Atlas CO

a) Statement of profit or loss and other comprehensive income for the year ended 31 march 20X3

Revenue less 10000 substance loan

(-)Cost of sales
Gross profit
(-)Distribution costs
(-)Adminstrative expenses
(-)Finance cost
Profit before tax
(-)Income tax expense
Profit for the year
Other comprehensive income
Gain on revaluation
Total comprehensive income

b) Statement of financial position as at 31 March 20X3

Non-current assests
Property plant and equipment

Current assets
Inventories
Trade receivables

Equity
Share capital
Share premium
Revaluation surplus
Retained earnings

Non-current liabilites
Deffered tax

Current liabilites
Trade and other payables
Tax payable
Overdraft

c) Statement of changes of equity for atlas for the year ended 31 march 20X7
Share capital Share premium Revaluation reserve
b/d 40000 6000 0
Share issue 10000 14000
Total other comprehensive income 7000
Dividend paid
c/d 50000 20000 7000

workings
1) Right issue

share capital 20m x 0.5=10m and share premium 20m x (1.2-0.5)=14m

ended 31 march 20X3 Workings
$'000
550000 1) Cost of sales
-428000
122000 As per question 411500
-21500 Closing inventory -7000
-30900 Depreciation of buildings 2500
-700 Depreciation of plant and equipment 13600
68900 420600
-29200
39700 2) Non current assets

7000 Land and buildings

46700
Carrying amount 40000
$'000 (-)Revaluation at that date -47000
Gain on revaluation -7000

97300 Cost 47000

(-) Depreciatiomn -2500
Carrying amount 44500
50700
42200 Plant
190200 NCA HFS does not depreciate and should be shown seperately

Other plant
50000
20000 Carrying amount
7000
30900
107900

9400

35100
27200
6800
186400

Retained earnings Total

11200 57200
24000
 31200 38200
-20000 -20000
22400 99400
be shown seperately
Vernon

a) Statement of profit or loss and other comprehensive income

Revenue (75350+3407+1875
(-) Cost of sales
Gross profit
(-)Operating expenses (20640-125-400)
Operating profit
(-)Finance cost
Investment income (1520+296+302+4000)
Profit before tax
(-) Tax expense (130+3200)
Profit for the year
Other comprehensive income
Gain on revaluation
Total comprehensive income

Workings

1) Sales

Initial revenue at present value 8mil x 1.08 = 7.407m

less: 4m already taken -4
3.407m
Finance income (7.407m x 8% x6/12) = 296k

2) Overseas sale

Sale valued at historic rate 12mil / 6.4 = 1.875m

Unsettled valued at closing 12mil / 6 = 2mil
Difference 0.125m reduce at operating expenses

3) Bonds

bonds at amotised cost

Investment income -450
b/d 9400 Interest 752
Interest 8% 752 Difference 302 Increase in investment income
(-) paid -450
c/d 9702 1) why is broker fees added to the bond

4) Revaluations

i) Increase 12
 DT 25% -3
Revaluation gain 9 goes to OCI

ii) Investment properties 4m increase goes to Investment income

5) Tax

underprovision 130
tax estimate 3200
3330
 $'000
80632
-46410
34222
-20115
14107
-4050
6118
16175
-3330
12845

9000
21845

n investment income

added to the bond

Runner

Consolidated statement of financial positions as at 31 March 20X5

$'000 $'000
Non-current assets
Property plant and equipment ( 455800+44700+9000) 509500
Investment 12500
Goodwill 20446
542446
Current assets
Inventory (22000+16000-720) 37280
Trade receivables (35300+9000-3000-3400) 37900
Bank (2800+1500+3000) 7300 82480
624926

Equity
Shares 202500
Retained earnings 290950
Non-controlling interest 14476
507926
Current liabilities
Current liabilities( 81800+17600-3400) 96000
Deffered consideration(19446+1554) 21000
624926
Workings

1) Net assets
Year end At acq Post acq
Share capital 25000 25000 0
Retained earnings 28600 19500 9100
Fair value adjustments 9000 10000 -1000
Unrealised profit -720 0 -720
61880 54500 7380

2) Goodwill

Cost of investment 42500

Deffered consideration 19446 (21000x0.926)
Non-controlling interest 13000
74946
(-) Net assets at acquistion -54500
Goodwill 20446

3) Non-controlling interest
 NCI at acquisition 13000
NCI share of post acquistion reserves 1476 (7380x20%)
14476

4) Intercompany tradings

Inventory held 4800

4800x15%
Unrealised profit 720

5) Retained earnings

Runner Co 286600
Share of Jogger co post acquistion 5904 (7380x80%)
Unwiding on deffered consideration -1554 (21000-19446) why deffered consideration add unwidin
290950

b) Accounting for Walker in the consolidated statement of financial position

Runner Co has significantly influence over walker co. Walker co should therefore be treated as an
associate in the consolidated financial statements, using the equity method.

In the consolidated statement of financial position, the interest in the associate should be presented as investment

Carrying amount of investment

Cost of investment 13000

Share of post acquistion change in net assets (30000x0.3) -9000
4000
red consideration add unwiding discount

reated as an

d be presented as investment in associate as a single line under non-current assets. The associate should initiallu be recognised at cost an
tiallu be recognised at cost and subsequently adjusted each period fir the parents share of the post-acquistion change in net assets( retain
on change in net assets( retained earnings) . This figure should be reviewed for impairment at each year end which given t,he fall in value
which given t,he fall in value of the investment due to the loss would be most likely.
Pandar

a) Goodwill
$'000 $'000
Shares issued 345600 (120x0.8x3/5x$6)
Non-controlling interest 76800 (120x0.2x$3.2)
422400
Equity shares 120000
Pre-acq reserves
b/d 152000
At date of acquistion 11500
Fair value adjustments 25000 -308500
Goodwill 113900

b) Consoliated statement of profit or loss for the year ended 30 September 20X6
$'000
Revenue(210000+(150000x6/12)-15000) 270000
(-) Cost of sales -162500
Gross profit 107500
Distribution costs(11200+(7000x6/12) -14700
Adminstrative expenses(18300+(9000x6/12) -22800
Investment income 1100
Finance costs -2300
Share of loss from associate(5000x40%x6/12) -1000
Impairment of investment in associate -3000
Profit before tax 64800
Income tax expense(15000+(10000x6/12) -20000
Profit for the year 44800

Attributable to :
Owners of the parent 43000
Non-controlling interest 1800
44800

Workings

1) Cost of sales

Pandar 126000
Salva (100000x6/12) 50000
Intra-group purchases -15000
Additional depreciation: Plant (5000/5yrs x 6/12) 500
Unrealised Profit in inventories( 15000/3 x20%) 1000
162500
2) Investment income

As per question 9500

Intra group interest(50000x8%x 6/12) -2000
Intra-group dividend (8000x80%) -6400
1100

3) Finance cost

Pandar 1800
Salva post-acquistion (3000-2000)x6/12 500
2300

4) Non-controlling interest

Salva post-acquistion profit 9500

(-) Post-acquistion additional depreciation -500
9000
NCI 20% 1800
Kingdom b) Analysis

a) Statement of cash flows for the year ended 30 September 20X6 i) Causes of fall in profit befo

Cash flows from operating activities : $'000 $'000 The fall in the company profi
Profit before tax 2400
Adjustments: 1) Changes at the gross profi
Depreciation of PPE 1500 2) The effect of overheads an
Loss on sale of PPE 500 3) The relative performance o
Finance cost 600
Rental received -350 The absolute effect on profit
FV changes for Investment properties 700 2.25m and 1.25m respectivel
Decrease in inventory 800 consider returns on investme
Decrease in receivables 400 however these returns do aff
Increase in payables 300
Cash generated from operations 6850 Gross profit
Interest paid -550
Income tax paid -1950 Despite slightly higher revenu
Net cash from operating activities 4350 from 34.1% to 30.3%. Applyin
would translate to an equiva
Cash flow from investing activities : the same as last year.
Purchase property plant and equipment -5000
Sale of property plant and equipment 1800 As the increase in revenue in
Purchase of investment property -1400 failing to pass on to custome
Investment property rentals received 350
Net cash used in investing activities -4250
Operating costs/over
The administrative exp
Cash flow from financing activities: these are $2.25m (or 2
Issue of equity shares 2200 they are still much high
Dividends paid -2800 overheads. The profit m
Net cash used in financing activities -600 margin fell slightly the
Net decrease in cash and cash equivalents -500 that has been the main
Cash and cash equivalents at beginning of period 300 Performance of inves
Cash and cash equivalents at end of period -200 The final element of th
has two elements. Firs
Workings rental (one transferred
generally. The second
1)Income tax the current year comp
mirrors a fall in the val
$1.3m), which sugges
Provision b/d -1850
(ii) Effects of rising p
Charge to Profit and loss -600
The term rising prices
Provision c/d 500
way, they have two ma
Tax paid -1950 potentially greater und
In the statement of pro
2) Property plant and equipment quoted examples are i
cost (a current value),
Balance b/d -25200 asset’s use (as the fair
In terms of interpreting
years’ results are not d
is with the return on ca
historical cost, the num
and the denominator (
 In the statement of pro
quoted examples are i
cost (a current value),
asset’s use (as the fair
Depreciation 1500 In terms of interpreting
Revaluation (downwards) 1300 years’ results are not d
Disposal 2300 is with the return on ca
Transfer from investment properties -1600 historical cost, the num
Balance c/d 26700 and the denominator (
asset values).
Acquired for the year 5000
The “overstated” profit
increased wage dema
3) Equity dividends

Retained earnings b/d 8700

Profit for the year 1800
Retained earnings c/d -7700
Dividend paid 2800

4) Reconiliation of investment properties

Balance b/d 5000

Acquired during year 1400
Loss in fair value -700
Transfer to PPE -1600
Balance c/d 4100
b) Analysis

i) Causes of fall in profit before tax

The fall in the company profit before tax can be analysed in three elements:

1) Changes at the gross profit level

2) The effect of overheads and
3) The relative performance of the investment properties

The absolute effect on profit before tax of these elements are reductions of 1.4m
2.25m and 1.25m respectively, amounting to 4.9m in total. Many companies would
consider returns on investments properties as not being part of operating activities
however these returns do affect profit before tax

Gross profit

Despite slightly higher revenue, gross profit fell by 1.4m. This is due to a fall in the gross profit margin
from 34.1% to 30.3%. Applying the stated 8% rise in the cost of sales last years cost of sales of 29m
would translate to an equivalent figure of 31.3m. This implies that the production activity of sales remained
the same as last year.

As the increase in revenue in the current year is only 2% the decline in gross profibilily has been caused by
failing to pass on to customers the percentage increase in the cost of sales. This may be due to managments slow response to rising price

Operating costs/overheads
The administrative expenses and distribution costs are the main culprit of the fall in profit before tax as
these are $2.25m (or 28%) higher than last year. Even if they too have increased 8%, due to rising prices,
they are still much higher than would have been expected, which implies a lack of cost control of these
overheads. The profit margin has fallen from 17.9% in 20X5 to 6.7% in 20X6 and although gross profit
margin fell slightly the fall in the profit margin ratio does highlight that it is the lack of control of overheads
that has been the main cause in the fall in profits.
Performance of investment properties
The final element of the fall in profit before tax is due to declining returns on the investment properties. This
has two elements. First, a reduction in rentals received which may be due to the change in properties under
rental (one transferred to owner-occupation and one newly let property) and/or a measure of falling rentals
generally. The second element is clearer: there has been a decrease in the fair values of the properties in
the current year compared to a rise in their fair values in the previous year. The fall in investment properties
mirrors a fall in the value of the company’s other properties within property, plant and equipment (down
$1.3m), which suggests problems in the commercial property market.
(ii) Effects of rising prices
The term rising prices may relate to specific goods/assets or to average prices (general inflation). Either
way, they have two main effects on financial statements: an understatement of operating costs and a
potentially greater understatement of asset values.
In the statement of profit or loss, input costs tend to be understated in real terms. The most commonly
quoted examples are inventory, where the purchase at historical cost would be lower than the replacement
cost (a current value), and depreciation which understates the real value of the benefit consumed by the
asset’s use (as the fair value of the non-current assets will have increased).
In terms of interpreting financial performance, rising prices distort trend comparisons, meaning that previous
years’ results are not directly comparable with the current year’s results. The most obvious example of this
is with the return on capital employed (ROCE). When comparing previous years with the current year, using
historical cost, the numerator (profit) would be relatively higher or overstated (due to lower operating costs)
and the denominator (equal to net assets) would be relatively lower or understated (due to lower reported
In the statement of profit or loss, input costs tend to be understated in real terms. The most commonly
quoted examples are inventory, where the purchase at historical cost would be lower than the replacement
cost (a current value), and depreciation which understates the real value of the benefit consumed by the
asset’s use (as the fair value of the non-current assets will have increased).
In terms of interpreting financial performance, rising prices distort trend comparisons, meaning that previous
years’ results are not directly comparable with the current year’s results. The most obvious example of this
is with the return on capital employed (ROCE). When comparing previous years with the current year, using
historical cost, the numerator (profit) would be relatively higher or overstated (due to lower operating costs)
and the denominator (equal to net assets) would be relatively lower or understated (due to lower reported
asset values).
The “overstated” profit due to not adjusting for rising prices may also lead to other problems, such as
increased wage demands, higher dividend payments and even higher taxes.
ts slow response to rising prices and to competitive pressures in the market

t before tax as
ue to rising prices,
ontrol of these
gh gross profit
trol of overheads

ent properties. This

in properties under
re of falling rentals
the properties in
vestment properties
uipment (down

nflation). Either
costs and a

ost commonly
n the replacement
onsumed by the

eaning that previous

us example of this
current year, using
er operating costs)
to lower reported
ost commonly
n the replacement
onsumed by the

eaning that previous

us example of this
current year, using
er operating costs)
to lower reported

ems, such as