ACC-1A Lecture Notes - Lecture 11: Matching Principle, Intangible Asset
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I need these ratios:
Return on Assets
|
You have obtained the following information:
STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER
20X8 | 20X7 | |||
Note | Draft ($m) | Actual ($m) | ||
Revenue | (1) | 645.5 | 606.5 | |
Other income | (2) | 15.6 | 14.4 | |
Changes in inventories | 3.8 | (16.4) | ||
Cost of materials | (334.1) | (286.8) | ||
Employee benefits expense | (91.0) | (83.9) | ||
Depreciation | (3) | (29.8) | (23.6) | |
Other expenses | (4) | (116.3) | (100.6) | |
Interest income, net | (5) | 12.3 | (20.9) | |
Profit before tax | 106.0 | 130.5 | ||
Income tax expense | (44.4) | (47.7) | ||
Profit for the year | 61.6 | 82.8 |
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER
20X8 | 20X7 | |||
Note | Draft ($m) | Actual ($m) | ||
Assets | ||||
Non-current assets | ||||
Intangible assets | (6) | 47.8 | 40.5 | |
Property, plant and equipment | (7) | 124.5 | 102.5 | |
172.3 | 143.0 | |||
Current assets | ||||
Inventories | (8) | 30.3 | 27.9 | |
Trade receivables | 73.1 | 50.3 | ||
Cash and cash equivalents | 111.4 | 86.0 | ||
Total assets | 387.1 | 307.2 | ||
Equity and liabilities | ||||
Equity | 5.8 | 5.8 | ||
Share capital | 15.3 | 15.3 | ||
Share premium | 112.1 | 80.1 | ||
Retained earnings | 133.2 | 101.2 | ||
Non-current liabilities | ||||
Provisions | (9) | 160.1 | 121.4 | |
Current liabilities | ||||
Trade payables | 33.5 | 31.8 | ||
Tax | 50.4 | 44.3 | ||
Other liabilities | 9.9 | 8.5 | ||
Total equity and liabilities | 387.1 | 307.2 |
Notes
(1) Revenue from business activities:
Revenue from business activities | ||
20X8 ($M) | 20X7 ($M) | |
Vehicles | 588.0 | 526.0 |
Parts and accessories | 39.6 | 36.8 |
Other | 17.9 | 43.7 |
645.5 | 606.5 |
Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.
Average number of employees:
20X8 (Draft) | 20X7 (Actual) | |
Wage earners | 484 | 499 |
Salaried employees | 483 | 477 |
Apprentices and trainees | 36 | 37 |
1,003 | 1,013 |
Other expenses include costs for warranties, administration and distribution, maintenance and insurance.
Interest income, net:
20X8 (Draft ($m) | 20X7 (Actual $m) | |
Interest and similar income | 16.8 | 25.1 |
Interest and similar expenses | (4.5) | (4.2) |
12.3 | 20.9 |
Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.
Property, plant and equipment:
Land and Buildings | Equipment | Assets under construction | Total | |
$m | $m | $m | $m | |
Cost | ||||
1 January 20X8 | 61.8 | 212.1 | 19.0 | 292.9 |
Additions | 5.0 | 28.9 | 9.4 | 43.3 |
Disposals | 0.0 | (4.5) | 0.0 | (4.5) |
Reclassification | 3.0 | 8.9 | (11.9) | 0.0 |
31 December 20X8 | 69.8 | 245.4 | 16.5 | 331.7 |
Depreciation | ||||
Current year | 1.9 | 18.4 | 0.0 | 20.3 |
Accumulated | 28.7 | 178.5 | 0.0 | 207.2 |
Net book value | ||||
31 December 20X8 | 41.1 | 66.9 | 16.5 | 124.5 |
31 December 20X7 | 34.9 | 48.6 | 19.0 | 102.5 |
(8) Inventories comprise:
20X8 (Draft $m) | 20X7 (Draft $m) | |
Raw materials, consumables and supplies | 8.3 | 7.3 |
Work-in-progress | 6.8 | 4.8 |
Finished goods | 15.2 | 15.8 |
30.3 | 27.9 |
(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.
The following additional information is available:
(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).
(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.
(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.
(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.
(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.
1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.
N.B these are pointers are for this question:
Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.
Question 1 (40 marks)
You are the audit manager of a medium-sized firm and have just received a package from Rachel Jones, the financial controller of KidSpace Ltd., an electronic toy manufacturer. This is your firmâs first year as auditor of KidSpace Ltd. The information below was prepared for a board meeting and Rachel, the acting Chief Financial Officer, felt it might be useful to you in preparation of the forthcoming audit for the year ended 30 June 2017.
KidSpace Ltd. | |||
Statement of Financial Position $'000s | |||
Current assets | 2017 | 2016 | 2015 |
Cash | 1,586 | 1,743 | 830 |
Accounts receivable and other receivables | 13,734 | 11,200 | 9,623 |
Inventory | 16,498 | 11,731 | 7,197 |
Total current assets | 31,818 | 24,674 | 17,650 |
Non-current assets | |||
Property, plant and equipment | 14,606 | 12,840 | 9,572 |
Long-term loan receivable | 5,200 | 3,600 | 3,300 |
Intangible assets | 1,400 | ||
Total non-current assets | 21,206 | 16,440 | 12,872 |
Total assets | 53,024 | 41,114 | 30,222 |
Current liabilities | |||
Trade payables and other payables | 9,012 | 6,288 | 2,021 |
Provisions | 4,875 | 3821 | 4577 |
Total current liabilities | 13,887 | 10,109 | 6,598 |
Non-current liabilities | |||
Long-term loan | 20,000 | 16,000 | 12,000 |
Total liabilities | 33,887 | 26,109 | 18,598 |
Net assets | 19,137 | 15,505 | 11,624 |
Shareholder's equity | |||
Share capital | 2,000 | 2,000 | 2,000 |
Retained earnings | 17,137 | 12,505 | 9,624 |
Total shareholder's equity | 19,137 | 14,505 | 11,624 |
KidSpace Ltd. | |||
Income Statement $'000s | |||
2017 | 2016 | 2015 | |
Sales revenue | 76,945 | 74,927 | 89,735 |
Cost of sales | 51,840 | 51,765 | 63,066 |
Gross profit | 25,105 | 23,162 | 26,669 |
Depreciation | 5,595 | 4,332 | 2,796 |
Inventory obsolescence | 990 | 1,173 | 670 |
Selling expenses | 2,405 | 3,153 | 3,317 |
Administrative expenses | 8,925 | 8,727 | 11,516 |
Finance costs | 1,040 | 1,275 | 1,140 |
Total expenses | 18,955 | 18,660 | 19,439 |
Profit before tax | 6,150 | 4,502 | 7,230 |
Tax expense | 1,518 | 1,621 | 2,386 |
Profit after tax | 4,632 | 2,881 | 4,844 |
Notes: | |||
Trade Receivables | 12,034 | 10,655 | 9,300 |
Pre-paids | 1,600 | 500 | 300 |
Other receivables | 100 | 45 | 23 |
Total Trade & other receivables | 13,734 | 11,200 | 9,623 |
Inventory | |||
Raw Materials | 6,599 | 5,866 | 3,845 |
WIP | 4,333 | 2,588 | 1,550 |
Inventory held for sale | 6,699 | 3,520 | 1,972 |
17,631 | 11,974 | 7,367 | |
Provision for Inventory obsolescence | (1,133) | (243) | (270) |
Total inventory | 16,498 | 11,731 | 7,197 |
Ratios | 2017 | 2016 | 2015 |
Profit ratio | 7.99% | 6.01% | 8.06% |
Return on shareholder equity | 24.20% | 19.86% | 41.67% |
Quick Ratio | 0.99 | 1.18 | 1.54 |
Times Interest Earned | 6.91 | 4.53 | 7.34 |
Accounts Receivable Turnover (times) | 6.78 | 7.51 | 9.33 |
Asset Turnover | 1.45 | 1.84 | 2.94 |
Inventory Turnover (times) | 3.50 | 5.35 | 8.76 |
During a brief telephone call with Rachel, you made the following notes:
1. One of the conditions of the long-term loan is that the company is not to exceed a debt-to equity ratio of 2:1 at any time and they must maintain a current ratio of 2:1. The loan is reviewed each year on 31 July.
2. Provision for obsolescence of finished inventory held for sale and work-in-progress is provided for at a flat rate of 10%. The amount provided in previous years was 20%. Rachel said that the company believes it has been overly conservative in previous years and 10% is a more realistic level, given the nature of its products.
3. To combat declining sales a senior management incentive scheme based on sales and profit levels was introduced in July 2016.
4. The long-term loan receivable is from a company involved in the development and production of computer software. It is owned by one of the directors.
Required:
a) Identify and explain what the inherent risks for KidSpace Ltd. that you will need to consider. (6 marks)
b) From the information provided, perform additional preliminary analytical procedures:
i) Simple comparison (3 marks)
ii) Current ratio (1 mark)
iii) Return on assets (1 mark)
iv) Gross profit ratio (1 mark)
v) Debt-to-equity ratio. (1 mark)
c) Drawing on information from a) & b), identify and justify:
i) Three key account areas that would require special attention during the audit of the 30 June 2017 financial statements. Also, indicate if those accounts are likely to be over or understated. (12 marks)
ii) Two key assertions at risk for each of those account areas. (12 marks)
d) Identify and discuss any going concern issues to be considered at this stage?. (3 marks)