Professional Documents
Culture Documents
e
ACCA
pl
STUDY QUESTION BANK
m
Paper F7 | FINANCIAL REPORTING
Sa
Becker Professional Education has also been awarded ACCA Approved Content Provider Status for materials
for the Diploma in International Financial Reporting (DipIFR).
Nearly half a million professionals have advanced their careers through Becker Professional Education's
courses. Throughout its more than 50-year history, Becker has earned a strong track record of student success
through world-class teaching, curriculum and learning tools.
Together with ATC International, we provide a single destination for individuals and companies in need of global
accounting certifications and continuing professional education.
e
*Platinum Moscow, Russia and Kiev, Ukraine. Gold Almaty, Kazakhstan
pl
Becker Professional Education's ACCA Study Materials
All of Beckers materials are authored by experienced ACCA lecturers and are used in the delivery of classroom
courses.
m
Study System: Gives complete coverage of the syllabus with a focus on learning outcomes. It is designed to
be used both as a reference text and as part of integrated study. It also includes the ACCA Syllabus and Study
Guide, exam advice and commentaries and a Study Question Bank containing practice questions relating to
each topic covered.
Revision Question Bank: Exam style and standard questions together with comprehensive answers to
support and prepare students for their exams. The Revision Question Bank also includes past examination
questions (updated where relevant), model answers and alternative solutions and tutorial notes.
Sa
Revision Essentials*: A condensed, easy-to-use aid to revision containing essential technical content and
exam guidance.
*Revision Essentials are substantially derived from content reviewed by ACCAs examining team.
e
ACCA
pl PAPER F7
FINANCIAL REPORTING
(INTERNATIONAL)
m
STUDY QUESTION BANK
Sa
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. (i)
No responsibility for loss occasioned to any person acting or refraining from action as a result of any
material in this publication can be accepted by the author, editor or publisher.
This training material has been prepared and published by Becker Professional Development
International Limited:
16 Elmtree Road
Teddington
TW11 8ST
United Kingdom
e
No part of this training material may be translated, reprinted or reproduced or utilised in any form either
in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented,
including photocopying and recording, or in any information storage and retrieval system without
express written permission. Request for permission or further information should be addressed to the
Permissions Department, DeVry/Becker Educational Development Corp.
pl
m
Sa
Acknowledgement
Past ACCA examination questions are the copyright of the Association of Chartered Certified
Accountants and have been reproduced by kind permission.
(ii) 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
CONTENTS
CONCEPTUAL FRAMEWORK
2 Nette (ACCA J04) 1 1002 6
3 Limitations 1 1003 8
4 Framework 1 1004 8
5 Regulatory Framework 2 1004 5
6 Four Concepts (ACCA D98) 2 1005 16
e
7 Comparability (ACCA J04) 2 1006 8
IAS 18 REVENUE
16 Jenson 10 1020 25
IAS 2 INVENTORY
Sa
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. (iii)
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
e
IFRS 5 HELD FOR SALE ASSETS AND DISCONTINUED OPERATIONS
29 Davis 19 1040 6
IAS 17 LEASES
31
32
33
XYZ
Snow
1046
9
15
9
m
IAS 10 EVENTS AFTER THE REPORTING PERIOD
34 Earley 22 1047 13
35 Accounting treatment 23 1048 12
FINANCIAL INSTRUMENTS
41 Simpkins 27 1053 10
42 Iota 29 1055 10
REGULATORY FRAMEWORK
43 Danny 30 1056 5
44 Picant 30 1056 4
(iv) 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
INTER-COMPANY ADJUSTMENTS
47 Hatton 34 1063 12
48 Hammer 36 1065 12
49 Hat 37 1067 15
e
52 Humphrey 40 1073 10
53 High 41 1075 10
54 Happy 42 1077 13
59
60
Hamish
Hydrogen
46
47
48
1081
1082
1084
1086
1089
10
16
20
18
10
m
IAS 7 STATEMENT OF CASH FLOWS
61 Standard 49 1090 20
62 Fallen 50 1093 20
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. (v)
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
e
pl
m
Sa
(vi) 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Question 1 IASB
Required:
(a) State the objectives of the International Accounting Standards Board (IASB). (4 marks)
(b) Explain how the IASB approaches the task of producing a standard, with particular
reference to the way in which comment or feedback from interested parties is obtained.
(8 marks)
(12 marks)
Question 2 NETTE
e
Nette, a public limited company, manufactures mining equipment and extracts natural gas. The
directors are uncertain about the role of the IASBs Conceptual Framework for Financial Reporting
(the Framework) in corporate reporting. Their view is that accounting is based on the transactions
carried out by the company and these transactions are allocated to the companys accounting period by
using the matching and prudence concepts. The argument put forward by the directors is that the
Framework does not take into account the business and legal constraints within which companies
operate.
Required:
pl
Explain the importance of the Framework to the reporting of corporate performance and
whether it takes into account the business and legal constraints placed upon companies.
(6 marks)
m
Question 3 LIMITATIONS
Financial statements identify position, performance and changes in position over a period of time. The
main statements include Statement of Financial Position, Statement of Comprehensive Income and
Statement of Cash Flows. These statements are intended to show how well a company has performed
and give an indication of the value of the business. However, many accountants feel that the financial
statements are limited in their value to the users of financial statements.
Sa
Required:
(a) State the main purpose of the Conceptual Framework for Financial Reporting (The
Framework) adopted by the International Accounting Standards Board (IASB).
(4 marks)
(c) State the underlying assumption of financial statements identified by The Framework.
(2 marks)
(8 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Required:
Briefly explain what a regulatory framework is and discuss the reasons why there is a need for a
regulatory framework in financial reporting.
(5 marks)
Required:
Define the following accounting concepts and explain for each their implications for the
preparation of financial statements:
e
(a) The entity concept (4 marks)
(b) Going concern (4 marks)
(c) Materiality (4 marks)
(d) Fair presentation (true and fair view) (4 marks)
Question 7 COMPARABILITY
pl
Comparability is an enhancing qualitative characteristic which adds to the usefulness of financial
statements.
Required:
(16 marks)
m
(a) Explain what is meant by the term comparability in financial statements, referring to
TWO types of comparison that users of financial statements may make. (4 marks)
(b) Explain TWO ways in which the IASBs Conceptual Framework for Financial Reporting
and the requirements of accounting standards aid the comparability of financial
information. (4 marks)
(8 marks)
Sa
The accounting treatment and disclosure of the vast majority of transactions will remain the same
whether they are accounted for on the basis of substance or form. However, some transactions will
have a commercial effect not fully indicated by their legal form, and where this is the case, it will not be
sufficient to account for them merely by recording that form.
Required:
Discuss the proposal that accounts should always reflect the commercial substance of
transactions.
(12 marks)
2 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
(a) On 10 December 2012, Hughes sold inventory with a production cost of $30 million to the
Wodwo Bank for $36 million cash. Hughes has a call option (an option to repurchase) on the
goods exercisable on 10 January 2013 at a price of $37.8 million. The Wodwo Bank has a
put option (an option to resell to the seller) exercisable on 10 February 2013 at a price of
$39.7 million.
Required:
Discuss how the transaction should be accounted for in the accounts of Hughes at 31
December 2012. (4 marks)
(b) Custom Cars customises standard sports cars purchased from a major manufacturer, Sigma,
e
by fitting extras (spoilers, skirts, tinted windows, etc) at its workshop premises. It sells them
from its showroom on the same site, which it owns. During the year, the showroom was
renovated and enlarged by means of an extension to the existing building. Sigma contributed
many of the interior fitments, such as display stands for the cars, free of charge and also made
a cash payment toward the total costs.
Required:
pl
Discuss whether or not the extension and fittings should be shown in the statement of
financial position of Custom Cars.
Question 10 OBJECTIVES
(4 marks)
(8 marks)
m
The objective of financial statements is to provide information about financial position, performance
and changes in financial position of an entity that is useful to a wide range of users in making economic
decisions.
Required:
(a) State five potential users of company published financial statements, briefly explaining
for each one their likely information needs from those statements. (10 marks)
Sa
(b) Briefly discuss whether you think that the company published financial statements,
prepared in accordance with IFRS, achieve the objective stated above, giving your
reasons.
Include in your answer two ways in which you think the quality of the information disclosed
in financial statements could be improved. (10 marks)
(20 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 3
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Question 11 MERCURY
e
Plant, accumulated depreciation, 1 July 2012 370
Trade payables 900
Trade receivables 600
Allowance for doubtful debts, at 1 July 2012 25
Purchases 2,030
Administrative expenses 205
Revenue
Distribution costs
Other expenses
Bank balance
pl
Ordinary dividend paid
10% Loan notes
240
50
110
_____
25
3,000
500
_____
m
5,930 5,930
You are provided with the following additional information:
(ii) Plant is to be depreciated at 20% per year using the reducing balance method and included in
distribution costs.
Sa
(iv) The allowance for doubtful debts is to be maintained at 5% of trade accounts receivable
balances.
(vi) Interest on the loan notes has not been paid during the year.
(vii) During June, a bonus (or scrip) issue of two for five was made to ordinary shareholders. This
has not been entered into the books. The bonus shares do not rank for dividend for the
current financial year.
4 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Required:
Prepare for Mercury for the year ended 30 June 2013, in accordance with IAS 1 Presentation of
Financial Statements:
Question 12 SULPHUR
e
The balances listed below were extracted from the records of Sulphur Co on 30 June 2013:
$
Revenue 530,650
Purchases 298,400
Returns (inwards) 1,880
Administrative expenses
Rent received
Investments (unlisted)
Investment income
pl
Delivery vehicles (carrying amount)
Factory plant and equipment (carrying amount)
Land and buildings (carrying amount)
Factory overheads
19,230
24,000
350,000
66,420
18,710
12,000
30,000
1,500
m
Inventory at 1 July 2012 24,680
Trade receivables 15,690
Trade payables 34,700
Distribution costs 44,280
Cash in hand 410
Bank overdraft 4,820
Ordinary shares ($1 each) 150,000
Retained earnings at 1 July 2012 160,030
The following transactions and events occurred on 30 June 2013, after the above balances had been
Sa
extracted:
(1) Sulphur received $460 from a customer.
(2) Inventory was valued at $29,170 at the close of business.
(3) Sulphur received an electricity bill for $1,240 relating to the factory for the three months to
30 June 2013. The bill was paid in July 2013.
(4) Sulphur paid $690 to a supplier in full settlement of an invoice for $700.
(5) The companys land and buildings were valued by a chartered surveyor at $390,000 and the
new value is to be included in the statement of financial position.
(6) Depreciation was provided on the reducing balance basis at the following annual rates:
Delivery vehicles 20%
Factory plant and equipment 10%
(7) Bonus shares were issued on the basis of one for every two held on 29 June 2013.
(8) Income tax for the financial year ended 30 June 2013 was estimated at $38,100.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 5
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Required:
Prepare for Sulphur for the year ended 30 June 2013, in accordance with IAS 1 Presentation of
Financial Statements:
(i) a statement of total comprehensive income using the cost of sales (i.e. function of
expense) method; (7 marks)
e
Question 13 CAYMAN
Cayman prepares annual financial statements to 30 September. At 30 September 2012, the companys
list of account balances was as follows:
Revenue
Production costs
pl
Inventory at 1 October 2011
Distribution costs
Administrative expenses
Loan interest expense
$000
4,140
695
540
730
120
$000
7,400
m
Land at valuation 5,250
Buildings cost 4,000
6 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
The following matters are relevant to the preparation of the financial statements for the year ended 30
September 2012:
(1) Inventory at 30 September 2012 amounted to $780,000 at cost before adjusting for the
following:
(i) Items which had cost $40,000 and which would normally sell for $60,000 were
found to be faulty. $10,000 needs to be spent on these items in order to sell them
for $45,000.
(ii) Goods sent to a customer on a sale or return basis have been omitted from inventory
and included as sales in September 2012. The cost of these items was $8,000 and
they were included in revenue at $12,000. The goods were returned by the
customer in October 2012.
e
(2) Depreciation is to be provided on cost as follows:
(3)
(4)
and administrative expenses.
pl
80% of the depreciation is to be charged to cost of sales and 10% to each of distribution costs
(5) During the year 4 million ordinary shares were issued at 75 cents each. The directors of
Cayman declared an interim dividend of 2 cents per share in September 2012. No dividends
were paid during the year.
Required:
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 7
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Question 14 OSCAR
A trial balance has been extracted from the books of account of Oscar as at 31 March 2013 as follows:
$000 $000
Administrative expenses 210
Share capital (ordinary shares of $1 fully paid) 600
Receivables 470
Bank overdraft 80
Income tax (overprovision in 2012) 25
Provision for pollution costs 180
Distribution costs 420
Listed financial asset investments 560
Investment income 75
e
Plant and machinery: Cost 750
Accumulated depreciation (at 31 March 2013) 220
Retained earnings (at 1 April 2012) 180
Purchases 960
Inventory (at 1 April 2012) 140
Trade payables 260
Sales revenue
Interim dividend paid
Additional information
(1)
pl
Inventory at 31 March 2013 was valued at $150,000.
120
3,630
2,010
3,630
m
(2) The following items are already included in the balances listed in the above trial balance:
Distribution Administrative
costs expenses
$000 $000
Depreciation (for the year to 31 March 2013) 27 5
Hire of plant and machinery 20 15
Auditors remuneration 30
Directors emoluments 45
Sa
Insofar as the information permits, prepare the companys statement of profit or loss for the year
to 31 March 2012 and a statement of financial position as at that date in accordance with IAS 1.
(18 marks)
8 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Question 15 PERSEUS
The list of account balances of Perseus, a limited liability company, contains the following items at 31
December 2012:
Dr Cr
$ $
Opening inventory 3,850,000
Accounts receivable ledger balances 2,980,000 1,970
Accounts payable ledger balances 14,300 1,210,400
Prepayments 770,000
Cash at bank A 940,000
Overdraft at bank B 360,000
The closing inventory amounted to $4,190,000, before allowing for the adjustments required by items
e
(2) and (3) below.
In the course of preparing the financial statements at 31 December 2012, the need for a number of
adjustments emerged, as detailed below:
(1) The opening inventory was found to have been overstated by $418,000 as a result of errors in
(2)
(3)
pl
calculations of values in the inventory sheets.
Some items included in closing inventory at cost of $16,000 were found to be defective and
were sold after the end of the reporting period for $10,400. Selling costs amounted to $600.
Goods with a sales value of $88,000 were in the hands of customers at 31 December 2012 on
a sale or return basis. The goods had been treated as sold in the records and the full sales
value of $88,000 had been included in trade receivables. After the end of the reporting
m
period, the goods were returned in good condition. The cost of the goods was $66,000.
(5) An allowance for doubtful debts is to be set up for 5% of the accounts receivable total.
(6) The manager of the main selling outlet of Perseus is entitled, from 1 January 2012, to a
commission of 2% of the companys profit after charging that commission. The profit
amounted to $1,101,600 before including the commission, and after adjusting for items (1) to
Sa
(5) above. The manager has already received $25,000 on account of the commission due
during the year ended 31 December 2012.
Required:
(a) (i) Explain how adjustment should be made for the error in the opening
inventory, according to IAS 8 Accounting Policies, Changes in Accounting
Estimates and Errors. (Assume that it constitutes a material error.)
(b) Show how the final figures for current assets should be presented in the statement of
financial position at 31 December 2012. (14 marks)
(20 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 9
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Question 16 JENSON
The timing of revenue (income) recognition has long been an area of debate and inconsistency in
accounting. Industry practice in relation to revenue recognition varies widely; the following are
examples of different points in the operating cycle of businesses that revenue and profit can be
recognised:
on the acquisition of goods;
during the manufacture or production of goods;
on delivery/acceptance of goods;
when certain conditions have been satisfied after the goods have been delivered;
receipt of payment for credit sales;
on the expiry of a guarantee or warranty.
e
In the past the critical event approach has been used to determine the timing of revenue recognition.
The International Accounting Standards Board in its Conceptual Framework for Financial Reporting
(the Framework) has defined the elements of financial statements, and it uses these to determine
when a gain or loss occurs.
Required:
(a)
(b) pl
Explain what is meant by the critical event in relation to revenue recognition and
discuss the criteria used in the Framework for determining when a gain or loss arises.
(5 marks)
For each of the stages of the operating cycle identified above, explain why it may be an
appropriate point to recognise revenue and, where possible, give a practical example of
an industry where it occurs. (12 marks)
m
(c) Jenson has entered into the following transactions/agreements in the year to 31 March 2013:
(i) Goods, which had cost of $20,000, were sold to Wholesaler for $35,000 on 1 June
2012. Jenson has an option to repurchase the goods from Wholesaler at any time
within the next two years. The repurchase price will be $35,000 plus interest
charged at 12% per year from the date of sale to the date of repurchase. It is
expected that Jenson will repurchase the goods.
(ii) Jenson owns the rights to a fast food franchise. On 1 April 2012 it sold the right to
Sa
open a new outlet to Mr Cody. The franchise is for five years. Jenson received an
initial fee of $50,000 for the first year and will receive $5,000 per year thereafter.
Jenson has continuing service obligations on its franchise for advertising and
product development that amount to approximately $8,000 per year per franchised
outlet. A reasonable profit margin on rendering the continuing services is deemed
to be 20% of revenues received.
(iii) On 1 September 2012 Jenson received total subscriptions in advance of $240,000.
The subscriptions are for 24 monthly publications of a magazine produced by
Jenson. At the year end Jenson had produced and despatched six of the 24
publications. The total cost of producing the magazine is estimated at $192,000
with each publication costing a broadly similar amount.
Required:
Describe how Jenson should treat each of the above examples in its financial statements
in the year to 31 March 2013. (8 marks)
(25 marks)
10 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Question 17 ALLRIGHTS
Allrights is an old established company operating in the highly competitive business of manufacturing
and marketing radios and television sets.
A new board of directors is considering the draft accounts, prepared under the historical cost
convention, for the year ended 31 March 2013. The main executive directors involved in the policy
discussions are:
Stevie Striver (managing)
Charlie Chatty (sales)
Gordon Gloome (production)
e
A standard model radio has the following disclosed costs:
$
Direct labour and material 38
Bought-in components 5
Factory overhead costs 8
For 1,000 radio sets, the other overhead costs are $14,000 made up as follows:
4,000
2,500
7,500
m
The advertised selling price of the model has recently been reduced to $60 because of intensive
competition.
The three directors have expressed the following views on the most appropriate method of valuing the
companys closing inventories:
A most prudent approach is necessary, particularly as the company has a cash flow problem
which means that the amount locked up in inventory should be kept as low as possible. I
propose a valuation of $43 per set.
Required:
Draft, for inclusion in a report, your opinions on the views expressed by each director, stating the
principles involved.
(8 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 11
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Question 18 SAMPI
(a) IAS 2 Inventories requires inventories of raw materials and finished goods to be valued in
financial statements at the lower of cost and of net realisable value.
Required:
(i) Describe three methods of arriving at cost of inventory which are acceptable
under IAS 2 and explain how they are regarded as acceptable. (5 marks)
(ii) Explain how the cost of an inventory of finished goods held by the
manufacturer would normally be arrived at when obtaining the figure for the
financial statements. (3 marks)
e
(b) Sampi is a manufacturer of garden furniture. The company has consistently used FIFO (first
in, first out) in valuing inventory, but it is interested to know the effect on its inventory
valuation of using weighted average cost instead of FIFO
At 28 February 2013 the company had inventory of 4,000 standard plastic tables, and has
computed its value on each side of the two bases as:
Basis
FIFO
Weighted average pl Unit
cost
$
16
13
During March 2013 the movements on the inventory of tables were as follows:
Total
value
$
64,000
52,000
m
Received from factory:
Production
Number cost per
Date of units unit
$
8 March 3,800 15
22 March 6,000 18
Sa
Revenue: Number of
units
12 March 5,000
18 March 2,000
24 March 3,000
28 March 2,000
Required:
Compute what the value of the inventory at 31 March 2013 would be using weighted
average cost (5 marks)
In arriving at the total inventory values you should make calculations to two decimal
places (where necessary) and deal with each inventory movement in date order.
(13 marks)
12 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Question 19 WILLIAM
William, a company which designs and builds racecourses, commenced a four year contract early in
2009. The price was initially agreed at $12,000,000.
Profit, which was reasonably foreseeable from the year ended 31 December 2009, is to be taken on a
costs basis, and revenue is to be taken on a consistent basis.
e
Required:
Show how the above would be disclosed in the statement of profit or loss and statement of
financial position of William for each of the four years ended 31 December 2012.
(12 marks)
Question 20 MERRYVIEW
pl
Merryview specialises in construction contracts. One of its contracts, with Better Homes, is to build a
complex of luxury flats. The price agreed for the contract is $40 million and its scheduled date of
completion is 31 December 2013. Details of the contract to 31 March 2012 are:
Plant and machinery used exclusively on the contract cost $3,600,000 on 1 July 2011. At the end of the
Sa
At 31 March 2013 the details for the construction contract have been summarised as:
Contract costs to date (i.e. since the start of the contract)
excluding all depreciation 20,400
Estimated cost to complete (excluding depreciation) 6,600
Merryview accrues profit on its construction contracts using the percentage of completion basis as
measured by the percentage of the cost to date compared to the total estimated contract cost.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 13
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Required:
Prepare extracts of the financial statements of Merryview for the construction contract with
Better Homes for:
Question 21 ADJUSTMENTS
Adjustments manufactures items for use in engineering products. You note that amongst its many
tangible non-current assets it has the following:
e
(a) A lathe was purchased on 1 January 2006 for $150,000. The plant had an estimated useful
life of twelve years, residual value of nil. Depreciation is charged on the straight line basis.
On 1 January 2012, when the assets carrying amount is $75,000, the directors decide that the
assets total useful life is only 10 years.
(b)
(c)
pl
A grinder was purchased on 1 January 2009 for $100,000. The plant had an estimated useful
life of 10 years and a residual value of Nil. Depreciation is charged on the straight line basis.
On 1 January 2012, when the assets carrying amount is $70,000, the directors decide that it
would be more appropriate to depreciate this asset using the sum of digits approach. The
remaining useful life is unchanged.
The company purchased a fifty year lease some years ago for $1,000,000. This was being
depreciated over its life on a straight line basis. On 1 January 2012, when the carrying
m
amount is $480,000 and twenty-four years of the lease are remaining, the asset is revalued to
$1,500,000. This revised value is being incorporated into the accounts.
Required:
As the companys financial accountant, prepare a memorandum for the attention of the board
explaining the effects of these changes on the depreciation charge and indicating what additional
disclosures need to be made in the accounts for the year to 31 December 2012.
Sa
(15 marks)
Question 22 FAM
14 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
(1) Further costs of $53,000 are incurred on buildings being constructed by the company. A
building costing $100,000 is completed during the year.
(2) A deposit of $20,000 is paid for a new computer system which is undelivered at the year end.
(4) Additions to fixtures, excluding the deposit on the new computer system, are $40,000.
e
$000 $000 $000
Plant 277 195 86
Fixtures 41 31 2
(6) Land and buildings were revalued at 1 January 2012 to $1,500,000, of which land is worth
$900,000. The revaluation was performed by Messrs Jackson & Co, Chartered Surveyors, on
(7)
(8)
years before the revaluation.
pl
the basis of existing use value on the open market.
The useful economic life of the buildings is unchanged. The buildings were purchased 10
Depreciation is provided on all assets in use at the year end at the following rates:
Required:
Show the disclosure under IAS 16 in relation to non-current assets in the notes to the published
accounts for the year ended 31 December 2012.
(14 marks)
Sa
Question 23 STOAT
The directors of Stoat, a limited liability company, are reviewing the companys draft financial
statements for the year ended 30 June 2013.
Two matters under discussion are depreciation and non-current asset valuation several directors are of
the opinion that the companys depreciation methods and rates are unsatisfactory, and that the statement
of financial position values of some of the non-current assets are unrealistic.
Required:
Draft a memorandum for the directors dealing with the following matters:
(a) The purpose of depreciation and the factors affecting the assessment of useful life
according to IAS 16 Property, Plant and Equipment. (7 marks)
(b) Three items of evidence obtainable from inside or outside the company, to check
whether the companys depreciation rates are in fact likely to be too low. (3 marks)
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 15
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Answer 1 IASB
(a) Objectives
e
A Steering Committee is set up, chaired by a Board representative, and usually
including representatives of at least three other countries.
The Steering Committee identifies and reviews all the accounting issues associated
with the topic. These will include:
pl
the application of the IASB Conceptual Framework for Financial
Reporting; and
The Steering Committee prepares a draft Exposure Draft for approval by the Board.
After revision, and with the approval of at least 9 members of the board, the
Exposure Draft is published. Comments are invited from all interested parties
during an exposure period, usually six months.
The Steering Committee reviews the comments and prepares a draft IFRS for
review by the Board. After revision, and with the approval of at least 9 members of
the board, the IFRS is published.
During the process, the Board may decide to issue a Discussion Paper for comment, or to
issue more than one Exposure Draft.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1001
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Answer 2 NETTE
The Conceptual Framework for Financial Reporting provides a conceptual underpinning for the
International Financial Reporting Standards (IFRS). The framework is in the process of being updated
by the IASB and as at 2012 it is a mixture of the old framework document plus two new chapters that
have been issued by the IASB as a replacement for sections of the old framework.
IFRS are based on the Framework and its aim is to provide a framework for the formulation of
accounting standards. If accounting issues arise which are not covered by accounting standards then
the Framework can provide a basis for the resolution of such issues. The Framework deals with several
areas:
the objective of financial statements
the underlying assumption
the qualitative characteristics of useful financial information
e
the elements of financial statements
recognition in financial statements
measurement in financial statements
concepts of capital and capital maintenance
The Framework adopts an approach which builds corporate reporting around the definitions of assets
pl
and liabilities and the criteria for recognising and measuring them in the statement of financial position.
This approach views accounting in a different way to most companies. The notion that the
measurement and recognition of assets and liabilities is the starting point for the determination of the
profit of the business does not sit easily with most practising accountants who see the transactions of
the company as the basis for accounting. The Framework provides a useful basis for discussion and is
an aid to academic thought. However, it seems to ignore the many legal and business roles that
financial statements play. In many jurisdictions, the financial statements form the basis of dividend
payments, the starting point for the assessment of taxation, and often the basis for executive
m
remuneration. A statement of financial position, fair value system which the IASB seems to favour
would have a major impact on the above elements, and would not currently fit the practice of
accounting. Very few companies fit this practice of accounting. Very few companies take into account
the principles embodied in the Framework unless those principles themselves are embodied in an
accounting standard. Some International Financial Reporting Standards are inconsistent with the
Framework primarily because they were issued earlier than the Framework. The Framework is a useful
basis for financial reporting but a fundamental change in the current basis of financial reporting will be
required for it to have any practical application. The IASB seems intent on ensuring that this change
will take place.
Sa
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors makes reference to the use of
the Framework where there is no IFRS or IFRIC in issue. The standard says in making the judgement,
management shall refer to, and consider the applicability of, the following sources in descending order:
the requirements and guidance in Standards and Interpretations dealing with similar and
related issues; and
the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses in the framework.
1002 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Answer 3 LIMITATIONS
Nowadays, financial statements prepared under a financial reporting framework (e.g. IFRS)
contain very complex and detailed information. Most users will not be able to fully
understand what the financial statements are trying to communicate. For example, accounting
for financial instruments encompasses detailed rules, which even accountants may struggle to
understand.
Decision-making processes undertaken by management require timely information on matters
that are not incorporated in financial statements. Therefore financial statements are of limited
use to management.
e
The values used in financial statements are mixed in nature. Some transactions and balances
are accounted for at historic cost whilst others are incorporated at fair value. Without detailed
knowledge of how these figures have been determined, their meaning can be difficult to
construe.
The financial statements are mainly historic in nature and summarise what has happened, not
what is going to happen. They cannot be used to make predictions about the future.
pl
Many items are excluded from the financial statements. For example, many internally-
generated intangible assets (e.g. a brand name) can never be recognised in the statement of
financial position of the reporting entity. The only way in which such assets can be
recognised is if the entity is acquired, but even then they are recognised only in the
consolidated statement of financial position of the acquiring company.
Management may be very creative in how information is presented in the financial statements.
m
Much of the information which is required to be disclosed is subjective in nature and
management may interpret the accounting requirements to portray information in a particular
light. Enron is the classic example of management being creative and, in doing so, the
financial statements not showing a realistic picture.
How the financial market perceives an entity cannot be recognised in the financial statements.
The market value of a company is very different to the carrying value presented in the
financial statements because market value reflects, for example, shareholders expectations of
future returns.
Sa
It can be quite difficult to judge at what point revenue should be recognised. When complex
contractual agreements are made between parties it may also be difficult to specify an
appropriate amount of revenue to be included. Therefore the statement of comprehensive
income may be inadequate in reflecting the amount of profit made in a period.
Financial statements are drawn up at a specified point in time. A cut-off therefore has to be
established to be able to prepare the financial statements. The point of cut-off could be in the
middle of a very detailed or complex transaction or related transactions which again the
financial statements may not be able to reflect fully.
From the end of the reporting period to when the statements are authorised for publication is
usually a minimum of three months. A lot can happen in that three-month period, so the
statements become out of date very quickly.
Many transactions take place between related parties. Although certain disclosures should be
made regarding related party transactions it is still difficult for the financial statements to fully
reflect the impact of these transactions.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1003
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Answer 4 FRAMEWORK
To assist preparers of accounts in applying IFRSs and in dealing with topics 1 per point to
that have yet to be covered by an IFRS. max 4
e
To assist auditors in forming an opinion on whether the accounts comply with
IFRS.
(b)
Status
pl
To provide those who are interested in the work of the IASB with information about
its approach to the formulation of standards.
Going concern
Sa
Therefore is assumed that the enterprise has neither intention nor need to liquidate 1
or curtail materially the scale of operations.
8
Answer 5 REGULATORY FRAMEWORK ___
A regulatory framework has been defined as a system of regulations and the means to enforce them,
usually established by a governing body to regulate a specific activity. Without such a framework the
system would fail to function properly and ad hoc rules and regulations would emerge which
individuals and bodies would not be able to understand fully. There would be no direction or
guidelines governing the content, or rules, that should be followed and parties would devise their own
rules.
1004 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
A regulatory framework is needed for financial reporting to ensure that all relevant parties understand
exactly what should be reported by the entity, and how. The framework may be a set of rules and
regulations detailing exactly what and to whom an entity should report or it may be a less formal
framework providing guidance for reporting.
Company law and/or accounting standards can be issued to create Generally Accepted Accounting
Practice (GAAP) for reporting entities to follow when preparing their financial statements. There is a
need for some form of regulatory framework in financial reporting to ensure there is consistency in
accounting treatments so that comparisons can be made between financial statements (e.g. year-on-year
and between companies).
Under IFRS the IASB has issued the Conceptual Framework for Financial Reporting. This is a
conceptual framework which is used by the IASB to assist relevant parties in the needs and
requirements of users of financial statements. It is used in conjunction with International Financial
e
Reporting Standards to form a set of principles with which reporting entities should comply when
preparing and presenting their financial statements. The conceptual framework is not in itself a
regulatory framework as there is no formal means of enforcing the issued standards, and as they are
principles-based they are open to interpretation.
Other GAAPs have formed regulatory frameworks in order to regulate the financial reporting activities
pl
of their members. UK GAAP is formed of company law issued by the UK government and accounting
standards issued by the Accounting Standards Board. The ASB has a body within it, the Financial
Reporting Review Panel, whose function is to police the financial statements issued by UK
companies. It aims to ensure that published financial statements are prepared in conformity with the
UK regulatory framework.
In accounting, it is necessary to define the boundaries of the entity concerned. In the case of a
limited liability company, only transactions of that company must be included. There must be
no confusion between the transactions of the company and the transactions of its owners and
managers.
If the entity concept is not followed, the profit, financial position and cash flow may all be
distorted to the point where they become meaningless.
Sa
A limited liability company is therefore a separate entity which can sue and be sued in its own
name.
(b) Going concern concept
The going concern is that financial statements are prepared on the basis that the entity will
continue for the foreseeable future that there is no intention or necessity to liquidate or
curtail the scale of operations.
If the going concern concept is followed when it is not appropriate, assets may be overstated,
liabilities may continue to be shown as non-current when the collapse of the going concern
status of the entity renders them current liabilities, and the profit is likely to be overstated.
(c) Materiality
Information is material if its omission from, or misstatement in, the financial statements could
influence the economic decisions of users. Materiality cannot always be measured in
monetary or percentage terms, but a commonly used measure is 5% of normal pre-tax profit.
Above that level, for example, the transaction would need to be disclosed in the financial
statements.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1005
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Materiality is not solely related to the size of a transaction; it would also be necessary to
consider the nature of the transaction and the fact that the nature would give rise to an item
being treated as material and require disclosure.
If the materiality concept is not followed, financial statements could become confused by the
inclusion of unnecessary detail of trivial matters, or could be rendered misleading by the
exclusion of reference to important matters.
Fair presentation really means that all figures in financial statements have been arrived at
accurately when accuracy is possible (true) and that when judgement or estimation is needed
it has been exercised without bias (fair). Compliance with generally accepted concepts and
principles will normally result in fair presentation.
e
Failure to present information fairly will obviously mean that users may be misled by the
financial statements.
Answer 7 COMPARABILITY
pl
Comparability means that users are able to draw conclusions about the performance or
financial position of a business by relating amounts for a particular period to other relevant
amounts. Possible types of comparison are with:
figures for the same business for earlier periods;
figures for other businesses for the same period;
budgets or forecasts.
m
The IASBs Framework and the requirements of accounting standards aid comparability by:
requiring businesses to treat similar items in the same way in each period and from
one period to the next (unless a change is required to comply with accounting
standards or to ensure that a more appropriate presentation of events or transactions
is provided).
1006 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Preparing accounts on a substance over form basis means that they should reflect the commercial
effect of transactions rather than their legal form.
The arguments for and against this treatment are discussed below.
Framework
The IASBs Conceptual Framework for Financial Reporting notes that financial statements are
frequently described as showing a true and fair view (as in the UK), or as presenting fairly the
financial position (as in the US).
Many other countries adopt similar requirements for financial statements, particularly in Europe
e
where the requirements of directives state that all member states financial statements should give a
true and fair view. This is, for example, translated as donner une image fidele in France. Some
countries interpret this as meaning in accordance with their own legislation, particularly in Germany,
but generally speaking, legislatures and accounting standard setters increasingly recognise an
overriding notion of truth and fairness.
pl
One of the fundamental qualitative characteristics required by the Framework is that of faithful
representation. To faithfully represent a transaction the entity must reflect the economic reality
(substance) rather than its legal form, if there is a difference. It gives the example of an entity
disposing of an asset in such a way that the documentation purports to pass legal ownership to a
third party, but where agreements exist to ensure that the entity continues to enjoy the future
economic benefits embodied in the assets. In such circumstances the reporting of a sale would not
represent faithfully the transaction entered into.
m
Application of the principle
IAS 17 Leases requires that finance leases be capitalised in the statement of financial position where
certain conditions are met. In such cases the legal form of the transaction is that the lessor retains
the legal title to the assets. The economic substance of the transaction however is that the lessee is
the true owner of the asset as the lease transfers substantially all the risks and rewards incident to
the ownership of the asset. The lessee therefore includes it in its financial statements. Not to do so
would distort gearing ratios.
Sa
IFRS 10 Consolidated Financial Statements requires that group accounts be prepared to show
information about the group as that of a single entity, without regard for the legal boundaries of the
separate legal entities.
IAS 32 Financial Instruments: Presentation recognises that some financial instruments take the legal
form of equity, but are liabilities in substances and requires that classification of an instrument is
made on the basis of an assessment of its substance when it is first recognised.
IAS 1 Presentation of Financial Statements states the importance of prudence, substance over form
and materiality in the selection and application of accounting policies and the preparation of
financial statements.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1007
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Other areas where the principle applies include the factoring of receivables and the sale and
repurchase of inventories. Factored debts are sold to a third party in exchange for a proportion of
the carrying amount of the debt. Such agreements vary considerably in their nature and some leave
the entity with most of the risks associated with the collection of the receivables. In such
circumstances it may be appropriate to keep the receivables on the face of the statement of financial
position and recognise the cash received from the factor as a liability, rather than accounting for the
transaction as a sale of the receivable.
Another argument put forward against the use of substance over form is that it introduces yet more
subjectivity into accounts (the judgment of the true substance). It is argued that if transactions were
accounted for on a legal basis, there would be greater certainty and objectivity in the preparation of
accounts and hence more comparability. It may be true that the certainty of legal form would
e
increase, but this does not mean the comparability. In fact most accountants would say that it is the
substance over form principle which is designed to increase comparability by making transactions of
a similar nature treated in similar ways.
It may introduce another element of subjectivity, but accounts preparation inevitably does involve
many judgmental decisions. It is these judgments that make accounts fair as well as true, and hence
duly comparable.
pl
A further argument against the proposal is that it may not be essential to account on the basis of
substance over form, but merely to provide additional disclosure.
The argument here rests on whether any amount of disclosure can compensate for a transaction
m
which is fundamentally misleadingly treated in the accounts. If additional disclosure is not so much
addition as contradictory to the accounting treatment, then surely the result is confusing the user and
hence still misleading and not true and fair.
Conclusion
Broadly speaking, the Anglo-Saxon world regards economic substance as being more important than
legal form. This is at least in part due to the historical separation of fiscal and financial accounting.
Countries with civil, as opposed to common law legal traditions place more emphasis on the fiscal
Sa
correctness of financial statements. With increasing globalisation of capital markets the trend, at the
moment seems to be away from legal form, and towards economic substance. However, the inherent
uncertainties in the notion of economic substance mean that there is an ever increasing volume of
accounting standards on what exactly is meant by substance as it is very easily abused.
(a) Hughes
The Conceptual Framework for Financial Reporting states that financial statements should
show the economic substance of transactions over their legal form.
Hughes has entered into a sale and repurchase agreement with the Wodwo Bank. Hughes
has received $36 million now. If Hughes exercises its call option after one month, it will
repurchase the inventory at a premium of $1.8 million which represents a finance charge of
5% for the month. If the Wodwo Bank exercises its put option after two months, Hughes
will repurchase the inventory at a premium of $3.7 million which represents a finance
charge of 5% for each of the two months.
1008 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
It is highly likely that one or other of the options will be exercised. Taking the transactions
as a whole, the commercial substance is that of a short-term loan secured on the inventory.
The inventory should remain in inventory at $30 million at year end. $36 million should
be shown in current liabilities. The interest payable to 31 December 2012of $1.2 million
($1.8m 21/31) should be charged to profit or loss and added to the liability in the statement
of financial position.
Unless Sigmas cash contribution is very substantial (say 80% as opposed to 20% of the
expenditure incurred by Custom Cars), there should be no doubt that Custom Cars owns
the extension (and has the risks and rewards of ownership).
e
The fittings supplied free of charge by Sigma could be excluded from the statement of
financial position on the grounds that they are not owned by Custom Cars. Also their
economic benefit is primarily to Sigma in promoting Sigmas product.
Answer 10 OBJECTIVES
(a) Users
(1)
pl
Investors and their advisers
Information needs
performance of management in achieving profit
growth while ensuring the continued solvency of
the company;
the risk inherent in the companys operations.
m
(2) Employees stability and survival of the company;
ability of the company to provide remuneration,
employment opportunities and retirement benefits.
(3) Lenders the solvency of the company;
profitability, to ensure payment of interest when
due;
asset values.
Sa
(4) Suppliers and other creditors information as to the solvency of the company and
its ability to pay, probably over a shorter period
than lenders.
(5) Customers information about the continuance of the company,
especially if they have a long term involvement
with it.
Users of financial statements are interested in three main areas in their use of company
financial statements:
profitability;
solvency/liquidity;
the risk of the operation.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1009
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
The statement of financial position details of current assets and liabilities enable users to form
a reasonable assessment of a companys solvency, because they are reasonably reliably
valued. Lack of information about the dates of payments to sundry accounts payable or
receipts from sundry accounts receivable could affect the position. Users would be very
interested in seeing the age analysis of the accounts receivable balances in order that they may
make a more informed judgement on the solvency of the business.
The leverage ratio (percentage of total assets financed by debt) provides a reasonably reliable
assessment of the financial risk of the companys operation.
e
Two ways in which the quality of information disclosed in financial statements could be
improved:
Answer 11 MERCURY
(a)
Revenue
standards.
pl
Statement of comprehensive income for the year ended 30 June 2013
Distribution costs
(240 + (20% (1,020 370)) + 30) 400
Administrative expenses (205 + (5% 900)) 250
Other expenses (50+ 5 (W1)) 55
___
Profit before interest and tax 315
Finance costs
Loan note interest (10% 500) 50
Preference dividend (7% 500) 35
(85)
___
Profit before tax 230
Income tax 55
___
Profit after tax 175
___
1010 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
(b) Statement of changes in equity for the year ended 30 June 2013
e
(c) Statement of financial position as at 30 June 2013
Current assets
Inventory
Trade receivables (600 30)
pl 900
1,020
_____
2,220
_____
180
500
___
680
___
500
570
720
520
_____
1,540
m
Bank 110
_____
1,180
_____
Total assets 2,720
_____
Capital and reserves
50 cent ordinary shares (250 + (2/3 250)) 350
Share premium account (180 100) 80
Retained earnings 220
_____
Sa
650
Non-current liabilities
10% Loan notes 500
7% Preferred shares of $1 500
Current liabilities
Trade payables 900
Income tax 55
Accrued expenses (50 + 30) 80
Dividends 35
_____
1,070
_____
Total equity and liabilities 2,720
_____
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1011
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
WORKING
$000
5% trade receivables (5% 600) 30
Brought forward (25)
__
Expense 5
___
Answer 12 SULPHUR
(i) Statement of total comprehensive income for the year ended 30 June 2013
e
Profit or loss
$
Revenue (530,650 1,880) 528,770
Cost of sales (W1) (363,960)
______
Gross profit
pl
Other operating income (1,500 + 12,000)
1012 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
$ $
ASSETS
Non-current assets
Land and buildings (at valuation) 390,000
Delivery vehicles (carrying amount)
($19,230 $3,846) 15,384
Factory plant and equipment (carrying amount)
($24,000 $2,400) 21,600
426,984
Investments 30,000
e
Current assets
Inventories 29,170
Trade receivables ($15,690 $460) 15,230
Cash 410
______
44,810
Total assets
225,000
40,000
158,404
m
423,404
Current liabilities
Trade payables ($34,700 $700) 34,000
Accrued expenses 1,240
Bank overdraft ($4,820 + $690 $460) 5,050
Income tax 38,100
______
78,390
Sa
WORKING
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1013
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Answer 13 CAYMAN
Statement of total comprehensive income for the year ended 30 September 2012
Profit or loss
$000
Revenue (7,400 12) 7,388
Cost of sales (W1) (5,140)
_____
Gross profit 2,248
Distribution costs (W2) (711)
Administrative expenses (W2) (871)
_____
e
Profit from operations 666
Finance cost (12% $1m) (120)
_____
Profit for the year 546
WORKINGS
(1)
pl
Total comprehensive income
Cost of sales
(250)
_____
296
_____
m
$000
Opening inventory 695
Production costs 4,140
Depreciation 80% ([2% $4m] + [20% $6.4m]) 1,088
Less: Closing inventory (780k 5k + 8k) (783)
_____
5,140
Sa
1014 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
$000 $000
ASSETS
Non-current assets
Property, plant and equipment (W3) 11,735
Current assets
Inventory (W1) 783
Trade receivables (2,060 12) 2,048
Prepayments (60 + 30) 90
2,921
______
Total assets 14,656
Non-current liabilities pl
Interest bearing borrowings 12% Loan (2019)
Current liabilities
1,250
1,836
______
12,086
1,000
m
Trade payables 1,120
Operating overdraft 40
Accrued expenses (95 + 35) 130
Interim dividend (14m 2c) 280
1,570
______
14,656
Sa
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1015
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
WORKINGS
$000
Land 5,000
Buildings (4,000 1,065 80) 2,855
Plant and equipment (6,400 1,240 1,280) 3,880
______
11,735
Answer 14 OSCAR
e
(a) Profit or loss for the year ended 31 March 2013
$000 Notes
Sales 2,010
Operating costs $(140 + 960 150 + 420 + 210 + 16) (1,596)
Operating profit before interest 414
Income tax
95
509
(49)
460
(2)
(1)
(3)
m
Extract from statement of changes in equity (not required by question)
Opening retained earnings 180
Profit for year 460
Dividends (120)
Closing retained earnings 520
Sa
1016 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
e
1,730
Equity and liabilities
Capital and reserves
Share capital 600 (8)
Retained earnings 520
Non-current liabilities
Current liabilities pl
Provisions for liabilities and charges
1,120
196
414
1,730
(7)
(6)
m
The following notes form part of these accounts:
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1017
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
e
(5) Investments $000
The financial asset investments are classed as fair value though profit or loss,
their fair value at 31 March 2013 was $580,000. The gain in value of $20,000
has been credited to profit or loss.
(6)
Income tax
pl
Current liabilities
Trade payables
Bank overdraft
$000
260
74
80
414
m
(7) Provisions for liabilities and charges
$000
Pollution costs
At 1 April 2012 180
Provided in the year 16
At 31 March 2013 196
Sa
Answer 15 PERSEUS
1018 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
The amount of the correction for the current period and for each prior period
presented.
The fact that comparative information has been restated or that it is impracticable to
do so.
$
Inventory (W1) 4,249,800
e
Trade receivables (W2) 2,674,300
Prepayments 773,400
Cash at bank 940,000
WORKINGS
(1)
(i)
Inventory
As originally taken
pl
Reduction to net realisable value
Original cost
Net realisable value (10,400 600)
$
16,000
9,800
$
4,190,000
(6,200)
m
(ii) Goods on sale or return at cost 66,000
_________
4,249,800
_________
(2) Trade receivables
As originally stated
Accounts receivable ledger 2,980,000
Sa
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1019
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
(3) Prepayments
$ $
As originally stated 770,000
Payments on account 25,000
Less: Commission due
2
/102 $1,101,600 21,600
______
3,400
_______
773,400
_______
Answer 16 JENSON
e
Problems of revenue recognition in accounting arise from the requirement to produce
financial statements for specific periods of reporting. Consequently accounting principles and
practices have evolved which focus on when and at what value transactions should be
recognised in financial statements. Annual reporting creates artificial periods that are not
related to the natural operating cycle of an entity. A typical operating cycle (for a
pl
manufacturing company) would comprise of acquiring goods or raw materials from which a
saleable product is manufactured, at some stage orders would be obtained for these goods and
they would then be delivered to and accepted by customers. The collection of cash for these
sales is often considered to be the end of this process, but it should be borne in mind that in
some cases further risks can exist in relation to product warranties or other after-sale
commitments. The critical event theory argues that there comes a stage in the operating cycle,
beyond which there is either no further significant risks or uncertainties or that they can be
estimated with sufficient accuracy to enable revenue to be recognised. The point at which
m
there remain no further risks is referred to as the critical event. For most transactions the
critical event is synonymous with full performance, but in theory, the critical event could
occur at almost any point in the operating cycle.
The traditional view of determining profit involves matching revenues earned with the related
cost of earning those revenues. This involves the use of the accruals, matching and prudence
concept, with prudence being closely related to the principle of realisation. Under this
approach the statement of financial position is effectively a statement of unexpired costs and
un-discharged liabilities.
Sa
In its Framework, the IASB advocates a different approach; it takes a balance sheet
approach to the process of revenue recognition. It chooses to define the elements of financial
statements, principally assets and liabilities, and uses these to determine income (gains) and
expenses (losses). Recognition of gains and losses takes place when there is an increase or
decrease in equity other than from contributions to, or withdrawals of, equity. Thus increases
in economic benefits in the form of enhancements of assets or decreases in liabilities result in
income, and decreases in economic benefits in the form of outflows or depletions of assets or
incurrences of liabilities results in losses (expenses). Recognition is the incorporation of an
item in the financial statements. It involves the depiction of the item in words and at a
monetary amount. For a transaction to be recognised as giving rise to a new asset or liability,
or to add to an existing one, it must meet the following recognition criteria:
(i) it is probable that any future economic benefit associated with the item will flow to
the entity; and
(ii) the item has a cost or value that can be measured with reliability.
1020 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
e
be flawed and therefore not produce saleable goods. Even if the goods are manufactured
properly, it does not necessarily mean someone will buy them. It could be argued that where
there is a firm order for the goods this would overcome some of the uncertainties, but it would
still be imprudent to recognise firm orders as sales. There are however some industries
where, due to a long production period, revenues are recognised during the production or
pl
manufacturing period. The most common example of this is the percentage of completion
method of profit recognition for construction contracts under IAS 11 Construction Contracts.
Where companies adopt this approach to revenue (and profit) recognition it is generally
referred to as the accretion approach.
Delivery/acceptance of the goods
For the vast majority of businesses this is the point at which revenue is recognised, and it
usually coincides with the transfer of the legal title to the goods and represents the point of
m
full performance. Although there may be some uncertainties beyond this point (e.g. the goods
may prove to be faulty or the customer may not be able to pay for them), these can usually be
quantified and provided for with reasonable accuracy based on past experience.
When a condition has been satisfied after the goods have been delivered
The most common occurrence of this type of sale is where the customer has the right to return
goods and not incur a liability for them. In most cases the condition is the passage of time
(e.g. goods may be returned within three months of delivery), but it may also occur in relation
Sa
to some other event such as their subsequent resale to another party. Traditionally with this
type of sale, its recognition is delayed until the condition has been met, however one could
argue that the substance of these transactions should be considered. Although a customer
may have the right to return goods, if it can be demonstrated that in practice this never
actually occurs, then recognising the sale before the expiry of the return period could be
justified. Another example of this type of condition is where the terms of a sale of say an
item of equipment required the seller to install and test the equipment. If this involves
significant expense or risk then recognition of this type of sale would be deferred until
completion of the installation.
Collection of cash
For most (credit) sales the risk of non-payment is relatively low. Revenue recognition would
only be delayed to the point of receipt of cash if its collection was perceived to be particularly
difficult or risky. Revenues (and profits) from high risk credit sale agreements may be
examples of this. Another possibility is sales made to risky overseas countries/customers,
particularly if they are in non-convertible currencies or the country has strict exchange
controls.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1021
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Expiry of guarantees/warranties
This serves as a reminder that not all the risks and associated costs are resolved when cash is
received. For some products such costs can be significant (e.g. with the supply of new motor
vehicles or rectification work on construction contracts); however it is normally possible to
reliably estimate these costs and provide for them at the time of the sale. It would be
unrealistic, and may cause distortions, if revenues were not recognised until such obligations
had elapsed.
(c) Transactions
(i) Although this agreement may be worded as a sale, and even if the title to the goods
passes to Wholesaler, it seems clear that this is not a sale it is a secured loan.
Therefore Jenson should not treat the income from Wholesaler as revenue, but
instead as a loan in its statement of financial position. The goods should continue to
e
be recognised as inventory, and accrued interest of $3,150 ($35,000 12% 9/12)
should be provided for against profit or loss.
(ii) It appears that the on-going fees after the first initial payment are insufficient to
cover Jensons servicing cost and provide a reasonable profit. In these
circumstances IAS 18 Revenue requires part of the initial fee of $50,000 to be
deferred and recognised in future periods as the servicing costs are incurred. As
(iii)
pl
there is a requirement to earn a (reasonable) profit of 20% on revenues, with on-
going servicing costs of $8,000, revenues of $10,000 would need to be recognised
in the next four years. The actual fees receivable are $5,000; therefore Jenson will
have to defer $20,000 ($5,000 four years) of the initial fee. Thus in the year to 31
March 2013 Jenson would recognise $30,000 ($50,000 $20,000) of the initial
franchise fee.
An accruals/matching approach to this problem would be to say that the profit on
m
each publication would be $2,000 (($240,000 $192,000)/24). In the year to 31
March 2013, as six of the 24 publications have been produced and delivered, the
profit or loss would include:
$
Sales (6 240,000/24) 60,000
Cost of sales (6 192,000/24) (48,000)
Profit 12,000
Sa
1022 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Answer 17 ALLRIGHTS
Striver: A prudent approach is necessary, but the concept of accruals is also important. It is not
acceptable to undervalue inventories. Valuing inventories at low figures will not of itself help cash
flow although, as profit will be reduced, the outgoings for bonuses, taxation and dividends may also
be reduced.
Chatty: It is not acceptable to include selling costs or costs not related to production in the cost
calculation.
e
Opinion
Inventories should be valued at the lower of cost and net realisable value under IAS 2 Inventories.
Cost means all costs of purchase, of conversions and other costs incurred in bringing inventories to
their present location and condition. They include a systematic allocation of fixed and variable
pl
production overheads including depreciation and maintenence of factory buildings and the cost of
factory management and administration. The allocation of these overheads must however be based
on the normal capacity of production facilities such that the value of inventories is not increased as a
result of inefficiencies.
In this case, Gloom indicates that there may have been some inefficiencies and these should be noted
carefully before any final decision is made.
m
Costs to be included are therefore as follows:
$
Direct labour and materials 38
Bought-in components 5
Factory overheads 8
Production planning ($4,000 1,000) 4
55
Sa
Net realisable value means the selling price to be obtained on sale in the normal course of business
less any costs inevitably incurred on sale (i.e. $60 less royalty $2 and commission $4 = $54).
Inventories therefore should be valued at $54.
Answer 18 SAMPI
Inventory is priced at the actual amount paid for each individual item of inventory
held
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1023
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
Inventory is priced at the moving weighted average price at which each inventory
line was purchased during the accounting period, or brought forward from the
previous period.
e
All three of these methods are acceptable under IAS 2 because they are either the
actual cost of the inventory (method 1) or a reasonably close approximation to that
actual cost (methods 2 and 3).
(b) pl
The cost of the inventory of finished goods would normally be arrived at by taking the labour
and materials consumed in manufacturing the items plus an allocation of overheads. The
overhead allocation should be based on the normal level of production and should exclude
selling expenses and general management expenses.
12 March (5,000)
_____
2,800 13.97
18 March (2,000)
_____
800 13.97
22 March 6,000 18.00
_____
6,800 17.53
24 March (3,000)
_____
3,800 17.53
28 March (2,000)
_____
1,800 17.53 31,554
_____ _____
1024 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
Answer 19 WILLIAM
e
2009 2010 2011 2012
$000 $000 $000 $000
Contract revenue recognised as revenue
in the period:
3,143 1,968 5,272 2,117
pl
Contract costs incurred and recognised profits
( less recognised losses ) to date
143
4,250
Nil
10,383
Nil
12,500
Nil
m
Gross amounts due to customers for
contract work (W2)
Nil 750 617 Nil
WORKINGS
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1025
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
e
(3) Revenue
Costs to date
Total costs
% complete
tender value
Revenue to date
pl2,750
(2,750+7,750)
26%
12,000
3,143
5,750
(5,750+7,750)
43%
12,000
5,111
9,950
(9,950+1,550)
86%
12,000
10,383
100%
11,100
11,100
Actual (12,500)
12,500
m
Less taken
in prior periods (3,143) (5,111) (10,383)
Revenue in year 3,143 1,968 5,272 2,117
Answer 20 MERRYVIEW
Sa
$000
Sales revenue (40,000 35% (W1)) 14,000
Cost of sales (W1) (9,100)
______
Profit on contract 4,900
______
Statement of financial position (extracts) as at 31 March 2012
Non-current assets
Plant and machinery (3,600 900 (W2)) 2,700
Current assets
Amount due from customer (W3) 1,500
1026 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
STUDY QUESTION BANK FINANCIAL REPORTING (F7)
$000
Sales revenue (40,000 75% 14,000 (W1)) 16,000
Cost of sales (22,500 9,100 (W1)) (13,400)
_______
Profit on contract 2,600
_______
Statement of financial position (extracts) as at 31 March 2013
Non-current assets
Plant and machinery (3,600 900 1,200 (W2)) 1,500
Current assets
Amount due from customer (W3) 1,000
e
WORKINGS (all figures $000):
pl
Materials used (3,100 300 inventory)
_______
Cost to date 22,500
Estimated cost to complete:
Excluding depreciation 6,600
Plant depreciation (9 months) 900 7,500
______ _______
Estimated total costs on completion 30,000
_______
Percentage of completion at 31 March 2013 (22,500/30,000) = 75%
(2) The plant has a depreciable amount of $3,000 (3,600 600 residual value)
Its estimated life on this contract is 30 months (1 July 2011 to 31 December 2013)
Depreciation would be $100 per month i.e. $900 for the period to 31 March 2012;
$1,200 for the period to 31 March 2013; and a further $900 to completion.
2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved. 1027
FINANCIAL REPORTING (F7) STUDY QUESTION BANK
e
30,000
Cash received 31 March 2012 (12,800)
31 March 2013 (16,200) (29,000)
_______ _______
Amount due at 31 March 2013 1,000
_______
Answer 21 ADJUSTMENTS
To
From
Date
Members of the Board pl
S Bean, Financial Accountant
5 February 2013
Internal memorandum
m
Re Adjustments to depreciation
At the board meeting on 1 January 2012 it was decided to modify the depreciation charge on a
number of assets of the company. Set out below is the effect that these modifications will have on
the accounts for the year to 31 December 2012.
(a) Lathe
Sa
The lathe was purchased in 2006 and was originally being written off over an estimated
useful life of 12 years. As at 1 January 2012 six of the years have elapsed with a further
six years remaining. It was decided that the machine will now only be usable for a further
four years.
IAS 16 Property, Plant and Equipment requires that where the original estimate of useful
life is revised, adjustments should be made in current and future periods (not in prior
periods). I therefore propose that the unamortised cost of the asset should be charged to
revenue over the remaining useful life of the asset. The carrying amount of $75,000
should therefore be charged over the remaining four years of useful life, giving an annual
depreciation charge of $18,750.
The revision is not a change in accounting policy, or an error. It is merely a refinement of
an existing policy to reflect changed circumstances. It is therefore not appropriate to deal
with any excess depreciation by adjusting opening retained earnings.
1028 2014DeVry/BeckerEducationalDevelopmentCorp.Allrightsreserved.
e
pl
ABOUT BECKER PROFESSIONAL EDUCATION
Together with ATC International, Becker Professional Education
provides a single destination for candidates and professionals
looking to advance their careers and achieve success in:
m
Accounting
International Financial Reporting
Project Management
Continuing Professional Education
Healthcare
Sa
This ACCA Study Question Bank has been reviewed
e
by ACCA's examining team and includes:
pl
m
Sa
www.becker.com/ACCA | acca@becker.com
2014 DeVry/Becker Educational Development Corp. All rights reserved.