BMAN10621B FUNDAMENTALS OF FINANCIAL REPORTING 2020
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BMAN10621B
FUNDAMENTALS OF FINANCIAL REPORTING
2020
SECTION A (COMPULSORY) – Answer BOTH questions
Question 1 (40 marks)
LAMA Ltd. has the following information as at 31st December 2018:
In addition, the following information is made available:
(i) Stock at 31st December 2018 is valued at £40,440.
(ii) Business rates include a payment of £6,900 made for the 6-month period from
(iii) Fixed assets are depreciated as follows:
Plant and machinery 15% per annum on cost
Equipment 20% per annum on net book value
Premises Nil
(iv) The provision for doubtful debts is to be adjusted to 5% of the debtors’ balance
(v) The interest on debentures in payable on a half yearly basis. The amount due for the second half of the year ended 31st December 2018 has not been paid.
(vi) The tax for the year is £19,200.
Required:
(a) Prepare an income statement for LAMA Ltd. for the year ended 31st December 2018.
(b) Prepare a statement of financial position for LAMA Ltd. as at the 31st December
(c) For each of the following stakeholders, identify the accounting information that will be of interest to them and why?
i) Investors (1 mark)
ii) Lenders (1 mark)
iii) Employees and their representatives (1 mark)
iv) Customers (1 mark)
v) The general public (1 mark)
(5 marks)
(d) The following are four of the main accounting conventions used when preparing the financial statements:
i) The prudence convention (2 marks)
ii) The business entity convention (2 marks)
iii) The historic cost convention (2 marks)
Explain each of the conventions above separately and discuss each convention’s effect on the financial statements. Provide relevant examples to illustrate your answer. (6 marks)
Total: 40 marks
Question 2 (35 marks)
Markon Limited operates a fashion business. The financial statements for Markon Limited are given below for the two years ended 30 June 2018 and 2019.
The following are the industry averages ratios for the same sector in which Markon Limited operates. These ratios have been consistent for the years 2018 and 2019.
Required:
a) From the financial statements of Markon Limited for both years 2018 and 2019 calculate the same ratios as given for the industry sector. (12 marks)
b) Compare the ratios calculated in a) above with the industry average and comment on the business’s performance from the viewpoint of a prospective purchaser of a majority of shares. (18 marks)
c) What other information could be useful for the prospective purchaser to make a decision to buy a majority of shares? (5 marks)
Total: 35 marks
SECTION B – Answer ONE of two questions
Question 3: Answer all parts below (25 marks)
a) Extracts from the Financial statements of Huff Ltd are shown below:
Additional information:
i. Profit before taxation for the year to 31 December 2019 was £410,000.
ii. Interest expense for the year to 31 December 2019 is £30,000. Interest of £20,000 was paid during the year. No disposals of non-current assets took place during 2019, and the only addition to non-current assets (paying cash) during 2019 was £10,000.
Required: Using the above information, calculate the cash flow from operating activities (using the indirect method) for the year ended 31 December 2019. Show your workings clearly. (10 Marks)
b) You have obtained the following summarised cashflow for Huff Ltd are shown below: £
Net cash flow from Operating activities 602,000
Net cash flow from Investing activities (570,000)
Net cash flow from Financing activities 300,000
Required: Explain this information to a work colleague with no accounting knowledge, including examples of the types of cashflow which would be included in each of the three activities. Is a net cash outflow in investing activities necessarily regarded as a
c) Explain to someone with no accounting knowledge the operating cash cycle and its importance in assessing the liquidity of a business that purchases goods on credit for subsequent resale on credit (for example, a wholesaler) (7 Marks)
(Total 25 marks)
Question 4: Answer all parts below (25 marks)
a) The market value of a company (i.e. the market value of its equity) is usually different from its book value (i.e. the book value of its equity). Give three reasons why this is the case and explain and discuss each of those reasons briefly. (10 marks)
b) The financial statements are affected by accounting choices and judgements.
i) Identify and explain two examples of a choice or judgement that affect the financial statements. (4 marks)
ii) Select two users/groups of financial statements (stakeholders) and explain how the choices and judgements you have selected would affect each of these user groups (4 marks)
c) Explain what is meant by the term Corporate Governance and why there is a need for corporate governance within a large company. Give two examples of good corporate governance practices that large companies are expected to follow in the UK.
(7 marks)
(Total 25 marks)
2022-01-20