Revision Questions

University of Greenwich Business School Introduction to Financial Accounting Revision materials for May 2011 examination
INTRODUCTION.
Your examination in May will be of three hours duration. The examination counts as 50 per cent of the total grade for your Introduction to Financial Accounting course. There will be 6 questions on the examination paper; 1 compulsory question and 5 others of which you can choose to attempt any 3. All questions will carry 25 marks and to pass you are looking to achieve a total of 40 or more marks. The content of the examination paper will be focused upon topics that you have studied in your lectures and tutorials since the beginning of the January term. However, it is important for you to remember that you will need the knowledge you acquired on bookkeeping and formulating financial statements for internal purposes before the Christmas vacation. The main topics are therefore: Preparation of published format to Income Statement and Balance Sheet in regard to primarily the International Accounting Standards format [IAS1] but having regard to UK Companies Acts and FRS. Published format to Cash Flow Statement, focusing upon IAS7 format. Published Annual Report of a company including awareness of form, content and purpose of Chairmans Report, Chief Executives Report, Directors Report [including sub-committees], Operating & Financial Review, or as it may be referred to as the Business Review, and most important Notes to the Accounting Statements. Corporate Governance: an appreciation of the key aspects of good governance. Definition of the key concepts of financial accounting and a discussion of the application of these concepts. The Regulatory Framework and qualitative characteristics of accounting information. Reporting and valuation of non-current assets and inventory Accounting for control cash book, sales & purchases control accounts. Bank reconciliations and cash management. Correction of errors and the formulation of financial statements from incomplete accounting information. This revision handbook provides you with practice exam-standard questions and solutions. You would be advised to revise using your course notes and examples and the textbook first before attempting these questions. Working diligently and practising exercises is the key and there is no easy substitute for this effort. Your reward will be a relaxing summer with no worry of resits in August and also confidence that you have the background knowledge and mastery of the basics to enable you to perform well in your second and third year studies.
QUESTION ONE (May 2008) The following summarised Trial Balance relates to Gratis plc at 31st March 2008. 000 000 Sales 3 750 Cost of sales 1 200 Administrative expenses 600 Distribution expenses 450 Goodwill 150 Land & buildings at valuation 2 400 Land & buildings accumulated depreciation 420 st at 1 April 2007 Vehicles at cost 1 200 Vehicles accumulated depreciation at 1st 450 April 2007 Long maturing loan 2015 180 st Retained earnings at 1 April 2007 108 Share premium 75 Revaluation reserve 90 General reserve 75 Ordinary share capital 1 1 350 Preference share capital 1 300 Taxation paid 258 Ordinary dividend paid 150 Accounts payable 36 Accounts receivable 300 Cash at bank 66 st Inventory at 1 April 2007 60 6 834 6 834 You are provided with the following additional information: 1. At 31st March 2008 the taxation owed amounted to 24 000. 2. Depreciation policy is to charge 2% per annum on land and buildings at revaluation amount and 20% on cost for vehicles. Depreciation on land and buildings is charged to administration and depreciation on vehicles is charged to distribution. 3. Closing inventory at 31st March 2008was valued at cost 65 000. 4. Authorised share capital 1 ordinary shares 1 preference shares 1 800 000 450 000
You are required to: Prepare the Income Statement for Gratis plc for the year ended 31st March 2008 and the Balance Sheet as at that date as they would appear in the published account as prepared under International Financial Reporting Standards. [25 marks]
QUESTION TWO (August 2008) The summarised Trial Balance below relating to Falkner plc at 30th April 2008 included the following balances: Dr Cr st Retained earnings at 1 May 2007 1 520 000 Issued ordinary share capital 1 5 840 000 Share premium 340 000 Provision for restructuring 124 000 Employee benefit provisions 306 000 Accounts payable 1 640 000 Bank loans 1 842 000 Goodwill 2 990 000 Plant & equipment 4 500 000 Accumulated depreciation plant & 1 880 000 equipment Land & buildings 852 000 Accumulated depreciation land & 122 000 buildings Investment in associates 750 000 Inventory finished goods 2 486 000 Accounts receivable 1 480 000 Allowance for doubtful debt 48 000 Other debtors 828 000 Cash on deposit 300 000 Cash at bank 322 000 Interest paid 148 000 Other borrowing expenses 12 000 Administrative expenses 840 000 Sales & marketing expenses 2 734 000 Distribution expenses 286 000 Cost of goods sold 9 956 000 Rent received 18 000 Other income 12 000 Share of profit of associate 72 000 Sales of goods 14 720 000 28 484 000 28 484 000
You are provided with the following additional information relating to the company: 1. 850 000 of bank loans are repayable within one year. 2. the planned restructuring is intended to be fully implemented within one year.
3. income tax liability for the year has been assessed at 270 000 4. the directors have proposed a year - end dividend of 5 pence per ordinary share. You are required to: Prepare the Income Statement for the year ended 30th April 2008 and a Balance Sheet as at that date in accordance with IAS1, using subheadings that a listed company is likely to use. [TOTAL 25 marks] QUESTION THREE (May 2009) [a] Debabuns plc is a listed retail company. Two new non-executive directors have recently been appointed to the Board of Directors of the company, neither of whom has served as a director of a listed company before. As an accountant employed by the company you have been asked to brief the two new directors by letter for their induction. You are required to: Draft such a letter that explains i. The role of the Board of Directors of a listed [plc] company as a whole in relation to Corporate Governance and also addresses their own role as nonexecutive directors [6 marks] ii. the difference between the roles of the Chairman and the Chief Executive of a listed company. [4 marks] [b] The following balances are from the accounting records of Barton Bunch plc at 31st December 2008. Sales revenue [note 2] 9 228 000 Opening inventory 864 000 Purchases [note 3] 5 241 600 Carriage inwards 285 600 Carriage outwards 544 800 Office equipment at 1st January 2008 Cost [notes 2,3 and 4] 1 101 400 Accumulated depreciation 220 800 Accounts receivable 1 488 000 Allowance for doubtful debt at 1st January 2008 48 000 [note 5] Bad debts written off during the year 36 000 Administrative expenses 998 400 The following additional information is available: 1. Closing inventory at 31st December 2008 was 1 080 000.
2. Some of the office equipment which had cost 48 000 with accumulated depreciation at 1st January 2008 amounting to 33 600 was sold for 36 000 during the year. The sale proceeds were included in error in the sales figure of 9 228 000. 3. The cost of new office equipment purchased on 1st July 2008 for 144 000 had been included in the Purchases figure of 5 241 600. 4. The company depreciates its office equipment at 20 per cent per annum on a straight-line basis, with proportionate depreciation in the year of purchase but none in the year of disposal. None of the office equipment held at 1st January 2008 was more than three years old. 5. The allowance for doubtful debt at 31st December 2008 is to be set at 5 per cent of total accounts receivable at that date. 6. Accruals and prepayments on administrative expenses at 31st December 2008 were: Accrued expenses 68 880 Prepaid expenses 34 560 7. The directors of the company propose a dividend of 6 pence per ordinary share [9 600 000 shares at 25 pence nominal value] to be paid in July 2009. No dividends were paid in 2008.
You are required to: 1. Prepare the Income Statement for Barton Bunch plc for the year ended 31st December 2008 in a form appropriate to the requirements of IAS1. [13 marks] 2. State the total amount for the proposed dividend and explain how that dividend would be dealt with in the companys financial statements for publication. [2 marks] Total 25 marks QUESTION FOUR (May 2009) The following balances are taken from the accounting records of MacFisheries plc at 30th April 2009. 000 Land and buildings At cost 24 000 Accumulated depreciation at 1st May 2008 8 640 Plant and equipment At cost 14 400 st Accumulated depreciation at 1 May 2008 7 680
Accounts receivable Accounts payable Accrued expenses 8% bank loan maturing 2014 Ordinary share capital 1 nominal Share premium account Retained earnings at 1st May 2008 Cash at bank The following additional information is available: 1. Inventory at 1st April 2009 was valued at 11 280 000
8 640 6 000 1 200 2 400 12 000 5 280 11 040 2 880
2. The companys land and buildings were re-valued at 1st May 2008. This revaluation has not yet been reflected in the balances given above. Cost Accumulated Net book Re-valued depreciation value amount 000 000 000 000 Land 9 600 nil 9 600 12 000 Buildings 14 400 8 640 5 760 9 600 3. The draft net profit for the year was 6 960 000. However, three adjustments are required Receivables totalling 672 000 are to be written off Provision is to be made for bonuses due to directors of the company totalling 600 000 Depreciation charges for the year, based on revalued amounts: 000 Buildings 480 Plant and equipment 2 880
You are required to: Prepare the balance Sheet for MacFisheries plc as at 30th April 2009 using the format and headings in IAS1 Presentation of Financial Statements [17 marks] [b] IAS10 Events after the Balance Sheet date defines the accounting treatment of material events occurring after the Balance Sheet date. You are required to: I. Explain what determines whether an event after the balance Sheet date must be adjusted for and reflected in the financial statements. [3 marks]
II. Explain what changes would have to be made to the following items in the Balance Sheet if it becomes clear shortly after the Balance Sheet date, that the going concern basis was no longer appropriate in regard to a particular company. Non-current assets Inventory Long maturing loan [5 marks] Total 25 marks QUESTION FIVE (May 2008) The financial statements below relate to Acerbic plc. Income Statement for the year ending 30th April 2008 Profit before taxation Taxation Profit after tax Dividends Retained profit for year Balance Sheets as at 30th April Non-current assets Intangible assets Patents Tangible assets Plant & machinery Cost Accumulated depreciation Investments Current assets Inventory Receivables Prepayments Cash at bank Total assets Financed by Ordinary share capital 1 Share premium Retained profit Long maturing liabilities 7% Debentures 2007 000 000 60 2008 000 000 100 000 300 [60] 240 40 200
600 [100]
500 200 760
1 000 [120]
880 200 1 180
100 40 50 90 280 1 040 500 200 100 160
80 90 60 105 335 1 515 600 310 300 220
Current liabilities Payables Accrued expenses Taxation due Dividends due
30 10 20 20 80 1 040
10 20 30 25 85 1 515
Notes: 1. Profit before taxation figure is determined after having added interest received of 30 000 and having deducted interest paid for the year of 16 000. 2. There were no disposals of non-current assets during the year. You are required to: [a] Prepare a Cash Flow Statement for Acerbic plc for the year ending 30th April 2008. [15 marks] [b] Comment briefly upon the change in the cash position of the company during the year. [5 marks] [c] explain why the Cash Flow Statement is an important statement from the viewpoint of the users of financial statements. [5 marks] Total 25 marks QUESTION SIX (August 2008) The following financial statements relate to Vaux Limited, a brewing company selling primarily to supermarkets and large pub chain such as Wetherspoons and Mitchell & Butler. Income Statement for the year ending 31st December 2004 000 15 200 [5 120] 10 080 [160] [1 600] [4 800] 3 520 2005 000 32 640 [8 320] 24 320 [160] [3 200] [9 600] 11 360
Profit before taxation Taxation Profit after taxation Dividends Preference [paid] Ordinary interim [paid] Final [proposed] Retained profits for the year
Balance Sheets as at 31st December. 2004 000 Non-current assets Plant, machinery & equipment Less accumulated depreciation Current assets Inventory Accounts receivable Prepayments Cash at bank and in hand Total assets Financed by Capital 10% 1 Preference shares Ordinary shares 1 nominal Share premium account Retained profit Long maturing liabilities 15% debenture stock Current liabilities Accounts payable Accrued expenses Taxation Dividends Bank overdraft 28 160 15 200 12 960 8 000 13 760 480 960 36 160 2005 000 38 420 17 200 21 040 24 000 42 720 640 Nil 88 400
1 600 6 400 1 600 4 800
1 600 7 400 2 100 16 160
960
1 200
9 600 1 280 5 120 4 800 Nil 36 160
16 000 1 600 8 320 9 600 24 420 88 400
During the year to 31st December 2005, non-current assets which had originally cost 8 800 000 were sold for 1 600 000. The accumulated depreciation on these assets at 31st December 2004 was 6 080 000. The company does not charge depreciation on non-current assets in their year of disposal. The accrued expenses include interest charges for the year on the 15% debenture stock. You are required to: [a] Prepare a Cash Flow Statement for Vaux Limited for the year ending 31st December 2005. You should apply the format and headings required of IAS7 in formulating your statement. [18 marks] [b] What does your Cash Flow Statement show regarding the financial performance of Vaux Limited for the two year period ended 31st December 2005. [7 marks] [total 25 marks]
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QUESTION SEVEN (May 2009) [a] Explain why it is possible for a company which has declared an adequate level of operating profit for its most recent accounting period only to find that it is in a position where a decline in its level of cash holdings forces the directors of that company to have to undertake significantly increased borrowings. [7 marks] [b] The Balance Sheets of Joystick plc at 30th April 2008 and 2009 are as below: 30th April 2009 000 000 355 200 30th April 2008 000 000 312 000
Non-current assets at NBV [note 1] Current assets Inventory Accounts receivable Cash at bank Total assets Equity and liabilities Capital and reserves Ordinary share capital Share premium account Revaluation reserve Retained earnings [note 1] Total equity Non current liabilities 8% bank loan [note 3] Current liabilities Accounts payable Taxation due [note 2] Bank overdraft Total equity & liabilities
33 600 51 360 nil 84 960 440 160
21 840 30 000 11 040 62 880 374 880
264 000 12 000 33 600 67 200 376 800 24 000 17 040 19 200 3 120 39 360 440 160
261 600 9 600 4 800 43 200 319 200 19 200 22 080 14 400 Nil 36 480 374 880
Notes: 1. The depreciation charge for the year was 31 200 000. 2. 14 880 000 was paid during the year to settle the companys taxation liability at 30th April 2008. 3. An additional loan was taken on 1st November 2008. All interest due was paid on 31st October 2008 and 30th April 2009. 4. Dividends paid during the year to 30th April 2009 totalled 9 600 000. You are required to: Prepare the Cash Flow Statement for Joystick plc for the year ended 30th April 2009, using the format required by IAS7 Cash Flow Statements. [18 marks] Total 25 marks
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QUESTION EIGHT (August 2009) (a) Explain clearly why a cash flow statement is necessary even though it is the profit figure for the year that is most important to any company. (5 marks) Catchup plc operates within the food wholesale sector distributing a range of top quality spices and condiments to restaurants. The following financial statements relate to the company for the past two years. 2009 000 162 000 42 000 57 300 99 300 261 300 2008 000 141 000 33 000 52 200 85 200 226 200
(b)
Balance sheet as at 31 March Non-current assets (NBV) Current assets Inventory Receivables Total Assets Equity and liabilities Ordinary shares 5p Share premium Accumulated profit Current liabilities Trade payables Dividends Taxation Bank overdraft
63 000 22 500 32 400 117 900 42 600 48 000 42 000 10 800 143 400 261 300
30 000 52 500 25 500 108 000 46 500 25 500 39 000 7 200 118 200 226 200
Income Statement for the year ending 31 March 2009 000 Gross profit 460 020 Less: expenses 316 920 Operating profit 143 100 Profit/(loss) on sale of non-current assets (4 200) Net profit before interest and tax 138 900 Less interest paid 30 000 Profit before taxation 108 900 Taxation 42 000 Profit after taxation 66 900 Dividends 60 000 Retained profit for the year 6 900
2008 000 396 600 284 700 111 900 8 400 120 300 30 000 90 300 39 000 51 300 34 500 16 800
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You are provided with the following additional information: 1. A bonus issue of ordinary shares was made during the year to 31 March 2009 by utilising 30 000 from the share premium account. A summary of the companys non-current assets for the year ended 31 March 2009 was provided: Non-current Assets - cost 000 261 000 31.03.09 31.03.09 42 000 303 000
2.
01.04.08 31.03.09
Balance b/d Additions
Disposals Balance c/d
000 36 000 267 000 303 000
The non-current assets which were sold realised 7 200 000 which represented a loss on disposal of 4 200 000 when compared to their net book value. YOU ARE REQUIRED TO: Produce a cash flow statement for the company for the year ended 31 March 2009 applying IAS 7 format. (20 marks) TOTAL 25 Marks QUESTION NINE (May 2008) Explain the roles of directors, shareholders and auditors in the corporate model. [25 marks] QUESTION TEN (May 2008) [a] Explain the role that the Annual Report of a company plays in the corporate governance process [13 marks] [b] Explain what you understand by the term creative accounting. Why do you think that creative accounting might come into conflict with the idea that the financial statements should be give a true and fair view of the position of a company? [12 marks] Total 25 marks QUESTION ELEVEN (August 2008) You are required to: Explain what you understand by the term corporate governance and why it is so important. [Total 25 marks] QUESTION TWELVE (August 2008) [a] The purpose of financial accounting is to provide information to different user groups for the purpose of economic decision-making.
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You are required to: Select any TWO user groups and through your knowledge of the Annual Report and Accounts of a public company demonstrate how, and to what extent, financial accounting achieves its purpose. [13 marks] [b] You are required to: Explain SIX qualities that are commonly identified as being required of financial accounting information to ensure that such information is fit for purpose. [12 marks] [Total 25 marks] QUESTION THIRTEEN ( May 2008) [a] Rachel Sampson operates a mobile fast-food business. The business owns a van which cost 24 000 on 1st January 2005 and which has been subject to depreciation at 25% per annum using the reducing balance method. On 30th June 2007 Rachel sold the van for 8000 [cheque received] and purchased a replacement van for 28 000. Rachel paid an initial deposit of 10 000 by cheque with further payments of 6 000 to be made on 30th September 2007, 31st December 2007 and 31st March 2008. Rachel charges depreciation on a part-year basis on acquisition or disposal of any non-current assets. You are required to: Provide the relevant ledger accounts in regard to the vehicles owned by Rachels business as at 31st December 2005, 2006 and 2007 including recording the disposal and the van replacement. Show the Balance Sheet extract in relation to vehicles as at 31st December 2007. [11 marks] [b] Albert King Engineering Limited has a provision for doubtful debt balance of 3 000 at 1st January 2006 based upon 5% of outstanding accounts receivable at that date. After writing off bad debts, the amount of outstanding accounts receivable at the end of 2006 and 2007 were 80 000 and 70 000 respectively. The company decided to change its provision for doubtful debt to a figure equivalent to 4% of outstanding accounts receivable at 31st December 2007. You are required to: Show how the Provision for Doubtful Debt Account will be adjusted at the end of the accounting years 31st December 2006 and 2007. [6 marks] [c] Goodwood Limited is a kitchen furniture retailer. The company sells a wide range of products including a Butchers Bench. The inventory movements for the Butchers Bench in April 2008 were as follows: 1st April Inventory of 10 benches at cost of 60 each 5th April Sold 2 benches th 8 April Sold 5 benches 12th April Bought 12 benches at cost 64 each th 15 April Sold 6 benches 21st April Sold 4 benches
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24th April 28th April 30th April
Bought 8 benches at cost 62 each Sold 4 benches Sold 3 benches
Each Butchers Bench sells for 100. Assuming that Goodwood Limited operates an inventory valuation policy based upon applying FIFO valuation method You are required to: 1. Calculate the value of total sales of Benches for the month of April. 2. Calculate the value of closing inventory of Benches at 30th April. 3. Calculate the amount of Gross profit achieved from the sale of the Benches in April. 4. What would have been the Gross Profit from the sale of Benches for the month of April had Goodwood Limited applied the LIFO inventroy valuation basis. [8 marks] Total 25 marks QUESTION FOURTEEN (May 2009) [a] The qualitative characteristics of relevance, reliability, and comparability identified in the International Accounting Standards Boards Framework for the preparation and presentation of financial statements are some of the attributes that make financial information useful to the various user groups of financial statements. You are required to: Explain what is meant by relevance, reliability, and comparability, and how they help to make financial information useful. [12 marks] [b] Select TWO of the user groups of financial statement information and explain the information needs of each user group. Attempt to evaluate the extent to which these information needs are actually met by the typical contents of the Annual Report and Accounts of a listed company. [13 marks] Total 25 marks. QUESTION FIFTEEN (August 2009) [a] The Framework for the preparation and presentation of financial statements states that in order to be useful financial information should meet four objectives. These objectives are: 1. relevance 2. reliability 3. comparability 4. understandability
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You are required to: [a] Explain each of these four objectives and show how each one contributes to making financial information suitable for the needs of different user groups. [8 marks]
[b] [i] Identify the likely stakeholders in a large multinational pharmaceutical company and explain how their information needs might differ. [10 marks]
[ii] What type of information might the stakeholders require that should be included in a Corporate Social and Environmental Report provided by such a multinational company? [7 marks] Total 25 marks QUESTION SIXTEEN (August 2008) [a] Explain the following accounting concepts providing an example of the application of each: 1. Historic cost 2. Prudence 3. Business entity 4. Matching 5. Going concern [20 marks] [b] At 30th January 2008, the balance in the Cash Book of Tandem Limited was a debit amount 144 927. The companys bank statement on that day showed a credit balance of 200 214. The following information subsequently became available: [i] The Cash Book had been under-added on the debit side by 16 200. [ii] Cheques paid in by the company but not yet credited by the bank amounted to 37 476. [iii] Cheques drawn by the company but not yet presented to the bank amounted to 76 563. You are required to: 1. Show the corrected Cash Book balance. 2. Prepare a statement reconciling the balance as per the bank statement to the corrected Cash Book balance [5 marks] [total 25 marks]
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QUESTION SEVENTEEN (August 2008) [a] You are required to: Define the terms capital expenditure and revenue expenditure and explain why, according to financial accounting practice, it is important to distinguish between the two. [8 marks] [b] Explain why depreciation is charged on non-cuurent assets [5 marks] st [c] Harbottle Joinery Limited purchased a new sawbench on 1 June 2005 at a cost of 65 000. The company managers anticipated that the sawbench would have a useful life of five years. However, early in 2008 the company lost a number of important customers who found imported supply sources cheaper and consequently the sawbench became surplus to future requirements. The sawbench was therefore sold on 31st March 2008 for 20 000. Assume that the companys financial year ends on 31st December and that the company charges depreciation on a monthly [part - year] basis in the year of acquisition and of disposal of a non-current asset. You are required to: Complete the ledger entries [including the disposal] relating to the sawbench for the years 2005, 2006, 2007, and 2008 assuming: [i] that the company applies the straight-line depreciation method and you should also assume that the expected disposal value of a 5 year old sawbench was 5 000. [6 marks] [ii] that the company applies the reducing balance depreciation method and you should further assume a rate of 30 per cent per annum. [6 marks] [TOTAL 25 marks] QUESTION EIGHTEEN (May 2009) [a] Explain clearly the distinction made in financial accounting between capital expenditure and revenue expenditure for accounting recording and reporting purposes. [4 marks] [b] Explain what you understand by the term the reducing balance depreciation method. [4 marks]
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[c] The following information relates to Cobblers and Last Limited. Fixtures & Plant & fittings equipment 290 000 180 000 Cost at 1st January 2008 Accumulated depreciation 70 000 74 656 at 1st January 2008
Total 470 000 144 656
Cobblers and Last Limited depreciates fixtures and fittings at 10% per annum by the straight-line method and plant and machinery at 20% per annum by the reducing balance method. A full years depreciation is charged in the year of acquisition and none is charged in the year of disposal of non- current assets. During the year to 31st December 2008 the following additions and disposals were made by the company: Additions at Original cost Proceeds from Year of cost 2008 of disposal disposal acquisition assets Fixtures & 50 000 36 000 12 800 2004 fittings Plant & 16 000 12 000 9 000 2005 equipment You are required to: Prepare the following ledger accounts for Cobblers and Last Limited for the year ending 31st December 2008. i. Fixtures and fittings at cost account ii. Fixtures and fittings accumulated depreciation account iii. Fixtures and fittings disposal account iv. Plant and equipment at cost account v. Plant and equipment accumulated depreciation account vi. Plant and equipment disposal account [17 marks] Total 25 marks. QUESTION NINETEEN (August 2009) [a] Explain the business entity concept and its impact on the recording of transactions. [5 marks] [b] State why it is important to differentiate between capital expenditure and revenue expenditure, and briefly explain the accounting treatment of each type of expenditure. [5 marks] [c] Givit Limited is a wholesaler company which distributes a single product. The draft accounts of the company have been prepared for the month of May 2009. The accounts report a net loss of 35 580 and total net assets of 283 468.
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However, upon examination of the financial statements of the company it is noted that: 1. The Income Statement does not report a figure for Gross profit. 2. The Income Statement does not include any value for closing inventory which is also therefore missing from the Balance Sheet. 3. The opening inventory has a value of 57 600. This figure was calculated on the First In First Out [FIFO] basis. There were 480 items in inventory valued at 120 per item. 4. Purchases during the month of May were: Date Number of items 9 May 1 140 15 May 1 310 24 May 620
Cost per item 145 150 155
5. Sales during the month of May were: Date Number of items 12 May 1 040 21 May 1 840
Selling price per item 205 220
6. As well as purchases, the other costs deducted from sales to calculate the net loss were: Wages of staff 44 700 Premises expenses 42 750 Administrative expenses 13 620 Selling and marketing costs 17 890 Carriage inwards 3 750 Carriage outwards 4 120 Depreciation 11 250 138 080 You are required to: [i] Calculate the number of items in inventory at 31st May 2009 the value of the inventory at 31st May 2009 on the FIFO basis. [ii] Using your revised figures for inventory calculate: the Cost of Sales figure for May 2009 the Gross Profit figure for May 2009 the Net Profit figure for May 2009 the value of the Net Assets at 31st May 2009.
[3 marks]
[10 marks]
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[iii] State the basic rule set out in IAS 2 which is to be applied to the valuation of inventory [2 marks] Total 25 marks QUESTION TWENTY (August 2008) [a] Peter Ayres owns and operates a sole proprietorship hairdressing business trading as Artful Clipper. Peter had intended some time ago to use Sage Software for his business accounting needs, but has never quite got round to doing so and therefore the accounting records of his business are not in double entry for. However, Peter does keep accurate records of his business transactions and the following information is available to you for his business for the year to 31st December 2007. Cash Summary. Balance at 1 January 2007 Receipts Cash sales Accounts receivable Payments Drawings Repairs Electricity Cash banked Balance at 31st December 2007. Bank Summary. Balance at 1 January 2007 Receipts Accounts receivable Cash banked Payments Accounts payable Rent Machinery Wages Insurance Dishonoured cheque Loan interest Balance at 31st December 2007.
st st
1 500
70 000 2 000
72 000 73 500
47 500 1 500 3 750 20 500
73 250 250
40 000
130 000 20 500
150 500 190 500
92 500 7 000 37 500 30 500 7 250 1 250 1 500
177 500 13 000
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The following additional information is also available to you in regard to Peter Ayres business. 1st January 31st December 2007 2007 Inventory 20 500 16 000 Machinery 63 000 79 500 Rent prepaid 1 000 Rent owing 1 250 Accounts receivable 31 500 25 000 Accounts payable 12 000 12 500 8% bank loan 40 000 40 000 Loan interest owing 500 You are required to: [i] Calculate the value of Peter Ayres capital investment in his business on 1st January 2007. [5 marks] [ii] Prepare the Income Statement for Peters business for the year ended 31st December 2008. [13 marks] [iii] Prepare the Balance Sheet for Peters business as at 31st December 2008. [7 marks] [TOTAL 25 marks] QUESTION TWENTY-ONE (August 2008) [a] The following information relates to Dexter Limited for the accounting period ended 30th June 2008. Total receipts from credit customers 1 787 760 Total payments to credit suppliers 2 162 052 Increase in provision for doubtful debt 324 Credit notes issued to credit customers 14 904 Credit notes received from credit suppliers 5 328 Bad debts written off 2 808 Refunds given to cash customers 18 252 Discounts allowed [all to credit customers] 19 872 Discounts received [all from credit suppliers] 12 636 Balance in sales ledger set off against balance 252 in purchases ledger Sales Credit 2 965 474 Cash 1 241 604 Purchases Credit 1 854 800 Cash 51 984
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The companys financial statements for the previous accounting period to 30th June 2007 indicate closing accounts receivable balance amounting to 548 640 and closing accounts payable balance amounting to 374 800. . You are required to: Prepare the Accounts Receivable Control Account and the Accounts Payable Control Account at 30th June 2008 to identify the closing balances for Accounts Receivable and Accounts Payable for entry to the companys Balance Sheet as at that date. [15 marks] [b] When the Trial Balance for Sumartra Limited, a specialist wholesaling and distribution company, was formed for the accounting year end 31st March 2008, the total of credit balances exceeded the total of debit balances by 209 280. Subsequent investigations by the companys accountant identified the following errors: 1. Discounts received from Delta Limited, a credit supplier, amounting to 1 410 in February 2006 had been posted to the debit of the discount allowed account. 2. A cheque of 90 000 was received from Terry Limited, a credit customer, in March 2008. The cheque had been debited to the company Bank account but had been also credited to Sales. 3. A cheque for 19 200 received from Blaster Limited, a credit customer, had been debited to the business Bank account but had also been posted to the credit of Blassman Limited, another credit customer of the company. 4. Payments totalling 10 800 to Bayswater Limited, a supplier, had been credited to the business Bank account but had also been posted to the debit of the Bayswater Limited account as 19 800. 5. Salaries paid amounting to 137 100 in March 2008 had been credited to the business Bank account but had not been posted to the appropriate expense account. 6. The company purchased new equipment for 84 000 cost from Derby Machine Tools Limited. Whilst payment was credited to the business Bank account, no entry was made to record the equipment acquisition in the companys Asset Register. Furthermore, no depreciation charge has been made on the equipment. The company policy is to charge a full years depreciation in the year of acquisition of any non-current asset by the straight-line depreciation method at a rate of 20 per cent per annum on cost. The draft accounts for the year ended 31st March 2008 of Sumatra Limited showed a net profit of 742 800.
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You are required to: Prepare the difference on the Trial Balance Suspense Account showing, where appropriate, the entries required to correct the accounting errors. Determine the corrected net profit figure for the year ended 31st March 2008 for Sumatra Limited following your correction of the above errors. [10 marks] [total 25 marks] QUESTION TWENTY-TWO (May 2008) The Following Balance Sheet relates to Fiona Bradburys business at 31st December 2006. Non-current assets Freehold land & buildings 125 000 154 000 Vehicles [cost 50 000] 29 000 Current assets Inventory 16 500 Accounts receivable 32 700 Prepayments 600 Bank 15 000 64 800 Total assets 218 800 Financed by Ownership capital 192 400 Current liabilities Accounts payable 26 100 Electricity accrued 300 26 400 218 400 The only ledger account kept by Fiona is a Cash Book of which for the year ended 31st December 2007 has been prepared below: Balance b/d 15 000 Rates 1 400 Cash takings banked 44 600 Salaries 28 200 Cheques from credit 159 300 Electricity 1 850 customers Capital introduced 5 000 Bank charges 100 Motor expenses 6 550 Payments to creditors 166 800 Stationery 2 300 Sundry expenses 400 Balance c/d 16 300 223 900 223 900 The following additional information is available: 1. Fiona had taken goods out of her business for her own use that cost 2 650. 2. inventory at 31st December 2007 was valued at 19 600.
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3. the accounts receivable and accounts payable outstanding at the end of the year were 29 200 and 28 600 respectively. 4. at 31st December 2007 there are rates prepaid of 700 and electricity accrued of 450. 5. salaries outstanding amount to 1 000. 6. the following amounts had been paid from cash takings before they were banked Personal drawings Purchases Petrol Repairs to building 220 000 5 600 850 4 900
You are required to: Prepare an Income Statement for Fionas business for the year ending 31st December 2007 and a Balance Sheet as at that date. You should show all your workings clearly. [25 marks] QUESTION TWENTY-THREE (May 2009) [a] Pamela Welton owns a sole proprietor retailing business. When Pamela prepared the Trial Balance of her business for the year ending 31st March 2009, it failed to balance. Pamela opened a suspense account for the difference. The Trial Balance totals, prior to opening the suspense account, were DR 288 130 and CR 304 710. Pamela subsequently discovered the following: i. A receipt from Julius Norwich, a debtor, had been correctly posted in the cash book but had been incorrectly posted to Julian Nortons debtor account. ii. A payment of 38 590 for the purchase of some new machinery and equipment had been posted as 35 890 to the machinery and equipment at cost account. iii. The petty cash book balance of 180 had been omitted from the Trial Balance. iv. Cheque totalling 7 350 paid in respect of maintenance and servicing of machinery was correctly entered in the business bank account but had been credited to the machinery and equipment at cost account. v. In recording a loan from the Midshires Bank plc, the cash received amounting in total to 111,000 was credited to the loan account as 110,000.
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You are required to: 1. Prepare the journal entries with brief narratives to correct the above errors. [8 marks] 2. Prepare the suspense account. [4 marks] [b] Ian Holm operates a sole proprietor wholesaling business. Ian became very puzzled as to why the balance on the business bank account in the nominal ledger on 31st March 2009 of 3 655 overdrawn did not agree with the balance shown on the statement received by Ian from the bank a couple of days later. To try to find the answers, Ian discovered the following: i. A telephone account direct debit of 1 470 had not been posted in the business ledgers. ii. A cheque received from Tom Bouncer, a debtor, for 385 included in a lodgement made in February 2009 had been dishonoured by the bank. No entry had been made in the books of Ian Holms business for this dishonoured cheque. iii. A lodgement made by Ian in March 2009 for 17 650 had been incorrectly totalled. The correct lodgement as recorded by the bank was 17 560. A cheque written by Ian to the value of 3 859 had not yet been presented to the bank for payment by 31st March 2009. Lodgements at 31st March 2009 of 8 980 had not been recorded by either the bank or by Ian in the ledgers of his business. The bank had incorrectly charged Ian Holms business account with a payment of 2 590. Bank charges of 380 had not been posted in the books of Ian Holms business.
iv.
v.
vi.
vii.
You are required to: 1. Prepare the revised bank account in the nominal ledger of Ian Holms business. [7 marks] 2. Determine the balance on the bank statement at 31st March 2009 by preparing a bank reconciliation statement. [4 marks] 3. Prepare the Journal entry for item [ii] above. [2 marks] Total 25 marks
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QUESTION TWENTY-FOUR (May 2009) [a] Explain the following financial accounting concepts: i. Going concern ii. Prudence [6 marks] [b] How should a bad debt be treated in the final ac\counts of a business, and what is the Journal entry required to record a bad debt? [3 marks] [c] Identify and explain TWO reasons for using Control Accounts. [4 marks] [d] The balance on the Accounts payable Control Account in the general ledger of Wilmington Limited is 91 010 on 31st March 2009. On that date the total value of the list of balances on the suppliers personal accounts is 93 772. The following additional information is available to you: i. A credit balance of 334 on the account of Peter Preston Limited, a supplier, was listed as a debit balance. ii. A payment of 680 to Shetland Limited, a supplier, was recorded in the cheques issued day book as 860. iii. A payment of 35 000 was made to settle a balance of 35 170 owed to Wise and Company. The balance on the suppliers personal account was fully written off, but only the payment for 35 000 was entered in the general ledger. iv. Payments to Johnstone White Limited, a supplier, totalling 3 600 had been recorded in the general ledger, but no entries had been made in Johnstone White Limiteds personal account. v. No entries had been made in respect of an agreement to offset a credit balance amounting to 1 728 in the payables ledger against a debit balance in the receivables ledger. vi. A credit note received from Maximillian Limited, a supplier, for 532 was entered in the daybook as an invoice. vii. An invoice from eastern Engineering Limited, a supplier, for 1 478 had been omitted from the accounting records entirely. You are required to: 1. Prepare the payables control account including the necessary adjusting entries and the corrected balance. [6 marks] 2. Prepare the reconciliation of the list of balances to the corrected balance on the payables control account. [4 marks] 3. State the correct payables balance for inclusion in the final accounts of Wilmington Limited and where it would be found in those final accounts. [2 marks] Total 25 marks
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QUESTION TWENTY-FIVE (August 2009) [a] The following information is available for Brian Blesseds sole proprietor business. st Net business assets at 1 May 2008 651 000 Net business assets at 30th April 2008 959 000 During the year ended 30th April 2009 Brian made cash drawings amounting to 238 000 Brian introduced additional capital amounting to 175 000 Brian used a cash withdrawal from the business bank account to purchase a new car for his daughters 18th birthday amounting to 32 000 You are required to: Determine the amount of net profit achieved by Brian Blesseds business for the year ended 30th April 2009. Show your workings clearly. [4 marks] [b] At 1st May 2008 Wadhurst Limited had the following capital structure: Ordinary shares 3 500 000 shares at 50 pence each 1 750 000 Share premium account 1 400 000 In the year ended 30th April 2009, the company made the following share issues: 1st February 2009 A bonus issue of one new share for every four ordinary shares in issue at that date, using the share premium account. 1st March 2009 A rights issue of one share for every five shares in issue at that date at a rights price of 2.20 per share. You are required to: Determine what will be the balances at 30th April 2009 as a result of these share issues on Wadhurst Limiteds ordinary share capital account and share premium account. [6 marks] [c] At 30th Aprl 2008 the allowance for accounts receivables made by Marlon Limited was 136 500. At 30th April 2009 accounts receivable for Marlon Limited totalled 1 809 500. Based upon past events, the directors of Marlon Limited decided to write off debts totalling 129 500 and to adjust the allowance for receivables to the equivalent of 5% of the accounts receivables outstanding. You are required to: Determine what figure should appear in the Income statement of Marlon Limited for the year ending 30th April 2009 for the items relating to accounts receivable. [5 marks]
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[d] The Payables Ledger Control Account for Ablett Traders for the month of April 2009 contained a number of errors. Payables Ledger Control Account Opening balance 1 108 800 Purchases 4 440 100 Cash paid to suppliers 4 775 050 Contras against debit 168 000 balances in receivables Purchase returns 144 200 Discount received 28 700 Refunds received from 9 450 Closing balance 1 407 000 suppliers 6 043 800 6 043 800 All items relate to purchases made on credit terms. You are required to: Correct the above Payables Ledger Control Account and hence determine the correct closing balance figure. [5 marks] [e] At 30th April, the balance in the Cash Book of Wrighton Limited was 14 492.70 debit. The companys bank statement on that day showed a balance of 20 021.40 credit. The following information subsequently became available: i. The cash Book had been undercast by 1620.00 on the debit side ii. Cheques paid in by the company but not yet credited by the bank amounted to 3 747.60 iii. Cheques drawn by the company but not yet presented to the bank amounted to 7 656.30 You are required to: Prepare a statement reconciling the balance as per the bank statement to the corrected Cash Book balance. [5 marks] Total 25 marks QUESTION TWENTY-SIX (August 2009) [b] A review of data from a companys financial statements provides valuable information about its present financial position. However to form an opinion over its future well being, user groups will find it necessary to examine additional areas. i. Identify other relevant information which is likely to be available within a companys Annual Report and Accounts. Identify non-financial areas over which users would wish to obtain and review appropriate information. [9 marks]
ii.
University of Greenwich Business School Introduction to Financial Accounting Revision materials for May 2011 examination SOLUTION ONE Workings: Depreciation on property 2 400 000 x 0.02 = 48 000 Vehicles 1 200 000 x 0.2 = 240 000
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[1 mark] Preference dividend due 300 000 x 0.05 = 15 000 [1 mark] Interest due 180 000 x 0.1 = 18 000 [1 mark] Notes to accounts Non-current assets Cost 000 2 400 1 200 3 600 Acc. Depr. 000 468 690 1 158 Nbv 000 1 932 510 2 442 [2 marks] Income Statement for Gratis plc for the year ending 31st March 2008 [1 mark] 000 Turnover 3 750 Cost of sales [1 200] Gross profit 2 550 1 mark Administrative expenses [648] Distribution expenses [690] Operating profit 1 212 2 marks Net interest [18] 1 194 Taxation charge for year [282] 2 marks Operating profit for year after tax 912 Preference dividend due [15] Ordinary dividend paid [150] 1 mark Net profit for year 747 1 mark Balance Sheet for Gratis plc as at 31st March 2008 [1 mark] 000 Non current assets Tangible assets Property, plant & equipment Intangible assets Goodwill Current assets Inventory Accounts receivable Cash at bank Total assets Financed by Issued share capital 1 ordinary shares 1 preference shares Share premium Revaluation reserve General reserve 000
Property vehicles
2 442 150 2 692 60 300 66 436 3 018 2 marks
2 marks
1 350 300 75 90 75

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University of Greenwich Business School Introduction to Financial Accounting Revision materials for May 2011 examination

8 640 6 000 1 200 2 400 12 000 5 280 11 040 2 880

500 200 760

880 200 1 180

100 40 50 90 280 1 040 500 200 100 160

80 90 60 105 335 1 515 600 310 300 220

Current liabilities Payables Accrued expenses Taxation due Dividends due

1 600 6 400 1 600 4 800

1 600 7 400 2 100 16 160

9 600 1 280 5 120 4 800 Nil 36 160

16 000 1 600 8 320 9 600 24 420 88 400

33 600 51 360 nil 84 960 440 160

21 840 30 000 11 040 62 880 374 880

Balance b/d Additions

Disposals Balance c/d

000 36 000 267 000 303 000

24th April 28th April 30th April

Bought 8 benches at cost 62 each Sold 4 benches Sold 3 benches

Total 470 000 144 656

Cost per item 145 150 155

Selling price per item 205 220

47 500 1 500 3 750 20 500

130 000 20 500

150 500 190 500

92 500 7 000 37 500 30 500 7 250 1 250 1 500

177 500 13 000

2 442 150 2 692 60 300 66 436 3 018 2 marks

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