AD 1101: Financial Accounting

Semester 1, AY 2019/20
Examiners’ Report
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The unmoderated examination median grade for this course is B-.

Question 1

Overall, most students performed satisfactorily for Part I but less than satisfactorily for Part II
of the question.

Part I

(i) Majority of the students were able to identify the type of the inventory system i.e.
perpetual and periodic inventory systems from the given journal entries based on the
accounts that were debited when goods were purchased. They were able to justify their
answers based on the accounts but some failed to explain the choices for such systems
based on the value of the goods purchased and sold. Some of the students confused the
inventory recording system with the cost-flow assumption of the inventory costing
method.

(ii) Again, majority of students were able to explain the cost-flow assumption of FIFO
(First-In-First-Out) adopted for Product XA, and justify their answers by tracing back
the unit cost of the goods sold as coming from the earliest batch of goods purchased. A
handful of students did not seem to know what the cost-flow assumption was and so
did not attempt the question.

(iii) Almost all students did well for this part of the question providing the correct answers
for the ending inventory, cost of inventory sold and gross profit. A small number of
students wrongly calculated the ending inventory by using the wrong unit cost based
on the wrong identification of cost-flow assumption in part (ii) above.

(iv) About half the number of students were able to describe the effects of goods-in-transit
not recorded in purchases but in physical count of inventory. However, a small portion
of these students did not extend the effects of the error in purchases on the Accounts
Payable in the Balance Sheet. Students who failed this question incorrectly stated that
the closing inventory was understated and consequently described its effects on the
accounts.

(v) This part was generally quite well done. Those who provided the correct journal entries
for writing down Product XA from cost to NRV and explained correctly its effect on
the Inventory Turnover ratio scored full marks.

Among those who provided the correct journal entries for the write-down of inventory,
a handful of them could not explain the effects of the write-down on the inventory
turnover ratio. Although they debited COGS, yet they incorrectly described that COGS
would decrease. Some erroneously thought that as long as both the numerator and the
denominator in the inventory turnover ratio are reduced by a constant amount, the ratio
would not be affected.

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 A noticeable number of students left this part undone. They seemed to have no idea of
what this part entailed.

Part II

(i) This part was satisfactorily performed. Students who performed poorly failed to
capitalise the stamp duty and land clearing fees as part of the costs of acquiring the
freehold land. They were also unable to analyse the effects of an upward revaluation of
the freehold land in the first year and a subsequent downward revaluation of the said
piece of land.

(ii) Majority of the students did very well for this part.

(iii) This part of the question posed some challenges to students who were not able to grasp
the comparison of carrying amount vis-à-vis the “fair value less cost of disposal” and
“value-in-use”. Therefore, quite a number of students did not calculate the impairment
loss correctly and henceforth the wrong carrying amount after impairment loss was used
for subsequent calculation of the depreciation. Many students also made mistakes in
determining the wrong number of months for depreciation calculation.

(iv) Almost all students did badly for this part which requires the calculation of the Fixed
Asset Turnover (FAT) ratio. Students were not able to determine the denominator
(average fixed assets) of the FAT ratio correctly especially the opening Fixed Assets
balance which could be worked out by subtracting the accumulated depreciation of the
machinery as at 1 July 2018 from its original cost. In addition, most students were not
able to adequately address the theory part which requires the comment of any one factor
that may influence the ratio. These students merely commented on the numerical changes
in the numerator and denominator in their answers.

Question 2

Overall this question produced mixed performances.

Part I

(i) Many students failed to identify item 1 as involving a right-of-return asset and item 2
as relating to a contingent asset. Those who provided brief answers or justifications in
explaining the issues /contingencies identified did not obtain good marks. Weaker
students merely showed journal entries to record the transactions without providing the
explanations required.

(ii) Majority of the students were able to provide two events/transactions that gave rise to
“other reserves” (for e.g. revaluation of property, plant and equipment and fair value
reserve arising from FV change in FVOCI).

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 It was surprising to see quite a number of students who erroneously provided changes
in the fair value of investment properties and investments at FVPL as their answers.
This clearly shows that they could not differentiate items reported in “other reserves”
from those reported in the income statement. In addition, there were some other
students who were clearly off-target when they highlighted treasury shares, gains or
losses from investment in associates, and non-controlling interest as items reported
under “other reserves”.

(iii) It was evident that those students who were able to explain the reasons for the change
in the “Other Reserves” account were also those who were able to handle requirement
(ii), albeit a few related the change in the other reserves to the provision movements in
requirement (i) which is clearly not the case here.

Part II

(i) Almost all the students were able to compute the net A/R (“x”) effortlessly, but majority
of them failed to realise that the allowance of impairment of AR is estimated based on
the gross AR. Hence, they should have added back the allowance for impairment of
A/R to the net A/R to arrive at the gross AR in order to determine the missing “y” and
thereafter, the missing “z”.

(ii) Most students were able to provide the correct journal entries for impairment of A/R
though some of them gave an incorrect amount.

(iii) This was by far the best attempted part where almost all the students gave the correct
journal entries to write off specific A/R account using the direct write-off method and
the allowance method.

(iv) This was another relatively well attempted part where students were able to explain the
disadvantages of the direct write-off method.

Question 3

(i) Students had many challenges when doing this problem. Many students do not know
the proper format of Statement of Cash Flows. For operating cash indirect method,
students often used net income after tax. Many cannot figure out the proper depreciation
expense and used the difference in accumulated depreciation instead. Instead of
subtracting the gain, many added it back. Many could not figure out the FV gain on
FVPL. Most students did well on the adjustments pertaining to the changes in current
assets and liabilities. Many students had trouble figuring out the cash tax paid.

For investing cash flow, many could figure out the proceeds from sale of equipment.
Many forgot about the proceeds from investments at FVPL or could not figure the
number out.

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 For financing cash flow, issuance of stock was a challenge for the students. Many also
could not figure out the dividends paid. Most correctly calculated the cash inflow from
notes payable.

Almost all students missed the disclosure requirement for the non-cash land transaction.

(ii) Most students did well in figuring out the average collection period for 2018. Some
students could only figure out the receivable turnover.

Most students did well in interpreting the meaning of the number of the average
collection period. However, some students could not interpret whether a higher or lower
average collection period is better for the company. Many students did not mention the
risk of having an average collection period that is too short. Many students also did not
show understanding that whether a particular ratio of a company is good or bad depends
on many other factors, such as the company’s credit terms, recent years’ trend, relative
industry benchmarks, etc.