Advanced Financial Accounting
Sample Paper 3
Questions & Suggested Solutions
Page 1 of 27 INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY Candidates must indicate clearly whether they are answering the paper in accordance with the law
and practice of Northern Ireland or the Republic of Ireland.
In this examination paper the €/£ symbol may be understood and used by candidates in Northern
Ireland to indicate the UK pound sterling by candidates in the Republic of Ireland to indicate the
Euro.
Answer ALL THREE questions in Section A and TWO of the THREE questions in Section B. If more than TWO questions is answered in Section B, then only the first TWO questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled, as appropriate, e.g. €’s, £’s, units etc. Answers should be illustrated with examples, where appropriate. Question 1 begins on Page 2 overleaf. NOTE: This sample paper and solution have been prepared in recognition that public companies are now required to prepare accounts implementing the language of International Accounting Standards (I.A.S.’s) but that other companies and non corporate entities are not required to do so. Examinees would be at liberty to use the language of either (i) I.A.S.’s or (ii) the Companies (Amendment) Act 1986 and F.R.S.’s/S.S.A.P’s in answering questions relating to non‐public companies Advanced Financial Accounting Sample Paper 3 Page 2 SECTION A
Answer ALL THREE Questions in this Section
(The total marks for section A will be 60, made up of a theory question of 20
marks, a multiple choice question of 15 marks and a further question of 25 marks)
QUESTION 1
(i)
The IASB developed a ‘Framework for the Presentation and Preparation of
Financial Statements’ which provides critical guidance on the basic principles
of financial accounting.
(a) Explain briefly the purpose of the Framework.
6 marks
(b)A friend who has not studied accountancy has read the Framework and
is confused by some of the terms and definitions discussed within.
Prepare a note setting out your understanding of three of the following
four terms:
i.
ii.
iii.
iv.
(ii)
Going concern
Accruals
Asset
Liability
6 marks
Define “Accounting Policies” and outline the circumstances under which an
accounting policy should be changed.
4 marks
Define “Accounting Estimates” and give examples of three items which are
usually the subject of accounting estimates.
4 marks
Total 20 marks
QUESTION 2
The following multiple choice question consists of TEN parts, each of which is
followed by FOUR possible answers. There is ONLY ONE right answer in each part.
Each part carries 1½ marks.
Requirement
Indicate the right answer to each of the following TEN parts.
Total 15 Marks
N.B. Candidates should answer this question by ticking the appropriate boxes on
the special green answer sheet which is supplied with the examination paper.
Advanced Financial Accounting Sample Paper 3 Page 3 QUESTION 2 (cont’d)
BACKGROUND INFORMATION TO PARTS [1] – [5]
The following information relates to ROCK Ltd:
£/€
60,000
Receivables at 1st January 2007 .....................................
80,000
Receivables at 31st December 2007.................................
75,000
Payables at 1st January 2007 .........................................
Payables at 31st December 2007.....................................
85,000
140,000
Inventory at 1st January 2007 ........................................
170,000
Inventory at 31st December 2007 ...................................
1,800,000
Sales on credit for the year ended 31st December 2007 .....
300,000
Cash sales for the year ended 31st December 2007 ...........
Purchases (all on credit) for the year ended 31st December 2007
.................................................................................
1,250,000
60,000
Bank overdraft at 31st December 2007 ............................
70,000
Taxation liability at 31st December 2007 ..........................
25,000
Accrued expenses at 31st December 2007 ........................
30,000
Prepaid expenses at 31st December 2007 .........................
[1] The receivable days outstanding at 31st December 2007 (to the nearest day)
was: (a)
(b)
(c)
(d)
[2]
days
days
days
days
The payables days outstanding at 31st December 2007 (to the nearest day)
was: (a)
(b)
(c)
(d)
[3]
12
14
16
18
23
24
25
26
days
days
days
days
The current ratio at 31st December 2007 (assuming no other current assets or
liabilities), to two decimal points, was: (a)
(b)
(c)
(d)
1.65
1.17
1.04
0.16
:1
:1
:1
:1
Advanced Financial Accounting Sample Paper 3 Page 4 Question 2 cont’d
[4] The inventory turnover (to two decimal places) for the year ended 31st
December 2007 was: (a)
(b)
(c)
(d)
[5]
32.2
38.6
41.9
44.3
%
%
%
%
It is the intention of I.A.S. 8 “Accounting Policies, Changes in Accounting
estimates and Errors” to enhance the quality of financial statements and in
this regard it discusses three main objectives of financial statements. These
are: (a)
(b)
(c)
(d)
[7]
times
times
times
times
The gross profit margin for the year ended 31st December 2007, to one
decimal point was: (a)
(b)
(c)
(d)
[6]
8.06
7.87
7.35
1.18
relevance,
relevance,
relevance,
relevance,
prudence, and reliability
materiality and reliability
materiality and comparability
reliability and comparability
I.A.S. 1 “Presentation of Financial Statements” states that a business should
prepare its financial statements on the basis that the business is a going
concern: (a) if it is being liquidated
(b) if it has ceased trading
(c) if the directors have no realistic alternative but to liquidate the entity or
to cease trading
(d) only if none of the above situations exist
[8]
Under the provisions of the Companies Acts there must be shown in a note to
the accounts:
(a)
(b)
(c)
(d)
the
the
the
the
average number of people employed during the year
number of people employed on the first day of the year
number of people employed on the last day of the year
number of new employees employed during the year
Advanced Financial Accounting Sample Paper 3 Page 5 Question 2 cont’d
[9]
Partners drawings are: (a)
(b)
(c)
(d)
charged
charged
credited
credited
against the partners in their capital accounts
against the partners in their current accounts
to the partners in their capital accounts
to the partners in their current accounts
[10] Payments by a lessee in an operating lease are:(a)
(b)
(c)
(d)
charged in the lessee’s Statement of Profit
balance basis
credited in the lessee’s Statement of Profit
balance basis
charged in the lessee’s Statement of Profit &
basis
credited in the lessee’s Statement of Profit &
basis
& Loss on the reducing
& Loss on the reducing
Loss on the straight line
Loss on the straight line
Advanced Financial Accounting Sample Paper 3 Page 6 QUESTION 3 CABLE Ltd., is a furniture company with an authorized share capital
£/€3,000,000, comprised of 6,000,000 ordinary shares of 50 pence/cent each.
of
The following trial balance was extracted as at 31st December 2008
£/€’000
Ordinary share capital ......................................................................
Share premium account ...................................................................
General reserve ................................................................................
Profit and loss account balance at 1 January 2008..........................
8% debenture stock ..........................................................................
Leasehold premises at cost ..............................................................
Leasehold premises – accumulated depreciation at 1 January 2008 ............
Plant and machinery at cost .............................................................
Plant and machinery – accumulated depreciation at 1 January 2008 ...........
Motor vehicles at cost ......................................................................
Motor vehicles – accumulated depreciation at 1 January 2008 ...................
Receivables ......................................................................................
Payables............................................................................................
Bank .................................................................................................
Sales .................................................................................................
Sales returns .....................................................................................
Opening inventory ...........................................................................
Purchases ..........................................................................................
Purchases returns .............................................................................
Administration expenses ..................................................................
Distribution expenses.......................................................................
Bank interest ....................................................................................
Deposit interest received..................................................................
Debenture interest ............................................................................
Interim ordinary dividend paid ........................................................
....................................................................................................
£/€’000
2,200
180
260
74
250
3,900
500
820
320
300
80
169
95
120
4,500
79
180
2,400
160
450
340
60
35
10
66
________
8,774
______
8,774
ADDITIONAL INFORMATION
(1)
Goods purchased on 28th December 2008 for £/€70,000 had not been
accounted for or included in the physical stock count at 31st December 2008.
(2)
Closing inventory, as per the physical stock count at 31st December 2008 was
£/€220,000.
(3)
Training grants of £/€20,000 in respect of training sales staff were due to the
company at 31st December 2008.
Advanced Financial Accounting Sample Paper 3 Page 7 QUESTION 3(Cont’d.)
(4)
Depreciation is to be charged as follows:
Leasehold premises ...........
Plant and machinery ..........
Motor vehicles ...................
2% on cost
10% on cost
20% on cost
Depreciation on leasehold premises and plant and machinery should be
included as part of administration expenses and depreciation of motor
vehicles should be included as part of distribution expenses.
(5) The charge for corporation tax for the year ended 31st December 2008 is
estimated at 50% of the profit before tax.
(6) A final dividend of 5 pence/cent per share was paid to the ordinary
shareholders on 31 December 2008 however this payment has not yet been
recorded in the accounts.
(7)
Half year debenture interest to be provided for.
Requirement
(a)
Prepare, in a form suitable for publication, the Statement of Comprehensive
Income of CABLE Ltd., for the year ended 31st December 2008 in as far as the
information provided permits.
N.B. You are NOT required to prepare a Statement of Financial Position or
notes to the accounts. You are required to submit workings to show the
make-up of the figures in the Statement of Comprehensive Income.
20 Marks
(b)
Prepare a Statement of Changes in Equity for the year ended 31 December
2008
3 Marks
Presentation: 2 marks
Total: 25 Marks
Advanced Financial Accounting Sample Paper 3 Page 8 SECTION B
Answer TWO of the THREE questions in this Section
QUESTION 4
Geoff, Henry and Ian are in partnership sharing profits and losses in the ratio
4:2:2. The partners receive a salary of £/€5,000, £/€6,000 and £/€7,000 each and
are entitled to interest on the balance on their capital accounts at 5% per annum.
Ian is entitled to a guaranteed share of profits, in addition to his salary and interest
on capital, of £/€6,000 any deficiency to be borne by Geoff and Henry equally.
The following is the draft balance sheet of the partnership as at 31 December 2008
(before the profit for the year has been divided between the partners).
DRAFT Statement of Financial Position as at 31st DECEMBER 2008
Cost
Non-current Assets
Premises ......................................................
Plant and machinery....................................
Furniture and fittings ..................................
£/€
Accumulated
Depreciation
£/€
Net Book
Amount
£/€
250,000
130,000
25,000
405,000
50,000
65,000
5,000
120,000
200,000
65,000
20,000
285,000
Current Assets
Inventory ....................................................
Trade receivables .......................................
Bank ...........................................................
30,000
26,000
12,000
68,000
.....................................................................
Partners Capital Accounts
Geoff ..........................................................
Henry ..........................................................
Ian ...............................................................
353,000
80,000
70,000
70,000
220,000
Partners Current Accounts
Geoff ..........................................................
Henry ..........................................................
Ian ...............................................................
16,000
(20,000)
10,000
6,000
88,000
Profit for the year (not yet divided between the partners)
Current liabilities
Payables .....................................................
Loan from Simon .......................................
Total capital and liabilities
Advanced Financial Accounting Sample Paper 3 26,000
13,000
39,000
353,000
Page 9 QUESTION 4 (Cont’d.)
Adjustment is required in respect of the following items:
(1)
Depreciation for the year has not been provided. It should be provided for as
follows:
Premises .....................
Plant and machinery .....
Furniture and fittings.....
£/€5,000
£/€26,000
£/€5,000
(2)
Wages and salaries of £/€14,000 have not been provided for at the year end.
(3)
Rent amounting to £/€7,000 has been prepaid at the year end.
Requirement
You are required to prepare:
(a)
a statement setting out the adjustments required to the profit for the year
arising out of items
(1) to (3) above;
3 Marks
(b)
a statement setting out the appropriation of the adjusted profit between the
partners;
3 Marks
(c)
the current accounts of the partners;
(d)
the revised balance sheet after dealing with parts (a) to (c) above.
4 Marks
8 Marks
Presentation: 2 marks
Total: 20 Marks
Advanced Financial Accounting Sample Paper 3 Page 10
QUESTION 5
JEWEL Limited, a car rental company, had a turnover of £/€4,500,000 and made a
net profit before taxation of £/€350,000 for the year ended 31st December 2008, as
per the draft accounts.
During a review of the draft accounts you ascertain the following:
(1)
A debtor who owed the company £/€80,000 at 31st December 2008 has gone
into receivership in January 2009 and is unlikely to be able to pay any part of
the debt.
(2)
A government grant of £/€50,000 to help meet the cost of wages and salaries
to train staff was treated as deferred income at 31st December 2008.
(3)
Inventory which cost £/€175,000 was found to be damaged and it is
estimated that it has a net realisable value of £/€125,000.
(4)
On 6th January 2009 goods costing £/€60,000 were received which had been
ordered from a supplier on 20th December 2008.
(5)
A customer of the company is suing the company for £/€600,000 damages on
the basis that a car which the customer rented from the company in
December 2008 was mechanically deficient and was the cause of the
customer being involved in an accident which resulted in the customer being
badly injured. The company’s lawyers are unsure as to the company liability.
The court case will not take place until after the accounts are approved by the
directors.
(6)
Wages due to casual workers, who were recruited for the busy Christmas
period, of £/€17,000, were due at 31st December 2008 and not yet accounted
for.
Requirement
(a)
Prepare the journal entries to show how each of the above items should be
dealt with in the final accounts for the year ended 31st December 2008. You
should use your understanding of relevant .I A S’s in dealing with each item.
14 marks
(b)
Compute the adjusted net profit before taxation for the year ended 31
December 2008 taking into account the adjustments made at [a] above.
4 marks
Presentation: 2 marks
Total: 20 Marks
Advanced Financial Accounting Sample Paper 3 Page 11
QUESTION 6 The Statement of Comprehensive Income of OLIVE Ltd., for the year ended 31st
December 2008 and the Statement of Financial Position as at 31st December 2008
(with comparative figures as at 31st December 2007) are as follows:
Statement of Comprehensive Income for the year ended 31st December 2008 £/€’000 £/€’000 Revenue .................................................................................. 5,100 Less: Cost of goods sold ................................................... 3,300 Gross Profit ........................................................................... 1,800 Government grant .............................................................. 10 Less: Expenses Loss on disposal of Property Plant and Equipment ........................................... 10 Depreciation ................................................................ 120 Other administration expenses ........................... 440 Distribution expenses .............................................. 390 (960) Profit from Operations ..................................................... 850 Debenture interest paid .................................................. (60) Deposit interest received ................................................ 20 (40) Profit before tax .................................................................. 810 Taxation On profits for the year ............................................. (320) Underprovided in previous years ...................... (80) (400) Total comprehensive income for the year 410 Advanced Financial Accounting Sample Paper 3 Page 12
Question 6 cont’d Statement of Financial Position as at 31ST DECEMBER 2008 2007 £/€’000 £/€’000 £/€’000 £/€’000 Assets Non current assets Property, plant and equipment .............. 1,880 1,480 Current assets Inventories ...................................................... 160 304 Receivables ...................................................... 692 520 Bank .................................................................... 596 480 1,448 1,304 Total assets 3,328 2,784 Equity and Liabilities Capital and reserves Ordinary share capital ................................ 1,100 1,000 Share premium account 100 ‐ Retained profits 970 720 2,170 1,720 Non current liabilities Debenture stock .............................................. 350 200 Current liabilities Payables ............................................................ 448 384 Taxation ............................................................ 320 480 Deferred income (govt grant) ................. 40 ‐ 808 864
Total equity and liabilities 3,328 2,784 NOTES to the accounts:
(1)
The profit on ordinary activities before taxation has been arrived at after
charging:
Auditors remuneration .............
Directors remuneration ............
Depreciation ..........................
24
80
120
Advanced Financial Accounting Sample Paper 3 Page 13
(2)
Property plant and equipment:
During the year ended 31st December 2008, OLIVE Ltd., sold for £/€40,000 an
asset which cost it £/€120,000 in 1999 and which had been depreciated by
£/€70,000 at the date of sale. There were no other sales of property plant
and equipment during the year.
(3)
A government grant of £/€50,000 relating to plant and equipment purchased
during the year was received.
(4)
Dividends paid during the year amounted to £/€160,000.
Requirement
Prepare a Statement of Cash Flow for OLIVE Ltd., for the year ended 31st December
2008, in accordance with the requirements of International Accounting Standard
No. 7 “Cash Flow Statement” (I.A.S.7).
18 marks
Presentation: 2 marks
Total: 20 Marks
Advanced Financial Accounting Sample Paper 3 Page 14
Accounting Financial Accounting Sample Paper 3 – Suggested Solutions NOTE: This sample paper and solution have been prepared in recognition that public companies are now required to prepare accounts implementing the language of International Accounting Standards (I.A.S.’s) but that other companies and non corporate entities are not required to do so. Examinees would be at liberty to use the language of either (i) I.A.S.’s, (ii) the Companies (Amendment) Act 1986 and F.R.S.’s/S.S.A.P’s in answering questions relating to non‐
public companies. Advanced Financial Accounting Sample Paper 3 Page 15
Solution to question 1 (i) (a) Purpose of the IASB Framework for the Preparation and Presentation of Financial Statements The IASB developed the Framework to act as a conceptual framework against which new accounting standards would be developed. The Framework is not an accounting standard however new standards issued following the publication of the Framework must be in line with the principles of the Framework. Going forward the incidents of conflict between the Framework and accounting standards will reduce thus leading to increased harmonisation in financial accounting regulations. However as the Framework is not an accounting standard it cannot override the principles of an existing accounting standard, where a conflict exists the principles as laid out in the standard must be complied with. The framework also provides very important definitions which were not previously defined, including the definitions of such frequently used terms such as asset and liability. This eliminates the need to provide such definitions in each standard thereby decreasing the time it takes to develop and publish new standards. Overall, the Framework promotes a more consistent regulatory environment which should help not only standard setting bodies but also preparers of financial statements and users of such financial information. (b)Definitions Going concern Financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. Foreseeable future is considered to be twelve months from the date the financial statements are signed. In the event that management decide that it is no longer appropriate to prepare the financial statements on a going concern basis this must be disclosed. Accruals Financial statements, with the exception of the cash flow statement, are prepared on the accruals basis of accounting where transactions are recognised in the period in which they take place irrespective of the when the cash flow arising from these transactions occurs. Asset An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. Future economic benefits represent the potential to contribute to the cash flow of the entity. Examples of assets include premises, equipment, receivables. Liability A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow of resources from the entity. Examples of liabilities include payables, finance lease obligations, accruals. Advanced Financial Accounting Sample Paper 3 Page 16
(ii) Accounting Policies As per I.A.S.8 Accounting Policies “are the specific principles, bases, conventions, rules and practices applied by an entity in preparing financial statements.” An entity should change an accounting policy only if the change: • is required by a Standard or an Interpretation, or • results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance or cash flows. Accounting Estimates Accounting estimates involve judgements on the uncertainties inherent in business activities which cannot be measured with precision but only estimated. Examples of items may which require accounting estimates are: • Provision for bad and doubtful debts • Inventory obsolescence • Useful life of depreciable assets Advanced Financial Accounting Sample Paper 3 Page 17
Solution to question 2 (1) C (80,000 *365 / 1,800,0000) (2) C (85,000 * 365 / 1,250,000) (3) B (170,000 +80,000+30,000)/(85,000+60,000+70,000+25,000) (4) B (140,000 + 1,250,000 – 170,000) / ((140,000 + 170,000) /2) (5) C (2,100,000 – (140,000 + 1250,000 – 170,000) = 880,000 *100/210,000 (6) D (7) D (8) A (9) B (10) C Advanced Financial Accounting Sample Paper 3 Page 18
Solution to question 3 Cable Ltd. Statement of Comprehensive Income for the year ended 31 December 2008 Sales Revenue (W.1) Cost of sales (W.2) Gross profit Distribution costs (W.3) Administrative expenses (W.4) Interest received Interest paid (W.5) Profit before tax Tax expense Profit on ordinary activities after tax £/€’000 4,421 2,200 2,221 (380) (610) 1,231 35 (80) 1,186 (593) 593 CABLE Limited Statement of Changes in Equity for the year ended 31 December 2008 As at 1 January 2008 Profit for the year Ordinary dividends (w.6) Share Capital £/€'000 Share Premium £/€'000 Retained earnings £/€'000 General Reserve Total £/€'000 £/€'000 2,200
180
74
593
(286)
260 2,714 593 (286) 2,200
180
381
260 3,021 Advanced Financial Accounting Sample Paper 3 Page 19
Solution to question 3(cont’d) Workings (1) Sales revenue Sales per T/B Less: sales returns (2) Cost of sales Opening stock Purchases Less : purchases returns Add : goods purchased on 28/12 Less : Closing stock Per physical count Add : not accounted for (3) Distribution expenses Per T/B Depreciation : Motor Veh. Training grant receivable (4) Administrative expenses Per T/B Add : Depreciation : Premises Plant and Mach. (5) Interest paid Bank overdraft interest Debenture interest Paid Due £/€’000 £/€’000 4,500 79 4,421 180 2,400 (160) 2,240 70 2,310 2,490 (220) (70) (290) 2,200 340 60 (20) 380 450 78 82 610 10 10 60 20 80 Advanced Financial Accounting Sample Paper 3 Page 20
Solution to question 3(cont’d) (6) Dividend Interim dividend per trial balance Final dividend paid Total dividend £/€’000 66 220 286 Advanced Financial Accounting Sample Paper 3 Page 21
Solution to question 4 (a) Statement of adjusted profit for the year ended 31 December 2008 €/£ Net profit as per draft accounts (1) Depreciation: Leasehold Premises 5,000 Plant and Machinery
26,000
Furniture & Fittings
(b) 5,000
(2) Wages owing (3) Rent prepaid Adjusted net profit (36,000) (14,000) 7,000 ______ 45,000 Appropriation account for the year ended 31 December 2008 Net profit Less: Partner’s salaries Geoff 5,000 Henry 6,000 Ian 7,000 Interest on capital Geoff 4,000 Henry 3,500 Ian 3,500 Appropriated as follows: €/£ 88,000 Geoff Less: to meet guarantee Henry Less: to meet guarantee Ian Add: to meet guarantee 8,000 (1,000) 4,000 (1,000) 4,000 2,000 Advanced Financial Accounting Sample Paper 3 45,000 (18,000) (11,000) 16,000
7,000 3,000 6,000 16,000 Page 22
Partners Current Accounts
Balance b/d Balance c/d Balance b/d Geoff 32,000 32,000 Henry 20,000 20,000 7,500 Ian 26,500 26,500 Bal b/d Salaries Interest on capital Share of profits Balance c/d Balance b/d Geoff 16,000 5,000 4,000 7,000 32,000 32,000 Henry Ian 10,000 6,000 7,000 3,500 3,500 3,000 6,000 7,500 20,000 26,500 26,500 Solution to Q4 continued overleaf Advanced Financial Accounting Sample Paper 3 Page 23
(d) Statement of Financial Position as at 31 December 2008 Cost Accumulated NBV Depreciation €/£ €/£ €/£ Non-current assets
Leasehold Premises Plant and machinery Furniture & Fittings Current Assets
Inventory Receivables Prepaid rent Bank Partners capital accounts Geoff Henry Ian Partners current accounts
Geoff Henry Ian Current liabilities Payables Loan from Simon Accrued wages and salaries 250,000 130,000 25,000 405,000 55,000 91,000 10,000 156,000 195,000 39,000 15,000 249,000 30,000 26,000 7,000 12,000 75,000 324,000 80,000 70,000 70,000 220,000 32,000 (7,500) 26,500 26,000 13,000 14,000 53,000 324,000 51,000 Advanced Financial Accounting Sample Paper 3 Page 24
Solution to question 5 (a) Journal Dr. Cr. £/€ £/€ (1) Bad Debts a/c (P&L a/c) 80,000 Debtor (BS) 80,000 (Adjusting event as per I.A.S.10 Events after the Balance sheet date. Therefore write off as a bad debt) (2) Deferred Income (BS) 50,000 Training Costs (P&L a/c) 50,000 (As per I.A.S.20 the grant is an income related grant an should be credited to the Statement of Profit & Loss under other income or deducted from the related expense. Error corrected by journal above) (3) Inventory (P&L a/c) 50,000 Inventory ( B/S ) 50,000 (Damaged stock written down to NRV) (4) No adjustment ; a non adjusting event as per I.A.S. 10 (5) Contingent liability, possible but not probable, no provision required as per I.A.S. 37. Show as a note to the accounts. (6) Wages expense (P&L a/c) 17,000 Accrued expense (B/S) 17,000 (Accounting for wages accrued due at year end not provided for) (b) Adjusted net profit before tax Profit before taxation per draft accounts £/€ £/€ 350,000 Adjustments : (1) Bad debt (2) Training grant (3) Inventory write off (6) Wages expense Adjusted net profit Advanced Financial Accounting Sample Paper 3 (80,000) 50,000 (50,000) (17,000) (97,000) 253,000 Page 25
Solution to question 6 OLIVE Ltd., Statement of Cash Flow for the year ended 31st December 2008 £/€’000 £/€’000 Cash flow from operating activities: Profit on ordinary activities before interest 850 Adjustment for: Government grant .......................................................................... (10) Depreciation ..................................................................................... 120 Loss on disposal of property plant and equipment ....... 10 120 970 Operating profit from working capital changes: Decrease in inventories ............................................................... 144 Increase in receivables ................................................................ (172) Increase in payables ...................................................................... 64 36 Cash generated from operations .......................................................... 1,006 Interest paid ................................................................................................... (60) Income tax paid (w.1) ................................................................................ (560) Net cash flow from operating activities ............................................. 386 Cash flow from investing activities:
Purchases of property plant and equipment (w.2) ....... Proceeds of sale of property, plant and equipment ....... Interest received ........................................................................... Net cash used in investing activities ................................................... Cash flow from financing activities:
Proceeds from issue of shares (100+100) .......................... Government grant received ....................................................... Proceeds from long term borrowing ..................................... Dividends paid ................................................................................ Net increase in cash and cash equivalents ....................................... Cash and cash equivalents at beginning of year ............................ Cash and cash equivalents at end of year ......................................... (570) 40 20 (510) (124) 200 50 150 (160) 240 116 480 596 Advanced Financial Accounting Sample Paper 3 Page 26
Solution to question 6 (Cont’d.)
WORKINGS
(1)
Income tax paid £/€’000 Due at 1st January 2006 ............................................ 480 Charge for year ............................................................. 400 880 Due at 31st December 2006 .................................... 320 Income tax paid ............................................................ 560 (2)
Purchase of property plant and equipment £/€’000 Net book amount at 1st January 2006 ................ 1,480 Less: net book amount of sale During year (£/€120,000 ‐ £/€70,000) ........... (50) 1430 Depreciation charge for year ................................. (120) 1310 Net book amount at 31st December 2006 ........ 1880 Purchases during year .............................................. 570 Advanced Financial Accounting Sample Paper 3 Page 27