4QQMN501 - Introduction to Financial Reporting
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4QQMN501 - Introduction to Financial Reporting
Section A
Question 1 is compulsory. Please complete it.
Question 1
The following information is the preliminary trial balance of Alpha Ltd for the year ended 31st December 2017.
|
|
Debits (£) |
Credits (£) |
|
Sales |
|
12,000,000 |
|
Delivery van |
418,000 |
|
|
Cash |
800,000 |
|
|
Property |
6,200,000 |
|
|
Inventories (at the 1st of January 2017) |
2,000,000 |
|
|
Share Premium Account |
|
0 |
|
Share Capital (£0.50 nominal) |
|
720,000 |
|
Revenue Reserve - Retained Earnings |
|
1,420,000 |
|
Capital Reserve - Asset Revaluation |
|
60,000 |
|
Purchases |
3,720,000 |
|
|
Employee Wages |
400,000 |
|
|
Prepaid Electricity Bill |
400 |
|
|
Bank loan |
|
1,000,000 |
|
Rent |
180,000 |
|
|
Bank Interest Received |
|
2,000 |
|
Management Salaries |
200,000 |
|
|
Accrued Employee Wages |
|
70,000 |
|
Delivery van motor expense |
3,000 |
|
|
Plant and machinery |
300,000 |
|
|
Trade Payables |
|
170,400 |
|
Trade Receivables |
221,000 |
|
|
Goodwill |
1,000,000 |
|
|
|
15,442,400 |
15,442,400 |
Adjustments
1) Corporation tax is 20% for the year, all due in April 2018.
2) Staff bonus of £200,000 was given to employees, due in June of 2018.
3) A bank loan of £720,000 was taken out and not yet accounted for at all.
4) Closing stock was £3,000,000 on the 31st of December 2017.
5) Depreciation (all based on reducing balance):
a) Delivery van - 40%
b) Plant and machinery - 10%
6) Impairment:
a) Goodwill – to be impaired at a cost of £100,000 for the year
7) Property was revalued from £6,200,000 to £6,500,000.
8) Land was purchased for £720,000 in cash.
9) Dividends were distributed to shareholders during the financial year to a value of £200,000 in cash.
10) A one-for-one bonus issue was given to shareholders, there were no other changes to share capital during the year.
Please prepare a balance sheet and income statement for 31st of December 2017 using the trial balance presented on the previous page, ensuring that you make all the requested adjustments.
Total marks for Question 1 (40 marks)
Section B
Answer ONE question (and all of its parts) from this section.
(e.g. all of Question 2 OR all of Question 3)
Question 2
Bravo Appliances PLC are seeking to expand their current product lines and are looking to purchase a new machine for their factory. Their chosen supplier has indicated that the machine will cost £14,500,000 and at the end of its use can be disassembled for parts with a total residual value of £3,000,000 after five years of regular use. Based upon the planned production the following anticipated output has been calculated:
25,550 miles in 2018
40,880 miles in 2019
51,100 miles in 2020
56,210 miles in 2021
61,320 miles in 2022
a) What is the difference between net book value and net realisable value in the context of depreciation? What is the relevance of the latter to impairments?
(5 marks)
b) What is meant by historic cost and what is meant by fair value with regards to asset valuation? Discuss at least one advantage and disadvantage of each method of valuation.
(6 marks)
c) Calculate the net book value and the yearly depreciation for EACH of the five years, based upon one of the following different methods of calculating depreciation:
1. Straight-line method.
2. Diminishing balance method
3. Sumoftheunits method
(12 marks)
d) Why is corporation tax based upon profits rather than sales in most countries?
(5 marks)
e) Based upon FOUR FULL YEARS of depreciation, which method would produce the smallest and largest OPERATING EXPENSE for the planned digger at the END OF FULL FOUR YEARS?
(2 marks)
Total marks for Question 2 (30 marks)
Question 3
The following information has been provided:
Beginning inventory and purchases
Units
August Inventory 150,000
August Sale
September Purchase 120,000 September Sale
October Purchase 120,000
October Sale
November Purchase 500,000 November Sale
December Purchase 860,000
December Sale
Total 1,750,000
Cost
4.30
2.80
3.40
4.50
3.50
Total
645,000
336,000
408,000
2,250,000
3,010,000
6,649,000
Sales Units
130,354
110,066
150,121
350,936
500,358
1,241,835
Charlie Confectionery products have a selling price of £23.99.
a) Please calculate the cost of sales and closing inventory figure during the period of August to December for Charlie Confectionary Ltd, using each of the three different methods of costing inventories (i.e. FIFO, LIFO and AVCO).
(15 marks)
b) Please calculate the gross profit under each method of costing inventories (i.e. FIFO, LIFO and AVCO).
(3 marks)
c) IAS 2 allows for only two of the three methods for costing inventories. Explain which two methods are permitted and discuss how this approach can be contrasted with accounting requirements in other parts of the world and why this is.
(7 marks)
d) What is meant by the statement for comprehensive income and how does it differ from the income statement?
(5 marks)
Total marks for Question 3 (30 marks)
Section C
Answer ONE question from this section
(e.g. Question 4 or Question 5)
Question 4
Critically discuss the role that auditors play in the financial reporting process and how this supports stewardship? In your answer, also reflect upon why there might be a conflict of interest by having auditing done in the private sector rather than by a government agency. Likewise, discuss in your answer why regardless of these conflicts of interest, auditing is most commonly done in the private sector in most countries and without too many accounting scandals.
(30 marks)
Question 5
Critically discuss in detail why the accruals concept and the representativeness principle are often in contradiction, particularly in situations of uncertainty or when revenues and expenses extend beyond more than one accounting period. Discuss with examples how the prudence concept supports accountants to deal with these challenges through the use of provisions, contingent assets and contingent liabilities in the annual statement.
(30 marks)
Answer only one of the above questions
Total marks for Section C (30 marks)
2021-12-16