Answers to Practice Questions

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Business Accounting


Answers to Practice Questions



1




In
troduction to the second edition


Business
Accounting

is an accessible, non
-
technical introduction to financial and
management accounting primarily intended for non
-
specialist undergraduate and
postgraduate students. The active
-
learning approach helps students gain an
understanding of the subjectiv
ity inherent in accounting and the ability to evaluate
financial information for a range of business purposes.


This edition

of

Business Accounting

features comprehensive revisions
. There are new
chapters o
n the regulatory and conceptual frameworks,
and
on
the preparation of single
entity and consolidated financial statements under IFRS
.
The revised chapter
on
financial statement analysis

takes a case study approach and has been given a strong
user focus.

For more advanced students

of financial accounting
,
there is a
new
chapter
on

ethics, corporate governance and corporate social responsibility. The chapters on
management accounting have been updated and
there is
a new chapter
that discusses
new issues, such as

strategic management accounting,
market
-
orie
nted accounting,
target costing,
the balanced score car
d
, accounting for quality and environmental
accounting. Many of the case studies are set in an international context.


Teaching and learning resources

includ
e

activities in the text and
exam
-
style prac
tice
questions

at the end of each chapter
.
There are also

detailed
PowerPoint slides

with
integrated exercises
, a
lecture workbook

and i
nteractive progress tests

on the website.
In addition, there are chapters and
associated teaching and learning materials

on
subjects not covered in the current edition.









Business Accounting


Answers to Practice Questions



2


Contents


Part I The world of accounting and finance

................................
...........................

3

1. Introduction to business accounting

................................
................................
....

3

2. The importance of cash
................................
................................
.......................

4


Par
t II Financial accounting

................................
................................
.....................

7

3. The accounting system

................................
................................
.......................

7

4. R
egulatory framework for financial reporting

................................
.....................

10

5. Conceptual framework for financial reporting

................................
....................

13

6. Statement of comprehensive income

................................
................................

16

7. Statement of financial position

................................
................................
..........

22

8. Consolidated statement of financial position

................................
.....................

32

9. Financial statement analysis

................................
................................
.............

34

10. Ethics, governance and corporate social responsibility

................................
...

41


Part III Management accounting

................................
................................
...........

43

11. Importance of cost information

................................
................................
........

43

12. Costing for product direct costs

................................
................................
.......

46

13. Costing for indirect costs

................................
................................
.................

49

14. Activity
-
based costing

................................
................................
.....................

52

15. Marginal costing

................................
................................
..............................

55

16. Budgetary planning and control

................................
................................
......

58

1
7
. Standard costing

................................
................................
.............................

62

18. Capi
tal investment appraisal

................................
................................
...........

64

19
.

Discounting methods of investment appraisal

................................
.................

64

20
.

Issues in management accounting

................................
................................
..

71









Business Accounting


Answers to Practice Questions



3



Part I The world of accounting and finance


1
. Introduction to business
accounting


The
following narrative answers are indicative of the main points in the chapter.


1.

Describe the advantages and disadvantages of the money measurement concept and explain
why students studying business and management should learn about accounting.


The money
measurement concept states that only items that can be measured in monetary terms are

included in the financial statements. The
main

advantages

are that it makes it

easier to aggregate

and
summarise
transactions,
and compare financial

statements
. In additi
on,
the concept is appropriate as
business is about money, and
it is easily understood

and
convenient for internal and external users of
the financial statements. The main disadvantages
of the monetary measurement concept
are

that it
limits the
usefulness
of information

in the financial statements
because n
on
-
financial items are
ignored (eg loyalty of workforce, management skills, size of customer
base).
In a
ddition, the v
alue of
money is not stable due to inflation/deflation

and, if
business has internatio
nal
transactions, the
value
of money fluctuates with exchange rates.


The main reason why business and management students should learn about accounting is that
it will
enhance their future employability.
Irrespective of whether they become entrepreneurs a
nd
start
their
own
business
es

or
find job
s

in large, small or medium
-
sized entit
ies
,

they
will need a basic
understanding of accounting.

This is because
they will need to understand the financial and other
quantitative information that accounting provides
to help them to control the resources for which they
are responsible, plan how those resources can be most effectively used and decide what course of
action they should take when a number of options are open.



2.

Define the term
accounting

and explain the difference between the two main branches of
accounting.


In its broadest sense, accounting
can be defined a
s a service provided to those who need financial
information. Law (2012, p. 6)
is more specific and defines accounting as ‘
t
he proce
ss of identifying,
measuring, recording and communicating economic transactions

.

The
re are

two main branches of
accounting
:




Financial accounting

is
concerned with classifying, measuring and recording the economic
transactions of an entity in accordance w
ith established principles, legal requirements and
accounting standards. It is p
rimarily concerned with communicating a true and fair view of the
financial performance and financial position of an entity to external parties at the end of the
accounting per
iod.



M
anagement accounting is concerned with collecting and analyzing financial and other
quantitative
information.

It is p
rimarily concerned with communicating information to management
to help effective performance measurement, planning, controlling and

decision making.

Therefore,
the main differences between the two branches of accounting are that
financial

accounting is
guided by a regulatory framework and
focuses on meeting the needs of
external users (those not
involved in managing the business), and

management accounting

is unregulated and focuses on
meeting the needs of
internal users.
However, both branches of accounting
draw on the same
data sources to generate financial information.







Business Accounting


Answers to Practice Questions



4


3.

Explain the concept of limited liability and the advantages o
f a company over an unincorporated
business.


Limited liability

means that on liquidation,
the liability of the
members

of a limited liability company or
limited partnership
for
the
debts incurred by the entity is limited to the capital they have invested
(including any amount owing)
. The liability
of the members
can be limited by shares or limited by
guarantee.


Limited liability for the
debts of the business is the main advantage
that
an incorporated business
has
over an unincorporated business.
An associated
advantage is that if one of the members of an
incorporated business dies, his or her shares can be transferred to someone else and the business
continues
, whereas
an unincorporated
entity
has a fi
nite life
. The indefinite life of an incorpora
ted
entity is possible because
complementary to the concept of limited liability for members is ‘the notion
that the company is a separate “legal person” distinct from the members and the directors’ (Mallett
and Brumwell, 1994, p. 7
).



4.

Compare and contras
t the advantages and disadvantages of public and private companies.


Once of the main advantages of a

public limited company
is that it
can advertise its shares for sale to
the public and, if
it

is listed on the stock exchange, its shares can be traded in
the stock market.
However, a private limited company’s shares cannot be advertised and can only be offered for sale
privately.

One of the main advantages of a

private company is that
, unlike a public listed company, it

is
not obliged to comply with stock e
xchange regulations and most small private companies do not
have to disclose as much financial information as a public company. In addition, the formalities for
setting up a private limited company are
less complex
than for a public company.



5.

Describe
the two underlying assumptions that underpin financial accounting and reporting,
providing examples to illustrate your explanations.


The
two
underlying assumption
s are the going concern concept and the accruals concept
:




The going concern concept is based

on the principle that the entity is a going concern and will
continue in operation for the foreseeable future. Therefore, unless it is known otherwise, it is
assumed that the entity is not intending to close down or significantly reduce its activities (IA
SB,
2010). If that presumption is not valid, the financial statements will need to show the assets of the
business at their break
-
up value and any liabilities that are applicable on liquidation. The going
concern assumption is confirmed by IAS 1,
Presentat
ion of Financial Statements
(IASB, 2011),
which requires management to look at least 12 months ahead to assess this and, if there is
significant doubt over the entity's ability to continue as a going concern, those uncertainties must
be disclosed, together

with the basis used.



The accruals concept is the principle that revenue and costs are recognized as they are earned
and incurred not as cash is received or paid (the realization concept), and they are matched with
one another (the matching concept) and de
alt with in the income statement of the period to which
they relate (the period concept).






Business Accounting


Answers to Practice Questions



5


2. The importance of cash


The following narrative answers are indicative of the main points in the chapter.


1.

Define finance and explain why students studying
business or management should learn about
the management of money.


Finance is

‘t
he practice of manipulating and managing money

.

It can also be used to describe ‘the
capital involved in a project, especially the capital needed to start a new business

[or]

a
loan of money
for a particular purpose, especially by a financial house
’ (
Law (2010, p. 185)
.
The main reason why
business and management students should learn about
finance

is that
it will enhance their future
employability.

Irrespective of whether the
y become entrepreneurs and
start
their own
business
es

or
find job
s

in large, small or medium
-
sized entit
ies
,
they
will need a basic
understanding of
finance
. This
is because they will need to understand the
main sources of finance and how to use cash flow
information to check that there will be sufficient cash to meet the needs of the
entity and to
plan the
investment of any surplus cash
.


2.

Explain the theory of the finance gap.


Some entrepreneurs who have an idea for a new business or
managers who
want to
expand an
existing business
have difficulty in gaining access to the finance they need
.
A finance gap is t
he
situation where a business has profitable opportunities, but is unable to raise the funds

to exploit them

(Jarvis, 2012)
. It
was formally recognise
d
in 1931 by
the Macmillan Committee
, which
reported that
the financing needs of small business were not well served by the financial services institutions

at that
time
.

The
main argument supporting the
notion of a finance gap is that the majority of
enter
prises in
the UK (and elsewhere) are small and medium
-
sized
sole proprietors
hips
, partnerships and private
companies,
which

cannot raise equity finance by selling shares to the public.
This is because only
public
listed
companies can raise capital on a sto
ck exchange. This aspect of the finance gap is
sometimes referred to as the
equity gap.


3.

Describe the potential sources of long
-
term finance available to a sole proprietor
ship

or traditional
partnership.


Long
-
term finance
is used to provide assets

that are expected to provide economic benefits to the
business in the long
-
term.

The
re are two
potential sources of l
ong
-
term finance

for unincorporated
businesses and both can be classified as debt finance.
A long
-
term loan is a suitable form of finance

for capital investment in assets that are not acquired for trading purposes but intended to be kept in
the business in the long term, such investment in plant and machinery.

A mortgage is a long
-
term loan
for purchasing land or premises. Mortgages are usu
ally supplied by financial institutions, such as
banks and building societies, for a specified number of years (in the UK the maximum period is
usually 25
-
30 years) at a fixed or variable rate of interest. Repayment may be in instalments or at the
end of t
he term.







Business Accounting


Answers to Practice Questions



6


4
(a)

Dudes & Divas Ltd

Cash flow forecast 1 July

to
30 September 2012


July

August

September

Total


£

£

£

£

Cash inflows





Capital

25,000

0

0

25,000

Cash sales

10,000

10,000

10,000

30,000

Credit sales

0

2,000

2,000

4,000


35,000

12,000

12,000

59,000

Cash outflows





Purchases

0

0

5,000

5,000

Overheads

5,000

5,000

5,000

15,000

Salaries

1,500

1,500

1,500

4,500

Fixtures and fittings

0

0

30,000

30,000


6,500

6,500

41,500

54,500

Net cash flow

28,500

5,500

(
29,500
)

4,500

Cumulative cash b/f

0

28,500

34,000

0

Cumulative cash c/f

28,500

34,000

4,500

4,500


4(b)
The forecast cumulative cash position at the end of each month is positive. The cash flow
forecast predicts there will be a cash surplus of £4,500 at 30 September
20
12
.



5
(a)

Trigg Electronics Ltd

Cash flow forecast 1 January

to
30 June 2012










January

February

March

April

May

June

Total


£

£

£

£

£

£

£

Cash inflows








Revenue from

A

0

0

792

858

858

990

3,498

Revenue from
B

0

1,300

1,300

1,560

1,560

1,560

7,280


0

1,300

2,092

2,418

2,418

2,550

10,778

Cash outflows








Rent

and rates

1,500

0

0

1,500

0

0

3,000

Electricity

0

120

120

120

120

120

600

T
elephone

and Internet

0

0

50

0

0

50

100

Printing, postage and stationery

0

209

216

242

255

248

1,170

General e
xpenses

25

25

25

25

25

25

150

Tools and e
quipment

2,500

1,000

500

0

0

0

4,000


4,025

1,354

911

1,887

400

443

9,020

Net cash flow

(4,025)

(54)

1,181

531

2,018

2,107

1,758

Cumulative cash b/f

0

(4,025)

(4,079)

(2,898)

(2,367)

(349)

0

Cumulative cash c/f

(4,025)

(4,079)

(2,898)

(2,367)

(349)

1,758

1,758










5(b)
Philip needs to invest capital of £4,079 in January to prevent the business from having a cash
deficit during the first six months.






Business Accounting


Answers to Practice Questions



7


Part II Financial accounting


3
. The

accounting system


1.
Wellworth Fencing Ltd

Capital account



£



£




1 June

Bank

50,000


Bank account



£



£

1 June

Capital

50,000

1 June

Lorry

16,000




1 June

Lorry insurance


1,400




1 June

Rent


4,500




2 June

Equipment


5,400




2
June

Purchases


850




2 June

Advertising


420


Lorry account



£



£

1 June

Bank

16,000





Lorry insurance account



£



£

1 June

Bank

1,400





Rent account



£



£

1 June

Bank

4,500





Equipment account



£



£

1 June

Bank

5,400





Purchases account



£



£

2 June

Bank

850




4 June

Timber supplies

120





Advertising account



£



£

2 June

Bank

420





Timber Supplies
Ltd
account



£



£




4 June

Purchases

120








Business Accounting


Answers to Practice Questions



8


2.
Lavender & Lace Ltd


Sales account



£



£




2 July

Cash

138




3 July

Cash

192


Postage account



£



£

1 July

Cash

25




2 July

Cash

31





Window cleaning account



£



£

1 July

Cash

10











Stationery

account



£



£

1 July

Cash

15




1 July

Cash

36





Parking

account



£



£

1 July

Cash

2




2 July

Cash

2




3 July

Cash

2





Petrol

account



£



£

1 July

Cash

18




2 July

Cash

18





Purchases account



£



£

2 July

Cash

104




3 July

Cash


89











Business Accounting


Answers to Practice Questions



9


3.
Burton’s Books Ltd


Bank account



£



£


1 October

Balance b/f

6,400


2 October

Purchases

750

12 October

Sales

1,800


3 October

Advertising

1,120

15 October

Jones Ltd

950

16 October

Purchases

2,300

18 October

Jones Ltd

950

18 October

Davies Ltd

780

30 October

Sales

1,450

25 October

Purchases

3,400




31
October

Balance c/f


3,200



11,550



11,550

1 November

Balance b/f


3,200







4.
O’Neill Ltd


O’Neill Ltd account



£



£


2 November

Sales

850

30 November

Cash

1,900

12 November

Sales

1,650

30 November

Balance c/f

1,900

18 November

Sales

260




21 November

Sales

400




25 November

Sales


640






3,800



3,800

1 October

Balance b/f

1,900







5.
Hampton Health Food Ltd


Hampton Health Food Ltd

Trial balance as at 30 June 2012


Debit

Credit


£

£

Sales


26,200

Purchases

36,770


Returns inward

900


Returns outward


460

Discounts allowed

720


Discounts received


620

Equipment

2,000


Bank

1,500


Salaries

1,600


Rent

1,400


General expenses


390


Capital at 1 July 2011

_____

18,000


45,280

45,280







Business Accounting


Answers to Practice Questions



10


4. Regulatory
framework for financial reporting


The following narrative answers are indicative of the main points in the chapter.


1.

Describe the key elements of the regulatory framework for public and private companies in the
UK.


The key elements of the
regulatory
framework

in the UK are:




Company law as represented by the Companies Act 2006 (CA2006) and subsequent statutory
instruments



National and international accounting standards issued by independent (non
-
government) bodies



Stock exchange rules, which are issue
d by an independent regulator.



2.

Define the term
financial reporting.

In addition, explain the need for the regulation of financial
reporting and the purpose of the regulatory framework.


Financial reporting refers to the statutory disclosure of general purpose financial information by limited
liability entities via the annual report and accounts.
Financial reporting

is derived from a complex
process known as financial accounting, which is

concerned with classifying, measuring, and recording
the economic transactions of an entity in accordance with established principles, legal requirements
and accounting standards. It is primarily concerned with communicating a true and fair view of the
fi
nancial performance and financial position of an entity to external parties. These external parties
include existing and potential investors, lenders and creditors, who rely on the directors’ integrity and
judgement to provide
high quality, reliable inform
ation for external users.

In an ideal world, the
directors would provide unambiguous and value
-
free measures of wealth, but the world is not ideal
and, hence, the need for regulation.


The purpose of the
regulatory framework is to guide corporate financial

reporting.

This helps the
preparers, auditors and users of the statutory information disclosed in the annual report and accounts.
T
he principles and rules help
ensure that the financial statements are prepared in a standard way,
thus aiding comparison, im
proving the credibility of the accountancy profession and imposing a
discipline on companies. Regulation
also
allows suspected cases of fraud or misconduct to be
investigated and curbs creative accounting.



3.

Explain the acronym GAAP and outline the histori
cal reasons why one country’s GAAP could
develop differently from another.


GAAP is the acronym for
Generally Accepted Accounting Practice

(or Principles)

and it

refers to the
regulatory framework for financial reporting that applies in a particular jurisd
iction
. UK GAAP
comprises general rules which have been codified in company law and more detailed regulations
which are contained in accounting standards. In addition, public companies with a listing on the
London Stock Exchange must co
mply with stock exch
ange rules.


The historical reasons for international differences in GAAP
can be summarised as differences in
accounting principles, differences in what is perceived as the objectives of financial reporting, and
various
economic, social and cultural
factors
.
A country’s GAAP is likely to consist of

a
ccounting
practices that have evolved over time and legal requirements that are added to from time to time
.
Legal requirements arise on a contingency basis
. For example, they can arise as
a response to an
unusual event (eg a financial scandal) or a change in the economic environment
. However,
it is
unlikely that
c
ountries
will

experience the same unusual events and, if they do, the events
may not
occur at the same time
or
lead to the same changes in require
ments
.
Views on the
objective of
financial reporting

vary because i
n some countries the focus is on meeting the needs of investors for
decision making and in others it is on providing financial information for creditor protection and



Business Accounting


Answers to Practice Questions



11


taxation. This differe
nce arises because in some countries
(eg the UK)

the main source of finance is
equity finance raised on the stock market
, whereas in other countries (eg Germany)
it is debt finance
from
financial institutions.
A further complication is that
in some countri
es there are separate rules for
financial reporting and tax purposes (
eg

the
UK), requiring two sets of financial statements to be
prepared
. One of the key cultural factors
that creates differences
is
due to different attitudes. In some
countries it is tak
en for granted that a law should be obeyed, whereas in other countries there is a
subtle understanding about which laws are obeyed and the degree to which they are obeyed
.


4.

Explain what an accounting standard is and discuss the advantages and disadvantages

of IFRS.
Draw conclusions from your analysis.


An accounting standard is an authoritative statement on how a particular type of transaction or other
event should be reflected in the financial statements. In the UK, compliance with accounting
standards is normally necessary for the financial statements
to give a true and fair view.
Ball (2006)

classified
the advantages
of IFRS
s
into direct and indirect
advantages
and the disadvantages into
immediate and longer
-
term

disadvantages:


Direct advantages of IFRSs:




IFRSs provide more accurate, comprehensive an
d timely financial statement information relative
to the national standards they replace in many countries



There are reduced costs arising from being informed in a timely fashion (mainly benefits small
investors who, unlike investment analysts, do not have

access to other sources of information).



The cost of processing financial information is reduced, since no adjustments are needed for
differences in GAAP. This benefits institutions creating standardised financial databases and
should increase the efficie
ncy with which the stock market incorporates the information in prices.



Most assets can be reported using fair value accounting (eg replacement cost, market value, net
realisable value, value in use), which contains more information than historical cost ac
counting



Companies can compete for capital on equal terms since there are reduced compliance costs for
multinational companies, which only need to prepare one set of accounts.



Transparency is achieved through the use of one global accounting language, whi
ch aids inter
-
company comparison and reduces information costs and information risk to investors, but only if
IFRSs are implemented consistently


Indirect advantages of IFRSs:




The cost of
equity

capital is reduced due to higher information quality reducin
g the risk to
investors.



The cost of
debt

capital is reduced due to more efficient contracting in debt markets, particularly
due to timelier loss recognition.



Corporate governance (the system by which companies are directed and controlled) is improved
due
to greater transparency. In particular, timelier loss recognition increases the incentives of
managers to attend to existing loss
-
making investments and strategies more quickly and to
undertake fewer unprofitable investments (for example, pet projects and
trophy acquisitions).

Immediate disadvantages of IFRSs:




It is hard to agree on a global accounting language and whether it should be based on principles
or rules. It will mean that national models of best practice may be lost.



There will be initial
training costs for preparers, auditors and enforcers.



Fair value accounting leads to volatility and may reflect estimation noise or managerial
manipulation.




Business Accounting


Answers to Practice Questions



12




Despite some regulatory co
-
ordination, political and economic forces will lead to inconsistency in
implementation.

Longer
-
term disadvantages of IFRSs:




Allowing all countries to use the IFRS brand name discards information about reporting quality
differences. There may also be free rider problem where low
-
quality countries may adopt IFRSs in
name only.



Competition encourages innovation and discourages complacency and bureaucracy and
imposing global standards is risky centralization.



At present IFRSs have a strong common law orientation, but over time the IASB risks becoming a
politicized, bureaucratic UN
-
style body.


5.

Search the ASB’s website (
http://www.frc.org.uk/asb/
) to get up
-
to
-
date information on the future
of UK GAAP and find articles on the subject in the accountancy press (for example Accountancy
Age, Accountancy magazine or Accounting & Business). Then write a brief essay on the
advantages and disadvantages of

the new regime.
Refer to the
above

w
ebsite

and
other
sources.







Business Accounting


Answers to Practice Questions



13


5
.
Conceptual
framework for financial reporting


The following narrative answers are indicative of the main points in the chapter.


1.

Explain what a conceptual framework is and the advantages
of having such a framework.


A conceptual framework is ‘a statement of theoretical principles that provides guidance for financial
accounting and reporting’ (Law, 2010, p. 102). The IASB’s
revised
conceptual framework
(first
revisions published in 2010)
is called the
Conceptual Framework for Financial Reporting
.

The main
advantage of a conceptual framework is that it clarifies the conceptual underpinnings of accounting
standards and allows standard setters to develop accounting standards on a consistent b
asis. It also
assists preparers, auditors and users of financial statements to understand the approach to standard
setting
,

and the nature and function of the financial information reported.
In addition, a conceptual
framework
gives guidance to preparers r
esolving accounting issues that are not specifically
addressed by an existing IFRS or interpretation.



2.

Describe the objective of general purpose financial reporting and the information needs of the
three primary user groups identified in the IASB Framewor
k (2010).


T
he objective of general purpose financial reporting is ‘to provide information about the reporting
entity that is
useful

to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entit
y. Those decisions involve buying, selling or holding equity and
debt instruments and providing or settling loans and other forms of credit.’ [OB2].
This principle forms
the foundation of the Framework and other aspects of the Framework flow logically from

it.
T
he
primary users of general purpose financial reports

are

existing and potential investors, lenders and
other creditors [OB3].




I
nvestors need financial information to help them make investment decisions such as buying,
selling or holding equity and
debt instruments. These decisions depend on the investment risks
and returns. Returns might include dividends payable on shares, principal and interest payments
or market price increases in equity and debt instruments.



Lenders need financial information to

help them make lending decisions. These decisions depend
on the lending risks and returns. They need to assess whether loans can be repaid and whether
the interest they expect to receive will be paid when it is due. As expectations depend on their
assessm
ent of the amount, timing and uncertainty of payments, they need information that will
help them assess the prospects for future net cash inflows to an entity.



Creditors need financial information to help them make credit decisions. These decisions will
de
pend on the credit risks and returns. The latter usually take the form of interest payments. As in
the case of lenders, their expectations depend on their assessment of the amount, timing and
uncertainty of receiving the amounts owed to them and therefore
they need information that will
help them assess the prospects for future net cash inflows to an entity.



3.

Explain the fundamental and enhancing qualitative characteristics of usefulness in the latest issue
of the IASB Framework.


Chapter 3 of t
he
IASB
Framework (2010)
divides
the
qualitative characteristics
of
that are likely to
make the financial information useful to users into fundamental and enhancing

characteristics.


Fundamental qualitative characteristics:



Relevance



Relevant financial information is capable of making a difference to users’ decisions.
Financial information is capable of making a difference to decisions if it has predictive value
and/or confirmatory value. These two are interrelated. M
ateriality is

a
n entity
-
specific aspect of



Business Accounting


Answers to Practice Questions



14


relevance based on the nature or magnitude (or both) of the items to which the information relates
in the context of an indivi
dual entity’s financial report.



Faithful representation



General purpose financial reports represent
economic phenomena in
words as well as numbers. To be useful, the information must not only represent relevant
phenomena but it must also be a faithful representation of the phenomena. Ideally it should be
complete, neutral and free from error. Free from e
rror does not mean perfectly accurate. For
example, an estimate of an unobservable value cannot be perfectly accurate, but it is a faithful
representation if is clearly described as being an estimate and the nature and limitations of the
estimating process

are explained, and no errors have been made in selecting and applying an
appropriate process for developing the estimate.


En
hancing qualitative characteristics
:



Comparability



The information is more useful if it can be compared with similar information

for
the entity in other periods, or similar information for other entities.

A comparison requires at least
two items. Consistency helps achieve comparability and refers to the use of the same methods for
the same items, either from period to period within

a reporting entity or in a single period across
entities.



Verifiability


The financial information is more useful if it is verifiable. Verifiability helps to assure
users that the information is a faithful representation. It means that different
knowledgeable and
independent observers could reach consensus, although not necessarily complete agreement,
that a particular depiction is a faithful representation.



Timeliness


The financial information is more useful if it is timely. Timeliness means th
at
information is available to users in time to be capable of influencing their decisions.



Understandability



The financial information is more useful if is readily understandable.
Classifying, characterising and presenting information clearly and concise
ly makes it
understandable. While some phenomena are inherently complex and cannot be made easy to
understand, to exclude such information would make financial reports incomplete and potentially
misleading. Financial reports are prepared for users who have

a reasonable knowledge of
business and economic activities and who review and analyse the information with diligence.



4.

Define the three elements of financial position and the two elements of financial performance in
the IASB Framework (2010).


Element of

financial position (IASB, 2010, para 4.4):




An asset is

a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.



A liability is a present obligation of the entity resulting
from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.



Equity is the residual interest in the assets of the entity after deducting all its liabilities.


Elements of financial
performance

(IASB
,

2010, para 4.25
)
:




Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contri
butions from equity participants.



Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other
than those relating to distri
butions to equity participants.






Business Accounting


Answers to Practice Questions



15


5.

Explain the general recognition criteria relating to the elements of financial statements and outline
the four measurement methods mentioned in the latest issue of the IASB Framework. In addition,
explain the financial cap
ital maintenance and physical capital maintenance concepts
.
..


The general recognition criteria are that the item
can be incorporated
in the statement of financial
position or statement of comprehensive income
if it

meets the definition of an element
and
it

also
satisfies the following

conditions
:




It is probable that any future economic benefit associated with the item will flow to or from the
entity; and



The item has a cost or value that can be measured with reliability
(IASB, 2010, para
4.37
-
38
)
.






Business Accounting


Answers to Practice Questions



16


6
.
S
tatement of comprehensive income


The following narrative answers are indicative of the main points in the chapter.


1.

Describe the general purpose of the statement of comprehensive income. In addition, explain the
terms
income

and
expenses

as defined by the Conceptual Framework for Financial Reporting
(IASB, 2010).


The purpose of the statement of comprehensive income is to provide information to users on the
financial performance of business over the accounting period.
Financial performanc
e is concerned
with the profitability of the entity. Users need information on the entity’s financial performance to
assess potential changes in its economic resources and its capacity to generate cash from its
resources. In addition, users need informatio
n to evaluate how effectively any additional resources
might be used.

There are two e
lements of financial performance

(IASB
,

2010, para 4.25
)
:




Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of
assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.



Expenses are decreases in economic benefits during the accounting period in the form of
outflows or depletions of as
sets or incurrences of liabilities that result in decreases in equity, other
than those relating to distributions to equity participants.



2.

Explain the accrual basis of accounting by defining the principles involved. Illustrate your answer
by taking the ex
ample of the cost of sales adjustment in the statement of comprehensive income.


The accrual basis of accounting shows

the effects of economic transactions and events in the period
in which those effects occur, even if the resulting cash receipts and payme
nts occur in a different
period.
It is based on t
he accruals concept

which is

the principle that revenue and costs are
recognized as they are earned and incurred not as cash is received or paid (the realization concept),
and they are matched with one anoth
er (the matching concept) and dealt with in the income statement
of the period to which they relate (the period concept).

For example, the c
ost of sales
includes
purchases

made during the period,

irrespective of whether
cash has yet changed hands. Cost of
sales
excludes the cost of closing inventory to match cost of goods sold
during the period
with sales
revenue

for the period
.



3.

M
issing figures



(a)

(b)

(c)

(d)

(e)


£

£

£

£

£

Opening inventory

100

50

1,020

232

14,960

Purchases

400

680

10,210

1,924

163,570


500

730

11,230

2,156

178,530

Closing inventory

(50)

(210)

(1,550)

(150)

(18,815)

Cost of sales

450

520

9,680

2,006

159,715














(f)

(g)

(h)

(i)

(j)


£

£

£

£

£

Revenue

10,000

600

17,000

18,150

27,750

Cost of sales

(6,000)

(450)

(13,500)

(680)

(24,590)

Gross profit

4,000

150

3,500

17,470

3,160

Expenses

(3,500)

(100)

(3,250)

(15,370)

(2,420)

Profit for the period

500

50

250

2,100

740






Business Accounting


Answers to Practice Questions



17


4.

Uplights Ltd

Statement of comprehensive income

for the year ended 31 December 2012


£

Revenue

66,500

Cost of sales

(W1)

(12,000)

Gross profit

54,500

Bank interest received

100

Rent and rates

(24,000)

Salaries

(21,500)

Insurance

(2,000)

Lighting and heating

(500)

Telephone and Internet

(400)

Advertising

(100)

Operating profit

6,100

Income tax expense

(2,000)

Profit for the
period

4,100


Working 1

£

Purchases

20,000

Closing inventory

(8,000)

Cost of sales

12,000







Business Accounting


Answers to Practice Questions



18


5(a)

Miphone Ltd

Draft statement of comprehensive income

for the year ended 30 June 2012


£

Revenue

75,200

Cost of sales (W1)

(11,270)

Gross profit

63,930

Other income

1,200

Salaries

(24,000)

Rent and rates

(18,000)

Insurance

(7,200)

Advertising (W2)

(600)

Lighting
and

heating (W2)

(1,160)

Telephone
and

Internet (W2)

(740)

General expenses

(410)

Operating profit

13,020

Income tax expense

(1,200)

Profit for the
period

11,820



Working 1

£




Purchases

12,160




Closing inventory

(890)




Cost of sales

11,270










Working 2

Trial balance

Accrued

Prepaid

Total


£

£

£

£

Advertising

860


(260)

600

Lighting
and

heating

620

540


1,160

Telephone
and

Internet

450

290


740

General expenses

250

160



410







Business Accounting


Answers to Practice Questions



19


5(b)

Miphone Ltd

Statement of comprehensive income

for the year ended 30 June 2012


£

Revenue

75,200

Cost of sales (W1)

(11,270)

Gross profit

63,930

Rental income

1,200

Salaries

(24,000)

Rent and rates

(18,000)

Insurance

(7,200)

Advertising (W2)

(600)

Lighting & heating (W
2
)

(1,160)

Telephone & Internet (W2)

(740)

General expenses

(410)

Allowances:


Depreciation on plant and equipment (W3)

(5,000)

Doubtful receivables (W4)

(120)

Operating profit

7,900

Income tax expense

(1,200)

Profit for the
period

6,700



Working 1

£




Purchases

12,160




Closing inventory

(890)




Cost of sales

11,270










Working 2

Trial balance

Accrued

Prepaid

Total


£

£

£

£

Advertising

860


(260)

600

Lighting and heating

620

540


1,160

Telephone and Internet

450

290


740

General expenses

250

160



410


Working 3

£




Plant and equipment at cost

25,000




Allowance for
depreciation

(
÷ 5 years
)

(5,000)














Working 4

£




Trade receivables in trial balance

1,200




Allowance for doubtful receivables

(
10%
)

(120)










Business Accounting


Answers to Practice Questions



20


5(c)

Miphone Ltd

Statement of comprehensive income

for the year ended 30
June 2012


£

Revenue

75,200

Cost of sales (W1)

(11,270)

Gross profit

63,930

Rental income

1,200

Dist
ribution

costs

(
W
5
)

(28,855)

Administrative expenses

(
W
5
)

(28,375)

Operating profit

7,900

Income tax expense

(1,200)

Profit for the
period

6,700



Working 1

£




Purchases

12,160




Closing inventory

(890)




Cost of sales

11,270





Working 2

Trial balance

Accrued

Prepaid

Total


£

£

£

£

Advertising

860


(260)

600

Lighting and heating

620

540


1,160

Telephone and Internet

450

290


740

General expenses

250

160



410


Working 3

£




Plant and equipment at cost

25,000




Allowance for depreciation (÷ 5 years)

(5,000)









Working 4

£




Trade receivables in trial balance

1,200




Allowance for doubtful receivables (10%)

(120)





Working

5


Amount


Distribution

costs

Administrative

ex
penses

Finance

costs


£

£

£

£

Salaries

24,000

12,000

12,000


Rent and rates

18,000

9,000

9,000


Insurance

7,200

3,600

3,600


Advertising
(W2
)

600

600



Lighting
and

heating (W2)

1,160

580

580


Telephone
and

Internet (W2)

740

370

370


General expenses

410

205

205


Allowances:





Depreciation: Plant and equip
ment

(W3)

5,000

2,500

2,500


Doubtful receivables (W4)

120


120



57,230

28,855

28,375

0







Business Accounting


Answers to Practice Questions



21


6.

Beauty Box Ltd

Statement of
comprehensive income

for the year ended 30 June 2012


£

Revenue

104,900

Cost of sales (W1)

(37,700)

Gross profit

67,200

Interest received

100

Salaries

(30,000)

Rent and rates

(15,000)

Insurance

(3,000)

Lighting & heating

(1,500)

Telephone &
Internet

(2,000)

Advertising

(500)

Allowances:


Depreciation on equipment (W2)

(4,000)

Doubtful receivables (W3)

400

Operating profit

11,700

Income tax expense

(4,500)

Profit for the
period

7,200



Working 1

£




Opening inventory

10,000




Purchases

39,700




Closing inventory

(12,000)




Cost of sales

37,700





Working 2

£

Equipment at cost

20,000

Allowance for depreciation (÷ 5 years)

(4,000)


Working 3

£

Trade receivables in trial balance

6,000

Year 2 doubtful debts

(600)

Adjusted trade receivables

5,400

Year 1 doubtful debts

(1,000)

Decrease in doubtful debts

400






Business Accounting


Answers to Practice Questions



22


7
. S
tatement of financial position


The following narrative answers are indicative of the main points in the chapter.


1.

Describe the general purpose of the statement of financial position. In addition, explain the terms
asset, liability

and
equity

as defined by the Conceptual Framework for Financial Reporting (IASB,
2010).


The purpose of the
statement of financial position

is to summarize the assets, equity and liabilities on
the last day of the accounting period for which the statement of comprehensive income was prepared.
There are three el
ement
s

of financial position (IASB, 2010, para 4.4):




An asset is

a resource contr
olled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.



A liability is a present obligation of the entity resulting from past events, the settlement of which is
expected to result in an out
flow from the entity of resources embodying economic benefits.



Equity is the residual interest in the assets of the entity after deducting all its liabilities.


2.

Explain the going concern basis of accounting by defining the principles involved. Illustrate
your
answer by taking the example of the valuation of tangible assets in the statement of financial
position.


The going concern concept is based on the principle that the entity is a going concern and will
continue in operation for the foreseeable future.

Therefore, unless it is known otherwise, it is assumed
that the entity is not intending to close down or significantly reduce its activities (IASB, 2010). If that
presumption is not valid, the financial statements will need to show the assets of the busin
ess at their
break
-
up value and any liabilities that are applicable on liquidation. IAS 1,
Presentation of Financial
Statements
(IASB, 2011)
requires management to look at
least 12 months ahead to assess this
and, if
there is significant doubt over the
entity's ability to continue as a going concern, those uncertainties
must be disclosed, together with the basis used.

For example, if an entity were not deemed to be a
going concern, the tangible assets w
ould

be valued at their net realisable value (the di
sposal value
less any direct selling costs), which is likely to be substantially

lower than the carrying amount
.








Business Accounting


Answers to Practice Questions



23


3.

Insert the missing figures in the following examples, remembering that some items will be added
and others will be subtracted.



(a)

(b)

(c
)

(d)

(e)


£

£

£

£

£

ASSETS






Non
-
current assets

12,400

22,800

32,000

42,200

54,200

Current assets

3,400

3,700

4,200

10,600

11,800

Total assets

15,800

26,500

36,200

52,800

66,000













EQUITY AND LIABILITIES






Equity






Capital

5,000

6,000

10,000

15,000

10,000

Retained earnings

4,800

13,300

22,700

25,800

37,700


9,800

19,300

32,700

40,800

47,700

Liabilities






Non
-
current liabilities

5,000

6,000

2,000

10,000

15,000

Current liabilities

1,000

1,200

1,500

2,000

3,300


6,000

7,200

3,500

12,000

18,300

Total equity and liabilities

15,800

26,500

36,200

52,800

66,000


Note


In the chapter we showed
the amounts for equity and liabilities in the chapter in brackets to remind
you
of
the
accounting equation, which states that assets

are always equal to the claims against them.
Therefore, assets minus equity and liabilities = 0. It is not necessary to do this in assessments.








Business Accounting


Answers to Practice Questions



24


4.

Uplights Ltd

Statement of comprehensive income

for the year ended 31 December 2012


£

Revenue

66,500

Cost of sales (W1)

(12,000)

Gross profit

54,500

Bank interest received

100

Rent and rates

(24,000)

Salaries

(21,500)

Insurance

(2,000)

Lighting and heating

(500)

Telephone and Internet

(400)

Advertising

(100)

Operating profit

6,100

Income tax
expense

(2,000)

Profit for the
period

4,100


Uplights Ltd

Draft statement of financial position

at 31 December 2012


£

ASSETS


Non
-
current assets


Property, plant
and

equipment at cost

20,000

Current assets


Inventory

8,000

Trade and other
receivables

2,000

Cash

14,500


24,500

Total assets

44,500



EQUITY AND LIABILITIES


Equity


Share capital

30,000

Retained earnings

4,10
0


34,100

Current liabilities


Trade and other payables

8,400

Current tax payable

2,000


10,400

Total
equity and liabilities

44,500



Working 1

£

Purchases

20,000

Closing inventory

(8,000)

Cost of sales

12,000







Business Accounting


Answers to Practice Questions



25


5
(a)

Miphone Ltd

Draft statement of comprehensive income

for the year ended 30 June 2012


£

Revenue

75,200

Cost of sales (W1)

(11,270)

Gross profit

63,930

Other income

1,200

Salaries

(24,000)

Rent and rates

(18,000)

Insurance

(7,200)

Advertising (W2)

(600)

Lighting and heating (W2)

(1,160)

Telephone and Internet (W2)

(740)

General expenses

(410)

Operating profit

13,020

Income
tax expense

(1,200)

Profit for the period

11,820


Miphone Ltd

Draft statement of financial position

at 30 June 2012


£

ASSETS


Non
-
current assets


P
roperty, p
lant and equipment (at cost)

25,000

Current assets


Inventory

890

Trade and other
receivables (W3)

1,460

Cash and cash equivalents

3,260


5,610

Total assets

30,610





EQUITY AND LIABILITIES


Equity


Share capital

15,000

Retained earnings

11,820


26,820

Current liabilities


Trade and other payables

(W4)

2,590

Current tax
payable

1,200


3,790

Total equity and liabilities

30,610



Working 1

£




Purchases

12,160




Closing inventory

(890)




Cost of sales

11,270



















Business Accounting


Answers to Practice Questions



26


Working 2

Trial balance

Accrued

Prepaid

Tota
l


£

£

£

£

Advertising

860


(260)

600

Lighting
and

heating

620

540


1,160

Telephone
and

Internet

450

290


740

General expenses

250

160



410

Total

accruals/prepayments


990

(260)



Working 3

£

Opening trade receivables

1,200

Prepayments

(W2)

260

Trade and other receivables

1,460





Working 4

£

Opening trade payables

1,600

Accruals

(W2)

990

Trade and other payables

2,590


5
(b)

Miphone Ltd

Statement of comprehensive income

for the year ended 30 June 2012


£

Revenue

75,200

Cost of sales (W1)

(11,270)

Gross profit

63,930

Rental income

1,200

Salaries

(24,000)

Rent and rates

(18,000)

Insurance

(7,200)

Advertising (W2)

(600)

Lighting & heating (W2)

(1,160)

Telephone & Internet (W2)

(740)

General expenses

(410)

Allowances:


Depreciation on plant and equipment (W3)

(5,000)

Doubtful receivables (W4)

(120)

Operating profit

7,900

Income tax expense

(1,200)

Profit for the
period

6,700








Business Accounting


Answers to Practice Questions



27


Miphone Ltd

Statement of financial position

at 30 June 2012


£

ASSETS


Non
-
current assets


P
roperty, p
lant and equipment
(W3)

20,000



Current assets


Inventory

890

Trade and other receivables (W4)

1,340

Cash and cash equivalents

3,260


5,490

Total assets

25,490



EQUITY AND LIABILITIES


Equity


Share capital

15,000

Retained earnings

6,700


21,700

Current
liabilities


Trade and other payables (W5)

2,590

Current tax payable

1,200


3,790

Total equity and liabilities

25,490


Working 1

£




Purchases

12,160




Closing inventory

(890)




Cost of sales

11,270









Working 2

Trial balance

Accrued

Prepaid

Total


£

£

£

£

Advertising

860


(260)

600

Lighting and heating

620

540


1,160

Telephone and Internet

450

290


740

General expenses

250

160



410

Total accruals/prepayments


990

(260)



Working 3

£




P
roperty, p
lant and equipment at cost

25,000




Year 1 depreciation

(5,000)




Closing carrying amount

20,000









Working 4

£




Trade receivables in trial balance

1,200




Allowance for doubtful receivables

(120)




Adjusted trade receivables

1,080




Prepayments

260




Trade and

other receivables

1,340






Working 5

£

Opening trade payables

1,600

Accruals

990

Trade and other payables

2,590

5(c)




Business Accounting


Answers to Practice Questions



28


Miphone Ltd

Statement of comprehensive income

for the year ended 30 June 2012


£

Revenue

75,200

Cost of sales (W1)

(11,270)

Gross profit

63,930

Rental income

1,200

Distribution costs (W6)

(28,855)

Administrative expenses (W6)

(28,375)

Operating profit

7,900

Income tax expense

(1,200)

Profit for the
period

6,700


Miphone Ltd

Statement of financial position

at 30 June
2012


£

ASSETS


Non
-
current assets


Property, plant and equipment (W3)

20,000



Current assets


Inventory

890

Trade and other receivables (W4)

1,340

Cash

3,260


5,490

Total assets

25,490





EQUITY AND LIABILITIES


Equity


Share capital

15,000

Retained earnings

6,700


21,700

Current liabilities


Trade and other payables (W5)

2,590

Current tax payable

1,200


3,790

Total equity and liabilities

25,490


Working 1

£




Purchases

12,160




Closing inventory

(890)




Cost of sales

11,270





Working 2

Trial balance

Accrued

Prepaid

Total


£

£

£

£

Advertising

860


(260)

600

Lighting and heating

620

540


1,160

Telephone and Internet

450

290


740

General expenses

250

160


410

Total accruals/prepayments


990

(260)












Business Accounting


Answers to Practice Questions



29


Working 3

£




P
roperty, p
lant and equipment at cost

25,000




Year 1 depreciation

(5,000)




Closing carrying amount

20,000














Working 4

£




Trade receivables in trial balance

1,200




Allowance for doubtful receivables

(120)




Adjusted trade receivables

1,080




Prepayments

260




Trade and other receivables

1,340














Working 5

£




Opening trade payables

1,600




Accruals

990




Trade and other payables

2,590














Working 6


Amount


Distribution
costs

Administrative
expenses

Finance
costs


£

£

£

£

Salaries

24,000

12,000

12,000


Rent and rates

18,000

9,000

9,000


Insurance

7,200

3,600

3,600


Advertising (W2)

600

600



Lighting and heating (W2)

1,160

580

580


Telephone and Internet (W2)

740

370

370


General expenses

410

205

205


Allowances:





Depreciation: P
PE

(W3)

5,000

2,500

2,500


Doubtful receivables (W4)

120


120



57,230

28,855

28,375

0










Business Accounting


Answers to Practice Questions



30


6.

Beauty Box Ltd

Statement of comprehensive income

for the year ended 30 June 2012


£

Revenue

104,900

Cost of sales (W1)

(37,700)

Gross profit

67,200

Interest received

100

Salaries

(30,000)

Rent and rates

(15,000)

Insurance

(3,000)

Lighting & heating

(1,500)

Telephone & Internet

(2,000)

Advertising

(500)

Allowances:


Depreciation on equipment (W2)

(4,000)

Doubtful receivables (W3)

400

Operating profit

11,700

Income tax expense

(4,500)

Profit for the
period

7,200



Beauty Box Ltd

Statement of financial position

at 30 June 2012


£

ASSETS


Non
-
current assets


Property, plant and e
quipment (W2)

12,000

Current assets


Inventory

12,000

Trade and other receivables (W3)

5,400

Cash

15,300


32,700

Total assets

44,700





EQUITY AND LIABILITIES


Equity


Share capital

20,000

Retained earnings

12,200


32,200

Current liabilities


Trade and other payables

8,000

Current tax payable

4,500


12,500

Total equity and liabilities

44,700








Business Accounting


Answers to Practice Questions



31


Working 1

£




Opening inventory

10,000




Purchases

39,700




Closing inventory

(12,000)




Cost of sales

37,700






Working 2

Year

Opening

carrying amount

Provision for
depreciation

Closing

carrying
amount



£

£

£

Equipment

1

20,000

(4,000)

16,000

Equipment

2

16,000

(4,000)

12,000



Working 3

£




Trade receivables in trial balance

6,000




Year 2 doubtful debts

(600)




Adjusted trade receivables

5,400




Year 1 doubtful debts

(1,000)




Decrease in doubtful debts

400











Business Accounting


Answers to Practice Questions



32


8
.

Consolidated
statement of
financial
position


The following narrative answers are indicative of the main points in the chapter.


1.

Under IFRS 10
,

control

of an investee is achieved when the investor is exposed

to
or has rights to
variable returns from its involvement with the investee and has the ability to affect those returns
through its power over the investee. As a result, control

is only achieved if the investor possesses
all th
ree of th
e following elements of control:




Power over the investee by having rights that give the ability to direct its relevant activities



Exposure, or rights, to variable returns from its involvement wi
th the investee



Ability to use its power over the investee to affect the amount of these returns.

In contrast, an investment that offers
joint control

provides a contractually agreed sharing of
control where strategic decisions about the relevant activitie
s, such as capital expenditure and
approving a business plan, require the unanimous consent of the parties sharing control.



2.

IFRS 3 states that goodwill can only recognised in the group accounts as a result of a business
combination. Goodwill is an asset
that represents the future economic benefits arising from assets
acquired in a business combination that cannot be individually separately identified and
recognised, such as the company’s reputation and loyalty of its workforce and customer base.
Goodwill
at the date of acquisition is the excess of the fair value of the consideration transferred
plus the value of any NCI less the fair value of the identifiable net assets acquired
.



3.

IFRS 3 requires that a subsidiary’s identifiable assets and liabilities sho
uld be recognised at fair
value rather than current book value (carrying value) at the date of acquisition. Fair value is the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participant
s at the measurement date. IFRS 3 requires measurement of a
subsidiary’s assets and liabilities at fair value as it provides a faithful representation of their
economic value at the date of acquisition.



4.

Agro Ltd



£000


Fair value of consideration
transferred

500

(b)

NCI at 1 July 2012 (£300k x 20%)

60


Fair value of subsidiary’s net assets at 1 July 2012

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Business Accounting


Answers to Practice Questions



33


5.

Major Ltd


(a)

£

Fair value of consideration transferred

60,000

Non
-
controlling interest (
£66,250

x 20%
)

13,250

Fair value of identifiable assets at 1 August 2011

(66,250)

Goodwill (balancing figure)

7,000


(b)

Consolidated statement of
financial position at 31 July 2012

Major

Ltd £

Minor
Ltd £

W1
£

W2
£

W3
£

W4
£

Group
£

ASSETS








Non
-
current assets








Property, plant and equipment

150,000

82,000





232,000

Investment in Minor Ltd

60,000


(60,000)




-

Goodwill





7,000





(3,500)

3,500


210,000

82,000

(53,000)



(3,500)

235,500

Current assets

195,000

92,250

-




-

287,250

Total assets

405,000

174,250

(53,000)

-

-

(3,500)

522,750









EQUITY AND LIABILITIES








Equity








Ordinary share capital

250,000

50,000

(40,000)

(10,000)



250,000

Retained earnings pre
-
acquisition


16,250

(13,000)

(3,250)



-

Retained earnings post acquisition

32,000

20,000



(4,000)

(3,500)

44,500

Revaluation reserve


10,000



(2,000)


8
,000

Non
-
controlling interest (NCI)







13,250

6
,000



19
,250


282,000

96,250

(53,000)

-

-

(3,500)

321,750

Current liabilities

123,000

78,000





201,000

Total equity and liabilities

405,000

174,250

(53,000)

-

-

(3,500)

522,750


Notes


W1 recognizes goodwill by deducting the parent’s 80% share of Minor’s
identifiable net assets

(
£
6
0,000
)