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CPA
Foundation Leval
Financial Accounting April 2022
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Financial Accounting
Revision Kit

QUESTION 1a

Q Highlight five elements of financial statements,
A

Solution


Financial Statements Elements


Element Description
Revenue Income generated from primary business activities.
Expenses The costs incurred in the process of generating revenue.
Assets Resources owned or controlled by the company, expected to provide future economic benefits.
Liabilities Obligations or debts that the company owes to external parties.
Equity The residual interest in the assets of the entity after deducting liabilities.


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QUESTION 1b

Q Required:
(i) Statement of profit or loss for the year ended 31 December 2021.

(ii) Statement of financial position as at 31 December 2021.
A

Solution


(i) Statement of profit or loss for the year ended 31 December 2021.


Fatuma Ali
Statement of profit or loss for the year ended 31 Dec 2021

Sales
Less: Cost of sales
Opening inventory
Add: Purchases 112,360 - 2,500 - 8,600 + 1,390
Less: Drawing in goods
Closing inventory
Gross profit
Less: Expenses
Commission 10% × 57,670
Manager salary
Depreciation
Motor vehicle 25% x 2,740
Fittings & Equipment 10% × 8,800
Interest on bank loan
Rent
General expense (8,335 + 840)
Net profit		 Sh 000



102,650
(100)
(36,500)


5,767
2,000

685
880
1,000
3,750
9,175

 Sh 000
123,720




(66,050)
57,670








(23,257)
34,413


(ii) Statement of financial position as at 31 December 2021.


Fatuma Ali
Statement of financial position as at 31 December 2021
Non Current Assets
Lease hold premises
Shop fitting and equipment
Motor vehicles (2,740 - 685)
Current Assets
Inventory
Bank balance 16,735 + 2,500
Cash balance
Total assets
Capital and liabilities
Capital
Add: net profit
Less: Drawings 4,000 + 100
Non current liabilities
Bank loan
Current liabilities
Account payables
Accrued managers salary 2,000 - 1,980
Bal fig
Total Capital and liabilities		 Sh."000"

(8,800 - 880)







30,000
34,413
(4,100)







 Sh."000"
20,000
7,920
2,055

36,500
19,235
100
85,810



60,313

20,000

8,600
20
(3,123)
85,810



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QUESTION 2

Q Required:
(i) Statement of profit or loss for the year ended 30 September 2021

(ii) Statement of financial position as at 30 September 2021.

(iii) Partners' current accounts.
A

Solution


(i) Statement of profit or loss for the year ended 30 September 2021


Jack ,Nina and Maria
Statement of profit or loss for the year ended 30/9/2021

Sales
Less: cost sales
Opening inventory
Add: Purchases
Less: Closing inventory
Gross Profit
Less Expenses
Depreciation
Motor vehicle 20% × 3,400
Furniture 5% × 1,200
Salaries & Wages (7,400 - 1,330)
Rent, rates & Electricity (1,240 - 260 + 60)
Allowance for doubtful debts
Consultancy fees (420 - 200)
General expenses
Net profit
Less: interest on
Capital - Jack
- Nina
- Maria
Profit to be shared
Share of profit
- Jack
- Nina
- Maria
Balance		 Sh 000
14,000



(6,560)
7,440


(340)
(30)
(3,035)
(520)
(120)
(110)
(1,410)
1,875

(150)
(100)

1,625

2/3 × 1,625 = 1,083
1/3 × 1,625 = 542

-
 Sh 000
21,000



(9,840)
11,160


(340)
(30)
(3,035)
(520)
(160)
(110)
(1,110)
5,855

(176.65)
(93.35)
(155)
5,430

2/5 x 5430 = 2,172
2/5 x 5430 = 2,172
1/5 x 5430 = 1,086
-
 Sh 000
35,000

(4,800)
(16,700)
5,100
18,600


(680)
(60)
(6,070)
(1,040)
(280)
(220)
(2,520)
7,730

(326.65)
(193.35)
(155)
7,055

3,255
2,714
1,086
-


Workings


W1

Goodwill recognized

J → 2 / 3 x 2,000 = 1,333

N → 2 / 3 x 2,000 = 667

Goodwill written off

J → 2 / 5 x 2,000 = 800

N → 2 / 5 x 2,000 = 800

M → 1 / 5 x 2,000 = 400

W2

Partners capital account


Goodwill written off

Bal c/d

 Jack
"000"
800

3,533
4,333		 Nina
"000"
800

1,867
2,667		 Maria
"000"
400

3,100
3,500

Bal b/d
Addition
Goodwill

 Jack
"000"
3,000

1,333
4,333		 Nina
"000"
2,000

667
2,667		 Maria
"000"

3,500

3,500


W3

Interest on capital

First 6 months

J → 3,000 x 10% x 6 / 12 = 150

N → 2,000 x 10% x 6 / 12 = 100

Next 6 months

J → 3,533 x 10% x 6 / 12 = 176.65

N → 1,867 x 10% x 6 / 12 = 93.35

M → 3,100 x 10% x 6 / 12 = 155

(ii) Statement of financial position as at 30 September 2021.


Jack Nina and Maria
Statement of Financial position as at 30th September 2021
Non Current assets
Office building (6,000 + 200)
Motor vehicles 3,400 - (1,200 + 680)
Furniture & fittings 1,200 - (400 + 60)
Current Assets
Inventory
Account receivable 900 - 280
Bank balance
Prepaid rates
Total assets
Capital and liabilities
Capital A/c
Jack 3,533
Nina 1,867
Maria 3,100
Current A/c
Jack 4,581.65
Nina 3,627.35
Maria 2,491
Current Liabilities
Account payables
Accrued electricity

 Sh 000
6,200
1,520
740

5,100
620
9,280
260
23,720




8,500



10,700

4,460
60
23,720


(iii) Partners' current accounts.




Drawings


Bal c/d

 Jack
"000"
600.00


4581.65
5,181.65		 Nina
"000"
480.00


3,627.35
4,107.35		 Maria
"000"
250.00


2,491.00
2,741.00

Bal b/d
Addition
Interest on capital
Share of profit

 Jack
"000"
1,600.00

326.65
3,255.00
5,181.65		 Nina
"000"
1,200.00

193.35
2,714.00
4,107.35		 Maria
"000"

1,500.00
155.00
1,086.00
2,741.00



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QUESTION 3

Q Required:
(a) Bar income statement for the year ended 31 October 2021.

(b) Income and expenditure statement for the year ended 31 October 2021.

(c) Statement of financial position as at 31 October 2021.
A

Solution


(a) Bar income statement for the year ended 31 October 2021.


Kite Golf Club
Bar income statement for the year ended 31/10/2021

Bar Receipts
Less: Cost of sales
Opening inventory
Add: Purchases (27,000 + 7,000 - 9,000)
Less: Closing inventory
Gross profit
Less: Bar salaries
Bar Profit		 Sh 000


7,000
25,000
(5,000)



Sh 000
42,000



(27,000)
15,000
(10,000)
5,000


(b) Income and expenditure statement for the year ended 31 October 2021.


Kite Golf club
Income and expenditure statement for the year ended 31 October 2021
Income
Bar profit
Subscription
Donations
Tournament profit (11,000 - 6,000)
Competition profit 5,900 - (1,600 + 500 - 400)
Profit on disposal of course equipment 2500 - (7000 - 5,600)
Total incomes
Less: Expenses
Depreciation:
Fixture & Fittings 10% x 70,000
Course Equipment 20% x (160,000 - 7,000)
Insurance (9,000 + 2,250 - 4,500)
Salaries - club house
Course repairs
Electricity expenses
Telephone expenses
Sundry Expenses
Surplus		 Sh 000









7,000
30,600
6,750
36,000
19,000
6,000
2,750
1,900

 Sh 000
5,000
87,000
36,000
5,000
4,200
1,100
138,300









(110,000)
28,300


Workings


W1

Subscription a/c

Arrear balance b/d
I & E (Balance figure)
In advance balance c/d

 Sh"000"
2,000
87,000
4,500
93,500
In advance balance
Subscription Received
arrears balance c/d

 Sh"000"
7,000
83,000
3,500
93,500


(c) Statement of financial position as at 31 October 2021.


Non current assets
Club house and course
Fixtures and fittings 70,000 - 7,000
Course Equipment (154,400-7,000)-(5,600+30,600)
Current Assets
Inventory
Subscription in arrears
Bank balance
Prepaid insurance
Total Assets
Financed by:
Accumulated fund
Plus Surplus
Current liabilities
Bar payables
Subscription in advance
Accruals - Telephone expenses
Completion expenses
Bal fig












636,500
28,300






Sh."000"
400,000
63,000
111,200

5,000
3,500
81,400
2,250
666,350


664,800

7,000
4,500
750
500
(11,200)
666,350


Workings


W2

Accumulated fund
Assets
Club house and course
Fixtures & fittings
Course equipment
Bar inventory
Subscription in arrears
Bank balance
Total Assets
Liabilities
Bar payables
Subscription in advance
Competition due
Telephone expense due
Accumulated fund









9,000
7,000
400
500

 sh."000"

400,000
70,000
154,400
7,000
2,000
20,000
653,400




(16,900)
636,500


W3

Prepaid insurance

(9,000 - 6,000) x 9 / 12 = 2,250


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QUESTION 4

Q Required:
(a) Compute the following ratios for each company:

(i) Gross profit margin.

(ii) Net profit margin.

(iii) Return on capital employed.

(iv) Return on assets.

(v)- Current ratio.

(vi) Assets turnover.

(Vii) Inventory turnover.

(Vii) Trade receivable days

(ix) Trade payable days.

(b) Comment on the profitability for each company
A

Solution


(a) Compute the following ratios for each company:


(i) Gross profit margin.


Gross profit / Sales x 100

Green traders


600 / 3,000 x 100 = 20%

Gold traders


600 / 1,800 x 100 = 33.3%

(ii) Net profit margin.


Net profit / sales x 100

Green traders


120 / 3,000 x 100 = 4%

Gold traders


150 / 1,800 x 100 = 8.33%

(iii) Return on capital employed.


ROCE = Net profit / Capital Employed x 100

Capital Employed = Total Assets − Current Liabilities

Green traders


(120 / (600 + 60)) x 100 = 18.18%

Gold traders


(150 / (3,000 + 720)) x 100 = 4.03%

(iv) Return on assets.


ROA = Net profit / Average Total Assets x 100

Green traders


120 / 966 x 100 = 12.42%

Gold traders


150 / 4,200 x 100 = 3.57%

(v) Current ratio.


Current assets / Current liabilities

Green traders


408 / 306 = 1.33

Gold traders


2,130 / 480 = 4.44

(vi) Assets turnover.


Sales / Total Assets

Green traders


3,000 / 966 = 3.11

Gold traders


1,800 / 4,200 = 0.43

(vii) Inventory turnover.


Green traders


Cost of sales / Average stock

2,400 / ((348 + 252) / 2) = 8

Gold traders


1,200 / ((750 + 1,170) / 2) = 1.25

(vii) Trade receivable days


(No. of days x Average Purchases ) / Credit sales

Green traders


(365 days x 150) / 3,000 = 18.25 days

Gold traders


(365 days x 600) / 1,800 = 121.67 days

(ix) Trade payable days.


(No of days x Average creditors) / credit purchases

Green traders


(365 days x 186) / 2,304 = 29.47

Gold traders


(365 days x 330) / 1,620 = 74.55 days

(b) Comment on the profitability for each company


Green traders translated 20% of their revenue into gross profit, while gold traders achieved a 33.3% conversion of revenue to gross profit, indicating superior performance by gold traders.


In terms of net profit, green traders converted 4% of their revenue, whereas gold traders achieved an 8.33% conversion, demonstrating that gold traders are performing better in this aspect as well.

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QUESTION 5(a)

Q In relation to public sector accounting:

(i) Explain the term "encumbrance (obligations)".

(ii) Highlight four characteristics of a government business enterprise.
A

Solution


(i) Explanation of "Encumbrance (Obligations)"


In public sector accounting, an encumbrance, also known as obligations, refers to a commitment made for future financial transactions. It represents the reserved portion of the budget that is earmarked for specific purposes but has not been expended yet. Encumbrances are often used to set aside funds for anticipated expenses, ensuring that the necessary budgetary resources are allocated for planned activities before the actual expenditure occurs.

(ii) Characteristics of a Government Business Enterprise


  • Operational Autonomy: A government business enterprise operates with a degree of independence and autonomy, allowing it to make business decisions without direct government intervention.
  • Profit Motive: Unlike typical government agencies, a government business enterprise is driven by a profit motive. It aims to generate revenue and operate in a commercially viable manner.
  • Market Orientation: Government business enterprises often operate in competitive markets, requiring them to adopt market-oriented strategies to succeed in their respective industries.
  • Financial Accountability: Despite its autonomy, a government business enterprise is still accountable for its financial performance. It must adhere to accounting standards and undergo audits to ensure transparency.
  • Ownership: The government typically owns a significant stake in a government business enterprise. However, it may also involve private ownership or partnerships, depending on the structure and nature of the enterprise.

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QUESTION 5(b)

Q Describe the following types of preference share capital:

(i) Cumulative preference shares.

(ii) Participating preference share capital.

(iii) Redeemable preference shares
A

Solution


(i) Cumulative Preference Shares


Cumulative preference shares are a type of preference shares where any unpaid dividends accumulate and must be paid out before dividends are distributed to common shareholders. If a company is unable to pay dividends in a particular year, the cumulative dividends accrue and must be settled in future years before any dividends can be paid to other classes of shareholders.

(ii) Participating Preference Share Capital


Participating preference shares give shareholders the right to receive additional dividends, beyond the fixed rate specified, if the company performs exceptionally well. In other words, participating preference shareholders have the opportunity to share in the profits of the company above and beyond the fixed dividend rate, providing them with potential additional returns on their investment.


(iii) Redeemable Preference Shares


Redeemable preference shares are preference shares that come with a predetermined date or conditions for redemption by the issuing company. The company has the option to buy back these shares at a specific time or under certain circumstances. This provides the company with flexibility in its capital structure by allowing it to reduce its share capital when necessary.



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QUESTION 5(c)

Q Required:
(i) An updated cashbook as at 30 September 2021.

(ii) Bank reconciliation statement as at 30 September 2021.
A

Solution


(i) An updated cashbook as at 30 September 2021.

Balance b/d
Cheque credited 65,000 × 2
Direct deposit


 Sh
530,000
130,000
187,000

847,000
Dishonored cheque
Bank charges
Standing order
Balance c/d

 Sh
92,000
9,500
230,000
515,500
847,000


(ii) Bank reconciliation statement as at 30 September 2021.



Balance as per updated cashbook
Add: unpresented cheque
Less: uncredited cheque
Balance as per bank balance statement		 Sh
515,500
299,000
(206,000)
608,500



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