Financial Accounting, Reporting and Disclosure Assignment-
SECTION A: Answer this question.
QUESTION 1 - Kalama Ltd is a surfboard manufacturing company located in London. Its summary statement of financial position (balance sheet) as at 31 December 2012 showed the following:
£
Assets
Property, plant and equipment, net book value 32,450
Inventory 900
Prepaid rent 4,000
Cash and cash equivalents 42,700
Liabilities
payables (620)
Long-term loan (9,000)
Net assets 70,430
Equity
Ordinary shares of £2 each 15,000
Retained earnings 55,430
Total equity 70,430
The following information is relevant for the 12 months to 31 December 2013:
(1) The company made sales of £117,800 and purchased materials costing £32,500, of which materials costing £2,450 remained at the end of the year. Included in this £2,450 were materials costing £130 which had been damaged in a fire during the year and were now worthless.
(2) Quarterly rent was £6,000 and was paid on the first day of the months of March, June, September, and December.
(3) Monthly wages were £2,330. At 31 December one month's salary was still owing to employees.
(4) During the year the company spent £1,100 on advertising and £850 on office administration. Monthly utility bills amounted to £700.
(5) Property, plant and equipment at the beginning of the year consisted of a machine purchased for £60,000 on 1 July 2000 and a delivery van purchased on 1 July 2007 for £7,000. The company calculates depreciation on a straight-line basis starting from the date of acquisition. The company estimated that the machine was to be depreciated over twenty years to a salvage value of £10,000, and the delivery van was to be depreciated over nine years to a salvage value of £1,600. On 30 June 2013, the company sold the delivery van for £4,500.
(6) On 1 October 2013 the company bought a new van for £8,000. The company estimated that it would use the new van for five years and that the new van's salvage value would be £1,500.
(7) The company borrowed £9,000 on 1 January 2012. The annual interest rate on the loan was 5%, paid yearly on 31 December. However, the company missed the interest payment due on 31 December 2013.
(8) At 31 December 2013, the company had invoices owing from customers of £3,800, but expected that 10% of this amount would ultimately be uncollectable. The company also had trade payables of £870.
(9) On 31 December 2013 the company declared and paid a cash dividend of 10 pence per share.
(10) The company estimated its tax bill to be £86 and had made a partial payment of £72.
REQUIRED:
(a) Prepare a draft income statement of Kalama Ltd for the directors of the company for the year ended 31 December 2013 and the statement of financial position (balance sheet) at that date.
(b) Using the information above, describe the effects of changes in accounting estimates with regard to depreciation on:
(i) the income statement for the year ended 31 December 2013,
(ii) the cash flow statement for the year ended 31 December 2013
(iii) the statement of financial position (balance sheet) at that date.
To illustrate the effect, calculate the effect of an increase in the estimated useful life of the machine from twenty years to fifty years effective on 1 January 2013.
SECTION B: Answer TWO questions from this section.
QUESTION 2 - Below is the statement of financial position (balance sheet) of Wrumbee Ltd as at 31 December 2012.
Wrumbee Ltd Statement of Financial Position as at 31 December 2012
£ £
Non-current assets
Property, plant and equipment 12,100
Accumulated depreciation (4,400)
7,700
Current assets
Inventory 635
Trade receivables 400
Cash and cash equivalents 17,325
Current liabilities
Trade payables (780)
Accrued interest (400)
Tax payable (240)
Current portion of non-current liabilities (8,000)
Net current assets 8,940
Net assets 16,640
Equity
Ordinary shares of £2 each 10,000
Retained earnings 6,640
Total equity 16,640
You are given the following information for the year ended 31 December 2013:
(1) The company's earnings before taxes were £4,760.
(2) The company had taken out a 4-year loan of £8,000 on 1 July 2009. The annual interest rate on the loan was 10% and interest was payable annually in arrears on 30 June. The company repaid this loan together with the final interest payment on 30 June 2013.
(3) Wrumbee Ltd depreciates all its non-current assets to zero residual value on a straight-line basis. Included in the property, plant and equipment as at 31 December 2012 was one computer which had been purchased for £2,100 on January 1, 2011 and had accumulated depreciation of £1,400 as of 31 December 2012. On 1 April 2013 the company sold this computer equipment for £560. (Depreciation on the computer equipment was recorded during 2013). The rest of the company's non-current assets were two vehicles purchased on 1 January 2010 which are being depreciated over ten years. On 1 July 2013 the company purchased a new vehicle costing £7,000, subject to the same depreciation policy.
(4) On 31 December 2013 the company declared and paid a dividend of 12 pence per share.
(5) The company calculated its corporation tax to be £1,834 for the year. It still owed £476 of tax at 31 December 2013.
(6) On 31 December 2013 the company had inventory costing £540, trade receivables of £530, and trade payables of £740.
REQUIRED:
(a) Prepare the cash flow statement for Wrumbee Ltd for the year ended 31 December 2013. Assume that Wrumbee Ltd classifies interest paid under cash flows from operating activities. You are not required to construct a closing balance sheet.
(b) Discuss how managers can affect the reported Earnings Per Share (EPS) and Cash Flows from Operating Activities (CFO). Your discussion may include accounting estimates, accounting methods, real activities, or classification decisions. No calculations are required.
QUESTION 3 - On 1 October 2013 BearsAreUs Ltd purchased an initial inventory of 15 beannies which cost £40 each. During the remainder of 2013 the company recorded the following movements:
10 October Sold 10 beannies
20 October Purchased 20 beannies at an average price of £30 each
1 November Sold 20 beannies
15 November Purchased 15 beannies at an average price of £20 each
1 December Sold 5 beannies
REQUIRED:
(a) Calculate the cost of sales of BearsAreUs Ltd for the three months ended 31 December 2013, using (i) the perpetual FIFO and (ii) the perpetual LIFO methods of inventory, and the value of the closing inventory at that date. Ignoring tax consequences, what is the effect of using different methods on the statement of cash flows?
(b) Show whether, and by how much, cost of sales and inventory under LIFO and FIFO vary under the periodic method compared to your answers in (a), and explain why this is the case. Ignoring tax consequences, what is the effect of using different methods on the statement of cash flows?
(c) Assuming that sales remain as above, management has the opportunity to purchase an additional 10 beannies on 15 December for £10 each. What would be the effect on reported income under (i) perpetual FIFO, (ii) perpetual LIFO, (iii) periodic FIFO, and (iv) periodic LIFO.
(d) Discuss whether the use of each of (i)-(iv) in part (c) is consistent with the goal of effective inventory management.
QUESTION 4 - On 1 September 2013, Azan Ltd acquired 100% of the ordinary share capital of Trui Ltd for a cash consideration of £26,800. Trui Ltd's retained earnings at the date of acquisition were £10,700. The statements of financial position (balance sheets) of the two companies as at 31 December 2013 are as follows:
Azan Ltd Trui Ltd
£ £
Non-current assets
Property, plant and equipment 98,000 22,000
Investment in Trui Ltd 26,800
124,800 22,000
Current assets 22,900 9,600
Current and non-current liabilities (43,600) (8,300)
Net assets 104,100 23,300
Equity
Ordinary shares of £1 each 36,000 9,600
Revaluation reserve 0 3,000
Retained earnings 68,100 10,700
Total equity 104,100 23,300
Additional information:
(1) Trui Ltd's property, plant and equipment were valued at £19,000 at the date of acquisition, and included equipment which was revalued upwards from £11,000 to £14,000 on 1 November 2013. This revaluation is reflected in Trui's year end accounts. Ignore the effect of depreciation.
(2) The inventory of Trui Ltd at 31 December 2013 includes goods which cost £4,000 that were purchased from Azan Ltd on 1 December 2013. The cost of the goods to Azan Ltd was £1,200. £2,100 from this transaction was still unpaid at the end of the year, and is reflected in the working capital of both companies.
(3) At the end of the year, Azan Ltd decided that goodwill had been impaired by £270.
REQUIRED:
(a) Calculate the goodwill arising on acquisition and prepare the consolidated statement of financial position (balance sheet) of Azan Group as at 31 December 2013.
(b) In this case Azan Ltd's ownership stake in Trui Ltd was 100%. Discuss how your answer to (a) would change if Azan's ownership stake in Trui Ltd were 97%. No further calculations are required.
(c) In part (a), it is assumed that Azan Ltd paid £26,800 in cash for its 100% ownership stake in Trui Ltd. Assume that Azan Ltd paid £8,000 instead. Discuss whether upwards revaluation of net assets at the time of acquisition is an appropriate accounting treatment.
QUESTION 5 - River Park Ltd's summary balance sheet as at 31 December 2013 was as follows:
£ '000
Cash and cash equivalents 14,000
Other assets 50,000
Net Assets 64,000
Ordinary share capital of £2 each 20,000
General reserves 44,000
Total Equity 64,000
On 1 January 2014, the directors of the company decided to make a one-for-ten capitalisation issue (bonus issue, issuing one new share for every 10 existing shares).
On 2 January 2014 River Park Ltd issued a three-year bond with a face value of £4,000,000 to purchase a property. The bond paid nominal interest of 4.5% annually at the end of each year and the company received proceeds of £4,169,717. At the time of issue, the effective market rate of interest was 3.0%.
REQUIRED:
(a) Show the balance sheet of River Park Ltd immediately following the one-for-ten capitalisation issue (January 1, 2014).
(b) Calculate the annual income statement interest expense and balance sheet value of the bond at 31 December 2014 and for each of the following two years.
(c) Companies may raise the same amount of funds by either issuing equity (i.e., make a rights issue) or issuing debt. Discuss the effect of (i) issuing debt and (ii) issuing equity on three accounting ratios: Return On Equity (ROE), Return On Assets (ROA) and Leverage Ratio. No calculations are required.
SECTION C: Answer ONE question from this section.
QUESTION 6 - Explain why it is important for analysts and other financial statement users to separate Unearned Revenues and Deferred Taxes from other liabilities when analysing financial statements.
QUESTION 7 - Explain how simple accounting-based indicators can be used to develop investment strategies. Discuss how companies would face an incentive to modify their reporting practices in anticipation of the investment community using accounting-based indicators? Support your arguments in light of relevant readings from the course package, which might include Piotroski.
Attachment:- Assignment.rar