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UNIVERSITY OF BRADFORD


FINANCIAL ACCOUNTING


MAN2907L


May 2013 xx.00 xx.00 hours





This is a CLOSED BOOK examination

There are THREE Sections

SECTION A is multiple choice.
Answer ALL the questions from this section
Mark your answers on the answer grid and return together with questions
No marks are deducted for wrong answers. (30% of marks)


SECTION B Answer ALL the questions from this section. (30% of marks)


SECTION C Answer ONE question from this section (40% of marks)


Non-programmable calculators without a long-term data memory are permitted.
















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FINANCIAL ACCOUNTING

MULTIPLE CHOICE QUESTION ANSWER SHEET


STUDENT REGISTRATION NO. .

PLEASE PLACE A CROSS AGAINST THE LETTER CORRESPONDING TO YOUR
ANSWER FOR EACH QUESTION ONE ANSWER ONLY FOR EACH QUESTION

THIS ANSWER SHEET MUST BE ATTACHED TO AND RETURNED WITH THE
QUESTION PAPER

EACH QUESTION CARRIES TWO MARKS: THERE IS NO NEGATIVE MARKING



Question (A) (B) (C) (D)

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SECTION A (ANSWER ALL) Total 30 marks


1. Objectives of financial reporting to external investors and creditors include preparing:

i) Information about economic resources claims to those resources, and changes in
both resources and claims.
ii) Information used to determine which products to produce and the pricing of
products.
iii) Information that is useful in assessing the amount, timing, and uncertainty of
future cash flows.
iv) Information that is useful in making investment and credit decisions.

A i) and ii)
B iii) and iv)
C i), ii) and iii)
D i), iii) and iv)


2. Which of the following is an example of an external user of accounting information?

A Officer of the corporation
B President of the labour union
C Marketing manager of the corporation
D Production supervisor of the corporation


3. Which of the following characteristics of financial information contribute to reliability,
according to the IASBs Framework for the Preparation and Presentation of Financial
Statements?

i) Freedom from bias
ii) Freedom from material error
iii) Faithful representation
iv) Consistency

A i), ii) and iii)
B i), ii) and iv)
C iii) and iv)
D All of the above



4. The accounting constraint that means that when in doubt the accountant should choose
the method that will be least likely to overstate assets and income is called:
A Matching concept.
B Materiality.
C Prudence concept.
D Monetary unit assumption.

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5. Which of the following accounts will be found on an income statement?

A Revenues and expenses
B Revenues, expenses, and cash
C Revenues, expenses, and dividends
D Expenses, dividends, and cash


6. Which of the following does not result in a cash flow in a given accounting period?
A Acquisition of new office premises at an auction of commercial premises
B Depreciation of non-current assets
C Issuing 15 million ordinary shares at 2.50 each
D Taking out a long-term loan for 2.8 million



7. Leo paid 25,000 cash for a new truck. What effect did the above transaction have on
assets, liabilities, and owners equity?

Assets Liabilities Owners Equity
A Higher Lower Higher
B Lower Higher None
C None Higher Higher
D None None None



8. Campus stationary shops beginning of the year account balances are:

Total assets 135,000
Total owners equity 85,000

During the year, total assets increased by 96,000, and total liabilities increased by
51,000. The owner withdrew 20,000 from the business. Net income for the year is:

A 25,000
B 45,000
C 65,000
D 245,000



9. The Max Corporation purchases 10,000 units of inventory for 1.50 each from various
wholesalers on January 1, 2013. The inventory could be sold to customers for 2.50
each. If Max Corporation valued the inventory on its books at 25,000, what valuation
basis was used?

A Fair market value
B Present value
C Historical cost
D Replacement cost



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10. In the year to 31 December 2010 Max Corporation recognised an increase of 62,500 in
the value of land and buildings. In the year to 31 December 2011, a further increase of
6,000 was recognised. During the year to 31 December 2012, the land and buildings
suffered an impairment of 15,000.

Based on the above information, what are the changes in value of retained profits and
shareholders funds over the three years?

Retained profits Shareholders funds
A no change an increase of 68,500
B an increase of 68,500 an increase of 53,500
C an increase of 53,500 no change
D no change an increase of 53,500



11. When allocating costs to inventory produced for the period, fixed overhead should be
based upon which of the following:

A The highest production levels in the last three periods
B The lowest production levels in the last three periods
C The normal capacity of production facilities
D The actual amounts of goods produced during the period



12. When should an anticipated loss on a long-term construction contract be recognised
under the percentage of completion method according to IAS 11 Construction Contracts?

A Immediately
B Over life of the contract
C When the outcome of the contract is certain
D When the contract is completed



13. In accordance with IAS 2 Inventories, the cost of interchangeable inventories must be
arrived at using cost formulas. Which of the following statements is (are) correct?

i) As long as the formula used is disclosed, any reasonable formula may be used
ii) First-in, first-out (FIFO) is the only acceptable formula
iii) Last-in, first-out (LIFO) is not an acceptable method
iv) An entity must use the same cost formula for all inventories having a similar
nature

A ii) only
B i) and iv)
C iii) and iv)
D i), iii) and iv)


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14. A company values its inventory using the first in, first out (FIFO) method. At 1 April 2011,
the company had 700 engines in inventory, valued at 150 each.
During the year ended 31 March, the following transactions took place:

2011
1 June Purchased 500 engines at 200 each
1 October Sold 450 engines for 135,000

2012
2 January Purchased 200 engines at 250 each
15 March Sold 200 engines for 80,000

What is the value of the companys closing inventory of engines at 31 March 2012?

A 40,000
B 115,000
C 136,607
D 157,500



15. At 30 September 2011, the following balances existed in the records of Max:

Equipment: Cost 980,000
Accumulated depreciation 450,000

During the year ended 30 September 2012, a piece of equipment with a written down
value of 50,000 was sold for 65,000. The equipment had originally cost 180,000.
Equipment purchased during the year cost 350,000. It is the companys policy to charge
a full years depreciation in the year of acquisition of an asset and none in the year of
sale, using a rate of 20% on the straight line basis.

What net amount should appear in Maxs balance sheet at 30 September 2012 for
equipment?

A 432,000
B 600,000
C 614,000
D 704,000



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SECTION B (total 30 marks)

Answer BOTH questions below which refer to the case data attached at the back of
this paper

(a) Prepare the consolidated statement of financial position for e-Communication (e-Com)
Group as at 31 December 2012. Show all workings.
(24 marks)


(b) Briefly explain the accounting treatment in the consolidated accounts of any goodwill
arising as a result of the acquisition of subsidiaries, in accordance with the appropriate
accounting standard.
(6 marks)

(Total 30 marks)
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SECTION C (total 40 marks)
Answer any ONE question from three.

Question 1
Max Global plcs income statement for the year ended 31 December 2012 and statements of
financial position as at 31 December 2011 and 31 December 2012 were as follows:

Max Global plc
Income statement for the year ended 31 December 2012
000 000
Sales 194,400
Raw material consumed (18,900)
Staff costs (25,380)
Depreciation (31,860)
Loss on disposal of non-current asset (4,860) (81,000)
113,400
Interest payable (7,560)
Profit before tax 105,840
Income tax expense (33,480)
Profit for the year 72,360

Max Global plc
Statements of financial position as at 31 December
2012 2011
000 000 000 000
Assets
Non-current assets
Cost 430,920 421,200
Depreciation (85,860) 345,060 (60,480) 360,720

Current assets
Inventory 6,480 5,400
Trade receivables 20,520 15,660
Cash at bank 12,960 39,960 15,120 36,180
Total assets 385,020 396,900

Equity and liabilities
Equity
Share capital 97,200 91,800
Share premium 9,720 6,480
Retained earnings 185,220 292,140 132,300 230,580

Non-current liabilities
Long-term loans 54,000 135,000
Current Liabilities
Trade payables 11,340 8,100
Income tax payable 27,540 38,880 23,220 31,320
Total equity and liabilities 385,020 396,900


Additional information:
During the year, the company paid 24.3 million for new machinery.
Required
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(a) Using the indirect method, prepare a statement of cash flows for Max Global plc for
the year ended 31 December 2012 in accordance with the requirements of IAS 7
Statement of Cash Flows. Show all workings.
(25 marks)


(b) Explain the treatment of the depreciation in the construction of the cash flow
statement.
(6 marks)


(c) Briefly discuss why is it that a company can make satisfactory profits but still be short
of cash or in a position with deteriorating cash position?
(9 marks)

(Total 40 marks)


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Question 2

(a) A financial analyst of an investment fund is presented with the following summarised
accounts for Max Ltd, a listed conglomerate operating in the UK.
Income statement for the year ended 30 September 2012
000
Revenue 11,520
Cost of sales (7,200)
Gross profit 4,320
Selling & administrative expenses (2,520)
Profit before interest and tax 1,800
Finance cost (360)
Profit before tax 1,440
Tax expense (720)
Profit for the year 720

Statement of financial position as at 30 September 2012
000 000
Non-current assets 10,800
Current assets
Inventory 3,240
Trade debtors 1,800
Cash at bank 360 5,400
Total assets 16,200

Equity
2 ordinary shares 7,200
Reserves 2,160
9,360
Non-current liabilities
10% loan notes 3,600
Current liabilities
Trade creditors 2,160
Taxation payables 720
Dividend (for the year) 360 3,240
Total equity and liabilities 16,200

The historical ratio values for Max Ltd for the year ended 30 September 2010 and 2011
as well as the current average for the industry in which Max Ltd operates are as follows:

Ratios Max Ltd Industry
Historical Data Average
2010 2011 2012
Return on capital employed (%) 16.2 14.7 16.2
Gross profit percentage (%) 30.4 34.7 32.3
Operating profit percentage (%) 19.3 17.7 17.3
Asset turnover ratio (use capital employed) (times) 0.84 0.83 0.94
Quick/Acid test ratio (times) 1.50 1.10 1.50
Debtors collection period (days) 32.0 44.0 35.0
Earnings per share (pence) 36.0 26.0 30.0
continued overleaf
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Required

(i) Calculate each of the above ratios for Max Ltd for the year ended 30 September
2012. State clearly the formulae used for each ratio and show all workings.
(10 marks)


(ii) Based on your calculation and the information available, write a brief report on the
financial performance and position of Max Ltd.
(14 marks)


(b) The practice of creative accounting is an inevitable consequence of the systems of
financial accountability which have developed in capitalist economies. Judicious
management of reported earnings and balance sheets using creative accounting
techniques is not necessarily a bad thing.
Discuss arguments both in favour and counter to the above assertions.
(16 marks)

(Total 40 marks)


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Question 3

(a) International Nuclear Fuels, a public limited company, disclosed the following
information in its financial statements for the year ending 31st December 20X9:

The company purchased an oil company during the year. As part of the sale agreement,
oil has to be supplied to the companys former holding company at an uneconomic rate
for a period of five years. As a result a provision for future operating losses has been set
up of 265m which relates solely to the uneconomic supply of oil. Additionally, the oil
company is exposed to environmental liabilities arising out of its past obligations,
principally in respect of soil and groundwater restoration costs, although currently there
is no legal obligation to carry out the work. Liabilities for environmental costs are
provided for when the group determines a formal plan of action on the closure of an
inactive site. It has been decided to provide 200m in respect of the environment liability
on the acquisition of the oil company. International Nuclear Fuels has a reputation for
insuring the preservation of the environment in its business activities.

Required

(i) IAS 37 Provisions, Contingent Liabilities and Contingent Assets sets out the
principles of accounting for these issues and clarifies when provisions should and
should not be made. Discuss the nature of provisions and the accounting
requirements for recognising them according to IAS 37.
(12 marks)

(ii) Discuss whether the provisions have been accounted for correctly by International
Nuclear Fuels under IAS 37 Provisions, Contingent Liabilities and Contingent
Assets.
(10 marks)


(b) State with reasons whether parties are related in the following situations:

(i) In 2010, Steve is a large loan creditor of Beta Ltd and receives interest at 18% p.a.
on this loan. He was a director of the company since the incorporation of the
company. In 2011, Steve resigned as director after a disagreement with other
directors. He has a 24% shareholding in Beta Ltd and the remaining 76% of the
shares are held by the remaining directors. Is Steve a related party to Beta Ltd?

(6 marks)

(ii) Margaret joined Beta Ltd on 5 January 2011. She brought clients with her that that
generated 38% of the firms 2011 turnover. Is Margaret a related party of Beta Ltd?

(6 marks)

(iii) Caspar is a director and major shareholder of Beta Ltd. His wife, Kate, is
employed in Beta Ltd on administrative duties for which she is paid 28,000 p.a.
Their son, Justin, is a business consultant running his own business. In 2011, Justin
carried out various consultancy services for Beta Limited for which Justin is paid
215,000. The fee charged for these consultancy services are at arms length
conditions. Are Kate or Justin related parties to Beta Limited?
(6 marks)
(Total 40 marks)
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Case Data: e-Communication, Mobile Technology, & Network Communication
e-Communication (e-Com) is a public listed company that acquired shareholding interests in
Mobile Technology Ltd (MTech) and Network Communication Ltd (NW-Com) some years
ago. The summarised statements of financial position for the three companies as at 31
December 2012 are as follows:
e-Com MTech NW-Com
000 000 000
Non-current assets
Property, plant & equipment 2,088 1,248 2,088
Investments at cost
960,000 shares in MTech 1,440
480,000 shares in NW-Com 720
Available-for-sale investments 336 132 nil
4,584 1,380 2,088
Current assets
Inventories 840 528 720
Trade receivables 288 192 144
Cash 504 432 408
1,632 1,152 1,272
Total assets 6,216 2,532 3,360
Liabilities
Current liabilities (552) (168) (504)
Non-current liabilities (360) (288) (600)
Total liabilities (912) (456) (1,104)
Net assets 5,304 2,076 2,256
Share capital 1,440 600 1,920
Retained earnings 3,864 1,476 336
Total equity 5,304 2,076 2,256
Supplementary information:
1. Details of the capital and retained earnings at the respective dates of acquisition were
as follows:
MTech (000) NW-Com (000)
Share capital
50 pence ordinary shares 600
1 ordinary shares 1,920
Retained earnings 912 220.8
At the date of acquisition, the fair value of MTechs property, plant & equipment was
192,000 more than their book value. This has required additional depreciation charges
totalling 36,000 as at 31 December 2012.
2. It is e-Com Groups policy to use the proportionate share of fair value of subsidiarys net
assets to measure the non-controlling interests.
3. The inventory of MTech at 31 December 2012 includes goods supplied by e-Com for
120,000 (at selling price from e-Com). e-Com adds a mark-up of 25% on cost when
selling goods to MTech.
4. At 31 December 2012, e-Coms trade receivables included 9,600 owing by MTech,
whose trade payables included 7,200 owing to e-Com. On investigation, the difference
was found to be resulting from cash in transit.
5. None of the companies have paid any dividends for many years.
~ End of Paper ~