SUGGESTED SOLUTION

B2 – FINANCIAL REPORTING
MAY 2023

ANSWER 1
(a) Statement of Profit or Loss
TZS.‘000’
Sales 1,488,900
Cost of goods sold (w6) 699,400
Gross Profit 789,500
Operating expenses (w8) 328,300
Profit before tax 461,200
Corporate tax 138,360
Profit after tax 322,840
Dividend (w9) (5,000 + 112,994) 117,994
Profit retained during the year 204,846

(b) Statement of Financial Position

ASSETS TZS.‘000’
Property, plant and equipment (w1) 495,750
Land and Buildings (w3) 386,200
Other non-current assets 66,920
Cash and bank balance 341,280
Trade receivables 215,700
Merchandise (w4) 288,200
TOTAL ASSETS 1,794,050

EQUITY AND LIABILITIES

Ordinary shares 800,000
Retained profit (204,846+105,150) 309,996
Revaluation surplus (w7) 75,100
5% Preference shares 100,000
Trade payables 89,300
Amount owing for PPE (w2) 105,000
Dividends payable (w9) 117,994
Tax payable 138,360
Provision for water wells drilling (note 4) 58,300
TOTAL EQUITY AND LIABILITIES 1,794,050

WI: NBV PPE

PPE at cost per TB 487,000
Add: cash payable for new item 30,000
Plot to exchange - FV 75,000
Less: Accumulated depreciation - 96,250
NBV at year end 495,750

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 W2: Other payable for PPE
Cash payable (note 1) 30,000
FV of lot to exchange (note 1) 75,000
Total payable 105,000

W3: Land and buildings -NBV

Value before depreciation per TB 563,000
1mpairment loss write off - 40,000
Adjusted balance 523,000
Less: Accumulated depreciation 136,800
NBV at year end 386,200

W4: Merchandise
Balance per TB 263,200
Returned stock (w5) 25,000
Adjusted balance 288,200

W5: Returned stock at cost

Invoice price (note 3) 34,300
Price before discount (34.3/.98) 35,000
Inventory at Vibarua’s cost (35/1.4) 25,000

W6: Cost of goods sold

Balance per TB 724,400
Less: cost of returned stock - 25,000
Cost of goods sold 699,400
Alternatively:
Balance per TB 724,400
Add: ending stock per TB 263,200
Less: adjusted ending stock - 88,200
Revised cost of goods sold 699,400

W7: Revaluation surplus

Balance per TB 115,100
1mpairment write off (note 2) 40,000
Ending balance 75,100

W8: Operating expenses

Balance per TB 270,000
Provision for construction - PV 58,300
Revised expense 328,300

W9: Dividend
Preference dividend 5,000
Ordinary dividend 112,994
Total Dividend 117,994
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ANSWER 2

Consolidated Statement of Profit or Loss of Kiba Group for the year ended
30th September 2021

TZS.‘000’
Revenue (TZS.150,000 + TZS.120,000 + 8/12 x TZS.108,000 –
TZS.12,000 – TZS.3,600) 326,400
Cost of sales (W1) (184,272)
Gross profit 142,128
Other operating expenses (TZS.24,000 + TZS.18,000 + 8/12 x (54,000)
TZS.18,000)
Income from investments (W2) 14,160
Finance costs (W3) (27,360)
Profit before tax 74,928
Income tax expense (TZS.10,800 +TZS.7,200 + 8/12 x TZS.6,480) (22,320)
Profit for the year 52 608
Share of profit attributable to:
Owners of the parent 46,248
Non-controlling interest (W4) 6,360
52,608

Summary consolidated statement of changes in equity for the year ended

30th September 2021

Noncontrolling
Group Total
shareholders
TZS.‘000’ TZS.‘000’ TZS.‘000’
Balance at 1st October 152,832 17,040 169,872
2020 (W5 & W6)
Add: Profit for the 46,248 6,360 52,608
year
Less: Dividends paid (16,800) (1,200) (18,000)
Add: Increase due to 26,460 26,460
acquisition (W7)
Balance at 30th 182,280 48,660 230,940
September 2021

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Workings
WI Cost of Sales
TZS.‘000’
Kiba 84,000
72,000
Chaghati 40,800

Kido (8/12 x 65,200) (192)

(240)
Provision for unrealized profit
Chaghati 25/125 x (TZS.2.400 – TZS.1,440) (1,200)
Kido 25/125 x TZS.1,200 (1,440)
Extra depreciation: (15,600)
Chaghati plant (1/4 x TZS.19,200 – TZS.14,400)
Kido brand (1/15 x TZS.32,400 x 8/12)
Internal transfer of goods (12,000 + 3,600)
184,272

W2 Income from investments

TZS.‘000’
Kiba + Chaghati + 8/12 x Kido 20,400
Dividend from Chaghati to Kiba (80% of TZS.6,000) (4,800)
Interest from Chaghati to Kiba (TZS.24,000 x 9/12 x 8%) 1,440
14,160

W3 Finance costs
TZS.‘000’
Kiba + Chaghati + 8/12 x Kido 28,800
Interest from Chaghati to Kiba (W2) (1,440)
27,360

W4 Non-controlling Interest
TZS.‘000’
Chaghati 20% x TZS.19,200 - TZS.1,200) 3,600
Kido 25% x ((TZS.18,720 x 8/12) TZS.1,440) 2,760
6,360
W5 Group equity at 1 October 20 8 (opening)
TZS.‘000’
Kiba – per financial statements 132,000
Chaghati: 24,000
Group share of post-acquisition movement per FS (80% (TZS.72,000 –
TZS.42,000) (2,880)
Additional depreciation-fair value adjustment (plant) (80% (TZS.19,200 - (288)
TZS.14,400) x 3/4)
Opening URP in inventory (25/125 x TZS.l,440)
152,832
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W6 Non-controlling interest in equity at 1 October 2008 (opening)
TZS.‘000’
Per financial statements (20% x TZS.72,000) 14,400
Net increase in fair value of land (TZS.42,000 — TZS.30,000) x 20% 2,400
Net increase in fair value of plant (20%(TZS.19,200— TZS.14,400) x 1/4 240
17,040

W7 Non-controlling interest in equity of Kido at 1 February 2021

TZS.‘000’
st
Equity of Kido per FS at 1 October 2008 67,200
Increase per FS at 31st January 2021 (TZS.18,720 x 4/12) Fair 6,240
value adjustment 32,400
NCI share is 25% of TZS.l05,840
105,840
26,460

ANSWER 3

(a) Calculation of Ratios

NAME OF THE RATIO FORMULA RATIO RATIO
2022 2021
(i) Operating Profit Margin EBIT/SALES x100 7.99% 11.698%
(ii) Return on Capital Employed EBIT/CAP. EMPLOYED x100 3.8% 9.5%
(iii) Net Assets Turnover SALES/NET ASSETS 0.477 times 0.814 times
(iv) Gearing LONG-TERM DEBT/ LONG- 40.54% 77.05%
TERM DEBT +EQUITY
(v) Interest Cover EBIT/INTEREST EXPENSE 1.34 times 1.82 times

(b) Comment on the Performance:

(i) Generally, the firm performed better in year 2021 as compared to year 2022.

(ii) The revaluation surplus only improves the equity position (revaluation surplus)
and non-current assets position of the firm, but, it does not improve the
productivity/performance of the firm concerned. The revaluation on non-current
assets made by Qgas in year 2022 almost doubled the non-current assets value,
while other items remained in normal values. This in turn made all the ratios in
base of total assets and in equity to be very low, e.g. the ROCE, Net Assets
Turnover and the Gearing.

(iii) Profit may continue falling in the coming year due to the current negotiation
with major customers as it was observed in the year 2022.

(c) The IASB Conceptual Framework identifies two concepts of capital:

• Financial capital – this is synonymous with the net assets or equity of
the entity. Under the financial maintenance concept, the profit is earned
only when the amount of net assets at the end of the period is greater

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 than the amount of net assets in the beginning, after excluding
contributions from and distributions to equity holders.

• Physical capital – this is the productive capacity of the entity based on,
for example, units of output per day. Here the profit is earned if physical
productive capacity increases during the period, after excluding the
movements with equity holders.

ANSWER 4

(a) Pros and cons of using Statement of Cash Flows when evaluating financial
performance

Pros of cashflow statement in evaluating financial performance:

l. Assessing liquidity/actual cash position at the end of accounting period which
statement of profit or loss is unable to specify. A discrepancy in cash position
can be gauged through analysis of the cash flow statement. When there is
excess cash then it can be used to invest and grow the business, The statement
of cash flows helps in defining an optimal cash position of an entity. If
optimum cash balance can be determined, the firm can ascertain the excess or
shortage of cash.

2. Assisting in planning, budgeting, and controlling: The financial planning and

analysis are done with the help of statement of cash flows. It helps the top-level
management to coordinate financial operations properly. Cash management is
possible through the preparing statement of cash flows. The management can
then prepare an estimate about various inflows of cash and outflows of cash so
that it becomes helpful to take future actions.

3. Performance Appraisal: The management can evaluate the performances

regarding the cash by comparing actual cash statement with projected statement
of cash flows. If any variance is found, it should be rectified accordingly.

4. It shows the actual cash movement of an entity between two reporting periods,
a revelation which statement of profit or loss is unable to present. So, it is
important to prepare statement of cash flows for helping anyone interested in
knowing liquidity position of an entity.

5. It also acts like a filter and is used by many analysts and investors to judge
whether company has prepared the financial statements properly or not because
if there is any discrepancy in the cash position as shown by the balance sheet
and the statement of cash flows, it means that statements may be incorrect.

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 Cons of using statement of cashflows in financial analysis:
1. The statement of cash flows fails to present the net income of an entity as it
ignores non-cash items which statement of profit or loss takes them into
account. Statement of cash flow does not help to assess profitability for it does
not consider noncash cost or revenues.
2. Statement of cash flows can no way become a substitute to utility one will get
from information that statement of profit or loss presents: The usefulness of a
statement of cash flows may not substitute those of statement of profit or loss.
3. Industry comparison may not be possible: As the statement of cash flows does
not measure efficiency of an entity, inter firm comparison with
others in the same industry is not possible. A firm having less capital
investment shall have less cash flow than the firm which more capital
investment resulting in higher cash flows.
4. In practice, the statement of cash flows does not assess liquidity or solvency
position of the firm for it presents cash position on a particular date. It only
helps to know what amount of obligation can be met.
5. In isolation, statement of cash flows may be of no use and it requires other
financial statements like statement of financial position or statement of profit
and loss etc. Therefore isolated, statement of cash flows has a limited use.

(b) Statement of Cash Flows for Jeyplus Limited for year ended December 31, 2020

TZS.‘000’
Profit before interest and tax (w4) 420,500
Add depreciation (w2) 107,910
Inventory write off 120,000
Add: goodwill write off 8,000
Add: provision for debtors (w5) 1,010
Adjusted profit 657,420
Working capital changes:
Decrease of trade payables (31,150)
Decrease of trade receivables 22,000
Increase of stock (56,200)
Tax paid (w4) (155,150)
Net cash inflow from operating activities 436,920
Investing activities
Acquisitions of NCA (w8) (228,300)

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 Disposal of NCA (w1) (23,890)
Net cash outflow from investing activities (204,410)
Financial Activities
Issue of shares (w3) 130,000
Dividends paid (w7) (148,810)
Net cash outflow from financing activities (18,810)
Net increase in cash and cash equivalent 213,700
Cash and cash equivalent at start 55,000
Cash and cash equivalent at end 268,700

WORKINGS (ALL AMOUNTS ARE THOUSANDS TZS.)

WI: Cash disposal /Acquisition of NCA

Machines Vehicles Others
Beginning cost BV+ Depreciation 330,700 194,500 74,600
Add: Noncash additions (note 3) 45,000
Less: Cost of noncash disposal (note 3) 71,000
Less: Ending cost (BV+ Depreciation) (466,100) (215,610) (96,500)
Cash disposal/Acquisition (206,400) 23,890 (21,900)

W2: Annual Depreciation Machines Vehicle Others

Ending (note 3) 118,900 69,210 28,500
Add: Portion of exchanged asset (note 3) 26,000
Less: Opening balance 57,600 56,500 20,600
Depreciation charge 87,300 12,710 7,900
Total depreciation charge 107,910

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 W3: Proceed from issuing shares

Value of shares at the beginning 400,000

Add: Bonus 120,000

Less: Value of shares at the end 650,000

New issue 600-400-120 130,000

W4: Tax

Profit after tax (given) 294,350

Profit before tax (294,350/.7) 420,500

Corporate tax (420.5-294.35) 126,150

Add: Beginning tax payable 103,000

Less: Ending tax payable 74,000

Tax paid 155,150

W5: Provision for receivables

Balance after provision items 49,490

Balance before provision (bal after/.98 50,500

Provision charged to profit 50.5-49.49 1,010

W7: Dividend paid

Opening payable 78,300

Add: Proposed 111,000

Less: Ending balance (40,490)

Dividends paid 148,810

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 W8: Cash acquisition of NCA
Machineries (W10) 206,400
Other tangible NCA 21,900
Total 228,300

W9: Decrease in Debtors

Ending balance before provision (w5) 50,500
Opening balance (no provision - note 2) 72,500
Decrease in debtors 22,000

ANSWER 5

(a) The loan will initially be included in the financial statements of Karo Ltd under long
term borrowings at its net proceeds ofTshs14,900,000 (TZS.15 million -
TZS.100,000).

The finance cost for the year will be TZS.1,490,000 (10% x TZS.14,900,000). This
will be charged to statement of comprehensive income and also added to the
outstanding loan liability.

On 31 December 2020 Karo Ltd pays interest of TZS.900,000 and this will reduce
the loan liability.

The closing loan liability will be TZS.14,900,000 + TZS. 1,490,000 – TZS.900,000 =

TZS.15,490 000.
The fair value of the loan is not relevant under IFRS 9 because the loan is a financial
liability measured at amortised cost.

(b)(i) The key focus of the pronouncements is whether the main objective of the
organization is profit, where capital providers seek return on their investments.
Where the university's (or any organization for that matter) primary objective is not
profit and no capital providers who seek return from their investment then it qualifies
for IPSASs adoption. So even private universities owned by Charities or church
organization qualify for IPSASs adoption. Where the university is a registered
company paying dividends to Shareholders or the university is established by the
registered company as a line of business paying dividends to the parent company,
does not qualify for IPSASs adoption.

ii. IPSASs are designed to apply to public sector entities with all of the following
characteristics
l) Are responsible for delivery of services to benefit the public/or to redistribute
income and wealth.

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 2) Mainly finance their activities, directly or indirectly by means of taxes or
transfer from other level of government, social
contribution, debt or fees.
3) Do not have capital providers that are seeking a return on their investment or a
return of their investment; and
4) Do not have a primary objective to profit.

(c) 1. Factors of making diluted earnings per share figure more useful than that of a basic
earnings per share
i) Diluted earnings per share consider every potential share. In arriving at diluted
earnings per share, all potential shares are taken into account even though they
may not be outstanding shares at the time of computing. Therefore, diluted
earnings per share value is more informative because of incorporating potential
shares given the fact that revenue and profit are also applicable to convertible
shares.
ii) Diluted earnings per share tell shareholders potential effect on earnings when
convertible shares are exercised. It is computed as if all rights of potential
shares are exercised thus showing users what they would earn on each share. As
such diluted earnings per share is a prudent approach of presenting earnings per
share as it can present the worst-case scenario which prudence principle
advocates.
iii) Diluted earnings per share uses a more comprehensive denominator in
computing earnings per share than a basic earnings per share, Inclusion of more
data makes it more accurate giving endowing that figure with more predictive
information content. That is, one can predict the future of earnings per share
using diluted earnings per share than using basic earnings per share.
iv) Diluted earnings per share are by far better metrics of comparing financial
performance than basic earnings per share because any downward trend can be
predicted earlier if there are dilutive factors. Using basic earnings per share one
may be lacking information content of making it a good comparator hence any
upward or downward trend can be viewed as a surprise movement.

2. Describe any three (3) limitations of information content of earnings per share

i. As it is with other ratios, earnings per share are also prone to manipulation of
financial information. Any approach an entity may use to influence the bottom-
line figure of statement of profit or loss will have its effect on earnings per
share too. That is when earnings are manipulated through creative accounting
earnings per share figure becomes unrealistic too.
ii. Earnings per share cannot measure financial health of an entity because it
cannot take into account cash flow. Numerator value used for computing
earnings per share is an accounting profit which includes accrual and non-cash
expenses such as accrued wages and depreciation. These noncash deductible
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 expenses have effect of making accounting profit insensitive to cash flow hence
making earnings per share figure which is dependent on accounting profit
unable to reflect cash position.
iii. Interpretation of earnings per share value may become challenging at times.
For instance, positive earnings per share are relatively easy to explain as
amount of earnings attributable to ordinary shareholders which a firm has
generated. That is easy for any layman to understand. It is challenging to
explain negative earnings per share figure for everyone to comprehend.

ANSWER 6
(a) (i)
General Journal
Date Account/Explanation PR Debit Credit

2021 Cash …………………………………………… 33,000,000

Sales revenue ……………………………….. 3,000,000

(3,000 machines x TZS 11,000 each) Warranty

2021 Warranty expense................................................ 1,800,000

Provision for warranty liability ……..………
1,800,000
(3,000 machines x TZS 600 per machine)

2021 Provision for warranty liability. ……………… 975,000

Cash, inventory, etc, ……………………….. 975,000

2022 Provision for warranty liability. ………………. 345,000

Cash, inventory, etc. ……………………….. 345,000

2023 Provision for warranty liability. ………………. 480,000

Cash, inventory, etc. …………………...…… 425,000
Recovery of warranty costs……….………….... 55,000

Note: This journal entry assumes that the three-year warranty period for all machines
sold in 2021 has now expired. The balance of the provision must be reduced to
zero once the warranty period ends. If there were still machines with remaining
warranty rights, the balance of the provision would be carried forward to 2024
until the warranty period expired.

i. 2021 warranty liability = 1,800,000 – 975,000 = TZS.825,000

2022 liability 825,000 – 345,000 = TZS.480,000
2023 warranty liability – 480,000 – 480,000 = TZS.0
(Assuming all warranty periods have expired by the end of 2023)

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 Note: In 2021, the liability would be separated into current and non-current portions,
based on management's best estimate of the pattern of future warranty repairs.
In 2022, the liability would be reported only as current.

(b) IFRS advisory council is comprised of forty or more members, and a

chairman, all appointed by the trustees. The members are expected to be from
diverse professional and geographical backgrounds.

Roles of IFRS advisory Council

• To provide a forum where the IASB consults individuals and the representatives
of the organizations.

• To support the IASB in the promotion and adoption of IFRSs throughout the
world.

(c) i. Financial information is decision useful if it is capable of making a difference

in the users’ decisions. financial information is capable of making a difference
in decisions if it has predictive value or confirmatory value.

The financial information is useful when it has: -

o Predictive value- can be used as a base for predictions, forecasts, and
projections.
o Feedback- when it can confirm or correct previous expectations.
Based on this feedback, users can make future decisions.
o Timeliness - Financial information must be available on time to influence
the decisions of users.

ii. The Enhancing qualitative characteristics of useful financial statement:

o Comparability – requires the financial information to be comparable
across periods and across companies.
o Verifiability – when independent and knowledgeable observers are able to
verify the information.
o Understandability – The information must be readily understandable
to users of the financial statements.
o Timeliness – Financial information must be available on time to influence
the decisions of users.

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