SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 1 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 2

(a) Alpha Limited

Statement Showing Recalculation of Net Profit
for the year ended June 30, 2018
Rs. ‘000’
Profit for period after dividend (130,800 - 14,760) 116,040 1.00
Dividends paid [(300,000) x (0.40 + 0.30)] 210,000 1.00
Draft profit for the year ended June 30, 2018 326,040 0.50
Fraud adjustment (4,800) 0.50
Profit on un-recorded sales (W-1) 720 0.50
Depreciation : Building (198,000/15years) 13,200 1.00
Plant (216,600 x 20%) 43,320 (56,520) 1.00
Increase in investment [(15,000 x 1,296/1,200) – 15,000] 1,200 1.00
Provision of income tax (13,680) 0.5
Re-calculated profit for the year ended June 30, 2018 252,960 0.5

(b) Alpha Limited

Statement of Financial Position
as at June 30, 2018
Rs. ‘000’
Non-Current Assets
Property, plant and equipment (W-4) 413,280 0.50
Investments at fair value through profit and loss 16,200
[15,000 + 1,200 (W-3)] 0.75
429,480
Current Assets
Stock [100,800 – 2,400 (W-1)] 98,400 0.75
Debtors [(62,640 + 3,120 – (4,800+1,800)] 59,160 1.00
Cash and bank 4,560 0.50
Total Assets 162,120
591,600 0.25

Equity and Liabilities

Equity
Ordinary share capital 300,000 0.50
Share premium 48,000 0.50
Revaluation reserve [(21,600 +31,200 (W-2)] 52,800 0.75
Retained earnings (W-3) 55,920 0.50
456,720
Current Liabilities
Income tax payable (13,680 + 23,040) 36,720 0.75
Short-term loan and other current liabilities 98,160 0.50
Total Equity and Liabilities 134,880
591,600 0.25

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provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 2 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
W-1: Recording of sales Rs. ‘000’
Trade receivable increased by 3,120 0.50
Inventory decreased by cost (3,120
x100/130) 2,400 0.50
Profit increased by un-recorded sale 720 0.50

W-2: Revaluation of Building Rs. ‘000’

b/d (222,000-24,000) 198,000 0.75
Depreciation on building (a) (13,200) 0.50
Book value as at June 30, 2018 184,800 0.50
Re-valued amount 216,000 0.50
To Re-valuation reserves 31,200 0.25

W-3: Retained earnings Rs. ‘000’

As per books 130,800 0.50
Fraud adjustment (4,800) 0.50
Profit on un-recorded sales (W-1) 720 0.50
Depreciation [13,200(a) + 43,320(a)] (56,520) 0.75
Increase in investment (a) 1,200 0.50
Provision of income tax (13,680) 0.50
Prior year adjustment of fraud (W-2) (1,800) 0.50
Retained Earnings as at June 30, 2018 55,920 0.25

W-4 Property, plant and equipment

Land 24,000 0.50
Building 216,000 0.50
Plant (216,600 x 80%) 173,280 0.75
413,280 0.25

Question No. 3

(a) Financial Assets and Financial Liabilities 04

Financial Assets:
Any asset that is:
 cash
 an equity instrument of another entity
 a contractual right
 to receive cash or another financial asset from another entity; or
 to exchange financial assets or financial liabilities with another entity under conditions
that are potentially favorable to the entity.
Financial Liabilities:
Any liability that is:
 a contractual obligation:
 to deliver cash or another financial asset to another entity; or
 to exchange financial assets or financial liabilities with another entity under conditions
that are potentially unfavorable to the entity
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stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 3 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

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(b) Classification into Financial Asset, Financial Liabilities and Others: 04
Financial Assets Financial Liabilities None
(i) Cash (xi) Trade payable (iii) Gold
(ii) Bank balance (xv) Loan payable (v) inventories
(iv) Trade receivable (xvi) Dividend payable (viii) prepaid expenses
(vi) Government notes receivable (ix) fixed assets
(vii) loan receivable (x) Patents, trade mark and goodwill
(xii) Warranty payable
(xiii) income tax
(xiv) deferred tax

(c) (i) Limitations of Cash Flows: 03

 Statements of cash flows are based on historical information and therefore do not
provide complete information for assessing future cash flows.
 There is some scope for manipulation of cash flows e.g. a business may delay paying
suppliers until after the year end.
 Cash flow is necessary for survival in the short term, but in order to survive in the long
term a business must be profitable. It is often necessary to sacrifice cash flow in the
short term in order to generate long term.

(ii) Differences between Net Profit and Net Cash Flows from Operating Activities: 03
 It differs for several reasons. One reason is non-cash expense, such as depreciation
and the amortization of intangible assets. These expenses, which require no cash
outlays when they are recognized, reduce net income but do not require cash
payments.
 Secondly, there is a timing differences existing between the recognition of revenue and
expense and the occurrence of the underlying cash flows.
 Finally, non-operating gains and losses enter into the determination of net income, but
the related cash flows are classified as investing or financing activities, not operation
activities.

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suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 4 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
(d)
Pioneer Limited
Statement of Cash Flows (Extract)
for the year Ended December 31, 2018
Rs.
Cash Flows from Operating Activities
Profit before tax 1,000,000 0.25
Adjustments for:
Depreciation charge 240,000 0.25
Gain on sale of marketable securities (80,000) 0.25
Interest expense 150,000 0.25
1,310,000
Working Capital Adjustment
Decrease in inventories 20,000 0.5
Increase in trade receivables (40,000) 0.5
Increase in trade payables 40,000 0.5
Net cash generated from operations 1,330,000 0.25
Interest paid (100,000) 0.25
Dividend paid (alternatively it may be taken 0.25
into financing activities) (335,000)
Tax paid (285,000) 0.25
610,000 0.5
Tax payable
Tax paid 285,000 Opening balance 240,000 0.25+0.25
Closing 180,000 Profit or Loss 225,000 0.25+0.25
465,000 465,000

Interest payable
Interest paid 100,000 Opening balance 230,000 0.25+0.25
Closing 280,000 Profit or Loss 150,000 0.25+0.25
380,000 380,000

Retained Earnings
Dividend paid 335,000 Opening balance 1,520,000 0.25+0.25
Closing 1,960,000 Profit or Loss 775,000 0.25+0.25
2,295,000 2,295,000

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stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 5 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 4
(a) Calculation of Depreciation Charge for the Year Ended June 30, 2018 and Book Value:
Rs. 000
Building 30,000 0.50
Less ; accumulated depreciation (5 x 30/15) (10,000) 1.00
Book value on July 01, 2017 20,000 0.50

Depreciation charge for the year ended June 30, 2018:

Book value of asset as at July 01, 2017 Rs. 20,000
Remaining useful life as at July 01, 2017 (25 years – 5 years) 20 years 1.00
Depreciation charge for the year ended June 30, 2018 (20,000 / 20) Rs. 1,000 1.00

Book value as at June 30, 2018

Book value at start of year 20,000 0.25
Depreciation charge for the year (1,000) 0.25
Book value as at June 30, 2018 19,000 0.50

(b) Conditions for Change in Accounting Policies and Required Treatment: 03

Change in accounting policy is permitted only if:
(i) change is required by IFRS; or
(ii) change results in giving more true and fair view of financial statements
Change in accounting policy is applied retrospectively, i.e. as if the new accounting policy had
always been applied. This involves:
- Adjusting last year's opening balance of retained earnings as if the new policy was applied
since inception; and
- Presenting last year's comparative figures as if the new policy had always been applied.

(c) Classification into Accounting Policies and Accounting Estimates: 03

Accounting Estimates:
(i) uncollectable receivables - bad debts
(iii) useful life of asset
(iv) salvage value of asset
(vi) depreciation methods change
(viii) warranty claims
(x) Value of pension benefits obligations.
Accounting Policies:
(ii) Inventory valuation methods (FIFO, average cost etc)
(v) Accruals basis of preparation of financial statements`
(vii) Basis of measurement of non-current assets such as historical cost and revaluation basis
(ix) Timing of recognition of assets, liabilities, expenses and income

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 6 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
Question No. 5
(a) Following are the yardsticks that should be used while recognizing intangible assets from 08
research and development work.
 No intangible asset arising from research shall be recognized.
 An intangible arising from development shall be recognized if, and only if , an entity can
demonstrate all of the following:
 The technical feasibility of completing the intangible asset so that it will be available for use
or sale.
 Its intention to complete the intangible asset and use or sell it.
 Its ability to use or sell the intangible asset.
 How the in tangible asset will generate probable future economic benefits. Among other
things, the entity can demonstrate the existence of a market for the output of the intangible
asset or the intangible asset itself or, if it is to be used internally, the usefulness of the
intangible asset.
 The availability of adequate technical, financial and other resources to complete
the development and to use or sell the intangible asset.
 Its ability to measure reliably the expenditure attributable to the intangible asset during its
development.

(b)
Rs.
(i) Final contract price 444,000 0.50
Less: Costs to date (200,000)
Estimated future costs (138,000)
Total cost 338,000 0.50
Estimated Final Profit 106,000 1.00

(ii) Statement of Profit or Loss (Extract)

Rs.
Revenue (444,000 x 0.57) 253,080 1.00
Cost of Sales (338,000 x 0.57) 192,660 1.00
Gross Profit 60,420 1.00

Statement of Financial Position

Current Assets:
Inventory (WIP) 7,340 1.00
(200,000 – 192, 660)

Trade receivable 48,080 1.00

(253,080 – 205,000)
55,420 1.00
Working:
Contract Revenue 444,000
Value of work certified 253,080

Progress % 253,080 1.00

=
444,000
= 0.57 1.00

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
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provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
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 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 7 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks

Question No. 6
(a) (i) & (ii) Book Values and Tax Bases as at March 31, 2018-19 Rupees
Current Tax
Tax depreciation:
Purchase cost April 01, 2017 1,000,000 0.25
First year allowance at 50% 500,000 0.5
Tax written down value at March 31, 2018 500,000 0.5
Tax depreciation second year at 25% 125,000 0.5
Tax written down value March 31, 2019 375,000 0.25

Accounting depreciation:
Purchase cost April 01, 2017 1,000,000 0.25
Straight line depreciation @ 20% 200,000 0.5
Accounting Book value on March 31, 2018 800,000 0.5
Straight line depreciation @ 20% 200,000 0.5
Accounting Book value on March 31, 2019 600,000 0.25

Rupees
at March at March
Deferred tax provision
31, 2018 31, 2019
Accounting book value 800,000 600,000 0.5 + 0.5
Tax base 500,000 375,000 0.5 + 0.5
Taxable temporary difference 300,000 225,000 0.5 + 0.5
Deferred tax liability as at March 31, 2018 90,000 0.5
(300,000 x 30%)
Deferred tax liability as at March 31, 2019 67,500 0.5
(225,000 x 30%)

(iii) Increase/ Decrease in Deferred Tax Liability:

Income statement for the year ended March 31, 2019 (Extract)
Income tax - reduction in deferred tax - Credit (22,500) 2.00
(67,500 – 90,000)

(b) The conceptual framework states that: 2.0

“The objective of general purpose financial reporting is to provide information about the reporting
entity
that is useful to existing and potential
investors, lenders and other creditors
in making decisions about providing resources to the entity”
 The users need information about
 The economic resources of the entity
 The claims against the entity

DISCLAIMER: These suggested answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA Pakistan members, students and faculty members only. No part of it can be reproduced,
stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA Pakistan. The
suggested answers provided on and made available through the ICMA Pakistan’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. The ICMA Pakistan has
provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.
 SUGGESTED SOLUTIONS/ ANSWERS – SUMMER 2019 EXAMINATIONS 8 of 8

FINANCIAL ACCOUNTING [M4] – MANAGERIAL LEVEL-2

Marks
(c) Definition of Accounting Concepts: 3.0
 Going Concern
The entity is normally viewed as a going concern, that is, as continuing in operation for the
foreseeable future.
It is assumed that the entity has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of its operations.
 Accrual Basis
The effects of transactions and other events are recognized when they occur (and not as
cash or its equivalent is received or paid) and they are recorded in the accounting records
and reported in the financial statements of the periods to which they relate.

THE END

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provided suggested answers on the basis of certain assumptions for general guidance of the students and there may be other possible answers/ solutions based on different assumptions and understanding. The ICMA Pakistan and its
Council Members, Examiners or Employees shall not be liable in respect of any damages, losses, claims and expenses arising out of using contents of these suggested answers. It is clarified that the ICMA Pakistan shall not be liable
to attend or receive any comments, observations or critiques related to the suggested answers.