (‘Park’) are companies which trade in a similar range of products on the cash basis. The level of inventories is expected to remain unchanged during 2010. The directors of each company have entered into an arrangement with a London citybased financial institution to lease the lorries. (13 marks) (Total: 25 marks) (b) 6.000. (continued) © ICSA. The directors of Tracey intend to account for the lease arrangement as an operating lease.990 3. on 1 January 2010. The interest rate implicit in the lease arrangement is 8% per annum. and five further annual payments of the same amount commencing 31 December 2010.600.000 1. their residual value is estimated to be £198. Their statements of financial position at 31 December 2009 were identical and contained the following information: Statement of financial position as at 31 December 2009 Assets Non-current assets Inventories Cash Equity Ordinary share capital Retained profit £000 2.
actual or perceived. (Total: 25 marks) The scenarios included here are entirely fictional. is purely coincidental.000. These statements should show the appropriate adjustments to cash and retained profit as the result of transactions undertaken during 2010.Required (a) Prepare the forecast statements of financial position of Tracey and Park as at 31 December 2010. above. (12 marks) (b) Note: All calculations to the nearest £1. Any resemblance of the information in the scenarios to real persons or organisations. you should illustrate your answer by reference to the content of the accounts prepared under part (a). 2010 Page 10 of 10 . © ICSA. (13 marks) Identify and discuss three arguments in support of the imposition of compulsory accounting standards for financial reporting. Where appropriate.
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