Fundamentals of Accounting & Finance: Income Statement, IAS 2, IFRS 8, IAS 37, IFRS 15, Invoice Discounting, Factoring, Yield to Maturity, Credit Management System

This study material covers topics such as Income Statement, IAS 2, IFRS 8, IAS 37, IFRS 15, Invoice Discounting, Factoring, Yield to Maturity, Credit Management System. It includes solved questions and answers related to these topics.

Fundamentals of Accounting
& Finance

TABLE OF CONTENTS
SECTION A.....................................................................................................................................3
Question 1...................................................................................................................................3
SECTION B.....................................................................................................................................4
Question 3...................................................................................................................................4
Question 4...................................................................................................................................5
SECTION C.....................................................................................................................................6
Question 6...................................................................................................................................6
REFERENCES................................................................................................................................9

SECTION A
Question 1
Income statement of Holiday Ltd’s for the year ended on 31 July 2021
Particulars Amount (£)
Revenue 3647125
Less COGS 210040
Gross Profit 1546725
Less: Indirect expenses
General administrative expenses 675800
Rent 180000
General selling expenses 250250
Accumulated depreciation 285000
Gas, electricity, and water 85750
Interest on loans 8800
Bad debts 4500
Delivery costs outwards 40000
Depreciation on plat and machinery 95000
Allowance to trade receivables 8640
Net Loss -87015
Working Note: Calculation of COGS
Particulars Amount (in £
Opening inventory 550000
Add purchase 1795800

Less Closing inventory 245400
COGS 2100400
SECTION B
Question 3
A
As per the IAS 2 relating to inventories it contains the requirement relating to how the
inventory is being recorded. As per the standard the inventory need to be recorded at the lower of
the cost and the net realisable value. This standard aims at providing a basis or the accounting
treatment relating to the inventories and its recording (Cai and et.al., 2019). In accordance to this
standard the cost must include cost relating to purchase, cost of conversion and other cost
relating to the bringing of inventory to the place. Thus, according to the IAS 2 the company must
record the inventory on the basis of the written down value that the value which occurred due to
normal activity that is 105 instead of 120.
B
The IFRS 8 is the one which relates with the entities whose equity and debt securities are
being traded publicly or are in process of issuing their instrument in public market. The criteria
which need to be satisfied at time of identifying an operating segment on the basis of IFRS 8 is
that the regular income being generated by that segment must be 10 % or more from the total
income of the business. in case the segment is not having this much income then this will affect
the working efficiency of the segment. Along with this, it is essential that the segmental
reporting is necessary and provides useful information to the users. This is pertaining to the fact
that under the segmental reporting all the information relating to segment that is its profit, cost
and other related aspects are listed and this in further assist in better decision. Hence, it presents
a clear picture of the working of segment and all these information is being shared with users.
C
Both these elements relate with the use of IAS 37 which relates with the provision,
contingent liabilities and contingent asset. The criteria for recognising the provision is that it will
be created only when there is probability that outflow of the cash or any other economic resource
will be necessary to settle the provision. Along with this, there is requirement of provision,

contingent liability and asset in order to meet the future losses of the company (Walkshäusl,
2019). in the present case of Cinema plc, the company must comply with the IAS 37 in order to
report the transaction in proper and effective manner. In accordance to this, the provision of
850000 will be recorded in the liabilities section of the balance sheet as it is a provision. On the
other hand, the cost of closure will not be recorded as there is not any further action being taken
on closure.
D
In accordance to the IFRS 15 relating to the revenue being generated from customer the
entity recognizes the revenue for depicting the transfer of the good to the consumer in numbers.
This reflects the consideration which the company is entitled to get in exchange of the product
and service being offered to the consumers. In the present case of Tech Plc, the, company must
not have invoiced the work completed to consumer. This is particularly because of the reason
that in actual the work has not been yet completed. Hence, as a result of this, Tech PLC has
already taken 80 % of the total invoice but in actual they have not done work worth the
requirement.
Question 4
A
In the present case the company will be recording the transaction on the basis of rates of
sterling. This is particularly because the books of account are being prepared on the basis of the
domestic currency only. Thus, in order to record the data, the company will be converting the
CHF 175000 into sterling. The purchases will be recorded in the balance sheet and the providing
of consultancy service will also be converted in sterling and then added in income statement.
B
In accordance to the IFRS 15 the revenue is only being depicted at the transfer of the
promised goods and services to the consumers. In the present case of Mobile plc, the different
warranties are being treated as the various services which will be provided to the consumers (Sun
and Habib, 2020). Thus, the above transaction of selling the combined contract of 1 April 2021
then it will not be recorded in financial statements only after the contract is being undertaken.
C
The IAS 33 set out the process relating to the calculation of diluted EPS and EPS. This is
applicable to the companies who are issuing ordinary shares or the potential ordinary shares. In

the present case of Violin plc, the earning per share will be recorded at the 180 only and this will
be attributable to the ordinary shareholders only.
D
The use of provision is a type of creative accounting which is assistive to the business in
order to create better working condition within the company (Hutton, 2017). in case there is any
contingent liability or expense which might occur in future, the provision is being created from
current period only. For example, the provision of the doubtful debt is being created in order to
have some fund available in case the debt is not recovered.
Along with this, off balance sheet financing is a method of accounting wherein company
record the current liability of asset in such a manner that it prevents them from appearing within
the balance sheet. For example, the joint venture, operating lease are common example of off-
balance sheet.
Furthermore, reclassifying debt as equity is another method of creative accounting,
wherein any party to which company owes some debt is being replaced with the equity
(Carolina, 2017). For example, ABS is the having debt of 100000, then in exchange of this they
are issued shared worth 100000 and debt is being settled.
SECTION C
Question 6
a. Differences and similarities between invoice discounting and factoring
Similarities which are present between invoice discounting and factoring is that
discounting is a loan which is secured against the outstanding invoice in which the company
purchases the unpaid invoices outright (Goh, 2017). Factoring helps in providing a factor which
can help the company towards controlling the credit. Thus, both of these techniques of banking
institutions. However, the differences between these two techniques are,
 Invoice discounting is a loan which secures the outstanding invoices but in factoring the
company actually purchases the unpaid invoices outright.
 Invoice factoring may sell the invoice as if the factoring company or the customer refuses
to pay then they will not be obligated to repay the money. On the other hand invoice
discounting is a loan which helps in making the sale which can create the money for
being repaid.

 The collection of these invoices is the main difference as in discounting the customer has
full control of collection but in invoice factoring the company purchases the unpaid
invoices to take over the collections.
b.
Heston ltd has just paid a dividend per share of £0.20. The dividend per share was £0.18 five
years ago. Heston has a market beta of 1.15, the risk-free rate is 4% and the expected market
return is 12%.
E(Ri) = r + βi [E(Rm) − r]
= .04 + 1.15 [.12 - .04]
= .04 + .09
= .13
P0 = 1 / (0.13 − 0.11)
= $50
c. What is the yield to maturity of bond X?
Particulars Figures (in $)
Par value 1000
Current market price 1120
Coupon Rate (%) 8
Years to Maturity 5
Payment Interval Annually
CY = C / P * 100
Where:
C is the periodic coupon payment,
P is the price of a bond,
Current yield = 80 / 1120 * 100
= 7.14%
Yield to maturity (YTM) = P = C × (1 + r) -1 + C×(1 + r) -2 + . . . + C×(1 + r) -Y + B×(1 + r) –Y
1120 = 80 * (1 + r) -1 + 80×(1 + r) -2 + 80×(1 + r) -3 + 80×(1 + r) -4 + 80×(1 + r) -5 + 1000×(1 + r) -5
YTM = 5.21%
d. Characteristic of good credit management system

A good credit management system is the system which is able to handle all the credit
accounts with the help of having assess of the risk that can determine how much credit is needed
to be offered during sending the bills for collection (Tran, Ly and Nguyen, 2020). The following
characteristics is what makes the credit management system a good one,
 It helps in evaluating the customer credit which is helpful for being applied against the
credit which is needed for the system to be automated and be able to determine the credit
worthiness.
 The credit management system needs to be very efficient in the collection of the credit.
 It needs to be practical for understanding the practical outlook of invaluable credit control
for tackling the problems with effectiveness.
 It needs to have accuracy so that the lenders are satisfied with the performance of the
credit control system.
 Perseverance is also very important for this system as it helps it to address the
management of the credit with patience.
Politeness is also important for recovering the credit so that positive relations can be maintained.

REFERENCES
Books and Journals
Cai, C. W., and et.al., 2019. Machine Learning and Expert Judgement: Analyzing Emerging
Topics in Accounting and Finance Research in the Asia–Pacific. Abacus. 55(4). pp.709-
733.
Carolina, Y., 2017. Understanding AIS User Knowledge, AIS Quality, and Accounting
Information Quality. Accounting and Finance Review (AFR) Vol. 2(3).
Goh, K., 2017. Trading places: Benefits of invoice finance for small and medium sized
enterprises as opposed to bank lending. Aberdeen Student L. Rev.. 7. p.56.
Hutton, A. P., 2017. Discussion of “Aggregate Margin Debt and the Divergence of Price from
Accounting Fundamentals”. Contemporary Accounting Research. 34(3). pp.1446-1452.
Sun, S. L. and Habib, A., 2020. Determinants and consequences of tournament incentives: A
survey of the literature in accounting and finance. Research in International Business
and Finance. 54. p.101256.
Tran, Q. T., Ly, H. A. and Nguyen, K. T., 2020. The effectiveness of the internal control system
in Vietnamese credit institutions. Banks and Bank Systems. 15(4). p.26.
Walkshäusl, C., 2019. The fundamentals of momentum investing: European evidence on
understanding momentum through fundamentals. Accounting & Finance. 59. pp.831-
857.