CPA INTERMEDIATE LEVEL

FINANCIAL REPORTING AND ANALYSIS

WEDNESDAY: 23 August 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings.
Do NOT write anything on this paper.

QUESTION ONE
(a) International Public Sector Accounting Standard (IPSAS) 24 – Presentation of Budget Information in Financial
Statements, requires a comparison of budget amounts and the actual amounts arising from execution of the budget to
be included in the financial statements of entities that are required to, or elect to, make publicly available their
approved budget(s), and for which they are, therefore, held publicly accountable.

With reference to International Public Sector Accounting Standard (IPSAS) 24:

(i) Differentiate between “original budget” and “final budget”. (2 marks)

(ii) Explain the requirements of the standard where there are changes between the original and final budget.
(2 marks)

(iii) Summarise TWO key disclosure requirements of the standard. (4 marks)

(b) Citing TWO practical examples, explain the meaning and application of “predictive analytics”, in the context of
financial analysis. (6 marks)

(c) With reference to International Accounting Standard (IAS) 21 – The Effects of Changes in Foreign Exchange Rates,
describe the procedure for translating results and financial position of a foreign entity. (6 marks)
(Total: 20 marks)

QUESTION TWO
(a) Somalax Ltd. has its head office in town A and a branch in town B. Orders are received from customers by the
head office, processed, packaged and sold at a profit of 12% of the selling price. Finished products are sent to the
branch at selling price less 6%.

The following are extracts from the company as at 31 December 2022:

Head Office Branch

Sh.“000” Sh.“000” Sh.“000” Sh.“000”
Bank balance 316,000 124,000
Branch office current account 720,000
Head office current account 562,080
Trade payables 800,000 80,000
Trade receivables 560,000 300,000
Other general expenses 800,000 80,000
Goods sent to branch 3,196,000 3,138,080
Sales 5,600,000 3,000,000
Purchase of material 8,000,000
Packaging material 880,000
Fixtures 320,000
Capital _________ 2,000,000 ________ ________
11,596,000 11,596,000 3,642,080 3,642,080

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 Additional information:
1. Fixtures are depreciated at the rate of 20% per annum on straight-line basis.
2. A provision is to be made for a bonus to the branch manager at the rate of 10% of the net profit after the
bonus.
3. Finished products whose selling price to the public was Sh.61,618,000 were dispatched by head office to
the branch on 30 December 2022 and were received on 10 January 2023.
4. The branch had sent cash amounting to Sh.100,000,000 to the head office on 28 December 2022. This
amount was received on 8 January 2023.
5. Materials which cost the head office Sh.20,000,000 were considered worthless.
6. There was a loss of packaging materials costing Sh.10,000,000 at the head office.
7. There was a shortage of products from the head office at the branch valued at Sh.26,000,000. This loss was
at invoice price by the head office to the branch.

Required:
(i) The head office, branch and combined statement of profit or loss for the year ended 31 December 2022.
(7 marks)

(ii) The head office, branch and combined statement of financial position as at 31 December 2022, in a
columnar format. (6 marks)

(b) Roy Ltd. has provided the following information to be used in inventory valuation:

Product Cost Realisable value Selling expenses

Sh.“million” Sh.“million” Sh.“million”
A 100 120 25
B 50 60 5
C 75 85 15

Required:
Determine the value of closing inventory for Roy Ltd. in compliance with International Accounting Standard (IAS)
2 - Inventories. (3 marks)

(c) On 1 January 2022, a farmer had a herd of 100 cattle all of which were 2 years old. At this date, the fair value less
point of sale costs of the herd was Sh.10,000,000.

On 1 July 2022, the farmer purchased 20 cattle (each two and a half years old) for Sh.60,000 each.

As at 31 December 2022, three-year-old cattle were selling at the market for Sh.90,000 each. Market auctioneers
usually charge a sales levy of 2%.

Required:
(i) Valuation of cattle bought on 1 July 2022. (2 marks)

(ii) Valuation of cattle as at 31 December 2022. (1 mark)

(iii) Total charge to statement of profit and loss for the year ended 31 December 2022. (1 mark)
(Total: 20 marks)

QUESTION THREE
Pika Limited, a public limited entity intends to expand its operations by acquiring investments in other entities.
On 1 November 2022, Pika Limited secured a 75% equity interest in Shiba Limited under the following terms:
• An immediate cash payment at a fair value of Sh.13 per share on 1 November 2022.
• An issue of three ordinary shares of Sh.10 par value in Pika Limited for every five shares acquired in Shiba Limited.
The fair value of a Pika Limited share was Sh.13 per share at the date of acquisition. The share issue has not yet
been recorded by Pika Limited.

On the same date, Pika Limited also acquired a 30% equity shareholding in Amua Limited paying Sh.24 million in
cash.

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The following draft statements of financial position as at 30 April 2023 relate to Pika Limited and Shiba Limited:

Pika Limited Shiba Limited

Sh.“000” Sh.“000”
Non-current assets:
Property, plant and equipment 135,000 100,400
Investments: Shiba Limited (6 million shares at Sh.13 each) 78,000 -
Amua Limited 24,000 -
237,000 100,400
Current assets:
Inventory 28,400 12,100
Trade receivables 27,500 19,900
Cash and cash equivalents 10,600 6,800
Total assets 303,500 139,200

Equity and liabilities:

Equity:
Ordinary shares of Sh.10 each 160,000 80,000
Retained profit: As at 1 May 2022 62,400 12,800
For the year ended 30 April 2023 21,700 10,800
Total equity 244,100 103,600

Non-current liabilities:
10% bank loans 25,000 10,000
Deferred tax 3,700 3,100
Current liabilities:
Trade payables 28,800 21,200
Current tax payable 1,900 1,300
Total equity and liabilities 303,500 139,200

Additional information:
1. At the date of acquisition, the fair values of Shiba Limited’s net assets approximated their carrying values with the
exception of plant whose fair value exceeded its carrying amount by Sh.10 million.
The plant had a remaining useful life of ten years at the date of Shiba Limited’s acquisition. The plant is being
depreciated on a straight-line basis. The plant is still carried at its carrying value in Shiba Limited’s financial
statements.
No fair value adjustments were necessary on the acquisition of investment in Amua Limited.
2. On 28 April 2023, Shiba Limited sent goods at an invoice price of Sh.7 million to Pika Limited which Pika Limited
neither received nor recorded until 5 May 2023. Shiba Limited had marked up those goods by 25% on cost.
The agreed trade payables recorded in the books of Pika Limited before the above transactions were Sh.6 million.
3. Pika Limited’s policy is to measure the non-controlling interests at fair value at the date of acquisition. For this
purpose, the directors of Pika Limited considered Shiba Limited’s share price of Sh.12 per share to be appropriate.
4. Impairment tests performed on 30 April 2023 revealed that goodwill on acquisition of Shiba Limited had not been
impaired, but due to declining sales of Amua Limited, the value of investment in Amua Limited had been impaired
to the extent of Sh.2 million.
5. Amua Limited reported a profit after tax of Sh.4 million for the year ended 30 April 2023.
6. Assume all profits and losses of the three companies accrued evenly throughout the year.

Required:
(a) Calculate the value of goodwill arising on acquisition of Shiba Limited. (4 marks)

(b) Determine the value of investment in Amua Limited as at 30 April 2023. (4 marks)

(c) Prepare a consolidated statement of financial position for Pika Group as at 30 April 2023. (12 marks)
(Total: 20 marks)

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QUESTION FOUR
(a) Lilongwe Ltd. is a public listed company. Details of the company’s statement of financial position as at 31 March
2022 and 31 March 2023 are shown below together with other relevant information.

Statement of financial position as at 31 March:

2023 2022
Sh.“million” Sh.“million” Sh.“million” Sh.“million”
Non-current assets:
Property, plant and equipment 880 760
Intangible assets 400 510
1,280 1,270
Current assets:
Inventory 350 420
Trade receivables 808 372
Interest receivable 5 3
Short term deposits 32 120
Bank 15 1,210 75 990
Total assets 2,490 2,260
Share capital and reserves:
Ordinary shares of Sh.1 each 300 200
Reserves:
Share premium 60 -
Revaluation reserves 112 45
Retained earnings 1,098 1,270 1,165 1,210
Total equity 1,570 1,410
Non-current liabilities:
12% loan note - 150
8% variable rate loan note 160 -
Deferred tax 90 250 75 225
Current liabilities:
Trade payables 530 515
Bank overdraft 125 -
Taxation 15 670 110 625
2,490 2,260

Additional information:
1. Details of property, plant and equipment as at:

31 March 2023 31 March 2022

Cost/ Depreciation Carrying Cost/ Depreciation Carrying
valuation amount valuation amount
Sh.“million” Sh.“million” Sh.“million” Sh.“million” Sh.“million” Sh.“million”

Land and
building
600 12 588 500 80 420
Plant 440 148 292 445 105 340
880 760

2. The company revalued the carrying value of land and building by an increase of Sh.70 million on 1 April
2022. On 31 March 2023, it transferred Sh.3 million from revaluation reserves to retained earnings relating
to depreciation on revaluation of buildings.
3. During the year, the company acquired new plant at a cost of Sh.60 million and sold some old plant for
Sh.15 million, incurring a loss of Sh.12 million.

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 4. The following is the statement of profit or loss (extract) for the year ended 31 March 2023:
Sh.“million” Sh.“million”
Operating loss (32)
Interest receivable 12
Finance costs (24)
Loss before tax (44)
Income tax repayment claim 14
Deferred tax charge (15) (1)
Loss for the period (45)
Finance costs are made of:
Interest expenses (18)
Penalty for early loan redemption (6)
24)
5. Short term deposits are deemed as cash equivalents.
6. Dividends of Sh.25 million were paid during the year.

Required:
Cash flow statement for Lilongwe Ltd. for the year ended 31 March 2023 in line with International Accounting
Standard (IAS) 7 - Cash Flow Statements. (14 marks)

(b) An item of plant and equipment in the books of Lima Ltd. had a carrying amount of Sh.6,000,000. It was classified
as held for sale on 30 September 2022. At that date, its fair value less costs to sell was estimated at Sh.5,500,000.
The asset was sold for Sh.5,550,000 on 30 November 2022. Lima Ltd.’s year end was 31 December 2022.

Required:
(i) Describe how the classification as held for sale and subsequent disposal should be treated in the financial
statements of Lima Ltd. (2 marks)

(ii) State how your response in (b) (i) above would change if the carrying amount of the asset at 30 September
2022 was Sh.5,000,000 and the rest of the amounts remained unchanged. (1 mark)

(c) A company received legal advice that the most likely outcome of a court case brought by an employee is that it will
lose the case and have to pay Sh.10 million. The legal team estimates that there is an 80% chance of this, but that
there is also a 10% chance of having to pay Sh.12 million and a 10% chance of paying nothing.

Required:
Determine if a provision is necessary and the best estimate of provision, if any. (3 marks)
(Total: 20 marks)

QUESTION FIVE
The following trial balance relates to Bidii Limited as at 31 December 2022:
Sh.“000” Sh.“000”
Property at cost (Building Sh.400 million) 600,000
Plant at cost 280,000
Motor vehicles at cost 70,000
Office equipment at cost 40,000
Accumulated depreciation (1 January 2022):
• Building 80,000
• Plant 111,160
• Motor vehicles 42,000
• Office equipment 15,000
Inventory (1 January 2022) 138,000
Purchases at cost 667,000
Distribution costs 44,000
Administrative expenses 93,500
Revenue 1,123,500
Trade receivables and trade payables 74,500 68,800
Bank balance 15,500
Deferred tax 32,400
Current tax 2,600
Bank interest 2,400
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 Sh.“000” Sh.“000”
Ordinary share capital (Sh.10 par value) 200,000
Share premium 50,000
Retained profit (1 January 2022) 223,640
Interim dividend paid 10,000
Suspense account 60,000
2,022,000 2,022,000

Additional information:
1. During the year ended 31 December 2022, Bidii Limited disposed of an item of plant for cash proceeds of
Sh.20,000,000 which were credited to the revenue account. No other accounting entry was made. The plant had
cost Sh.39,700,000 and had an accumulated depreciation of Sh.15,860,000.
Any gain/loss on disposal of plant should be included within the cost of sales.
It is the company’s policy to provide for full year’s depreciation in the year of asset purchase and none in the year of
disposal.
2. Depreciation on property, plant and equipment is to be provided and allocated as follows:
Asset Rate per annum Basis Allocation
• Building 2.5% Straight-line Administrative
• Plant 10% Reducing balance Cost of sales
• Motor vehicles 20% Straight-line Distribution
• Office equipment 12.5% Straight-line Administrative
3. It has been discovered that the former financial controller of Bidii Limited engaged in fraudulent financial reporting.
Sh.12,000,000 of trade receivables are non-existent and need to be written off. Of this amount, Sh.7,000,000 relates
to the year ended 31 December 2022, with the balance relating to prior periods.
4. The existing debit balance on the current tax in the trial balance represents the under/over provision for previous
year’s tax. A provision for current tax for the year ended 31 December 2022 of Sh.52,000,000 is required, together
with a decrease to the deferred tax provision of Sh.3,000,000.
5. Inventory count on 31 December 2022 revealed the value of inventory at a cost of Sh.85,000,000.
6. On 30 December 2022, the company directors invited the current shareholders to subscribe for a rights issue on the
basis of one new share for every five shares held at an exercise price of Sh.15 each. The cum rights price on the last
day of trading was Sh.20 per share.
The proceeds from the fully subscribed rights issue were credited to the suspense account.
Required:
The following financial statements presented in a suitable format for publication:

(a) Statement of profit or loss for the year ended 31 December 2022. (6 marks)
(b) Statement of changes in equity for the year ended 31 December 2022. (4 marks)
(c) Statement of financial position as at 31 December 2022. (10 marks)
(Total: 20 marks)
…………………………………………………………………………

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