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AC491 – Summative Assignment

Part I - General Concepts

[2 marks each; 20 marks total]  

Circle one answer only.

1. Which of the following items are fundamental qualitative characteristics of financial information?

a. Going concern and accrual accounting

b. Relevance and faithful representation

c. Materiality and Cost-benefits

d. Assets and Liabilities

e. All of the above are fundamental qualitative characteristics

2. A journal entry decreases an asset account and reduces the profit of the year. This is an example of a(n):

a. accrued revenue.

b. deferred revenue.

c. accrued expense.

d. deferred expense. 

3. Retained earnings appears on which of the following financial statements?

a. Statement of Changes in Equity, Statement of Cash Flows, and Balance Sheet, but not the Income Statement

b. Statement of Changes in Equity, Statement of Cash Flows, and Income Statement, but not the Balance Sheet

c. Statement of Changes in Equity and Statement of Cash Flows, but not the Income Statement or Balance Sheet

d. Statement of Changes in Equity and Balance Sheet, but not the Income Statement or Statement of Cash Flows 

4. Performing services on account would:

a. increase both assets and liabilities.

b. decrease liabilities and increase shareholders’ equity.

c. increase assets and decrease shareholders’ equity.

d. increase net income and shareholders’ equity.

5. On September 1, Banger Bros Company paid £9,000 for one year of rent in advance. Which of the following accounts and amounts will appear on the financial statements prepared on December 31?

a. Prepaid Rent of £9,000

b. Prepaid Rent of £3,000

c. Rent Expense of £6,000

d. Rent Expense of £3,000

e. Both b and c. 

6. The following data was collected from the accounting records of Ambrose, Inc., which currently uses the FIFO method of valuing inventory.  

What would have been the difference in Ambrose’s ending inventory under the LIFO costing method?

a. Ending inventory would have been £120 higher.

b. Ending inventory would have been £120 lower.

c. Ending inventory would have been the same under both methods.

d. The difference cannot be determined using this information.

7. Under the allowance method for estimating uncollectible accounts, the entry to write off an account:

a. increases Allowance for Uncollectible Accounts, thus decreasing net realizable value.

b. increases both Accounts Receivable and Allowance for Uncollectible Accounts, thus decreasing net realizable value.

c. decreases Accounts Receivable, thus decreasing net realizable value.

d. has no effect on net realizable value.

8. Art Modell Company reported £61,000 in depreciation expense for the current year using an accelerated depreciation method. The company estimates that it saved net cash of £12,000 in income taxes by using the accelerated method instead of the straight-line method. The company has a 30% tax rate. What would depreciation expense have been using the straight-line method?

a. £43,857

b. £40,000

c. £21,000

d. £7,200 

9. Which of the following statements is false?

a. Assets that are increasing in value are still subject to depreciation.

b. Depreciation is a non-cash expense.

c. Accumulated depreciation represents a growing amount of cash to be used to replace the existing asset.

d. Accumulated depreciation is that portion of a PPE’s cost that has been recorded previously as an expense.

10. Under the effective-interest method of amortisation, the amount of discount amortised each interest period is always equal to the:

a. total amount of interest expense, divided by the number of interest payments to be paid.

b. total discount, divided by the number of interest payments to be made.

c. amount of interest expense plus the cash paid.

d. amount of interest expense less the cash paid.

e. amount of cash paid.

Part II: Essay Questions [21 marks]

This problem consists of three essay questions. Please provide short, concise answers to each question. Please note that the maximum word count for each essay question is 210 words.

1. In December 2021, the UK Government announced the award of a £2bn contract to a 50-50 joint venture formed by Hitachi/Alstom. The joint venture will design and build the next generation of Britain’s High-Speed-Two (HS2) trains, as well as subsequently maintain the HS2 trains for at least 12 years. While the construction of the trains will commence in 2025, the award of the contract has been confirmed and is legally binding. Discuss how Hitachi/Alstom should report the £2bn contract upon its announcement in 2021 and in subsequent years. Discuss also the recognition of associated costs. [7 marks]

2. In 2020, the UK Government developed an “Eat Out to Help Out” Scheme to support the reopening of restaurants and pubs after the COVID-19 lockdown period, with the aim of protecting jobs in this sector. Under the Scheme, diners got state-backed discounts on the price of the food and non-alcoholic drinks consumed in participating restaurants and pubs; the Government paid these restaurants and pubs 50% of cost of the meals (up to a maximum of £10 discount per person per meal). Explain the accounting implications of this scheme for participating hospitality firms. [7 marks]

3. In June 2017, a fire at Grenfell Tower (London) destroyed a 24-storey building, killing 72 people. The fire started as an electrical fault in a refrigerator but spread quickly due to the flammable materials used to clad the building. Since then, similar flammable cladding has been found in many buildings, prompting calls for it to be replaced. After a lengthy review, the UK Government recently announced that large building companies will have to make financial contributions to a dedicated fund and undertake all necessary remediation of buildings over 11 metres tall that they have developed. Upon this announcement, most major building companies suffered market values declines of over 3%. Explain how this announcement, and subsequent payments, will affect the financial statements of the building companies involved in the cladding crisis. [7 marks]

[Total: 21 marks]

Part III: AstraZeneca : Revenues, Cash Flows and Inventories

AstraZeneca plc is a British-Swedish multinational pharmaceutical and biotechnology company, headquartered in Cambridge.  It develops and commercialises drugs for major diseases in a variety of areas including oncology, cardiovascular, gastrointestinal, infection, neuroscience, respiratory, and inflammation.

On pages 6-8, you are provided with excerpts from AstraZeneca’s 2020 Annual Report. Using the information contained in these pages, please answer the following questions.

Note:

· Unless otherwise stated, the amounts are in millions.

· For product sales: cost of sales includes manufacturing costs, movements in provisions for inventories, inventory write-offs and impairment charges in relation to manufacturing assets.

REQUIRED:

a) AstraZeneca generates revenues from product sales (e.g., oncology, cardiovascular and respiratory medicines and vaccines) and collaborative arrangements (e.g., royalty income, participation in profit share arrangements, etc.). Based on the information provided (on page 7), briefly explain how AstraZeneca recognises these two streams of revenues, together with any issues that may arise in the recognition of costs. [6 marks]

b) How much revenue did AstraZeneca recognise in fiscal year 2020? What percentage of this revenue is due to product sales? [3 marks]

c) How much cash did the company collect from all contracts with customers (i.e., product and collaboration contracts) during the year? [7 marks]

d) How much cash does AstraZeneca expect to collect in 2021 with regards to revenues earned in 2020? [4 marks]

e) What is the total amount recognised as inventory cost within the cost of sales in 2020? [2 marks]

f) What is the total value of the finished goods and goods for resale produced over 2020? Assuming that the company spent $500 million in raw materials, what is the value of product costs capitalised during the year? [7 marks]

g) In Note 20, the company shows an account called “Rebates, chargebacks, returns and other revenue accruals”. Explain the nature of this account. Assume that AstraZeneca made a provision for “rebates, chargebacks, returns and other revenue accruals” of $4,500 million during 2020. Show the accounting entries explaining the changes in this account over the 2020 period. [5 marks]

[Total: 34 marks]