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ACFI290 Financial Reporting and Finance (Non-Specialist)

January Examinations 2022

PART A:  Short Answer Questions (5 marks each); [Total mark = 40]

Question A1

A business’s statement of financial position shows the following relationships:

Current ratio = 3:1

Acid test ratio = 2.5:1

Current assets to non-current assets = 1:2

The total assets of the business are £27 million.

What is the value of the inventories as shown on the statement of financial position? If necessary, round to the first decimal point.

Question A2

Please discuss whether each of the following statements is true or false and why.

1. The reducing-balance method of depreciation results in higher charges to the income statement than the straight-line method of depreciation over the life of the asset.

2. The purpose of depreciation is to derive the current market value (at each statements of financial position date) of the asset that is being depreciated.

Question A3

Please identify and discuss the major factors that a bank would take into account before deciding whether to grant an increase in the overdraft of a business.

Question A4

Please discuss why companies make ‘rights’ issues of equity, rather than raising the equity in some other way.

Question A5

Dolly plc is considering investing in a project that has an initial cash outlay followed by a series of net cash inflows. The business applied the NPV and IRR methods to evaluate the project but, after the evaluation had been undertaken, it was found that the correct cost of capital figure was lower than that used in the evaluation. When Dolly corrects this error, will the NPV figure increase, decrease or remain the same and why?

Question A6

Please explain what grossing up means and give an example.

Question A7

John purchased a valuable painting for £2,500 in June 2010. He sold it in March 2021 for £5,900. What are the capital gains consequences and why?

Question A8

Roger bought a non-exempt fixed asset for use in his business in August 2000 for £1,700 and sold it in June 2020 for £5,000. What is the chargeable gain (or loss) and how is it going to be applied?

PART B:  Long Answer Questions (20 marks each); [Total mark = 60]

Question B1

Demerzel Ltd manufactures nuts and bolts. Below are the income statements and the statements of financial position for 2019 and 2020.

Income statements for the year ended on 31 December

Statements of financial position as of 31 December

Dividends were paid on ordinary shares of £70,000 and £72,000 in 2019 and 2020, respectively.

Required:

(a) Calculate the following financial ratios for both years (using year-end figures for statements of financial position). Round ratio outputs to the first decimal point and days to the full number.

· Return on capital employed

· Operating profit margin

· Gross profit margin

· Current ratio

· Acid test ratio

· Receivables days

· Payables days

· Inventory days [8 points]

(b) Using the ratios calculated in (a) and any other information you consider helpful, comment on the company’s performance from the viewpoint of a business considering supplying a substantial amount of goods to Demerzel Ltd on usual trade credit terms. [12 points]

Question B2

Pepper plc bought 48 million shares in Salt plc on 1 January 2020. At that time, Salt’s share capital was the same as it is now and the retained earnings stood at £90 million. The statements of financial position and income statements for each company for 2020 are set

out below.

Statements of financial position as at 31 December 2020

Income statements for the year ended 31 December 2020

No dividends were paid by either company.

At the time of the acquisition, the fair value of the assets of Salt plc was the same as their statement of financial position values, except for land and buildings that have a fair value of

£72 million. Goodwill arising on consolidation has been judged not to have been impaired in

value. Pepper uses the proportionate method.

Required:

(a) Prepare the group statement of financial position as at 31 December 2020. If necessary, round up intermediate and final results to nearest £. [11 points]

(b) Prepare the group income statement for the year ended 31 December 2020. If necessary, round up intermediate and final results to nearest £. [9 points]