Financial Accounting and Reporting-I

Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

A.1 Katas Industries Limited

Statement of cost of goods manufactured for the year ended 30 June 2020

Rs. in '000
Raw materials consumed (W-1) 89,550
Salaries and wages 9,200×0.75 6,900
Prime cost 96,450
Manufacturing overheads:
Salaries and wages 9,200×0.25+860 3,160
Depreciation 3,500 + 150 3,650
Rent 3,640 + 380 4,020
Utilities 2,780 + 450 3,230
Manufacturing overheads 14,060
Total manufacturing costs 110,510
Work in progress - opening 1,980
Work in progress - closing (1,600)
Cost of goods manufactured 110,890

W-1: Materials consumed Rs. in '000

Opening stock 6,800
Purchases 96,100
Discount on bulk purchase (3,290)
Abnormal production losses (1,560)
Closing stock (8,500)
89,550

A.2 Limitations of ratio analysis:

(i) Historical
All information used in ratio analysis is derived from actual historical results. This
does not mean that the same results will carry forward into the future. However,
ratio analysis can be used on pro forma information and compare it to historical
results for consistency.

(ii) Historical versus current cost

The information on the income statement is stated in current costs (or close to it),
whereas many elements of the balance sheet are stated at historical cost (which
could vary substantially from current costs). This disparity can result in unusual ratio
results.

(iii) Inflationary effect

If the rate of inflation has changed in any of the periods under review, this can mean
that the numbers are not comparable across periods. For example, if the inflation rate
was 100% in one year, sales would appear to have doubled over the preceding year,
when in fact sales did not change at all.

(iv) Aggregation
The information in a financial statement line item that is used for a ratio analysis may
have been aggregated differently in the past, so that running the ratio analysis on a
trend line does not compare the same information through the entire trend period.

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Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

A.3 Indus Pharma Limited

General Journal
Debit Credit
Date Description
Rs. in million
Jan. 2019 Plant 280
Cash/Bank 280

Jan. 2019/ Depreciation expense/Profit or loss 280÷7×4 160

31-12-2019 Accumulated depreciation - Plant 160

31-12-2019 Depreciation expense 630÷7 90

Accumulated depreciation - Plant 90

31-12-2019 Impairment loss (W-1) 19

Accumulated impairment - Plant 19

W-1: Impairment review as on 31 December 2019 Rs. in million

Year Net inflows Discounting at 12% Present value
2020 (90+10) 100 0.8929 89
2021 (80+10) 90 0.7972 72
Value in use 161
Fair value less cost to sell 160–5 155
Recoverable amount (Higher of both) 161
WDV of the plant as on 31 December 2019 630÷7×2 180
Impairment loss 180–161 19

A.4 (i) (a) Profits will be overstated and assets will be understated
(ii) (d) Residual value of the property
(iii) (c) A significant increase in credit sales
(iv) (b) Semi-variable cost
(v) (c) Rs. 1,905,000
(vi) (b) Increase current ratio and decrease quick ratio
(vii) (d) Declaration and payment of cash dividend
(viii) (a) If funds have been arranged from various general borrowings, the amount to be
capitalised is based on the weighted average cost of borrowings

A.5 (a) Allocation of transaction price

(i) Standalone Allocation of Rs. 70,000 to Allocation of Rs. Transaction
Product price E-2 and E-3 90,000 price
-------------------------------------- Rs. --------------------------------------
E-1 30,000
30,000 (30,000×90,000÷100,000) 27,000
E-2 30,000
(30,000×70,000÷80,000
) 26,250 (26,250×90,000÷100,000) 23,625
E-3 50,000 43,750 39,375

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Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

(50,000×70,000÷80,000 (43,750×90,000÷100,000)
)
110,000 100,000 90,000

(ii) Standalone price Allocation of Rs. 104,000 Transaction price

Product
-------------------------------------- Rs. --------------------------------------
E-1 30,000 (30,000×104,000÷130,000) 24,000
E-3 (50,000×2)
100,000 (100,000×104,000÷130,000) (40,000×2) 80,000
130,000 104,000

(b) (i) Computation of profit – performance obligation satisfied ‘over time’:

2019 2020
Completion % 65% 100%
(26÷40×100)
----------------- Rs. -----------------
Revenue 39.0 11.0
(50+10)×65% (50–39)
Cost (26.0) (16.0)
(42–26)
Profit/(loss) 13.0 (5.0)

(ii) Computation of profit – performance obligation satisfied ‘at a point in time’:

2019 2020
----------------- Rs. -----------------
Revenue - 50.0
Cost - (42.0)
Profit - 8.0

(c) Transaction price:

The transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer,
excluding amounts to be collected on behalf of third parties.

Factors affecting determination of the transaction price:

(i) Variable consideration
(ii) Constraints on variable consideration
(iii) Existence of a significant financing components (time value of money)
(iv) Non-cash consideration
(v) Consideration payable to a customer

A.6 Taxila Limited

Statement of cash flows for the year ended 30 June 2020
Rs. in million
Cash flows from operating activities
Profit (W-1) 140
Adjustments for:
Depreciation on property, plant and equipment 290
Depreciation on investment property 120+180–290 10
Gain on disposal of property, plant and equipment (8)
Revaluation gain (35)
Interest expense 45

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Financial Accounting and Reporting-I
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Certificate in Accounting and Finance – Autumn 2020

Operating profit before working capital changes 442

Changes in working capital:
Increase in inventory 205–180 (25)
Decrease in prepayments and other receivables (14–3)–20 9
Increase in trade receivables 342–291 (51)
Decrease in short-term investments (60–35)–(48–20) 3
Increase in trade and other payables (144–12)–(120–17) 29
(35)
Cash generated from operations 407
Interest paid 17+45–12 (50)
Net cash flows from operating activities 357

Cash flows from investing activities

Purchase of property, plant and equipment (W-2) (389)
Purchase of investment property (180)
Proceeds from disposal of property, plant & equipment 8–3 5
Net cash flows used in investing activities (564)

Cash flows from financing activities

Proceeds from issue of shares at premium (W-3) 300
Repayment of long term loan (367+78)– (445+60) (60)
Net cash flows from financing activities 240
Net increase in cash and cash equivalents 33
Cash and cash equivalents at beginning of the year 6+20 26
Cash and cash equivalents at the end of the year 24+35 59

W-1: Profit for the year Rs. in million

Retained earnings – closing 260
Transfer from revaluation surplus 200+(80–35)–215 (30)
Retained earnings – opening (90)
140

W-2: Purchase of property, plant and equipment Rs. in million

Opening balance 1,200
Equipment acquired against issuance of shares 240
Revaluation surplus 80
Depreciation for the year (290)
Closing balance (1,619)
389

W-3: Issuance of shares at premium Rs. in million

Share capital and share premium – closing 1,200+290 1,490
Issuance of shares for property, plant and equipment (240)
Share capital and share premium – opening 800+150 (950)
300

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Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

A.7 Gandhara Enterprises

Rs. in '000
(a) Amount of suspected fraud:
Difference in cash balance 48–20 28
Proceeds from sale of fixed assets 65+55 120
Fake credit sales invoices 260÷1.3 200
Fake goods in transit 140
Embezzlement through inventory 750–620 130
Cash defalcated from cash sales (W-1) 763
1,381

W-1: Cash
Rs. in '000 Rs. in '000
Petty expenses
Opening balance 36 25×12 300
Cash sales PL 3,475 Cash banked 2,400
Cash shortage 48–20 28
Closing balance 20
Cash defalcated from
cash sales (Bal.) 763
3,511 3,511

(b) Gandhara Enterprises

Statement of profit or loss for the year ended 30 June 2020
--------- Rs. in '000 ---------
Sales - Credit (W-2) 8,190
- Cash [9,080–6,300(8,190÷1.3)]×1.25 3,475
11,665
Cost of goods sold
Opening inventory 715
Purchases (W-3) 9,455
Goods in transit (140)
Good issues against fake invoices 260÷1.3 (200)
Goods physically not found (130)
Closing stock 750–130 (620)
Cost of sales (9,080)
Gross profit 2,585
Operating expenses
Salaries 86+900–120 866
Utilities 500
Repair and maintenance 450
Petty cash expenses 25×12 300
Depreciation 3,460+150–3,400 210
Loss due to defalcation (a) 1,381
Total operating expenses (3,707)
(1,122)
Rent income 980+450–300 1,130
Gain on disposal of fixed assets 120–65 55
Net profit 63

Page 5 of 7
Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

W-2: Debtors
Rs. in '000 Rs. in '000
Opening balance 730 Bank 7,420
Credit sales (Bal.) 8,190 Uncleared cheques 860
Closing balance (900–
260) 640
8,920 8,920

W-3: Creditors
Rs. in '000 Rs. in '000
Bank 8,300 Opening balance 690
Unpresented cheques 950 Purchases (Bal.) 9,455
Closing balance 895
10,145 10,145

A.8 Harappa Industries Limited

Notes to the financial statements for the year ended 30 June 2020
1 Property, plant and equipment:
Land Buildings Plant Vehicles
------------------ Rs. in '000 ------------------
Gross carrying amount - opening 100,000 70,000 180,000 8, 800
Accumulated depreciation - (14,000) (60,000) (4,000)
Opening carrying amount 100,000 56,000 120,000 4,800
Additions - - (W-1)102,840 1,800
Depreciation for the year - (3,500) (14,571) (1,068)
(70,000÷20
) (W-2) (W-4)
Disposals - - - (W-3) (648)
Revaluation
(W-5)
- Surplus (Bal.) 8,000 (15,000) - -
- P&L 12,000 (Bal.) (2,500) - -
Closing carrying amount 120,000 35,000 208,269 4,884

Gross carrying amount - closing 120,000 35,000 282,840 9,600

Accumulated depreciation - - (74,571) (4,716)
Closing carrying amount 120,000 35,000 208,269 4,884

1.1 Land Buildings Plant Vehicles

Measurement base Revaluation Revaluation Cost model Cost model
Useful life /depreciation rate Infinite 15 Years 15/10 years 20%
Depreciation method - Straight line Straight line Reducing bal.

1.2 The last revaluation was performed on 30 June 2020 by Smart Consultants, an independent firm of
valuers.
1.3 Had revaluations not made, the carrying value of the land and buildings as on 30 June 2020 would
have been Rs. 112 million (100+12) and Rs. 37.5 million (35,000+2,500) respectively.

W-1: Cost - Plant Rs. in '000

Cost 120,000
Government grant (20,000)
Capitalisation of borrowing cost:

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Financial Accounting and Reporting-I
Suggested Answers
Certificate in Accounting and Finance – Autumn 2020

1 August - 1 October 2019 12,000×12%×2÷12 240

1 October - 31 December 2019 60,000×12%×3÷12 1,800
1 January - 29 February 2020 (60,000–20,000)×12%×2÷12 800
2,840
102,840

W-2: Depreciation – Plant Rs. in '000

On opening balance 180,000÷15 12,000
On the new plant 102,840(W-1)÷10×3÷12 2,571
14,571

W-3: Written down value - Engine disposed off Rs. in '000

Cost 2,500×40% 1,000
Accumulated depreciation:
For the six months ended 30 June 2018 1,000×20%×6÷12 100
For 2018-2019 (1,000–100)×20% 180
For the six months ended 31 December 2019 (1,000–280)×20%×6÷12 72
352
648

W-4: Depreciation – Vehicles Rs. in '000

On disposal of old engine (W-3) 72
On remaining opening balance [(8,800–1,000)–(4,000–280)]×20% 816
On addition of new engine 1,800×20%×6÷12 180
1,068

W-5: Revaluation surplus – Buildings Rs. in '000

Opening balance 16,000
Incremental
depreciation 16,000÷16[(56,000÷70,000)×20] (1,000)
15,000

(THE END)

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