answers march2012 f1

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Financial Operations March 20121

The Examiner's Answers – F1 - Financial Operations

Some of the answers that follow are fuller and more comprehensive than would be expected from a well-prepared candidate. They have been written in this way to aid teaching, study and revision for tutors and candidates alike.

SECTION A

Answer to Question One

1.1 B

1.2 A tax base is something that is liable to tax, e.g. income or consumption of goods

1.3 C

1.4 $000Accounting profit 860Add depreciation 42Add amortisation

91715

Less tax depreciationTaxable profit

51

Tax @ 25% 216.5866

Answer D

1.5 D

1.6 A

1.7 C



March 2012 Financial Operations2

1.8 An operating segment is defined by IFRS 8 as a component of an entity whoseoperating results are regularly reviewed by the entity’s chief operating decision makerto make decisions about resources to be allocated to the segment and assess itsperformance.

1.9 Four from the following:

• Significant risks and rewards of ownership of the goods have been transferred tothe buyer

• The seller does not retain any continuing influence or control over the goods• Revenue can be measured reliably• It is reasonably certain the buyer will pay for the goods• The costs to the seller can be measured reliably




SECTION B

Answer to Question Two

(a)

Deferred tax balance at 31 December 2011:

Carrying Value Tax base$000 $000

Cost 1 January 2010 440 440Year to 31 December 2010 (55) (220)

385 220

Revaluation 1 Jan 2011 070455 220Year to 31 December 2011 (65) (55)

390 165

At 31 December 2010: $385,000 - $220,000 = $165,000At 31 December 2011: $390,000 - $165,000 = $225,000Change (Increase)Tax at 25% = $15,000

$60,000

Deferred tax movement in year to 31 December 2011:Debit to income statement of $15,000

Deferred tax balance at 31 December 2011:Credit balance $225,000 x 25% = $56,250

(b)

(i)An item that is Zero rated means that no VAT is charged on sales but UYT can reclaim VAT

paid on its inputs.An item exempted from VAT means that the revenue earned is exempt VAT, so no VAT ischarged but UYT cannot reclaim the portion of input VAT that relates to the exempted goods.If an actual figure cannot be calculated it will be on a proportional basis.

Excl VAT VAT 15%$ $

Inputs:Cost 400,000 60,000Input VAT claim limited to 450/600 45,000

Outputs:Standard rate 450,000 67,500Exempt 150,000 0

600,000 67,500Net 22,500

(ii) Net Vat due to be paid is $22,500




(c)

Under the classical system of corporate income tax the entity’s profit for the year is taxed andthen when a dividend is paid the shareholder is taxed on the full amount received. In this casethe dividends have been taxed twice.With an imputation system of corporate income tax the entity pays corporate income tax on allthe profits before paying a dividend but then all or part of the underlying corporate income taxthat relates to the distribution is imputed to the shareholders as a tax credit. Thereforeavoiding the problem of double taxation of dividends.If the personal income tax rate of the shareholder is higher than the rate of tax credit theshareholder may have to apy additional tax on the dividend, however it will still only havebeen taxed once.With systems using the full imputation system all of the underlying corporate income tax ispassed to the shareholder as a tax credit if a partial imputation system is used only part of thetax paid by the entity will be passed to the shareholder.

YT has received a dividend from LKJ and will have received a tax credit for the proportion oftax paid by LKJ on the underlying profit. As LKJ is an entity resident in Country X it will havepaid corporate income tax at 25% on its taxable profit for the year. This will be passed on toits shareholders as a tax credit as Country X uses the full imputation system..

YT will receive a tax credit and will be able to set this tax credit against any tax due on thedividend leaving additional tax to be paid if YT’s personal tax rate is higher than 25%.

YT is therefore incorrect in thinking that his dividend has been taxed twice.

(d)

The four main entities involved in developing and implementing IFRS are:

• IFRS Foundation (formerly known as the International Accounting StandardsCommittee Foundation (IASCF).Role – governance and fund raising

• International Accounting Standards Board (IASB)Role – responsibility for all technical matters including the preparation and publicationof international financial reporting standards

• IFRS Advisory Council (formerly known as the Standards Advisory Council)Role – to provide a forum for wider participation. Provides strategic advice to theIASB and informs the IASB of public views on major standard setting projects.

• IFRS Interpretations Committee (formerly known as the International FinancialReporting Interpretations Committee IFRIC)Role – provides timely guidance on the application and interpretation of IFRSs




(e)

(i)According to the International Standard on Auditing (ISA) 200 “Objective and General Principles Governing an Audit of Financial Statements” the objective of an audit is to enableauditors to express an opinion as to whether the financial statements give a true and fair view… of the affairs of the entity at the period end and of its profit or loss … for the period thenended and have been properly prepared in accordance with the applicable reportingframework (e.g. relevant legislation and applicable accounting standards).

(ii)

Three key areas of content of the audit report as required by ISA 700 The Auditor’s Report on Financial Statements include:

• Management’s responsibility for the financial statementsReport should state that management is responsible for the preparation and fairpresentation of the financial statements.

• Auditor’s responsibilityReport should state that the responsibility of the auditor is to express an opinion onthe financial statements based on the audit.

• Description of the audit work doneReport should give an overview of the type of work done during the audit, such asobtaining audit evidence, risk assessment, procedures selected and the evaluation ofthe accounting policies used.

• Auditor’s opinionReport should give the auditor’s opinion on whether the financial statements give atrue and fair view or are presented fairly in all material respects, in accordance withthe applicable financial reporting framework.

(f)

The ethical problem that XQ faces is that a professional accountant in business shouldprepare or present information fairly, honestly and in accordance with relevant professionalstandards so that the information will be understood in its context. A professional accountantis expected to act with integrity and objectivity and not allow any undue influence from othersto override his professional judgement.XQ is facing pressure from others to change the results and therefore break the CIMA Code.XQ is being asked to misrepresent the facts of the actual situation which would be contrary tothe CIMA Code’s fundamental principles of integrity and objectivity. XQ would also bebreaking the due care requirement of the CIMA Code.

XQ should apply safeguards to eliminate the threats or reduce them to an acceptable level.As other staff are offering incentives XQ will need to decline these and refuse to alter theaccounting information.

XQ should also consult with his line manager. XQ may also wish to get advice from the CIMAhelpline.The situation is unlikely to require XQ to seek legal advice or resign.




SECTION C

Answer to Question Three

RTY - Statement of comprehensive income for the year ended 31 January 2012 $000 $000Revenue 9,320Cost of sales (6,059)Gross Profit 3,261Administrative expenses (1,225)Distribution costs (679) (1,904)Profit from operations 1,357Finance cost (137)Profit before tax 1,220Income tax expense (755)Net profit for the period 465Other Comprehensive Income

Revaluation of property (W7) 1,2401,705

RTY - Statement of Financial Position at 31 January 2012 $000 $000

Non-current assetsProperty, plant and equipment 14,877Deferred development expenditure 272

15,149Current assets

Inventory 330Trade receivables 1,428Cash and cash equivalents 142

Total assets1,900

17,049

Equity and liabilitiesEquity

Share capital 1,375Share premium 2,750Retained earnings 3,912Revaluation reserve 3,340

Total equity 11,377

Non-current liabilitiesLong term borrowings 2,740Deferred tax 1,019

Total non-current liabilities 3,759

Current liabilitiesTrade payables 1,080Tax payable 765Interest payable 68

Total current liabilitiesTotal equity and liabilities

1,91317,049




RTY Statement of changes in equity for year ended 31 January 2012Equity

Shares Share

Premium Retained Earnings

Revaluation Reserve

Total

$000 $000 $000 $000 $000 Balance at 1 February 2011 1,375 2,750 2,785 2,900 9,810

Statement of comprehensiveincome for year 465 1,240 1,705

Disposal of revalued property (W4) 800 (800) 0Dividend paid (138) (138)Balance at 31 January 2012 1,375 2,750 3,912 3,340 11,377

Workings (All figures in $000)

(W1) Depreciation Cost/revalued amount Land Buildings Plant & equipment TotalBalance b/f 6,220 10,900 5,750 22,870Revaluation adjustment 630 (2,000) . (1,370)

6,850 8,900 5,750 21,500Assets sold (1,800) . (820) (2,620)

5,050 8,900 4,930Depreciation

18,880

Balance b/f 2,610 3,900 6,510Assets sold . (800) (800)

2,610 3,100 5,710Revaluation adjustment (2,610) (2,610)Depreciation for year 445 458 903

. 445 3,558Carrying value 31 Jan 2012

4,0035,050 8,455 1,372 14,877

(W2) Deferred development expenditure

Balance b/f 455Expenditure in year 71

526Year’s amortisation (254)

272

Year’s amortisation:Capitalised in previous years 1,199Expenditure in 2011 71

1,270Amortised at 20% 254

(W3) Cost of sales

Administration Distribution

Trial balance 4,939 1,225 679Depreciation – (W1) 903Research 163Bad debt 48Development amortisation (W2) 254Gain on disposal of non-current assets (248) . .Totals 6,059 1,225 679




(W4) Disposal of non-current assetsLand Plant and equipment Land

Carrying value 1,800 (820-800)= 20 Revalued amount 1,800Selling price 2,060 8 CostProfit/(loss)

1,000260 (12) Reversal of revaluation 800

(W5) InterestYears loan interest (2740 x 5%) 137Paid 69Current liability 68

(W6) Tax

Statement of financial positionCurrent liability – tax 765Provision deferred tax 1,019

(W7) Revaluation of Land and buildings

Land (W1) 630Buildings (W1) (2,610 – 2,000) 610

1,240

Balance b/f 35Year 765

800Decrease in deferred tax (45)

Income statement 755




Answer to Question Four

Workings (All workings in $000)

Equity Shares 790(i) Fair value of net assets of Branch at acquisition

Retained earnings 380Fair value adjustment 240

1,410

Cost 1,500(ii) Goodwill - Branch

Fair value of net assets acquired:Goodwill

1,41090

Cost 550

(iii) Investment in associate - Leaf

Add group share of post acquisition profits(220 - 70) = 150 x 40% = 60Investment at 31 January 2012 610

(iv) Intra-group trading

Mark up on cost 50% = 50/150 or 33.3% margin on selling price.Selling price 180; profit = 180 x 33.3% = 602/3 remain in inventory - unrealised profit 60 x 2/3 = 40

Dr. Cr.Consolidated cost of sales 40Consolidated current assets - inventory 40Consolidated revenue 180Consolidated cost of sales 180

Current accounts:Tree current account with Branch 123Less cheque in transit 28

95Branch current account with Tree

Cancels95

Cancels

Loan interestAccrue interest receivable by Tree 30

Dr CrInterest payable 30Interest receivable 30

Consolidated interest payable = (102 + 59 – 30) = 131Consolidated interest receivable (30 – 30) = 0

(v) Excess depreciationFair value adjustment – 240Economic life 10 years, straight line basisExcess depreciation = 240/10 = 24




Balance – Tree at 1 Feb 2011 (665 – 620) 45(vi) Consolidated Retained Earnings

Add consolidated profit for yearBalance 31 Jan 2012

761806

Alternative calculation:

Balance - Tree (665 + 30) 695(vi) Consolidated Retained Earnings

Branch - group share of post acquisition profits (495 - 380) = 115Associate - Leaf, group share of post acquisition profits (iii) 60Excess depreciation (24)Cancel unrealised profit in inventory (iv) (40)

806

Tree 1,535(vii) Consolidated Property, plant and equipment

Branch 1,155Fair value adjustment 240Excess depreciation (24)

2,906

Tree Group – Consolidated Statement of Comprehensive Income for year ended 31January 2012 $000Revenue(2,200 + 777 -180) 2,797Cost of sales (1,112 + 456 – 180 + 24 + 40)Gross profit 1,345

(1,452)

Expenses (221 + 115)Profit from operations 1,009

(336)

Share of profit of associated entity 60Finance costProfit before tax 938

(131)

Tax (145 + 32)Profit for the year 761

(177)

Tree Group - Consolidated Statement of Financial Position as at 31 January 2012$000 $000

Non-Current AssetsProperty, plant and equipment (vii) 2,906Goodwill (ii) 90Investment in associate (iii) 610

3,606Current AssetsInventory (1,360 + 411 - 40) 1,731Trade receivables (1,540 + 734) 2,274Cash and cash equivalents (47 + 75 + 28) 150 Total assets

4,1557,761

Equity and LiabilitiesEquity Shares 3,900Retained Earnings (vi) 806

4,706 Current LiabilitiesTrade payables (2,690 + 365) 3,055

7,761

answers march2012 f1

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