BSc Accounting and Finance FINAL YEAR EXAMINATION

Financial Accounting and Analysis

Assessment Period: August 2020 (A3)

Assessment Submission Guidelines

• This Take Away Paper (TAP) consists of Section A and B.
• Candidates must attempt ALL questions.
• You should answer directly under each question in this word document. Show all your workings. Use subtitles and bullet points where necessary, to improve the clarity of your answers. You may use web resources, notes and/or texts. This TAP (24 hours) will have a notional work time of up to 8 hours.
• You should submit your answer file electronically through the “E-submissions” link on the module’s Canvas site WITHIN 24 hours after the release of this TAP. Please check the module’s Canvas site for the exact date and time for submitting your answers.

 
SECTION A

(40 Marks in total)

Answer all questions in this section concisely. As a guide around 200 words (including numbers) is expected for each question . Use bullet points to improve clarity where necessary.

1. According to the IFRS Conceptual Framework,

1) What are the fundamental and enhancing qualitative characteristics of useful financial information? [4 marks]

2) Use one example, such as an inappropriate accounting record for a specific transaction of a company, to illustrate where a financial report does not meet one of the fundamental qualitative characteristics as required by the IFRS Conceptual Framework. (Providing an example is to demonstrate your understanding of this topic. The company and its transaction do not need to be real. [6 marks]

2. Drawing on IAS38,

1) Distinguish between research expenditure and development expenditure. [4 marks]

2) During the year to 31 July 2020, a pharmaceuticals company spent a total of £830,000 on research and development. Of this amount, £370,000 was spent on unsuccessful research to find a cure for the common cold. The remaining £460,000 was spent on the development of a new range of cosmetic products. The directors are confident of the success of these products. How should this expenditure be accounted for in the company’s financial statements?

Write up your answer briefly and explain why by referring to IAS38. [6 marks]

3. According to IAS2,

1) How are inventories measured? [4 marks]

2) In preparing financial statements for the year ended 31st March 2019, the inventory count was carried out on 6th April 2019. The value of inventory counted was £30 million. Between 31st March and 6th April 2019, goods with a cost of £3 million were received into inventory and sales of £6 million were made at a mark-up on cost of 20%. At what amount should the inventory be stated in the statement of financial position as at 31st March 2019?

Write up your answer briefly and showing all workings. [6 marks]

4. According to IAS10,

1) What are (1) adjusting events after the reporting period and (2) non-adjusting events after the reporting period? [4 marks]

2) A company prepares financial statements to 31st March each year. The following events occurred after 31st March 2019, but before the financial statements for the year to 31st March 2019 were authorised and filed with Companies House for issue.
Briefly explain whether the following are adjusting or non-adjusting events by applying IAS10.
a) Inventory held at 31st March 2019 was sold to a customer.
b) A customer who owed an amount of money to the company on 31st March 2019 was declared bankrupt.
c) It was discovered that cash shown as an asset in the statement of financial position at 31st March 2019 had been stolen on 25th March 2019.
d) It was discovered that a laptop included as an asset in the statement of financial position at 31st March 2019 had been stolen on 5th April 2019.
[6 marks]

SECTION B

(60 Marks in total)

Answer all questions in this section concisely, in around 400 words (including numbers) for each question. Use bullet points to improve clarity where necessary.

5. Read the following information for the case of X Co:

i. X Co decided to reorganise a manufacturing facility during November 2019 and commissioned a consulting engineer to carry out a feasibility study. A provision for the reorganisation was created at 31st December 2019.
ii. Staff functions will change following the reorganisation, so in December 2019, X Co contracted with a new training company to provide retraining to take place in January 2020. A provision for this expenditure was created at 31st December 2019.
iii. X Co hopes that reorganising its manufacturing facility will improve quality control. It gives a one-year warranty with all products and the rate of returns under warranty is 10%. 5% of the returned items can be repaired at a cost of £5 (free of charge to the customer). The other 95% are scrapped and a full refund of £30 is given. X Co sold 500,000 units during the year to 31st December 2019.
iv. In 5 years, X Co will have to dismantle its factory and return the site to the local authority. A provision was set up for the present value of the dismantling costs when the factory was first acquired. The opening balance on the provision at 1st January 2019 was £2 million. X has a cost of capital of 8%.

Required:
1) Under IAS 37, evaluate whether a provision can be set up for the reorganisation of the facility and the staff training for the year to 31st December 2019? Explain why by referring to the case of X Co. 7 Marks

2) Calculate the amount of the provision that should be created at 31st December 2019 for returns under warranty in the case of X Co. Show your workings.
6 Marks

3) Calculate the amount of the provision that should be carried forward at 31st December 2019 for the dismantling of the factory in the case of X Co. Show your workings and refer to IAS37 in your explanation. 7 Marks

6. On 1st January 2019, a company buys £100,000 of 6% loan stock for £93,930. Interest will be received on 31st December each year and the stock will be redeemed at par on 31st December 2023. After initial recognition, the loan stock is to be measured at amortised cost using an effective interest rate of 7.5% per annum.

Required:
1) By referring to IAS 32, instead of buying this loan stock, (1) illustrate an alternative financial instrument that this company could invest and (2) explain the pros and cons of this alternative financial instrument, comparing to a loan stock. 8 Marks

2) Calculate the amount at which the loan stock should be measured on 31st December 2019, 2020, 2021, 2022 and 2023. You can refer to the following table structure to present your answers on your answer sheet. Also show the other necessary workings in your answers. (A rounding error within £2 is allowed).
According to the IFRS Conceptual Framework: What are the fundamental and enhancing qualitative characteristics of useful financial information?

Year Balance b/f Interest at 7.5% Received Amortised Cost c/f
2019
2020
2021
2022
2023

6 Marks

3) Show that the effective rate of 7.5% exactly discounts estimated future cash receipts to the initial carrying amount of the asset. 6 Marks

7. Critically evaluate the following FOUR statements regarding IFRS for SMEs. To what extent these statements are right or wrong, and why? Refer to research findings or examples in practice that you have learnt where appropriate. You may use web resources, notes and/or texts. Cite references using the Harvard Referencing Style.

1) IFRS for SMEs Standard can be adopted by PLCs. [5 Marks]

2) ‘Concepts and pervasive principles’ in the IFRS for SMEs Standard serves a similar purpose to the Conceptual Framework and sets out the principles which underlie the financial statements of small and medium-sized entities. [5 Marks]

3) SMEs do not need to prepare a statement of comprehensive income. [5 Marks]

4) A statement of changes in equity is not required if the only changes in equity during the period arise from profit or loss, payment of dividends, changes in accounting policy and the correction of prior period errors. [5 Marks]

END OF PAPER