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)
|
![](file:///C:\Users\Monika\AppData\Local\Temp\msohtmlclip1\01\clip_image001.gif)
(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
|
|
|
![](file:///C:\Users\Monika\AppData\Local\Temp\msohtmlclip1\01\clip_image001.gif)
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?