CPA
Foundation Leval
Financial Accounting November 2015
Suggested solutions

1. Title:

   The document is a "Partnership Deed."

2. Name and Address of the Partnership:

   Official name and registered address of the partnership.

3. Date of Commencement:

   Specify the date when the partnership officially begins its operations.

4. Nature of Business:

   Describe the primary business activities and operations of the partnership.

5. Partnership Duration:

   Indicate whether the partnership is for a fixed term or if it is ongoing until further notice.

6. Partners' Information:

   Provide details about each partner, including their names, addresses, and contributions to the partnership.

7. Capital Contributions:

   Outline the amount of capital contributed by each partner and the method of contribution.

8. Profit and Loss Sharing:

   Specify the percentage or ratio in which profits and losses will be shared among the partners.

9. Salaries and Interest:

   If applicable, detail any salaries or interest to be paid to partners and the terms of such payments.

10. Management and Decision-Making:

    Clarify the roles and responsibilities of each partner in the management of the business. Specify how decisions will be made and voting rights if applicable.

11. Banking and Finance:

    Outline the procedures for handling banking transactions, loans, and financial matters.

12. Books of Accounts:

    Specify the accounting methods to be used, the frequency of financial statements, and how the books of accounts will be maintained.

13. Admission and Retirement of Partners:

    Detail the procedures for admitting new partners and the terms under which existing partners may retire or withdraw from the partnership.

14. Dispute Resolution:

    Establish a mechanism for resolving disputes among partners, which may include mediation or arbitration.

15. Dissolution of the Partnership:

    Outline the circumstances under which the partnership may be dissolved and the procedures to be followed in such cases.

16. Miscellaneous Provisions:

    Include any other relevant clauses, such as non-compete agreements, confidentiality clauses, or any specific terms unique to the partnership.

17. Signatures:

    All partners hereby agree to the terms and conditions outlined in this Partnership Deed.

Prime Costs:

1. Definition: Prime costs are the direct costs directly associated with the manufacturing of a product. These costs are directly traceable to the production process and include expenditures directly tied to the materials, labor, and other direct costs involved in the manufacturing process.
2. Components:
   • Direct Materials: The cost of raw materials or components that can be specifically identified with a particular product.
   • Direct Labor: The cost of labor directly engaged in the manufacturing process, such as wages for assembly line workers.
3. Example: For a furniture manufacturer, the cost of wood (direct material) and the wages of workers assembling the furniture (direct labor) would be considered prime costs.
4. Calculation: Prime Costs = Direct Materials + Direct Labor

Indirect Costs:

1. Definition: Indirect costs, also known as overhead costs, are expenses that cannot be directly attributed to a specific product or job. These costs are incurred to support the overall manufacturing process but are not easily traceable to individual units of production.
2. Components:
   • Indirect Materials: Materials that are used in the manufacturing process but are not directly linked to a specific product. For example, lubricants or small tools used in the production line.
   • Indirect Labor: Labor costs associated with employees who are not directly involved in the production process, such as maintenance staff or supervisors.
   • Other Indirect Costs: Overhead expenses like rent, utilities, depreciation on machinery, and other general manufacturing overhead.
3. Example: For the furniture manufacturer, the salary of the factory manager, the cost of utilities for the entire production facility, and depreciation on factory equipment would be considered indirect costs.
4. Calculation: Indirect Costs = Indirect Materials + Indirect Labor + Other Indirect Costs

• Priority in Dividends:

  Preference shareholders have the right to receive a fixed rate of dividend before any dividend is paid to ordinary shareholders.

• Priority in Repayment of Capital:

  In the event of the company being wound up, preference shareholders have a prior claim on the assets of the company over ordinary shareholders.

• Cumulative Dividend Rights:

  Many preference shares come with cumulative dividend rights, ensuring unpaid dividends accumulate and must be paid in the future before any dividends to ordinary shareholders.

• Redemption Rights:

  Some preference shares have a redemption feature, allowing the company to buy back the preference shares at a predetermined price.

• Voting Rights in Certain Matters:

  Preference shareholders may have voting rights in matters that directly affect their interests.

• Pre-emption Rights:

  Preference shareholders may have the first opportunity to buy additional shares before they are offered to ordinary shareholders.

(ii) Ways in Which a Company Might Utilize its Share Premium

• Writing off Preliminary Expenses:

  Companies can use share premium to write off preliminary expenses incurred in the formation of the company.

• Writing off Discount on Issuance of Shares:

  Share premium can be used to offset the discount when shares are issued at a discount.

• Bonus Issues:

  The company may issue bonus shares to existing shareholders by capitalizing the share premium account.

• Purchasing its Own Shares:

  Share premium can be utilized to buy back the company's own shares through a share buyback program.

• Issuing Redeemable Preference Shares:

  Share premium can be used to create a reserve for the redemption of preference shares.

• Setting up a Debenture Redemption Reserve:

  Share premium may be used to establish and maintain a debenture redemption reserve.

• Expenses of a Capital Nature:

  Share premium can be used to meet expenses of a capital nature, such as the cost of issuing new shares or debentures.

1. Relevance:

   Definition: Information is relevant if it is capable of making a difference in the decisions made by users. Relevant information helps users predict future events or confirm or correct prior expectations.

   Example: Including the current market value of inventory in the financial statements is relevant because it provides users with up-to-date information on the value of the company's assets.

2. Reliability:

   Definition: Information is reliable when it is free from material error and bias and faithfully represents what it purports to represent. Reliability enhances the credibility of financial information.

   Example: Using reliable sources to determine the historical cost of an asset and ensuring accurate recording of financial transactions contribute to the reliability of financial statements.

3. Faithful Representation:

   Definition: Faithful representation means that the financial information faithfully represents the economic phenomena it purports to represent. It requires completeness, neutrality, and freedom from material error.

   Example: Recording the exact amount paid for an asset in the financial statements faithfully represents the actual economic transaction.

4. Neutrality:

   Definition: Neutrality means that financial information is free from bias and is not intentionally designed to influence the behavior of users in a particular direction.

   Example: Providing objective and unbiased information about the financial performance of a company, without intentionally highlighting positive or negative aspects, ensures neutrality.

5. Completeness:

   Definition: Completeness means that financial statements include all information necessary for users to understand the financial position and performance of an entity. It includes all material information, even if it requires additional disclosure.

   Example: Including all relevant details about contingent liabilities, even if they are not certain to occur, contributes to the completeness of financial statements.

6. Comparability:

   Definition: Comparability ensures that financial information is presented in a consistent manner over time, allowing users to compare financial statements across different periods or entities. It facilitates trend analysis and benchmarking.

   Example: Using consistent accounting policies and disclosure practices from one period to another enhances the comparability of financial statements.