 The Chartered Institute of Management Accountants 2004 1

MANAGERIAL LEVEL
FINANCIAL MANAGEMENT PILLAR
PAPER P7 – FINANCIAL ACCOUNTING AND TAX
PRINCIPLES
This is a Pilot Paper and is intended only to be an indicative guide
for tutors and students of the style and type of questions that are
likely to appear in future examinations. It does not seek to cover the
full range of the syllabus learning outcomes for this subject.
Financial Accounting and Tax Principles will be a three hour paper
with two compulsory sections (50 marks and 30 marks respectively)
and one section with a choice of questions for 20 marks.
CONTENTS
Pilot Question Paper
Section A: Twenty one objective test questions Pages 2-13
Section B: Six short answer questions Pages 14-16
Section C: Two scenario questions Pages 17-20
Indicative Maths Tables and Formulae Pages 21-23
Pilot Answers Pages 24-36
P
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P7 PILOT PAPER 2
SECTION A – 50 MARKS
ANSWER ALL TWENTY-ONE SUB-QUESTIONS
Question One
1.1 Which ONE of the following transactions is most likely to affect the overall amount
of working capital?
A Receipt of full amount of cash from a customer to settle their trade receivable
account.
B Payment of a trade payable account in full.
C Sale of a non-current asset on credit at its net book value.
D Purchase of inventory on credit.
(2 marks)
REQUIRED:
On the indicative ANSWER SHEET, either write your answer in the space provided
where the sub-question requires a written response, or place a circle “O” around the
letter that gives the correct answer to the sub-question where a list of distractors
has been provided.
If you wish to change your mind about an answer to such a sub-question, block
out your first answer completely and then circle another letter. You will not receive
marks if more than one letter is circled.
Space has been provided on the four-page answer sheet for workings. If you
require further space, please use the last page of your answer book and clearly
indicate which question(s) these workings refer to.
You must detach the answer sheet from the question paper and attach it to the
front cover of your answer book before you hand it to the invigilators at the end of
the examination.
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P7 PILOT PAPER 3
Financial Accounting and Tax Principles Write here your full examination number:
Centre Code
Hall Code
INDICATIVE ANSWER SHEET FOR SECTION A
Desk Number
1.1 A B C D
1.2 A B C D
1.3 A B C D
No more than 15 additional words: A direct tax is one that
1.4
1.5 The optimal amount to the nearest $100 to be transferred is:
1
2
3
1.6
Maximum 5
words per
item
4
1.7 The annual rate of interest is: %
1.8 A B C D
1.9 The average working capital cycle is:
1.10 A B C D
1.11 A B C D
1.12 A B C D
1.13 Cash expected to be received is: $
1.14 A B C D
1.15 Tax due is: $
1.16 A B C D
THIS ANSWER SHEET CONTINUES ON PAGE 4
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P7 PILOT PAPER 4
In no more than 30 words: 1.17
In no more than 30 words: 1.18
1.19 The value of goodwill to be included in the accounts is: $
1.20 The optimal order size is:
1.21 A B C D
You must detach this Answer sheet from the question paper and attach it to the
inside front cover of your answer book before you hand it in to the invigilators at the
end of the examination.
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P7 PILOT PAPER 5
Space for workings for Section A
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P7 PILOT PAPER 6
Space for workings for Section A
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P7 PILOT PAPER 7
1.2 B entered into a three-year contract to build a leisure centre for an enterprise.
The contract value was $6 million. B recognises profit on the basis of certified
work completed.
At the end of the first year, the following figures were extracted from B's
accounting records:
$000
Certified value of work completed (progress payments billed) 2,000
Cost of work certified as complete 1,650
Cost of work-in-progress (not included in completed work) 550
Estimated cost of remaining work required to complete the contract 2,750
Progress payments received from enterprise 1,600
Cash paid to suppliers for work on the contract 1,300
What values should B record for this contract as "gross amounts due from customers"
and "current liabilities – trade and other payables"?
Gross amounts due from Current liabilities – trade and
customers other payables
A $950,000 $350,000
B $950,000 $900,000
C $1,250,000 $600,000
D $2,550,000 $900,000
(2 marks)
1.3 IAS 8 – Net Profit or Loss for the Period, Fundamental Errors and Changes in
accounting policies specifies the definition and treatment of a number of different
items.
Which of the following is NOT specified by IAS 8?
A The effect of a change in an accounting estimate.
B Prior period adjustments.
C Provisions.
D Extraordinary items.
(2 marks)
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P7 PILOT PAPER 8
1.4 In no more than 15 words, complete the following sentence:
“A direct tax is one that…”
(Write your answer in the space provided on the answer sheet)
(2 marks)
1.5 A company uses the Baumol cash management model. Cash disbursements are
constant at $20,000 each month. Money on deposit earns 5% a year, while
money in the current account earns a zero return. Switching costs (that is, for
each purchase or sale of securities) are $30 for each transaction.
What is the optimal amount (to the nearest $100) to be transferred in each transaction?
(Write your answer in the space provided on the answer sheet)
(2 marks)
1.6 List (using no more than five words per item) the four main sources of tax rules in
a country.
(Write your answer in the space provided on the answer sheet)
(4 marks)
1.7 WM’s major supplier, INT, supplies electrical tools and is one of the largest
companies in the industry, with international operations. Deliveries from INT are
currently made monthly, and are constant throughout the year. Delivery and
invoicing both occur in the last week of each month.
Details of the credit terms offered by INT are as follows:
Normal credit period Cash discount Average monthly
purchases
40 days 2% for settlement in 10 days $100,000
WM always takes advantage of the cash discount from INT.
Calculate the annual rate of interest (to two decimal places) implied in the cash
discount offered by INT. Assume a 365-day year.
(Write your answer in the space provided on the answer sheet)
(3 marks)
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P7 PILOT PAPER 9
1.8 A company has a current ratio of 2 :1. Due to having significant surplus cash
balances, it has decided to pay its trade payable accounts after 30 days in future,
rather than after 50 days, as it has in the past.
What will be the effect of this change on the company's current ratio and its cash
operating cycle?
Current ratio Cash operating cycle
A Increase Increase
B Increase Decrease
C Decrease Increase
D Decrease Decrease
(2 marks)
1.9 The following balances were extracted from the books of A:
Year ended 31
March 2003
$000
Revenue 300
Cost of sales 200
Gross profit 100
At 31 March 2003
$000
Closing inventory 15
Trade receivables 36
Trade payables 28
Assume all revenue is credit sales and cost of sales equates to inventory purchases.
What is A's average working capital cycle for the year ended 31 March 2003?
(Write your answer in the space provided on the answer sheet)
(3 marks)
1.10 Double tax relief is used to
A ensure that you do not pay tax twice on any of your income.
B mitigate taxing overseas income twice.
C avoid taxing dividends received from subsidiaries in the same country twice.
D provide relief where a company pays tax at double the normal rate.
(2 marks)
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P7 PILOT PAPER 10
1.11 A withholding tax is:
A tax withheld from payment to the tax authorities.
B tax paid less an amount withheld from payment.
C tax deducted at source before payment of interest or dividends.
D tax paid on increases in value of investment holdings.
(2 marks)
1.12 Tax on an enterprise’s trading profits could be referred to as:
(i) Income tax
(ii) Profits tax
(iii) Indirect tax
(iv) Direct tax
(v) Earnings tax
Which TWO of the above would most accurately describe tax on an enterprise’s trading
profits:
A (i) and (iii)
B (i) and (iv)
C (ii) and (iii)
D (iv) and (v)
(2 marks)
1.13 An enterprise commenced business on 1 April 2002. Revenue in April 2002 was
$20,000, but this is expected to increase at 2% a month. Credit sales amount to
60% of total sales. The credit period allowed is one month. Bad debts are
expected to be 3% of credit sales, but other customers are expected to pay on
time. Cash sales represent the other 40% of revenue.
How much cash is expected to be received in May 2002?
(Write your answer in the space provided on the answer sheet)
(3 marks)
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P7 PILOT PAPER 11
1.14 Which of the following types of taxes is regarded as an indirect tax?
A Taxes on income.
B Taxes on capital gains.
C Taxes on inherited wealth.
D Sales tax (Value added tax).
(2 marks)
1.15 E has an accounting profit before tax of $95,000. The tax rate on trading profits
applicable to E for the year is 25%. The accounting profit included non-taxable
income from government grants of $15,000 and non-tax allowable expenditure of
$10,000 on entertaining expenses.
How much tax is E due to pay for the year?
(Write your answer in the space provided on the answer sheet)
(2 marks)
1.16 Which TWO of the following are underlying assumptions in the International
Accounting Standards Board’s Framework for the preparation and presentation of
financial statements?
(i) Accruals
(ii) Relevance
(iii) Comparability
(iv) Going concern
(v) Reliability
A (i) and (v)
B (ii) and (v)
C (iii) and (iv)
D (i) and (iv)
(2 marks)
1.17 The International Accounting Standards Board’s Framework for the preparation
and presentation of financial statements defines elements of financial statements.
In no more than 30 words define an asset.
(Write your answer in the space provided on the answer sheet)
(2 marks)
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P7 PILOT PAPER 12
The following data is to be used to answer questions 1.18 and 1.19 below
X acquired the business and assets from the owners of an unincorporated business:
the purchase price was satisfied by the issue of 10,000 equity shares with a nominal
market value of $10 each and $20,000 cash. The market value of X shares at the date
of acquisition was $20 each.
The assets acquired were:
• Net tangible non-current assets with a book value of $20,000 and current
value of $25,000.
• Patents for a specialised process valued by a specialist valuer at $15,000.
• Brand name, valued by a specialist brand valuer on the basis of a multiple
of earnings at $50,000.
• Publishing rights of the first text from an author that the management of X
expects to become a best seller. The publishing rights were a gift from the
author to the previous owners at no cost. The management of X has
estimated the future value of the potential best seller at $100,000. However,
there is no reliable evidence available to support the estimate of the
management.
1.18 In no more than 30 words, explain the accounting treatment to be used for the
publishing rights of the first text.
(Write your answer in the space provided on the answer sheet)
(2 marks)
1.19 Calculate the value of goodwill to be included in the accounts of X for this
purchase.
(4 marks)
1.20 SK sells bathroom fittings throughout the country in which it operates. In order to
obtain the best price, it has decided to purchase all its annual demand of 10,000
shower units from a single supplier. RR has offered to provide the required
number of showers each year under an exclusive long-term contract.
Demand for shower units is at a constant rate all year. The cost to SK of holding
one shower unit in Inventory for one year is $4 plus 3% of the purchase price.
RR is located only a few miles from the SK main showroom. It has offered to
supply each shower unit at $400 with a transport charge of $200 per delivery. It
has guaranteed such a regular and prompt delivery service that SK believes it will
not be necessary to hold any safety Inventory (that is buffer Inventory) if it uses
RR as its supplier.
Using the economic order quantity model (EOQ model), calculate the optimal order
size, assuming that RR is chosen as the sole supplier of shower units for SK.
(Write your answer in the space provided on the answer sheet)
(3 marks)
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P7 PILOT PAPER 13
1.21 Which of the following would be LEAST LIKELY to arise from the introduction of a
Just-in-Time stock ordering system?
A Lower stockholding costs.
B Less risk of stock shortages.
C More frequent deliveries.
D Increased dependence on suppliers.
(2 marks)
(Section A = 50 marks)
End of Section A
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P7 PILOT PAPER 14
SECTION B – 30 MARKS
ANSWER ALL SIX SHORT-ANSWER QUESTIONS
Question Two
A new type of delivery vehicle, when purchased on 1 April 2000 for $20,000, was
expected to have a useful economic life of four years. It now appears that the original
estimate of the useful economic life was too short, and the vehicle is now expected to
have a useful economic life of six years, from the date of purchase. All delivery vehicles
are depreciated using the straight-line method and are assumed to have zero residual
value.
Required:
As the trainee management accountant, draft a memo to the transport manager
explaining whether it is possible to change the useful economic life of the new delivery
vehicle. Using appropriate International Accounting Standards, explain how the
accounting transactions relating to the delivery vehicle should be recorded in the
income statement for the year ended 31 March 2003 and the balance sheet at that
date.
(5 marks)
Question Three
NDL drilled a new oil well, which started production on 1 March 2003. The licence
granting permission to drill the new oil well included a clause that requires NDL to
"return the land to the state it was in before drilling commenced".
NDL estimates that the oil well will have a 20-year production life. At the end of that
time, the oil well will be de-commissioned and work carried out to reinstate the land.
The cost of this de-commissioning work is estimated to be $20 million.
Required:
As the trainee management accountant, draft a memo to the production manager
explaining how NDL must treat the de-commissioning costs in its financial statements
for the year to 31 March 2003. Your memo should refer to appropriate International
Accounting Standards.
(5 marks)
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P7 PILOT PAPER 15
Question Four
HRD owns a number of small hotels. The room occupancy rate varies significantly from
month to month. There are also high fixed costs. As a result, the cash generated each
month has been very difficult to estimate.
Christmas is normally a busy period and large cash surpluses are expected in
December. There is, however, a possibility that a rival group of hotels will offer large
discounts in December and this could damage December trade for HRD to a significant
extent.
January is a poor period for the industry and therefore all the company's hotels will
close for the month, resulting in a negative cash flow. The Finance Director has
identified the following possible outcomes and their associated probabilities:
$000 Probability
Expected cash balance at 30 November 2003 +175 1·0
Net operating cash flow in December 2003 +700 0·7
-300 0·3
Net operating cash flow in January 2004 -900 1·0
Assume cash flows arise at month ends.
After January 2004, trade is expected to improve, but there is still a high degree of
uncertainty in relation to the cash surpluses or deficits that will be generated in each
month.
Required:
Calculate the expected cash balance or overdraft of HRD at 31 January 2004.
Explain why your answer may not be useful for short-term cash planning and outline
alternative approaches that could be used.
(5 marks)
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P7 PILOT PAPER 16
Question Five
On 1 January 2003, SPJ had an opening debit balance of $5,000 on its tax account,
which represented the balance on the account after settling its tax liability for the
previous year. SPJ had a credit balance on its deferred tax account of $1⋅6 million at
the same date.
SPJ has been advised that it should expect to pay $1 million tax on its trading profits for
the year ended 31 December 2003 and increase its deferred tax account balance by
$150,000.
Required:
Prepare extracts from the income statement for the year ended 31 December 2003,
balance sheet at that date and notes to the accounts showing the tax entries required.
(5 marks)
Question Six
IAS 37 defines the meaning of a provision and sets out when a provision should be
recognised.
Required:
Using the IAS 37 definition of a provision, explain how a provision meets the
International Accounting Standards Board’s Framework for the preparation and
presentation of financial statements definition of a liability.
(5 marks)
Question Seven
A lessee leases a non-current asset on a non-cancellable lease contract of five years,
the details of which are:
• The asset has a useful economic life of five years.
• The rental is $21,000 per annum payable at the end of each year.
• The lessee also has to pay all insurance and maintenance costs.
• The fair value of the asset was $88,300.
The lessee uses the sum of digits method to calculate finance charges on the lease.
Required:
Prepare income statement and balance sheet extracts for years one and two of the
lease.
(5 marks)
(Section B = 30 marks)
End of section B
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P7 PILOT PAPER 17
SECTION C – 20 MARKS
ANSWER ONE QUESTION ONLY
Question Eight
AZ is a quoted manufacturing enterprise. Its finished products are stored in a nearby
warehouse until ordered by customers. AZ has been re-organising the business to
improve performance.
The trial balance for AZ at 31 March 2003 was as follows:
$000 $000
7% Loan Notes (redeemable 2007) 18,250
Accumulated profits at 31 March 2002 14,677
Administrative expenses 16,020
Bank & Cash 26,250
Cost of goods manufactured in the year to 31 March 2003
(excluding depreciation) 94,000
Distribution costs 9,060
Dividends paid 1,000
Dividends received 1,200
Equity shares $1 each, fully paid 20,000
Interest paid 639
Inventory at 31 March 2002 4,852
Plant & Equipment 30,315
Provision for Depreciation at 31 March 2002:
Plant & Equipment 6,060
Vehicles 1,670
Provision for doubtful trade receivables 600
Restructuring costs 121
Sales revenue 124,900
Share issue expenses 70
Share premium 500
Trade payables 8,120
Trade receivables 9,930
Vehicles 3,720
195,977 195,977
Additional information provided:
(i) Non-current assets are being depreciated as follows:
Plant & Equipment 20% per annum straight line
Vehicles 25% per annum reducing balance
Depreciation of plant and equipment is considered to be part of cost of sales,
while depreciation of vehicles should be included under distribution costs.
(ii) Tax due for the year to 31 March 2003 is estimated at $15,000.
(iii) The closing inventory at 31 March 2003 was $5,180,000.
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P7 PILOT PAPER 18
(iv) A dividend of 5 cents per ordinary share was paid in February 2003.
(v) The 7% loan notes are 10-year loans due for repayment by 31 March 2007. AZ
incurred no other interest charges in the year to 31 March 2003.
(vi) The restructuring costs in the trial balance represent the cost of the final phase of
a major fundamental restructuring of the enterprise to improve competitiveness
and future profitability.
(vii) At 31 March 2003, AZ was engaged in defending a legal action against the
enterprise. Legal advisers have indicated that it is reasonably certain that the
outcome of the case will be against the enterprise. The amount of compensation
is currently estimated at $25,000 and has not been included in the trial balance.
(viii) On 1 October 2002, AZ issued 1,000,000 equity shares at $1⋅50 each. All money
had been received and correctly accounted for by the year end.
Required:
Prepare AZ's income statement for the year to 31 March 2003, a balance sheet at that
date, and a statement of changes in equity for the year. These should be in a form
suitable for presentation to the shareholders, in accordance with the requirements of
International Accounting Standards.
(20 marks)
Notes to the financial statements are NOT required, but all workings must be clearly
shown. DO NOT prepare a statement of accounting policies or a statement of total
recognised gains and losses.
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P7 PILOT PAPER 19
Question Nine
The following information has been extracted from the draft financial statements of
TEX, a manufacturing enterprise:
TEX – Income statement for the year ended 30 September 2003
$000
Revenue 15,000
Cost of sales (9,000)
Gross profit 6,000
Other operating expenses (2,300)
3,700
Finance cost (124)
Profit before tax 3,576
Income tax expense (1,040)
Dividends (1,100)
1,436
TEX – Balance sheets at 30 September
2003 2002
$000 $000 $000 $000
Assets
Non-current assets 18,160 14,500
Current assets:
Inventories 1,600 1,100
Trade receivables 1,500 800
Bank 150 1,200
3,250 3,100
Total assets 21,410 17,600
Equity and liabilities
Capital and reserves:
Issued capital 10,834 7,815
Accumulated profits 5,836 4,400
16,670 12,215
Non-current liabilities:
Interest-bearing borrowings 1,700 2,900
Deferred tax 600 400
2,300 3,300
Current liabilities:
Trade payables 700 800
Proposed dividend 700 600
Tax 1,040 685
2,440 2,085
21,410 17,600
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P7 PILOT PAPER 20
Non-current assets
Property Plant Total
$000 $000 $000
At 30 September 2002
Cost 8,400 10,800 19,200
Depreciation 1,300 3,400 4,700
Net book value 7,100 7,400 14,500
At 30 September 2003
Cost 11,200 13,400 24,600
Depreciation 1,540 4,900 6,440
Net book value 9,660 8,500 18,160
(i) Plant disposed of during the year had an original cost of $2,600,000 and
accumulated depreciation of $900,000; cash received on disposal was $730,000.
(ii) All additions to non-current assets were purchased for cash.
(iii) Dividends were declared before the balance sheet dates.
Required:
Prepare TEX's cash flow statement and associated notes for the year ended
30 September 2003, in accordance with IAS 7 – Cash flow statements.
(20 marks)
(Section C = 20 marks)
End of Question Paper
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P7 PILOT PAPER 21
APPLICABLE MATHS TABLES AND FORMULAE
Present value table
Present value of £1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.
Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149
Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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P7 PILOT PAPER 22
Cumulative present value of £1 per annum,
Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1
Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514
Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
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P7 PILOT PAPER 23
FORMULAE
Valuation models
(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of £1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+
(iii) Present value of an annuity of £1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1
(iv) Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1
(v) Present value of £1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1
Inventory management
(i) Economic Order Quantity
EOQ =
h
o
C
D 2C
where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand
Cash management
(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2
(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3
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P7 PILOT PAPER 24
SOLUTIONS TO PILOT PAPER
SECTION A
Answer to Question One
1.1 The answer is C
1.2
Gross amounts due from customers are calculated as: $
Certified value of work completed 2,000
Less cash received from enterprise 1,600
400
Plus work in progress 550
950
Current liabilities – trade and other payables are calculated as:
Cost of work certified as complete 1,650
Cost of work in progress (not included in completed work) 550
2,200
Less cash paid to creditors for work on the contract 1,300
900
The answer is B
1.3 The answer is C
1.4 A direct tax is one that is levied directly on the person who is intended to pay the
tax.
1.5
] 05 0 / ) 240,000 x 30 x 2 [( ⋅ = $16,970 that is approximately $17,000
1.6
1 Domestic legislation and court rulings
2 Practice of tax authority
3 Supranational bodies
4 International treaties
1.7 (100/98)
365/30
- 1 = 27·86%
1.8 The answer is A
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P7 PILOT PAPER 25
1.9
Inventory turnover (15/200) x 365 = 27⋅4 days
Receivables (36/300) x 365 = 43⋅8 days
Payables (28/200) x 365 = 51⋅1 days
Working capital cycle is therefore = (27⋅4 + 43⋅8 - 51⋅1) = 20⋅1 days
1.10 The answer is B
1.11 The answer is C
1.12 The answer is D
1.13 (20,000 x 1·02 x 40%) + (20,000 x 60% x 0·97) = $19,800
1.14 The answer is D
1.15 Accounting profit $95,000
Less non-taxable income $15,000
$80,000
Add non-tax allowable expenses $10,000
Taxable profit $90,000
Tax at 25% $22,500
1.16 The answer is D
1.17 “an asset is a resource controlled by an enterprise as a result of past events and
from which future economic benefits are expected to flow to the enterprise”
1.18 The publishing rights had no cost as they were a gift, therefore they cannot be
recognised. Expected future value cannot be recognised as the event has not yet
occurred.
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P7 PILOT PAPER 26
1.19
$
Tangible non-current assets 25,000
Patents 15,000
Brand name 50,000
90,000
Purchase consideration: $
Cash 20,000
Shares 200,000
220,000
Goodwill 130,000
1.20
Holding cost = $4 + (3% x $400) = $16
EOQ = ) / 2 (
h o
C D C
= ] $200)/$16 x 10,000 x (2 [
Optimal order = 500 units
1.21 The answer is B
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P7 PILOT PAPER 27
SECTION B
Answer to Question Two
Memo
To: Transport Manager
From: Trainee Management Accountant
Date: January 2004
International Accounting Standards (IAS) require the economic life of the vehicle to be
changed.
IAS 16 requires the useful economic lives of non-current assets to be regularly
reviewed and adjusted if they are found to be incorrect. IAS 16 also requires realistic
economic lives to be used for non-current assets. A review of the delivery vehicle
indicates that its useful economic life must be adjusted to a more realistic total of six
years from date of purchase.
When economic lives are adjusted, IAS 16 requires the net book value to be recovered
over the remaining useful economic life of the asset.
The delivery vehicle will have been depreciated for two years, 2000/2001 and
2001/2002.
$000
Cost 20
Depreciation 2/4 10
Net book value at 31 March 2002 10
The useful economic life is adjusted to six years, two years having elapsed. The
remaining useful life is now four years. The net book value, at 31 March 2002, of
$10,000 will be depreciated over the remaining four years at $2,500 a year. The effect
in the Income Statement for the year to 31 March 2003 will be to charge $2,500
depreciation.
The balance sheet will show cost $20,000, less accumulated depreciation of $10,000
plus $2,500, total $12,500. The net book value at 31 March is $7,500.
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P7 PILOT PAPER 28
Answer to Question Three
Memo
To: Production Manager
From: Trainee Management Accountant
Date: January 2004
International Accounting Standard (IAS) 37 requires that any future obligations arising out of
past events should be recognised immediately. The drilling licence includes a clause that
requires the land to be returned to the state it was in before drilling commenced. The past
event occurs as soon as the licence is granted and the de-commissioning costs are incurred
as soon as the oil well has been drilled on the site.
The full obligation must be recognised in the accounts ending 31March 2003. The full cost of
the de-commissioning has been estimated ($20 million); this is then discounted to present
value and recorded as a provision in the balance sheet at 31 March 2003
Where the expenditure gives access to future economic benefits such as access to oil
reserves for the next 20 years, the de-commissioning costs are treated as capital
expenditure and added on to the cost of the non-current asset. The new total cost of the oil
well would then need to be reviewed to ensure that its book value was not greater than its
recoverable amount.
The cost of the oil well (including the provision) should be depreciated each year and
charged to the income statement. The provision will remain in the balance sheet until the oil
well is de-commissioned in 20 years’ time.
Answer to Question Four
$000 $000
Opening balance (1 December 2003) 175
December
+700 x 0·7 490
- 300 x 0·3 -90
400
January -900
Closing balance (31 January 2004) -325
The expected balance at 31 January is an overdraft of $325,000.
The expected balance is based on probabilities and will not occur. It therefore provides
a poor basis for short-term cash planning. Based on the probabilities provided, there
will either be a cash inflow of $700,000 in December or a cash outflow of $300,000.
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P7 PILOT PAPER 29
The mean expected value would only be relevant if the event could be repeated a
significant number of times. The alternative approaches to planning should be to plan
for each of the two possible outcomes, +$700,000 or -$300,000.
Answer to Question Five
Notes to the accounts
Note 1: Tax expense
$
Balance brought forward 1 January 2003 (5,000)
Tax for current year 1,000,000
Deferred tax increase 150,000
Income statement 1,145,000
Note 2: Deferred tax
Deferred tax – balance at 1 January 2003 1,600,000
Increase in year 150,000
Balance at 31 December 2003 1,750,000
Income Statement (extract) for the year ended 31 December 2003
Tax expense (note 1) $1,145,000
Balance Sheet at 31 December 2003 (extracts)
Current liabilities:
Tax payable $1,000,000
Non-current liabilities
Deferred tax (note 2) $1,750,000
Answer to Question Six
The International Accounting Standards Board’s Framework for the preparation and
presentation of financial statements (the Framework) defines a liability as:
“a present obligation of the enterprise arising from past events, the settlement of
which is expected to result in an outflow of resources from the enterprise.”
IAS 37 defines a provision as a liability of uncertain timing or amount. A provision is
only recognised when:
• There is a present obligation (legal or constructive) arising as a result of a past
event.
• It is probable (or more likely than not) that an outflow of resources embodying
economic benefits will be required to settle the obligation.
• A reliable estimate can be made of the amount of the obligation.
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P7 PILOT PAPER 30
This definition is very similar to the one given in the IASB’s Framework for a liability.
“…a present obligation of the enterprise arising from past events.”
A provision is a present obligation arising from a past event. The event must already
have happened at the balance sheet date. If the event has not occurred, the entity may
be able to avoid it, so a provision will not be made.
The obligation can arise from legal consequences or could be constructive.
Constructive obligations arise out of past practice or as a result of promises previously
made which have created the expectation that the organisation would honour its
promise. Therefore a provision meets this part of the definition of a liability.
“…the settlement of which is expected to result in an outflow of resources from
the enterprise.”
Settlement is probably going to result in an outflow of resources. If the outflow of
resources is more likely than not to occur it can be expected to happen, thus meeting
this part of the definition of a liability.
Answer to Question Seven
$
Payments under the lease 5 x 21,000 105,000
Fair value 88,300
Finance charge 16,700
Finance charge spread using 5 years’ sum of digits
$
Yr 1 5/15 x 16,700 = 5,567
Yr 2 4/15 x 16,700 = 4,453
Yr 3 3/15 x 16,700 = 3,340
Yr 4 2/15 x 16,700 = 2,227
Yr 5 1/15 x 16,700 = 1,113
Balance Finance
charge
Repayment Balance
Yr 1 88,300 5,567 21,000 72,867
Yr 2 72,867 4,453 21,000 56,320
Yr 3 56,320 3,340 21,000 38,660
Yr 4 38,660 2,227 21,000 19,887
Yr 5 19,887 1,113 21,000 0
Income statement (extracts)
Year 1 $
Depreciation 17,660
Finance charge 5,567
Year 2 $
Depreciation 17,660
Finance charge 4,453
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P7 PILOT PAPER 31
Balance sheet (extracts) $ $
Year 1 Year 2
Non-current assets at cost - leased 88,300 88,300
Provision for depreciation 17,660 35,320
Net book value 70,640 52,980
Liabilities – amounts due under leases
Current liabilities 16,547 17,660
Non-current liabilities 56,320 38,660
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P7 PILOT PAPER 32
SECTION C
Answer to Question Eight
AZ – Income Statement for the year ended 31 March 2003
$000 $000
Revenue 124,900
Cost of sales (W1) (99,735)
Gross profit 25,165
Distribution costs (W4) (9,573)
Administration expenses (W3) (16,045)
Other operating expenses (121) (25,739)
Loss from operations (574)
Finance cost (W7) (1,278)
Income from other fixed asset investments 1,200 (78)
Loss before tax (652)
Income tax expense (15)
Net loss for the period (667)
AZ – Statement of Changes in Equity for the year ended 31 March 2003
Share
capital
Share
premium
Accumulated
profits
Total equity
Balance at 31 March 2002 19,000 0 14,677 33,677
Issue of shares 1,000 500 1,500
Share issue costs (70) (70)
Net loss for the period (667) (667)
Dividends (W6) (1,000) (1,000)
Balance at 31 March 2003 20,000 430 13,010 33,440
AZ – Balance Sheet at 31 March 2003
$000 $000 $000
Non-current Assets Cost Depreciation Net Book
Value
Property, plant and equipment (W9) 34,035 14,306 19,729
Current Assets
Inventory 5,180
Trade receivables (W8) 9,330
Cash at bank & in hand 26,250
40,760
60,489
Capital and Reserves
Called up share capital 20,000
Share premium account 430
Accumulated profits 13,010
33,440
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P7 PILOT PAPER 33
Non-current liabilities
7% Loan notes (redeemable 2007) 18,250
Other provisions 25
18,275
51,715
Current liabilities
Trade payables 8,120
Tax 15
Accruals (W7) 639 8,774
60,489
Workings
W1 Cost of sales:
Opening inventory 4,852
Cost of goods manufactured in year 94,000
98,852
Less closing inventory (5,180)
93,672
Add depreciation – plant and equipment (W2) 6,063
99,735
W2 Depreciation
Plant and equipment, cost 30,315
Depreciation for year @ 20% 6,063 (IS)
Depreciation b/f 6,060
Depreciation c/f 12,123 (BS)
W3 Administration expenses
Per trial balance 16,020
Provision for legal claim 25
16,045
W4 Distribution expenses
Per trial balance 9,060
Depreciation vehicles (W5) 513
9,573
W5 Depreciation
Vehicles, cost 3,720
Depreciation b/f 1,670
2,050
Depreciation for year @ 25% 513 (IS)
Depreciation b/f 1,670
Depreciation c/f 2,183 (B/S)
W6 Dividends
Dividends paid
Ordinary dividend 0⋅05 x 20 million shares = 1,000 (SCE)
W7 Finance cost
7% interest on Loan notes 1,278 (IS)
Paid 639
Accrued interest 639 (B/S)
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P7 PILOT PAPER 34
W8 Trade receivables 9,930
Provision for doubtful trade receivables 600
Trade receivables – Balance sheet 9,330
W9 Non-current assets
Cost Depreciation
Plant Vehicles Plant (W2) Vehicles (W5)
Balance b/f 30,315 3,720 6,060 1,670
Depreciation 6,063 513
Balance c/f 30,315 3,720 12,123 2,183
Totals 34,035 14,306
Answer to Question Nine
TEX – Cash Flow Statement for the year ended 30 September 2003
$000 $000
Cash inflow from operating activities
Cash receipts from customers (W1) 14,300
Cash paid to suppliers and employees (W2) (8,290)
Cash generated from operations 6,010
Interest paid (124)
Income taxes paid (W4) (485)
Net cash from operating activities 5,401
Cash flows from investing activities
Purchase of property, plant and equipment (W6) (8,000)
Proceeds from sale of equipment 730
Net cash used in investing activities (7,270)
Cash flows from financing activities
Proceeds from issue of share capital (W5) 3,019
Repayment of long term borrowings (1,200)
Dividends paid (W3) (1,000)
Net cash from financing activities 819
Net decrease in cash and cash equivalents (1,050)
Cash and cash equivalents at 30 September 2002 1,200
Cash and cash equivalents at 30 September 2003 150
Notes
1 During the period the company acquired property, plant and equipment with an
aggregate cost of $8 million. These were paid for by cash.
2 Cash and cash equivalents consist of cash on hand and balances with banks.
Cash and cash equivalents included in the cash flow statement comprise the
following balance sheet amounts:
2002 2003
$000 $000
Cash on hand and balances with banks 1,200 150
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P7 PILOT PAPER 35
Workings
$000
W1 Cash receipts from customers
Trade Receivables
Balance at 30 September 2002 800
Revenue from Income statement 15,000
15,800
Balance at 30 September 2003 1,500
Receipts 14,300
W2 Cash paid to suppliers and employees
Cost of Sales
Income Statement 9,000
Less depreciation (W6) (2,640)
Less loss on disposal (970)
Income Statement cost of sales 5,390
Less inventory at 30 September 2002 (1,100)
4,290
Add inventory at 30 September 2003 1,600
Purchases 5,890
Trade Payables
Balance at 30 September 2002 800
Purchases 5,890
6,690
Less balance at 30 September 2003 (700)
Payments to suppliers 5,990
Total payments to suppliers and employees
Payments to suppliers 5,990
Other expenses from Income Statement 2,300
Total 8,290
W3 Dividends
Balance at 30 September 2002 600
Income statement 1,100
1,700
Less balance at 30 September 2003 (700)
Paid 1,000
W4 Income Taxes
Balance at 30 September 2002
Taxes 685
Deferred tax 400
1,085
Income Statement 1,040
2,125
Less balance at 30 September 2003
Taxes (1,040)
Deferred tax (600)
485
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P7 PILOT PAPER 36
W5 – Share capital
Balance at 30 September 2002 7,815
Balance at 30 September 2003 10,834
Cash issue 3,019
W6 – Tangible non-current assets
Property Cost Depreciation
$000 $000
Balance at 30 September 2002 8,400 1,300
Balance at 30 September 2003 11,200 1,540
Purchased 2,800
Depreciation in year 240
Plant Cost Depreciation
$000 $000
Balance at 30 September 2002 10,800 3,400
Less disposal 2,600 900
8,200 2,500
Balance at 30 September 2003 13,400 4,900
Purchased 5,200
Depreciation in year 2,400
Total purchases $000
Property 2,800
Plant 5,200
8,000
Total depreciation
Property 240
Plant 2,400
2,640
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P7 PILOT PAPER 37
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P7 PILOT PAPER 38
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P7 PILOT PAPER 39
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P7 PILOT PAPER 40
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 The Chartered Institute of Management Accountants 2005

Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax
Principles
26 May 2005 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read the question requirement before
attempting the question concerned. The requirements for questions in
Sections B and C are highlighted in a dotted box.
Answer the ONE compulsory question in Section A. This is comprised of 20
sub-questions on pages 2 to 8.
Answer ALL SIX compulsory sub-questions in Section B on pages 10 to 13.
Answer ONE of the two questions in Section C on pages 14 to 17.
Maths Tables and Formulae are provided on pages 19 to 21. These pages
are detachable for ease of reference.
Write your full examination number, paper number and the examination
subject title in the spaces provided on the front of the examination answer
book. Also write your contact ID and name in the space provided in the right
hand margin and seal to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

P
7



F
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n
a
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c
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a
l

A
c
c
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n
t
i
n
g

a
n
d

T
a
x

P
r
i
n
c
i
p
l
e
s


TURN OVER
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P7 2 May 2005

SECTION A – 50 MARKS
[the indicative time for answering this Section is 90 minutes]
ANSWER ALL TWENTY SUB-QUESTIONS




Instructions for answering Section A:

The answers to the twenty sub-questions in Section A should ALL be written in your
answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off so that the markers know which sub-question you are answering.

For 1.8, 1.9, 1.12, 1.14 and 1.16 you should show your workings as marks are
available for the method you use to answer these sub-questions.



Question One

1.1 The term GAAP is used to mean

A Generally accepted accounting procedures
B General accounting and audit practice
C Generally agreed accounting practice
D Generally accepted accounting practice

(2 marks)


1.2 The effective incidence of a tax is

A the date the tax is actually paid.

B the person or entity that finally bears the cost of the tax.

C the date the tax assessment is issued.

D the person or entity receiving the tax assessment.

(2 marks)


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May 2005 3 P7

1.3 IAS 32 Financial Instruments – Disclosure and Presentation classifies issued shares as
either equity instruments or financial liabilities. An entity has the following categories of
funding on its balance sheet:

(i) A preference share that is redeemable for cash at a 10% premium on 30 May 2015.
(ii) An ordinary share which is not redeemable and has no restrictions on receiving
dividends.
(iii) A loan note that is redeemable at par in 2020.
(iv) A cumulative preference share that is entitled to receive a dividend of 7% a year.

Applying IAS 32, how would EACH of the above be categorised on the balance sheet?

As an equity
instrument
As a financial
liability
A (i) and (ii) (iii) and (iv)
B (ii) and (iii) (i) and (iv)
C (ii) (i), (iii) and (iv)
D (i), (ii) and (iii) (iv)

(2 marks)


1.4 List FOUR forms of short-term finance generally available to small entities.

(4 marks)


1.5 In no more than 15 words, define the meaning of “competent jurisdiction”.

(2 marks)


1.6 Which ONE of the following is responsible for governance and fundraising in relation to
the development of International Accounting Standards?

A International Accounting Standards Board

B International Financial Reporting Interpretations Committee

C International Accounting Standards Committee Foundation Trustees

D Standards Advisory Council

(2 marks)




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P7 4 May 2005

1.7 An entity is preparing a segmental analysis in accordance with IAS 14 Segment
Reporting. The directors have elected to disclose business segments as the primary
reporting format, but are unsure which of the following items need disclosure.

(i) external revenue
(ii) cost of sales
(iii) capital employed
(iv) segment profit

Which TWO of the above require separate disclosure under IAS 14 in respect of segments
reported as primary segments?

A (i) and (ii) only

B (i) and (iv) only

C (i) and (iii) only

D (iii) and (iv) only

(2 marks)


1.8 A bond with a coupon rate of 7% is redeemable in 8 years’ time for $100. Its current
purchase price is $82. What is the percentage yield to maturity?

(4 marks)


1.9 AC made the following payments during the year ended 30 April 2005:

$000
Operating costs (excluding depreciation) 23
Finance costs 4
Capital repayment of loans 10
Payments for the purchase of new computer equipment for use in AC’s business 20

AC’s revenue for the period was $45,000 and the corporate income tax rate applicable to
AC’s profits was 25%. The computer equipment qualifies for tax allowances of 10% per
year on a straight line basis.

Calculate AC’s tax payable for the year ended 30 April 2005.

(3 marks)













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May 2005 5 P7

1.10 Financial statements prepared using International Standards and the International
Accounting Standards Board’s (IASB) Framework for the Preparation and Presentation of
Financial Statements (Framework) are presumed to apply two of the following four
underlying assumptions:

(i) Relevance
(ii) Going concern
(iii) Prudence
(iv) Accruals

Which TWO of the above are underlying assumptions according to the IASB’s Framework?

A (i) and (ii) only

B (ii) and (iii) only

C (iii) and (iv) only

D (ii) and (iv) only

(2 marks)


1.11 Which ONE of the following would be treated as a non-adjusting event after the balance
sheet date, as required by IAS 10 Events after the Balance Sheet Date, in the financial
statements of AN for the period ended 31 January 2005? The financial statements were
approved for publication on 15 May 2005.

A Notice was received on 31 March 2005 that a major customer of AN had ceased trading
and was unlikely to make any further payments.

B Inventory items at 31 January 2005, original cost $30,000, were sold in April 2005 for
$20,000.

C During 2004, a customer commenced legal action against AN. At 31 January 2005, legal
advisers were of the opinion that AN would lose the case, so AN created a provision of
$200,000 for the damages claimed by the customer. On 27 April 2005, the court awarded
damages of $250,000 to the customer.

D There was a fire on 2 May 2005 in AN’s main warehouse which destroyed 50% of AN’s
total inventory.

(2 marks)


1.12 AL’s customers all pay their accounts at the end of 30 days. To try and improve its cash
flow, AL is considering offering all customers a 1⋅5% discount for payment within 14 days.

Calculate the implied annual (interest) cost to AL of offering the discount, using compound
interest methodology and assuming a 365 day year.

(3 marks)





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P7 6 May 2005

1.13 List the THREE criteria set out in IAS 37 Provisions, Contingent Liabilities and Contingent
Assets for the recognition of a provision.

(3 marks)


1.14 AE purchases products from a foreign entity and imports them into a country A. On
import, the products are subject to an excise duty of $5 per item and Value Added Tax
(VAT) of 15% on cost plus excise duty.

AE purchased 200 items for $30 each and after importing them sold all of the items for
$50 each plus VAT at 15%.

How much is due to be paid to the tax authorities for these transactions?

A $450

B $1,450

C $2,050

D $2,500

(3 marks)


1.15 The economic order quantity formula includes the cost of placing an order. However, the
Management Accountant is unsure which of the following items should be included in
“cost of placing an order”:

(i) Administrative costs
(ii) Postage
(iii) Quality control cost
(iv) Unit cost of products
(v) Storekeeper’s salary

Which THREE of the above would usually be regarded as part of the cost of placing an order?

A (i), (ii) and (iii) only

B (i), (iv) and (v) only

C (ii), (iii) and (iv) only

D (i), (ii) and (v) only

(2 marks)











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May 2005 7 P7

1.16 An item of plant and equipment was purchased on 1 April 2001 for $100,000. At the date
of acquisition its expected useful economic life was 10 years. Depreciation was provided
on a straight line basis, with no residual value.

On 1 April 2003, the asset was revalued to $95,000. On 1 April 2004, the useful life of the
asset was reviewed and the remaining useful economic life was reduced to 5 years, a
total useful life of 8 years.

Calculate the amounts that would be included in the balance sheet for the asset cost/valuation
and provision for accumulated depreciation at 31 March 2005.

(4 marks)


1.17 AP has the following two legal claims outstanding:

• A legal action claiming compensation of $500,000 filed against AP in March 2004.

• A legal action taken by AP against a third party, claiming damages of $200,000
was started in January 2003 and is nearing completion.

In both cases, it is more likely than not that the amount claimed will have to be paid.

How should AP report these legal actions in its financial statements for the year ended
31 March 2005?

Legal action against AP Legal action by AP
A Disclose by a note No disclosure
B Make a provision No disclosure
C Make a provision Disclose as a note
D Make a provision Accrue the income
(2 marks)


1.18 Which ONE of the following powers is a tax authority least likely to have granted to them?

A Power of arrest.
B Power to examine records.
C Power of entry and search.
D Power to give information to other countries’ tax authorities.
(2 marks)









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P7 8 May 2005

1.19 IAS 16 Property, Plant and Equipment provides definitions of terms relevant to non-
current assets. Complete the following sentence, in no more than 10 words.

“Depreciable amount is…”

(2 marks)


1.20 The OECD model tax convention defines a permanent establishment to include a number
of different types of establishments:

(i) A place of management
(ii) A warehouse
(iii) A workshop
(iv) A quarry
(v) A building site that was used for 9 months

Which of the above are included in the OECD’s list of permanent establishments?

A (i), (ii) and (iii) only
B (i), (iii) and (iv) only
C (ii), (iii) and (iv) only
D (iii), (iv) and (v) only
(2 marks)


(Total for Section A = 50 marks)






End of Section A
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May 2005 9 P7











Section B starts on the next page












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P7 10 May 2005

SECTION B – 30 MARKS
[the indicative time for answering this Section is 54 minutes]
ANSWER ALL SIX SUB-QUESTIONS


Question Two

(a) AB acquired non-current assets on 1 April 2003 costing $250,000. The assets qualified
for accelerated first year tax allowance at the rate of 50% for the first year. The second
and subsequent years were at a tax depreciation rate of 25% per year on the reducing
balance method.

AB depreciates all non-current assets at 20% a year on the straight line basis.

The rate of corporate income tax applying to AB for 2003/04 and 2004/05 was 30%.
Assume AB has no other qualifying non-current assets.


Required:

Apply IAS 12 Income Taxes and calculate:

(i) the deferred tax balance required at 31 March 2004;
(ii) the deferred tax balance required at 31 March 2005;
(iii) the charge to the income statement for the year ended 31 March 2005.

(Total for requirement (a) = 5 marks)





(b) AD, a manufacturing entity, has the following balances at 30 April 2005:

Extract from financial statements: $000
Trade receivables 216
Trade payables 97

Revenue (all credit sales) 992
Cost of sales 898
Purchases in year 641

Inventories at 30 April 2005:
Raw materials 111
Work in progress 63
Finished goods 102


Required:

Calculate AD’s working capital cycle.
(Total for requirement (b) = 5 marks)




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May 2005 11 P7

(c)


Required:

List the FIVE elements of financial statements defined in the IASB’s Framework
and explain the meaning of each.

(Total for requirement (c) = 5 marks)





(d) AE has a three year contract which commenced on 1 April 2004. At 31 March 2005, AE
had the following balances in its ledger relating to the contract:

$000 $000
Total contract value 60,000
Cost incurred up to 31 March 2005:
Attributable to work completed 21,000
Inventory purchased for use in 2005/6 3,000 24,000
Progress payments received 25,000

Other information:
Expected further costs to completion 19,000

At 31 March 2005, the contract was certified as 50% complete.


Required:

Prepare the income statement and balance sheet extracts showing the balances
relating to this contract, as required by IAS 11 Long Term Contracts.

(Total for requirement (d) = 5 marks)








Section B continues on the next page




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P7 12 May 2005

(e) AM is a trading entity operating in a country where there is no sales tax. Purchases are
on credit, with 70% paid in the month following the date of purchase and 30% paid in the
month after that.

Sales are partly on credit and partly for cash. Customers who receive credit are given 30
days to pay. On average 60% pay within 30 days, 30% pay between 30 and 60 days and
5% pay between 60 and 90 days. The balance is written off as irrecoverable. Other
overheads, including salaries, are paid within the month incurred.

AM plans to purchase new equipment at the end of June 2005, the expected cost of
which is $250,000. The equipment will be purchased on 30 days credit, payable at the
end of July.

The cash balance on 1 May 2005 is $96,000.

The actual/budgeted balances for the six months to July 2005 were:

All figures $000 Actual Budgeted
Feb Mar Apr May Jun Jul
Credit sales 100 100 110 110 120 120
Cash sales 30 30 35 35 40 40
Credit purchases 45 50 50 55 55 60
Other overhead expense 40 40 40 50 50 50



Required:

Prepare a monthly cash budget for the period May to July 2005 and assess the
likelihood of AM being able to pay for the equipment when it falls due. (Round all
figures to the nearest $000)

(Total for requirement (e) = 5 marks)




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May 2005 13 P7

(f) A five year finance lease commenced on 1 April 2003. The annual payments are $30,000
in arrears. The fair value of the asset at 1 April 2003 was $116,000. Use the sum of
digits method for interest allocations and assume that the asset has no residual value at
the end of the lease term.


Required:

In accordance with IAS 17 Operating and Finance Leases:

(i) calculate the amount of finance cost that would be charged to the income
statement for the year ended 31 March 2005;

(ii) prepare balance sheet extracts for the lease at 31 March 2005.

(Total for requirement (f) = 5 marks)




(Total for Section B = 30 marks)





End of Section B




Section C starts on the next page





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P7 14 May 2005

SECTION C – 20 MARKS
[the indicative time for answering this Section is 36 minutes]
ANSWER ONE QUESTION ONLY



Question Three

AF is a furniture manufacturing entity. The trial balance for AF at 31 March 2005 was as follows:

$000 $000
6% loan notes (redeemable 2010) 1,500
Accumulated profits at 31 March 2004 388
Administrative expenses 1,540
Available for sale investments at market value 31 March 2004 1,640
Bank and cash 822
Cost of sales 3,463
Distribution costs 1,590
Dividend paid 1 December 2004 275
Interest paid on loan notes – half year to 30 September 2004 45
Inventory at 31 March 2005 1,320
Investment income received 68
Land and buildings at cost 5,190
Ordinary shares of $1 each, fully paid 4,500
Plant and equipment at cost 3,400
Provision for deferred tax 710
Provisions for depreciation at 31 March 2004: Buildings 1,500
Provisions for depreciation at 31 March 2004: Plant and equipment 1,659
Revaluation reserve 330
Sales revenue 8,210
Share premium 1,380
Trade payables 520
Trade receivables 1,480
20,765 20,765

Additional information provided:

(i) Available for sale investments are carried in the financial statements at market value.
The market value of the available for sale investments at 31 March 2005 was $1,750,000.

(ii) There were no sales or purchases of non-current assets or available for sale investments
during the year ended 31 March 2005.

(iii) Income tax due for the year ended 31 March 2005 is estimated at $250,000. There is no
balance outstanding in relation to previous years’ corporate income tax. The deferred tax
provision needs to be increased by $100,000.
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May 2005 15 P7

(iv) Depreciation is charged on buildings using the straight-line basis at 3% each year. The
cost of land included in land and buildings is $2,000,000. Plant and equipment is
depreciated using the reducing balance method at 20%. Depreciation is regarded as a
cost of sales.

(v) AF entered into a non-cancellable five year operating lease on 1 April 2004 to acquire
machinery to manufacture a new range of kitchen units. Under the terms of the lease, AF
will receive the first year rent free, then $62,500 is payable for four years commencing in
year two of the lease. The machine is estimated to have a useful economic life of 20
years.

(vi) The 6% loan notes are 10 year loans due for repayment March 2010. AF incurred no
other finance costs in the year to 31 March 2005.



Required:

Prepare the income statement for AF for the year to 31 March 2005 and a balance
sheet at that date, in a form suitable for presentation to the shareholders and in
accordance with the requirements of International Financial Reporting Standards.



Notes to the financial statements are NOT required, but all workings must be
clearly shown. DO NOT prepare a statement of accounting policies or a statement
of changes in equity.


(Total for Question Three = 20 marks)









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P7 16 May 2005

Question Four

The financial statements of AG are given below:

Balance sheets as at 31 March 2005 31 March 2004
$000 $000 $000 $000
Non-current assets:
Plant, property and equipment 4,500 4,800
Development expenditure 370 4,870 400 5,200

Current assets:
Inventories 685 575
Trade receivables 515 420
Cash and cash equivalents 552 1,752 232 1,227
Total assets 6,622 6,427

Equity and liabilities
Equity:
Share capital 2,600 1,900
Share premium account 750 400
Revaluation reserve 425 300
Retained earnings 1,430 1,415
Total equity 5,205 4,015

Non-current liabilities:
10% loan notes 0 1,000
5% loan notes 500 500
Deferred tax 250 200
Total non-current liabilities: 750 1,700

Current liabilities:
Trade payables 480 350
Income tax 80 190
Accrued expenses 107 172
Total current liabilities: 667 712
Total equity and liabilities 6,622 6,427


Income statement for the year ended 31 March 2005
$000 $000
Revenue 7,500
Cost of sales 4,000
Gross profit 3,500
Distribution costs 900
Administrative expenses 2,300 3,200
Profit from operations 300
Finance costs 45
Profit before tax 255
Income tax expense 140
Profit for the period 115
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May 2005 17 P7

Additional information:

(i) On 1 April 2004, AG issued 1,400,000 $0⋅50 ordinary shares at a premium of 50%.

(ii) On 1 May 2004, AG purchased and cancelled all its 10% loan notes at par.

(iii) Non-current tangible assets include properties which were revalued upwards by $125,000
during the year.

(iv) Non-current tangible assets disposed of in the year had a net book value of $75,000;
cash received on disposal was $98,000. Any gain or loss on disposal has been included
under cost of sales.

(v) Cost of sales includes $80,000 for development expenditure amortised during the year.

(vi) Depreciation charged for the year was $720,000.

(vii) The accrued expenses balance includes interest payable of $87,000 at 31 March 2004
and $12,000 at 31 March 2005.

(viii) The income tax expenses for the year to 31 March 2005 is made up as follows:

$000
Corporate income tax 90
Deferred tax 50
140

(ix) Dividends paid during the year were $100,000.


Required:

Prepare a cash flow statement, using the indirect method, for AG for the year
ended 31 March 2005, in accordance with IAS 7 Cash Flow Statements.

(Total for Question Four = 20 marks)




(Total for Section C = 20 marks)






End of Question Paper




Maths Tables and Formulae are on pages 19 to 21





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P7 18 May 2005












[this page is blank]
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May 2005 19 P7

MATHS TABLES AND FORMULAE

Present value table

Present value of £1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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P7 20 May 2005

Cumulative present value of £1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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May 2005 21 P7

FORMULAE

Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of £1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of £1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of £1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


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P7 24 May 2005

Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
May 2005
Thursday Afternoon Session
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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2005 Exam

The Chartered Institute of Management Accountants Page 1

General Comments

This first paper of the new syllabus applied the new question paper format for the first time. The
overall result was generally very pleasing with a good standard of answer being produced by many
candidates. The overall average mark and pass rate were slightly above expectations. There was
evidence of a number of well-prepared candidates with a wide range of knowledge, able to tackle
most of the sub-questions in questions one and two and prepare good answers to one of the optional
questions. There were, however, still candidates who struggled to gain a quarter of the marks.

Time allocation seemed to be a problem for some candidates, with evidence of rushed answers to
either question one or question two. Some candidates may have used more time on the optional
question and not spent sufficient time on the shorter sub-questions. This was evidenced by the lack
of workings and questions requiring some calculation being left out to save time. Question one is 50
marks and should be given approximately 50% of the time.

Question one was generally well done, but no one scored full marks. Most candidates provided
workings for the three and four mark questions, but a number did not. If workings are not given, no
marks can be awarded for wrong answers using the correct principle.

Question two included one question from each of sections A and B of the syllabus and two questions
from each of sections C and D. Question two will continue to include questions from all sections of
the syllabus. This question was generally not as well done as the other questions on the paper,
although a few candidates did achieve full marks. Some candidates were obviously ill-prepared for
deferred tax, long-term contracts and finance leases and many did not know what the five elements of
financial statements were.

Question three required the preparation of an income statement and balance sheet with some
adjustments. This question was expected by candidates and most of those attempting this question
were well prepared, resulting in good marks being achieved.

Question four required the preparation of a cash flow statement in accordance with IAS 7. This
question was very well done by those attempting this question with some excellent answers and a
number of candidates scoring full marks.

The following guide provides guidance to candidates preparing for future examinations and has been
prepared with that in mind. It therefore may give the impression that there were few good marks and
few passes as all the main errors have been listed for each question. It must be remembered though
that not all candidates made the errors listed and that overall there was a good result for this paper.
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SECTION A – 50 MARKS

Question One


Question 1.1

The term GAAP is used to mean

A Generally accepted accounting procedures
B General accounting and audit practice
C Generally agreed accounting practice
D Generally accepted accounting practice
(2 marks)
The answer is D


Question 1.2

The effective incidence of a tax is

A the date the tax is actually paid
B the person or entity that finally bears the cost of the tax
C the date the tax assessment is issued
D the person or entity receiving the tax assessment
(2 marks)
The answer is B


Question 1.3

IAS 32 Financial Instruments – Disclosure and Presentation classifies issued shares as either equity
instruments or financial liabilities. An entity has the following categories of funding on its balance
sheet:

(i) A preference share that is redeemable for cash at a 10% premium on 30 May 2015.
(ii) An ordinary share which is not redeemable and has no restrictions on receiving dividends.
(iii) A loan note that is redeemable at par in 2020.
(iv) A cumulative preference share that is entitled to receive a dividend of 7% a year.

As an equity instrument

As a financial liability

A (i) and (ii) (iii) and (iv)
B (ii) and (iii) (i) and (iv)
C (ii) (i), (iii) and (iv)
D (i), (ii) and (iii) (iv)
(2 marks)
The answer is C

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Question 1.4

List FOUR forms of short-term finance generally available to small entities.
(4 marks)

The answer is

Trade credit
Bank overdraft
Term loan
Factoring

Any other relevant sources, such as hire purchase or leasing were acceptable alternatives.



Question 1.5

In no more than 15 words, define the meaning of “competent jurisdiction”.
(2 marks)

The answer is

The competent jurisdiction is the country whose tax laws apply to the entity.


Question 1.6

Which ONE of the following is responsible for governance and fundraising in relation to the
development of International Accounting Standards?

A International Accounting Standards Board
B International Financial Reporting Interpretations Committee
C International Accounting Standards Committee Foundation Trustees
D Standards Advisory Council
(2 marks)
The answer is C



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Question 1.7

An entity is preparing a segmental analysis in accordance with IAS 14 Segment Reporting. The
directors have elected to disclose business segments as the primary reporting format, but are unsure
which of the following items need disclosure.

(i) external revenue
(ii) cost of sales
(iii) capital employed
(iv) segment profit

Which TWO of the above require separate disclosure under IAS 14 in respect of segments reported as
primary segments?

A (i) and (ii) only.
B (i) and (iv) only.
C (i) and (iii) only.
D (iii) and (iv) only.
(2 marks)

The answer is B


Question 1.8

A bond with a coupon rate of 7% is redeemable in 8 years’ time for $100. Its current purchase price is
$82. What is the percentage yield to maturity?
(4 marks)

The answer is 10⋅5%

Workings

Using cumulative present value table and present value table. Calculate cumulative present value of
annual interest received and add on the present value of the $100 receivable in 8 years time. Use t=8
and assume an interest rate. Calculate with the first rate (10% in answer below), check how close this
is to the cost of $82 and select a second interest rate that will give an answer the other side of the
cost $82. A rate of 10% gives $84⋅045 so a higher rate is required, using 12% the answer is $75⋅176,
by interpolation we can then calculate the approximate rate of 10.5%.

t = 8; r = 10
(7 x 5⋅335) + (100 x 0⋅467) = 37⋅345 + 46⋅7 = $84⋅045

t = 8; r = 12
(7 x 4⋅968) + (100 x 0⋅404) = 34⋅776 + 40⋅4 = $75⋅176

By interpolation:
10% + (((84⋅045 - 82⋅0)/(84⋅045 - 75⋅176)) x 2) =
10% + (2⋅045/8⋅869 x 2) =
10% + 0⋅461 = 10⋅461% ≈ 10⋅5%


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Question 1.9

AC made the following payments during the year ended 30 April 2005:

$000
Operating costs (excluding depreciation) 23
Finance costs 4
Capital repayment of loans 10
Payments for the purchase of new computer equipment for use in AC’s
business

20

AC’s revenue for the period was $45,000 and the corporate income tax rate applicable to AC’s
profits was 25%. The computer equipment qualifies for tax allowances of 10% per year on a straight
line basis. Calculate AC’s tax payable for the year ended 30 April 2005.
(3 marks)
The answer is $4,000

Workings

$000

$000
Revenue 45
Operating costs 23
Finance costs 4
Tax allowances - computer 2 29
16
Tax @ 25% 4



Question 1.10

Financial statements prepared using International Standards and the International Accounting
Standards Board’s (IASB) Framework for the Preparation and Presentation of Financial Statements
(Framework) are presumed to apply two of the following four underlying assumptions:

(i) Relevance
(ii) Going concern
(iii) Prudence
(iv) Accruals

Which TWO of the above are underlying assumptions according to the IASB’s Framework?

A (i) and (ii) only.
B (ii) and (iii) only.
C (iii) and (iv) only.
D (ii) and (iv) only.
(2 marks)

The answer is D

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Question 1.11

Which ONE of the following would be treated as a non-adjusting event after the balance sheet date,
as required by IAS 10 Events after the Balance Sheet Date, in the financial statements of AN for the
period ended 31 January 2005? The financial statements were approved for publication on 15 May
2005.

A Notice was received on 31 March 2005 that a major customer of AN had ceased trading and
was unlikely to make any further payments.

B Inventory items at 31 January 2005, original cost $30,000, were sold in April 2005 for
$20,000.

C During 2004, a customer commenced legal action against AN. At 31 January 2005, legal
advisers were of the opinion that AN would lose the case, so AN created a provision of
$200,000 for the damages claimed by the customer. On 27 April 2005, the court awarded
damages of $250,000 to the customer.

D There was a fire on 2 May 2005 in AN’s main warehouse which destroyed 50% of AN’s total
inventory.
(2 marks)
The answer is D


Question 1.12

AL’s customers all pay their accounts at the end of 30 days. To try and improve its cash flow, AL is
considering offering all customers a 1⋅5% discount for payment within 14 days.

Calculate the implied annual (interest) cost to AL of offering the discount, using compound interest
methodology and assuming a 365 day year.
(3 marks)

The answer is 40⋅4%

Workings for 1.12

AL offers 1⋅5% interest for 16 days
(100/98⋅5)
(365/16)
- 1 =
(1⋅015)
22⋅813
- 1 = 40⋅4%

An alternative approach is to use the compound interest formula and then convert the answer to an
annualised rate.

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Question 1.13

List the THREE criteria set out in IAS 37 Provisions, Contingent Liabilities and Contingent Assets for
the recognition of a provision.
(3 marks)

The answer is
An entity has a present obligation as a result of a past event.
It is probable that an outflow of resources will be required to settle the obligation.
A reliable estimate can be made of the amount.



Question 1.14

AE purchases products from a foreign entity and imports them into a country A. On import, the
products are subject to an excise duty of $5 per item and Value Added Tax (VAT) of 15% on cost plus
excise duty.

AE purchased 200 items for $30 each and after importing them sold all of the items for $50 each plus
VAT at 15%.

How much is due to be paid to the tax authorities for these transactions?

A $450
B $1,450
C $2,050
D $2,500
(3 marks)

The answer is B

Workings for 1.14

$
Sales 200 x $50 = 10,000
VAT on sales @ 15% 1,500
Less: VAT paid on import 200 x $35 x 15% = 1,050
VAT Due 450
Excise duty due 200 x $5 = 1,000
Total to be paid to tax authorities 1,450


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Question 1.15

The economic order quantity formula includes the cost of placing an order. However, the Management
Accountant is unsure which of the following items should be included in “cost of placing an order”:

(i) Administrative costs
(ii) Postage
(iii) Quality control cost
(iv) Unit cost of products
(v) Storekeeper’s salary

Which THREE of the above would usually be regarded as part of the cost of placing an order?

A (i), (ii) and (iii) only.
B (i), (iv) and (v) only.
C (ii), (iii) and (iv) only.
D (i), (ii) and (v) only.
(2 marks)

The answer is A


Question 1.16

An item of plant and equipment was purchased on 1 April 2001 for $100,000. At the date of
acquisition its expected useful economic life was 10 years. Depreciation was provided on a straight
line basis, with no residual value.

On 1 April 2003, the asset was revalued to $95,000. On 1 April 2004, the useful life of the asset
was reviewed and the remaining useful economic life was reduced to 5 years, a total useful life of 8
years.

Calculate the amounts that would be included in the balance sheet for the asset cost/valuation and
provision for accumulated depreciation at 31 March 2005.
(4 marks)

The answer is:
Balance Sheet at 31 March 2005 $
Non-current assets – plant and equipment at valuation 95,000
Accumulated depreciation (28,500)
Net book value 66,500
Or
Alternative treatment allowed by IAS 16:
Balance Sheet at 31 March 2005 $
Non-current assets – plant and equipment at valuation 115,000
Accumulated depreciation (48,500)
Net book value 66,500



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Workings



$
Cost 100,000
Two years’ depreciation at 10% 20,000
80,000
Revaluation 15,000
95,000
Depreciation at 12⋅5% 11,875
83,125
Depreciation at 20% 16,625
Net book value

66,500


Question 1.17

AP has the following two legal claims outstanding:

• A legal action claiming compensation of $500,000 filed against AP in March 2004.

• A legal action taken by AP against a third party, claiming damages of $200,000 was started in
January 2003 and is nearing completion.

In both cases, it is more likely than not that the amount claimed will have to be paid.

How should AP report these legal actions in its financial statements for the year ended 31 March
2005?

Legal action against AP Legal action by AP
A Disclose by a note No disclosure
B Make a provision No disclosure
C Make a provision Disclose as a note
D Make a provision Accrue the income
(2 marks)
The answer is C


Question 1.18

Which ONE of the following powers is a tax authority least likely to have granted to them?

A Power of arrest.
B Power to examine records.
C Power of entry and search.
D Power to give information to other countries’ tax authorities.
(2 marks)
The answer is A

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Question 1.19

IAS 16 Property, Plant and Equipment provides definitions of terms relevant to non-current assets.
Complete the following sentence, in no more than 10 words.

“Depreciable amount is…”
(2 marks)

The answer is “the asset’s cost or valuation less its residual value.”


Question 1.20

The OECD model tax convention defines a permanent establishment to include a number of different
types of establishments:

(i) A place of management
(ii) A warehouse
(iii) A workshop
(iv) A quarry
(v) A building site that was used for 9 months

Which of the above are included in the OECD’s list of permanent establishments?

A (i), (ii) and (iii) only.
B (i), (iii) and (iv) only.
C (ii), (iii) and (iv) only.
D (iii), (iv) and (v) only.
(2 marks)
The answer is B

Examiner’s Comments
Most candidates set out their answers in an easily readable format, but some candidates made it
difficult to mark by not distinguishing their answer clearly from their workings. Most candidates
included workings for the three and four mark questions, but a sizable minority omitted all workings.
Without workings, answers marked as correct are given full marks, answers marked as wrong are
given zero marks.

Common Errors
This section applies to the questions that required candidates to provide an answer and excludes the
multiple choice questions.

1.4 Some candidates could not tell the difference between short- and long-term financing methods.
There were also a number of candidates who included investment methods.
1.5 Most candidates omitted to state the relevance to the entity.
1.8 Very few candidates had any idea how to calculate the yield to maturity. This is an important
concept that will be required in later CIMA papers.
1.9 Many candidates incorrectly included capital repayment of loans and/or the payment for the
new equipment in the taxable profit.
1.13 Most candidates were able to give an answer, but few scored full marks as some key points
were missed out.
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1.14 Most candidates scored part of the marks on this question as their workings showed partially
correct answers
1.16 The asset revaluation caused some problems. Some candidates charged three years
depreciation before revaluing and many did not recalculate depreciation correctly after the
revaluation. The change in the useful life caused problems for many candidates.
1.19 IAS 16 gives a clear definition of “depreciable amount”, but very few candidates were able to
give a correct definition of this basic concept.
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SECTION B – 30 MARKS
ANSWER ALL SIX SUB-QUESTIONS


Question Two (a)
AB acquired non-current assets on 1 April 2003 costing $250,000. The assets qualified for
accelerated first year tax allowance at the rate of 50% for the first year. The second and subsequent
years were at a tax depreciation rate of 25% per year on the reducing balance method.

AB depreciates all non-current assets at 20% a year on the straight line basis.

The rate of corporate income tax applying to AB for 2003/04 and 2004/05 was 30%. Assume AB has
no other qualifying non-current assets.
Required:
Apply IAS 12 Income Taxes and calculate:

(i) the deferred tax balance required at 31 March 2004;
(ii) the deferred tax balance required at 31 March 2005;
(iii) the charge to the income statement for the year ended 31 March 2005.
(Total for requirement (a) = 5 marks)

The answer is:
Balance sheet at 31 March 2004
Deferred tax $22,500
Balance sheet at 31 March 2005
Deferred tax $16,875
Income statement for the year ended 31 March 2005
Income tax expense – reduction in deferred tax


$5,625 credit

Workings

Tax depreciation

$
Purchase cost 1 April 2003 250,000
First year allowance at 50% 125,000
125,000
Tax depreciation second year at 25% 31,250
Tax written down value 93,750

Accounting depreciation $
Purchase cost 1 April 2003 250,000
Straight line depreciation at 20% 50,000
200,000
Straight line depreciation at 20% 50,000
Accounting book value 150,000

Deferred tax provision: at 31 March 2004 at 31 March 2005
$ $
Accounting book value 200,000 150,000
Tax written down value 125,000 93,750
75,000 56,250
Tax at 30% = 22,500 16,875
Change in deferred tax = 22,500 - 16,875 =

5,625

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Rationale

To test candidates’ ability to calculate current and deferred taxation under the accounting rules in IAS
12 Income Taxes.


Suggested Approach

• Calculate tax written down value at the end of each year.
• Calculate the accounting book value at the end of each year.
• Deduct the tax written down value from the accounting book value and multiply by the tax rate to
give deferred tax balance at each year end. The difference between the two year ends is a
credit to the income statement as there has been a reduction in the deferred tax provision.


Marking Guide

Marks

Calculation of deferred tax provision for 2004

2
Calculation of deferred tax provision for 2005 2
Calculation of income tax credit 1


Examiner’s Comments

If the IAS 12 approach was followed, this should have been a straight forward question. However very
few candidates provided a fully correct answer.

Common Errors
Some candidates demonstrated very little knowledge of deferred taxation and gave an answer based
purely on the tax depreciation figures. Of those candidates demonstrating some knowledge of
deferred taxation the most common errors were:
• Calculating figures for three years, 2003 to 2005 instead of two 12 month periods April 2003 to
March 2005. The answer was then given based on the second and third years, which gives the
wrong answer, even when the calculations are correct.
• Calculating the second year based on the change in the year rather then the change in the
balance at the year end. This is an acceptable method as long as the change is identified as
the income statement figure and the balance calculated by adjusting the previous year’s
balance by the income statement figure. Most candidates using this method however reversed
the answer and called the change in the year the balance on the provision and identified the
balance as the income statement figure.
• Many candidates correctly calculated the year end balances for accounting and tax but did not
multiply their answers by the tax rate to calculate the tax liability.
• Some candidates with correct answers failed to gain full marks as they called the income
statement amount a charge or expense and failed to identify it as a credit.


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Question Two (b)

AD, a manufacturing entity, has the following balances at 30 April 2005:

Extract from financial statements: $000
Trade receivables 216
Trade payables 97

Revenue (all credit sales) 992
Cost of sales 898
Purchases in year 641

Inventories at 30 April 2005:
Raw materials 111
Work in progress 63
Finished goods 102

Required:
Calculate AD’s Working Capital Cycle.
(Total for requirement (b) = 5 marks)

The answer is:

AD’s working capital cycle can be expressed as:

Raw materials inventory less payables days plus production time plus finished goods inventory plus
receivables days.
63⋅2 + 25⋅6 + 41⋅4 + 79⋅5 - 55⋅2 = 154⋅5 days


Workings

Days
Raw materials inventory
purchases
inventory materials raw

111/641* 365 = 63⋅2
Payables days
purchases
payables

97/641 * 365 = (55⋅2)
Production time
sales of cost
progress in work

63/898 * 365 = 25⋅6
Finished goods inventory
sales of cost
inventory goods finished

102/898 * 365 = 41⋅4
Receivables days
sales credit
s receivable Trade

216/992 * 365 = 79⋅5
Working capital cycle – days 154⋅5


Rationale

To test candidates’ ability to calculate and interpret working capital ratios for business sectors.

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Suggested Approach

• Calculate individual ratios for each type of inventory, payables and receivables.
• Add together the inventory days and receivables days and deduct payables days.


Marking Guide

Marks

Calculation of raw materials inventory days

1
Calculation of payables days 1
Calculation of production time – WIP days 1
Calculation of finished goods inventory days 1
Calculation of receivables days

1

Examiner’s Comments

Most candidates did well on this sub-question, many gaining full marks.

Common Errors
• The most common error was not identifying that each type of inventory needs to be treated
separately, as raw materials are related to purchases whereas work in progress and finished
goods are related to cost of sales.
• Some candidates failed to include all types of inventory in their calculations whilst many
candidates grouped all inventory together.
• A few candidates did not deduct payables.


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Question Two(c)

List the FIVE elements of financial statements defined in the IASB’s Framework and explain the
meaning of each.
(Total for requirement (c) = 5 marks)


Answer

According to the IASB’s Framework, the FIVE elements of financial statements are:

Asset An asset is a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity;
Liability A liability is a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow of resources from the entity;
Equity The residual interest in the assets of the entity after deducting all its liabilities;
Income Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity,
other than those relating to combinations from equity participants;
Expenses Decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets that result in decreases in equity, other than those relating to
distributions to equity participants.


Rationale

To test candidates’ ability to explain the IASB’s Framework for the Presentation and Preparation of
Financial Statements.


Suggested Approach

• List the five elements and then explain each in turn.
• The exact words of the Framework do not need to be quoted, as long as the correct meaning
is conveyed.


Marking Guide

Marks

Explain asset

1
Explain liability 1
Explain equity 1
Explain income 1
Explain expenditure 1

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Examiner’s Comments

The Framework is quite specific as to what the five elements are. Candidates either scored well on
this sub-question or they scored zero as they did not know what the elements were.

Common Errors
A high proportion of candidates did not answer the question correctly as they failed to identify the
meaning given by the Framework to the elements of financial statements. Those not identifying the
elements gave completely wrong answers and scored no marks. The incorrect interpretations
included:

• The topics covered by the Framework
• The objectives of financial statements, including the financial statements themselves
• The underlying assumptions
• The qualitative characteristics

Of the candidates correctly identifying the five elements, the most common error causing loss of
marks was giving insufficient detail or defining an element without any reference to the Framework’s
approach, for example saying income was as a result of sales or equity was share capital.


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Question Two(d)

AE has a three year contract which commenced on 1 April 2004. At 31 March 2005, AE had the
following balances in its ledger relating to the contract:

$000 $000
Total contract value 60,000
Cost incurred up to 31 March 2005:
Attributable to work completed 21,000
Inventory purchased for use in 2005/6 3,000 24,000
Progress payments received 25,000

Other information:
Expected further costs to completion 19,000

At 31 March 2005, the contract was certified as 50% complete.

Required:

Prepare the income statement and balance sheet extracts showing the balances relating to this
contract, as required by IAS 11 Long Term Contracts.
(Total for requirement (d) = 5 marks)

The answer is:
Income statement for the year to 31 March 2005 – extract
$000
Revenue from long-term contract 30,000
Cost of sales 21,500
Profit 8,500

Balance sheet as at 31 March 2005 – extract $000
Receivables
Long-term contract – gross amounts due from customers

7,500

Workings

Overall profitability check:

$000

$000
Revenue 60,000
Costs incurred to 31 March 2005 24,000
Costs to completion 19,000
43,000
Profit 17,000

Income statement:
Contract 50% complete therefore recognise 50% profit 8,500
Revenue recognised 50% of contract value 60,000/2 30,000

Balance sheet:
Total contract costs incurred 24,000
Recognised profit 8,500
32,500
Less: Progress payments received 25,000
Gross amount due from customers 7,500

Note: Alternative approaches to calculations are acceptable.


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Rationale

To test candidates’ ability to prepare financial statements reporting on performance, tangible non-
current assets and inventories. Explain the principles of the accounting rules contained in IASs
dealing with construction contracts.


Suggested Approach

• First check the overall profitability of the contract.
• The contract is stated as being 50% complete. Therefore recognise 50% of total profit, 50% of
turnover and 50% of total cost in the income statement.
• Calculate the balance sheet figures for the gross amount due from customers as the difference
between the income statement amounts recognised and the amounts paid or received to date.


Marking Guide

Marks

Calculate profit

1
Calculate the income statement figures 2
Calculate gross amounts due on balance sheet 2


Examiner’s Comments

Few candidates were able to produce a correct answer.

Common Errors
• Not calculating overall profitability of the contract. Without this it is difficult to get any of the
other figures correct, except the revenue figure.
• Leaving the work in progress inventory out of total cost and profit calculations
• Showing inventory separately on the balance sheet, instead of including it under the heading
“gross amounts due from customers” as required by IAS 11.


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Question Two(e)

AM is a trading entity operating in a country where there is no sales tax. Purchases are on credit, with
70% paid in the month following the date of purchase and 30% paid in the month after that.

Sales are partly on credit and partly for cash. Customers who receive credit are given 30 days to pay.
On average 60% pay within 30 days, 30% pay between 30 and 60 days and 5% pay between 60 and
90 days. The balance is written off as irrecoverable. Other overheads, including salaries, are paid
within the month incurred.

AM plans to purchase new equipment at the end of June 2005, the expected cost of which is
$250,000. The equipment will be purchased on 30 days credit, payable at the end of July.

The cash balance on 1 May 2005 is $96,000.

The actual/budgeted balances for the six months to July 2005 were:

All figures $000 Actual Budgeted
Feb Mar Apr May Jun Jul
Credit sales 100 100 110 110 120 120
Cash sales 30 30 35 35 40 40
Credit purchases 45 50 50 55 55 60
Other overhead
expense
40 40 40 50 50 50

Required:
Prepare a monthly cash budget for the period May to July 2005 and assess the likelihood of AM
being able to pay for the equipment when it falls due. (Round all figures to the nearest $000)
(Total for requirement (e) = 5 marks)


Answer

Cash budget for the three month period May to July 2005:

May June July
$000 $000 $000
Cash receipts
Cash sales 35 40 40
Credit sales receipts (W1) 101 104 111
Total receipts 136 144 151
Credit purchase payments (W2) 50 54 55
Expenses paid 50 50 50
Equipment purchase paid 250
Total payments 100 104 355
Net cash movement in month 36 40 (204)
Balance b/fwd 96 132 172
Balance c/fwd 132 172 (32)

AM will not be able to pay for the equipment on time unless further finance is arranged.


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Workings

(W1) Credit sales – receipts:
Total May June July
$000 $000 $000 $000
February sales 100 5
March sales 100 30 5
April sales 110 66 33 6
May sales 110 66 33
June sales 120 72
Totals 101 104 111

(W2) Credit purchases – payments

Total May June July
$000 $000 $000 $000
March 50 15
April 50 35 15
May 55 39 16
June 55 39
Totals 50 54 55


Rationale

To test candidates’ ability to prepare and analyse cash-flow forecasts over a three-month period.


Suggested Approach

• Apply the information provided on credit sales and calculate cash receipts from receivables.
• Apply the information provided on credit purchases and calculate cash paid to payables.
• Prepare a three month cash budget including cash receipts from receivables and cash sales
and cash paid to payables and expenses.
• Prepare a short conclusion identifying whether the non-current asset purchase is possible or
not.


Marking Guide

Marks

Calculate credit sales receipts


Calculate credit purchase payments 1
Prepare a cash budget, including cash receipts and payments 2
Advise whether entity will be able to pay for the equipment when it is due

½
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Examiner’s Comments

Some candidates misinterpreted receipts from credit customers being given 30 days to pay as
meaning they paid within the month of sale instead of in the next month. A significant number of
candidates failed to assess the likelihood of being able to pay for equipment.

Common Errors
• Treating receipts from credit sales as received in the month of sale.
• Treating purchases on credit as being paid in month of purchase.
• Including bad debts as a cash flow.
• Not giving a conclusion.


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Question Two(f)

A five year finance lease commenced on 1 April 2003. The annual payments are $30,000 in arrears.
The fair value of the asset at 1 April 2003 was $116,000. Use the sum of digits method for interest
allocations and assume that the asset has no residual value at the end of the lease term.

Required:

In accordance with IAS 17 Operating and Finance Leases:

(i) calculate the amount of finance cost that would be charged to the income statement for
the year ended 31 March 2005;
(ii) prepare balance sheet extracts for the lease at 31 March 2005.

(Total for requirement (f) = 5 marks)

The answer is:
Finance charge for year ended 31 March 2005 is the second year of the lease.
The finance charge to the income statement for the year ended 31 March 2005 is $9,067

Balance sheet as at 31 March 2005 – extract

Non-current assets – Tangible $
Finance lease 116,000
Less: Depreciation (116,000/5 x 2) 46,400
69,600

Non-current liabilities
Amounts due under finance lease $53,200

Current liabilities
Amounts due under finance lease $23,200
(76,400 - 53,200)



Workings
$
Total payments under the lease ($30,000 x 5) 150,000
Fair value of the asset 116,000
Finance cost 34,000

Five periods gives sum of digits (5 x (5 + 1))/2 = 15

Year Proportion Allocation (proportion x $34,000)
$
2003/04 5/15 11,333
2004/05 4/15 9,067
2005/06 3/15 6,800
2006/07 2/15 4,533
2007/08 1/15 2,267

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Year Balance
b/fwd
Finance
charge
Repayment Balance c/fwd
$ $ $ $
2003/04 116,000 11,333 (30,000) 97,333
2004/05 97,333 9,067 (30,000) 76,400
2005/06 76,400 6,800 (30,000) 53,200
2006/07 53,200 4,533 (30,000) 27,733
2007/08

27,733 2,267 (30,000) 0

Rationale

To test candidates’ ability to explain the principles of the accounting rules contained in IAS’s dealing
with leases (lessee only).


Suggested Approach

• Calculate the finance cost by taking the fair value of the asset away from the total payments
due. Calculate the sum of digits and multiply the finance cost with the appropriate proportion
allocating the finance cost to each year. Calculate the balance outstanding at the end of years
two and three.
• Prepare the income statement and balance sheet extracts required by the question.


Marking Guide

Marks

Calculation of finance cost and allocation to years

2
Calculation of finance charge to income statement 1
Calculation of non-current assets – tangible (balance sheet) 1
Calculation of liabilities and split between non-current and current liabilities

1

Examiner’s Comments

Most candidates were able to calculate the finance cost and apportion it to each period. Most were
also able to calculate the outstanding balances at each year end. However many candidates were
unable to use the correctly calculated figures and produce correct income statement and balance
sheet extracts.

Common Errors
• Calculating the sum of digits for 4 years instead of 5 years.
• Applying the proportions using 1 in the first year and two in the second year etc.
• Giving income statement finance charge as the charge for year three.
• Giving the income statement charge as the annual repayment figure.
• Applying the sum of digits to the annual repayment instead of the finance charge.
• Not giving any non-current asset figures on the balance sheet extract.
• Using wrong years to calculate the liabilities.
• Not splitting the liability between non-current and current.


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SECTION C – 20 MARKS
ANSWER ONE QUESTION ONLY


Question Three

Prepare the income statement for AF for the year to 31 March 2005 and a balance sheet at that
date, in a form suitable for presentation to the shareholders and in accordance with the
requirements of International Financial Reporting Standards.

Notes to the financial statements are NOT required, but all workings must be clearly shown. DO NOT
prepare a statement of accounting policies or a statement of changes in equity.

(Total for Question Three = 20 marks)


Rationale

To test candidates’ ability to prepare financial statements in a form suitable for publication, with
appropriate notes. To apply the accounting rules contained in IAS 12 for current and deferred
taxation.


Suggested Approach

• Using the additional information provided and the trial balance figures, prepare workings to:
1. Calculate depreciation of buildings and plant and equipment for the year and cumulative.
2. Calculate the operating lease charge to income statement.
3. Calculate the cost of sales.
4. Calculate tax charge and outstanding balances.
• Prepare the income statement using IAS 1 format.
• Prepare workings to calculate the balances on reserves and retained earnings.
• Prepare the balance sheet using IAS 1 format.


Marking Guide

Marks

Preparation of Income Statement using correct format

7
Preparation of Balance Sheet using correct format 11
Marks available for format and correct headings

2
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Examiner’s Comments

This question was generally very well done by candidates, many obtaining near full marks. Very few
gained full marks as very few candidates could apply IAS 17 Operating and finance leases correctly to
the operating lease.

Common Errors
• Stating that as there was no payment for the lease there was no charge in the income
statement.
• Treating the operating lease as a finance lease, putting the total liability on the balance sheet
and in a few cases also capitalising the asset and including it under non-current assets.
• Including the available for sale investments under current assets.
• Not accruing interest due on the loan notes.
• Incorrectly deducting deferred tax from income tax charge for the year.
• Incorrectly applying the reducing balance method to the plant and equipment.
• Deducting dividends from revaluation reserve.
• Including deferred tax as a current asset.
• Including depreciation as part of administration or distribution expenses when the question
specified cost of sales.
• Including dividends paid as a current liability.


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Question Four

Prepare a cash flow statement, using the indirect method, for AG for the year ended 31 March
2005, in accordance with IAS 7 Cash Flow Statements.

(Total for Question Four = 20 marks)


Rationale

To test candidates’ ability to prepare a cash flow statement in accordance with IAS 7. Apply the
accounting rules contained in IAS 12 for current and deferred taxation.


Suggested Approach

• Use workings to calculate the cash flows for accrued expenditure, interest, income taxes,
purchase of property, plant and equipment, development expenditure and issue of shares.
• Use the IAS 7 format to prepare a cash flow statement using the indirect method.


Marking Guide

Marks

Cash Flow Statement – Calculation of cash flows from operating activities


Cash Flow Statement – Calculation of cash flows from investing activities 5½
Cash Flow Statement – Calculation of cash flows from financing activities 2½
Cash and cash equivalents 1
Marks available for format and correct headings



Examiner’s Comments

There were some excellent answers to this question, with a number of candidates gaining full marks.

Common Errors
• Not using the correct IAS 7 format, for example:
o Starting with operating profit instead of profit before tax.
o Putting all items in one long list.
o Putting items under the wrong headings.
o Attempting to use the direct method.
• Mixing up proceeds of sale and gain on disposal.
• Calculating accrued expenses without adjusting for interest balances.
• Calculating tax paid without adjusting for deferred tax.
• Missing out depreciation and/or revaluation when calculating cash paid for non-current assets.


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 The Chartered Institute of Management Accountants 2005

Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax
Principles
24 November 2005 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is, all parts and/or sub-
questions). The requirements for questions in Sections B and C are
highlighted in a dotted box.
Answer the ONE compulsory question in Section A. This is comprised of 20
sub-questions on pages 2 to 9.
Answer ALL SIX compulsory sub-questions in Section B on pages 10 to 12.
Answer ONE of the two questions in Section C on pages 14 to 17.
Maths Tables and Formulae are provided on pages 19 to 21. These pages
are detachable for ease of reference.
Write your full examination number, paper number and the examination
subject title in the spaces provided on the front of the examination answer
book. Also write your contact ID and name in the space provided in the right
hand margin and seal to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.

P
7



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P7 2 November 2005

SECTION A – 50 MARKS
[the indicative time for answering this Section is 90 minutes]
ANSWER ALL TWENTY SUB-QUESTIONS



Instructions for answering Section A:

The answers to the twenty sub-questions in Section A should ALL be written in your
answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and the
letter of the answer option you have chosen. You do not need to start a new page
for each sub-question.

For sub-questions 1.5, 1.6, 1.7, 1.9 and 1.18 you should show your workings as
marks are available for the method you use to answer these sub-questions.



Question One

1.1 The following measures relate to a non-current asset:

(i) Net book value $20,000
(ii) Net realisable value $18,000
(iii) Value in use $22,000
(iv) Replacement cost $50,000

The recoverable amount of the asset is

A $18,000
B $20,000
C $22,000
D $50,000
(2 marks)


1.2 Which ONE of the following would be regarded as a related party of BS?

A BX, a customer of BS.
B The president of the BS Board, who is also the chief executive officer of another entity,
BU, that supplies goods to BS.
C BQ, a supplier of BS.
D BY, BS’s main banker.
(2 marks)

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November 2005 3 P7


1.3 Which ONE of the following would be regarded as a change of accounting policy under
IAS 8 Accounting policies, changes in accounting estimates and errors?

A An entity changes its method of depreciation of machinery from straight line to reducing
balance.
B An entity has started capitalising borrowing costs for assets under the alternative
treatment allowed by IAS 23 Borrowing costs. The borrowing costs previously had been
charged to income statement.
C An entity changes its method of calculating the provision for warranty claims on its
products sold.
D An entity disclosed a contingent liability for a legal claim in the previous year’s accounts.
In the current year, a provision has been made for the same legal claim.
(2 marks)


1.4 An entity’s working capital financing policy is to finance working capital using short-term
financing to fund all the fluctuating current assets as well as some of the permanent part
of the current assets.

The above policy is an example of

A an aggressive policy.
B a conservative policy.
C a short-term policy.
D a moderate policy.
(2 marks)


1.5 An item of machinery leased under a five year finance lease on 1 October 2003 had a fair
value of $51,900 at date of purchase.

The lease payments were $12,000 per year, payable in arrears.

If the sum of digits method is used to apportion interest to accounting periods, calculate the
finance cost for the year ended 30 September 2005.

(3 marks)







Section A continues on the next page





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P7 4 November 2005

1.6 At 30 September 2005, BY had the following balances, with comparatives:

Balance Sheet extracts:

As at 30 September 2005 2004
$000 $000
Non-current tangible assets
Property, plant and equipment 260 180

Equity and reserves
Property, plant and equipment revaluation reserve 30 10

The income statement for the year ended 30 September 2005 included:
Gain on disposal of an item of equipment $10,000
Depreciation charge for the year $40,000

Notes to the accounts:
Equipment disposed of had cost $90,000. The proceeds received on disposal were
$15,000.

Calculate the property, plant and equipment purchases that BY would show in its cash flow
statement for the year ended 30 September 2005, as required by IAS 7 Cash flow statements.

(4 marks)


1.7 BC, a small entity, purchased its only non-current tangible asset on 1 October 2003. The
asset cost $900,000, all of which qualified for tax depreciation.

BC’s asset qualified for an accelerated first year tax allowance of 50%. The second and
subsequent years qualified for tax depreciation at 25% per year on the reducing balance
method.

BC’s accounting depreciation policy is to depreciate the asset over its useful economic life
of five years, assuming a residual value of $50,000.

Assume that BC pays tax on its income at the rate of 30%.

Calculate BC’s deferred tax balance required in the balance sheet as at 30 September 2005
according to IAS 12 Income taxes.

(4 marks)


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November 2005 5 P7

1.8 The setting of International Accounting Standards is carried out by co-operation between
a number of committees and boards, which include:

(i) International Accounting Standards Committee Foundation (IASC Foundation)
(ii) Standards Advisory Council (SAC)
(iii) International Financial Reporting Interpretations Committee (IFRIC)

Which of the above reports to, or advises, the International Accounting Standards Board
(IASB)?

Reports to: Advises:
A (i) and (iii) (ii)
B (i) and (ii) (iii)
C (iii) (ii)
D (ii) (i)
(2 marks)


1.9 Country B has a corporate income tax system that treats capital gains/losses separately
from trading profits/losses. Capital gains/losses cannot be offset against trading
profits/losses. All losses can be carried forward indefinitely, but cannot be carried back to
previous years. Trading profits and capital gains are both taxed at 20%.

BD had no brought forward losses on 1 October 2002. BD’s results for 2003 to 2005
were as follows:


Trading profit/(loss) Capital gains/(loss)
$000 $000

Year to September 2003 200 (100)

Year to September 2004 (120) 0

Year to September 2005 150 130

Calculate BD’s corporate income tax due for each of the years ended 30 September 2003 to
2005.
(3 marks)








Section A continues on the next page






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P7 6 November 2005

1.10 Which ONE of the following would require a provision to be created by BW at its balance
sheet date of 31 October 2005?

A The government introduced new laws on data protection which come into force on
1 January 2006. BW’s directors have agreed that this will require a large number of staff
to be retrained. At 31 October 2005, the directors were waiting on a report they had
commissioned that would identify the actual training requirements.
B At the balance sheet date, BW is negotiating with its insurance provider about the amount
of an insurance claim that it had filed. On 20 November 2005, the insurance provider
agreed to pay $200,000.
C BW makes refunds to customers for any goods returned within 30 days of sale, and has
done so for many years.
D A customer is suing BW for damages alleged to have been caused by BW’s product. BW
is contesting the claim and, at 31 October 2005, the directors have been advised by BW’s
legal advisers it is very unlikely to lose the case.
(2 marks)


1.11 IAS 18 Revenue recognition defines when revenue may be recognised on the sale of
goods.

List FOUR of the five conditions that IAS 18 requires to be met for income to be recognised.

(4 marks)


1.12 Country OS has a value added tax (VAT) system where VAT is charged on all goods and
services. Registered VAT entities are allowed to recover input VAT paid on their
purchases.

VAT operates at different levels in OS:

• Standard rate 10%
• Luxury rate 20%
• Zero rate 0%

During the last VAT period, an entity, BZ, purchased materials and services costing
$100,000, excluding VAT. All materials and services were at standard rate VAT.

BZ converted the materials into two products Z and L; product Z is zero rated and product
L is luxury rated for VAT purposes.

During the VAT period, BZ made the following sales, excluding VAT:

$
Z 60,000
L 120,000

At the end of the period, BZ paid the net VAT due to the tax authorities.

Assuming BZ had no other VAT-related transactions, how much VAT did BZ pay?

(2 marks)


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November 2005 7 P7

1.13 At 1 October 2004, BK had the following balance:

Accrued interest payable $12,000 credit

During the year ended 30 September 2005, BK charged interest payable of $41,000 to its
income statement. The closing balance on accrued interest payable account at
30 September 2005 was $15,000 credit.

How much interest paid should BK show on its cash flow statement for the year ended
30 September 2005?

A $38,000
B $41,000
C $44,000
D $53,000
(2 marks)


1.14 If an external auditor does not agree with the directors’ treatment of a material item in the
accounts, the first action they should take is to

A give a qualified opinion of the financial statements.
B give an unqualified opinion of the financial statements.
C force the directors to change the treatment of the item in the accounts.
D persuade the directors to change the treatment of the item in the accounts.
(2 marks)


1.15 BL started a contract on 1 November 2004. The contract was scheduled to run for two
years and has a sales value of $40 million.

At 31 October 2005, the following details were obtained from BL’s records:

$m
Costs incurred to date 16
Estimated costs to completion 18
Percentage complete at 31 October 2005 45%

Applying IAS 11 Construction contracts, how much revenue and profit should BL recognise in its
income statement for the year ended 31 October 2005?

(2 marks)




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P7 8 November 2005

1.16 An entity sells furniture and adds a sales tax to the selling price of all products sold.
A customer purchasing furniture from the entity has to pay the cost of the furniture plus
the sales tax. The customer therefore bears the cost of the sales tax.

This is referred to as

A formal incidence.
B indirect incidence.
C effective incidence.
D direct incidence.
(2 marks)


1.17 BN is a listed entity and has the following balances included on its opening balance sheet:

$000
Equity and reserves:
Equity shares, $1 shares, fully paid 750
Share premium 250
Retained earnings 500
1,500

BN reacquired 100,000 of its shares and classified them as “treasury shares”. BN still
held the treasury shares at the year end.

How should BN classify the treasury shares on its closing balance sheet in accordance with
IAS 32 Financial instruments – disclosure and presentation?

A As a non-current asset investment.
B As a deduction from equity.
C As a current asset investment.
D As a non-current liability.
(2 marks)


1.18 BE has been offering 60 day payment terms to its customers, but now wants to improve
its cash flow. BE is proposing to offer a 1⋅5% discount for payment within 20 days.

Assume a 365 day year and an invoice value of $1,000.

What is the effective annual interest rate that BE will incur for this action?

(4 marks)


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November 2005 9 P7

1.19 BM has a taxable profit of $30,000 and receives a tax assessment of $3,000.

BV has a taxable profit of $60,000 and receives a tax assessment of $7,500.

BM and BV are resident in the same tax jurisdiction.

This tax could be said to be

A a progressive tax.
B a regressive tax.
C a direct tax.
D a proportional tax.
(2 marks)


1.20 IAS 1 Presentation of financial statements requires some of the items to be disclosed on
the face of the financial statements and others to be disclosed in the notes.

(i) Depreciation
(ii) Revenue
(iii) Closing inventory
(iv) Finance cost
(v) Dividends

Which TWO of the above have to be shown on the face of the income statement, rather than in
the notes:

A (i) and (iv)
B (iii) and (v)
C (ii) and (iii)
D (ii) and (iv)
(2 marks)


(Total for Section A = 50 marks)




End of Section A



Section B starts on the next page


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P7 10 November 2005

SECTION B – 30 MARKS
[the indicative time for answering this Section is 54 minutes]
ANSWER ALL SIX SUB-QUESTIONS



Question Two

(a)


Required:

(i) Explain the difference between tax avoidance and tax evasion.

(2 marks)

(ii) Briefly explain the methods that governments can use to reduce tax avoidance
and tax evasion.
(3 marks)

(Total for sub-question (a) = 5 marks)




(b) BF manufactures a range of domestic appliances. Due to past delays in suppliers
providing goods, BF has had to hold an inventory of raw materials, in order that the
production could continue to operate smoothly. Due to recent improvements in supplier
reliability, BF is re-examining its inventory holding policies and recalculating economic
order quantities (EOQ).

• Item “Z” costs BF $10⋅00 per unit
• Expected annual production usage is 65,000 units
• Procurement costs (cost of placing and processing one order) are $25⋅00
• The cost of holding one unit for one year has been calculated as $3⋅00

The supplier of item “Z” has informed BF that if the order was 2,000 units or more at one time, a
2% discount would be given on the price of the goods.


Required:

(i) Calculate the EOQ for item “Z” before the quantity discount.
(2 marks)

(ii) Advise BF if it should increase the order size of item “Z” so as to qualify for the
2% discount.
(3 marks)

(Total for sub-question (b) = 5 marks)



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November 2005 11 P7

(c) BJ is an entity that provides a range of facilities for holidaymakers and travellers.
At 1 October 2004 these included:

• a short haul airline operating within Europe; and
• a travel agency specialising in arranging holidays to more exotic destinations, such as
Hawaii and Fiji.

BJ’s airline operation has made significant losses for the last two years. On 31 January 2005,
the directors of BJ decided that, due to a significant increase in competition on short haul flights
within Europe, BJ would close all of its airline operations and dispose of its fleet of aircraft. All
flights for holiday makers and travellers who had already booked seats would be provided by
third party airlines. All operations ceased on 31 May 2005.

On 31 July 2005, BJ sold its fleet of aircraft and associated non-current assets for $500 million,
the carrying value at that date was $750 million.

At the balance sheet date, BJ were still in negotiation with some employees regarding
severance payments. BJ has estimated that in the financial period October 2005 to September
2006, they will agree a settlement of $20 million compensation.

The closure of the airline operation caused BJ to carry out a major restructuring of the entire
entity. The restructuring has been agreed by the directors and active steps have been taken to
implement it. The cost of restructuring to be incurred in year 2005/2006 is estimated at
$10 million.


Required:

Explain how BJ should report the events described above and quantify any
amounts required to be included in its financial statements for the year ended
30 September 2005. (Detailed disclosure notes are not required.)

(Total for sub-question (c) = 5 marks)





(d) The International Accounting Standards Board’s (IASB’s) Framework for the preparation
and presentation of financial statements (Framework) identifies four principal qualitative
characteristics of financial information.


Required:

Identify and explain EACH of the FOUR principal qualitative characteristics of financial
information listed in the IASB’s Framework.

(Total for sub-question (d) = 5 marks)









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P7 12 November 2005

(e) BI owns a building which it uses as its offices, warehouse and garage. The land is carried
as a separate non-current tangible asset in the balance sheet.

BI has a policy of regularly revaluing its non-current tangible assets. The original cost of the
building in October 2002 was $1,000,000; it was assumed to have a remaining useful life of 20
years at that date, with no residual value. The building was revalued on 30 September 2004 by
a professional valuer at $1,800,000.

BI also owns a brand name which it acquired 1 October 2000 for $500,000. The brand name is
being amortised over 10 years.

The economic climate had deteriorated during 2005, causing BI to carry out an impairment
review of its assets at 30 September 2005. BI’s building was valued at a market value of
$1,500,000 on 30 September 2005 by an independent valuer. A brand specialist valued BI’s
brand name at market value of $200,000 on the same date.

BI’s management accountant calculated that the brand name’s value in use at 30 September
2005 was $150,000.


Required:

Explain how BI should report the events described above and quantify any amounts
required to be included in its financial statements for the year ended 30 September
2005.

(Total for sub-question (e) = 5 marks)




(f) BH purchased a bond with a face value of $1,000 on 1 June 2003 for $850. The bond
has a coupon rate of 7%. BH intends holding the bond to its maturity on 31 May 2008
when it will repay its face value.


Required:

(i) Explain the difference between the coupon rate of a security and its yield to
maturity.
(2 marks)

(ii) Calculate the bond’s yield to maturity.
(3 marks)

(Total for sub-question (f) = 5 marks)




(Total for Section B = 30 marks)



End of Section B
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November 2005 13 P7





Section C starts on the next page



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P7 14 November 2005

SECTION C – 20 MARKS
[the indicative time for answering this Section is 36 minutes]
ANSWER ONE QUESTION FROM TWO



Question Three

BG provides office cleaning services to a range of organisations in its local area. BG operates
through a small network of depots that are rented spaces situated in out-of-town industrial
developments. BG has a policy to lease all vehicles on operating leases.

The trial balance for BG at 30 September 2005 was as follows:

$000 $000
10% bonds (redeemable 2010) 150
Administrative expenses 239
Available for sale investments at market value 30 September 2004 205
Bank & cash 147
Bond interest paid – half year to 31 March 2005 8
Cost of cleaning materials consumed 101
Direct operating expenses (including cleaning staff) 548
Dividend paid 60
Equipment and fixtures, cost at 30 September 2005 752
Equity shares $1 each, fully paid 200
Income tax 9
Inventory of cleaning materials at 30 September 2005 37
Investment income received 11
Provision for deferred tax 50
Provision for depreciation at 30 September 2004:
Equipment and fixtures

370
Provision for legal claim balance at 30 September 2004 190
Retained earnings at 30 September 2004 226
Revaluation reserve at 30 September 2004 30
Revenue 1,017
Share premium 40
Trade payables 24
Trade receivables 141
Vehicle operating lease rentals paid 61
2,308 2,308

Additional information:

(i) Available for sale investments are carried in the financial statements at market value. The
market value of the available for sale investments at 30 September 2005 was $225,000.
There were no purchases or sales of available for sale investments held during the year.

(ii) The income tax balance in the trial balance is a result of the underprovision of tax for the
year ended 30 September 2004.

(iii) The taxation due for the year ended 30 September 2005 is estimated at $64,000 and the
deferred tax provision needs to be increased by $15,000.

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November 2005 15 P7

(iv) Equipment and fixtures are depreciated at 20% per annum straight line. Depreciation of
equipment and fixtures is considered to be part of direct cost of sales. BG’s policy is to
charge a full year’s depreciation in the year of acquisition and no depreciation in the year
of disposal.

(v) The 10% bonds were issued in 2000.

(vi) BG paid an interim dividend during the year, but does not propose to pay a final dividend
as profit for the year is well below expectations.

(vii) At 30 September 2004, BG had an outstanding legal claim from a customer alleging that
BG had caused a major fire in the customer’s premises. BG was advised that it would
very probably lose the case, so a provision of $190,000 was set up at 30 September
2004. During 2005, new evidence was discovered and the case against BG was
dropped. As there is no further liability, the directors have decided that the provision is no
longer required.



Required:

Prepare the income statement and a statement of changes in equity for BG for the
year to 30 September 2005 and a balance sheet at that date, in a form suitable for
presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards.



Notes to the financial statements are NOT required, but all workings must be
clearly shown. All workings should be to the nearest $000. DO NOT prepare a
statement of accounting policies.


(Total for Question Three = 20 marks)






Section C continues on the next page



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P7 16 November 2005

Question Four

BB is a private sector training entity, which provides short courses and various in-house courses
for large employers.

BB’s forecast financial statements for the year ended 31 December includes the following:

Forecast Balance Sheet at 31 December 2005 (extract)
Current assets
Trade receivables: In-house training courses $34,100
Bank $12,460

Forecast Income Statement for the year ended 31 December 2005 (extract)
Revenue: In-house training courses $125,000

BB is preparing its budgets for the year 1 January 2006 to 31 December 2006, but the cash
budget has not yet been completed. The Finance Director is concerned about the cash flow
forecast for the first six months and has asked you, a trainee management accountant, to
prepare a cash budget for the six months from January to June 2006 from the budgeted
information provided.

Budgeted revenue

Short training courses
Short training courses budgeted charge $100 per person per course.

Short courses are generally one night a week for four weeks commencing on the first of each
month, except December and January.

Budgeted short course information: Jan Feb Mar Apr May Jun Jul
Number of courses 0 2 3 3 4 4 4
Forecast students per course 0 10 12 12 14 13 15

BB expects to receive payment in advance of each course. Experience shows that, on average,
one third of students pay one month in advance and the rest pay on the first day of the course.

In-house training courses
The exact number and type of in-house training courses is unknown at present but, during 2006,
BB is expecting to earn $130,000 spread evenly throughout the year. Based on previous
experience, the following receipts are forecast:

Jan Feb Mar Apr May Jun
In-house training course fee
receipts (including trade receivables
at 31 December 2005)
$5,000 $8,000 $10,000 $11,000 $12,000 $6,000

BB has previously experienced problems of slow payment from some large employers and is
monitoring the trade receivables collection period.

Budgeted expenditure
BB employs permanent full-time members of staff to run the entity and provide key lecturing
skills. Most of the trainers are part-time tutors at an hourly rate.

Budgeted wages 2006 Jan Feb Mar Apr May Jun
Part-time tutor wages $0 $2,500 $4,000 $4,000 $5,000 $6,000

Permanent staff salaries are currently $4,000 a month. All full-time staff will receive an increase
of 5% from 1 March 2006.

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November 2005 17 P7

BB rents the premises for $2,500 a year, payable in quarterly instalments in January, April, July
and October.

Teaching materials, printing and photocopying average $150 per short course (paid in the
month of the course). The in-house courses cost, on average, $100 per month.

Budgeted payments in respect of overheads (electricity, telephone and so on) for January and
April are $1,500 and for February, March, May and June are $600.

Capital expenditure in the first six months of 2006 is planned as follows:

(i) New furniture for the managing director’s office $5,000 payable in April.

(ii) BB needs to replace all the IT equipment in one of its computer labs early in 2006. This is
currently planned to take place in April, with payment in May 2006. The budgeted cost of
the equipment is $40,000 for 20 top-of-the-range PCs and related equipment.

Other information
BB has negotiated an overdraft facility with the bank for an overdraft up to $5,000.



Required:

(a) Calculate BB’s in-house training course trade receivables days outstanding

(i) according to the forecast at 31 December 2005;

(ii) according to the projected figures at 30 June 2006, assuming the revenue
and cash flow budgets are implemented.
(5 marks)

(b) Prepare BB’s cash budget for the first six months of 2006 (January to June).

(10 marks)

(c) Advise BB of any actions it can take to make sufficient funds available to
purchase the new technology as budgeted in May 2006.

(5 marks)

(Total for Question Four = 20 marks)




(Total for Section C = 20 marks)



End of Question Paper


Maths Tables and Formulae are on pages 19 to 21



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P7 18 November 2005












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November 2005 19 P7

MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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P7 20 November 2005

Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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November 2005 21 P7

FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


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P7 22 November 2005












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November 2005 23 P7












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P7 24 November 2005

Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
November 2005
Thursday Afternoon Session
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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2005 Exam

The Chartered Institute of Management Accountants Page 1

Examiner’s General Comments
This was the second paper of the new syllabus using the new question paper format. The overall
result was generally very pleasing with a good standard of answer being produced by many
candidates. The overall average mark and pass rate were slightly down from May 2005 but were still
very good. There was evidence of a number of well prepared candidates with a wide range of
knowledge, able to tackle most of the sub-questions in question 1 and 2 and prepare good answers to
one of the optional questions. There were however still candidates who struggled to gain a quarter of
the marks.

Time allocation seemed to be a problem for some candidates, with evidence of rushed answers to
either question 1 or question 2. Some candidates may have used more time on the optional question
and not spent sufficient time on the shorter sub-questions. This was evidenced by the lack of
workings and questions requiring some calculation being left out to save time. Question 1 is 50 marks
and should be given approximately 50% of the time.

Question 1 was generally well done, with a few candidates scoring full marks. Most candidates
provided workings for the three and four mark questions, but a number did not. If workings are not
given no marks can be awarded for wrong answers using the correct principle.

As on the May 2005 paper question 2 included one question from each of sections A and B of the
syllabus and two questions from each of sections C and D. Question 2 will continue to include
questions from all sections of the syllabus. This question was generally not as well done as the other
questions on the paper although a few candidates did achieve full marks. Some candidates were
obviously ill prepared for coupon rate and yield to maturity and many did not know what the four
principal qualitative characteristics of financial information were.

Question 3 required the preparation of an income statement, a statement of changes in equity and a
balance sheet with some adjustments. This question was expected by candidates and most of those
attempting this question were well prepared, resulting in good marks being achieved.

Question 4 required the calculation of trade receivables days outstanding and a cash budget. Part (b)
was well done by those attempting this question with some excellent answers and a number of
candidates scoring full marks. However very few were able to calculate the forecast trade receivables
in part (a).

The following provides guidance to candidates preparing for future examinations and has been
prepared with that in mind. It therefore may give the impression that there were few good marks and
few passes as all the main errors have been listed for each question. It must be remembered though
that not all candidates made the errors listed and that overall there was a good result for this paper.
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SECTION A


Question 1.1

The following measures relate to a non-current asset:

(i) Net book value $20,000
(ii) Net realisable value $18,000
(iii) Value in use $22,000
(iv) Replacement cost $50,000

The recoverable amount of the asset is

A $18,000
B $20,000
C $22,000
D $50,000
(2 marks)
The answer is C



Question 1.2

Which ONE of the following would be regarded as a related party of BS?

A BX, a customer of BS.
B The president of the BS Board, who is also the chief executive officer of another entity,
BU, that supplies goods to BS.
C BQ, a supplier of BS.
D BY, BS’s main banker.
(2 marks)
The answer is B


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Question 1.3

Which ONE of the following would be regarded as a change of accounting policy under IAS 8
Accounting policies, changes in accounting estimates and errors?

A An entity changes its method of depreciation of machinery from straight line to reducing
balance.
B An entity has started capitalising borrowing costs for assets under the alternative
treatment allowed by IAS 23 Borrowing costs. The borrowing costs previously had
been charged to income statement.
C An entity changes its method of calculating the provision for warranty claims on its
products sold.
D An entity disclosed a contingent liability for a legal claim in the previous year’s
accounts. In the current year, a provision has been made for the same legal claim.
(2 marks)
The answer is B



Question 1.4

An entity’s working capital financing policy is to finance working capital using short-term
financing to fund all the fluctuating current assets as well as some of the permanent part of
the current assets.

The above policy is an example of

A an aggressive policy.
B a conservative policy.
C a short-term policy.
D a moderate policy.

(2 marks)
The answer is A


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Question 1.5

An item of machinery leased under a five year finance lease on 1 October 2003 had a fair value of
$51,900 at date of purchase.

The lease payments were $12,000 per year, payable in arrears.

If the sum of digits method is used to apportion interest to accounting periods, calculate the finance
cost for the year ended 30 September 2005.
(3 marks)



Lease payments (5 x 12) =
Fair value
Finance cost
Sum of digits (5 x 6)/2 = 15
Year 2 digit = 4
Finance charge = 8,100 x 4/15 =
$
60,000
51,900
8,100


2,160

Examiners comment: a significant proportion of candidates correctly calculated the
finance charge for each year, but then selected the wrong figure for the answer.



Question 1.6

At 30 September 2005, BY had the following balances, with comparatives:

Balance Sheet extracts:

As at 30 September 2005 2004
$000 $000
Non-current tangible assets
Property, plant and equipment 260 180

Equity and reserves
Property, plant and equipment revaluation reserve 30 10

The income statement for the year ended 30 September 2005 included:
Gain on disposal of an item of equipment $10,000
Depreciation charge for the year $40,000

Notes to the accounts:
Equipment disposed of had cost $90,000. The proceeds received on disposal were $15,000.

Calculate the property, plant and equipment purchases that BY would show in its cash flow
statement for the year ended 30 September 2005, as required by IAS 7 Cash flow statements.
(4 marks)
$000
Balance b/fwd 180
Revaluation (30 - 10) 20
Disposal (15 - 10) (5)
Depreciation (40)
155
Balance c/fwd (260)
Purchases 105

Examiners comment: Many candidates were unable to “work backwards”
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to calculate the purchases figure. The most common error was the
inability to calculate the net book value of the assets disposed of during
the year, and correctly adjust for this.




Question 1.7

BC, a small entity, purchased its only non-current tangible asset on 1 October 2003. The asset cost
$900,000, all of which qualified for tax depreciation.

BC’s asset qualified for an accelerated first year tax allowance of 50%. The second and subsequent
years qualified for tax depreciation at 25% per year on the reducing balance method.

BC’s accounting depreciation policy is to depreciate the asset over its useful economic life of five
years, assuming a residual value of $50,000.

Assume that BC pays tax on its income at the rate of 30%.

Calculate BC’s deferred tax balance required in the balance sheet as at 30 September 2005
according to IAS 12 Income taxes.

(4 marks)
Accounting depreciation = cost - residual value = $900,000 - $50,000 = $850,000
850,000/5 = $170,000 per year
2004/5
Accounting figures $000
Cost 900
Depreciation (2 years) (340)
Carrying value 560

Tax base $
Cost 900,000
First year allowance 50% = 450,000
450,000
October 2005 25% 112,500
Tax base 337,500

2004/5
Timing difference $000
Carrying value 560⋅0
Tax base 337⋅5
222⋅5
Deferred tax
Tax = 222.5 x 30% 66⋅75

Required deferred tax provision $66,750
Examiners comment: more candidates seemed to be prepared for a deferred tax question this time,
with many correct answers. However there was still a significant number of candidates who
displayed only a basic grasp of the principles of deferred tax.

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Question 1.8

The setting of International Accounting Standards is carried out by co-operation between a
number of committees and boards, which include:

(i) International Accounting Standards Committee Foundation (IASC Foundation)
(ii) Standards Advisory Council (SAC)
(iii) International Financial Reporting Interpretations Committee (IFRIC)

Which of the above reports to, or advises, the International Accounting Standards Board
(IASB)?
(2 marks)

Reports to: Advises:
A (i) and (iii) (ii)
B (i) and (ii) (iii)
C (iii) (ii)
D (ii) (i)

The answer is C



Question 1.9

Country B has a corporate income tax system that treats capital gains/losses separately from
trading profits/losses. Capital gains/losses cannot be offset against trading profits/losses. All
losses can be carried forward indefinitely, but cannot be carried back to previous years. Trading
profits and capital gains are both taxed at 20%.

BD had no brought forward losses on 1 October 2002. BD’s results for 2003 to 2005 were as
follows:

Trading profit/(loss) Capital gains/(loss)
$000 $000

Year to September 2003 200 (100)

Year to September 2004 (120) 0

Year to September 2005 150 130

Calculate BD’s corporate income tax due for each of the years ended 30 September 2003 to 2005.
(3 marks)

Trading profit/
(loss)
$000
Taxable
$000
Capital gain
(loss)
$000
Taxable
$000
Tax
$000
2002/3 200 200 (100) 0 200 x 20% = 40
2003/4 (120) 0 0 0 0
2004/5 150 150 - 120 = 30 130 130 - 100 = 30 30 + 30 = 60 x 20% = 12
Examiners comment: a number of candidates ignored the instruction given in the question
that capital losses could not be offset against trading profits, and hence should be carried
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forward against future capital gains

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Question 1.10

Which ONE of the following would require a provision to be created by BW at its balance
sheet date of 31 October 2005?

A The government introduced new laws on data protection which come into force on
1 January 2006. BW’s directors have agreed that this will require a large number of
staff to be retrained. At 31 October 2005, the directors were waiting on a report they
had commissioned that would identify the actual training requirements.
B At the balance sheet date, BW is negotiating with its insurance provider about the
amount of an insurance claim that it had filed. On 20 November 2005, the insurance
provider agreed to pay $200,000.
C BW makes refunds to customers for any goods returned within 30 days of sale, and
has done so for many years.
D A customer is suing BW for damages alleged to have been caused by BW’s product.
BW is contesting the claim and, at 31 October 2005, the directors have been advised
by BW’s legal advisers it is very unlikely to lose the case.
(2 marks)
The answer is C



Question 1.11

IAS 18 Revenue recognition defines when revenue may be recognised on the sale of goods.

List FOUR of the five conditions that IAS 18 requires to be met for income to be recognised.
(4 marks)
Any four of the following five:
(i) The significant risks and rewards of ownership of the goods have been transferred to the
buyer;
(ii) The entity selling does not retain any continuing influence or control over the goods;
(iii) revenue can be measured reliably;
(iv) it is reasonably certain that the buyer will pay for the goods;
(v) the costs to the selling entity can be measured reliably.
Examiners comment: Answers were typically too brief, e.g. “ the amount can be measured”.
Candidates needed to state which amount they were referring to (e.g. revenue) and include
the word “reliably” for a full mark for this point.

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Question 1.12

Country OS has a value added tax (VAT) system where VAT is charged on all goods and
services. Registered VAT entities are allowed to recover input VAT paid on their purchases.

VAT operates at different levels in OS:

• Standard rate 10%
• Luxury rate 20%
• Zero rate 0%

During the last VAT period, an entity, BZ, purchased materials and services costing
$100,000, excluding VAT. All materials and services were at standard rate VAT.

BZ converted the materials into two products Z and L; product Z is zero rated and product L is
luxury rated for VAT purposes.

During the VAT period, BZ made the following sales, excluding VAT:

$
Z 60,000
L 120,000

At the end of the period, BZ paid the net VAT due to the tax authorities.

Assuming BZ had no other VAT-related transactions, how much VAT did BZ pay?
(2 marks)
The answer is BZ paid VAT = $14,000

Input VAT = 100 x 10% = 10
Out put VAT = (60 x 0%) + (120 x 20%) = 24
VAT due = 24 – 10 = 14
VAT paid = $14,000

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Question 1.13

At 1 October 2004, BK had the following balance:

Accrued interest payable $12,000 credit

During the year ended 30 September 2005, BK charged interest payable of $41,000 to its
income statement. The closing balance on accrued interest payable account at 30 September
2005 was $15,000 credit.

How much interest paid should BK show on its cash flow statement for the year ended
30 September 2005?

A $38,000
B $41,000
C $44,000
D $53,000
(2 marks)
The answer is A
$000
Income statement 41
Add balance b/fwd 12
53
Less balance c/fwd 15
38



Question 1.14

If an external auditor does not agree with the directors’ treatment of a material item in the
accounts, the first action they should take is to

A give a qualified opinion of the financial statements.
B give an unqualified opinion of the financial statements.
C force the directors to change the treatment of the item in the accounts.
D persuade the directors to change the treatment of the item in the accounts.
(2 marks)
The answer is D


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Question 1.15

BL started a contract on 1 November 2004. The contract was scheduled to run for two years
and has a sales value of $40 million.

At 31 October 2005, the following details were obtained from BL’s records:

$m
Costs incurred to date 16
Estimated costs to completion 18
Percentage complete at 31 October 2005 45%

Applying IAS 11 Construction contracts, how much revenue and profit should BL recognise in
its income statement for the year ended 31 October 2005?
(2 marks)

Total revenue
$m
40
Total cost 16 + 18 = 34
Profit 6
Recognise


Revenue (40 x 45%) $18m
Profit (6 x 45%) $2⋅7m


Question 1.16

An entity sells furniture and adds a sales tax to the selling price of all products sold. A
customer purchasing furniture from the entity has to pay the cost of the furniture plus the
sales tax. The customer therefore bears the cost of the sales tax.

This is referred to as

A formal incidence.
B indirect incidence.
C effective incidence.
D direct incidence.
(2 marks)
The answer is C


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Question 1.17

BN is a listed entity and has the following balances included on its opening balance sheet:

$000
Equity and reserves:
Equity shares, $1 shares, fully paid 750
Share premium 250
Retained earnings 500
1,500

BN reacquired 100,000 of its shares and classified them as “treasury shares”. BN still held
the treasury shares at the year end.

How should BN classify the treasury shares on its closing balance sheet in accordance with
IAS 32 Financial instruments – disclosure and presentation?

A As a non-current asset investment.
B As a deduction from equity.
C As a current asset investment.
D As a non-current liability.
(2 marks)
The answer is B




Question 1.18

BE has been offering 60 day payment terms to its customers, but now wants to improve its
cash flow. BE is proposing to offer a 1⋅5% discount for payment within 20 days.

Assume a 365 day year and an invoice value of $1,000.

What is the effective annual interest rate that BE will incur for this action?
(4 marks)
s = x (1 + r)
n

1,000 = 985 (1 + r)
365/40

1 + r = (1,000/985)
9⋅125

1 + r = 1⋅148
r = 14⋅8%
Examiners comment: Very few candidates used the correct formula for this, and if they did,
the figures used were often incorrect.

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Question 1.19

BM has a taxable profit of $30,000 and receives a tax assessment of $3,000.

BV has a taxable profit of $60,000 and receives a tax assessment of $7,500.

BM and BV are resident in the same tax jurisdiction.

This tax could be said to be

A a progressive tax.
B a regressive tax.
C a direct tax.
D a proportional tax.
(2 marks)
The answer is A




Question 1.20

IAS 1 Presentation of financial statements requires some of the items to be disclosed on the
face of the financial statements and others to be disclosed in the notes.

(i) Depreciation
(ii) Revenue
(iii) Closing inventory
(iv) Finance cost
(v) Dividends
Which TWO of the above have to be shown on the face of the income statement, rather than
in the notes:

A (i) and (iv)
B (iii) and (v)
C (ii) and (iii)
D (ii) and (iv)
(2 marks)
The answer is D


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SECTION B


Question Two

(a)

Required:

(i) Explain the difference between tax avoidance and tax evasion.

(2 marks)

(ii) Briefly explain the methods that governments can use to reduce tax avoidance and tax
evasion.
(3 marks)

(Total for sub-question (a) = 5 marks)


Rationale

Tests candidates’ ability to explain the difference in principle between tax avoidance and tax
evasion and the methods that can be used to reduce them at a national level. Tests learning
outcome A (vi).


Suggested Approach

Explain the meaning of tax avoidance and tax evasion, highlighting the difference between them.
Identify and explain three methods that can be used to reduce either or both avoidance and
evasion.


Marking Guide

Marks

Explain tax avoidance 1
Explain tax evasion 1
Description of method – reducing opportunity 1
Description of method – increasing perceived risk/penalties 1
Description of method – changing social attitudes 1


Examiner’s Comments
Most candidates were able to explain the meaning of avoidance and evasion with fewer highlighting
the difference between them. Some candidates gave odd examples of tax avoidance, such as
“claiming capital allowances” or “claiming loss relief”. These are not examples of tax avoidance,
they are proper application of the tax legislation and are not “loopholes”.
Several candidates stated that giving double tax relief on overseas profits was a means of
preventing tax avoidance, which is incorrect.
Many candidates did not give enough examples or sufficient detail within the examples to earn full
marks

Common Errors
Not highlighting the difference between tax evasion and tax avoidance
Giving insufficient number of methods to score three marks
Giving several examples of the same method, for example an efficient system of auditing tax
returns and visits to entities to check their tax returns.

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Question Two

(b)

BF manufactures a range of domestic appliances. Due to past delays in suppliers providing goods,
BF has had to hold an inventory of raw materials, in order that the production could continue to
operate smoothly. Due to recent improvements in supplier reliability, BF is re-examining its
inventory holding policies and recalculating economic order quantities (EOQ).

• Item “Z” costs BF $10⋅00 per unit
• Expected annual production usage is 65,000 units
• Procurement costs (cost of placing and processing one order) are $25⋅00
• The cost of holding one unit for one year has been calculated as $3⋅00

The supplier of item “Z” has informed BF that if the order was 2,000 units or more at one time, a
2% discount would be given on the price of the goods.

Required:

(i) Calculate the EOQ for item “Z” before the quantity discount.
(2 marks)

(ii) Advise BF if it should increase the order size of item “Z” so as to qualify for the 2% discount.

(3 marks)

(Total for sub-question (b) = 5 marks)


Rationale

Tests candidates’ ability to calculate economic order quantities and whether or not a discount
offered by a supplier is worth seeking for the entity detailed in the question. Tests learning
outcome D (vii).


Suggested Approach
Use the formula from the question paper formulae sheet and calculate the EOQ.
Calculate total cost of the calculated EOQ and then calculate the total cost using the discount
order level of 2,000.
Compare the two total costs to see if there is any benefit in increasing the order size.
Advise BF whether to increase the order size or not


Marking Guide

Marks

Calculate the EOQ 2
Calculate the cost of seeking the discount (or not) and advise accordingly 3


Examiner’s Comments
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Almost every candidate correctly calculated the Economic Order Quantity.

In calculating the likely extra cost / savings of increasing the order quantity to take advantage of
the discount, almost all candidates omitted to calculate (or even consider) the increased stock
holding cost. When the holding cost was included the unit cost was frequently excluded. Very few
candidates were able to correctly calculate the saving and advise accordingly. Most candidates
advised not to accept the discount. Other candidates tried to advise BF without any calculation at
all.


Common Errors
In part (ii):
Trying to recalculate the reorder quantity including the discount using the formula.
Only calculating and considering one or maximum two of the three items of cost. Usually the saving
on the unit cost and ordering cost, occasionally the saving on ordering cost less increase in holding
cost.

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Question Two

(c)


BJ is an entity that provides a range of facilities for holidaymakers and travellers. At
1 October 2004 these included:

• a short haul airline operating within Europe; and
• a travel agency specialising in arranging holidays to more exotic destinations, such as
Hawaii and Fiji.

BJ’s airline operation has made significant losses for the last two years. On 31 January 2005,
the directors of BJ decided that, due to a significant increase in competition on short haul
flights within Europe, BJ would close all of its airline operations and dispose of its fleet of
aircraft. All flights for holiday makers and travellers who had already booked seats would be
provided by third party airlines. All operations ceased on 31 May 2005.

On 31 July 2005, BJ sold its fleet of aircraft and associated non-current assets for $500
million, the carrying value at that date was $750 million.

At the balance sheet date, BJ were still in negotiation with some employees regarding
severance payments. BJ has estimated that in the financial period October 2005 to
September 2006, they will agree a settlement of $20 million compensation.

The closure of the airline operation caused BJ to carry out a major restructuring of the entire
entity. The restructuring has been agreed by the directors and active steps have been taken
to implement it. The cost of restructuring to be incurred in year 2005/2006 is estimated at
$10 million.

Required:

Explain how BJ should report the events described above and quantify any amounts required
to be included in its financial statements for the year ended 30 September 2005. (Detailed
disclosure notes are not required.)
(Total for sub-question (c) = 5 marks)


Rationale

Tests candidates’ ability to explain the reporting of various events occurring to an entityand
how these may be included in its year-end financial statements. Tests learning outcomes C
(iii) and (v).


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Suggested Approach
Take each of the items in turn and explain its impact on the financial statements, quantifying
any effects on the income statement and balance sheet. The items are:
• disposal of the airline operation and its assets
• employee severance payments
• restructuring costs


Marking Guide

Marks

Identifying loss on closure as discontinued with correct income statement
figures
2
Identifying a provision for severance payments with correct income statement
and balance sheet entries

Identifying a provision for restructuring costs and its treatment as a continuing
activity



Examiner’s Comments
This part had a very poor average mark. Many candidates did not explain and quantify as
required in the question.
As regards the closure of the airline business, candidates should note that this ceased before
the year end, and all assets were disposed of before that date. Many candidates said that the
loss on disposal should be shown in the Balance Sheet! Candidates should note that the
assets should have already been removed from the ledger accounts and hence no
adjustments would be needed to the balance sheet at all. The loss on disposal should appear
in the income statement, and is an actual loss – not an impairment loss, as many candidates
stated it was.
Very few candidates identified the closure of the airline business as “discontinued
operations”, and almost none considered the status of the restructuring costs. Candidates
also failed to realise that making a provision has two effects - a charge to the income
statement as well as a liability on the balance sheet. Many candidates said that a provision
was required in the balance sheet.
The restructuring is allowed under IAS 37 as it is committed. Many candidates said it was not
allowed, of those correctly allowing the provision very few identified it as a continuing
activities item.

Common Errors
Not identifying the disposal as a discontinued activity.
Saying that the disposal would be shown in the balance sheet
Not stating that the loss should be shown in the income statement
Saying that the receipt from the disposal should be shown as revenue in the income
statement or even worse in the balance sheet!
Correctly identifying a provision for severance payments but not quantifying the amount. Few
answers actually said that a the $20 million should be shown as an expense in the income
statement.
Saying that the provision should be shown in the balance sheet without any reference to the
income statement.
Saying that restructuring was an expense next year and should not be included
Classifying the restructuring provision as discontinuing


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Question Two

(d)

The International Accounting Standards Board’s (IASB’s) Framework for the preparation and
presentation of financial statements (Framework) identifies four principal qualitative
characteristics of financial information.

Required:

Identify and explain EACH of the FOUR principal qualitative characteristics of financial
information listed in the IASB’s Framework.
(Total for sub-question (d) = 5 marks)


Rationale

Tests candidates’ ability to identify and explain the four principal qualitative characteristics of
the IASB’s Framework. Tests learning outcome B (iv).


Suggested Approach
Specify the four characteristics and then explain each one


Marking Guide

Marks

Understandability 1
Relevance 1
Reliability 2
Comparability 1


Examiner’s Comments
Candidates failed to include enough detail in their answers. Many answers identified a
characteristic and then the explanation added nothing to it, for example Relevance,
information needs to be relevant.

Common Errors
Not identifying the characteristics, instead identifying other parts of the framework, for
example identifying the elements of financial statements or the underlying assumptions,
accruals and going concern.
Not explaining each characteristic


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Question Two

(e)

BI owns a building which it uses as its offices, warehouse and garage. The land is carried as
a separate non-current tangible asset in the balance sheet.

BI has a policy of regularly revaluing its non-current tangible assets. The original cost of the
building in October 2002 was $1,000,000; it was assumed to have a remaining useful life of
20 years at that date, with no residual value. The building was revalued on 30 September
2004 by a professional valuer at $1,800,000.

BI also owns a brand name which it acquired 1 October 2000 for $500,000. The brand name
is being amortised over 10 years.

The economic climate had deteriorated during 2005, causing BI to carry out an impairment
review of its assets at 30 September 2005. BI’s building was valued at a market value of
$1,500,000 on 30 September 2005 by an independent valuer. A brand specialist valued BI’s
brand name at market value of $200,000 on the same date.

BI’s management accountant calculated that the brand name’s value in use at 30 September
2005 was $150,000.

Required:

Explain how BI should report the events described above and quantify any amounts required
to be included in its financial statements for the year ended 30 September 2005.

(Total for sub-question (e) = 5 marks)


Rationale

Tests candidates’ ability to explain the reporting of various events occurring to an entity and
how these may be included in its year-end financial statements. Tests learning outcomes C
(iii) and (v).


Suggested Approach
Prepare workings for the building to calculate the amounts of depreciation and any
gains/losses on revaluation each year.
Prepare workings for the brand name to calculate the amounts of amortisation and any losses
on impairment.
Explain how the figures calculated should be reported in BI’s financial statements.


Marking Guide

Marks

Calculation and explanation of the building treatment 3
Calculation and explanation of the brand name treatment 2


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November 2005 Exam

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Question Two

(e) continued


Examiner’s Comments
Most candidates made a better attempt at the buildings part of the question than the brand
name.
The main error with buildings for a large number of candidates was not depreciating for
enough years before revaluing.
Despite the question saying that the brand name was acquired for $ 500,000 many
candidates insisted on classifying it as internally generated.
A significant number of candidates stated that the brand name should be classed as goodwill
(which would only apply if its value was not readily ascertainable), and could not be shown in
the financial statements.
Many candidates did not understand the requirements in IAS 36 regarding the value of the
asset, which is the higher of market value or value in use. Most candidates valued the brand
at the lower figure if they did not classify it as internally generated or as goodwill.
Many candidates stated that the reduction in value should be deducted from the Revaluation
Reserve account, which would only occur if the brand had previously been revalued upwards
(which it had not).

Common Errors
Buildings:
Depreciating the buildings for only one year prior to the first revaluation, instead of two years.
Not reducing the 20 year useful life correctly when recalculating depreciation after revaluation
The main errors involved the brand name:
Not amortising the brand name for the correct number of years
Incorrectly revaluing the brand name at $150,000 rather than its market value of $200,000.
Stating that the reduction in value should be deducted from the Revaluation Reserve account.
Not amortising the brand name at all



Question Two

(f)


BH purchased a bond with a face value of $1,000 on 1 June 2003 for $850. The bond has a
coupon rate of 7%. BH intends holding the bond to its maturity on 31 May 2008 when it will
repay its face value.

Required:

(i) Explain the difference between the coupon rate of a security and its yield to maturity.

(2 marks)

(ii) Calculate the bond’s yield to maturity.
(3 marks)

(Total for sub-question (f) = 5 marks)


Rationale
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Tests candidates’ ability to explain the difference between the coupon rate of a security and
its yield to maturity and to calculate the bond’s yield to maturity. Tests learning outcome D
(viii).


Suggested Approach
Define coupon rate and yield to maturity and highlight the difference between them.
Calculate the yield to maturity using the discounted annual rate of return at which the present
value of future interest payments and the redemption value equal the current market value.
The present values can be looked up in the tables attached to the examination paper.

Marking Guide

Marks

Explaining the difference between the coupon rate and yield to
redemption
2
Calculating the yield to redemption 3


Examiner’s Comments
Many candidates were unable to explain the terms “coupon rate” and “yield to maturity”
satisfactorily.
The vast majority of candidates were unable to calculate the yield to maturity. Very few
candidates even got the formula correct.

Common Errors
Incorrectly identifying the coupon rate as related to the purchase price
Identifying the yield to maturity as the cash received on redemption, totally ignoring all the
interest payments.
Using totally inappropriate formulae.

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Post Exam Guide
November 2005 Exam

The Chartered Institute of Management Accountants Page 23

SECTION C


Question Three

Prepare the income statement and a statement of changes in equity for BG for the year to
30 September 2005 and a balance sheet at that date, in a form suitable for presentation to the
shareholders and in accordance with the requirements of International Financial Reporting
Standards.

Notes to the financial statements are NOT required, but all workings must be clearly shown. All
workings should be to the nearest $000. DO NOT prepare a statement of accounting policies.

(Total for question 3 = 20 marks)


Rationale

Tests candidates’ ability to prepare an income statement, balance sheet and a statement of
changes in equity in a form suitable for publication, and in accordance with International Financial
Reporting Standards, based upon the trial balance of a given entity. Tests learning outcomes A
(viii) and C (i).


Suggested Approach
Read the question carefully and then using the additional information provided and the trial balance
figures, prepare workings to:
1. calculate depreciation of equipment and fixtures for the year and cumulative
2. calculate the cost of sales
3. calculate tax charge and outstanding balances.
4. calculate the effect of writing back the provision
Prepare the income statement using IAS 1 format.
Prepare workings to calculate the balances on reserves and retained earnings
Prepare the statement of changes in equity
Prepare the balance sheet using IAS 1 format


Marking Guide

Marks

Preparing the income statement using correct format 8
Preparing the balance sheet using correct format 7.5
Preparing the statement of changes in equity using correct format 2
Marks available for format and correct headings 2.5

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Examiner’s Comments
This question was generally very well done by candidates, many obtaining near full marks. Very
few gained full marks as very few candidates could correctly deal with the release of the provision.
Many candidates are still following the old UK format, including the dividend paid as a deduction
from the income statement. The IFRS requirement is to show the dividend as a movement in the
statement of changes in equity, not as a deduction from the income statement which should end
with the profit for the year after tax.
In the Balance Sheet, many candidates included the available for sale investments as current
assets. While this may appear logical (and indeed they may be sold within 12 months, as may
other non-current assets), they are nevertheless held as investments either until the cash is
required or the investments have risen in value to a point where a sale is regarded as a wise
course of action.
Deferred tax and current tax were often wrongly calculated, and both included in either current
liabilities or non-current liabilities. Deferred tax is non-current while current tax is a current liability.
The statement of changes in equity was usually quite well done except that several candidates had
problems identifying the correct balances brought forward, quite a few students showed the equity
shares issued during the year!


Common Errors
• In the Income Statement, many candidates failed to realise that, for an office cleaning service,
the cost of cleaning materials consumed was part of Cost of Sales.
• Adjusting for the closing inventory, which had already been adjusted in the trial balance.
• Incorrectly calculating the finance cost as being for a half year, rather than the full year cost of
$15,000.
• Calculating a full year’s interest on the 10% bonds and adding it to the interest already paid to
give finance cost.
• Deducting the dividends paid in the Income Statement
• Including dividends paid as a current liability
• Adding the retained profit brought forward to the income statement
• Including the available for sale investments as current assets in the Balance Sheet.
• Deferred tax and current tax were often wrongly calculated, and both included in either current
liabilities or non-current liabilities.
• Including depreciation as part of administration or distribution expenses when the question
specified cost of sales
• Omitting revaluation increase in the revaluation reserve movement
• Not showing equity shares and share premium as brought forward in the statement of changes
in equity.
• Not showing the provision as a credit to income statement
• Showing the provision on the balance sheet or in the statement of changes in equity



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November 2005 Exam

The Chartered Institute of Management Accountants Page 25



Question Four

Required:

(a) Calculate BB’s in-house training course trade receivables days outstanding

(i) according to the forecast at 31 December 2005;

(ii) according to the projected figures at 30 June 2006, assuming the revenue and
cash flow budgets are implemented.

(5 marks)


Rationale

Tests candidates’ ability to calculate trade receivable days and forecast days outstanding.
Tests learning outcome D (i).


Suggested Approach

Calculate the trade receivables days outstanding based on the estimated figures given.
Calculate the sales forecast for the period and the forecast cash receipts. Calculate the
forecast balance for trade receivables on 30 June 2006. Calculate the forecast trade
receivables days outstanding at 30 June 2006.

Marking Guide

Marks

Calculation of projected balance 3
Calculation of trade receivables outstanding @ 31 December 2005 1
Calculation of trade receivables outstanding @ 30 June 2006 1


Examiner’s Comments

Part (i) was well done with most candidates getting the mark available. Few candidates were
able to calculate the forecast balance at 30 June although some managed to calculate the
sales for the period.

Common Errors
Not attempting to calculate a forecast balance, but using budgeted receipts instead.
Deducting receipts from the balance at 31 December and using that figure without adding on
revenue.
Dividing by half of the turnover figure instead of the annual figure.

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Post Exam Guide
November 2005 Exam

The Chartered Institute of Management Accountants Page 26



Question Four

Required:

(b) Prepare BB’s cash budget for the first six months of 2006 (January to June).

(10 marks)


Rationale

Tests candidates’ ability to prepare a cash budget based upon forecast income statement
and balance sheets of a given entity. Tests learning outcomes D (ii).


Suggested Approach
Prepare workings to calculate short course income and the cash receipts from short courses.
Prepare a six month cash flow statement separating cash inflows and cash outflows.


Marking Guide

Marks

Workings of short course income 3
Calculation and compilation of cash budget 6
Format and layout of cash budget 1


Examiner’s Comments
This section was very well done by most candidates attempting the question. The main
problem was with short course income calculation and remembering to include the cash
balance brought forward.

Common Errors
Applying different split to short course income receipts than 1/3 and 2/3 given in question.
Not including cash balance brought forward
Missing some January figures out, such as materials and short course income


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November 2005 Exam

The Chartered Institute of Management Accountants Page 27



Question Four

Required:

(c) Advise BB of any actions it can take to make sufficient funds available to purchase the
new technology as budgeted in May 2006.
(5 marks)
(Total for question 4 = 20 marks)

Rationale

Tests candidates’ ability to advise the entity of actions it might take to have sufficient funds
available to make a major purchase of equipment. Tests learning outcomes D (iii).


Suggested Approach
Identify the shortfall of cash available and then make sensible suggestions as to how extra
cash could be generated or raised in other ways.


Marking Guide

Marks

Advising the entity of actions it might take 5


Examiner’s Comments
Most candidates were able to identify the obvious solutions of increasing the overdraft or
raising a loan. However the better candidates also included other suggestions and the
consequences of the actions, eg extra interest payments.
Many students gave insufficient detail for the marks on offer, often giving two/three word
answers such as “increase overdraft” or “get a loan”. While correct these are insufficient to
obtain full marks.
Common Errors
Not identifying enough options for five marks
Not giving sufficient detail for each option


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 The Chartered Institute of Management Accountants 2006

Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax
Principles
25 May 2006 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is, all parts and/or sub-
questions). The requirements for questions in Sections B and C are
highlighted in a dotted box.
Answer the ONE compulsory question in Section A. This contains 21 sub-
questions and is on pages 2 to 8.
Answer the SIX compulsory sub-questions in Section B on pages 10 to 13.
Answer ONE of the two questions in Section C on pages 14 to 17.
Maths Tables and Formulae are provided on pages 19 to 21. These pages
are detachable for ease of reference.
Write your full examination number, paper number and the examination
subject title in the spaces provided on the front of the examination answer
book. Also write your contact ID and name in the space provided in the right
hand margin and seal to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P
7



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P7 2 May 2006

SECTION A – 50 MARKS
[the indicative time for answering this Section is 90 minutes]
ANSWER ALL TWENTY ONE SUB-QUESTIONS



Instructions for answering Section A:

The answers to the twenty one sub-questions in Section A should ALL be written in
your answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.2, 1.8, 1.9, 1.17, 1.20 and 1.21 you should show your workings
as marks are available for the method you use to answer these sub-questions.



Question One

1.1 If an entity regularly fails to pay its suppliers by the normal due dates, it may lead to a
number of problems:

(i) Having insufficient cash to settle trade payables;
(ii) Difficulty in obtaining credit from new suppliers;
(iii) Reduction in credit rating;
(iv) Settlement of trade receivables may be delayed.

Which TWO of the above could arise as a result of exceeding suppliers’ trade credit terms?

A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) and (iv)
(2 marks)


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May 2006 3 P7

1.2 CI purchased equipment on 1 April 2002 for $100,000. The equipment was depreciated
using the reducing balance method at 25% per year. CI’s balance sheet date is
31 March.

Depreciation was charged up to and including 31 March 2006. At that date, the
recoverable amount was $28,000.

Calculate the impairment loss on the equipment according to IAS 36 Impairment of Assets.

(3 marks)


1.3 List THREE possible reasons why governments set deadlines for filing returns and/or
paying taxes.
(3 marks)


1.4 IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be
presented on the face of the income statement. The analysis of expenses must use a
classification based on either the nature of expense, or its function, within the entity such
as:

(i) Raw materials and consumables used;
(ii) Distribution costs;
(iii) Employee benefit costs;
(iv) Cost of sales;
(v) Depreciation and amortisation expense.

Which of the above would be disclosed on the face of the income statement if a manufacturing
entity uses analysis based on function?

A (i), (iii) and (iv)
B (ii) and (iv)
C (i) and (v)
D (ii), (iii) and (v)
(2 marks)


1.5 The International Accounting Standards Board’s (IASB) Framework for the Preparation
and Presentation of Financial Statements (Framework) provides definitions of the
elements of financial statements. One of the elements defined by the framework is
“expenses”.

In no more than 35 words, give the IASB Framework’s definition of expenses.

(2 marks)



Section A continues on the next page

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P7 4 May 2006

The following data are given for sub-questions 1.6 and 1.7 below

CN started a three year contract to build a new university campus on 1 April 2004. The contract
had a fixed price of $90 million.

CN incurred costs to 31 March 2006 of $77 million and estimated that a further $33 million would
need to be spent to complete the contract.

CN uses the percentage of cost incurred to date to total cost method to calculate stage of
completion of the contract.


1.6 Calculate revenue earned on the contract to 31 March 2006, according to IAS 11
Construction Contracts.

(2 marks)


1.7 State how much gross profit/loss CN should recognise in its income statement for the
year ended 31 March 2006, according to IAS 11 Construction Contracts.

(2 marks)


1.8 CY had the following amounts for 2003 to 2005:

Year ended 31 December: 2003 2004 2005
$ $ $
Accounting depreciation for the year 1,630 1,590 1,530
Tax depreciation allowance for the year 2,120 1,860 1,320

At 31 December 2002, CY had the following balances brought forward:
$
Cost of property, plant and equipment qualifying for tax depreciation 20,000
Accounting depreciation 5,000
Tax depreciation 12,500

CY had no non-current asset acquisitions or disposals during the period 2003 to 2005.

Assume the corporate income tax rate is 25% for all years.

Calculate the deferred tax provision required by IAS 12 Income Taxes at 31 December 2005.

(3 marks)


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May 2006 5 P7

The following data are given for sub-questions 1.9 and 1.10 below

CS acquired a machine, using a finance lease, on 1 January 2004. The machine had an
expected useful life of 12,000 operating hours, after which it would have no residual value.

The finance lease was for a five-year term with rentals of $20,000 per year payable in arrears.
The cost price of the machine was $80,000 and the implied interest rate is 7⋅93% per year. CS
used the machine for 2,600 hours in 2004 and 2,350 hours in 2005.


1.9 Using the actuarial method, calculate the non-current liability and current liability figures
required by IAS 17 Leases to be shown in CS’s balance sheet at 31 December 2005.

(3 marks)


1.10 Calculate the non-current asset – property, plant and equipment net book value that
would be shown in CS’s balance sheet at 31 December 2005. Calculate the depreciation
charge using the machine hours method.
(2 marks)


1.11 IAS 14 Segment Reporting requires an entity to select a primary and secondary segment
reporting format.
CL has a number of different product groups and most of its trade is in Europe.
CQ has one major product and trades in a wide range of countries and cultural
environments.
Which ONE of the following will CL and CQ select as primary and secondary segment formats?

Primary reporting format Secondary reporting format
CL CQ CL CQ

A Business segments Business segments Geographical
segments
Geographical
segments

B Geographical
segments
Geographical
segments
Business segments Business segments

C Geographical
segments
Business segments Business segments Geographical
segments

D Business segments Geographical
segments
Geographical
segments
Business segments

(2 marks)


1.12 The external auditor has a duty to report on the truth and fairness of the financial
statements and to report any reservations. The auditor is normally given a number of
powers by statute to enable the statutory duties to be carried out.

List THREE powers that are usually granted to the auditor by statute.

(3 marks)


Section A continues on the next page
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P7 6 May 2006

1.13 A full imputation system of corporate income tax is one where an entity is taxable on

A all of its income and gains whether they are distributed or not. The shareholder is liable
for taxation on all dividends received.
B all of its income and gains whether they are distributed or not, but all the underlying
corporation tax is passed to the shareholder as a tax credit.
C all of its income and gains whether they are distributed or not, but only part of the
underlying corporation tax is passed to the shareholder as a tax credit.
D its retained profits at one rate and on its distributed profits at another (usually lower) rate
of tax.
(2 marks)


1.14 Which ONE of the following items would CM recognise as subsequent expenditure on a
non-current asset and capitalise it as required by IAS 16 Property, Plant and Equipment?

A CM purchased a furnace five years ago, when the furnace lining was separately identified
in the accounting records. The furnace now requires relining at a cost of $200,000.
When the furnace is relined it will be able to be used in CM’s business for a further five
years.
B CM’s office building has been badly damaged by a fire. CM intends to restore the
building to its original condition at a cost of $250,000.
C CM’s delivery vehicle broke down. When it was inspected by the repairers it was
discovered that it needed a new engine. The engine and associated labour costs are
estimated to be $5,000.
D CM closes its factory for two weeks every year. During this time, all plant and equipment
has its routine annual maintenance check and any necessary repairs are carried out. The
cost of the current year’s maintenance check and repairs was $75,000.
(2 marks)


1.15 A conservative policy for financing working capital is one where short-term finance is used
to fund

A all of the fluctuating current assets, but no part of the permanent current assets.
B all of the fluctuating current assets and part of the permanent current assets.
C part of the fluctuating current assets and part of the permanent current assets.
D part of the fluctuating current assets, but no part of the permanent current assets.
(2 marks)


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May 2006 7 P7

1.16 CU manufactures clothing and operates in a country that has a Value Added Tax system
(VAT). The VAT system allows entities to reclaim input tax that they have paid on taxable
supplies. VAT is at 15% of the selling price at all stages of the manufacturing and
distribution chain.

CU manufactures a batch of clothing and pays expenses (taxable inputs) of $100 plus
VAT. CU sells the batch of clothing to a retailer CZ for $250 plus VAT. CZ unpacks the
clothing and sells the items separately to various customers for a total of $600 plus VAT.

How much VAT do CU and CZ each have to pay in respect of this one batch of clothing?

(2 marks)


1.17 CT uses the Miller-Orr cash management model to help manage cash flows. The
management accountant has agreed with the directors that the lower limit for cash will be
$2,500.

The current rate of interest that CT pays is 0⋅025% per day. Each transaction costs CT
$30. CT’s daily cash flows have been measured and the variance calculated as
$300,000.

Calculate, for CT, the Miller-Orr return point and upper limit.

(3 marks)


1.18 After a bill of exchange has been accepted, there are a number of possible actions that
the drawer could take.

Which ONE of the following is NOT a possible course of action?

A Ask the customer for immediate payment.
B Discount the bill with a bank.
C Hold the bill until the due date and then present it for payment.
D Use the bill to settle a trade payable.

(2 marks)


1.19 Calculate the economic order quantity (EOQ) for the following item of inventory:

• Quantity required per year 32,000 items;
• Order costs are $15 per order;
• Inventory holding costs are estimated at 3% of inventory value per year;
• Each unit currently costs $40.
(2 marks)



Section A continues on the next page

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P7 8 May 2006

1.20 On 31 March 2006, CH had a credit balance brought forward on its deferred tax account
of $642,000. There was also a credit balance on its corporate income tax account of
$31,000, representing an over-estimate of the tax charge for the year ended 31 March
2005.

CH’s taxable profit for the year ended 31 March 2006 was $946,000. CH’s directors
estimated the deferred tax provision required at 31 March 2006 to be $759,000 and the
applicable income tax rate for the year to 31 March 2006 as 22%.

Calculate the income tax expense that CH will charge in its income statement for the year ended
31 March 2006, as required by IAS 12 Income Taxes.

(3 marks)


1.21 CX purchased $10,000 of unquoted bonds when they were issued by Z. CX now wishes
to sell the bonds to B. The bonds have a coupon rate of 7% and will repay their face
value at the end of five years. Similar bonds have a yield to maturity of 10%.

Calculate the current market price for the bonds.

(3 marks)


(Total for Question One = 50 marks)



End of Section A


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May 2006 9 P7





Section B starts on page 10




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P7 10 May 2006

SECTION B – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.



Question Two

(a) CW owns 40% of the equity shares in Z, an entity resident in a foreign country.
CW receives a dividend of $45,000 from Z; the amount received is after deduction of
withholding tax of 10%. Z had before tax profits for the year of $500,000 and paid
corporate income tax of $100,000.



Required:

(i) Explain the meaning of “withholding tax” and “underlying tax.”
(2 marks)

(ii) Calculate the amount of withholding tax paid by CW.
(1 mark)

(iii) Calculate the amount of underlying tax that relates to CW’s dividend.
(2 marks)

(Total for sub-question (a) = 5 marks)






Section B continues on the opposite page



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May 2006 11 P7

(b) CB is an entity specialising in importing a wide range of non-food items and selling them
to retailers. George is CB’s president and founder and owns 40% of CB’s equity shares:

• CB’s largest customer, XC, accounts for 35% of CB’s revenue. XC has just
completed negotiations with CB for a special 5% discount on all sales.

• During the accounting period, George purchased a property from CB for $500,000.
CB had previously declared the property surplus to its requirements and had
valued it at $750,000.

• George’s son, Arnold, is a director in a financial institution, FC. During the
accounting period, FC advanced $2 million to CB as an unsecured loan at a
favourable rate of interest.



Required:

Explain, with reasons, the extent to which each of the above transactions should be
classified and disclosed in accordance with IAS 24 Related Party Disclosures in CB’s
financial statements for the period.

(Total for sub-question (b) = 5 marks)




(c) C is a small developing country which passed legislation to create a recognised
professional accounting body two years ago. At the same time as the accounting body
was created, new regulations governing financial reporting requirements of entities were
passed. However, there are currently no accounting standards in C.

C’s government has asked the new professional accounting body to prepare a report
setting out the country’s options for developing and implementing a set of high quality
local accounting standards. The government request also referred to the work of the
IASB and its International Financial Reporting Standards.

















Section B continues on the next page



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Required:

As an advisor to the professional accounting body, outline THREE options open to
C for the development of a set of high quality local accounting standards. Identify
ONE advantage and ONE disadvantage of each option.

(Total for sub-question (c) = 5 marks)
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P7 12 May 2006

(d) CD is a manufacturing entity that runs a number of operations including a bottling plant
that bottles carbonated soft drinks. CD has been developing a new bottling process that
will allow the bottles to be filled and sealed more efficiently.

The new process took a year to develop. At the start of development, CD estimated that
the new process would increase output by 15% with no additional cost (other than the
extra bottles and their contents). Development work commenced on 1 May 2005 and was
completed on 20 April 2006. Testing at the end of the development confirmed CD’s
original estimates.

CD incurred expenditure of $180,000 on the above development in 2005/06.

CD plans to install the new process in its bottling plant and start operating the new
process from 1 May 2006.

CD’s balance sheet date is 30 April.

















(e) CR issued 200,000 $10 redeemable 5% preference shares at par on 1 April 2005. The
shares were redeemable on 31 March 2010 at a premium of 15%. Issue costs amounted
to $192,800.






















Required:

(i) Explain the requirements of IAS 38 Intangible Assets for the treatment of
development costs.
(3 marks)

(ii) Explain how CD should treat its development costs in its financial
statements for the year ended 30 April 2006.
(2 marks)

(Total for sub-question (d) = 5 marks)
Required:

(a) Calculate the total finance cost over the life of the preference shares.

(2 marks)

(b) Calculate the annual charge to the income statement for finance expense,
as required by IAS 39 Financial Instruments: Recognition and Measurement,
for each of the five years 2006 to 2010. Assume the constant annual rate of
interest as 10%.
(3 marks)
(Total for sub-question (e) = 5 marks)
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May 2006 13 P7

(f) The following is an extract from the trial balance of CE at 31 March 2006:

$000 $000
Administration expenses 260
Cost of sales 480
Interest paid 190
Interest bearing borrowings 2,200
Inventory at 31 March 2006 220
Property, plant and equipment at cost 1,500
Property, plant and equipment, depreciation to 31 March 2005 540
Distribution costs 200
Revenue 2,000

Notes:

(i) Included in the closing inventory at the balance sheet date was inventory at a cost of
$35,000, which was sold during April 2006 for $19,000.
(ii) Depreciation is provided for on property, plant and equipment at 20% per year using the
reducing balance method. Depreciation is regarded as cost of sales.
(iii) A member of the public was seriously injured while using one of CE’s products on
4 October 2005. Professional legal advice is that CE will probably have to pay
$500,000 compensation.













(Total for Section B = 30 marks)



End of Section B

Section C starts on page 14

TURN OVER

Required:

Prepare CE’s Income Statement for the year ended 31 March 2006 down to the line
“profit before tax”.
(Total for sub-question (f) = 5 marks)
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P7 14 May 2006

SECTION C – 20 MARKS

[the indicative time for this Section is 36 minutes]

ANSWER ONE QUESTION ONLY



Question Three

The financial statements of CJ for the year to 31 March 2006 were as follows:

Balance Sheets at 31 March 2006 31 March 2005
$000 $000 $000 $000
Non-current tangible assets
Property 19,160 18,000
Plant and equipment 8,500 10,000
Available for sale investments 1,500 2,100
29,160 30,100
Current assets
Inventory
Trade receivables
Cash at bank
Cash in hand
2,714
2,106
6,553
409

2,500
1,800
0
320
11,782 4,620
Total assets 40,942 34,720
Equity and liabilities
Ordinary shares $0⋅50 each
Share premium
Revaluation reserve
Retained profit
12,000
10,000
4,200
3,009

7,000
5,000
2,700
1,510
29,209 16,210
Non-current liabilities
Interest bearing borrowings 7,000

13,000
Provision for deferred tax 999 7,999 800 13,800

Current liabilities
Bank overdraft
Trade and other payables
Corporate income tax payable
0
1,820
1,914


1,200
1,700
1,810
3,734 4,710
40,942 34,720

Income Statement for the Year to 31 March 2006
$000
Revenue 31,000
Cost of sales (19,000)
Gross profit 12,000
Other income 200
Administrative expenses (3,900)
Distribution costs (2,600)
5,700
Finance cost (1,302)
Profit before tax 4,398
Income tax expense (2,099)
Profit for the period 2,299
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May 2006 15 P7

Additional information:

1. On 1 April 2005, CJ issued 10,000,000 $0⋅50 ordinary shares at a premium of 100%.

2. No additional available for sale investments were acquired during the year.

3. On 1 July 2005, CJ repaid $6,000,000 of its interest bearing borrowings.

4. Properties were revalued by $1,500,000 during the year.

5. Plant disposed of in the year had a net book value of $95,000; cash received on disposal
was $118,000.

6. Depreciation charged for the year was properties $2,070,000 and plant and equipment
$1,985,000.

7. The trade and other payables balance includes interest payable of $650,000 at 31 March
2005 and $350,000 at 31 March 2006.

8. Dividends paid during the year, $800,000 comprised last year’s final dividend plus the
current year’s interim dividend. CJ’s accounting policy is not to accrue proposed
dividends.

9. Other income comprises:
$
Dividends received 180,000
Gain on disposal of available for sale investments 20,000
200,000
Dividends receivable are not accrued.

10. Income tax expense comprises:
$
Corporate income tax 1,900,000
Deferred tax 199,000
2,099,000


















Section C continues on the next page





TURN OVER

Required:

Prepare CJ’s Cash-flow statement for the year ended 31 March 2006, in
accordance with IAS 7 Cash-flow Statements.
(Total for Question Three = 20 marks)

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P7 16 May 2006

Question Four

CK is an entity that sells computer spare parts and peripherals to computer retail stores. The
entity’s sales and purchases accrue evenly throughout the year and inventory is managed in
such a way as to give a constant inventory level throughout the year.

CK had the following figures for the year ended 31 March 2006:

$000
Revenue from credit sales during the year 6,192
Purchases on credit during the year 4,128
Trade receivables balance at 31 March 2006 1,083
Trade payables balance at 31 March 2006 344
Inventory balance at 31 March 2006 1,020
Cash balance at 31 March 2006 622

The directors wanted working capital management improved and commissioned a consultant to
prepare a report on working capital management in CK. The consultant’s report indicated that
efficiency savings were possible and, if the recommendations were implemented, the following
changes in outstanding days would be achieved:

Trade receivables reduced to 45 days.

Suppliers would be willing to wait a total of 40 days for payment.

Inventory could be reduced by 40% (from 31 March 2006 $ value levels) without having
an adverse impact on sales.

The budgets for the year to 31 March 2007 have been commenced, but are incomplete.
Budgeted revenue from credit sales is based on the year to 31 March 2006 figure, plus a price
increase of 10% from 1 April 2006 and a reduction of an estimated 3% in volume caused by the
price increase.

Cost of sales is budgeted at the same percentage of credit sales revenue as the year to
31 March 2006.

$000
Salaries and wages are budgeted at 620 for the year
Other operating expenses budget is 432 for the year
Budgeted capital expenditure is 2,500

The consultant’s report recommended that $1,500,000 of the proposed purchase of non-current
tangible assets could be leased instead of purchased. The terms of the lease would be five
payments of $400,000 each, payable in advance of 1 April each year, commencing on 1 April
2006.

The lease would be classified as a finance lease by IAS 17 Leases.

The implicit interest rate is 16⋅875%.
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May 2006 17 P7



Required:
(a) Calculate the following for CK at 31 March 2006:
• Trade receivables days outstanding;
• Trade payables days outstanding;
• Inventory days outstanding.
(Note: You should base your calculations on a 365 day year)
(3 marks)
(b) Prepare a cash budget for the year to 31 March 2007 based on the budgeted
data and assuming CK implements the efficiency changes recommended by
the consultant from 1 April 2006.
(10 marks)
(c) Explain the effect on CK’s cash budget if it decides to lease $1,500,000 of
the non-current assets, instead of purchasing them.
(Note: You are not required to recalculate CK’s cash budget)
(2 marks)
(d) Comment on any possible difficulties that CK may encounter when
implementing the efficiency changes.
(5 marks)
(Note: All workings should be to the nearest $000)
(Total for Question Four = 20 marks)




(Total for Section C = 20 marks)






End of Question Paper




Maths Tables and Formulae are on pages 19 to 21






TURN OVER
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P7 18 May 2006












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May 2006 19 P7

MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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P7 20 May 2006

Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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May 2006 21 P7

FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


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P7 22 May 2006











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May 2006 23 P7











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P7 24 May 2006

Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
May 2006
Thursday Afternoon Session
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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2006 Exam

The Chartered Institute of Management Accountants Page 1

Examiner’s General Comments
This was the third paper of the new syllabus using the new question paper format. The overall result
was generally very pleasing with a good standard of answer being produced by many candidates. The
overall average mark and pass rate were slightly down from November 2005 but were still very good.
There was evidence of a number of well prepared candidates with a wide range of knowledge, able to
tackle most of the sub-questions in questions One and Two and prepare good answers to one of the
optional questions. There were however a number of candidates that had not taken note of the fact that
financial statements include cash flow statements and that I had previously stated that income
statements and balance sheets would not always be examined in section C. My stated intention is to
examine financial statements, in the widest sense, in section C and on this occasion this meant that
there was not an income statement or balance sheet in section C. Some candidates had relied on an
income statement/balance sheet question and had not revised cash flow statements or cash budgets.
Question spotting is not advised in this paper and on this occasion meant that a significant number of
candidates were caught out.

Question One was generally well done, with a few candidates scoring full marks. Questions 1.9 finance
lease and 1.21 current market price of a bond were the questions with the least correct responses. For
Question 1.9 some candidates were able to do the calculation but could not identify the current and non-
current elements correctly. Question 1.21 had very few correct answers, this is an important topic as it
leads on to the strategic level. Most candidates provided workings for the three and four mark
questions, but a number did not. If workings are not given no marks can be awarded for wrong answers
using the correct principle.

Question Two was generally not as well done as the other questions on the paper. Some candidates
were obviously ill prepared for underlying tax and calculating the finance cost of a redeemable
preference share.

Question Three required the preparation of a cash flow statement. This question was generally well
done, with many candidates scoring full marks.

Question Four required the calculation of trade receivables, trade payables and inventory days
outstanding and a cash budget prepared using the revised working capital policies. Part (a) and part (d)
were fairly well done by those attempting this question with some excellent answers and a number of
candidates scoring full marks, however very few were able to adjust the cash budget for the changes in
working capital policy. Marks on this question were generally lower than on Question Three.

The following provides guidance to candidates preparing for future examinations and has been
prepared with that in mind. It therefore may give the impression that there were few good marks and few
passes as all the main errors have been listed for each question. It must be remembered though that
not all candidates made the errors listed and that overall there was a good result for this paper.
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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2006 Exam

The Chartered Institute of Management Accountants Page 2

SECTION A
Please note that in this PEG the mark available has been omitted from the end of each question in this
section.

Question 1.1
If an entity regularly fails to pay its suppliers by the normal due dates, it may lead to a number
of problems:

(i) Having insufficient cash to settle trade payables;
(ii) Difficulty in obtaining credit from new suppliers;
(iii) Reduction in credit rating;
(iv) Settlement of trade receivables may be delayed.

Which TWO of the above could arise as a result of exceeding suppliers’ trade credit terms?

A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (iii) and (iv)
The answer is C



Question 1.2
CI purchased equipment on 1 April 2003 for $100,000. The equipment was depreciated
using the reducing balance method at 25% per year. CI’s balance sheet date is
31 March.

Depreciation was charged up to and including 31 March 2006. At that date, the recoverable
amount was $28,000.

Calculate the impairment loss on the equipment according to IAS 36 Impairment of Assets.


Answer
$
Cost 100,000
Depreciation 2002/03 (25,000)
75,000
Depreciation 2003/04 (18,750)
56,250
Depreciation 2004/05 (14,063)
42,187
Depreciation 2005/06 (10,547)
31,640
Impaired value (28,000)
Reduction 3,640


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2006 Exam

The Chartered Institute of Management Accountants Page 3



Question 1.3
List THREE possible reasons why governments set deadlines for filing returns and/or paying
taxes.



Any three from the following:

• So that entities know when payment is required;
• It enables the tax authorities to forecast their cash flows more accurately;
• Provides a reference point for late payment. It would otherwise be difficult to
enforce any penalties for entities not paying;
• To prevent entities spending tax money deducted from employees. If tax is
deducted from employees at source and not paid to the tax authorities fairly
quickly, there is more chance of an entity spending the amount deducted, instead
of paying it to the tax authorities.
Note: Any other reasonable point would have been acceptable in the examination.




Question 1.4
IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be
presented on the face of the income statement. The analysis of expenses must use a
classification based on either the nature of expense, or its function, within the entity such as:

(i) Raw materials and consumables used;
(ii) Distribution costs;
(iii) Employee benefit costs;
(iv) Cost of sales;
(v) Depreciation and amortisation expense.

Which of the above would be disclosed on the face of the income statement if a
manufacturing entity uses analysis based on function?

A (i), (iii) and (iv)
B (ii) and (iv)
C (i) and (v)
D (ii), (iii) and (v)

The answer is B


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2006 Exam

The Chartered Institute of Management Accountants Page 4



Question 1.5
The International Accounting Standards Board’s (IASB) Framework for the Preparation and
Presentation of Financial Statements (Framework) provides definitions of the elements of
financial statements. One of the elements defined by the framework is “expenses”.

In no more than 35 words, give the IASB Framework’s definition of expenses.



Expenses – Decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets that result in decreases in equity, other than those relating to
distributions to equity participants.


The following data are given for sub-questions 1.6 and 1.7 below


CN started a three year contract to build a new university campus on 1 April 2004. The
contract had a fixed price of $90 million.

CN incurred costs to 31 March 2006 of $77 million and estimated that a further $33 million
would need to be spent to complete the contract.

CN uses the percentage of cost incurred to date to total cost method to calculate stage of
completion of the contract


Question 1.6
Calculate revenue earned on the contract to 31 March 2006, according to IAS 11
Construction Contracts.



Workings for 1.6 and 1.7
$m
Revenue 90
Total cost – incurred to date (77)
– estimated future (33)
Overall loss (20)
Revenue for year = 90 x 70% = 63
Cost of sales = 110 x 70% = (77)
Loss (14)
Provision for future loss (6)
Total loss (20)



Revenue earned $63 million








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Question 1.7

State how much gross profit/loss CN should recognise in its income statement for the year ended 31
March 2006, according to IAS 11 Construction Contracts.



Income Statement for year ended 31 March 2006
$m
Gross loss (20)



Question 1.8

CY had the following amounts for 2003 to 2005:

Year ended 31 December: 2003 2004 2005
$ $ $
Accounting depreciation for the year 1,630 1,590 1,530
Tax depreciation allowance for the year 2,120 1,860 1,320

At 31 December 2002, CY had the following balances brought forward:
$
Cost of property, plant and equipment qualifying for tax depreciation 20,000
Accounting depreciation 5,000
Tax depreciation 12,500

CY had no non-current asset acquisitions or disposals during the period 2003 to 2005.

Assume the corporate income tax rate is 25% for all years.

Calculate the deferred tax provision required by IAS 12 Income Taxes at 31 December 2005.


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Answer to 1.8
Accounting
depreciation
Tax
depreciation
Difference
$ $ $
Cost 20,000 20,000
Less: Depreciation b/fwd 5,000 12,500
15,000 7,500
2003 1,630 2,120
2004 1,590 1,860
2005 1,530 1,320
Net written down value at
31 December 2005 10,250 2,200 8,050
Tax at 25% 2,013

Alternative calculation: 2003 2004 2005
$ $ $
Less: Tax depreciation 2,120 1,860 1,320
Less: Accounting depreciation 1,630 1,590 1,530
490 270 (210)

Cumulative difference at 31 December 2002 7,500
Add: Increase 490
Add: Increase 270
Less: Reduction (210)
8,050
Tax at 25% 2,013
Required deferred tax provision $2,013





The following data are given for sub-questions 1.9 and 1.10 below


CS acquired a machine, using a finance lease, on 1 January 2004. The machine had an
expected useful life of 12,000 operating hours, after which it would have no residual value.

The finance lease was for a five-year term with rentals of $20,000 per year payable in
arrears. The cost price of the machine was $80,000 and the implied interest rate is 7⋅93%
per year. CS used the machine for 2,600 hours in 2004 and 2,350 hours in 2005.

Question 1.9
Using the actuarial method, calculate the non-current liability and current liability figures
required by IAS 17 Leases to be shown in CS’s balance sheet at 31 December 2005.


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Answer to 1.9

Interest rate 7⋅93%

Bal b/fwd Interest Payment
Balance
c/fwd

2004 80,000 6,344 -20,000 66,344

2005 66,344 5,261 -20,000 51,605

2006 51,605 4,092 -20,000 35,697

2007 35,697 2,831 -20,000 18,528

2008 18,528 1,472 -20,000 0

Note: Only the first three rows needed to be calculated to answer the question.

Answer – Non-current liability $35,697
Current liability (51,605 - 35,697) = $15,908





Question 1.10

Calculate the non-current asset – property, plant and equipment net book value that would be
shown in CS’s balance sheet at 31 December 2005. Calculate the depreciation charge using
the machine hours method.




$
Cost 80,000

Depreciation =
+
80,000 x
12,000
2,350) (2,600

33,000
47,000



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Question 1.11

IAS 14 Segment Reporting requires an entity to select a primary and secondary segment
reporting format.

CL has a number of different product groups and most of its trade is in Europe.

CQ has one major product and trades in a wide range of countries and cultural environments.

Which ONE of the following will CL and CQ select as primary and secondary segment
formats?
Primary reporting format Secondary reporting format
CL CQ CL CQ
A Business segments Business segments Geographical
segments
Geographical
segments

B Geographical
segments
Geographical
segments
Business segments Business
segments

C Geographical
segments
Business segments Business segments Geographical
segments

D Business segments Geographical
segments
Geographical
segments
Business
segments

The answer is D



Question 1.12

The external auditor has a duty to report on the truth and fairness of the financial statements
and to report any reservations. The auditor is normally given a number of powers by statute
to enable the statutory duties to be carried out.

List THREE powers that are usually granted to the auditor by statute.


Powers of the auditor can include:

• Right of access at all times to the books, records, documents and accounts;
• Right to be notified, and attend meetings, of equity holders;
• Right to require officers of the entity to provide them with information and
explanations;
• Right to speak at equity holders’ meetings.

Note: Any three of the above would have gained the marks available.

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Question 1.13
A full imputation system of corporate income tax is one where an entity is taxable on

A all of its income and gains whether they are distributed or not. The shareholder is
liable for taxation on all dividends received.
B all of its income and gains whether they are distributed or not, but all the underlying
corporation tax is passed to the shareholder as a tax credit.
C all of its income and gains whether they are distributed or not, but only part of the
underlying corporation tax is passed to the shareholder as a tax credit.
D its retained profits at one rate and on its distributed profits at another (usually lower)
rate of tax.
The answer is B


Question 1.14

Which ONE of the following items would CM recognise as subsequent expenditure on a non-
current asset and capitalise it as required by IAS 16 Property, Plant and Equipment?

A CM purchased a furnace five years ago, when the furnace lining was separately
identified in the accounting records. The furnace now requires relining at a cost of
$200,000. When the furnace is relined it will be able to be used in CM’s business for a
further five years.
B CM’s office building has been badly damaged by a fire. CM intends to restore the
building to its original condition at a cost of $250,000.
C CM’s delivery vehicle broke down. When it was inspected by the repairers it was
discovered that it needed a new engine. The engine and associated labour costs are
estimated to be $5,000.
D CM closes its factory for two weeks every year. During this time, all plant and
equipment has its routine annual maintenance check and any necessary repairs are
carried out. The cost of the current year’s maintenance check and repairs was
$75,000.
The answer is A


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Question 1.15

A conservative policy for financing working capital is one where short-term finance is used to
fund

A all of the fluctuating current assets, but no part of the permanent current assets.
B all of the fluctuating current assets and part of the permanent current assets.
C part of the fluctuating current assets and part of the permanent current assets.
D part of the fluctuating current assets, but no part of the permanent current assets.
The answer is D



Question 1.16

CU manufactures clothing and operates in a country that has a Value Added Tax system
(VAT). The VAT system allows entities to reclaim input tax that they have paid on taxable
supplies. VAT is at 15% of the selling price at all stages of the manufacturing and distribution
chain.

CU manufactures a batch of clothing and pays expenses (taxable inputs) of $100 plus VAT.
CU sells the batch of clothing to a retailer CZ for $250 plus VAT. CZ unpacks the clothing
and sells the items separately to various customers for a total of $600 plus VAT.

How much VAT does CU and CZ each have to pay in respect of this one batch of clothing?



Cost (Inputs) Sales Net VAT
$ $ $ $
CU 100 250 150 22⋅5
CZ 250 600 350 52⋅5



Question 1.17

CT uses the Miller-Orr cash management model to help manage cash flows. The
management accountant has agreed with the directors that the lower limit for cash will be
$2,500.

The current rate of interest that CT pays is 0⋅025% per day. Each transaction costs CT $30.
CT’s daily cash flows have been measured and the variance calculated as $300,000.

Calculate, for CT, the Miller-Orr return point and upper limit.


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Answer to 1.17

Formula from formulae sheet:
Spread = 9,000
00025 0
300,000 x 30 x
x 3
3
1
4
/
3
=










Return point = 2,500 + (9,000 x
1
/
3
) = 5,500

Upper limit = 2,500 + 9,000 = 11,500



Question 1.18

After a bill of exchange has been accepted, there are a number of possible actions that the
drawer could take.

Which ONE of the following is NOT a possible course of action?

A Ask the customer for immediate payment.
B Discount the bill with a bank.
C Hold the bill until the due date and then present it for payment.
D Use the bill to pay a trade payable.
The answer is A



Question 1.19

1.19 Calculate the economic order quantity (EOQ) for the following item of inventory:

• Quantity required per year 32,000 items;
• Order costs are $15 per order;
• Inventory holding costs are estimated at 3% of inventory value per year;
• Each unit currently costs $40.




Using the EOQ formula from the formulae sheet:

800,000
2 $1
32,000 x $15 x 2
=

= 894⋅43 units




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Question 1.20
On 31 March 2006, CH had a credit balance brought forward on its deferred tax account of
$642,000. There was also a credit balance on its corporate income tax account of $31,000,
representing an over-estimate of the tax charge for the year ended 31 March 2005.

CH’s taxable profit for the year ended 31 March 2006 was $946,000. CH’s directors
estimated the deferred tax provision required at 31 March 2006 to be $759,000 and the
applicable income tax rate for the year to 31 March 2006 as 22%.

Calculate the income tax expense that CH will charge in its income statement for the year
ended
31 March 2006, as required by IAS 12 Income Taxes.



Income statement – Income Tax $
Deferred tax increase (759,000 - 642,000) = 117,000
Charge for year (946,000 x 22%) = 208,120
Overprovision from previous year (31,000)
294,120



Question 1.21

CX purchased $10,000 of unquoted bonds when they were issued by Z. CX now wishes to
sell the bonds to B. The bonds have a coupon rate of 7% and will repay their face value at
the end of five years. Similar bonds have a yield to maturity of 10%.

Calculate the current market price for the bonds.



$700 x (annuity factor for t = 5; r = 10) + 10,000 x (discount factor t = 5; r = 10) =

($700 x 3⋅791) + (10,000 x 0⋅621) = 2,653⋅7 + 6,210 = $8,863⋅7

Annuity factor and discount factor are from tables.

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SECTION B


Question Two

(a)

(i) Explain the meaning of “withholding tax” and “underlying tax.”
(2 marks)

(ii) Calculate the amount of withholding tax paid by CW.
(1 mark)

(iii) Calculate the amount of underlying tax that relates to CW’s dividend.
(2 marks)
(Total for sub-question (a) = 5 marks)


Rationale

Tests candidates’ ability to define the meaning of different types of taxation relevant to an
incorporated entity in a particular country and to calculate the amounts of these different types of
taxation per the entity described in the question. Tests learning outcome A (i).


Suggested Approach
Explain the meaning of the terms then apply the definitions to calculate answers to parts (ii) and
(iii)


Marking Guide

Marks

Explanation of meanings (i) 2
Calculations (ii) 1
Calculations (iii) 2


Examiner’s Comments
Most candidates could define withholding tax whilst many candidates found difficulty defining
underlying tax.
Most candidates were able to calculate withholding tax but could not calculate underlying tax.

Common Errors
Part (ii) not grossing up the amount received to calculate the total dividend before calculating
withholding tax.
As many candidates did not know what underlying tax was they could not calculate it. Those that
gave correct answers to part (i) generally got the correct answer to part (iii)



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Question Two

(b)

Explain, with reasons, the extent to which each of the above transactions should be classified and
disclosed in accordance with IAS 24 Related Party Disclosures in CB’s financial statements for the
period.
(Total for sub-question (b) = 5 marks)


Rationale

Tests candidates’ ability to explain the principles of an International Accounting Standard – IAS 24
Related Party Disclosures – in relation to three transactions to be classified and disclosed in an
entity’s financial statements. Tests learning outcome D (v).


Suggested Approach
Take each transaction in turn and apply the requirements of IAS 24. Explain how the IAS 24
requirements relate to the transaction and how the transaction should be treated in the financial
statements according to IAS 24.

Marking Guide

Marks

Explanation for transaction 1 1
Explanation for transaction 2 2
Explanation for transaction 3 2


Examiner’s Comments
Most candidates correctly identified that the customer was not a related party.
Most candidates correctly identified that George was a related party but did not give sufficient
explanation.
Some candidates correctly identified the provider of finance as not being a related party, but did
not go on to identify that Arnold was a related party. Other candidates just focused on Arnold and
identified the loan transaction as a related party transaction without giving sufficient detail.


Common Errors
Incorrectly identifying the customer as a related party due to the volume of sales revenue.
Not giving sufficient detail to earn full marks in part 2 or 3.
Correctly stating that the loan did not need to be disclosed as providers of finance are not related
parties but not identifying Arnold’s relationship which made him a related party.

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Question Two

(c)


As an advisor to the professional accounting body, outline THREE options open to C for the
development of a set of high quality local accounting standards. Identify ONE advantage and
ONE disadvantage of each option.
(Total for sub-question (c) = 5 marks)


Rationale

Tests candidates’ ability to describe the options for a country developing its own accounting
standards for the first time. Tests learning outcomes C (vi).


Suggested Approach
Describe three approaches that can be taken to develop high quality accounting standards.
Explain one advantage and one disadvantage for each.


Marking Guide

Marks

For each option, and advantage and disadvantage Up to 2
Maximum 5

Examiner’s Comments
Most candidates did well on this question, although some could not think of three alternatives.

Common Errors
Using bullet points or short notes to answer the question and as a result not providing
sufficient detail for 5 marks.


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Question Two

(d)

(i) Explain the requirements of IAS 38 Intangible Assets for the treatment of development
costs.
(3 marks)
(ii) Explain how CD should treat its development costs in its financial statements for the
year ended 30 April 2006.
(2 marks)

(Total for sub-question (d) = 5 marks)


Rationale

Tests candidates’ ability to explain the principles of the accounting rules contained in an
International Accounting Standard – IAS 38 Intangible Assets – and how the requirements of
this Standard should be applied to various items in an entity’s financial statements. Tests
learning outcome D (v).


Suggested Approach
Explain the six IAS 38 criteria for recognising intangible assets.
Apply the criteria to the information given and explain how the development costs should be
treated.


Marking Guide

Marks

Explanation of IAS 38 criteria 3
Explanation of treatment of development costs 2


Examiner’s Comments
Most candidates were able to score good marks on this question. Many had learnt a
mnemonic to aid their recall of the six criteria.

Common Errors
Using single word bullet points and failing to give sufficient detail to earn full marks.
In part (ii) failing to explain why the development costs should be treated the way
recommended. To get full marks the reasons for the treatment have to be given.


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Question Two

(e)

(a) Calculate the total finance cost over the life of the preference shares.
(2 marks)

(b) Calculate the annual charge to the income statement for finance expense, as required
by IAS 39 Financial Instruments: Recognition and Measurement, for each of the five
years 2006 to 2010. Assume the constant annual rate of interest as 10%.
(3 marks)

(Total for sub-question (e) = 5 marks)


Rationale

Tests candidates’ ability to calculate the annual charge and the total finance cost over the life
of preference shares issued by an entity, per the accounting rules contained in an
International Accounting Standard – IAS 39 Financial Instruments: Recognition and
Measurement. Tests learning outcomes C (iv).


Suggested Approach

Calculate the total finance cost.
Calculate the annual charge to income statement using the actuarial method with a rate of
10%.


Marking Guide

Marks

Calculation of the total finance cost 2
Calculation of the annual charge to the income statement for finance expense 3


Examiner’s Comments
Few candidates did well on this question.
Most candidates failed to include all three elements of the finance cost in the total cost.
Some candidates used the straight line or sum of digits method to allocate finance cost
instead of actuarial method. The actuarial method was clearly required as the discount rate of
10% was given.

Common Errors
Not including all three elements in total finance cost.
Including annual interest for one year instead of 5 years.
Using the sum of digits or straight line method to calculate the annual finance charge.
Starting the actuarial calculation with the nominal value rather than the net amount received.
Deducting the dividend paid before adding on the finance cost for the year.

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Question Two

(f)


Prepare CE’s Income Statement for the year ended 31 March 2006 down to the line “profit
before tax”.
(Total for sub-question (f) = 5 marks)

Rationale

Tests candidates’ ability to prepare, in part, the income statement in a form suitable for
publication, with appropriate workings, for a given entity from its trial balance. Tests learning
outcome C (i).


Suggested Approach
Prepare workings to calculate depreciation, stock adjustment and cost of sales.
Prepare the income statement using standard IAS 1 format.


Marking Guide

Marks

Preparation of Income statement 2.5
Calculation of cost of sales, including depreciation and stock
adjustment
2.5


Examiner’s Comments
Candidates scored high marks on this question. This question was the most popular part of
question 2 and was generally the best answer.

Common Errors
The most common error, causing many not to achieve full marks, was to incorrectly adjust for
the change in stock value.
The provision for compensation was ignored by some candidates, the wording of the question
was intended to indicate a provision was required.

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SECTION C


Question Three

Prepare CJ’s Cash-flow statement for the year ended 31 March 2006, in accordance with IAS 7
Cash-flow Statements.
(Total for question 3 = 20 marks)

Rationale

Tests candidates’ ability to prepare a cash-flow statement in a form suitable for publication, and in
accordance with an International Accounting Standard – IAS 7 Cash-flow Statements – for a given
entity. Tests learning outcomes C (i) and (ii).


Suggested Approach

Use workings to calculate the cash flows for purchase of property, plant and equipment, disposal of
plant and investments, interest, income taxes, and issue of shares.
Use the IAS 7 format to prepare a cash flow statement using the indirect method.

Marking Guide

Marks

Cash Flow Statement – Calculation of cash flows from operating activities

8.5
Cash Flow Statement – Calculation of cash flows from investing activities 6
Cash Flow Statement – Calculation of cash flows from financing activities 2.5
Cash and cash equivalents 1
Marks available for format and correct headings 2

Examiner’s Comments
This question was generally very well done, with many candidates obtaining full marks.


Common Errors
• Not using the correct IAS 7 format, for example:
o Starting with operating profit instead of profit before tax
o Putting all items in one long list
o Putting items under the wrong headings
o Attempting to use the direct method
• Mixing up proceeds of sale and gain on disposal
• Calculating trade payables without adjusting for interest balances
• Calculating tax paid without adjusting for deferred tax
• Missing out depreciation and/or revaluation when calculating cash paid for non-current
assets


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Question Four

(a) Calculate the following for CK at 31 March 2006:
• Trade receivables days outstanding;
• Trade payables days outstanding;
• Inventory days outstanding.
(Note: You should base your calculations on a 365 day year)
(3 marks)
(b) Prepare a cash budget for the year to 31 March 2007 based on the budgeted data and
assuming CK implements the efficiency changes recommended by the consultant from
1 April 2006.
(10 marks)
(c) Explain the effect on CK’s cash budget if it decides to lease $1,500,000 of the non-
current assets, instead of purchasing them.
(Note: You are not required to recalculate CK’s cash budget)
(2 marks)

(d) Comment on any possible difficulties that CK may encounter when implementing the
efficiency changes.
(5 marks)
(Note: All workings should be to the nearest $000)
(Total for question 4 = 20 marks)


Rationale

Tests candidates’ ability to calculate various financial indicators for a given entity and then
prepare a cash budget, assuming the implementation of various efficiency proposals
suggested by a consultant that the entity has commissioned. Candidates are also required to
comment on any difficulties the entity might encounter when implementing these efficiency
proposals. Tests learning outcomes D (ii) and (iii).


Suggested Approach
Calculate the days outstanding as required for part (a).
Prepare workings to calculate the adjusted revenue receipts and payments to trade payables.
Prepare a summarised cash budget for the year.
Explain the effect of leasing the non-current assets.
Comment on difficulties that could be encountered implementing the changes.


Marking Guide

Marks

Calculations for part (a) 3
Calculation of revenue receipts 3
Calculation of revised payments to trade payables 5
Preparation of cash budget and other headings 2
Comments on the effect of leasing 2
Comments on any possible difficulties 5
20


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Examiner’s Comments
Part (a) was generally well done as was part (d).
Part (b) was not done at all well, most candidates were not aware of the adjustments required
to the cash flows as a result of the changes in the working capital policies. Adjustments for
changes in inventory levels were nearly always left out.

Common Errors
Revenue receipts:
• Uplifting for the price increase but not reducing for the reduction in demand.
• Not adjusting revenue forecast by the change in receivable balances to calculate
cash flow.
Trade payables:
• Trying to calculate payments based on the original cash figures instead of calculating
cost of sales as a percentage of revenue.
• Not adjusting cost of sales by changes in inventory balances
• Not adjusting cost of sales by changes in trade payable balances
In part (d) not giving sufficient detailed explanation to gain full marks.



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 The Chartered Institute of Management Accountants 2006

Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax
Principles
23 November 2006 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, make
annotations on the question paper. However, you will not be allowed, under
any circumstances, to open the answer book and start writing or use your
calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is, all parts and/or sub-
questions). The requirements for questions in Sections B and C are
highlighted in a dotted box.
Answer the ONE compulsory question in Section A. This contains 18 sub-
questions and is on pages 2 to 7.
Answer the SIX compulsory sub-questions in Section B on pages 8 to 11.
Answer ONE of the two questions in Section C on pages 12 to 15.
Maths Tables and Formulae are provided on pages 17 to 19. These pages
are detachable for ease of reference.
Write your full examination number, paper number and the examination
subject title in the spaces provided on the front of the examination answer
book. Also write your contact ID and name in the space provided in the right
hand margin and seal to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P
7



F
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A
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a
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T
a
x

P
r
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s




TURN OVER
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P7 2 November 2006

SECTION A – 50 MARKS
[the indicative time for answering this Section is 90 minutes]
ANSWER ALL EIGHTEEN SUB-QUESTIONS



Instructions for answering Section A:

The answers to the eighteen sub-questions in Section A should ALL be written in
your answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.5, 1.13, 1.16, 1.17 and 1.18, you should show your workings
as marks are available for the method you use to answer these sub-questions.



Question One

1.1 Corporate residence for tax purposes can be determined in a number of ways, depending
on the country concerned.

Which ONE of the following is NOT normally used to determine corporate residence for tax
purposes?

A The country from which control of the entity is exercised.
B The country of incorporation of the entity.
C The country where management of the entity hold their meetings.
D The country where most of the entity’s products are sold
(2 marks)


1.2 The process leading to the publication of an International Financial Reporting Standard
(IFRS) has a number of stages.

List the THREE stages that normally precede the final issue of an IFRS.
(3 marks)


1.3 The International Accounting Standards Board’s Framework for the Preparation and
Presentation of Financial Statements defines five elements of financial statements. Three
of the elements are asset, liability and income.

List the other TWO elements.
(2 marks)



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November 2006 3 P7

1.4 IAS 14 Segment Reporting requires segment information to be disclosed by publicly
quoted entities.

List THREE criteria identified by IAS 14 to define a reportable business or geographical
segment.

(3 marks)


1.5 DS purchased a machine on 1 October 2002 at a cost of $21,000 with an expected useful
economic life of six years, with no expected residual value. DS depreciates its machines
using the straight line basis.

The machine has been used and depreciated for three years to 30 September 2005.
New technology was invented in December 2005, which enabled a cheaper, more
efficient machine to be produced; this technology makes DS’s type of machine obsolete.
The obsolete machine will generate no further economic benefit or have any residual
value once the new machines become available. However, because of production
delays, the new machines will not be available on the market until 1 October 2007.

Calculate how much depreciation DS should charge to its income statement for the year ended
30 September 2006, as required by IAS 16 Property, Plant and Equipment.

(3 marks)


1.6 In 1776, Adam Smith proposed that an acceptable tax should meet four characteristics.
Three of these characteristics were certainty, convenience and efficiency.

Identify the FOURTH characteristic.

A Neutrality.
B Transparency.
C Equity.
D Simplicity.
(2 marks)


1.7 IAS 38 Intangible Assets sets out six criteria that must be met before an internally
generated intangible asset can be recognised.

List FOUR of IAS 38’s criteria for recognition.
(4 marks)



Section A continues on the next page



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P7 4 November 2006

1.8 DT’s final dividend for the year ended 31 October 2005 of $150,000 was declared on
1 February 2006 and paid in cash on 1 April 2006. The financial statements were
approved on 31 March 2006.

The following statements refer to the treatment of the dividend in the accounts of DT:

(i) The payment clears an accrued liability set up in the balance sheet as at 31 October
2005;
(ii) The dividend is shown as a deduction in the income statement for the year ended
31 October 2006;
(iii) The dividend is shown as an accrued liability in the balance sheet as at 31 October 2006;
(iv) The $150,000 dividend was shown in the notes to the financial statements at 31 October
2005;
(v) The dividend is shown as a deduction in the statement of changes in equity for the year
ended 31 October 2006.

Which of the above statements reflect the correct treatment of the dividend?

A (i) and (ii)
B (i) and (iv)
C (iii) and (v)
D (iv) and (v)
(2 marks)


1.9 DZ recognised a tax liability of $290,000 in its financial statements for the year ended
30 September 2005. This was subsequently agreed with and paid to the tax authorities
as $280,000 on 1 March 2006. The directors of DZ estimate that the tax due on the
profits for the year to 30 September 2006 will be $320,000. DZ has no deferred tax
liability.

What is DZ’s income statement tax charge for the year ended 30 September 2006?

A $310,000
B $320,000
C $330,000
D $600,000
(2 marks)









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November 2006 5 P7

1.10 An entity, DP, in Country A receives a dividend from an entity in Country B. The gross
dividend of $50,000 is subject to a withholding tax of $5,000 and $45,000 is paid to DP.
Country A levies a tax of 12% on overseas dividends.

Country A and Country B have both signed a double taxation treaty based on the OECD
model convention and both apply the credit method when relieving double taxation.

How much tax would DP be expected to pay in Country A on the dividend received from the
entity in Country B?

A $400
B $1,000
C $5,400
D $6,000
(2 marks)


The following data are given for sub-questions 1.11 and 1.12 below

Country D uses a value added tax (VAT) system whereby VAT is charged on all goods and
services at a rate of 15%. Registered VAT entities are allowed to recover input VAT paid on
their purchases.

Country E uses a multi-stage sales tax system, where a cumulative tax is levied every time a
sale is made. The tax rate is 7% and tax paid on purchases is not recoverable.

DA is a manufacturer and sells products to DB, a retailer, for $500 excluding tax. DB sells the
products to customers for a total of $1,000 excluding tax.

DA paid $200 plus VAT/sales tax for the manufacturing cost of its products.


1.11 Assume DA operates in Country D and sells products to DB in the same country.

Calculate the net VAT due to be paid by DA and DB for the products.
(2 marks)


1.12 Assume DA operates in Country E and sells products to DB in the same country.

Calculate the total sales tax due to be paid on all of the sales of the products.

(2 marks)



Section A continues on the next page



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P7 6 November 2006

1.13 The trade receivables ledger account for customer C shows the following entries:

Debits Credits
$ $
Balance brought forward 0
10 June 06 Invoice 201 345
19 June 06 Invoice 225 520
27 June 06 Invoice 241 150
3 July 06 Receipt 1009 – Inv 201 200
10 July 06 Invoice 311 233
4 August 06 Receipt 1122 – Inv 225 520
6 August 06 Invoice 392 197
18 August 06 Invoice 420 231
30 August 06 Receipt 1310 – Inv 311 233
7 September 06 Invoice 556 319
21 September 06 Receipt 1501 – Inv 392 197
30 September 06 Balance 845

Prepare an age analysis showing the outstanding balance on a monthly basis for customer C at
30 September 2006.

(4 marks)


1.14 List the THREE criteria specified in IAS 37 Provisions, Contingent Liabilities and
Contingent Assets that must be satisfied before a provision is recognised in the financial
statements.

(3 marks)


1.15 DR makes a taxable profit of $400,000 and pays an equity dividend of $250,000. Income
tax on DR’s profit is at a rate of 25%.

Equity shareholders pay tax on their dividend income at a rate of 30%.

If DR and its equity shareholders pay a total of $175,000 tax between them, what method of
corporate income tax is being used in that country?

A The classical system
B The imputation system
C The partial imputation system
D The split rate system
(2 marks)





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November 2006 7 P7


1.16 DX had the following balances in its trial balance at 30 September 2006:

Trial balance extract at 30 September 2006
$000 $000
Revenue 2,400
Cost of sales 1,400
Inventories 360
Trade receivables 290
Trade payables 190
Cash and cash equivalents 95

Calculate the length of DX’s working capital cycle at 30 September 2006.

(4 marks)


1.17 DK is considering investing in government bonds. The current price of a $100 bond with
10 years to maturity is $88. The bonds have a coupon rate of 6% and repay face value of
$100 at the end of the 10 years.

Calculate the yield to maturity.

(4 marks)


1.18 DY had a balance outstanding on trade receivables at 30 September 2006 of $68,000.
Forecast credit sales for the next six months are $250,000 and customers are expected to
return goods with a sales value of $2,500.

Based on past experience, within the next six months DY expects to collect $252,100
cash and to write off as bad debts 5% of the balance outstanding at 30 September 2006.

Calculate DY’s forecast trade receivables days outstanding at 31 March 2007.

(4 marks)


(Total for Section A = 50 marks)



End of Section A


Section B starts on the next page


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P7 8 November 2006

SECTION B – 30 MARKS
[the indicative time for answering this Section is 54 minutes]
ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.



Question Two

(a) DV purchased two buildings on 1 September 1996. Building A cost $200,000 and had a
useful economic life of 20 years. Building B cost $120,000 and had a useful economic life
of 15 years. DV’s accounting policies are to revalue buildings every five years and
depreciate them over their useful economic lives on the straight line basis. DV does not
make an annual transfer from revaluation reserve to retained profits for excess
depreciation.

DV received the following valuations from its professionally qualified external valuer:

31 August 2001 Building A $180,000
Building B $75,000

31 August 2006 Building A $100,000
Building B $30,000












Required:

Calculate the gains or impairments arising on the revaluation of Buildings A and B at
31 August 2006 and identify where they should be recognised in the financial
statements of DV.

(Total for sub-question (a) = 5 marks)
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November 2006 9 P7

(b) DC is carrying out three different construction contracts. The balances and results for the
year to 30 September 2006 were as follows:

Contract 1 2 3
Contract end date 30 Sept 2010 31 Dec 2007 30 Sept 2007
$m $m $m
Profit/(loss) recognised for year 2 2⋅3 (0⋅6)
Expected total profit/(loss) on contract 12 5 (3)

DC’s management have included $3⋅7m profit in the income statement for the year ended
30 September 2006.

No allowance has been made in the income statement for the future loss expected to
arise on contract 3, as management consider the loss should be offset against the
expected profits on the other two contracts.

EA & Co are DC’s external auditors. EA & Co consider that the profit in relation to long
term contracts for the year ended 30 September 2006 should be $1⋅3m, according to
IAS 11 Construction Contracts. Assume that EA & Co have been unable to persuade
DC’s management to change their treatment of the long term contract profit/loss.


















Section B continues on the next page



TURN OVER
Required:

(i) Explain the objective of an external audit.

(ii) Identify, with reasons, the type of audit report that would be appropriate for
EA & Co to use for DC’s financial statements for the year ended
30 September 2006. Briefly explain what information should be included in
the audit report in relation to the contracts.

Your answer should refer to appropriate International Standards on Auditing (ISA).
(Total for sub-question (b) = 5 marks)
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P7 10 November 2006

(c) You are in charge of the preparation of the financial statements for DF. You are nearing
completion of the preparation of the accounts for the year ended 30 September 2006 and
two items have come to your attention.

1. Shortly after a senior employee left DF in April 2006, a number of accounting
discrepancies were discovered. With further investigation, it became clear that
fraudulent activity had been going on. DF has calculated that, because of the
fraud, the profit for the year ended 30 September 2005 had been overstated by
$45,000.

2. On 1 September 2006, DF received an order from a new customer enclosing full
payment for the goods ordered; the order value was $90,000. DF scheduled the
manufacture of the goods to commence on 28 November 2006. The cost of
manufacture was expected to be $70,000. DF’s management want to recognise
the $20,000 profit in the income statement for the year ended 30 September 2006.
It has been suggested that the $90,000 should be recognised as revenue and a
provision of $70,000 created for the cost of manufacture.

DF’s income statement for the year ended 30 September 2005 showed a profit of
$600,000. The draft income statement for the year ended 30 September 2006 showed a
profit of $700,000. The 30 September 2005 accounts were approved by the directors on
1 March 2006.











(d) DG purchased its only non-current tangible asset on 1 October 2002. The asset cost
$200,000, all of which qualified for tax depreciation. DG’s accounting depreciation policy
is to depreciate the asset over its useful economic life of five years, assuming no residual
value, charging a full year’s depreciation in the year of acquisition and no depreciation in
the year of disposal.

The asset qualified for tax depreciation at a rate of 30% per year on the reducing balance
method. DG sold the asset on 30 September 2006 for $60,000.

The rate of income tax to apply to DG’s profit is 20%. DG’s accounting period is
1 October to 30 September.















Required:

Explain how the events described above should be reported in the financial
statements of DF for the years ended 30 September 2005 and 2006.

(Total for sub-question (c) = 5 marks)
Required:

(i) Calculate DG’s deferred tax balance at 30 September 2005.
(ii) Calculate DG’s accounting profit/loss that will be recognised in its income
statement on the disposal of the asset, in accordance with IAS 16 Property,
Plant and Equipment.
(iii) Calculate DG’s tax balancing allowance/charge arising on the disposal of the
asset.
(Total for sub-question (d) = 5 marks)
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November 2006 11 P7

(e) DH raised cash through an equity share issue to pay for a new factory it planned to
construct. However, the factory contract has been delayed and payments are not
expected to be required for three or four months. DH is going to invest its surplus funds
until they are required.

One of the directors of DH has identified three possible investment opportunities:

(i) Treasury bills issued by the central bank of DH’s country. They could be
purchased on 1 December 2006 for a period of 91 days. The likely purchase price
is $990 per $1,000.
(ii) Equities quoted on DH’s local stock exchange. The stock exchange has had a
good record in recent months with the equity index increasing in value for 14
consecutive months. The director recommends that DH invests in three large multi-
national entities each paying an annual dividend that provides an annual yield of
10% on the current share price.
(iii) DH’s bank would pay 3⋅5% per year on money placed in a deposit account with 30
day’s notice.











(f) DJ maintains a minimum cash holding of $1,000. The standard deviation of its daily cash
flows has been measured at $300 (variance is $90,000). DJ’s annual cash outgoings are
$420,000 spread evenly over the year. The transaction cost of each sale or purchase of
treasury bills is $25. The daily interest rate is 0⋅02% (7⋅3% per year).















Total for Section B = 30 marks


End of Section B

Section C starts on the next page

TURN OVER
Required:

As Assistant Management Accountant, you have been asked to prepare notes on the
risk and effective yield of each of the above investment opportunities for use by the
Management Accountant at the next board meeting.

(Total for sub-question (e) = 5 marks)
Required:

(i) Using the Baumol cash management model, calculate the optimum amount of
treasury bills to be sold each time cash is required.

(ii) Using the Miller-Orr cash management model, calculate the optimum amount of
securities to sell when cash holding reaches the lower limit.

(Total for sub-question (f) = 5 marks)
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P7 12 November 2006

SECTION C – 20 MARKS
[the indicative time for answering this Section is 36 minutes]
ANSWER ONE QUESTION ONLY



Question Three

The trial balance for DM, a trading entity, at 30 September 2006 was as follows:

$000 $000
6% Loan (repayable 2025) 140
Administrative expenses 91
Cash and cash equivalents 43
Distribution costs 46
Dividend paid 1 June 2006 25
Inventory at 30 September 2005 84
Inventory purchases 285
Land and buildings at cost 500
Equity shares $1 each, fully paid 300
Plant and equipment at cost 211
Provision for deferred tax at 30 September 2005 40
Provision for depreciation at 30 September 2005 – Buildings 45
Provision for depreciation at 30 September 2005 – Plant and
equipment
80
Retained earnings at 30 September 2005 32
Sales revenue 602
Share premium 50
Trade payables 29
Trade receivables 6
Vehicle lease rental paid 27
1,318 1,318

Additional information:

(i) Inventory at 30 September 2006 was $93,000;
(ii) There were no sales of non-current assets during the year ended 30 September 2006;
(iii) The income tax due for the year ended 30 September 2006 is estimated at $24,000. The
deferred tax provision needs to be increased by $15,000;
(iv) Depreciation is charged on buildings using the straight line method at 3% per annum.
The cost of land included in land and buildings is $200,000. Buildings depreciation is
treated as an administration expense;
(v) Plant and equipment is depreciated using the reducing balance method at 20%. Plant
and equipment depreciation is regarded as a cost of sales.
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November 2006 13 P7

(vi) Vehicles are depreciated using the straight line method at 20% per year. Vehicles
depreciation is regarded as a distribution cost;
(vii) During the year DM issued 100,000 new $1 equity shares at a premium of 50%. The
proceeds were all received before 30 September 2006 and are included in the trial
balance figures;
(viii) DM entered into a non-cancellable five-year finance lease on 1 October 2005 to acquire a
number of vehicles for use in the entity. The vehicles had a fair value of $100,000 and
the annual lease payment is $27,000 per year in arrears. The finance charge is to be
allocated using the actuarial method. The interest rate implicit in the lease is 10⋅92%. All
the vehicles have economic useful lives of five years. The only entry in the accounting
system is the lease payments made to date of $27,000;
(ix) The 6% loan was taken out on 1 December 2005.


Required:

Prepare the income statement and a statement of changes in equity for the year
ended 30 September 2006 and a balance sheet at that date, in a form suitable for
presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards.

(Notes to the financial statements are NOT required, but all workings must be clearly
shown and should be to the nearest $000. Do not prepare a statement of
accounting policies.)

(Total for Question Three = 20 marks)







Section C continues on the next page






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P7 14 November 2006

Question Four

DN’s draft financial statements for the year ended 31 October 2006 are as follows:

DN Income Statement for the Year to 31 October 2006
$000 $000
Revenue 2,600
Cost of sales
Parts and sub-assemblies (500)
Labour (400)
Overheads (400) (1,300)
Gross profit 1,300
Administrative expenses (300)
Distribution costs (100) (400)
Profit from operations 900
Finance cost (110)
Profit before tax 790
Income tax expense (140)
Profit for the period 650

DN Balance Sheet at 31 October 2006 31 October 2005
$000 $000 $000 $000
ASSETS
Non-current assets
Property, plant and equipment 4,942 4,205

Current assets
Inventories 190 140
Trade receivables 340 230
Cash and cash equivalents 0 530 45 415
Total assets 5,472 4,620

EQUITY AND LIABILITIES

Equity
Equity shares of $0⋅50 each 1,300 1,000
Share premium 300 0
Revaluation reserve 400 0
Retained earnings 1,660 1,410
Total equity 3,660 2,410

Non-current liabilities
Bank loans (various rates) 1,500 2,000
5,160 4,410
Current liabilities 312 210
Total equity and liabilities 5,472 4,620

Additional information:

(i) Property, plant and equipment comprises:

2006 2005
$000 $000
Property 3,100 2,800
Plant and equipment 1,842 1,405

(ii) Plant and equipment sold during the year for $15,000 had originally cost $60,000 five
years ago. The plant and equipment were depreciated on the straight line basis over six
years. Any gain/loss on disposal has been included in overheads;

(iii) Properties were revalued on 31 October 2006;
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November 2006 15 P7


(iv) DN made an equity share issue on 31 October 2006. The new shares do not rank for
dividend until the following accounting period;

(v) DN’s funding includes two bank loans:
• $1,500,000 6% loan commenced 30 June 2006, due for repayment 29 June 2009;
• $2,000,000 7% loan repaid early on 1 July 2006;

(vi) Current liabilities:
2006 2005
$000 $000
Trade payables 105 85
Interest payable 55 75
Tax payable 70 50
Bank overdraft 82 0
Total current liabilities 312 210

(vii) A dividend of $0⋅20 per share was paid on 1 May 2006;

(viii) Overheads include the annual depreciation charge of $100,000 for property and $230,000
for plant and equipment.



Required:

Prepare DN’s cash flow statement for the year ended 31 October 2006, using the
indirect method, in accordance with IAS 7 Cash Flow Statements.

(Total for Question Four = 20 marks)




(Total for Section C = 20 marks)





End of Question Paper




Maths Tables and Formulae are on pages 17 to 19





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P7 16 November 2006












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November 2006 17 P7

MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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P7 18 November 2006

Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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November 2006 19 P7

FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


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P7 24 November 2006

Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
November 2006
Thursday Afternoon Session
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November 2006 Exam

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Examiner’s General Comments
The overall result was generally very pleasing with a good standard of answer being produced by many
candidates. The overall average mark and pass rate were slightly down from May 2006 but were still very
good. There was evidence of a number of well prepared candidates with a wide range of knowledge, able to
tackle most of the sub-questions in questions One and Two and prepare good answers to one of the optional
questions. There were however a number of candidates that were obviously question spotting and had not
prepared for some of the topics on the paper, for example questions Two (b) and Two (e). Question spotting
is not advised in this paper as most learning outcomes are covered in each examination.

Question One was generally well done, but no one scored full marks. Most candidates provided workings for
the three and four mark questions, but a number did not. If workings are not given no marks can be awarded
for wrong answers using the correct principle.
• Question 1.2 caused some problems where candidates could not identify the stages of developing a
standard.
• Question 1.4 was frequently answered in terms of the characteristics of a segment that might cause it to
be shown separately rather than the criteria set out by IAS 14.
• Question 1.5 candidates were generally able to calculate the balance on the asset account but few gave
the correct answer allocating the balance over two years.
• Very few gave the correct answer to the treatment of dividends in question 1.8, or the calculation of the
income statement charge in question 1.9.
• Surprisingly question 1.13 caused problems for a large number of candidates who clearly did not know
what a receivables age analysis was. Many candidates spent quite a lot of time on workings but did not
arrive at a suitable answer.
• A number of candidates used the same template for their answers to questions 1.7 and 1.14; this often
failed to give many marks for either question.
• The yield to maturity in question 1.17 still causes problems for a considerable number of candidates, but
there were more correct answers than in previous diets.
• In question 1.18 almost all candidates failed to realise that the figures given were for half a year,
therefore when calculating the days outstanding either the sales figure needs to be doubled or the
number of days halved.

Question Two (a) was generally not as well done as the other questions on the paper. Some candidates
were obviously ill prepared for a question on auditing or on risk and yield of possible investments.
Question Two (b) – candidates failed to state that a Qualified opinion should result, and failed to say what
information should be included in the report.
Question Two (c) – candidates failed to realise that this was not a situation involving Events after the
Balance Sheet date, but was a Prior Period Mis-statement.
Question Two (d) – candidates often calculated accounting depreciation and tax depreciation in the year of
disposal of the asset. Candidates failed to realise that there would be only one tax implication in the year,
that of the balancing allowance.
Question Two (e) – candidates often failed to mention that the treasury bills could be traded in before the 91
days; they also failed to appreciate that the dividends on the equities might not be realised if the shares were
sold before the dividend was declared. In addition, they also failed to realise that the interest on the bank
deposit would accrue irrespective of the timescale of the investment. They also failed to consider that if the
30-days notice was not given, they would lose a month’s interest.

Question Three required the preparation of an income statement, a statement of changes in equity and a
balance sheet with some adjustments. This question was expected by candidates and most of those
attempting this question were well prepared, resulting in good marks being achieved.

Question Four required the preparation of a cash flow statement in accordance with IAS 7. This question
was less popular than question 3 but was very well done by many of those attempting this question with
some excellent answers and a number of candidates scoring full marks.

The following guide provides guidance to candidates preparing for future examinations and has been
prepared with that in mind. It therefore may give the impression that there were few good marks and few
passes as all the main errors have been listed for each question. It must be remembered though that not all
candidates made the errors listed and that overall there was a good result for this paper.
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SECTION A
Please note that in this PEG the mark available has been omitted from the end of each question in this
section


Question 1.1

Corporate residence for tax purposes can be determined in a number of ways, depending on
the country concerned.

Which ONE of the following is NOT normally used to determine corporate residence for tax
purposes?

A The country from which control of the entity is exercised.
B The country of incorporation of the entity.
C The country where management of the entity hold their meetings.
D The country where most of the entity’s products are sold.
The answer is D



Question 1.2

The process leading to the publication of an International Financial Reporting Standard
(IFRS) has a number of stages.

List the THREE stages that normally precede the final issue of an IFRS.



Answer
Set up advisory committee or group
Discussion document
Exposure draft



Question 1.3

The International Accounting Standards Board’s Framework for the Preparation and
Presentation of Financial Statements defines five elements of financial statements. Three of
the elements are asset, liability and income.

List the other TWO elements.



Answer
Equity and Expenses

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Question 1.4

IAS 14 Segment Reporting requires segment information to be disclosed by publicly quoted
entities.

List THREE criteria identified by IAS 14 to define a reportable business or geographical
segment.



Any Three of the following:

At least 10% of total sales revenue.
At least 10% of profits of all profit-making segments.
At least 10% of losses of all loss-making segments.
At least 10% of total assets.



Question 1.5

DS purchased a machine on 1 October 2002 at a cost of $21,000 with an expected useful
economic life of six years, with no expected residual value. DS depreciates its machines using
the straight line basis.

The machine has been used and depreciated for three years to 30 September 2005. New
technology was invented in December 2005, which enabled a cheaper, more efficient machine
to be produced; this technology makes DS’s type of machine obsolete. The obsolete machine
will generate no further economic benefit or have any residual value once the new machines
become available. However, because of production delays, the new machines will not be
available on the market until 1 October 2007.

Calculate how much depreciation DS should charge to its income statement for the year
ended 30 September 2006, as required by IAS 16 Property, Plant and Equipment.



Answer
Cost $21,000.
Depreciated for 3 out of 6 years.
Net book value $10,500.
IAS 16 requires useful life to be reassessed each year. It will be assessed to two remaining
years.
Depreciation for the year is therefore $5,250.


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Question 1.6

In 1776, Adam Smith proposed that an acceptable tax should meet four characteristics. Three
of these characteristics were certainty, convenience and efficiency.

Identify the FOURTH characteristic.

A Neutrality.
B Transparency.
C Equity.
D Simplicity.
The answer is C



Question 1.7

IAS 38 Intangible Assets sets out six criteria that must be met before an internally generated
intangible asset can be recognised.

List FOUR of IAS 38’s criteria for recognition.



Answer
Any Four of the following:
• Technically feasible to complete the intangible asset.
• Have the intention to complete it and use or sell it.
• Have the ability to use or sell the asset.
• The asset will generate probable future economic benefit.
• The entity has the technical, financial and other resources to complete the
project.
• Expenditure on the development can be measured reliably.


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Question 1.8

DT’s final dividend for the year ended 31 October 2005 of $150,000 was declared on 1
February 2006 and paid in cash on 1 April 2006. The financial statements were approved on
31 March 2006.

The following statements refer to the treatment of the dividend in the accounts of DT:

(i) The payment clears an accrued liability set up in the balance sheet at 31 October 2005;
(ii) The dividend is shown as a deduction in the income statement for the year ended 31
October 2006;
(iii) The dividend is shown as an accrued liability in the balance sheet at 31 October 2006;
(iv) The $150,000 dividend was shown in the notes to the financial statements at 31
October 2005;
(v) The dividend is shown as a deduction in the statement of changes in equity for the year
ended 31 October 2006.

Which of the above statements reflect the correct treatment of the dividend?

A (i) and (ii)
B (i) and (iv)
C (iii) and (v)
D (iv) and (v)
The answer is D



Question 1.9

DZ recognised a tax liability of $290,000 in its financial statements for the year ended
30 September 2005. This was subsequently agreed with and paid to the tax authorities as
$280,000 on 1 March 2006. The directors of DZ estimate that the tax due on the profits for
the year to 30 September 2006 will be $320,000. DZ has no deferred tax liability.

What is DZ’s income statement tax charge for the year ended 30 September 2006?

A $310,000
B $320,000
C $330,000
D $600,000


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The answer is A
DZ income statement tax charge is:
Tax due for the year 320
Over provision previous year (10)
310



Question 1.10

An entity, DP, in Country A receives a dividend from an entity in Country B. The gross
dividend of $50,000 is subject to a withholding tax of $5,000 and $45,000 is paid to DP.
Country A levies a tax of 12% on overseas dividends.

Country A and Country B have both signed a double taxation treaty based on the OECD
model convention and both apply the credit method when relieving double taxation.

How much tax would DP be expected to pay in Country A on the dividend received from the
entity in Country B?

A $400
B $1,000
C $5,400
D $6,000

The answer is B
Country A tax at 12% on $50,000 = $6,000
Country B withholding tax = $5,000
$1,000


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The following data are given for sub-questions 1.11 and 1.12 below

Country D uses a value added tax (VAT) system whereby VAT is charged on all goods and
services at a rate of 15%. Registered VAT entities are allowed to recover input VAT paid on
their purchases.

Country E uses a multi-stage sales tax system, where a cumulative tax is levied every time a
sale is made. The tax rate is 7% and tax paid on purchases is not recoverable.

DA is a manufacturer and sells products to DB, a retailer, for $500 excluding tax. DB sells the
products to customers for a total of $1,000 excluding tax.

DA paid $200 plus VAT/sales tax for the manufacturing cost of its products.



Question 1.11

Assume DA operates in Country D and sells products to DB in the same country.

Calculate the net VAT due to be paid by DA and DB for the products.



Answer
VAT
Transaction Selling price Output tax at 15% Input tax at 15% VAT paid
DA sale to DB 500 75 30 45
DB sale to customers 1,000 150 75 75
Total VAT paid 120



Question 1.12

Assume DA operates in Country E and sells products to DB in the same country.

Calculate the total sales tax due to be paid on all of the sales of the products.



Answer
Sales Tax
Transaction Selling price Tax due
DA sale to DB 500 35
DB sale to customers 1,000 70
Total sales tax due 105

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Question 1.13

The trade receivables ledger account for customer C shows the following entries:

Debits Credits
$ $
Balance brought forward 0
10 June 06 Invoice 201 345
19 June 06 Invoice 225 520
27 June 06 Invoice 241 150
3 July 06 Receipt 1009 – Inv 201 200
10 July 06 Invoice 311 233
4 August 06 Receipt 1122 – Inv 225 520
6 August 06 Invoice 392 197
18 August 06 Invoice 420 231
30 August 06 Receipt 1310 – Inv 311 233
7 September 06 Invoice 556 319
21 September 06 Receipt 1501 – Inv 392 197
30 September 06 Balance 845

Prepare an age analysis showing the outstanding balance on a monthly basis for customer C
at 30 September 2006.



Answer
Customer Total due Current <30 days >1 & <2 months >2 & <3 months >3 months
C 845 319 231 0 295



Question 1.14

List the THREE criteria specified in IAS 37 Provisions, Contingent Liabilities and Contingent
Assets that must be satisfied before a provision is recognised in the financial statements.



Answer
• An entity has a present obligation as a result of a past event.
• It is probable that an outflow of resources will be required to settle the obligation.
• A reliable estimate can be made of the amount of the obligation.

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Question 1.15

DR makes a taxable profit of $400,000 and pays an equity dividend of $250,000. Income tax
on DR’s profit is at a rate of 25%.

Equity shareholders pay tax on their dividend income at a rate of 30%.

If DR and its equity shareholders pay a total of $175,000 tax between them, what method of
corporate income tax is being used in that country?

A The classical system
B The imputation system
C The partial imputation system
D The split rate system
The answer is A



Question 1.16

DX had the following balances in its trial balance at 30 September 2006:

Trial balance extract at 30 September 2006
$000 $000
Revenue 2,400
Cost of sales 1,400
Inventories 360
Trade receivables 290
Trade payables 190
Cash and cash equivalents 95

Calculate the length of DX’s working capital cycle at 30 September 2006.



Answer
Inventory 360/1,400 x 365 = 93⋅86
Trade receivables 290/2,400 x 365 = 44⋅10
Trade payables 190/1,400 x 365 = (49⋅54)
Working capital cycle 88⋅42

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Question 1.17

DK is considering investing in government bonds. The current price of a $100 bond with 10
years to maturity is $88. The bonds have a coupon rate of 6% and repay face value of $100
at the end of the 10 years.

Calculate the yield to maturity.



Answer
Assume t = 10 and r = 7 from tables:
(6 x 7⋅024) + (100 x 0⋅508) = 42⋅14 + 50⋅8 = 92⋅94

Assume t = 10 and r = 10:
(6 x 6⋅145) + (100 x 0⋅386) = 36⋅87 + 38⋅6 = 75⋅47

=
)
`
¹
¹
´
¦
(
¸
(

¸



+ =
¦
)
¦
`
¹
¦
¹
¦
´
¦
(
¸
(

¸

|
.
|

\
|
⋅ − ⋅
⋅ − ⋅
+ 3 x
47 17
94 4
7 3 x
47 75 94 92
0 88 94 92
7

7 + (0⋅28 x 3) = 7⋅84%



Question 1.18

DY had a balance outstanding on trade receivables at 30 September 2006 of $68,000.
Forecast credit sales for the next six months are $250,000 and customers are expected to
return goods with a sales value of $2,500.

Based on past experience, within the next six months DY expects to collect $252,100 cash
and to write off as bad debts 5% of the balance outstanding at 30 September 2006.

Calculate DY’s forecast trade receivables days outstanding at 31 March 2007.



Answer


Trade receivables forecast:
$
Balance brought forward 68,000
Forecast sales 250,000
Less: Returns (2,500)
Less: Bad debt (3,400)
Less: Collections (252,100)
Balance outstanding c/fwd 60,000

Forecast trade receivables days = days 2 44 5 182 x
2,500 - 250,000
60,000
⋅ = ⋅
Or days 2 44 365 x
5,000 - 500,000
60,000
⋅ =

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SECTION B


Question Two

(a)


Calculate the gains or impairments arising on the revaluation of Buildings A and B at 31 August
2006 and identify where they should be recognised in the financial statements of DV.
(Total for sub-question (a) = 5 marks)


Rationale

To test candidates’ knowledge and application of IAS 16 requirements in relation to property, plant
and equipment. Tests learning outcome C(iii)


Suggested Approach

Calculate the net book values for each building at 31 August 2001 and the resulting gains/losses
on revaluation at that date. Then recalculate depreciation and calculate the net book values at 31
Aug 2006 and the additional gains/losses.



Marking Guide

Marks

Calculate the gains or impairments arising Building A 2
1
/
2

Calculate the gains or impairments arising Building B 2
1
/
2

Total 5


Examiner’s Comments

This question was well done by well prepared candidates with many gaining full marks. However
there were a number of candidates that clearly did not understand the concept of revaluing assets
and who made no adjustment for the 2001 valuation and did not recalculate depreciation.

Common Errors
The most common error made by those who understood the concept of revaluing non-current
assets was to miscount the number of years’ depreciation, either using 4 or 6 years before the first
revaluation in 2001. Although this gives the wrong net book value it should be corrected after
revaluing the assets. However most compounded their error by dividing the revalued amount by
the incorrect remaining years.
Some candidates using the correct number of years prior to 2001 calculated building B
depreciation based on 15 years instead of 10.


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Question Two

(b)


(i) Explain the objective of an external audit.

(ii) Identify, with reasons, the type of audit report that would be appropriate for EA & Co to
use for DC’s financial statements for the year ended 30 September 2006. Briefly explain
what information should be included in the audit report in relation to the contracts.

Your answer should refer to appropriate International Standards on Auditing (ISA).
(Total for sub-question (b) = 5 marks)


Rationale

To test the candidates’ understanding of the objective of an audit and then to test the candidates’
application of knowledge of the type of audit report required. Tests learning outcome B (vii)


Suggested Approach

Explain the objective of an audit.
Consider the circumstances given and decide the type of audit report required. Explain the
reasons for that type of report. Explain the correct treatment of the contracts and compare with the
actual treatment. Explain the information required to be included.


Marking Guide

Marks

Definition of the objective of an audit 2
Identification of, with reference to applicable Standards, audit report required 3
Total 5


Examiner’s Comments

I was very surprised at the low quality of answers to this question. Many candidates clearly did not
understand the objective of an audit and a large proportion of answers were unable to correctly
identify the type of report or the information required. Only a few candidates gained full marks on
this question.

Common Errors
The most common problem among candidates who had an idea of what was required was the
lack of detail in the answer. For example saying that there is a need to ensure that accounts show
a true and fair view but not mentioning any thing about the relevant accounting regulations or the
fact that the auditor only expresses an opinion.
A number of candidates clearly did not understand the objective of an audit and gave answers
such as the auditor prepares the accounts and does the tax computation.
In part (ii) many candidates said that the audit report should be an unqualified report, in most
cases this seemed to be a mis-understanding of the two terms qualified and unqualified.
Many candidates said the qualified report should be an adverse one and some said that it should
be a disclaimer.
Many candidates did not give enough detail on why there was a disagreement over the treatment
of the contracts.


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Question Two

(c)


Explain how the events described above should be reported in the financial statements of DF
for the years ended 30 September 2005 and 2006.
(Total for sub-question (c) = 5 marks)


Rationale

To test candidates ability to identify, from a given scenario, the appropriate accounting
standard and their ability to explain how the relevant accounting standard would be applied.
Tests learning outcome C (iii)


Suggested Approach

Analyse event 1 and decide the appropriate accounting standard. Describe how the event
would be dealt with using the appropriate accounting standard.

Analyse event 2 and decide the appropriate accounting standard. Describe how the event
would be dealt with using the appropriate accounting standard.


Marking Guide

Marks

Identifying the fraudulent activity as a prior period adjustment and explaining the
adjustments required applying IAS 8

Identifying item 2 as a revenue recognition problem. Explaining IAS 18 revenue
recognition requirements and explaining how they would be applied

Total 5


Examiner’s Comments

A large proportion of candidates seemed to have problems with the dates in this question.
They identified the problem as being an adjusting event after the balance sheet date and said
that the accounts for 2005 should be changed, despite the fact that the fraud was discovered
more than 6 months after the year end and the accounts had been signed off by the directors
two months earlier.
The second situation caused a significant number of candidates to agree with the directors’
treatment. Candidates agreeing with recognition and the creation of a provision identified the
relevant accounting standard as IAS 37 provisions, contingent liabilities and contingent
assets rather than a question of revenue recognition.

Common Errors
Wanting to change the 2005 accounts instead of treating as a prior period adjustment
Not explaining in sufficient detail how to adjust for the prior period error.
Saying that the 2006 income statement should be adjusted instead of the retained profits
brought forward.
Item 2 concentrating on IAS 37 and ignoring IAS 18 provisions
Saying that the revenue and expenditure can be recognised but the profit cannot be!


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Question Two

(d)


(i) Calculate DG’s deferred tax balance at 30 September 2005.
(ii) Calculate DG’s accounting profit/loss that will be recognised in its income statement on
the disposal of the asset, in accordance with IAS 16 Property, Plant and Equipment.
(iii) Calculate DG’s tax balancing allowance/charge arising on the disposal of the asset.
(Total for sub-question (d) = 5 marks)


Rationale

To test candidates’ understanding of deferred tax, its calculation and effect on the income
statement. Tests learning outcome A (viii)


Suggested Approach

Calculate accounting depreciation for the three years and the accounting written down value.
Calculate the tax depreciation for the same period and the tax written down value. Deduct the
tax WDV from the accounting WDV to calculate temporary difference then multiply by tax rate
to give the deferred tax.
To calculate the accounting loss deduct the cash received from the accounting WDV.
To calculate the balancing allowance, deduct the cash received from the tax WDV.


Marking Guide

Marks

Calculation of accounting depreciation 1
Calculation of tax depreciation 1
Calculation of deferred tax provision 1
Calculation of accounting loss on disposal 1
Calculation of tax balancing allowance 1
Total 5


Examiner’s Comments

Part (i) was fairly well done; most candidates seem to be getting the idea of temporary
differences and deferred tax balances. Some still had a problem knowing what to do with the
written down values once calculated.
Candidates seemed to have a problem with dates on this question as well. The asset was
purchased on 1 October 2002 and the question asked for the balance at 30 September 2005.
This is a three year period, but a large proportion of candidates calculated four years and
some even five years before working out the temporary difference. Other candidates
calculated a different number of years for the accounting depreciation and the tax
depreciation.

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2006 Exam

The Chartered Institute of Management Accountants Page 15

Common Errors
Using the wrong number of years to calculate written down values.
Applying the wrong rate of tax to the temporary difference. Some candidates used the 30%
(tax writing down allowance) instead of 20%.
Having correctly worked out written down values being unable to calculate accounting loss or
the tax balancing charge. These two sections were often left out.


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2006 Exam

The Chartered Institute of Management Accountants Page 16



Question Two

(e)


As Assistant Management Accountant, you have been asked to prepare notes on the risk and
effective yield of each of the above investment opportunities for use by the Management
Accountant at the next board meeting.
(Total for sub-question (e) = 5 marks)


Rationale

To test the candidates understanding of risk and return on three alternatives for investment.
Tests learning outcome D (viii)


Suggested Approach

Calculate yield of each investment type on a consistent basis, either for three months or
annual. Prepare notes on the risk associated with each investment.


Marking Guide

Marks

Return on investments – calculations of annual yields 2
Risk of investments 3
Total 5


Examiner’s Comments

The number of candidates who completely ignored this question was quite surprising. There
were some easy marks to be had on this question, for example general knowledge comments
on the risk of investing in the stock market.

Common Errors
Calculating returns on an inconsistent basis then incorrectly comparing them, for example
calculating the three month rate for treasury bills and comparing with the annual bank interest
rate.
Saying that an investment was high or low risk but not explaining why.
Failing to mention that the treasury bills could be traded in before the 91 days
Assuming that as the stock market had increased for 14 consecutive months it would
continue to do so and was therefore a safe investment.
Failing to appreciate that the dividends on the equities might not be realised if the shares
were sold before the dividend was declared.
Failing to realise that the interest on the bank deposit would accrue irrespective of the
timescale of the investment.
Failing to mention that if the 30-days notice was not given, they would lose a month’s interest.


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2006 Exam

The Chartered Institute of Management Accountants Page 17



Question Two

(f)


(i) Using the Baumol cash management model, calculate the optimum amount of treasury
bills to be sold each time cash is required.

(ii) Using the Miller-Orr cash management model, calculate the optimum amount of securities
to sell when cash holding reaches the lower limit.
(Total for sub-question (f) = 5 marks)

Rationale

To test candidates’ understanding of the two cash management models.
Tests learning outcome D (iv)


Suggested Approach

Calculate the optimum amount to be sold using the Baumol model.
Calculate the spread using the Miller-Orr model and use this to calculate the amount to sell.


Marking Guide

Marks

Calculation of Baumol Model 2
Calculation of Miller-Orr Model 3
Total 5


Examiner’s Comments

The formulae for both models are given in the examination paper but many candidates found
difficulty substituting the information in the question into the formulae. The interest rate in
each formula caused the most problems with candidates unsure whether to use the daily or
annual rate. Some candidates commented that they were unable to do the calculation as their
calculator did not have the correct functions. The calculations required a square root and
raising to a power, both of which are included in examples in all the CIMA texts and have
both appeared regularly in past papers. Candidates should be properly prepared for these
simple mathematical calculations. Candidates need to ensure that they have a calculator
which is capable of providing these functions.

Common Errors
Using the daily rate instead of the annual rate in the Baumol model.
Using the annual rate instead of the daily rate in the Miller-Orr model.
Incorrectly converting the percentages to numbers for the formula, for example 0.02% should
be 0.0002 but many candidates used a different number of decimal places, usually fewer than
required. The annual rate was also misinterpreted, although less frequently,


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2006 Exam

The Chartered Institute of Management Accountants Page 18

SECTION C


Question Three


Prepare the income statement and a statement of changes in equity for the year ended 30
September 2006 and a balance sheet at that date, in a form suitable for presentation to the
shareholders and in accordance with the requirements of International Financial Reporting
Standards.
(Notes to the financial statements are NOT required, but all workings must be clearly shown and
should be to the nearest $000. Do not prepare a statement of accounting policies.)

(Total for Question Three = 20 marks)


Rationale

Tests candidates’ ability to prepare an income statement, balance sheet and a statement of
changes in equity in a form suitable for publication, and in accordance with International Financial
Reporting Standards, based upon the trial balance of a given entity. Tests learning outcomes A
(viii) and C (i).


Suggested Approach

Read the question carefully and then using the additional information provided and the trial balance
figures, prepare workings to:
1. calculate depreciation of buildings, equipment and fixtures and vehicles for the year and
cumulative
2. calculate the cost of sales, administration and distribution
3. calculate tax charge and outstanding balances.
4. calculate the finance charge and outstanding balances of the finance lease liability.
Prepare the income statement using IAS 1 format.
Prepare the statement of changes in equity
Prepare the balance sheet using IAS 1 format


Marking Guide

Marks

Preparing the income statement using correct format 6
Preparing the balance sheet using correct format 9.5
Preparing the statement of changes in equity using correct
format
2
Marks available for format and correct headings 2.5
Total 20


Examiner’s Comments

This question was generally very well done by candidates, some obtaining near full marks. Very
few gained full marks as they were unable to correctly deal with the finance lease liability. Many
candidates showed the annual payment as an expense in the income statement.
Deferred tax and current tax were often wrongly calculated, and both included in either current
liabilities or non-current liabilities. Deferred tax is non-current while current tax is a current liability.
The statement of changes in equity was not done very well by most candidates. Several candidates
had problems identifying the correct balances brought forward, quite a few candidates showed the
equity shares issued during the year as part of the balance brought forward!

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2006 Exam

The Chartered Institute of Management Accountants Page 19


Common Errors
Incorrectly calculating depreciation, particularly equipment and fixtures which required the reducing
balance method to be used.
Not capitalising and depreciating the vehicle, charging the annual payment to income statement
instead of the finance charge.
Not including the increase in deferred tax in the income statement tax charge.
Showing deferred tax under current liabilities
Not including accrued items (tax and interest) in current liabilities,
Not showing the finance lease liability split between current and non-current liabilities on the
balance sheet.
Including the new share issue in the brought forward figures for shares and or share premium.
Showing dividends paid as an expense in the income statement and/or as a current liability in the
balance sheet.


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2006 Exam

The Chartered Institute of Management Accountants Page 20



Question Four

Prepare DN’s cash flow statement for the year ended 31 October 2006, using the indirect
method, in accordance with IAS 7 Cash Flow Statements.

(Total for Question Four = 20 marks)


Rationale

To test candidates’ ability to prepare a cash flow statement in accordance with IAS 7. Tests
learning outcome C (ii)


Suggested Approach

Use workings to calculate the cash flows for accrued expenditure, interest, income taxes,
purchase of property, plant and equipment and issue of shares.
Use the IAS 7 format to prepare a cash flow statement using the indirect method.


Marking Guide

Marks

Cash Flow Statement – Calculation of cash flows from operating activities

7
Cash Flow Statement – Calculation of cash flows from investing activities 6.5
Cash Flow Statement – Calculation of cash flows from financing activities 4
Format and correct headings of cash flow statement 2
Cash and cash equivalents 0.5
Total 20


Examiner’s Comments

This question was less popular than question 3. There were some excellent answers to this
question, with a number of candidates gaining full marks.

Common Errors
Not using the correct IAS 7 format, for example:
• Starting with operating profit instead of profit before tax
• Putting all items in one long list
• Putting items under the wrong headings
• Adding instead of subtracting the gain on disposal.
• Mixing up proceeds of sale and gain on disposal
• When calculating the purchase of property plant and equipment some candidates
missed out one or more items. Revaluation during the year was the most frequently
missed item.
• The disposal was often included in the PPE calculation as the cost of 60,000 instead
of the net of depreciation figure of 10,000.
• Proceeds for issue of shares only included the change in share capital.
• Dividends paid were incorrectly calculated using $1 shares instead of $0.50.


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 The Chartered Institute of Management Accountants 2007


Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax
Principles
24 May 2007 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to open the answer book and start writing or use
your calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions). The requirements for the questions in Sections B and C are
highlighted in a dotted box.
ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be submitted for marking.
Answer the ONE compulsory question in Section A. This has 15 sub-
questions on pages 2 to 7.
Answer the SIX compulsory sub-questions in Section B on pages 8 to 11.
Answer the ONE compulsory question in Section C on pages 12 to 13.
Maths Tables and Formulae are provided on pages 15 to 17. These pages
are detachable for ease of reference.
The list of verbs as published in the syllabus is given for reference on the
inside back cover of this question paper.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P
7



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TURN OVER
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P7 2 May 2007

SECTION A – 40 MARKS
[the indicative time for answering this Section is 72 minutes]
ANSWER ALL FIFTEEN SUB-QUESTIONS



Instructions for answering Section A:

The answers to the fifteen sub-questions in Section A must ALL be written in your
answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.3, 1.7, 1.13 and 1.15 you should show your workings as marks
are available for the method you use to answer these sub-questions.



Question One

1.1 DH has the following two legal claims outstanding:

• A legal action against DH claiming compensation of $700,000, filed in February
2007. DH has been advised that it is probable that the liability will materialise.

• A legal action taken by DH against another entity, claiming damages of $300,000,
started in March 2004. DH has been advised that it is probable that it will win the
case.

How should DH report these legal actions in its financial statements for the year ended
30 April 2007?

Legal action against DH Legal action taken by DH
A Disclose by a note to the accounts No disclosure
B Make a provision No disclosure
C Make a provision Disclose as a note
D Make a provision Accrue the income
(2 marks)


1.2 Country X uses a Pay-As-You-Earn (PAYE) system for collecting taxes from employees.
Each employer is provided with information about each employee’s tax position and
tables showing the amount of tax to deduct each period. EmpIoyers are required to
deduct tax from employees and pay it to the revenue authorities on a monthly basis.

From the perspective of the government, list THREE advantages of the PAYE system.
(3 marks)


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May 2007 3 P7

1.3 DS uses the Economic Order Quantity (EOQ) model. Demand for DS’s product is 95,000
units per annum. Demand is evenly distributed throughout the year. The cost of placing
an order is $15 and the cost of holding a unit of inventory for a year is $3.

How many orders should DS make in a year?
(3 marks)


1.4 According to the International Accounting Standards Board’s Framework for the
Preparation and Presentation of Financial Statements, what is the objective of financial
statements?

Write your answer in no more than 35 words.
(2 marks)


1.5 The International Standard on Auditing 701 Modifications to the Independent Auditor’s
Report, classifies modified audit reports into “matters that do not affect the auditor’s
opinion” and “matters that do affect the auditor’s opinion”. This latter category is further
sub-divided into three categories.

List these THREE categories.
(3 marks)


1.6 DY’s trade receivables balance at 1 April 2006 was $22,000. DY’s income statement
showed revenue from credit sales of $290,510 during the year ended 31 March 2007.
DY’s trade receivables at 31 March 2007 were 49 days.
Assume DY’s sales occur evenly throughout the year and that all balances outstanding at
1 April 2006 have been received.

Also, it should be assumed all sales are on credit, there were no bad debts and no trade
discount was given.

How much cash did DY receive from its customers during the year to 31 March 2007?

A $268,510
B $273,510
C $312,510
D $351,510
(2 marks)







Section A continues on the next page






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P7 4 May 2007

1.7 DD purchased an item of plant and machinery costing $500,000 on 1 April 2004, which
qualified for 50% capital allowances in the first year, and 20% each year thereafter, on the
reducing balance basis.

DD’s policy in respect of plant and machinery is to charge depreciation on a straight line
basis over five years, with no residual value. On 1 April 2006, DD decides to revalue the
item of plant and machinery upwards, from its net book value, by $120,000.

Assuming there are no other capital transactions in the three year period and a tax rate of 30%
throughout, calculate the amount of deferred tax to be shown in DD’s income statement for the
year ended 31 March 2007, and the deferred tax provision to be included in its balance sheet at
31 March 2007.
(4 marks)


1.8 On 31 March 2007, DT received an order from a new customer, XX, for products with a
sales value of $900,000. XX enclosed a deposit with the order of $90,000.

On 31 March 2007, DT had not completed credit referencing of XX and had not
despatched any goods. DT is considering the following possible entries for this
transaction in its financial statements for the year ended 31 March 2007:

(i) include $900,000 in income statement revenue for the year;
(ii) include $90,000 in income statement revenue for the year;
(iii) do not include anything in income statement revenue for the year;
(iv) create a trade receivable for $810,000;
(v) create a trade payable for $90,000.

According to IAS 18 Revenue Recognition, how should DT record this transaction in its financial
statements for the year ended 31 March 2007?

A (i) and (iv)
B (ii) and (v)
C (iii) and (iv)
D (iii) and (v)
(2 marks)


1.9 Excise duties are deemed to be most suitable for commodities that have certain specific
characteristics.

List THREE characteristics of a commodity that, from a revenue authority’s point of view, would
make that commodity suitable for an excise duty to be imposed.
(3 marks)

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May 2007 5 P7

1.10 During its 2006 accounting year, DL made the following changes.

Which ONE of these changes would be classified as “a change in accounting policy” as
determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?

A Increased the bad debt provision for 2006 from 5% to 10% of outstanding debts.
B Changed the treatment of borrowing costs from capitalising borrowing costs incurred on
capital projects to treating all borrowing costs as an expense in the year incurred.
C Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation.
D Changed the useful economic life of its motor vehicles from six years to four years.

(2 marks)


1.11 DR has the following balances under current assets and current liabilities:

Current assets $
Inventory 50,000
Trade receivables 70,000
Bank 10,000

Current liabilities $
Trade payables 88,000
Interest payable 7,000

DR’s quick ratio is

A 0⋅80 : 1
B 0⋅84 : 1
C 0⋅91 : 1
D 1⋅37 : 1
(2 marks)


1.12 Which ONE of the following is most likely to increase an entity’s working capital?

A Delaying payment to trade payables.
B Reducing the credit period given to customers.
C Purchasing inventory on credit.
D Paying a supplier and taking an early settlement discount.
(2 marks)




Section A continues on the next page



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P7 6 May 2007

1.13 Details from DV’s long-term contract, which commenced on 1 May 2006, at 30 April 2007
were:

$000
Invoiced to client for work done 2,000
Costs incurred to date:
Attributable to work completed 1,500
Inventory purchased, but not yet used 250
Progress payment received from client 900
Expected further costs to complete project 400
Total contract value 3,000

DV uses the percentage of costs incurred to total costs to calculate attributable profit.

Calculate the amount that DV should recognise in its income statement for the year ended
30 April 2007 for revenue, cost of sales and attributable profits on this contract according to
IAS 11 Construction Contracts.
(4 marks)


1.14 Country Y has a VAT system which allows entities to reclaim input tax paid.

In Country Y the VAT rates are:

Zero rated 0%
Standard rated 15%

DE runs a small retail store. DE’s sales include items that are zero rated, standard rated
and exempt.

DE’s electronic cash register provides an analysis of sales. The figures for the three
months to 30 April 2007 were:
Sales value, excluding VAT
$
Zero rated 11,000
Standard rated 15,000
Exempt 13,000
Total 39,000

DE’s analysis of expenditure for the same period provided the following:

Expenditure, excluding VAT
$
Zero rated purchases 5,000
Standard rated purchases relating to standard rate outputs 9,000
Standard rated purchases relating to exempt outputs 7,000
Standard rated purchases relating to zero rated outputs 3,000
24,000

Calculate the VAT due to/from DE for the three months ended 30 April 2007.
(2 marks)

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May 2007 7 P7


1.15 A bond has a current market price of $83. It will repay its face value of $100 in seven
years’ time and has a coupon rate of 4%.

If the bond is purchased at $83 and held, what is its yield to maturity?
(4 marks)


(Total for Question One = 40 marks)






Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be
submitted for marking.




End of Section A



Section B starts on page 8















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P7 8 May 2007

SECTION B – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.



Question Two

(a)

Country Z has the following tax regulations in force for the years 2005 and 2006 (each year
January to December):

• Corporate income is taxed at the following rates:
o $1 to $10,000 at 0%;
o $10,001 to $25,000 at 15%;
o $25,001 and over at 25%.
• When calculating corporate income tax, Country Z does not allow the following
types of expenses to be charged against taxable income:
o Entertaining expenses;
o Taxes paid to other public bodies;
o Accounting depreciation of non-current assets.
• Tax relief on capital expenditure is available at the following rates:
o Buildings at 4% per annum on straight line basis;
o All other non-current tangible assets are allowed tax depreciation at 27% per
annum on reducing balance basis.

DB commenced business on 1 January 2005 when all assets were purchased. No first year
allowances were available for 2005.

Non-current assets cost at 1 January 2005
$
Land 27,000
Buildings 70,000
Plant and equipment 80,000

On 1 January 2006, DB purchased another machine for $20,000. This machine qualified for a
first year tax allowance of 50%.

DB’s Income statement for the year to 31 December 2006
$
Gross profit 160,000
Administrative expenses 81,000
Entertaining 600
Tax paid to local government 950
Depreciation on buildings 1,600
Depreciation on plant and equipment 20,000
Distribution costs 20,000
35,850
Finance cost 1,900
Profit before tax 33,950

The question requirement is on the opposite page
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May 2007 9 P7


Required for (a):

Calculate DB’s corporate income tax due for the year 2006.

(Total for sub-question (a) = 5 marks)




(b) On 1 April 2005, DX acquired plant and machinery with a fair value of $900,000 on a
finance lease. The lease is for five years with the annual lease payments of $228,000
being paid in advance on 1 April each year. The interest rate implicit in the lease is
13⋅44%. The first payment was made on 1 April 2005.


Required:

(i) Calculate the finance charge in respect of the lease that will be shown in DX’s
income statement for the year ended 31 March 2007.

(ii) Calculate the amount to be shown as a current liability and a non-current liability
in DX’s balance sheet at 31 March 2007.

(All workings should be to the nearest $000.)

(Total for sub-question (b) = 5 marks)




(c) The Framework for the Preparation and Presentation of Financial Statements
(Framework) was first published in 1989 and was adopted by The International
Accounting Standards Board (IASB).


Required:

Explain the purposes of the Framework.
(Total for sub-question (c) = 5 marks)






Section B continues on the next page




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P7 10 May 2007

(d) On 1 June 2006, the directors of DP commissioned a report to determine possible actions
they could take to reduce DP’s losses. The report, which was presented to the directors
on 1 December 2006, proposed that DP cease all of its manufacturing activities and
concentrate on its retail activities.

The directors formally approved the plan to close DP’s factory. The factory was gradually
shut down, commencing on 5 December 2006, with production finally ceasing on
15 March 2007. All employees had ceased working, or had been transferred to other
facilities in the company, by 29 March 2007. The plant and equipment was removed and
sold for $25,000 (net book value $95,000) on 30 March 2007.

The factory land and building was being advertised for sale, but had not been sold by
31 March 2007. The net book value of the land and building at 31 March 2007, based on
original cost, was $750,000. The estimated net realisable value of the land and building
at 31 March 2007 was $1,125,000.

Closure costs incurred (and paid) up to 31 March 2007 were $620,000.

The cash flows, revenues and expenses relating to the factory were clearly
distinguishable from DP’s other operations. The output from the factory was sold directly
to third parties and to DP’s retail outlets. The manufacturing facility was shown as a
separate segment in DP’s segmental information.













(e) DN currently has an overdraft on which it pays interest at 10% per year. DN has been
offered credit terms from one of its suppliers, whereby it can either claim a cash discount
of 2% if payment is made within 10 days of the date of the invoice or pay on normal credit
terms, within 40 days of the date of the invoice.

Assume a 365 day year and an invoice value of $100.


Required:

Explain to DN, with reasons and supporting calculations, whether it should pay the
supplier early and take advantage of the discount offered.

(Total for sub-question (e) = 5 marks)




Required:

With reference to relevant International Accounting Standards, explain how DP
should treat the factory closure in its financial statements for the year ended
31 March 2007.
(Total for sub-question (d) = 5 marks)
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May 2007 11 P7


(f) DF, a sports and fitness training equipment wholesaler has prepared its forecast cash
flow for the next six months and has calculated that it will need $2 million additional short-
term finance in three months’ time.

DF has an annual gross revenue of $240 million and achieves a gross margin of 50%. It
currently has the following outstanding working capital balances:

• $16 million trade payables;
• $20 million trade receivables;
• $5 million bank overdraft.

DF forecasts that it will be able to repay half the $2 million within three months and the
balance within a further three months.











(Total for Section B = 30 marks)








End of Section B


Section C starts on page 12







TURN OVER

Required:

Advise DF of possible sources of funding available to it.

(Total for sub-question (f) = 5 marks)
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P7 12 May 2007

SECTION C – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER THIS QUESTION



Question Three

DZ is a manufacturing entity and produces one group of products, known as product Y.

DZ’s trial balance at 31 March 2007 is shown below:

$000 $000
8% loan 2020 (see note (xiv)) 2,000
Administration expenses 891
Bank and cash 103
Cash received on disposal of land 1,500
Cash received on disposal of plant 5
Cost of raw materials purchased in year 2,020
Direct production labour costs 912
Distribution costs 462
Equity shares $1 each, fully paid 1,000
Income tax (see note (xi)) 25
Inventory of finished goods at 31 March 2006 240
Inventory of raw materials at 31 March 2006 132
Land at valuation at 31 March 2006 1,250
Loan interest paid – half year 80
Plant and equipment at cost at 31 March 2006 4,180
Production overheads (excluding depreciation) 633
Property at cost at 31 March 2006 11,200
Provision for deferred tax at 31 March 2006 (see note (xii)) 773
Provision for depreciation at 31 March 2006: (see notes (iv) and (v))
Property 1,900
Plant and equipment 2,840
Research and development (see note (vi)) 500
Retained earnings at 31 March 2006 2,024
Revaluation reserve at 31 March 2006 2,100
Revenue 8,772
Trade payables 773
Trade receivables 1,059
23,687 23,687


Further information:
(i) The property cost of $11,200,000 consisted of land $3,500,000 and buildings $7,700,000.

(ii) During the year, DZ disposed of non-current assets as follows:
• A piece of surplus land was sold on 1 March 2007 for $1,500,000;
• Obsolete plant was sold for $5,000 scrap value on the same date;
• All the cash received is included in the trial balance;
Details of the assets sold were:

Asset type Cost Revalued amount Accumulated depreciation
Land $500,000 $1,250,000 $0
Plant and equipment $620,000 $600,000

(iii) On 31 March 2007, DZ revalued its properties to $9,800,000 (land $4,100,000 and buildings
$5,700,000).

(iv) Buildings are depreciated at 5% per annum on the straight line basis. Buildings depreciation is
treated as 80% production overhead and 20% administration.

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May 2007 13 P7

(v) Plant and equipment is depreciated at 25% per annum using the reducing balance method, the
depreciation being treated as a production overhead.

(vi) Product Y was developed in-house. Research and development is carried out on a continuous
basis to ensure that the product range continues to meet customer demands. The research and
development figure in the trial balance is made up as follows:
$000
Development costs capitalised in previous years 867
Less: Amortisation to 31 March 2006 534
333
Research costs incurred in the year to 31 March 2007 119
Development costs (all meet IAS 38 Intangible Assets criteria) incurred in the year to
31 March 2007

48
Total 500

(vii) Development costs are amortised on a straight line basis at 20% per annum.

(viii) Research and development costs are treated as cost of sales when charged to the income
statement.

(ix) DZ charges a full year’s amortisation and depreciation in the year of acquisition and none in the
year of disposal.

(x) Inventory of raw materials at 31 March 2007 was $165,000. Inventory of finished goods at
31 March 2007 was $270,000.

(xi) The directors estimate the income tax charge on the year’s profits at $811,000. The balance on the
income tax account represents the underprovision for the previous year’s tax charge.

(xii) The deferred tax provision is to be reduced to $665,000.

(xiii) No interim dividend was paid during the year.

(xiv) The 8% loan is a 20-year loan issued in 2000.


Required:

(a) Prepare DZ’s Property, Plant and Equipment note to the accounts for the year
ended 31 March 2007.
(6 marks)

(b) Prepare the income statement and a statement of changes in equity for the year
to 31 March 2007 and a balance sheet at that date, in a form suitable for
presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards.

(All workings should be to the nearest $000).
(24 marks)

Notes to the financial statements are NOT required (except as specified in part (a) of
the question), but ALL workings must be clearly shown. Do NOT prepare a statement
of accounting policies.

(Total for Question Three = 30 marks)



(Total for Section C = 30 marks)


End of Question Paper. Maths Tables and Formulae are on pages 15-17
TURN OVER
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P7 14 May 2007












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May 2007 15 P7

MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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P7 16 May 2007

Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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May 2007 17 P7

FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


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P7 18 May 2007











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May 2007 19 P7


LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
1 KNOWLEDGE

What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
2 COMPREHENSION

What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
3 APPLICATION

How you are expected to apply your knowledge. Apply
Calculate/compute
To put to practical use
To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 ANALYSIS

How are you expected to analyse the detail of
what you have learned.
Analyse
Categorise
Examine in detail the structure of
Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence
5 EVALUATION

How are you expected to use your learning to
evaluate, make decisions or recommendations.

Advise
Evaluate
Recommend
To counsel, inform or notify
To appraise or assess the value of
To advise on a course of action


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P7 20 May 2007

Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
May 2007
Thursday Afternoon Session
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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2007 Exam

The Chartered Institute of Management Accountants Page 1
Examiner’s General Comments
This was the first examination using the new format paper, there seemed to be little impact of the revised
format on the overall pass rates, the UK pass rate was marginally lower and the international pass rate was
about the same as November 2006. Overall there was a good standard of answer being produced by many
candidates. There was evidence of a number of well prepared candidates with a wide range of knowledge,
able to tackle most of the sub-questions in questions 1 and 2 and prepare a good answer to question 3.
There were however a number of candidates that were obviously question spotting and had not prepared for
some of the topics on the paper, for example questions 2c and 2e. Question spotting is not advised in this
paper as most learning outcomes are covered in each examination.

Question One was generally well done, but no one scored full marks. Most candidates provided workings for
the three and four mark questions, but a number did not. If workings are not given no marks can be awarded
for wrong answers using the correct principle.

Question 1.4 caused problems for many candidates as they could not correctly state the objective of financial
statements
Question 1.5 many candidates could only provide one or two correct categories of “matters that do affect the
auditor’s opinion”.
Question 1.7, deferred tax is still causing problems for some candidates, many did not correctly adjust for the
revaluation of the asset.
Question 1.9 caused problems for many candidates as they did not seem to have heard of specific
characteristics making certain goods more suitable for excise duties than others.
Question 1.13 caused a number of problems. Some candidates did not read the question and used the
percentage of revenue earned instead of percentage of cost incurred. Some candidates calculated total cost
correctly but included inventory in cost incurred to date.
Question 1.14 was only completed correctly by a few candidates. The majority of candidates did not know
how to treat zero rated and exempt outputs and input tax relating to them.
Question 1.15, yield to maturity is still causing difficulties, with a significant number of candidates not
attempting the question. Of those attempting the question, a number of candidates selected 4% as one of
the interest rates to use in their calculation. As the coupon rate given was 4% the return, being interest
received plus capital gain on redemption, must be more than 4% indicating that a higher rate should be
used.

Question 2 was generally not as well done as the other questions on the paper. Some candidates were
obviously ill prepared for a question on the purposes of the IASB Framework or for a question on accepting a
discount from a supplier.

Question Two (b) – Most candidates were able to calculate the finance charge for each year correctly, but
were unable to use their calculations to calculate the current and non-current liabilities.

Question Two (c) – many candidates were unable to identify more than one purpose of the framework. Many
ill prepared candidates tried to explain the purpose of financial statements instead of the purpose of the
Framework. A significant number of those candidates that were able to identify purposes of the framework
did not explain them as required by the question.

Question Two (d) – many candidates gave a very poor answer to this question. Most candidates correctly
identified the factory closure as a discontinued activity but did not give sufficient explanation to gain more
than a mark. Few candidates were able to explain how to deal with the assets “held for sale”.

Question Two (e) – nearly all candidates were able to correctly calculate the rate of interest being offered by
the supplier for early settlement. Unfortunately the majority of candidates did not understand their own
calculations as they went on to say that as the rate on offer was much higher than the overdraft rate early
settlement was not recommended.

Question Three required the preparation of a property, plant and equipment note and the preparation of an
income statement, a statement of changes in equity and a balance sheet with some adjustments. Although
part (b) was expected by candidates and most were able to prepare good well structured answers, part (a),
although required as workings for part (b) was not well done by most candidates, resulting in lower overall
marks being achieved on this question.

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2007 Exam

The Chartered Institute of Management Accountants Page 2
The following provides guidance to candidates preparing for future examinations and has been prepared with
that in mind. It therefore may give the impression that there were few good marks and few passes as all the
main errors have been listed for each question. It must be remembered though that not all candidates made
the errors listed.

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2007 Exam

The Chartered Institute of Management Accountants Page 3
SECTION A

Please note that in this PEG the mark available has been omitted from the end of each question in this
section


Question 1.1

DH has the following two legal claims outstanding:

• A legal action against DH claiming compensation of $700,000, filed in February 2007. DH
has been advised that it is probable that the liability will materialise.

• A legal action taken by DH against another entity, claiming damages of $300,000, started
in March 2004. DH has been advised that it is probable that it will win the case.

How should DH report these legal actions in its financial statements for the year ended
30 April 2007?

Legal action against DH Legal action taken by DH
A Disclose by a note to the accounts No disclosure
B Make a provision No disclosure
C Make a provision Disclose as a note
D Make a provision Accrue the income
The answer is C



Question 1.2

Country X uses a Pay-As-You-Earn (PAYE) system for collecting taxes from employees.
Each employer is provided with information about each employee’s tax position and tables
showing the amount of tax to deduct each period. EmpIoyers are required to deduct tax from
employees and pay it to the revenue authorities on a monthly basis.

From the perspective of the government, list THREE advantages of the PAYE system.



Answer
Three advantages of PAYE are:

• The tax is collected earlier than systems that assess earnings at the end of the year;
this improves the government’s cash flow;

• It makes payment of taxes easier for individuals as there is not one large bill to pay;
this reduces defaults and late payments;

• Most of the administration costs are borne by the employers, instead of government;

• Regular predictable receipts make government budgeting easier.

Note: Any other relevant point would have been acceptable in the exam.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2007 Exam

The Chartered Institute of Management Accountants Page 4


Question 1.3

DS uses the Economic Order Quantity (EOQ) model. Demand for DS’s product is 95,000
units per annum. Demand is evenly distributed throughout the year. The cost of placing an
order is $15 and the cost of holding a unit of inventory for a year is $3.

How many orders should DS make in a year?



Answer
From Formula sheet:

Q =
h
C
D
o
2C


68 974
3
95,000 x 15 x 2
⋅ =

95,000/975 = 97⋅4 rounded to 98 orders.



Question 1.4

According to the International Accounting Standards Board’s Framework for the Preparation
and Presentation of Financial Statements, what is the objective of financial statements?

Write your answer in no more than 35 words.



Answer

The objective of financial statements is to provide information about the financial position,
performance, and changes in that position, of an entity that is useful to a wide range of users
in making economic decisions.



Question 1.5

The International Standard on Auditing 701 Modifications to the Independent Auditor’s Report,
classifies modified audit reports into “matters that do not affect the auditor’s opinion” and
“matters that do affect the auditor’s opinion”. This latter category is further sub-divided into
three categories.

List these THREE categories.



Answer
Qualified opinion
Adverse opinion
Disclaimer of opinion


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2007 Exam

The Chartered Institute of Management Accountants Page 5


Question 1.6

DY’s trade receivables balance at 1 April 2006 was $22,000. DY’s income statement showed
revenue from credit sales of $290,510 during the year ended 31 March 2007.

DY’s trade receivables at 31 March 2007 were 49 days.

Assume DY’s sales occur evenly throughout the year and that all balances outstanding at
1 April 2006 have been received.

Also, it should be assumed all sales are on credit, there were no bad debts and no trade
discount was given.

How much cash did DY receive from its customers during the year to 31 March 2007?

A $268,510
B $273,510
C $312,510
D $351,510
The answer is B



Working to Answer 1.6

Balance c/fwd is $290,510 x 49/365 = $39,000

$
Balance b/fwd 22,000
Credit sales 290,510
312,510
Less: Balance c/fwd (39,000)
Receipts 273,510



Question 1.7

DD purchased an item of plant and machinery costing $500,000 on 1 April 2004, which
qualified for 50% capital allowances in the first year, and 20% each year thereafter, on the
reducing balance basis.

DD’s policy in respect of plant and machinery is to charge depreciation on a straight line basis
over five years, with no residual value. On 1 April 2006, DD decides to revalue the item of
plant and machinery upwards, from its net book value, by $120,000.

Assuming there are no other capital transactions in the three year period and a tax rate of
30% throughout, calculate the amount of deferred tax to be shown in DD’s income statement
for the year ended 31 March 2007, and the deferred tax provision to be included in its balance
sheet at 31 March 2007.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2007 Exam

The Chartered Institute of Management Accountants Page 6


Answer to Question 1.7

Tax base $000 Accounting book value $000
Cost 500 Cost 500
2004/05 First year allowance 50% 250 Depreciation 2004/05 100
250 400
2005/06 20% 50 Depreciation 2005/06 100
200 300
2006/07 20% 40 Revaluation 120
160 420
Depreciation 2006/07 140
280

2005/06 2006/07
$000 $000
Accounting book value 300 280
Tax base 200 160
Temporary difference 100 120
Deferred tax at 30% 30 36

Income statement, increase (36 - 30) = 6
Balance sheet – deferred tax provision 2007 36



Question 1.8

On 31 March 2007, DT received an order from a new customer, XX, for products with a sales
value of $900,000. XX enclosed a deposit with the order of $90,000.

On 31 March 2007, DT had not completed credit referencing of XX and had not despatched
any goods. DT is considering the following possible entries for this transaction in its financial
statements for the year ended 31 March 2007:

(i) include $900,000 in income statement revenue for the year;
(ii) include $90,000 in income statement revenue for the year;
(iii) do not include anything in income statement revenue for the year;
(iv) create a trade receivable for $810,000;
(v) create a trade payable for $90,000.

According to IAS 18 Revenue Recognition, how should DT record this transaction in its
financial statements for the year ended 31 March 2007?

A (i) and (iv)
B (ii) and (v)
C (iii) and (iv)
D (iii) and (v)
The answer is D



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Question 1.9

Excise duties are deemed to be most suitable for commodities that have certain specific
characteristics.

List THREE characteristics of a commodity that, from a revenue authority’s point of view,
would make that commodity suitable for an excise duty to be imposed.



Answer

From the revenue authority’s point of view, the characteristics of commodities suitable for
excise duties are:

• Few large producers/suppliers;
• Inelastic demand with no close substitutes;
• Large sales volumes; and
• Easy to define products covered by the tax.

Note: Any three of the above would have been acceptable in the exam.



Question 1.10

During its 2006 accounting year, DL made the following changes.

Which ONE of these changes would be classified as “a change in accounting policy” as
determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?

A Increased the bad debt provision for 2006 from 5% to 10% of outstanding debts.
B Changed the treatment of borrowing costs from capitalising borrowing costs incurred on
capital projects to treating all borrowing costs as an expense in the year incurred.
C Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation.
D Changed the useful economic life of its motor vehicles from six years to four years.

The answer is B


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Question 1.11

DR has the following balances under current assets and current liabilities:

Current assets $
Inventory 50,000
Trade receivables 70,000
Bank 10,000

Current liabilities $
Trade payables 88,000
Interest payable 7,000

DR’s quick ratio is

A 0⋅80 : 1
B 0⋅84 : 1
C 0⋅91 : 1
D 1⋅37 : 1



Answer
(70,000 + 10,000) : (88,000 + 7,000)
80,000 : 95,000
0⋅84 : 1
Therefore the answer is B



Question 1.12

Which ONE of the following is most likely to increase an entity’s working capital?

A Delaying payment to trade payables.
B Reducing the credit period given to customers.
C Purchasing inventory on credit.
D Paying a supplier and taking an early settlement discount.
The answer is D



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Question 1.13

Details from DV’s long-term contract, which commenced on 1 May 2006, at 30 April 2007
were:

$000
Invoiced to client for work done 2,000
Costs incurred to date:
Attributable to work completed 1,500
Inventory purchased, but not yet used 250
Progress payment received from client 900
Expected further costs to complete project 400
Total contract value 3,000

DV uses the percentage of costs incurred to total costs to calculate attributable profit.

Calculate the amount that DV should recognise in its income statement for the year ended
30 April 2007 for revenue, cost of sales and attributable profits on this contract according to
IAS 11 Construction Contracts.



Answer
$000
Total cost
Cost incurred on attributable work 1,500
Inventory not yet used 250
Expected further costs 400
2,150
Cost incurred on attributable work 1,500
% complete 1,500/2,150 = 69⋅76% (round to 70%)

Total contract revenue 3,000
Total cost 2,150
Total profit 850

Income statement figures for contract
Revenue (3,000 x 70%) 2,100
Cost of sales 1,500
Profit 600



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Question 1.14

Country Y has a VAT system which allows entities to reclaim input tax paid.

In Country Y the VAT rates are:

Zero rated 0%
Standard rated 15%

DE runs a small retail store. DE’s sales include items that are zero rated, standard
rated and exempt.

DE’s electronic cash register provides an analysis of sales. The figures for the three
months to 30 April 2007 were:
Sales value, excluding
VAT
$
Zero rated 11,000
Standard rated 15,000
Exempt 13,000
Total 39,000

DE’s analysis of expenditure for the same period provided the following:

Expenditure, excluding
VAT
$
Zero rated purchases 5,000
Standard rated purchases relating to standard rate
outputs
9,000
Standard rated purchases relating to exempt outputs 7,000
Standard rated purchases relating to zero rated outputs 3,000
24,000

Calculate the VAT due to/from DE for the three months ended 30 April 2007.



Answer

DE’s outputs:
15,000 x 15% = 2,250

Inputs:
[9,000 + 3,000] x 15% = 1,800
Net payment due from DE = 2,250 - 1,800 = 450

VAT relating to exempt items cannot be reclaimed and is ignored.



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Question 1.15

A bond has a current market price of $83. It will repay its face value of $100 in seven years’
time and has a coupon rate of 4%.

If the bond is purchased at $83 and held, what is its yield to maturity?



Answer
Yield to maturity:

Using t = 7 and r = 6 and 8, from tables

(4 x 5⋅582) and (100 x 0⋅665) = 22⋅328 + 66⋅5 = 88⋅828

(4 x 5⋅206) and (100 x 0⋅583) = 20⋅824 + 58⋅3 = 79⋅124









+ =






⋅ − ⋅
⋅ − ⋅
+ 2 x
04 7 9
28 8 5
6 2 x
124 79 828 88
00 83 828 88
6

6 + 1⋅20 = 7⋅20%



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SECTION B


Question Two

(a)


Country Z has the following tax regulations in force for the years 2005 and 2006 (each year
January to December):

• Corporate income is taxed at the following rates:
o $1 to $10,000 at 0%;
o $10,001 to $25,000 at 15%;
o $25,001 and over at 25%.
• When calculating corporate income tax, Country Z does not allow the following types
of expenses to be charged against taxable income:
o Entertaining expenses;
o Taxes paid to other public bodies;
o Accounting depreciation of non-current assets.
• Tax relief on capital expenditure is available at the following rates:
o Buildings at 4% per annum on straight line basis;
o All other non-current tangible assets are allowed tax depreciation at 27% per
annum on reducing balance basis.

DB commenced business on 1 January 2005 when all assets were purchased. No first year
allowances were available for 2005.

Non-current assets cost at 1 January 2005
$
Land 27,000
Buildings 70,000
Plant and equipment 80,000

On 1 January 2006, DB purchased another machine for $20,000. This machine qualified for a first
year tax allowance of 50%.

DB’s Income statement for the year to 31 December 2006
$
Gross profit 160,000
Administrative expenses 81,000
Entertaining 600
Tax paid to local government 950
Depreciation on buildings 1,600
Depreciation on plant and equipment 20,000
Distribution costs 20,000
35,850
Finance cost 1,900
Profit before tax 33,950

Calculate DB’s corporate income tax due for the year 2006.
(Total for sub-question (a) = 5 marks)



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Rationale

Tests candidates’ ability to calculate corporate income tax for an entity for a given year. Tests
learning outcome A (i).


Suggested Approach

Add back the expenditure that is not allowed for tax purposes.
Calculate the tax relief allowed for the assets.
Deduct tax depreciation from the adjusted profits.
Calculate tax payable using the tax rates given.


Marking Guide

Marks

Corporate income tax 5


Examiner’s Comments

Most candidates gained reasonable marks for this question. The majority of candidates were able
to calculate the adjusted profit before tax relief for non-current assets although the tax
depreciation was often calculated incorrectly.

Common Errors
The most common error was calculating the tax depreciation as if all assets were purchased
during the year, instead of calculating two years for the original assets.
Applying the wrong rates of tax depreciation to each category of asset.
Not applying the tax bands correctly to the taxable profits



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Question Two

(b)


On 1 April 2005, DX acquired plant and machinery with a fair value of $900,000 on a finance
lease. The lease is for five years with the annual lease payments of $228,000 being paid in
advance on 1 April each year. The interest rate implicit in the lease is 13⋅44%. The first payment
was made on 1 April 2005.

(i) Calculate the finance charge in respect of the lease that will be shown in DX’s income
statement for the year ended 31 March 2007.

(ii) Calculate the amount to be shown as a current liability and a non-current liability in DX’s
balance sheet at 31 March 2007.

(All workings should be to the nearest $000.)

(Total for sub-question (b) = 5 marks)


Rationale

Tests candidates’ ability to calculate the finance charge in respect of a lease to be shown on an
entity’s income statement and to calculate the amounts to be shown as liabilities on the entity’s
balance sheet. Tests learning outcome C (v).


Suggested Approach

Calculate the finance charge and closing balance for each of the first three years of the lease.
Use the figures calculated to answer the question, part (i) is the finance charge for year two of the
lease. Part (ii), the non-current liability is the balance after making the third payment and the
current liability is the difference between this and the balance at the end of the second year.


Marking Guide

Marks

Calculation of finance charge and balances for three years (workings)

3
Stating the finance charge in respect of the lease 0.5
Stating the amount to be shown as a current liability and a non-current liability 1.5


Examiner’s Comments

Most candidates were able to correctly calculate the finance charges and balances for each of the
three years, but many candidates could not select the correct figures from their workings to answer
the question.

Common Errors
Using payment in arrears instead of payment in advance
Using sum of digits method when the interest rate implicit in the lease was given
Selecting the wrong finance charge figure for answer to part (a)
Selecting the wrong balances for part (b) answer



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Question Two

(c)


The Framework for the Preparation and Presentation of Financial Statements (Framework)
was first published in 1989 and was adopted by The International Accounting Standards
Board (IASB).

Explain the purposes of the Framework.
(Total for sub-question (c) = 5 marks)


Rationale

Tests candidates’ ability to explain the purposes of the IASB Framework for the Preparation
and Presentation of Financial Statements. Tests learning outcome B (ii).


Suggested Approach

Explain at least five of the purposes set out in the Framework


Marking Guide

Marks

1 Mark per valid point up to a maximum of 5 Marks 5


Examiner’s Comments

The answers provided for this part of question 2 were very weak. Many candidates did not
know what the purpose of the Framework was and tried explaining the purpose of financial
statements.

Common Errors
Explaining the purpose of financial statements.
Only explaining one or two purposes
Providing a list of purposes with little or no explanation



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Question Two

(d)


On 1 June 2006, the directors of DP commissioned a report to determine possible actions
they could take to reduce DP’s losses. The report, which was presented to the directors on
1 December 2006, proposed that DP cease all of its manufacturing activities and concentrate
on its retail activities.

The directors formally approved the plan to close DP’s factory. The factory was gradually shut
down, commencing on 5 December 2006, with production finally ceasing on 15 March 2007.
All employees had ceased working, or had been transferred to other facilities in the company,
by 29 March 2007. The plant and equipment was removed and sold for $25,000 (net book
value $95,000) on 30 March 2007.

The factory land and building was being advertised for sale, but had not been sold by
31 March 2007. The net book value of the land and building at 31 March 2007, based on
original cost, was $750,000. The estimated net realisable value of the land and building at 31
March 2007 was $1,125,000.

Closure costs incurred (and paid) up to 31 March 2007 were $620,000.

The cash flows, revenues and expenses relating to the factory were clearly distinguishable
from DP’s other operations. The output from the factory was sold directly to third parties and
to DP’s retail outlets. The manufacturing facility was shown as a separate segment in DP’s
segmental information.

With reference to relevant International Accounting Standards, explain how DP should treat
the factory closure in its financial statements for the year ended 31 March 2007.
(Total for sub-question (d) = 5 marks)


Rationale

Tests candidates’ ability to explain how a factory closure should be treated in an entity’s
financial statements according to International Accounting Standards. Tests learning outcome
C (iii).


Suggested Approach

Define a discontinued activity according to IFRS 5, then analyse the data provided and
decide whether the definition has been satisfied. Explain how the definition has been met.
Define the meaning of “held for sale” according to IFRS 5 and apply the definition to the
question. Explain how the discontinued activity should be treated in the financial statements.
Explain how the asset “held for sale” should be treated in the financial statements.


Marking Guide

Marks

Discussion of discontinued activity and assets held for sale. 3
Treatment of discontinued activity and assets held for sale in financial
statements

2


Examiner’s Comments

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Most candidates correctly identified the factory closure as a discontinued activity but did not
give sufficient explanation to gain more than a mark. Few candidates were able to explain
how to deal with the assets “held for sale”. Most candidates failed to give specific details of
the treatment in financial statements, for example saying the discontinued activity should be
shown in the financial statements is too general a comment and gets no marks.

Common Errors
Not giving sufficient explanation for concluding that the closure should be treated as a
discontinued activity.
Not referring to any IAS or IFRS requirements.
Completely ignoring “assets held for sale”, both explanation and treatment
Only giving the income statement treatment, not referring to cash flow or balance sheet
treatment of the closure.



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Question Two

(e)


DN currently has an overdraft on which it pays interest at 10% per year. DN has been offered
credit terms from one of its suppliers, whereby it can either claim a cash discount of 2% if
payment is made within 10 days of the date of the invoice or pay on normal credit terms,
within 40 days of the date of the invoice.

Assume a 365 day year and an invoice value of $100.

Explain to DN, with reasons and supporting calculations, whether it should pay the supplier
early and take advantage of the discount offered.
(Total for sub-question (e) = 5 marks)


Rationale

Tests candidates’ ability to advise whether or not an entity should take advantage of a
discount offered by a supplier. Tests learning outcome D (ix).


Suggested Approach

Calculate the interest rate that would be earned if the discount were taken. Compare the
answer with the rate currently being paid on the overdraft and draw a conclusion.


Marking Guide

Marks

Supporting calculations 3
Conclusion and reasons for accepting/rejecting discount 2


Examiner’s Comments

A number of candidates did not answer this question. A significant number of candidates
were able to correctly calculate the rate of interest being offered but came to the incorrect
conclusion, assuming that it would cost DN more to accept the offer as the rate was higher
than the overdraft.
Some credit was also given to those candidates that managed to come to the correct
conclusion without using compound interest methods.

Common Errors
Using the wrong number of days to calculate the interest, for example 40 instead of 30 days.
Inverting the formula, using 30/365 instead of 365/30
Concluding that it would be a disadvantage to DN to accept the offer of 27.8% discount from
a supplier when the overdraft interest rate was 10%.



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Question Two

(f)


DF, a sports and fitness training equipment wholesaler has prepared its forecast cash flow for
the next six months and has calculated that it will need $2 million additional short-term
finance in three months’ time.

DF has an annual gross revenue of $240 million and achieves a gross margin of 50%. It
currently has the following outstanding working capital balances:

• $16 million trade payables;
• $20 million trade receivables;
• $5 million bank overdraft.

DF forecasts that it will be able to repay half the $2 million within three months and the
balance within a further three months.

Advise DF of possible sources of funding available to it.
(Total for sub-question (f) = 5 marks)

Rationale

Tests candidates’ ability to advise an entity of possible sources of funding available to it for
short-term financing purposes. Tests learning outcome D (vi).


Suggested Approach

Identify and explain the possible sources of funding that could be used by DF to fund a cash
shortfall for approximately six months. Explain each source and discuss any advantages or
disadvantages of each. Calculate the trade payable and trade receivable days outstanding, to
be able to comment on the practicality of increasing/reducing them.


Marking Guide

Marks

Each source of funding: identification, comment on suitability and
likely availability.
up to 1.5
each
Calculation of trade payable days outstanding and comment 1
Calculation of trade receivable days outstanding and comment 1


Examiner’s Comments

Most candidates were able to identify possible sources of funding, but most gave only
superficial explanations. Very few candidates used the information provided to calculate trade
payable/receivable days outstanding. A large proportion of the answers gave textbook
solutions rather than realistic solutions, often the solution ignored the data provided in the
question.


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Question Two (f)

Common Errors
Not giving sufficient explanation of the suitability and possible availability of each source.
Stating that share issues and raising loans were possible sources, even though the
requirement was for a maximum of six months.
Not identifying the possible problem of getting money more quickly from customers, given
that they are already paying in 30 days.
Not identifying the problem of delaying payments to suppliers, given that the payments were
currently made in 49 days.



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SECTION C


Question Three


DZ is a manufacturing entity and produces one group of products, known as product Y.

DZ’s trial balance at 31 March 2007 is shown below:
$000 $000
8% loan 2020 (see note (xiv)) 2,000
Administration expenses 891
Bank and cash 103
Cash received on disposal of land 1,500
Cash received on disposal of plant 5
Cost of raw materials purchased in year 2,020
Direct production labour costs 912
Distribution costs 462
Equity shares $1 each, fully paid 1,000
Income tax (see note (xi)) 25
Inventory of finished goods at 31 March 2006 240
Inventory of raw materials at 31 March 2006 132
Land at valuation at 31 March 2006 1,250
Loan interest paid – half year 80
Plant and equipment at cost at 31 March 2006 4,180
Production overheads (excluding depreciation) 633
Property at cost at 31 March 2006 11,200
Provision for deferred tax at 31 March 2006 (see note (xii)) 773
Provision for depreciation at 31 March 2006: (see notes (iv)
and (v))

Property 1,900
Plant and equipment 2,840
Research and development (see note (vi)) 500
Retained earnings at 31 March 2006 2,024
Revaluation reserve at 31 March 2006 2,100
Revenue 8,772
Trade payables 773
Trade receivables 1,059
23,687 23,687


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Further information:
(i) The property cost of $11,200,000 consisted of land $3,500,000 and buildings $7,700,000.

(ii) During the year, DZ disposed of non-current assets as follows:
• A piece of surplus land was sold on 1 March 2007 for $1,500,000;
• Obsolete plant was sold for $5,000 scrap value on the same date;
• All the cash received is included in the trial balance;
Details of the assets sold were:

Asset type Cost Revalued amount Accumulated depreciation
Land $500,000 $1,250,000 $0
Plant and equipment $620,000 $600,000

(iii) On 31 March 2007, DZ revalued its properties to $9,800,000 (land $4,100,000 and buildings
$5,700,000).

(iv) Buildings are depreciated at 5% per annum on the straight line basis. Buildings depreciation
is treated as 80% production overhead and 20% administration.

(v) Plant and equipment is depreciated at 25% per annum using the reducing balance method,
the depreciation being treated as a production overhead.

(vi) Product Y was developed in-house. Research and development is carried out on a
continuous basis to ensure that the product range continues to meet customer demands. The
research and development figure in the trial balance is made up as follows:
$000
Development costs capitalised in previous years 867
Less: Amortisation to 31 March 2006 534
333
Research costs incurred in the year to 31 March 2007 119
Development costs (all meet IAS 38 Intangible Assets criteria) incurred in the year
to 31 March 2007

48
Total 500

(vii) Development costs are amortised on a straight line basis at 20% per annum.

(viii) Research and development costs are treated as cost of sales when charged to the income
statement.

(ix) DZ charges a full year’s amortisation and depreciation in the year of acquisition and none in
the year of disposal.

(x) Inventory of raw materials at 31 March 2007 was $165,000. Inventory of finished goods at
31 March 2007 was $270,000.

(xi) The directors estimate the income tax charge on the year’s profits at $811,000. The balance
on the income tax account represents the underprovision for the previous year’s tax charge.

(xii) The deferred tax provision is to be reduced to $665,000.

(xiii) No interim dividend was paid during the year.

(xiv) The 8% loan is a 20-year loan issued in 2000.

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(a) Prepare DZ’s Property, Plant and Equipment note to the accounts for the year ended 31
March 2007.
(6 marks)

(b) Prepare the income statement and a statement of changes in equity for the year to 31 March
2007 and a balance sheet at that date, in a form suitable for presentation to the shareholders
and in accordance with the requirements of International Financial Reporting Standards.

(All workings should be to the nearest $000).
(24 marks)

Notes to the financial statements are NOT required (except as specified in part (a) of the question),
but ALL workings must be clearly shown. Do NOT prepare a statement of accounting policies.

(Total for Question Three = 30 marks)


Rationale

Tests candidates’ ability to prepare, from information provided in the question scenario, financial
statements in a form suitable for publication and in accordance with current International Financial
Reporting Standards. Part (a) tests the preparation of a note to the accounts for the entity’s
property, plant and equipment. Part (b) requires an income statement, balance sheet and a
statement of changes in equity. Tests learning outcomes C (i) and A (viii).


Suggested Approach

Read the question carefully and then using the additional information provided and the trial balance
figures, prepare workings to calculate depreciation of plant and equipment for the year.
Prepare a DZ’s property, plant and equipment note to the accounts for the year ended 31 March
2007.
Using the additional information provided and the trial balance figures, prepare workings to:
1. calculate the cost of sales and administration
2. calculate tax charge and outstanding balances.
3. calculate the income statement and balance figures for research and development
4. calculate the gain on disposal of land.
Prepare the income statement using IAS 1 format.
Prepare the statement of changes in equity
Prepare the balance sheet using IAS 1 format


Marking Guide

Marks

Property, Plant and Equipment note 6
Income statement 11
Statement of changes in equity 2
Balance sheet 8
Formats 3



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Examiner’s Comments

Very few gained full marks as they were unable to correctly prepare a property, plant and
equipment note. Many candidates prepared workings for part (b) but did not bring them together as
a note to the accounts.
Many candidates did not include the land at valuation in the trail balance that was sold during the
year, instead they treated the land element of properties as being sold. A significant number still
have problems calculating basic depreciation, particularly when it is reducing balance.
Deferred tax and current tax were often wrongly calculated, and both included in either current
liabilities or non-current liabilities. Deferred tax is non-current while current tax is a current liability.
Research and development caused a lot of confusion. Many candidates could not differentiate
between non-current asset values and expense for the year. Very few used the correct treatment
for the income statement (expense in year and amortisation) and balance sheet, asset value
carried forward.
The statement of changes in equity was not done very well by most candidates. Several candidates
had problems identifying the correct balances brought forward, quite a few students showed the
equity shares brought forward as issued during the year! Very few candidates recorded the transfer
of the realised gain on disposal from revaluation reserve to retained earnings.

Common Errors
Part (a)
Not including the land for resale in balances brought forward. Deducting the land disposal from
property.
Incorrectly calculating revaluation of property. Many candidates ignored depreciation when
revaluing property. The revalued amount is the net value at date of valuation and depreciation must
be included in the calculation of gain/loss on revaluation.
Not adjusting for the disposal of the item of plant before calculating depreciation for the year.
Not deducting depreciation brought forward for the plant disposed of in the year. When assets are
disposed of the cots/valuation and cumulative depreciation must be removed from the trail balance
balances.
Part (b)
Incorrectly calculating cost of goods sold, either as a result of leaving out one category of inventory
or reversing the opening and closing inventory adjustments.
Incorrectly creating a separate expense heading for production, all production costs are part of cost
of sales.
Research and development trail balance figure for the year not correctly split between income
statement expense and carried forward as an asset on the balance sheet. Amortisation was
incorrectly calculated, often the balance brought forward was completely excluded or a net figure
was used.
Not including the increase in deferred tax in the income statement tax charge.
Showing deferred tax under current liabilities
Not including accrued items (tax and interest) in current liabilities.



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Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax Principles
22 November 2007 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to open the answer book and start writing or use
your calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions). The requirements for the questions in Sections B and C are
highlighted in a dotted box.
ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be submitted for marking.
Answer the ONE compulsory question in Section A. This has 15 sub-
questions on pages 2 to 6.
Answer the SIX compulsory sub-questions in Section B on pages 8 to 11.
Answer the ONE compulsory question in Section C on pages 12 to 15. The
question requirement is on page 15, which is detachable for ease of
reference.
Maths Tables and Formulae are provided on pages 17 to 19. These pages
are detachable for ease of reference.
The list of verbs as published in the syllabus is given for reference on the
inside back cover of this question paper.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P
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TURN OVER
© The Chartered Institute of Management Accountants 2007
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SECTION A – 40 MARKS
[the indicative time for answering this Section is 72 minutes]
ANSWER ALL FIFTEEN SUB-QUESTIONS



Instructions for answering Section A:

The answers to the fifteen sub-questions in Section A must ALL be written in your
answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.9, 1.10, 1.11, 1.13, 1.14 and 1.15 you should show your
workings as marks are available for the method you use to answer these sub-
questions.



Question One

1.1 The International Accounting Standards Board’s (IASB) Framework for the Preparation
and Presentation of Financial Statements (Framework), sets out four qualitative
characteristics of financial information.

Two of the characteristics are relevance and comparability. List the other TWO characteristics.
(2 marks)


1.2 IAS 16 Property, Plant and Equipment requires an asset to be measured at cost on its
original recognition in the financial statements.

EW used its own staff, assisted by contractors when required, to construct a new
warehouse for its own use.

Which ONE of the following costs would NOT be included in attributable costs of the non-current
asset?

A Clearance of the site prior to work commencing.
B Professional surveyors’ fees for managing the construction work.
C EW’s own staff wages for time spent working on the construction.
D An allocation of EW’s administration costs, based on EW staff time spent on the
construction as a percentage of the total staff time.
(2 marks)

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1.3 An external auditor gives a qualified audit report that is a “disclaimer of opinion”.

This means that the auditor

A has been unable to agree with an accounting treatment used by the directors in relation to
a material item.
B has been prevented from obtaining sufficient appropriate audit evidence.
C has found extensive errors in the financial statements and concludes that they do not
show a true and fair view.
D has discovered a few immaterial differences that do not affect the auditor’s opinion.

(2 marks)


1.4 The trial balance of EH at 31 October 2007 showed trade receivables of $82,000 before
adjustments.

On 1 November 2007 EH discovered that one of its customers had ceased trading and
was very unlikely to pay any of its outstanding balance of $12,250.

On the same date EH carried out an assessment of the collectability of its other trade
receivable balances. Using its knowledge of its customers and past experience EH
determined that the remaining trade receivables had suffered a 3% impairment at
31 October 2007.

What is EH’s balance of trade receivables, as at 31 October 2007?

A $66,202
B $67,290
C $67,657
D $79,540
(2 marks)


1.5 EX is preparing its cash forecast for the next three months.

Which ONE of the following items should be left out of its calculations?

A Expected gain on the disposal of a piece of land.
B Tax payment due, that relates to last year’s profits.
C Rental payment on a leased vehicle.
D Receipt of a new bank loan raised for the purpose of purchasing new machinery.

(2 marks)





Section A continues on the next page



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1.6 The following details relate to EA:

• Incorporated in Country A.
• Carries out its main business activities in Country B.
• Its senior management operate from Country C and effective control is exercised
from Country C.

Assume countries A, B and C have all signed double tax treaties with each other, based
on the OECD model tax convention.

Which country will EA be deemed to be resident in for tax purposes?

A Country A
B Country B
C Country C
D Both Countries B and C
(2 marks)


1.7 Treasury shares are defined as

A equity shares sold by an entity in the period.
B equity shares repurchased by the issuing entity, not cancelled before the period end.
C non-equity shares sold by an entity in the period.
D equity shares repurchased by the issuing entity and cancelled before the period end.

(2 marks)


1.8 EE reported accounting profits of $822,000 for the period ended 30 November 2007. This
was after deducting entertaining expenses of $32,000 and a donation to a political party
of $50,000, both of which are disallowable for tax purposes.

EE’s reported profit also included $103,000 government grant income that was exempt
from taxation. EE paid dividends of $240,000 in the period.

Assume EE had no temporary differences between accounting profits and taxable profits.

Assume that a classical tax system applies to EE’s profits and that the tax rate is 25%.

What would EE’s tax payable be on its profits for the year to 30 November 2007?

(2 marks)

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1.9 EG purchased a property for $630,000 on 1 September 2000. EG incurred additional
costs for the purchase of $3,500 surveyors’ fees and $6,500 legal fees. EG then spent
$100,000 renovating the property prior to letting it. All of EG’s expenditure was classified
as capital expenditure according to the local tax regulations.

Indexation of the purchase and renovation costs is allowed on EE’s property. The index
increased by 50% between September 2000 and October 2007. Assume that acquisition
and renovation costs were incurred in September 2000. EG sold the property on
1 October 2007 for $1,250,000, incurring tax allowable costs on disposal of $2,000.

Calculate EG’s tax due on disposal assuming a tax rate of 30%.
(3 marks)


1.10 A government wanted to encourage investment in new non-current assets by entities and
decided to change tax allowances for non-current assets to give a 100% first year
allowance on all new non-current assets purchased after 1 January 2005.

ED purchased new machinery for $400,000 on 1 October 2005 and claimed the 100%
first year allowance. For accounting purposes ED depreciated the machinery on the
reducing balance basis at 25% per year. The rate of corporate income tax to be applied
to ED’s taxable profits was 22%.

Assume ED had no other temporary differences.

Calculate the amount of deferred tax that ED would show in its balance sheet at
30 September 2007.
(3 marks)


1.11 EP sells refrigerators and freezers and provides a one year warranty against faults
occurring after sale.

EP estimates that if all goods with an outstanding warranty at the balance sheet date
need minor repairs the total cost would be $3 million. If all the products under warranty
needed major repairs the total cost would be $12 million.

Based on previous years’ experience, EP estimates that 85% of the products will require
no repairs; 14% will require minor repairs and 1% will require major repairs.

Calculate the expected value of the cost of the repair of goods with an outstanding warranty at
the balance sheet date.

(3 marks)


1.12 List FOUR advantages of forfaiting for an exporter.
(4 marks)


1.13 A bond has a coupon rate of 7%. It will repay its face value of $1,000 at the end of
six years. The market expects this type of bond to have a yield to maturity of 10%.

What is the current market value of the bond?
(4 marks)


Section A continues on the next page
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1.14 EB has an investment of 25% of the equity shares in XY, an entity resident in a foreign
country.

EB receives a dividend of $90,000 from XY, the amount being after the deduction of
withholding tax of 10%.

XY had profits before tax for the year of $1,200,000 and paid corporate income tax of
$200,000.

How much underlying tax can EB claim for double taxation relief?
(3 marks)


1.15 EV had inventory days outstanding of 60 days and trade payables outstanding of 50 days
at 31 October 2007.

EV’s inventory balance at 1 November 2006 was $56,000 and trade payables were
$42,000 at that date.

EV’s cost of goods sold comprises purchased goods cost only. During the year to
31 October 2007, EV’s cost of goods sold was $350,000.

Assume purchases and sales accrue evenly throughout the year and use a 365 day year.
Further assume that there were no goods returned to suppliers and EV claimed no
discounts.

Calculate how much EV paid to its credit suppliers during the year to 31 October 2007.

(4 marks)


(Total for Question One = 40 marks)






Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be
submitted for marking.

End of Section A
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Section B starts on page 8








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SECTION B – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.



Question Two

(a)

On 1 September 2007, the Directors of EK decided to sell EK’s retailing division and concentrate
activities entirely on its manufacturing division.

The retailing division was available for immediate sale, but EK had not succeeded in disposing
of the operation by 31 October 2007. EK identified a potential buyer for the retailing division, but
negotiations were at an early stage. The Directors of EK are certain that the sale will be
completed by 31 August 2008.

The retailing division’s carrying value at 31 August 2007 was:
$000
Non-current tangible assets – property, plant and equipment 300
Non-current tangible assets – goodwill 100
Net current assets 43
Total carrying value 443

The retailing division has been valued at $423,000, comprising:
$000
Non-current tangible assets – property, plant and equipment 320
Non-current tangible assets – goodwill 60
Net current assets 43
Total carrying value 423

EK’s directors have estimated that EK will incur consultancy and legal fees for the disposal of
$25,000.



















Required:

(i) Explain whether EK can treat the sale of its retailing division as a “discontinued
operation”, as defined by IFRS 5 Non-current Assets held for Sale and
Discontinued Operations, in its financial statements for the year ended
31 October 2007.
(3 marks)

(ii) Explain how EK should treat the retailing division in its financial statements for
the year ended 31 October 2007, assuming the sale of its retailing division
meets the classification requirements for a disposaI group (IFRS 5).
(2 marks)

(Total for sub-question (a) = 5 marks)
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(b)

EF is an importer and imports perfumes and similar products in bulk. EF repackages the
products and sells them to retailers. EF is registered for Value Added Tax (VAT).
EF imports a consignment of perfume priced at $10,000 (excluding excise duty and VAT) and
pays excise duty of 20% and VAT on the total (including duty) at 15%.
EF pays $6,900 repackaging costs, including VAT at 15% and then sells all the perfume for
$40,250 including VAT at 15%.
EF has not paid or received any VAT payments to/from the VAT authorities for this consignment.











Required:

(i) Calculate EF’s net profit on the perfume consignment.

(ii) Calculate the net VAT due to be paid by EF on the perfume consignment.

(Total for sub-question (b) = 5 marks)



(c)

The trade receivables ledger account for customer X is as follows:
Debits Credits Balance
01-Jul-07 Balance b/fwd 162
12-Jul-07 Invoice AC34 172 334
14-Jul-07 Invoice AC112 213 547
28-Jul-07 Invoice AC215 196 743
08-Aug-07 Receipt RK 116 (Balance + AC34) 334 409
21-Aug-07 Invoice AC420 330 739
03-Sep-07 Receipt RL162 (AC215) 196 543
12-Sep-07 Credit note CN92 (AC112) 53 490
23-Sep-07 Invoice AC615 116 606
25-Sep-07 Invoice AC690 204 810
05-Oct-07 Receipt RM223 (AC420) 330 480
16-Oct-07 Invoice AC913 233 713
25-Oct-07 Receipt RM360 (AC615) 116 597













Required:

(i) Prepare an age analysis showing the outstanding balance on a monthly basis for
customer X.
(3 marks)
(ii) Explain how an age analysis of receivables can be useful to an entity.
(2 marks)

(Total for sub-question (c) = 5 marks)


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(d)

EJ publishes trade magazines and sells them to retailers. EJ has just concluded negotiations
with a large supermarket chain for the supply of a large quantity of several of its trade
magazines on a regular basis.

EJ has agreed a substantial discount on the following terms:

• The same quantity of each trade magazine will be supplied each month;
• Quantities can only be changed at the end of each six month period;
• Payment must be made six monthly in advance.

The supermarket paid $150,000 on 1 September 2007 for six months supply of trade magazines
to 29 February 2008. At 31 October 2007, EJ had supplied two months of trade magazines.
EJ estimates that the cost of supplying the supermarket each month is $20,000.














Required:

(i) State the criteria in IAS 18 Revenue Recognition for income recognition.
(2 marks)
(ii) Explain, with reasons, how EJ should treat the above in its financial statements for the
year ended 31 October 2007.
(3 marks)
(Total for sub-question (d) = 5 marks)



(e)

The objective of IAS 24 Related Party Disclosures is to ensure that financial statements disclose
the effect of the existence of related parties.










Required:

With reference to IAS 24, explain the meaning of the terms “related party” and “related party
transaction”.
(Total for sub-question (e) = 5 marks)
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(f)

ES estimates from its cash flow forecast that it will have $120,000 to invest for 12 months.

ES is considering the following investments:

(i) Purchase of fixed term bonds issued by a “blue chip” entity quoted on the local stock
exchange. The bonds have a maturity date in 12 months’ time and pay 12⋅5% interest on
face value. The bonds will be redeemed at face value in 12 months’ time. ES will incur
commission costs on purchasing the bonds of 1% of cost. The bonds are currently
trading at $102 per $100.

(ii) An internet bank is offering a deposit account that pays interest on a monthly basis at
0⋅8% per month.









Required:

Identify which is the most appropriate investment for the year, giving your reasons.

(Total for sub-question (f) = 5 marks)


(Total for Section B = 30 marks)










End of Section B


Section C starts on page 12










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SECTION C – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER THIS QUESTION


Question Three

EY is an office and industrial furniture manufacturing entity that specialises in developing and
using new materials and manufacturing processes in the production of its furniture.

The balance sheet below relates to the previous year, 31 October 2006, which is followed by a
summary of EY’s cash book for the year to 31 October 2007.

EY Balance Sheet at 31 October 2006
$000 $000 $000
Non-current assets
Development costs – cost 1,000
– amortisation 200 800
Property, plant and equipment – cost 7,300
– depreciation 1,110 6,190 6,990
Current assets
Inventory 1,200
Trade receivables 753
Cash and cash equivalents 82
2,035
9,025

Equity and liabilities
Equity
Share capital 3,000
Revaluation reserve 600
Retained earnings 1,625
5,225

Non-current liabilities
Loan notes 2,260
Deferred tax 180
2,440

Current liabilities
Trade and other payables 573
Tax payable 670
Interest payable 117
1,360
Total liabilities 3,800
9,025
EY’s summarised cash book for the year ended 31 October 2007
Receipts/(Payments)
Note $000
Cash book balance at 1 November 2006 82
Expenditure incurred on government contract (i) (600)
Interest paid during the year (ii) (160)
Administration expenses paid (500)
Research and development costs (iii) (1,600)
Income tax (iv) (690)
Purchase cost of property, plant and equipment (v) (3,460)
Final dividend of 25c per share for year ended 31 October 2006 (750)
Receipt for disposal of land (vi) 1,200
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Summarised cash book continued:

Cash received from customers 7,500
Payments to suppliers of production materials, wages and other production costs (3,000)
Distribution and selling costs (730)
Cash received from increase in loan notes 2,500
Cash book balance at 31 October 2007 (208)

Notes:
(i) The government contract is a long-term project for the supply of a new type of seating for
government offices involving the development of new materials. The total contract value is
$1,400,000. The expenditure includes all costs incurred during the first year of the
contract. The project leader is confident that the remainder of the work will cost no more
than $400,000. The contract provides that EY can charge for the proportion of work
completed by 31 October each year. The percentage of cost incurred to total cost should
be used to apportion profit/losses on the contract.
(ii) Interest outstanding at 31 October 2007 was $130,000.
(iii) During the year EY spent $1,600,000 on research and development. This comprised
three projects:
• Cost in the year $300,000 – Funded research projects carried out at the local
university;
• Cost in the year $500,000 – Development of a new type of laminate expected to be a
very profitable product line. The final development phase has just finished, and
production of the laminate is expected from January 2008.
• Cost in the year $800,000 – Development of a new type of artificial wood, to replace
real wood in some furniture and help reduce EY’s use of wood. The development
produced a good substitute for wood, but was five times more expensive and hence
not viable.
Capitalised development expenditure is amortised on the straight line basis over five
years and treated as a cost of sale.
(iv) Income tax due for the year was estimated by EY at $420,000.
(v) The property, plant and equipment balance at 31 October 2006 was made up as follows:
Land Premises Plant &
equipment
Total
$000 $000 $000 $000
Cost/valuation 2,000 1,500 3,800 7,300
Depreciation 0 350 760 1,110
Net book value 2,000 1,150 3,040 6,190
During the year EY purchased new premises at a cost of $1,600,000, and new plant and
equipment for $1,860,000. Premises are depreciated on the straight line basis at 6% per
year, and plant and machinery are depreciated on the reducing balance at 15% per year
and are treated as a cost of sale. EY charges a full year’s depreciation in the year of
acquisition. No assets were fully depreciated at 31 October 2006.
(vi) Land originally costing $600,000, which had previously been revalued to $1,000,000 was
sold during the year for $1,200,000.
(vii) A bonus issue of shares was made on the basis of one new share for every six shares
held.
(viii) Deferred tax is to be increased by $42,000.
(ix) Balances at 31 October 2007 included: trade receivables $620,000;
outstanding trade payables $670,000;
inventory $985,000.


The question requirement is on page 15, which is detachable for
ease of reference.
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This page is blank








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Question Three (continued from page 13)











(Total for Section C = 30 marks)













End of Question Paper


Maths Tables and Formulae are on pages 17-19
November 2007 15 P7

Required:

Prepare the income statement and a statement of changes in equity for the year to
31 October 2007 and a balance sheet at that date, in a form suitable for presentation to the
shareholders and in accordance with the requirements of International Financial Reporting
Standards. (All workings should be to the nearest $000)

Notes to the financial statements are NOT required, but all workings must be clearly
shown. Do NOT prepare a statement of accounting policies.
(Total for Question Three = 30 marks)
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[this page is blank]

P7 16 November 2007

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MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

November 2007 17 P7

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P7 18 November 2007

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FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


November 2007 19 P7

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P7 22 November 2007

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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
1 KNOWLEDGE

What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
2 COMPREHENSION

What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
3 APPLICATION

How you are expected to apply your knowledge. Apply
Calculate/compute
To put to practical use
To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 ANALYSIS

How you are expected to analyse the detail of
what you have learned.
Analyse
Categorise
Examine in detail the structure of
Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence
5 EVALUATION

How you are expected to use your learning to
evaluate, make decisions or recommendations.

Advise
Evaluate
Recommend
To counsel, inform or notify
To appraise or assess the value of
To advise on a course of action


November 2007 23 P7

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Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
November 2007
Thursday Afternoon Session

P7 24 November 2007

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2007 Exam

The Chartered Institute of Management Accountants Page 1

Examiner’s General Comments

There was a good standard of answer being produced by many candidates, but performance overall was
disappointing. There was evidence of a number of well-prepared candidates with a wide range of knowledge,
able to tackle most of the sub-questions in Questions One and Two and prepare a good answer to Question
Three. However, there seemed to be an increasing number of candidates that were obviously question
spotting and had not prepared for some of the topics on the paper, for example questions Two (c), Two (e)
and Two (f). Question spotting is not advised in this paper as most learning outcomes are covered in each
examination. In some key topics, all of which have been examined previously, some candidates still do not
appear to understand the principles, for example deferred tax (sub-question 1.10), valuing a financial
instrument (sub-question 1.13), calculation of VAT (Question Two (b)) and areas of Question Three such as
research and development costs and amortisation and long-term contracts.

The following guide provides assistance to candidates preparing for future examinations and has been
prepared with that in mind. It therefore may give the impression that there were few good marks and few
passes as all the main errors have been listed for each question. It must be remembered though that not all
candidates made the errors listed.

Question One did not appear to be as well done as in previous papers, with a number of candidates
obviously unprepared for certain topics, particularly 1.13, 1.14 and 1.15. All these topics have featured on
previous examination papers and should have caused no surprises.

Sub-question 1.10, deferred tax is still causing problems for some candidates, many could not deal with the
fact that ED had received 100% tax allowance in year one.

Sub-question 1.13 asked for the “current value” of the bond and gave the yield as 10%. Many candidates
could not identify the correct method to calculate value, trying to work out the yield percentage instead. It
should have been a simple matter of applying the percentage yield to the annuity and discount factors given
in the attached tables. Of those that attempted to apply the correct method many transposed the annuity and
discount factors.

Sub-question 1.14 very few candidates were able to calculate the underlying tax for double taxation relief.
Most candidates were only able to calculate the gross dividend.

Sub-question 1.15 required candidates to use the inventory days and trade payables days outstanding to
calculate cash paid in the period. Very few candidates got this question correct. Most were unable to link the
two phases of inventory adjusting purchases and then trade payables adjusting purchases to give the
payment.

Question Two was generally not as well done as the other questions on the paper. Some candidates were
obviously ill-prepared for any of the questions in this section and did not seem to understand what was
required for five marks. Many candidates were able to explain the requirements, for example on discontinued
operations, but were unable to apply them. The computations required for the questions on value added tax
(VAT), age analysis of receivables, and calculating compound interest on an investment seemed to defeat a
significant number of candidates, although these are basic calculations.

Question Three was presented as a summarised cash book rather than a trial balance. Well-prepared
candidates were not affected by this presentation as they were able to apply their knowledge of double entry
bookkeeping and calculate the correct figures. Less well-prepared candidates often reversed the opening
and closing balances adding instead of subtracting. There were a significant number of candidates correctly
calculating figures in workings and then either ignoring the workings completely, leaving them out of the
answer or misusing the results of their workings in the answer. This applied to a number of adjustments
including tax, deferred tax and depreciation. It was particularly conspicuous with the government contract, a
large proportion of candidates calculated turnover, cost of sales and profit correctly and did not include
anything in the income statement or balance sheet.
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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2007 Exam

The Chartered Institute of Management Accountants Page 2

SECTION A

Please note that in this PEG the mark available has been omitted from the end of each question in this
section


Question 1.1

The International Accounting Standards Board’s (IASB) Framework for the Preparation
and Presentation of Financial Statements (Framework), sets out four qualitative
characteristics of financial information. Two of the characteristics are relevance and
comparability. List the other TWO characteristics.
The answers are: Reliability and Understandability.


Question 1.2

IAS 16 Property, Plant and Equipment requires an asset to be measured at cost on its
original recognition in the financial statements. EW used its own staff, assisted by contractors
when required, to construct a new warehouse for its own use. Which ONE of the following
costs would NOT be included in attributable costs of the non-current asset?

A Clearance of the site prior to work commencing.
B Professional surveyors’ fees for managing the construction work.
C EW’s own staff wages for time spent working on the construction.
D An allocation of EW’s administration costs, based on EW staff time spent on the
construction as a percentage of the total staff time.


The Answer is D


Question 1.3

An external auditor gives a qualified audit report that is a “disclaimer of opinion”. This means
that the auditor

A has been unable to agree with an accounting treatment used by the directors in relation to
a material item.
B has been prevented from obtaining sufficient appropriate audit evidence.
C has found extensive errors in the financial statements and concludes that they do not
show a true and fair view.
D has discovered a few immaterial differences that do not affect the auditor’s opinion.



The Answer is B
For mat t ed: English (U.K.)
For mat t ed: English (U.K.)
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Question 1.4

The trial balance of EH at 31 October 2007 showed trade receivables of $82,000 before
adjustments. On 1 November 2007 EH discovered that one of its customers had ceased
trading and was very unlikely to pay any of its outstanding balance of $12,250. On the same
date EH carried out an assessment of the collectability of its other trade receivable balances.
Using its knowledge of its customers and past experience EH determined that the remaining
trade receivables had suffered a 3% impairment at 31 October 2007. What is EH’s balance of
trade receivables, as at 31 October 2007?

A $66,202
B $67,290
C $67,657
D $79,540



The Answer is C


Question 1.5

EX is preparing its cash forecast for the next three months. Which ONE of the following items
should be left out of its calculations?

A Expected gain on the disposal of a piece of land.
B Tax payment due, that relates to last year’s profits.
C Rental payment on a leased vehicle.
D Receipt of a new bank loan raised for the purpose of purchasing new machinery.



The Answer is A


Question 1.6

The following details relate to EA:

• Incorporated in Country A.
• Carries out its main business activities in Country B.
• Its senior management operate from Country C and effective control is exercised from
Country C.

Assume countries A, B and C have all signed double tax treaties with each other, based
on the OECD model tax convention. Which country will EA be deemed to be resident in for
tax purposes?

A Country A
B Country B
C Country C
D Both Countries B and C



The Answer is C


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Question 1.7

Treasury shares are defined as

A equity shares sold by an entity in the period.
B equity shares repurchased by the issuing entity, not cancelled before the period end.
C non-equity shares sold by an entity in the period.
D equity shares repurchased by the issuing entity and cancelled before the period end.



The Answer is B


Question 1.8

EE reported accounting profits of $822,000 for the period ended 30 November 2007. This
was after deducting entertaining expenses of $32,000 and a donation to a political party
of $50,000, both of which are disallowable for tax purposes. EE’s reported profit also included
$103,000 government grant income that was exempt from taxation. EE paid dividends of
$240,000 in the period. Assume EE had no temporary differences between accounting profits
and taxable profits. Assume that a classical tax system applies to EE’s profits and that the tax
rate is 25%. What would EE’s tax payable be on its profits for the year to 30 November 2007?



Answer


$000
Profit 822
Add back entertaining expenses 32
Political party donation 50
904
Less grant (103)
801
Tax due = 801 x 25% = 200



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Question 1.9

EG purchased a property for $630,000 on 1 September 2000. EG incurred additional costs
for the purchase of $3,500 surveyors’ fees and $6,500 legal fees. EG then spent $100,000
renovating the property prior to letting it. All of EG’s expenditure was classified as capital
expenditure according to the local tax regulations. Indexation of the purchase and renovation
costs is allowed on EE’s property. The index increased by 50% between September 2000
and October 2007. Assume that acquisition and renovation costs were incurred in September
2000. EG sold the property on 1 October 2007 for $1,250,000, incurring tax allowable costs
on disposal of $2,000. Calculate EG’s tax due on disposal assuming a tax rate of 30%.


Answer
$000 $000
Cost 630
Fees 10
640
Renovation 100
740
Indexation at 50% 370
1,110
Selling price 1,250
Less cost of disposal 2 1,248
Taxable amount 138
Tax at 30% = 41⋅4


Question 1.10

A government wanted to encourage investment in new non-current assets by entities and
decided to change tax allowances for non-current assets to give a 100% first year allowance
on all new non-current assets purchased after 1 January 2005. ED purchased new machinery
for $400,000 on 1 October 2005 and claimed the 100% first year allowance. For accounting
purposes ED depreciated the machinery on the reducing balance basis at 25% per year. The
rate of corporate income tax to be applied to ED’s taxable profits was 22%. Assume ED had
no other temporary differences. Calculate the amount of deferred tax that ED would show in
its balance sheet at 30 September 2007.



Answer
Deferred tax balance: $000
Accounting depreciation:
Cost 400
Depreciation to September 2006 100
300
Depreciation to September 2007 75
225
Tax allowances:
Allowance to September 2006 400

Temporary difference at September 2007 is 400 – 175 = 225
Deferred tax provision is 225 @ 22% = 49⋅5


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Question 1.11

EP sells refrigerators and freezers and provides a one year warranty against faults occurring
after sale. EP estimates that if all goods with an outstanding warranty at the balance sheet
date need minor repairs the total cost would be $3 million. If all the products under warranty
needed major repairs the total cost would be $12 million. Based on previous years’
experience, EP estimates that 85% of the products will require no repairs; 14% will require
minor repairs and 1% will require major repairs. Calculate the expected value of the cost of
the repair of goods with an outstanding warranty at the balance sheet date.


Answer

Warranty cost provision = ($3m x 0⋅14) + ($12m x 0⋅01) = $540,000



Question 1.12

List FOUR advantages of forfaiting for an exporter.



Answer

Advantages of forfaiting; any FOUR of the following:

• trade receivables are turned into immediate cash;
• as it is non-recourse, no liability appears on the balance sheet;
• future foreign-exchange and interest-rate risk is eliminated;
• overdraft and other credit limits are not affected;
• any other reasonable advantage.



Question 1.13

A bond has a coupon rate of 7%. It will repay its face value of $1,000 at the end of six years.
The market expects this type of bond to have a yield to maturity of 10%. What is the current
market value of the bond?



Answer

($70 x (annuity factor t = 6, r = 10)) + ($1,000 x (discount factor t = 6, r = 10))
($70 x 4·355) + ($1,000 x 0·564) = 304·85 + 564 = $868·85


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Question 1.14

EB has an investment of 25% of the equity shares in XY, an entity resident in a foreign
country. EB receives a dividend of $90,000 from XY, the amount being after the deduction of
withholding tax of 10%. XY had profits before tax for the year of $1,200,000 and paid
corporate income tax of $200,000. How much underlying tax can EB claim for double taxation
relief?



Answer

Gross dividend = 90 x 100/90 = 100
After tax profits 1,000
Underlying tax = 100/1,000 x 200 = 20



Question 1.15

EV had inventory days outstanding of 60 days and trade payables outstanding of 50 days
at 31 October 2007. EV’s inventory balance at 1 November 2006 was $56,000 and trade
payables were $42,000 at that date. EV’s cost of goods sold comprises purchased goods
cost only. During the year to 31 October 2007, EV’s cost of goods sold was $350,000.
Assume purchases and sales accrue evenly throughout the year and use a 365 day year.
Further assume that there were no goods returned to suppliers and EV claimed no
discounts. Calculate how much EV paid to its credit suppliers during the year to 31 October
2007.


Answer


At 31 October 2007:


Cost of goods sold = $350,000
Inventory = $350,000 x 60/365 = $57,534

Inventory b/fwd 1/11/06 56,000
Purchases (balancing figure) 351,534
407,534
Inventory c/fwd 31/10/07 57,534
350,000

Closing trade payables = $351,534 x 50/365 = $48,155

Trade payables b/fwd 1/11/06 42,000
Purchases 351,534
393,534
Trade payables c/fwd 31/10/07 48,155
Paid 345,379

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November 2007 Exam

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SECTION B


Question Two

(a)


(i) Explain whether EK can treat the sale of its retailing division as a “discontinued operation”, as
defined by IFRS 5 Non-current Assets held for Sale and Discontinued Operations, in its financial
statements for the year ended 31 October 2007.
(ii) Explain how EK should treat the retailing division in its financial statements for the year ended
31 October 2007, assuming the sale of its retailing division meets the classification requirements
for a disposaI group (IFRS 5).

Rationale

Tests candidates’ ability to explain whether the entity concerned can treat the sale of a division as
a “discontinued operation”, per IFRS 5 Non-current Assets held for Sale and Discontinued
Operations; and if the sale meets the Standard’s classification requirements and how this is then
treated in its financial statements. Tests learning outcome B (iv).


Suggested Approach

(i) Explain “discontinued operation” and conclude this does not qualify.
Explain criteria for “disposal group” and conclude it does qualify.

(ii) Explain how the disposal group should be valued, calculate figures and identify amounts to be
shown in income statement and balance sheet.


Marking Guide

Marks

Explanation of “discontinued operation” and disposal group”, with correct
conclusion


3
Explanation of valuation and correct entries for income statement and balance
sheet

2


Examiner’s Comments

Some candidates only defined discontinued operations and ignored disposal groups in part (i),
even though it had been signalled in part (ii) of the question.
Many did not appreciate the criteria for recognising a disposal group as “discontinued” or “held for
sale” and were unable to explain the criteria.
A large proportion of answers did not refer to the asset values and costs given in the question. If a
question asks for an explanation of the treatment in financial statements and provides figures it
should be fairly obvious that the answer must include reference to costs and assets values given.

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November 2007 Exam

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Common Errors for Question Two (a)

(i) Insufficient detailed explanation, an answer needs to say why this is or is not a “discontinued
operation” or “held for sale” disposal group.
Not including disposal groups in the answer.

(ii) Ignoring one or other of the income statement or balance sheet entries.
Giving a very general answer, ignoring the detailed figures given in the question.
Not being able to apply IFRS 5 requirements on valuation of disposal groups.


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Question Two

(b)


(i) Calculate EF’s net profit on the perfume consignment.

(ii)Calculate the net VAT due to be paid by EF on the perfume consignment.


Rationale

Tests candidates’ ability to calculate both the net profit on the perfume consignment and
the net VAT due to be paid by the entity concerned on it. Tests learning outcome A (ii).


Suggested Approach

Calculate the total profit excluding VAT, total VAT and total including VAT as a check only.
When calculating VAT and income net of VAT be wary of whether the figures given are including
VAT or excluding VAT.


Marking Guide

Marks

Net profit excluding VAT 2.5
VAT payable 2.5


Examiner’s Comments

This should have been a straight forward question for well-prepared candidates.
It was surprising how many gave the total including VAT as the net profit. VAT on turnover cannot
be counted as revenue of the entity and VAT paid should not be included in any profit calculation,
unless such VAT paid is irrecoverable.
It was also surprising how many candidates could not correctly calculate VAT when the figure
inclusive of VAT was given. The repackaging costs and revenue figures were given including VAT.

Common Errors
Including VAT in the calculation of net profit.
Using 15% to calculate VAT when a VAT inclusive amount has been given, instead of 15/115.
Counting excise duty as VAT.
Not charging VAT on the excise duty, even though this was stated in the question.


Del et ed: Vat
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Question Two

(c)


(i) Prepare an age analysis showing the outstanding balance on a monthly basis for customer
X.

(ii) Explain how an age analysis of receivables can be useful to an entity.


Rationale

Tests candidates’ ability to prepare an age analysis showing the outstanding balance on a
monthly basis for a customer of the entity concerned and to explain its usefulness to the
entity. Tests learning outcome D (v).


Suggested Approach

Analyse the sales invoices and receipts and match the receipts to its invoice. List the invoices
unpaid at the period end, analysing them into the month they were issued.
Explain how this process can be useful in an entity.


Marking Guide

Marks

Preparation of age analysis 3
Explanation of usefulness 2


Examiner’s Comments

(i) Although this type of question appeared in Question One in a previous paper it was not
done well by most candidates. Most did not seem to know what an age analysis was or how
to prepare one. Many presented an account listing sales invoices and receipts or calculated
monthly sales and monthly cash receipts.
(ii) Slightly more candidates were able to to identify the usefulness of an age analysis and
score a mark or two on this part of the question.

Common Errors
Allocating receipts to the month they were received instead of to the invoice.
A number of candidates calculated total invoices and total receipts in each month rather than
the outstanding balance at the period end.
Preparing a ledger account.
Allocating the credit note to the period issued instead of adjusting the invoice.


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Question Two

(d)


(i) State the criteria in IAS 18 Revenue Recognition for income recognition.

(ii) Explain, with reasons, how EJ should treat the above in its financial statements for the
year ended 31 October 2007.


Rationale

Tests candidates’ ability to state the criteria in IAS 18 Revenue Recognition and explain
their treatment in the financial statements of the entity concerned. Tests learning outcome
C (v).


Suggested Approach

Explain the criteria of IAS 18 for revenue recognition
Apply the IAS 18 criteria to the situation given and explain how the transaction should be
treated, with calculation of amounts.


Marking Guide

Marks

IAS 18 recognition criteria 2
Explanation and calculation of figures to include in the financial statements 3


Examiner’s Comments

Most candidates were able to give most of the IAS 18 criteria but few were able to apply the
criteria correctly to the scenario. Few were able to give reasons for their proposed treatment
in the financial statements.

Common Errors
Not giving sufficient detail in the answer, for example saying two months revenue should be
recognised as income but not saying where it is recognised or how much to recognise.
Proposing that a provision for costs to be incurred should be set up.
Recognising all of the revenue in the year.


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Post Exam Guide
November 2007 Exam

The Chartered Institute of Management Accountants Page 13



Question Two

(e)


With reference to IAS 24, explain the meaning of the terms “related party” and “related party
transaction”.


Rationale

Tests candidates’ ability to explain the meaning of the terms “related party” and “related
party transaction” with reference to IAS 24 Related Party Disclosures. Tests learning
outcome C (v).


Suggested Approach

Explain the meaning of related party using examples to illustrate.
Explain the meaning of related party transaction with example


Marking Guide

Marks

Related party explanation and examples 3
Related party transaction with example 2


Examiner’s Comments

Some candidates clearly had not studied IAS 24 and were guessing. The main problem with
those that had read the standard was that they did not give enough detail for the marks
available.

Common Errors
Not including the full range of related parties. Most candidates concentrated on key
management personnel and their relatives.
Stating anyone that did business with the entity was a related party, including categories
specifically excluded by IAS 24.
Not including any examples to illustrate the explanation


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2007 Exam

The Chartered Institute of Management Accountants Page 14



Question Two

(f)


(i) Identify which is the most appropriate investment for the year, giving your reasons.

Rationale

Tests candidates’ ability to identify and justify, for the entity concerned, what would be the
most appropriate investment for it to make for the year. Tests learning outcome D (viii).


Suggested Approach

Calculate the return from each of the possible investments
Compare the return from each investment and consider other factors before making a
recommendation


Marking Guide

Marks

Calculations

3.5
Other factors and recommendation 1.5


Examiner’s Comments

The compound interest required for the internet bank caused many candidates problems,
many ignored compounding. If the interest is stated as a monthly rate and the cash is left in
the bank the interest will earn interest and the rate must be compounded.
The bonds had a current value in excess of the redemption value, this caused many
candidates problems. It was usually taken into account for the purchase cost but was nearly
always ignored when calculating the return on investment.
The commission costs were incorrectly treated by most candidates. Very few realised that the
amount of money available was fixed, at least for comparison purposes. They therefore
allowed the commission costs to be added on to the $120,000 instead of treating it as part of
the cost.
Due to the above errors most candidates concluded that the return on the bonds was much
higher than on the internet bank account, instead of the reverse.
Only a significant minority considered factors other than return on investment.

Common Errors
Using 0.8% times 12 for the return on the bank deposit.
Calculating the number of bonds to purchase without taking account of the commission or the
premium on purchase.
When calculating the return assuming that the bonds were sold for $102 instead of the face
value $100.
Comparing the return on the bank deposit of $120,000 with the total received from an
investment in bonds, the cost of which was well above $120,000, for example based on
120,000 bonds at $102 plus commission.
Not providing any other factors that would need to be considered before a decision was
made.


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2007 Exam

The Chartered Institute of Management Accountants Page 15

SECTION C


Question Three


Prepare the income statement and a statement of changes in equity for the year to 31 October
2007 and a balance sheet at that date, in a form suitable for presentation to the shareholders and in
accordance with the requirements of International Financial Reporting Standards. (All workings
should be to the nearest $000) Notes to the financial statements are NOT required, but all
workings must be clearly shown. Do NOT prepare a statement of accounting policies.

(Total for Question Three = 30 marks)


Rationale

Tests candidates’ ability to prepare (from information provided in the question scenario) an income
statement, balance sheet and a statement of changes in equity for the entity concerned. The
financial statements required should be in a form suitable for publication and in accordance with
current International Financial Reporting Standards. Tests learning outcomes A (viii) and C (i).


Suggested Approach

Read the question carefully and then using the additional information provided and the summary
cash book figures, prepare workings to calculate depreciation of premises and plant and equipment
for the year and amortisation of development costs.
Prepare workings for the government contract.
Using the additional information provided and the summary cash book figures, prepare workings to:
1. calculate revenue
2. calculate the cost of sales and administration
3. calculate tax charge and outstanding balances.
4. calculate the income statement and balance sheet figures for research and development
5. calculate the gain on disposal of land.
Prepare the income statement using IAS 1 format.
Prepare the statement of changes in equity using IAS 1 format
Prepare the balance sheet using IAS 1 format


Marking Guide

Marks

Income statement

14.5
Statement of changes in equity 3.5
Balance sheet 9
Formats 3


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2007 Exam

The Chartered Institute of Management Accountants Page 16



Examiner’s Comments on Question Three

Many candidates prepared workings for the government contract, but did not use the figures
correctly in the accounts.
Many candidates did not include the disposal of land properly. A significant number still have
problems calculating basic depreciation, particularly when it is reducing balance.
Deferred tax and current tax were often wrongly calculated, and both included in either current
liabilities or non-current liabilities. Deferred tax is non-current while current tax is a current liability.
Research and development caused a lot of confusion. Many candidates could not differentiate
between non-current asset values, amortisation and expense for the year. Very few used the
correct treatment for the income statement (expense in year and amortisation) and balance sheet,
asset value carried forward.
The statement of changes in equity was not done very well by most candidates. Very few
candidates showed the bonus issue, those that did usually only showed one entry under share
capital. The transfer of the realised gain on disposal from revaluation reserve to retained earnings
was nearly always omitted from the statement. The format of this part was often poor, with no total
column and headings omitted.
Overall this question was reasonably well done but few gained full marks.

Common Errors
Calculating figures for the government contract but not including them in revenue and cost of sales.
Using a basis other than proportion of cost of work completed to total cost for calculating the
revenue and profit to date.
Showing the contract profit to date as a single item in the income statement.
Reversing the opening and closing balances when adjusting the cash paid to suppliers to credit
purchases.
Reversing the opening and closing balances when adjusting credit purchases to cost of sales.
Reversing the opening and closing balances when adjusting cash received from customers to credit
sales.
Not making any adjustments to cash paid and cash received for the opening and closing balances
of trade payables, trade receivables and inventory.
Research and development expenditure during the year had to be split between expense and asset
by applying IAS 38. Many candidates did not correctly split the expenditure between income
statement expense and carried forward as an asset on the balance sheet. Amortisation was
incorrectly calculated, often the balance brought forward was completely excluded or a net figure
was used.
Not including the increase in deferred tax in the income statement tax charge.
Showing deferred tax under current liabilities.
Not including accrued items (tax and interest) in current liabilities.
Including bank overdraft under current assets.
Including dividends paid on the balance sheet.


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Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax Principles
22 May 2008 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to open the answer book and start writing or use
your calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions). The requirements for the questions in Sections B and C are
highlighted in a dotted box.
ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be submitted for marking.
Answer the ONE compulsory question in Section A. This has 15 sub-
questions on pages 2 to 6.
Answer the SIX compulsory sub-questions in Section B on pages 8 to 11.
Answer the ONE compulsory question in Section C on pages 12 to 15. The
question requirement is on page 15, which is detachable for ease of
reference.
Maths Tables and Formulae are provided on pages 17 to 19. These pages
are detachable for ease of reference.
The list of verbs as published in the syllabus is given for reference on the
inside back cover of this question paper.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P
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TURN OVER
© The Chartered Institute of Management Accountants 2008
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SECTION A – 40 MARKS
[the indicative time for answering this Section is 72 minutes]
ANSWER ALL FIFTEEN SUB-QUESTIONS



Instructions for answering Section A:

The answers to the fifteen sub-questions in Section A must ALL be written in your
answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.9, 1.10, 1.11, 1.12, 1.14 and 1.15 you should show your
workings as marks are available for the method you use to answer these sub-
questions.



Question One

1.1 Which ONE of the following statements about an overdraft facility is correct?

A An overdraft is a permanent loan.
B Assets are always required as security.
C Interest is paid on the full facility.
D Compared with other types of loan it is quick and easy to set up.
(2 marks)


1.2 What is “Hypothecation”?

A Process of earmarking tax revenues for specific types of expenditure.
B Estimation of tax revenue made by the tax authorities for budget purposes.
C Refund made by tax authorities for tax paid in other countries.
D Payment of taxes due to tax authorities, net of tax refunds due from tax authorities.
(2 marks)


P7 2 May 2008

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1.3 Which ONE of the following is correct?

A cash budget prepared on a monthly basis is done to calculate

A the amount of inventory to purchase in the following month.
B when to pay workers’ wages.
C next month’s sales volumes.
D whether there will be sufficient cash in the bank to meet requirements.
(2 marks)


1.4 Which ONE of the powers listed below is unlikely to be granted to the auditor by
legislation?

A The right of access at all times to the books, records, documents and accounts of the
entity.
B The right to be notified of, attend, and speak at meetings of equity holders.
C The right to correct financial statements if the auditor believes the statements do not show
a true and fair view.
D The right to require officers of the entity to provide whatever information and explanations
thought necessary for the performance of the duties of the auditor.
(2 marks)


1.5 Which ONE of the following statements would be correct when an independent auditor’s
report gives an adverse opinion?

A The effect of the disagreement with management is so pervasive that the financial
statements are misleading and, in the opinion of the auditor, do not give a true and fair
view.
B A disagreement with management over material items needs to be highlighted using an
“except for” statement.
C An opinion cannot be given because insufficient information or access to records has
been given to the auditor.
D A disagreement with management over material items means that an unqualified report
must be issued.
(2 marks)







Section A continues on the next page






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1.6 Where a resident entity runs an overseas operation as a branch of the entity, certain tax
implications arise.

Which ONE of the following does not usually apply in relation to an overseas branch?

A Assets can be transferred to the branch without triggering a capital gain.
B Corporate income tax is paid on profits remitted by the branch.
C Tax depreciation can be claimed on any qualifying assets used in the trade of the branch.
D Losses sustained by the branch are immediately deductible against the resident entity’s
income.
(2 marks)


1.7 The “tax gap” is the difference between

A when a tax payment is due and the date it is actually paid.
B the tax due calculated by the entity and the tax demanded by the tax authority.
C the amount of tax due to be paid and the amount actually collected.
D the date when the entity was notified by the tax authority of the tax due and the date the
tax should be paid.

(2 marks)


1.8 Which of the following are functions of the International Accounting Standards Committee
Foundation?

(i) Issuing International Accounting Standards
(ii) Approving the annual budget of the International Accounting Standards
Committee (IASC) and its committees
(iii) Enforcing International Accounting Standards
(iv) Reviewing the strategy of the IASC
(v) Publishing an annual report on the activities of the IASC and IASB


A (i), (ii) and (v)
B (ii) and (iv)
C (i), (iii) and (v)
D (ii), (iv) and (v)
(2 marks)


P7 4 May 2008

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1.9 FD purchased an item of plant and machinery costing $600,000 on 1 April 2005, which
qualified for 50% capital allowances in the first year and 25% per year thereafter, on the
reducing balance basis.

FD’s policy in respect of plant and machinery is to charge depreciation on a straight line
basis over five years, with no residual value.

On 1 April 2007, FD carried out an impairment review of all its non-current assets. This
item of plant and machinery was found to have a value in use of $240,000. FD adjusted
its financial records and wrote the plant and machinery down to its value in use on 1 April
2007.

Assuming there are no other temporary differences in the period and a tax rate of 25% per
annum over the five years, calculate the amount of any deferred tax balances outstanding at
31 March 2007 and 31 March 2008. (Work to the nearest $1,000)
(4 marks)


1.10
FR Income statement for the year ended 31 March 2008
$000
Revenue 270
Cost of goods sold 139
Gross profit 131

Assume all sales and all purchases are on credit and that there are no returns or
discounts. All trade payables relate to cost of sales.

FR Balance sheet at 31 March 2008 (Extract)
Current assets $000 $000
Inventory 79
Trade receivables 52
Cash 25
156
Current liabilities
Trade payables 40
Accrued interest 21
Income tax 88
149

Inventory balance at 31 March 2007 was $79,000.

Calculate the number of days in FR’s working capital cycle.
(4 marks)


1.11 FW holds a 91 day treasury bill, with a face value of $10,000. FW wants to sell the
treasury bill, which has 40 days remaining to maturity.
The market yield for treasury bills is 6%.
Calculate the expected selling price of the treasury bill. (Assume 365 days in a year for interest
calculation purposes.)
(3 marks)



Section A continues on the next page

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May 2008 5 P7

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1.12 Country Z has a VAT system which allows entities to reclaim input tax paid.

In Country Z, the VAT rates are:
Zero rated 0%
Standard rated 15%

FE owns and runs a small retail store. The store’s sales include items that are zero rated,
standard rated and exempt.

FE’s electronic cash register provides an analysis of sales. The figures for the three
months to 30 April 2008 were:
Sales value, including VAT where appropriate
$
Zero rated 13,000
Standard rated 18,400
Exempt 11,000
Total 42,400
FE’s analysis of expenditure for the same period provided the following:
Expenditure, excluding VAT
$
Zero rated purchases 6,000
Standard rated purchases relating to standard rate outputs 10,000
Standard rated purchases relating to zero rate outputs 4,000
Standard rated purchases relating to exempt outputs 5,000
25,000

Calculate the VAT due to/from FE for the three months ended 30 April 2008.
(3 marks)


1.13 State TWO reasons why a group of entities might want to claim group loss relief rather
than use the loss in the entity to which it relates. (Group loss relief is where, for tax
purposes, the loss for the year of one entity in the group is offset against the profit of the
year of one or more other entities in the group.)
(2 marks)


1.14 A $1,000 bond has a coupon rate of 12% and will repay its face value on redemption in
four years’ time.

If the bond is purchased for $1,090 ex interest and held, what is its yield to maturity?
(4 marks)


1.15 FJ commenced business on 1 April 2008. Sales in April 2008 were $60,000. This is
forecast to increase by 2% per month.

Credit sales accounted for 50% of sales. Credit sales customers are allowed one month
to pay; 75% of April credit customers paid on time. A further 20% are expected to pay
after more than one month, but before two months. The remaining 5% are not expected
to pay. All these percentages are expected to continue in the near future.

Calculate the total amount of cash FJ should forecast to be received in June 2008.
(4 marks)


(Total for Question One = 40 marks)


P7 6 May 2008

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Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be
submitted for marking.



End of Section A



Section B starts on page 8














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May 2008 7 P7

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SECTION B – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.



Question Two

(a)

EK publishes various types of book and occasionally produces films which it sells to major film
distributors.

(i) On 31 March 2007, EK acquired book publishing and film rights to the next book
to be written by an internationally acclaimed author, for $1 million. The author
has not yet started writing the book, but expects to complete it in 2009.

(ii) Between 1 June and 31 July 2007, EK spent $500,000 exhibiting its range of
products at a major international trade fair. This was the first time EK had
attended this type of event. No new orders were taken as a direct result of the
event, although EK directors claim to have made valuable contacts that should
generate additional sales or additional funding for films in the future. No
estimate can be made of additional revenue at present.

(iii) During the year, EK employed an external consultant to redesign EK’s corporate
logo and to create advertising material to improve EK’s corporate image. The
total cost of the consultancy was $800,000.

EK’s directors want to treat all of the above items of expenditure as assets.



Required:

Explain how EK should treat these items of expenditure in its financial statements for
the year ended 31 October 2007 with reference to the International Accounting
Standards Board’s (IASB) Framework for the Preparation and Presentation of
Financial Statements (Framework) and relevant International Financial Reporting
Standards.
(Total for sub-question (a) = 5 marks)
















P7 8 May 2008

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(b) The following financial information relates to FC for the year ended 31 March 2008.

Income statement for the year ended 31 March 2008

$000
Revenue 445
Cost of sales (220)
Gross profit 225
Other income 105
330
Administrative expense (177)
153
Finance costs (20)
Profit before tax 133
Income tax expense (43)
Profit 90

The following administrative expenses were incurred in the year:

$000
Wages 70
Other general expenses 15
Depreciation 92
177

Other income:
Rentals received 45
Gain on disposal of non-current assets 60
105

Balance sheet extracts at:
31 March 2008 31 March 2007
$000 $000
Inventories 40 25
Trade receivables 50 45
Trade payables (30) (20)



Required:

Prepare FC’s cash flow statement for the year ended 31 March 2008, down to the line
“Cash generated from operations”, using the direct method.

(Total for sub-question (b) = 5 marks)







Section B continues on the next page





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(c) FG issued 10,000,000 $1, 5% preferred shares at par on 1 May 2006. The shares are
redeemable at a 10% premium four years after issue on 30 April 2010. Issue costs were
$601,500.


Required:

(i) Calculate the finance charge for EACH of the four years 1 May 2006 to 30 April
2010 using the sum of digits method.
(3 marks)
(ii) Prepare extracts from FG’s income statement for the year ended 30 April 2008
and its balance sheet at that date, to show the accounting entries required for
the preferred shares.
(2 marks)

(Total for sub-question (c) = 5 marks)





(d)













(e)


Required:

The International Accounting Standards Board’s (IASB) Framework for the Preparation
and Presentation of Financial Statements (Framework) defines the elements of
financial statements.

Explain EACH of the elements, illustrating each with an example.

(Total for sub-question (e) = 5 marks)



Required:

Explain the possible benefits and limitations of a Just-In-Time (JIT) purchasing
system.
(Total for sub-question (d) = 5 marks)


P7 10 May 2008

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(f) Country X has the following tax regulations in force.

• The tax year is 1 May to 30 April;
• All corporate profits are taxed at 20%;
• When calculating corporate taxable income, depreciation of non-current
assets cannot be charged against taxable income.
• Tax depreciation is allowed at the following rates:
o Buildings at 5% per annum on straight line basis;
o All other non-current tangible assets are allowed tax depreciation at
25% per annum on a reducing balance basis;
• No tax allowances are allowed on land or furniture and fittings.

FB commenced trading on 1 May 2005 when it purchased all its non-current assets.

FB’s non-current asset balances were:
Cost
1 May 2005
Net book value
1 Mayl 2007
Tax written down value
1 May 2007
$ $ $
Land 20,000 20,000 -
Buildings 80,000 73,600 72,000
Plant and equipment 21,000 1,000 11,812
Furniture and fittings 15,000 5,000 -
FB did not purchase any non-current assets between 1 May 2005 and 30 April 2007. On
2 May 2007, FB disposed of all its plant and equipment for $5,000 and purchased new
plant and equipment for $30,000. The new plant and equipment qualified for a first year
tax allowance of 50%.

FB’s Income statement for the year ended 30 April 2008
$
Gross profit 210,000
Administrative expenses (114,000)
Gain on disposal of plant and equipment 4,000
Depreciation – furniture and fittings (5,000)
Depreciation – buildings (3,200)
Depreciation – plant and equipment (6,000)
Distribution costs (49,000)
36,800
Finance cost (7,000)
Profit before tax 29,800










Required:

Calculate FB’s corporate income tax due for the year ended 30 April 2008.

(Total for sub-question (f) = 5 marks)


(Total for Question Two = 30 marks)


End of Section B. Section C starts on page 12


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SECTION C – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER THIS QUESTION. THE QUESTION REQUIREMENTS ARE ON
PAGE 15, WHICH IS DETACHABLE FOR EASE OF REFERENCE


Question Three

FZ is an entity which owns a number of factories that specialise in packaging and selling
fresh dairy products in bulk to wholesale entities and large supermarkets. FZ also owns
a chain of small newsagents’ shops.

At its meeting on 1 January 2008, the Board of FZ decided that, to maximise its
strategic opportunities, it would sell the newsagents’ shops and concentrate on its dairy
product business.

FZ’s trial balance at 31 March 2008 is shown below:
Notes $000 $000
5% Loan notes (redeemable 2020) 1,000
Administrative expenses 440
Cash and cash equivalents 853
Cash received on disposal of vehicles 15
Cost of goods sold 4,120
Distribution costs 432
Equity dividend paid 500
Factory buildings at valuation 12,000
Goodwill 300
Inventory at 31 March 2008 900
Newsagents shops at cost 6,200
Ordinary shares $1 each, fully paid at 31 March 2008 5,000
Plant and equipment 2,313
Provision for deferred tax at 31 March 2007 197
Provision for property, plant and equipment depreciation
at 31 March 2007 (iii) 3,337
Retained earnings at 31 March 2007 5,808
Revaluation reserve 190
Sales revenue 10,170
Share premium at 31 March 2008 3,000
Trade payables 417
Trade receivables 929
Vehicles at cost 147
29,134 29,134

Notes:
(i) The newsagents’ shops were valued at $5,000,000 by a qualified external valuer on
1 January 2008. On the same date, a prospective buyer expressed an interest at that
price. At 31 March 2008, detailed negotiations were continuing, with the sale expected to
be concluded by 31 July 2008, for the full valuation of $5,000,000.

The net book values (all included in the relevant figures in the trial balance) of the assets
relating to the newsagents’ shops at 1 January 2008, before revaluation, were:
$000
Goodwill 300
Newsagents’ shops 4,960
5,260
The newsagents’ shops are regarded as a cash generating unit. The cost of selling the
shops is estimated at $200,000.
P7 12 May 2008

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The revenue and expenses of the newsagents’ shops for the year ended 31 March 2008,
all included in the trial balance figures, were as follows:

$000
Revenue 772
Cost of sales 580
Administrative expenses 96
Distribution costs 57

The sale agreement provides for all employee contracts to be transferred to the new
owners of the shops.

Loan note interest does not relate to newsagents shops.

(ii) At their meeting on 1 February 2008, the directors of FZ agreed a $2,000,000
reorganisation package for all of FZ, excluding the newsagents’ shops. The restructuring
was announced to the staff on 16 February 2008. It was scheduled to begin
implementation on 1 June 2008 and to be completed by 31 December 2008. The
reorganisation package covered staff retraining, staff relocation and development of new
computer systems.

(iii) Property, plant and equipment depreciation at 31 March 2007 comprised:

$000
Factory buildings 720
Plant and equipment 1,310
Vehicles 67
Newsagents shops 1,240

(iv) On 1 May 2008, FZ was informed that one of its customers, X, had ceased trading. The
liquidators advised FZ that it was very unlikely to receive payment of any of the $62,000
due from X at 31 March 2008.

(v) The taxation due for the year ended 31 March 2008 is estimated at $920,000 (net of tax
credit for newsagents’ shops of $120,000) and the deferred tax provision needs to be
increased to $237,000, (all relating to continuing activities).

(vi) Depreciation is to be charged on non-current assets as follows:
• Factory buildings, straight line basis at 3%;
• Plant and equipment, straight line basis at 20%;
• Newsagents’ shops, straight line basis at 10%.
These items of depreciation are regarded as a cost of sales.
• Vehicles, reducing balance at 25%.
This depreciation is regarded as a distribution cost.

FZ provides a full year’s depreciation in the year of purchase and no depreciation in the
year of sale.

(vii) During the year, FZ disposed of old vehicles for $15,000. The original cost of these
vehicles was $57,000 and accumulated depreciation at 31 March 2007 was $52,000.

(viii) The revaluation reserve arose when the factory buildings were revalued in 2005.

(ix) During the year, FZ raised new capital by making a rights issue of 1,000,000 $1 equity
shares at $1⋅50 each. All rights were taken up and all amounts are included in the trial
balance.

(x) The 5% loan notes were issued in 2000.

(xi) FZ wants to disclose the minimum information allowed by IFRS in its primary financial
statements.
May 2008 13 P7

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[this page is blank]
P7 14 May 2008

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Question Three



Required:

(a) Explain, with reasons, how items (i) and (ii) above should be treated in
FZ’s financial statements for the year ended 31 March 2008.
(5 marks)

(b) Prepare FZ’s income statement and a statement of changes in equity for the
year to 31 March 2008 and a balance sheet at that date, in a form suitable for
presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards.
(25 marks)

Notes to the financial statements are NOT required, but ALL workings must be clearly
shown. Do NOT prepare a statement of accounting policies.

(Total for Question Three = 30 marks)




(Total for Section C = 30 marks)











End of Question Paper


Maths Tables and Formulae are on pages 17-19









TURN OVER
May 2008 15 P7

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P7 16 May 2008

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MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

May 2008 17 P7

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

P7 18 May 2008

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FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


May 2008 19 P7

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P7 22 May 2008

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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
1 KNOWLEDGE

What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
2 COMPREHENSION

What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
3 APPLICATION

How you are expected to apply your knowledge. Apply
Calculate/compute
To put to practical use
To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 ANALYSIS

How are you expected to analyse the detail of
what you have learned.
Analyse
Categorise
Examine in detail the structure of
Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence
5 EVALUATION

How are you expected to use your learning to
evaluate, make decisions or recommendations.

Advise
Evaluate
Recommend
To counsel, inform or notify
To appraise or assess the value of
To advise on a course of action


May 2008 23 P7

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Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
May 2008
Thursday Afternoon Session
P7 24 May 2008

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 1
Examiner’s General Comments

The following is intended to provide guidance to candidates preparing for future examinations and has been
prepared with that in mind. It therefore may give the impression that there were few good marks and few
passes as all the main errors have been listed for each question. It must be remembered though that not all
candidates made the errors listed and that overall there was a good result for this paper.

There was evidence of a number of well prepared candidates with a wide range of knowledge, able to tackle
most of the sub-questions in questions One and Two and prepare a good answer to question Three. However
there seemed to be an increasing number of candidates that were obviously question spotting and had not
prepared for some of the topics on the paper, for example questions Two (b), Two (c) and Question Three
discontinued operations. Question spotting is not advised in this paper as most learning outcomes are covered in
each examination. In some key topics, all of which have been examined previously, some candidates still do not
appear to understand the principles, for example deferred tax (question 1.9), valuing a financial instrument
(question 1.11), calculation of VAT (question 1.12), yield of an investment (question 1.14).

The answers to question 1 seemed marginally better overall than the last paper. More candidates seemed
prepared for the questions in this section than previously, although a number scored lower marks on the
multiple choice questions. Some topics continue to cause problems, even though they have regularly appeared in
the paper. All the topics have now appeared on previous examination papers and should have caused no
surprises.

Question 1.9, deferred tax is still causing problems for some candidates, many could not deal with the fact that
FD revalued the asset in its financial statements.

Question 1.11 asked for the “expected selling price” of a bond, this is the same as “current value”. Many
candidates could not identify the correct method to calculate value, trying to work out the yield percentage
instead.

Question 1.12 included input and output tax, one inclusive of VAT and one excluding VAT. Many candidates
could not calculate the correct VAT amount, often using the inclusive method instead of exclusive and vice versa.
Exempt items were also included in error in many answers.

Question 1.14 yield to maturity is still causing difficulties, with a significant number of candidates not attempting
the question. Of those attempting the question a number made it more difficult by selecting two interest rates
that were the same side of the correct rate, for example 10% and 15%. When this happens in an answer
candidates must be very careful to use the correct sign in front of each element of the formula.

The answer to question 2 was generally much better than in the last few diets. Some candidates were obviously
ill prepared for a question on intangible assets or for a question on accounting for a redeemable preferred share.

Question 2 (a) A number of candidates still do not seem to understand what is required for five marks. Many
candidates were able to explain the requirements on intangible assets but were unable to apply them. Some
candidates seem to think that it is sufficient to simply say “treat it as an expense” without explaining why.

Question 2 (b) Most candidates provided a cash flow statement following the IAS 7 indirect method. This was
presumably because they had not been taught/had not studied the direct method. The direct method is
preferred by IAS 7 and is included in all the study guides. I also clearly stated at the last lecturers’ conference that
the direct method would occasionally be tested.

Question 2 (c) required the calculation of the finance charge and the treatment of the shares in the financial
statements. Only a few candidates correctly identified the total cost of the issue and correctly applied the sum of
digits method. Very few even attempted to identify the entries required in the financial statements.

Questions 2 (d) and (e) were both relatively well done with quite a few candidates achieving full marks on at
least one section. However some candidates did not take account of the five mark limit and spent far too much
time answering these two questions. They may have achieved five marks on each of these questions but they ran
out of time and were unable to finish all questions on the paper. Take note of the number of marks and
calculate the time allowed for the question based on the marks and stick to it. You will then be less likely to run
out of time before completing the paper.

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 2

Question 2 (f) required the calculation of the tax payable for FB. This caused problems for some candidates as
they seemed unsure how to calculate the taxable profits. Although this type of question is set in a fictitious
country all the information required is provided. It should be a simple matter of adding back items that are not
allowed for tax and deducting tax allowances for assets. Some candidates filled a page or more with calculations
but did not show how the results would be used. You must answer the question asked, in this case the question
asked for tax payable so the answer must state the taxable profits and tax payable otherwise the question has
not been answered.

The overall performance on question 3 was not as good as it has been in recent examination diets. Part (a)
required candidates to explain how a disposal of a significant part of the business should be treated in the
financial statements. The majority of candidates found some reason not to treat the sale as a discontinued
operation when it should have been. The second element of part (a) required a comment on the treatment of a
reorganisation package that included staff training, staff relocation and new computer systems. Nearly all
candidates said that this package required a provision as it met IAS 37 requirements. They all failed to notice that
the three categories listed are all specifically excluded by IAS 37 and cannot therefore be provided for. Part (b)
required the candidate to prepare an income statement, statement of changes in equity and a balance sheet.
This part should have included the application of the treatment specified in part (a). Unfortunately most
candidates ignored their own comments in part (a) when preparing part (b). The majority of those identifying
that the sale of the shops was a discontinued operation ignored discontinued operations in part (b). Many of
those stating that a provision should be made for the reorganisation package failed to create a provision in part
(b).

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 3
SECTION A

Please note that in this PEG the mark available has been omitted from the end of each question in this section.


Question 1.1

Which ONE of the following statements about an overdraft facility is correct?

A An overdraft is a permanent loan.
B Assets are always required as security.
C Interest is paid on the full facility.
D Compared with other types of loan it is quick and easy to set up.
The answer is D



Question 1.2

What is “Hypothecation”?

A Process of earmarking tax revenues for specific types of expenditure.
B Estimation of tax revenue made by the tax authorities for budget purposes.
C Refund made by tax authorities for tax paid in other countries.
D Payment of taxes due to tax authorities, net of tax refunds due from tax authorities.

The answer is A



Question 1.3

Which ONE of the following is correct?
A cash budget prepared on a monthly basis is done to calculate

A the amount of inventory to purchase in the following month.
B when to pay workers’ wages.
C next month’s sales volumes.
D whether there will be sufficient cash in the bank to meet requirements.

The answer is D


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 4


Question 1.4

Which ONE of the powers listed below is unlikely to be granted to the auditor by legislation?

A The right of access at all times to the books, records, documents and accounts of the
entity.
B The right to be notified of, attend, and speak at meetings of equity holders.
C The right to correct financial statements if the auditor believes the statements do not
show a true and fair view.
D The right to require officers of the entity to provide whatever information and
explanations thought necessary for the performance of the duties of the auditor.

The answer is C



Question 1.5

Which ONE of the following statements would be correct when an independent auditor’s report
gives an adverse opinion?

A The effect of the disagreement with management is so pervasive that the financial
statements are misleading and, in the opinion of the auditor, do not give a true and fair
view.
B A disagreement with management over material items needs to be highlighted using an
“except for” statement.
C An opinion cannot be given because insufficient information or access to records has been
given to the auditor.
D A disagreement with management over material items means that an unqualified report
must be issued.

The answer is A



Question 1.6

Where a resident entity runs an overseas operation as a branch of the entity, certain tax
implications arise. Which ONE of the following does not usually apply in relation to an overseas
branch?

A Assets can be transferred to the branch without triggering a capital gain.
B Corporate income tax is paid on profits remitted by the branch.
C Tax depreciation can be claimed on any qualifying assets used in the trade of the branch.
D Losses sustained by the branch are immediately deductible against the resident entity’s
income.
The answer is B


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 5


Question 1.7

The “tax gap” is the difference between

A when a tax payment is due and the date it is actually paid.
B the tax due calculated by the entity and the tax demanded by the tax authority.
C the amount of tax due to be paid and the amount actually collected.
D the date when the entity was notified by the tax authority of the tax due and the date the
tax should be paid.
The answer is C



Question 1.8
Which of the following are functions of the International Accounting Standards Committee
Foundation?

(i) Issuing International Accounting Standards
(ii) Approving the annual budget of the International Accounting Standards Committee
(IASC) and its committees
(iii) Enforcing International Accounting Standards
(iv) Reviewing the strategy of the IASC
(v) Publishing an annual report on the activities of the IASC and IASB

A (i), (ii) and (v)
B (ii) and (iv)
C (i), (iii) and (v)
D (ii), (iv) and (v)

The answer is D


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 6


Question 1.9

FD purchased an item of plant and machinery costing $600,000 on 1 April 2005, which qualified
for 50% capital allowances in the first year and 25% per year thereafter, on the reducing
balance basis.

FD’s policy in respect of plant and machinery is to charge depreciation on a straight line basis
over five years, with no residual value.

On 1 April 2007, FD carried out an impairment review of all its non-current assets. This item of
plant and machinery was found to have a value in use of $240,000. FD adjusted its financial
records and wrote the plant and machinery down to its value in use on 1 April 2007.

Assuming there are no other temporary differences in the period and a tax rate of 25% per
annum over the five years, calculate the amount of any deferred tax balances outstanding at
31 March 2007 and 31 March 2008. (Work to the nearest $1,000)




Tax base $000 Accounting book value $000
Cost 600 Cost 600
2005/06 First year allowance 50% 300 Depreciation 2005/06 120
300 480
2006/07 25% 75 Depreciation 2006/07 120
225 360
Impairment 1/4/07 120
240
2007/08 25% 56 Depreciation 2007/08 80
169 160

2006/07 2007/08
$000 $000
Accounting book value 360 160
Tax base 225 169
Timing difference 135 (9)
Deferred tax balance at 25% 34 (2)

Alternative answer format:

Cumulative depreciation 2007 240
Less: Cumulative tax allowances 375
135
Deferred tax balance (at 25%) 34

Cumulative depreciation 2008 320
Add: Impairment 120
440
Less: Cumulative tax allowances 431
(9)
Deferred tax balance (at 25%) (2)



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 7


Question 1.10

FR Income statement for the year ended 31 March 2008
$000
Revenue 270
Cost of goods sold 139
Gross profit 131

Assume all sales and all purchases are on credit and that there are no returns or discounts. All
trade payables relate to cost of sales.

FR Balance sheet at 31 March 2008 (Extract)
Current assets $000 $000
Inventory 79
Trade receivables 52
Cash 25
156
Current liabilities
Trade payables 40
Accrued interest 21
Income tax 88
149

Inventory balance at 31 March 2007 was $79,000.

Calculate the number of days in FR’s working capital cycle.





Trade payable days = 40/139 x 365 = 105⋅0 days
Inventory days = 79/139 x 365 = 207⋅4 days
Trade receivable days = 52/270 x 365 = 70⋅3 days
Working capital cycle = 207⋅4 + 70⋅3 - 105⋅0 = 172⋅7 days



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 8


Question 1.11

FW holds a 91 day treasury bill, with a face value of $10,000. FW wants to sell the treasury bill,
which has 40 days remaining to maturity.
The market yield for treasury bills is 6%.
Calculate the expected selling price of the treasury bill. (Assume 365 days in a year for interest
calculation purposes.)


The expected selling price of the treasury bill is:
$10,000 x [1 - (0⋅06) x 40/365)] = $10,000 x 0⋅9934247 = $9,934⋅25




Question 1.12

Country Z has a VAT system which allows entities to reclaim input tax paid.

In Country Z, the VAT rates are:
Zero rated 0%
Standard rated 15%

FE owns and runs a small retail store. The store’s sales include items that are zero rated, standard
rated and exempt.

FE’s electronic cash register provides an analysis of sales. The figures for the three months to
30 April 2008 were:

Sales value, including VAT where appropriate
$
Zero rated 13,000
Standard rated 18,400
Exempt 11,000
Total 42,400
FE’s analysis of expenditure for the same period provided the following:
Expenditure, excluding VAT
$
Zero rated purchases 6,000
Standard rated purchases relating to standard rate outputs 10,000
Standard rated purchases relating to zero rate outputs 4,000
Standard rated purchases relating to exempt outputs 5,000
25,000

Calculate the VAT due to/from FE for the three months ended 30 April 2008.


The answer to 1.12 is on the next page

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 9

Output VAT $18,400 x 15/115 2,400


Inputs
Standard rate/standard rate 10,000
Standard rate/zero rate 4,000
14,000
VAT @ 15% 2,100
VAT due to be paid by FE 300



Question 1.13

State TWO reasons why a group of entities might want to claim group loss relief rather than use
the loss in the entity to which it relates. (Group loss relief is where, for tax purposes, the loss for
the year of one entity in the group is offset against the profit of the year of one or more other
entities in the group.)


• To reduce the total tax liability of the group in the year as a result of obtaining relief at
higher rates of tax;
• To improve group cash flows as the loss is relieved quicker.



Question 1.14

A $1,000 bond has a coupon rate of 12% and will repay its face value on redemption in four
years’ time.

If the bond is purchased for $1,090 ex interest and held, what is its yield to maturity?



Using t = 4 and r = 9 and 11

9% = [(120 x 3⋅24) + (1,000 x 0⋅708)] - 1,090 = [388⋅8 + 708⋅0] - 1,090 = 6⋅80

11% = [(120 x 3⋅102) + (1,000 x 0⋅659)] - 1,090 = [372⋅24 + 659⋅0] - 1,090 = -58⋅76
Difference 65⋅56
9 + [(6⋅80/65⋅56) x 2] = 9⋅21

Yield to maturity is 9⋅21%.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 10


Question 1.15

FJ commenced business on 1 April 2008. Sales in April 2008 were $60,000. This is forecast to
increase by 2% per month.
Credit sales accounted for 50% of sales. Credit sales customers are allowed one month to pay;
75% of April credit customers paid on time. A further 20% are expected to pay after more than
one month, but before two months. The remaining 5% are not expected to pay. All these
percentages are expected to continue in the near future.
Calculate the total amount of cash FJ should forecast to be received in June 2008.



Sales (actual and forecast):
$ $
April 60,000
May (60,000 x 1⋅02) 61,200
June (61,200 x 1⋅02) 62,424

Forecast receipts in June:
Cash (50% x 62,424) 31,212
Cash from credit sales:
April sales (60,000 x 50% x 20%) 6,000
May sales (61,200 x 50% x 75%) 22,950
Total forecast receipts 60,162


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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 11
SECTION B


Question Two

(a)


Explain how EK should treat these items of expenditure in its financial statements for the year ended
31 October 2007 with reference to the International Accounting Standards Board’s (IASB) Framework
for the Preparation and Presentation of Financial Statements (Framework) and relevant International
Financial Reporting Standards.


Rationale

Tests candidates’ ability to explain how the entity described in the question scenario should treat
defined items of expenditure in its financial statements. Tests learning outcome C (v).


Suggested Approach

Identify the requirements of the relevant IAS, IAS 38 Intangible Assets.
Apply IAS 38 Intangible Assets to each of the scenarios in turn, explain how the requirements of IAS
38 are met/not met.
Explain the treatment of each item in the financial statements.


Marking Guide

Marks

Definition of IAS 38 0.5
Explain how IAS 38 applies to the book/film rights and that the $1m expenditure
must be treated as a non-current intangible asset
1.5
Explain how IAS 38 applies to the trade fair expenses and that the cost of the fair
must be treated as an expense
1.5
Explain how IAS 38 applies to the consultancy costs and that the cost of the
consultancy must be treated as an expense
1.5


Examiner’s Comments

This question was very badly answered. A large proportion of candidates were unable to identify the
main problem, can EK recognise the three items as intangible assets or not. These candidates selected
other accounting standards to apply, this invariably gave an incorrect answer.
Part (ii) was mostly correctly identified. Part (i) was nearly always identified as an expense, when it
clearly has a value and therefore a future benefit. Rights of this type can be resold. Part (iii) was
mainly identified as an asset. If any asset is created it will be internally generated goodwill that cannot
be recognised.
Those candidates that did identify the correct IAS and the correct accounting treatment often omitted
to explain why the items should be treated that way, as a consequence only partial marks could be
awarded.


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May 2008 Exam

The Chartered Institute of Management Accountants Page 12

Question Two (a) continued
Common Errors
The two most common IASs used in answers were:
Explaining and applying IAS 18 Revenue recognition. The question is not about generation of
revenue, it is about future economic benefits.
Explaining and applying IAS 37 Provisions, contingent liabilities and contingent assets. All expenditure
has been incurred, no provisions are needed.
Other errors were:
• Not explaining why a stated approach was recommended.
• Giving an ambiguous answer, for example saying that the item should be treated as an
intangible asset then in the next sentence saying that it should be charged as an expense in
the income statement.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 13


Question Two

(b)


Prepare FC’s cash flow statement for the year ended 31 March 2008, down to the line “Cash
generated from operations”, using the direct method.


Rationale

Tests candidates’ ability to prepare the cash flow statement (down to the line “Cash generated from
operations”) using the direct method, of the entity described in the question scenario. Tests learning
outcome C (ii).


Suggested Approach

Prepare workings to calculate cash received from customers from the sales revenue and the opening
and closing receivables.
Prepare workings to calculate cash paid to suppliers from the cost of materials used and the opening
and closing inventories and payables.
Prepare the section of cash flow statement required by the question using the direct method.


Marking Guide

Marks

Correct figure in cash flow statement for total of cash received from customers 1
Correct figure in cash flow statement for total of payments to suppliers 2.5
Correct figures for rent received, payments to and on behalf of employees and
operating expenses

1.5

Examiner’s Comments

A very large proportion of candidates prepared a cash flow statement according to IAS 7 Indirect
method rather than the direct method, thereby losing most of the marks.
It was clear that many candidates had not learnt the direct method as set out in IAS 7.

Common Errors
Using the indirect method instead of the direct method for preparation of the cash flow statement.
Using a mixture of both the direct and indirect methods.
Reversing the debits and credits when using the opening and closing balances to calculate the cash
paid/received.
Only calculating one stage in the calculation of payment to suppliers. A number of candidates only
adjusted the cost of materials for the opening and closing payables, a few only adjusted for opening
and closing inventories.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 14


Question Two

(c)


(i) Calculate the finance charge for EACH of the four years 1 May 2006 to 30 April 2010
using the sum of digits method.

(ii) Prepare extracts from FG’s income statement for the year ended 30 April 2008 and its
balance sheet at that date, to show the accounting entries required for the preferred
shares.


Rationale

Tests candidates’ ability to correctly deal with redeemable preferred shares according to IAS 32
and to test the candidates’ understanding of the accounting entries required.


Suggested Approach

Calculate the total finance charge over the four years. Allocate the finance charge to periods
using the sum of digits method. Calculate the balance outstanding at the end of the first and
second years. Finally prepare income statement and balance sheet extracts using the figures
calculated.


Marking Guide

Marks

(i) Calculations of the finance charge for EACH of the four years 3
(ii) Calculations of the balances and preparation of accounting entries 2


Examiner’s Comments

A comparatively small number of candidates were able to calculate the correct total finance
charge. The majority of candidates were able to allocate a finance charge to periods using the
sum of digits method. However comparatively few were able to calculate the closing balances
and even fewer were able to prepare correct accounting extracts.

Common Errors
Not including all three cost items in the calculation of finance charges. Most candidates only
included annual interest, some included one other charge but very few included all three items.
A few candidates did not understand sum of digits, applying the factors in reverse, 1/10 then
2/10 and so on.
A significant proportion of those attempting to calculate the closing balances used the nominal
value of the issue as the starting point, instead of deducting issue costs.
Very few prepared any extracts. A significant proportion of those preparing extracts selected
figures from the wrong periods, for example using the 2008-9 figures for the financial
statements ending 30 April 2008.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 15


Question Two

(d)


Explain the possible benefits and limitations of a Just-In-Time (JIT) purchasing system.


Rationale

Tests candidates’ ability to explain the possible benefits and limitations of a Just-In-Time (JIT)
purchasing system. Tests learning outcome D (vii).


Suggested Approach
Explain the possible benefits of JIT Purchasing.
Explain the possible limitations of JIT purchasing


Marking Guide

Marks

Possible benefits 3
Possible limitations 2


Examiner’s Comments

This question was comparatively well done, most candidates were able to achieve a pass mark
on the question and many scored full marks.

Common Errors
The most common error was not limiting the answer to JIT purchasing. Including JIT production
and all related benefits/limitations were outside the scope of the question and scored no marks.
Many candidates spent too long on the question, writing far more than required for five marks.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 16


Question Two

(e)


The International Accounting Standards Board’s (IASB) Framework for the Preparation and
Presentation of Financial Statements (Framework) defines the elements of financial statements.

Explain EACH of the elements, illustrating each with an example.


Rationale

Tests candidates’ ability to explain and illustrate each of the elements of the financial statements
as defined by the IASB Framework. Tests learning outcome B (iv).


Suggested Approach

Take each of the five elements in turn, for each one briefly explain the term and give a short
example.


Marking Guide

Marks

For each correct explanation with an illustration 1


Examiner’s Comments

This question was also well done, many candidates scoring full marks.

Common Errors
Many candidates spent too much time explaining the elements at length.
Some candidates could not identify what was meant by “the elements of financial statements”
and explained something completely different. The most common misinterpretation was to
explain the different types of financial statements such as the balance sheet and income
statement. A few referred to the characteristics of financial information such as accuracy,
reliability and so on. Some candidates failed to give any examples.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 17


Question Two

(f)


Calculate FB’s corporate income tax due for the year ended 30 April 2008.


Rationale

Tests candidates’ ability to calculate the corporate income tax due for the year-end of the entity
described in the question scenario. Tests learning outcome A (viii).


Suggested Approach

Read the question carefully noting the tax regulations in force in Country X.
Calculate the tax depreciation allowed for the year and any adjustment arising from the disposal of assets.
Starting with the profit before tax shown in the income statement, add back items listed in the income
statement that are not allowed for tax.
Then deduct tax depreciation and adjustments for disposal of assets.
Apply the income tax rate of 20% to the taxable profits.

Marking Guide

Marks

Adding back items not allowed 2
Calculations of writing down allowances, adjustments for disposal and calculating total
corporate income tax due
3


Examiner’s Comments

All the required information was given in the question. This should have been a matter of following the
regulations stated and calculating the tax for the year. Most candidates were unable to apply the regulations
stated, some using their knowledge of other tax regimes.

Common Errors
Calculating tax depreciation and not using the figures in any calculation of tax.
Attempting to work out the balancing allowance but ignoring the result in the tax calculation
Using tax rates other than those given in the question.
Allowing tax depreciation on land and /or furniture and fittings, when the question says there is no tax
allowance available.



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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 18
SECTION C


Question Three


(a) Explain, with reasons, how items (i) and (ii) above should be treated in FZ’s financial statements for the
year ended 31 March 2008.

(b) Prepare FZ’s income statement and a statement of changes in equity for the year to 31 March 2008 and a
balance sheet at that date, in a form suitable for presentation to the shareholders and in accordance with
the requirements of International Financial Reporting Standards.

Notes to the financial statements are NOT required, but ALL workings must be clearly shown. Do NOT prepare a
statement of accounting policies.


Rationale

Tests candidates’ ability to prepare (from information provided in the question scenario) an income statement,
balance sheet and a statement of changes in equity for the entity concerned. The financial statements required
should be in a form suitable for publication and in accordance with current International Financial Reporting
Standards. Tests learning outcome C (i).


Suggested Approach

Read the question carefully, then answer part (a), explaining the treatment of the newsagents’ shops and the
reorganisation package.
Then using the additional information provided and the trial balance figures, prepare workings to calculate
depreciation of buildings and machinery and equipment for the year. Prepare FZ’s non-current asset totals at 31
March 2008.
Using the additional information provided and the trial balance figures, prepare workings to:
1. calculate the cost of sales, administration and distribution taking account of the discontinued operation.
2. calculate tax charge and outstanding balances.
3. calculate the income statement net loss for the discontinued operation and the balance figure for non-
current assets classified as held for sale
Prepare the income statement using IAS 1 format.
Prepare the statement of changes in equity
Prepare the balance sheet using IAS 1 format


Marking Guide

Marks

Requirement (a)
Item (i) Explanation/calculation of treatment of shops in financial statements 2.5
Item (ii) Explanation/calculation of treatment of reorganisation costs in financial statements 2.5

Requirement (b)
Preparation of Income Statement – calculations and formatting 14
Preparation of Balance Sheet – calculations and formatting 8
Preparation of SOCE – calculations and formatting 3



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Post Exam Guide
May 2008 Exam

The Chartered Institute of Management Accountants Page 19


Examiner’s Comments

A disappointing number of candidates were unable to correctly identify the sale of the shops as a discontinued
operation. Most candidates that correctly identified the discontinued operation did not apply their answer in part
(a) to their workings in part (b).
A disappointing number of candidates wanted to create a provision for the reorganisation package, even though
the items constituting the package were all disallowed by IAS 37.
Very few candidates provided for a discontinued operation in calculating the profit for the year.

Common Errors
Not giving sufficient explanation in part (a) for a five mark question.
Not applying the answer in part (a) to calculations in part (b)
Not splitting the revenue and expenses between continuing and discontinued operations.
Deducting the discontinued element from income and expenses but not putting anything in the income
statement for discontinued operations.
Not showing discontinued operations as one line in the income statement as required by revised IAS 37.
Not adjusting for the disposal of the vehicle before calculating depreciation for the year.
Not deducting depreciation brought forward for the vehicle disposed of in the year. When assets are disposed of
the cost/valuation and cumulative depreciation must be removed from the trial balance balances.
Not showing the non-current assets available for sale separately after current assets in the balance sheet.
Not including accrued items (tax and interest) in current liabilities.
Deferred tax and current tax were often wrongly calculated, and both included in either current liabilities or non-
current liabilities. Deferred tax is non-current while current tax is a current liability.
Several candidates had problems identifying the correct balances brought forward in the statement of changes
in equity, quite a few candidates showed the balance of equity shares and share premium brought forward as
the amount shown in the trial balance instead of working back to the balance at the beginning of the year.
Some candidates still show the dividend paid in the income statement.



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Financial Management Pillar
Managerial Level Paper
P7 – Financial Accounting and Tax Principles
20 November 2008 – Thursday Afternoon Session
Instructions to candidates
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins
during which you should read the question paper and, if you wish, highlight
and/or make notes on the question paper. However, you will not be allowed,
under any circumstances, to open the answer book and start writing or use
your calculator during this reading time.
You are strongly advised to carefully read ALL the question requirements
before attempting the question concerned (that is all parts and/or sub-
questions). The requirements for the questions in Sections B and C are
highlighted in a dotted box.
ALL answers must be written in the answer book. Answers or notes written
on the question paper will not be submitted for marking.
Answer the ONE compulsory question in Section A. This has 17 sub-
questions on pages 2 to 6.
Answer the SIX compulsory sub-questions in Section B on pages 8 to 11.
Answer the ONE compulsory question in Section C on pages 12 to 15. The
question requirement is on page 15, which is detachable for ease of
reference.
Maths Tables and Formulae are provided on pages 17 to 19. These pages
are detachable for ease of reference.
The list of verbs as published in the syllabus is given for reference on the
inside back cover of this question paper.
Write your candidate number, the paper number and examination subject title
in the spaces provided on the front of the answer book. Also write your
contact ID and name in the space provided in the right hand margin and seal
to close.
Tick the appropriate boxes on the front of the answer book to indicate which
questions you have answered.
P
7



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TURN OVER
© The Chartered Institute of Management Accountants 2008
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SECTION A – 40 MARKS
[the indicative time for answering this Section is 72 minutes]
ANSWER ALL SEVENTEEN SUB-QUESTIONS



Instructions for answering Section A:

The answers to the seventeen sub-questions in Section A must ALL be written in
your answer book.

Your answers should be clearly numbered with the sub-question number and then
ruled off, so that the markers know which sub-question you are answering. For
multiple choice questions, you need only write the sub-question number and
the letter of the answer option you have chosen. You do not need to start a new
page for each sub-question.

For sub-questions 1.14, 1.15 and 1.17 you should show your workings as marks
are available for the method you use to answer these sub-questions.



Question One

1.1 The OECD Model tax convention defines a permanent establishment.

Which ONE of the following is not specifically listed as a “permanent establishment” by the
OECD Model tax convention?

A An office.
B A factory.
C An oil well.
D A site of an 11 month construction project.
(2 marks)


1.2 In no more than 25 words, explain the meaning of “overtrading”.
(2 marks)


1.3 Which ONE of the following would not have the effect of shortening the working capital
cycle?

A Reducing raw material inventory holding.
B Increasing credit given to customers.
C Delaying payments to suppliers.
D Increasing the turnover of finished goods inventory.
(2 marks)




November 2008 2 P7

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1.4 GD’s financial reporting period is 1 September 2007 to 31 August 2008.

Which ONE of the following would be classified as a non-adjusting event according to
IAS 10 Events After the Balance Sheet Date?

Assume all amounts are material and that GD’s financial statements have not yet been
approved for publication.

A On 30 October 2008, GD received a communication stating that one of its customers had
ceased trading and gone into liquidation. The balance outstanding at 31 August 2008
was unlikely to be paid.
B At 31 August 2008, GD had not provided for an outstanding legal action against the local
government administration for losses suffered as a result of incorrect enforcement of local
business regulations. On 5 November 2008, the court awarded GD $50,000 damages.
C On 1 October 2008, GD made a rights issue of 1 new share for every 3 shares held at a
price of $1⋅75. The market price on that date was $2⋅00.
D At 31 August 2008, GD had an outstanding insurance claim of $150,000. On 10 October
2008, the insurance company informed GD that it would pay $140,000 as settlement.

(2 marks)


1.5 The external auditors have completed the audit of GQ for the year ended 30 June 2008
and have several outstanding differences of opinion that they have been unable to
resolve with the management of GQ. The senior partner of the external auditors has
reviewed these outstanding differences and concluded that individually and in aggregate
the differences are not material.

Which ONE of the following audit opinions will the external auditors use for GQ’s financial
statements for the year ended 30 June 2008?

A An unqualified opinion.

B An adverse opinion.

C An emphasis of matter.

D A qualified opinion.
(2 marks)









Section A continues on the next page







TURN OVER
November 2008 3 P7

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1.6 GS forecast its need for financing to be $220,000, comprising:

$
Non-current assets 100,000
Permanent portion of current assets 70,000
Fluctuating portion of current assets 50,000
220,000

GS plans to fund this requirement as follows:

$
Equity share capital 125,000
Seven year bank loan 65,000
Bank overdraft and funding from trade payables 30,000
220,000

GS could be said to have a financing of working capital policy that is

A aggressive.
B conservative.
C tactical.
D strategic.
(2 marks)


1.7 GY made a number of changes during the financial year to 30 September 2008.

Which ONE of the following changes would be classified as a change in accounting policy,
according to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?

A Depreciation of motor vehicles was changed from straight line to reducing balance from
1 October 2007.
B Up to 30 September 2007, GY had been applying the benchmark treatment of IAS 23
Borrowing Costs and charged all interest paid to its income statement. GY has decided to
adopt IAS 23 (revised 2007) early and, from 1 October 2007, will charge interest incurred
on the purchase, or construction, of non-current assets to the cost of the asset.
C On 1 March 2008, GY decided to change the method it used to apportion revenue and
costs on its construction contracts. From 1 March 2008, GY changed from the cost
incurred to date as a percentage of total cost of the contract, to the value of work
completed to date as a percentage of total contract revenue.
D On 1 August 2008, GY decided to sell one of its factories and designated the factory and
all related facilities as a disposal group as required by IFRS 5 Disposal of Non-current
Assets Held for Sale and Discontinued Operations. GY revalued the disposal group
assets to fair value less costs to sell.
(2 marks)








November 2008 4 P7

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1.8 Which ONE of the following actions is most likely to reduce tax evasion?

A Creating a tax system that is perceived as equitable to all.
B Deducting tax at source whenever possible.
C Simplifying the tax structure as much as possible.
D Reducing penalties for late or incorrect tax returns.
(2 marks)


1.9 Developed countries generally use three tax bases. One tax base widely used is income.

List the other TWO widely used tax bases.
(2 marks)


1.10 An investment account pays interest every quarter. The quarterly interest rate is 3%.

Assuming the interest is reinvested every quarter, calculate the annual yield.
(2 marks)


1.11 State the TWO concepts of capital referred to in the International Accounting Standards
Board’s (IASB’s) Framework for the Preparation and Presentation of Financial Statements
(Framework).
(2 marks)


1.12 The IASB’s Framework identifies eight categories of users of financial statements.
Investors, employees and government are three of the eight categories of users of
financial statements.

List TWO of the other categories.
(2 marks)


1.13 GK purchased a piece of development land on 31 October 2000 for $500,000. GK
revalued the land on 31 October 2004 to $700,000. The latest valuation report, dated
31 October 2008, values the land at $450,000.

GK has adjusted the land balance shown in non-current assets at 31 October 2008.

Which ONE of the following shows the correct debit entry in GK’s financial statements for the
year ended 31 October 2008?

A DR Revaluation reserve $50,000 and DR Income Statement $200,000

B DR Revaluation reserve $250,000

C DR Revaluation reserve $200,000 and DR Income Statement $50,000

D DR Income Statement $250,000

(2 marks)



TURN OVER
November 2008 5 P7

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1.14 GL’s trade payables days outstanding at 30 September 2008 were 45 days. Purchases
for the year to 30 September 2008 were $324,444 accruing evenly throughout the year.

GL is budgeting for an increase in annual purchases to $356,900 for the 12 months to
30 September 2009.

Assume that the accounts payable outstanding balance at 30 September 2009 will be the
same amount as at 30 September 2008.

Calculate the budgeted trade payables days outstanding at 30 September 2009.
(3 marks)


1.15 GF wants to sell an unquoted bond. The bond has a coupon rate of 5% and will repay its
face value of $1,000 at the end of four years.

GF estimates that the market requires a yield to maturity of 11% from this type of bond.
GF has asked you to recommend a selling price for the bond.

Calculate a selling price for the bond.
(4 marks)


1.16 Explain briefly THREE major principles of modern taxation.
(3 marks)


1.17 Country Z has a VAT system where VAT is charged on all goods and services.
Registered VAT entities are allowed to recover input VAT paid on their purchases.

VAT operates at three different levels in Z:

• Standard rate 15%
• Luxury rate 22%
• Zero rate 0%

During the last VAT period, an entity, GW, purchased materials and services costing
$138,000, including VAT. All materials and services were at standard rate VAT.

GW converted the materials into two products A and B; product A is zero-rated and
product B is luxury-rated for VAT purposes.

During the VAT period, GW made the following sales, including VAT:

$
A 70,000
B 183,000

At the end of the period, GW paid the net VAT due to the tax authorities.

Assume no opening or closing inventory balances.

Assuming GW had no other VAT-related transactions, calculate GW’s profit and the amount of
VAT that GW paid?
(4 marks)


(Total for Question One = 40 marks)


November 2008 6 P7

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Reminder

All answers to Section A must be written in your answer book.

Answers to Section A written on the question paper will not be
submitted for marking.

End of Section A

















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November 2008 7 P7

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SECTION B – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5
MARKS.



Question Two

(a) The International Accounting Standards Committee Foundation (IASCF) oversees a
number of other International committees, two of which are the Standards Advisory
Council (SAC) and the International Financial Reporting Interpretations Committee
(IFRIC).


Required:

Explain the role of the SAC and the IFRIC in assisting with developing and
implementing International Financial Reporting Standards.

(Total for sub-question (a) = 5 marks)




(b) GC manufactures a range of bicycles and holds an inventory of certain bicycle parts.

Part number 1258 costs GC $8⋅00 per unit. GC expects to use 8,000 units of part 1258
per year.

Ordering costs have been calculated at $150 per order and inventory holding costs have
been estimated at $2⋅75 per unit per year.

The supplier of part number 1258 has offered a 2% discount off the purchase price if each
order is for 2,000 units or more.


Required:

(i) Calculate the economic order quantity for part 1258, assuming no discount is
given.
(ii) State whether GC should accept the discount offered.
(Total for sub-question (b) = 5 marks)




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(c) GN is a retailer, selling directly to the public for cash payment and to other entities on
credit. GN is preparing a cash forecast for the first three months of 2009. Credit
customers are given 30 days to pay. Credit sales are expected to be six times the value
of direct sales to the public.

GN’s estimate of sales for the first three months of 2009 is as follows:

Month January February March
$000 $000 $000
Sales value 400 400 500

Actual and estimated sales for the last three months of 2008 are:

Month October (actual) November (estimate) December (estimate)
$000 $000 $000
Sales value 396 428 550

From past experience, GN expects 10% of credit customers to pay in the same month as
the sale is made, a further 25% to pay in the month after the sale, and 63% in the month
after that. The outstanding balance is expected to be written off.


Required:

Prepare a monthly cash forecast of GN’s total receipts for January to March 2009.
(Work to the nearest $000.)
(Total for sub-question (c) = 5 marks)




(d) GJ commenced business on 1 October 2005 and, on that date, it acquired property, plant
and equipment for $220,000. GJ uses the straight line method of depreciation. The
estimated useful life of the assets was five years and the residual value was estimated at
$10,000. GJ’s accounting year end is 30 September.

All the assets acquired qualified for a first year tax allowance of 50% and then an annual
tax allowance of 25% of the reducing balance.

On 1 October 2007, GJ revalued all of its assets; this led to an increase in asset values of
$53,000.

GJ’s applicable tax rate for the year is 25%.











Required:

Calculate the amount of the deferred tax provision that GJ should include in its
balance sheet at 30 September 2008, in accordance with IAS 12 Income Taxes.

(Total for sub-question (d) = 5 marks)



Section B continues on the next page

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The following data are to be used to answer questions (e) and (f)

The financial statements of GK for the year to 31 October 2008 were as follows:

Balance sheets at 31 October 2008 31 October 2007
$000 $000 $000 $000
Assets
Non-current tangible assets
Property 10,000 10,500
Plant and equipment 5,000 15,000 4,550 15,050

Current assets
Inventory 1,750 1,500
Trade receivables 1,050 900
Cash and cash equivalents 310 150
3,110 2,550
Total assets 18,110 17,600

Equity and liabilities
Ordinary shares @ $0⋅50 each 6,000 3,000
Share premium 2,500 1,000
Revaluation reserve 3,000 3,000
Retained earnings 1,701 1,000
13,201 8,000
Non-current liabilities
Interest-bearing borrowings 2,400 7,000
Deferred tax 540 2,940 450 7,450

Current liabilities
Trade and other payables 1,060 1,400
Tax payable 909 750
1,969 2,150
18,110 17,600


Income statement for the year to 31 October 2008
$000 $000
Revenue 16,000
Cost of sales 10,000
Gross profit 6,000
Administrative expenses (2,000)
Distribution costs (1,200) (3,200)
2,800
Finance cost (600)
Profit before tax 2,200
Income tax expense (999)
Profit for the period 1,201

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Additional information:

1. Trade and other payables comprise:

31 October 2008 31 October 2007
$000 $000
Trade payables 730 800
Interest payable 330 600
1,060 1,400

2. Plant disposed of in the year had a net book value of $35,000; cash received on disposal
was $60,000.

3. GK’s income statement includes depreciation for the year of $1,110,000 for properties
and $882,000 for plant and equipment.

4. Dividends paid during the year were $500,000.



Required for (e):

Using the data relating to GK above, calculate the cash generated from operations that
would appear in GK’s Cash flow statement, using the indirect method, for the year
ended 31 October 2008, in accordance with IAS 7 Cash Flow Statements.

(Total for sub-question (e) = 5 marks)















Required for (f):

Using the data relating to GK above, calculate the cash flow from investing
activities and cash flows from financing activities sections of GK’s Cash flow
statement for the year ended 31 October 2008, in accordance with IAS 7 Cash
Flow Statements.
(Total for sub-question (f) = 5 marks)


(Total for Section B = 30 marks)




End of Section B


Section C starts on page 12



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SECTION C – 30 MARKS

[the indicative time for this Section is 54 minutes]

ANSWER THIS QUESTION. THE QUESTION REQUIREMENTS ARE ON
PAGE 15, WHICH IS DETACHABLE FOR EASE OF REFERENCE



Question Three

GZ is a small mining entity which operated a single gold mine for many years. The gold
mine ceased operations on 31 October 2007 and was closed on 1 January 2008.

On 1 November 2007, GZ commenced operating a new silver mine.

The trial balance for GZ at 31 October 2008 was as follows:

$000 $000
4% Loan notes (redeemable 1 April 2009) 1,900
Administrative expenses 1,131
Available for sale investments at market value 31 October 2007 2,177
Bank & cash 2,025
Decommissioning and landscaping expenses of gold mine (see note (iii)) 1,008
Direct operating expenses (excluding depreciation) 5,245
Distribution costs 719
Dividend paid 1 March 2008 550
Equity shares $1 each, fully paid 5,000
Finance lease payable at 31 October 2007 (see note (ix)) 900
Government operating licence, silver mine at cost (see note (ii)) 100
Income tax 13
Interest paid on loan notes – half year to 30 April 2008 38
Inventory at 31 October 2008 2,410
Investment income received 218
Mine properties at cost (see note (iv)) 6,719
Plant (finance lease) at 31 October 2007 (see note (ix)) 900
Plant and equipment at 31 October 2007 (excluding finance lease) 3,025
Plant lease rentals paid in year 160
Provision for decommissioning gold mine at 31 October 2007 950
Provision for deferred tax at 31 October 2007 731
Provision for depreciation at 31 October 2007:
Mine properties (see note (iv)) 2,123
Plant and equipment 370
Receipt from sale of plant (see note (iii)) 2
Retained earnings at 31 October 2007 2,810
Revaluation reserve at 31 October 2007 80
Revenue 9,600
Suspense account (see note (xii)) 1,820
Trade payables 2,431
Trade receivables 2,715
28,935 28,935

Additional information provided:

(i) Each mine requires a government operating licence for 20 years and is expected to be
productive for that time. After 20 years, the mine will be closed and decommissioned.

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(ii) On 1 November 2007, GZ received a government operating licence to operate the new
silver mine. The licence cost $100,000 and is for 20 years. Included in the licence is a
condition that, on closure of the mine, all above-ground structures must be removed and
the ground landscaped. GZ has estimated this cost and discounted it to a present value
of $3,230,000 at 31 October 2008. The trial balance excludes this decommissioning
provision.

(iii) On 1 January 2008, GZ closed its gold mine. The $950,000 shown in the trial balance
provision as “provision for decommissioning gold mine” has been charged against profits
in the previous year. The removal of buildings and other above ground structures,
landscaping and other decommissioning costs was complete at 31 October 2008; the
actual cost incurred was $1,008,000.

GZ sold old plant and equipment from the gold mine for $2,000 (original cost $200,000,
net book value $5,000). The gold mine property is now surplus to GZ’s requirements. At
31 October 2008, the gold mine property had a market value of $520,000 with estimated
selling and legal costs of $27,000.

(iv) The mine property balances in the trial balance comprised:

Mine property Gold Mine Silver Mine Total
$000 $000 $000
Cost 2,623 4,096 6,719
Provision for depreciation 2,123 0 2,123
500 4,096 4,596

(v) The market value of the available for sale investments at 31 October 2008 was
$2,311,000.

(vi) There were no sales or purchases of available for sale investments during the year ended
31 October 2008 and no acquisitions of other non-current assets, except for those in note
(ix) below.

(vii) Income tax due for the year ended 31 October 2008 is estimated at $375,000. The
deferred tax provision needs to be reduced by $60,000.

(viii) Depreciation is charged on mining property using the straight-line basis at 5% per annum.
Plant and equipment is depreciated using the reducing balance method at 25%. The
depreciation policy is to charge a full year’s depreciation in the year of acquisition and no
depreciation in the year of disposal. Depreciation is regarded as a cost of production.

(ix) GZ entered into a non-cancellable seven-year finance lease on 1 November 2007 to
acquire mining machinery. Under the terms of the lease, GZ will make annual payments
of $160,000 in arrears, the first payment being made on 31 October 2008. The
machinery is estimated to have a useful economic life of seven years. The fair value of
the machinery at 1 November 2007 was $900,000. GZ allocates finance charges using
the sum of digits method.

(x) The 4% loan notes are ten-year loans due for repayment 1 April 2009. GZ incurred no
other interest charges in the year to 31 October 2008.

(xi) The final dividend for the year to 31 October 2007 was paid on 1 March 2008.

(xii) GZ made a new issue of 1,400 equity shares on 31 October 2008 at a premium of 30%.
The cash received was debited to the bank account and credited to the suspense
account.

The requirements for Question Three are on page 15
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Question Three


Required:

(a) Prepare GZ’s Property, Plant and Equipment note to the financial statements
for the year to 31 October 2008.
(6 marks)

(b) Prepare GZ’s income statement and a statement of changes in equity for the
year to 31 October 2008 and a balance sheet at that date, in a form suitable for
presentation to the shareholders and in accordance with the requirements of
International Financial Reporting Standards. (All workings should be to the
nearest $000).

Notes to the financial statements, except as indicated in part (a) above, are NOT
required, but all workings must be clearly shown. Do NOT prepare a statement of
accounting policies.
(24 marks)

(Total for Question Three = 30 marks)




(Total for Section C = 30 marks)










End of Question Paper


Maths Tables and Formulae are on pages 17-19









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MATHS TABLES AND FORMULAE

Present value table

Present value of $1, that is (1 + r)
-n
where r = interest rate; n = number of periods until payment or receipt.

Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

November 2008 17 P7

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.079 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
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Cumulative present value of $1 per annum

Receivable or Payable at the end of each year for n years
r
r
n −
+ − ) (1 1


Interest rates (r) Periods
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

Interest rates (r) Periods
(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 7.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870

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FORMULAE
Valuation models

(i) Future value of S, of a sum X, invested for n periods, compounded at r% interest: S = X[1 + r]
n
(ii) Present value of $1 payable or receivable in n years, discounted at r% per annum:
PV =
n
r ] [1
1
+

(iii) Present value of an annuity of $1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:
PV =






+

n
r r ] [1
1
1
1

(iv) Present value of $1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at r%
per annum:
PV =
r
1

(v) Present value of $1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =
g r −
1



Inventory management

(i) Economic Order Quantity
EOQ =
h
o
C
D 2C

where: C
o
= cost of placing an order
C
h
= cost of holding one unit in Inventory for one year
D = annual demand


Cash management

(i) Optimal sale of securities, Baumol model:
Optimal sale =
rate interest
securities of sale per Cost x nts disburseme cash Annual x 2


(ii) Spread between upper and lower cash balance limits, Miller-Orr model:
Spread = 3
3
1










rate interest
flows cash of variance x cost n transactio x
4
3


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LIST OF VERBS USED IN THE QUESTION REQUIREMENTS
A list of the learning objectives and verbs that appear in the syllabus and in the question requirements for
each question in this paper.

It is important that you answer the question according to the definition of the verb.
LEARNING OBJECTIVE VERBS USED DEFINITION
1 KNOWLEDGE

What you are expected to know. List Make a list of
State Express, fully or clearly, the details of/facts of
Define Give the exact meaning of
2 COMPREHENSION

What you are expected to understand. Describe Communicate the key features
Distinguish Highlight the differences between
Explain Make clear or intelligible/State the meaning of
Identify Recognise, establish or select after
consideration
Illustrate Use an example to describe or explain
something
3 APPLICATION

How you are expected to apply your knowledge. Apply
Calculate/compute
To put to practical use
To ascertain or reckon mathematically
Demonstrate To prove with certainty or to exhibit by
practical means
Prepare To make or get ready for use
Reconcile To make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 ANALYSIS

How are you expected to analyse the detail of
what you have learned.
Analyse
Categorise
Examine in detail the structure of
Place into a defined class or division
Compare and contrast Show the similarities and/or differences
between
Construct To build up or compile
Discuss To examine in detail by argument
Interpret To translate into intelligible or familiar terms
Produce To create or bring into existence
5 EVALUATION

How are you expected to use your learning to
evaluate, make decisions or recommendations.

Advise
Evaluate
Recommend
To counsel, inform or notify
To appraise or assess the value of
To advise on a course of action


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Financial Management Pillar
Managerial Level
P7 – Financial Accounting
and Tax Principles
November 2008
Thursday Afternoon Session

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Paper P7 – Financial Accounting and Tax Principles
Post Exam Guide
November 2008 Exam

© The Chartered Institute of Management Accountants 2008 1
Examiner’s General Comments

The following guide gives guidance to candidates preparing for future examinations and has been prepared with
that in mind. It therefore may give the impression that there were few good marks and few passes as all the
main errors have been listed for each question. It must be remembered though that not all candidates made the
errors listed and that overall there was a good result for this paper.

There was evidence of a number of well prepared candidates with a wide range of knowledge, able to tackle
most of the sub-questions in Questions One and Two and prepare a good answer to Question Three. However
there seemed to be an increasing number of candidates that were obviously question spotting and had not
prepared for some of the topics on the paper, for example Questions Two (a), Two (b), Two (2) and Three
finance leases and discontinued operations. Question spotting is not advised in this paper as most
learning outcomes are covered in each examination. In some key topics, all of which have been examined
previously, some candidates still do not appear to understand the principles, for example deferred tax (Question
Two (d)), valuing a financial instrument (question 1.15), calculation of VAT (question 1.17).

Question One seemed marginally worse overall than the last few papers. More candidates seemed unprepared
for the questions in this section than previously. A significant number scored lower marks on the multiple choice
questions. Some topics continue to cause problems, even though they have regularly appeared in the paper. All
the topics have now appeared on previous examination papers and should have caused no surprises.

Question 1.2 caused candidates difficulty in answering within the 25 word limit. This was not penalised if the
word count was reasonable, but some candidates took more than double the limit to explain the simple
principle.

Question 1.9 caused candidates to give examples of taxes rather than tax bases, for example VAT instead of
expenditure.

Question 1.11 resulted in few candidates giving the two concepts correctly.

Question 1.12 resulted in many candidates repeating the users given in the question.

Question 1.15 asked for the “selling price” of a bond, this is the same as “current value”. Many candidates
could not identify the correct method to calculate value, trying to work out the yield percentage instead.

Question 1.17 included input and output tax, one inclusive of VAT and one excluding VAT. Many candidates
could not calculate the correct VAT amount, often using the inclusive method instead of exclusive and vice versa.

Question Two was generally much better answered than in the last few diets.

Question Two (a) was the question with the lowest average mark on the paper. Very few candidates seemed
aware of the role of the SAC and IFRIC. Many candidates did not answer the question asked, but gave
everything they knew about the two organisations.

Question Two (b) Most candidates were able to use the formula from the formula sheet and calculate EOQ
correctly, but few seemed to know how to evaluate whether the offered discount should be accepted. A large
number of candidates failed to realise that it is impossible to order 934.2 units, and the amount should be
rounded to 935. A lot of candidates rounded this down to 934 units, which would actually mean that the
business could run out of stock.

Question Two (c) required a basic calculation of cash flows for a three month period. This question was not well
done by a significant number of candidates. All the details were provided in the question but some candidates
could not apply the facts given, for example the percentages of cash collected were not applied correctly and
after calculating the cash received it was often allocated to the wrong month.

Question Two (d), deferred tax is still causing problems for some candidates; many could not deal with the fact
that GJ revalued the asset in its financial statements.


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Questions Two (e) and (f) were both relatively well done with quite a few candidates achieving full marks on at
least one section, though many candidates failed to realise that items not connected with operations were to be
ignored in the calculation of cash flows from operating activities in Question Two (e).

Question Three

The quality of answers overall was disappointing for this question, with the overall performance on Question
Three lower than it has been in recent examination diets. Part (a) required candidates to prepare a property,
plant and equipment note, the majority of candidates were not able to produce a reasonable PP&E note, many
scoring only 1 or 2 out of the 6 marks. This is a relatively simple statement to prepare and candidates often
missed easy marks in getting items in the wrong columns or ignoring disposals. More worrying was the number
of candidates unable to calculate depreciation correctly. Few candidates even realised that the question included
a discontinued activity. So there were few answers with discontinued activities correctly treated in the income
statement or the non-current assets held for sale correctly treated in the balance sheet.

Part (b) required the candidate to prepare an income statement, statement of changes in equity and a balance
sheet. Most answers excluded reference to discontinued activities and did not include any assets held for sale in
the balance sheet.

Format marks were frequently lost as candidates did not include total columns in the various statements and
included items in the wrong category in the income statement and/or balance sheet.

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SECTION A

Please note that in this PEG the mark available has been omitted from the end of each question in this section


Question 1.1

The OECD Model tax convention defines a permanent establishment. Which ONE of the following is not
specifically listed as a “permanent establishment” by the OECD Model tax convention?

A An office.
B A factory.
C An oil well.
D A site of an 11 month construction project.
The answer is D



Question 1.2

In no more than 25 words, explain the meaning of “overtrading”.

Overtrading is where an entity enters into trading commitments in excess of its available short-
term resources.



Question 1.3

Which ONE of the following would not have the effect of shortening the working capital cycle?

A Reducing raw material inventory holding.
B Increasing credit given to customers.
C Delaying payments to suppliers.
D Increasing the turnover of finished goods inventory.

The answer is B




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Question 1.4

GD’s financial reporting period is 1 September 2007 to 31 August 2008. Which ONE of the following would
be classified as a non-adjusting event according to IAS 10 Events After the Balance Sheet Date? Assume all
amounts are material and that GD’s financial statements have not yet been approved for publication.

A On 30 October 2008, GD received a communication stating that one of its customers had ceased
trading and gone into liquidation. The balance outstanding at 31 August 2008 was unlikely to be
paid.
B At 31 August 2008, GD had not provided for an outstanding legal action against the local
government administration for losses suffered as a result of incorrect enforcement of local business
regulations. On 5 November 2008, the court awarded GD $50,000 damages.
C On 1 October 2008, GD made a rights issue of 1 new share for every 3 shares held at a price of
$1⋅75. The market price on that date was $2⋅00.
D At 31 August 2008, GD had an outstanding insurance claim of $150,000. On 10 October 2008, the
insurance company informed GD that it would pay $140,000 as settlement.

The answer is C



Question 1.5

The external auditors have completed the audit of GQ for the year ended 30 June 2008 and have several
outstanding differences of opinion that they have been unable to resolve with the management of GQ. The
senior partner of the external auditors has reviewed these outstanding differences and concluded that
individually and in aggregate the differences are not material.

Which ONE of the following audit opinions will the external auditors use for GQ’s financial statements for
the year ended 30 June 2008?

A An unqualified opinion.

B An adverse opinion.

C An emphasis of matter.

D A qualified opinion.

The answer is A



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Question 1.6

GS forecast its need for financing to be $220,000, comprising:

$
Non-current assets 100,000
Permanent portion of current assets 70,000
Fluctuating portion of current assets 50,000
220,000

GS plans to fund this requirement as follows:

$
Equity share capital 125,000
Seven year bank loan 65,000
Bank overdraft and funding from trade payables 30,000
220,000

GS could be said to have a financing of working capital policy that is

A aggressive.
B conservative.
C tactical.
D strategic.

The answer is B



Question 1.7

GY made a number of changes during the financial year to 30 September 2008.

Which ONE of the following changes would be classified as a change in accounting policy, according to IAS
8 Accounting Policies, Changes in Accounting Estimates and Errors?

A Depreciation of motor vehicles was changed from straight line to reducing balance from 1 October
2007.
B Up to 30 September 2007, GY had been applying the benchmark treatment of IAS 23 Borrowing
Costs and charged all interest paid to its income statement. GY has decided to adopt IAS 23 (revised
2007) early and, from 1 October 2007, will charge interest incurred on the purchase, or construction,
of non-current assets to the cost of the asset.
C On 1 March 2008, GY decided to change the method it used to apportion revenue and costs on its
construction contracts. From 1 March 2008, GY changed from the cost incurred to date as a
percentage of total cost of the contract, to the value of work completed to date as a percentage of
total contract revenue.
D On 1 August 2008, GY decided to sell one of its factories and designated the factory and all related
facilities as a disposal group as required by IFRS 5 Disposal of Non-current Assets Held for Sale and
Discontinued Operations. GY revalued the disposal group assets to fair value less costs to sell.

The answer is B


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Question 1.8

Which ONE of the following actions is most likely to reduce tax evasion?

A Creating a tax system that is perceived as equitable to all.
B Deducting tax at source whenever possible.
C Simplifying the tax structure as much as possible.
D Reducing penalties for late or incorrect tax returns.
The answer is C



Question 1.9

Developed countries generally use three tax bases. One tax base widely used is income.

List the other TWO widely used tax bases.

The widely used tax bases are capital and consumption.




Question 1.10

An investment account pays interest every quarter. The quarterly interest rate is 3%. Assuming
the interest is reinvested every quarter, calculate the annual yield.

[(1 + 0⋅3)
4
- 1] x 100 = 12⋅55%



Question 1.11

State the TWO concepts of capital referred to in the International Accounting Standards Board’s (IASB’s)
Framework for the Preparation and Presentation of Financial Statements (Framework).

The two concepts of capital referred to in the Framework are:

• Financial concept
• Physical concept



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Question 1.12

The IASB’s Framework identifies eight categories of users of financial statements. Investors, employees and
government are three of the eight categories of users of financial statements.

List TWO of the other categories.

Any TWO of the following would have been acceptable answers:

• Lenders
• Suppliers
• Other trade creditors
• Customers
• The public




Question 1.13

GK purchased a piece of development land on 31 October 2000 for $500,000. GK revalued the land on 31
October 2004 to $700,000. The latest valuation report, dated 31 October 2008, values the land at $450,000.

GK has adjusted the land balance shown in non-current assets at 31 October 2008.

Which ONE of the following shows the correct debit entry in GK’s financial statements for the year ended 31
October 2008?

A DR Revaluation reserve $50,000 and DR Income Statement $200,000

B DR Revaluation reserve $250,000

C DR Revaluation reserve $200,000 and DR Income Statement $50,000

D DR Income Statement $250,000

The answer is C



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Question 1.14

GL’s trade payables days outstanding at 30 September 2008 were 45 days. Purchases for the
year to 30 September 2008 were $324,444 accruing evenly throughout the year.

GL is budgeting for an increase in annual purchases to $356,900 for the 12 months to
30 September 2009.

Assume that the accounts payable outstanding balance at 30 September 2009 will be the same
amount as at 30 September 2008.

Calculate the budgeted trade payables days outstanding at 30 September 2009.

The outstanding balance of trade payables in 2008 is:

45 365 x
444 , 324
=
x


365
324,444
x 45 = x

40,000 = x

2009 forecast average payment period:

365 x
356,900
40,000
= x

91 40 ⋅ = x

Days outstanding = 41 days




Question 1.15

GF wants to sell an unquoted bond. The bond has a coupon rate of 5% and will repay its face
value of $1,000 at the end of four years.

GF estimates that the market requires a yield to maturity of 11% from this type of bond. GF has
asked you to recommend a selling price for the bond.

Calculate a selling price for the bond.

($50 x (annuity factor t = 4, r = 11) + ($1,000 x (discount factor t = 4, r = 11)
from tables
(50 x 3⋅102) + (1,000 x 0⋅659) =
155⋅1 + 659 = $814⋅10
GF should sell the bond for $814⋅10



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Question 1.16

Explain briefly THREE major principles of modern taxation.

(i) Efficiency – tax should be easy and cheap to collect
(ii) Equity – should be fair between one tax payer and another
(iii) Economic effects must be considered




Question 1.17

Country Z has a VAT system where VAT is charged on all goods and services. Registered VAT
entities are allowed to recover input VAT paid on their purchases.

VAT operates at three different levels in Z:

• Standard rate 15%
• Luxury rate 22%
• Zero rate 0%

During the last VAT period, an entity, GW, purchased materials and services costing
$138,000, including VAT. All materials and services were at standard rate VAT.

GW converted the materials into two products A and B; product A is zero-rated and
product B is luxury-rated for VAT purposes.

During the VAT period, GW made the following sales, including VAT:

$
A 70,000
B 183,000

At the end of the period, GW paid the net VAT due to the tax authorities.

Assume no opening or closing inventory balances.

Assuming GW had no other VAT-related transactions, calculate GW’s profit and the amount of
VAT that GW paid?

Including VAT VAT Net
Revenue
Product A 70 0 70
Product B 183 (183 x 22/122) 33 150
253 33 220
Cost of goods (138) (138 x 15/115) (18) (120)
115 15 100

Profit is $100,000
VAT paid is $15,000



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SECTION B


Question Two (a)


Explain the role of the SAC and the IFRIC in assisting with developing and implementing International
Financial Reporting Standards.


Rationale

Tests candidates’ ability to explain the roles of both the Standards Advisory Council and the
International Financial Reporting Interpretations Committee in assisting with the development and
implementation of International Financial Reporting Standards. Tests learning outcome B (iii).


Suggested Approach

Explain the role of the SAC in assisting with the development and implementation of IFRS.
Explain the role of the IFRIC in assisting with the development and implementation of IFRS.


Marking Guide

Marks

Role of SAC 2.5
Role of IFRIC 2.5


Examiner’s Comments

Very few candidates did well on this question. The question specifically asks for the roles in relation to
the development and implementation of IFRS, very few answers addressed the question. Most
answers gave very general roles of each of the bodies and did not relate the answer to the
development and implementation of IFRS.


Common Errors
Giving very little information in the answer. Being vague or very general, for example saying that the
IFRIC interprets standards.

Giving details on the composition and duties of each of the bodies, instead of answering the
question.

Completely misunderstanding the roles of the SAC and IFRIC, examples include saying that the SAC
develops and publishes IFRSs or the IFRIC interprets proposed standards and tells the IASB what to
accept.



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Question Two (b)


(i) Calculate the economic order quantity for part 1258, assuming no discount is given.

(ii) State whether GC should accept the discount offered.

Rationale

Tests candidates’ ability to calculate the economic order quantity for the part described in the question
scenario, assuming no discount is given, and whether or not the entity concerned should accept the
discount offered. Tests learning outcome D (vii).


Suggested Approach

Using the formula from the formula sheet, calculate EOQ.
Calculate the total order cost per year using the EOQ. Calculate total order cost per year assuming
that the discount is taken. Compare the two total cost figures to determine whether GC should
accept the discount and make a recommendation.


Marking Guide

Marks

Calculation of EOQ 1.5
Calculation of ordering costs for EOQ and discounted order levels and making a
recommendation
3.5


Examiner’s Comments

Most candidates successfully calculated the EOQ, but few rounded the part product up to a whole
number.
A surprising number of candidates did not appear to know how to compare the effect of the discount
with the EOQ level of orders. A significant number of candidates ignored part (ii).


Common Errors
Not rounding the EOQ to a whole number, stating that the EOQ was 934.1987 or similar.

Trying to compare the cost on an order basis rather than an annual basis.

Using total inventory ordered instead of the average inventory held.

After calculating the effect of the discount, not making a recommendation.

Not stating a recommendation to accept or reject.



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Question Two (c)


Prepare a monthly cash forecast of GN’s total receipts for January to March 2009. (Work to the
nearest $000.)


Rationale

Tests candidates’ ability to prepare a monthly cash forecast, for the entity concerned, of its total
receipts for the first quarter of 2009. Tests learning outcome D (ii).


Suggested Approach

Take total sales and split 1/7 to cash and 6/7 to credit sales.
Taking the credit sales figures apply the expected time delays, cash is received over a three
month period.
Total the credit sale cash for each month and add on cash sales to give total receipts for each
month.


Marking Guide

Marks

Timing of credit sale receipts 3
Calculation of cash sales and total cash receipts per month 2


Examiner’s Comments

This question was not well done by a significant number of candidates. All the details were
provided in the question but some candidates could not apply the facts given, for example after
calculating percentage cash received allocating it to the wrong month.


Common Errors
Taking the total sales figure given and multiplying by 6 to get credit sales.

Using total sales as credit sales.

Ignoring cash sales completely.

Not using the October to December sales to calculate part of the receipts for January and
February. Limiting receipts in January and February to sales in those months.

Treating the 2% bad debt as a cash outflow.



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Question Two (d)


Calculate the amount of the deferred tax provision that GJ should include in its balance sheet at
30 September 2008, in accordance with IAS 12 Income Taxes.


Rationale

Tests candidates’ ability to calculate the amount of the deferred tax provision that the entity
concerned should include in its balance sheet in accordance with current International
Accounting Standards. Tests learning outcome A (viii).


Suggested Approach

Calculate the asset’s net book value at 30/09/08 by deducting 2 years’ depreciation, then
revaluing the asset and depreciating it for one more year.
Calculate the tax written down value or tax base by applying the first year allowance and then
deducting two further years tax allowance.
Subtract the tax base from the net book value to give the temporary difference and multiply by
the tax rate to give the total provision required.


Marking Guide

Marks

Calculation of net book value 2
Calculation of tax base 1.5
Calculation of temporary difference and deferred tax provision 1.5


Examiner’s Comments

Deferred tax is still causing candidates’ problems. The standard of answers for this question was
better than in previous diets, but could still be improved. Basic application of IAS 16 in terms of
depreciation and revaluation of assets caused some candidates additional problems. Many
candidates seemed to forget that after revaluation an asset is depreciated over its remaining
useful life.
Some candidates were able to calculate both the tax base and net book value but did not seem
to know what to do with the results.


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Common Errors for Question Two (d)
Not taking account of the residual value when calculating straight line depreciation.

Deducting too few or too many years’ depreciation before revaluing the asset.

After revaluing the asset either deducting the same depreciation as before or recalculating
depreciation over the original 5 years.

Recalculating depreciation after revaluation over an incorrect number of years.

Calculating the temporary difference by deducting the year’s tax allowance from the year’s
depreciation.

Not multiplying the temporary difference by the tax rate.




Question Two (e)


Calculate the cash generated from operations that would appear in GK’s Cash flow statement,
using the indirect method, for the year ended 31 October 2008, in accordance with IAS 7 Cash
Flow Statements.


Rationale

Tests candidates’ ability to use data in the scenario, relating to the entity concerned, to calculate
the cash generated from operations that would appear in its cash flow statement, using the
indirect method, in accordance with current International Accounting Standards. Tests learning
outcome C (ii)


Suggested Approach

Using the IAS 7 format, starting with profit before tax, add back the non-cash items and
depreciation, then deduct the gain on disposal of plant. Then list the changes in working capital
to calculate the cash generated from operations.


Marking Guide

Marks

Profit adjusted for non-cash items 3
Changes in working capital 2


Examiner’s Comments

This was a relatively straight forward question, with many candidates scoring full marks. Some
candidates, presumably remembering the May paper used the direct method for their answers.
Apart from being wrong, this also made the question more difficult to answer. The question only
asked for cash flow from operating activities, many candidates did not notice this and wasted
time calculating tax and interest paid to give net cash from operating activities.


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Common Errors for Question Two (e)
Using a profit other than before tax.

Not deducting the gain on disposal, either leaving it out or adding it back.

Getting some or all of the working capital figure signs the wrong way round, adding instead of
subtracting.

Calculating and including tax and interest when the answer should have stopped at cash
generated from operations.




Question Two (f)


Calculate the cash flow from investing activities and cash flows from financing activities sections of GK’s Cash
flow statement for the year ended 31 October 2008, in accordance with IAS 7 Cash Flow Statements.


Rationale

Tests candidates’ ability to use data in the scenario, relating to the entity concerned, to calculate the cash flow
from investing activities and the cash flow from financing activities sections that would appear in its cash flow
statement in accordance with current International Accounting Standards. Tests learning outcome C (ii)


Suggested Approach

Calculate the amount paid for purchases of property and plant and equipment.
Prepare the cash flows from investing activities.
Prepare the cash flows from financing activities


Marking Guide

Marks

cash flows from investing activities. 2.5
cash flows from financing activities 2.5


Examiner’s Comments

This question was well done by the majority of candidates, with many scoring full marks, although some did not
seem to be aware of the items to put under cash flows from investing activities and cash flows from financing
activities, scattering items randomly between the two headings. Some candidates clearly were unaware how to
calculate the cash paid for purchase of assets.


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Common Errors for Question Two (f)
Calculating assets purchased as the difference between opening and closing balances, ignoring the other
movements.

Ignoring proceeds from disposal of plant and equipment.

Putting dividends paid under investing activities or leaving out altogether.

Adding the repayment of loans.

Deducting the issue of shares.

Calculating the cash flow on issue of shares using the nominal value only.



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SECTION C


Question Three


(a) Prepare GZ’s Property, Plant and Equipment note to the financial statements for the year to 31 October
2008.

(b) Prepare GZ’s income statement and a statement of changes in equity for the year to 31 October 2008 and
a balance sheet at that date, in a form suitable for presentation to the shareholders and in accordance
with the requirements of International Financial Reporting Standards. (All workings should be to the
nearest $000).

Notes to the financial statements, except as indicated in part (a) above, are NOT required, but all workings must
be clearly shown. Do NOT prepare a statement of accounting policies.

Rationale

Tests candidates’ ability to prepare (from information provided in the question scenario) an income statement,
balance sheet and a statement of changes in equity for the entity concerned, together with a property, plant and
equipment note. The financial statements should be in a form suitable for publication and in accordance with
current International Financial Reporting Standards. Tests learning outcomes A (viii) and C (i).


Suggested Approach

Prepare workings to calculate depreciation of each category of assets.
Prepare the PP&E note as required by part (a)
Prepare workings for cost of sales
Prepare workings for the finance lease
Prepare workings for discontinued operations
Calculate interest and tax charges for the year
Prepare the income statement
Prepare the statement of changes in equity
Prepare the balance sheet


Marking Guide

Marks

PP&E note 6
Preparation of the income statement 10
Preparation of the statement of changes in equity 4
Preparation of the balance sheet 10


Examiner’s Comments

The quality of answers overall were disappointing for this question. The majority of candidates were not able to
produce a reasonable PP&E note, many scoring only 1 or 2 out of the 6 marks. More worrying was the number
of candidates unable to calculate depreciation correctly.
Few candidates even realised that the question included a discontinued activity. So there were few answers with
discontinued activities correctly treated in the income statement or the non-current assets held for sale correctly
treated in the balance sheet.
Pleasingly many candidates were able to calculate the finance cost of the lease, but were unable to split the
liability between current and non-current liabilities.


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Common Errors for Question Three
Not including the asset movements during the year in the note on PP&E.

Not deducting disposals when calculating depreciation.

Not including leased plant as a non-current asset.

Not treating the government licence as an intangible non-current asset. Most candidates charged it as an
expense in year.

Incorrectly calculating the decommissioning provision, the provision brought forward was utilised during the
year, so a new provision was required.

Charging the full amount spent on decommissioning to the profit or loss rather than netting off the provision
brought forward.

Very few candidates grouped the discontinued activities together as an item in the income statement. Most
candidates, if they recognised them at all, deducted them from continuing activities.

The finance lease liability caused many different problems. Total finance cost was often miscalculated. The sum
of digits calculation was usually correct, but some used 1 over the total, instead of 7, when calculating the
annual interest. Many candidates failed to use their calculated interest and lease liability balance correctly; many
did not include the figures calculated in the income statement or balance sheet.

Many found the calculation of the loss on the non-current asset held for sale too difficult.

SoCIE – the share premium was often missed out or included under share capital.

Income statement – items were frequently just listed in the income statement without any attempt to group
them under the standard headings. Hardly anyone showed the discontinued activities as a heading.

Balance sheet – intangible assets and available for sale investments frequently not included in non-current assets.

Non-current assets frequently not shown at all, when included often shown in the wrong place.

Some candidates got mixed up with current and non-current liabilities, including deferred tax and
decommissioning as current and the current loan as non-current. Very few included the liability for the lease
payments, when they did the split between current and non-current was usually incorrect.



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SECTION A – 50 MARKS ANSWER ALL TWENTY-ONE SUB-QUESTIONS

REQUIRED: On the indicative ANSWER SHEET, either write your answer in the space provided where the sub-question requires a written response, or place a circle “O” around the letter that gives the correct answer to the sub-question where a list of distractors has been provided. If you wish to change your mind about an answer to such a sub-question, block out your first answer completely and then circle another letter. You will not receive marks if more than one letter is circled. Space has been provided on the four-page answer sheet for workings. If you require further space, please use the last page of your answer book and clearly indicate which question(s) these workings refer to. You must detach the answer sheet from the question paper and attach it to the front cover of your answer book before you hand it to the invigilators at the end of the examination.

Question One 1.1 A B C D Which ONE of the following transactions is most likely to affect the overall amount of working capital? Receipt of full amount of cash from a customer to settle their trade receivable account. Payment of a trade payable account in full. Sale of a non-current asset on credit at its net book value. Purchase of inventory on credit. (2 marks)

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Financial Accounting and Tax Principles

Write here your full examination number: Centre Code Hall Code

INDICATIVE ANSWER SHEET FOR SECTION A

Desk Number

1.1 1.2 1.3 1.4

A A A

B B B

C C C

D D D

No more than 15 additional words: A direct tax is one that

1.5 1.6 Maximum 5 words per item

The optimal amount to the nearest $100 to be transferred is: 1 2 3 4

1.7 1.8 1.9 1.10 1.11 1.12 1.13 1.14 1.15 1.16

The annual rate of interest is: A B C

% D

The average working capital cycle is: A A A B B B C C C D D D

Cash expected to be received is: $ A Tax due is: $ A B C D B C D

THIS ANSWER SHEET CONTINUES ON PAGE 4

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1.17

In no more than 30 words:

1.18

In no more than 30 words:

1.19 1.20 1.21

The value of goodwill to be included in the accounts is: $ The optimal order size is: A B C D

You must detach this Answer sheet from the question paper and attach it to the inside front cover of your answer book before you hand it in to the invigilators at the end of the examination.

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4

Space for workings for Section A

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Space for workings for Section A

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1.2

B entered into a three-year contract to build a leisure centre for an enterprise. The contract value was $6 million. B recognises profit on the basis of certified work completed. At the end of the first year, the following figures were extracted from B's accounting records: Certified value of work completed (progress payments billed) Cost of work certified as complete Cost of work-in-progress (not included in completed work) Estimated cost of remaining work required to complete the contract Progress payments received from enterprise Cash paid to suppliers for work on the contract $000 2,000 1,650 550 2,750 1,600 1,300

What values should B record for this contract as "gross amounts due from customers" and "current liabilities – trade and other payables"? Gross amounts due from customers $950,000 $950,000 $1,250,000 $2,550,000 Current liabilities – trade and other payables $350,000 $900,000 $600,000 $900,000 (2 marks) 1.3 IAS 8 – Net Profit or Loss for the Period, Fundamental Errors and Changes in accounting policies specifies the definition and treatment of a number of different items.

A B C D

Which of the following is NOT specified by IAS 8? A B C D The effect of a change in an accounting estimate. Prior period adjustments. Provisions. Extraordinary items. (2 marks)

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1.4

In no more than 15 words, complete the following sentence: “A direct tax is one that…” (Write your answer in the space provided on the answer sheet) (2 marks)

1.5

A company uses the Baumol cash management model. Cash disbursements are constant at $20,000 each month. Money on deposit earns 5% a year, while money in the current account earns a zero return. Switching costs (that is, for each purchase or sale of securities) are $30 for each transaction.

What is the optimal amount (to the nearest $100) to be transferred in each transaction? (Write your answer in the space provided on the answer sheet) (2 marks) 1.6 List (using no more than five words per item) the four main sources of tax rules in a country. (Write your answer in the space provided on the answer sheet) (4 marks) 1.7 WM’s major supplier, INT, supplies electrical tools and is one of the largest companies in the industry, with international operations. Deliveries from INT are currently made monthly, and are constant throughout the year. Delivery and invoicing both occur in the last week of each month. Details of the credit terms offered by INT are as follows: Normal credit period 40 days Cash discount 2% for settlement in 10 days Average monthly purchases $100,000

WM always takes advantage of the cash discount from INT. Calculate the annual rate of interest (to two decimal places) implied in the cash discount offered by INT. Assume a 365-day year. (Write your answer in the space provided on the answer sheet) (3 marks)

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8 A company has a current ratio of 2 :1. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. avoid taxing dividends received from subsidiaries in the same country twice.10 Double tax relief is used to A B C D ensure that you do not pay tax twice on any of your income.9 The following balances were extracted from the books of A: Year ended 31 March 2003 $000 300 200 100 At 31 March 2003 $000 15 36 28 Revenue Cost of sales Gross profit Closing inventory Trade receivables Trade payables Assume all revenue is credit sales and cost of sales equates to inventory purchases. What will be the effect of this change on the company's current ratio and its cash operating cycle? Current ratio A B C D Increase Increase Decrease Decrease Cash operating cycle Increase Decrease Increase Decrease (2 marks) 1.com . What is A's average working capital cycle for the year ended 31 March 2003? (Write your answer in the space provided on the answer sheet) (3 marks) 1. as it has in the past. it has decided to pay its trade payable accounts after 30 days in future. (2 marks) P7 PILOT PAPER 9 FOR FREE ACCA. Due to having significant surplus cash balances. rather than after 50 days. provide relief where a company pays tax at double the normal rate. mitigate taxing overseas income twice.1.blogspot.

com .13 An enterprise commenced business on 1 April 2002. Bad debts are expected to be 3% of credit sales. but other customers are expected to pay on time. Cash sales represent the other 40% of revenue. Revenue in April 2002 was $20.12 Tax on an enterprise’s trading profits could be referred to as: (i) (ii) (iii) (iv) (v) Income tax Profits tax Indirect tax Direct tax Earnings tax Which TWO of the above would most accurately describe tax on an enterprise’s trading profits: A B C D (i) and (iii) (i) and (iv) (ii) and (iii) (iv) and (v) (2 marks) 1.1. but this is expected to increase at 2% a month. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. tax paid less an amount withheld from payment. How much cash is expected to be received in May 2002? (Write your answer in the space provided on the answer sheet) (3 marks) P7 PILOT PAPER 10 FOR FREE ACCA. tax deducted at source before payment of interest or dividends.blogspot.000.11 A withholding tax is: A B C D tax withheld from payment to the tax authorities. (2 marks) 1. tax paid on increases in value of investment holdings. The credit period allowed is one month. Credit sales amount to 60% of total sales.

In no more than 30 words define an asset.14 Which of the following types of taxes is regarded as an indirect tax? A B C D Taxes on income. The tax rate on trading profits applicable to E for the year is 25%. Taxes on capital gains.000.000 on entertaining expenses.000 and non-tax allowable expenditure of $10. Sales tax (Value added tax). (2 marks) 1.com .15 E has an accounting profit before tax of $95. (Write your answer in the space provided on the answer sheet) (2 marks) Reliability P7 PILOT PAPER 11 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.17 The International Accounting Standards Board’s Framework for the preparation and presentation of financial statements defines elements of financial statements.1.blogspot. How much tax is E due to pay for the year? (Write your answer in the space provided on the answer sheet) (2 marks) 1. The accounting profit included non-taxable income from government grants of $15. Taxes on inherited wealth.16 Which TWO of the following are underlying assumptions in the International Accounting Standards Board’s Framework for the preparation and presentation of financial statements? (i) (ii) Accruals Relevance (iii) Comparability (iv) Going concern (v) A B C D (i) and (v) (ii) and (v) (iii) and (iv) (i) and (iv) (2 marks) 1.

com .000 shower units from a single supplier.000.20 SK sells bathroom fittings throughout the country in which it operates. The publishing rights were a gift from the author to the previous owners at no cost.18 and 1. calculate the optimal order size.19 Calculate the value of goodwill to be included in the accounts of X for this purchase. RR has offered to provide the required number of showers each year under an exclusive long-term contract.000. (Write your answer in the space provided on the answer sheet) (3 marks) P7 PILOT PAPER 12 FOR FREE ACCA.000 and current value of $25. assuming that RR is chosen as the sole supplier of shower units for SK.000 equity shares with a nominal market value of $10 each and $20.000.19 below X acquired the business and assets from the owners of an unincorporated business: the purchase price was satisfied by the issue of 10.18 In no more than 30 words. explain the accounting treatment to be used for the publishing rights of the first text. RR is located only a few miles from the SK main showroom. (4 marks) 1. However. Using the economic order quantity model (EOQ model). 1.The following data is to be used to answer questions 1. (Write your answer in the space provided on the answer sheet) (2 marks) 1.000 cash. The assets acquired were: • • • • Net tangible non-current assets with a book value of $20. Patents for a specialised process valued by a specialist valuer at $15. Publishing rights of the first text from an author that the management of X expects to become a best seller. It has guaranteed such a regular and prompt delivery service that SK believes it will not be necessary to hold any safety Inventory (that is buffer Inventory) if it uses RR as its supplier. valued by a specialist brand valuer on the basis of a multiple of earnings at $50.blogspot. Brand name. It has offered to supply each shower unit at $400 with a transport charge of $200 per delivery. there is no reliable evidence available to support the estimate of the management. In order to obtain the best price. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. The market value of X shares at the date of acquisition was $20 each.000. The management of X has estimated the future value of the potential best seller at $100. it has decided to purchase all its annual demand of 10. Demand for shower units is at a constant rate all year. The cost to SK of holding one shower unit in Inventory for one year is $4 plus 3% of the purchase price.

1. Less risk of stock shortages. More frequent deliveries. (2 marks) (Section A = 50 marks) End of Section A P7 PILOT PAPER 13 FOR FREE ACCA.21 Which of the following would be LEAST LIKELY to arise from the introduction of a Just-in-Time stock ordering system? A B C D Lower stockholding costs.com . Increased dependence on suppliers. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.

Required: As the trainee management accountant. when purchased on 1 April 2000 for $20. explain how the accounting transactions relating to the delivery vehicle should be recorded in the income statement for the year ended 31 March 2003 and the balance sheet at that date. and the vehicle is now expected to have a useful economic life of six years. The cost of this de-commissioning work is estimated to be $20 million. All delivery vehicles are depreciated using the straight-line method and are assumed to have zero residual value. Required: As the trainee management accountant. It now appears that the original estimate of the useful economic life was too short. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. At the end of that time. the oil well will be de-commissioned and work carried out to reinstate the land. draft a memo to the production manager explaining how NDL must treat the de-commissioning costs in its financial statements for the year to 31 March 2003. The licence granting permission to drill the new oil well included a clause that requires NDL to "return the land to the state it was in before drilling commenced".SECTION B – 30 MARKS ANSWER ALL SIX SHORT-ANSWER QUESTIONS Question Two A new type of delivery vehicle. (5 marks) Question Three NDL drilled a new oil well. which started production on 1 March 2003. (5 marks) P7 PILOT PAPER 14 FOR FREE ACCA. Your memo should refer to appropriate International Accounting Standards. Using appropriate International Accounting Standards. was expected to have a useful economic life of four years.blogspot. NDL estimates that the oil well will have a 20-year production life.000.com . draft a memo to the transport manager explaining whether it is possible to change the useful economic life of the new delivery vehicle. from the date of purchase.

There is. however. As a result. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. but there is still a high degree of uncertainty in relation to the cash surpluses or deficits that will be generated in each month.blogspot. a possibility that a rival group of hotels will offer large discounts in December and this could damage December trade for HRD to a significant extent. The Finance Director has identified the following possible outcomes and their associated probabilities: Expected cash balance at 30 November 2003 Net operating cash flow in December 2003 Net operating cash flow in January 2004 Assume cash flows arise at month ends. resulting in a negative cash flow. the cash generated each month has been very difficult to estimate. $000 +175 +700 -300 -900 Probability 1·0 0·7 0·3 1·0 Required: Calculate the expected cash balance or overdraft of HRD at 31 January 2004. After January 2004. trade is expected to improve. January is a poor period for the industry and therefore all the company's hotels will close for the month.com . Christmas is normally a busy period and large cash surpluses are expected in December. The room occupancy rate varies significantly from month to month. (5 marks) P7 PILOT PAPER 15 FOR FREE ACCA. There are also high fixed costs.Question Four HRD owns a number of small hotels. Explain why your answer may not be useful for short-term cash planning and outline alternative approaches that could be used.

000 on its tax account. Required: Using the IAS 37 definition of a provision.300. (5 marks) Question Seven A lessee leases a non-current asset on a non-cancellable lease contract of five years.blogspot. (5 marks) Question Six IAS 37 defines the meaning of a provision and sets out when a provision should be recognised. Required: Prepare extracts from the income statement for the year ended 31 December 2003. The rental is $21. (5 marks) (Section B = 30 marks) End of section B P7 PILOT PAPER 16 FOR FREE ACCA. the details of which are: • • • • The asset has a useful economic life of five years. which represented the balance on the account after settling its tax liability for the previous year. Required: Prepare income statement and balance sheet extracts for years one and two of the lease. The fair value of the asset was $88. The lessee also has to pay all insurance and maintenance costs.000. explain how a provision meets the International Accounting Standards Board’s Framework for the preparation and presentation of financial statements definition of a liability. SPJ had an opening debit balance of $5.com . balance sheet at that date and notes to the accounts showing the tax entries required.Question Five On 1 January 2003. The lessee uses the sum of digits method to calculate finance charges on the lease. SPJ had a credit balance on its deferred tax account of $1⋅6 million at the same date.000 per annum payable at the end of each year. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. SPJ has been advised that it should expect to pay $1 million tax on its trading profits for the year ended 31 December 2003 and increase its deferred tax account balance by $150.

250 94. Its finished products are stored in a nearby warehouse until ordered by customers. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 1.com .000 9. P7 PILOT PAPER 17 FOR FREE ACCA. fully paid Interest paid Inventory at 31 March 2002 Plant & Equipment Provision for Depreciation at 31 March 2002: Plant & Equipment Vehicles Provision for doubtful trade receivables Restructuring costs Sales revenue Share issue expenses Share premium Trade payables Trade receivables Vehicles Additional information provided: (i) Non-current assets are being depreciated as follows: Plant & Equipment Vehicles 20% per annum straight line 25% per annum reducing balance 16. The trial balance for AZ at 31 March 2003 was as follows: $000 7% Loan Notes (redeemable 2007) Accumulated profits at 31 March 2002 Administrative expenses Bank & Cash Cost of goods manufactured in the year to 31 March 2003 (excluding depreciation) Distribution costs Dividends paid Dividends received Equity shares $1 each.852 30.SECTION C – 20 MARKS ANSWER ONE QUESTION ONLY Question Eight AZ is a quoted manufacturing enterprise.670 600 121 124.000. while depreciation of vehicles should be included under distribution costs.000 639 4.200 20. The closing inventory at 31 March 2003 was $5.315 6.977 $000 18. (ii) (iii) Tax due for the year to 31 March 2003 is estimated at $15. AZ has been re-organising the business to improve performance.977 195.blogspot.060 1.060 1.900 70 500 8.930 3.677 Depreciation of plant and equipment is considered to be part of cost of sales.250 14.020 26.180.720 195.000.120 9.

(viii) On 1 October 2002. (vii) At 31 March 2003. All money had been received and correctly accounted for by the year end.000 and has not been included in the trial balance. Notes to the financial statements are NOT required.com . DO NOT prepare a statement of accounting policies or a statement of total recognised gains and losses. (20 marks) P7 PILOT PAPER 18 FOR FREE ACCA. in accordance with the requirements of International Accounting Standards.blogspot.(iv) (v) (vi) A dividend of 5 cents per ordinary share was paid in February 2003. AZ issued 1. Required: Prepare AZ's income statement for the year to 31 March 2003. AZ incurred no other interest charges in the year to 31 March 2003. The 7% loan notes are 10-year loans due for repayment by 31 March 2007. and a statement of changes in equity for the year. These should be in a form suitable for presentation to the shareholders. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 equity shares at $1⋅50 each. but all workings must be clearly shown. Legal advisers have indicated that it is reasonably certain that the outcome of the case will be against the enterprise. The amount of compensation is currently estimated at $25. a balance sheet at that date. AZ was engaged in defending a legal action against the enterprise.000. The restructuring costs in the trial balance represent the cost of the final phase of a major fundamental restructuring of the enterprise to improve competitiveness and future profitability.

834 5.blogspot.436 TEX – Balance sheets at 30 September 2003 $000 Assets Non-current assets Current assets: Inventories Trade receivables Bank Total assets Equity and liabilities Capital and reserves: Issued capital Accumulated profits Non-current liabilities: Interest-bearing borrowings Deferred tax Current liabilities: Trade payables Proposed dividend Tax 1. a manufacturing enterprise: TEX – Income statement for the year ended 30 September 2003 Revenue Cost of sales Gross profit Other operating expenses Finance cost Profit before tax Income tax expense Dividends $000 15.500 10.300 2.250 21.040 2.440 21.215 3.600 $000 2002 $000 14.400 12.700 600 2.900 400 7.300 700 700 1.670 1.100 17.160 1.700 (124) 3.576 (1.200 3.000 (2.000 (9. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000) 6.600 1.Question Nine The following information has been extracted from the draft financial statements of TEX.410 $000 18.500 150 3.300) 3.040) (1.815 4.100) 1.410 800 600 685 2.100 800 1.836 16.085 17.600 P7 PILOT PAPER 19 FOR FREE ACCA.com .

200 4.000.blogspot.900 8.100 11.400 4.600. Dividends were declared before the balance sheet dates.540 9.200 1. in accordance with IAS 7 – Cash flow statements. (20 marks) (Section C = 20 marks) End of Question Paper P7 PILOT PAPER 20 FOR FREE ACCA.com .800 3.300 7.500 Total $000 19.000.500 24. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Non-current assets Property $000 At 30 September 2002 Cost Depreciation Net book value At 30 September 2003 Cost Depreciation Net book value (i) (ii) (iii) 8. Required: Prepare TEX's cash flow statement and associated notes for the year ended 30 September 2003.160 Plant disposed of during the year had an original cost of $2.400 13.600 6.400 1.660 Plant $000 10.400 7.440 18. cash received on disposal was $730.700 14. All additions to non-current assets were purchased for cash.000 and accumulated depreciation of $900.

140 0.505 0.195 0.180 0.758 0.980 0.456 7% 0.587 0.728 0.376 0.508 0.507 0.181 0.645 0.080 0.763 0.718 0.877 0.231 0.116 0.962 0.305 0.125 0.475 0.208 0.111 0.543 0.686 0.322 0.371 0.942 0.079 0.368 0.290 0.534 0.888 0.326 0.065 0.862 0.519 0.592 0.722 0.703 0.650 0.579 0.296 0.572 0.557 0.084 0.317 0.315 0.141 0.078 0.500 0.681 0.731 0.425 0.026 P7 PILOT PAPER 21 FOR FREE ACCA.901 0.270 0.071 0.747 0.370 0.356 0.146 0.361 0.650 0.386 0.567 0.585 0.415 0.971 0.636 0.502 0.052 0.093 0.914 0.410 0.112 0.209 0.552 0.209 0.756 0.593 0.659 0.961 0.377 0.130 0.153 0.205 0.909 0.925 0.031 20% 0.104 13% 0.051 1% 0.394 0.blogspot.713 0.397 0.098 0.176 0.906 0.396 0.124 12% 0.390 0.099 0.350 0.804 0.540 0.204 0.083 0.362 0.051 0.258 0.744 0.952 0.700 0.232 0.137 0.676 0.148 0.400 0.APPLICABLE MATHS TABLES AND FORMULAE Present value table Present value of £1.714 0.317 0.124 0.388 0.766 0.896 0.452 0.215 0.917 0.772 0.497 0.277 0.160 0.333 0.844 0.570 0.482 0.060 0.250 0.735 0.905 0.915 0.287 0.751 0.070 0.081 0.069 0.924 0.081 0.059 0.535 0.233 0.037 0.043 0.402 0.694 0.314 0.232 0.044 0.218 0.857 0.263 0.243 0.951 0.873 0.108 0.116 0.436 0.292 0.621 0.813 0.252 0.826 0.681 0.225 0.130 0.513 0.661 0.627 0.187 0.971 0.104 0.168 0.554 4% 0.784 0.212 0.482 0.666 0.073 17% 0.888 0.879 0.789 0.926 0.429 0.481 0.623 0.352 0.327 0.743 0.837 0.060 0. that is (1 + r)-n where r = interest rate.351 0.417 0.249 0.331 0.675 0.183 0.943 0.162 0.247 0.792 0.145 0.907 0.037 19% 0.605 0.388 0.312 Interest rates (r) 15% 16% 0.783 0.467 0.893 0.592 0.658 0.582 0.275 0. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.530 0.547 0.828 0.980 0.923 0.790 0.444 0.706 0.135 0.308 0.123 0.031 0.853 0.855 0.227 0.422 0.711 0.990 0.889 0.942 0.527 0.847 0.855 0.797 0.863 0. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest rates (r) 5% 6% 0.516 0.625 0.432 0.499 0.043 18% 0.812 0.693 0.701 0.354 0.820 0.061 0.641 0.350 0.239 0.285 0.673 3% 0.596 0.593 0.231 0.731 0.630 0.480 0.069 0.624 0.178 10% 0.054 0.890 0.887 0.164 0.840 0.261 0.299 0.683 0.613 0.424 0.731 0.051 0.123 0.376 0.088 0.442 0.794 0.279 0.141 0.162 0.861 0.820 2% 0.266 0.194 0.270 0.419 0.434 0.836 0.558 0.095 0.601 0.404 0.822 0.677 0.286 0.038 0.208 0.295 0.475 0.935 0.416 0.577 0.853 0.760 0.178 0.263 0.609 0.194 0.170 0.319 0.045 0.095 0.138 0.335 0.864 0.476 0.191 0.712 0.237 0.340 0.160 0.788 0.108 0.339 0.871 0.352 0.188 0.840 0.163 0.961 0.229 0.257 0.111 0.665 0.623 0.087 14% 0.258 8% 0.769 0.093 0.163 0.125 0.743 0.833 0.456 0.773 0.816 0.870 0.198 0.391 0.870 0.555 0.com .614 0. n = number of periods until payment or receipt.463 0.497 0.333 0.456 0.107 0.469 0.534 0.544 0.842 0.093 0.062 0.182 0.943 0.437 0.564 0.458 0.215 9% 0.296 0.513 0.885 0.642 0.583 0.152 0.823 0.460 0.284 0.708 0.494 0.149 11% 0.837 0.933 0.746 0705 0.

410 3.904 8.736 2.222 5.528 2.231 4.922 4.723 2.274 3.713 2.361 2.blogspot.358 8.566 9.240 3.747 6.935 1.775 3.462 4.313 8.435 8.712 10.402 3.194 6.974 3.855 1.070 5.855 2.368 11.594 8% 0.913 2.122 6.322 2.405 5.162 8.929 17% 0.379 7.668 5.451 4.675 4.590 Interest rates (r) 5% 6% 0.623 5.733 7.106 12.811 6.853 5.100 4.859 1.993 4.833 1.355 4.467 6.316 5.471 10.111 4.146 5.498 3.550 6.022 8.639 4.914 3.487 7.447 9.253 9.453 5.230 7.950 9.158 11.373 6.039 4.495 6.760 9.564 4.968 5.889 6.360 7.946 5.767 5.025 14% 0.452 5.650 5.696 4.660 5.242 6.303 4.562 16.059 10.206 5.839 7.160 4.728 7.191 7.537 5.106 2.833 5.111 8.814 7.902 4.886 2.127 3.439 4.352 3.998 4.601 6.398 17.166 12.786 6.549 7.652 8.605 3.019 5.983 9.210 2.917 1.607 4.210 6.328 5.824 8.324 5.679 16.808 4.836 4.870 0.198 6.690 12.134 13.730 4.853 9.626 1.829 3.799 5.487 3.037 3.128 6.710 7.980 1.910 5.134 13.818 5.605 4.118 5.884 3.954 10.145 6.718 15.775 4.Cumulative present value of £1 per annum.163 4.749 5.849 13.244 8.061 8.974 7.899 10.389 5.901 1.426 5.499 7.170 3.623 Interest rates (r) 15% 16% 0.076 5.715 4.763 10.201 8.122 9.142 6.002 6.031 4.118 11.743 3.791 4.535 5.652 12.469 13% 0.132 5.339 4. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.611 4.229 5.234 5.687 5.954 4.729 6.033 5.847 1.877 5.274 11.628 6.877 1.793 4.795 6.192 4.312 3.417 6.889 4.722 8.805 7.862 1.668 2.970 2.561 13.085 12.162 5.470 7% 0.462 6.367 7.808 2.992 15.494 4.798 3.103 7.624 3.351 3% 0.418 6.971 6.772 5.020 7.941 3.384 8.207 4.327 4.833 2.212 5.863 9.659 4.534 5.468 5.954 6.101 20% 0.717 4.843 4.890 4.342 5.783 2.818 9% 0.918 6.129 10% 0.938 7.611 4.802 7. Receivable or Payable at the end of each year for n years Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1− (1+ r ) − n r 1% 0.247 6.639 3.943 8.885 1.161 7.583 5.786 8.745 9.385 9.876 4.575 5.605 2.847 5.582 6.423 4.659 13.492 6.756 8.604 6.514 11% 0.421 5.120 7.424 6.108 9.078 4.952 0.273 5.635 11.335 5.324 14.004 13.517 3.584 5.326 3.259 3.394 9.380 10.575 11.784 4.887 8.108 7.559 8.306 8.477 10.971 1.288 4.990 5.536 7.578 14.365 8.812 4.139 7.991 3.754 14.547 2.580 5.943 1.802 4.759 6.366 7.174 2.812 4.296 11.566 2.265 6.029 5.990 1.387 4.589 2.353 19% 0.702 7.140 2.046 2% 0.589 3.759 2.336 10.962 1.870 P7 PILOT PAPER 22 FOR FREE ACCA.647 2.033 5.563 11.656 7.207 6.893 1.786 8.963 12% 0.008 5.713 5.577 3.092 5.938 6.685 4.295 9.533 4.250 7.585 2.917 5.515 7.986 10.628 18% 0.630 4.868 5.530 9.988 5.840 6.255 12.926 1.329 4.199 3.102 3.024 7.828 11.865 14.690 2.982 7.840 1.938 12.531 3.878 4% 0.325 8.475 5.472 7.283 2.837 4.197 5.909 1.690 3.546 3.851 9.444 3.938 4.com .604 9.047 6.246 2.302 6.673 3.216 5.002 6.433 3.544 8.166 13.226 18.787 10.348 12.486 5.058 3.606 7.942 2.842 6.724 5.750 6.486 4.106 10.712 5.372 9.706 3.463 7.344 4.487 4.292 14.838 11.995 6.465 4.

of a sum X. commencing in one year. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. payable or receivable in perpetuity. commencing in one year.FORMULAE Valuation models (i) (ii) Future value of S. discounted at r% per annum: PV = 1 1 1 − [1 + r ] n r     (iv) Present value of £1 per annum.blogspot. Baumol model: Optimal sale = 2 x Annual cash disburseme nts x Cost per sale of securities interest rate (ii) Spread between upper and lower cash balance limits. discounted at r% per annum: PV = S = X[1 + r] n 1 [1 + r ] n (iii) Present value of an annuity of £1 per annum. receivable or payable for n years. discounted at r% per annum: PV = 1 r (v) Present value of £1 per annum. compounded at r% interest: Present value of £1 payable or receivable in n years. invested for n periods. receivable or payable. commencing in one year. discounted at r% per annum: PV = 1 r −g Inventory management (i) Economic Order Quantity EOQ = where: Co Ch D = = = cost of placing an order cost of holding one unit in Inventory for one year annual demand 2C o D Ch Cash management (i) Optimal sale of securities.com . Miller-Orr model: 3 4 Spread = 3    3 x transactio n cost x variance of cash flows   interest rate   1 P7 PILOT PAPER 23 FOR FREE ACCA. growing in perpetuity at a constant rate of g% per annum.

7 1.000 1.000 1.3 1.000 ) / 0 ⋅ 05] = $16.1 1.650 Cost of work in progress (not included in completed work) 550 2.blogspot.200 Less cash paid to creditors for work on the contract 1.2 Gross amounts due from customers are calculated as: Certified value of work completed Less cash received from enterprise Plus work in progress $ 2.1 = 27·86% The answer is A P7 PILOT PAPER 24 FOR FREE ACCA.4 The answer is C A direct tax is one that is levied directly on the person who is intended to pay the tax.970 that is approximately $17.5 [( 2 x 30 x 240.8 Domestic legislation and court rulings Practice of tax authority Supranational bodies International treaties (100/98)365/30 . 1.com .6 1 2 3 4 1. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.300 900 The answer is B 1.SOLUTIONS TO PILOT PAPER SECTION A Answer to Question One 1.600 400 550 950 The answer is C Current liabilities – trade and other payables are calculated as: Cost of work certified as complete 1.

13 (20.000 $80.10 The answer is B 1.16 The answer is D 1.500 P7 PILOT PAPER 25 FOR FREE ACCA.15 Accounting profit Less non-taxable income Add non-tax allowable expenses Taxable profit Tax at 25% 1.000 $10. $95.000 x 60% x 0·97) = $19.14 The answer is D 1.blogspot. Expected future value cannot be recognised as the event has not yet occurred.800 1.18 The publishing rights had no cost as they were a gift.9 Inventory turnover (15/200) x 365 = 27⋅4 days Receivables (36/300) x 365 = 43⋅8 days Payables (28/200) x 365 = 51⋅1 days Working capital cycle is therefore = (27⋅4 + 43⋅8 . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 $90.000 $15.11 The answer is C 1.com .000 $22.17 “an asset is a resource controlled by an enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise” 1.12 The answer is D 1. therefore they cannot be recognised.000 x 1·02 x 40%) + (20.51⋅1) = 20⋅1 days 1.1.

000 220.21 The answer is B (2Co D / Ch ) [(2 x 10. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 = 500 units P7 PILOT PAPER 26 FOR FREE ACCA.000 $ 20.20 Holding cost EOQ = $4 + (3% x $400) = $16 = = Optimal order 1.000 200.000 90.000 50.000 130.000 x $200)/$16 ] $ 25.blogspot.1.19 Tangible non-current assets Patents Brand name Purchase consideration: Cash Shares Goodwill 1.000 15.com .

500 depreciation.com .000 will be depreciated over the remaining four years at $2. The balance sheet will show cost $20. IAS 16 requires the useful economic lives of non-current assets to be regularly reviewed and adjusted if they are found to be incorrect. at 31 March 2002. total $12. The net book value at 31 March is $7.SECTION B Answer to Question Two Memo To: From: Date: Transport Manager Trainee Management Accountant January 2004 International Accounting Standards (IAS) require the economic life of the vehicle to be changed.500 a year.000 plus $2. A review of the delivery vehicle indicates that its useful economic life must be adjusted to a more realistic total of six years from date of purchase. The delivery vehicle will have been depreciated for two years. The net book value. IAS 16 requires the net book value to be recovered over the remaining useful economic life of the asset. of $10.blogspot. IAS 16 also requires realistic economic lives to be used for non-current assets. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. The remaining useful life is now four years. less accumulated depreciation of $10. When economic lives are adjusted. Cost Depreciation 2/4 Net book value at 31 March 2002 $000 20 10 10 The useful economic life is adjusted to six years. The effect in the Income Statement for the year to 31 March 2003 will be to charge $2.500. two years having elapsed.000. P7 PILOT PAPER 27 FOR FREE ACCA. 2000/2001 and 2001/2002.500.500.

P7 PILOT PAPER 28 FOR FREE ACCA. The new total cost of the oil well would then need to be reviewed to ensure that its book value was not greater than its recoverable amount. The expected balance is based on probabilities and will not occur. the de-commissioning costs are treated as capital expenditure and added on to the cost of the non-current asset. The drilling licence includes a clause that requires the land to be returned to the state it was in before drilling commenced. The cost of the oil well (including the provision) should be depreciated each year and charged to the income statement. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. The full cost of the de-commissioning has been estimated ($20 million). It therefore provides a poor basis for short-term cash planning. Answer to Question Four $000 Opening balance (1 December 2003) December +700 x 0·7 .000.000. there will either be a cash inflow of $700. The provision will remain in the balance sheet until the oil well is de-commissioned in 20 years’ time.blogspot. this is then discounted to present value and recorded as a provision in the balance sheet at 31 March 2003 Where the expenditure gives access to future economic benefits such as access to oil reserves for the next 20 years.com .300 x 0·3 January Closing balance (31 January 2004) 490 -90 400 -900 -325 $000 175 The expected balance at 31 January is an overdraft of $325.000 in December or a cash outflow of $300. Based on the probabilities provided. The past event occurs as soon as the licence is granted and the de-commissioning costs are incurred as soon as the oil well has been drilled on the site.Answer to Question Three Memo To: From: Date: Production Manager Trainee Management Accountant January 2004 International Accounting Standard (IAS) 37 requires that any future obligations arising out of past events should be recognised immediately. The full obligation must be recognised in the accounts ending 31March 2003.

Answer to Question Five Notes to the accounts Note 1: Tax expense Balance brought forward 1 January 2003 Tax for current year Deferred tax increase Income statement Note 2: Deferred tax Deferred tax – balance at 1 January 2003 Increase in year Balance at 31 December 2003 $ (5.The mean expected value would only be relevant if the event could be repeated a significant number of times.145.750.000.000 150. the settlement of which is expected to result in an outflow of resources from the enterprise.000 150. A provision is only recognised when: • There is a present obligation (legal or constructive) arising as a result of a past event.145.000 $1. +$700.000 1. The alternative approaches to planning should be to plan for each of the two possible outcomes. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 or -$300.000. • A reliable estimate can be made of the amount of the obligation.000 1.000 Income Statement (extract) for the year ended 31 December 2003 Tax expense (note 1) $1.000) 1.” IAS 37 defines a provision as a liability of uncertain timing or amount.000 Answer to Question Six The International Accounting Standards Board’s Framework for the preparation and presentation of financial statements (the Framework) defines a liability as: “a present obligation of the enterprise arising from past events. P7 PILOT PAPER 29 FOR FREE ACCA. • It is probable (or more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation.000 Balance Sheet at 31 December 2003 (extracts) Current liabilities: Tax payable Non-current liabilities Deferred tax (note 2) $1.000 1.600.000.750.blogspot.com .

The event must already have happened at the balance sheet date.700 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Finance charge spread using 5 years’ sum of digits $ 5/15 x 16. thus meeting this part of the definition of a liability. Therefore a provision meets this part of the definition of a liability.867 56.300 72.” A provision is a present obligation arising from a past event. so a provision will not be made.700 = 4.” Settlement is probably going to result in an outflow of resources.320 38.567 4.113 Balance Finance charge 5. Answer to Question Seven Payments under the lease Fair value Finance charge 5 x 21.227 1.000 21.700 = 3. If the event has not occurred.340 2/15 x 16. the entity may be able to avoid it.113 Repayment 21.700 = 1.000 21.867 56.320 38.com .660 19.000 Balance 72.700 = 5.453 3.300 16.000 21.000 88. The obligation can arise from legal consequences or could be constructive.700 = 2.567 Year 2 Depreciation Finance charge $ 17. Constructive obligations arise out of past practice or as a result of promises previously made which have created the expectation that the organisation would honour its promise. If the outflow of resources is more likely than not to occur it can be expected to happen.340 2.453 P7 PILOT PAPER 30 FOR FREE ACCA.000 $ 105.This definition is very similar to the one given in the IASB’s Framework for a liability. “…a present obligation of the enterprise arising from past events.227 1/15 x 16.567 4/15 x 16.453 3/15 x 16.887 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 88.000 21. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.660 19. “…the settlement of which is expected to result in an outflow of resources from the enterprise.blogspot.887 Income statement (extracts) Year 1 $ Depreciation 17.660 Finance charge 5.660 4.

320 52.300 17.Balance sheet (extracts) Non-current assets at cost .660 P7 PILOT PAPER 31 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com .blogspot.640 16.leased Provision for depreciation Net book value Liabilities – amounts due under leases Current liabilities Non-current liabilities $ Year 1 88.660 70.980 17.660 38.300 35.547 56.320 $ Year 2 88.

com . plant and equipment (W9) Current Assets Inventory Trade receivables (W8) Cash at bank & in hand $000 Cost 34.729 P7 PILOT PAPER 32 FOR FREE ACCA.677 1.000 Share premium 0 500 (70) 430 Accumulated profits 14.010 33.000 1.278) 1.200 AZ – Statement of Changes in Equity for the year ended 31 March 2003 Share capital 19. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.180 9.SECTION C Answer to Question Eight AZ – Income Statement for the year ended 31 March 2003 $000 Revenue Cost of sales (W1) Gross profit Distribution costs (W4) Administration expenses (W3) Other operating expenses Loss from operations Finance cost (W7) Income from other fixed asset investments Loss before tax Income tax expense Net loss for the period $000 124.677 (667) (1.440 $000 Net Book Value 19.165 (25.489 Capital and Reserves Called up share capital Share premium account Accumulated profits 20.000) 33.250 40.573) (16.440 Balance at 31 March 2002 Issue of shares Share issue costs Net loss for the period Dividends (W6) Balance at 31 March 2003 20.330 26.500 (70) (667) (1.000 AZ – Balance Sheet at 31 March 2003 Non-current Assets Property.000) 13.035 $000 Depreciation 14.045) (121) (1.739) (574) (78) (652) (15) (667) (9.900 (99.blogspot.760 60.735) 25.000 430 13.010 Total equity 33.306 5.

183 (IS) (BS) (IS) (B/S) 1.672 6.060 12.060 513 9.000 98.blogspot.120 15 639 8.123 16. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. cost Depreciation for year @ 20% Depreciation b/f Depreciation c/f W3 Administration expenses Per trial balance Provision for legal claim W4 Distribution expenses Per trial balance Depreciation vehicles (W5) W5 Depreciation Vehicles. cost Depreciation b/f Depreciation for year @ 25% Depreciation b/f Depreciation c/f W6 Dividends Dividends paid Ordinary dividend 0⋅05 x 20 million shares = W7 Finance cost 7% interest on Loan notes Paid Accrued interest 8.020 25 16.000 1.063 99.489 4.250 25 18.275 51.050 513 1.670 2.573 3.715 Current liabilities Trade payables Tax Accruals (W7) Workings W1 Cost of sales: Opening inventory Cost of goods manufactured in year Less closing inventory Add depreciation – plant and equipment (W2) W2 Depreciation Plant and equipment.315 6.852 94.com .852 (5.670 2.774 60.720 1.063 6.278 639 639 (SCE) (IS) (B/S) P7 PILOT PAPER 33 FOR FREE ACCA.045 9.735 30.Non-current liabilities 7% Loan notes (redeemable 2007) Other provisions 18.180) 93.

035 Vehicles 3.720 9.315 34. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts: 2002 $000 1.blogspot.670 6.019 (1. These were paid for by cash.050) 1.123 2.183 14.401 (8.010 (124) (485) 5.000) 819 (1.063 513 12.com .270) 3.306 Answer to Question Nine TEX – Cash Flow Statement for the year ended 30 September 2003 $000 Cash inflow from operating activities Cash receipts from customers (W1) Cash paid to suppliers and employees (W2) Cash generated from operations Interest paid Income taxes paid (W4) Net cash from operating activities Cash flows from investing activities Purchase of property.720 3.290) 6.200) (1. plant and equipment with an aggregate cost of $8 million.315 30.300 (8. plant and equipment (W6) Proceeds from sale of equipment Net cash used in investing activities Cash flows from financing activities Proceeds from issue of share capital (W5) Repayment of long term borrowings Dividends paid (W3) Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at 30 September 2002 Cash and cash equivalents at 30 September 2003 14. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.200 2003 $000 150 Cash on hand and balances with banks P7 PILOT PAPER 34 FOR FREE ACCA.330 Depreciation Plant (W2) Vehicles (W5) 6.W8 Trade receivables Provision for doubtful trade receivables Trade receivables – Balance sheet W9 Non-current assets Cost Balance b/f Depreciation Balance c/f Totals Plant 30. 2 Cash and cash equivalents consist of cash on hand and balances with banks.930 600 9.000) 730 (7.060 1.200 150 $000 Notes 1 During the period the company acquired property.

125 (1.Workings $000 W1 Cash receipts from customers Trade Receivables Balance at 30 September 2002 Revenue from Income statement Balance at 30 September 2003 Receipts 800 15.890 6.290 Add inventory at 30 September 2003 1.300 W2 Cash paid to suppliers and employees Cost of Sales Income Statement 9.com .500 14.040 2.290 600 1.040) (600) 485 P7 PILOT PAPER 35 FOR FREE ACCA.300 8.000 Less depreciation (W6) (2.390 Less inventory at 30 September 2002 (1.100 1.700 (700) 1.600 Purchases 5.640) Less loss on disposal (970) Income Statement cost of sales 5.990 5.blogspot.100) 4.690 (700) 5.890 Trade Payables Balance at 30 September 2002 Purchases Less balance at 30 September 2003 Payments to suppliers Total payments to suppliers and employees Payments to suppliers Other expenses from Income Statement Total W3 Dividends Balance at 30 September 2002 Income statement Less balance at 30 September 2003 Paid W4 Income Taxes Balance at 30 September 2002 Taxes Deferred tax Income Statement Less balance at 30 September 2003 Taxes Deferred tax 800 5.085 1.000 15.800 1.000 685 400 1.990 2. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

800 5.500 4.834 3.000 240 2.W5 – Share capital Balance at 30 September 2002 Balance at 30 September 2003 Cash issue W6 – Tangible non-current assets Property Balance at 30 September 2002 Balance at 30 September 2003 Purchased Depreciation in year Plant Balance at 30 September 2002 Less disposal Balance at 30 September 2003 Purchased Depreciation in year Total purchases Property Plant Total depreciation Property Plant 7.900 2.019 Cost $000 8.200 $000 2.200 8.300 1.600 8.200 2.640 Depreciation $000 1.800 2.815 10.400 900 2.400 2.com .400 11. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.540 240 Depreciation $000 3.400 5.800 Cost $000 10.200 13.400 P7 PILOT PAPER 36 FOR FREE ACCA.blogspot.

P7 PILOT PAPER 37 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com .blogspot.

P7 PILOT PAPER 38 FOR FREE ACCA.blogspot.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

blogspot.com .P7 PILOT PAPER 39 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.P7 PILOT PAPER 40 FOR FREE ACCA.blogspot.

These pages are detachable for ease of reference.blogspot. Also write your contact ID and name in the space provided in the right hand margin and seal to close. However. you will not be allowed. paper number and the examination subject title in the spaces provided on the front of the examination answer book. to open the answer book and start writing or use your calculator during this reading time. This is comprised of 20 sub-questions on pages 2 to 8. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. TURN OVER  The Chartered Institute of Management Accountants 2005 FOR FREE ACCA. Answer ONE of the two questions in Section C on pages 14 to 17. Answer ALL SIX compulsory sub-questions in Section B on pages 10 to 13.Financial Management Pillar Managerial Level Paper P7 – Financial Accounting and Tax Principles 26 May 2005 – Thursday Afternoon Session Instructions to candidates You are allowed three hours to answer this question paper. under any circumstances. You are strongly advised to carefully read the question requirement before attempting the question concerned. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered. Write your full examination number. make annotations on the question paper. Answer the ONE compulsory question in Section A.com P7 – Financial Accounting and Tax Principles . Maths Tables and Formulae are provided on pages 19 to 21. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and. if you wish. The requirements for questions in Sections B and C are highlighted in a dotted box.

SECTION A – 50 MARKS [the indicative time for answering this Section is 90 minutes] ANSWER ALL TWENTY SUB-QUESTIONS Instructions for answering Section A: The answers to the twenty sub-questions in Section A should ALL be written in your answer book. the person or entity that finally bears the cost of the tax. 1.16 you should show your workings as marks are available for the method you use to answer these sub-questions.14 and 1. (2 marks) P7 2 May 2005 FOR FREE ACCA. Question One 1. 1.9. the date the tax assessment is issued. 1. For 1.1 A B C D The term GAAP is used to mean Generally accepted accounting procedures General accounting and audit practice Generally agreed accounting practice Generally accepted accounting practice (2 marks) 1.2 A B C D The effective incidence of a tax is the date the tax is actually paid. Your answers should be clearly numbered with the sub-question number and then ruled off so that the markers know which sub-question you are answering.com .blogspot.8. the person or entity receiving the tax assessment.12. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

how would EACH of the above be categorised on the balance sheet? As an equity instrument A B C D (i) and (ii) (ii) and (iii) (ii) (i). CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.1. (2 marks) 1. define the meaning of “competent jurisdiction”. An entity has the following categories of funding on its balance sheet: (i) (ii) (iii) (iv) A preference share that is redeemable for cash at a 10% premium on 30 May 2015.3 IAS 32 Financial Instruments – Disclosure and Presentation classifies issued shares as either equity instruments or financial liabilities.com .4 List FOUR forms of short-term finance generally available to small entities.6 A B C D Which ONE of the following is responsible for governance and fundraising in relation to the development of International Accounting Standards? International Accounting Standards Board International Financial Reporting Interpretations Committee International Accounting Standards Committee Foundation Trustees Standards Advisory Council (2 marks) TURN OVER May 2005 3 P7 FOR FREE ACCA. (4 marks) 1. A cumulative preference share that is entitled to receive a dividend of 7% a year. Applying IAS 32. (ii) and (iii) As a financial liability (iii) and (iv) (i) and (iv) (i).5 In no more than 15 words. A loan note that is redeemable at par in 2020. (iii) and (iv) (iv) (2 marks) 1. An ordinary share which is not redeemable and has no restrictions on receiving dividends.blogspot.

000 and the corporate income tax rate applicable to AC’s profits was 25%. (3 marks) P7 4 May 2005 FOR FREE ACCA. Calculate AC’s tax payable for the year ended 30 April 2005. (i) (ii) (iii) (iv) external revenue cost of sales capital employed segment profit Which TWO of the above require separate disclosure under IAS 14 in respect of segments reported as primary segments? A B C D (i) and (ii) only (i) and (iv) only (i) and (iii) only (iii) and (iv) only (2 marks) 1.7 An entity is preparing a segmental analysis in accordance with IAS 14 Segment Reporting. The directors have elected to disclose business segments as the primary reporting format. The computer equipment qualifies for tax allowances of 10% per year on a straight line basis.com .9 AC made the following payments during the year ended 30 April 2005: Operating costs (excluding depreciation) Finance costs Capital repayment of loans Payments for the purchase of new computer equipment for use in AC’s business $000 23 4 10 20 AC’s revenue for the period was $45. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.1.8 A bond with a coupon rate of 7% is redeemable in 8 years’ time for $100. What is the percentage yield to maturity? (4 marks) 1. but are unsure which of the following items need disclosure. Its current purchase price is $82.blogspot.

the court awarded damages of $250. There was a fire on 2 May 2005 in AN’s main warehouse which destroyed 50% of AN’s total inventory. original cost $30. as required by IAS 10 Events after the Balance Sheet Date.10 Financial statements prepared using International Standards and the International Accounting Standards Board’s (IASB) Framework for the Preparation and Presentation of Financial Statements (Framework) are presumed to apply two of the following four underlying assumptions: (i) (ii) (iii) (iv) Relevance Going concern Prudence Accruals Which TWO of the above are underlying assumptions according to the IASB’s Framework? A B C D (i) and (ii) only (ii) and (iii) only (iii) and (iv) only (ii) and (iv) only (2 marks) 1.com . (3 marks) D TURN OVER May 2005 5 P7 FOR FREE ACCA. legal advisers were of the opinion that AN would lose the case. At 31 January 2005. A B C Notice was received on 31 March 2005 that a major customer of AN had ceased trading and was unlikely to make any further payments. During 2004. AL is considering offering all customers a 1⋅5% discount for payment within 14 days. in the financial statements of AN for the period ended 31 January 2005? The financial statements were approved for publication on 15 May 2005. To try and improve its cash flow. using compound interest methodology and assuming a 365 day year. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot. a customer commenced legal action against AN. were sold in April 2005 for $20.12 AL’s customers all pay their accounts at the end of 30 days.000.000.000 for the damages claimed by the customer. On 27 April 2005. Inventory items at 31 January 2005.000 to the customer.1. (2 marks) 1. Calculate the implied annual (interest) cost to AL of offering the discount.11 Which ONE of the following would be treated as a non-adjusting event after the balance sheet date. so AN created a provision of $200.

CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.14 AE purchases products from a foreign entity and imports them into a country A. Contingent Liabilities and Contingent Assets for the recognition of a provision. the Management Accountant is unsure which of the following items should be included in “cost of placing an order”: (i) (ii) (iii) (iv) (v) Administrative costs Postage Quality control cost Unit cost of products Storekeeper’s salary Which THREE of the above would usually be regarded as part of the cost of placing an order? A B C D (i). (ii) and (v) only (2 marks) P7 6 May 2005 FOR FREE ACCA. the products are subject to an excise duty of $5 per item and Value Added Tax (VAT) of 15% on cost plus excise duty.1.15 The economic order quantity formula includes the cost of placing an order.450 $2. (iii) and (iv) only (i).blogspot. How much is due to be paid to the tax authorities for these transactions? A B C D $450 $1.13 List the THREE criteria set out in IAS 37 Provisions. AE purchased 200 items for $30 each and after importing them sold all of the items for $50 each plus VAT at 15%. On import. (3 marks) 1.050 $2.500 (3 marks) 1.com . However. (iv) and (v) only (ii). (ii) and (iii) only (i).

In both cases.000. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot. Power of entry and search.18 Which ONE of the following powers is a tax authority least likely to have granted to them? A B C D Power of arrest. Depreciation was provided on a straight line basis. On 1 April 2003.1. Power to give information to other countries’ tax authorities. (4 marks) 1. Power to examine records. How should AP report these legal actions in its financial statements for the year ended 31 March 2005? Legal action against AP A B C D Disclose by a note Make a provision Make a provision Make a provision Legal action by AP No disclosure No disclosure Disclose as a note Accrue the income (2 marks) 1. At the date of acquisition its expected useful economic life was 10 years. (2 marks) TURN OVER May 2005 7 P7 FOR FREE ACCA. claiming damages of $200. A legal action taken by AP against a third party.16 An item of plant and equipment was purchased on 1 April 2001 for $100.000. On 1 April 2004. it is more likely than not that the amount claimed will have to be paid. the asset was revalued to $95.17 AP has the following two legal claims outstanding: • • A legal action claiming compensation of $500. the useful life of the asset was reviewed and the remaining useful economic life was reduced to 5 years. with no residual value. a total useful life of 8 years.000 was started in January 2003 and is nearing completion.com . Calculate the amounts that would be included in the balance sheet for the asset cost/valuation and provision for accumulated depreciation at 31 March 2005.000 filed against AP in March 2004.

in no more than 10 words. (iv) and (v) only (2 marks) (Total for Section A = 50 marks) End of Section A P7 8 May 2005 FOR FREE ACCA. “Depreciable amount is…” (2 marks) 1. Plant and Equipment provides definitions of terms relevant to noncurrent assets.19 IAS 16 Property.blogspot. (iii) and (iv) only (iii).1.20 The OECD model tax convention defines a permanent establishment to include a number of different types of establishments: (i) (ii) (iii) (iv) (v) A place of management A warehouse A workshop A quarry A building site that was used for 9 months Which of the above are included in the OECD’s list of permanent establishments? A B C D (i).com . (iii) and (iv) only (ii). Complete the following sentence. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. (ii) and (iii) only (i).

com .blogspot.Section B starts on the next page TURN OVER May 2005 9 P7 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

000. AB depreciates all non-current assets at 20% a year on the straight line basis. Required: Apply IAS 12 Income Taxes and calculate: (i) (ii) (iii) the deferred tax balance required at 31 March 2004. has the following balances at 30 April 2005: Extract from financial statements: Trade receivables Trade payables Revenue (all credit sales) Cost of sales Purchases in year Inventories at 30 April 2005: Raw materials Work in progress Finished goods $000 216 97 992 898 641 111 63 102 Required: Calculate AD’s working capital cycle.SECTION B – 30 MARKS [the indicative time for answering this Section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS Question Two (a) AB acquired non-current assets on 1 April 2003 costing $250.blogspot. The rate of corporate income tax applying to AB for 2003/04 and 2004/05 was 30%. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. (Total for requirement (a) = 5 marks) (b) AD. the charge to the income statement for the year ended 31 March 2005. The second and subsequent years were at a tax depreciation rate of 25% per year on the reducing balance method. The assets qualified for accelerated first year tax allowance at the rate of 50% for the first year.com . a manufacturing entity. Assume AB has no other qualifying non-current assets. (Total for requirement (b) = 5 marks) P7 10 May 2005 FOR FREE ACCA. the deferred tax balance required at 31 March 2005.

At 31 March 2005.000 $000 60.000 3.000 At 31 March 2005. as required by IAS 11 Long Term Contracts.(c) Required: List the FIVE elements of financial statements defined in the IASB’s Framework and explain the meaning of each. (Total for requirement (d) = 5 marks) Section B continues on the next page TURN OVER May 2005 11 P7 FOR FREE ACCA. Required: Prepare the income statement and balance sheet extracts showing the balances relating to this contract. the contract was certified as 50% complete.000 25.000 24. AE had the following balances in its ledger relating to the contract: $000 Total contract value Cost incurred up to 31 March 2005: Attributable to work completed Inventory purchased for use in 2005/6 Progress payments received Other information: Expected further costs to completion 21.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 19.blogspot. (Total for requirement (c) = 5 marks) (d) AE has a three year contract which commenced on 1 April 2004.

Purchases are on credit. Sales are partly on credit and partly for cash. (Round all figures to the nearest $000) (Total for requirement (e) = 5 marks) P7 12 May 2005 FOR FREE ACCA.000.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. are paid within the month incurred.(e) AM is a trading entity operating in a country where there is no sales tax. Other overheads. The actual/budgeted balances for the six months to July 2005 were: All figures $000 Credit sales Cash sales Credit purchases Other overhead expense Feb 100 30 45 40 Actual Mar 100 30 50 40 Apr 110 35 50 40 May 110 35 55 50 Budgeted Jun Jul 120 120 40 55 50 40 60 50 Required: Prepare a monthly cash budget for the period May to July 2005 and assess the likelihood of AM being able to pay for the equipment when it falls due. On average 60% pay within 30 days. The equipment will be purchased on 30 days credit. The cash balance on 1 May 2005 is $96. with 70% paid in the month following the date of purchase and 30% paid in the month after that. Customers who receive credit are given 30 days to pay. The balance is written off as irrecoverable.000. the expected cost of which is $250. AM plans to purchase new equipment at the end of June 2005. 30% pay between 30 and 60 days and 5% pay between 60 and 90 days. payable at the end of July. including salaries.blogspot.

The fair value of the asset at 1 April 2003 was $116.blogspot.(f) A five year finance lease commenced on 1 April 2003. Required: In accordance with IAS 17 Operating and Finance Leases: (i) (ii) calculate the amount of finance cost that would be charged to the income statement for the year ended 31 March 2005. prepare balance sheet extracts for the lease at 31 March 2005. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. (Total for requirement (f) = 5 marks) (Total for Section B = 30 marks) End of Section B Section C starts on the next page TURN OVER May 2005 13 P7 FOR FREE ACCA.com .000. Use the sum of digits method for interest allocations and assume that the asset has no residual value at the end of the lease term.000 in arrears. The annual payments are $30.

500 1.540 1.463 1.com .320 68 $000 1.640 822 3.000.blogspot.000.SECTION C – 20 MARKS [the indicative time for answering this Section is 36 minutes] ANSWER ONE QUESTION ONLY Question Three AF is a furniture manufacturing entity. Income tax due for the year ended 31 March 2005 is estimated at $250.210 1.500 388 P7 14 May 2005 FOR FREE ACCA.750. 1. There is no balance outstanding in relation to previous years’ corporate income tax.000. The market value of the available for sale investments at 31 March 2005 was $1.659 330 8. The trial balance for AF at 31 March 2005 was as follows: $000 6% loan notes (redeemable 2010) Accumulated profits at 31 March 2004 Administrative expenses Available for sale investments at market value 31 March 2004 Bank and cash Cost of sales Distribution costs Dividend paid 1 December 2004 Interest paid on loan notes – half year to 30 September 2004 Inventory at 31 March 2005 Investment income received Land and buildings at cost Ordinary shares of $1 each. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.500 1.765 3.480 20.190 4. There were no sales or purchases of non-current assets or available for sale investments during the year ended 31 March 2005.380 520 20.400 710 1.765 5. fully paid Plant and equipment at cost Provision for deferred tax Provisions for depreciation at 31 March 2004: Buildings Provisions for depreciation at 31 March 2004: Plant and equipment Revaluation reserve Sales revenue Share premium Trade payables Trade receivables Additional information provided: (i) (ii) (iii) Available for sale investments are carried in the financial statements at market value.590 275 45 1. The deferred tax provision needs to be increased by $100.

AF will receive the first year rent free. The 6% loan notes are 10 year loans due for repayment March 2010. The cost of land included in land and buildings is $2. in a form suitable for presentation to the shareholders and in accordance with the requirements of International Financial Reporting Standards. DO NOT prepare a statement of accounting policies or a statement of changes in equity.blogspot. (v) (vi) Required: Prepare the income statement for AF for the year to 31 March 2005 and a balance sheet at that date. (Total for Question Three = 20 marks) TURN OVER May 2005 15 P7 FOR FREE ACCA. Notes to the financial statements are NOT required.000. The machine is estimated to have a useful economic life of 20 years. Depreciation is regarded as a cost of sales.com . but all workings must be clearly shown. Plant and equipment is depreciated using the reducing balance method at 20%. AF entered into a non-cancellable five year operating lease on 1 April 2004 to acquire machinery to manufacture a new range of kitchen units. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000.(iv) Depreciation is charged on buildings using the straight-line basis at 3% each year.500 is payable for four years commencing in year two of the lease. Under the terms of the lease. AF incurred no other finance costs in the year to 31 March 2005. then $62.

500 370 685 515 552 4.700 350 190 172 712 6.900 400 300 1.427 Income statement for the year ended 31 March 2005 $000 Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Income tax expense Profit for the period 900 2.870 31 March 2004 $000 $000 4.800 400 575 420 232 5.752 6.622 1.500 4.600 750 425 1.Question Four The financial statements of AG are given below: Balance sheets as at Non-current assets: Plant.015 1.000 500 200 1.622 1. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.205 0 500 250 750 480 80 107 667 6.300 3.427 2.227 6.blogspot.500 P7 16 May 2005 FOR FREE ACCA.000 3.com .200 1.415 4.430 5. property and equipment Development expenditure Current assets: Inventories Trade receivables Cash and cash equivalents Total assets Equity and liabilities Equity: Share capital Share premium account Revaluation reserve Retained earnings Total equity Non-current liabilities: 10% loan notes 5% loan notes Deferred tax Total non-current liabilities: Current liabilities: Trade payables Income tax Accrued expenses Total current liabilities: Total equity and liabilities 31 March 2005 $000 $000 4.200 300 45 255 140 115 $000 7.

Any gain or loss on disposal has been included under cost of sales.000. AG issued 1. The accrued expenses balance includes interest payable of $87.000 for development expenditure amortised during the year.000 during the year.000.000. On 1 May 2004. Cost of sales includes $80. cash received on disposal was $98.blogspot.000 at 31 March 2004 and $12. Required: Prepare a cash flow statement. Non-current tangible assets disposed of in the year had a net book value of $75.000 $0⋅50 ordinary shares at a premium of 50%. Depreciation charged for the year was $720. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com .Additional information: (i) (ii) (iii) (iv) On 1 April 2004. The income tax expenses for the year to 31 March 2005 is made up as follows: Corporate income tax Deferred tax (ix) $000 90 50 140 (v) (vi) (vii) (viii) Dividends paid during the year were $100.000 at 31 March 2005. Non-current tangible assets include properties which were revalued upwards by $125.000. in accordance with IAS 7 Cash Flow Statements. AG purchased and cancelled all its 10% loan notes at par.400. (Total for Question Four = 20 marks) (Total for Section C = 20 marks) End of Question Paper Maths Tables and Formulae are on pages 19 to 21 TURN OVER May 2005 17 P7 FOR FREE ACCA. using the indirect method. for AG for the year ended 31 March 2005.

[this page is blank] P7 18 May 2005 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.com .

836 0.942 0.125 0.333 0.163 0.037 19% 0.901 0.694 0.044 0.160 0.826 0.907 0.847 0.497 0.279 0.728 0.513 0.038 0.980 0.614 0.481 0.587 0.361 0.123 0.661 0.885 0.073 17% 0.232 0.051 0.356 0.505 0.059 0.971 0.456 7% 0.820 0.564 0.263 0.630 0.350 0.116 0.582 0.198 0.188 0.442 0.208 0.416 0.237 0.658 0.547 0.601 0.391 0.558 0.062 0.351 0.194 0.215 9% 0.813 0.592 0.148 0.686 0.502 0.176 0.703 0.312 Interest rates (r) 15% 16% 0.783 0.043 18% 0.263 0.065 0.352 0.624 0.327 0.497 0.613 0.873 0.052 0.792 0.837 0.243 0.425 0.665 0.659 0.388 0.286 0.650 0.666 0.820 2% 0.com .853 0.181 0.837 0.840 0.031 20% 0.746 0705 0.043 0.232 0.722 0.152 0.061 0.295 0.083 0.990 0.592 0.605 0.467 0.544 0.711 0.870 0.437 0.104 13% 0.475 0.888 0.706 0.530 0.422 0.623 0.833 0.350 0.888 0. that is (1 + r)-n where r = interest rate.980 0.266 0.137 0.081 0.452 0.079 0.296 0.751 0.160 0.149 11% 0.163 0.054 0.178 0.410 0.621 0.758 0.051 0.572 0.194 0.354 0.284 0.081 0.390 0.952 0.333 0.645 0.394 0.296 0.853 0.135 0.088 0.476 0.305 0.535 0.191 0.463 0.458 0.760 0.227 0.326 0.362 0.923 0.045 0.557 0.258 0.270 0.585 0.130 0.099 0.693 0.906 0.641 0.095 0.887 0.037 0.424 0.138 0.925 0.482 0.371 0.712 0.700 0.769 0.713 0.250 0.429 0.790 0.315 0.642 0.322 0.475 0.683 0.570 0.789 0.252 0.554 4% 0.971 0.170 0.183 0.896 0.812 0.164 0.914 0.249 0.231 0.093 0.317 0.060 0.104 0.335 0.352 0.842 0.026 May 2005 19 P7 FOR FREE ACCA.552 0. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.577 0.915 0.239 0.084 0.331 0.480 0.402 0.731 0.943 0.168 0.031 0.299 0.596 0.287 0.855 0.212 0.275 0.258 8% 0.766 0.285 0.225 0.080 0.386 0.261 0.951 0.650 0.209 0.828 0.708 0.534 0.593 0.314 0.909 0.593 0.844 0.935 0.141 0.MATHS TABLES AND FORMULAE Present value table Present value of £1.195 0.397 0.108 0.555 0.933 0.681 0.677 0.676 0.339 0.419 0.277 0.069 0.926 0.877 0.743 0.861 0.319 0.340 0.417 0.871 0.763 0.112 0.636 0.218 0.180 0.456 0.735 0.140 0.855 0.231 0.540 0.069 0.627 0.804 0.204 0.942 0.579 0.527 0.469 0.567 0.773 0.508 0.784 0.070 0.125 0.116 0.675 0.822 0.772 0.308 0.499 0.516 0.893 0.130 0.961 0.583 0.400 0.744 0.093 0.215 0.247 0.blogspot.388 0.917 0.519 0.731 0.743 0.123 0.905 0.108 0.153 0.797 0.747 0.370 0.961 0.436 0.513 0.507 0.840 0.731 0.182 0.756 0.494 0.404 0. n = number of periods until payment or receipt.376 0.609 0.078 0.673 3% 0.317 0.396 0.178 10% 0.816 0.051 1% 0.701 0.292 0.229 0. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest rates (r) 5% 6% 0.432 0.141 0.257 0.870 0.124 0.368 0.205 0.187 0.482 0.863 0.415 0.623 0.962 0.377 0.060 0.208 0.146 0.124 12% 0.788 0.460 0.162 0.823 0.889 0.145 0.111 0.890 0.209 0.794 0.087 14% 0.444 0.534 0.543 0.714 0.233 0.376 0.095 0.943 0.862 0.093 0.456 0.111 0.857 0.434 0.864 0.071 0.107 0.625 0.162 0.098 0.879 0.924 0.500 0.718 0.681 0.270 0.290 0.

076 5.863 9.798 3.471 10.451 4.108 9.718 15.601 6.002 6.145 6.594 8% 0.244 8.566 9.535 5.687 5.877 5.971 1.750 6.240 3.462 6.690 12.246 2.421 5.162 5.954 6.722 8.685 4.853 5.713 5.647 2.998 4.733 7.713 2.303 4.784 4.085 12. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.767 5.623 5.971 6.008 5.842 6.808 2.795 6.917 1.772 5.424 6.673 3.659 13.590 Interest rates (r) 5% 6% 0.993 4.660 5.025 14% 0.837 4.229 5.226 18.889 6.833 1.296 11.635 11.288 4.492 6.652 12.102 3.324 5.849 13.467 6.833 5.812 4.192 4.498 3.348 12.329 4.577 3.696 4.344 4.417 6.385 9.549 7.070 5.829 3.410 3.710 7.423 4.426 5.942 2.743 3.517 3.352 3.887 8.749 5.918 6.283 2.166 13.623 Interest rates (r) 15% 16% 0.838 11.847 5.326 3.836 4.046 2% 0.162 8.763 10.787 10.253 9.878 4% 0.802 4.754 14.292 14.756 8.170 3.201 8.158 11.870 P7 20 May 2005 FOR FREE ACCA.368 11.980 1.990 1.206 5.536 7.230 7.783 2.690 2.002 6.954 10.210 6.991 3.360 7.059 10.913 2.943 1.101 20% 0.712 5.690 3.465 4.870 0.566 2.078 4.890 4.353 19% 0.134 13.468 5.914 3.495 6.885 1.828 11.537 5.210 2.444 3.339 4.563 11.729 6.316 5.893 1.702 7.786 6.128 6.582 6.531 3.606 7.715 4.103 7.com .387 4.198 6.679 16.902 4.938 6.884 3.575 11.926 1.161 7.630 4.935 1.322 2.723 2.946 5.033 5.327 4.564 4.605 4.106 2.197 5.207 6.917 5.954 4.876 4.019 5.859 1.191 7.865 14.389 5.120 7.255 12.033 5.962 1.639 3.031 4.163 4.990 5.904 8.242 6.639 4.blogspot.111 4.886 2.986 10.578 14.166 12.544 8.862 1.952 0.469 13% 0.950 9.231 4.004 13.941 3.487 3.194 6.394 9.901 1.134 13.433 3.216 5.122 9.561 13.668 5.589 2.736 2.995 6.855 2.843 4.889 4.855 1.805 7.515 7.160 4.628 6.306 8.020 7.452 5.668 2.938 12.656 7.207 4.058 3.793 4.786 8.470 7% 0.106 12.775 4.108 7.982 7.706 3.974 7.605 2.313 8.435 8.546 3.475 5.146 5.775 3.373 6.379 7.760 9.580 5.724 5.398 17.358 8.851 9.Cumulative present value of £1 per annum Receivable or Payable at the end of each year for n years Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1− (1+ r ) − n r 1% 0.259 3.140 2.328 5.847 1.808 4.037 3.092 5.142 6.628 18% 0.325 8.366 7.312 3.361 2.909 1.877 1.047 6.922 4.324 14.550 6.494 4.868 5.380 10.730 4.342 5.562 16.533 4.759 6.791 4.840 6.970 2.812 4.611 4.024 7.818 9% 0.968 5.747 6.559 8.759 2.929 17% 0.853 9.604 9.712 10.487 4.355 4.106 10.650 5.626 1.273 5.974 3.447 9.487 7.100 4.899 10.199 3.583 5.910 5.265 6.585 2.174 2.530 9.402 3.717 4.367 7.486 5.472 7.786 8.534 5.963 12% 0.839 7.824 8.127 3.061 8.983 9.605 3.351 3% 0.589 3.274 3.575 5.938 7.212 5.139 7.486 4.118 11.222 5.528 2.604 6.499 7.029 5.818 5.302 6.477 10.132 5.372 9.247 6.799 5.943 8.938 4.336 10.992 15.384 8.274 11.453 5.547 2.439 4.462 4.250 7.840 1.584 5.607 4.814 7.728 7.129 10% 0.833 2.122 6.335 5.652 8.802 7.811 6.611 4.745 9.418 6.022 8.039 4.295 9.514 11% 0.624 3.111 8.659 4.365 8.405 5.675 4.118 5.234 5.463 7.988 5.

commencing in one year. receivable or payable. payable or receivable in perpetuity.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. discounted at r% per annum: PV = 1 r (v) Present value of £1 per annum. discounted at r% per annum: PV = 1 1 1 − [1 + r ] n r     (iv) Present value of £1 per annum. of a sum X. discounted at r% per annum: PV = 1 r −g Inventory management (i) Economic Order Quantity EOQ = where: Co Ch D = = = cost of placing an order cost of holding one unit in Inventory for one year annual demand 2C o D Ch Cash management (i) Optimal sale of securities. Baumol model: Optimal sale = 2 x Annual cash disburseme nts x Cost per sale of securities interest rate (ii) Spread between upper and lower cash balance limits. Miller-Orr model: 3 4 Spread = 3    3 x transactio n cost x variance of cash flows   interest rate   1 May 2005 21 P7 FOR FREE ACCA. growing in perpetuity at a constant rate of g% per annum.FORMULAE Valuation models (i) (ii) Future value of S. commencing in one year. commencing in one year. invested for n periods.blogspot. discounted at r% per annum: PV = S = X[1 + r] n 1 [1 + r ] n (iii) Present value of an annuity of £1 per annum. compounded at r% interest: Present value of £1 payable or receivable in n years. receivable or payable for n years.

CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.[this page is blank] P7 22 May 2005 FOR FREE ACCA.com .

[this page is blank] May 2005 23 P7 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.com .

com .blogspot.Financial Management Pillar Managerial Level P7 – Financial Accounting and Tax Principles May 2005 Thursday Afternoon Session P7 24 May 2005 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

There were. The following guide provides guidance to candidates preparing for future examinations and has been prepared with that in mind. This question was very well done by those attempting this question with some excellent answers and a number of candidates scoring full marks. Question three required the preparation of an income statement and balance sheet with some adjustments. although a few candidates did achieve full marks. still candidates who struggled to gain a quarter of the marks. but a number did not. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Some candidates were obviously ill-prepared for deferred tax. Question two included one question from each of sections A and B of the syllabus and two questions from each of sections C and D. able to tackle most of the sub-questions in questions one and two and prepare good answers to one of the optional questions. no marks can be awarded for wrong answers using the correct principle. The Chartered Institute of Management Accountants Page 1 FOR FREE ACCA.blogspot. Most candidates provided workings for the three and four mark questions. with evidence of rushed answers to either question one or question two. Question four required the preparation of a cash flow statement in accordance with IAS 7. but no one scored full marks. Question one was generally well done. long-term contracts and finance leases and many did not know what the five elements of financial statements were. Question two will continue to include questions from all sections of the syllabus. Some candidates may have used more time on the optional question and not spent sufficient time on the shorter sub-questions. Question one is 50 marks and should be given approximately 50% of the time. This was evidenced by the lack of workings and questions requiring some calculation being left out to save time. however. The overall result was generally very pleasing with a good standard of answer being produced by many candidates. It therefore may give the impression that there were few good marks and few passes as all the main errors have been listed for each question. The overall average mark and pass rate were slightly above expectations. resulting in good marks being achieved. This question was generally not as well done as the other questions on the paper. It must be remembered though that not all candidates made the errors listed and that overall there was a good result for this paper. This question was expected by candidates and most of those attempting this question were well prepared.com .Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam General Comments This first paper of the new syllabus applied the new question paper format for the first time. Time allocation seemed to be a problem for some candidates. If workings are not given. There was evidence of a number of well-prepared candidates with a wide range of knowledge.

(ii) and (iii) As a financial liability (iii) and (iv) (i) and (iv) (i). An ordinary share which is not redeemable and has no restrictions on receiving dividends. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. A loan note that is redeemable at par in 2020.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam SECTION A – 50 MARKS Question One Question 1. An entity has the following categories of funding on its balance sheet: (i) (ii) (iii) (iv) A B C D A preference share that is redeemable for cash at a 10% premium on 30 May 2015. (iii) and (iv) (iv) (2 marks) The answer is C The Chartered Institute of Management Accountants Page 2 FOR FREE ACCA.blogspot.3 IAS 32 Financial Instruments – Disclosure and Presentation classifies issued shares as either equity instruments or financial liabilities.2 The effective incidence of a tax is A B C D the date the tax is actually paid the person or entity that finally bears the cost of the tax the date the tax assessment is issued the person or entity receiving the tax assessment (2 marks) The answer is B Question 1. As an equity instrument (i) and (ii) (ii) and (iii) (ii) (i). A cumulative preference share that is entitled to receive a dividend of 7% a year.1 The term GAAP is used to mean A B C D Generally accepted accounting procedures General accounting and audit practice Generally agreed accounting practice Generally accepted accounting practice (2 marks) The answer is D Question 1.com .

Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1. (2 marks) The answer is The competent jurisdiction is the country whose tax laws apply to the entity. Question 1. define the meaning of “competent jurisdiction”. Question 1.4 List FOUR forms of short-term finance generally available to small entities. (4 marks) The answer is Trade credit Bank overdraft Term loan Factoring Any other relevant sources.6 Which ONE of the following is responsible for governance and fundraising in relation to the development of International Accounting Standards? A B C D International Accounting Standards Board International Financial Reporting Interpretations Committee International Accounting Standards Committee Foundation Trustees Standards Advisory Council (2 marks) The answer is C The Chartered Institute of Management Accountants Page 3 FOR FREE ACCA.blogspot.5 In no more than 15 words. such as hire purchase or leasing were acceptable alternatives.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

r = 12 (7 x 4⋅968) + (100 x 0⋅404) = 34⋅776 + 40⋅4 = $75⋅176 By interpolation: 10% + (((84⋅045 . (i) and (iv) only. (iii) and (iv) only. by interpolation we can then calculate the approximate rate of 10.8 A bond with a coupon rate of 7% is redeemable in 8 years’ time for $100. check how close this is to the cost of $82 and select a second interest rate that will give an answer the other side of the cost $82. (2 marks) The answer is B Question 1.5%.com . The directors have elected to disclose business segments as the primary reporting format. Calculate cumulative present value of annual interest received and add on the present value of the $100 receivable in 8 years time. using 12% the answer is $75⋅176. Calculate with the first rate (10% in answer below).75⋅176)) x 2) = 10% + (2⋅045/8⋅869 x 2) = 10% + 0⋅461 = 10⋅461% ≈ 10⋅5% The Chartered Institute of Management Accountants Page 4 FOR FREE ACCA. A rate of 10% gives $84⋅045 so a higher rate is required.blogspot.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1. r = 10 (7 x 5⋅335) + (100 x 0⋅467) = 37⋅345 + 46⋅7 = $84⋅045 t = 8. Use t=8 and assume an interest rate. (i) (ii) (iii) (iv) external revenue cost of sales capital employed segment profit Which TWO of the above require separate disclosure under IAS 14 in respect of segments reported as primary segments? A B C D (i) and (ii) only.82⋅0)/(84⋅045 . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Its current purchase price is $82. t = 8. What is the percentage yield to maturity? (4 marks) The answer is 10⋅5% Workings Using cumulative present value table and present value table. (i) and (iii) only. but are unsure which of the following items need disclosure.7 An entity is preparing a segmental analysis in accordance with IAS 14 Segment Reporting.

(3 marks) The answer is $4. (ii) and (iv) only. (2 marks) The answer is D The Chartered Institute of Management Accountants Page 5 FOR FREE ACCA.blogspot. Calculate AC’s tax payable for the year ended 30 April 2005.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1.10 Financial statements prepared using International Standards and the International Accounting Standards Board’s (IASB) Framework for the Preparation and Presentation of Financial Statements (Framework) are presumed to apply two of the following four underlying assumptions: (i) (ii) (iii) (iv) Relevance Going concern Prudence Accruals Which TWO of the above are underlying assumptions according to the IASB’s Framework? A B C D (i) and (ii) only.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.computer Tax @ 25% 23 4 2 $000 45 29 16 4 Question 1.000 and the corporate income tax rate applicable to AC’s profits was 25%.9 AC made the following payments during the year ended 30 April 2005: Operating costs (excluding depreciation) Finance costs Capital repayment of loans Payments for the purchase of new computer equipment for use in AC’s business $000 23 4 10 20 AC’s revenue for the period was $45. The computer equipment qualifies for tax allowances of 10% per year on a straight line basis.000 Workings $000 Revenue Operating costs Finance costs Tax allowances . (ii) and (iii) only. (iii) and (iv) only.

(2 marks) The answer is D D Question 1. so AN created a provision of $200. (3 marks) The answer is 40⋅4% Workings for 1. legal advisers were of the opinion that AN would lose the case.000.12 AL’s customers all pay their accounts at the end of 30 days. using compound interest methodology and assuming a 365 day year.000 to the customer. the court awarded damages of $250.blogspot. At 31 January 2005.11 Which ONE of the following would be treated as a non-adjusting event after the balance sheet date. Inventory items at 31 January 2005.1 = 40⋅4% An alternative approach is to use the compound interest formula and then convert the answer to an annualised rate.1 = (1⋅015) 22⋅813 . There was a fire on 2 May 2005 in AN’s main warehouse which destroyed 50% of AN’s total inventory. On 27 April 2005. as required by IAS 10 Events after the Balance Sheet Date. were sold in April 2005 for $20. a customer commenced legal action against AN.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1.12 AL offers 1⋅5% interest for 16 days (100/98⋅5) (365/16) . A B C Notice was received on 31 March 2005 that a major customer of AN had ceased trading and was unlikely to make any further payments. in the financial statements of AN for the period ended 31 January 2005? The financial statements were approved for publication on 15 May 2005. To try and improve its cash flow.000. Calculate the implied annual (interest) cost to AL of offering the discount.000 for the damages claimed by the customer. During 2004. The Chartered Institute of Management Accountants Page 6 FOR FREE ACCA. AL is considering offering all customers a 1⋅5% discount for payment within 14 days.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. original cost $30.

450 $2.450 The Chartered Institute of Management Accountants Page 7 FOR FREE ACCA. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 1.com .14 Sales 200 x $50 = VAT on sales @ 15% Less: VAT paid on import 200 x $35 x 15% = VAT Due Excise duty due 200 x $5 = Total to be paid to tax authorities $ 10. How much is due to be paid to the tax authorities for these transactions? A B C D $450 $1. Contingent Liabilities and Contingent Assets for the recognition of a provision.13 List the THREE criteria set out in IAS 37 Provisions.000 1. AE purchased 200 items for $30 each and after importing them sold all of the items for $50 each plus VAT at 15%.050 $2. Question 1.14 AE purchases products from a foreign entity and imports them into a country A.blogspot. A reliable estimate can be made of the amount.500 (3 marks) The answer is B Workings for 1. It is probable that an outflow of resources will be required to settle the obligation. On import. (3 marks) The answer is An entity has a present obligation as a result of a past event. the products are subject to an excise duty of $5 per item and Value Added Tax (VAT) of 15% on cost plus excise duty.500 1.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1.050 450 1.

(iii) and (iv) only. However. Depreciation was provided on a straight line basis.blogspot.500) 66. (ii) and (iii) only. (i). the useful life of the asset was reviewed and the remaining useful economic life was reduced to 5 years.500 $ 115.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1. Calculate the amounts that would be included in the balance sheet for the asset cost/valuation and provision for accumulated depreciation at 31 March 2005.500 The Chartered Institute of Management Accountants Page 8 FOR FREE ACCA. (4 marks) The answer is: Balance Sheet at 31 March 2005 Non-current assets – plant and equipment at valuation Accumulated depreciation Net book value Or Alternative treatment allowed by IAS 16: Balance Sheet at 31 March 2005 Non-current assets – plant and equipment at valuation Accumulated depreciation Net book value $ 95.000. At the date of acquisition its expected useful economic life was 10 years.000. (ii).000 (48. On 1 April 2003.000 (28. (ii) and (v) only. (iv) and (v) only. (i).15 The economic order quantity formula includes the cost of placing an order. the Management Accountant is unsure which of the following items should be included in “cost of placing an order”: (i) (ii) (iii) (iv) (v) Administrative costs Postage Quality control cost Unit cost of products Storekeeper’s salary Which THREE of the above would usually be regarded as part of the cost of placing an order? A B C D (i). (2 marks) The answer is A Question 1.500) 66. the asset was revalued to $95. with no residual value.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. a total useful life of 8 years.16 An item of plant and equipment was purchased on 1 April 2001 for $100. On 1 April 2004.

500 Question 1.blogspot. A legal action taken by AP against a third party.17 AP has the following two legal claims outstanding: • • A legal action claiming compensation of $500. In both cases.000 95.000 80.000 15.125 16.625 66. (2 marks) The answer is A The Chartered Institute of Management Accountants Page 9 FOR FREE ACCA. How should AP report these legal actions in its financial statements for the year ended 31 March 2005? A B C D Legal action against AP Disclose by a note Make a provision Make a provision Make a provision Legal action by AP No disclosure No disclosure Disclose as a note Accrue the income (2 marks) The answer is C Question 1.18 Which ONE of the following powers is a tax authority least likely to have granted to them? A B C D Power of arrest. Power to give information to other countries’ tax authorities. Power of entry and search.000 filed against AP in March 2004. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Workings Cost Two years’ depreciation at 10% Revaluation Depreciation at 12⋅5% Depreciation at 20% Net book value $ 100.000 was started in January 2003 and is nearing completion. claiming damages of $200. it is more likely than not that the amount claimed will have to be paid. Power to examine records.000 11.com .000 20.875 83.

Very few candidates had any idea how to calculate the yield to maturity. in no more than 10 words.5 1. Common Errors This section applies to the questions that required candidates to provide an answer and excludes the multiple choice questions. (2 marks) The answer is B Examiner’s Comments Most candidates set out their answers in an easily readable format.8 1. 1.9 Some candidates could not tell the difference between short.and long-term financing methods. but few scored full marks as some key points were missed out. answers marked as correct are given full marks.13 Most candidates were able to give an answer.4 1. answers marked as wrong are given zero marks. (iii) and (iv) only. 1.20 The OECD model tax convention defines a permanent establishment to include a number of different types of establishments: (i) (ii) (iii) (iv) (v) A place of management A warehouse A workshop A quarry A building site that was used for 9 months Which of the above are included in the OECD’s list of permanent establishments? A B C D (i).” Question 1. (iii). Plant and Equipment provides definitions of terms relevant to non-current assets. This is an important concept that will be required in later CIMA papers.blogspot.19 IAS 16 Property. (ii) and (iii) only.com . but a sizable minority omitted all workings. Many candidates incorrectly included capital repayment of loans and/or the payment for the new equipment in the taxable profit. Most candidates included workings for the three and four mark questions. Without workings. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question 1. “Depreciable amount is…” (2 marks) The answer is “the asset’s cost or valuation less its residual value. Most candidates omitted to state the relevance to the entity. There were also a number of candidates who included investment methods. (ii). but some candidates made it difficult to mark by not distinguishing their answer clearly from their workings. (iv) and (v) only. (iii) and (iv) only. Complete the following sentence. The Chartered Institute of Management Accountants Page 10 FOR FREE ACCA. (i).

14 Most candidates scored part of the marks on this question as their workings showed partially correct answers 1. Some candidates charged three years depreciation before revaluing and many did not recalculate depreciation correctly after the revaluation.19 IAS 16 gives a clear definition of “depreciable amount”. but very few candidates were able to give a correct definition of this basic concept.16 The asset revaluation caused some problems. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot. The Chartered Institute of Management Accountants Page 11 FOR FREE ACCA. 1.com .Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam 1. The change in the useful life caused problems for many candidates.

625 credit $ 250.16.000 200. The assets qualified for accelerated first year tax allowance at the rate of 50% for the first year.000.500 .Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam SECTION B – 30 MARKS ANSWER ALL SIX SUB-QUESTIONS Question Two (a) AB acquired non-current assets on 1 April 2003 costing $250.000 50.000 22. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.875 = $22. the deferred tax balance required at 31 March 2005.000 125.000 150.750 $ 250. (Total for requirement (a) = 5 marks) The answer is: Balance sheet at 31 March 2004 Deferred tax Balance sheet at 31 March 2005 Deferred tax Income statement for the year ended 31 March 2005 Income tax expense – reduction in deferred tax Workings Tax depreciation Purchase cost 1 April 2003 First year allowance at 50% Tax depreciation second year at 25% Tax written down value Accounting depreciation Purchase cost 1 April 2003 Straight line depreciation at 20% Straight line depreciation at 20% Accounting book value Deferred tax provision: Accounting book value Tax written down value Tax at 30% = Change in deferred tax = 22.000 50.000 75. Assume AB has no other qualifying non-current assets.250 93. The second and subsequent years were at a tax depreciation rate of 25% per year on the reducing balance method.500 $16.875 The Chartered Institute of Management Accountants Page 12 FOR FREE ACCA. AB depreciates all non-current assets at 20% a year on the straight line basis.000 at 31 March 2004 $ 200. The rate of corporate income tax applying to AB for 2003/04 and 2004/05 was 30%. the charge to the income statement for the year ended 31 March 2005. Required: Apply IAS 12 Income Taxes and calculate: (i) (ii) (iii) the deferred tax balance required at 31 March 2004.000 93.blogspot.com .500 5.250 16.625 at 31 March 2005 $ 150.875 $5.000 125.750 56.000 125.000 31.

Most candidates using this method however reversed the answer and called the change in the year the balance on the provision and identified the balance as the income statement figure.blogspot. Common Errors Some candidates demonstrated very little knowledge of deferred taxation and gave an answer based purely on the tax depreciation figures. Many candidates correctly calculated the year end balances for accounting and tax but did not multiply their answers by the tax rate to calculate the tax liability.com . The difference between the two year ends is a credit to the income statement as there has been a reduction in the deferred tax provision. which gives the wrong answer. Some candidates with correct answers failed to gain full marks as they called the income statement amount a charge or expense and failed to identify it as a credit. Suggested Approach • • • Calculate tax written down value at the end of each year. Calculate the accounting book value at the end of each year.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Rationale To test candidates’ ability to calculate current and deferred taxation under the accounting rules in IAS 12 Income Taxes. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Calculating the second year based on the change in the year rather then the change in the balance at the year end. This is an acceptable method as long as the change is identified as the income statement figure and the balance calculated by adjusting the previous year’s balance by the income statement figure. However very few candidates provided a fully correct answer. • • • The Chartered Institute of Management Accountants Page 13 FOR FREE ACCA. 2003 to 2005 instead of two 12 month periods April 2003 to March 2005. Deduct the tax written down value from the accounting book value and multiply by the tax rate to give deferred tax balance at each year end. The answer was then given based on the second and third years. even when the calculations are correct. Of those candidates demonstrating some knowledge of deferred taxation the most common errors were: • Calculating figures for three years. this should have been a straight forward question. Marks 2 2 1 Marking Guide Calculation of deferred tax provision for 2004 Calculation of deferred tax provision for 2005 Calculation of income tax credit Examiner’s Comments If the IAS 12 approach was followed.

Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question Two (b) AD. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. has the following balances at 30 April 2005: Extract from financial statements: Trade receivables Trade payables Revenue (all credit sales) Cost of sales Purchases in year Inventories at 30 April 2005: Raw materials Work in progress Finished goods Required: Calculate AD’s Working Capital Cycle. 63⋅2 + 25⋅6 + 41⋅4 + 79⋅5 .com . (Total for requirement (b) = 5 marks) The answer is: AD’s working capital cycle can be expressed as: Raw materials inventory less payables days plus production time plus finished goods inventory plus receivables days.55⋅2 = 154⋅5 days Workings Raw materials inventory raw materials inventory purchases payables purchases work in progress cost of sales finished goods inventory cost of sales $000 216 97 992 898 641 111 63 102 111/641* 365 = Days 63⋅2 Payables days Production time Finished goods inventory 97/641 * 365 = 63/898 * 365 = 102/898 * 365 = (55⋅2) 25⋅6 41⋅4 Receivables days Working capital cycle – days Rationale Trade receivables credit sales 216/992 * 365 = 79⋅5 154⋅5 To test candidates’ ability to calculate and interpret working capital ratios for business sectors.blogspot. The Chartered Institute of Management Accountants Page 14 FOR FREE ACCA. a manufacturing entity.

com . Marks 1 1 1 1 1 Marking Guide Calculation of raw materials inventory days Calculation of payables days Calculation of production time – WIP days Calculation of finished goods inventory days Calculation of receivables days Examiner’s Comments Most candidates did well on this sub-question. Add together the inventory days and receivables days and deduct payables days. many gaining full marks. as raw materials are related to purchases whereas work in progress and finished goods are related to cost of sales. A few candidates did not deduct payables. • • The Chartered Institute of Management Accountants Page 15 FOR FREE ACCA. payables and receivables. Some candidates failed to include all types of inventory in their calculations whilst many candidates grouped all inventory together.blogspot. Common Errors • The most common error was not identifying that each type of inventory needs to be treated separately. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Suggested Approach • • Calculate individual ratios for each type of inventory.

Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question Two(c) List the FIVE elements of financial statements defined in the IASB’s Framework and explain the meaning of each.com . the settlement of which is expected to result in an outflow of resources from the entity.blogspot. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Liability A liability is a present obligation of the entity arising from past events. the FIVE elements of financial statements are: Asset An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. other than those relating to combinations from equity participants. The exact words of the Framework do not need to be quoted. Suggested Approach • • List the five elements and then explain each in turn. Marks 1 1 1 1 1 Marking Guide Explain asset Explain liability Explain equity Explain income Explain expenditure The Chartered Institute of Management Accountants Page 16 FOR FREE ACCA. Income Increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity. other than those relating to distributions to equity participants. (Total for requirement (c) = 5 marks) Answer According to the IASB’s Framework. Equity The residual interest in the assets of the entity after deducting all its liabilities. Rationale To test candidates’ ability to explain the IASB’s Framework for the Presentation and Preparation of Financial Statements. as long as the correct meaning is conveyed. Expenses Decreases in economic benefits during the accounting period in the form of outflows or depletions of assets that result in decreases in equity.

the most common error causing loss of marks was giving insufficient detail or defining an element without any reference to the Framework’s approach.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Examiner’s Comments The Framework is quite specific as to what the five elements are. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot. for example saying income was as a result of sales or equity was share capital. Those not identifying the elements gave completely wrong answers and scored no marks.com . Common Errors A high proportion of candidates did not answer the question correctly as they failed to identify the meaning given by the Framework to the elements of financial statements. including the financial statements themselves The underlying assumptions The qualitative characteristics Of the candidates correctly identifying the five elements. Candidates either scored well on this sub-question or they scored zero as they did not know what the elements were. The Chartered Institute of Management Accountants Page 17 FOR FREE ACCA. The incorrect interpretations included: • • • • The topics covered by the Framework The objectives of financial statements.

Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question Two(d) AE has a three year contract which commenced on 1 April 2004.500 $000 60.000 Required: Prepare the income statement and balance sheet extracts showing the balances relating to this contract. (Total for requirement (d) = 5 marks) The answer is: Income statement for the year to 31 March 2005 – extract Revenue from long-term contract Cost of sales Profit Balance sheet as at 31 March 2005 – extract Receivables Long-term contract – gross amounts due from customers Workings Overall profitability check: Revenue Costs incurred to 31 March 2005 Costs to completion Profit Income statement: Contract 50% complete therefore recognise 50% profit Revenue recognised 50% of contract value 60.000 43.000 25.500 30.000 24.000 8.000 7.500 The Chartered Institute of Management Accountants Page 18 FOR FREE ACCA.000 21.000 17.000 8.000 $000 30.000 3. as required by IAS 11 Long Term Contracts. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 19. the contract was certified as 50% complete.000 $000 60.000 24.blogspot.500 $000 7.500 8. $000 24. At 31 March 2005.500 32. 21.com .000/2 Balance sheet: Total contract costs incurred Recognised profit Less: Progress payments received Gross amount due from customers Note: Alternative approaches to calculations are acceptable. AE had the following balances in its ledger relating to the contract: $000 Total contract value Cost incurred up to 31 March 2005: Attributable to work completed Inventory purchased for use in 2005/6 Progress payments received Other information: Expected further costs to completion At 31 March 2005.500 25.000 19.

Common Errors • • • Marks 1 2 2 Not calculating overall profitability of the contract.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Rationale To test candidates’ ability to prepare financial statements reporting on performance. The Chartered Institute of Management Accountants Page 19 FOR FREE ACCA. Marking Guide Calculate profit Calculate the income statement figures Calculate gross amounts due on balance sheet Examiner’s Comments Few candidates were able to produce a correct answer. except the revenue figure. Therefore recognise 50% of total profit. tangible noncurrent assets and inventories. The contract is stated as being 50% complete. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Suggested Approach • • • First check the overall profitability of the contract. Calculate the balance sheet figures for the gross amount due from customers as the difference between the income statement amounts recognised and the amounts paid or received to date.com . Leaving the work in progress inventory out of total cost and profit calculations Showing inventory separately on the balance sheet. 50% of turnover and 50% of total cost in the income statement. instead of including it under the heading “gross amounts due from customers” as required by IAS 11. Explain the principles of the accounting rules contained in IASs dealing with construction contracts.blogspot. Without this it is difficult to get any of the other figures correct.

including salaries. On average 60% pay within 30 days. The actual/budgeted balances for the six months to July 2005 were: All figures $000 Credit sales Cash sales Credit purchases Other overhead expense Feb 100 30 45 40 Actual Mar 100 30 50 40 Apr 110 35 50 40 May 110 35 55 50 Budgeted Jun 120 40 55 50 Jul 120 40 60 50 Required: Prepare a monthly cash budget for the period May to July 2005 and assess the likelihood of AM being able to pay for the equipment when it falls due. Other overheads. The balance is written off as irrecoverable. are paid within the month incurred.blogspot. Sales are partly on credit and partly for cash.com . The Chartered Institute of Management Accountants Page 20 FOR FREE ACCA. The equipment will be purchased on 30 days credit.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question Two(e) AM is a trading entity operating in a country where there is no sales tax. Purchases are on credit. the expected cost of which is $250. The cash balance on 1 May 2005 is $96. AM plans to purchase new equipment at the end of June 2005. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000. payable at the end of July.000. with 70% paid in the month following the date of purchase and 30% paid in the month after that. (Round all figures to the nearest $000) (Total for requirement (e) = 5 marks) Answer Cash budget for the three month period May to July 2005: May $000 Cash receipts Cash sales Credit sales receipts (W1) Total receipts Credit purchase payments (W2) Expenses paid Equipment purchase paid Total payments Net cash movement in month Balance b/fwd Balance c/fwd 35 101 136 50 50 100 36 96 132 June $000 40 104 144 54 50 104 40 132 172 July $000 40 111 151 55 50 250 355 (204) 172 (32) AM will not be able to pay for the equipment on time unless further finance is arranged. Customers who receive credit are given 30 days to pay. 30% pay between 30 and 60 days and 5% pay between 60 and 90 days.

blogspot. Marking Guide Calculate credit sales receipts Calculate credit purchase payments Prepare a cash budget.com . Apply the information provided on credit purchases and calculate cash paid to payables.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Workings (W1) Credit sales – receipts: February sales March sales April sales May sales June sales Totals (W2) Credit purchases – payments Total $000 50 50 55 55 May $000 15 35 50 June $000 15 39 54 July $000 16 39 55 Total $000 100 100 110 110 120 May $000 5 30 66 101 June $000 5 33 66 104 July $000 6 33 72 111 March April May June Totals Rationale To test candidates’ ability to prepare and analyse cash-flow forecasts over a three-month period. including cash receipts and payments Advise whether entity will be able to pay for the equipment when it is due Marks 1½ 1 2 ½ The Chartered Institute of Management Accountants Page 21 FOR FREE ACCA. Prepare a three month cash budget including cash receipts from receivables and cash sales and cash paid to payables and expenses. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Suggested Approach • • • • Apply the information provided on credit sales and calculate cash receipts from receivables. Prepare a short conclusion identifying whether the non-current asset purchase is possible or not.

Common Errors • • • • Treating receipts from credit sales as received in the month of sale. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com .Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Examiner’s Comments Some candidates misinterpreted receipts from credit customers being given 30 days to pay as meaning they paid within the month of sale instead of in the next month. Treating purchases on credit as being paid in month of purchase. Not giving a conclusion. A significant number of candidates failed to assess the likelihood of being able to pay for equipment. Including bad debts as a cash flow. The Chartered Institute of Management Accountants Page 22 FOR FREE ACCA.blogspot.

067 Balance sheet as at 31 March 2005 – extract Non-current assets – Tangible Finance lease Less: Depreciation (116.200 The Chartered Institute of Management Accountants Page 23 FOR FREE ACCA. Use the sum of digits method for interest allocations and assume that the asset has no residual value at the end of the lease term.com .400 69. Required: In accordance with IAS 17 Operating and Finance Leases: (i) (ii) calculate the amount of finance cost that would be charged to the income statement for the year ended 31 March 2005.000 34. The annual payments are $30.267 $ 150.067 6.000.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question Two(f) A five year finance lease commenced on 1 April 2003.53. The finance charge to the income statement for the year ended 31 March 2005 is $9.533 2.000 x 5) Fair value of the asset Finance cost Five periods gives sum of digits (5 x (5 + 1))/2 = 15 Year 2003/04 2004/05 2005/06 2006/07 2007/08 Proportion 5/15 4/15 3/15 2/15 1/15 Allocation (proportion x $34.200) Workings Total payments under the lease ($30.333 9.blogspot.600 $53.000 116.200 $23.000) $ 11.000/5 x 2) Non-current liabilities Amounts due under finance lease Current liabilities Amounts due under finance lease (76. The fair value of the asset at 1 April 2003 was $116.800 4. (Total for requirement (f) = 5 marks) The answer is: Finance charge for year ended 31 March 2005 is the second year of the lease. prepare balance sheet extracts for the lease at 31 March 2005.000 in arrears. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.400 .000 $ 116.000 46.

Prepare the income statement and balance sheet extracts required by the question.333 9.blogspot. Suggested Approach • Calculate the finance cost by taking the fair value of the asset away from the total payments due.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Year 2003/04 2004/05 2005/06 2006/07 2007/08 Rationale To test candidates’ ability to explain the principles of the accounting rules contained in IAS’s dealing with leases (lessee only). Applying the sum of digits to the annual repayment instead of the finance charge.333 76. Using wrong years to calculate the liabilities. Giving income statement finance charge as the charge for year three. Balance b/fwd $ 116.733 Finance charge $ 11. Calculate the balance outstanding at the end of years two and three. Most were also able to calculate the outstanding balances at each year end. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Common Errors • • • • • • • • Calculating the sum of digits for 4 years instead of 5 years. Calculate the sum of digits and multiply the finance cost with the appropriate proportion allocating the finance cost to each year.000 97.000) (30.000) (30.733 0 • Marking Guide Calculation of finance cost and allocation to years Calculation of finance charge to income statement Calculation of non-current assets – tangible (balance sheet) Calculation of liabilities and split between non-current and current liabilities Examiner’s Comments Marks 2 1 1 1 Most candidates were able to calculate the finance cost and apportion it to each period.com .200 27.000) (30.267 Repayment $ (30.067 6.000) Balance c/fwd $ 97. However many candidates were unable to use the correctly calculated figures and produce correct income statement and balance sheet extracts.000) (30.400 53. The Chartered Institute of Management Accountants Page 24 FOR FREE ACCA. Applying the proportions using 1 in the first year and two in the second year etc.200 27. Not giving any non-current asset figures on the balance sheet extract.533 2. Giving the income statement charge as the annual repayment figure.800 4. Not splitting the liability between non-current and current.400 53.333 76.

blogspot. 4. To apply the accounting rules contained in IAS 12 for current and deferred taxation. Calculate the operating lease charge to income statement. Prepare the income statement using IAS 1 format. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. 3. Calculate depreciation of buildings and plant and equipment for the year and cumulative. prepare workings to: 1. in a form suitable for presentation to the shareholders and in accordance with the requirements of International Financial Reporting Standards. Notes to the financial statements are NOT required. Suggested Approach • Using the additional information provided and the trial balance figures. but all workings must be clearly shown.com . Calculate tax charge and outstanding balances. Calculate the cost of sales. DO NOT prepare a statement of accounting policies or a statement of changes in equity. Prepare workings to calculate the balances on reserves and retained earnings. with appropriate notes. Prepare the balance sheet using IAS 1 format.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam SECTION C – 20 MARKS ANSWER ONE QUESTION ONLY Question Three Prepare the income statement for AF for the year to 31 March 2005 and a balance sheet at that date. • • • Marking Guide Preparation of Income Statement using correct format Preparation of Balance Sheet using correct format Marks available for format and correct headings Marks 7 11 2 The Chartered Institute of Management Accountants Page 25 FOR FREE ACCA. (Total for Question Three = 20 marks) Rationale To test candidates’ ability to prepare financial statements in a form suitable for publication. 2.

Treating the operating lease as a finance lease. Incorrectly deducting deferred tax from income tax charge for the year. Very few gained full marks as very few candidates could apply IAS 17 Operating and finance leases correctly to the operating lease. Including dividends paid as a current liability.com . Including deferred tax as a current asset. Deducting dividends from revaluation reserve. Including depreciation as part of administration or distribution expenses when the question specified cost of sales. Not accruing interest due on the loan notes.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Examiner’s Comments This question was generally very well done by candidates.blogspot. The Chartered Institute of Management Accountants Page 26 FOR FREE ACCA. putting the total liability on the balance sheet and in a few cases also capitalising the asset and including it under non-current assets. Including the available for sale investments under current assets. Common Errors • • • • • • • • • • Stating that as there was no payment for the lease there was no charge in the income statement. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. many obtaining near full marks. Incorrectly applying the reducing balance method to the plant and equipment.

Calculating accrued expenses without adjusting for interest balances. development expenditure and issue of shares.blogspot. in accordance with IAS 7 Cash Flow Statements. Mixing up proceeds of sale and gain on disposal. using the indirect method. interest. Use the IAS 7 format to prepare a cash flow statement using the indirect method. plant and equipment. with a number of candidates gaining full marks.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. o Putting items under the wrong headings. Common Errors • Not using the correct IAS 7 format. Calculating tax paid without adjusting for deferred tax. (Total for Question Four = 20 marks) Rationale To test candidates’ ability to prepare a cash flow statement in accordance with IAS 7. Marking Guide Cash Flow Statement – Calculation of cash flows from operating activities Cash Flow Statement – Calculation of cash flows from investing activities Cash Flow Statement – Calculation of cash flows from financing activities Cash and cash equivalents Marks available for format and correct headings Examiner’s Comments Marks 9½ 5½ 2½ 1 1½ There were some excellent answers to this question. for example: o Starting with operating profit instead of profit before tax. Suggested Approach • • Use workings to calculate the cash flows for accrued expenditure. income taxes. purchase of property.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2005 Exam Question Four Prepare a cash flow statement. Apply the accounting rules contained in IAS 12 for current and deferred taxation. for AG for the year ended 31 March 2005. o Putting all items in one long list. Missing out depreciation and/or revaluation when calculating cash paid for non-current assets. o Attempting to use the direct method. • • • • The Chartered Institute of Management Accountants Page 27 FOR FREE ACCA.

Answer ALL SIX compulsory sub-questions in Section B on pages 10 to 12.com P7 – Financial Accounting and Tax Principles . all parts and/or subquestions). Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered.blogspot. Answer ONE of the two questions in Section C on pages 14 to 17. These pages are detachable for ease of reference. This is comprised of 20 sub-questions on pages 2 to 9. Maths Tables and Formulae are provided on pages 19 to 21. Answer the ONE compulsory question in Section A. you will not be allowed. paper number and the examination subject title in the spaces provided on the front of the examination answer book. The requirements for questions in Sections B and C are highlighted in a dotted box. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is. Also write your contact ID and name in the space provided in the right hand margin and seal to close. to open the answer book and start writing or use your calculator during this reading time. Write your full examination number. You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and. make annotations on the question paper.Financial Management Pillar Managerial Level Paper P7 – Financial Accounting and Tax Principles 24 November 2005 – Thursday Afternoon Session Instructions to candidates You are allowed three hours to answer this question paper. under any circumstances. However. if you wish. TURN OVER  The Chartered Institute of Management Accountants 2005 FOR FREE ACCA.

The president of the BS Board.000 $20.000 $22.18 you should show your workings as marks are available for the method you use to answer these sub-questions.SECTION A – 50 MARKS [the indicative time for answering this Section is 90 minutes] ANSWER ALL TWENTY SUB-QUESTIONS Instructions for answering Section A: The answers to the twenty sub-questions in Section A should ALL be written in your answer book. BQ. 1. a supplier of BS.000 $22. 1.com . BY. who is also the chief executive officer of another entity. Your answers should be clearly numbered with the sub-question number and then ruled off. BS’s main banker.000 $50.2 A B C D Which ONE of the following would be regarded as a related party of BS? BX.000 (2 marks) 1.000 $50.000 $18. you need only write the sub-question number and the letter of the answer option you have chosen.9 and 1. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. that supplies goods to BS. Question One 1.6.000 The recoverable amount of the asset is A B C D $18. so that the markers know which sub-question you are answering. For sub-questions 1. For multiple choice questions.5. a customer of BS. (2 marks) P7 2 November 2005 FOR FREE ACCA.1 The following measures relate to a non-current asset: (i) (ii) (iii) (iv) Net book value Net realisable value Value in use Replacement cost $20. You do not need to start a new page for each sub-question.7. 1.blogspot. BU.

1. calculate the finance cost for the year ended 30 September 2005. a short-term policy. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. The borrowing costs previously had been charged to income statement. An entity has started capitalising borrowing costs for assets under the alternative treatment allowed by IAS 23 Borrowing costs.000 per year. (2 marks) C D 1. In the current year. (3 marks) Section A continues on the next page TURN OVER November 2005 3 P7 FOR FREE ACCA. (2 marks) 1. changes in accounting estimates and errors? An entity changes its method of depreciation of machinery from straight line to reducing balance.900 at date of purchase.com . payable in arrears.blogspot.5 An item of machinery leased under a five year finance lease on 1 October 2003 had a fair value of $51. If the sum of digits method is used to apportion interest to accounting periods. a conservative policy. An entity changes its method of calculating the provision for warranty claims on its products sold.3 A B Which ONE of the following would be regarded as a change of accounting policy under IAS 8 Accounting policies.4 An entity’s working capital financing policy is to finance working capital using short-term financing to fund all the fluctuating current assets as well as some of the permanent part of the current assets. a moderate policy. The above policy is an example of A B C D an aggressive policy. An entity disclosed a contingent liability for a legal claim in the previous year’s accounts. a provision has been made for the same legal claim. The lease payments were $12.

CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. all of which qualified for tax depreciation. assuming a residual value of $50. The proceeds received on disposal were $15. Assume that BC pays tax on its income at the rate of 30%. BC’s accounting depreciation policy is to depreciate the asset over its useful economic life of five years.blogspot. Calculate the property.1.6 At 30 September 2005.000 Notes to the accounts: Equipment disposed of had cost $90.000. BC’s asset qualified for an accelerated first year tax allowance of 50%. The asset cost $900. with comparatives: Balance Sheet extracts: As at 30 September Non-current tangible assets Property.7 BC. Calculate BC’s deferred tax balance required in the balance sheet as at 30 September 2005 according to IAS 12 Income taxes. (4 marks) P7 4 November 2005 FOR FREE ACCA.000. (4 marks) 1.000. purchased its only non-current tangible asset on 1 October 2003. as required by IAS 7 Cash flow statements. plant and equipment purchases that BY would show in its cash flow statement for the year ended 30 September 2005. plant and equipment revaluation reserve 2005 $000 260 30 2004 $000 180 10 The income statement for the year ended 30 September 2005 included: Gain on disposal of an item of equipment Depreciation charge for the year $10. BY had the following balances.com . a small entity. The second and subsequent years qualified for tax depreciation at 25% per year on the reducing balance method.000 $40. plant and equipment Equity and reserves Property.000.

All losses can be carried forward indefinitely. (3 marks) Section A continues on the next page TURN OVER November 2005 5 P7 FOR FREE ACCA. Capital gains/losses cannot be offset against trading profits/losses.9 Country B has a corporate income tax system that treats capital gains/losses separately from trading profits/losses. BD’s results for 2003 to 2005 were as follows: Trading profit/(loss) $000 200 (120) 150 Capital gains/(loss) $000 (100) 0 130 Year to September 2003 Year to September 2004 Year to September 2005 Calculate BD’s corporate income tax due for each of the years ended 30 September 2003 to 2005. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. which include: (i) (ii) (iii) International Accounting Standards Committee Foundation (IASC Foundation) Standards Advisory Council (SAC) International Financial Reporting Interpretations Committee (IFRIC) Which of the above reports to.8 The setting of International Accounting Standards is carried out by co-operation between a number of committees and boards. or advises.blogspot. but cannot be carried back to previous years.com . Trading profits and capital gains are both taxed at 20%. the International Accounting Standards Board (IASB)? Reports to: A B C D (i) and (iii) (i) and (ii) (iii) (ii) Advises: (ii) (iii) (ii) (i) (2 marks) 1.1. BD had no brought forward losses on 1 October 2002.

an entity.12 Country OS has a value added tax (VAT) system where VAT is charged on all goods and services. the insurance provider agreed to pay $200. (4 marks) 1. VAT operates at different levels in OS: • • • Standard rate Luxury rate Zero rate 10% 20% 0% B C D During the last VAT period. On 20 November 2005. BW is contesting the claim and. List FOUR of the five conditions that IAS 18 requires to be met for income to be recognised. A customer is suing BW for damages alleged to have been caused by BW’s product.000 120. BZ.000. and has done so for many years. BW’s directors have agreed that this will require a large number of staff to be retrained. All materials and services were at standard rate VAT. how much VAT did BZ pay? (2 marks) P7 6 November 2005 FOR FREE ACCA.1. excluding VAT. the directors have been advised by BW’s legal advisers it is very unlikely to lose the case. excluding VAT: Z L $ 60.11 IAS 18 Revenue recognition defines when revenue may be recognised on the sale of goods. BW is negotiating with its insurance provider about the amount of an insurance claim that it had filed. BZ converted the materials into two products Z and L.blogspot.10 Which ONE of the following would require a provision to be created by BW at its balance sheet date of 31 October 2005? A The government introduced new laws on data protection which come into force on 1 January 2006. purchased materials and services costing $100.000. Assuming BZ had no other VAT-related transactions. During the VAT period. BW makes refunds to customers for any goods returned within 30 days of sale. (2 marks) 1. product Z is zero rated and product L is luxury rated for VAT purposes.com . BZ made the following sales. the directors were waiting on a report they had commissioned that would identify the actual training requirements. Registered VAT entities are allowed to recover input VAT paid on their purchases.000 At the end of the period. at 31 October 2005. BZ paid the net VAT due to the tax authorities. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. At 31 October 2005. At the balance sheet date.

force the directors to change the treatment of the item in the accounts.blogspot.14 If an external auditor does not agree with the directors’ treatment of a material item in the accounts. How much interest paid should BK show on its cash flow statement for the year ended 30 September 2005? A B C D $38.13 At 1 October 2004. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 $41.000 $44. the first action they should take is to A B C D give a qualified opinion of the financial statements. The contract was scheduled to run for two years and has a sales value of $40 million.000 credit During the year ended 30 September 2005.000 to its income statement. At 31 October 2005. how much revenue and profit should BL recognise in its income statement for the year ended 31 October 2005? (2 marks) Section A continues on the next page TURN OVER November 2005 7 P7 FOR FREE ACCA.15 BL started a contract on 1 November 2004. (2 marks) 1. BK charged interest payable of $41. persuade the directors to change the treatment of the item in the accounts.000 $53. BK had the following balance: Accrued interest payable $12. the following details were obtained from BL’s records: Costs incurred to date Estimated costs to completion Percentage complete at 31 October 2005 $m 16 18 45% Applying IAS 11 Construction contracts.000 credit.000 (2 marks) 1.com .1. give an unqualified opinion of the financial statements. The closing balance on accrued interest payable account at 30 September 2005 was $15.

000. BE is proposing to offer a 1⋅5% discount for payment within 20 days.1.500 BN reacquired 100.000 of its shares and classified them as “treasury shares”.blogspot. fully paid Share premium Retained earnings 750 250 500 1. effective incidence. (2 marks) 1. but now wants to improve its cash flow. (2 marks) 1. Assume a 365 day year and an invoice value of $1. $1 shares. direct incidence. The customer therefore bears the cost of the sales tax. As a non-current liability. How should BN classify the treasury shares on its closing balance sheet in accordance with IAS 32 Financial instruments – disclosure and presentation? A B C D As a non-current asset investment.17 BN is a listed entity and has the following balances included on its opening balance sheet: $000 Equity and reserves: Equity shares. As a current asset investment.16 An entity sells furniture and adds a sales tax to the selling price of all products sold. What is the effective annual interest rate that BE will incur for this action? (4 marks) P7 8 November 2005 FOR FREE ACCA. This is referred to as A B C D formal incidence.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. indirect incidence. As a deduction from equity. A customer purchasing furniture from the entity has to pay the cost of the furniture plus the sales tax. BN still held the treasury shares at the year end.18 BE has been offering 60 day payment terms to its customers.

000 and receives a tax assessment of $3. (2 marks) 1.com . This tax could be said to be A B C D a progressive tax. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. BM and BV are resident in the same tax jurisdiction.blogspot.500. BV has a taxable profit of $60. (i) (ii) (iii) (iv) (v) Depreciation Revenue Closing inventory Finance cost Dividends Which TWO of the above have to be shown on the face of the income statement.000 and receives a tax assessment of $7.19 BM has a taxable profit of $30. rather than in the notes: A B C D (i) and (iv) (iii) and (v) (ii) and (iii) (ii) and (iv) (2 marks) (Total for Section A = 50 marks) End of Section A Section B starts on the next page TURN OVER November 2005 9 P7 FOR FREE ACCA. a regressive tax. a proportional tax.000.1. a direct tax.20 IAS 1 Presentation of financial statements requires some of the items to be disclosed on the face of the financial statements and others to be disclosed in the notes.

blogspot. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 units $25⋅00 $3⋅00 • • • • The supplier of item “Z” has informed BF that if the order was 2.000 units or more at one time. Item “Z” costs BF Expected annual production usage is Procurement costs (cost of placing and processing one order) are The cost of holding one unit for one year has been calculated as $10⋅00 per unit 65. Due to recent improvements in supplier reliability. a 2% discount would be given on the price of the goods. in order that the production could continue to operate smoothly.com . Due to past delays in suppliers providing goods. (3 marks) (Total for sub-question (a) = 5 marks) (b) BF manufactures a range of domestic appliances. Required: (i) (ii) Calculate the EOQ for item “Z” before the quantity discount. BF has had to hold an inventory of raw materials. (2 marks) Advise BF if it should increase the order size of item “Z” so as to qualify for the 2% discount. (3 marks) (Total for sub-question (b) = 5 marks) P7 10 November 2005 FOR FREE ACCA. (2 marks) (ii) Briefly explain the methods that governments can use to reduce tax avoidance and tax evasion. BF is re-examining its inventory holding policies and recalculating economic order quantities (EOQ).SECTION B – 30 MARKS [the indicative time for answering this Section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS Question Two (a) Required: (i) Explain the difference between tax avoidance and tax evasion.

and a travel agency specialising in arranging holidays to more exotic destinations.(c) • • BJ is an entity that provides a range of facilities for holidaymakers and travellers. BJ sold its fleet of aircraft and associated non-current assets for $500 million.blogspot. The restructuring has been agreed by the directors and active steps have been taken to implement it. At 1 October 2004 these included: a short haul airline operating within Europe. The cost of restructuring to be incurred in year 2005/2006 is estimated at $10 million. the directors of BJ decided that. they will agree a settlement of $20 million compensation. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. On 31 January 2005. due to a significant increase in competition on short haul flights within Europe. The closure of the airline operation caused BJ to carry out a major restructuring of the entire entity. (Detailed disclosure notes are not required. Required: Explain how BJ should report the events described above and quantify any amounts required to be included in its financial statements for the year ended 30 September 2005. All operations ceased on 31 May 2005. such as Hawaii and Fiji. BJ’s airline operation has made significant losses for the last two years.com . On 31 July 2005. All flights for holiday makers and travellers who had already booked seats would be provided by third party airlines. the carrying value at that date was $750 million. BJ has estimated that in the financial period October 2005 to September 2006. At the balance sheet date. BJ were still in negotiation with some employees regarding severance payments.) (Total for sub-question (c) = 5 marks) (d) The International Accounting Standards Board’s (IASB’s) Framework for the preparation and presentation of financial statements (Framework) identifies four principal qualitative characteristics of financial information. (Total for sub-question (d) = 5 marks) TURN OVER November 2005 11 P7 FOR FREE ACCA. BJ would close all of its airline operations and dispose of its fleet of aircraft. Required: Identify and explain EACH of the FOUR principal qualitative characteristics of financial information listed in the IASB’s Framework.

The building was revalued on 30 September 2004 by a professional valuer at $1.000.blogspot. BH intends holding the bond to its maturity on 31 May 2008 when it will repay its face value.000 on 1 June 2003 for $850. with no residual value. BI’s management accountant calculated that the brand name’s value in use at 30 September 2005 was $150. it was assumed to have a remaining useful life of 20 years at that date. Required: (i) Explain the difference between the coupon rate of a security and its yield to maturity.000 on 30 September 2005 by an independent valuer. Required: Explain how BI should report the events described above and quantify any amounts required to be included in its financial statements for the year ended 30 September 2005. The brand name is being amortised over 10 years.000.500. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.800. (2 marks) Calculate the bond’s yield to maturity. The economic climate had deteriorated during 2005. BI’s building was valued at a market value of $1. A brand specialist valued BI’s brand name at market value of $200. The land is carried as a separate non-current tangible asset in the balance sheet. (Total for sub-question (e) = 5 marks) (f) BH purchased a bond with a face value of $1. BI also owns a brand name which it acquired 1 October 2000 for $500.000 on the same date. warehouse and garage. BI has a policy of regularly revaluing its non-current tangible assets.000.000. The original cost of the building in October 2002 was $1. The bond has a coupon rate of 7%. (3 marks) (Total for sub-question (f) = 5 marks) (ii) (Total for Section B = 30 marks) End of Section B P7 12 November 2005 FOR FREE ACCA. causing BI to carry out an impairment review of its assets at 30 September 2005.(e) BI owns a building which it uses as its offices.000.com .

com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.Section C starts on the next page TURN OVER November 2005 13 P7 FOR FREE ACCA.

com . (ii) (iii) P7 14 November 2005 FOR FREE ACCA.000. The income tax balance in the trial balance is a result of the underprovision of tax for the year ended 30 September 2004. cost at 30 September 2005 Equity shares $1 each. fully paid Income tax Inventory of cleaning materials at 30 September 2005 Investment income received Provision for deferred tax Provision for depreciation at 30 September 2004: Equipment and fixtures Provision for legal claim balance at 30 September 2004 Retained earnings at 30 September 2004 Revaluation reserve at 30 September 2004 Revenue Share premium Trade payables Trade receivables Vehicle operating lease rentals paid 239 205 147 8 101 548 60 752 200 9 37 11 50 370 190 226 30 1. The market value of the available for sale investments at 30 September 2005 was $225.308 $000 150 2.000. BG operates through a small network of depots that are rented spaces situated in out-of-town industrial developments. The trial balance for BG at 30 September 2005 was as follows: $000 10% bonds (redeemable 2010) Administrative expenses Available for sale investments at market value 30 September 2004 Bank & cash Bond interest paid – half year to 31 March 2005 Cost of cleaning materials consumed Direct operating expenses (including cleaning staff) Dividend paid Equipment and fixtures.000 and the deferred tax provision needs to be increased by $15.308 Additional information: (i) Available for sale investments are carried in the financial statements at market value. BG has a policy to lease all vehicles on operating leases.017 40 24 141 61 2. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.SECTION C – 20 MARKS [the indicative time for answering this Section is 36 minutes] ANSWER ONE QUESTION FROM TWO Question Three BG provides office cleaning services to a range of organisations in its local area. There were no purchases or sales of available for sale investments held during the year. The taxation due for the year ended 30 September 2005 is estimated at $64.blogspot.

BG had an outstanding legal claim from a customer alleging that BG had caused a major fire in the customer’s premises.blogspot. Depreciation of equipment and fixtures is considered to be part of direct cost of sales. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.(iv) Equipment and fixtures are depreciated at 20% per annum straight line. but all workings must be clearly shown. (v) (vi) (vii) Required: Prepare the income statement and a statement of changes in equity for BG for the year to 30 September 2005 and a balance sheet at that date. During 2005. BG was advised that it would very probably lose the case. but does not propose to pay a final dividend as profit for the year is well below expectations. new evidence was discovered and the case against BG was dropped.000 was set up at 30 September 2004. Notes to the financial statements are NOT required. (Total for Question Three = 20 marks) Section C continues on the next page TURN OVER November 2005 15 P7 FOR FREE ACCA. The 10% bonds were issued in 2000. the directors have decided that the provision is no longer required. BG paid an interim dividend during the year. All workings should be to the nearest $000.com . so a provision of $190. At 30 September 2004. BG’s policy is to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal. As there is no further liability. in a form suitable for presentation to the shareholders and in accordance with the requirements of International Financial Reporting Standards. DO NOT prepare a statement of accounting policies.

000 Jun $6.Question Four BB is a private sector training entity. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. All full-time staff will receive an increase of 5% from 1 March 2006. The Finance Director is concerned about the cash flow forecast for the first six months and has asked you. one third of students pay one month in advance and the rest pay on the first day of the course.000 a month.500 Mar $4. Budgeted short course information: Number of courses Forecast students per course Jan 0 0 Feb 2 10 Mar 3 12 Apr 3 12 May 4 14 Jun 4 13 Jul 4 15 BB expects to receive payment in advance of each course.000 Apr $4.000 spread evenly throughout the year.460 $125. which provides short courses and various in-house courses for large employers.blogspot.000 BB is preparing its budgets for the year 1 January 2006 to 31 December 2006.000 May $5.000 BB has previously experienced problems of slow payment from some large employers and is monitoring the trade receivables collection period. to prepare a cash budget for the six months from January to June 2006 from the budgeted information provided.000 Permanent staff salaries are currently $4. but the cash budget has not yet been completed.000 Feb $8. Short courses are generally one night a week for four weeks commencing on the first of each month. a trainee management accountant. Budgeted wages 2006 Part-time tutor wages Jan $0 Feb $2.000 May $12. Budgeted expenditure BB employs permanent full-time members of staff to run the entity and provide key lecturing skills. on average. BB’s forecast financial statements for the year ended 31 December includes the following: Forecast Balance Sheet at 31 December 2005 (extract) Current assets Trade receivables: In-house training courses Bank Forecast Income Statement for the year ended 31 December 2005 (extract) Revenue: In-house training courses $34.000 Mar $10. In-house training courses The exact number and type of in-house training courses is unknown at present but. except December and January. Based on previous experience. P7 16 November 2005 FOR FREE ACCA.000 Jun $6. during 2006.000 Apr $11. Budgeted revenue Short training courses Short training courses budgeted charge $100 per person per course. BB is expecting to earn $130.100 $12. Experience shows that.com . Most of the trainers are part-time tutors at an hourly rate. the following receipts are forecast: In-house training course fee receipts (including trade receivables at 31 December 2005) Jan $5.

BB needs to replace all the IT equipment in one of its computer labs early in 2006. Required: (a) Calculate BB’s in-house training course trade receivables days outstanding (i) (ii) according to the forecast at 31 December 2005. Budgeted payments in respect of overheads (electricity.500 a year. (5 marks) (b) Prepare BB’s cash budget for the first six months of 2006 (January to June).blogspot. $100 per month. Capital expenditure in the first six months of 2006 is planned as follows: (i) (ii) New furniture for the managing director’s office $5. The budgeted cost of the equipment is $40. printing and photocopying average $150 per short course (paid in the month of the course). April.000 payable in April. according to the projected figures at 30 June 2006. Teaching materials. assuming the revenue and cash flow budgets are implemented. The in-house courses cost. payable in quarterly instalments in January.000. March. This is currently planned to take place in April. May and June are $600. (10 marks) (c) Advise BB of any actions it can take to make sufficient funds available to purchase the new technology as budgeted in May 2006.500 and for February. with payment in May 2006. Other information BB has negotiated an overdraft facility with the bank for an overdraft up to $5.000 for 20 top-of-the-range PCs and related equipment. (5 marks) (Total for Question Four = 20 marks) (Total for Section C = 20 marks) End of Question Paper Maths Tables and Formulae are on pages 19 to 21 TURN OVER November 2005 17 P7 FOR FREE ACCA. July and October. telephone and so on) for January and April are $1.BB rents the premises for $2. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com . on average.

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763 0.436 0.766 0.681 0.087 14% 0.804 0.847 0.482 0.544 0.400 0.480 0.088 0.425 0.460 0.836 0.744 0.233 0.162 0.125 0.816 0.164 0.713 0.962 0.593 0.844 0.208 0.942 0.952 0.552 0.935 0.666 0.585 0.990 0.773 0.694 0.822 0.415 0.862 0.614 0.208 0.390 0.722 0.182 0.093 0.232 0.031 20% 0.093 0.060 0.833 0.879 0.104 13% 0.731 0.052 0.352 0.971 0.893 0.215 9% 0.051 0.339 0.299 0.095 0.925 0.577 0.370 0.840 0.073 17% 0.145 0.198 0.424 0.601 0.361 0.596 0.540 0.229 0.044 0.797 0.312 Interest rates (r) 15% 16% 0.331 0.873 0.507 0.582 0.693 0.429 0.502 0.146 0.239 0.231 0.215 0.376 0.148 0.377 0.187 0.162 0.914 0.659 0.045 0.335 0.195 0.923 0.951 0.062 0.261 0.038 0.758 0.665 0.231 0.555 0.735 0.287 0.123 0.718 0.888 0.534 0.MATHS TABLES AND FORMULAE Present value table Present value of $1.163 0.083 0.621 0.237 0.051 0.209 0.961 0.116 0.870 0.772 0.513 0.890 0.225 0.789 0.636 0.180 0.623 0.402 0.333 0.080 0.505 0.209 0.452 0.069 0.535 0.069 0.650 0.889 0.124 0.731 0. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.837 0.258 8% 0.326 0.583 0.627 0.790 0.263 0.290 0.747 0.701 0.130 0.497 0.138 0.340 0.266 0.371 0.037 0.031 0.728 0.391 0.458 0.456 0.769 0.933 0.558 0.592 0.130 0.054 0.275 0.410 0.111 0.714 0.887 0.191 0.896 0.071 0.314 0.567 0.857 0.703 0.516 0.842 0.422 0.322 0.853 0.116 0.417 0.258 0.137 0.111 0.043 0.212 0.051 1% 0.624 0.350 0.508 0.683 0. n = number of periods until payment or receipt.609 0.961 0.579 0.blogspot.093 0.820 0.855 0.263 0.317 0.592 0.178 10% 0.176 0.855 0.037 19% 0.178 0.124 12% 0.070 0.641 0.286 0.108 0.352 0.467 0.296 0.388 0.194 0.499 0.877 0.270 0.084 0.901 0.673 3% 0.140 0.783 0.926 0.497 0.456 0.095 0.905 0.712 0.456 7% 0.500 0.557 0.917 0.794 0.519 0.396 0.416 0.613 0.751 0.870 0.183 0.564 0.823 0.642 0.605 0.368 0.943 0.853 0.924 0.404 0.475 0.587 0.746 0705 0.630 0.885 0.104 0.112 0.700 0.305 0.760 0.123 0.444 0.317 0.432 0.658 0.708 0.570 0.279 0.354 0.756 0.351 0.227 0.482 0.319 0.494 0.530 0.863 0.081 0.826 0.543 0.188 0.285 0.706 0.098 0.915 0.com .043 18% 0.943 0.437 0. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest rates (r) 5% 6% 0.081 0.547 0.625 0.257 0.871 0.534 0.079 0.061 0.362 0.232 0.554 4% 0.277 0.204 0.327 0.270 0.743 0.247 0.218 0.308 0.356 0.059 0.295 0.181 0.980 0.107 0.572 0.675 0.160 0.837 0.397 0.792 0.469 0.513 0.731 0.149 11% 0.135 0.153 0.292 0.650 0.394 0.906 0.170 0.350 0.788 0.099 0.296 0.677 0.820 2% 0.475 0.861 0.168 0.152 0.108 0.386 0.481 0.315 0.250 0.205 0.711 0.434 0.980 0.828 0.623 0.463 0.252 0.971 0.078 0.743 0.813 0. that is (1 + r)-n where r = interest rate.125 0.909 0.645 0.840 0.333 0.249 0.527 0.686 0.888 0.593 0.160 0.376 0.141 0.864 0.026 November 2005 19 P7 FOR FREE ACCA.284 0.141 0.243 0.812 0.681 0.442 0.163 0.060 0.676 0.388 0.065 0.419 0.661 0.942 0.907 0.194 0.784 0.476 0.

134 13.659 13.292 14.265 6.549 7.630 4.607 4.336 10.477 10.439 4.575 5.893 1.536 7.729 6.628 6.763 10.679 16.580 5.647 2.828 11.142 6.814 7.577 3.713 2.358 8.877 1.194 6.995 6.462 6.566 9.025 14% 0.723 2.537 5.472 7.604 9.226 18.728 7.775 3.550 6.910 5.198 6.974 7.673 3.426 5.288 4.394 9.675 4.578 14.197 5.274 3.163 4.101 20% 0.601 6.022 8.974 3.447 9.772 5.166 13.870 P7 20 November 2005 FOR FREE ACCA.335 5.938 7.047 6.379 7.259 3.589 3.031 4.652 12.589 2.059 10.106 10.829 3.207 4.192 4.158 11.019 5. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.039 4.756 8.242 6.360 7.917 5.818 5.247 6.329 4.421 5.718 15.743 3.938 4.791 4.562 16.913 2.353 19% 0.837 4.639 4.590 Interest rates (r) 5% 6% 0.833 1.475 5.405 5.160 4.487 3.076 5.870 0.355 4.528 2.174 2.366 7.201 8.901 1.902 4.435 8.535 5.624 3.802 4.941 3.534 5.849 13.283 2.942 2.775 4.656 7.199 3.760 9.884 3.899 10.877 5.754 14.029 5.563 11.216 5.851 9.139 7.853 5.890 4.929 17% 0.327 4.118 11.833 2.635 11.061 8.326 3.342 5.717 4.206 5.733 7.492 6.585 2.811 6.628 18% 0.498 3.943 1.668 2.402 3.303 4.876 4.626 1.998 4.713 5.033 5.494 4.122 9.471 10.786 6.312 3.750 6.605 3.463 7.533 4.783 2.324 14.373 6.605 4.971 1.904 8.451 4.250 7.132 5.808 4.986 10.517 3.838 11.367 7.623 5.253 9.935 1.808 2.316 5.328 5.470 7% 0.417 6.855 1.102 3.127 3.710 7.836 4.954 6.410 3.650 5.468 5.660 5.313 8.950 9.162 5.106 12.971 6.486 4.122 6.889 4.162 8.696 4.611 4.730 4.759 2.361 2.611 4.786 8.724 5.584 5.842 6.210 2.990 5.840 6.384 8.092 5.129 10% 0.368 11.339 4.120 7.886 2.418 6.161 7.922 4.759 6.344 4.786 8.722 8.561 13.859 1.952 0.324 5.992 15.787 10.547 2.462 4.993 4.111 4.306 8.575 11.145 6.745 9.Cumulative present value of $1 per annum Receivable or Payable at the end of each year for n years Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1− (1+ r ) − n r 1% 0.784 4.690 2.389 5.954 4.943 8.865 14.469 13% 0.352 3.423 4.134 13.296 11.702 7.623 Interest rates (r) 15% 16% 0.231 4.887 8.990 1.100 4.033 5.230 7.380 10.843 4.818 9% 0.812 4.002 6.212 5.com .244 8.980 1.793 4.583 5.799 5.855 2.847 1.795 6.106 2.387 4.103 7.917 1.128 6.938 6.210 6.946 5.146 5.736 2.712 10.078 4.240 3.322 2.004 13.805 7.606 7.058 3.433 3.246 2.566 2.970 2.868 5.847 5.020 7.938 12.530 9.988 5.833 5.812 4.594 8% 0.486 5.559 8.495 6.982 7.385 9.546 3.968 5.687 5.234 5.639 3.002 6.191 7.983 9.749 5.424 6.824 8.515 7.302 6.962 1.853 9.499 7.325 8.798 3.008 5.166 12.914 3.668 5.747 6.207 6.108 7.111 8.991 3.862 1.839 7.885 1.452 5.604 6.351 3% 0.398 17.564 4.531 3.222 5.767 5.878 4% 0.444 3.273 5.685 4.118 5.544 8.085 12.453 5.652 8.487 4.046 2% 0.889 6.372 9.024 7.926 1.715 4.840 1.918 6.690 12.467 6.037 3.802 7.070 5.963 12% 0.863 9.514 11% 0.690 3.365 8.blogspot.140 2.255 12.295 9.229 5.954 10.582 6.706 3.348 12.274 11.659 4.108 9.909 1.465 4.487 7.712 5.605 2.170 3.

Baumol model: Optimal sale = 2 x Annual cash disburseme nts x Cost per sale of securities interest rate (ii) Spread between upper and lower cash balance limits. discounted at r% per annum: PV = 1 r −g Inventory management (i) Economic Order Quantity EOQ = where: Co Ch D = = = cost of placing an order cost of holding one unit in Inventory for one year annual demand 2C o D Ch Cash management (i) Optimal sale of securities. commencing in one year. discounted at r% per annum: PV = S = X[1 + r] n 1 [1 + r ] n (iii) Present value of an annuity of $1 per annum. Miller-Orr model: 4 Spread = 3    3 x transactio n cost x variance of cash flows interest rate      1 3 November 2005 21 P7 FOR FREE ACCA. discounted at r% per annum: PV = 1 1 1 − [1 + r ] n r     (iv) Present value of $1 per annum. growing in perpetuity at a constant rate of g% per annum. receivable or payable for n years. payable or receivable in perpetuity. compounded at r% interest: Present value of $1 payable or receivable in n years. invested for n periods. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. commencing in one year. discounted at r% per annum: PV = 1 r (v) Present value of $1 per annum. of a sum X. commencing in one year.com . receivable or payable.blogspot.FORMULAE Valuation models (i) (ii) Future value of S.

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blogspot. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.[this page is blank] November 2005 23 P7 FOR FREE ACCA.com .

Financial Management Pillar Managerial Level P7 – Financial Accounting and Tax Principles November 2005 Thursday Afternoon Session P7 24 November 2005 FOR FREE ACCA.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot.

Question 1 is 50 marks and should be given approximately 50% of the time. It therefore may give the impression that there were few good marks and few passes as all the main errors have been listed for each question. but a number did not. As on the May 2005 paper question 2 included one question from each of sections A and B of the syllabus and two questions from each of sections C and D. with a few candidates scoring full marks. There was evidence of a number of well prepared candidates with a wide range of knowledge.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Examiner’s General Comments This was the second paper of the new syllabus using the new question paper format. There were however still candidates who struggled to gain a quarter of the marks. resulting in good marks being achieved. Question 4 required the calculation of trade receivables days outstanding and a cash budget. This question was generally not as well done as the other questions on the paper although a few candidates did achieve full marks.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. If workings are not given no marks can be awarded for wrong answers using the correct principle. This question was expected by candidates and most of those attempting this question were well prepared. The overall average mark and pass rate were slightly down from May 2005 but were still very good. Question 3 required the preparation of an income statement. The following provides guidance to candidates preparing for future examinations and has been prepared with that in mind. It must be remembered though that not all candidates made the errors listed and that overall there was a good result for this paper. Time allocation seemed to be a problem for some candidates. The overall result was generally very pleasing with a good standard of answer being produced by many candidates. Most candidates provided workings for the three and four mark questions. However very few were able to calculate the forecast trade receivables in part (a). The Chartered Institute of Management Accountants Page 1 FOR FREE ACCA. Question 1 was generally well done. with evidence of rushed answers to either question 1 or question 2.blogspot. Question 2 will continue to include questions from all sections of the syllabus. Some candidates were obviously ill prepared for coupon rate and yield to maturity and many did not know what the four principal qualitative characteristics of financial information were. a statement of changes in equity and a balance sheet with some adjustments. This was evidenced by the lack of workings and questions requiring some calculation being left out to save time. able to tackle most of the sub-questions in question 1 and 2 and prepare good answers to one of the optional questions. Part (b) was well done by those attempting this question with some excellent answers and a number of candidates scoring full marks. Some candidates may have used more time on the optional question and not spent sufficient time on the shorter sub-questions.

(2 marks) The answer is B The Chartered Institute of Management Accountants Page 2 FOR FREE ACCA.com .Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam SECTION A Question 1. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.000 $22. BU. a supplier of BS. BS’s main banker.000 $50.blogspot.2 Which ONE of the following would be regarded as a related party of BS? A B C D BX. a customer of BS. who is also the chief executive officer of another entity.000 $20. The president of the BS Board.000 $18.000 $22. BY. that supplies goods to BS.000 (2 marks) The answer is C Question 1. BQ.000 $50.1 The following measures relate to a non-current asset: (i) (ii) (iii) (iv) Net book value Net realisable value Value in use Replacement cost $20.000 The recoverable amount of the asset is A B C D $18.

(2 marks) The answer is B C D Question 1.4 An entity’s working capital financing policy is to finance working capital using short-term financing to fund all the fluctuating current assets as well as some of the permanent part of the current assets. a short-term policy. An entity has started capitalising borrowing costs for assets under the alternative treatment allowed by IAS 23 Borrowing costs. a conservative policy. changes in accounting estimates and errors? A B An entity changes its method of depreciation of machinery from straight line to reducing balance. An entity changes its method of calculating the provision for warranty claims on its products sold.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1. a provision has been made for the same legal claim.3 Which ONE of the following would be regarded as a change of accounting policy under IAS 8 Accounting policies. In the current year.com . a moderate policy. The borrowing costs previously had been charged to income statement. The above policy is an example of A B C D an aggressive policy.blogspot. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. An entity disclosed a contingent liability for a legal claim in the previous year’s accounts. (2 marks) The answer is A The Chartered Institute of Management Accountants Page 3 FOR FREE ACCA.

with comparatives: Balance Sheet extracts: As at 30 September Non-current tangible assets Property. If the sum of digits method is used to apportion interest to accounting periods.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1.000.160 Finance charge = 8. Question 1. as required by IAS 7 Cash flow statements.100 Finance cost Sum of digits (5 x 6)/2 = 15 Year 2 digit = 4 2. BY had the following balances. but then selected the wrong figure for the answer.000. The proceeds received on disposal were $15. payable in arrears.000 $40.10) (5) Depreciation (40) 155 Balance c/fwd (260) Purchases 105 Examiners comment: Many candidates were unable to “work backwards” The Chartered Institute of Management Accountants Page 4 FOR FREE ACCA.10) 20 Disposal (15 .blogspot. plant and equipment revaluation reserve 2005 $000 260 30 2004 $000 180 10 The income statement for the year ended 30 September 2005 included: Gain on disposal of an item of equipment Depreciation charge for the year $10.000 Fair value 51. (3 marks) $ Lease payments (5 x 12) = 60.100 x 4/15 = Examiners comment: a significant proportion of candidates correctly calculated the finance charge for each year. The lease payments were $12. plant and equipment purchases that BY would show in its cash flow statement for the year ended 30 September 2005.5 An item of machinery leased under a five year finance lease on 1 October 2003 had a fair value of $51.900 8.900 at date of purchase.6 At 30 September 2005.000 Notes to the accounts: Equipment disposed of had cost $90. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com . calculate the finance cost for the year ended 30 September 2005. plant and equipment Equity and reserves Property.000 per year. (4 marks) $000 Balance b/fwd 180 Revaluation (30 . Calculate the property.

$50.000 850. BC’s asset qualified for an accelerated first year tax allowance of 50%.000 450.000.com . all of which qualified for tax depreciation.000/5 = $170.750 $ 900. The second and subsequent years qualified for tax depreciation at 25% per year on the reducing balance method. The asset cost $900.500 2004/5 $000 560⋅0 337⋅5 222⋅5 Examiners comment: more candidates seemed to be prepared for a deferred tax question this time. assuming a residual value of $50. However there was still a significant number of candidates who displayed only a basic grasp of the principles of deferred tax.000 .residual value = $900.000 450.5 x 30% Required deferred tax provision 66⋅75 $66. purchased its only non-current tangible asset on 1 October 2003.500 337.000 per year 2004/5 Accounting figures $000 Cost 900 Depreciation (2 years) (340) Carrying value 560 Tax base Cost First year allowance 50% = October 2005 25% Tax base Timing difference Carrying value Tax base Deferred tax Tax = 222.000 = $850.blogspot. (4 marks) Accounting depreciation = cost . with many correct answers. and correctly adjust for this. BC’s accounting depreciation policy is to depreciate the asset over its useful economic life of five years.000. a small entity. The Chartered Institute of Management Accountants Page 5 FOR FREE ACCA. Assume that BC pays tax on its income at the rate of 30%.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam to calculate the purchases figure. The most common error was the inability to calculate the net book value of the assets disposed of during the year. Calculate BC’s deferred tax balance required in the balance sheet as at 30 September 2005 according to IAS 12 Income taxes. Question 1.000 112.7 BC. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

Trading profits and capital gains are both taxed at 20%.blogspot. but cannot be carried back to previous years.120 = 30 130 130 . (3 marks) Trading profit/ Taxable Capital gain Taxable Tax (loss) $000 (loss) $000 $000 $000 $000 200 200 (100) 0 200 x 20% = 40 (120) 0 0 0 0 150 150 . which include: (i) (ii) (iii) International Accounting Standards Committee Foundation (IASC Foundation) Standards Advisory Council (SAC) International Financial Reporting Interpretations Committee (IFRIC) Which of the above reports to. All losses can be carried forward indefinitely. BD had no brought forward losses on 1 October 2002. the International Accounting Standards Board (IASB)? (2 marks) Reports to: A B C D (i) and (iii) (i) and (ii) (iii) (ii) Advises: (ii) (iii) (ii) (i) The answer is C Question 1.8 The setting of International Accounting Standards is carried out by co-operation between a number of committees and boards.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1.9 Country B has a corporate income tax system that treats capital gains/losses separately from trading profits/losses. Capital gains/losses cannot be offset against trading profits/losses.100 = 30 30 + 30 = 60 x 20% = 12 Examiners comment: a number of candidates ignored the instruction given in the question that capital losses could not be offset against trading profits.com . and hence should be carried Page 6 2002/3 2003/4 2004/5 The Chartered Institute of Management Accountants FOR FREE ACCA. BD’s results for 2003 to 2005 were as follows: Trading profit/(loss) Capital gains/(loss) $000 $000 Year to September 2003 200 (100) Year to September 2004 Year to September 2005 (120) 150 0 130 Calculate BD’s corporate income tax due for each of the years ended 30 September 2003 to 2005. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. or advises.

com .Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam forward against future capital gains The Chartered Institute of Management Accountants Page 7 FOR FREE ACCA.blogspot. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

the directors were waiting on a report they had commissioned that would identify the actual training requirements.g. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. At the balance sheet date. e. The Chartered Institute of Management Accountants Page 8 FOR FREE ACCA. (iii) revenue can be measured reliably. BW is contesting the claim and.g. at 31 October 2005. At 31 October 2005. and has done so for many years. On 20 November 2005. (2 marks) The answer is C B C D Question 1. BW is negotiating with its insurance provider about the amount of an insurance claim that it had filed.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1. (4 marks) Any four of the following five: (i) The significant risks and rewards of ownership of the goods have been transferred to the buyer. the insurance provider agreed to pay $200. BW’s directors have agreed that this will require a large number of staff to be retrained. (iv) it is reasonably certain that the buyer will pay for the goods. (ii) The entity selling does not retain any continuing influence or control over the goods.10 Which ONE of the following would require a provision to be created by BW at its balance sheet date of 31 October 2005? A The government introduced new laws on data protection which come into force on 1 January 2006. revenue) and include the word “reliably” for a full mark for this point. BW makes refunds to customers for any goods returned within 30 days of sale. Examiners comment: Answers were typically too brief. A customer is suing BW for damages alleged to have been caused by BW’s product.11 IAS 18 Revenue recognition defines when revenue may be recognised on the sale of goods.000. List FOUR of the five conditions that IAS 18 requires to be met for income to be recognised.blogspot. “ the amount can be measured”.com . (v) the costs to the selling entity can be measured reliably. the directors have been advised by BW’s legal advisers it is very unlikely to lose the case. Candidates needed to state which amount they were referring to (e.

blogspot. BZ. Registered VAT entities are allowed to recover input VAT paid on their purchases. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. VAT operates at different levels in OS: • • • Standard rate Luxury rate Zero rate 10% 20% 0% During the last VAT period. excluding VAT.000 Input VAT = 100 x 10% = 10 Out put VAT = (60 x 0%) + (120 x 20%) = 24 VAT due = 24 – 10 = 14 VAT paid = $14. Assuming BZ had no other VAT-related transactions. All materials and services were at standard rate VAT.12 Country OS has a value added tax (VAT) system where VAT is charged on all goods and services. excluding VAT: Z L $ 60.000 At the end of the period. BZ made the following sales. how much VAT did BZ pay? (2 marks) The answer is BZ paid VAT = $14. BZ converted the materials into two products Z and L. purchased materials and services costing $100. BZ paid the net VAT due to the tax authorities.com .000 The Chartered Institute of Management Accountants Page 9 FOR FREE ACCA.000 120.000. an entity. product Z is zero rated and product L is luxury rated for VAT purposes. During the VAT period.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1.

Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1. The closing balance on accrued interest payable account at 30 September 2005 was $15.000 $53.000 $41.000 to its income statement. (2 marks) The answer is D The Chartered Institute of Management Accountants Page 10 FOR FREE ACCA.000 (2 marks) The answer is A Income statement Add balance b/fwd Less balance c/fwd $000 41 12 53 15 38 Question 1.14 If an external auditor does not agree with the directors’ treatment of a material item in the accounts. How much interest paid should BK show on its cash flow statement for the year ended 30 September 2005? A B C D $38.blogspot. persuade the directors to change the treatment of the item in the accounts.com .000 $44.000 credit During the year ended 30 September 2005. give an unqualified opinion of the financial statements. force the directors to change the treatment of the item in the accounts.000 credit. the first action they should take is to A B C D give a qualified opinion of the financial statements. BK had the following balance: Accrued interest payable $12. BK charged interest payable of $41.13 At 1 October 2004. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.

The customer therefore bears the cost of the sales tax.com . This is referred to as A B C D formal incidence. direct incidence.15 BL started a contract on 1 November 2004. (2 marks) The answer is C The Chartered Institute of Management Accountants Page 11 FOR FREE ACCA. indirect incidence.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1. At 31 October 2005.16 An entity sells furniture and adds a sales tax to the selling price of all products sold. The contract was scheduled to run for two years and has a sales value of $40 million. A customer purchasing furniture from the entity has to pay the cost of the furniture plus the sales tax. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. the following details were obtained from BL’s records: Costs incurred to date Estimated costs to completion Percentage complete at 31 October 2005 $m 16 18 45% Applying IAS 11 Construction contracts.blogspot. how much revenue and profit should BL recognise in its income statement for the year ended 31 October 2005? (2 marks) Total revenue Total cost 16 + 18 = Profit Recognise Revenue (40 x 45%) Profit (6 x 45%) $m 40 34 6 $18m $2⋅7m Question 1. effective incidence.

fully paid Share premium Retained earnings 750 250 500 1. What is the effective annual interest rate that BE will incur for this action? (4 marks) s = x (1 + r)n 1. Assume a 365 day year and an invoice value of $1. As a non-current liability.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1.000 = 985 (1 + r)365/40 1 + r = (1. the figures used were often incorrect. $1 shares. but now wants to improve its cash flow.000/985)9⋅125 1 + r = 1⋅148 r = 14⋅8% Examiners comment: Very few candidates used the correct formula for this. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. As a current asset investment. and if they did.000.18 BE has been offering 60 day payment terms to its customers.com .17 BN is a listed entity and has the following balances included on its opening balance sheet: $000 Equity and reserves: Equity shares.500 BN reacquired 100.blogspot. The Chartered Institute of Management Accountants Page 12 FOR FREE ACCA.000 of its shares and classified them as “treasury shares”. BE is proposing to offer a 1⋅5% discount for payment within 20 days. How should BN classify the treasury shares on its closing balance sheet in accordance with IAS 32 Financial instruments – disclosure and presentation? A B C D As a non-current asset investment. As a deduction from equity. BN still held the treasury shares at the year end. (2 marks) The answer is B Question 1.

(2 marks) The answer is A Question 1. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. a direct tax.com .000.19 BM has a taxable profit of $30.000 and receives a tax assessment of $7. This tax could be said to be A B C D a progressive tax.blogspot. BM and BV are resident in the same tax jurisdiction.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question 1. rather than in the notes: A B C D (i) and (iv) (iii) and (v) (ii) and (iii) (ii) and (iv) (2 marks) The answer is D The Chartered Institute of Management Accountants Page 13 FOR FREE ACCA.20 IAS 1 Presentation of financial statements requires some of the items to be disclosed on the face of the financial statements and others to be disclosed in the notes. a regressive tax.500. a proportional tax.000 and receives a tax assessment of $3. BV has a taxable profit of $60. (i) (ii) (iii) (iv) (v) Depreciation Revenue Closing inventory Finance cost Dividends Which TWO of the above have to be shown on the face of the income statement.

such as “claiming capital allowances” or “claiming loss relief”. they are proper application of the tax legislation and are not “loopholes”. Suggested Approach Explain the meaning of tax avoidance and tax evasion. Many candidates did not give enough examples or sufficient detail within the examples to earn full marks Common Errors Not highlighting the difference between tax evasion and tax avoidance Giving insufficient number of methods to score three marks Giving several examples of the same method. Some candidates gave odd examples of tax avoidance. which is incorrect. These are not examples of tax avoidance.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam SECTION B Question Two (a) Required: (i) Explain the difference between tax avoidance and tax evasion. highlighting the difference between them. Tests learning outcome A (vi). Identify and explain three methods that can be used to reduce either or both avoidance and evasion. Marking Guide Explain tax avoidance Explain tax evasion Description of method – reducing opportunity Description of method – increasing perceived risk/penalties Description of method – changing social attitudes Marks 1 1 1 1 1 Examiner’s Comments Most candidates were able to explain the meaning of avoidance and evasion with fewer highlighting the difference between them.com . for example an efficient system of auditing tax returns and visits to entities to check their tax returns. Several candidates stated that giving double tax relief on overseas profits was a means of preventing tax avoidance. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. The Chartered Institute of Management Accountants Page 14 FOR FREE ACCA. (2 marks) (ii) Briefly explain the methods that governments can use to reduce tax avoidance and tax evasion.blogspot. (3 marks) (Total for sub-question (a) = 5 marks) Rationale Tests candidates’ ability to explain the difference in principle between tax avoidance and tax evasion and the methods that can be used to reduce them at a national level.

Due to recent improvements in supplier reliability.blogspot. BF is re-examining its inventory holding policies and recalculating economic order quantities (EOQ). Calculate total cost of the calculated EOQ and then calculate the total cost using the discount order level of 2. in order that the production could continue to operate smoothly.000.000 units or more at one time.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Two (b) BF manufactures a range of domestic appliances.com . a 2% discount would be given on the price of the goods. Compare the two total costs to see if there is any benefit in increasing the order size. (2 marks) Advise BF if it should increase the order size of item “Z” so as to qualify for the 2% discount. (3 marks) (Total for sub-question (b) = 5 marks) Rationale Tests candidates’ ability to calculate economic order quantities and whether or not a discount offered by a supplier is worth seeking for the entity detailed in the question. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. BF has had to hold an inventory of raw materials. • • • • Item “Z” costs BF Expected annual production usage is Procurement costs (cost of placing and processing one order) are The cost of holding one unit for one year has been calculated as $10⋅00 per unit 65. Tests learning outcome D (vii). Advise BF whether to increase the order size or not Marking Guide Calculate the EOQ Calculate the cost of seeking the discount (or not) and advise accordingly Examiner’s Comments Marks 2 3 The Chartered Institute of Management Accountants Page 15 FOR FREE ACCA. Suggested Approach Use the formula from the question paper formulae sheet and calculate the EOQ.000 units $25⋅00 $3⋅00 The supplier of item “Z” has informed BF that if the order was 2. Required: (i) (ii) Calculate the EOQ for item “Z” before the quantity discount. Due to past delays in suppliers providing goods.

occasionally the saving on ordering cost less increase in holding cost. Very few candidates were able to correctly calculate the saving and advise accordingly. almost all candidates omitted to calculate (or even consider) the increased stock holding cost. In calculating the likely extra cost / savings of increasing the order quantity to take advantage of the discount. Usually the saving on the unit cost and ordering cost. The Chartered Institute of Management Accountants Page 16 FOR FREE ACCA.com . Only calculating and considering one or maximum two of the three items of cost. Other candidates tried to advise BF without any calculation at all.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Almost every candidate correctly calculated the Economic Order Quantity. Most candidates advised not to accept the discount. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Common Errors In part (ii): Trying to recalculate the reorder quantity including the discount using the formula. When the holding cost was included the unit cost was frequently excluded.blogspot.

All flights for holiday makers and travellers who had already booked seats would be provided by third party airlines.blogspot. At 1 October 2004 these included: • • a short haul airline operating within Europe. Required: Explain how BJ should report the events described above and quantify any amounts required to be included in its financial statements for the year ended 30 September 2005. BJ has estimated that in the financial period October 2005 to September 2006. The closure of the airline operation caused BJ to carry out a major restructuring of the entire entity.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Two (c) BJ is an entity that provides a range of facilities for holidaymakers and travellers.com . All operations ceased on 31 May 2005. such as Hawaii and Fiji. the carrying value at that date was $750 million. they will agree a settlement of $20 million compensation. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. BJ’s airline operation has made significant losses for the last two years. the directors of BJ decided that.) (Total for sub-question (c) = 5 marks) Rationale Tests candidates’ ability to explain the reporting of various events occurring to an entityand how these may be included in its year-end financial statements. BJ would close all of its airline operations and dispose of its fleet of aircraft. BJ were still in negotiation with some employees regarding severance payments. and a travel agency specialising in arranging holidays to more exotic destinations. due to a significant increase in competition on short haul flights within Europe. The restructuring has been agreed by the directors and active steps have been taken to implement it. The Chartered Institute of Management Accountants Page 17 FOR FREE ACCA. On 31 January 2005. Tests learning outcomes C (iii) and (v). (Detailed disclosure notes are not required. On 31 July 2005. The cost of restructuring to be incurred in year 2005/2006 is estimated at $10 million. At the balance sheet date. BJ sold its fleet of aircraft and associated non-current assets for $500 million.

Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Suggested Approach Take each of the items in turn and explain its impact on the financial statements. Many candidates said it was not allowed. Many candidates said that a provision was required in the balance sheet. Very few candidates identified the closure of the airline business as “discontinued operations”. The restructuring is allowed under IAS 37 as it is committed.com . Common Errors Not identifying the disposal as a discontinued activity. and is an actual loss – not an impairment loss. candidates should note that this ceased before the year end. Few answers actually said that a the $20 million should be shown as an expense in the income statement. Candidates also failed to realise that making a provision has two effects . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Saying that the disposal would be shown in the balance sheet Not stating that the loss should be shown in the income statement Saying that the receipt from the disposal should be shown as revenue in the income statement or even worse in the balance sheet! Correctly identifying a provision for severance payments but not quantifying the amount. as many candidates stated it was. and all assets were disposed of before that date. Many candidates said that the loss on disposal should be shown in the Balance Sheet! Candidates should note that the assets should have already been removed from the ledger accounts and hence no adjustments would be needed to the balance sheet at all. quantifying any effects on the income statement and balance sheet. Saying that the provision should be shown in the balance sheet without any reference to the income statement. As regards the closure of the airline business. Many candidates did not explain and quantify as required in the question. The loss on disposal should appear in the income statement. of those correctly allowing the provision very few identified it as a continuing activities item.a charge to the income statement as well as a liability on the balance sheet. The items are: • disposal of the airline operation and its assets • employee severance payments • restructuring costs Marking Guide Identifying loss on closure as discontinued with correct income statement figures Identifying a provision for severance payments with correct income statement and balance sheet entries Identifying a provision for restructuring costs and its treatment as a continuing activity Marks 2 1½ 1½ Examiner’s Comments This part had a very poor average mark. Saying that restructuring was an expense next year and should not be included Classifying the restructuring provision as discontinuing The Chartered Institute of Management Accountants Page 18 FOR FREE ACCA. and almost none considered the status of the restructuring costs.blogspot.

for example identifying the elements of financial statements or the underlying assumptions. Required: Identify and explain EACH of the FOUR principal qualitative characteristics of financial information listed in the IASB’s Framework. Suggested Approach Specify the four characteristics and then explain each one Marking Guide Understandability Relevance Reliability Comparability Examiner’s Comments Candidates failed to include enough detail in their answers. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. for example Relevance. accruals and going concern.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Two (d) The International Accounting Standards Board’s (IASB’s) Framework for the preparation and presentation of financial statements (Framework) identifies four principal qualitative characteristics of financial information.blogspot. instead identifying other parts of the framework. (Total for sub-question (d) = 5 marks) Rationale Tests candidates’ ability to identify and explain the four principal qualitative characteristics of the IASB’s Framework. Common Errors Not identifying the characteristics. Tests learning outcome B (iv).com . information needs to be relevant. Not explaining each characteristic Marks 1 1 2 1 The Chartered Institute of Management Accountants Page 19 FOR FREE ACCA. Many answers identified a characteristic and then the explanation added nothing to it.

it was assumed to have a remaining useful life of 20 years at that date. Required: Explain how BI should report the events described above and quantify any amounts required to be included in its financial statements for the year ended 30 September 2005. A brand specialist valued BI’s brand name at market value of $200. BI has a policy of regularly revaluing its non-current tangible assets. Suggested Approach Prepare workings for the building to calculate the amounts of depreciation and any gains/losses on revaluation each year. The original cost of the building in October 2002 was $1. The building was revalued on 30 September 2004 by a professional valuer at $1.com . BI’s building was valued at a market value of $1.000 on the same date. BI’s management accountant calculated that the brand name’s value in use at 30 September 2005 was $150.000 on 30 September 2005 by an independent valuer. with no residual value.500. Explain how the figures calculated should be reported in BI’s financial statements. (Total for sub-question (e) = 5 marks) Rationale Tests candidates’ ability to explain the reporting of various events occurring to an entity and how these may be included in its year-end financial statements.000.blogspot. The brand name is being amortised over 10 years.000. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. BI also owns a brand name which it acquired 1 October 2000 for $500.800. The land is carried as a separate non-current tangible asset in the balance sheet.000. warehouse and garage.000.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Two (e) BI owns a building which it uses as its offices. Tests learning outcomes C (iii) and (v). Marking Guide Calculation and explanation of the building treatment Calculation and explanation of the brand name treatment Marks 3 2 The Chartered Institute of Management Accountants Page 20 FOR FREE ACCA. The economic climate had deteriorated during 2005. causing BI to carry out an impairment review of its assets at 30 September 2005.000. Prepare workings for the brand name to calculate the amounts of amortisation and any losses on impairment.

The bond has a coupon rate of 7%. and could not be shown in the financial statements.000 rather than its market value of $200. A significant number of candidates stated that the brand name should be classed as goodwill (which would only apply if its value was not readily ascertainable). Stating that the reduction in value should be deducted from the Revaluation Reserve account. Required: (i) Explain the difference between the coupon rate of a security and its yield to maturity. Not amortising the brand name at all Question Two (f) BH purchased a bond with a face value of $1. Common Errors Buildings: Depreciating the buildings for only one year prior to the first revaluation. BH intends holding the bond to its maturity on 31 May 2008 when it will repay its face value.blogspot.000. The main error with buildings for a large number of candidates was not depreciating for enough years before revaluing. which is the higher of market value or value in use. Despite the question saying that the brand name was acquired for $ 500. (3 marks) (Total for sub-question (f) = 5 marks) Rationale The Chartered Institute of Management Accountants Page 21 FOR FREE ACCA. instead of two years. Most candidates valued the brand at the lower figure if they did not classify it as internally generated or as goodwill.000 many candidates insisted on classifying it as internally generated.com . Not reducing the 20 year useful life correctly when recalculating depreciation after revaluation The main errors involved the brand name: Not amortising the brand name for the correct number of years Incorrectly revaluing the brand name at $150. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Two (e) continued Examiner’s Comments Most candidates made a better attempt at the buildings part of the question than the brand name. Many candidates did not understand the requirements in IAS 36 regarding the value of the asset. (2 marks) (ii) Calculate the bond’s yield to maturity. Many candidates stated that the reduction in value should be deducted from the Revaluation Reserve account. which would only occur if the brand had previously been revalued upwards (which it had not).000 on 1 June 2003 for $850.

totally ignoring all the interest payments.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Tests candidates’ ability to explain the difference between the coupon rate of a security and its yield to maturity and to calculate the bond’s yield to maturity. Tests learning outcome D (viii). CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. The present values can be looked up in the tables attached to the examination paper. The vast majority of candidates were unable to calculate the yield to maturity. Suggested Approach Define coupon rate and yield to maturity and highlight the difference between them. Marks 2 3 The Chartered Institute of Management Accountants Page 22 FOR FREE ACCA. Marking Guide Explaining the difference between the coupon rate and yield to redemption Calculating the yield to redemption Examiner’s Comments Many candidates were unable to explain the terms “coupon rate” and “yield to maturity” satisfactorily. Common Errors Incorrectly identifying the coupon rate as related to the purchase price Identifying the yield to maturity as the cash received on redemption.blogspot. Calculate the yield to maturity using the discounted annual rate of return at which the present value of future interest payments and the redemption value equal the current market value.com . Very few candidates even got the formula correct. Using totally inappropriate formulae.

Notes to the financial statements are NOT required. in a form suitable for presentation to the shareholders and in accordance with the requirements of International Financial Reporting Standards. and in accordance with International Financial Reporting Standards. calculate the effect of writing back the provision Prepare the income statement using IAS 1 format.com . CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. 4. calculate the cost of sales 3. calculate depreciation of equipment and fixtures for the year and cumulative 2. DO NOT prepare a statement of accounting policies.blogspot. calculate tax charge and outstanding balances. Suggested Approach Read the question carefully and then using the additional information provided and the trial balance figures. Prepare workings to calculate the balances on reserves and retained earnings Prepare the statement of changes in equity Prepare the balance sheet using IAS 1 format Marking Guide Preparing the income statement using correct format Preparing the balance sheet using correct format Preparing the statement of changes in equity using correct format Marks available for format and correct headings Marks 8 7. based upon the trial balance of a given entity. Tests learning outcomes A (viii) and C (i).5 2 2. All workings should be to the nearest $000.5 The Chartered Institute of Management Accountants Page 23 FOR FREE ACCA. balance sheet and a statement of changes in equity in a form suitable for publication. prepare workings to: 1.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam SECTION C Question Three Prepare the income statement and a statement of changes in equity for BG for the year to 30 September 2005 and a balance sheet at that date. but all workings must be clearly shown. (Total for question 3 = 20 marks) Rationale Tests candidates’ ability to prepare an income statement.

blogspot. they are nevertheless held as investments either until the cash is required or the investments have risen in value to a point where a sale is regarded as a wise course of action. Deferred tax is non-current while current tax is a current liability. • Deducting the dividends paid in the Income Statement • Including dividends paid as a current liability • Adding the retained profit brought forward to the income statement • Including the available for sale investments as current assets in the Balance Sheet. which had already been adjusted in the trial balance. The statement of changes in equity was usually quite well done except that several candidates had problems identifying the correct balances brought forward. • Calculating a full year’s interest on the 10% bonds and adding it to the interest already paid to give finance cost. In the Balance Sheet. rather than the full year cost of $15.com . • Incorrectly calculating the finance cost as being for a half year. quite a few students showed the equity shares issued during the year! Common Errors • In the Income Statement. and both included in either current liabilities or non-current liabilities. The IFRS requirement is to show the dividend as a movement in the statement of changes in equity.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Examiner’s Comments This question was generally very well done by candidates.000. Many candidates are still following the old UK format. many candidates included the available for sale investments as current assets. many obtaining near full marks. including the dividend paid as a deduction from the income statement. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. the cost of cleaning materials consumed was part of Cost of Sales. not as a deduction from the income statement which should end with the profit for the year after tax. While this may appear logical (and indeed they may be sold within 12 months. for an office cleaning service. • Adjusting for the closing inventory. • Not showing the provision as a credit to income statement • Showing the provision on the balance sheet or in the statement of changes in equity The Chartered Institute of Management Accountants Page 24 FOR FREE ACCA. and both included in either current liabilities or non-current liabilities. • Deferred tax and current tax were often wrongly calculated. many candidates failed to realise that. Very few gained full marks as very few candidates could correctly deal with the release of the provision. • Including depreciation as part of administration or distribution expenses when the question specified cost of sales • Omitting revaluation increase in the revaluation reserve movement • Not showing equity shares and share premium as brought forward in the statement of changes in equity. as may other non-current assets). Deferred tax and current tax were often wrongly calculated.

Suggested Approach Calculate the trade receivables days outstanding based on the estimated figures given. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Tests learning outcome D (i).com . Common Errors Not attempting to calculate a forecast balance. Calculate the forecast trade receivables days outstanding at 30 June 2006. Marks 3 1 1 The Chartered Institute of Management Accountants Page 25 FOR FREE ACCA. assuming the revenue and cash flow budgets are implemented. Few candidates were able to calculate the forecast balance at 30 June although some managed to calculate the sales for the period. Dividing by half of the turnover figure instead of the annual figure. Marking Guide Calculation of projected balance Calculation of trade receivables outstanding @ 31 December 2005 Calculation of trade receivables outstanding @ 30 June 2006 Examiner’s Comments Part (i) was well done with most candidates getting the mark available. according to the projected figures at 30 June 2006. but using budgeted receipts instead.blogspot. Calculate the forecast balance for trade receivables on 30 June 2006.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Four Required: (a) Calculate BB’s in-house training course trade receivables days outstanding (i) (ii) according to the forecast at 31 December 2005. Calculate the sales forecast for the period and the forecast cash receipts. Deducting receipts from the balance at 31 December and using that figure without adding on revenue. (5 marks) Rationale Tests candidates’ ability to calculate trade receivable days and forecast days outstanding.

Marking Guide Workings of short course income Calculation and compilation of cash budget Format and layout of cash budget Marks 3 6 1 Examiner’s Comments This section was very well done by most candidates attempting the question.com . Tests learning outcomes D (ii). Common Errors Applying different split to short course income receipts than 1/3 and 2/3 given in question. (10 marks) Rationale Tests candidates’ ability to prepare a cash budget based upon forecast income statement and balance sheets of a given entity. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Suggested Approach Prepare workings to calculate short course income and the cash receipts from short courses.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Four Required: (b) Prepare BB’s cash budget for the first six months of 2006 (January to June). Not including cash balance brought forward Missing some January figures out. such as materials and short course income The Chartered Institute of Management Accountants Page 26 FOR FREE ACCA.blogspot. The main problem was with short course income calculation and remembering to include the cash balance brought forward. Prepare a six month cash flow statement separating cash inflows and cash outflows.

Many students gave insufficient detail for the marks on offer. However the better candidates also included other suggestions and the consequences of the actions. Marking Guide Advising the entity of actions it might take Marks 5 Examiner’s Comments Most candidates were able to identify the obvious solutions of increasing the overdraft or raising a loan.blogspot. Suggested Approach Identify the shortfall of cash available and then make sensible suggestions as to how extra cash could be generated or raised in other ways. Tests learning outcomes D (iii). Common Errors Not identifying enough options for five marks Not giving sufficient detail for each option The Chartered Institute of Management Accountants Page 27 FOR FREE ACCA.com . (5 marks) (Total for question 4 = 20 marks) Rationale Tests candidates’ ability to advise the entity of actions it might take to have sufficient funds available to make a major purchase of equipment. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. eg extra interest payments. While correct these are insufficient to obtain full marks. often giving two/three word answers such as “increase overdraft” or “get a loan”.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide November 2005 Exam Question Four Required: (c) Advise BB of any actions it can take to make sufficient funds available to purchase the new technology as budgeted in May 2006.

Answer ONE of the two questions in Section C on pages 14 to 17. Answer the SIX compulsory sub-questions in Section B on pages 10 to 13. However.Financial Management Pillar Managerial Level Paper P7 – Financial Accounting and Tax Principles 25 May 2006 – Thursday Afternoon Session Instructions to candidates You are allowed three hours to answer this question paper. You are strongly advised to carefully read ALL the question requirements before attempting the question concerned (that is. Answer the ONE compulsory question in Section A. make annotations on the question paper. TURN OVER  The Chartered Institute of Management Accountants 2006 FOR FREE ACCA. Maths Tables and Formulae are provided on pages 19 to 21. if you wish. Also write your contact ID and name in the space provided in the right hand margin and seal to close.com P7 – Financial Accounting and Tax Principles . You are allowed 20 minutes reading time before the examination begins during which you should read the question paper and. These pages are detachable for ease of reference. Tick the appropriate boxes on the front of the answer book to indicate which questions you have answered. This contains 21 subquestions and is on pages 2 to 8. The requirements for questions in Sections B and C are highlighted in a dotted box. you will not be allowed. paper number and the examination subject title in the spaces provided on the front of the examination answer book. all parts and/or subquestions). under any circumstances. to open the answer book and start writing or use your calculator during this reading time. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot. Write your full examination number.

1.1 If an entity regularly fails to pay its suppliers by the normal due dates. Reduction in credit rating. Which TWO of the above could arise as a result of exceeding suppliers’ trade credit terms? A B C D (i) and (ii) (i) and (iii) (ii) and (iii) (iii) and (iv) (2 marks) P7 2 May 2006 FOR FREE ACCA. Question One 1. You do not need to start a new page for each sub-question. Your answers should be clearly numbered with the sub-question number and then ruled off.17.9. For multiple choice questions. 1.8. it may lead to a number of problems: (i) (ii) (iii) (iv) Having insufficient cash to settle trade payables. For sub-questions 1.SECTION A – 50 MARKS [the indicative time for answering this Section is 90 minutes] ANSWER ALL TWENTY ONE SUB-QUESTIONS Instructions for answering Section A: The answers to the twenty one sub-questions in Section A should ALL be written in your answer book.21 you should show your workings as marks are available for the method you use to answer these sub-questions.2. 1. Difficulty in obtaining credit from new suppliers. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.20 and 1.blogspot. you need only write the sub-question number and the letter of the answer option you have chosen. so that the markers know which sub-question you are answering. Settlement of trade receivables may be delayed. 1.com .

5 The International Accounting Standards Board’s (IASB) Framework for the Preparation and Presentation of Financial Statements (Framework) provides definitions of the elements of financial statements. Distribution costs. One of the elements defined by the framework is “expenses”. The equipment was depreciated using the reducing balance method at 25% per year. give the IASB Framework’s definition of expenses. Depreciation was charged up to and including 31 March 2006.000. 1. CI’s balance sheet date is 31 March. Calculate the impairment loss on the equipment according to IAS 36 Impairment of Assets. In no more than 35 words. (iii) and (iv) (ii) and (iv) (i) and (v) (ii). CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Depreciation and amortisation expense. Employee benefit costs. (3 marks) 1.2 CI purchased equipment on 1 April 2002 for $100.com .1.3 List THREE possible reasons why governments set deadlines for filing returns and/or paying taxes. The analysis of expenses must use a classification based on either the nature of expense. the recoverable amount was $28. (3 marks) IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be presented on the face of the income statement.4 Which of the above would be disclosed on the face of the income statement if a manufacturing entity uses analysis based on function? A B C D (i). (2 marks) Section A continues on the next page TURN OVER May 2006 3 P7 FOR FREE ACCA. Cost of sales. or its function. within the entity such as: (i) (ii) (iii) (iv) (v) Raw materials and consumables used.000. At that date. (iii) and (v) (2 marks) 1.blogspot.

500 At 31 December 2002. (3 marks) P7 4 May 2006 FOR FREE ACCA. CN uses the percentage of cost incurred to date to total cost method to calculate stage of completion of the contract. Assume the corporate income tax rate is 25% for all years.860 2005 $ 1.The following data are given for sub-questions 1. according to IAS 11 Construction Contracts. CN incurred costs to 31 March 2006 of $77 million and estimated that a further $33 million would need to be spent to complete the contract.7 State how much gross profit/loss CN should recognise in its income statement for the year ended 31 March 2006.blogspot. (2 marks) 1.000 5.530 1.6 Calculate revenue earned on the contract to 31 March 2006. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.8 CY had the following amounts for 2003 to 2005: Year ended 31 December: Accounting depreciation for the year Tax depreciation allowance for the year 2003 $ 1.000 12. CY had the following balances brought forward: Cost of property.7 below CN started a three year contract to build a new university campus on 1 April 2004. 1. Calculate the deferred tax provision required by IAS 12 Income Taxes at 31 December 2005.6 and 1.320 $ 20.630 2. according to IAS 11 Construction Contracts. The contract had a fixed price of $90 million. (2 marks) 1.com .120 2004 $ 1.590 1. plant and equipment qualifying for tax depreciation Accounting depreciation Tax depreciation CY had no non-current asset acquisitions or disposals during the period 2003 to 2005.

Calculate the depreciation charge using the machine hours method. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.9 and 1. The machine had an expected useful life of 12. The auditor is normally given a number of powers by statute to enable the statutory duties to be carried out.10 below CS acquired a machine.000 per year payable in arrears.11 IAS 14 Segment Reporting requires an entity to select a primary and secondary segment reporting format. 1.12 The external auditor has a duty to report on the truth and fairness of the financial statements and to report any reservations. The cost price of the machine was $80. plant and equipment net book value that would be shown in CS’s balance sheet at 31 December 2005.The following data are given for sub-questions 1. calculate the non-current liability and current liability figures required by IAS 17 Leases to be shown in CS’s balance sheet at 31 December 2005. on 1 January 2004. after which it would have no residual value.000 and the implied interest rate is 7⋅93% per year. Which ONE of the following will CL and CQ select as primary and secondary segment formats? Primary reporting format CL CQ A B C D Business segments Geographical segments Geographical segments Business segments Business segments Geographical segments Business segments Geographical segments Secondary reporting format CL CQ Geographical segments Business segments Business segments Geographical segments Geographical segments Business segments Geographical segments Business segments (2 marks) 1. using a finance lease.blogspot.10 Calculate the non-current asset – property.600 hours in 2004 and 2. CS used the machine for 2. (3 marks) Section A continues on the next page TURN OVER May 2006 5 P7 FOR FREE ACCA. (2 marks) 1.9 Using the actuarial method.com . The finance lease was for a five-year term with rentals of $20.000 operating hours. List THREE powers that are usually granted to the auditor by statute. (3 marks) 1.350 hours in 2005. CL has a number of different product groups and most of its trade is in Europe. CQ has one major product and trades in a wide range of countries and cultural environments.

(2 marks) 1. The engine and associated labour costs are estimated to be $5. part of the fluctuating current assets.000. During this time. part of the fluctuating current assets and part of the permanent current assets. but no part of the permanent current assets. CM closes its factory for two weeks every year. The shareholder is liable for taxation on all dividends received.1. but no part of the permanent current assets. CM intends to restore the building to its original condition at a cost of $250. Plant and Equipment? A CM purchased a furnace five years ago.14 Which ONE of the following items would CM recognise as subsequent expenditure on a non-current asset and capitalise it as required by IAS 16 Property.000.13 A full imputation system of corporate income tax is one where an entity is taxable on A B C D all of its income and gains whether they are distributed or not. The furnace now requires relining at a cost of $200.15 A conservative policy for financing working capital is one where short-term finance is used to fund A B C D all of the fluctuating current assets. when the furnace lining was separately identified in the accounting records. When the furnace is relined it will be able to be used in CM’s business for a further five years.com . CM’s delivery vehicle broke down. but all the underlying corporation tax is passed to the shareholder as a tax credit. its retained profits at one rate and on its distributed profits at another (usually lower) rate of tax. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. (2 marks) 1. all of its income and gains whether they are distributed or not. all of the fluctuating current assets and part of the permanent current assets. CM’s office building has been badly damaged by a fire. The cost of the current year’s maintenance check and repairs was $75. all of its income and gains whether they are distributed or not.blogspot. but only part of the underlying corporation tax is passed to the shareholder as a tax credit. all plant and equipment has its routine annual maintenance check and any necessary repairs are carried out.000. (2 marks) B C D P7 6 May 2006 FOR FREE ACCA. When it was inspected by the repairers it was discovered that it needed a new engine.000.

1.16 CU manufactures clothing and operates in a country that has a Value Added Tax system (VAT). The VAT system allows entities to reclaim input tax that they have paid on taxable supplies. VAT is at 15% of the selling price at all stages of the manufacturing and distribution chain. CU manufactures a batch of clothing and pays expenses (taxable inputs) of $100 plus VAT. CU sells the batch of clothing to a retailer CZ for $250 plus VAT. CZ unpacks the clothing and sells the items separately to various customers for a total of $600 plus VAT. How much VAT do CU and CZ each have to pay in respect of this one batch of clothing? (2 marks) 1.17 CT uses the Miller-Orr cash management model to help manage cash flows. The management accountant has agreed with the directors that the lower limit for cash will be $2,500. The current rate of interest that CT pays is 0⋅025% per day. Each transaction costs CT $30. CT’s daily cash flows have been measured and the variance calculated as $300,000. Calculate, for CT, the Miller-Orr return point and upper limit. (3 marks) 1.18 After a bill of exchange has been accepted, there are a number of possible actions that the drawer could take. Which ONE of the following is NOT a possible course of action? A B C D Ask the customer for immediate payment. Discount the bill with a bank. Hold the bill until the due date and then present it for payment. Use the bill to settle a trade payable. (2 marks) 1.19 Calculate the economic order quantity (EOQ) for the following item of inventory: • • • • Quantity required per year 32,000 items; Order costs are $15 per order; Inventory holding costs are estimated at 3% of inventory value per year; Each unit currently costs $40. (2 marks)

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1.20 On 31 March 2006, CH had a credit balance brought forward on its deferred tax account of $642,000. There was also a credit balance on its corporate income tax account of $31,000, representing an over-estimate of the tax charge for the year ended 31 March 2005. CH’s taxable profit for the year ended 31 March 2006 was $946,000. CH’s directors estimated the deferred tax provision required at 31 March 2006 to be $759,000 and the applicable income tax rate for the year to 31 March 2006 as 22%. Calculate the income tax expense that CH will charge in its income statement for the year ended 31 March 2006, as required by IAS 12 Income Taxes. (3 marks) 1.21 CX purchased $10,000 of unquoted bonds when they were issued by Z. CX now wishes to sell the bonds to B. The bonds have a coupon rate of 7% and will repay their face value at the end of five years. Similar bonds have a yield to maturity of 10%. Calculate the current market price for the bonds. (3 marks) (Total for Question One = 50 marks)

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Section B starts on page 10

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SECTION B – 30 MARKS [the indicative time for this Section is 54 minutes] ANSWER ALL SIX SUB-QUESTIONS. EACH SUB-QUESTION IS WORTH 5 MARKS.

Question Two (a)
CW owns 40% of the equity shares in Z, an entity resident in a foreign country. CW receives a dividend of $45,000 from Z; the amount received is after deduction of withholding tax of 10%. Z had before tax profits for the year of $500,000 and paid corporate income tax of $100,000.

Required:
(i) (ii) (iii) Explain the meaning of “withholding tax” and “underlying tax.” (2 marks) Calculate the amount of withholding tax paid by CW. (1 mark) Calculate the amount of underlying tax that relates to CW’s dividend. (2 marks) (Total for sub-question (a) = 5 marks)

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(b)

CB is an entity specialising in importing a wide range of non-food items and selling them to retailers. George is CB’s president and founder and owns 40% of CB’s equity shares: • • CB’s largest customer, XC, accounts for 35% of CB’s revenue. XC has just completed negotiations with CB for a special 5% discount on all sales. During the accounting period, George purchased a property from CB for $500,000. CB had previously declared the property surplus to its requirements and had valued it at $750,000. George’s son, Arnold, is a director in a financial institution, FC. During the accounting period, FC advanced $2 million to CB as an unsecured loan at a favourable rate of interest.

Required:
Explain, with reasons, the extent to which each of the above transactions should be classified and disclosed in accordance with IAS 24 Related Party Disclosures in CB’s financial statements for the period. (Total for sub-question (b) = 5 marks)

(c)

C is a small developing country which passed legislation to create a recognised professional accounting body two years ago. At the same time as the accounting body was created, new regulations governing financial reporting requirements of entities were passed. However, there are currently no accounting standards in C. C’s government has asked the new professional accounting body to prepare a report setting out the country’s options for developing and implementing a set of high quality local accounting standards. The government request also referred to the work of the IASB and its International Financial Reporting Standards.

Required:
As an advisor to the professional accounting body, outline THREE options open to C for the development of a set of high quality local accounting standards. Identify ONE advantage and ONE disadvantage of each option. (Total for sub-question (c) = 5 marks)

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(d)

CD is a manufacturing entity that runs a number of operations including a bottling plant that bottles carbonated soft drinks. CD has been developing a new bottling process that will allow the bottles to be filled and sealed more efficiently. The new process took a year to develop. At the start of development, CD estimated that the new process would increase output by 15% with no additional cost (other than the extra bottles and their contents). Development work commenced on 1 May 2005 and was completed on 20 April 2006. Testing at the end of the development confirmed CD’s original estimates. CD incurred expenditure of $180,000 on the above development in 2005/06. CD plans to install the new process in its bottling plant and start operating the new process from 1 May 2006. CD’s balance sheet date is 30 April.

Required:
(i) Explain the requirements of IAS 38 Intangible Assets for the treatment of development costs. (3 marks) Explain how CD should treat its development costs in its financial statements for the year ended 30 April 2006. (2 marks) (Total for sub-question (d) = 5 marks)

(ii)

(e)

CR issued 200,000 $10 redeemable 5% preference shares at par on 1 April 2005. The shares were redeemable on 31 March 2010 at a premium of 15%. Issue costs amounted to $192,800.

Required: (a)
Calculate the total finance cost over the life of the preference shares. (2 marks)

(b)

Calculate the annual charge to the income statement for finance expense, as required by IAS 39 Financial Instruments: Recognition and Measurement, for each of the five years 2006 to 2010. Assume the constant annual rate of interest as 10%. (3 marks) (Total for sub-question (e) = 5 marks)

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(f)

The following is an extract from the trial balance of CE at 31 March 2006: Administration expenses Cost of sales Interest paid Interest bearing borrowings Inventory at 31 March 2006 Property, plant and equipment at cost Property, plant and equipment, depreciation to 31 March 2005 Distribution costs Revenue $000 260 480 190 220 1,500 540 200 2,000 $000

2,200

Notes: (i) (ii) (iii) Included in the closing inventory at the balance sheet date was inventory at a cost of $35,000, which was sold during April 2006 for $19,000. Depreciation is provided for on property, plant and equipment at 20% per year using the reducing balance method. Depreciation is regarded as cost of sales. A member of the public was seriously injured while using one of CE’s products on 4 October 2005. Professional legal advice is that CE will probably have to pay $500,000 compensation.

Required:
Prepare CE’s Income Statement for the year ended 31 March 2006 down to the line “profit before tax”. (Total for sub-question (f) = 5 marks)

(Total for Section B = 30 marks)

End of Section B

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SECTION C – 20 MARKS [the indicative time for this Section is 36 minutes] ANSWER ONE QUESTION ONLY

Question Three
The financial statements of CJ for the year to 31 March 2006 were as follows: Balance Sheets at Non-current tangible assets Property Plant and equipment Available for sale investments Current assets Inventory Trade receivables Cash at bank Cash in hand Total assets Equity and liabilities Ordinary shares $0⋅50 each Share premium Revaluation reserve Retained profit Non-current liabilities Interest bearing borrowings Provision for deferred tax Current liabilities Bank overdraft Trade and other payables Corporate income tax payable 31 March 2006 $000 $000 19,160 8,500 1,500 29,160 2,714 2,106 6,553 409 11,782 40,942 12,000 10,000 4,200 3,009 29,209 7,000 999 0 1,820 1,914 3,734 40,942 Income Statement for the Year to 31 March 2006 Revenue Cost of sales Gross profit Other income Administrative expenses Distribution costs Finance cost Profit before tax Income tax expense Profit for the period $000 31,000 (19,000) 12,000 200 (3,900) (2,600) 5,700 (1,302) 4,398 (2,099) 2,299 7,999 13,000 800 1,200 1,700 1,810 4,710 34,720 2,500 1,800 0 320 4,620 34,720 7,000 5,000 2,700 1,510 16,210 13,800 31 March 2005 $000 $000 18,000 10,000 2,100 30,100

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May 2006

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Properties were revalued by $1. CJ issued 10.blogspot. 5. (Total for Question Three = 20 marks) Section C continues on the next page TURN OVER May 2006 15 P7 FOR FREE ACCA. 4. 6.900. in accordance with IAS 7 Cash-flow Statements. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.com . On 1 April 2005.000 $ 180.000.000.000. Dividends paid during the year. Other income comprises: Dividends received Gain on disposal of available for sale investments Dividends receivable are not accrued. $800.000 2.000 199. 8. 3.000 and plant and equipment $1.000 at 31 March 2005 and $350. The trade and other payables balance includes interest payable of $650.070.000 200. CJ’s accounting policy is not to accrue proposed dividends. CJ repaid $6. Income tax expense comprises: Corporate income tax Deferred tax $ 1. Plant disposed of in the year had a net book value of $95.099. On 1 July 2005. Depreciation charged for the year was properties $2. 10.000.000 9.500.000.000 during the year. 7.000 20. No additional available for sale investments were acquired during the year.000 $0⋅50 ordinary shares at a premium of 100%.000 of its interest bearing borrowings.985. 2.000 at 31 March 2006.000 comprised last year’s final dividend plus the current year’s interim dividend. Required: Prepare CJ’s Cash-flow statement for the year ended 31 March 2006.Additional information: 1. cash received on disposal was $118.

The entity’s sales and purchases accrue evenly throughout the year and inventory is managed in such a way as to give a constant inventory level throughout the year. payable in advance of 1 April each year. Suppliers would be willing to wait a total of 40 days for payment.000 each. plus a price increase of 10% from 1 April 2006 and a reduction of an estimated 3% in volume caused by the price increase.500.083 344 1. Salaries and wages are budgeted at Other operating expenses budget is Budgeted capital expenditure is $000 620 432 2. Cost of sales is budgeted at the same percentage of credit sales revenue as the year to 31 March 2006. Budgeted revenue from credit sales is based on the year to 31 March 2006 figure. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Inventory could be reduced by 40% (from 31 March 2006 $ value levels) without having an adverse impact on sales. commencing on 1 April 2006.500 for the year for the year The consultant’s report recommended that $1. The lease would be classified as a finance lease by IAS 17 Leases.128 1. CK had the following figures for the year ended 31 March 2006: Revenue from credit sales during the year Purchases on credit during the year Trade receivables balance at 31 March 2006 Trade payables balance at 31 March 2006 Inventory balance at 31 March 2006 Cash balance at 31 March 2006 $000 6.000 of the proposed purchase of non-current tangible assets could be leased instead of purchased. The terms of the lease would be five payments of $400. the following changes in outstanding days would be achieved: Trade receivables reduced to 45 days. but are incomplete.020 622 The directors wanted working capital management improved and commissioned a consultant to prepare a report on working capital management in CK. The consultant’s report indicated that efficiency savings were possible and.192 4. The budgets for the year to 31 March 2007 have been commenced.blogspot. if the recommendations were implemented.com . The implicit interest rate is 16⋅875%.Question Four CK is an entity that sells computer spare parts and peripherals to computer retail stores. P7 16 May 2006 FOR FREE ACCA.

500. Inventory days outstanding. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Required: (a) Calculate the following for CK at 31 March 2006: • • • Trade receivables days outstanding. (10 marks) (c) Explain the effect on CK’s cash budget if it decides to lease $1.com . (5 marks) (d) (Note: All workings should be to the nearest $000) (Total for Question Four = 20 marks) (Total for Section C = 20 marks) End of Question Paper Maths Tables and Formulae are on pages 19 to 21 TURN OVER May 2006 17 P7 FOR FREE ACCA. instead of purchasing them.blogspot. Trade payables days outstanding. (3 marks) (Note: You should base your calculations on a 365 day year) (b) Prepare a cash budget for the year to 31 March 2007 based on the budgeted data and assuming CK implements the efficiency changes recommended by the consultant from 1 April 2006. (Note: You are not required to recalculate CK’s cash budget) (2 marks) Comment on any possible difficulties that CK may encounter when implementing the efficiency changes.000 of the non-current assets.

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500 0.513 0.942 0.543 0.728 0.820 2% 0.com .187 0.623 0.308 0.641 0.141 0.333 0.943 0.502 0.279 0.249 0.164 0.507 0.456 0.731 0.609 0.312 Interest rates (r) 15% 16% 0.804 0.842 0.558 0.596 0.888 0.124 12% 0.356 0.585 0. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.579 0.252 0.286 0.823 0.239 0.547 0.352 0.107 0.296 0.735 0.530 0.722 0.416 0.391 0.162 0.837 0.296 0.327 0.191 0.051 0.475 0.756 0.266 0.760 0.577 0.148 0.862 0.480 0.658 0.676 0.388 0.163 0.847 0.627 0.877 0.083 0.621 0.583 0.452 0.178 0.263 0.873 0.790 0.258 0.432 0.371 0.572 0.093 0.257 0.773 0.095 0.700 0.362 0.879 0.258 8% 0.376 0.212 0.914 0.137 0.396 0.661 0.095 0.519 0.170 0.417 0.227 0.534 0.112 0.071 0.863 0.299 0.270 0.942 0.893 0.081 0.425 0.743 0.130 0.317 0.907 0.419 0.275 0.666 0.370 0.104 13% 0. that is (1 + r)-n where r = interest rate.404 0.295 0.788 0.123 0.146 0.857 0.231 0.861 0.570 0.183 0.123 0.434 0.499 0.125 0.516 0.088 0.686 0.677 0.980 0.229 0.636 0.784 0.458 0.108 0.675 0.410 0.906 0.743 0.555 0.582 0.376 0.204 0.178 10% 0.070 0.152 0.605 0.527 0.424 0.961 0.751 0.535 0.397 0.901 0.208 0.335 0.354 0.915 0.624 0. Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Interest rates (r) 5% 6% 0.037 19% 0.630 0.195 0.315 0.706 0.554 4% 0.694 0.084 0.319 0.350 0.497 0.924 0.145 0.885 0.769 0.043 0.980 0.564 0.326 0.429 0.952 0.031 0.437 0.045 0.351 0.079 0.731 0.168 0. n = number of periods until payment or receipt.209 0.456 7% 0.642 0.104 0.783 0.194 0.797 0.026 May 2006 19 P7 FOR FREE ACCA.794 0.712 0.758 0.065 0.896 0.060 0.713 0.482 0.909 0.209 0.340 0.386 0.059 0.601 0.054 0.693 0.060 0.153 0.081 0.163 0.772 0.557 0.390 0.436 0.826 0.494 0.231 0.763 0.592 0.714 0.261 0.093 0.708 0.232 0.889 0.822 0.505 0.138 0.593 0.703 0.093 0.322 0.339 0.951 0.277 0.870 0.124 0.180 0.361 0.368 0.116 0.247 0.766 0.623 0.567 0.069 0.813 0.225 0.069 0.681 0.905 0.552 0.659 0.160 0.061 0.828 0.705 0.513 0.497 0.141 0.176 0.243 0.237 0.469 0.415 0.263 0.731 0.888 0.215 9% 0.333 0.080 0.467 0.587 0.681 0.160 0.284 0.887 0.917 0.460 0.078 0.789 0.837 0.352 0.890 0.840 0.135 0.108 0.718 0.665 0.534 0.711 0.287 0.943 0.205 0.961 0.198 0.844 0.073 17% 0.232 0.864 0.098 0.blogspot.840 0.394 0.149 11% 0.162 0.508 0.971 0.111 0.592 0.043 18% 0.683 0.933 0.650 0.MATHS TABLES AND FORMULAE Present value table Present value of $1.087 14% 0.270 0.350 0.250 0.476 0.051 1% 0.746 0.038 0.044 0.233 0.650 0.031 20% 0.317 0.870 0.140 0.673 3% 0.836 0.812 0.285 0.037 0.853 0.744 0.062 0.292 0.099 0.614 0.111 0.816 0.820 0.853 0.855 0.475 0.208 0.481 0.400 0.613 0.990 0.331 0.463 0.701 0.923 0.305 0.290 0.971 0.593 0.935 0.962 0.116 0.188 0.181 0.194 0.051 0.544 0.645 0.855 0.926 0.377 0.182 0.314 0.833 0.130 0.422 0.747 0.218 0.402 0.871 0.125 0.444 0.052 0.925 0.482 0.792 0.388 0.625 0.456 0.540 0.442 0.215 0.

793 4.578 14.562 16.379 7.893 1.160 4.818 5.863 9.106 12.216 5.439 4.802 7.650 5.855 2.566 2.611 4.849 13.471 10.426 5.970 2.601 6.274 11.929 17% 0.847 5.812 4.926 1.250 7.162 8.100 4.108 9.031 4.325 8.733 7.201 8.247 6.210 6.360 7.132 5.712 5.170 3.647 2.367 7.033 5.687 5.812 4.352 3.361 2.197 5.076 5.675 4.805 7.577 3.624 3.775 4.575 5.717 4.303 4.840 1.718 15.453 5.760 9.859 1.754 14.917 5.628 18% 0.002 6.295 9.938 12.222 5.784 4.561 13.901 1.559 8.139 7.604 9.799 5.904 8.639 4.210 2.983 9.713 2.385 9.366 7.673 3.536 7.594 8% 0.com .212 5.537 5.111 8.611 4.302 6.194 6.033 5.954 6.836 4.938 7.853 9.902 4.829 3.134 13.918 6.Cumulative present value of $1 per annum Receivable or Payable at the end of each year for n years Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Periods (n) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1− (1+ r ) − n r 1% 0.231 4.550 6.968 5.037 3.660 5.327 4.605 3.316 5.118 5.106 10.059 10.120 7.326 3.728 7.795 6.946 5.402 3.922 4.368 11.351 3% 0.029 5.207 6.982 7.583 5.288 4.736 2.162 5.475 5.198 6.103 7.889 4.685 4.759 6.750 6.163 4.246 2.514 11% 0.463 7.585 2.313 8.868 5.971 1.092 5.174 2.564 4.842 6.889 6.808 4.623 Interest rates (r) 15% 16% 0.943 8.019 5.974 7.274 3.472 7.623 5.blogspot.122 9.786 8.798 3.118 11.840 6.106 2. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.802 4.702 7.410 3.998 4.255 12.808 2.767 5.772 5.405 5.954 4.421 5.878 4% 0.229 5.389 5.605 4.990 5.322 2.837 4.604 6.373 6.025 14% 0.192 4.914 3.528 2.838 11.467 6.547 2.791 4.814 7.843 4.265 6.342 5.712 10.847 1.380 10.273 5.963 12% 0.022 8.348 12.344 4.630 4.206 5.913 2.938 4.444 3.668 2.078 4.158 11.328 5.696 4.353 19% 0.690 3.811 6.372 9.763 10.166 12.986 10.589 3.253 9.515 7.952 0.145 6.122 6.447 9.877 5.839 7.355 4.531 3.990 1.787 10.656 7.870 P7 20 May 2006 FOR FREE ACCA.722 8.384 8.943 1.950 9.584 5.580 5.358 8.941 3.335 5.530 9.590 Interest rates (r) 5% 6% 0.487 4.713 5.398 17.743 3.635 11.417 6.418 6.230 7.659 4.477 10.339 4.938 6.487 3.544 8.306 8.387 4.745 9.884 3.723 2.498 3.365 8.242 6.259 3.652 8.492 6.191 7.424 6.729 6.715 4.747 6.394 9.756 8.495 6.494 4.296 11.324 5.828 11.240 3.085 12.534 5.468 5.452 5.865 14.991 3.974 3.070 5.563 11.047 6.749 5.575 11.759 2.039 4.910 5.161 7.046 2% 0.108 7.061 8.818 9% 0.451 4.465 4.971 6.992 15.535 5.606 7.002 6.877 1.433 3.855 1.486 4.207 4.899 10.020 7.988 5.607 4.582 6.851 9.954 10.786 8.824 8.870 0.008 5.142 6.199 3.129 10% 0.462 6.283 2.626 1.690 2.101 20% 0.724 5.962 1.605 2.058 3.668 5.783 2.234 5.004 13.486 5.993 4.487 7.533 4.127 3.942 2.549 7.469 13% 0.244 8.775 3.140 2.312 3.470 7% 0.980 1.659 13.499 7.935 1.853 5.876 4.423 4.887 8.517 3.435 8.710 7.833 1.329 4.909 1.652 12.336 10.589 2.833 2.546 3.833 5.024 7.885 1.886 2.786 6.111 4.917 1.730 4.890 4.324 14.862 1.995 6.128 6.146 5.628 6.102 3.639 3.226 18.134 13.462 4.566 9.166 13.690 12.706 3.679 16.292 14.

growing in perpetuity at a constant rate of g% per annum. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani. Miller-Orr model: 4 Spread = 3    3 x transactio n cost x variance of cash flows interest rate      1 3 May 2006 21 P7 FOR FREE ACCA.FORMULAE Valuation models (i) (ii) Future value of S. payable or receivable in perpetuity. commencing in one year. commencing in one year.blogspot. Baumol model: Optimal sale = 2 x Annual cash disburseme nts x Cost per sale of securities interest rate (ii) Spread between upper and lower cash balance limits. discounted at r% per annum: PV = 1 r −g Inventory management (i) Economic Order Quantity EOQ = where: Co Ch D = = = cost of placing an order cost of holding one unit in Inventory for one year annual demand 2C o D Ch Cash management (i) Optimal sale of securities. discounted at r% per annum: PV = 1 1 1 − [1 + r ] n r     (iv) Present value of $1 per annum. discounted at r% per annum: PV = 1 r (v) Present value of $1 per annum. discounted at r% per annum: PV = S = X[1 + r] n 1 [1 + r ] n (iii) Present value of an annuity of $1 per annum. of a sum X. commencing in one year. invested for n periods. receivable or payable. receivable or payable for n years.com . compounded at r% interest: Present value of $1 payable or receivable in n years.

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blogspot. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.Financial Management Pillar Managerial Level P7 – Financial Accounting and Tax Principles May 2006 Thursday Afternoon Session P7 24 May 2006 FOR FREE ACCA.com .

but a number did not. this is an important topic as it leads on to the strategic level. Question Four required the calculation of trade receivables. It must be remembered though that not all candidates made the errors listed and that overall there was a good result for this paper. able to tackle most of the sub-questions in questions One and Two and prepare good answers to one of the optional questions.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2006 Exam Examiner’s General Comments This was the third paper of the new syllabus using the new question paper format. The following provides guidance to candidates preparing for future examinations and has been prepared with that in mind. For Question 1. Part (a) and part (d) were fairly well done by those attempting this question with some excellent answers and a number of candidates scoring full marks. There was evidence of a number of well prepared candidates with a wide range of knowledge. Marks on this question were generally lower than on Question Three. however very few were able to adjust the cash budget for the changes in working capital policy. Question Two was generally not as well done as the other questions on the paper.blogspot.21 current market price of a bond were the questions with the least correct responses. Some candidates had relied on an income statement/balance sheet question and had not revised cash flow statements or cash budgets. My stated intention is to examine financial statements. with a few candidates scoring full marks.9 finance lease and 1.com . Question One was generally well done. There were however a number of candidates that had not taken note of the fact that financial statements include cash flow statements and that I had previously stated that income statements and balance sheets would not always be examined in section C. If workings are not given no marks can be awarded for wrong answers using the correct principle. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.21 had very few correct answers. Question spotting is not advised in this paper and on this occasion meant that a significant number of candidates were caught out. Question 1. with many candidates scoring full marks. Some candidates were obviously ill prepared for underlying tax and calculating the finance cost of a redeemable preference share. The Chartered Institute of Management Accountants Page 1 FOR FREE ACCA. Most candidates provided workings for the three and four mark questions.9 some candidates were able to do the calculation but could not identify the current and noncurrent elements correctly. Question Three required the preparation of a cash flow statement. The overall average mark and pass rate were slightly down from November 2005 but were still very good. The overall result was generally very pleasing with a good standard of answer being produced by many candidates. Questions 1. in the widest sense. This question was generally well done. It therefore may give the impression that there were few good marks and few passes as all the main errors have been listed for each question. in section C and on this occasion this meant that there was not an income statement or balance sheet in section C. trade payables and inventory days outstanding and a cash budget prepared using the revised working capital policies.

Settlement of trade receivables may be delayed.000.000 (18. the recoverable amount was $28.blogspot.000) 75. Reduction in credit rating.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2006 Exam SECTION A Please note that in this PEG the mark available has been omitted from the end of each question in this section.640 (28.000.1 If an entity regularly fails to pay its suppliers by the normal due dates. Question 1. Depreciation was charged up to and including 31 March 2006. Difficulty in obtaining credit from new suppliers.com . Calculate the impairment loss on the equipment according to IAS 36 Impairment of Assets. it may lead to a number of problems: (i) (ii) (iii) (iv) Having insufficient cash to settle trade payables.250 (14.547) 31.640 The Chartered Institute of Management Accountants Page 2 FOR FREE ACCA. CI’s balance sheet date is 31 March.063) 42. Which TWO of the above could arise as a result of exceeding suppliers’ trade credit terms? A B C D (i) and (ii) (i) and (iii) (ii) and (iii) (iii) and (iv) The answer is C Question 1.187 (10. Answer Cost Depreciation 2002/03 Depreciation 2003/04 Depreciation 2004/05 Depreciation 2005/06 Impaired value Reduction $ 100.000) 3.000 (25. The equipment was depreciated using the reducing balance method at 25% per year. At that date.2 CI purchased equipment on 1 April 2003 for $100. CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.750) 56.

CIMA & CAT RESOURCES VISIT: http://kaka-pakistani.blogspot. Cost of sales.Paper P7 – Financial Accounting and Tax Principles Post Exam Guide May 2006 Exam Question 1.com .4 IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be presented on the face of the income statement. The analysis of expenses must use a classification based on either the nature of expense. there is more chance of an entity spending the amount deducted. It would otherwise be difficult to enforce any penalties for entities not paying. Any three from the following: • • • • So that entities know when payment is required. (iii) and (v) The answer is B The Chartered Institute of Management Accountants Page 3 FOR FREE ACCA. or