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BMAN 21020: Financial
Reporting and Accountability Revision Advice and Preparation for Ground Rules on Questions relating to the Exam ▪ Assessment guidance provided in this Lecture ▪ To ensure the same information is available all, no additional information will be provided by either your workshop leader or lecturer on an individual basis ▪ Emails cannot be answered on individual questions relating to the assessment…..nor can we have individual conversations with you…. …… Please: use Blackboard discussion forum for Q’s Revision Strategy ▪ You should focus revision across the topics covered in semester 2 and NOT on a small number of topics. ▪ The exam will comprise MCQ and written section to allow for a full coverage of the syllabus ▪ Assessment will cover a range of Semester 2 topics, so you need a broad understanding of the subject to do well Approach to Revision Sources of Revision in Order of importance – Revision Activities – Workshops – Exercises set in lectures – Homework Activities & review questions – Core text book chapters covering lecture topics – Wider financial press – Academic papers Remember this is a very dynamic subject. Financial press contains many of the issues we discussed in lectures. Use these examples to enlighten your answers. May 2022 Assessment ▪ 50% of your course grade (other 50% = Semester 1) ▪ Format is same as for semester 1, but with only ONE compulsory question for the open-book section: Semester 2 assessment: ▪ MCQ Section (1 hour, 60 marks: 1 minute per mark) 10 Questions, ranging between 2 and 8 marks 40% ▪ Open-Book EXAM (1½ hour, 60 marks: 1½ mins per mark) Q1 (compulsory): 5 sections. Essay-style question on interpretation, with other aspects [1,500 words] 60% Assessment Areas from Semester 2 Interpretation ▪ Basic ratios & extensions; Trend & multivariate analysis; recasting for comparability ▪ Revise WSP 2 (Positive Accounting Theory) Equity & Liabilities: ▪ Capital Maintenance & Distributable Profits ▪ Capital Reconstruction ▪ Financial Instruments ▪ Company Tax ▪ Employee Benefits Normative Theories: ▪ Changing prices Positive Accounting Theory: ▪ How A/c-based agreements with lenders & managers can incentivise manipulation (Thomas Cook in Workshop): ▪ E.g., debt covenants and financial instruments ▪ E.g., executive pay related to reported profit Corporate Governance and Audit ▪ Role of: Board of Directors and external auditor MCQ section ▪ For the first section you will have 10 MCQ questions. Areas that may be covered include: Equity & Liabilities: ▪ Capital Maintenance & Distributable Profits ▪ Capital Reconstruction ▪ Financial Instruments ▪ Company Tax ▪ Employee Benefits (pensions) Normative Theories: ▪ Changing prices Corporate Governance and Audit ▪ Role of: o Board of Directors o External auditor MCQ section Capital Maintenance & Distributable Profits: Topic 1 Sem 2: Lecture 1, WSP 1 ▪ Financial capital maintenance [Historic Cost Accounting – Perspective taken in historical cost accounting ▪ Purchasing power maintenance [Current Purchasing Power] – HC adjusted for changes the purchasing power (inflation) ▪ Physical operating capital maintenance [Current Cost Accounting] – Revaluing transactions to current costs to maintain funds for the same level of operations Normative Accounting Theory: Accounting for changes in prices Text [p. 64] Capital of £10, buys one unit of X (RPI: 100). Year 1: sells X at year end (RPI: 140, replacement cost: £15) for £20. Income statement Financial Capital Maintenance (Nominal: HC) Financial Capital Maintenance (Purchasing Power) Physical Capital Maintenance Sales 20 20 20 Cost/replacement Profit (all paid as dividends) (10) 10 (14) 6 (15) 5 “Retained” (relative to HC) - 4 5 Opening Capital: 10 10 10 Closing Capital: 10 14 15 All reported profit is paid as dividends Cash (after dividends paid) 10 14 15 SOFP Capital Maintenance Capital Maintenance & Distributable Profits: Topic 1 Sem 2: Lecture 1, WSP 1 Go through the workshop activities to remind you of the alternative accounting treatments that were proposed. Revision Area in Blackboard: Revision Qs answers after quiz answered o Two types of MCQ possible: o What profit is distributable whilst maintaining HCA / CPP / CCA o Holding gains (inventory held), or loss (holding cash under CPP) o More detailed revision activity also provided (which goes beyond the level of exam, so is optional: not required for revision) Normative Accounting Theory: Accounting for changes in prices Capital Reconstruction Key areas to revise include: ▪ Can you explain why creditors may be willing to agree to a reduction in share capital and a restructuring of the business that owes them money? ▪ Can you account for a capital reconstruction and reorganisation? This will require knowledge of double entry and the ability to use a Capital Reorganisation account as a “stepping stone” to complete the full list of adjustments. ▪ We went through an example in the relevant workshop Capital Reconstruction: Here’s a REVISION Q for you: £'000 £'000 Non-current Assets (PPE) 170 Current Assets (no cash) 220 Current Liabilities Trade Payables (220) Bank Overdraft (50) (270) Net Current Liabilities (50) Total Assets less liabilities 120 Capital and Reserves 150,000 Pref shares (£1) 200 100,000 Ord shares (£1) 100 Retained Earnings (180) 120 The following capital restructuring scheme is approved and authorised: i. 50,000 of the ordinary shares are to be surrendered. ii. The preference shares are to be surrendered and cancelled and the holder of every 50 pref shares pays Beta £30 cash, and gets issued : o One 7% loan note of £50 each, and o 20 fully paid ord. shares of £1 (redistributing shares from [i]) iii. The freehold property to be revalued upwards by £80,000 iv. The negative balance on retained earnings to be written off, with any remaining balance on the Capital reduction and reorganisation (CR&R) used to write down equipment. FULL Q with Test for you will be in BBD’s Revision [Sem 2] ANS available once you complete test Capital Reconstruction Other aspects: What are the challenges in raising finance for a company with this SOFP? How would the company manage to persuade stakeholders to: o Accept the restructuring o Be willing to provide more cash Capital Reconstruction Revision Area also includes Quiz based on another Capital Reduction and Reorganisation (CR&R) question, so you can see how MCQs may be raised – e.g.: o What is the remaining balance on the CR&R account (to use to write down an asset) o What are the impacts on CR&R relating to some of the proposed adjustments (e.g. steps 1 and 3 in previous slide) Two Further Activities included in revision section. Company Tax Company Tax ▪ Revision [Sem 2] contains short test on accounting entries relating to tax. Most companies have a corporation tax account and a deferred tax account; consider their impact on the income statement. An over- or under-provision from previous years, means income statement tax charge differs from the closing Tax liability. Similarly, accelerated capital allowances (or other timing differences) will also impact upon the tax charge in the year. ▪ Ensure you focus on the concepts of deferred tax: how they arise and why we account for them as we do: o Deferred Tax Liability o Deferred Tax Asset when is each recognised and why, and how is each calculated?