BSc (Hons) Accounting with Finance

Cohort: BACF/18A/FT

Examinations for Academic Year 2019 – 2020

Semester I / Academic Year 2019 Semester II

MODULE : ADVANCED FINANCIAL REPORTING

MODULE CODE : ACCF3114
DURATION : 2 ½ HOURS
READING TIME : 15 MINUTES

Instructions to Candidates:

1. This question paper consists of Section A and Section B.

2. Section A is Compulsory.
3. Answer any two questions from Section B.
4. Non programmable calculators are allowed.
5. It is important to show each step in any calculation, even if you
have used a calculator.
6. Any necessary assumptions introduced in answering a question
are to be stated.
7. Start each question on a fresh page.
8. Total Marks: 100.
This Question Paper is printed on BOTH SIDES.

This Question Paper Contains 4 questions and 7 pages.

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 SECTION A: COMPULSORY

QUESTION 1: (40 MARKS)

Talent plc is a parent company. The Talent plc group includes two manufacturers of
kitchen appliances. One of these companies, Wonder Ltd, serves the North of
England and Scotland. The other company, Kid Ltd, serves the Midlands, Wales and
Southern England. Each of the two companies manufactures an identical range of
products.

Talent plc has a quarterly reporting system. Each group member is required to
submit an abbreviated set of financial statements to head office. This must be
accompanied by a set of ratios specified by the board of Talent plc. All
manufacturing companies, including Wonder Ltd and Kid Ltd, are required to
calculate the following ratios for each quarter:

• Return on capital employed

• Trade receivables collection period
• Trade payables payment period
• Inventory turnover (based upon average inventories)

The financial statements for the three months (that is 89 days) ended 30 April 2019,
submitted to the parent company, were as shown below.

Statement of profit or loss and other comprehensive income for

the quarter ended 30 April 2019
Wonder Ltd Kid Ltd
$ 000 $ 000 $ 000 $ 000
Revenue 3,000 4,400
Opening inventories 455 684
Purchases 1,500 2,100
1,955 2,784
Closing inventories (539) (849)
Cost of materials 1,416 1,935
Wages and salaries 700 960
Depreciation 128 83
Cost of sales (2,244) (2,978)
Gross profit 756 1,422
Marketing 450 570
Administration 147 238
Loan interest 10 -
Overdraft interest - (607) 5 (813)
Profit for the period 149 609

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 Statement of financial position at 30 April 2019
Wonder Ltd Kid Ltd
$ 000 $ 000 $ 000 $ 000
ASSETS
Non-current assets
Property 2,000 2,000
Plant and equipment 1,700 1,700
3,700 3,700
Current assets
Inventories 539 539
Trade and other receivables 1,422 1,422
Cash and cash equivalents 71 71
2,032 2,032
Total assets 5,732 5,732

EQUITY AND LIABILITIES

Equity
Ordinary share capital 1,745 479
Revaluation surplus 700 -
Retained earnings 2,049 3,309
Equity 4,494 3,788

Non-current liabilities
Borrowings 800 -
5,294 3,788
Current liabilities
Trade and other payables 438 1,062
Overdraft - 438 130 1,192

Total equity and liabilities 5,732 4,980

The managing director of Wonder Ltd feels that it is unfair to compare the two
companies on the basis of the figures shown above, even though they have been
calculated in accordance with the group's standardised accounting policies. The
reasons he puts forward are as follows.

Talent plc is in the process of revaluing all land and buildings belonging to group
members.

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Wonder Ltd's properties were revalued up by $700,000 on 1 February 2019 and this
revaluation was incorporated into the company's financial statements. The valuers
have not yet visited Kid Ltd and that company's property is carried at cost less
depreciation.

The Talent group depreciates property on a quarterly basis, calculated at a rate of

4% per annum.
Wonder Ltd's new production line costing $600,000 became available for use during
the final week of the period under review. The cost of purchase was borrowed from a
bank and is included in the figures for non-current borrowings.

The managing director of Wonder Ltd believes the effect of the purchase of this
machine should be removed as it happened so close to the period end.

The Talent group depreciates machinery at a rate of 25% of cost per annum.

Wonder Ltd supplied the Talent group's hotel division with goods to the value of
$300,000 in October 2018. This amount is still outstanding and has been included in
Wonder Ltd's trade receivables figure. Wonder Ltd has been told that this balance
will not be paid until the hotel division has sufficient liquid funds.

Wonder Ltd purchased $400,000 of its materials, at normal trade prices, from a
fellow member of the Talent group. This supplier had liquidity problems and the
group's corporate treasurer ordered Wonder Ltd to pay for the goods as soon as they
were delivered.

REQUIRED:
(i) Calculate the ratios required by the Talent group for both Wonder Ltd and Kid Ltd
for the quarter, using the figures in the financial statements submitted to the
holding company. (16 marks)

(ii) Explain briefly which company's ratio appears the stronger in each case.
(8 marks)

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(iii) Explain how the information in the notes above has affected Wonder Ltd's return
on capital employed, trade receivables collection period and trade payables
payment period. (8 marks)

(iv) Explain how the calculation of the ratios should be adjusted to provide a fairer
basis for comparing Wonder Ltd with Kid Ltd. (8 marks)

SECTION B: ANSWER ANY TWO QUESTIONS

QUESTION 2: (30 MARKS)

Yellow plc (‘Yellow’) is preparing its first Annual Report and Accounts. Yellow is
considering whether it complies with the National Code of Corporate Governance
(the ‘Code’) in certain areas.

One area it is examining is board composition. Yellow has three executive and two
non-executive directors (including the Chairman) on its board. The Chairman, Jackie
Chan, has recent financial experience and also chairs the audit committee. Audit is
the only committee of the board.

The board of Yellow has carried out its own performance evaluation in the last year,
which was satisfactory.

REQUIRED:
(i) Explain the principles of the National Code of Corporate Governance (the ‘Code’).
(12 marks)

(ii) Explain the requirements of (the Code) with regards to the structure of the board
and its committees along with any compliance issues for Yellow. (18 marks)

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QUESTION 3: (30 MARKS)

A. PHARMORIA PLC

Pharmoria plc operates in the pharmaceutical business. The following

information relates to the company's activities in research and development
for the year ended 31 October 2018.

(1) Commercial production started on 1 June 2014 for Formula A. By 31

October 2017 $43,000 had been capitalised in respect of development
expenditure on this product. During the year a further $10,000 was spent
on development of this product.

Pharmoria plc has taken out a patent in respect of Formula A which will last
for ten years. Legal and administrative expenses in relation to this of $2,000
were incurred on 1 November 2017.
In the current year, sales of Formula A amounted to $50,000. Sales are
expected to be made over the next three years of $150,000, $200,000 and
$100,000 respectively.

(2) The development of Formula B is at an earlier stage. Although the

company believes it has a reasonable expectation of future benefits from
this project it has not as yet been able to demonstrate this with sufficient
certainty. Expenditure on this project in the current year was $20,000.

REQUIRED:
(i) Calculate the total amount to be recognised in profit or loss in respect of
the above in the year ended 31 October 2018. (4 marks)

(ii) Draft the table showing the movement on intangible assets which should
appear in the notes to the financial statements of Pharmoria plc for the
year ended 31 October 2018. (6 marks)

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B. Explain whether the following relationships are related party relationships
under IAS 24 Related Party Disclosures.

(i) Albert plc and James plc each have a board containing five directors, four
of whom are common. There are no common shareholdings. Are the
companies related entities?
(ii) James plc has two associated companies, Hector Ltd and Frances Ltd. Is
Hector Ltd a related party of Frances Ltd?
(iii) Fredrick Pearson is a director of Gambit plc and Frodsham Ltd – are these
companies related?
(iv) Giprock Ltd controls Jasper plc. Giprock Ltd also exerts influence over
Kendal plc. Are Jasper plc and Kendal plc related entities? (10 marks)

C. Explain the five-step model framework of IFRS 15 – Revenue from contracts

with customers. (10 marks)

QUESTION 4: (30 MARKS)

Chartered Accountants are expected to demonstrate the highest standards of

professional conduct and to take into consideration the public interest. Ethical
behaviour by Chartered Accountants plays a vital role in ensuring public trust in
financial reporting and business practices and upholding the reputation of the
accountancy profession.

(i) Discuss the five fundamental principles of the code of ethics. (10 marks)

(ii) Discuss the five threats attached to the fundamental principles above.
(10 marks)

(iii) Your employer has put you in charge of a project which when you
considered it carefully requires expertise that you do not have. You are
uneasy about doing the job given that you do not have the necessary
expertise and are uncertain about what to say to your employer. How
would you approach this? (10 marks)

***END OF QUESTION PAPER***

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