Diagnostic Exam

Financial Reporting

Name:

Date:

1 The following trial balance relates to Chelsea FC at 31 March 2016:

$’000 $’000
Equity shares of 50 cents each 56,000
Retained earnings (note (i)) 1,400
8% convertible loan note (note (ii)) 30,000
Freehold property – at cost 1 April 2015 (land element $25 million (note (iii))) 75,000
Plant and equipment – at cost 74,500
Accumulated depreciation – 1 April 2015 – building 10,000
– plant and equipment 24,500
Current tax (note (iv)) 800
Deferred tax (note (iv)) 2,600
Inventory – 4 April 2016 (note (v)) 36,000
Trade receivables 47,100
Bank 11,500
Trade payables 24,500
Revenue 339,650
Cost of sales 207,750
Distribution costs 27,500
Administrative expenses (note (vi)) 30,700
Loan interest paid (note (ii)) 2,400
–––––––– ––––––––
500,950 500,950
–––––––– ––––––––
The following notes are relevant:
(i) An equity dividend of 5 cents per share was paid in November 2015 and charged to retained
earnings.
(ii) The 8% $30 million convertible loan note was issued on 1 April 2015 at par. Interest is payable
annually in arrears on 31 March each year. The loan note is redeemable at par on 31 March 2018 or
convertible into equity shares at the option of the loan note holders on the basis of 30 equity shares
for each $100 of loan note. Finance director of Chelsea FC has calculated that to issue an equivalent
loan note without the conversion rights it would have to pay an interest rate of 10% per annum to
attract investors.
The present value of $1 receivable at the end of each year, based on discount rates of 8% and 10%
are:
8% 10%
End of year 1 0·93 0·91
2 0·86 0·83
3 0·79 0·75
(iii) Non-current assets:
On 1 April 2015 Chelsea FC decided for the first time to value its freehold property at its current
value. A qualified property valuer reported that the market value of the freehold property on this date
was $80 million, of which $30 million related to the land. At this date the remaining estimated life of
the property was 20 years. Chelsea FC does not make a transfer to retained earnings in respect of
excess depreciation on the revaluation of its assets. Plant is depreciated at 20% per annum on the
reducing balance method. All depreciation of non-current assets is charged to cost of sales.

(iv) The balance on current tax represents the under/over provision of the tax liability for the year ended
31 March 2015. The required provision for income tax for the year ended 31 March 2016 is $19·4
million. The difference between the carrying amounts of the net assets of Chelsea FC (including the
revaluation of the property in note (iii) above) and their (lower) tax base at 31 March 2016 is $27
 million. The relevant rate of income tax is 25%.

(v) The inventory of Chelsea FC was not counted until 4 April 2016 due to operational reasons. At this
date its value at cost was $36 million and this figure has been used in the cost of sales calculation
above. Between the year end of 31 March 2016 and 4 April 2016, Highwood received a delivery of
goods at a cost of $2·7 million and made sales of $7·8 million at a mark-up on cost of 30%. Neither
the goods delivered nor the sales made in this period were included in the purchases (as part of cost
of sales) or revenue in the above trial balance.

(vi) On 31 March 2016 Chelsea FC factored (sold) trade receivables with a book value of $10 million to
Arsenal. Chelsea FC received an immediate payment of $8·7 million and will pay Arsenal 2% per
month on any uncollected balances. Any of the factored receivables outstanding after six months will
be refunded to Arsenal. Chelsea FC has derecognized the receivables and charged $1·3 million to
administrative expenses. If Chelsea FC had not factored these receivables it would have made an
allowance of $600,000 against them.

Required:
(i) Prepare the statement of comprehensive income for Chelsea FC for the year ended 31 March 2016;

(ii) Prepare the statement of changes in equity for Chelsea FC for the year ended 31 March 2016;

(iii) Prepare the statement of financial position of Chelsea FC as at 31 March 2016.

Note: your answers and workings should be presented to the nearest $1,000; notes to the financial statements
are not required.
2 Chelsea FC is a public company. Its most recent financial statements are shown below:

Income statements for the year ended 31 March

2016 2015
$’000 $’000
Revenue 25,500 17,250
Cost of sales (14,800) (10,350)
––––––– –––––––
Gross profit 10,700 6,900
Distribution costs (2,700) (1,850)
Administrative expenses (2,100) (1,450)
Finance costs (650) (100)
––––––– –––––––
Profit before taxation 5,250 3,500
Income tax expense (2,250) (1,000)
––––––– –––––––
Profit for the year 3,000 2,500
––––––– –––––––

Statements of financial position as at 31

March
2016 2015
$’000 $’000 $’000 $’000
Non-current assets
Property, plant and equipment 9,500 5,400
Intangibles 6,200 nil
––––––– –––––––
15,700 5,400
Current assets
Inventory 3,600 1,800
Trade receivables 2,400 1,400
Bank nil 4,000
Non-current assets held for sale 2,000 8,000 nil 7,200
–––––– ––––––– –––––– –––––––
Total assets 23,700 12,600
––––––– –––––––
Equity and liabilities
Equity
Equity shares of $1 each 5,000 5,000
Retained earnings 4,500 2,250
––––––– –––––––
9,500 7,250
Non-current liabilities
5% loan notes 2,000 2,000
8% loan notes 7,000 nil
Current liabilities
Bank overdraft 200 nil
Trade payables 2,800 2,150
Current tax payable 2,200 5,200 1,200 3,350
–––––– ––––––– –––––– –––––––
Total equity and liabilities 23,700 12,600
––––––– –––––––
Notes
(i) There were no disposals of non-current assets during the period; however Bengal does have some
non-current assets classified as ‘held for sale’ at 31 March 2016.
(ii) Depreciation of property, plant and equipment for the year ended 31 March 2016 was $640,000.
A disappointed shareholder has observed that although revenue during the year has increased by 48%
(8,250/17,250 x 100), profit for the year has only increased by 20% (500/2,500 x 100).
Required:
(a) Prepare a statement of cash flows for Bengal for the year ended 31 March 2016, in accordance
with IAS 7 Statement of cash flows, using the indirect method.

(b) Using the information in the question and your answer to (a) above, comment on the performance
(including addressing the shareholder’s observation) and financial position of Bengal for the year
ended 31 March 2016.