CIMAPRA19-F02-1 Exam - Topic 5 Question 134 Discussion

Question

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?

Ivette · Accepted Answer

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

Ivette · Answer

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

Ivette · Answer

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

Ivette · Answer

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