El método para medir el PRD

General comments

This question tested the preparation of single entity financial statements (in this case an income statement and a statement of financial position) from a trial balance plus a number of adjustments. Adjustments included prepayments and accruals, the correction of a suspense account, an adjustment for inventories held by third parties, two provisions and an asset held for sale.

Moreton Ltd

Income statement for the year ended 30 September 2009

£

Revenue (2,885,500 – 30,000) 2,855,500

Cost of sales (W1) (1,879,900)

Gross profit 975,600

Distribution costs (W1) (309,600)

Administrative expenses (W1) (637,400)

Profit from operations 28,600

Finance cost (200,000 x 5%) (10,000)

Profit before tax 18,600

Income tax expense (4,000)

Profit for the period 14,600

Statement of financial position as at 30 September 2009

Assets £

Current assets

Inventories (W1) 176,000

Trade and other receivables (978,400 + 56,000 – 30,000)

1,004,400

Other receivables (W2) 45,000

Cash and cash equivalents 820

1,226,220 Non-current asset held for sale (W4) 21,000

Total assets 1,247,220

Equity and liabilities £ Equity

Ordinary share capital 100,000

Share premium account 20,000

Retained earnings (W3) 193,500

313,500 Non-current liabilities

Borrowings 200,000

Current liabilities

Trade and other payables (578,620 + 75,000 + (10,000 – 7,500))

Total equity and liabilities 1,247,220

Tutorial note

Equal credit was given if candidates assumed that the £7,500 interest paid in the trial balance related to the overdraft and therefore accrued the whole £10,000 interest on the loan.

Marks were also awarded if the impairment of £9,000 and/or the provision expense of £15,000 were shown separately on the face of the income statement (instead of within cost of sales and cost of sales or

administrative expenses respectively) on the grounds that either of these amounts would have a significant impact on the profit for the period.

Workings

(1) Allocation of expenses

Cost of sales Administrative expenses

Prepayments and accruals (56,000) 75,000

Closing inventories (156,000 + 20,000) (176,000) Movement on provision (W2) 15,000 Movement on provision (W2) (2,000) Amortisation/impairment charges (2,000 +

9,000) (W4)

11,000

1,879,900 637,400 309,600

(2) Provision for legal claims

£

At 1 October 2008 27,000

Settled at (25,000)

Released to IS 2,000

New provision at 30 September 2009 (most likely outcome) 60,000

Counter claim @ 75% (45,000)

(4) Patent held for sale

£

Cost 40,000

Accumulated amortisation to 30 September 2008 (8,000) Amortisation to date of classification as held for sale ((40,000 ÷ 10) x 6/12) (2,000) Carrying amount at classification as held for sale 30,000 Fair value less costs to sell (22,000 – 1,000) (21,000)

Impairment 9,000

As in previous sittings, candidates were clearly very well-prepared for this type of question. Almost all candidates produced a well-laid out income statement and statement of financial position with all narrative and sub-totals completed. Although some candidates lost presentation marks for the statement of financial position by not adding across numbers in brackets or failing to complete sub-totals and/or totals on their statements or by having incomplete or abbreviated narrative, presentation for this statement was much improved from previous sittings. Others lost presentation marks for failing to include a sub-total for profit from operations on their income statement. As ever, candidates should remember that this type of question requires financial statements to be in a form suitable for publication.

Although many workings, in particular the cost matrix and impairment working, were clearly laid out, a few candidates’ workings were disorganised, untidy and therefore hard to follow, making it difficult to establish candidates’ approaches where they had not calculated the correct figure. It is particularly difficult to follow workings which use little or no narrative, or costs workings done on the face of the income statement.

Most candidates were able to deal with the more straightforward adjustments such as the prepayments and accruals, adjusting the closing inventories for goods held by a customer on sale or return, the settlement of the opening provision and the creation of a new provision at the year end and the income tax charge/liability. However, a number of candidates failed to complete the double entry on their adjustments, for example:

• adding prepayments to expenses (a debit) and showing them as a current asset (another debit) on the statement of financial position

• correctly adjusting trade and other receivables by £30,000 for the goods held by a customer on sale or return but failing to make the corresponding adjustment to revenue

• correctly recognising that a provision for £60,000 should be set up and charging the £60,000 to the income statement, but failing to recognise the provision itself within current liabilities

• recognising an amount for accrued finance costs in the income statement, but failing to recognise the same amount on the statement of financial position.

The majority of candidates arrived at the correct figure for the impairment on the asset classified as held for sale although a few calculated accumulated amortisation incorrectly. However, not all candidates who arrived at an impairment loss then charged this loss to the income statement. Others took the impairment loss to the income statement but failed to take the amortisation charge for the year to the income statement or classified one under cost of sales, the other as an administrative expense.

The most disappointing area in candidates’ answers related to the two provisions, with a number of candidates clearly confused about the appropriate double entry. Errors included:

• Not releasing the £2,000 over-provision brought forward to the income statement (with a number of candidates instead adding it to the closing provision).

• Calculating the closing provision on a weighted average basis rather than taking the most likely outcome (as this was a single obligation).

• Not recognising the contingent asset even though it was “virtually certain” to be recovered.

• Netting the provision and the contingent asset off on the face of the statement of financial position instead of presenting them separately.

• Recognising the provision and contingent asset on the statement of financial position, but ignoring the impact on the income statement.

Errors in dealing with the other adjustments included the following:

• Failing to disclose the asset held for sale correctly on the statement of financial position (within current assets after a separate sub-total for all other current assets).

• Offsetting the cash in hand against the overdraft, sometimes even showing a net positive cash balance.

• Failing to make the correct (or any) adjustment for the goods held by a customer on sale or return, with a number of candidates deducting these goods from closing inventories rather than adding them.

• Adding prepayments to expenses and deducting accruals or adjusting for both in the same direction.

• Reflecting the income tax charge for the year in the income statement but not showing the corresponding liability.

Total possible marks Maximum full marks

21 19