UNIVERSITY OF BOTSWANA

FACULTY OF BUSINESS

DEPARTMENT OF ACCOUNTING AND FINANCE

2020/2021 Semester One

Test One

FRONT PAGE

COURSE NO: ACC 410 DURATION: 2 HOURS DATE: 11 October 2020

TITLE OF PAPER: Financial Reporting SUBJECT: Accounting

INSTRUCTIONS
1. There are three questions, answer all the questions.
2. All relevant work should be written using a pen not pencil.
3. You are required to show all workings as they may carry marks.
4. Begin a question on a new page.
5. Write both your name and ID on the answer sheet.

DO NOT OPEN THIS PAPER UNTIL YOU HAVE BEEN TOLD TO DO SO BY THE
SUPERVISOR/INVIGILATOR

NO OF PAGES 5 (including cover page)

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Question 1 ( 24 marks)
The Statement of Comprehensive Income and Statement of Financial Position for Sedimo
business for the year ended 31 March 2020 are given below. The manager of the business has
approached a bank for a loan.
Statement of Comprehensive Income for the year ended 31 March 2020
Pula
Revenue 551 000
Cost of sales (379 100)
Gross profit 171 900
Distribution expenses (27 000)
Administration expenses (63 000)
Profit from operation 81 900
Finance charge (6 500)
Profit before tax 75 400
Tax (7 540)
Profit for the year 67 860

Statement of Financial Position as at 31 March 2020

Pula
Assets:
Non-current assets:
Property, plant and Equipment 661 500 Required to:
Current assets: a) Calculate the following ratios:
Inventory 72 000 i. Current ratio
Trade receivables 49 400 ii. Acid test/ quick ratio,
Bank balance 5 000 iii. Return on capital
Total current assets 126 400 employed,
Total assets 787 900 iv. Stock turnover,
Equity and liabilities v. Debtor collection period,
Share capital and reserve vi. Debt ratio
Share Capital (32 000 shares of P10 each 320 000 vii. Net profit ratio
Share premium 120 000 viii. Earnings per share
General reserve 200 860 ix. Asset turn over
640 860 x. Trade payable collection
Non-current liability period
10% Loan 65 000
Current liabilities
Trade payables 36 000
Taxation 7 540
Dividends 32 000
Interest on borrowings 6 500
Total current liabilities 82 040
Total equity and liabilities 787 900
(1mark formula and 1 correct ratio)
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 b) Based on your knowledge of ratio analysis advice whether the bank should give a loan or
not. . (4 marks)

Question 2 ( 20 marks)
The statement of financial position (balance sheet) for Tawana Ltd for two years ending 31
December 2018 and 2019 are shown below.
2019 2018

Non-current assets
Land and Buildings 720 000 580 000
Less depreciation 240 000 480 000 150 000 430 000
Investment 80 000 20 000
560 000 450 000
Current assets
Inventory 140 000 160 000
Trade receivables 120 000 90 000
Bank balance - 260 000 30 000 280 000
Total assets 820 000 730 000
Share capital and liabilities
Ordinary share capital 70 000 60 000
Share premium 30 000 20 000
Retained earnings 320 000 250 000
420 000 330 000
Non-current liabilities
12% loan 210 000 250 000
Current liabilities
Trade payables 80 000 50 000
Accruals 10 000 20 000
Tax liability 50 000 40 000
Proposed dividend 40 000 40 000
Bank overdraft 10 000 -
190 000 150 000
Total capital and liabilities 820 000 730 000

The summarised income statement is as follows

P
Profit from operations 170 000
Investment income 10 000
Finance cost (20 000)
Profit before tax 160 000
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Taxation (40 000)
Profit for the year 120 000
Additional information
1. During the year the company sold non-current assets which had originally cost P50 000
which had a net book value of P30 000. These assets were sold for cash P20 000.
2. On 30 June 2019 interim dividend of P10 000 was paid on ordinary shares
3. At 31 December 2019, the directors proposed a final dividend of P40 000 on ordinary
shares
Required to:
a) Prepare a statement of cash flow for Tawana Ltd for the year ended 31 December 2019.
(18 marks)
b) Explain why shareholders may need information contained in the statement of cash flow
( 2 marks)

Question 3 ( 16 marks)

Wame Company took over the business of Kago Ltd on 1 January 2020. The purchase
consideration was P 300 000. The company placed the following values on the assets taken over:
Machinery 60 000
Fixtures 120 000
Inventory 80 000.

The financial statements of the two businesses before the take-over was as shown below:
Kago Ltd statement of financial position
Machinery 60 000
Fixtures 120 000
Inventory 80 000
260 000

Capital 260 000

Wame Company Statement of financial position as at 1 January 2020

Machinery 220 000
Vehicles 300 000
Inventory 100 000
Bank 180 000
800 000

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Share capital 600 000
Retained Profit 200 000
500 000
You are required to:
a) Pass journal entries to close the accounts of Kago Ltd. ( 4 marks)
b) Prepare the statement of financial position of Wame Company immediately after the
takeover of Kago Ltd assuming payment by Wame Company was made by issuing 300
000 shares of P1 each. (10 marks)
c) Briefly explain what amalgamation in business combination is. ( 2 marks)

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 MARKING KEY

Question 1 (24 marks)

a)
Ratio Formula (1 mark) Answer (1 mark)

1 Current ratio Current asset/current liability 126 400/82 040= 1.54

2 Acid test ratio
3 ROCE
4 Stock turn over
5 Debtors collection
period
6 Debt ratio
7 Net profit ratio
8 Earnings per share
9 Asset turnover
10 Payables collection
period
Current assets- inventory/current 126 400-72 000/82
liability 040=0.66
Profit before tax/capital employed 75 400/705 860 )×100
=10.68
Cost of sales/average stock 379 100/72 000= 5.3 times
(Debtors/credit sales) ×365 (49 400/551 000) ×365 =33
days
Total liabilities/total assets (147 040/787 900)=0.19
Net profit/Net Sales (75 400/551 000)×
100=13.7%
Net profit after tax/number of 67 860/32 000)= P 2.12
shares
Revenue/total assets (551 000/787 900) =0.7
Average creditors/credit 36 000/379 100) ×365 =35
purchases)×365 days
Total 20 marks

b) The profitability and liquidity ratios are important for the bank to decide whether to grant
the loan or not. The liquidity ratios are the current ratio at 1.54 and the acid test ratio at
0.66. Both these ratios are low; the desirable ratios are current ratio of 2 and acid test
ratio of 1. The calculated ratios suggest that the business might struggle to pay its current
liabilities when they fall due.
The profitability ratios are the return on capital employed and the net profit ratio. These ratios
are all positive which suggest the business is profitable. However since there is no information
which shows the performance of other businesses in the same sector, it is not possible to
determine whether the business is performing well or not. Given that the business is profitable
the bank should consider granting them a loan (4 marks)

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Question 2 ( 20 marks)

Same Ltd statement of cash flow for the period ended 31 December 2019
Pula Pula Marks
Profit before tax 160 000 1.0
Finance cost 20 000 1.0
Loss on sale of non-current asset 10 000 1.0
Depreciation 110 000 1.0
Investment income ( 10 000) 1.0
290 000
Decrease in inventory 20 000 1.0
Increase in Receivables ( debtors0 (30 000) 1.0
Increase in payables 30 000 1.0
Decrease in accruals (10 000) 1.0
Cash from operations 300 000
Interest paid (20 000) 1.0
Tax paid (30 000) 1.0
Dividend paid (50 000) 1.0
Investment income 10 000
Net cash flow from operating activities 210 000

Cash flow from investing activities

Sale of non-current asset 20 000 1.0
Purchase on non-current asset (190 000) 1.0
Purchase of investment (60 000) 1.0
Net cash flow from investing activities (230 000)

Cash from financing activities

Share issued 20 000 1.0
Loan repayment (40 000) 1.0
Net cash flow from financing activities (20 000)
Decrease in cash during the period (40 000)
Add opening bank balance 30 000 1.0
Closing bank balance (10 000)
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a) A statement of cash flow is important to shareholders because they want to find out
whether the business is able to generate enough cash to pay dividend when it is declared.
(2 marks)

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Question 3 ( 16 marks)

a) Debit realisation account 260 000 (1mark)

Credit Machinery 60 000 (1mark)
Credit Fixtures 120 000 (1mark)
Credit Inventory 80 000 (1mark)
(Entries to close the accounts of Kago Ltd )
(4 marks)
b) Statement of financial position for Wame Company as at 1 January 2020
Assets:
Non-current assets:
Machine 280 000(1mark)
Vehicles 300 000(1mark)
Fixtures 120 000(1mark)
700 000
Goodwill 40 000(2 mark)
740 000
Current assets:
Inventory 180 000(1mark)
Bank 180 000(1mark)
Total current assets 360 000
Total assets 1 100 000
Equity and liabilities
Share capital and reserve
Share Capital (600 000 +300 000) 900 000(2mark)
Retained profit 200 000(1mark)
Total capitals and liabilities 1 100 000
10 marks)

c) Amalgamation is a form of business combination which occurs when two or more businesses
join together to form a new and usually bigger business. Amalgamation result in a new
company being formed. For example CAT Ltd is formed to take over the activities of A
Ltd and B Ltd. The two companies A Ltd and B Ltd have to be liquidated. ( 2
marks)