F8 SCENARIO QUESTION DISCUSSIONS – Q3 (b), June 2008

This is a discussion relating to Q3 (b), June 2008. I am working from the UK paper but both the UK and INT papers are similar. For a link to the international paper, go here:

https://www.accaglobal.com/pubs/students/acca/exams/f8/past_papers/int/f8int_2008_jun_q.pdf

Since parts (a) and (c) are theoretical, we will omit them from this discussion and go straight to the scenario.

Part (b) introduces us to Zak Ltd, a chain of 15 retail outlets.

The opening paragraph tells us that (i) sales are made to individuals, in the form of cash and debit sales. This is important in that it shows Zak are making NO CREDIT SALES that we know of.

We are also told that (ii) Zak use delivery vans to transport items to the customers. Again, this is important, in that it relates to Zak’s selling and distribution costs.

Finally, we are informed that (iii) Zak has had a difficult year but are still able to present us with acceptable results. Which begs the question: Are they concealing figures from us?

We are then given a Profit And Loss Account/Income Statement to work with.

It is our job to identify and provide a possible explanation for unusual changes in this financial statement. The best place to start is PROFIT BEFORE TAX, before starting at the top with TURNOVER/REVENUE and taking it from there. Reason being profit relates to both income and expenditure.

NET PROFIT
A glance at our figures show that a £3,000 net loss has risen to a £1,790k NET PROFIT.
At this point, we glance at TURNOVER and calculate a mere 17% increase.
We then glance briefly at OPERATING EXPENSES – they don’t seem to have changed much either.
Possibility: Understatement of expenditure.

TURNOVER/REVENUE
Calculations show that turnover/revenue has increased by 17%.
And yet the opening paragraph told us that “Zak had a difficult year”. Why the increase, then?
Possibility: The industry has been growing as a whole.

COST OF SALES
Calculations show COS has fallen by 17%.
So why have sales increased significantly, then?
Possibilities: Valuation of stock/inventory may be all wrong, or Zak Ltd might have decided to buy their goods from cheaper suppliers. Either possibility is acceptable.

GROSS PROFIT
Calculations show a huge increase in gross profit, of 88% – it has nearly doubled.
To understand this change, we need to focus on both the TURNOVER and COST OF SALES.

OPERATING EXPENSES – Administration
Calculations show that administrative expenses have fallen by 6%.
Since SALES have gone up, this is unusual.
Possibilities: Expenditure has been understated, or more admin. staff are required.

OPERATING EXPENSES – Sales and distribution costs
Calculations show an increase in these costs, by 42%. But… and this is a big but… they have not increased in line with SALES (17%). Why?
Possibilities: Misallocation of expenses, or increase in service costs due to condition of delivery vans (they may be too old).

OPERATING EXPENSES – Interest Payable
Interest Payable has remained pretty much the same from year to year. But why is the company still continuing to pay interest with a massive profit?
Possibility: Overstatement of figure in financial statement.

OPERATING EXPENSES – Investment Income
Considering Zak’s profit this year, the inclusion of Investment Income isn’t surprising. The amount is still pretty high though.
Possibility: Errors in the financial statement.

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This question can be done in tabular format.

0.5 mark for unusual change
0.5 mark for why it is unusual
0.5 mark for what may have caused it

A total of six points are needed to gain full marks (NINE) for this question, although we have discussed eight.

Hope this helps!

Si80