Question 1

**Section B - Case 2: Single Entity Accounts & Ratio Analysis**

*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
1) Depreciation on new turbines of $50,000 was omitted.
2) An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
3) Closing inventory was overvalued by $30,000.
4) An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*

Horizon Wind Farms operates in a highly capital-intensive industry. Which of the following statements best interprets their gearing ratio of 33.3%?

Accepted Answer

Evaluate the 33.3% figure. Gearing below 50% is generally considered low/moderate. It means the company is funded more by equity than by debt, implying lower financial risk (lower mandatory interest payments).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Assuming any presence of a large loan ($1.5m) automatically means the company is 'highly geared' without looking at the proportion to equity.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 1

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