Financial Statements of Limited Companies

2 financial statements of limited companies tutor zone Task 1 (a) Avery Ltd – Statement of profit or loss and other comprehensive income for the year ...

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Financial Statements of Limited Companies Answers to practice assessment 1

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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.