Reference no: EM132339065

Assessment - Financial Accounting and Reporting

1 Understand the regulatory framework for financial reporting

2 Prepare financial statements from complete or incomplete records

3 Present financial information in accepted formats for publication

4 Interpret financial statements

Assignment Task

You work as an assistant in a busy accounting office and have a number of tasks to complete as follows:

Task 1

A client of the business who runs a small business and investment consultancy is preparing to construct a web-based facility as part of the information resources for clients.

Part of the web page is to be a section on Frequently Asked Questions (FAQ?s) for those people who may be thinking of starting their own businesses or investing in UK company shares.

The client has asked if someone from the office would prepare some FAQ?s and answers covering various aspects of the regulatory framework which exists within the European Union (EU). The responses to FAQ?s are to be aimed at those people with a non-financial background rather than at a „professional? business level.

You are required to draft out some brief responses to support the following FAQ?s:

1a) Who are the main "users" of sets of published financial accounts?

1b) For each main user, what are their potential area(s) of interest in the  published information?

1c) What are the main accounting and legal differences between Partnerships and Limited Companies within the United Kingdom?

1d) What is the main role of the International Financial Reporting Standards Foundation (IFRS Foundation)?

1e) How may the short-term liquidity of a business be of importance to any of the „users? identified in 1a), above?

1f) How could the financial gearing of a business be important to any of the  „users? identified in 1a), above?

1g) What is the purpose of general financial reporting as outlined by the IASB?s Conceptual Framework document?

1h) What are the main benefits to users of financial reports arising from the creation of the Conceptual Framework document?

Task 2a)

You are preparing some financial information for a new client, a sole trader called Carter.

Unfortunately complete accounting records have not been maintained and you have the following information for the accounting year to 31 December 2013 to assist with the production of the trader?s tax return for the year:

Carter Sole Trader	1 January 2013	31 December 2013
	Assets	Liabilities		Assets	Liabilities
	£	£		£	£
Land and Buildings	600,000			800,000
Motor vehicles	90,000			45,000
Equipment	150,000			100,000
Stocks (Inventories)	180,000			120,000
Trade Debtors	210,000			140,000
Cash at Bank / overdrawn	150,000				50,000
Trade Creditors		60,000			40,000
Bank Loan		900,000			600,000

Carter has taken drawings of £65,000 from the business during the year.

Required

Using the „accounting equation?, produce a calculation of the trader?s profit for the year to 31st December 2013. Note it is not possible to produce a detailed profit and loss account from the above information.

Task 2 b)

You are also preparing some financial information for a client, a sole trader called Bale.

The client wishes to know his net profit for the trading year, but complete accounting records have not been maintained.

You have the following information for the accounting year to 31 December 2013 to assist with the production of the information for the trader:

Opening cash in hand at bank	1 January 2013		51,000
Debtors at	1 January 2013		30,000
Cash Received from debtors in year			585,000
Debtors at	31 December 2013		45,000
Bad debts written off during the year.			-
Creditors for purchases at	1 January 2013		81,000
Cash paid to suppliers in year	31 December 2013		408,000
Creditors for purchases at	31 December 2013		108,000
Stock of goods for resale (Inventory) at	1 January 2013		75,000
Stock of goods for resale (Inventory) at	31 December 2013		96,000
Cash paid for other expenses in year			90,000
Cash drawings in year			95,000

Required:

(i) Produce the calculation of the net profit for Bale for the year to 31st December 2013 which arrives at a net profit of £96,000. Note that in this case is possible to produce a detailed profit and loss account from the above information.

(ii) Show the calculation which indicates how the trader?s cash in hand at bank is £43,000 as at 31st December 2013

Task 3)

You are also in possession of a summary of the accounting information for Heath plc for the year to 31st December 2013. This is in the form of a trial balance as follows:

	Heath plc	Dr	Cr
	Trial Balance as at	£	£
	31 December 2013
	Share Capital - Authorised and Issued £1 Ordinary shares		4,500,000
	Opening Stock (Inventory)	150,000
5%	Debenture Loan (Repayable in full in 3 years time)		1,500,000
	Sales		12,000,000
	Trade Debtors (Trade receivables)	675,000
	Profit and Loss account balance at start of year		1,599,000
	Trade Creditors (Trade Payables)		450,000
	Deferred Taxation (long term liability)		600,000
	Debenture Loan Interest (half year)	37,500
	Business property taxes (rates) [operating cost]	3,600,000
	Purchases	1,950,000
	Vehicles and Equipment at Cost	1,050,000
	Freehold land at Valuation	9,000,000
	Freehold buildings at Cost	4,998,000
	Freehold Land Revaluation Reserve		300,000
	Cash in hand and bank	60,000	735,000
	Vehicle running costs	135,000
	Directors remuneration	907,965
	Wages and Salaries	450,000
	Intangible fixed assets	750,000
	Administrative expenses	1,200,000
	Bad debts written off during year	164,700
	Provision for bad debts opening balance		30,000
	Provision for depreciation balances at start of year:
	Vehicles and Equipment		150,000
	Freehold Buildings		97,965
	Heat, light and cleaning	600,000
	Taxation paid during year	300,000
	Long-term provisions		3,355,200
	Corporation tax balance at start of year		711,000
		26,028,165	26,028,165

The following additional information has also been obtained from the company in respect of final account year-end adjustments which are to be made:

	Notes	£
1	Closing stock (inventory) has been valued at	450,000
2	The provision for bad debts as at the year end
	is to be 4% of closing trade debtors	?
3	The following expenses were prepaid at the end of the year:
	Business property taxes (rates)	1,440,000
	Vehicle running costs	27,000
	Administrative expenses	240,000
4	The following expenses were to be accrued at the end of the year:
	Heat, light and cleaning	120,000
	Administrative expenses	240,000
	Debenture loan interest (half year)	?
5	Provision for annual depreciation is to be as follows:
	Freehold buildings 2% of Cost	?
	Vehicles and Equipment 25% of book value	?
6	The Corporation Tax charge for the year has been agreed as	848,475

Task 3a)

You are required to produce, for Heath plc, an Income Statement (Profit and Loss account) for the year to 31st December 2013 in a form suitable for internal use.

Note that your profit after tax figure should be £3,393,900 

Task 3b)

You are required to produce, for Heath plc, a Position Statement (Balance Sheet) as at 31st December 2013 in a form suitable for internal use.

Note that your share capital and reserves figure should be £9,792,900  

Task 3c)

Using your own internal Income Statement from task 3a), above, together with additional information below, you are now required to present the Income Statement for the year to 31st December 2013 for Heath plc in a format suitable for presentation.

You should use the vertical format required by IAS 1, Presentation of Financial Statements. You should only prepare the Statement of Comprehensive income.

An illustration of the IAS 1 format is available at the end of this assessment.

In order to summarise the information for the published Statement of Comprehensive Income, you are able to ascertain that Heath plc allocates its operating expenses to cost of sales (COS) Distribution (Dist) and Administration (Admin) in the following manner:

Operating Expense	COS	Dist	Admin
Cost of Sales from Trading account	100%
Wages and Salaries	30%	40%	30%
Business property taxes (rates)	20%	20%	60%
Heat, light and cleaning	40%	40%	20%
Administrative expenses	0%	0%	100%
Vehicle running costs	10%	30%	60%
Directors remuneration	30%	30%	40%
Bad debts written off during year			100%
Adjustment to bad debts provision			100%
Annual depreciation:
Freehold buildings	20%	40%	40%
Vehicles and Equipment	30%	30%	40%

Your profit for the year (after tax) figure should be the same as for the internal accounts, that is £3,393,900.

Task 3d)

Concentrating on the presentation of the Statement of Comprehensive Income only:

• With reference to users of accounting information generally, identify the main differences between the published information you have produced under task 4 and the internal information you produced under task 3.

• Describe briefly at least one of the „recognised gains and losses? which you might find within the published accounts.  

Short paragraphs of explanation will be sufficient for this task.

Task 3e)

On 1 January 2013, a client, Strong plc, a retailer, completed the purchase of 100% of the Ordinary Share Capital of Fragile plc for an amount of £5,000,000. The Shares of Fragile plc at that time were in the books at £5,000,000 and as Fragile plc had not yet traded at the date of acquisition there were no other reserves.

One year has since passed and both businesses have traded for a year. Both have produced Income Statements for the year to 31st December 2013 together with Balance Sheets as at that date.

These accounts are as follows:

Income Statements year ended	Strong plc	Fragile plc
31 December 2013	£	£
Sales	5,000,000	3,000,000
Cost of Sales	(3,500,000)	(1,800,000)
Gross profit	1,500,000	1,200,000
Operating Costs	(750,000)	(750,000)
Operating profit	750,000	450,000
Taxation	(150,000)	(90,000)
Retained profit:
After taxation	600,000	360,000
1 January 2013	700,000	-
31 December 2013	1,300,000	360,000

Balance Sheets as at	Strong plc	Fragile plc
31 December 2013	£	£
Fixed assets	6,230,000	5,355,000
Investment In:
Fragile plc	5,000,000
Current Assets	250,000	150,000
Current Liabilities	(180,000)	(145,000)
Net Assets	11,300,000	5,360,000
Ordinary Share Capital	10,000,000	5,000,000
Profit and Loss Reserve	1,300,000	360,000
	11,300,000	5,360,000

During the year Strong plc had bought goods costing £325,000 from Fragile plc. The sales of Fragile plc and the cost of sales of Strong plc reflect these transactions. All of the goods purchased by Strong plc from Fragile plc had been sold by the end of the year.

As at the year end Strong plc still owed Fragile plc £55,000 for some of the goods purchased from Fragile plc during the year. The current assets of Fragile plc and the current liabilities of Strong plc reflect this position as at 31st December 2013.

You are required to prepare for the Strong plc Group, the Consolidated:

(i)  Income Statement for the year ended 31st December 2013,

(ii) Consolidated Balance Sheet as at 31st December 2013.

You should show all your workings.

Task 4)

Telefónica is an operator in the telecommunication sector, providing communication, information and entertainment solutions, with presence in Europe and Latin America.

One of the firm?s clients has asked for a brief financial analysis of the recent performance of Telefónica. Extracts from the summarised Income Statements are shown below:

Telefonica Group Consolidated Income Statement for year ended
31st December		2011			2012
	€ millions	€ millions		€ millions	€ millions
Revenue		62,837			62,356
Operating Expenses		(54,880)			(53,881)
		7,957			8,475
Income from associated companies		(635)			(1,275)
Other Income / (expense)		2,107			2,323
Operating profit		9,429			9,523
Foreign Exchange adjustments		(159)			(597)
Finance income	827			963
Finance costs	(3,609)	(2,782)		(4,025)	(3,062)
Profit before taxation		6,488			5,864
Income tax expense		(301)			(1,461)
Retained profit for year		6,187			4,403

Extracts from summarised Group Balance Sheets are shown below:

Telefonica Group Consolidated Statement of Financial Position as at
31st December		2011			2012
		€ millions			€ millions
Assets
Non-Current Assets
Property, plant and equipment		35,469			35,021
Goodwill		21,464			21,382
Other intangible assets		31,707			28,659
Available for sale financial assets		148			114
Other		20,012			19,001
Total non- current assets		108,800			104,177
Current Assets
Inventories (stocks)		1,164			1,188
Trade receivables (debtors)		11,331			10,711
Other current assets		4,193			3,850
Cash and cash equivalents		4,135			9,847
Total current assets		20,823			25,596
Total Assets		129,623			129,773
Equity and Liabilities
Total equity		27,383			27,661
Non-Current Liabilities
Long-term borrowings		28,376			56,608
Deferred tax		4,739			4,788
Long-term provisions		34,455			7,064
Total non-current liabilities		67,570			68,460
Current Liabilities
Trade Creditors		19,947			19,230
Short-term borrowings		10,652			10,245
Current tax payable		2,568			2,522
Short-term provisions		1,503			1,655
Total current liabilities		34,670			33,652
Total Liabilities		102,240			102,112
Total equity and liabilities		129,623			129,773
Total Capital Employed (for ratio analysis)		94,953			96,121

Task 4a) Required:

Calculate, for Telefónica for years 2012 and 2011, the eight financial ratios shown below. The figures in parenthesis (brackets) are the results for a competitor, BT Group plc for the year ending 31 March 2013

Return on capital employed; (19.1%)

Operating profit margin; (17.3%)

Working capital (current) ratio; (0.57:1)

Quick asset (acid test) ratio; (0.56:1)

Net asset turnover; (1.1 times)

Debtors payment period; (62 days)

Financial gearing, and (61.1%)

Fixed interest cover. (5.0 times)

For fixed interest cover, please use the „net basis? which uses finance costs minus finance income. You must show your workings.

Task 4b)

Make a brief comment, as far as is possible, on the financial performance and position of Telefónica, 2012 as compared to 2011 and to the BT Group plc results. This should take the form of a suitable comparative summary based on the above 8 financial ratios, together with a short set of notes suitable for scrutiny by a potential investor.

Task 4c)

Identify additional financial and non-financial information which might be helpful to make a judgement of the financial performance and prospects of the business.

Task 4d)

What is your own opinion of the suitability of financial ratio analysis as a predictor for the future success of a business?