Question 1

LM has made the following share purchases during the year:

* Purchased 55% of the equity share capital of OP.

* Purchased 45% of the equity share capital of QR.LM have the power to appoint the majority of board members on the QR board.

* Purchased 30% of the equity share capital of ST. LM is represented by one director on the main board of ST which has five members in total. The other 70% of ST's equity share capital is owned by a single company, UV.

The Managing Director has told you that OP has performed well, but both QR and ST have not performed as expected. He is therefore pleased thatOP will be included as a subsidiaryand that QR and ST will only be included as investments in the group financial statements.

In accordance with the ethical principle of professional competence and due care how should the investments in OP, QR and ST be treated in the group financial statements?

Options :

A : OP and QR should be consolidated and ST should be equity accounted

B : OP should be consolidated and QR and ST should be equity accounted.

C : OP should be consolidated, QR should be equity accounted and ST should be valued at cost.

D : OP and QR should be equity accounted and ST should be valued at cost.

Answer: A

Question 2

The dividend yield of ST hasfallen in theyear to 31 May 20X5, compared to the previous year.

The share price on 31 May 20X4 was $4.50 and on 31 May 20X5 was $4.00. There were no issues of share capital during the year.

Whichof the following should explain the reduction in the dividend yield for the year to 31 May 20X5 compared to the previous year?

Options :

A : The dividend paid in the year was reduced in order to pay for new assets.

B : Surplus cash was used to pay a special dividend in additionto the normal dividend in the year.

C :

The profit for the year fell significantly and the dividend per share stayed the same.

D : To compensate investors for thereduction in share price a higher dividend per share was paid.

Answer: A

Question 3

If you were asked to express the overall performance of an entityas a percentage of its total investment in net assets which of the following ratios would you calculate?

Options :

A : Return on capital employed

B : Asset utilisation

C : Dividend yield

D : Non-current asset turnover

Answer: A

Question 4

AB and EF are located in the same country and prepare their financial statements to 31 October in accordance with International Accounting Standards. EF supplies AB with a component that is vital to AB's product range. AB is considering acquiring a controlling interest in EF by 31 December 20X4 in order to guarantee future supply. The Board of EF has indicated that such an approach would be postively considered. AB would use its control to make AB the sole customer of EF.

The Finance Director of AB has been granted access to EF's management accounts and has conducted some initial analysis from the financial press. The results togther with comparisons for AB for the year to 31 October 20X4 are presented below:

AB and EF are forecasting revenues of S1,500,000 and $700,000 respectively for the year ended 31 October 20X5.

Which of the followingindependent optionswouldexplainthe differencebetween thegearingratios of AB and EF at 31 October 20X4?

Options :

A : EF-s average cost of borrowing is significantly lower than that of AB and EF has taken advantage of that.

B : EF has a policy of revaluing non current assetswhereas AB does not.

C : EF made a bonus issue of shares from retained earnings during the year whereas AB did not.

D : EF-s market value of sharesat 31 October 20X4 is lower than that of AB.

Answer: A

Question 5

Information from the financial statements of RST for the year ended 30 April 20X9 is as follows:

At 30 April 20X9 the ordinary shares are trading at $4.75.

What is the price earnings (P/E) ratio for RST at 30 April 20X9?

Options :

A : 15.83

B : 7.92

C : 10.56

D : 9.31

Answer: A