Chartered Secretaries Qualifying Scheme – Level 1
Financial Reporting and
Analysis
Sample paper
Time allowed: 3 hours and 15 minutes
(including reading time)
Do not open this examination paper until the presiding officer or an invigilator tells
you to.
You must not take this paper out of the examination room.
This examination paper is divided into two sections. Each question on this paper carries 25
marks. You must answer the compulsory question in Section A.
Section B contains five questions. You must attempt three questions only from Section B.
© ICSA, 2010
Page 1 of 10
Section A
(Compulsory question)
1.
You are the company secretary of Highbury plc (‘Highbury’) and the summarised draft
accounts prepared for the year to 31 March 2010 contained the following information:
Statement of comprehensive income for the year ended 31 March
2010
£000
Revenue
12,296
Profit on sale of investments surplus to requirements
602
12,898
Cost of goods sold
7,376
Depreciation
556
Distribution, selling and marketing costs
3,307
Directors’ emoluments
400
Finance charge
72
Profit on ordinary activities before tax
1,187
Taxation
350
Profit for the year
837
Dividends paid
180
Retained profit for the year
657
2009
£000
10,260
10,260
6,182
440
2,761
357
520
200
320
180
140
Statement of financial position at 31 March
Non-current assets
Land, buildings, plant and machinery at cost less
depreciation
Goodwill at cost
Quoted investments at cost
Current assets
Inventories
Trade receivables
Cash at bank and in hand
Equity and liabilities
Called up share capital (£1 shares)
Retained earnings
Non-current liabilities
Provision for deferred taxation
Current liabilities
Bank overdraft
Trade payables
Corporation tax
2010
£000
2009
£000
2,647
340
2,987
1,756
400
2,156
2,490
2,280
4,770
7,757
1,951
1,701
26
3,678
5,834
1,800
2,226
4,026
1,800
1,569
3,369
1,452
1,452
1,272
1,272
564
1,545
170
2,279
7,757
983
210
1,193
5,834
(continued)
© ICSA, 2010
Page 2 of 10
In April 2009, Highbury added to its existing operations by acquiring the business
assets of Wheatsheaf Ltd, a local competitor trading with a turnover of £2,000,000 per
annum. The purchase price of £1,400,000 included acquisition of plant and machinery
worth £700,000 and inventories worth £360,000.
Required
Prepare a report for the board of directors of Highbury on the company’s financial
progress during the year to 31 March 2010 and on its financial position at that date
based on the information provided above. You should support your analysis with
relevant accounting ratios covering: profit margins; return on investment; asset
utilisation; and short-term liquidity.
(25 marks)
© ICSA, 2010
Page 3 of 10
Section B
(Answer three questions from this section)
2.
The summarised statements of comprehensive income and financial position of the
Sturton group of companies (‘the Sturton group’) for 2009 were as follows:
Statement of comprehensive income for the year ending 31 December 2009
2009
£000
Revenue
61,345
Cost of sales
- 45,890
Gross profit
15,455
Net operating expenses
-10,190
Share of operating profits of associated company
780
Operating profit
6,045
Finance costs
-666
Profit before tax
5,379
Taxation
-3,100
Profit after tax
2,279
Attributable to:
Equity holders of the parent company
1,593
Minority interest
686
(continued)
© ICSA, 2010
Page 4 of 10
Statement of financial position at 31 March 2009
Assets
Non-current assets
Property, plant and equipment
Goodwill at cost
Investments in associated company
Current assets
Inventories
Trade receivables
Cash and cash equivalents
Equity
Parent company shareholders’ equity
Share capital
Other reserves
Retained earnings
Minority interest
Total equity
Non-current liabilities
Long-term borrowings
Deferred taxation
Current liabilities
Trade and other payables
Short-term borrowings
Taxation
2009
£000
2008
£000
5,400
1,250
940
7,590
3,250
800
575
4,625
3,344
4,009
1,111
8,464
16,054
4,020
3,955
888
8,863
13,488
1,396
556
2,893
4,845
666
5,511
1,346
345
1,300
2,991
540
3,531
3,006
825
3,831
2,708
746
3,454
4,443
1,555
714
6,712
16,054
3,896
2,040
567
6,503
13,488
Cost
6,290
3,562
Depreciation
3,040
You are provided with the following additional information:
(i)
Property, plant and equipment
Balance at 1 January 2009
Additions
Charge for the year
Surplus on revaluation
Disposals
Balance at 31 December 2009
Carrying value at 31 December 2009
1,295
211
-1,796
8,267
5,400
-1,468
2,867
Property, plant and equipment was disposed of at carrying value.
(ii)
Taxation
Corporation tax charge for the year
Provision for deferred taxation
Associated company
2,688
79
333
3,100
(continued)
© ICSA, 2010
Page 5 of 10
Required
(a)
Prepare a consolidated statement of cash flows of the Sturton group for the year
ended 31 December 2009 using the ‘indirect method’ in accordance with IAS 7
‘Statement of Cash Flows’.
(18 marks)
(b)
Based on the content of the cash flow statement prepared under (a), above,
prepare a memorandum explaining to the board the main financial developments
at the Sturton group during 2009.
(7 marks)
(Total: 25 marks)
3.
The following draft accounts have been prepared in respect of Priory plc (‘Priory’) for
the year to 31 March 2010.
Statement of comprehensive income for the year ending 31 March 2010
Notes
£000
(i)
31,400
5,130
8,511
Revenue
Cost of sales
Provision for closure costs
Distribution, selling and marketing costs
Operating profit
Dividend from Woodman Ltd
Profit for the period
(ii)
£000
50,600
45,041
5,559
200
5,759
Statement of financial position at 31 March 2010
Assets
Tangible non-current assets
Freehold property
Plant and equipment at cost
Less: Accumulated depreciation
Intangible non-current assets
Goodwill
Research and development
Current assets
Inventories
Other current assets less liabilities
Equity
Ordinary share capital (£1 ordinary shares)
Retained earnings at 1 April 2009
Retained earnings for the year to 31 March 2010
Notes
£000
(iii)
£000
15,000
9,000
6,200
2,800
17,800
(iv)
(v)
1,100
1,720
(vi)
3,250
1,929
25,799
17,000
3,040
5,759
25,799
(continued)
© ICSA, 2010
Page 6 of 10
The following further information is provided in respect of the items indicated by Notes
(i) – (vi) above.
(i)
On 2 March 2010, the directors of Priory made the decision to close down a lossmaking division with effect from 30 September 2010. The figure contained in the
accounts is the provision for expected losses between 1 April 2010 and 30
September 2010 together with the estimated costs associated with the closure.
At 31 March 2010, the closure decision remained confidential.
(ii)
Priory acquired 25% of the ordinary share capital of Woodman Ltd on 1 April
2009 and, through representation on the board of directors, is able to exercise a
significant influence over the financial and operating policies of that company.
The profit made by Woodman Ltd in the year to 31 March 2010 amounted to
£1,400,000.
The purchase consideration was £9,000,000 and was satisfied by the issue of 3
million ordinary shares of £1 each in Priory. No entry has been made in the
above accounts of Priory in respect of the acquisition.
(iii)
Priory’s freehold property was professionally revalued on 31 March 2010 at
£22,000,000. It has been decided to use this figure in the accounts in order to
show a fairer view of the financial position of the company.
(iv)
This amount represents goodwill arising on the acquisition of the tangible and
intangible assets of a local business, Trinity Ltd, on 1 April 2009. The goodwill is
estimated to be worth £1,010,000 on 31 March 2010.
(v)
The balance is made up of the following:
(vi)

Development expenditure brought forward on 1 April 2009 of £1,350,000.
This was incurred to develop a new product which came on to the market
on 1 April 2009. It is estimated that the new product will prove highly
profitable for a period of nine years from that date.

Research expenditure of £370,000 incurred during the year to 31 March
2010 in the endeavour to invent a new design for one of Priory’s leading
products. The directors are convinced that this will result in the creation of
an improved design in due course.
The cost and net realisable value of the company’s inventories, analysed in
categories of similar items, are as follows:
Category
A
B
C
Cost
£000
800
1,170
1,280
Net selling price
£000
660
2,100
1,970
(continued)
© ICSA, 2010
Page 7 of 10
Required
(a)
Explain the required treatment of items (i), (ii) and (iv), above, in order to comply
with the relevant accounting standards.
(9 marks)
(b)
Prepare the accounts of Priory for the year ended 31 March 2010 revised, as
appropriate, to comply with standard accounting practice so far as the available
information permits.
(16 marks)
Notes:

Ignore taxation.

Calculations to the nearest £000.

Assume there were no differences between the purchase price and fair value of
the net assets of Woodman Ltd at the acquisition date.

Assume all figures to be material.
(Total: 25 marks)
4.
The following issues have arisen in relation to the accounts of Dundee plc (‘Dundee’)
for the year ending 31 December 2009:
(i)
Dundee received from a customer, during December 2009, an advance payment
of £3 million for the supply of services over the next three years. The directors
plan to include this amount as sales revenue for 2009.
(ii)
An action has been brought against Dundee for negligence during 2009.
Dundee’s lawyers have been instructed to vigorously defend the action, but tell
the directors that they should expect to lose the case, which would cost up to
£1.5 million. A court decision is not expected for at least a year.
(iii)
Dundee’s Chief Accountant believes that the company should always take
the most prudent approach when valuing assets for inclusion in the accounts.
(iv)
A property was purchased at the beginning of 2009 for £10 million. On 31
December 2009 the property is expected to be worth £16 million, and the finance
director of Dundee is not sure which figure should be used when preparing the
accounts.
(v)
Dundee owns a machine with a carrying value of £50,000 at 31 December 2009
which is now obsolete. The directors have discovered that the machine could be
sold to a South American company, in January 2010, for £50,000. It would cost
Dundee £62,000 to transport the machine to South America. The directors are
unsure whether the machine should be treated as an asset in the accounts.
Required
Advise the directors of Dundee how to deal with the above five issues in the accounts
for the year ended 31 December 2009. You should base your advice on the
underlying assumptions and qualitative characteristics contained in the IASB’s
‘Framework for the preparation and presentation of financial statements’.
(25 marks)
© ICSA, 2010
Page 8 of 10
5.
(a)
Trace the evolution of stand-alone environmental reports and explain why this
development has occurred.
(12 marks)
(b)
Outline the activities involved in an environmental audit.
(13 marks)
(Total: 25 marks)
6.
Tracey Ltd (‘Tracey’) and Park Ltd (‘Park’) are companies which trade in a similar
range of products on the cash basis. Their statements of financial position at 31
December 2009 were identical and contained the following information:
Statement of financial position as at 31 December 2009
Assets
Non-current assets
Inventories
Cash
£000
2,800
840
350
3,990
Equity
Ordinary share capital
Retained profit
2,000
1,990
3,990
To put into effect plans for expansion, each company needs to acquire a fleet of new
lorries which will cost £998,600. Each lorry is expected to have a useful life of five
years and, in total, their residual value is estimated to be £198,600.
The directors of each company have entered into an arrangement with a London citybased financial institution to lease the lorries. The lease contract provides for an initial
payment of £200,000, on 1 January 2010, and five further annual payments of the
same amount commencing 31 December 2010. The interest rate implicit in the lease
arrangement is 8% per annum.
The forecast operating profits of Tracey and Park for 2010 are £594,000. This amount
is before lease rental charges (if any) and depreciation of £400,000 on the non-current
assets owned at 31 December 2009. The level of inventories is expected to remain
unchanged during 2010.
The directors of Tracey intend to account for the lease arrangement as an operating
lease, whereas the directors of Park have decided to account for it as a finance lease.
(continued)
© ICSA, 2010
Page 9 of 10
Required
(a)
Prepare the forecast statements of financial position of Tracey and Park as at 31
December 2010. These statements should show the appropriate adjustments to
cash and retained profit as the result of transactions undertaken during 2010.
(13 marks)
(b)
Identify and discuss three arguments in support of the imposition of compulsory
accounting standards for financial reporting. Where appropriate, you should
illustrate your answer by reference to the content of the accounts prepared under
part (a), above.
(12 marks)
Note: All calculations to the nearest £1,000.
(Total: 25 marks)
The scenarios included here are entirely fictional. Any resemblance of the information in
the scenarios to real persons or organisations, actual or perceived, is purely coincidental.
© ICSA, 2010
Page 10 of 10