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Contents
Page
Finding questions
Question index ..............................................................................................................................v
Topic index ................................................................................................................................ viii
Helping you with your revision......................................................................................................... x
Using your BPP Practice & Revision Kit........................................................................................... xi
Passing the F3/FFA exam ............................................................................................................. xii
Approach to examining the syllabus ............................................................................................... xii
Tackling Multiple Choice Questions............................................................................................... xiii
Using your BPP products..............................................................................................................xiv
Questions and answers
Questions .................................................................................................................................... 3
Answers .................................................................................................................................. 171
Exam practice
Mock exam 1 – Specimen Exam June 2014
Questions......................................................................................................................... 239
Answers........................................................................................................................... 253
ACCA’s exam answers to Specimen Exam June 2014................................................................... 261
Mock exam 2
Questions......................................................................................................................... 271
Answers........................................................................................................................... 285
Review form
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F3/FFA FOUNDATIONS OF FINANCIAL ACCOUNTING
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QUESTION INDEX
v
Question index
Time
allocation Page
Marks Mins Question Answer
Part A: The context and purpose of financial reporting
The context and purpose of financial reporting
Questions 1.1 to 1.14 28 34 5 171
Part B: The qualitative characteristics of financial information
The qualitative characteristics of financial information
Questions 2.1 to 2.13 26 31 11 171
Part C: The use of double entry and accounting systems
Double entry bookkeeping
Questions 3.1 to 3.19 38 46 17 172
Questions 4.1 to 4.18 36 43 20 173
Part D: Recording transactions and events
Sales tax
Questions 5.1 to 5.8 16 19 27 175
Inventory
Questions 6.1 to 6.19 38 46 28 176
Tangible non-current assets
Questions 7.1 to 7.19 38 46 34 178
Questions 8.1 to 8.20 40 48 39 180
Intangible non-current assets
Questions 9.1 to 9.14 28 34 43 182
Accruals and prepayments
Questions 10.1 to 10.14 28 34 47 183
Receivables and payables
Questions 11.1 to 11.20 40 48 51 185
Provisions and contingencies
Questions 12.1 to 12.13 26 31 55 187
Capital structure and finance costs
Questions 13.1 to 13.13 26 31 58 188
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F3/FFA FOUNDATIONS OF FINANCIAL ACCOUNTING
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Time
allocation Page
Marks Mins Question Answer
Part E: Preparing a trial balance
15 mark question: trial balance
Question 14.1 15 18 65 189
Control accounts
Questions 15.1 to 15.20 40 48 66 190
Bank reconciliations
Questions 16.1 to 16.15 30 36 71 193
Correction of errors
Questions 17.1 to 17.17 34 41 75 194
Suspense accounts
Questions 18.1 to 18.10 20 24 80 196
Part F: Preparing basic financial statements
15 mark questions: preparing basic financial statements
Questions 19.1 to 19.7 105 126 85 197
Incomplete records
Questions 20.1 to 20.16 32 38 93 206
Company financial statements
Questions 21.1 to 21.10 20 24 97 208
Disclosure notes
Questions 22.1 to 22.9 18 22 100 208
Events after the reporting period
Questions 23.1 to 23.9 18 22 102 209
Statements of cash flows
Questions 24.1 to 24.20 40 48 105 209
Part G: Preparing simple consolidated financial statements
15 mark questions: preparing simple consolidated financial
statements
Questions 25.1 to 25.4 60 72 113 211
Consolidated financial statements
Questions 26.1 to 26.27 54 65 116 217
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QUESTION INDEX
vii
Time
allocation Page
Marks Mins Question Answer
Part H: Interpretation of financial statements
15 mark question: interpretation of financial statements
Question 27.1 15 18 127 220
Interpretation of financial statements
Questions 28.1 to 28.11 22 26 128 221
Mixed banks
Mixed bank 1: Questions 29.1 to 29.19 38 46 130 222
Mixed bank 2: Questions 30.1 to 30.20 40 48 136 223
Mixed bank 3: Questions 31.1 to 31.19 38 46 142 226
Mixed bank 4: Questions 32.1 to 32.18 36 43 147 228
Mixed bank 5: Questions 33.1 to 33.20 40 48 153 230
Mixed bank 6: Questions 34.1 to 34.18 36 43 158 232
Mixed bank 7: Questions 35.1 to 35.18 36 43 163 233
Mock exams
Mock exam 1 (Specimen Exam June 2014) 100 120 239 253
Mock exam 2 100 120 271 285
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F3/FFA FOUNDATIONS OF FINANCIAL ACCOUNTING
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Topic Index
Listed below are the key F3/FFA syllabus topics and the numbers of the questions in this Kit covering
those topics.
If you need to concentrate your practice and revision on certain topics or if you want to attempt all
available questions that refer to a particular subject, you will find this index useful.
Syllabus topic Question numbers
Analytical procedures 52, 89, 90, 91
Audit documentation 28, 29
Audit evidence 17, 18, 74, 99
Audit planning 8, 9, 18, 26, 30
Audit procedures 78, 79, 88, 101
Audit reports (+ auditor’s opinion) 111, 112, 113, 114, 115, 116, 117, 118, 119, 120
Audit risk 11, 12, 13, 14, 15
Audit software 24, 25
Audit strategy 34
Auditor’s responsibilities 5, 6, 97, 98
Bank confirmation letter 88, 96
CAATs 22, 23, 24, 25, 103
Code of Ethics 2,4
Control environment 37, 38, 54
Estimates 76, 77
Ethics 2, 4, 97
Experts 16
Deficiencies in internal control 45
Financial statement assertions 75, 100, 102
Going concern 107, 108, 109
Independence 28
Inherent risk 10, 36, 68
Internal controls 39, 40, 41, 67, 69, 70, 71
Inventory 48, 49, 50, 80, 81, 82, 83, 84
Letter of representation 110, 117
Materiality 19, 20
Non-current assets 60, 66, 92, 95, 61
Objectivity 3
Payables 87, 104
Procurement 55
Provisions 93, 94
Purchases controls 51, 52, 53, 55, 56
Questionnaires 65
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TOPIC INDEX
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Syllabus topic Question numbers
Receivables 85, 86, 94
Risk-based approach 14, 15, 43
Sales controls 42, 44, 45, 46, 47
Sampling 19, 31, 33
Segregation of duties 72
Subsequent events 106
Third party confirmations 88, 106
Threats 3, 28, 69
Understanding the entity 27, 32
Wages system 57, 58, 59, 62, 63, 64
Working papers 28, 29
Working papers review 109
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F3/FFA FOUNDATIONS OF FINANCIAL ACCOUNTING
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Helping you with your revision
BPP Learning Media – ACCA Approved Content Provider
As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use revision
materials reviewed by the ACCA examination team. By incorporating the ACCA examination team’s
comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP Learning
Media Practice & Revision Kit provides excellent, ACCA-approved support for your revision.
Selecting questions
We provide signposts to help you plan your revision.
A full question index
A topic index listing questions that cover each part of the syllabus, so that you can locate the
questions that provide practice on key topics, and see the different ways in which they might be
tested.
Attempting mock exams
There are two mock exams that provide practice at coping with the pressures of the exam day. We
strongly recommend that you attempt them under exam conditions. Mock exam 1 is the Specimen Exam
June 2014. Mock exam 2 reflects the question styles and syllabus coverage of the exam.
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USING YOUR BPP PRACTICE AND REVISION KIT
xi
Using your BPP Practice & Revision Kit
Aim of this Practice & Revision Kit
To provide the practice to help you succeed in the examination for F3/FFA Financial Accounting.
To pass the examination you need a thorough understanding in all areas covered by the syllabus and
teaching guide.
Recommended approach
Make sure you are able to answer questions on everything specified by the syllabus and teaching
guide. You cannot make any assumptions about what questions may come up on your paper. The
examination team aims to discourage 'question spotting'.
Learning is an active process. Use the DO YOU KNOW? Checklists to test your knowledge and
understanding of the topics covered in F3/FFA Financial Accounting by filling in the blank
spaces. Then check your answers against the DID YOU KNOW? Checklists. Do not attempt any
questions if you are unable to fill in any of the blanks – go back to your BPP Interactive Text and
revise first.
When you are revising a topic, think about the mistakes that you know that you should avoid by
writing down POSSIBLE PITFALLS at the end of each DO YOU KNOW? Checklist.
Once you have completed the checklists successfully, you should attempt the questions on that
topic. Each section has a selection of MULTIPLE CHOICE QUESTIONS and COMPULSORY
WRITTEN QUESTIONS. Make good use of the HELPING HANDS provided to help you answer
the questions.
There is a mark allocation for each compulsory written question. Each mark carries with it a time
allocation of 1.2 minutes (including time for selecting and reading questions). A 10 mark
question should therefore be completed in 12 minutes.
Twenty percent of the exam consists of Multiple Choice Questions. You should attempt each
bank of MCQs to ensure you are familiar with their styles and to practise your technique. Ensure
you read Tackling Multiple Choice Questions on page xiii to get advice on how best to approach
them.
Once you have completed all of the questions in the body of this Practice & Revision Kit, you
should attempt the MOCK EXAMS under examination conditions. Check your answers against our
answers to find out how well you did.
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F3/FFA FOUNDATIONS OF FINANCIAL ACCOUNTING
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Passing the F3/FFA exam
Paper F3/FFA aims to develop your knowledge and understanding of the underlying principles, concepts
and regulations relating to financial accounting. You will need to demonstrate technical proficiency in the
use of double entry techniques, including the preparation of basic financial statements for incorporated
and unincorporated entities, as well as simple consolidated financial statements for group incorporated
entities. You also need to be able to conduct a basic interpretation of financial statements. If you plan to
progress through the ACCA qualification, the skills you learn at F3/FFA will be built upon in papers F7
and P2.
To access Foundations in Accountancy syllabuses, visit the ACCA website
www2.accaglobal.com/students/fia
The exam
You can take this exam as a paper based exam or by computer based exam. All questions in the exam
are compulsory. This means you cannot avoid any topic, but also means that you do not need to waste
time in the exam deciding which questions to attempt. There are thirty-five MCQs in the paper-based
exam and a mixture of MCQs and other types of objective test question (number entry, multiple response
and multiple response matching) in the CBE. This means that the examiner is able to test most of the
syllabus at each sitting, so you need to have revised right across the syllabus for this exam.
Revision
This Practice and Revision kit has been reviewed by the F3/FFA examining team and contains the
Specimen exam June 2014, so if you just worked through it to the end you would be very well prepared
for the exam. It is important to tackle questions under exam conditions. Allow yourself just the number
of minutes shown next to the questions in the index and don’t look at the answers until you have
finished. Then correct your answer and go back to the Interactive Text for any topic you are really having
trouble with. Try the same question again a week later – you will be surprised how much better you are
getting. Doing the questions like this will really show you what you know, and will make the exam
experience less worrying.
Doing the exam
If you have honestly done your revision you can pass this exam. There are a couple of points to bear in
mind:
Read the question properly.
Don’t spend more than the allotted time on each question. If you are having trouble with a
question leave it and carry on. You can come back to it at the end.
Approach to examining the syllabus
F3/FFA is a two-hour paper. It can be taken as a paper based or a computer based exam.
The exam is structured as follows:
No of marks
Section A – 35 compulsory objective test questions of 2 marks each 70
Section B – 2 compulsory multi-part questions of 15 marks each 30
100
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TACKLING MULTIPLE CHOICE QUESTIONS
xiii
Tackling Multiple Choice Questions
MCQs are part of all Foundations in Accountancy exams and the first three ACCA exams (F1, F2 and
F3). MCQs may feature in the CBE, along with other types of question.
The MCQs in your exam contain four possible answers. You have to choose the option that best
answers the question. The three incorrect options are called distracters. There is a skill in answering
MCQs quickly and correctly. By practising MCQs you can develop this skill, giving you a better chance of
passing the exam.
You may wish to follow the approach outlined below, or you may prefer to adapt it.
Step 1 Skim read all the MCQs and identify what appear to be the easier questions.
Step 2 Attempt each question – starting with the easier questions identified in Step 1. Read
the question thoroughly. You may prefer to work out the answer before looking at the
options, or you may prefer to look at the options at the beginning. Adopt the method
that works best for you.
Step 3 Read the four options and see if one matches your own answer. Be careful with
numerical questions as the distracters are designed to match answers that incorporate
common errors. Check that your calculation is correct. Have you followed the
requirement exactly? Have you included every stage of the calculation?
Step 4 You may find that none of the options matches your answer.
Re-read the question to ensure that you understand it and are answering the
requirement
Eliminate any obviously wrong answers
Consider which of the remaining answers is the most likely to be correct and
select the option
Step 5 If you are still unsure make a note and continue to the next question
Step 6 Revisit unanswered questions. When you come back to a question after a break you
often find you are able to answer it correctly straight away. If you are still unsure have a
guess. You are not penalised for incorrect answers, so never leave a question
unanswered!
After extensive practice and revision of MCQs, you may find that you recognise a question when you sit
the exam. Be aware that the detail and/or requirement may be different. If the question seems familiar
read the requirement and options carefully – do not assume that it is identical.
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F3/FFA FOUNDATIONS OF FINANCIAL ACCOUNTING
xiv
Using your BPP products
This Kit gives you the question practice and guidance you need in the exam. Our other products can also help
you pass:
Interactive Text introduces and explains the knowledge required for your exam
Passcards provide you with clear topic summaries and exam tips
You can purchase these products by visiting www.bpp.com/learningmedia.
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Questions
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F3/FFA FINANCIAL ACCOUNTING
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QUESTIONS
3
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
F……..…… r ……..… is a way of recording, analysing and summarising financial data.
Businesses of whatever size or nature exist to make a ………….
P………….. is the excess of ……………… over expenditure. When e…………… exceeds
………………… the business is running at a l…….
A s……… t…………… is a business owned and run by one individual, perhaps employing one or two
assistants and controlling their work.
L ……… l………… status means that the business's debts and the personal debts of the business's
owners (shareholders) are legally separate.
………………… are arrangements between individuals to carry on business in common with a view to
profit. Partnerships are governed by a ………………… …………….
Financial accounting is mainly a method of reporting the …………..… and ………....… of a business.
Financial accounts provide ………… information.
There are various groups of people who need ………………. about the activities of a business.
Those charged with g……………… of a company are responsible for the preparation of the financial
statements.
The statement of financial position is simply a list of all the a………… owned and all the l……………
owed by a business as at a particular date.
An ……… is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
A ………….... is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
E…………. is the residual interest in the assets of the entity after deducting all its liabilities.
A statement of profit or loss is a record of ………………… generated and ………………… incurred over
a given period.
Accounting standards were developed to try to address s……………y
The IASB develops …………… …….……. …….……. …….…….
The main objectives of the IFRS Foundation are to:
– …………. a single set of high quality, understandable, enforceable and globally accepted I…..
through its standard-setting body, the I……
– Promote the …...… and rigours application of those standards
– Take account of the financial reporting needs of emerging economies and ……… and ………….
………. entities
– Bring about c……………… of national accounting standards and IFRSs to high quality solutions.
Do you know? – The context and purpose of financial reporting
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F3/FFA FINANCIAL ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Financial reporting is a way of recording, analysing and summarising financial data.
For-profit entities of whatever size or nature exist to make a profit.
Not-for-profit entities exist for the achievement of specific objectives rather than to make a profit.
Profit is the excess of income over expenditure. When expenditure exceeds revenue, the business is
running at a loss.
A sole tradership is a business owned and run by one individual, perhaps employing one or two
assistants and controlling their work.
Limited liability status means that the business's debts and the personal debts of the business's owners
(shareholders) are legally separate.
Partnerships are arrangements between individuals to carry on business in common with a view to
profit. Partnerships are governed by a partnership agreement.
Financial accounting is mainly a method of reporting the financial performance and financial position of
a business. Financial accounts provide historical information.
There are various groups of people who need information about the activities of a business.
Those charged with governance of a company are responsible for the preparation of the financial
statements.
The statement of financial position is simply a list of all the assets owned and all the liabilities owed by
a business as at a particular date.
An asset is a resource controlled by an entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.
Equity is the residual interest in the assets of the entity after deducting all its liabilities.
A statement of profit or loss is a record of income generated and expenditure incurred over a given
period.
Accounting standards were developed to try to address subjectivity.
The IASB develops International Financial Reporting Standards (IFRSs).
The main objectives of the IFRS Foundation are to:
– Develop a single set of high quality, understandable, enforceable and globally accepted
international financial reporting standards (IFRSs) through its standard-setting body, the IASB
– Promote the use and rigorous application of those standards
– Take account of the financial reporting needs of emerging economies and small and mediumsized
entities (SMEs)
– Bring about convergence of national accounting standards and IFRSs to high quality solutions.
Did you know? – The context and purpose of financial reporting
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QUESTIONS
5
1 The context and purpose of financial reporting 34 mins
1.1 Who issues International Financial Reporting Standards?
A The IFRS Advisory Committee
B The stock exchange
C The International Accounting Standards Board
D The government (2 marks)
1.2 Which groups of people are most likely to be interested in the financial statements of a sole trader?
1 Shareholders of the company
2 The business’s bank manager
3 The tax authorities
4 Financial analysts
A 1 and 2 only
B 2 and 3 only
C 2, 3 and 4 only
D 1, 2 and 3 only (2 marks)
1.3 Which of the following statements is/are true?
1 A supplier of goods on credit is interested only in the statement of financial position, ie an
indication of the current state of affairs.
2 The objective of financial statements is to provide information about the financial position,
performance and changes in financial position of an entity that is useful to a wide range of users
in making economic decisions.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2 (2 marks)
1.4 Which of the following are advantages of trading as a limited liability company?
1 Operating as a limited liability company makes raising finance easier because additional shares
can be issued to raise additional cash.
2 Operating as a limited liability company is more risky than operating as a sole trader because the
shareholders of a business are liable for all the debts of the business whereas the sole trader is
only liable for the debts up to the amount he has invested.
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2 (2 marks)
1.5 Which of the following best describes corporate governance?
A Corporate governance is the system of rules and regulations surrounding financial reporting.
B Corporate governance is the system by which companies and other entities are directed and
controlled.
C Corporate governance is carried out by the finance department in preparing the financial
statements.
D Corporate governance is the system by which an entity monitors its impact on the natural
environment. (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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1.6 Which of the following statements is/are true?
1 The directors of a company are ultimately responsible for the preparation of financial statements,
even if the majority of the work on them is performed by the finance department.
2 If financial statements are audited, then the responsibility for those financial statements instead
falls on the auditors instead of the directors.
3 There are generally no laws surrounding the duties of directors in managing the affairs of a
company.
A 1 only
B 1 and 2 only
C 1, 2 and 3
D 1 and 3 only (2 marks)
1.7 Which ONE of the following statements correctly describes the contents of the Statement of Financial
Position?
A A list of ledger balances shown in debit and credit columns
B A list of all the assets owned and all the liabilities owed by a business
C A record of income generated and expenditure incurred over a given period
D A record of the amount of cash generated and used by a company in a given period
(2 marks)
1.8 Which ONE of the following statements correctly describes the contents of the Statement of Profit or
Loss?
A A list of ledger balances shown in debit and credit columns
B A list of all the assets owned and all the liabilities owed by a business
C A record of income generated and expenditure incurred over a given period
D A record of the amount of cash generated and used by a company in a given period
(2 marks)
1.9 Which of the following are TRUE of partnerships?
1 The partners’ individual exposure to debt is limited.
2 Financial statements for the partnership by law must be produced and made public.
3 A partnership is not a separate legal entity from the partners themselves.
A 1 and 2 only
B 2 only
C 3 only
D 1 and 3 only (2 marks)
1.10 Which of the following statements is/are true?
1 Directors of companies have a duty of care to show reasonable competence in their management
of the affairs of a company.
2 Directors of companies must act honestly in what they consider to be the best interest of the
company.
3 A Director’s main aim should be to create wealth for the shareholders of the company.
A 1 and 2 only
B 2 only
C 1, 2 and 3
D 1 and 3 only (2 marks)
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QUESTIONS
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1.11 Which of the following statements is/are true?
1 The IFRS Interpretations Committee is a forum for the IASB to consult with the outside world.
2 The IFRS Foundation produces IFRSs. The IFRS Foundation is overseen by the IASB.
3 One of the objectives of the IFRS Foundation is to bring about convergence of national accounting
standards and IFRSs.
A 1 and 3 only
B 2 only
C 2 and 3 only
D 3 only (2 marks)
1.12 What is the role of the IASB?
A Oversee the standard setting and regulatory process
B Formulate international financial reporting standards
C Review defective accounts
D Control the accountancy profession (2 marks)
1.13 Which ONE of the following is NOT an objective of the IFRS Foundation?
A Through the IASB, develop a single set of globally accepted International Financial Reporting
Standards (IFRSs)
B Promote the use and rigorous application of International Financial Reporting Standards (IFRSs)
C Ensure International Financial Reporting Standards (IFRSs) focus primarily on the needs of
global, multi-national organisations
D Bring about the convergence of national accounting standards and IFRSs (2 marks)
1.14 Which ONE of the following statements correctly describes how International Financial Reporting
Standards (IFRSs) should be used?
A To provide examples of best financial reporting practice for national bodies who develop their own
requirements
B To ensure high ethical standards are maintained by financial reporting professionals
internationally
C To facilitate the enforcement of a single set of global financial reporting standards
D To prevent national bodies from developing their own financial reporting standards
(2 marks)
(Total = 28 marks)
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F3/FFA FINANCIAL ACCOUNTING
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QUESTIONS
9
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
In preparing financial statements, accountants follow certain fundamental a………………
The IASB's C………..l f……………k provides the basis for its IFRSs.
The main underlying assumption is ………. ……….
The Conceptual framework states that ………………… characteristics are the attributes that make the
information provided in financial statements useful to users.
The four enhancing qualitative characteristics are …………………, …………………, …………………
and …………………..
Other important qualitative characteristics and concepts include fair …………………, c………………
and the business …………… concept.
A …………… …… between qualitative characteristics is often necessary, the aim being to achieve an
appropriate balance to meet the objective of financial statements.
Do you know? – The qualitative characteristics of financial information
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F3/FFA FINANCIAL ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
In preparing financial statements, accountants follow certain fundamental assumptions.
The IASB's Conceptual framework provides the basis for its IFRSs.
The main underlying assumption is going concern.
The Conceptual framework states that qualitative characteristics are the attributes that make the
information provided in financial statements useful to users.
The four enhancing qualitative characteristics are understandability, verifiability, timeliness and
comparability.
Other important qualitative characteristics and concepts include fair presentation, consistency and the
business entity concept.
A trade off between qualitative characteristics is often necessary, the aim being to achieve an
appropriate balance to meet the objective of financial statements.
Did you know? – The qualitative characteristics of financial information
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QUESTIONS
11
2 The qualitative characteristics of financial information 31 mins
2.1 Which accounting concept should be considered if the owner of a business takes goods from inventory
for his own personal use?
A The fair presentation concept
B The accruals concept
C The going concern concept
D The business entity concept (2 marks)
2.2 Sales revenue should be recognised when goods and services have been supplied; costs are incurred
when goods and services have been received.
Which accounting concept governs the above?
A The business entity concept
B The materiality concept
C The accruals concept
D The duality concept (2 marks)
2.3 Which accounting concept states that omitting or misstating this information could influence users of the
financial statements?
A The consistency concept
B The accruals concept
C The materiality concept
D The going concern concept (2 marks)
2.4 According to the IASB's Conceptual Framework for Financial Reporting, which TWO of the following are
part of faithful representation?
1 It is neutral
2 It is relevant
3 It is presented fairly
4 It is free from material error
A 1 and 2
B 2 and 3
C 1 and 4
D 3 and 4 (2 marks)
2.5 Which of the following accounting concepts means that similar items should receive a similar accounting
treatment?
A Going concern
B Accruals
C Matching
D Consistency (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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2.6 Listed below are some characteristics of financial information.
1 Relevance
2 Consistency
3 Faithful representation
4 Accuracy
Which of these are qualitative characteristics of financial information according to the IASB's Conceptual
Framework for Financial Reporting?
A 1 and 2 only
B 2 and 4 only
C 3 and 4 only
D 1 and 3 only (2 marks)
2.7 Which ONE of the following statements describes faithful representation, a qualitative characteristic of
faithful representation?
A Revenue earned must be matched against the expenditure incurred in earning it.
B Having information available to decision-makers in time to be capable of influencing their
decisions.
C The presentation and classification of items in the financial statements should stay the same from
one period to the next.
D Financial information should be complete, neutral and free from error (2 marks)
2.8 Listed below are some comments on accounting concepts.
1 Financial statements always treat the business as a separate entity.
2 Materiality means that only items having a physical existence may be recognised as assets.
3 Provisions are estimates and therefore can be altered to make the financial results of a business
more attractive to investors.
Which, if any, of these comments is correct, according to the IASB's Conceptual Framework for
Financial Reporting?
A 1 only
B 2 only
C 3 only
D None of them (2 marks)
2.9 Which of the following statements about accounting concepts and the characteristics of financial
information are correct?
1 The concept of accruals requires transactions to be reflected in the financial statements once the
cash or its equivalent is received or paid.
2 Information is material if its omission or misstatement could influence the economic decisions of
users taken on the basis of the financial statements.
3 Based on faithful representation, it may sometimes be necessary to exclude material information
from financial statements due to difficulties establishing an accurate figure.
A 1 only
B 1 and 2 only
C 2 only
D 2 and 3 only (2 marks)
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QUESTIONS
13
2.10 The IASB's Conceptual Framework for Financial Reporting gives six qualitative characteristics of
financial information. What are these six characteristics?
A Relevance, Faithful representation, Comparability, Verifiability, Timeliness and Understandability
B Accuracy, Faithful representation, Comparability, Verifiability, Timeliness and Understandability
C Relevance, Faithful representation, Consistency, Verifiability, Timeliness and Understandability
D Relevance, Comparability, Consistency, Verifiability, Timeliness and Understandability
(2 marks)
2.11 Which one of the following is not a qualitative characteristic of financial information according to the
Conceptual framework for Financial Reporting?
A Faithful representation
B Relevance
C Timeliness
D Accruals (2 marks)
2.12 According to the IASB Conceptual framework which of the following is not an objective of financial
statements?
A Providing information regarding the financial position of a business
B Providing information regarding the performance of a business
C Enabling users to assess the performance of management to aid decision making
D Providing reliable investment advice (2 marks)
2.13 Which of the following statements about accounting concepts and policies is/are correct?
1 Companies should never change the presentation or classification of items in their financial
statements, even if there is a significant change in the nature of operations.
2 Companies should create provisions in times of company growth to be utilised in more difficult
times, to smooth profits.
A 1 only
B 2 only
C 1 and 2
D Both are incorrect (2 marks)
(Total = 26 marks)
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F3/FFA FINANCIAL ACCOUNTING
14
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QUESTIONS
15
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
Business transactions are recorded on s………. d……………. Examples include sales and purchase
orders, ……….. and ……….. ………..
Books of ……….. ……….. are books in which we first record transactions.
The main books of prime entry are:
(a) ……… day book
(b) ……… day book
(c) ……… ……… day book
(d) ……… ……… day book
(e) J………l
(f) ……… book
(g) ……… ……… book
Entries in the ……… ……… are totalled and analysed before posting to the n……… ledger.
The ………..……….. and ………..……….. ledgers contain the personal accounts of individual
customers and suppliers. They do not normally form part of the double-entry system.
The b……….. e……… concept means that a business is always treated separately from its owner(s).
The accounting equation is: ………… = ……… + LIABILITIES – ……….. + PROFIT
Trade accounts payable are l………. Trade accounts receivable are a……….
In double entry bookkeeping every transaction is recorded ……… so that every ……… is balanced by a
……….
A debit entry will:
– ……… an asset
– ……… a liability
– ……… an expense
A credit entry will:
– ……… an asset
– ……… a liability
– ……… income
A trial balance can be used to test the ……… of the double entry accounting records.
A ……… and ……… ledger account is opened up to gather all items relating to income and expenses.
When rearranged, the items make up the …………………………………
Do you know? – The use of double entry and accounting systems
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F3/FFA FINANCIAL ACCOUNTING
16
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Business transactions are recorded on source documents. Examples include sales and purchase orders,
invoices and credit notes.
Books of prime entry are books in which we first record transactions.
The main books of prime entry are:
(a) Sales day book
(b) Purchase day book
(c) Sales returns day book
(d) Purchase returns day book
(e) Journal
(f) Cash book
(g) Petty cash book
Entries in the day books are totalled and analysed before posting to the nominal ledger.
The receivables and payables ledgers contain the personal accounts of individual customers and
suppliers. They do not normally form part of the double-entry system.
The business entity concept means that a business is always treated separately from its owner(s).
The accounting equation is: ASSETS = CAPITAL + LIABILITIES – DRAWINGS + PROFIT
Trade accounts payable are liabilities. Trade accounts receivable are assets.
In double entry bookkeeping every transaction is recorded twice so that every debit is balanced by a
credit.
A debit entry will:
Increase an asset
Decrease a liability
Increase an expense
A credit entry will:
Decrease an asset
Increase a liability
Increase income
A trial balance can be used to test the accuracy of the double entry accounting records.
A profit and loss ledger account is opened up to gather all items relating to income and expenses. When
rearranged, the items make up the statement of profit or loss
Did you know? – The use of double entry and accounting systems
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QUESTIONS
17
3 Double entry bookkeeping I 46 mins
3.1 Which one of the following can the accounting equation can be rewritten as?
A Assets + profit – drawings – liabilities = closing capital
B Assets – liabilities – drawings = opening capital + profit
C Assets – liabilities – opening capital + drawings = profit
D Assets – profit – drawings = closing capital – liabilities (2 marks)
3.2 A trader's net profit for the year may be computed by using which of the following formulae?
A Opening capital + drawings – capital introduced – closing capital
B Closing capital + drawings – capital introduced – opening capital
C Opening capital – drawings + capital introduced – closing capital
D Opening capital – drawings – capital introduced – closing capital (2 marks)
3.3 The profit earned by a business in 20X7 was $72,500. The proprietor injected new capital of $8,000
during the year and withdrew goods for his private use which had cost $2,200.
If net assets at the beginning of 20X7 were $101,700, what were the closing net assets?
A $35,000
B $39,400
C $168,400
D $180,000 (2 marks)
3.4 The profit made by a business in 20X7 was $35,400. The proprietor injected new capital of $10,200
during the year and withdrew a monthly salary of $500.
If net assets at the end of 20X7 were $95,100, what was the proprietor's capital at the beginning of the
year?
A $50,000
B $55,500
C $63,900
D $134,700 (2 marks)
3.5 A sole trader took some goods costing $800 from inventory for his own use. The normal selling price of
the goods is $1,600.
Which of the following journal entries would correctly record this?
Dr Cr
$ $
A Inventory account 800
Purchases account 800
B Drawings account 800
Purchases account 800
C Sales account 1,600
Drawings account 1,600
D Drawings account 800
Sales account 800 (2 marks)
3.6 A business can make a profit and yet have a reduction in its bank balance. Which ONE of the following
might cause this to happen?
A The sale of non-current assets at a loss
B The charging of depreciation in the statement of profit or loss
C The lengthening of the period of credit given to customers
D The lengthening of the period of credit taken from suppliers (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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3.7 The net assets of Altese, a trader, at 1 January 20X2 amounted to $128,000. During the year to
31 December 20X2 Altese introduced a further $50,000 of capital and made drawings of $48,000. At
31 December 20X2 Altese's net assets totalled $184,000.
What is Altese's total profit or loss for the year ended 31 December 20X2?
A $54,000 profit
B $54,000 loss
C $42,000 loss
D $58,000 profit (2 marks)
3.8 Jones Co has the following transactions:
1 Payment of $400 to J Bloggs for a cash purchase
2 Payment of $250 to J Doe in respect of an invoice for goods purchased last month
What are the correct ledger entries to record these transactions?
A Dr Cash $650
Cr Purchases $650
B Dr Purchases $650
Cr Cash $650
C Dr Purchases $400
Dr Trade Payables $250
Cr Cash $650
D Dr Cash $650
Cr Trade Payables $250
Cr Purchases $400 (2 marks)
3.9 T Tallon had the following transactions:
1 Sale of goods on credit for $150 to F Rogit
2 Return of goods from B Blendigg originally sold for $300 in cash to B Blendigg
What are the correct ledger entries to record these transactions?
A Dr Receivables $150
Dr Sales Returns $300
Cr Sales $150
Cr Cash $300
B Dr Sales $150
Dr Cash $300
Cr Receivables $150
Cr Sales Returns $300
C Dr Receivables $450
Cr Sales $150
Cr Sales Returns $300
D Dr Sales Returns $300
Dr Sales $150
Cr Cash $450 (2 marks)
3.10 Which of the following documents should accompany a return of goods to a supplier?
A Debit note
B Remittance advice
C Purchase invoice
D Credit note (2 marks)
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QUESTIONS
19
3.11 Which of the following are books of prime entry?
1 Sales day book
2 Cash book
3 Journal
4 Purchase ledger
A 1 and 2 only
B 1, 2 and 3 only
C 1 only
D All of them (2 marks)
3.12 In which book of prime entry will a business record debit notes in respect of goods which have been
sent back to suppliers?
A The sales returns day book
B The cash book
C The purchase returns day book
D The purchase day book (2 marks)
3.13 A company’s motor vehicles at cost account at 30 June 20X6 is as follows:
MOTOR VEHICLES – COST
$ $
Balance b/d 150,500 Disposal 85,000
Additions 120,950 Balance c/d 186,450
271,450 271,450
What opening balance should be included in the following period’s trial balance for motor vehicles – cost
at 1 July 20X6?
A $271,450 DR
B $271,450 DR
C $186,450 CR
D $186,450 DR (2 marks)
3.14 A company’s trade payables account at 30 September 20X1 is as follows:
TRADE PAYABLES ACCOUNT
$ $
Cash at bank 21,600 Balance b/d 14,000
Balance c/d 11,900 Purchases 19,500
33,500 33,500
What was the balance for trade payables in the trial balance at 1 October 20X0?
A $14,000 DR
B $14,000 CR
C $11,900 DR
D $11,900 CR (2 marks)
3.15 Which of the following would be recorded in the sales day book?
A Discounts allowed
B Sales invoices
C Credit notes received
D Trade discounts (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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3.16 Which of the following statements is true?
A A debit records an increase in liabilities.
B A debit records a decrease in assets.
C A credit records an increase in liabilities.
D A credit records an decrease in capital. (2 marks)
3.17 How is the total of the purchases day book posted to the nominal ledger?
A Debit purchases, Credit cash
B Debit payables control, Credit purchases
C Debit cash, Credit purchases
D Debit purchases, Credit payables control (2 marks)
3.18 Which one of the following statements about an imprest system of petty cash is correct?
A An imprest system for petty cash controls small cash expenditures because a fixed amount is paid
into petty cash at the beginning of each period.
B The imprest system provides a control over petty cash spending because the amount of cash held
in petty cash at any time must be equal to the value of the petty cash vouchers for the period.
C An imprest system for petty cash can operate without the need for petty cash vouchers or receipts
for spending.
D An imprest system for petty cash helps with management of small cash expenditures and reduces
the risk of fraud.
(2 marks)
3.19 Which one of the following provides evidence that an item of expenditure on petty cash has been
approved or authorised?
A Petty cash voucher
B Record of the transaction in the petty cash book
C Receipt for the expense
D Transfer of cash from the bank account into petty cash (2 marks)
(Total = 38 marks)
4 Double entry bookkeeping II 43 mins
The following information is relevant for questions 4.1 and 4.2.
On 1 May 20X9 Marshall's cash book showed a cash balance of $224 and an overdraft of $336. During the
week ended 6 May the following transactions took place.
May 1 Sold $160 of goods to P Dixon on credit.
May 1 Withdrew $50 of cash from the bank for business use.
May 2 Purchased goods from A Clarke on credit for $380 less 15% trade discount.
May 2 Repaid a debt of $120 owing to R Hill, taking advantage of a 10% cash discount. The
payment was by cheque.
May 3 Sold $45 of goods for cash.
May 4 Sold $80 of goods to M Maguire on credit, offering a 121/2% discount if payment made within
7 days.
May 4 Paid a telephone bill of $210 by cheque.
May 4 Purchased $400 of goods on credit from D Daley.
May 5 Received a cheque from H Larkin for $180. Larkin has taken advantage of a $20 cash
discount offered to him.
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QUESTIONS
21
May 5 Sold $304 of goods to M Donald on credit.
May 5 Purchased $135 of goods from Honour Co by cheque.
May 6 Received a cheque from D Randle for $482.
May 6 Purchased $100 of goods on credit from G Perkins.
4.1 What is the total of the sales day book?
A $544
B $589
C $534
D $579 (2 marks)
4.2 What is the total of the purchases day book?
A $880
B $823
C $1,033
D $958 (2 marks)
4.3 Smith Co has the following transactions:
1 Purchase of goods on credit from T Rader: $450
2 Return of goods purchased on credit last month to T Rouble: $700
What are the correct ledger entries to record these transactions?
A Dr Purchases $450
Dr Purchase Returns $700
Cr Cash $450
Cr Trade Payables $700
B Dr Purchases $450
Dr Trade Payables $700
Cr Purchase Returns $1,150
C Dr Purchases $450
Dr Trade Payables $250
Cr Purchase Returns $700
D Dr Purchase Returns $700
Dr Purchases $450
Cr Trade Payables $1,150 (2 marks)
4.4 Mew Ling has the following transactions:
1 Receipt of cash from R Singh in respect of an invoice for goods sold three weeks ago
2 Receipt of cash from S Kalu for cash sales
What are the ledger entries required to record the above transactions?
A Dr Cash
Cr Sales
B Dr Cash
Cr Sales
Cr Trade Receivables
C Dr Sales
Cr Cash
D Dr Trade Receivables
Dr Sales
Cr Cash (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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4.5 How is the total of the sales day book recorded in the nominal ledger?
Debit Credit
A Receivables Receivables
Ledger Control Account
B Receivables Receivables
Control Account Ledger
C Sales Receivables
Control Account
D Receivables Sales
Control Account (2 marks)
4.6 Are the following statements about debit entries true or false?
1 A debit entry in the cash book will increase an overdraft in the accounts.
2 A debit entry in the cash book will increase a bank balance in the accounts.
A Both true
B Both false
C 1 true and 2 false
D 1 false and 2 true (2 marks)
4.7 An accountant has inserted all the relevant figures into the trade payables account, but has not yet
balanced off the account.
TRADE PAYABLES ACCOUNT
$ $
Cash at bank 100,750 Balance b/d 250,225
Purchases 325,010
Assuming there are no other entries to be made, other than to balance off the account, what is the
closing balance on the trade payables account?
A $474,485 DR
B $575,235 DR
C $474,485 CR
D $575,235 CR (2 marks)
4.8 You are given the following information:
Receivables at 1 January 20X3 $10,000
Receivables at 31 December 20X3 $9,000
Total receipts during 20X3 (including cash sales of $5,000) $85,000
What are sales on credit during 20X3?
A $81,000
B $86,000
C $79,000
D $84,000 (2 marks)
4.9 A business sells $100 worth of goods to a customer, the customer pays $50 in cash immediately and
will pay the remaining $50 in 30 days' time.
What is the double entry to record the purchase in the customer’s accounting records?
A Debit cash $50, credit payables $50, credit purchases $50
B Debit payables $50, debit cash $50, credit purchases $100
C Debit purchases $100, credit payables $50, credit cash $50
D Debit purchases $100, credit cash $100 (2 marks)
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QUESTIONS
23
4.10 Tin Co purchases $250 worth of metal from Steel Co. Tin Co agrees to pay Steel Co in 60 days time.
What is the double entry to record the purchase in Steel Co’s books?
A Debit sales $250, credit receivables $250
B Debit purchases $250, credit payables $250
C Debit receivables $250, credit sales $250
D Debit payables $250, credit purchases $250 (2 marks)
4.11 The following totals appear in the day books for March 20X8.
$
Sales day book 40,000
Purchases day book 20,000
Returns inwards day book 2,000
Returns outward day book 4,000
Opening and closing inventories are both $3,000. What is the gross profit for March 20X8?
A $22,000
B $24,000
C $20,000
D $18,000 (2 marks)
4.12 William's trial balance at 30 September 20X5 includes the following balances:
Trade receivables $75,943
Receivables allowance $4,751
How should these balances be reported in William's statement of financial position as at 30 September
20X5?
A An asset of $71,192
B An asset of $75,943 and a liability of $4,751
C A liability of $71,192
D A liability of $75,943 and an asset of $4,751 (2 marks)
4.13 A trial balance is made up of a list of debit balances and credit balances.
Which of the following statements is correct?
A Every debit balance represents an expense.
B Assets are represented by debit balances.
C Liabilities are represented by debit balances.
D Income is included in the list of debit balances. (2 marks)
4.14 At 30 November 20X5 Jenny had a bank loan of $8,500 and a balance of $678 in hand in her bank
account.
How should these amounts be recorded on Jenny's opening trial balance at 1 December 20X5?
A Debit $7,822
B Credit $7,822
C Credit $8,500 and Debit $678
D Debit $8,500 and Credit $678 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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4.15 Bert has extracted the following list of balances from his general ledger at 31 October 20X5:
$
Sales 258,542
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets (carrying amount) 63,960
Receivables 31,746
Payables 13,864
Cash at bank 1,783
Capital 12,525
What is the total of the debit balances in Bert's trial balance at 31 October 20X5?
A $267,049
B $275,282
C $283,148
D $284,931 (2 marks)
4.16 At 31 October 20X6 Roger's trial balance included the following balances:
$
Machinery at cost 12,890
Accumulated depreciation 8,950
Inventory 5,754
Trade receivables 11,745
Trade payables 7,830
Bank overdraft 1,675
Cash at bank 150
What is the value of Roger's current assets at 31 October 20X6?
A $17,649
B $17,499
C $15,974
D $13,734 (2 marks)
4.17 Which ONE of the following statements does NOT describe a way in which an effective accounting
system facilitates the provision of useful accounting information?
A By requiring authorisation in line with organisational policies
B By processing and recording transactions in accordance with accounting rules
C By preventing transactions from being processed inaccurately
D By enabling transactions to be recorded as necessary to permit preparation of financial
statements (2 marks)
4.18 Which of the following statements is/are TRUE or FALSE?
1 Cash purchases are recorded in the purchases day book.
2 The sales day books is used to keep a list of invoices received from suppliers.
A Both statements are TRUE
B Both statements are FALSE
C Statement 1 is TRUE and statement 2 is FALSE
D Statement 1 is FALSE and statement 2 is TRUE (2 marks)
(Total = 36 marks)
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QUESTIONS
25
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
S……… t…… is an indirect tax levied on the sale of goods and services.
R……………… businesses charge ……………… sales tax on sales and suffer ……………… sales tax
on purchases.
The c…… of g…… s..…..is calculated as: Opening inventory + purchases – closing inventory.
Carriage ……………… is included in the cost of purchases. Carriage ……………… is a selling expense.
The value of inventories is calculated at the l……… of c……… and n…… r………… v……..
The cost of inventories can be arrived at by using ……………… or ………………
C……….. expenditure is expenditure which forms part of the cost of non-current assets. R………………
expenditure is expenditure incurred for the purpose of the trade or to maintain non current assets.
The …… of a non-current asset, less its estimated residual value, is allocated fairly between accounting
periods by means of d………………..
D……………… costs must be capitalised as an i……………… asset if the criteria in IAS 38 are
satisfied.
A……………… are expenses which relate to an accounting period but have not yet been paid for. They
are shown in the statement of financial position as a l……………….
P………………are expenses which have already been paid but relate to a future accounting period.
They are shown in the statement of financial position as an ……………….
I……………… debts are specific debts owed to a business which it decides are never going to be paid.
They are written off as an ……………… in the statement of profit or loss.
An ……………… in the allowance for receivables is shown as an expense in the statement of profit or
loss.
A provision should be recognised:
– When an entity has a p……… o…….……
– It is p……….. that a transfer of economic benefits will be required to settle it
– A r……… e……… can be made of its amount
A c……………… liability must not be recognised as a liability in the financial statements. Instead it
should be d………….. in the notes to the financial statements.
Do you know? – Recording transactions and events
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F3/FFA FINANCIAL ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Sales tax is an indirect tax levied on the sale of goods and services.
Registered businesses charge output sales tax on sales and suffer input sales tax on purchases.
The cost of goods sold is calculated as: Opening inventory + purchases – closing inventory.
Carriage inwards is included in the cost of purchases. Carriage outwards is a selling expense.
The value of inventories is calculated at the lower of cost and net realisable value.
The cost of inventories can be arrived at by using FIFO (first in-first out) or AVCO (weighted average
costing, both periodic weighted average and continuous weighted average).
Capital expenditure is expenditure which forms part of the cost of non-current assets. Revenue
expenditure is expenditure incurred for the purpose of the trade or to maintain non current assets.
The cost of a non-current asset, less its estimated residual value, is allocated fairly between accounting
periods by means of depreciation.
Development costs must be capitalised as an intangible asset if the criteria in IAS 38 are satisfied.
Accruals are expenses which relate to an accounting period but have not yet been paid for. They are
shown in the statement of financial position as a liability.
Prepayments are expenses which have already been paid but relate to a future accounting period. They
are shown in the statement of financial position as an asset.
Irrecoverable debts are specific debts owed to a business which it decides are never going to be paid.
They are written off as an expense in the statement of profit or loss.
An increase in the allowance for receivables is shown as an expense in the statement of profit or loss.
A provision should be recognised:
– When an entity has a present obligation
– It is probable that a transfer of economic benefits will be required to settle it
– A reliable estimate can be made of its amount
A contingent liability must not be recognised as a liability in the financial statements. Instead it should
be disclosed in the notes to the financial statements.
Did you know? – Recording transactions and events
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QUESTIONS
27
5 Sales tax 19 mins
5.1 W is registered for sales tax. The managing director has asked four staff in the accounts department why
the output tax for the last quarter does not equal 20% of sales (20% is the rate of tax). Which one of
the following four replies she received was not correct?
A The company had some exports that were not liable to sales tax.
B The company made some sales of zero-rated products.
C The company made some sales of exempt products.
D The company sold some products to businesses not registered for sales tax. (2 marks)
5.2 The following information relates to Eva Co's sales tax for the month of March 20X3:
$
Sales (including sales tax) 109,250
Purchases (net of sales tax) 64,000
Sales tax is charged at a flat rate of 15%. Eva Co's sales tax account showed an opening credit balance
of $4,540 at the beginning of the month and a closing debit balance of $2,720 at the end of the
month.
What was the total sales tax paid to regulatory authorities during the month of March 20X3?
A $6,470.00
B $11,910.00
C $14,047.50
D $13,162.17 (2 marks)
5.3 Alana is not registered for sales tax purposes. She has recently received an invoice for goods for resale
which cost $500 before sales tax, which is levied at 15%. The total value was therefore $575.
What is the correct entry to be made in Alana’s general ledger in respect of the invoice?
A Dr Purchases $500, Dr Sales tax $75, Cr Payables $575
B Dr Purchases $575, Cr Sales tax $75, Cr Payables $500
C Dr Purchases $500, Cr Payables $500
D Dr Purchases $575, Cr Payables $575 (2 marks)
5.4 Information relating to Lauren Co's transactions for the month of May 20X4 is shown below:
$
Sales (including sales tax) 140,000*
Purchases (net of sales tax) 65,000
Sales tax is charged at a flat rate of 20%. Lauren Co's sales tax account had a zero balance at the
beginning of the month and at the end of the month.
* Lauren Co's sales for the month of $140,000 included $20,000 of sales exempt from sales tax.
What was the total sales tax paid to regulatory authorities at the end of May 20X4 (to the nearest $)?
A $7,000
B $20,000
C $23,333
D $13,000 (2 marks)
5.5 A business commenced with capital in cash of $1,000. Inventory costing $800 plus sales tax is
purchased on credit, and half is sold for $1,000 plus sales tax, the customer paying in cash at once.
The sales tax rate is 20%.
What would the accounting equation after these transactions show?
A Assets $1,800 less Liabilities $200 equals Capital $1,600
B Assets $2,200 less Liabilities $1,000 equals Capital $1,200
C Assets $2,600 less Liabilities $800 equals Capital $1,800
D Assets $2,600 less Liabilities $1,000 equals Capital $1,600 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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5.6 Trade receivables and payables in the financial statements of a sales tax registered trader will appear as
described by which of the following?
A Inclusive of sales tax in the statement of financial position
B Exclusive of sales tax in the statement of financial position
C The sales tax is deducted and added to the sales tax account in the statement of financial
position
D Sales tax does not appear in the statement of financial position because the business simply acts
as a collector on behalf of the tax authorities (2 marks)
5.7 Which of the following correctly describe the entry in the sales account for a sale for a sales tax
registered trader?
A Credited with the total of sales made, including sales tax
B Credited with the total of sales made, excluding sales tax
C Debited with the total of sales made, including sales tax
D Debited with the total of sales made, excluding sales tax (2 marks)
5.8 Sales (including sales tax) amounted to $27,612.50, and purchases (excluding sales tax) amounted to
$18,000. What is the balance on the sales tax account, assuming all items are subject to sales tax at
17.5%?
A $962.50 debit
B $962.50 credit
C $1,682.10 debit
D $1,682.10 credit (2 marks)
(Total = 16 marks)
6 Inventory 46 mins
6.1 The inventory value for the financial statements of Global Co for the year ended 30 June 20X3 was
based on a inventory count on 7 July 20X3, which gave a total inventory value of $950,000.
Between 30 June and 7 July 20X6, the following transactions took place.
$
Purchase of goods 11,750
Sale of goods (mark up on cost at 15%) 14,950
Goods returned by Global Co to supplier 1,500
What figure should be included in the financial statements for inventories at 30 June 20X3?
A $952,750
B $949,750
C $926,750
D $958,950 (2 marks)
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QUESTIONS
29
6.2 Which of the following costs may be included when arriving at the cost of finished goods inventory for
inclusion in the financial statements of a manufacturing company?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 Finished goods storage costs
5 Factory supervisors' wages
A 1 and 5 only
B 2, 4 and 5 only
C 1, 3 and 5 only
D 1, 2, 3 and 4 only (2 marks)
6.3 The closing inventory at cost of a company at 31 January 20X3 amounted to $284,700.
The following items were included at cost in the total:
1 400 coats, which had cost $80 each and normally sold for $150 each. Owing to a defect in
manufacture, they were all sold after the reporting date at 50% of their normal price. Selling
expenses amounted to 5% of the proceeds.
2 800 skirts, which had cost $20 each. These too were found to be defective. Remedial work in
February 20X3 cost $5 per skirt, and selling expenses for the batch totalled $800. They were
sold for $28 each.
What should the inventory value be according to IAS 2 Inventories after considering the above items?
A $281,200
B $282,800
C $329,200
D None of these (2 marks)
6.4 A company values its inventory using the first in, first out (FIFO) method. At 1 May 20X2 the company
had 700 engines in inventory, valued at $190 each.
During the year ended 30 April 20X3 the following transactions took place:
20X2
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000
20X3
1 February Purchased 300 engines at $230 each
15 April Sold 250 engines for $125,000
What is the value of the company's closing inventory of engines at 30 April 20X3?
A $188,500
B $195,500
C $166,000
D None of these figures (2 marks)
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6.5 Which of the following statements about the valuation of inventory are correct, according to IAS 2
Inventories?
1 Inventory items are normally to be valued at the higher of cost and net realisable value.
2 The cost of goods manufactured by an entity will include materials and labour only. Overhead
costs cannot be included.
3 LIFO (last in, first out) cannot be used to value inventory.
4 Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable
approximation to actual cost.
A 1, 3 and 4 only
B 1 and 2 only
C 3 and 4 only
D None of the statements are correct (2 marks)
6.6 A company with an accounting date of 31 October carried out a physical check of inventory on
4 November 20X3, leading to an inventory value at cost at this date of $483,700.
Between 1 November 20X3 and 4 November 20X3 the following transactions took place:
1 Goods costing $38,400 were received from suppliers.
2 Goods that had cost $14,800 were sold for $20,000.
3 A customer returned, in good condition, some goods which had been sold to him in October for
$600 and which had cost $400.
4 The company returned goods that had cost $1,800 in October to the supplier, and received a
credit note for them.
What figure should appear in the company's financial statements at 31 October 20X3 for closing
inventory, based on this information?
A $458,700
B $505,900
C $508,700
D $461,500 (2 marks)
6.7 In preparing its financial statements for the current year, a company's closing inventory was understated
by $300,000.
What will be the effect of this error if it remains uncorrected?
A The current year's profit will be overstated and next year's profit will be understated.
B The current year's profit will be understated but there will be no effect on next year's profit.
C The current year's profit will be understated and next year's profit will be overstated.
D The current year's profit will be overstated but there will be no effect on next year's profit.
(2 marks)
6.8 The financial year of Mitex Co ended on 31 December 20X1. An inventory count on January 4 20X2
gave a total inventory value of $527,300.
The following transactions occurred between January 1 and January 4.
$
Purchases of goods 7,900
Sales of goods (gross profit margin 40% on sales) 15,000
Goods returned to a supplier 800
What inventory value should be included in Mitex Co’s financial statements at 31 December 20X1?
A $525,400
B $527,600
C $529,200
D $535,200 (2 marks)
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QUESTIONS
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6.9 Which of the following statements about IAS 2 Inventories is correct?
A Production overheads should be included in cost on the basis of a company's normal level of
activity in the period.
B In arriving at the net realisable value of inventories, trade discounts and settlement discounts
must be deducted.
C In arriving at the cost of inventories, FIFO, LIFO and weighted average cost formulas are
acceptable.
D It is permitted to value finished goods inventories at materials plus labour cost only, without
adding production overheads.
(2 marks)
6.10 You are preparing the financial statements for a business. The cost of the items in closing inventory is
$41,875. This includes some items which cost $1,960 and which were damaged in transit. You have
estimated that it will cost $360 to repair the items, and they can then be sold for $1,200.
What is the correct inventory valuation for inclusion in the financial statements?
A $39,915
B $40,755
C $41,515
D $42,995 (2 marks)
6.11 S sells three products – Basic, Super and Luxury. The following information was available at the year
end.
Basic Super Luxury
$ per unit $ per unit $ per unit
Original cost 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs 1 4 5
units units units
Units of inventory 200 250 150
What is the value of inventory at the year end?
A $4,200
B $4,700
C $5,700
D $6,150 (2 marks)
6.12 An inventory record card shows the following details.
February 1 50 units in stock at a cost of $40 per unit
7 100 units purchased at a cost of $45 per unit
14 80 units sold
21 50 units purchased at a cost of $50 per unit
28 60 units sold
What is the value of inventory at 28 February using the FIFO method?
A $2,450
B $2,700
C $2,950
D $3,000 (2 marks)
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6.13 IAS 2 Inventories defines the items that may be included in computing the value of an inventory of
finished goods manufactured by a business.
Which one of the following lists consists only of items which may be included in the statement of
financial position value of such inventories, according to IAS 2?
A Supervisor's wages, carriage inwards, carriage outwards, raw materials
B Raw materials, carriage inwards, costs of storage of finished goods, plant depreciation
C Plant depreciation, carriage inwards, raw materials, Supervisor's wages
D Carriage outwards, raw materials, Supervisor's wages, plant depreciation (2 marks)
6.14 The closing inventory of X amounted to $116,400 excluding the following two inventory lines:
1 400 items which had cost $4 each. All were sold after the reporting period for $3 each, with
selling expenses of $200 for the batch.
2 200 different items which had cost $30 each. These items were found to be defective at the end
of the reporting period. Rectification work after the statement of financial position amounted to
$1,200, after which they were sold for $35 each, with selling expenses totalling $300.
Which of the following total figures should appear in the statement of financial position of X for
inventory?
A $122,300
B $121,900
C $122,900
D $123,300 (2 marks)
6.15 The inventory value for the financial statements of Q for the year ended 31 December 20X4 was based
on an inventory count on 4 January 20X5, which gave a total inventory value of $836,200.
Between 31 December and 4 January 20X5, the following transactions took place:
$
Purchases of goods 8,600
Sales of goods (profit margin 30% on sales) 14,000
Goods returned by Q to supplier 700
What adjusted figure should be included in the financial statements for inventories at 31 December
20X4?
A $838,100
B $853,900
C $818,500
D $834,300 (2 marks)
6.16 A company has decided to switch from using the FIFO method of inventory valuation to using the
average cost method (AVCO).
In the first accounting period where the change is made, opening inventory valued by the FIFO method
was $53,200. Closing inventory valued by the AVCO method was $59,800.
Total purchases and during the period were $136,500. Using the continuous AVCO method, opening
inventory would have been valued at $56,200.
What is the cost of materials that should be included in the statement of profit or loss for the period?
A $129,900
B $132,900
C $135,900
D $140,100 (2 marks)
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QUESTIONS
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6.17 Which one of the following statements about the use of a continuous inventory system is INCORRECT?
A In a retail organisation, a continuous inventory system can be used to keep track of the quantity
of each stock item available in its distribution centres.
B Under continuous inventory, the cost of each receipt of inventory and the cost of each issue from
inventory is recorded individually.
C A continuous inventory system removes the need for periodic physical inventory counts.
D Both the FIFO and average cost (AVCO) methods of pricing inventory may be used within a
continuous inventory system. (2 marks)
6.18 The information below relates to inventory item Z.
March 1 50 units held in opening inventory at a cost of $40 per unit
17 50 units purchased at a cost of $50 per unit
31 60 units sold at a selling price of $100 per unit
Under AVCO, what is the value of inventory held for item Z at the end of March 31?
A $4,000
B $1,800
C $2,000
D $2,500 (2 marks)
6.19 A firm has the following transactions with its product R.
1 January 20X1 Opening inventory: nil
1 February 20X1 Buys 10 units at $300 per unit
11 February 20X1 Buys 12 units at $250 per unit
1 April 20X1 Sells 8 units at $400 per unit
1 August 20X1 Buys 6 units at $200 per unit
1 December 20X1 Sells 12 units at $400 per unit
The firm uses periodic weighted average cost (AVCO) to value its inventory. What is the inventory value
at the end of the year?
A $nil
B $2,057.12
C $2,400.00
D $2,007.20 (2 marks)
(Total = 38 marks)
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7 Tangible non-current assets I 46 mins
7.1 What is the purpose of charging depreciation in financial statements?
A To allocate the cost of a non-current asset over the accounting periods expected to benefit from
its use
B To ensure that funds are available for the eventual replacement of the asset
C To reduce the cost of the asset in the statement of financial position to its estimated market value
D To account for the ‘wearing-out’ of the asset over its life (2 marks)
7.2 Which of the statements below correctly states the purpose of the asset register?
A An internal control to ensure details of all assets are readily available in the event of loss or theft
B To ensure the organisation is aware of the age of plant and machinery
C An internal control to ensure information relating to non-current assets in the nominal ledger and
the financial statements is correct
D To enable the organisation to comply with IAS 16 Property, plant and equipment
(2 marks)
7.3 An asset register showed a carrying amount of $67,460. A non-current asset costing $15,000 had been
sold for $4,000, making a loss on disposal of $1,250. No entries had been made in the asset register
for this disposal.
What is the correct balance on the asset register?
A $42,710
B $51,210
C $53,710
D $62,210 (2 marks)
7.4 An organisation's asset register shows a carrying amount of $145,600. The non-current asset account in
the nominal ledger shows a carrying amount of $135,600. The difference could be due to a disposed
asset not having been deducted from the asset register. Which one of the following could represent that
asset?
A Asset with disposal proceeds of $15,000 and a profit on disposal of $5,000
B Asset with disposal proceeds of $15,000 and a carrying amount of $5,000
C Asset with disposal proceeds of $15,000 and a loss on disposal of $5,000
D Asset with disposal proceeds of $5,000 and a carrying amount of $5,000 (2 marks)
7.5 Which one of the following would occur if the purchase of computer stationary was debited to the
computer equipment at cost account?
A An overstatement of profit and an overstatement of non-current assets
B An understatement of profit and an overstatement of non-current assets
C An overstatement of profit and an understatement of non-current assets
D An understatement of profit and an understatement of non-current assets (2 marks)
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QUESTIONS
35
7.6 Which one of the following statements correctly defines non-current assets?
A Assets that are held for use in the production of goods or services and are expected to be used
during more than one accounting period
B Assets which are intended to be used by the business on a continuing basis, including both
tangible and intangible assets that do not meet the IASB definition of a current asset
C Non-monetary assets without physical substance that are controlled by the entity and from which
future benefits are expected to flow
D Assets in the form of materials or supplies to be consumed in the production process
(2 marks)
7.7 A company bought a property four years ago on 1 January for $ 170,000. Since then property prices
have risen substantially and the property has been revalued at $210,000.
The property was estimated as having a useful life of 20 years when it was purchased. What is the
balance on the revaluation surplus reported in the statement of financial position?
A $210,000
B $136,000
C $74,000
D $34,000 (2 marks)
7.8 A business purchased a motor car on 1 July 20X3 for $20,000. It is to be depreciated at 20 per cent
per year on the straight line basis, assuming a residual value at the end of five years of $4,000, with a
proportionate depreciation charge in the years of purchase and disposal.
The $20,000 cost was correctly entered in the cash book but posted to the debit of the motor vehicles
repairs account.
How will the business profit for the year ended 31 December 20X3 be affected by the error?
A Understated by $18,400
B Understated by $16,800
C Overstated by $18,400
D Overstated by $16,800 (2 marks)
7.9 A company's policy is to charge depreciation on plant and machinery at 20% per year on cost, with
proportional depreciation for items purchased or sold during a year.
The company's plant and machinery at cost account for the year ended 30 September 20X3 is shown
below.
PLANT AND MACHINERY – COST
$ $
20X2 20X3
1 Oct Balance 200,000 30 Jun Transfer disposal account 40,000
30 Sep Balance 210,000
20X3
1 Apr Cash-purchase of plant 50,000
250,000 250,000
What should be the depreciation charge for plant and machinery (excluding any profit or loss on the
disposal) for the year ended 30 September 20X3?
A $43,000
B $51,000
C $42,000
D $45,000 (2 marks)
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7.10 The plant and machinery at cost account of a business for the year ended 30 June 20X4 was as follows:
PLANT AND MACHINERY – COST
$ $
20X3 20X3
1 Jul Balance 240,000 30 Sep Transfer disposal account 60,000
20X4 20X4
1 Jan Cash – purchase of plant 160,000 30 Jun Balance 340,000
400,000 400,000
The company's policy is to charge depreciation at 20% per year on the reducing balance basis, with
proportionate depreciation in the years of purchase and disposal.
What should be the depreciation charge for the year ended 30 June 20X4?
A $68,000
B $64,000
C $61,000
D $55,000 (2 marks)
7.11 A manufacturing company receives an invoice on 29 February 20X2 for work done on one of its
machines. $25,500 of the cost is actually for a machine upgrade, which will improve efficiency. The
accounts department do not notice and charge the whole amount to maintenance costs. Machinery is
depreciated at 25% per annum on a straight-line basis, with a proportional charge in the years of
acquisition and disposal. By what amount will the profit for the year to 30 June 20X2 be understated?
A $19,125
B $25,500
C $23,375
D $21,250 (2 marks)
7.12 W bought a new printing machine. The cost of the machine was $80,000. The installation costs were
$5,000 and the employees received training on how to use the machine, at a cost of $2,000. Before
using the machine to print customers' orders, a test was undertaken and the paper and ink cost $1,000.
What should be the cost of the machine in the company's statement of financial position?
A $80,000
B $85,000
C $86,000
D $88,000 (2 marks)
7.13 What are the correct ledger entries to record an acquisition of a non-current asset on credit?
Debit Credit
A Non-current assets – cost Receivables
B Payables Non-current assets – cost
C Non-current assets – cost Payables
D Non-current assets – cost Revaluation surplus (2 marks)
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QUESTIONS
37
7.14 Alpha sells machine B for $50,000 cash on 30 April 20X4. Machine B cost $100,000 when it was
purchased and has a carrying amount of $65,000 at the date of disposal. What are the journal entries
to record the disposal of machine B?
A Dr Accumulated depreciation $35,000
Dr Loss on disposal (SPL) $15,000
Dr Cash $50,000
Cr Non-current assets – cost $100,000
B Dr Accumulated depreciation $65,000
Dr Loss on disposal (SPL) $35,000
Cr Non-current assets – cost $100,000
C Dr Accumulated depreciation $35,000
Dr Cash $50,000
Cr Non-current assets $65,000
Cr Profit on disposal (SPL) $20,000
D Dr Non-current assets $65,000
Dr Accumulated depreciation $35,000
Cr Cash $50,000
Cr Profit on disposal (SPL) $50,000
(2 marks)
7.15 Which of the following statements are correct?
1 IAS 16 Property, plant and equipment requires entities to disclose the purchase date of each
asset.
2 The carrying amount of a non-current asset is the cost or valuation of that asset less accumulated
depreciation.
3 IAS 16 Property, plant and equipment permits entities to make a transfer from the revaluation
surplus to retained earnings for excess depreciation on revalued assets.
4 Once decided, the useful life of a non-current asset should not be changed.
A 1, 2 and 3
B 2 and 3 only
C 2 and 4 only
D 1, 2 and 4 only (2 marks)
The following information is relevant for questions 7.16 and 7.17.
Gusna Co purchased a building on 31 December 20X1 for $750,000. At the date of acquisition, the useful life
of the building was estimated to be 25 years and depreciation is calculated using the straight-line method. At
31 December 20X6, an independent valuer valued the building at $1,000,000 and the revaluation was
recognised in the financial statements. Gusna’s accounting policies state that excess depreciation arising on
revaluation of non-current assets can be transferred from the revaluation surplus to retained earnings.
7.16 What is the depreciation charge on the building for the year ended 31 December 20X7?
A $40,000
B $50,000
C $30,000
D $42,500 (2 marks)
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7.17 What is the journal entry to record the transfer of excess depreciation from the revaluation surplus to
retained earnings?
A Dr Revaluation surplus $20,000
Cr Retained earnings $20,000
B Dr Revaluation surplus $12,500
Cr Retained earnings $12,500
C Dr Retained earnings $20,000
Cr Revaluation surplus $20,000
D Dr Revaluation surplus $12,500
Cr Retained earnings $12,500
(2 marks)
7.18 Which of the following should be disclosed for tangible non-current assets according to IAS 16 Property,
plant and equipment?
1 Depreciation methods used and the total depreciation allocated for the period
2 A reconciliation of the carrying amount of non-current assets at the beginning and end of the
period
3 For revalued assets, whether an independent valuer was involved in the valuation
4 For revalued assets, the effective date of the revaluation
A 1, 2 and 4 only
B 1 and 2 only
C 1, 2, 3 and 4
D 1, 3 and 4 only (2 marks)
7.19 Which of the following should be included in the reconciliation of the carrying amount of tangible noncurrent
assets at the beginning and end of the accounting period?
1 Additions
2 Disposals
3 Depreciation
4 Increases/decreases from revaluations
A 1 and 3 only
B 1, 2, and 3 only
C 1, 3 and 4
D 1, 2, 3 and 4 (2 marks)
(Total = 38 marks)
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QUESTIONS
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8 Tangible non-current assets II 48 mins
8.1 A car was purchased by a newsagent business in May 20X0 for:
$
Cost 10,000
Road tax 150
Total 10,150
The business adopts a date of 31 December as its year end.
The car was traded in for a replacement vehicle in August 20X3 at an agreed value of $5,000.
It has been depreciated at 25% per annum on the reducing balance method, charging a full year's
depreciation in the year of purchase and none in the year of sale.
What was the profit or loss on disposal of the vehicle during the year ended December 20X3?
A Profit: $718
B Profit: $781
C Profit: $1,788
D Profit: $1,836 (2 marks)
8.2 The carrying amount of a company's non-current assets was $200,000 at 1 August 20X0. During the
year ended 31 July 20X1, the company sold non-current assets for $25,000 on which it made a loss of
$5,000. The depreciation charge for the year was $20,000. What was the carrying amount of noncurrent
assets at 31 July 20X1?
A $150,000
B $155,000
C $160,000
D $180,000 (2 marks)
8.3 Y purchased some plant on 1 January 20X0 for $38,000. The payment for the plant was correctly
entered in the cash book but was entered on the debit side of the plant repairs account.
Y charges depreciation on the straight line basis at 20% per year, with a proportionate charge in the
years of acquisition and disposal, and assuming no scrap value at the end of the life of the asset.
How will Y's profit for the year ended 31 March 20X0 be affected by the error?
A Understated by $30,400
B Understated by $36,100
C Understated by $38,000
D Overstated by $1,900 (2 marks)
8.4 B acquired a lorry on 1 May 20X0 at a cost of $30,000. The lorry has an estimated useful life of four
years, and an estimated resale value at the end of that time of $6,000. B charges depreciation on the
straight line basis, with a proportionate charge in the period of acquisition.
What will the depreciation charge for the lorry be in B's accounting period to 30 September 20X0?
A $3,000
B $2,500
C $2,000
D $5,000 (2 marks)
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8.5 At 31 December 20X3 Q, a limited liability company, owned a building that had cost $800,000 on
1 January 20W4.
It was being depreciated at 2% per year.
On 31 December 20X3 a revaluation to $1,000,000 was recognised. At this date the building had a
remaining useful life of 40 years.
What is the balance on the revaluation surplus at 31 December 20X3 and the depreciation charge in the
statement of profit or loss for the year ended 31 December 20X4?
Depreciation charge for Revaluation surplus
year ended 31 December 20X4 as at 31 December 20X3
(statement of profit or loss) (statement of financial position)
$ $
A 25,000 200,000
B 25,000 360,000
C 20,000 200,000
D 20,000 360,000
(2 marks)
8.6 Which of the following best explains what is meant by 'capital expenditure'?
A Expenditure on non-current assets, including repairs and maintenance
B Expenditure on expensive assets
C Expenditure relating to the issue of share capital
D Expenditure relating to the acquisition or improvement of non-current assets
(2 marks)
8.7 Which of the following costs would be classified as capital expenditure for a restaurant business?
A A replacement for a broken window
B Repainting the restaurant
C An illuminated sign advertising the business name
D Cleaning of the kitchen floors (2 marks)
8.8 Which one of the following costs would be classified as revenue expenditure on the invoice for a new
company car?
A Road tax
B Number plates
C Fitted stereo radio
D Delivery costs (2 marks)
8.9 Lance is entering an invoice for a new item of equipment in the accounts. The invoice shows the
following costs:
Water treatment equipment $39,800
Delivery $1,100
Maintenance charge $3,980
Sales tax $7,854
Invoice total $52,734
Lance is registered for sales tax. What is the total value of capital expenditure on the invoice?
A $39,800
B $40,900
C $44,880
D $52,734 (2 marks)
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QUESTIONS
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8.10 Which one of the following assets may be classified as a non-current asset in the financial statements of
a business?
A A tax refund due next year
B A motor vehicle held for resale
C A computer used in the office
D Cleaning products used to clean the office floors (2 marks)
8.11 Which of the following items should be included in current assets?
(i) Assets which are not intended to be converted into cash
(ii) Assets which will be converted into cash in the long term
(iii) Assets which will be converted into cash in the near future
A (i) only
B (ii) only
C (iii) only
D (ii) and (iii) (2 marks)
8.12 Which of the following statements describes current assets?
A Assets which are currently located on the business premises
B Assets which are used to conduct the organisation’s current business
C Assets which are expected to be converted into cash in the short-term
D Assets which are not expected to be converted into cash in the short-term
(2 marks)
8.13 Gamma purchases a motor vehicle on 30 September 20X1 for $15,000 on credit. Gamma has a policy
of depreciating motor vehicles using the reducing balance method at 15% per annum, pro rata in the
years of purchase and sale.
What are the correct ledger entries to record the purchase of the vehicle at 30 September 20X1 and
what is the depreciation charge for the year ended 30 November 20X1?
Purchase of motor Depreciation charge
vehicle on 30.9.X1 for year ended 30.11.X1
A Dr Non-current assets – cost $15,000 $2,250
Cr Payables $15,000
B Dr Payables $15,000 $2,250
Cr Non-current assets – cost $15,000
C Dr Non-current assets – cost $15,000 $375
Cr Payables $15,000
D Dr Payables $15,000 $375
Cr Non-current assets – cost $15,000 (2 marks)
8.14 Banjo Co purchased a building on 30 June 20X8 for $1,250,000. At acquisition, the useful life of the
building was 50 years. Depreciation is calculated on the straight-line basis. 10 years later, on 30 June
20Y8 when the carrying amount of the building was $1,000,000, the building was revalued to
$1,600,000. Banjo Co has a policy of transferring the excess depreciation on revaluation from the
revaluation surplus to retained earnings.
Assuming no further revaluations take place, what is the balance on the revaluation surplus at 30 June
20Y9?
A $335,000
B $310,000
C $560,000
D $585,000 (2 marks)
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8.15 A non-current asset (cost $15,000, depreciation $10,000) is given in part exchange for a new asset
costing $20,500. The agreed trade-in value was $5,500. Which of the following will be included in the
statement of profit or loss?
A A profit on disposal $5,500
B A loss on disposal $4,500
C A loss on purchase of a new asset $5,500
D A profit on disposal $500 (2 marks)
8.16 Baxter Co purchased an asset for $100,000 on 1.1.X1. It had an estimated useful life of 5 years and it
was depreciated using the straight line method. On 1.1.X3 Baxter Co revised the remaining estimated
useful life to 8 years.
What is the carrying amount of the asset at 31.12.X3?
A $40,000
B $52,500
C $40,000
D $62,500 (2 marks)
8.17 Senakuta Co purchased a machine with an estimated useful life of 5 years for $34,000 on
30 September 20X5. Senakuta Co planned to scrap the machine at the end of its useful life and
estimated that the scrap value at the purchase date was $4,000. On 1 October 20X8, Senakuta revised
the scrap value to $2,000 due to the decreased value of scrap metal.
What is the depreciation charge for the year ended 30 September 20X9?
A $7,000
B $6,800
C $2,800
D $6,400 (2 marks)
8.18 Evans Co purchased a machine with an estimated useful life of 10 years for $76,000 on 30 September
20X5. The machine had a residual value of $16,000.
What are the ledger entries to record the depreciation charge for the machine in the year ended
30 September 20X8?
A Dr Depreciation charge $6,000
Cr Accumulated depreciation $6,000
B Dr Depreciation charge $6,000
Dr Non-current assets $12,000
Cr Accumulated depreciation $18,000
C Dr Accumulated depreciation $6,000
Cr Depreciation charge $6,000
D Dr Accumulated depreciation $18,000
Cr Non-current assets $18,000
(2 marks)
8.19 Banter Co purchased an office building on 1 January 20X1. The building cost was $1,600,000 and this
was depreciated by the straight line method at 2% per year, assuming a 50-year life and nil residual
value. The building was re-valued to $2,250,000 on 1 January 20X6. The useful life was not revised.
The company’s financial year ends on 31 December.
What is the balance on the revaluation surplus at 31 December 20X6?
A $650,000
B $792,000
C $797,000
D $810,000
(2 marks)
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QUESTIONS
43
8.20 A company purchased an asset on 1 January 20X3 at a cost of $1,000,000. It is depreciated over
50 years by the straight line method (nil residual value), with a proportionate charge for depreciation in
the year of acquisition and the year of disposal. At 31 December 20X4 the asset was re-valued to
$1,200,000. There was no change in the expected useful life of the asset.
The asset was sold on 30 June 20X5 for $1,195,000.
What profit or loss on disposal of the asset will be reported in the statement of profit or loss of the
company for the year ended 31 December 20X5?
A Profit of $7,500
B Profit of $235,000
C Profit of $247,500
D Loss of $5,000 (2 marks)
(Total = 40 marks)
9 Intangible non-current assets 34 mins
9.1 According to IAS 38 Intangible assets, which of the following statements about research and
development expenditure are correct?
1 Research expenditure, other than capital expenditure on research facilities, should be recognised
as an expense as incurred.
2 In deciding whether development expenditure qualifies to be recognised as an asset, it is
necessary to consider whether there will be adequate finance available to complete the project.
3 Development expenditure recognised as an asset must be amortised over a period not exceeding
five years.
A 1, 2 and 3
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only (2 marks)
9.2 According to IAS 38 Intangible assets, which of the following statements about research and
development expenditure are correct?
1 If certain conditions are met, an entity may decide to capitalise development expenditure.
2 Research expenditure, other than capital expenditure on research facilities, must be written off as
incurred.
3 Capitalised development expenditure must be amortised over a period not exceeding 5 years.
4 Capitalised development expenditure must be disclosed in the statement of financial position
under intangible non-current assets.
A 1, 2 and 4 only
B 1 and 3 only
C 2 and 4 only
D 3 and 4 only (2 marks)
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9.3 According to IAS 38 Intangible assets, which of the following statements concerning the accounting
treatment of research and development expenditure are true?
1 Development costs recognised as an asset must be amortised over a period not exceeding five
years.
2 Research expenditure, other than capital expenditure on research facilities, should be recognised
as an expense as incurred.
3 In deciding whether development expenditure qualifies to be recognised as an asset, it is
necessary to consider whether there will be adequate finance available to complete the project.
4 Development projects must be reviewed at each reporting date, and expenditure on any project
no longer qualifying for capitalisation must be amortised through the statement of profit or loss
and other comprehensive income over a period not exceeding five years.
A 1 and 4
B 2 and 4
C 2 and 3
D 1 and 3 (2 marks)
9.4 According to IAS 38 Intangible assets, which of the following statements is/are correct?
1 Capitalised development expenditure must be amortised over a period not exceeding five years.
2 If all the conditions specified in IAS 38 are met, development expenditure may be capitalised if
the directors decide to do so.
3 Capitalised development costs are shown in the statement of financial position under the heading
of non-current assets.
4 Amortisation of capitalised development expenditure will appear as an item in a company's
statement of changes in equity.
A 3 only
B 2 and 3
C 1 and 4
D 1 and 3 (2 marks)
9.5 According to IAS 38 Intangible assets, which of the following are intangible non-current assets in the
financial statements of Iota Co?
1 A patent for a new glue purchased for $20,000 by Iota Co
2 Development costs capitalised in accordance with IAS 38
3 A licence to broadcast a television series, purchased by Iota Co for $150,000
4 A state of the art factory purchased by Iota Co for $1.5million
A 1 and 3 only
B 1, 2 and 3 only
C 2 and 4 only
D 2, 3 and 4 only (2 marks)
9.6 According to IAS 38 Intangible assets, which of the following statements about intangible assets are
correct?
1 If certain criteria are met, research expenditure must be recognised as an intangible asset.
2 If certain criteria are met, development expenditure must be capitalised
3 Intangible assets must be amortised if they have a definite useful life
A 2 and 3 only
B 1 and 3 only
C 1 and 2 only
D All three statements are correct (2 marks)
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QUESTIONS
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9.7 According to IAS 38 Intangible assets, which of the following statements concerning the accounting
treatment of research and development expenditure are true?
1 If certain criteria are met, research expenditure may be recognised as an asset.
2 Research expenditure, other than capital expenditure on research facilities, should be recognised
as an expense as incurred.
3 In deciding whether development expenditure qualifies to be recognised as an asset, it is
necessary to consider whether there will be adequate finance available to complete the project.
4 Development expenditure recognised as an asset must be amortised over a period not exceeding
five years.
5 The financial statements should disclose the total amount of research and development
expenditure recognised as an expense during the period.
A 1, 4 and 5
B 2, 4 and 5
C 2, 3 and 4
D 2, 3 and 5 (2 marks)
9.8 According to IAS 38 Intangible assets, which of the following statements are correct?
1 Research expenditure should not be capitalised.
2 Intangible assets are never amortised.
3 Development expenditure must be capitalised if certain conditions are met.
A 1 and 3 only
B 1 and 2 only
C 2 and 3 only
D All three statements are correct (2 marks)
The following information is relevant for questions 9.9 and 9.10.
The following balances existed in the accounting records of Koppa Co, at 31 December 20X7.
$'000
Development costs capitalised, 1 January 20X7 180
Research and development expenditure for the year 162
In preparing the company's statement of profit or loss and other comprehensive income and statement of
financial position at 31 December 20X7 the following further information is relevant.
(a) The $180,000 total for development costs as at 1 January 20X7 relates to two projects:
$'000
Project 836: completed project 82
(balance being amortised over the period expected to benefit from it.
Amount to be amortised in 20X7: $20,000)
Project 910: in progress 98
180
(b) The research and development expenditure for the year is made up of:
$'000
Research expenditure 103
Development costs on Project 910 which continues to satisfy the
requirements in IAS 38 for capitalisation 59
162
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9.9 According to IAS 38 Intangible assets, what amount should be charged in the statement of profit or loss
and other comprehensive income for research and development costs for the year ended 31 December
20X7?
A $123,000
B $182,000
C $162,000
D $103,000 (2 marks)
9.10 According to IAS 38 Intangible assets, what amount should be disclosed as an intangible asset in the
statement of financial position for the year ended 31 December 20X7?
A $219,000
B $180,000
C $160,000
D $59,000 (2 marks)
9.11 Theta Co purchased a patent on 31 December 20X3 for $250,000. Theta Co expects to use the patent
for ten years, after which it will be valueless. According to IAS 38 Intangible assets, what amount will
be amortised in Theta Co’s statement of profit or loss and other comprehensive income for the year
ended 31 December 20X4?
A $250,000
B $125,000
C $25,000
D $50,000 (2 marks)
9.12 PF purchased a quota for carbon dioxide emissions for $15,000 on 30 April 20X6 and capitalised it as
an intangible asset in its statement of financial position. PF estimates that the quota will have a useful
life of 3 years. What is the journal entry required to record the amortisation of the quota in the accounts
for the year ended 30 April 20X9?
A Dr Expenses $15,000
Cr Accumulated amortisation $15,000
B Dr Expenses $5,000
Cr Accumulated amortisation $5,000
C Dr Intangible assets $5,000
Cr Accumulated amortisation $5,000
D Dr Accumulated amortisation $15,000
Cr Intangible assets $15,000 (2 marks)
9.13 What is the purpose of amortisation?
A To allocate the cost of an intangible non-current asset over its useful life
B To ensure that funds are available for the eventual purchase of a replacement non-current asset
C To reduce the cost of an intangible non-current asset in the statement of financial position to its
estimated market value
D To account for the risk associated with intangible assets (2 marks)
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QUESTIONS
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9.14 Which of the following items (that all generate future economic benefits, and whose costs can be
measured reliably), is an intangible non-current asset?
1 Computer hardware owned by a business
2 Operating software that operates the computer hardware in (1)
3 A patent bought by a business
4 An extension to an office building owned by a business
A All four items
B 1, 2 and 4 only
C 1 and 2 only
D 3 only
(2 marks)
(Total = 28 marks)
10 Accruals and prepayments 34 mins
10.1 A company receives rent for subletting part of its office block.
Rent, receivable quarterly in advance, is received as follows:
Date of receipt Period covered $
1 October 20X1 3 months to 31 December 20X1 7,500
30 December 20X1 3 months to 31 March 20X2 7,500
4 April 20X2 3 months to 30 June 20X2 9,000
1 July 20X2 3 months to 30 September 20X2 9,000
1 October 20X2 3 months to 31 December 20X2 9,000
What figures, based on these receipts, should appear in the company's financial statements for the year
ended 30 November 20X2?
Statement of profit or loss Statement of financial position
A $34,000 Debit Rent in arrears (Dr) $3,000
B $34,500 Credit Rent received in advance (Cr) $6,000
C $34,000 Credit Rent received in advance (Cr) $3,000
D $34,000 Credit Rent in arrears (Dr) $3,000
(2 marks)
10.2 A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The
rent was increased from $90,000 per year to $120,000 per year as from 1 October 20X2.
What rent expense and accrual should be included in the company's financial statements for the year
ended 31 January 20X3?
Rent expense Accrual
$ $
A 100,000 20,000
B 100,000 10,000
C 97,500 10,000
D 97,500 20,000 (2 marks)
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10.3 At 31 March 20X2 a company had oil in hand to be used for heating costing $8,200 and an unpaid
heating oil bill for $3,600.
At 31 March 20X3 the heating oil in hand was $9,300 and there was an outstanding heating oil bill of
$3,200.
Payments made for heating oil during the year ended 31 March 20X3 totalled $34,600.
Based on these figures, what amount should appear in the company's statement of profit or loss and
other comprehensive income for heating oil for the year?
A $23,900
B $36,100
C $45,300
D $33,100 (2 marks)
10.4 A company has sublet part of its offices and in the year ended 30 November 20X3 the rent receivable
was:
Until 30 June 20X3 $8,400 per year
From 1 July 20X3 $12,000 per year
Rent was paid quarterly in advance on 1 January, April, July, and October each year.
What amounts should appear in the company's financial statements for the year ended 30 November
20X3?
Rent receivable Statement of financial position
A $9,900 $2,000 in sundry payables
B $9,900 $1,000 in sundry payables
C $10,200 $1,000 in sundry payables
D $9,900 $2,000 in sundry receivables (2 marks)
10.5 A business compiling its financial statements for the year to 31 July each year pays rent quarterly in
advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from
$60,000 per year to $72,000 per year as from 1 October 20X3.
What figure should appear for rent expense in the business’s statement of profit or loss and other
comprehensive income for the year ended 31 July 20X4?
A $69,000
B $62,000
C $70,000
D $63,000 (2 marks)
10.6 Diesel fuel in inventory at 1 November 20X7 was $12,500, and there were invoices awaited for
$1,700. During the year to 31 October 20X8, diesel fuel bills of $85,400 were paid, and a delivery
worth $1,300 had yet to be invoiced. At 31 October 20X8, the inventory of diesel fuel was valued at
$9,800. What is the value of diesel fuel to be charged to the statement of profit or loss and other
comprehensive income for the year to 31 October 20X8?
A $87,700
B $89,400
C $88,500
D $91,100 (2 marks)
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QUESTIONS
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10.7 The electricity account for the year ended 30 June 20X1 was as follows.
$
Opening balance for electricity accrued at 1 July 20X0 300
Payments made during the year
1 August 20X0 for three months to 31 July 20X0 600
1 November 20X0 for three months to 31 October 20X0 720
1 February 20X1 for three months to 31 January 20X1 900
30 June 20X1 for three months to 30 April 20X1 840
1 August 20X1 for three months to 31 July 20X1 840
Which of the following is the appropriate entry for electricity?
Accrued Charge to SPL
at 30 June 20X1 year ended 30 June 20X1
A $Nil $3,060
B $460 $3,320
C $560 $3,320
D $560 $3,420
(2 marks)
10.8 The year end of M Co is 30 November 20X0. The company pays for its gas by a standing order of $600
per month. On 1 December 20W9, the statement from the gas supplier showed that M Co had overpaid
by $200. M Co received gas bills for the four quarters commencing on 1 December 20W9 and ending
on 30 November 20X0 for $1,300, $1,400, $2,100 and $2,000 respectively.
Which of the following is the correct charge for gas in M Inc's statement of profit or loss for the year
ended 30 November 20X0?
A $6,800
B $7,000
C $7,200
D $7,400 (2 marks)
10.9 A business compiling its financial statements for the year to 31 January each year pays rent quarterly in
advance on 1 January, 1 April, 1 July and 1 October each year. After remaining unchanged for some
years, the rent was increased from $24,000 per year to $30,000 per year as from 1 July 20X0.
Which of the following figures is the rent expense which should appear in the statement of profit or loss
for year ended 31 January 20X1?
A $27,500
B $29,500
C $28,000
D $29,000 (2 marks)
10.10 B, a limited liability company, receives rent for subletting part of its office premises to a number of
tenants.
In the year ended 31 December 20X4 B received cash of $318,600 from its tenants.
Details of rent in advance and in arrears at the beginning and end of 20X4 are as follows:
31 December
20X4 20X3
$ $
Rent received in advance 28,400 24,600
Rent owing by tenants 18,300 16,900
All rent owing was subsequently received
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What figure for rental income should be included in the statement of profit or loss of B for 20X4?
A $341,000
B $336,400
C $300,800
D $316,200 (2 marks)
10.11 During 20X4, B, a limited liability company, paid a total of $60,000 for rent, covering the period from
1 October 20X3 to 31 March 20X5.
What figures should appear in the company's financial statements for the year ended 31 December
20X4?
Statement of profit or loss and other Statement of
comprehensive income financial position
$ $
A 40,000 10,000 Prepayment
B 40,000 15,000 Prepayment
C 50,000 10,000 Accrual
D 50,000 15,000 Accrual (2 marks)
10.12 The trainee accountant at Judd Co has forgotten to make an accrual for rent for December in the
financial statements for the year ended 31 December 20X2. Rent is charged in arrears at the end of
February, May, August and November each year. The bill payable in February is expected to be
$30,000. Judd Co’s draft statement of profit or loss shows a profit of $25,000 and draft statement of
financial position shows net assets of $275,000.
What is the profit or loss for the year and what is the net asset position after the accrual has been
included in the financial statements?
Profit for the year Net asset position
A $15,000 $265,000
B $15,000 $285,000
C $35,000 $265,000
D $35,000 $285,000 (2 marks)
10.13 Buster's draft financial statements for the year to 31 October 20X5 report a loss of $1,486. When he
prepared the financial statements, Buster did not include an accrual of $1,625 and a prepayment of
$834.
What is Buster's profit or loss for the year to 31 October 20X5 following the inclusion of the accrual and
prepayment?
A A loss of $695
B A loss of $2,277
C A loss of $3,945
D A profit of $1,807 (2 marks)
10.14 Bookz Co pays royalties to writers annually, in February, the payment covering the previous calendar
year.
As at the end of December 20X2, Bookz Co had accrued $100,000 in royalties due to writers. However,
a check of the royalty calculation performed in January 20X3 established that the actual figure due to be
paid by Bookz Co to writers was $150,000.
Before this under-accrual was discovered, Bookz Co's draft statement of profit or loss for the accounting
year ended 31 December 20X2 showed a profit of $125,000 and their draft statement of financial
position showed net assets of $375,000.
What will Bookz Co's profit and net asset position be after an entry to correct the under-accrual has been
processed?
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QUESTIONS
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Profit for the year Net asset position
A $175,000 $425,000
B $125,000 $375,000
C $75,000 $325,000
D $25,000 $225,000 (2 marks)
(Total = 28 marks)
11 Receivables and payables 48 mins
11.1 Which of the following statements regarding payables and receivables are TRUE?
1 Payables represent money the business owes.
2 Payables are an asset.
3 Receivables represent money owed to the business.
A Statement 1 only
B Statements 1 and 2 only
C Statements 1 and 3 only
D Statement 3 only (2 marks)
11.2 At 31 December 20X2 a company's receivables totalled $400,000 and an allowance for receivables of
$50,000 had been brought forward from the year ended 31 December 20X1.
It was decided to write off debts totalling $38,000. The allowance for receivables was to be adjusted to
the equivalent of 10% of the receivables.
What charge for receivables expense should appear in the company's statement of profit or loss for the
year ended 31 December 20X2?
A $74,200
B $51,800
C $28,000
D $24,200 (2 marks)
11.3 At 1 July 20X2 the receivables allowance of Q was $18,000.
During the year ended 30 June 20X3 debts totalling $14,600 were written off. The receivables
allowance required was to be $16,000 as at 30 June 20X3.
What amount should appear in Q's statement of profit or loss for receivables expense for the year ended
30 June 20X3?
A $12,600
B $16,600
C $48,600
D $30,600 (2 marks)
11.4 At 30 September 20X2 a company's allowance for receivables amounted to $38,000, which was
equivalent to five per cent of the receivables at that date.
At 30 September 20X3 receivables totalled $868,500. It was decided to write off $28,500 of debts as
irrecoverable. The allowance for receivables required was to be the equivalent of five per cent of
receivables.
What should be the charge in the statement of profit or loss for the year ended 30 September 20X3 for
receivables expense?
A $42,000
B $33,925
C $70,500
D $32,500 (2 marks)
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11.5 At 1 July 20X3 a limited liability company had an allowance for receivables of $83,000.
During the year ended 30 June 20X4 debts totalling $146,000 were written off. At 30 June 20X4 a
receivables allowance of $218,000 was required.
What figure should appear in the company's statement of profit or loss for the year ended 30 June 20X4
for receivables expense?
A $155,000
B $364,000
C $281,000
D $11,000 (2 marks)
11.6 A company has received cash for a debt that was previously written off. Which of the following is the
correct double entry to record the cash received?
Debit Credit
A Irrecoverable debts expense Accounts receivable
B Cash Irrecoverable debts expense
C Allowance for receivables Accounts receivable
D Cash Allowance for receivables
(2 marks)
11.7 At 31 December 20X4 a company's trade receivables totalled $864,000 and the allowance for
receivables was $48,000.
It was decided that debts totalling $13,000 were to be written off. The allowance for receivables was to
be adjusted to the equivalent of five per cent of the receivables.
What figures should appear in the statement of financial position for trade receivables (after deducting
the allowance) and in the statement of profit or loss for receivables expense?
Statement of profit or loss Statement of financial position
$ $
A 8,200 807,800
B 7,550 808,450
C 18,450 808,450
D 55,550 808,450 (2 marks)
11.8 Which of the following would a decrease in the allowance for receivables result in?
A An increase in liabilities
B A decrease in working capital
C A decrease in net profit
D An increase in net profit (2 marks)
11.9 A company has been notified that a customer has been declared bankrupt. The company had previously
made an allowance for this debt. Which of the following is the correct double entry to account for this
new information?
Debit Credit
A Irrecoverable debts Receivables
B Receivables Irrecoverable debts
C Allowance for receivables Receivables
D Receivables Allowance for receivables (2 marks)
11.10 An increase in an allowance for receivables of $8,000 has been treated as a reduction in the allowance
in the financial statements. Which of the following explains the resulting effects?
A Net profit is overstated by $16,000, receivables overstated by $8,000
B Net profit understated by $16,000, receivables understated by $16,000
C Net profit overstated by $16,000, receivables overstated by $16,000
D Gross profit overstated by $16,000, receivables overstated by $16,000 (2 marks)
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QUESTIONS
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11.11 At 1 January 20X1, there was an allowance for receivables of $3,000. During the year, $1,000 of debts
were written off as irrecoverable, and $800 of debts previously written off were recovered. At
31 December 20X1, it was decided to adjust the allowance for receivables to 5% of receivables which
are $20,000.
What is the total receivables expense for the year?
A $200 debit
B $1,800 debit
C $2,200 debit
D $1,800 credit (2 marks)
11.12 Top Co has total receivables outstanding of $280,000. The accountant believes that approximately 1%
of these balances will not be collected, so wishes to make an allowance of $28,000. No previous
allowance has been made for receivables.
Which of the following is the correct double entry to create this allowance?
Debit Credit
A Irrecoverable debts Allowance for receivables
B Allowance for receivables Receivables
C Irrecoverable debts Receivables
D Receivables Allowance for receivables (2 marks)
11.13 At the beginning of the year, the allowance for receivables was $850. At the year-end, the allowance
required was $1,000. During the year $500 of debts were written off, which includes $100 previously
included in the allowance for receivables.
What is the charge to statement of profit or loss for receivables expense for the year?
A $1,500
B $1,000
C $650
D $550 (2 marks)
11.14 Which of the following statements are correct?
1 An aged receivables analysis shows how long invoices for each customer have been outstanding.
2 A credit limit is a tool applied by the credit control department to make suppliers provide goods
on time.
3 Receivables are included in the statement of financial position net of the receivables allowance.
4 Credit limits are applied to customers who purchase goods using cash only.
A 1 and 2
B 2 and 3
C 1 and 3
D 3 and 4 (2 marks)
11.15 At 31 May 20X7 Roberta's trial balance included the following items.
$
Inventory at 1 June 20X6 23,856
Trade receivables 55,742
Trade payables 32,165
Bank overdraft 5,855
Loan due for repayment in 20X9 15,000
What is the value of Roberta's current liabilities at 31 May 20X7?
A $38,020
B $53,020
C $61,597
D $76,597 (2 marks)
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11.16 Which one of the following statements is NOT a benefit of offering credit facilities to customers?
A Improved convenience for the customer
B The separation of product and service delivery from payment
C Provides time for appropriate payment approval procedures
D Fewer irrecoverable debts (2 marks)
11.17 What is the correct double entry for discounts received?
Debit Credit
A Payables control account Expenses
B Expenses Payables control account
C Discounts received (income) Payables control account
D Payables control account Discounts received (income)
(2 marks)
11.18 Which of the following are examples of payables of a business?
1 Interest owed from the bank
2 Loans and advances to employees
3 Money owed from customers
4 Tax owed to the tax authority
A 1, 3, and 4 only
B 2, 3 and 4 only
C 2 and 4 only
D 4 only (2 marks)
11.19 Which of the following are not examples of payables of a business?
1 An estimation of tax owed to the tax authority for the year just ended
2 $500 owed to a supplier for invoiced goods
3 An estimation of probable repair costs under warranty claims
A 1, 2, and 3
B 1 only
C 1 and 3 only
D 2 only (2 marks)
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QUESTIONS
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11.20 A business commenced trading on 01 January 20X1. The following transactions with Supplier A have
been recorded in the purchase ledger.
01 January 20X1 Opening balance $nil
(1) 01 January 20X1 Purchase of goods $50
(2) 01 February 20X1 Purchase of goods $435
(3) 30 March 20X1 Payment $385
31 March 20X1 Closing balance $100
On 31 March 20X1, the business receives the following statement from the supplier.
Opening balance $nil
(4) 1 January 20X1 Invoice #365 $50
(5) 1 February 20X1 Invoice #490 $435
(6) 31 March 20X1 Invoice #533 $35
Closing balance $520
Which transactions should be noted as reconciling items on the supplier statement reconciliation at
31 March 20X1?
A 3 only
B 6 only
C 3 and 6 only
D 1 to 6 (2 marks)
(Total = 40 marks)
12 Provisions and contingencies 31 mins
12.1 Which of the following statements about provisions and contingencies is/are correct?
1 A company should disclose details of the change in carrying amount of a provision from the
beginning to the end of the year.
2 Contingent assets must be recognised in the financial statements in accordance with the
prudence concept.
3 Contingent liabilities must be treated as actual liabilities and provided for if it is probable that
they will arise.
A 3 only
B 2 and 3 only
C 1 and 3 only
D All three statements are correct (2 marks)
12.2 Which of the following statements about contingent assets and contingent liabilities are correct?
1 A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
2 A contingent liability should be disclosed by note if it is probable that a transfer of economic
benefits to settle it will be required, with no provision being made.
3 No disclosure is required for a contingent liability if it is not probable that a transfer of economic
benefits to settle it will be required.
4 No disclosure is required for either a contingent liability or a contingent asset if the likelihood of a
payment or receipt is remote.
A 1 and 4 only
B 2 and 3 only
C 2, 3 and 4
D 1, 2 and 4 (2 marks)
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12.3 An ex-director of X company has commenced an action against the company claiming substantial
damages for wrongful dismissal. The company's solicitors have advised that the ex-director is unlikely to
succeed with his claim, although the chance of X paying any monies to the ex-director is not remote.
The solicitors' estimates of the company's potential liabilities are:
$
Legal costs (to be incurred whether the claim is successful or not) 50,000
Settlement of claim if successful 500,000
550,000
According to IAS 37 Provisions, contingent liabilities and continent assets, how should this claim be
treated in the financial statements?
A Provision of $550,000
B Disclose a contingent liability of $550,000
C Disclose a provision of $50,000 and a contingent liability of $500,000
D Provision for $500,000 and a contingent liability of $50,000 (2 marks)
12.4 The following items have to be considered in finalising the financial statements of Q, a limited liability
company:
1 The company gives warranties on its products. The company’s statistics show that about 5% of
sales give rise to a warranty claim.
2 The company has guaranteed the overdraft of another company. The likelihood of a liability
arising under the guarantee is assessed as possible.
According to IAS 37 Provisions, contingent liabilities and continent assets, what is the correct action to
be taken in the financial statements for these items?
Create a provision Disclose by note only No action
A 1 2
B 1 2
C 1, 2
D 2 1
(2 marks)
12.5 Which of the following statements about the requirements of IAS 37 Provisions, contingent liabilities
and contingent assets are correct?
1 A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
2 No disclosure of a contingent liability is required if the possibility of a transfer of economic
benefits arising is remote.
3 Contingent assets must not be recognised in financial statements unless an inflow of economic
benefits is virtually certain to arise.
A All three statements are correct
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only (2 marks)
12.6 Wanda Co allows customers to return faulty goods within 14 days of purchase. At 30 November 20X5 a
provision of $6,548 was made for sales returns. At 30 November 20X6, the provision was re-calculated
and should now be $7,634.
What should be reported in Wanda Co's statement of profit or loss for the year to 31 October 20X6 in
respect of the provision?
A A charge of $7,634
B A credit of $7,634
C A charge of $1,086
D A credit of $1,086 (2 marks)
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QUESTIONS
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12.7 Doggard Co is a business that sells second hand cars. If a car develops a fault within 30 days of the
sale, Doggard Co will repair it free of charge.
At 30 April 20X4 Doggard Co had made a provision for repairs of $2,500. At 30 April 20X5 Doggard Co
calculated that the provision should be $2,000.
What entry should be made for the provision in Doggard Co's statement of profit or loss for the year to
30 April 20X5?
A A charge of $500
B A credit of $500
C A charge of $2,000
D A credit of $2,000 (2 marks)
12.8 Which of the following best describes a provision according to IAS 37 Provisions, contingent liabilities
and contingent assets?
A A provision is a liability of uncertain timing or amount.
B A provision is a possible obligation of uncertain timing or amount.
C A provision is a credit balance set up to offset a contingent asset so that the effect on the
statement of financial position is nil.
D A provision is a possible asset that arises from past events. (2 marks)
12.9 Which of the following items does the statement below describe?
“A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the entity's
control”
A A provision
B A current liability
C A contingent liability
D A contingent asset (2 marks)
12.10 Montague’s paint shop has suffered some bad publicity as a result of a customer claiming to be suffering
from skin rashes as a result of using a new brand of paint sold by Montague’s shop. The customer
launched a court action against Montague in November 20X3, claiming damages of $5,000.
Montague’s lawyer has advised him that the most probable outcome is that he will have to pay the
customer $3,000.
What amount should Montague include as a provision in his financial statements for the year ended
31 December 20X3?
A $nil
B $5,000
C $3,000
D $8,000 (2 marks)
12.11 Mobiles Co sells goods with a one year warranty under which customers are covered for any defect that
becomes apparent within a year of purchase. In calendar year 20X4, Mobiles Co sold 100,000 units.
The company expects warranty claims for 5% of units sold. Half of these claims will be for a major
defect, with an average claim value of $50. The other half of these claims will be for a minor defect,
with an average claim value of $10.
What amount should Mobiles Co include as a provision in the statement of financial position for the year
ended 31 December 20X4?
A $125,000
B $ 25,000
C $300,000
D $150,000 (2 marks)
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12.12 When a provision is needed that involves a number of outcomes, the provision is calculated using the
expected value of expenditure. The expected value of expenditure is the total expenditure of:
A Each possible outcome
B Each possible outcome weighted according to the probability of each outcome happening
C Each possible outcome divided by the number of outcomes
D Each possible outcome multiplied by the number of outcomes
12.13 X Co sells goods with a one year warranty and had a provision for warranty claims of $64,000 at
31 December 20X0. During the year ended 31 December 20X1, $25,000 in claims were paid to
customers. On 31 December 20X1, X Co estimated that the following claims will be paid in the
following year:
Scenario Probability Anticipated cost
Worst case 5% $150,000
Best case 20% $25,000
Most likely 75% $60,000
What amount should X Co record in the statement of profit or loss for the year ended 31 December
20X1 in respect of the provision?
A $57,500
B $6,500
C $18,500
D $39,000
(Total = 26 marks)
13 Capital structure and finance costs 31 mins
13.1 The issued share capital of Alpha, a limited liability company, is as follows:
$
Ordinary shares of 10c each 1,000,000
8% Redeemable preference shares of 50c each 500,000
In the year ended 31 October 20X2, the company has paid the preference dividend for the year and an
interim dividend of 2c per share on the ordinary shares. A final ordinary dividend of 3c per share was
proposed, before the reporting date.
What would be recognised for dividends in the equity section of the statement of financial position at
31 October 20X2?
A $580,000
B $90,000
C $130,000
D $200,000 (2 marks)
13.2 When a company makes a rights issue of equity shares which of the following effects will the issue
have?
1 Assets are increased
2 Retained earnings are reduced
3 Share premium account is reduced
4 Investments are increased
A 1 only
B 1 and 2
C 3 only
D 1 and 4 (2 marks)
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QUESTIONS
59
13.3 A company made an issue for cash of 1,000,000 50c shares at a premium of 30c per share.
Which one of the following journal entries correctly records the issue?
Debit Credit
$ $
A Share capital 500,000
Share premium 300,000
Bank 800,000
B Bank 800,000
Share capital 500,000
Share premium 300,000
C Bank 1,300,000
Share capital 1,000,000
Share premium 300,000
D Share capital 1,000,000
Share premium 300,000
Bank 1,300,000 (2 marks)
13.4 At 31 December 20X1 the capital structure of a company was as follows:
$
Ordinary share capital
100,000 shares of 50c each 50,000
Share premium account 180,000
During 20X2 the company made a bonus issue of 1 share for every 2 held, using the share premium
account for the purpose, and later issued for cash another 60,000 shares at 80c per share.
What is the company's capital structure at 31 December 20X2?
Ordinary share capital Share premium account
$ $
A 130,000 173,000
B 105,000 173,000
C 130,000 137,000
D 105,000 137,000
(2 marks)
13.5 An organisation's year end is 30 September. On 1 January 20X6 the organisation took out a loan of
$100,000 with annual interest of 12%. The interest is payable in equal instalments on the first day of
April, July, October and January in arrears.
How much should be charged to the statement of profit or loss (SPL) for the year ended 30 September
20X6, and how much should be accrued on the statement of financial position (SOFP)?
SPL SOFP
A $12,000 $3,000
B $9,000 $3,000
C $9,000 NIL
D $6,000 $3,000 (2 marks)
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13.6 Which of the following statements about company financial statements is/are correct, according to
International Financial Reporting Standards?
1 Dividends paid on ordinary shares should be included in the statement of profit or loss and other
comprehensive income.
2 Dividends paid on redeemable preference shares are treated in the same way as dividends paid
on ordinary shares.
3 The statement of profit or loss and other comprehensive income shows the gain on revaluation of
non-current assets for the period.
A 1, 2 and 3
B 2 and 3
C 3 only
D All three statements are correct (2 marks)
13.7 At 30 June 20X2 a company's capital structure was as follows:
$
Ordinary share capital
500,000 shares of 25c each 125,000
Share premium account 100,000
In the year ended 30 June 20X3 the company made a rights issue of 1 share for every 2 held at $1 per
share and this was taken up in full. Later in the year the company made a bonus issue of 1 share for
every 5 held, using the share premium account for the purpose.
What was the company's capital structure at 30 June 20X3?
Ordinary share capital Share premium account
$ $
A 450,000 25,000
B 225,000 250,000
C 225,000 325,000
D 212,500 262,500 (2 marks)
13.8 At 30 June 20X2 a company had $1m 8% loan notes in issue, interest being paid half-yearly on
30 June and 31 December.
On 30 September 20X2 the company redeemed $250,000 of these loan notes at par, paying interest
due to that date.
On 1 April 20X3 the company issued $500,000 7% loan notes, interest payable half-yearly on
31 March and 30 September.
What figure should appear in the company's statement of profit or loss for interest payable in the year
ended 30 June 20X3?
A $88,750
B $82,500
C $65,000
D $73,750 (2 marks)
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QUESTIONS
61
13.9 A limited liability company issued 50,000 ordinary shares of 25c each at a premium of 50c per share.
The cash received was correctly recorded but the full amount was credited to the ordinary share capital
account.
Which one of the following journal entries is needed to correct this error?
Debit Credit
$ $
A Share premium account 25,000
Share capital account 25,000
B Share capital account 25,000
Share premium account 25,000
C Share capital account 37,500
Share premium account 37,500
D Share capital account 25,000
Cash 25,000 (2 marks)
13.10 Which one of the following journal entries could correctly record a bonus issue of shares?
Debit Credit
$ $
A Cash 100,000
Ordinary share capital 100,000
B Ordinary share capital 100,000
Share premium 100,000
C Share premium 100,000
Ordinary share capital 100,000
D Investments 100,000
Cash 100,000 (2 marks)
13.11 Which of these statements about limited liability companies is/are correct?
1 A company might make a bonus issue of shares to raise funds for expansion.
2 No cash is received when a company makes a rights issue of shares, instead other reserves
(usually share premium) are capitalised and reclassified as share capital.
3 A rights issue of shares dilutes the shareholding of existing shareholders if they do not take up
their rights.
A 1 and 3
B 2 and 3
C 1 and 2
D 3 only (2 marks)
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13.12 At 1 January 20X0 the capital structure of Q, a limited liability company, was as follows:
$
Issued share capital 1,000,000 ordinary shares of 50c each 500,000
Share premium account 300,000
On 1 April 20X0 the company made an issue of 200,000 50c shares at $1.30 each, and on 1 July the
company made a bonus (capitalisation) issue of one share for every four in issue at the time, using the
share premium account for the purpose.
Which of the following correctly states the company's share capital and share premium account at
31 December 20X0?
Share capital Share premium account
A $750,000 $230,000
B $875,000 $285,000
C $750,000 $310,000
D $750,000 $610,000
(2 marks)
13.13 According to the illustrative financial structure in IAS 1 Presentation of financial statements, where
should dividends paid during the year should be disclosed?
A Statement of profit or loss and other comprehensive income
B Statement of changes in equity
C Statement of financial position
D None of these (2 marks)
(Total = 26 marks)
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QUESTIONS
63
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
A …… reconciliation is a comparison of a b…… s……….… (sent monthly, weekly or even daily by the
bank) with the cash book. Differences between the balance on the bank statement and the balance in
the cash book will be errors or …………… differences, and they should be identified and satisfactorily
explained.
Differences between the cash book and the bank statement arise for three reasons:
– ………………… – usually in the cash book
– Omissions – such as b…… c…………not posted in the cash book
– T………… differences – such as unpresented cheques
There are five main types of error: errors of t……………, o…………, pr…………, c…………, and
comp………… errors.
A suspense account is an account showing a balance equal to the difference in a t …… b…….….
Suspense accounts are only ………... None should exist when it comes to drawing up the financial
statements at the end of the accounting period.
The two most important control accounts are those for …………… and …………. They are part of the
double entry system.
Cash books and day books are totalled periodically and the totals posted to the c………… accounts.
The balance totals on the p………… accounts should agree to the balance on the c…………… account.
Discounts can be defined as follows:
– A……… discount is a reduction in the list price of an article, given by a wholesaler or
manufacturer to a retailer.
– A………………… discount is a reduction in the amount payable for the purchase of goods or
services in return for payment in cash, or within an agreed period.
…….…. discounts received are d………… from the cost of purchases. C…… discounts received are
included as o……… i…..….. of the period in the statement of profit or loss.
…….…. discounts allowed are d………… from sales and c…… discounts allowed are shown as
……….. of the period.
Do you know? – Preparing a trial balance
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F3/FFA FINANCIAL ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
A bank reconciliation is a comparison of a bank statement (sent monthly, weekly or even daily by the
bank) with the cash book. Differences between the balance on the bank statement and the balance in
the cash book will be errors or timing differences, and they should be identified and satisfactorily
explained.
Differences between the cash book and the bank statement arise for three reasons:
– Errors – usually in the cash book
– Omissions – such as bank charges not posted in the cash book
– Timing differences – such as unpresented cheques
There are five main types of error: errors of transposition, omission, principle, commission and
compensating errors.
A suspense account is an account showing a balance equal to the difference in a trial balance.
Suspense accounts are only temporary. None should exist when it comes to drawing up the financial
statements at the end of the accounting period.
The two most important control accounts are those for receivables and payables. They are part of the
double entry system.
Cash books and day books are totalled periodically and the totals posted to the control accounts. The
balance totals on the personal accounts should agree to the balance on the control account.
Discounts can be defined as follows:
– A trade discount is a reduction in the list price of an article, given by a wholesaler or
manufacturer to a retailer.
– A cash (settlement) discount is a reduction in the amount payable for the purchase of goods or
services in return for payment in cash, or within an agreed period.
Trade discounts received are deducted from the cost of purchases. Cash discounts received are included
as other income of the period in the statement of profit or loss.
Trade discounts allowed are deducted from sales and cash discounts allowed are shown as expenses of
the period.
Did you know? – Preparing a trial balance
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QUESTIONS
65
14 15 mark question: trial balance 18 mins
14.1 Mr Yousef
The following trial balance has been extracted from the ledger of Mr Yousef, a sole trader.
TRIAL BALANCE AS AT 31 MAY 20X6
Dr Cr
$ $
Sales 138,078
Purchases 82,350
Carriage 5,144
Drawings 7,800
Rent and insurance 6,622
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Irrecoverable debts 877
Allowance for receivables 130
Receivables 12,120
Payables 6,471
Cash on hand 177
Cash at bank 1,002
Inventory as at 1 June 20X5 11,927
Equipment at cost 58,000
Accumulated depreciation 19,000
Capital 53,091
216,770 216,770
The following additional information as at 31 May 20X6 is available.
1 Rent is accrued by $210.
2 Insurance has been prepaid by $880.
3 $2,211 of carriage represents carriage inwards on purchases.
4 Equipment is to be depreciated at 15% per annum using the straight-line method.
5 The allowance for receivables is to be increased by $40.
6 Inventory at the close of business has been valued at $13,551.
Required
(a) Prepare a statement of profit or loss for the year ended 31 May 20X6. (8 marks)
(b) Prepare a statement of financial position as at that date. (7 marks)
(15 marks)
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15 Control accounts 48 mins
15.1 You are given the following information:
Receivables at 1 January 20X3 $10,000
Receivables at 31 December 20X3 $9,000
Total receipts during 20X3 (including cash sales of $5,000) $85,000
What is the figure for sales on credit during 20X3?
A $81,000
B $86,000
C $79,000
D $84,000 (2 marks)
15.2 A supplier sends you a statement showing a balance outstanding of $14,350. Your own records show a
balance outstanding of $14,500.
Which one of the following could be the reason for this difference?
A The supplier sent an invoice for $150 which you have not yet received.
B The supplier has allowed you $150 cash discount which you had omitted to enter in your ledgers.
C You have paid the supplier $150 which he has not yet accounted for.
D You have returned goods worth $150 which the supplier has not yet accounted for.
(2 marks)
15.3 Your payables control account has a balance at 1 October 20X8 of $34,500 credit. During October,
credit purchases were $78,400, cash purchases were $2,400 and payments made to suppliers,
excluding cash purchases, and after deducting settlement discounts of $1,200, were $68,900.
Purchase returns were $4,700.
What was the closing balance?
A $38,100
B $40,500
C $47,500
D $49,900 (2 marks)
15.4 A receivables ledger control account had a closing balance of $8,500. It contained a contra to the
payables ledger of $400, but this had been entered on the wrong side of the control account.
What should be the correct balance on the control account?
A $7,700 debit
B $8,100 debit
C $8,400 debit
D $8,900 debit (2 marks)
15.5 Which of the following items could appear on the credit side of a receivables ledger control account?
1 Cash received from customers
2 Irrecoverable debts written off
3 Increase in allowance for receivables
4 Discounts allowed
5 Sales
6 Credits for goods returned by customers
7 Cash refunds to customers
A 1, 2, 4 and 6
B 1, 2, 4 and 7
C 3, 4, 5 and 6
D 5 and 7 (2 marks)
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QUESTIONS
67
15.6 An inexperienced bookkeeper has drawn up the following receivables ledger control account:
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 180,000 Credit sales 190,000
Cash from credit customers 228,000 Irrecoverable debts written off 1,500
Sales returns 8,000 Contras against payables 2,400
Cash refunds to credit customers 3,300 Closing balance (balancing figure) 229,600
Discount allowed 4,200
423,500 423,500
What should the closing balance be after correcting the errors made in preparing the account?
A $130,600
B $129,200
C $142,400
D $214,600 (2 marks)
15.7 The payables ledger control account below contains a number of errors:
PAYABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance (amounts Purchases 1,268,600
owed to suppliers) 318,600 Contras against debit
Cash paid to suppliers 1,364,300 balances in receivables ledger 48,000
Purchases returns 41,200 Discounts received 8,200
Refunds received from suppliers 2,700 Closing balance 402,000
$1,726,800 $1,726,800
All items relate to credit purchases.
What should the closing balance be when all the errors are corrected?
A $128,200
B $509,000
C $224,200
D $144,600 (2 marks)
15.8 The following control account has been prepared by a trainee accountant:
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 308,600 Cash received from credit
customers
147,200
Credit sales 154,200 Discounts allowed to credit
Cash sales 88,100 customers 1,400
Contras against credit balances in Interest charged on overdue
payables ledger 4,600 accounts 2,400
Irrecoverable debts written off 4,900
Allowance for receivables 2,800
Closing balance 396,800
555,500 555,500
What should the closing balance be when all the errors made in preparing the receivables ledger control
account have been corrected?
A $395,200
B $304,300
C $307,100
D $309,500 (2 marks)
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15.9 The following receivables ledger control account prepared by a trainee accountant contains a number of
errors:
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
20X4 20X4
1 Jan Balance 614,000 31 Dec Credit sales 301,000
31 Jan Cash from credit customers 311,000 Discounts allowed 3,400
Contras against amounts Irrecoverable debts
due to suppliers in written off 32,000
payables ledger 8,650 Interest charged on overdue
accounts 1,600
Balance 595,650
933,650 933,650
What should the closing balance on the control account be after the errors in it have been corrected?
A $561,550
B $578,850
C $581,550
D $568,350 (2 marks)
15.10 Your organisation sold goods to PQ Co for $800 less trade discount of 20% and cash discount of 5% for
payment within 14 days. The invoice was settled by cheque five days later. Which one of the following
gives the entries required to record BOTH of these transactions?
DEBIT CREDIT
$ $
A PQ Co 640
Sales 640
Bank 608
Discount allowed 32
PQ Co 640
B PQ Co 640
Sales 640
Bank 600
Discount allowed 40
PQ Co 640
C PQ Co 640
Sales 640
Bank 608
Discount received 32
PQ Co 640
D PQ Co 800
Sales 800
Bank 608
Discount allowed 182
PQ Co 800
(2 marks)
15.11 Which one of the following is not a purpose of a receivables ledger control account?
A A receivables ledger control account provides a check on the overall accuracy of the personal
ledger accounts.
B A receivables ledger control account ensures the trial balance balances.
C A receivables ledger control account aims to ensure there are no errors in the personal ledger.
D Control accounts help deter fraud. (2 marks)
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QUESTIONS
69
15.12 Which of the following lists is composed only of items which would appear on the credit side of the
receivables control account?
A Cash received from customers, sales returns, irrecoverable debts written off, contras against
amounts due to suppliers in the accounts payable ledger
B Sales, cash refunds to customers, irrecoverable debts written off, discounts allowed
C Cash received from customers, discounts allowed, interest charged on overdue accounts,
irrecoverable debts written off
D Sales, cash refunds to customers, interest charged on overdue accounts, contras against amounts
due to suppliers in the accounts payable ledger (2 marks)
15.13 The following receivables ledger control account has been prepared by a trainee accountant:
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
20X5 20X5
1 Jan Balance 318,650 31 Jan Cash from credit customers 181,140
Credit sales 161,770 Interest charged on overdue
accounts 280
Cash sales 84,260 Irrecoverable debts written off 1,390
Discounts allowed to Sales returns from credit
credit customers 1,240 customers 3,990
Balance 379,120
565,920 565,920
What should the closing balance at 31 January 20X5 be after correcting the errors in the account?
A $292,380
B $295,420
C $292,940
D $377,200 (2 marks)
15.14 At 1 April 20X9, the payables ledger control account showed a balance of $142,320.
At the end of April the following totals are extracted from the subsidiary books for April:
$
Purchases day book 183,800
Returns outwards day book 27,490
Returns inwards day book 13,240
Payments to payables, after deducting $1,430 cash discount 196,360
It is also discovered that:
(a) The purchase day book figure is net of sales tax at 17.5%; the other figures all include sales tax.
(b) A customer's balance of $2,420 has been offset against his balance of $3,650 in the payables
ledger.
(c) A supplier's account in the payables ledger, with a debit balance of $800, has been included on
the list of payables as a credit balance.
What is the corrected balance on the payables ledger control account?
A $130,585
B $144,835
C $98,429
D $128,985 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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The following scenario relates to questions 15.15 to 15.17.
P & Co maintain a receivables ledger control account within the nominal ledger. At 30 November 20X0, the
total of the list of individual balances extracted from the receivables ledger was $15,800, which did not agree
with the balance on the receivables ledger control account. An examination of the books revealed the following
information, which can be used to reconcile the receivables ledger and the receivables ledger control account.
1 The credit balance of $420 in Ahmed's payables ledger account had been set off against his account in
the receivables ledger, but no entries had been made in the receivables and payables ledger control
accounts.
2 The personal account of Mahmood was undercast by $90.
3 Yasmin's balance of (debit) $780 had been omitted from the list of balances.
4 Thomas' personal account balance of $240 had been removed from the receivables ledger as a bad
debt, but no entry had been made in the receivables ledger control account.
5 The January total of $8,900 in the sales daybook had been posted as $9,800.
6 A credit note to Charles for $1,000, plus sales tax of $300, had been posted to the receivables ledger
control account as $1,300 and to Charles' personal account as $1,000.
7 The total on the credit side of Edward's personal account had been overcast by $125.
15.15 Which of these items need to be corrected by journal entries in the nominal ledger?
A 1, 3, 4 and 5 only
B 1, 4 and 5 only
C 1, 2, 5 and 6 only
D 2, 3, 6 and 7 only (2 marks)
15.16 What is the revised total of the balances in the receivables ledger after the errors have been corrected?
A $15,105
B $16,195
C $16,495
D $16,915 (2 marks)
15.17 Assuming that the closing balance on the receivables ledger control account should be $16,000, what
is the opening balance on the receivables ledger control account before the errors were corrected?
A $14,440
B $15,760
C $17,560
D $17,860 (2 marks)
15.18 The balance on Jude Co’s payables ledger control account is $31,554. The accountant at Jude Co has
discovered that she has not recorded:
A settlement discount of $53 received from a supplier; and
A supplier’s invoice for $622.
What amount should be reported for payables on Jude Co’s statement of financial position?
A $30,879
B $30,985
C $32,123
D $32,229 (2 marks)
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QUESTIONS
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15.19 The accountant at Borris Co has prepared the following reconciliation between the balance on the trade
payables ledger control account in the general ledger and the list of balances from the suppliers ledger:
$
Balance on general ledger control account 68,566
Credit balance omitted from list of balances from payables ledger (127)
68,439
Undercasting of purchases day book 99
Total of list of balances 68,538
What balance should be reported on Borris Co’s statement of financial position for trade payables?
A $68,439
B $68,538
C $68,566
D $68,665 (2 marks)
15.20 How should the balance on the payables ledger control account be reported in the final financial
statements?
A As an expense account
B As a non-current liability
C As a current asset
D As a current liability (2 marks)
(Total = 40 marks)
16 Bank reconciliations 36 mins
16.1 Your cash book at 31 December 20X3 shows a bank balance of $565 overdrawn. On comparing this
with your bank statement at the same date, you discover the following.
1 A cheque for $57 drawn by you on 29 December 20X3 has not yet been presented for payment.
2 A cheque for $92 from a customer, which was paid into the bank on 24 December 20X3, has
been dishonoured on 31 December 20X3.
What is the correct bank balance to be shown in the statement of financial position at 31 December
20X3?
A $714 overdrawn
B $657 overdrawn
C $473 overdrawn
D $53 overdrawn (2 marks)
16.2 The cash book shows a bank balance of $5,675 overdrawn at 31 August 20X5. It is subsequently
discovered that a standing order for $125 has been entered twice, and that a dishonoured cheque for
$450 has been debited in the cash book instead of credited.
What is the correct bank balance?
A $5,100 overdrawn
B $6,000 overdrawn
C $6,250 overdrawn
D $6,450 overdrawn (2 marks)
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16.3 A business had a balance at the bank of $2,500 at the start of the month. During the following month,
it paid for materials invoiced at $1,000 less trade discount of 20% and cash discount of 10%. It
received a cheque from a customer in respect of an invoice for $200, subject to cash discount of 5%.
What was the balance at the bank at the end of the month?
A $1,970
B $1,980
C $1,990
D $2,000 (2 marks)
16.4 The bank statement on 31 October 20X7 showed an overdraft of $800. On reconciling the bank
statement, it was discovered that a cheque drawn by your company for $80 had not been presented for
payment, and that a cheque for $130 from a customer had been dishonoured on 30 October 20X7, but
that this had not yet been notified to you by the bank.
What is the correct bank balance to be shown in the statement of financial position at 31 October
20X7?
A $1,010 overdrawn
B $880 overdrawn
C $750 overdrawn
D $720 overdrawn (2 marks)
16.5 The following information relates to a bank reconciliation.
(i) The bank balance in the cashbook before taking the items below into account was $8,970
overdrawn.
(ii) Bank charges of $550 on the bank statement have not been entered in the cashbook.
(iii) The bank has credited the account in error with $425 which belongs to another customer.
(iv) Cheque payments totalling $3,275 have been entered in the cashbook but have not been
presented for payment.
(v) Cheques totalling $5,380 have been correctly entered on the debit side of the cashbook but have
not been paid in at the bank.
What was the balance as shown by the bank statement before taking the above items into account?
A $9,520 overdrawn
B $11,200 overdrawn
C $9,520 in credit
D $11,200 in credit (2 marks)
16.6 The following bank reconciliation statement has been prepared by a trainee accountant:
BANK RECONCILIATION 30 SEPTEMBER 20X2
$
Balance per bank statement (overdrawn) 36,840
Add: lodgements credited after date 51,240
88,080
Less: unpresented cheques 43,620
Balance per cash book (credit) 44,460
Assuming the amounts stated for items other than the cash book balance are correct, what should the
cash book balance be?
A $44,460 credit as stated
B $60,020 credit
C $29,220 debit
D $29,220 credit (2 marks)
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QUESTIONS
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16.7 Listed below are some possible causes of difference between the cash book balance and the bank
statement balance when preparing a bank reconciliation:
1 Cheque paid in, subsequently dishonoured
2 Error by bank
3 Bank charges
4 Lodgements credited after date
5 Unpresented cheques not yet presented
Which of these items require an entry in the cash book?
A 1 and 3 only
B 1, 2, 3, 4 and 5
C 2, 4, and 5 only
D 4 and 5 only (2 marks)
16.8 In preparing a company's bank reconciliation statement at March 20X3, the following items are causing
the difference between the cash book balance and the bank statement balance:
1 Bank charges $380
2 Error by bank $1,000 (cheque incorrectly debited to the account)
3 Lodgements not credited $4,580
4 Unpresented cheques $1,475
5 Direct debit $350
6 Cheque paid in by the company and dishonoured $400
Which of these items will require an entry in the cash book?
A 2, 4 and 6
B 1, 5 and 6
C 3 and 4
D 3 and 5 (2 marks)
16.9 The following bank reconciliation statement has been prepared by a trainee accountant:
$
Overdraft per bank statement 3,860
Less: unpresented cheques 9,160
5,300
Add: deposits credited after date 16,690
Cash at bank as calculated above 21,990
What should be the correct balance per the cash book?
A $21,990 balance at bank as stated
B $3,670 balance at bank
C $11,390 balance at bank
D $3,670 overdrawn (2 marks)
16.10 Which of the following statements about bank reconciliations are correct?
1 A difference between the cash book and the bank statement must be corrected by means of a
journal entry.
2 In preparing a bank reconciliation, lodgements recorded before date in the cash book but credited
by the bank after date should reduce an overdrawn balance in the bank statement.
3 Bank charges not yet entered in the cash book should be dealt with by an adjustment in the bank
reconciliation statement.
4 If a cheque received from a customer is dishonoured after date, a credit entry in the cash book is
required.
A 2 and 4
B 1 and 4
C 2 and 3
D 1 and 3 (2 marks)
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16.11 The following information relates to a bank reconciliation.
(i) The bank balance in the cashbook before taking the items below into account was
$8,970 overdrawn.
(ii) Bank charges of $550 on the bank statement have not been entered in the cashbook.
(iii) The bank has credited the account in error with $425 which belongs to another customer.
(iv) Cheque payments totalling $3,275 have been entered in the cashbook but have not been
presented for payment.
(v) Cheques totalling $5,380 have been correctly entered on the debit side of the cashbook but have
not been paid in at the bank.
What was the balance as shown by the bank statement before taking the items above into account?
A $8,970 overdrawn
B $11,200 overdrawn
C $12,050 overdrawn
D $17,750 overdrawn (2 marks)
16.12 The following attempt at a bank reconciliation statement has been prepared by Q Co:
$
Overdraft per bank statement 38,600
Add: deposits not credited 41,200
79,800
Less: unpresented cheques 3,300
Overdraft per cash book 76,500
Assuming the bank statement balance of $38,600 to be correct, what should the cash book balance
be?
A $76,500 overdrawn, as stated
B $5,900 overdrawn
C $700 overdrawn
D $5,900 cash at bank (2 marks)
16.13 After checking a business cash book against the bank statement, which of the following items could
require an entry in the cash book?
1 Bank charges
2 A cheque from a customer which was dishonoured
3 Cheque not presented
4 Deposits not credited
5 Credit transfer entered in bank statement
6 Standing order entered in bank statement.
A 1, 2, 5 and 6
B 3 and 4
C 1, 3, 4 and 6
D 3, 4, 5 and 6 (2 marks)
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QUESTIONS
75
16.14 The following bank reconciliation statement has been prepared for a company:
$
Overdraft per bank statement 39,800
Add: Deposits credited after date 64,100
103,900
Less: Unpresented cheques presented after date 44,200
Overdraft per cash book 59,700
Assuming the amount of the overdraft per the bank statement of $39,800 is correct, what should be the
balance in the cash book?
A $158,100 overdrawn
B $19,900 overdrawn
C $68,500 overdrawn
D $59,700 overdrawn (2 marks)
16.15 Listed below are five potential causes of difference between a company's cash book balance and its bank
statement balance as at 30 November 20X3:
1 Cheques recorded and sent to suppliers before 30 November 20X3 but not yet presented for
payment
2 An error by the bank in crediting to another customer's account a lodgement made by the
company
3 Bank charges
4 Cheques paid in before 30 November 20X3 but not credited by the bank until 3 December 20X3
5 A cheque recorded and paid in before 30 November 20X3 but dishonoured by the bank
Which one of the following alternatives correctly analyses these items into those requiring an entry in the
cash book and those that would feature in the bank reconciliation?
Cash book entry Bank reconciliation
A 1, 2, 4 3, 5
B 3, 5 1, 2, 4
C 3, 4 1, 2, 5
D 2, 3, 5 1, 4 (2 marks)
(Total = 30 marks)
17 Correction of errors 41 mins
17.1 The debit side of a trial balance totals $800 more than the credit side.
Which one of the following errors would fully account for the difference?
A $400 paid for plant maintenance has been correctly entered in the cash book and credited to the
plant asset account.
B Discount received $400 has been debited to discount allowed account.
C A receipt of $800 for commission receivable has been omitted from the records.
D The petty cash balance of $800 has been omitted from the trial balance.
(2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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17.2 The bookkeeper of Peri made the following mistakes:
Discount allowed $3,840 was credited to discounts received account.
Discount received $2,960 was debited to discounts allowed account.
Discounts were otherwise correctly recorded.
Which one of the following journal entries will correct the errors?
Dr Cr
$ $
A Discount allowed 7,680
Discount received 5,920
Suspense account 1,760
B Discount allowed 880
Discount received 880
Suspense account 1,760
C Discount allowed 6,800
Discount received 6,800
D Suspense account 1,760
Discount allowed 880
Discount received 880
(2 marks)
17.3 A company's trial balance failed to agree, the totals being:
Debit $815,602
Credit $808,420
Which one of the following errors could fully account for the difference?
A The omission from the trial balance of the balance on the insurance expense account $7,182
debit
B Discount allowed $3,591 debited in error to the discount received account
C No entries made in the records for cash sales totalling $7,182
D The returns outwards total of $3,591 was included in the trial balance as a debit balance
(2 marks)
17.4 The debit side of a trial balance totals $50 more than the credit side. Which one of the following could
this be due to?
A A purchase of goods for $50 being omitted from the payables control account
B A sale of goods for $50 being omitted from the receivables control account
C An invoice of $25 for electricity being credited to the electricity account
D A receipt for $50 from a customer being omitted from the cash book (2 marks)
17.5 Which one of the following would be an error of principle?
A Plant and machinery purchased was credited to a non-current assets account.
B Plant and machinery purchased was debited to the purchases account.
C Plant and machinery purchased was debited to the equipment account.
D Plant and machinery purchased was credited to the equipment account. (2 marks)
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QUESTIONS
77
17.6 What is an error of commission?
A An error where a transaction has not been recorded
B An error where one side of a transaction has been recorded in the wrong account, and that
account is of a different class to the correct account
C An error where one side of a transaction has been recorded in the wrong account, and that
account is of the same class as the correct account
D An error where the numbers in the posting have been transposed (2 marks)
17.7 Where a transaction is entered into the correct ledger accounts, but the wrong amount is used, what is
the error known as?
A An error of omission
B An error of original entry
C An error of commission
D An error of principle (2 marks)
17.8 A business statement of profit or loss and other comprehensive income for the year ended 31 December
20X4 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor
van had been debited to motor expenses account. It is the company's policy to depreciate motor vans at
25 per cent per year, with a full year's charge in the year of acquisition.
What would the net profit be after adjusting for this error?
A $106,100
B $70,100
C $97,100
D $101,600 (2 marks)
17.9 An organisation restores its petty cash balance to $250 at the end of each month. During October, the
total expenditure column in the petty cash book was calculated as being $210, and the imprest was
restored by this amount. The analysis columns posted to the nominal ledger totalled only $200.
Which one of the following would this error cause?
A The trial balance being $10 higher on the debit side
B The trial balance being $10 higher on the credit side
C No imbalance in the trial balance
D The petty cash balance being $10 lower than it should be (2 marks)
17.10 Net profit was calculated as being $10,200. It was later discovered that capital expenditure of $3,000
had been treated as revenue expenditure, and revenue receipts of $1,400 had been treated as capital
receipts.
What is the net profit after correcting this error?
A $5,800
B $8,600
C $11,800
D $14,600 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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17.11 The accountant at Investotech discovered the following errors after calculating the company's profit for
20X3:
(a) A non-current asset costing $50,000 has been included in the purchases account
(b) Stationery costing $10,000 has been included as closing inventory of raw materials, instead of
stationery expenses
What is the effect of these errors on gross profit and net profit?
A Understatement of gross profit by $40,000 and understatement of net profit by $30,000
B Understatement of both gross profit and net profit by $40,000
C Understatement of gross profit by $60,000 and understatement of net profit by $50,000
D Overstatement of both gross profit and net profit by $60,000 (2 marks)
17.12 A purchase return of $48 has been wrongly posted to the debit of the sales returns account, but has
been correctly entered in the supplier's account.
Which of the following statements about the trial balance would be correct?
A The credit side to be $48 more than the debit side
B The debit side to be $48 more than the credit side
C The credit side to be $96 more than the debit side
D The debit side to be $96 more than the credit side (2 marks)
17.13 Two types of common errors in bookkeeping are errors of principle and errors of transposition.
Which of the following correctly states whether or not these errors will be revealed by extracting a trial
balance?
Errors of principle Errors of transposition
A Will be revealed Will not be revealed
B Will be revealed Will be revealed
C Will not be revealed Will not be revealed
D Will not be revealed Will be revealed
(2 marks)
17.14 The following are balances on the accounts of Luigi, a sole trader, as at the end of the current financial
year and after all entries have been processed and the profit for the year has been calculated.
$
Non-current assets 85,000
Receivables 7,000
Trade payables 3,000
Bank loan 15,000
Allowance for depreciation, non-current assets 15,000
Inventory 4,000
Accruals 1,000
Prepayments 2,000
Bank overdraft 2,000
What is the balance on Luigi’s capital account?
A $59,000
B $66,000
C $62,000
D $64,000 (2 marks)
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QUESTIONS
79
17.15 The following balances have been extracted from the nominal ledger accounts of Tanya, but the figure
for bank loan is unknown. There are no other accounts in the main ledger.
$
Payables 27,000
Capital 66,000
Purchases 160,000
Sales 300,000
Other expenses 110,000
Receivables 33,000
Purchase returns 2,000
Non-current assets 120,000
Cash in bank 18,000
Bank loan Unknown
What is the credit balance on the bank loan account?
A $46,000
B $102,000
C $78,000
D $34,000 (2 marks)
17.16 Beta Co has total assets of $650,000 and profit for the year of $150,000 recorded in the financial
statements for the year ended 31 December 20X3. Inventory costing $50,000, with a resale value of
$75,000, was received into the warehouse on 2 January 20X4 and included in the inventory value that
was recorded in the financial statements at 31 December 20X3.
What would the total assets figure in the Statement of Financial Position, and the adjusted profit for the
year figure, be after adjusting for this error?
Total assets (SOFP) Profit for year
A $700,000 $200,000
B $600,000 $100,000
C $725,000 $225,000
D $600,000 $75,000
(2 marks)
17.17 The electricity account for Jingles Co for the year ended 30 June 20X1 was as follows.
$
Opening balance for electricity accrued at 1 July 20X0 300
Payments made during the year
1 August 20X0 for three months to 31 July 20X0 600
1 November 20X0 for three months to 31 October 20X0 720
1 February 20X1 for three months to 31 January 20X1 900
30 June 20X1 for three months to 30 April 20X1 840
Jingles Co expects the next bill due in September to be for the same amount as the bill received in June.
What are the appropriate amounts for electricity to be included in the financial statements of Jingles Co
for the year ended 30 June 20X1?
Statement of Statement of
financial position profit or loss
A $560 $3,320
B $560 $3,060
C $860 $3,320
D $860 $3,060
(2 marks)
(Total = 34 marks)
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F3/FFA FINANCIAL ACCOUNTING
80
18 Suspense accounts 24 mins
The following information is relevant for question 18.1 and 18.2.
When Q's trial balance failed to agree, a suspense account was opened for the difference. The trial balance
totals were:
Debit $864,390
Credit $860,930
The company does not have control accounts for its receivables and payables ledgers.
The following errors were found:
1 In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary share
capital account as $330,000.
2 Cash $2,800 paid for plant repairs was correctly accounted for in the cash book but was credited to the
plant asset account.
3 The petty cash book balance $500 had been omitted from the trial balance.
4 A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles account
as $87,400.
5 A contra between the receivables ledger and the payables ledger for $1,200 which should have been
credited in the receivables ledger and debited in the payables ledger was actually debited in the
receivables ledger and credited in the payables ledger.
18.1 Which of these errors will require an entry to the suspense account to correct them?
A All five items
B 3 and 5 only
C 2, 4 and 5 only
D 1, 2, 3 and 4 only (2 marks)
18.2 What will the balance on the suspense account be after making the necessary entries to correct the
errors affecting the suspense account?
A $2,440 Debit
B $15,560 Credit
C $13,640 Debit
D $3,440 Debit (2 marks)
18.3 A company's trial balance totals were:
Debit $387,642
Credit $379,511
A suspense account was opened for the difference.
Which one of the following errors would have the effect of reducing the difference when corrected?
A The petty cash balance of $500 has been omitted from the trial balance.
B $4,000 received for rent of part of the office has been correctly recorded in the cash book and
debited to rent account.
C $3,000 paid for repairs to plant has been debited to the plant asset account.
D An invoice for Mr A Smith for $400 has been posted to the account of Mrs B Smith in error.
(2 marks)
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QUESTIONS
81
18.4 A trial balance extracted from a sole trader's records failed to agree, and a suspense account was opened
for the difference.
Which of the following errors would require an entry in the suspense account in correcting them?
1 Discount allowed was mistakenly debited to discount received account.
2 Cash received from the sale of a non-current asset was correctly entered in the cash book but
was debited to the disposal account.
3 The balance on the rent account was omitted from the trial balance.
4 Goods taken from inventory by the proprietor had been recorded by crediting drawings account
and debiting purchases account.
A All four items
B 2 and 3 only
C 2 and 4 only
D 1 and 3 only (2 marks)
18.5 A suspense account was opened when a trial balance failed to agree. The following errors were later
discovered.
A gas bill of $420 had been recorded in the gas account as $240.
A discount of $50 given to a customer had been credited to discounts received.
Interest received of $70 had been entered in the bank account only.
What was the original balance on the suspense account?
A Debit $210
B Credit $210
C Debit $160
D Credit $160 (2 marks)
18.6 A company's trial balance failed to agree, the out of balance difference of $25,000 being posted to a
suspense account.
Subsequent investigation revealed the difference was due to one side of an entry to record the purchase
of machinery for $25,000, by cheque, failing to post to the plant and machinery account.
Which of the following journal entries would correct the error?
Debit Credit
$ $
A Plant and machinery 25,000
Bank current account 25,000
B Suspense account 25,000
Plant and machinery 25,000
C Plant and machinery 25,000
Suspense account 25,000
D Bank current account 25,000
Suspense account 25,000
(2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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18.7 The trial balance of Z failed to agree, the totals being: debit $836,200
credit $819,700
A suspense account was opened for the amount of the difference and the following errors were found
and corrected:
1 The totals of the cash discount columns in the cash book had not been posted to the discount
accounts. The figures were discount allowed $3,900 and discount received $5,100.
2 A cheque for $19,000 received from a customer was correctly entered in the cash book but was
posted to the control account as $9,100.
What will be the remaining balance on the suspense be after the correction of these errors?
A $25,300 credit
B $7,700 credit
C $27,700 debit
D $5,400 credit (2 marks)
18.8 The trial balance of C, a limited liability company, did not agree, and a suspense account was opened
for the difference. Checking in the bookkeeping system revealed a number of errors.
1 $4,600 paid for motor van repairs was correctly treated in the cash book but was credited to
motor vehicles asset account.
2 $360 received from B, a customer, was credited in error to the account of BB.
3 $9,500 paid for rent was debited to the rent account as $5,900.
4 The total of the discount allowed column in the cash book had been debited in error to the
discounts received account.
5 No entries have been made to record a cash sale of $100.
Which of the errors above would require an entry to the suspense account as part of the process of
correcting them?
A 3 and 4
B 1 and 3
C 2 and 5
D 2 and 3 (2 marks)
18.9 The suspense account shows a debit balance of $100. What could this balance be due to?
A Entering $50 received from A Turner on the debit side of A Turner's account
B Entering $50 received from A Turner on the credit side of A Turner's account
C Undercasting the sales day book by $100
D Undercasting the purchases account by $100 (2 marks)
18.10 A suspense account shows a credit balance of $130. Which of the following could be due to?
A Omitting a sale of $130 from the sales ledger
B Recording a purchase of $130 twice in the purchases account
C Failing to write off a bad debt of $130
D Recording an electricity bill paid of $65 by debiting the bank account and crediting the electricity
account (2 marks)
(Total = 20 marks)
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QUESTIONS
83
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
There are some important differences between the accounts of a l………… l………… c……..… and
those of sole traders or partnerships.
…………… liability means that the maximum amount that an owner stands to lose, in the event that
the company becomes insolvent and cannot pay off its debts, is his share of the capital in the business.
…………… capital and …………… are 'owned' by the shareholders. They are known collectively as
'shareholders' equity'.
A company can increase its share capital by means of a …………… issue or a …………… issue.
…………… are included in a set of financial statements to give users extra information.
IAS 18 is concerned with the recognition of …………
Events after the reporting date but before the date the financial statements are approved that provide
further e………… of conditions that existed at the reporting date should be ……….. for in the financial
statements.
Events which do not affect the situation at the reporting date should not be ………… for but should be
…………… in the financial statements.
The approach to incomplete records questions is to build up the information given so as to complete the
necessary …………… entry.
………- ……… is the profit as a percentage of cost.
G……… p………. …..……. is the profit as a percentage of sales.
Where no trading records have been kept, profit can be derived from opening and closing net assets by
use of the b……..…. e………….
The business equation is Profit = increase in …………… – capital introduced + ……………
Statements of c…… f…..… are a useful addition to the financial statements of companies because it is
recognised that accounting profit is not the only indicator of a company's performance.
…………… activities are the principal revenue-producing activities of the enterprise and other activities
that are not investing or financing activities.
…………… activities are the acquisition and disposal of non-current assets and other investments not
included in cash equivalents.
…………… activities are activities that result in changes in the size and composition of the equity
capital and borrowings of the entity.
Do you know? – Preparing basic financial statements
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F3/FFA FINANCIAL ACCOUNTING
84
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
There are some important differences between the accounts of a limited liability company and those of
sole traders or partnerships.
Limited liability means that the maximum amount that an owner stands to lose, in the event that the
company becomes insolvent and cannot pay off its debts, is his share of the capital in the business.
Share capital and reserves are 'owned' by the shareholders. They are known collectively as 'shareholders'
equity'.
A company can increase its share capital by means of a bonus issue or a rights issue.
Notes are included in a set of financial statements to give users extra information.
IAS 18 is concerned with the recognition of revenue.
Events after the reporting date but before the date the financial statements are approved that provide
further evidence of conditions that existed at the reporting date should be adjusted for in the financial
statements.
Events which do not affect the situation at the reporting date should not be adjusted for, but should be
disclosed in the financial statements.
The approach to incomplete records questions is to build up the information given so as to complete the
necessary double entry.
Mark-up is the profit as a percentage of cost.
Gross profit margin is the profit as a percentage of sales.
Where no trading records have been kept, profit can be derived from opening and closing net assets by
use of the business equation.
The business equation is Profit = increase in net assets – capital introduced + drawings
Statements of cash flows are a useful addition to the financial statements of companies because it is
recognised that accounting profit is not the only indicator of a company's performance.
Operating activities are the principal revenue-producing activities of the enterprise and other activities
that are not investing or financing activities.
Investing activities are the acquisition and disposal of non-current assets and other investments not
included in cash equivalents.
Financing activities are activities that result in changes in the size and composition of the equity capital
and borrowings of the entity.
Did you know? – Preparing basic financial statements
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QUESTIONS
85
19 15 mark questions: preparing basic financial statements 126 mins
19.1 Shuswap
Exam focus point. This question provides excellent practise of the knowledge and skills required to tackle long
questions that may appear in Section B of the paper-based exam. However, the question is slightly longer, and
the mark allocations lower, than a typical 15 mark exam question. Use this question to practise the techniques
required to score well in longer Section B financial statement questions.
The draft statement of financial position shown below has been prepared for Shuswap, a limited liability
company, as at 31 December 20X4:
Accumulated Carrying
Cost depreciation value
$'000 $'000 $'000
Assets
Non-current assets
Land and buildings 9,000 1,000 8,000
Plant and equipment 21,000 9,000 12,000
30,000 10,000 20,000
Current assets
Inventories 3,000
Receivables 2,600
Cash at bank 1,900
Total assets 27,500
Equity and liabilities
Equity
Issued share capital (ordinary shares of 50c each) 6,000
Retained earnings 12,400
Non-current liabilities
Loan notes (redeemable 20Y0) 2,000
Current liabilities
Trade payables 2,100
22,500
Suspense account 5,000
27,500
The following further information is available:
1 It has been decided to revalue the land and buildings to $12,000,000 at 31 December 20X4.
2 Trade receivables totalling $200,000 are to be written off.
3 During the year there was a contra settlement of $106,000 in which an amount due to a supplier was
set off against the amount due from the same company for goods sold to it. No entry has yet been made
to record the set-off.
4 Some inventory items included in the draft statement of financial position at cost $500,000 were sold
after the reporting date for $400,000, with selling expenses of $40,000.
5 The suspense account is made up of two items:
(a) The proceeds of issue of 4,000,000 50c shares at $1.10 per share, credited to the suspense
account from the cash book.
(b) The balance of the account is the proceeds of sale of some plant on 1 January 20X4 with a
carrying amount at the date of sale of $700,000 and which had originally cost $1,400,000. No
other accounting entries have yet been made for the disposal apart from the cash book entry for
the receipt of the proceeds. Depreciation on plant has been charged at 25% (straight line basis)
in preparing the draft statement of financial position without allowing for the sale. The
depreciation for the year relating to the plant sold should be adjusted for in full.
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F3/FFA FINANCIAL ACCOUNTING
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Required
(a) Prepare the journal entries to clear the suspense account. (4 marks)
(b) Prepare the company's statement of financial position as at 31 December 20X4, complying as far as
possible with IAS 1 Presentation of financial statements. Details of non-current assets, adjusted
appropriately, should appear as they are presented in the question. (11 marks)
(15 marks)
19.2 Malright
Exam focus point. This question provides excellent practise of the knowledge and skills required to tackle long
questions that may appear in Section B of the paper-based exam. However, the question is slightly longer, and
the mark allocations lower, than a typical 15 mark exam question. Use this question to practise the techniques
required to score well in longer Section B financial statement questions.
You are presented with the following trial balance of Malright, a limited liability company, at 31 October 20X7.
Dr Cr
$'000 $'000
Buildings at cost 740
Buildings, accumulated depreciation, 1 November 20X6 60
Plant at cost 220
Plant, accumulated depreciation, 1 November 20X6 110
Land at cost 235
Bank balance 50
Revenue 1,800
Purchases 1,105
Discounts received 90
Returns inwards 35
Wages 180
Energy expenses 105
Inventory at 1 November 20X6 160
Trade payables 250
Trade receivables 320
Administrative expenses 80
Allowance for receivables, at 1 November 20X6 10
Directors' remuneration 70
Retained earnings at 1 November 20X6 130
10% loan notes 50
Dividend paid 30
$1 ordinary shares 650
Share premium account 80
3,280 3,280
Additional information as at 31 October 20X7:
(a) Closing inventory has been counted and is valued at $75,000.
(b) The items listed below should be apportioned as indicated.
Cost of Distribution Administrative
sales costs expenses
% % %
Discounts received – – 100
Energy expenses 40 20 40
Wages 40 25 35
Directors' remuneration – – 100
(c) An invoice of $15,000 for energy expenses for October 20X7 has not been received.
(d) Loan note interest has not been paid for the year.
(e) The allowance for receivables is to be increased to the equivalent of 5% of trade receivables. Any
expenses connected with receivables should be charged to administrative expenses.
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QUESTIONS
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(f) Plant is depreciated at 20% per annum using the reducing balance method. The entire charge is to be
allocated to cost of sales.
(g) Buildings are depreciated at 5% per annum on their original cost, allocated 30% to cost of sales, 30%
to distribution costs and 40% to administrative expenses.
(h) Income tax has been calculated as $45,000 for the year.
Required
Prepare the following financial statements for Malright in accordance with IAS 1 Presentation of financial
statements:
(a) The statement of profit or loss for the year ended 31 October 20X7 (6 marks)
(b) The statement of changes in equity for the year ended 31 October 20X7 (3 marks)
(c) The statement of financial position as at 31 October 20X7 (6 marks)
(15 marks)
19.3 Tonson
Exam focus point. This question provides excellent practise of the knowledge and skills required to tackle long
questions that may appear in Section B of the paper-based exam. However, the question is slightly longer, and
the mark allocations lower, than a typical 15 mark exam question. Use this question to practise the techniques
required to score well in longer Section B financial statement questions.
The following information has been extracted from the books of Tonson, a limited liability company, as at
31 October 20X6.
Dr Cr
$'000 $'000
Cash 15
Insurance 75
Inventory at 1 November 20X5 350
General expenses 60
Energy expenses 66
Marketing expenses 50
Wages and salaries 675
Discounts received 50
Share premium account 200
Retained earnings at 1 November 20X5 315
Allowance for receivables at 1 November 20X5 40
Sales revenue 5,780
Telephone expenses 80
Property expenses 100
Bank 94
Returns inward 95
Trade payables 290
Loan note interest 33
Trade receivables 900
Purchases 3,570
7% loan notes 470
Irrecoverable debts 150
$1 ordinary shares 1,800
Accumulated depreciation at 1 November 20X5
Buildings 360
Motor Vehicles 80
Furniture and equipment 420
Land at cost 740
Buildings at cost 1,500
Motor vehicles at cost 240
Furniture and equipment at cost 1,200
9,899 9,899
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You have also been provided with the following information:
(a) Inventory at 31 October 20X6 was valued at $275,000 based on its original cost. However, $45,000 of
this inventory has been in the warehouse for over two years and the directors have agreed to sell it in
November 20X6 for a cash price of $20,000.
(b) The marketing expenses include $5,000 which relates to November 20X6.
(c) The allowance for receivables is to be increased to the equivalent of 5% of trade receivables.
(d) There are wages and salaries outstanding of $40,000 for the year ended 31 October 20X6.
(e) Buildings are depreciated at 5% of cost. At 31 October 20X6 the buildings were professionally valued at
$1,800,000 and the directors wish this valuation to be incorporated into the financial statements.
(f) Depreciation is to be charged as follows:
(i) Motor vehicles at 20% of carrying amount
(ii) Furniture and equipment at 20% of cost
(g) No dividends have been paid or declared.
(h) Tax of $150,000 is to be provided for the year.
(i) During October 20X6 a bonus issue of one for ten shares was made to ordinary shareholders. This has
not been entered into the books. The share premium account was used for this purpose.
Required
Prepare the following statements, for internal use:
(a) The statement of profit or loss for the year ended 31 October 20X6 (8 marks)
(b) The statement of financial position as at 31 October 20X6 (7 marks)
(15 marks)
19.4 Emma
Set out below are the financial statements of Emma, a limited liability company. You have been asked to
prepare the company's statement of cash flows, implementing IAS 7 Statement of cash flows.
EMMA
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X2
$'000
Sales revenue 2,553
Cost of sales 1,814
Gross profit 739
Distribution costs 125
Administrative expenses 264
Operating profit 350
Interest received 25
Interest paid 75
Profit before tax 300
Income tax expense 240
Profit for the year 60
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QUESTIONS
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EMMA
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER
20X2 20X1
$'000 $'000
Non-current assets
Tangible assets 380 305
Intangible assets 250 200
Investments – 25
630 530
Current assets
Inventories 150 102
Receivables 390 315
Short-term investments 50 –
Cash in hand 2 1
592 418
1,222 948
Equity and liabilities
Share capital ($1 ordinary shares) 200 150
Share premium account 160 150
Revaluation surplus 100 91
Retained earnings 160 100
620 491
Non-current liabilities
Long-term loan 100 –
Current liabilities
Trade payables 127 119
Bank overdraft 85 98
Taxation 290 240
502 457
1,222 948
The following information is available.
(a) The proceeds of the sale of non-current asset investments amounted to $30,000.
(b) Fixtures and fittings, with an original cost of $85,000 and a carrying amount of $45,000, were sold for
$32,000 during the year.
(c) The current asset investments fall within the definition of cash equivalents under IAS 7.
(d) The following information relates to property, plant and equipment.
31.12.20X2 31.12.20X1
$'000 $'000
Cost 720 595
Accumulated depreciation 340 290
Carrying amount 380 305
(e) 50,000 $1 ordinary shares were issued during the year at a premium of 20c per share.
Required
Prepare a statement of cash flows for the year to 31 December 20X2 using the format laid out in IAS 7,
together with the relevant notes to the statement. (15 marks)
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19.5 Sioux
The following information is available for Sioux, a limited liability company:
Statements of financial position
31 December
20X4 20X3
$'000 $'000 $'000 $'000
Non-current assets
Cost or valuation 11,000 8,000
Accumulated depreciation (5,600) (4,800)
Carrying amount 5,400 3,200
Current assets
Inventories 3,400 3,800
Receivables 3,800 2,900
Cash at bank 400 7,600 100 6,800
13,000 10,000
Equity and liabilities
Capital and reserves
Ordinary share capital 1,000 1,000
Revaluation surplus 1,500 1,000
Retained earnings 3,100 5,600 2,200 4,200
Non-current liabilities
10% Loan notes 3,000 2,000
Current liabilities
Trade payables 3,700 3,200
Income tax 700 4,400 600 3,800
13,000 10,000
Summarised statement of profit or loss for the year ended 31 December 20X4
$'000
Profit from operations 2,650
Finance cost (loan note interest) (300)
2,350
Income tax expense (700)
Net profit for the year 1,650
Notes
1 During the year non-current assets which had cost $800,000, with a carrying amount of $350,000,
were sold for $500,000.
2 The revaluation surplus arose from the revaluation of some land that was not being depreciated.
3 The 20X3 income tax liability was settled at the amount provided for at 31 December 20X3.
4 The additional loan notes were issued on 1 January 20X4. Interest was paid on 30 June 20X4 and
31 December 20X4.
5 Dividends paid during the year amounted to $750,000.
Required
Prepare the company's statement of cash flows for the year ended 31 December 20X4, using the indirect
method, adopting the format in IAS 7 Statement of cash flows. (15 marks)
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QUESTIONS
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19.6 Snowdrop
The following information has been extracted from the draft financial statements of Snowdrop, a limited liability
company.
SNOWDROP
STATEMENTS OF FINANCIAL POSITION AS AT 31 MAY
20X4 20X5
$'000 $'000 $'000 $'000
Non-current assets 4,600 2,700
Current assets
Inventory 580 500
Trade receivables 360 230
Bank 0 170
940 900
Total assets 5,540 3,600
Equity and liabilities
Equity
Ordinary share capital 3,500 2,370
Share premium 300 150
Retained earnings 1,052 470
4,852 2,990
Non-current liabilities
10% Loan note
(redeemable 31 May 20X5) 0 100
Current liabilities
Trade payables 450 365
Taxation 180 145
Bank overdraft 58 0
688 510
5,540 3,600
Additional information
(a) The statement of profit or loss for the year ended 31 May 20X5 shows the following.
$'000
Operating profit 1,042
Interest payable (10)
Profit before taxation 1,032
Taxation (180)
Profit for financial year 852
(b) During the year dividends paid were $270,000.
(c) Profit before taxation had been arrived at after charging $700,000 for depreciation on non-current
assets.
(d) During the year non-current assets with a net book value of $200,000 were sold for $180,000.
Required
Prepare a statement of cash flows for Snowdrop for the year ended 31 May 20X5 in accordance with IAS 7
Statement of cash flows, using the indirect method. (15 marks)
19.7 Geofost
Exam focus point. The statement of cash flows questions in this set have required use of the indirect method.
Ensure you are also familiar with the direct method, as explained in Chapter 22 of your Study Text and tested
in section 22 of this Practice and Revision Kit.
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F3/FFA FINANCIAL ACCOUNTING
92
Geofost is preparing its statement of cash flows for the year ended 31 October 20X7. You have been presented
with the following information.
GEOFOST
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 OCTOBER 20X7
$'000
Profit from operations 15,730
Finance cost (730)
Profit before tax 15,000
Taxation (4,350)
Profit for the year 10,650
STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER
20X7 20X6
$'000 $'000 $'000 $'000
Non-current assets 44,282 26,574
Current assets
Inventory 3,560 9,635
Trade receivables 6,405 4,542
Cash 559 1,063
10,524 15,240
Total assets 54,806 41,814
Equity and liabilities
Equity
Ordinary share capital 16,000 15,000
Share premium account 3,365 2,496
Retained earnings 15,629 6,465
34,994 23,961
Non-current liabilities
9% loan notes 8,000 10,300
Current liabilities
Bank overdraft 1,230 429
Trade payables 7,442 4,264
Interest payable 120 100
Taxation 3,020 2,760
11,812 7,553
Total equity and liabilities 54,806 41,814
Additional information
(a) During the year dividends paid were $1,486,000.
(b) Summary schedule of changes to non-current assets during 20X7.
Accumulated Carrying
Cost depreciation value
$'000 $'000 $'000
Balance b/f 33,218 6,644 26,574
Additions 24,340 24,340
Disposals (2,964) (990) (1,974)
Depreciation 4,658 (4,658)
Balance c/f 54,594 10,312 44,282
(c) The total proceeds from the disposal of non-current assets were $2,694,000.
Required
Prepare a statement of cash flows for Geofost for the year ended 31 October 20X7 in accordance with IAS 7
Statement of cash flows, using the indirect method. (15 marks)
(Total = 105 marks)
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QUESTIONS
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20 Incomplete records 38 mins
20.1 A business has compiled the following information for the year ended 31 October 20X2:
$
Opening inventory 386,200
Purchases 989,000
Closing inventory 422,700
The gross profit as a percentage of sales is always 40%
Based on these figures, what is the sales revenue for the year?
A $1,333,500
B $1,587,500
C $2,381,250
D The sales revenue figure cannot be calculated from this information (2 marks)
20.2 Which of the following calculations could produce an acceptable figure for a trader's net profit for a
period if no accounting records had been kept?
A Closing net assets plus drawings minus capital introduced minus opening net assets
B Closing net assets minus drawings plus capital introduced minus opening net assets
C Closing net assets minus drawings minus capital introduced minus opening net assets
D Closing net assets plus drawings plus capital introduced minus opening net assets
(2 marks)
20.3 A sole trader fixes his prices to achieve a gross profit percentage on sales revenue of 40%. All his sales
are for cash. He suspects that one of his sales assistants is stealing cash from sales revenue.
His trading account for the month of June 20X3 is as follows:
$
Recorded sales revenue 181,600
Cost of sales 114,000
Gross profit 67,600
Assuming that the cost of sales figure is correct, how much cash could the sales assistant have taken?
A $5,040
B $8,400
C $22,000
D It is not possible to calculate a figure from this information (2 marks)
The following information is relevant for questions 20.4 and 20.5.
A is a sole trader who does not keep full accounting records. The following details relate to her transactions
with credit customers and suppliers for the year ended 30 November 20X3.
$
Trade receivables, 1 December 20X2 130,000
Trade payables, 1 December 20X2 60,000
Cash received from customers 686,400
Cash paid to suppliers 302,800
Discounts allowed 1,400
Discounts received 2,960
Irrecoverable debts 4,160
Amount due from a customer who is also a supplier offset against an amount due
for goods supplied by him 2,000
Trade receivables, 30 November 20X3 181,000
Trade payables, 30 November 20X3 84,000
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20.4 Based on the above information, what figure should appear in A's statement of profit or loss for the year
ended 30 November 20X3 for sales revenue?
A $748,960
B $748,800
C $744,960
D $743,560 (2 marks)
20.5 Based on the above information, what figure should appear in A's statement of profit or loss for the year
ended 30 November 20X3 for purchases?
A $283,760
B $325,840
C $329,760
D $331,760 (2 marks)
20.6 A sole trader fixes her prices by adding 50 per cent to the cost of all goods purchased. On 31 October
20X3 a fire destroyed a considerable part of the inventory and all inventory records.
Her trading account for the year ended 31 October 20X3 included the following figures:
$ $
Sales 281,250
Opening inventory at cost 183,600
Purchases 249,200
432,800
Closing inventory at cost 204,600
228,200
Gross profit 53,050
Using this information, what inventory loss has occurred?
A $61,050
B $87,575
C $40,700
D $110,850 (2 marks)
20.7 A fire on 30 September 20X2 destroyed some of a company's inventory and its inventory records.
The following information is available:
$
Inventory 1 September 20X2 318,000
Sales for September 20X2 612,000
Purchases for September 20X2 412,000
Inventory in good condition at 30 September 20X2 214,000
Standard gross profit percentage on sales is 25%
Based on this information, what is the value of the inventory lost?
A $96,000
B $271,000
C $26,400
D $57,000 (2 marks)
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QUESTIONS
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20.8 A business's bank balance increased by $750,000 during its last financial year. During the same period
it issued shares of $1 million and repaid a loan note of $750,000. It purchased non-current assets for
$200,000 and charged depreciation of $100,000. Working capital (other than the bank balance)
increased by $575,000.
What was its profit for the year?
A $1,175,000
B $1,275,000
C $1,325,000
D $1,375,000 (2 marks)
20.9 A sole trader's business made a profit of $32,500 during the year ended 31 March 20X8. This figure
was after deducting $100 per week wages for himself. In addition, he put his home telephone bill
through the business books, amounting to $400 plus sales tax at 17.5%. He is registered for sales tax
and therefore has charged only the net amount to his statement of profit or loss and other
comprehensive income.
His capital at 1 April 20X7 was $6,500. What was his capital at 31 March 20X8?
A $33,730
B $33,800
C $38,930
D $39,000 (2 marks)
20.10 Senji does not keep proper accounting records, and it is necessary to calculate her total purchases for
the year ended 31 January 20X3 from the following information:
$
Trade payables: 31 January 20X2 130,400
31 January 20X3 171,250
Payment to suppliers 888,400
Cost of goods taken from inventory by Senji for her personal use 1,000
Refunds received from suppliers 2,400
Discounts received 11,200
What is the figure for purchases that should be included in Senji’s financial statements?
A $914,650
B $937,050
C $939,050
D $941,850
(2 marks)
20.11 Aluki fixes prices to make a standard gross profit percentage on sales of 20%.
The following information for the year ended 31 January 20X3 is available to compute her sales total for
the year.
$
Inventory: 1 February 20X2 243,000
31 January 20X3 261,700
Purchases 595,400
Purchases returns 41,200
What is the sales figure for the year ended 31 January 20X3?
A $669,375
B $702,600
C $772,375
D $741,480 (2 marks)
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20.12 Alpha is a sole trader who does not keep proper accounting records.
Alpha’s first year of trading was 20X4. From reviewing Alpha’s bank statements and the incomplete
records relating to cash maintained, the following summary has been compiled.
Bank and cash summary, Alpha, 20X4
$
Cash received from credit customers and paid into the bank 381,600
Expenses paid out of cash received from credit customers before banking 6,800
Cash sales 112,900
Other information, Alpha, 20X4
Irrecoverable debts written off 7,200
Discounts allowed to credit customers 9,400
Closing balance of Trade receivables 0
Which of the following correctly represents Alpha's sales figure for 20X4?
A $517,900
B $112,900
C $381,600
D $510,900 (2 marks)
20.13 A sole trader who does not keep full accounting records wishes to calculate her sales revenue for the year.
The information available is:
1 Opening inventory $17,000
2 Closing inventory $24,000
3 Purchases $91,000
4 Standard gross profit percentage on sales revenue 40%
Which of the following is the sales figure for the year calculated from these figures?
A $117,600
B $108,000
C $210,000
D $140,000 (2 marks)
20.14 On 31 December 20X0 the inventory of V was completely destroyed by fire. The following information is
available:
1 Inventory at 1 December 20X0 at cost $28,400
2 Purchases for December 20X0 $49,600
3 Sales for December 20X0 $64,800
4 Standard gross profit percentage on sales revenue 30%
Based on this information, which of the following is the amount of inventory destroyed?
A $45,360
B $32,640
C $40,971
D $19,440 (2 marks)
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QUESTIONS
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20.15 The following information is available for the year ended 31 December 20X4 for a trader who does not
keep proper accounting records:
$
Inventories at 1 January 20X4 38,000
Inventories at 31 December 20X4 45,000
Purchases 637,000
Gross profit percentage on sales = 30%
Based on this information, what was the trader's sales figure for the year?
A $900,000
B $819,000
C $920,000
D $837,200 (2 marks)
20.16 Wanda keeps no accounting records. The following information is available about her position and
transactions for the year ended 31 December 20X4:
$
Net assets at 1 January 20X4 210,000
Drawings during 20X4 48,000
Capital introduced during 20X4 100,000
Net assets at 31 December 20X4 400,000
Based on this information, what was Wanda's profit for 20X4?
A $42,000
B $242,000
C $138,000
D $338,000 (2 marks)
(Total = 32 marks)
21 Company financial statements 24 mins
21.1 Which of the following items may appear as current liabilities in a company's statement of financial
position?
1 Revaluation surplus
2 Loan due for repayment within one year
3 Taxation
4 Preference dividend payable on redeemable preference shares
A 1, 2 and 3
B 1, 2 and 4
C 1, 3 and 4
D 2, 3 and 4 (2 marks)
21.2 Which of the following might appear as an item in a company's statement of changes in equity?
1 Profit on disposal of properties
2 Surplus on revaluation of properties
3 Equity dividends proposed after the reporting date
4 Issue of share capital
A 1, 3 and 4 only
B 2 and 4 only
C 1 and 2 only
D 3 and 4 only (2 marks)
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21.3 At 31 December 20X2 the following matters require inclusion in a company's financial statements:
1 On 1 January 20X2 the company made a loan of $12,000 to an employee, repayable on
30 April 20X3, charging interest at 2 per cent per year. On the due date she repaid the loan and
paid the whole of the interest due on the loan to that date.
2 The company has paid insurance $9,000 in 20X2, covering the year ending 31 August 20X3.
3 In January 20X3 the company received rent from a tenant $4,000 covering the six months to
31 December 20X2.
For these items, what total figures should be included in the company's statement of financial position at
31 December 20X2?
Receivables and prepayments Payables and accruals
$ $
A 22,000 240
B 22,240 NIL
C 10,240 NIL
D 16,240 6,000 (2 marks)
21.4 Which of the following items are required to be disclosed by a limited liability company, either on the
face of their main financial statements or in the notes, according to International Financial Reporting
Standards?
1 Share capital
2 Finance costs
3 Dividends proposed
4 Depreciation and amortisation
A 1, 2 and 3 only
B 2, 3 and 4 only
C 1, 2 and 4 only
D All four items (2 marks)
21.5 Which of the following statements about the financial statements of limited liability companies are
correct according to International Financial Reporting Standards?
1 In preparing a statement of cash flows, either the direct or the indirect method may be used.
Both lead to the same figure for net cash from operating activities.
2 Loan notes can be classified as current or non-current liabilities.
3 Financial statements must disclose a company's total expense for depreciation, if material.
4 A company must disclose by note details of all adjusting events allowed for in the financial
statements.
A 1, 2 and 3 only
B 2 and 4 only
C 3 and 4 only
D All four items (2 marks)
21.6 Which of the following could appear as separate items in the statement of changes in equity required by
IAS 1 Presentation of Financial Statements as part of a company's financial statements?
1 Dividends on equity shares paid during the period
2 Loss on sale of investments
3 Proceeds of an issue of ordinary shares
4 Dividends proposed after the year end
A 1, 3 and 4 only
B 1, 2 and 4 only
C 1 and 3 only
D All four items (2 marks)
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QUESTIONS
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21.7 Which one of the following items does not appear under the heading 'equity and reserves' on a company
statement of financial position?
A Share premium account
B Retained earnings
C Revaluation surplus
D Loan stock (2 marks)
21.8 The correct ledger entries needed to record the issue of 200,000 $1 shares at a premium of 30c, and
paid for in full, would be
A Dr Ordinary share capital $200,000
Cr Share premium account $60,000
Cr Cash $140,000
B Dr Cash $260,000
Cr Ordinary share capital $200,000
Cr Share premium account $60,000
C Dr Ordinary share capital $200,000
Cr Share premium account $60,000
Cr Cash $260,000
D Dr Cash $200,000
Dr Share premium account $60,000
Cr Ordinary share capital $260,000
(2 marks)
21.9 Which of the following statements about limited liability companies' accounting is/are correct?
1 A revaluation surplus arises when a non-current asset is sold at a profit.
2 The authorised share capital of a company is the maximum nominal value of shares and loan
notes the company may issue.
3 IAS 10 Events after the reporting period requires all non-adjusting events to be disclosed in the
notes to the financial statements.
A 1 and 2 only
B 2 only
C 3 only
D None of the statements are correct (2 marks)
21.10 Fruitz Co has a tax liability relating to 20X1 brought forward in 20X2 of $16,000. This liability is finally
agreed at $18,500, which is paid in 20X2.
Fruitz’s accountant estimates their tax liability for profits earned in 20X2 will be $20,000.
What should the charge for taxation be in Fruitz's statement of profit or loss (SPL) for the year ended
31 December 20X2?
A $22,500
B $15,000
C $17,500
D $20,000 (2 marks)
(Total = 20 marks)
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F3/FFA FINANCIAL ACCOUNTING
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22 Disclosure notes 22 mins
22.1 Which of the following best describes the purpose of disclosure notes in the financial statements?
A To provide more detail for the users of financial statements about the information in the
statement of financial position and statement of profit or loss and other comprehensive income.
B To allow companies to present their financial results in a more favourable way by only disclosing
some things in the notes and not on the main financial statements.
C To give all the detail of all the transactions that occurred during the period because the main
financial statements only present a summary.
D To explain the accounting treatment adopted where management have chosen not to apply
accounting standards. (2 marks)
22.2 For which class or classes of assets should a company disclose in the notes to the financial statements a
reconciliation of the opening carrying amount to the closing carrying amount, showing the movements in
the period?
1 Cash
2 Intangible assets
3 Tangible non-current assets
4 Trade receivables
A 3 only
B 2 and 3 only
C 1 and 4 only
D 1 only (2 marks)
22.3 Which of the following should be disclosed in the note to the financial statements for inventories?
1 The date the inventories were purchased or manufactured and/or how long they have been held
as inventories
2 The amount of inventories carried at net realisable value
3 The accounting policies adopted in measuring inventories
4 The useful life of the inventories
A 3 only
B 2 and 3 only
C 1 and 4 only
D 1 only (2 marks)
22.4 Which of the following should be disclosed in the note to the financial statements for intangible assets?
1 The method of amortisation used
2 A reconciliation of the carrying amount at the beginning and end of the period
3 The useful life of the assets
4 The net realisable value of any deferred development costs capitalised
A 1, 2 and 3 only
B 2 and 3 only
C 2, 3 and 4 only
D 2 only (2 marks)
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QUESTIONS
101
22.5 Which of the following statements is/are correct?
1 IAS 37 requires disclosure in the notes to the financial statements of the uncertainties affecting
the outcome of a provision
2 IAS 10 requires disclosure of the nature and financial effect of a non-adjusting event after the
reporting period in the notes to the financial statements
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 or 2 (2 marks)
22.6 A certain IFRS requires that the following disclosure is made in a note to the financial statements:
(i) A brief description of its nature
(ii) Where practicable an estimate of the financial effect
(iii) An indication of the uncertainties relating to the amount or timing of any outflow
(iv) The possibility of any reimbursement
Which of the following does the above disclosure apply to?
A Provisions
B Contingent liabilities
C Contingent assets
D Events after the reporting period (2 marks)
22.7 Which of the following should be disclosed in the note to the financial statements for tangible noncurrent
assets?
1 The market value of all assets classified as tangible non-current assets, whether they have been
revalued or not
2 A reconciliation of the carrying amount of non-current assets at the beginning and end of the
period
3 For revalued assets, the methods and significant assumptions applied in estimating the value
4 For revalued assets, the carrying amount of each class of assets that would have been included in
the financial statements had the assets been carried at cost less depreciation
A 1, 2 and 3 only
B 2 and 3 only
C 2, 3 and 4 only
D 2 only (2 marks)
22.8 Which of the following are required as disclosures by IAS 2 Inventories?
1 The amount of write-downs of inventories in the period that have been recognised as an expense
2 The original cost of inventories that are carried at net realisable value
3 The carrying amount of inventories classified by type (for example, raw materials, work in
progress)
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3 (2 marks)
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22.9 Which one of the following is a disclosure about non-adjusting events required by IAS 10 Events after
the reporting period?
A Dividends declared before the end of the reporting period and paid after the end of the reporting
period
B The nature of both material and non-material non-adjusting events
C The date that the non-adjusting event occurred
D An estimate of the financial effect of the event, unless a reasonable estimate cannot be made
(2 marks)
(Total = 18 marks)
23 Events after the reporting period 22 mins
23.1 Which of the following material events after the reporting period and before the financial statements are
approved by the directors should be adjusted for in those financial statements?
1 A valuation of property providing evidence of impairment in value at the reporting period
2 Sale of inventory held at the end of the reporting period for less than cost
3 Discovery of fraud or error affecting the financial statements
4 The insolvency of a customer with a debt owing at the end of the reporting period which is still
outstanding
A All of them
B 1, 2 and 4 only
C 3 and 4 only
D 1, 2 and 3 only (2 marks)
23.2 The draft financial statements of a limited liability company are under consideration. The accounting
treatment of the following material events after the reporting period needs to be determined.
1 The bankruptcy of a major customer, with a substantial debt outstanding at the end of the
reporting period
2 A fire destroying some of the company's inventory (the company's going concern status is not
affected)
3 An issue of shares to finance expansion
4 Sale for less than cost of some inventory held at the end of the reporting period
According to IAS 10 Events after the reporting period, which of the above events require an adjustment
to the figures in the draft financial statements?
A 1 and 4 only
B 1, 2 and 3 only
C 2 and 3 only
D 2 and 4 only (2 marks)
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QUESTIONS
103
23.3 In finalising the financial statements of a company for the year ended 30 June 20X4, which of the
following material matters should be adjusted for?
1 A customer who owed $180,000 at the end of the reporting period went bankrupt in July 20X4.
2 The sale in August 20X4 for $400,000 of some inventory items valued in the statement of
financial position at $500,000.
3 A factory with a value of $3,000,000 was seriously damaged by a fire in July 20X4. The factory
was back in production by August 20X4 but its value was reduced to $2,000,000.
4 The company issued 1,000,000 ordinary shares in August 20X4.
A All four items
B 1 and 2 only
C 1 and 4 only
D 2 and 3 only (2 marks)
23.4 IAS 10 Events after the reporting period regulates the extent to which events after the reporting period
should be reflected in financial statements.
Which one of the following lists of such events consists only of items that, according to IAS 10, should
normally be classified as non-adjusting?
A Insolvency of an account receivable which was outstanding at the end of the reporting period,
issue of shares or loan notes, an acquisition of another company
B Issue of shares or loan notes, changes in foreign exchange rates, major purchases of non-current
assets
C An acquisition of another company, destruction of a major non-current asset by fire, discovery of
fraud or error which shows that the financial statements were incorrect
D Sale of inventory which gives evidence about its value at the end of the reporting period, issue of
shares or loan notes, destruction of a major non-current asset by fire
(2 marks)
23.5 Which of the following events occurring after the reporting period are classified as adjusting, if material?
1 The sale of inventories valued at cost at the end of the reporting period for a figure in excess of
cost
2 A valuation of land and buildings providing evidence of an impairment in value at the year end
3 The issue of shares and loan notes
4 The insolvency of a customer with a balance outstanding at the year end
A 1 and 3
B 2 and 4
C 2 and 3
D 1 and 4 (2 marks)
23.6 The financial statements of Overexposure Co for the year ended 31 December 20X1 are to be approved
on 31 March 20X2. Before they are approved, the following events take place.
1 On 14 February 20X2 the directors took the strategic decision to sell their investment in Quebec
Co despite the fact that this investment generated material revenues.
2 On 15 March 20X2, a fire occurred in the eastern branch factory which destroyed a material
amount of inventory. It is estimated that it will cost $505,000 to repair the significant damage
done to the factory.
3 On 17 March 20X2, a customer of Overexposure Co went into liquidation. Overexposure has
been advised that it is unlikely to receive payment for any of the outstanding balances owed by
the customer at the year end.
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F3/FFA FINANCIAL ACCOUNTING
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How should these events reflected in the financial statements at 31 December 20X1?
Adjust Disclose Do nothing
A 3 2, 3 1
B 2, 3 1 –
C 3 1, 2 –
D 2 3, 1 (2 marks)
23.7 Which of the following events between the reporting date and the date the financial statements are
authorised for issue must be adjusted in the financial statements?
1 Declaration of equity dividends
2 Decline in market value of investments
3 The announcement of changes in tax rates
4 The announcement of a major restructuring
A 1 only
B 2 and 4
C 3 only
D None of them (2 marks)
23.8 Which of the following is the correct definition of an adjusting event after the reporting period?
A An event that occurs between the reporting date and the date on which the financial statements
are authorised for issue that provides further evidence of conditions that existed at the reporting
date
B An event that occurs between the reporting date and the date on which the financial statements
are authorised for issue that provides evidence of conditions that arose subsequent to the
reporting date
C An event that occurs after the date the financial statements are authorised for issue that provides
further evidence of conditions that existed at the reporting date
D An event that occurs after the date the financial statements are authorised for issue that provides
evidence of conditions that arose subsequent to the reporting date (2 marks)
23.9 If a material event occurs after the reporting date but before the financial statements are authorised for
issue outside the organisation, and this event does NOT require adjustment, what information should be
disclosed in the financial statements?
A The nature of the event and an estimate of the financial effect (or a statement that such an
estimate cannot be made)
B The nature of the event only
C An estimate of the financial effect (or a statement that such an estimate cannot be made) only
D No disclosure required (2 marks)
(Total = 18 marks)
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QUESTIONS
105
24 Statements of cash flows 48 mins
24.1 Which of the following items could appear in a company's statement of cash flows?
1 Surplus on revaluation of non-current assets
2 Proceeds of issue of shares
3 Proposed dividend
4 Irrecoverable debts written off
5 Dividends received
A 1, 2 and 5 only
B 2, 3, 4, 5 only
C 2 and 5 only
D 3 and 4 only (2 marks)
24.2 Part of the process of preparing a company's statement of cash flows is the calculation of cash inflow
from operating activities.
Which of the following statements about that calculation (using the indirect method) are correct?
1 Loss on sale of operating non-current assets should be deducted from net profit before taxation.
2 Increase in inventory should be deducted from operating profits.
3 Increase in payables should be added to operating profits.
4 Depreciation charges should be added to net profit before taxation.
A 1, 2 and 3
B 1, 2 and 4
C 1, 3 and 4
D 2, 3 and 4 (2 marks)
24.3 In the course of preparing a company's statement of cash flows, the following figures are to be included
in the calculation of net cash from operating activities.
$
Depreciation charges 980,000
Profit on sale of non-current assets 40,000
Increase in inventories 130,000
Decrease in receivables 100,000
Increase in payables 80,000
What will the net effect of these items be in the statement of cash flows?
$
A Addition to operating profit 890,000
B Subtraction from operating profit 890,000
C Addition to operating profit 1,070,000
D Addition to operating profit 990,000 (2 marks)
24.4 Part of a company's draft statement of cash flows is shown below:
$’000
Net profit before tax 8,640
Depreciation charges (2,160)
Proceeds of sale of non-current assets 360
Increase in inventory (330)
Increase in accounts payable 440
The following criticisms of the above extract have been made:
1 Depreciation charges should have been added, not deducted.
2 Increase in inventory should have been added, not deducted.
3 Increase in accounts payable should have been deducted, not added.
4 Proceeds of sale of non-current assets should not appear in this part of the statement of cash
flows.
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F3/FFA FINANCIAL ACCOUNTING
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Which of these criticisms are valid?
A 2 and 3 only
B 1 and 4 only
C 1 and 3 only
D 2 and 4 only (2 marks)
24.5 In preparing a company's statement of cash flows complying with IAS 7 Statements of Cash Flows,
which, if any, of the following items could form part of the calculation of cash flow from financing
activities?
1 Proceeds of sale of premises
2 Dividends received
3 Bonus issue of shares
A 1 only
B 2 only
C 3 only
D None of them (2 marks)
24.6 Which of the following assertions about statement of cash flows is/are correct?
1 A statement of cash flows prepared using the direct method produces a different figure for
operating cash flow from that produced if the indirect method is used.
2 Rights issues of shares do not feature in statements of cash flows.
3 A surplus on revaluation of a non-current asset will not appear as an item in a statement of cash
flows.
4 A profit on the sale of a non-current asset will appear as an item under Cash Flows from Investing
Activities in a statement of cash flows.
A 1 and 4
B 2 and 3
C 3 only
D 2 and 4 (2 marks)
24.7 An extract from a statement of cash flows prepared by a trainee accountant is shown below.
Cash flows from operating activities
$m
Net profit before taxation 28
Adjustments for: Depreciation (9)
Operating profit before working capital changes 19
Decrease in inventories 13
Increase in receivables (4)
Increase in payables (8)
Cash generated from operations 10
Which of the following criticisms of this extract are correct?
1 Depreciation charges should have been added, not deducted.
2 Decrease in inventories should have been deducted, not added.
3 Increase in receivables should have been added, not deducted.
4 Increase in payables should have been added, not deducted.
A 2 and 4
B 2 and 3
C 1 and 3
D 1 and 4 (2 marks)
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QUESTIONS
107
24.8 Which of the following items could appear in a company's statement of cash flows?
1 Proposed dividends
2 Rights issue of shares
3 Bonus issue of shares
4 Repayment of loan
A 1 and 3
B 2 and 4
C 1 and 4
D 2 and 3 (2 marks)
24.9 IAS 7 requires the statement of cash flows to open with the calculation of net cash from operating
activities, arrived at by adjusting net profit before taxation.
Which one of the following lists consists only of items which could appear in such a calculation?
A Depreciation, increase in receivables, decrease in payables, proceeds from sale of equipment,
increase in inventories
B Increase in payables, decrease in inventories, profit on sale of plant, depreciation, decrease in
receivables
C Increase in payables, proceeds from sale of equipment, depreciation, decrease in receivables,
increase in inventories
D Depreciation, interest paid, proceeds from sale of equipment, decrease in inventories
(2 marks)
24.10 The following extract is from the financial statements of Pompeii, a limited liability company at
31 October:
20X9 20X8
$’000 $’000
Equity and liabilities
Share capital 120 80
Share premium 60 40
Retained earnings 85 68
265 188
Non-current liabilities
Bank loan 100 150
365 338
What is the cash flow from financing activities to be disclosed in the statement of cash flows for the year
ended 31 October 20X9?
A $60,000 inflow
B $10,000 inflow
C $110,000 inflow
D $27,000 inflow (2 marks)
24.11 A draft statement of cash flows contains the following calculation of cash flows from operating activities:
$m
Profit before tax 13
Depreciation 2
Decrease in inventories (3)
Decrease in trade and other receivables 5
Decrease in trade payables 4
Net cash inflow from operating activities 21
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F3/FFA FINANCIAL ACCOUNTING
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Which of the following corrections need to be made to the calculation?
1 Depreciation should be deducted, not added.
2 Decrease in inventories should be added, not deducted.
3 Decrease in receivables should be deducted, not added.
4 Decrease in payables should be deducted, not added.
A 1 and 3
B 2 and 3
C 1 and 4
D 2 and 4 (2 marks)
24.12 The following extract is taken from a draft version of company’s statement of cash flows, prepared by a
trainee accountant.
$’000
Net cash flow from operating activities
Profit before tax 484
Depreciation charges 327
Profit on sale of property, plant and equipment 35
Increase in inventories (74)
Decrease in trade and other receivables (41)
Increase in trade payables 29
Cash generated from operations 760
Four possible mistakes that may have been made by the trainee accountant are listed below.
1 The profit on sale of property, plant and equipment should be subtracted, not added.
2 The increase in inventories should be added, not subtracted.
3 The decrease in trade and other receivables should be added, not subtracted.
4 The increase in trade payables should be subtracted, not added.
Which of the four mistakes did the trainee accountant make when preparing the draft statement?
A 1 and 2 only
B 1 and 3 only
C 2 and 4 only
D 3 and 4 only (2 marks)
24.13 Which, if any, of the following items could be included in ‘cash flows from financing activities’ in a
statement of cash flows that complies with IAS 7 Statement of Cash Flows?
1 Interest received
2 Taxation paid
3 Proceeds from sale of property
A 1 only
B 2 only
C 3 only
D None of them (2 marks)
24.14 Which one of the following statements is correct, with regard to the preparation of a statement of cash
flows that complies with IAS 7 Statement of Cash Flows?
A A statement of cash flows prepared using the direct method produces the same figure for net
cash from operating activities as a statement produced by the indirect method.
B An increase in a bank overdraft during the accounting period is included within cash flows from
financing activities.
C A profit on the sale of equipment is included within cash flows from investing activities.
D A surplus on the revaluation of property will appear within cash flows from investing activities.
(2 marks)
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QUESTIONS
109
24.15 The following information is available about the plant, property and equipment of Lok Co, for the year to
31 December 20X3.
$’000
Carrying amount of assets at beginning of the year 462
Carrying amount of assets at end of the year 633
Increase in revaluation surplus during the year 50
Disposals during the year, at cost 110
Accumulated depreciation on the assets disposed of 65
Depreciation charge for the year 38
What will be included in cash flows from investing activities for the year, in a statement of cash flows
that complies with IAS 7 Statement of Cash Flows?
A $104,000
B $159,000
C $166,000
D $204,000 (2 marks)
24.16 A company sold warehouse premises at a loss during a financial period. How would this transaction be
included in a statement of cash flows for the period that complies with IAS 7 Statement of Cash Flows
and that uses the indirect method to present cash flows from operating activities?
Loss on disposal Proceeds from sale
A Deduct as an adjustment in the calculation of
cash flows from operating activities
Include in cash flows from investing activities
B Deduct as an adjustment in the calculation of
cash flows from operating activities
Include in cash flows from operating activities
C Add as an adjustment in the calculation of
cash flows from operating activities
Include in cash flows from investing activities
D Add as an adjustment in the calculation of
cash flows from operating activities
Include in cash flows from operating activities
(2 marks)
24.17 Big Time Co had the following transactions during the year.
Purchases from suppliers were $18,500, of which $2,550 was unpaid at the year end. Brought
forward payables were $1,000.
Wages and salaries amounted to $9,500, of which $750 was unpaid at the year end. The
financial statements for the previous year showed an accrual for wages and salaries of $1,500.
Interest of $2,100 on a long term loan was paid in the year.
Sales revenue was $33,400, including $900 receivables at the year end. Brought forward
receivables were $400.
Interest on cash deposits at the bank amounted to $175.
Using the direct method, what is Big Time Co's cash flow from operating activities?
A $3,425
B $3,775
C $1,425
D $6,775 (2 marks)
24.18 Which one of the following statements is correct?
A If a business makes a profit, it has positive cash flow.
B If a business makes a loss, it has negative cash flow.
C A business may make a profit but have negative cash flow.
D A business that breaks even has cash inflows equal to cash used. (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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24.19 Toots Co has made healthy profits for the past year, although at times the company has been close to
running out of cash. Because Toots Co is profitable, Adam, their accountant is unconcerned by the cash
shortage. Jo, the financial controller at Toots Co, is concerned. Jo tells Adam, ‘profits are fine on paper,
but in the real world cash is king’. Jo believes Toots Co needs to take a more proactive approach to cash
flow management.
Adam and Jo have two different views. Who is correct, and why?
A Adam is correct. A profitable business should not waste management time on cash flow issues.
B Adam is correct. A profitable business will always survive and prosper.
C Jo is correct. Proactive cash flow management is required under IAS 7 Statements of Cash
Flows.
D Jo is correct. A business that does not have cash available to fund operations is likely to fail.
(2 marks)
24.20 Which one of the following statements correctly identifies a valid disadvantage to users of financial
statements of the statement of cash flows?
A Under IAS 7 Statement of cash flows, an entity may use any format for their statement.
B There is an opportunity to reclassify some cash outflows that might have been reported in the
operating section as investing cash outflows.
C Under IAS 7 Statement of cash flows the statement of cash flows may cover a different period of
time to the other financial statements.
D Cash flow figures are more open to manipulation than the profit figure.
(2 marks)
(Total = 40 marks)
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QUESTIONS
111
Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
……………… means presenting the results, assets and liabilities of a group of companies as if they
were one company.
A ……………… is an entity controlled by another entity.
An ……………… is an entity over which another entity exerts significant influence.
……………… are accounted for in the consolidated statements of a group using the e……… method.
A t……… i………… is a simple investment in the shares of another entity that is not an associate or a
subsidiary.
……………… financial statements present the results of the g………, they do not replace the separate
financial statements of the individual group companies.
Basic consolidation consists of two procedures:
– ……………… which appear as an asset in one company and a liability in another
– Then adding together all the ……………… assets and liabilities on a line by line basis
……………… arising on consolidation is recognised as an ……………… asset in the consolidated
statement of financial position.
The n.…-c………… i..……. shows the extent to which net assets controlled by the group are owned by
other parties.
A consolidation adjustment is required to remove ……………… profit on intra-group trading and transfer
of non-current assets.
When a parent company acquires a subsidiary part way through the year, the profits for the period need
to be apportioned between p….. and p…… acquisition. Only p..… acquisition profits are included in the
group's consolidated statement of financial position.
The ……………… statement of profit or loss is prepared by combining the statements of profit or loss of
each group company on a line-by-line basis.
Intra-group ……………… and ……………… are eliminated from the consolidated statement of profit or
loss.
If a ……………… is acquired during the year, only the post-acquisition element of statement of profit or
loss balances are included on consolidation.
Do you know? – Preparing simple consolidated financial statements
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F3/FFA FINANCIAL ACCOUNTING
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Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Consolidation means presenting the results, assets and liabilities of a group of companies as if they were
one company.
A subsidiary is an entity controlled by another entity.
An associate is an entity over which another entity exerts significant influence.
Associates are accounted for in the consolidated statements of a group using the equity method.
A trade investment is a simple investment in the shares of another entity that is not an associate or a
subsidiary.
Consolidated financial statements present the results of the group, they do not replace the separate
financial statements of the individual group companies.
Basic consolidation consists of two procedures:
– Cancelling out items which appear as an asset in one company and a liability in another
– Then adding together all the uncancelled assets and liabilities on a line by line basis
Goodwill arising on consolidation is recognised as an intangible asset in the consolidated statement of
financial position.
The non-controlling interest (NCI) shows the extent to which net assets controlled by the group are
owned by other parties.
A consolidation adjustment is required to remove unrealised profit on intra-group trading and transfer of
non-current assets.
When a parent company acquires a subsidiary part way through the year, the profits for the period need
to be apportioned between pre and post acquisition. Only post acquisition profits are included in the
group's consolidated statement of financial position.
The consolidated statement of profit or loss is prepared by combining the statements of profit or loss of
each group company on a line-by-line basis.
Intra-group sales and purchases are eliminated from the consolidated statement of profit or loss.
If a subsidiary is acquired during the year, only the post-acquisition element of statement of profit or
loss balances are included on consolidation.
Did you know? – Preparing simple consolidated financial statements
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QUESTIONS
113
25 15 mark questions: preparing simple consolidated
financial statements 72 mins
Exam focus point. This question provides excellent practice of the knowledge and skills required to tackle long
questions that may appear in Section B of the paper-based exam. As well as full questions such as those in this
section, questions in the exam may also be based on extracts from financial statements and include a number
of separate requirements (see Question 2 of the ACCA Specimen Exam for an example).
25.1 Swing and Cat
Swing purchased 80% of Cat's equity on 1 January 20X8 for $120,000 when Cat’s retained earnings were
$50,000. The fair value of the non-controlling interest on that date was $40,000. During the year, Swing sold
goods which cost $80,000 to Cat, at an invoiced cost of $100,000. Cat had 50% of the goods still in
inventories at the year end. The two companies' draft financial statements as at 31 December 20X8 are shown
below.
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X8
Swing Cat
$'000 $'000
Revenue 5,000 1,000
Cost of sales 2,900 600
Gross profit 2,100 400
Other expenses 1,700 320
Net profit 400 80
Income tax 130 25
Profit for the year 270 55
STATEMENTS OF FINANCIAL POSITION AT 31 DECEMBER 20X8
Swing Cat
$'000 $'000
Non-current assets
Investment in Cat 120 –
Tangible non-current assets 1,880 200
2,000 200
Current assets
Inventory 500 120
Trade receivables 650 40
Bank and cash 390 35
1,540 195
3,540 395
Equity and liabilities
Equity
Share capital 2,000 100
Retained earnings 400 200
2,400 300
Current liabilities
Trade payables 910 30
Tax 230 65
1,140 95
3,540 395
Required
Prepare the draft consolidated statement of profit or loss and draft consolidated statement of financial position
for the Swing group at 31 December 20X8. (15 marks)
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25.2 Black and Bury
The following are the financial statements relating to Black, a limited liability company, and its subsidiary
company Bury.
STATEMENTS OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 OCTOBER 20X5
Black Bury
$'000 $'000
Sales revenue 245,000 95,000
Cost of sales (140,000) (52,000)
Gross profit 105,000 43,000
Distribution costs (12,000) (10,000)
Administrative expenses (55,000) (13,000)
Dividend income from Bury 7,000 –
Profit before tax 45,000 20,000
Tax (13,250) (5,000)
Profit for the year 31,750 15,000
STATEMENTS OF FINANCIAL POSITION
AS AT 31 OCTOBER 20X5
Black Bury
$'000 $'000 $'000 $'000
Assets
Non-current assets
Property, plant and equipment 110,000 40,000
Investments
21,000,000 $1 ordinary shares in Bury at cost 21,000 –
131,000 40,000
Current assets
Inventory, at cost 13,360 3,890
Trade receivables and dividend receivable 14,640 6,280
Bank 3,500 2,570
Total assets 31,500 12,740
162,500 52,740
Equity and liabilities
Equity
$1 Ordinary shares 100,000 30,000
Retained earnings 33,500 10,280
133,500 40,280
Current liabilities
Payables 9,000 2,460
Dividend 20,000 10,000
Total equity and liabilities 29,000 12,460
162,500 52,740
Additional information
(a) Black purchased its $1 ordinary shares in Bury on 1 November 20X0. At that date the balance on
Bury's retained earnings was $2 million. The fair value of the non-controlling interest at the date of
acquisition was $11,800,000. Goodwill on acquisition was $800,000.
(b) During the year ended 31 October 20X5 Black sold goods which originally cost $12 million to Bury.
Black invoiced Bury at cost plus 40%. Bury still has 30% of these goods in inventory at 31 October
20X5.
(c) Bury owed Black $1.5 million at 31 October 20X5 for some of the goods Black supplied during the
year.
Required
(a) Prepare the following financial statements for Black.
(i) The consolidated statement of profit or loss for the year ended 31 October 20X5. (6 marks)
(ii) The consolidated statement of financial position as at 31 October 20X5. (6 marks)
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(b) Calculate the net profit percentage ratio for Black and Bury and comment on this ratio for the two
companies. (3 marks)
Disclosure notes are not required. (15 marks)
25.3 Prestend
Prestend is the parent company of Northon. The following are the statements of financial position for both
companies as at 31 October 20X7.
Prestend Northon
$'000 $'000 $'000 $'000
Assets
Non-current assets
Property, plant and equipment 4,200 3,300
Investments: shares in Northon at cost 3,345 –
Current assets
Inventory 1,500 800
Receivables 1,800 750
Bank 600 350
3,900 1,900
Total assets 11,445 5,200
Equity and liabilities
Equity
$1 ordinary shares 9,000 4,000
Retained earnings 525 200
9,525 4,200
Current liabilities
Payables 1,220 200
Tax 700 800
Total equity and liabilities 11,445 5,200
The following information is also available.
(a) Prestend purchased 2,800,000 shares in Northon a year ago when Northon had retained earnings of
$60,000. The fair value of the non-controlling interest at the date of acquisition was $1,415,000.
(b) During the year Prestend sold goods with an invoice value of $240,000 to Northon. These goods were
invoiced at cost plus 20%. Half of the goods are still in Northon's inventory at the year end.
(c) Northon owes Prestend $30,000 at 31 October 20X7 for goods it purchased during the year.
Required
(a) Calculate the goodwill on acquisition. (5 marks)
(b) Prepare the consolidated statement of financial position for the Prestend group as at 31 October 20X7.
Note. A working should be included for group retained earnings. Disclosure notes are not required.
(10 marks)
(15 marks)
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25.4 Liverton and Everpool
The summarised statements of profit or loss of two companies, Liverton and Everpool, for the year ended
31 May 20X6 are provided below. Liverton acquired 3,000,000 ordinary shares in Everpool for $3,500,000
on 1 June 20X4. At that time, the retained earnings of Everpool were $200,000 and the fair value of the noncontrolling
interest in Everpool was $1,000,000.
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MAY 20X6
Liverton Everpool
$'000 $'000
Sales revenue 6,400 2,600
Cost of sales (3,700) (1,450)
Gross profit 2,700 1,150
Distribution costs (1,100) (490)
Administrative expenses (700) (320)
Profit from operations 900 340
Dividends received from Everpool 150 –
Profit before tax 1,050 340
Tax (400) (80)
Profit for the year 650 260
The following information is also available.
(a) Everpool's total share capital consists of 4,000,000 ordinary shares of $1 each.
(b) During the year ended 31 May 20X6 Liverton sold goods costing $110,000 to Everpool for $200,000.
At 31 May 20X6, 60% of these goods remained in Everpool's inventory.
Required
(a) Calculate the total goodwill arising on the acquisition of Everpool. (5 marks)
(b) Prepare the consolidated statement of profit or loss for Liverton for the year ended 31 May 20X6.
(10 marks)
(15 marks)
(Total = 60 marks)
26 Consolidated financial statements 65 mins
The following information is relevant for questions 26.1 to 26.3.
On 1 January 20X0 Alpha Co purchased 90,000 ordinary $1 shares in Beta Co for $270,000. At that date
Beta Co's retained earnings amounted to $90,000 and the fair values of Beta Co's assets at acquisition were
equal to their book values.
Three years later, on 31 December 20X2, the statements of financial position of the two companies were:
Alpha Co Beta Co
$ $
Sundry net assets 230,000 260,000
Shares in Beta 180,000 –
410,000 260,000
Share capital
Ordinary shares of $1 each 200,000 100,000
Retained earnings 210,000 160,000
410,000 260,000
The share capital of Beta Co has remained unchanged since 1 January 20X0. The fair value of the noncontrolling
interest at acquisition was $42,000.
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26.1 What amount should appear in the group's consolidated statement of financial position at 31 December
20X2 for goodwill?
A $52,000
B $80,000
C $122,000
D $212,000 (2 marks)
26.2 What amount should appear in the group's consolidated statement of financial position at 31 December
20X2 for non-controlling interest?
A $49,000
B $58,000
C $51,000
D $42,000 (2 marks)
26.3 What amount should appear in the group's consolidated statement of financial position at 31 December
20X2 for retained earnings?
A $280,000
B $291,000
C $354,000
D $273,000 (2 marks)
26.4 Which of the following companies are subsidiaries of Gamma Co?
Zeta Co: Gamma Co owns 51% of the non-voting preference shares of Zeta Co Iota Co: Gamma Co has
3 representatives on the board of directors of Iota Co. Each director can cast 10 votes each out of the
total of 40 votes at board meetings.
Kappa Co: Gamma Co owns 75% of the ordinary share capital of Kappa Co, however Kappa Cois
located overseas and is subject to tax in that country.
A Zeta Co, Iota Co and Kappa Co
B Zeta Co and Kappa Co
C Iota Co and Kappa Co
D Zeta Co and Iota Co (2 marks)
The following information is relevant for questions 26.5 and 26.6.
Hilton Co acquired 80% of the share capital of Shrew Co on 1 January 20X3 for $280,000.
The statements of financial position of the two companies at 31 December 20X3 were as follows:
STATEMENTS OF FINANCIAL POSITION
Hilton Co Shrew Co
$ $
Sundry assets 660,000 290,000
Investment in Shrew 280,000 –
940,000 290,000
Issued share capital 400,000 140,000
Share premium account 320,000 50,000
Retained earnings
As at 1 Jan 20X3 140,000 60,000
Profit for 20X3 80,000 40,000
940,000 290,000
There have been no changes in the share capital or share premium account of either company since 1 January
20X3. The fair value of the non-controlling interest on acquisition was $65,000.
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26.5 What figure for goodwill on consolidation should appear in the consolidated statement of financial
position of the Hilton group at 31 December 20X3?
A $30,000
B $55,000
C $95,000
D $(10,000) (2 marks)
26.6 What figure for non-controlling interest should appear in the consolidated statement of financial position
of the Hilton group at 31 December 20X3?
A $77,000
B $85,000
C $73,000
D $105,000 (2 marks)
26.7 Fanta Co acquired 100% of the ordinary share capital of Tizer Co on 1 October 20X7.
On 31 December 20X7 the share capital and retained earnings of Tizer Co were as follows:
$'000
Ordinary shares of $1 each 400
Retained earnings at 1 January 20X7 100
Retained profit for the year ended 31 December 20X7 80
580
The profits of Tizer Co have accrued evenly throughout 20X7. Goodwill arising on the acquisition of Tizer
Co was $30,000.
What was the cost of the investment in Tizer Co?
A $400,000
B $580,000
C $610,000
D $590,000 (2 marks)
26.8 Evergreen Co owns 35% of the ordinary shares of Deciduous. What is the correct accounting treatment
of the revenues and costs of Deciduous for reporting period in the consolidated statement of profit or loss
of the Evergreen group?
A The revenues and costs of Deciduous are added to the revenues and costs of Evergreen on a line
by line basis.
B 35% of the profit after tax of Deciduous should be added to Evergreen’s consolidated profit before
tax.
C 35% of the revenues and costs of Deciduous are added to the revenues and costs of Evergreen on
a line by line basis.
D The revenues and costs of Deciduous are added to the revenues and costs of Evergreen Co on a
line by line basis, then 65% of the profit after tax is deducted so that only Evergreen Co’s share
remains in the consolidated financial statements. (2 marks)
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26.9 Mercedes Co has owned 100% of Benz Co since incorporation. At 31 March 20X9 extracts from their
individual statements of financial position were as follows.
Mercedes Co Benz Co
$ $
Share capital 100,000 50,000
Retained earnings 450,000 120,000
550,000 170,000
During the year ended 31 March 20X9, Benz Co had sold goods to Mercedes Co for $50,000. Mercedes
Co still had these goods in inventory at the year end. Benz Co uses a 25% mark up on all goods.
What were the consolidated retained earnings of Mercedes Group at 31 March 20X9?
A $560,000
B $580,000
C $570,000
D $557,500 (2 marks)
26.10 Micro Co acquired 90% of the $100,000 ordinary share capital of Minnie Co for $300,000 on
1 January 20X9 when the retained earnings of Minnie Co were $156,000. At the date of acquisition the
fair value of plant held by Minnie Co was $20,000 higher than its carrying amount. The fair value of the
non-controlling interest at the date of acquisition was $75,000.
What is the goodwill arising on the acquisition of Minnie Co?
A $119,000
B $99,000
C $139,000
D $24,000 (2 marks)
26.11 On 1 April 20X7 Possum Co acquired 60% of the share capital of Koala Co for $120,000. During the
year Possum Co sold goods to Koala Co for $30,000, including a profit margin of 25%. 40% of these
goods were still in inventory at the year end.
The following extract was taken from the financial statements of Possum Co and Koala Co at 31 March
20X8.
Possum Co Koala Co
$'000 $'000
Revenue 750 400
Cost of sales (420) (100)
Gross profit 330 300
What is the consolidated gross profit of the Possum group at 31 March 20X8?
A $627,600
B $633,000
C $622,500
D $627,000 (2 marks)
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26.12 Which of the following statements is/are incorrect?
1 A Co owns 25% of the ordinary share capital of B Co, which means that B Co is an associate of
A Co.
2 C Co can appoint 4 out of 6 directors to the board of D Co, which means that C Co has control
over D Co.
3 E Co has the power to govern the financial and operating policies of F Co, which means that F Co
is an associate of E Co.
4 G Co owns 19% of the share capital of H Co, but by agreement with the majority shareholder,
has control over the financial and operating policies of H Co, so H Co is an associate of G Co.
A 1 and 2 only
B 1, 2 and 3 only
C 3 and 4 only
D 4 only (2 marks)
26.13 Clementine Co has owned 21% of the ordinary shares of Tangerine Co for several years. Clementine Co
does not have any investments in any other companies. How should the investment in Tangerine Co be
reflected in the financial statements of Clementine Co?
A The revenues and costs and assets and liabilities of Tangerine Co are added to the revenues and
costs and assets and liabilities of Clementine Co on a line by line basis.
B An amount is shown in the statement of financial position for ‘investment in associate’ being the
original cost paid for the investment plus Clementine Co’s share of the profit after tax of Tangerine
Co. 21% of the profit after tax of Tangerine Co should be added to Clementine Co’s profit before
tax in the statement of profit or loss each year.
C An amount is shown in the statement of financial position under ‘investments’ being the original
cost paid for the investment, this amount does not change. Dividends received from Tangerine
are recognised in the statement of profit or loss of Clementine Co.
D An amount is shown in the statement of financial position under ‘investments’ being the original
cost paid for the investment, this amount does not change. 21% of the profit after tax of
Tangerine Co should be added to Clementine Co’s profit after tax in the statement of profit or loss
each year.
(2 marks)
26.14 Which of the following statements relating to parent companies and subsidiaries are correct?
1 A parent company could consolidate a company in which it holds less than 50% of the ordinary
share capital in certain circumstances.
2 Goodwill on consolidation will appear as an item in the parent company's individual statement of
financial position.
3 Consolidated financial statements ignore the legal form of the relationship between parents and
subsidiaries and present the results and position of the group as if it was a single entity.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 3 only (2 marks)
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QUESTIONS
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26.15 P Co, the parent company of a group, owns shares in three other companies. P Co’s holdings are:
Q Shares giving control of 60% of the voting rights in Q Co
R Shares giving control of 20% of the voting rights in R Co. P Co also has the right to appoint or
remove all the directors of R Co
S Shares giving control of 10% of the voting rights in S Co, plus 90% of the non-voting preference
shares
Which of these companies are subsidiaries of P Co?
A Q Co, R Co and S Co
B Q Co and S Co only
C R Co and S Co only
D Q Co and R Co only (2 marks)
26.16 Which of the following should be accounted for in the consolidated financial statements of Company A
using equity accounting?
1 An investment in 51% of the ordinary shares of W Co
2 An investment in 20% of the preference (non-voting) shares of X Co
3 An investment in 33% of the ordinary shares of Y Co
4 An investment in 20% of the ordinary shares of Z Co, and an agreement with other shareholders
to appoint the majority of the directors to the board of Z Co
A 1 and 4 only
B 2 only
C 3 only
D 3 and 4 only (2 marks)
26.17 Breakspear Co purchased 600,000 of the voting equity shares of Fleet Co when the value of the noncontrolling
interest in Fleet Co is $150,000.
The following information relates to Fleet at the acquisition date.
At acquisition
$’000
Share capital, $0.5 ordinary shares 500
Retained earnings 150
Revaluation surplus 50
700
The goodwill arising on acquisition is $70,000. What was the consideration paid by Breakspear Co for
the investment in Fleet Co?
A $420,000
B $770,000
C $620,000
D $570,000 (2 marks)
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26.18 Date Co owns 100% of the ordinary share capital of Prune Co. The following balances relate to Prune
Co.
At acquisition At 31.12.X8
$’000 $’000
Tangible non-current assets
Freehold land 500 500
Plant and equipment 350 450
850 950
At acquisition, the fair value of Prune Co’s land was $50,000 more than shown in the financial
statements of Prune Co. At 31 December 20X8, Date Co’s financial statements show a total tangible
non-current asset balance of $1,250,000.
What amount should be included in the consolidated financial statements of the Date group at
31 December 20X8 for tangible non-current assets?
A $2,250,000
B $1,000,000
C $1,850,000
D $2,200,000 (2 marks)
26.19 Six Co owns 80% of the equity share capital of Seven Co. At 31 December 20X4, the trade receivables
and trade payables of the two companies were as follows:
Six Co Seven Co
Trade receivables $64,000 $39,000
Trade payables $37,000 $48,000
These figures include $30,000 that is owed by Seven Co to Six Co for the purchase of goods, for which
Six Co has not yet paid. These goods were sold by Six Co for a profit of $15,000 and 50% of them were
still held as inventory by Seven Co at 31 December 20X4.
What should be the amounts for trade receivables and trade payables in the consolidated statement of
financial position as at 31 December 20X4?
A Trade receivables $73,000, Trade payables $55,000
B Trade receivables $88,000, Trade payables $70,000
C Trade receivables $95,000, Trade payables $77,000
D Trade receivables $103,000, Trade payables $85,000 (2 marks)
26.20 Donna Co acquired 80% of the equity share capital of Blitsen Co on 1 January 20X4 when the retained
earnings of Blitsen Co were $40,000. The fair value of the non-controlling interest at this date was
$25,000. At 31 December 20X4, the equity capital of Blitsen Co was as follows:
$’000
Share capital 40
Share premium 10
Retained earnings 60
110
During the year Blitsen Co sold goods to Donna Co for $20,000. This price included a mark-up of
$12,000 for profit. At 31 December 20X4, 50% of these goods remained unsold in the inventory of
Donna Co.
What is the value of the non-controlling interest in the Donna Group at 31 December 20X4, for the
purpose of preparing the consolidated statement of financial position?
A $20,800
B $27,800
C $26,600
D $29,000 (2 marks)
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QUESTIONS
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26.21 Volcano Co acquired 75% of the equity share capital of Lava Co on 1 September 20X3. The retained
profits of the two individual companies at the beginning and end of their financial year were as follows.
Volcano Co Lava Co
$’000 $’000
Retained earnings at 1 January 20X3 596 264
Retained earnings at 31 December 20X3 650 336
What is the parent company’s share of consolidated retained earnings that should be reported in the
consolidated statement of financial position of the Volcano Group at 31 December 20X3?
A $668,000
B $674,000
C $704,000
D $722,000 (2 marks)
26.22 Tin Co acquired 90% of the equity share capital of Drum Co on 1 April 20X3. The following information
relates to the financial year to 31 December 20X3 for each company.
Tin Co Drum Co
$’000 $’000
Retained earnings at 1 January 20X3 840 170
Profit for the year 70 60
Retained earnings at 31 December 20X3 910 230
Neither company paid any dividends during the year.
What profit is attributable to the parent company in the consolidated statement of profit or loss of the
Tin Group for the year to 31 December 20X3?
A $83,500
B $110,500
C $115,000
D $124,000 (2 marks)
26.23 Sand Co acquired 80% of the equity share capital of Sun Co several years ago. In the year to
31 December 20X4, Sand Co made a profit after taxation of $120,000 and Sun Co made a profit after
taxation of $35,000. During the year Sun Co sold goods to Sand Co at a price of $40,000. The profit
mark-up was 40% on the sales price. At 31 December 20X4, 25% of these goods were still held in the
inventory of Sand Co.
What profit is attributable to the parent company in the consolidated statement of profit or loss of the
Sand Group for the year to 31 December 20X4?
A $144,000
B $148,000
C $144,800
D $151,000 (2 marks)
26.24 On 1 August 20X7 Patronic purchased 18 million of the 24 million $1 equity shares of Sardonic. The
acquisition was through a share exchange of two shares in Patronic for every three shares in Sardonic.
The market price of a share in Patronic at 1 August 20X7 was $5.75.
What is the fair value of the consideration transferred for the acquisition of Sardonic?
A $103.5 million
B $69 million
C $155.25 million
D $92 million
(2 marks)
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26.25 X Co acquired 80% of the equity share capital in Y Co on 31 July 20X6. Extracts from the two
companies' statements of profit or loss for the year ended 30 September 20X6 were as follows:
X Co Y Co
$'000 $'000
Revenue 3 400 2 400
Cost of sales 1 500 1 800
During the year ended 30 September 20X6, Y Co sold goods for $5 000 each month to X Co, at a mark
up of 25%. At the end of the year X Co had 50% of these goods left in inventory.
What is the group gross profit for the year ended 30 September 20X6?
A $1,901,000
B $2,001,000
C $2,004,000
D $1,904,000 (2 marks)
26.26 WX acquired 75% of the equity share capital of YZ several years ago. At 31 March 20X6 WX had goods
in inventory valued at cost of $60,000, that had been purchased from YZ at a mark-up of 20%.
What is the effect on the profit attributable to the non-controlling interest, and the profit attributable to
the parent company for the year ended 31 March 20X6?
Profit attributable to non-controlling interest Profit attributable to WX
A no effect decrease by $5,000
B no effect decrease by $12,000
C decrease by $3,000 decrease by $9,000
D decrease by $2,500 decrease by $7,500
(2 marks)
26.27 P owns 80% of the equity share capital of S The profit after tax of S for the year ended 31 December
20X6 was $60 million. During 20X6, P sold goods to S for $4 million at cost plus 20%. At the year end
50% of these goods were left in the inventory of S.
What is non-controlling interest share of the after-tax profit of S for the year ended 31 December 20X6?
A $11.36 million
B $11.6 million
C $11.68 million
D $12 million (2 marks)
(Total = 54 marks)
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QUESTIONS
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Check that you can fill in the blanks in the statements below before you attempt any questions. If in doubt,
you should go back to your BPP Interactive Text and revise first.
Users of financial statements can gain a better understanding of the s…………… of the information in
financial statements by comparing it with other r…………… information.
Ratios provide information through ……………….
P……………… ratios include:
– Return on capital employed
– Net ………… as a percentage of sales
– ……… turnover ratio
– G……… profit as a percentage of sales
Liquidity and working capital ratios include:
– ……………… ratio
– ……………… ratio
– Accounts ……………… collection period
– Accounts ……………… payment period
– ……………… inventory ……………… period
Debt and g……………… /leverage ratios include:
– Debt ratios
– G…………..… ratio/leverage
– I……………… cover
Do you know? – Interpretation of financial statements
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F3/FFA FINANCIAL ACCOUNTING
126
Could you fill in the blanks? The answers are in bold. Use this page for revision purposes as you approach
the exam.
Users of financial statements can gain a better understanding of the significance of the information in
financial statements by comparing it with other relevant information.
Ratios provide information through comparison.
Profitability ratios include:
– Return on capital employed
– Net profit as a percentage of sales
– Asset turnover ratio
– Gross profit as a percentage of sales
Liquidity and working capital ratios include:
– Current ratio
– Quick ratio
– Accounts receivable collection period
– Accounts payable payment period
– Average inventory turnover period
Debt and gearing/leverage ratios include:
– Debt ratios
– Gearing ratio/leverage
– Interest cover
Did you know? – Interpretation of financial statements
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27 15 mark question: interpretation of financial statements 18 mins
Exam focus point. It is unlikely that there would be a 15 mark question solely on interpretation in the exam.
However, interpretation could easily form part of a 15 mark question and test the skills covered in this
question. Interpretation could also be tested in a multiple-choice question, such as those included in Section
26 of this Kit.
27.1 Binky and Smokey
Two companies Binky and Smokey trade in the same market. Their financial statements for the year ended
31 October 20X6 are summarised below:
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 OCTOBER 20X6
Binky Smokey
$'000 $'000 $'000 $'000
Sales revenue 284 305
Cost of sales (155) (151)
Gross profit 129 154
Expenses
Administrative 24 37
Selling and distribution 35 53
Depreciation 9 12
Loan note interest – 5
(68) (107)
Net profit 61 47
STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER 20X6
Binky Smokey
Assets $'000 $'000 $'000 $'000
Non-current assets
At cost 320 515
Accumulated depreciation (75) (96)
245 419
Current assets
Inventory 91 293
Receivables 46 75
Bank 64 15
201 383
446 802
Equity and liabilities
Share capital and reserves
Share capital 150 250
Retained earnings 108 177
10% Loan note – 50
Current liabilities 188 325
Total equity and liabilities 446 802
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F3/FFA FINANCIAL ACCOUNTING
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Required
(a) Calculate the following ratios for Binky and Smokey:
(State the formulae used for calculating the ratios.)
Profitability ratios
Gross profit percentage
Net profit percentage
Asset turnover ratio
Liquidity ratios
Current ratio
Quick ratio (acid test ratio)
Receivables collection period (6 marks)
(b) Compare and comment on the performance of the companies as indicated by the ratios you have
calculated in part (a). (9 marks)
(15 marks)
28 Interpretation of financial statements 26 mins
28.1 Which one of the following would help a company with high gearing to reduce its gearing ratio?
A Making a rights issue of equity shares
B Issuing further long-term loan notes
C Making a bonus issue of shares
D Paying dividends on its equity shares (2 marks)
28.2 A company's gross profit as a percentage of sales increased from 24% in the year ended 31 December
20X1 to 27% in the year ended 31 December 20X2.
Which of the following events is most likely to have caused the increase?
A An increase in sales volume
B A purchase in December 20X1 mistakenly being recorded as happening in January 20X2
C Overstatement of the closing inventory at 31 December 20X1
D Understatement of the closing inventory at 31 December 20X1 (2 marks)
28.3 Which of the following transactions would result in an increase in capital employed?
A Selling inventory at a profit
B Writing off a bad debt
C Paying a payable in cash
D Increasing the bank overdraft to purchase a non-current asset (2 marks)
28.4 From the following information regarding the year to 31 August 20X6, what is the accounts payable
payment period? You should calculate the ratio using purchases as the denominator.
$
Sales 43,000
Cost of sales 32,500
Opening inventory 6,000
Closing inventory 3,800
Trade accounts payable at 31 August 20X6 4,750
A 40 days
B 50 days
C 53 days
D 57 days (2 marks)
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QUESTIONS
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The following information is relevant for questions 28.5 to 28.7.
Quality Co are drafting their financial statements. An extract from their draft statement of financial position at
31 March 20X8 is set out below.
$ $
Non-current assets 450
Current assets: Inventory 65
Receivables 110
Prepayments 30
205
Current liabilities: Payables 30
Bank overdraft (Note) 50
80
125
575
Non-current liability: Loan (75)
500
Ordinary share capital 400
Statement of profit or loss 100
500
Note: The bank overdraft first occurred on 30 September 20X7.
28.5 What is the gearing of the company? You should calculate gearing using capital employed as the
denominator.
A 13%
B 16%
C 20%
D 24% (2 marks)
28.6 What is the quick ratio of the company?
A 1.75
B 2.56
C 2.88
D 3.20 (2 marks)
28.7 What is the current ratio of the company?
A 1.75
B 2.56
C 2.88
D 3.20 (2 marks)
28.8 Which of the following is a ratio which is used to measure how much a business owes in relation to its
size?
A Asset turnover
B Profit margin
C Gearing
D Return on capital employed (2 marks)
28.9 A business operates on a gross profit margin of 331/3%. Gross profit on a sale was $800, and expenses
were $680.
What is the net profit margin?
A 3.75%
B 5%
C 11.25%
D 22.67% (2 marks)
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28.10 A company has the following details extracted from its statement of financial position:
$'000
Inventories 1,900
Receivables 1,000
Bank overdraft 100
Payables 1,000
The industry the company operates in has a current ratio norm of 1.8. Companies who manage liquidity
well in this industry have a current ratio lower than the norm.
Which of the following statements accurately describes the company’s liquidity position?
A Liquidity appears to be well managed as the bank overdraft is relatively low
B Liquidity appears to be poorly-controlled as shown by the large payables balance
C Liquidity appears to be poorly-controlled as shown by the company’s relatively high current ratio
D Liquidity appears to be poorly-controlled as shown by the existence of a bank overdraft
(2 marks)
28.11 Why is analysis of financial statements carried out?
A So that the analyst can determine a company’s accounting policies
B So that the significance of financial statements can be better understood through comparisons
with historical performance and with other companies
C To get back to the ‘real’ underlying figures, without the numbers being skewed by the
requirements of International Financial Reporting Standards
D To produce a report that can replace the financial statements, so that the financial statements no
longer need to be looked at (2 marks)
(Total = 22 marks)
29 Mixed bank 1 46 mins
29.1 The following information is available for a sole trader who keeps no accounting records:
$
Net business assets at 1 July 20X4 186,000
Net business assets at 30 June 20X5 274,000
During the year ended 30 June 20X5:
Cash drawings by proprietor 68,000
Additional capital introduced by proprietor 50,000
Business cash used to buy a car for the proprietor's wife, who takes no part in the
business
20,000
Using this information, what is the trader's profit for the year ended 30 June 20X5?
A $126,000
B $50,000
C $86,000
D $90,000 (2 marks)
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QUESTIONS
131
29.2 Evon, a limited liability company, issued 1,000,000 ordinary shares of 25 cents each at a price of
$1.10 per share, all received in cash.
What should be the accounting entries to record this issue?
A Debit: Cash $1,100,000
Credit: Share capital $250,000
Credit: Share premium $850,000
B Debit: Share capital $250,000
Debit: Share premium $850,000
Credit: Cash $1,100,000
C Debit: Cash $1,100,000
Credit: Share capital $1,100,000
D Debit: Cash $1,100,000
Credit: Share capital $250,000
Credit: Retained earnings $850,000
(2 marks)
29.3 Which of the following statements apply when producing a consolidated statement of financial position?
(i) All intra-group balances should be eliminated.
(ii) Intra-group profit in year-end inventory should be eliminated.
(iii) Closing inventory held by subsidiaries needs to be included at fair value.
A (i) only
B (i), (ii) and (iii)
C (i) and (ii) only
D (iii) only (2 marks)
29.4 At 1 July 20X4 a limited liability company's capital structure was as follows:
$
Share capital 1,000,000 shares of 50c each 500,000
Share premium account 400,000
In the year ended 30 June 20X5 the company made the following share issues:
1 January 20X5:
A bonus issue of one share for every four in issue at that date, using the share premium account.
1 April 20X5
A rights issue of one share for every ten in issue at that date, at $1.50 per share.
What will be the balances on the company's share capital and share premium accounts at 30 June
20X5 as a result of these issues?
Share capital Share premium account
$ $
A 687,500 650,000
B 675,000 375,000
C 687,500 150,000
D 687,500 400,000
(2 marks)
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29.5 The receivables ledger control account below contains several incorrect entries.
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 138,400 Credit sales 80,660
Contras against credit balances
in payables ledger 1,000
Cash received from credit customers 78,420 Discounts allowed to credit customers 1,950
Irrecoverable debts written off 3,000
Dishonoured cheques from credit
customers 850
Closing balance 129,360
216,820 216,820
What should the closing balance be when all the errors are corrected?
A $133,840
B $135,540
C $137,740
D $139,840 (2 marks)
29.6 A limited liability company's trial balance does not balance. The totals are:
Debit $384,030
Credit $398,580
A suspense account is opened for the difference.
Which of the following pairs of errors could clear the balance on the suspense account when corrected?
A Debit side of cash book undercast by $10,000; $6,160 paid for rent correctly entered in the
cash book but entered in the rent account as $1,610.
B Debit side of cash book overcast by $10,000; $1,610 paid for rent correctly entered in the cash
book but entered in the rent account as $6,160.
C Debit side of cash book undercast by $10,000; $1,610 paid for rent correctly entered in the
cash book but entered in the rent account as $6,160.
D Debit side of cash book overcast by $10,000; $6,160 paid for rent correctly entered in the cash
book but entered in the rent account as $1,610. (2 marks)
29.7 Which of the following items could appear in a company’s statement of cash flows?
(i) Surplus on revaluation of non-current assets
(ii) Repayment of long-term borrowing
(iii) Bonus issue of shares
(iv) Interest received
A (i) and (ii)
B (iii) and (iv)
C (i) and (iii)
D (ii) and (iv) (2 marks)
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QUESTIONS
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29.8 The following information is available for Orset, a sole trader who does not keep full accounting records:
$
Inventory 1 July 20X4 138,600
30 June 20X5 149,100
Purchases made for year ended 30 June 20X5 716,100
Orset makes a standard gross profit of 30 percent on sales.
Based on these figures, what is Orset's sales figure for the year ended 30 June 20X5?
A $2,352,000
B $1,038,000
C $917,280
D $1,008,000 (2 marks)
29.9 At 1 July 20X4 a company had prepaid insurance of $8,200. On 1 January 20X5 the company paid
$38,000 for insurance for the year to 30 September 20X5.
What figures should appear for insurance in the company's financial statements for the year ended
30 June 20X5?
SPLOCI SOFP
A $27,200 Prepayment $19,000
B $39,300 Prepayment $9,500
C $36,700 Prepayment $9,500
D $55,700 Prepayment $9,500
(2 marks)
29.10 Which of the following statements are correct?
(i) A liability is a present obligation, arising from past events, the settlement of which is expected to
result in an outflow of economic resources.
(ii) An uncertain liability may be called a provision.
(iii) A contingent liability should be disclosed in the notes to the financial statements.
A (i) only
B (i) and (ii) only
C (ii) and (iii) only
D (i), (ii) and (iii) (2 marks)
29.11 Alpha buys goods from Beta. At 30 June 20X5 Beta's account in Alpha's records showed $5,700 owing
to Beta. Beta submitted a statement to Alpha as at the same date showing a balance due of $5,200.
Which one of the following could account fully for the difference?
A Alpha has sent a cheque to Beta for $500 which has not yet been received by Beta.
B The credit side of Beta's account in Alpha's records has been undercast by $500.
C An invoice for $250 from Beta has been treated in Alpha's records as if it had been a credit note.
D Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.
(2 marks)
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29.12 Which of the following statements about intangible assets are correct?
1 If certain criteria are met, research expenditure must be recognised as an intangible asset.
2 The notes to the financial statements should disclose the gross carrying amount and the
accumulated amortisation at the beginning and the end of the period for each class of intangible
asset.
3 Intangible assets must be amortised over their useful life.
A 2 and 3 only
B 1 and 3 only
C 1 and 2 only
D All three statements are correct. (2 marks)
29.13 Which of the following material events that took place after the reporting date, but before the financial
statements were approved, are non-adjusting when applying IAS 10 Events after the reporting period?
(i) Inventory held at the reporting date was sold for less than cost.
(ii) Capital raised by issuing shares at a premium.
(iii) A company reorganisation which results in discontinuing a line of activity producing 25% of its
profit.
(iv) The settlement of a claim for compensation from a former employee wrongly dismissed just
before the reporting date.
A (i) and (ii)
B (i), (iii) and (iv)
C (i) and (iii) only
D (ii) and (iii) (2 marks)
29.14 A company sublets part of its office accommodation. In the year ended 30 June 20X5 cash received
from tenants was $83,700.
Details of rent in arrears and in advance at the beginning and end of the year were:
In arrears In advance
$ $
30 June 20X4 3,800 2,400
30 June 20X5 4,700 3,000
All arrears of rent were subsequently received.
What figure for rental income should be included in the company's statement of profit or loss for the year
ended 30 June 20X5?
A $84,000
B $83,400
C $80,600
D $85,800 (2 marks)
29.15 At 30 June 20X4 a company's allowance for receivables was $39,000. At 30 June 20X5 trade
receivables totalled $517,000. It was decided to write off debts totalling $37,000. The allowance for
receivables was to be adjusted to the equivalent of 5 per cent of the trade receivables.
What figure should appear in the statement of profit or loss for these items?
A $61,000
B $22,000
C $24,000
D $23,850 (2 marks)
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QUESTIONS
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29.16 IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories of finished
goods.
Which of the following statements about the IAS 2 requirements in this area are correct?
1 Finished goods inventories may be valued on the basis of labour and materials cost only, without
including overheads.
2 Carriage inwards, but not carriage outwards, should be included in overheads when valuing
inventories of finished goods.
3 Factory management costs should be included in fixed overheads allocated to inventories of
finished goods.
A All three statements are correct
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only (2 marks)
29.17 A limited liability company sold a building at a profit.
How will this transaction be treated in the company's statement of cash flows?
Proceeds of sale Profit on sale
A Cash inflow under financing activities Add to profit in calculating cash flow from
operating activities
B Cash inflow under investing activities Deducted from profit in calculating cash flow
from operating activities
C Cash inflow under investing activities Added to profit in calculating cash flow from
operating activities
D Cash inflow under financing activities Deducted from profit in calculating cash flow
from operating activities
(2 marks)
29.18 Which of the following items may appear in a company's statement of changes in equity, according to
IAS 1 Presentation of financial statements?
1 Unrealised revaluation gains
2 Dividends paid
3 Proceeds of equity share issue
4 Profit for the period
A 2, 3 and 4 only
B 1, 3 and 4 only
C All four items
D 1, 2 and 4 only (2 marks)
29.19 Sigma's bank statement shows an overdrawn balance of $38,600 at 30 June 20X5. A check against the
company's cash book revealed the following differences:
1 Bank charges of $200 have not been entered in the cash book.
2 Lodgements recorded on 30 June 20X5 but credited by the bank on 2 July $14,700.
3 Cheque repayments entered in cash book but not presented for payment at 30 June 20X5
$27,800.
4 A cheque payment to a supplier of $4,200 charged to the account in June 20X5 recorded in the
cash book as a receipt.
Based on this information, what was the cash book balance before any adjustments?
A $43,100 overdrawn
B $16,900 overdrawn
C $60,300 overdrawn
D $34,100 overdrawn (2 marks)
(Total = 38 marks)
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30 Mixed bank 2 48 mins
30.1 The plant and machinery cost account of a company is shown below. The company's policy is to charge
depreciation at 20% on the straight line basis, with proportionate depreciation in years of acquisition
and disposal.
PLANT AND MACHINERY – COST
20X5 $ 20X5 $
1 Jan Balance b/f 280,000 30 June Transfer disposal 14,000
1 Apr Cash 48,000
1 Sept Cash 36,000 31 Dec Balance c/f 350,000
364,000 364,000
What should be the depreciation charge for the year ended 31 December 20X5?
A $67,000
B $70,000
C $64,200
D $68,600 (2 marks)
30.2 Which of the following are correct?
1 The statement of financial position value of inventory should be as close as possible to net
realisable value.
2 The valuation of finished goods inventory must include production overheads.
3 Production overheads included in valuing inventory should be calculated by reference to the
company's normal level of production during the period.
4 In assessing net realisable value, inventory items must be considered separately, or in groups of
similar items, not by taking the inventory value as a whole.
A 1 and 2 only
B 3 and 4 only
C 1 and 3 only
D 2, 3 and 4 (2 marks)
30.3 A business sublets part of its office accommodation.
The rent is received quarterly in advance on 1 January, 1 April, 1 July and 1 October. The annual rent
has been $24,000 for some years, but it was increased to $30,000 from 1 July 20X5.
What amounts for this rent should appear in the company's financial statements for the year ended
31 January 20X6?
SPLOCI SOFP
A $27,500 $5,000 in sundry receivables
B $27,000 $2,500 in sundry receivables
C $27,000 $2,500 in sundry payables
D $27,500 $5,000 in sundry payables (2 marks)
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QUESTIONS
137
30.4 The figures shown in the table below are an extract from the financial statements of Ridgeway (capital
employed is $1.5m).
$
Revenue 1,000,000
Cost of sales 400,000
Gross profit 600,000
Distribution expenses and administration cost 300,000
Profit before interest and tax 300,000
Finance cost 50,000
Profit before tax 250,000
Income tax expense 100,000
Profit after tax 150,000
What is the return on capital employed (ROCE)?
A 7%
B 10%
C 40%
D 20% (2 marks)
30.5 Which of the following events after the reporting period would normally qualify as adjusting events
according to IAS 10 Events after the reporting period?
1 The bankruptcy of a credit customer with a balance outstanding at the end of the reporting period
2 A decline in the market value of investments
3 The declaration of an ordinary dividend
4 The determination of the cost of assets purchased before the end of the reporting period
A 1, 3, and 4
B 1 and 2 only
C 2 and 3 only
D 1 and 4 only (2 marks)
30.6 Ordan received a statement from one of its suppliers, Alta, showing a balance due of $3,980. The
amount due according to the payables ledger account of Alta in Ordan's records was only $230.
Comparison of the statement and the ledger account revealed the following differences:
1 A cheque sent by Ordan for $270 has not been allowed for in Alta's statement.
2 Alta has not allowed for goods returned by Ordan $180.
3 Ordan made a contra entry, reducing the amount due to Alta by $3,200, for a balance due from
Alta in Ordan's receivables ledger. No such entry has been made in Alta's records.
What difference remains between the two companies' records after adjusting for these items?
A $460
B $640
C $6,500
D $100 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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30.7 A company's trial balance failed to agree, and a suspense account was opened for the difference.
Subsequent checking revealed that discounts allowed $13,000 had been credited to discounts received
account and an entry on the credit side of the cash book for the purchase of some machinery $18,000
had not been posted to the plant and machinery account.
Which two of the following journal entries would correct the errors?
Debit Credit
$ $
(1) Discounts allowed 13,000
Discounts received 13,000
(2) Discounts allowed 13,000
Discounts received 13,000
Suspense account 26,000
(3) Suspense account 26,000
Discounts allowed 13,000
Discounts received 13,000
(4) Plant and machinery 18,000
Suspense account 18,000
(5) Suspense account 18,000
Plant and machinery 18,000
A 1 and 4
B 2 and 5
C 2 and 4
D 3 and 5 (2 marks)
The following information is relevant for questions 30.8 and 30.9.
A company's draft financial statements for 20X5 showed a profit of $630,000. However, the trial balance did
not agree, and a suspense account appeared in the company's draft statement of financial position. Subsequent
checking revealed the following errors:
(1) The cost of an item of plant $48,000 had been entered in the cash book and in the plant register as
$4,800. Depreciation at the rate of 10% per year ($480) had been charged.
(2) Bank charges of $440 appeared in the bank statement in December 20X5 but had not been entered in
the company's records.
(3) One of the directors of the company paid $800 due to a supplier in the company's payables ledger by a
personal cheque. The bookkeeper recorded a debit in the supplier's ledger account but did not complete
the double entry for the transaction. (The company does not maintain a payables ledger control
account).
(4) The payments side of the cash book had been understated by $10,000.
30.8 Which of the above items would require an entry to the suspense account in correcting them?
A All four items
B 3 and 4 only
C 2 and 3 only
D 1, 2 and 4 only (2 marks)
30.9 What would the company's profit become after the correction of the above errors?
A $634,760
B $624,760
C $624,440
D $625,240 (2 marks)
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QUESTIONS
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30.10 Which of the following statements are correct?
1 A company might make a rights issue if it wished to raise more equity capital.
2 A rights issue might increase the share premium account whereas a bonus issue is likely to
reduce it.
3 A bonus issue will generate cash for a company.
4 A rights issue will always increase the number of shareholders in a company whereas a bonus
issue will not.
A 1 and 2
B 1 and 3
C 2 and 3
D 2 and 4 (2 marks)
30.11 Which of the following statements are correct?
1 Contingent assets are included as assets in financial statements if it is probable that they will
arise.
2 Contingent liabilities must be provided for in financial statements if it is probable that they will
arise.
3 Material non-adjusting events are disclosed by note in the financial statements.
A 1 only
B 1 and 3
C 2 and 3
D 3 only (2 marks)
30.12 At 1 January 20X5 a company had an allowance for receivables of $18,000
At 31 December 20X5 the company's trade receivables were $458,000.
It was decided:
(a) To write off debts totalling $28,000 as irrecoverable
(b) To adjust the allowance for receivables to the equivalent of 5% of the remaining receivables
What figure should appear in the company's statement of profit or loss for the total of debts written off
as irrecoverable and the movement in the allowance for receivables for the year ended 31 December
20X5?
A $49,500
B $31,500
C $32,900
D $50,900 (2 marks)
30.13 The following payables ledger control account contains some errors. All goods are purchased on credit.
PAYABLES LEDGER CONTROL ACCOUNT
$ $
Purchases 963,200 Opening balance 384,600
Discounts received 12,600 Purchases returns 17,400
Contras with amounts Cash paid to suppliers 988,400
receivable in receivables ledger 4,200
Closing balance 410,400
1,390,400 1,390,400
What should the closing balance be when the errors have been corrected?
A $325,200
B $350,400
C $358,800
D $376,800 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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30.14 Which one of the following journal entries is required to record goods taken from inventory by the owner
of a business?
A Debit Drawings
Credit Purchases
B Debit Sales
Credit Drawings
C Debit Drawings
Credit Inventory
D Debit Purchases
Credit Drawings (2 marks)
30.15 The following information is available about the transactions of Razil, a sole trader who does not keep
proper accounting records:
$
Opening inventory 77,000
Closing inventory 84,000
Purchases 763,000
Gross profit as a percentage of sales 30%
Based on this information, what is Razil's sales revenue for the year?
A $982,800
B $1,090,000
C $2,520,000
D $1,080,000 (2 marks)
30.16 Which of the following statements are correct?
1 All non-current assets must be depreciated.
2 If property accounted for in accordance with IAS 16 Property, plant and equipment is revalued,
the gain on revaluation is shown in the statement of profit or loss.
3 If a tangible non-current asset is revalued, all tangible assets of the same class should be
revalued.
4 In a company's published statement of financial position, tangible assets and intangible assets
must be shown separately.
A 1 and 2
B 2 and 3
C 3 and 4
D 1 and 4 (2 marks)
30.17 The following bank reconciliation statement has been prepared by a trainee accountant at 31 December
20X5.
$
Balance per bank statement (overdrawn) 38,640
Add: lodgements not credited 19,270
57,910
Less: unpresented cheques 14,260
Balance per cash book 43,650
What should the final cash book balance be when all the above items have been properly dealt with?
A $43,650 overdrawn
B $33,630 overdrawn
C $5,110 overdrawn
D $72,170 overdrawn
(2 marks)
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QUESTIONS
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30.18 On 1 January 20X5 a company purchased some plant.
The invoice showed
$
Cost of plant 48,000
Delivery to factory 400
One year warranty covering breakdown during 20X5 800
49,200
Modifications to the factory building costing $2,200 were necessary to enable the plant to be installed.
What amount should be capitalised for the plant in the company's records?
A $51,400
B $48,000
C $50,600
D $48,400 (2 marks)
30.19 A business had an opening inventory of $180,000 and a closing inventory of $220,000 in its financial
statements for the year ended 31 December 20X5.
Which of the following entries for these opening and closing inventory figures are made when completing
the financial records of the business?
Debit Credit
$ $
A Inventory account 180,000
Statement of profit or loss (SPL) 180,000
Statement of profit or loss (SPL) 220,000
Inventory account 220,000
B Statement of profit or loss (SPL) 180,000
Inventory account 180,000
Inventory account 220,000
Statement of profit or loss (SPL) 220,000
C Inventory account 40,000
Purchases account 40,000
D Purchases account 40,000
Inventory account 40,000
(2 marks)
30.20 Tinsel Co has 5 million $1 issued ordinary shares. At 1 May 20X0 Fairy Co purchased 60% of Tinsel
Co’s $1 ordinary shares for $4,000,000. At that date Tinsel Co had net assets with a fair value of
$4,750,000 and a share price of $1.10. Fairy Co valued the non-controlling interest in Tinsel Co at
acquisition as $2,200,000.
What is the total goodwill on acquisition at 1 May 20X0?
A $1,150,000
B $1,750,000
C $ 750,000
D $1,450,000 (2 marks)
(Total = 40 marks)
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31 Mixed bank 3 46 mins
31.1 On 1 September 20X6, a business had inventory of $380,000. During the month, sales totalled
$650,000 and purchases $480,000. On 30 September 20X6 a fire destroyed some of the inventory.
The undamaged goods in inventory were valued at $220,000. The business operates with a standard
gross profit margin of 30%.
Based on this information, what is the cost of the inventory destroyed in the fire?
A $185,000
B $140,000
C $405,000
D $360,000 (2 marks)
31.2 Which of the following should appear as separate items in a company's statement of changes in equity?
1 Profit for the financial year
2 Income from investments
3 Dividends paid on redeemable preference shares
4 Dividends paid on equity shares
A 1, 3 and 4
B 1 and 4 only
C 2 and 3 only
D 1, 2 and 3 (2 marks)
31.3 The following information is available about a company's dividends:
$
20X5
Sept. Final dividend for the year ended 30 June 20X5 paid (declared August
20X5)
100,000
20X6
March Interim dividend for the year ended 30 June 20X6 paid 40,000
Sept. Final dividend for the year ended 30 June 20X6 paid (declared August
20X6)
120,000
What figures, if any, should be disclosed in the company's statement of profit or loss and other
comprehensive income for the year ended 30 June 20X6 and its statement of financial position as at
that date?
SPLOCI for the period SOFP liability
A $160,000 deduction $120,000
B $140,000 deduction nil
C nil $120,000
D nil nil (2 marks)
31.4 Goose Co has a 49% shareholding in each of the following three companies.
1 Turkey Co: Goose Co has the right to appoint or remove a majority of the directors of Turkey Co.
2 Duck Co: Goose Co has more than half the voting rights in Duck Co as a result of an agreement
with other investors.
3 Partridge Co: Goose Co has the power to govern the financial and operating policies of Partridge
Co.
Which of these companies are subsidiaries of Goose Co for financial reporting purposes?
A Turkey Co and Duck Co only
B Partridge Co and Duck Co only
C Partridge Co and Turkey Co only
D Partridge Co, Turkey Co and Duck Co (2 marks)
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QUESTIONS
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31.5 At 1 July 20X5 a company's allowance for receivables was $48,000.
At 30 June 20X6, trade receivables amounted to $838,000. It was decided to write off $72,000 of
these debts and adjust the allowance for receivables to $60,000.
What are the final amounts for inclusion in the company's statement of financial position at 30 June
20X6?
Trade Allowance for Net
receivables receivables balance
$ $ $
A 838,000 60,000 778,000
B 766,000 60,000 706,000
C 766,000 108,000 658,000
D 838,000 108,000 730,000 (2 marks)
31.6 Which of the following statements about inventory valuation for statement of financial position purposes
are correct?
1 According to IAS 2 Inventories, average cost and FIFO (first in, first out) are both acceptable
methods of arriving at the cost of inventories.
2 Inventories of finished goods may be valued at labour and materials cost only, without including
overheads.
3 Inventories should be valued at the lowest of cost, net realisable value and replacement cost.
4 It may be acceptable for inventories to be valued at selling price less estimated profit margin.
A 1 and 3
B 2 and 3
C 1 and 4
D 2 and 4 (2 marks)
31.7 A business received a delivery of goods on 29 June 20X6, which was included in inventory at 30 June
20X6. The invoice for the goods was recorded in July 20X6.
What effect will this have on the business?
1 Profit for the year ended 30 June 20X6 will be overstated.
2 Inventory at 30 June 20X6 will be understated.
3 Profit for the year ending 30 June 20X7 will be overstated.
4 Inventory at 30 June 20X6 will be overstated.
A 1 and 2
B 2 and 3
C 1 only
D 1 and 4 (2 marks)
31.8 What is the acid test ratio of Edward Co given the information below?
EDWARD CO TRIAL BALANCE (EXTRACT)
$
Receivables 176,000
Inventories 20,000
Trade payables 61,000
Bank overdraft 79,000
Long term loan 10,000
Retained earnings 5,000
A 1.13:1
B 1.40:1
C 1.35:1
D 1.26:1 (2 marks)
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31.9 Which of the following characteristics of financial information are included in the IASB's Conceptual
Framework for Financial Reporting?
1 Comparability
2 Relevance
3 Timeliness
4 Faithful representation
A All four items
B 1, 2 and 3 only
C 1, 2 and 4 only
D 2, 3 and 4 only (2 marks)
31.10 Details of a company's insurance policy are shown below:
Premium for year ended 31 March 20X6 paid April 20X5 $10,800
Premium for year ending 31 March 20X7 paid April 20X6 $12,000
What figures should be included in the company's financial statements for the year ended 30 June
20X6?
SPL SOFP
$ $
A 11,100 9,000 prepayment (Dr)
B 11,700 9,000 prepayment (Dr)
C 11,100 9,000 accrual (Cr)
D 11,700 9,000 accrual (Cr) (2 marks)
31.11 Which of the following statements about bank reconciliations are correct?
1 In preparing a bank reconciliation, unpresented cheques must be deducted from a balance of
cash at bank shown in the bank statement.
2 A cheque from a customer paid into the bank but dishonoured must be corrected by making a
debit entry in the cash book.
3 An error by the bank must be corrected by an entry in the cash book.
4 An overdraft is a debit balance in the bank statement.
A 1 and 3
B 2 and 3
C 1 and 4
D 2 and 4 (2 marks)
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QUESTIONS
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31.12 At 30 June 20X5 the capital and reserves of Meredith, a limited liability company, were:
$m
Share capital
Ordinary shares of $1 each 100
Share premium account 80
During the year ended 30 June 2006, the following transactions took place:
1 September 20X5 A bonus issue of one ordinary share for every two held, using the share premium
account.
1 January 20X6 A fully subscribed rights issue of two ordinary shares for every five held at that
date, at $1.50 per share.
What would the balances on each account be at 30 June 20X6?
Share capital Share premium
$m $m
A 210 110
B 210 60
C 240 30
D 240 80 (2 marks)
31.13 Which of the following statements about the requirements of IAS 37 Provisions, Contingent Liabilities
and Contingent Assets are correct?
1 Contingent assets and liabilities should not be recognised in the financial statements.
2 A contingent asset should only be disclosed in the notes to a financial statement where an inflow
of economic benefits is probable.
3 A contingent liability may be ignored if the possibility of the transfer of economic benefits is remote.
A All three statements are correct
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only (2 marks)
31.14 Which of the following errors would cause a trial balance not to balance?
1 An error in the addition in the cash book.
2 Failure to record a transaction at all.
3 Cost of a motor vehicle debited to motor expenses account. The cash entry was correctly made.
4 Goods taken by the proprietor of a business recorded by debiting purchases and crediting
drawings account.
A 1 only
B 1 and 2 only
C 3 and 4 only
D All four items (2 marks)
31.15 Manchester has 10 million $1 issued ordinary shares. At 1 May 20X9 Bristol purchased 70% of
Manchester’s $1 ordinary shares for $8,000,000. At that date Manchester had net assets with a fair
value of $8,750,000 and its share price was $1.20. The non-controlling interest is valued using the
share price at the date of acquisition.
What was the total goodwill arising on acquisition at 1 May 20X9?
A $4,400,000
B $350,000
C $750,000
D $2,850,000 (2 marks)
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31.16 All the sales made by a retailer are for cash, and her sale prices are fixed by doubling cost. Details
recorded of her transactions for September 20X6 are as follows:
$
1 Sept Inventories 40,000
30 Sept Purchases for month 60,000
Cash banked for sales for month 95,000
Inventories 50,000
Which two of the following conclusions could separately be drawn from this information?
1 $5,000 cash has been stolen from the sales revenue prior to banking.
2 Goods costing $5,000 have been stolen.
3 Goods costing $2,500 have been stolen.
4 Some goods costing $2,500 had been sold at cost price.
A 1 and 2
B 1 and 3
C 2 and 4
D 3 and 4 (2 marks)
31.17 A company owns a number of properties which are rented to tenants. The following information is
available for the year ended 30 June 20X6:
Rent Rent
in advance in arrears
$ $
30 June 20X5 134,600 4,800
30 June 20X6 144,400 8,700
Cash received from tenants in the year ended 30 June 20X6 was $834,600.
All rent in arrears was subsequently received.
What figure should appear in the company's statement of profit or loss for rent receivable in the year
ended 30 June 20X6?
A $840,500
B $1,100,100
C $569,100
D $828,700 (2 marks)
31.18 The following receivables ledger control account has been prepared by a trainee accountant:
$ $
20X3 20X3
1 Jan Balance 284,680 31 Dec Cash received from credit
31 Dec Credit sales 189,120 customers 179,790
Discounts allowed 3,660 Contras against amounts
Irrecoverable debts owing by company in
written off 1,800 payables ledger 800
Sales returns 4,920 Balance 303,590
484,180 484,180
What should the closing balance on the account be when the errors in it are corrected?
A $290,150
B $286,430
C $282,830
D $284,430 (2 marks)
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QUESTIONS
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31.19 The carrying amount of a company's non-current assets was $200,000 at 1 August 20X0. During the
year ended 31 July 20X1, the company sold non current assets for $25,000 on which it made a loss of
$5,000. The depreciation charge of the year was $20,000. What was the carrying amount of noncurrent
assets at 31 July 20X1?
A $150,000
B $155,000
C $170,000
D $175,000 (2 marks)
(Total = 38 marks)
32 Mixed bank 4 43 mins
32.1 A company issued one million ordinary $1 shares at a premium of 50c per share. The proceeds were
correctly recorded in the cash book, but were incorrectly credited to the sales account.
Which one of the following journal entries will correct the error?
Debit Credit
$ $
A Sales 1,500,000
Share capital 1,000,000
Share premium 500,000
B Share capital 1,000,000
Share premium 500,000
Sales 1,500,000
C Sales 1,500,000
Share capital 1,500,000
D Share capital 1,500,000
Sales 1,500,000 (2 marks)
32.2 After proposing a final dividend, Kenilworth Co has a current ratio of 2.0 and a quick ratio of 0.8.
If the company now uses its positive cash balance to pay that final dividend, what will be the effect
upon these two ratios?
A Increase current ratio and decrease quick ratio
B Increase current ratio and increase quick ratio
C Decrease current ratio and decrease quick ratio
D Decrease current ratio and increase quick ratio (2 marks)
32.3 A property company received cash for rent totalling $838,600 in the year ended 31 December 20X6.
Figures for rent in advance and in arrears at the beginning and end of the year were:
31 December 20X5 31 December 20X6
$ $
Rent received in advance 102,600 88,700
Rent in arrears (all subsequently received) 42,300 48,400
What amount should appear in the company's statement of profit or loss for the year ended
31 December 20X6 for rental income?
A $818,600
B $738,000
C $939,200
D $858,600 (2 marks)
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32.4 Which one of the following journal entries is correct according to its narrative?
Debit Credit
$ $
A Mr Smith personal account 100,000
Directors' remuneration 100,000
Bonus allocated to account of managing director (Mr Smith)
B Purchases 14,000
Wages 24,000
Repairs to buildings 38,000
Transferring cost of repairs to buildings carried out by company's
own employees, using materials from inventory.
C Discounts allowed 2,800
Discounts received 2,800
Correction of error: discounts allowed total incorrectly debited to
discounts received account
D Suspense account 20,000
Rent receivable 10,000
Rent payable 10,000
Correction of error: rent received credited in error to rent payable
account. (2 marks)
32.5 IAS 37 Provisions, Contingent Liabilities and Contingent Assets deals with accounting for
contingencies. What is the correct accounting treatment for the following?
1 A probable loss (a constructive obligation exists, for which the amount can be reliably estimated)
2 A probable gain
Probable loss Probable gain
A Accrued Disclosed
B Accrued Not disclosed
C Disclosed, but not accrued Disclosed
D Disclosed, but not accrued Not disclosed (2 marks)
32.6 A company has occupied rented premises for some years, paying an annual rent of $120,000. From
1 April 20X6 the rent was increased to $144,000 per year. Rent is paid quarterly in advance on
1 January, 1 April, 1 July and 1 October each year.
What figures should appear for rent in the company's financial statements for the year ended
30 November 20X6?
SPLOCI SOFP
$ $
A 136,000 Prepayment 12,000
B 136,000 Prepayment 24,000
C 138,000 Nil
D 136,000 Accrual 12,000 (2 marks)
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QUESTIONS
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32.7 At 1 January 20X6 a company had an allowance for receivables of $49,000.
At 31 December 20X6 the company's trade receivables were $863,000 and it was decided to write off
balances totalling $23,000. The allowance for receivables was to be adjusted to the equivalent of 5% of
the remaining receivables.
What total figure should appear in the company's statement of profit or loss for receivables expense?
A $16,000
B $65,000
C $30,000
D $16,150 (2 marks)
32.8 At 1 January 20X6, a company's capital structure was as follows:
$
Ordinary share capital
2,000,000 shares of 50c each 1,000,000
Share premium account 1,400,000
In January 20X6 the company issued 1,000,000 shares at $1·40 each.
In September 20X6 the company made a bonus issue of 1 share for every 3 held using the share
premium account.
What were the balances on the company's share capital and share premium accounts after these
transactions?
Share capital Share premium
$ $
A 4,000,000 800,000
B 3,200,000 600,000
C 2,000,000 1,800,000
D 2,000,000 1,300,000 (2 marks)
32.9 Which of the following statements about the treatment of inventory and work in progress in financial
statements are correct?
1 Inventory should be valued at the lowest of cost, net realisable value and replacement cost.
2 In valuing work in progress, materials costs, labour costs and variable and fixed production
overheads must be included.
3 Inventory items can be valued using either first in, first out (FIFO) or weighted average cost.
4 A company's financial statements must disclose the accounting policies used in measuring
inventories.
A All four statements are correct.
B 1, 2 and 3 only
C 2, 3 and 4 only
D 1 and 4 only (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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32.10 The plant and equipment account in the records of a company for the year ended 31 December 20X6 is
shown below.
PLANT AND EQUIPMENT – COST
20X6 $ 20X6 $
1 Jan Balance 960,000
1 July Cash 48,000 30 Sept Transfer disposal account 84,000
31 Dec Balance 924,000
1,008,000 1,008,000
The company's policy is to charge depreciation on the straight line basis at 20% per year, with
proportionate depreciation in the years of purchase and sale.
What should be the charge for depreciation in the company's statement of profit or loss for the year
ended 31 December 20X6?
A $184,800
B $192,600
C $191,400
D $184,200 (2 marks)
32.11 The trial balance of a company did not balance, and a suspense account was opened for the difference.
Which of the following errors would require an entry to the suspense account in correcting them?
(1) A cash payment to purchase a motor van had been correctly entered in the cash book but had
been debited to the motor expenses account.
(2) The debit side of the wages account had been undercast.
(3) The total of the discounts allowed column in the cash book had been credited to the discounts
received account.
(4) A cash refund to a customer had been recorded by debiting the cash book and crediting the
customer's account.
A 1 and 2
B 2 and 3
C 3 and 4
D 2 and 4 (2 marks)
32.12 A trader took goods that had cost $2,000 from inventory for personal use.
Which one of the following journal entries would correctly record this?
Debit Credit
$ $
A Drawings 2,000
Inventory 2,000
B Purchases 2,000
Drawings 2,000
C Sales 2,000
Drawings 2,000
D Drawings 2,000
Purchases 2,000 (2 marks)
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QUESTIONS
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32.13 Nasty is a wholly owned subsidiary of Ugly. Inventories in their individual statements of financial
position at the year end are shown as:
Ugly $40,000
Nasty $20,000
Sales by Ugly to Nasty during the year were invoiced at $15,000 which included a profit by Ugly of
25% on cost. Two thirds of these goods were included in inventories at the year end.
At what value should inventories appear in the consolidated statement of financial position?
A $50,000
B $57,000
C $57,500
D $58,000 (2 marks)
32.14 Where in the financial statements should tax on profit for the current period, and profit for the period, be
separately disclosed?
Statement of profit or loss
and other comprehensive income Statement of changes in equity
A Tax on profit and profit for the period Tax on profit
B Profit for the period Tax on profit and profit for the period
C Tax on profit Profit for the period
D Tax on profit and profit for the period Profit for the period (2 marks)
32.15 When is the reducing balance method of depreciating non-current assets more appropriate than the
straight-line method?
A When the expected life of the asset is short
B When the asset is expected to decrease in value by a fixed percentage of cost each year
C When the expected life of the asset is not capable of being estimated accurately
D When the asset is expected to decrease in value less in later years than in the early years of its
life (2 marks)
32.16 A draft statement of cash flows contains the following:
$m
Profit before tax 22
Depreciation 8
Increase in inventories (4)
Decrease in receivables (3)
Increase in payables (2)
Net cash inflow from operating activities 21
Which of the following corrections need to be made to the calculation?
1 Depreciation should be deducted, not added
2 Increase in inventories should be added, not deducted
3 Decrease in receivables should be added, not deducted
4 Increase in payables should be added, not deducted
A 1 and 2
B 1 and 3
C 2 and 4
D 3 and 4 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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32.17 Your inexperienced colleague, Paul Jones, has attempted to extract and total the individual balances in
the receivables ledger. He provides you with the following listing which he has prepared.
$
Bury Inc 7,500
P Fox & Son (Swindon) Co 2,000
Frank Wrendlebury & Co 4,297
D Richardson & Co 6,847
Ultra Co 783
Lawrenson Co 3,765
Walkers Inc 4,091
P Fox & Son (Swindon) Co 2,000
Whitchurch Co 8,112
Ron Bradbury & Co 5,910
Anderson Co 1,442
46,747
Subsequent to the drawing up of the list, the following errors have so far been found.
(a) A sales invoice for $267 sent to Whitchurch Co had been correctly entered in the day book but
had not then been posted to the account for Whitchurch Co in the receivables ledger.
(b) One of the errors made by Paul Jones was to omit the $2,435 balance of Rectofon Co from the
list.
(c) A credit note for $95 sent to Bury Co had been correctly entered in the day book but was entered
in the account in the receivables ledger as $75.
What is the revised balance of the receivables ledger after correcting these errors?
A $45,665
B $47,449
C $47,429
D $45,645 (2 marks)
32.18 A payables ledger control account showed a credit balance of $768,420. The payables ledger balances
totalled $781,200.
Which one of the following possible errors could account in full for the difference?
A A contra against a receivables ledger debit balance of $6,390 has been entered on the credit side
of the payables ledger control account.
B The total of discount allowed $28,400 was entered to the debit of the payables ledger control
account instead of the correct figure for discount received of $15,620.
C $12,780 cash paid to a supplier was entered on the credit side of the supplier's account in the
payables ledger.
D The total of discount received $6,390 has been entered on the credit side of the payables ledger
control account. (2 marks)
(Total = 36 marks)
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QUESTIONS
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33 Mixed bank 5 48 mins
33.1 A firm has the following transactions with its product R.
1 January 20X1 Opening inventory: nil
1 February 20X1 Buys 10 units at $300 per unit
11 February 20X1 Buys 12 units at $250 per unit
1 April 20X1 Sells 8 units at $400 per unit
1 August 20X1 Buys 6 units at $200 per unit
1 December 20X1 Sells 12 units at $400 per unit
The firm uses FIFO to value its inventory. What is the inventory value at the end of the year?
A $nil
B $1,700
C $2,400
D $2,007.20 (2 marks)
33.2 Which of the following provides advice to the International Accounting Standards Board (IASB) as well
as informing the IASB of the implications of proposed standards for users and preparers of financial
statements?
A The IFRS Advisory Council
B The IFRS Interpretations Committee
C The IFRS Foundation
D The Trustees (2 marks)
33.3 Samantha has extracted a trial balance and created a suspense account with a credit balance of $759
to make it balance.
Samantha found the following:
1 A sales invoice for $4,569 has not been entered in the accounting records.
2 A payment of $1,512 has been posted correctly to the payables control account but no other
entry has been made.
3 A credit sale of $131 has only been credited to the sales account.
What is the remaining balance on the suspense account after these errors have been corrected?
A $3,810 debit
B $2,140 credit
C $890 credit
D $622 debit (2 marks)
33.4 Which of the following errors should be identified by performing a receivables control account
reconciliation?
A A sales invoice of $500 has been omitted from the sales daybook.
B A sales return of $45 was entered as $54 in the sales returns daybook.
C Purchases of $72 were entered as sales returns in the sales returns daybook and the individual
account.
D The total of the sales daybook was miscast by $200. (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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33.5 Carol had receivables of $598,600 at 30 November 20X8. Her allowance for receivables at
1 December 20X7 was $12,460. She wished to change it to the equivalent of 2% of receivables at
30 November 20X8. On 29 November 2008 she received $635 in full settlement of a debt that she
had written off in the year ended 30 November 20X7.
What total amount should be recognised for receivables in the statement of profit or loss for the year
ended 30 November 20X8?
A $488 credit
B $11,972 debit
C $1,123 credit
D $147 debit (2 marks)
33.6 Joanna has prepared her draft financial statements for the year ended 30 April 20X8, and needs to
adjust them for the following items:
1 Rent of $10,500 was paid and recorded on 2 January 20X7 for the period 1 January to
31 December 20X7. The landlord has advised that the annual rent for 20X8 will be $12,000
although it has not been invoiced or paid yet.
2 Property and contents insurance is paid annually on 1 March. Joanna paid and recorded $6,000
on 1 March 20X8 for the year from 1 March 20X8 to 28 February 20X9.
What should the net effect on profit be in the draft financial statements for the year ended 30 April
20X8 of adjusting for the above items?
A $1,000 decrease
B $1,500 increase
C $1,000 increase
D $1,500 decrease (2 marks)
33.7 Carter, a limited liability company, has non-current assets with a carrying amount of $2,500,000 on
1 December 20X7.
During the year ended 30 November 20X8, the following occurred:
– Depreciation of $75,000 was charged to the statement of profit or loss.
– Land and buildings with a carrying amount of $1,200,000 were revalued to $1,700,000.
– An asset with a carrying amount of $120,000 was disposed of for $150,000.
– The carrying amount of non-current assets at 30 November 20X8 was $4,200,000.
In accordance with IAS7 Statement of Cash Flows, what net cash flows from the above transactions
would be included within ‘net cash flows from investing activities’ for the year ended 30 November
20X8?
A $(1,395,000)
B $(1,365,000)
C $150,000
D $(1,245,000) (2 marks)
33.8 Steven’s receivables ledger control account does not agree with the total of the receivables ledger. He
discovered the following errors:
1 A sales invoice has been entered into the sales day book as $895 rather than $859.
2 The receivables column of the cash received day book has been undercast by $600.
3 A contra of $400 against the purchase ledger has only been entered in the control account.
Which of the above errors would cause a difference between the receivables control account and the
total of the receivables ledger?
A 2 and 3 only
B 1 and 3 only
C 1 and 2 only
D 1, 2 and 3 (2 marks)
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QUESTIONS
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33.9 Luis sold goods to Pedro in May 20X9 with a list price of $98,000. Luis allowed a trade discount of
10%. Pedro returned goods with a list price of $3,000 on 31 May and returned a further $5,000 of
goods at list price on 6 June as they were found to be unsuitable.
How much should Luis record in the sales returns account at 31 May?
A $2,700
B $3,000
C $8,000
D $7,200 (2 marks)
33.10 A newly-registered company is considering the accounting policies it should adopt.
Policies under consideration are:
1 Research and development expenditure should be capitalised and amortised over the years in
which the resultant product is sold or used.
2 Inventory should be valued at the lower of cost and net realisable value.
3 Goodwill arising in a business combination should be written off immediately to the statement of
profit or loss.
Which of these possible accounting policies would, if adopted, contravene International Financial
Reporting Standards?
A 1 and 2 only
B 2 and 3 only
C 1 and 3 only
D 1, 2 and 3 (2 marks)
33.11 You have recently been appointed as assistant accountant of PQR Co. You have assisted in preparing a
forecast set of financial statements for the company whose year end is 31 December 20X7. The forecast
shows that the company is expected to make a loss during the year to 31 December 20X7.
The managing director is concerned that the company's shareholders would be unhappy to hear that the
company had made a loss. He is determined to avoid making a loss if at all possible. He has made the
following suggestions in order to remedy the situation.
1 Value inventory using the LIFO basis as prices are rising so this will reduce inventory costs in the
statement of profit or loss.
2 Create a provision against future losses in case this happens again in the future.
3 Stop amortising all capitalised development expenditure.
Which of these suggestions do you agree with?
A 1 and 2 only
B 3 only
C 2 only
D None of the statements (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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33.12 Which of the following journal entries may be accepted as being correct according to their narratives?
DR CR
$ $
1 Wages account 38,000
Purchases account 49,000
Buildings account 87,000
Labour and materials used in construction of extension to factory
2 Directors' personal accounts: A 30,000
B 40,000
Directors' remuneration 70,000
Directors' bonuses transferred to their accounts
3 Suspense account 10,000
Sales account 10,000
Correction of error in addition – total of credit side of sales account $10,000 understated
A 1 and 3
B 1 and 2
C 3 only
D 2 and 3 (2 marks)
33.13 Which of the following costs should be included in valuing inventories of finished goods held by a
manufacturing company, according to IAS 2 Inventories?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 Accounts department costs relating to wages for production employees
A All four items
B 2 and 3 only
C 1, 3 and 4 only
D 1 and 4 only (2 marks)
33.14 Frog acquired 100% of the ordinary share capital of Toad on 1 October 20X7.
On 31 December 20X7 retained earnings of Toad and Frog were as follows:
Frog Toad
$'000 $'000
Retained earnings at 1 January 20X7 500 100
Retained profit for the year ended 31 December 20X7 150 60
650 160
The profits of Toad have accrued evenly throughout 20X7.
What figure for retained earnings should be included in the consolidated financial statements of the Frog
group at 31 December 20X7?
A $150,000
B $175,000
C $665,000
D $810,000 (2 marks)
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QUESTIONS
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33.15 The following extract is from the statement of profit or loss of Gearing Co for the year ended 30 April
20X8.
$
Profit before tax 68,000
Tax (32,000)
Profit for the year 36,000
In addition to the profit above:
1 Gearing Co paid a dividend of $21,000 during the year.
2 A gain on revaluation of land resulted in a surplus of $18,000.
What total amount will be added to retained earnings at the end of the financial year?
A $36,000
B $33,000
C $47,000
D $15,000 (2 marks)
33.16 What does an increase in the allowance for receivables result in?
A A decrease in current liabilities
B An increase in net profit
C An increase in working capital
D A decrease in working capital (2 marks)
33.17 A company's telephone bill consists of two elements. One is a quarterly rental charge, payable in
advance; the other is a quarterly charge for calls made, payable in arrears. At 1 April 20X9, the previous
bill dated 1 March 20X9 had included line rental of $90. Estimated call charges during March 20X9
were $80.
During the following 12 months, bills totalling $2,145 were received on 1 June, 1 September,
1 December 20X9 and 1 March 20Y0, each containing rental of $90 as well as call charges. Estimated
call charges for March 20Y0 were $120.
What is the amount to be charged to the statement of profit or loss for the year ended 31 March 20Y0?
A $2,185
B $2,205
C $2,155
D $2,215 (2 marks)
33.18 Which three of the following sets of items all appear on the same side of the trial balance?
1 Sales, interest received and accruals
2 Receivables, drawings and discount received
3 Non current assets, cost of sales and carriage outwards
4 Capital, trade payables and other operating expenses
5 Sundry expenses, prepayments and purchases
A 1, 4 and 5
B 1, 3 and 5
C 1, 2 and 3
D 3, 4 and 5 (2 marks)
33.19 The increase in net assets is $173, drawings are $77 and capital introduced is $45.
What is the net profit for the year?
A $295
B $205
C $51
D $141 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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33.20 Capital introduced is $50. Profits brought forward at the beginning of the year amount to $100 and
liabilities are $70. Assets are $90.
What is the retained profit for the year?
A $130 profit
B $130 loss
C $10 profit
D $10 loss (2 marks)
(Total = 40 marks)
34 Mixed bank 6 43 mins
34.1 If there is a debit balance of $1,250 on X's account in the books of Y, what does this mean?
A X owes $1,250 to Y
B Y owes $1,250 to X
C X has returned goods worth $1,250 to Y
D X is owed $1,250 by Y (2 marks)
34.2 You are an employee of Exelan Co and have been asked to help prepare the end of year statements for
the period ended 30 November 20X9 by agreeing the figure for the total receivables.
The following figures, relating to the financial year, have been obtained from the books of original entry.
$
Purchases for the year 361,947
Sales 472,185
Returns inwards 41,226
Returns outwards 16,979
Irrecoverable debts written off 1,914
Discounts allowed 2,672
Discounts received 1,864
Cheques paid to suppliers 342,791
Cheques received from customers 429,811
Customer cheques dishonoured 626
You discover that at the close of business on 30 November 20X8 the total of the receivables amounted
to $50,241. What is the balance on the receivables ledger control account at 30 November 20X9?
A $47,429
B $52,773
C $51,257
D $48,237 (2 marks)
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34.3 Sandilands Co uses a computer package to maintain its accounting records. A printout of its cash book
for the month of May 20X3 was extracted on 31 May and is summarised below.
$ $
Balance b/d 546 Payments 5,966
Receipts 6,293 Balance c/d 873
6,839 6,839
The company's chief accountant provides you with the following information.
(a) Bank charges of $630 shown on the bank statement have not been entered in the company's
cash book.
(b) Three standing orders entered on the bank statement have not been recorded in the company's
cash book: a subscription for trade journals of $52, an insurance premium of $360 and a
business rates payment of $2,172.
(c) A cheque drawn by Sandilands Co for $693 and presented to the bank on 26 May has been
incorrectly entered in the cash book as $936.
After correcting the errors above, what is the revised balance on the cash book?
A $2,098 debit
B $2,584 debit
C $3,868 credit
D $3,382 credit (2 marks)
34.4 A company purchases a machine with an expected useful life of 6 years for $9,000. After two years of
use, management revised the expected useful life to 8 years. The machine is to be depreciated at 30%
per annum on the reducing balance basis. A full year's depreciation is charged in the year of purchase,
with none in the year of sale. During year 4, it is sold for $3,000.
What is the profit or loss on disposal?
A $1,000 profit
B $87 loss
C $1,410 profit
D $840 profit (2 marks)
34.5 Which one of the following does a business aim to ensure by charging depreciation in the financial
statements?
A The cost of non current assets is spread over the accounting periods which benefit from their use.
B There are sufficient funds set aside to replace the assets when necessary.
C Profits are not understated.
D Assets are shown at their realisable value. (2 marks)
34.6 A business purchased an asset on 1 January 20X1 at a cost of $160,000. The asset had an expected
life of eight years and a residual value of $40,000. The straight-line method is used to measure
depreciation. The financial year ends on 31 December.
At 31 December 20X3, the estimated remaining life of the asset from that date is now expected to be
only three more years, but the residual value is unchanged.
What will be the net book value of the asset as at 31 December 20X3, for inclusion in the statement of
financial position?
A $97,500
B $100,000
C $107,500
D $115,000 (2 marks)
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34.7 The debit side of a trial balance totals $400 more than the credit side.
Which one of the following errors would fully account for the difference?
A $200 paid for building repairs has been correctly entered in the cashbook and credited to the
building non-current asset account.
B Discount received $200 has been debited to the discount allowed account.
C A receipt of $400 for commission receivable has been omitted from the records.
D An invoice for $400 has been entered into the sales day book but omitted from the receivables
ledger. (2 marks)
34.8 Under IAS 1 Presentation of financial statements, which of the following must be disclosed on the face
of the statement of profit or loss and other comprehensive income?
A Profit before tax
B Gross profit
C Revenue
D Dividends (2 marks)
34.9 The following bank reconciliation has been prepared:
$
Balance per bank statement (overdrawn) 73,680
Add: Outstanding lodgements 102,480
Less: Unpresented cheques (87,240)
Balance per cash book (credit) 88,920
Assuming the amounts stated for items other than the cash book balance are correct, what should the
cash book balance be?
A $88,920 credit (as stated)
B $120,040 credit
C $58,440 debit
D $58,440 credit (2 marks)
34.10 In relation to statements of cash flows, which, if any, of the following are correct?
1 The direct method of calculating net cash from operating activities leads to a different figure from
that produced by the indirect method, but this is balanced elsewhere in the statement of cash
flows.
2 A company making high profits must necessarily have a net cash inflow from operating activities.
3 Profits and losses on disposals of non-current assets appear as items under cash flows from
investing activities in the statement of cash flows or a note to it.
A Item 1 only
B Items 2 and 3
C None of the items
D All of the items (2 marks)
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35.7 Which, if any, of the following statements about intangible assets are correct?
1 Deferred development expenditure must be amortised over a period not exceeding five years.
2 If the conditions specified in IAS 38 Intangible assets are met, development expenditure may be
capitalised, if the directors decide to do so.
3 Trade investments must appear in a company’s statement of financial position under the heading
of intangible assets.
A 1 and 2
B 2 and 3
C 1 and 3
D None of the statements is correct (2 marks)
35.8 A company owns a number of properties which are rented to tenants. The following information is
available for the year ended 30 June 20X6:
Rent Rent
in advance in arrears
$ $
30 June 2005 134,600 4,800
30 June 2006 144,400 8,700
Cash received from tenants in the year ended 30 June 2006 was $834,600.
All rent in arrears was subsequently received.
What figure should appear in the company’s statement of profit or loss for rent receivable in the year
ended 30 June 2006?
A $840,500
B $1,100,100
C $569,100
D $828,700 (2 marks)
35.9 Which of the following transactions is a capital transaction?
A Depreciation of plant and equipment
B Expenditure on rent
C Payment of interest on loan stock
D Buying shares as an investment (2 marks)
35.10 Which of the following transactions is revenue expenditure?
A Expenditure resulting in improvements to property
B Expenditure on heat and light
C Purchasing non-current assets
D Repaying a bank overdraft (2 marks)
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35.11 The payables ledger control account below contains a number of errors:
PAYABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance (amounts owed to Purchases 1,268,600
suppliers) 318,600 Contras against debt balances
in
Cash paid to suppliers 1,364,300 receivables ledger 48,000
Purchases returns 41,200 Discounts received 8,200
Refunds received from suppliers 2,700 Closing balance 402,000
1,726,800 1,726,800
All items relate to credit purchases.
What should the closing balance be when all the errors are corrected?
A $128,200
B $509,000
C $224,200
D $144,600 (2 marks)
35.12 What are the journal entries for an accrual of rent expenses of $500?
A Debit prepayments $500, credit rent $500
B Debit accrual $500, credit rent $500
C Debit rent $500, credit accruals $500
D Debit rent $500, credit prepayments $500 (2 marks)
35.13 An electrical store and a cake shop both have the same mark up on cost. However, the gross profit
margin of the electrical store is significantly higher than that of the cake shop.
Which of the following is a possible reason for this?
A The cake shop has a higher turnover of inventory than the electrical store.
B The electrical store takes advantage of trade-discounts for bulk buying.
C The cake shop has a higher level of wastage of inventory than the electrical store.
D The cake shop's revenue is increasing, while that of the electrical store is decreasing.
(2 marks)
35.14 Analysis of the statement of financial position of Charon for the year ended 20X9 reveals the following
relationships:
Current ratio 2:1
Sales: current assets 5:1
Acid test ratio 1.5:1
If the sales for the year were $30 million, what is the value of inventory that will appear in the
statement of financial position?
A $1.5m
B $10.5m
C $3.0m
D $4.5m (2 marks)
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35.15 Which of the following statements are correct?
1 If company A has an investment in company B that gives it control over the company B, then the
company B is classified as a subsidiary in the consolidated financial statements of company A.
2 If a company has associates, but not subsidiaries, it will not prepare consolidated financial
statements.
3 If a company has a 21% investment in the voting equity of another company, it will account for
its investment using the equity method.
A 1 and 2
B 2 and 3
C All three statements are correct
D None of the statements are correct (2 marks)
35.16 XYX Co’s non-current assets had carrying amounts of $368,400 and $485,000 at the beginning and
end of the year respectively. Depreciation for the year was $48,600. Assets originally costing $35,000,
with a carrying amount of $18,100 were sold in the year for $15,000.
What were the additions to non-current assets in the year?
A $183,300
B $200,200
C $49,900
D $180,200 (2 marks)
35.17 At 1 November 20X9, Telway Co had an allowance for receivables of $90,000. At 31 October 20X0, its
trade receivables were $1,232,000 of which $60,000 was identified as unrecoverable and was written
off. Telway Co’s allowance for receivables has now been adjusted to the equivalent of 5% of remaining
trade receivables.
What amount should be recorded in the statement of profit or loss for the receivables expense for the
year ended 31 October 20X0?
A $58,600 debit
B $28,600 debit
C $31,400 credit
D $118,600 debit (2 marks)
35.18 Why do we prepare a trial balance?
A To test the accuracy of the double entry bookkeeping records
B To prepare management accounts
C To prepare financial statements
D To clear the suspense account (2 marks)
(Total = 36 marks)
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Answers
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1 The context and purpose of financial reporting
1.1 C The role of the IASB is to develop and publish International Financial Reporting Standards.
1.2 B A sole trader does not have any shareholders. The financial statements are unlikely to be of
interest to a financial analyst, they are more usually interested in the financial statements of
public companies.
1.3 B (2) is the IASB’s Conceptual framework description of the purpose of financial statements. (1) is
false – although the supplier needs to know the current situation, the supplier also needs to be
able to assess future prospects to ensure the entity has the ability to pay and to support an
ongoing relationship.
1.4 A (2) is incorrect – shareholders are only liable for the debts of the business up to the amount they
have invested in shares, whereas sole traders are liable for all of the debts of the business.
1.5 B Corporate governance is the system by which companies and other entities are directed and
controlled.
1.6 A The responsibility of the financial statements rests with the directors, whether or not those
financial statements are audited. Some of the duties of directors are statutory duties, laid down in
law, including the duty to act within their powers, promote the success of the company and
exercise reasonable skill and care.
1.7 B The Statement of Financial Position contains a list of all the assets owned and all the liabilities
owed by a business.
1.8 C The Statement of Profit or Loss contains a record of income generated and expenditure incurred
over a given period.
1.9 C Unless a partnership is a limited liability partnership, the partners’ individual exposure to debt is
not limited because the partnership is not a separate legal entity from the partners themselves.
Financial records must be maintained by a partnership, but there is no requirement to make
them publicly available unless the partnership is a limited liability partnership.
1.10 C All three statements are true.
1.11 D The IFRS Advisory Council is a forum for the IASB to consult with the outside world. The IASB
produces IFRSs and is overseen by the IFRS Foundation.
1.12 B The role of the IASB is to develop and publish international financial reporting standards.
1.13 C The IFRS Foundation does not focus primarily on the needs of global, multi-national
organisations. One of the objectives of the foundation is to take account of the financial reporting
needs of emerging economies and small and medium-sized entities (SMEs).
1.14 A One of the ways IFRSs are used is as an international benchmark for those countries which
develop their own requirements.
2 The qualitative characteristics of financial information
2.1 D The business entity concept.
2.2 C The accruals concept.
2.3 C The materiality concept.
2.4 C Information has the quality of faithful representation when it is complete, neutral and free from
material error.
2.5 D Consistency. To maintain consistency, the presentation and classification of items in the financial
statements should stay the same from one period to the next, unless a change is required by an
IFRS or unless there is a significant change in the nature of operations or a review of the
accounts indicates a more appropriate presentation.
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2.6 D Relevance and faithful representation.
2.7 D Financial information should be complete, neutral and free from error.
2.8 A Statement (1) only is correct
(2) Materiality concerns whether an item in the financial statements can influence users’
decisions.
(3) Information should be a faithful representation of the economic phenomena it purports to
represent. This includes being neutral, ie without bias in the selection or presentation of
the financial information. Therefore information must not be manipulated in any way in
order to influence the decisions of the users.
2.9 C Statement (2) only is correct. Information is material if its omission or misstatement could
influence the economic decisions of users taken on the basis of the financial statements.
Statement 1 describes the opposite of the accruals concept. Statement 3 is also incorrect, faithful
representation does not prevent estimates being made.
2.10 A Relevance, Faithful representation, Comparability, Verifiability, Timeliness and Understandability.
2.11 D The accruals concept is not a qualitative characteristic of financial information.
2.12 D Providing information regarding the financial position and performance of a business are primary
objectives of financial statements. All classes of users require information for decision making.
2.13 D (1) is incorrect, the presentation or classification can be changed if there is a significant change
in the nature of operations, if an IFRS requires it or if a review of the accounts indicates a more
appropriate presentation. (2) is incorrect, companies should not make provisions in order to
smooth profits, provisions should only be made in accordance with IAS 37.
3 Double entry bookkeeping I
3.1 C Assets – liabilities = opening capital + profits – drawings
Therefore, assets – liabilities – opening capital + drawings = profit
3.2 B Closing capital – opening capital = increase (I) in net assets. This means that option B is
equivalent to:
P = I + D – Ci
This is the correct form of the business equation.
3.3 D I = P + Ci – D
= $(72,500 + 8,000 – 2,200)
= $78,300
Therefore, closing net assets = $(101,700 + 78,300) = $180,000.
3.4 B I = P + Ci – D
= $(35,400 – 6,000 + 10,200)
= $39,600
Therefore, opening capital = opening net assets = $(95,100 – 39,600) = $55,500.
3.5 B The selling price is not relevant to this adjustment.
3.6 C This will mean less cash coming into the bank.
3.7 A Increase in net assets = Capital introduced + profit – drawings
184,000 – 128,000 = 50,000 + profit – 48,000
Profit = 56,000 – 50,000 + 48,000
= $54,000
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3.8 C Dr Purchases $400
Dr Trade Payables $250
Cr Cash $650
A payment is a credit to the cash account. The payment to J Bloggs is a cash purchase and so
the double entry is Dr Purchases, Cr Cash. Remember that the purchase from J Doe has already
been recorded as Dr Purchases, Cr Trade Payables, so the payment of cash to clear the invoice
should now be recorded as Dr Trade Payables, Cr Cash.
3.9 A Dr Receivables $150
Dr Sales Returns $300
Cr Sales $150
Cr Cash $300
The double entry for the sale of goods on credit is Dr Receivables, Cr Sales $150. The return of
goods previously sold for cash is Dr Sales Returns, Cr Cash $300.
3.10 A A debit note is sent to a supplier with a return of goods. A debit note is in effect a request for a
credit note.
3.11 B The journal, cash book and sales day book are books of prime entry.
3.12 C Debit notes sent to suppliers are recorded in the purchase returns day book.
3.13 D Balance carried down from previous period shows debits exceed credits and so it is a debit
balance brought down for the new period.
3.14 B The opening balance on the ledger is $14,000 CR, this is the amount that would have appeared
in the trial balance at 1 October 20X0.
3.15 B Discounts allowed are recorded in the cash book. Credit notes received are to do with returned
purchases (not sales). Trade discounts are not recorded, as they are deducted on the sales
invoices and only the net sale is recorded.
3.16 C A debit records an increase in assets or a decrease in liabilities. A credit records an increase in
liabilities and/or capital. Therefore only C is true.
3.17 D Remember that only credit purchases are listed in the purchases daybook.
3.18 D An imprest system for petty cash helps with management of small cash expenditures and reduces
the risk of fraud. The amount paid in to replenish petty cash at the beginning of each period
should be the amount of petty cash spending in the previous period, which is the total of
expenditures shown by petty cash vouchers for the previous period. The amount of petty cash at
any time is the maximum petty cash balance minus the value of the petty cash vouchers for the
period.
3.19 A The petty cash voucher is a record that cash has been issued for an approved item of expense.
The receipt is evidence of the amount of the expense. The petty cash book is used to record the
transaction in the book-keeping system.
4 Double entry bookkeeping II
4.1 A $544
SALES DAY BOOK
20X9 $
1 May P Dixon 160
4 May M Maguire 80
5 May M Donald 304
544
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4.2 B $823
PURCHASES BOOK
20X9 $
2 May A Clarke (W1) 323
4 May D Daley 400
6 May G Perkins 100
823
W1 $380
85
100
= $323
4.3 C Dr Purchases $450
Dr Trade Payables $250
Cr Purchase Returns $700
The purchase of goods on credit is recorded as Dr Purchases, Cr Trade payables $450. The
return of goods which were purchased on credit is recorded as Dr Trade Payables, Cr Purchase
Returns, combining both entries gives the answer above.
4.4 B Dr Cash
Cr Sales
Cr Trade Receivables
Cash received is a debit to the cash account. The cash received from R Singh is offset against the
trade receivable balance due from R Singh: Dr Cash, Cr Trade Receivables. The cash received
from S Kalu is a cash sale: Dr Cash, Cr Sales.
4.5 D Remember the receivables account is a memorandum account.
4.6 D When cash is received by a business, a debit entry is made in the cashbook. A receipt of cash
decreases an overdraft and increases a bank balance.
4.7 C
TRADE PAYABLES ACCOUNT
$ $
Cash at bank 100,750 Balance b/d 250,225
Balance c/d 474,485 Purchases 325,010
575,235 575,235
4.8 C Credit sales = $80,000 – $10,000 + $9,000 = $79,000.
4.9 C A is incorrect as the debits and credits don’t equal each other, B is incorrect as the debits and
credits are the wrong way round and D are incorrect as the credit purchase has been ignored.
4.10 C You are recording the transaction in Steel Co’s books – Steel Co is the seller, so the double entry
is Dr receivables, Cr sales $250.
4.11 A $22,000
$ $
Sales 40,000
Returns inwards (2,000)
38,000
Opening inventory 3,000
Purchases 20,000
Returns outwards (4,000)
Closing inventory (3,000)
(16,000)
Gross profit 22,000
4.12 A The receivables allowance is deducted from trade receivables and the net figure of $71,192
($75,943 – $4,751) is reported in the statement of financial position.
4.13 B Assets are represented by debit balances.
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4.14 C The two balances must be separately disclosed.
4.15 D The debits are as follows:
$
Opening inventory 9,649
Purchases 142,958
Expenses 34,835
Non-current assets 63,960
Receivables 31,746
Cash at bank 1,783
284,931
4.16 A (5,754 + 11,745 + 150)
4.17 C No system can prevent a transaction being processed inaccurately, for example being posted to an
incorrect but valid account code (although an effective system can reduce the likelihood of this).
4.18 B Cash purchases are recorded in the cash book. The sales day book lists invoices sent to
customers, not invoices received from suppliers.
5 Sales tax
5.1 D A, B and C could all be reasons why the output tax does not equal 20% of sales. D is incorrect as
it makes no difference whether the customer is registered for sales tax or not.
5.2 B SALES TAX CONTROL ACCOUNT
$ $
b/d 4,540
Purchases ($64,000 15%) 9,600 Sales ($109,250 15%/115%) 14,250
Cash 11,910 c/d 2,720
21,510 21,510
5.3 D Dr Purchases $575 and Cr Payables $575.
Alana is not registered for sales tax purposes and therefore cannot reclaim the input sales tax of
$75.
5.4 A $7,000
SALES TAX CONTROL ACCOUNT
$ $
Purchases ($65,000 20%) 13,000 Sales ($120,000 20% / 120%) 20,000
Paid to tax authority 7,000
20,000 20,000
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5.5 D
$
Assets
Opening cash 1,000
Cash received $(1,000 + 200 sales tax) 1,200
Closing cash 2,200
Inventory $(800 – 400) 400
2,600
Liabilities
Opening liabilities –
Sales tax payable $(200 – 160) 40
Purchase inventory $(800 + 160 sales tax) 960
Closing liabilities 1,000
Capital
Opening capital 1,000
Profit on sale of inventory $(1,000 – 400) 600
Closing capital 1,600
5.6 A Receivables and payables include sales tax where applicable.
5.7 B The sales tax element of the invoices will go to the sales tax account in the statement of financial
position.
5.8 B
$
Output sales tax $27,612.50
17.5
117.5
4,112.50
Input sales tax $18,000
17.5
100
3,150.00
Balance on sales tax a/c (credit) 962.50
6 Inventory
6.1 A 950,000 – 11,750 + 1,500 + (14,950 100/115) = $952,750
6.2 C Carriage outwards and storage are distribution costs.
6.3 A
$
Original value 284,700
Coats – Cost 400 $80 (32,000)
– NRV ($75 95%) 400 28,500
281,200
At 31 January 20X3 the skirts were correctly valued at costs incurred to date of $20 per skirt
which was lower than the NRV of $22. Therefore no adjustment required.
6.4 A
$
50 @ $190 9,500
500 @ $220 110,000
300 @ $230 69,000
188,500
6.5 C Statement 1) inventory should be valued at the lower of cost and NRV not the higher
Statement 2) production overheads based on a normal level of production should be included
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6.6 D
$
Inventory check balance 483,700
Less: goods from suppliers (38,400)
Add: goods sold 14,800
Less: goods returned (400)
Add: goods returned to supplier 1,800
461,500
6.7 C If closing inventory is understated, cost of sales will be overstated. Next year opening inventory
will be understated and cost of sales will be understated.
6.8 C $
Inventory count, 4 January 20X2 527,300
Purchases since end of year (7,900)
Cost of sales since end of year (15,000 60%) 9,000
Purchase returns since end of year 800
Inventory at 31 December 20X1 529,200
6.9 A Trade discounts should be deducted but not settlement discounts. IAS 2 does not allow the use
of LIFO. Production overheads are part of the costs of conversion of finished goods and do form
part of the valuation.
6.10 B
$
Original inventory valuation 41,875
Cost of damaged items (1,960)
NRV of damaged items (1,200 – 360) 840
40,755
6.11 B
Net Lower of
Cost realisable value cost & NRV Units Value
$ $ $ $
Basic 6 8 6 200 1,200
Super 9 8 8 250 2,000
Luxury 18 10 10 150 1,500
4,700
6.12 C $2,950 (10 units @$45 and 50 units @$50)
6.13 C
6.14 C
$
116,400
Line 1: (400 $3) – $200 1,000
Line 2: (200 $35) – $300 – $1,200 5,500
122,900
6.15 A $
Inventory count value 836,200
Less: purchases (8,600)
Add: sales (14,000 70/100) 9,800
Add: goods returned 700
Inventory figure 838,100
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6.16 B The cost of materials used should be based on opening and closing valuations of inventory at
AVCO.
$
Opening inventory 56,200
Purchases 136,500
192,700
Less: Closing inventory (59,800)
Cost of materials used 132,900
6.17 C Continuous inventory reduces the need for physical inventory counts, but in practice periodic
counts are needed to ensure that the recorded quantities of inventory match the physical
quantities that are held (and, for example, there have not been significant losses of inventory due
to theft).
6.18 B
Cost Balance in
Date Units Unit cost of issues inventory
$ $
1 March 50 $40 2,000
17 March 50 $50 2,500
100 $45* 4,500
31 March – 60 $45 2,700
40 $45 1,800
* 4,500 / 100
6.19 B Price per unit under periodic weighted average cost:
= Total cost /(opening quantity + total quantity received)
= ($300 10)+($250 12)+($200 6)/(0+10+12+6)
= $257.14 per unit.
Valuation of closing inventory of 8 units (10+12–8+6–12) $257.14 = $2,057.12
7 Tangible non-current assets I
7.1 A It is never B as funds are not set aside, nor C, this is revaluation, nor D – depreciation has
nothing to do with the wearing out of assets, depreciation is an application of the matching
concept and allocates the cost of the asset over the accounting periods expected to benefit from
its use.
7.2 C An internal control to ensure information relating to non-current assets in the nominal ledger and
the financial statements is correct.
7.3 D
$
Balance b/d 67,460
Less: Carrying amount of non-current asset sold
(4,000 + 1,250) 5,250
62,210
7.4 A If disposal proceeds were $15,000 and profit on disposal is $5,000, then carrying amount must
be $10,000, the difference between the asset register figure and the non-current asset account in
the nominal ledger.
7.5 A An expense has been posted as a non-current asset.
7.6 B Assets which are intended to be used by the business on a continuing basis, including both
tangible and intangible assets that do not meet the IASB definition of a current asset.
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7.7 C $
Valuation 210,000
Carrying amount (170,000 16/20) (136,000)
Revaluation surplus 74,000
7.8 A $
Repairs cost overstated 20,000
Depreciation understated ((20,000 – 4,000) 20% 6/12) (1,600)
Profit understated 18,400
7.9 A $
Plant held all year (200,000 – 40,000) 20% 32,000
Disposal 40,000 20% 9/12 6,000
Additions 50,000 20% 6/12 5,000
43,000
7.10 D $
Plant held all year (240,000 – 60,000) 20% 36,000
Addition 160,000 20% 6/12 16,000
Disposal 60,000 20% 3/12 3,000
55,000
7.11 C Cost less 4 months depreciation = 25,500 – 2,125 = $23,375
7.12 C
$
Cost of machine 80,000
Installation 5,000
Testing 1,000
86,000
Staff training cannot be capitalised as part of the cost of the asset.
7.13 C Dr Non-current assets – cost, Cr Payables
7.14 A Using T accounts:
PLANT AND MACHINERY ACCOUNT
$ $
Balance b/d 100,000 Plant and machinery disposals a/c 100,000
PLANT AND MACHINERY ACCUMULATED DEPRECIATION
$ $
Plant and machinery disposals 35,000 Balance b/d 35,000
PLANT AND MACHINERY DISPOSALS
$ $
Plant and machinery account 100,000 Accumulated depreciation 35,000
Cash 50,000
SPL (loss on sale) 15,000
100,000 100,000
7.15 B IAS 16 does not require the purchase date of each asset to be disclosed. The carrying amount of
an asset = cost/valuation – accumulated depreciation. The useful life of an asset is determined
upon acquisition and should be reviewed at least annually and depreciation rates adjusted for the
current and future periods if expectations vary significantly from the original estimates. When an
asset is revalued, IAS 16 permits entities to make a transfer from the revaluation surplus to
retained earnings of the excess depreciation arising due to the revaluation.
7.16 B The depreciation charge is calculated based on the remaining useful life at the date of the
revaluation: 1,000,000/20 years = $50,000
7.17 A The excess deprecation is the new depreciation amount of $50,000 less the old depreciation
charge of $30,000 ($750,000/25 years) which is $20,000. This amount should be debited
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from the revaluation surplus and credited to retained earnings each year. Remember that both
retained earnings and the revaluations surplus are credit balances in the trial balance.
7.18 C The disclosure requirements in IAS 16 are comprehensive, particularly in relation to revalued
assets.
7.19 D The reconciliation should show the movement on the non-current asset balance and include the
following:
Additions
Disposals
Increases/decreases from revaluations
Reductions in carrying amount
Depreciation
Any other movements.
8 Tangible non-current assets II
8.1 B
$
Cost 10,000
20X0 Depreciation 2,500
7,500
20X1 Depreciation 1,875
5,625
20X2 Depreciation 1,406
4,219
20X3 Part exchange 5,000
Profit 781
8.2 A
$ $
Carrying amount at 1st August 20X0 200,000
Less depreciation (20,000)
Proceeds 25,000
Loss 5,000
Therefore carrying amount (30,000)
150,000
8.3 B DEBIT Property, plant and equipment $38,000
CREDIT Plant repairs $38,000
DEBIT Dep'n expense $1,900
CREDIT Accumulated dep'n $1,900
Profit is understated by $38,000 – $1,900 = $36,100
8.4 B
$30,000 – $6,000
4 years
5months
12months
= $2,500
8.5 B Revaluation surplus – (1,000,000 – (800,000 – (800,000 2% 10)) = $360,000
Depreciation charge – (1,000,000/40) = $25,000
8.6 D Improvements are capital expenditure, repairs and maintenance are not.
8.7 C An illuminated sign advertising the business name will provide long-term benefits for the business
and is therefore a non-current asset, ie capital expenditure. A replacement for a broken window is
a repair, so it is revenue expenditure. Repainting the restaurant is a repair and renewal expense
so it would be likely to be treated as revenue expenditure. Cleaning of the kitchen floors is a
maintenance cost and therefore is revenue expenditure.
8.8 A Number plates, radio and delivery costs are included in the capital cost of acquiring the car.
Road tax is an annual charge against revenue.
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ANSWERS
181
8.9 B
$
Water treatment equipment 39,800
Delivery 1,100
40,900
8.10 C A is a receivable, B and D are inventory.
8.11 C Items (i) and (ii) are non-current assets. Only item (iii) is a current asset.
8.12 C Assets which are expected to be converted into cash in the short term.
8.13 C To record the purchase of the asset:
Dr Non-current assets – cost $15,000
Cr Payables $15,000
Depreciation charge is 15,000 15% 2/12 = $375
8.14 D $585,000
The revaluation surplus at 30 June 20Y8 was $600,000 ($1,600k – $1,000k). The old
deprecation charge was $25,000 ($1,250,000/50 years) per year. The new depreciation charge
is $40,000 ($1,600,000/40 years), so the excess depreciation is $15,000 per year. The
balance on the revaluation surplus is therefore $600,000 – $15,000 = $585,000 at 30 June
20Y9.
8.15 D $
Carrying amount at disposal (15,000 – 10,000) 5,000
Trade-in allowance 5,500
Profit on disposal 500
8.16 B $52,500
Carrying amount at 1.1.X3 = 100,000 – (100,000 2/5) = $60,000
New depreciation charge = Carrying amount/Revised useful life = $60,000/8 years = $7,500
Carrying amount at 31.12.X3 = $60,000 – $7,500 = $52,500
8.17 A $7,000
Carrying amount at 1.10.X8: 34,000 – ((34,000 – 4,000) × 3/5) = $16,000
Revised depreciation charge: (Carrying amount – revised residual value)/remaining useful life
= (16,000 – 2,000)/2 = $7,000.
8.18 A Dr Depreciation charge $6,000
Cr Accumulated depreciation $6,000
8.19 B In the 5 years to 31 December 20X5, accumulated depreciation on the building is $1,600,000
2% 5 years = $160,000.
On revaluation on 1 January 20X6:
Debit Credit
$ $
Building (2,250,000 – 1,600,000) 650,000
Accumulated depreciation 160,000
Revaluation surplus 810,000
The annual depreciation charge from 1 January 20X6 = $2,250,000/45 years remaining =
$50,000. This is $18,000 more than the annual depreciation charge based on the historical cost
of the asset.
This excess depreciation charge is transferred each year from revaluation surplus to retained
earnings, and the revaluation surplus at 31 December 20X6 = $810,000 – $18,000 =
$792,000.
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8.20 A Annual depreciation was initially $1,000,000/50 years = $20,000.
After revaluation, annual depreciation is $1,200,000/48 years = $25,000.
$
Valuation, 1 January 20X5 1,200,000
Accumulated depreciation to 30 June 20X5 (6/12 $25,000) 12,500
Carrying amount at 30 June 20X5 1,187,500
Sale/disposal price 1,195,000
Profit on disposal in statement of profit or loss 7,500
Note: The balance on the revaluation surplus at 30 June will be transferred to realised profits
(retained profits reserve), but this will not be reported as profit in the statement of profit or loss.
9 Intangible non-current assets
9.1 B There is no requirement that development expenditure should be amortised over a period not
exceeding five years.
9.2 C 1 Development expenditure must be capitalised if the criteria are met.
3 There is no time scale given by IAS 38 for amortisation.
9.3 C Development costs are amortised over the useful life of the project. This is not confined to five
years.
9.4 A 3 only.
9.5 B A factory is a tangible asset as it has physical form. The others are intangible assets.
9.6 A Research expenditure is never capitalised.
9.7 D Research expenditure is never capitalised.
9.8 A Research expenditure is never capitalised, development expenditure is capitalised if it meets
certain conditions per IAS 38. Intangible assets are amortised over their useful life, if the life of
the asset is indefinite, then it does not have to be amortised.
9.9 A $123,000. Research expenditure $103,000 + depreciation of development costs $20,000.
9.10 A $219,000. Development costs b/f $180,000 + additions on project 910 $59,000 –
depreciation $20,000.
9.11 C The patent should be amortised over its useful life of 10 years. (250,000 / 10) = $25,000
9.12 B The amortisation charge is $15,000/3 years = $5,000 per annum. The double entry to record
the amortisation is Dr expenses, Cr accumulated amortisation.
9.13 A Amortisation is an application of the matching concept and allocates the cost of the intangible
asset over its useful life (over the accounting periods expected to benefit from its use).
9.14 C A patent has no physical substance and provides future economic benefits; it is therefore an
intangible non-current asset.
Computer hardware is a tangible non-current asset as it is physical in substance and provides
future economic benefits.
Operating software that operates the computer hardware on first glance may appear to be an
intangible non-current asset. However since it is an integral part of the computer hardware
(which could not function without it) it is classed as part of the computer hardware.
A building extension has physical substance and provides future economic benefits and is
therefore a tangible non-current asset.
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ANSWERS
183
10 Accruals and prepayments
10.1 C $
Receipt
1 October 20X1 ($7,500 1/3) 2,500
30 December 20X1 7,500
4 April 20X2 9,000
1 July 20X2 9,000
1 October 20X2 (9,000 2/3) 6,000 (3,000 Credit rent in advance)
Credit to statement of profit or loss 34,000
10.2 B $
February to March 20X2 (22,500 2/3) 15,000
April to June 22,500
July to September 22,500
October to December 30,000
January 20X3 (30,000 1/3) 10,000
Rent for the year 100,000
Accrual 30,000 1/3 = 10,000
10.3 D $
Payments made 34,600
Add: opening balance 8,200
Less: opening accrual (3,600)
Less: closing balance (9,300)
Add: closing accrual 3,200
33,100
10.4 B $
Statement of profit or loss
December to June 8,400 7/12 4,900
July to November 12,000 5/12 5,000
9,900
Sundry payables 12,000 1/12 = 1,000 (December rent received in advance)
10.5 C $
August to September 60,000 2/12 10,000
October to July 72,000 10/12 60,000
70,000
10.6 A $87,700
Diesel fuel payable account
$
Balance b/fwd (1,700)
Payments 85,400
Balance c/fwd 1,300
Purchases 85,000
Cost of fuel used
$
Opening inventory 12,500
Purchases 85,000
Closing inventory (9,800)
Transfer to SPL 87,700
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10.7 C ELECTRICITY ACCOUNT
$ $
Balance b/fwd 300
20X0:
1 August Paid bank 600
1 November Paid bank 720
20X1:
1 February Paid bank 900
30 June Paid bank 840
30 June Accrual c/d
$840 2/3
560
SPL 3,320
3,620 3,620
10.8 A GAS SUPPLIER ACCOUNT
$ $
Balance b/fwd 200
Bank $600 12 7,200 28 February invoice 1,300
31 May invoice 1,400
31 August invoice 2,100
30 November invoice 2,000
30 November bal. c/d 600
7,400 7,400
GAS ACCOUNT
$ $
28 February invoice 1,300
31 May invoice 1,400
31 August invoice 2,100
30 November invoice 2,000 30 November SPL 6,800
6,800 6,800
10.9 A
5months
12months
$24,000 = $10,000
7months
12months
$30,000 = $17,500
Total rent: $10,000 + $17,500 = $27,500
10.10 D RENTAL INCOME ACCOUNT
$ $
Opening rent owing 16,900 Opening rent in advance 24,600
Rent income (balancing figure) 316,200 Cash received 318,600
Closing rent in advance 28,400 Closing rent owing 18,300
361,500 361,500
10.11 A Statement of profit or loss and other comprehensive income = $60,000 12/18 = $40,000
Statement of financial position = $60,000 3/18 prepayment = $10,000
10.12 A An accrual should be made for $10,000 ($30,000/3 months). The double entry to record the
accrual in the accounts is:
Dr Expenses (SPL) $10,000
Cr Accruals (SOFP) $10,000
This reduces profit from $25,000 to $15,000
An accrual is a liability and so will reduce the net asset position, from $275,000 to $265,000.
Remember that net assets = assets – liabilities.
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ANSWERS
185
10.13 B
$
Original loss (1,486)
Accrual (1,625)
Prepayment 834
Revised loss (2,277)
10.14 C The double entry to record the accrual in the accounts is:
Dr Expenses (SPL) $50,000
Cr Accruals (SOFP) $50,000
This reduces profit from $125,000 to $75,000 and the net asset position from $375,000 to
$325,000.
11 Receivables and payables
11.1 C Payables are a liability, so statement 2 is false.
11.2 D $
Closing allowance (400,000 – 38,000) 10% 36,200
Opening allowance 50,000
Decrease in allowance (13,800)
Irrecoverable debts written off 38,000
Statement of profit or loss charge 24,200
11.3 A $
Irrecoverable debts written off 14,600
Reduction in allowance (2,000)
12,600
11.4 D $
Irrecoverable debt written off 28,500
Increase in allowance ((868,500 – 28,500) 5% – 38,000) 4,000
32,500
11.5 C $146,000 + ($218,000 – $83,000) = $281,000
11.6 B Because the debt has been previously written off, there is no receivable for which to offset the
cash, therefore the double entry is Dr Cash, Cr Irrecoverable debts expense.
11.7 B
$
Allowance required 5% (864,000 – 13,000) 42,550
Existing allowance (48,000)
Reduction in allowance (5,450)
Irrecoverable debts written off 13,000
Statement of profit or loss charge 7,550
Net trade receivables = $864,000 – 13,000 – 42,550
= $808,450
11.8 D A decrease in the allowance is written back to profit or loss.
11.9 C The debt needs to be fully written out of the books. An allowance was already made, so the SPL
has already been charged ie:
Dr Irrecoverable debts (SPL) X
Cr Allowance for receivables (SOFP) X
Therefore you only need to clear the balances from Receivables and Allowances for receivables,
which option C will do.
11.10 C An increase in the allowance for receivables will reduce profits and receivables. Gross profit will
not be affected since allowances for receivables are dealt with in the net profit section.
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11.11 D
SPL charge
$ $
Receivables allowance at 31.12.X1 (15% of $20,000) 1,000
Receivables allowance at 1.1.X1 3,000
Decrease in allowance 2,000
Irrecoverable debts written off (1,000)
Debt recovered 800
Total credit to statement of profit or loss 1,800
11.12 A When a business first establishes an allowance for receivables the full amount of the allowance
should be debited to Irrecoverable debts (statement of profit or loss) and credited to Allowance
for receivables (statement of financial position).
11.13 C
SPL charge
$ $
Receivables allowance at year end 1,000
Receivables allowance at beginning of year 850
Increase in allowance (150)
Irrecoverable debts written off (500)
Total charge to statement of profit or loss 650
11.14 C An aged receivables analysis shows the outstanding balances owed by each customer analysed
by how long they have been outstanding, usually 30, 60 and 90+ days. The receivables
allowance is deducted from the receivables balance in the statement of financial position.
A credit limit is set by the credit control department of the business and is the maximum amount
of credit each customer of that business can have. Credit limits are not applied to cash sales.
11.15 A The trade payables are due to be paid within 12 months, the overdraft is repayable on demand.
11.16 D Offering credit facilities will not reduce the level of irrecoverable debts.
11.17 D Dr Payables control account, Cr Discounts received (income).
11.18 D Statement (4) only is correct.
A payable is a person or institution to whom a business owes money.
Statements (1) to (3) are examples of where money is owed to the business from others, so these
are receivables. In the case of (2), if a company makes a loan or advance to an employee, this
creates a receivable, being the repayment due from the employee.
Statement (4) is an example of where money is owed by the business to others, so this is a
payable.
11.19 C Statements (1) and (3) are correct.
A payable is a person or institution to whom a business owes money eg, a supplier. The amount
of money owed will be known exactly as it will have been billed or invoiced by the supplier.
Therefore the liability of $500 for invoiced goods (2) is a payable.
An accrual or accrued expense is an expense which is charged against the profit or loss for a
particular period, with a corresponding liability, even though it has not yet been paid for. The
amount and timing of money owed will not be known exactly as it will not yet have been billed or
invoiced. However timing is virtually certain and a close estimate is usually known. This is
recorded as the accrual. The amount owed to the tax authorities (1) is therefore an accrual rather
than a payable.
A provision is a liability of uncertain timing or amount. The timing and/or amount are less certain
than for an accrual. The amount owed for the warranty claims (3) comes under this definition
rather than a payable.
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ANSWERS
187
11.20 C The reconciling items are (3) and (6).
The supplier statement reconciliation would read as follows with items (3) and (6) as reconciling
items. All the other transactions appear both in the ledger and the supplier statement.
$
Balance per supplier's statement 31 March 20X1 520
Less reconciling items:
Payment (30 March) not on statement (3) (385)
Invoice (#533) on statement, not on payables ledger (6) (35)
Balance per payables ledger 31 March 20X1 100
Invoice #533 would then need to be investigated with the supplier to ensure it is not an error on
their part. Once it is established it is a valid invoice, the ledger should be corrected to record this
invoice.
12 Provisions and contingencies
12.1 C Contingent assets should not be recognised in the financial statements. However, they should be
disclosed if it is probable that the economic benefits associated with the asset will flow to the
entity. If it becomes probable that the a transfer of economic benefits associated with a
contingent liability will happen, then the contingent liability is no longer contingent and a liability
should be recognised in the financial statements.
12.2 A A possible transfer of economic benefits should be disclosed. Where transfer is probable a
provision should be made.
12.3 C As the claim is unlikely to succeed, the potential settlement of $500,000 should be disclosed as
a contingent liability note. However, given that the legal costs of $50,000 must be paid whether
the claim is successful or not, this amount should be provided for in the company's financial
statements.
12.4 A A provision is required for the warranties sold, it should be calculated using the expected value
approach. 2 is a contingent liability because it is possible that the company will have to pay out,
if it was probable, then a provision would be required. If it was remote, no disclosure would be
needed.
12.5 A All 3 statements are correct.
12.6 C The provision should be increased by $1,086, the double entry is therefore Dr Expenses, Cr
Provision.
12.7 B Doggard Co needs to reduce the provision by $500 ie a credit to the statement of profit or loss.
12.8 A A provision is a liability of uncertain timing or amount. A contingent liability is a possible
obligation of uncertain timing or amount.
12.9 C The statement is the definition of a contingent liability.
12.10 C Montague should include a provision of $3,000 in his year-end financial statements as this is the
best estimate of the amount he will probably have to pay out.
12.11 D Mobiles Co should provide on the basis of the expected cost. The expected cost would be
calculated as (2.5% 100,000 $50) + (2.5% 100,000 $10) = $125,000 + $25,000
= $150,000.
12.12 B The expected value approach to calculating a provision takes each possible outcome (ie the
amount of money that will need to be paid under each circumstance) and weights it according to
the probability of that outcome happening. The total amount of each weighted value is the
provision.
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12.13 C
$$’000
Provision required at 31.12.X1 = (0.05 150) + (0.20 25) + (0.75 60) 57.5
Provision b/f at 31.12.X0 64
Utilised during year (25)
Increase required – charge to SPL 18.5
Provision c/f at 31.12.X1 57.5
13 Capital structure and finance costs
13.1 D Paid ordinary dividend only: 10m 2c = $200,000. The dividend paid on the redeemable
preference shares will be recognised in the financial statements as a finance cost.
The proposed ordinary dividend will not be recognised in the financial statements, but will be
disclosed in the notes to the financial statements.
Only the paid interim ordinary dividend will be recognised as a deduction from equity reserves in
the statement of financial position.
13.2 A A rights issue will increase cash and therefore assets. Retained earnings remain the same and the
share premium account will be increased.
13.3 B Share capital will be credited with the nominal value of the shares – the balance goes to share
premium.
13.4 B $
Ordinary shares at start of year 50,000
Add: bonus issue 50,000 50c 25,000
Add: new issue 60,000 50c 30,000
105,000
Share premium at start of year 180,000
Less: bonus issue 50,000 50c (25,000)
Add: new issue 60,000 30c 18,000
173,000
13.5 B $9,000 is payable (SPL), but only $6,000 paid (April and July).
13.6 C Dividends paid on ordinary shares are included in the statement of changes in equity, not the
statement of profit or loss and other comprehensive income. Dividends paid on redeemable
preference shares are treated like interest on loans and are shown in the statement of profit or
loss and other comprehensive income as a finance charge. The gain on revaluation of non-current
assets is shown in the statement of profit or loss and other comprehensive income, as other
comprehensive income.
13.7 B
$
Ordinary shares
Opening balance 125,000
Rights issue 250,000 25c 62,500
Bonus issue 150,000 25c 37,500
225,000
Share premium
Opening balance 100,000
Rights issue 250,000 75c 187,500
Bonus issue 150,000 25c (37,500)
250,000
13.8 D $
July – September 1,000,000 8% 3/12 20,000
October – March 750,000 8% 6/12 30,000
April – June 750,000 8% 3/12 15,000
500,000 7% 3/12 8,750
73,750
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ANSWERS
189
13.9 B This is the transfer of the premium to the share premium account.
13.10 C A bonus issue does not involve cash but can be financed from the share premium account.
13.11 D A bonus issue does not raise any funds, instead other reserves are capitalised and reclassified as
share capital. A rights issue is an issue of shares for cash, the right to buy the shares are initially
offered to existing shareholders. If the existing shareholders do not take up their right to buy the
shares, then their shareholding will be diluted.
13.12 C
$
Share capital @ 1.1.20X0 500,000
Issue on 1.4.20X0 (200,000 @ 50c) 100,000
Bonus issue (1.2m 4) @ 50c 150,000
Share capital as at 31.12.20X0 750,000
Share premium @ 1.1.20X0 300,000
1.4.20X0 200,000 shares @ (130c – 50c) 160,000
Bonus issue (as above) (150,000)
310,000
13.13 B The statement of changes in equity.
14 15 mark question: trial balance
14.1 Mr Yousef
(a)
MR YOUSEF
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MAY 20X6
$ $
Sales 138,078
Opening inventory 11,927
Purchases (W1) 84,561
96,488
Less closing inventory 13,551
Cost of goods sold 82,937
Gross profit 55,141
Carriage out (W2) 2,933
Rent and insurance (W3) 5,952
Postage and stationery 3,001
Advertising 1,330
Salaries and wages 26,420
Irrecoverable debts 877
Depreciation charge (W4) 8,700
Increase in allowance for receivables 40
49,253
Net profit 5,888
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(b)
MR YOUSEF
STATEMENT OF FINANCIAL POSITION AS AT 31 MAY 20X6
Accumulated Carrying
Cost depreciation value
$ $ $
Non-current assets
Equipment 58,000 27,700 30,300
Current assets
Inventory 13,551
Receivables 12,120
Less allowance for receivables 170
11,950
Prepayment 880
Cash 177
Bank 1,002
27,560
57,860
Capital
At 1 June 20X5 53,091
Profit for year 5,888
58,979
Drawings (7,800)
At 31 May 20X6 51,179
Current liabilities
Payables 6,471
Accrual 210
6,681
57,860
Workings
1 Purchases
$
Per trial balance 82,350
Add carriage inwards 2,211
Per statement of profit or loss 84,561
2 Carriage out = $5,144 $2,211 = $2,933.
3 Rent, rates and insurance
$
Per trial balance 6,622
Add rent accrual 210
Less insurance prepayment (880)
Per statement of profit or loss 5,952
4 Depreciation charge = 15% $58,000 = $8,700
15 Control accounts
15.1 C Credit sales = $80,000 – $10,000 + $9,000 = $79,000.
15.2 B A, C and D would make the supplier's statement $150 higher.
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ANSWERS
191
15.3 A $
Opening balance 34,500
Credit purchases 78,400
Discounts (1,200)
Payments (68,900)
Purchase returns (4,700)
38,100
15.4 A $8,500 – (2 $400) = $7,700.
15.5 A Sales and refunds are posted on the debit side, changes in the allowance for receivables do not
appear in the control account.
15.6 B RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 180,000 Cash from credit customers 228,000
Credit sales 190,000 Irrecoverable debts written off 1,500
Cash refunds 3,300 Sales returns 8,000
Discount allowed 4,200
Contras 2,400
Closing balance 129,200
373,300 373,300
15.7 A
PAYABLES LEDGER CONTROL ACCOUNT
$ $
Purchases returns 41,200 Bal b/f 318,600
Cash paid 1,364,300 Purchases 1,268,600
Discounts received 8,200 Refunds 2,700
Contras 48,000
Bal c/f 128,200
1,589,900 1,589,900
15.8 C RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 308,600 Cash received 147,200
Credit sales 154,200 Discounts allowed 1,400
Interest charged 2,400 Contra 4,600
Irrecoverable debts 4,900
Closing balance 307,100
465,200 465,200
15.9 A RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 614,000 Cash from customers 311,000
Credit sales 301,000 Discounts allowed 3,400
Interest charged on overdue Irrecoverable debts written off 32,000
accounts 1,600 Contras 8,650
Closing balance 561,550
916,600 916,600
15.10 A
Debit Credit $
Sales price 800
Less: 20% trade discount 120
Sale PQ Co Sales 640
Cash discount 5% Discount allowed 32
Cash payment Bank 608
PQ Co 640
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15.11 B A receivables ledger control account does not ensure the trial balance balances.
15.12 A
15.13 C RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 318,650 Cash from customers 181,140
Credit sales 161,770 Discounts allowed 1,240
Interest on overdue accounts 280 Irrecoverable debts written off 1,390
Sales returns 3,990
Closing balance 292,940
480,700 480,700
15.14 A $130,585
PAYABLES LEDGER CONTROL ACCOUNT
$ $
Returns outwards 27,490 Balance b/f 142,320
Payments to payables 196,360 Credit purchases (183,800
1.175)
215,965
Discount received 1,430
Contra 2,420
Balance c/f 130,585
358,285 358,285
Balance b/f 130,585
15.15 B 1, 4 and 5
JOURNAL ENTRIES
$ $
DR CR
Error 1 Payables ledger control 420
Receivables ledger control 420
Error 4 Irrecoverable debts 240
Receivables ledger control 240
Error 5 Sales 900
Receivables ledger control 900
15.16 C $16,495
BALANCES EXTRACTED FROM THE RECEIVABLES LEDGER
+ –
$ $ $
Total before corrections for errors 15,800
Error 2 Mahmood 90
Error 3 Yasmin 780
Error 6 Charles 300
Error 7 Edward 125
995 300 695
16,495
15.17 C $17,560
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Balance b/f 17,560 Error 1 Ahmed 420
Error 4 Thomas 240
Error 5 Sales daybook total 900
1,560
Balance c/f 16,000
17,560 17,560
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ANSWERS
193
15.18 C
Balance per ledger $31,554 Cr
Discount $53 Dr
Invoice $622 Cr
Corrected balance $32,123
15.19 D
Control
account
List of
balances
$ $
Balance/total 68,566 68,538
Credit balance omitted – 127
Undercasting of day book 99 –
68,665 68,665
15.20 D Trade payables are a current liability
16 Bank reconciliations
16.1 B $(565)o/d – $92 dishonoured cheque = $(657) o/d
16.2 D $
Balance b/d 5,675 o/d
Less: standing order (125)
Add: dishonoured cheque (450 2) 900
6,450 o/d
16.3 A $
Opening bank balance 2,500
Payment ($1,000 – $200) 90% (720)
Receipt ($200 – $10) 190
Closing bank balance 1,970
16.4 B $
Balance per bank statement (800)
Unpresented cheque (80)
Dishonoured cheque (affects cash book only) –
(880)
16.5 B $11,200 overdrawn
Cash book $ Bank statement $
Balance (8,970) Balance b/f (bal fig) (11,200)
Bank charges (550) Credit in error (425)
Unpresented cheques (3,275)
Outstanding deposits 5,380
(9,520) (9,520)
16.6 D $
Bank statement (36,840)
Deposits credited after date 51,240
Unpresented cheques (43,620)
Balance per cash book (o/d) (29,220)
16.7 A Dishonoured cheques and bank charges must be entered in the cash book.
16.8 B Bank charges, direct debits and dishonoured cheques will all be written into the cash book.
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16.9 B $
Overdraft (3,860)
Unpresented cheques (9,160)
(13,020)
Outstanding lodgements 16,690
Cash at bank 3,670
16.10 A Bank charges not entered in the cash book can be entered, and the cash book balance adjusted.
16.11 B
Cash book $ Bank statement $
Balance (8,970) Balance (11,200)
Bank charges (550) Credit in error (425)
Unpresented cheques (3,275)
Outstanding lodgements 5,380
(9,520) (9,520)
16.12 C The bank is overdrawn.
$
Overdraft (38,600)
Outstanding lodgements 41,200
2,600
Unpresented cheques (3,300)
Overdraft (700)
16.13 A The other two items are part of the bank reconciliation.
16.14 B $
Overdraft per bank statement 39,800
Less: deposits credited after date (64,100)
Add: unpresented cheques 44,200
Overdraft per cash book 19,900
16.15 B Cash book 3, 5: bank reconciliation 1, 2, 4
17 Correction of errors
17.1 B The discount received should have been credited to discounts received, so the effect is doubled.
17.2 B Start by posting the adjustment in full:
Debit Credit
$ $
Discount allowed 3,840 2,960
Discount received 3,840 2,960
Suspense account 1,760
17.3 D Returns outwards are returns to suppliers, which should therefore reduce the purchases balance
– ie it should be a credit balance.
Option A would result in credits being higher than debits in the trial balance. Options B and C
would not cause an imbalance.
17.4 A B and C would make the credit side $50 higher. D would have no effect.
17.5 B This has debited a non-current asset to cost of sales which is an error of principle as it has
broken the principles of accounting – ie that non-current assets should be capitalised.
17.6 C A transaction has been posted to the wrong account, but not the wrong class of account.
17.7 B This is an error of original entry.
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ANSWERS
195
17.8 C $
Draft net profit 83,600
Add: purchase price 18,000
Less: additional depreciation (18,000 25%) (4,500)
Adjusted profit 97,100
17.9 B The cash book was credited with $210 reimbursement of petty cash. However, the nominal
ledger was posted with only $200 of expenditure (debits). Therefore the credits are $10 higher
than the debits.
17.10 D $10,200 + $3,000 + $1,400 = $14,600.
17.11 A Both errors will affect cost of sales and therefore gross profit, making a net effect of $40,000.
Net profit will be further reduced by $10,000 missing from stationery expense.
17.12 D Debits will exceed credits by 2 $48 = $96
17.13 D Errors of principle, such as recording a capital expenditure transaction as revenue expenditure,
would not be revealed by a trial balance because it would not create an inequality between total
debits and total credits. Transposition errors are errors where figures (digits) are written in the
wrong order in either a credit or a debit entry. This would create an imbalance between credits
and debts, and so the error would be indicated by extracting a trial balance.
17.14 C
Debit Credit
$ $
Non-current assets 85,000
Receivables 7,000
Trade payables 3,000
Bank loan 15,000
Allowance for depreciation, non-current assets 15,000
Inventory 4,000
Accruals 1,000
Prepayments 2,000
Bank overdraft 2,000
98,000 36,000
17.15 A
Debit balances $ $
Purchases 160,000
Non-current assets 120,000
Receivables 33,000
Other expenses 110,000
Bank 18,000
441,000
Credit balances
Payables 27,000
Capital 66,000
Sales 300,000
Purchase returns 2,000
395,000
Bank loan (credit balance) 46,000
17.16 B $600,000 – $50,000 = $600,000. $150,000 – $50,000 = $100,000.
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17.17 A Statement of financial position $560, Statement of profit or loss $3,320.
ELECTRICITY ACCOUNT
$ $
Balance b/fwd 300
20X9:
1 August Paid bank 600
1 November Paid bank 720
20Y0:
1 February Paid bank 900
30 June Paid bank 840
30 June Accrual c/d $840 2/3 560 SPL 3,320
3,620 3,620
18 Suspense accounts
18.1 D Error (5) will not cause a trial balance imbalance.
18.2 A SUSPENSE ACCOUNT
$ $
Share capital 3,000 Opening balance 3,460
Motor vehicles 9,000 Plant asset (2,800 × 2) 5,600
Petty cash (TB) 500
Closing balance 2,440
12,000 12,000
18.3 B This results in a debit to the suspense account therefore reducing the balance.
Option A results in a credit to the suspense account and options C and D do not affect the
suspense account at all.
18.4 B (1) This entry has been correctly debited but to the wrong account – no effect on trial balance
(4) Double entry has been carried out although the wrong way round – no effect on trial
balance
18.5 A SUSPENSE ACCOUNT
$ $
Balance b/d 210 Gas bill (420 – 240) 180
Interest 70 Discount (2 500) 100
280 280
18.6 C The $25,000 currently held in the Suspense account needs to be posted to Plant and machinery.
18.7 D
Suspense account $
Opening balance 16,500 credit
Discount allowed (debit discount allowed) 3,900 credit
Discount received (credit discount received) (5,100) debit
Transposition of cash received (credit RLCA) (9,900) debit
5,400 credit
18.8 B Only errors 1 and 3 involve a suspense account entry to correct them.
18.9 D A and B will only affect the personal ledgers, C will cause an incorrect double entry.
18.10 B A would give a debit balance of $130, C would have no effect and D would not cause a trial
balance imbalance.
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ANSWERS
197
19 15 mark questions: preparing financial statements
19.1 Shuswap
(a) Suspense account
Proceeds of issue of 4m shares at $1.10 4,400
Proceeds of sale of plant (balance) 600
5,000
Journal entries:
DR Suspense a/c 5,000
CR Issued share capital (4m 50c) 2,000
Share premium (4m 60c) 2,400
Disposal a/c 600
(b)
SHUSWAP
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20X4
Cost or Accumulated Carrying
valuation depreciation value
$'000 $'000 $'000
Assets
Non-current assets
Land and buildings 12,000 – 12,000
Plant and equipment (W1) 19,600 7,950 11,650
23,650
Current assets
Inventories (3,000 – 140) 2,860
Receivables (2,600 – 200 – 106) 2,294
Cash at bank 1,900
Total assets 30,704
Equity and liabilities
Equity
Issued share capital (6,000 + 2,000 (part (a))) 8,000
Share premium (part (a)) 2,400
Revaluation surplus (3,000 + 1,000) 4,000
Retained earnings (W2) 12,310
26,710
Non-current liabilities
Loan notes (redeemable 20Y0) 2,000
Current liabilities
Trade payables (2,100 – 106) 1,994
Total equity and liabilities 30,704
Workings
1 Plant and equipment
$'000
Disposal – Cost 1,400
– Depreciation (700)
– Carrying amount 700
Proceeds (part (a)) (600)
Loss on sale 100
Cost adjustment 21,000 – 1,400 = 19,600
Accumulated depreciation adjustment (9,000 – 700 – (1,400 25%)) = 7,950
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2 Retained earnings
$'000
Per draft 12,400
Irrecoverable debts (200)
Inventory write down (500 – 360) (140)
Loss on disposal of plant (W1) (100)
Depreciation adjustment (1,400 25%) (W1) 350
12,310
19.2 Malright
(a) MALRIGHT
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 OCTOBER 20X7
$'000
Revenue (W4) 1,765
Cost of sales (W1) (1,343)
Gross profit 422
Distribution costs (W1) (80)
Administrative expenses (W1) (192)
Profit before interest and tax 150
Finance cost: 50,000 10% (5)
Profit before taxation 145
Income taxes (45)
Profit for the year 100
(b) MALRIGHT
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 OCTOBER 20X7
Ordinary Share Retained Total
shares premium earnings
$’000 $’000 $’000 $’000
Balance at 1 Nov 20X6 650 80 130 860
Total comprehensive 100 100
income for the year
Dividends paid (30) (30)
Balance at 31 Oct 20X7 650 80 200 930
(c) MALRIGHT
STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X7
$'000 $'000
Non-current assets
Tangible assets (W3) 966
Current assets
Inventory 75
Trade receivables (320 – 16) 304
379
Equity and liabilities 1,345
Equity
$1 ordinary shares 650
Share premium 80
Retained earnings (part (b)) 200
930
Non-current liabilities
10 % loan notes 50
Current liabilities
Trade payables 250
Bank overdraft 50
Tax payable 45
Loan interest payable 5
Energy expense accrual 15
365
Total equity and liabilities 1,345
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ANSWERS
199
Workings
1 Cost of sales/distribution costs/administration expenses
Cost of Distribution Administrative
sales cost expenses
$'000 $'000 $'000
Purchases 1,105
Discounts received (90)
Wages (40:25:35) 72 45 63
Energy expenses ($105 + $15)
(40:20:40) 48 24 48
Opening inventory 160
Administrative expenses 80
Increase in allowance for receivables
(W2)
6
Director's remuneration 70
Closing inventory (75)
Depreciation – buildings (30:30:40) (W3) 11 11 15
Depreciation – plant (W3) 22
1,343 80 192
2 Allowance for receivables
$'000
Trade receivables at 31 October 20X7 320
Allowance needed: $320 5% 16
Allowance at 1 November 20X6 10
Increase 6
3 Tangible non-current assets
Land Buildings Plant Total
$'000 $'000 $'000 $'000
Cost 235 740 220 1,195
Accumulated dep'n
at 1.11.X6 – 60 110 170
Charge for year
Buildings:
$740,000 5%
37
37
Plant:
(220 – 110) 20%
22
22
– 97 132 229
Carrying amount
at 31.10.X7
235
643
88
966
4 Revenue
$'000
Per trial balance 1,800
Less returns inward (35)
1,765
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19.3 Tonson
(a) TONSON
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 30 OCTOBER 20X6
$'000 $'000
Sales revenue 5,780
Less returns inward (95)
5,685
Cost of sales (W1) (3,670)
2,015
Discounts received 50
Gross profit 2,065
Expenses
Insurance 75
General expenses 60
Energy expenses 66
Marketing expenses (50 – 5) 45
Wages and salaries (675 + 40) 715
Telephone expenses 80
Property expenses 100
Debenture interest 33
Irrecoverable debt expense (W2) 155
Depreciation (W3) 347
(1,676)
Net profit before taxation 389
Taxation (150)
Profit for the year 239
(b) TONSON
STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X6
$'000 $'000 $'000
Cost/ Accumulated
valuation depn.
Land 740 – 740
Buildings 1,800 – 1,800
Motor vehicles (W3) 240 112 128
Furniture and equipment (W3) 1,200 660 540
3,980 772 3,208
Current assets
Inventory (W1) 250
Receivables 900
Less allowance (45)
855
Prepayments (marketing expenses) 5
Cash in hand 15
1,125
4,333
Equity and liabilities
Equity
$1 Ordinary shares (W4) 1,980
Share premium account (W4) 20
Revaluation surplus (W3) 735
Retained earnings (315 + 239) 554
3,289
Non-current liabilities
7% loan note 470
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ANSWERS
201
$'000 $'000 $'000
Current liabilities
Trade payables 290
Accruals (wages) 40
Tax 150
Bank overdraft 94
574
4,333
Workings
1 Cost of sales
$'000 $'000
Opening inventory 350
Purchases 3,570
3,920
Closing inventory
Per question 275
Less write-down to NRV (45 – 20) (25)
(250)
3,670
2 Irrecoverable debt expense
$
Receivables per trial balance 900,000
Allowance required 900,000 5% 45,000
Allowance per trial balance 40,000
Increase 5,000
Irrecoverable debt written off 150,000
Total irrecoverable debt expense 155,000
3 Non-current assets and depreciation
Motor Furniture and
Land Buildings vehicles equipment
$'000 $'000 $'000 $'000
Cost 740 1,500 240 1,200
Depreciation at 1.11.X5 – 360 80 420
Charge for the year
1,500 5% 75
(240 – 80) 20% 32
1,200 20% 240
– 435 112 660
Carrying amount at
31.10.X6 740 1,065 128 540
Total depreciation charge: 75 + 32 + 240 = $347,000
Revaluation of buildings:
$
Carrying amount at 31.10.X6 1,065
Revaluation surplus (bal) 735
Valuation at 31.10.X6 1,800
4 Equity
$
Share capital
Per trial balance 1,800
Bonus issue one for ten 180
1,980
Share premium
Per trial balance 200
Bonus issue (180)
20
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19.4 Emma
EMMA
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X2
$'000 $'000
Cash flows from operating activities
Net profit before taxation 300
Adjustments for:
Depreciation (W1) 90
Loss on sale for non-current assets (45–32) 13
Profit on sale of non-current asset investments (5)
Interest received (25)
Interest expense 75
Operating profit before working capital changes 448
Increase in inventories (48)
Increase in receivables (75)
Increase in payables 8
Cash generated from operations 333
Interest paid (75)
Income taxes paid (W2) (190)
Net cash from operating activities 68
Cash flows from investing activities
Purchase of intangible non-current assets (50)
Purchase of tangible non-current assets (W3) (201)
Receipts from sale of non-current assets (32+30) 62
Interest received 25
Net cash used in investing activities (164)
Cash flows from financing activities
Proceeds from issue of share capital 60
Long-term loan 100
160
Net increase in cash and cash equivalents 64
Cash and cash equivalents at 1 January 20X2 (Note 1) (97)
Cash and cash equivalents at 31 December 20X2 (Note 1) (33)
Note 1 Cash and cash equivalents
31 December
20X2 20X1
$'000 $'000
Cash in hand 2 1
Bank overdraft (85) (98)
Short-term investments 50
(33) (97)
Workings
1 Depreciation charge
$'000 $'000
Depreciation at 31 December 20X2 340
Depreciation 31 December 20X1 290
Depreciation on assets sold (85 45) 40
250
Charge for the year 90
2 Tax paid
INCOME TAX
$'000 $'000
Tax paid 190 1.1.X2 balance b/d 240
31.12.X2 balance c/d 290 Statement of profit or loss 240
480 480
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ANSWERS
203
3 Purchase of tangible non-current assets
TANGIBLE NON-CURRENT ASSETS
$'000 $'000
1.1.X2 Balance b/d 595 Disposals 85
Revaluation (100 91) 9
Purchases (bal fig) 201 31.12.X2 Balance c/d 720
805 805
19.5 Sioux
SIOUX
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 20X4
$'000 $'000
Net profit before tax 2,350
Add: depreciation (W) 1,250
Less: profit on disposal (500 – 350) (150)
Add: Interest 300
Operating profit before working capital changes 3,750
Decrease in inventories 400
Increase in receivables (900)
Increase in payables 500
Cash generated from operations 3,750
Interest paid (3,000 10%) (300)
Tax paid (600)
2,850
Cash flows from investing activities
Payments to acquire non-current assets (W) (3,300)
Proceeds from sale of non-current assets 500
Net cash used in investing activities (2,800)
Cash flows from financing activities
Proceeds from issue of loan notes (3,000 – 2,000) 1,000
Dividends paid (750)
Net cash from financing activities 250
Net increase in cash 300
Cash at 1 January 20X4 100
Cash at 31 December 20X4 400
Workings
Non-current assets
NON-CURRENT ASSETS AT COST
$ $
Opening balance 8,000 Disposal 800
Revaluation 500 Closing balance 11,000
Additions (balance figure) 3,300
11,800 11,800
NON-CURRENT ASSETS – ACCUMULATED DEPRECIATION
$ $
Disposal (800 – 350) 450 Opening balance 4,800
Closing balance 5,600 Charge for year (balance figure) 1,250
6,050 6,050
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19.6 Snowdrop
SNOWDROP LIMITED
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MAY 20X5
$'000 $'000
Cash flows from operating activities
Net profit before tax 1,032
Adjustments for
Depreciation 700
Loss on sale of tangible non-current assts 20
Interest 10
1,762
Operating profit before working capital changes
Increase in inventory (80)
Increase in receivables (130)
Increase in payables 85
Cash generated from operations 1,637
Interest paid (10)
Tax paid (W1) (145)
Dividends paid (270)
Net cash from operating activities 1,212
Cash flow from investing activities
Purchase of non-current assets (W2) (2,800)
Receipts from sales of tangible non-current assets 180
Cash flows from financing activities
Proceeds from issue of share capital 1,280
Repayment of long term borrowing (100)
1,180
Net increase/(decrease) in cash and cash equivalents (228)
Cash and cash equivalents at the beginning of period 170
Cash and cash equivalents at end of period (58)
Note. Dividends paid and interest paid may be shown in either operating activities or financing activities.
Workings
1 Tax paid
TAXATION
$'000 $'000
Tax paid (bal fig) 145 Balance b/fwd 145
Balance c/fwd 180 Statement of profit or loss 180
325 325
2 Payments for tangible non-current assets
TANGIBLE NON-CURRENT ASSETS
$'000 $'000
Balance b/fwd 2,700 Depreciation 700
Additions (bal fig) 2,800 Disposals (carrying amount) 200
Balance c/fwd 4,600
5,500 5,500
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ANSWERS
205
19.7 Geofost
GEOFOST
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 20X7
$ $
Cash flows from operating activities
Net profit before tax 15,000
Adjustments for
Depreciation 4,658
Finance cost 730
Profit on disposal of non-current assets (W1) (720)
Operating profit before working capital changes 19,668
Decrease in inventory 6,075
Increase in receivables (1,863)
Increase in payables 3,178
Cash generated from operations 27,058
Interest paid (W2) (710)
Tax paid (W3) (4,090)
Net cash from operating activities 22,258
Cash flows from investing activities
Payments to acquire property, plant and equipment (24,340)
Proceeds from sale of property, plant and equipment _ 2,694
Net cash used in investing activities (21,646)
Cash flows from financing activities
Proceeds from issue of share capital 1,869
Repayment of long term borrowing (2,300)
Dividend paid (1,486)
Net cash used in financing activities (1,917)
Net decrease in cash and cash equivalents (1,305)
Cash and cash equivalents at the beginning of period 634
Cash and cash equivalents at end of period (671)
Workings
1 Profit on sale of tangible non-current asset
$'000
Sale proceeds 2,694
Net book value 1,974
Profit 720
2 Interest paid
INTEREST PAYABLE
$'000 $'000
Interest paid (bal fig) 710 Balance b/f 100
Balance c/f 120 Statement of profit or loss 730
830 830
3 Tax paid
TAXATION
$'000 $'000
Tax paid (bal fig) 4,090 Balance b/f 2,760
Balance c/f 3,020 Statement of profit or loss 4,350
7,110 7,110
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20 Incomplete records
20.1 B $
Opening inventory 386,200
Purchases 989,000
Closing inventory (422,700)
Cost of sales 952,500
952,500 100/60 = 1,587,500
20.2 A Closing net assets plus drawings minus capital introduced minus opening net assets.
20.3 B Cost of sales = $114,000
Therefore sales should be = $114,000 100/60 = $190,000
Theft = $190,000 – 181 600 = $8,400
20.4 C TOTAL RECEIVABLES ACCOUNT
$ $
Opening balance 130,000 Cash received 686,400
Sales (balancing figure) 744,960 Discounts allowed 1,400
Irrecoverable debts 4,160
Contra 2,000
Closing balance 181,000
874,960 874,960
20.5 D TOTAL PAYABLES ACCOUNT
$ $
Cash paid 302,800 Opening balance 60,000
Discounts received 2,960 Purchases (balancing figure) 331,760
Contra 2,000
Closing balance 84,000
391,760 391,760
20.6 C Cost of sales = $281,250 2/3 = $187,500
Loss of inventory = $228,200 – 187,500 = $40,700
20.7 D $
Opening inventory 318,000
Purchases 412,000
Closing inventory (214,000)
516,000
Notional cost of sales (612,000 75%) (459,000)
Inventory lost 57,000
20.8 A $'000
Profit for the year 1,175
Add back depreciation 100
1,275
Add: issue of shares 1,000
Less: repayment of loan notes (750)
Less: purchase of non current assets (200)
1,325
Less: increase in working capital (575)
Increase in bank balance 750
20.9 C $
Capital at 1 April 20X7 6,500
Add: profit (after drawings) 32,500
Less: sales tax element (70)
Capital at 31 March 20X8 38,930
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ANSWERS
207
20.10 B $937,050
PURCHASES CONTROL ACCOUNT
$ $
Payments to suppliers 888,400 Opening balance 130,400
Discounts received 11,200 Goods taken 1,000
Closing balance 171,250 Refunds received 2,400
Purchases (bal fig) 937,050
1,070,850 1,070,850
20.11 A $669,375
Cost of sales
$
Opening inventory 243,000
Purchases 595,400
Less: purchases returns (41,200)
797,200
Less: closing inventory (261,700)
535,500
Sales = 535,500 100/80 = $669,375
20.12 A
Sales = 381,600 + 6,800 + 112,900 + 7,200 + 9,400 = $517,900
20.13 D Cost of sales: $17,000 + $91,000 – $24,000 = $84,000
Sales 100%
Cost of sales 60%
Gross profit 40%
Sales:
$84,000
60%
= $140,000
20.14 B
$
Sales (100%) 64,800
Cost of sales (70%) 45,360
Gross profit (30%) 19,440
$
Opening inventory 28,400
Purchases 49,600
78,000
Calculated closing inventory (bal fig) (32,640)
Cost of sales 45,360
Calculated closing inventory 32,640
Actual closing inventory –
Destroyed by fire 32,640
20.15 A $
Cost of sales
Opening inventory 38,000
Purchases 637,000
Less: closing inventory (45,000)
630,000
Sales 630,000 100/70 = $900,000
20.16 C Opening net assets + Profit + Capital introduced – Drawings = Closing net assets
210,000 + Profit + 100,000 – 48,000 = 400,000
Profit = $138,000
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21 Company financial statements
21.1 D The revaluation surplus is part of equity. Dividends paid on redeemable preference shares are
treated like interest paid on loans, and are therefore accrued for as finance costs in the financial
statements.
21.2 B Profit on disposal of properties will be included in profit in the statement of profit or loss and
other comprehensive income. Equity dividends proposed after the reporting period are disclosed
by note.
21.3 B $
Receivables and prepayments
Insurance 9,000 8/12 prepayment 6,000
Loan (receivable) 12,000
Interest due 12,000 2% (receivable) 240
Rent due (receivable) 4,000
22,240
21.4 D All of these items are disclosed, either on the face of the main financial statements or in the
notes. Although dividends proposed are not included in the statement of changes in equity, they
must still be disclosed in the notes.
21.5 A Adjusting events after the reporting period should be adjusted for, not just disclosed.
21.6 C The loss on sale of investments will have been recognised in the statement of profit or loss and
other comprehensive income. Dividends proposed after the year end are disclosed in the notes,
they are not recognised in the financial statements.
21.7 D Loan stock is a non-current liability.
A Share premium account is a statutory reserve.
B Retained earnings is otherwise known as the revenue reserve.
C Revaluation surplus is an unrealised reserve.
21.8 B The total will be $260,000, of which $60,000 will be credited to share premium.
21.9 C A revaluation surplus arises when a non-current asset is revalued. Loan notes are not part of
share capital.
21.10 A The under provision for the previous year of $2,500 plus the provision for the current year of
$20,000 gives a charge to the SPL of $22,500.
22 Disclosure notes
22.1 A Disclosure notes provide more detail about the information in the main financial statements.
22.2 B A reconciliation of the opening and closing carrying amounts is required by IAS 16 for tangible
non-current assets and by IAS 38 for intangible assets.
22.3 B IAS 2 requires disclosure of the accounting policies adopted in measuring inventories, including
the cost formula used, the total carrying amount of inventories and the carrying amount in
classifications appropriate to the entity and the carrying amount of inventories carried at net
realisable value.
22.4 A IAS 38 does not require the net realisable value of deferred development costs to be disclosed.
22.5 C Both statements are correct.
22.6 B These are the disclosure requirements given in IAS 37 for contingent liabilities.
22.7 C IAS 16 does not require disclosure of the market value of all tangible non-current assets.
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ANSWERS
209
22.8 B Inventories must be valued at the lower of cost and net realisable value. The amount of any writedown
in the period must be disclosed, and so too must the carrying amount of inventories
classified by type and the cost of inventories recognised as an expense in the period. There is no
requirement to disclose the original cost of inventories that have been written down in value.
22.9 D IAS 10 requires disclosure of the nature of material non-adjusting events after the reporting
period and either an estimate of the financial effect of the event or a statement that a reasonable
estimate cannot be made.
23 Events after the reporting period
23.1 A All of these events are indicative of conditions that existed at the reporting period.
23.2 A 2 and 3 do not affect the company's position at the end of the reporting period.
23.3 B These affect valuation of receivables and inventory at the end of the reporting period.
23.4 B These events are adjusting if discovered between the reporting date and the date the financial
statements are authorised for issue as they provide evidence about conditions that existed at the
reporting date: insolvency of an account receivable which was outstanding at the end of the
reporting period, discovery of fraud or error which shows that the financial statements were
incorrect, sale of inventory which gives evidence about its value at the end of the reporting
period.
23.5 B 2 and 4 both affect the valuation of assets at the end of the reporting period.
23.6 C IAS 10 requires the financial statements to be adjusted for events that reflect conditions that
existed at the reporting date. Only event 3 is indicative of conditions at the reporting date – ie the
recoverability of the receivable balance. Events 1 and 2 are non-adjusting events, however, they
are material so they should be disclosed.
23.7 D None of these events require adjustment in the financial statements.
23.8 A An adjusting event after the reporting date is event that occurs between the reporting date and
the date on which the financial statements are authorised for issue that provides further evidence
of conditions that existed at the reporting date. The event must occur after the reporting period
but before the date the financial statements are authorised for issue.
23.9 A The nature of the event and an estimate of the financial effect (or a statement that such an
estimate cannot be made) should be disclosed.
24 Statements of cash flows
24.1 C Only the proceeds of a share issue and dividends received involve the movement of cash.
24.2 D Loss on sale of non-current assets should be added back to net profit before tax.
24.3 D $
Add: depreciation charge 980,000
Less: profit on sale of assets (40,000)
Less: increase in inventories (130,000)
Add: decrease in receivables 100,000
Add: increase in payables 80,000
Addition to operating profit 990,000
24.4 B Depreciation should be added back as it not a cash flow and proceeds of sale of non-current
assets appears under 'investing' cash flows.
24.5 D 1 Proceeds from sale of premises appears under investing activities.
2 Dividends received appears under operating or investing activities.
3 A bonus issue of shares is not a cash flow.
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F3/FFA FINANCIAL ACCOUNTING
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24.6 C 1 The direct and indirect methods will give the correct figure.
2 A rights issue of shares is a cash flow.
4 The profit on sale of a non-current asset appears as an adjustment to profit in order to
reach net cash flow from operations.
24.7 D The depreciation charge and the increase in payables should both have been added.
24.8 B Neither a proposed dividend nor a bonus issue of shares involve the movement of cash.
24.9 B Proceeds from sale of equipment are included in investing activities.
24.10 B
$’000
Cash flows from financing:
Issue of share capital (120 + 60) – (80 + 40) 60
Repayment of bank loan (100 – 150) (50)
10
24.11 D 2 and 4. Decrease in inventories should be added, decrease in payables should be deducted.
24.12 B The corrected extract is as follows:
$’000
Net cash flow from operating activities
Profit before tax 484
Depreciation charges 327
Profit on sale of property, plant and equipment (35)
Increase in inventories (74)
Decrease in trade and other receivables 41
Increase in trade payables 29
Cash generated from operations 772
24.13 D Interest received and proceeds from the sale of property are cash flows from investing activities;
taxation paid is a cash flow from operating activities.
24.14 A The net cash flows from operating activities will be the same using the two methods.
24.15 D
$’000
Carrying amount of assets at beginning of the year 462
Increase in revaluation surplus during the year 50
Book value of assets disposed of (110 – 65) (45)
Depreciation charge for the year (38)
429
Carrying amount of assets at end of the year 633
Purchases of property, plant and equipment during the year 204
24.16 C A loss on disposal of a non-current asset is added back as an adjustment in the calculation of
cash flows from operating activities (using the indirect method), and the cash received from the
disposal is included within cash flows from investing activities
24.17 B Cash flows from operating activities $
Cash received from customers ($400 + $33,400 – $900) 32,900
Cash paid to suppliers ($1,000 + $18,500 – $2,550) (16,950)
Cash paid to employees ($1,500 + $9,500 – $750) (10,250)
Interest paid (2,100)
Interest received 175
Net cash flow from operating activities 3,775
24.18 C A business may make a profit but have negative cash flow.
24.19 D Jo is correct. A business that does not have cash available to fund operations is likely to fail.
24.20 B There is an opportunity to reclassify some cash outflows that might have been reported in the
operating section as investing cash outflows. For example, questionable capitalisation of
expenses.
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ANSWERS
211
25 15 mark questions: preparing simple consolidated
financial statements
25.1 Swing and Cat
SWING GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X8
$'000
Revenue (5,000 + 1,000 – 100*) 5,900
Cost of sales (2,900 + 600 – 100* + 10(W2)) 3,410
Gross profit 2,490
Other expenses (1,700 + 320) 2,020
Net profit 470
Tax (130 + 25) 155
Profit for the year 315
Profit attributable to:
Owners of the parent (bal fig) 304
Non-controlling interest (20% $55,000) 11
315
* to remove the intra-group sale
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X8
$'000 $'000
Non-current assets
Goodwill (W1) 10
Tangible non-current assets (1,880 + 200) 2,080
2,090
Current assets
Inventory (500 + 120 – 10(W2)) 610
Trade receivables (650 + 40) 690
Bank and cash (390 + 35) 425
1,725
3,815
Equity and liabilities
Equity attributable to owners of the parent
Share capital (Swing only) 2,000
Retained earnings (W3) 510
2,510
Non-controlling interest (W4) 70
Total equity 2,580
Current liabilities
Trade payables (910 + 30) 940
Tax (230 + 65) 295
1,235
Total equity and liabilities 3,815
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Workings
1 Goodwill
$ $’000
Fair value of consideration transferred 120
Plus fair value of non-controlling interest at acquisition 40
Less fair value of net assets acquired as represented by
Ordinary share capital 100
Retained earnings 50
(150)
Goodwill 10
2 Provision for unrealised profit
$
Profit on intra-group sale (100,000 – 80,000) 20,000
Unrealised profit (50% 20,000)* 10,000
* 50% of the inventories from the intra-group sales remain in inventories at the year end, therefore the
unrealised profit is 50% of the overall profit made on the intra-group sales. The rest of the profit from
the intra-group sales is now realised as the inventories have been sold outside the group.
3 Retained earnings
Swing Cat
$’000 $’000
Per question 400 200
Adjustments (unrealised profit (W2)) (10)
Pre-acquisition retained earnings (50)
150
Group share of post-acq’n retained earnings:
Cat (80% 150) 120
Group retained earnings 510
4 Non-controlling interest at reporting date
$’000
Fair value of NCI at acquisition 40
Plus NCI’s share of post-acquisition retained earnings (20% 150) 30
NCI at reporting date 60
25.2 Black and Bury
(a) Calculation of goodwill
$’000 $’000
Fair value of consideration transferred 21,000
Plus fair value of NCI at acquisition 11,800
32,800
Less net acquisition-date fair value of identifiable assets acquired and
liabilities assumed:
Share capital 30,000
Retained earnings at acquisition 2,000
(32,000)
Goodwill 800
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213
(b) (i) BLACK GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 OCTOBER 20X5
$'000
Revenue (245 + 95 – 16.8 (W2)) 323,200
Cost of sales (140 + 52 – 16.8 +1.44) (176,640)
Gross profit (W2) 146,560
Distribution costs (12 + 10) (22,000)
Administrative expenses (55 + 13) (68,000)
Profit before tax 56,560
Tax (13.25 + 5) (18,250)
Profit for the year 38,310
Attributable to
Owners of the parent (bal.fig.) 33,810
Non-controlling interest (30% 15) 4,500
38,310
(ii) BLACK GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X5
$'000 $'000
Non-current assets
Goodwill 800
Property, plant and equipment (110 + 40) 150,000
150,800
Current assets
Inventory (W3) 15,810
Trade receivables (W4) 12,420
Bank (3.5 + 2.57) 6,070
34,300
Total assets 185,100
Equity and liabilities
Equity attributable to owners of the parent
Share capital 100,000
Retained earnings (W6) 37,856
137,856
Non controlling interest (W7) 14,284
Current liabilities
Trade payables (W5) 9,960
Dividends (20+ (10 30%)) 23,000
32,960
Total equity and liabilities 185,100
Workings
1 Group structure
Black
Bury
2 Intragroup sale
Sale price to be eliminated from consolidated revenue:
$'000
Cost to Black 12,000
40% mark up 4,800
Cost to Bury 16,800
70%
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F3/FFA FINANCIAL ACCOUNTING
214
Unrealised profit in inventory: $4,800,000 30% = $1,440,000
Gross profit = $105,000,000 + $43,000,000 – $1,440,000
= $146,560,000
3 Inventory
$'000
Black 13,360
Bury 3,890
Less unrealised profit (W2) (1,440)
15,810
4 Trade receivables
$'000 $'000
Black 14,640
Less dividend receivable (7,000)
7,640
Bury 6,280
Less intragroup (1,500)
12,420
5 Trade payables
$'000
Black 9,000
Bury 2,460
Less intragroup (1,500)
9,960
6 Retained earnings
Black Bury
$'000 $'000
Per question 33,500 10,280
Adjustment (unrealised profit (W2)) (1,440) –
Pre-acquisition retained earnings (2,000)
8,280
Group share of post-acq’n ret’d earnings:
Bury (70% 8,280)
5,796
Group retained earnings 37,856
7 Non-controlling interest
$'000
Fair value of NCI at acquisition 11,800
Plus NCI’s share of post-acquisition retained earnings (30% 8,280) 2,484
NCI at reporting date 14,284
(b) Black Bury
Net profit percentage Net profit
Sales
100
45/245 100 =18.4% 25/95 100 = 21.1%
At 21.1%, the net profit percentage of Bury is slightly higher than that of Black (18.4%). The main
reason for this is that Black has higher administrative expenses compared to its sales than Bury. Since
wages and salaries normally make up the most part of administrative expenses, the reason for the
difference may be that Bury is making more efficient use of its staff.
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ANSWERS
215
25.3 Prestend
(a) Calculation of goodwill on the acquisition of Northon
$ $’000
Fair value of consideration transferred 3,345
Plus fair value of NCI at acquisition 1,415
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Ordinary share capital 4,000
Retained earnings at acquisition 60
(4,060)
Goodwill 700
(b) PRESTEND GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X7
$'000 $'000
Non-current assets
Goodwill 700
Tangible non-current assets (4,200 + 3,300) 7,500
8,200
Current assets
Inventory (1,500 + 800 – 20 (W2)) 2,280
Receivables (1,800 + 750 – 30) 2,520
Bank (600 + 350) 950
5,750
13,950
Equity and liabilities
Equity
$1 Ordinary shares 9,000
Retained earnings (W3) 603
Non-controlling interest (W4) 1,457
11,060
Current liabilities
Payables (1,220 + 200 – 30) 1,390
Tax (700 + 800) 1,500
2,890
Total equity and liabilities 13,950
Workings
1 Group structure
Prestend
2,800,000
4,000,000
= 70%
Northon
2 Unrealised profit on intra-group sale
Profit on intra-group sale is $240,000
20
120
= $40,000
Unrealised profit is $40,000 50% = $20,000
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216
3 Retained earnings
Prestend Northon
$'000 $'000
Per question 525 200
Adjustment (unrealised profit (W2)) (20)
Pre-acquisition retained earnings (60)
140
Group share of post-acq’n ret’d earnings:
Northon (70% 140)
98
Group retained earnings 603
4 Non-controlling interest
$'000
Fair value of NCI at acquisition 1,415
Plus NCI’s share of post-acquisition retained earnings (30% 140) 42
NCI at reporting date 1,457
25.4 Liverton and Everpool
(a) Calculation of goodwill on acquisition of Everpool
$'000 $'000
Fair value of consideration transferred 3,500
Plus fair value of NCI at acquisition 1,000
4,500
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Share capital 4,000
Retained earnings at acquisition 200
4,200
Goodwill 300
(b) LIVERTON
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MAY 20X6
$'000
Sales revenue (6,400 + 2,600 – 200) 8,800
Cost of sales (W) (5,004)
Gross profit (W) 3,796
Distribution costs (1,110 + 490) (1,590)
Administration expenses (700 + 320) (1,020)
Profit before tax 1,186
Tax (400 + 80) (480)
Profit for the year 706
Profit attributable to
Owners of the parent 641
Non-controlling interest (25% 260) 65
706
Working: group structure
Liverton
3,000
4,000
= 75%
Everpool
Working: Consolidated gross profit
Profit on sale by Liverton to Everpool: $200,000 – $110,000 = $90,000
Unrealised profit: $90,000 60% = $54,500
Consolidated gross profit: $2,700,000 + $1,150,000 – $54,000 = $3,796,000
Cost of sales is the balancing figure.
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ANSWERS
217
26 Consolidated financial statements
26.1 C $ $
Fair value of consideration 270,000
Plus fair value of NCI at acquisition 42,000
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Share capital 100,000
Retained earnings at acquisition 90,000
190,000
Goodwill in statement of financial position 122,000
26.2 A
Non-controlling interest $
Fair value of NCI at acquisition 42,000
Plus NCI’s share of post-acq’n retained earnings (10% (160 – 90)) 7,000
NCI at reporting date 49,000
26.3 D $
Alpha retained earnings 210,000
Group share post-acq’n ret’d earnings:
Beta ((160,000 – 90,000) 90%)
63,000
273,000
26.4 C Iota is a subsidiary as Gamma has power to cast a majority of votes at meetings of the board of
directors. Kappa is a subsidiary as Gamma owns >50% of the ordinary shares of Kappa, it
doesn’t make any difference that Kappa is based overseas or pays tax in that country. Zeta is not
a subsidiary of Gamma because Gamma’s investment in the non-voting preference shares will not
give it the ability to control Zeta.
26.5 C $ $
Fair value of consideration 280,000
Plus fair value of NCI at acquisition 65,000
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Share capital 140,000
Share premium 50,000
Retained earnings at acquisition 60,000
250,000
Goodwill 95,000
26.6 C
Non-controlling interest $
Fair value of NCI at acquisition 65,000
Plus NCI’s share of post-acq’n retained earnings (20% (100 – 60)) 8,000
NCI at reporting date 73,000
26.7 D
$’000
Fair value of net assets acquired:
Ordinary shares 400
Retained earnings at 1 January 20X7 100
Retained earnings for 9 months to acquisition date (80 9/12) 60
560
Add goodwill 30
590
26.8 B Deciduous is an associate of Evergreen. Under equity accounting, the Evergreen group’s share of
the profit after tax of Deciduous is added to the group profit before tax.
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218
26.9 A
$
Mercedes Co retained earnings 450,000
Benz Co retained earnings 120,000
Unrealised profit in closing inventory (50,000 25/125) (10,000)
Consolidated retained earnings at 31 March 20X9 560,000
26.10 B $ $
Fair value of consideration 300,000
Plus fair value of NCI at acquisition 75,000
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Share capital 100,000
Retained earnings at acquisition 156,000
Fair value adjustment at acquisition 20,000
276,000
Goodwill 99,000
26.11 D
26.12 C 3 and 4 are incorrect.
An investor must have significant influence over the investee in order for the investee to be
classified as an associate. If the investor holds 20% or more of the voting power of the entity,
significant influence can be assumed (unless it can clearly be shown that this is not the case).
Therefore 1 is true. For an investee to be classified as a subsidiary, the investor (the parent) must
have control over the investee (the subsidiary). Control can be demonstrated if the investor has
the power to appoint the majority of board members of the investee, so 2 is true. 3 is incorrect
because the power to govern the financial and operating policies of F make F a subsidiary of E.
Likewise, 4 is incorrect as the power to govern the financial and operating policies of H makes H
a subsidiary of G.
26.13 C Tangerine is an associate of Clementine, however because Clementine has no other investments
in other companies, it will not produce consolidated financial statements. Therefore the
investment will appear in the single company financial statements of Clementine as a simple
investment. The statement of financial position will show an investment at cost and the
statement of profit or loss will show dividends received from Tangerine. If Clementine instead did
produce consolidated financial statements, Tangerine would be accounted for using the equity
method and B would instead be correct.
26.14 B A parent may hold less than 50% of the share capital but more than 50% of the voting rights.
Goodwill only appears in the consolidated statement of financial position. Consolidated financial
statements present the substance of the relationship between parent and subsidiaries, rather than
the legal form.
26.15 D S is not a subsidiary as P’s shareholdings in S do not give it the power to control S. R is a
subsidiary as P has the right to appoint or remove the directors of R, and so control it.
26.16 C Investments in associates are accounted for using equity accounting. An investment is an
associate if the investor has significant influence over the investee. Significant influence is
presumed if the investor owns at least 20% of the voting equity of the investee. Therefore 2 is
not an associate. 1 and 4 are subsidiaries as Company A investor has control over them.
$’000
Unrealised profit (30,000 25% 40%) 3
Gross profit (330 + 300 – 3) 627
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ANSWERS
219
26.17 C $’000 $’000
Fair value of consideration (bal fig) 620
Plus fair value of NCI at acquisition 150
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed:
Share capital 500
Retained earnings at acquisition 150
Revaluation surplus at acquisition 50
(700)
Goodwill 70
26.18 A $950 + $1,250 + $50 = $2,250,000
26.19 A The $30,000 owed by Seven Co to Six Co is included within the receivables of Six Co and the
payables of Seven Co. These intra-group balances should be eliminated for the purpose of
consolidation.
Trade receivables = $(64,000 + 39,000 – 30,000) = $73,000
Trade payables = $(37,000 + 48,000 – 30,000) = $55,000
The unrealised profit on closing inventory will be an adjustment to inventory on consolidation,
and does not affect consolidated receivables and payables.
26.20 B
$
Fair value of NCI at date of acquisition 25,000
NCI share of retained post-acquisition earnings: 20% $(60,000 – 40,000) 4,000
29,000
NCI share in unrealised profit: 20% 50% $12,000 (1,200)
Non-controlling interest at 31 December 20X4 27,800
26.21 A Retained post-acquisition earnings of Lava Co = 4/12 × $(336,000 – 264,000) = $24,000.
$000
Volcano retained earnings 650
Parent company share of post-acquisition earnings: 75% × $24,000 18
Parent company’s share of consolidated retained earnings at 31 Dec 20X3 668
26.22 B Post-acquisition earnings of Drum Co = 9/12 × $60,000 = $45,000.
$
Tin Co profit for the year 70,000
Parent company share of post-acquisition profit of Drum Co: 90% × $45,000 40,500
Parent company’s share of consolidated retained earnings at 31 Dec 20X3 110,500
26.23 C The unrealised profit in the closing inventory of Sand Co = 25% × 40% × $40,000 = $4,000.
The NCI share of this is 20% × $4,000 = $800.
$ $
NCI share of profit of Sun Co: 20% × $35,000 7,000
Less: NCI share of unrealised profit (800)
6,200
Combined profits of Sand Co and Sun Co: (120,000 + 35,000) 155,000
Less: Unrealised profit in closing inventory (4,000)
Total consolidated profit for the year 151,000
Attributable to the parent company 144,800
26.24 B
$’000
Shares (18m 2/3 $5.75) 69,000
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220
26.25 B
X Co Y Co 2/12 Adj Group
$'000 $'000 $'000 $'000
Revenue 3,400 400 (10) 3,790
Cost of sales 1,500 300 (10+1*) 1,789
2,001
* Unrealised profit
$
Sale price 125% 10,000
Cost price 100% (8,000)
Gross profit 25% 2,000
Unrealised profit (2,000 50%) 1,000
26.26 D
Eliminate unrealised profit on goods in inventory of WX:
$
Sale price 120% 60,000
Cost price 100% (50,000)
Gross profit 20% 10,000
Unrealised profit attributable to NCI = $10,000 25% = $2,500
Unrealised profit attributable to WX = $10,000 75% = $7,500
26.27 C
$'000
Net profit of S 60 000
NCI share of profit of S (20%) (12,000)
Because the sale was made from the parent, P to the subsidiary, S, there is no unrealised profit
attributable to the non-controlling interest.
27 15 mark question: interpretation of financial statements
27.1 Binky and Smokey
(a) Binky Smokey
Gross profit
percentage
Gross profit
Sales
100
129
284
100
= 45.4% 154
305
100 = 50.5%
Net profit
percentage
Net profit
Sales
100
61
284
100
= 21.5% 47
305
100 = 15.4%
Asset turnover
ratio
Sales
Capital employed
100
284
258
100
= 110.1% 305
477
100 = 63.9%
Current ratio
Current assets
Current liabilities
201
188
= 1.1:1 383
325
= 1.2:1
Quick ratio
Current assets inventory
Current liabilities
110
188
= 0.6:1 90
325
= 0.3:1
Receivables
collection period
Receivables
Sales
365
46
284
365
= 59.1 days 75
305
365 = 89.8 days
(b) The gross profit percentage is high for both companies. Smokey, which has a higher sales figure in
absolute terms, also has a higher gross profit percentage. It is possible that its marginally greater sales
volume enables it to take advantage of discounts. As the two companies operate in the same market, it
is possibly geographical location that makes the difference in the profit margin Smokey can make.
The picture is different when it comes to net profit percentage. At 21.5%, that of Binky is significantly
higher than that of Smokey (15.4%). The main reason for this is that expenses in all categories are
higher for Smokey. In addition, Smokey is paying loan interest, while Binky does not have any loans.
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ANSWERS
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The asset turnover ratios show that Binky is making more efficient use of assets than Smokey, as it is
generating proportionally more sales from the assets. As discussed below, the inefficiency of Smokey
may be partly because working capital is tied up in inventory.
The current ratios of both companies are greater than one, with Smokey having the edge slightly. These
ratios indicate that the companies have sufficient current assets to meet their current liabilities.
However, the quick ratios are more worrying.
Both companies have quick ratios of less than one, indicating potential liquidity problems. In the case
of Smokey, the quick ratio is very low at 0.3:1. Much of Smokey Ltd's working capital is tied up in
inventory, and the high inventory level suggests that inventory is not selling. Smokey, with its low cash
balance and lack of liquidity, may have problems paying debts as they fall due.
The receivables collection period is high for both companies, but for Smokey, at 89.8 days it is
considerably higher than that of Binky, which has 59.1 days. Smokey Ltd needs to pay attention to
credit control. The longer a debt remains unpaid, the less likely it is to be paid.
In conclusion, although Smokey has a higher profit margin, it has liquidity problems, is less efficient and
has ineffective credit control. Binky is therefore a better investment prospect.
28 Interpretation of financial statements
28.1 A Issuing further loan notes and paying dividends will increase gearing. A bonus issue simply
capitalises reserves, so has no effect.
28.2 D Understatement of the December 20X1 closing inventory will lead to understatement of
December 20X2 opening inventory and therefore understatement of cost of sales.
28.3 A Profit will be an addition to owner's capital.
28.4 D Purchases = $(32,500 – 6,000 + 3,800)
= $30,300
Accounts payable payment period =
4,750
30,300
365 = 57 days
28.5 A Gearing =
Total long term debt 75
13%
Total long term debt share holders equity 75 500
28.6 A Quick ratio =
Current assets Inventory 205 65
1.75
Current liabilities 80
28.7 A Current ratio = Current assets 205
2.56
Current liabilities 80
28.8 C The gearing ratio is used to assess how much the company owes in relation to its size.
28.9 B
% $
Sales 100 2,400
Cost of sales 66 2/3 1,600
Gross profit 33 1/3 800
Expenses 28 1/3 680
Net profit 5 120
28.10 C Current ratio is 2,900 : 1,100 = 2.6: 1 ie high compared to the industry norm.
28.11 B Analysis of financial statements is carried out so that the significance of the financial statements
can be better understood. Comparisons through time and with other companies help to show
how well the company is doing.
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29 Mixed bank 1
29.1 A
$
Increase in net assets 88,000
Capital introduced (50,000)
Drawings (68,000 + 20,000) 88,000
Profit for the year 126,000
29.2 A
$
Debit cash 1,100,000
Credit share capital 250,000
Credit share premium 850,000
29.3 C Closing inventory should be valued at the lower of cost and NRV as per IAS 2.
29.4 D
Share
capital
Share
premium
$ $
1 July 20X4 500,000 400,000
1 January 20X5 – bonus issue (250,000 50c) 125,000 (125,000)
1 April 20X5 – rights issue 62,500 125,000
687,500 400,000
29.5 B RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 138,400 Cash received 78,420
Credit sales 80,660 Payables contra 1,000
Dishonoured cheques 850 Discounts allowed 1,950
Irrecoverable debts written off 3,000
Closing balance 135,540
219,910 219,910
29.6 A SUSPENSE ACCOUNT
$ $
Opening balance 14,550 To cash account 10,000
To rent account 4,550
29.7 D A revaluation of a non-current asset and a bonus issue of shares are both non-cash transactions.
29.8 D
$
Opening inventory 138,600
Purchases 716,100
Closing inventory (149,100)
Cost of sales 705,600
Sales = 705,600 100/70 = 1,008,000
29.9 C
SPLOCI SOFP
$ $
Prepaid insurance 8,200
Payment January 20X5 38,000
Prepayment July-Sept 20X5 (9,500) 9,500
36,700 9,500
29.10 D All three statements are correct.
29.11 D Beta has issued a credit note for $500 to Alpha which Alpha has not yet received.
29.12 A Research expenditure is never capitalised.
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223
29.13 D (i) and (iv) provide information about conditions which existed at the reporting date and are
therefore adjusting.
29.14 A RENT RECEIVED
$ $
Arrears b/f 3,800 In advance b/f 2,400
Rent in advance 3,000 Cash received 83,700
Balance c/f 84,000 In arrears 4,700
90,800 90,800
29.15 B
$
Allowance for receivables ((517,000 – 37,000) 5%) 24,000
Previous allowance (39,000)
Reduction (15,000)
Debts written off 37,000
Charge to statement of profit or loss 22,000
29.16 D 2 and 3 only. Attributable overheads should be included in finished goods inventories.
29.17 B The proceeds will appear under investing activities and any profit will be deducted under
operating activities.
29.18 C All four items will appear in the statement of changes in equity.
29.19 A
$
Balance per bank statement (38,600)
Bank charges 200
Lodgements 14,700
Cheque payments (27,800)
Cheque payment misposted 8,400
Balance per cash book (43,100)
30 Mixed bank 2
30.1 C
$
Balance b/f ((280,000 – 14,000) 20%) 53,200
Addition 1 April (48,000 20% 9
12
)
7,200
Addition 1 Sept (36,000 20% 4
12
)
2,400
62,800
Sale (14,000 20% 1
2
)
1,400
64,200
30.2 D Item 1 is wrong, as inventory should be valued at the lower of cost and net realisable value.
Items 2, 3 and 4 are all correct.
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30.3 D RENT RECEIVABLE
$ $
31.1.X6 Statement of profit or loss 27,500
1.2.X5 Balance b/f ( 2
3
× $6,000) 4,000
1.4.X5 Received 6,000
1.7.X5 Received 7,500
1.10.X5 Received 7,500
31.1. X6 Balance c/f ( 2
3
$7,500) 5,000 1.1.X6 Received 7,500
32,500 32,500
30.4 D 20%. ROCE is defined as the profit on ordinary activities before interest and tax divided by
capital employed = $300,000/$1.5m = 20%
30.5 D Items 1 and 4 are adjusting events. Item 2 is a non-adjusting event but might be disclosed by
way of note if material. Item 3 is a non-adjusting event that is disclosed by way of note.
30.6 D
$
Balance per Alta 3,980
Cheque not yet received (270)
Goods returned (180)
Contra entry (3,200)
Revised balance per Alta 330
Balance per Ordan (230)
Remaining difference 100
30.7 C For discounts, we need to debit the discounts received account $13,000 to reverse the entry and
debit the discounts allowed account $13,000 to record the entry correctly. The credit of
$26,000 will be to suspense. So journal 2 is correct.
For machinery, we need to debit plant and machinery $18,000 and credit suspense $18,000.
So journal 4 is correct.
30.8 B Item (1), as the plant register is not part of the double entry system, the adjustment does not go
through the suspense account.
Item (2), the transaction has been completely omitted from the records.
Therefore only items (3) and (4) affect the suspense account.
30.9 D
$
Initial profit 630,000
Item (1) – increase in depreciation (4,800 – 480) (4,320)
Item (2) – bank charges (440)
Item (3) – no effect on P/L –
Item (4) – no effect on P/L –
Revised profit 625,240
30.10 A Statements 1 and 2 are correct.
30.11 C Only statements 2 and 3 are correct.
30.12 B
$
Closing receivables 458,000
Irrecoverable debts w/off (28,000)
430,000
Allowance required (5% 430,000) 21,500
Existing allowance (18,000)
Increase required 3,500
Charge to statement of profit or loss (28,000 + 3,500) 31,500
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225
30.13 A PLCA
$ $
Cash paid to suppliers 988,400 Opening balance 384,600
Discounts received 12,600 Purchases 963,200
Purchases returns 17,400
Contras 4,200
Closing balance 325,200
1,347,800 1,347,800
30.14 A We need to increase drawings (debit) and reduce purchases (credit). Therefore journal A is the
correct answer. Remember that we only adjust inventory at the year end.
30.15 D
$ $
Sales (balancing figure) 1,080,000
Opening inventory 77,000
Purchases 763,000
840,000
Closing inventory 84,000
Cost of sales (70%) 756,000
Gross profit ( 30
70
756,000)
324,000
30.16 C Statements (3) and (4) are correct. Statement (1) is incorrect because land is not usually
depreciated. Statement (2) is incorrect as the gain on revaluation for property accounted for in
accordance with IAS 16 is shown in the statement of profit or loss and other comprehensive
income, under ‘other comprehensive income’ or in the separate statement of other comprehensive
income. (NB gains on property classified as investment property per IAS 40 are recognised in
profit or loss, but this is beyond the scope of this syllabus).
30.17 B
$
Balance per bank (overdrawn) (38,640)
Add: outstanding lodgements 19,270
(19,370)
Less: unpresented cheques (14,260)
Balance per cash book (overdrawn) (33,630)
30.18 C 48,000 + 400 + 2,200 = 50,600
30.19 B Opening inventory: debit statement of profit or loss, credit inventory account
Closing inventory: debit inventory account, credit statement of profit or loss
Remember that inventory is part of cost of sales, which is included in the statement of profit or
loss.
30.20 D $’000
Fair value of consideration 4,000
Plus fair value of NCI at acquisition 2,200
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed
(4,750)
Goodwill 1,450
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31 Mixed bank 3
31.1 A
$
Sales (100%) 650,000
Cost of sales (70%) 455,000
Gross profit (30%) 195,000
Opening inventory 380,000
Purchases 480,000
860,000
Closing inventory (bal. fig.) (405,000)
Cost of sales 455,000
Calculated inventory 405,000
Actual inventory 220,000
Lost in fire 185,000
31.2 B Income from investments and dividends paid on redeemable preference shares are recognised in
the statement of profit or loss.
31.3 D Dividends paid go through the SOCIE, not the statement of profit or loss and other comprehensive
income. Also dividends declared after the end of the reporting period, are disclosed by way of
note to the financial statements.
31.4 D Goose Co has control over all three of these investments, and hence they are all subsidiaries.
31.5 B Trade receivables = 838,000 – 72,000
= 766,000
Allowance for receivables = 60,000
Net balance = 766,000 – 60,000
= 706,000
31.6 C 1 and 4 are correct. Overheads must be included in the value of finished goods. Inventories
should be valued at the lower of cost and net realisable value, not replacement cost.
31.7 C Inventory is correctly recorded, so 2 and 4 are incorrect. Purchases are understated, so cost of
sales are understated and so profit for 20X6 is overstated. Therefore 1 only is the correct answer.
31.8 D 1.26:1. (Receivables 176,000)/(trade payables 61,000 + overdraft 79,000).
31.9 A All four items are correct.
31.10 A
INSURANCE
$ $
Prepayment b/f 8,100 SPL 11,100
(3/4 10,800) Prepayments c/f 9,000
Paid 12,000 (3/4 12,000)
20,100 20,100
31.11 C Statements 2 and 3 are incorrect. A bounced cheque is credited to the cash book and bank errors
do not go through the cash book at all.
31.12 B
SHARE CAPITAL
$m $m
Bal b/f 100
Bonus (1/2 100m) 50
Bal c/f 210 Rights (2/5 150m) 60
210 210
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227
SHARE PREMIUM
$m $m
Bonus 50 Bal b/f 80
Bal c/f 60 Rights 30
110 110
31.13 A All three statements are correct
31.14 A Items 2, 3 and 4 preserve double entry and so would not show up in a trial balance.
31.15 D $’000
Fair value of consideration transferred 8,000
Plus fair value of NCI at acquisition ($1.20 3,000,000) 3,600
Less net acquisition-date fair value of identifiable assets acquired
and liabilities assumed
(8,750)
Goodwill 2,850
31.16 B
$
Opening inventory 40,000
Purchases 60,000
100,000
Closing inventory (50,000)
Cost of sales 50,000
This implies sales 100,000 (50,000 2)
So either 1 is correct or 3 is correct.
31.17 D
RENT RECEIVED
$ $
Arrears b/f 4,800 Prepayments b/f 134,600
Cash received 834,600
SPL 828,700
Prepayments c/f 144,400 Arrears c/f 8,700
977,900 977,900
31.18 C RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 284,680 Cash received 179,790
Credit sales 189,120 Discounts allowed 3,660
Irrecoverable debts written off 1,800
Sales returns 4,920
Contras 800
Closing balance 282,830
473,800 473,800
31.19 A $150,000
$
Carrying amount at 1st August 20X0 200,000
Less depreciation (20,000)
180,000
Proceeds 25,000
Loss 5,000
Carrying amount of asset sold (30,000)
Therefore carrying amount 150,000
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32 Mixed bank 4
32.1 A Share capital (1m $1) = 1,000,000
Share premium (1m 50c) = 500,000
32.2 C The correct answer is decrease current ratio and decrease quick ratio. Proposed dividends are not
accrued for, so the only impact on the financial statements is to decrease cash.
32.3 D
RENTAL INCOME
$ $
Arrears b/f 42,300 Prepayments b/f 102,600
SPL 858,600 Received 838,600
Prepayments c/f 88,700 Arrears c/f 48,400
989,600 989,600
32.4 C Journals A and B have their entries reversed and Journal D should not include the suspense
account at all.
32.5 A Per IAS 37 provide for probable losses of known amount and for which there is a constructive
obligation, disclose possible losses, ignore remote ones.
32.6 A
RENT PAID
$ $
Prepayment b/f 10,000
(1/12 120,000)
Paid – 1/1 30,000 SPL 136,000
– 1/4 36,000
– 1/7 36,000
– 1/10 36,000 Prepayments c/f
(1/3 36,000)
12,000
148,000 148,000
32.7 A
$ $
Trade receivables 863,000
Irrecoverable debts w/off (23,000)
840,000
Closing allowance for receivables (5% 840,000) 42,000
Opening allowance 49,000
Reduction (7,000)
Charge = 23,000 – 7,000
= 16,000
32.8 C
SHARE CAPITAL
$m $m
Bal b/f 1.0
Share issue (note 1) 0.5
Bal c/f 2.0 Bonus (note 2) 0.5
2.0 2.0
SHARE PREMIUM
$m $m
Bonus (note 2) 0.5 Bal b/f 1.4
Bal c/f 1.8 Share issue (note 1) 0.9
2.3 2.3
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ANSWERS
229
Notes
1 Share issues of 1,000,000 shares raises $1,400,000. Shares are 50c each, so share capital
is $500,000 and share premium $900,000.
2 Share capital is $1.5m or 3m shares. Therefore the bonus issue is 1m shares.
32.9 C Inventory should be valued at the lower of cost and net realisable value, so statement 1 is
incorrect.
32.10 B
$
Held all year ((960,000 – 84,000) 20%) 175,200
Addition (48,000 20% 1/2) 4,800
Disposal (84,000 20% 3/4) 12,600
192,600
32.11 B Items 1 and 4 involve completed double entry and so do not go through the suspense account.
32.12 D Debit drawings and credit the cost to purchases.
32.13 D Cost + Profit = Selling price
100 25 125
PUP = (25/125 15,000) 2/3 = $2,000
Inventories = $40,000 + $20,000 – $2,000 = $58,000
32.14 D Tax is separately disclosed in the statement of profit or loss and other comprehensive income
only, while profit for the period is shown in the statement of profit or loss and other
comprehensive income and in the statement of changes in equity.
32.15 D The reducing balance method charges more depreciation in earlier years.
32.16 D A decrease in receivables should be added and so should an increase in payables. Therefore 3
and 4 are correct.
32.17 C $47,429
$ $
Balance per P Johnson 46,747
Add: Whitchurch Co invoice, previously omitted from ledger 267
Rectofon Co balance, previously omitted from list 2,435
3,102
49,449
Less: Error on posting of Bury Inc's credit note to ledger 20
P Fox & Son (Swindon) Co's balance included twice 2,000
2,020
Revised balance per receivables ledger 47,429
32.18 B Only B fully accounts for the difference of $12,780 credit.
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33 Mixed bank 5
33.1 B Closing inventory $1,700
Inventory Unit
Purchases Sales Balance value cost
Units Units Units $ $
10 10 3,000 300
12 3,000 250
22 6,000
8 (2,400)
14 3,600
6 1,200 200
20 4,800
12 (3,100)*
8 1,700
* 2 @ $300 + 10 @ $250 = $3,100
33.2 A The IFRS Advisory Council
33.3 D SUSPENSE ACCOUNT
$ $
Cash 1,512 Bal b/f 759
Receivables 131
Bal c/f 622
1,512 1,512
33.4 D The sales daybook has been totalled incorrectly so the incorrect total has been posted to the
control account. Each individual transaction has been posted to the individual accounts so when
the two are compared there will be a difference of $200.
33.5 C
$
Receivables allowance at 30/11/X8 (598,600 2%) 11,972
Opening allowance at 1/12/X7 (12,460)
Reduction in allowance (credit to statement of profit or loss) (488)
Total credit to statement of profit or loss = 488 + 635 = $1,123
33.6 C
$
Rent accrual (4/12 $12,000) (4,000)
Insurance prepayment (10/12 $6,000) 5,000
Net increase in profit 1,000
33.7 D
$
Non-current assets at 1 December 20X7 2,500,000
Depreciation charge for the year (75,000)
Non-current asset disposed of (carrying amount) (120,000)
Revaluation of non-current assets 500,000
2,805,000
Non-current assets at 30 November 20X8 4,200,000
Therefore non-current assets acquired during the year (1,395,000)
Sales proceeds from disposal of non-current asset 150,000
To be included in ‘net cash flows from investing activities’ (1,245,000)
NON-CURRENT ASSETS
$’000 $’000
Bal b/f 2,500 Depreciation 75
Revaluation 500 Disposal 120
Additions (bal fig) 1,395 Bal c/f 4,200
4,395 4,395
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231
33.8 A A transposition error in the sales day book will not cause a difference between the SLCA and the
receivables ledger as the total of the SDB is posted to the SLCA and the individual balances in
the SDB to the receivables ledger, therefore the same error will be posted to both the SLCA and
the receivables ledger.
33.9 A Make sure you read the dates carefully as some of the goods are returned after 31 May and we
are only concerned with sales returns at that date, which is the goods with a list price of $3,000.
The value of the original sale is after the trade discount of 10%, so the actual amount invoiced
for those goods is $2,700 ($3,000 × 90%).
33.10 C Only statement 2 is correct. Development expenditure should be capitalised in accordance with
IAS 38, however, research expenditure should be written off to the statement of profit or loss as
incurred. Goodwill arising in a business combination should be capitalised as a non-current asset
in the statement of financial position.
33.11 D All of the suggestions are flawed. FIFO is not permitted under IAS 2. Provisions cannot be created
unless a constructive obligation exists, the amount can be reliably estimated and the likelihood of
having to pay out cash is probable – none of these conditions are met, therefore a provision
cannot be made. Development expenditure must be amortised over its useful life.
33.12 C Journal entries 1 and 2 should both be reversed.
33.13 C Carriage outwards is a distribution expense.
33.14 C
Frog Toad
$'000 $'000
Per question 650 160
Pre-acquisition retained earnings (145)*
15
Post-acquisition retained earnings of Toad 15
Group retained earnings 665
* 100 + (60/12 9)
33.15 D
$
Profit before tax 36,000
Dividend (21,000)
Added to retained earnings 15,000
33.16 D It reduces receivables.
33.17 A $2,185. Prepayment b/f $60 (2/3 90) + $2,145 – prepayment c/f $60 – accrual b/f $80 +
accrual c/f $120 = $2,185.
33.18 B In option 2, receivables and drawings are debits but discount received is a credit. In option 4,
capital and trade payables are credits but operating expenses are debits.
33.19 B $205
Profit = Drawings + Increase in net assets – Capital introduced
= $77 + $173 – $45
= $205
33.20 B $130 loss
Capital = Assets – Liabilities
$50 + $100 + profit for the year = $90 – $70
$150 + profit for the year = $20
Therefore, the profit for the year is in fact a loss of $130.
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34 Mixed bank 6
34.1 A X is a receivable of Y.
34.2 A $47,429
RECEIVABLES LEDGER CONTROL
$ $
Balance b/d 50,241 Returns inwards 41,226
Sales 472,185 Irrecoverable debts written off 1,914
Cheques dishonoured 626 Discounts allowed 2,672
Cheques received 429,811
Balance c/d 47,429
523,052 523,052
34.3 A $2,098
CASH BOOK
$ $
20X3 20X3
31 May Balance b/d 873 31 May Bank charges 630
Error $(936 – 693) 243 Trade journals 52
Balance c/d 2,098 Insurance 360
Business rates 2,172
3,214 3,214
1 May Balance b/d 2,098
34.4 B $87 loss
$
Carrying amount: 9,000 0.7 0.7 0.7 3,087
Proceeds of sale (3,000)
Loss on disposal 87
34.5 A Depreciation is an application of the accruals principle.
34.6 C Original annual depreciation = $(160,000 – 40,000)/8 years = $15,000 per year.
The change in the estimated life of the asset is made on 31 December 20X3, and this means
that the change should be applied for the year ending 31 December 20X3.
$
Cost 160,000
Accumulated depreciation to 31 December 20X2 (2 years $15,000) 30,000
Carrying amount at 1 January 2008 130,000
Residual value 40,000
Remaining depreciable amount as at 1 January 20X3 90,000
Remaining life from 1 January 20X3 = 4 years
Annual depreciation = $90,000/4 years = $22,500.
Net book value (carrying amount at 31 December 20X3 =
$130,000 – $22,500 = $107,500.
34.7 B $200 debit which should have been credited – correction will bring trial balance into agreement
34.8 C IAS 1 requires revenue to be disclosed on the face of the statement of profit or loss and other
comprehensive income. It does not specify that a company must disclose profit before tax or
gross profit on the face of the statement of profit or loss and other comprehensive income,
however, most companies choose to do this. Dividends are disclosed in the statement of changes
in equity if they are paid or are declared before the period end.
34.9 D ($73,680) + 102,480 – 87,240 = (58,440) $58,440 overdrawn
34.10 C 1, 2 and 3 are all incorrect.
34.11 A
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233
34.12 B $952,500 100/60 = $1,587,500
34.13 C
$
Theoretical gross profit ($130,000 30%) 39,000
Actual gross profit ($130,000 – $49,800 – $88,600 + $32,000) 23,600
Shortfall – missing inventory 15,400
34.14 A $ $
Sales 240,000
Purchases 134,025
Drawings (2,640)
Inventory adjustment (11,385)
Cost of sales (50% 240,000) 120,000
120,000
34.15 D Incorrect answers: Goods purchased for cash – current assets remain the same, Payables paid
out of an overdraft – current liabilities remain the same
34.16 D
PUP = 50,000 25/125 40% = $4,000
Lexus
group
$’000
Revenue (350 + 150 – 50*) 450
Cost of sales (200 + 60 – 50* + 4) 214
* to remove intragroup sales
34.17 D
Share capital 75,000 + 15,000 + 30,000 = 120,000
Share premium 200,000 + 57,000 – 30,000 = 227,000
(Remember shares are 25c)
34.18 D
35 Mixed bank 7
35.1 A PLANT AND EQUIPMENT (CARRYING AMOUNT)
$’000 $’000
b/d 155 Depreciation charge in year 25
Purchases of P+E 10 Carrying amount of sale 15
c/d 125
165 165
$’000
So, Carrying amount 15
Proceeds (7)
Loss 8
35.2 D (2c + 3c) 10,000,000. The final ordinary dividend is declared before the year end and so is
accrued for. The preference dividend is classified as a finance cost.
35.3 A Working capital is increased as the company will receive cash for the share issue. Share premium
is not reduced as it is not a bonus issue of shares, it will probably increase as the shares will
probably be issued at a premium.
35.4 D A revaluation surplus will be presented as part of equity, not current liabilities.
35.5 C In statement (i) both sides of the double entry posting from the cash book would be incorrect but
equal in value, so this would not cause a trial balance imbalance. In statement (ii), both
expenses and non-current assets are debit balances in the trial balance, so posting to the wrong
account in this case would not cause a trial balance imbalance.
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35.6 D The dividends actually paid will go through the statement of changes in equity. The final
proposed dividend of $120,000 is disclosed in the notes to the statement of financial position.
35.7 D Deferred development expenditure should be amortised over its useful life. If the conditions in
IAS 38 are met, development expenditure must be capitalised. Trade investments are not
intangible assets, they should be reported under non-current assets: investments in the SOFP.
35.8 D RENT
$ $
Bal b/f (rent in arrears) 4,800 Bal b/f (rent in advance) 134,600
SPL (bal. fig.) 828,700 Bank 834,600
Bal c/f (rent in advance) 144,400 Bal c/f (rent in arrears) 8,700
977,900 977,900
35.9 D A, B and C are all income items reflected in the statement of profit or loss and other
comprehensive income. In contrast D is reflected in the statement of financial position.
35.10 B Items A, C and D are all capital items, reflected in the statement of financial position.
35.11 A PAYABLES LEDGER CONTROL ACCOUNT
$ $
Cash paid to suppliers 1,364,300 Opening balance 318,600
Discounts received 8,200 Purchases 1,268,600
Purchases returns 41,200 Refunds received
from suppliers
2,700
Contras 48,000
Closing balance 128,200
1,589,900 1,589,900
35.12 C We need to increase the rent expenses (debit) and set up a liability to pay this amount (credit
accruals).
35.13 C Wastage of inventory means that cost of sales is high relative to revenue.
35.14 A Sales: current assets = 5:1
Therefore current assets ($30m/5) = $6m
Current ratio = 2:1
Therefore current liabilities ($6m/2) = $3m
Acid test ratio = 1.5:1
Therefore current assets – inventory ($3m 1.5) = $4.5m
Hence, Inventory ($6m – $4.5m) = $1.5m
35.15 C All three statements are correct.
35.16 A 485,000 + 48,600 + 18,100 – 368,400
35.17 B = 60,000 + ((1,232,000 – 60,000) 5%) – 90,000
35.18 A Although we may use a trial balance as a step in preparing management or financial statements,
the main reason is A.
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Mock Exams
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ACCA
Paper FFA/F3
Financial Accounting
Mock Examination 1
(Specimen exam)
Question Paper
Time allowed 2 hours
This paper is divided into two sections:
Section A – ALL 35 questions are compulsory and MUST be attempted
Section B – BOTH questions are compulsory and MUST be attempted
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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SECTION A – ALL 35 questions are compulsory and MUST be attempted
1 Which of the following calculates a sole trader’s net profit for a period?
A Closing net assets + drawings – capital introduced – opening net assets
B Closing net assets – drawings + capital introduced – opening net assets
C Closing net assets – drawings – capital introduced – opening net assets
D Closing net assets + drawings + capital introduced – opening net assets (2 marks)
2 Which of the following explains the imprest system of operating petty cash?
A Weekly expenditure cannot exceed a set amount.
B The exact amount of expenditure is reimbursed at intervals to maintain a fixed float.
C All expenditure out of the petty cash must be properly authorised.
D Regular equal amounts of cash are transferred into petty cash at intervals. (2 marks)
3 Which of the following statements are TRUE of limited liability companies?
1 The company’s exposure to debts and liability is limited
2 Financial statements must be produced
3 A company continues to exist regardless of the identity of its owners
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3 (2 marks)
4 Annie is a sole trader who does not keep full accounting records. The following details relate to her
transactions with credit customers and suppliers for the year ended 30 June 20X6:
$
Trade receivables, 1 July 20X5 130,000
Trade payables, 1 July 20X5 60,000
Cash received from customers 686,400
Cash paid to suppliers 302,800
Discounts allowed 1,400
Discounts received 2,960
Contra between payables and receivables ledgers 2,000
Trade receivables, 30 June 20X6 181,000
Trade payables, 30 June 20X6 84,000
What figure should appear for purchases in Annie’s statement of profit or loss for the year ended
30 June 20X6?
A $325,840
B $330,200
C $331,760
D $327,760 (2 marks)
5 Which TWO of the following errors would cause the total of the debit column and the total of the credit
column of a trial balance not to agree?
1 A transposition error was made when entering a sales invoice into the sales day book
2 A cheque received from a customer was credited to cash and correctly recognised in receivables
3 A purchase of non-current assets was omitted from the accounting records
4 Rent received was included in the trial balance as a debit balance
A 1 and 2
B 1 and 3
C 2 and 3
D 2 and 4 (2 marks)
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6 At 31 December 20X5 the following require inclusion in a company’s financial statements:
1 On 1 January 20X5 the company made a loan of $12,000 to an employee, repayable on
1 January 20X6, charging interest at 2% per year. On the due date she repaid the loan and paid
the whole of the interest due on the loan to that date.
2 The company paid an annual insurance premium of $9,000 in 20X5, covering the year ending
31 August 20X6.
3 In January 20X6 the company received rent from a tenant of $4,000 covering the six months to
31 December 20X5.
For these items, what total figures should be included in the company’s statement of financial position
as at 31 December 20X5?
A Current assets $10,000 Current liabilities $12,240
B Current assets $22,240 Current liabilities $nil
C Current assets $10,240 Current liabilities $nil
D Current assets $16,240 Current liabilities $6,000 (2 marks)
7 A company’s statement of profit or loss for the year ended 31 December 20X5 showed a net profit of
$83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the
motor expenses account. It is the company’s policy to depreciate motor vans at 25% per year on the
straight line basis, with a full year’s charge in the year of acquisition.
What would the net profit be after adjusting for this error?
A $106,100
B $70,100
C $97,100
D $101,600 (2 marks)
8 Xena has the following working capital ratios:
20X9 20X8
Current ratio 1.2:1 1.5:1
Receivables days 75 days 50 days
Payables days 30 days 45 days
Inventory turnover 42 days 35 days
Which of the following statements is correct?
A Xena’s liquidity and working capital has improved in 20X9
B Xena is receiving cash from customers more quickly in 20X9 than in 20X8
C Xena is suffering from a worsening liquidity position in 20X9
D Xena is taking longer to pay suppliers in 20X9 than in 20X8 (2 marks)
9 Which of the following statements is/are correct?
1 A statement of cash flows prepared using the direct method produces a different figure to net
cash from operating activities from that produced if the indirect method is used.
2 Rights issues of shares do not feature in a statement of cash flows.
3 A surplus on revaluation of a non-current asset will not appear as an item in a statement of cash
flows.
4 A profit on the sale of a non-current asset will appear as an item under cash flows from investing
activities in the statement of cash flows.
A 1 and 3 only
B 3 and 4 only
C 2 and 4 only
D 3 only (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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10 A company receives rent from a large number of properties. The total received in the year ended 30 April
20X6 was $481,200.
The following were the amounts of rent in advance and in arrears at 30 April 20X5 and 20X6:
30 April 20X5 30 April 20X6
$ $
Rent received in advance 28,700 31,200
Rent in arrears (all subsequently received) 21,200 18,400
What amount of rental income should appear in the company’s statement of profit or loss for the year
ended 30 April 20X6?
A $486,500
B $460,900
C $501,500
D $475,900 (2 marks)
11 Which of the following are differences between sole traders and limited liability companies?
1 A sole trader’s financial statements are private and never made available to third parties; a
company’s financial statements are sent to shareholders and may be publicly filed.
2 Only companies have share capital.
3 A sole trader is fully and personally liable for any losses that the business might make.
4 Drawings would only appear in a sole trader’s financial statements.
A 1 and 4 only
B 2, 3 and 4
C 2 and 3 only
D 1, 3 and 4 (2 marks)
12 Which of the following statements is true?
A The interpretation of an entity’s financial statements using ratios is only useful for potential
investors.
B Ratios based on historical data can predict the future performance of an entity.
C The analysis of financial statements using ratios provides useful information when compared with
previous performance or industry averages.
D An entity’s management will not assess an entity’s performance using financial ratios.
(2 marks)
13 A company’s motor vehicles cost account at 30 June 20X6 is as follows:
MOTOR VEHICLES – COST
$ $
Balance b/f 35,800 Disposal 12,000
Additions 12,950 Balance c/f 36,750
48,750 48,750
What opening balance should be included in the following period’s trial balance for Motor vehicles – cost
at 1 July 20X6?
A $36,750 Dr
B $48,750 Dr
C $36,750 Cr
D $48,750 Cr (2 marks)
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14 Which TWO of the following items must be disclosed in the note to the financial statements for
intangible assets?
1 The useful lives of intangible assets capitalised in the financial statements
2 A description of the development projects that have been undertaken during the period
3 A list of all intangible assets purchased or developed in the period
4 Impairment losses written off intangible assets during the period
A 1 and 4
B 2 and 3
C 3 and 4
D 1 and 2 (2 marks)
15 Which of the following statements are correct ?
1 Capitalised development expenditure must be amortised over a period not exceeding five years.
2 Capitalised development costs are shown in the statement of financial position under the heading
of non-current assets.
3 If certain criteria are met, research expenditure must be recognised as an intangible asset.
A 2 only
B 2 and 3
C 1 only
D 1 and 3 (2 marks)
16 The following transactions relate to Rashid’s electricity expense ledger account for the year ended
30 June 20X9:
$
Prepayment brought forward 550
Cash paid 5,400
Accrual carried forward 650
What amount should be charged to the statement of profit or loss in the year ended 30 June 20X9 for
electricity?
A $6,600
B $5,400
C $5,500
D $5,300 (2 marks)
17 At 30 June 20X5 a company’s allowance for receivables was $39,000. At 30 June 20X6 trade
receivables totalled $517,000. It was decided to write off debts totalling $37,000. The receivables
allowance was to be adjusted to an amount equivalent to 5% of the trade receivables.
What figure should appear in the statement of profit or loss for the year ended 30 June 20X6 for
receivables expense?
A $61,000
B $52,000
C $22,000
D $37,000 (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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18 The total of the list of balances in Valley’s payables ledger was $438,900 at 30 June 20X6. This
balance did not agree with Valley’s payables ledger control account balance. The following errors were
discovered:
1 A contra entry of $980 was recorded in the payables ledger control account, but not in the
payables ledger.
2 The total of the purchase returns daybook was undercast by $1,000.
3 An invoice for $4,344 was posted to the supplier’s account as $4,434.
What amount should Valley report in its statement of financial position for accounts payable at 30 June
20X6?
A $436,830
B $438,010
C $439,790
D $437,830 (2 marks)
19 According to IAS 2 Inventories, which TWO of the following costs should be included in valuing the
inventories of a manufacturing company?
1 Carriage inwards
2 Carriage outwards
3 Depreciation of factory plant
4 General administrative overheads
A 1 and 4
B 1 and 3
C 3 and 4
D 2 and 3 (2 marks)
20 Prisha has not kept accurate accounting records during the financial year. She had opening inventory of
$6,700 and purchased goods costing $84,000 during the year. At the year end she had $5,400 left in
inventory. All sales are made at a mark up on cost of 20%.
What is Prisha’s gross profit for the year?
A $13,750
B $17,060
C $16,540
D $20,675 (2 marks)
21 At 31 December 20X4 a company’s capital structure was as follows:
$
Ordinary share capital (500,000 shares of 25c each) 125,000
Share premium account 100,000
In the year ended 31 December 20X5 the company made a rights issue of 1 share for every 2 held at
$1 per share and this was taken up in full. Later in the year the company made a bonus issue of
1 share for every 5 held, using the share premium account for the purpose.
What was the company’s capital structure at 31 December 20X5?
Ordinary share capital Share premium account
A $450,000 $25,000
B $225,000 $250,000
C $225,000 $325,000
D $212,500 $262,500 (2 marks)
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22 Which of the following should appear in a company’s statement of changes in equity?
1 Total comprehensive income for the year
2 Amortisation of capitalised development costs
3 Surplus on revaluation of non-current assets
A 1, 2 and 3
B 2 and 3 only
C 1 and 3 only
D 1 and 2 only (2 marks)
23 The plant and machinery account (at cost) of a business for the year ended 31 December 20X5 was as
follows:
PLANT AND MACHINERY – COST
20X5 $ 20X5 $
1 Jan Balance b/f 240,000 31 Mar Transfer to disposal account 60,000
30 Jun Cash purchase of plant 160,000 31 Dec Balance c/f 340,000
400,000 400,000
The company’s policy is to charge depreciation at 20% per year on the straight line basis, with
proportionate depreciation in the years of purchase and disposal.
What should be the depreciation charge for the year ended 31 December 20X5?
A $68,000
B $64,000
C $61,000
D $55,000 (2 marks)
24 The following extracts are from Hassan’s financial statements:
$
Profit before interest and tax 10,200
Interest (1,600)
Tax (3,300)
Profit after tax 5,300
Share capital 20,000
Reserves 15,600
35,600
Loan liability 6,900
42,500
What is Hassan’s return on capital employed?
A 15%
B 29%
C 24%
D 12% (2 marks)
25 Which of the following statements about sales tax is/are true?
1 Sales tax is an expense to the ultimate consumer of the goods purchased
2 Sales tax is recorded as income in the accounts of the entity selling the goods
A 1 only
B 2 only
C Both 1 and 2
D Neither 1 nor 2 (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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26 Q’s trial balance failed to agree and a suspense account was opened for the difference. Q does not keep
receivables and payables control accounts. The following errors were found in Q’s accounting records:
1 In recording an issue of shares at par, cash received of $333,000 was credited to the ordinary
share capital account as $330,000
2 Cash of $2,800 paid for plant repairs was correctly accounted for in the cash book but was
credited to the plant asset account
3 The petty cash book balance of $500 had been omitted from the trial balance
4 A cheque for $78,400 paid for the purchase of a motor car was debited to the motor vehicles
account as $87,400.
Which of the errors will require an entry to the suspense account to correct them?
A 1, 2 and 4 only
B 1, 2, 3 and 4
C 1 and 4 only
D 2 and 3 only (2 marks)
27 Prior to the financial year end of 31 July 20X9, Cannon Co has received a claim of $100,000 from a
customer for providing poor quality goods which have damaged the customer’s plant and equipment.
Cannon Co’s lawyers have stated that there is a 20% chance that Cannon will successfully defend the
claim.
Which of the following is the correct accounting treatment for the claim in the financial statements for
the year ended 31 July 20X9?
A Cannon should neither provide for nor disclose the claim.
B Cannon should disclose a contingent liability of $100,000.
C Cannon should provide for the expected cost of the claim of $100,000.
D Cannon should provide for an expected cost of $20,000. (2 marks)
28 Gareth, a sales tax registered trader purchased a computer for use in his business. The invoice for the
computer showed the following costs related to the purchase:
$
Computer 890
Additional memory 95
Delivery 10
Installation 20
Maintenance (1 year) 25
1,040
Sales tax (17.5%) 182
Total 1,222
How much should Gareth capitalise as a non-current asset in relation to the purchase?
A $1,193
B $1,040
C $1,222
D $1,015 (2 marks)
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29 The following bank reconciliation statement has been prepared by a trainee accountant:
$
Overdraft per bank statement 3,860
Less: Unpresented cheques 9,160
5,300
Add: Outstanding lodgements 16,690
Cash at bank 21,990
What should be the correct balance per the cash book?
A $21,990 balance at bank as stated
B $3,670 balance at bank
C $11,390 balance at bank
D $3,670 overdrawn (2 marks)
30 The IASB’s Conceptual Framework for Financial Reporting identifies characteristics which make
financial information faithfully represent what it purports to represent.
Which of the following are examples of those characteristics?
1 Accruals
2 Completeness
3 Going concern
4 Neutrality
A 1 and 2
B 2 and 4
C 2 and 3
D 1 and 4 (2 marks)
31 The following control account has been prepared by a trainee accountant:
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 308,600 Cash 147,200
Credit sales 154,200 Discounts allowed 1,400
Cash sales 88,100 Interest charged on overdue
accounts
2,400
Contras 4,600 Irrecoverable debts 4,900
Allowance for receivables 2,800
Closing balance 396,800
555,500 555,500
What should the closing balance be when all the errors made in preparing the receivables ledger control
account have been corrected?
A $395,200
B $304,300
C $309,500
D $307,100 (2 marks)
32 Which of the following material events after the reporting date and before the financial statements are
approved are adjusting events?
1 A valuation of property providing evidence of impairment in value at the reporting date.
2 Sale of inventory held at the reporting date for less than cost.
3 Discovery of fraud or error affecting the financial statements.
4 The insolvency of a customer with a debt owing at the reporting date which is still outstanding.
A 1, 2 and 4 only
B 1, 2, 3 and 4
C 1 and 4 only
D 2 and 3 only (2 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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33 A company values its inventory using the FIFO method. At 1 May 20X5 the company had 700 engines
in inventory, valued at $190 each. During the year ended 30 April 20X6 the following transactions took
place:
20X5
1 July Purchased 500 engines at $220 each
1 November Sold 400 engines for $160,000
20X6
1 February Purchased 300 engines at $230 each
15 April Sold 250 engines for $125,000
What is the value of the company’s closing inventory of engines at 30 April 20X6?
A $188,500
B $195,500
C $166,000
D $106,000 (2 marks)
34 Amy is a sole trader and had assets of $569,400 and liabilities of $412,840 on 1 January 20X8.
During the year ended 31 December 20X8 she paid $65,000 capital into the business and she paid
herself wages of $800 per month.
At 31 December 20X8, Amy had assets of $614,130 and liabilities of $369,770.
What is Amy’s profit for the year ended 31 December 20X8?
A $32,400
B $23,600
C $22,800
D $87,800 (2 marks)
35 Bumbly Co extracted the trial balance for the year ended 31 December 20X7. The total of the debits
exceeded the credits by $300.
Which of the following could explain the imbalance?
A Sales of $300 were omitted from the sales day book.
B Returns inward of $150 were extracted to the debit column of the trial balance.
C Discounts received of $150 were extracted to the debit column of the trial balance.
D The bank ledger account did not agree with the bank statement by a debit of $300.
(2 marks)
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SECTION B – BOTH questions are compulsory and MUST be attempted
Please write your answer within the answer booklet in accordance with the detailed instructions provided
within each of the questions in this section of the exam paper.
1 Keswick Co acquired 80% of the share capital of Derwent Co on 1 June 20X5. The summarised draft
statements of profit or loss for Keswick Co and Derwent Co for the year ended 31 May 20X6 are shown
below:
Keswick Co Derwent Co
$'000 $'000
Revenue 8,400 3,200
Cost of sales (4,600) (1,700)
Gross profit 3,800 1,500
Operating expenses (2,200) (960)
Profit before tax 1,600 540
Tax (600) (140)
Profit of the year 1,000 400
During the year Keswick Co sold goods costing $1,000,000 to Derwent Co for $1,500,000. At 31 May
20X6, 30% of these goods remained in Derwent Co’s inventory.
Required
(a) Prepare the Keswick group consolidated statement of profit or loss for the year ended 31 May
20X6.
Note: The statement should stop once the consolidated profit for the year has been determined.
The amounts attributable to the non-controlling interest and equity owners of Keswick are not
required. Show all workings as credit will be awarded to these as appropriate. (7 marks)
(b) Which of the following formulas describes the amount to be entered in the consolidated
statement of profit or loss as ‘Profit attributable to: Equity owners of Keswick Co’?
A Group profit after tax – non-controlling interest
B Group profit after tax + non-controlling interest
C Keswick Co’s profit after tax
D Group profit after tax (2 marks)
(c) What amount should be shown in the consolidated statement of profit or loss for the noncontrolling
interest? (2 marks)
(d) The following table shows factors to be considered when determining whether a
parent–subsidiary relationship exists.
Factor Description
A Significant influence
B Control
C Non-controlling interest
D Greater than 50% of the equity shares being held by an investor
E 100% of the equity shares being held by an investor
F Greater than 50% of the preference shares being held by an investor
G 50% of all shares and all debt being held by an investor
H Greater than 50% of preference shares and debt being held by an investor
Required
Which of the above factors A to H illustrate the existence of a parent–subsidiary relationship?
(4 marks)
(15 marks)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // QUESTIONS
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2 Malright, a limited liability company, has an accounting year end of 31 October. The accountant is
preparing the financial statements as at 31 October 20X7 and requires your assistance. The following
trial balance has been extracted from the general ledger.
Account Dr Cr
$'000 $'000
Buildings at cost 740
Buildings accumulated depreciation, 1 November 20X6 60
Plant at cost 220
Plant accumulated depreciation, 1 November 20X6 110
Bank balance 70
Revenue 1,800
Net purchases 1,140
Inventory at 1 November 20X6 160
Cash 20
Trade payables 250
Trade receivables 320
Administrative expenses 325
Allowance for receivables at 1 November 20X6 10
Retained earnings at 1 November 20X6 130
Equity shares, $1 415
Share premium account 80
2,925 2,925
The following additional information is also available:
– The allowance for receivables was to be increased to an amount equivalent to 5% of trade
receivables. The allowance for receivables is treated as an administrative expense.
– Plant is depreciated at 20% per annum using the reducing balance method and buildings are
depreciated at 5% per annum on their original cost. Depreciation is treated as a cost of sales
expense.
– Closing inventory has been counted and is valued at $75,000.
– An invoice of $15,000 for energy costs relating to the quarter ended 30 November 20X7 was
received on 2 December 20X7. Energy costs are included in administrative expenses.
Required
Prepare the statement of profit or loss and the statement of financial position of Malright Co as at
31 October 20X7. (15 marks)
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Answers to
Mock Exam 1
(Specimen exam)
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // ANSWERS
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Note: The ACCA examiner’s answers follow these BPP Learning Media answers.
SECTION A
1 A Remember that: closing net assets = opening net assets + capital introduced + profit –
drawings.
2 B Under the imprest system, a reimbursement which equals the total of expense vouchers paid out,
is made at intervals to maintain the petty cash balance at a certain amount.
3 C The shareholder’s exposure to debts is limited, not the company’s.
4 C
PAYABLES CONTROL ACCOUNT
$ $
Cash paid to suppliers 302,800 Balance b/f 60,000
Discounts received 2,960 Purchases (bal fig) 331,760
Contra 2,000
Balance c/f 84,000
391,760 391,760
5 D Errors (1) and (3) will not cause a trial balance imbalance. In error 1, the incorrect amount will
be posted to both sales and receivables (Dr receivables, Cr sales). In error 3, the complete
omission of the transaction will have no effect on the trial balance.
6 B
Current assets $
Loan asset 12,000
Interest (12,000 12%) 240
Prepayment (8/12 9,000) 6,000
Accrued rent 4,000
22,240
7 C
$
Profit 83,600
Purchase of van 18,000
Depreciation 18,000 25% (4,500)
97,100
8 C The ratios given relate to working capital and liquidity. The ratios have all worsened from 20X8
to 20X9, suggesting a worsening liquidity position. Receivables days have gone up, meaning that
customers are taking longer to pay. Payables days have gone down, meaning that Xena is paying
suppliers more quickly. Inventory turnover days have gone up, meaning inventories are being held
for longer.
9 D Only item (3) is correct. The direct and indirect method both produce the same figure for cash
from operating activities. A rights issue of shares does feature in a statement of cash flows as
cash is received for the issue, a bonus issue, however, would not feature as no cash is received.
A profit on the sale of a non-current asset would not appear as an investing cash flow, rather the
cash received from the sale would appear as an investing cash flow and the profit on the sale
would be added back to profit before tax under the indirect method of calculating cash from
operating activities.
10 D
$
Balance b/f (advance) 28,700
Balance b/f (arrears) (21,200)
Cash received 481,200
Balance c/f (advance) (31,200)
Balance c/f (arrears) 18,400
475,900
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11 B A sole trader’s financial statements are not publicly available, but they might be made available
to some third parties, for example, the tax authorities.
12 C Ratio analysis is useful for different users of financial statements, including management,
potential investors, the government, employees and so on. Historical performance can give an
indication of what might occur in the future, especially if a trend is shown, but it cannot be used
to accurately predict the future.
13 A Motor vehicles – cost account is an asset and so the balance brought forward must be a debit. It
is $36,750 as this is the figure that balances the account.
14 A An entity is not required to disclose a description of the development projects undertaken in the
period, or a list of all intangible assets purchased or developed in the period. It is however,
required to: disclose a description, the carrying amount and remaining amortisation period of any
individual intangible asset that is material to the entity’s financial statements, and distinguish
between internally generated intangible assets capitalised in the period and those acquired in the
period.
15 A Statement 2 is the only correct statement. Statement 1 is incorrect because capitalised
development expenditure is amortised over its useful life. Statement 3 is incorrect because
research expenditure is never capitalised.
16 A
$
Balance b/f 550
Expense incurred (cash) 5,400
Accrual c/f 650
6,600
17 C
$ $
Debts written off 37,000
Movement in allowance:
(517 – 37) 5% 24,000
Less opening allowance 39,000
(15,000)
Receivables expense 22,000
18 D
$
Balance per ledger 438,900
Less contra (980)
Posting error (90)
Corrected balance 437,830
The individual returns from the purchase returns day book are posted to the individual accounts
in the memorandum payables ledger, so the list of balances does not need to be adjusted for
error (2).
19 B Carriage outwards is a distribution expense. General administrative overheads should not be
included per IAS 2.
20 B (6,700 + 84,000 – 5,400) 20% = $17,060
21 B Share capital = 125,000 + 62,500 rights issue of 250,000 25c shares (500,000/2) +
37,500 bonus issue of 150,000 25c shares (750,000/5) = 225,000
Share premium = 100,000 + 187,500 rights issue (250,000 75c) – 37,500 bonus issue
(150,000 25c) = 250,000
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // ANSWERS
255
22 C Amortisation of development costs will appear in the statement of profit or loss, not the statement
of changes in equity.
23 D
$
Depreciation:
Jan–Mar 240,000 20% 3/12 12,000
Apr–Jun (240,000 – 60,000) 20% 3/12 9,000
Jul–Dec (180,000 + 160,000) 20% 6/12 34,000
55,000
24 C 10,200/42,500
25 A Sales tax is merely collected by the business, the ultimate consumer bears the expense.
26 B All of the errors would require an entry to the suspense account to correct them.
27 C It is probable that Canon will have to pay $100,000 for the claim, therefore a provision is
required.
28 D 1,040 – 25 = $1,015. The maintenance costs should not be capitalised. The sales tax is
recoverable as Gareth is registered for sales tax, therefore is should not be capitalised.
29 B
$
Overdraft per bank statement (3,860)
Less: Unpresented cheques (9,160)
Add: Outstanding lodgements 16,690
Cash at bank 3,670
30 B Completeness and neutrality are two characteristics given in the Conceptual framework. Going
concern is the underlying assumption and accruals is not a stated characteristic.
31 D
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Opening balance 308,600 Cash 147,200
Credit sales 154,200 Discounts allowed 1,400
Interest charged on overdue accounts 2,400 Contras 4,600
Irrecoverable debts 4,900
Closing balance 307,100
465,200 465,200
32 B All of the events are adjusting events.
33 A Closing inventory:
$
50 $190 9,500
500 $220 110,000
300 $230 69,000
188,500
34 A Closing net assets = opening net assets + capital introduced + profit – drawings
$
Opening assets 569,400
Opening liabilities (412,840)
Capital introduced 65,000
Drawings (800 12) (9,600)
211,960
Profit (bal fig) 32,400
Closing net assets (614,130 – 369,770) 244,360
35 C Discounts received are recorded as a credit balance and appear as other income in the statement
of profit or loss: Dr payables, Cr discounts received.
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F3/FFA FINANCIAL ACCOUNTING
256
SECTION B
1 (a) KESWICK GROUP
CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MAY 20X6
$'000
Revenue (8,400 + 3,200 – 1,500) 10,100
Cost of sales (4,600 + 1,700 – 1,500 + 150) (4,950)
Gross profit 5,150
Operating expenses (2,200 + 960)) (3,160)
Profit before tax 1,990
Tax (600 + 140) (740)
Profit of the year 1,250
(b) A
(c) Non-controlling interest = $80,000 ($400,000 20%)
(d) The following factors illustrate the existence of a parent–subsidiary relationship: B, C, D, E.
2 MALRIGHT CO
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 OCTOBER 20X7
$'000
Revenue 1,800
Cost of sales (W1) (1,284)
Gross profit 514
Administrative expenses (325 + 10 (W4) + (16 (W3) – 10)) (314)
Profit for the year 175
STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X7
$'000 $'000
Assets
Non-current assets (W2) 731
Current assets
Inventories 75
Trade receivables (W3) 304
Cash 20
399
Total assets 1,130
Equity and liabilities
Equity
Share capital 415
Retained earnings (130 + 175) 305
Share premium 80
800
Current liabilities
Trade and other payables (250 + 10 (W4)) 260
Bank overdraft 70
330
Total equity and liabilities 1,130
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MOCK EXAM 1 (SPECIMEN EXAM JUNE 2014) // ANSWERS
257
Workings
1 Cost of sales
$'000
Opening inventory 160
Purchases 1,140
Closing inventory (75)
1,225
Depreciation (W2) 59
1,284
2 Non-current assets
Property Plant Total
$'000 $'000 $'000
Cost 740 220 960
Depreciation b/f (60) (110) (170)
Depreciation for year
740 5% (37)
(220 – 110) 20%) (22) (59)
Net book value 31 October 20X7 643 88 731
3 Trade receivables
Allowance = 320,000 5% = $16,000
320,000 – 16,000 = $304,000
4 Trade and other payables
Energy cost accrual
15,000 2/3 = $10,000
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F3/FFA FINANCIAL ACCOUNTING
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259
ACCA's exam answers to
Specimen exam
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F3/FFA FINANCIAL ACCOUNTING
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ACCA’S EXAM ANSWERS TO SPECIMEN EXAM
261
SECTION A
1 A
2 B
3 C
4 C
Payables: $
Balance b/f 60,000
Cash paid to suppliers (302,800)
Discounts received (2,960)
Contra (2,000)
Balance c/f (84,000)
Purchases 331,760
5 D
6 B
Current assets $
Loan asset 12,000
Interest (12,000 12%) 240
Prepayment (8/12 9,000) 6,000
Accrued rent 4,000
22,240
7 C
$
Profit 83,600
Purchase of van 18,000
Depreciation 18,000 25% (4,500)
97,100
8 C
9 D
10 D
$
Balance b/f (advance) 28,700
Balance b/f (arrears) (21,200)
Cash received 481,200
Balance c/f (advance) (31,200)
Balance c/f (arrears) 18,400
475,900
11 B
12 C
13 A
14 A
15 A
16 A
$
Balance b/f 550
Expense incurred (cash) 5,400
Accrual c/f 650
6,600
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17 C
$ $
Debts written off 37,000
Movement in allowance:
(517 – 37) 5% 24,000
Less opening allowance 39,000
(15,000)
Receivables expense 22,000
18 D
$
Balance per ledger 438,900
Less contra (980)
Posting error (90)
Corrected balance 437,830
19 B
20 B (6,700 + 84,000 – 5,400) 20% = $17,060
21 B
Share
Share capital premium
$ $
Balance b/f 125,000 100,000
Rights issue 62,500 187,500
Bonus issue 37,500 (37,500)
Balance c/f 225,000 250,000
22 C
23 D
$
Depreciation:
Jan–Mar 240,000 20% 3/12 12,000
Apr–Jun (240,000 – 60,000) 20% 3/12 9,000
Jul–Dec (180,000 + 160,000) 20% 6/12 34,000
55,000
24 C 10,200/42,500
25 A
26 B
27 C
28 D 1,040 – 25 = $1,015
29 B
$
Overdraft per bank statement (3,860)
Less: Unpresented cheques (9,160)
Add: Outstanding lodgements 16,690
Cash at bank 3,670
30 B
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ACCA’S EXAM ANSWERS TO SPECIMEN EXAM
263
31 D
Receivables ledger control account
$ $
Opening balance 308,600 Cash 147,200
Credit sales 154,200 Discounts allowed 1,400
Interest charged on overdue accounts 2,400 Contras 4,600
Irrecoverable debts 4,900
Closing balance 307,100
465,200 465,200
32 B
33 A
Closing inventory:
$
50 $190 9,500
500 $220 110,000
300 $230 69,000
188,500
34 A
$
Opening assets 569,400
Opening liabilities (412,840)
Capital introduced 65,000
Drawings (800 12) (9,600)
211,960
Profit (bal fig) 32,400
Closing net assets (614,130 – 369,770) 244,360
35 C
SECTION B
1 (a) Consolidated statement of profit or loss for the year ended 31 May 20X6
$'000
Revenue (W1) 10,100
Cost of sales (W1) (4,950)
Gross profit 5,150
Operating expenses (W1) (3,160)
Profit before tax 1,990
Tax (740)
Profit of the year 1,250
(b) A
(c) Non-controlling interest = $80,000 ($400,000 (W1) 20%)
(d) The following factors illustrate the existence of a parent–subsidiary relationship: B, C, D, E.
Workings
Working 1
Keswick Co Derwent Co Adjustments Consolidated
$'000 $'000 $'000 $'000
Revenue 8,400 3,200 (1,500) 10,100
Cost of sales (4,600) (1,700) 1,500 (4,950)
Unrealised profit (150)
Operating expenses (2,200) (960) (3,160)
Tax (600) (140) (740)
850 400
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2 Statement of profit or loss for the year ended 31 October 20X7
$'000
Revenue 1,800
Cost of sales (W1) (1,284)
Gross profit 514
Administrative expenses (325 + 10 (W4) + (16 (W3) –10)) (314)
Profit for the year 175
Statement of financial position as at 31 October 20X7
$'000 $'000
Assets
Non-current assets (W2) 731
Current assets
Inventories 75
Trade receivables (W3) 304
Cash 20
399
Total assets 1,130
Equity and liabilities
Equity
Share capital 415
Retained earnings (130 + 175) 305
Share premium 80
800
Current liabilities
Trade and other payables (250 + 10 (W4)) 260
Bank overdraft 70
330
Total equity and liabilities 1,130
Workings
Working 1
$'000
Cost of sales
Opening inventory 160
Purchases 1,140
Closing inventory (75)
1,225
Depreciation (W2) 59
1,284
Working 2
Property Plant Total
$'000 $'000 $'000
Cost 740 220 960
Depreciation b/f (60) (110) (170)
Depreciation for year
740 5% (37)
(220 – 110) 20%) (22) (59)
Net book value 31 October 20X7 643 88 731
Working 3
Trade receivables
Allowance = 320,000 5% = $16,000
320,000 – 16,000 = $304,000
Working 4
Energy cost accrual
15,000 2/3 = $10,000
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ACCA’S EXAM ANSWERS TO SPECIMEN EXAM
265
Fundamentals Level – Knowledge Module, Paper F3
Financial Accounting Specimen Exam Marking Scheme
Marks
1 (a) Format of consolidated statement of profit or loss 1
Revenue 2
Cost of sales 2
Operating expenses 1
Tax expense 1
7
(b) 2
(c) 2
(d) 4
15
2 Formats 1
Statement of profit or loss
Revenue 0.5
Cost of sales 3.5
Administrative expenses 2.5
Statement of financial position
Non-current assets 1
Inventory 0.5
Receivables 1.5
Cash 0.5
Share capital 0.5
Retained earnings 1.5
Share premium 0.5
Payables 1
Overdraft 0.5
15
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267
Mock Exam 2
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269
ACCA
Paper FFA/F3
Financial Accounting
Mock Examination 2
Question Paper
Time allowed 2 hours
This paper is divided into two sections:
Section A – ALL 35 questions are compulsory and MUST be attempted
Section B – BOTH questions are compulsory and MUST be attempted
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
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MOCK EXAM 2 // QUESTIONS
271
SECTION A
1 In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the
following criteria must be present in order for a company to recognise a provision?
1 There is a present obligation as a result of past events.
2 It is probable that a transfer of economic benefits will be required to settle the obligation.
3 A reliable estimate of the obligation can be made.
A All three criteria must be present.
B 1 and 2 only
C 1 and 3 only
D 2 and 3 only (2 marks)
2 Which one of the following types of book-keeping error is never indicated when a trial balance of
nominal ledger account balances is extracted?
A Errors of commission
B Errors of omission
C Errors of principle
D Transposition errors
(2 marks)
3 Nooma Co owns 55% of the ordinary shares of Matic Co. What is the correct accounting treatment of
the revenues and costs of Matic Co in the consolidated statement of profit or loss of the Nooma Group?
A The revenues and costs of Matic Co are added to the revenues and costs of Nooma Co on a line
by line basis.
B 55% of the profit after tax of Matic Co should be added to Nooma Co’s consolidated profit after
tax.
C 55% of the revenues and costs of Matic Co are added to the revenues and costs of Nooma Co on
a line by line basis.
D Only dividends received from Matic Co are shown in the consolidated statement of profit or loss
of Nooma Co.
(2 marks)
4 Your firm's cash book at 30 April 20X8 shows a balance at the bank of $2,490. Comparison with the
bank statement at the same date reveals the following differences:
$
Unpresented cheques 840
Bank charges not in cash book 50
Receipts not yet credited by the bank 470
Dishonoured cheque not in cash book 140
What is the adjusted bank balance per the cash book at 30 April 20X8?
A $1,460
B $2,300
C $2,580
D $3,140 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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5 W Co, a sales tax registered trader, bought a new printing machine. The cost of the machine was
$80,000, excluding sales tax at 17.5%. The delivery costs were $2,000 and installation costs were
$5,000. Before using the machine to print customers' orders, a test was undertaken and the paper and
ink cost $1,000.
What should be the cost of the machine in the company's statement of financial position?
A $80,000
B $82,000
C $87,000
D $88,000 (2 marks)
6 Which of the following correctly defines ‘equity’ according to the IASB's Conceptual Framework for
Financial Reporting?
A Equity is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefit.
B Equity is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
C Equity is the residual interest in the assets of the entity after deducting all its liabilities.
D Equity is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities. (2 marks)
7 Which of the following is a qualitative characteristic of financial information included in the IASB’s
Conceptual framework for financial reporting?
A Relevance
B Fair presentation
C Consistency
D Accruals (2 marks)
8 S & Co sell three products – A, B and C. The following information was available at the year end.
Basic Super Luxury
$ per unit $ per unit $ per unit
Original cost 10 9 20
Estimated selling price 9 12 26
Selling and distribution costs 1 4 5
units units units
Units of inventory 500 1,250 850
In accordance with IAS2 Inventories, what is the value of inventory at the year end?
A $23,500
B $31,000
C $31,850
D $32,750 (2 marks)
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MOCK EXAM 2 // QUESTIONS
273
9 A car was purchased by a business in May 20X1 for:
$
Cost 10,000
Road fund licence 150
Total 10,150
The business adopts a date of 31 December as its year end.
The car was traded in for a replacement vehicle in August 20X4 at an agreed value of $5,000.
It has been depreciated at 25% per annum on the reducing-balance method, charging a full year's
depreciation in the year of purchase and none in the year of sale.
What was the profit or loss on disposal of the vehicle during the year ended December 20X4?
A Loss of $2,890
B Profit of $781
C Profit of $2,500
D Profit of $3,750 (2 marks)
10 At 1 January 20X3, Attila Co had an allowance for receivables of $35,000. At 31 December 20X3, the
trade receivables of the company were $620,000. It was decided to:
1 Write off (as uncollectable) receivables totalling $30,000, and
2 Adjust the allowance for receivables to an amount equivalent to 5% of receivables.
What is the combined expense that should appear in the company’s statement of profit or loss for the
year, for irrecoverable debts and the allowance for receivables?
A $24,500
B $26,000
C $34,000
D $35,500
(2 marks)
11 The annual sales of a company are $235,000 including sales tax at 17.5%. Half of the sales are on
credit terms, half are cash sales. The receivables in the statement of financial position are $23,500.
What is the output tax?
A $17,500
B $20,562.5
C $35,000
D $41,125 (2 marks)
12 Beta purchased some plant and equipment on 1 July 20X1 for $40,000. The scrap value of the plant in
ten years' time is estimated to be $4,000. Beta's policy is to charge depreciation on the straight line
basis, with a proportionate charge in the period of acquisition.
What is the depreciation charge on the plant in Beta's financial statements for the year ended
30 September 20X1?
A $900
B $1,000
C $3,600
D $4,000 (2 marks)
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F3/FFA FINANCIAL ACCOUNTING
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13 The following figures are taken from the statement of financial position of GEN Co.
$m
Inventory 2
Receivables 3
Cash 1
Payables 3
Bank loan repayable in 5 years time 3
What is the current ratio?
A 1.33
B 2.00
C 1.00
D 0.33 (2 marks)
14 A particular source of finance has the following characteristics: fixed payments, a fixed repayment date,
it is secured on the assets of the company and the payments are classified as an expense.
Which of the following best describes this source of finance?
A A redeemable preference share
B An irredeemable preference share
C A loan note
D An overdraft (2 marks)
15 Tong Co acquired 100% of the $100,000 ordinary share capital of Cheek Co for $1,200,000 on
1 January 20X5 when the retained earnings of Cheek Co were $550,000 and the balance on the
revaluation surplus was $150,000. At the date of acquisition the fair value of plant held by Cheek Co
was $80,000 higher than its carrying value.
What is the goodwill arising on the acquisition of Cheek Co?
A $320,000
B $400,000
C $470,000
D $550,000 (2 marks)
16 During the year ended 31 December 20X1, Alpha Rescue had the following transactions on the
receivables ledger.
$
Receivables at 1 January 20X1 100,000
Receivables at 31 December 20X1 107,250
Goods returned 12,750
Amounts paid into the bank from receivables 225,000
Discount received 75,000
Discounts allowed 5,000
What were the sales for the year?
A $107,250
B $240,000
C $250,000
D $320,000 (2 marks)
17 Financial analysts calculate ratios from the published financial statements of large companies. Which
one of the following reasons is UNLIKELY to be a reason why they calculate and analyse financial ratios?
A Ratios can reduce lengthy or complex financial statements into a fairly small number of more
easily-understood indicators.
B Ratios can indicate whether a business is at serious risk of insolvency.
C Ratios can help with comparisons between businesses in the same industry.
D Ratios can indicate changes in the financial performance and financial position of a business over
time.
(2 marks)
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MOCK EXAM 2 // QUESTIONS
275
18 Cat Co has held 85% of the share capital of Dog Co for many years. During the current year Cat Co sold
goods to Dog Co for $15,000, including a mark up of 25% on cost. 60% of these goods were still in
inventory at the year end.
The following extract was taken from the accounting records of Cat Co and Dog Co at 31 March 20X8.
Cat Co Dog Co
$'000 $'000
Opening inventory 650 275
Closing Inventory 750 400
What is the figure for inventory to be included in the statement of financial position of the Cat Group at
31 March 20X8?
A $1,151,800
B $1,152,250
C $1,197,750
D $1,148,200 (2 marks)
19 A company’s quick ratio has increased from 0.9:1 at 31 December 20X1 to 1.5:1 at 31 December
20X2. Which of the following events could explain this increase?
A Improved inventory control
B The refinancing of a long-term loan
C A reduction in payables
D An increase in payables (2 marks)
20 Which of the following represents an error of original entry?
A The purchase of goods for resale using cash was debited to the purchases account and credited
to the cash book using the incorrect amount in both cases.
B The purchase of goods for resale using cash was debited to the motor vehicles account and
credited to the cash book using the correct amount in both cases.
C The purchase of goods for resale using cash was debited to the purchases account and credited
to the sales day book using the correct amount in both cases.
D The purchase of goods for resale using cash was debited to the purchases account but no credit
entry was made. (2 marks)
21 A machine was purchased for $100,000 on 1 January 20X1 and was expected to have a useful life of
10 years. After 3 years, management revised their expectation of the remaining useful life to 20 years.
The business depreciates machines using the straight line method.
What is the carrying value of the machine at 31 December 20X5?
A $50,000
B $63,000
C $72,000
D $75,000 (2 marks)
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22 Your organisation has received a statement of account from one of its suppliers, showing an outstanding
balance due to them of $1,350. On comparison with your ledger account, the following is determined:
Your ledger account shows a credit balance of $260
The supplier has disallowed a cash discount of $80 due to late payment of an invoice
The supplier has not yet allowed for goods returned at the end of the period of $270
Cash in transit of $830 has not been received by the supplier
Following consideration of these items, what is the unreconciled difference between the two records?
A $nil
B $10
C $90
D $(180) (2 marks)
23 A company is preparing its statement of cash flows for the year ended 31 December 20X2. Relevant
extracts from the accounts are as follows.
Statement of profit or loss $
Depreciation 15,000
Profit on sale of non-current assets 40,000
Statement of financial position 20X2 20X1
$ $
Plant and machinery – cost 185,000 250,000
Plant and machinery – depreciation 45,000 50,000
Plant and machinery additions during the year were $35,000. What is the cash flow arising from the
sale of non-current assets?
A $40,000
B $100,000
C $120,000
D $135,000 (2 marks)
24 Which body is responsible for issuing International Financial Reporting Standards?
A IFRS Interpretations Committee
B IFRS Advisory Council
C International Accounting Standards Board
D The United Nations (2 marks)
25 Teo Co acquired 95% of the ordinary share capital of Mat Co 31 December 20X0. The following
information relates to Mat Co:
20X0 20X1
$’000 $’000
Retained earnings 700 800
Revaluation surplus – 100
700 900
The fair value of the non-controlling interest in Mat Co at the date of acquisition was $45,000.
What is the amount reported for non-controlling interest in the statement of financial position of the Teo
Group as at 31 December 20X1?
A $45,000
B $55,000
C $85,000
D $90,000 (2 marks)
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MOCK EXAM 2 // QUESTIONS
277
26 Which of the following statements is/are correct?
1 AZ owns 25% of the preferred (non-voting) share capital of BX, which means that BX is an
associate of AZ.
2 CW has a 10% shareholding in DY and can appoint 4 out of 6 directors to the board of DY, so
DY is classified as a subsidiary of CW.
3 ES has significant influence over FT, which means that FT is an associate of ES.
4 GR owns 55% of the share capital of HU, but by agreement with the minority shareholder, does
not have control or significant influence over the financial and operating policies of HU, so HU is
a simple investment of GR.
A 1 and 2 only
B 2 and 3 only
C 2, 3 and 4 only
D 4 only (2 marks)
27 Which, if any, of the following journal entries is correct according to their narratives?
Debit Credit
$ $
1 B receivables ledger account 450
Irrecoverable debts account 450
Irrecoverable balance written off
2 Investments: Q ordinary shares 100,000
Share capital 100,000
80,000 shares of 50c each issued at $1·25 in exchange for shares in Q.
3 Suspense account 1,000
Motor vehicles account 1,000
Correction of error – debit side of Motor vehicles account undercast
by $1,000
A None of them
B 1 only
C 2 only
D 3 only (2 marks)
28 Jay Co values inventories on the first in first out (FIFO) basis. Jay Co has 120 items of product A valued
at $8 each in inventory at 1 October 20X9. During October 20X9, the following transactions in product
A took place.
3 October Purchases 180 items at $9 each
4 October Sales 150 items at $12 each
8 October Sales 80 items at $15 each
18 October Purchases 300 items at $10 each
22 October Sales 100 items at $15 each
What is the closing balance on the inventory account at 31 October 20X9?
A $1,500
B $2,560
C $2,628
D $2,700 (2 marks)
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29 Fred’s trial balance did not balance so he opened a suspense account with a debit balance of $346.
Control accounts are maintained for receivables and payables.
Fred discovered the following:
1 The sales day book was undercast by $400.
2 Purchases of $520 from the purchases day book have only been recorded in the payables ledger
control account.
3 Profit on sale of non-current assets of $670 had been recorded in the sundry income account as $760.
What is the remaining balance on Fred’s suspense account after these errors have been corrected?
A $264 credit
B $136 debit
C $956 debit
D $1,266 debit (2 marks)
30 Charles Co entered into the following transactions:
1 He sold goods on credit to Cody with a list price of $3,200. He allows a 10% trade discount and
a further 2% discount for payment within seven days. Cody paid within two days.
2 He made a credit sale to Mary allowing a 5% trade discount on the list price of $640.
3 He purchased goods for $600 and paid $590, receiving a discount for immediate cash payment.
How much discount should be recorded in the Discount Allowed account as a result of the above
transactions?
A $57.60
B $10.00
C $352.00
D $409.60 (2 marks)
31 Where, in a company's financial statements complying with International Financial Reporting Standards,
should you find the proceeds of non-current assets sold during the period?
A Statement of cash flows and statement of financial position
B Statement of changes in equity and statement of financial position
C Statement of profit or loss and other comprehensive income and statement of cash flows
D Statement of cash flows only (2 marks)
32 If the current ratio for a company is equal to its quick ratio, which of the following statements is true?
A The current ratio must be greater than one.
B The company does not carry any inventory.
C Receivables plus cash is greater than payables minus inventories.
D Working capital is positive. (2 marks)
33 The closing inventory of Epsilon amounted to $284,000 at 30 September 20X1, the reporting date.
This total includes two inventory lines about which the inventory taker is uncertain.
1 500 items which had cost $15 each and which were included at $7,500. These items were
found to have been defective at the end of the reporting period. Remedial work after the reporting
period cost $1,800 and they were then sold for $20 each. Selling expenses were $400.
2 100 items which had cost $10 each. After the reporting period they were sold for $8 each, with
selling expenses of $150.
What figure should appear in Epsilon's statement of financial position for inventory?
A $283,650
B $283,800
C $284,000
D $284,450 (2 marks)
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279
34 Which of these statements about research and development expenditure are correct?
1 If certain conditions are satisfied, research and development expenditure must be capitalised.
2 One of the conditions to be satisfied if development expenditure is to be capitalised is that the
technical feasibility of the project is reasonably assured.
3 The amount of capitalised development expenditure for each project should be reviewed each
year. If circumstances no longer justify the capitalisation, the balance should be written off over a
period not exceeding five years.
4 Development expenditure may only be capitalised if it can be shown that adequate resources will
be available to finance the completion of the project.
A 1 and 2 only
B 1 and 4 only
C 2 and 3 only
D 2 and 4 only (2 marks)
35 A company measures the average time to collect receivables as:
[Receivables at end of financial year/Annual credit sales] 365 days
Accounting ratios have just been calculated from the financial statements for the financial year that has
just ended. These show an abnormally high average time to collect receivables, compared with ratios
calculated for the previous financial year.
Which of the following may help to explain this unusually high turnover period for trade receivables?
1 There was an unusually large sale on credit close to the end of the financial year.
2 The company has seasonal trade, and sales in the final quarter of the year are always higher than
in the other quarters.
3 However, sales in the final quarter of the year that has just ended were lower than in the previous
year.
A Reason 1 only
B Reason 2 only
C Reason 3 only
D Reasons 1, 2 and 3
(2 marks)
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SECTION B
1 You have been given the following information relating to a limited liability company called Nobrie. This
company is preparing financial statements for the year ended 31 May 20X4.
NOBRIE
STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED 31 MAY 20X4
$'000
Revenue 66,600
Cost of sales (13,785)
Gross profit 52,815
Distribution costs (7,530)
Administrative expenses (2,516)
Investment income 146
Finance cost (1,177)
Profit before tax 41,738
Tax (9,857)
Profit for the year 31,881
Retained earnings brought forward at 1 June 20X3 28,063
Retained earnings carried forward at 31 May 20X4 59,944
NOBRIE
STATEMENTS OF FINANCIAL POSITION AS AT 31 MAY
20X4 20X3
$'000 $'000 $'000 $'000
Assets
Non-current assets
Cost 144,844 114,785
Accumulated depreciation (27,433) (26,319)
117,411 88,466
Current assets
Inventory 24,931 24,065
Trade receivables 18,922 13,238
Cash 3,689 2,224
47,542 39,527
Total assets 164,953 127,993
Equity and liabilities
Equity
Ordinary share capital 27,000 23,331
Share premium 14,569 10,788
Revaluation surplus 15,395 7,123
Retained earnings 59,944 28,063
116,908 69,305
Non current liabilities
6% loan note 17,824 24,068
Current liabilities
Bank overdraft 5,533 6,973
Trade payables 16,699 20,324
Taxation 7,989 7,323
30,221 34,620
Total equity and liabilities 164,953 127,993
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MOCK EXAM 2 // QUESTIONS
281
Additional information
(a) During the year ended 31 May 20X4, the company sold a piece of equipment for $3,053,000,
realising a profit of $1,540,000. There were no other disposals of non-current assets during the
year.
(b) Depreciation of $5,862,000 has been charged.
(c) There were no amounts outstanding in respect of interest payable or receivable as at 31 May 20X3 or
20X4.
(d) There were no dividends paid or declared during the year.
Required
Prepare a statement of cash flows for Nobrie for the year ended 31 May 20X4 in accordance with IAS 7
Statement of cash flows. (15 marks)
2 The draft statements of financial position of Spyder and its subsidiary company Phly at 31 October
20X5 are as follows.
Spyder Phly
$'000 $'000 $'000 $'000
Assets
Non-current assets
Tangible assets
Land and buildings 315,000 278,000
Plant 285,000 220,000
600,000 498,000
Investment
Shares in Phly at cost 660,000 –
Current assets
Inventory 357,000 252,000
Receivables 525,000 126,000
Bank 158,000 30,000
1,040,000 408,000
2,300,000 906,000
Equity and liabilities
Equity
$1 ordinary shares 1,500,000 600,000
Reserves 580,000 212,000
2,080,000 812,000
Current liabilities
Payables 220,000 94,000
Total equity and liabilities 2,300,000 906,000
The following information is also available.
(a) Spyder purchased 480 million shares in Phly some years ago, when Phly had a credit balance of
$95 million in reserves. The fair value of the non-controlling interest at the date of acquisition
was $165 million.
(b) At the date of acquisition the freehold land of Phly was valued at $70 million in excess of its
book value. The revaluation was not recorded in the accounts of Phly.
(c) Phly's inventory includes goods purchased from Spyder at a price that includes a profit to Spyder
of $12 million.
(d) At 31 October 20X5 Phly owes Spyder $25 million for goods purchased during the year.
Required
(a) Calculate the total goodwill on acquisition.
(b) Prepare the consolidated statement of financial position for Spyder as at 31 October 20X5.
(15 marks)
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283
Answers to Mock Exam 2
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MOCK EXAM 2 // ANSWERS
285
SECTION A
1 A All three criteria must be present.
2 C The existence of a transposition error should always be revealed by a trial balance. Errors of
omission and commission may or may not be revealed, depending on the nature of the error and
whether the error has resulted fin a mismatch between debt and credit entries in the nominal
ledger accounts. An error of omission is never revealed, because there have been no entries in the
nominal ledger for the omitted item.
3 A Matic Co is a subsidiary of Nooma Co, so the results of Matic Co should be consolidated on a line
by line basis with the results of Nooma Co.
4 B
Original cash book figure 2,490
Adjustment re charges (50)
Adjustment re dishonoured cheque (140)
2,300
5 D $88,000
$
Cost of machine 80,000
Installation 5,000
Delivery 2,000
Testing 1,000
88,000
6 C A is the definition of a liability, B is the definition of an asset and D is the definition of income
according to the Conceptual framework.
7 A Relevance is a qualitative characteristic. The other options are accounting concepts.
8 B $31,000
Cost Net realisable value Lower of cost & NRV Units Value
$ $ $ $
A 10 8 8 500 4,000
B 9 8 8 1,250 10,000
C 20 21 20 850 17,000
31,000
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9 B $781 profit
$
Cost 10,000
20X1 Depreciation 2,500
7,500
20X2 Depreciation 1,875
5,625
20X3 Depreciation 1,406
4,219
20X4 Part exchange 5,000
Profit 781
10 A
$ $
Amount written off 30,000
Allowance for receivables at 31 December 20X3
5% $(620,000 – 30,000)
29,500
Allowance for receivables at 1 January 20X3 35,000
Reduction in allowance for receivables (5,500)
Combined expense 24,500
11 C $35,000
Output tax = 235,000
17.5
117.5
12 A $900. ($36,000/10) 3/12
13 B This is the ratio of current assets to current liabilities. C is wrong as the five year bank loan would
not normally be included with current liabilities. A is the quick ratio (excludes inventory).
14 C It is a loan note. It is not a preference share because it is secured. An overdraft does not have a
fixed return or a fixed repayment date and is not secured.
15 A $ $
Fair value of consideration 1,200,000
Net assets at acquisition as represented by
Share capital 100,000
Retained earnings 550,000
Revaluation surplus 150,000
Fair value adjustment 80,000
(880,000)
Goodwill 320,000
16 C $250,000
RECEIVABLES LEDGER CONTROL ACCOUNT
$ $
Bal b/f 100,000 Bank 225,000
Sales (balancing figure) 250,000 Discounts allowed 5,000
Returns 12,750
Bal c/f 107,250
350,000 350,000
Discounts received refer to purchases and go in the payables ledger control account.
17 B Ratios can be used to analyse financial performance, and to make comparisons of performance
over time and between different businesses in the same industry, but they cannot usually provide
a reliable indicator of insolvency, especially if they are prepared only once a year.
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18 D $1,148,200
19 C Quick ratio = current assets excluding inventories / current liabilities.
The quick ratio does not include inventories or long term loans, so A and B will have no effect. An
increase in payables would reduce the quick ratio.
20 A B and C are errors of principle, D is an error of omission.
21 B $63,000.
Carrying value at the end of year 3: 100,000 – (100,000 3/10) = $70,000
Carrying value at the end of year 5: 70,000 – (70,000 2/20) = $63,000
22 C $90 $
Ledger balance 260
Add back: disallowed discount 80
returns goods 270
cash in transit 830
Total balance 1,440
As stated by the supplier 1,350
Unreconciled difference 90
23 C $120,000
$
Sale proceeds (balancing figure) 120,000
Carrying amount (see below) 80,000
Profit on sale 40,000
Carrying amount at 31 December 20X1 (250,000 – 50,000) 200,000
Additions 35,000
235,000
Carrying amount of disposals (balancing figure) (80,000)
Depreciation (15,000)
Carrying amount at 31 December 20X2 (185,000 – 45,000) 140,000
24 C The International Accounting Standards Board is responsible for issuing IFRSs.
25 B
$
Fair value of NCI at acquisition 45,000
Plus NCI’s share of post-acquisition retained earnings (and other reserves)
((800 – 100) 5% + 100 5%)
10,000
NCI at reporting date (31 December 20X1) 55,000
26 C An investor must have significant influence over the investee in order for the investee to be
classified as an associate, therefore 3 is correct. If the investor owns between 20% and <50% of
the ordinary shares (voting) of the investee, significant influence can be assumed, 1 is not true
as the shares held do not have voting rights. For an investee to be classified as a subsidiary, the
investor must have control over the investee. Control can be demonstrated if the investor can
appoint the majority of board members of the investee, so 2 is correct. 4 is also correct as
despite its 55% shareholding, GR does not have control or significant influence over HU and as
such is not classified as a subsidiary or as an associate, but as a simple trade investment.
27 A All three are incorrect. In 1 and 3 the debit and credit entries should be reversed and 2 should
show a credit of $60,000 to the share premium account.
$’000
Unrealised profit (15,000 25/125 60%) 1.8
Inventory (750 + 400 – 1.8) 1,148.2
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28 D $2,700
No. of
items
Unit price
Value
Date $ $
1.10.X9 Balance 120 8 960
3.10.X9 Purchases 180 9 1,620
Balance 300 2,580
4.10.X9 Sales (120) 8 (960)
Sales (30) 9 (270)
Balance 150 1,350
8.10.X9 Sales (80) 9 (720)
Balance 70 630
18.10.X9 Purchases 300 10 3,000
Balance 370 3,630
22.10.X9 Sales (70) 9 (630)
Sales (30) 10 (300)
Balance 270 2,700
29 A
SUSPENSE ACCOUNT
$ $
Bal b/f 346 Purchases (2) 520
Bal c/f 264 Sundry income (3) 90
610 610
30 A Selling price = $3,200 90% = $2,880. Early settlement discount = 2% $2,880 =
$57.60.
31 D Proceeds of a sale of non-current assets will only be shown in the statement of cash flows.
32 B The company does not carry any inventory.
33 A $283,650
$
284,000
Item 1 – No change as NRV exceeds cost
Item 2 (350) Reduce to NRV (1,000 – 650)
283,650
34 D 2 and 4 only are correct. Statements 1 and 3 are incorrect.
35 A If there has been a large credit sale near the end of the financial year, the amount owed will be
included within receivables at the year end and trade receivables may be unusually high. If so,
the average time for receivables to pay may be distorted, because year-end receivables are used
to calculate the turnover ratio.
A large volume of sales in the final quarter of every year may explain why the measurement of the
average collection period is long every year, but not why the collection period should be unusually
long compared with the previous year.
Comparatively low sales in the final quarter would be more likely to result in a shorter-thannormal
measurement of the average collection period.
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MOCK EXAM 2 // ANSWERS
289
SECTION B
1
NOBRIE
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 MAY 20X4
$'000 $'000
Cash flow from operating activities
Net profit before tax 41,738
Adjustments for
Depreciation 5,862
Profit on equipment disposal (1,540)
Investment income (146)
Interest paid 1,177
Operating profit before working capital changes 47,091
Increase in inventory (866)
Increase in receivables (5,684)
Decrease in payables (3,625)
Cash generated from operations 36,916
Interest received* 146
Interest paid* (1,177)
Tax paid (W1) (9,191)
Net cash flows from operating activities 26,694
Cash flows from investing activities
Purchase at property plant and equipment (W2) (28,048)
Proceeds from sale of equipment 3,053
Net cash used in investing activities (24,995)
Cash flows from financing activities
Proceeds from issue of share capital
(27,000 + 14,569) – (23,331 + 10,788) 7,450
Repayment of long term borrowings (24,068 – 17,824) (6,244)
Net cash flows from financing activities 1,206
Increase in cash and cash equivalents 2,905
Cash and cash equivalents at beginning of period (2,224 – 6,973) (4,749)
Cash and cash equivalents at end of period (3,689 – 5,533) (1,844)
* Note. Interest paid can be either an operating cash flow or a financing cash flows. Interest received
can be either an operating cash flow or an investing cash flow.
Workings
1 Tax paid
TAXATION
$'000 $'000
Tax paid (bal fig) 9,191 Balance b/fwd 7,323
Balance c/fwd 7,989 Statement of profit or loss 9,857
17,180 17,180
2 Purchases of property, plant and equipment
PROPERTY, PLANT AND EQUIPMENT
$'000 $'000
Balance b/fwd (carrying value) 88,466 Disposals (carrying value)
(W3)
1,513
Revaluation (15,395 – 7,123) 8,272 Depreciation 5,862
Purchases (bal fig) 28,048 Balance c/fwd (carrying value) 117,411
124,786 124,786
3 Disposals
$'000
Proceeds 3,053
Profit 1,540
Carrying value of disposals 1,513
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2
(a) Calculation of goodwill
$'000 $'000
Fair value of consideration transferred 660,000
Plus fair value of NCI at acquisition 165,000
Less net acquisition-date fair value of identifiable assets
acquired and liabilities assumed:
Share capital 600,000
Retained earnings at acquisition 95,000
Fair value adjustment at acquisition 70,000
(765,000)
Goodwill 60,000
(b) SPYDER GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X5
$'000 $'000
Assets
Non-current assets
Goodwill 60,000
Land and buildings (315 + 278 + 70) 663,000
Plant (285 + 220) 505,000
1,228,000
Current assets
Inventory (357 + 252 – 12) 597,000
Receivables (525 + 126 – 25) 626,000
Bank (158 + 30) 188,000
1,411,000
2,639,000
Equity and liabilities
Equity attributable to owners of the parent
$1 ordinary shares 1,500,000
Reserves (W2) 661,600
Non-controlling interest (W3) 188,400
2,350,000
Current liabilities
Payables (220 + 94 – 25) 289,000
Total equity and liabilities 2,639,000
Workings
1 Group structure
480m
600m
= 80%
2 Retained earnings
Spyder Phly
$m $m
Per question 580.0 212
Adjustment (unrealised profit) (12.0)
Pre-acquisition retained earnings (95)
117
Group share of post-acq’n ret’d earnings:
Phly (80% 117)
93.6
Group retained earnings 661.6
3 Non-controlling interest
$m
Fair value of NCI at acquisition 165.0
Plus NCI’s share of post-acquisition retained earnings (20% 117) 23.4
NCI at reporting date 188.4
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F3/FFA FINANCIAL ACCOUNTING
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