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CPA
Foundation Leval
Financial Accounting May 2016
Suggested solutions

Financial Accounting
Revision Kit

QUESTION 1a

Q Manufacturing account and income statement for the year ended 31 March 2016
A

Solution


Bidii Ltd
Manufacturing account for the year ended 31 March 2016
Raw materials consumed
Opening of raw materials
Add: purchases of raw materials
Add: carriage on raw materials
Less: closing stock on raw materials
Direct material cost
Direct labour: Factory wages(333,000-143,000)
Direct expenses-royalties
Prime cost
Add: factory overheads
Lighting expenses (70% x 72,000)
Rent (70% x 120,000)
Insurance expenses (70%x 132,000)
Depreciation of production machinery 10%×600,000
General factory expenses
Factory power
Indirect labour

Add: Opening work in progress
Less: Closing work in progress
Total cost of production
Sh 000
46,000
400,000
39,400
(60,000)
425,400















Sh 000




425,400
190,000
37,000
652,400

50,400
84,000
92,400
60,000
66,000
118,000
143,000
1,266,200
33,000
(25,000)
1,274,200


Bidii Ltd
income statement for the year ended 31 March 2016
Sales
Less: Cost of sales
Opening finished goods
Add: Total cost of produce
Less: Closing finished goods
Gross profit 2 / 5 × 2,400,000
Less expenses
Lighting expenses 30% × 7,200 =
Rent (30% × 120,000)
Insurance expenses (30% x 132,000)
Depreciation of office equipment 10%(100,000)
Sales agent salaries 80,000 - (35,000 x 2) / 7
Carriage outwards
Administrative salaries
Commission to sales agents
General administrative expenses
Bank charges
Discount allowed
Net profit
Less: Transfer to general reserve
Less: Ordinary dividend (441,000 x 0.8) / 10
Retained profit for the year
Add: Retained profit Balance b/d
Retained profit Balance c/d


667,000
1,274,200
(501,200)


21,600
36,000
39,600
10,000
70,000
124,000
270,000
19,000
144,000
9,600
28,000






2,400,000



(1,440,000)
960,000











(771,800)
188,200
(100,000)
(35,280)
52,920
140,000
192,920




QUESTION 1b

Q Statement of financial position as at 31 March 2016.
A

Solution


Bidii Ltd
Statement of financial position as at 31st March 2016
Assets
Non-current assets

Production machinery
Office equipment
Current assets
Inventory - Raw materials
work in progresme
Finished goods
Trade receivables
Cash in hand
Prepaid sales agent salaries
Total assets
Equity and liabilities
Capital and reserves
Ordinary share capital;
Retained profits
General reserves
Current liabilities
Trade payables
Bank overdraft
Final ordinary dividend
Total equity and liabilities
Sh 000

(390,000 - 60,000)
(100,000 - 10,000)

60,000
25,000
501,200


(35000 x 2) / 7





(429,200 + 100,000)





Sh 000

330,000
90,000



586,200
691,000
15,000
10,000
1,722,200


441,000
192,920
529,200

497,000
26,800
35,280
1,722,200




QUESTION 2a

Q Income statement for the year ended 30 April 2016.
A

Solution


Working

Partner Current account


Drawings
Drawings in goods

Balance c/d

Maria
Sh 000

2,800.0
150.0

5,401.5
8,351.5
Bakari
Sh 000

2,000.0
590.0

1,861.0
4,451.0


Balance b/d
Interest on capital
Salaries to partners
Shares of profit

Maria
Sh 000
3,000.0
600.0
1,000.0
3,751.5
8,351.5
Bakari
Sh 000

1,000.0
250.0
700.0
2,501.0
4,451.0


Maria and Bakari
Income statement for the year ended 30 April 2016

Sales
Less: Cost of sales
Opening inventory
Add: purchases
Add: carriage inwards
Less: drawings in goods(150 + 590)
Less: closing inventory
Gross profit
Less: Expenses
Depreciation
Buildings 2.5% x 8,500
Furniture 10%(3,200 - 750)
Salaries and wages(2,400 + 200)
Electricity (500 + 90)
Allowance for doubtful debts (200 - 0)
Insurance (300 - 40)
Renovation of buildings
Rent and rates
Repairs and maintenance
General expenses
Office expenses
Bad debts write off
profit for the year
Less: interest on capital
M → 5% x 12,000
B → 5% x 5,000
Less: Salaries to partners
M →
B →

Profits to be shared
Share of profit M → 3 / 5 × 6,252.5
B → 2 / 5 × 6,252.5

Sh 000


19,000
62,140
960
(740)
(15,600)



212.5
245
2,600
590
200
260
1,500
400
1,320
4,700
600
270


600
250

1,000
700


3,751.5
2,501

Sh 000
87,460





(65,760)
21,700













(12,897.5)
8,802.5


(850)


(1,700)
6,252.5


(6,252.5)
0





QUESTION 2(b)

Q Statement of financial position as at 30 April 2016.
A

Solution


Maria and Bakari
Statement of financial position as at 30/4/2016
Non-current assets
Buildings
Furniture
Current assets
Inventory
Account receivables
Cash balance
Prepaid insurance
Total Assets
Capital and liabilities
Capital A/c

Current A/c

Current liabilities
Account payable
Bank overdraft
Accrued salaries and wages
Electricity

Sh 000
(8,500 - 212.5)
(3,200 - (750 + 245)


(5,660 - 200)




M → 12,000
B → 5,000
M → 5401.5
B → 1,861






Sh 000
8,287.5
2,205

15,600
5,460
230
40
31,822.5


17,000

7,262.5

6,200
1,070
200
90
31,822.5




QUESTION 3(a)

Q Income statement for the year ended 31 March 2016.
A

Solution


Statement of affairs as at 1 April 2015
Assets
Furniture and fittings
Motor vehicles
Freehold land
Equipment
Inventory
Trade receivables
Prepaid rates
Bank balances

Less: liabilities
15% bank loan 6,000
Trade payables 1,350
Accrued power 150
Capital
Sh 000
1,200
3,000
2,400
6,000
1,800
2,700
90
810
18,000



(7,500)
10,500


Bank Account

Balance b/d
Receivables







Sh000
810
178,500






179,310

Purchase of equipment
Payment to suppliers
Interest on loan
Salaries
Rates, Insurance and power
Loan repayment
Drawings
Balance c/d

Sh000
300
126,000
450
18,105
11,640
3,000
12,000
7,815
179,310


Receivables a/c
Balance b/d
Sales



2,700
180,000


182,700
Discount allowed
Bad debts
Bank
Balance c/d

480
120
178,500
3,600
182,700


Payables a/c
Discount received
Sales
Balance c/d

450
126,000
1,500
127,950
Balance b/d
Bad debts


1,350
126,600

127,950


(a) Income statement for the year ended 31 March 2016.


Samson Kimwatu
Income statement for the year ended 31 March 2016

Sales
Less: Cost of sales
Opening inventory
Add: purchases
Less: closing inventory
Gross profit (3 / 10 x 180,000)
Add: Other incomes
Discount received

Less: Expenses
Discount allowed
Bad debts
Salaries
Rates, Insurance and powers (11,640 + 90 - 120 + 240 - 150)
Interest on loan (15% x 6,000 × 6 / 12) + (15% × 3,000 × 6 / 12)
Depreciation
Equipment (2,400 + 300 - 1,920)
Motor vehicle (3,000 - 2,250)
Furniture & settings (1,200 - 960)
Profit for the year
Sh 000


1,800
126,600
(2,400)





480
120
18,105
11,700
675

780
750
240

Sh 000
180,000



(126,000)
54,000

450
54,450









(32,850)
21,600





QUESTION 3(b)

Q Statement of financial position as at 31 March 2016.
A

Solution


Samson Kimwatu
Statement of financial position as at 31 March 2016
Assets
Non-current Assets

Free hold land
Furniture and fittings
Motor vehicle
Equipment
Current Assets
Inventory
Trade receivables
Bank balance
Prepaid rates
Total Assets
Equity and liabilities

Capital
Revaluation reserve
Add: Net profit
Less Drawings
Non-current liabilities
15% Bank loan
Current liabilities
Trade payables
Accrued power
Accrued loan interest
Total Equity and liabilities













10,500
2,000
21,600
(12,000)







Sh 000

8,000
960
2,250
1,920

2,400
3,600
7,815
120
27,065




22,100

3,000

1,500
240
225
27,065



QUESTION 4(a)

Q Explain three reasons why the amount of cash generated by a business entity might differ from the profit reported by the same business entity during the same financial period-
A

Solution


Reasons for Cash Flow - Profit Disparity


  1. Non-Cash Expenses:
    • Depreciation: A non-cash expense impacting profit but not cash flow.
  2. Changes in Working Capital:
    • Accounts Receivable: Sales on credit affect profit but may not bring in immediate cash.
    • Inventory Levels: Increase in inventory ties up cash without an immediate impact on profit.
  3. Accounts Payable:
    • Delayed Payments: Delaying payments to suppliers improves cash flow without affecting reported profit immediately.
  4. Investing Activities:
    • Capital Expenditures: Cash spent on long-term assets impacts cash flow but may not fully affect profit immediately.
  5. Financing Activities:
    • Debt Repayment or Issuance: Impacts cash flow but may not directly affect reported profit.
    • Dividends: Dividend payments reduce cash without being deducted from profit on the income statement.
  6. One-Time Events:
    • Sale of Assets: Generates cash but gains or losses may not be recurring and can create disparities.
    • Restructuring Costs: One-time expenses or gains may impact profit without immediate cash flow effects.
  7. Tax Timing Differences:
    • Deferred Tax Liabilities or Assets: Differences in recognizing taxes for financial reporting and actual cash payments.
  8. Foreign Exchange Gains/Losses:
    • Currency Fluctuations: Exchange rate changes impact profit without corresponding cash movements.
  9. Accrual Accounting:
    • Recognition Timing: Accrual accounting timing differences in recognizing revenue and expenses.
  10. Loan Principal Repayments:
    • Principal Repayments: Repaying loan principal reduces cash, but only the interest portion affects profit.



QUESTION 4(b)

Q (i) Gross profit margin.

(ii) Return on capital employed (ROCE).

(iii) Current ratio.

(iv) Acid test ratio.

(v) Inventory turnover.

(vi) Trade receivables collection period.
A

Solution


(i) Gross profit margin.


Gross profit / sales x 100

2015 → 180,400 / 450,600 x 100 = 40.04%

2016 → 212,100 / 480,500 × 100 = 44.14%

(ii) Return on capital employed (ROCE)


Net profit / (Net assets(TA - CL)) x 100

2015 → 80,900 / (590,600 - 125,300) x 100 = 17.39%

2016 → 95,500 / (648,500 - 170,900) × 100 = 20%

(iii) Current ratio.


Current assets / Current liabilities x 100

2015 → 104,600 / 125,300 x 100 = 0.83

2016 → 126,500 / 170,900 x 100 = 0.74

(iv) Acid test ratio


(Current Assets - inventory) / Current Liabilities

2015 → (104,600 - 60,000) / 125,300 = 0.36

2016 → (126,500 - 72,000) / 170,900 = 0.32

(v) Inventory Turnover


Cost of sales / Average inventory

2015 → 270,200 / ((64,000 + 60,000) / 2) = 4.36

2016 → 268,400 / ((60,000 + 72,000) / 2) = 4.07

(vi) Trade receivables collection period


(No of days x average recievables) / credit sales

2015 → (365days x (42,300)) / 450,600 = 34.26days

2016 → (365days x (51,300)) / 480,500 = 38.97days




QUESTION 5(a)

Q Explain two objectives of the International Public Sector Accounting Standards Board (IPSASB).
A

Solution


Objectives of the International Public Sector Accounting Standards Board (IPSASB)


The International Public Sector Accounting Standards Board (IPSASB) is an independent standard-setting board that develops accounting standards for use by public sector entities around the world. The objectives of the IPSASB are designed to enhance financial reporting and accountability in the public sector.

Objectives of the IPSASB:

  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.





QUESTION 5(b)

Q Describe three qualities of useful accounting information.
A

Solution


Qualities of Useful Accounting Information


Useful accounting information possesses several qualities that enhance its relevance, reliability, and comparability. These qualities, often referred to as the qualitative characteristics of financial information, are essential for financial statements to effectively meet the needs of users.

key qualities of useful accounting information:

  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.




QUESTION 5(c)

Q Explain in what way, if at all, the practice of providing for depreciation ensures that property, plant and equipment are replaced at the end of their useful economic lives.
A

Solution


Depreciation and Replacement of Property, Plant, and Equipment


The practice of providing for depreciation in accounting serves as a means to allocate the cost of property, plant, and equipment (PPE) over their estimated useful economic lives. While depreciation itself does not ensure that assets are physically replaced at the end of their useful lives, it plays a crucial role in facilitating financial planning and maintaining the entity's capacity for ongoing operations. Here's how the practice of providing for depreciation contributes to ensuring that PPE are replaced or adequately maintained:

  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.




QUESTION 5(d)

Q Describe three errors that do not affect the trial balance.
A

Solution


Errors that do not affect the trial balance


Errors that do not affect the trial balance are those that do not impact the equality of debits and credits in the accounting system. The trial balance is a statement of all the general ledger accounts with their respective debit or credit balances, and it is used to ensure that the accounting equation (assets = liabilities + equity) is in balance. However, certain errors may occur that don't immediately disrupt this balance but can still affect the accuracy of financial statements. These errors includes but not limited to:

  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.





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