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Brunel University London MG5613 Financial Reporting

Exam Question Paper

· 案例展示

 

 

College / Institute

College of Business, Arts and Social Sciences

Department

Brunel Business School

Exam Author

Sue Hardman

Module Code

MG5613

Module Title

Financial Reporting

Paper Type

Main

Duration

3 hours

Section A: Answer THREE questions (all questions are compulsory)

Section B: Answer ONE question

All questions carry equal marks (25 marks each).

Narrative answers must be presented in sentences, with paragraphs as appropriate.

Answer FOUR questions only

Are Calculators Permitted?

Yes

Permitted Reference Materials

None

Required Stationery

None

SECTION A

(Answer all THREE compulsory questions)

Question 1

Flamingo Plc’s financial accountant is going to prepare the company’s statement of cash flows for the year ended 31 December 2017. The company’s statements of financial position at 31 December 2017 and 2016 are shown below, together with an extract from the statement of profit or loss and the statement of changes in equity for the year ended 31 December 2017.

Flamingo Plc

Statements of financial position at 31 December

2017 2016

£000 £000

Non-current assets

Property, plant and equipment 12,300 9,240

Investments 3,660          2,520

                                           15,960         11,760

Current assets

Inventory 840 780

Trade and other receivables 360 300

Cash and cash equivalents 1,800             2,520

                                           3,000             3,600

Total assets 18,960 15,360

Equity

Share capital (£1 ordinary shares) 3,000 2,400

Share premium account 1,200 600

Retained earnings 4,080             3,600

                                           8,280             6,600

Non-current liabilities                       

Bank loan 7,920          6,660

Current liabilities

Trade and other payables 1,500 780

Tax payable 960 900

Dividends payable 300             420

                                           2,760             2,100

Total equity and liabilities 18,960 15,360

Continued…

Flamingo Plc

Statement of profit or loss for the year ended 31 December 2017 (extract)

£000

Revenue 9,000

Cost of sales 4,500

                            Gross profit 4,500

Other income 300

Administrative expenses (2,340)

                            Operating profit 2,460

Finance costs (720)

                            Profit before tax 1,740

Tax expenses (960)

Profit for the period 780

Flamingo Plc

Statement of changes in equity for the year ended 31 December 2017

Share capital Share premium Retained earnings

£000 £000 £000

Balance b/d 2,400 600 3,600

Issue of shares 600 600

Profit for the period 780

Dividends (300)

Balance c/d 3,000 1,200 4,080

The following additional information is available at 31 December 2017:

  • Depreciation of £300,000 was charged in respect of property, plant and equipment. This was included in administrative expenses.
  • During the year an investment was sold for £270,000. The investment had a book value of £210,000 and the resulting gain was taken to the statement of profit or loss and is included in other income. There were no other disposals of investments during the period.
  • The company bought new plant during the period and paid for it in cash. No plant was sold during the year.

Required

  1. Prepare a statement of cash flows for Flamingo Plc for the year ended 31 December 2017 using the indirect method and the format specified by IAS 7, Statement of Cash Flows. Show all your workings.

(20 marks)

  1. The company’s managing director, Ms Palacios, has asked you to explain why you have used the indirect method to calculate operating cashflows as she has heard from a friend that accounting standards recommend the direct method. Write Ms Palacios a short email explaining the difference between the direct and indirect methods and why IAS 7 recommends the direct method but few companies use it.

(5 marks)

(Total 25 marks)

Question 2

Tropical PLC acquired 80% of the share capital of Sun Ltd for £9,000,000 on 1 January 2015. At the date of acquisition, the share capital and retained earnings of Sun Ltd were £6,000,000 and £2,000,000, respectively. The statements of financial position of Tropical PLC and Sun Ltd at 31 December 2017 are set out below.

Statements of financial position at 31 December 2017

£000

£000

ASSETS

Non-current assets

31,166

8,000

Investment in Sun Ltd

9,000

Other investments

1,000

Current assets

14,553

2,630

Total assets

55,719

10,630

EQUITY AND LIABILITIES

Equity

Share capital

20,000

6,000

Retained earnings

12,573

3,002

Non-current liabilities

13,500

1,100

Current liabilities

9,646

528

Total equity and liabilities

55,719

10,630

Other information

  • At the date of acquisition, the fair value of the assets of Sun Ltd were deemed to be in line with the carrying amount, apart from land which was valued at £2,000,000 above the carrying amount.
  • Tropical PLC and Sun Ltd had traded with each other in previous years and this had continued since Sun Ltd became part of the Group. Tropical buys goods from Sun at a margin of 20%. The value of these goods, included in Tropical’s year-end inventory, amounted to £1,000,000.
  • At 31 December 2017, the goodwill was tested but found not to be subject to impairment.
  • Tropical PLC measures the non-controlling interest in Sun Ltd as the proportionate share of the subsidiary’s identifiable net assets.

Required

  1. Prepare a consolidated statement of financial position as at 31 December 2017 in accordance with IFRS 3, Business Combinations. Show all your workings.

(20 marks)

  1. Tropical PLC is considering buying a 30% interest in Skies Ltd, with a view to holding 30% of the voting rights and having a representative on their board of directors. Advise Tropical PLC on the appropriate treatment of the interest in Skies Ltd in the consolidated financial statements if the purchase is made.

(5 marks)

(Total 25 marks)

Question 3

You have been asked to analyse the financial statements of Cocktail PLC for the last 2 years. You work in an investment company and your line manager has asked for the analysis because she is considering adding Cocktail PLC to the company’s investment portfolio. You have been told that your manager is interested in low risk companies with potential for good returns in the form of dividends. The most recent financial statements of Cocktail PLC are shown below.

GROUP INCOME STATEMENT

NOTE

52 WEEKS ENDED

52 WEEKS ENDED

FOR THE 52 WEEKS ENDED

31 JANUARY 2016

31st JANUARY 2015

£’000

£’000

Revenue

356784

291341

Cost of sales

-224678

-201645

GROSS PROFIT

132,106

89,696

Distribution costs

-106789

-113487

Administrative expenses

-11567

-10041

Exceptional costs

-1098

-834

Other operating (expense)/income

-812

-132

OPERATING PROFIT

11,840

(34,798)

Finance income

216

632

Finance expenses

4

-1621

-1312

PROFIT BEFORE TAX

10,435

(35,478)

Income tax expense

-1921

10071

PROFIT FOR THE PERIOD

8,514

(25,407)

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE 52 WEEKS ENDED

31 JANUARY 2015

31 JANUARY 2015

£’000

£’000

PROFIT FOR THE PERIOD

8,514

(25,407)

OTHER COMPREHENSIVE INCOME

Revaluation gains and losses on property

2,692

(3,276)

OTHER COMPREHENSIVE INCOME FOR THE PERIOD

2,692

(3,276)

TOTAL COMPREHENSIVE INCOME FOR THE PERIOD

11,206

(28,683)

Continued…

GROUP BALANCE SHEET

NOTE

31 JANUARY 2016

31st JANUARY 2015

AT 31 JANUARY 2016

£’000

£’000

Intangible assets

13800

6080

Property, plant and equipment

55780

45083

NON-CURRENT ASSETS

69,580

51,163

Inventories

82330

92355

Trade and other receivables

15

45789

50765

Cash and cash equivalents

7380

12999

CURRENT ASSETS

135,499

156,119

Trade and other payables

18

-47046

-45290

Bank overdraft

-26204

-37282

Income tax payable

-7202

-3857

CURRENT LIABILITIES

(80,452)

(86,429)

NON-CURRENT LIABILITIES

0

0

NET ASSETS

124,627

120,853

EQUITY

Share capital

9

2000

2000

Share premium account

10000

10000

Revaluation reserve

3772

1,080

Retained earnings

108,855

107,773

TOTAL EQUITY

124,627

120,853

SELECTED NOTES TO THE FINANCIAL STATEMENTS

31 JANUARY 2016

31JANUARY 2015

4 Of which, interest payable (£'000)

(1,064)

(1,009)

8 Total dividends for the period (£'000)

5,000

4,800

9 Weighted number of ordinary shares ('000)

4,000

4,000

15 Of which, trade receivables (£'000)

30,789

21,456

18 Of which, trade payables (£'000)

(36,201)

(24,019)

19 Market share price at year end

214.9

175.6

20 Maximum risk free interest rate (%)

4.60

4.70

Required

  1. Using appropriate ratios, conduct a financial analysis of Cocktail PLC’s financial statements to inform your manager’s investment decision. You should keep in mind your company’s investment decision and show all your workings.

(18 marks)

  1. Critically evaluate the use of ratio analysis to interpret financial statements.

(7 marks)

(Total 25 marks)

 

SECTION B

(Answer ONE question from this section)

Question 4

When a company acquires shares in another company it can be described as:

  • An investment
  • An associate
  • A joint venture
  • A joint operation
  • A subsidiary
  1. Critically evaluate the treatment of each of the above types of investment in the financial statements of the parent company, as prescribed by IAS and IFRS.

(18 marks)

  1. Critically evaluate the importance of the distinction between the above types of investment to the users of financial statements.

(7 marks)

(Total 25 marks)

Question 5

‘Historical cost accounting has been perceived to be inadequate in reporting some transactions and circumstances and has been significantly modified in specific reporting domains… the boundaries of the traditional accounting model are moving’ (Aerts and Walton, 2013 p. 380).

Required

Critically evaluate the above statement, commenting on:

  1. Why there are mixed views on fair value accounting (6 marks)
  2. The main cases in favour of fair value accounting (6 marks)
  3. The potential practical problems with fair value (6 marks)
  4. IFRS 13, Fair Value Measurement issued by the IASB (7 marks)

(Total 25 marks)

Question 6

It can be argued that separate financial, environmental and corporate responsibility reports within the annual report only provide a partial picture of how an entity adds economic, social and environmental value. This has led to calls for an integrated report.

‘An integrated report is a concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term’ (IIRC, 2013, p. 7).

Required

  1. Critically evaluate the usefulness of a company’s annual report to the primary users of general purpose financial reporting information. Comment on whether you consider the information needs of these users are being met.

(12 marks)

  1. Critically evaluate the introduction of integrated reporting to the annual report of large organisations. Comment on the advantages and disadvantages of making integrated reporting mandatory.

 (13 marks)

(Total 25 marks)

END OF EXAMINATION PAPER

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