Exam question paper
NVQ/SVQ Level 4 in Accounting
Drafting Financial Statements
(Accounting Practice, Industry
and Commerce) (DFS)
2003 Standards
Diploma in Accounting
(Diploma Pathway)
Drafting Financial Statements
(Accounting Practice, Industry
and Commerce) (DFS)
2003 Standards
Wednesday 5 December 2007 (morning)
Time allowed - 3 hours plus 15 minutes’ reading time
Important:
This exam paper is in two sections. You should try to complete every task in both sections.
We recommend that you use the 15 minutes’ reading time to study the exam paper fully
and carefully so that you understand what to do for each task. However, you may begin to
write your answers within the reading time, if you wish.
We strongly recommend that you use a pen rather than a pencil.
You may not use programmable calculators or dictionaries in the exam.
Do NOT open this paper until instructed to do so by the Supervisor.
Note:
This exam paper is in TWO sections.
You must show competence in both sections. So, try to complete EVERY task in BOTH sections. Section 1 contains 6 tasks and Section 2 contains 2 tasks.
Please use the answer booklet provided.
You should include all your workings and essential calculations in your answers. The answer booklet includes the following pro-formas:
• Journal entries
• Company income statement • Company balance sheet • Consolidated balance sheet • Cash flow statement
Section 1
This section is in three parts.
Part A
You should spend about 55 minutes on this part.
Data
You have been asked to help prepare the financial statements of Benard Ltd for the year ended 31 October 2007. The company’s trial balance as at 31 October 2007 is shown below.
Benard Ltd
Trial balance as at 31 October 2007
Debit Credit £000 £000
Share capital 12,000
Trade and other payables 3,348
Property, plant and equipment – cost 58,463
Property, plant and equipment – accumulated depreciation 27,974
Trade and other receivables 6,690
Accruals 387
7% bank loan repayable 2012 16,000
Cash at bank 1,184 Retained earnings 12,345 Interest 560 Sales 50,875 Purchases 35,245 Returns inwards 678 Returns outwards 453 Distribution costs 6,654 Administrative expenses 4,152 Inventories as at 1 November 2006 8,456
Final dividend for year ended 31 October 2006 700
Interim dividend for year ended 31 October 2007 600
Further information:
• The share capital of the company consists of ordinary shares with a nominal value of £1.
• The sales figure in the trial balance does not include the credit sales for October 2007 of £3,564,000.
• The inventories at the close of business on 31 October 2007 cost £9,786,000.
• Goods for resale costing £127,000 purchased on two months’ credit in October 2007 were returned
to the supplier on 30 October 2007. No entries have been made in the accounts in the trial balance.
• The company paid £48,000 insurance costs in June 2007, which covered the period from 1 July
2007 to 30 June 2008. This was included in administrative expenses in the trial balance.
• Interest on the bank loan for the last six months of the year has not been included in the accounts in
the trial balance.
• The corporation tax charge for the year has been calculated as £1,254,000.
• All of the operations are continuing operations.
Task 1.1
Using the pro-forma in your answer booklet, make the necessary journal entries as a result of the further information given above.
Task 1.2
(a) Using the pro-forma in your answer booklet, draft the income statement for Benard Ltd for the year ended 31 October 2007.
(b) Using the pro-forma in your answer booklet, draft the balance sheet for Benard Ltd as at 31 October 2007.
Part B
You should spend about 45 minutes on this part.
Data
The Managing Director of Dumyat plc has asked you to prepare the balance sheet for the group. Dumyat plc has one subsidiary undertaking, Devon Ltd. The balance sheets of the two companies as at 31 October 2007 are set out below.
Balance sheets as at 31 October 2007
Dumyat plc) Devon Ltd)
£000) £000)
Non-current assets
Property, plant and equipment 65,388) 31,887)
Investment in Devon Ltd 26,000)
91,388) 31,887)
Current assets
Inventories 28,273) 5,566)
Trade and other receivables 11,508) 5,154)
Receivable from Devon Ltd 4,000) 0)
Cash and cash equivalents 2,146) 68)
45,927) 10,788)
Total assets 137,315) 42,675v
Current liabilities
Trade and other payables (13,554) (1,475)
Payable to Dumyat plc 0) (4,000)
Tax liabilities (6,140) (108)
(19,694) (5,583)
Net current assets 26,233) 5,205)
Non-current liabilities Long-term loans (25,000) (4,000) Total liabilities (44,694) (9,583) Net assets 92,621) 33,092) Equity Share capital 25,000) 12,000) Share premium 12,000) 4,000) Retained earnings 55,621) 17,092) Total equity 92,621) 33,092)
You have been given the following further information:
• The share capital of Devon Ltd consists of ordinary shares of £1 each. Ownership of these shares carries voting rights in Devon Ltd. There have been no changes to the balances of share capital and share premium during the year. No dividends were paid or proposed by Devon Ltd during the year.
• Dumyat plc acquired 9,000,000 shares in Devon Ltd on 1 November 2006.
• At 1 November 2006 the balance of retained earnings of Devon Ltd was £12,052,000.
• The fair value of the non-current assets of Devon Ltd at 1 November 2006 was £28,800,000. The book
value of the non-current assets at 1 November 2006 was £25,800,000. The revaluation has not been recorded in the books of Devon Ltd (ignore any effect on the depreciation for the year).
• The directors of Dumyat plc have concluded that goodwill has not been impaired during the year.
Task 1.3
Using the pro-forma in your answer booklet, draft a consolidated balance sheet for Dumyat plc and its subsidiary undertaking as at 31 October 2007.
Task 1.4
Prepare brief notes for the directors to answer the following questions. (a) What is a "business combination"?
(b) How is the acquirer in a business combination identified?
Part C
You should spend about 25 minutes on this part.
Data
For the year ended 31 October 2007 you have been asked to prepare:
• a reconciliation between profit from operations and net cash from operating activities
• a cash flow statement for Lochnagar Ltd.
The balance sheets of Lochnagar Ltd for the past two years and the most recent income statement are set out below:
Lochnagar Ltd
Income statement for the year ended 31 October 2007
£000)
Continuing operations
Revenue 22,400)
Cost of sales (12,320)
Gross profit 10,080)
Gain on disposal of property, plant and equipment 224)
Distribution costs (4,704)
Administrative expenses (2,240)
Profit from operations 3,360)
Finance costs – interest on loans (91)
Profit before tax 3,269)
Tax (1,344)
Lochnagar Ltd
Balance sheets as at 31 October
2007)
£000) 2006£000))
Non-current assets
Property, plant and equipment 25,171) 24,100)
Current assets
Inventories 3,696) 2,464)
Trade and other receivables 3,360) 2,464)
Cash and cash equivalents 0) 129)
7,056) 5,057)
Total assets 32,227) 29,157)
Current liabilities
Trade and other payables (1,232) (1,848)
Tax liability (1,344) (944)
Bank overdraft (361) 0)
(2,937) (2,792)
Net current assets 4,119) 2,265)
Non-current liabilities Bank loans (1,300) (800) Total liabilities (4,237) (3,592) Net assets 27,990) 25,565) Equity Share capital 2,200) 2,000) Share premium 800) 500) Retained earnings 24,990) 23,065) Total equity 27,990) 25,565)
Further information:
• The total depreciation charge for the year was £3,545,000.
• Property, plant and equipment costing £976,000 with accumulated depreciation of £355,000 was
sold in the year at a profit of £224,000.
• All sales and purchases were on credit. Other expenses were paid for in cash.
Task 1.5
Provide a reconciliation of profit from operations to net cash from operating activities for Lochnagar Ltd for the year ended 31 October 2007.
Task 1.6
Using the pro-forma in your answer booklet, prepare the cash flow statement for Lochnagar Ltd for the year ended 31 October 2007.
Section 2
You should spend about 55 minutes on this section.
Data
Sally Forth is a shareholder in Tay Ltd. She wishes to assess the efficiency and effectiveness of the management of the company. She has asked you to assist her by analysing the financial statements of the company for the last two years. The financial statements of Tay Ltd are set out below:
Tay Ltd
Income statements for the year ended 31 October
2007) £000) 2006£000)) Continuing operations Revenue 2,400) 2,100) Cost of sales (1,392) (1,155) Gross profit 1,008) 945) Distribution costs (540) (472) Administrative expenses (240) (315)
Profit from operations 228) 158)
Finance costs (91) (56)
Profit before tax 137) 102)
Tax (44) (22)
Profit for the period from continuing operations attributable to
Tay Ltd
Balance sheets as at 31 October
2007)
£000) 2006£000))
Non-current assets
Property,plant and equipment 4,750) 4,100)
Current assets
Inventories 320) 208)
Trade receivables 360) 231)
Cash and cash equivalents 0) 68)
680) 507) Total assets 5,430) 4,607) Current liabilities Trade payables (195) (139) Tax liabilities (44) (22) Bank overdraft (152) 0) (391) (161)
Net current assets 289) 346)
Non-current liabilities Bank loans (1,300
)
(800) Total liabilities (1,691)
(961) Net assets 3,739) 3,646) Equity Share capital 2,500) 2,500) Retained earnings 1,239) 1,146) Total equity 3,739) 3,646)Task 2.1
Prepare a report for Sally Forth that includes the following:
(a) the formulas that are used to calculate each of the following ratios: (i) gross profit ratio
(ii) net profit ratio
(iii) inventories turnover in days (based on cost of sales)
(iv) trade receivables turnover in days (trade receivables collection period) (b) a calculation of the above ratios for the two years
(c) a comment on the relative performance of the company for the two years based on the ratios calculated and what this tells you about the company
(d) ONE suggestion as to how EACH of the ratios might be improved.
Task 2.2
(a) Set out the accounting equation and define the elements in the equation.
Note:
NVQ/SVQ qualification codes
Technician (2003 standards) - 100/2942/4 / G794 24 Unit number (DFS) – Y/101/8109
