THE INSTITUTE OF CHARTERED ACCOUNTANTS OF PAKISTAN

EXAMINERS’ COMMENTS

SUBJECT SESSION
Introduction to Financial Accounting Foundation Examination – Spring 2009

General:

Overall performance in the paper was poor as only 16% secured passing marks. In
questions 2 and 6, the performance was abysmal with students averaging 5 out of 35
marks. Question-wise comments are as follows:

Q.1 Because of poor expressions, students could not explain the accounting terms in
part (a) properly. Similarly they were also unable to properly distinguish between
short and long-term finances, in part (c). In part (b) however, most of the students
were able to identify the basis of measurement of assets such as historical cost,
current (replacement) costs, realizable value and offered relatively better
explanations. Many of them however got confused between measurement of asset
and recognition of asset and lost easy marks.

Q.2 This question required the reconciliation of inventory ledger balance with the
physical record balance. For an accurate answer, a two-way reconciliation
statement was to be prepared. Items (i), (iii), (vii) and (viii) required adjustment to
ledger balance as well as journal entries. Items (ii), (iv) and (v) required
adjustment to physical record balance. No adjustment was necessary in case of
item (vi). The difference between the two adjusted balances represented inventory
shortage. The value of inventory to be recorded in balance sheet was Rs. 71,690
thousand.

Although it was not a difficult question yet the performance was very poor. As
many as 41% students did not attempt the question. Many students prepared a
single reconciliation i.e. they did not distinguish between the adjustments to be
made in the ledger and those requiring adjustment to physical inventory.
Consequently they also failed to determine the inventory shortage and the amount
to be reported in the balance sheet.

Q.3 Question on Cash Flow statements are normally high-scoring but the performance
this time was average as only one-third of the students obtained pass marks.
Students used T-accounts for almost all computations which is very time
consuming. They are strongly advised to learn/practice to compute figures in
parenthesis form. Some of the common errors were as follows:

(i) Many students were unable to compute the profit correctly by considering
the following:

• increase in capital
• owner’s drawings
• injection of capital of Rs. 12,000 by the owner in the shape of
repayment of long-term loan

Very few students included the last of the above items, in the calculation of
profit.

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 Examiners’ Comments on Introduction to Financial Accounting – Spring 2009

(ii) Some of the students who correctly included the owner’s drawing and
capital injection of Rs. 12,000 in the calculation of profit, as discussed
above, were confused as regards their corresponding treatment and failed to
realize that they need to be disclosed separately also i.e. in outflows and
inflows respectively.

(iii) Net increase in the cost of furniture and fixtures was taken as the capital
expenditure whereas loss of furniture due to fire and receipt of insurance
claim was ignored.

Q.4 In this question on branch accounting, majority of the students could not perform
well mainly because they failed to read the question carefully. It was clearly stated
in the question that head office maintains the stock account at cost with a
memorandum column for selling prices and it was expected that the students
would do the same. However most of them made either the cost column or the
memorandum column.

Other significant mistakes were as follows:

(i) Entries in ‘goods sent to branch accounts’ were made at selling prices
instead of cost.

(ii) It was stated in the question that goods sent to branch are invoiced at cost
1
plus 33 % . Hence the cost of inventory should have been arrived at by
3
3
multiplying the selling price with . Instead, many students deducted one-
4
third of the selling price from the selling price, to arrive at cost.

(iii) Similar errors as discussed in (ii) above were also made in calculating the
cost of goods sent to and returned from branch.

(iv) Many students were not aware of the method of calculating the closing
stock and the branch profit. Some of them balanced the branch stock
account without incorporating the branch profit.

Q.5 This was the best attempted question. However, a number of students made simple
errors which are not expected at this level.

(i) Payment of rent was not properly apportioned as Rs. 120,000 to expense
and Rs. 30,000 to prepayment as many students apportioned it in the ratio
of 9:3.

(ii) Many students could not correctly compute the cost of equipment which
was Rs. 56,000 comprising of advance payment of Rs. 40,000 plus amount
paid later i.e. Rs. 12,000 (i.e. 75% of Rs. 16,000) and Rs. 4,000 outstanding
on December 31, 2008.

(iii) Repair cost of Rs. 52,000 which was incurred to bring the newly purchased
van to working condition, was charged to repairs expense instead of being
capitalized. Depreciation on the van was computed for full year instead of
11 months.

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 Examiners’ Comments on Introduction to Financial Accounting – Spring 2009

(iv) Many students couldn’t realize that by valuing the stock of 950 pairs of
jeans they had already accounted for the shortage of stock. They doubled
the impact of shortage by making another provision based on cost of 50 T-
shirts. Similar error was made in case of damaged T-shirts also. Once the
value of damaged T-shirts was taken as Rs. 5,000, there was no need to
pass another entry to record the decline in value of stock.

Yet again, after valuing pocket calculators at Rs. 150,000 i.e. sales value of
Rs. 250,000 less repair cost of Rs. 100,000, provision for repair charges of
Rs. 100,000 was made separately also.

(v) For the T-shirts gifted to family members and given to customers, the
correct treatment was to deduct their cost from purchases and debit
drawings with Rs. 1,500 (20 x 75) and advertisement/sales promotion
expenses with Rs. 2,250 (30 x 75). Many students did not make these
adjustments.

(vi) Some students included the realizable value of calculators of Rs. 250,000 in
sales.

Q.6 In this question the candidates were required to find out the correct balances of
cost and accumulated depreciation of various items for fixed assets and the correct
amount of gain/loss on disposal of fixed assets, after correcting the errors made in
current as well as prior years. The question was very poorly attempted by most of
the students. Some of the glaring observations are mentioned below:

• In item (iii) very few of the students could correctly work back the cost of
assets whose book values and date of purchases were given in the question.
This involved simple mathematics and the students were expected to be really
good at working out such figures. However, most of them worked out the
depreciation on the book values, instead of cost. Even those who managed to
calculate the cost correctly, were unable to pass proper adjustment in the
related accounts.

• In item (iv), although the depreciation calculation was straightforward, yet

many mistakes were made. Depreciation for the year 2005 was charged for full
year instead of half year; depreciation for 2008 was either omitted or provided
for the whole year.

• While recording the depreciation, most students credited the asset account
instead of crediting the accumulated depreciation account.

(THE END)

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