Assessment - Financial Accounting and Reporting

1 Understand the regulatory framework for financial reporting

2 Prepare financial statements from complete or incomplete records

3 Present financial information in accepted formats for publication

4 Interpret financial statements

Assignment Task

You work as an assistant in a busy accounting office and have a number of tasks to complete as follows:

Task 1

A client of the business who runs a small business and investment consultancy is preparing to construct a web-based facility as part of the information resources for clients.

Part of the web page is to be a section on Frequently Asked Questions (FAQ?s) for those people who may be thinking of starting their own businesses or investing in UK company shares.

The client has asked if someone from the office would prepare some FAQ?s and answers covering various aspects of the regulatory framework which exists within the European Union (EU). The responses to FAQ?s are to be aimed at those people with a non-financial background rather than at a „professional? business level.

You are required to draft out some brief responses to support the following FAQ?s:

1a) Who are the main "users" of sets of published financial accounts?

1b) For each main user, what are their potential area(s) of interest in the  published information?

1c) What are the main accounting and legal differences between Partnerships and Limited Companies within the United Kingdom?

1d) What is the main role of the International Financial Reporting Standards Foundation (IFRS Foundation)?

1e) How may the short-term liquidity of a business be of importance to any of the „users? identified in 1a), above?

1f) How could the financial gearing of a business be important to any of the  „users? identified in 1a), above?

1g) What is the purpose of general financial reporting as outlined by the IASB?s Conceptual Framework document?

1h) What are the main benefits to users of financial reports arising from the creation of the Conceptual Framework document?

Task 2a)

You are preparing some financial information for a new client, a sole trader called Carter.

Unfortunately complete accounting records have not been maintained and you have the following information for the accounting year to 31 December 2013 to assist with the production of the trader?s tax return for the year:

(ii) Show the calculation which indicates how the trader?s cash in hand at bank is £43,000 as at 31st December 2013

Task 3)

You are also in possession of a summary of the accounting information for Heath plc for the year to 31st December 2013. This is in the form of a trial balance as follows:

Note that your profit after tax figure should be £3,393,900 

Task 3b)

You are required to produce, for Heath plc, a Position Statement (Balance Sheet) as at 31st December 2013 in a form suitable for internal use.

Note that your share capital and reserves figure should be £9,792,900  

Task 3c)

Using your own internal Income Statement from task 3a), above, together with additional information below, you are now required to present the Income Statement for the year to 31st December 2013 for Heath plc in a format suitable for presentation.

You should use the vertical format required by IAS 1, Presentation of Financial Statements. You should only prepare the Statement of Comprehensive income.

An illustration of the IAS 1 format is available at the end of this assessment.

In order to summarise the information for the published Statement of Comprehensive Income, you are able to ascertain that Heath plc allocates its operating expenses to cost of sales (COS) Distribution (Dist) and Administration (Admin) in the following manner:

Task 3d)

Concentrating on the presentation of the Statement of Comprehensive Income only:

• With reference to users of accounting information generally, identify the main differences between the published information you have produced under task 4 and the internal information you produced under task 3.

• Describe briefly at least one of the „recognised gains and losses? which you might find within the published accounts.  

Short paragraphs of explanation will be sufficient for this task.

Task 3e)

On 1 January 2013, a client, Strong plc, a retailer, completed the purchase of 100% of the Ordinary Share Capital of Fragile plc for an amount of £5,000,000. The Shares of Fragile plc at that time were in the books at £5,000,000 and as Fragile plc had not yet traded at the date of acquisition there were no other reserves.

One year has since passed and both businesses have traded for a year. Both have produced Income Statements for the year to 31st December 2013 together with Balance Sheets as at that date.

These accounts are as follows:

During the year Strong plc had bought goods costing £325,000 from Fragile plc. The sales of Fragile plc and the cost of sales of Strong plc reflect these transactions. All of the goods purchased by Strong plc from Fragile plc had been sold by the end of the year.

As at the year end Strong plc still owed Fragile plc £55,000 for some of the goods purchased from Fragile plc during the year. The current assets of Fragile plc and the current liabilities of Strong plc reflect this position as at 31st December 2013.

You are required to prepare for the Strong plc Group, the Consolidated:

(i)  Income Statement for the year ended 31st December 2013,

(ii) Consolidated Balance Sheet as at 31st December 2013.

You should show all your workings.

Task 4)

Telefónica is an operator in the telecommunication sector, providing communication, information and entertainment solutions, with presence in Europe and Latin America.

One of the firm?s clients has asked for a brief financial analysis of the recent performance of Telefónica. Extracts from the summarised Income Statements are shown below:

Extracts from summarised Group Balance Sheets are shown below:

Operating profit margin; (17.3%)

Working capital (current) ratio; (0.57:1)

Quick asset (acid test) ratio; (0.56:1)

Net asset turnover; (1.1 times)

Debtors payment period; (62 days)

Financial gearing, and (61.1%)

Fixed interest cover. (5.0 times)

For fixed interest cover, please use the „net basis? which uses finance costs minus finance income. You must show your workings.

Task 4b)

Make a brief comment, as far as is possible, on the financial performance and position of Telefónica, 2012 as compared to 2011 and to the BT Group plc results. This should take the form of a suitable comparative summary based on the above 8 financial ratios, together with a short set of notes suitable for scrutiny by a potential investor.

Task 4c)

Identify additional financial and non-financial information which might be helpful to make a judgement of the financial performance and prospects of the business.

Task 4d)

What is your own opinion of the suitability of financial ratio analysis as a predictor for the future success of a business?