Osborne Books Tutor Zone
Financial Statements of Limited Companies Answers to practice assessment 1
© Osborne Books Limited, 2016
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financial statements of limited companies tutor zone
Task 1 (a)
Avery Ltd – Statement of profit or loss and other comprehensive income for the year ended 31 March 20-1 Revenue
£000
83,926
Cost of sales
–55,249
Distribution costs
–11,369
Gross profit
Administrative expenses
Profit from operations Finance costs
28,677
–13,721
3,587 –400
Profit before tax
3,187
Profit for the year from continuing operations
2,535
Tax
Other comprehensive income for the year
Total comprehensive income for the year
Workings:
Cost of sales
Opening inventories
–652
5,000
7,535
£000
7,986
Purchases
52,342
Depreciation
*1,225
Closing inventories Cost of sales =
–6,304
55,249
*depreciation: buildings £10,000 x 2% x 50% = £100; plant and equipment (£16,000 – £7,000) x 25% x 50% = £1,125; total £1,225 Distribution costs Distribution costs Accrual
Depreciation
Distribution costs =
*depreciation as per cost of sales, but at 20%
£000
10,847
32
*490
11,369
answers to practice assessment 1 Administrative expenses
£000
Administrative expenses
12,961
Irrecoverable debt
25
Depreciation
*735
Administrative expenses =
(b)
3
13,721
*depreciation as per cost of sales, but at 30%
Avery Ltd – Statement of changes in equity for the year ended 31 March 20-1
Balance at 1 April 20-0
Changes in equity for 20-1
Share capital
Share premium
Revaluation surplus
Retained earnings
Total equity
40,000
0
5,000
2,640
47,640
5,000
2,535
7,535
£000
£000
Total comprehensive income Dividends
Issue of share capital
Balance at 31 March 20-1
40,000
0
£000
10,000
£000
£000
–1,000
–1,000
4,175
54,175
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financial statements of limited companies tutor zone
Task 2
Avery Ltd – Statement of financial position as at 31 March 20-1 ASSETS
Non-current assets
Property, plant and equipment Current assets Inventories
Trade and other receivables Cash and cash equivalents Total assets
EQUITY AND LIABILITIES
Equity
Share capital
Revaluation surplus Retained earnings
£000 50,350 6,304
13,616
5,102
25,022 75,372 40,000
10,000
4,175
Total equity
54,175
Bank loans
10,000
Non-current liabilities Current liabilities
Trade and other payables Tax liability
Total liabilities
Total equity and liabilities
10,000 10,545
652
11,197
21,197
75,372
answers to practice assessment 1 Workings: Property, plant and equipment Land and buildings – value
Accumulated depreciation – land and buildings Revaluation – land and buildings Plant and equipment – cost
Accumulated depreciation – plant and equipment Property, plant and equipment =
*£1,200 + £200
**£7,000 + £2,250
Trade and other receivables
£000
40,000
*–1,400
5,000
16,000
**–9,250
50,350
£000
Trade and other receivables
13,641
Trade and other receivables =
13,616
Irrecoverable debt
Trade and other payables Trade and other payables Accruals – trial balance
Additional costs accrued
Trade and other payables =
*distribution costs accrued
–25
£000
10,456
57
*32
10,545
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financial statements of limited companies tutor zone
Task 3
Matter 1 (a)
(b)
Financial statements are prepared assuming that a business entity will continue to operate in the foreseeable future without the need or intention on the part of management to liquidate the entity or to significantly curtail its operational activities. Therefore, it is assumed that the entity will realise its assets and settle its obligations in the normal course of the business.
The financial statements of the entity would need to be prepared on break up basis. This means that assets will be recognised at the amount which is expected to be realised from its sale (net of selling costs) rather than from its continuing use in the ordinary course of the business. Assets are valued for their individual worth rather than their value as a combined unit. Liabilities shall be recognised at amounts that are likely to be settled.
Matter 2
The relevant fundamental principle in accordance with the AAT Code of Professional Ethics is confidentiality.
Information must not be disclosed to third parties without specific authority unless there is a legal or professional right or duty to disclose. Confidential information must not be used for personal gain or to the advantage of third parties.
Task 4 (a)
(b)
Task 5
There is a present obligation that has arisen from a past event, the customer’s injury. This will be treated as a contingent liability and will not be recognised in the financial statements because it is not probable that an outflow of economic benefits will be required to settle the obligation. However, the amount of the claim is material and as such should be disclosed as a note to the financial statements providing a brief description of its nature and the estimated financial effect.
The useful life of an asset is to be reviewed at least annually and if there is any change the depreciation will be recalculated accordingly. The equipment will have been depreciated by £15,000 (£40,000 / 8 x 3) which would result in the equipment having a carrying amount of £25,000 at 1 April 20-3. The total useful life of the equipment has been revised to 7 years, as 3 years depreciation has been provided, the depreciation for the year ended 31 March 20-4 will be calculated by dividing the carrying amount of the asset by the remaining useful life of 4 years (£25,000 / 4 = £6,250). The depreciation charge of £6,250 will be charged as an expense in the profit or loss. The carrying amount of £18,750 will be shown in the statement of financial position. This is calculated by deducting the accumulated depreciation (£15,000 + £6,250) from the cost of the asset.
(a)
(b)
(b)
(a)
1 and 3
(d)
(b)
Only disclosed as a contingent liability in a note to the financial statements
(c)
(e)
(d) (c)
£32,000 outflow*
*(£37,500) + £4,200 + £3,700 + £1,500 - £6,100 + £2,200
2 and 4
£30,500
answers to practice assessment 1 Task 6
Golden plc – Consolidated statement of financial position as at 31 March 20-1 ASSETS
Non-current assets Goodwill
£000
3,468
Property, plant and equipment
73,900
Current assets
20,900
Total assets
EQUITY AND LIABILITIES Equity
Share capital
Share premium
Retained earnings
Non-controlling interest Total equity
77,368
98,268
40,000
6,000
8,168
4,300
58,468
Non-current liabilities
18,500
Total liabilities
39,800
Current liabilities
Total equity and liabilities
21,300
98,268
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financial statements of limited companies tutor zone
Workings:
Goodwill
Consideration
NCI at acquisition
Net assets acquired
Impairment (15% x *£4,080)
£000
20,000
3,980
–19,900
–612
Goodwill =
3,468
Non-controlling interest (NCI)
£000
Share capital – attributable to NCI
Share premium – attributable to NCI
Revaluation reserve – attributable to NCI
2,000
400
300
Retained earnings – attributable to NCI
1,600
Retained earnings
£000
Non-controlling interest =
Parent
Impairment
Subsidiary – attributable to parent
Retained earnings =
*80% x (£8,000 – £6,400)
4,300
7,500
–612
*1,280
8,168
Notes (£000): •
•
The revaluation reserve of £1,500 (ie £26,200 – £24,700) is split 80% to Golden plc and 20% to the non-controlling interest (ie £1,200 and £300 respectively). The inter-company debt is deducted from both current assets and current liabilities to give: current assets £12,600 + £8,500 – £200 = £20,900
current liabilities £13,700 + £7,800 – £200 = £21,300
answers to practice assessment 1
9
Task 7
(a) and (b)
Ratio
(a) Formula
(1) Profit from operations
Profit from operations x 100 Revenue
1,568 22,400
=
7.0%
(2) Return on capital employed
Profit from operations x 100 Total equity + non-current liabilities
1,568 x 100 = 14,378 + 1,700
9.8%
percentage
(b) Calculation of ratio for Martin Ltd x 100
(3) Acid test (quick) ratio
Current assets – inventories Current liabilities
5,180 – 1,823 2,452
=
(4) Inventory holding period (days)
Inventories Cost of sales
1,823 12,320
x 365
= 54.0 days
(5) Trade payables payment period (days)
Trade payables x 365 days Cost of sales
2,110 12,320
x 365
= 62.5 days
x 365 days
1.4:1
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financial statements of limited companies tutor zone
Task 8 (a)
To: From: Subject: Date:
REPORT
Riona Aitken AAT student Shareholding in Wentworth Ltd Today
As requested I have looked into the financial situation of Wentworth Ltd (1) The gross profit percentage has deteriorated.
Less gross profit is being generated by sales/gross profit margin on sales.
Deterioration may be due to decreasing its sales price or increasing the cost of sales or both. Could have been a change in the product mix.
(2) The profit from operations percentage has deteriorated.
Less profit from operations is being generated from sales – possibly due to a decrease in sales volume. Either a decrease in the sales margins or an increase in expenses, or both.
(3) The return on shareholders’ funds has deteriorated.
Less profit after tax is being generated from shareholders’ funds.
Lower return is likely to result in lower dividend payments for shareholders.
(4) Gearing has deteriorated.
Could cause problems obtaining loans in the future. This makes the company more risky.
May have taken out additional loans during the year.
(5) Interest cover has deteriorated.
Less profit from operations to cover interest payments. This makes the company more risky.
Caused by lower profit from operations/higher interest payments.
Higher interest payments could be due to new loans taken out during the year.
(b)
Riona should be advised to consider selling her shares since profitability, including return on shareholders’ funds, has deteriorated. The financial position of the company has deteriorated with both gearing and interest cover worsening.
Before making a final decision she should seek further financial information from the company.
