ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Tutorial note
The dividends reflected in the statement of changes in equity will be Max’s only, i.e.
$25,000.
Working
Max Min
Consolidated
$ $
$
Revenue 216,300 24,400
240,700
Cost of sales (136,269) (15,372)
(151,641)
–
–––––––
–
–––––––
–
–––––––
Gross profit 80,031 9,028
89,059
Administrative expenses
– Per question
– Impairment of goodwill
(21,630)
(4,000)
(2,440)
(28,070)
–
–––––––
–
–––––––
–
–––––––
Profit before tax 54,401 6,588
60,989
Income tax expense (28,119) (3,172)
(31,291)
–
–––––––
–
–––––––
–
–––––––
Profit for the period 26,282 3,416
29,698
–
–––––––
–
–––––––
–
–––––––
33 Bruce
Consolidated income statement for the year ended 30 April Year 3
$
Revenue 5,554
Cost of sales (2,482)
–
–––––
Gross profit 3,072
Administrative expenses (945)
–
–––––
Profit before tax 2,127
Income tax expense (1,004)
–
–––––
Profit for the period 1,123
–
–––––
$
Attributable to:
Owners of the parent (balancing figure) 1,077
Non-controlling interests (W3) 46
–
–––––
1,123
–
–––––
Workings
(1) Group structure
%
Parent share 80
Non-controlling interests 20
–
–––
100
–
–––
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(2) Consolidation schedule
Bruce Gavin
(5/12)
Consolidated
$ $
$
Revenue 4,418 1,136
5,554
Cost of sales (1,974) (508)
(2,482)
–
–––––
–
–––––
–
–––––
Gross profit 2,444 628
3,072
Administrative expenses (752) (193)
(945)
–
–––––
–
–––––
–
–––––
Profit before tax 1,692 435
2,127
Income tax expense (799) (205)
(1,004)
–
–––––
–
–––––
–
–––––
Profit for the period 893 230
1,123
–
–––––
–
–––––
–
–––––
(3) Non-controlling interests
20% × Gavin’s profit after tax of $230 (W2) = $46
34 Hack and Sack
Hackacquired75%ofthesharesofSack(=6million/8million),byissuing3million
sharesina1for2exchange(=6million×½).
The net assets of Sack as at the acquisition date can be calculated from the values for
share capital and reserves in the company’s statement of financial position as at 1
July Year 3. Net assets = $(8 + 4 + 16) million = $28 million
(Working 1)
Total goodwill and the value of the NCI at the acquisition date can be calculated
as follows:
$million
Purchaseconsiderationpaidbytheparentcompany
(3millionshares×$8.50)
25.5
Fairvalueofparentcompanyshareofnetassets
(75%×$28million)
21.0
Purchasedgoodwillattributabletoparent 4.5
$million
FairvalueofNCIatacquisitiondate(2million×$3.90) 7.8
NCIshareofnetassetsatthisdate(25%×$28million) 7.0
PurchasedgoodwillattributabletoNCI 0.8
$million
Purchasedgoodwillattributabletoparent 4.5
GoodwillattributabletoNCI 0.8
Totalgoodwillinconsolidatedstatementoffinancialposition 5.3
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Alternatively,totalgoodwillcouldbecalculatedasfollows:
$million
Purchaseconsiderationpaidbytheparentcompany 25.5
FairvalueofNCIatacquisitiondate 7.8
33.3
Netassetsofthesubsidiaryattheacquisitiondate(atfairvalue) 28.0
Totalgoodwill(parentandNCI) 5.3
(Working2)
Non‐controllinginterests $million
ProportionateshareofnetassetsofSack(=25%of(37–5–2)) 7.5
GoodwillattributabletoNCI 0.8
Totalgoodwillinconsolidatedstatementoffinancialposition 8.3
(Working3)
Hack issued 3 million new shares of $1 at a valuation of $8.50 each. The share
premiumonthenewsharesistherefore$7.50pershareor$22.5millionintotal.
Theconsolidatedstatementoffinancialpositionisasfollows:
HackGroup:consolidatedstatementoffinancialposition
as
at30JuneYear4
$million $million
Tangiblenon‐currentassets(38+29)67.0
Goodwill5.3
–
––––
72.3
Currentassets(14+8–0.4acquisitioncosts)21.6
–
––––
Totalassets93.9
–
––––
Equityandliabilities
Equityattributabletoownersofth eparent
Sharecapital(10million+3millionnewsharesof$1)13.0
Sharepremium(7.0+22.5fornewshareissue)29.5
RetainedearningsofHack(24+3) 27.0
Shareofpost‐acquisitionretainedearningsofSack(75%×
2.0) 1.5
Directlyattributableacquisitioncosts (0.4) 28.1
–––––
–
––––
Equityattributabletoownersofparent70.6
Non‐controllinginterest(working2)
8.3
–
––––
Totalequity
78.9
Non‐currentliabilities:6%loannotes(5+5)10.0
Currentliabilities(3+2)5.0
–
––––
Totalequityandliabilities93.9
–
––––
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Answertoquestion(b)
If non‐controlling interests were valued at a proportionate share of net assets of
Sack,ratherthanbythefairvaluemethod,therewouldbenogoodwillattributable
toNCI.
GoodwillintheconsolidatedstatementoffinancialpositionandNCIwouldbothbe
lowerby$800,000.
35 Holdings
In statement of financial position of
Holdings
In statement of financial position
of Subsidiary
$
$
Receivable from Subsidiary 25,000 Payable to Holdings 20,000
Cash in transit (3,000) Goods in transit 2,000
–
–––
–
–
–
–– ––––––
–
––
22,000
22,000
–
–––
–
–
–
–– ––––––
–
––
The balances then cancel out on consolidation.
36 Polly
(a)
Polly Solly Adjustments Consolidated
$ $ $
$
Revenue 800 500 (50)
1,250
Cost of sales (600) (300) 50
(850)
Gross profit 200 200
400
(b)
Polly Solly Adjustments Consolidated
$000 $000 $000
$000
Revenue 800 500 (50)
1,250
Cost of sales
- Per question
- Unrealised profit
(600)
(300)
(5)
50
(855)
–
–––
–
–––
–
–––
Gross profit 200 195
395
–
–––
–
–––
–
–––
Unrealised profit in inventory
Inventory held at year end
% $000
Selling price (50 x 1/2) 125 25
Cost (100) (20)
–
––––
–
––––
Unrealised profit 25 5
–
––––
–
––––
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(c)
Polly Solly Adjustments Consolidated
$ $ $
$
Revenue 800 500 (50)
1,250
Cost of sales
- Per question
- Unrealised profit
(600)
(300)
(6.25)
50
(856.25)
–
–––––
–
–––––
–
–––––––
Gross profit 200 193.75
393.75
–
–––––
–
–––––
–
–––––––
Unrealised profit in inventory
Inventory held at year end
% $000
Selling price (50 x 1/2) 100 25
Cost (75) (18.75)
–
–––
–
–––––
Unrealised profit 25 6.25
–
–––
–
–––––
37 Parent
Consolidated income statement for the year ended 31 December Year 4
$000
Revenue 1,300.0
Cost of sales (607.5)
–
––––––
Gross profit 692.5
Administrative expenses (430.0)
–
––––––
Profit before tax 262.5
Income tax expense (90.0)
–
––––––
Profit for the period 172.5
–
––––––
$000
Attributable to:
Owners of the parent (balancing
figure)
165.25
Non-controlling interests (W3) 7.25
–
––––––
172.5
–
––––––
Workings
(1) Group structure
%
Parent share 90
Non-controlling interests 10
100
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(2) Consolidation schedule
Parent Subsidiary AdjustmentsConsolidated
$000 $000 $000 $000
Revenue 900 700 (300) 1,300
Cost of sales
- Per question
- Unrealised profit (W4)
(500)
(400)
(7.5)
300
(607.5)
–
––––
–
–––––
–
––––––
Gross profit 400 292.5
692.5
Administrative expenses (250) (180)
(430)
–
––––
–
–––––
–
––––––
Profit before tax 150 112.5
262.5
Income tax expense (50) (40)
(90)
–
––––
–
–––––
–
––––––
Profit for the period 100 72.5
172.5
–
––––
–
–––––
–
––––––
(3) Non-controlling interests
10% × 72,500 (W2) = $7,250
(4) Unrealised profit in inventory
Inventory held at year
end
% $000
Selling price 133
30.0
Cost (100) (22.5)
–
–––
–
–––
Unrealised profit 33 7.5
–
–––
–
–––
38 Porthos
Consolidated statement of financial position
$
Investment in associate (W) 391,000
Consolidated income statement
Share of profits of associate (30% × 50,000)
15,000
Working
Investment in associate
$
Investment at cost 350,000
Investor’s share of post-acquisition profits of Aramis
(30% × (400,000 – 250,000))
45,000
Minus accumulated impairment in the investment (4,000)
–
–––––––
391,000
–
–––––––
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39 Anna
Investment in associate
Reduce by group share of unrealised profit in inventory held by Anna purchased
from Paula ($6,400 (W) × 30%) = $1,920.
Consolidated inventory (Paula + Susie)
Reduce by unrealised profit in inventory purchased by Paula from Susie = $16,000
(W).
Consolidated retained earnings (Paula plus group share of post-acquisition profits
of Susie + group share of post-acquisition profits of Anna)
Reduce by
group share of unrealised profit in inventory sold by Susie to Paula ($16,000 (W)
× 60%) = $9,600, and
group share of unrealised profit in inventory sold by Paula to Anna ($6,400 (W)
× 30%) = $1,920.
Non-controlling interests
Reduce by non-controlling interests’ share of unrealised profit in inventory sold by
Susie to Paula ($16,000 (W) × 40%) = $6,400.
Working
Unrealised profit in inventory
Held by Paula Held by Anna
Inventory held at year end
% $
$
Selling price 125 80,000
32,000
Cost (100) (64,000)
(25,600)
–
–––
–
––––––
–
––––––
Unrealised profit 25 16,000
6,400
–
–––
–
––––––
–
––––––
40 Sam
Ratios
Year 7 Year 6
Gross profit % =
100 x
Sales
profit Gross
405
2,160
x 100 = 19%
362
1,806
x 100 = 20%
Net profit % =
Net profit
Sales
x 100
9
2,160
x 100 = 0.4%
53
1,806
x 100 = 2.9%
Return on capital employed =
15
246
x 100 = 6%
56
190
x 100 = 29%
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Profit before interest and tax
Share capital and reserves+ Long - term debt capital
Asset turnover =
Sales
Share capital and reserves+Long- term debt capital
x 10
0
2,160
246
= 8.8 times
1,806
190
= 9.5 times
Current ratio =
Current assets
Current liabilities
422
254
= 1.7 times
265
147
= 1.8 times
Quick ratio =
Current assets excluding inventory
Current liabilities
422 - 106
254
= 1.2 times
265 - 61
147
= 1.4 times
Average time to collect =
Trade receivables
Sales
x 365
316 x 365
2,160
= 53 days
198 x 365
1,806
= 40 days
Average time to pay =
Trade payables
Cost of purchases
x 365
198 x 365
1,755
= 41 days
142 x 365
1,444
= 36 days
Inventory turnover =
Inventory
Cost of sales
x 365
106 x 365
1,755
= 22 days
61 x 365
1,444
= 15 days
Commentary
Profitability
Although revenue has increased by 20% this has not led to increased profitability, as
shown by the gross profit and net profit percentages.
The gross profit percentage is largely unchanged suggesting that Sam has
maintained its profit margins.
However, the net profit percentage has fallen significantly (from 2.9% to 0.4%).
There may be increased costs because of the increased level of business (e.g.
recruitment of new employees) but it may also mean that overheads are getting out
of control.
Return on capital employed has fallen even more significantly (from 29% to 6%).
The asset base has increased over the last year and revenue has increased
accordingly, but the company has not been able to maintain its profitability.
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Efficiency/liquidity
Inventory turnover has also fallen (from 15 days to 22 days) showing that, whilst
there has been an increased volume of business, Sam is exercising less control over
working capital as the amount tied up in inventory has increased.
However, the main indicators of liquidity, the current and quick ratios, show that
there has been little change in the last year, suggesting that Sam is not having
problems meeting its debts as they fall due.
The average time to collect debts has worsened from 40 days to 53 days. This may
indicate a loss of credit control or that more favourable terms have been given to
customers in order to gain sales. In either case, it indicates an increased bad debt
risk, although, to some extent, it is mitigated by the small increase in average time to
pay from 36 to 41 days.
41 Chris and Caroline
Ratios
Chris Caroline
Gross profit % =
Gross profit
Sales
x 100
90,000
150,000
x 100 = 60%
490,000
700,000
x 100 = 70%
Net profit % =
Net profit
Sales
x 100
44,895
150,000
x 100 = 30%
270,830
700,000
x 100 = 39%
Return on capital employed =
Profit before interest and tax
Share capital and reserves + Long - term debt capital
x 100
61,500 + 500
207,395 +10,000
x 100 = 28.5%
371,000 +12,000
565,580 + 250,000
x 100 = 47%
Asset turnover =
Sales
Share capital and reserves + Long - term debt capital
x 100
150,000
207,395 +10,000
= 0.7 times
700,000
565,580 + 250,000
= 0.85 times
Current ratio =
Current assets
Current liabilities
50,000
22,605
= 2.2 times
153,250
117,670
= 1.3 times
Quick ratio =
Current assets excluding inventory
Current liabilities
50,000 -12,000
22,605
= 1.7 times
153,250 - 26,250
117,670
= 1.1 times
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