CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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THE INTERPRETATION OF FINANCIAL STATEMENTS
REVISION QUESTIONS C2
530
Requirements
(a) Insert the missing words, phrases or fi gures into the following:
(i) The gearing ratio formula is:
$
100
%
$
(ii) The gearing ratio for MBC plc is:
$
100
%
$
(iii) The return on total capital employed formula is:
$
100
%
$
(iv) The return on total capital employed for MBC plc is:
$
100
%
$
(b) If the company raises an additional $10m through the issue of shares:
(i) Calculate the gearing ratio for the next year:
$
100
%
$
(ii) Calculate the ROCE for the next year:
$
100
%
$
(c) If the company raises an additional $10m through the issue of 6 per cent debentures:
(i) Calculate the gearing ratio for the next year:
$
100
%
$
(ii) Calculate the ROCE for the next year:
$
100
%
$
(d) Insert the missing word in these sentences:
(i) ______ research is into new scientifi c or technological principles.
(ii) ______ research infers a more practical nature, but not necessarily leading to a
practical application.
(iii) ______ expenditure is where there is a clearly defi ned outcome and which is
expected to produce profi ts.
THE INTERPRETATION OF FINANCIAL STATEMENTS
531
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Question 7
D WS Ltd prepares its fi nancial statements to 30 September each year. On 30 September
20X4 its trial balance was as follows:
Debit ($) Credit ($)
Plant and machinery
Cost 125,000
Acc. depreciation at 1 October 20X3 28,000
O f fi ce equipment:
Cost 45,000
Acc. depreciation at 1 October 20X3 15,000
Inventories at 1 October 20X3 31,000
Purchases and sales 115,000 188,000
Returns inwards and outwards 8,000 6,000
Selling expenses 12,000
Heat and light 8,000
Wages and salaries 14,000
Directors ’ fees 5,000
Printing and stationery 6,000
Telephone and fax 6,000
Rent and insurance 4,000
Trade receivables and payables 35,000 33,000
Allowance for receivables at 1 October 20X3 4,000
Bank 3,000
Petty cash 1,000
Dividend paid 2,000
Ordinary shares of 50¢ each 100,000
Share premium account 8,000
General reserve 7,000
Retained earnings balance at 1 October 20X3 34,000
Suspense account 3,000
423,000 423,000
The following additional information at 30 September 20X4 is available:
(i) Closing inventories of goods for resale amount to $53,000.
(ii) Prepayments:
Telephone and fax rental $1,000
Insurance $1,000
(iii) Accruals:
Wages and salaries $1,500
Directors ’ fees 2% of net turnover
Auditor’s fees $3,500
THE INTERPRETATION OF FINANCIAL STATEMENTS
REVISION QUESTIONS C2
532
(iv) Bad debts to be written off amount to $3,000.
(v) Allowance for receivables is to be amended to 5 per cent of receivables, after adjust-
ing for bad debts written off.
(vi) The following bookkeeping errors are discovered:
●
The purchase of an item of inventory has been debited to the offi ce equipment
account, cost $1,200.
●
The payment of $1,300 to a payable has been recorded by debiting the bank
account and crediting the payable’s account.
Any remaining balance on the suspense account is to be added to prepayments or
accruals, as appropriate, on the statement of fi nancial position.
(vii) The fi gure in the trial balance for the bank balance is the balance appearing in the
cash book, prior to the reconciliation with the bank statement. Upon reconciliation,
it is discovered that
●
unpresented cheques amount to $3,000;
●
bank charges not entered in the ledgers amount to $4,000.
(viii) Depreciation of non-current assets is to be calculated as follows:
Plant and machinery 10% on cost
O f fi ce equipment
33
1
3
%
on the reducing balance at the end of the year
(ix) A fi nal dividend of 1.5¢ per share was declared before the year end, but not paid
until after the year end.
(x) $10,000 is to be transferred to general reserves.
(xi) An accrual of $1,000 for income tax is to be made.
THE INTERPRETATION OF FINANCIAL STATEMENTS
533
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Requirements
(a) Insert the missing items in the income statement for the year ended 30 September
20X4.
Income statement of DWS Ltd for the year ended 30 September 20X4
$ $
Sales
Gross profi t
Operating profi t
THE INTERPRETATION OF FINANCIAL STATEMENTS
REVISION QUESTIONS C2
534
(b) Insert the missing fi gures in the statement of changes in equity for the year ended
30 September 20X4.
General Reserve Retained Earnings Total
$ $ $
Balance at the start of the period
(c) Insert the missing items in the statement of fi nancial position at 30 September 20X4.
Statement of fi nancial position of DWS Ltd as at 30 September 20X4
Assets Cost ($) Acc. Depreciation ($) Carrying Amount ($)
Non-current assets
Current assets
Equity and liabilities
Current liabilities
THE INTERPRETATION OF FINANCIAL STATEMENTS
535
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(d) Calculate the current ratio and the quick ratio.
Current ratio
Ratio :
Figures : :
Quick ratio
Ratio :
Figures : :
Question 8
You are considering the purchase of a small business, JK, and have managed to obtain
a copy of its fi nancial statements for the last complete accounting year to 30 September
20X3. These appear as follows:
Income statement for the year to 30 September 20X3
$ $
Sale 385,200
Less : cost of goods sold
Opening inventories 93,250
Purchases 174,340
Less closing inventories (84,630)
(182,960)
Gross profi t 202,240
Less : expenses
Selling and delivery costs 83,500
Administration costs 51,420
Depreciation 36,760
(171,680)
Net profi t 30,560
THE INTERPRETATION OF FINANCIAL STATEMENTS
REVISION QUESTIONS C2
536
Statement of fi nancial position as at 30 September 20X3
Assets $ $
Non-current assets
Assets at cost 235,070
Less accumulated depreciation (88,030)
147,040
Current assets
Inventories 84,630
Receivables and prepayments 36,825
Bank and cash 9,120
130,575
277,615
Capital and liabilities
Capital at 1 October 20X2 197,075
Net profi t for the year 30,560
Proprietor’s drawings (12,405)
215,230
Current liabilities
Payables and accruals 62,385
277,615
Requirements
Calculate the following accounting ratios from the fi nancial statements presented above:
(i) Net profi t percentage
$
100
%
$
(ii) Return on capital employed
$
100
%
$
(iii) Current ratio
$
100
%
$
(iv) Quick (acid test) ratio
$
100
%
$
THE INTERPRETATION OF FINANCIAL STATEMENTS
537
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Question 9
The draft fi nancial statements for B Ltd are set out below.
Income statement of B Ltd for the year ended 30 September 20X7
$’000
Turnover 600
Cost of sales (410)
Gross profi t 190
P r o fi t on sale of non-current asset 10
200
Operating expenses (70)
Depreciation (30)
Operating profi t 100
Interest (15)
P r o fi t for the period 85
Note : Dividends of $50,000 were declared before the year end and paid after the year end.
Statement of fi nancial position of B Ltd as at 30 September 20X6 and 20X7
20X7 20X7 20X6 20X6
$’000 $’000 $’000 $’000
Assets
Non-current assets (see note) 450 520
Current assets
Inventories 65 50
Receivables 80 30
Bank and cash 30 15
175 95
625 615
Equity and liabilities
Share capital 400 400
Retained earnings 95 60
495 460
Long-term liability
Loan 20 100
Current liabilities
Payables 60 20
Dividends 50 35
110 55
625 615
Note : B Ltd purchased non-current assets for $40,000 during the year ended 30 September
20X7.
THE INTERPRETATION OF FINANCIAL STATEMENTS
REVISION QUESTIONS C2
538
Requirements
Insert the missing items into the cash-fl ow statement and workings below.
Cash-fl ow statement of B Ltd for the year ended 30 September 20X7
$’000 $’000
Cash fl ow from operating activities
Cash generated from operations – see workings
Interest
Cash fl ows from investing activities
Cash fl ows from fi nancing activities
Net increase in bank and cash
Workings
$
Operating activities
Operating profi t
Adjustment for non-cash fl ow items
Adjustment for working capital
Sale of non-current assets
539
Solution 1
1.1 Mark-up is gross profi t as a percentage of cost of sales, so a mark-up of 40 per cent
will result in a selling price of 140 per cent of cost of sales. Thus, if the selling price is
$350, this represents 140 per cent of the cost of sales, therefore 100 per cent would
be 350 / 140 100 $250 cost price.
This can be confi rmed by checking that 40 per cent of $250 gives a mark-up of
$100, and hence a selling price of $350.
A common mistake is candidates simply calculate 40 per cent of $350 to arrive at
$140 as the mark-up (and hence $210 as the cost of sales); this is obviously incorrect
as the mark-up is not 40 per cent of sales, but 40 per cent of cost of sales.
1.2 Inventories days is found by dividing cost of goods sold by average inventories and
multiplying by 365. Average inventories is:
12 000 10 000
2
11 000
,,
£, .
+
⎛
⎝
⎜
⎜
⎜
⎞
⎠
⎟
⎟
⎟
⎟
=
Cost of goods sold is found as follows:
$
Opening inventories 12,000
Purchases 80,000
92,000
Less : closing inventories (10,000)
Cost of goods sold 82,000
Rate of inventories turnover is therefore:
$,
$,
11 000
82 000
365 49×= days
Solutions to Revision
Questions
14