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 Advanced Financial Reporting & Theory

 

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PAST EXAMINATION QUESTIONS

2020

 

  

 

THE UNIVERSITY OF HULL

 

 

 

Table of Contents

Department of Accounting and Finance

 

 

Level 6 Examination

 

 

Semester 1

Academic Year 2015-2016

 

 

 

Advanced Financial Reporting & Theory

 

 

 

Duration of Exam: 2 hours

 

 

Section A: 1 compulsory question worth 40 marks

Section B: 2 questions worth 30 marks each, ANSWER ANY ONE QUESTION

Section C: 3 questions worth 30 marks each, ANSWER ANY ONE QUESTION

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised statements of financial position and income statements for Hill plc, Holt plc and Hesham plc are as follows:

 

Balance Sheets as at 31/12/2015
Hill Holt Hesham
Non current assets £ 000’s £ 000’s £ 000’s
Property, plant, equipment 745,200 318,500 198,400
Investment in subsidiary 310,000
Investment in associate 95,200
1,150,400 318,500 198,400
Current assets
Inventories 287,100 113,700 72,100
Trade receivables 246,300 197,600 76,300
Current account Holt 20,400
Current account Hesham 12,800
Bank 146,900 49,100 12,000
713,500 360,400 160,400
Total assets 1,863,900 678,900 358,800
Equity and reserves
Share capital 750,000 250,000 175,000
General Reserve 150,000 50,000 25,000
Retained earnings 379,300 122,100 53,800
Shareholders’ funds 1,279,300 422,100 253,800
       
Non current liabilities
Loan 200,000 75,000 40,000
       
Current liabilities
Trade payables 284,600 126,400 42,200
Current account Hill 20,400 12,800
Dividend payable 100,000 35,000 10,000
384,600 181,800 65,000
Total equity and liabilities 1,863,900 678,900 358,800

 

Income statements for year ended 31/12/2015
  Hill Holt Hesham
  £ 000’s £ 000’s £ 000’s
Sales 1,875,000 476,400 247,200
Cost of sales -1,312,500 -333,480 -197,760
Gross profit 562,500 142,920 49,440
Expenses -225,000 -57,168 -19,776
Operating profit 337,500 85,752 29,664
Dividends received from Holt and Hesham 26,500
Profit before tax 364,000 85,752 29,664
Income tax expense -72,800 -17,150 -5,933
Profit after tax 291,200 68,602 23,731
Dividends payable 100,000 35,000 10,000

 

Other information:

  1. Hill acquired a 70% holding in Holt on 1st April 2013 when the general reserve of Holt was £20 million and the retained earnings were £41.3 million. At the date of acquisition, the fair value of the land and buildings was considered to be £40 million higher than the book value.  No adjustment has been made in the financial statements for this amount.
  2. Following an impairment review, Hill has decided to write off 30% of the value of goodwill arising upon the acquisition of Holt.
  • During the year, Hill had sold goods to Holt with a sales value of £250 million, including a 25% mark up on cost. At the year-end, 30% of these goods remained in stock.
  1. On 1st May 2013 Hill purchased a 20% holding in Hesham, when the general reserve was £12 million and the retained earnings were £12.4 million. The fair values were the same as the book values.

 

Required:

 

  1. Prepare the consolidated statement of financial position and the consolidated income statement for Hill plc for the year ended 31st December 2015, complying, as far as the information permits, with the requirements of IFRS 10 Consolidated Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IFRS 3 Business Combinations. Non-controlling interests are to be measured using method 1.

(28 marks)

  1. The criteria for determining whether a company should be considered a subsidiary or an associated is detailed within IFRS 10 Consolidated Financial Statements and also in IAS 28 Investments in Associates and Joint Ventures. A key issue in this determination is the distinction between significant influence and control.  You are required to critically evaluate this criteria and evaluate its effectiveness from the perspective of the usefulness of consolidated financial statements.

(12 marks)

(Total 40 marks)

  

  

SECTION B

 

2 QUESTIONS – ANSWER 1 QUESTION

 

Question 2

 

The following summary extract information for the last 4 years relates to Hibrow plc, a UK retailer:

 

Extract information 2012 2013 2014 2015
Operating Profit after tax 20,250,000 19,400,000 18,900,000 21,350,000
Long term liabilities 50,000,000 55,000,000 70,000,000 70,000,000
Shareholders’ funds 100,000,000 105,000,000 101,250,000 107,450,000
Dividend per share 1.25 0.90 1.00 1.30
Market value per share 15.50 12.75 9.90 14.20
Weighted average cost of capital 10% 12% 11% 10%
Number of ordinary shares 5,000,000 5,000,000 5,000,000 5,000,000

 

 

Required:

 

  1. Calculate the following investment ratios/percentages for the last 4 years:

 

  1. Gearing
  2. Dividend cover
  • Dividend yield
  1. Return on equity
  2. Economic Value Added
  3. Economic Value Added percentage change from 2013 to 2015
  • Earnings per share
  • Price/earnings ratio

(16 marks)

 

  1. Critically discuss the performance of Hibrow over the last 4 years using your calculations in part a. Include in your discussion what additional qualitative information might shareholders and the wider stakeholder community find useful in order to assist in their financial decision making relating to Hibrow plc.

(14 marks)

(Total 30 marks)

 

 

 Following is a summary of the consolidated statement of comprehensive income for Sinclair plc:

 

Extract from Consolidated Statement of Comprehensive Income for the year ended 31st December 2015
£ million’s
Turnover 1,800
Operating costs 1,260
Operating profit 540
Interest payable 135
Profit before tax 405
Taxation 81
Profit after tax 324

 

The following additional information is available:

  1. The company had 10,000,000 ordinary shares at 1st January 2015 with a par value of £1 and a market value of £6.40. The company also has 5,000,000 £1 convertible 5% preference shares that can be converted at the end of 2018 at a rate of 1 ordinary share for every 5 preference shares.
  2. The company also has a £2,500,000 convertible 10% loan, redeemable in 2018 for a rate of 1 share for every £10 in loan value.
  • On 1st May 2015 the company made a 1 for 4 rights issue to ordinary shareholders for a price of £5 per share, when the market value was £6.40 per share.
  1. The company also issued a further 5,000,000 ordinary shares on 1st August 2015 for the market price of £5.75 per share.

 

Required:

 

  1. Calculate the basic earnings per share for 2015 and explain whether the basic earnings per share should be re-stated for 2014 and why. Your workings should clearly show the impact of the rights issue in terms of the theoretical ex rights price.

(12 marks)

  1. Calculate the diluted earnings per share for 2015, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti-dilutive.

(8 marks)

  1. Explain the key requirements of IAS 33 Earnings Per Share and critically evaluate the usefulness of this information to shareholders and the wider stakeholder community. Explain why EPS needs to be disclosed in relation to both potential dilution in future years and also dilution for prior years.

(10 marks)

(Total 30 marks)

 

 

 

SECTION C

 

3 QUESTIONS – ANSWER 1 QUESTION

 

Question 4

 

Companies can select accounting policies that enable them to determine a desired level of earnings/profit.

 

Critically discuss how Watts and Zimmerman’s Positive Accounting Theory allows the users of financial statements to explain and predict how companies might manipulate their financial statement numbers.

(Total 30 marks)

 

 

Question 5

 

Cultural, institutional and national differences might have lead different countries to develop their own accounting systems.

 

Critically discuss the reasons why financial reporting regulation and practices might vary between countries.

 

(Total 30 marks)

 

Question 6

 

There is limited regulation pertaining to the disclosure of environmental and social information. Therefore most disclosure of environmental and social accounting information is voluntary.

 

Critically discuss the rationale for, and usefulness of, company disclosure of environmental and social accounting information, giving relevant examples where necessary.

 

(Total 30 marks)

 

 

 

THE UNIVERSITY OF HULL

HKU SPACE

 

 

Department of Accounting

 

 

Level 6 Examination

 

 

July 2015

 

 

 

Advanced Financial Reporting & Theory

 

Edited to include interpretation question

 

20th July 2015

 

 

2 hours

 

 

 

SECTION A – Question 1 is COMPULSORY

 

SECTION B – Answer ONE question

 

SECTION C – Answer ONE question

 

 

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised Statements of Financial Position and Income Statements for Admiralty Ltd, Chen Ltd and Deng Ltd are as follows:

 

Balance Sheets @ 30/04/2015 HK$ 000’s
Admiralty Chen Deng
Non current assets
Property, plant, equipment 900,000 678,200 478,500
Investment in subsidiary 800,000
Investment in associate 130,000
1,830,000 678,200 478,500
Current assets
Inventories 410,000 147,800 72,100
Trade receivables 195,000 68,000 37,400
Current account Chen 22,000
Current account Deng 13,000
Bank 52,000 14,000 7,000
692,000 229,800 116,500
Total assets 2,522,000 908,000 595,000
Equity and reserves
Share capital 750,000 300,000 160,000
General Reserve 200,000 50,000 35,100
Retained earnings 1,092,000 371,000 327,900
Share holders funds 2,042,000 721,000 523,000
Non current liabilities
Loan 250,000 75,000 30,000
Current liabilities
Trade payables 185,000 85,000 25,000
Current account Admiralty 22,000 13,000
Dividend payable 45,000 5,000 4,000
230,000 112,000 42,000
Total equity and liabilities 2,522,000 908,000 595,000

 

 

                                             (continued)

Income statements for ye 30/04/2015
Sales 2,547,500 988,000 641,000
Cost of sales -1,910,625 -741,000 -480,750
Gross profit 636,875 247,000 160,250
Expenses -254,750 -98,800 -64,100
Operating profit 382,125 148,200 96,150
Dividends recd from Chen & Deng 10,700
Profit before tax 392,825 148,200 96,150
Income tax expense -40,000 -8,000 -3,000
Profit after tax 352,825 140,200 93,150
Dividends paid 200,000 10,000 9,000

 

Other information:

 

  1. Admiralty acquired an 80% holding in Chen on 1st February 2010 when the general reserve of Chen was $15 million and the retained earnings were $125 million. At the date of acquisition, the fair value of the land and buildings was considered to be $20 million higher than the book value.  No adjustment has been made in the financial statements for this amount.
  2. Following an impairment review, Admiralty has decided to write off 30% of the value of goodwill arising upon the acquisition of Chen.
  • During the year, Admiralty had sold goods to Chen with a sales value of $500 million, including a 1/3 mark up on cost. At the year-end, 60% of these goods remained in stock.
  1. On 1st May 2014 Admiralty purchased a 30% holding in Deng, when the general reserve was $12 million and the retained earnings were $85 million. The fair values were the same as the book values.

 

Required:

 

  1. a) Prepare the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position of Admiralty Ltd and its subsidiary and associate at 30th April 2015 complying, as far as the information permits, with the requirements of IFRS 10 and IFRS 3. Non-controlling interests are to be measured using method 1.

(28 marks)

     

  1. b) According to IAS 28 and IFRS 10 Admiralty has control over Chen and significant influence over Deng. You are required to critically evaluate the criteria and differences between control and significant influence and explain why this is important in the consolidation of financial statements.

(12 marks)

 

                [TOTAL 40 MARKS]        

(continued)

 

 

 

 

SECTION B

 

Answer ONE question from this Section

 

Question 2

 

The following summary extract information for the last 4 years relates to Spencer Burtons plc, a UK retailer:

 

Extract information 2012 2013 2014 2015
Operating Profit after tax     15,250,000     17,500,250   19,450,225    23,564,000
Long term liabilities     35,000,000     40,000,000   45,000,000    50,000,000
Shareholders funds     20,000,000     25,000,000   30,000,000    35,000,000
Dividend per share 2.00 2.50 2.75 3.00
Market value per share 16.00 18.00 20.00 22.00
Weighted average cost of capital 7% 7% 6% 6%
Number of ordinary shares     10,000,000     10,000,000   12,000,000    12,000,000

 

 

Required:

 

  1. Calculate the following investment ratios/percentages for the last 4 years:

 

  1. Gearing
  2. Dividend cover
  • Dividend yield
  1. Return on equity
  2. Economic Value Added
  3. Economic Value Added percentage change from 2013 to 2015
  • Earnings per share
  • Price/earnings ratio
  • marks)

 

  1. Critically discuss the performance of Spencer Burtons plc over the last 4 years using your calculations in part a. Include in your discussion what additional qualitative information might shareholders and the wider stakeholder community find useful in order to assist in their financial decision making relating to Spencer Burtons plc.

(14 marks)

(Total 30 marks)

 

(continued)

 

 

 

Question 3

 

The following is a summary of the consolidated statement of comprehensive income for Wong Limited:

 

Extract from Consolidated Statement of Comprehensive Income for y/e 31st December 2014
HK$000’s
Turnover 11,800,000
Operating costs 8,850,000
Operating profit 2,950,000
Interest payable 300,000
Profit before tax 2,650,000
Taxation 530,000
Profit after tax 2,120,000

 

The following additional information is available:

  1. The company had 2,100,000 ordinary shares at 1st January 2014 with a par value of $2 and a market value of $5. The company also has 750,000 $1 convertible 5% preference shares that can be converted at the end of 2017 at a rate of 1 ordinary share for every 5 preference shares.
  2. The company also has a $500,000 convertible 10% loan, redeemable in 2017 for a rate of 1 share for every $10 in loan value.
  • On 1st April 2014 the company made a 1 for 3 rights issue to ordinary shareholders for a price of $3 per share, when the market value was $5 per share.
  1. The company also issued a further 600,000 ordinary shares on 1st July 2014 for the market price of $4.80 per share.

 

Required:

  1. Calculate the basic earnings per share for 2014 and explain whether the basic earnings per share should be re-stated for 2013 and why. Your workings should clearly show the impact of the rights issue in terms of the theoretical ex rights price.

(12 marks)

 

  1. Calculate the diluted earnings per share for 2014, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti dilutive.

(8 marks)

 

  1. EPS is often used alongside the Price/earnings ratio as a benchmark indicator of performance. You are required to critically evaluate the usefulness of the EPS figures to users within the regulatory context of IAS 33 Earnings per share.

(10 marks)

[TOTAL 30 MARKS]

SECTION C

Answer ONE question from this Section

 

Question 4

 

Positive accounting theory attempts to explain why certain behaviour takes place within reporting financial performance within the context of anomalies of the efficient market hypothesis and agency theory.

 

You are required to critically evaluate the key concepts behind the positive accounting theory and justify whether you think this is a useful approach to aid the practice of financial reporting.

 

      (30 marks)

 

Question 5

 

Normative accounting research involves the observation of accounting practice and making suggestions as to how this practice might be improved, often using empirical or practice based evidence to support such suggestions.  Part of the normative debate has centred on the core issue of recognition, measurement and valuation within financial reporting and more recently, this has focused on the concept of fair value.

 

You are required to critically evaluate the theoretical constructs in relation to recognition, measurement and valuation within financial reporting and consider whether you think the idea of fair value can improve the quality of financial statements.

 

(30 marks)

 

Question 6

 

Environmental and social accounting research has evolved relatively recently compared to some other theoretical financial reporting work, largely as a result of the practice of corporations desire to report such information, arguably driven by pressure from a wide range of stakeholders.  You are required to critically evaluate how useful research in this area is and its relevance to financial reporting.

 

 

(30 marks)

 

 

You have reached the end of the examination paper.

At this point you should have answered 3 questions: the compulsory question from Section A, one question from Section B and one from

Section C

 

End

 

 

 

THE UNIVERSITY OF HULL

 

 

The Business School

 

 

 

 

 

26142 Advanced Financial Reporting & Theory

 

Revised to include interpretation question

 

 

SECTION A – Question 1 is COMPULSORY

 

 

SECTION B – Answer ONE question

 

 

SECTION C – Answer ONE question

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised Statements of Financial Position and Income Statements for Abacus Ltd, Bing Ltd and Chow Ltd are as follows:

 

Balance Sheets @ 30/04/2015 HK$ 000’s
Abacus Bing Chow
Non current assets
Property, plant, equipment 470,000 250,000 150,000
Investment in subsidiary 250,000
Investment in associate 60,000
780,000 250,000 150,000
Current assets
Inventories 320,000 110,000 56,000
Trade receivables 180,000 68,000 40,000
Current account Bing 15,000
Current account Chow 10,000
Bank 52,000 4,000 2,000
577,000 182,000 98,000
Total assets 1,357,000 432,000 248,000
Equity and reserves
Share capital 500,000 200,000 140,000
General Reserve 100,000 20,000 20,000
Retained earnings 232,000 47,000 23,000
Shareholder funds 832,000 267,000 183,000
Non-current liabilities
Loan 185,000 50,000 20,000
Current liabilities
Trade payables 200,000 85,000 30,000
Current account Abacus 15,000 10,000
Dividend payable 140,000 15,000 5,000
340,000 115,000 45,000
Total equity and liabilities 1,357,000 432,000 248,000

 

 

 

 

 

 

 

 

Income statements for ye 30/04/2015 HK$ 000’s
Abacus Bing Chow
Sales 2,450,000 1,395,000 850,000
Cost of sales -1,547,000 -988,000 -625,000
Gross profit 903,000 407,000 225,000
Expenses -598,000 -359,000 -201,000
Operating profit 305,000 48,000 24,000
Dividends recd from Bing & Chow 9,750
Profit before tax 314,750 48,000 24,000
Income tax expense -40,000 -8,000 -3,000
Profit after tax 274,750 40,000 21,000
Dividends paid 200,000 10,000 9,000

 

Other information:

 

i)                 Abacus acquired a 75% holding in Bing on 1st February 2014 when the general reserve of Bing was $12.5 million and the retained earnings were $20 million.  At the date of acquisition, the fair value of the land and buildings was considered to be $20 million higher than the book value.  No adjustment has been made in the financial statements for this amount.

ii)               Following an impairment review, Abacus has decided to write off 20% of the value of goodwill arising upon the acquisition of Bing.

iii)              During the year, Abacus had sold goods to Bing with a sales value of $100 million, including a 25% mark up on cost.  At the year-end, 80% of these goods remained in stock.

iv)             On 1st May 2014 Abacus purchased a 25% holding in Chow, when the general reserve was $9 million and the retained earnings were $11 million.  The fair values were the same as the book values.

 

Required:

  1. a) Prepare the Consolidated Statement of Comprehensive Income and the Consolidated Statement of Financial Position of Abacus Ltd and its subsidiary and associate at 30th April 2015 complying, as far as the information permits, with the requirements of IFRS 10 and IFRS 3. Non-controlling interests are to be measured using method 1.

(28 marks)

     

  1. b) According to IAS 28 and IFRS 10 Abacus has control over Bing and significant influence over Chow. You are required to critically evaluate the criteria and differences between control and significant influence and explain why this is important in the consolidation of financial statements.

(12 marks)

TOTAL 40 marks                               (continued)

 

 

SECTION B

 

Answer ONE question from this Section

 

Question 2

 

The following summary extract information for the last 4 years relates to McFly plc, a UK supermarket:

 

Extract information 2012 2013 2014 2015
Operating Profit after tax      4,550,000    5,875,000    6,158,000       5,995,000
Long term liabilities    15,000,000  17,000,000  18,000,000      20,000,000
Shareholders funds    20,000,000  22,000,000  23,000,000      23,000,000
Dividend per share 0.75 2.50 2.75 3.00
Market value per share 5.50 6.75 7.00 6.50
Weighted average cost of capital 10% 8% 6% 7%
Number of ordinary shares      5,000,000    5,000,000    5,000,000       5,000,000

 

Required:

 

  1. Calculate the following investment ratios/percentages for the last 4 years:

 

  1. Gearing
  2. ii)      Dividend cover

iii)       Dividend yield

  1. Return on equity
  2. Economic Value Added
  3. Economic Value Added percentage change from 2013 to 2015
  • Earnings per share
  • Price/earnings ratio
  • marks)

 

  1. Critically discuss the performance of McFly plc over the last 4 years using your calculations in part a. Include in your discussion what additional qualitative information might shareholders and the wider stakeholder community find useful in order to assist in their financial decision making relating to McFly plc.

(14 marks)

(Total 30 marks)

 

(continued)

Question 3

 

The following is a summary of the consolidated statement of comprehensive income for Xing Limited:

Extract from Consolidated Statement of Comprehensive Income for y/e 31st December 2014
HK$
Turnover 800,000
Operating costs 480,000
Operating profit 320,000
Interest payable 120,000
Profit before tax 200,000
Taxation 40,000
Profit after tax 160,000

 

The following additional information is available:

 

  1. The company had 1,000,000 ordinary shares at 1st January 2014 with a par value of $1 and a market value of $4. The company also has 500,000 $1 convertible 5% preference shares that can be converted at the end of 2017 at a rate of 1 ordinary share for every 5 preference shares.
  2. The company also has a $250,000 convertible 10% loan, redeemable in 2017 for a rate of 1 share for every $10 in loan value.
  3. On 1st April 2014 the company made a 1 for 4 rights issue to ordinary shareholders for a price of $1.20 per share, when the market value was $4 per share.
  4. The company also issued a further 500,000 ordinary shares on 1st July 2014 for the market price of $3.75 per share.

 

Required:

 

  1. Calculate the basic earnings per share for 2014 and explain whether the basic earnings per share should be re-stated for 2013 and why. Your workings should clearly show the impact of the rights issue in terms of the theoretical ex rights price.                                                                                      14 marks

 

  1. Calculate the diluted earnings per share for 2014, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti-dilutive.

6 marks

 

  1. Discuss the usefulness of the EPS figures to users and also explain why EPS needs to be disclosed in relation to both potential dilution and for prior years in accordance with IAS 33 Earnings per share.

10 marks

TOTAL 30 marks

(continued)

SECTION C

 

Answer ONE question from this Section

 

Question 4

 

Market based accounting research has been described as having a purpose to show the usefulness of accounting information in making economic decisions by examining the extant of any resultant share price change.  You are required to critically evaluate whether you think market based accounting research achieves this purpose.

      (30 marks)

 

 

Question 5

 

Environmental and social accounting research has evolved relatively recently compared to some other theoretical financial reporting work, largely as a result of the practice of corporations desire to report such information, arguably driven by pressure from a wide range of stakeholders.  You are required to critically evaluate how useful research in this area is and its relevance to financial reporting.

 

 

(30 marks)

 

 

Question 6

 

Positive accounting theory was principally developed by Watts and Zimmerman and attempts to explain why certain behaviour takes place within reporting financial performance with the context of managers behaving in an opportunistic manner.  You are required to critically evaluate the key concepts behind positive accounting theory and justify whether you think this is a useful approach to aid the practice of financial reporting.

 

(30 marks)

 

 

 

You have reached the end of the examination paper.

At this point you should have answered 3 questions: the compulsory question from Section A, one question from Section B and one from

Section C

 

THE UNIVERSITY OF HULL

 

Department of Accounting and Finance

 

 

Level 6 Examination

 

 

Semester 1 

 

Academic Year 2016-2017

 

 

Advanced Financial Reporting & Theory

 

 

Duration of Exam: 2 hours

 

 

Section A: 1 compulsory question worth 40 marks

Section B: 2 questions worth 30 marks each, ANSWER ANY ONE QUESTION

Section C: 3 questions worth 30 marks each, ANSWER ANY ONE QUESTION

 

 

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised statements of financial position and income statements for May plc, Cameron plc and Clegg plc are as follows:

 

 

Balance Sheets as at 30/12/2016    £ 000’s £ 000’s £ 000’s
May Cameron Clegg
Non-current assets
Property, plant, equipment 630,200 225,400 134,600
Investment in subsidiary 310,000
Investment in associate 95,200
1,035,400 225,400 134,600
Current assets
Inventories 154,200 68,400 46,000
Trade receivables 121,400 73,400 33,510
Current account Cameron 9,840
Current account Clegg 2,460
Bank 67,410 32,640 8,840
355,310 174,440 88,350
Total assets 1,390,710 399,840 222,950
Equity and reserves
Share capital 500,000 150,000 75,000
General reserve 100,000 50,000 25,000
Retained earnings 362,290 53,200 40,740
Shareholders’ funds 962,290 253,200 140,740
Non-current liabilities
Loan 300,000 75,000 40,000
Current liabilities
Trade payables 128,420 61,800 39,750
Current account May 9,840 2,460
128,420 71,640 42,210
Total equity and liabilities 1,390,710 399,840 222,950

 

 

    £ 000’s £ 000’s £ 000’s
Income statements for year ended 31/12/2016 May Cameron Clegg
Sales 1,546,200 323,400 247,200
Cost of sales (1,236,960) (226,380) (197,760)
Gross profit 309,240 97,020 49,440
Expenses (247,392) (77,616) (39,552)
Operating profit 61,848 19,404 9,888
Dividends received from Cameron & Clegg 14,500
Profit before tax 76,348 19,404 9,888
Income tax expense (15,270) (3,881) (1,978)
Profit after tax 61,078 15,523 7,910
Dividends payable (part of equity) 50,000 15,000 5,000

 

Other information:

 

  1. May acquired a 90% holding in Cameron on 1st April 2013 when the general reserve of Cameron was £35 million and the retained earnings were £37.2 million. At the date of acquisition, the fair value of the land and buildings was considered to be £100 million higher than the book value.  At the date of acquisition, the fair value of the non-controlling interest in Cameron was considered to be £35 million.  No adjustment has been made in the financial statements for these amounts.
  2. Following an impairment review during the year, May has decided to write off 30% of the value of goodwill arising upon the acquisition of Cameron.
  • During the year, May had sold goods to Cameron with a sales value of £150 million, including a 30% mark up on cost. At the year-end, 20% of these goods remained in inventory.
  1. On 1st May 2013 May purchased a 20% holding in Clegg, when the general reserve was £18.7 million and the retained earnings were £28.5 million. The fair values were the same as the book values.

 

Required:

 

  1. Prepare the consolidated statement of financial position and the consolidated income statement for May plc for the year ended 31st December 2016, complying, as far as the information permits, with the requirements of IFRS 10 Consolidated Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IFRS 3 Business Combinations. Non-controlling interests are to be measured using Method 2.
  • marks)
  1. The criteria for determining the extent of goodwill upon the acquisition of a subsidiary follows the fair value approach. Using Method 2 in the consolidation process also adopts the fair value approach.  You are required to evaluate critically the decision criteria in respect of arriving at a fair valuation for goodwill.

(12 marks)

(Total 40 marks)

 

SECTION B

 

2 QUESTIONS – ANSWER 1 QUESTION

 

Question 2

 

The following summary extract information for the last 4 years relates to Macaw plc, a UK retailer:

 

Extract information 2013 2014 2015 2016
Operating Profit after tax £30,375,000 £29,100,000 £28,350,000 £26,450,000
Long term liabilities £75,000,000 £82,500,000 £105,000,000 £105,000,000
Shareholders funds £150,000,000 £157,500,000 £151,875,000 £161,175,000
Dividend per share £1.88 £1.35 £1.50 £1.95
Market value per share £23.25 £19.13 £14.85 £10.65
Weighted average cost of capital 15% 18% 18% 20%
Number of ordinary shares 7,500,000 10,000,000 10,000,000 10,000,000

 

 

Required:

 

  1. a) Calculate the following investment ratios/percentages for the last 4 years:

 

  • Gearing
  • Dividend cover
  • Dividend yield
  • Return on equity
  • Economic Value Added
  • Economic Value Added yearly percentage change from 2014 to 2016
  • Earnings per share
  • Price/earnings ratio
  • marks)

 

  1. b) Critically discuss the performance of Macaw over the last 4 years using your calculations in part a. Include in your discussion the limitations of this analysis and consider what additional qualitative information might shareholders and the wider stakeholder community find useful in order to assist in their financial decision making relating to Macaw plc.

(14 marks)

(Total 30

Question 3

 

The following is a summary of the consolidated statement of comprehensive income for Green plc:

Extract from Consolidated Statement of Comprehensive Income for year ended 31st December 2016
£million’s
Turnover 25
Operating costs 20
Operating profit 5
Interest payable 1
Profit before tax 4
Taxation 1
Profit after tax 3

 

The following additional information is available:

 

  • The company had 500,000 ordinary shares at 1st January 2016 with a par value of £1 and a market value of £5.00. The company also has 150,000 £1 convertible 10% preference shares that can be converted at the end of 2018 at a rate of 1 ordinary share for every 10 preference shares.
  • The company also has a £200,000 convertible 5% loan, redeemable in 2018 at a rate of 1 share for every £5 in loan value.
  • On 1st April 2016 the company made a 1 for 5 rights issue to ordinary shareholders for a price of £4 per share, when the market value was £5.00 per share.
  • The company also issued a further 200,000 ordinary shares on 1st September

2016 for the market price of £6.00 per share.

 

Required:

 

  1. a) Calculate the basic earnings per share for 2016 and explain whether the basic earnings per share should be re-stated for 2015. Your workings should clearly show the impact of the rights issue in terms of the theoretical ex-rights price.
  • marks)

 

  1. b) Calculate the diluted earnings per share for 2016, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti-dilutive.
  • marks)

 

  1. c) Evaluate critically the usefulness of the EPS figures to users and also explain what other information shareholders might find useful in order to evaluate their investment. Also explain if IAS 33 Earnings per share provides sufficient information to shareholders.

(10 marks)

(Total 30 marks)

 

 

 

SECTION C

 

3 QUESTIONS – ANSWER 1 QUESTION

 

Question 4

 

Company financial statements, particularly the profit figure, may be manipulated to meet the expectations of stock market investors and other users. Therefore, it is not surprising that various researchers have put forward and tested various hypotheses to explain these situations. However, probably the best known set of hypotheses are those suggested by Watts and Zimmerman’s Positive Accounting Theory.

 

You are required to discuss critically how Watts and Zimmerman’s Positive Accounting Theory might be used to explain manipulations existing within company financial statements.

 

 (Total 30 marks)

 

Question 5

 

Much financial reporting research involves using large data-bases of company share prices, profit/earnings figures and complex statistical models. One such research area is called Market Based Accounting Research.

 

You are required to explain and discuss critically how Market Based Accounting Research has contributed to our understanding of real-life financial reporting and stock market behaviour.

 

(Total 30 marks)

 

Question 6

 

Most large companies now issue some form of environmental and social reports in addition to their traditional financial statements.

 

You are required to explain and discuss critically the rational for, and usefulness of, company disclosure of environmental and social accounting information. Provide examples to support your arguments.

 

(Total 30 mark

End of question paper

 

 

THE UNIVERSITY OF HULL

 

Department of Accounting and Finance

 

 

Level 6 Examination

 

 

Semester 1 

 

Academic Year 2017-2018

 

 

 

Advanced Financial Reporting & Theory

 

 

 

Duration of Exam: 2 hours

 

 

Section A: 1 compulsory question worth 40 marks

Section B: 2 questions worth 30 marks each, ANSWER ANY ONE QUESTION

Section C: 3 questions worth 30 marks each, ANSWER ANY ONE QUESTION

 

(26325)

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised statements of financial position and income statements for Trump plc, Merkel plc and Putin plc are as follows:

 

Balance Sheets at 30/12/2017 £ 000’s
Trump Merkel Putin
Non-current assets
Property, plant, equipment 721,500 274,300 141,800
Investment in subsidiary 332,400
Investment in associate 102,600
1,156,500 274,300 141,800
Current assets
Inventories 168,700 73,600 52,400
Trade receivables 128,500 81,400 39,400
Current account Merkel 10,160
Current account Putin 2,840
Bank 75,630 33,720 10,140
385,830 188,720 101,940
Total assets 1,542,330 463,020 243,740
Equity and reserves
Share capital 500,000 100,000 75,000
General Reserve 100,000 50,000 25,000
Retained earnings 404,930 116,390 51,150
Shareholders funds 1,004,930 266,390 151,150
Non-current liabilities
Loan 400,000 120,000 50,000
Current liabilities
Trade payables 137,400 66,470 39,750
Current account Trump 10,160 2,840
137,400 76,630 42,590
Total equity and liabilities 1,542,330 463,020 243,740

 

 

£ 000’s
Income statements for ye 31/12/2017 Trump Merkel Putin
Sales 1,854,210 374,200 276,410
Cost of sales -1,483,368 -261,940 -221,128
Gross profit 370,842 112,260 55,282
Expenses -296,674 -89,808 -44,226
Operating profit 74,168 22,452 11,056
Dividends recd from Merkel and Putin 11,750
Profit before tax 85,918 22,452 11,056
Income tax expense -17,184 -4,490 -2,211
Profit after tax 68,735 17,962 8,845
Dividends payable (part of equity) 50,000 15,000 5,000

 

Other information:

 

  • Trump acquired a 70% holding in Merkel on 1st March 2013 when the general reserve of Merkel was £30 million and the retained earnings were £60 million. At the date of acquisition, the fair value of the land and buildings was considered to be £200 million higher than the book value.  At the date of acquisition, the fair value of the non-controlling interest in Merkel was considered to be £139 million.  No adjustment has been made in the financial statements for these amounts.
  • Following an impairment review during the year, Trump has decided to write off 25% of the value of goodwill arising upon the acquisition of Merkel.
  • During the year, Trump had sold goods to Merkel with a sales value of £180 million, including a 20% mark up on cost. At the year-end, 40% of these goods remained in inventory.
  • On 1st April 2013 Trump purchased a 25% holding in Putin, when the general reserve was £15 million and the retained earnings were £30 million. The fair values were the same as the book values.

 

Required:

a)Prepare the consolidated statement of financial position and the consolidated income statement for Trump plc for the year ended 31st December 2017, complying, as far as the information permits, with the requirements of IFRS 10 Consolidated Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IFRS 3 Business Combinations.  Non-controlling interests are to be measured using Method 2.

  • marks)

 

b)Trump plc has decided to write off 25% of the value of goodwill upon the acquisition of Merkel as an impairment loss.  This decision will have been determined by the information available to the management of Trump plc in addition to a range of other judgements.  You are required to briefly explain how an asset impairment loss is determined and evaluate the extent of subjectivity in arriving at this impairment figure.

(12 marks)

(Total 40 marks)

 

 

 

SECTION B

 

2 QUESTIONS – ANSWER 1 QUESTION

 

Question 2

 

The following summary extract information for the last 4 years relates to Cymru plc, a UK manufacturer of components for the motor industry:

 

Extract information 2014 2015 2016 2017
Operating Profit after tax 10,150 8,540 9,170 13,480
Long term liabilities 30,000 40,000 45,000 50,000
Shareholders’ funds 50,000 52,000 54,000 57,000
Dividend per share 1.25 1.25 1.00 1.50
Market value per share 6.50 4.90 5.60 7.10
Weighted average cost of capital 8% 9% 10% 10%
Number of ordinary shares 100,000 100,000 105,000 110,000

 

 

Required:

 

a). Calculate the following investment ratios/percentages for the last 4 years:

 

  • Gearing
  • Dividend cover
  • Dividend yield
  • Return on equity
  • Economic Value Added
  • Economic Value Added yearly percentage change from 2015 to 2017
  • Earnings per share
  • Price/earnings ratio
  • marks)

 

b). Critically discuss the performance of Cymru over the last 4 years using your calculations in part a.  In addition to your analysis of the key investment ratio’s that you have calculation in part (a), you should consider what additional information might shareholders and the wider stakeholder community use in order to assist in their financial decision making relating to Cymru plc.

(14 marks)

(Total 30 marks)

 

 

Question 3

 

The following is a summary of the consolidated statement of comprehensive income for Blue plc:

Extract from Consolidated Statement of Comprehensive Income for y/e 31st December 2017
£000’s
Turnover 37,400
Operating costs 29,920
Operating profit 7,480
Interest payable 1,496
Profit before tax 5,984
Taxation 1,496
Profit after tax 4,488

 

The following additional information is available:

 

  • The company had 300,000 ordinary shares at 1st January 2017 with a par value of £1 and a market value of £3.00. The company also has 90,000 £1 convertible 5% preference shares that can be converted at the end of 2019 at a rate of 1 ordinary share for every 5 preference shares.
  • The company also has a £120,000 convertible 10% loan, redeemable in 2019 at a rate of 1 share for every £3 in loan value.
  • On 1st March 2017 the company made a 1 for 3 rights issue to ordinary shareholders for a price of £2.30 per share, when the market value was £3.00 per share.
  • The company also issued a further 200,000 ordinary shares on 1st August 2017 for the market price of £4.00 per share.

 

Required:

  1. Calculate the basic earnings per share for 2017 and explain whether the basic earnings per share should be re-stated for 2016. Your workings should clearly show the impact of the rights issue in terms of the theoretical ex-rights price.
  • marks)
  1. Calculate the diluted earnings per share for 2017, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti-dilutive.
  • marks)
  1. IAS 33 Earnings Per Share includes specific disclosure requirements in terms of presenting additional information relating to potentially diluted EPS figures as a result of future obligations and commitments made by a company. You are required to briefly explain what these requirements are and also discuss why they exist.

 

(10 marks)

(Total 30 marks)

 

SECTION C

 

3 QUESTIONS – ANSWER 1 QUESTION

 

Question 4

 

One aspect of normative accounting theory relates to the issue of how elements in the financial statements, such as assets and liabilities, should be initially recognised, measured and subsequently valued over time.

 

You are required to discuss the various approaches to asset recognition, measurement and subsequent valuation and consider which method you might prefer and why.

 (Total 30 marks)

 

Question 5

 

Hofstede developed a theoretical framework relating to the influence that culture can have on the development of financial reporting within a country.  You are required to critically discuss the impact that different cultures can play within financial reporting practice and consider whether the current International Accounting Standards and International Financial Reporting Standards are culturally sensitive to these differences.

(Total 30 marks)

 

Question 6

 

Environmental and social reporting by organisations has increased dramatically in recent years, driven by a number of reasons, such as the wider stakeholder influence interest in the publication of such information.

 

You are required to explain the reasons for the increase in environmental and social reporting and consider whether you think this translates into a genuine desire by corporations to increase their sustainability and reduce their environmental impact.

(Total 30 marks)

 

THE UNIVERSITY OF HULL

 

 

 

Department of Accounting and Finance

 

 

Level 6 Examination

 

 

Semester 1

Academic Year 2018-2019

 

 

 

Advanced Financial Reporting & Theory

 

 

 

Duration of Exam: 2 hours

 

 

Section A: 1 compulsory question worth 40 marks

Section B: 2 questions worth 30 marks each, ANSWER ANY ONE QUESTION

Section C: 3 questions worth 30 marks each, ANSWER ANY ONE QUESTION

 

You should answer all compulsory questions. If you do not attempt to answer a compulsory question you will receive a mark of 0 for that question.

If you have a choice of questions and you answer more than you are asked to, your answers will be marked in the order that the questions appear on the examination question paper.  Any additional questions that you attempt will not be marked.

You should cross out any questions which you attempt but do not wish to be marked.

Do not open or turn over this exam paper, or start to write anything until told to by the Invigilator.  Starting to write before permitted to do so may be seen as an attempt to use Unfair Means.

 

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised statements of financial position and income statements for Calvin plc, Smith plc and West plc are as follows:

 

Balance Sheets at 30/12/2018 £ 000’s
Calvin Smith West
Non-current assets
Property, plant, equipment 6,250 845 1,875
Investment in subsidiary 1,350
Investment in associate 894
8,494 845 1,875
Current assets
Inventories 700 250 284
Trade receivables 500 143 175
Current account Smith 120
Current account West 85
Bank 1,625 425 752
3,030 818 1,211
Total assets 11,524 1,663 3,086
Equity and reserves
Share capital 5,000 1,000 1,500
General Reserve 2,500 125 250
Retained earnings 424 91 585
Shareholders funds 7,924 1,216 2,335
Non-current liabilities
Loan 3,000 195 500
Current liabilities
Trade payables 600 132 166
Current account Calvin 120 85
600 252 251
Total equity and liabilities 11,524 1,663 3,086

 

 

 

£ 000’s
Income statements for ye 31/12/2018 Calvin Smith West
Sales 7,500 4,250 5,840
Cost of sales -6,000 -2,975 -4,672
Gross profit 1,500 1,275 1,168
Expenses -1,200 -1,020 -934
Operating profit 300 255 234
Dividends recd from Smith and West 198
Profit before tax 498 255 234
Income tax expense -100 -51 -47
Profit after tax 398 204 187
Dividends payable (part of equity) 5,000 200 150

 

Other information:

 

  1. Calvin acquired an 80% holding in Smith on 1st April 2013 when the general reserve of Smith was £100,000 and the retained earnings were £50,000. At the date of acquisition, the fair value of the land and buildings was considered to be £155,000 higher than the book value. No adjustment has been made in the financial statements for these amounts.

b.Following an impairment review during the year, Calvin has decided to write off 25% of the value of goodwill arising upon the acquisition of Smith.

c.During the year, Calvin had sold goods to Smith with a sales value of £100,000, including a 25% mark up on cost.  At the year-end, all of these goods remained in inventory.

d.On 1st May 2013 Calvin purchased a 25% holding in West, when the general reserve was £150,000 and the retained earnings were £400,000.  The fair values were the same as the book values.

 

Required:

 

a.Prepare the consolidated statement of financial position and the consolidated income statement for the Calvin Group plc for the year ended 31st December 2018, complying, as far as the information permits, with the requirements of IFRS 10 Consolidated Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IFRS 3 Business Combinations.  Non-controlling interests are to be measured using Method 1.

  • marks)

 

b.Calvin Group plc has decided to write off 25% of the value of goodwill upon the acquisition of Smith as an impairment loss.  The implementation of an asset impairment loss has been associated with the phenomenon known as Big Bath accounting.  You are required to critically evaluate whether you consider the management of Calvin Group may have decided to take a big bath in the decision to implement an asset impairment charge upon the acquisition of Smith.

(12 marks)

(Total 40 marks)

 

 

SECTION B

 

2 QUESTIONS – ANSWER 1 QUESTION

 

Question 2

 

The following summary extract information for the last 4 years relates to Hunmanby Ltd, a UK wholesaler of components for the electronics industry:

 

Extract information 2015 2016 2017 2018
Operating Profit after tax £550,000 £725,000 £850,000 £875,000
Long term liabilities £650,000 £800,000 £900,000 £950,000
Shareholders funds £450,000 £500,000 £500,000 £500,000
Dividend per share £3.00 £4.00 £5.00 £6.00
Market value per share £2.50 £3.25 £4.50 £5.00
Weighted average cost of capital 5% 6% 6% 7%
Number of ordinary shares 50,000 75,000 85,000 95,000

 

 

Required:

 

a.Calculate the following investment ratios/percentages for the last 4 years:

 

  • Gearing
  • Dividend cover
  • Dividend yield
  • Return on equity
  • Economic Value Added
  • Economic Value Added yearly percentage change from 2016 to 2018
  • Earnings per share
  • Price/earnings ratio
  • arks)

 

b.Critically discuss the performance of Hunmanby over the last 4 years using your calculations in part a.  In addition to your analysis of the key investment ratio’s that you have calculated in part (a), what additional information might shareholders and the wider stakeholder community be interested in, to assist in their decision making relating to Hunmanby plc.

(14 marks)

(Total 30 marks)

 

Question 3

 

The following is a summary of the consolidated statement of comprehensive income for Cooper plc:

Extract from Consolidated Statement of Comprehensive Income for y/e 31st December 2018
£m’s
Turnover 100
Operating costs 80
Operating profit 20
Interest payable 4
Profit before tax 16
Taxation 4
Profit after tax 12

 

The following additional information is available:

 

  • The company had 1 million ordinary shares at 1st January 2018 with a par value of £1 and a market value of £4.00. The company also has 200,000 £1 convertible 5% preference shares that can be converted at the end of 2020 at a rate of 1 ordinary share for every 4 preference shares.
  • The company also has a £300,000 convertible 7% loan, redeemable in 2020 at a rate of 1 share for every £3 in loan value.
  • On 1st April 2018 the company made a 1 for 5 rights issue to ordinary shareholders for a price of £3.50 per share, when the market value was £4.00 per share.
  • The company also issued a further 400,000 ordinary shares on 1st September 2018 for the market price of £4.00 per share.

 

Required:

 

a.Calculate the basic earnings per share (EPS) for 2018 and explain whether the basic earnings per share should be re-stated for 2017.  Your workings should clearly show the impact of the rights issue in terms of the theoretical ex-rights price.

  • marks)

 

b.Calculate the diluted earnings per share for 2018, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti-dilutive.

  • marks)

 

c.Earnings Per Share and its regulation under IAS 33 is considered to provide a useful measure of corporation performance.  Many other alternative performance measurement (APM) indicators are used by corporations to report their performance in the annual report and other media areas.  You are required to critically evaluate how these APM’s complement the existing requirements in relation to EPS.

(10 marks)

(Total 30 marks)

SECTION C

 

3 QUESTIONS – ANSWER 1 QUESTION

 

Question 4

 

The purpose of the conceptual framework for financial reporting is an aspect of normative accounting theory that attempts to construct an overarching set of principles upon which international financial reporting standards (IFRS) should be based.  You are required to discuss critically whether a conceptual framework is beneficial to the development of IFRS’s.

 

 (Total 30 marks)

 

Question 5

 

Culture can have a significant impact on the development of financial reporting within a country.  Hofstede developed a theoretical framework relating to culture and financial reporting.  You are required to critically discuss the usefulness of the Hofstede framework in evaluating the impact that different cultures can play within development of financial reporting practice and consider whether this type of framework assists in the development of international financial reporting standards.

 

(Total 30 marks)

 

Question 6

 

Positive Accounting Theory (PAT) is largely based on the notion of Agency Theory that implies that management usually act in their own self-interest rather than in the interest of the company they are managing.  You are required to discuss critically the constructs behind PAT and consider whether you agree with the key ideas behind PAT.

(Total 30 marks)

 

End of question paper

 

 

THE UNIVERSITY OF HULL

 

Department of Accounting and Finance

 

 

Level 6 Examination

 

 

Semester 1

Academic Year 2019-2020

 

 

 

Advanced Financial Reporting & Theory

 

 

 

Duration of Exam: 2 hours

 

 

Section A: 1 compulsory question worth 40 marks

Section B: 2 questions worth 30 marks each, ANSWER ANY ONE QUESTION

Section C: 3 questions worth 30 marks each, ANSWER ANY ONE QUESTION

 

 

 

 

 

You should answer all compulsory questions. If you do not attempt to answer a compulsory question you will receive a mark of 0 for that question.

If you have a choice of questions and you answer more than you are asked to, your answers will be marked in the order that the questions appear on the examination question paper.  Any additional questions that you attempt will not be marked.

You should cross out any questions which you attempt but do not wish to be marked.

Do not open or turn over this exam paper, or start to write anything until told to by the Invigilator.  Starting to write before permitted to do so may be seen as an attempt to use Unfair Means.

 

 

(600538)

 

SECTION A

 

Compulsory Question

 

 

 Question 1

 

The summarised statements of financial position and income statements for Johnson plc, Corbyn plc and Swinson plc are as follows:

 

Balance Sheets at 31/12/2019 £ 000’s
Johnson Corbyn Swinson
Non current assets
Property, plant, equipment 552,100 178,200 80,400
Investment in subsidiary 180,000
Investment in associate 125,400
857,500 178,200 80,400
Current assets
Inventories 88,200 51,600 18,600
Trade receivables 54,300 28,700 12,800
Current account Corbyn 8,720
Loan interest receivable 1,000
Bank 17,600 10,200 4,370
169,820 90,500 35,770
Total assets 1,027,320 268,700 116,170
Equity and reserves
Share capital 500,000 50,000 40,000
General Reserve 100,000 25,000 5,000
Retained earnings 165,920 34,510 25,970
Share holders funds 765,920 109,510 70,970
Non current liabilities
Loan 200,000 80,000 30,000
Current liabilities
Trade payables 61,400 66,470 15,200
Current account Corbyn 8,720
Loan interest payable 4,000
61,400 79,190 15,200
Total equity and liabilities 1,027,320 268,700 116,170

 

 

£ 000’s
Income statements for ye 31/12/2019 Johnson Corbyn Swinson
Sales 985,400 374,200 276,410
Cost of sales -788,320 -261,940 -221,128
Gross profit 197,080 112,260 55,282
Expenses -157,664 -89,808 -44,226
Operating profit 39,416 22,452 11,056
Profit before tax 39,416 22,452 11,056
Income tax expense -7,883 -4,490 -2,211
Profit after tax 31,533 17,962 8,845

 

 

Other information:

 

  • Johnson acquired an 80% ordinary shareholding and also acquired 25% of the loan in Corbyn and gained control of the company on 1st February 2016 when the general reserve of Corbyn was £10 million and the retained earnings were £15 million.
  • At the date of acquisition, the fair value of the non-controlling interest in Corbyn was considered to be £25 million. No adjustment has been made in the financial statements for these amounts.
  • Following an impairment review during the year, Johnson has decided to write off 25% of the value of goodwill arising upon the acquisition of Corbyn.
  • On 1st April 2014 Johnson purchased a 20% holding in Swinson, when the general reserve was £3 million and the retained earnings were £12 million. The fair values were the same as the book values.

 

Required:

 

a)Prepare the consolidated statement of financial position and the consolidated income statement for Johnson plc for the year ended 31st December 2019, complying, as far as the information permits, with the requirements of IFRS 10 Consolidated Financial Statements, IAS 28 Investments in Associates and Joint Ventures and IFRS 3 Business Combinations.  Non-controlling interests are to be measured using Method 2.

  • marks)

 

b)Johnson plc has decided to implement an asset impairment charge of 25% of the value of goodwill upon the acquisition of Corbyn, after carrying out an annual impairment review in accordance with IAS 36 Impairment of Assets.  You are required to evaluate critically how Johnson may have arrived at such an asset impairment decision and evaluate the extent of subjectivity in arriving at this impairment figure.

(12 marks)

(Total 40 marks)

 

 

SECTION B

 

2 QUESTIONS – ANSWER 1 QUESTION

 

Question 2

 

The following summary extract information for the last 4 years relates to Highland plc, a Scottish based fish farm:

 

Extract information 2015 2016 2017 2018
Operating Profit after tax £8,000 £7,500 £6,300 £5,400
Long term liabilities £15,000 £16,000 £18,000 £20,000
Shareholders funds £10,000 £10,000 £10,000 £10,000
Dividend per share £0.80 £0.75 £0.63 £0.54
Market value per share £1.50 £1.30 £1.10 £1.00
Weighted average cost of capital 15% 16% 15% 18%
Number of ordinary shares 10,000 10,000 10,000 10,000

 

 

Required:

 

a)Calculate the following investment ratios/percentages for the last 4 years:

 

  • Gearing
  • Dividend cover
  • Dividend yield
  • Return on equity
  • Economic Value Added
  • Economic Value Added yearly percentage change from 2016 to 2018
  • Earnings per share
  • Price/earnings ratio
  • arks)

 

b)Critically discuss the performance of Highland over the last 4 years using your calculations in part a.  In addition to your analysis of the key investment ratio’s that you have calculated in part (a), you should consider what additional information might shareholders and the wider stakeholder community use in order to assist in their financial decision making relating to Highland plc.

(14 marks)

(Total 30 marks)

 

Question 3

 

The following is a summary of the consolidated statement of comprehensive income for White plc:

 

Extract from Consolidated Statement of Comprehensive Income for y/e 31st December 2019                                                   £
Turnover 850,000
Operating costs   689,000
Operating profit 161,000
Interest payable 24,000
Profit before tax   137,000
Taxation 34,250
Profit after tax   102,750

 

The following additional information is available:

 

  • The company had 500,000 ordinary shares at 1st January 2019 with a par value of £2 and a market value of £4.00. The company also has 100,000 £1 convertible 10% preference shares that can be converted at the end of 2021 at a rate of 1 ordinary share for every 4 preference shares.
  • The company also has a £300,000 convertible 8% loan, redeemable in 2021 at a rate of 1 share for every £10 in loan value.
  • On 1st June 2019 the company made a 1 for 5 rights issue to ordinary shareholders for a price of £3.50 per share, when the market value was £4.00 per share.
  • The company also issued a further 200,000 ordinary shares on 1st September 2019 for the market price of £4.00 per share.

 

Required:

 

a)Calculate the basic earnings per share for 2019 and explain whether the basic earnings per share should be re-stated for 2018.  Your workings should clearly show the impact of the rights issue in terms of the theoretical ex-rights price.

  • marks)

 

b)Calculate the diluted earnings per share for 2019, to take account of the potential dilution relating to the convertible preference shares and the convertible loan, clearly showing whether the change in EPS is dilutive or anti-dilutive.

  • marks)

 

c)IAS 33 Earnings Per Share includes specific disclosure requirements in terms of presenting additional information relating to potentially diluted EPS figures as a result of future obligations and commitments made by a company.  You are required to evaluate how useful this additional information is to shareholders and the wider stakeholder community.

(10 marks)

(Total 30 marks

SECTION C

 

3 QUESTIONS – ANSWER 1 QUESTION

 

Question 4

 

One aspect of normative accounting theory relates to the issue the usefulness of a conceptual framework and how helpful such a framework is in terms of both users and preparers of financial statements.

 

You are required to discuss critically whether you think a global conceptual framework aids the information quality within published financial statements.

 

(Total 30 marks)

 

Question 5

 

Cultural dimensions of different countries have been classified into Individualism, Power Distance, Uncertainty Avoidance, Masculinity and Long term orientation by Hofstede and these classifications have been evaluated within the context of the accounting profession and the information they produce.

 

You are required to evaluate critically the impact that culture might have upon both the accounting profession and the information that they produce.  You should use examples to support your discussion.

 (Total 30 marks)

 

Question 6

 

A key assumption inherent in the Positive Accounting Theory (PAT) debate put forward by Watts and Zimmerman is the notion that all managers seek to behave in an opportunistic, self-interest manner.

 

You are required to discuss and critically evaluate whether you consider if the key underlying assumption behind the PAT literature is valid.

(Total 30 

 

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