Exam question paper

Exam question paper NVQ/SVQ Level 4 in Accounting Drafting Financial Statements (Accounting Practice, Industry and Commerce) (DFS) 2003 Standards

Diploma in Accounting (Diploma Pathway) Drafting Financial Statements (Accounting Practice, Industry and Commerce) (DFS) 2003 Standards

Wednesday 5 December 2007 (morning) Time allowed - 3 hours plus 15 minutes’ reading time Important: This exam paper is in two sections. You should try to complete every task in both sections. We recommend that you use the 15 minutes’ reading time to study the exam paper fully and carefully so that you understand what to do for each task. However, you may begin to write your answers within the reading time, if you wish. We strongly recommend that you use a pen rather than a pencil. You may not use programmable calculators or dictionaries in the exam. Do NOT open this paper until instructed to do so by the Supervisor.

DFS

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This exam paper is in TWO sections.

You must show competence in both sections. So, try to complete EVERY task in BOTH sections.

Section 1 contains 6 tasks and Section 2 contains 2 tasks.

Please use the answer booklet provided.

You should include all your workings and essential calculations in your answers.

The answer booklet includes the following pro-formas:

• Journal entries • Company income statement • Company balance sheet • Consolidated balance sheet • Cash flow statement You should spend about 125 minutes on Section 1 and about 55 minutes on Section 2.

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Section 1 This section is in three parts. Part A You should spend about 55 minutes on this part. Data You have been asked to help prepare the financial statements of Benard Ltd for the year ended 31 October 2007. The company’s trial balance as at 31 October 2007 is shown below.

Benard Ltd Trial balance as at 31 October 2007

Debit Credit £000 £000

Share capital 12,000

Trade and other payables 3,348

Property, plant and equipment – cost 58,463

Property, plant and equipment – accumulated depreciation 27,974

Trade and other receivables 6,690

Accruals 387

7% bank loan repayable 2012 16,000

Cash at bank 1,184

Retained earnings 12,345

Interest 560

Sales 50,875

Purchases 35,245

Returns inwards 678

Returns outwards 453

Distribution costs 6,654

Administrative expenses 4,152

Inventories as at 1 November 2006 8,456

Final dividend for year ended 31 October 2006 700

Interim dividend for year ended 31 October 2007 600

123,382 123,382

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Further information: • The share capital of the company consists of ordinary shares with a nominal value of £1. • The sales figure in the trial balance does not include the credit sales for October 2007 of £3,564,000. • The inventories at the close of business on 31 October 2007 cost £9,786,000. • Goods for resale costing £127,000 purchased on two months’ credit in October 2007 were returned

to the supplier on 30 October 2007. No entries have been made in the accounts in the trial balance. • The company paid £48,000 insurance costs in June 2007, which covered the period from 1 July

2007 to 30 June 2008. This was included in administrative expenses in the trial balance. • Interest on the bank loan for the last six months of the year has not been included in the accounts in

the trial balance. • The corporation tax charge for the year has been calculated as £1,254,000. • All of the operations are continuing operations. Task 1.1 Using the pro-forma in your answer booklet, make the necessary journal entries as a result of the further information given above. Task 1.2 (a) Using the pro-forma in your answer booklet, draft the income statement for Benard Ltd for the

year ended 31 October 2007. (b) Using the pro-forma in your answer booklet, draft the balance sheet for Benard Ltd as at

31 October 2007.

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Part B You should spend about 45 minutes on this part. Data The Managing Director of Dumyat plc has asked you to prepare the balance sheet for the group. Dumyat plc has one subsidiary undertaking, Devon Ltd. The balance sheets of the two companies as at 31 October 2007 are set out below. Balance sheets as at 31 October 2007 Dumyat plc) Devon Ltd) £000) £000) Non-current assets Property, plant and equipment 65,388) 31,887) Investment in Devon Ltd 26,000) 91,388) 31,887) Current assets Inventories 28,273) 5,566) Trade and other receivables 11,508) 5,154) Receivable from Devon Ltd 4,000) 0) Cash and cash equivalents 2,146) 68) 45,927) 10,788) Total assets 137,315) 42,675v Current liabilities Trade and other payables (13,554) (1,475) Payable to Dumyat plc 0) (4,000) Tax liabilities (6,140) (108) (19,694) (5,583) Net current assets 26,233) 5,205) Non-current liabilities Long-term loans (25,000) (4,000) Total liabilities (44,694) (9,583) Net assets 92,621) 33,092) Equity Share capital 25,000) 12,000) Share premium 12,000) 4,000) Retained earnings 55,621) 17,092) Total equity 92,621) 33,092)

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You have been given the following further information: • The share capital of Devon Ltd consists of ordinary shares of £1 each. Ownership of these shares carries

voting rights in Devon Ltd. There have been no changes to the balances of share capital and share premium during the year. No dividends were paid or proposed by Devon Ltd during the year.

• Dumyat plc acquired 9,000,000 shares in Devon Ltd on 1 November 2006. • At 1 November 2006 the balance of retained earnings of Devon Ltd was £12,052,000. • The fair value of the non-current assets of Devon Ltd at 1 November 2006 was £28,800,000. The book

value of the non-current assets at 1 November 2006 was £25,800,000. The revaluation has not been recorded in the books of Devon Ltd (ignore any effect on the depreciation for the year).

• The directors of Dumyat plc have concluded that goodwill has not been impaired during the year.

Task 1.3 Using the pro-forma in your answer booklet, draft a consolidated balance sheet for Dumyat plc and its subsidiary undertaking as at 31 October 2007. Task 1.4 Prepare brief notes for the directors to answer the following questions. (a) What is a "business combination"? (b) How is the acquirer in a business combination identified? (c) Explain why Dumyat plc is the acquirer in a business combination.

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Part C You should spend about 25 minutes on this part. Data For the year ended 31 October 2007 you have been asked to prepare: • a reconciliation between profit from operations and net cash from operating activities • a cash flow statement for Lochnagar Ltd. The balance sheets of Lochnagar Ltd for the past two years and the most recent income statement are set out below:

Lochnagar Ltd Income statement for the year ended 31 October 2007

£000)

Continuing operations

Revenue 22,400)

Cost of sales (12,320)

Gross profit 10,080)

Gain on disposal of property, plant and equipment 224)

Distribution costs (4,704)

Administrative expenses (2,240)

Profit from operations 3,360)

Finance costs – interest on loans (91)

Profit before tax 3,269)

Tax (1,344)

Profit for the period from continuing operations attributable to equity holders 1,925

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Lochnagar Ltd Balance sheets as at 31 October

2007)£000)

2006)£000)

Non-current assets

Property, plant and equipment 25,171) 24,100)

Current assets

Inventories 3,696) 2,464)

Trade and other receivables 3,360) 2,464)

Cash and cash equivalents 0) 129)

7,056) 5,057)

Total assets 32,227) 29,157)

Current liabilities

Trade and other payables (1,232) (1,848)

Tax liability (1,344) (944)

Bank overdraft (361) 0)

(2,937) (2,792)

Net current assets 4,119) 2,265)

Non-current liabilities

Bank loans (1,300) (800) Total liabilities (4,237) (3,592)

Net assets 27,990) 25,565)

Equity

Share capital 2,200) 2,000)

Share premium 800) 500)

Retained earnings 24,990) 23,065)

Total equity 27,990) 25,565)

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Further information: • The total depreciation charge for the year was £3,545,000. • Property, plant and equipment costing £976,000 with accumulated depreciation of £355,000 was

sold in the year at a profit of £224,000. • All sales and purchases were on credit. Other expenses were paid for in cash. Task 1.5 Provide a reconciliation of profit from operations to net cash from operating activities for Lochnagar Ltd for the year ended 31 October 2007. Task 1.6 Using the pro-forma in your answer booklet, prepare the cash flow statement for Lochnagar Ltd for the year ended 31 October 2007.

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Note:Please turn over for Section 2.

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Section 2 You should spend about 55 minutes on this section. Data Sally Forth is a shareholder in Tay Ltd. She wishes to assess the efficiency and effectiveness of the management of the company. She has asked you to assist her by analysing the financial statements of the company for the last two years. The financial statements of Tay Ltd are set out below:

Tay Ltd Income statements for the year ended 31 October

2007)£000)

2006)£000)

Continuing operations

Revenue 2,400) 2,100)

Cost of sales (1,392) (1,155)

Gross profit 1,008) 945)

Distribution costs (540) (472)

Administrative expenses (240) (315)

Profit from operations 228) 158)

Finance costs (91) (56)

Profit before tax 137) 102)

Tax (44) (22) Profit for the period from continuing operations attributable to equity holders 93 80

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Tay Ltd Balance sheets as at 31 October

2007)£000)

2006)£000)

Non-current assets Property,plant and equipment 4,750) 4,100) Current assets Inventories 320) 208)Trade receivables 360) 231)Cash and cash equivalents 0) 68) 680) 507) Total assets 5,430) 4,607) Current liabilities Trade payables (195) (139)Tax liabilities (44) (22)Bank overdraft (152) 0) (391) (161) Net current assets 289) 346) Non-current liabilities Bank loans (1,300) (800) Total liabilities (1,691) (961) Net assets 3,739) 3,646) Equity Share capital 2,500) 2,500)Retained earnings 1,239) 1,146) Total equity 3,739) 3,646)

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Task 2.1 Prepare a report for Sally Forth that includes the following: (a) the formulas that are used to calculate each of the following ratios:

(i) gross profit ratio (ii) net profit ratio (iii) inventories turnover in days (based on cost of sales) (iv) trade receivables turnover in days (trade receivables collection period)

(b) a calculation of the above ratios for the two years (c) a comment on the relative performance of the company for the two years based on the ratios

calculated and what this tells you about the company (d) ONE suggestion as to how EACH of the ratios might be improved. Task 2.2 (a) Set out the accounting equation and define the elements in the equation. (b) Briefly explain how the profit for the year affects the elements in the accounting equation.

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NVQ/SVQ qualification codes

Technician (2003 standards) - 100/2942/4 / G794 24Unit number (DFS) – Y/101/8109