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MARKING SCHEME

FINANCIAL ACCOUNTING
MAN2907L
SUPPLEMENTARY PAPER – AUGUST 2011

312871435.doc1 of 13

FINANCIAL ACCOUNTING MULTIPLE CHOICE QUESTION ANSWER SHEET STUDENT REGISTRATION NO. PLEASE PLACE A CROSS AGAINST THE LETTER CORRESPONDING TO YOUR ANSWER FOR EACH QUESTION – ONE ANSWER ONLY FOR EACH QUESTION THIS ANSWER SHEET MUST BE ATTACHED TO AND RETURNED WITH THE QUESTION PAPER EACH QUESTION CARRIES TWO MARKS: THERE IS NO NEGATIVE MARKING Question (A) (B) (C) 1 * 2 * 3 * * 4 * 5 * 6 * 7 * 8 * 9 10 * 11 * 12 13 312871435.doc2 of 13 (D) * * 14 * 15 * . ……………………………………………….

since no group exists any longer. However.such as the composition of the board . If so. As a 50% holding.above as to any “dominant influence” which Christie might exercise over Chandler. Chandler would thus become no longer a subsidiary undertaking and would only require to be dealt with as an associated undertaking. would not need to be accounted for on an “equity accounting” basis. (10 marks) 2. perhaps. a cash investment of £5m does not affect the net asset position of the company. Depending on the degree of control or influence. Chandler continues to be a subsidiary undertaking of Christie. under the Companies Act 1989.would be required to ascertain whether Christie had a “dominant influence” over the associate. The effect of the share issue increases Chandler’s net assets by £5m and has the same benefits and drawbacks as for Christie in 1. (5 marks) 3. although satisfying the requirements as an associated undertaking of Chandler. A share issue causes the company’s net asset position to increase by £5m. given the directors’ stated policy on this issue. Long-term loan finance might offer a more attractive alternative to the overdraft route. full consolidation as a subsidiary would be required. A preference share issue would avoid this problem. given the associated higher interest charges . A cash payment by Chandler does not affect its net asset position. The level of risk attaching to this option by way of the reduced control/influence which could be exercised by Christie would depend on the composition of the Chandler board and their relationship with Christie. This seems unlikely. However the “strength” of the balance sheet has been reduced due to a reduction in liquidity and a net current liability position of £1. This would be up to the directors of Chandler. further information .7m shares would drop to 45.9m shares. The directors should consider whether financing the acquisition by way of an overdraft is appropriate. Without the share issue in 2.a result the directors may wish to avoid. then Christie’s current holding of 2. would be to dilute earnings per share . it is likely that the joint venture would be treated as an associated undertaking.Section B ANSWER TO SEEN CASE QUESTION: Christie & Chandler 1. As can be seen from the amended company balance sheet. however. adversely affecting the company’s future borrowing capacity. this approach creates a substantial level of net current liability in Chandler. In such a case. This option is more creative than the others! If Chandler issues 2.7% rather than the current 90%. The disadvantage of such a move. If no consolidation were needed then the joint venture. it is likely that the joint venture would be accounted for as an associated undertaking. above.doc3 of 13 .and the long-term nature of the investment. above.82m. However. it may be that Christie would not have any influence over the policies of the joint venture. The same question would arise as in 1. (15 marks) (Total 40 marks) 312871435.

000 Non-current assets Property.320 4.000 5.180 21.000 Dividends receivable 180 180 Inter-company balance . plant and equipment 7.140 Other 1.000 Retained earnings 2.500 Capital reserves 2.000 18.000 2.000 £21.Chandler 140 140 3.000 Investment in Chandler 6.320 £22.000 1.000 £.000 3.000 Investment in joint venture 5.000 Current assets Other Cash Total assets 860 3.000 7.500 Equity Share capital Share premium 1.000 18.140 1. 20X2 Share In cash issue £.180 Total equity Current liabilities Overdraft 4.180 Total equity and liabilities 312871435.000 5.180 16.180 2.320 £22.doc4 of 13 .CHRISTIE AND CHANDLER Computations Company balance sheet as at December 31.180 12.180 £21.000 6.000 15.

000 15.930 20 20 Current liabilities Dividend payable Overdraft 4.500 Goodwill Note 1 Investment in joint venture Current assets Total assets Equity Share capital Share premium 1.000 2. 20X2 Share In cash issue £.140 Other 3.000 5.810 Total equity and liabilities 312871435.450 2.360 £24.020 3.500 Capital reserves Retained earnings Shareholders' funds Minority interests Total equity Note 2 2.000 Cash 500 1.810 12.500 5.950 5.950 £25.950 1.450 20.360 4.Christie Group plc balance sheet at December 31.880 £24.000 2.500 1.000 Non-current assets Property.000 20.450 480 480 16. plant and equipment 13.930 21.500 13.450 21.860 8.950 £25.860 3.450 16.000 £.doc5 of 13 .450 Other 4.000 4.

000 11. plant and equipment 6.800 Shareholders' funds 9.200 Total equity and liabilities 312871435. 20X2 £.500 £13.9m shares Chandler Limited balance sheet at December 31.800 Current liabilities 3.900 Share premium 2.100 Retained earnings 1.500 Investment in joint venture 5.000 Equity Share capital 5.Chandler company balance sheet after issue of 2.000 .doc6 of 13 £13.000 Non-current assets Property.500 Current assets Total assets 1.

000 £.(800 ret'd+200 divi)/2 Pre-acquisition reserves 1.310 Total equity and liabilities Note 1 . 20X2 £.860 £12.500 £25.000 4.450 1.800 16.000 Consideration 6.000 Equity Share capital Capital reserves 2.500 90% acquired Goodwill .310 3.860 7.450 Minority interests Total equity 480 4.800 16. 20X2 312871435.930 Dividend payable 200 20 Inter-company balance 140 Current liabilities Overdraft 4.500 Goodwill Investment in joint venture 13.Goodwill on acquisition of Chandler £.000 12.500 4.450 Shareholders' funds 4.500 Other 2.380 £12.800 2.Chandler Christie £.500 £25.000 Reserves at December 31.balance sheet Note 2 .000 Non-current assets Property.000 5.000 Current assets Other Cash Total assets 860 1.860 3.000 11.Consolidated retained earnings at December 31.500 Net assets at acquisition 4.000 Retained earnings 1.950 5.950 .050 £1.000 Share capital 3.doc7 of 13 4.700 8. 20X1 1.500 1.000 4. plant and equipment 6.000 Apportioned profits to July 1.000 500 .500 20.

180 Share of Chandlers post-acquisition reserves 90% of half year profits .(500 apportioned-200 dividend) 270 £2.£300k .£.doc8 of 13 .450 312871435.000 Christie's reserves 2.

(2 mark) A material event after the reporting date should be disclosed where It is a non-adjusting event - an event which concerns conditions which did not exist at reporting date (2 mark) of such materiality that its non. or (1 mark) .e. (4 marks) (iii) The rights issue relates entirely to the period after the year end. It should be disclosed by way of notes.disclosure would affect the ability of the users of financial statements to reach a proper understanding of the financial positions (2 mark) or It is the reversal or maturity after the year end - of a transaction entered into before the yearend (1 mark) the substance of which was primary to alter the appearance of the company’s statement of financial position. and therefore lays down the following treatment for events after the reporting date.000) and requires separate disclosure for users to properly understand the accounts. (2 mark) (subtotal 10 marks) (b) 12 marks (marks each for underlined + 1 mark for overall style) (i) The closure of the company's factory is a discontinuance of a business segment. an event which provides additional evidence of conditions existing at the reporting date).It is an adjusting event (i. A material event after the reporting date requires changes in the amounts to be included in the financial statements where .doc9 of 13 . disclose under discontinued heading. Under IFRS 5.Section C Question 1 (a) IAS 10 requires that financial statements should be prepared on the basis of conditions existing at the reporting date. because it is material ($300. It should be charged in arriving at the profit for the year. as it was clearly a material and separately identifiable component of the company’s business operations. and should be disclosed separately. (4 marks) (subtotal 12 marks) 312871435.It indicates that application of the going concern concept to the whole or a material part of the company is not appropriate. therefore it is a nonadjusting event under IAS 10. (4 marks) (ii) This is an unusual item.

(2 marks) (6 marks: 1 mark for each point. (2 marks) (6 marks: 1 mark for each point.Any additional information required to understand the transaction .  Barbara appears to fall within the definition of key management personnel. enquiry would be required to establish that this has actually been the effect of the disagreement.  Further. 2 marks for last point +1) 312871435.  Alan is therefore presumed to be a related party  However.  Barbara’s abilities to take 35% of the turnover with her would be prima facie evidence of such authority.Amounts due at statement of financial position date.  Barbara is therefore presumed to be a related party.Description of relationship . 2 marks for last point +1) (iii)  Both would be presumed to be related parties to Alpha Limited  Connie is an employee and there would be no requirement to disclose emoluments.doc10 of 13 .  The disclosure required by para. 17 of IAS 24 includes: .The amounts involved .Description of the transaction . (6 marks: 1 mark for each point +1) (ii)  Key management is defined as a person in a senior position having authority or responsibility for directing or controlling the major activities and resources of the reporting entity. Alan would not appear to be able to influence the financial and operating policies because of the disagreement.  Significant influence would normally be assumed if a party owns at least 20% of voting rights.  Christopher is not an employee and amounts paid to Christopher by Alpha Limited would be disclosed. 9 state that a related party is a party that can exercise significant influence over another party.(c) (i)  IAS 24 para.

000 / 2. So based on P/E and EPS Charlie possibly has a slight edge over Bravo .000 = 12.000.5p (0.000.000 (0.000.000 / 0. At present the market is not really distinguishing between the two in its expectations for the future and there is equal demand for shares in both companies.5 marks) Charlie (1.500.000 – 90.Question 2 (a) EPS (i) Bravo earnings = Profit less preference dividends = 280.doc11 of 13 .5 marks) (subtotal 3 marks) (c) - PE ratio of Bravo & Charlie are the same – although once the additional shares in Charlie have been held for a full year this may mean Charlie’s P/E will decrease.50) = 2.000 / 2.5 mark) No of share (weighted average) = (1.5 = 50 times = 480 / 9.000/ 2.000. Charlie has a higher EPS than Bravo and if there is expectation that this differential will be maintained or even increased then the P/E for Charlie may outstrip Bravo despite the higher number of shares.5 mark) (subtotal 5 marks) (b) PE ratio Bravo = 475 / 9. The share price in Charlie would have been expected to reduce on issuing the bonus shares if no other circumstances changed.5 mark) (ii) Charlie earnings = 240.000 (2 mark) Charlie EPS = 240.000 = 9.000 = 9.000/2) / 0.(4 marks) - Any three of the following reasons that the market will be taking on board in assessing its expectations for the future (i) Type of industry (ii) Growth potential (iii) Track record of past performance (iv) Diversity of its products (v) Quality of management (vi) Customer attachment and so on (6 marks : 2 marks each) (d) Other matters Steven should take account of before he makes his choice (i) What Charlie Limited’s EPS would have been if there had been no bonus issue = 240.000 shares (0.5 mark) Bravo EPS = 190.000 = 190.0p Charlie Limited appears better than Bravo Limited (1 mark) 312871435.000.500.000+500.6p (0.6 = 50 times (1.000 (1 mark) No of share = (1.50) = 2.

.5 marks) (iii) Return on equity capital (ROEC) = (PBT less Preference dividend/ equity capital + reserves) x 100% Bravo Limited = (354.450.310.950. may be required to renegotiate the loan at a higher rate of interest or even by issuing additional ordinary shares to the lenders in recognition of their increased risk.Equity shareholders benefit if the return on investment exceeds the costs of borrowing .710.There is no dilution of the existing shareholders’ interest if funds are raised by borrowing rather than by an issue to new shareholders.000) x 100% = 19.000) x 100% = 27% (2 marks) Charlie Limited= (385.7% (1.000/ 1.g.000/ 2.Lenders normally obtain some form of security in the form of either a charge on assets or prior rights on liquidation.Impact on company’s funding if equity shareholders perceived that there is a greater risk to equity funds if there is high gearing and as a result require a higher return on their investment.000) x 100% = 18.000/2.Adverse impact on amount available for distribution to shareholders if profits fall. e.000) x 100% = 21. (5 marks: 2 marks for each factor + 1 mark for style) Disadvantage . . their required rate of interest is lower.doc12 of 13 545 113 21 £’000 2 marks 1 mark 2 marks .Impact on the company’s funding if loan covenants are breached. (5 marks: 2 marks for each factor + 1 mark for style) (subtotal 10 marks) (Total 40 marks) Question 3 (a) Statement of cash flows for the year ended 31 March 20X2 £’000 Operating Activities Profit before tax Depreciation Loss on disposal 312871435.2% (1. .5 marks) Charlie Limited = (445.000/1.(ii) Return on capital employed (ROCE) = (PBIT/ capital employed) x 100% Bravo Limited = (588.Loan interest is allowable for tax relief. This means that their risk is lower and therefore.7% (2 marks) (iv) Bravo Limited provides a better return on equity Bravo Limited’s EPS is not quite so favourable Bravo Limited is more geared Bravo Limited had borrowed at a significantly higher cost than Charlie Limited (4 marks: 1 mark for each factor) (subtotal 12 marks) (e) Advantage and disadvantage of gearing Advantage . .

140) Net cash used in financing activities Increase in cash and cash equivalents in the year Cash and cash equivalents B/F Cash and cash equivalents C/F (700) 429 1 mark 3 marks (271) (170) 3 marks (170) 19 1 mark 53 1 mark 72 1 mark Note: IAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow.679 (4) (4) 6 677 (217) Inventories increase Receivables increase Payables increase Cash generated from operations Taxation paid (927 + 343 – 1. Interest received can be an operating cash flow or an investing cash flow.doc13 of 13 .21) Net cash used in investing activities Financing Activities Equity dividends paid (110 + 200 .053) Net cash from operating activities 2 marks 2 marks 2 marks 3 marks 460 Investing Activities Purchase of non-current assets Proceeds on disposal (800 . Either of these options from students is acceptable. (subtotal 24 marks) (b) Ways in which a company could manipulate the year-end cash position (elaboration is needed for good marks) – Offering short term incentives to customers to increase sales – Reducing the selling price to increase sales – Cutting expenses – Disposing of assets – Delaying payments to creditors – Encouraging debtors to pay early by offering discounts – Resourcing effective debt collection procedures (3 marks each point + 1 for overall style – max 16) (Total 40 marks) 312871435.350 .