Interpretation of Financial Statements (Y7C22)

1	Which one of the following would help a company with high gearing to reduce its gearing ratio?
	A	Making a rights issue of equity shares
	B	Issuing further long-term loan notes
	C	Making a bonus issue of shares
	D	Paying dividends on its equity share
2	A company's gross profit as a percentage of sales increased from 24% in the year ended 31 December 20X1 to 27% in the year ended 31 December 20X2. Which of the following events is most likely to have caused the increase?
	A	An increase in sales volume
	B	A purchase in December 20X1 mistakenly being recorded as happening in January 20X2
	C	Overstatement of the closing inventory at 31 December 20X1
	D	Understatement of the closing inventory at 31 December 20X1
3	Which of the following transactions would result in an increase in capital employed?
	A	Selling inventory at a profit
	B	Writing off a bad debt
	C	Paying a payable in cash
	D	Increasing the bank overdraft to purchase a non-current asset
4	From the following information regarding the year to 31 August 20X6, what is the accounts payable payment period? You should calculate the ratio using purchases as the denominator.
	Sales Cost of sales Opening inventory Closing inventory Trade accounts payable at 31 August 20X6			$ 43,000 32,500 6,000 3,800 4,750
	A	40 days
	B	50 days
	C	53 days
	D	57 days
	The following information is relevant for questions 5 to 7.
	Quality Co is drafting their financial statements. An extract from their draft statement of financial position at 31 March 20X8 is set out below.
					$	$
	Non-current assets					450
	Current assets:		Inventory Receivables Prepayments		65 110 30
					250
	Current liabilities:		Payables Bank Overdraft (Note)		30 50
					80
						125
	Non-current liability:		Loan			575 (75)
						500
	Ordinary share capital SPL					400 100
						500
	Note: The bank overdraft first occurred on 30 September 20X7.
5	What is the gearing of the company? You should calculate gearing using capital employed as the denominator.
	A	13%
	B	16%
	C	20%
	D	24%
6	What is the quick ratio of the company?
	A	1.75
	B	2.56
	C	2.88
	D	3.20
7	What is the current ratio of the company?
	A	1.75
	B	2.56
	C	2.88
	D	3.20
8	Which of the following is a ratio which is used to measure how much a business owes in relation to its size?
	A	Asset turnover
	B	Profit margin
	C	Gearing
	D	Return on capital employed
9	A business operates on a gross profit margin of 331/3%. Gross profit on a sale was $800, and expenses were $680. What is the net profit margin?
	A	3.75%
	B	5%
	C	11.25%
	D	22.67%
10	A company has the following details extracted from its statement of financial position:
	Inventories Receivables Bank overdraft Payables			$’000 1,900 1,000 100 1,000
	The industry the company operates in has a current ratio norm of 1.8. Companies who manage liquidity well in this industry have a current ratio lower than the norm. Which of the following statements accurately describes the company’s liquidity position?
	A	Liquidity appears to be well managed as the bank overdraft is relatively low
	B	Liquidity appears to be poorly-controlled as shown by the large payables balance
	C	Liquidity appears to be poorly-controlled as shown by the company’s relatively high current ratio
	D	Liquidity appears to be poorly-controlled as shown by the existence of a bank overdraft
11	Why is analysis of financial statements carried out?
	A	So that the analyst can determine a company’s accounting policies
	B	So that the significance of financial statements can be better understood through comparisons with historical performance and with other companies
	C	To get back to the ‘real’ underlying figures, without the numbers being skewed by the requirements of International Financial Reporting Standards
	D	To produce a report that can replace the financial statements, so that the financial statements no longer need to be looked at

Consolidated Financial Statements (Y7C21)

The following information is relevant for questions 1 to 3.

On 1 January 20X0 Alpha Co purchased 90,000 ordinary $1 shares in Beta Co for $270,000. At that date Beta Co's retained earnings amounted to $90,000 and the fair values of Beta Co's assets at acquisition were equal to their book values. Three years later, on 31 December 20X2, the statements of financial position of the two companies were:

Alpha Co $

Beta Co $

Sundry net assets Shares in Beta

230,000 180,000

260,000 -

410,000

260,000

Share capital Ordinary shares of $1 each Retained earnings

200,000 210,000

100,000 160,000

410,000

260,000

The share capital of Beta Co has remained unchanged since 1 January 20X0. The fair value of the non-controlling interest at acquisition was $42,000.

1

What amount should appear in the group's consolidated statement of financial position at 31 December 20X2 for goodwill?

A

$52,000

B

$80,000

C

$122,000

D

$212,000

2

What amount should appear in the group's consolidated statement of financial position at 31 December 20X2 for non-controlling interest?

A

$49,000

B

$58,000

C

$51,000

D

$42,000

3

What amount should appear in the group's consolidated statement of financial position at 31 December 20X2 for retained earnings?

A

$280,000

B

$291,000

C

$354,000

D

$273,000

4

Which of the following companies are subsidiaries of Gamma Co? Zeta Co: Gamma Co owns 51% of the non-voting preference shares of Zeta Co Iota Co: Gamma Co has 3 representatives on the board of directors of Iota Co. Each director can cast 10 votes each out of the total of 40 votes at board meetings. Kappa Co: Gamma Co owns 75% of the ordinary share capital of Kappa Co, however Kappa Co is located overseas and is subject to tax in that country.

A

Zeta Co, Iota Co and Kappa Co

B

Zeta Co and Kappa Co

C

Iota Co and Kappa Co

D

Zeta Co and Iota Co

The following information is relevant for questions 5 and 6.

Hilton Co acquired 80% of the share capital of Shrew Co on 1 January 20X3 for $280,000. The statements of financial position of the two companies at 31 December 20X3 were as follows: STATEMENTS OF FINANCIAL POSITION

Hilton Co $

Shrew Co $

Sundry assets Investment in Shrew

660,000 280,000

290,000 -

940,000

290,000

Issued share capital Share premium account Retained earnings As at 1 Jan 20x3 Profit for 20x3

400,000 320,000 140,000 80,000

140,000 50,000 60,000 40,000

940,000

290,000

There have been no changes in the share capital or share premium account of either company since 1 January 20X3. The fair value of the non-controlling interest on acquisition was $65,000.

5

What figure for goodwill on consolidation should appear in the consolidated statement of financial position of the Hilton group at 31 December 20X3?

A

$30,000

B

$55,000

C

$95,000

D

$(10,000)

6

What figure for non-controlling interest should appear in the consolidated statement of financial position of the Hilton group at 31 December 20X3?

A

$77,000

B

$85,000

C

$73,000

D

$105,000

7

Fanta Co acquired 100% of the ordinary share capital of Tizer Co on 1 October 20X7. On 31 December 20X7 the share capital and retained earnings of Tizer Co were as follows:

Ordinary shares of $1 each Retained earnings at 1 January 20x7 Retained profit for the year ended 31 December 20x7

$’000 400 100 80

580

The profits of Tizer Co have accrued evenly throughout 20X7. Goodwill arising on the acquisition of Tizer Co was $30,000. What was the cost of the investment in Tizer Co?

A

$400,000

B

$580,000

C

$610,000

D

$590,000

8

Evergreen Co owns 35% of the ordinary shares of Deciduous. What is the correct accounting treatment of the revenues and costs of Deciduous for reporting period in the consolidated statement of profit or loss of the Evergreen group?

A

The revenues and costs of Deciduous are added to the revenues and costs of Evergreen on a line by line basis.

B

35% of the profit after tax of Deciduous should be added to Evergreen’s consolidated profit before tax.

C

35% of the revenues and costs of Deciduous are added to the revenues and costs of Evergreen on a line by line basis.

D

The revenues and costs of Deciduous are added to the revenues and costs of Evergreen Co on a line by line basis, then 65% of the profit after tax is deducted so that only Evergreen Co’s share remains in the consolidated financial statements.

9

Mercedes Co has owned 100% of Benz Co since incorporation. At 31 March 20X9 extracts from their individual statements of financial position were as follows.

Mercedes Co $

Benz Co $

Share capital Retained earnings

100,000 450,000

50,000 120,000

550,000

170,000

During the year ended 31 March 20X9, Benz Co had sold goods to Mercedes Co for $50,000. Mercedes Co still had these goods in inventory at the year end. Benz Co uses a 25% mark up on all goods. What were the consolidated retained earnings of Mercedes Group at 31 March 20X9?

A

$560,000

B

$580,000

C

$570,000

D

$557,500

10

Micro Co acquired 90% of the $100,000 ordinary share capital of Minnie Co for $300,000 on 1 January 20X9 when the retained earnings of Minnie Co were $156,000. At the date of acquisition the fair value of plant held by Minnie Co was $20,000 higher than its carrying amount. The fair value of the non-controlling interest at the date of acquisition was $75,000. What is the goodwill arising on the acquisition of Minnie Co?

A

$119,000

B

$99,000

C

$139,000

D

$24,000

11

On 1 April 20X7 Possum Co acquired 60% of the share capital of Koala Co for $120,000. During the year Possum Co sold goods to Koala Co for $30,000, including a profit margin of 25%. 40% of these goods were still in inventory at the year end. The following extract was taken from the financial statements of Possum Co and Koala Co at 31 March 20X8.

Possum Co $’000

Koala Co $’000

Revenue Cost of sales

750 (420)

400 (100)

Gross profit

330

300

What is the consolidated gross profit of the Possum group at 31 March 20X8?

A

$627,600

B

$633,000

C

$622,500

D

$627,000

12

Which of the following statements is/are incorrect?

1

A Co owns 25% of the ordinary share capital of B Co, which means that B Co is an associate of A Co.

2

C Co can appoint 4 out of 6 directors to the board of D Co, which means that C Co has control over D Co.

3

E Co has the power to govern the financial and operating policies of F Co, which means that F Co is an associate of E Co.

4

G Co owns 19% of the share capital of H Co, but by agreement with the majority shareholder, has control over the financial and operating policies of H Co, so H Co is an associate of G Co.

A

1 and 2 only

B

1, 2 and 3 only

C

3 and 4 only

D

4 only

13

Clementine Co has owned 21% of the ordinary shares of Tangerine Co for several years. Clementine Co does not have any investments in any other companies. How should the investment in Tangerine Co be reflected in the financial statements of Clementine Co?

A

The revenues and costs and assets and liabilities of Tangerine Co are added to the revenues and costs and assets and liabilities of Clementine Co on a line by line basis.

B

An amount is shown in the statement of financial position for ‘investment in associate’ being the original cost paid for the investment plus Clementine Co’s share of the profit after tax of Tangerine Co. 21% of the profit after tax of Tangerine Co should be added to Clementine Co’s profit before tax in the statement of profit or loss each year.

C

An amount is shown in the statement of financial position under ‘investments’ being the original cost paid for the investment, this amount does not change. Dividends received from Tangerine are recognised in the statement of profit or loss of Clementine Co.

D

An amount is shown in the statement of financial position under ‘investments’ being the original cost paid for the investment, this amount does not change. 21% of the profit after tax of Tangerine Co should be added to Clementine Co’s profit after tax in the statement of profit or loss each year.

14

Which of the following statements relating to parent companies and subsidiaries are correct?

1

A parent company could consolidate a company in which it holds less than 50% of the ordinary share capital in certain circumstances.

2

Goodwill on consolidation will appear as an item in the parent company's individual statement of financial position.

3

Consolidated financial statements ignore the legal form of the relationship between parents and subsidiaries and present the results and position of the group as if it was a single entity.

A

1 and 2 only

B

1 and 3 only

C

2 and 3 only

D

3 only

15

P Co, the parent company of a group, owns shares in three other companies. P Co’s holdings are:

Q

Shares giving control of 60% of the voting rights in Q Co

R

Shares giving control of 20% of the voting rights in R Co. P Co also has the right to appoint or remove all the directors of R Co

S

Shares giving control of 10% of the voting rights in S Co, plus 90% of the non-voting preference shares

Which of these companies are subsidiaries of P Co?

A

Q Co, R Co and S Co

B

Q Co and S Co only

C

R Co and S Co only

D

Q Co and R Co

16

Which of the following should be accounted for in the consolidated financial statements of Company A using equity accounting?

1

An investment in 51% of the ordinary shares of W Co

2

An investment in 20% of the preference (non-voting) shares of X Co

3

An investment in 33% of the ordinary shares of Y Co

4

An investment in 20% of the ordinary shares of Z Co, and an agreement with other shareholders to appoint the majority of the directors to the board of Z Co

A

1 and 4 only

B

2 only

C

3 only

D

3 and 4 only

17

Breakspear Co purchased 600,000 of the voting equity shares of Fleet Co when the value of the non-controlling interest in Fleet Co is $150,000. The following information relates to Fleet at the acquisition date.

Share capital. $0.5 ordinary shares Retained earnings Revaluation surplus

At acquisition $’000 500 150 50

700

The goodwill arising on acquisition is $70,000. What was the consideration paid by Breakspear Co for the investment in Fleet Co?

A

$420,000

B

$770,000

C

$620,000

D

$570,000

18

Date Co owns 100% of the ordinary share capital of Prune Co. The following balances relate to Prune Co.

Tangible non-current assets Freehold land Plant and equipment

At acquisition $’000 500 350

At 31.12.x8 $’000 500 450

850

950

At acquisition, the fair value of Prune Co’s land was $50,000 more than shown in the financial statements of Prune Co. At 31 December 20X8, Date Co’s financial statements show a total tangible non-current asset balance of $1,250,000. What amount should be included in the consolidated financial statements of the Date group at 31 December 20X8 for tangible non-current assets?

A

$2,250,000

B

$1,000,000

C

$1,850,000

D

$2,200,000

19

Six Co owns 80% of the equity share capital of Seven Co. At 31 December 20X4, the trade receivables and trade payables of the two companies were as follows:

Trade receivables Trade payables

Six Co $64,000 $37,000

Seven Co $39,000 $48,000

These figures include $30,000 that is owed by Seven Co to Six Co for the purchase of goods, for which Six Co has not yet paid. These goods were sold by Six Co for a profit of $15,000 and 50% of them were still held as inventory by Seven Co at 31 December 20X4. What should be the amounts for trade receivables and trade payables in the consolidated statement of financial position as at 31 December 20X4?

A

Trade receivables $73,000, Trade payables $55,000

B

Trade receivables $88,000, Trade payables $70,000

C

Trade receivables $95,000, Trade payables $77,000

D

Trade receivables $103,000, Trade payables $85,000

20

Donna Co acquired 80% of the equity share capital of Blitsen Co on 1 January 20X4 when the retained earnings of Blitsen Co were $40,000. The fair value of the non-controlling interest at this date was $25,000. At 31 December 20X4, the equity capital of Blitsen Co was as follows:

Share capital Share premium Retained earnings

$,000 40 10 60

110

During the year Blitsen Co sold goods to Donna Co for $20,000. This price included a mark-up of $12,000 for profit. At 31 December 20X4, 50% of these goods remained unsold in the inventory of Donna Co. What is the value of the non-controlling interest in the Donna Group at 31 December 20X4, for the purpose of preparing the consolidated statement of financial position?

A

$20,800

B

$27,800

C

$26,600

D

$29,000

21

Volcano Co acquired 75% of the equity share capital of Lava Co on 1 September 20X3. The retained profits of the two individual companies at the beginning and end of their financial year were as follows.

Retained earnings at 1 January 20x3 Retained earnings at 31 December 20x3

Volcano Co $’000 596 650

Lava Co $’000 264 336

What is the parent company’s share of consolidated retained earnings that should be reported in the consolidated statement of financial position of the Volcano Group at 31 December 20X3?

A

$668,000

B

$674,000

C

$704,000

D

$722,000

22

Tin Co acquired 90% of the equity share capital of Drum Co on 1 April 20X3. The following information relates to the financial year to 31 December 20X3 for each company

Retained earnings at 1 January 20x3 Profit for the year

Tin Co $’000 840 70

Drum Co $’000 170 60

Retained earnings at 31 December 20x3

910

230

Neither company paid any dividends during the year. What profit is attributable to the parent company in the consolidated statement of profit or loss of the Tin Group for the year to 31 December 20X3?

A

$83,500

B

$110,500

C

$115,000

D

$124,000

23

Sand Co acquired 80% of the equity share capital of Sun Co several years ago. In the year to 31 December 20X4, Sand Co made a profit after taxation of $120,000 and Sun Co made a profit after taxation of $35,000. During the year Sun Co sold goods to Sand Co at a price of $40,000. The profit mark-up was 40% on the sales price. At 31 December 20X4, 25% of these goods were still held in the inventory of Sand Co. What profit is attributable to the parent company in the consolidated statement of profit or loss of the Sand Group for the year to 31 December 20X4?

A

$144,000

B

$148,000

C

$144,800

D

$151,000

24

On 1 August 20X7 Patronic purchased 18 million of the 24 million $1 equity shares of Sardonic. The acquisition was through a share exchange of two shares in Patronic for every three shares in Sardonic. The market price of a share in Patronic at 1 August 20X7 was $5.75. What is the fair value of the consideration transferred for the acquisition of Sardonic?

A

$103.5 million

B

$69 million

C

$155.25 million

D

$92 million

25

X Co acquired 80% of the equity share capital in Y Co on 31 July 20X6. Extracts from the two companies' statements of profit or loss for the year ended 30 September 20X6 were as follows:

Revenue Cost of sales

X Co $’000 3,400 1,500

Y Co $’000 2,400 1,800

During the year ended 30 September 20X6, Y Co sold goods for $5 000 each month to X Co, at a mark up of 25%. At the end of the year X Co had 50% of these goods left in inventory. What is the group gross profit for the year ended 30 September 20X6?

A

$1,901,000

B

$2,001,000

C

$2,004,000

D

$1,904,000

26

WX acquired 75% of the equity share capital of YZ several years ago. At 31 March 20X6 WX had goods in inventory valued at cost of $60,000 that had been purchased from YZ at a mark-up of 20%. What is the effect on the profit attributable to the non-controlling interest, and the profit attributable to the parent company for the year ended 31 March 20X6?

Profit attributable to non-controlling interest

Profit attributable to WX

A

No effect

Decrease by $5,000

B

No effect

Decrease by $12,000

C

Decrease by $3,000

Decrease by $9,000

D

Decrease by $2,500

Decrease by $7,500

27

P owns 80% of the equity share capital of S The profit after tax of S for the year ended 31 December 20X6 was $60 million. During 20X6, P sold goods to S for $4 million at cost plus 20%. At the year end 50% of these goods were left in the inventory of S. What is non-controlling interest share of the after-tax profit of S for the year ended 31 December 20X6?

A

$11.36 million

B

$11.6 million

C

$11.68 million

D

$12 million