Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th

ting, Instructor's Manual, 8th edition

PART 1: Introduction to Financial Reporting CHAPTER 3: Presentation of Financial Statements

Chapter 3 (c)
Chilwell Ltd
Presentation of financial statements Statement of financial position as at 31 October 2022
*3.7 Chilwell Ltd prepares financial statements to 31 October each year. The company's trial 5. The cost of inventory at 31 October 2022 is £92,280. £ £
balance at 31 October 2022 is as follows: 6. Trade receivables include bad debts of £2,000 which should be written off. The Assets
£ £ 3.7
allowance for doubtful receivables should then be adjusted to 2% of the remaining Non-current assets
Land at valuation 250,000 trade receivables. (a) Property, plant and equipment (W4) 565,550
Buildings at cost 300,000 Current assets
7. The company's tax liability for the year to 31 October 2021 was underestimated by Chilwell Ltd
Equipment and motor vehicles at cost 197,400 Statement of comprehensive income for the year to 31 October 2022 Inventories 92,280
£8,400. The liability for the year to 31 October 2022 is estimated to be £20,000 and
Allowances for depreciation at 1 November 2021:
falls due on 1 August 2023. Trade receivables (£69,500 ´ 98%) 68,110 160,390
Buildings 60,000 £ ———- ———-
8. The loan stock was issued on 1 January 2022. Interest is payable half-yearly on 30 Sales revenue (£1,025,420 - £27,110) 998,310 Total assets 725,940
Equipment and motor vehicles 105,750 ———-
June and 31 December. The interest due on 30 June 2022 was paid on the due date. Cost of sales (W1) 465,900
Disposal of vehicle 18,000 ———- Equity
Inventory at 1 November 2021 87,520 Accrued interest at 31 October 2022 has not yet been accounted for. Gross profit 532,410 Share capital 120,000
Trade receivables and payables 71,500 103,290 9. Directors' fees are to be treated as administrative expenses. Wages and salaries Distribution costs (W2) 173,610 Other reserves 105,000
Allowance for doubtful receivables at 1 November 2021 1,520 should be split 50:50 between administrative expenses and distribution costs. Administrative expenses (W3) 259,250 432,860 Retained earnings 243,660 468,660
Bank balance 10,390 ———- ———- ———-
10. A 1 for 2 bonus issue of ordinary shares was made on 1 July 2022, financed out of 99,550 Liabilities
Taxation 8,400 retained earnings. No entries have yet been made in relation to this issue. Other operating income 10,270 Non-current liabilities
9% Loan stock (repayable 2026) 120,000 ———-
Required: Long-term borrowings 120,000
Purchases and sales 483,230 1,025,420 Profit from operations 109,820
Current liabilities
Returns inwards and outwards 27,110 12,570 Prepare the following financial statements for Chilwell Ltd in accordance with the require- Finance costs (£6,220 + £3,600) 9,820
———- Trade and other payables (£103,290 + £3,600) 106,890
Directors' fees 50,000 ments of international standard IAS1:
Profit before taxation 100,000 Bank overdraft 10,390
Wages and salaries 102,400
(a) a statement of comprehensive income for the year to 31 October 2022 Taxation expense (£20,000 + £8,400) 28,400 Current tax payable 20,000 137,280
General administrative expenses 143,440 ———- ———- ———-
General distribution costs 107,050 (b) a statement of changes in equity for the year to 31 October 2022 Profit for the year 71,600 Total equity and liabilities 725,940
———-
Royalties received 10,270 (c) a statement of financial position as at 31 October 2022. Other comprehensive income for the year:
Interest paid 6,220 Items that will not be reclassified to profit or loss:
Formal notes to the accounts are not required, but all workings should be shown.
Dividends paid 35,000 Gain on revaluation of land 30,000
Ordinary shares of £1 80,000 (CIPFA) ———-
Revaluation reserve 75,000 Total comprehensive income for the year 101,600
———-
Retained earnings at 1 November 2021 247,060
–––––––– –––––––– (b)
1,869,270 1,869,270 Please note that further exercises on the preparation of a company's financial statements may be found Chilwell Ltd
–––––––– –––––––– at the end of Chapter 15 (Exercises 15.8 and 15.9). However, these additional exercises involve many Statement of changes in equity for the year to 31 October 2022
The following information is also available:
of the international standards which are explained in Chapters 4 to 15 inclusive and so should not be Share Revaluation Retained Total
1. Land is non-depreciable and is to be revalued at £280,000 on 31 October 2022. attempted until those chapters have been studied. capital reserve earnings equity
2. The buildings were acquired on 1 November 2011. At that time, their useful life was £ £ £ £
estimated to be 50 years and it was decided to adopt the straight-line method of Balance at 1 November 2021 80,000 75,000 247,060 402,060
depreciation, assuming no residual value. On 1 November 2021, it was determined Total comprehensive income 30,000 71,600 101,600
that the useful life of the buildings would end on 31 October 2051. The estimate of Dividend paid (35,000) (35,000)
residual value remains unchanged. Bonus issue 40,000 (40,000)
———- ———- ———- ———-
3. Equipment and vehicles are depreciated at 25% per annum on the reducing balance Balance at 31 October 2022 120,000 105,000 243,660 468,660
basis. A full year's depreciation is charged in the year of acquisition but no ———- ———- ———- ———-
depreciation is charged in the year of disposal. In June 2022, a distribution vehicle
which had cost £64,000 in February 2018 was sold for £18,000. This amount was
debited to the bank account and was credited to a disposal account, but no further
entries have yet been made with regard to this disposal.
4. Depreciation of the buildings should be split 70:30 between administrative expenses
and distribution costs. Depreciation of the equipment and vehicles should be split
40:60 between administrative expenses and distribution costs.

66 67 5 6
© 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.

Melville: International Financial Reporting, Instructor's Manual, 8th edition

Melville: International Financial Reporting, Instructor's Manual, 8th edition
CHAPTER 16: Statement of Cash Flows PART 2: Financial Reporting in Practice
Workings
W1 Cost of sales £ Chapter 16
Opening inventory 87,520
Purchases 483,230 *16.8 The statement of financial position of Aadvaark Trading Ltd at 30 November 2023 (with (v) There is no tax liability for the year to 30 November 2023. The tax liability for the Statement of cash flows
Returns outwards (12,570) comparatives for 2022) is as follows: year to 30 November 2022 was underestimated by £20,000.
Closing inventory (92,280) Statement of financial position at 30 November 2023 (vi) No dividends were paid or proposed in either year. 16.8
———-
465,900 2023 2022 (vii) The short-term investments were sold for £150,000 in June 2023. These investments Statement of cash flows for the year to 30 November 2023
———- ranked as cash equivalents as defined by IAS7.
£000 £000 £000 £000 £000 £000
W2 Distribution costs £ Assets Required: Cash flows from operating activities
Per trial balance 107,050 Non-current assets Loss before taxation (480 + 20 – 800) (300)
Wages and salaries (50%) 51,200 Prepare a statement of cash flows for Aadvaark Trading Ltd for the year to 30 November
Property, plant and equipment at cost Depreciation (850 – 630 + 80) 300
Buildings depreciation (W4) (30%) 2,400 2023, in accordance with the requirements of accounting standard IAS7 and using the
or valuation 2,470 1,790 Loss on disposal of plant and equipment (40 – 30) 10
Equip't depreciation (W4) (60%) 10,710 indirect method. (CIPFA)
Less: Accumulated depreciation 850 1,620 630 1,160 Profit on disposal of investments (20)
Loss on disposal (W4) 2,250 ––––– –––– Interest expense 70
———- Investments at cost 50 100
173,610 ––––– ––––– Increase in inventories (740 – 510) (230)
———- 1,670 1,260 Increase in trade receivables (1,010 – 640) (370)
Current assets Increase in trade payables (660 – 530) 130
W3 Administrative expenses £ ––––
Per trial balance 143,440 Inventories 740 510 Cash generated from operations (410)
Directors' fees 50,000 Trade receivables 1,010 640 Interest paid (70)
Wages and salaries (50%) 51,200 Short-term investments - 150 Taxation paid (110 + 20) (130) (200)
Buildings depreciation (W4) (70%) 5,600 –––– ––––
Bank balance - 1,750 180 1,480
––––– ––––– Net cash outflow from operating activities (610)
Equip't depreciation (W4) (40%) 7,140 ––––– –––––
Bad debts 2,000 3,420 2,740 Cash flows from investing activities
Reduction in allowance for receivables: ––––– –––––
Acquisition of plant and equipment
(2% ´ £69,500) - £1,520 (130) Equity
(2,470 – 1,790 + 120 – 250) (550)
———- Share capital 500 400
259,250 Disposal of plant and equipment 30
———- Share premium account 140 100 Disposal of investments 70
Revaluation reserve 550 300 ––––
W4 Property, plant and equipment £ £ £ Net cash outflow from investing activities (450)
Retained earnings 480 800
Land at valuation 280,000 ––––– –––––
Buildings at cost 300,000 1,670 1,600 Cash flows from financing activities
Depreciation to 31/10/2021 60,000 Liabilities Proceeds of share issue 140
Depreciation for year (£240,000 ÷ 30) 8,000 68,000 232,000 Non-current liabilities Increase in long-term loans 400
———- ———- Long-term loans 900 500 ––––
Equipment at cost (£197,400 - £64,000) 133,400 Net cash inflow from financing activities 540
Current liabilities ––––
Depreciation to 31/10/2021 (£105,750 - £43,750) 62,000 Trade payables 660 530 Net decrease in cash and cash equivalents (520)
Depreciation for year (25% ´ £71,400) 17,850 79,850 53,550 Current tax payable - 110 Cash and cash equivalents at 1 December 2022 330
———- ———- ———- ––––
565,550 Bank overdraft 190 850 - 640 Cash and cash equivalents at 30 November 2023 (190)
———- ––––– ––––– ––––
––––– –––––
Notes re sold vehicle: 3,420 2,740
––––– –––––
(i) WDV of sold vehicle was £64,000 ´ 75% ´ 75% ´ 75% ´ 75% = £20,250. The following information is also available:
(ii) Accumulated depreciation was £43,750 (£64,000 - £20,250).
(iii) The loss on disposal was £2,250 (£20,250 - £18,000). (i) Freehold property which had been valued at £500,000 on 30 November 2022 was
revalued at £750,000 on 30 November 2023.
(ii) Plant and equipment with an original cost of £120,000 and accumulated depreciation
of £80,000 was sold in February 2023 for £30,000.
(iii) One half of the non-current asset investments were sold for £70,000 in June 2023.
Dividends received during the year to 30 November 2023 were £nil.
(iv) Interest expense (and interest paid) for the year was £70,000.

34
7 279 © 2022 Pearson Education Limited. All Rights Reserved.
© 2022 Pearson Education Limited. All Rights Reserved.

Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition
PART 2: Financial Reporting in Practice CHAPTER 16: Statement of Cash Flows
16.9 W2 Calculation of purchases £000
Cost of sales 25,051
Statement of cash flows for the year ended 31 May 2024 Closing inventory 412
Statement of profit or loss for the year to 31 May 2024
Cash flows from operating activities £000 £000 Opening inventory (389)
£000 Cash receipts from customers (W1) 43,290 ––––––
Revenue 43,381 Cash paid to suppliers and employees (W7) (36,530) Purchases 25,074
–––––– ––––––
Cost of sales (25,051)
––––––– Cash generated from operations 6,760 W3 Cash payments to suppliers £000
Gross profit 18,330 Interest paid (812) Opening trade payables 310
Operating expenses (15,834) Income taxes paid (W8) (261) Purchases (W2) 25,074
––––––– ––––––
Net cash inflow from operating activities 5,687 Closing trade payables (410)
Operating profit 2,496 ––––––
Interest expense (812) Cash paid to suppliers 24,974
––––––– Cash flows from investing activities ––––––
Profit before tax 1,684 Purchase of non-current assets (W6) (23,914) W4 Calculation of depreciation £000
Taxation expense (279) Proceeds from sales of plant and machinery 45 Increase in accumulated depreciation 3,991
*16.9 The following draft financial statements are available for Sipfalor plc for the year ended ––––––– ––––––
Net cash outflow from investing activities (23,869) Withdrawn on disposals 276
31 May 2024: Profit for the year 1,405 ––––––
––––––– Depreciation charge for the year 4,267
Statement of financial position at 31 May 2024 Note: Cash flows from financing activities ––––––
2024 2023 Sipfalor plc presents a separate statement of profit or loss for the year (as above) and a Proceeds from issue of share capital 19,000 W5 Profit or loss on disposal of non-current assets £000
£000 £000 £000 £000 separate statement of comprehensive income. Issue of long-term borrowings 2,500 Carrying amount 56
Assets Dividends paid (680) Proceeds 45
The following additional information for the year ended 31 May 2024 is available: –––––– ––––––
Non-current assets at cost or valuation 81,536 57,754 Net cash inflow from financing activities 20,820 Loss on disposal (11)
Less: Accumulated depreciation 16,678 12,687 1) Dividends paid during the year were £680,000. –––––– ––––––
–––––– –––––– Net increase in cash and cash equivalents 2,638
64,858 45,067 2) Non-current assets which had cost £332,000 and which had a carrying value of Cash and cash equivalents at 1 June 2023 64 W6 Purchases of non current assets £000
Current assets £56,000 were sold for £45,000. Any surpluses or deficits on the disposal of non- –––––– Increase in cost or valuation 23,782
current assets have been included in the depreciation charge for the year. Other Cash and cash equivalents at 31 May 2024 2,702 Withdrawn on disposal 332
Inventory 412 389 ––––––
movements in the company's non-current assets are due to purchases of new assets Revaluation surplus (200)
Trade receivables 559 468 Note: ––––––
Other current assets 3 2 and revaluations. Purchases of non-current assets 23,914
Although the question asks only for the direct method, the cash generated from operations could also be ––––––
Cash and cash equivalents 2,702 3,676 64 923 3) "Other current assets" consists of prepaid insurance. "Other payables" consists of
––––– –––––– ––––– –––––– calculated by the indirect method. The calculation is as follows: W7 Cash paid to suppliers and employees £000
accrued wages and salaries.
Total assets 68,534 45,990 £000 Cash payments to suppliers (W3) 24,974
–––––– –––––– Required: Profit before tax 1,684
Equity Operating expenses 15,834
Depreciation (W4) 4,267 ––––––
Issued share capital 35,000 20,000 Prepare a statement of cash flows for Sipfalor plc for the year ended 31 May 2024 in 40,808
Loss on disposal of non-current assets (W5) 11
Share premium 5,500 1,500 accordance with IAS7 Statement of Cash Flows using the direct method. Additional notes Increase in inventories (412 – 389) (23) Accrued at start of year 4
Revaluation reserve 1,000 800 are not required. Ignore VAT. Increase in trade receivables (559 – 468) (91) Accrued at the end of the year (5)
Retained earnings 18,422 17,697 (CIPFA) Increase in prepayments (3 – 2) (1) Prepaid at the start of the year (2)
–––––– –––––– Prepaid at the end of the year 3
Increase in trade payables (410 – 310) 100 ––––––
59,922 39,997 Please note that the monetary amounts in this question were not originally rounded to the Increase in accruals (5 – 4) 1 40,808
Liabilities nearest £000. For instance, revenue for the year was stated to be £43,380,756 and cost of Interest expense 812 Exclude depreciation (W4) (4,267)
Non-current liabilities sales was £25,050,812. However, these amounts have now been rounded so as to make ––––––
Loan stocks 7,500 5,000 Cash generated from operations 6,760 Exclude loss on disposal of non current assets (W5) (11)
the calculations more manageable. –––––– ––––––
Deferred tax 360 7,860 289 5,289 Cash paid to suppliers and employees 36,530
––––– ––––– ––––––
Current liabilities Workings
W8 Taxation paid £000
Trade payables 410 310 W1 Cash received from customers £000 Liability at start of year 390
Other payables 5 4 Opening trade receivables 468 Taxation expense for the year 279
Current tax payable 337 752 390 704 Sales 43,381 Transferred to deferred taxation (71)
––––– –––––– ––––– –––––– Closing trade receivables (559)
Total equity and liabilities 68,534 45,990 –––––– Liability at end of year (337)
––––––
–––––– –––––– Cash received from customers 43,290
–––––– Paid during the year 261
––––––

35 36
280 281 © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.

Melville: International Financial Reporting, Instructor's Manual, 8th edition

PART 2: Financial Reporting in Practice CHAPTER 16: Statement of Cash Flows PART 2: Financial Reporting in Practice
16.10
Statement of cash flows for the year to 30 September 2023
*16.10 The following information relates to the draft financial statements of Mocha: Summarised statements of comprehensive income for the years to 30 September (3) Share issues:
£000 £000
Summarised statements of financial position as at 30 September 2023 2022 On 1 April 2023, there was a bonus issue of shares that was funded from the share Cash flows from operating activities
£000 £000 premium account and some of the revaluation reserve. This was followed on 30 April Profit before taxation 3,900
2023 2022 2023 by an issue of shares for cash at par.
Revenue 58,500 41,000 Depreciation expense 2,500
£000 £000 £000 £000 Profit on disposal of property (8,100 – 4,000) (4,100)
Assets Cost of sales (46,500) (30,000)
–––––– –––––– (4) Provision for product warranties: Decrease in provision for warranties (4,000 – 1,600) (2,400)
Non-current assets Gross profit 12,000 11,000 Investment income (1,100)
The movement in the product warranty provision has been included in the cost of
Property, plant and equipment (1) 32,600 24,100 Operating expenses (8,700) (4,500) Finance costs 500
sales figure in the statement of comprehensive income.
Equity investments (2) 4,500 7,000 –––––– –––––– Increase in inventories (10,200 – 7,200) (3,000)
–––––– –––––– Operating profit 3,300 6,500
Required: Decrease in trade receivables (3,500 – 3,700) 200
37,100 31,100 Investment income (2) 1,100 700 Decrease in trade payables (3,200 – 4,600) (1,400)
Current assets Finance costs (500) (400) Prepare a statement of cash flows for Mocha for the year to 30 September 2023, in –––––
Inventory 10,200 7,200 –––––– –––––– accordance with the requirements of IAS7 Statement of Cash Flows and using the indirect Cash generated from operations (4,900)
Trade receivables 3,500 3,700 Profit before tax 3,900 6,800 method. Interest paid (500)
Bank nil 13,700 1,400 12,300 Taxation expense (1,000) (1,800) (ACCA) Taxation paid (W1) (800) (1,300)
––––– –––––– ––––– –––––– –––––– –––––– ––––– –––––
Total assets 50,800 43,400 Profit for the year 2,900 5,000 Net cash outflow from operating activities (6,200)
–––––– –––––– –––––– ––––––
Equity Cash flows from investing activities
Ordinary shares of £1 each (3) 14,000 8,000 The following additional information is available: Acquisition of property, plant and equipment (8,300)
Share premium (3) nil 2,000 Disposal of property, plant and equipment 8,100
(1) Property, plant and equipment:
Revaluation reserve (3) 2,000 3,600 Disposal of investments 3,400
Retained earnings 13,000 10,100 Cost Accumulated Carrying Dividends received 200
–––––– –––––– depreciation amount –––––
29,000 23,700 £000 £000 £000 Net cash inflow from investing activities 3,400
Liabilities As at 30 September 2022 33,600 (9,500) 24,100 Cash flows from financing activities
Non-current liabilities New right-of-use assets 6,700 6,700 Proceeds of share issue (W2) 2,400
Lease liabilities 7,000 6,900 Purchase of new plant 8,300 8,300 Repayment of lease liabilities (W3) (3,900)
Deferred tax 1,300 8,300 900 7,800 Disposal of property (5,000) 1,000 (4,000) –––––
––––– ––––– Net cash outflow from financing activities (1,500)
Current liabilities Depreciation expense for the year (2,500) (2,500) –––––
–––––– –––––– –––––– Net decrease in cash and cash equivalents (4,300)
Taxation 1,000 1,200 As at 30 September 2023 43,600 (11,000) 32,600
Bank overdraft 2,900 nil –––––– –––––– –––––– Cash and cash equivalents at 1 October 2022 1,400
–––––
Provision for product warranties (4) 1,600 4,000 The property disposed of was sold for £8.1 million. Cash and cash equivalents at 30 September 2023 (2,900)
Lease liabilities 4,800 2,100 –––––
Trade payables 3,200 13,500 4,600 11,900 (2) Investments and investment income:
––––– –––––– ––––– –––––– Tutorial notes:
Total equity and liabilities 50,800 43,400 During the year an investment that had a carrying amount of £3 million was sold for
–––––– –––––– (a) Equity investments were £7m at the start of the year. Investments with a carrying amount of £3m
£3.4 million. No investments were purchased during the year.
were sold and there was an increase in fair value of £0.5m. This leaves a balance of £4.5m, which
The numerals which are shown in bold type and in parentheses after some of the line items Investment income consists of: agrees with the investments figure in the statement of financial position at 30 September 2023.
refer to the additional information notes which follow the financial statements. 2023 2022
(b) Profit for the year is £2.9m and this is equal to the increase in the retained earnings figure. Therefore
£000 £000
the company did not pay any dividends during the year.
Dividends received 200 250
Profit on sale of investment 400 nil (c) Workings are shown on the next page.
Increases in fair value 500 450
–––––– ––––––
1,100 700
–––––– ––––––

37
282 283 284 © 2022 Pearson Education Limited. All Rights Reserved.
 Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition

CHAPTER 18: Groups of Companies (1)

Workings W1. Goodwill
Chapter 18 £000 £000
W1 Taxation £000
Current tax liability at start of year 1,200 *18.6 The statements of financial position of CC Ltd and its two subsidiaries DD Ltd and HH Groups of companies (1) DD Ltd
Price paid by parent 600
Taxation expense for the year 1,000 Ltd as at 31 December 2022 are as follows:
Transferred to deferred taxation (400) Subsidiary's share capital at 1 January 2021 500
CC Ltd DD Ltd HH Ltd 18.6 Subsidiary's retained earnings at 1 January 2021 280
Liability at end of year (1,000)
–––––– £000 £000 £000 Group statement of financial position as at 31 December 2022 Fair value adjustment 30
Paid during the year 800 Assets Non- –––
––––––
current assets £000 £000 60% ´ 810 486
––– –––
W2 Share issues £000 Property and equipment 4,761 521 411 Assets
Goodwill at 1 January 2021 114
Share capital at start of year 8,000 Investment in DD Ltd 600 Non-current assets
Less: Impairment (50%) 57
Bonus issue (2,000 + (3,600 – 2,000)) 3,600 Investment in HH Ltd 575 Property and equipment (4,761 + 521 + 411 + 30) 5,723 –––
Shares issued at par (balancing figure) 2,400 ––––– Goodwill (W1) 90 Goodwill at 31 December 2022 57
–––––– 5,936 ––––– –––
Share capital at end of year 14,000 5,813 HH Ltd
–––––– Current assets
Current assets Price paid by parent 575
Inventories Trade 1,532 222 187
W3 Lease liabilities £000 Inventories (1,532 + 222 + 187 – 3) 1,938 Subsidiary's share capital at 1 January 2022 300
receivables Cash at 1,947 258 202
Liabilities at start of year (6,900 + 2,100) 9,000 Trade receivables (1,947 + 258 + 202 – 48) 2,359 Subsidiary's retained earnings at 1 January 2022 230
bank 239 3,718 30 510 13 402 Cash at bank (239 + 30 + 13) 282 4,579
New right-of-use assets acquired 6,700 ––––– ––––– ––––– ––––– ––––– ––––– ––––– ––––– Subsidiary's revaluation reserve at 1 January 2022 60
Repayments (balancing figure) (3,900) 9,654 1,031 813 –––
–––––– ––––– ––––– ––––– 10,392 90% ´ 590 531
––––– ––– –––
Liabilities at end of year (7,000 + 4,800) 11,800 Equity Equity
–––––– Goodwill at 1 January 2022 44
Ordinary share capital 5,000 500 300 Ordinary share capital 5,000 Less: Impairment (25%) 11
Interest will also have been paid in relation to leases, but this cash outflow is already accounted for within Revaluation reserve 2,500 - 100 Revaluation reserve (W3) 2,536 –––
the figure for interest paid shown under operating activities. Retained earnings 547 320 250 Retained earnings (W2) 518 Goodwill at 31 December 2022 33
––––– ––––– ––––– ––––– –––
8,047 820 650 8,054 Total goodwill at 31 December 2022 (57 + 33) 90
–––
Liabilities Non-controlling interest (W4) 405
Current liabilities ––––– W2. Group retained earnings
8,459 £000 £000
Trade payables 1,607 211 163
––––– ––––– ––––– Liabilities Parent's retained earnings at 31 December 2022 547
9,654 1,031 813 Current liabilities
––––– ––––– ––––– DD Ltd
Trade payables (1,607 + 211 + 163 – 48) 1,933
––––– Subsidiary's retained earnings at 31 December 2022 320
The following information is available: 10,392 Less: Subsidiary's retained earnings at 1 January 2021 280
––––– –––
(a) CC Ltd acquired 60% of the shares of DD Ltd on 1 January 2021, when DD Ltd had Notes: 60% ´ 40 24
retained earnings of £280,000. The fair value of the property and equipment of DD –––
Ltd on that date was £30,000 more than book value. This valuation has not been (i) The goods invoiced to DD Ltd for £8,000 must have cost CC Ltd £5,000 (£8,000 ´ 100/160). So the HH Ltd
reflected in the books of DD Ltd. unrealised profit is £3,000. Subsidiary's retained earnings at 31 December 2022 250
(ii) A total of £48,000 of intra-group debts (£15,000 + £25,000 + £8,000) must be subtracted from trade Less: Subsidiary's retained earnings at 1 January 2022 230
(b) CC Ltd acquired 90% of the shares of HH Ltd on 1 January 2022, when HH Ltd had –––
receivables and from trade payables. 90% ´ 20 18
a revaluation reserve of £60,000 and retained earnings of £230,000. The fair value –––
of HH Ltd's assets and liabilities on that date was equal to their book value. (iii) Workings W1 to W4 are given below.
Less: Goodwill impairment (57 + 11) (68)
(c) Neither DD Ltd nor HH Ltd have issued any shares since being acquired by CC Ltd. Less: Unrealised profit on inventories (3)
–––
(d) Goodwill arising on consolidation in relation to DD Ltd has suffered an impairment Group retained earnings at 31 December 2022 518
loss of 50% since the date of acquisition. The impairment loss for HH Ltd is 25%. –––
(e) The following intra-group balances exist on 31 December 2022:
- DD Ltd owes CC Ltd £15,000
- HH Ltd owes CC Ltd £25,000
- HH Ltd owes DD Ltd £8,000.
All of these balances are included in trade receivables and payables.
(f) Goods purchased for £8,000 from CC Ltd are included in DD Ltd's inventory at 31
December 2022. CC Ltd had invoiced these goods to DD Ltd at cost plus 60%.
(g) Any depreciation consequences of the fair value adjustment relating to the property
38 325 40 41
and equipment of DD Ltd may be ignored.
© 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.
Required:
Prepare a consolidated statement of financial position as at 31 December 2022.

*18.7 The following are the statements of financial position of two companies at 31 October
2023, the end of their most recent financial years:
Melville: International Financial Reporting, Instructor's Manual, 8th edition Multa plc Tuli plc Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition
£m £m
W3. Group revaluation reserve Assets Non- 18.7 W1. Goodwill
£000 £000 current assets £m £m
Parent's revaluation reserve at 31 December 2022 2,500 Property, plant and equipment 425 288 Group statement of financial position as at 31 October 2023 Price paid by parent 120
HH Ltd revaluation reserve at 31 December 2022 100 Investments, at cost 147 13 £m £m Subsidiary's ordinary share capital at 1 November 2021 150
––– –––
Less: HH Ltd revaluation reserve at 1 January 2022 60 Assets Subsidiary's retained earnings at 1 November 2021 30
––– 572 301 –––
––– ––– Non-current assets
90% ´ 40 36 Current assets Property and equipment (425 + 288) 713 60% ´ 180 108
––– ––––– ––– –––
Group revaluation reserve at 31 December 2022 2,536 Inventories 88 73 Goodwill (W1) 9 Goodwill at 1 November 2021 12
––––– Trade receivables 147 106 Investments (147 – 120 + 13) 40 Less: Impairment 3
–––– –––
W4. Non-controlling interest Other current assets 37 22 762
Cash and cash equivalents 36 15 Goodwill at 31 October 2023 9
£000 £000 Current assets –––
DD Ltd ––– –––
308 216 Inventories (88 + 73 – 2) 159 W2. Group retained earnings
Subsidiary's share capital at 31 December 2022 500 ––– ––– Trade receivables (147 + 106 – 18) 235 £m £m
Subsidiary's retained earnings at 31 December 2022 320 Total assets 880 517 Other current assets (37 + 22) 59
––– ––– Parent's retained earnings at 31 October 2023 157
Fair value adjustment 30 Cash and cash equivalents (36 + 15) 51 504
––– –––– –––– Subsidiary's retained earnings at 31 October 2023 90
40% ´ 850 340 1,266 Less: Subsidiary's retained earnings at 1 November 2021 30
––– Equity –––– –––
HH Ltd Ordinary share capital (£1 shares) 300 150 Equity 60% ´ 60 36
Subsidiary's share capital at 31 December 2022 300 10% Preference share capital (£1 shares) - 45 –––
Ordinary share capital 300
Subsidiary's retained earnings at 31 December 2022 250 Retained earnings 157 90 Less: Goodwill impairment (3)
Retained earnings (W2) 188
Subsidiary's revaluation reserve at 31 December 2022 100 ––– ––– –––– Less: Unrealised profit on inventories (2)
––– 457 285 488 –––
10% ´ 650 65 ––– –––
Non-controlling interest (W3) 141 Group retained earnings at 31 October 2023 188
––– ––– Liabilities Non- –––– –––
Non-controlling interest at 31 December 2022 405 current liabilities 150 82 629
––– W3. Non-controlling interest
––– ––– Liabilities £m £m
Current liabilities Non-current liabilities (150 + 82) 232 Subsidiary's ordinary share capital at 31 October 2023 150
Trade payables 184 56 Current liabilities Subsidiary's retained earnings at 31 October 2023 90
Current tax payable 89 69 Trade payables (184 + 56 – 18) 222 –––
Bank overdraft - 25 Current tax payable (89 + 69) 158 40% ´ 240 96
––– ––– –––
273 150 Bank overdraft 25 405
–––– –––– Subsidiary's preference share capital at 31 October 2023 45
––– ––– –––
Total liabilities 423 232 1,266
–––– Non-controlling interest at 31 October 2023 141
––– ––– –––
Notes:
Total equity and liabilities 880 517
––– ––– (i) Tuli's ordinary share capital consists of 150m shares and Multa owns 90m of these shares. This is a
The following additional information is available: 60% holding.
(ii) The price of the goods sold by Multa to Tuli included a profit of £10m (40% ´ £25m). 20% of these
1) On 1 November 2021 Multa plc purchased 90,000,000 ordinary shares in Tuli plc
goods have not yet been sold so the unrealised profit is £2m (20% ´ £10m).
paying a total of £120,000,000. The reserves of Tuli plc on 1 November 2021 were
£30,000,000. It was agreed that all the assets and liabilities of Tuli plc were reported (iii) Intra-group debts of £18m must be subtracted from trade receivables and from trade payables.
in its financial statements at fair values as at 1 November 2021. Since then, the (iv) Workings W1 to W3 are given below.
directors of Multa plc feel that the amount paid for as goodwill upon the acquisition
has been impaired by £3,000,000.
2) During the year ended 31 October 2023 Multa plc sold inventory to Tuli plc for
£25,000,000. Multa plc earned a uniform margin of 40% on these sales. During the
year ended 31 October 2023 Tuli plc resold 80% of this inventory. On 31 October
2023 Tuli plc had unpaid invoices totalling £18,000,000 payable to Multa plc in
respect of these purchases.
3) Each ordinary share in Tuli plc carries one vote and there are no other voting rights
in the company. The company's preference shares (which are not redeemable) are
correctly classified as equity in accordance with international standards.
Required:
42 43 44
(a) Calculate the amount paid as goodwill on the acquisition of Tuli plc on 1 November
© 2022 Pearson Education Limited. All Rights Reserved. 2021. © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.

(b) Prepare with full supportive workings the consolidated statement of financial
position of Multa plc as at 31 October 2023.
(CIPFA)

Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition
CHAPTER 19: Groups of Companies (2) PART 3: Consolidated Financial Statements

Chapter 19 (c) Group statement of financial position as at 30 June 2023

£000 £000
*19.5 The financial statements of JJ Ltd and KK Ltd for the year to 30 June 2023 are shown Statements of changes in equity for the year to 30 June 2023 Groups of companies (2) Assets
below: Non-current assets
JJ Ltd KK Ltd Property, plant and equipment (5,961 + 2,667 + 600) 9,228
Statements of comprehensive income for the year to 30 June 2023 Share Retained Total Share Retained Total 19.5
Goodwill (W1) 180
capital earnings capital earnings (a) Group statement of comprehensive income for the year to 30 June 2023 ––––––
JJ Ltd KK Ltd 9,408
£000 £000 £000 £000 £000 £000
£000 £000 £000 Current assets
Balance b/f 7,000 1,549 8,549 2,500 92 2,592 Sales revenue (21,545 + 5,328 – 2,400) 24,473
Sales revenue 21,545 5,328 Inventories (2,215 + 852 – 192) 2,875
Profit for the year 3,650 3,650 916 916 Cost of sales (13,335 + 3,552 – 2,400 + 192) 14,679
Cost of sales 13,335 3,552 Trade receivables (1,823 + 629 – 216) 2,236
–––––– –––––– Dividends paid (1,800) (1,800) (500) (500) ––––––
–––– –––– –––– –––– –––– –––– Gross profit 9,794 Cash at bank (101 + 5) 106 5,217
Gross profit 8,210 1,776 ––––– ––––––
Balance c/f 7,000 3,399 10,399 2,500 508 3,008 Operating expenses (4,085 + 640 + 30) 4,755
Operating expenses 4,085 640 –––– –––– –––– –––– –––– –––– –––––– 14,625
–––––– –––––– ––––––
Profit before tax 5,039 Equity
Operating profit 4,125 1,136 The following information is also available:
Taxation expense (850 + 220) 1,070 Ordinary share capital 7,000
Dividends received from KK Ltd 375 - ––––––
–––––– –––––– 1. On 1 July 2019, JJ Ltd paid £3,153,000 to acquire 75% of the ordinary share capital Retained earnings (W2) 2,940
Profit for the year 3,969 ––––––
Profit before tax 4,500 1,136 of KK Ltd. On that date, the retained earnings of KK Ltd were £704,000. Attributable to the non-controlling interest 229
Taxation expense 850 220 –––––– 9,940
2. The fair value of the non-current assets of KK Ltd on 1 July 2019 exceeded their Non-controlling interest (W3) 902
–––––– –––––– Attributable to the group 3,740
Profit for the year 3,650 916 carrying amount by £600,000. This valuation has not been reflected in the books of –––––– ––––––
–––––– –––––– KK Ltd. 10,842
Notes: Liabilities
Statements of financial position as at 30 June 2023 3. KK Ltd has issued no shares since being acquired by JJ Ltd.
(i) The intragroup sales of £2,400,000 must be subtracted from group sales and from group cost of Current liabilities
4. Goodwill had suffered impairment losses of 30% by 30 June 2022 and there was a sales. There is unrealised profit of £192,000 (£512,000 ´ 60/160) which must be eliminated Trade payables (2,004 + 925 – 216) 2,713
JJ Ltd KK Ltd
further impairment loss during the year to 30 June 2023. This further impairment from inventories and added to cost of sales. Taxation (850 + 220) 1,070 3,783
£000 £000 ––––– ––––––
loss is equal to 10% of the amount originally paid for goodwill.
Assets (ii) Goodwill arising at acquisition was £300,000 (see Working 1). Impairment in the year to 30 14,625
Non-current assets 5. JJ Ltd sells goods to KK Ltd at cost plus 60%. In the year to 30 June 2023, these June 2023 is £30,000 (10% ´ £300,000). This has been included in operating expenses. ––––––
Property, plant and equipment 5,961 2,667 sales totalled £2,400,000, of which £216,000 was still owing to JJ Ltd at the end of (iii) Dividends of £375,000 (75% ´ £500,000) received by JJ Ltd from KK Ltd have been cancelled Workings:
Investment in KK Ltd 3,153 the year. The inventory of KK Ltd at 30 June 2023 includes goods bought from JJ out. The remaining £125,000 (£500,000 – £375,000) of dividends paid by KK Ltd were paid to
–––––– Ltd for £512,000. W1. Goodwill
the non-controlling interest. £000 £000
9,114 6. Any depreciation consequences of the fair value adjustment may be ignored. (iv) The profit of KK Ltd for the year to 30 June 2023 is £916,000. So the profit attributable to the Price paid by parent 3,153
Current assets
non-controlling interest is £229,000 (25% ´ £916,000). Subsidiary's ordinary share capital at 1 July 2019 2,500
Inventories 2,215 852 Required:
Trade receivables 1,823 629 Subsidiary's retained earnings at 1 July 2019 704
(a) Prepare a consolidated statement of comprehensive income for the year to 30 June (b) Group statement of changes in equity for the year to 30 June 2023
Cash at bank 101 4,139 5 1,486 Fair value adjustment 600
––––– –––––– ––––– –––––– 2023. ––––
Share Retained Total Non- Total 75% ´ 3,804 (2,853)
13,253 4,153 (b) Prepare a consolidated statement of changes in equity for the year to 30 June 2023. capital earnings controlling equity –––– ––––
–––––– ––––– interest
(c) Prepare a consolidated statement of financial position as at 30 June 2023. Goodwill at 1 July 2019 300
Equity £000 £000 £000 £000 £000 Less: Impairment (40%) 120
Ordinary share capital 7,000 2,500 (d) Explain how each of these financial statements would differ if the intra-group sales Balance b/f 7,000 1,000 8,000 798 8,798 ––––
Retained earnings 3,399 508 described above were from KK Ltd to JJ Ltd (rather than from JJ Ltd to KK Ltd). Profit for the year 3,740 3,740 229 3,969 Goodwill at 30 June 2023 180
–––––– ––––– ––––
(e) Explain how the consolidated financial statements would differ if the depreciation Dividends paid (1,800) (1,800) (125) (1,925)
10,399 3,008 –––– –––– –––– –––– ––––
Liabilities consequences of the fair value adjustment were not ignored. It may be assumed that Balance c/f 7,000 2,940 9,940 902 10,842
Current liabilities the financial statements of KK Ltd for each of the four years to 30 June 2023 would –––– –––– –––– –––– ––––
Trade payables 2,004 925 have been charged with additional depreciation of £40,000 if the company had Note:
Taxation 850 2,854 220 1,145 revalued its non-current assets to their fair value on 1 July 2019. The opening and closing figures for group retained earnings and the non-controlling interest are
––––– –––––– ––––– –––––– derived in the workings below.
13,253 4,153
–––––– –––––

45 46
341 342 © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.

Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition
CHAPTER 19: Groups of Companies (2) PART 3: Consolidated Financial Statements
W2. Group retained earnings 19.6
£000 £000
Parent's retained earnings at 30 June 2023 3,399 (a) Group statement of comprehensive income for the year to 30 September 2023
*19.6 On 1 April 2023, Pedantic acquired 60% of the equity share capital of Sophistic in a share 2. Sales from Sophistic to Pedantic in the post-acquisition period totalled £8 million.
Subsidiary's retained earnings at 30 June 2023 508 exchange of two shares in Pedantic for three shares in Sophistic. The issue of shares has Sophistic made a mark-up on cost of 40% on these sales. Pedantic had sold £5.2 £000
Less: Subsidiary's retained earnings at 1 July 2019 704 not yet been recorded by Pedantic. At the date of acquisition, shares in Pedantic had a million (at cost to Pedantic) of these goods by 30 September 2023. Sales revenue (85,000 + (6/12 ´ 42,000) – 8,000) 98,000
–––– Cost of sales (63,000 + (6/12 ´ 32,000) – 8,000 + 800 + 200) 72,000
75% ´ (196) (147) market value of £6 each. The summarised draft financial statements of both companies for ––––––
–––– 3. Other than where indicated, items in the statement of comprehensive income are
the year to 30 September 2023 are shown below. Gross profit 26,000
Less: Goodwill impairment (120) deemed to accrue evenly on a time basis.
Distribution costs (2,000 + (6/12 ´ 2,000)) 3,000
Statements of comprehensive income for the year to 30 September 2023
Less: Unrealised profit on inventories (192) 4. Sophistic's trade receivables at 30 September 2023 include £600,000 due from Administrative expenses (6,000 + (6/12 ´ 3,200)) 7,600
–––– Finance costs (300 + (6/12 ´ 400)) 500 11,100
Group retained earnings at 30 June 2023 2,940 Pedantic Sophistic Pedantic which did not agree with Pedantic's corresponding trade payable. This
––––– ––––––
–––– £000 £000 difference was due to cash in transit of £200,000 from Pedantic to Sophistic. Both Profit before tax 14,900
Group retained earnings at 30 June 2022 were £1,549,000 + (75% ´ (£92,000 – £704,000)) – impairment Sales revenue 85,000 42,000 companies have positive bank balances. Taxation expense (4,700 + (6/12 ´ 1,400)) 5,400
£90,000 = £1,000,000. This assumes that there were no unrealised profits at 30 June 2022. Cost of sales (63,000) (32,000) ––––––
–––––– –––––– 5. Pedantic has a policy of accounting for non-controlling interests on acquisition at Profit for the year 9,500
Gross profit 22,000 10,000 fair value. For this purpose, the fair value of the goodwill attributable to the non- Attributable to the non-controlling interest 200
W3. Non-controlling interest ––––––
Distribution costs (2,000) (2,000) controlling interest in Sophistic is £1.5 million. Consolidated goodwill was not
£000 £000 Attributable to the group 9,300
Administrative expenses (6,000) (3,200) impaired at 30 September 2023. ––––––
Subsidiary's ordinary share capital at 30 June 2023 2,500
Subsidiary's retained earnings at 30 June 2023 508 Finance costs (300) (400) Required:
–––––– –––––– Notes:
Fair value adjustment 600 Profit before tax 13,700 4,400
–––– (a) Prepare a consolidated statement of comprehensive income for Pedantic for the year (i) The intragroup sales of £8,000,000 must be subtracted from group sales and from group cost of
25% ´ 3,608 902 Taxation expense (4,700) (1,400) to 30 September 2023. sales. There is unrealised profit of £800,000 (£2,800,000 ´ 40/140) which must be eliminated
–––– –––– –––––– ––––––
from inventories and added to cost of sales.
Non-controlling interest at 30 June 2023 902 Profit for the year 9,000 3,000 (b) Prepare a consolidated statement of financial position for Pedantic as at 30 Sept-
–––– –––––– –––––– (ii) As a result of the fair value adjustment, Sophistic's depreciation expense rises by (£2,000,000 ´
ember 2023.
Non-controlling interest at 30 June 2022 was (25% ´ (£2,500,000 + £92,000 + £600,000)) = £798,000. Statements of financial position as at 30 September 2023 (ACCA) 1/5th ´ 6/12) = £200,000. This is added to cost of sales.
£000 £000 (iii) The profit of Sophistic for the year to 30 September 2023 is £3,000,000, of which 6/12ths refers
(d) If the intra-group sales were from KK Ltd to JJ Ltd, 25% of the unrealised profit would be deducted
Assets to the post-acquisition period (£1,500,000). This is reduced by the unrealised profit of £800,000
from the non-controlling interest. The profit attributable to the non-controlling interest shown in the
group statement of comprehensive income would fall by £48,000 (25% ´ £192,000) to £181,000 and Non-current assets and by the additional depreciation of £200,000, leaving £500,000. So the profit attributable to
the profit attributable to the group would increase by £48,000 to £3,788,000. Property, plant and equipment 40,600 12,600 the non-controlling interest is £200,000 (40% ´ £500,000).

These amendments would be reflected in the group statement of changes in equity and in the group Current assets 16,000 6,600 (b) Notes for the statement of financial position:
–––––– –––––
statement of financial position. Group retained earnings would rise by £48,000 to £2,988,000. The Total assets 56,600 19,200 (i) Pedantic acquired 2,400,000 shares in Sophistic (60% ´ 4,000,000) in a two for three share
non-controlling interest would fall by £48,000 to £854,000. –––––– –––––
exchange. Therefore Pedantic issued 1,600,000 shares (2/3 ´ 2,400,000) with a total market
Equity
value of £9,600,000 (1,600,000 ´ £6). This is equivalent to issuing 1,600,000 £1 shares at a
(e) In the group statement of comprehensive income, additional depreciation of £40,000 would reduce Ordinary shares of £1 each 10,000 4,000
premium of £5 each, so the share premium is £8,000,000.
profit for the year to £3,929,000. Profit attributable to the non-controlling interest would reduce by Retained earnings 35,400 6,500
£10,000 to £219,000 and profit attributable to the group would reduce by £30,000 to £3,710,000. –––––– ––––– (ii) Sophistic's retained earnings at 30 September 2023 are £6,500,000. The company's profit for the
45,400 10,500 year is £3,000,000, so retained earnings must have been £3,500,000 at 1 October 2022 and
In the group statement of financial position, additional accumulated depreciation of £160,000 would
Liabilities £5,000,000 (£3,500,000 + 6/12 ´ £3,000,000) on the date of acquisition by Pedantic.
reduce non-current assets by that amount. Retained earnings would fall by £120,000 and the non-
Non-current liabilities
controlling interest would fall by £40,000. (iii) The unrealized profit of £800,000 (see above) must be eliminated from group inventories and
10% loan notes 3,000 4,000
therefore reduces group current assets by £800,000.
In the group statement of changes in equity, retained earnings brought forward would fall by £90,000 Current liabilities 8,200 4,700
(75% ´ 3 ´ £40,000). Non-controlling interest brought forward would fall by £30,000. The carried –––––– ––––– (iv) Sophistic's trade receivables include £600,000 due from Pedantic. Similarly, Pedantic's trade
forward figures would fall by £120,000 and £40,000 respectively. Total equity and liabilities 56,600 19,200 payables include £400,000 due to Sophistic. These amounts must be eliminated from group
–––––– ––––– current assets and group current liabilities respectively. But group current assets are increased
The following information is available: by the cash in transit of £200,000.

1. At the date of acquisition, the fair values of Sophistic's assets were equal to their The group statement of financial position, together with detailed workings, is shown below.
carrying amounts with the exception of one item of plant, which had a fair value of
£2 million in excess of its carrying amount. It had a remaining life of five years at
that date [straight-line depreciation is used]. Sophistic has not adjusted the carrying
amount of its plant as a result of the fair value exercise.

47 48
© 2022 Pearson Education Limited. All Rights Reserved.
343 344 © 2022 Pearson Education Limited. All Rights Reserved.
 *20.5 On 1 October 2023 Pumice acquired the following non-current investments:
Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition (i) 80% of the equity share capital of Silverton at a cost of £13.6 million Melville: International Financial Reporting, Instructor's Manual, 8th edition
(ii) 50% of Silverton's 10% loan notes at par
(iii) 1.6 million equity shares in Amok at a cost of £6.25 each.
Group statement of financial position as at 30 September 2023
£000
W2. Group retained earnings
£000 £000 Draft statements of financial position of the three companies at 31 March 2024 are:
Chapter 20
Assets Parent's retained earnings at 30 September 2023 35,400
Pumice Silverton Amok
Associates and joint arrangements
Non-current assets Subsidiary's retained earnings at 30 September 2023 6,500
Property, plant and equipment (40,600 + 12,600 + 2,000 - depr'n 200) 55,000 £000 £000 £000
Less: Subsidiary's retained earnings at 1 April 2023 (5,000)
Goodwill (W1) 4,500 ––––– Assets Non- 20.5
–––––– 1,500 current assets
59,500 Property, plant and equipment 20,000 8,500 16,500 (a)
Less: Unrealised profit on inventories (800)
Current assets (16,000 + 6,600 - 600 + CIT 200 - unrealised profit 800) 21,400 Less: Additional depreciation (200) Investments 26,000 1,500 Pumice has 80% of Silverton's ordinary shares. This gives Pumice control over Silverton and so there is a
––––– ––––– ––––-– ––––-– ––––-–
Total assets 80,900 parent-subsidiary relationship. Group accounts must be prepared in which the results of Silverton as from
–––––– 60% ´ 500 300 46,000 8,500 18,000 1 October 2023 are consolidated with those of Pumice for the year to 31 March 2024. The investment in
––––– ––––– Current assets 15,000 8,000 11,000
Equity Group retained earnings at 30 September 2023 35,700 the loan notes of Silverton is an intra-group loan which is cancelled out on consolidation.
––––-– ––––-– ––––-–
Ordinary shares of £1 each (10,000 + 1,600) 11,600 –––––
61,000 16,500 29,000 Pumice has 40% of Amok's ordinary shares. Presumably this gives Pumice significant influence over
Share premium 8,000 Check: Assuming no dividends paid during the year, the parent's retained earnings at 1 October ––––-– ––––-– ––––-–
Retained earnings (W2) 35,700 Equity Amok and so Amok is an associate of Pumice. The investment in Amok must be included in the
–––––– 2022 were 26,400 (35,400 – 9,000). Group profit for the year is 9,300, so the group's retained consolidated financial statements using the equity method.
earnings at 30 September 2023 are (26,400 + 9,300) = 35,700. Ordinary shares of £1 each 10,000 3,000 4,000
55,300
Retained earnings 37,000 8,000 20,000 (b)
Non-controlling interest (W3) 6,100 ––––-– ––––-– ––––-–
–––––– W3. Non-controlling interest The consolidated statement of financial position at 31 March 2024 is as follows:
61,400 47,000 11,000 24,000
£000 £000
Liabilities Liabilities Non- £000
Subsidiary's ordinary share capital at 30 September 2023 4,000
Non-current liabilities current liabilities Assets
Subsidiary's retained earnings at 30 September 2023 6,500
10% loan notes (3,000 + 4,000) 7,000 8% loan notes 4,000 Non-current assets
Fair value adjustment 2,000
––––– 10% loan notes 2,000 Property, plant and equipment (20,000 + 8,500 + 400 + 1,600 – dep'n 200) 30,300
Current liabilities (8,200 + 4,700 - 400) 12,500
–––––– 12,500 Current liabilities 10,000 3,500 5,000 Investments:
Total equity and liabilities 80,900 Less: Unrealised profit on inventories (800) ––––-– ––––-– ––––-– Investment in associate (10,000 + (40% ´ (6/12 ´ 8,000)) – impairment 200) 11,400
–––––– Less: Additional depreciation (200) 61,000 16,500 29,000 Other investments (26,000 – 13,600 – 1,000 – 10,000) 1,400
––––– ––––-– ––––-– ––––-–
Goodwill (W1) 3,600
Workings: 40% ´ 11,500 4,600 –––––
––––– 46,700
W1. Goodwill Non-controlling interest's share of goodwill 1,500
––––– The following information is relevant: Current assets (15,000 + 8,000 – intragroup debt 1,500 – unrealised profit 1,000) 20,500
£000 £000 –––––
Price paid by parent 9,600 Non-controlling interest at 30 September 2023 6,100 (i) On 1 October 2023, the fair values of Silverton's assets were equal to their carrying 67,200
–––––
amounts with the exception of land and plant. Silverton's land had a fair value of –––––
Subsidiary's ordinary share capital at 1 April 2023 4,000 Check: NCI created on acquisition was 40% ´ (4,000 + 5,000 + 2,000) = 4,400, plus goodwill Equity
Subsidiary's retained earnings at 1 April 2023 5,000 £400,000 in excess of its carrying amount and plant had a fair value of £1.6 million
1,500, giving a total of 5,900. The NCI's share of profit for the year is 200, so the NCI at 30 Ordinary share capital 10,000
Fair value adjustment 2,000 in excess of its carrying amount. The plant had a remaining life of four years
––––– September 2023 is (5,900 + 200) = 6,100. Retained earnings (W2) 37,640
(straight-line depreciation) at the date of acquisition. –––––
60% ´ 11,000 (6,600) 47,640
––––– ––––– (ii) In the post-acquisition period, Pumice sold goods to Silverton for £6 million. These
Parent's goodwill at 1 April 2023 3,000 goods had cost Pumice £4 million. Half of these goods were still in the inventory of Non-controlling interest (W3) 2,560
–––––
Non-controlling interest's goodwill at 1 April 2023 1,500 Silverton at 31 March 2024. Silverton had a balance of £1.5 million owing to Pumice 50,200
––––– at 31 March 2024 which agreed with Pumice's records.
Goodwill at 1 April 2023 (and at 30 September 2023) 4,500 Liabilities
––––– (iii) The profit after tax for the year ended 31 March 2024 was £2 million for Silverton Non-current liabilities
and £8 million for Amok. Assume profits accrued evenly throughout the year. 8% loan notes 4,000
(iv) An impairment test at 31 March 2024 concluded that consolidated goodwill was 10% loan notes 1,000
impaired by £400,000 and the investment in Amok was impaired by £200,000. Current liabilities (10,000 + 3,500 – intragroup debt 1,500) 12,000
–––––
(v) No dividends were paid during the year by any of the companies. 67,200
–––––
(vi) Non-controlling interests in subsidiaries are to be measured at the non-controlling Notes:
shareholders' proportion of the subsidiary's identifiable net assets.
(i) Amok's retained earnings have increased by £4m since 1 October 2023, so these must have been
Required: £16m on that date. The company's equity on 1 October 2023 was £20m (£4m + £16m) so the price
paid by Pumice for goodwill was £2m (£10m – (40% ´ £20m)). This is not negative and so it is not
(a) Explain how the investments purchased by Pumice on 1 October 2023 should be
recognised separately.
treated in its consolidated financial statements.
(b) Prepare the consolidated statement of financial position for Pumice as at 31 March (ii) Workings W1 to W3 are given below.
2024. (ACCA)
49 50 51
© 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.

*22.5 Western Trading plc is a limited company which uses a variety of component parts in its
Melville: International Financial Reporting, Instructor's Manual, 8th edition manufacturing operations. One of the company's main suppliers has recently gone out of Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition
business and therefore Western is now seeking an alternative (and reliable) source of
W1. Goodwill supply for the component parts which were previously purchased from that supplier. Two Gearing
£000 £000 companies have been identified as potential suppliers. Both companies prepare accounts
Chapter 22 (i) X is very low-geared.
Price paid by parent 13,600 to 31 December each year and Western has obtained the following copies of each Ratio analysis (ii) Y is comparatively high-geared and may find it difficult to service its high level of debt and/or to
Subsidiary's ordinary share capital at 1 October 2023 3,000 company's financial statements for the year to 31 December 2023: obtain further long-term finance.
Subsidiary's retained earnings at 1 October 2023 (8,000 – 6/12 ´ 2,000) 7,000 Statements of comprehensive income for the year to 31 December 2023
Fair value adjustment (400 + 1,600) 2,000
22.5 Conclusion
––––– X Ltd Y Ltd X is the sounder company. Y might offer larger stocks and more generous credit terms but X would seem
(a)
80% ´ 12,000 9,600 £000 £000 to be the better choice if Western is seeking a long-term, reliable source of supply.
––––– ––––– X Ltd Y Ltd
Goodwill at 1 October 2023 4,000
Sales revenue 5,720 6,310 Profitability ratios
Cost of sales 3,840 4,240 (c) Further information required includes:
Less: Impairment 400
––––– ––––– ––––– ROCE 1,120/5,320 ´ 100% = 21.1% 990/6,530 ´ 100% = 15.2%
Gross profit 1,880 2,070 (i) financial statements for several previous years (to detect trends)
Goodwill at 31 March 2024 3,600 Gross profit margin 1,880/5,720 ´ 100% = 32.9% 2,070/6,310 ´ 100% = 32.8%
––––– Operating expenses 760 1,080 (ii) year-average figures for items shown in the statements of financial position
––––– ––––– Operating profit margin 1,120/5,720 ´ 100% = 19.6% 990/6,310 ´ 100% = 15.7%
W2. Group retained earnings (iii) a statement of accounting policies for each company
Profit from operations 1,120 990 Liquidity ratios
£000 £000 Interest expense 50 350 (iv) industry-average accounting ratios
Parent's retained earnings at 31 March 2024 37,000 ––––– ––––– Current ratio 1,520/770 = 1.97 1,980/1,780 = 1.1
(v) projections for the future.
Subsidiary's retained earnings at 31 March 2024 8,000 Profit before taxation 1,070 640 Quick ratio 1,010/770 = 1.31 1,090/1,780 = 0.6
Less: Subsidiary's retained earnings at 1 October 2023 7,000 Taxation expense 320 210 Efficiency ratios
––––– ––––– –––––
Profit for the year 750 430 Inv. holding period 510/3,840 ´ 365 = 48 days 890/4,240 ´ 365 = 77 days
1,000
†Additional depreciation (6/12 ´ 1/4 ´ 1,600) ––––– ––––– TR collection period 670/5,720 ´ 365 = 43 days 1,090/6,310 ´ 365 = 63 days
(200)
––––– Statements of financial position as at 31 December 2023 TP payment period 450/3,840 ´ 365 = 43 days 1,130/4,240 ´ 365 = 97 days
80% ´ 800 640
––––– X Ltd Y Ltd Gearing ratio
Less: Goodwill impairment (400) £000 £000 Capital gearing ratio 500/5,320 ´ 100% = 9.4% 3,500/6,530 ´ 100% = 53.6%
Less: Unrealised profit on inventories (1,000) Assets
––––– Note that the trade payables payment period has been calculated with reference to cost of sales, since the
Non-current assets 4,570 6,330
36,240 figures for purchases are not available.
Current assets
Retained earnings of associate (40% ´ (6/12 ´ 8,000)) 1,600 Inventories 510 890
(b) The main points to make are as follows:
Less: Impairment of investment in associate (200) Trade receivables 670 1,090
––––– Profitability
Group retained earnings at 31 March 2024 37,640 Bank balance 340 1,520 - 1,980
––––– ––––– ––––– ––––– ––––– (i) X is making a better return on capital.
6,090 8,310
† If a fair value adjustment is made when a subsidiary is acquired and this relates to depreciable non-current ––––– (ii) Both companies have a similar gross profit margin, perhaps indicating that similar prices are charged
assets, depreciation charges in subsequent accounting periods should be based upon the fair values of those X Ltd Y Ltd to customers.
assets. In this case the extra depreciation charge is £200,000. 80% of this is deducted from group retained £000 £000 (iii) X has a better operating profit margin. This suggests that X has better control over its overheads.
earnings. The remaining 20% is deducted from the non-controlling interest. Equity Liquidity
Ordinary share capital 2,000 2,000 (i) X has better liquidity (as measured by both liquidity ratios).
W3. Non-controlling interest Retained earnings 2,820 1,030
£000 £0000 ––––– ––––– (ii) Y's quick ratio is especially worrying.
Subsidiary's ordinary share capital at 31 March 2024 3,000 4,820 3,030 (iii) Y has no cash and high borrowings. X has cash in the bank and comparatively low borrowings.
Subsidiary's retained earnings at 31 March 2024 8,000 Liabilities Non-current Efficiency
Fair value adjustment (400 + 1,600) 2,000 liabilities
Additional depreciation (6/12 ´ 1/4 ´ 1,600) (200) (i) X takes a total of 91 days to turn inventories into cash.
Long-term loans 500 3,500
––––– (ii) Y takes much longer to turn inventories into cash (140 days) and so is less efficient. However, the
Current liabilities
20% ´ 12,800 2,560 company might be deliberately holding larger stocks and offering longer credit so as to attract
––––– Trade payables 450 1,130
––––– customers. This is beneficial to Western, so long as it is sustainable in the long term.
Taxation 320 210
Non-controlling interest at 31 March 2024 2,560
––––– Bank balance -
770 440 1,780 (iii) Y pays its suppliers much later than X. This may be a sign of efficiency but may also be a sign that
–––––
––––– ––––– ––––– Y is struggling to pay its debts and could find it difficult to obtain credit in future.
6,090 8,310
––––– –––––
For both companies, all purchases and sales are made on credit terms.
Required:
(a) Calculate three profitability ratios, two liquidity ratios, three efficiency ratios and
one gearing ratio for X Ltd and for Y Ltd.
52 54 55
(b) Use the information that is provided by these ratios to explain to the management of
© 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.
Western Trading plc which of the two companies (X Ltd or Y Ltd) seems likely to
be the more reliable source of supply.
(c) Identify any further information which should be obtained before a final decision is
made. (CIPFA)

*22.6 In July 2024, Brenda is considering an investment in the ordinary shares of either Baker Melville: International Financial Reporting, Instructor's Manual, 8th edition
plc or Grant plc. Both companies operate in the same sector of industry and both prepare
PART 4: Analysis of Financial Statements
accounts to 30 September each year. Financial statements for the year to 30 September CHAPTER 22: Ratio Analysis
2023 are shown below. 22.6
Statements of comprehensive income for the year to 30 September 2023 (a)
*22.7 Quartile sells jewellery through stores in retail shopping centres throughout the country.
Required: Baker plc Grant plc
Baker plc Grant plc Over the last two years it has experienced declining profitability and is wondering if this
£000 £000 ROCE 2,280/13,380 ´ 100% = 17.0% 1,960/9,940 ´ 100% = 19.7% is related to the sector as whole. It has recently subscribed to an agency that produces
(a) In so far as the information given permits, compute the following ratios for Baker
Sales revenue 15,160 12,260 plc and Grant plc: Earnings per share 1,320/6,000 ´ 100p = 22p 1,440/6,000 ´ 100p = 24p average ratios across many businesses. Below are the ratios that have been provided by
Cost of sales 10,720 8,680 Price earnings ratio 165p/22p = 7.5 240p/24p = 10 the agency for Quartile’s business sector based on a year-end of 30 June 2023.
––––– ––––– – return on capital employed
Gross profit 4,440 3,580 – earnings per share Current ratio 3,300/3,040 = 1.09 2,900/1,440 = 2.01 Return on year-end capital employed (ROCE) 16.8%
Operating expenses 2,160 1,620 – price earnings ratio Quick ratio (acid test) 1,720/3,040 = 0.57 1,640/1,440 = 1.14 Net asset (total assets less current liabilities) turnover 1.4 times
––––– ––––– – current ratio TP payment period 1,920/10,720 ´ 365 = 65 days 960/8,680 ´ 365 = 40 days Gross profit margin 35%
Profit from operations 2,280 1,960 – quick ratio (acid test)
Interest expense 520 40 Capital gearing ratio 3,500/13,380 ´ 100% = 26.2% 500/9,940 ´ 100% = 5.0% Operating profit margin 12%
––––– ––––– – trade payables payment period Current ratio 1.25:1
– capital gearing ratio Dividend yield 3p/165p ´ 100% = 1.8% 10p/240p = 4.2%
Profit before taxation 1,760 1,920 Average inventory turnover 3 times
Taxation expense 440 480 – dividend yield. Trade payables payment period 64 days
(b) The main points to make are as follows:
––––– –––––
(b) Ratios for the two companies based upon the financial statements for the previous Debt to equity (non-current liabilities to equity) 38%
Profit after taxation 1,320 1,440 – Grant’s ROCE and EPS are both better than Baker’s and these ratios have improved since last year,
––––– ––––– year (i.e. the year to 30 September 2022) were as follows:
whilst Baker’s have declined. Grant seems to be the more profitable company. The financial statements of Quartile for the year to 30 September 2023 are as follows:
Baker plc Grant plc
Statements of financial position as at 30 September 2023 Return on capital employed 18.5% 18.9% – Grant’s PE ratio has risen since last year and is higher than Baker’s (which has declined). This may Statement of comprehensive income for the year to 30 September 2023
Earnings per share 23p 23p indicate greater investor confidence in Grant’s future prospects than Baker’s.
Baker plc Grant plc £000 £000
£000 £000 Price earnings ratio 8.5 9.5 – Grant’s liquidity ratios are roughly the same as in the previous year and appear to be much better than Sales revenue 56,000
Assets Current ratio 1.2 2.1 Baker’s (which have declined). Coupled with Baker’s lack of cash, high borrowings and lengthening Opening inventory 8,300
Non-current assets 13,120 8,480 Quick ratio (acid test) 0.7 1.1 trade payables payment period, this suggests that Baker may be experiencing liquidity problems. Purchases 43,900
Current assets Trade payables payment period 49 days 39 days ––––––
– On the other hand, it is possible that Baker’s liquidity problems are caused by a large and recent 52,200
Inventories 1,580 1,260 Capital gearing ratio 11% 5% investment in non-current assets (which are substantially higher than Grant’s). If this is the case, the
Trade receivables 1,720 1,360 Dividend yield 3% 4% Closing inventory (10,200) (42,000)
use of these assets may feed through to greater prosperity in future years. –––––– ––––––
Bank balance - 3,300 280 2,900 Taking into account these ratios and those which you have calculated for the year to Gross profit 14,000
––––– ––––– ––––– ––––– – Neither company is high-geared, but Baker has a substantially higher gearing ratio than Grant and
30 September 2023, advise Brenda as to which of the two companies appears to be Operating costs (9,800)
16,420 11,380 this ratio has more than doubled since last year. This indicates that Baker has borrowed during the
––––– ––––– the better investment. Give reasons for your advice. Finance costs (800)
year. This may have been done as a means of investing in non-current assets, but further substantial
Equity ––––––
(c) Identify three types of further information which should be obtained before a final borrowing could turn Baker into a high-geared company and prejudice shareholders' interests.
Share capital 6,000 6,000 Profit before taxation 3,400
investment decision is made. (CIPFA) – Grant’s dividend yield has been maintained since last year and is higher than Baker’s (which has Taxation expense 1,000
Retained earnings 3,880 3,440
––––– ––––– declined). This could be further evidence of Baker’s liquidity problems and could indicate that ––––––
9,880 9,440 Baker’s shares may not be a wise choice for an investor seeking dividend income. Profit for the year 2,400
Liabilities
––––––
– On the whole, the ratio analysis suggests that Grant plc is more profitable than Baker plc, has better
Non-current liabilities Statement of financial position as at 30 September 2023
liquidity and is lower-geared. This may indicate that an investment in the shares of Grant plc should
Long-term loans 3,500 500 £000 £000
be recommended, but further information should be obtained before a final decision is made (see
Current liabilities Assets
below).
Trade payables 1,920 960 Non-current assets
Taxation 440 480 (c) Further information required includes: Property and shop fittings 25,600
Bank balance 680 3,040 - 1,440 Deferred development expenditure 5,000
––––– ––––– ––––– ––––– (i) more recent financial information (half-year results? is it worth waiting until the September 2024 ––––––
16,420 11,380 accounts are available?) 30,600
––––– –––––
(ii) forecasts for the future performance of each company (if possible) Current assets
The following information is also available: Inventory 10,200
(iii) accounts for the last five years, including statements of cash flows
1. For both companies, all purchases and sales are made on credit terms. Bank 1,000 11,200
(iv) industry average ratios –––––– ––––––
2. During the year to 30 September 2023, Baker plc paid dividends of £180,000 and (v) statement of accounting policies for each company. 41,800
Grant plc paid dividends of £600,000. ––––––
3. Each company's issued share capital consists of 6 million ordinary £1 shares. (continued)
4. At the close of business on 30 September 2023, the market price of an ordinary share
in Baker plc was £1.65 and the market price of an ordinary share in Grant plc was
£2.40. 401 56
© 2022 Pearson Education Limited. All Rights Reserved.
402
Having examined the financial statements of the two companies, Brenda is inclined to
invest in the shares of Baker plc. Her reasons for this view are that Baker plc has higher
turnover, higher operating profit and greater assets than Grant plc. The shares of Baker plc
are also cheaper.

Melville: International Financial Reporting, Instructor's Manual, 8th edition Melville: International Financial Reporting, Instructor's Manual, 8th edition
CHAPTER 22: Ratio Analysis
22.7 Gearing
(a) Quartile's ratios in comparison to sector average ratios Quartile's debt to equity ratio is lower than average. Furthermore, the company is obtaining an ROCE of
Equity Sector 12.1% (at least) on funds borrowed at 10%. So there seem to be no gearing concerns.
Ordinary shares of £1 each 15,000 Quartile Average
Property revaluation reserve 3,000 Conclusion
ROCE (14,000 – 9,800)/(26,600 + 8,000) 12.1% 16.8%
Retained earnings 8,600 Quartile seems to have no liquidity or gearing problems but is suffering from lower profitability when
–––––– Net asset turnover 56,000/(41,800 – 7,200) 1.6 1.4 compared with the sector average. The lower gross profit margin and operating profit margin would not
26,600 Gross profit margin 14,000/56,000 25% 35% be a worry if only the company's ROCE (the main test of profitability) were higher. However, as stated
Liabilities Operating profit margin (14,000 – 9,800)/56,000 7.5% 12% above, the ROCE might have been depressed by the fact that Quartile has revalued its property and also
Non-current liabilities by the recent development expenditure which has not yet had time to work through to increased profits.
Current ratio 11,200/7,200 1.6 1.25
10% loan notes 8,000 Further investigation is advisable.
Current liabilities Average inventory turnover 42,000/((8,300 + 10,200)/2) 4.5 3
Trade payables 5,400 TP payment period 5,400/43,900 ´ 365 45 days 64 days (c) Possible limitations of this ratio analysis
Current tax payable 1,800 7,200 Debt to equity 8,000/26,600 30% 38% (i) Lack of standard ratio definitions. As was made clear in Chapter 22, some of the accounting ratios
–––––– ––––––
41,800 lack a standard definition. Therefore it would not be wise to base important economic decisions on
–––––– (b) Financial and operating performance of Quartile the results of the above analysis without first asking the agency to supply details of the definitions
Profitability that it has used. If necessary, some of Quartile's own ratios would then need to be recalculated on the
Note:
same basis as that used by the agency, to ensure that comparisons are valid.
The deferred development expenditure relates to an investment in a new process to (i) It seems that Quartile is less profitable than the sector average. ROCE is lower, gross profit margin
manufacture artificial precious gems for future sale by Quartile in the retail jewellery is much lower and so is the operating profit margin. (ii) Accounting policies. It is very unlikely that all companies in the retail jewellery trade will use the
same accounting policies. For instance, some companies may adopt the cost model for property whilst
market. (ii) However, it appears that £5m of Quartile's capital has been used to fund development expenditure
others (like Quartile) may adopt the revaluation model. A similar point applies to intangible assets.
which will not generate profits until some time in the future. If this £5m were ignored, ROCE would
And there may be differences in the way in which inventories are measured. Such differences in
Required: be (14,000 – 9,800)/(26,600 + 8,000 – 5,000) = 14.2%, which is closer to the sector average.
accounting policy distort the ratio analysis and make it much more difficult to effect meaningful
(a) Prepare for Quartile the equivalent ratios that have been provided by the agency. (iii) If (in addition) the property had not been revalued, the ROCE would then be (14,000 – 9,800)/(26,600 comparisons between Quartile and the rest of the retail jewellery sector.
+ 8,000 – 5,000 – 3,000) = 15.8%, which is very close to the sector average. So it is unclear whether
(b) Assess the financial and operating performance of Quartile in comparison to its (iii) Different reporting dates. The sector average ratios supplied by the agency are for the year to 30 June
or not Quartile's underlying ROCE is in fact especially low.
sector averages. 2023, whilst Quartile's financial statements are for the year to 30 September 2023. This may not be
(c) Explain four possible limitations of the usefulness of the above comparison. (iv) As regards the gross profit margin and operating profit margin, there is no doubt that Quartile is terribly significant but it is feasible that seasonal variations may have some impact. For instance, do
under-achieving when compared to the rest of the sector. But the company may have adopted a retail jewellers build up inventories in readiness for the Christmas trade? If so, inventory ratios based
(ACCA) deliberate policy of selling jewellery at low prices to stimulate sales. on financial statements for the year to 30 June may not be directly comparable with inventory ratios
based on financial statements for the year to 30 September.
(v) One encouraging point is that the gap between Quartile's gross profit margin and operating profit
margin (i.e. the percentage of sales revenue taken up by operating expenses) is 17.5%, compared with (iv) Variations across the sector. The retail jewellery sector probably consists of a mixture of businesses,
a sector average of 23%. So perhaps Quartile is running a business with low margins, high sales ranging from upmarket shops selling very expensive items, through to shops that sell cheaper items
volumes and low overheads. This theory is borne out by the fact that the company's asset turnover is to the general public. Average ratios calculated across a disparate range of businesses like this may
higher than average. In fact, if the distortions caused by the development expenditure and property not be very meaningful and it would be preferable to compare Quartile's ratios with the average for
revaluation were removed, asset turnover would be 56,000/(41,800 – 5,000 – 3,000 – 7,200) = 2.1, those businesses in the same sector which are of a similar size and type to Quartile.
which is 50% better than the sector average. And the company's inventory also moves at a 50% faster
rate than is typical in the sector as a whole.
Liquidity
(i) As measured by the current ratio, Quartile's liquidity is rather better than average. If we can assume
that the sector average figure is generally acceptable in the retail jewellery trade, it would appear that
Quartile has no liquidity problems.
(ii) Furthermore, the company's trade payables period is considerably lower than average. This may be
evidence of the fact that Quartile has no trouble in paying its debts when they fall due. On the other
hand, it might be the case that the company's creditors offer Quartile less generous credit terms than
are typical in the sector.

57 58
403 © 2022 Pearson Education Limited. All Rights Reserved. © 2022 Pearson Education Limited. All Rights Reserved.