Subject (SQ): FINANCIAL REPORTING

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  • 15 Marks

FR – L2 – Q100 – Presentation of Financial Statements

Prepare a report analyzing JB Co Ltd's financial position using gearing and liquidity ratios, highlighting areas for further investigation.

BNN Co is considering acquiring an interest in its competitor JB Co Ltd. The managing director of BNN Co has obtained the three most recent statements of financial position of JB Co Ltd as shown below.

JB Co Ltd – Statement of Financial Position at 31st December

20X7 GH$’000 20X8 GH$’000 20X9 GH$’000
Non-current assets
Land and buildings 11,460 12,121 11,081
Plant and equipment 8,896 9,020 9,130
20,356 21,141 20,211
Current assets
Inventories 1,775 2,663 3,995
Trade receivables 1,440 2,260 3,164
Cash 50 53 55
3,265 4,976 7,214
Total assets 23,621 26,117 27,425
Equity
Share capital 8,000 8,000 8,000
Retained earnings 6,434 7,313 7,584
14,434 15,313 15,584
Non-current liabilities
12% debentures 20X9–20Y2 5,000 5,000 5,000
Current liabilities
Trade payable 390 388 446
Bank 1,300 2,300 3,400
Income taxes payable 897 1,420 1,195
Dividend payable 1,600 1,696 1,800
4,187 5,804 6,841
Total equity and liabilities 23,621 26,117 27,425

Required:
Prepare a report for the managing director of BNN Co. commenting on the financial position of JB Co Ltd. and highlight any areas that require further investigation (using gearing and liquidity ratios only).

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  • 20 Marks

FR – L2 – Q99 – Presentation of Financial Statements

Calculate financial ratios for Jeck Ltd for the year ended 31 March 20X9 based on provided financial statements.

Jeck Ltd is a listed company that assembles domestic electrical goods which it then sells to both wholesale and retail customers. Jeck Ltd’s management was disappointed in the company’s results for the year ended 31 March 20X8. In an attempt to improve performance the following measures were taken early in the year ended 31 March 20X9:

  • A national advertising campaign was undertaken,
  • Rebates to all wholesale customers purchasing goods above set quantity levels were introduced,
  • The assembly of certain lines ceased and was replaced by bought-in completed products. This allowed Jeck Ltd to dispose of surplus plant.

Jeck Ltd’s summarised financial statements for the year ended 31 March 20X9 are set out below:

Statement of Financial Position as at 31 March 20X9

GH$’000 GH$’000
Non-current assets
Property, plant and equipment (note (ii)) 550
Current assets
Inventory 250
Trade receivables 360
Bank Nil
610
Total assets
Equity and liabilities
Stated capital (400m shares) 100
Income surplus 380
480
Non-current liabilities
8% loan notes 200
Current liabilities
Bank overdraft 10
Trade payables 430
Current tax payables 40
480
Total equity and liabilities

Statement of Profit or Loss and Other Comprehensive Income for the Year Ended 31 March 20X9

GH$’000
Revenue (25% cash sales)
Cost of sales
Gross profit
Operating expenses
Operating profit
Profit on disposal of plant (note (i))
Financial charges
Profit before tax
Income tax expense
Profit for the year

Below are ratios calculated for the year ended 31 March 20X8:

  • Return on year-end capital employed (profit before interest and tax over total assets less current liabilities): 17%
  • Net assets (equal to capital employed) turnover: 4 times
  • Gross profit margin: 6.3%
  • Net profit (before tax) margin: Not provided
  • Current ratio: 1.6:1
  • Closing inventory holding period: 46 days
  • Trade receivables’ collection period: 45 days
  • Trade payables’ payment period: 55 days
  • Dividend yield: 3.75%
  • Dividend cover: 2 times

Notes:
(i) Jeck Ltd received GH$120m from the sale of plant that had a carrying amount of GH$80m at the date of its sale.
(ii) The market price of Jeck Ltd’s share throughout the year averaged GH$3.75 each. There were no issues or redemption of shares or loans during the year.
(iii) Dividends paid during the year ended 31 March 20Y0 amounted to GH$90m, maintaining the same dividend paid in the year ended 31 March 20X9.

Required:
(a) Calculate ratios for the year ended 31 March 20X9 (showing your workings) for Jeck Ltd, equivalent to those provided above.

(b) Analyse the financial performance and position of Jeck Ltd for the year ended 31 March 20X9 compared to the previous year.

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  • 25 Marks

FR – L2 – Q98 – Consolidated Financial Statements

Prepare Kari Plc's consolidated statement of financial position as at 31 March 20X4, accounting for subsidiaries and associates.

Kari Plc acquired 90% of Kane Ltd’s GH$1 ordinary shares on 1 April 20X2 paying GH$3.00 per share. The balance on Kane Ltd’s retained earnings at this date was GH$800,000. On 1 October 20X3, Kari Plc acquired 30% of Kora Ltd’s GH$1 ordinary shares for GH$3.50 per share. The statements of financial position of the three companies at 31 March 20X4 are shown below:

Kari Plc Kane Ltd Kora Ltd
GH$000 GH$000 GH$000 GH$000 GH$000 GH$000
Non-current assets
Property, plant and equipment 8,050 3,600 1,650
Investments 4,000 910 nil
12,050 4,510 1,650
Current assets
Inventory 830 340 250
Accounts receivable 520 290 350
Bank 240 nil 100
1,590 630 700
Total assets 13,640 5,140 2,350
Equity and liabilities
Equity:
Ordinary shares of GH$1 each 5,000 1,200 600
Reserves:
Retained earnings b/f 6,000 1,400 900
Profit year to 31 March 20X4 1,400 600 300
7,400 2,000 1,200
12,400 3,200 1,800
Non-current liabilities
10% Loan notes 500 240 nil
Current liabilities
Accounts payable 420 960 350
Taxation 220 250 100
Overdraft nil 490 nil
640 1,700 450
Total equity and liabilities 13,640 5,140 2,350

The following information is relevant:
(i) The fair value of the non-controlling interest in Kane Ltd at the date of acquisition was GH$2.50 per share.
(ii) In January 20X4 Kari Plc sold goods to Kora Ltd for GH$65,000. These were transferred at a mark-up of 30% on cost. Two thirds of these goods were still in the inventory of Kora Ltd at 31 March 20X4.
(iii) To facilitate the consolidation procedures the group insists that all inter-company current account balances are settled prior to the year-end. However a cheque of GH$40,000 from Kane Ltd to Kari Plc was not received until early April 20X4. Inter-company balances are included in accounts receivable and payable as appropriate.
(iv) Kora Ltd is to be treated as an associated company of Kari Plc.
(v) An impairment test at 31 March 20X4 on the consolidated goodwill of Kane Ltd and Kora Ltd concluded that it should be written down by GH$468,000 and GH$12,000 respectively. No other assets were impaired.

Required
(a) Prepare the consolidated statement of financial position of Kari Plc as at 31 March 20X4.

(b) Discuss the matters to consider in determining whether an investment in another company constitutes associated company status.

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  • 25 Marks

FR – L2 – Q97 – Business Combinations

Prepare Peak Plc's consolidated statement of financial position as at 31 March 20X4, incorporating acquisitions of Flare Plc and Crest Ltd, with adjustments for intra-group transactions and fair value.

Peak Plc acquired the following non-current investments on 1 April 20X3:
(1) 4 million of Flare Plc’s 5 million equity shares, by means of an exchange of one share in Peak for every one share in Flare Plc, plus GH¢6.05 million in cash for each Flare Plc share acquired. The professional fees associated with the acquisition amounted to GH¢1 million. The market price of shares in Peak Plc at the date of the acquisition was GH¢9 per share. The market price of Flare Plc shares just before the acquisition was GH¢7. The cash part of the consideration is deferred and will not be paid until two years after the acquisition.
(2) 25% of Crest Ltd’s 6 million equity shares, at a cost of GH¢6 per share. The money to make this payment was obtained by issuing one million new shares in Peak Plc at GH¢9 per share.

None of these transactions has yet been recorded in the summary statements of financial position that are shown below.

The summarised draft statements of financial position of the three companies at 31 March 20X4 are as follows:

Statement of financial position Peak Plc Flare Plc Crest Ltd
GH¢ million GH¢ million GH¢ million
Assets
Non-current assets
Property, plant and equipment 60.0 31.0 16.0
Other equity investments 0.8 nil nil
60.8 31.0 16.0
Current assets 18.2 8.0 9.0
Total assets 79.0 39.0 25.0
Equity and liabilities
Equity shares 18.0 9.0 10.0
Retained earnings: at 1 April 20X3 36.0 16.0 8.0
– for year ended 31 March 20X4 8.0 3.0 2.0
62.0 28.0 20.0
Non-current liabilities
6% loan notes 10.0 – –
7% loan notes – 6.0 3.0
Current liabilities 7.0 5.0 2.0
Total equity and liabilities 79.0 39.0 25.0

The following information is relevant:
(1) Peak Plc has chosen to value the non-controlling interest in Flare Plc using the fair value method permitted by IFRS 3 (revised). The fair value of the non-controlling interests at the acquisition date is estimated to be the market value of the shares before the acquisition.
(2) At the date of acquisition of Flare Plc, the fair values of its assets were equal to their carrying amounts.
(3) The cost of capital of Peak Plc is 10% per year.
(4) During the year ended 31 March 20X4, Flare Plc sold goods to Peak Plc for GH¢3.6 million, at a mark-up of 50% on cost. Peak Plc had 75% of the goods in its inventory at 31 March 20X4.
(5) There were no intra-group receivables and payables at 31 March 20X4.
(6) On 1 April 20X3, Peak Plc sold a group of machines to Flare Plc at their agreed fair value of GH¢3 million. At the time of the sale, the carrying amount of the machines was GH¢2 million. The estimated remaining useful life of the plant at the date of the sale was four years. Plant and machinery is depreciated to a residual value of nil using straight-line depreciation and at 1 April 20X3 the machines had an estimated remaining life of five years.
(7) “Other equity investments” are included in the summary statement of financial position of Peak Plc at their fair value on 1 April 20X3. Their fair value at 31 March 20X4 is GH¢0.65 million.
(8) Impairment tests were carried out on 31 March 20X4. These show that there is no impairment of the value of the investment in Crest Ltd or in the consolidated goodwill.
(9) No dividends were paid during the year by any of the three companies.

Required
Prepare the consolidated statement of financial position for Peak Plc as at 31 March 20X4.

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  • 10 Marks

FR – L2 – Q96 – Consolidated Financial Statements

Prepare Shade Ltd's consolidated statement of profit or loss for 20X4, adjusting for intra-group sales and unrealised profits.

Shade Ltd holds 80% of the ordinary share capital of Find Ltd (acquired on 1 February 20X4) and 30% of the ordinary share capital of Reach Ltd (acquired on 1 July 20X3).
Shade Ltd had no other investments.
The draft statements of profit or loss for the year ended 30 June 20X4, are set out below.

Shade Ltd GH¢000 Find Ltd GH¢000 Reach Ltd GH¢000
Revenue 12,614 6,160 8,640
Operating expenses (11,318) (5,524) (7,614)
Dividends receivable 150 – –
1,446 636 1,026
Taxation (621) (275) (432)
Profit after taxation 825 361 594

Included in the inventory of Find Ltd at 30 June 20X4 was GH¢50,000 for goods purchased from Shade Ltd in May 20X4 which the latter company had invoiced at cost plus 25%. These were the only goods sold by Shade Ltd to Find Ltd but it did make sales of GH¢180,000 to Reach Ltd during the year. None of these goods remained in Reach Ltd’s inventory at the year end.
Required
Prepare a consolidated statement of profit or loss for Shade Ltd for the year ended 30 June 20X4.

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  • 10 Marks

FR – L2 – Q95 – Business Combinations

Adjust unrealised profit in inventory for consolidation of Anita Healthcare Ltd, Pamela Wellness Ltd, and Sophie Pharmaceuticals Ltd.

On 31 December Year 5, an associate, Anita Healthcare Ltd, holds inventory which is valued at GH¢32,000 purchased during the year from its investor Pamela Wellness Ltd. At the same date, Pamela Wellness Ltd holds inventory purchased from a subsidiary, Sophie Pharmaceuticals Ltd, which is valued at GH¢80,000.
Sales from Pamela Wellness Ltd to Anita Healthcare Ltd and from Sophie Pharmaceuticals Ltd to Pamela Wellness Ltd are priced at a mark-up of one-quarter on cost.
Pamela Wellness Ltd owns 30% of Anita Healthcare Ltd and 60% of Sophie Pharmaceuticals Ltd.

Required
Set out the adjustments necessary to reflect any unrealised profit in the above in the consolidated statement of financial position.

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  • 10 Marks

FR – L2 – Q94 – Associates and Joint Ventures

Prepare entries for Portico Ltd's 30% holding in Armand Ltd in the Year 5 consolidated financial statements, including financial position and profit or loss.

Portico Ltd acquired 30% of the equity shares in Armand Ltd (which satisfies the definition of associate) during Year 1 at a cost of GH₵350,000 when the fair value of the net assets of Armand Ltd was GH₵250,000. Since that time, the investment in Armand Ltd has been impaired by GH₵4,000.
On 31 December Year 5, the net assets of Armand Ltd were GH₵400,000. Since the date of acquisition, there have been no changes in the share capital of Armand Ltd or in any reserves other than retained earnings.
In the year to 31 December Year 5, the profits of Armand Ltd after tax were GH₵50,000.

Required
Show how the holding in Armand Ltd would be reflected in the Year 5 consolidated statement of financial position and consolidated statement of profit or loss.

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  • 10 Marks

FR – L2 – Q93 – Consolidated Financial Statements

Prepare Apex Ltd's consolidated statement of financial position as at 31 December 20X4, incorporating subsidiary and associate investments.

APEX LTD
The draft statements of financial position as at 31 December 20X4 of three companies are set out below.

Apex Ltd GHS’000 Nexus Ltd GHS’000 Zephyr Ltd GHS’000
Assets
Non-current assets
Property, plant and equipment 400 100 160
Investments:
– shares in Nexus Ltd (60%) 75
– shares in Zephyr Ltd (30%) 30
Current assets 445 160 80
Total assets 950 260 240
Equity and liabilities
Share capital 100 30 60
Retained earnings 650 180 100
Non-current loans 200 50 80
Total equity and liabilities 950 260 240

The reserves of Nexus Ltd and Zephyr Ltd when the investments were acquired were GHS’000 70 and GHS’000 30 respectively.
Required
Prepare the consolidated statement of financial position as at 31 December 20X4.

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  • 20 Marks

FR – L2 – Q92 – Consolidated Financial Statements

Prepare consolidated financial statements for Henks Plc, including profit or loss, changes in equity, and financial position for 20X4.

HENKS PLC

Statements of financial position as at 31 December 20X4

Henks Plc GH₵000 Streen Ltd GH₵000 Scote Ltd GH₵000
Non-current assets
Property, plant and equipment 32,000 25,000 20,000
Investments 33,500 – –
65,500 25,000 20,000
Current assets
Cash at bank and in hand 9,500 2,000 4,000
Trade receivables 20,000 8,000 17,000
Inventory 30,000 18,000 18,000
59,500 28,000 39,000
125,000 53,000 59,000
Share capital 46,500 10,000 15,000
Retained earnings 55,000 37,000 27,000
101,500 47,000 42,000
Current liabilities 23,500 6,000 17,000
125,000 53,000 59,000

Statement of profit or loss for the year ended 31 December 20X4

Henks Plc GH₵000 Streen Ltd GH₵000 Scote Ltd GH₵000
Revenue 125,000 117,000 82,000
Cost of sales (65,000) (64,000) (42,000)
Gross profit 60,000 53,000 40,000
Distribution and administrative costs (35,000) (22,000) (23,000)
Profit before taxation 25,000 31,000 17,000
Income tax expense (10,000) (9,000) (5,000)
Profit after tax 15,000 22,000 12,000

Statement of changes in equity (extract) for the year ending 31 December 20X4

Henks Plc GH₵000 Streen Ltd GH₵000 Scote Ltd GH₵000
Retained earnings brought forward 40,000 15,000 15,000
Retained profit for the financial year 15,000 22,000 12,000
Dividends – – –
Retained earnings carried forward 55,000 37,000 27,000

You are given the following additional information.
(1) Henks Plc owns 80% of Streen Ltd’s shares. These were purchased in 20X1 for GH₵20.5 million cash, when the balance on Streen Ltd’s retained earnings stood at GH₵7 million.
(2) Five years ago, Henks Plc purchased 60% of the shares of Scote Ltd by the issue of shares with a market value of GH₵13 million. At that date, the retained earnings of Scote Ltd stood at GH₵3 million and the fair value of the net assets of Scote Ltd was GH₵24 million. It was agreed that any undervaluation of the net assets should be attributed to land. This land was still held at 31 December 20X4.
(3) Included in the inventory of Scote Ltd and Streen Ltd at 31 December 20X4 are goods purchased from Henks Plc for GH₵5.2 million and GH₵3.9 million, respectively. Henks Plc aims to earn a profit of 30% on cost. Total sales from Henks Plc to Scote Ltd and to Streen Ltd were GH₵8 million and GH₵6 million, respectively.
(4) Henks Plc and Streen Ltd each proposed a dividend before the year end of GH₵2 million and GH₵2.5 million, respectively. No accounting entries have yet been made for these.
(5) Henks Plc has conducted annual impairment tests on goodwill in accordance with IFRS 3 and IAS 36. The estimated recoverable amount of goodwill at 31 December 20X1 was GH₵5 million and at 31 December 20X4 was GH₵4.5 million.

Required
Prepare the consolidated statement of profit or loss and consolidated statement of changes in equity for the year ended 31 December 20X4 and the consolidated statement of financial position at that date.

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  • 12 Marks

FR – L2 – Q91 – Consolidated Financial Statements

Prepare Falcon Ltd's consolidated profit or loss, financial position, and retained profit movement for 20X4.

FALCON LTD

Statement of changes in equity for the year ended 30 June 20X4 (extract)

Falcon Ltd GH¢000 Crane Ltd GH¢000
Retained earnings brought forward 8,000 10,500
Profit for the financial year 12,000 8,000
Retained earnings carried forward 20,000 18,500

Required

Prepare Falcon Ltd’s consolidated statement of profit or loss, consolidated statement of financial position and a working showing the movement on consolidated retained profit for Falcon Ltd for the year ended 30 June 20X4.

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