Professional Stage Financial Accounting September 2009

MARK PLAN AND EXAMINERS COMMENTARY

The mark plan set out below was that used to mark these questions. Markers are encouraged to use
discretion and to award partial marks where a point was either not explained fully or made by implication. More
marks are available than could be awarded for each requirement, where indicated. This allows credit to be
given for a variety of valid points, which are made by candidates.

Question 1

Total marks: 22

General comments
This is a trial balance question with the preparation of a statement of financial position and a statement of
changes in equity required. Adjustments are required for depreciation, the recognition of a provision and
related asset, development expenditure, an operating lease as well as other minor adjustments.

(a)
Adeje Ltd Statement of financial position as at 30 June 2009

ASSETS
Non-current assets
Property, plant and equipment (W2)
Intangible assets (120,000 40,000 25,000)

2,175,050
55,000
2,230,050

Current assets
Inventories (42,000 + 2,500)
Trade & other receivables (32,000 + 10,000)

44,500
42,000
86,500
2,316,550

Total assets
EQUITY AND LIABILITIES
Equity
Ordinary share capital
Share premium account
6% Irredeemable preference shares
Retained earnings

1,050,000
200,000
60,000
874,050
2,184,050

Current liabilities
Trade and other payables (58,000 + 250 (W3))
Bank overdraft
Taxation
Provisions

58,250
18,250
41,000
15,000
132,500

Total equity and liabilities

The Institute of Chartered Accountants in England and Wales 2009

2,316,550

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Professional Stage Financial Accounting September 2009

Statement of changes in equity for the year ended 30 June 2009

Ordinary
share
capital

Irredeem.
pref
shares

Balance b/fwd
Balance c/fwd

Total comprehensive
loss for the period (W3)
Interim ordinary
dividend
Issue of shares
Irredeemable dividend
(60,000 x 6% x 6/12)

Share
premium

Retained
earnings

Total

(84,900)

(84,900)

(21,250)

(21,250)

60,000

(1,800)

60,000
(1,800)

1,050,000

200,000

60,000

(107,950)
982,000

(47,950)
2,232,000

1,050,000

200,000

60,000

874,050

2,184,050

W1 Depreciation
Depreciation on buildings

(2,500,000 700,000) x 3% = 54,000 pa

Depreciation on plant & equipment (351,000 1,000 (lease) 97,000) x 15% = 37,950 pa
W2 Property, plant and equipment
Land &
buildings

2,500,000

Cost b/fwd
Adjustment

Acc. deprec. b/fwd

Charge for year (W1)
Acc. deprec. b/fwd
Carrying amount

Plant &
equipment

351,000
(1,000)
350,000

486,000
54,000
540,000

97,000
37,950
134,950

1,960,000

215,050

Total

2,175,050

W3 Operating lease
Deposit
4 instalments of 1,000
Total lease payments

1,000
4,000
5,000

Straight line over two years = 5,000 / 2 years = 2,500

6 months charge in the period = 2,500 x 6/12 months = 1,250
Accrual: 1,250 1,000 (paid) = 250

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting September 2009

W4 Total comprehensive profit/loss for the period

Trial balance profit before tax

Adjustments:
Irredeemable preference dividend
Provision
Reimbursement
Inventory
Research & development exp (40,000 + 25,000)
Depreciation charge (54,000 + 37,950)
Lease charge (W2)
Taxation
Loss for the period

115,000

1,800
(15,000)
10,000
2,500
(65,000)
(91,950)
(1,250)
(158,900)
(41,000)
(84,900)

Candidates performance on this question was good and fairly consistent with previous sittings although the
preparation of the statement of changes in equity rather than the income statement continues to cause
weaker candidates problems. Almost all candidates attempted this question highlighting just how
comfortable candidates are with this style of question, which continues to be fundamental to the Financial
Accounting syllabus. A good majority of candidates attempted this question first.
Almost all candidates produced a well laid out statement of financial position, however the preparation of the
statement of changes in equity was often a little haphazard. Candidates seem extremely comfortable when
they are asked to prepare the statement of financial position and income statement, but less so when the
statement of changes in equity is asked for. Candidates should be reminded that it is likely that any two of
these three statements could be, and frequently are, asked for.
Candidates generally spent time totalling each line item in their statement of financial position, although subtotals were often missing. Candidates should continue to be reminded that presentation marks are available
in this type of question as the requirement asked for statements that are suitable for publication. Workings
were generally clearer than in the past with most candidates producing well laid out workings for the property,
plant and equipment calculations instead of adding or subtracting figures on the face of the statement which
has been a criticism in the past.
Most candidates were able to take items from the trial balance and insert them in the correct place in the
statement of financial position. Marks were awarded where presentation differed to the marking guide but
resulted in a reasonable alternative.
A number of candidates produced a working for retained earnings carried forward, seeming not to realise that
this simply duplicated the information from one column of their statement of changes in equity which itself
acted as a working for the figure in the statement of financial position. A good number of candidates missed
the column for preference shares in the statement of changes in equity and consequently incorrectly showed
the share issue as ordinary shares.
Most candidates coped well with the goods omitted from the inventory count, the calculation of the
appropriate provision, the annual depreciation charges, the issue of irredeemable preference shares and the
tax charge for the year. Pleasingly, only a minority of candidates misclassified the irredeemable preference
shares as debt, rather than equity.
Strong candidates coped well with adjusting the profit before tax figure in the question for each adjustment
made. Weaker candidates made the adjustments to statement of financial position figures but failed to make
the corresponding adjustment to profit in order to arrive at the correct figure for total comprehensive income
in the statement of changes in equity.

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting September 2009

The worse attempted adjustment was that of the lease, with only a minority of candidates arriving at the
correct adjustment to profit and the correct closing accrual. Common errors were to treat the operating lease
as a finance lease, in spite of the fact that the question specified that this was an operating lease. Some
candidates simply treated the 1,000 as an expense, others treated half of it as a prepayment, while others
set up the future payments as lease liabilities. A number of candidates failed to deal with this adjustment at
all.
Other common errors included netting off the 10,000 expected refund against the 15,000 provision and
thereby showing only a net 5,000 provision in the statement of financial position, failing to reduce the
amount capitalised for research and development expenditure by one of the two amounts that were not
allowable under IAS 38, although candidates generally completed their double entry adjustment correctly,
calculating the preference dividend based on a whole year rather than six months and reducing trade
receivables by 10,000 in respect of the returned goods.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

22
22

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Professional Stage Financial Accounting September 2009

Question 2

Total marks: 19

General comments
This question requires the preparation of a statement of cash flows along with the note reconciling profit
before tax to cash generated from operation using the indirect method. A number of adjustments are
required, including the disposal of an item of plant with a deferred receipt, two share issues, one for cash and
one as part of an acquisition and deferred credit terms on the acquisition of new equipment.
Caleta plc
Statement cash flows for the year ended 30 June 2009

Cash flows from operating activities

Cash generated from operations (Note)
Interest paid (W1)
Income tax paid (W2)
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Purchase of intangible assets
Proceeds from sales of property, plant and equipment
(35,000 11,000) / 2
Net cash used in investing activities
Cash flows from financing activities
Proceeds from issue of ordinary share capital
(80,000 (W5) + 10,000 (W6))
Repayment of loan (600,000 350,000)
Dividends paid (W7)
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

546,680
(165,200)
(20,780)
360,700
(50,000)
(100,000)
12,000
(138,000)

90,000
(250,000)
(34,000)
(194,000)
28,700
59,300
88,000

Note: Reconciliation of profit before tax to cash generated from operations

Profit before tax
Finance costs
Depreciation charge (W3)
Amortisation charge (W4)
Loss on disposal of property, plant and equipment
Increase in inventories (123,100 106,000)
Increase in trade and other receivables ((229,800 12,000) 216,500)
Decrease in trade and other payables
((334,800 6,300 39,000) (358,600 7,500))
Cash generated from operations

The Institute of Chartered Accountants in England and Wales 2009

133,380
164,000
36,600
281,700
11,000
(17,100)
(1,300)
(61,600)
546,680

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Professional Stage Financial Accounting September 2009

Workings
(1) Interest paid

Cash ()
C/d

165,200
6,300
171,500

B/d
IS

7,500
164,000
171,500

20,780
32,000
52,780

B/d
IS

22,000
30,780
52,780

(2) Tax paid

Cash ()
C/d

(3) PPE

B/d
Additions

366,500
89,000
455,500

Disposal
Depreciation ()
C/d

35,000
36,600
383,900
455,500

Amortisation ()
C/d

281,700
1,163,300
1,445,000

B/d
Non-cash issue
Cash ()

550,000
50,000
80,000
680,000

B/d
Non-cash issue
Cash ()

110,000
50,000
10,000
170,000

B/d
IS

352,700
102,600
455,300

(4) Intangibles

B/d
Additions

1,245,000
200,000
1,445,000

(5) Share capital

C/d

680,000
680,000

(6) Share premium

C/d

170,000
170,000

(7) Retained earnings

Dividends in SCE ()
C/d

34,000
421,300
455,300

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting September 2009

Candidates are clearly very comfortable with the preparation of a statement of cash flows. This question was
generally completed early on showing that candidates continue to favour this topic.
Presentation was generally good and most candidates produced workings in T-accounts. A significant
minority of candidates produced T-accounts with the brought forward and carried forward figures the wrong
way round and got in-flows and out-flows back to front on the face of the statement of cash flows.
The vast majority of candidates arrived at the correct figures for interest paid, tax paid, purchase of property,
plant and equipment and intangibles, repayment of loan and dividends paid in the statement of cash flows
itself. In the reconciliation most arrived at correct figures (or used their incorrectly calculated adjustments
correctly) for all but the changes in working capital, where there were a number of more unusual adjustments
to be made.
Where errors were made they included adjusting the closing interest accrual by the 1,700, not taking the
issue of shares for non-cash consideration into account when calculating the cash proceeds from issue of
ordinary share capital, not adjusting the movement on trade payables for the 39,000 due in respect of
property, plant and equipment and adjusting the property, plant and equipment T-account by the accumulated
depreciation on the asset sold instead of by the carrying amount.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

19
19

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Professional Stage Financial Accounting September 2009

Question 3

Total marks: 18

General comments
This is a mixed topic question covering both revenue recognition and the treatment of an associate acquired
during the period in the consolidated statement of financial position. The question also contains a separate
element on the different users of financial statements and their information needs.
(a)
Income statement for year ended 30 June 2009

Revenue
Fixed price contract (120,000 x 50%)
Interest-free credit
Commission sales (1,300,000 x 15%)
High technology fittings
(85,000 (4,000 x 2 yrs))
Maintenance income (4,000 x 3/12)
Cost of sales (45,000 + 35,000) x 50%
Finance income (25,000 23,500) x 6/12 months

60,000
23,500
195,000
77,000
1,000
40,000
750

Statement of financial position as at 30 June 2009

Trade and other receivables

Fixed price contract (60,000 40,000)
Interest-free credit (23,500 + 750)

20,000
24,250

Non-current liabilities
Deferred income (4,000 x (21 12)/12 months)

3,000

Current liabilities
Deferred income

4,000

(It was not necessary to split the deferred income between non-current and current liabilities to gain the
marks.)
Candidates seem to struggle with extract style questions whether they are single or mixed topic.
Candidates are not able to simply follow a process with this style of question and as a result they appear to
forget their basic accounting knowledge. This question was often left to the end suggesting that candidates
are not comfortable with this style of question.
Answers to this question were mixed with the question proving to be a good discriminator between strong
and weak candidates.
In Part (a) although the majority of candidates arrived at some correct figures, the weaker candidates failed
to properly complete their double entry, so whilst they might arrive at, say, a correct figure for revenue they
failed to give the correct figure for receivables, or deferred income. A significant number of candidates
wasted time providing extracts from the financial statements when all that was required was clearly labelled
calculations. A significant number of candidates also made, what appeared to be, correct calculations but
there were no clues as to what these figures represented, for example, revenue, cost of sales, receivables
etc and therefore lost marks.
Comments on specific parts of Part (a) are as follows:
Fixed price contract: Most candidates correctly arrived at revenue of 60,000 but then calculated cost of
sales as being 45,000, being the cost incurred to date (instead of adding the costs incurred to date and
estimated future costs and then taking 50% of the total as reflecting the stage of completion). Few
calculated a closing receivables figure and others described this as deferred income. A minority used
the costs basis to calculate cost of sales when a completion basis was specified in the question.
Interest free credit: Many arrived correctly at revenue of 23,500 but gave receivables as 25,000 (or

The Institute of Chartered Accountants in England and Wales 2009

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Professional Stage Financial Accounting September 2009

vice versa). A number of candidates calculated finance income based on one year instead of six months
and others described this figure as finance cost, as opposed to finance income. Of those who calculated
these two income figures few then gave the corresponding total receivable.
Commission sales: the revenue figure was correctly calculated by the majority of candidates.
High technology fittings: attempts at calculating a revenue figure varied with most candidates reducing
the 85,000 fee by only one years worth of maintenance charges, rather than two. Only the better
candidates arrived at the correct figure for revenue and the corresponding figure for deferred income.
Total possible marks
Maximum full marks

7
6

(b)
Extract from consolidated statement of financial position
ASSETS
Non-current assets
Investment in associate (W1)
129,100
Current assets
Dividend from Alcala Ltd (W2)
(W1) Associate
Year end carrying amount
Cost
Share of post-acq change in net assets
35% x (576,000 650,000)
Impairment in year
Investment in associate

14,000

175,000
(25,900)
149,100
(20,000)
129,100

(W2) Dividend
(400,000 / 0.50) x 5p x 35% = 14,000

In Part (b), which did require extracts, a significant number of candidates provided calculations only.
Candidates must learn to distinguish between requirements asking for extracts (where marks will be given
for presentation and own figure marks from workings) and those requiring calculations only.
There was a split between candidates who attempted to calculate a figure for dividend receivable from the
associate and those who ignored this totally. Many arrived at an incorrect figure, either missing the fact that
these were 50p shares, or that a 35% share was needed. Once calculated, the most common mistake was
for this figure to be used to adjust the retained earnings of the associate, with few candidates realising that
retained earnings given in the question would already have been reduced by this figure. Disappointingly, it
was very rare to see a consolidated statement of financial position extract for the dividend receivable.
Most candidates made a reasonable attempt at calculating the carrying amount for the investment in the
associate and correctly deducted the impairment of 20,000. Common errors included failing to recognise
that the associate had made a post-acquisition loss, as opposed to a post-acquisition profit, consequently
adding 25,900 to the cost of the associate rather than deducting it.
A worrying minority of candidates treated the associate as a subsidiary and attempted to calculate figures
such as goodwill. Even though the (given) 35% shareholding should in itself have indicated an associate, as
opposed to a subsidiary, the question also clearly stated that the investment should be treated as an
associate.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

5
5

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Professional Stage Financial Accounting September 2009

(c)(i)
Investors Investors need to decide whether to buy or sell their shares. They analyse information from the
financial statements, such as the companys past dividend policy, the level of profits that the company is
making and how the company uses its resources.
Employees financial statement information is needed to assess their employers stability and profitability
and their ongoing ability to offer further remuneration and career progression. Does the company have plans
to expand in the future, is competition fierce or does the company have a niche market? Does the company
have share plans for its employees?
Lenders - financial statement information is needed to assess whether the company will have sufficient funds
available to pay the finance costs and repayments when they fall due. Working capital and cash flow will be
of particular interest.
Suppliers - financial statement information is needed to assess the companys ability to pay their debts when
they fall due. Working capital and cash flow will be of particular interest.
Customers - financial statement information is needed to assess a companys ability to continue trading,
providing continuity of supply for customers. What are the companys plans for the future, is it planning to
expand, diversify or reorganise its business?
Government agencies - financial statement information is needed to assess the allocation of resources and
therefore the activities of the company. Various different financial and non-financial information will be used
by the Government in its collection of national statistics, such as number of employees, level of revenue,
geographical locations etc.
The general public - financial statement information is needed to assess trends and recent developments in
the companys activities and future trading potential. Expansion plans for the future will be of particular
interest as they may provide additional local employment opportunities and are likely to encourage other
businesses into the local area. The financial performance of the company may provide some insight into
whether the company is likely to remain in the local area.
[Note: information presented on the first two user groups only will be marked.]
Total possible marks
Maximum full marks

5
4

(c)(ii)
The financial statements have a number of limitations as set out below:

Financial statements are prepared to a specific date, the information, when published is therefore
historic and backward looking. Although, historic information is useful in assessing how a company
has been performing it is limited in the amount of information that it can provide about a companys
future performance.

Financial statements are prepared in a standardised manner with much of the information
aggregated. While this means that it is easier to compare information between companies because it
is presented in a similar manner it also means that the content of standardised and aggregated
information may be difficult to identify.

Financial statements only contain a limited amount of narrative information about the business which
can provide valuable insight into the companys future, for example, how it is operating, what the
companys plans are for the future, the risks facing the company, such as the number of competitors
in the market and how the company is managed.

(Markers were encouraged to use their judgement and award marks where candidates had provided
alternative limitations.)
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

5
3

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Professional Stage Financial Accounting September 2009

Answers to Part (c) continued the trend of candidates struggling with the written part of questions although
there were some good answers from some of the stronger candidates. However, it was pleasing that almost
all candidates attempted this part of the question, which was an improvement on previous sittings where
weaker candidates often miss out the written elements.
Common misconceptions included identifying management/directors and/or auditors as users of the
financial statements, stating that banks looking to lend to companies will rely on historic financial
statements (as opposed to requiring cash flow forecasts), that financial statements include no narrative
information and that immaterial errors matter to users (indicating a lack of understanding of the concept of
materiality).
Some candidates wasted time discussing the qualitative characteristics of financial information, cost versus
benefit, materiality in general and the inherent limitations of an audit.
Total possible marks
Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

22
18

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Professional Stage Financial Accounting September 2009

Question 4

Total marks: 21

General comments
This is a consolidation question. A consolidated income statement is required along with an extract from the
consolidated statement of financial position showing equity. A subsidiary has been acquired during the
period and the consolidation includes an associate. Adjustments are required for differences between the
fair value and carrying amount of the subsidiary acquired and inter-company trading has taken place
between the parent and both a subsidiary and the associate companies.
(a)
Galletas plc
Consolidated income statement for the year ended 30 June 2009

2,291,300
(1,238,125)

Revenue (W2)
Cost of sales (W2)

1,053,175
(263,980)

Gross profit
Operating expenses (W2)
Profit from operations
Share of profits of associate (W6)

789,195
51,383
840,578
(240,685)

Profit before tax

Income tax expense (W2)

599,893

Profit for the period

Attributable to:
Equity holders of Galletas plc (Bal)
Non-controlling interest (W5)

517,579
82,314
599,893

Consolidated statement of financial position (extract)

Share capital
Retained earnings (W7)

4,000,000
1,879,116

Non-controlling interest (W8)

5,879,116
2,070,600

Total equity

7,949,716

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Professional Stage Financial Accounting September 2009

Workings (All figures in 000)

W1 Group Structure
Galletas

900 / 3,000 = 30%

Arico
2.1 / 3.5 =
60%

85%
1 Apr 09
(3/12 months)

Vilaflor
Masca

W2 Consolidation schedule
Galletas
Revenue
Cost of sales
Per question
PURP (W4)
PURP (W4)
Operating expenses
Per question
Fair value adj (dep) (W3)
Tax
PAT

1,410,500

870,300

Masca
3/12
160,000

(850,000)
(9,750)
(2,700)

(470,300)

(54,875)

(103,200)

(136,000)

(137,100)

(79,200)
184,800

(23,780)
(1,000)
(24,385)
55,960

Vilaflor

Total

Adjustments
(149,500)

2,291,300

149,500

(1,238,125)

(263,980)
(240,685)

W3 Fair value adjustment

Additional fair value 320,000
Buildings 320,000 x 50% = 160,000
Additional depreciation charge in year 160,000 / 40 years x 3/12 months = 1,000
W4 Unrealised profit
Arico
Vilaflor
207,000
180,000
27,000

149,500
130,000
19,500

115%
100%
15%

Vilaflor - 19,500 x = 9,750

Arico - 27,000 x 1/3 = 9,000
Galletas share of Arico PURP - 9,000 x 30% = 2,700
W5 Non-controlling interest
Vilaflor Ltd (40% x 184,800 (W2)) = 73,920
Masca Ltd (15% x 55,960 (W2)) = 8,394
Non-controlling interest = 73,920 + 8,394 = 82,314

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Professional Stage Financial Accounting September 2009

W6 Associate
Profit for the year

204,610

Galletas share x 30%

Less: impairment for year
Share of associates profit

61,383
(10,000)
51,383

W7 Consolidated retained earnings

Galletas plc c/fwd
Less: PURP with Vilaflor (W4)
Less: PURP with Arico (W4)
Vilaflor Ltd (60% x (580 195))
Masca Ltd (85% x 55,960) (W2)
Arico Ltd ((30% x (340 130)) 10(imp))

1,560,000
(9,750)
(2,700)
231,000
47,566
53,000
1,879,116

W8 Non-controlling interest - SFP

Vilaflor Ltd (4,080,000 x 40%)
Masca Ltd
Net assets per question
Fair value adjustment (increase)
Less: extra depreciation on FV adj

1,632,000
2,605,000
320,000
(1,000)
2,924,000

NCI 2,924,000 x 15%

438,600
2,070,600

The average mark on this question was pleasing with candidates performance much improved since the
last time a consolidated income statement was set. Almost all candidates made a good attempt at the
consolidated income statement itself although attempts at the extracts from the consolidated statement of
financial position varied, showing once again that weaker candidates struggle when required to move away
from a pure learnt technique style of requirement.
The consolidated income statement showed a well-honed exam technique, with candidates clearly
understanding the principles of consolidation, adding together the results for the subsidiaries line by line
and only including Mascas results for the three months since acquisition. Presentation was generally good
with the majority of candidates showing the two attributable to figures although very few struck a sub-total
for operating profit before adding the share of the associates profits.
Several common errors were in respect of the associate, including failing to take 30% of the PURP in
respect of sales to the associate, setting the PURP in respect of sales to the associate against the share of
the associates profits instead of against the parents profits, adjusting sales and cost of sales for sales
between the associate and the parent and setting the impairment in respect of the associate against the
parents profits instead of against the parents share of the associates profits.
Other common errors included calculating the additional depreciation on the fair value adjustment based on
a whole year instead of just three months, setting the additional depreciation against the parent instead of
against the subsidiary and classifying the additional depreciation as a cost of sale instead of as an
operating expense (as it related to the companys head office).
Errors on the consolidated statement of financial position extract were more common, with a few candidates
making little or no attempt at this. A small minority of candidates produced a consolidated statement of

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Professional Stage Financial Accounting September 2009

changes in equity instead of an extract from the consolidated statement of financial position. Many
candidates produced lengthy (and largely unnecessary) net assets workings in the way they would have
practised for a question requiring a complete consolidated statement of financial position.
Errors on this part included when calculating consolidated retained earnings, producing a new working to
arrive at post acquisition retained earnings for the subsidiary acquired during the year when the figure had
already been calculated in the consolidation schedule, omitting to reduce consolidated retained earnings by
the PURPs and when calculating non-controlling interest, failing to adjust the net assets of the subsidiary
acquired during the year by the fair value adjustment and additional depreciation thereon. Even if those
adjustments had been made in a separate net assets working, many candidates failed to use the figure
from that working and took the non-controlling interest share of just the net assets at the year end.

Total possible marks

Maximum full marks

The Institute of Chartered Accountants in England and Wales 2009

21
21

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