STRICTLY CONFIDENTIAL

THE PUBLIC ACCOUNTANTS EXAMINATION

COUNCIL OF MALAWI

2007 EXAMINATIONS

CERTIFICATE IN FINANCIAL ACCOUNTING

PROGRAMME

PAPER FA 3: BUSINESS KNOWLEDGE

(DECEMBER 2007 )

TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS
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SECTION A

Answer TWO questions ONLY from this section

1. (a) Special features of a limited company:

(i) It is a legal entity, an incorporated body entirely separate from the

people owning it.
(ii) Shareholders have limited liability.
(iii) It must publish information about themselves including their
accounts.
(iv) Continuity is assured as shares change hands.

(b) The following documents must be lodged with the Registrar of Companies
before a company can be registered:

(i) The Memorandum of Association.

(ii) Articles of Association.
(iii) Statutory declaration.
(iv) Statement in the prescribed form.

(c) A limited company is owned by shareholders.

(d) Directors control a limited company.

2. (a) Warehousing is the provision of storage facility for goods.

(b) Warehouses are necessary for the following reasons:

(i) To store goods that are seasonal in supply.

(ii) Change over from production in response to direct orders to
production in anticipation of demand.
(iii) To meet customers’ need immediately on demand.
(iv) Storage sometimes improves quality.

(c) Types of warehouses are:

(i) Private warehouses

(ii) Public warehouses.

(d) A bonded warehouse is a public warehouse which stores goods which

have been imported into the country and on which duty has not been paid.
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(e) (i) Firm stock control – Goods must be stored in an orderly manner so
that any item can be found easily and stock movement tracked.

(ii) Protection – Goods must be stored in such a way that they do not
deteriorate and are safeguarded against theft, fire and pilferage.

(iii) Efficient distribution – There must be efficient methods of dealing

with sales so that orders are dealt with quickly and accurately.

3. (a) ‘A Bill of Exchange is an unconditional order in writing addressed by one

person to another signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable
future time a sum certain in money to or to the order of a specified person
or to bearer’. Section 3 of Bills of Exchange Act.

(b) The stages in the transaction of a Bill of Exchange are:

(i) The exporter draws a Bill.

(ii) The importer accepts the Bill by signing it.

(iii) The accepted bill is sent to the exporter’s bank where the exporter
can discount it.

(iv) When the bill falls due, the importer will pay the exporter’s bank
the sum on the Bill.

(c) Endorsing a Bill of Exchange makes it transferable to the endorsee.

(d) The need for a Bill arises in two set of circumstances:

(i) where the buyer needs a period of credit before paying but where
the seller cannot afford to give credit.

(ii) where the distance between the supplier and the buyer is so large
that there is delay between the dispatch and the arrival of the
goods.

(e) A Bill of Exchange can be discounted at:

(i) a commercial bank,
(i) a discount house.
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SECTION B

Answer THREE question ONLY from this Section

4. (a) (i) Primary production is concerned with obtaining the direct products
of nature.
(ii) Secondary production relates to the industries concerned with
converting natural products, i.e. manufacturing and constructive
industries.

(iii) Tertiary production relates to commerce and personal and public

services.

(b) (i) Mchenga Coal Mine Limited.

(c) (ii) Sugar Corporation of Malawi.
(d) (iii) Terrastone Limited.

(e) The four players involved in making sugar available to consumers are:
(i) Primary producers who grow the sugar canes.
(ii) Manufacturers who turn the sugar cane into sugar.
(iii) Wholesalers who buy from the manufacturer to sell to retailers.
(iv) Retailers who buy in bulk from wholesalers and sales to consumers
in single units.
5. (a) A parastatal organisation is a corporation or company created by special
Act of Parliament.

(b) Government controls parastatal organizations through:

(i) Ministry of Statutory Corporations;

(ii) Treasury in Ministry of Finance;
Parent or technical ministries.
(c) Ministry of Statutory Corporations is responsible for overseeing the
running of all parastatals in Malawi.
Examples of two parastatals in Malawi are:

(i) ESCOM;
(ii) ADMARC.

(f) The advantages of having parastatals in a country are:

(i) Essential services are provides at affordable prices to the general

public.
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(ii) In-economies that would result from unnecessary competition are

eliminated e.g. Water Board.

The disadvantages are:

(i) Provision of substandard goods or services as the parastatal may be

the only provider.

(ii) Unfair competitiveness on the capital market as parastatals may

enjoy government guaranteed loans.

6. (a) Why countries engage in international trade:

(i) To exchange resources which nature has distributed differently.

(ii) Differences in climate means countries produce different natural

products.

(iii) A country may have vast demands that must be supplemented with
imports.

(iv) Trade takes place when it is to the economic advantage of nations

concerned to specialize in particular activities.

(b) A limited company may raise capital:

(i) By issuing shares.

(ii) By using retained profits.

(c) (i) Differences are:

(1) A public limited company (PLC) can assist the public to

buy shares in the company while private limited
companies cannot.

(2) A private limited company cannot have more than

50 members but there is no maximum number of members
in the case of PLC.

(ii) The similarities are:

(1) They operate with the aim of making profits.

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(2) The members share the profits of the company in the form
of dividends.

7. (a) A contract is an agreement which legally binds the parties

(b) The following elements should exist to have a valid contract with crossing
section 78 Mart:

(i) There must be an offer and acceptance.

(ii) The two parties must intend to create legal relations.

(iii) Each party must assume obligations which are supported by value
or price known as consideration.

(iv) The parties must have necessary capacity to enter into agreement.

(v) The form as required by that particular type of contract must be

observed.

(c) An exclusion clause is a term in a contract which seeks to exempt one of

the parties from liability or which seeks to limit his/her liability to a
specific sum if certain events occur e.g. breach of warranty, negligence or
theft of goods.

(d) The following may incapacitate one of them:

(i) If Bengo is of unsound mind.

(ii) If Bengo was under 18 years of age when entering into the
agreement.

(iii) If Crossing Section 78 Mart is restricted by law to have contracts

of the type entered with Bengo.

END