CHARTERED ACCOUNTANTS EXAMINATIONS

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LICENTIATE LEVEL
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L1: FINANCIAL REPORTING

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MONDAY 13 JUNE 2016
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TOTAL MARKS – 100; TIME ALLOWED: THREE (3) HOURS

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INSTRUCTIONS TO CANDIDATES

1. You have fifteen (15) minutes reading time. Use it to study the examination paper
carefully so that you understand what to do in each question. You will be told when
to start writing.

2. This paper is divided into TWO sections:

Section A: Two (2) Compulsory Questions.

Section B: Three (3) Optional Questions. Attempt any Two (2) questions.

3. Enter your student number and your National Registration Card number on the front
of the answer booklet. Your name must NOT appear anywhere on your answer
booklet.

4. Do NOT write in pencil (except for graphs and diagrams).

5. Cell Phones are NOT allowed in the Examination Room.

6. The marks shown against the requirement(s) for each question should be taken as
an indication of the expected length and depth of the answer.

7. All workings must be done in the answer booklet.

8. Present legible and tidy work.

9. Graph paper (if required) is provided at the end of the answer booklet.
SECTION A

There are two (2) compulsory questions in this Section.

Attempt both questions.

QUESTION ONE

On 1 April 2014, Peach, a public listed company acquired 36,000 equity shares in Strawberry
by an exchange of two shares in Peach for every four shares in Strawberry plus K1.25 per
acquired Strawberry share in cash. The market price of each of Peach’s and Strawberry’s
shares at the date of acquisition was K6.00 and K3.25 respectively. On the same date,
Peach acquired 30% of the equity shares of Apple at a cost of K7.50 per share in cash.

Only the cash consideration of the above investments has been recorded by Peach. In
addition, K6,000 issue costs relating to the acquisition of Strawberry are also included in the
cost of the investment.

The summarised draft statements of financial position of the three companies at 31 March
2015 are:

ASSETS Peach Strawberry Apple

Non current K K K

Property, plant and equipment 220,800 124,800 216,000

Investment in Strawberry and Apple 159,000

Other Investments 78,000 _
457,800 124,800 216,000
Current
Inventory 82,800 74,400 43,200
Trade Receivables 38,400 18,000 28,800
Total current assets 121,200 92,400 72,000
Total assets 579,000 217,200 288,000

Equity and liabilities

Equity shares of K1 each 120,000 48,000 48,000
Retained earnings 303,000 106,800 192,000
Total equity 423,000 154,800 240,000
Non current liabilities
7% loan notes 60,000 12,000 12,000
Current liabilities 96,000 50,400 36,000

Total equity and liabilities 579,000 217,200 288,000

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The following information is relevant:

(i) The retained earnings of Strawberry and Apple at 1 April 2014 as reported in their
separate financial statements were K72,000 and K132,000 respectively.

(ii) At the date of acquisition, Strawberry’s plant had a fair value of K40,000 in excess of
its carrying amount and had a remaining life of four years (straight line depreciation
is used). All other tangible non-current assets had a fair value equal to their carrying
value.

(iii) Additionally, Strawberry had an internally generated brand name on the date Peach
acquired control over it. The directors of Peach estimated the fair value of this brand
name to be K12,000, with indefinite life and that it had not suffered any impairment.

(iv) On 1 April 2014, peach sold an item of plant to Strawberry at an agreed fair value of
K30,000. Its carrying amount prior to the sale was K24,000. The estimated
remaining life of the plant at the date of sale was five years (straight line
depreciation is used).

(v) During the year ended 31 March 2015, Strawberry sold goods to Peach for K32,400.
Strawberry had marked up these goods by 50% on cost. Peach had one third of the
goods still in its inventory at 31 March 2015.

(vi) Peach owed Strawberry K8,500 at 31 March 2015 for some of the goods Strawberry
supplied during the year.

(vii) The other investments are included in Peach’s statement of financial position above
at their fair value on 1 April 2014. They had a fair value of K108,000 at 31 March
2015.

(viii) Peach has a policy of valuing non controlling interest at fair value at the date of
acquisition. For this purpose, the share price of Strawberry at the date of acquisition
should be used.

(ix) No dividends were paid during the year by any of the companies.

(x) An impairment test on 31 March 2015 showed that the recoverable amount of Gross
Goodwill in respect of Strawberry was K15,000.

Required:

(a) Prepare the consolidated statement of financial position for Peach as at 31 March
2015. (27 marks)

(b) Describe three (3) circumstances in which the consideration for an acquisition may
be less than the fair value of the net assets acquired. (3 marks)

[Total: 30 Marks]

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QUESTION TWO

The following is a trial balance of Malao Plc as at 31st May 2015.

K’million K’million

Equity shares of K1.00 each (note 5) 100

Share premium 40
Revaluation reserve – Land (note 3) 15
Retained earnings 190
15% loan notes (note 7) 200
Loan interest paid 15
Deferred tax asset (note 4) 8
Current tax (note 4) 5
Trade payables 32
Bank 18
Trade receivables 52
Inventory at 31st May 2015 62
Cost of sales 480
Revenue 980
Distribution costs 124
Administrative costs 260
Land at valuation 40
Buildings at cost 200
Motor vehicles at cost 90
Computers at cost 30
Allowance for depreciation as at 1st June 2014:
Buildings 120
Motor vehicles 45
Computers 6
Total 1,556 1,556

Additional information:

1) Property, plant and equipment is depreciated as follows:

Item Rate and method Where depreciation is charged

Buildings 5% straight line to administrative (admin) cost

Motor vehicles 25% straight line 10% admin. balance to distribution

Computers 20% reducing balance 40% admin. balance to distribution

Malao Plc has not yet taken into account depreciation charge for the year to 31st May
2015 in arriving at trial balance figures.

Note: Assume nil scrap values for property, plant and equipment.

2) Malao Plc leased a motor vehicle on 31st May 2015 from Bana Bank for a period of
four (4) years. This was equal to its useful economic life. The motor vehicle had a

Page 4 of 19
 cash price of K60 million at 31st May 2015. Malao is required to pay an annual rent of
K19 million every 31st May starting on 31st May 2016. The interest rate implicit in the
lease agreement was 10% per annum.

No entry has been made in the books of Malao Plc relating to the lease.

Note: You are not required to calculate the present value of minimum
lease payments.

3) Malao Plc has a policy of revaluing land every year on 31st May. On 31st May 2015,
land was revalued to K40 million when its carrying value was K30 million.

The revaluation has been correctly accounted for in the books of Malao.

4) The tax figure in the trial balance represents an under/over provision of tax. The
directors of Malao have estimated an income tax of K14 million for the year to 31st
May 2015.

The deferred tax asset in the trial balance represents the figure at 31st May 2014.
The figure at 31st May 2015 is a deferred tax liability of K12 million.

5) Malao issued 20 million equity shares on 1st March 2015 at a price of K1.40 each.
This price was equal to the market price of Malao’s equity shares at that date.

The issue of equity shares has been correctly accounted for in the books of Malao.

6) No dividends were paid during the year to 31st May 2015 by Malao.

7) Malao issued the 15% loan note on 1st June 1996. It is required to pay total annual
interest twice a year on 30th November and 31st May. The interest payment due on
31st May 2015 was paid on 5th June 2015.

The principal amount of the loan will be repaid in full on 30th May 2016.

Required:

(a) Prepare the statement of profit or loss and other comprehensive income for Malao Plc
for the year ended 31st May 2015. (9 marks)

(b) Prepare the statement of changes in equity for the year ended 31st May 2015.

(6 marks)

(c) Prepare the statement of financial position for Malao Plc as at 31st May 2015.

(15 marks)

[Total: 30 Marks]

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SECTION B

Attempt any Two (2) questions in this section.

QUESTION THREE

(a) Bienne Airlines is a newly formed domestic Zambian airline company and has been
contracted by the Government of the Republic of Zambia to offer six daily scheduled
flights; 2 daily flights to Eastern Province, 3 daily flights to Western Province and 1
daily flight to Muchinga Province.

Bienne is able to identify the cash flows associated with each of these routes and
each route has separately identifiable assets.

All the routes are running profitably with the exception of the 3 daily flights to
Western Province which are loss making. The aggregate carrying value of the assets
used by Bienne to operate the contracted routes is K7,000 million. The aggregate net
realizable value of the assets is K5,900 million and the present value of the expected
cash flows from the routes is currently K9,800 million.

Required:

(i) Explain what a cash generating unit is and state with reasons how many cash
generating units Bienne Airlines has. (3 marks)

(ii) Distinguish between the ‘recoverable amount’ and ‘value in use’ of an asset.
(2 marks)

(iii) State, with reasons, the amount of any impairment loss in the air route assets,
and the value at which they should be reported in the statement of financial
position of Bienne Airlines.
(3 marks)

(b) Mweene’s year end is 31 December. He bought a machine on 1 January 2014 for
K200,000. The machine’s useful economic life had been estimated at 4 years with nil
residual value. On 30 September 2014, Mweene decided to sell the machine.
However, the asset had not been sold by 31 December 2014 but was expected to be
sold by 30 April 2015. The fair value less costs to sale for the machine was K180,000
on both 30 September and 31 December 2014.
Required:

(i) Describe the measurement rules for Non-current assets held for sale according
to IFRS 5. (3 marks)

(ii) Assuming the criteria for classification of the asset as held for sale are met, state
the amounts which should be shown in Mweene’s Statement of profit or loss for
the year ended 31 December 2014 and his Statement of financial position at that
date.

(4 marks)

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(c) (i) IAS 18 ’Revenue’, deals with revenue recognition in reporting entities.

Required:

State the IAS 18 recognition principles for revenue from provision of services.

(2 marks)

(ii) Suppose Nyambe supplies a product to a customer for a total price of

K80,000. The price includes ‘free’ servicing of the product for two years.
Nyambe estimates that the annual cost of servicing the product will be
K9,600 and normally earns a margin of 20% on service revenue.

Required:

State Nyambe’s revenue to be recognised from the rendering of service in the

above scenario. (3 marks)
[Total: 20 Marks]
QUESTION FOUR

The following financial statements relate to Madaka Plc.

Statement of profit or loss for the year ended 31st May 2015.

K’million

Revenue 900
Cost of sales (400)
Gross profit 500
Other income 20
Selling and distribution costs (140)

Administrative cost (234)

Finance cost (36)
Profit before tax 110
Taxation (33)
Profit for the period 77
Other comprehensive income
Revaluation surplus 15
Total comprehensive income 92

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Statement of financial position as at 31st May 2015
K’million

Assets
Non-current
Property, plant and equipment 450
Current
Inventory 90
Trade receivables 140
Bank 68
298

Total assets 748

Equity and liabilities
Equity
Equity shares of K1.00 each 150

Share premium 30
Revaluation reserve 15
Retained earnings 110
Total equity 305

Liabilities
Non-current
Deferred tax 80
10% loan notes 180
260
Current
Trade payables 150
Taxation 33
183
Total liabilities 443
Total equity and liabilities 748

Additional information

Madaka Plc had the following ratios for the year to 31st May 2014

 Return on capital employed 24.21%

 Net assets turnover 1.65 times

 Gross profit margin 45.56%

 Operating profit margin 15.22%

 Current ratio 1.83

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  Trade receivables collection period 38 days

 Trade payables payment period 120 days

 Gearing (prior charge capital/prior charge capital + equity) 50%

Required:

(a) Calculate the above ratios for the year ending 31st May 2015 for Madaka Plc.
(8 marks)

(b) Analyse the performance of Madaka Plc for the year ending 31st May 2015.
(10 marks)

(c) Explain any two additional information that would help you assess the performance
of Madaka Plc for the year to 31st May 2015.

(2 marks)
[Total: 20 marks]

QUESTION FIVE

(a) IAS 41 ‘Agriculture’ applies to the treatment of biological assets, agricultural produce
at the point of sale and government grants.

Required:

(i) Distinguish between a biological asset and an agricultural produce. (2 marks)

(ii) State the criteria that should be met for biological assets to be recognised as
assets in the financial statements. (3 marks)

(b) A conceptual framework is a statement of generally accepted theoretical principles

which form the frame of reference for financial reporting.

Required:

Explain advantages and disadvantages of a conceptual framework. (10 marks)

(c) Explain any five (5) features of a finance lease. (5 marks)

[Total: 20 Marks]

END OF PAPER

Page 9 of 19
 JUNE 2016: FINANCIAL REPORTING (L1)

SOLUTIONS

SOLUTION ONE

a) Peach group consolidated Statement of financial position as at 31 March 2015

Non-current assets ‘K’

PPE (220,800 +124,800 +30,000– 6000 +1200) (w5 and w6) 370,800
Goodwill 20,000(w2) – 5,000(impairment) 15,000
Intangible assets – brand 12,000
Investment in associate (w3) 126,000
Investments in equity instruments 108,000
631,800
Current assets
Inventory (82,800 + 74,400 – 3,600) (w5) 153,600
Trade Receivables (38,400 + 18,000 – 8500) 47,900
Total current assets 201,500
Total assets 833,300

Equity and liabilities

Equity shares K1 (K120,000 + K18,000) (w8) 138,000
Share premium (w8) 90,000
Retained earnings (w4) 352,050
Total equity 580,350
Non controlling interest (w7) 43,050

Non current liabilities

7% loan notes (60,000 + 12,000) 72,000
Current liabilities (96,000 + 50,400 – 8,500) 137,900
Total equity and liabilities 833,300

b) The consideration given for the business may be less than the fair value of the net
assets acquired, leading to what is often described as negative goodwill. A careful check is
recommended, of the value of the assets acquired and bargain price. The reasons for this
include:

 Bargain purchase – occurs when a vendor is in poor financial position and need to
realize assets quickly, or good negotiating skills of acquirer
 Anticipated future losses – acquirer may take into account the cost of anticipated
future losses and post-acquisition reorganization expenditure in determining the
amount of consideration it is willing to pay.
 Some Liabilities may have been omitted or understated thereby increasing fair value
unnecessarily.
 Fair values of net assets may be incorrectly valued.

Page 10 of 19
Workings

1. Group structure:
Peach

1 Apr 2014 1 Apr 2014

75% 30%

Strawberry Apple

Peach in Strawberry 36,000 shares/48,000 shares x 100 = 75%

Peach in Apple (per question) = 30%

2. Goodwill on acquisition of Strawberry

Purchase consideration:
Share exchange (36,000 shares/4 shares x 2 shares x K6) 108,000
Cash (1.25 x 36,000) 45,000

Fair value of Non controlling interest (K3.25 x [25% x 48,000]) 39,000

192,000
Less net assets acquired:
Share capital 48,000
Retained earnings 72,000
Brand name 12,000
Fair value of plant 40,000
(172,000)
Goodwill 20,000

3. Investment in Apple
Cost of investment (K7.50 x 30% (48,000)) 108,000
Peach’s share of Apple’s post acq. retained earnings (30% x 60,000) 18,000
Net cost of investment 126,000

4. Group retained earnings:

Peach Strawberry Apple
‘K’ ‘K’ ‘K’
Per question 303,000 106,800 192,000
Less pre-acquisition retained Earn. (72,000) (132,000)
Unrealized profit on goods/NCAs (6,000) (3,600) 60,000
Excess depreciation on intr trade-NCA 1,200
Fair value depreciation (10,000)
Gain on other investments 30,000 21,200
Issue costs on acquisition (6,000)

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Peach share of impairment loss:
[75% x (K20,000 – K15,000)] (3,750)
Peach’s share of Stwberry (75%x21,200) 15,900
Peach’s share of Apple (30% x 60,000) 18,000
Group retained earnings 352,350

5. Unrealized profit:
On intra-group sale of goods: 50/150 x K32,400 x 1/3 =K3,600

On intra-group sale of non current asset: K30,000 – K24,000 = K6,000

Excess depreciation on the sale =6,000/5 years = K1,200

Double entry:
Dr Retained earnings 6,000
Cr PPE 6,000

Dr PPE 1,200
Cr Retained earnings 1,200

6. Fair value adjustments

At Acquisition movement At reporting date
‘K’ ‘K’ ‘K’
Brand 12,000 - 12,000
Plant 40,000/4 (10,000) 30,000

7. Non Controlling Interest

Fair value of NCI at acquisition 39,000
NCI share of impairment loss (25% x 5,000) (1,250)
NCI share of Str/berry post acquisition profits:
(25% x 21,200) 5,300
43,050

8. Share Exchange proceed

36,000 shares/4shares x 2 shares = 18,000 shares (@K6 divided as follows)
To share capital 18,000 shares x K1 = K18,000
To share premium 18,000 shares x K5 = K90,000

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SOLUTION TWO

a) Malao Plc
Statement of profit or loss and other comprehensive income for the year
ended 31st May 2015

K’000

Revenue 980,000
Cost of sales (480,000)
Gross profit 500,000
Distribution cost W1 (147,130)
Administrative costs W1 (274,170)
Finance cost 15% x200 (30,000)
Profit before tax 48,700
Income tax 14+8+5+12 (39,000)
Profit for the period 9,700
Other comprehensive income
Revaluation surplus 10,000
Total comprehensive income 19,700

b) Malao Plc
Statement of changes in equity for the year ended 31st May 2015
Equity Share Revaluation Retained Total
SC Premium Reserve Earnings

K’000 K’000 K’000 K’000 K’000

Bal. b/f 80,000 32,000 5,000 (190,000) (73,000)
Issue of shs 20,000 8,000 - - 28,000
Total comp. inc. - - 10,000 9,700 19,700
Balances 100,000 40,000 15,000 (180,300) (25,300)

Note: Balances brought forward for equity share capital, share premium and revaluation
reserve are balancing figures.

c) Malao Plc
Statement of financial position as at 31st May 2015

Assets K’000 K’000

Non-current
Property, plant and equipment W2 211,700
Current
Inventory 62,000
Trade receivables 52,000
114,000
Total Assets 325,700
Equity & liabilities
Equity

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Equity shares K1 each 100,000
Share premium 40,000
Revaluation reserve 15,000
Retained earnings (180,300)
Total Equity (25,300)
Liabilities
Non-current
Deferred tax liability 12,000
Obligations under finance lease W3 47,000
59,000

Current
Trade payables 32,000
Obligations under finance lease W3 19 – 6 13,000
15% loan 200,000
Bank overdraft 18,000
Accrued loan interest 30 – 15 15,000
Income tax 14,000
292,000
Total liabilities 351,000
Total equity and liabilities 325,700

Workings

W1 Admin. Distribution
K’000 K’000
As per trial balance 260,000 124,000
Depreciation:
Buildings 5%x 200 10,000 -
Motor vehicles 25%x90 (10:90) 2,250 20,250
Leased M Vehicles - -
Computers 20%x(30-6) (40:60) 1,920 2,880
274,170 147,130

W2 Property, plant and equipment

Cost Accum.deptn NBV
K’000 K’000 K’000

Land at valuation 40,000 - 40,000

Buildings 200,000 130,000 70,000
Motor vehicles 90,000 67,500 22,500
Leased motor vehicles 60,000 - 60,000
Computers 30,000 10,800 19,200
420,000 208,300 211,700

Page 14 of 19
 W3 Leased motor vehicle

K’000
31 May 2015 Fair value
st
60,000
31st May 2016 Interest @10% 6,000
31st May 2016 Rental (19,000)
47,000

SOLUTION THREE

i) Billience Airlines’ contract with Government

i) IAS 36 Impairment of Assets defines a cash generating unit as the smallest

identifiable group of assets that generates cash inflows that are largely independent
of the cash flows from other assets or groups of assets.

The number of cash generating units depends on the contract Billience Airlines has
with the Government of the republic of Zambia. If all three routes have to be
operated under the same contract, then there is only one cash generating unit. This
is because the cash flows of each route are not independent even although they can
be measured separately. So, impairment would need to be assessed for all six routes
as a single cash generating unit.

Alternatively, if there are three contracts, one for the Eastern Province route, one for
the Western Province route and one for the Muchinga route, then there would be
three cash generating units. In this case, the Western Province route could be
impaired as a separate cash generating unit.

ii) Recoverable amount is the higher of the fair value less selling costs of an asset (i.e.
its net realizable value) and the value in use. Value in use is present value of the
future cash flows that an asset is expected to generate from its continued use other
than through a sale.

iii) The recoverable amount of the bus routes is the higher of K 5,900m (net realizable
value or fair value less costs to sell) and K 9,800m (value in use) i.e. K 9,800m. As
this is higher than the current carrying value of the assets of K 7,000m there is no
impairment and the carrying value should continue to be based on K 7,000m.

(b)

i) IFRS 5 states that non-current assets (or disposal groups) classified as held for
sale are measured at the lower of:

• Carrying amount; and

• Fair value less costs to sell.

Any impairment loss arising on reclassification is accounted for as normal (IAS

36). Non-current assets/disposal groups classified as held for sale are not
depreciated.

Page 15 of 19
 ii) In the Statement of profit or loss for the year ended 31 December 2012, the
depreciation expense will be K37,500 (25% x K200,000 x 9 ÷ 12) which is for 9
months to 30 September 2014. There will be no depreciation for the last 3
months as the asset was classified as ‘held for sale’ effective 1st October 2014.

At 30 September 2014 the asset will be measured at its carrying amount of

K162,500 (K200,000 cost, less depreciation K37,500), which is lower than the fair
value less costs to sell of K180,000. The same amount will be reflected in the
statement of financial position at 31 December 2014 as a current asset.

There will be no impairment loss on 30 September 2014.

(c)

i) Revenue recognition on provision of services

IAS 18 states that ‘where the outcome of a transaction involving the rendering of
services can be estimated reliably, associated revenue should be recognised by
reference to the stage of completion of the transaction at the end of the reporting
period’. In other words, the revenue is recognised gradually, rather than all at one
‘critical. IAS 18 further states that the outcome of a transaction can be estimated
reliably when all the following conditions are satisfied:

1. The amount of revenue can be measured reliably.

2. It is probable that the economic benefits associated with the transaction will flow
to the seller.
3. The stage of completion of the transaction at the end of the reporting period can
be measured reliably.
4. The costs incurred to date for the transaction and the costs to complete the
transaction can be measured reliably.

ii) Revenue to be recognized by Nyambe on provision of services:

The expected total cost to Nyambe of providing the ‘free service’ is K19,200 (2 x
K9,600). Given the normal margin on service work, this works out to a revenue of
K24,000 (K19,200 x 100 ÷ 80). Therefore, Nyambe would recognise revenue from the
sale of the product of K56,000 (K80,000 - K24,000) at the date of supply and service
revenue of K24,000 over the two years following the supply.

SOLUTION FOUR

a) Return on capital employed = Profit before interest & tax x 100%

Capital employed
= 110+36/748-183 = 25.84%

Net assets turnover = Sales/Capital employed = 900/565 = 1.59 times

Gross profit margin = Gross profit x100%

Sales
= 500/900 = 55.56%

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 Operating profit margin = Operating profit x100%
Sales
= 146/900 = 16.22%

Current ratio = Current assets/current liabilities

= 298/183 = 1.63

Trade receivables collection period = Trade receivables x 365 days

Sales
= (140/900) x 365 = 58 days

Trade payables payment period = Trade payables x 365 days

Cost of sales
= (150/400) x 365 = 137 days

Gearing = Prior charge capital x 100%

Prior charge capital + equity
= 180/180+305 = 37%

b) Performance of Madaka Plc for the year ended 31st May 2015.

Three broad areas will be looked at in analysing the performance of Madaka Plc for the
year ended 31st May 2015. The first area is profitability and return on capital, the
second is liquidity and the third is gearing.

Profitability and return on capital

The company’s profitability has generally improved compared to the previous year.
Return on capital employed has increased from 24.21% to 25.84% representing a
6.73% increase. This could be attributable to an increase in operating profit margin to
16.22% from 15.22%. This is mainly as a result of an increase in gross profit margin
to 55.56% from 45.56%. Further, the sales for the year to 31st May 2015 might have
increased by more than an increase in costs. However, net assets turnover had
reduced from 1.65 times to 1.59 times. This could have been due to an increase
capital employed as a result of revaluing non-current assets upwards as evidenced by
revaluation surplus in the statement of profit or loss and other comprehensive income
of K15million or the company could have acquired non-current assets during the year
that are to start generating significant sales.

Liquidity

The company’s liquidity has worsened overall. Current ratio has reduced from 1.83 to
1.63. Trade receivables collection period has increased from 38 days to 58 days. This
could have been used as a strategy to boost sales. As a consequence of increasing
trade receivables period, the company’s trade payable payment period had equally
increased from 120 days to 137 days. The increased trade receivables collection period
may result in an increase in irrecoverable debts. The increased trade payables
payment period may lead to a company not taking up cash discounts and having an
increase in its purchases as a result. This could decrease its profitability in the long
run.

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 Gearing

The gearing shows a remarkable decrease. The ratio has reduced to 37% from 50%.
The company could have paid off some of its debts.

Conclusion

The company’s profitability has improved as well as its gearing though this might have
been achieved at the expense of liquidity.

c)

i) Inventory holding period or inventory turnover - to establish how long the

company takes to sale their inventory.
ii) Industry average ratio - to compare company’s performance with that of other
companies.
iii) Sales, cost of sales and expenses for the previous year – to compute
percentage changes in the figures.
iv) The company’s future plans i.e. short-term, medium term and long – term plans
– to know the direction of the company and establish how far it is from
achieving its objectives and management’s commitment towards attaining
company’s goals.

SOLUTION FIVE

a) (i) A biological asset is a living animal or plant while an agricultural produce is the
harvested product of an entity’s biological assets.

(ii) The recognition criteria are very similar to those for other assets, in that animals or
plants should be recognised as assets in the following circumstances:

 The entity controls the asset as a result of past event or transaction.

 It is probable that future economic benefits associated with the asset will flow to
the entity.

 The fair value or cost of the asset to the entity can be measured reliably.

b) Advantages and disadvantages of a conceptual framework

Advantages
 It increases financial statement users’ understanding of and confidence in financial
reporting and makes it easier to compare different companies’ financial statements.
 It enables issuance of consistent and useful standards. In addition, without an
existing set of standards, it is not possible to resolve any new problems that emerge.
 It avoids a situation whereby standards are developed on a patchwork basis, where
a particular accounting problem is recognised as having emerged, and resources
were then channelled into standardising accounting practice in that area, without
regard to whether that particular issue remaining at that time without
standardisation.
 Development of certain standards, especially national standards, has been subject to
considerable political interference from interested parties. Where there is a conflict of
interest between user groups on which policies to choose, policies deriving from a

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 conceptual framework will be less open to criticism that the standard setter buckled
to external pressure.
 Some standards may concentrate on the statement of profit or loss and other
comprehensive income whereas some may concentrate on the valuation of net
assets (statement of financial position).

Disadvantages
 It is not certain that a single conceptual framework can be devised which will suit all
users as financial statements are intended for a variety of users. Further, a single
conceptual framework may not address the needs of various users of financial
statements.
 Given the diversity user requirements, there may be need for a variety of accounting
standards, each produced for a different purpose and with different concepts as a
basis.
 It is not clear that a conceptual framework makes the task of preparing and then
implementing standard any easier than without a framework.

c) Five (5) features of a finance lease

 The lessee has the right to buy the asset at the end of the lease at a price that is
less than asset’s fair value at that date.
 The lease should be substantially equal to the asset’s useful economic life.
 The lessee is responsible for the maintenance and insurance of the asset.
 The present value of minimum lease payments is substantially equal to the asset’s
fair value.
 The lessee cannot cancel the lease agreement without incurring penalties.
 The asset is specialised and can only be used by the lessee.

END OF SOLUTIONS

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