Question

QUESTION 3

(Total 20 marks)

A. Undeniably, profitability is the ultimate goal of companies and readers of a company’s financial statements are very much interested in the reported profit figure. The profit figure is achieved by the preparation of the statement of profit or loss and the statement of financial position. If the foregoing is the

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case, why then bother about the statement of cash flows?

B. Globally, accounting standards are developed based on different methods. It is generally agreed that the nature of accounting standards depends on the systems of regulation. It has been argued that there are two main systems of regulation.

Required:

Identify and explain the difference between the two systems of regulation, stating clearly which system you believe describes the International Financial Reporting Standards (IFRS)

C. On 1st January 2018, Global Drilling Ltd entered into a GHS22million contract for the construction of an office complex at Tema. The building was completed at the end of December 2018. During the period, the following payments were made to the contractor:

Payment date

Amount

GHS’m 1 January 2018 2.00 31 March 2018 6.00

30 September 2018 12.00 31 December 2018 2.00 22.00

Global Drilling’s borrowings as at its year end of 31st December 2018 were as follows:

 10% 4-year Loan Note with simple interest payable annually, which relates specifically to the building project, loans outstanding at 31st December 2018 amounted to GHS7,000,000. Interest of GHS700,000 was incurred on these borrowings during the year, and interest income of GHS200,000

was earned on these funds while they were held in anticipation of payments.

 12.5% Five-year Loan Note with simple interest payable annually; debt outstanding at 1st January 2018 amounted to GHS10,000,000 and remained unchanged during the year.

 10% Five-year Loan Note with simple interest payable annually; debt outstanding at 1st January 2018 amounted to GHS15,000,000 and remained unchanged during the year

Required:

Calculate the borrowing costs to be capitalised.

D. Miss Nsiah is a qualified chartered accountant who prepares financial statements for a firm located at Tesano. Miss Nsiah does not qualify for a practicing certificate and so she does not provide audit service to the client.

This is her first year of preparing financial statements for the firm. When compiling the most recent accounts, she detected some material errors in the previous financial statements. It seemed that the accounts were based on incomplete records as certain costs were excluded, either deliberately or because records were not maintained.

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The Chief Executive Officer of the firm has also requested some additional work to be completed on a complex tax issue. However, she has no prior experience and does not feel competent to the work. The CEO would also like her to provide an audit opinion as they are planning to apply for funding from a bank and the bank would like some further assurance.

Required:

With reference to Code of Ethics for accountants, discuss the ethical principles applicable to the above

scenario.

(5 mark

Answer 1

Answer(a): Cash flow statemet- It is a very important financial statement that shows inflow and outflow of cash for a given period of time. It is as important as Profit and loss statement because cash is necessary element for any business and it is a statement of flow of cash.

Importance of Cash flow statement in the business- Some points are as following:

• Cash flow statement tells the cash position in the business and inflow and outflow of cash. It tells business that business should have cash all the time.
• It provides information about the uses and disbursement of cash for a given period of time, it is also helpful in controlling the wastage of cash.
• It helps analyzing the working capital needs, long term and short term cash planning and also the optimum level of cash in the business.

Answer(b): Accounting standards-

GAAP- Generally accepted accounting principles are set by Financial accounting standard board (FASB) and followed by many companies in USA. GAAP is rule based accounting. It uses First in first out (FIFO) and Last in first out (LIFO) method of inventory.

IFRS- International financial reporting standards are set by International accounting standard board (IASB) and followed by many companies internationally. IFRS is principle based accounting. It does not use Last in first out (LIFO) method of inventory. It is the set of standards so that financial statements are transparent, uniform, consistent and comparable around the world.