T6 Cat Past Papers PDF

Certified Accounting Technician examination
Sample multiple choice questions – June 2009
Paper T6 (INT)
Drafting Financial Statements
Section A only
All questions are compulsory
Note: Section B of the actual exam paper will contain three written questions
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The following questions are typical of those that will appear in Section A of the examination paper from June 2009
onwards. There will be a total of ten questions in section A.
All questions in Section A will be worth two marks each.
1 Aye and Bee are in partnership sharing profits and losses in the ratio 3:2 respectively. The partners’ capital and current
account balances at the beginning of the year were as follows:
Aye Bee
$ $
Current accounts 7,500CR 2,100CR
Capital accounts 12,000CR 9,000CR
The partnership made a profit of $100,000 for the year. Aye’s drawings were $9,200, and Bee’s were $7,320.
What should Aye’s current account balance be at the end of the year?
A $67,500
B $58,300
C $76,700

D $16,700
(2 marks)
2 At 1 May 2009 Tibor purchased six million of Kinnot’s ten million $1 ordinary shares for $6,000,000. At that date
Kinnot had net assets with a fair value of $8,450,000 and its share price was $1.10. It is group policy to value the
non-controlling interest at the fair value of the subsidiary’s identifiable net assets using the market value of the shares
at acquistion.
What is the total goodwill on acquisition of Kinnot?
A $930,000
B $2,450,000
C $1,550,000
D $1,950,000
(2 marks)
3 Which of the following four statements are correct?

A If all the conditions specified in IAS 38 Intangible assets are met, the directors can chose whether to capitalise the
development expenditure or not.
B Amortisation of capitalised development expenditure will appear as an item in a company’s statement of changes
in equity.
C Capitalised development costs are shown in the statement of financial position as non-current assets.
D Capitalised development expenditure must be amortised over a period not exceeding five years.
(2 marks)
2
4 According to IAS I Presentation of Financial Statements, which of the following items could appear in the statement
of changes in equity:
(1) Total comprehensive income for the year
(2) Dividends
(3) Loss on sale of investments.
(4) Issue of share capital
A 1, 2 and 4 only
B 1, 3 and 4 only
C 1 and 3 only
D 1, 2, 3 and 4
(2 marks)
5 A property company received cash for rent totalling $628,950 in the year ended 31 May 2009. Figures for rent in
advance and in arrears at the beginning and end of the year were:
31 May 2008 3
1 May 2009
$ $
Rent received in advance 76,950 66,525
Rent in arrears (all subsequently received) 31,725 36,300
What amount should appear in the company’s income statement for the year ended 31 May 2009 for rental
income?
A $613,950
B $634,800
C $623,100
D $643,950
(2 marks)
6 According to IAS 10 Events after the Reporting Period, which of the above material events which occurred after
the reporting date, require an adjustment to the figures in the financial statements?
(1) An issue of shares to finance expansion.
(2) A fire destroying some of the company’s inventory (the company’s going concern status is not affected).
(3) Sale for less than cost of some old inventory held at the reporting date
(4) The bankruptcy of a major customer, with a substantial debt outstanding at the reporting date.
A 3 and 4 only
B 1, 2 and 3
C 2 and 3 only
D 2 and 4 only
(2 marks)
3
7 Which of the following statements are correct?
(1) The money measurement concept is that only items capable of being measured in monetary terms can be
recognised in financial statements.
(2) Materiality means that only physical assets are recognised in the financial statements.
(3) In times of rising prices, the use of historical cost accounting tends to understate assets and overstate
profits.
A 1 only
B 2 only
C None of the statements
D 3 only
(2 marks)
8 When calculating a company’s gearing ratio which of the following factors would cause it to fall?
(1) A rights issue of ordinary shares.
(2) An issue of loan notes.
(3) An upward revaluation of non-current assets.
A 1 only
B 1 and 2
C 2 and 3
D 1 and 3
(2 marks)
9 Steve and Paul are in partnership and share profits equally. Steve receives an annual salary $30,250 and interest on
capital is paid at 5% per year.
At 1 June 2008 their capital balances were:
$
Steve 150,000
Paul 75,000
On 1 December 2008 Paul introduced a further $75,000 capital, and Steve’s salary was discontinued. The partnership
profit for the year ended 31 May 2009 was $228,250.
What was Steve’s total profit share for the year ended 31 May 2009?
A $100,000
B $99,000
C $122,625
D $105,625
(2 marks)
4
10 At 31 May 2008 Stoneacre’s capital structure was as follows:
$
Ordinary share capital (1,000,000 shares of 25c each) 250,000
Share premium account 200,000
In the year ended 31 May 2009 Stoneacre made a rights issue of 1 share for every 2 held at $1 per share and this
was taken up in full.
Later in the year Stoneacre made a bonus issue of 1 share for every 10 held, using the share premium account for the
purpose.
What was the company’s capital structure at 31 May 2009?
Ordinary share capital Share premium account
$ $
A 387,500 187,500
B 412,500 537,500
C 387,500 550,000
D 400,000 550,000
(2 marks)
End of Sample Questions
5
6
Answers
7
Sample Multiple Choice Question Paper T6 (INT) Answers
Drafting Financial Statements
1 B
$
Opening balance 7,500
Profit share (100,000 x 3/5) 60,000
Drawings (9,200)

Closing current account balance 58,300
2 D
$
Consideration transferred 6,000,000
Fair value of non-controlling interest 4,000,000 x $1.10 4,400,000

10,400,000
Less fair value of net assets at acquistion (8,450,000)

Goodwill = 1,950,000
3 C
4 A
5 D 628,950 + (76,950 – 31,725) – (66,525 – 36,300) = 643,950
6 A
7 A
8 D
9 C
Steve Paul
$ $ $
Profit 228,250
Salary (30,250 x ½) 15,125 (15,125)
Interest on capital (150,000 x 5%) 7,500 (7,500)
(75,000 x 5% x ½) 1,875
(150,000 x 5% x ½) 3,750 (5,625)

Profit share 100,000 100,000 200,000
Total profit share 122,625 105,625

10 B
Share capital Share premium
$ $
Opening balance 250,000 200,000
Rights issue (1,000,000 x 1/2 x 25c) 125,000
(1,000,000 x 1/2 x 75c) 375,000
Bonus issue (1,500,000 x 1/10 x 25c) 37,500
(1,500,000 x 1/10 x 25c) (37,500)
Total 412,500 537,500
8
Answers

Paper 6INT
ACCA Certified Accounting Technician Examination – Paper T6(INT) June 2004 Answers
4J–INTIX
Drafting Financial Statements (International Stream) and Marking Scheme
Marks
1 (a) (i) Sondaw
Paper 6INT
4J–INTAA
Income Statement for the year ended 31 May 2004 0·5

$000
Revenue 5,876 0·5
Cost of sales (W1) (3,072) 5·0
––––––
Gross profit 2,804 0·5
Distribution costs (W1) (492) 3·0
Administrative expenses (W1) (763) 6·0
––––––
Profit from operations 1,549 0·5
Finance cost (30) 0·5
––––––
Profit before tax 1,519 0·5
Tax (250) 0·5
––––––
Net profit for the period 1,269 0·5
––––––
––––––
–––––
Total 18·0
–––––
(ii) Sondaw
Balance sheet as at 31 May 2004 0·5
Assets $000
Non-current assets
Property, plant and equipment (W2) 3,193 3·0
Current assets
Inventory 800 0·5
Trade and other receivables ($438 – $38 – $20 + $6) 386 2·5
Cash 50 1,236 1·0
––––––
Total assets 4,429
––––––
––––––
Equity and liabilities
Capital and reserves
$1 Ordinary shares 1,500 1·0
Accumulated profits ($280 + $1,269) 1,549 1·0
––––––
3,049
Non-current liabilities
5% loan notes 600 0·5
Current liabilities
Trade and other payables ($500 + $10 + $20) 530 3·5
Taxation 250 780 0·5
–––––– ––––––
Total equity and liabilities 4,429
––––––
––––––
–––––
Total 14
–––––
11
Marks
Paper 6INT
4J–INTAA
Workings Cost of Sales Distribution Costs Administrative

Expenses
1 $000 $000 $000
Opening inventory 1,200
General expenses (10:40:50) 60 240 300
Heat and light (50:30:20) 45 27 18
Marketing and advertising ($248 – $6) 242
Wages ($490 + $10) (60:30:10) 300 150 50
Purchases 2,200
Discounts received (150)
Closing inventory (800)
Bad debt expense 38
Allowance for bad and doubtful debts (($438 – $38) x 5%) 20
Depreciation – buildings (50:20:30) 125 50 75
Depreciation – motor vehicles 25
Depreciation – plant and equipment 92
Audit fee 20
–––––– –––– ––––
3,072 492 763
––––––
–––––– ––––
–––– ––––
––––
2 Non current assets ($000) Total Property
Buildings Vehicles Plant & Equip Plant & Equip
$ $ $ $
Cost 5,000 160 700 5,860
Depreciation b/f (2,000) (60) (240) (2,300)
Current year’s depreciation:
Buildings $5000 x 5% (250) 1,(250)
Motor vehicles ($160 – $60) x 25% (25) 1,1(25)
Plant & equipment ($700 – $240) x 20% (92) 1,1(92)
–––––– –––– –––– ––––––
2,750 75 368 3,193
––––––
–––––– ––––
–––– ––––
–––– ––––––
––––––
(b) The purpose of depreciation is to spread the cost of an asset, less its residual value, over its productive
(economic) life. 1·0
When deciding the method of calculating depreciation the following factors are relevant:
Pattern of usage – If the main value from the asset is obtained during its earliest years then it might be 1·0
appropriate to use reducing balance.
Life of the asset – The time period in which wear and tear, obsolescence or depletion takes place. 1·0
–––––
Total 3·0
–––––
–––––
12
Marks
Paper 6INT
4J–INTAB
2 Nobrie
Cash flow statement for the year ended 31 May 2004 0·5
$000 $000
Cash flows from operating activities
Net profit before tax 41,738 0·5
Adjustments for:
Depreciation 5,862 0·5
Investment income (146) 0·5
Interest paid 1,177 0·5
Profit on equipment disposal (1,540) 1·5
–––––––
Operating profit before working capital changes 47,091
Increase in inventory (866) 1·5
Increase in receivables (5,684) 1·5
Decrease in payables (3,625) 1·5
–––––––
Cash generated from operations 36,916
Interest received 146 0·5
Interest paid (1,177) 0·5
Tax paid (9,191) 2·0
–––––––
Net cash from operating activities 26,694 1·0
Cash flows from investing activities
Purchase of property, plant and equipment (28,048) 4·0
Proceeds from sale of equipment 3,053 1·0
–––––––
Net cash used in investing activities (24,995) 1·0
Cash flows from financing activities

Proceeds from issue of share capital 7,450 2·0
Repayment of long term borrowing (6,244) 1·0
–––––––
Net cash used in financing activities 1,206 0·5
–––––––
Net increase in cash and cash equivalents 2,905 1·0
Cash and cash equivalents at the beginning of period (4,749) 1·0
–––––––
Cash and cash equivalents at end of period (1,844) 1·0
–––––––
–––––––
–––––
Total 25·0
–––––
–––––
Examiner’s note
IAS 7 allows interest paid to be an operating cash flow or a financing cash flow. Interest received can be an operating cash flow
or an investing cash flow.
Workings
1 Taxation
$000 $000
Paid (Balancing figure) 9,191 Balance b/f 7,323
Balance c/f 7,989 Income statement 9,857
––––––– –––––––
17,180 17,180
–––––––
––––––– –––––––
–––––––
2 $000
Disposal of assets
Proceeds 3,053
Less NBV (Balancing figure) (1,513)
––––––
Profit on sale 1,540
––––––
––––––
3 Non-current Asset NBV
$000 $000
B/fwd 88,466 Depreciation 5,862
Revaluation 8,272 Disposal NBV (W2) 1,513
Additions (Balancing figure) 28,048 C/Fwd 117,411
–––––––– ––––––––
124,786 124,786
––––––––
–––––––– ––––––––
––––––––
13
Marks
Paper 6INT
4J–INTAC
3 Partnership profit statement for the year ended 31 May 2004

3 months to 9 months to Total
31 August 2003 31 May 2004
$000 $000 $000
Unadjusted profit 200,000 600,000 800,000 1·0
Bad debt written off (25,000 ) – (25,000) 1·0
Loan interest (W1) – (18,000) (18,000) 1·0
–––––––– –––––––– ––––––––
175,000 582,000 757,000
––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
Division of Profit
Angela 4/7 100,000 4/10 232,800 332,800 1·0
Brenda 2/7 50,000 3/10 174,600 224,600 1·0
Christine 1/7 25,000 – 25,000 0·5
Hannah – 3/10 174,600 174,600 0·5
–––––––– –––––––– –––––––– ––––
175,000 582,000 757,000 6·0
––––––––
–––––––– ––––––––
–––––––– ––––––––
–––––––– ––––
Capital accounts
Marks Marks
Pre 31/8/03 Angela Brenda Christine Hannah Angela Brenda Christine Hannah
$ $ $ $ $ $ $ $
G’dwill 2:1 467,667 233,333 – – 1·0 Balance b/f 500,000 260,000 330,000 –
Loan a/c – – 480,000 – 0·5 G’will 4:2:1 400,000 200,000 100,000 – 1·5
Balance c/d 633,333 326,667 – – F Prop 4:2:1 200,000 100,000 50,000 – 1·5
–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––
1,100,000 560,000 480,000 – 1,100,000 560,000 480,000 –
––––––––––
–––––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––––
–––––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
Post 31/8/03
G’dwill 4:3:3 280,000 210,000 – 210,000 1·5 Balances b/d 633,333 326,667 – –
Bal c/f 820,000 350,000 – 250,000 Cash – capital – – – 250,000 0·5
Cash – g’dwill – – – 210,000 0·5
G’dwill 466,667 233,333 – – 1·0
–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––
1,100,000 560,000 – 460,000 1,100,000 560,000 – 460,000
–––––––––– ––––––––
–––––––––– –––––––– –––––––– –––––––– ––––
–––––––– –––––––– ––––––––––
–––––––––– –––––––– ––––––––
–––––––– –––––––– ––––––––
–––––––– ––––
3·0 5·0
–––– ––––
Current accounts
Marks Marks
Pre 31/8/03 Angela Brenda Christine Hannah Angela Brenda Christine Hannah
$ $ $ $ $ $ $ $
Drawings 20,000 110,000 35,000 – 1·5 Bal b/f 60,000 40,000 10,000 –
Bal c/d 140,000 80,000 – – Profit to 31/8/03 100,000 50,000 25,000 – 1·5
–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––
160,000 90,000 35,000 – 160,000 90,000 35,000 –
––––––––––
–––––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––––
–––––––––– ––––––––
–––––––– ––––––––
–––––––– ––––––––
––––––––
Post 31/8/03
Drawings 40,000 40,000 – 30,000 1·5 Bal b/d 140,000 80,000 – –
Bal c/f 332,800 214,600 – 144,600 Profit to 31/5/04 232,800 174,600 – 174,600 1·5
–––––––––– –––––––– –––––––– –––––––– –––––––––– –––––––– –––––––– ––––––––
372,800 254,600 – 174,600 372,800 254,600 – 174,600
––––––––––
–––––––––– –––––––– ––––––––
–––––––– –––––––– ––––––––
–––––––– –––– –––––––––– ––––––––
–––––––––– –––––––– ––––––––
–––––––– –––––––– –––––––– ––––
3·0 3·0
–––– ––––
Working
(W1) Interest on Christine’s loan
Closing capital $480,000
Interest at 5% for 9/12 = $18,000
14
4 (a) 2003 2004
Paper 6INT
4J–INTAD
Gross profit percentage Gross profit x 100 4,600 x 100 = 23·00% 4,950 x 100 = 19·04%
–––––––––– ––––––– –––––––
Sales 20,000 26,000
Net profit percentage Net profit x 100 2,140 x 100 = 10·70% 2,180 x 100 = 8·38%
––––––––––– ––––––– –––––––
Sales revenue 20,000 26,000
Return on equity Net Profit x 100 2,140 x 100 = 19·24% 2,180 x 100 = 16·39%
–––––––––– ––––––– –––––––
Equity 11,120 13,300
Inventory turnover Cost of goods sold 15,400 = 2·57 times 21,050 = 3·14 times
–––––––––––––––– –––––––– –––––––
Inventory 6,000 6,700
Quick ratio Current assets – inventory 4,520 = 1·41 :1 7,700 = 1·83 :1

––––––––––––––––––––– ––––––– –––––––
Current liabilities 3,200 4,200
Receivables collection period Receivables x 365 4,400 x 365 = 80·30 days 6,740 x 365 = 94·62 days
––––––––– ––––––– –––––––
Sales 20,000 26,000
Marking Scheme
1/ mark for correctly stating the formula and 1/ mark for each correct ratio
2 2
(b) Relevant comments could include:

– It is difficult to judge the success of the expansion over such a short period of time.
– The profitability ratios have deteriorated.
– The reduction in the gross profit percentage could be due to difficult trading conditions or that the selling prices have
been lowered to generate sales.
– The deterioration in the net profit percentage is partly due to the reduced gross profits.
– The rate of inventory turnover has improved which might suggest that profitability in the future will improve.
– The quick ratio has improved, this is partly due to the increase in cash which may indicate that not all the cash raised
from issuing the debentures has been invested.
– The receivables collection period has increased which may indicate poor credit control, or longer credit terms being
offered to customers, or increased sales due to the success of the expansion.
Marking scheme
1 mark for each relevant comment up to a maximum of 7 marks.
(c) Some of the factors Egriff should consider when deciding whether to raise finance by loan notes rather than issuing more
shares:
1 Loan notes pay a fixed level of interest. Therefore, the company will find budgeting for the cash flows straight-forward.
2 Loan note holders are non-current creditors of the company and therefore do not control the company, unlike
shareholders who own the company and will be able to vote on issues affecting the company.
3 If company profits fall then share dividends do not have to be paid. However, the interest on loan notes will still have
to be paid regardless of the level of profit.
4 Shareholders will often expect dividend payments to grow over time, therefore increasing the costs to the company.
5 If the company was to be wound up then loan note holders would rank higher than ordinary shareholders.
Marking scheme
15
Paper T6(INT)
Drafting Financial
Statements
(International Stream)
ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION
ADVANCED LEVEL
MONDAY 7 JUNE 2004
QUESTION PAPER
Time allowed 3 hours
ALL FOUR questions are compulsory and MUST be answered
The Association of Chartered Certified Accountants

ALL FOUR questions are compulsory and MUST be attempted
4J–GIRLAA
Paper 6IRL
1 You have been provided with the following trial balance as at 31 May 2004 for a limited liability company called
Sondaw.
Dr Cr
$000 $000
Bank 50
Inventory at 1 June 2003 1,200
General expenses 600
Heating and lighting 90
Marketing and advertising expenses 248
Wages 490
Buildings at cost 5,000
Motor vehicles at cost 160
Plant and equipment at cost 700
Accumulated profits at 1 June 2003 280
Trade receivables 438
Purchases 2,200
Loan note interest paid 30
5% Loan note 600
Revenue 5,876
Discounts received 150
Trade payables 500
$1 Ordinary Shares 1,500
Accumulated depreciation at 1 June 2003
Buildings 2,000
Motor vehicles 60
Plant and equipment 240
––––––– –––––––
11,206 11,206
––––––– –––––––
The following notes are relevant:
1 Inventory at 31 May 2004 was valued at $800,000.
2 Marketing and advertising expenses include $6,000 paid in advance for a marketing campaign which will begin
in June 2004. Marketing and advertising expenses should be allocated to administrative expenses.
3 There are wages outstanding of $10,000 for the year ended 31 May 2004.
4 A customer ceased trading owing the company $38,000; the debt is not expected to be recovered.
5 An allowance for doubtful debts is to be established amounting to 5% of trade receivables.
6 Depreciation is to be provided for as follows:
(i) buildings at 5% per annum on their original cost, allocated 50% to cost of sales, 20% to distribution costs
and 30% to administrative expenses.
(ii) motor vehicles at 25% per annum of their written down value, allocated to distribution costs.
(iii) plant and equipment at 20% per annum of their written down value, allocated to cost of sales.
7 No dividends have been paid or declared.
8 Income tax of $250,000 is to be provided for the year.
9 The audit fee is estimated to be $20,000.
10 The expenses listed below should be apportioned as follows:
Cost of Distribution Administrative
Sales Costs Expenses
General expenses 10% 40% 50%
Heating and lighting 50% 30% 20%
Wages and salaries 60% 30% 10%
2
Required:
Paper 6IRL
4J–IRLAA
(a) Prepare the following financial statements for the year ended 31 May 2004 for Sondaw in accordance with
IAS 1 Presentation of Financial Statements:
(i) An income statement; (18 marks)
(ii) A balance sheet. (14 marks)
You are advised to show workings where appropriate.
(b) Briefly explain the purpose of providing for depreciation and identify the factors to be taken into account
when deciding on which depreciation method to use. (3 marks)
(35 marks)
3 [P.T.O.
2 You have been given the following information relating to a limited liability company called Nobrie.
Paper 6INT
4J–INTAB
This company is preparing its financial statements for the year ended 31 May 2004.
Nobrie
Income statement for the year ended 31 May 2004
$000
Revenue 66,600
Cost of sales (13,785)
–––––––
Gross profit 52,815
Distribution costs (7,530)
Administrative expenses (2,516)
–––––––
Profit from operations 42,769
Investment income 146
Finance cost (1,177)
–––––––
Profit before tax 41,738
Tax (9,857)
–––––––
Net profit for the period 31,881
Accumulated profits brought forward at 1 June 2003 28,063
–––––––
Accumulated profits carried forward at 31 May 2004 59,944
–––––––
Nobrie
Balance Sheets as at 31 May
2004 2003
Assets $000 $000 $000 $000
Non-current assets
Cost 144,844 114,785
Accumulated depreciation (27,433) (26,319)
–––––––– ––––––––
117,411 88,466
Current Assets
Inventory 24,931 24,065
Trade receivables 18,922 13,238
Cash 3,689 47,542 2,224 39,527
––––––– –––––––– ––––––– –––––––
Total assets 164,953 127,993
–––––––– –––––––
Ordinary share capital 27,000 23,331
Share premium 14,569 10,788
Revaluation reserve 15,395 7,123
Accumulated profits 59,944 116,908 28,063 69,305
––––––– –––––––
6% loan note 17,824 24,068
Current Liabilities
Bank overdraft 5,533 6,973
Trade payables 16,699 20,324
Taxation 7,989 30,221 7,323 34,620
––––––– –––––––– ––––––– –––––––
Total equity and liabilities 164,953 127,993
–––––––– –––––––
4
Additional information
Paper 6INT
4J–INTAB
(i) During the year ended 31 May 2004, the company sold a piece of equipment for $3,053,000, realising a profit
of $1,540,000. There were no other disposals of non-current assets during the year.
(ii) Profit from operations is stated after charging depreciation of $5,862,000.
(iii) There were no amounts outstanding in respect of interest payable or receivable as at 31 May 2003 or 2004.
(iv) There were no dividends paid or declared during the year.
Required:
Prepare a cash flow statement for Nobrie for the year ended 31 May 2004 in accordance with IAS 7 Cash Flow
Statements.
(25 marks)
3 Angela, Brenda and Christine are in a partnership and share profits and losses in the ratio 4:2:1. They prepare their
Paper 6INT
4J–INTAC
accounts to 31 May each year. At 1 June 2003 their capital and current accounts showed the following balances:
Capital accounts Current accounts
$ $
Angela 500,000 60,000
Brenda 260,000 40,000
Christine 330,000 10,000
On 31 August 2003 Christine decided to leave the partnership due to ill health. Hannah joined the partnership on
1 September 2003 and introduced $250,000 as capital and also paid $210,000 for a 30% share of the goodwill.
Goodwill, which is not to be reported in the balance sheet, is agreed to be worth $700,000. After Hannah’s admission
to the partnership it was agreed the profits and losses would be shared as follows:
Angela 40%
Brenda 30%
Hannah 30%
Before calculating the amount Christine is entitled to when she leaves the partnership the following adjustments need
to be taken into account:
(a) The net profit for the partnership for the year ended 31 May 2004 was $800,000 before allowing for items (b)
and (c) below. It was agreed that the profit accrued evenly throughout the year.
(b) A bad debt of $25,000 relating to a sale made in June 2003 is to be written off for the year ended 31 May
2004.
(c) Christine has decided to leave her final agreed capital balance in the partnership as a loan and receive interest
at a rate of 5% per annum up to the year end. The loan interest was paid to her on 31 May 2004.
(d) The partnership’s freehold property is to be revalued upwards by $350,000 and it is agreed that the freehold
property will be carried at the revalued amount in the balance sheet.
(e) The partners’ drawings during the year were:
$
Angela 60,000 ($20,000 before 31 August 2003 and the remainder afterwards)
Brenda 50,000 ($10,000 before 31 August 2003 and the remainder afterwards)
Christine 35,000 (All before 31 August 2003)
Hannah 30,000 (All after 31 August 2003)
Required:
Prepare a statement showing the final profit for the year ended 31 May 2004 and the share attributable to each
partner, together with the capital and current accounts for all four partners.
(20 marks)
5 [P.T.O.
4 The financial statements of Egriff, a company limited by liability, for the years ended 31 May 2003 and 31 May 2004
Paper 6INT
4J–INTAD
are summarised below.

Income statements for the years ended
31 May 2003 31 May 2004
$000 $000 $000 $000
Revenue 20,000 26,000
Cost of sales (15,400) (21,050)
––––––– –––––––
Gross profit 4,600 4,950
Expenses:
Administrative (800) (900)
Selling and distribution (1,550) (1,565)
Depreciation (110) (200)
Loan note interest – (105)
––––––– –––––––
(2,460) (2,770)
––––––– –––––––
Net profit 2,140 2,180
–––––––
––––––– –––––––
–––––––
Balance sheets as at
31 May 2003 31 May 2004
$000 $000 $000 $000
Non current assets
At cost 4,600 5,600
Accumulated depreciation (800) (1,000)
––––––– 3,800 ––––––– 4,600
Current assets
Receivables 4,400 6,740
Bank 120 960
––––––– 10,520 ––––––– 14,400
––––––– –––––––
14,320 19,000
–––––––
––––––– –––––––
–––––––
Issued share capital 8,000 8,000
Accumulated profit 3,120 5,300
––––––– –––––––
11,120 13,300
7% Loan notes – 1,500
Current liabilities 3,200 4,200
––––––– –––––––
14,320 19,000
–––––––
––––––– –––––––
–––––––
Additional Information
During 2003 Egriff issued loan notes of $1,500,000 at 7% per annum to fund the expansion of the business. The
additional cash was received on 1 June 2003.
6
Required:
Paper 6INT
4J–INTAD
(a) Calculate the following ratios for Egriff for both years.
Gross profit percentage
Net profit percentage
Return on equity
Inventory turnover
Quick ratio
Receivables collection period
State the formulas used for calculating the ratios. (9 marks)
(b) Comment on the success of the business expansion as indicated by the ratios you have calculated in part
(a). (7 marks)
(c) Briefly explain the factors Egriff should consider in deciding whether to raise finance by issuing loan notes
rather than issuing more shares. (4 marks)
(20 marks)
End of Question Paper
7
Answers

ACCA Certified Accounting Technician Examination – Paper T6(INT) December 2004 Answers
1 (a) Guyridge Marks Workings ($)

Income statement for the year ended 31 October 2004 0·5
$ $ $
Sales revenue (W1) 395,000 3·0
Opening inventory 25,000 0·5
Purchases (W2) 195,000 2·0
Carriage inwards 4,500 0·5
––––––––
224,500
Less closing inventory (37,000) 0·5
––––––––
Cost of goods sold (187,500) 0·5
––––––––
Expenses
Vehicle running expenses 13,500 0·5
Insurance 8,000 1·5 (5,000 + 4,000 – 1,000)
Heating and lighting 6,250 1·5 (7,000 – 3,000 + 2,250)
Telephone 3,500 0·5
Advertising 4,250 1·5 (2,250 + 2,000)
Rent and rates 14,000 1·5 (15,000 – 1,000)
Office supplies 1,250 0·5
Depreciation for: Vehicles 6,000 1·0
Equipment 12,000 18,000 1·0
––––––
Bad debts 15,000 0·5
Discounts allowed 5,000 0·5
––––––––
(88,750)
––––––––
Net profit before appropriation 118,750 0·5
Interest on drawings: Kevin 2,000 0·5
David 1,000 3,000 0·5
–––––––– ––––––––
121,750
Interest on capital: Kevin 8,000 0·5
David 5,000 (13,000) 0·5
________ ________
108,750
––––––––
––––––––
Share of Profit: Kevin 2/3 72,500 1·0
1
David /3 36,250 1·0
––––––––
108,750
––––––––
–––––––– –––
23
–––
–––
(b) Current Accounts
Kevin
$ $
Drawings 60,000 Balance b/f 23,000 1·0
Interest on drawings 2,000 Interest on capital 8,000 1·0
Balance c/f 41,500 Share of profit 72,500 0·5
–––––––– ––––––––
103,500 103,500
––––––––
–––––––– ––––––––
––––––––
David
$ $
Interest on drawings 1,000 Interest on capital 5,000 1·0
––––––– –––––––
62,250 62,250
–––––––
––––––– –––––––
––––––– –––
5·0
–––
–––
11
Marks
(c) Guyridge
Balance Sheet as at 31 October 2004 0·5
Cost Provision for Net Book
Depreciation Value
$ $ $
Non-current assets
Vehicles 32,000 14,000 18,000 1·0
Equipment 60,000 24,000 36,000 1·0
––––––– ––––––– ––––––––
92,000 38,000 54,000 1·0
–––––––
––––––– –––––––
–––––––
Current Assets
Inventory 37,000 0·5
Trade receivables (W1) 55,000 0·5
Prepayments 1,000 1·0
Bank (W3) 68,000 161,000 3·0
––––––– ––––––––
215,000
––––––––
––––––––
Partners’ capital accounts
Kevin 80,000 0·5
David 50,000 130,000 0·5
–––––––
Partners’ current accounts
Kevin 41,500 0·5
David 31,250 72,750 0·5
––––––– ––––––––
202,750
Current liabilities
Trade payables (W2) 10,000 0·5
Accruals 2,250 12,250 1·0
––––––– ––––––––
215,000
––––––––
–––––––– –––
12
–––
–––
Allocation
Workings of marks
W1 Trade Receivables Control Account
$ $
Receivables b/f 80,000 Bad debts 15,000 0·5 + 0·5
Sales (bal. fig) 395,000 Settlement discounts 5,000 0·5 + 0·5
Bank 400,000 0·5
Receivables c/f 55,000 0·5
–––––––– ––––––––
475,000 475,000
––––––––
–––––––– ––––––––
––––––––
W2 Trade Payables Control Account
$ $
Bank 200,000 Trade payables b/f 15,000 0·5 + 0·5
Payables c/f 10,000 Purchases (bal. fig) 195,000 0·5 + 0·5
–––––––– ––––––––
210,000 210,000
––––––––
–––––––– ––––––––
––––––––
W3 Bank
$ $
Balance b/f 10,000 Trade payables control 200,000 0·5 + 0·5
Receivables control 400,000 Drawings: Kevin 60,000) 0·5 + 0·5
David 30,000)
Carriage inwards 4,500)
Vehicle expenses 13,500)
Insurance 5,000)
Heating and lighting 7,000) 1
Telephone 3,500)
Advertising 2,250)
Rent and rates 15,000)
Office supplies 1,250)
Balance c/f 68,000
–––––––– ––––––––
410,000 410,000
––––––––
–––––––– ––––––––
––––––––
12
Marks
2 (a) Goodwill on acquisition of Bury $000 $000
Cost of investment 24,000 0·5
Share capital ($30,000 x 70%) 21,000 0·5
General reserve ($500,000 x 70%) 350 1·0
Accumulated profits ($1,500,000 x 70%) 1,050 (22,400) 1·0
––––––– –––––––
1,600
–––––––
–––––––
–––
Total 3
–––
–––
(i) Black 0·5
Consolidated income statement for the year ended 31 October 2004
$000 Workings ($000)
Sales revenue 323,200 2·0 245,000 + 95,000 – 16,800
Cost of sales (176,640) 2·5 140,000 + 52,000 – 16,800 + 1,440*
–––––––––
Gross Profit 146,560
Distribution costs (22,000) 0·5
Administrative expenses (68,000) 0·5
Goodwill impairment (160) 1·0 (960 – 800)
–––––––––
Income tax expense (18,250) 0·5
–––––––––
Profit after tax 38,150
Minority interest (4,500) 2·0 30% x 15,000
–––––––––
Net profit for the period 33,650 0·5
–––––––––
––––––––– ––––
Total 10·0
––––
––––
(ii) Black Marks
Consolidated Balance Sheet as at 31 October 2004 0·5
Assets $000 $000
Non-current assets
Intangible – goodwill 800 2·0
Property, plant and equipment 150,000 0·5 (110,000 + 40,000)
––––––––
150,800
Current assets
Inventory, at cost 15,810 1·5 (13,360 + 3,890 – 1,440*)
Trade receivables 12,420 2·5 (14,640 + 6,280 – 7,000** – 1,500***)
Bank 6,070 34,300 0·5 (3,500 + 2,570)
–––––––– ––––––––
Total assets 185,100
––––––––
––––––––
Capital and Reserves
General reserves 9,550 1·5 (9,200 + ((1,000 – 500) x 70%)
Accumulated profits (W1) 30,506 3·0
Minority interest 12,084 1·0 (30% x 40,280)
––––––––
152,140
Current liabilities
Trade payables 9,960 2·0 (9,000 + 2,460 – 1,500***)
Dividends payable to Minority
Interests 3,000 1·0 (10,000 – 7,000)
Dividends 20,000 32,960 0·5
–––––––– ––––––––
––––––––
–––––––– ––––
17·0
––––
––––
Notes:
* Exclusion of unrealised profit held in inventory ($1,440,000)
** Exclusion of the intragroup dividends from trade receivables ($7,000,000)
*** Intracompany indebtedness
13
Working Paper
W1 Accumulated profits as at 31 October 2004
$000 $000
Black balance sheet 27,300
Less unrealised profit (1,440)
Bury:
Retained profits 9,280
Pre-acquisition reserves (1,500)
–––––––
7,780
Group share (70% x $7,780,000) 5,446
Less cumulative goodwill impairment as at 31 October 2004 (800) (1600 – (960 – 160))
–––––––
30,506
–––––––
–––––––
Marks
Dividend for the year 10,000
3 (a) Dividend per share ––––––––––––––––––––––– –––––––– = 20 cents per share 1·5
Number of shares in issue 50,000
Profit after tax for ord sh’holders 11,150

Dividend cover –––––––––––––––––––––––––––– ––––––– = 1·1 times 1·5
Dividend 10,000
Net Profit after tax 11,150

Earnings per share ––––––––––––––––––––––– –––––––– = 22 cents 1·5
No. of ordinary shares 50,000
Price per share 150

Price earnings ratio –––––––––––––––––––– ––––– = 6·7 1·5
Earnings per share 22·3
Debt 1,000
Debt/equity ratio –––––––– ––––––– = 3% 1·5
Equity 32,520
Profit before interest and taxation 12,715

Interest cover ––––––––––––––––––––––––––––– ––––––– = 254 times 1·5
Interest 50
____
Total marks 9
––––
––––
14
(b) (i) & (ii)
Notes on Tressven’s ratios
Ratio Tressven Hilladay Comment on the ratio calculated
Dividend per share 20c 10c The level of dividend per share available to Tressven
shareholders is double that available to Hilladay. This
may suggest a generous level of dividend which will
please shareholders in the short term.
Dividend cover 1·1 5 The level of dividend does not appear to be justified by
the available profit. It also suggests that this level of
dividend may not be sustainable in the future.
Earnings per share 22c 20c The EPS for Tressven is similar to Hilladay’s EPS.
However, Hilladay has retained half its earnings for
future investment. This is not the case for Tressven
and would suggest profit levels may stagnate.
Price earnings ratio 6·7 13·4 A comparison of the PE ratio suggests that investors
are keener to invest in Hilladay than Tressven. This may
be because of concerns regarding the future profitability of
Tressven.
Debt/equity ratio 3% 15% The gearing ratio for Tressven seems low in comparison
with Hilladay. It may be that Tressven is not borrowing
sufficiently to invest in the future of the company.
Alternatively Hilladay may have high borrowings.
Interest cover 254 100 Tressven can comfortably afford to meet its interest
charges, so can Hilladay. This suggests that Tressven
could afford to increase its borrowing to invest.
There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the information
available. Other comments, if appropriate, will also be given credit.
1 mark for making a relevant comment about each ratio up to 6 marks.
15
4 (a) The main purposes of the ‘Framework for the Preparation and Presentation of Financial Statements’ are:
(i) To provide a framework for the future development of international accounting standards and the review of existing ones.
(ii) To inform interested parties (e.g. national standard setting bodies) of the approach taken by the IASB in formulating
standards.
(iii) To provide guidance to practitioners when applying international accounting standards.
(iv) To provide a basis for reducing the number of alternative accounting treatments permitted by international accounting
standards and thereby promoting harmonisation of regulations, accounting standards and procedures.
(v) To assist auditors in forming an opinion as to whether financial statements conform with international accounting
standards.
(vi) To assist the users of financial statements when interpreting the information.
(1 mark for each reason up to a maximum of 5 marks)
(b) User Group Information needs
Current (and future) investors They need to assess the financial performance of the organisation to understand
the level of risk and the returns provided by their investment.
Key information requirements: ability to generate cash, level of profitability, and
dividends.
Lenders They need information on the ability of the organisation to repay loans and any
interest.
Key information: profitability, ability to manage working capital (liquidity), current
level of borrowing, value of assets.
Customers Customers that are dependent on the organisation for significant levels of
business or are considering placing long term contracts will need to know
whether it will stay in business or not.
Key information requirements: ability to generate cash, and profitability.
Suppliers (and trade creditors) They will want to know whether the organisation will stay in business and
whether they will be paid.
Key information requirements: ability to generate cash, and profitability.
Marking scheme
1
/2 mark for identifying the user group and up to 2 marks for stating their information requirements. Maximum of 10 marks.
16
Paper T6(INT)
Drafting Financial
Statements
ADVANCED LEVEL
MONDAY 6 DECEMBER 2004
QUESTION PAPER
Do not open this paper until instructed by the supervisor
This question paper must not be removed from the examination

hall

1 Kevin and David are in partnership together and trade under the name Guyridge. They have just completed their
second year of trading and have asked for your help in preparing their final accounts for the year ended 31 October
2004.
The business has expanded rapidly. Consequently, the partners have not had time to maintain the accounting records
properly. However, they are able to provide you with the following information.
At 1 November 2003 the business had the following balances:
Dr Cr
$ $
Capital accounts: Kevin 80,000
David 50,000
Current accounts: Kevin 23,000
David 21,000
Vehicles at cost 32,000
Equipment at cost 60,000
Provisions for depreciation
Vehicles 8,000
Equipment 12,000
Prepayments:
Advertising 2,000
Insurance 4,000
Accruals:
Heating and lighting 3,000
Rent and rates 1,000
Cash at bank 10,000
Inventory 25,000
Trade payables 15,000
Trade receivables 80,000
–––––––– ––––––––
213,000 213,000
––––––––
–––––––– ––––––––
––––––––
The business also made payments during the year for the following:
$
Carriage inwards 4,500
Vehicle running expenses 13,500
Insurance 5,000
Heating and lighting 7,000
Telephone 3,500
Advertising 2,250
Rent and rates 15,000
Office supplies 1,250
Suppliers 200,000
––––––––
252,000
––––––––
––––––––
– Inventory as at 31 October 2004 was valued at $37,000.
– The business owed $10,000 to suppliers as at 31 October 2004.
– Insurance of $1,000 was paid in advance at 31 October 2004.
– During the year bad debts of $15,000 were written off.
– Interest on capital account balances is to be allowed at 10%.
– Receipts from customers were $400,000 and there was $55,000 outstanding from customers at 31 October 2004.
– Settlement discounts of $5,000 were given to customers.
– Invoices totalling $2,250 relating to heating and lighting were unpaid at 31 October 2004.
– Depreciation on vehicles is to be provided at 25% of their written down value.
2
– Depreciation on equipment is to be provided at 20% on it’s original cost.
– Cash drawings during the year were: Kevin $60,000; David $30,000.
– Interest on drawings is to be charged as follows: Kevin $2,000; David $1,000.
– Kevin and David have an agreement to share the profits in the ratio 2:1.
Required
Prepare the following statements for the partnership:
(a) the income statement and appropriation account for the year ended 31 October 2004; (23 marks)
(b) the partners’ current accounts for the year ended 31 October 2004; and (5 marks)
(c) the balance sheet as at 31 October 2004. (12 marks)

(You are advised to show any necessary supporting workings)
(40 marks)
3 [P.T.O.
2 The following are the financial statements relating to Black, a limited liability company, and its subsidiary company
Bury.
Income statements for the year ended 31 October 2004
Black Bury
$000 $000
Cost of sales (140,000) (52,000)
––––––––– –––––––––
Distribution costs (12,000) (10,000)
Administrative expenses (55,000) (13,000)
––––––––– –––––––––
Profit from operations 38,000 20,000
Dividend income from Bury 7,000 –
––––––––– –––––––––
Profit before tax 45,000 20,000
Tax (13,250) (5,000)
––––––––– –––––––––
Net profit for the period 31,750 15,000
–––––––––
––––––––– –––––––––
–––––––––
Balance Sheets as at 31 October 2004
Black Bury
$000 $000 $000 $000
Assets
Non-current assets
Property, plant and equipment 110,000 40,000
Investments:
21,000,000 $1 ordinary shares in Bury at cost 24,000 –
–––––––– ––––––––
134,000 40,000
Current assets
Inventory, at cost 13,360 3,890
Trade receivables and dividend receivable 14,640 6,280
Bank 3,500 31,500 2,570 12,740
–––––––– –––––––– –––––––– ––––––––
Total assets 165,500 52,740
––––––––
–––––––– –––––––
–––––––
$1 Ordinary shares 100,000 30,000
General reserve 9,200 1,000
Accumulated profits 27,300 9,280
–––––––– ––––––––
136,500 40,280
Current liabilities
Payables 9,000 2,460
Dividend 20,000 29,000 10,000 12,460
–––––––– –––––––– –––––––– ––––––––
––––––––
–––––––– ––––––––
––––––––
4
The following information is also available:
(a) Black purchased its $1 ordinary shares in Bury on 1 November 1999. At that date the balance on Bury’s general
reserve was $0·5 million and the balance of accumulated profits was $1·5 million.
(b) At 1 November 2003 the goodwill arising from the acquisition of Bury was valued at $960,000. Black’s
impairment review of this goodwill at 31 October 2004 valued it at $800,000.
(c) During the year ended 31 October 2004 Black sold goods which originally cost $12 million to Bury. Black
invoiced Bury at cost plus 40%. Bury still has 30% of these goods in inventory at 31 October 2004.
(d) Bury owed Black $1·5 million at 31 October 2004 for some of the goods Black supplied during the year.
Required:
(a) Calculate the goodwill arising on the acquisition of Bury. (3 marks)
(b) Prepare the following financial statements for Black:

(i) the consolidated income statement for the year ended 31 October 2004; (10 marks)
(ii) the consolidated balance sheet as at 31 October 2004. (17 marks)
Disclosure notes are not required.
(30 marks)
5 [P.T.O.
3 Nicola is thinking of investing in a limited liability company called Tressven. She has asked for your help to calculate
some of the ratios she needs to decide whether or not to invest. She has given you the summarised financial
statements of Tressven which are shown below:
Tressven
Income statement for the year ended 31 October 2004
$000
Sales revenue 23,420
––––––––
Gross profit 15,175
Expenses (2,460)
––––––––
Finance cost (50)
––––––––
Income tax expense (1,515)
––––––––
Net profit for the period 11,150
––––––––
––––––––
Tressven
Balance sheet as at 31 October 2004
$000 $000
Assets
Non-current assets 31,000
Current assets
Inventory 1,450
Cash 50 4,000
–––––– –––––––
Total assets 35,000
–––––––
–––––––
$0·50 Ordinary Shares 25,000
Reserves 7,520
–––––––
32,520
Current liabilities
Trade payables 860
Tax 620 1,480
––––––
Loan notes 1,000
–––––––
–––––––
–––––––
6
(i) During the year Tressven paid dividends of $10 million.
(ii) The market share price for Tressven is $1·50.
(iii) Tressven’s main competitor is a company called Hilladay which has the following ratios:
Dividend per share 10 cents
Dividend cover 5 times
Earnings per share (EPS) 20 cents
Price earnings ratio 13·4
Debt/equity ratio 15%
Interest cover 100 times
Required:
(a) Calculate the following ratios for Tressven:
(i) Dividend per share;

(ii) Dividend cover;
(iii) Earnings per share (EPS);
(iv) Price earnings ratio (PE ratio);
(v) Debt/equity ratio;
(vi) Interest cover.
Show all workings (9 marks)
(b) Prepare notes for Nicola that comment on the ratios you have calculated. Use the ratios for Hilladay as a
comparator. (6 marks)
(15 marks)
4 Required:
(a) Explain the main purposes of the International Accounting Standards Board’s ‘Framework for the Preparation
and Presentation of Financial Statements’. (5 marks)
(b) Identify any four user groups of financial statements and explain what information they are likely to want
from them. (10 marks)
(15 marks)
7
Answers

ACCA Certified Accounting Technician Examination – Paper T6(INT) June 2005 Answers and
Drafting Financial Statements (International Stream) Marking Scheme
Marks Workings
1 (a) (i) Adnett $000
Income statement for the year ended 31 May 2005 1·0
$000
Revenue 3,485 1·0 (3,500 – 15)
––––––
Gross profit 770
––––––
Profit from operations 286
Finance cost (58) 0·5 (580 x 10%)
––––––
Profit before tax 228
Tax (70) 0·5
––––––
Net profit for the period 158 1·0
––––––
–––––– –––––
15·0
–––––
–––––
(ii) Adnett
Balance sheet as at 31 May 2005 1
$000 $000
Assets
Non-current assets (W2)
Property, plant and equipment 1,773 4
Goodwill 68 1·0
––––––
1,841
Current assets
Inventory 560 0·5
Trade receivables 660 1·0 (700 – 40)
Bank 147 1,367 0·5
–––––– ––––––
Total assets 3,208
––––––
––––––
$1 Ordinary shares (W3) 1,080 1·5
Share premium account (W3) 40 1·5
General reserve 70 1·0 (35 + 35)
Retained earnings 238 2·0 (115 + 158 – 35)
––––––
1,428
10% Loan notes 580 0·5
Current liabilities
Trade payables 1,030 0·5
Income tax 70 0·5
Wages accrual 42 1·0
Loan notes interest 58 1,200 0·5
–––––– ––––––
––––––
–––––– –––––
17·0
–––––
–––––
13
Workings
1 Cost of Distribution Administrative
Sales Cost Expenses
$000 $000 $000
Opening inventory 515
Discounts allowed 70
Discounts received (80)
Heating and lighting (40:20:40) 108 54 108
Administrative expenses 60
Wages and salaries ($250 + $42) (50:25:25) 146 73 73
Purchases ($2,170 + $35 – $17) (11/2 marks) 2,188
Carriage inwards 105
Closing inventory (1/2 mark) (560)
Increase in allowance for doubtful debts 10
Goodwill impairment 17
Depreciation – plant 200
Director’s remuneration 60
–––––– –––– ––––
2,715 153 331
––––––
–––––– ––––
–––– ––––
––––
(5 marks) (1·5 marks) (4·5 marks)
2 Non-current assets Total
Property, Plant
Goodwill Land Buildings Plant & Equipment
$000 $000 $000 $000 $000
Cost 85 345 1,040 1,200 2,585
Depreciation b/f – – (160) (400) (560)
Current year’s depreciation/amortisation:
Goodwill write-down (17)
Buildings $1,040 x 5% (52) (52)
Plant ($1,200 – $400) x 25% (200) (200)
––– –––– –––– –––– ––––––
68 345 828 600 1,773
–––
––– ––––
–––– ––––
–––– ––––
–––– ––––––
––––––
3 Share Capital Reconciliation
Share Capital Share Premium
$000 $000
Opening balance 800 200
Issued on purchase of business 100 20
––––– –––––
Shares ranking for dividend 900 220
Bonus issue 900 x 1/5 180 (180)
––––– –––––
Closing balance 1,080 40
–––––
––––– –––––
–––––
(b) The accounting treatment for goodwill as required by IFRS 3

At the date of acquisition the acquirer recognises goodwill as an intangible asset. On an ongoing basis goodwill is measured
at cost and is assessed for impairment in accordance with IAS 36 at least annually. When a recoverable amount write-down
is required that write-down is taken through the income statement in the period in which it is identified.
3 marks
14
Marks
2 (a) Prepared in accordance with IAS7
Snowdrop
Cash flow statement for the year ended 31 May 2005 1
$’000s $’000s
Net profit before tax 1,032 1
Adjustments for:
Depreciation 700 1
Loss on sale of tangible non-current assets 20 1
Interest 10 0·5
––––––
Increase in inventory (80) 1
Increase in receivables (130) 1
Increase in payables 85 1
––––––
Interest paid (10) 0·5
Tax paid (145) 2
Dividends paid (270) 1
––––––
Net cash from operating activities 1,212
Cash flow from investing activities
Purchase of non-current assets (2,800) 2·5
Receipts from sales of tangible non-current assets 180 1
Proceeds from issue of share capital 1,280 1
Repayment of long term borrowing (100) 1
––––––
1,180 1
––––––
Net increase/(decrease) in cash and cash equivalents (228) 1
Cash and cash equivalents at the beginning of period 170 0·5
––––––
Cash and cash equivalents at end of period (58) 1
––––––
––––––
Note
–––––
Dividends paid and interest paid may be shown in either operating activities or financing activities. 20
–––––
–––––
Workings
Non-current assets
$000 $000
Balance b/f 2,700 Depreciation 700
New non-current assets (bal) 2,800 Disposals 200
Balance c/f 4,600
–––––– –––––––
5,500 5,500
––––––
–––––– –––––––
–––––––
Tax
$000 $000
Tax paid (balancing figure) 145 Balance b/f 145
Balance c/f 180 Income statement 180
–––––– –––––––
325 325
––––––
–––––– –––––––
–––––––
(b) Comment on the financial position of Snowdrop as shown by the cash flow statement
There has been a net outflow of cash $228,000 which has left the company with an overdraft of $58,000.
There was significant expenditure on non-current assets of $2,800,000 during the year. This should help improve
operational efficiency and future profitability.
Additional ordinary shares were issued which resulted in a cash inflow of $1,280,000. This will result in future cash
outflows in the form of dividends.
Long term loans of $100,000 were repaid which will reduce interest payments in future.
There has been an increase in receivables of $130,000 which may mean customers are taking longer to pay and
consequently having an adverse impact on cash flows.
1·5 marks for each relevant comment which is adequately explained up to a maximum of 6 marks.
15
(c) Briefly state some of the ways in which a company could manipulate the year end cash position.
(i) Offering short term incentives to customers to increase sales.
(ii) Reducing the selling price to increase sales.
(iii) Cutting expenses.
(iv) Disposing of assets.
(v) Delaying payments to credit suppliers.
(vi) Encouraging customers to pay early by offering discounts.
(vii) Resourcing effective debt collection procedures.
Marks
3 (a) (i) Capital accounts immediately before sole traders merge
A. Little’s Capital Account
$000 $000
Balance c/f 205 Balance b/f 160
Revaluation 10
Goodwill 35
–––– ––––
205 205
––––
–––– ––––
––––
2
B. Sutton’s Capital Account
$000 $000
Revaluation (70 – 55) 15 Balance b/f 79 2
Balance c/f 89 Goodwill 25
–––– ––––
104 104
––––
–––– ––––
––––
(ii) Little Sutton’s Capital Accounts
A. Little B. Sutton A. Little B. Sutton
$000 $000 $000 $000
Goodwill w/off (2:1) 40 20 Transfer: Sole traders 205 89 3
Balances c/f 165 69
–––– ––– –––– –––
205 89 205 89
––––
–––– –––
––– ––––
–––– –––
–––
(iii) Little Sutton
Balance sheet as at 1 June 2005
$000 $000
Assets
Non-current assets
Freehold property 120 0·5
Plant and equipment 80 0·5
––––
200
Current assets
Inventory 27 0·5
Trade receivables 18 0·5
Bank and cash 23 68 0·5
––– ––––
Total assets 268
––––
––––
Capital and liabilities
Capital Accounts
A. Little 165 0·5
B. Sutton 69 0·5
––––
234
Current liabilities
Trade payables 34 0·5
––––
Total capital and liabilities 268
––––
–––– –––––
4
–––––
–––––
16
(b) Briefly state two advantages and two disadvantages of A Little and B Sutton becoming partners rather than continuing as
sole traders.
Advantages
– Risks are spread between the partners
– They may be able to specialise in a particular activity within the business.
– They may find it easier to raise finance for the business.
– They can pool their network of contacts
Disadvantages
– They may find working together a problem.
– Their individual freedom for decision making might be limited.
– They now have to share any profits.
1 mark for each advantage or disadvantage up to a maximum of 4 marks.
Marks
4 (a) (i) Return on capital employed* Net Profit before Interest & tax x 100 25 x 100 =13·9% 1·5
–––––––––––––––––––––––––– ––––
Capital employed 180
(ii) Gross profit percentage Gross Profit x 100 60 x 100 =37·5% 1·5
––––––––––– ––––
Revenue 160
(iii) Net profit percentage* Net Profit before interest and tax x 100 25 x 100 =15·6% 1·5
–––––––––––––––––––––––––––– ––––
Revenue 160
(iv) Quick/Acid test ratio Current Assets – Inventory :1 75 – 45 :1 = 0·67 :1 1·5
–––––––––––––––––––––– ––––––
Current liabilities 45
(v) Receivables collection period Receivables x 365 25 x 365 = 57 days 1·5
––––––––––– ––––
Revenue 160
(vi) Earnings per share Profits on ordinary activities after tax 10 = 10 cents 1·5
––––––––––––––––––––––––––––––– ––––
No. of ordinary shares in issue 100
* Alternative definitions are also acceptable
––––
9·0
––––
––––
(b) Brief Report

To:
From: A CAT Student
Date June 2005
Subject: Financial Appraisal of F. Raser Using Accounting Ratios
Introduction
The purpose of this report is to analyse the financial performance of F. Raser over the last three years using accounting ratios.
The report specifically comments on the following ratios:
– Return on capital employed;
– Gross profit percentage;
– Net profit percentage;
– Quick/acid test ratio;
– Receivables collection period; and
– Earnings per share
The report also highlights what other information would be useful to help interpret the ratios.
Return on capital employed
The return on capital employed has declined over the last three years from 16·2% to 13·9% and is now well below the
industry average (16·2%). This should be a cause for concern to the board of directors because if investors can obtain a
higher return elsewhere then they may withdraw their investment. Alternatively they may seek to change the management
board. It would be helpful to have more information on the market in which F. Raser operates e.g. is the market growing or
declining, are there many buyers and sellers or just a few.
17
The gross profit percentage has risen over the period from 30·4% to 37·5%. Clearly the company has either
(i) increased the selling price of its goods, e.g. perhaps it is able to sell at a premium because of perceptions regarding the
quality of the goods sold.
(ii) reduced the cost of its supplies. Possibly changing suppliers or obtaining greater discounts as sales volume has
increased.
It would be useful to know what the company is selling and the volume of sales analysed by product and year.
The net profit percentage has declined over the period from 19·3% to 15·6% and is significantly below the industry average
of 17·3%. This is worrying considering the increase in the gross profit percentage over the same period. The decline in the
net profit percentage suggests that the costs may not be tightly controlled within the company. More detailed information on
expenditure during the period would be helpful in identifying the reasons for the decline in profitability.
Quick (or acid test) ratio
The quick ratio has also declined significantly during the period from 1·5 to 0·67 suggesting the company may be
experiencing liquidity problems. This view is also supported when the ratio is compared to the industry average which is over
double that of F. Raser. The level of inventory may be a concern as it is tying up cash. More information on the type of
inventory and the level of inventory turnover would be useful.
The time taken to collect debts has increased over the period from 32 days to 57 days. This seems very high when compared
to the industry average debt collection period of just 35 days. The ratio suggests that there is little control over debt collection.
In addition, the lengthening of the collection period means it is more likely that some debts will not be paid by customers.
The poor control over debt collection will be a factor contributing to the adverse liquidity situation of the company.
Earnings per share
The earnings per share deteriorated over the period from 18c per share to 10c per share. This level of EPS is also significantly
below the industry average and it is likely to discourage potential investors from investing in the company and may not be
sufficient to keep existing shareholders.
Conclusion
Although the company has managed to increase its gross profit over the period, this has not resulted in a similar increase in
net profit. In summary the ratios indicate poor internal control of costs and poor management of working capital. The return
on capital employed and the EPS ratios are unlikely to be sufficiently attractive to potential investors or to existing
shareholders.
Marking scheme
1 mark for each relevant comment up to a maximum of 10 marks. 1 mark for report format.
18
Paper T6(INT)
Drafting Financial
Statements
ADVANCED LEVEL
MONDAY 6 JUNE 2005
QUESTION PAPER

hall

1 The trial balance of Adnett, a limited liability company, at 31 May 2005 was as follows:
Dr Cr
$000 $000
Revenue 3,500
Discounts allowed 70
Bank balance 147
Buildings, accumulated depreciation, 1 June 2004 160
Plant at cost 1,200
Plant, accumulated depreciation, 1 June 2004 400
Land at cost 345
Purchases 2,170
Returns inwards 15
Returns outwards 17
Heating and lighting 270
Carriage inwards 105
Wages and salaries 250
10% Loan notes 580
General reserve 35
Allowance for doubtful debts, at 1 June 2004 30
Retained earnings at 1 June 2004 115
$1 Ordinary shares 800
Inventory at 1 June 2004 515
Share premium account 200
–––––– ––––––
6,947 6,947
––––––
–––––– ––––––
––––––
Additional information as at 31 May 2005
(i) Closing inventory has been counted and is valued at $560,000.
(ii) There are wages and salaries to be paid of $42,000.
(iii) Loan note interest has not been paid during the year.
(iv) The allowance for doubtful debts is to be increased to $40,000.
(v) Plant is depreciated at 25% per annum using the reducing balance method. The entire charge is to be allocated
to cost of sales.
(vi) Buildings are depreciated at 5% per annum on their original cost, allocated 25% to cost of sales, 50% to
distribution costs and 25% to administrative expenses.
(vii) On 1 August 2004 Adnett purchased and absorbed another business as a going concern. Adnett paid $85,000
for goodwill and $35,000 for the business’ inventory. The purchase was paid for by the issue of 100,000
ordinary shares. This transaction has not yet been recorded in the books of Adnett. At 31 May 2005 the fair
value of the goodwill was $68,000.
(viii) During May 2005 a bonus (or scrip) issue of one for five was made to ordinary shareholders. This has not been
entered into the books. The share premium account is to be used for this purpose.
(ix) No dividends have been paid or declared.
(x) The directors have agreed a transfer of $35,000 to the general reserve from profits for the period.
(xi) Tax has been calculated as $70,000 for the year.
2
(xii) The expenses listed below should be apportioned as indicated:
Discounts allowed and received – – 100%
Heating and lighting 40% 20% 40%
Wages and salaries 50% 25% 25%
Goodwill impairment – – 100%
Required:
(a) Prepare, for external use, the following financial statements for Adnett in accordance with IAS 1 Presentation
of Financial Statements:
(i) the income statement for the year ended 31 May 2005; and (15 marks)
(ii) the balance sheet as at 31 May 2005 (17 marks)
(Notes to the financial statements are not required)
(b) Briefly explain the accounting treatment for purchased goodwill. (3 marks)
(35 marks)
3 [P.T.O.
2 The following information has been extracted from the draft financial statements of Snowdrop, a limited liability
company.
Snowdrop
2005 2004
$000 $000 $000 $000
Assets
Non-current assets 4,600 2,700
Current assets
Inventory 580 500
Trade receivables 360 230
Bank 0 940 170 900
–––– ––––––– –––– –––––––
–––––––
––––––– –––––––
–––––––
Share premium 300 150
Retained earnings 1,052 470
––––––– –––––––
4,852 2,990
10% Loan note (redeemable 31 May 2005) 0 100
Current liabilities
Trade payables 450 365
Taxation 180 145
Bank overdraft 58 688 0 510
–––– ––––––– –––– –––––––
–––––––
––––––– –––––––
–––––––
(i) The income statement for the year ended 31 May 2005 shows the following:
$000
Operating profit 1,042
Interest payable (10)
––––––
Profit before taxation 1,032
Taxation (180)
––––––
Profit for financial year 852
––––––
(ii) During the year dividends paid were $270,000.
(iii) Profit before taxation had been arrived at after charging $700,000 for depreciation on non-current assets.
(iv) During the year non-current assets with a net book value of $200,000 were sold for $180,000.
4
Required:
(a) Prepare a cash flow statement for Snowdrop for the year ended 31 May 2005 in accordance with IAS 7
‘Cash Flow Statements’, using the indirect method. (20 marks)
(b) Comment on the financial position of Snowdrop as shown by the cash flow statement you have prepared.
(6 marks)
(c) Briefly state some of the ways in which companies could manipulate their year end cash position.
(4 marks)
(30 marks)
5 [P.T.O.
3 A. Little and B. Sutton were two sole traders in the same line of business. On 1 June 2005 they decided to merge
their businesses to form a partnership called Little Sutton. It was agreed that the profits from the partnership should
be split between A. Little and B. Sutton in the ratio 2:1.
The balance sheets for the two sole traders were as follows:
Balance Sheets as at 31 May 2005
A. Little B. Sutton
$000 $000 $000 $000
Assets
Non-current
Freehold property 110 –
Plant and equipment 25 70
–––– –––
135 70
Current assets
Inventory 15 12
Bank and cash 15 40 8 28
––– –––– ––– –––
Total assets 175 98
––––
–––– –––
–––
Proprietors’ Capital
A. Little 160
B. Sutton 79
Current liabilities
–––– –––
Total capital and liabilities 175 98
––––
–––– –––
–––
Additional information not included in the balance sheets above:
(i) The freehold property was revalued at $120,000 on 31 May 2005.
(ii) The plant and equipment which originally belonged to B. Sutton was revalued to $55,000 on 31 May 2005.
(iii) Goodwill is agreed at 31 May 2005 to be $35,000 for A. Little and $25,000 for B. Sutton. Goodwill is not to
be carried in the partnership balance sheet.
(iv) All assets and liabilities are taken over by the partnership.
Required:
(a) Prepare the:
(i) capital accounts of A. Little and B. Sutton as at 31 May 2005 prior to the formation of the partnership.
(4 marks)
(ii) partners’ capital accounts as in the new partnership as at 1 June 2005. (3 marks)
(iii) opening balance sheet for the Little Sutton partnership. (4 marks)
(b) Briefly state two advantages and two disadvantages of A. Little and B. Sutton becoming partners rather than
continuing as sole traders. (4 marks)
(15 marks)
6
This is a blank page.
Question 4 begins on page 8.
7 [P.T.O.
4 You are presented with the following summarised accounts for F. Raser, a limited liability company.
F. Raser
$000
Revenue 160
Cost of sales (100)
–––––
Gross profit 60
Distribution & administrative expenses (35)
–––––
Finance cost (5)
–––––
Tax expense (10)
–––––
Net profit for the period 10
–––––
–––––
F. Raser
Balance sheet as at 31 May 2005
$000 $000
Assets
Non-current assets 150
Current assets
Inventory 45
Cash and bank 5 75
––– ––––
Total Assets 225
––––
––––
Reserves 30
––––
130
10% loan notes 50
Current liabilities
Trade payables 30
Taxation 10
Dividends (for the year) 5 45
––– ––––
Total equity and liabilities 225
––––
––––
The ratio values for F. Raser for 2003 and 2004 as well as the current average ratio values for the industry sector in
which F. Raser operates are as follows:
Ratio Historical Data Industry Average
2003 2004 2005
Return on capital employed (%) 16·2 14·7 16·2
Gross profit percentage (%) 30·4 34·7 32·3
Net profit percentage (%) 19·3 17·7 17·3
Quick/Acid test ratio 1·5 1·1 1·5
Receivables collection period (days) 32·0 44·0 35·0
Earnings per share (cents) 18·0 13·0 15·0
8
Required:
(a) Calculate the following ratios for F. Raser for the year ended 31 May 2005. State clearly the formulae used
for each ratio.
(i) Return on capital employed
(ii) Gross profit percentage
(iii) Net profit percentage
(iv) Quick/Acid test ratio
(v) Receivables collection period
(vi) Earnings per share (9 marks)
(b) Using the additional information given and the ratios you calculated in part (a), write a brief report on the
financial performance of F. Raser. Indicate in your report what additional information might be useful to help
interpret the ratios. (11 marks)
(20 marks)
9
Answers

ACCA Certified Accounting Technician Examination – Paper T6(INT) December 2005 Answers and
Drafting Financial Statements (International Stream) Marking Scheme
Marks Workings
1 (a) Wisaron
Income Statement and Appropriation Account
for the year ended 31 October 2005 0·5
$ $
Sales revenue 302,200 0·5
Less Returns inwards (3,600) 0·5
––––––––
298,600
Add Purchases 214,400 1·0 ($215,300 – $900)
––––––––
239,050
Less closing inventory 19,000 0·5
––––––––
––––––––
Gross Profit 78,550 0·5
Expenses
Selling expenses 17,500 0·5
Rent 12,000 1·0 ($13,000 – $1,000)
General expenses 1,900 0·5
Insurance 800 0·5
Motor vehicle expenses 6,000 0·5
Wages 9,490 1·0 ($9,090 + $400)
Depreciation
– Motor vehicles 2,500 1·5 (($16,000 – $6,000) x 25%)
– Fixtures and fittings 800 1·0 ($8,000 x 10%)
Loan interest 200 1·0 (($5,000 x 8%) x 0·5)
Bank charges 75 0·5
Irrecoverable debts 400 0·5
Increase in allowance for receivables 565 (53,570) 1·5 (($25,700 – $400) x 5%) – $700
–––––––– ––––––––
Net profit 24,980 0·5
Interest on drawings: Lewis 270 0·5
Aaron 210 480 0·5
–––––––– ––––––––
25,460
Salary: Aaron (8,500) 1·0
––––––––
16,960
––––––––
––––––––
Share of profit: Lewis 3/5 10,176 0·5
Aaron 2/5 6,784 0·5
–––––––– ––––––––
16,960
––––––––
–––––––– –––––
19·0
–––––
11
Marks Workings
(b) Current Accounts
Lewis
$ $
Drawings 6,500 Balance b/f 2,560 0·5 + 0·5
Goods 900 Loan interest 200 1+1
Interest on drawings 270 Share of profit 10,176 0·5 + 0·5
Balance c/f 5,266
––––––– –––––––
12,936 12,936
–––––––
––––––– –––––––
–––––––
Aaron
$ $
Drawings 5,600 Balance b/f 1,370 0·5 + 0·5
Interest on drawings 210 Salary 8,500 0·5 + 1
Balance c/f 10,844 Share of profit 6,784 0 + 0·5
––––––– –––––––
16,654 16,654
–––––––
––––––– –––––––
––––––– –––
7
–––
(c) Wisaron
Balance sheet as at 31 October 2005 0·5
Accumulated Net
Cost Depreciation Book
Value
Assets $ $ $
Non-current assets
Motor vehicles 16,000 8,500 7,500 1·0
Fixtures and fittings 8,000 3,800 4,200 1·0
––––––– ––––––– –––––––
24,000 12,300 11,700 1·0
–––––––
––––––– –––––––
–––––––
Current assets
Trade receivables 25,300 1·0 ($25,700 – $400)
Allowance for receivables (1,265) 24,035 1·0 ($25,300 x 5%)
–––––––
Prepayment (rent) 1,000 1·0
Bank 1,375 45,410 1·0 ($1,450 – $75)
––––––– –––––––
Total assets 57,110 0·5
–––––––
–––––––
Lewis 7,000 1·0 ($12,000 – $5,000)
Aaron 6,000 13,000 0·5
–––––––
Lewis 5,266 0·5
Aaron 10,844 16,110 0·5
–––––––
Loan from Lewis 5,000 1·0
Current Liabilities
Payables 22,600 0·5
Accruals (wages) 400 23,000 1·0
––––––– –––––––
Total capital and liabilities 57,110 0·5
–––––––
––––––– –––
14
–––
12
Workings Marks
$000 $000 $m
2 (a) Goodwill on acquisition
Cost of investment 660,000 1
Share Capital 480,000 (80% x 600) 1
Reserves 76,000 (80% x 95) 1
Revaluation of land 56,000 (80% x 70) 1
–––––––– (612,000)
–––––––– –––
Goodwill 48,000 4
––––––––
–––––––– –––
(b) Spyder
Consolidated Balance Sheet as at 31 October 2005
Assets $000 $000
Non-current assets
Land and buildings 663,000 (W1) 2
Plant 505,000 (285 + 220) 0·5
––––––––––
1,168,000
Current assets
Inventory 597,000 (357 + 252 – 12) 1·5
Trade receivables 626,000 (525 + 126 – 25) 1·5
Bank 188,000 1,411,000 (158 + 30) 0·5
–––––––––– ––––––––––
Total assets 2,579,000
––––––––––
––––––––––
$1 Ordinary shares 1,500,000 1
Reserves 613,600 (W2) 3·5
Minority Interest 176,400 (W3) 3
––––––––––
2,290,000
Current liabilities
Payables 289,000 (220 + 94 – 25) 1·5
––––––––––
Total equity and liabilities 2,579,000
––––––––––
–––––––––– –––
15
–––
Workings
W1 Land and Buildings $000 $000 Analysis of marks
Spyder 315,000 0·5
Phly: Book value 278,000 0·5
: Revaluation of land on acquisition 70,000 1
–––––––– –––
348,000 2
–––––––– –––
663,000
––––––––
––––––––
W2 Reserves
Spyder balance 580,000 0·5
Reserves of Phly (80% x $212 million) 169,600 1
Pre acquisition reserves (80% x $95 million) (76,000) 1
Less Goodwill (48,000) 0·5
Profit on purchases from Spyder (12,000) 0·5
––––––––
(136,000)
–––––––– –––
Reserves 613,600 3·5
––––––––
–––––––– –––
W3 Minority Interest
Share Capital (20% x $600 million) 120,000 1
Revaluation (20% x $70 million) 14,000 1
Reserves (20% x $212 million) 42,400 1
–––––––– –––
Minority Interest 176,400 3
––––––––
–––––––– –––
13
(c) Inter-company trading and consolidation
The companies within a group are separate legal entities and therefore may treat other companies within the group the same
as any other customers. For example, in this question, Phly has purchased goods from Spyder.
The accounts of Spyder will show a profit earned on sales to Phly and similarly Phly’s balance sheet will include inventory at
the cost purchased from Spyder. There are two accounting issues that need to be addressed when preparing the group
accounts:
(i) Although Spyder has made a profit on the goods it has sold to Phly, the group has not made a sale, or any profit, until
an outside customer buys the goods from Phly.
(ii) Any purchases that remain unsold by Phly at the end of the year will be included in Phly’s inventory. Their balance sheet
value will be their cost to Phly, which is not the same as to the group.
The only profits to be recognised should be those made by the group in providing goods to third parties. Inventory in the
consolidated balance sheet should also be valued at the cost to the group. Thus, the $12 million of Spyder’s profit in Phly’s
closing inventory is unrealised from the group’s perspective and is eliminated in full upon consolidation.
There may also be receivables and payables within a group. In these circumstances these internal balances are cancelled.
For example in this question Phly is indebted to Spyder for $25 million. Therefore Phly has a payable on its balance sheet of
$25 million and Spyder has a receivable of $25 million on its balance sheet. When the accounts are consolidated the two
balances are cancelled.
Marking scheme
Up to 3 marks for identifying the issue of unrealised profit on inventory, explaining how they are treated on consolidation and
using an example from the question.
Up to 3 marks for identifying the issue of internal receivables and payables, explaining how they are treated on consolidation
and using an example from the question.
3 (a) Ratio Formulae Aber Cromby

Gross Profit 1,100 2,160
Gross profit percentage –––––––––– x 100 –––––– x 100 = 20·0% –––––– x 100 = 30·0%
Sales 5,500 7,200
Profit before int. & tax 490 475
Return on capital employed* ––––––––––––––––––– x 100 –––––– x 100 = 11·8% –––––– x 100 = 6·3%
Capital Employed 4,155 7,520
Net Profit after tax 275 280
Earnings per share –––––––––––––––––––– –––––– = 9·2 cents –––––– = 4·0 cents
No. of ordinary shares 3,000 7,000
Marking scheme
1 mark for each ratio (6 marks)
* Alternative ratio definitions and calculations may be acceptable.
(b) Ratio Aber Cromby Comment

Gross profit percentage 20% 30% Cromby has been able to achieve a significantly higher gross profit
percentage than Aber. This may be due to a number of factors; for
example, Cromby may be operating at the luxury (branded) end of the
leisurewear market, consequently it may be able to charge its
customers a premium price for its goods. Cromby may also be able
to obtain good discounts from its suppliers for bulk purchases.
Alternatively, Aber may have expensive suppliers, with high costs
associated with carriage inwards.
Return on capital employed 11·8% 6·3% Aber’s return on capital employed is nearly double that of Cromby.
This might suggest that Aber is managed more efficiently than
Cromby. Certainly Aber’s return represents a reasonable return when
compared to current market borrowing rates. However, more
information is needed; for example are the property assets of both
businesses correctly valued?
Earnings per share 9·2c 4·0c Aber has a higher EPS than Cromby and from a shareholder’s
perspective, Aber would be considered a better investment.
It would be useful to have the previous year’s EPS figures so that any
trends could be identified.
There should be some evidence of trying to interpret the ratios, while acknowledging the limitations of the information
available. Other comments, if appropriate, will also be given credit.
1 mark for each relevant comment up to 9 marks.
14
(c) Limitations of ratio analysis:
1 The accounting information used to prepare the ratios may be out of date.
2 Usually the information presented in the published accounts is summarised, making a detailed analysis impossible.
3 Price changes over time make year on year comparisons difficult.
4 Changes in accounting policies from year to year may produce misleading ratios.
5 Different businesses use different accounting policies. This may make direct comparisons difficult.
Marking scheme
1 mark for each limitation that is explained up to 5 marks (other examples may be given).
4 (a) (i) Going Concern Concept

The going concern concept implies that the business will continue in operational existence for the foreseeable future,
and that there is no intention to put the company into liquidation or make drastic cutbacks to the scale of operation.
This concept has a major influence on the assumptions made when evaluating particular items in the balance sheet.
For example assets are not normally shown at net realisable value because they are expected to be kept in the business
for future use.
2 marks
(ii) Accruals Concept
The accruals concept requires that revenue and costs are recognised as they are earned or incurred, not when the money
is received or paid. They must be matched with one another so far as their relationship can be established or justifiably
assumed and dealt with in the income statement of the period to which they relate.
2 marks
(iii) Reliablity
Accounting information must be reliable if it is to be useful. In accounting terms this means the information should be
free from material error and bias. The user must be able to depend on it being a faithful representation.
2 marks
(iv) Understandability
Users of financial statements must be able to understand them. However, it is assumed they have some business,
economic and accounting knowledge and they are able to apply themselves to study the information provided properly.
The complex matters of financial statements should not be left out simply because of their difficulty, if it is relevant
information.
2 marks
(b) The arguments for having accounting standards

– Accounting standards restrict the number of choices in the methods used to prepare financial statements and therefore
reduce the risk of creative accounting. This should help the users of accounts to compare the financial performance of
different organisations.
– Companies are obliged to disclose the accounting policies they have used in the preparation of accounts. This should
help the users of accounts better understand the information presented.
– Accounting standards should increase the credibility of accounts by increasing uniformity of accounting treatment
between companies.
– Accounting standards require companies to disclose information which they might not want to disclose if the standards
did not exist.
– Accounting standards provide a focal point for discussion about accounting practice.
The arguments against having accounting standards
– Sometimes the accounting method advocated may not be appropriate in some particular circumstances or for certain
types of organisation.
– Accounting standards may be overly prescriptive, reducing flexibility and the opportunity for accountants to use their
professional judgement.
– Standards may be too general, resulting in a lack of clear guidance in some situations.
– If standards contain too many detailed rules, there is a danger that preparers will develop creative accounting techniques
that technically adhere to the rules but conflict with the overall aims and principles behind financial statements.
– Accounting standards may have been drafted as a consequence of a particular pressure group.
– Some accounting standards can be expensive to comply with.
Marking scheme: 1 mark for each relevant point up to 7 marks.
15
Paper T6(INT)
Drafting Financial
Statements
ADVANCED LEVEL
QUESTION PAPER

hall

1 Lewis and Aaron are in partnership trading as Wisaron. The trial balance for Wisaron as at 31 October 2005 was as
follows:
Dr Cr
$ $
Purchases 215,300
Selling expenses 17,500
Returns inwards 3,600
Rent 13,000
Bank 1,450
General expenses 1,900
Current accounts at 1 November 2004 – Lewis 2,560
– Aaron 1,370
Insurance 800
Inventory at 1 November 2004 23,500
Motor vehicle expenses 6,000
Allowance for receivables at 1 November 2004 700
Settlement discounts allowed 1,340
Wages 9,090
Drawings – Lewis 6,500
– Aaron 5,600
Capital accounts at 1 November 2004 – Lewis 12,000
– Aaron 6,000
Motor vehicles, at cost 16,000
Fixtures and fittings, at cost 8,000
Accumulated depreciation at 1 November 2004:
– Motor vehicles 6,000
– Fixtures and fittings 3,000
–––––––– ––––––––
356,430 356,430
––––––––
–––––––– ––––––––
––––––––
The following additional information as at 31 October 2005 is available:
1 Lewis and Aaron share profits and losses in the ratio 3:2 respectively.
2 Lewis has taken some goods for his own use during the year to the value of $900, but this has not yet been
recorded in the accounts.
3 Interest on drawings for the year is $270 for Lewis and $210 for Aaron.
4 Aaron is entitled to a salary of $8,500 per annum before profits are shared.
5 On 1 May 2005 it was agreed that $5,000 should be transferred from Lewis’ capital account to a loan account
bearing 8% interest per annum. However, no entries have yet been recorded in the accounts for the transfer.
6 Rent of $1,000 has been paid in advance.
7 Inventory was valued at $19,000.
8 Bank charges of $75 have not been entered into the accounts.
9 There are outstanding wages of $400.
10 Debts of $400 are to be written off and the allowance for receivables to be adjusted, based on past events to the
equivalent of 5% of the remaining trade receivables.
– Motor vehicles at 25% using the reducing balance method.
– Fixtures and fittings at 10% using the straight line method.
2
Required:
(a) the income statement and appropriation account for the year ended 31 October 2005. (19 marks)
(b) the partners’ current accounts for the year ended 31 October 2005; and (7 marks)
(c) the balance sheet as at 31 October 2005. (14 marks)
(40 marks)
3 [P.T.O.
2 The draft balance sheets of Spyder, a limited liability company and its subsidiary company Phly at 31 October 2005
are as follows:
Spyder Phly
Assets $000 $000 $000 $000
Non-current assets
Tangible assets:
Land and buildings 315,000 278,000
Plant 285,000 220,000
–––––––––– ––––––––
600,000 498,000
Investment:
Shares in Phly at cost 660,000
Current assets
Inventory 357,000 252,000
Bank 158,000 1,040,000 30,000 408,000
–––––––––– –––––––––– –––––––– ––––––––
Total assets 2,300,000 906,000
––––––––––
–––––––––– ––––––––
––––––––
$1 Ordinary shares 1,500,000 600,000
Reserves 580,000 212,000
–––––––––– ––––––––
2,080,000 812,000
Current liabilities
Payables 220,000 94,000
–––––––––– ––––––––
Total equity and liabilities 2,300,000 906,000
––––––––––
–––––––––– ––––––––
––––––––
(1) Spyder purchased 480 million shares in Phly some years ago, when Phly had a credit balance of $95 million in
reserves. All the purchased goodwill has now been written off.
(2) At the date of acquisition the freehold land of Phly was revalued at $70 million in excess of its book value. The
revaluation was not recorded in the accounts of Phly.
(3) Phly’s inventory includes goods purchased from Spyder at a price that includes a profit to Spyder of
$12 million.
(4) At 31 October 2005 Phly owes Spyder $25 million for goods purchased during the year.
Required:
(a) Calculate the goodwill on acquisition. (4 marks)
(b) Prepare the consolidated balance sheet for Spyder as at 31 October 2005. (15 marks)
(show clearly any workings)
(c) Explain the accounting treatment of intra-group trading and inter-company balances when preparing
consolidated accounts. Use the transactions between Spyder and Phly to illustrate your answer. (6 marks)
(25 marks)
4
5 [P.T.O.
3 Aber and Cromby are two retail businesses trading in the leisurewear market. Your manager has asked you to review
the performance of both businesses from the financial statements which are provided below.
Income Statements
for the year ended 31 October 2005
Aber Cromby
$000 $000
Revenue 5,500 7,200
Cost of sales (4,400) (5,040)
–––––– ––––––
Expenses (610) (1,685)
–––––– ––––––
Profit from operations 490 475
Finance cost (15) (15)
–––––– ––––––
Profit before tax 475 460
Income tax expense (200) (180)
–––––– ––––––
Net profit for the period 275 280
––––––
–––––– ––––––
––––––
Balance sheets
as at 31 October 2005
Aber Cromby
Assets $000 $000
Current assets
Inventory 125 360
Cash 30 655 0 550
––––– –––––– –––– ––––––
––––––
–––––– ––––––
––––––
$1 Ordinary Shares 3,000 7,000
Reserves 1,080 410
–––––– ––––––
4,080 7,410
Loan notes 75 110
Current liabilities
Overdraft 0 5
Tax 50 250 20 230
––––– –––––– –––– ––––––
––––––
–––––– ––––––
––––––
6
Required:
(a) Calculate the following ratios for BOTH Aber and Cromby.
(i) Gross profit percentage;
(ii) Return on capital employed;
(iii) Earnings per share.
(Show all workings) (6 marks)
(b) Comment on the performance of the businesses as indicated by each of the ratios you have calculated in
part (a). (9 marks)
(c) Explain the limitations of using ratios as a basis for analysing business performance. (5 marks)
(20 marks)
4 (a) Required:
Explain the following accounting terms:
(i) Going concern concept;
(ii) Accruals concept;
(iii) Reliability;
(iv) Understandability. (8 marks)
(b) State the arguments for and against having accounting standards as a basis for preparing financial
statements. (7 marks)
(15 marks)
7
Answers

1 (a) Calculation of profit before interest and tax.

Retained Earnings
Marks
$000 $000
Taxation 80 Bal. at 1 June 2005 130 1
Dividends 100 Profit before interest
and tax (Bal. fig) 370 1
Loan note interest 6 0·5
Bal. at 31 May 2006 314 0·5
–––– –––– –––
500 500 3
––––
–––– ––––
–––– –––
(b) Prepared in accordance with IAS 7

Hadrian
Cash flow statement for the year ended 31 May 2006 0·5
$000 $000
Net profit before tax 364 1
Adjustments for:
Depreciation 300 1
Profit on sale of tangible non-current assets (20) 1
Interest 6 0·5
––––
Operating profit before working capital changes 650
Increase in inventory (110) 1
Increase in receivables (120) 1
Decrease in payables (30) 1
––––
Cash generated from operations 390
Tax paid (60) 1·5
Dividends paid (100) (166) 1
–––– ––––
Net cash from operating activities 224
Cash flow from investing activities
Purchase of non-current assets (880) 2·5
Receipts from sale of tangible non-current assets 100 1·5
––––
Net cash used in investing activities (780)
Proceeds from issue of share capital 550 1·5
Repayment of long term borrowing (60) 1·5
––––
Net cash from financing activities 490 1
––––
Net decrease in cash and cash equivalents (66) 1
––––
Cash and cash equivalents at end of period 4 0·5
––––
–––– –––
20
–––
Note
Interest paid and dividends paid may be shown in either operating activities or financing activities.
Workings
Non-current assets
$000 $000
Balance b/f 1,500 Depreciation 300
New non-current assets (bal) 880 Disposals 80
Balance c/f 2,000
–––––– ––––––
2,380 2,380
––––––
–––––– ––––––
––––––
9
(c) (i) Return on capital employed* Profit before int. & tax x 100 370 x 100 = 15%
––––––––––––––––––– ––––––
Capital employed 2,414
(ii) Quick ratio Current Assets – Inventory :1 274 :1 = 1·4 : 1
–––––––––––––––––––––– ––––––
(iii) Receivables collection period# Receivables x 365 270 x 365 = 123 Days
–––––––––––– ––––––
Sales revenue 800
(iv) Earnings per share Profits on ordinary act. after tax 284 = 14 cents
–––––––––––––––––––––––––––– ––––––
No. of ordinary shares 2,000
* Alternative ratio definitions and calculations may be acceptable.
# Average receivables may be used in ratio definition and calculation.
Marking scheme: 0·5 for each correct formula and 1 mark for each correct ratio.
(d) Comments on the cash flow statement

Cash in the business has decreased by $66,000 and the changes in working capital suggest a squeeze on liquidity i.e.
receivables and inventory have increased over the period and at the same time payables have decreased. However, cash from
operations is positive and Hadrian is able to pay interest and tax which are key items.
During the year Hadrian has:
– repaid $60,000 of long term loans which will reduce future year’s interest payments
– purchased non-current assets worth $880,000 which may improve future efficiency and therefore profitability
– issued 500,000 shares at a 10% premium
Comments on ratios
Return on capital employed
The return on capital employed appears to be good when compared with the industry average. However, this may be
misleading if the company’s non-current assets are under valued.
Quick ratio
The low quick ratio in comparison with the industry average confirms the analysis from the cash flow statement that liquidity
may be a problem for this company.
The long receivables collection period suggests the company may be having problems collecting its debts. This long debt
collection period will be having an adverse impact on the company’s liquidity. In addition, the longer the collection period,
the less likely the debts will be recovered.
Earnings per share
The earnings per share is just slightly lower than the industry average. This may not necessarily be a cause for concern, as
the company issued shares in 2006 which will have reduced the EPS. The success of the share issue suggests that investors
find this company an attractive investment. The investment by the company, in new assets, is likely to result in a higher EPS
in the future.
Marking Scheme: 1 mark for each relevant comment up to a maximum of 11 marks.
10
Marks Workings
2 (a) Paul and Barry
Income statement and appropriation account
for the year ended 31 May 2006 0·5
$ $
Less returns inwards (5,100) 0·5
––––––––
562,900
Add Purchases 375,150 1·0 ($375,600 – $450)
––––––––
414,350
––––––––
––––––––
Expenses
Rent 18,760 0·5
Selling expenses 55,600 0·5
General expenses 4,280 1·0 ($3,680 + $600)
Wages 18,000 0·5
Depreciation
– Motor vehicles 4,200 1·5 (($30,000 – $9,000) x 20%)
– Fixtures and fittings 2,100 1·0 ($14,000 x 15%)
Insurance 640 1·0 ($1,540 – $900)
Motor vehicle expenses 9,300 0·5
Increase in allowance for receivables 220 (123,100) 1·5 (($47,500 – $1,100) x 5%) – $2,100
–––––––– ––––––––
Net profit before appropriation 57,450
Interest on drawings: Paul 420 0·5
Barry 180 600 0·5
–––––––– ––––––––
58,050
Salary: Paul (15,000) 0·5
––––––––
43,050
––––––––
––––––––
Share of profit: Paul 2/3 28,700 0·5
Barry 1/3 14,350 0·5
–––––––– ––––––––
43,050
––––––––
–––––––– ––––
16·0
––––
(b)
Current Accounts
Paul
$ $
Drawings 16,000 Bal b/f 3,570 0·5 + 0
Interest on drawings 420 Salary 15,000 0·5 + 0·5
Balance c/f 30,850 Share of profit 28,700 0 + 0·5
––––––– –––––––
47,270 47,270
–––––––
––––––– –––––––
–––––––
Barry
$ $
Drawings 11,000 Bal b/f 2,190 0·5 + 0
Goods 450 Share of profit 14,350 0·5 + 0·5
Interest on drawings 180 0·5
Balance c/f 4,910
––––––– –––––––
16,540 16,540
–––––––
––––––– –––––––
––––––– –––
4
–––
11
(c) Marks Workings
Paul and Barry 0·5
Accumulated Net
Cost Depreciation Book
Value
$ $ $
Non-current assets
Motor vehicles 30,000 13,200 16,800 1·0
Fixtures and fittings 14,000 9,100 4,900 1·0
––––––– ––––––– ––––––––
44,000 22,300 21,700 0·5
–––––––
––––––– –––––––
–––––––
Current assets
Trade receivables 46,400 1·0 ($47,500 – $1,100)
Allowance for receivables (2,320) 44,080 1·0 ($46,400 x 5%)
–––––––
Prepayment (insurance) 900 0·5
Bank 13,980 90,960 0·5
––––––– ––––––––
112,660
––––––––
––––––––
Paul 20,000 0·5
Barry 15,000 35,000 0·5
–––––––
Paul 30,850 0·5
Barry 4,910 35,760 0·5
––––––– ––––––––
70,760
Current Liabilities
Accruals (general expenses) 600 41,900 0·5
––––––– ––––––––
112,660 0·5
––––––––
–––––––– ––––
10·0
––––
3 (a) Goodwill on acquisition of Workings ($000)

Everpool $000 $000
Share capital (75% of $4,000,000) (3,000) 1
Pre-acquisition reserves (75% of $200,000) (150) (3,150) 1
–––––– ––––––
Goodwill on acquisition 350 0·5
––––––
–––––– –––
3
–––
(b) Liverton
Consolidated income statement for the year ended 31 May 2006
$000
Sales revenue 8,800 1·5 (6,400 + 2,600 – 200)
Cost of sales (5,004) 2·5 (3,700 + 1,450 – 200 + (60% x 90))
––––––
Gross profit 3,796
Goodwill impairment (70) 1 (200 – 130)
––––––
Income tax expense (480) 0·5
––––––
Profit for the period 636
––––––
Attributable to:
Equity holders of the parent 571 0·5
Minority interest 65 1 (260 x 25%)
––––––
636
–––––– –––
8
–––
12
(c) Associates
An associate is defined as an entity over which an investor has significant influence and that is neither a subsidiary nor a
joint venture of the investor. Significant influence is the power to participate in the financial and operating policy decisions of
the investee. If an investor holds between 20% and 50% of the voting power of the investee then the investor will usually
have significant influence over the investee, unless it can be clearly demonstrated this is not the case.
The existence of significant influence might also be demonstrated in one or more of the following ways:
(a) Representative of the investor on the board of directors.
(b) Participation in the policy making process.
(c) Material transactions between investee and investor.
(d) Interchange of management personnel.
(e) Provision of essential technical information.
Marking scheme: 1 mark for each point up to a maximum of 4 marks for a good answer.
4 (a) Adjusting events – These are events that provide evidence of a condition that existed at the balance sheet.
IAS 10 requires that the amounts recognised in the financial statements be adjusted to take account of an adjusting event.
The standard also requires that disclosures be up-dated in the light of new information that relate to a condition that existed
at the balance sheet date.
Non-adjusting event – These are events that are indicative of conditions that arose after the balance sheet date.
IAS 10 prohibits the adjustment of amounts recognised in the financial statements to reflect non-adjusting events after the
balance sheet date. However, if a non-adjusting event is material and its non-disclosure could influence the decisions of users
then an entity should disclose the following:
(a) the nature of the event
(b) an estimate of its financial effect, or a statement that such an estimate cannot be made.
Marking scheme: up to 2 marks for defining each type of event and how they should be treated (maximum 4 marks).
(b) (i) Receivables that were thought to be good at the balance sheet date will not now be paid. – Adjusting event
(ii) Jilton Newl has announced a bid to take over another company. – Non adjusting event
(iii) Some material errors have been discovered which show the financial statements are incorrect. – Adjusting event
(iv) The factory workforce at Jilton Newl has started strike action for an indefinite length of time. – Non adjusting event
Marking scheme: 1 mark for each correct answer (maximum 4 marks)
(c) Contingent liability

IAS 37 defines a contingent liability as:
A possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within the control of the entity; or
A present obligation that arises from past events but is not recognised because:
– It is not probable that a transfer of economic benefits will be required to settle the obligation; or
– The amount of the obligation cannot be measured with sufficient reliability
Contingent liabilities should not be recognised in the financial statements but they should be disclosed unless the possibility
of any liability is remote. The required disclosures are:
– A brief description of the nature of the contingent liability
– An estimate of its financial effect
– An indication of the uncertainties that exist
– The possibility of any reimbursement
Marking scheme: up to 1·5 marks for defining a contingent liability and up to 2 marks for the accounting treatment.
Contingent asset
IAS 37 defines a contingent asset as:
A possible asset that arises from past events and whose existence will be confirmed by the occurrence, or non-occurrence,
of one or more uncertain future events not wholly within the entity’s control.
13
A contingent asset must not be recognised. Only when the realisation of the related economic benefit is virtually certain should
recognition take place. At that point the asset is no longer a contingent asset.
A contingent asset is disclosed where an inflow of economic benefit is probable.
Marking scheme: up to 1·5 marks for defining a contingent asset and up to 2 marks for the accounting treatment.
14
Paper T6(INT)
Drafting Financial
Statements
ADVANCED LEVEL
MONDAY 5 JUNE 2006
QUESTION PAPER

hall

1 The balance sheet of Hadrian, a limited liability company, as at 31 May 2006 is provided below together with
comparative figures for the previous year.
Hadrian
2006 2005
$000 $000 $000 $000
Assets
Current assets
Inventory 340 230
Bank 4 614 70 450
––––– –––––– ––––– ––––––
2,614 1,950
––––––
–––––– ––––––
––––––
Ordinary share capital (shares of $1) 2,000 1,500
Retained earnings 314 130
–––––– ––––––
2,414 1,680
10% Loan note – 60
Current liabilities
Taxation 80 200 60 210
––––– –––––– ––––– ––––––
––––––
–––––– ––––––
––––––
(i) Interest paid was $6,000 during the year ended 31 May 2006.
(ii) There was no over or under provision of tax for the year ended 31 May 2005.
(iii) Dividends paid were $100,000 during the year ended 31 May 2006.
(iv) Depreciation of $300,000 was charged for the year ended 31 May 2006.
(v) Non-current assets with a net book value of $80,000 were sold at a profit of $20,000 during the year ended
31 May 2006.
Required:
(a) Calculate the profit before interest and tax of Hadrian for the year ended 31 May 2006. (3 marks)
(b) Prepare a cash flow statement for Hadrian for the year ended 31 May 2006 in accordance with IAS 7 – Cash
Flow Statements, using the indirect method. (20 marks)
2
Further Information
(i) Sales revenue for the year ended 31 May 2006 was $800,000.
(ii) The latest average ratios for the industry in which Hadrian operates are as follows:
Return on capital employed 10%
Quick ratio 2:1
Receivables collection period 80 days
Earnings per share 15 cents
(c) Calculate the following ratios for Hadrian for the year ended 31 May 2006 ONLY:
(i) Return on capital employed;
(ii) Quick ratio;
(iii) Receivables collection period;
(iv) Earnings per share.
State the formula used for each ratio. (6 marks)
(d) Using information from your cash flow statement, the industry ratios and the ratios you have calculated in
(c), comment on the financial performance of Hadrian. (11 marks)
(40 marks)
3 [P.T.O.
2 Paul and Barry are in a business partnership. Their trial balance as at 31 May 2006 is given below:
Dr Cr
$ $
Returns inwards 5,100
Purchases 375,600
Rent 18,760
Selling expenses 55,600
General expenses 3,680
Allowance for receivables at 1 June 2005 2,100
Bank 13,980
Wages 18,000
Current accounts at 1 June 2005 – Paul 3,570
Current accounts at 1 June 2005 – Barry 2,190
Motor vehicles, at cost 30,000
Fixtures and fittings, at cost 14,000
Accumulated depreciation at 1 June 2005:
Accumulated depreciation – Motor vehicles 9,000
Accumulated depreciation – Fixtures and fittings 7,000
Insurance 1,540
Inventory at 1 June 2005 39,200
Motor vehicle expenses 9,300
Discounts allowed 8,900
Drawings – Paul 16,000
Drawings – Barry 11,000
Capital accounts at 1 June 2005 – Paul 20,000
Capital accounts at 1 June 2005 – Barry 15,000
–––––––– ––––––––
668,160 668,160
––––––––
–––––––– ––––––––
––––––––
The following additional information as at 31 May 2006 is available:
1 Paul and Barry share profits and losses in the ratio 2:1 respectively.
2 Inventory was valued at $32,000.
3 During the year, Barry has taken some goods for his own use to the value of $450, but this has not yet been
recorded in the accounting records.
4 Interest on drawings for the year were $420 for Paul and $180 for Barry.
5 Paul is entitled to a salary of $15,000 per annum before profits are shared.
6 Insurance of $900 has been paid in advance.
– Motor vehicles at 20% using the reducing balance method
– Fixtures and fittings at 15% using the straight line method
8 There are outstanding general expenses of $600.
9 Debts of $1,100 are to be written off and the allowance for receivables is to be adjusted to the equivalent of 5%
of the remaining trade receivables, based on past experience.
Required:
(a) the income statement and appropriation account for the year ended 31 May 2006. (16 marks)
(b) the partners’ current accounts for the year ended 31 May 2006; and (4 marks)
(c) the balance sheet as at 31 May 2006. (10 marks)
(30 marks)
4
3 The summarised income statements of two companies, Liverton and Everpool, for the year ended 31 May 2006 are
provided below. Liverton acquired 3,000,000 ordinary shares in Everpool for $3,500,000 on 1 June 2004. At that
time, the retained earnings of Everpool were $200,000.
Income statements for the year ended 31 May 2006
Liverton Everpool
$000 $000
Cost of sales (3,700) (1,450)
–––––– ––––––
Distribution costs (1,100) (490)
Administrative expenses (700) (320)
–––––– ––––––
Profit from operations 900 340
Dividends received from Everpool 150 –
–––––– ––––––
Profit before tax 1,050 340
Tax (400) (80)
–––––– ––––––
Net profit for the period 650 260
––––––
–––––– ––––––
––––––
(i) Everpool’s total share capital consists of 4,000,000 ordinary shares of $1 each.
(ii) At 31 May 2005 Liverton had valued the goodwill arising from the acquisition of Everpool at $200,000. An
impairment review of this goodwill at 31 May 2006 valued it at $130,000.
(iii) During the year ended 31 May 2006 Liverton sold goods costing $110,000 to Everpool for $200,000. At
31 May 2006, 60% of these goods remained in Everpool’s inventory.
Required:
(a) Calculate the goodwill arising on the acquisition of Everpool. (3 marks)
(b) Prepare the consolidated income statement for Liverton for the year ended 31 May 2006. (8 marks)
(c) Explain the criteria that should be met for a company to be accounted for as an associate company.
(4 marks)
(15 marks)
5 [P.T.O.
4 (a) Define an adjusting event after the balance sheet date and a non-adjusting event after the balance sheet date
and state how each should be accounted for. (4 marks)
(b) Jilton Newl is a large manufacturing company. After the date of the balance sheet, but prior to the financial
statements being authorised for issue, the following material events occurred:
(i) It was discovered that a receivables balance existing at the balance sheet date will not now be received.
(ii) Jilton Newl has announced a bid to take over another company.
(iii) Some material errors have been discovered which show the financial statements are incorrect.
(iv) The factory workforce at Jilton Newl has started strike action for an indefinite length of time.
Required:
For each of the events described above, state if they should be treated as an adjusting or non-adjusting event
after the balance sheet date. (4 marks)
(c) Define a ‘contingent liability’ and a ‘contingent asset’, and explain how each should be treated in the
financial statements. (7 marks)
(15 marks)
6
Answers

Paper T6INT
ACCA Certified Accounting Technician Examination – Paper T6(INT) December 2006 Answers
6D–INTIX
Marks
1 (a) Tonson
Paper T6INT
6D–INTAA

$000 $000
Less returns inward (95) 1·0
––––––
5,685
Opening inventory 350 0·5
Add purchases 3,570 0·5
––––––
3,920
Less closing inventory (275 – 25) (250) 1·0
––––––
––––––
2,015
Discounts received 50 1·0
––––––
General expenses 60 0·5
Insurance 75 0·5
Marketing expenses (W1) 45 1·5
Wages and salaries (W2) 715 1·5
Energy expenses 66 0·5
Telephone 80 0·5
Property expenses 100 0·5
Loan note interest 33 0·5
Receivables expense (W3) 155 1·5
Depreciation: Buildings 75 1·5
Motor vehicles 32 1·5
Furniture and equipment 240 1·5
––––––
(1,676)
––––––
Net profit before taxation 389
Tax (150) 0·5
––––––
Net profit for the period 239
––––––
––––––
Total 18·0
13
Marks
(b) Tonson
Paper T6INT
6D–INTAA

Cost/ Accumulated Net Book
Assets Valuation Depreciation Value
Non-current assets $000 $000 $000
Land 740 0 740 0·5
Buildings 1,800 0 1,800 0·5
Furniture and equipment (W4) 1,200 660 540 1·0
Motor vehicles (W5) 240 112 128 1·0
–––––– –––––– ––––––
3,980 772 3,208 0·5
––––––
–––––– ––––––
––––––
Current assets
Inventory 250 1·0
Trade receivables 900 0·5
Less allowance (45) 855 1·0
––––––
Prepayments 5 1·0
Cash in hand 15 1,125 0·5
–––––– ––––––
––––––
––––––
$1 Ordinary shares ($1,800 + $180) 1,980 1.0
Share premium account ($200 – $180) 20 1.0
Revaluation reserve (W6) 735 1·5
Retained earnings ($315 + $239) 554 1·0
––––––
3,289
Current liabilities
Tax 150 0·5
Accruals 40 1·0
Bank overdraft 94 574 1·0
–––––– ––––––
––––––
––––––
Total 17.0
Working Papers
W1 Marketing expenses
$ $
Balance as per TB 50,000 Income statement 45,000
Prepayment c/f 5,000
––––––– –––––––
50,000 50,000
–––––––
––––––– –––––––
–––––––
W2 Wages and Salaries
$ $
Wages accrued c/f 40,000
–––––––– ––––––––
715,000 715,000
––––––––
–––––––– ––––––––
––––––––
14
Marks
W3 Receivables Expense
Paper T6INT
6D–INTAA
$ $
Allowance for receivables 5,000
–––––––– ––––––––
155,000 155,000
––––––––
–––––––– ––––––––
––––––––
Allowance for receivables
$ $
Balance c/f 45,000 Balance as per TB 40,000
Bad debts 5,000
––––––– –––––––
45,000 45,000
–––––––
––––––– –––––––
–––––––
W4 Furniture and Equipment Accumulated Depreciation
$ $
Inc. Statem’t
(20% of $1,200,000) 240,000
–––––––– ––––––––
660,000 660,000
––––––––
–––––––– ––––––––
––––––––
W5 Motor Vehicles Accumulated Depreciation
$ $
Inc. Statem’t
20% of ($240,000 – $80,000) 32,000
–––––––– ––––––––
112,000 112,000
––––––––
–––––––– ––––––––
––––––––
W6 Revaluation Reserve
Depreciation on buildings for the year is calculated as $1,500,000 x 5% = $75,000
Therefore the net book value of the buildings is $1,065,000 at the end of the year, i.e.
$1,500,000 – $360,000 – $75,000.
When the buildings are revalued at the end of the year a revaluation reserve is created of
$735,000. i.e. $1,800,000 – $1,065,000 = $735,000.
15
Marks
2 (a) Prepared in accordance with IAS 7
Paper T6INT
6D–INTAB
H Marathon
Cash flow statement for the year ended 31 October 2006 0·5
$000 $000
Adjustments for
Depreciation 6,784 1
Interest received (101) 0·5
Interest paid 1,749 0·5
Profit on equipment disposal (1,806) 1
––––––––
Decrease in inventory 3,015 0·5
Decrease in receivables 3,034 0·5
Decrease in payables (270) 0·5
–––––––
Interest paid (1,749) 0·5
Tax paid (W4) (2,395) 2
––––––––
Purchase of property, plant and equipment (W1 to W3) (7,671) 3
Proceeds from sale of equipment 5,667 1
Dividends paid (3,697) 1
––––––––
Net cash used in investing activities (5,701)
––––––––
Proceeds from issues of share capital 4,231 1
Repayment of long term borrowing (16,889) 1
––––––––
Net cash used in financing activities (12,658)
––––––––
Net increase in cash and cash equivalents 892 1
Cash and cash equivalents at the beginning of the period (4,806) 1
––––––––
Cash and cash equivalents at the end of the period (3,914)
––––––––
––––––––
Total 18
Examiner’s note
IAS 7 allows interest paid to be an operating cash flow or a financing cash flow. Interest received can be an
operating cash flow or an investing cash flow. Dividends paid can be shown as cash flows from investing
activities or cash flows from financing activities.
Workings (all in $000):
W1 Non-current assets at cost W2 Accumulated depreciation
B/f 124,252 Disposal 5,296 On dis- b/f 25,629

Reval’n 6,525 posals 1,435 Charge 6,784
Additions 7,671 c/f 133,152 c/f 30,978
–––––––– –––––––– ––––––– –––––––
138,448 138,448 32,413 32,413
––––––––
–––––––– ––––––––
–––––––– –––––––
––––––– –––––––
–––––––
W3 Non-current assets disposal a/c W4 Taxation
Cost 5,296 Acc dep 1,435 Paid 2,395 B/f 1,926

Profit 1,806 Cash 5,667 C/f 2,101 Inc. stat. 2,570
–––––––– –––––––– ––––––– –––––––
7,102 7,102 4,496 4,496
––––––––
–––––––– ––––––––
–––––––– –––––––
––––––– –––––––
–––––––
Note: the entries in italics in these t-accounts are the ‘balancing figures’.
16
Marks
Alternative workings:
Paper T6INT
6D–INTAB
Additions of non-current assets: Non-current assets NBV
Opening net book value 98,623 B/forward 98,623 Disposals 3,861

Disposals (5,667 – 1,806) (3,861) Revaluation 6,525 Depr'tion 6,784
Depreciation (6,784) Add’ns (bal) 7,671 C/f 102,174
Revaluation (12,554 – 6,029) 6,525 –––––––– ––––––––
–––––––– 112,819 112,819
94,503 ––––––––
–––––––– ––––––––
––––––––
Additions (Balancing figure) 7,671
––––––––
Closing net book value 102,174
––––––––
––––––––
(b) Over the period there was a net cash inflow to the business of $892,000. (1 mark)
The company purchased non-current assets of $7,671,000. The purchase of new non-current
assets may help operational efficiency and therefore improve future cash flows. (2 marks)
The company was able to generate additional cash by selling non-current assets for $5,667,000. (1 mark)
Loan notes of $16,889,000 were redeemed, this will reduce interest payments in the future. (2 marks)
Inventory levels were reduced by $3,015,000. This might indicate the company has adopted
better inventory control procedures which should have a positive impact on future cash flows. (2 marks)
Receivables were reduced by $3,034,000 and there was a small decrease in payables. These
changes may indicate better cash flow management procedures being adopted by the company. (2 marks)
Marking scheme – Other relevant comments may be acceptable. Maximum of 8 marks
(c) Cash flow statements may be more useful than profit statements for the following reasons:
Cash flow statements help users understand where the company has generated its cash and
how it has been applied during the period.
Cash flow statements are more objective than profit statements as they cannot be manipulated
by choosing more favourable accounting policies.
Cash flow statements provide a useful insight into the changes in the structure of working capital.
Cash flow statements enable users to establish whether the company is able to repay its debts.
Marking scheme – Up to 4 marks for relevant comments
3 (i) Partners’ Accounts

Paper T6INT
6D–INTAC
Nyfe Ork Poon Nyfe Ork Poon

$ $ $ $ $ $
Realisation a/c 9,000 Capital a/cs 45,000 30,000 15,000 1
Cash 56,255 38,453 12,802 Current a/cs 9,750 7,450 6,300 2
Realisation a/c 1,505 1,003 502 1
––––––– ––––––– ––––––– ––––––– ––––––– –––––––
56,255 38,453 21,802 56,255 38,453 21,802
–––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
–––––––
Total 4
(ii) Realisation Account
$ $
Furniture & fittings (NBV) 50,000 Loan a/c 18,000 0·5 0·5
Motor vehicles (NBV) 35,000 Payables 26,500 0·5 0·5
Receivables 42,000 0·5
Cash and bank: Cash and bank:
Loan 18,000 Furniture and fittings 48,800 0·5 0·5
Payables 25,440 Motor vehicles 29,500 0·5 0·5
Dissolution expenses 1,000 Inventory 27,750 0·5 0·5
Profit on realisation: Nyfe 3/6 1,505 Receivables 39,900 1 0·5
Ork 2/6 1,003 Poon (motor vehicle) 9,000 1 0·5
Poon 1/6 502 1
–––––––– ––––––––
199,450 199,450 Total 10
––––––––
–––––––– ––––––––
––––––––
17
Marks
Paper T6INT
(iii) Cash and bank

6D–INTAC
$ $
Balance 6,000 Realisation A/c: 0·5
Realisation a/c Loan 18,000 0·5
Furniture and fittings 48,800 Payables 25,440 0·5 0·5
Motor vehicles 29,500 Dissolution expenses 1,000 0·5 1
Inventory 27,750 Partners a/c: Nyfe 56,255 0·5 0·5
Receivables 39,900 Ork 38,453 0·5 0·5
Poon 12,802 0·5
–––––––– ––––––––
151,950 151,950
––––––––
–––––––– ––––––––
––––––––
Total 6
4 (a) Binky Smokey

Paper T6INT
6D–INTAD
Gross profit percentage Gross profit x 100 129 x 100 = 45·4 % 154 x 100 = 50·5 %
–––––––––– –––– ––––
Sales 284 305
Net profit percentage Net profit x 100 61 x 100 = 21·5 % 47 x 100 = 15·4 %
–––––––––– –––– ––––
Sales 284 305
Asset Turnover ratio Sales x 100 284 x100 = 110·1 % 305 x 100 = 63·9 %
–––––––––––––– –––– ––––
Capital employed 258 477
Current ratio Current assets 201 = 1·1 :1 383 = 1·2 :1
––––––––––––––– –––– ––––
Current liabilities 188 325
Quick ratio Current assets – inventory 110 = 0·6 :1 90 = 0·3 :1
–––––––––––––––––––––– –––– ––––
Rec’bles collection period Receivables x 365 46 x 365 = 59·1 days 75 x 365 = 89·8 days
–––––––––– –––– ––––
Sales 284 305
Marking Scheme
1/mark for correctly stating the formula and 1/2 mark for each correct ratio
2

– Smokey has a higher gross profit percentage than Binky. Smokey may have a cheaper supplier
than Binky or benefit from discounts. Alternatively, its market position or geographical location may
enable the company to charge a premium.
– The net profit percentage for Smokey is significantly lower than Binky suggesting that Smokey is
not controlling its expenses as tightly as Binky.
– Binky is able to obtain a significantly higher level of sales from its assets, suggesting the company
is being run more efficiently.
– The current ratios indicate that both companies have sufficient current assets to meet their current
liabilities. However, the quick ratios reveal a more worrying picture.
– The quick ratios for both companies are less than 1. Smokey has a very low quick ratio of 0·3 and
may not be able to pay its debts as they become due. The very high inventory levels may indicate
poor inventory control, it might be that some of the inventory is unsellable.
– The receivables collection period for Smokey is significantly higher than Binky. This will obviously
be contributing to the company’s adverse liquidity position. Action is required to improve the debt
collection procedures.
– Overall Binky appears to be the better company to invest in, from the information given.
Marking scheme
18
Paper T6(INT)
Drafting Financial
Statements
ADVANCED LEVEL
QUESTION PAPER

hall

Paper T6INT
6D–INTPA
1 The following information has been extracted from the books of Tonson, a limited liability company, as at 31 October
Paper T6INT
6D–INTAA
2006.
Dr Cr
$000 $000
Cash 15
Insurance 75
Inventory at 1 November 2005 350
General expenses 60
Energy expenses 66
Marketing expenses 50
Wages and salaries 675
Retained earnings at 1 November 2005 315
Sales revenue 5,780
Telephone expenses 80
Property expenses 100
Bank 94
Returns inward 95
Trade payables 290
Loan note interest 33
Purchases 3,570
7% Loan notes 470
Bad debts 150
$1 Ordinary shares 1,800
Accumulated depreciation at 1 November 2005
Buildings 360
Motor Vehicles 80
Furniture and equipment 420
Land at cost 740
Furniture and equipment at cost 1,200
–––––– ––––––
9,899 9,899
––––––
–––––– ––––––
––––––
You have also been provided with the following information:
1 Inventory at 31 October 2006 was valued at $275,000 based on its original cost. However, $45,000 of this
inventory has been in the warehouse for over two years and the directors have agreed to sell it in November 2006
for a cash price of $20,000.
2 The marketing expenses include $5,000 which relates to November 2006.
3 Based on past experience the allowance for receivables is to be increased to 5% of trade receivables.
4 There are wages and salaries outstanding of $40,000 for the year ended 31 October 2006.
5 Buildings are depreciated at 5% of cost. At 31 October 2006 the buildings were professionally valued at
$1,800,000 and the directors wish this valuation to be incorporated into the accounts.
6 Depreciation is to be charged as follows:
(i) Motor vehicles at 20% of written down value.
(ii) Furniture and equipment at 20% of cost.
7 No dividends have been paid or declared.
8 Tax of $150,000 is to be provided for the year.
9 During October 2006 a bonus (or scrip) issue of one for ten was made to ordinary shareholders. This has not
been entered into the books. The share premium account was used for this purpose.
2
Required:
Paper T6INT
6D–INTAA
Prepare the following statements, FOR INTERNAL USE:

(a) the income statement for the year ended 31 October 2006; and (18 marks)
(b) the balance sheet as at 31 October 2006 (17 marks)
(35 marks)
3 [P.T.O.
2 You have been given the following information relating to H Marathon, a limited liability company. The company is
Paper T6INT
6D–INTAB
preparing its cash flow statement for the year ended 31 October 2006
H Marathon
Income statement for the year ended 31 October 2006 $000
Revenue 54,577
––––––––
Gross profit 27,449
––––––––
Interest received 101
Finance cost (1,749)
––––––––
Taxation (2,570)
––––––––
Profit for the period 8,319
––––––––
––––––––
Balance sheets as at 31 October 2006 2005

Assets $000 $000
Non-current assets
Cost 133,152 124,252
–––––––– ––––––––
102,174 98,623
–––––––– ––––––––
Current assets
Inventory 26,350 29,365
Bank 2,955 3,036
–––––––– ––––––––
42,717 48,847
–––––––– ––––––––
Total assets 144,891 147,470
––––––––
–––––––– ––––––––
––––––––
Retained earnings 58,532 53,910
–––––––– ––––––––
106,644 91,266
–––––––– ––––––––
7% loan notes 5,743 22,632
–––––––– ––––––––
Current liabilities
Bank overdraft 6,869 7,842
Taxation 2,101 1,926
–––––––– ––––––––
32,504 33,572
–––––––– ––––––––
––––––––
–––––––– ––––––––
––––––––
4
Paper T6INT
6D–INTAB
(i) During the year dividends paid were $3,697,000.

(ii) There were no amounts outstanding in respect of interest payable or receivable as at either year end.
(iii) Operating profit is stated after charging depreciation of $6,784,000.
(iv) During the year, the company sold equipment for $5,667,000 realising a profit of $1,806,000. This equipment
had never been revalued, and there were no other disposals of non-current assets during the year.
(v) The only revaluation of non-current assets was that of a piece of freehold land.
Required:
(a) Prepare a cash flow statement for H Marathon for the year ended 31 October 2006 in accordance with
IAS 7 – Cash Flow Statements, using the indirect method. (18 marks)
(b) Comment on the financial performance and position of H Marathon as shown by the cash flow statement you
have prepared.
(8 marks)
(c) Why are cash flow statements sometimes considered more useful than profit statements? (4 marks)
(30 marks)
5 [P.T.O.
3 Nyfe, Ork and Poon decide to dissolve their partnership on 1 December 2006 after being in business for many years.
Paper T6INT
6D–INTAC
The balance sheet of the partnership as at 30 November 2006 was as follows:

Nyfe, Ork and Poon
Balance sheet as at 30 November 2006
Assets
Non-current assets $ $
Furniture and fittings 50,000
Motor vehicles 35,000
––––––––
85,000
Current assets
Inventory 25,000
Receivables 42,000
Bank 6,000 73,000
–––––––– ––––––––
––––––––
––––––––
Nyfe 45,000
Ork 30,000
Poon 15,000
––––––––
90,000
Nyfe 9,750
Ork 7,450
Poon 6,300
––––––––
23,500
Loan 18,000
Current Liabilities
Payables 26,500
––––––––
Total capital and liabilities 158,000
––––––––
––––––––
(a) The partnership agreement states that Nife, Ork and Poon share profits and losses in the ratio 3:2:1
(b) The furniture and fittings were sold for $48,800.
(c) Only $39,900 of outstanding receivables were recovered.
(d) The payables were settled for $25,440.
(e) It was agreed between the partners that Poon could take a motor vehicle at a valuation of $9,000 in addition to
his share of the profit. The motor vehicle had a net book value of $8,000. The other motor vehicles were sold
for $29,500.
(f) The inventory was sold for $27,750.
(g) The loan was repaid in full on 1 December 2006.
(h) There were no outstanding interest payments on the loan.
(i) Expenses incurred in dissolving the partnership were $1,000.
6
Required:
Paper T6INT
6D–INTAC
Prepare the following accounts on dissolution:

(i) Partners’ accounts (4 marks)
(ii) Realisation account (10 marks)
(iii) Cash and bank account (6 marks)
(20 marks)
7 [P.T.O.
4 Two companies Binky and Smokey trade in the same market. Their financial statements for the year ended 31 October
Paper T6INT
6D–INTAD
2006 are summarised below:

Binky Smokey
$000 $000 $000 $000
Sales revenue 284 305
Cost of sales (155) (151)
–––– ––––
Gross profit 129 154
Expenses:
Selling and distribution (35) (53)
–––– ––––
(68) (107)
–––– ––––
Net profit 61 47
––––
–––– ––––
––––
Balance sheets as at 31 October 2006
Binky Smokey
Assets $000 $000 $000 $000
Non-current assets
At cost 320 515
Accumulated depreciation (75) (96)
–––– ––––
245 419
Current assets
Inventory 91 293
Receivables 46 75
Bank 64 201 15 383
–––– –––– –––– ––––
Total assets 446 802
––––
–––– ––––
––––
Share capital and reserves
Share capital 150 250
–––– ––––
Total equity and liabilities 446 802
––––
–––– ––––
––––
8
Required:
Paper T6INT
6D–INTAD
(a) Calculate the following ratios for Binky and Smokey:

(State the formulas used for calculating the ratios)
Profitability ratios:
Asset turnover ratio
Liquidity ratios:
Current ratio
Quick ratio (acid test ratio)
Receivables collection period (9 marks)
(b) Compare and comment on the performance of the companies as indicated by the ratios you have calculated
in part (a). (6 marks)
(15 marks)
9
Answers

Marks
1 (a) Goodwill on acquisition of Tricepts $000 $000
Share capital ($25 million x 80%) 20,000 1
Retained earnings ($2 million x 80%) 1,600 (21,600) 1
––––––– –––––––
Goodwill 2,400
–––––––
––––––– –––
Total 3
–––
(b) (i) Bicepts

Consolidated income statement for the year ended 31 May 2007 0·5
$000 Workings ($000)
Sales revenue 197,000 1·5 135,000 + 74,000 – 12,000
Cost of sales (89,000) 2·5 70,000 + 30,000 – 12,000 + 1,000*
––––––––
Gross Profit 108,000
Goodwill impairment (600) 1·5 2,400 – 1,800
––––––––
Net profit before interest and tax 66,916
Interest payable (12) 1·0 16 – 4
––––––––
Income tax expense (19,000) 0·5
––––––––
Profit for the year 47,904
––––––––
––––––––
Attributable to:
Equity holders of the parent 43,704
Minority interest 4,200 1·5 20% x 21,000
––––––––
47,904
––––––––
–––––––– ––––
Total 10·0
––––
(ii) Bicepts
Consolidated Balance Sheet as at 31 May 2007 0·5
Assets $000 $000
Non-current assets
Intangible – goodwill 1,800 1·0 (2,400 – 600)
Property, plant and equipment 119,050 0·5 (80,000 + 39,050)
––––––––
120,850
Current assets
Inventory 14,128 1·5 (10,630 + 4,498 – 1,000*)
Receivables 22,486 3·5 (18,460 + 12,230 – 6,400** – 1,800*** – 4****)
Bank 4,744 41,358 0·5 (3,400 + 1,344)
––––––– ––––––––
––––––––
––––––––
Retained earnings (W1) 46,340 4·0
Minority interest 8,000 1·5 (20% x 40,000)
––––––––
124,340
Current liabilities
Payables 6,118 2·5 (6,000 + 1,922 – 1,800*** – 4****)
Tax 18,000 0·5
Dividends payable to Minority Interests 1,600 1·0
Dividends 12,000 37,718 0·5
–––––––
8% Loan Notes 150 1·0 (200 – 50)
––––––––
––––––––
–––––––– ––––
Total 19·0
––––
11
Marks
Notes:
* Exclusion of unrealised profit held in inventory ($1,000,000)
** Exclusion of the intragroup dividends from receivables ($6,400,000)
*** Intragroup indebtedness ($1,800,000)
**** Exclusion of intragroup interest ($4,000)
Workings
W1 Retained earnings as at 31 May 2007
$000 $000
Bicepts Balance Sheet 37,540 0·5
Less unrealised profit (1,000) 1
Tricepts :
Retained earnings 15,000
Pre-acquisition reserves (2,000)
–––––––
13,000
Group share (80% x $13,000,000) 10,400 2
Less goodwill written off as at 31 May 2007 (600) 0·5
–––––––
46,340
–––––––
––––––– –––
4
–––
(c) When one company sells goods to another company within the same group an identical amount is shown in the sales figure
of the first company and in the cost of sales of the second. However, as far as the group is concerned there has not been an
external sale. Therefore, on consolidation the amount of the inter-company trade must be eliminated from sales and purchases
(cost of sales).
If there are unrealised profits on inter-company trading these also need to be excluded from the figures for the group profits.
This is achieved by calculating and then deducting the amount of unrealised profit from unsold inventory at the year end.
Similarly, if non-current assets have been sold at profit between companies in a group then the profit element has to be
eliminated.
Any receivables/payables balances outstanding between the two companies at the year end are cancelled on consolidation to
avoid producing a misleading balance sheet.
Marking Scheme: Up to a total of 3 marks
2 (a) J Moor’s accounts Marks

(i) Revaluation account
$ $
Inventory – loss 500 Goodwill 12,000 1·0 + 0·5
Capital account 16,500 Property – profit 5,000 0·5 + 1·0
––––––– –––––––
17,000 17,000
–––––––
––––––– –––––––
–––––––
(ii) Capital account
$ $
Balance c/f to new business 56,000 Balance b/f 35,000 0·5 + 0·5
Dodd’s loan 4,500 1·0
Profit on revaluation 16,500 0·5
––––––– –––––––
56,000 56,000
–––––––
––––––– –––––––
–––––––
P Croft’s accounts
(i) Revaluation account
$ $
Plant and machinery – loss 1,500 Goodwill 9,000 1·0 + 0·5
Capital account 7,500 0·5
–––––– ––––––
9,000 9,000
––––––
–––––– ––––––
––––––
12
Marks
(ii) Capital account
$ $
Motor vehicle 7,000 Balance b/f 23,300 1·0 + 0·5
Balance c/f to new business 23,800 Profit on revaluation 7,500 0·5 + 0·5
––––––– –––––––
30,800 30,800
–––––––
––––––– –––––––
–––––––
Total 10
(b) Marks Workings

Moorcroft
Assets $ $
Non-current assets
Property 30,000 1
Plant and machinery 28,500 1 ($14,000 + $14,500)
–––––––
58,500
Current assets
Inventory 8,500 1 ($4,500 + $4,000)
Trade receivables 2,800 1
Cash at bank 4,000 15,300 1
––––––– –––––––
Total assets 73,800
–––––––
–––––––
Capital accounts
J Moor 42,000 2 W1
P Croft 16,800 2 W1
–––––––
58,800
Current liabilities
Trade payables 15,000 1
–––––––
–––––––
–––––––
Total 10
Working 1 Marks
Partners’ Capital accounts
Moor Croft Moor Croft
$ $ $ $
Goodwill written off Balance b/f from
2:1 x $21,000 14,000 7,000 old business 56,000 23,800 1·0 + 1·0 + 0·5 + 0·5
Balance c/f 42,000 16,800 0·5 + 0·5
––––––– ––––––– ––––––– –––––––
56,000 23,800 56,000 23,800
–––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
–––––––
(c) Goodwill is calculated as the difference between the value of the whole business as a going concern and the value of the
tangible and other identifiable intangible assets less any liabilities. Therefore, goodwill is a balancing item rather than an item
that is objectively valued. (up to 2 marks)
Goodwill needs to be recalculated when a partner joins a partnership business for the following reasons.
A new partner that joins a business is entitled to share in the future growth of all the partnership assets. Their entitlement
arises because they make a payment to enter the partnership, or the existing partners consider they will enhance the future
profitability of the firm. However, the new partner’s entitlement is to share in the future growth of the business not its past
growth.
Any goodwill which has already been built up by the existing partners needs to be credited to them. (up to 3 marks)
Total 5 marks
13
Marks
3 (a) (i) Gross profit 95
Gross profit percentage ––––––––– x 100 ––– x 100 = 25·3% 1
Revenue 375
(ii) Net profit from operations 50
Net profit percentage* –––––––––––––––––––––– x 100 ––– x 100 = 13·3% 1
Revenue 375
(iii) Current assets 133
Current ratio –––––––––––––– x 100 ––– :1 = 1·3:1 1
(iv) Current assets – inventory 133 – 96
Acid test (Quick) ratio –––––––––––––––––––––– :1 –––––––– :1 = 0·4:1 1
(v) Trade receivables 34
Receivables collection period ––––––––––––– x 365 –––– x 365 = 33·1 days 1
Sales 375
* Could also be profit for the period. Total 5
(b) Comments on the performance of Acoms

Gross Profit
Gross profit percentage has reduced from the previous year by 27%. This might indicate increased competition in the market
and that selling prices have been discounted. Alternatively the cost of purchases may have increased significantly. The
situation is particularly worrying because this ratio is now below the industry average.
Net Profit
The net profit percentage has also deteriorated on the previous year and is below the industry average. This suggests that the
control of costs needs to be improved if the company is to remain competitive.
Current Ratio
The current ratio has deteriorated slightly on the previous year but is simliar to the industry average. The business has
sufficient current assets to cover its current liabilities. However, the composition of the current assets is heavily weighted with
inventory. The company may have problems converting inventory to cash if it is required quickly.
Acid Test
The acid test ratio gives a better indication of liquidity than the current ratio. This ratio is 0·4:1 and has fallen significantly
below the industry average. This ratio suggests the company may be experiencing some liquidity problems. The current
inventory levels might also indicate the business is having some trading problems.
The receivables collection period has more than doubled since the previous year and is 13 days longer than the industry
average. The business may be giving customers more credit in order to sell more inventory. Alternatively the receivables
collection procedures may need to be tightened up, which would help to improve the business’ liquidity situation.
Marking scheme: Maximum of 10 marks.
(c) Main limitations of ratio analysis

– Inflation may distort comparisons of ratios over time.
– Different accounting policies may distort intercompany comparisons.
– The ratios are only as good as the financial information on which they are based.
– The accounting information used to prepare the ratios may be out of date.
– Changes in accounting policies from year to year may produce misleading ratios.
– Usually the information presented in the published accounts is summarised, making a detailed analysis impossible.
– Using industry averages as a basis for comparison can be misleading as they are the average of the ratios from a number
of companies.
Marking scheme 1 mark for each relevant comment up to a maximum of 5 marks
4 (a) (i) The role of the IASC Foundation is to oversee the IASB and related bodies and to raise the funds needed.
(ii) The role of the IASB is to develop and issue global accounting standards.
(iii) The role of IFRIC is to provide timely guidance on the application of IFRSs where unsatisfactory interpretations exist or
new processes arise.
(iv) The role of SAC is to provide a formal forum where the IASB can consult individuals, and representatives of organisations
affected by its work.
Marking scheme: 1 mark for briefly explaining each role up to a maximum of 4 marks.
14
(b) The qualitative characteristics of financial information are the characteristics that make the information useful and determine
whether, when and how it is presented in financial statements so that the information they give is useful to users for assessing
the financial position, performance and financial adaptability of the business.
(1) Relevance
Information is considered to be relevant if it has the ability to influence the economic decisions of users and is provided
in time to influence those decisions.
(2) Reliability
Information is reliable if:
(a) it can be depended upon by users to represent faithfully what it either purports to represent or is reasonably
expected to represent and therefore reflects the substance of the transactions and other events that have taken
place.
(b) it is free from deliberate or systematic bias and material error, and is complete; and
(c) in its preparation under conditions of uncertainty, a degree of caution has been applied in exercising the necessary
judgements.
(3) Comparability
Information is comparable if it enables users to determine and evaluate similarities in, and differences between, the
nature and effects of transactions and other events over time and across different businesses.
(4) Understandability
Information is understandable if its significance can be appreciated by users that have a reasonable knowledge of
business and economic activities and accounting and a willingness to study with reasonable diligence the information
provided.
Marking scheme: 1/2 a mark for identifying and 2 marks for explaining the characteristic. Maximum of 10 marks.
(c) The main problems with historical cost accounting are:

(i) Non-current assets values are unrealistic
The value of non-current assets shown on the balance sheet may be unrealistic if presented at their historical cost. For
example, property assets have a tendency to appreciate over time, hence the value on the balance sheet becomes
understated.
To overcome this problem a business may periodically revalue its assets.
(ii) Potential capital reduction
Distributions made out of profit based on the historical cost basis may result in a reduction of capital in real terms.
Depreciation is regarded as a proxy for the contribution non-current assets have made to the business over the
accounting period. A criticism of depreciation based on historical cost is that it may not adequately reflect the value of
the asset’s contribution during the year. This inadequacy is partly overcome by periodically revaluing the assets.
(iii) Holding gains on inventory are included in profit
Closing inventory, during a period of rising prices, will tend to have a higher value than goods purchased in earlier
periods (i.e. inventory appreciation). Therefore, the gross profit will be overstated because the closing inventory is
deducted from the opening inventory plus purchases. However, when the inventory is eventually sold it will probably
cost more to replace.
(iv) Comparisons over time are unrealistic
Measuring the growth or the success of a business over time can be difficult during periods of inflation. For example,
comparing the current profitability of a company with its performance ten years later would be meaningless without
attempting to adjust the figures for inflation.
Examiner’s note: reference to Current Purchasing Power Accounting (CPP) and Current Cost Accounting (CCA) should be given
due credit.
Marking Scheme: 1 mark per relevant point up to a maximum of 6 marks.
15
Paper T6(INT)
Drafting Financial
Statements
ADVANCED LEVEL
MONDAY 4 JUNE 2007
QUESTION PAPER

hall

1 You are provided with the following financial statements for Bicepts, a limited liability company, and its subsidiary
Tricepts:
Bicepts Tricepts
$000 $000
Sales Revenue 135,000 74,000
Cost of sales (70,000) (30,000)
–––––––– ––––––––
–––––––– ––––––––
Profit from operations 38,500 30,016
Income from Tricepts: Loan note Interest 4 –
Dividends 6,400 –
Interest payable – (16)
–––––––– ––––––––
Income tax expense (10,000) (9,000)
–––––––– ––––––––
Profit for the period 34,904 21,000
––––––––
–––––––– ––––––––
––––––––
Balance Sheets as at 31 May 2007
Bicepts Tricepts
Assets $000 $000 $000 $000
Non-current assets
Investments:
$1 ordinary shares in Tricepts at cost 24,000 –
Tricepts loan notes 50 –
–––––––– –––––––
104,050 39,050
Current assets
Bank 3,400 32,490 1,344 18,072
––––––– –––––––– ––––––– –––––––
––––––––
–––––––– –––––––
–––––––
–––––––– –––––––
107,540 40,000
Current liabilities
Tax 11,000 7,000
Dividends payable 12,000 29,000 8,000 16,922
––––––– –––––––
–––––––– –––––––
––––––––
–––––––– –––––––
–––––––
2
(i) Bicepts purchased 80% of the $1 ordinary shares in Tricepts on 1 June 2006. At that date Tricepts’ retained
earnings were $2,000,000.
(ii) Bicepts’ annual impairment review of goodwill on acquisition of Tricepts valued it at $1,800,000 at 31 May
2007.
(iii) During the year ended 31 May 2007 Bicepts sold goods which originally cost $8,000,000 to Tricepts for
$12,000,000. Tricepts still had 25% of these goods in inventory at 31 May 2007.
(iv) Tricepts owed Bicepts $1,800,000 at 31 May 2007 for some of the goods Bicepts supplied during the year.
(v) Bicepts owns $50,000 of Tricepts’ loan notes. The interest is paid annually in arrears at 31 May. Interest for the
year ended 31 May 2007 is included in Tricepts’ payables. Bicepts has also included the interest in its
receivables.
(vi) All dividends were declared, but not paid prior to the year end.
Required:
(a) Calculate the goodwill arising on the acquisition of Tricepts. (3 marks)
(b) Prepare the following financial statements for Bicepts:

(i) the consolidated income statement for the year ended 31 May 2007. (10 marks)
(ii) the consolidated balance sheet as at 31 May 2007.
Note: A working should be included for the retained earnings. Disclosure notes are not required.
(19 marks)
(c) Explain the accounting treatment of intra-group trading in consolidated accounts. (3 marks)
(35 marks)
3 [P.T.O.
2 J Moor and P Croft have been trading independently as sole traders. They have decided to form a partnership called
Moorcroft from their existing businesses. The future profit sharing ratio in the new business will be 2:1 to J Moor and
P Croft respectively.
The balance sheets of the sole trader businesses at the date of the formation of the partnership were as follows:
Balance sheets as at 31 May 2007
J Moor P Croft
Assets
Non-current $ $ $ $
Property 25,000 –
Plant and machinery 14,000 16,000
Motor vehicle – 7,000
––––––– –––––––
39,000 23,000
Current assets
Cash at bank 1,000 7,500 3,000 8,300
––––––– ––––––– ––––––– –––––––
––––––– –––––––
Capital accounts
Moor 35,000 –
Croft – 23,300
Current liabilities
Loan from Dodd 4,500 –
––––––– –––––––
Total capital and liabilities 46,500 31,300
–––––––
––––––– –––––––
–––––––
At the date of formation of the partnership:
(i) the property belonging to J Moor was revalued at $30,000.
(ii) the motor vehicle was retained by P Croft and not transferred to Moorcroft.
(iii) J Moor’s inventory was revalued at $4,500.
(iv) the plant and machinery belonging to P Croft was revalued at $14,500.
(v) J Moor agreed to take personal responsibility for the loan from Dodd.
(vi) goodwill was agreed to be $12,000 for J Moor and $9,000 for P Croft.
(vii) all the trade payables and trade receivables were taken over by Moorcroft at their book values.
Required:
(a) Prepare the following accounts for both J Moor and P Croft as they would appear on the closing of their sole
trader businesses:
(i) Revaluation accounts; (5 marks)
(ii) Capital accounts. (5 marks)
(b) Prepare the balance sheet of Moorcroft immediately following the formation of the partnership.
Note: goodwill is not carried in the balance sheet.
(10 marks)
(c) Explain briefly how partnership goodwill is calculated and why it needs to be recalculated when a new
partner joins a partnership. (5 marks)
(25 marks)
4
5 [P.T.O.
3 Acoms is a small business with limited liability. Its summarised financial results are given below:
Acoms
$000
Revenue 375
Cost of sales (280)
––––
Gross profit 95
Distribution & administrative expenses (45)
––––
Finance costs (5)
––––
Income tax expense (15)
––––
Profit for the period 30
––––
––––
Acoms
$000 $000
Assets
Non-current assets 410
Current assets
Inventory 96
Cash and bank 3 133
––––– –––––
Total assets 543
–––––
–––––
Retained earnings 90
–––––
390
Current liabilities
Trade payables 88
Taxation 15 103
–––––
10% Loan notes 50
–––––
Total equity and liabilities 543
–––––
–––––
The following are ratios for Acoms for the year to 31 May 2006 and the industry average ratios for 2007:
Acoms Industry Average
Ratio 2006 2007
Gross profit percentage (%) 34·7 30·0
Net profit percentage (%) 17·7 20·0
Current ratio 1·5 1·5
Acid test (Quick) ratio 1·1 1·0
Receivables collection period (days) 16·0 20·0
6
Required:
(a) Calculate the following ratios for Acoms for the year ended 31 May 2007. State clearly the formula used for
each ratio.
(i) Gross profit percentage
(ii) Net profit percentage
(iii) Current ratio
(iv) Acid test (Quick) ratio
(v) Receivables collection period (5 marks)
(b) Use the information given and the ratios you calculated in part (a) to comment on the performance of Acoms.
(10 marks)
(c) State five limitations of ratio analysis. (5 marks)
(20 marks)
4 Required:
(a) State the role of each of the following bodies:
(i) International Accounting Standards Committee Foundation
(ii) International Accounting Standards Board (IASB)
(iii) International Financial Reporting Interpretations Committee (IFRIC)
(iv) Standards Advisory Council (SAC) (4 marks)
(b) Identify and explain the four qualitative characteristics of financial information that are currently included in
the IASB’s Framework for the Preparation and Presentation of Financial Statements. (10 marks)
(c) Discuss the problems with using historical cost accounting during a period of rising prices and explain how
these problems may be overcome. (6 marks)
(20 marks)
7
Answers

ACCA Certified Accounting Technician Examination – Paper T6 (INT) December 2007 Answers
Marks Workings
1 (a) (i) Malright $000
$000
Revenue 1,765 1·0 (1,800 – 35)
––––––
Gross profit 422
––––––
Finance cost (5) 1·0
––––––
Tax (45) 1·0
––––––
Profit for the period 100 0·5
––––––
–––––– ––––
14·0
––––
(ii) Malright
$000 $000
Assets
Non-current assets
Property, plant and equipment (W2) 966 3·5
Current assets
Inventory 75 0·5
Trade receivables 304 379 1·0 (320 – 16)
–––– ––––––
––––––
––––––
$1 Ordinary shares 650 0·5
Share premium account 80 0·5
Retained earnings 200 2·0 (130 + 100 – 30)
––––––
930
Current liabilities
Bank overdraft 50 1·0
Current tax 45 1·0
Energy expenses accrual 15 1·0
Loan notes interest 5 365 1·0
–––– ––––––
Total equity and liabilities 1,345 0·5
––––––
–––––– ––––
15·0
––––
11
Workings
W1 Cost of Distribution Administrative
Sales Cost Expenses
$000 $000 $000
Purchases 1,105
Discounts received (90) (1 mark)
Wages (40:25:35) 72 45 63
Energy expenses ($105 + $15) (40:20:40) 48 24 48
Increase in allowance for receivables ((320 x 0·05) – 10) 6 (1 mark)
Closing inventory (75) (1 mark)
Depreciation – plant 22
–––––– ––– ––––
1,343 80 192
––––––
–––––– –––
––– ––––
––––
(4 marks) (1·5 marks) (4·5 marks)
W2 Non-current assets Total
Property, Plant
Land Buildings Plant & Equipment
$000 $000 $000 $000
Cost 235 740 220 1,195
Accumulated depreciation b/f – (60) (110) (170)
Buildings $740 x 5% (37) (37)
Plant ($220 – $110) x 20% (22) (22)
–––– –––– ––– ––––
235 643 88 966
––––
–––– ––––
–––– –––
––– ––––
––––
(0·5 mark) (1·5 marks) (1·5 marks) (3·5 marks)
(b) Accounting ratios for Malright

Current assets – inventory 379 – 75
(i) Quick ratio –––––––––––––––––––––– :1 = –––––––– = 0·83:1
(acid test ratio) Current liabilities 365
Profit before interest and tax 150
(ii) Interest cover –––––––––––––––––––––––– = –––– = 30 times
Interest 5
Profit after tax 100
(iii) Earnings per share –––––––––––––––––– = –––– = 15·4 cents
No of ordinary shares 650
Current share price per share 130
(iv) Price earnings ratio –––––––––––––––––––––––– = ––––– = 8·4
Earnings per share 15·4
Marking scheme: A total of 6 marks – 0·5 mark for stating the correct formula and 1 mark for the correct ratio.
2 (a) Appropriation Account for the year ended 31 October 2007 Marks
$ $
Net profit 134,904 0·5
Less partners’ salaries
Alan 30,000 )
Bob 35,000 ) 1
Colin 28,000 (93,000) )
–––––––
Less interest on capital
Alan 4,000 )
Bob 3,500 ) 1
Colin 3,000 (10,500) )
––––––– ––––––––
Net profit available for appropriation 31,404
––––––––
––––––––
Alan 3/6 15,702 0·5
Bob 2/6 10,468 0·5
Colin 1/6 5,234 0·5
–––––––– ––––
31,404 4
––––––––
–––––––– ––––
12
(b) Partners’ Current Accounts Marks
Alan Bob Colin Alan Bob Colin
$ $ $ $ $ $
Bal b/f – – 1,600 Bal /b/f 2,800 1,200 – 1+1
Drawings 22,000 17,000 25,000 Int on cap 4,000 3,500 3,000 1+1
Capital a/c 30,502 Salaries 30,000 35,000 28,000 1+1
Bal c/f 33,168 9,634 Profit 15,702 10,468 5,234 1+1
––––––– ––––––– ––––––– ––––––– ––––––– ––––––– –––––
52,502 50,168 36,234 52,502 50,168 36,234 8
–––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––
(c) Partners’ Capital Accounts

Alan Bob Colin Alan Bob Colin
$ $ $ $ $ $
Goodwill 28,800 43,200 Bal b/f 40,000 35,000 30,000 1+1
Loan a/c 109,502 Cash 15,000 15,000 1+1
Bal c/f 47,200 14,800 Revaluation a/c 3,000 2,000 1,000 1+2
Goodwill: 3:2:1 36,000 24,000 12,000 1
Current a/c 30,502 1
–––––––– ––––––– ––––––– –––––––– ––––––– ––––––– –––––
109,502 76,000 58,000 109,502 76,000 58,000 9
–––––––– ––––––– ––––––– –––––––– ––––––– ––––––– –––––
Working for Revaluations
Book Value Revalued amount Change
$ $ $
Property 120,000 136,000 16,000
Equipment and machinery 40,000 35,000 (5,000)
Inventory 22,000 18,000 (4,000)
Receivables 18,000 17,000 (1,000)
––––––
Net Change 6,000
––––––
––––––
New valuations apportioned to each partner
Alan 3/6 3,000
Bob 2/6 2,000
Colin 1/6 1,000
––––––
6,000
––––––
––––––
(d) Advantages of operating as a partnership:

(i) Business risk is spread amongst more people.
(ii) Individual partners may be able to specialise in particular activities within the business.
(iii) Access to a larger pool of capital.
Disadvantages of operating as a partnership:
(i) Disputes might arise between the partners.
(ii) Decision making may take longer if all partners have to be consulted.
Marking scheme: 1 mark for each relevant point up to a maximum of 4 marks
Workings Marks
3 (a) Goodwill on acquisition $000 $000 $000
Share capital 2,800 1
Retained earnings 42 (2,842) (70% x 60) 1·5
–––––– –––
Goodwill 503 3
––––––
–––––– –––
13
(b) Prestend Workings Marks
Consolidated Balance Sheet as at 31 October 2007 0·5
Assets $000 $000 $000
Non-current assets
Property, plant and equipment 7,500 (4,200 + 3,300) 0·5
Current assets
Inventory 2,280 (1,500 + 800 – 20) 1·5
Trade receivables 2,520 (1,800 + 750 – 30) 1·5
Bank 950 5,750 (600 + 350) 0·5
–––––– –––––––
Total assets 13,250
–––––––
–––––––
$1 Ordinary shares 9,000 1
Retained earnings 100 (W1) 4·5
Minority Interest 1,260 (W2) 2
–––––––
10,360
Current liabilities
Payables 1,390 (1,220 + 200 – 30) 1·5
Tax 1,500 (700 + 800) 0·5
–––––––
–––––––
––––––– –––
14
–––
Workings
W1 Retained earnings
Prestend balance 525 0·5
Retained earnings of Northon (70% x $200,000) 140 1
Pre acquisition reserves (70% x $60,000) (42) 1
Less Goodwill (503) 1
Unrealised profit on purchases from Prestend (20) (565) 1
––––– ––––––– –––
Reserves 100 4·5
–––––––
––––––– –––
W2 Minority Interest
Share Capital (30% x $4,000,000) 1,200 1
Retained earnings (30% x $200,000) 60 1
––––––– ––
Minority Interest 1,260 2
–––––––
––––––– ––
(c) The existence of significant influence might be demonstrated where there is:
(a) A holding of 20% or more of the shares in the investee company, but less than 50%.
(b) Participation in the policy making process of the investee company.
(c) Material transactions between the two companies.
(d) An interchange of management personnel beween the companies.
(e) The provision of essential technical information by the investor company.
(f) A representative of the investor company on the board of directors of the investee company.
Marking scheme: 1 mark for each circumstance up to a maximum of 3 marks.
14
4 (a) Prepared in accordance with IAS 7 Marks
Geofost
Cash flow statement for the year ended 31 October 2007
$000 $000
Net profit before tax 15,000 0·5
Adjustments for:
Finance cost 730 0·5
Profit on disposal of non-current assets (720) 1
–––––––
Decrease in inventory 6,075 1
Increase in receivables (1,863) 1
Increase in payables 3,178 1
–––––––
Interest paid (100 – 120 + 730) (710) 1·5
Tax paid (W1) (4,090) 1
–––––––
Payments to acquire property, plant & equipment (24,340) 1
Proceeds from sale of property, plant & equipment 2,694 0·5
–––––––
Dividend paid (1,486) 1
–––––––
Net cash used in financing activities (1,917)
–––––––
Net increase (decrease) in cash and cash equivalents (1,305) 0·5
–––––––
Cash and cash equivalents at end of period (671)
–––––––
––––––– –––
14
–––
Examiner’s note
IAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow.
W1 Taxation
Paid 4,090 B/f 2,760
C/f 3,020 Income statement 4,350
–––––– ––––––
7,110 7,110
––––––
–––––– ––––––
––––––
Note: The ‘Paid’ entry is the ‘balancing figure’.
(b) Over the period there was a net cash outflow from the business of $1,305,000.
The company purchased non-current assets of $24,340,000. The purchase of new non-current assets may help the future
operational efficiency of the business and therefore improve future cash flows.
The company generated additional cash by selling non-current assets for $2,694,000 which yielded a profit on their NBV of
$720,000.
Loan notes of $2,300,000 were repaid, this will reduce interest payments in the future. However, the bank overdraft has
increased by $801,000. This will inevitably increase the cost of finance from the bank.
Inventory levels were reduced by $6,075,000. This had a positive impact on the cash flow of the business.
Receivables have increased by $1,863,000. This might suggest increased sales or that debt collection arrangements need
tightening up.
The payables increase is good for cash flow but potentially may lead to problems with suppliers if the company does not stay
within agreed credit terms. Payables have almost doubled and the company may find they are no longer given credit.
Marking scheme – Other relevant comments may be acceptable. Maximum of 6 marks
15
Paper T6 (INT)
Certified Accounting Technician Examination
Advanced Level
Drafting Financial
Statements
Monday 3 December 2007
Time allowed
Reading and planning: 15 minutes
Writing: 3 hours
ALL FOUR questions are compulsory and MUST be attempted.
Do NOT open this paper until instructed by the supervisor.

During reading and planning time only the question paper may
be annotated. You must NOT write in your answer booklet until
instructed by the supervisor.
This question paper must not be removed from the examination hall.

1 You are presented with the following trial balance of Malright, a limited liability company, at 31 October 2007:
Dr Cr
$000 $000
Buildings at cost 740
Buildings, accumulated depreciation, 1 November 2006 60
Plant at cost 220
Plant, accumulated depreciation, 1 November 2006 110
Land at cost 235
Bank balance 50
Revenue 1,800
Purchases 1,105
Returns inwards 35
Wages 180
Energy expenses 105
Trade payables 250
Allowance for receivables, at 1 November 2006 10
10% Loan notes 50
Dividend paid 30
–––––– ––––––
3,280 3,280
––––––
–––––– ––––––
––––––
Additional information as at 31 October 2007:
(i) Closing inventory has been counted and is valued at $75,000.
(ii) The items listed below should be apportioned as indicated:
Discounts received – – 100%
Energy expenses 40% 20% 40%
Wages 40% 25% 35%
Director’s remuneration – – 100%
(iii) An invoice of $15,000 for energy expenses for October 2007 has not been received.
(iv) Loan note interest has not been paid for the year.
(v) The allowance for receivables is to be increased to 5% of trade receivables.
(vi) Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to be allocated
to cost of sales.
(vii) Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost of sales, 30% to
distribution costs and 40% to administrative expenses.
(viii) Tax has been calculated as $45,000 for the year.
(ix) The current share price of Malright is $1·30 per share.
2
Required:
(a) Prepare the following financial statements for Malright in accordance with IAS 1 Presentation of Financial
Statements:
(i) the income statement for the year ended 31 October 2007; and (14 marks)
(ii) the balance sheet as at 31 October 2007. (15 marks)
Note: notes to the financial statements are not required. Round all figures to the nearest thousand dollars
(b) Calculate the following accounting ratios for Malright:

(i) Quick ratio (acid test ratio);
(ii) Interest cover;
(iii) Earnings per share;
(iv) Price earnings ratio.
Note: show ratio formulas and workings. (6 marks)
(35 marks)
3 [P.T.O.
2 Alan, Bob and Colin have been successfully trading as ABC partnership for several years. Due to ill health Alan has
decided to retire from the partnership as from 31 October 2007.
You have been provided with the following information:
(i) Alan, Bob and Colin shared profits in the ratio 3:2:1.
(ii) The partnership made a profit for the year ended 31 October 2007 of $134,904.
(iii) Alan has agreed that if there was a credit balance on his capital account at 31 October 2007 it can be transferred
into a loan to the partnership.
(iv) The partnership agreement allows for the following salaries per annum: Alan $30,000, Bob $35,000 and Colin
$28,000.
(v) During the year cash drawings were as follows: Alan $22,000, Bob $17,000 and Colin $25,000. No interest
is charged on drawings.
(vi) At 1 November 2006 Alan and Bob had credit balances on their current accounts of $2,800 and $1,200
respectively, Colin had a debit balance of $1,600.
(vii) Interest on capital is to be paid at a rate of 10% on the balance at 1 November 2006 on capital accounts. On
1 November 2006, the partners had credit capital account balances as follows: Alan: $40,000, Bob $35,000
and Colin $30,000.
(viii) On the retirement of Alan, both Bob and Colin invested a further $15,000 each into the business and agreed a
new profit-sharing ratio:
Bob 2/5
Colin 3/5
(ix) The assets of the partnership were revalued at 31 October 2007 for the purpose of Alan’s retirement.
The book values and the revalued amounts are as follows.
Book Value Revalued amount
$ $
Property 120,000 136,000
Equipment and machinery 40,000 35,000
Inventory 22,000 18,000
The revalued amounts are to remain in the books of the new partnership.
(x) Goodwill is not carried on the balance sheet. However, at 31 October 2007 the goodwill in the partnership was
valued at $72,000. Any adjustments for goodwill are to be made through the partners’ capital accounts.
Required:
(a) Prepare an appropriation account for the partnership for the year ended 31 October 2007. (4 marks)
(b) Prepare the partners’ current accounts for the year ended 31 October 2007. (8 marks)
(c) Prepare the partners’ capital accounts for the year ended 31 October 2007 showing the adjustments that
need to be made on the retirement of Alan from the partnership. (9 marks)
(d) State the advantages and disadvantages of operating as a partnership rather than as a sole proprietor.
(4 marks)
(25 marks)
4
3 Prestend is the parent company of Northon. The following are the balance sheets for both companies as at 31 October
2007.
Prestend Northon
Assets $000 $000 $000 $000
Non-current assets
Investments:
Shares in Northon at cost 3,345
Current assets
Inventory 1,500 800
Receivables 1,800 750
Bank 600 3,900 350 1,900
––––– ––––––– –––– ––––––
–––––––
––––––– ––––––
––––––
––––––– ––––––
9,525 4,200
Current liabilities
Payables 1,220 200
Tax 700 800
––––––– ––––––
–––––––
––––––– ––––––
––––––
(i) Prestend purchased 2,800,000 shares in Northon some years ago when Northon had retained earnings of
$60,000. Goodwill on acquisition has been fully written off as impaired in prior years.
(ii) During the year Prestend sold goods with an invoice value of $240,000 to Northon. These goods were invoiced
at cost plus 20%. Half of the goods are still in Northon’s inventory at the year end.
(iii) Northon owes Prestend $30,000 at 31 October 2007 for goods it purchased during the year.
Required:
(a) Calculate the goodwill on acquisition. (3 marks)
(b) Prepare the consolidated balance sheet for the Prestend group as at 31 0ctober 2007.
Note: a working should be included for group retained earnings. Disclosure notes are not required.
(14 marks)
(c) A company that owns less than 50% of the shares of another company will regard it as an ‘associate’ if it is
able to exert ‘significant influence’. Identify three circumstances that might demonstrate ‘significant
influence’. (3 marks)
(20 marks)
5 [P.T.O.
4 Geofost, a limited liability company is preparing its cashflow statement for the year ended 31 October 2007. You have
been presented with the following information.
Geofost
Income statement for the year ended 31 October 2007 $000
Finance cost (730)
–––––––
Taxation (4,350)
–––––––
–––––––
–––––––
Balance sheets as at 31 October 2007 2006
Assets $000 $000
Current assets
Cash 559 10,524 1,063 15,240
–––––– ––––––– ––––––– –––––––
–––––––
––––––– –––––––
–––––––
Share premium account 3,365 2,496
––––––– –––––––
34,994 23,961
9% loan notes 8,000 10,300
Current liabilities
Bank overdraft 1,230 429
Interest payable 120 100
Taxation 3,020 11,812 2,760 7,553
–––––– ––––––– ––––––– –––––––
–––––––
––––––– –––––––
–––––––
(i) During the year dividends paid were $1,486,000.
(ii) Summary schedule of changes to non-current assets during 2007:
Accumulated Net book
Cost depreciation value
$’000 $’000 $’000
Balance b/f 33,218 6,644 26,574
Additions 24,340 24,340
Disposals (2,964) (990) (1,974)
Depreciation 4,658 (4,658)
––––––– ––––––– –––––––
Balance c/f 54,594 10,312 44,282
–––––––
––––––– –––––––
––––––– –––––––
–––––––
(iii) The total proceeds from the disposal of non-current assets were $2,694,000.
6
Required:
(a) Prepare a cash flow statement for Geofost for the year ended 31 October 2007 in accordance with IAS 7 –
Cash Flow Statements, using the indirect method. (14 marks)
(b) Comment on the financial performance and position of Geofost as shown by the cash flow statement you
have prepared. (6 marks)
(20 marks)
7
Answers

ACCA Certified Accounting Technician Examination – Paper T6 (INT) June 2008 Answers
1 (a) Steven, Stephanie and Michael Marks Workings ($)

Income statement for the year ended 31 May 2008 0·5
$ $ $
Sales revenue (W1) 513,500 3
Purchases (W2) 266,000 2
––––––––––
308,500
––––––––––
Cost of goods sold (285,500)
–––––––––
Expenses
Vehicle running expenses 20,400 0·5
Insurance 7,000 1 (8,000 – 1,000)
Energy 10,100 1·5 (10,000 – 2,500 + 2,600)
Telephone 5,750 0·5
Advertising 3,150 0·5
Rent 24,000 1 (20,000 + 4,000)
Stationery 1,400 0·5
Depreciation for: Vehicles 5,600 1
Equipment 20,000 25,600 1
–––––––––
–––––––––
(122,400)
–––––––––
Net profit before appropriation 105,600
Interest on drawings: Steven 1,500 0·5
Stephanie 1,000 0·5
Michael 500 3,000 0·5
––––––––– –––––––––
108,600
Interest on capital: Steven (5,000) 0·5
Stephanie (5,000) 0·5
Michael (2,500) (12,500) 0·5
––––––––– –––––––––
96,100
–––––––––
–––––––––
Share of Profit: Steven 38,440 1
Stephanie 38,440 1
Michael 19,220 1
–––––––––
96,100
–––––––––
––––––––– –––
22
–––
–––
13
(b) Current Accounts Marks
Steven
$ $
Interest on drawings 1,500 Interest on capital 5,000 1
––––––– –––––––
66,440 66,440
–––––––
––––––– –––––––
–––––––
Stephanie
$ $
Interest on drawings 1,000 Interest on capital 5,000 1
––––––– –––––––
64,440 64,440
–––––––
––––––– –––––––
–––––––
Michael
$ $
Interest on drawings 500 Interest on capital 2,500 1
––––––– –––––––
39,720 39,720
–––––––
––––––– –––––––
––––––– –––
6
–––
–––
(c) Steven, Stephanie and Michael

Statement of financial position as at 31 May 2008 0·5
Cost Accumulated Net Book
Depreciation Value
$ $ $
Non-current assets
Vehicles 40,000 17,600 22,400 1
Equipment 80,000 36,000 44,000 1
–––––––– –––––––– ––––––––
120,000 53,600 66,400
––––––––
–––––––– ––––––––
––––––––
Current Assets
Trade receivables 50,000 0·5
Prepayments 1,000 1
Bank (W3) 38,800 112,800 3
–––––––– ––––––––
––––––––
––––––––
Steven 50,000 0·5
Michael 25,000 125,000 0·5
––––––––
Steven 4,940 0·5
Michael 14,220 37,600 0·5
–––––––– ––––––––
162,600
Current liabilities
Accruals 2,600 16,600 1
–––––––– –––––––– –––
Total equity and liabilities 179,200 12
––––––––
–––––––– –––
–––
14
Workings Allocation
of marks
W1 Trade Receivables Control Account
$ $
Receivables b/f 61,500 Bad debts 17,000 0·5 + 0·5
Credit Sales (bal fig) 513,500 Settlement discounts 8,000 0·5 + 0·5
Bank 500,000 0·5
Receivables c/f 50,000 0·5
–––––––– ––––––––
575,000 575,000
––––––––
–––––––– ––––––––
––––––––
W2 Trade Payables Control Account
$ $
Bank 270,000 Trade payables b/f 18,000 0·5 + 0·5
Payables c/f 14,000 Purchases (bal fig) 266,000 0·5 + 0·5
–––––––– ––––––––
284,000 284,000
––––––––
–––––––– ––––––––
––––––––
W3 Bank
$ $
Balance b/f 15,000 Trade payables control 270,000 0·5 + 0·5
Receivables control 500,000 Drawings: Steven 60,000 ⎫
Stephanie 45,000 ⎬ 0·5 + 0·5
Michael 25,000 ⎭
Other Payments 76,200 1
Balance c/f 38,800
–––––––– ––––––––
515,000 515,000
––––––––
–––––––– ––––––––
––––––––
2 (a) Prepared in accordance with IAS7

Marks
Traffold
Statement of cash flows for the year ended 31 May 2008 0·5
$000 $000
Adjustments for:
Interest received (57) 0·5
Interest paid 794 0·5
Profit on equipment disposal (66) 1
–––––––
Increase in inventory (1,940) 0·5
Decrease in receivables 2,450 0·5
Increase in payables 554 0·5
–––––––
Tax paid (W2) (1,665) 2
–––––––
Purchase of property, plant and equipment (W1) (9,262) 3
Proceeds from sale of equipment 766 1
–––––––
15
Marks
Dividends paid (1,540) 1
–––––––
Net cash used in financing activities 1,836
–––––––
Net increase in cash and cash equivalents 59 1
Cash and cash equivalents at the beginning of period 536 1
–––––––
Cash and cash equivalents at end of period 595
–––––––
––––––– –––
18
–––
–––
Examiner’s note
IAS 7 allows interest paid and dividend paid to be an operating cash flow or a financing cash flow. Interest received can be
an operating cash flow or an investing cash flow.
W1 Additions of non-current assets: Marks or Non-current assets NBV
Opening net book value 41,016 B/forward 41,016 Disposals 700
Disposals (766 – 66) (700) 1 Revaluation 3,362 Depr’tion 2,487
Depreciation (2,487) 0·5 Add’ns (bal) 9,262 C/f 50,453
––––––– –––––––
Revaluation (7,454 – 4,092) 3,362 1 53,640 53,640
––––––– _______
––––––– _______
–––––––
41,191
Additions (Balancing figure) 9,262 0·5
–––––––
Closing net book value 50,453
–––––––
–––––––
W2 Taxation or Taxation
Bal b/f 1,296 0·5 Paid 1,665 B/f 1,296
Income statement 1,570 0·5 C/f 1,201 Inc state 1,570
––––––– –––––––
Tax paid (1,665) 1 2,866 2,866
––––––– –––––––
––––––– –––––––
–––––––
Closing balance 1,201
–––––––
–––––––
Note: the entries in italics in these t-accounts are the ‘balancing figures’.
(b) Comments could be: Indicative

marks
Over the period there was a net cash inflow to the business of $59,000. The bank balance increased
from $536,000 to $595,000. (0·5 mark)
The company was able to generate additional cash by selling some equipment for $766,000. (0·5 mark)
Loan notes of $2,091,000 were repaid, this will reduce interest payments in the future and therefore
help the cash flow situation of the company. (2 marks)
Inventory levels have increased by $1,940,000. This might indicate the company is experiencing some
trading difficulties. Alternatively it could be that the company is taking advantage of some short term
supplier discounts and purchasing inventory. (2 marks)
Receivables have decreased by $2,450,000. This could indicate that sales have fallen, alternatively
it could be that the company has taken action to improve its credit control arrangements. (2 marks)
The company purchased non-current assets of $8,262,000. The purchase of new non-current assets
may help improve operational efficiency, reduce costs and therefore improve future cash flows. (2 marks)
4,000,000 additional shares were issued during the year generating a cash inflow of $5,467,000. (1 mark)
Marking scheme – Answers above indicate the types of comments that could be made. Other relevant comments are
acceptable. Maximum of 7 marks available.
16
3 (a) Marks Workings ($000)
Goodwill on acquisition of Derwent
$000 $000
Share capital (80% of $5,000,000) 4,000 1
Pre-acquisition reserves (80% of $500,000) 400 (4,400) 1
–––––– –––––––
Goodwill on acquisition 350
–––––––
––––––– –––
Total 3
–––
–––
(b) Keswick
Consolidated income statement for the year ended 31 May 2008 0·5
$000
Sales revenue 10,100 1·5 8,400 + 3,200 – 1,500
Cost of sales (4,950) 2·5 4,600 + 1,700 – 1500 + (30% x 500)*
–––––––
Gross Profit 5,150
Goodwill impairment (80) 1 250 – 170
–––––––
–––––––
Profit after tax 970
–––––––
–––––––
Attributable to:
Shareholders of Keswick 890 1·5
Minority interest 80 1·5 400 x 20%
–––––––
970
–––––––
–––––––
–––
Total 10
–––
–––
* Unrealised profit
(c) Any two of the following:

(i) The parent has an agreement with other investors which gives it control over more than 50% of the voting rights.
(ii) The parent under an agreement or by statute has power to govern the financial and operating policies of the entity.
(iii) The parent has the power to appoint or remove a majority of members of the board of directors.
(iv) The parent has the power to cast the majority of votes at meetings of boards of directors.
Marking scheme: 1 mark for each, up to max of 2 marks
17
4 (a) Any 6 ratios: 2008 2007

Gross profit percentage –––––––––– x 100 ––––– x 100 = 50·2% ––––– x 100 = 40·9%
Sales 1,886 1,150
Net profit 249 64
Net profit percentage –––––––––– x 100 ––––– x 100 = 13·2% ––––– x 100 = 5·6%
Sales 1,886 1,150
Current assets 405 515
Current ratio ––––––––––––––– ––––– = 1·0 : 1 ––––– = 2·6 : 1
Current assets – inventory 165 385
Quick ratio ––––––––––––––––––––– ––––– = 0·4 : 1 ––––– = 2·0 : 1
Loans 650 150
Gearing ––––––––––––––– x 100 ––––– x 100 = 91% ––––– x 100 = 21·4%
Ord Share cap 718 700
& reserves
Receivables 165 85
Rec’bles collection period ––––––––––– x 365 ––––– x 365 = 31·9 days ––––– x 365 = 27·0 days
Sales 1,886 1,150
Cost of sales 940 680
Inventory turnover ––––––––––––––– ––––– = 3·9 times ––––– = 5·2 times
Closing inventory 240 130
or:
Closing inventory 240 130
Inventory turnover ––––––––––––––– x 365 ––––– x 365 = 93·2 days ––––– x 365 = 69·8 days
Cost of sales 940 680
Payables 187 145
Payables period ––––––––––– x 365 ––––– x 365 72·6 days ––––– x 365 = 77·8 days
cost of sales* 940 680
PBIT 412 132
Return on capital emp. ––––––––––––– x 100 ––––– x 100 = 30% ––––– x 100 = 15·5%
S.Cap + Res + 1,368 850
Non curr lia.
* a proxy for purchases
Marking Scheme
The above ratios are indicative of the ones a candidate could produce. 1/2 should be awarded for each ratio calculated
correctly and 1/2 for stating the correct formula, a maximum of 9 marks.

Gross Profit Percentage – Gross profit percentage has increased significantly. This may be because Quadrop has obtained
better discounts from its suppliers. Alternatively, its market position or location may be allowing it to charge its customers
premium prices.
Net Profit Percentage – Net profit has improved as a percentage of sales, but not by the same increase in the gross profit
percentage. It may be that extra expenses, e.g. in marketing, are being incurred to generate the higher level of sales.
Current Ratio – The current ratio has fallen. The company may be suffering from liquidity problems and may not be able to
make payments as they fall due. The financial statements show that cash balances have fallen from a $300,000 surplus to
an overdraft of $120,000.
Quick Ratio – Quadrop’s quick ratio has deteriorated from the previous year and is worryingly low. The business clearly has
cash flow problems.
Gearing – There has been a significant increase in the gearing of the company. It has taken on additional loans presumably
to finance the additional non-current and intangible assets.
Receivables collection period – This has increased from the previous year by nearly five days. The slower collection of
receivables will be contributing to the poor liquidity situation.
Inventory turnover – The inventory turnover ratio has fallen suggesting that there may be some inventory control problems.
Alternatively the company may be changing the mix/type of goods it sells resulting in different turnover ratios.
Payables – The payables period has decreased from 77·8 days to 72·6 days which suggests it is paying suppliers more
quickly. This will have an adverse impact on the cash flow position, unless discounts are being received for early payment.
18
Return on capital employed – The business has improved its ROCE from 15·5%–30% despite taking out more long term
loans. This level of return to shareholders should be acceptable and attractive to any prospective shareholders.
Marking scheme
(c) The nature of Quadrop’s business

Industry average ratios
The general economic conditions that exist
The size of Quadrop in comparison to its competitors
Marking scheme: 1 mark for each piece of information up to a maximum of 3 marks
19
Paper T6 (INT)
Advanced Level
Drafting Financial
Statements
Monday 2 June 2008
Time allowed
Writing: 3 hours


1 Steven, Stephanie and Michael are in partnership. They have asked you to prepare their accounts for the year ended
31 May 2008. Unfortunately the partners have not maintained full accounting records. However, they know that
during the year they made the following payments:
$
Suppliers 270,000
Energy 10,000
Vehicle running expenses 20,400
Insurance 8,000
Advertising 3,150
Rent 20,000
Telephone 5,750
Stationery 1,400
––––––––
346,200
––––––––
––––––––
The following balances at 1 June 2007 are available:
Dr Cr
$ $
Capital accounts: Steven 50,000
Stephanie 50,000
Michael 25,000
Current accounts: Steven 23,000
Stephanie 21,000
Michael 18,000
Cash at bank 15,000
Inventory 35,000
Vehicles at cost 40,000
Equipment at cost 80,000
Accumulated depreciation
Vehicles 12,000
Equipment 16,000
Accrual for energy 2,500
Prepayment for rent 4,000
–––––––– ––––––––
235,500 235,500
––––––––
–––––––– ––––––––
––––––––
(i) $14,000 was owed to suppliers as at 31 May 2008.
(ii) Insurance of $1,000 was paid in advance at 31 May 2008.
(iii) Receipts from customers were $500,000 and there was $50,000 outstanding from credit customers at 31 May
2008.
(iv) During the year bad debts of $17,000 were written off.
(v) Settlement discounts of $8,000 were given to credit customers.
(vi) An invoice for $2,600 relating to energy expenses was unpaid at 31 May 2008.
(vii) Inventory as at 31 May 2008 was valued at $23,000.
(viii) Cash drawings during the year were: Steven $60,000; Stephanie $45,000; Michael $25,000.
(ix) Depreciation on vehicles is to be provided at 20% of written down value.
(x) Depreciation on equipment is to be provided at 25% on original cost.
(xi) Interest on drawings is to be charged as follows: Steven $1,500; Stephanie $1,000; Michael $500.
2
(xii) Interest on capital account balances is to be allowed at 10%.
(xiii) Steven, Stephanie and Michael have an agreement to share profits in the ratio 2:2:1.
Required:
Prepare the following for the partnership:
(a) the income statement and appropriation account for the year ended 31 May 2008; (22 marks)
(b) the partners’ current accounts for the year ended 31 May 2008; and (6 marks)
(c) the statement of financial position as at 31 May 2008. (12 marks)
(40 marks)
3 [P.T.O.
2 Traffold, a limited liability company, is preparing its statement of cash flows for the year ended 31 May 2008.
Traffold
Statements of financial position as at 31 May 2008 2007
Assets $000 $000
Non-current assets
Cost 65,251 53,525
–––––––– ––––––––
50,453 41,016
–––––––– ––––––––
Current assets
Inventory 16,503 14,563
Bank 595 536
–––––––– ––––––––
23,312 23,763
–––––––– ––––––––
––––––––
–––––––– ––––––––
––––––––
$1 Ordinary share capital 21,000 17,000
–––––––– ––––––––
56,325 45,707
–––––––– ––––––––
9% loan notes 6,734 8,825
–––––––– ––––––––
Current liabilities
Taxation 1,201 1,296
–––––––– ––––––––
10,706 10,247
–––––––– ––––––––
––––––––
–––––––– ––––––––
––––––––
Traffold
Income statement for the year ended 31 May 2008 $000
––––––––
Gross profit 13,954
––––––––
Interest received 57
Finance cost (794)
––––––––
Taxation (1,570)
––––––––
––––––––
––––––––
4
(i) Dividends paid during the year were $1,540,000.
(ii) There were no amounts outstanding in respect of interest payable or receivable as at either year end.
(iii) Total depreciation for the year was $2,487,000.
(iv) The only revaluation of non-current assets was of a piece of freehold land.
(v) During the year, the company sold equipment for $766,000 realising a profit of $66,000.
Required:
(a) Prepare a statement of cash flows for Traffold for the year ended 31 May 2008 in accordance with IAS 7 –
Statement of Cash Flows, using the indirect method. (18 marks)
(b) Comment on the financial position of Traffold as shown by the statement of cash flows you have prepared.
(7 marks)
(25 marks)
5 [P.T.O.
3 Derwent is a limited liability company with a total share capital of 5,000,000 ordinary shares of $1 each. On
1 June 2005, Keswick acquired 80% of the ordinary shares in Derwent for $4,750,000. At that time, Derwent had
reserves of $500,000.
The summarised draft income statements of Keswick and Derwent for the year ended 31 May 2008 are provided
below.
Keswick Derwent
$000 $000
Cost of sales (4,600) (1,700)
––––––– –––––––
Distribution costs (1,500) (510)
Administrative costs (900) (450)
––––––– –––––––
Profit from operations 1,400 540
Dividend received from Derwent 200 –
––––––– –––––––
Profit before tax 1,600 540
Tax (600) (140)
––––––– –––––––
Profit for the period 1,000 400
–––––––
––––––– –––––––
–––––––
(i) During the year ended 31 May 2008 Keswick sold goods costing $1,000,000 to Derwent for $1,500,000. At
31 May 2008, 30% of these goods remained in Derwent’s inventory.
(ii) At 31 May 2007 Keswick valued the goodwill arising from the acquisition of Derwent at $250,000. An
impairment review of this goodwill at 31 May 2008 valued it at $170,000.
Required:
(a) Calculate the goodwill arising on the acquisition of Derwent on 1 June 2005. (3 marks)
(b) Prepare the consolidated income statement for Keswick for the year ended 31 May 2008. (10 marks)
(c) Identify two circumstances when a company owning 50% or less of the shares of an entity will still be
deemed to have control of the entity. (2 marks)
(15 marks)
6
Question 4 starts on page 8.
7 [P.T.O.
4 Janet owns some shares in a company. She has received the most recent financial statements that the company has
produced, which are shown below. You have agreed to prepare an analysis of the financial performance and liquidity
of the company for her.
Quadrop
Income statements for the year ended 31 May
2008 2007
$000 $000 $000 $000
–––––– ––––––
Administration costs (349) (223)
Distribution costs (185) (115)
Interest payable (68) (13)
–––––– ––––––
(602) (351)
–––––– ––––––
Profit before tax 344 119
Taxation (95) (55)
–––––– ––––––
Profit for period 249 64
––––––
–––––– ––––––
––––––
Statements of financial position as at 31 May
2008 2007
Assets $000 $000 $000 $000
Non-current assets
Property, Plant & Equipment 950 530
Intangibles 400 1,350 – 530
–––––– ––––––
Current assets
Inventory 240 130
Receivables 165 85
Bank – 405 300 515
–––––– –––––– –––––– ––––––
––––––
–––––– ––––––
––––––
Equity
Ordinary share capital 400 400
Revaluation reserve 50 50
–––––– ––––––
Total equity 718 700
Liabilities
Loans 650 150
Current liabilities
Payables 187 145
Taxation 80 50
Overdraft 120 387 – 195
–––––– –––––– –––––– ––––––
––––––
–––––– ––––––
––––––
8
Required:
(a) Calculate six accounting ratios for 2007 and 2008, which could be used to analyse the financial performance
and liquidity of Quadrop. State the formulas used for calculating the ratios. (9 marks)
(b) Using the ratios you have calculated in part (a), comment on the performance and liquidity of Quadrop.
(8 marks)
(c) What additional information about Quadrop would help you to interpret the ratios? (3 marks)
(20 marks)
9
Answers

ACCA Certified Accounting Technician Examination – Paper T6 (INT) December 2008 Answers
Marks
1 (a) Screeth
Statement of comprehensive income for the year ended 31 October 2008 0·5
$000
Revenue 9,261 1·5 ($9,427 – $166)
––––––
Gross profit 2,491
Administrative expenses (W1) (1,228) 5·0
Finance costs (58) 0·5
––––––
Profit before tax 250 0·5
––––––
Profit for the year 130 0·5
––––––
Other comprehensive income:
Gains on property revaluation 1,267 1·0 ($3,150 – $1,883)
––––––
Total comprehensive income for the year 1,397 0·5
––––––
–––––– ––––
17·0
––––
––––
(b) Screeth
Statement of financial position as at 31 October 2008 0·5
Assets $000 $000
Non-current assets
Property, plant and equipment (W3) 4,960 4·5
Current assets
Inventory 480 0·5
Trade receivables 1,615 1·5 ($1,700 – $85)
Prepayments 10 1·0
Cash in hand 27 2,132 0·5
–––––– ––––––
––––––
––––––
Equity and Liabilities
Share premium account 350 0·5
Revaluation reserve 1,267 1·0
Retained earnings ($875 + $130 – $200) 805 2·5
––––––
5,272
Current liabilities
Tax 120 0·5
Accruals 60 1·0
Bank overdraft 311 1·0
––––––
Total liabilities 998
––––––
Total equity and liabilities 7,092 0·5
––––––
–––––– ––––
18·0
––––
––––
13
Marks
Workings
W1 Cost of Distribution Administrative
Sales Cost Expenses
$000 $000 $000
Distribution costs 250
Salaries (1,180 + 60) (25:35:40) 310 434 496
Discounts received (1 mark) (88)
Property expenses (20:30:50) 58 87 145
Insurance (130 – 10) (20:40:40) 24 48 48
Purchases 6,248
Depreciation – buildings 132 (W2) (0:50:50) 66 66
Depreciation – motor vehicles (W2) 70
Depreciation – furniture and equipment (W2) 160
Closing inventory (1 mark) (480)
Receivables expense (W4) (1 mark) 275
–––––– –––– ––––––
6,770 955 1,228
––––––
–––––– ––––
–––– ––––––
––––––
(3·5 marks) (3 marks) (5 marks)
W2 Depreciation on non-current assets
Motor Furniture
Buildings vehicles & equipment
$000 $000 $000
Cost 2,640 420 800
Depreciation b/f (625) (140) (335)
Buildings 2,640 x 5% (132)
Motor vehicles (420 – 140) x 25% (70)
Furniture and equipment 800 x 20% (160)
–––––– –––– ––––
1,883 210 305
––––––
–––––– ––––
–––– ––––
––––
W3 Non-current assets as at 31 October 2008 $000
Land (from TB) 1,295 0·5
Buildings revalued at 31 October 2008 3,150 1·0
Motor vehicles (W2) 210 1·5
Furniture and equipment (W2) 305 1·5
–––––– ––––
Total Property, Plant & Equipment 4,960 4·5
––––––
–––––– ––––
––––
Working Papers
W4 Receivables Expense
$ $
Allowance for receivables 15,000
–––––––– ––––––––
275,000 275,000
––––––––
–––––––– ––––––––
––––––––
Allowance for Receivables
$ $
Balance c/f ($1,700,000 x 5%) 85,000 Balance as per TB 70,000
Receivables expenses 15,000
––––––– –––––––
85,000 85,000
–––––––
––––––– –––––––
–––––––
14
Marks Workings ($000)
2 (a) Goodwill on acquisition of Bruce
$000 $000
Share capital ($9,260,000 x 70%) 6,482 1·0
Retained earnings ($750,000 x 70%) 525 (7,007) 1·0
–––––– ––––––
Parent’s goodwill 1,793
Non-controlling interest’s goodwill 600 1·0
––––––
Total goodwill 2,393
––––––
–––––– ––––
Total 4·0
––––
––––
(b) (i) Wallace

Consolidated income statement for the year ended 31 October 2008
$000
Revenue 72,400 1·0 50,000 + 27,400 – 5,000
Cost of sales (33,200) 2·0 26,000 + 11,000 – 5,000 + 1,200*
––––––––
Gross profit 39,200
Administrative expenses (9,792) 0·5 7,000 + 2,792
Finance costs (2) 1·0 8–6
––––––––
Income tax expense (6,800) 0·5 3,700 + 3,100
––––––––
Profit for the year 17,606
––––––––
––––––––
Profit attributable to:
Owners of the parent 15,506 0·5
Non-controlling interest 2,100 2·0 30% x (8,200 – 1,200)
––––––––
17,606
––––––––
–––––––– ––––
Total 8·0
––––
––––
(ii) Wallace
Consolidated statement of financial position as at 31 October 2008
Assets $000 $000
Non-current assets
Tangible assets, net book value 44,895 0·5 (30,000 + 14,895)
Intangible – goodwill 2,393 0·5
–––––––
47,288
Current assets
Inventory, at cost 4,365 1·5 (3,900 + 1,665 – 1,200*)
Receivables 10,774 3·5 (6,850 + 4,530 – 600** – 6***)
Cash and cash equivalents 1,762 16,901 0·5 (1,260 + 502)
––––––– –––––––
Total assets 64,189
–––––––
–––––––
Equity and Liabilities
Retained earnings (W1) 16,945 3·0
–––––––
42,945
Non-controlling interest (W2) 4,803 3·0
–––––––
Total equity 47,748
10% Loan note 20 1·0 (80 – 60)
Current liabilities
Payables 9,839 2·5 (6,645 + 3,800 – 600** – 6***)
Tax 6,582 1·0 4,080 + 2,502
–––––––
Total current liabilities 16,421
–––––––
–––––––
––––––– ––––
Total 18·0
––––
––––
15
Marks
Notes:
* Exclusion of unrealised profit held in inventory (($5,000,000 – $3,000,000) x 60% = $1,200,000)
** Intra-company indebtedness ($600,000)
*** Exclusion of intragroup interest ($6,000)
Workings
W1 Retained earnings as at 31 October 2008
$000 $000
Wallace as per statement of financial position 14,145 0·5
Bruce:
Retained earnings 5,950
Pre-acquisition reserves (750)
Unrealised profit (1,200)
––––––
4,000
Group share (70% x $4,000) 2,800 2·5
–––––––
16,945
–––––––
––––––– ––––
3·0
––––
––––
W2 Non-controlling interest as at 31 October 2008
$000
Net assets of Bruce at 31 October 2008 15,210 0·5
Less unrealised profit (1,200) 0·5
–––––––
14,010
–––––––
Non-controlling interest share (30% x $14,010) 4,203 1·0
Goodwill attributable to non-controlling interest 600 1·0
––––––– ––––
Total non-controlling interest 4,803 3·0
––––––– ––––
––––
3 (a) Realisation Account

$ $
Property 100,000 Loan a/c 10,000 0·5 0·5
Furniture & fittings (NBV) 30,000 Payables 32,520 0·5 0·5
Motor vehicles (NBV) 20,000 0·5
Receivables 49,000 0·5
Cash and bank: Cash and bank:
Loan 10,000 Property 110,000 0·5 0·5
Payables 29,350 Furniture and fittings 26,800 0·5 0·5
Dissolution expenses 2,100 Motor vehicles 22,300 0·5 0·5
Profit on realisation: Melanie –12 4,360 Inventory 21,650 1·0 0·5
Vicky –14 2,180 Receivables 45,900 1·0 0·5
Lucy –14 2,180 0·5
–––––––– –––––––– ––––
269,170 269,170 Total 10·0
––––––––
–––––––– ––––––––
–––––––– ––––
––––
(b) Cash and Bank

$ $
Balance b/f 5,000 Realisation A/c:
Realisation a/c Loan 10,000 0·5
Property 110,000 Payables 29,350 0·5 0·5
Furniture and fittings 26,800 Dissolution expenses 2,100 0·5 1·0
Motor vehicles 22,300 Partners a/c: Melanie 92,040 0·5 0·5
Inventory 21,650 Vicky 40,680 0·5 0·5
Receivables 45,900 Lucy 57,480 0·5 0·5
–––––––– –––––––– ––––
231,650 231,650 Total 6·0
––––––––
–––––––– ––––––––
–––––––– ––––
––––
16
Marks
(c) Partners’ Accounts
Melanie Vicky Lucy Melanie Vicky Lucy
$ $ $ $ $ $
Cash 92,040 40,680 57,480 Capital a/cs 80,000 30,000 50,000 2·0
Current a/cs 7,680 8,500 5,300 1·0
Realisation a/c 4,360 2,180 2,180 1·0
––––––– ––––––– ––––––– ––––––– ––––––– –––––––
92,040 40,680 57,480 92,040 40,680 57,480
–––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– –––––––
––––––– ––––
Total 4·0
––––
––––
4 (a) Ratio Formula Campbell Giddens

Calculation Ratio Calculation Ratio
Current assets 303 274
Current ratio –––––––––––––– :1 –––– 4·3:1 –––– 1·8:1
Current assets – inventory 165 107
Quick ratio –––––––––––––––––––––– :1 –––– 2·4:1 –––– 0·7:1
Receivables 69 98
Rec’bles collection period –––––––––– x 365 –––– x 365 42 days –––– x 365 53 days
Sales 596 678
PBIT 99 32
Return on capital employed ––––––––––––––––––––––––– x 100 –––– x 100 18·3% ––––– x 100 3·1%
S. Cap + Res + Non curr lia. 540 1,049
Gross profit percentage –––––––––– x 100 –––– x 100 33·9% –––– x 100 22·4%
Sales 596 678
Net profit 99 24
Net profit percentage –––––––– x 100 –––– x 100 16·6% –––– x 100 3·5%
Sales 596 678
Marking scheme: 1/2 mark for correctly stating the formula and 1/2 mark for each correct ratio

– The current ratios indicate that both companies have sufficient current assets to meet their current liabilities. Campbell’s
current ratio is very healthy due mainly to the relatively lower level of liabilities.
– The quick ratio shows that Giddens may have some liquidity problems; it is less than 1:1 and therefore the company
may not be able to pay its debts as they become due. The high level of payables relative to current assets may indicate
some difficulty in paying suppliers. Giddens’ bank balance when compared to Campbell’s is also low.
– The receivables collection period for Giddens is longer than for Campbell. This may indicate poor credit control in
Giddens and may have an adverse effect on company liquidity.
– Campbell is making a very good return on capital employed (18%) compared to Giddens (3·1%). Campbell should be
an attractive investment to potential investors with this level of return.
– Campbell has a higher gross profit percentage than Giddens. It may be that Campbell is able to source its supplies more
cheaply than Giddens or benefit from discounts. Alternatively, it may have some other advantage such as its location
which enables it to charge higher prices.
– The net profit percentage for Giddens is very low compared with Campbell, suggesting that it is not controlling its
expenses as carefully as it should.
Marking scheme
17
Paper T6 (INT)
Advanced Level
Drafting Financial
Statements
Monday 1 December 2008
Time allowed
Writing: 3 hours


1 Screeth is a limited liability company with the following trial balance as at 31 October 2008.
Dr Cr
$000 $000
Distribution costs 250
Salaries 1,180
Sales 9,427
Property expenses 290
Returns inward 166
Cash 27
Insurance 130
Purchases 6,248
Bank 311
Loan note interest 58
Trade payables 507
7% Loan notes 822
Receivables expense 260
$1 Ordinary shares 2,850
Dividends paid: Final for year ended 31 October 2007 200
Land at cost 1,295
Furniture and equipment at cost 800
Accumulated depreciation at 1 November 2007
Buildings 625
Motor vehicles 140
Furniture and equipment 335
––––––– –––––––
16,400 16,400
–––––––
––––––– –––––––
–––––––
Further information relating to Screeth:
1 The insurance includes $10,000 which relates to November 2008.
2 Buildings are depreciated at 5% of cost. Building depreciation during the year is allocated 50% to distribution
costs and 50% to administrative expenses.
3 At 31 October 2008 the buildings were professionally valued at $3,150,000 and the directors wish this
valuation to be incorporated into the accounts.
4 Depreciation is to be charged as follows:
(i) Motor vehicles at 25% of written down value, allocated to distribution costs
(ii) Furniture and equipment at 20% of cost, allocated to administrative expenses.
5 Inventory at 31 October 2008 was valued at $480,000 based on its original cost.
6 Based on past experience the allowance for receivables is to be increased to 5% of trade receivables and allocated
to administrative expenses.
7 There are salaries outstanding of $60,000 for the year ended 31 October 2008.
2
8 The items listed below should be apportioned as indicated:
Property expenses 20% 30% 50%
Insurance 20% 40% 40%
Salaries 25% 35% 40%
Discounts received 100%
9 Tax of $120,000 is to be provided for the year.
Required:
Prepare, the following financial statements for Screeth:
(a) the statement of comprehensive income for the year ended 31 October 2008. (17 marks)
(b) the statement of financial position as at 31 October 2008. (18 marks)
(35 marks)
3 [P.T.O.
2 You are presented with the following information for Wallace, a limited liability company, and its subsidiary Bruce:
Wallace Bruce
$000 $000
Revenue 50,000 27,400
Cost of sales (26,000) (11,000)
–––––––– ––––––––
Finance costs – (8)
Income from Bruce: Loan note interest 6 –
Dividends 2,100 –
–––––––– ––––––––
Income tax expense (3,700) (3,100)
–––––––– ––––––––
Profit for the year 12,706 8,200
–––––––– ––––––––
Statements of financial position as at 31 October 2008
Wallace Bruce
Assets $000 $000 $000 $000
Non-current assets
Tangible assets 30,000 14,895
Investments:
$1 ordinary shares in Bruce at cost 8,800 –
Bruce loan notes 60 –
––––––– –––––––
38,860 14,895
Current assets
Inventory, at cost 3,900 1,665
Cash and cash equivalents 1,260 12,010 502 6,697
––––––– ––––––– ––––––– –––––––
–––––––
––––––– –––––––
–––––––
––––––– –––––––
Total equity 40,145 15,210
Current liabilities
Tax 4,080 2,502
Total liabilities ––––––– 10,725 ––––––– 6,302
––––––– –––––––
–––––––
––––––– –––––––
–––––––
(i) Wallace purchased 70% of the $1 ordinary shares in Bruce on 1 November 2007. At that date Bruce’s retained
earnings were $750,000.
(ii) It is group policy to value the non-controlling interest at fair value. For this purpose, the fair value of the goodwill
attributable to the non-controlling interest of Bruce is $600,000. Consolidated goodwill was not impaired at
31 October 2008.
4
(iii) Wallace owns $60,000 of Bruce’s loan notes. The interest is paid annually in arrears. Interest for the year ended
31 October 2008 is included in Bruce’s payables. Wallace has also accrued the interest in its receivables.
(iv) During the year ended 31 October 2008 Bruce sold goods which originally cost $3,000,000 to Wallace for
$5,000,000. Wallace has only been able to sell 40% of these goods by 31 October 2008.
(v) At 31 October 2008 Wallace owed Bruce $600,000 for some of the goods that Bruce supplied during the year.
(vi) All Bruce’s dividends were paid in the financial year ended 31 October 2008.
Required:
(a) Calculate the goodwill arising on the acquisition of Bruce as at 1 November 2007. (4 marks)
(b) Prepare the following financial statements for Wallace:

(i) the consolidated income statement for the year ended 31 October 2008; (8 marks)
(ii) the consolidated statement of financial position as at 31 October 2008.
Note: A working should be included for the retained earnings. Disclosure notes are not required. (18 marks)
(30 marks)
5 [P.T.O.
3 Melanie, Vicky and Lucy have had a business partnership for a number of years and share profits and losses in the
ratio 2:1:1. The partnership was dissolved on 1 December 2008. The statement of financial position for the
partnership as at 30 November 2008 was as follows:
Melanie, Vicky and Lucy
Statement of financial position as at 30 November 2008
Assets $ $
Non-current assets
Property 100,000
Furniture and fittings 30,000
Motor vehicles 20,000
––––––––
150,000
Current assets
Inventory 20,000
Receivables 49,000
Bank 5,000 74,000
–––––––– ––––––––
––––––––
––––––––
Melanie 80,000
Vicky 30,000
Lucy 50,000
––––––––
160,000
Melanie 7,680
Vicky 8,500
Lucy 5,300
––––––––
21,480
Loan 10,000
Current liabilities
Payables 32,520
––––––––
––––––––
––––––––
(a) The property was sold for $110,000 and the furniture and fittings were sold for $26,800.
(b) The motor vehicles were all sold for $22,300.
(c) Only $45,900 of outstanding receivables were recovered.
(d) The payables were settled for $29,350.
(e) The inventory was sold for $21,650.
(f) The loan was repaid in full on 1 December 2008.
(g) There were no outstanding interest payments on the loan.
(h) There were expenses incurred in dissolving the partnership of $2,100.
6
Required:
Prepare the following accounts on dissolution:
(a) Realisation account. (10 marks)
(b) Cash and bank account. (6 marks)
(c) Partners’ accounts. (4 marks)
(20 marks)
7 [P.T.O.
4 An investor is considering the purchase of shares in either Campbell or Giddens. Both companies are in the same line
of business and their accounts are summarised below:
Statements of financial position as at 31 October 2008
Campbell Giddens
Assets $000 $000 $000 $000
Non-current assets
At cost 420 1,070
Accumulated depreciation (113) (144)
––––– ––––––
307 926
Current assets
Inventory 138 167
Receivables 69 98
Cash and cash equivalents 96 303 9 274
––––– ––––– –––––– ––––––
610 1,200
–––––
––––– ––––––
––––––
Share capital 370 900
––––– ––––––
540 969
Current liabilities
Interest payable – 1
Income tax 10 70 30 151
––––– ––––– –––––– ––––––
Total equity and liabilities 610 1,200
–––––
––––– ––––––
––––––
Campbell Giddens
$000 $000 $000 $000
Sales revenue 596 678
––––– ––––––
Expenses:
Selling and distribution (53) (56)
––––– ––––––
(103) (128)
––––– ––––––
Net profit 99 24
–––––
––––– ––––––
––––––
8
Required:
(a) Calculate the following six ratios for both companies, clearly showing the ratio formulae and figures used.
(i) Current ratio;
(ii) Quick ratio (acid test ratio);
(iii) Receivables collection period;
(iv) Return on capital employed;
(v) Gross profit percentage;
(vi) Net profit percentage. (9 marks)
(b) Prepare, for the investor, comments on the performance and position of Campbell and Giddens using the
ratios calculated in part (a). (6 marks)
(15 marks)
9

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Certified Accounting Technician examination

Sample multiple choice questions – June 2009

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3 Which of the following four statements are correct?

End of Sample Questions

5 D 628,950 + (76,950 – 31,725) – (66,525 – 36,300) = 643,950

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Drafting Financial Statements (International Stream) and Marking Scheme

Income Statement for the year ended 31 May 2004 0·5

Workings Cost of Sales Distribution Costs Administrative

Cash flows from financing activities

3 Partnership profit statement for the year ended 31 May 2004

Quick ratio Current assets – inventory 4,520 = 1·41 :1 7,700 = 1·83 :1

(b) Relevant comments could include:

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

MONDAY 7 JUNE 2004

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

The Association of Chartered Certified Accountants

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are summarised below.

End of Question Paper

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1 (a) Guyridge Marks Workings ($)

Profit after tax for ord sh’holders 11,150

Net Profit after tax 11,150

Price per share 150

Profit before interest and taxation 12,715

Notes on Tressven’s ratios

Ratio Tressven Hilladay Comment on the ratio calculated

(b) User Group Information needs

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

MONDAY 6 DECEMBER 2004

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

The Association of Chartered Certified Accountants

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(c) the balance sheet as at 31 October 2004. (12 marks)

(b) Prepare the following financial statements for Black:

(i) Dividend per share;

End of Question Paper

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(b) The accounting treatment for goodwill as required by IFRS 3

(b) Brief Report

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

MONDAY 6 JUNE 2005

Time allowed 3 hours

ALL FOUR questions are compulsory and MUST be answered

Do not open this paper until instructed by the supervisor

This question paper must not be removed from the examination

The Association of Chartered Certified Accountants

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End of Question Paper

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3 (a) Ratio Formulae Aber Cromby

(b) Ratio Aber Cromby Comment

4 (a) (i) Going Concern Concept

(b) The arguments for having accounting standards

ACCA CERTIFIED ACCOUNTING TECHNICIAN EXAMINATION

MONDAY 5 DECEMBER 2005

Time allowed 3 hours