Sample/practice exam May 2018, questions PDF

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Cass Undergraduate School BSc (Hons) Degree in Finance BSc (Hons) Degree in Accounting & Finance BSc (Hons) Degree in Banking and International Finance BSc (Hons) Degree in Investment & Financial Risk Management BSc (Hons) Degree in Economics & Accountancy

AF3203 Advanced financial accounting - theory and practice Stage 3 Examination

17 May 2018

10:00 – 12:15

Instructions to students: Candidates must answer FOUR QUESTIONS OUT OF FIVE. The number of marks allocated is shown at the end of each question. This examination paper consists of 6 printed pages including the title page.

Materials: Number of answer books to be provided: 1 Only the Casio calculators FX-83 (MS, ES or GT+) or FX-85 (MS, ES or GT+) are permitted for use in this exam. Dictionaries are not permitted. This examination paper Must Not be removed from the examination room.

External Examiner: Ms Catherine Gregory Internal Examiner: Mr Stefano De Cesaris

Page 1 of 6

Question 1 Admiral plc is a UK-based entity which uses the pound sterling (£) to present its consolidated financial statements. Admiral plc formed a foreign subsidiary called Bright Inc in the United States of America on 1 January 20X0. The summarised financial statements of Bright Inc for the financial years ending 31 December 20X0 and 20X1 are as follows: Statements of comprehensive income for the year to 31 December 20X0

20X1

In US Dollars (USD) Sales

67,200

71,820

Expenses

40,320

41,580

Net Profit

26,880

30,240

Statements of financial position as at 31 December 20X0

20X1

In US Dollars (USD) Total assets

112,400

145,920

Total liabilities

25,520

28,800

Share capital *

60,000

60,000

Retained earnings

26,880

57,120

Total liabilities and equity 112,400

145,920

* issued on 1 January 20X0 Exchange rates At 1 January 20X0

£1 = USD 1.66

At 31 December 20X0

£1 = USD 1.56

At 31 December 20X1

£1 = USD 1.47

Average for the year to 31 December 20X0

£1 = USD 1.60

Average for the year to 31 December 20X1

£1 = USD 1.52

Page 2 of 6

Required: Translate Bright Inc’s financial statements for the purpose of preparing Admiral plc’s consolidated financial statements for all periods shown, explaining the related IFRS accounting rules and procedures, and showing all your workings. 25 marks Question 2 Answer all parts of this question On 1st January 20X0, Fargo plc was started as a new business by its owners, who contributed £60,000 in cash as equity capital. Fargo plc recorded the following transactions during the month of January 20X0: •

2nd January: Purchased 100 units of inventory for £500 per unit, paid in cash

•

5th January: Sold 80 units of inventory for £570 per unit, received in cash

•

11th January: Purchased 50 units of inventory for £540 per unit, paid in cash

The following data is available about the replacement cost of Fargo plc’s inventory: Date

Replacement cost (per unit of inventory)

5th Jan 20X0

£520

15th Jan 20X0

£550

On 15th January 20X0, Fargo plc could have sold its inventory at a price of £590 per unit. Required: (a) Compute realised and unrealised holding gains (losses) using current replacement cost accounting for the period 1st – 15th January 20X0, showing all your workings; 6 marks (b) Showing all workings, prepare Fargo plc’s balance sheet at 15 January 20X0 and income statement for the period 1st – 15th January 20X0 using: i.

Current replacement cost 7 marks

ii.

Current realizable value 12 marks (Total - 25 marks) Page 3 of 6

Question 3 Answer all parts of this question An agricultural business owned a herd of one hundred 2-year-old animals at 1 January 20X1. The following events took place during the year ending 31 December 20X1: •

Twenty animals aged 2-and-a-half years were purchased on 1 July 20X1 for a total cost of £2,300;

•

Ten animals were born on 1 July 20X1;

•

Five animals aged 2 years and 9 months were sold on 30 September 20X1 for a total price of £750.

The table below provides fair value measurements per animal on specific dates within the year ending 31 December 20X1: Age of animal at measurement date

Date of measurement

Fair value per animal (in pound sterling £)

Newborn

1 July

70

Newborn

31 December

72

6 months

31 December

80

2 years

1 January

100

2 years

31 December

105

2-and-a-half years

1 July

108

2 years and 9 months

30 September

111

3 years

31 December

120

Required: a) Showing all your workings, compute the following amounts according to IAS 41 Agriculture: i.

The herd’s fair value on 31 December 20X1. 5 marks

ii.

The total gain or loss to be reported on the entity’s income statement for the year ending 31 December 20X1. 10 marks

b) IAS 41 Agriculture requires measuring biological assets at fair value. Explain the advantages and disadvantages of such a choice of measurement basis, from the perspective of an investor.

10 marks (Total - 25 marks) Page 4 of 6

Question 4 Answer all parts of this question i) In relation to the contents of the IASB Conceptual Framework for Financial Reporting: a. Describe the concept of materiality and explain its relationship with the concept of relevance; 10 marks b. Describe the going concern assumption and provide an example of its application in the preparation of financial reports. 7 marks ii) Can a comprehensive theory of accounting benefit the accounting profession? Provide a brief answer focused on your key observations. 8 marks

(Total - 25 marks)

Page 5 of 6

Question 5 Answer all parts of this question On 1 January 20X0, Hydra plc owned an asset which was expected to generate three cash flows as follows:

Cash flow

31 Dec 20X0

31 Dec 20X1

31 Dec 20X2

£11,000

£12,100

£66,550

Hydra plc uses a 10% discount rate to evaluate the asset’s cash flows.

Required: a) Compute Hydra plc’s economic capital at 31 Dec 20X0, assuming that the cash flow received on that date is paid as dividend to Hydra plc’s shareholders. Show all workings. 4 marks

b) Compute Hydra plc’s economic income for the year ending 31 Dec 20X0. 7 marks

c) Compute the amount of dividends payable to Hydra plc’s owners o n 31 Dec 20X0 which would result in the maintenance of Hydra plc’s economic capital during year ending 31 Dec 20X0. 6 marks d) Hydra plc’s directors made the following statement on 1 January 20X0: “We are offering our asset for sale at a proposed sale price of £70,000, which we believe is a reasonable valuation for our asset”. Taking the perspective of a potential buyer, explain whether you find the proposed price to be a “reasonable valuation” of Hydra plc’s asset. 8 marks

(Total - 25 marks)

Page 6 of 6...