Accounting Qualification Question paper

Technician/Level 4 Diploma (QCF) Drafting financial statements (DFS)

Wednesday 15 June 2011 (morning) Time allowed - 3 hours plus 15 minutes reading time Important: This exam paper is in two sections. You should try to complete every task in both sections. We recommend that you use the 15 minutes reading time to study the exam paper fully and carefully so that you understand what to do for each task. However, you may begin to write your answers within the reading time, if you wish. You must use permanent ink, preferably black, to write your answers. Correcting fluid may not be used. You must not, during the exam, communicate with any other candidate or be in possession of unauthorised materials, such as pre-prepared notes, books, programmable calculators and dictionaries. Any of these actions will constitute malpractice and will result in disciplinary action. If you are in possession of unauthorised materials you must give them to the Supervisor before the start of the exam. Do NOT open this paper until instructed to do so by the Supervisor.

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This exam paper is in TWO sections. You must show competence in BOTH sections. So, try to complete EVERY task in BOTH sections. Section 1 contains 7 tasks and Section 2 contains 2 tasks. Please use the answer booklet provided. You should include all your workings and essential calculations in your answers. The answer booklet includes the following pro-formas: Journal entries Company income statement Company statement of financial position Consolidated statement of financial position Statement of cash flows

You should spend about 125 minutes on Section 1 and about 55 minutes on Section 2. Against each task is the recommended time for that task, but please note that these times are guidelines only.

Section 1
This section is in three parts.

Part A
You should spend about 55 minutes on this part.

Data
You have been asked to help prepare the financial statements of Eastmains Ltd for the year ended 31 March 2011. The companys trial balance as at 31 March 2011 is shown below. Eastmains Ltd Trial balance as at 31 March 2011 Debit 000 Share capital Trade and other payables Property, plant and equipment cost Property, plant and equipment accumulated depreciation Trade and other receivables Accruals 6% bank loan repayable 2016 Cash at bank Retained earnings Interest Sales Purchases Returns inwards Returns outwards Distribution costs Administrative expenses Inventories as at 1 April 2010 Final dividend for year ended 31 March 2010 Interim dividend for year ended 31 March 2011 4,657 5,599 4,790 1,080 827 135,572 135,572 51,342 1,222 888 540 65,980 4,067 3,465 3,568 255 12,000 57,880 32,450 Credit 000 18,000 2,534

Additional data
The share capital of the company consists of ordinary shares with a nominal value of 1. The inventories at the close of business on 31 March 2011 were valued at 5,132,000. The company paid 2,064,000 for eight months general office insurance on 1 October 2010, which is due to expire on 31 May 2011. The company hired extra warehouse space to store finished goods. It was able to negotiate a contract with a local company for the period 1 February 2011 to 31 May 2011 at a cost of 288,000. This was invoiced on 6 April 2011, and paid, in full, on 1 May 2011. No entry has been made in the accounts. Interest on the bank loan for the last quarter of the year has not been included in the accounts in the trial balance. The corporation tax charge for the year has been calculated as 1,123,000. All of the operations are continuing operations.

Task 1.1 (10 minutes)

Using the pro-forma in your answer booklet, make the necessary journal entries as a result of the additional data given above.

Task 1.2 (30 minutes)

(a) Using the pro-forma in your answer booklet, draft the income statement for Eastmains Ltd for the year ended 31 March 2011. (b) Using the pro-forma in your answer booklet, draft the statement of financial position for Eastmains Ltd as at 31 March 2011.

Task 1.3 (15 minutes)

The objective of IAS 16 is to prescribe the accounting treatment for property, plant and equipment. (a) (b) (c) Identify the principal issues in the accounting treatment of property, plant and equipment. When should items of property, plant and equipment be recognised as assets? Which costs should be included on initial recognition of property, plant and equipment?

Part B
You should spend about 45 minutes on this part.

Data
The Managing Director of Forth plc has asked you to prepare the statement of financial position for the group. Forth plc has one subsidiary undertaking, Vale Ltd. The statements of financial position of the two companies as at 31 March 2011 are set out below. Statements of financial position as at 31 March 2011 Forth plc Assets Non-current assets Property, plant and equipment Investment in Vale Ltd 000 56,570 21,000 77,570 Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Vale Ltd 000 22,340 22,340

16,549 5,467 879 22,895 100,465

3,645 2,376 449 6,470 28,810

Equity and liabilities Equity Share capital Share premium Retained earnings Total equity Liabilities Non-current liabilities Long-term loans Current liabilities Trade and other payables Tax liabilities Total liabilities Total equity and liabilities

42,000 7,000 27,511 76,511

10,000 5,000 9,510 24,510

16,000 16,000 6,644 1,310 7,954 23,954 100,465

2,500 2,500 1,559 241 1,800 4,300 28,810

Additional data
The share capital of Vale Ltd consists of ordinary shares of 50p each. Ownership of these shares carries voting rights in Vale Ltd. There have been no changes to the balances of share capital and share premium during the year. No dividends were paid or proposed by Vale Ltd during the year. Forth plc acquired 14,000,000 shares in Vale Ltd on 1 April 2010. At 1 April 2010 the balance of retained earnings of Vale Ltd was 5,240,000. The fair value of the non-current assets of Vale Ltd at 1 April 2010 was 21,500,000. The book value of the non-current assets at 1 April 2010 was 15,500,000. The revaluation has not been recorded in the books of Vale Ltd (ignore any effect on the depreciation for the year). Included in trade and other receivables for Forth plc and in trade and other payables for Vale Ltd is an inter-company transaction for 600,000 that took place in early March 2011. The directors of Forth plc have concluded that goodwill has been impaired by 25% during the year. Forth plc has decided non-controlling interest will be valued at their proportionate share of net assets.

Task 1.4 (35 minutes)

Using the pro-forma in your answer booklet, draft a consolidated statement of financial position for Forth plc and its subsidiary undertaking as at 31 March 2011.

Task 1.5 (10 minutes)

Prepare brief notes to answer the following points for the directors: (a) (b) State how, according to IAS 36, an impairment loss is calculated and which two figures are needed. Explain what is meant by each of these figures.

(c) State how an impairment loss is to be treated in the financial statements.

Part C
You should spend about 25 minutes on this part.

Data
You have been asked to prepare the statement of cash flows for Middleton Ltd for the year ended 31 March 2011. The most recent income statement and statements of financial position of the company for the past two years are set out below. Middleton Ltd Income statement for the year ended 31 March 2011 000 Continuing operations Revenue Cost of sales Gross profit Gain on disposal of property, plant and equipment Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Tax Profit/(Loss) for the period from continuing operations attributable to equity holders 5,039 116,000 (63,800) 52,200 1,044 (25,520) (20,880) 6,844 (525) 6,319 (1,280)

Middleton Ltd Statements of financial position as at 31 March 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 Share premium Retained earnings Total equity Non-current liabilities Bank loans

2011 000

2010 000

58,943 58,943 5,104 6,960 925 12,989 71,932

39,890 39,890 7,018 8,120 0 15,138 55,028

12,000 6,000 38,772 56,772

8,000 4,000 33,733 45,733

7,500 7,500

2,000 2,000

Current liabilities Trade and other payables Tax liability Bank overdraft Total liabilities Total equity and liabilities

6,380 1,280 0 7,660 15,160 71,932

5,742 1,256 297 7,295 9,295 55,028

Additional data
The total depreciation charged for the year was 3,356,000. Property, plant and equipment costing 768,000 with accumulated depreciation of 445,000 was sold in the year. All sales and purchases were on credit. Other expenses were paid for in cash.

Task 1.6 (10 minutes)

Prepare a reconciliation of profit from operations to net cash from operating activities for Middleton Ltd for the year ended 31 March 2011.

Task 1.7 (15 minutes)

Using the pro-forma in your answer booklet, prepare the statement of cash flows for Middleton Ltd for the year ended 31 March 2011.

Section 2
You should spend about 55 minutes on this section. Against each task is the recommended time for that task, but please note that these times are guidelines only.

Data
Jamie Deemac is considering investing in Elmbank Ltd. He wishes to assess the effectiveness of the management in using its resources and the riskiness of the investment. He has asked you to assist him by analysing the financial statements of the company, which are set out below. Elmbank Ltd Income statements for the year ended 31 March Continuing operations Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Tax Profit for the period from continuing operations attributable to equity holders 2,086 1,788 42,000 (23,100) 18,900 (7,980) (7,140) 3,780 (560) 3,220 (1,134) 25,000 (13,000) 12,000 (4,000) (4,500) 3,500 (910) 2,590 (802)

2011 000

2010 000

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Elmbank Ltd

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Statements of financial position as at 31 March 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 Retained earnings Total equity Non-current liabilities Bank loans Current liabilities Trade payables Tax liabilities Bank overdraft Total liabilities Total equity and liabilities

2011 000

2010 000

25,418 25,418 2,772 4,620 360 7,752 33,170

23,808 23,808 2,470 2,000 0 4,470 28,278

16,000 5,957 21,957

9,000 3,871 12,871

8,000 8,000 2,079 1,134 0 3,213 11,213 33,170

13,000 13,000 1,300 802 305 2,407 15,407 28,278

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Additional data
Jamie knows that you have almost finished your AAT studies and has emailed you to get some advice on whether or not to invest. From: To: Sent: Subject: Hi I am thinking of investing in Elmbank Ltd and wondered if you could give some advice. I have managed to get a copy of the last two years accounts. I have heard that the following ratios are particularly useful: Gearing, Interest cover, Trade receivable days, Trade payable days (based on cost of sales) and Inventory turnover days. I hope you can advise me, given that my main concern is how risky my investment might be. Many thanks Jamie jmd2512@warmmail.com aatstudent@dfsexam 13 June 2010 Accounting ratios

Task 2.1 (45 minutes)

Prepare an email reply for Jamie that includes: (a) (b) (c) (d) The formulas that are used to calculate the ratios mentioned above. A calculation (to one decimal place) of those ratios for both years for Elmbank Ltd. Comments on whether the company has performed better or worse, in respect of the calculated ratios only, in 2011 as compared to 2010. Advice, based only on the ratios calculated, to Jamie as to whether or not to make the investment.

Task 2.2 (10 minutes)

(a) (b) List the elements that appear in financial statements according to the Framework for the Preparation and Presentation of Financial Statements. Define the elements that appear in the statement of financial position of a company in accordance with the definitions in the Framework for the Preparation and Presentation of Financial Statements.

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NVQ/SVQ qualification codes Technician (2003 standards) 100/2942/4 / G794 24 Unit number (DFS) Y/101/8109 Diploma Pathway qualification codes Diploma (2003 standards) 100/5925/8 Unit number (DFS) Y/103/6450

Association of Accounting Technicians (AAT) 06.11 140 Aldersgate Street, London EC1A 4HY, UK t: 0845 863 0800 (UK) +44 (0)20 7397 3000 (non-UK) e: aat@aat.org.uk w: aat.org.uk