IB1240

University of Warwick
Summer 2019
Introduction to Financial Accounting

Instructions
This is a CLOSED book examination.

Time allowed: 1.5 hours

Candidates should answer BOTH QUESTIONS in Section A (pages 2 - 5) and ONE QUESTION from
Section B (page 6).

Section A is worth 80% of the total marks for this paper and Section B is worth 20%.

One silent calculator, which is not capable of data storage or retrieval is permitted. Electronic
devices such as, for example, a mobile phone, tablet, smart watch, fitbit or similar device are not
permitted.

Read carefully the instructions on the answer book and make sure that the particulars required are
entered on each answer book.

Page 1 of 6
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SECTION A

Answer BOTH questions in this section

Question 1

The following trial balance has been produced from the accounting system of Novotna plc, a
company which imports and wholesales cloth, at 30 April 2019.
Debit Credit
£000 £000
Plant and machinery: cost 4,206
Plant and machinery: accumulated depreciation at 1 May 2018 1,682
Motor vehicles: cost 1,124
Motor vehicles: accumulated depreciation at 1 May 2018 569
Inventories at 1 May 2018 586
Accounts receivable 1,470
Equity share capital (20p shares) 660
Retained earnings 853
Accounts payable 420
Bank 545
Bank loan 1,500
Sales 10,570
Purchases 6,204
Sales returns 210
Purchase returns 112
Wages and salaries 856
Insurance 152
Heat and light 63
Rent 256
Irrecoverable debts 35
Other administrative expenses 768
Marketing and distribution costs 133
Interest 18
Allowance for receivables 32
Income tax paid 140
Dividends paid 132
Bank loan payment 590
16,943 16,943

(Continued…/)

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Additional information:
(1) The cost of inventories at 30 April 2019 was £535,000. One shipment, included in this figure,
and which cost £26,000, has been damaged in transit. It would normally have sold for £32,000,
but is marketed for sale at a discount of 40% on normal selling price.
(2) Insurance includes a payment of £42,000 for employers liability insurance for the 12 months to
31 December 2019.
(3) An electricity invoice for £18,000 for the period 1 March to 31 May 2019 was received on 6 June
2019.
(4) Since the year end, a customer of Novotna plc has gone into liquidation owing £72,000.
Novotna plc does not expect to receive any cash from this customer.
(5) Novotna plc considers it requires an allowance for receivables at 30 April 2019 of 3% of
remaining receivables.
(6) Novotna plc’s depreciation policies are as follows:
Plant and machinery 20% straight-line
Motor vehicles 25% reducing balance
There were no additions to or disposals of non-current assets during the year ended 30 April
2019. The residual value of all non-current assets is assumed to be zero.
(7) The bank loan is being repaid in instalments of £500,000 each 30 April. The bank loan paid
figure included in the trial balance is the 30 April 2019 instalment together with the interest for
the year ended 30 April 2019.
(8) Income tax on the profits of Novotna plc for the year ended 30 April 2019 totalled £175,000.
(9) On 31 May 2019 Novotna plc declared a financial dividend of 6p per share for the year end 30
April 2019.

Required:
Prepare the following financial statements for Novotna plc:

(a) Statement of profit or loss for the year ended 30 April 2019 [22%]

(b) Statement of changes in equity for the year ended 30 April 2019 [8%]

(c) Statement of financial position at 30 April 2019 [20%]

[Total: 50%]

(Continued…/)

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Question 2

Extracts from the financial statements of Evert plc for the years ended 31 December 2018 and 2017
are as follows:

Statements of financial position at 31 December

2018 2017
£000 £000
Assets
Property, plant and equipment
Land and buildings – Cost 2,560 2,180
− Accumulated depreciation 497 472
Fixtures and fittings – Cost 1,458 1,360
− Accumulated depreciation 685 542
Investments 1,030 850
Bank 94 289
Interest receivable 8 6

Liabilities
6% Debentures 1,200 1,750
Interest accrual 18 26

Equity
Equity share capital 1,400 900
Share premium 885 460
Retained earnings 1,434 1,467

Statements of profit or loss for the year ended 31 December

2018 2017
£000 £000
Profit from operations 221 196
Interest income 47 42
Interest expense (97) (105)
Income tax (36) (27)
Profit for the year 135 106

(Continued…/)

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Other information:
(1) Evert plc paid dividends during the year.
(2) On 31 August 2018, Evert plc sold some fixtures and fittings which had been purchased on 1
March 2015 for £128,000, and at the date of sale had accumulated depreciation of £51,000.
The company recognised a loss on sale of £28,000. There were no other sales of property, plant
and equipment during 2018.

Required:

(a) Prepare the cash flows from investing activities and cash flows from financing activities which
would be presented in Evert plc’s statement of cash flows for the year ended 31 December
2018.
[16%]
(b) Calculate the following ratios for 2018 and 2017 for Evert plc:
(i) Gearing
(ii) Interest cover
[6%]
(c) Using your answers to parts (a) and (b), discuss the financing activities of Evert plc during the
year ended 31 December 2018 and the result of these in comparison with 2017.
[8%]

[Total: 30%]

(Continued…/)

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SECTION B

Answer ONE question from this section

Question 3

Giving examples of their application, discuss the significance of the following concepts in financial
accounting:

(a) Accruals and matching

(b) Prudence
(c) Consistency

[Total: 20%]

Question 4

Discuss the implications for the financial accounting and reporting of a business forming itself either
as a sole trader or as a limited company.

[Total: 20%]

End of Paper

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