Steve's DFS Answers for December 2009

Steve Collings

Hi All,

Please find attached my suggested answers for DFS December 2009. My overall opinion of the paper that it was extremely fair and a well-prepared student should definitely not have any problems getting a pass in this paper!

Sandy Hood and I do our suggested answers for you guys in our own time. In recognition of this, I would be grateful if you could please support our respective charities by donating some money to them if you find our answers helpful.

Sandy is supporting this charity whilst I am a supporter of Cancer Research.

Could I also mention that my answers in section 2 (the ratio email) are much longer than you would write in exam time, so don't panic - I didn't have to do this in exam conditions!

Please feel free to ask any questions relating to my answers if you need any clarification.

Regards
Steve

A-Vic

Hi Steve thanks for posting your suggested answers.

as i remember section one simular had nothing anywhere close on ias 16 PPE answer, but section two picked up simular points but a heck of a lot less explanation for ratio's apart from gearing (totally got confused) and also advised to withdrawl from the investment and look for an investment with a return closer to the standard ones she had looked at.

Also in 2.2 i included current assets and current liabilities?

lisnic

steve thanks for this i have a question about section 2 email though big panic

im very confident with section 1 :-) recognise all the figures

im panicking a lot with email - how do they mark this? is there a right or wrong or do you get some merit?

this is sort of what i put?

i didnt mention gross or net profit at all in report as one of the 3 points said she was happy and in line with industry average. gearing i used long term debt/capital employed x 100 got 47% or something so said not as highly geared as industry who appears to be a highly geared industry and said this could have been to do with share issue and said they are less risky than industry and in comparison to previous year (BUM BUM BUM! IS THIS MAJOR MAJOR BAD?)

interest cover i had 3.3 said this was something to consider and said almost half industry standards but still sufficient cover. said this could be do do with reduced revenue and increased expenses effecting profit from operations and also increased loans increasing interest payable. said was of some concern

current and acid test i said current ratio in line with industry and acid test a little lower than industry but looking at inventories this was probably the reason as was 62% of all current assets. i said stock control needed to be looked at as industry averages being slightly lower suggested that they held lower percentages of stock. i said a further ratio could be looked at inventories turnover and said that if inventories held were reduced that this would impact reduce cost of sales and improve profits from operations and so interest cover also. i said that there was evidence of expansion to do investment in ppe and that this could also be a reason for high stock levels and said bit about timing of purchase and how this may not be generating economic benefits as yet but when it did interest cover would increase as a result

then trade receivables and payables said that they were bit better than industry at collecting debts quicker good for cash flow and industry figures suggest that the industry tends to pay within credit terms. payables i said they were a bit quicker than paying than industry and possibly werent using full credit terms available and if they did this could help OD however they were receiving debts before paying debts so this was good working capital management

then i said that currently i would leave investment in business as they appeared less risky than other businesses in industry and compared to previous year due to gearing (BUM BUM AGAIN!! BIG PROBLEM??) then said although they were in an OD at end of year this didnt necessarily have to be negative as was investment in ppe and evidence of expansion and that when this did produce the economic benefits it would increase profits distributable to shareholders. also said that they were managing working capital fairly well currently

so how does the report thing work marking wise as im bit worried about this now using wrong gearing (we were told when it said gearing though it meant gearing and when it said debt equity it meant debt equity not a choice!) and saying not as risky when it was as from this i seem to have recommended wrong????

thanks

Steve Collings

Hi Lisinc,

The report writing section can be looked at from varying angles. The question requirement says to give advice to Lisa with reasons whether or not she should continue with her investment.

Some people will offer advice whether to keep her investment in for reasons such as yours that the company has invested in PPE which might be more technically advanced, others will look at the requirement of shareholders - they want a return on their investment. Hoy's going to struggle paying a decent return because it is so highly geared so in this respect others will advise Louise to get out.

What is important is that you don't 'sit on the fence' when it comes to the report writing section. In real life, clients want 'yes' and 'no' answers, not ifs, buts and maybes. If you have drawn a conclusion, with valid reasons then you will still be marked accordingly.

Remember, my answers are suggested answers. I take the view that Louise should run a mile with her investment back in her purse based on the reasons in my suggested answers.

kind regards
Steve

steveng

Hi Steve,

Do you have any knowledge of how the exams are marked? and what the pass mark is?

Cheers

Steve

lisnic

thanks

just need to pray i get some credit and they can see why i have said what i have etc enough to pass section 2

if i had realised the gearing thing (kicking myself why i didnt check but hey ho!) i would have probably said to withdraw but i have looked at each ratio individually and my reasonings for recommendation i have linked back and have tried to link everything together. i didnt sit on fence and was very thorough looking at everything that could possibly make ratio how it was in that year and possible reasons for differences to industry - shame i missed the huge hint of the gearing! i had 1hr 35mins so had plenty of time to write - 6 pages in fact i do write big though!

ill be gutted if i fail as not blowing own trumpet but from your answers and i thought this after exam also my section 1 give or take a few marks in ppe section i reckon would be pretty perfect and section 2.2 was almost worst identical to yours (and past papers!). i am going to prepare myself for it though just incase gutted as ill be!

tigger37

DFS Answers - Steve

Hi Steve,

My answers for section 1 look pretty familiar except one bit on the consolidated finanal statement(it didn't quite balance on the top half, but I know I mucked up the goodwill, I think), but the bottom section was the same. All workings were shown though. Also, I mentioned the capitalisation of PPE for the written question so I hope I get some marks. How severe are the markings for the written questions? I would think the majority of points come from all of the statements we had to produce?
On section 2, I did my gearing the other way and ended up with the 47%, burt my rationale all coincided with that answer so hopefully I will get some points? Also, on the written question, I mentioned each section of the statements, such as current assets, current liabilities, etc....
I can't remember what I put for the bottom bit, but I know I mentioned something about assets being from current or past transactions and there would be inflows to the business. Something like that.
Do you think I may pass, even though I did not do as well on the written bits(exception being the ratio analysis as I flew through that one).?

Kerry0789

Steve Collings wrote: »

Hi All,

Please find attached my suggested answers for DFS December 2009. My overall opinion of the paper that it was extremely fair and a well-prepared student should definitely not have any problems getting a pass in this paper!

Sandy Hood and I do our suggested answers for you guys in our own time. In recognition of this, I would be grateful if you could please support our respective charities by donating some money to them if you find our answers helpful.

Sandy is supporting this charity whilst I am a supporter of Cancer Research.

Could I also mention that my answers in section 2 (the ratio email) are much longer than you would write in exam time, so don't panic - I didn't have to do this in exam conditions!

Please feel free to ask any questions relating to my answers if you need any clarification.

Regards
Steve

I am really confident I got the income sheet, balance sheet, consolidated balance sheet and income stement correct. I am also confident I got the ratio definitions and conclusion and section 2.2 correct. However, when it came to the IAS16 questions my mind went blank and my answers were very poor. Will this effect me passing section 1?

nag17

Hi Steve


Thanks so much for your time and your continuous help throughout the year ...I understood from your replies that there is no right or wrong answer on the email section. But from the overall percentage of section 2 how much % u think will be for the email in section 2? Thanks again and looking forward to hear from you.

messedup89

feeling farely confident now. Even on section 2

Steve Collings

Hi All,

I have been inundated with emails and PM's regarding my suggested answers and I apologise for not replying individually - unfortunately time isn't on my side at present due to heavy work commitments so thought it best to upload a thread offering a "global" reply.

Several students have asked me how the marking works for DFS and whether the inclusion of additional information over and above the question requirements would score "bonus" marks.

Firstly, I think it is important that students are aware that I am not involved in the marking process of DFS. It is a subject that I lecture on in the lead up to the exam but I do not have any influence over the marking process and do not see the marking criteria.

An AAT examiner has written an article (admittedly this is quite old) on what happens to your exam paper from when it is written to when it is marked. This might answer some of your questions.

There seems to have been a lot of confusion concerning the last question on the paper (as indeed there was in June). The question asked for the 'elements' of financial statements and then went on to ask candidates to define those elements that are found in the statement of financial position (balance sheet) - namely: assets, liabilities and equity. These definitions are found in the IASB's Framework Document but seemingly some candidates went on to define current assets and current liabilities which are found in IAS 1. The same issue (though vice versa) occurred in June 2009.

With regards to the email in section 2. Lots of students are asking me why the AAT included the 2008 comparative gearing ratio. As I have highlighted in my suggested answers, there are two ways to calculate this ratio: long term debt / long term debt + equity or debt/equity. The paper used the latter and the examiner (rather cunningly, though understandably) included this pre-calculated ratio in an attempt to ensure candidates were able to determine the basis for the calculation in order to compare Hoy's gearing ratio to industry averages which also used the debt/equity way of calculating the ratio.

The question on IAS 16 was quite technically demanding and candidates would have had to have studied this standard quite thoroughly to cope with this question, notably the first section asking about the principles involved in accounting for PPE under IAS 16. The remaining two requirements in this question should have been a gift because rote learning was sufficient here.

To conclude, I am not in a position where I can offer students satisfaction in saying "yes you will get marks if you said that". However, what I can say is that the marking process is often not as black and white as students think and in my experience students often conclude they have failed an exam and then go on to pass it - as was the case in June 2009!

Once again, I apologise for not being able to reply to PM's and e-mails individually, but there are so many of them that time just simply will not permit.

Forget about the exams now and enjoy the break!!

Best wishes
Steve

A-Vic

Hi Steve

Can only speak for myself but am sure its reapted by a lot student members on here wishes thank you for all the time and effort you put into helping us lot during a very stressful year.

Now on to the important stuff hows your feelings on tutoring MAC lmao kidding. Hope you and your family have a wonderful christmas and a peaceful break.

Vic

Brumi

DFS Dec

Steve

I am one of the chosen few who failed section 2 in June. I feel fairly confident that Dec was okay apart from one question. After reading your answers where he negotiated a contact £99 invoiced in Nov for payment in Dec. I put a note on my workings to ignore this as not invoiced until Next year any suggestions as to how I read this so wrong

Steve Collings

Brumi wrote: »

Steve

I am one of the chosen few who failed section 2 in June. I feel fairly confident that Dec was okay apart from one question. After reading your answers where he negotiated a contact £99 invoiced in Nov for payment in Dec. I put a note on my workings to ignore this as not invoiced until Next year any suggestions as to how I read this so wrong

You may never know because under exam conditions it is so easy to miss out information, overlook parts of the question or simply do something wrong that you have practised and perfected hundreds of times!

You have missed a very small part of a very large question so I wouldn't worry.

Kind regards
Steve

Glynis

Steve I have been redoing DFS to keep my knowledge up to speed as I am trying to get a job in practice.
I do not agree your cash flow statement balances as you should take off the profit from sale of PPE surely.

A-Vic

Glynis he did take off the gain in disposal

Adjustments for:
- depreciation 4,398
- gain on disposal of PPE (455)

Glynis

But his answer doesn't seem to make it clear. Maybe I am missing something. Surely his cash flow statement should not balance the way he has done it it just seems odd.

A-Vic

looks perfectly right to me, and to me hes the one with the better knowledge also i did it the same

Steve Collings

Glynis wrote: »

But his answer doesn't seem to make it clear. Maybe I am missing something. Surely his cash flow statement should not balance the way he has done it it just seems odd.

Glynis,

I'm not sure how I haven't made it clear in my answer. The gain on disposal of PPE would have uplifted operating profit when disposing of the asset thus it follows that logically when reconciling operating profit to net cash flows from operations that you (deduct) the gain and illustrate this by placing the number in brackets.

You mention in a previous thread that you have reworked the paper. How did you treat the gain on PPE if my method is not in agreement with yours??

Kind regards
Steve

A-Vic

Also glynis did you take the gain on disposal from the statements?

Glynis

I see now why steves answer is like it is now. Just testing!

Steve Collings

Ok......

But, if you reworked the exam paper, then presumably you must have deducted the gain from operating profit because otherwise your statement of cash flows would not have agreed or have I missed something?

Kind regards
Steve

Criggers

Glynis wrote: »

I see now why steves answer is like it is now. Just testing!

And what was your error?

jiribu

Btc

Hello, thank you very much for your answers to DFS. Are you going to publish your answers to BTC as well please?

Steve Collings

jiribu wrote: »

Hello, thank you very much for your answers to DFS. Are you going to publish your answers to BTC as well please?

Hi,

Unfortunately I haven't got time to attempt the BTC exam as it would take me longer to work the answers than DFS and time isn't on my side at present with the self-assessment season in full swing.

Kind regards
Steve

Glynis

Ok so I do not agree with steve's answer so why is there a witchunt? Answers should explain more clearly where amounts come from that's all I am saying.

A-Vic

Glynis wrote: »

Ok so I do not agree with steve's answer so why is there a witchunt? Answers should explain more clearly where amounts come from that's all I am saying.

Glynis steve took his very own time out to do this for no charge at all just for people sitting the exam (which you didnt).

what witch hunt? and am sure when the answers for the exam paper are shown it will be the exact same way because EVERYONE knows you drag the gain off disposal from the statements.

Not saying i have passed the exam but am extreamly grateful to him for the help he has given me.

Steve Collings

Glynis wrote: »

Ok so I do not agree with steve's answer so why is there a witchunt? Answers should explain more clearly where amounts come from that's all I am saying.

Hi Glynis,

With respect, I am not sure what your disagreement is or where this is actually going.

As A-Vic quite rightly points out, it is always the case that when doing a statement of cash flows that you (deduct) any gain on PPE disposal from the operating profit. This is a matter of fact. Placing the number in brackets represents the deduction.

The point you are raising about the gain is in the actual question. I cannot start cross-referencing every single component part of my answers to the relevant parts of the question. In addition, I only provide workings for those areas of the questions where workings are absolutely required.

Sally

Glynis wrote: »

Ok so I do not agree with steve's answer so why is there a witchunt? Answers should explain more clearly where amounts come from that's all I am saying.

I would not normally get into discussions like this..... but i have just read this post and physically cringed!!! I CANNOT believe you would criticise the format of Steve's answers when he has worked on them in his own time.... for no fee..... just to be of assistance to students who have just sat DFS and cant bear to wait for their results in February. As one of those students, i am very grateful to Steve.

As Steve has books published on this subject ..did you really think the error was Steve's and not yours?!?!

Criggers

Glynis wrote: »

Ok so I do not agree with steve's answer so why is there a witchunt? Answers should explain more clearly where amounts come from that's all I am saying.

Mr Collings published the answers for students who had revised and understood the paper to help give them an idea of how they did in the exam. It is not there as teaching/revision material.

The answer is right, if you do not understand it then I would suggest going back to the drawing board. Gain on Disposal is clearly stated as 455 on the income statement.

When the item is disposed of you basically swap the net book value (cost + acc dep'n) for cash. If you sell the item for more or less than the netbook value then a gain/loss on disposal is required in the income statement as a balancing figure. This will inflate (if a gain) or deflate (if a loss) the Profit from Op's figure.

The Profit from Operations is carried to the Cash Reconciliation where the adjustments are made for the "imaginary" figures of Gain/Loss on Disposal and the depreciation.

The proceeds from disposal - the cash from the sale - goes into the Cash Flow Statement. This is the actual money received from the sale (NBV +/- gain/loss on disposal).

I think this is where you probably confused yourself since you talk of deducting gains on disposal in the cash flow statement.

You deduct gains in the reconciliation. You add proceeds in the cash flow.