B7AF102

QQI
BA (HONS) ACCOUNTING & FINANCE

SUMMER 2023 EXAMINATIONS

Module Code: B7AF102

Module Description: Financial Accounting

Examiner: James Browne

Internal Moderator: Ms Puteri Nursyazwani

Megat Daud
Richard O’Callaghan

External Examiner: Svetlana Hensmen

Date: Tuesday, 2 May 2023

Time: 9:30 – 12:30

INSTRUCTIONS TO CANDIDATES
Time allowed is 3 hours
Section A: Compulsory question, 25 marks.
Section B: Compulsory. Answer ALL questions, total 45 marks.
Section C: Answer ANY TWO questions, 15 marks each.

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Total: 100 marks.

Section A: COMPULSORY

Question 1

The following trial balance has been extracted from the financial records of ChipyCo as
at 31 December 2022:

€000 €000

Property – at valuation 1 Jan 2022 (Note (i)) 18,225

Plant and equipment – at cost (Note (i)) 4,000
Plant and equipment – accumulated depreciation as at 1 Jan 2022 1,440
Investment property – at valuation 31 Dec 2021 (Note (ii)) 3,000
Inventory at 31 December 2022 25,000
Trade receivables and trade payables 21,490 18,500
Bank 50
Provision for bad debts (Note (iii)) 950
Revenue 265,820
Cost of sales 115,100
Distribution costs 81,000
Administration costs 58,000
Interest paid on long term loan 180
Interest on bank overdraft 6
Equity dividend paid 4,000
Proceeds of ordinary share issue (Note (vi)) 5,000
Equity shares (€0.50) 20,000
Share premium 4,000
Long term loan (Note (iv)) 8,000
Retained earnings at 1 Jan 2022 5,821
Income tax provision (Note (v)) 20
Property revaluation reserve 400
330,001 441,543

The following additional information is relevant:

(i) Non-current assets:

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The property was purchased three years ago and had a remaining useful life of 45
years at 1 January 2022. The company policy is to revalue all property at each
year end and at 31 December 2022 it was valued at €18 million as a result of
uncertain market prices in the local area.
All plant and equipment is depreciated at 20% per annum using the reducing
balance method. Depreciation of all non-current assets is charged to cost of
sales.

(ii) Investment property:

This property is held for its investment potential and meets the criteria of IAS
40 to be classified as an investment property. ChipyCo purchased this property
on 1 January 2019 at a cost of €2.5 million. The agreed valuation as at 31
December 2021 is €3 million and by 31 December 2022 this had increased by a
further €0.5 million. The property has an expected useful life of 40 years from
the original date purchased.

(iii) Included in Trade Receivables is an amount of €30,000 relating to a customer

who went bankrupt during December. This fact has only become known during
the review of “Events After the Reporting Date” under IAS 10. Company
policy is to make a provision for general bad debts equal to 5% of final Trade
Receivables. All amounts in relation to bad debts should be included in cost of
sales.

(iv) The long term loan of €8 million in the trial balance was received on 1 July
2022 and carries an annual interest rate of 7% per annum.

(v) The Directors have estimated the provision for income tax for the year ended 31
December 2022 at €2 million. The balance of income tax shown in the trial
balance represents the over / under provision for the previous year.

(vi) During the year there was a 1 for 5 issue of ordinary shares at a premium of
25% to the nominal value. The directors are unsure how to record this and have
lodged the cash into the bank and shown the proceeds as a single figure in the
trial balance.

Required:

(a) Prepare the Statement of Comprehensive Income for the year ended 31
December 2022.
(10 marks)

(b) Prepare the Statement of Changes in Equity for the year ended 31 December
2022.
(5 marks)

(c) Prepare the Statement of Financial Position as at 31 December 2022.

(10 marks)

(Total: 25 Marks)

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Section B: COMPULSORY (Answer BOTH questions)

Question 2

The following information has been extracted from the financial statements of BottlerCo
a company which prepares its accounts up to 31 December each year.

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Income Statement (Extracts) for Year Ended 31 December

€m €m
2022 2021
Revenue 933 801

Operating profit 140 110

Net finance costs 30 20
Profit before tax 110 90
Tax charge 21 20
Profit after tax 89 70

Statement of Financial Position as at 31 December

€m €m €m €m
2022 2022 2021 2021
Property, plant & equipment 470 402
Long term investments 10 10
Non current assets 480 412

Inventories 105 81
Trade receivables 150 139
Bank 15 9
270 229
Total Assets 750 641

Ordinary share capital (50 cent) 100 100

Retained Earnings 256 205
356 305
Long term debentures (2025) 150 125
506 430

Short term loans 70 80

Trade payables 135 106
Taxation liability 28 20
Accrued expenses 11 5
244 211
Total Equity & Liabilities 750 641

The following additional information has been provided.

2022 2021

Average share price (cent) 405 310

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Average P/E ratio (for the industry) 10 8

Required:

(a) Write a report to critically assess the financial performance and position of
BottlerCo over the period using ratio analysis under the headings of profitability,
liquidity, efficiency, solvency and shareholders.

Calculate no more than two ratios under each heading, clearly show your
workings and state any assumptions you consider necessary. All ratios should be
calculated to 2 decimal places.
(20 marks)

(b) Explain two situations where ratios might be said to distort an entity’s reported
performance and potentially mislead users’ interpretations.
(5 marks)

(Total 25 marks)

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Question 3

The following extracts are from the financial statements of BaggCo. for the year ended
31 December 2022:

Income Statement for the year ended 31 December 2022

€m
Sales revenue 1,016
Cost of Sales (696)
Gross profit 320
Distribution costs (55)
Administrative expenses (60)
Profit from operations 205
Interest receivable 5
Interest payable (13)
Profit before tax 197
Income tax expense (21)
Profit after tax 176

Statement of Financial Position as at:

31 Dec 2022 31 Dec 2021
€m €m €m €m
Non-current assets
Property, plant and equipment 914 714
Intangible assets 40 35
Investments 12 10
966 759
Current Assets
Inventories 62 77
Trade receivables 175 181
Cash 25 24
262 282
Total Assets 1,228 1,041

Equity
Issued share capital (€1 nominal value) 240 200
Share premium 112 80
Revaluation reserve 21 -
Retained earnings 422 366
795 646
Non-current liabilities
Long term loan 300 250

Current liabilities
Trade payables 94 82
Bank Overdraft 27 41
Taxation 12 22
133 145
Total equity and liabilities 1,228 1,041

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Additional information:

(i) Profit from operations is after charging depreciation on the property, plant
and equipment of €58 million and amortisation on the intangible fixed assets
of €3 million.
(ii) The revaluation reserve relates wholly to property, plant and equipment.
(iii) During the year ended 31 December 2022, plant and machinery costing €100
million, and with accumulated depreciation of €25 million at date of disposal,
was sold for €65 million.
(iv) A fully subscribed one for five Rights Issue took place on 31 August 2022,
resulting in 40 million new €1 shares being issued at an issue price of €1.80
each.
(v) Dividends paid during the year were €120 million

Required:

Prepare a Statement of Cash Flow for BaggCo for the year ended 31 December 2022 in
compliance with IAS 7.

(Total 20 marks)

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Section C Answer any TWO questions

Question 4

(a)

International harmonisation is the process of developing one common set of agreed

financial reporting standards for use by all entities throughout the world.

There are a number of reasons why the harmonisation of accounting standards would be
beneficial. Businesses operate on a global scale and investors make investment
decisions on a worldwide basis. Thus, there is a need for financial information to be
presented on a consistent basis.

Required:

Explain TWO advantages and TWO disadvantages of international harmonisation.

(10 marks)

(b)

Qualitative characteristics are the attributes that make information provided in financial
statements useful to others.

One of the qualitative characteristics is Relevance. Relevance can be defined as:

“information is relevant if it has the ability to influence the economic decisions of users
and is provided in the time to influence those decisions.”

For instance, in order to record business machinery, a company may choose to either
record the asset at the Fair Value or the Cost.

Required:

Discuss, which would be the most relevant valuation for the business machinery if:

i. A business is a going concern with no intentions to reduce or curtail its

operations.

ii. A business is not a going concern.

(5 marks)

(Total 15 marks)

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Question 5

IAS 10 provides guidance on the treatment in the financial statements of Events After
the Reporting Date.

Required:

(a) Explain how events might qualify to be described as “Events After the Reporting
Date” and explain the two potential classifications of such events as permitted in
IAS 10.
(6 marks)

(b) You are finalising the draft financial statements for the annual trading period
ended 31 December 2022 and have compiled the following list of material events
which occurred after the reporting date. Classify each event in accordance with
IAS 10 and explain briefly how it should be dealt with in the financial statements
for year ended 31 December 2022.

(i) Inventory held at the year-end was sold to a customer at below cost.

(ii) The company made a major investment in plant.

(iii)The final dividend for the year ended 31 December 2022 was announced.

(iv) The company launched a corporate take-over of a competitor.

(v) A customer who owed money at the year-end was declared bankrupt on 3
January 2023.

(vi) A customer who owed money at the year-end was declared bankrupt on
31 May 2023.
(Each event carries equal marks. Subtotal = 9 marks)

(Total 15 marks)

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Question 6

DongCo has capitalised deferred development expenditure as an intangible asset with a

total of €2,400,000 relating to the development of a new product called Ding.
Commercial production has begun in the current year and it is expected that customer
demand for the product will continue for a total of five years. Annual sales are projected
as per the following table:

Period Units
Year 1 100,000
Year 2 150,000
Year 3 350,000
Year 4 400,000
Year 5 200,000

The unit selling price is expected to remain constant over the five-year period after
which the product will be replaced by a new model.

IAS 38 provides guidance on the recognition, measurement and amortisation of

intangible assets in the financial statements.

Required:

(a) Explain the two alternative methods allowed by IAS 38 for amortising
development expenditure and calculate the annual amortisation charge for each
of the five years under each method.
(9 marks)

(b) Clearly explain the difference between “research” and “development” within the
context of IAS 38 Intangible Assets.
(3 marks)

(c) IAS 38 permits the revaluation of intangible assets. However, it requires the
existence of an “active market” to do so.

Explain the criteria necessary to identify that an active market exists and that
revaluations are therefore permissible.
(3 marks)

(Total 15 marks)

END OF PAPER

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