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CAT Programme

T6 Drafting Financial Statements

Online Mock Test

Section A – ALL 10 questions are compulsory and MUST be attempted. (20%)

Each question within this section is worth 2 marks.

1. What effect does the purchase of inventory have on the acid test and working capital?
a) Acid test ratio will reduce; working capital will remain unchanged
b) Acid test ratio will remain unchanged; working capital will remain unchanged
c) Acid test ratio will remain unchanged; working capital will reduce
d) Acid test ratio will reduce; working capital will increase ( )

2. If $20,000 is owed by customers at the beginning of the year, $15,000 is owed at the end and
credit sales are $100,000, what is the amount of cash received from customers for the year?
a) $95,000
b) $120,000
c) $100,000
d) $105,000 ( )

3. Which is a possible explanation for a company reporting a net loss but enjoys a positive cash
inflow from its operating activities?
a) A decrease in trade receivables
b) An increase in trade receivables
c) The sale of non-current assets for cash
d) The issue of share capital ( )

4. Which of the following is not true in relation to partnership accounts?

a) Notional interest charged on partners drawings increases the profit to be shared out in the
agreed profit sharing ratio
b) Partners’ drawings are not featured in the income statement
c) Partners are liable to the extent of their investment in the business
d) Loan interest paid to a partner is not appropriation of profit ( )

5. If a shareholder in a public limited liability company sells his shares to another private investor
for less than he paid for them, the share capital of the company will:
a) Remained unchanged
b) Increase by the par value of the shares
c) Increase by the amount received for the shares
d) Decrease by the par value of the shares ( )

6. The ____________ provides a guide to market confidence concerning the future prospects of a
a) Earnings per share
b) Price/earnings ratio
c) Dividend yield
d) Return on capital employed ( )

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7. When a company purchases a majority of the shares in another company and pays less for the
shares than the underlying value of the net assets, there will be _______________ arising on
a) Goodwill
b) Premium
c) A capital reserve
d) A revenue reserve ( )

8. The _______________ convention is designed to provide guidance concerning the recognition

of expenses.
a) Duality
b) Historic cost
c) Realisation
d) Matching ( )

9. When consolidating the financial statements of a group of companies, intercompany balances

should be _______________.
a) Eliminated
b) Added together
c) Shown separately in the statement of financial position
d) Shown as a note to the statement of financial position ( )

10. What are the four key characteristics that accounting information should possess?
a) Relevance, timeliness, completeness, reliability
b) Relevance, comparability, reliability, comprehensibility
c) Relevance, comparability, completeness, timeliness
d) Relevance, consistency, reliability, prudence ( )

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Section B – ALL THREE questions are compulsory and MUST be attempted. (80%)

Question 1
The following trial balance has been extracted from the books of Big Bang Ltd as at 31 May 2008:

Debit Credit
$'000 $'000
Cash in hand 10
Inventory at 1 June 20X7 650
General expenses 25
Insurance 45
Advertising 35
Wages and salaries 800
Heating and lighting 70
General reserve 50
Share premium 120
Discount received 100
Land at cost 550
Building at cost 2,500
Motor vehicles at cost 160
Furniture and equipment at cost 1,500
Retained profits at 1 June 20X7 142
Allowance for receivables 35
Telephone 25
Business rates 75
Sales revenue 8,500
Return inward 85
Trade account payables 310
Bank 123
Trade account receivables 1,400
Purchases 3,300
Debenture interest 40
Irrecoverable debt 500
8% Debenture 500
9% $1 Preference shares 200
$1 Ordinary shares 1,000
Accumulated depreciation:
Buildings 330
Motor vehicles 60
Furniture and equipment 300
11,770 11,770

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Additional information:
a) The inventory at 31 May 2008 was valued at $500,000.
b) The insurance expenditure includes $11,000 which relates to June 2008 to August 2008.
c) There are wages and salaries outstanding of $65,000 for the year ended 31 May 2008.
d) The allowance for receivables is to be increased to 5% of debtors.
e) Buildings are depreciated at 5% of cost. At 31 May 2008 the buildings were professionally
valued at $2,700,000 and the directors wish this valuation to be incorporated into the
f) Depreciation is to be provided for as follows:
Motor vehicles at 20% written down value
Furniture and equipment at 20% of cost
g) During May 2008 a bonus issue of one for ten was made to ordinary shareholders. This has
not been entered into the books. The share premium account is to be used for this purpose.
h) The directors have declared an ordinary dividend of 25 cents per share. The bonus shares
do not rank for dividend until the year ended 31 May 2009.
i) An additional $250,000 is to be transferred to the general reserve.
j) Corporation tax of $500,000 is to be provided for the year.

Prepare the following financial statements for internal use:
a) The statement of comprehensive income for the year ended 31 May 20X8.
(17 marks)

b) The statement of financial position as at 31 May 20X8. (18 marks)

(35 marks)

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Question 2
The following are the summarised financial statements of Cordoba Ltd for the past two years.

Income Statement for the years ended 30 November

Year 4 Year 5
$000 $000 $000 $000
Revenue 4,940 6,850
Cost of sales
Opening stock 630 930
Purchases 3,320 4770
Closing stock 930 3,020 1,150 4,550
Gross profit 1,920 2,300
Expenses 1,460 1,850
Net profit 460 450

Statements of Financial Position as at 30 November

Year 4 Year 5
$000 $000 $000 $000
Non-current assets 2,600 3,210
Current assets
Stock 930 1,850
Debtors 820 1,230
Bank 20 10
1,770 3,090
Total assets 4,370 6,300

$1 ordinary shares 1,000 1,800
Share premium - 400
Reserves 2,810 3,260
3,810 5,460
Current liabilities 560 840
4,370 6,300

a) Calculate the following ratios for both years.
i. Gross profit margin
ii. Net profit margin
iii. Return on equity
iv. Current ratio
v. Acid test (quick) ratio
vi. Inventory turnover period
vii. Receivables collection period
viii. Asset turnover (8 marks)

b) Comment on the performance of the business over the two years using ratios and
any other information that you consider appropriate. (10 marks)

c) Discuss the limitations of ratio analysis. (5 marks)

d) What other sources of information would be useful for analysing business

performance? (2 marks)
(25 marks)

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Question 3
GTB Trading is a partnership formed by Gigg, Tim and Bill. The following trial balance was
extracted from the books of GTB as at 31 October 2008.

$'000 $'000
Sales 354,810
Motor vehicle, at cost 18,000
Fixtures and fitting, at cost 6,000
Motor vehicle, accumulated depreciation 8,000
Fixtures and fitting, accumulated depreciation 4,000
Selling expenses 19,000
Purchases 278,000
Bank 2,560
Business rates 2,350
Trade receivables 27,600
Trade payables 23,000
Current accounts - Gigg 1,500
- Tim 2,300
- Bill 900
Inventory at 1 November 20X7 25,000
Insurance 1,000
Motor vehicle expenses 5,000
Allowance for receivables 1,200
Discount allowed 2,000
Wages 7,200
Capital accounts at 1 November 20X7 - Gigg 2,500
- Tim 7,000
- Bill 5,500
Drawings - Gigg 8,000
- Tim 6,500
- Bill 2,500
410,710 410,710

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Additional information as at 31 October 2008:

i. Business rates of $1,000 have been paid in advance.

ii. Depreciation is to be provided for using reducing balance method at 10% on fixtures and
fittings and 20% on motor vehicles.
iii. No rent has been paid during the year. The agreement with the landlord states that rent of
$6,000 a year is payable.
iv. There are wages outstanding of $900.
v. Bank charges of $100 have not been entered into the accounts.
vi. Inventory was valued at $28,000.
vii. Bad debts of $850 are to be written off and the allowance to be adjusted to 5% of the
remaining receivables.
viii. Bill has taken some goods for his own use to the value of $840.
ix. Interest on drawings for the year is Gigg $335, Tim $300 and Bill $110.
x. Gigg, Tim and Bill share profits and losses in the ratio of 5:3:2 respectively after charging
interest on capital of 5%.
xi. Tim is entitled to a salary of $4,000 per annum.


Prepare the following:

a) Income statement for the year ended 31 October 2008. (10 marks)

b) The statement of financial position as at 31 October 2008. (10 marks)


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