SOLUTION: FINANCIAL REPORTING, MAY 2014 Question 1 Symptoms of Overtrading Overtrading arises when a company expands its sales revenue fairly rapidly without securing additional long term capital adequate for its needs . The symptoms of overtrading are:  Inventory increasing, possibly more than proportionately to sales revenue.  Receivables increasing , possibly more than proportionately to sales revenue.  Cash and liquid assets declining at a fairly alarming rate.  Payables increasing rapidly. The symptoms imply that the company has expanded without giving proper thought to the necessity to expand its capital base. It has consequently continued to rely on its suppliers and probably its bank overdraft to provide the additional finance required Ratios calculations Ratio Current Ratio i ii

Acid test Ratio

Company X 35,000/10,000:1 = 3.5:1

Company Y 18,000/10,000: 1 = 1.8:1

11,000/10,000:1 = 1.1:1

12,000/10,000: 1 = 1.2:1

iii Inventory turnover period iv v vi

24,000//70,000 x365 days = 6,000/73.000 x 365 days = 125 days 30 days Receivable collection period 8,500/100,000 x 365 days= 2,125/100,000 x 365 days = 31 days 7.8 [8] days Trade Receivable collection 8,500/100,000 x 365 days= 2,125/100,000 x 365 days = period 31 days 7.8 [8] days ROCE 6,300/90,000 x 100% = 7% 5,760/48,000 x 100% = 12%

Bii Kec Services Ltd :Selling as cheaply as possible , This is Company Y because I Achieves lower gross profit margin [27%] ii. Sells goods faster and keeps lower inventory [shorter inventory turnover period of 30 days] iii. Collects cash from customers faster [8 days] iv Maintains high current ratio [3.5:1] because of high levels of inventory and receivables Ree Services Ltd : Customer focus and charges premium price This is Company X, because I Achieves higher gross profit margin [30%] ii. Sells slowly and keeps higher inventory [longer inventory turnover period of 125 days] iii. Grants customers longer credit period [31 days] iv. Maintains low current ratio [1. 8: 1] because of low levels of inventory and receivables

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SOLUTION TO QUESTION 2 1 (a) Sharp Ltd Group Consolidated statement of comprehensive income for the year ended 30 September 2013 GHC’000 Revenue (225,000 + (120,000 x 6/12) – 20,000 intra-group sales) 265,000 Cost of sales (w (i)) (139,400) –––––––– Gross profit 125,600 Distribution costs (11,800 + (6,000 x 6/12)) (14,800) Administrative expenses (13,500 + (11,500 x 6/12)) (19,250) Finance costs (750 + (600 x 6/12)) (1,050) Profit before tax 90,500 Income tax expense (24,000 + (13,900 x 6/12)) (30,950) Profit for the year 59,550 –––––––– Other comprehensive income Gain on revaluation of land (1,250 + 500) 1,750 Loss on fair value of equity financial asset investments (850 + (200 x 6/12)) (950) –––––––– 800 –––––––– Total comprehensive income 60,350 –––––––– Profit attributable to: Owners of the parent 55,800 Non-controlling interest (w (ii)) 3,750 –––––––– 59,550 –––––––– Total comprehensive income attributable to: Owners of the parent 56,500 Non-controlling interest (w (ii)) 3,850 –––––––– 60,350 –––––––– (ii) Sharp Ltd Group Equity section of the consolidated statement of financial position as at 30th September 2013 Equity attributable to owners of the parent Share capital 175,000 Revaluation reserve (land) (4,200 + 1,250 + (500 x 75%)) 5,825 Other equity reserve (1,600 – 850 – (200 x 6/12 x 75%)) 675 Retained earnings [45,000+ 55,800] 100,800 –––––––– 282,300 Non-controlling interest (w (iv)) 53,850 –––––––– Total equity 336,150 ––––––––

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Workings (figures in brackets in GHC’000) (i) Cost of sales Sharp Bright (55,000 x 6/12) Intra-group purchases Unrealised profit on sale of plant Depreciation adjustment on sale of plant (500/2½ years x 6/12) Unrealised profit in inventory (6,000 x 5000/20,000)

(ii) Non controlling interest in statement of comprehensive income profit: Bright’s post-acquisition profit (33,000 x 6/12) Less: Unrealised profit in inventory (w (i))

x 25% = Non controlling interest in total comprehensive income As above Other comprehensive income [(500– (200 x 6/12)] x 25%)

(iii) Retained earnings Sharp at 1 April 2010 Per statement of comprehensive income

130,000 27,500 (20,000) 500 (100) 1,500 139,400 –––––––– 16,500 (1,500) ––––––– 15,000 ===== 3,750

3,750 100 ––––––– 3,850 ––––––– 45,000 55.800 –––––––– 100.800 ––––––––

(iv) Non-controlling interest in statement of financial position At acquisition Per statement of comprehensive income

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50.000 3, 850 –––––––– 53,850 ––––––––

SOLUTION TO QUESTION 3 Asetrapa Ltd Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December 2012 GHS’million Sales Revenue 2,648 Cost of sales (1,756)/( --------Gross Profit 892 Distribution cost (514) Admin expenses [345+18( depreciation of buildings)] (363) Loss on disposal of PPE [12-7] (5)* ---------Net Operating Profit 10 Other Income: Rental Income 48 Fair valuation gain on Investment Property 38 ---Profit before interest and tax [PBIT] 96 Finance costs [Interest on loan note] (6) ----Profit before tax 90 Taxation (27) -----Profit for the year 63 Other comprehensive income: Revaluation surplus on land and buildings 484 ---Total comprehensive income 547 === * An alternative treatment of the loss on disposal of plant is to charge it to cost of sale [in line with the treatment of depreciation of plant] Statement of changes in equity for the year ended 31December 2012 Stated Capital Retained Capital Surplus earnings GHC’m GHC’m GHC’m GHC’m Balance as at 1 January 2012 100 314 849 Bonus issue 375 (375) Total comprehensive income 484 63 Transfer : Real revaluation surplus (13) 13 Dividend (6) -----------------------Balance as at 31 December 2012 475 785 544 ===== ===== =====

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Total

1,263 547 (6) -------1,804 =====

Statement of financial position as at 31 December 2012 GHC’m ASSETS Non-current assets Property, plant and equipment Investment property

878 586 -----1.464 ------

Current assets Inventory Trade receivable Cash

381 645 28 ----954 ------2,418 =====

Total assets EQUITY AND LIABILITIES Equity Stated capital Capital surplus Retained earnings

475 785 544 -----1,804 -------

Non-current liability Loan note

150 -----

Current liabilities Trade payables Current tax payable Loan interest accrued

434 27 3 -----464 ----2,418 =====

Equity and liabilities

Workings 1 Cost of sales Opening inventory Purchases Closing inventory Cost of goods sold

444 1,669 (381) ------1,732 5

Depreciation of plant

24 -----Cost of sales 1,756 ===== 2 Depreciation of plant and equipment Plant and equipment –cost b/f 258 Disposal (15) -----243 ----Accumulated depreciation b/f 126 Disposal (3) ---123 ---NBV 243-123 120 === Depreciation charge [20% of 120] 24 ==== Note The plant referred to in note (C) is not impaired. Please check below: Carrying value at 31 December 2011 22 Depreciation for 2012 [20%of 22] 4.4 ----Carrying value at 31 December 2012 17.6 ----Fair value less cost to sell at 31 Dec 2012 16 ----Value in use at 31 December 2012: 3.8 x 3.993 15.2 4.2 x 0.667 2.8 -----18 ---Therefore recoverable amount is 18 which is higher than carrying amount,

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Land and buildings Land 120 ----NBV 120 Revalued amount 100 ----Revaluation surplus/ to OCI (20) === Depreciation charge [700/40 years Cost Ac dep

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PPE Land and buildings Plant and equipment

Buildings 260 (64) ---196 700 ---504 === 17.5 [18]

[800 – 18 (depreciation)] 120-24]

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Total 380 (64) -----316 800 ---484 ====

782 96 --878 ===

SOLUTION TO QUESTION 4 a Asempa Systems Ltd Income Statement for the year ended 31 December 2013 Cash Sales GHC Sales 36,000 Cost of sales (24,000) ----------12,000 Provision for unrealized profit ----------Gross profit earned 12,000 Operating expenses Depreciation Net profit

HP Sales GHC 270,000 (150,000) ------------120,000 (49.896) ----------70,104

Total GHC 306,000 (174,000) ------------132,000 (49,896) ----------82,104 (65,000) (7,500) ---------9, 604 ======

Asempa Systems Ltd Statement of financial position as at 31 December 2013 GHC Assets Non-current asset PPE (50.000 -30,000)

20,000

Current asset Inventory HP Trade receivable ( 113,400 – 50,400) Cash

4,500 63,000 3,104 --------70,604 90,604 ======

Total Assets

Equity and liabilities Equity Stated capital Retained earnings

37,500 13,104 ---------50,604

Trade payables

40,000 ------------90.604 =======

Equity and liability

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Workings ( all figures are in GHC) Cost of sales Cash sales Sales 36,000 Cost of sales 24,000 Closing Inventory Opening Inventory Purchases

Cost of sales Closing inventory

HP Sales 270,000 150,000

Total 306,000 174,000

7,500 171,000 ----------178,500 (174,000) -----------4.500 ======

HP Trade receivable Balance at 1 January 1,134 HP Sales 270,000 Cash received from HP trade receivable (157,734) ------------Balance as at 31 December 113,400 Provision for unrealized profit At 31 December [80/180 x 113,400] Balance as at 1 January Charge to the income statement

50,400 504 ----------49,896 =======

Answer to Question 4.b Answer to Question 4.b [Alternative 1] Where Note 3 of the question is interpreted as the 20% of the receivables represents the total value of WIP Partners capital accounts Nii GHC Balance b/f 50,000 Adjustment [Revaluation] of Goodwill 11,760 Profit on transfer of car 348 Recognition of WIP 12,600 Takeover of car (2,000) Goodwill written off WIP write off Capital settlement (30,000) --------Balance before settlements 42,708 Loan to Osei (16,548) Additional capital introduced/Withdrawal ---------Loan /Capital c/d 26,160 ====== Opening statement of financial position of new firm ASSETS Non-current assets 8

Maafio GHC 36,000 9,800 290 10,500

Eno GHC 17,400 5,880 174 6,300

Osei GHC -

(26,670) (14,700) 10,000 ---------25,220

(16,002) (8,820) 10,000 --------14,932

(10,668) (5,880) 10,000 ---------(6,548) 16,548

(220) -------25,000 ======

GHC

68 ------15,000 =====

--------10,000 =====

Tangible fixed assets

[44,800 – 1188]

43,612

Current assets Receivables Bank [20,900 -220 +68]

147,000 20,748 --------211,360 =======

Total Assets CAPITAL AND LIABILITIES Capital: Maafio Eno Osei

25,000 15,000 10,000 ---------50,000 26,160

Loan from Nii Current liabilities Sundry payables

135,200 --------211,360 =====

Answer to Question 4.b b [Alternative 2 ] Where Note 3 of the question is interpreted as the 20% of the receivables represents Nii’s share of the WIP Partners capital accounts Nii GHC Balance b/f 50,000 Adjustment [Revaluation] of Goodwill 11,760 Profit on transfer of car 348 Recognition of WIP 29,400 Takeover of car (2,000) Goodwill written off WIP write off Capital settlement (30,000) --------Balance before settlements 59,508 Loan to Osei (24,388) Additional capital introduced ---------Loan /Capital c/d 35,120 ======

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Maafio GHC 36,000 9,800 290 24,500

Eno GHC 17,400 5,880 174 14,700

Osei GHC -

(26,670) (34,300) 10,000 ---------19,620

(16,002) (20,580) 10,000 --------11,572

(10,668) (13,720) 10,000 ---------(14,388) 24,388

5,380 -------25,000 ======

3,428 ------15,000 =====

--------10,000 =====

Opening statement of financial position of new firm ASSETS Non-current assets Tangible fixed assets [44,800 – 1188] Current assets Receivables Bank [20,900+ 5,380 +3,428]

GHC 43,612

147,000 29,708 --------220,320 =======

Total Assets CAPITAL AND LIABILITIES Capital: Maafio Eno Osei

25,000 15,000 10,000 ---------50,000 35,120

Loan from Nii Current liabilities Sundry payables

135,200 --------220,320 =====

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ANSWER TO QUESTION 5 Ai 

Relevance: Relevance is one of the primary qualitative characteristics relating to content . Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming, or correcting, their past evaluations.

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Reliability: Reliability is another qualitative characteristic relating to content. Information has the quality of reliability when it is free from material error and bias and can be depended upon by users to represent faithfully that which it either purports to represent or could reasonably be expected to represent.



Understandability : Understandability is one of the qualitative characteristics relating to presentation of financial statement. Financial statement should be presented in such a way that it is readily understandable by users. For this purpose, users are assumed to have abilities , i.e reasonable knowledge of business and economic activities and the willingness to study the information with reasonable willingness.



Comparability : Comparability is another qualitative characteristic relating to presentation of financial statement. Users must be able to compare the financial statements of an enterprise over time in order to identify trends in its financial position and performance. Users must be able to compare the financial statements of different enterprises to evaluate their relative financial position, performance and changes in position. Consistency is therefore required

Aii Measurement of the elements of financial statements The Framework identifies four possible measurements bases:  Historical cost  Current cost  Realizable value  Present value. 1 Historical cost Assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation. ii Current cost Assets are carried at the amount of cash or cash equivalents required to acquire them currently. Liabilities are carried at the discounted amount currently required to settle them. iii Realizable value Assets are carried at the amount which could currently be obtained by an orderly disposal. Liabilities are carried at their settlement values-the amount to be paid to satisfy them in the normal course of business. iv Present value Assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business, and liabilities at the present discounted value of the expected outflows necessary to settle them.

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B Value in use

DCF of future cash flows: Year Cash Flows GHC 2013 200,000 2014 275,000 2015 100,000

DF 0.909 0.826 0.751

Net Realisable Value Carrying Amount

Impairment Loss

= = =

PV GHC 181,800 227,150 75,100 --------484,050 ====== 350,000 ====== 572,000 ======

Carrying Amount – Recoverable Amount GHC572,000 = GHC484,050 * GHC87,950*

*[These figures may be different depending on number of decimal places chosen for the discount factor] C Future costs associated with the acquisition/construction and use of non-current assets, such as the environmental costs in this case, should be treated as a liability as soon as they become unavoidable. For JD this would be at the same time as the platform is acquired and brought into use. The provision is for the present value of the expected costs and this same amount is treated as part of the cost of the asset. The provision is ‘unwound’ by charging a finance cost to the income statement each year and increasing the provision by the finance cost. Annual depreciation of the asset effectively allocates the (discounted) environmental costs over the life of the asset. Income statement for the year ended 30 June 2013 Depreciation (see below) Finance costs (GHC13,8 million x 8%) Statement of financial position as at 30 June 2013 Non-current assets Cost (GHC60 million + GHC13.8 million (GHC15 million x 0·46)) Depreciation (over 10 years)

Non-current liabilities Environmental provision (GHC13.8 million x 1·08) or [GHC13.8 m + GH1.104 m ]

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GHC’000 7,380 1,104

73,800 ( 7,380) ––––––– 66,420 ––––––– 14,904