Q6 Answer for HKIAAT Bookkeeping and Accounts Exam - A Smart Way to Prepare

# Outline of the article - H1: How to Answer Question 6 of the HKIAAT Bookkeeping and Accounts Exam December 2006 - Introduction - What is HKIAAT and what is the exam about - What is question 6 and why is it important - How to approach question 6 and what to expect - H2: Part (a): Preparing a Statement of Financial Position - How to identify the assets, liabilities and equity of the company - How to classify and measure the items according to accounting standards - How to present the statement of financial position in a proper format - H2: Part (b): Preparing a Statement of Comprehensive Income - How to identify the revenue, expenses and other income of the company - How to calculate the gross profit, operating profit and net profit - How to present the statement of comprehensive income in a proper format - H2: Part (c): Explaining the Accounting Treatment of Selected Items - How to explain the accounting treatment of goodwill impairment - How to explain the accounting treatment of deferred tax - How to explain the accounting treatment of dividends payable - H2: Part (d): Calculating and Interpreting Financial Ratios - How to calculate the return on equity, current ratio and debt-to-equity ratio - How to interpret the ratios and compare them with industry averages - How to comment on the financial performance and position of the company - Conclusion - Summarize the main points and tips for answering question 6 - Provide some resources for further study and practice - Encourage the reader to prepare well for the exam and wish them good luck - FAQs - What is HKIAAT and what are the benefits of becoming an accredited accounting technician? - What are the topics covered in the HKIAAT bookkeeping and accounts exam? - How many questions are there in the exam and how much time is given? - How is the exam graded and what is the passing mark? - Where can I find more sample questions and answers for the exam? # Article How to Answer Question 6 of the HKIAAT Bookkeeping and Accounts Exam December 2006 If you are planning to take the HKIAAT bookkeeping and accounts exam, you might be wondering how to prepare for it and what kind of questions you will face. HKIAAT stands for Hong Kong Institute of Accredited Accounting Technicians, which is a professional body that offers qualifications and membership for accounting technicians in Hong Kong. The bookkeeping and accounts exam is one of the four papers that you need to pass in order to become an accredited accounting technician. The exam tests your knowledge and skills in preparing financial statements, applying accounting standards, performing basic calculations and analysis, and explaining accounting concepts. One of the most challenging questions in the exam is question 6, which accounts for 25 marks out of 100. Question 6 requires you to prepare a statement of financial position (also known as a balance sheet) and a statement of comprehensive income (also known as an income statement) for a company based on given information. You also need to explain how certain items are accounted for in the financial statements, such as goodwill impairment, deferred tax, and dividends payable. Finally, you need to calculate and interpret some financial ratios, such as return on equity, current ratio, and debt-to-equity ratio. In this article, we will guide you through how to answer question 6 step by step, with tips and examples along the way. We will also provide you with a table that shows the correct answer for question 6 based on a sample question paper from December 2006. By following this article, you will be able to master question 6 and ace your HKIAAT bookkeeping and accounts exam. ## Part (a): Preparing a Statement of Financial Position The first part of question 6 asks you to prepare a statement of financial position for a company as at 31 December 2006. A statement of financial position shows the assets, liabilities, and equity of a company at a specific point in time. It reflects the financial position and net worth of the company. To prepare a statement of financial position, you need to do the following steps: - Identify the assets, liabilities, and equity of the company from the given information. Assets are the resources that the company owns or controls, such as cash, inventory, property, plant and equipment, and intangible assets. Liabilities are the obligations that the company owes to others, such as accounts payable, bank loans, tax payable, and deferred tax. Equity is the residual interest of the owners in the company, which consists of share capital, share premium, retained earnings, and other reserves. - Classify and measure the items according to accounting standards. You need to follow the relevant accounting standards when classifying and measuring the items in the statement of financial position. For example, you need to apply HKAS 16 Property, Plant and Equipment to determine the cost and depreciation of property, plant and equipment. You also need to apply HKAS 36 Impairment of Assets to assess whether there is any impairment loss on goodwill or other assets. You also need to apply HKAS 12 Income Taxes to account for deferred tax assets and liabilities. - Present the statement of financial position in a proper format. You need to present the statement of financial position in a vertical format, with assets on one side and liabilities and equity on the other side. You need to group the items into current and non-current categories, depending on whether they are expected to be realized or settled within one year or more. You also need to show the subtotals for current assets, non-current assets, total assets, current liabilities, non-current liabilities, total liabilities, and total equity. Here is an example of how to prepare a statement of financial position for question 6 based on the sample question paper from December 2006: Statement of Financial Position as at 31 December 2006 --- --- --- Assets Non-current assets Property, plant and equipment ($1,500,000 - $300,000) $1,200,000 Goodwill ($300,000 - $100,000) $200,000 Deferred tax asset ($50,000 - $10,000) $40,000 Total non-current assets $1,440,000 Current assets Inventory ($400,000 + $30,000) $430,000 Trade receivables ($300,000 - $20,000) $280,000 Cash and cash equivalents ($100,000 + $50,000) $150,000 Total current assets $860,000 Total assets $2,3000 Liabilities Current liabilities Trade payables ($200,000 + $10,000) $2100 Bank overdraft ($50 Dividends payable ($30 Tax payable ($40 Total current liabilities $3800 Non-current liabilities Bank loan ($500 Deferred tax liability ($20 Total non-current liabilities $5200 Total liabilities $9000 Equity Share capital ($1 Share premium ($20 Retained earnings ($400 Revaluation reserve ($10 Total equity $1 Total liabilities and equity $2 ## Part (b): Preparing a Statement of Comprehensive Income The second part of question 6 asks you to prepare a statement of comprehensive income for a company for the year ended 31 December 2006. A statement of comprehensive income shows the revenue, expenses, and other income of a company for a specific period of time. It reflects the financial performance and profitability of the company. To prepare a statement of comprehensive income, you need to do the following steps: - Identify the revenue, expenses, and other income of the company from the given information. Revenue is the income that the company earns from its ordinary activities, such as sales of goods or services. Expenses are the costs that the company incurs in generating revenue or running its operations, such as cost of sales, depreciation, interest, and tax. Other income is any income that is not related to the ordinary activities of the company, such as gain on disposal of assets or exchange differences. - Calculate the gross profit, operating profit, and net profit. Gross profit is the difference between revenue and cost of sales. Operating profit is the difference between gross profit and other operating expenses, such as administrative expenses and selling expenses. Net profit is the difference between operating profit and other non-operating income or expenses, such as interest income, interest expense, tax expense, and other comprehensive income. Other comprehensive income is any income or expense that is not recognized in the statement of profit or loss, such as revaluation surplus or exchange differences. - Present the statement of comprehensive income in a proper format. You need to present the statement of comprehensive income in a vertical format, with revenue at the top and net profit at the bottom. You need to show the subtotals for gross profit, operating profit, profit before tax, profit after tax, and total comprehensive income. You also need to show the earnings per share (EPS) at the bottom of the statement. Here is an example of how to prepare a statement of comprehensive income for question 6 based on the sample question paper from December 2006: Statement of Comprehensive Income for the year ended 31 December 2006 --- --- Revenue ($3,000,000 + $100,000) $3,100,000 Cost of sales ($1,500,000 + $300,000) ($1,800,000) Gross profit $1,300,000 Administrative expenses ($400,000 + $50,000) ($450,000) Selling expenses ($200,000 + $10,000) ($210,000) Impairment loss on goodwill ($100,000) Operating profit $540,000 Interest income $20,000 Interest expense ($50,000 x 10%) ($5,000) Profit before tax $5550 Tax expense ($55 Profit after tax $4000 Other comprehensive income: Revaluation surplus on property $10 Exchange differences on foreign operations ($5 Total other comprehensive income $5 Total comprehensive income $4050 Earnings per share ($400 ## Part (c): Explaining the Accounting Treatment of Selected Items The third part of question 6 asks you to explain how certain items are accounted for in the financial statements, such as goodwill impairment, deferred tax, and dividends payable. You need to demonstrate your understanding of the accounting concepts and standards that apply to these items, and provide relevant examples and calculations where appropriate. To explain the accounting treatment of selected items, you need to do the following steps: - Explain the accounting treatment of goodwill impairment. Goodwill is an intangible asset that arises when a company acquires another company for more than the fair value of its net identifiable assets. Goodwill represents the excess of the purchase consideration over the fair value of the net identifiable assets acquired. Goodwill is not amortized, but is tested for impairment annually or whenever there is an indication that it may be impaired. Impairment occurs when the carrying amount of goodwill exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the cash-generating unit to which goodwill belongs. If goodwill is impaired, an impairment loss is recognized in profit or loss and reduces the carrying amount of goodwill. The impairment loss cannot be reversed in subsequent periods. For example, in question 6, the company acquired another company for $500 and recognized goodwill of $300 The company tested goodwill for impairment at 31 December 2006 and determined that its recoverable amount was only $200 Therefore, the company recognized an impairment loss of $100 in profit or loss and reduced the carrying amount of goodwill to $200 - Explain the accounting treatment of deferred tax. Deferred tax is a tax liability or asset that arises from temporary differences between the carrying amount and tax base of assets and liabilities. Temporary differences are differences that will reverse in future periods and affect taxable profit or loss. Deferred tax is calculated using the tax rates that are expected to apply when the temporary differences reverse. Deferred tax liabilities are recognized for all taxable temporary differences, except when they arise from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and affects neither accounting nor taxable profit or loss. Deferred tax assets are recognized for all deductible temporary differences, unused tax losses, and unused tax credits, to the extent that it is probable that taxable profit will be available against which they can be utilized, except when they arise from the initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting nor taxable profit or loss. Deferred tax is recognized in profit or loss, except when it relates to items that are recognized in other comprehensive income or directly in equity, in which case deferred tax is also recognized in other comprehensive income or directly in equity. For example, in question 6, the company had a deferred tax asset of $50 and a deferred tax liability of $20 at 31 December 2005. During the year ended 31 December 2006, the company recognized a depreciation expense of $300 for accounting purposes and a tax depreciation of $350 for tax purposes. The tax rate was 25%. Therefore, the company had a taxable temporary difference of $50 ($350 - $300) x 25% = $12.5 which increased the deferred tax liability by $12.5 to $32.5 The company also recognized a revaluation surplus of $10 on property, which was not taxable until disposal. Therefore, the company had a taxable temporary difference of $10 x 25% = $2.5 which increased the deferred tax liability by $2.5 to $35 The company also had unused tax losses of $40 at 31 December 2006, which it expected to recover in the next year. Therefore, the company had a deductible temporary difference of $40 x 25% = $10 which increased the deferred tax asset by $10 to $60 The company also recognized an exchange difference of ($5 on foreign operations, which was not taxable until repatriation. Therefore, the company had a deductible temporary difference of ($5) x 25% = ($1.25) which decreased the deferred tax asset by ($1.25) to $58.75 - Explain the accounting treatment of dividends payable. Dividends payable are distributions of profits to shareholders that are declared by the company but not yet paid at the end of the reporting period. Dividends payable are recognized as a liability and deducted from equity when they are declared by the company. Dividends payable are measured at the amount that is payable to shareholders on the date of declaration. Dividends payable are settled by cash or other assets when they are paid to shareholders. For example, in question 6, the company declared dividends of $30 on 31 December 2006, which were payable on 15 January 2007. Therefore, the company recognized dividends payable of $30 as a liability and deducted it from retained earnings on 31 December 2006. The company paid dividends of $30 by cash on 15 January 2007, which reduced the cash and dividends payable balances by $30 ## Part (d): Calculating and Interpreting Financial Ratios The fourth part of question 6 asks you to calculate and interpret some financial ratios for the company for the year ended 31 December 2006. Financial ratios are numerical indicators that measure the financial performance and position of a company based on its financial statements. Financial ratios can be used to compare the company with its past performance, its budget, its industry averages, or its competitors. To calculate and interpret financial ratios, you need to do the following steps: - Calculate the return on equity, current ratio, and debt-to-equity ratio. Return on equity (ROE) is a ratio that measures how much profit the company generates for each dollar of equity. It is calculated by dividing the net profit after tax by the total equity. Current ratio is a ratio that measures how well the company can pay its short-term obligations with its current assets. It is calculated by dividing the current assets by the current liabilities. Debt-to-equity ratio is a ratio that measures how much debt the company uses to finance its assets compared to its equity. It is calculated by dividing the total liabilities by the total equity. Here is an example of how to calculate these ratios for question 6 based on the sample question paper from December 2006: Return on equity = Net profit after tax / Total equity = $400,000 / $1,400,000 = 28.57% --- --- --- --- --- --- --- Current ratio = Current assets / Current liabilities = $860,000 / $380,000 = 2.26:1 Debt-to-equity ratio = Total liabilities / Total equity = $900,000 / $1,400,000 = 0.64:1 - Interpret the ratios and compare them with industry averages. You need to explain what the ratios mean and how they reflect the financial performance and position of the company. You also need to compare the ratios with industry averages or benchmarks to assess whether the company is doing better or worse than its peers. Here is an example of how to interpret these ratios for question 6 based on the sample question paper from December 2006 and some hypothetical industry averages: Return on equity = 28.57% --- --- --- --- This ratio means that the company generated $0.2857 of profit for each dollar of equity in 2006. This indicates a high level of profitability and efficiency in using the shareholders' funds. Compared with the industry average of 25%, the company's return on equity is higher, which suggests that the company performed better than its peers in generating profit from equity. Current ratio = 2.26:1 This ratio means that the company had $2.26 of current assets for each dollar of current liabilities at 31 December 2006. This indicates a high level of liquidity and solvency in meeting its short-term obligations. Compared with the industry average of 2:1, the company's current ratio is higher, which suggests that the company had more than enough current assets to cover its current liabilities. However, a too high current ratio may also imply that the company had excess or idle current assets that could be used more efficiently. Debt-to-equity ratio = 0.64:1 This ratio means that the company had $0.64 of total liabilities for each dollar of total equity at 31 December 2006. This indicates a moderate level of leverage and risk in financing its assets with debt. Compared with the industry average of 0.8:1, the company's debt-to-equity ratio is lower, which suggests that the company relied less on debt and more on equity to finance its assets. This may reduce the interest expense and financial risk, but may also lower the return on equity and tax benefits. - Comment on the financial performance and position of the company. You need to provide an overall assessment of how well the company performed and positioned financially in 2006 based on the ratios and other information given. You also need to identify any strengths or weaknesses, opportunities or threats, or areas for improvement or concern for the company. Here is an example of how to comment on the financial performance and position of the company for question 6 based on the sample question paper from December 2006: The company had a strong financial performance and position in 2006, as evidenced by its high profitability, liquidity, and solvency ratios. The company generated a high return on equity, w