Cima F2 Exam Question No 42

Question No 42:

Other entries affecting the pension assets and liabilities

• There are additional changes in the defined benefit asset/liability in the period affecting only the statement of financial position:
• Contributions (from the employer): Dr Pension asset Cr Bank
• Benefits paid: Dr Pension liability Cr Pension asset

Cima F2 Exam Question No 41

Question No 41:

What is effect on statement of comprehensive income for the period?

The changes in the defined benefit asset/liability in the period are treated as follows:
Current and past service costs: Dr P&L Cr Pension liability
Interest cost (on liability): Dr P&L (finance cost) Cr Pension liability
Interest income (on asset): Dr Pension asset Cr P&L (net off against finance cost)
Curtailments and settlements (if any): Dr or Cr P&L
Cr or Dr Pension liability
Remeasurement component gain/loss: Dr or Cr Other comprehensive income Cr or Dr Pension asset / liability

Cima F2 Exam Question No 40

Question No 40:

What is futures contracts?

Futures contracts oblige the holder to buy or sell a standard quantity of a specific underlying item at a specified future date. Futures contracts are very similar to forward contracts. The difference is that futures contracts have standard terms and are traded on a financial exchange, whereas forward contracts are tailor made and are not traded on a financial exchange.

Cima F2 Exam Question No 39

Question No 39:

Defined benefit plans?

The pension payable on retirement normally depends on either the final salary or the average salary of the employee during their career.

• The employer undertakes to finance a pension income of a certain amount, e.g. 2/3 × final salary × (years of service/40 years)

• The employer has an ongoing obligation to make sufficient contributions to the plan to fund the pensions.

• An actuary calculates the amount that must be paid into the plan each year in order to provide the promised pension. The calculation is based on various estimates and assumptions including: - life expectancy - expected length of service to retirement / employee turnover - investment returns - wage inflation.

• Therefore, the cost of providing pensions is not certain and varies from year to year.
  

Cima F2 Exam Question No 38

Question No 38:

A sale and repurchase agreement can be in the form of a sale and leaseback?

• Under a sale and leaseback transaction, an entity sells one of its own assets and immediately leases the asset back.
• This is a common way of raising finance whilst retaining the use of the related assets. The buyer / lessor is normally a bank.
• The leaseback is classified as finance or operating in accordance with the usual IAS 17 criteria.

Cima F2 Exam Question No 37

Question No 37:

Determining the substance of a transaction?

Common features of transactions whose substance is not readily apparent are:

• The legal title to an asset may be separated from the principal benefits and risks associated with the asset
• A transaction may be linked with other transactions which means that the commercial effect of the individual transaction cannot be understood without an understanding of all of the transactions
• Options may be included in a transaction where the terms of the option make it highly likely that the option will be exercised.

Cima F2 Exam Question No 36

Question No 36:

What is the forward rate agreements?

Forward rate agreements can be used to fix the interest charge on a floating rate loan.

Cima F2 Exam Question No 35

Question No 35:

What is forward contracts?

The holder of a forward contract is obliged to buy or sell a defined amount of a specific underlying asset, at a specified price at a specified future date. For example, a forward contract for foreign currency might require £100,000 to be exchanged for $150,000 in three months' time. Both parties to the contract have both a financial asset and a financial liability. For example, one party has the right to receive $150,000 and the obligation to pay £100,000.

Forward currency contracts may be used to minimise the risk on amounts receivable or payable in foreign currencies

Cima F2 Exam Question No 34

Question No 34:

What are the types of derivative?

• Forward - the obligation to buy or sell a defined amount of a specific underlying asset, at a specified price at a specified future date.
• Forward rate agreements - a contract to fix the interest charge on a floating rate loan.
• Futures contracts - the obligation to buy or sell a standard quantity of a specific underlying item at a specified future date.
• Swaps - an agreement to exchange periodic payments at specified intervals over a specified time period.
• Options - the right, but not the obligation, to buy or sell a specific underlying asset on or before a specified future date.

Cima F2 Exam Question No 33

Question No 33:

What is Swaps?

Two parties agree to exchange periodic payments at specified intervals over a specified time period. For example, in an interest rate swap, the parties may agree to exchange fixed and floating rate interest payments calculated by reference to a notional principal amount. This enables companies to keep a balance between their fixed and floating rate interest payments without having to change the underlying loans.

Cima F2 Exam Question No 32

Question No 32:

What is Accounting treatment of the commercial substance of a lease?
As the commercial substance of a finance lease is that the lessee is the effective owner of the asset the required accounting treatment is to:

• Record the asset as a non-current asset in the lessee's statement of financial position
• Record a liability for the lease payments payable to the lessor.
  

Cima F2 Exam Question No 31

Question No 31:

What is Futures contracts?\

Futures contracts oblige the holder to buy or sell a standard quantity of a specific underlying item at a specified future date. Futures contracts are very similar to forward contracts. The difference is that futures contracts have standard terms and are traded on a financial exchange, whereas forward contracts are tailor made and are not traded on a financial exchange.

Cima F2 Exam Question No 30

Question No 30:

When can WACC be used as a discount rate?

The WACC is often used as a discount rate when using net present value or internal rate of return calculations. However, this is only appropriate if the following conditions are met:
(1) The capital structure is constant. If the capital structure changes, the weightings in the WACC will also change.
(2) The new investment does not carry a different business risk profile to the existing entity's operations.
(3) The new investment is marginal to the entity. If we are only looking at a small investment then we would not expect any of ke, kd or the WACC to change materially. If the investment is substantial it will usually cause these values to change.

Cima F2 Exam Question No 29

Question No 29:

Cash-settled share-based payments measure?

• Until the liability is settled, the entity remeasures the fair value of the liability at each reporting date and then at the date of settlement. Notice that this is different from accounting for equity share-based payments, where the fair value is fixed at the grant date.
• Changes in fair value are recognized in profit or loss for the period.
• Where services are received, these are recognized over the period that the employees render the services. (This is the same principle as for equity-settled transactions).
• The expense recognized in each accounting period has a double entry to a provision/liability account.
• Dr P/L
• Cr Liability
• On the vesting date, the amount of the liability should equal the cash to be paid.

Cima F2 Exam Question No 28

Question No 28:

Dividend related ratios?

Growth potential and the ability to generate future wealth in the entity may depend on the amount of profits retained. This relationship may be measured using the profit retention ratio: (Profit after dividends / Profit before dividends )× 100. The higher the proportion of earnings retained, the higher the growth potential. Cash is retained in the entity for growth as opposed to being paid to shareholders.
Dividend yield will indicate the return on capital investment, relative to market price: ( Dividend per share/ Market price per share
) × 100. Dividend cover measures the ability of the entity to maintain the existing level of dividend and is used in conjunction with the dividend yield: Earnings per share / Dividends per share
The higher the dividend cover, the more likely it is that the dividend yield can be maintained.

Cima F2 Exam Question No 27

Question No 27:

Covenants include?

• Dividend restrictions - Limitations on the level of dividends a company is permitted to pay. This is designed to prevent excessive dividend payments which may seriously weaken the company's future cash flows and thereby place the lender at greater risk.
• Financial ratios - Specified levels below which certain ratios may not fall, e.g. debt to net assets ratio, current ratio.
• Financial reports - Regular accounts and financial reports to be provided to the lender to monitor progress.
• Issue of further debt - The amount and type of debt that can be issued may be restricted. Subordinated debt (i.e. debt ranking below the existing unsecured debt) can usually still be issued

Cima F2 Exam Question No 26

Question  No 26:

What is Covenants?

A further means of limiting the risk to the lender is to restrict the actions of the directors through the means of covenants. These are specific requirements or limitations laid down as a condition of taking on debt financing

Cima F2 Exam Question No 25

Question No 25:

What is Security - charges?

1. Fixed charge - The debt is secured against a specific asset, normally land or buildings. This form of security is preferred because, in the event of liquidation, it puts the lender at the 'front of the queue' of creditors.
2. Floating charge - The debt is secured against the general assets of the business. This form of security is not as strong; again it confers a measure of security on liquidation as a 'preferred creditor', meaning the lender is higher in the list of creditors than otherwise.

Cima F2 Exam Question No 24

Question No 24:

What is Debt finance?

This is the loan of funds to a business without conferring ownership rights. The key features of debt financing arising from this 'arm's length relationship' are:

• Interest is paid out of pre-tax profits as an expense of the business.
• It carries a risk of default if interest and principal payments are not met.

Cima F2 Exam Question No 23

Question No 23:

Defined contribution plans?

The pension payable on retirement depends on the contributions paid into the plan by the employee and the employer.

• The employer's contribution is usually a fixed percentage of the employee's salary. The employer has no further obligation after this amount is paid.
• Therefore, the annual cost to the employer is reasonably predictable.
• Defined contribution plans present few accounting problems.

Cima F2 Exam Question No 22

Question No 22:

What is 'Ex rights'?

On the first day of dealings in the newly issued shares, the rights no longer exist and the old shares are now traded 'ex rights' (without rights attached).

Cima F2 Exam Question No 21

Question No 21:

What is 'Cum rights'?

When a rights issue is announced, all existing shareholders have the right to subscribe for new shares, and so there are rights ('cum rights') attached to the shares, and the shares are traded 'cum rights'

Cima F2 Exam Question No 20

Question No 20:

What is Market price after issue?

• After the announcement of a rights issue there is a tendency for share prices to fall.
• The temporary fall is due to uncertainty about:
• Consequences of the issue
• Future profits
• Future dividends.
• After the actual issue the market price will normally fall again because:
• There are more shares in issue (adverse affect on earnings per share), and
• New shares were issued at market price discount.

Cima F2 Exam Question No 19

Question No 19:

A rights issue may be defined as:

Raising of new capital by giving existing shareholders the right to subscribe to new shares in proportion to their current holdings. These shares are usually issued at a discount to market price.

Cima F2 Exam Question No 18

Question No 18:

What are the Rights issues?

A rights issue is where new shares are offered for sale to existing shareholders, in proportion to the size of their shareholding.

Cima F2 Exam Question No 17

Question No 17:

What is Institutional investors?

Institutional investors have little direct involvement other than as investors, agreeing to buy a certain number of shares. They may also be used by the entity and its advisers to provide an indication of the likely take up and acceptable offer price for the shares. Once the shares are in issue institutional investors have a major influence on the evaluation and the market for the shares.

Cima F2 Exam Question No 16

Question No 16:

What are the Stockbrokers provide?

Stockbrokers provide advice on the various methods of obtaining a listing. They may work with investment banks on identifying institutional investors, but usually they are involved with smaller issues and placings.   

Cima F2 Exam Question No 15

Question No 15:

What is the role of advisors in a share issue?

Investment banks usually take the lead role in share issues and will advise on:
• the appointment of other specialists (e.g. lawyers)
• stock exchange requirements
• forms of any new capital to be made available
• the number of shares to be issued and the issue price
• arrangements for underwriting
• publishing the offer.

Cima F2 Exam Question No 14

Question No 14:

What are the two important capital markets in the UK?

• The full Stock Exchange - a market for larger companies. Entry costs are high and scrutiny is very high for companies listed on the 'full list', but the profile of a Stock Exchange listed company's shares is very high, so the shares are extremely marketable.
• The Alternative Investment Market (AIM) - a market for smaller companies, with lower associated costs and less stringent entry criteria.

Cima F2 Exam Question No 13

Question No 13:

What are the A stock exchange listing Disadvantages of a listing?

• Costly for a small entity (flotation, underwriting costs, etc.)
• Making enough shares available to allow a market, and hence loss of at least some control of the original owners.
• Reporting requirements are more onerous.
• Stock exchange rules for obtaining a quotation can be stringent

Cima F2 Exam Question No 12

Question No 12:

What are the A stock exchange listing Advantages of a listing?

• Once listed, the market will provide a more accurate valuation of the entity than had been previously possible.
• Realisation of paper profits, and mechanism for buying and selling shares in the future at will.
• Raise profile of entity, which may have an impact on revenues, credibility with suppliers and long-term providers of finance.
• Raise capital for future investment.
• Makes employee share schemes more accessible.

Cima F2 Exam Question No 11

Question No 11:

A stock exchange listing

When an entity obtains a listing (or quotation) for its shares on a stock exchange this is referred to as a flotation or an Initial Public Offering (IPO).

Cima F2 Exam Question No 10

Question No 10:

What is Public limited company (plc in UK terminology)?

Answer:

A public limited company is a limited liability company that may sell shares to the public. It can be either an unlisted company, or a listed company on the stock exchange.

Cima F2 Exam Question No 9

Question No 9:

What is the Limited by shares?

Means that the company has shareholders, and that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder's personal assets are thereby protected in the event of the company's insolvency, but money invested in the company will be lost.

Cima F2 Exam Question No 8

Question No 8:

What is Private limited company (Ltd in UK terminology)?

A private company limited by shares, usually called a private limited company, has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company

Cima F2 Exam Question No 7

Question No 7:

What  is the Capital markets functions?

Primary function: The primary function of a stock market is to enable companies to raise new finance (either equity or debt). Through the stock market, a company can communicate with a large pool of potential investors, so it is much easier for a company to raise finance in this way, rather than contacting investors individually. Note that in the UK, a company must be a plc before it is allowed to raise finance from the public on the stock market.
Secondary function: The secondary function of a stock market is to enable investors to sell their investments to other investors. A listed company's shares are therefore more marketable than an unlisted company's, which means that they tend to be more attractive to investors

Cima F2 Exam Question No 6

Question No 6:

What is Capital markets?

Capital markets (or stock markets) must fulfil both primary and secondary functions.

Cima F2 Exam Question No 5

Question No 5:

What is the Different types of preference shares? 

• cumulative preference shares, for which dividends must be paid including skipped dividends i.e. if a dividend is skipped one year, the skipped dividend has to be paid the following year along with the 'normal' dividend.
• non-cumulative preference shares, for which skipped dividends do not have to be paid later.
• participating preference shares, which give the holder fixed dividends plus extra earnings based on certain conditions (in a similar way to ordinary shares).
• convertible preference shares, which can be exchanged for a specified number of ordinary shares on some given future date.   

Cima F2 Exam Question No 4

Question No 4:

What is Preference shares?

Answer:

Preference shares are shares that pays a fixed dividend, which is paid in preference to (before) ordinary share dividends, hence the name.

Cima F2 Exam Question No 3

Question No 3:

What is Ordinary shares?

Answer:

Ordinary shares pay dividends at the discretion of the entity's directors. The ordinary shareholders of a company are the owners of the company and they have the right to attend meetings and vote on any important matters.

Cima F2 Exam Question No 2

Question No 2:

What is Share?

Answer:

A fixed identifiable unit of capital in an entity which normally has a fixed nominal value, which may be quite different from its market value. Shareholders receive returns from their investment in shares in the form of dividends, and also capital growth in the share price.

Cima F2 Exam Question No 1

Question No 1:

Sources of long term finance?

1. The capital markets
2. Bank borrowings
3. Government and similar sources