The Examiner's Answers

F1 - Financial Operations
November 2014
Some of the answers that follow are fuller and more comprehensive than would be expected from a wellprepared candidate. They have been written in this way to aid teaching, study and revision for tutors and
candidates alike.

SECTION A
Answers to Question One
Rationale
Question One consists of 10 objective test sub-questions. These are drawn from all sections of
the syllabus. They are designed to examine breadth across the syllabus and thus cover many
learning outcomes.

1.1

1.2

Output VAT
(250 x $65 x 15%) =
$2,437.5
Input VAT
[(45+8) x 250 x 15%] = $1,987.5
VAT payable
$450.0
Excise duty payable (8 x 250) =
$2,000.0
$2,450.0
Answer = B

1.3
Tax evasion is the illegal manipulation of the tax system to avoid paying tax. Intentional disregard of the
law to escape tax and can include falsifying tax returns and claiming fictitious enterprises.

1.4

Two from:
Income
Consumption
Assets (capital)

1.5

C
Financial Operations

November 2014

1.6

1.7

1.8

1.9

1.10

November 2014

Financial Operations

SECTION B
Answers to Question Two

(a)
Rationale
To test candidates knowledge of the treatment of changes in non-current assets in the
statement of cash flows.
Tests learning outcome C2c.

Suggested Approach
Calculate the proceeds from disposal of property, plant and equipment during the year.
Calculate the amount invested in property, plant and equipment during the year.
Calculate the deferred development expenditure capitalised during the year.

(i) Proceeds from disposal of property, plant and equipment during the year
Carrying value
$95,000
$23,000
Loss on disposal
$72,000
Cash received
(ii) Property, plant and equipment
Carrying value at 31 March 2013
Revalued during the year
Carrying value of assets sold during the year
Annual depreciation
Carrying value at 31 March 2014
Assets acquired during the year
(iii) Deferred development expenditure
Carrying value at 31 March 2013
Amortised in year
Carrying value at 31 March 2014
Expenditure during the year

$28,000,000
$3,000,000
$31,000,000
($95,000)
($4,055,000)
$26,850,000
$27,660,000
$810,000

$290,000
($73,000)
$217,000
$370,000
$153,000

ALZ Statement of cash flows for the year ended 31 March 2014 (Extract)
Investing activities:
Purchase of Property, plant and equipment (ii)
($810,000)
Proceeds from disposal of property, plant and equipment (i)
$72,000
($153,000)
Deferred development expenditure incurred in year (iii)
($891,000)
Net cash used in investing activities

Financial Operations

November 2014

(b)

Rationale
To test the candidates understanding of the concept of residence and its impact on an
international entity.
Tests learning outcome A2a.

Suggested Approach
Explain why residence is important for corporate income tax.
Explain the OECD model tax conventions definition of residence and apply it to CXV.

(i)

In most countries corporate income tax is a residence-based tax. The residence, for tax purposes, of an
entity determines where its worldwide profits will be subject to corporate income tax. It is therefore
important to establish the residence of an entity for tax purposes.

(ii)

The key criterion for an entitys residence status, as long as it can be determined, is where an entitys
effective management is located.
CXV holds all its management board meetings in country X and its senior managers all live in country X.
These two circumstances both imply effective management is in country X.
CXV will therefore be deemed to be resident in country X for tax purposes as that is where its place of
effective management is.

November 2014

Financial Operations

(c)

Rationale
To test the candidates understanding of the CIMA code of ethics.
Tests learning outcome B2c.

Suggested Approach
Describe two of the five fundamental principles of ethical behaviour contained in the code.
Explain how an accountant should resolve an ethical dilemma.

(i) According to CIMAs code of ethics the five fundamental principles of ethical behaviour contained in the
code are:
Objectivity not allowing bias, conflict of interest or influence of others to override professional
judgement.
Professional competence and due care the need to maintain your level of knowledge and skill.
Professional behaviour comply with relevant laws and regulations
Integrity being straightforward honest and truthful.
Confidentiality respecting the confidential nature of the information you acquire during your work.
Briefly describe two of the above.
(ii) First the ethical dilemma needs to be assessed to decide if it is significant. If the dilemma is significant
action should be taken to remove or mitigate it. A significant ethical dilemma should be resolved by taking
actions, these actions are referred to in the code as safeguards. A safeguard should eliminate a dilemma
or reduce it to a level where it is no longer significant or of any consequence.
An accountant should:

Gather all relevant information to be sure of the facts and help decide if there is a significant
problem.
Raise concern internally and then escalate it if need be. Use any existing grievance procedure or
whistle blowing procedure.
Consider reporting externally, take legal advice and remember confidentiality.
Finally if all else has failed consider removing yourself from the situation.

Financial Operations

November 2014

(d)
Rationale
To test candidates understanding of the enhancing qualitative characteristics of financial
information identified in the IASBs Conceptual Framework for Financial Reporting (2010).
Tests learning outcome B1d.

Suggested Approach
Explain each one of the four enhancing qualitative characteristics of financial information
identified in the IASBs Conceptual Framework for Financial Reporting (2010).

The four enhancing qualitative characteristics of financial information identified in the IASBs Conceptual
Framework for Financial Reporting (2010) are comparability, verifiability, understandability and timeliness.
(i) Comparability: being able to compare financial statements for an entity through time and being able to
compare the financial statements of different entities. To achieve this requires similar items to be treated in
a consistent way from one period to the next and from one entity to another.
(ii) Verifiability: Information must be verifiable. Verification can be direct, e.g. physical check or indirect using
formulae or computer models.
(iii) Understandability: Information needs to be readily understandable by users. Users are assumed to have a
reasonable knowledge of business and economic activities and be willing to put some effort into studying
the information.
(iv) Timeliness: The information needs to be available to the decision makers in time to influence their
decisions.

November 2014

Financial Operations

(e)

Rationale
To test candidates understanding of deferred tax.
Tests learning outcome A4a.

Suggested Approach
Explain why YTs revaluation of its assets would cause a temporary difference as defined by IAS
12 Income Taxes.
Calculate the deferred tax provision for YT as at 30 September 2014.

(i)

Temporary differences arise as a result of different treatment of assets for tax purposes and for accounting
purposes. This causes a difference between the carrying amount of an asset or liability in the statement of
financial position and its tax base (value used for calculating tax). In YT the revaluation of assets changes
accounting depreciation but has no effect on the tax base.
The tax on the temporary difference is the amount of deferred tax, that is the tax that will need to be
paid/refunded in the future as a result of the different treatments in the current period.

(ii) Figures per accounts:

Annual depreciation is (440,000 / 5) =
Cost
Depreciation 2012/13
Revaluation 1/10/13
Depreciation 2013/14(1/4)
Net book value at 30/9/14
Tax balances
Cost
First year allowance 50%
Allowance 2013/14 25%
Tax base at 30/9/14

$
88,000

440,000
88,000
352,000
100,000
452,000
113,000
339,000
$
440,000
220,000
220,000
55,000
165,000

Temporary difference is the difference between the accounting net book value and the tax base.
$
Accounting net book value
339,000
165,000
Tax base
Temporary difference
174,000
Total deferred tax provision required = $174,000 x 25%= $43,500

Financial Operations

November 2014

(f)

Rationale
To test candidates knowledge of the calculation of corporate income tax.
Tests learning outcome A3a.

Suggested Approach
Calculate the depreciation charged against profits.
Calculate the tax depreciation allowance.
Calculate the taxable profit for the year.
Calculate the tax due for the year.

Accounting depreciation:
Plant and equipment ($112,000 + $188,000) x 20% = $60,000
Tax depreciation allowances for plant & equipment -:
Allowance for plant and equipment purchased 1 October 2012
First year $112,000 x 50% =
$56,000
Year to 30 September 2014 writing down allowance (112,000 56,000) x 25% = $14,000
Year to 30 September 2014
First year allowance for plant & equipment purchased 1 October 2013
$188,000 x 50% = $94,000
Total tax depreciation for year ended 30 September 2014 = $14,000 + $94,000 = $108,000
MX Tax computation for year to 30 September 2014:
$
Profit before tax
291,100
Add:
Donations
9,440
Entertaining expenses
22,120
Accounting depreciation
60,000
Less:
(108,000)
Tax depreciation plant & equipment
Taxable profit
274,660
Tax due at 25% = ($274,660 x 25%) = $68,665

November 2014

Financial Operations

SECTION C

Question Three

Rationale
To test candidates ability to prepare a set of financial statements for a single entity.
Tests learning outcome C1a.

Suggested Approach
Prepare the non-current assets and depreciation calculations.
Prepare workings for cost of sales and administration.
Prepare all other required workings.
Prepare the statement of profit or loss.
Prepare the statement of financial position.
Prepare the statement of changes in equity.

TYV - Statement of profit or loss for the year ended 30 September 2014
$000
Revenue
Cost of sales (W2)
Gross Profit
Administrative expenses (W2)
Distribution costs

$000
19,460
(11,119)
8,341

(1,954)
(1,110)
(3,064)
5,277
(378)
4,899
(971)
3,928

Profit from operations

Finance cost (W4)
Profit before tax
Income tax expense (W5)
Profit for the period

TYV Statement of changes in equity for the year ended 30 September 2014

Balance at 30 Sept 2013

Profit for period
Dividend paid
Balance at

Financial Operations

Equity
Shares
$000
6,000

Share
Premium
$000
850

6,000

850

Retained
earnings
$000
491
3,928
(350)
4,069

Total
$000
7,341
3,928
(350)
10,919

November 2014

TYV Statement of financial position as at 30 September 2014

$000

$000

Non-current assets
Property, plant and equipment (W1)

16,415

Current Assets
Inventory
Trade receivables
Cash and cash equivalents

575
2,250
272
3,097
1,420
20,932

Non-current assets held for sale

Total Assets
Equity and liabilities
Equity
Share capital
Share premium
Retained earnings
Total equity

6,000
850
4,069
10,919

Non-current Liabilities
7% Loan
Deferred tax (W5)
Total non-current liabilities

5,000
576

Current liabilities
Trade payables
Tax payable
Short term loan
Interest
Total current liabilities
Total equity and liabilities

1,880
940
1,500
117

5,576

4,437
20,932

Workings - All figures in $000

W1 Tangible Non-current Assets
Cost/Valuation
Balance 30/9/13
Disposal factory B
Transfer factory A - held for sale
Plant & equipment scrapped
New factory building

Land
11,000
(1,120)
(1,375)

Buildings
6,386
(325)
(455)

.
8,505

1,099
6,705

Depreciation
Balance 30/9/13
Disposal factory B
Transfer factory A-held for sale
Plant & equipment scrapped
Charge for year
Net book value at 30/9/14

Plant
& Equipment
7,750

(175)
.
7,575

1,700
(286)
(364)

8,505

Total

4,510

(120)
796
5,186
2,389

134
1,184
5,521

16,415

Depreciation
Buildings
6,705 x 2% = 134
Plant and equipment
Reducing balance =
7,575 (4,510-120) = 3,185 x 25% = 796
November 2014

10

Financial Operations

W2
Cost of sales
$000
10,200

Balance per trial balance

Depreciation buildings (W1)
Loss on factory closures Factory A (W3)
Loss on factory closures Factory B (W3)
Loss on plant and equipment (W3)
Depreciation plant & equipment (W1)

W3 Loss on factory closures

Factory A
Carrying value:
Land
1,375
Buildings
455
Less depreciation
Fair value 30/9/2014
Write down
Factory B
Carrying value:
Land
Buildings
Less depreciation

_______
1,954

1,830
(364)
1,466
1,420
(46)

1,120
325

Cash received
Loss on disposal
Plant and equipment
Cost
Less depreciation
Cash received
Loss

46
29
48
796
11,119

Administrative
Expenses
$000
1,820
134

1,445
(286)
1,159
1,130
(29)

175
(120)

(48)

W4 Finance cost:
Interest on long term loan:
Balance t/b
Accrued ($5,000 x 7% x 4/12)

233
117
350

Finance charge on short term loan:

3 months 113 x 3/12 =

W5 Income tax expense:

Income tax for year
Previous year balance

28
378

940
80
1,020
(49)
971

Deferred tax decrease

Income statement
Deferred tax b/f
Reduction
Deferred tax at 30 Sept 2014

55
7

625
(49)
576

W6 Cost of new factory

Cost of new factory building
Finance charge on short term loan,
9 months added to cost of building (IAS 23).
113 x 9/12 = 84.75

Financial Operations

1,014

85
1,099
11

November 2014

Question Four
Rationale
To test candidates ability to prepare a journal entry to record a share issue.
To test candidates ability to prepare a set of financial statements for a group of entities.
Tests learning outcomes C2b and C1c and d.

Suggested Approach
Prepare a journal entry to record the purchase of SU in HCs accounting records.
Calculate goodwill arising on acquisition of SU.
Calculate investment in associated entity AS.
Prepare workings for intra-group activities.
Calculate consolidated property, plant and equipment.
Prepare the consolidated statement of profit or loss.
Calculate consolidated retained earnings.
Prepare consolidated statement of financial position.

(a)
Consideration for SU paid in shares:
Cost $1,356,000; HC issued 600,000 shares therefore share premium was $756,000 (1,356,000 600,000).
Journal

Investment in SU
Equity shares
Share premium

Dr
$000
1,356

Cr
$000
600
756

(b)
Investment of HC in SU
HC purchased all 720,000 shares in SU on 1 October 2013.
100% shares purchased therefore treat SU as wholly owned subsidiary of HC from 1 October 2013.
Investment of HC in AS
HC purchased 96,000 of ASs 320,000 shares on 1 October 2013.
This gave HC 30% of ASs equity.
As HC has in excess of 20% of ASs equity and can exercise significant influence over all aspects of ASs financial
and operating policies HC will treat AS as an associated entity from 1 October 2013.
Workings (All workings in $000)
(i) Fair value of net assets of SU at acquisition
Equity Shares
720
Retained earnings
319
Fair value adjustment
231
1,270
(ii) Goodwill - SU
Cost
Fair value of net assets acquired:
Goodwill
Impairment
Balance at 30 September 2014

November 2014

1,356
1,270
86
(13)
73

12

Financial Operations

(iii) Investment in associate - AS

Cost
Add group share of post acquisition profits
(229 - 132) = 97 x 30% =
Investment at 30 September 2014

384
29
413

(iv) Intra-group trading

Mark up on cost 25% = 25/125 or 20% margin on selling price.
Selling price 170; unrealised profit = 170 x 20% = 34
50% of goods remain in inventory, adjust inventory by (34 x 50%) 17.
Dr.
Consolidated cost of sales
17
Consolidated current assets - inventory
Consolidated revenue
170
Consolidated cost of sales
Consolidated trade payables
170
Consolidated trade receivables
(v) Cash transfer
Consolidated cash and cash equivalents
Consolidated trade payables

Cr.
17
170
170

90
90

(vi) Excess depreciation

Fair value adjustment 231
Economic life 21 years, straight line basis
Excess depreciation = 231/21 = 11
(vii) Consolidated Retained Earnings
Balance HC at 1 October 2013 (796-(611-25))
Add consolidated profit for year
Balance 30 September 2014

210
712
922

Alternative calculation:
(viii) Consolidated Retained Earnings
Balance HC
SU - group share of post acquisition profits (457-319) =
Associate - AS, group share of post acquisition profits (iii)
Excess depreciation
Goodwill impairment
Cancel unrealised profit in inventory (iv)
(ix) Consolidated Property, plant and equipment
HC
SU
Fair value adjustment
Excess depreciation

796
138
29
(11)
(13)
(17)
922

2,192
920
231
(11)
3,332

HC Group Consolidated Statement of Profit or Loss for year ended 30 September 2014
$000
Revenue(1,925+480-170)
2,235
(1,013)
Cost of sales (925+230-170+11+17)
Gross profit
1,222
Expenses (240+54+13)
(307)
Profit from operations
915
Share of profit of associated entity (iii)
29
Finance cost (27+45-25)
(47)
Profit before tax
897
Tax (147+38)
(185)
Profit for the year
712

Financial Operations

13

November 2014

HC Group - Consolidated Statement of Financial Position as at 30 September 2014

$000
$000
Non-Current Assets
Property, plant and equipment (ix)
3,332
Goodwill (ii)
73
413
Investment in associate (iii)
3,818
Current Assets
Inventory (1,810+782-17)
2,575
Trade receivables (2,292+686-170)
2,808
273
Cash and cash equivalents (113+70+90)
5,656
Total assets
9,474
Equity and Liabilities
Equity Shares (5,520+600)
Share premium [see part (a)]
Retained Earnings (viii)

6,120
756
922
7,798

Non-current Liabilities
Long term loans (650-250)

400

Current Liabilities
Trade payables (725+631-170+90)

November 2014

1,276
9,474

14

Financial Operations