ACCA F7 (INT) Financial Reporting - Study text - 2010 - Emile Woolf Publishing
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Chris Caroline
Average time to collect =
Trade receivables
Sales
x 365
37,500
150,000
x 365 = 91 days
105,000
700,000
x 365 = 55 days
Average time to pay =
Trade payables
Cost of purchases
x 365
22,605
60,000
x 365 = 137 days
117,670
210,000
x 365 = 204 days
Inventory turnover =
Inventory
Cost of sales
x 365
12,000
60,000
x 365 = 73 days
26,250
210,000
x 365 = 46 days
Gearing ratio =
Long - term debt
Share capital and reserves
x 100
10,000
207,395
x 100 = 4.8%
250,000
565,580
x 100 = 44%
Interest cover =
Profit before interest and tax
Interest charges in the year
61,500 + 500
500
= 124 times
371,000 +12,000
12,000
= 32 times
Answers to practice questions
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Paper F7: Financial reporting (International)
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Commentary
Profitability
The return on capital employed achieved by Chris (28.5%) is substantially lower
than that achieved by Caroline (47%). This variation in performance is also seen at
the gross profit (60% compared to 70%) and net profit levels (30% compared to
39%).
The variation in gross profit percentage could be caused by differences in sales mix,
inventory valuation methods or mark-up.
Since these entities operate in the same sector it is unlikely that their selling prices
differ significantly. However, Caroline, as a much larger entity, may be able to
negotiate better prices from its suppliers.
Caroline is also more efficient at using its assets. It is generating 85c per $1 of assets
whereby Chris is only generating 70c per $1.
Efficiency/liquidity
The liquidity of both entities appears satisfactory, although Caroline has less funds
tied up in its current assets. Caroline is also more efficient at collecting its debts (55
days compared to Chris’s 91 days), and takes a longer credit period from its
suppliers.
Solvency
Caroline is much more highly geared than Chris (44% compared to 4.8%). Caroline
has the ability to raise debt more easily because of its greater profitability and its
property, on which debt can be secured. Both companies can easily cover their
interest payments suggesting that neither entity’s debt is at risk.
Conclusion
Caroline is the stronger entity.
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Paper F7 (INT)
Financial Reporting
i
Index
20% or more rule 433
A
Accounting concepts 34
Accounting equation approach 104
Accounting estimates 98
Accounting for substance 54
Accounting policies 25, 96
Accounting standards 64
Accrual basis 19
Acid test ratio 458
Acquired intangible assets 371
Acquisition costs 363
Adjusting events after the reporting period 237
Adjustments for working capital 326
Aggregation 34
Amortisation 150
Amortised cost 190, 193
Amounts recoverable on contracts 175
Asset 27, 56, 81
Associate 432
Available-for-sale financial assets 198
Average time for holding inventory 454
Average time to collect 453
Average time to pay suppliers 454
B
Bank overdrafts 314
Bargain purchase 154
Bargain purchases 369
Basic EPS 290
Bonus issue of shares 189, 281, 293
C
Capital items 115
Capital maintenance 48
Capitalisation of borrowing costs 117
Cash and cash equivalents 312
Cash flow from financing activities 316
Cash flow information 349
Cash flows from financing activities 344
Cash flows from investing activities 316, 338
Cash flows from operating activities 315
Cash generated from operations 315
Cash in transit 410
Cash operating cycle 455
Cash-generating units 161
Changes in accounting estimates 99
Changes in accounting policies 26, 96
Changes in financial position 19
Common reporting date 358
Company law 64
Comparability 23
Comparative information 77
Completeness 23
Components of equity 93
Compound financial instrument 279
Comprehensive income 85
Conceptual framework 14
Confirmatory role 19
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Confirmatory value 21
Consignment inventory 58
Consistency 23
Consistency of presentation 34
Consolidated financial statements 355
Consolidated income statement 395
Consolidated statement of comprehensive
income 394
Constant purchasing power accounting
(CPP) 47
Construction contracts: IAS11 168
Constructive obligation 224
Contingent asset 235
Contingent consideration 372
Contingent liability 234
Contract costs 170
Contract revenue 169
Control 27, 354
Controlled non-subsidiaries 54
Convertible bond 183, 194, 279, 300
Convertible loan stock 183
Convertible preference shares 300
Correction of prior period errors 101
Corresponding figures 23
Cost model 115, 149
Cost model for investment property 137
Cost of acquisition 364
Cost of inventory 167
Cost/sales ratios 450
Costs basis 169
Creative accounting 16, 467
Credit risk 185
Current assets 79
Current cost 38
Current liabilities 80
Current purchasing power accounting 47
Current ratio 457
Current tax and other comprehensive
income 249
Current tax: IAS12 244
Current value accounting 45
D
Days sales outstanding 453
Debt 182
Debt ratios 459
Deferred consideration 402
Deferred tax account 253
Deferred tax assets 257
Deferred tax liabilities and assets 253
Deferred tax relating to revaluations 257
Deferred tax: IAS12 251
Depreciable amount 123
Depreciation 123
Depreciation methods 124
Deprival value 45
Derecognition 57
Derecognition of non-current assets 127
Derivatives 181
Development costs 148, 256
Diluted EPS 299
options and warrants 303
Direct method 316, 332
Direct or indirect method 336
Directly attributable costs 115
Directly-related acquisition costs 363, 364
Discontinued operations 87, 106
Dismantling and restoring a site 231
Disposal group 107
Disposal of assets held for sale 127
Disposal of non-current assets 338
Dividend cover 463
Dividend paid by a subsidiary 426
Dividend payments to equity shareholders 347
Dividend yield 462
Dividends 83, 239
Dividends paid 322
Dividends paid by a subsidiary 428
Dividends received by the parent 427
E
Earnings per share (EPS) 286, 462
Earnings per share and trends 309
Economic substance 54
Economic value 45
Effective annual rate of interest 190
Environmental and similar provisions 229
EPS and IAS33 286
EPS: convertible preference shares and
convertible bonds 300
Equity 28, 81, 182
Equity accounting 435
Equity capital 83
Index
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Equity method 434
Equity shares 187
Errors 100
Estimates 98
Events after the reporting period: IAS10 237
Expected future economic benefits 27
Expenses 29
Exposure Draft 71
Extraordinary items 87
F
Factoring of accounts receivable 61
Fair presentation 30
Fair presentation and compliance with
IFRSs 77
Fair value 50
Fair value adjustments 382, 401
Fair value formula 389
Fair value method 381
Fair value method of accounting for
NCI 374, 389
Fair value model for investment property 137
Faithful representation 22
FASB 70
Finance costs 280
Finance lease 202, 205, 268
Financial assets 180
Financial assets at fair value through
profit or loss 197
Financial capital maintenance 48
Financial derivatives 181
Financial instruments 180
recognition and measurement 196
Financial liabilities 180
Financial performance 18, 104
Financial position 18
Financial statements: elements 27
Financing activities 344
Fixed rate debt 193
Format of published accounts 76
Framework for the Preparation and
Presentation of Financial Statements 15
Future operating losses 229
G
Gains 29
Gains on revaluation 118
Gearing ratio 459
Generally Accepted Accounting Principles 14
Going concern assumption 240
Going concern basis 19
Goods in transit 410
Goodwill 152, 364
impairment 366
Goodwill attributable to NCI 389, 391
Government grants: IAS20 132
Grants related to assets 132, 133
Grants related to income 132
Gross profit ratio 451
Group accounts 356
H
Held for sale 106
Held-to-maturity investments 197
High-geared 459
Historical cost 38
Historical cost accounting 44
Holding company 355
I
IAS1 Presentation of Financial Statements 76
IAS8 Accounting policies, changes in
accounting estimates and errors 25, 96
IAS10 Events after the reporting period 237
IAS11 Construction contracts 168
IAS16 Property, plant and equipment 114
IAS17 Leases 202, 214
IAS18 Revenue 40
IAS23 Borrowing costs 117
IAS28 Investments in associates 432
IAS32 Financial instruments: Presentation 182
IAS33 and diluted EPS 299
IAS33 Earnings per share 286
IAS36 Impairment of assets 156
IAS38 Intangible assets 144
IAS40 Investment property 276
IASB Framework 15, 25, 36, 48, 54
IASC Foundation 66
IASs 69
IFRS 3 (revised) 381, 389
IFRS5 Non-current assets held for sale and
discontinued operations 106
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IFRS7 Financial instruments: Disclosure 184
IFRSs 69
IFRSs and financial performance 104
Impairment of assets: IAS36 156
Impairment of goodwill 394, 399
Impairment of goodwill after acquisition 392
Impairment of intangible assets 150
Impairment review 150
Income 28
Income statement 85
Indirect method 317, 319
Intangible assets 144
Interest and dividends received 322
Interest cover ratio 460
Interest paid and tax paid 323
Interest payments 322, 324
Interest, royalties and dividends 43
Interest, taxation and dividends 322
Internally-generated goodwill 152
Internally-generated intangibles 146
International Accounting Standards
Board (IASB) 66, 67
International Financial Reporting
Interpretations Committee (IFRIC) 67
International GAAP 30
Interpretations of IFRSs 71
Intra-group balances 407
items in transit 410
Intra-group dividends 426
Intra-group interest 424
Intra-group loans 424
Intra-group sales 406
Intra-group transactions 404
Inventories on sale or return 58
Inventories: IAS2 166
Inventory turnover 454
Investing activities 338
Investment property: IAS40 136
Investor ratios 462
IOSCO 68
Irredeemable non-cumulative
preference shares 183
Issued shares 187
L
Lease 202
Lease payment table 207
Lease payments made in advance 211
Lease payments made in arrears 210
Leases of land and buildings 203
Leasing 55
Legal form 54
Legal obligation 223
Leverage 459
Liabilities 28, 81
Liability 56
Liquidity ratios 457
Liquidity risk 185
Listing Rules 65
Loan notes 268
Loans and receivables 197
Losses 29
Losses on revaluation 119
Low-geared 459
M
Market risk 186
Material items 88, 105
Material non-adjusting events 239
Materiality 21, 34
Measurement of revenue 40
Minority interest 373
N
NCI and goodwill 374
Negative goodwill 369
IFRS3 154
Net cash from operating activities 315
Net profit ratio 451
Net realisable value 45
Net realisable value (NRV) 166
Neutrality 22
Nil provision method 259
Non-adjusting events after the
reporting period 238
Non-controlling interest in the
consolidated income statement 397
Non-controlling interests 373
Non-controlling interests and
intra-group loans 424
Non-current assets 114
Non-current assets held for sale 107
Index
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Non-financial information 469
Non-financial ratios 472
Not-for-profit entities 72
O
Objectives of financial statements 18
Off balance sheet finance 467
Offsetting 34
Onerous contracts 227
Open market value 51
Operating lease 202, 214, 269
Options 303
Ordinary share 288
Other comprehensive income 86
P
Parent entity 354
Partial provision method 259
Payments of taxation 323
Percentage annual growth in sales 452
Percentage of completion method 42
Permanent differences 251
Physical capital maintenance 49
Post-acquisition profits 361
Potential ordinary share 288
Potential ordinary shares that are not
dilutive 304
Pre- and post-acquisition profits 396
Pre-acquisition profits 361
Predictive role 19
Predictive value 21
Preference dividend 183, 184
Preference shares in a subsidiary 425
Preference shares: debt or equity? 182
Present obligation 28
Present value 38
Price/earnings ratio 286
Price-earnings ratio (P/E ratio) 462
Principles and rules 65
Principles-based system 16
Prior period errors 100
Profit/sales ratio 450
Proposed dividends 239
Prospective application 99
Provision 220
Provision for environmental costs 230
Prudence 23
Public sector entities 72
Purchased goodwill 152, 364
Q
Qualifying asset 117
Qualitative characteristics 21
Quick ratio 458
R
Realisable value 38
Receivables days 453
Reclassification adjustments 87
Recognition 57
Recognition criteria for intangible assets 146
Recognition in the financial statements 36
Recognition of assets 37
Recognition of expenses 37
Recognition of income 37
Recognition of liabilities 37
Recoverable amount 160
Redeemable preference shares 183, 190
Regulatory framework 64
Related party transaction 468
Relevance 21
Reliability 22
Reliability of measurement 36
Rendering of services: revenue recognition 42
Repayments on finance leases 348
Replacement cost 45
Reporting period 78
Research and development expenditure 147
Research costs 147
Reserves 83
Restructuring 228
Retrospective adjustments 93
Retrospective application 97
Retrospective correction 102
Return on capital employed 448
Return on shareholder capital 449
Revaluation model 118, 149
Revaluation of leasehold property 270
Revenue 29, 40, 278
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Revenue items 115
Revenue recognition and substance 42
Reversal of an impairment loss 162
Rights issues of shares 296
S
Sale and leaseback 61
Sale and repurchase agreements 59
Sale of goods: revenue recognition 41
Sale with an option to repurchase 60
Sales basis 169
Sales tax 242
Sales/capital employed ratio 451
Settlement value 38
Share options 303
Share warrants 303
SOCIE 93
Specialised entities 72
Stage of completion of a contract 169
Standards Advisory Council (SAC) 68
Standard-setting process 71
Statement of changes in equity 93, 105, 273, 283
Statement of comprehensive income 85, 91, 272
Statement of financial position 82
Statements of cash flows 312
Step-by-step approach to accounting for
NCI 375
Stewardship 18
Subsequent expenditure 116
Subsidiary 354
Substance over form 22, 54, 205
T
Tax base 254
Tax withheld at source 245
Taxable profit 244
Taxable temporary differences 251
Temporary differences 251, 254
Timeliness 24
Total comprehensive income 86
Transaction costs of issuing new equity
shares 187
Transactions with owners in their capacity as
owners 93
Transfers of non-current assets 421
Transit 410
Transitional provisions 96
True and fair view 30
U
Under-provision or over-provision of tax 248
Understandability 21
Uniform accounting policies 358
Unrealised profit in inventory 414
Users of financial statements 17
V
Value added tax 242
Value in use 160
W
Warranties 226
Warrants 303
Window dressing 467
Working capital 326
Working capital adjustments 321
Working capital cycle 455
Working capital efficiency ratios 453
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