AC102 Financial Accounting Past Paper 2024/25 PDF

SAMPLE EXAM PAPER 3 AC102 Introduction to Financial Accounting 2024/25 WT Syllabus – not for resit/deferred candidates Instructions to candidates Answer all questions. Candidates must not take the question paper away with them after the examination. Please leave it on your desk at the end of the...

SAMPLE EXAM PAPER 3 AC102 Introduction to Financial Accounting 2024/25 WT Syllabus – not for resit/deferred candidates Instructions to candidates Answer all questions. Candidates must not take the question paper away with them after the examination. Please leave it on your desk at the end of the examination. Time Allowed Reading Time: 15 minutes Writing Time: 1 hour 30 minutes You are supplied with: No additional materials You may also use: No additional materials Calculators: Calculators are allowed in this exam Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 1 of 7  QUESTION 1 The following information has been extracted from the bookkeeping records of LiteLeather plc, a retailer of handbags and wallets as at 31 May 2020. Trial Balance as at 31 May 2020 £000 £000 Inventory 1.6.2019 7,000 Trade receivables 4,500 Provision for doubtful debts 1.6.2019 250 Prepaid directors’ fee 1.6.2019 70 Cash and cash equivalents 6,255 Land 8,750 Factory: cost 5,000 Factory: accumulated depreciation 1.6.2019 570 Equipment: cost 3,460 Equipment: accumulated depreciation 1.6.2019 870 Trade payables 3,189 Accrued insurance 1.6.2019 78 8% Debentures 2022 800 Share capital (£1 ordinary shares) 5,000 Share premium 6,300 Revaluation reserve 35 Retained earnings 170 Sales 46,100 Purchases 22,970 Administrative expenses 3,430 Heat and light 305 Distribution costs 31 Directors’ fees 602 Underprovision of corporation tax 31.5.2019 10 Insurance 848 Interest 64 Interim dividend paid 67 63,362 63,362 (1) The land is not depreciable. On 15 November 2019 a real estate agent revalued the land at £9,050,000. The directors of LiteLeather plc decided to reflect the revalued amount in the accounts for the year to 31 May 2020. Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 2 of 7 (2) The company depreciates its other assets to zero residual value as follows: Factory 20% per year reducing balance Equipment 10% per year straight-line The company provides full depreciation in the year of acquisition and none in the year of disposal. The company disposed of equipment bought on 5 January 2016 for £740,000 and sold on 29 June 2019 for £125,000. No entries have been made in the books for this disposal. (3) The directors have decided that £400,000 of trade receivables are not expected to be collected and should be written off and that the provision for doubtful debts should then be adjusted to 4% of the remaining balance. (4) A stock count was carried out on 31 May 2020 and inventory was valued at normal selling price of £5,600,000. The company marks up the cost of inventory by 60%. Included in this total are inventory items costing £100,000 which have become obsolete. It has been decided to sell these items at 40% of their cost. (5) Insurance premiums are paid three months in advance. The last quarterly payment of £210,000 was made on 1 May 2020. The accrued expense at 1 June 2019 was for insurance. (6) Provision is to be made for the current year’s remaining directors’ fee of £15,000. The prepayment at 1 June 2019 was for directors’ fee. (7) The market price of the existing shares has increased to £3.25 per share. (8) The company has estimated the tax for the current financial year to be £2,790,000. Corporation tax for 31 May 2019 was under estimated. REQUIRED: (a) Prepare the income statement of LiteLeather plc for the year ended 31 May 2020 and the statement of financial position at that date in a form suitable for presentation to the directors of the company (i.e. compliance with the accounting requirements of the Companies Act 2006 or with IAS1 Presentation of Financial Statements is not required). [40 marks] (b) The auditors find that a bad debt of £100,000 was not noted down as an expense in the draft accounts. The director says, ‘We need not change the accounts for such a small expense when our profits are £70 million. If needed, we can adjust this in the next year’s financial statements.’ Use three qualitative characteristics of financial statements to discuss whether you agree or disagree with this statement. [10 marks] [Total 50 marks] Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 3 of 7 Question 2 Happy Clothes Ltd is a retail company that sells clothes and toys. This company was fairly profitable until 2012, and used to regularly pay dividends to its shareholders. It started facing huge losses from 2012 onwards. The company hired a new Chief Executive Officer (CEO) in 2016 to turn things around. Shown below are some ratios, financial statements and graphs pertaining to this company. Answer the questions given below using this information. Extract from the Statement of Financial Position (SOFP) Assets (£m) 2015 2016 2017 2018 2019 2020 Cash 1.8 17.6 17.3 31.5 0.3 0 Equity (£m) Share Capital 44.3 44.3 44.4 85.2 85.4 85.4 Key ratios of Happy Clothes Ltd Profitability 2015 2016 2017 2018 2019 2020 Gross Margin (%) 5.1 7.1 4.1 8.1 8.9 8.8 Operating Margin (%) -12.6 -2.3 -2.6 -0.9 1.8 1.5 Return on Capital Employed ( %) -59.1 -20.1 -24.5 -12.8 10.2 9.4 Efficiency ratios 2015 2016 2017 2018 2019 2020 Receivables settlement period (days) 22.1 20.6 20.1 24.4 29.5 28.6 Inventory holding period (days) 50.9 54.9 53.4 50.2 55.5 61.1 Payables payment period (days) 35.2 37.1 35.1 32.7 38.1 44.5 Shareholder ratios 2015 2016 2017 2018 2019 2020 Dividend Payout Ratio % 0.4 - - - - - Earnings Per Share GBP -0.8 -0.2 -0.2 -0.1 0.1 0.2 Liquidity ratios 2015 2016 2017 2018 2019 2020 Current Ratio 1.1 1.3 1.5 1.4 1.4 0.9 Acid test Ratio 0.3 0.5 0.4 0.7 0.5 0.4 Gearing ratios 2015 2016 2017 2018 2019 2020 Gearing ratio 4.6 8.7 19.7 14.2 3.8 4.2 Interest Cover ratio -79.1 -4.5 -2.6 -1.0 4.0 11.1 Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 4 of 7  Return on Shareholders’ Funds (ROSF) Answer the following questions using the information given above. You should reference the ratios or numbers when answering these questions. (i) What is operating cash cycle? Calculate the operating cash cycle for 2017 and 2020. [5 marks] (ii) What does the graph of Return on Shareholders’ Funds (ROSF) convey? [4 marks] (iii) What were the steps taken by the company to improve their profitability? In particular, how did the firm fund any changes planned? [6 marks] (iv) From the graph of Return on Shareholders’ Funds (ROSF), it can be seen that the company has improved significantly in 2020. Is the company safe now? Are there any potential areas where future problems could arise? [10 marks] [Total 25 marks] QUESTION 3 (a) On 1 April 2020, Brahm’s Hill Ltd acquires 80% of share capital of White Label Ltd for £464,000. Following is an extract of statement of financial position of White Label Ltd on the date of acquisition: Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 5 of 7  £ Share capital 400,000 Share premium 50,000 Retained profits 48,000 Included in White Label’s statement of financial position on the date of acquisition was land at cost of £45,000. Land is not depreciable. The fair value of the land on 1 April 2023 was estimated to be £55,000. The retained profits of White Label Ltd at 31 December 2023 was £170,000. At the end of 2023, directors estimate that goodwill has been impaired by £2,500. Share capital and share premium of White Label Ltd haven’t changed since the date of acquisition. Brahm’s retained earnings at the date of acquisition was £50,000. REQUIRED: Calculate the amounts that will be included in the consolidated statement of financial position of Brahm’s group as at 31 December 2023 for Goodwill. [7 marks] (b) In following US generally accepted accounting principles (GAAP), the consolidated statement of financial position of companies does not include an intangible asset for the value created by internally generated research and development (R&D) costs. Under US GAAP, both research costs and development costs are expensed as incurred, making the recognition of internally generated intangible assets rare. Under International Financial Reporting Standards (IFRS), costs associated with the creation of intangible assets can be capitalised if certain criteria are met. In your opinion, which accounting principle (IFRS or US GAAP) provides financial statements that better reflect costs and benefits of periodic R&D spending? [8 marks] [Total 15 marks] Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 6 of 7 QUESTION 4 Vettel Ltd is a bike dealership. The following information is available: Income Statement for the year to 31 December 2019 £000 Revenue 38,475 Cost of sales 12,750 Gross Profit 25,725 Depreciation 1,080 Administrative expenses 1,995 Operating Profit 22,650 Profit on disposal of equipment 300 Interest expense 57 Profit before taxation 22,893 Taxation 3,450 Profit for the year 19,443 Extracts from the Statements of Financial Position at 31 December 2018 and 2019 are shown below: 2018 2019 £000 £000 Current Assets Inventory 700 1,200 Trade receivables 300 259 Cash 40 2,268 Current Liabilities Trade Payables 150 170 Tax payable 800 600 Accrued interest 250 290 REQUIRED: Calculate cash flow from operating activities only for the year ended 31 December 2019. [10 marks] Ó LSE WT 2024/AC102 SAMPLE PAPER 3 Page 7 of 7