IB124 Introduction to Financial Accounting

IB124 Introduction to Financial AccountingAutumn Term 2011

Seminar Questions ~ Seminars 1-8

List of contents:

Seminar 1 Week 3Users of financial statements, the accounting equation, the statement of financial position, definitions of assets and liabilitiesSeminar 2 Week 4The income statement, double-entry bookkeepingSeminar 3 Week 5Closing off the accounting system at period-end, accruals and prepayments Seminar 4 Week 6Depreciation, disposal of non-current assets, bad and doubtful debtsSeminar 5 Week 7Inventory valuation, from trial balance to final financial statements, company issuesSeminar 6 Week 8Published financial statements for companies, regulation of company financial reportingSeminar 7 Week 9Cash flow statementsSeminar 8 Week 10Interpretation of financial statements through ratio analysisSeminar Approach

The material for each seminar is divided into 2 main sections:

Class Discussion Section Additional Study SectionBefore your seminar you are required to prepare full solutions to all questions within the CLASS DISCUSSION section. It is these questions which your tutor will work through within your seminars. You will be required to share your thoughts/ideas/solutions within your seminars so make sure you prepare thoroughly in advance of the session.

Further practice questions are provided in the ADDITIONAL STUDY section of the materials for each seminar. Although time constraints prevent us from working through these questions within the seminar sessions they all cover examinable topics/material and as such you should fully attempt each question, making sure you understand all the issues/techniques before consulting the solutions available via my.wbs.

Seminar 1 Week 3

Class Discussion

Question 1

Part a

Financial statements are used by a variety of groups, including:For each of these user groups briefly identify the particular types or aspects of financial information contained within the financial statements that they may be particularly interested in, in order to support the (economic) decisions they may have to make.

Investors (existing and potential)Shareholders are the owners of shares in a company. They have invested money in the company and expect to receive a dividend payment as their share of the profits. Shareholders will naturally be interested in the profit and loss statement.

EmployeesEmployees depend on the business for their pay and their jobs, so they will want to have a profitable and stable employer. Some employers give their employees a profit-sharingbonus.Provide retirement? Employment benefitsPension plan may invest into the company itself

Lenders e.g. banks how quick they can get their money back risk-assessment for the future determine assets, if they are unable to pay out

Government and their agencies e.g. HMRCPaying taxes, etcShould they provide subsidies for the companiesDetermine economic trends: GDP; unemployment, etc

Part b

Identify the main users of accounting information for a university. Do these users, or the way in which they use accounting information, differ very much from the users of accounting information for private-sector business?

Well, it depends on what organization actually owns the university. If Gov owns the UNI, the ministry of education, the board of education to determine the running cost of the UNI, will use the accounting report. The donators will use if its owned by non-profit organization then the report, the board to determine how effective the funds have been used. If it's own by profit private organization then it's similar to private sector business, as this is just another way of making profits.Most likely differs in that its not necessarily for profit. Allocation of fundsStudent unionEmployers will want to know if they can remain employedGovernments to determine if they need extra fundingPeople who donated money for scholarships will want to know

Part c

Outline three influences which seem likely to have a major impact on the development of accounting over the next few years and explain their possible impact.

1. Legal system;2. Political system;3. Nature of business ownership;4. Differences in size and complexity of business firms;5. Social climate;6. Level of sophistication of business;7. Degree of legislative business inference;8. Presence of specific accounting legislation;9. Speed of business innovations;10. Stage of economic development;11. Growth pattern of an economy;12. Status of professional education and organization.13. Globalization, as it increases the need for a unified format as investor are capable and willing to invest all over the world, which clearly also lies in the interest of the companies14. internet, as information travels faster and is more accessible, rather than being compared by post15. adoption of a common currency, such as the euro16. growing competition, increases the need of unification and sharing information with the public to display advantages

Question 2

(a) For each of the following transactions, show the effect (+ or -) on assets, liabilities and capital, identifying the accounts affected:

AssetsLiabilitiesCapital

1Owner pays in 5,000 to a business bank account+5000-/++5000

2Business buys van for 3,000 by cheque+5000-/++5000

3Business borrows 2,000 from Sharks plc as a loan+7000+2000+5000

4Business buys machines on credit from Vince Foxley (1,500)+8500+3500+5000

5Owner draws out 100 cheque for personal use+8400+3500+4900

6Business pays Vince Foxley 500 on account of amount due+7900+3000+4900

Overall change+7900+3000+4900

(b) What was the business bank balance at the end of the above transactions? 4,900

Question 3

A business is established with ordinary share capital of 2,000 and this amount is paid into a business bank account. During the first years trading (ignore the exact dates for simplicity), the following transactions occurred: a) Purchases of goods for resale, on credit4,300b) Non-current assets purchased for cash1,500c) Sales, all goods are sold and all are on credit5,800d) Payments to suppliers3,600e) Payments from customers3,200f) Other expenses, all paid in cash 900

The bank has provided an overdraft facility of up to 3,000.

Required:Draw up a statement of financial position at the end of the first year.

Mr WellsStatement of financial position at 5th January 20X1

Non-current assets1,5001,500 Current assets Inventories 0 Accounts receivable(5800 3200)2,600Total assets4,100

Capital invested2,000Profit 13,300

Expenses

Net profit

Capital2,600

Current liabilities Account payable(4300 3600) 700 Bank overdraft(2000 1500 + 3200 900) 800 1,500Total capital and liabilities 4,100

Asset increase DebitAsset decreaseCreditExpenseDebitProfitCreditCapital decreaseDebitCapital increaseCreditLiabilities decreaseDebitLiability increaseCredit

Debit =Accounts payableCredit = Accounts receivable

Additional Study Questions (Self-study not for seminar discussion)

Question 4

Using your knowledge of the accounting equation, fill in the shaded boxes in the following table (all figures in ):

AssetsLiabilitiesCapital

163,52932,15931370

215,7823,071

316,8973,901

463,71551,774

535,27110,360

6222,69176,812

73,690,7252,568,013

84,518,9232,296,009

9333,251227,828

10101,67924,877

Totals:

Capital = Assets - Liabilities

Question 5

Businesses can take a variety of formats the most common of which are sole traders, partnerships and companies. Outline the characteristic features of each of these 3 main commercial business formats and briefly consider the relative advantages and disadvantages of each.

COMPANY VS PARTNERSHIP VS SOLE TRADER

Which one you choose will dictate what sort of records you have to keep and submit, your liability for the businesss debts, and how you manage tax.

COMPANY: PROS AND CONSRead more about starting up as a limited company.The pros Your liability is limited to whatever money youve put into the business. You may be treated more seriously as a business, although this will depend on your area of business (most people wont care if their window cleaner is a limited company, for instance). You may be able to arrange tax advantages compared with being a sole trader.The cons There is more administration to carry out in terms of paperwork and filing. Youre likely to end up paying professionals like accountants to do this for you. There are legal obligations on directors, and you can be fined if you dont carry them out.PARTNERSHIP: PROS AND CONSYou can set yourself up as a standard partnership or as a limited liability partnership (LLP).The prosi) They are easier to set up and run than a limited company.ii) If you do down the LLP route, your liability is limited.The cons The extra benefits of an LLP are offset by some extra duties. There are more forms to fill in, and some members will have to shoulder extra responsiblity as the designated members. If youre a standard partnership, your liability is NOT limited - you can be pursued for the partnerships debts.SOLE TRADER: PROS AND CONSRead more about starting up as a sole trader. Youll need to register as self employed.The pros You are your own boss - you make all the money, and you make all the decisions. Less form filling means you will spend less on accountants bills.The cons You are responsible for everything - including any debts the business runs up. You have fewer options to minimise your tax bill.In some industries, you may not be treated as seriously as a limited company.

Question 6

Part a

Mr. Bun the Baker Ltd bought a city centre shop from a property developer 10 years ago for 500,000, during which a contract was signed transferring legal title of the shop to Mr. Bunn the Baker Ltd. The company sells bread, cakes, hot and cold snacks and sandwiches from this shop. Working through the recognition of assets diagram provided in the lecture, decide if the shop constitutes an asset of the business.

Part b

When the company bought the city centre shop from a property developer 10 years ago for 500,000, the purchase was financed by a loan from the bank of 500,000 which is currently repayable in full in 15 years time. Does this loan constitute a liability of the business?

Part c

The directors of Warwick Academicals Football Club Limited are unsure as to whether player registrations can be recognised as assets on the statement of financial position of the club.

There are two groups of players, those bought in by the club from other teams on the transfer market and those that have come up through the youth scheme and who have been playing at various levels for the club since the age of 12. The accounts department has informed the directors that the transfer fees for the bought in players amount to 25m. The directors, however, cannot agree on a valuation for the players that have been developed by the club. The managing director thinks these players should be valued at 30m, while the finance director thinks this is far too high a figure and would value these players at 15m. Various offers have been received from other clubs to sign the players developed by the club and the combined values of these offers have ranged from 10m to 25m. Advise the directors on whether any of the players registrations can be recognised in the statement of financial position and, if they can be so recognised, the category of assets that these registrations would be recognised under.

Question 7

What are the limitations of financial statements?

Seminar 2 Week 4

Class Discussion

Question 1[Question 9.4 p120 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward.]

L. Johnson started business on 1 March 20X0 with a capital of 10,000 in a bank current/cheque account. During March 20X0 he made the following transactions:

1 MarPaid 5,000 by cheque for a 10-year lease on a shop 2 MarBought office equipment by cheque at a cost of 1,400 4 MarBought goods costing 630 from E. Lamb on credit 6 MarPaid postage of 35 by cheque 9 MarPurchases by cheque: 42011 MarSold goods on credit to G. Lion for 88013 MarDrawings by cheque: 25016 MarReturned goods costing 180 to E. Lamb18 MarSold goods and received a cheque for 540 in payment20 MarPaid telephone bills by cheque: 12022 MarG. Lion returned goods invoiced at 31024 MarPaid gas bill by cheque: 6526 MarSent E. Lamb a cheque for 23028 MarReceived a cheque for 280 from G. Lion30 MarPaid electricity bill of 85 by cheque31 MarPaid bank charges of 45

You are required to enter the above transactions in the nominal ledger (use T accounts).

Question 2

The following information relates to the activities of H & S Retailers for the year ended 30th April 20X9:

Motor vehicle running expenses 1,200xInventories at 30th April 20X9 3,000Rent and rates 5,000Motor vans cost 6,300Heat and light 900Telephone and postage 450xSales revenue97,400xGoods purchased for resale 68,350Insurance 750Loan 10,000Loan interest 620Balance at bank 4,780Salaries and wages 10,400xInventories at 30th April 2008 4,000

Prepare an income statement for the year ended 30th April 20X9.(Note not all items listed above should appear on this statement.)

Additional Study

Question 3

Thomas Tenby, trading as Tenby & Company, owns a business which sells a standard computer to educational establishments. He buys these at 700 each and sells them for 1,000 each.

At the start of January, Thomas had 25 computers in inventory During January he bought 60 computers from his supplier On 25th January he paid his supplier for the 70 computers which he had bought in the previous month of December During January he sold 75 computers to various educational establishments During January he received payment for 45 computers which he had sold in December On 25th February he paid his suppliers for the 60 computers which he had bought in January During February he received payment for 55 of the 75 computers which he sold in January

Thomas Tenby incurs the following overhead expenses:

Rent and rates: 1,000 per monthGas and electricity: 200 per monthTelephone: quarterly bill for January-March 210Insurance: annual charge 1,200Advertising in trade magazines: 200 per month2 assistants salaries: 1,000 each per month

And has a bank loan of 10,000 on which he is paying interest at 12% p.a., payments being made each quarter.

Required:Draw up the Income Statement for Tenby & Company for the month of January.

Question 4

[Question 9.3 p119 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward.]

Seminar 3 Week 5

Class Discussion

Question 1(See Seminar 1 Question 3)

A business is established with ordinary share capital of 2,000 and this amount is paid into a business bank account. During the first years trading (ignore the exact dates for simplicity), the following transactions occurred: a) Purchases of goods for resale, on credit4,300b) Non-current assets purchased for cash1,500c) Sales, all goods are sold and all are on credit5,800d) Payments to suppliers3,600e) Payments from customers3,200f) Other expenses, all paid in cash 900

The bank has provided an overdraft facility of up to 3,000.

Required:1. For each transaction state the debit and credit entry2. Prepare the T accounts and record the transactions3. Close off the T accounts4. Extract a trial balance5. Prepare the Income Statement for the year and Statement of Financial Position at the year-end

Question 2

The following information relates to a business' gas and electricity accounts for a year:GasElectricity================================Balance brought forward800 owed760 prepaid(a credit balance)(a debit balance)Payments during year4,6402,880Income Statement charge4,880missingBalance carried forwardmissing900 prepaidWhat are the missing figures for gas and electricity respectively?

a)1,040 and 2,740b)1,040 and 4,540c)2,640 and 4,540d)2,640 and 2,740e) 560 and 3,020

Question 3

[Question 17.6 p132 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward.]

Stationery During the year to 31 December 2012 1,300 was paid in respect of stationery. The amount owing at 31 December 2011 was 140 and the amount owing at 31 December 2012 was 200.

Rent Kristal received rent of 3,000 during the year ended 31 December 2012. The tenant owed Kristal 210 on 31 December 2011 and owed her 340 on 31 December 2012.

Required:

Draft T accounts for the above transactions including the balances transferred to the comprehensive income account for 20X2 and the balance brought down to 20X3.

Additional Study

Question 4

Are the following statements (1-5) below TRUE or FALSE

1 A closing accrual is added to expenses when calculating the total expense for a financial period.

2 A prepayment would be shown as a non-current asset in the Statement of Financial Position. 3 An accrual would be shown as a current asset in the Statement of Financial Position.

4 If only three quarterly* electricity bills have been paid during a year, then we can ignore the fourth quarter when drawing up an Income Statement for the year. *A quarterly bill covers one quarter of a year (i.e. 3 months).

5 Wages is shown on a trial balance as 40,000, and there is a wages accrual of 4,000. The amount for wages in the Income Statement will be 36,000

Question 5

Question 17.5 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward p132

Question 6

Question 17.7 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward p132

Seminar 4 Week 6

Class Discussion

Question 1

On 1 July 2010 Tardy Limited had the following balances on its books relating to printing equipment:

Printing equipment costDr. balance24,000Accumulated depreciationCr. balance 8,000

The company sold this equipment for 16,375 on 30 November 2010 and acquired a new machine costing 28,000 on the same date. The companys policy is to charge depreciation at 25% using the reducing balance method on an annual basis. No depreciation is charged in the year of sale.

What will be the total charge to the Income Statement relating to these transactions for the year ended 30 June 2011?

Profit on sale of asset16,735 (24,000 8,000)Profit = $375

Depreciation28,000 x 25% = 7,000

Income StatementDepreciation 7,000Profit on disposale 375

6,625

Question 2

[Question 15.16 p 162 of custom edition of core text: Introduction to Financial Accounting (2009), Thomas and Ward.]

Pusher commenced business on 1 January 20W9 with two lorries A and B. A cost 1,000 and B cost 1,600. On 3 March 20X0, A was written off in an accident and Pusher received 750 from the insurance company. This vehicle was replaced on 10 March 20X0 by C which cost 2,000.

A full years depreciation is charged in the year of acquisition and no depreciation is charged in the year of disposal.

Required

(a) Show the appropriate extracts from Pushers statement of financial position and income statement for the two years to 31/12/W9 and 31/12/X0 assuming that:

(i) Depreciation is charged at 20% straight lineLorry A: 20% x 1,000 = 200

Lorry B: 20% x 1,600 = 320

Total Depreciation = 520

Lorry B: 20% x 1,600 = 320

Lorry C:20% x 2,000 = 400

Total Depreciation = 720

Loss on disposal = Sale Price Net Book Value= 750 (1000-2000) = -50

Income Statement W9X0

Depreciation 520720Less: Loss on disposal0(50)520670

Statement of Financial PositionW9X0

NCAMV at Cost2,6003,600Less: acc. Depreciation(520)(1,040)Net Book Value2,0802,560

(ii) Depreciation is charged at 25% reducing balance

Year 2: Lorry B: 25% x 1,200 = 300Lorry C: 25% x 2,000 = 500Year 1Lorry A: 25% x 1,000 = 250Lorry B: 25% x 1,600 = 400 Total Depreciation = 800

Loss on disposal = Sale price net book value= 750 (1,000 250)= 0Income StatementW9X0Depreciation650800Disposal-- 650800

Statement of Financial PositionNCAMV at cost2,6003,600Less: acc. Dep(650)(1,200)Net book value1,9502,400

(b) Comment briefly on the pros and cons of using the straight line and reducing balance methods of depreciation.Straight-line MethodProCon

Simplicity Gives more stable profit Value will be higher in the earlier years; short-term Appropriate for some assets; i.e. patents

doesn't appropriately represent usage of assets

Reducing balance MethodProCon

Reducing profits in the first years to lower taxation Profits are less stable More complex

Question 3

The following transactions are to be recorded. At the beginning of year 1 the provision for doubtful debts account shows a brought forward provision of 2% against trade receivables of 50,000. During the year bad debts of 2,345 are to be written off. At the end of year 1 the provision for doubtful debts is required to be 2% against trade receivables of 60,000.

In year 2 bad debts of 37 are to be written off. At the end of year 2 a provision of 1% against trade receivables of 70,000 is required.

Required:(a) Prepare the bad debts expense and provision for doubtful debts accounts for the two years.ProvisionDebitCredit

Bd c/d 1,200 1,200

bal c/d 700bd a/c 500 1,200Yr 1= bal b/d2% of (50,000) = 1,000bd a/c 200 1,200Yr 2 Bal b/d 1,200

Bad debts accountDebitCredit

Yr 1 BDW/O 2,345Inc in prov 200 2,545

Yr 2Bd w/o 37Inc. Stat. 463 500I/S 2,545 2,545Dr I/S 2,545Cr bd A/C 2,545

Reduction in prov 500 500

(b) Show the amounts to be charged to the income statement for the two years and to be included in the statement of financial position at the end of each year.

Income StatementYr 1Yr 2

Bad debt account2,545(463)

Balance SheetYr 1Yr 2

Debtors60,00070,000

Provision(1,200)(700)

58,80069,300

Additional Study

Question 4

[Question 15.15 p 162 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward.]

An item of plant and machinery was sold within the year for 5,000. This asset had cost the company 10,000 over 2 years ago. The balances on the plant and machinery account and accumulated depreciation account prior to this disposal were 118,000 and 18,000 respectively. It is company policy to provide for depreciation in the year of purchase but not in the year of sale.

Note: Two years depreciation charged at 20% straight line per year had been expensed in relation to this asset.

Required:

Calculate the profit or loss on disposal for this asset showing all relevant ledger (T) accounts.

Question 5

Questions 16.7 and 16.8 p 177 of custom edition of the core text: Introduction to Financial Accounting (2009) Thomas and Ward.

Note that the answers to both of these questions can be found at the back of the core text in Appendix 2.

Question 6

Make brief notes that explain each of the following accounting concepts:

Prudence Measurement Materiality Substance over form Entity Time period Historic cost Money measurement Duality

Seminar 5 Week 7

Class Discussion

Question 1

[Question 23.8 p 213 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward].

After stocktaking for the year ended 31 May 20X0 had taken place, the closing inventory of Cobden Ltd was aggregated to a figure of 87,612. During the course of the audit that followed, the following facts were discovered:

(i) Some goods stored outside had been included at their normal cost price of 570. They had, however, deteriorated and would require an estimated 120 to be spent to restore them to their original condition, after which they could be sold for 800.(ii) Some goods had been damaged and were now unsaleable. They could, however, be sold for 110 as spares after repairs estimated at 40 had been carried out. They had originally cost 200.(iii) One inventory sheet had been over added by 126 and another under added by 72.(iv) Cobden Ltd had received goods costing 2,010 during the last week of May 20X0 but because the invoiced did not arrive until June 20X0, they have not been included in inventories.(v) An inventory sheet total of 1,234 had been transferred to the summary sheet as 1,243.(vi) Invoices totalling 638 arrived during the last week of May 20X0 (and were included in the purchases and in trade payables) but, because of transport delays, the goods did not arrive until late June 20X0 and were not included in closing inventory.(vii) Portable generators on hire from another company at a charge of 347 were included, at this figure, in inventories.(viii) Free samples sent to Cobden Ltd by various suppliers had been included in inventories at the catalogue price of 63.(ix) Goods costing 418 sent to customers on a sale or return basis had been included in inventories at their selling price, 602.(x) Goods sent on a sale or return basis to Cobden Ltd had been included in inventories at the amount payable (267) if retained. No decision to retain had been made.

Required:

Prepare a schedule amending the inventory figure as at 31 May 20X0. State your reason for each amendment or for not making an amendment.

Question 2

[Question 18.4 p 404 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward]

The following trial balance has been prepared from the books and records of Sulphur Products as at 30 September 20X2. The figures have to be amended to take into account the further adjustments listed below.

Debit ()Credit ()

Capital99,000

Drawings9,000

Vehicles60,000

Trade payables47,000

Trade receivables37,000

Inventories (1 October 20X1)12,000

Rent15,400

Telephone1,800

Postage300

Electricity2,100

Bank22,000

Returns inwards4,000

Returns outwards2,500

Provision for doubtful debts900

Purchases213,000

Sales revenue370,000

Plant and equipment147,000

Discounts received 6,000

Bank charges 1,800

525,400525,400

Additional information:

(i) A bad debt of 2,000 has yet to be written off.(ii) The provision for doubtful debts is to be 3% of trade receivables.(iii) There are unpaid bills for electricity 200 and telephone 300.(iv) Rent is payable at 3,300 per quarter, and has been paid until the end of November 20X2.(v) The value of inventories at 30 September 20X2 is 16,500.(vi) Depreciation is to be provided on Plant and Equipment using a 25% reducing balance method.

Required:Prepare an income statement for Sulphur Products for the period ended 30 September 20X2 and a statement of financial position at that date.Sulphur ProductsIncome Statement for the year ending 30 September 20X2

Sales370,000Less: Return inwards(4,000)366,000

Cost of salesOpening stock12,000Purchases213,000Less: Return outwards(2,500)210,500222,500

Less: Closing inventory(16,500)206,000Gross profit160,000Discount income166,000

Less: ExpensesRent15,400Prepayment(2,200)13,200Telephone1,800Accrual(300)21,000Postage 300Electricity2,100Accrual 200 2,300Bad debt 2,000Provision for doubtful debt 150Depreciation36,750Bank charge 1,80058,600

Net Profit 107,400

Sulphur ProductsStatement of Financial Position at 30 September 20X2

AssetsNot-current assetsCostAcc. Dep.NBVPlant Equipment147,00036,750110,250Vehicles60,000

Current assetsInventories16,500Trade receivables35,000Provision for doubtful debt(1,050)33,950Bank22,000Prepayment 3,20074,650

Total Assets244,900

Equity Liabilities Capital99,000Profit for the year107,400206,400Drawings(9,000)197,400

Current LiabilitiesTrade payables 47,000Accruals(500)47,500244,900

Additional Study

Question 3

A business woman started trading with a capital in cash of 6,000, which she placed in the business bank account at the outset.

Her transactions, none of which were on credit, were as follows (in date sequence) for the first accounting period. All takings were banked immediately and all suppliers were paid by cheque. She traded only in one line of merchandising.

PurchasesSales

Quantity NoPrice per unit Quantity NoPrice per unit

1,2001.00

1,0001.05

8001.70

6001.10

6001.90

9001.20

1,1002.00

8001.25

1,3002.00

7001.30

4002.05

In addition, she incurred expenses amounting to 1,740, of which she still owed 570 at the end of the period.

Required:

Prepare separately using the FIFO (first in, first out), the LIFO (last in, first out) and AVCO (weighted average cost, calculated for the period to the nearest penny) methods of inventory evaluation:

a) A statement of cost of sales for the period;b) A statement of financial position at the end of the period.

Question 4

A limited companys equity in its statement of financial position is as follows:

Equity Equity share capital (1 shares)100,000 Share premium 75,000 Revaluation reserve140,000 Retained earnings330,000 645,000

(a) To what extent is it true to say that reserves equal cash?(b) Explain the difference between a revenue reserve and a capital reserve and give one example of each from the above statement of financial position.(c) What is share premium? If the company had only ever made one issue of shares, what price was each share sold for?(d) Explain why a revaluation reserve is created. What other item in the statement of financial position, not listed above, would have been affected when this reserve was created?(e) Explain a way in which the company could return reserves to shareholders without paying cash to them.(f) If the company, immediately after extracting the above statement of financial position, made a rights issue on a 3 for 2 basis at 2.40 per share, what effect would this have on the statement of financial position, assuming all shareholders took up their rights?

Question 5

Design a table highlighting the attributes of a preference share that might cause it to be regarded as being equity, and the attributes that are more likely to cause it to be regarded as debt.

Seminar 6 Week 8

Class Discussion

Question 1

[Question 30.12 p 267 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward]

Part aThe following items usually appear in the final statements of a limited company:

(i) Interim dividends: A dividend payment made before a companys AGM and financial statements. This declared dividends usually accompanies the companys interim financial statements. (ii) Authorised capital: the maximum amount of share capital that the company is authorised by its constitutional documents to issue to shareholders. Part of the authorised capital can remain unissued. Sometimes referred to as nominal capital.(iii) General reserve: any retained earnings from a companys profits. (iv) Share premium account: a part of shareholders fund in a company, formed of the premium paid for new shares sold above par. The par value of the shares is the nominal capital of the capital. (i.e. share value is $100 and 10,000 shares are sold at $110; share premium account will be debited with 100,000)

Required:

Explain the meaning of each of the above terms.

Part bThe following information has been obtained from the books of Drayfuss Ltd:

Authorised capital100,000 8% 1 preference shares400,000 50p ordinary (equity) sharesRetained earnings 1 April 20X0355,000General reserve105,000Issued capital 80,000 8% 1 preference shares (fully paid)(Accrual, interest expense of 80,000 x 8% = 6,400)250,000 50p equity shares (fully paid) (Accrual, interest expense of 250,000 x .15 = $ 37,500)Profit for the year to 31 Mar 20X195,000

- The preference share interim dividend of 4% had been paid and the directors had proposed the final dividend of 4%. - No equity share interim dividend had been declared, but the directors proposed a final dividend of 15p per share.- The directors agreed to transfer 150,000 to general reserve.

Required:Prepare the statement of changes in equity for the year ended 31 March 20X1. Ignore taxation.

Drayfuss LtdStatement of Changes in Stockholders Equity For the Year Ended March 31, 20X1

Share CapitalGeneral ReserveRetained EarningTotal

Balance at 1 April 20X1125,00105,000355,000585,000

Equity dividends paid

Profit for the period88,600088,600

Transfer to general reserve150,000(150,000)

125,000255,000293,600673,600

Question 2

[Question 30.13 p 268 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward]

The following information has been extracted from the statement of financial position of Astro Products Ltd as at 30 April 20X1. 000Authorised share capitalEquity shares of 50p each4,0006% preference shares of 1 each1,5005,500Allotted and called-up share capitalEquity shares of 50p each2,0006% preference shares of 1 each1,0003,000

Retained profits 950

There were no other reserves in the statement of financial position at 30 April 20X1. You are given the following additional information relating to the year ended 30 April 20X2:

(i) The company issued one million equity shares at a price of 75p per share on 1 January 20X2.1m x .50 = 500,0001m x .25 = 250,000

(ii) The management have decided to revalue the land and buildings that cost 400,000 at a value of 600,000Comprehensive income! (opposite of depreciation) (iii) The profit before tax for the year ended 30 April 20X2 was 475,000.(iv) The income tax charge on the profit for the year ended 30 April 20X2 was estimated to be 325,000.(v) There are no interim dividends during the year ended 30 April 20X2 but the directors have proposed a final dividend on the preference shares, and a dividend of 10p each on the equity shares.(vi) The directors have agreed to transfer 350,000 to a general reserve at 30 April 20X2.

Required:

As far as the information permits, prepare the statement of comprehensive income and statement of changes in equity for the year ended 30 April 20X2, and a statement of financial position extract at that date showing the composition of the equity.

Statement of comprehensive income

$000$000

Profit from operation475

Less: Finance cost(1m x 6%)(60)

415

Less: Income Tax(325)

Comprehensive income90

Other comprehensive income

Revaluation of property200

Total comprehensive income290

Statement of changes in equity

Share CapitalShare PremiumRevaluation ReserveReserve Retained earningTotal

Balance at 1 May2,0009502,950

Changes in equity from 20X2

Share issue in year500250750

Equity dividend paid

Total comprehensive income20090290

Transfer to general reserve350(350)

2,5002502003506903,990

Statement of financial position

$000

Equity

Share Capital2,500

Share premium250

Revaluation Reserve200

Revenue Reserve350

Retained earnings690

3,990

Additional Study

Question 3

Question 30.19 pp 274-5 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward. Note that the solution to this question is contained within the custom edition in Appendix 2.

Question 4

Question 30.20 pp 276-7 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward. Note that the solution to this question is contained within the custom edition in Appendix 2.

Question 5

Briefly outline the benefits and criticisms of the IASBs Conceptual Framework.

Seminar 7 Week 9

Class Discussion

Question 1

The following information relates to the activities of Hexagon Ltd.:

Statements of financial position at 31st March 20X8 20X7

000000000000

Non-current assets

Freehold land at cost780700

Plant and equipment - cost660560

Less: Accumulated depreciation 296 230

364 330

1,1441,030

Current assets

Inventory498356

Receivables304330

Bank - 30

802716

Total assets 1,946 1,746

Equity

Ordinary 1 shares550400

Share premium210160

Retained earnings490 376

1,250936

Non-current liabilities

6% debentures 250 450

Current liabilities

Trade payables230240

Corporation tax90120

Bank overdraft 126 -

446360

Total equity and liabilities 1,946 1,746

Income Statement for the year ended 31st March 20X8

000

Sales4,520

Cost of sales3,420

Gross profit1,100

Expenses 766

Profit before tax334

Tax 150

Profit after tax 184

Statement of Changes in Equity for the year ended 31st March 20X8

ShareShareRetained

CapitalPremiumEarningsTotal

000000000000

Balance at 1st April 20X7400160376936

Issue of share capital15050200

Profit for the year184184

Dividends paid(70)(70)

Balance at 31st March 20X85502104901,250

You are informed that:

(a) Plant which originally cost 80,000 was sold for cash of 14,000. The profit/loss on disposal is included in expenses. Accumulated depreciation relating to the plant sold amounted to 58,000.(b) The debentures were repaid on 30th September 20X7. Interest for the year was fully paid by 31st March 20X8 and is included in expenses.

Required:

(i) The net cash flow for the year ended 31st March 20X8.

Balance at 31st March 20073030

Decrease(156)126

Balance at 31st March 2008(126)156

(ii) The cash flow from operating activities prepared using the indirect method (i.e. reconciling profit before tax to cash flow from operating activities).

$000

Profit before tax334

Add: Interest(450 x 6% x 6/12) + (250 x 6% x 6/12)21

Add back: DepreciationUsually, opening balance of acc. Dep. closing balance of acc. Dep. However, plus sale price of 58. Hence 296 (230 58)124

Loss on sale of plant8

Increase in inventory(498 358) (142)

Decrease o receivable(330 304) 26

Decrease in payables(240 230)(10)

361

(iii) Prepare the complete statement of cash flows for Hexagon Ltd. for the year ended 31st March 20X8.$000$000

Cash flow from operating activities361

Interest(21)

Tax paid 120 + (150 90) (180)

Cash from op. activities

Cash flow from investing activities 160

Purchase of non current assets(780 700) + {660 (560 80)}(260)

Proceed on sale of plant14

(246)

Cash flow from financing activities

Issue of share capital(150 + 50)200

Debenture (450 250)(200)

Dividend(70)

(70)

OVERALL DECREASE IN CASH(156)

(iv) Comment on the information provided.

Additional Study

Question 2

[Question 31.16 pp 319-20 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward]

The statement of financial position of C.F. plc for the year ended 31 December 20X1, together with comparative figures for the previous year, is shown below:

20X120X0

000000

ASSETS

Non-current assets

Property, plant & equipment cost 270180

Accumulated depreciation(90)(56)

180 124

Current assets

Inventory5042

Trade receivables4033

Cash - 11

90 86

Total assets270210

EQUITY AND LIABILITES

Equity

Equity share capital 1 shares2520

Share premium108

Retained earnings 93 81

Total equity128109

Non-current liabilities

15% debentures, repayable 20X5 80 60

Total non-current liabilities 80 60

Current liabilities

Trade and operating payables3324

Current tax payable1917

Bank overdraft 10 -

Total current liabilities 62 41

Total liabilities142101

Total equity and liabilities270210

Additional information:

(i) There were no sales of non-current assets during 20X1.(ii) The company declared a final dividend of 26,000 for 20X1 (20X0 was 28,000). This is paid immediately after the AGM that takes place 2 months after the year end. The company does not pay any interim dividends.(iii) New debentures and shares issued in 20X1 were issued on 1 January.

Required:

a) Calculate the operating profit of C.F. plc for the year ended 31 December 20X1.

b) Prepare a statement of cash flows for the year, in accordance with IAS 7 Statement of Cash Flows.

c) Comment on the implications of the information given in the question, plus the statement you have prepared, regarding the financial position of the company.

d) IAS 7 supports the use of the indirect method of arriving at the net cash inflow from operating activities, which is the method you have used to answer part (b) of this question. What is the direct method of arriving at the net cash inflow from operations? State, with reasons, whether you agree with the IAS 7 acceptance of the indirect method.

Question 3

The statement of financial position of Gower Ltd at 30th June 20X4 and 20X3 and a summary of the income statement for the year ended 30th June 20X4 are given below:

Statements of financial position at 30th June20X420X3

Non-current assets

Land and buildingsCost47,00047,000

Acc. depreciation(12,000)(10,000)

Plant and machineryCost36,00029,100

Acc. depreciation(17,000)(12,600)

54,00053,500

Investments at cost7,5006,000

61,50059,500

Current assets

Inventory12,63111,412

Receivables and prepayments10,98712,784

Cash at bank-4,713

23,61828,909

Total assets 85,118 88,409

Current liabilities

Bank overdraft1,490-

Trade payables and accruals10,7139,812

Corporation tax3,0004,000

15,20313,812

Non-current liabilities

10% debentures2,80013,000

Total liabilities18,00326,812

Equity

1 ordinary shares33,00033,000

Retained earnings34,11528,597

67,11561,597

Total equity and liabilities 85,118 88,409

Summarised income statement for the year ended 30th June 20X4

Profit before tax10,518

Tax2,000

Profit after tax 8,518

You are given the following additional information:

(a) During the year certain items of machinery were disposed of for proceeds of 1,200. The machines had originally cost 4,000 and had a net book value at disposal of 500.(b) The debentures were repaid on 30th September 20X3. All interest due has been paid.Required:Prepare a statement of cash flows for the year ended 30th June 20X4 in accordance with IAS 7.

Question 4

Question 31.17 pp 320-1 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward. Note that the solution to this question is contained within the core text in Appendix 2.

Seminar 8 Week 10

Question 1

[Question 32.11 pp 353-4 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward]

The following are the summarised financial statements of Alpha and Omega, two businesses that operate in the same industry:

Summarised Statements of Financial PositionAlphaOmega

mm

ASSETS

Non-current assets 7901,000

Current assets

Inventories1,2001,800

Trade receivables7201,200

Bank 190 -

2,1103,000

Total assets2,9004,000

CAPITAL AND LIABILITIES

Capital at start of year1,1601,756

Profit for the year 340 404

Capital at end of year1,5002,160

Non-current liabilities

Loan500-

Current liabilities

Trade payables9001,040

Bank overdraft - 800

Total liabilities1,4001,840

Total capital and liabilities2,9004,000

Summarised Income StatementsAlphaOmega

m m m m

Revenue6,0007,200

Cost of goods sold

Opening inventory 1,000 1,500

Add: Purchases 4,760 5,916

5,760 7,416

Less: Closing inventory(1,200)(1,800)

(4,560)(5,616)

Gross profit1,4401,584

Expenses(1,100)(1,180)

Profit for the year 340 404

Required:Using ratio analysis, comment on the profitability, efficiency, liquidity and gearing of both businesses.

Profits explained:

Sales = Revenue Gross profit = revenue cost of salesNet profit = revenue cost of sales expensesProfit for the year

Profitability Ratiosi) ROCE = Profit before Interest and Taxx 100Shareholder funds + loansShareholder funds (capital at the end of the year) A: (340 / 2000) x 100 = 17% O: (404 / 2160) x 100 = 18.7%ii) Gross Profit margin = Gross Profitx 100SalesA: (1440 / 6000) x 100 = 24%O: (1584 / 7200) x 100 = 22%iii) Net profit margin=Net profitx 100SalesA: (340 / 6000) x 100 = 57%O: (404 / 7200) x 100 = 56%iv) Net asset turnover= Sales_____________________Net asset on capital employed(Total assets current liabilities)A: 6000 / 2000 = 3O: 7200 / 2160 = 3.3

Efficiency Ratiosv) Inventory Turnover=Cost of sales_______________Closing inventory (avg. inventory)A: 4560 / 1200 = 3.8O: 5616 / 1800 = 3.12vi) Trade receivables=Closing trade receivablesx 365SalesA: (720 / 6000) x 365 = 44 daysO: (1200 / 7200) x 365 = 61 daysvii) Trade payables=Closing trade payablesx 365PurchasesA: (900 / 4760) x 365 = 69 daysO: (1040 / 5916) x 365 = 64 days

- A is quicker to turn into cash. (Based on first equation)- If you sell something on credit, it takes A less time (44 days compared to 69 days) to receive money. - If you buy something on credit, A holds its money longer, making it easier to cover debts. Therefore Alpha is more efficient and more liquid. Liquidity Ratiosviii) Current Ratio=Current asset____Current liabilitiesA: 2110 / 900 = 2.3 : 1They can pay current liabilities with their current assetsO: 3000 / 1840 = 1.6 : 1 They also seemingly have the ability to cover short term debt, however looking at quick ratio ix) Quick ratio=Current asset (excluding inventory)Current liabilitiesA: 910 / 900 = 1.0 : 1They will still be able to cover their short term liabilities, even without liquidating inventory. Comparing these results to O O: 1200 / 1840 = 0.65 : 1O will not be able to cover its short term debt easily, as their ratio is less < 1 : 1x) Gearing ratio= Debt________________Shareholder fund + debt A: 500 / 2000 = 25% A will be able to pay their debt using its share capital O: not applicableO does not have any an overdraft. Hence gearing is not applicable.

Additional Study

Question 2

Question 32.12 pp 354-5 of custom edition of core text: Introduction to Financial Accounting (2009) Thomas and Ward. Note that the solution to this question is contained within the core text in Appendix 2.

Question 3

Rose Ltd operates a small chain of retail shops which sell high quality teas and coffees. Approximately half of sales are on credit. Abbreviated and unaudited accounts are given below.

1.You are a shareholder with a 5% holding, who believes that Rose Ltd will announce a rights issue in the near future.

(a)Calculate and comment on the changes in key profitability figures.

(b)Calculate the following profitability ratios for 20X7 and 20X6:(i)ROCE(ii)Asset turnover(iii)Net profit %(iv)Gross profit %(v)Expenses as % of sales

(c)Comment on what your calculations in (a) and (b) indicate to you about the performance of Rose Ltd. by considering the following questions: Is the business expanding or contracting? From where has any additional capital invested in the business come? What has this been used for? What has caused the change in ROCE? Have the additional assets been used efficiently in 20X7? If sales increase from year to year, what might you expect to happen to profit,and has this happened in Rose Ltd? What has happened with trading profits in 20X7? What might be the causes behind this? What has happened to expenses?

2.You are the bank manager who has given Rose Ltd its current overdraft facility.

(a)Calculate and comment on the changes in key liquidity figures.

(b) Complete the following liquidity and working capital management ratios for 20X7 and 20X6:(i)Current ratio(ii)Liquid ratio(iii)Inventory turnover(iv)Receivables collection period(v)Payables payment period

(c) Comment on what your calculations in (a) and (b) indicate to you about the liquidity of Rose Ltd. by considering the following questions: What has happened to the cash position of the company in 20X7? Has the liquidity position improved or worsened? What are the principal causes of this? For how long is Rose Ltd. holding inventories? If Rose Ltd. allows its customers 2 months to settle their debts, is this being met? How long is the company taking to pay its suppliers? What else has caused the liquidity position to deteriorate in 20X7?

Rose Ltd

Income Statements for the years ended 31st March

20X720X6

000000000000

Sales12,0807,800

Cost of sales6,2824,370

Gross profit5,7983,430

Labour costs2,6582,106

Depreciation625450

Other operating costs1,00392

4,2862,648

Profit from operations1,512782

Interest66 -

Profit before tax1,446782

Tax259158

Profit for year 1,187 624

Dividends paid were 20X7: 300,000 (20X6: 250,000).

Rose Ltd

Statements of financial position at 31st March20X720X6

000000000000

ASSETS

Non-current assets (see note)2,7281,536

Current assets

Inventories1,583925

Receivables996488

Bank and cash26312

2,6051,725

Total assets 5,333 3,261

EQUITY & LIABILITIES

Equity

Ordinary share capital (50p shares)750750

Share premium250250

Retained earnings1,759872

2,7591,872

Non-current liabilities

Secured loan (20Y2)300 -

Current liabilities

Trade payables1,418910

Other payables417321

Tax259158

Bank overdraft180 -

2,2741,389

Total equity & liabilities 5,333 3,261

Note: Schedule of non-current assets

ShortFixturesMotorTotal

leasehold& fittingsvehicles

000000000000

Cost

At 1st April 20X61,1981,1555602,913

Disposals - -(210)(210)

Additions9477801201,847

At 31st March 20X72,1451,9354704,550

Depreciation

At 1st April 20X65475582721,377

Disposals (180)(180)

Charge for year329178118625

At 31st March 20X78767362101,822

Net book value

At 31st March 20X71,2691,1992602,728

Question 4

Outline the advantages and disadvantages of ratio analysis.

Question 5

You are the financial accountant of Clean Duck Plc. The managing director has the following draft accounts. She is not happy.

Clean Duck PlcDraft Income Statement for the year ended 30 June 20X9

Notes000000

Sales1750

Less: Cost of Sales

Opening inventory80

Add: Purchases320

400

Less: closing inventory2-60340

Gross profit410

Less: Expenses

Depreciation3-60

Interest payable 4-30

Other expenses-332-422

Net loss-12

Notes:1. The companys sales policy is to record sales prudently, one month after invoicing the customer so as to allow sales returns. If the company recorded sales when invoiced, this would increase sales by 150,000.2. This is a prudent valuation; a more optimistic valuation gives 65,000.3. Depreciation is currently charged on fixed assets over 10 years. This is a realistic expected life, but a competitor charges depreciation over 15 years.4. Half the interest payable relates to the borrowing of money to finance the construction of fixed assets.

Required:

Using the accounts, and the notes above, present as flattering a bottom-line profit figure as you can.

Question 6

Many companies now produce corporate sustainability reports in addition to their published annual reports. Access Marks & Spencers How we do Business 2011 report (available on my.wbs) and look at what this includes and discusses. You do not have to read all of it in detail, but review it in enough detail to answer the following questions:

What type of information does the report provide? Who do you think are the users of this information? How reliable is the information contained in the report? Are Plan A objectives and the commitments that highlight whether the objectives were met clearly reported? Sustainability is central to how we do business and Plan A will help us to stay ahead in a fast moving world. Marc Bolland, Chief Executive Officer.Do you think Marks & Spencer Group is sacrificing its profitability in order to pursue this vision?

[You may want to access details of Marks & Spencers Plan A at http://plana.marksandspencer.com/about ]

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