Financial Accounting: Statement of Financial Position and Income Statement; The Matching Principle;

Statement of Financial Position and Income Statement

The land was purchased in 2008 for £2,000,000. It was externally valued at £4,000,000 on 31 December 2020. The directors wish to include this figure in the accounts.

Inventory at 31 December 2020 cost £300,000. This includes some slow-moving items which cost £18,000 which would normally sell for £22,000 but which the directors have decided to sell at £14,000 to clear them.

The company’s depreciation policy is to provide a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal with the following rates applicable to the non-current assets:

Freehold land – no depreciation required.

Buildings – 2% per year on a straight-line basis.

Plant and machinery – 10% on a reducing balance method.

A bad debt of £20,000 is to be written off. The company has decided to maintain the provision for doubtful debts at 5% of remaining trade receivables.

The prepayment on building insurance on 31 December 2020 was £100,000.

Corporation Tax of £25,000 on the current year’s profits is to be provided. An audit fee for £13,000 would also need to be provided.

The company issued 12,000 additional shares at £2.50 each on 30 December 2020. The proceeds were paid as Christmas bonuses to employees. No entries have been made in the company’s accounting records in respect of this transaction.

There was no movement on the debenture account in 2020. Any unpaid interest has yet to be accrued for.

Required:

(a) Prepare the Statement of Financial Position and the Income Statement for the year ended 31 December 2020 for the directors.

(b) “The Matching Principle is the essence of financial accounting, with significant implications for the compilation of both the income statement and the statement of financial position.”

Ashtonplc’s income statement for the year ended 31 December 2020 and statements of financial position at 31 December 2019 and 2020 were as follows:

Additional information for the year ended 31 December 2020 is as follows:

During the year, the company sold machinery that originally costs £40,000 for £26,000. The accumulated depreciation for this machinery sold was £15,000.

Dividends of £18,000 was paid.

(a) Prepare a Statement of Cash Flows for Ashton plc for the year ended 31 December 2020 in accordance with IAS 7 ‘Statement of Cash Flow.’

(b) Critically discuss what insights can be drawn from a statement of cash flows and why this offers important insights beyond what is included in the income statement or statement of financial position.

Bottle plc manufactures eco-friendly drinking bottles. The company is considering various investment projects that should help improve their products. They have shortlisted three projects and asked you to recommend the best option.

They provided you with the following information about the projects:

Project I will last for 3 years. The initial outlay is £400,000 and the expected cash flow originating from the project is £200,000 for the first 2 years of the project and £60,000 in the last year of the project life.

Project II will last for 3 years. The initial outlay is £350,000 and the expected cash flow originating from the project is £180,000 for the first 2 years of the project and £200,000 in the last year of the project life.

Project III will last for 4 years. The initial outlay is £380,000 and the expected cash flow originating from the project is £150,000 in the first 2 years and then increaseby £60,000 in year 3 and stay at that level until the end of the project life.

Current cost of capital is 20%.

(a) Evaluate each of the three projects using Payback Period.

(b) Evaluate each of the three projects using Net Present Value

(c) Explain which projects should be accepted and why.