NVQ/SVQ Level 4 in Accounting Drafting Financial Statements - AAT

NVQ/SVQ Level 4 in AccountingDrafting Financial Statements(Accounting Practice, Industry and Commerce) (DFS)(2003 standards)

Wednesday 7 December 2005 (morning)

EXAMINATION

Time allowed - 3 hours plus 15 minutes’ reading time

Important:

This exam paper is in two sections. You must complete all tasks in both sections.

We recommend that you use the 15 minutes’ reading time to study the exam paper fullyand carefully so that you understand what to do for each task. However, you may beginto write your answers within the reading time, if you wish. We strongly recommend thatyou use a pen rather than a pencil.

You may not use programmable calculators or dictionaries in the examination.

Do NOT open this paper until instructed to do so by the Supervisor.

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This examination is in TWO sections.

You must show competence in both sections, so attempt and aim to complete EVERY task in EACH section.

Please use the answer booklet provided. All workings should be shown in the answer booklet.

The answer booklet includes the following pro-formas:

• Consolidated Balance Sheet (Format 1) • Journal entries • Profit and loss account (Format 1 as supplemented by FRS 3) • Companies Act 1985 balance sheet (Format 1) You should spend about 125 minutes on Section 1 and 55 minutes on Section 2. SECTION 1 This section is in three parts. PART A You should spend about 40 minutes on this part. DATA Haydn plc has one subsidiary undertaking, Seek Ltd, which was acquired on 1 October 2004. The balance sheets of Haydn plc and Seek Ltd as at 30 September 2005 are set out on page 4.

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Haydn plc Seek Ltd

£000 £000

£000

£000 Tangible fixed assets Investment in Seek Ltd Current assets Stock Debtors Cash at bank Creditors: amounts falling due within one year Trade creditors Accruals Taxation Net current assets Long-term loan Capital and reserves Called up share capital Share premium Profit and loss account

25,205 9,147

401 34,753

(11,669) (2,984) (1,832)

(16,485)

88,301 39,500

18,268

(50,000) 96,069

30,000 20,000 46,069 96,069

6,861 4,725 1,028 12,614

(5,002) (991) (714) (6,707)

45,523

5,907

(7,000) 44,430

5,000 2,000 37,430 44,430

You have been given the following further information. • The share capital of Seek Ltd consists of ordinary shares of £1 each. There have been no

changes to the balances of share capital and share premium during the year. No dividends were paid or proposed by Seek Ltd during the year.

• Haydn plc acquired 3,000,000 shares in Seek Ltd on 1 October 2004. • At 1 October 2004 the balance on the profit and loss account of Seek Ltd was

£32,550,000. • The fair value of the fixed assets of Seek Ltd at 1 October 2004 was £42,500,000. The

book value of the fixed assets at 1 October 2004 was £38,500,000. The revaluation has not been recorded in the books of Seek Ltd (ignore any effect on the depreciation for the year).

• The directors of Haydn plc consider that the goodwill in the consolidated financial statements has an indefinite economic life and that this can be demonstrated. They also believe that the goodwill is capable of continued measurement.

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Task 1.1 Using the pro-forma in your answer booklet, prepare the consolidated balance sheet of Haydn plc and its subsidiary undertaking as at 30 September 2005. Task 1.2 Advise the directors of Haydn plc on the accounting treatment of the goodwill in the consolidated financial statements. Note: Your answer should make reference to relevant accounting standards.

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PART B You should spend about 55 minutes on this part. DATA The financial accountant of Moatsart Ltd is away from work due to ill health. You have been asked to take over the preparation of the financial statements of Moatsart Ltd for the year ended 30 September 2005. An extended trial balance of the company as at 30 September has been produced by the accountant, but some of the balances need to be adjusted. The extended trial balance is opposite .

MO

AT

SAR

T L

TD

E

XT

EN

DE

D T

RIA

L B

AL

AN

CE

AS

AT

30

SEPT

EM

BE

R 2

005

DE

SCR

IPT

ION

TR

IAL

BA

LAN

CE

A

DJU

STM

EN

TS

PR

OFI

T A

ND

LO

SS

BA

LA

NC

E S

HE

ET

D

ebit

£000

C

redi

t £0

00

Deb

it £0

00

Cre

dit

£000

D

ebit

£000

C

redi

t £0

00

Deb

it £0

00

Cre

dit

£000

Pu

rcha

ses

37,5

43

37

,543

Sa

les

70,6

13

70,6

13

Ret

urns

inw

ards

2,

372

2,

372

R

etur

ns o

utw

ards

1,

463

1,

463

O

rdin

ary

shar

e ca

pita

l 8,

000

8,00

0 Sh

are

prem

ium

3,

000

3,

000

Rev

alua

tion

rese

rve

2,50

0

2,

500

Inte

rim d

ivid

end

2,40

0

2,

400

Lo

ng-te

rm lo

an

15,0

00

15

,000

St

ock

7,45

47,

454

Fi

xed

asse

t inv

estm

ents

4,

000

4,00

0

Adm

inis

tratio

n ex

pens

es

7,11

57,

115

D

istri

butio

n co

sts

12,3

8612

,386

Pr

epay

men

ts

403

403

Fi

xed

asse

ts –

cos

t 84

,856

84,8

56

Fixe

d as

sets

– a

ccum

ulat

ed

de

prec

iatio

n 26

,422

26

,422

Pr

ovis

ion

for d

oubt

ful d

ebts

68

2

68

2 Tr

ade

debt

ors

8,75

4

8,

754

Tr

ade

cred

itors

8,

939

8,93

9 A

ccru

als

642

64

2 C

ash

at b

ank

1,53

5

1,53

5

Inte

rest

60

0

60

0

Prof

it an

d lo

ss a

ccou

nt

32,1

57

32

,157

Pr

ofit

2,20

62,

206

TOTA

L 16

9,41

816

9,41

872

,076

72,0

7699

,548

99,5

48

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Further information is as follows. • All of the operations are continuing operations. • The authorised share capital of the company consists of 20,000,000 ordinary shares with a

nominal value of £1. • At the beginning of the year the issued share capital was 8,000,000 ordinary shares. At

the end of the year another 2,000,000 ordinary shares were issued at a price of £1.50 per share. This issue of shares has not been accounted for in the ledger accounts in the extended trial balance.

• The closing stock at 30 September 2005 was £8,731,000. • Fixed assets that had cost £2,300,000 and had accumulated depreciation of £1,250,000

were sold at the end of the year for £1,500,000 cash. The sale has not been accounted for in the ledger accounts in the extended trial balance.

• The corporation tax charge for the year has been calculated as £3,948,000. • Interest on the long-term loan has been paid for six months of the year. No adjustment

has been made for the interest due for the final six months of the year. Interest is charged on the loan at a rate of 8% per annum.

• No final dividend is proposed. Task 1.3 Using the pro-forma in your answer booklet, make the necessary journal entries as a result of the further information given above. Notes: 1. You do not need to give any dates or narratives, but must show account names. 2. You must show any workings relevant to these adjustments. 3. Ignore any effect of these adjustments on the tax charge for the year given above. Task 1.4 (a) Using the pro-forma in your answer booklet, draft a profit and loss account

for Moatsart Ltd for the year ended 30 September 2005. (b)

Using the pro-forma in your answer booklet, draft a balance sheet for Moatsart Ltd as at 30 September 2005.

Note: You do not need to prepare any of the notes to the financial statements that are required by FRS 3.

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DATA The directors of Moatsart Ltd are interested in the principles to be followed in selecting accounting policies for the company. Task 1.5 (a) FRS 18 identifies the two concepts of going concern and accrual that play a

role in the selection of accounting policies. Explain these two concepts. (b)

(i) According to FRS 18, how should an entity decide what accounting

policies should be adopted? (ii) What are the objectives against which an entity should judge the

appropriateness of accounting policies to its particular circumstances? Explain two of the objectives.

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PART C You should spend about 30 minutes on this part. DATA You have been asked to prepare a reconciliation between cash flows from operating activities and operating profit and to interpret the cash flow statement for Bateoven Ltd for the year ended 30 September 2005. The balance sheet and cash flow statement of Bateoven Ltd are set out below and on page 11.

Bateoven Ltd

Balance sheet as at 30 September 2005

2005 2004 £000 £000 £000 £000

Fixed assets Current assets Stocks Trade debtors Cash Current liabilities Trade creditors Taxation Net current assets Long-term loan Capital and reserves Called up share capital Share premium Profit and loss account

3,670 1,777 93

5,540

(646)(1,923)(2,569)

23,814

2,971 (9,100)17,685

8,0004,000

5,68517,685

3,162 1,306 1,401 5,869

(975) (1,284)

(2,259)

18,507

3,610 (5,000)17,117

5,0002,000

10,11717,117

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Bateoven Ltd Cash Flow Statement for the year ended 30 September 2005

Net cash inflow from operating activities Returns on investments and servicing of finance Interest paid Taxation Capital expenditure Payments to acquire tangible fixed assets Equity dividends paid Financing Issue of ordinary share capital Increase in loan Decrease in cash

£000

5,0004,100

£000

2,574

(560)

(1,284)

(9,138)

(2,000) (10,408)

9,100

(1,308) Further information is as follows. • The operating profit for the year ended 30 September 2005 was £312,000. This was after

depreciation of £3,570,000 was charged. • All sales and purchases were on credit. Other expenses were paid for in cash. Task 1.6 Provide a reconciliation of operating profit to net cash flows from operating activities for Bateoven Ltd for the year ended 30 September 2005. Task 1.7 Draft a letter to the directors of Bateoven Ltd commenting on the sources and uses of cash during the year ended 30 September 2005 as indicated by the cash flow statement.

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SECTION 2 You should spend about 55 minutes on this part. DATA John Brams is a shareholder of Ma Leer Ltd. He has obtained some ratios that are based on the financial statements of the company for the last two years. He is interested in how the directors have managed the business in the past year and in the company’s financial performance. You have been asked to explain how the ratios were calculated and to analyse the financial performance of the company using the ratios computed. The ratios John has obtained are set out below.

Ratio 2005 2004 Return on capital employed Net profit ratio Gross profit ratio Expenses ratio Asset turnover (based on net assets) Stock turnover in days (stock turnover period based on cost of sales) Debtors turnover in days (debtors payment period) Creditors turnover in days (creditors payment period based on cost of sales)

15%

20%

46%

26%

0.75

93 days

54 days

25 days

19%

22%

42%

24%

0.86

71 days

47 days

29 days

Task 2.1 Prepare a report for John Brams that includes the following: (a) the formulas used to calculate each of the ratios (b) a statement of whether the ratios have, in your opinion, improved or deteriorated in

2005 when compared with 2004, along with your reasons for thinking so (c) your comments on the overall change in financial performance of Ma Leer Ltd over

the two years based on your analysis of the ratios and the relationship between them.

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Task 2.2 (a) Explain how the use of financial information in Task 2.1 illustrates the objective of

financial statements. (b) Give TWO examples of other classes of user who might be interested in the

information in financial statements. Explain what they might use this information for.

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Association of Accounting Technicians154 Clerkenwell Road, London EC1R 5AD, UK Tel: +44 (0)20 7837 8600 Fax: +44 (0)20 7837 6970 © 12.05

NVQ/SVQ qualification codes

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