UNIVERSITY OF MAURITIUS

FACULTY OF LAW AND MANAGEMENT

SECOND SEMESTER EXAMINATIONS

MAY 2015

BSc (Hons) Accounting (Minor: Finance)

BSc (Hons) Accounting (Minor: Business Informatics)
PROGRAMME
BSc (Hons) Accounting (Minor: Management)
Level II

MODULE NAME FINANCIAL REPORTING

DATE Thursday MODULE CODE DFA 2000Y (3)

14 May 2015

TIME 13:30 – 16:30 Hours DURATION 3 Hours

NO. OF 4 NO. OF QUESTIONS 4

QUESTIONS SET TO BE ATTEMPTED

INSTRUCTIONS TO CANDIDATES

This paper consists of 4 questions.

Attempt ALL FOUR (4) questions.
 Financial Reporting – DFA 2000Y (3)

Question 1 [25 marks]

1. On 1 January 2014 P Ltd acquired 3 million equity shares in S Ltd by an exchange of

one share in P Ltd for every 2 shares in S Ltd plus $1.25 per acquired share in S Ltd.
The market price of each share in P Ltd at the date of acquisition was $6 and the
market price of each share in S Ltd at the date of acquisition was $3.25.

It should be noted that in the books of P Ltd, only the cash consideration of the above
investments was recorded. In addition, $500,000 of professional costs relating to the
investment in S Ltd was also included as part of the cost of the investment.

2. On 1 January 2014, S Ltd had an intangible asset worth $1,000,000. The intangible asset
has an indefinite life and has not suffered any impairment since acquisition.

3. On 1 July 2014, P Ltd sold an item of plant to S Ltd at its agreed fair value of $2.5
million. Its carrying amount prior to sale was $2 million. The estimated remaining life
of the plant at the date of sale was 5 years.

4. During the year ended 31 December 2014, S Ltd sold goods to P Ltd for $2.7 million at
a mark up of 50%. P Ltd had a third of the goods still in inventory at
31 December 2014. There were no intra-group receivables and payables with regard to
this transaction.

5. At 31 December 2014, the debtors of P Ltd showed Rs1,500,000 receivable from S Ltd,
whilst the creditors of S Ltd showed Rs1,050,000 payable to P Ltd.
(i) On 30 December 2014, P Ltd dispatched a consignment of goods to S Ltd
having an invoice value of Rs300,000. The consignment was received and
recorded by S Ltd on 3 January 2015.
(ii) On 31 December 2014, S Ltd sent P Ltd a cash payment of Rs150,000. This
payment was received and recorded by P Ltd on 4 January 2015.

6. The investments in other equity instruments (other than in S Ltd) have a fair value of
$9 million at 31 December 2014.

7. It is group policy to value non-controlling interest at the date of acquisition.

8. The summarised draft statements of financial position of P Ltd and S Ltd at

31 December 2014 are given below:

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 Financial Reporting – DFA 2000Y (3)

P Ltd S Ltd
$’000 $’000
Non-current assets
Property, Plant and equipment 18,400 15,000
Investments in S Ltd 4,250
Investments in equity instruments 6,500

29,150 15000
Current assets
Inventory 6,900 4,000
Trade receivables 12,200 6,000
Total assets 48,250 25,000

Equity and Liabilities

Ordinary shares of $1 10,000 4,000
Retained earnings:
At 31.12.2013 16,000 6,000
Profit for Year ended 31.12.2014 9,250 4,000

Total equity 35,250 14,000

Non-current Liabilities
7% Loan notes 5,000 1,000
Current Liabilities
Trade payables 8,000 10,000
Total equity and Liabilities 48,250 25,000

Required:

Prepare the consolidated statement of financial position as at 31 December 2014.

[25 marks]

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 Financial Reporting – DFA 2000Y (3)

Question 2 [25 marks]

The following list of balances relates to Kaplan Ltd for the year ended 30 September 2014.

Rs’000 Rs’000
Revenue (note 1(a) and (b)) 394800
Material purchases (note 2) 64,000
Production Labour (note 2) 124,000
Factory Overheads (note 2) 80,000
Distribution costs 23,200
Administrative expenses (note 3) 46,400
Finance cost (interest on debentures) 1200
Investment Income 800
Leased property – at cost (note 2) 50,000
Plant and equipment at cost (note 2) 44,500
Accumulated depreciation at 1 October 2013:
Leased property 10,000
Plant and equipment 14,500
Financial asset: equity investments (note 7) 32,800
Inventory at 1 October 2013 46,700
Trade receivables 53,550
Trade payables 36,800
Bank overdraft 5,850
Equity shares of 20 cents each 50,000
Retained earnings at 1 October 2013 33,600
6 % Debentures (note 6) 20,000
Trial Balance Total 566,350 566,350

Note 1 (a)
On 1 October 2013, goods with an invoice value of Rs10,000,000 were sold to a long-
established customer on the following terms: annual instalments of Rs2,000,000 are
due each year on 30 September for 5 years from date of sale. The normal cash price of
the asset is Rs10,000,000. Based on the customer's credit rating, the seller believes the
buyer would be able to obtain finance at an interest rate of 10 per cent. As at 30
September 2014, the cash account had been debited with Rs2,000,000 and sales had
been credited with Rs2,000,000. No other entries had been made.

Note 1 (b)
Revenue includes goods sold and despatched in September 2014 on a 30-day right of
return basis. Their selling price was Rs2.4 million and they were sold at a gross profit
margin of 25%. Kaplan Ltd is uncertain as to whether any of these goods will be
returned within the 30-day period.

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 Financial Reporting – DFA 2000Y (3)

Note 2
During the year Kaplan Ltd manufactured an item of plant for its own use. The
direct materials and labour were Rs3 million and Rs4 million respectively.
Production overheads are 75% of direct labour cost and these manufacturing costs
are included in the relevant expense items in the trial balance. The plant was
completed and brought into use on 1 April 2014.

All plant and equipment is depreciated at 20% per annum using the reducing
balance method with time apportionment in the year of acquisition.

The directors decided to revalue the leased property at cost in line with recent
increases in market values. On 1 October 2013 an independent surveyor valued the
leased property at Rs48 million which the directors have approved. The leased
property was being depreciated over an original life of 20 years which has not
changed.

All depreciation is charged to cost of sales.

Note 3
On 15th August 2014, Kaplan Ltd’s share price stood at RS2.40 per share. On this
date, the board of directors proposed and paid a dividend (mistakenly included in
administrative expenses) that was computed to generate a yield of 4%.

Note 4
The inventory of Kaplan Ltd at 30 September 2014 was valued at cost at Rs54.8
million.

Note 5
A provision for income tax for the year ended 30 September 2014 is required. The
corporation tax rate on profits is 30%.

Note 6
The 6% Rs20,000,000 debentures were issued on 1st October 2013 at a discount of
10%. Issue costs amounted to Rs1,000,000. The debentures will be redeemed at a
premium of Rs1,015,000 above par value. Interest payments (equivalent to 6% of
Rs20,000,000) are effected every 30 September. The effective rate of interest is 12%
per annum. The discount of Rs2,000,000 on issue together with the issue costs have
been included in administrative expenses.

Note 7

The equity investment had a fair value of Rs32.2 million on 30 September 2014.

Required:
Prepare the statement of profit or loss and other comprehensive income for the year
ended 30 September 2014 and a statement of financial position as at that date in
accordance with the provisions of relevant international accounting standards.

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 Financial Reporting – DFA 2000Y (3)

Question 3 [25 marks]

The summarised financial statements of Stevenson Ltd for the years 31 December 2013 and
2014 are as follows:

Income statement for the year ended 31 December 2014

Rs’000
Sales 216,000
Cost of sales (144,000)
Gross profit 72,000
Operating expenses (35,496)
Profit on sale of land 2,880
Loss on sale of motor vehicles (1,944)
Profit before interest and tax 37,440
Finance cost (1,440)
Profit before tax 36,000
Income tax expense (14,400)
Profit after tax 21,600
Other Comprehensive Income
Revaluation gain 7,200
Total Comprehensive income 28,800

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 Financial Reporting – DFA 2000Y (3)

Statements of Financial Position as at 31 December

2014 2013
Rs’000 Rs’000 Rs’000 Rs’000
Assets
Non-Current Assets
Motor Vehicles (Note 1) 14,400 18,720
Buildings (Note 1) 21,456 14,976
Land (Note 1) 129,600 115,200
Intangible assets (Note 2) 12,960 178,416 30,240 179,136
Current Assets
Inventories 49,240 57,600
Trade receivables 98,360 48,960
Short-term treasury bills 620 564
Cash at bank 1,180 149,400 1,344 108,468
Total Assets 327,816 287,604

Equity and Liabilities

Equity
Ordinary share capital (Rs1) 63,900 60,000
Share premium account 8,280 3,000
Revaluation reserve 14,400 7,200
Accumulated profits 46,800 25,200
133,380 95,400
10% Preference shares 73,760 207,140 70,200 165,600

Non-Current Liabilities
8% Debentures 18,300 10,800
Loan 2,800 3,600
Current Liabilities
Trade payables 47,160 38,880
Interest payable 360 -
Taxation payable 11,880 13,680
Dividend payable 360 5,040
Bank Overdraft 39,816 50,004
Total Liabilities 120,676 122,004
Total Equity and Liabilities 327,816 287,604

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 Financial Reporting – DFA 2000Y (3)

Note 1

Motor Buildings Land

Vehicles
Rs’000 Rs’000 R’000s
Cost
At 1 January 2014 37,440 28,800 115,200
Additions 4,320 7,200 28,800
Revaluations 7,200
Disposal (8,640) (21,600)
At 31 December 2014 33,120 36,000 129,600

Depreciation
At 1 January 2014 18,720 13,824 -
Depreciation for the year 6,624 720 -
Disposal Adjustment (6,624) -
At 31 December 2014 18,720 14,544 -

Note 2

The fall in intangible assets is due to amortization expense for the year ended 31 December
2014.

Required:

(a) Prepare the statement of cash flows for the year ended 31 December 2014 in
accordance with IAS 7 for Stevenson Ltd.

[20 marks]

(b) Explain the extent to which a cash flow statement may be useful to users of
accounting information.

[5 marks]

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 Financial Reporting – DFA 2000Y (3)

Question 4 [25 marks]

Consider the following information regarding Premier Ltd and Falamana Ltd. Both
companies operate in the garment retail industry where competition is fierce.

Income Statements for the year ended 31 December 2014

Premier Ltd Falamana Ltd
Rs’000 Rs’000
Sales 45,190 52,680
Cost of sales 18,275 28,390
Gross profit 26,915 24,290
Operating expenses 14,100 18,595
Profit from operations 12,815 5,695
Finance cost 190 76
Profit before tax 12,625 5,619
Income tax expense 4,760 2,215
Net profit for period 7,865 3,404

Balance Sheets as at 31 December 2014

Premier Ltd Falamana Ltd
Rs’000 Rs’000 Rs’000 Rs’000
Assets
Non-Current Assets
Property, plant and equipment 7,890 5,650
Current Assets
Inventories 5,180 4,100
Trade receivables 28,125 8,995
Cash at bank 195 33,500 8,760 21,855
Total Assets 41,390 27,505

Equity and Liabilities

Equity
Ordinary share capital (Rs1) 7,850 3,160
Accumulated profits 17,895 25,745 7,980 11,140

Non-Current Liabilities
Debentures 2,375 950
Current Liabilities
Trade creditors 9,285 12,135
Taxation payable 3,200 2,000
Dividend payable 785 1,280
Total Liabilities 15,645 16,365
Total Equity and Liabilities 41,390 27,505

Required :
a) Calculate the ratios listed below for Premier Ltd and Falamana Ltd.
[10 marks]

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 Financial Reporting – DFA 2000Y (3)

Profitability Formula
1. Return on Assets (Profit before interest and tax/total assets) x 100%
2. Operating profit margin (Profit before interest and tax/sales) x 100%
3. Gross profit margin (Gross profit/sales) x 100%
4. Expenses margin (Operating expenses/sales) x 100%

Liquidity and efficiency Formula

1. Quick asset ratio (Current assets – closing stock) / current liabilities
2. Cash ratio Cash/current liabilities
3. Period of inventory turnover (Closing stock/cost of sales) x 365days
4. Debtors collection period (debtors/ credit sales) x 365days
5. Creditors payment period (Creditors/credit purchases) x 365days
6. Cash operating cycle (3) + (4) – (5)

Assume that all sales and purchases were on credit.

b) Mr Clavis is interested in investing in one of the two companies. Based on your ratios
computed in (a) comment on the profitability, efficiency and liquidity of each
company and advise Mr Clavis which company he should invest in.
[11 marks]

(c) Explain the limitations of financial ratio analysis.

[4 marks]

END OF QUESTION PAPER

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