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Financial Accounting Ans PDF
Financial Accounting Ans PDF
DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK
EXAM
ii
Financial Accounting
The Institute of Chartered Accountants Ghana
First edition 2015
ISBN 9781 4727 2834 0
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Published by
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Question 1
Marking scheme
Marks
Partners' accounts:
NF
OR
PN
1
1
2
4
10
6
20
Suggested solution
(a)
PARTNERS' ACCOUNTS
Realisation a/c
Cash
NF
GHS
OR
GHS
112,510
76,906
PN
GHS
18,000
25,604
112,510
76,906
43,604
(b)
Capital a/cs
Current a/cs
Realisation a/c
NF
GHS
90,000
19,500
3,010
112,510
OR
GHS
60,000
14,900
2,006
76,906
REALISATION ACCOUNT
Furniture and fittings (Carrying
Amount)
Motor vehicles (Carrying Amount)
Inventory
Receivables
Cash and bank
Loan
Payables
Dissolution expenses
Profit on realisation
NF 3/6
OR 2/6
PN 1/6
GHS
100,000
70,000
50,000
84,000
36,000
50,880
2,000
3,010
2,006
1,004
398,900
Loan a/c
GHS
36,000
Payables
53,000
97,600
59,000
55,500
79,800
18,000
398,900
PN
GHS
30,000
12,600
1,004
43,604
(c)
Balance b/f
Realisation a/c
Furniture and fittings
Motor vehicles
Inventory
Receivables
97,600
59,000
55,500
79,800
GHS
Realisation a/c
Loan
Payables
Dissolution expenses
Partners
NF
OR
PN
36,000
50,880
2,000
112,510
76,906
25,604
303,900
303,900
Question 2
Marking scheme
Marks
(a)
(b)
10
9
11
20
Suggested solution
(a)
(i)
(ii)
(iii)
(iv)
(v)
Gross profit
Revenue
:1 (15090)/90 :1 = 0.67 :1
Brief Report
To:
From: A Student
Date June 20X5
Subject: Financial appraisal of FR using accounting ratios
Introduction
The purpose of this report is to analyse the financial performance of FR over the last three years using
accounting ratios.
The report also highlights what other information would be useful to help interpret the ratios.
Return on capital employed
The return on capital employed has declined over the last three years from 16.2% to 13.9% and is
now well below the industry average (16.2%). This should be a cause for concern to the board of
directors because if investors can obtain a higher return elsewhere then they may withdraw their
investment. Alternatively they may seek to change the management board. It would be helpful to have
more information on the market in which FR operates eg is the market growing or declining, are there
many buyers and sellers or just a few?
Gross profit percentage
The gross profit percentage has risen over the period from 30.4% to 37.5%. Clearly the company has
either:
(i)
Increased the selling price of its goods, eg perhaps it is able to sell at a premium because of
perceptions regarding the quality of the goods sold, or
(ii)
Reduced the cost of its supplies, possibly changing suppliers or obtaining greater discounts as
sales volume has increased.
It would be useful to know what the company is selling and the volume of sales analysed by product
and year.
Net profit percentage
The net profit percentage has declined over the period from 19.3% to 15.6% and is significantly
below the industry average of 17.3%. This is worrying considering the increase in the gross profit
percentage over the same period. The decline in the net profit percentage suggests that the costs may
not be tightly controlled within the company. More detailed information on expenditure during the
period would be helpful in identifying the reasons for the decline in profitability.
Quick (or acid test) ratio
The quick ratio has also declined significantly during the period from 1.5:1 to 0.67:1 suggesting the
company may be experiencing liquidity problems. This view is also supported when the ratio is
compared to the industry average which is over double that of FR. The level of inventory may be a
concern as it is tying up cash. More information on the type of inventory and the level of inventory
turnover would be useful.
Receivables collection period
The time taken to collect debts has increased over the period from 32 days to 57 days. This seems
very high when compared to the industry average debt collection period of just 35 days. The period
suggests that there is little control over debt collection.
In addition, the lengthening of the collection period means it is more likely that some debts will not be
paid by customers. The poor control over debt collection will be a factor contributing to the adverse
liquidity situation of the company.
Conclusion
Although the company has managed to increase its gross profit over the period, this has not resulted
in a similar increase in net profit. In summary the ratios indicate poor internal control of costs and
poor management of working capital. The return on capital employed is unlikely to be sufficiently
attractive to potential investors or to existing shareholders.
Question 3
Marking scheme
Marks
1
1
1
1
1
1
1
1
2
1
2
1
1
1
1
1
1
1
20
Suggested solution
Prepared in accordance with IAS7
SD
Statement of cash flows for the year ended 31 May 20X5
Cash flows from operating activities
Profit before interest and tax (2,064 + 20)
Adjustments for:
Depreciation
Loss on sale of tangible non-current assets (400 360)
Increase in inventory
Increase in receivables
Increase in payables
Cash generated from operations
Interest paid
Tax paid (W2)
Net cash from operating activities
Cash flow from investing activities
Purchase of non-current assets (W1)
Receipts from sales of tangible non-current assets
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Proceeds from issue of shares
Repayment of long term borrowing
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of period
Cash and cash equivalents at end of period
GHS,000
GHS,000
2,084
1,400
40
(160)
(260)
170
3,274
(20)
(290)
2,964
(5,600)
360
(5,240)
(540)
2,560
(200)
1,820
(456)
340
116
Workings
NON-CURRENT ASSETS
Balance b/f
New non-current assets (bal)
GHS'000
5,400
5,600
GHS'000
1,400
400
9,200
11,000
Depreciation
Disposals
Balance c/f
11,000
2
TAX
Tax paid (balancing figure)
Balance c/f
GHS'000
290
360
650
Balance b/f
Statement of profit or loss
GHS'000
290
360
650
Question 4
Marking scheme
Marks
(a)
2
2
(b)
(i)
1
1
1
1
1
1
1
(ii)
1
2
2
1
1
7
(c)
Overdrawn
Current liability
1
1
2
20
Suggested solution
(a)
(iv)
(v)
(b)
(i)
BANK ACCOUNT
(1)
(7)
GHS
90
1,250
292
GHS
226
766
640
Opening balance
(2) Bank charges
(3) Returned cheque
1,632
1,632
Balance b/f
(ii)
292
GHS
440
2,008
GHS
456
(2,448)
(1,992)
1,700
(292)
The bank balance is GHS292 overdrawn. This will be reported as a current liability in the statement
of financial position.
Question 5
Marking scheme
Marks
(a)
(b)
5
15
20
Suggested solution
(a)
This type of structure is ideal if the business is not complicated, and especially if it does not require a
great deal of outside capital. Advantages include:
Less stringent reporting obligations compared with other business structures no requirement
to make financial accounts publicly available, no audit requirement
Personal property may be vulnerable for debts and other business liabilities.
Large sums of capital are less likely to be available to a sole proprietorship, leading to reliance
on overdrafts and personal savings.
(b)
May lead to long working hours without the normal employee recreation leave and other
benefits
May be issues of continuity of business in the event of death or illness of the owner
(i)
There is a conflict here between the accruals or matching concept and the Conceptual
Framework criteria for recognition of an asset. The accruals concept states that costs should be
matched against revenue which they generate. Thus it might be argued that, since half the
revenue expected to result from the advertising campaign will be achieved in 20X6, it might be
appropriate to defer half the costs of the advertising campaign until 20X6. This would mean
that GHS2,800 would be treated as deferred expenditure (an asset) in the financial statements
for the year ended 31 December 20X5. However, it is not possible to reliably measure the
future revenue expected to be generated from the advertising campaign, so the revenue should
not be anticipated but provision should be made for all known losses (and expenses). Therefore
all the costs of the advertising campaign should be written off as an expense in the 20X5
accounts.
(ii)
When the proprietor of a business takes inventory for his own use, it counts as drawings, which
are a deduction from the owner's capital. The entries to record the drawings are:
DEBIT
CREDIT
Drawings
Purchases
GHS1,000
GHS1,000
(iii)
The receipt of compensation from the insurance company is contingent upon the outcome of
the court case. As such it is a contingent asset and the accounting treatment is governed by
IAS 37 Provisions, contingent liabilities and contingent assets. As the asset is only contingent,
it should not be recognised in the financial statements for the year ended 31 December 20X5.
If the cash inflow is 'probable' it should be disclosed in a note to the accounts. If the contingent
asset is only 'possible' it should not be disclosed at all. It is not clear whether the term
'reasonable' means probable or possible and the solicitor would need to be consulted further to
determine the accounting treatment.
(iv)
Under the business entity concept the business is a separate entity from JB as a person. This
applies for accounting purposes, although not for legal purposes. The loan should, therefore, be
recognised in the financial statements of the business: as the loan was made specifically for
the business and not for the personal use of JB it is a business transaction.
Question 6
Marking scheme
Marks
(a)
(b)
(c)
(d)
3
2
9
1
2
2
1
6
20
Suggested solution
(a)
The accruals, or matching, concept requires that the revenue earned in a period is matched with the
expenses incurred in earning that profit. Therefore if a payment includes a prepayment for the
following period, this must be excluded from expenses in the statement of profit or loss. In other
words, costs are recognised on the basis of the period covered by those costs, not by the timing of the
payment.
(b)
Depreciation is a way of charging for the use of an asset in earning the current period's profits. It
spreads the cost of a non-current asset over its useful life. This is an example of the accruals or
matching concept.
(c)
(i)
Accrued expenses
GHS
9,160
Prepayment
GHS
28,500
31 60 days
Over 60 days
Irrecoverable debt
Balance
GHS
54,400
9,672
(1,320)
8,352
20%
75%
Allowance required
Existing allowance
Increase in allowance
(iv)
6,264
17,144
15,800
1,344
Accumulated depreciation
GHS
170,800
35,840
206,640
Allowance
required
GHS
10,880
GHS
Non-current assets
Equipment at cost
Accumulated depreciation (a(iv))
GHS
350,000
(206,640)
143,360
Current assets
Inventory
Trade receivables (W1)
Prepayment (a(ii))
Bank
84,678
296,158
28,500
12,560
421,896
565,256
382,976
173,120
9,160
182,280
565,256
Workings
Trade receivables
GHS
298,822
(1,320)
(1,344)
296,158
Capital
GHS
402,140
(9,160)
28,500
(1,320)
(1,344)
(35,840)
382,976
Question 7
Marking scheme
Marks
2
1
1
1
1
8
3
1
1
1
1
11
1
20
Suggested solution
AT Co
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30
JUNE 20X9
Revenue (14,800 24) (W1)
Cost of sales (W1)
Gross profit
Distribution costs (1,080 + 272 + 190 120)
Administration expenses (1,460 + 272 + 70 60)
Finance cost (2,000 10% 3/12)
Profit for the year
Other comprehensive income
Revaluation gains
Total comprehensive income for the year
GHS'000
14,776
(10,280)
4,496
(1,422)
(1,742)
(50)
1,282
1,500
2,782
10
ATOK CO
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X9
Assets
Non current assets
Property, plant and equipment (W3)
Current assets
Inventories (W1)
Receivables (4,120 + 120 + 60 24)
Cash and cash equivalents
GHS'000
25,470
1,566
4,276
160
6,002
31,472
Total assets
Equity
Stated capital
Income surplus
Capital surplus
Non current liabilities
10% loan notes 20X8
Current liabilities
Trade payables
Accruals (190 + 70 + 50)
Total current liabilities
Total equity and liabilities
GHS'000
18,000
4,422
4,500
26,922
2,000
2,240
310
2,250
31,472
Workings
Cost of sales
Opening inventory
Purchases
Closing inventories ((1,560 + 16 10) see below)
Depreciation (W2)
Cost of sales
GHS'000
1,390
8,280
9,670
(1,566)
8,104
2,176
10,280
Inventory adjustments
(i)
(ii)
Depreciation
GHS'000
160
2,560
2,720
80% to cost of sales: 2,176. 10% to distribution and 10% to administration: 272
3
GHS'000
17,710
7,760
25,470