Financial Statements of Limited Companies - Osborne Books

2 financial statements of limited companies tutor zone Tasks 1 and 2 You have been asked to help prepare the financial statements of Kyle plc for the ...

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Financial Statements of Limited Companies Practice assessment 3 Important note to tutors

In order to provide further practice in the type of questions that may have to be answered in the Assessment there are alternative questions for Tasks 1 & 2 and Task 6 provided at the end of this Assessment.

© Osborne Books Limited, 2016

2

financial statements of limited companies tutor zone

Tasks 1 and 2

You have been asked to help prepare the financial statements of Kyle plc for the year ended 31 March 20-1. The company’s trial balance as at 31 March 20-1 is shown below. Kyle plc

Trial balance as at 31 March 20-1

Share capital

Debit £000

Share premium

95,500

Plant & equipment – cost

50,000

Trade and other receivables

27,238

Plant & equipment – accumulated depreciation Accruals

Prepayments

2,220

Cash at bank

15,801

Interest paid

1,750

7% bank loan repayable 20-9 Retained earnings Sales

Purchases

73,899

Administrative expenses

21,056

Distribution costs Carriage in

Inventories as at 1 April 20-0 Tax

Dividends paid

70,000

15,000

Land & buildings – cost

Land & buildings – accumulated depreciation

£000

10,000

Revaluation reserve

Trade and other payables

Credit

9,372

11,640 24,400 1,450 30,000 7,580 152,473

23,922

2,340

15,559 2,850

332,135

220 332,135

practice assessment 3

3

Further information •

The inventories at the close of business on 31 March 20-1 cost £9,197,000. On 11 April 20-1, goods included in this total at a value of £740,000 were found to be damaged and were sold for £590,000.



Carriage inwards of £460,000 owing at 31 March 20-1 is to be provided for.



At the end of the year the company carried out an impairment test on machinery which had a carrying amount of £12,500,000. At present it could be sold for £13,000,000 and would incur disposal costs of £1,400,000. The company estimate that the machine will generate cash flows with a net present value of £11,900,000 over the remainder of its useful life. No adjustment has been made in respect of the impairment test. Any impairment losses are apportioned equally between distribution costs and administration expenses.



Land, which is non-depreciable, is included in the trial balance at a value of £34,200,000. This is to be revalued at £38,000,000 and this revaluation is to be included in the financial statements for the year ended 31 March 20-1.



Interest on the bank loan for the last two months of the year has not been included in the accounts in the trial balance.



The corporation tax balance of £220,000 included in the trial balance was the result of an overestimate of the tax liability for the previous year. The corporation tax charge in respect of the current year to 31 March 20-1 is estimated as £4,427,000.



All the operations are continuing operations.

Required (a)

Draft the statement of profit or loss and other comprehensive income for Kyle plc for the year ended 31 March 20-1.

(c)

Draft the statement of financial position for Kyle plc as at 31 March 20-1.

(b)

Draft the statement of changes in equity for Kyle plc for the year ended 31 March 20-1.

Kyle plc

Statement of profit or loss and other comprehensive income for the year ended 31 March 20-1 Continuing operations

Revenue

Cost of sales Gross profit

Distribution costs

Administration expenses Profit from operations Finance costs

Profit before tax Tax

Profit for the period from continuing operations

Other comprehensive income for the year Total comprehensive income for the year

£000

4

financial statements of limited companies tutor zone

Kyle plc

Statement of changes in equity for the year ended 31 March 20-1 Share capital

Balance at 1 April 20-0

Changes in equity for the year

Total comprehensive income Dividends

Balance at 31 March 20-1

£000

Share Revaluation premium £000

£000

Retained earnings

£000

Total equity

£000

practice assessment 3 Kyle plc

Statement of financial position as at 31 March 20-1 Assets

Non-current assets Current assets

Total assets

Equity and liabilities

Equity

Total equity

Non-current liabilities Current liabilities

Total liabilities

Total equity and liabilities

£000

5

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financial statements of limited companies tutor zone

Task 3

You are an Accounting Technician employed by Amato Accountants and are currently working on preparing the first years financial statements of Brompton Ltd, a hotel and spa chain, for the year ended 31 March 20-1. Matter 1

One of the hotels purchases a new printer costing £130.00 for the administration office which is expected to have a useful life of five years. The IASB’s Conceptual Framework for Financial Reporting refers to preparers of the financial statements making judgements as to whether an item is material. (a)

(b)

Explain the term materiality and how it can impact on the users of financial statements.

With reference to the materiality concept, explain how the purchase should be treated in the financial statements.

Matter 2

You receive a phone call from a supplier of beauty products asking for financial information about Brompton Ltd who have requested to trade with them on credit. Identify the relevant fundamental principle in accordance with the AAT Code of Professional Ethics and explain the action that should be taken.

Task 4

Trenchard Ltd is preparing the financial statements for the year ending 31 March 20-1. During April 20-1 the following information becomes available: •



An impairment review was carried out on a fleet of vehicles and it was found that an impairment loss of £40,000 had occurred. A proposed dividend totalling £2,000,000 was declared.

Prepare brief notes explaining the following: (a)

What is meant by an event after the reporting period according to IAS 10?

(c)

How will the proposed dividend be treated in the financial statements in accordance with IAS 10?

(b)

How will the impairment loss be treated in the financial statements in accordance with IAS 10?

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practice assessment 3 Task 5 (a)

Amato plc acquires an asset with a fair value of £51,400 under a finance lease on 1 April 20-0. Four annual payments of £18,000 are paid on 31 March each year. The actuarial method is used to allocate the interest rate of 15% to the accounting periods over the term of the lease. What is the lease obligation at the end of the first year at 31 March 20-1?

You may wish to use the following table to make the required calculations.

1 (a)

£25,690

(c)

£38,410

(b) (d)

(b)

Lease outstanding

Interest @ 15%

Total

Repayment on 31/03

After repayment

£33,400 £41,110

Amato plc purchases an item of machinery that will be used to produce a new product. The following costs are incurred. List price of machinery Delivery cost

280,000

Installation cost

Pre-production testing

Start-up costs for introducing the new product Warranty cost

Annual insurance

What are the total attributable costs which can be included in the cost of the machinery? (a)

£286,900

(c)

£305,200

(b) (d)

£292,600

£313,400

£

2,800

4,100

5,700

12,600

8,200

3,900

8 (c)

financial statements of limited companies tutor zone Percy’s Plants Ltd provides plants and their continued care on a 12 month contract to business offices. The company prepares its financial statements to 31 March each year.

During the year to 31 March 20-1, Percy’s Plants entered into a 12 month contract to provide plants and their care in the reception of Arbery’s Accountants. The contract was for £22,200 and commenced on 1 September 20-0.

What is the amount of revenue, if any, which should be recognised in the financial statements for the year ending 31 March 20-1 in respect of the contract with Arbery’s Accountants? (a)

Nil

(c)

£12,950

(b) (d)

(d)

£22,200

Buxton plc has held 30% of the ordinary share capital of Robin Ltd for three years and includes the investment under the heading of non-current assets using the equity method. How will Buxton value the investment in the statement of financial position? (a)

At the original price paid

(c)

At the proportionate share of Robin Ltd net assets plus the original value of goodwill on acquisition

(b) (d)

(e)

£11,100

At the proportionate share of Robin Ltd net assets

At the proportionate share of Robin Ltd net assets plus the carrying value of goodwill

Retro plc purchased for its own use a factory on 1 March 20-1 for £750,000. The factory is depreciated over its estimated useful life of 40 years using the straight line method. At 1 March 20-5 the building is valued at £800,000 and the directors decide to incorporate this valuation into the books of account from this date. What is the amount to be transferred to the revaluation surplus? (a)

£50,000

(c)

£125,000

(b) (d)

£106,250

£143,750

practice assessment 3 Task 6

9

The Managing Director of Walker plc has asked you to prepare the consolidated statement of financial position for the group. Walker plc has one subsidiary undertaking, Quaver Ltd. The statement of financial position of the two companies as at 31 March 20-1 are set out below. Statements of financial position as at 31 March 20-1

Non-current assets

Investment in Quaver Ltd

Property, plant and equipment Current assets Inventories

Trade and other receivables Cash and cash equivalents Total assets

Walker plc

£000

31,800

Quaver Ltd £000

57,000

36,200

26,145

12,466

3,347

259

88,800 18,218

47,710

36,200 7,386

20,111

136,510

56,311

Share capital

54,000

15,000

Retained earnings

41,398

20,260

15,000

8,400

8,995

5,276

12,112

7,451

Equity and liabilities

Equity

Share premium

Non-current liabilities

Long-term loans

Current liabilities

Trade and other payables Tax liabilities

Total liabilities Total equity and liabilities

14,000

109,398

3,117

5,200

40,460

2,175

27,112

15,851

136,510

56,311

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financial statements of limited companies tutor zone

Further information •





• •



The share capital of Quaver Ltd consists of ordinary shares of £1 each. Ownership of these shares carries voting rights in Quaver Ltd. There have been no changes to the balances of share capital and share premium during the year. Walker plc acquired 10,500,000 shares in Quaver Ltd on 1 April 20-0.

At 1 April 20-0 the balance of retained earnings of Quaver Ltd was £12,600,000.

On 1 December 20-0 Walker plc made an interest-free long-term loan of £3,000,000 to Quaver Ltd and classified it as part of its investment in Quaver Ltd. Quaver Ltd has classified the loan as a non-current liability in its financial statements. No loan repayments have been made.

During the year Walker plc sold goods costing £600,000 to Quaver plc for £840,000. At 31 March 20-1 half of these goods were still included in the inventories of Quaver Ltd.

The directors of Walker plc have concluded that goodwill has been impaired by 20% during the year.

Required

Draft the consolidated statement of financial position for Walker plc and its subsidiary undertaking as at 31 March 20-1 Goodwill

Consideration

£000

NCI at acquisition

Net assets acquired Impairment Goodwill

Non-controlling interest

Share capital attributable to NCI

£000

Share premium attributable to NCI

Retained earnings attributable to NCI Non-controlling interest

Retained earnings Parent

Inter-company adjustment

Subsidiary – attributable to Parent Impairment

Group retained earnings

£000

practice assessment 3 Walker plc

Consolidated statement of financial position as at 31 March 20-1 Assets

Non-current assets Goodwill

Property, plant and equipment Current assets Inventories

Trade and other receivables Cash and cash equivalents Total assets

Equity and liabilities

Equity

Share capital

Share premium

Retained earnings

Non-controlling interest Total equity

Non-current liabilities

Loan

Current liabilities

Trade and other payables Tax liabilities

Total liabilities

Total equity and liabilities

£000

11

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financial statements of limited companies tutor zone

Task 7

You have been asked you to calculate ratios for Bradford Ltd in respect of its financial statements for the year ending 31 March 20-1 to assist your manager in his analysis of the company. Bradford Ltd’s statement of profit or loss and statement of financial position are set out below. Bradford Ltd statement of profit or loss for the year ended 31 March 20-1 Continuing operations

Revenue

Cost of sales Gross profit

Distribution costs

Administration expenses Profit from operations Finance costs

£000

31,602

(17,730) 13,872

(5,867)

(3,913) 4,092

(645)

Profit before tax

3,447

Profit for the year

2,729

Tax

(718)

practice assessment 3 Statement of financial position as at 31 March 20-1 Non-current assets

Property, plant and equipment Current assets Inventories

Trade and other receivables Cash and cash equivalents Total assets

Equity and liabilities

Equity

£000 43,422 10,570

3,781

1,453

15,804 59,226

Share capital

18,000

Retained earnings

26,845

Share premium

3,400

Total equity

48,245

Bank loans

8,000

Non-current liabilities Current liabilities

Trade and other payables Tax liability

Total liabilities

Total equity and liabilities

8,000 2,231

750

2,981

10,981

59,226

13

14 (a)

financial statements of limited companies tutor zone Identify the formulae that are used to calculate each of the following ratios. Return on shareholders’ funds

Profit from operations / Total equity x 100 Profit from operations / Share capital Profit after tax / Total equity x 100

Profit after tax / (Total equity + Non-current liabilities) x 100 Acid test ratio

Total assets / Total liabilities

Current assets / Current liabilities

(Total assets – inventories) / Current liabilities

(Current assets – inventories) / Current liabilities

Asset turnover (net assets)

Revenue / Non-current assets

Revenue / (Total assets – Current liabilities) Profit from operations / Non-current assets

Profit from operations / (Total assets – Current liabilities)

Gearing

Non-current liabilities / (Total equity + Non-current liabilities) x 100 Total liabilities / Total equity x 100

Total liabilities / (Total equity + Non-current liabilities) x 100 Total equity / Non-current liabilities x 100

Interest cover

Profit after tax / Finance costs

Profit from operations / Finance costs Finance costs / Profit after tax

Finance costs / Profit from operations

practice assessment 3 (b)

15

Calculate the following ratios (to the nearest one decimal place where appropriate). Return on shareholders’ funds

%

Asset turnover (net assets)

times

Acid test ratio

:1

Gearing

%

Interest cover

times

Task 8

The directors of Ashanti Ltd have concerns about the liquidity and cash flow of the company following a significant reduction in the cash balances during the year. The company has invested in plant and machinery during the year. Ashanti Ltd is highly profitable and had no problem in raising the additional funds through a loan and issuing some shares. The directors have provided you with the following information for the past two years. 20-1

Bank balance Reconciliation of profit from operations to net cash flow (extract)

20-0

£000

£000

20-1

20-0

(1,805)

630

Increase in inventories

(6,050)

(4,508)

Decrease in trade payables

(3,025)

(1,650)

Increase in trade receivables Ratios Current ratio

Quick (acid test) ratio

Trade receivables collection period

(3,300)

20-1

(1,510)

20-0

4.6:1

2.5:1

67 days

41 days

2.8:1

1.1:1

Prepare notes for the directors that: (a)

(b)

Comment on the movements in working capital shown in the reconciliation of operating profit to net cash flow from operating activities extract between 20-0 and 20-1.

Comment on the liquidity and use of resources based on the information provided and what this tells you about the company.

16

financial statements of limited companies tutor zone

TA S K S 1 & 2 ( A LT E R N AT I V E ) You have been asked to prepare the statement of cash flow and statement of changes in equity for Amato Ltd for the year ended 31 March 20-1.

The most recent statement of profit or loss and the statements of financial position of Amato Ltd for the past two years are set out below. Amato Ltd

Statement of profit or loss for the year ended 31 March 20-1 Continuing operations

Revenue

Cost of sales Gross profit

Dividends received

Loss on disposal of property, plant and equipment Distribution costs

Administrative expenses Profit from operations Finance costs

Profit before tax Tax

Profit for the period from continuing operations

Other comprehensive income for the year – gain on revaluation Total comprehensive income for the year

£000

61,298

(32,483) 28,815

500

(679)

(12,548)

(7,991) 8,097

(250)

7,847

(1,061) 6,786

1,500

practice assessment 3

17

Amato Ltd

Statements of financial position as at 31 March

Non-current assets

Property, plant and equipment Current assets Inventories

Trade and other receivables Cash and cash equivalents

20-1

20-0

£000

£000

35,162

27,530

10,870

9,638

0

217

9,726

9,983

20,596

19,838

Share capital

15,300

13,600

Revaluation

2,500

1,000

Total assets

Equity and liabilities

Equity

Share premium Retained earnings Total equity

Non-current liabilities

Bank loans

Current liabilities

Trade and other payables Tax liability

Bank overdraft Total liabilities

Total equity and liabilities

55,758

5,100

47,368

4,300

25,932

20,946

2,160

2,420

3,474

3,932

214

0

48,832 2,160 1,078

4,766

6,926

55,758

39,846 2,420 1,170

5,102

7,522

47,368

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financial statements of limited companies tutor zone

Further information •

The total depreciation charge for the year was £3,940,000.



All sales and purchases were on credit. Other expenses were paid for in cash.



Property, plant and equipment costing £2,098,000 with accumulated depreciation of £1,250,000 was sold in the year.



A dividend of £1,800,000 was paid during the year.

(a)

Prepare a reconciliation of profit before tax to net cash from operating activities for Amato Ltd for the year ended 31 March 20-1.

(c)

Draft the statement of changes in equity for the year ended 31 March 20-1.

(b)

Using the pro-forma in your answer booklet, prepare the statement of cash flows for Amato Ltd for the year ended 31 March 20-1.

Reconciliation of profit before tax to net cash from operating activities

Adjustments for:

Cash generated from operations Net cash from operating activities

£000

practice assessment 3 Amato Ltd statement of cash flows for the year ended 31 March 20-1

19

£000

Net cash from operating activities Investing activities

Net cash used in investing activities Financing activities

Net cash from financing activities

Net increase/decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year

Amato Ltd

Statement of changes in equity for the year ended 31 March 20-1 Share capital

Balance at 1 April 20-0

Changes in equity for the year Total comprehensive income Dividends

Balance at 31 March 20-1

£000

Share Revaluation premium £000

£000

Retained earnings

£000

Total equity

£000

20

financial statements of limited companies tutor zone

TA S K 6 ( A LT E R N AT I V E ) Graff plc acquired 80% of the ordinary share capital of Wade Ltd on 1 April 20-0.

The statements of profit or loss of the two companies for the year ended 31 March 20-1 is set out below. Statements of profit or loss for the year ended 31 March 20-1

Continuing operations

Revenue

Graff plc

Wade Ltd

65,383

18,064

£000

Cost of sales

(42,678)

Other income

2,200

Gross profit

Distribution costs

Administrative expenses Profit from operations Finance costs

Profit before tax Tax

Profit for the period from continuing operations

22,705

£000

(7,586) 10,478

(10,221)

(4,481)

7,912

2,744

(6,772) (800)

(3,253) (355)

7,112

2,389

5,677

1,900

(1,435)

(489)

Further information •



During the year Graff plc sold goods which had cost £2,580,000 to Wade Ltd for £3,300,000. A third of the goods that Graff plc had sold to Wade Ltd remained in the inventories of Wade Ltd. Wade Ltd paid dividends of £2,500,000 during the year.

Required

Draft a consolidated statement of profit or loss for Graff plc and its subsidiary for the year ended 31 March 20-1.

practice assessment 3 Revenue Graff

21

£000

Wade

Total inter-company adjustment Consolidated revenue

Cost of sales Graff

£000

Wade

Total inter-company adjustment Consolidated cost of sales

Consolidated statement of profit or loss for the year ended 31 March 20-1 Continuing operations

Revenue

Cost of sales Gross profit

Other income

Distribution costs

Administration expenses Profit from operations

Finance costs

Profit before tax Tax

Profit for the year Attributable to:

Equity holders of the parent Non-controlling interest

£000