Candidates’ Performance in the 2010 Examination – Paper 1

1. Candidates’ Performancein the 2010 Examination – Paper 1 Mr. WAN Shiu-kee Vice Chairman Hong Kong Association for Business Education

2. Overall Performance • Satisfactory • Possess required skill and knowledge in presenting financial information in logical and systematic manner • Should have thorough understanding of the syllabus • Able to give appropriate answers based on the scenarios given

3. Overall Performance • Abbreviations are not acceptable • Proper heading / title should be given to each account / statement • Journal narrations should not be omitted • Should show workings in their answers

4. Overall Performance

5. Question 1 – Consolidated financial statements • Good • Demonstrated an acceptable level of understanding of consolidated financial statements

6. Question 1 – Consolidated financial statements • Well-answered • Only a few candidates failed to work out the correct amount of purchase consideration • A few others ignored the revaluation adjustment for land and building in calculating the net assets of Sea Ltd

8. Question 1 – Consolidated financial statements • Poor • Many candidates could not give appropriate explanation for negative goodwill • Tended to repeat same circumstances in different wordings as two separate answers

10. Question 1 – Consolidated financial statements • Not familiar with the adjustments relating to intra-group transactions • Most candidates reduced turnover and cost of goods sold by the amount of intra-group sales of merchandise but some could not make the adjustment correctly • Had difficulties in handling intra-group sales with 2 different profit margins normal margin treated as mark-up on costs understatement of cost of goods sold and overstatement of gross profit

11. Question 1 – Consolidated financial statements • Not able to calculate and adjust depreciation overcharged arising from upstream sale of office equipment and the depreciation undercharged on the revalued land and building • Debentures of Sea Ltd acquired on 1.7.2009  debenture interest for 6 months should be deducted from both the income from investment and finance costs

12. Question 1 – Consolidated financial statements • Profits attributable to equity holders of the parent and MI were to be shown separately in the consolidated income statement • Only amount of depreciation adjustment arising from revaluation of land and building was to be shared by MI • No unrealised profits or losses arising from upstream sale of non-current assets in year 2009

14. Question 1 – Consolidated financial statements • Should present the consolidated balance sheet in vertical form and classify various items under appropriate headings • Not able to adjust the correct amounts of depreciation to net book values of office equipment and land and building • Overlooked the amount of intra-group debenture interest did not take it away from both trade receivables and debenture interest payable

15. Question 1 – Consolidated financial statements • Treated the revaluation of land and building as post-acquisition adjustment and created a revaluation reserve on the consolidated balance sheet • Unrealised profit in inventory and depreciation adjustment on office equipment should be eliminated in full against retained profits

16. Question 1 – Consolidated financial statements • Most candidates were able to reduce retained profits and MI with amounts of unrealised profits on intra-group sale of office equipment and depreciation adjustment on revalued land and building but some omitted the fair adjustment from MI

20. Question 2 – Cash flow statement • Satisfactorily answered • Candidates were well prepared for the question • Apparently familiar with the classification of cash flows into 3 activities

21. Question 2 – Cash flow statement • Good • Some candidates did not follow the requirements of updating the cash at bank account and prepare the bank reconciliation

23. Question 2 – Cash flow statement • Poor • Not able to explain the accounting treatment for the returned chequerepeatedthe accounting entries made without considering the impact of the returned cheque on accrued expenses and prepaid insurance

25. Question 2 – Cash flow statement • Satisfactorily answered • Could not work out the figures for the various cash flows from operating activities • Mixed up various cheques received from customers and hence could not arrive at a correct amount of cash receipts from them

26. Question 2 – Cash flow statement • Had difficulties in computing the amount for purchase of office equipment not able to exclude it from cash paid to suppliers • Non-cash items should not be included in cash paid for operating expenses • Other income should not be grouped under investing activities

27. Question 2 – Cash flow statement • NBV of the new office equipment should be calculated by taking into account the NBV of the disposed office equipment and depreciation on the old office equipment Depreciation + NBV = Cost of the new office equipment • Trade-in allowance should be excluded in computing the amount of cash paid for purchase of office equipment

28. Question 2 – Cash flow statement • Fixed deposits already included as cash and cash equivalents should not be classified as as item under investing activities • Proceeds from issuance of ordinary shares should not be divided into par value and share premium and disclose separately

32. Question 3 – Partnership • Good • Quite familiar with the preparation of various accounts for a partnership

33. Question 3 – Partnership • Good. • Should adopt the account names as given in the question

34. Question 3 – Partnership • Fair • NO goodwill account maintained in the books amount of goodwill should be written off through the partners’ capital accounts using the old and new profit and loss sharing ratios • Many ignored that all non-current assets, except goodwill, had to be recorded back to their original NBVs basing on the new sharing ratios

36. Question 3 – Partnership • Good • Required to transfer book values of various assets to the realisation account  Some failed to show net amount of motor vehicles and plant and machinery  Others forgot to include cash at bank and deduct allowance for doubtful debts from trade receivables

37. Question 3 – Partnership • Amount of trade receivables collected by Kam did not include discounts allowed and uncollectible debts • Commission to be credited to the capital acoount of Kam should be based on the amount collected • Interest on capital and share of profit should NOT be credited to partners’ capital accounts

39. Question 4 – Ratios analysis and Valuation of inventories • Satisfactorily answered • Weak in answering conceptual questions

40. Question 4 – Ratios analysis • Could not interpret dividend cover correctly  only able to describe how the ratio was to be calculated • Able to state 3 limitations of using ratio analysis in assessing financial position of a company

41. Question 4 – Ratios analysis • Could NOT calculate the 3 ratios correctly  forgot to deduct amount of preference dividend from profits after tax  took an incorrect number of ordinary shares as the denominator • Did NOT present ‘earnings per share’ in dollars

43. Question 4 – Valuation of inventories • Not aware of the adoption of perpetual inventory system and FIFO method • Not familiar with journal entries relating to sales, returns inwards, abnormal inventory loss and inventory written-down

44. Question 4 – Valuation of inventories • Could NOT work out the right amounts of sales and cost of goods sold on 20.1.2010 and 31.1.2010 • Did Not prepare journal entries to update cost of goods sold and inventory for sales and returns inwards • Could state 1 or 2 situations in which NRV of inventory was less than cost

46. Question 5 – Errors and Control accounts • Poor • NOT aware that sales ledger control account was kept as part of double entry system while sales ledger was kept on a memorandum basis • Ignored that the books had not been closed

47. Question 5 – Errors and Control accounts • Many recorded the corrections or omissions directly to P&L instead of various revenues and expenses accounts Salesledger control account should be adjusted instead of debtors’ account

48. Question 5 – Errors and Control accounts • Performance in item (iii) was poor  Careless in missing the fact that a uniform mark-up of 25% was maintained on all goods sold  Could NOT differentiate entries relating to sales and goods sent on sale-or-return basis Mistakenly debited stock and credited sales ledger control with cost of goods to be returned by customers

49. Question 5 – Errors and Control accounts • Did NOT possess sufficient understanding of finance lease  Could NOT show journal entries relating to acquisition of leased office equipment, payments made and lease interest for year 2009

50. Question 5 – Errors and Control accounts • Well-answered • Some prepared an account instead of a statement in columnar form to update the totals of the extracted sales ledger balances