M096LON/2021MAYAUG

AUGUST 2020

Coventry University London

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M096LON Examination

Understanding Financial Reporting and Analysis

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Time allowed: Open for 16 Hours (this paper should take approximately 3
hours to complete)
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Instructions to candidates

This exam has FOUR Questions. Answer all parts of each questions.

This is an open book examination.

English Translation Dictionaries are permitted. Students whose first

language is not English are allowed to use a translation dictionary during the
first 15 minutes of any examination, in order to clarify the meaning of the
questions. This dictionary must be a translation dictionary only and not
contain diagrams or illustrations or encyclopaedic definitions. All dictionaries
must be clean and not annotated in any way.

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Answer all Questions

Question 1

You have been recruited as Financial Analyst for Solar Corporation based in
USA and with business interest in UK. The following financial statements is
available to you and you have been asked to mentor some trainee analysts.
These trainees are eager to learn about aspects of preparing the cash flow
statement and how treatment differs between IFRS and US-GAAP.

Solar Corporation
Statement of financial position as at 31 December 2020
2020 2019
£M £M
Non-Current Assets
Property, plant and equipment 9,545 9,854

Current Assets
Inventory 3,984 3,277
Receivables 1,012 957
Prepaid expenses 155 178
Cash and cash equivalents 1,011 1,163
6,162 5,575
Total assets 15,707 15,429
Equity
Common stock 3,750 4,350
Retained earnings 3,966 2,876
7,716 7,226
Non-current liabilities
Loan stock 3,075 3,575

Current liabilities
Trade payables 3,588 3,325
Salaries and wages 85 75
Interest payable 62 74
Income taxes payable 55 50
Other accrued liabilities 1,126 1,104
4,916 4,628
Total Equity and Liabilities 15,707 15,429

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Solar Corporation
Income statement for the year ended 31 October 2020
£’M
Revenue 23,598
Cost of Sale (11,456)
Gross profit 12,142
Salaries and wages expense (4,123)
Depreciation expenses (1,052)
Other operating expense (3,577)
Profit from operations 3,390
Gain on sale of equipment 205
Interest on expense (246)
Income before tax 3,349
Income tax expense (1,139)
Net income 2,210

Note:
i. During 2019, Acme purchased new equipment for a total cost of
$1,300.
ii. No items impacted retained earnings other than net income and
dividends.
iii. The book value of the equipment sold was $300,000.

Required:

a) There are two methods of presenting cash flows from operating activities:
direct and indirect method.

Explain to the visiting students the differences between the direct and
indirect methods of presenting cash flows from operating activities.

What are the arguments in favour of each with reference to IFRS and US-
GAAP? (Maximum 200 words)
(8 marks)
The direct method results in providing the information about the particular
sources and the cash use where as the indirect method result in showing the
net result. This method is recommended by both US- GAAP and IFRS.
The indirect method tell the detail about the reason why the operating flow of
cash generally differ from the net income and Mirrors the approach of
forecasting that is being used by the analyst and allowed them in starting from
the forecasting of the net income for the particular company
Ifrs allow in some kind of description in classification of the dividend and
interest. It requires that the income tax should be classified as the operating
activity and can be identified with financing or investing activity.

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The US- GAAP does not result in allowing such kind of discretion as interest
received and paid at classified in India activities of operations and dividend
that are being paid are classified in the financing activity

b) Based on the financial statements above, prepare an the Cash Flow from
operating activities to illustrate to the students using:
(i) the Direct Method
(amoun
cash flow statement t $)
Cash flow from operation  
revenue 23598
depreciation 1052
increase in trade payables 263
increase in inventory 707
increase in receivables 55
decrease in prepaid expense 23
income tax payable 1139
net cash flow from operations 23035
cash flow from investing activity  
gain on sale of equipment 205
purchased new equipment 1300
net cash flow from investing activity -1095
Cash flow from financing activity  
sale of stock 600
paid loan stock 500
net cash flow from financing activity 100
opening cash 1163
net cash flow 152
ending balance 1011

(11 marks)
(ii) the Indirect Method
(amoun
cash flow statement t $)
Cash flow from operation  
revenue 23598
depreciation 1052
increase in trade payables 263
increase in inventory 707
increase in receivables 55
decrease in prepaid expense 23
income tax payable 1139
net cash flow from operations 23035
cash flow from investing activity  
gain on sale of equipment 205
purchased new equipment 1300

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net cash flow from investing activity -1095

Cash flow from financing activity  
sale of stock 600
paid loan stock 500
net cash flow from financing activity 100
opening cash 1163
net cash flow 152
ending balance 1011

(11 marks)
(Show working for every item where applicable)

Total: 30 Marks
Question 2

a) The main methods of accounting for depreciation expense are Straight-

Line Method, Double Declining Method and Units of Production Method.
Explain how the depreciation amount is accounted (calculation) for in each
method. (Maximum 200 words)
(6 marks)
This can be provided that for calculating depreciation by using Straight line
method there is need to simply subtract the salvage value from the assets
cost for getting total depreciation, then there is need to divide that by useful
life for getting annual depreciation. Cost of asset-residual value/useful life of
asset
This can be provided that firstly there is need to divide 100% by the number of
years for the assets for the useful life. Then multiply this number by 2 and this
is the double depreciation rate. 2*asset cost-accumulated depreciation/useful
life of assets
By using depreciation by using units of production method can be calculated
by dividing the original cost related to the equipment less its salvage value by
the expected number related to the units of the assets that is related to the
useful life. For this purpose, the formula is depreciable base=cost of asset-
residual value.
Then depreciation per unit=depreciable base/total units.
b) On 1st March 2010, Providence Systems Plc with a year-end to 31
December purchased an energy-saving bulb-making machine for a total
cost of €1,200,000. They expect the machine to have a useful life of 8
years during which time it is projected to manufacture 200,000 bulbs balls
and a salvage value of €150,000. During the first year of purchased (2010
fiscal year), the machine produces 15,000 tennis balls. The production for
subsequent years are as below:

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Year Production
201 22,000
1
201 25,000
2
201 30,000
3
201 36,000
4
201 32,000
5
Required:
201 26,000
i) Calculate 6 Providence
Systems’ 201 14,000 depreciation
expense per 7 year using the
double-decline method. (Show
workings used).
Cost=$1200000
Salvage value=150000
Life=8years
Depreciation  
Year  
Depreciation  
Expense  
2011 $125,000
   
2012 $268,750
   
2013 $201,563
   
2014 $151,172
   
2015 $113,379
   
2016 $85,034
   
2017 $63,776

(12 marks)

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ii) Calculate Providence Systems’ depreciation expense per year up to 2017

using the units of production method. Present your answer in a table form
that indicate clearly. (Show workings used).
(12 marks)
Per unit depreciation*total number of units produced
Depreciation per Unit: $131,250.000

Total: 30 marks

Question 3
Springs Engineering Plc has engaged you, a company that is involved in
heavy-duty construction in USA and UK. The company often hires equipment
from leasing companies for use in its contracts. It needs advice on how to
account properly for the equipment leased as it has had issues recently for
not accounting appropriately. The following are the areas where the company
needs clarification.

a) You are to identify and compare the conditions that must exist for Springs
Engineering plc to account for the lease as a finance lease, under the
IFRS and US GAAP. (Maximum of 200 words)
This can be identified that the key difference between two system that is
GAAP is rules based and IFRS is principle based. This is helpful for
disconnecting manifest in some of the specific details and interpretations.
This can be advised that IFRS guidelines are helpful for providing overall
detail then US GAAP. Consequently this can be provided that with
theoretical framework and principles related to IFRS provides more room
for interpretation and also require land the disclosure on the financial
statements. On the other hand this can also be provided that the principle
and consistent principles related to IFRS are more logical and also
represents economics related to business transactions. This can also be
provided that the most specific difference between IFRS and GAAP is the
treatment of inventory. The IFRS rules are not included last in first out
inventory accounting method on the other hand US GAAP rules allow for
last in first out. This also includes that IFRS allow first in first out method
and weighted average cost method on the other hand US GAAP does not
allow any of the inventory reversal on the other and ifrs permit under sum
of specific conditions.
(6 marks)

b) The company leases an equipment, making four annual payments of

$125,000. The applicable discount rate is 8%.

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Illustrate in a table the lease liability and the extract of the balance sheet if
the lease is classified as a finance lease, and assuming straight-line
depreciation. (Show workings used).
PMT = PV – FV / [(1+i)^n / (1 – (1 / (1+i)^n / i)]
3020.83 (monthly)
Total payment will be 145000

c) With the aid of figures calculated in (b) above, explain the accounting
entries required under a finance lease with respect to the statement of
financial position and income statement of the lessee inthe following
phases during the lease:

i. At inception phase (beginning)

Lease asset a/c dr145000
To lease liability a/c145000
;(2 marks)

ii. At the first year during the term of lease

Lease assets a/c dr3020.83
To lease liability a/c 3020.83
(4 marks)

(Maximum of 200 words)

Total = 20 marks

Question 4

Masterly Informatics Inc. has been in the business making bespoke high-end
personal computer for professionals. The company has different types and
categories of inventory to report on the financial statements. The executives
are not sure about the requirements in relation to the reporting of inventory
and has approached you for an advice.

You are required to:

a) Identify and explain briefly four disclosure requirements that should

accompany the financial statements in respect of inventory.
(Maximum of 200 words)
For disclosure requirements that is required to accompany the financial
statement in relation to inventory includes:

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It is required that there should be disclosure of the category of inventory

that includes the work in progress, raw material, finished goods, etc.
It is required that the the method of valuation of inventory is required to be
disclosed as what valuation inventory method is being used by the
company that includes LIFO, FIFO and average inventory method.
Another disclosure that is required to be made is the amount of inventory
that is been recognised as the expense in the particular period.
Along with this the circumstances that will result in the reversal of the
written down of the inventory will be required to be disclosed
(8 marks)

b) Discuss the circumstance under which changing in inventory method is

possible under IFRS and US GAAP.
It has been determined that the company can change the method of
inventory as often as they like in showing the best possible result of
finance. As per the ifrs and GAAP the changes in the inventory Method
can be made for calculating better financial report of the organisation and
if it is been required by the law

(6 marks)

c) Tonto Furniture, a company that prepares its financial statements in

accordance with IFRS, manufactures office tables. In 2020, the factory
produced 2,000,000 finished tables and 1,800 were scrapped. For the
finished tables, raw material costs were $22.22 million, direct labour
conversion costs were $40 million, and production overhead costs were $4
million. The company got a discount of $2.22 on the raw materials
purchased.

The 1,800 scrapped tables (attributable to abnormal waste) had a total

production cost of $70,000 ($22,200 raw material costs and $47,800
conversion costs; these costs are not included in the $22.22 million raw
material and $40 million total conversion costs of the finished tables).

During the year, Astro spent $4.44 million for freight delivery charges on
raw materials and $1.33 for storing finished goods inventory. Tonto does
not have any work-in-progress inventory at the end of the year.

Required: Calculate the costs that should be included in inventory in

2020.
(6 marks)

Total = 20 marks

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END OF EXAM QUESTION PAPER

TOTAL: 100 marks

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