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CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
The Examiner's Answers – Specimen Paper
F1 - Financial Operations
SECTION A
Answers to Question One
1.1 D
$
1.2 Accounting profit 72,000
Add accounting depreciation 12,000
Add entertaining costs 15,000
Less tax depreciation (10,000)*
89,000
Taxed at 25% 22,250
Answer therefore D
*$40,000 x 25% = $10,000
1.3 B
1.4 C
1.5 Comparability and understandability
1.6 Integrity and confidentiality
1.7 B
1.8 A
The Chartered Institute of Management Accountants 2009
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
1.9 Cost $2.20
Selling price $3.50
Repair costs $1.50
Net realisable value $2.00
Use lower of cost and net realisable value = $2.00 x 300 units = $600
Therefore answer is A
1.10 C
SECTION B
Answer to Question Two
Requirement (a)
(i) It is important to determine corporate residence as corporate income tax is usually a
residence-based tax. Whether corporate income tax will be charged depends on the
residence, for tax purposes, of any particular entity.
(ii) The OECD model tax convention provides that an entities status shall be determined as
follows:
a) it shall be deemed to be a resident only of the State in which its place of effective
management is situated;
b) if the State in which its place of effective management is situated cannot be
determined or if its place of effective management is in neither State, it shall be
deemed to be a resident only of the State with which its economic relations are
closer;
c) if the State with which its economic relations are closer cannot be determined, it
shall be deemed to be a resident of the State from the laws of which it derives its
legal status.
ATOZ will be deemed to be resident in country NOP as that is where its place of
effective management is.
Requirement (b)
(i) Single-stage sales taxes apply at one level of the production/distribution chain only; they
can be applied to any one of the following levels:
● the manufacturing level;
● the wholesale level;
● the retail level.
Tax paid by entities is not recoverable.
VAT charges tax at every level, but tax paid at one level can usually be recovered by
deducting it from tax collected at the next level. The ultimate consumer bears all the tax.
Specimen Exam Paper 2 Financial Operations
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
(ii)
Outputs: Sale excluding VAT VAT
$ $
Standard rate 200,000 30,000
Zero rate 115,000 0
Total 30,000
Inputs
Materials and services 130,000 19,500
New machinery 300,000 45,000
64,500
Amount due to be refunded by tax authority 34,500
Requirement (c)
The possible advantages of having accounting standards based on principles rather than
being prescriptive include:
It will be harder to construct ways of avoiding the requirements of individual standards,
for example, in country K the prescriptive standard sets out definitions of what is
allowed and what is not allowed, this causes problems if some items are not specified,
such as in RS’s case. Whereas if the standard sets out general principles, it is much
harder to avoid the standard’s requirements as what is included will be defined by
applying the principle.
If a prescriptive standard lists items or specifies quantities they may go out of date fairly
quickly and need to be regularly updated. This may be the problem with RS, the
expenditure incurred may not have been required when the standard was agreed. If
principles based standards are used they do not go out of date unless a principle is
changed.
If an actual value is specified in a standard, it may be possible for some entities to
construct various means of avoiding the application of that requirement. If a general
principle is specified it will apply no matter what value is put on it
With principle based standards the requirements in certain situations will need to be
applied using professional judgement, which can help ensure that the correct
application is used. Whereas a prescriptive standard would require a certain treatment
to be used, regardless of the situation, which could lead to similar items being treated
the same way even if the circumstances are different.
Principles-based GAAP should ensure that the spirit of the regulations are adhered to,
whereas the prescriptive system is more likely to lead to the letter of the law being
followed rather than the spirit.
Requirement (d)
The manufacturing facility has been shown as a separate reportable operating segment
according to IFRS 8. This means that it must be a separate operating unit whose operating
results are regularly reviewed by BD’s chief operating decision maker. This implies that there
is discrete financial information available for the manufacturing facility’s operations. It will
therefore meet the IFRS 5 definition of a discontinued operation, a component of an entity
classified as held for sale and is part of a single plan to dispose of a separate major line of
business.
Financial Operations 3 Specimen Exam Paper
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
The manufacturing facility loss of $0.5 million will be shown as one amount as a discontinued
operation on the statement of comprehensive income, at the end of the income statement
section, after profit from continuing activities and before other comprehensive income. The
detailed breakdown of the loss will be given in the notes to the statement of comprehensive
income.
The manufacturing facility has not been disposed of by the year end, so it will be classified as
a “non-current asset held for sale”. Non-current assets held for sale are valued in the
statement of financial position at fair value less the cost to sell. The assets and liabilities have
to be shown separately, so the assets of $3.4 million (assets $3.6 million less cost to sell $0.2
million) will be shown after current assets, with the heading non-current assets held for sale.
The liabilities of $0.8 million will be shown under current liabilities and headed “liabilities
directly associated with non-current assets classified as held for sale”.
Requirement (e)
Office Space - Operating lease
Rentals due: Total payments 4 years at $1,000x12 = £48,000
Spread over 5 years = $48,000/5 = $9,600 p.a.
Income statement for year to 31 March 2010 (extract)
Administrative expenses - Office rentals $9,600
Statement of financial position as at 31 March 2010 (extract)
Current liability - Accrued rentals $9,600
Computer System
Finance Charge: Allocate finance charge using actuarial method at 12.5% interest paid in
arrears.
Depreciate asset using normal accounting policy.
Payment Income Paid Balance
date Opening statement at year
bal Finance end
charge
31.03.10 35720 4465 -15000 25185
31.03.11 25185 3148 -15000 13333
31.03.12 13333 1667 -15000 0
Summary of accounting entries:
Income statement for year ended 31.03.10 (extract)
£
Finance charges 4,465
Depreciation 11,907
Depreciation 35720/3 = 11,907
Specimen Exam Paper 4 Financial Operations
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
Statement of Financial Position (extract)
Non-current assets
Leased equipment under finance leases at cost 35,720
Accounting depreciation 11,907
NBV 23,813
Non-current liabilities
Obligations under finance leases 13,333
Current liabilities
Obligations under finance leases 11,852
Requirement (f)
(i) IAS 32 requires the particular rights attaching to a preference share to be analysed to
determine whether it exhibits the fundamental characteristic of a financial liability. There
are a number of characteristics that will indicate that there is an obligation to transfer
financial assets to the holder of the share, in each case the preferred share will need to
be classified as debt rather than equity.
If the terms of issue provide for mandatory redemption for cash the preferred shares will
be treated as liabilities.
If the preference shares are non-redeemable, the appropriate classification is based on
an assessment of the substance of the contractual arrangements and the definitions of
a financial liability and equity instrument. For example if the preferred shares are
cumulative it means that a dividend will always eventually have to be paid and is
therefore not discretionary. Therefore the preferred shares are classified as debt.
(ii) PS’s shares provide for a cash redemption and are therefore classified as debt. In the
statement of financial position the preferred shares will be shown under non-current
liabilities. The dividend paid on the preferred shares will be treated as finance cost in
the income statement.
PS Extracts from financial statements:
PS Statement of comprehensive income for year ended 31 March 2010 (extract)
Finance expense $61,642
PS Statement of financial position as at 31 March 2010 (extract)
Non-current liabilities
Preferred shares $1,211,642
Financial Operations 5 Specimen Exam Paper
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
___________________________________________________________________________
SECTION C
Question Three
Requirement (a)
Balance at 31 Balance at 31 Difference =
March 2009 March 2010 Change in Year
$000 $000 $000 $000 $000
Property, plant and equipment
Accounting book value
Cost 630 630
Depreciation 378 504
Net book value 252 126
Tax written down value
Cost 630 630
Tax depreciation 453 497
177 133
Cumulative difference 75 (7) (82)
Deferred tax @ 25% 18.75 (1.75) (20.50)
Rounded 19 (2) (21)
Financial statements
Statement of comprehensive income (extract)
$000
Income tax expense – deferred tax (21)
Statement of financial position (extract)
Current assets – deferred tax 2
Requirement (b)
XY - Statement of comprehensive income for the year ended 31 March 2010
Continuing Operations $000
Revenue 1,770
Cost of sales (1,025)
Gross Profit 745
Administrative expenses (317)
Distribution costs (176) (493)
Profit from operations 252
Finance cost (14)
Profit before tax 238
Income tax expense (W5) (87)
Profit for the period from continuing operations 151
Other Comprehensive Income
Gain on fair value adjustment of available for sale
investments 44
Profit for the year 195
Specimen Exam Paper 6 Financial Operations
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
XY Statement of Financial Position at 31 March 2010
$000
Non-current assets (Net book value)
Land 729
Property, plant and equipment 126
Available for sale investments 608 1,463
Current assets
Inventory 76
Trade receivables 210
Deferred tax asset 2
Cash and cash equivalents 21 309
Total assets 1,772
Equity and liabilities
Equity
Share capital 500
Share premium 200
Revaluation reserve 204 404
Accumulated profits 422
Total equity 1,326
Non-current liabilities
Long term borrowings 280
Total non-current liabilities 280
Current liabilities
Trade payables 56
Tax payable 96
Interest payable 14
Total current liabilities 166
Total equity and liabilities 1,772
XY – Statement of changes in equity for the year ended 31 March 2010
Equity Share Revaluation Accumulated Total
shares premium Reserve profits
$000 $000 $000 $000
Balance at 1 April 2009 400 150 160 321 1,031
New share issue 100 50 150
Statement of 44 151 195
comprehensive income
Dividend paid (50)
(50)
Balance at 31 March 500 200 204 422 1,326
2010
Financial Operations 7 Specimen Exam Paper
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
Workings (All figures in $000)
(W1) Land Impairment
Land
Balance b/fwd 782
Disposal (39)
743
Fair value c/f 729
Impairment (14)
(W2) Depreciation
Property, plant and equipment
Depreciation = 630 x 20% = 126
(W3) Gain on disposal
Cost 39
Cash received 48
Gain on disposal 9
(W4) Cost of sales
Trial balance 908
Gain on disposal (W3) (9)
Depreciation – property, plant and equipment (W2) 126
1,025
(W5) Administrative Expenses
Per trail balance 303
Land - impairment 14
317
(W6) Taxation expense
Year 96
Last year under-estimate 12
Reduction in deferred tax (see part (21)
(a))
87
(W7) Interest due
Accrued interest = 280 x 5% = 14
Specimen Exam Paper 8 Financial Operations
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
Question Four
Requirement (a)
Draft
To P’s Directors
From Management Accountant
Treatment of A in the P Group Consolidated Financial Statements
Entities should be consolidated according to the requirements of International Financial
Reporting Standards and not according to whether the entity makes a profit or loss during the
year.
P owns 40% of the equity shares in A and exercises significant influence over all
aspects of A’s strategic and operational decisions.
P does not control A as it only holds 40% of the shares/votes. P would need >50% of the
equity shares to be able to exercise control over A. The argument that A does not need to be
consolidated is partially correct, A cannot be consolidated as a subsidiary. Instead A will need
to be consolidated as an associated entity using the equity method, as P exercises significant
influence over all aspects of A’s strategic and operational decisions.
Equity accounting recognises the post acquisition profits and losses of the associated entity
and includes the group share instead of simply recording dividends received from the
associated entity.
To treat A as a simple investment at cost could be construed as unethical as it would not
follow the requirements of international financial reporting standards. The CIMA Code of
Ethics for Professional Accountants requires an accountant to have integrity. Integrity implies
fair dealing and truthfulness. A professional accountant should not be associated with financial
reports that they believe omits or obscures information required to be included where such
omission or obscurity would be misleading. Treating A as an investment would obscure the full
extent of P’s commitment to its associate and could therefore be unethical. We cannot
therefore allow A to be treated as an investment.
Requirement (b)
Group holdings:
P in S
40,000,000/40,000,000 = 100% Treat as wholly owned subsidiary
P in A
8,000,000/20,000,000 = 40% Treat as an associate
(i) Fair value of net assets of S at acquisition
$000
Equity Shares 40,000
Retained earnings 6,400
Fair value adjustment 1,000
47,400
The property has a useful life of 20 years, excess depreciation is therefore $1,000,000/20 =
$50,000.
Financial Operations 9 Specimen Exam Paper
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
Dr. Cr.
$000 $000
Consolidated retained profits 50
Consolidated property, plant and equipment 50
(ii) Goodwill - S
$000
Cost 60,000
Fair value of net assets acquired (100%) 47,400
Goodwill 12,600
(iii) Investment in associate -A
$000
Cost 13,000
Add group share of post acquisition losses
(7,800 – 21,000) x 40%= (5,280)
Investment at 31 March 2010 7,720
(iv) Current accounts Dr. Cr.
$000 $000
P receives a cheque from S
Cash and bank 2,000
Current account with S 2,000
Cancel current accounts on consolidation
Current account with P 6,000
Current account with S 6,000
(v) Intra-group trading
Mark up on cost 33⅓% = 25% margin on selling price.
Selling price $4,000,000; unrealised profit = $4,000,000 x 25% = $1,000,000
Dr. Cr.
$000 $000
Consolidated retained profits 1,000
Consolidated current assets – inventory 1,000
(vi) Cancellation of loan to S
Dr. Cr.
$000 $000
Loan to S 10,000
Non-current liabilities – Borrowings 10,000
Loan interest
Trade payables 250
Trade receivables 250
(vii) Consolidated Retained Earnings
$000
Balance P 21,000
S – group share of post acquisition profits (13,000 – 6,400) 6,600
Associate – A, group share of post acquisition profits (iii) (5,280)
Excess depreciation on fair value increase of property (50)
Cancel unrealised profit in inventory (v) (1,000)
21,270
Specimen Exam Paper 10 Financial Operations
CIMA 2010 Chartered Management Accounting Qualification – Answers for Specimen Examination Paper F1
Published May 2010 (V2)
P Group - Consolidated Statement of Financial Position as at 31 March 2010
$000
Non-Current Assets
Goodwill 12,600
Property, plant and equipment
(40,000+48,000+1,000-50) 88,950
Investment in associate (iii) 7,720
109,270
Current Assets
Inventory (8,000+12,000-1,000) 19,000
Trade receivables (17,000+11,000-250) 27,750
Cash and bank (1,000+3,000+2,000) 6,000
162,020
Equity and Reserves
Ordinary Shares 100,000
Retained Earnings (vii) 21,270
121,270
Non-current liabilities
Borrowings (26,000+10,000-10,000) 26,000
Current Liabilities
Trade payables (10,000+5,000-250) 14,750
162,020
The Chartered Institute of Management Accountants 2009
Financial Operations 11 Specimen Exam Paper
