Financial Reporting 1 hr 30 (Short Exam)

Solutions: This paper must be left in the Examination Hall. Before you begin, please write your ID number here: ACCOUNTING For BUSINESS BSB530 Mock (1) 2 Hours Answer ALL questions from SECTION A and TWO questions from SECTION B The Exam has 100 marks. Candidates may use any approved calculator. Page 1 of 11 SECTION A Answer ALL questions from this section. (60 marks in total) 1 Financial Statement Preparation Mia opened a new deluxe Food Hamper business that started trading on 1st January 2020 investing £100,000 cash into the business. The following is a summary of the transactions for the first year of trading. 1. She purchased a delivery van for cash on 1st January for £15,000. It is expected that the van will be used for 4 years and then be sold for £7,000. 2. She rented premises for £18,000 for the period from 1st January 2020 to 30 June 2021 and paid in advance. This includes utilities and was paid on 1st January 2020. 3. She paid £600 for her internet services covering the period from 1st January 2020 to 31 September and owes an estimated £150 for the period from 1 October through to 31 December. 4. Wages totalling £26,000 were paid out during the year, and £2,200 was still owed for work undertaken in the month of December. 5. She bought Food Hampers (stock) for £225,000 bought on credit. 6. Sales revenue of £255,000 was generated, all on credit. The cost of the goods sold amounted to £195,000. Customers paid her £160,000. 7. She made payments to trade payables (suppliers) totalled £135,000. 8. Running expenses for the van came to £6,100 and were paid in cash. Produce a report showing cashflows, and then prepare an Income Statement for the year ended 31st December 2019 and a Statement of Financial Position as at the 31st December 2019. (Total: 30 marks) 2. Depreciation of non-current assets A firm bought a piece of equipment for £250,000. Management estimated that it would have a residual value of £10,000 when disposed of. Work out its net book value at the end of the second year: (a) Under straight line assuming a useful economic life of 4 years. (b) Under reducing balance assuming a depreciation rate of 50%. (10 marks) 3. Preparation of Statement of Cash Flows The following are extracts from Sports Tours Plc’s financial statements for 2019. Sports Tours organises tours to people for major sporting events around the world. All of its revenue comes from advance sales. Income Statement for Year Ending 31 December 2020 (£) Revenue 134,000 - Cost of goods sold (including depreciation of £21,000) (80,000) Gross profit 54,000 - Other expenses (18,000) Core operating profit 36,000 Loss on sale of property, plant and equipment (4,200) Interest income from long-term investments 3,000 Finance expense (4,000) Net interest expense (1,000 Tax expense (9,000) Profit after tax 21,800 Statement of Financial Position as of 31 December (£) 2020 2019 Cash 22,000 15,000 Inventory 17,000 20,000 Current assets 37,000 35,000 Trade payables 11,000 13,000 Tax payables 1,200 1,400 Unearned income 8,000 14,000 Overdrafts 4,000 6,000 Current liabilities 24,200 34,400 Work out Cash Flows from operating activities for 2020 using the indirect method starting with Profit After Tax. (20 marks) SECTION B Answer TWO questions from this section. (40 marks in total) 4. Explain how metrics can be applied to analyse changes in working capital identifying any issues or limitations in their use, (20 marks) 5. Three methods (FIFO, LIFO and AVCO) are available for the valuation of indistinguishable inventory. (a) Explain how inventory valuations and cost-of-sales are determined under FIFO. (b) Which method will give a higher profit when prices are rising? LIFO or FIFO? Explain. (c) Explain why LIFO is prohibited under IFRS. 20 marks) 6. Discuss the limitations of published financial statements to aid decision making. (20 marks) 1. Mia Food Hampers Cash flows for year ended 31 December 2021 (£) Cash at start 100,000     Sales 160,000 Delivery van 15,000 Rent 18,000 Internet services 600 Wages 26,000 Suppliers 135,000   Van expenses 6,100 Total 160,000   200,700 Cash from operations (40,700)     Cash at end 59,300 Income Statement or year ended 31 December 2021 (£) Revenue 255,000 Cost-of-sales 195,000 Gross profit 60,000 Van depreciation 2,000 Rent 12,000 Internet services 750 Wages 28,200 Van running expenses 6,100 Other operating expenses 49,050 Operating profit 10,950 Notes: Depreciation charge: (15,000 -7,000) /4 = 2,000 NBV of van 13,000 Rent: 18,000 for 18 months – hence 12,000 as expenses and 6,000 as prepaid expenses Internet services: expenses 600 +150 = 750 with 150 as accrued expenses Wages: 26,000 + 2,200 = 28,200 as expenses and 2,200 as employee payables Assets Cash and cash equivalents 59,300 Inventory (225,000 -195,000) 30,000 Trade receivables (255,000 -160,000) 95,000 Prepaid expenses (18,000 -12,000) 6,000 Current assets 190,300 Van 13,000 Non-current assets 13,000 Total Assets 203,300 Liabilities and Equity Trade payables (225,000 -135,000) 90,000 Accrued expenses 150 Employee payables 2,200 Current/total liabilities 92,350 Share capital 100,000 Retained earnings 10,950 Equity 110,950 Liabilities and Equity 203,300 (30 marks) (2) a) Straight line: Charge = (250,000 -10,000) / 4 = 60,000 Two years’ charges = 120,000 hence NBV = 250,000 -120,000 = 130,000 b) Reducing balance at 50% Charge in first year = (250,000 -10,000) x 0.5 = 120,000, NBV = 130,000 Charge in second year = (130,000 -10,000) x 0.5 = 60,000 Hence NBV at end of second year = 70,000 (=130,000 -60,000) (10 marks) (3) Non-cash working capital 2020 2019 Inventory 17,000 20,000 Current assets 17,000 20,000 Trade payables 11,000 13,000 Tax payables 1,200 1,400 Unearned income 8,000 14,000 Current liabilities 20,200 28,400 Non-cash working capital (3,200) (8,400) Change in non-cash working capital – increase in 5,200 (=-3,200 –(-8,400)) Profit after tax 21,800 Add back depreciation 21,000 Subtract increase in non-cash working capital (5,200) Add back net interest expense 1,000 Add back loss on sale of PP&E 4,200 Cash flows from operating activities 42,800 (20 marks)