Financial Accounting And Reporting, Revised Edition Solution Manual

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3Brief contentsChaptersPagesPart 1Introduction to accounting on a cash flow and accrual accountingbasis51.Accounting and reporting on a cash flow basis62.Accounting and reporting on an accrual accounting basis11Part 2Preparation of internal and published financial statements163.Preparation of financial statements of comprehensive income, changesin equity and financial position174.Annual report: additional financial disclosures395.Statements of cash flows54Part 3Regulatory framework – an attempt to achieve uniformity656.Financial reporting – evolution of global standards667.Concepts – evolution of an international conceptual framework688.Ethical behaviour and implications for accountants71Part 4Income and asset value measurement systems749.Income and asset value measurement: an economist’s approach7510.Accounting for price-level changes8811.Revenue recognition106Part 5Statement of financial position – equity, liability and assetmeasurement and disclosure12212.Share capital, distributable profits and reduction of capital12313.Liabilities13314.Financial instruments14115.Employee benefits16016.Taxation in company accounts17117.Property, plant and equipment (PPE)18018.Leasing19319.Intangible assets20020.Inventories21221.Construction contracts223

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4Part 6Consolidated accounts24122.Accounting for groups at the date of acquisition24223.Preparation of consolidated statements of financial position afterthe date of acquisition26124.Preparation of consolidated statements of income,changes in equity and cash flows26925.Accounting for associates and joint arrangements28626.Introduction to accounting for exchange differences305Part 7Interpretation32227.Earnings per share32328.Review of financial ratio analysis34029.Analysis of published financial statements367Part 8Accountability38831.Corporate governance38932.Integrated reporting: sustainability, environmental and social394Weblinks for Financial Accounting and Reporting404

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5PART 1Introduction to accounting on a cashflow and accrual accounting basis

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6C H A P T E R1Accounting and reporting on a cash flow basisQuestion 1 – Sasha Parker(a)Cash budget (£000)JanFebMarAprMayJuneTotalInitial capital150.0082.50232.50Customers60.0075.00135.00Total receipts150.0082.5060.0075.00367.50Machinery30.0030.00Motor vehicles24.0024.00Premises75.0075.00Drawings1.201.201.201.201.201.207.20Suppliers30.0048.0060.0060.0060.00258.00Rates1.201.20Wages2.252.252.252.252.252.2513.50General expenses0.750.750.750.750.753.75Insurance–––––2.102.10Total payments132.4535.4052.2064.2064.2066.30414.75Net cash flow17.55(35.40)(52.20)18.30(4.20)8.70Balance b/f–17.55(17.85)(70.05)(51.75)(55.95)Balance c/f17.55(17.85)(70.05)(51.75)(55.95)(47.25)(47.25)(b)Statement of cash flows (£000)Realised operating cash flows for the period ended 30 June 20X1Receipts from customers135.00Payments:Suppliers258.00Rates1.20Wages13.50General expenses3.75Insurance2.10278.55(143.55)

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual7For information onlyStatement of financial position as at 30 June 20X1£000Capital – introduced232.50– withdrawn(7.20)Net operating cash flows:Realised(143.55)Unrealised(7.80)73.95Premises (NRV)75.00Vehicles (NRV)19.20Machinery (NRV)27.00Net cash balance(47.25)73.95(c)Further information regarding Sasha ParkerNature of business linked to Parker’s business background, technical ability, special skills,know-how, existing/terminated business involvement, contacts, associates and related parties.Type of business unit to be used, and rationale for its selection.Sources of long- and short-term capital.Products’ life cycle and cash flow projections over product life cycle.Initial investment in fixed assets and their terminal value at the end of the life cycle.Parker’s attitude to risk, and how this affects the choice of discount rate and payback period.Question 2 – Mr Norman(a)Purchases budget (€000)JanFebMarAprMayJuneSales15.0020.0035.0040.0040.0045.00Gross profit3.004.007.008.008.009.00Purchases12.0016.0028.0032.0032.0036.00Payments12.0016.0028.0032.0032.00

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual8Notes:This is a start-up situation.Purchases equal projected sales less a gross margin on sales at 20%.Goods are bought in the month of sale; assume stocks remain constant.(b)Statement of cash flows (£000)JanFebMarAprMayJuneTotalInitial capital50.0050.00Cash sales7.5010.0017.5020.0020.0022.5097.50Credit sales–7.5010.0017.5020.0020.0075.0057.5017.5027.5037.5040.0042.50222.50Premises80.0080.00Rentandrates2.202.202.202.202.202.2013.20Suppliers12.0016.0028.0032.0032.00120.00Commission0.300.400.700.800.803.00Wages0.600.600.600.600.600.603.60Insurance3.50–––––3.5086.3015.1019.2031.5035.6035.60223.30Net cash flow(28.80)2.408.306.004.406.90Balance b/f–(28.80)(26.40)(18.10)(12.10)(7.70)Balance c/f(28.80)(26.40)(18.10)(12.10)(7.70)(0.80)(0.80)(c)Statements of operating cash flows and financial positionRealised operating cash flows for the period ended 30 June 20X8£000Receipts from customers172.50Payments:Suppliers120.00Rates13.20Wages3.60Commission3.00Insurance3.50143.3029.20

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual9Notes:The cash flow statement with summary attached is effectively a six-month cash budget showingthe cash received, cash paid each month and the resulting month-end balances.It is necessary to separate sales and purchase transactions into cash and on-credit, and to identifyclearly the month of receipt and payment.Commission is paid in the month after the sale is made, and all other cash flows are clearlyindicated and allocated to specific months.Note that the format of the cash flow statement brings out key figures – for managementdecision and control. For example:month-end balances – assist in the control of liquidity;cash deficiencies – identify how much must be financed;early warning – allows management to approach appropriate sources;cash surpluses – identify amounts to be invested on the best terms.Statement of financial position as at 30 June 20X8£000Capital – introduction50.00Net operating cash flows:Realised29.20:Unrealised(4.00)75.20Premises(NRV)76.00Net cash balance(0.80)75.20Notes:This statement shows net assets of £75,200.Make up: premises £76,000 less the negative cash balance £800.The negative cash balance indicates the need for overdraft arrangements.The statement is based on cash flow concept:It ignores accrual-based figures (£36,900 less £25,250).Accruals are not regarded as real assets and liabilities.Critics of the cash flow concept would maintain that its utility has, therefore, been seriouslydiminished.(d)Letter to the bank requesting an overdraft facilityThe maximum overdraft facility of £28,800:

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual10will be required at the end of January;will be eliminated by July.Overdraft will fall progressively as per the cash budget.It might be practical to request a limit of £30,000:for the full six-month period;reducing it to £15,000 thereafter to allow for contingencies. The facility is only to be called onas required.Refer to the cash budget to support the request:confirm that it is based on the most likely scenario;agree to a repayment schedule.Specify that collateral security is available in the form of premises if it should be required.If not an existing customer:give outline details of business background;explain future plans;market.

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11C H A P T E R2Accounting and reporting on an accrualaccounting basisQuestion 1 – Sasha Parker(a)Cash budget (€000)JanFebMarAprMayJuneTotalInitial capital150.0075.00225.00Customers60.0075.0075.00210.00Total receipts150.0060.0075.00150.00435.00Machinery30.0030.00Motor vehicles24.0024.00Premises75.0075.00Drawings1.501.501.501.501.501.509.00Suppliers30.0048.0060.0060.0060.00258.00RatesWages2.252.252.252.252.252.2513.50General expenses0.750.750.750.750.753.75132.7534.5052.5064.5064.5064.50413.25Net cash flow17.25(34.50)(52.50)(4.50)10.5085.50Balance b/f–17.25(17.25)(69.75)(74.25)(63.75)Balance c/f17.25(17.25)(69.75)(74.25)(63.75)(21.75)(21.75)All balances are overdrawn except for January 20X1FebMarAprMayJuneo/d17.2569.7574.2563.754.65Note:No entries will be made for the 20X0/X1 local taxes that are paid in Feb 20X2 – this situationarose because Sasha Parker had assumed that the business would only pay the taxes from thestart of the tax year, e.g. 1.4.20X1.However, there will be an entry in the profit and loss account and the statement of financialposition.

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual12(b)Sasha Parker – profit and loss account for six months ended 30 June20X1€000€000Sales[60.00 + (5 × 75.00)]435.00Purchases378.00Closing inventory(30.00)Cost of sales348.00Gross profit87.00Wages13.50General expenses4.50Local taxes (1.1.X1–30.6.X1)4.00Insurance13.20Depreciation:– Vehicles2.40– Machinery1.5039.10Net profit47.90Budgeted statement of financial position as at 30 June 20X1Capital225.00Net profit47.90Less: drawings(9.00)263.90Non-current assetsPremises75.00Vehicles24.00Less: depreciation2.4021.60Machinery30.00Less: depreciation1.5028.50Current assetsInventory30.00Trade receivables (3×75.00)225.00Insurance13.20268.20Current liabilitiesTrade payables120.00Local taxes (1.1.X1–30.6.X1)4.00Bank overdraft4.65General expenses0.75(129.40)Net current assets138.80263.90

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual13(c)Possible action to deal with exceeding agreed overdraft limitApproach the bank to re-negotiate the overdraft or arrange a loan facility for an agreed term.The amount and the period for which additional facilities are required depend on preparing aprojected cash flow statement for a longer period taking into account future plans, e.g. owner’sdrawings requirement and any additional capital expenditure.In particular, consider alternatives such as the following:Leasing vehicles and/or machineryMortgaging the propertyGetting debts in quicker mannerIntroducing more capitalObtaining or providing loan capital.Question 2 – Mr Norman(a)Purchases budget ($000)JanFebMarAprMayJunSales units1.652.203.854.404.404.95− Closing inventory0.550.961.101.101.24+ Closing inventory0.550.961.101.101.241.38Purchases units2.202.613.994.404.545.09PurchasesSales$000$000Jan(2,200 × 40)88.0082.50(1,650 × 50)Feb(2,610 × 40)104.40110.00(2,200 × 50)Mar(3,990 × 40)159.60192.50(3,850 × 50)Apr(4,400 × 40)176.00220.00(4,400 × 50)May(4,540 × 40)181.60220.00(4,400 × 50)Jun(5,090 × 40)203.60247.50(4,950 × 50)913.201,072.50

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual14(b)Cash flow forecast ($000)JanFebMarAprMayJuneTotalInitial capital150.00150.00Cash sales41.2555.0096.25110.00110.00123.75536.25Credit sales41.2555.0096.25110.00110.00412.50191.2596.25151.25206.25220.00233.751,098.75Premises80.0080.00Commission1.652.203.854.404.4016.50Suppliers88.00104.40159.60176.00181.60709.60Administration8.008.008.008.008.008.0048.00Wages17.0017.0017.0017.0017.0017.00102.00Insurance0.350.35Total payments105.35114.65131.60188.45205.40211.00956.45Net cash flow85.90(18.40)19.6517.8014.6022.75Balance b/f–85.9067.5087.15104.95119.55Balance c/f85.9067.5087.15104.95119.55142.30(c)Budgeted statement of income for six months ended 30 June 20X8$000$000Sales1,072.50Purchases913.20Closing inventory (1,380 units × £40)(55.20)Cost of sales858.00Gross profit214.50Wages102.00Administration48.00Commission (2% of 1,072.50)21.45Insurance0.18Amortisation of lease8.00179.63Net profit34.87

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Barry Elliott,Financial Accounting and Reporting, 18e,’s Manual15Budgeted statement of financial position as at 30 June 20X8$000$000Capital150.00Net profit34.87184.87Non-current assetsLeasehold premises80.00Less amortisation(8.00)72.00Current assetsInventory55.20Trade receivables123.75Pre-payments − insurance0.17Cash142.30321.42Current liabilitiesTrade payables203.60Commission4.95208.55Net current assets112.87184.87(d)Investment of surplus fundsAcid test ratioAt the end of the first six-month trading, Norman’s statement of financial position shows thatthe acid test ratio is 1.28:1 (266.22/208.55) – this is higher than the basic 1:1 ratio but it shouldbe compared with the ratio of similar businesses in the same industry in order to establish anorm. It would appear, however, that the business has surplus funds to invest.Amount to investA projected cash flow statement is required, taking into account future plans regarding theowner’s drawing requirements, future capital commitments and working capital criteria, e.g.debtor collection and creditor payment terms.Period to investThe projected cash flow will give an indication of the period of the investment, e.g. it couldrange from overnight on the money market to term investments.The important aspect is that the owner should be aware of the projected cash flows, so thatreturn on surplus funds can be maximised.

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16PART 2Preparation of internal and publishedfinancial statements

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17C H A P T E R3Preparation of financial statements ofcomprehensive income, changes in equity andfinancial positionQuestion 1 – Old NV(a)Statement of income (internal) for the year ended 31 December 20X1€000Sales12,050Less: returns35011,700Inventory at 1.1. 20X1825Purchases6,263Carriage on purchases13Less:returns( 313)6,788Inventory at 31.12.20X11,1255,663Depreciation of plant3135,976Gross profit5,724Administration:Wages738Administration expenses (286 − 12)274Directors’ remuneration375Selling:Salesmen’s salaries800Distribution:Distribution expenses290Depreciation of vehicles187Carriage125Financial:Goodwill impairment177Audit fee38Debenture interest25Rent receivable(100)2,9292,795Tax562Profit for year2,233

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