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MGT132
MANAGEMENT SCHOOL Spring Semester 2020-2021
INTRODUCTION TO FINANCIAL ACCOUNTING 2 hours
There are two sections in this examination paper (section A and section B) and
four questions in total. You must answer THREE questions in total as follows:
Section A consists of ONE COMPULSORY question.
Section B consists of three questions and you must answer TWO of these
questions.
All workings must be shown clearly.
Unless you are told otherwise, you should work to the nearest ￡1.
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SECTION A
Question A1 (Compulsory question)
Leeds plc had the following trial balance as at 31 December 2020:
Dr (￡) Cr (￡)
Ordinary shares of ￡1 each 1,400,000
7% ￡1 preference shares 600,000
Share premium 140,000
Revaluation reserve 300,000
Retained earnings at 1 January 2020 63,000
Buildings 2,000,000
Accumulated depreciation: Buildings 120,000
Office equipment at cost 480,000
Accumulated depreciation: Office
equipment
96,000
Revenue 2,861,600
Inventory at 1 January 2020 180,400
Purchases 1,213,200
General distribution costs 433,600
General administration costs 280,400
Business rates 180,000
Bad debts written off 16,400
Provision for bad debts 4,800
Directors’ remuneration 510,000
Bank 78,000
Trade receivables and trade payables 370,000 156,600
5,742,000 5,742,000
The following information is also available.
The cost of the inventory at 31 December 2020 is ￡172,800.
The provision for doubtful debts is to be set at 4% of trade receivables. And the
company’s policy is to treat bad debts as selling and distribution expenses.
Depreciation is to be provided as follows:
Buildings: 2 percent per annum on a straight-line basis.
Office equipment: 15 percent per annum on a reducing-balance basis.
The office equipment is used by the distribution and administration functions in
equal proportions.
The premises related expenses are to be divided between distribution and
administration costs in the ratio 2:3.
Two of the directors are engaged in selling activities and earn a total of ￡100,000.
The other directors are all engaged in administrative activities.
Bad debt expenses are regarded as a distribution cost
Corporation tax for the year is estimated at ￡62,000.
Leeds plc declared the preference dividend for the year ended 31 December
2020 but it has not yet been paid.
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The company does not propose to pay an ordinary dividend for the year ending
31 December 2020.
Required:
a) Prepare the statement of comprehensive income for the year ended 31
December 2020 and the statement of financial position at 31 December 2020
for Leeds plc, in accordance with International Financial Reporting Standards.
(28 marks)
b) Explain the distinction between capital expenditure and revenue expenditure
and why this distinction is important in financial accounting.
(12 marks)
(40 marks in total)
END OF SECTION A

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SECTION B (Answer TWO questions only)
Question B1
A. The data presented below show actual figures for selected accounts of Norwich
plc for the fiscal year ended December 31, 2020. Norwich’s finance director is in
the process of reviewing the 2020 results.
2020 Operations ￡’000
Credit Sales 700,000
Cost of Sales (320,000)
Administrative expenses (134,000)
Debenture interest (6,000)
Tax expense (40% tax rate) (96,000)
Dividends declared and paid in 2020 (120,000)
Extracts from the Statement of Financial Position
for York plc, as of 31 December
2020 2019
￡’000 ￡’000
Inventory 140,000 160,000
Trade receivable 200,000 140,000
Cash 40,000 20,000
Short term investments 40,000 40,000
Current assets 420,000 360,000
Non-current assets 550,000 510,000
Current liabilities 156,000 170,000
Long-term debt 150,000 60,000
Ordinary Shares ￡60 par value per share 600,000 600,000
Retained Earnings 64,000 40,000
REQUIRED:
For Norwich plc, calculate the following financial ratios for 2020:
1. Return on Assets.
2. Operating profit margin.
3. Asset Turnover.
4. Current ratio.
5. Quick ratio.
6. Inventory holding period.
7. Receivables collection period.
8. Debt to equity ratio.
9. Debt to total assets.
10.Interest coverage ratio.
(20 marks)
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B. Evaluate the financial performance of Norwich plc using the ratios calculated in
part (A) and the following ratios obtained from the financial statements of a
competitor:
Return on assets 44%
Current ratio 2.5:1
Inventory holding period 100 days
Interest coverage ratio 0.40 times
(10 marks)
(Total: 30 marks)
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Question B2
(This question consists of two parts. Answer both parts.)
PART I
The following trial balance has been prepared from the books of Manchester plc as
at 31 December 2020:
￡ ￡
Debit Credit
Bank 102,000
Trade receivables 204,000
Inventory 90,800
Land 260,000
Buildings 380,000
Equipment 160,000
Provision for doubtful debts 1,800
Accumulated depreciation – Buildings 120,000
Accumulated depreciation – Equipment 57,600
Trade payables 77,200
Unearned rent revenue 32,000
10% debentures 200,000
Ordinary shares (￡10 par) 120,000
Share premium 24,000
Retained Earnings reserve 300,200
Sales revenue 2,280,000
Cost of Sales 1,600,000
Selling and Distribution expense 156,000
Administration expenses 260,000
3,212,800 3,212,800
The following additional information remains to be adjusted for in preparing the
financial statements for the year ended 31 December 2020:
1. Manchester plc estimates that provision for doubtful debts at the year-end is
￡20,400.
2. Buildings are being depreciated using the straight-line method over 30 years.
The salvage value is ￡20,000.
3. The equipment is being depreciated using the straight-line method over 10
years. The salvage value is ￡16,000.
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4. The 10% debentures pay interest every 1st January. The interest for the 12
months ended 31 December 2020, has not been paid or recorded.
5. The unearned rent was collected on 1st of October 2017. It was the receipt of 4
months’ rent in advance (1st of October 2017 through January 31 2018).
6. Manchester plc issued 4,000 6% preference shares with a par value of ￡20 per
share, for ￡88,000.
7. Manchester plc issued 4,000 shares of ordinary shares for ￡92,000.
8. Manchester plc reacquired 1,200 shares of its ordinary shares for ￡49 per
share.
9. On 31 December 2017, Manchester plc declared the annual cash dividend on
the preference shares and a ￡1.50 per share dividend on the outstanding
ordinary shares, all payable on 15 January 2018.

Required: Prepare the journal entries for Manchester plc for the year ended 31
December 2020.
(20 marks)
PART II
Explain briefly the following inventory cost formulas:
1. Specific identification.
2. FIFO
(10 marks)
(30 marks in total)
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Question B3
You are provided with the following details from the financial statements of Leicester
plc:
Leicester plc statements of financial position as of 31st
December ￡ ￡
2020 2019
Non-current assets:
Land 260,000 40,000
Buildings at Cost 320,000 80,000
Accumulated depreciation – Buildings (22,000) (10,000)
Equipment at cost 54,000 20,000
Accumulated depreciation – Equipment (6,000) (2,000)
Total Non-current assets 606,000 128,000
Current assets:
Inventory 30,000 20,000
Trade receivables 40,000 60,000
Prepaid expenses 10,000 2,000
Cash 110,000 66,000
Total current assets 190,000 148,000
Total assets 796,000 276,000
Current liabilities:
Trade payables 56,000 24,000
Tax payable 12,000 16,000
Total current liabilities 68,000 40,000
Non-current Liabilities:
Debentures 260,000 40,000
Equity:
Ordinary Shares 140,000 100,000
Retained Earnings 328,000 96,000
Total Equity 468,000 196,000
Total liabilities and equity 796,000 276,000
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Leicester plc Income statement for the year ended 31st December 2017
￡
Sales Revenue 1,014,000
Cost of Sales (300,000)
Gross Profit 714,000
Operating Expenses (Excluding Depreciation) (222,000)
Depreciation Expense (18,000)
Loss on sale of Equipment (6,000)
Operating profit 468,000
Finance Costs (84,000)
Profit before Tax 384,000
Corporation Tax (94,000)
Profit after Tax 290,000
Additional information for 2020:
1. The depreciation expense comprised of ￡12,000 for building and ￡6,000 for
equipment.
2. The company sold equipment with a net book value of ￡14,000 (cost ￡16,000, less
accumulated depreciation ￡2,000) for cash.
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3. The company issued ￡220,000 of long-term debentures in direct exchange for
land.
4. A building costing ￡240,000 was purchased for cash. Equipment costing ￡50,000
was also purchased for cash.
5. The company issued ordinary shares for ￡40,000 cash.
6. The company declared and paid a ￡58,000 cash dividend.
Required: Prepare the cash flow statement in accordance with IAS 7 for Leicester
plc for the year ended 31 December 2020 using the direct method. Assume that all
sales and purchases are made on account.
(Total: 30 marks)
END OF SECTION B
END OF THE EXAMINATION PAPER