Advanced Financial Accounting - Tenjin · PDF fileTENJIN 1900 Solution (a) The users of...

Advanced Financial Accounting

Suggested Solutions to Practice Questions

Table of Contents

Chapter 2: .................................................................................................................................... 2

Chapter 3: .................................................................................................................................... 8

Chapter 4: .................................................................................................................................. 15

Chapter 5: .................................................................................................................................. 19

Chapter 6: .................................................................................................................................. 25

Chapter 7: .................................................................................................................................. 33

Chapter 8: .................................................................................................................................. 40

Chapter 9: .................................................................................................................................. 45

Chapter 10: .................................................................................................................................. 50

Chapter 11: .................................................................................................................................. 54

Chapter 12: .................................................................................................................................. 58

Chapter 13: .................................................................................................................................. 64

Chapter 14: .................................................................................................................................. 72

Chapter 15: .................................................................................................................................. 79

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1900 Solution(a) The users of accounting information are a wide and diverse group, with not all users requiring the same

information.

For example the information required by the management of a company, (e.g., is a particular product lineprofitable?) is likely to be quite different to the information required by the suppliers of a company (e.g. doesthe company have sufficient cash to pay its liabilities?).

Therefore, two different branches of accounting have developed over time to meet the informationalrequirements of the various user groups.

These branches are Management Accounting and Financial Accounting.

Financial accounting is the process of summarising financial information from the company’s books orrecords in order to prepare the company’s financial statements.

The financial statements of an organisation are the income statement, statement of financial position andstatement of cash flows.

These statements are primarily of interest to users of accounting information who are external to an entity.

Financial statements are historical in nature and are prepared usually on an annual basis.

The information contained therein could therefore not be considered timely enough for many users, as insome cases, they are a year out of date by the time they are prepared.

In essence, financial accounting is the manner in which an organisation communicates financial information,namely performance, position and cash flow, to the outside world.

The information contained within a set of financial statements of a company is generally available to thepublic.

In contrast, management accounting is the process of providing detailed information to management: both on current performance, and on projections of future results, profitability, etc., of the company. Management accounting information assists management with decision-making.

The information provided by management accounting information is current/predicted, up-to-date and oftenquite strategic in nature.

It is usually prepared for management on request and is internal to the company; rarely would it be madeavailable to the general public.

(b) Management accounting information and financial accounting information are prepared under very differentregulatory environments.

When preparing management accounting information (e.g. a budget) there are generally accepted formatsand methods.

However there is no obligation on the entity to follow these formats and in essence any format, method orassumption can be used.

There is effectively no regulatory environment for preparing management accounting information.

Due to the wide user group for financial accounting information, companies cannot be allowed to prepare thisinformation in different formats or using different assumptions and concepts.

Therefore a significant body of legislation, both professional and statutory, has developed. This prescribes how financial accounting information should be prepared and disclosed.

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Chapter 2

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This regulatory environment is important as, in its absence, companies could use different accounting policies and presentation formats. The comparability of information across companies could therefore be significantly impaired.



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1903 SolutionThe FRC standard-setting process comprises the following steps:

(i) Research

Initial scoping of the issue being considered;

(ii) Discussion paper

Providing a detailed overview of the issue, why a standard is necessary, different potential approaches fordealing with the issue, preliminary views of the FRC and an invitation to comment on the issue;

(iii) Public consultation

Inviting a variety of stakeholders to comment on the discussion paper;

(iv) Outreach events

Financial Reporting Lab activities, case studies on topics and reports on investigations;

(v) Exposure Draft

A specific proposal in the form of a draft standard for dealing with the issue.

This will consider the comments made on the discussion paper, the public consultation and research by theFinancial Reporting Lab;

(vi) Final code/standard

Implements feedback received on the exposure draft;

(vii) Post implementation review

Involves holding meetings with interested parties to consider unanticipated issues that arose relating to thepractical application of the standard;

(viii) Regular reviews

Standards require continual review, they are regularly updated when the financial reporting environment orregulatory environments change and when comments and feedback on the practical application of thestandard is received.

As can be seen from the preceding list the process through which an accounting standard is developedinvolves a significant amount of public consultation.

This is undertaken in order to improve transparency in the standard setting process.



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1905 Solution(a) Companies are owned by shareholders, the number of which varies depending on whether the company is

private or public.

Whilst private companies may have very few shareholders, public companies on the other hand may have thousands of shareholders.

Although some shareholders may also act as directors, the majority of shareholders will have no directinvolvement with the company’s day to day activities.

Such shareholders are almost entirely reliant on the information contained in the annual financial statementsto determine the company’s performance and financial position and to help them make informed decisions inrelation to the company and/or their share ownership.

Financial statements also act as the sole source of information in relation to the company sought by otherusers of financial statements such as lending institutions, tax authorities, suppliers, customers, employeesetc.

Therefore financial statements need to be reliable and consistent and it is for this reason that the need forregulation arose.

The importance and benefits of regulation are as follows:

(i) True and Fair (fair presentation)

Users of financial statements are a wide and diverse audience who do not work in the business on a day today basis.

Therefore the information contained in the financial statements is more than likely the only information theyreceive about the performance and financial position of the company.

Accounting rules and regulations allow for better understanding of this financial information as it gives the users knowledge of the accounting policies and procedures which have been used when financial statements are being prepared.

By complying with accounting regulation, users can reasonably assume that the financial statements fairly present the performance and position of a company.

(ii) Decision making

The various user groups need to be able to rely upon and understand the information contained in financialstatements.

In this regard regulation has been put in place and strengthened over time to ensure users of the reliability offinancial statements.

If the form and content of financial statements were not regulated it would be possible for incompetent orunscrupulous directors to provide users with false or misleading information which would result in usersmaking poor economic decisions and undermine the whole purpose of preparing financial statements.

(iii) Comparability

All companies, with very few exceptions, must comply with financial accounting rules and regulations.

Therefore this aids comparability between financial statements produced by different companies.

The users know that if these all comply with Irish GAAP for example then they have all been prepared usingsimilar policies and procedures and are therefore comparable.

Limited companies have limited liability and therefore the debts of the entity will only be discharged from theassets of the entity.

For this reason, when deciding whether to interact with a limited company, a supplier will often assess thecreditworthiness of the company by examining its financial statements.



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Suppliers thus rely on financial statements to be true and fair and users in general rely on accounting rulesand regulation to enhance the reliability of financial statements.

(b) The four main sources of UK/Irish GAAP:

(i) Professional regulation (domestic and international)

Prior to and during the 1970s a significant amount of criticism was levied against the accounting professionfor lack of regulation and the concerns which this gave rise to.

Therefore in the 1970s the Accounting Standards Committee (‘ASC’) was set up in an attempt to selfregulate and address the criticisms the profession had attracted.

The ASC, which was later replaced by the ASB and more recently the FRC, issued accounting standards that are authoritative in the UK and Ireland.

The function of accounting standards, both SSAPs and FRSs, is to describe and provide guidance to the accounting profession and users of accounting information about how difficult matters should be treated.

The need for international regulation arose due to the increasing number of companies operating in morethan one jurisdiction.

The aim of international regulation is to promote international comparability and consistency between thefinancial statements prepared by companies worldwide.

(ii) Company law (Republic of Ireland and UK)

Company law deals with many aspects of companies including the manner in which financial informationmust be presented and disclosed to users and filing requirements for companies.

Company law also details what information must be presented in a set of financial statements and what a setof financial statements must include, depending on the size of the company.

(iii) EU Directives

Several EU Directives were issued with the aim of achieving harmonisation in financial accounting acrossmember states.

At a later date the European Commission decided to support the accounting standards issued by the IASBrather than to issue further Directives and this made the goal of harmonisation a more achievable target.

The EU does this by adopting each standard, which is then ‘franked’ for use by EU listed entities.

All publicly quoted companies must comply with IFRSs when preparing consolidated accounts.

(iv) Stock exchange regulation

These regulations only apply to public limited companies.

Although the stock exchange was one of the first publishers of rules and regulations governing financialstatements, many of these rules and regulation have been included, and in some instances expanded upon,in either statutory or professional regulation.

However this does not reduce the importance of stock exchange regulation which still contains importantregulation not contained in other areas.



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1907 SolutionProfessional regulation was largely absent in Ireland and the UK prior to the 1970s.

The Institute of Chartered Accountants in England and Wales issued guidance on accounting principles to itsmembers.

The guidance issued was just that, guidance and as such it was not enforceable.

However in the late 1960s the accounting profession suffered a wave of adverse publicity in relation to theaccounting principles widely used by companies.

One such example was the GEC-AEI takeover.

AEI prior to the takeover issued a forecasted profit figure for 1967 of £10m (Sterling). GEC re-prepared theprofit statement for the same period using the accounting methods used by GEC and reported a forecast lossof £4.5m.

About £5m of the difference was explained by the fact that AEI’s profit forecast contained predictedinformation for a number of months whereas GEC’s profit statement was based on actual data and thepredictions had not been correct.

However, an outcry resulted from the fact that £9.5m of the difference occurred because GEC used adifferent method of inventory valuation for the same underlying inventory items.

The fundamental issue behind the controversy was that the methods of valuing inventory used by the twocompanies were allowable at the time.

The concern which this raised was that if entities were free to choose different accounting methods and thesemethods resulted in very different profit figures being reported, then how could the users of accountinginformation rely on the information contained in the annual report of companies?

A significant amount of criticism was levied against the accounting profession in this respect.

Therefore in the 1970s the Accounting Standards Committee (ASC) was set up by the UK accountingprofession in an attempt to self-regulate and address the criticisms that had been levied.

The committee issued accounting standards known as Statements of Standard Accounting Practices(SSAPs)

Later in the 1990s the Accounting Standards Board (ASB) replaced the ASC. More recently, the Financial Reporting Council (FRC) took over responsibility for standard setting in the UK and Ireland.

The ASB issued accounting standards known as Financial Reporting Standards (FRSs), and the FRC iscontinuing to use the same terminology.

Their function is to describe and provide guidance to accounting practitioners and the users of financialinformation about how contentious and difficult areas, where a variety of different treatments have developedover time, should be treated.

Thus a financial reporting standard outlines the recommended treatment and disclosure requirement of aparticular item in financial statement.

For example, under the national UK and Ireland framework, part of FRS 102 focuses on accounting forinventory.

The relevant part of FRS 102 outlines the recommended methods that can be used to value inventory,provides guidance on when the inventory should be recognised and details the information that should bedisclosed about the inventory in the financial statements.

Under the international framework, a whole financial reporting standard is dedicated to providing guidance onaccounting for inventory.



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891 SolutionThe correct answer is option (b).


Chapter 3


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892 SolutionThe correct answer is option (c).



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1713 Solution

(a) Accruals

Income is recognised initially in the financial statements as it is earned, not when the cash is received.Similarly, expenditure is recognised as it is incurred, not when it is paid for.

When income is incurred over time (e.g., rental/finance income) or expenditures are time-based (e.g., rentpayments), the income and expenditure recognised in profit or loss should relate to the time period ratherthan to the receipts and payments of cash.

Going concern

Financial transactions are usually prepared on the assumption that the business will continue in operational existence for the foreseeable future.

This means that the financial statements are drawn up on the assumption that there is no intention ornecessity to close down the business.

If the financial statements are not prepared on the going concern basis, then they would be prepared on whatis known as a break-up basis.

Historical cost

Many assets are recognised initially at historical cost, i.e., the amount for which they were acquired.

Historical cost, as a basis of measuring assets and liabilities in financial statements has some drawbacks.

One significant drawback is that noncurrent assets may not reflect current market values. As aconsequence, a statement of financial position may not show the current value of a business.

Historical cost continues to be used in accounting because it is simple to apply and amounts are objectiveand verifiable.

Materiality

An accounting item’s materiality is judged in the context both of the financial statements as a whole and ofthe other information available to users that would affect their evaluations of financial statements.

For example, if the carrying amount of noncurrent assets is €250,000 and total assets amount to €320,000,then the noncurrent assets would be regarded to be material in the context of the reporting entity.

Prudence

The uncertainties that inevitably surround many events and circumstances are acknowledged by thedisclosure of their nature and extent and by the exercise of prudence in the preparation of the financialstatements.

Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making theestimates required under conditions of uncertainty, such that assets or income are not overstated andliabilities or expenses are not understated.

However, the exercise of prudence does not allow the deliberate understatement of assets or income, or thedeliberate overstatement of liabilities or expenses. In short, prudence does not permit bias.



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(b) Accounting policies are those principles, bases, conventions, rules and practices applied by an entity thatspecify how the effects of transactions and other events are to be reflected in its financial statementsthrough: recognising, selecting measurement basis for and presenting assets, liabilities, gains, losses andchanges to equity.

Generally speaking, an entity should apply its accounting policies consistently year on year in order toachieve comparability and consistency.

It is appropriate to change an accounting policy for two reasons: (i) when required by a new accountingstandard; and (ii) when the change will result in reliable and more relevant presentation of information.

(c) Lenders

Banks that lend money to a business require information that helps them determine whether loans andfinance costs will be paid when due.

The key accounting information for lenders is, therefore, cash flow, liquidity, gearing and profitability of thebusiness.

Payables

Suppliers and trade payables require information that helps them understand and assess the short-termliquidity of a business. Is the business able to pay short-term debt when it falls due?

The key accounting information for payables is therefore cash flow, liquidity and profitability.

Receivables

Customers require information about the ability of the business to survive and prosper.

As customers of the entity’s products, they have a long-term interest in the company’s range of productsand services.

They may even be dependent on the business for certain products and services.

The key accounting information for receivables is therefore sales growth, profitability, receivables' days, newproduct development and investment decisions.

Employees

Employees require information about the stability and continuing profitability of the business.

They are interested in information about employment prospects and the maintenance of pension funding andretirement benefits. They are also likely to be interested in the pay and benefits obtained by seniormanagement.

The key accounting information for employees is therefore revenue and profit growth, levels of investment inthe business and overall employment data (numbers employed, wages and salary costs).

Government

Many government agencies and departments are interested in accounting information.

For many businesses, the most significant one is the tax authorities.



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The tax authorities need information on business profitability in order to assess and collect the relevant taxes.

Analysts

Investment analysts require financial and other information in order to analyse the competitive performanceof a business and its sector.

Much of this is provided by the detailed accounting disclosures that are required for companies that are listedcompanies.

Public at large

Interest groups formed by various groups of individuals who have a specific interest in the activities andperformance of businesses will also require accounting information such as the environmental policies of thebusiness.

Shareholders/investors

Shareholders are the owners of a company. However, they may be external to the company.

They therefore need information to determine whether they should retain their ownership stake or sell it.

They will be interested in the financial performance, cash position, liquidity and financial position of the entity.

Also, they are will be interested in investor information such as dividend payout percentages, dividendgrowth, share price growth and the future intentions of management.



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2323 Solution

(a)

(i) Relevance

Information is relevant if it makes a difference to decision-making.

It helps a user to evaluate the past, make decisions about the present or the future in relation to the entity orconfirm or correct past evaluations which the user may have made.

Relevant information has predictive value, confirmatory value or both.

(ii) Materiality

Information is material to the financial statements if its omission or misstatement could influence theeconomic decisions of users about the reporting entity.

Information can be material in terms of its size in relation to the financial statements as a whole or an itemcan be material by its nature.

(iii) Reliability

Information is reliable when it is free from material error and bias and represents faithfully that which it eitherpurports to represent or could reasonably be expected to represent.

Financial statements are not free from bias (i.e., not neutral) if, by the selection or presentation ofinformation, they are intended to influence the making of a decision or judgement in order to achieve apredetermined result or outcome.

(b) Users

Investors (existing and potential)

Lenders

Creditors

Government (including the tax authorities)

Employees

Suppliers

Customers

The public generally

Examples of information needs

Profit levels, profit trends, debt levels, capital structure, details of directors including remuneration, liquidity ratios, details of major loans or assets, efficiency performance levels, working capital management.

(c) Complete set of financial statements

Statement of comprehensive income

Statement of financial position

Statement of changes in equity

Statement of cash flows

Notes to the financial statements

(d) Reporting entities must include comparative information in financial statements (including accountingpolicies).

Comparative figures must also be provided in the notes to the financial statements.



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This is to aid users make informed decisions by being able to compare current period results withcorresponding prior period information.



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1921 Solution

€Opening payables (5,830)Payments to suppliers 36,820Discount received 4,420Closing payables 8,930Credit purchases 44,340


Chapter 4


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1922 Solution

€Opening inventories 3,900Purchases 29,900Returns out (6,400)Carriage in 4,600Closing inventories (4,900)Cost of goods sold 27,100



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1925 Solution

€ €Sales revenue 45,316Gross margin (50%) (22,658)Cost of sales 22,658Opening inventories 2,036Purchases 25,380

(27,416)Derived closing inventories (4,758)Actual closing inventories 1,998Value of inventories lost in fire 2,760



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1927 Solution

€Closing net assets at 11 Nov 2016 236,470Opening net assets at 31 Dec 2015 (204,200)Movement in net assets 32,270Capital introduced (38,000)Drawings 46,740Profit for the year 41,010Grant amortisation (deduct) (6,280)Profit before amortisation 34,730



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1930 SolutionPartnerships do not necessarily require a partnership agreement. There is no legal requirement to draw up such an agreement.

In the absence of one, the Partnership Act 1890, as amended in 1907, applies.

The main provisions of the Act as amended are:

(i) All profits and losses must be shared equally;

(ii) All partners have the right to take part in the business;

(iii) All partners have the right to prevent the entry of another partner;

(iv) All partners have the right to examine the books of the partnership;

(v) No interest is paid on the capital advanced by each partner;

(vi) No remuneration is paid to partners for acting within the business;

(vii) All partners have the right to receive interest at 5% p.a. on loans and advances made to the partnership inexcess of their capital subscription;

(viii) Differences of opinion shall be settled by the majority of the partners but the nature of the business cannot bechanged without the consent of all partners.

The provision of the 1890 Act, as amended, only applies when there is no partnership agreement in place. Partners in a partnership are free to agree to any terms they feel appropriate and have these formalised in a partnership agreement.


Chapter 5


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1931 Solution

(a) Profit appropriation account for the year ended 31 December 2016Total F K V

€ € € €Interest on capital 1,400 400 800 200Share of profit (w1) 13,600 3,589 7,497 2,514

15,000 3,989 8,297 2,714

(b) Partners' current accounts F K V€ € €

Opening balances 3,800 3,500 2,700Interest on capital 400 800 200Share of profit 3,589 7,497 2,514Drawings (780) (2,360) (1,090)

7,009 9,437 4,324

Workingsw1 Total F K VShare of profit € € € €

(i) First €12,000 12,000 3,429 6,857 1,714(ii) Remaining €1,600 1,600 160 640 800

13,600 3,589 7,497 2,514



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1933 Solution

(a) Statement of adjusted profit for the year ended 31 December 2016€ €

Profit per draft financial statements 107,280Adjust for:Depreciation of premises (4% x €176,000) (7,040)Depreciation of plant and machinery (10% x €127,000) (12,700)Depreciation of furniture and fittings (20% x €32,000) (6,400)

(26,140)Wages prepayment 16,100Rent accrual (17,600)Sales revenue 1,800

81,440

(b) Profit appropriation account for the year ended 31 December 2016€ €

Adjusted profit 81,440Partners' salaries:Geoff 5,000Hamed 9,000Isobel 3,000

(17,000)Interest on capital at 9%:Geoff 6,570Hamed 6,300Isobel 6,570

(19,440)Residual profit 45,000

Appropriated as follows: Total Geoff Hamed Isobel€ € € €

Based on profit sharing ratios 45,000 18,000 18,000 9,000Isobel top-up to guaranteed profit (1,000) (1,000) 2,000

45,000 17,000 17,000 11,000

(c) Current accounts for the year ended 31 December 2016Geoff Hamed Isobel

€ € €Opening balances at 1 January 2016 14,800 (13,400) 13,200Salaries 5,000 9,000 3,000Interest on capital 6,570 6,300 6,570Share of profits 17,000 17,000 11,000Closing balances at 31 December 2016 43,370 18,900 33,770

(d) Statement of financial position at 31 December 2016Cost Deprec. Value

Noncurrent assets € € €Premises 176,000 (36,040) 139,960Plant and machinery 127,000 (40,700) 86,300Furniture and fittings 32,000 (13,400) 18,600



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335,000 (90,140) 244,860Current assetsInventories 35,210Trade receivables (including additional sales revenue) 38,060Prepayment 16,100Bank 32,110

121,480Total assets 366,340Partners' equityCapital accounts:Geoff 73,000Hamed 70,000Isobel 73,000

216,000Current accounts:Geoff 43,370Hamed 18,900Isobel 33,770

96,040312,040

Current liabilitiesTrade payables 25,500Loan from Simone 11,200Accrual 17,600

54,300Total equity and liabilities 366,340



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1189 SolutionA B C€ € €

Allocation of profit as per profit sharing ratio 4,050 2,700 2,700Top up for partner C (900) (600) 1,500Partners' share of profits 3,150 2,100 4,200



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2340 Solution

Horatio Marie

€ €Interest on capital at 6% 1,662 1,416Share of remaining profit (€32,222) 9,022 23,200

10,684 24,616



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1190 Solution €

Cost 9,000Depreciation 2013 (1,800)

7,200Depreciation 2014 (1,440)

5,760Depreciation 2015 (1,152)Carrying amount 2016 4,608Proceeds 2016 5,000Profit on disposal 392


Chapter 6


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1942 Solution €New machine 157,700Delivery costs 11,200Site preparation 27,010Costs to be capitalised 195,910



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1943 SolutionThe correct answer is option (c).Tutorial note:Cost of site preparation, initial delivery and handling costs, installation costs, testing, unavoidable costs ofdismantling and removing the asset



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1944 Solution(a) Plant and machinery - cost

2016 € 2016 €1 Jan Bal b/d 743,0001 Jul Bank 119,000 31 Dec Bal c/d 862,000

862,000 862,000

Plant and machinery - accumulated depreciation2016 € 2016 €

1 Jan Bal b/d 148,60031 Dec Bal c/d 198,538 31 Dec P/L (w1) 49,938

198,538 198,538

Fixtures and fittings - cost

2016 € 2016 €1 Jan Bal b/d 707,000 1 Sep Disposal 142,0001 Feb Bank 241,000 31 Dec Bal c/d 806,000

948,000 948,000

Fixtures and fittings - accumulated depreciation2016 € 2016 €1 Sep Disposal 116,000 1 Jan Bal b/d 396,0001 Sep Disposal (w2) 4,733 31 Dec P/L (w2) 47,57931 Dec Bal c/d 322,846

443,579 443,579

Disposal2016 € 2016 €1 Sep F&F - cost 142,000 1 Sep F&F - acc. dep. 120,733

1 Sep Bank 19,2001 Sep P/L 2,067

142,000 142,000Workingsw1Depreciation of plant and machinery

(i) Plant held for full year € €Cost 743,000Depreciation (148,600)

594,400Depreciation at 7% 41,608

(ii) Plant acquired during the year119,000Cost

Depreciation (€119,000 x 14% x 6 months) 8,33049,938

w2Depreciation of fixtures and fittings

(i) Fixtures held for full year € €Cost at beginning of the year 707,000Cost of assets disposed of (142,000)

565,000



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Depreciation at 5% 28,250(ii) Fixtures disposed of

Cost of assets disposed of 142,0004,733 Depreciation (€142,000 x 5% x 8 months)

(iii) Fixtures acquiredCost of fixtures acquired 241,000Estimated residual value (34,000)Depreciable cost 207,000Annual depreciation based on estimated 13 year life 15,923Eleven months' depreciation 14,596

47,579

(b) If the purchase of noncurrent assets were recognised immediately as expenses,then profit or loss in the yearof acquisition would bear the entire cost of the assets purchased.

Noncurrent assets are to be used in the business to help the business generate revenues into the future.

Therefore it is more appropriate to match the cost of the asset over the useful economic life of the asset (viadepreciation) to the revenues that the asset helps to generate over its useful economic life.

(c) The method of depreciation should reflect, as fairly as possible, the pattern at which the useful economicbenefits of the asset are consumed by the business.

Some assets will tend to have a regular flat pattern of consumption (e.g,. a building). For such assets thestraight line method is probably the most appropriate.

However for other assets, the pattern of consumption will not be even over their useful economic lives. For example, some vehicles will tend to generate proportionately greater benefits in the first years after purchase due to requiring fewer repairs in comparison to the later years of their useufl lives. For such assets the reducing balance method is probably the more appropriate.



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1947 Solution

Buildings - cost/valuation2016 € 2016 €

Balance b/d 508,000 Buildings - acc. dep. 330,200Revaluation surplus 35,600 Balance c/d 213,400

543,600 543,600

Buildings - accumulated depreciation2016 € 2016 €

Buildings - cost 330,200 Balance b/d (w1) 304,800Profit or loss (w2) 25,400

Balance c/d 30,486 Profit or loss (w3) 30,486360,686 360,686

Revaluation surplus2016 € 2016 €

Balance c/d 35,600 Buildings - cost 35,60035,600 35,600

Workingsw1Opening accumulated depreciation €€508,000 x 10% for six years 304,800

w2Depreciation up to date of revaluation €€508,000 x 10% for six months 25,400

w3Depreciation after date of revaluation €Valuation (€) 213,400Remaining life (years) 3.50€213,400 divided by 3.5 years multiplied by six months 30,486



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1948 Solution

Office buildings - cost2016 € 2016 €

Balance b/d 848,000 Acc. depreciation 314,467Revaluation surplus 37,367 Balance c/d 570,900

885,367 885,367

Office buildings - accumulated depreciation2016 € 2016 €

Buildings - cost 314,467 Balance b/d 296,800Profit or loss (w1) 17,667

Balance c/d 26,473 Profit or loss (w1) 26,473340,940 340,940

Plant and machinery - cost2016 € 2016 €

Balance b/d 504,000 Disposal 141,200Bank 231,900 Balance c/d 594,700

735,900 735,900

Plan and machinery - accumulated depreciation2016 € 2016 €

Disposal 49,900 Balance b/d 116,000Disposal (w2) 29,417 Profit or loss (w2) 153,936Balance c/d 190,619

269,936 269,936

Revaluation surplus2016 € 2016 €

Balance c/d 37,367 Office buildings cost 37,36737,367 37,367

Disposal of plant2016 € 2016 €

Plant - cost 141,200 Plant - acc. dep. 79,317Bank 66,900

Profit or loss 5,017146,217 146,217

Workingsw1

Depreciation of buildings(i) Up to date of revaluation € € €

Annual depreciation expense (848,000 x 5%) 42,400Five months' depreciation 17,667

(ii) After date of revaluationValuation of buildings 570,900Annual depreciation based on remaining life of 12.58 years 45,382Seven months' depreciation 26,473Buildings depreciation expense for the year 44,140



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w2Depreciation of plant and machinery

(i) Assets held for full year € €Cost of assets held at beginning of the year 504,000Cost of asset disposed of (141,200)

362,800Depreciation at 25% 90,700

(ii) Asset disposed of up to date of disposalAnnual depreciation expense (141,200 x 25%) 35,300Ten months' depreciation 29,417

(iii) Asset acquired during the yearAnnual depreciation expense (231,900 x 25%) 57,975Seven months' depreciation 33,819Plant and machinery depreciation expense for the year 153,936



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889 Solution€ €

Draft cost per unit:(€32,000/3,200 units) 10.00Deduct incorrectly included costs:Admin overheads per unit (1.50)Selling costs per unit (0.70)

7.80Selling price per unit 8.30Deduct selling costs per unit (0.70)

7.60

Value per unit (lower of cost and NRV) 7.60Units on hand 3,200Inventories valuation 24,320


Chapter 7


TENJ

IN

1186 SolutionThe correct answer is option (b).



TENJ

IN

1951 SolutionJournals dr cr

€ €Profit or loss (cost of sales) 2,710Inventories 2,710Being write-down to net realisable value (w1)

Workingw1 € €Inventories at cost 43,630Inventories at realisable value 44,000Commission costs at 7% (3,080)

(40,920)Write-down required 2,710



TENJ

IN

1954 SolutionThe inventory must be written down to de-recognise the cost of inventories destroyed in the fire.

A receivable in respect of the insurance proceeds recoverable may be recognised if receipt is sufficientlycertain.

Journals dr cr€ €

1 Profit or loss (cost of sales) 30,400Inventories 30,400Being inventories destroyed by fire

2 Other receivable (€30,400 x 25%) 7,600Profit or loss (cost of sales) 7,600Being insurance receivable in respect of inventories destroyed by fire



TENJ

IN

1958 Solution(a)

(i) FIFODate Purchase Cost (€) Used Cost (€) Total (€)Opening 150 11.91Week 1 130 10.10Week 2 150 11.91 1,786.50Week 2 63 10.10 636.30

213Week 3 56 9.40Week 4 67 10.10 676.70Week 4 13 9.40 122.20

80 3,221.70AVCODate Purchase Unit (€) Total (€) Total (€)Opening 150 11.91 1,786.50Week 1 130 10.10 1,313.00

280 11.07 3,099.50Week 2 used (213) 11.07 (2,357.91) 2,357.91

67 741.59Week 3 56 9.40 526.40

123 10.31 1,267.99Week 4 used (80) 10.31 (824.80) 824.80

43 10.31 443.19 3,182.71

(ii) Closing inventories FIFO AVCOUnits 43 43Cost per unit (€) 9.40 10.31Valuation of closing inventories at cost (€) 404.20 443.33

(b) Journals dr cr€ €

1 Inventories 75,447Profit or loss (cost of sales) 75,447Being inventories at cost based on count

2 Profit or loss (cost of sales) 11,413Inventories 11,413Being cost of inventories destroyed by fire

3 Profit or loss (cost of sales) 14,342Inventories 14,342Being cost of inventories sold prior to year end

4 Profit or loss (cost of sales) 3,444Inventories 3,444Being write-down to net realisable value (w1)

Workingw1 Units €Inventory unit count 747Destroyed by fire (113)Sold (142)



TENJ

IN

On hand at reporting date 492Valued at €101 cost per unit 49,692Valued at €94 net realisable value 46,248Inventory write down to net realisable value 3,444



TENJ

IN

1959 Solution(a) Inventories should be measured at the lower of cost or net realisable value.

Cost is made up of cost of purchase and cost of conversion.

Cost of purchase includes the price paid plus import duties, transport costs, handling costs and any otherdirectly attributable costs less trade discount, rebates and subsidies.

Cost of conversion includes costs specifically attributable to units of production, e.g. direct labour, directexpenses and subcontract work plus production overheads and other overheads attributable to the particularcircumstances.

Such overheads should be those incurred based on normal levels of activity in bringing the product to itspresent condition.

Net realisable value is the actual or estimated selling price less any further costs of conversion and all coststo be incurred in marketing, selling and distribution directly related to the inventory in question.

(b) Cost of 590 tables as follows: € € €Direct materials 23,010Direct labour 10,620Depreciation of machinery 7,080Factory expenses 7,670Other production expenses 10,620

59,000Cost per table (€59,000/590) 100Valuation of 148 tables at cost 14,800

Realisable value of each table 104Selling costs per table (12)Net realisable value per table 92Valuation of 148 tables at net realisable value 13,616

Lower of cost and net realisable value 13,616



TENJ

IN

1963 Solutiondr cr€ €

1 Leased machinery 85,987Finance lease obligation 85,987Being acquisition of machinery by means of a finance lease

2 Finance lease obligation 14,400Bank 14,400Being finance lease payment in arrears

3 Profit or loss (depreciation) 10,748Leased machinery (accumulated depreciation) 10,748Being depreciation of leased machinery

4 Profit or loss (lease finance cost) 6,019Finance lease obligation 6,019Being finance lease interest expense


Chapter 8


TENJ

IN

1965 SolutionIt appears that the lease agreement is a finance lease for the following reasons:

(i) The asset was purchased to the specifications of the lessee;

(ii) Exocet is committed to paying substantially all of the fair value of the leased asset at the inception of thelease;

(iii) Exocet will lease the asset for substantially all of its useful economic life.

Finance lease obligation2016 € 2016 €Bank 2,500 Computers 9,308Balance c/d 7,148 Finance cost expense 340

9,648 9,6482017 € 2017 €Bank 2,500 Balance b/d 7,148Balance c/d 4,880 Finance cost expense 232

7,380 7,3802018 € 2018 €Bank 2,500 Balance b/d 4,880Balance c/d 2,499 Finance cost expense 119

4,999 4,9992019 € 2019 €Bank 2,500 Balance b/d 2,499

2,500 2,499

Tutorial note:The periodic finance cost is calculated as 5% of (opening balance minus the payment). Note that leasepayments are in advance.



TENJ

IN

1966 Solution(a) € €

Total payments 50,800Annual lease rental (€50,800/4) 12,700

Tutorial note:As a general rule, operating lease commitments are expensed to profit or loss on a straight line basisregardless of the pattern of rental payments.

(b) Operating lease2016 € 2016 €Bank 14,300 Profit or loss 12,700

Balance c/d 1,60014,300 14,300

2017 € 2017 €Balance b/d 1,600Bank 12,700 Profit or loss 12,700

Balance c/d 1,60014,300 14,300

2018 € 2018 €Balance b/d 1,600Bank 10,200 Profit or loss 12,700Balance c/d 900

12,700 12,7002019 € 2019 €

Balance b/d 900Bank 13,600 Profit or loss 12,700

13,600 13,600



TENJ

IN

1969 Solution(a)(i) A lease is an agreement whereby the lessor conveys an asset to the lessee in return for a series of payments

or a single payment. The lessee then has the right to use the asset for an agreed period of time.

(ii) An operating lease involves the lessee paying a rental for the hire of an asset for a period of time which isnormally substantially less than its useful economic life.

The lessor retains the risks and rewards of ownership of the asset in the case of an operating lease.

(iii) A finance lease is a lessee that transfers substantially all the risks and rewards incident to ownership of anasset (to the lessee).

The transfer of legal ownership may happen at the end of the lease. In any case, the lessee controls the useof the asset throughout its economic life.

(b)

(i) Present value of minimum lease paymentsYear € Factor PV (€)

2016 10,600 0.9434 10,000

2017 10,600 0.8900 9,434

2018 10,600 0.8396 8,900

2019 10,600 0.7921 8,396

2020 10,600 0.7473 7,92144,651

(ii) Statement of financial position2017 2016

Asset € €Machinery (w1) 26,791 35,721LiabilityFinance lease obligation (w2) 28,334 36,730

Income statement2017 2016

Expenses € €Depreciation (w1) (8,930) (8,930)Finance cost (w2) (2,204) (2,679)

Workingsw1Machinery €Present value of minimum lease payments 44,651Depreciation expense 2016 (8,930)Carrying amount at 31 December 2016 35,721Depreciation expense 2017 (8,930)Carrying amount at 31 December 2017 26,791

w2Finance lease obligation €Present value of minimum lease payments 44,651Finance cost at 6% 2,679



TENJ

IN

47,330Payment for 2016 (10,600)Finance lease obligation at 31 December 2016 36,730Finance cost at 6% 2,204

38,934Payment for 2017 (10,600)Finance lease obligation at 31 December 2017 28,334



TENJ

IN

1185 Solution€

Amount of capital grant received 20,000One year (of four) of amortisation expense (5,000)Deferred grant income balance at 31 Mar 2016 15,000


Chapter 9


TENJ

IN

1971 Solution(a) Journals dr cr

€ €1 Machinery 457,000

Bank 457,000Being cost of new machinery

2 Bank 54,000Deferred grant income 54,000Being receipt of capital grant

3 Profit or loss (training) 88,900Bank 88,900Being training expenses

4 Bank 29,000Profit or loss (other income - training) 29,000Being receipt of revenue grant

5 Profit or loss (depreciation of machinery) 22,850Machinery (accumulated depreciation) 22,850Being depreciation of machinery

6 Deferred grant income 2,700Profit or loss (other income - amortisation of grant) 2,700Being amortisation of capital grant

(b) The grant of €29,000 towards the training costs is either offset directly against the costs or is presentedseparately as an item of other income.

The grant is therefore matched against the expenditure to which it relates.

The grant of €54,000 should be deferred and amortised to profit or loss as the corresponding capitalexpenditure is expensed as depreciation to profit or loss.



TENJ

IN


Deferred income 21,620Profit or loss (other income - training costs) 21,620Being correction to account for receipt of grant as revenue-based grant



TENJ

IN

1974 SolutionJournals dr cr

€ €1 Bank 15,700

Profit or loss (other income - training costs) 15,700Being receipt of grant to offset training costs

2 Bank 69,400Deferred grant income 69,400Being receipt of capital grant to part-finance building renovation costs

3 Deferred grant income 13,880Profit or loss (other income - amortisation of capital grant) 13,880Being amortisation of capital grant



TENJ

IN

1978 Solution(a) Income statement extract for the year ended 31 December 2016

Other income €Amortisation of capital grant (w1) 87,153

(b) Statement of financial position extract at 31 December 2016Noncurrent liabilities €Deferred income - grant (w2) 702,332Current liabilitiesDeferred income - grant (w2) 87,153

(c) Statement of cash flows extract for the year ended 31 December 2016Operating activities €Profit before tax xxxAdjust for:Amortisation of capital grants (87,153)Investing activitiesReceipt of capital grant 205,952

Workingsw1Amortisation of capital grants

Grant received (€) Years Income (€)

496,524 23 21,588358,389 9 39,821205,952 8 25,744

87,153w2Deferred income balance Total Grant 1 Grant 2 Grant 3

€ € € €Opening balances 670,686 431,760 238,926Capital grant received 205,952 205,952Amortisation (w1) (87,153) (21,588) (39,821) (25,744)Closing balances 789,485 410,172 199,105 180,208

Current component 87,153Noncurrent component 702,332

789,485



TENJ

IN

1982 Solution(a) Profit smoothing

Profit smoothing recognises accounting transactions with the intention of presenting stable profits in theincome statement from period to period.

In the absence of these transactions, there would be greater fluctuation of profits from period to period.

Profit smoothing is achieved by transferring profits out of profit or loss to a provision account in years when the business is profitable. This has the effect of reducing profits in those years.

Then, in later years, when profitability is relatively poor, profits are transferred out of the provision accounts back into profit or loss, thereby increasing profits in those periods.

Accounting regulation on provisions was introduced to reduce abuses in this area. Profit smoothing is not as pervasive since the introduction of regulation but research indicates that it still occurs.

(b) ProvisionA provision is ‘a liability of uncertain timing or amount’. A provision can only be recognised in the financialstatements when all three of the following conditions have been met:

(i) A business has a present obligation as a result of a past event (the obligating event);

(ii) It is probable that a transfer of economic benefits will be required to settle the obligation;

(iii) A reliable estimate can be made of the amount of the obligation.

(c) Contingent liabilityA ‘contingent liability’ is an item which has failed one of the recognition criteria of a provision. A ‘contingentliability’ is:

(i) A present obligation that arises from past events but is not recognised because it is not probable that atransfer of economic benefits will be required to settle the obligation or the amount of the obligation cannot bemeasured with sufficient reliability; or

(ii) A possible obligation that arises from past events and whose existence will only be confirmed by theoccurrence of one or more uncertain future events not wholly within the entity’s control.

Contingent liabilities should not be recognised in financial statements but they should be disclosed by way ofa note.

(d) A ‘contingent asset’ is a possible asset that arises from past events, the existence of which will beconfirmed only by the occurrence of one or more uncertain future events not wholly within the business’scontrol.

As a general rule, contingent assets are not recognised. It should only be recognised when the realisation ofthe related economic benefit is virtually certain. At that point, the asset is, in effect, no longer a contingentasset.


Chapter 10


TENJ

IN

1986 Solution(c) A provision should be recognised for the best estimate of the liability in 1; item 2 should be disclosed by a

note; item 3 not disclosed at all;



TENJ

IN


(i) Provision 38,000Profit or loss (repairs and maintenance) 38,000Being reversal of provision

(ii) No provision required. No obligating event so there is no obligation to be recognised.

Due to absence of action to implement the decision, the directors could reverse the decision easily enough.

(iii) Contingent liability, possible but not yet probable based on available advice, no provision required. Discloseas a note in the 2016 financial statements.



TENJ

IN

1989 Solution(a) There is a present obligation (to close the division) as a result of a past obligating event (decision to close

division and communication of this decision to suppliers and employees).

It is more probable that a transfer of economics benefits will arise as the entity will incur closure costs.

Therefore a provision should be recognised in the financial statements for the estimated costs of closure. If the costs cannot be estimated, then a dislcosure to explain the closure should be included in the financial statements.

(b) There is a present obligation (to repair or replace the defective products) as a result of a past obligating event(sale of goods to customers which includes a three year warranty).

A transfer of economic benefits will result as the company must meet the cost of repair or replacement andthis can be reliably measured based on sales information and costs incurred in prior years.

Therefore a provision should be recognised in the financial statements.

(c) There is a present obligation (to pay lease payments as they arise and become due) as a result of a pastobligating event (signing of the lease).

Until such time as the entity finds a new tenant the entity must pay the unavoidable lease payments and thiscan be reliably measured.

Therefore a provision should be recognised in the financial statements.

(d) There is no present obligation as there is no past obligating event (neither the cost of fitting of smoke alarmsnor the fines under the new legislation).

Therefore no provision should be recognised in the financial statements.



TENJ

IN

1990 Solution(a) An adjusting event is an event after the reporting period that provides further evidence of conditions that

existed at the end of the reporting period, including an event that indicates that the going concern assumptionin relation to the whole or part of the business is not appropriate.

As an adjusting event gives further evidence regarding a condition that was in existence at the reporting date,the financial statements for the period must be adjusted to reflect the event as if it had occurred within thereporting period. This is the case for all material adjusting events.

A non-adjusting event is an event after the reporting period that is indicative of a condition that arose after theend of the reporting period.

(b) Adjusting events(ii) A receivable on the statement of financial position that was, it has since emerged, insolvent at the reporting

date;

(v) Sales price achieved for inventories sold after the reporting period that provides evidence of net realisablevalue at end of the reporting period being less than cost;

(vi) Discovery of fraud that indicate the financial statements were incorrect;(viii) The decision in a court case that was ongoing as at the reporting date;

Non-adjusting events(i) The acquisition of another company after the reporting period;(iii) An issue of loan stock after the reporting period;(iv) A fire after the reporting period that destroyed items of noncurrent asset;(vii) A decline in the market value of investments as a result of a decline in general market conditions after the

reporting date;

(ix) Declaration of dividends after the reporting period.


Chapter 11


TENJ

IN

1992 Solution

The correct answer is option (c).

Tutorial note:

Credit profit or loss and debit provision for repairs

Confirmation on 28 February 2017 that no expense would in fact be incurred is an adjusting event for the2016 financial statements.



TENJ

IN

1993 Solution(a) An adjusting event is an event after the reporting period that provides further evidence of conditions that

existed at the end of the reporting period, including an event that indicates that the going concern assumptionin relation to the whole or part of the business is not appropriate.

A non-adjusting event is an event after the reporting period that is indicative of a condition that arose after theend of the reporting period.

(b)(i) This is an adjusting event. An adjustment should be made to the financial statements in respect of the

€19,600 owing at the reporting date - write off the receivable on the statement of financial position andrecognise the irrecoverable debt in profit or loss.

No adjustment should be made in respect of the €15,880 arising after the reporting date. This is anon-adjusting event.

However, if €15,880 is material in the context of the financial statements, then a note should be disclosed inthe financial statements stating that further receivables incurred in respect of the credit customer after thereporting date of €15,880 are unlikely to be recoverable.

(ii) The destruction of inventory by a fire after the year end should be accounted for as a non-adjusting event(i.e., a new condition which did not exist at year end).

However, it is likely that the loss due to under-insurance is material, given its value of €150,960 and,accordingly, it should be disclosed by way of note to the financial statements.

The note should describe the nature of the event and an estimate of its financial effect.

Non-reporting of this event would prevent users of the financial statements from reaching a properunderstanding of the financial position.



TENJ

IN

2336 Solution

The correct answer is option (c).

Tutorial note:

Events occurring after the reporting period that provide additional information about conditions existing at thereporting period date should result in adjustments to the financial statements being finalised.



TENJ

IN

1998 Solution

(a) € €Trade receivables at 31 December 2016 594,000Specific allowance (47,600) 47,600Receivables balance for which general allowance required 546,400General allowance at 8% 43,712Required allowance for receivables at 31 December 2016 91,312Allowance for receivables at 1 January 2016 (100,450)Profit or loss (decrease in allowance for receivables) (9,138)

(b) Statement of financial position extract at 31 December 2016Current assets € €Trade receivables 594,000Allowance for receivables (91,312)

502,688


Chapter 12


TENJ

IN

2004 Solution

Statement of changes in equity for the year ended 31 December 2016

Share capital Share premium Retainedearnings Reval. surplus General

reserve Total

€ € € € € €At 1 January 2016 206,000 231,000 716,900 217,000 141,000 1,511,900Issue of shares 48,400 8,800 57,200Profit for the year 53,500 53,500Dividend distribution (17,130) (17,130)Revaluation deficit (141,100) (141,100)Intra-equity transfer (215,100) 215,100

254,400 239,800 538,170 75,900 356,100 1,464,370



TENJ

IN

2006 Solution

(a) Statement of financial position at 31 December 2016TB Adjust Final Final

Noncurrent assets €'000 €'000 €'000 €'000Property, plant and equipment (see part (b)) 2,077 (17) 2,060Financial asset equity investments 230 230

2,290Current assetsInventories 110 110Financial asset equity investment 20 20Trade receivables (net of allowance) 194 194Bank deposit account 90 90Cash on hand 14 14Prepayments 30 30

458Total assets 2,748EquityEquity share capital 1,291 1,291Retained earnings at 1 January 2016 90 90Profit for the year ended 31 December 2016 (w3) 190 27 217

1,598Noncurrent liabilities5% loan stock 200 2009% debentures 2021 120 120Loan from director 190 190

510Current liabilitiesTrade payables 390 390Current tax 40 40Sales tax 50 50Current bank account (see w1) 60 60Accruals 100 100

640Total equity and liabilities 2,748

(b) Noncurrent assets at 31 December 2016 Land Premises Machinery Fittings Total

Cost €'000 €'000 €'000 €'000 €'000At 1 January 2016 110 900 870 860 2,740Additions 60 50 110Disposals (w1) (45) (45)At 31 December 2016 110 900 885 910 2,805DepreciationAt 1 January 2016 297 95 163 555Expense for the year 9 114 95 218Disposals (w1) (28) (28)At 31 December 2016 306 181 258 745Carrying amountAt 31 December 2016 110 594 704 652 2,060At 1 January 2016 110 603 775 697 2,185



TENJ

IN

WorkingsJournal

ref.w1Disposal of machinery €'000 €'000Cost 45 1Accumulated depreciation to date of disposal (28) 2Carrying amount at date of disposal 17Proceeds of disposal 14 3Profit or loss on disposal 3

w2 €'000Recognise prepayments 30 4

w3Profit for the year €'000Per TB 190Disposal of machinery (w1) (3)Prepayments (w2) 30

217

Summary of journal adjustments dr cr€'000 €'000

1 Profit for the year (asset disposal) 45Property, plant and equipment - cost 45Being de-recognition of cost of disposed of machinery

2 Property, plant and equipment - depreciation 28Profit for the year (asset disposal) 28Being de-recognition of accumulated depreciation on disposed of machinery

3 Cash on hand 14Profit for the year (asset disposal) 14Being recognition of proceeds of disposal

4 Prepayment 30Profit for the year (relevant expense accounts) 30Being recognition of prepayments



TENJ

IN

2008 Solution

(a) Income statement for the year ended 31 December 2016TB Adjust Final

€'000 €'000 €'000Revenue 1,629Returns inwards (30)Sales revenue 1,599 1,599Opening inventories 201Purchases (note (ii) of question) 396 39Purchases returns (12)Closing inventories (250)Cost of sales (585) 211 (374)Gross profit 1,225Distribution expenses (w1) (159) (14) (173)Administration expenses (w2) (139) (249) (388)

664Other income (w5) 11 11 22Bank interest (21)Debenture interest (w3) (9) (9)Finance cost (30) (9) (39)Profit before taxation 647Tax expense (388) (388)Profit for the year 259

(b) Statement of changes in equity for the year ended 31 December 2016

Share capital Share premium Retainedearnings Other reserve Total

€'000 €'000 €'000 €'000 €'000At 1 January 2016 296 129 520 51 996Profit for the year 259 259Equity dividend (w4) (173) (173)At 31 December 2016 296 129 606 51 1,082

Workingsw1Distribution expenses €'000Per TB (159)Depreciation of motor vehicles (140 x 10%) (14)

(173)w2Administration expenses €'000Per TB (139)Depreciation of leasehold premises (2,300 x 5%) (115)Depreciation of fixtures and fittings (670 x 20%) (134)

(388)w3Debenture interest accrual €'000 €'000Debentures per TB 300Half year of interest at 6% 9



TENJ

IN

w4Equity dividend €'000Interim dividend per TB 55Number of issued equity shares ('000) 592Final dividend at €0.20 per share 118

173

w5Other income €'000Deposit interest received (per TB) 11Training grant 11

22



TENJ

IN

2009 SolutionThe majority of businesses are set up with the primary focus of making a profit. In the long term, a businessentity must make a profit in order to continue in operation.

However, in the short term businesses can survive making a loss for several years.

The situation with respect to cash is very different. Cash is often referred to as the life blood of a business.

Businesses require cash on a daily basis to discharge expenses and continue in operation.

If a business runs short of cash, measures can be taken: payment to suppliers can be delayed for example.

However, suppliers are unlikely to continue to supply goods to companies who are not paying their bills forlonger than a period of a month or two.

Further, employees will not continue to work for a business that cannot meet the monthly payroll.

The survival time for a company that runs short of cash is much shorter than for a company making losses.

This is particularly true as the main sources of finance (cash), shareholders and banks, may not bewilling/able to advance further cash in time to save the business.

Raising funds through investors can take time, time the company may not have.

Investors may also be reluctant to pump more money into a failing company because of the high level of risk.Similarly, bank loan/overdraft repayments are made out of cash.

Thus banks may be reluctant to lend to a company that is experiencing cash flow problems.

Cash, cash flow, the sources of cash and the uses of cash within a business are therefore of paramountimportance to all businesses.

Increasingly, businesses are becoming more and more aware of the need to properly manage their cashflow.


Chapter 13


TENJ

IN

2011 SolutionThe correct answer is option (c).

Tutorial notes:

Interest received and dividends received may be included in either operating or investing activities.

Interest paid and dividends paid may be included in either operating or financing activities.



TENJ

IN

2014 Solution

€Opening liability (13,200)Taxation expense (29,200)Closing liability 38,160Tax paid (4,240)



TENJ

IN

2015 Solution€'000 €'000

(a) Opening ordinary share capital (730)Opening share premium (250)

(980)Closing ordinary share capital 790Closing share premium 300

1,090Cash received from issue of shares (at a premium) 110

(b) Opening debenture liability (110)Closing debenture liability 130Cash received from issue of debentures 20



TENJ

IN

2017 Solution

(a) Statement of cash flows for the year ended 28 February 2016Cash flows from operating activities €'000 €'000Profit before interest and taxation 559Adjust for:Depreciation 200Loss on disposal 11Increase in inventories (30)Decrease in trade receivables 20Decrease in trade payables (20)Cash generated from operations 740Interest paid (80)Tax paid (w3) (40)Net cash from operating activities 620Cash flows from investing activitiesPayments to acquire property, plant and equipment (w1) (880)Proceeds from disposal of noncurrent assets 150Interest received 40Net cash used in investing activities (690)Cash flows from financing activitiesProceeds from issue of equity shares (w2) 50Proceeds from issue of debentures ( -€250 + €310) 60Dividends paid (160)Net cash used in financing activities (50)Decrease in cash and cash equivalents (120)Cash and cash equivalents at 28 February 2015 490Cash and cash equivalents at 28 February 2016 370

Workingsw1Payments to acquire property, plant and equipment €'000Opening carrying amount 1,370Depreciation (200)Disposal (€274,000 - €113,000) (161)Closing carrying amount (1,889)

(880)w2Proceeds from issue of shares €'000Opening ordinary shares (800)Opening share premium (50)Closing ordinary shares 840Closing share premium 60

50w3Tax paid €'000Opening liability (520)Profit or loss (tax expense) (60)Closing liability 540

(40)



TENJ

IN

(b) Whereas businesses need both profits and cash to survive in the long run, businesses could survive withoutprofit for a period of time but could only survive for a short period without cash.

Businesses need cash on a daily basis to meet all the expenses incurred while running the business, forexample wages, electricity, purchases.

The following outlines the main differences between profit and cash:

(i) Treatment of capital expenditureCapital expenditure is expenditure on items which are used by the companies in the production and/ orsupply of goods or services.

Capital expenditure can be quite significant and is long term in nature.Capital expenditure will have a negative impact on cash flow as the organisation has to meet the cost of the capital expenditure however the capital expenditure incurred will not have any immediate impact on the income statement and therefore on profit.

Capital expenditure is depreciated to the income statement to reflect the gradual consumption of the capital expenditure over the useful life of the asset.

(ii) Non-cash itemsThe income statement will usually contain some transactions that have no cash impact on the business andthese items are referred to as non-cash items.

An example of a non-cash item is depreciation. Depreciation is charged to the income statement on anannual basis and accordingly reduces profit.However it has no cash implications for the business in the period in which it is charged to the incomestatement.

(iii) Accruals conceptWith the exception of the statement of cash flows the financial statements of an organisation are to beprepared using the accruals concept.

The accruals concept states that transactions must be recorded in the period in which they were incurred notthe period in which the corresponding cash transaction took place.

The concept therefore gives rise to timing differences between when the profit or loss from an activity isrecorded and when the cash is received/paid.



TENJ

IN

2018 Solution

Statement of cash flows for the year ended 30 April 2016Cash flows from operating activities €'000 €'000Profit before interest and tax (w9) 660Adjust for:Depreciation 565Profit on disposal (17)Increase in inventories (80)Decrease in trade receivables 120Increase in trade payables (w3) 50Cash generated from operations 1,298Interest paid (439)Tax paid (w4) (44)Net cash generated from operating activities 815Cash flows from investing activitiesPayments to acquire property, plant and equipment (w1) (478)Proceeds from disposal of property, plant and equipment (w2) 132Net cash used in investing activities (346)Cash flows from financing activitiesProceeds from issue of equity shares (w5) 70Repayment of bank loans (w6) (602)Proceeds from issue of debentures (w7) 134Dividends paid (w8) (65)Net cash used in financing activities (463)Increase in cash and cash equivalents 6Cash and cash equivalents at 30 April 2015 (20)Cash and cash equivalents at 30 April 2016 (14)

Workingsw1Payments to acquire property, plant and equipment €'000Opening carrying amount 1,270Disposal (115)Depreciation (565)Closing carrying amount (1,220)Purchase of property, plant and equipment (630)Payable outstanding in respect of purchases 152

(478)w2Proceeds from disposal of property, plant and equipment €'000Carrying amount of assets at date of disposal 115Profit on disposal 17Proceeds of disposal 132

w3Increase in trade payables €'000 €'000Opening balance (700)Closing balance 902Payable attributable to property, plant and equipment (w1) (152)

750



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50w4Tax paid €'000Opening balance (60)Profit or loss (tax expense) (46)Closing balance 62

(44)w5Proceeds from issue of equity shares €'000Opening ordinary shares (580)Opening share premium (11)Closing ordinary shares 615Closing share premium 46

70w6Repayment of bank loans €'000Opening bank loan (current) (1,879)Opening bank loan (noncurrent) (380)Closing bank loan (current) 1,307Closing bank loan (noncurrent) 350

(602)w7Proceeds from issue of debentures €'000Opening debenture liability (current) (24)Opening debenture liability (noncurrent) (690)Closing debenture liability (current) 28Closing debenture liability (noncurrent) 820

134w8Equity dividends paid €'000Opening dividend liability (26)Retained earnings (98)Closing dividend liability 59

(65)w9Profit before interest and tax €'000Profit for the year 175Profit or loss (interest expense) 439Profit or loss (taxation expense) 46

660



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2019 Solution(a) Gross profit percentage/margin;

The gross profit percentage or margin refers to the percentage of gross profit (in cents) earned for every €1 of revenue.

Cost of sales percentage;A cost of sales percentage refers to the percentage amount that is spent on cost of sales expenditure and the amount that remains as gross profit for every €1 of revenue.

Net profit percentage/margin;The net profit percentage/margin refers to the percentage amount remaining out of every €1 of revenue after deducting cost of sales, administration and distribution expenses.

Expenses percentage;The expenses percentage refers to the percentage amount incurred on administration and distribution for every €1 of revenue.

Return on capital employed (ROCE);The ROCE expresses the profit for a financial year as a percentage of the capital investment in the business by providers of equity and long-term debt finance.Current ratio;The current ratio shows the level of current assets relative to current liabilities.

Acid test ratio (Quick ratio);The quick ratio is a tougher test of liquidity as it excludes closing inventory. It measures the number of timescurrent assets (excluding inventories), is greater than current liabilities.

Inventory turnover period;This ratio measures how long, on average, it takes a business to sell inventories.

Trade receivables days;The receivables day ratio refers to the average time in days it takes customers to settle their accounts andpay a business for the goods purchased.

Trade payables days;The payable day ratio refers to the average time (in days) it takes the business to pay its payables (creditsuppliers).

Gearing ratio;Gearing (sometimes referred to as leverage) examines the portion of the total funds invested in the businessthat come from borrowed funds (debt).

A business that has a high level debt relative to equity is referred to as having high gearing, whereas abusiness that has a low level of debt relative to equity is referred to as having low gearing.

Interest cover;An interest cover of a certain number means that profits cover the annual interest charge that number of times. Profits should cover interest payments. If not, there is a risk that the business will be unable to pay its interest as it falls due.

Dividend per share;The dividend per share tells an investor for each equity share held by a shareholder, the dividend receivablefrom a company in any particular year.

Dividend cover;This ratio gives similar information as interest cover except in relation to dividends. The ratio illustrates thenumber of times the profits available to ordinary shareholders cover the ordinary share dividend.

Dividend yield;


Chapter 14


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This ratio relates the cash return (dividend) from a share to its current market value. In essence, the dividendyield ratio calculates the percentage return on the market price of each share.

Earnings per share (EPS);

Earnings are another term for profits and therefore this ratio measures the profit the company has generatedfor each equity share issued.

Price earnings ratio (P/E ratio).The price earnings ratio relates the market value of a share to the earnings per share. The ratio is a measureof market confidence in the future of the company.

(b) Gross profit percentage/margin - lending and investing decisions;Cost of sales percentage -lending and investing decisions;Net profit percentage/margin - lending and investing decisions;Expenses percentage - lending and investing decisions;Return on capital employed (ROCE) - lending and investing decisions;Current ratio - lending and investing decisions;Acid test ratio (quick ratio) - lending and investing decisions;Inventory turnover period - lending and investing decisions;Trade receivables days ratio - lending and investing decisions;Trade payable days - lending and investing decisions;Gearing ratio - lending and investing decisions;Interest cover – lending decisions;Dividend per share - investing decisions;Dividend cover - investing decisions;Dividend yield ratio - investing decisions;Earnings per share (EPS) - investing decisions;Price earnings ratio (P/E ratio) - investing decisions.



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2021 Solution(a) Receivables days

(€67,310/€1,289,700) x 365 19 days

(b) Payables days(€44,920/€928,590) x 365 18 days

(c) Current ratio(€67,310 + €58,470 + €32,400)/(€44,920 + €27,500 + €70,900 + €20,200) 0.97 : 1

(d) Average inventory days((62,200 + 58,470)/2)/(62,200 + 928,590 - 58,470) x 365 24 days

(e) Gross profit margin € €Sales revenue 1,483,160Cost of salesOpening inventories 62,200Purchases 928,590Closing inventories (58,470)

(932,320)550,840

(€550,840/€1,483,160) x 100 37.1%



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2023 Solution(a) 2016 2015

Gross profit percentage 50.00% 41.99%Net profit percentage 37.64% 35.41%Inventory turnover (days) 109.47 103.44Receivables collection period (days) 56.82 30.48Payables days 70.01 124.87Return on capital employed (%) 38.14%* 45.90%**Earnings per share (€) 0.80 0.68Gearing 9.65% 9.79%

(b) Limitations of ratios

Ratios are only a guide.

Ratios by themselves do not provide control.

Only comparable when calculated in same manner from year to year.

Ratios using statement of financial position figures are using figures at a particular moment of time, whichmay not be representative of the norm throughout the year.

Different entities can use different accounting treatments and policies, which limits the comparability of ratiosacross entities.

Ratios are based on historic information that may not reflect the current state of play.

Ratios may not reflect non-financial factors (e.g., an entity has won a major new contract).


*€1,620 / (€3,837 + €410)**€1,359 / (€2,671 + €290)


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2024 Solution(a) Earnings per share (cents)

€134,811/1,236,000 shares 10.91 c

(b) Return on capital employed (%)€134,811/€1,169,200 11.53%

(c) Dividend per share (cents)€31,100/1,236,000 shares 2.52 c

(d) Price/earnings ratio (times)0.96/0.109 8.80 times



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2025 Solution(a) The price earnings ratio relates the market value of a share to the earnings per share. It is calculated as

follows:

Market value per share divided by earnings per share

(b) The statement is true.A high price to earnings ratio means that relative to profits (earnings) the price of the share is quite high.

Why would any shareholder be willing to pay a high price for a share which had poor earnings in the currentyear? The higher the price to earnings ratio the greater the confidence in the future earning power of thecompany.

So, although current earnings are low, investors expect them to increase in the future and therefore investorsare prepared to pay a high price for the share today in relation to the current earnings of the share.

A low price to earnings ratio means that the share price is quite low compared to earnings.

This implies a pessimistic view of the future, because even though the current year’s earnings are quitegood the current market value of the share is low.

Investors therefore must not believe that the profitability of the company in the future will be good and are notwilling to pay a high price for a share in a company with poor trading prospects.



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2028 Solution2016 2015

(a) Current ratio; 2.12 3.74(b) Acid test ratio; 0.95 1.76(c) Inventory turnover ratio (days); 50 66(d) Gross margin. 34% 38%



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2030 SolutionIn the last decade, both in the USA and in Europe, significant criticism has been levied against the externalaudit function.

The main source of this criticism has come from the perceived failure of the external audit to preventcorporate failures.

In late 2001, the collapse of Enron directly resulted in the downfall of Arthur Andersen, then one of the fivelargest accountancy and audit firms in the world.

Much of the criticism stems from common misperceptions as to the nature and function of the external audit.

The common misperceptions of the external audit are as follows:

(i) Opinion Not Fact

An external auditor forms an opinion on whether the financial statements prepared by the directors:

(a) comply with professional accounting standards;

(b) have been properly prepared in accordance with company law;

(c) whether the financial statements give a true and fair view of the company’s financial health over theaccounting year under review.

However, the auditors are not required to state that the financial statements are absolutely accurate.

To be able to do so, every single transaction for the financial year under review that the company enteredinto would need to be examined and even then there is no guarantee as there could be collusion betweenstaff, senior management and/or directors.

This would be extremely costly in terms of the audit personal required but also in terms of time. Instead, anauditor forms an opinion by examining a sample of transactions.

The results of this sample are then extrapolated over the whole population of transactions and using this as abasis, the auditor forms an opinion of the truth and fairness of the financial statements.

What is also important and often missed is that the auditor is expressing an opinion, not a statement of fact.

As with all opinions, a different auditor could examine the same information and arrive at a different opinion.

(ii) Fraud

The second main area of misperception with respect to the external audit is that it is the legal duty of theauditor to find fraud and error.

The prevention and detection of fraud and error is not the responsibility of the external auditors, it is theresponsibility of the directors.

However, the audit process in itself can often be a deterrent to fraudulent activities. The external audit doeshave some duties with respect to fraud and error.

These duties are to carry out an audit in line with relevant audit standards and plan audit work with a view toidentifying all material errors, be they caused by fraud or error.


Chapter 15


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2031 Solution(a) Internal controls

(i) The need to purchase inventory is determined by the personnel within the warehouse department;

(ii) A purchase requisition form is prepared by warehouse personnel and passed for signature to the warehousemanager; (Authorisation)

(iii) Once signed, the purchase requisition form is then passed to the accounts payable department (Segregationof duties) who examine the prices being offered by suppliers and then place the order with the cheapestsupplier;

(iv) When goods are received by the warehouse department (Segregation of duties) they are entered into thecompany’s inventory system and are ready for resale;

(v) Warehouse department personnel pass information regarding the inventory received to the accounts department where this is compared to the details on the invoice received from supplier (Arithmetical);

(vi) The invoice is then booked onto ABC Limited accounting system;

(vii) Once credit terms, usually 60 days have expired, the accounting system will automatically generate a chequerun to pay all invoices which have reached their credit terms (System control);

(viii) These cheques are passed to the financial control (Authorisation and Segregation of duties) who signs thecheques.

No back up documentation is viewed by the financial controller as the accounts payable person has workedwithin the company for a long period of time and is highly trusted and respected;

(ix) The financial controller can sign a cheque for any value.

(x) The accounts payable individual posts the cheque to the supplier and at the end of each month prepares thebank reconciliation (Arithmetical).

Overall there would appear to be Organisation control as individuals within the system appear to understand their roles.

(b) Additional controls that may improve in the purchase order system:

(i) There is no mention that the warehouse has cameras and therefore physical controls over inventory;

(ii) There appears to be no approved supplier list and the accounts payable individual appears to have the abilityto place an order with whomever they want – thus they could set up a dummy supplier account.

There should be an approved supplier list, and controls to ensure that orders can only be placed withsuppliers on this list.

(iii) The accounts payable individual looks for the cheapest price but there appears to be no consideration givento the quality of the product received.

The company should implement a best price policy where the level of quality is determined and then thecheapest price at that quality level sought;

(iv) When orders are received there is no mention that the warehouse personnel check the order for accuracy(correct amount of good supplied) or damage;

(v) The financial controller should not be signing cheques without back up documentation. A significant amountof frauds are committed by individuals who have been with the company for a significant amount of time andare ‘trusted’;

(vi) The financial controller should not be allowed to authorise a cheque for any value.



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There should be signing limits in place, say €10,000, after which the financial controller requires aco-signature with, for example, a member of the board of directors;

(vii) The accounts payable individual is responsible for too many functions: choosing the supplier, placing theorder, checking the invoice, posting the invoice, preparing the cheque for authorisation by the financialcontroller, posting of payments and preparing the monthly bank reconciliation.

These should be separated between more individuals and functions should be divided among a number ofindividuals.



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2033 SolutionFinancial controls ensure the quality and integrity of the financial information that is produced both for usewithin the organisation and for external reporting.

Examples include those in place to ensure that all liabilities are recorded in the accounts of the company orthe control that not all members of staff are usually permitted to order stationery.

If an item of stationery is required a purchase requisition’s form will usually have to be filled out, signed byan individual in a position of authority and passed to the purchasing department who will order the item.

That same individual will not be in a position to make payments for these requisitions.

The two control examples are authorisation (the signature, evidencing approval from the individual in aposition of authority) and segregation of duties (to order stationery an employee cannot place the orderthemselves it must be placed by a member of the purchasing department).



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2036 SolutionCurrently there are two competing schools of thought in relation to ensuring that companies behave in anethical manner.

These are (i) the rules based approach, and (ii) the principles based approach.

(i) The Rules-Based Approach

This approach is based upon the idea that if we want companies to behave in an ethical manner, rules mustbe set up and enforced to achieve this.

The best example of a jurisdiction with a rules based system is the USA through the Sarbanes-Oxley Act2002.

Two massive corporate failures in the USA in 2001 and 2002 (Enron and WorldCom) brought the issue ofcorporate governance and ethical behaviour by companies to the fore.

The US government responded with a set of rules and regulations that were enacted in the Sarbanes-OxleyAct 2002.

The act is very strong and very prescriptive in that it lays down a large number of rules and regulations thatcompanies must follow.

Compliance with these rules and regulations (it is considered) will lead to good corporate governance andethical behaviour by companies.

The following are some of the main provisions of the Act:

(a) The chief executive officer (CEO) and the chief financial officer (CFO) are required to take personalresponsibility for the accuracy of the company accounts;

(b) If the financial statements need to be re-stated due to non-compliance with financial reporting standards thenthe CEO and CFO have to repay any bonuses that they received in the previous twelve months;

(c) Companies (other than banks) cannot lend monies to company directors or executives under anycircumstances;

(d) The consulting work that can be performed by the company’s auditors is significantly reduced/ eliminated;

(e) Directors and senior executives cannot trade shares in the company during black-out periods.

These blackout periods run from 15 days prior to the announcement of quarterly results to two days after theannouncement of the results.

(f) Section 404 of the Act states that public companies must review the internal controls around their financialreporting function every year and maintain evidence that this review has taken place.

The proponents of the rules-based approach stated that to leave the ultimate decision on ethical behaviour tothe company means that in many cases the worst offenders will choose to ignore the ethical principles.

Under the rules-based approach a minimum standard of ethical behaviour is established.

(ii) The Principles-Based Approach

This approach states that it is not possible to establish a single set of rules that are applicable to allcompanies in all situations.

Instead a corporate governance code should apply to all companies and the code should be made up of aset of principles that companies can apply to any given situation as opposed to a set of exact rules.



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The principles based approach to corporate governance is favoured in the UK and Ireland (though Irelandhas started to legislate for a number of corporate governance issues – for example, legislation hasintroduced the directors’ compliance statement).

In 1998 the Combined Code of Corporate Governance was issued, it has since been revised several times.

The Combined Code sets out a standard of good practice and ethical behaviour in relation to the followingareas: board of director composition, executive remuneration, accountability of directors, audit andrelationship with shareholders

In 2010, the UK Corporate Governance Code was issued and became mandatory for public limitedcompanies in the UK and in July 2011 was annexed to the Irish Stock Exchange rules.

The Code was further updated and republished in 2012 and in 2014. Some amendments were included also.

The main change from the Combined Code was the focus on shareholders taking more responsibilities fortheir companies, giving them more say in the running of the company and requiring directors of FTSE 350companies to come up for re- election yearly.

The Code also emphasises the requirement to comply or explain.

However, the Code sets out a set of principles, not rules. While companies are expected to comply withthese guidelines, they are not required to do so.

A ‘comply or explain’ approach has developed, whereby if a company chooses not to comply with theprovisions of the Code, they must notify shareholders of this fact and explain why this is the case

All public companies in Ireland and the UK are required to report on how they have applied the provision ofthe UK Corporate Governance Code



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2037 SolutionCompany directors are responsible for the prevention and detection of fraud and error.

To this end, Plc companies establish a corporate governance policy. Corporate governance is ‘the systemby which companies are managed and controlled’ (Cadbury, 1992).

It simply is the system of management within a company. Good corporate governance will ensure that thecompany is well managed and that the directors act in the best interest of the company.

Corporate governance has become very important in companies as it was found to be wanting in many largecompanies that were being managed by very highly paid, qualified directors and whose financial statementshad clean audit reports.

These companies actually failed or suffered a serious reduction in share value – examples being Pollypeck,Parmalat, Enron, Worldcom, Royal Bank of Scotland.

One corporate governance tool used to prevent and detect fraud is the establishment of a set of internalcontrols and by having an internal audit function that continually examines and assesses the internal controlsin place.

Other recommendations include:

(i) Getting an appropriately qualified board that have more non-executive directors (who are independent) thanexecutive directors;

(ii) Having an odd number of directors on the board so that a decision can be taken;

(iii) Having segregation of duties within the board;

(iv) Limiting the number of directorships that the directors can hold;

(v) Requiring re-election on a yearly basis;

(vi) Forming a remuneration committee;

(vii) Forming an audit committee;

(viii) Providing price-sensitive information to shareholders in an appropriate and transparent manner;

(ix) Having an external audit;

(x) Appropriate training for the board on corporate governance;

(xi) Having appropriate salaries;

(xii) Getting shareholders involved in the running of the company (at a certain level);

(xiii) Forming a risk committee;

(xiv) Organising events for shareholders that enable them to hold shareholders to account.



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2038 SolutionThe role of the external auditor is to examine the financial statements and books and records of a companyin order to form an opinion as to whether the information contained in the financial statements can be reliedupon.

The role of the internal auditor is to help directors discharge their responsibility for the prevention anddetection of fraud and error.

The internal audit department, where one exists within a company, will examine the internal controls withinan organisation to help determine if they are operating efficiently and effectively.

Key differences between the external and internal auditor:

(i) Scope of the work

The external auditor has a narrow focus that is the truth and fairness of the financial statements.

The external auditor must also consider such matters as compliance with legislation to ensure that thefinancial impact of new legislative requirements is reflected in the financial statements.

The internal auditor has a much wider focus which is looking at the internal operations of the entire business.

The internal auditor must make sure that the operational, compliance and financial controls within a companyare operating effectively.

(ii) IndependenceThe external auditor is an accountant from an independent firm of accountants. The external auditor must beindependent of the company it audits.

The independence of the auditor is critical and is a key factor which enables users of financial statements torely upon the opinion expressed regarding the truth and fairness of the financial statements.

The internal auditor is employed by the company and therefore is not independent.

However, the independence of the internal auditor can be improved by deciding to whom the internal auditorreports.

If the internal auditor reports directly to an audit committee this is considered to be more independent andtherefore objective than if it were to report to the head of the finance function on which it is reporting.

(iii) ReportingThe reporting lines of both the external and internal auditor are very different.

The external auditor reports externally to the shareholders on the truth and fairness of the financialstatements.

The internal auditor usually reports to the board of directors, or the audit committee who in turn report to theboard of directors, on the effectiveness of the internal control environment within the company.

(iv) Legal requirement

There is a legal requirement in Ireland and the UK for all companies, other than those which meet the criteriato avail of audit exemption, to engage an external auditor to undertake an audit of the year-end financialstatements.

There is currently no legal requirement, in Ireland or the UK, for companies to have an internal audit function.



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However, best practice, as outlined in the UK Corporate Governance Code, states that public limitedcompanies should have an internal audit function and where one does not exist directors must assess theneed for one on an annual basis.



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2039 Solution(c) saying that the financial statements show a true and fair view;

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