CPA
Foundation Leval
Financial Accounting May 2016
Suggested solutions

(ii) Return on capital employed (ROCE)

(iii) Current ratio.

(iv) Acid test ratio

(v) Inventory Turnover

(vi) Trade receivables collection period

1. Developing High-Quality Accounting Standards:

   The primary goal of the IPSASB is to develop and issue high-quality international public sector accounting standards, improving consistency, comparability, and transparency.

2. Meeting the Needs of Diverse Users:

   IPSASB strives to meet the information needs of diverse users, including policymakers, legislators, citizens, and other stakeholders, providing relevant and reliable information.

3. Enhancing Accountability and Transparency:

   IPSASB aims to enhance accountability and transparency by establishing standards that require comprehensive and clear financial reporting, providing a true and fair view.

4. Adapting to Evolving Public Sector Practices:

   Recognizing the dynamic nature of the public sector, IPSASB aims to adapt its standards to reflect changes in practices and the evolving nature of government operations.

5. Facilitating Global Comparisons:

   IPSASB aims to facilitate global comparisons of financial information, promoting consistency and convergence to enable users to assess entities across jurisdictions.

6. Encouraging Accountability for Stewardship:

   IPSASB emphasizes the importance of accountability for stewardship of public resources, providing a framework for reporting on resource acquisition, use, and management.

7. Promoting Good Governance:

   IPSASB contributes to the promotion of good governance by providing a basis for transparent and accountable financial reporting, supporting effective decision-making.

8. Safeguarding the Public Interest:

   IPSASB operates in the public interest, aiming to protect the interests of citizens and stakeholders by ensuring reliable financial information.

9. Assisting in Capacity Building:

   IPSASB supports the development of accounting and financial management capabilities in the public sector, providing guidance and resources for implementation.

10. Contributing to Global Financial Stability:

    IPSASB's work contributes to global financial stability by promoting sound financial management practices, building confidence among investors, creditors, and stakeholders.

1. Relevance:
   • Definition: Information influences economic decisions.
   • Characteristics: Timeliness, Predictive value, Confirmatory value.
2. Reliability:
   • Definition: Information is free from error and bias.
   • Characteristics: Faithful representation, Neutrality, Verifiability, Understandability.
3. Comparability:
   • Definition: Users can identify similarities and differences.
   • Characteristics: Consistency, Comparability with other entities.
4. Consistency:
   • Definition: Applying the same accounting principles consistently.
   • Characteristics: Consistent application of policies and methods.
5. Understandability:
   • Definition: Information is comprehensible to users.
   • Characteristics: Clarity, Conciseness, Use of Plain Language.
6. Materiality:
   • Definition: Information is material if its omission could influence decisions.
   • Characteristics: Focusing on significant items and transactions.
7. Timeliness:
   • Definition: Information is available in time to influence decisions.
   • Characteristics: Providing information promptly.
8. Predictive Value:
   • Definition: Information helps form expectations about future outcomes.
   • Characteristics: Forward-looking information.
9. Confirmatory Value:
   • Definition: Information confirms or corrects users' previous expectations.
   • Characteristics: Providing feedback on past predictions.
10. Neutrality:
    • Definition: Information is free from bias.
    • Characteristics: Unbiased representation.

1. Cost Allocation:
   • Purpose: Depreciation allocates the cost of an asset over its useful life.
   • Impact: Spreading the cost over time matches expense with revenue, providing an accurate representation of the cost of using the asset.
2. Accurate Profit Measurement:
   • Purpose: Depreciation is a non-cash expense reflecting the gradual consumption of economic benefits.
   • Impact: Including depreciation in the income statement ensures reported profit reflects the true economic cost of using the asset.
3. Accrual Accounting Principle:
   • Purpose: Depreciation aligns with the accrual accounting principle.
   • Impact: Recognizing expenses when incurred promotes a more realistic reflection of the entity's financial position.
4. Building Reserves for Replacement:
   • Purpose: Depreciation allows for the accumulation of reserves.
   • Impact: Accumulated depreciation represents a reserve that can be used to fund asset replacement or upgrades.
5. Capital Expenditure Planning:
   • Purpose: Depreciation aids in capital expenditure planning.
   • Impact: Estimating future capital expenditure helps in budgeting and ensures funds are available for replacement or upgrades.
6. Asset Management:
   • Purpose: Depreciation prompts regular assessments of asset conditions.
   • Impact: Regular reviews ensure assets are maintained and replaced when necessary.
7. Financial Reporting and Transparency:
   • Purpose: Depreciation enhances financial reporting.
   • Impact: Including depreciation provides transparency about ongoing asset usage costs for stakeholders.

1. Compensating Errors:

   Compensating errors are errors that occur in different accounts but offset each other, so the trial balance still balances. For example, an overstatement of revenue in one account might be compensated by an equal overstatement of an expense in another account.

2. Errors of Omission:

   If a transaction is completely omitted from the accounting records, it will not impact the trial balance since no entries have been made for that particular transaction. However, it will result in misstated financial statements.

3. Errors of Commission:

   These are errors where entries are made, but they are incorrect. If the errors are offsetting (i.e., a debit error in one account is offset by a credit error in another), the trial balance may still balance.

4. Errors of Principle:

   Errors of principle involve using an incorrect accounting principle. For example, recording a capital expenditure as a revenue expenditure or vice versa. While this may not immediately affect the trial balance, it leads to inaccuracies in the financial statements.

5. Errors in Posting:

   If a transaction is correctly recorded in the journal but posted to the wrong account, it may not affect the trial balance if the debits and credits still match within the incorrect accounts.

6. Reversal of Entries:

   Sometimes, entries may be mistakenly reversed (debit entry recorded as credit, and vice versa). If this happens in different accounts and the amounts are equal, the trial balance may still be in balance.