Accounting Question

Business Finance

International Financial Reporting Standards

Aston University, Birmingham

Question Description

Two tasks:

Task 1: Discuss and apply IFRS to a series of transactions and prepare a set of financial statements, 800 words.

Task 2: Appraise the performance and position of an entity in comparison to the sector average, 1500 words.

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COURSEWORK ASSIGNMENT Academic Year 2020/21 Module Code: BF2269 Module Name: INTERNATIONA L FINANCIAL REPORTING Module Leader: BOBBIE RETALLACK Coursework Title: BF2269 Coursework Portf olio Task Details/Description: You are required to provide a coursework portfolio (submitted as one document) which brings together 2 separate task elements as follows: Req no. Task Marks Word Limit Guide 1 Discuss and apply IFRS to a series of transactions and prepare a set of f inancial statements. 50 800* 2 Appraise the perf ormance and position of an entity in comparison to the sector average. 50 1,500* 100 TOTAL 2,300** * The word count split between tasks 1 & 2 is a guide only. ** Word limits can be f lexed by +10% Module Learning Outcomes Assessed: 1. Apply the Conceptual Framework f or Financial Reporting and International Financial Reporting Standards (IFRS) to enable an accurate assessment of accounting issues and be able to of f er a solution, with justif ication to f inancial reporting issues. Be able to articulate these complex issues in varied f ormats including those commonly used in prof essional communication - letters, emails reports etc. 2. Develop the ability to use prof essional judgement on subjective areas of the f inancial statements in readiness f or placement and f inal year studies. 3. Critically assess the impact of judgement on f inancial statements and other repo rt s taking into consideration the dif f erent perspectives of the users of the f inancial statements and their inf ormation needs. 4. Prepare f inancial statements. Presentation Requirements: Word Count: See detail per task. Overall limit of 2,000 words on the narrative requirements (all calculations and f inancial statements do not count towards word count). Font Style: Arial or Calibri Font Size: 11 or 12 Line Spacing: 1.5 lines Submission Date & Time: Monday 11 January 2021 (12:00) Assessment Weighting for the Module: The coursework assignment makes up 40% of the overall module mark f or BF2269. Assessment Criteria For each task you will be required to provide answers (and assumptions and workings where applicable) to the questions set. Please ref er to the requirements f or guidance on the calculations and written analysis that is required f or each task. In particular requirement 2 will require f eedback (via a report) to the Finance Director on company perf ormance and position. As such, you are required to produce a prof essional document, incorporating clear business English and an appropriate f ormat is required. No essential reading for this coursework task is required. TASK 1 The following trial balance has been extracted from the records of Flora Plc (Flora) as at 31 May 2020: £'000 Revenue Inventories Trade and other receivables Trade and other payables Bank overdraft Cost of sales Administrative expenses Distribution costs Finance costs Property, plant and equipment (note (i)) Ordinary share capital (£1) Share premium 8% Loan notes 6% Bank loan Dividend Retained earnings £'000 103,500 16,150 17,800 14,900 2,900 72,840 14,750 7,970 1,890 44,600 5,000 12,000 18,000 10,000 900 10,600 176,900 176,900 The following information is also relevant: (i) Flora received a £10 million 6% loan from a bank on 1 December 2019. The funds which were used towards the construction of a new property have been correctly capitalised as part of the property, plant & equipment above. Six months interest has been paid an d is included within finance costs in the trial balance. Construction of th e property was incomplete at the financial year end and is expected to be completed in September 2020. Flora decided to revalue an item of property on 1 June 2019 for the first time. The carrying amount of the asset at this date was £4.3 million (included in property, plant and equipment above). The directors accepted the report of an independent surveyor who valued the property at £5.1 million on that date. The remaining life of this property is 20 years at the date of the revaluation. It is Flora’s policy to make an annual transfer to retained profits in respect of the excess depreciation arising from the revaluation surplus. No adjustments have been made relating to this property during the year. Apart from the notes above, all other assets have been correctly accounted for and included in property, plant & equipment in the trial balance. No further adjustments are required in respect of these. (ii) Development costs of £9 million were incurred evenly between 1 June 2019 and 28 February 2020 (on a pro-rata basis) and have been included in cost of sales. IAS 38 development criteria were met on 1 September 2019. The project was completed and the product was launched on 28 February 2020. The product is expected to generate revenue over the next five years. (iii) Flora sold and delivered goods to a major customer on 1 December 2019. Under the terms of the agreement, Flora will receive payment of £3 million on 30 November 2020. Flora has recorded £3 million in revenue and trade receivables at 31 May 2020. The costs of this sale have been accounted for correctly in the financial statements for the year ended 31 May 2020. Market rates of interest available to this particular customer are 7%. (iv) An inventory count was performed at the year-end and has been included in the trial balance at cost. Included in this count is some inventory that was damaged. This inventory originally cost £800,000. Following the damage it is expected that the inventory will be sold for £900,000 but will need to be repaired before it can be sold at a cost of £230,000. (v) On 16 March 2020 a legal claim was made against Flora by an exemployee. Flora’s lawyers believe that there is a 75% chance that Flora will lose the case and pay damages of £95,000. They also believe that there is a 15% chance that the payout will be £120,000 and a 10% chance that the case will be dismissed. The case is due to go to court in September 2020. (vi) A tax estimate of £1.8 million for the year ended 31 May 2020 is required. REQUIRED: (a) Justify and explain the appropriate accounting treatment with respect to the matters in notes (i) to (v) in accordance with relevant International Financial Reporting Standards (IFRS) and the IFRS Conceptual Framework for Financial Reporting. (b) Using the above trial balance and your accounting treatment outlined in part (a) prepare a statement of profit or loss and other comprehensive income, a statement of financial position and a statement of changes in equity for Flora for the year ended 31 May 2020. (Provide workings for all calculations and present results to the nearest thousand) (50 marks) TASK 2 Flora wants to expand and diversify its activities and is considering the acquisition of another entity to help do this. Following extensive research, Flora has identified two potential acquisition targets Nevea and Autz. B oth companies operate in the same industry and have the same financial year end. Nevea primarily sells to retail stores whereas Autz sells to internet retailers. Both Nevea and Autz can be purchased at approximately the same amount. Extracts of the financial statements of Nevea and Autz for the year ended 31 May 2020 are shown below: Extract from the statements of profit or loss Revenue Cost of sales Gross profit Operating expenses Profit from operations Finance costs Profit before tax Nevea £’000 23,975 10,662 13,313 7,538 5,775 288 5,487 Autz £’000 15,375 9,775 5,600 3,346 2,254 480 1,774 Extract from the statements of financial position Property, plant & equipment Investments Inventory Receivables Cash at bank Equity Non-current liabilities (loan) Current liabilities Nevea £’000 11,700 Nil 1,640 3,700 840 10,575 4,200 3,800 Autz £’000 14,945 5,440 874 720 487 12,766 8,000 1,700 The following information is relevant: (i) Nevea has an established, loyal customer base whereas Autz sells to numerous customers on a less regular basis. (ii) Nevea accounts for its property using the cost model per IAS 16 Property, Plant & Equipment, whereas Autz uses the revaluation model. (iii) Nevea disposed of property during the year resulting in a loss on disposal of £1.2 million (included in the profit or loss extracts above). (iv) Included within Autz’s non -current liabilities is a £3 million loan note that is due to be repaid in July 2021. REQUIRED: (a) Calculate the following ratios for both companies: - Return on capital employed Asset turnover Gross profit margin Operating profit margin Current ratio Quick ratio Inventory turnover period (days) Receivables collection period (days) Gearing Interest cover (10 marks) (b) Prepare a report for the directors of Flora that analyses the performance and position of Nevea & Autz using the ratios calculated in part (a) and the information available in the scenario. You should reach a conclusion and make a recommendation to Flora which company it should invest in. (30 marks) (c) Using relevant research identify and explain the potential limitation s in using ratio analysis for comparison purposes between entities. (10 marks) (TOTAL: 50 marks) ...
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