Candidates’ Performance in the 2009 Examination – Paper 1 Mr. WAN Shiu-kee

2 Overall Performance  Satisfactory  Possess broad understanding of the topics  Able to give appropriate answers based on the scenarios given

3 Overall Performance  Should read the questions carefully  Should present their answers in a logical and systematic manner  Abbreviations are not acceptable  Proper heading / title should be provided for each account / statement  Journal narratives should not be omitted  Should show workings in their answers

4 Overall Performance QuestionsPopularityPerformance 1 Satisfactorily answered 2Good 396.0%Well answered 435.7%Poor 568.3%Well answered

5 Question 1 – Consolidated financial statements  Satisfactorily answered  Well prepared for a question on consolidated financial statements

6 Question 1 – Consolidated financial statements a)Poor  Not able to explain the accounting definition of goodwill in the context of consolidation  Wrongly focused on elaborating the difference between purchased goodwill and inherent goodwill  Did not understand the meaning of “attributing factors”

7 Question 1 – Consolidated financial statements b)Well answered  Computation of goodwill should include holding company’s share of ordinary share capital, share premium, pre-acquisition profits and fair value adjustments on office premises  Did not net off the pre-acquisition dividend from the cost of investment

8 Question 1 – Consolidated financial statements c)Not familiar with the adjustments relating to intra-group transactions  Mistakenly treated the mark-up as gross profit margin  overstatement of cost of goods sold and understatement of gross profit  Could not identify the adjustments to be made to depreciation expenses  depreciation on profit of the transferred machinery should be excluded, additional depreciation should be computed basing on the fair value adjustment of the office premises

9 Question 1 – Consolidated financial statements  Failed to exclude intra-group management fees from administrative expenses  No difficulty in calculating goodwill arising from consolidation, but not familiar with the treatment of impairment loss on goodwill  Profit attributable to the equity holders of the parent and minority interest were to be shown separately

10 Question 1 – Consolidated financial statements  Amounts of unrealised profit adjustment arising from upstream sale of machinery and additional depreciation on revaluation of office premises were to be apportioned to minority interest

11 Question 1 – Consolidated financial statements  Should present the consolidated balance sheet in vertical form and classify various items under the appropriate headings  Did not adjust the net book value of PPE with the amounts of unrealised profits on machinery, fair value adjustments on office premises and the related depreciation

12 Question 1 – Consolidated financial statements  Cash in transit should be shown neither as a separate item nor as a reduction of bank overdraft  Failed to deduct 2 years’ additional depreciation on fair value adjustment from retained profits  Ignored the depreciation adjustment on the transferred machinery from retained profits

13 Question 2 – Partnership accounts  Good  Quite familiar with the preparation of various accounts for a partnership

14 Question 2 – Partnership accounts a)Confused the treatments of debit notes and credit notes  Rule of the lower of cost or net realisable value (LCN rule) should be applied to the valuation of closing inventories  Not aware that insurance expenses had been included in selling and administrative expenses  Wrongly calculated the allowance for doubtful debts basing on “confirmations received from trade debtors”  Returned cheques should be added to the balance of trade debtors

15 Question 2 – Partnership accounts b)Remember that no goodwill account was to be maintained in the books  GW should be written off through partners’ capital accounts  No difficulty in recording the drawings of the partners but the full amount of the partners’ salaries had been credited to the capital accounts  Share of profits should be calculated after taking away the partners’ salaries from the net profit before appropriation

16 Question 2 – Partnership accounts c)Should transfer the book values of various assets to the realisation account  failed to show the net amount of trade debtors and forgot to include the prepaid portion of the insurance expenses  Could not record the correct payment to trade creditors in the bank account  Ignored the share of realisation profits in recording the final settlement to the partners

17 Question 2 – Partnership accounts d)No difficulty in preparing the required journal entries  Mistakenly recorded the assets in the books of A&B Ltd at book values

18 Question 3 – Cash flow statement  Well answered  Demonstrated an acceptable level of understanding in preparing a cash flow statement

19 Question 3 – Cash flow statement a)Not able to calculate the correct amounts of the depreciation of machinery and equipment as well as profit before taxation  Not aware that short-term investment was listed at fair value  wrongly computed the profit on sale of investment  Had difficulties in calculating the valuation surplus on short-term investments for adjustment to net cash flows from operating activities

20 Question 3 – Cash flow statement  Should classify interest paid as an operating activity and dividend income as an investing activity  Wrongly disclosed increase in fixed deposit as a cash flow from investing activities  Should not divide the proceeds from issuance of ordinary shares into par value and share premium and disclosed separately

21 Question 3 – Cash flow statement  Did not notice the repayment in 2008 and the re-classification of bank loan at the end of 2007 and 2008  Fixed deposit with a maturity of 6- months was not to be treated as cash equivalents

22 Question 3 – Cash flow statement b)Fair  Could not manage to explain 2 advantages of a cash flow statement to investors  focused on stating the uses and classifications of a cash flow statement

23 Question 4 – Ratios and Errors  Poor  Could not apply conceptual understanding in solving various accounting problems  Did not posses sufficient knowledge of some specific issues related to lease, provisions and intangible assets, etc

24 Question 4 – Ratios and Errors a)Could not calculate the return on equity and return on capital employed correctly  wrongly used average profit figure instead of averages for equity and capital employed  Failed to include issued debenture in calculating opening figure for equity  Did not adjust debenture interest to net profit in computing return on capital employed

25 Question 4 – Ratios and Errors b)Gave comments only on the gearing ratio without giving proper reference to their answers in (a)  Failed to explain the implications of return on equity and return on capital employed to the shareholders of a highly geared company

26 Question 4 – Ratios and Errors c)Did not understand how to apply the concept of “substance over form” in the question  tended to list the criteria of a lease as their answers

27 Question 4 – Ratios and Errors d)Not aware that the books had been closed  recorded omissions and corrections directly to various expenses instead of profit and loss account  Had difficulty in calculating the amounts of lease creditors and finance charge for the year  Not able to prepare the necessary journal entries to recorded the lease

28 Question 4 – Ratios and Errors  Should not record the construction cost of the fire exits as a liability  Failed to apply the matching principle to deal with the non- refundable rental premium and the accrued rent at the end of year 2008

29 Question 5 – Non-profit making organisation  Well-answered  Could identify the items to be shown in the income and expenditure account and balance sheet

30 Question 5 – Non-profit making organisation a)Did not know how to work out the cost of goods sold from sales to star plan members  mistakenly treated the margin as the mark-up in arriving at total amount of cost of goods sold  Did not account for stock loss when calculating operating expenses

31 Question 5 – Non-profit making organisation b)Had difficulty in calculating income from subscription fees  forgot to allocate the star plan members’ subscription fees over a period of 3 years  Failed to apply the realisation principle in calculating revenue from wine tasting courses  Did not include the deposits for the function room as an expense in computing profit from annual dinner

32 Question 5 – Non-profit making organisation c)Could not manage to split deferred subscription fees into current and non-current portions and show them correctly in the balance sheet  Deferred course fees for January and February 2009 should be disclosed as a current liability

Thank you !