RIFT VALLEY UNIVERSITY
TARGET GROUP- 4TH YEAR AcFn EXTENSION STUDENTS
COURSE-ADVANCED FINANCIAL ACCOUNTING I (AcFn-4011)
Group Assignment: Submission Date- one day final exam date
Instructions
 Submit on time
 Attempt all questions
 Show all the necessary steps
 Sharing Answer is strictly forbidden
 Assignment should be submitted via soft copy to the instructor telegram/email address
(mohitadese23@gmail.com).
1. List and discuss in detail the key differences between IFRS 4 and IFRS 17, and the
rational for the amendment and replacement of IFRS 4 by IFRS 17.
2. Discuss in detail about
A. Insurance contract measurement models with practical illustrations that
incorporates major insurance contract features and shows initial and
subsequent measurement of insurance contracts.
(Note-Don’t forget to discuss their key differences and applicable areas)
B. Insurance contract with direct participation and discretionary participation
features.
3. Brockman Guitar Company is in the business of manufacturing top-quality, steel-string
folk guitars. In recent years, the company has experienced working capital problems
resulting from the procurement of factory equipment, the unanticipated buildup of
receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing
facility. The founder and president of the company, Barbara Brockman, has attempted to
raise cash from various financial institutions, but to no avail because of the company’s
poor performance in recent years. In particular, the company’s lead bank, First Financial,
is especially concerned about Brockman’s inability to maintain a positive cash position.
The commercial loan officer from First Financial told Barbara, “I can’t even consider your
request for capital financing unless I see that your company is able to generate positive
cash flows from operations.”
1|Page
1|Page
Thinking about the banker’s comment, Barbara came up with what she believes is a good
plan: With a more attractive statement of cash flows, the bank might be willing to provide
long-term financing. To “window dress” cash flows, the company can sell its accounts
receivables to factors and liquidate its raw materials inventories. These rather costly
transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it
is your job to tell Barbara what you think of her plan.
Instructions
Answer the following questions.
a. What are the ethical issues related to Barbara Brockman’s idea?
b. What would you tell Barbara Brockman?
4.The following information relates to the draft financial statements of Global trading
company.
Summarized statement of financial position as at:
31 December 2018
Assets
Non-current assets
Property, plant and equipment (note (i))
Current assets
Inventory
Trade receivables
Tax refund due
Bank
Total assets
Equity and liabilities Equity
Equity shares of $1 each (note (ii))
Share premium (note (ii))
Retained earnings
Non-current liabilities
10% loan note (note (iii))
Finance lease obligations
Deferred tax
2|Page
31 December 2017
$’000
$’000
19,000
25,500
12,500
4,500
500
nil
–––––––
36,500
–––––––
4,600
2,000
nil
1,500
–––––––
33,600
–––––––
10,000
3,200
4,500
––––––
nil
4,800
1,200
7,700
–––––––
17,700
6,000
8,000
4,000
6,300
––––––
5,000
2,000
800
10,300
–––––––
18,300
7,800
Current liabilities
10% loan note (note (iii))
Tax
Bank overdraft
Finance lease obligations
Trade payables
Total equity and liabilities
5,000
nil
1,400
1,700
4,700
––––––
12,800
–––––––
36,500
nil
2,500
nil
800
4,200
––––––
7,500
–––––––
33,600
Summarized Income statements for the years ended:
31 December 2018
31 December 2017
$’000
$’000
Revenue
55,000
40,000
Cost of sales
(43,800)
(25,000)
–––––––
–––––––
Gross profit
11,200
15,000
Operating expenses
(12,000)
(6,000)
Finance costs (note (iv))
(1,000)
(600)
–––––––
–––––––
Profit (loss) before tax
(1,800)
8,400
Income tax relief (expense)
700
(2,800)
–––––––
–––––––
Profit (loss) for the year
(1,100)
5,600
The following additional information is available:
Property, plant and equipment is made up of:
As at:
31 December 2018 31December 2017
$’000
$’000
Leasehold property
nil
8,800
Owned plant
12,500
14,200
Leased plant
6,500
2,500
–––––––
–––––––
19,000
25,500
–––––––
–––––––
During the year Alpha Trading sold its leasehold property for $8·5 million and entered into an
arrangement to rent it back from the purchaser. There were no additions to or
disposals of owned plant during the year. The depreciation charges (to cost of sales)
for the year ended 31 December 2018 were:
$’000
Leasehold property
200
Owned plant
1,700
Leased plant
1,800
3,700
(i)
3|Page
(ii)
On 1 April 2017 there was a bonus issue of shares from share premium of one new
share for every 10 held. On 1 July 2017 there was a fully subscribed cash issue of
shares at par.
(iii)
The 10% loan note is due for repayment on 31 March 2018. Alpha Trading is in
negotiations with the loan provider to refinance the same amount for another five
years.
(iv)
The finance costs are made up of:
For year ended:
Finance lease charges
Overdraft interest
Loan note interest
31 December 2018
$’000
300
200
500
1,000
31 December 2017
$’000
100
nil
500
600
Required:
Prepare a statement of cash flows for Alpha Trading for the year ended 31 December
2018 in accordance with IAS 7 Statement of cash flows, using the indirect method;
(ii) Based on the information available, advice the loan provider on the matters you would
take into consideration when deciding whether to grant Alpha Trading a renewal of its
maturing loan note.
(i)
(b) On a separate matter, you have been asked to advice on an application for a loan to
build an extension to a sports club which is a not-for-profit organization. You have been
provided with the audited financial statements of the sports club for the last four years.
Required: Identify and explain the ratios that you would calculate to assist in determining
whether you would advise that the loan should be granted.
4|Page
5. General Motors Company, a major retailer of bicycles and accessories, operates several
stores and is a publicly traded company. The comparative statement of financial position
and the income statement for General Motors as of May 31, 2022, are as follows. The
company is preparing its statement of cash flows.
General Motors Company
Comparative Statements of Financial Position
As of May 31
2022
2021
Plant assets
$600,000
$502,000
Less: Accumulated depreciation—plant assets
150,000
125,000
Plant assets (net)
450,000
377,000
Inventory
220,000
250,000
Prepaid expenses
9,000
7,000
Accounts receivable
75,000
58,000
Cash
28,250
20,000
Total current assets
332,250
335,000
$782,250
$712,000
Share capital—ordinary, $10 par
$370,000
$280,000
Retained earnings
145,000
120,000
515,000
400,000
70,000
100,000
Current assets
Total assets
Equity
Total equity
Non-current liabilities
Bonds payable
5|Page
Current liabilities
Accounts payable
123,000
115,000
Salaries and wages payable
47,250
72,000
Interest payable
27,000
25,000
Total current liabilities
197,250
212,000
Total liabilities
267,250
312,000
$782,250
$712,000
Total equity and liabilities
General Motors Company
Income Statement
For the Year Ended May 31, 2022
Sales revenue
$1,255,250
Cost of merchandise sold
722,000
Gross profit
533,250
Expenses
Salaries and wages expense
252,100
Interest expense
75,000
Other expenses
8,150
Depreciation expense
25,000
Total expenses
360,250
Operating income
173,000
Income tax expense
43,000
Net Income
130,000
6|Page
The following is additional information concerning General Motor’s transactions during
the year ended May 31, 2022.
1. All sales during the year were made on account.
2. All merchandise was purchased on account, comprising the total accounts payable
account.
3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing
7,000 ordinary shares.
4. The “other expenses” are related to prepaid items.
5. All income taxes incurred during the year were paid during the year.
6. In order to supplement its cash, General Motor issued 2,000 ordinary shares at par
value.
7. There were no penalties assessed for the retirement of bonds.
8. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.
Instructions
a. Compare and contrast the direct method and the indirect method for reporting cash
flows from operating activities.
b. Prepare a statement of cash flows for General Motors Company for the year ended May
31, 2022, using the direct method. Be sure to support the statement with appropriate
calculations.
c. Using the indirect method, calculate only the net cash flow from operating activities for
General Motors Company for the year ended May 31, 2022.
d. What would you expect to observe in the operating, investing, and financing sections
of a statement of cash flows of:
1. A severely financially troubled firm?
2. A recently formed firm that is experiencing rapid growth?
7|Page
6. Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows
for Panaka Clothing Store’s first year of operations.
Panaka Clothing Store
Statement of Cash Flows
For the Year Ended January 31, 2022
Sources of cash
From sales of merchandise
€ 382,000
From sale of ordinary shares
380,000
From sale of debt investment
120,000
From depreciation
80,000
From issuance of note for truck
30,000
From interest on investments
8,000
Total sources of cash
1,000,000
Uses of cash
For purchase of fixtures and equipment
330,000
For merchandise purchased for resale
253,000
For operating expenses (including
depreciation)
For purchase of debt investment
170,000
For purchase of truck by issuance of note
30,000
For purchase of treasury shares
10,000
For interest on note
3,000
Total uses of cash
891,000
Net increase in cash
€ 109,000
8|Page
95,000
Teresa claims that Panaka’s statement of cash flows shows a superb first year, with cash
increasing €109,000. Lenny replies that it was not a superb first year: the year was an
operating failure, the statement was incorrectly presented, and €109,000 is not the actual
increase in cash.
Instructions
a. With whom do you agree, Teresa or Lenny? Explain your position.
b. Using the data provided, prepare a statement of cash flows in proper indirect method
form. The only non-cash items in income are depreciation and the gain from the sale of
the investment (purchase and sale are related).
9|Page