EPCR

pay for the goods rather than when they have been fitted.
Details of the
relevant sales figures are;
N000
Sales made in retail outlets for the year to 31 March, 2014
69,000
Sales value of NIXAQ fitted in the 14 days to 14 April, 2013 3,600
Sales value of NIXAQ fitted in the 14 days to 14 April, 2014 4,800
Note: The sales value of NIXAQ in the 14 days to 14 April, 2013 are not
included in the annual sales figure of N69million, but those for the 14
April, 2014 are included.
Required:
Discuss whether or not the above represents a change of accounting policy,

and calculate the amount that you would include in the revenue for NIXAQ
in the year to 31 March, 2014.
(6 Marks)
(Total 20 Marks)
QUESTION 3
Prochain Plc
The Directors of Prochain Plc have pursued an aggressive policy of expansion in the
last two years. They have developed several new products and market share has
increased.
The financial statements for the year ended 31 December, 2013 which will be
presented to the Board of Directors at its next meeting is being finalised.
The financial statements at the year-end are presented below:
Statement of profit or loss and other comprehensive income for the year ended 31
December
2013 2012
(Nm) (Nm)
Revenue 34,200 28,900
Cost of sales (24,000) (20,250)
Gross profit 10,200 8,650
Distribution costs & administration expenses (5,120) (3,300)
Finance costs (520) (450)
Profit before tax 4,560 4,900
Income tax (1,300) (1,400)
Profit for the year 3,260 3,500
PROFESSIONAL EXAMINATION NOVEMBER 2014

5
Other comprehensive income - -
Total comprehensive income for the year 3,260 3,500
The results of the company as well as certain key ratios that will form part of the
covenants in respect of the loan facilities will be discussed at the Board of Directors
meeting.
Statement of Financial Position as at 31 December
2013 2012
Note N000 N000 N000 N000
Non-current assets
Property, plant & equipment 25,930 17,880
Available for sale investment 6,200 32,130 5,400 23,280
Current assets
Inventories 4,500 3,600
Trade receivables 4,300 5,200
Cash and cash equivalents - 8,800 120 8,920
Total assets 40,930 32,200
Equity and liabilities
Equity
Share capital (N0.50k) 10,000 10,000
Revaluation reserve 1 4,200 1,100
Other reserves 2 1,800 1,000
Retained earnings 7,460 23,460 4,200 16,300
Non-current liabilities:
Term loan 6,000 6,000
6% bonus bonds (2015) 3 5,400 11,400 5,200 11,200
Current liabilities:
Trade and other payables 5,800 4,700
Short-term borrowings 270 6,070 - 4,700
Total equity & liabilities 40,930 32,200
Notes:
1 The movement on the revaluation reserve relates to property, plant and

equipment revalued in the year.
2 The movement on other reserves relates to the gains on the investments

available for sale.
3 The bonds are repayable on 1 July, 2015.

6
The key ratios for the loan covenants include:
Target
i. Gearing 50%
ii. Interest cover 9.5 times
iii. Current ratio 1.5:1
iv. Quick ratio 1.1:1
Required:
(a) Based on the results of Prochain Plc for the year ended 31 December, 2013,
calculate the key ratios for the loan. (8 Marks)
(b) Prepare a report commenting on the financial performance for the year in
relation to the key ratios for the loan. (12 Marks)
(Total 20 Marks)
QUESTION 4
(a) The following is the statement of financial position of Lagos Plc as at

31 December, 2013 with its immediate two comparative years.
2013 2012 2011

Non-current assets N000 N000 N000
Property, plant & equipment 30,600 26,010 22,628
Goodwill on business acquisition 4,300 4,300 -
Investment property 15,400 11,704 10,537
50,300 42,014 33,165
Current assets
Inventory 16,900 12,675 11,281
Trade Receivables 21,680 18,862 18,673
Other Receivables 413 560 616
Cash & cash equivalents 5,437 3,821 2,980
44,430 35,918 33,550
Total Assets 94,730 77,932 66,715
Equity and Liabilities
Ordinary share capital 20,612 20,612 20,612
Share premium 600 600 600
Retained earnings 30,163 17,164 12,482
51,375 38,376 33,694
Current liabilities
Trade payables 24,000 21,120 19,008
Other payables 6,816 7,210 6,273
Bank overdraft 11,223 9,299 6,044
Current tax payable 1,316 1,927 1,696
43,355 39,556 33,021

7
The management of Lagos Plc is not sure of the impact of IAS12 (Income Taxes)
on its retained earnings as at 31 December, 2013 as well as what the new
deferred tax balance will be on migrating to IFRS.
The following information was also available as at the year end.
N000
Tax written down value of PPE 40,300
Tax written down value of goodwill on business
acquisition 4,300
Tax base of trade receivables 29,800
Tax base of trade payables 13,000
Assume that current tax has been correctly computed in line with the applicable
tax laws at 30%.
Required:
Using relevant computations, advise the management of Lagos Plc on the

impact of deferred tax calculated on retained earnings in accordance with
IAS 12. (12 Marks)
(b) On 1 June, 2013, Bam Plc acquired Mango Limited for N3,150million. The fair
value of the identifiable net assets of Mango Limited at this date was
N2,550million and retained earnings and other components of equity were
N825million and N105million respectively. Mango Limited share capital was
N1,500million.
The excess of the fair value of the net assets is due to an increase in the value of
property, plant and equipment.
Required:
Evaluate the impact of full deferred tax on the excess of the fair value of the net
assets attributable to increase in the value of property, plant and equipment of
Bam Plc. (8 Marks)
(Total 20 Marks)
SECTION C: ATTEMPT TWO OUT OF THREE QUESTIONS (30 MARKS)
QUESTION 5
Critics of traditional corporate financial reporting under Generally Acceptable

Accounting Practice (GAAP) argue that financial statements alone are not considered
sufficient without a narrative that provides a context within which to interpret the
financial position, financial performance and cash flows of an entity.

8
i.e (sales of N4.8m from retail premises not fitted will not be recognized).
If there is a change in accounting policy, the new accounting policy should be

applied as if it had always been in place and the income recognized in the year
to 31 March 2014 would be N69 million.
Conclusively, changes in accounting procedures resulting from circumstances

that differ from previous circumstances is not a change of accounting policy.
Thus the amount to be recognized in income for the year to 31 March 2014
would be:
N000
Sales in retail outlet 69,000
Sales value of NIXAQ fitted in the 14 days to 14th April 2013 3,600
Total sales revenue for the year to 31 March 2014 72,600
Given this change in the recognition of revenue, there may be need for the
management of MAIDOGO LTD to begin to make provision for warranty obligation
which will be based on past experience.
EXAMINERS REPORT
This three-part question tests candidates understanding of principles and practices

involved in the transfer of risks and rewards in a sale or return transaction. Income
Tax treatment in financial statements, and revenue recognition in Income Statement.
Most of the candidates attempted the question and performance was fair.
Candidates commonest pitfall was the use of income recognition principles in place of
practices for the transfer of risks and rewards in sale or return transactions.
Candidates are advised to understand the requirements of questions being attempted

to assure improved performance.
SOLUTION 3
(a) Computation of Key Ratios for the Loan Covenants
Year 2013 Year 2012 Target

(i) Gearing:
= 32.7% 40.73% 50%
(ii) Interest Cover : =
= 9.8 times 11.9 times

21
9.5 times
(iii) Current Ratio : =
= 1.45:1 1.90:1 1.5:1
(iv) Quick Ratio: =
= 0.71 :1 1.13:1 1.1:1
Other ratios Necessary for the performance Review are:
Profitability Ratios
(v) ROCE = =
2013 2012
=
= 14.6% = 19.5%
(vi) GROSS PROFIT % = =
2013 2012
=
= 29.8% = 29.9%
(vii) PROFIT MARGIN =
2013 2012
=
= 14.9% = 18.5%
(b) Report on Prochain Plc.
The comments are based on the financial statements of Prochain Plc and the
ratios calculated are based on the annual report as presented in (a) above.

22
Financial Performance
(i) Aggressive expansion policy pursued in the last two years helped in
increasing revenue by 18% while the company was able to maintain the
gross profit margin at 29%.
However, the profit margin dropped by 3.6%, while distribution and

administrative expenses as well as finance cost in the period increased
substantially by 55%.
(ii) Return on Capital Employed has fallen from 19.5% to 14.6%. This is
because profit is decreasing while capital employed is increasing due to
revaluation of assets.
Financial Position: (based on the key ratios for Loan Covenants)
(iii) Gearing
The Companys gearing has improved, decreasing to 32.7% from 40.73%
which is within threshold set by the bank (i.e Target of 50%)
This shows that there is a reduction in the level of financial risk bearing
faced by Prochain Plc.
Bonds payable are due for repayment in less than 12 months time-July
2015. The Company needs to secure some longer term funding to trade
and expand as well as repay the bonds; hence the application for the
bank Loan.
(iv) Interest Cover
The interest cover dropped from 11.9 times in year 2012 to 9.8 times in
year 2013. Although, the Company met the target of 9.5times , the bank
will be concerned about the falling margin and the effect on the Interest
cover.
The interest is 6% on the bond, a funding with a significantly higher

associated cost is likely to decrease the interest cover further. The
interest cover is already close to the acceptable threshold set by the
bank.
(v) Current and Quick Ratio
The Current ratio dropped below the target from 1.9 in 2012 to 1.45 in
2013. The Quick ratio also decreased from 1.13 in 2012 to 0.71 in 2013.

23
Changes in the two ratios moved against the target of 1.5:1 and 1.1:1 for
current ratio and quick ratio in year 2013 respectively.
This working capital problem may be an issue to be given further

consideration by the Board.
Cash held decreased from a positive balance of N120,000,000 to an

overdraft of N270,000.
The company should consider the option of selling investments which

performed well in the year to inject more working capital.
EXAMINERS REPORT
The question examines the computation, interpretation and application of ratios.
Majority of the candidates attempted the question. Candidates performance on ratio

computation was fair but most of them were unable to interprete correctly the
computed ratios.
Candidates should undertake in-depth study and practice questions covering all areas
of the syllabus.
SOLUTION 4
(a) LAGOS PLC
Computation of Deferred Tax Asset/Liability

Relevant Asset/Liability Carrying Tax Base Temporary Tax Rate Asset/
Amount Difference Liability
N000 N000 N000 % N000
Property, Plant & Equipment 30,600 40,300 9,700 30% 2,910
Good will 4,300 4,300
Trade Receivables 21,680 29,800 8,120 30% 2,436
Trade Payables 24,000 13,000 11,000 30% 3,300
Total Deferred Tax Assets at
31 December, 2013 N8,646
Journal Entries:
DR Deferred Tax (in SOFP)

CR Deferred Tax credit (in SCI)
With N8,646,000
Advice to Management of Lagos Plc.

24
Given the above background information, the temporary differences in
Lagos Plc deferred tax computation result in deductible temporary
differences thereby resulting into a total deferred tax asset of
N8.646million at the end of 31 December 2013.
The required treatment therefore is to debit (DR) deferred tax assets

and credit (CR) retained earnings provided it is probable that there
shall be available future taxable profit to utilize the deferred tax asset.
The effects of this deferred tax asset is that it will increase the Non-
current assets of Lagos Plc in the Statement of Financial Position at 31
December 2013 by N8.646 million and increase the retained earnings
by the same amount in the Statement of changes in equity.
The deferred tax balance is a deferred tax asset which will be classified
as a Non-current asset.
(b) BAM PLC ACQUIRED MENGO LIMITED.
Calculation of Deferred Tax on Fair Value Adjustment
NM NM
Fair value of net assets 2,550
Less: Book value of net assets:
Ordinary shares Capital 1,500
Retained Earnings 825
Other equity 105
(2,430)
Fair value Adjustment (subject to deferred tax) 120
Deferred Tax Liability (30% x 120) 36
Goodwill on initial recognition = purchase consideration fair value of Net Asset

acquired = N(3,150 2,550)m = N600m.
Final Goodwill recognized = N(60036)m = N564m.
The amounts that arise in deferred tax on business acquisition is adjusted to the
amount of goodwill.

25
PATHFINDER
QUESTION 2
IAS 7 (Statement of Cash Flow) states that additional information may be relevant
to users in understanding the financial position and liquidity of an entity.
(a) State FOUR advantages of cash flow accounting. (4 Marks)
(b) Highlight THREE of the disclosures which are required by the Standard (with
comments) by the management of the entity when preparing the Statement
of Cash Flow. (3 Marks)
(c) Hassan Limiteds Statement of Profit or Loss for the year ended 31 December
2011 and Statement of Financial Position as at 31 December 2010 and 2011
are as follows:
HASSAN LIMITED
Statement of Profit or Loss for the year ended 31 December 2011
Nm Nm
Revenue 360
Raw Materials consumed 35
Staff costs 47
Depreciation 59
Loss on disposal of non-current assets 9
150
Operating profit before interest and tax 210
Interest payable 14
Profit before tax 196
Taxation 62
134
HASSAN LIMITED
Statement of Financial Position as at 31 December 2011
2011 2010
Nm Nm
Non Current Assets (cost) 798 780
Depreciation (159) (112)
639 668
Current Assets:
Inventory 12 10
Trade receivable 38 29
Bank 24 28
15
PROFESSIONAL EXAMINATION I - NOVEMBER 2012
PATHFINDER
74 67
Total Assets 713 735
Equity and liabilities:
Share capital 180 170
Share premium 18 12
Retained earnings 358 257
556 439
Non-current liabilities
Long -term loans 100 250
Current liabilities:
Trade payables 6 3
Taxation 51 43
57 46
Total equity and liabilities 713 735
Dividend paid was N33million.
During the year, the company paid N45million for a new piece of
machinery.
Required:
Prepare a Statement of Cash Flows for Hassan Limited for the year
ended 31 December 2011, in accordance with the requirements of IAS
7, using the indirect method.
(8 Marks)
(Total 15 Marks)
QUESTION 3
Legon Limited issued 12% N250,000,000 Loan Note at N102 on I January 2007. It is
the companys policy to maintain a Sinking Fund set up to redeem the Loan Note on
2 January 2012. The sum to be appropriated out of the income statements must be
such that when invested annually at a compound interest of 15% per annum, will
amount to N300,000,000 at the date of redemption of the Loan Notes. Interest is
paid on 28 February and 31 August every year.
On 2 January 2012, the Loan Note was fully redeemed at N110. On the redemption,
date the Sinking Fund Investment was disposed for N292,000,000.
16
PATHFINDER
(b) Ratio analysis;

(c) Translation and conversion of foreign currencies; and
(d) Stock Exchange listing requirements.
Being a compulsory question almost all the candidates attempted the question and
performance was poor.
The commonest pitfalls were:
(a) Majority of the candidates were translating information in Statement of

Financial Position instead of Statement of Profit or Loss and Other
Comprehensive Income.
(b) Most of the candidates stated calculation of goodwill using Statement of

Accounting Standard (SAS) requirements instead of addressing the question
which specifically required computations based on IFRS 3 (business
Combination),
(c) Candidates could also not list correctly the requirements for subsequently
listing of securities on the Nigerian Stock Exchange (NSE); and
(d) Few of the candidates that were able to prepare the Statement of Profit or
Loss were unable to correctly calculate impairment losses and exchange gain.
In view of the above lapses candidates are advised to pay more attention to various
aspects of the syllabus. Also, they should update their practical knowledge of
accounting by ensuring that they review regularly, the financial accounting journals
issued by the Institute as well as those of other foreign professional accounting
institutions for better performance.
QUESTION 2
(a) The advantages of cash flow accounting are as follows:
i. Survival in business depends on the ability to generate cash. Cash

flow accounting directs attention towards this critical issue.
ii. Cash flow is more comprehensive than profit which is dependent on
accounting conventions and concepts.
iii. Creditors (long and shortterm) are more interested in an entitys
ability to pay debts than in its profitability. Whereas profits might
30
PATHFINDER
indicate that cash is likely to be available, cash flow accounting is

more direct with its message,
iv. Cash flow reporting provides a better means of comparing the results
of different companies than traditional profit reporting.
v. Cashflow reporting satisfies the needs of all users in the following
ways:
- For management: it provides the sort of information on which
decisions should be taken (in management accounting, relevant
costs to a decision are future cash flows); traditional profit
accounting does not help with decision-making.
- For shareholders and auditors: Cashflow accounting can provide a
satisfactory basis for stewardship accounting.
- Creditors and employees: The information needs of creditors and
employees will be better served by cashflow accounting.
vi. Cashflow forecasts are easier to prepare, and more useful, than profit
forecasts.
vii. They can, in some respects, be audited more easily than accounts
based on the accruals concept.
viii. The accruals concept is confusing, and cash flows are more easily
understood.
ix. Cashflow accounting should be retrospective, and also forecast for the
future. This is of great value to all users of accounting information.
x. Forecasts can subsequently be monitored by the publication of
variance statements which compare actual cash flows against the
forecast.
(b) Disclosure requirements of IAS - 7
i. Restrictions on the use of access to any part of cash equivalents.

ii. The amount of undrawn borrowing facilities which are available.
iii. Cash flows which increased operating capacity compared to cash flows
which merely maintained operating capacity.
iv. The amount of undrawn borrowing facilities that may be available for
future operating activities, and to settle capital commitments, indicating
any restrictions on the use of these facilities.
v. The aggregate amounts of the cash flows from each of operating,
investing and financing activities, related to interest in joint ventures
reported using proportionate consolidation.
31
PATHFINDER
vi. The aggregate amount of the cash flows that represent increases in
operating capacity, separately from those cash flows that are required to
maintain operating capacity.
vii. The amount of the cash flows arising from the operating, investing and
financing activities of each reportable segment (see IFRS 8 Operating
Segments).
viii. The amount of significant cash and cash equivalents balances held by
the entity that are not available for use by the group.
HASSAN LTD.
c. Statement of Cash Flow for the year Ended 31/12/11
Nm Nm
Cash Flows from Operating Activities
Profit before taxation 196
Adjustments
Add: Interest Payables 14
Loss on disposal of Assets 9
Depreciation 59
Changes in Working Capital

Increase in Inventory (12 - 10) (2)
Increase in Trade Receivables (38 - 29) (9)
Increase in Trade Payables (6 - 3) 3
270
Tax Paid (43 + 62 51) (54)
Net Cash Flow form Operating Activities 216
Cash Flow Investing Activities

Purchase of Machinery (45)
Proceeds from Disposal of Non-Current Assets (15-9) 6
Net Cash in -Flow from Investing Activities (39)
Cash Flow from Financing Activities

Interest Paid (14)
Issue of Shares (198-182) 16
Redemption of Long- Term Loans (250 -100) (150)
Dividend Paid (33)
Net cash out flow from financing activities (181)
Increase/(Decrease) in Cash and Cash Equivalent (4)
Cash and Cash Equivalent at the Beginning 28
32
PATHFINDER
Cash and Cash Equivalent at the End 24
WORKINGS:
ACCUMULATED DEPRECIATION
Nm Nm
1 Disposal 12 1/1/2011 Bal b/d 112
31/12/2011 Bal c/d 159 Profit or loss 59
171 171
Current Asset of disposal 15

Net loss reported 9
Proceeds of disposals 6
NON-CURRENT ASSET ACCOUNT

Nm Nm
2 Bal c/d 1/1/2011 668 Disposal (NBV) 15
Additions (Banks) 45 Depreciation 59
Bal c/d 31/12/2011 639
713 713
EXAMINERS REPORT
The question tests candidates understanding of the advantages of cashflow

accounting, disclosure requirements under IAS 7 (statement of cash flow) and
preparation of cash flow statements, using the indirect method.
Majority of the candidates attempted the question and performance was above
average.
Candidates commonest pitfalls were their inability to highlight the disclosure

requirements under IAS 7 and their inability to correctly prepare the cashflow
statement using the indirect method.
Candidates are advised to pay more attention to various aspects of syllabus and the
application of International Financial Reporting Standards (IFRS) which comprise
IFRS, IAS, IFRIC and SIC.
33
PATHFINDER
QUESTION 5
Patrol Plc and Secure Plc presented the following Statement of Profit or Loss for the
year ended 31 December 2013:
Patrol Plc Secure
Plc
N000 N000
Revenue 200,000 160,000
Cost of sales (98,000) (85,000)
Gross profit 102,000 75,000
Administrative expenses (25,000) (18,000)
77,000 57,000
Finance costs (10,500) (4,500)
Operating Profit 66,500 52,500
Income tax expense (20,500) (16,500)
The following information are also relevant:
(i) Patrol Plc acquired 80% of the ordinary shares in Secure Plc on 1
January 2010.
(ii) Patrol Plc declared N20 million as dividend on ordinary shares while
Secure Plc declared N16 million.
(iii) Land, which is non-depreciable is included in the trial balance at a
value of N38 million. At 31 December 2013, it was re-valued to N50
million and this revaluation is to be included in the financial
statements.
You are required to:
a. Calculate the following ratios for Patrol Plc and Secure Plc for the year ended
31 December 2013:
(i) Dividend cover
(ii) Interest cover
(iii) Gross profit margin
(iv) Operating profit margin
(7 Marks)
b. Prepare a consolidated Statement of Profit or Loss and other Comprehensive
Income for the year ended 31 December 2013. (8 Marks)
(Total 15 Marks)
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PROFESSIONAL EXAMINATION I - MAY 2014
PATHFINDER
QUESTION 6
The following are the abridged annual financial statements of BUTANE Nigeria
Limited.
Statement of Comprehensive Income for the year end 31 March 2014
N000
Revenue 1,275,000
Cost of sales (956,250)
Gross profit 18,750
Administrative expenses (42,150)
Operating expenses (110,400)
166,200
Finance cost (23,700)
Operating profit 142,500
Income tax expense (66,000)
Profit for the year 76,500
Statement of Changes in Equity

for the year ended 31 March 2014
Share Revaluation Accumulated Total
capital reserve profit
N000 N000 N000 N000
Balance b/forward 180,000 - 181,500 361,500
Revaluation of building - 30,000 30,000
Profit for the year - - 76,500 76,500
Dividend paid - - (37,500) (37,500)
180,000 30,000 220,500 430,500
Statement of Financial Position

As at 31March 2014
2014 2013
Non-Current Assets: N000 N000
Property plant & equipment Office building 375,000 330,000
- Plant & machinery 52,500 30,000
- Motor vehicle 9,000 6,000
Long term loans to directors 96,000 90,000
532,500 456,000
Current Assets:
Receivables 94,500 64,500
Prepaid expenses 31,500 24,000
Bank 30,000 9,000
279,000 160,500
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PATHFINDER
Total assets 811,500 616,500
Equity& Liabilities
Share capital 180,000 180,000
Revaluation reserve 30,000 -
Accumulated profits 220,500 181,500
430,500 361,500
Non-current Liability
Borrowings 148,500 187,500
Current Liabilities
Trade payables 108,000 52,500
Bank overdraft 64,500 -
Taxation due 60,000 15,000
232,500 67,500
Total equity & liabilities 811,500 616,500
Additional information:
(i) The following depreciation charges were included in operating expenses:

- Plant & machinery N37,500,000
- Motor vehicles N 3,000,000
(ii) Fully depreciated plant & machinery with an original cost of N22,500,000
was sold for N7,500,000 during the year, the profit is included in operating
expenses.
Prepare a Statement of Cash Flows for the year ended 31 March 2014, using the
Direct Method. (Total 15 Marks)
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PATHFINDER
QUESTION 5
(a) RATIOS OF PATROL PLC AND SECURE PLC

Patrol Plc Secure Plc
Nm Nm
i. Dividend cover
= Profit for the year = 46m 36m
Ordinary share dividend 20m 16m
2.3 times 2.25 times

ii. Interest cover
= Operating profit = 77m 57m
Finance cost 10.5m 4.5m
7.33 times 12.67 times

iii. Gross profit margin
Gross profit x 100% = 102m x 100% 75m x 100%
Revenue 200m 160m
= 51% = 46.88%
iv. Operating profit margin
Operating profit x 100% 77m x 100% 57m x 100%
Revenue 200m 160m
= 38.5% = 35.63%
(b) Patrol Group
Consolidated Statement of Profit or Loss & Other Comprehensive Income for
the year 31 December 2013
N000 N000
Revenue (N200m + N160m) 360,000
Cost of sales (N98m + N85m) (183,000)
Gross profit 177,000
Administrative expenses
(N25m + N18m) (43,000)
134,000
Finance Cost (15,000)
Taxation (N20.5m + N16.5) (37,000)
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PATHFINDER
Other comprehensive income for the year

Gain on revaluation of land 12,000
(N50m N38m)
Total comprehensive income for the year 94,000
EXAMINERS REPORT
The question tests the ability of the candidates to calculate accounting ratios and
also prepare consolidated profit or loss and other comprehensive income.
Majority of the candidates attempted the question and the performance was
average. Although most of the candidates understood the requirements of the
questions, but their inability to identify correct figures led to loss of marks.
Similarly, some candidates failed to recognise that the figures in the questions
were expressed in millions, but their solutions were stated in thousands. This also
led to loss of marks. Other candidates abandoned the question half way and could
not complete the solution, thus leading to further loss of marks.
Candidates are advised to pay more attention to the preparation of Consolidated

financial statements, calculation of accounting ratios and application of such ratios
for the purpose of interpretation of the financial statements.
QUESTION 6
(a) BUTANE NIGERIA LIMITED

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2014
CASH FLOWS FROM OPERATING ACTIVITIES N000
Cash receipts from customers (W1) 1,245,000
Cash payment to suppliers & employees (W2) (1,087,800)
Interest paid (23,700)
Taxation paid (W3) (21,000)
Net cash flow for operating activities 112,500
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property plant & equipment (W4) (81,000)

Proceed; from sales of plant & machinery 7,500
Loans notes to directors (6,000)
(79,500)
CASH FLOWS FROM FINANCING ACTIVITIES

Borrowing repayment (39,000)
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Dividend paid (37,500)
(76,500)
Net decrease in cash & cash equivalent (43,500)
Cash & cash equivalent @ beginning of the year 9,000
Cash & cash equivalent @ the end of the year (W5) (34,500)
WORKINGS (A)
W1 Cash received from customers: N000
Revenue 1,275,000
Increase in receivables (94,500 64,5000) (30,000)
1,245,000
W2 Cash payments to suppliers & Employees N000

Cost of sales 956,250
Administrative expenses 42,150
Operating expenses 110,400
Adj for non cash items
Profit on sale of plant & machinery 7,500
Depreciation (40,500)
Increase in inventories (123,000 63,000) 60,000
Increase in Trade Payables (108,000 52,5000) (55,500)
Increase in prepaid expenses (31,500 24,000) 7,500
1,087,800
W3 Taxation Paid N000

Balance b/fwd 15,000
Charged to 66,000
Less: Balance c/fwd (60,000)
Tax paid 21,000
W4 PURCHASE OF PROPERTY PLANT & EQUIPMENT

N000 N000
(i) Office building
Bal b/fwd 330,000
Revaluation 30,000
Less Balance c/fwd (375,000)
Acquisition 15,000
(ii) Plant & machinery b/fwd 30,000
Bal c/fwd (52,500)
(iii) Vehicles 60,000
Bal b/fwd 6,000
Bal c/fwd (9,000) 6,000
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81,000
N000
Cash & cash equivalent @ the end of the year:
W5
Bank balance 30,000
Overdraft (64,500)
(34,500)
EXAMINERS REPORT
The question tests the preparation of Statement of Cash flows using the Direct
method. Only few of the candidates attempted the question and performance was
poor.
The commonest pitfalls were that majority of the candidates used indirect method
for preparing the cash flow statement despite the fact that the examiner clearly
indicated that the direct method should be used. Also, some candidates could not
generate correctly the figures under investing & financing activities sections of the
Statement of Cash Flows.
Candidates are advised to pay attention to the provisions of IAS 7 on Statement of

Cash Flows for better performance on related questions in future.
90
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made all necessary payments and transferred the cash in hand to the
liquidator on 30 June 2013.
(v) The liquidator sold and realised N150million on the inventories. He was
able to collect N170million from account receivables. His remuneration and
expenses totalled N32million.
(a) Prepare:
(i) Receivers Receipts and Payments Account

(ii) Liquidators Receipts and Payments Account
(Show all workings) (12 Marks)
(b) State the circumstances that may lead to winding up of a company by court
order. (3 Marks)
(Total 15 Marks)
QUESTION 3
You are a freelance management accountant. Baale Plc is a public limited

company. Your client, Mr. Souza, currently owns 20million shares in Baale Plc. He
recently received the published financial statements of Baale Plc for the year ended
31 March 2013. Mr. Souza is not sure how the performance of the company during
the year will affect the market value of the entitys shares but he is aware that the
earnings per share statistics are often used by analysts in assessing the
performance of listed companies.
Extracts from these published financial statements and other relevant information
are given below.
Statement of Profit or Loss for the period ended 31 March 2013

2013 2012
Nm Nm
Revenue 18,000 15,300

Cost of Sales (11,340) (9,180)
Gross Profit 6,660 6,120
Operating Expenses (3,420) (3,240)
Operating Profit 3,240 2,880
Interest Payable (540) (576)
Profit before tax 2,700 2,304
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Taxation (846) (720)

Profit after tax 1,854 1,584
Statement of Financial Position as at 31 March 2013
2013 2012
Nm Nm Nm Nm
Intangible assets 5,400 -
Tangible assets 7,200 6,660
12,600 6,660
Current Assets
Inventory 2,340 1,800
Receivables 2,700 2,160
Cash in bank 180 5,220 162 4,122
17,820 10,782
Capital and Reserves
Share Capital 2,700 900
Share Premium 4,860 900
Retained Earnings 1,620 1,206
9,180 3,006
Current Liabilities
Trade Payables 3,060 2,160
Taxation 900 756
Bank Overdraft 1,080 1,260
5,040 4,176
14,220 7,182
15% Loan Note 3,600 3,600
17,820 10,782
The following information is also relevant:
(i) The share capital of the company comprises N1 equity shares only.
(ii) On 1 October 2012, the company made a rights issue to existing

shareholders of two new shares for every one share held at a price of
N5.94 per share and paid issue cost of N180,000.
(iii) The market price of shares immediately before the rights issue was
N6.30 per share.
(iv) No other changes took place in the equity capital of Baale Plc in the year
ended 31 March 2013.
16
PATHFINDER
(a) Compute EPS for the year and the comparative figures that will be included
in the published financial statements of Baale Plc for the year ended 31
March 2013. (4 Marks)
(b) Using the extracts you have been provided with, write a report to Mr. Souza
identifying the key factors which led to the change in the EPS of Baale Plc
since the year ended 31 March 2013. (7 Marks)
(c) Comment on the relevance of the EPS statistics to shareholders. (4 Marks)

(Total 15 Marks)
QUESTION 4
(a) Distinguish between a finance lease and an operating lease, showing their
disclosure requirements in accordance with the provisions of IAS 17 (Leases)
(9 Marks)
(b) A property, plant and equipment company has entered into a lease
agreement with another company. The terms of the contract stipulate that
the property, plant and equipment company will pay an annual rent of
N50million for 12 years on an asset valued at N350million. The cost of
capital is 10%.
(i) Calculate on yearly basis, the present value of the rental payments.
(4 Marks)
(ii) Determine the type of lease involved, giving your reasons. (2 Marks)
(Total 15 Marks)
QUESTION 5
(a) State and explain the TWO types of joint arrangement identified in IFRS 11
(7 Marks)
(b) A joint operator is expected to recognise and account for certain elements in
relation to the joint operations. State FIVE elements to be recognised.
(5 Marks)
(c) State TWO characteristics of a joint arrangement. (3 Marks)
(Total 15 Marks)
17
PATHFINDER
2(b) Conditions for winding up by court order
i. A company is wound up due to its inability to pay its debt.

ii. The company had by special resolution resolved that it be wound up.
iii. Default is made in delivering the statutory report to the Corporate
Affairs Commission or in holding the statutory meetings.
iv. The company does not commence its business within a year from its
incorporation or suspend its business for a whole year.
v. The court is of the opinion that it is just and equitable that the
company should be wound up.
EXAMINERS REPORT
The question tests the candidates knowledge of Liquidation of a company with

emphasis on the preparation of Receiver and Liquidator receipts and payments
accounts.
Majority of the candidates attempted the question but showed little understanding
of the question. Performance was poor. In part (a) of the question, most candidates
could not determine correctly the amount of the preferential and unsecured
creditors while others failed to accrue for the loan notes interest up to the date of
settlement.
Candidates are advised to acquaint themselves with the accounting principles

required for the preparation of accounts of companies in Liquidation.
SOLUTION 3
(a) Earnings Per Share

= Profit after tax
No of shares issued
1,854
2013 = N x 100k
1,818
= 101 kobo
1,584 6.06
2012 = x 100k x
900 6.30
= 169kobo
Workings
27
PATHFINDER
1. Calculation of theoretical ex-rights price

1 share at N6.30 each 6.30
2 rights issue for every 1 at N5.94 11.88
3 shares for 18.18
Price per share N18.18 = N6.06
3
2. Weight average number of shares
1 April 30 Sept. 2012 = 900m x 6/12 x 6.30 = 467.8

6.06
1 Oct. 31 March 2013 = 2,700 x /12
6
= 1,350
1,818
(b) REPORT
To: Mr. Souza
From: Management Accountant
Date: 15 April 2013
SUBJECT: EVALUTING THE CHANGES IN EPS OF BAALE PLC
The key factors which has led to changes in the EPS of BAALE Plc. are as
follows:
Revenue and profitability. Revenue increased by N2,700 million (18%) last

year, but the gross profit and net profit ratios have not increased
proportionately.
The gross profit percentage fell from 40% to 37% in 2013, while the net profit
percentage remained constant at 10%.
Factors responsible for the decline might be due to the inability of the entity
to maintain good profit margin coupled with the failure to also maintain
good control over operating expenses.
The more funds realised from the rights issue did not lead to any significant
increase in return on capital employed which fell from 43% in 2012 to 25% in
2013 2,880 to 3,240
6,606 12,780
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PATHFINDER
Capital employed: raising over N5,760 million of new finance was largely
used to acquire intangible assets.
It is hoped that this asset will start generating substantial returns in the near
future.
EPS has therefore fallen from 169kobo in 2012 to 101kobo in 2013.
Signed
Management Accountant
APPENDIX TO THE REPORT
The ratios that are relevant to discussion and evaluation of changes in EPS of Baale
Plc are those that relate to profitability and return on capital employed.
The effect of the rights issue should also be considered in the discussion in relation
to how the funds raised through the shares were employed.
TABLE OF RATIOS
(i) Change in revenue = 18,000 15,300 x 100

18,000 = 18% Increase
2013 2012
(ii) Costs of sales/revenue 11,340 = 63% 6,120 = 40%

18,000 15,300
(iii) Gross profit % 6,660 = 37% 6,120 = 40%

18,000 15,300
(iv) Net profit % 1,854 = 10% = 10%

18,000
(v) Operating expenses % 3,420 = 19% 3,240 = 21%

18,000 15,300
(vi) Interest payable/sales 540 = 3% 576 = 4%

18,000 15,300
(vii) Taxation/sales 846 = 5% 720 = 5%

18,000 15,300
(viii) Capital employed 3,240 =25% 2,880 = 43%
29
PATHFINDER
9,180 + 3,600 3,006 + 3,600
(ix) Assets/turnover 18,000 = 1.41 15,300 = 2.32

12,780 6,606
Relevance of EPS to shareholders
(i) The EPS is used to compute the Price Earning (P/E) ratio, a major market
indicator to determine how successful a company has been operating.
(ii) The Price Earning figure is a multiple of the EPS, where the multiple
represents the number of years earnings required to recoup the price paid
for the share.
(iii) Rising trend in EPS is a more accurate performance indicator than rising
trend in profit after tax. The investor should consider the future economic
conditions of an entity with some other ratios such as dividend cover and
ROCE.
(iv) EPS is a measure of performance from the existing and potential investors
perspective.
(v) EPS show the amount available to each ordinary shareholder thereby
indicating the potential returns on individual investment.
(vi) EPS is used to compare the activities of two entities in the same industry.
EXAMINERS REPORT
The question tests the candidates understanding of concept of Earning Per Share
(EPS) with emphasis on Computation of EPS and factors that could lead to changes
in Earnings Per Share (EPS) as well as the importance of EPS Statistic to
Shareholders.
Few candidates attempted the question and performance was poor. The
commonest pitfalls were:
Inability of candidates to correctly calculate EPS ratio
Poor report writing and lack of adequate knowledge of the relevance of EPS
to shareholders.
30
PATHFINDER
Candidates are advised to adequately cover all aspects of the syllabus including the
International Financial Reporting Standards (IFRS) in order to improve their
performance at this level of the Institutes examination.
SOLUTION 4
a) DIFFERENCES
Finance lease Operating lease
* High probability that ownership of the * Ownership of the asset will not
asset would be transferred to the be transferred to the lessee at
lessee at the end of the lease period. the end of the lease term.
* Lessee has the option to purchase the * Even if the lessee has the option
asset at a price which is expected to to purchase the asset, he is
be sufficiently lower than the fair unlikely to exercise the option.
value at the date the option becomes
exercisable such that it is reasonably
certain at the inception of the lease
that the option will be exercised
* The lease period is for the major part * The lease term is relatively
of the economic life of the asset even short in comparison with the
if the title is transferred. economic life of the asset.
* Present value of minimum lease * The annual lease charge will be

payments at the inception of the lease insignificant compared to the
amount to substantially the fair value fair value of the asset.
of the asset.
* Risks and rewards incidental to * Risks and rewards incidental to

ownership resides with the lessee. ownership resides with the
lessor.
(a) ii. DISCLOSURE REQUIREMENTS
Finance lease Operating lease

* A reconciliation between the gross * This is not required.
carrying amount of the investment
in the lease and the present value
of the future minimum lease
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PATHFINDER
payment receivable.
* The gross investment in the lease * Future minimum lease payment

and the future minimum lease under non-cancellable operating
payment for each of the following: lease for each of the following:
- Not later than one year - Not later than one year
- Later than one year but not - Later than one year but not
later than five years later than five years
- Later than five years - Later than five years
* Unearned finance income * Not required
* Unguaranteed residual value * Not required
* Doubtful recoverable lease * Not required

payment
(bi)
Calculation on yearly basis, the present value of the rent payment
S/N DF% 10% Annual Rent PV
N million NM
1 0. 9091 50 45.46
2 0. 8264 50 41.32
3 0. 7513 50 37.56
4 0. 6830 50 34.15
5 0. 6209 50 31.05
6 0. 5645 50 28.23
7 0. 5132 50 25.66
8 0. 4665 50 23.23
9 0. 4241 50 21.21
10 0. 3855 50 19.28
11 0. 3505 50 17.53
12 0. 3186 50 34.15
6.8136 340.71
(bii)
32
PATHFINDER
The lease involved is a finance lease for the following reasons:

At the inception of the lease, the present value of the annual
lease rentals, at N341m, is substantially the same as the fair
value of the asset, N350m and
The periodic lease finance charge is at a constant rate (10%) of

the outstanding lease obligation.
EXAMINERS REPORT
This is a question on Accounting for Lease that require candidates to distinguish
between finance and operating lease as well as the disclosure requirements in
accordance with IFRS 17 on leases. Candidates are also required to compute the
present value of the lease rental payments.
The question was attempted by majority of the candidates and performance was
fair. Most candidates could not correctly distinguish between finance and
operating leases as stated in IFRS 17. Few of the candidates that attempted this
question were able to calculate the present value of lease rental payments on
yearly basis as required by the examiner.
Candidates are advised that most of the topics covered by the Professional
Examination 1 syllabus can be linked to a particular IFRS, hence, attention should
be paid to the principles and applications of these International Accounting
Standards when preparing for examinations at this level.
SOLUTION 5
(a)
(i) Joint Operations
A joint operation is a joint arrangement whereby the parties that have joint
control of the arrangement have right to the assets and obligations for the
liabilities relating to the arrangement. Those parties are called joint
operators.
(ii) Joint venture

A joint venture is a joint arrangement whereby the parties that have joint
control of the arrangement have right to the net asset of the arrangement.
These parties are referred to as joint venturers.
(b) Elements to be recognised by a joint operator

33
The Chief Operating Officer, a non-accountant has asked for an explanation of the
accounting principles and practices which should be used to account for the above events
on the purchase of handsets and the recognition of revenue from customers and dealers.
(iii) Alilerimba Limited issued 8% preference shares which entitles the holders to receive cash,
with a redemption feature.
Required:
Advise the directors of Alilerimba Limited on:
a. Accounting for the convertible bonds. (12 Marks)
b. The principles and practices which should be used for the purchase of handsets and the
recognition of revenue from customers and dealers. (6 Marks)
c. The provisions of IAS 32 on the presentation in financial statements of financial
instruments which entitle the holder to receive cash with a redemption feature.
(2 Marks)
(Total 20 Marks)
QUESTION 3
Real Expansion Plc is a large group that seeks to grow by acquisition. The directors have
identified two potential entities and obtained copies of their financial statements. The accountant
of the company computed key ratios to evaluate the performance of these companies relating to:
Profitability and returns;
Efficiency in the use of assets;
Corporate leverage; and
Investor based decision
The computation generated hot arguments among the directors and they decided to engage a
Consultant to give expert advice on which of the companies to acquire.
Extracts from these financial statements are given below:
COMPANY A (N000) COMPANY B (N000)
2014 2013 2012 2014 2013 2012
Revenue 77,888,548 64,088,879 59,864,385 14,096,123 12,932,549 12,726,227
Results from operating
activities 9,130,834 5,526,734 4,802,379 1,795,956 1,868,652 2,600,357
Profit before taxation 7,616,444 3,262,719 2,558,644 2,043,293 1,857,089 2,300,357
Profit for the year 6,434,601 2,856,504 1,678,471 1,467,344 1,328,580 1,774,660
Total comprehensive
income for the year 6,160,014 2,928,875 1,678,471 1,467,344 1,328,580 1,443,990
Share capital 320,295 320,295 320,295 249,986 249,986 249,986
Share premium 299,140 299,140 299,140 312,847 312,847 312,847
PROFESSIONAL LEVEL EXAMINATIONS MAY 2015
5
Retained earnings 16,709,260 11,958,545 9,688,160 10,764,382 9,463,028 8,334,437
Equity 17,328,695 12,577,980 10,307,595 13,753,157 12,455,803 11,327,212
Current liabilities 29,867,824 27,862,495 29,670,126 9,693,313 4,760,565 3,650,513
Non-current liabilities
8,666,690 10,929,695 8,507,941 3,990,011 5,240,199 3,043,865
Total non-current assets
38,238,065 35,873,744 33,480,167 9,693,742 9,891,975 9,113,908
Total Current assets 17,625,144 15,496,426 15,055,492 17,472,739 12,564,592 8,907,682
Share price at year-end
(N) 90 49 42 14.43 10.50 9.50
Required:
a. As the Consultant to the company, carry out a financial analysis on the financial
statements and advise the company appropriately. (15 Marks)
b. State the major limitations of ratio analysis for performance evaluation.
(5 Marks)
(Total 20 Marks)
QUESTION 4
LIKELY EFFECT LIMITED
Likely Effect Limited has shown a sincere intention to be IFRS compliant. Among a number of
events and transactions, there is the need to change the accounting policies of the company in
trying to comply with a few other standards. As the Consultant of the company, your attention
was drawn to the fact that prior to 2013, the company had capitalised training costs.
According to IAS 38, training cost is regarded as an internally generated intangible asset and
cannot be capitalised. Therefore, there is the need for a change of accounting policy which must
be applied retrospectively.
The training costs capitalised in 2012 was N6m while the total for periods before 2012 was
N12m.
Training costs incurred in 2013 is N4.5m. Retained earnings were N600m and N649m at the
beginning and end of 2012 respectively. The corporate income tax rate is 30% for the relevant
periods. Additional information available is given below:
2013 2012
(NM) (NM)
Income tax expense 24 21
Profit after tax 56 49
Share capital 50 50
6
Required:
a. Advise the directors on the implication of the change in accounting standard relating to
treatment of intangible assets and tax effect on the company.
(5 Marks)
b. Prepare statements of profit or loss and other comprehensive income and changes in
equity showing a retrospective application of the change in policy.
(7 Marks)
c. Analyse the effects of the change in accounting policy on periods before 2013.
(8 Marks)
(Total 20 Marks)
SECTION C - ATTEMPT ANY TWO OUT OF THREE QUESTIONS IN THIS SECTION (30
Marks)
QUESTION 5
International Financial Reporting Standards (IFRS) for small and medium size entities (SMEs)
was mandatorily adopted in Nigeria as at January 1, 2014. Entities that do not meet the IFRS for
SME criteria shall report using Small and Medium size Entities Guidelines on Accounting
(SMEGA).
Jossy Limited has total costs excluding land of two-hundred million naira. Being a family
business, the labour force totalled 150 workers with an annual turnover of N18 million. The
management of this company sought your advice to have better understanding of some of the
recognition and measurement principles of SMEs.
Required:
a. Justify the need for IFRS for SMEs financial statements. (6 Marks)
b. Assess the circumstances of Jossy Limited and advise on the principal recognition and
measurement principles that will reduce the companys reporting burden.
(9 Marks)
(Total 15 Marks)
QUESTION 6
NICE & DICE is a large charity located in Abuja and set up to provide support and assistance to
disadvantaged people in major cities. Most of the charitys income comes from members of the
public through direct cash collections and regular monthly payments from donors. The other
source of funding comes from government bodies who give grants to support specific projects
that are recognised as being beneficial to the public good.
7
(iii) IAS 32 - (FINANCIAL INSTRUMENTS: PRESENTATION)
IAS 32 - (Instruments: Presentation) Outlines the two options:
Recognise the financial liability as debt
Recognise the financial liability as equity
In this case, IAS 32 states that when a financial instrument entitles the holder to receive
cash or contains a redemption feature, such instruments are classified as debts.
This is because the substance, not the legal form, is reflected in the financial statements.
A contractual obligation exists to deliver cash and this obligation gives rise to a liability
(debt).
When a financial instrument does not entitle the holder to receive cash or does not
contain a redemption feature, you recognise these types of instruments in equity.
EXAMINERS REPORT
The question tests the requirements, principles and practices of accounting for convertible
bonds, revenue recognition and presentation of financial instruments based on IFRS.
About 20% of the candidates attempted the question and performance was poor.
Candidates major challenge was their lack of in-depth knowledge of the provisions and
applications of IAS 18-Revenue recognition and IAS 32- Financial Instruments
(Presentation).
Candidates are advised to thoroughly study and practice questions on relevant provisions
of the International Financial Reporting Standards (IFRS) to enhance their performance in
this paper in future.
SOLUTION 3
(a) Expected ratios and their formulae are:

1. Profitability and returns:
i) Profit margin = 100
PBIT is Profit before interest and tax

ii) Returns on Capital Employed (ROCE)
100
17
Capital employed = Total assets less current liabilities
2. Efficiency in the use of assets

Asset Turnover ratio =
3. Corporate leverage
Debt Equity ratio
=
Alternatively
=
4. Investors Based Ratios:
(i) EPS = Earnings Per Share = .

PAT is Profit after Taxation
(ii) PE = Price Earnings =
&
(iii) NAPS = Net Asset Per Share = .
(iv) EY = Earnings Yield =
Ratio Computation
Company A Company B
2014 2013 2012 2014 2013 2012
Total liabilities (N) 38,534,514 38,792,190 38,178,067 13,683,324 10,000,764 6,694,378
Total assets (N) 55,863,209 51,370,170 48,485,662 17,473,168 17,696,002 14,371,077
Capital employed(N) 25.995.385 23,507.675 18,815,536 17,473,168 17,696,002 14,371,077
No. of ord. share 640,590 640.590 640.590 499.972 499,972 499,972
Profit margin 0.10 0.05 0.04 0.15 0.14 0.18
ROCE 0.29 0.14 0.14 0.12 0.11 0.16
Asset turnover 3 times 2.7 times 3.18 times 0.8 times 0.73 times 0.89 times
Debt/Equity 0.69 0.76 0.79 0.50 0.45 0.37
NAPS 27.05 19.64 16.09 27.51 24.91 22.66
EPS 10.05 4.46 2.62 2.94 2.66 3.55
PE 8.96 10.99 16.03 4.92 3.95 2.68
18
Comments and advice on the Ratios.
Based on the financial statements of the two companies and the computed ratios, the following
conclusions are made:
(i) Company A is bigger than Company B.
(ii) Although Company B seems to be more profitable having a higher profit margin, the
returns on capital employed for Company A is higher.
(iii) Company A is more efficient in the use of assets than Company B.
(iv) The net asset per share for the two companies are very close, but the earnings per share
and price earnings ratios for Company A is higher.
(v) Real Expansion Plc. should acquire company A based on the performance evaluation
above.
(b) LIMITATIONS OF RATIO FOR FINANCIAL ANALYSIS

Traditional ratio analysis is becoming outdated because of a number of draw- backs
identified with ratio analysis which include:
(i) Absence of valid universal definition of standard ratios
(ii) Dual meanings and implications of some ratios. This fact calls for the need for
further enquiries or investigations before coming to conclusions when using ratios
for financial analysis. Difference in meaning of certain terms e.g. profit (gross,
net, before taxation or after taxation etc) assets (tangible or intangible), should
preference share be part of debt?
(iii) Incomparable financial statements in the face of different accounting policies,
degrees of diversification and other policies.
(iv) Impact of seasonality on accounting figures may render ratios based on those
figures unreliable for comparative analysis.
(v) Management can easily manipulate accounting figures. Financial ratios are not
very useful when viewed in isolation.
(vi) Accounting figures and valuations are affected by changes in price level resulting
from inflation, hence ratios based on amalgam of currency values are not very
reliable. Also changes in technology and environment affects accounting figures.
(vii) Information in annual report is in summary form and may be inadequate or
unsuitable when detail analysis is needed.
(viii) Accounting information presented in annual report is historic, suffer short-term
changes hence of little value for future decisions or predicting the future.
19
(ix) Basis of information is often out of date, therefore timeliness of information leads
to problem of interpretation.
(x) Analysis of accounting information identifies symptoms and not causes.
EXAMINERS REPORT
The question tests candidates competence in identifying, computing and interpreting
relevant financial ratios for evaluation, profitability and efficiency in asset utilization,
corporate leverage and investment decisions.
Almost all the candidates attempted the question but displayed poor understanding of the
requirements of the question.
Most of the candidates could not identify the relevant ratios while others did not know
appropriate formulae.
Candidates are advised to sustain knowledge acquired at the Financial Accounting and
Financial Reporting stages of the examination.
20
SOLUTION 4
LIKELY EFFECT LIMITED
a. Users of financial statements need to be able to compare financial statements of an entity

over time. This will be in agreement with consistency convention and in order to identify
trends in its financial performance and financial position. Changes in accounting
standards will therefore have significant impact on the choice of accounting policy
adopted by entities and consequently cause major alterations in operating results in the
financial statements.
Changes in accounting policies are rare but are allowed or permitted if and only if:
i. required by statute;
ii. occasioned by a change in standard e.g. a new IFRS replacing an existing one;
iii. the change would result in more reliable and relevant financial information (IAS
8)
Whenever there is a change in accounting policy, the change and its effects on the
financial statements must be disclosed.
Since Likely Effect Limited has shown intention to be IFRS compliant, it is required that
the entity must give appropriate effects to the treatment of its intangible assets.
Therefore, its training costs which were previously capitalized as intangible assets would
be derecognized in compliance with the requirements of IAS 38, because such cost will
not qualify as intangible asset within the context of the standard.
The appropriate treatment is to carry out the derecognition in a retrospective manner. By

retrospective application, it means that the entity should adjust the opening balance for
each item of equity affected by the change for the earliest prior period presented and the
other comparative amounts for each prior period presented as if the new accounting
policy or standard had always been applied.
Arising from the foregoing, the directors of LIKELY EFFECT LIMITED will be
required to adjust the net of tax effect of training cost capitalized for each of 2012 and
2013 with respect to IFRS Statement of Profit or Loss. However, the cumulative effect
of previously capitalized amount of the same cost prior to 2012 will be adjusted from the
retained earnings of the earliest comparative period net of tax (January 1, 2012).
b. (i) LIKELY EFFECT LIMITED
21
Statement of Comprehensive Income
for the Year ended 31 December, 2013
2013 2012
N000 N000
Profit before Income Tax 80,000 64,000
Less: Income Tax 24,000 19,200
Other items of Comprehensive Income - -
Total Comprehensive Income 56,000 44,800
(ii) Statement of Changes in Equity

for the year ended 31 December, 2013
Share Retained
Total
Capital Earnings
N000 N000 N000
Balances previously reported as at 2011 50,000 600,000 650,000
Reduction in Retained Earnings resulting from change in
(8,400) (8,400)
Policy
Balances as at 31 December, 2011 (Restated) 50,000 591,600 641,600
Comprehensive Income for the Year ended 31 December,
44,800 44,800
2012 (Restated)
Balances as at 31 December, 2012 50,000 636,400 686,400
Comprehensive Income for the Year ended 31 December,
56,000 56,000
2013
Balance as at 31 December, 2013 50,000 692,400 742,400
Workings:
(i) Profit after income tax + Income tax = Profit before Income tax
= N56,000,000 + N24,000,000
= N80,000,000
N000
(ii) Profit after income tax in 2012 = 49,000
Income tax = 21,000
Profit before income tax = 70,000
Less training cost capitalized in the period = 6,000
22
64,000
(iii) Income tax payable should be reduced by the tax element on N6,000,000
overstatement of profit.
Income tax = N21,000,000 (N6,000,000 x 30%)
= N21,000,000 1,800,000
= N19,200,000
(iv) Reduction = Retained Earnings as a result of change in

capitalization of training costs
= N12,000,000 x (1 30%)
= N 8,400,000
c. Effects of change in Accounting Policy on previous periods:
Apart from restatement of comparative figures for 2012 on the Statement of

Comprehensive Income, the following items will be affected as analysed
below:
Effect on 2012 figures: N000
i. Decrease in profit before tax (the amount of training cost) (6,000)
ii. Decrease in income tax expenses (30% of N6,000) 1,800
iii. Decrease in profit for the period (N6,000 - N1,800) (4,200)
iv. Decrease in comprehensive income (4,200)
v. Decrease in intangible assets (6,000)
vi. Decrease in deferred tax liabilities 1,800
vii. Decrease in retained earnings at the end of the December 2012 (12,600)
(649,000 636,400)
Effects on Period before 2012 N000
23
i. Decrease in profit for the period (8,400)
(Total training cost before 2012 x (1 30%)
(N12,000,000 x 1 30%) = Net effect
ii. Decrease in Comprehensive income (8,400)
iii. Decrease in intangible assets (12,000)
iv. Decrease in Deferred tax liabilities (30% of 12,000) 3,600
Judging from the above, the adoption or compliance with IFRS by LIKELY EFFECT LIMITED
in Year 2013 will affect the entitys prior periods information as presented under the old
NGAAP or accounting policies.
Some of the likely effects may include the following:
Previous Retained Earnings:

The cumulative effect of the change would have been adjusted on the retained earnings available
as at the beginning of earliest comparative period. As shown in the initial calculation, the
cumulative effect of the change in treatment of training cost on the opening retained earnings as
at 1 January, 2012 net of tax gives rise to a reduction in opening retained earnings by absolute
figure of N8.4m. This reduction has inadvertently reduced the total equity thereby affecting all
relevant ratios relating to equity in the entity. Ratio such as debt to equity, return on equity,
return on capital employed, gearing, etc. previously computed will be affected by this change.
Comparative period profit for the year:

The effect of the change in the accounting policy will equally have directional effect on the
adjusted profit for the year in respect of 2012 financial year-end. The amount of training
expenses of N6m (N4.2m net of tax) was adjusted to arrive at profit for the year thereby reducing
the initial profit for the year of N49m to N44,8m after the said adjustment for the effect of the
change in accounting policy. This will have an analytical effect of reduction in net profit margin,
return on asset, etc. calculated.
EXAMINERS REPORT
24
TABLE OF CONTENTS
SUBJECT PAGES
FINANCIAL REPORTING 1 37
TAXATION 38 62
PERFORMANCE MANAGEMENT 63 88
AUDIT AND ASSURANCE 89 121
PUBLIC SECTOR ACCOUNTING AND FINANCE 122 - 147
MANAGEMENT GOVERNANCE AND ETHICS 148 - 170
SKILLS EXAMINATION NOVEMBER 2014

III
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF NIGERIA
SKILLS LEVEL EXAMINATION - NOVEMBER 2014
FINANCIAL REPORTING
Time Allowed: 3 hours
SECTION A: COMPULSORY QUESTION (30 Marks)
QUESTION 1
The Trial Balance of Excellent Plc. as at 30 June 2014 is as follows:
N000 N000
Salaries & wages 80,000
Plant and machinery maintenance cost 44,800
Irrecoverable debt 14,700
Plant and machinery at cost 75,500
Provision for receivables 21,220
Provision for depreciation:
- Plant and machinery 41,150
- Furniture 37,000
Delivery van at cost 49,000
Provision for depreciation:
- Delivery Van 12,000
Delivery van expenses 11,970
Purchases/Revenue 195,000 940,000
10% Loan Notes 100,000
Bank balance 20,900
Furniture at cost 64,000
Sundry expenses 39,500
Trade receivables/payables 48,000 30,000
Goodwill 45,000
Inventories: 30/6/2013 16,000
Dividend paid to ordinary shareholders 15,000
Retained earnings 30,000
Ordinary shares of N1 each 100,000
Revaluation surplus (Furniture) 8,000
Freehold land 600,000 -
1,319,370 1,319,370

1
The following notes are relevant:
i. Inventories as at 30/6/2013:
Units Unit Cost

000 Price (N) N000
Commodity 1 300 20 6,000
Commodity 2 350 15 5,250
Commodity 3 475 10 4,750
16,000
The net realisable values of these commodities per unit are as follows:
Commodity 1 Commodity 2 Commodity 3

Net Realisable Value per unit N15 N20 N8
Any increase or decrease in the value of opening inventories is to be adjusted to

cost of sales.
ii. Inventories on 30 June 2014 amounted to N9,000,000
iii. Prepaid salaries and wages were N10,000,000
iv. Included in the plant and machinery maintenance cost was depreciation of
N14,800,000.
v. The allowances for receivables are no longer required. The outstanding 10%
loan notes interest was paid on 30 June 2014 and this has not been accounted
for. The fair value of goods is N40,000,000 at the end of the year.
vi. The value in use of delivery van for the year 30 June 2014 is N31,000,000. The
prevailing market interest rate is 21% per annum and the Discounting Factor for
this year is 0.8264.
vii. The fair value of delivery van at an arms length transaction as at 30 June 2014
was N28,000,000 and the cost to sell was N2,000,000. All non-current assets
were depreciated at 10% per annum on reducing balance basis.
viii. Current tax provision for the year is N165,000,000.

2
Required:
a. Identify any FOUR of the cost items that are EXCLUDED in the valuation of
inventories under IAS 2. (4 Marks)
b. Calculate the following:
(i) Value of opening inventories to be included in the Statement of Profit or

Loss and Other Comprehensive Income. (2 Marks)
(ii) The present value in the use of delivery van (1 Mark)
(iii) The fair value and recoverable amount of delivery van (2 Marks)
(iv) The carrying amount and impairment if any on delivery van (2 Marks)
c. Prepare the Statement of Profit or Loss and Other Comprehensive Income (OCI)
and Statement of Changes in Equity for the year ended 30 June 2014.
(11 Marks)
d. Prepare the Statement of Financial Position as at 30 June 2014. (8 Marks)

Show all relevant workings (Total 30 Marks)
SECTION B: ATTEMPT TWO QUESTIONS FROM THIS SECTION (40 MARKS)
QUESTION 2
a. A non-accountant friend of yours attended a seminar for non-accounting

executives on interpretation of financial statements.
Though, he enjoyed the seminar especially the aspect on the uses of accounting
ratios, he strongly believes that they have their limitations.
State and explain the limitations of ratios for the purpose of interpreting
financial statements. (5 Marks)
b. You are provided with the following set of amended published Financial
Statements of HAMMED Plc for the year ended 31 December 2013:
Consolidated Statement of Profit or Loss and Other Comprehensive Income

3
2013 2012
N000 N000
Revenue 257,520 254,444
Cost of sales (126,796) (127,458)
Gross Profit 130,724 126,986
Net operating expenses (97,910) (95,728)
32,814 31,258
Net finance income 1,948 1,316
Net profit before tax 34,762 32,574
Income tax expense (10,256) (9,170)
Profit for the period 24,506 23,404
Dividend per share paid 58.50k 52.50k

Total dividend paid (N000) 11,256 10,216
Dividend per share proposed 44k 39k
Total dividend proposed (N000) 8,564 7,590
Basic earnings per share 130.12k 125.22k
Consolidated Statement of Financial Position

2013 2012
N000 N000
Non-current assets:
Property, plant & equipment (PPE) 69,864 74,630
Motor Vehicles 11,554 11,200
81,418 85,830
Current assets:
Trade and other receivables 59,092 41,982
Cash at bank 62,824 69,916
Assets classified as held for sale 1,874 -
140,338 130,242
Total assets: 221,756 216,072
Current liabilities 48,090 49,432

Non-current liabilities 43,778 45,276
Capital and Reserves Attributable to

equity shareholders:

4
Called-up share capital 9,730 9,730
Share premium account 1,810 1,810
Own shares held (8,596) (6,200)
Share option reserve 2,832 1,652
Retained earnings 124,112 114,372
129,888 121,364
221,756 216,072
Additional information
i. The issued share capital of the company consists of 50k ordinary shares.
ii. The market price of the ordinary shares was N17 at 31 December 2012
and N19.16 at 31 December 2013.
iii. There were no preference shares and no loan notes.
iv. The cost of purchases plus production cost was N124,966,000 in 2012
and N125,000,000 in 2013.
v. Other opening and closing balances:
Closing Closing Opening

2013 2012 2012
N000 N000 N000
PPE accumulated depreciation 37,046 129,540 122,288
Inventories 16,548 18,344 20,836
Trade receivables 40,486 37,160 35,678
Trade payables 9,604 12,882 11,412
Other taxes and social security 3,822 3,640 3,818
Accruals 30,740 27,810 27,680
Equity 129,888 121,364 106,274
Required:
i. Calculate performance (efficiency) and investment ratios for each of the

two years as far as the available information permits. (10 Marks)
ii. Comment on the companys financial performance for the year ended 31
December 2013 based on the ratios. (5 Marks)
(Total 20 Marks)

5
QUESTION 3
USMAN Plc.
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2013
N000 N000
Revenue 1,600,000
Interest income 10,000
Gain on sale of plant 8,000
1,618,000
Expenses:
Wages and salaries expenses 240,000
Depreciation on plant and equipment 50,000
Interest expense 8,000
Other expenses 152,000 (1,410,000)
Profit before tax 208,000
Income tax expense (60,000)
Other comprehensive income:
Gain on available for sale Investment 4,000
Income tax (1,200) 2,800
Total comprehensive income for the year 150,800
USMAN Plc.
Comparative Statements of Financial Position as at:
31 Dec. 31 Dec. Increase/
2013 2012 (Decrease)
N000 N000 N000
Cash at bank 113,100 120,000 (6,900)
Accounts receivable 158,000 140,000 18,000
Inventory 140,000 130,000 10,000
Prepayments 19,000 16,000 3,000
Interest receivable 200 300 (100)
Plant and equipment 330,000 300,000 30,000
Investment (Available for sale) 28,000 24,000 4,000
Intangible assets 30,000 - 30,000
818,300 730,300 88,000
Accounts payable 90,000 84,000 6,000
Wages and salaries payable 10,000 8,000 2,000

6
Accrued interests 400 - 400
Other expenses payable 3,600 6,000 (2,400)
Current tax payable 32,000 28,000 4,000
Deferred tax liability 17,200 10,000 7,200
Long-term borrowings 140,000 120,000 20,000
Share capital 400,000 400,000 -
Retained earnings 122,300 74,300 48,000
Available for sale reserve 2,800 - 2,800
818,300 730,300 88,000
Additional information extracted from the companys records are:
(i) Plant which had a carrying amount of N20,000,000 was sold for N28,000,000
cash and new equipment was purchased for N100million.
(ii) Intangibles valued at N30,000,000 were acquired for cash.
(iii) Borrowings of N20,000,000 were made during the year and received in cash.
(iv) Dividends paid in cash amounted to N100,000,000.
Required:
Prepare Statement of Cash Flows for USMAN Plc for the year ended 31 December 2013
in accordance with IAS7 using direct method. (20 Marks)
QUESTION 4
a. International Financial Reporting Standards (IFRS) through the International

Accounting Standard Board (IASB) sets out the definition and essential
characteristics of assets and liabilities in the presentation of financial
statements which users of the statements are likely to rely on when making
major economic decisions.
Required:
Identify the essential characteristics of assets and comment on the features of

liabilities in accordance with provisions of IAS1 on presentation of financial
statements. (10 Marks)
b. Island Plc is an international airline which operates in Nigeria. The entity plans
to enter into a lease agreement with KLM Leasing Limited for the use of a

7
(ii) The leasehold property was acquired on 1 October 2011 on 15 years
lease at a cost of N300,000,000. The companys policy is to revalue the
property at market value at each year end. At 30 September 2013, the
property was valued at N204,600,000.
(iii) Plant acquired is depreciated at 25% per annum using the reducing
balance method while the leased plant is also depreciated at 25% using
the straight-line method.
(iv) One item of plant acquired for N48,000,000 on 1 October 2010 was
disposed on 30 September, 2013 for N36,000,000 while a new plant with
a higher capacity was acquired as a replacement for N65,000,000 on the
same date.
(v) All the additional pieces of information above are yet to be adjusted for
in the books of Kwali Nigeria Plc.
Required:
Prepare a statement of changes in Property, Plant and Equipment for inclusion in the
Financial Statements for the year ended 30 September 2013. (10 Marks)
(Total 15 Marks)
SOLUTION 1
(a) Excluded costs in IAS 2 on inventories include the following:
Abnormal amount of wasted materials, labour or other production cost.
Storage costs, unless those costs that are necessary in the production
process before a further production stage.
Administrative overheads that do not contribute to bringing

inventories to their present location or condition.
Selling costs.
Interest cost/charges that may arise when inventory is bought on terms

that allow for settlements at a later date.

12
Foreign exchange differences that may arise when inventory
bought is payable to agent for arranging imported inventories.
After sales warranty costs.

Borrowing costs not qualified for capitalization under IAS 23.
bi.
Inventory
Commodity (a) Units Unit cost N (b) Value (lower
of a or b)
N000 000 N000 N000
1 6,000 300 15 4,500 4,500
2 5,250 350 15 7,000 5,250
3 4,750 475 8 3,800 3,800
16,000 15,300 13,550
ii. The Present Value in use remains at N31,000,000
iii Fair value of delivery van = N28,000,000

Recoverable amount is N31million being the higher of
N000
Fair value less cost to sell (N28million N2million) 26,000
Value in use (PV of future CF) 31,000
iv. The carrying amount as at 30/6/2014 N000 N000

Cost 49,000
Less Accum. Depreciation at 30/6/2013 12,000
Depreciation for 2014 is (10% of ( N49,000 N12,000) 3,700 (15,700)
33,300
Impairment loss (2,300)
31,000
Carrying amount after impairment as at 30/6/2014
Impairment loss is excess of: N000

Carrying amount (before possible impairment) as at 30/6/2014 33,300
Recoverable amount 31,000
2,300

13
c.
EXCELLENT PLC
Statement of Profit or Loss and Other Comprehensive Income for the year ended
30 June 2014
N000
Revenue 940,000
Cost of sale (w1) (199,550)
Personnel cost (N80million - N10million prepayments) (70,000)
Depreciation, amortization & impairment charges (w2) (23,500)
Admin. and other operating expenses (w3) (74,950)
Finance costs (10,000)
Profit Before Tax (PBT) 562,000
Income tax expenses (165,000)
397,000
EXCELLENT PLC.
Statement of Changes in Equity for the year ended 30 June 2014
Ordinary Share Retained Revaluation Total
Capital Earnings Surplus
N000 N000 N000 N000
B/fwd 100,000 30,000 8,000 138,000
Prior year Adjustment (2,450) (2,450)
Restated B/fwd 100,000 27,550 8,000 135,550
Dividend paid (15,000) (15,000)
100,000 409,550 8,000 517,550
WORKINGS: N000
1. Cost of sales:
Opening inventories as adjusted 13,550
Purchases 195,000
Cost of goods available for sale 208,550
Closing inventories (9,000)
2. Depreciation, Amortisation & Impairment Charges

Depreciation: Plant & Machinery 14,800
Delivery van 3,700

14
Furniture (10% x (N64m N37m) 2,700
Impairment charge for delivery van 2,300
Admin Expenses/Other operating:
3. Maintenance Cost-Plant (N44,800 N14,800) 30,000

Irrecoverable debts 14,700
Reversal of impairments on receivables (21,220)
Delivery van expenses 11,970
Sundry expenses 39,500
74,950
EXCELLENT PLC.
Statement of Financial Position as at 30 June 2014
ASSET N000
Non-Current Assets:
Property Plant & Equipment (W1) 689,650
Intangible Asset: Goodwill 45,000
734,650
Current Assets:
Inventories (lower of N9m and N40m) 9,000
Trade and other receivables 48,000
Cash & Cash equivalents (N20.9m-N 10m) 10,900
Other Assets (i.e prepaid salary) 10,000
77,900
Total Assets 812,550
EQUITY & LIABILITIES N000

Share Capital & Reserves:
Ordinary Share Capital (N1 per share) 100,000
Retained Earnings (N30 million - N2.45m- N15m + N397m) 409,550
Revaluation Reserve 8,000
Non -Current Liabilities:

10% Loan notes 100,000
Current Liabilities:
Trade and other payables 30,000
Current Tax payable 165,000
195,000
Total Equity and Liabilities 812,550

15
WORKINGS:
1. Statement of Changes in Property, Plant and Equipment

Cost Acc Depr. Acc Impair. Carrying Amount
N000 N000 N000 N000
Freehold Land 600,000 600,000
Plant & Machinery 75,500 (41,150) 34,350
Furniture 64,000 (39,700) 24,300
Delivery van 49,000 (15,700) (2,300) 31,000
788,500 (96,550) (2,300) 689,650
EXAMINERS REPORT
The question tests candidates understanding of the provisions of IAS2 on inventory,

IAS 36 on impairment of assets and their application to the preparation and
presentation of published financial statements. It specifically requires candidates to
value the opening inventory, determine impairment, if any, on the delivery van and to
prepare the Statement of Profit or Loss and Other Comprehensive Income, Statement of
Changes in Equity and Statement of Financial Position.
The candidates performance was very poor as only about 10% of the candidates
obtained up to 40% of the allocated marks.
The candidates commonest pitfalls were their lack of understanding of the provisions
of the relevant accounting standards tested and their inability to present the required
financial statements in IFRS prescribed format.
Candidates are advised to study all aspects of the preparation of published financial
statements of companies including groups. They should also acquaint themselves
with all the accounting standards stated in syllabus for the Financial Reporting paper.

16
SOLUTION 2
The limitations of accounting ratios include the following:
(i) Heterogeneity or Homogeneity:

A company may have various divisions operating in many different
industries. This can make it difficult to find comparative industry ratios to
use for comparison purposes.
(ii) Need to determine whether the results of the ratio analyses are consistent:
One set of ratios may indicate a problem, whereas another set may indicate
that the potential problem is only short-term in nature.
(iii) Need to use judgment:

Although financial ratios are used to help assess the growth, political and
risk profile of a company, they cannot be used alone; the entire operation of
the company must be examined, and the external economic and industry
setting in which it is operating must be considered when interpreting
financial ratios.
(iv) The use of alternative accounting methods:

Companies frequently have latitude when choosing certain accounting
methods. Ratios obtained from financial statements that employ different
accounting choices may not be comparable unless adjustments are made.
(v) Management Assumptions, Basis of Estimation and Judgment:

IFRS is principles-based; it requires significant judgement from
management of entities, this could result in material differences in the
financial statements of the entities. It can also further limit the financial
analyses of financial statements with accounting ratios unless further
adjustments are made to the accounts.
(vi) Differences in Accounting Policies:-

IFRS as a principlesbased financial reporting system, allows alternative
treatments of transactions via accounting policy choice, which invariably
makes comparison of companys performance via accounting ratios more
difficult and less meaningful unless alignment of the accounting policies of
the entities are considered.

17
(vii) Use of Historical Cost Data:
Decisions about future expectations are based on historical data, which in

some cases, make it difficult and insensitive to reaching economic decision
that are likely to take into consideration changes in underlying variables
that determine companys performance.
(viii) Inflation can distort the financial statements:
Inflation can distort the financial statements (particularly the statement of

financial position). Any problem in the financials caused by inflation can be
passed on to ratios.
(ix) Difference in ratio definitions may make it difficult to compare ratios from
different sources:
Differences in ratio definitions make it difficult to compare ratios from

different sources. There can be many different ways to compute the same
ratio. This can cause confusion or different answers.
(x) Use of Industrial average:
Comparison against industry average may not be subjected to factors that

are not common in the industry.
(xi) Lack of comparative figure for a new entity:

In the companys first year of trading, there will be no comparative figures,
hence no indicator to compare with.
(i) EFFICIENCY RATIOS
S/N RATIOS FORMULAE YEAR 2013 YEAR 2012
(i) Gross Profit x

%
50.76%
49.70%
(ii) OPERATING
PROFIT
MARGIN 12.74% 12.28%

18
(iii) NET PROFIT
MARGIN
9.52% 9.20%
(iv) INVENTORY
TURNOVER
7.27 6.51
(v) AVERAGE
COLLECTION
PERIOD = 55 days = 52 days
(vi) AVERAGE x 365

PAYMENT
PERIOD 33days 35days
(vii) RETURN
CAPITAL
ON 25.26%
EMPLOYED 25.76%
(viii) ASSET
TURNOVER
1.98 2.10
INVESTMENT FORMULAE YEAR 2013 YEAR 2012

RATIOS
(i) EARNINGS
YEILD (%)
1.98 2.10
(ii) DIVIDEND x
YIELD %
2.3% 2.29%
(iii) PRICE
EARNINGS
RATIO 14.72% 13.58%
(iv) DIVIDEND
PAYOUT
33.81% 31.15%

19
(v) RETENTION x
RATIO
66.19% 68.859%
(vi) DIVIDEND
COVER
2.96 3.21
ANALYSIS AND REVIEW OF THE ACCOUNTING RATIOS

PERFORMANCE (EFFICIENCY) RATIOS
The analysis of performance via the profitability Ratio revealed that the performance
of 2013 is marginally better than the performance observed for the preceding period
(2012) as every profitability measures/ratios showed an enhanced performance, which
include:
Gross Profit Margin of 51% in 2013 as against 50% in 2012, operating profit margin of
13% in 2013 from 12% in 2012, and Net Income Margin of 10% in 2013 from 9% in
2012.
All indications with respect to profitability in 2013 are clear evidence of management
efficiency with respect to efficient utilisation of its assets to generate economic
benefits and enhanced returns (even though marginal).
The analysis of performance via the working Capital Efficiency revealed increase in
inventory turnover from 6.51 times to 7.27 times. Furthermore, there was insignificant
difference/variation with respect to average payment period to vendors/suppliers with
2 days shortened payment period observed with respect to the management of the
entitys working capital, there exists consistency in its short term solvency and
liquidity position based on slight improvement. The performance of the entity via its
liquidity, has continued to demonstrate the original decrease, is recorded in the return
on capital employed and net asset turnover. The return on capital employed
decreased from 25.76% in 2012 to 25.26% in 2013 while the assets turnover decreased
from 2.10 times in 2012 to 1.98 times in 2013.
INVESTMENT RATIOS
The analysis of investment ratios equally demonstrated the applaudable performance

of the company with respect to meeting investors expectations as regards its
enhanced returns as shown by the increase in Price Earnings from 13.58 in 2012) to

20
14.72 in 2013. Increase in dividend yield (2.30% in 2013 as compared with 2.29% in
2012), dividend payout of 34% in 2013 from 31% in 2012. There was slight exception
in performance with respect to drop in earnings from 7.37% in 2012 to 6.79% in 2013,
likewise was a further drop in dividend cover from 3.21 times to 2.96 times. Overall, it
is perceived that on an average basis, the market expectations of the investors may
have been satisfied based on the analysis and review of the companys performance
for 2013.
EXAMINERS REPORT
The question tests candidates knowledge of accounting ratios and the limitations of
using accounting ratios in the analysis and interpretation of Financial Statements.
Candidates are required to compute performance (efficiency) and investment ratios

and to comment on the performance of the entity based on the computed ratios.
Candidates performance was fair as over 40% of the candidates who attempted the
question obtained up to 50% of the marks allocated.
Candidates commonest pitfall was their inability to identify the relevant accounting
ratios which measure performance and investments of an entity. Some candidates in
addition, had problem with stating the correct formulae for computing the ratios.
Candidates are therefore advised to study all aspects of accounting ratios including its
limitations.
SOLUTION 3
USMAN PLC.
STATEMENT OF CASHFLOW FOR THE YEAR ENDED 31 DECEMBER 2013
NOTES N000 N000
CASHFLOW FROM OPERATING ACTIVITIES:
Cash Receipts from customers (1) 1,582,000
Cash paid to supplier and employers (2) (1,359,400)
Cash generated from operations 222,600
Interest Received (3) 10,100
Interest paid (4) (7,600)
Income Tax paid (5) (50,000)
Net cash from operating activities 175,100

21
Cash flow from investing activities:
Purchase of intangibles (30,000)
Purchase of plant (100,000)
Proceeds from sale of plant 28,000
Net cash used in Investing Activities (102,000)
Cash flow from Financing Activities:
Proceeds from borrowing 20,000
Dividends paid (100,000)
Net cash used in Financing Activities (80,000)
Net Decrease in cash and Equivalents (6,900)
Cash and Cash equivalent at the beginning of the
year 120,000
Cash and cash equivalent at the end of the year 113,100
Notes:
1. Cash Receipts from customers:

N000
Revenue 1,600,000
Beginning account receivable 140,000
1,740,000
Ending account receivable (158,000)
Cash receipts from customer 1,582,000
OR
ACCOUNT RECEIVABLES
N000 N000
Opening bal 140,000 Cash receipts 1,582,000
Sales Revenue 1,600,000 Closing bal 158,000
1,740,000 1,740,000
2(a) Payment to suppliers for Purchases:

N000
Increase in inventory 10,000
970,000

22
Increase in account payables (6,000)
Payment for purchases 964,000
(b) Payment for other services

Other expenses 152,000
Increase in prepayments 3,000
Decrease in other expenses payable 2,400
157,400
(c) Payment to employees
Wages and salaries expenses 240,000
Increase in wages and salaries payable (2,000)
238,000
(d) Summary of total payment to suppliers and
employees:
For purchases 964,000
For services 157,400
For salaries and wages 238,000
1,359,400
(3) Interest received:

Interest revenue increase in interest receivable or decrease in interest
receivable = N10,000,000 + N100,000 = N10,100,000
(4) Interest paid: N000

Interest expenses 8,000
Decrease in accrued interest 400
7,600
(5) Income Tax paid:
Beginning balance 28,000
Income tax expenses 54,000
Income tax paid (50,000)
Ending balance 32,000
(a) Deferred Tax

N000 N000
Balance c/d 17,200 Bal b/d 10,000
Tax on OCI 1,200
Income tax expenses 6,000
17,200 17,200

23
N000
OCI = Other Comprehensive Income
(b) Income Tax expenses 60,000
Less: Deferred Tax (5a) 6,000
54,000
EXAMINERS REPORT
The question tests candidates ability to prepare and present a statement of Cash
Flows using the direct method.
Candidates performance was poor as about 20% of those who attempted the question
obtained up to 40% of the marks allocated.
Candidates commonest pitfall was their inability to correctly classify the cash flows.
Candidates are advised to study the different classification of cash flows against future
examinations.
SOLUTION 4
(a) Essential characteristics of Assets.
IASB defines asset as a resource controlled by an entity as a result of past

events and from which future economic benefits are expected to flow to the
entity.
The characteristics of this definition are as follows:
Emphasis on control rather than ownership of asset. It means ability to

restrict other entity from using the asset.
Also, it places emphasis on substance of the transactions rather than

their legal form.
When there is control of an asset, it is recognised in the statement of

financial position e.g. Finance lease, contractual rights.
The definition makes reference to past events, thereby excluding asset
that may occur in future.

24
PATHFINDER
The Financial Consultants advice were fully implemented and the subsidiary
company Burka-Bala Farms Limited was registered on 30 June 2010. The new head
of accounts unit ensured that proper Financial Statements were prepared for the
years ended 31 December 2010 and 2011. At the Annual General Meeting (AGM) to
consider the 2011 accounts, the shareholders were informed that the company will
comply with the relevant IFRS in the presentation of the financial statements for
the year ended 31 December 2012.
The following trial balance was extracted from the companys books at 31
December 2012:
N000 N000
Revenue 855,000
Purchases 503,600
Distribution costs 31,950
Administrative expenses 104,400
Finance costs 1,020
18,250
Investment income
Leased property at cost 125,000
Plant and equipment at cost 98,800
Accumulated amortisation/depreciation at 1/1/2012:
Leased property 35,000
Plant and equipment 28,800
Financial instruments 40,500
Inventory at 1/1/2012 85,075
Trade receivables 72,400
Trade payables 62,550
Bank 5,175
Share premium 8,400
Equity shares of 50kobo each 115,000
Retained earnings at 1/1/2012 55,600
Investment in subsidiary 131,030
6% Convertible Loan Notes _______ 10,000
1,193,775 1,193,775
The following notes are relevant:
i. Revenue includes goods sold and despatched from 15 December 2012, on a

30-day right of return basis. Their selling price was N3.6million and they
were sold at a gross profit margin of 20%. Burka-Bala Plc is uncertain as to
whether any of these goods will be returned within the 30-day period.
65
PATHFINDER
ii. The directors decided to revalue the leased property in line with recent
increases in market values. On 1 September 2012, an independent surveyor
valued the leased property at N99million, which the directors have accepted.
The leased property was amortised over an original life of 25 years which
has not changed. Burka-Bala Plc does not make a transfer to retained
earnings in respect of excess amortisation.
iii. The plant and equipment is depreciated at 15% per annum using the
reducing balance method and all depreciation and amortisation are charged
to cost of sales. No depreciation or amortisation has yet been charged on
any non-current asset for the year ended 31 December 2012.
iv. The financial instruments are investments in equities of public companies

and had a fair value of N39.7million on 31 December 2012. There were no
purchases or disposals of any of these investments during the year. Burka-
Bala Plc has not made the election in accordance with IFRS 9 on Financial
Instruments. The company adopts this standard when accounting for its
financial assets.
v. On 20 November 2012, Burka-Bala Plcs share price stood at N2.20 per

share. On this date, a dividend that was calculated to give a dividend yield
of 5% was paid by the company. The dividend paid was included as part of
administrative expenses figure shown in the trial balance.
vi. The inventory on Burka-Bala Plcs premises at 31 December 2012, after stock
taking was valued at cost of N106million and a provision for income tax for
the year then ended of N86.75million is required.
vii. During the year, the company issued twenty million shares at a premium of
10kobo per share. The conversion rate for the loan note is N100 loan notes
for three ordinary shares of 50kobo. The current market price per share is
N2.54.
At the Christmas party organised by the company, the chairman of the

company Alhaji Burka reminded the accountant on the need to present IFRS
compliant Financial Statements at the forthcoming AGM fixed for March
2013.
66
PATHFINDER
a. Prepare the Statement of Profit or Loss and Other Comprehensive Income for
the year ended 31 December 2012. (4 Marks)
b. Prepare the Statement of Changes in Equity for the same period. (4 Marks)
c. Explain the term financial assets and state the FOUR classes of financial
assets identified in IFRS 9 and how each is valued or measured. (3 Marks)
d. Calculate the following ratios
(i) Basic Earnings per share

(ii) Diluted or Adjusted Earnings per share
(iii) P/E ratio (2 Marks)
e. What is biological assets? State any THREE conditions to be met before a

biological asset or agricultural produce can be recognised in the books of
accounts. (2
Marks)
(Total 15 Marks)
67
PATHFINDER
Q15. 30% (N42m N30m) = N3.6m
Q17. N100,000 + N25,000 x 6 = N250,000
Q18. (2500 units x N500) + (2,000 x N800)

N2,850,000
Q19. N300,000 + N60,000 + N40,000

N400,000
Q20 N50,000 + N10,000 + N8,000 + N5,000

N73,000
EXAMINERS REPORT
The questions cover all sections of the syllabus and candidates performance was
below average. Candidates commonest pitfall was their inability to correctly
answer computational questions.
Candidates are advised to ensure that they pay more attention to accounting
principles which are applied in accounting computations.
SOLUTIONS TO SECTION B
QUESTION 1
CASE STUDY
a. Burka-Bala Plc
Statement of Profit or Loss and Other Comprehensive Income for the year
ended 31 December 2012.
Notes N000
Revenue (wi) 851,400
Cost of sales (wii) (495,532)
Distribution cost (31,950)
Administrative expenses (wiii) (79,100)
Profit from operations 244,818
Investment income 18,250
Finance cost (1,020)
79
PATHFINDER
Fair value loss on financial instrument
(40,500 39,700) (800)
Profit before tax 261,248
Income tax expenses (86,750)
Other comprehensive income:
Fair value gain on leasehold property 12,333
Total comprehensive income for the year N186,831
Working Notes:
i. Revenue N855,000 N3,600 value of returnable goods = N851,400
ii. Cost of sales: Opening inventory 85,075

Purchases 503,600
Depreciation Plant & Equip (0.15 of N98,800 N28,800) 10,500
Amortization leased property (N3,833 + N4/208 of N99,000) 5,237
Closing inventory (N106,000 + 0.8 of N3,600) (note iv) (108,880)
N495,532
iii. Admin expenses: N10,400 less N25,300 dividend = N79,1000

Dividend = N115,00 x 2 x N2.2 x N0.05
N
iv. Closing inventory: As per question 106,000
Sales return at cost (80% of 3,600) 2,880
108,880
b. Statement of changes in Equity for the year ended 31 December 2012
Share Share Revaluation Retained Total
Capital Premium Surplus Earnings
N000 N000 N000 N000 N000
Balance as at 1/1/2012 105,000 6,400 - 55,600 167,000
Issue of shares 10,000 2,000 - - 12,000
Profit for the year - - - 174,498 174,498
Fair value gain - - 12,333 - 12,333
Realised during the year - - (237) 237 -
Dividend paid - - - (25,300) (25,300)
Balance 31/12/2012 115,000 8,400 12,096 205,035 340,531
i. Revaluation of leased property N000 N000

Cost as at 1/1/2012 125,000
Accumulated depreciation as at 1/1/2012 35,000
For the eight months to 1/9/2012:
80
PATHFINDER
8/12 of 125,000 25 years 3,333 38,333

86,667
Value of leased property 99,000
(12,333)
c (i) A financial asset is any asset that is cash, an equity instrument of another
entity or a contractual right to receive cash or another financial asset from
another entity; or to exchange financial assets or financial liabilities with
another entity under conditions that are potentially favourable to the entity.
(ii) The classes of financial assess and how each is valued are as follows:
Classification Measurement
Financial assets at fair value through Fair value through income

profit or loss statement
Held-to-maturity investments Amortised cost
Loans and receivables Amortised cost
Available-for-sale Fair value through other
comprehensive income
d. i. Basic Earnings per share:

EPS = Profit for the year x 100
No of ordinary shares issued 1
= N174,498,000 x 100 = 75.87 kobo

230,000,000 shares 1
ii. Diluted Earnings per share:

Conversion of loan note = N10,000,000 x 3shares = 300,000
Shares
100
EPS = N174,498,000 + Interest of N600,000 x 100

230,000,000 + 300,000 shares = 76 kobo
iii. P/E ratio = Market Price Per Share

EPS
= N2.54 = 3.35 Times
N0.7587
81
PATHFINDER
e (i) Biological Asset is defined as a living animal or plant. Entities are required
to recognise biological assets or agricultural produce when and only when,
all of the following conditions are met:
e (ii) The entity controls the asset as a result of past events;
It is probable that future economic benefits associated with the asset

will flow to the entity; and
The fair value or cost of the asset can be measured reliably.
EXAMINERS REPORT
The question tests candidates ability to prepare IFRS compliant Financial

Statements. It also tests candidates knowledge of financial assets and its
classification and measurement as well as accounting ratios and biological
assets.
Majority of the candidates attempted the question and performance was

poor. Candidates commonest pitfalls are:
Poor presentation of Financial Statement

Inability to treat items as required by IFRS recommendation
Inability of candidates to correctly define biological and financial
assets
Candidates are advised to study properly the newly introduced IFRS

requirements, and also ensure that they cover the syllabus adequately for
better performance in future.
QUESTION 2
(a) RECEIVERS RECEIPTS AND PAYMENTS ACCOUNTS

Receipts N000 Payments N000
Surplus on fixed assets 7,500 Receivers Expenses 9,250
(N22,500 N15,000) Receivers Remuneration 16,920
Remaining Plant and Machinery 246,500 Pref. Creditors (W.I.) 80,100
10% Loan Notes 120,000
Accrued Loan Notes
Interest
to 31 March 2011 6,000
Accrued loan int. ( w2) 5,000
82

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pay for the goods rather than when they have been fitted.

Discuss whether or not the above represents a change of accounting policy,

The financial statements at the year-end are presented below:

PROFESSIONAL EXAMINATION NOVEMBER 2014

Statement of Financial Position as at 31 December

1 The movement on the revaluation reserve relates to property, plant and

2 The movement on other reserves relates to the gains on the investments

3 The bonds are repayable on 1 July, 2015.

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(a) The following is the statement of financial position of Lagos Plc as at

2013 2012 2011

PROFESSIONAL EXAMINATION NOVEMBER 2014

The following information was also available as at the year end.

Using relevant computations, advise the management of Lagos Plc on the

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Critics of traditional corporate financial reporting under Generally Acceptable

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If there is a change in accounting policy, the new accounting policy should be

Conclusively, changes in accounting procedures resulting from circumstances

This three-part question tests candidates understanding of principles and practices

Candidates are advised to understand the requirements of questions being attempted

(a) Computation of Key Ratios for the Loan Covenants

Year 2013 Year 2012 Target

= 32.7% 40.73% 50%

(ii) Interest Cover : =

= 9.8 times 11.9 times

PROFESSIONAL EXAMINATION NOVEMBER 2014

(iii) Current Ratio : =

= 1.45:1 1.90:1 1.5:1

(iv) Quick Ratio: =

= 0.71 :1 1.13:1 1.1:1

Other ratios Necessary for the performance Review are:

(vi) GROSS PROFIT % = =

(vii) PROFIT MARGIN =

(b) Report on Prochain Plc.

PROFESSIONAL EXAMINATION NOVEMBER 2014

However, the profit margin dropped by 3.6%, while distribution and

Financial Position: (based on the key ratios for Loan Covenants)

(iv) Interest Cover

The interest is 6% on the bond, a funding with a significantly higher

(v) Current and Quick Ratio

PROFESSIONAL EXAMINATION NOVEMBER 2014

This working capital problem may be an issue to be given further

Cash held decreased from a positive balance of N120,000,000 to an

The company should consider the option of selling investments which

The question examines the computation, interpretation and application of ratios.

Majority of the candidates attempted the question. Candidates performance on ratio

(a) LAGOS PLC

Computation of Deferred Tax Asset/Liability

DR Deferred Tax (in SOFP)

Advice to Management of Lagos Plc.

PROFESSIONAL EXAMINATION NOVEMBER 2014

The required treatment therefore is to debit (DR) deferred tax assets

(b) BAM PLC ACQUIRED MENGO LIMITED.

Calculation of Deferred Tax on Fair Value Adjustment

Fair value Adjustment (subject to deferred tax) 120

Deferred Tax Liability (30% x 120) 36

Goodwill on initial recognition = purchase consideration fair value of Net Asset

Final Goodwill recognized = N(60036)m = N564m.

PROFESSIONAL EXAMINATION NOVEMBER 2014

(a) State FOUR advantages of cash flow accounting. (4 Marks)

Total equity and liabilities 713 735

Dividend paid was N33million.

(b) Ratio analysis;