Topic 1: Financial accounting

Answers to Exam-style
questions
1 a Members’ subscriptions
Opening balance 450 Opening balance 150
Income 7 850 Subscriptions w/o 100
Closing balance 200 Bank: receipts 7 550
Closing balance 700
8 500 8 500
Balance b/d 700 Balance b/d 200

 [5 marks]
b Café refreshments account for the year ended
31 March 2015
$ $
Revenue 3 120
Less cost of sales
Opening inventory 680
Purchases (W1) 2 640
3 320
Closing inventory (720)
(2 600)

Profit on refreshments (20% × cost of sales) 520

 [5 marks]
Revenue for café refreshments is $3120 less actual receipts $2970.
So cash stolen is $150.
W1
Purchases of café refreshments
Opening amount due to suppliers (80)
Payments to suppliers 2 240
Closing amount due to suppliers 480
2 640

1
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 Answers to Exam-style questions

c
Grandford Sports Club
Income and expenditure account
for the year ended 31 March 2015
$ $
INCOME
Life membership fund (W2) 2 150
Members’ subscriptions 7 850
Café profit 520
Sports competition profit
Sales of tickets 2 590
less expenses 1 330
1 260
11 780
EXPENDITURE
Members’ subscriptions written off 100
Café cash stolen 150
Secretary’s honorarium 820
Loss on disposal of sports 560
equipment (W3)
Sports club repairs 5 330
Travel expenses 950
Depreciation
Sports equipment (W4) 1 600
Property (2% × $90 000) 1 800
(11 310)
Surplus 470

 [8 marks]
W2
Income from life membership fund
12.5% × (opening balance $12 800 + additions $4400)
i.e. 12.5% × $17 000
i.e. $2150
W3
Loss on disposal of sports equipment
Book value $800 less proceeds $240 = $560

2
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 Answers to Exam-style questions

W4
Depreciation of sports equipment
$
Opening book value 17 400
Less disposal at book value (800)
Additions 7 900
24 500
Less closing book value 22 900
1 600

d
Possible reasons for taking steps to improve the club’s income:
uuThe club’s cash position has moved from a comfortable surplus
bank balance of $2280 to a bank overdraft of $740, indicating
that the club’s cash receipts were insufficient to cover payments.
uuAt the same time the club has made a small surplus of $470
indicating that the club’s income is only just enough to cover the
club’s running costs.
uuAn increase in income possibly from an increase in members’
annual subscriptions would overcome these problems.
Possible reasons for taking no action:
uuThe bank overdraft may have arisen from exceptional
circumstances. For example the club has spent a significant
sum ($7900) on new sports equipment and also paid $5330
on sports club repairs. It is quite possible that this level of
expenditure will not occur again so that the bank overdraft may
be only temporary.
uuIt is also the case that the club is owed a significant amount in
unpaid subscriptions ($700). If the amount is collected in full
it will almost entirely wipe out the overdraft. So the overdraft
problem could be avoided if steps were taken to improve the
collection of unpaid subscriptions.
uuThe small surplus of $470 may also be a temporary occurrence.
Assuming the need to spend a large sum as sports club repairs
will not occur again for some years, the club will operate with a
satisfactory surplus of about $6000.
On balance it seems unlikely that the club will need to increase its
income and any attempt to increase the annual subscription may be
counter productive as members may decide to cancel their
membership. [7 marks]
 [Total: 25 marks]

3
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 Answers to Exam-style questions

3 a Diversification: possibility of extending the range of products

offered by the company.
Location: company now operates in an additional location.
Economies: may be able to buy goods for resale in greater bulk
and so receive larger trade discounts.
Financial economies: the enlarged company may find it easier to
raise additional finance.
Cost efficiencies: the combined business may be able
to make savings in expenses achieved through economies
of scale. [4 marks]
b Profit on takeover made by Rakesh
Purchase consideration 180 000
Net value of assets taken over by Esplan Ltd (assets taken (149 700)
over $161 300 – 11 600)
Profit 30 300

 [4 marks]
c
Esplan Ltd
Statement of financial position at 1 March 2015
$ $
Non-current assets
Goodwill (W1) 47 100
Tangible assets ($282 000 + $125 000) 407 000
454 100
Current assets
Inventories ($27 900 + $11 000) 38 900

Trade receivables ($18 500 + $8 500) 27 000

65 900
Total assets 520 000
Equity
Issued shares (250 000 + 90 000) $1 each 340 000
Share premium (W2) 45 000
Retained earnings 37 600
422 600
Non-current liabilities
Debentures 7% ($40 000 + $30 000) 70 000
Current liabilities
Trade payables ($12 500 + $11 600) 24 100
Cash and cash equivalents ($11 700 – $15 000) 3 300
27 400
Total equity and liabilities 520 000

4
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 Answers to Exam-style questions

Workings
W1
Goodwill
$ $
Purchase consideration 180 000
Net assets taken over
Non-current assets 125 000
Inventories 11 000
Trade receivables 8 500
144 500
Less trade payables (11 600)
(132 900)
(47 100)

W2
Share premium
$
Purchase consideration 180 000
Less shares at par value 90 000
debentures 30 000
cash 15 000
(135 000)
45 000

 [11 marks]
d Rakesh’s potential income from business
Return on capital employed × $152 000 × 12% 18 240
Rakesh’s potential income after takeover
Interest on investment: [5% × ($2 300 + $15 000)] 865
Possible dividend
90 000 shares × $0.20 dividend per shares 18 000
Interest on debentures 2 100
20 965

Rakesh will be better off. However there is no guarantee that

dividend payments will be maintained at their current levels. [6 marks]
 [Total: 25 marks]

5
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 1.1.1 Manufacturing
businesses

Answers to End-of-chapter questions

1 Cost Direct Indirect
Cost of raw materials X
Salary of factory supervisor X
Lease of factory X
Machine depreciation X

3 Extract from the manufacturing account for S Ramjeet Ltd

for the year ended 31 March 2015
$
Opening inventory of raw materials 6 200
Purchases of raw materials 21 000
Closing inventory of raw materials (7 400)
Cost of raw materials consumed 19 800
Direct wages 33 600
Other direct costs 1 800

Prime cost 55 200

5 Anderson plc
Manufacturing account for the year ended
31 March 2015
$000 $000
Opening inventory raw materials 27.0
Purchases of raw materials 216.5
Less: returns outwards (16.3)
227.2
Closing inventory of raw materials (26.6)
Raw materials consumed 200.6
Direct factory wages 150.4
Prime cost 351.0
Factory overheads
Indirect factory wages 25.7
Insurance (4 : 1) 4.0
Power (432.6 + 1.7) 434.3
Rent 42.0
506.0
Cost of production 857.0

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7 Navin plc
Manufacturing account for the year ended
31 January 2015
$000 $000
Opening inventory raw materials 42
Purchases of raw materials 567
Carriage inwards 15
624
Closing inventory of raw materials (65)
Raw materials consumed 559
Direct factory wages (60% × 460) 276
Prime cost 835
Factory overheads
Indirect factory wages (40% × 460) 184
Heating and lighting (75% × 68) 51
Power (80% × 110) 88
Rent and rates (75% × 84) 63
Depreciation of machinery 68
454
1 289
Add opening inventory work in progress 19
Less: closing inventory work in progress (22)
Cost of production 1 286

Income statement for the year ended

31 January 2015
$000 $000
Revenue 1 846
Opening inventory of finished goods 132
Cost of production 1 286
1 418
Closing inventory of finished goods (146)
1 272
Gross profit 574
Carriage outwards 21
Heating and lighting (25% × 68) 17
Depreciation of office equipment 9
Office salaries 245
Power (20% × 110) 22
Rent and rates (25% × 84) 21
(335)
Profit for the year 239

Statement of financial position at

31 January 2015 (extract)

Current assets
Inventories
Raw materials 65
Work in progress 22
Finished goods 146
233

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9 Nikoloz Ltd
Statement of financial position at
31 October 2014 (extract)
Current assets $ $
Inventories
Raw materials 16 100
Work in progress 23 800
Finished goods (note 1) 33 600
73 500

42 000 × 4 = 33 600
Note 1:
5
11 a Increase of $200. This reduces profit.
b Tabco Products
Statement of financial position at
30 November 2014 (extract)

Current assets $ $
Inventories
Raw materials 28 000
Work in progress 8 500
Finished goods 19 500
56 000

c If unrealised profit is not adjusted for both, inventory within the current
assets and profit within the income statement will be overstated.

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 1.1.2 Not-for-profit
organisations

Answers to End-of-chapter questions

1 Item Receipts and Income and Statement of
payments account expenditure account financial position at
year end
Payment for x x
refreshments supplies
Closing bank balance x x
Subscriptions due at x x
year end
Loan received from x x
member

3 Dr Receipts and payments account Cr

$ $
1 Nov 2013 Balance b/d 450 Hall hire 685
Membership subs 2 400 Tournament fees 810
Tournament cost 680
Refreshments 300
Unbanked money 70
31 Oct 2014 Balance c/d 305
2 850 2 850
1 Nov 2014 Balance b/d 305

5 Dr WALKING FIT Subscriptions account Cr

Opening balance (due) 70 Opening balance (in advance) 32
Income and expenditure 1 462 Bank: receipts 1 420
Closing balance c/d (in advance) 12 Closing balance c/d (due) 92
1 544 1 544
Balance b/d 92 Balance b/d 12

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 b Income and expenditure account
for the year ended 31 March 2015
$ $
INCOME
Members’ subscriptions 1 462
Competition profit
  ticket sales 234
  less prizes 142
92
Social evening profit

  ticket sales 828

  less costs 461
367
Barbecue evening profit
 sales 52
  less costs 31
21
1 942
EXPENDITURE
Administration 55
Advertising 180
Maps 70
Hiking equipment depreciation 220
525
Surplus 1 417

7 a Cuppa and Cake

Statement of affairs at 1 January 2014
Assets $ $
Refreshments Inventory 270
Bank balance 23
Rental costs prepaid 70
363
Liabilities
Payables (refreshments) 132
Advertising costs due 38
(170)
Accumulated fund at 1 January 2014 193

b Refreshments account
for the year ended 31 December 2014
$ $
Revenue from refreshments 3 620
Less Opening inventory 270
Purchases (2 931 + 112 − 132) 2 911
3 181
Closing inventory (292)
(2 889)
Profit on refreshments 731

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 c
Income and expenditure account
for the year ended 31 December 2014
$ $
Income
Profit on refreshments 731
Greeting card profit (49 − 21) 28
Secondhand book sales 101
Donation 152
1 012
Expenditure
Administration 60
Rental costs (210 − 62 + 70) 218
Advertising costs (80 − 38) 42
Cleaning 142
Donations to children’s charities 484
(946)
Surplus 66

d Statement of financial position at 31 December 2014
$ $
Current assets
  Refreshment inventories 292
  Other receivables (rent) 62
  Cash at bank 17
371
Accumulated fund
  Balance at 1 January 193
  Add surplus for year 66
259
Current liabilities
  Trade payables (refreshments) 112
371

9 Sing to the Sky

Statement of affairs at 1 January 2014
$ $
Assets
Clubhouse 52 000
Refreshments inventory 170
Bank balance 230
Brochure costs prepaid 85
52 485
Liabilities
Payables (refreshments) 230
Advertising costs due 30
Singing teachers’ fees due 50
(310)
Accumulated fund at 1 January 2014 52 175

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 Concert account
for the year ended 31 December 2014
$ $
Refreshments sales 2 120
Less: opening inventory 170
Purchases 910
1 080
Closing inventory (190)
(890)
Profit on refreshments 1 230
Add: Barbecue sales 250
  Barbecue costs (140)
Profit on barbecue 110
Add concert entrance fees 1 600
Total income 2 940
Less concert costs 1 050
  Advertising (180 – 30) 150
1 200
Profit on concerts 1 740
Note: refreshments purchases paid $930 less opening balance due $230
plus closing balance due $210 = $910

Income and expenditure account

for the year ended 31 December 2014
$ $
Income
  Profit on concert   1 740
Expenditure
 Administration    50
  Clubhouse expenses 1 090
  Brochure costs (120 + 85 − 65)   140
  Depreciation of clubhouse 2 000
  Singing teachers’ fees (600 − 50 + 150)   700
  3 980
Deficit (2 240)
Statement of financial position at
31 December 2014
$ $
Non-current assets
 Clubhouse 50 000
Current assets
  Inventory (refreshments)    190
  Other receivables
  Prepayments (brochures)     65
  Balance at bank     40
   295
50 295
Accumulated fund
  Balance at 1 January 2014 52 175
  Less deficit for year   2 240
49 935

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 Current liabilities
Other payables
  Refreshment supplies    210
  Singing teacher’s fees due    150
   360
50 295

11 a Calculation of accumulated fund at 1 January 2014

$ $
Assets
Costumes and stage sets 11 900
Prepaid hire of community centre    270
Subscriptions due     90
Cash at bank   3 150
15 410
Liabilities
Administration expenses due    140
Subscriptions received in advance    320
Life membership fund   5 600
  6 060
  9 350

b Dr Subscriptions account Cr
Opening balance due    90 Opening balance
Income and expenditure 3 540   received in advance   320
Closing balance c/d Receipts 3 200
  received in advance   110 Closing balance c/d
 due   220
3 740   3 740
Balance b/d   220 Balance b/d   110

c Curtain-Up Drama Club

Income and expenditure account for the year ended 31 December 2014
$ $ $
INCOME
Members’ subscriptions   3 540
Profit on production
  Ticket sales 4 480
  Less: production costs 2 300
  2 180
Profit on competitions
 Receipts   630
  Less: cost of prizes   380
    250
Life membership fund (W1)     690
  6 660
EXPENDITURE
Rent of premises (W2)   2 190
Administration expenses (W3)     300

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 Depreciation of costumes and stage sets (W4)   3 200
  5 690
Surplus    970

W1 Life membership fund

$
Opening balance   5 600
Add receipts   1 300
  6 900
Less: transfer to income and expenditure (10%) (690)
Closing balance   6 210

W2 Rent
$
Payment   1 740
Add opening amount prepaid     270
Add closing amount due     180
  Expenditure for year   2 190

W3 Administration expenses
$
Payment     490
Less opening amount due (140)
Less closing amount prepaid (50)
  Expenditure for year     300

W4 Depreciation of costumes and stage sets

$
Opening valuation   11 900
Add additions   8 800
  20 700
Less: closing valuation (17 500)
Depreciation   3 200

d Statement of financial position at 31 December 2014

$ $
Non-current assets
Costumes and stage sets at valuation 17 500

Current assets
Other receivables (subscriptions due $220,     270
administration expenses prepaid $50)
Balance at bank   5 050
  5 320
22 820
Accumulated fund
Opening balance   9 350
Add surplus     970
10 320
Donation   6 000

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 Non-current liabilities
Life membership fund   6 210

Current liabilities
Other payables (subscriptions received in
advance $110, hire of community centre $180)
   290
22 820

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 1.1.3 Limited liability
companies

Answers to End-of-chapter questions

1 The financial statements required are: income statement; statement of
financial position; statement of changes in equity; statement of cash flows;
notes to the accounts; directors’ report; auditors’ report.
3 $
Operating profit for the year 82 310
Depreciation 10 420
Loss on sale of non-current assets 800
Increase in inventories (3 800)
Decrease in trade receivables 1 940
Increase in trade payables 2 530
Cash from operating activities 94 200

5 Operating activities $000

Operating profit for the year 60
Depreciation 12
Increase in inventories (2)
Increase in trade receivables (5)
Decrease in trade payables (5)
Cash from operating activities 60
Taxation paid (22)
Interest paid (9)
Net cash from operating activities 29
Investing activities
Purchase of non-current assets (30)
Cash used in investing activities (30)
Financing activities
Receipts from issue of share capital 30
Receipts from bank loan 16
Equity dividends paid (19)
Cash from financing activities 27
Net increase in cash and cash equivalents 26
Cash and cash equivalents at start of the year (11)
Cash and cash equivalents at end of the year 15

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7 SEDELL LTD
Statement of cash flows for the year ended 30 June 2014
$000 $000
Statement reconciling operating profit to net cash from operating
activities
Profit before interest and tax 4 594
Adjustment for depreciation 1 012
Loss on sale of non-current assets (W1) 118
Decrease in inventories 19
Increase in trade and other receivables (24)
Decrease in trade and other payables (30)
5 689
Interest paid (535)
Tax paid (501)
Net cash flow from operating activities 4 653
Cash flow from investing activities
Proceeds from sales of non-current assets 88
Payments to acquire non-current assets (4 500)
Net cash flow from investing activities (4 412)
Cash flow from financing activities
Issue of shares 1 200
Issue of debentures 400
Dividends paid (1 830)
Cash from financing activities (230)
Increase in cash and cash equivalents 11
Cash and cash equivalents at 1 July 2013 41
Cash and cash equivalents at 30 June 2014 52

W1 Loss on disposal of non-current assets $000

Cost 1 048
Total depreciation 842
206
Less proceeds of sale 88
118

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 International
1.1.4 accounting
standards
Answers to End-of-chapter questions
1 Identifying the correct standard
Situation IAS IAS title
number
a Accruals, going concern, consistency and materiality concepts 1 Presentation of financial statements
must be applied
b A company has paid a significant amount to acquire some 38 Intangible assets
valuable technology patents
c The lower of cost and net realisable value must be used 2 Inventories
d Financial statements must include comparative figures 1 Presentation of financial statements
e The useful life of an asset should take account of wear and tear 16 Property, plant and equipment
f A loss has occurred because the recoverable amount for some 36 Impairment of assets
equipment is less than its carrying amount
g A statement of changes in equity must be published 1 Presentation of financial statements
h Machinery repair costs should be treated as an expense in the 16 Property, plant and equipment
income statement
i The directors have chosen to use the reducing-balance method 16 Property, plant and equipment
depreciation
j Some research expenditure has been charged to a company’s 38 Intangible assets
income statement
k A schedule of non-current assets must be included in the 16 Property, plant and equipment
published accounts
l Internally generated goodwill has been written off in the income 38 Intangible assets
statement
m The AVCO method may be used 2 Inventories
n It is possible that a company may lose a court case in progress 37 Provisions, contingent liabilities and contingent
at the end of the financial year and be required to pay damages assets
o At the end of a financial year, a company’s premises were 10 Events after the reporting period
damaged by a flood. The insurance company valued the extent
of the damage shortly after the preparation of the financial
statements

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3 Applying international accounting standards
i
uuSituation a: IAS 36 Impairment of assets
uuSituation b: IAS 37 Provisions, contingent liabilities and contingent assets
uuSituation c: IAS 10 Events after the reporting period
ii
uuIAS 36 requires any impairment loss to be written off to a company’s
income statement. An impairment loss occurs where the recoverable
amount (the higher of fair value and value in use) is less than the
carrying value.
uuIAS 37 requires any possible obligation arising from past events but
which is dependent on uncertain future events to be shown as a note
to the financial statements.
uuIAS 10 requires proposed dividends for the year under review to
be shown as a note to the financial statements as they are a non-
adjusting event.
iii
uuSituation a: There is an impairment loss which should be shown in the
company’s income statement. The loss is $12 000 and is calculated by
calculating the higher of value in use ($20 000) or fair value
(i.e. $23 000 less expenses $4000 – in other words $19 000) and
deducting this from the recoverable amount ($32 000).
uuSituation b: A note to the accounts will state that the company has a
contingent liability of $25 000 arising from legal proceedings against
the company.
uuSituation c: The proposed dividend of $50 000 should be shown as a
note to the accounts.

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 Auditing and
1.1.5 stewardship of
limited companies
Answers to End-of-chapter questions
1
True False
a Auditors are appointed by directors P
b Auditors report to the shareholders P
c If auditors provide a qualified report it means they do
not believe the accounts show a true and fair view of P
the company’s financial affairs
d Shareholders elect directors P
e Auditors must ensure the company’s accounts are free
P
from fraud
f Directors must include a report on their management of
P
the company as part of the annual report
g Auditors prepare the financial statements P
h Shareholders have the right to look at the day-to-day
accounting records of the company in which they have P
invested
i Auditors must act independently P

3 a The directors act as stewards on behalf of the shareholders. They are

responsible for ensuring that the resources of the company are managed
to best effect on behalf of the shareholders. To this end directors are
responsible for ensuring that proper books of account are prepared,
and that an annual report is published including financial statements
which present a true and fair picture of the company’s affairs. The law
also requires directors to include a report on their management of the
company as part of the report.
b The auditors are appointed to act as an independent check on the
reliability of the company’s accounting records. The auditors are required
to carry out their duties objectively. They must ensure that the accounts
comply with current accounting standards and the requirements of
Companies Acts. The overriding requirement is that auditors must ensure
the accounts present a true and fair picture of the company’s financial
affairs and that they are free from significant errors. The auditors are
required to report to shareholders as part of the annual report giving
their judgment as to whether or not the financial statements meet
these criteria.

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5 Answers might include any of the following:
uuThe financial statements are relevant, reliable, comparable and
understandable.
uuThe financial statements agree with the company’s accounting records.
uuThe financial statements are free from bias.
uuThe financial statements are comprehensive in reporting the company’s
assets and liabilities.
uuThe financial statements comply with relevant accounting standards.
uuThe financial statements meet the requirements of the Companies Acts.
7 Directors must provide the auditors with reasonable access to the company’s
accounting records and answer auditors’ questions within a reasonable
timeframe.

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 Business
1.2.1 purchase
and merger
Answers to End-of-chapter questions
1 Realisation account
$ $
Net assets 100 000 Purchase consideration 210 000
Profit on dissolution: 88 000
Profit on dissolution: 22 000
210 000 210 000

Capital accounts
Marion Nigel Marion Nigel
$ $ $ $
Shares (4 : 1) 144 000 36 000 Balance b/d 60 000 40 000
Cash and cash 4 000 26 000 Profit on 88 000 22 000
equivalents realisation
148 000 62 000 148 000 62 000

Opus Ltd
$ $
Realisation account 210 000 Bank 30 000
Shares 180 000
210 000 210 000

Cash and cash equivalents

$ $
Opus Ltd 30 000 Capital account: Marion 4 000
Capital account: Nigel 26 000
30 000 30 000

3 a Dr Realisation account Cr
Net assets 176 000 Sally plc 210 000
Dissolution costs   1 000
Capitals: profit
 Tom   16 500
 Dick   11 000
 Harry   5 500
210 000 210 000

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 b Dr Capital accounts Cr
Tom Dick Harry Tom Dick Harry
Shares in Sally plc   90 000 60 000 30 000 Opening balances 110 000 50 000 21 000
Debentures   15 000 10 000   5 000 Realisation profit   16 500 11 000   5 500
Bank   26 500 Bank   9 000 13 500
126 500 70 000 40 000 126 500 70 000 40 000

c Dr Bank account Cr
Opening balance   5 000 Dissolution costs   1 000
Capital: Dick   9 000 Capital: Tom 26 500
Capital: Harry 13 500
27 500 27 500

d Dr Sally plc Cr
Realisation 210 000 Capitals:
 Shares 180 000
 Debentures   30 000
210 000 210 000

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 Consignment
1.3.1 and joint venture
accounts
Answers to End-of-chapter questions
1
BOOKS OF HAMISH POWERTOOLS LTD
Dr   Consignment outwards account Cr
Jan 5 Consignment to Kai Inc 20 800

Dr   Consignment to Kai Inc, Hong Kong Cr

Jan 5 Consignment outwards 20 800 Feb 11 Kai Inc
5 Bank: Sale proceeds 44 000
Shipping costs 3 200  
Insurance 3 400  
Customs duties 1 750  
Feb 11 Kai Inc  
Landing charges 1 900  
Storage costs 2 100  
Commission (6%) 2 640  
Del credere commission (2%) 880  
Income statement (profit) 7 330  
44 000   44 000

Dr   Kai Inc, Hong Kong Cr

Feb 11 Consignment, sales proceeds 44 000 Feb 11 Consignment expenses
  Landing charges 1 900
  Storage costs 2 100
  Commission 2 640
  Del credere commission 880
  13 Bank, net proceeds 36 480
44 000   44 000

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 BOOKS OF KAI INC, HONG KONG
Dr   Hamish Powertools Ltd Cr
Feb 11 Landing fees 1 900 Feb 11 Bank, sale proceeds 44 000
Storage costs 2 100  
Commission 2 640  
Del credere commission 880  
13 Bank, net proceeds 36 480  
44 000   44 000

Dr   Commission Cr
Feb 11 Hamish Powertools Ltd 2 640

Dr   Del credere commission Cr

Feb 11 Hamish Powertools Ltd         880

3 a Calculation of value of unsold inventory

$ $
Cost of unsold goods
80* crates at $60 per crate 4 800
Expenses paid on whole consignment
Expenses paid by Harry Clarke 4 200
Expenses paid by Consignee
storage and import duties 2 100
6 300
Portion (1/4**) of total expenses 1 575
Value of unsold inventory 6 375

* The number of crates sold was 19 200 = 240

80
hence number of unsold crates is 320 (whole consignment) less 240 (sold) = 80

** 80 unsold crates represents 80 of original consignment, i.e. 1

320 4

b Double entry for unsold inventory in consignor’s accounts

Dr Consignment to Agent, Kenya with balance b/d of $6 375
Cr Consignment to Agent, Kenya with balance c/d of $6 375

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5 BOOKS OF DWIGHT
Dr Joint venture with Zamran Cr
Feb 1 Bank, goods 12 400 Feb 23 Bank, sale proceeds 14 230
3 Bank, carriage 750   28 Bank, receipt from Zamran 2 570
15 Bank, advertising 280  
28 Income statement, profit  
on joint venture 3 370  
16 800   16 800

BOOKS OF ZAMRAN
Dr Joint venture with Dwight Cr
Feb 1 Bank, goods 7 200 Feb 9 Bank, sale proceeds 10 800
4 Bank, rent 560   27 Inventory taken over 2 900
28 Income statement, profit  
on joint venture 3 370  
28 Bank, payment to Dwight 2 570  
13 700   13 700

MEMORANDUM RECORDS
Dwight and Zamran
Dr Memorandum joint venture Cr
Goods purchased 19 600   Sale proceeds 25 030
Carriage 750   Inventory taken over 2 900
Advertising 280  
Rent 560  
Profit on joint venture 6 740  
27 930   27 930

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 Computerised
1.4.1 accounting
systems
Answers to End-of-chapter questions
1 Item A or D
1 Cost of training D
2 Improved accuracy A
3 Aged receivables analysis A
4 Automatic processing and updating A
5 Computer virus D
6 Technical support D
7 Management reports A
8 Increased speed of processing A
9 Reduced workload for staff A
10 Cost of computer installation D
11 Security breach (‘hacking’) D

12 Frequency of software upgrades D

3 Advantage Disadvantage
Workload Will be able to work more Possibly fewer staff
efficiently. Will be able to process required, so could pose a
data more quickly and less threat to job security.
chance of errors in work, so
less time spent checking and
correcting errors.
Career Prospect of receiving training May not cope well with
prospects and so developing new skills new skills required despite
which could increase chances being offered training.
of promotion or make employee
more attractive to other
employers.

5 The manager could consider (any five of ):

uuwhat the business requires from its accounting system now and in the
foreseeable future
uuwhich software package to use or whether a customised software package
will be required
uuhow information will be backed up to ensure that the chance of data being
lost is minimised
uucosts involved in purchasing equipment and software
uuthe impact on staff

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 uuwho will have access to different aspects of the accounting system; this
may involve the use of passwords, encryption and the use of extranets
uuwhat security measures need to be introduced to ensure computers are
protected from viruses
uuhow the period of transition can be managed effectively.

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 Further
1.5.1 interpretation and
analysis ratios
Answers to End-of-chapter questions
1 a Dividend yield is dividend per share/market price per share = 4.29%
b Earnings per share is profit after tax/number of ordinary shares = 48¢
c Price/earnings per share is market price per share/earnings per share
= 2.92
3 Formula 31 March 31 March 31 March
2013 2014 2015
Interest cover operating profit/interest paid 16.4 times 17.1 times 17.86 times
EPS profit after tax and pref div/ 17.8¢ 18.74¢ 22.54¢
number of ordinary shares
Ordinary dividend ordinary div/number of ordinary 3.1¢ 3.3¢ 4.16
paid per share shares
P/E ratio market price per share/ 24.5 25.7 24.44
earnings per share
Dividend yield div per share/market price per 0.6% 0.6% 0.68%
share
Gearing fixed cost capital/total capital 23% 18.62% 30%

Interest cover is improving each year, because there is a larger operating profit
each year.
EPS is improving due to increased profitability.
Dividend per share has improved slowly each year.
PE ratio is similar to previous years.
Dividend yield is low.
Gearing is low although there has been a significant increase in 2015.

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5 Income statement for Lozon Ltd for the year ended 31 March 2015
$ $
Revenue (248 000/65 × 100) 381 538
Opening inventory 28 000
Purchases (248 000 + 6 000) 254 000
Closing inventory (34 000)
Cost of sales (31 000 × 8 000) 248 000
Gross profit (35% × revenue) 133 538
Administration expenses (58 502)
Distribution costs (29 251)
Profit from operations (12% × revenue) 45 785
Finance charges (40% × profit from operations) (18 314)

Profit for the year 27 471

Statement of changes in equity (extract)

for the year ended 31 March 2015
$
Retained earnings
$
Balance, 1 April 2014 39 000
Profit for year 27 471
Dividends paid (25 000)
Balance: 31 March 2015 41 471

Dividend yield 8.00%

Dividend cover 2.6 times
Dividend per share $0.20
Earnings per share (EPS) $0.52
Price earnings ratio 4.81 times
Gearing ratio 64.52%

Zeng Ltd is highly geared.

PE ratio is low.
Dividend cover is low so dividends are not safe in the future if profits fall.
Good dividend per share.
Dividend yield is high.
Low EPS.
Company is a risky source of investment. Directors were not correct.
7 2014 2013
a Dividend cover 2.93 times 2.56 times
b Earnings per share 11.9¢ 12.6¢
c Price earnings ratio 9.24 7.14
d Dividend yield 3.69% 5.49%

e Gearing ratio 6.48% 6.4%

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