Advanced Financial Reporting & Theory (Online Exam)

This document provides a comprehensive study material for Advanced Financial Reporting & Theory. It includes the preparation of consolidated financial statements, key factors in arriving at a fair value for goodwill, and various financial ratios. Additionally, it discusses the impact of culture on accounting information. The document is suitable for students studying finance and accounting courses.

ADVANCED FINANCIAL REPORTING
&THEORY (ONLINE EXAM)

Table of Contents
SECTION A.....................................................................................................................................3
Question 1...................................................................................................................................3
SECTION B.....................................................................................................................................6
Question 2...................................................................................................................................6
SECTION C.....................................................................................................................................8
Question 5...................................................................................................................................8
REFERENCES..............................................................................................................................10

SECTION A
Question 1.
(a) Prepare the consolidated statement of financial position and the consolidated income statement for Tate plc for the year ended 31st
December 2020
Consolidated balance for year ended 31st December 2020-
Non current assets
Property, plant, equipment 421600
Investment in subsidiary 101000
Investment in associate 63300
585900
Current assets 0
Inventories (80200+2000) 82200
Trade receivables 52300
Current account McRae 4250
Loan interest receivable 600
Bank 12420
149770
Total assets 755670

Equity and reserves
Share capital 250000
General Reserve 24500
Retained earnings 69520
Minority Interest 54000
Share holders funds 396020
Non current liabilities 0
Loan 253000
Current liabilities 0
Trade payables 80400
Current account Tate 4250
Loan interest payable 2000
86650
Total equity and liabilities 755670
Working Note:
Stock of McRae has been increased by 2 million due to purchasing from Tate.
Consolidated income statement for year ended 31st December 2020-

Sales 2578300
Cost of sales -512920
Gross profit 130220
Expenses -104176
Profit before tax 26044
Income tax expense -5209
Profit after tax 20835
Working note:
Sales of Tate-
Particulars Amount
Sales 324200
Add: sale to McRae of 2 Million 2 million
2324200
Increase in cost of sales of Tate by 25% so,
COGS of Tate (259360*25%): 324200
(b) Key factors in arriving at a fair value for goodwill.

There are a range of factors which occurs during fair value of goodwill. Below some of those factors are explained in such manner:
Amount of non-controlling interest- This is the factor which is considered when computing the fair value of goodwill. It is so because
in the non controlling interest, shareholders owns lower than 50% of share which need to consider.
Fair value of previous equity interest- In addition to this, fair value of past equity is also a key factor which need to be consider when
we measure the value of goodwill. The rationale behind this is that equity interest is paid by company to their shareholders and by
considering this it becomes feasible to know value of goodwill.
Net identifiable assets- Another factor which is considered is the net identifiable assets which is measured by deducting total assets
from total liabilities. The reason to consider this is because under this net value of assets is computed that indicates efficiency of a
company to manage liabilities.
SECTION B
Question 2
RATIOS FORMULAS 2017 2018 2019 2020
Long term liabilities 1000 1200 1500 1700
Shareholders’ Equity 2150 2200 2250 2300
1) Gearing Long term liabilities / Shareholders Equity 0.465 0.545 0.667 0.739
operating profit 200 100 80 60
total assets 3900 4300 4600 4900
total current liabilities 750 900 850 900
2)
Return on capital
employed operating profit / (total assets- total current liabilities) 6.349 2.941 2.133 1.5
current assets 1400 1600 1600 1400
current liabilities 750 900 850 900
3) Current ratio current assets / current liabilities 1.867 1.778 1.882 1.556

Net income 200 100 80 60
Weighted average common shares outstanding 1000 1000 1000 1000
4) Earnings per share Net income / Weighted average common shares outstanding 0.2 0.1 0.08 0.06
Share price 4.8 4.5 4.3 4
Earnings per share 0.2 0.1 0.08 0.06
5) Price/ Earnings ratio Share price / Earnings per share 24 45 53.75 66.667
Net income 200 100 80 60
Shareholders’ Equity 2150 2200 2250 2300
6) Return on Equity Net income / shareholders’ equity 0.093 0.045 0.036 0.026
Net operating profits after tax 200 100 80 60
WACC
6.00
% 8.00%
9.00
%
11.00
%
Capital invested 3150 3400 3750 4000
7) Economic value added Net operating profits after tax – (WACC* Capital invested) 11 -172
-
257.5 -380
EVA base year 11 -172 -257.5
Change in EVA -183 -85.5 -122.5
8) EVA percentage change Change in EVA / EVA base year *100
-
1663.636
49.70
9 47.573
Net income 200 100 80 60
Dividend paid 150 75 60 50
9) Dividend cover Net income / Dividend paid 1.333 1.333 1.333 1.2
Dividend paid 150 75 60 50
Number of outstanding shares 1000 1000 1000 1000
Market price of share 4.8 4.5 4.3 4
10
) Dividend Yield
(Dividend paid/ Number of outstanding shares)/ Market price of
share 0.031 0.017 0.014 0.013

With the evaluation of the above calculation the it can be seen that the return in the capital employed of Glenn plc is
decreasing since past four years. In the year 2017 it was 6.349 which decreased to 1.5 till 2020. This is not good for the company as
the return which the company is providing to the capital employed is decreasing. Further with help of current ratio also it is evident
that it is constant for all the years but has a reduction in 2020. In addition to this with help of the EPS it was clear that EPS was low
for 2020 which is 0.06. This suggest that earning per share of the company has reduced which in turn reflects the profitability of
company has reduced. On the evaluation of the return on equity it was clear that the return is decreasing which suggest that the return
which the company is giving to the shareholders is decreasing to a great extent. Further from the dividend cover it is evaluated that it
is constant of the company and there is not much increase in the dividend paid.
As a potential investor it is not advisable to invest within the company as the return which the company is providing to the
equity holder is decreasing. This in turn reflects that the operations of the company are reducing and because of this the company is
not a good option for the investment. The current market value per share is reasonable as the current earning per share is very low in
comparison with the market price of the company. thus, the current market price is reasonable as the shareholder will be in profit in
comparison with the EPS.
SECTION C
Question 5
By the work of Hofstede and Gray it was clear that the culture is having a great impact over the society and its working. But
along with this there is also a great impact of culture over the accounting information. In accordance with the work of the Hofstede
and Gray there are different cultural dimension which creates a great impact over the accounting profession and information they
product. These elements are classified in individualism, uncertainty avoidance, long term orientation, power distance and masculinity.
There are many different types of research which suggest that the cultural differences lead the accountant of different countries
to interpret the different type of the accounting principle and standards in different manner. This is particularly because of the reason
that is an accountant is coming from a different cultural background and if they are not in position to understand the accounting

principle then it may be possible that they are not able to understand it. There are many different reason underlying this like the person
is not acquainted with that language or some of the words of the principles are not understandable by the person.
This model of Hofstede involves the major aspect which is uncertainty avoidance which involves the fact that how much the
individual is comfortable in society and how they feel in situation of ambiguity and uncertainty. If the accountant is very uncertain and
get tensed by thinking of the future uncertainty, then this will affect the working of the accountant and they will not be in condition of
doing the accounting function in proper and effective manner (Ameen, Ahmed and Abd Hafez, 2018).
Further another major aspect of this model involves the individualism as a factor which includes the preference of the person
with respect to the loosely knit social framework wherein individual are expected to take care of the themselves only. On the flip side
another aspect is collectivism which involves preference of tightly knit framework wherein individual expect their member loyalty.
With respect to the accounting is the accountant will be more of individualist then they will be thinking of their own benefit only
rather than the benefit of every person within the company. hence, this depends on the culture of the person that whether they will be
more of individualist or will prefer collectivism.
Another aspect of Hofstede is achievement orientation and if the culture of the accountant is related in positive manner to this
then this will motivate the accountant to work in proper and effective manner. In addition to this is the accountant is not much
achievement oriented then this will demotivate the person and they will not perform their task in proper and effective manner.
Last aspect of the model of Hofstede is the power distance which highlights the hierarchy and the power distribution among
the people. If the power is equally divided among the people, then they will be motivated towards working otherwise not.
Hence, from the application of the model it can be stated by Putra (2019) that the culture creates a great impact over the
working of the accountant and use of accounting information to a great extent. Thus, it can be clearly stated that if the culture is not
proper and appropriate then this will affect the working of accountant to a great extent.

REFERENCES
Books and Journals
Putra, Y.M., 2019. Analysis of Factors Affecting the Interests of SMEs Using Accounting Applications. Journal of Economics and
Business, 2(3).
Ameen, A.M., Ahmed, M.F. and Abd Hafez, M.A., 2018. The Impact of Management Accounting and How It Can Be Implemented
into the Organizational Culture. Dutch Journal of Finance and Management, 2(1), p.02.