Advanced Financial Accounting: 2 Year Examination

Advanced Financial Accounting
2nd Year Examination
August 2014
Exam Paper, Solutions & Examiner’s Comments

Advanced Financial Accounting August 2014 2nd Year Paper
NOTES TO USERS ABOUT THESE SOLUTIONS
The solutions in this document are published by Accounting Technicians Ireland. They are intended to
provide guidance to students and their teachers regarding possible answers to questions in our
examinations.
Although they are published by us, we do not necessarily endorse these solutions or agree with the views
expressed by their authors.
There are often many possible approaches to the solution of questions in professional examinations. It
should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us.
Alternative answers will be marked on their own merits.
This publication is intended to serve as an educational aid. For this reason, the published solutions will
often be significantly longer than would be expected of a candidate in an examination. This will be
particularly the case where discursive answers are involved.
This publication is copyright 2014 and may not be reproduced without permission of Accounting
Technicians Ireland.
© Accounting Technicians Ireland, 2014.
2
Accounting Technicians Ireland

2nd Year Examination: Autumn 2014
Paper: Advanced Financial Accounting
Monday 11th August 2014 - 2.30 p.m. to 5.30 p.m.
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 and 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 are 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 paper uses the language of International Accounting Standards (I.A.S). Examinees are
permitted to use either I.A.S or Financial Reporting Standards (F.R.S) terminology when
preparing financial statements but the use of the language of the International Accounting
Standards (e.g. Receivables rather than Debtors) is preferred.
3 A2014 Advanced Financial Accounting (AFA )

SECTION A
Answer ALL THREE Questions in this Section
QUESTION 1 (Compulsory)
(a) Discuss the following principles in the context of IAS 1, Presentation of Financial
Statements;
(i) Accruals
(ii) Going Concern
(iii) Materiality and aggregation
(iv) Consistency
8 marks
(b) The “Conceptual Framework” identifies “comparability”, “verifiability”, “timeliness” and

“understandability” as attributes that enhance the qualitative characteristics of useful
financial information. Write a brief note on any two of these attributes.
8 marks
(c) According to the “Conceptual Framework”, which users should the preparers of financial
reports, aim to provide useful information for?
4 marks
Total: 20 marks
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 1 ½ marks.
Requirement
Indicate the right answer to each of the following ten parts.

Total: 15 marks
Candidates should answer this question by ticking the appropriate boxes on the special answer sheet
which is contained within the answer booklet.
1. Drawings, by a partner in a partnership, made during the year should be:
(a) included as an expense in the partnership Statement of Profit and Loss.

(b) included as revenue in the partnership Statement of Profit and Loss.
(c) credited to the current account of the partner concerned.
(d) debited to the current account of the partner concerned.
2. Where a partnership exists and there is no partnership agreement, then;
(a) the partners share profits equally.

(b) the partners share profits in proportion to the balances on their capital accounts.
(c) the partners share profits equally and interest of 5% is paid per annum on capital
balances.
(d) the partners share profits in proportion to their combined capital and current account
balances.
Question 2 is continued overleaf

QUESTION 2 (Cont’d)
3. With regard to IAS 16 (Property plant and equipment), which of these statements are true?
(a) If an item of property, plant and equipment is re-valued, the entire class of property
plant and equipment to which it belongs must be re-valued.
(b) An item of property plant and equipment cannot be re-valued unless it is greater than
two years old.
(c) If an item of property plant and equipment is re-valued, depreciation continues to be
calculated on the original cost of the asset.
(d) If an item of property plant and equipment is re-valued, there is no obligation to re-
value any other asset within the same class of property plant and equipment.
4. In accordance with IAS 2 “inventories”, which of the following costs cannot be included as part
of the cost of inventory;
(a) variable overheads.

(b) import duties.
(c) fixed overheads.
(d) general administrative costs.
5. In January 2013, ABC Ltd purchased a new machine for €/£280,000. Delivery costs of €/£3,000
were incurred and the cost of insuring the machine for the year to 31 December 2013 was
€/£3,500. How much of the above expenditure may ABC Ltd capitalise in its Statement of
Financial Position?
.
(a) €/£280,000
(b) €/£286,500
(c) €/£283,000
(d) €/£283,500
6. According to IAS 17 “Leases”, which of the following statements is true?
(a) A finance lease is a lease that has a minimum period of over five years.
(b) A finance lease transfers substantially all the risks and rewards of ownership to the
lessee.
(c) A finance lease transfers substantially all the risks and rewards of ownership to the
lessor.
(d) A finance lease is a lease which has the ability to continue for a secondary period at a
rent greater than the market rent.
7. In accordance with IAS 20 “Government Grants”, a grant should not be recognised in the
financial statements until:
(a) the conditions for its receipt have been more or less complied with.
(b) the conditions for its receipt have been complied with and there is reasonable
assurance that the grant will be received.
(c) the grant has been received.
(d) the expenditure to which the grant relates, has been incurred.

8. In accordance with IAS 10 “Events after the Reporting period” which of the following statements
is correct:
(a) An adjusting event is an event which confirms conditions that existed at the reporting
period end date.
(b) An adjusting event relates to conditions that did not exist at the reporting period end
date but developed afterwards.
(c) An adjusting event requires an adjustment to the notes to the financial statements only.
(d) An adjusting event requires an adjustment to prior year financial statements.
9. An unqualified audit report, as issued by an external auditor is;
(a) saying with certainty that the financial statements are accurate.
(b) saying that the financial statements do not give a true and fair view.
(c) saying with certainty that the financial statements are not accurate.
(d) saying that the financial statements give a true and fair view.
10. ABA Plc makes a gross profit margin on sales/revenue of 17%. If the company’s gross profit for
the year ended 31 December 2013 was €/£399,500, what was its sales/revenue for the year?
(a) €/£67,915
(b) €/£2,350,000
(c) €/£2,749,500
(d) €/£459,000

The following are extracts from the Financial Statements of Flying Fashion Limited, a Fashion
retailer:
Statement of Comprehensive Income for the year ended 31 December 2013
Statement of Profit or Loss Year ended 31/12/13 Year ended 31/12/12
€/£’000 €/£’000 €/£’000 €/£’000
Revenue 9,600 8,400
Less Cost of Sales:

Opening Inventory 1,200 1,400
Purchases 7,800 4,800
Less Closing Inventory (1,400) (1,200)
Cost of Sales (7,600) (5,000)
Gross Profit 2,000 3,400

Less Expenses (1,200) (1,400)
Net Profit 800 2,000
Statement of Financial Position

as at 31 Deecember 2013 2013 2013 2012 2012
€/£’000 €/£’000 €/£’000 €/£’000
Non Current Assets 1,400 1,500
Current Assets
Inventory 1,400 1,200
Receivables 720 480
Cash 480 2,600 520 2,200
Total Assets 4,000 3,700
Equity and Liabilities

Equity and Reserves
Ordinary Share Capital (€1 ordinary shares) 1,500 1,500
Reserves 1,020 860
2,520 2,360
Non Current Liabilities
Long-Term Debt 400 100
Current Liabilities
Payables 600 900
Bank Overdraft 480 340
1,080 1,240
Total Equity and Liabilities 4,000 3,700

The average ratios for companies within the fashion retail industry are as follows:
Current ratio 1.9 : 1

Acid test ratio 0.9 : 1
Net profit margin 6%
Return on Capital Employed (ROCE) 25%
Receivable’s days 45 days
Payable’s days 38 days
Gearing ratio 60%
Inventory Turnover 4.4 times
EPS 75 cent
DPS 25 cent
Requirement
(a) Prepare a ratio analysis for Flying Fashion Limited, comparing company performance over the
two year period and against average for the industry. Comment on results obtained.
Note; your analysis should include ratios on profitability, return on capital employed, liquidity,
working capital, and gearing.
10 marks
(b) Assuming the shares held were €/£1 ordinary shares and the company declared a dividend in 2013
of €/£300,000 and in 2012 of €/£ 500,000, calculate, the EPS and DPS for the company and
comment on its performance from a shareholders view point.
8 marks
(c) Ratio analysis is a valuable tool for the user of financial statements. Nonetheless, the technique
does have limitations and shortcomings. Discuss three such limitations.
5 marks
Presentation: 2 marks
Total: 25 marks

SECTION B
Answer TWO of the THREE questions in this Section
QUESTION 4
You have been asked to help with the financial statements of XXX Ltd. for the year ended 31 March
2013. A draft trial balance as at 31st March 2013 is shown below.
€/£’000 €/£’000
Sales 50,332
Purchases 29,778
PPE – cost 59,088
PPE – accumulated depreciation 25,486
Inventories 1st April 2012 7,865
Interest 200
Accruals 426
Distribution costs 8,985
Administrative expenses 7,039
Retained earnings 23,457
Trade receivables 9,045
Cash at bank 182
8% Bank loan repayable 2018 5,000
Share capital 10,000
Share premium 5,000
Trade payables 2,481
122,182 122,182
The following further information is available:
1. The share capital of the company consists of ordinary shares with a nominal value of €/£1
each.
2. No dividends are to be paid for the current year.
3. The sales figure in the trial balance includes sales made on credit for April 2013 amounting to
€/£3,147,000.
4. The inventories at the close of business on 31 st March 2013 cost €/£8,407,000. Included in
this figure are inventories that cost €/£480,000, but which can be sold for only €/£180,000.
5. Transport costs of €/£157,000 relating to March 2013 are not included in the trial balance as
the invoice was received after the year-end.
6. Interest on the bank loan for the last six months of the year has not been included in the trial
balance.
7. The corporation tax charge for the year has been calculated as €/£235,000.
Requirement:
(a) Prepare the Statement of Comprehensive Income of XXX Ltd. for the year ended 31st March
2013.
7 marks
(b) Prepare the Statement of Financial Position as at 31 March 2013.
7 marks
(c) Prepare the Statement of Changes in Equity for the year ended 31 March 2013.
4 marks
Total: 20 marks

QUESTION 5
ABC Plc.
Statement of Comprehensive income for the year ended 31st December 2013
Statement of Profit or Loss

€/£’000
Revenue 5,400
Cost of sales 4,276
Gross Profit 1,124
Distribution costs (276)
Administration costs(including depreciation) (500)
Operating Profit before taxation 348
Taxation (124)
Profit after taxation 224
ABC Plc
Statement of Financial Position as at 31st December 2013
2013 2012
€/£ '000 €/£ '000
Assets
Non-Current Assets
Tangible Assets 3,260 2,840
Current Assets
Inventory 900 800
Receivables 450 300
Cash 30
1,380 1,100
Total Assets 4,640 3,940

Equity and Reserves
Share Capital 1,602 1,300
Share Premium account 100 50
Profit and Loss Account 768 640
2,470 1,990
Non- Current Liabilities

10% debentures 400 300
Current Liabilities
Trade Payables 1,500 1,400

Taxation 270 190
Bank Overdraft 60
1,770 1,650
Total Equity and Liabilities 4,640 3,940

Additional information:
 Fixed assets with a cost of €/£110,000 and accumulated depreciation of €/£40,000 were sold
during the year for €/£60,000. There were no other disposals of fixed assets during the year.
 New debentures were issued on 1 January 2013.
 Dividends of €/£ 96,000 were paid during the year.
Requirement:
(a) Prepare a cash flow statement for the year ended 31 st December 2013, in accordance with
applicable accounting standards.
10 marks
(b) Comment on the key issues highlighted by the Cash Flow statement that will assist the
directors of ABC Plc in having a greater understanding of the movement of cash in the
company.
8 marks
Total: 20 marks
QUESTION 6
(a) On 1st January 2013, Green Ltd., a company that prepares financial statements to 31st
December each year, buys a machine at a cost of €/£46,300. The useful life of the machine is
estimated at four years with a residual value of €/£6,000.
Requirement:
Calculate depreciation charges for each of the four years using:
(i) The straight-line method;
(ii) The reducing balance method (at a rate of 40%);
8 marks
(b) Blue Ltd. prepares financial statements to 31st May each year. On 31 st May 2011, the
company acquired buildings for €/£400,000. The buildings were re-valued at €/£450,000 on
31st May 2012 and at €/£500,000 on 31st May 2013.
Red Ltd, prepares financial statements to 30th June each year. On 30 th June 2011, the
company acquired buildings for €/£600,000. The buildings were re-valued at €/£660,000 on
30th June 2012 and at €/£620,000 on 30th June 2013.
Requirement:
Assuming that both companies use the revaluation model, prepare journals to show how each of the
above revaluations should be treated in the financial statements in accordance with IAS 16 and explain
how each revaluation should be presented in the financial statements in accordance with IAS 1.
10 marks
Total: 20 marks

2nd Year Examination: August 2014
Advanced Financial Accounting
Suggested Solutions
and
Examiner’s Comments
Students please note: These are suggested solutions only; alternative answers may also be deemed to
be correct and will be marked on their own merits.
Statistical Analysis – By Question

Question No. 1 2 3 4 5 6
Average Mark (%) 50% 71% 37% 63% 51% 66%
Nos. Attempting 188 188 188 167 125 81
Statistical Analysis - Overall

Pass Rate 76%
Average Mark 54%
Range of Marks Nos. of Students
0-39 32
40-49 13
50-59 74
60-69 50
70 and over 19
Total No. Sitting Exam 188
Total Absent 52
Total Approved Absent 10
Total No. Applied for Exam 250
General Comments:
GENERAL COMMENTS ON THE PAPER AS A WHOLE
In general the standard of answering was good with some students achieving very high marks. There
were a number of cases where students did not answer all questions in Section A but did answer three
rather than two questions in Section B. In these cases, students lost valuable marks. Even an attempt at
the third question in Section A could yield a better result that completing a third question in Section B.

Examiner’s Comments on Question One
This question was reasonably well answered with most students achieving close to
or above the pass mark.
Marks
Solution One
Allocated
Part A
IAS 1 sets down a number of principles that govern the preparation and presentation of Financial
Statements. These principles include Accruals, Going Concern, Materiality and Aggregation and
Consistency.
Accruals
The accruals concept provides that income and expenditure should be recognised in the financial
statements of the financial year to which they relate, rather than in the year in which they are paid. On
2
this basis, for example, rent and other expenses owing at the year- end date should be included as
expenses in the Income Statement for the year in question and as accruals/ liabilities in the Statement
of Financial Position, notwithstanding that the amounts involved may not be paid until the subsequent
year. Likewise, amounts paid in the current year that relate to future financial periods should not be
included as expenses in the current years Income statement but instead carried forward as prepayments
in the Statement of Financial Position and expensed in future years as appropriate.
Going Concern
The “Going Concern” concept provides that readers of financial statements are entitled to assume
unless it is explicitly stated otherwise, that the reporting entity will continue in business for the 2
foreseeable future (i.e. at least the next twelve months) and that the financial statements in question
have been prepared on this basis. If management intend to liquidate the entity or if there is no realistic
alternative but to do so, then the financial statements should be prepared on a “break – up“ basis.
Where material uncertainties exist or cast doubt over the going concern assumption, then under IAS 1,
these should be disclosed in the financial statements.
Materiality and Aggregation

Information is material to the financial statements if its omission or misstatement could influence the
economic decisions of users. Information can be material in terms of its size in relation to the financial
statements as a whole or an item could be material by its nature. IAS 1 provides that each material 2
class of similar items must be presented separately in the financial statements. Dissimilar items can
only be aggregated if they are individually immaterial. For example, sales invoices are aggregated in
the Income Statement and included as a line item “Revenue”. However revenue is not aggregated with
expenditure.
Consistency
IAS 1 requires that the presentation and classification of items in the financial statements should be the
same from one period to the next, unless a change is justified by a change in circumstance or by a new 2
IFRS. This is to ensure comparability of financial statements from one period to the next. If the
presentation of financial statements were allowed to change on a regular basis or if the classification of
elements were allowed to change then, the comparability of financial statements would be significantly
reduced.

Solution One (Cont’d)
Part B
Comparability
Verifiability
Timeliness
Understandability
Comparability
Comparability of financial information is important for its users. Examining an entity’s financial Marks
statements for one accounting year gives only a certain amount of insight into the financial Allocated
performance and position of the entity. By comparing financial information of an entity over time, one
can assess trends and by comparing financial information against industry standards, one can
benchmark performance against competitors. 4 marks
for each of
Comparability both in presentation and calculation can be achieved by being consistent in the use of the two
accounting policies over time. Where new policies are introduced by for example, the introduction of a attributes
new accounting standard, consistency and comparability can be achieved by properly disclosing the covered
change in the accounting policy and outlining the effect of the change.
Verifiability
Verifiability can be achieved when two or more independent and knowledgeable observers can reach a
concensus on the treatment and measurement of an economic transaction. In these circumstances the
economic transactios is regarded as being faithfully represented. For example, if financial information
is independently verified by external auditors, this increases the degree to which it is regarded as
faithfully represented and hence increases the usefulness of the reported information.
Timeliness
If information is to be useful, it must be provided in a timely manner. If information is out of date, it is
less likely to be useful to a user’s decision making. This may not always be the case however as
historical data can be used to identify trends which provide useful informnation for predicting future
outcomes and accordingly aid decision- making.
Understandability.
When information is classified, characterised, and presented clearly and concisely it is more likely to
be understandable to users with a reasonable knowledge of business, economic activity and accounting
and who are prepared to study the information. The “Conceptual Framework” accepts that preparers of
financial statements can assume that users have this reasonable information.
Part C
The conceptual Framework considers that the purpose of financial reporting is to provide financial
information about the entity to 2
Investors (existing and potential) 1
Lenders and 1
Other creditors.

Examiner’s Comments on Question Two
In general, this question was answered very well answered.
Solution Two
Marks
Allocated
[1] (d)
[2] (a) 1.5
marks
[3] (a) each
[4] (d)
[5] (c)
[6] (b)
[7] (b)
[8] (a)
[9] (d)
[10] (b)
Part 5 workings:
280,000 +3,000 delivery costs.
Part 10 workings:
399,500/17*100 = 2,350,000
Examiner’s Comments on Question Three
Students tended to score either strongly or quite poorly in this question. A number of
students did not attempt part ( c ) which lost them valuable attempt marks as this
part did not necessarily require hugely technical knowledge but rather an
understanding of ratios and why they are only one of a number of assessment
techniques which management can rely on.

Solution Three
Part A
Flying Fashion Limited. Industry Marks

2013 2013 2012 2012 Average Allocated
Liquidity
Current ratio =2600/1080 2.41 :1 =2200/1240 1.77:1 1.9 :1
Acid test ratio =(2600-1400)/1080 1.11:1 =(2200-1200)/1240 0.81:1 0.9:1 1
Profitability
Net profit margin =800/9600 8% =2000/8400 24% 6% 1
ROCE * =800/2920 27% =2000/2460 81% 25% 1
Activity
Receivables days =(720/9600)*365 27 days =(480/8400)*365 21 days 45 days
Payables days =(600/7800)*365 28 days =(900/4800)*365 68 days 38 days 2
Inventory turnover =7600/((1200+1400)/2) 5.8 times =5000/((1400+1200)/2) 3.8 times 4.4 times
Gearing
Gearing ratio =400/(400+2520) 14% =100/(2360+100) 4% 60% 1
Shareholder Ratio
EPS** =800/1500 * 53 cent =2000/1500 133 cent 75 cent PART B - 2
DPS =300/1500 20 cent =500/1500 33 cent 25 cent PART B - 2
* *EPS is calculated as earnings available to equity shareholders divided by the number of equity shares in issue. Earnings available to equity shareholders
is calculated as net profit after deducting interest, tax and preference dividends. Where net profit after interest and tax is not available, net prfit before interest and tax
should be used.

Marks
Solution Three (Cont’d) Allocated
Comments
 Liquidity Ratios were below the benchmarks in 2012 but the company seems to have tackled this 4 marks
and they are now above the industry averages of 1.9:1 and 0.9:1 for the Current ratio and Acid test for the
ratio respectively. This may be as a result of higher sales and corresponding higher debtors and discussion of
stocks. In this regard, however a current ratio in excess of 2:1 and an Acid test ratio in excess of the results
1.1 would be considered excessive and indicative of perhaps poor credit control and/or inefficient obtained.
inventory control.
 The company’s Profitability, as measured by the net profit margin and ROCE, is above the
industry averages of 6% and 25% respectively in both years but the dramatic decreases from 24%
to 8% and from 81% to 27% for the net profit margin and ROCE respectively are very worrying
and need to be addressed. The Gross profit margin has fallen by over 50% from 2012 to 2013
which explains most of the reduction in net profit. This may be due to an increase in the prices
charged by suppliers or a reduction in sales prices charged by the company in order to compete
with high street retailers.
 In terms of Working capital Activity, it is taking the company longer in 2013 to collect from its
debtors but the figure for both years is comfortably below the industry average (of 45 days). The
increase of 6 days in 2013 may show that the company has given more credit to customers or is
not controlling collection of debts as effectively as before.
 The company is paying creditors much more promptly in 2013 (28 days as opposed to 68 days).
This may be interpreted as a healthy sign as it reflects improved liquidity and capability to avail of
discounts for prompt payment. However the company should ensure that it continues to avail of
the full credit period available from each major supplier- generally 30 days.
 In 2012 the company was a net recipient of credit (about 47 days), however, in 2013 the
company’s Debtor’s and Creditor’s days are very similar.
 The company’s stock turnover has improved from 3.8 to 5.8 times. In 2012 it was below the
industry average of 4.4 but is now above it
 The Gearing of the company has increased by almost ten percentage points but it is still
comfortably below a level that may be considered risky by shareholders (such as the industry
average of 60%).
Conclusion:
Overall the company is performing reasonably well. Its liquidity has improved and is above the
industry average but may be approaching levels which suggest working capital inefficiencies. Its 2 marks
profitability is above the industry average but has fallen quite dramatically between 2012 and 2013. for
The company needs to investigate its falling profit and higher stock levels to ensure continued growth presentation
and profitability in the future. At present the gearing level of the company is lower than the industry
average and this allows flexibility for the company to raise funds should it need to do so.
Part B
See table above for EPS and DPS calculation.
Both EPS and DPS have declined over the year and were below industry average for 2013. This is in 4 marks
line with the reduced net profit in 2013. As discussed above, if concerns regarding the gross profit for the
margin is successfully addressed, this should substantially feed through to the net profit at the end of discussion of
the year and in turn to the EPS calculation. A stronger EPS will also increase the capacity to improve performance
annual dividends and consequently the DBS, although there will be other factors influencing the level from a
of dividend pay – out such as cash reserves/requirements and future capital financing requirements. shareholders
view point.

Marks
Solution Three (Cont’d) Allocated
Part C
Limitations include:
1 mark
 Different accounting policies between businesses make company comparisons difficult. for each
of 3
 The Statement of Financial Position is a snap shop picture at a point in time. It may not limitations
represent the financial position throughout the year, particularly in the case of a seasonal
business.
 Inflation or deflation may hamper the comparison of ratios over a number of years.
Additional
 In conglomerate situations, it may be more meaningful to look at ratios for individual areas 2 marks
available
of the business rather than the conglomerate as a whole.
for relevant
discussion
 Ratio analysis may not capture developments in areas such as customer loyalty, skill and of the
loyalty of staff, and market competition which could have significant future impact on limitations.
business performance.
Examiner’s Comments on Question Four
This was a relatively straightforward question but surprisingly, many students were
unfamiliar with the format for the Statement of Changes in Equity and as a result
lost “easy” marks.

Solution Four Marks Allocated
XXX Ltd
Statement of Comprehensive Income for the year ended 31 st March 2013
Statement of Profit or Loss

2013 2013 2012
€/£ '000 €/£ '000
Revenue 47,185 1
Cost of sales 29,536 1
Gross Profit 17,649
Distribution costs 9,142 1

Admin expenses 7,039 16,181 1
Profit from operations 1,468

Finance Costs 400 1
Profit before tax 1,068
Taxation 235 1
Profit for the year 833 1
Statement of Financial Position as at 31 st March 2013

2013 2013 2012
Assets €/£ '000 €/£ '000
Non-current assets
PPE 33,602 1
Current Assets
Inventories 8,107 ½ mark
Trade Receivables 5,898 1
Cash at bank 182 14,187 ½ mark
Total Assets 47,789

Solution Four (Cont’d)

Marks Allocated
Equity and Reserves
Ordinary share capital 10,000
Share premium account 5,000
Retained earnings 24,290 1
39,290
Liabilities
Non-current liabilities
Bank loans 5,000 ½ mark

Current liabilities
Trade payables 2,481 1
Accruals 783 1
Taxation 235 3,499 ½ mark

Total Equity and
Liabilities 47,789
Statement of Changes in Equity for the year to 31 st March 2013

Share Other Retained Total
Cap Reserves Earnings Equity
Balance at 31st March 2012 10000 5000 23457 38457 Share Cap - 1
Valuation gain Other Res – 1
Profit for the period 833 833 Retained Earn - 1
Dividend paid Total Equity - 1
Balance at 31st March 2013 10000 5000 24290 39290
Workings
Presentation and
format - 2
1 Revenue 50,332 - 3,147 (sales cut off adjustment)
2 Cost of Sales 7865+29778-8107

Closing Inventory 8407-300
3 Distribution costs 8985+157

Solution Four (Cont’d)

Marks Allocated
4 Finance costs 200 + 200 accrual
5 Trade Receivables 9045-3147 (sales cut off adjustment)
6 Accruals 200 int.+157 transport + T.B. fig. 426
Examiner’s Comments on Question Five
In general students scored well in this question. Some students were challenged by
section (b)- while they were familiar with the format and methodology of a cash-
flow statement, they found it difficult to discuss the key points it highlighted.
Solution Five
Part A
Marks
ABC Plc Allocated
Statement of Cash Flow for the year ended 31 December 2013
€/£ €/£ €/£
Cash Flow from Operating Activities ½ mark
Operating Profit Wkg. 1 388
Loss on sales of non current assets Wkg 2 10 1

398
Working Capital Changes
(Increase)/decrease in Inventories -100 ½ mark each
(Increase)/decrease in trade receivables -150 (total 1. 5 )
Increase/(decrease) in trade payables 100 -150
Cash generated from operations 248
Interest paid Wkg.3 -40 1
Taxation paid Wkg. 4 -44 1
Net cash flow from operating activities 164
Cash Flow from Investing Activities

Payments to acquire plant Wkg.5 -490 1
Receipts from sale of plant 60 1
Net cash flow from investing activities -430

Marks
Solution Five (Cont’d) Allocated
€/£ €/£ €/£
Cash Flow from Financing Activities
Issue of 10% debenture loan 100 ½ mark
Issue of ord. share cap. (incl share prem) 352 ½ mark
Dividends Paid Wkg.6 -96 1
Net cash flow from financing activities 356
Net Increase/(decrease) in cash and cash

equivalents 90
Cash & Cash equivalents at the beginning of the

period -60 1
Cash & Cash equivalents at the end of the period 30
Presentation -
2
Workings
1. Profit before interest, tax and dividends; €/£
Profit before tax 348

Add back 10% interest on debentures 40
Profit before interest, tax and dividends 388
2.. Loss on sale of fixed assets
Sales proceeds – Net book value
60-70 -10
3.. Interest paid
No opening or closing accruals
Amt paid = 400 *10% 40
4.. Tax paid
190 + 124 -270 44

Solution Five (Cont’d)
5. Fixed Assets acquired
3260-(2840-70) 490
6. Dividends Paid
No opening or closing accrual 96
Part B
While the company reported a profit before tax for the year of €348,000, the net cash actually
generated from its core operating activities was €248,000. This is because certain items charged in 8 marks
arriving at net profit, such as loss on disposal of fixed assets, do not involve the movement of cash and for the
also because there was a net investment in working capital during the year which absorbed cash of discussion of
€150,000. the key
issues
Cash generated from operating activities was not sufficient to completely fund capital investment highlighted.
during the year and both shareholder and debenture holder financing was raised. In this regard the
company should assess future capital funding requirements and the availability and cost of such
funding in the light of future capital investment objectives and dividend/interest pay out projections. It
may be appropriate for the company to reconsider its high dividend pay- out policy particularly in the
short term, given the other demands on its’ scarce cash resources. In 2013, the company’s net cash
position improved by €90,000. However the prospect for continued improvement in the cash position
depends on future capital investment and the financing of same, the cost of funding existing and future
finance sources, as well as the net cash generated or absorbed by the core operating business of the
company.
Examiner’s Comments on Question Six
This proved to be a high – scoring question for a lot of students who attempted it.
Just one point to note: some students seemed to mistake journal entries for “T
accounts” and so lost valuable marks.

Solution Six
Part A
Marks
1. The straight-line method Allocated
The machines depreciable amount is: €/£
Cost 46,300
Less residual value 6,000 4
40,300
Using the straight line method of depreciation the charge is

€10,075 per annum (40,300/4)
2. The diminishing balance method (at a rate of 40%)
Year Carrying Depreciation Carrying

amount b/f @40% amount c/f
2013 46,300 18,520 27,780 4
2014 27,780 11,112 16,668
2015 16,668 6,667 10,001
2016 10,001 4,000 6,000
Part B
Blue Ltd
31st May 2012

The €/£50,000 revaluation increase on 31st May 2012 should be debited to buildings and credited
direct to a revaluation gain account. The revaluation gain account will be shown in the Statement of
Changes in Equity and will be included under Equity and Reserves in the Statement of Financial
Position. For disclosure purposes, the revaluation gain will also be included as Other Comprehensive
Income in the Statement of Comprehensive Income.
Journal
Dr Buildings €/£50,000
Cr Revaluation Reserve Account
Gain on property revaluation €/£50,000 3
Being revaluation gain on buildings.

Marks
Solution Six (Cont’d) Allocated
31st May 2013

The €/£50,000 revaluation increase on 31st May 2013 should be debited to buildings and credited
direct to a revaluation gain account. The revaluation gain account will be shown in the Statement of
Changes in Equity and will be included under Equity and Reserves in the Statement of Financial
Position. For disclosure purposes, the revaluation gain will also be included as Other Comprehensive
Income in the Statement of Comprehensive Income.
Journal
2
Cr Revaluation Reserve Account

Gain on Property revaluation €/£50,000
Red Ltd.
30th June 2012
The €/£60,000 revaluation increase on 30 June 2012 should be debited to buildings and credited direct
to a revaluation gain account. The revaluation gain account will be shown in the Statement of Changes
in Equity and will be included under Equity and Reserves in the Statement of Financial Position. For
disclosure purposes, the revaluation gain will also be included as Other Comprehensive Income in the
Statement of Comprehensive Income.
Journal
3
Cr Revaluation Reserve A/C

Gain on Property Revaluation €/£60,000

Marks
Allocated
30th June 2013
The €/£40,000 revaluation decrease on 30th June 2013 should be debited to the revaluation reserve
account as it reverses €/£40,000 of the previous revaluation gain.
Journal
Dr Revaluation Reserve Account–
2
Loss on revaluation €/£40,000
Cr Buildings €/£40,000
Being loss on revaluation.
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Advanced Financial Accounting

2nd Year Examination

Exam Paper, Solutions & Examiner’s Comments

NOTES TO USERS ABOUT THESE SOLUTIONS

© Accounting Technicians Ireland, 2014.

Accounting Technicians Ireland

PLEASE READ CAREFULLY

Candidates should allocate their time carefully.

All workings should be shown.

Answers should be illustrated with examples, where appropriate.

Question 1 begins on Page 2 overleaf.

3 A2014 Advanced Financial Accounting (AFA )

Answer ALL THREE Questions in this Section

(b) The “Conceptual Framework” identifies “comparability”, “verifiability”, “timeliness” and

Each part carries 1 ½ marks.

Indicate the right answer to each of the following ten parts.

1. Drawings, by a partner in a partnership, made during the year should be:

(a) included as an expense in the partnership Statement of Profit and Loss.

2. Where a partnership exists and there is no partnership agreement, then;

(a) the partners share profits equally.

Question 2 is continued overleaf

4 A2014 Advanced Financial Accounting (AFA )

(a) variable overheads.

6. According to IAS 17 “Leases”, which of the following statements is true?

Question 2 is continued overleaf

5 A2014 Advanced Financial Accounting (AFA )

9. An unqualified audit report, as issued by an external auditor is;

6 A2014 Advanced Financial Accounting (AFA )

Statement of Comprehensive Income for the year ended 31 December 2013

Statement of Profit or Loss Year ended 31/12/13 Year ended 31/12/12

€/£’000 €/£’000 €/£’000 €/£’000

Revenue 9,600 8,400

Less Cost of Sales:

Gross Profit 2,000 3,400

Statement of Financial Position

€/£’000 €/£’000 €/£’000 €/£’000

Non Current Assets 1,400 1,500

Total Assets 4,000 3,700

Equity and Liabilities

Question 3 is continued overleaf

7 A2014 Advanced Financial Accounting (AFA )

Current ratio 1.9 : 1

8 A2014 Advanced Financial Accounting (AFA )

Answer TWO of the THREE questions in this Section

The following further information is available:

9 A2014 Advanced Financial Accounting (AFA )

Statement of Profit or Loss

Total Assets 4,640 3,940

Equity and Liabilities

Non- Current Liabilities

Trade Payables 1,500 1,400

Total Equity and Liabilities 4,640 3,940

Question 5 is continued overleaf

10 A2014 Advanced Financial Accounting (AFA )

 New debentures were issued on 1 January 2013.

 Dividends of €/£ 96,000 were paid during the year.

11 A2014 Advanced Financial Accounting (AFA )

2nd Year Examination: August 2014

Payables days =(600/7800)365 28 days =(900/4800)365 68 days 38 days 2