BMAN10501 FINANCIAL REPORTING Final exam 2020/21
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BMAN10501
2020/21
FINANCIAL REPORTING
Final exam
Question 1
The following information is taken from the accounting records of Moonbeam Limited, a retailer of second-hand books, for the year ended 31st October 2020.
Trial Balance |
Dr £ |
Cr £ |
Called up Share Capital at £1 per share |
|
100,000 |
Retained Earnings at 31 October 2020 |
|
384,900 |
Land and Buildings - cost |
391,000 |
|
Land and Buildings – accumulated depreciation |
|
100,000 |
Motor Vehicles – cost |
60,000 |
|
Motor Vehicles – accumulated depreciation |
|
30,000 |
Inventories at 1 November 2019 |
88,000 |
|
Trade Receivables |
22,000 |
|
Trade Payables |
|
54,000 |
Sales Revenue |
|
520,100 |
Purchases |
365,000 |
|
Admin Expenses |
120,000 |
|
Tax Expense |
35,000 |
|
Cash |
108,000 |
|
|
1,189,000 |
1,189,000 |
Relevant Accounting Policies
• Depreciation is charged annually.
• Buildings have a useful economic life of 30 years and depreciation is calculated on a straight-line basis.
• Motor Vehicles’ depreciation is on a 40% reducing balance basis.
• A full year’s depreciation is charged in the year of acquisition and no depreciation is charged in the year of disposal.
In addition, the following information is provided regarding matters which are not reflected in the above figures:
i. Moonbeam Limited bought a new van for £15,000 cash, on 30th October 2020 to deliver books to customers.
ii. On 1st September 2020 Moonbeam Limited disposed of a car, which was bought on 1st November 2018, for £12,000. The car was sold for £2,000 cash.
iii. After the year end it was discovered that £40,000 of expenses, which had been included in the accounts for heating and lighting , related to the period from 1st October 2020 to 31st January 2021. This matter needs to be adjusted for in the process of finalising the accounts for the year ended 31st October 2020.
iv. Moonbeam Limited has been informed that an employee is launching a legal claim after falling off a ladder. Lawyers have been consulted and it is probable the claim will be successful. For this, Moonbeam Limited will need to pay out £20,000.
v. Following a physical stock count on 31st October 2020, the inventory at that date is valued at £120,000 and the periodic method of calculating costs of sales is used.
vi. In the year 100,000 new shares were issued at 20p above the £1 par value. Cash was received for the new shares but neither the cash nor the share issues has been reflected in the trial balance above.
Required:
(a) On the first tab of the Excel template, detail the double-entry accounting
adjustments required to address points (i) to (vi) above, include any assumptions and explain your calculations.
(b) On the second tab of the Excel template, prepare the extended trial balance
accommodating the changes required by the adjustments outlined in part (a). Show the opening trial balance, the adjustments and the revised figures.
(c) On the third and fourth tab of the Excel template, prepare the final Income Statement for the 12 months ended 31st October 2020 and the Balance Sheet as at 31 October 2020 for Moonbeam Limited.
(d) Explain which of the adjustments (i) to (vi) above would affect the cashflows for the investing activities section of the cash flow statement and state what the cash inflow or outflow would be. Assume Moonbeam Limited uses the indirect method to prepare its cashflow statement.
(e) Comment on which of the adjustment(s) made in preparing the final accounts
illustrate(s) the accruals principle and why making this adjustment is important for true and fair accounts for Moonbeam Limited .
Question 2
Spike Limited is a sportswear manufacturer. The company makes a high-end range of sustainable sportswear products and this year launched a new product called “Fat Runners” , high performance running shoes whose soles are made from recycled cooking oil. The recycling process, which Spike Limited has successfully patented, has considerably reduced the cost of making the shoes. The company funded the new production process with a bank loan and most of the company’s recent growth in sales is attributable to this new product. Unlike its main competitors, Spike Limited makes all its products in the UK and for financial year 2020 implemented a decision to increase the minimum wage paid by the company above the National Minimum Wage of £8.20 per hour to the National Living Wage of £8.72 per hour to all employees regardless of their age.
Despite being only 5 years old, the company now has a well-recognised brand, a fact attributable to the quality of its products and a highly effective (although expensive) marketing function. Spike launched Fat Runners via a social media campaign and for
the first time paid a number of “influencers” to endorse the product .
The following balances have been extracted from Spike’s financial reports:
|
2019 |
2020 |
£’000 |
£’000 |
|
Revenue |
2,600 |
3,400 |
Costs of sales |
2,000 |
2,300 |
Operating profit |
340 |
600 |
Interest expense |
80 |
160 |
Tax expense |
50 |
70 |
Total assets |
6,500 |
9,200 |
Debt |
2,000 |
4,000 |
Equity |
3,000 |
3,300 |
Dividend paid |
10p per share |
15p per share |
Required:
(a) Assess Spike’s ability to generate profit, relative to its costs. Your analysis of
Spike’s profitability should be supported by specific ratios, along with your interpretation of those ratios. You should conclude by briefly identifying some limitations of your assessment.
(b) Following a major strategic review, Spike is looking to diversify its product range
and is exploring two options. The first involves acquiring a sports drink company called Natural Boost. Natural Boost has net assets of £4 million, on its latest balance sheet, but Spike has been advised that they would need to pay £7 million to acquire the brand. The second involves investing in plant and machinery to develop its own rival drink called Spiked Water. This option would require an initial investment of £5 million but the marketing team are confident that, building on the success of the Spike brand, the Spiked Water brand would be worth £6 million within 3 years.
Drawing on your understanding of accounting for intangible assets, explain how you would account in Spike’s accounting records for ‘Natural Boost’ and ‘Spiked Water’ if the transactions went ahead as stated .
(c) Spike has been contemplating how to fund its strategy of diversification and has been exploring two options: borrowing from the bank and issuing shares. With reference to the financial information in (a) above, explain the different risks that Spike should consider when making this decision.
(d) Referencing the information in (a)-(c) above, outline some of the key stakeholders to whom Spike is accountable and assess the extent to which current financial reports meet their information requirements.
SECTION B
Question 3
The following are quotes from the article ‘Who is More Powerful – States or Corporations?’ written by Babic, Heemskerk and Fichtner, published in The Conversation (2018).
“We live in an era where the interplay between state and corporate power shapes the reality of international relations more than ever”
”States (are) using corporations to achieve geopolitical goals in an increasingly hostile environment, and powerful corporations (are) perhaps using more aggressive strategies to extract profits in response. ”
Required:
(a) Evaluate whether the four desired characteristics of financial reporting of
comparability, verifiability, timeliness and understandability can reduce aggressive strategies aimed at generating excessive profits for corporations.
(b) Financial reporting is considered to be crucial in holding corporations publicly
accountable. Explain why this is the case and evaluate how the role and nature of financial reporting could be extended, given the increasing power of large corporations.
Question 4
The following is a quote from the article 'Worst year for High Street job losses in 25 years'’ written by Haigh, published in BBC Business News (2021).
“Last year was the worst for the High Street in more than 25 years as the coronavirus accelerated the move towards online shopping, analysts say. Nearly 180,000 retail jobs were lost in the UK in 2020, up by almost a quarter on the previous year, according to the Centre for Retail Research (CRR). It warned there will be more pain for the sector in 2021 as retailers face a cash flow crisis and rent payments.”
Required:
(a) With reference to specific accounting conventions, explain why the growth in a
business' cash balance over its financial year does not typically equate to the business' stated profit for the year.
Your answer should also indicate the respective significance of profitability levels and cash balances in assessing the viability of a business, either as a trading venture or as a potential investment opportunity.
(b) Drawing on your understanding of ratio analysis, explain its value in assessing the
adequacy of the working capital position being maintained by a high street retailer. Your answer should indicate which figures and/or ratios that you think would be particularly significant given the current circumstances confronting high street retailers.
2022-01-17