Open University of Mauritius

MSC FINANCE AND INVESTMENT [OUpm001]

MBA SPECIALISATION [OUpm006]

EXAMINATION FOR : November/December 2017

MODULE : Financial Reporting & Analysis

[OUpm001111/OUpm0062107]

DURATION : 3 Hours

READING TIME : 15 Minutes

INSTRUCTIONS TO CANDIDATES

1. The paper consists of Section A and Section B.

2. Section A is compulsory.
3. Answer ANY TWO (2) questions from Section B.
4. Always start a new question on a fresh page.
5. The use of a scientific calculator is allowed
6. Total marks: 100

This question paper contains 4 questions and 10 pages.

Page 1 of 10
 SECTION A – [Compulsory]

Question 1 (40 Marks)

(a) IAS 1 - Presentation of Financial Statements requires the presentation of,

inter-alia, a statement of cash flows and the statement of cash flows should
be written as per the provisions of IAS 7 - Statement of Cash Flows.

Discuss the key principles specified by IAS 7 for the preparation of a

statement of cash flows. (13 marks)

(b) The summarized financial statements for Angel Ltd for the years ended 30
September 2016 and 2017 are as follows:
Income Statement for the year ended 30 September 2017
MUR 000
Sales 24,000
Cost of sales (16,000)
Gross profit 8,000
Net operating expenses (3,944)
Profit on sale of land 320
Loss on sale of plant (216)
Profit before interest and tax 4,160
Finance cost (160)
Profit before tax 4,000
Corporate tax expense (1,600)
Net profit 2,400

Page 2 of 10
Statement of Financial Position as at 30 September 2016 and 2017

2017 2016
MUR 000 MUR 000
Non-current assets
Property, plant and equipment (Note 1) 18,384 16,544
Intangible assets (Note 2) 1,440 3,360
19,824 19,904
Current assets
Inventories 9,600 6,400
Short-term investments
(Maturity: 30 days) 120
Trade receivables 7,200 5,440
Cash at bank 120 80
17,040 11,920
Total assets 36,864 31,824

Equity and Liabilities

Equity
Ordinary shares MUR10 each 8,000 6,400
7% preference shares 8,000 8,000
Share premium account 1,600 400
Revaluation surplus 1,600 800
Retained earnings 5,200 2,800
24,400 18,400
Liabilities
Non-current liabilities
10% debentures 1,200 1,600
Current liabilities
Bank overdraft 4,464 5,424
Trade payables 5,440 4,320
Dividends 0 560
Corporate tax 1,360 1,520
11,264 11,824
Total equity and liabilities 36,864 31,824

Page 3 of 10
Note 1 – Property, plant and equipment (PPE) (MUR 000)
Land Buildings Plant Vehicles Total
Cost
At 1 Oct 2016 12,800 3,200 3,360 800 20,160
Additions 3,200 800 480 4,480
Revaluations 800 800
Disposal (2,400) _____ (960) ___ (3,360)
At 30 Sep 2017 14,400 4,000 2,880 800 22,080
Depreciation
At 1 Oct 2016 1.536 1,600 480 3,616
Charge for the year 80 576 160 816
Adj. for disposal ___ (736) ___ (736)
At 30 Sep 2017 1,616 1,440 640 3,696
Net Book Values
At 30 Sep 2017 14,400 2,384 1,440 160 18,384
At 1 Oct 2016 12,840 1,664 1,760 320 16,544

Note 2 – Research & development (R&D) cost of MUR 1,920,000 was

written off during the year ended 30 September 2017

Required:
Write down the Cash Flow Statement for Angel Ltd for the year ended
30 September 2017 (27 marks)

Page 4 of 10
 SECTION B
Answer Any Two (2) questions from this section

QUESTION 2 (30 Marks)

Teaco plc started operations on 1 July 2012 producing an exclusive brand of tea
products. The company has been experiencing considerable growth in China,
Reunion and Canada. To satisfy demand of its products, Teaco plc has increased
production levels. The tea sector is very competitive with the presence of tea from
India, Sri Lanka and Kenaya on the international markets. Because a large
proportion of Teaco plc’s product costs are fixed, the company spends heavily on
advertising to increase sales volume. Profits after tax for the year ended 30 June
2015 stood at MUR 2,800,000 increasing to MUR 3,364,000 in 2016 achieving a
record high of MUR 4,800,000 in 2017.

At the start of operations in 2012, Teaco plc was financed by a combination of

equity and debt. The debt finance consisted of a loan of MUR 2,700,000 which was
repayable in April 2017.

On 1 October 2016 Teaco plc's shares were being traded at MUR 2 but over the
past 6 months the share price had been trading at around MUR 1.70.The accounts
for the year ended 30 June 2017 was published on 30 September 2017 and this
has triggered a sharp fall in the company's share price to MUR 1.35 as at 1 October
2017. Apparently analysts and investors have been very critical of the overall
performance and financial position of the company for the year ended 30 June
2017. The directors are perplexed by the fact that the company has achieved
record sales and profits for the current year just ended but yet analysts appear to
have shifted their view of the company.

The directors would like to identify the reasons behind the change in sentiment
towards the business.

The following information has been extracted from the published accounts of Teaco
plc for the year ended 30 June 2017.

Page 5 of 10
Balance sheet as at 30 June 2017
2017 2016
MUR’ MUR’ MUR’ MUR’
000 000 000 000
ASSETS
Non-current assets
Property, plant and equipment 3,200 5,600
Current assets
Inventories 4,300 2,100
Trade receivables 7,740 4,380
Cash at bank 640 1,300
12,680 7,780
Total assets 16,480 13,380
EQUITY AND LIABILITIES
Equity
Issued share capital (MUR 1) 3,200 2,000
Share premium 800 -
Retained earnings 9.980 5,580
13,980 7,580
Current liabilities
Trade payables 500 1,760
Loan - 2,700
Taxation payable 1,600 1,000
Dividend payable 400 340
2,500 5,800
16,480 13,380

Income statement for the year ended 30 June 2017

2017 2016
MUR’ 000 MUR’ 000
Sales 39,424 25,496
Cost of sales 16,864 13,072
Gross profit 22,560 12,424
Selling and distribution expenses 5,980 3,700
Administration expenses 10,000 4,100
Profit from operations 6,580 4,624
Net interest cost 180 260
Profit before tax 6,400 4,364
Corporate tax expenses 1,600 1,000
Net profit for period 4,800 3,364

Page 6 of 10
Cash flow statement for the year ended 30 June 2017
MUR’ 000 MUR’ 000
Cash flow from operating activities
Net profit before tax 6,400
Adjustments for: Depreciation 840
Interest expense 180
Profit on disposal of Property, plant and equipment (220)
7,200
(Increase)/decrease in inventories (2,200)
(Increase)/decrease in trade and other receivables (3,360)
Increase/(decrease) in trade and other payables (1,260)
Cash generated from operations 380
Interest paid -
Corporate tax paid (1,000)
Net cash used in operating activities (620)
Cash flow from investing activities
Proceeds from sale of equipment 1,180
Cash flow from investing activities 1,180
Cash flow from financing activities
Cash proceeds from issue of shares 2,000
Interest paid (180)
Loan repaid (2,700)
Dividends paid (340)
Cash flows used in financing activities (1,220)
Increase/(decrease) in cash and cash equivalent (660)
Cash and cash equivalent at 30 June 2016 1,300
Cash and cash equivalent at 30 June 2017 640

The following additional information is available:

1. Ordinary share capital comprises shares with a nominal value of Rs1.
2. There were no purchases of property, plant and equipment during the year.
3. Straight line depreciation for the year amounted to Rs840,000.
4. The gain on disposal of an item of equipment was Rs220,000.
5. All sales are made on credit.
6. In view of the profitable track record of the company, it was customary for
directors to agree the amount of proposed dividends before the year-end.

Following, the wave of criticism which followed the release of the 2017 accounts,
the financial director has been paying closer attention to the performance of other
companies in the same sector and has compiled the following industry average
ratios:

Page 7 of 10
 Operating profit margin 25%
Earnings per share 2.2
Asset utilization 1.5
Price earnings ratio 2.5
Gross profit margin 40%
Current ratio 2
Debtors collection period 60 days
Inventory turnover 6 times
Non-current assets as a % of total assets 45%

Required:
(a) From the information in the financial statements above, calculate the various
ratios which would shed light on the following:
(i) Profitability (5 marks)
(ii) Liquidity (3 marks)
(iii) Efficiency (4 marks)
(iv) Gearing (2 marks)
(v) Stock market performance (2 marks)

(b) Analyse and interprete the information obtained from (a) and state whether
or not you agree with the views shared by investors and analysts.
(14 marks)

Page 8 of 10
Question 3 (30 Marks)
(a) Explain the concept of Associate in Financial Accounting elaborating on how
associates may be identified. (6 marks)

(b) The summary Statements of Financial Position of Seeds Ltd, Buds Ltd and
Petals Ltd as at 30 June 2017 are as follows:

Statement of Financial Position at 30 June 2017

Seeds Ltd Buds Ltd Petals Ltd
MUR’000 MUR’000 MUR’000
Non-Current assets
PPE 200 160 180
Investment at cost 300
Current assets 180 240 80
680 400 260

Ordinary share capital (MUR10) 400 160 100

Revenue Reserves 240 120 80
Current liabilities 40 60 80
680 200 260

On 30 June 2016 Seeds Ltd had acquired 80% of the shares in Buds Ltd at
a cost of MUR 240,000 and 25% of the share capital of Petals Ltd at a cost
of MUR 60,000. Seeds Ltd controls Buds Ltd and exercises significant
influence over Petals Ltd.

At the time of acquisition, Buds’s profits stood at MUR 40,000 and an item
of PPE in the books of Buds Ltd was undervalued by MUR 40,000. This item
of PPE had a remaining useful life of 5 years at date of acquisition.

At the time of acquisition, Petals’s Ltd’s profits stood at MUR 60,000 and its
net assets at that date were deemed to reflect fair values.

Goodwill in Buds Ltd is deemed to have been impaired by 20% since the
date of acquisition. The fair value of non-controlling interest at 30 June 2016
was MUR 60,000.

Page 9 of 10
 There was no impairment in the investment in Petals Ltd.
During the year ended 30 June 2017, Buds Ltd sold goods to Seeds Ltd for
MUR 40,000 and Seeds Ltd still has 40% of the goods in stock at balance
sheet date. Buds Ltd applies a margin of 25% on all sales.

Prepare the Consolidated Statement of financial position of Seeds group at

30 June 2017 (24 marks)

QUESTION 4 (30 Marks)

(a) Briefly explain the main provisions of the Conceptual Framework for
Financial Reporting (15 marks)

(b) Explain the term harmonization of International Accounting Standards and

discuss the advantages and disadvantages. (15 marks)

Page 10 of 10