IAS1

International Accounting Standard
Regulatory system
Limited companies must prepare their financial statements within a regulatory framework. This
framework consists of:
 the UK Companies Act 1985 as amended by the UK Companies Act 1989

 international accounting standards (International Accounting Standards and International
Financial Reporting Standards)
Why is there a need to have standards?
The standards seek to:
 resolve areas of difference in the preparation and presentation of accounting information
 recommend disclosure of accounting bases
 identify any departure from the standards
 improve existing disclosure requirements.
International Accounting Standards (IAS) are gradually being replaced with International
Financial Reporting Standards (IFRS)
Although it is not, as yet, mandatory for the financial statements of private limited companies
to be prepared in accordance with the IASs, it seems inevitable that, in time, the standards will
apply to all limited companies. Consequently, in this book appropriate standards have been
applied to the preparation of the financial statements of all limited companies.
IAS Topic
IAS 1 Presentation of financial statements

IAS 2 Inventories (not long-term contracts)
IAS 7 Statement of cash flows
IAS 8 Accounting policies
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment IAS
36 Impairment of assets
IAS 37 Provisions, contingent liabilities and contingent assets IAS
38 Intangible assets
IAS 1 – Presentation of Financial Statements Components
of Financial Statements
Financial Statement comprise
 Income Statement
 Statement of Financial Position
 Cash Flow Statement
 Statement of Changes in Equity
 Notes to Accounts
General Terms and Discussions:
Accounting Policies
Accounting policies are the bases (methods, accounting treatments) developed for applying fundamental
accounting concepts.
The reliability of financial statement is achieved if the information provides for: faithful representation,
substance over form, prudence and completeness.
Fundamental Accounting Concepts
Fundamental Accounting concepts are going concern, accruals, consistency of presentation and prudence.
Materiality and Aggregation
All material items should be disclosed in the financial statements.

Amounts which are immaterial can be aggregated with amounts of a similar nature or function and need not
be presented separately
Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements
Offsetting
IAS 1 does not allow assets and liabilities to be offset against each other unless such a treatment is required
or permitted by another IFRS.
Income and expenses can be offset only when one of the following applies.
(a) An IFRS requires/permits it.
(b) Gains, losses and related expenses arising from the same/similar transactions are not material
IAS 2 -Inventory
Marginal Costing is not an acceptable method for inventory valuation.
IAS 2 Inventories are defined as:

 Goods or other assets purchased for resale
 Consumables storesRaw material and components purchased for incorporation into products for
sale
 Products and services in intermediate stage of completion
 Finished goods
Cost of purchase comprises the purchase price including import taxes, transport and handling costs
and any other costs that are directly attributable to the goods Cost
of conversion comprises:
 Costs that can be specifically attributed to units of production, for example direct labour, other
direct expenses and subcontracted work
 Production overheads
 Any other overheads
The standard states that inventory should be valued at the lower of cost and net realizable value of separate
items of inventory or of groups of similar items
IAS 7 – Cash Flow Statement
A cash flow statement has three sections.
 Cash flow from operating activities

 Cash flow from investing activities
 Cash flow from financing activities
IAS 8 – Accounting Policies
Accounting policies once adopted should be applied consistently from year to year. The consistently use of
accounting information enhances the usefulness of the financial statements.
Change in accounting policy, will include, for example change in the method of inventory valuation from
FIFO to average cost.
A change in accounting policy is permitted only if the change:
 is required by a new IAS

 results in more and true and fair view of financial statements
IAS 10 – Events after Reporting Period
Events after the reporting period are those events, both favourable and unfavourable, that occur between the
reporting date and the date on which the financial statements are authorised for issue. Two types of events can
be identified:
 those that provide further evidence of conditions that existed at the reporting date; and
 those that are indicative of conditions that arose subsequent to the reporting date
The date when financial statements are authorised for issue is the date when board of directors reviews the
year end draft financial statements and authorises them for issue.
Events after balance sheet date are categorised into
 Adjusting Events
 Non adjusting Events
Adjusting event is one which requires the accounts of the year to be adjusted as a result of the
conditions of the event existing at the statement of financial position date
Examples could include:
 A valuation of property indicating permanent diminution in value as at the balance sheet date
 The insolvency of debtor included in the year end figure for debtors
 The announcement of a tax rate applicable to the year ended on the balance sheet date
 The discovery of an error in the accounts
 Decision taken by the board of directors relating to the year concerned, e.g, amount of proposed
dividend or of transfer to reserve
A non-adjusting event is an event that occurs after the period end where the conditions did not exist at the
period end. It is usually shown by a note to the final financial statements.
A non-adjusting event does not require the statements to be adjusted but a note is added as the
conditions leading to the event were not present at the statement of financial position date
Examples might include:
 A major restructuring of the business;

 Significant business commitments entered into after the balance sheet date.
 Proposed dividend
IAS 16 – Property, Plant and Equipment
This standard sets out how property, plant and equipment is dealt with. Plant, property and equipment is
measured at cost. Cost includes the purchase price, plus any import duties, plus any costs attributable to make
the asset fit for use at the intended location, plus any estimated costs of dismantling and removing the asset at
the end of its life.
After acquisition the company must chose to value its assets using:
Cost – the asset is shown at cost less accumulated depreciation and impairment losses. Revaluation– the
asset is shown at a revalued amount (that is an amount at which the asset could be exchanged between
knowledgeable, willing parties in an arm’s length transaction) less subsequent depreciation and impairment
losses.
Depreciation is to be charged on all non-current assets with the exception of freehold land.
The two methods examined are:

 The straight-line method
 The diminishing (reducing) balance method.
The company chooses the method in a manner that reflects the way in which the assets’ economic benefits are
consumed. The method used should be reviewed at least annually in order to consider whether the method
used is still the most appropriate method.
IAS 36 – Impairment of Assets
Impairment: A fall in the value of an asset, so that its recoverable amount is now less than its carrying
value in the balance sheet.
This standard sets out the accounting treatment to ensure that assets are shown in the balance sheet at no more
than their value or recoverable amount.
The recoverable amount is the higher of a fair value less any costs that would be incurred were it to be sold
and its present value in use.
The standard applies to non-current assets. Assets need to be reviewed at each balance sheet date to judge
whether there is evidence of any impairment.
If there is an impairment loss, the asset should be shown on the balance sheet at its recoverable amount
and the impairment loss should be shown on the income statement as an expense.
IAS 37 – Provisions, Contingent Liabilities and Contingent assets
Provisions
Provision can be defined as a liability of uncertain timings or amounts

For example: a business is facing legal action for breaching health and safety law. The likely repercussion is
that they will be fined. The timing and severity of the fine will be decided by the criminal court at some point
in future. The key question is should the business attempt to reflect this cost in the financial statements?
As the amount would be settle in the future a corresponding liability is recorded as follows
Dr Expenses
Cr Provision Liability
Criteria for recording provision
 There must be present obligation (legal or constructive) that exists as a result of past event
 There must be a probable transfer of economic benefits
 There must be a reliable estimate of the potential cost
Worked example
A business has been told by its lawyers that it is likely to have to pay $10,000 damages for a product that
failed. The business duly set up a provision at 31 December 20X7. However, the following year, the lawyers
found that damages were more likely to be $50,000. How is the provision treated in the accounts at:
(a) 31 December 20X7?
(b) 31 December 20X8?
Contingent liabilities
Contingent liabilities are made with regard to liabilities of uncertain timing or amount. However , unlike
provisions no accounting entries are made with regard to contingent liabilities (no expense or liability is
recognized). When a contingent liability is required the business will include a note in the financial statements
describing the potential liability to the users.
A contingent liability is recognized when there is:
 A possible obligation that arises from past events; or

 A probable obligation that arise from past events but the amount of the obligation cannot be
measured with sufficient reliability
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Examples of contingent liabilities include outstanding litigation where the potential costs cannot be estimated with
any degree of reliability or when the likelihood of losing the litigation is only deemed possible
Contingent assets
A contingent asset is a possible asset that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise.
An example of a contingent asset is when a business is claiming compensation off either an individual or another
business and the outcome of the claim is uncertain at the reporting date.
Accounting for contingent liabilities and assets
The requirements as regards to contingent liabilities and assets are summarized in the following table.
Probability of occurrence Contingent liabilities Contingent assets

Virtually certain Provide Recognize
Probable Provide Disclose in note
Possible Disclose in note Ignore
Remote Ignore Ignore
Note that the standard gives no guidance as the meaning of the terms in the left handed column. One possible
interpretation is as follows
Virtually certain greater than 95%

Probable between 51% - 95%
Possible between 5% - 50%
Remote less than 5%
IAS 38 – Intangible Assets
Intangible Asset
An intangible asset is an identifiable non-monetary asset without physical substance. The asset must be:
– Controlled by the entity as a result of events in the past; and
– Something from which the entity expects future economic benefits to flow
Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical
knowledge and understanding.
Development is the application of research findings or other knowledge to a plan or design for the production of
new or substantially improved materials, devices, products, processes, systems or services prior to the
commencement of commercial production or use.Amortisation is the systematic allocation of the depreciable
amount of an intangible asset over its useful life. Amortisation period and amortisation method should be reviewed
at each financial year end.
Depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.
Useful life is:
(a) The period over which an asset is expected to be available for use by an entity; or
(b) The number of production or similar units expected to be obtained from the asset by an entity.
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The standard gives examples of activities which might be included in either research or development or which are
neither but may be closely associated with both.
Research
– Activities aimed at obtaining new knowledge

– The search for applications of research findings or other knowledge
– The search for product or process alternatives
– The formulation and design of possible new or improved product or process alternatives
Development
– The design, construction and testing of pre-production prototypes and models

– The design of tools, jigs, moulds and dies involving new technology
– The design, construction and operation of a pilot plant that is not of a scale economically feasible for
commercial production
– The design construction and testing of a chosen alternative for new/improved materials
IAS
The accountant of PS plc prepared draft financial statements for the year ended 31 March 2022. The following
information was based on these draft statements.
Purchases $361 000

Purchases returns $8 560
Inventory at 1 April 2021 $68 210
Inventory at 31 March 2022 $71 650
Mark-up 60%
Operating expenses to revenue ratio 25%
Expenses to revenue ratio (includes finance costs) 28%
Answer the following questions in the question paper. Questions are printed here for reference
only.
(a) Prepare a summarised version of the draft income statement for the year ended 31 March
2022. [4]
Additional information
The draft financial statements did not take into account the following information items.
1 During the year one of the company’s delivery drivers had caused an accident resulting in repairs to
another vehicle costing $7000. Of this, $5000 will be covered by the company’s insurance. No
payments have yet been made.
2 Another vehicle is recorded in the books with a book value of $27 000. It is now estimated that it has
a value in use of $22 000 and could be sold for $19 000.
3 A credit customer who owed the company $1000 at the year-end was discovered to have gone bankrupt
and was not expected to pay any of the debt.
4 A dissatisfied customer was taking legal action and was suing the company for damages of
$10 000. The company had estimated that the customer had a 35% chance of success.
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5 Goods with a selling price of $7200 were held 1 by a credit customer on 31 March 2022 on a sale or
return basis. These goods were treated in the draft financial statements as having been sold.
6 The premises were revalued on 31 March 2022 from $400 000 to $580 000.
7 The draft financial statements showed a value of $24 000 for an intangible asset which had been
bought by the company on 1 April 2021. The directors were of the opinion that this should be
amortised (depreciated) over 20 years from the date of purchase.
8 A fire on 4 April 2022 destroyed the company’s entire inventory.
(b) Identify the two items from the information items 1 to 8 which should be disclosed by way of a note to
the accounts. Explain the reason for their treatment. [6]
(c) State what is meant by the term ‘contingent asset’. Illustrate your answer with an example. [2]
(d) Calculate the correct profit for the year. Start your answer with the draft profit from your answer
to (a). [7]
(e) Prepare the journal entry to record information item 6 from the list given. A narrative is
required. [3]
The value of trade receivables in the draft statement of financial position was $81 900.
(f) Calculate the correct value of trade receivables at 31 March 2022.
[3] [Total:
25]
)N/22/31
The book-keeper of NM plc produced the following draft financial statements for the year ended 31
December 2021, which contained errors and omissions.
Income statement
$ $
Revenue 196 000
Cost of sales 62 900
133 100
Profit from revaluation 72 000
205 100
Expenses 114 200
Dividend paid 10 000
Dividend proposed 25 000 149 200
Profit for the year 55 900
Statement of financial position
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1 $
Assets
Non-current assets
Property, plant and equipment 612 000
Current assets
Inventory 19 800
Trade receivables 36 200
Cash and cash equivalents 1 400
57 400
Total assets 669 400
Equity
Ordinary share capital 315 000
Retained earnings 267 500
582 500
Non-current liabilities
Bank loan 40 000
Current liabilities
Trade payables 21 900
Proposed dividend 25 000
46 900
Total equity and liabilities 669 400
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The following additional information is available.
1 Share capital consists of ordinary shares of $1 each. Initially 100 000 shares were issued and raised
$120 000, and later 150 000 shares were issued, raising $195 000.
2 A year end transfer to general reserve, $45 000, had been agreed on but had not been recorded.
3 The three vehicles included in property, plant and equipment had the following values.
vehicle carrying amount fair value value in use

$ $ $
1 36 100 33 100 37 000
2 30 800 29 000 29 500
3 19 500 18 200 18 100
Costs to sell were expected to be $60 in all cases.
4 The correct value of inventory at the year end was $18 900.
5 The bank loan is being repaid in equal instalments, one every six months. At the year end there were ten
instalments remaining, with the next due on 1 March 2022.
6 On 5 January 2022 some inventory with a cost of $600 was damaged and could only be sold for
$200.
On 6 January 2022 it was discovered that a credit customer who had owed $1000 at the year end had gone
out of business and was unlikely to pay more than 20% of his debt.
7 A bank statement was received in January 2022 showing that a cheque from a credit customer for
$2000, paid in on 30 December 2021, had been dishonoured.
Answer the following questions in the question paper. Questions are printed here for
reference only.
(a) Prepare a corrected statement of financial position at 31 December 2021. [18]
(b) State whether each of the two events in point 6 of the additional information are adjusting or non-
adjusting events. [2]
(c) Explain why a business might want to revalue its non-current assets. [2]
An amount of $7600 for irrecoverable debts is included in the expenses in the income statement. The
directors are considering creating a provision for doubtful debts to reduce the level of future irrecoverable
debts.
(d) Advise the directors whether or not they should create a provision for doubtful debts. Justify your
answer. [3]
ON/22/33
Three separate companies all had a profit for the year of $200 000 before taking into account costs related to
research and development and patents.
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AB plc spent $80 000 on research and development. Of this, $30 000 was research cost and the remainder was
development cost incurred in upgrading its current processes. The sales of the company’s existing product will
be unchanged, as will its selling price and costs.
CD plc also spent $30 000 on research and $50 000 on developing a new product which it was starting to sell by
the end of the year, and which it expected to sell for 20 years in total.
EF plc spent $80 000 buying patents allowing it to produce and sell a new product which it also expected to sell
for 20 years.
reference only.
(a) State when an intangible asset can be recognised in accordance with IAS 38. [2]
All three companies had ordinary share capital of $400 000. It is the policy of the companies to charge a
full year’s amortisation (depreciation) on any intangible asset.
Information relating to one ordinary share was as follows:
Par value Market price

$ $
AB plc 1.00 1.20
CD plc 0.50 1.08
EF plc 0.80 2.35
(b) Calculate for each company:
(i) the earnings per share to the nearest whole cent [10]
(ii) the price earnings ratio to two decimal places. [3]
Simon is considering investing in one of the three companies.
(c) Name two other ratios of these companies which Simon might wish to consider. [2]
(d) Advise Simon which company he should invest in. Justify your answer. [4]
The directors’ report of AB plc stated that the development costs had enabled the company to drastically
reduce its greenhouse gas emissions.
(e) Explain how this information might affect potential investors. [2]
(f) State two other matters which might be covered in the directors’ report of AB plc. [2]
[Total: 25]
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MJ/22/32
AB plc is a trading company. The draft profit from operations for the year ended 31 December 2021 was $98
000 before the following items were considered.
1 On 1 September 2021, AB plc issued a 6% debenture for $200 000. Interest is payable half-yearly.
2 Revaluation reserve at 1 January 2021, $72 000, arose from the revaluation of a property on 1 January
2017. The property was purchased on 1 January 2013. It is depreciated using the straight-line method over
its useful life of 40 years with no residual value.
On 1 January 2017, the market value of the property was $432 000.
On 1 January 2021, the property was revalued again at $296 000. No accounting entries had been made to
record this.
The book-keeper had continued to provide depreciation for the property based on the value of
$432 000.
3 In the financial statements of 2020, a non-current asset was wrongly classified, with the effect that
depreciation had been overcharged by $20 000 in 2020 and $14 000 in 2021.
4 AB plc sells goods at a mark-up of 60%. In December 2021, defective goods with a sales value of $28 000
were returned by customers. The cost value of the returned goods had been included in inventory at 31
December 2021. It is expected that if $6000 is incurred to repair the returned goods, they can be sold at
80% of normal selling price.
only.
(a) Prepare a statement to show the ‘profit for the year’ for the year ended 31 December 2021.
[8]
(b) Explain the accounting treatment of the following, with reference to the relevant international
accounting standards (IAS):
(i) item 3 [3]
(ii) item 4. [3]

Equity of AB plc at 31 December 2020 was as follows:
$
Ordinary share capital ($1 shares) 500 000
Share premium 86 000
Revaluation reserve 72 000
850 000
During the year ended 31 December 2021, the following transactions took place.
1 On 1 February, the final dividend of $0.08 per share was paid from the 2020 profit.
2 On 5 March, a bonus issue of one ordinary share for every ten ordinary shares held was made. It
is the policy of the company to keep its reserves in the most flexible form.
3 On 1 June, 100 000 new ordinary shares were offered to the public at $1.80 each. AB plc received
subscriptions for 80 000 shares which were fully paid.
4 On 1 September, an interim dividend of $0.02 per share was paid on all shares held at 31
March 2021.
5 On 31 December, a final dividend of $0.09 per share was proposed on all shares held at 31
December 2021.
(c) State one difference between a rights issue and a bonus issue of shares. [2]
(d) Prepare the statement of changes in equity for the year ended 31 December 2021. A total column is
not required.
[9]
MJ/22/31
G plc’s financial year ends on 31 December. The financial statements for the year ended 31
December 2021 were expected to be approved by the board of directors on 1 March 2022.
The accountant had prepared the draft statement of financial position, which contained errors and omissions,
as follows:
Draft statement of financial position at 31 December 2021

$ $
Assets
Non-current assets
Current assets
Inventory 80 000
Cash and cash equivalents 86 000 330 000
Equity and liabilities

Equity
Ordinary share capital ($1 shares) 600 000
Retained earnings 184 000 784 000
Current liabilities
Other payables 24 000 152 000
Inventory comprised of the following items.
Category Purchase Estimated Estimated cost Estimated selling

cost selling price of repairing expenses
$ $ $ $
A 57 000 98 000 – 7 000
B 13 000 14 000 – 3 000
C 10 000 12 000 2 500 1 000
Total 80 000 124 000 2 500 11 000
Only the purchase cost of each category had been taken into account. The
following items had not been fully taken into account.
1 A machine, costing $80 000, had been purchased on 1 December 2021. G plc had paid $30 000 for the
machine on 1 December 2021 and the balance was to be paid on 1 February 2022. Only the initial payment
of $30 000 was recorded in the relevant accounts. The annual rate of depreciation is 15% per annum using
the reducing balance method. A full year’s depreciation is charged in the year of purchase.
2 A building which had cost $300 000, with accumulated depreciation of $96 000 at 31 December 2021, was
revalued on that date at $350 000.
3 In December 2021, an employee filed a lawsuit against G plc for wrongful dismissal and asked for
compensation of $26 000. The company’s lawyer advised the directors that there was an 80% probability
of successfully defending the case. The legal cost for defending the case, of about
$8 000, would be settled when the case finished regardless of the outcome.
4 On 1 February 2022, a credit customer owing $12 000 at 31 December 2021 was declared bankrupt. G plc
was advised that none of the debt could be recovered.
reference only.
(a) Prepare a revised statement of financial position at 31 December 2021. [14]
(b) Explain the correct accounting treatments of the claim and the legal cost in item 3 with
reference to the relevant international accounting standard (IAS). [7]
(c) State what is meant by:
(i) events after the reporting period [2]
(ii) adjusting events [1]

(iii) non-adjusting events. [1]
ON/21/31
DW Limited is a small manufacturing company which seeks to implement the requirements of International
Accounting Standards. Its financial year end is 31 December.
At the end of 2019, the directors decided to replace the manual accounting system with a computerised one. At
the beginning of 2020, the company bought the computer equipment and the software, and sent staff on a
training course.
reference only.
(a) Outline the next steps the company needed to take to implement the computerised accounting system.
Your answer should consider the need for both accuracy and security.
[8]
The company accountant prepared the draft income statement of the company for the year ended 31
December 2020. When the finance director reviewed it he thought that it might contain errors. He
identified five areas where he thought an error might have occurred. These were as follows.
1 The staff training had cost $5000. Since the employees of the company usually stay with the
company for about ten years, the accountant had decided to charge $500 to expenses for staff training
each year for ten years, starting in 2020.
2 An impairment review had considered vehicles with a carrying amount of $72 000. It found that their
fair value was $67 000 and their value in use was $65 000. The accountant included an impairment
loss on vehicles of $7000 in expenses.
3 An impairment review had considered machinery with a carrying amount of $98 000. It found that its
fair value was $81 000 and its value in use was $102 000. The accountant included an impairment
loss on machinery of $17 000 in expenses.
4 Water damage had destroyed inventory costing $8000 on 5 January 2021. The accountant took this
loss into account when preparing the income statement.
5 The premises had been revalued upwards by $28 000 at the year end. The accountant omitted to
record this.
(b) Complete the table given in the question paper showing the effect of the correction of errors on
the draft profit for the year.
In the second column enter the amount by which the draft profit for the year would change due to any
correction of errors. State whether the correction increases or decreases the profit. If no correction is
needed enter Nil.
In the third column explain why the correction is needed, or why no correction is needed. [15]
(c) Explain why the errors, corrected in (b), had not been caused by the computerised accounting
system.
[2]
ON/21/33
SW plc has a financial year end of 31 December. It provided the following information.
1 All non-current assets are depreciated using the straight-line method, and depreciation is provided monthly.
The per annum rates used are as follows.
Buildings 2%
Fixtures and fittings 10%
Vehicles 20%
2 The balances on the company’s books of account at 1 January 2020 included the following. Only one
vehicle was owned on that date.
cost accumulated
depreciation
$ $
Premises 100 000 5 000
Fixtures and fittings 64 000 19 200
Vehicle 28 000 16 800
3 On 1 April 2020 the company purchased a sole trader’s business for a consideration of $146 000. The
assets taken over were valued at: premises $94 000, inventory $21 000 and trade receivables
$14 000. All liabilities were settled by the sole trader.
4 On 30 June 2020 the vehicle was sold for $9100. The next day a replacement vehicle was purchased for
$26 000.
5 On 30 September 2020 the premises owned by the company at the start of the year were revalued at $180
000. The company reviewed its estimate of the remaining economic life of the premises and decided to
continue to provide depreciation on buildings at 2%.
6 The values of all premises are 50% land and 50% buildings.
7 On 1 January 2021 a review showed that the recoverable amount of the vehicle was $22 000.
only.
(a) State how a recoverable amount is determined. [3]
(b) Calculate the impairment loss arising. [3]
(c) Explain whether the impairment loss was an adjusting or a non-adjusting event in relation to the
statement of financial position at 31 December 2020.
[2]
(d) Prepare an extract from the statement of financial position at 31 December 2020 to show the non-
current assets section.
[9]
3
(e) Calculate the amount of the revaluation reserve created during the year ended 31 December 2020.
[3]
(f) Explain how the creation of the revaluation reserve affects the directors’ ability to pay dividends.
[2]
SW plc is involved in substantial research and development.
One of the directors has suggested that development costs should in future be capitalised.
(g) Advise the directors whether or not development costs should be capitalised. Justify your
answer. [3]
MJ/21/32
The accounting year of Y Limited ends on 31 December.
For the year ended 31 December 2019, Y Limited had revenue of $806 400 and a non-current asset
turnover of 2.10 times.
reference only.
(a) (i) State how non-current asset turnover is calculated. [1]
(ii) Explain why a company may want to know this ratio. [2]
(b) Calculate the total net book value of non-current assets of Y Limited at 31 December 2019.
[1]
Y Limited classifies non-current assets into three categories. The accumulated depreciation at 31
December 2019 for each category was:
$
Property 128 000
Plant and equipment 168 800
Furniture and fixtures 101 200
The net book values of the three categories at 31 December 2019 were in the proportion of 5 :3 : 2. The
following information relates to the accounting year ended 31 December 2020.
1 On 1 January 2020, the property was revalued at $360 000.
2 On 1 March 2020, office furniture was purchased at the cost of $25 000.
3 On 1 July 2020, an item of old equipment was part exchanged for a new item. Y Limited
paid cash, $34 000, as a part payment for the new item. The old item had an original cost of
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$35 000 and was fully depreciated. Its part exchange value was $8000.
4 A full year’s depreciation is charged in the year of purchase and none in the year of sale.
5 Non-current assets are depreciated as follows:
Property Straight-line method over 20 years

Plant and equipment 20% per annum reducing balance method
Furniture and fixtures 20% per annum straight-line method
(c) Prepare the non-current assets schedule to use as a note to the financial statements for the year
ended 31 December 2020.[14]
The directors plan to buy new motor vehicles in 2021.
(d) Explain to the directors why they need to depreciate motor vehicles. [3]
(e) Explain to the directors the impact on the profit of using each of the straight-line and the
reducing balance method of depreciation. [4]
MJ/21/32
G Limited has prepared the draft financial statements which are to be audited.
The draft statement of financial position at 31 December 2020 is as follows.
$ $
Non-current assets
Goodwill 80 000
624 000
Current assets
Inventory 88 000
Cash and cash equivalents 34 800 310 000
Equity
Ordinary share capital ($1 share) 500 000
738 000
Non-current liabilities
Bank loan (2021–2025) 100 000
Current liabilities
The following information is available.
1 Goodwill is comprised of two elements.

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i On 1 January 2020 G Limited acquired a partnership business and goodwill valued at $30 000
was recorded. The value of goodwill at 31 December 2020 should be $24 000.
ii An advertising campaign two years ago had boosted the sales. The directors believe that the
products are getting more popular and the company has a good reputation. Goodwill of
$50 000 and the associated revaluation reserve of $50 000 have been created and recorded.
2 Included in the property, plant and equipment is a specialised machine with a net book value of
$32 400. This machine is used exclusively to produce a particular product whose production will be
stopped two years later. The fair value and value in use of the specialised machine are
$29 000 and $28 600 respectively. If the specialised machine is to be sold, a selling cost of $2000 is
expected to be incurred.
3 Inventory includes one product which had been accounted for at the selling price of $40 000. The
mark-up for this product is 25%.
4 G Limited started providing for doubtful debts in 2020. A provision of 4% had been made. A credit
customer owing $15 000 had been declared bankrupt and the whole amount had to be written off.
5 One-fifth of the bank loan will be repaid in 2021.
reference only.
(a) State three features of financial statements which show a ‘true and fair view’. [3]
(b) Explain to the directors the appropriate accounting treatments for information items 1i, 1ii
and 2, making reference to the relevant International Accounting Standards (IAS). [9]
(c) Prepare the revised statement of financial position at 31 December 2020 using all the
available information. [10]
A director of G Limited says ‘whether the financial statements show a true and fair view does not
really matter to the company’.
(d) Comment on whether or not the director’s statement is correct. Justify your answer. [3]
MJ/21/31
The following information relates to D Limited for the year ended 31 December 2020.
Revenue $1 051 200

Purchases $642 400
Gross profit margin 40%
Non-current asset turnover 2.4 times
Current ratio 2.2 : 1
Trade receivables turnover 33 days
Trade payables turnover 45 days
All sales and purchases were on credit.
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The value of closing inventory was 20% higher than the opening inventory.
Current assets consisted of inventory, trade receivables and cash and cash equivalents. Current
liabilities consisted of trade payables only.
reference only.
(a) Prepare the total assets section of the statement of financial position at 31 December 2020,
showing the cash and cash equivalents as the balancing figure. Use the space provided to show
your workings. [9]
(b) Calculate the working capital cycle (in days). [3]
The following accounting ratios for 2019 are also available.
Non-current asset turnover 2.05 times
Working capital cycle 30 days
(c) Compare the performance of D Limited over both years by considering the non-current asset
turnover and working capital cycle. [3]
The price earnings ratio of D Limited has increased from 2019 to 2020.
(d) Explain two possible reasons for the change in the ratio from 2019 to 2020. [6]
(e) State four limitations of ratio analysis. [4]

MJ/21/34
The directors of DW plc seek to comply with all International Accounting Standards.
reference only.
(a) Explain what is meant by the following terms:
(i) an adjusting event [2]
(ii) a non-adjusting event. [2]
DW plc has a financial year end of 31 December. On 31 December 2020 the draft profit for the year was
calculated as $8100 and the draft statement of financial position at that date included the following values.
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Machinery (at cost) 186 000
Accumulated depreciation of machinery 91 500
On 1 January 2021 the directors reviewed the values of all the non-current assets. This indicated that the
machinery could be sold for $87 000. The cost of dismantling the machinery and transporting it to a new
owner would amount to $3000.
The present value of future total estimated net cash flows arising from the use of the machinery was
$90 000.
(b) State the amounts of the following with regard to the machinery:
(i) its fair value [1]
(ii) its value in use. [1]
(c) Calculate with regard to the machinery:
(i) the carrying amount [1]
(ii) the recoverable amount [1]
(iii) the impairment loss. [2]
(d) Explain how the impairment loss should be recorded in the financial statements. [4]
On 3 January 2021 there was a fire in the company’s warehouse, and inventory costing $18 000 was
destroyed. It was expected that the company’s insurance would cover only part of the cost.
(e) Explain how the financial effects of the fire should be recorded in the financial statements for 31
December 2020. [3]
(f) Explain what is meant by an audit of a limited company. [3]
(g) Discuss how the shareholders of DW plc are likely to react to an unqualified audit report. [3]
(h) Explain what is meant by the term ‘stewardship’ in relation to the directors of DW plc. [2]
ON/20/31
PL plc is a trading company. A trainee in the finance department made a start on preparing the financial
statements for the year ended 31 December 2019. He produced the following statement, which contains
errors.
Statement of changes in equity for the year ended 31 December 2019
Ordinary Retained Bank loans

share capital earnings
($1 shares)
$ $ $
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Balance at 1 January 2019 250 000 76 000 80 000

Issue of new ordinary shares at $2.50 each 150 000
Dividend paid (20 000)
1 for 10 bonus issue of ordinary shares (31 000) 31 000
New five-year bank loan received 25 000
Profit from operations for the year 63 000
Loan interest paid (12 000)
Balance at 31 December 2019 349 000 170 000 93 000
In addition to the obvious errors, the following had not been considered.
1 At the end of the year, the premises had been revalued from $100 000 to $195 000.
2 A general reserve had been created, $30 000.
3 Accrued interest had amounted to $3000 on 1 January 2019 and $5000 on 31 December 2019.
The following information was also available.
1 Trade payables at the year end were $67 000.
2 It is the policy of the company to keep its reserves in the most flexible form.
3 Of the original bank loan, $20 000 is due to be repaid during 2020, with the remainder due in the
following years.
reference only.
(a) Calculate the profit for the year ended 31 December 2019. [3]
(b) Prepare the correct equity and liabilities section of the statement of financial position at
31 December 2019. [16]
The financial statements of PL plc also contain a value for goodwill.
(c) Explain the event which has taken place and caused the company to record the value for
goodwill. [2]
(d) State two other reasons why goodwill might arise. [2]
(e) Explain what is meant by the term ‘audit’. [2]

ON/20/33
GH plc prepared draft financial statements for the year ended 30 June 2020. These included the
following.
GH plc
Draft income statement for the year ended 30 June 2020
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3
$
Revenue 1 980 000
Cost of sales 1 324 000
Gross profit 656 000
Distribution costs 186 500
Administrative expenses 391 000
Profit from operations 78 500
Finance costs 49 000
Draft profit for the year 29 500
The following information was also available.
1 The draft cost of sales value comprised opening inventory of $85 000, purchases of $1 317 000 and
closing inventory of $78 000.
2 Included in sales were goods which had been invoiced to a customer on a sale or return basis at the
end of June 2020. These goods had an original cost of $8000 and a selling price of $20 000. The
customer had not yet decided to make a purchase.
3 Included in closing inventory were goods which had originally cost $27 000 and had a normal selling
price of $63 000. These had been damaged and could now only be sold for $18 200 after repairs
costing $4100 had taken place.
4 Import duties of $30 000 on goods purchased for resale had been included in distribution costs. Of
these $3500 related to goods in inventory at the year end.
5 Export duties of $7200 had been included in administrative expenses in the draft income statement.
6 The value of trade receivables in the draft statement of financial position was $194 000, which was
shown after deducting a provision for doubtful debts of $6000. This was the provision for the start of
the financial year which needed to be updated to 5% of the closing trade receivables.
7 Other income of $6300 had been netted off against administrative expenses in the draft income
statement.
8 During the year ended 30 June 2020 a customer had started legal action against GH plc. At the year
end, it was considered that there was a 75% possibility that GH plc would lose the case and have to
pay $31 000.
9 An impairment loss of $4000 relating to a delivery vehicle was yet to be accounted for.
reference only.
(a) Calculate the correct values of:
(i) inventory at 30 June 2020 [4]
(ii) cost of sales for the year ended 30 June 2020. [2]
(b) Prepare a corrected income statement for the year ended 30 June 2020. [15]
(c) Explain how your treatment of item 8 would be different if there was a 25% possibility of the
company losing the case.
ON/17/32
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3 LS Limited has completed its first year of trading. The company has four directors, of whom two are not
shareholders. The auditors are currently carrying out the end of year audit.
REQUIRED
(a) (i) Explain the term ‘stewardship’. [2]
(ii) Explain how directors carry out their role of stewardship within a limited company. [2]
(iii) Explain the purpose of an end of year audit. [2]
The draft financial statements for the year showed the following:
$
Sales 182 000
Sales returns 8 000
Purchases 154 000
Purchases returns 12 000
All sales were at a mark-up of 150%.
During the audit the auditors discovered that included in the sales records was a sales invoice for
$6000 which had been prepared for a customer but not yet been sent. The customer had received
the inventory on a sale or return basis, but had yet to decide whether or not to keep the inventory.
REQUIRED
(b) (i) Calculate what should have been the value of the closing inventory. [5]
(ii) Calculate the gross profit for the year. [1]
During the year the warehouse manager had been absent from work for a long period of time. There had
been little control over the movement of inventory. Staff had valued the inventory actually in the
warehouse at the end of the year at $24 000.
REQUIRED
(b) Calculate the percentage change in gross profit if the inventory valuation from the warehouse had
been used.
[3]
(c) Discuss three possible reasons for the difference between the warehouse inventory valuation and
the calculated value of inventory.
[6]
(d) Discuss whether the directors should use the warehouse inventory valuation or the amount from the
accounting records as the inventory figure in the financial statements. Justify your answer.
[4]
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3
MJ/17/32
1 Lushan and Samson are the directors of Z Limited which was newly formed on 1 January 2016. They
understand that they are legally obliged to prepare financial statements in accordance with International
Accounting Standards.
REQUIRED
(a) State four reasons why the business should comply with International Accounting Standards when
financial statements are being prepared.
[4]
(b) Explain what is meant by stewardship with regard to the role of the directors. [2]
The directors prepared the following draft statement of financial position at 31 December 2016: Z
Limited
Statement of financial position at 31 December 2016
$
Non-current assets
478 000
Current assets
Inventories 124 000
473 000

Equity
Ordinary shares of $1 each 500 000
Total equity 710 000
Current liabilities
Taxation 53 000
241 000
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3
Julia is the auditor of Z Limited. During the course of conducting her audit she was provided with the
following information.
1 On 31 December 2016, Z Limited had been sued for an amount of $29 000. Legal advice
indicated that Z Limited had a 90% chance of losing the case.
2 Included in the trade receivables was a debt of $30 000 owed by P Limited which was in financial
difficulty. The directors of Z Limited had accepted office equipment from P Limited on 31 December
2016 to settle 70% of P Limited’s debt. They were of the opinion that the recovery of the remaining
debt was highly improbable.
3 A piece of machinery had been purchased on 1 January 2016 for $50 000. The machinery had
been depreciated at an annual rate of 20% by using the straight-line method. At 31
December 2016, it had an estimated fair value of $32 500 and the estimated value in use was $19
500.
REQUIRED
(c) Prepare a revised draft statement of financial position at 31 December 2016 after considering the
information provided to Julia.
[8]
(d) Explain the adjustments you have made to the statement of financial position in (c). [6]
Jack, Julia's brother, is the sole trader of a small business. He has asked his sister if his accounts should be
audited.
REQUIRED
(e) Discuss the advantages and disadvantages to Jack of having his accounts audited. [5]
MJ/17/31
1 The directors of G Limited prepared the following draft statement of financial position at 31
December 2016:
G Limited
Statement of Financial Position at 31 December 2016
$
Non-current assets 642 000
Current assets
Inventory 78 000
Other receivables 3 000
324 000

Equity
Ordinary shares of $1 each 550 000
785 000
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3
Current liabilities
Other payables 10 000
181 000
The auditor brings the following items to the attention of the directors:
1 G Limited entered into an 18-month rental agreement for a warehouse on 1 May 2016. The following
payments totalling $220 000 were made and charged as an expense in the draft income statement:
$20 000 rental deposit which is refundable at the end of the lease period; and
$200 000 total rent covering the period from 1 May 2016 to 28 February 2017.
2 After an inspection of G Limited’s office premises by the local authority in December 2016, it was
found that the fire exits did not meet the safety specifications. A penalty of $27 000 is probable and G
Limited will incur a cost of $47 000 to rebuild the fire exits. No accounting entries had been made for
this.
3 A customer who owed $12 000 at 31 December 2016 was declared bankrupt on 12
January 2017. It is probable that only 20% of the debt is recoverable. No accounting entries had been
made for this.
(a) Prepare the revised statement of financial position at 31 December 2016. [10]
(b) Explain how each of items 1 and 2 should be treated in the financial statements. [5]
(c) Explain the role of an external auditor. [4]
(d) Explain why the audit report of a limited company is addressed to the company’s shareholders
and not its directors.
[2]
G Limited adopted the Weighted Average Cost (AVCO) method to ascertain the value of inventories in
2016. The purchase price has been increasing over recent years. The directors are now considering
changing to First in, First out (FIFO) method to value inventory in 2017.
REQUIRED
(e) Advise the directors whether or not the method of valuing inventory should be changed. Justify
your answer.
[4]
Mar/17/32
Euan was the external auditor of Z Limited.
REQUIRED
(a) Explain the difference between the role of an external auditor and the role of an internal auditor
of a limited company.
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3
[4]
For the purpose of carrying out the audit, Euan was presented with the following draft financial
statements which were prepared by the directors of Z Limited.
Draft Income Statement for year ended 31 December 2016
$
Revenue 848 000
Cost of sales 494 000
Gross profit 354 000
Administrative and distribution expenses 254 200
Profit for the year 99 800
Dividend paid 20 000
Dividend proposed 30 000
Retained earnings for the year 49 800
Retained earnings 1 January 2016 94 600
Retained earnings 31 December 2016 144 400
Draft Statement of Financial Position at 31 December 2016

$
Assets
Non-current assets
Freehold property 700 000
Machinery and equipment 457 400
Goodwill 200 000
1 357 400
Current assets
Inventories 44 500
155 300
Total assets 1 512 700
Equity
Ordinary shares 1 000 000
Total equity 1 444 400
Current liabilities
Dividend payable 30 000
68 300
Total equity and liabilities 1 512 700
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3
The directors of Z Limited provided Euan with the following information.
1 At 31 December 2016 the directors proposed a final dividend of $30 000. This had been included in the draft
financial statements.
2 The company purchased a machine in 2016 for $150 000 to print graphics on the products requested by the
customers. The machine had been depreciated by 20% using the straight-line method.
3 The demand for printing services is expected to decrease in the future. The directors suggest that the new
machine should be depreciated at 30% by using the reducing balance method. This has not yet been
actioned.
4 Z Limited’s share capital and revaluation reserve (from freehold property) at 1 January 2016 amounted to $1
000 000 and $100 000 respectively.
5 A professional valuer suggested that the goodwill of the company would be $200 000. This amount had been
included in the non-current assets and the revaluation reserve.
6 Inventory valued at cost, $44 500, had been included in the draft financial statements. Further information
was available.
Purchase Estimated
Price Selling Price
$ $
Inventory
Category A 24 200 33 800
Category B 15 100 24 000
Category C 5 200 4 100
REQUIRED
(b) Recommend how information 1, 3, 5 and 6 should be treated in the financial statements. [8]
(c) Calculate the revised profit for the year ended 31 December 2016 after taking into account your
recommendations in (b). [3]
(d) Prepare the statement of changes in equity for the year ended 31 December 2016. [4]
(e) Prepare the redrafted statement of financial position at 31 December 2016. [3]
(f) Discuss what actions Euan should take if the directors do not adjust the financial statements.
[3]
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3
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International Accounting Standard

 the UK Companies Act 1985 as amended by the UK Companies Act 1989

Why is there a need to have standards?

The standards seek to:

 resolve areas of difference in the preparation and presentation of accounting information

 recommend disclosure of accounting bases

 identify any departure from the standards

 improve existing disclosure requirements.

Financial Reporting Standards (IFRS)

IAS 1 Presentation of financial statements

Financial Statement comprise

General Terms and Discussions:

Fundamental Accounting Concepts

Materiality and Aggregation

All material items should be disclosed in the financial statements.

Marginal Costing is not an acceptable method for inventory valuation.

IAS 2 Inventories are defined as:

IAS 7 – Cash Flow Statement

A cash flow statement has three sections.

 Cash flow from operating activities

IAS 8 – Accounting Policies

 is required by a new IAS

IAS 10 – Events after Reporting Period

Events after balance sheet date are categorised into

Examples could include:

Examples might include:

 A major restructuring of the business;

IAS 16 – Property, Plant and Equipment

The two methods examined are:

IAS 37 – Provisions, Contingent Liabilities and Contingent assets

Provision can be defined as a liability of uncertain timings or amounts

Criteria for recording provision

 A possible obligation that arises from past events; or

Accounting for contingent liabilities and assets

Probability of occurrence Contingent liabilities Contingent assets

Virtually certain greater than 95%

IAS 38 – Intangible Assets

Useful life is:

– Activities aimed at obtaining new knowledge

– The design, construction and testing of pre-production prototypes and models

Purchases $361 000

8 A fire on 4 April 2022 destroyed the company’s entire inventory.

(f) Calculate the correct value of trade receivables at 31 March 2022.

Statement of financial position

Total assets 669 400

Total equity and liabilities 669 400

The following additional information is available.

vehicle carrying amount fair value value in use

Costs to sell were expected to be $60 in all cases.

(a) Prepare a corrected statement of financial position at 31 December 2021. [18]

Information relating to one ordinary share was as follows:

Par value Market price

(b) Calculate for each company:

(ii) the price earnings ratio to two decimal places. [3]

Simon is considering investing in one of the three companies.

(i) item 3 [3]

(ii) item 4. [3]

Equity of AB plc at 31 December 2020 was as follows:

Draft statement of financial position at 31 December 2021