NAME: FUNGAYI JOHANE MAJURIRA

STUDENT ID: 21981559

COURSE: ADVANCED ACCOUNTING THEORY

COURSE CODE: BBAC 421

PROGRAM: BACHELOR OF BUSINESS IN ACCOUNTING

LECTURER MR.F.CHANDA

DATE: 5 DECEMBER 2022

FINAL EXAM DECEMBER 2022

1
SECTION A
QUESTION 1

Workings

(W1) Group structure

Date Acquired Total Percentage

2015 1,450,000shares 2,000,000 1,450,000 *100
2,000,000
= 72.5%

NCI = 27.5%

(W2) Net Assets at acquisition of Beta

Item At Acquisition At reporting date Post acquisition

K’000 K’000 K’000
Share Capital 1,000 1,000
General Reserve 400 800 400
Retained Earnings - 100 100
1,400 1,900 500

(W3) Goodwill
K’000 K’000
Consideration transferred 1,450
NCI (27.5% * 1,400,000) 385
Net Assets at acquisition
Share capital 1,000
General reserve 400
1,400)
Good will 435

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(W4) Retained earnings
K’000 K’000
Per statement 485 100
Less Pre-acquisition -

Group share’s
100,000*72.5% 72.5
557.5

(W5) Group Reserves

K’000 K’000
Per statement 1,200 800
Less pre-acquisition 400
1,200 400
Post-acquisition group portion
(72.5%*400) 290
1,490

(W6) NCI at year end

K’000
NCI at acquisition 385
Post acquisition share of shared retained earnings
Retained earnings 100,000* 27.5%) 27.5
Reserves (400 * 27.5%) 110
522.5

Gain in Consolidated Statement of Profit or Loss

Km
Sale proceeds 37.8
Carrying amount of Investment at disposal
Net Assets at disposal
Goodwill at disposal
Less: NCI at disposal (13.5)
24.3

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Alpha Consolidated Statement of Financial Position as at 31 December 2019
K’000 K’000
Assets
Non-Current Assets
Goodwill 435
Property, Plant and Equipment (8,868+1,787 10,655
11,070

Current Assets
Inventories(1983+1425) 3,408
Receivables(1462+1307) 2,769
Cash(25+46) 71
Bank(3447+2748) 6,195
12,443
Total assets 23,513

Equity and Liabilities

Ordinary shares of K0.50c 5,500

Retained earnings 557.5
Reserves 1,490
7,547.5
Non-controlling interest 522.5
8,070.0

Non-current Liabilities
Borrowings 10% 4,000
Borrowings 15% 500
4,500
Current Liabilities
Bank overdraft (1176+840) 2,016
Trade payables (887+1077) 1,964
Taxation(540+218) 758
4,738
17,308

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(b) Unrealized profit
Intra-group balance owned by Beta to Alpha represents an invoice of goods sold
by Alpha to Beta at a mark –up of 18% on cost and still unsold by Beta at 31
December 2019

Since the seller is the parent the profit element is included in the parent’s retained
earnings and belongs to the group.

Adjusting journals
Dr Group retained earnings
Cr Group inventory (deducting from inventory in SFP

Unrealized profit
Sales * Mark-up fraction * remaining inventory = 23,000 * 14/1158

= 3,000

Adjustment to Net Assets

Item At Acquisition At reporting date Post acquisition
K’000 K’000 K’000
Share Capital 1,000 1,000
Retained Earnings - 100 100
Unrealized profit (3) (3)
Reserves 400 800 -
1,400 1,897 497

Dr group Retained earnings 3,000

Cr Group Inventory 3,000

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Adjusted Alpha Consolidated Statement of Financial Position as at 31
December 2019

Assets
Non-Current Assets
Goodwill 435
Property, Plant and Equipment (8,868+1,787 10,655
11,070

Current Assets
Inventories(1983+1425 - 3) 3,405
Receivables(1462+1307) 2,769
Cash(25+46) 71
Bank(3447+2748) 6,195
12,440
Total assets 23,510

Equity and Liabilities

Ordinary shares of K0.50c 5,500

Retained earnings(557.5-3) 554.5
Reserves 1,490
7,544.5
Non-controlling interest 522.5
8,067.0

Non-current Liabilities
Borrowings 10% 4,000
Borrowings 15% 500
4,500
Current Liabilities
Bank overdraft (1176+840) 2,016
Trade payables (887+1077) 1,964
Taxation(540+218) 758
4,738
17,305

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QUESTION 2

(a) Define and explain in detail the difference between the following:
Functional and presentational currency
Exchange gains and exchange losses

Functional currency according to IAS 21 (The effects of changes in foreign exchange

rates) is the currency of the primary economic environment in which the entity
operates. It is the main currency that a company conducts its business. As companies
transact in many currencies but report their financial statements in one currency, the
foreign currencies have to be translated into the functional currency
Functional currency is the currency which is mostly used for a nation’s economic
activities, Therefore all corporate according IAS 21 are compelled to report their year
end results in the functional currency.

Presentational currency is the currency in which the financial statements of an entity

are presented. This is an accounting policy choice under IAS 21. The entity is free to
choose the currency in which to present to its shareholders. The difference between the
two is that whereas functional currency is the default currency that is being used by the
economy where the company is operating from, presentational currency is the default
currency that the company presents its financial reports in. For example Pepsi
functional currency is the Kwacha(K) and its presentational currency will be the United
states dollar (Usd). The presentation currency is the currency in which the Financial
statements are laid or presented to the shareholders according to IAS 21. Functional
currency picks its definition from the fact that it is a national currency and all companies
are compelled to present their financial statements to the locals affected by the
business operations in the financial gazette of the local community. The locals include
shareholders bankers suppliers government, they would want to see the results in the
functional currency for them to make a viable judgment. Vis a vi the presentation
currency which is a result of a company that has subsidiary in the local and Head office
in another country a requirement by the shareholders of the parent company to translate
the financial statements in the presentation currency. For example standard chartered

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bank in Zambia trades in Kwacha but the main shareholders is based in British pounds
so a conversion is requirement to determine the performance of his investment.
Presentation currency is controlled internally within the organization functional currency
is a requirement by the government of the local

Exchange gains is the difference that emanates from the resulting gain or loss from
translating a given proportion of currency into another currency at different exchange
rates according to IAS 21. The application of an exchange rate(being the difference in
the value of the foreign currency when converted to the local currency of the seller) that
result in a home currency increase after a conversion. If however the home currency
declines after the conversion it results in an exchange loss. Suppose a company
invoices a customer abroad in a different currency from the local currency. On the day
the invoice is generated you would have calculated and applied your converted prices
but when the customer eventually pays the exchange rate will invariably be different
from when you generated the invoice in your accounting system. There will
consequently be a slight difference in the amount paid. That difference will be a gain if
there has been an increase in the foreign currency and an exchange loss if the foreign
currency decreases in value. The valuation channel which looks a forex gains or losses
at the world market according to Lane and Miles- and Ferretty (2007) there is rapid
movement in the growth of cross border financial holdings which contributes a lot to
gains and losses on foreign assets and liabilities. If a dollar depreciates the net
international investment of the currency will be reduced the vice versa is true.

(b)

Apex Ltd
USd Exchange rate Kwacha
Debtors(Electro) 833.33 12 10,000
813.01 12.3 10,000

Electro
Creditors(Apex Ltd) Kwacha Exchange rate Usd
10,000 12 833.33

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 10,000 12.3 813.01

Apex Books of Accounts

On sale 10,000/12 = 833.33

Dr Debtors 833.33
Cr Sales 833.33

On payment
Dollar value of cash received = 10,000 / 12.3 = 813.01
Loss on transaction = 833.33 – 813.01 = 20.32

Dr Bank 813.01
Cr Debtors 833.33
Dr P&L 20.32

Electro Books of Accounts

On purchase 10,000/12 = 833.33

Dr Purchases 833.33
Cr Payables 833.33

On payment
Dollar value of cash paid = 10,000 / 12.3 = 813.01
Gain on transaction = 833.33 – 813.01 = 20.32

Dr Creditors 833.33
Cr Bank 813.01
Cr P&L 20.32

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QUESTION 3

a) The objectives of financial statements

The objectives of financial statements is to provide information about the financial
position, performance and changes in financial position of an entity that is useful
to a wide range of users in making economic decisions in general.
The above objectives are communicated through
1. Income statement
2. Balance Sheet
3. Cash Flow statement
4. Share holders Equity

The Income statement reports the financial performance of the business over some time
and comprises, Revenue (cash inflows), expenses(cash outflows) and also gains and
losses not attributable in the ordinary course of business. Excess of Revenue over
expenses results in Profit and vice versa result in Loss for the business. The income
statement also includes other comprehensive income which consists of all changes in
equity except shareholder transactions

The Balance sheet reports the business’s financial position at a particular point in time.
It is also known as the Statement of financial Position. It shows the Assets owned by
the business on one side and sources of funds used in the business to hold such assets
in the form of Capita contribution and liabilities incurred by the business on the other
side. It consists of
 Assets – these are the resources controlled by the business and fall into,
Tangible and Intangible Assets, Current and Non-Current Assets
 Liabilities – these are the amounts owed to lenders and other creditors. The are
classified under Current Liabilities such as Bills Payable and Non-Current
liabilities such as Loans and Debentures.
 Owners Equity – also known as Capital Contribution by the owner. It shows the
residual interest in the Net Assets of an entity that remains after deducting its
liabilities

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Cash flow Statement – This shows the changes in the business’s financial position from
the perspective of the movement of cash into and from the business. The primary
rationale behind it is to supplement the Income statement and statement of financial
position as they on their own do not provide sufficient insight into movements in cash
balances, It then bridges the gap and helps various business stakeholders understand
the sources of cash and utilization of cash. It is composed of three sections
 Cash Flow from Operating activities – reconciles operating profit to cash
 Cash flow from Investing activities – comprises all acquisition/purchase of long
term assets and disposal/sale of long-term assets and other investments. It also
includes receipts of interest and dividends from investments
 Cash Flow from financing activities – it accounts for equity capita and borrowing
changes. It comprises the payment of dividends to shareholders, cash flows
arising from the repayment of loans and fresh borrowing and issue of shares

Share holders Equity – This statement reports the amount and sources of changes in
Equity’s Shareholders’ Investment in the business over a period of time. It summarizes
the changes in the capital and reserves attributable to equity holders over the
accounting period. All increase and decreases during the year when adjusted with the
beginning balance result in the ending balance. It includes transactions with
shareholders and reconciles each equity account’s beginning and ending balance
including capital stock, additional paid-in-capital, retained earnings accumulated and
other comprehensive income and shows how the composition of equity(share capital,
other reserves and retained earnings) has changed over the years.

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b) Explain why consolidated financial statements are useful to the users of
financial statements.
Financial statements prepared by companies are used by different categories of
individuals, corporate in a sense relevant to them.

Owners

Management
Customers

Business
Concern
Creditors

Government

Employees
oncern
Investors

1. Owners
The owners provide funds or capital to the organization. They possess
curiosity in knowing whether the business is being conducted on sound lines
or not and whether the capital is being employed properly or not. Owners,
being businessmen, always keep an eye on the returns from the investment.

2. Management
The management of the business is greatly interested in knowing the position
of the entity. The accounts are the basis, on which the management can
study the merits and demerits of the business activity. Thus, the management
is interested in financial statements to find whether the business carried on is
profitable or not. The financial statements are the “eyes and ears of
management and facilitate in drawing future course of action, further
expansion or any other decision”.

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3. Creditors
Creditors are the persons who supply goods on credit, or bankers or lenders
of money. It is usual that these groups are interested to know that financial
soundness before granting credit. The progress and prosperity of the firm, to
which creditors are extended, are largely watched by the creditors from the
point of view of security and further credit. Profit and loss and Balance Sheet
are their main focal point of reference.

4. Employees
Payment of bonus depends upon the size of profit earned by the firm. The
more important point is that the workers expect regular income for their
pockets. The demand for wage rise, bonus, better working conditions depend
upon the profitability of the firm and in turn depend upon financial position
hence their interest in the financial statements.

5. Investors
The prospective investors, who want to invest their money in a firm, wish to
see the progress and prosperity of the firm, before investing their money, by
going through the firm’s financial statements. For this purpose, this group is
eager to go through the accounting statements which enable them to know
the safety of investment.

6. Government
Government keeps a close watch on the firm which yield good amount of
profits. The state and central governments are interested in the financial
statements to know the earnings for the purpose of taxation.

7. Consumers
These groups are interested in getting the goods at reduced prices.
Therefore, they wish to know the establishment of proper accounting control,

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 which in turn will reduce the cost of production, in turn less price to be paid by
consumers.

Besides being a statutory requirement Consolidated financial statements allow

investors, financial analysts, business owners and other interested parties to get a
complete overview of the parent company. At a glance they can view the overall health
of the business and how each subsidiary impacts the parent company.

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QUESTION 4

(a) Profitability ratios: 2018 2019

Gross profit margin

= Gross profit * 100 214,000 * 100 138,000 * 100

Turnover 510,000 345,000

= 41.96% = 40%
Operating profit margin

= EBIT * 10 105,000-13000 *100 70,000-2,000 * 100

Turnover 510,000 345,000

92,000 * 100 68,000 * 100

510,000 345,000

= 18.04% = 19.71%

Asset turnover ratio

= Turnover 510,000 * 100 345,000 * 100

Total Assets – Current liabilities 474,000 – 44,000 252,000 – 24,000
(Capital employed)
510,000 345,000
430,000 228,000

= 1.19 times = 1.51 times

Liquidity Ratios

Quick ratio

= Current Assets – Inventories 160,000 - 72000 * 100 144,000 – 36,000 * 100

Current liabilities 44,000 24,000

= 2 = 4.5
Receivables collection period

= trade receivable * 365 days 88,000 * 365 28,000 * 365

Credit turnover 510,000 345,000

= 62.98 days = 29.62 days

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Inventory holding period

= average inventories * 365 days = 72,000 * 365 36,000 * 365

Cost of sales 296,000 207,000

= 88.75 days = 63.48 days

Long term solvency ratio

Gearing

= Total Debt = 84,000 = 76,200

Total Equity 190,000 145,000

= 44% = 53%

Interest cover

= EBIT = 105,000 = 70,000

Interest expense 13,000 2,000

= 8.08 = 35

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b) Commentary on the performance of the company for the two years

Profitability ratios

Gross margin
It is net sales less cost of goods sold.
Giltex plc gross profit margin declined from 41.96% in 2018 to 40% in 2019 due to
increased cost of sales from 58% to 60%. Cost of sales are increased because of
failing to manage the source of raw materials by buying from more expensive
suppliers.

Operating profit margin

It measures how much profit a company makes on a dollar of sales after paying for
variable costs of production but before interest and tax.
However operating profit margin has increased from 18.04% to 19.71%. Operating
costs have been managed efficiently in 2018 compared to 2019 having increased
from 18.8% to 19.1%. The core operations have improved without the costs of the
capital structure and tax expense.

Asset turnover
Is the ratio of turnover over average assets.
Giltex plc has utilized its assets more efficiently in 2019 at 1.51 times compared to
1.19 times in 2018.

Liquidity ratios

Quick ratio
It measures a company’s capacity to pay its current liabilities without needing to sell
its inventory or obtain additional financing.
The quick ratio represents the extent to which Giltex plc can pay its short-term
obligations with its most liquid assets, cash and those that can be readily converted
to cash. In 2018 it had debt cover of 2 whereas in 2019 it had improved to 4.5 times.
They have improved in their receivables collection period as well as their debtors
that have almost trebled from 2018 to 2019.

Receivables collection period.

Is a measure of the number of days it takes, on average, to collect accounts
receivable based on the average balance in accounts receivable.
Giltex plc collection period has improved from 62.98 days to 29.62 days. This
reflects the company’s skill in negotiating for good payment terms as well as good
vetting before credit terms.

Inventory holding period

Is a ratio that depicts the number of days for which an organization holds inventory
before sales.

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Giltex plc holding days have improved from 88.75 days 2018 to 63.48 days in 2019.
They have managed to rotate their inventory to sales back to inventory because of
marketing skills, reduces prices and management of debt.

Long term solvency ratio

Gearing
Is a measure of how much of a company’s operations are funded using debt versus
funding received from shareholders s equity. A high gearing ratio shows a high
proportion of debt to equity while a low gearing ratio shows the opposite.
Giltex gearing has increased from 44% in 2018 to 53% in 2019 reflecting a
dwindling of equity and heavier dependency on debt shown by increase in loan
notes from 30,800 in 2018 to 200,000 in 2019.

Interest cover
Is used to measure how well a firm can pay the interest due on outstanding debt.
The lower the interest coverage ratio, the greater the company’s debt and possibility
of bankruptcy. Glitex plc interest cover in 2018 was 8.08 whereas in 2019 it was 35.
This showed an improvement and good management of business as more operating
profits are available to meet interest payments.

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