• An arrangement to finance the use of the asset, in which one party pays consideration to the other party in periodical installments, is known as Hire purchasing. Leasing is a business deal in which one party buys the asset and grants the other party to use it, in return for lease rentals.
• In Hire Purchasing, the ownership is transferred to the hirer only if he pays the outstanding installments. On the other hand, in a finance lease, the lessee gets the option to buy the asset at the end of the term by paying a nominal amount, but in operating lease, there is no such option available to the lessee.
• Leasing is governed by International Financial Reporting Standard (IFRS)- IAS 17, IFRS 16 whereas there is no specific accounting standard for Hire Purchase.
• Hire purchase is a must in hire-purchasing but not in leasing.
• The duration of leasing is longer than hire purchase.
• The installment paid in hire purchasing includes the principal amount and interest. In contrast to leasing where the lessee has to pay the cost of using the asset only.                                                                                                                      (Any 3)

(6 marks spread evenly using ticks)

                                                         Report to the Managing Director
To                 : Managing Director
From             : Financial Controller
Subject          : Analysis of performance for the year 2015
This report should be read in conjunction with the appendix attached which shows the relevant ratios.        (1 mark)
Profitability
Profit margin is one of the key indicators used to evaluate a company’s performance as this margin calculates a company’s net income as a percentage of the company’s sales. Several factors directly contribute to the change in a company’s net profit margin. A high profit margin shows that a company can convert sales into profits. The net profit margin also considers all of the costs associated with the sale of the products. Profit margin was better than that of our competitor Diamond Ltd as well as the industry average. This suggest that if we increase sales, there will be more profits for the company.
Return on Capital Employed is very useful for companies that require large amounts of capital to facilitate production, otherwise known as capital-intensive industries. Return on capital employed was bit lower than that of Diamond just approximating the industry average .Options available to the company to improve on its return on capital employed (ROCE) ratio include reducing costs, increasing sales, and paying off debt or restructuring financing.
Return on equity (ROE) is a measure of profitability that calculates how many Ghana cedis of profit a company generates with each Ghana cedi of shareholders’ equity. ROE compared to the industry average of 20% was quite lower. This is bad even though it’s significantly higher than that of Diamond. Return on equity can be improved if asset turnover, financial leverage and profit margins are properly managed by the company.                                     (2 marks)
Liquidity
The current and quick ratios performed better than the industry and that of Diamond. The higher the current ratio, the more capable the company is of paying its obligations, as it has a larger proportion of asset value relative to the value of its liabilities. This suggests that Shine has no short term liquidity challenges and should have no difficulty in paying short term debts as they fall due.                                                                                                              (2 marks)
Gearing
Gearing focuses on the capital structure of the business – that means the proportion of finance that is provided by debt relative to the finance provided by equity (or shareholders). However, it focuses on the long-term financial stability of a business. Our interest cover although slightly below the industry average it is marginally higher than that of Diamond. This also shows the company’s ability to adequately settle interest charges.
The debt to equity ratio compares favourably with Diamond and is significantly lower than industry average. The higher the level of borrowing (gearing) the higher are the risks to a business, since the payment of interest and repayment of debts are not “optional” in the same way as dividends. However, gearing can be a financially sound part of Shine’s capital structure particularly if the business has strong, predictable cash flows.                         (2 marks)
Efficiency
Average collection period is worse off than both Diamond’s and the industry average. Our longer credit days is yet to translate into higher sales for us compared to Diamond. More effort is required at the Credit Control Unit to reduce the collection period.
Although we collect from our debtors latter than Diamond and industry, we pay our suppliers earlier than both. We need to negotiate better credit terms form our suppliers to match the industry norm. The inventory days on hand is higher than industry and Diamond’s. There is the possibility of having some obsolete items in store. This high level of inventory has been financed by increased overdraft which may reduce if the inventory levels can be managed down.                    (2 marks)
Signed: Financial Controller.

                                                   Haruna Ltd
           Statement of cash flows for the year ended 31 March 2017.

The investment is revalued to fair value at the reporting date. A gain of GH¢200,000 results. This is recognised in other comprehensive income, as the entity made an election to do so at the date of purchase.
31 Jan 2017   Dr   Financial assets       GH¢200,000
                      Cr   Other comprehensive income / reserves             GH¢200,000
(Fair value gain on investment in shares of another entity)

As the cash flows due to Bawaleshie under the terms of the bond consist solely of interest and principal, the amortised cost method should be applied. Interest earned during the year ended 31 January 2017 is GH¢800,000 (8% of GH¢10m).
As this is not payable until the anniversary of the bond’s issue (1 February 2017), an accrual must be made for this amount. The fair value of the bond at 31 January 2017 is therefore irrelevant.
31 Jan 2017   Dr   Interest receivable (current asset)      GH¢800,000
                      Cr   Profit or loss                                       GH¢800,000
(Interest accrued to Bawaleshie Ltd on bond investment)

Deferred tax is the estimated future tax consequences of transactions and events that have been recognized in the financial statements of the current and previous periods. Deferred tax arises due to the temporary differences between the accounting profit and the taxable profit. The temporary differences cause the carrying value of some items in the statement of financial position to be different from their tax base (the amount recognized for tax calculation).

Kobby Ltd’s statement of comprehensive income shows an increase in deferred tax, this suggests that temporary differences in the year to 31/3/2015. The main reason was probably an increase in non-current assets causing the tax depreciation to increase more than the accounting depreciation for the year to 31/3/2015, thus causing the increase of GH¢200,000 in deferred tax provision.

Current tax is the estimated amount of corporate income tax payable on the taxable profits of the entity for the period. The amount of current tax is accrued in the financial statements and carried forward as a current liability to the next accounting period when it will be paid. When the tax is paid there will usually be a difference between the amount paid and the amount accrued. If the amount paid is less than the amount accrued there will be an over provision of income tax. The amount over provided will be an adjustment to the income tax expense in the following period. In Kobby Ltd, the current tax estimate for year to 31 March 2014 was GH¢650,000, the statement of cash flows shows that GH¢600,000 was paid in the following period leaving a balance of GH¢50,000 over provided.

The earthquake occurred after the end of the accounting period. Assets and liabilities at 31 August 2014 were not affected. The earthquake is indicative of conditions that arose after the reporting period and does not give any further evidence in relation to assets and liabilities in existence at the reporting date. Therefore according to IAS 10 Events after the reporting period it will be classified as a non-adjusting event after the reporting period. The cost of the repairs will be charged to the Statement of comprehensive income in the period when it is incurred. Due to the impact on Akakpo Ltd, i.e. closure and loss of earnings for 6 months, the earthquake and an estimate of its effect will need to be disclosed by way of a note in Akakpo Ltd’s financial statements for the year ended 31 August 2015.

IAS 37 Provisions, contingent liabilities and contingent assets requires that future costs of reinstatement be provided for as soon as they become an unavoidable commitment. The mine’s license requires the work to be done, so there is a commitment as soon as the mine starts operations. The present value of the full cost must be provided for. GH¢ 3 million will be credited to provisions and added to the cost of the non-current asset.

The IASB Framework for the Preparation and Presentation of Financial Statements (IASB Framework) says that information is relevant ―when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. For accounting information to be relevant, ―accounting information must be capable of making a difference in a decision by helping users to form predictions about the outcomes of past, present, and future events or to confirm or correct expectations, and goes on to define event and outcome.

CPP makes adjustments for general inflation whereas CCA allows for specific price movements (changes in the deprival value of assets).
Specific price changes (in CCA) enable a company to determine whether its operating capability has been maintained. The two concepts use different concepts of capital maintenance; namely operating capability with CCA and general purchasing power with CPP.

• It is probable that any future economic benefit associated with the item will flow to or from the entity.
• The item has a cost or value that can be measured with reliability.

• Different purposes of financial reporting
• Different legal system
• Different user groups
• Needs of developing countries
• Nationalism demonstrated in the unwillingness to accept another country’s standards
• Cultural differences resulting in different objectives for accounting systems
• Unique circumstances
• The lack of strong accountancy bodies                                                                                                                        (Any 3)