Questions and answers

101 Financial Accounting Practices: A Practical Working Questions & Answers

©2013 George E. Ekeha 1

Table of Contents

CHAPTER 1: BASIC ACCOUNTING PRINCIPLES .................................. 3

Question 1: Wellinton Sole Proprietorship Business .................................... 3

Question 6: Jennifer Agueliyah Boutique ..................................................... 4

Question 8: Tianshi Bright Business Ventures ............................................. 5

Question 13: Chucker and Zooloo Car Dealers ............................................ 7

CHAPTER 2 INCOMPLETE RECORDS AND CONTROL ACC ............... 9

Question 17: Pangola Star Tilapia Shops ..................................................... 9

Question 22: Triple Star Company Ltd Control Accounts ......................... 10

Question 25: Emmanuel Sasakawa Meat Shop ........................................... 12

Question 29: Sight and Visions General Eye Clinic ................................... 13

CHAPTER 3 PREPARATION OF MANUFACTURING ACC .................. 16

Question 32: Kangaroo Carrier Bags Plc .................................................... 16

Question 36: Raphael Trash Manufacturer of Wheelie Bins ....................... 17

Question 40: Akasanoma Vision Ltd Manufacturers .................................. 19

CHAPTER 4: PRESENTATION OF PARTNERSHIP ACC ........................ 21

Question 42: Jonny, Ferdinand and Kwartson Business Ventures .............. 21

Question 43: George and Cyril Akpanaway Consultants ............................ 21

Question 48: Wawa and Mahoganey Carpentry Ventures .......................... 22

CHAPTER 5 PREPARATION OF COMPANY’S ACCOUNTS ................ 25

Question 50: Alluwako Company Ltd, Alluminium Products .................... 25

Question 57: ZoomVultures Ltd, Cleaners & Cleaning Products ............... 26

Question 62: Ekegey Plantations Plc Farms & Equipments ........................ 29

CHAPTER 6 FUNDAMENTAL ACCOUNTING CONCEPTS ................. 31

Question 64: Fundamental Accounting Concepts ....................................... 31

Question 67: Atongo, The Science Student ................................................ 31

Question 71: Logba Young Lions plc, Footbal Club .................................. 32

CHAPTER 7 CASH FLOW STATEMENTS .............................................. 33

Question 76: Darryl Amfic Company Ltd, Cold Stores .............................. 33

Question 78: Kingdom Furniture Plc .......................................................... 34

CHAPTER 8: STATEMENTS ANALYSIS & INTERPRETATION .......... 36

Question 82: Divine Nooque Oil Company Ltd ......................................... 36

Question 86: Kantamanto Scrappers And Melters ...................................... 38

Question 89: Kafui Akpoblu Mobile Company .......................................... 38

CHAPTER 9: PRACTICAL BRAIN TEASERS .......................................... 42

Question 92: Bamboozer Ltd, Food Distribution ........................................ 42

Question 93: JAK Waawa and JJR Boom Veterinary Services................... 43

Question 101: Amfic Yingor’s Garages ..................................................... 46



SUGGEATED ANSWERS ............................................................................. 47

Answer 1: WELLINTON SOLE PROPRIETORSHIP .............................. 48

Answer 5: GEEPROPERTIES RENTALS & FINANCIALS..................... 54

Answer 6: JENNIFER AGUELIYAH BOUTIQUE ................................... 54

Answer 8: TIANSHI BRIGHT BUSINESS VENTURES .......................... 57

Answer 13: CHUCKER AND ZOOLOO CAR DEALERS ....................... 59

Answer 17: PANGOLA STAR TILAPIA SHOPS ..................................... 60

Answer 22: TRIPLE STAR COMPANY LTD .......................................... 62

Answer 28: MANDELA AMEWU ICE-CREAM ..................................... 63

Answer 32: KANGAROO PLC, CARRIER BAGS .................................. 66

Answer 35: ATONGO PIONEER NAILS MANUFACTURERS .............. 68

Answer 38: NORA NUSINYO FURNITURE COMPANY ....................... 70

Answer 40: AKASANOMA VISION LTD ............................................... 72

Answer 43: MESSRS GEORGE & CYRIL AKPANAWAY ..................... 74

Answer 48: WAWA AND MAHOGANEY FURNITURE ....................... 75

Answer 52: OLUSEGUN INTERNATIONAL PLC .................................. 78

Answer 59: AMAZING FREDDY’S FOOD ............................................. 79

Answer 64: FUNDAMENTAL ACCOUNTING CONCEPTS .................. 82

Answer 65: FREDDY’S CONNER ............................................................ 84

Answer 67: ATONGO, THE SCIENCE STUDENT .................................. 86

Answer 71: LOGBA YOUNG LIONS PLC ............................................... 87

Answer 78: KINGDOM FURNITURE, PLC ............................................. 90

Answer 81: JUNE JULY ENGINEERING BUSINESS ............................. 92

Answer 82: DIVINE NOOQUE VOLUNTARIES LTD ............................ 95



CHAPTER 1: BASIC BOOKKEEPING AND ACCOUNTING PRINCIPLES

Question 1: Wellinton Sole Proprietorship Business

On 1 January 20 ‘5, Mr. Wellinton started business Weliware Ventures with

GH¢10,000 which he paid into the business account at Stanbic Bank in Accra

and Stock of goods valued at GH¢9,850. On the same day, he purchased a

Motor Van from Toyota Company valued at GH¢6,000 and paid half of the

amount by cheque.

The following transactions took place in the month of January:

2/01 Negotiated a Loan from Stanbic for an amount of GH¢20,000 which

was granted at an interest of 12% per annum payable monthly.

Paid GH¢7,000 by cheque as rent advance to his landlord for the

premises of the business covering a period of 10 years.

3/01 Purchased goods from GeeMerchants Ltd valued at GH¢52,000 and

paid for half of the amount by cheque, after a cash discount of 4%

4/01 Purchased Office Equipment valued at GH¢2,500 and Furniture and

Fittings valued at GH¢3,000 paying all by cheque.

7/01 Sold goods valued at GH¢8,500 for cash and paid for some stationery

valued at GH¢900 by cash.

9/01 Sold goods to Mr. Tarzan valued at GH¢6,700 who paid three quarter of

the amount by cheque.

11/01 In order to increase sales Mr. Wellinton decided to run a promotion

from 12th

January to 20th

January. All sales with cash payment will be

given a 5% discount and all sale of GH¢10,000 and above will qualify

for a trade discount of 6%.

12/01 Mr. James Brown came to purchase goods valued at GH¢14,500 and

paid half of the amount due by cheque, after necessary discounts. Total

cash sales for the day also amounted to GH¢8,974

13/01 Sold goods valued at GH¢5,000 to Akua Cynthia

14/01 Total cash sales for the day amounted to GH¢12,896 and cash banked

amounted to GH¢14,500

15/01 Sold goods to Malik Baako Ventures valued at GH¢16,785 who paid

half of the amount due by cash. Sent GH¢16,500 from the safe to bank.

18/01 Purchased goods from K. Gyasi Ltd valued at GH¢37,880 and paid half

of the amount due by cheque after a 5% cash discount. Total cash sales

for the day amounted to GH¢9,678

19/01 Sold goods to Honey Love valued at GH¢18,964, who paid three

quarters of the amount due by cheque. Paid GeeMerchants the full

balance on their account by cheque.



20/01 Total cash sales for the day amounted to GH¢18,259 and cash purchases

were also GH¢8,689. Received a cheque for GH¢4,680 from Akua

Cynthia as full settlement.

22/01 Sold goods valued at GH¢11,380 to Mr. Ugly Head who paid half of the

amount due by cash. Total cash lodged at the bank was GH¢33,860

25/01 Paid K. Gyasi GH¢8,940 by cheque on account and received final

payment by cheque from Malik Baako Ventures and cash sales

amounted to GH¢11,380.

30/01 Paid salaries of GH¢3,820 by cheque and utility bills of GH¢860 by

cash. Received a cheque for GH¢3,240 from Mr. Ugly Head as payment

on account.

At 31 January 20 ‘5 closing stock amounted to GH¢5,375.

Requirements

(a) Write up the ledger accounts using the three column cash book.

(b) Extract a trial balance at 31 January 20 ‘5

(c) Prepare a trading and profit and loss account for the months ended 31

January 20 ‘5 and a balance sheet at that date.

Question 6: Jennifer Agueliyah Boutique

Jennifer Agueliyah is a dealer in fancy designer clothes. At 1 January 20 ‘7

her ledger included the following balances.

€

Debtors 38,168

Provision for doubtful debts 6,270

Creditors 36,505

Debtors at 1 January 20 ‘7 were:

€

S Mahama 12,540

J Baafi 12,811

The Miklin Holidays 12,817

Creditors at 1 January 20 ‘7 were:

€

M Normenyo 12,058

James Nkomode 12,217

Obraku Sarpong 12,230



During January 20 ‘7 Agueliya’s books of prime entry showed the following.

€ €

Purchases day book Sales day book

Normenyo 6,270 Mahama 330

James Nkomode 4,521 Baafi 11,616

Obraku Sarpong 7,392 Miklin Holidays 10,989

18,183 22,935

€ €

Cash payments book Cash receipts book

Normenyo 5,940 Baafi 12,540

James Nkomode 330 Miklin Holidays 12,817


11,702 25,357

The flowing information is relevant:

(1) The opening provision for doubtful debts consisted of a 50% provision

against Mahama’s debt. During January Mahama was run over by an

invalid car on the highway and was found to have died penniless.

(2) Baafi argued about €271 of her outstanding balance, saying that the

goods concerned were of the wrong design. Agueliya decided to

provide for this amount as a specific provision.

Requirements

Write up for the month of January 20 ‘7

(a) Individual debtors’ and creditors accounts

(b) Sales and purchases accounts

(c) Debtors’ and creditors’ ledger control accounts

(d) Provision for doubtful debts and bad debt expense accounts

(e) The individual debtors and creditors listings

Question 8: Tianshi Bright Business Ventures

Tianshi Bright is a sole trader who does not maintain a set of ledgers to record

his accounting transactions. Instead, he relies on details of cash receipts and

payments, bank statements and files of invoices. He started business on 1 July

20 ‘7 with private capital of ¥27,500 which comprised a second-hand van

valued at ¥8,250 and ¥19,250 cash which he deposited in a business bank

account on that date. He has not prepared any accounts since he commenced

trading and you have agreed to prepare his first set of accounts for him in

respect of the eighteen months ended 31 December 20 ‘8. You have

discovered the following.



(1) A summary of his cash transactions from his cash book for the period was

¥ ¥

Receipts:

Capital introduced 19,250

Cash sale receipts 116,875

Sale of motor van 4,675

140,800

Payments:

Cash paid to bank 117,425

Cash purchases 11,880

Postage and stationery 2,607

Motor expenses 5,055 (136’967)

Cash in hand at 31 December 20 ‘8 3,833

(2) A summary of his bank statement shows

¥ ¥

Receipts

Cash paid into bank 117,425

Bank loan 24,750

Credit sale receipts 10,753 152,928

Payments:

Purchase of goods 40,233

Office equipment 7,040

Motor van 22,000

Drawings 29,700

Rent and rates 10,175

Light and heat 5,077 (114,224)

Balance are 31 December 20 ‘8 38,704

(3) The office equipment was purchased on 1 October 20 ‘7.

(4) The new motor van was purchased on 1 April 20 ‘8 to replace the

original second-hand van which was sold on the same date.

Depreciation charges for the year on the second-hand van can be

ignored.

(5) Tianshi expects the office equipment to last five years but to have no

value at the end of its life. The motor van bought on 1 April 20 ‘8 is

expected to be used for three years and to be sold for ¥3,850 at the end

of that time.

(6) The cost of goods unsold on 31 December 20 ‘8 was ¥7,838. Tianshi

thought he would sell these for ¥14,575, with no item being sold for less

than its original cost.



(7) On 31 December 20 ‘8 Tianshi owed ¥4,119 for goods bought on credit

and was owed ¥2,370 for goods sold on credit. Of these amounts ¥1,040

was due from/to Harry Governor who is both a customer and supplier of

Tianshi. A contra settlement arrangement has been agreed by both

Tianshi and Harry Governor.

(8) Rent and rates paid includes an invoice for ¥6,600 for the rates due for

the billing year to 31 March 20 ‘9, accrued on equal monthly basis.

(9) No invoice was received for light and heat in respect of November and

December 20 ‘8 until 25 February 20 ‘9. This showed that the amount

due for the three months ended 31 January 20 ‘9 was ¥627.

(10) The bank loan was received on 1 January 20 ‘8. Interest is charged at

10% per annum on the amount outstanding.

Requirement

Prepare Tianshi Bright’s trading and profit and loss account for the period

ended 31 December 20 ‘8 and his balance sheet at that date.

Question 13: Chucker and Zooloo Car Dealers

Chucker and Zooloo are well established car dealers on Zulu street. Their draft

account for the year ended 31 March 20 ‘8 show a net profit of R90,000 which

they feel was lower than expected and ask you their accountant to investigate.

You discover the following.

(1) Discount received in August 20 ‘8 of R2,100 have been credited, in error,

to purchases.

(2) A debt of R3,000 due from Francis Nguemah & Co was written off as

irrecoverable in December 20 ‘7. Since preparing the draft account,

Francis Nguemah & Co has settled the debt in full.

(3) The company’s main warehouse was burgled in June 20 ‘7, when goods

costing R200,000 were stolen. This amount has been shown in the draft

accounts as an overhead item “Loss due to burglary”. Although the

insurance company denied liability originally, in recent days, the decision

has been changed as they have agreed to pay R140,000 as settlement.

(4) On 1 January20 ‘8 a Ford Mondeo car, which had cost R18,000, was

taken from the showroom for use by one of the sales representatives

whilst on business. The price tag on this vehicle in the showroom was

R24,000. The transfer has not been effected in the books although the

car was not included in the trading stock valuation at 31 March 20 ‘8.

The business provides for depreciation on motor vehicles at the rate of

25% of the cost of all vehicles held at the end of each financial year.



(5) A Toyota Camry bought from Tamungah Transport on 30 March 20 ‘8

at a cost of R12,000 was not recorded in the books until April 20 ‘8.

Although unsold on 31 March 20 ‘8, the car in question was not

included in the stock valuation at the date.

(6) The business is hoping to market a new car accessory in July 20 ‘8. The

new venture is to be launched with an advertising campaign

commencing in April 20 ‘8. The cost of the campaign is R50,000 and

this has been debited in the profit and loss account for the year ended 31

March 20 ‘8 and is included in current liabilities as a provision,

notwithstanding the confident expectation that the new product will be a

success.

(7) On 31 March 20 ‘8 the business paid an insurance premium of R6,000,

the renewal being the year beginning 1 April 20 ‘8. This premium was

included in the insurance charge of R11,000 debited in the draft profit

and loss account.

Requirement

Prepare a statement of adjustment to profit for the year ended 31 March 20 ‘9.



CHAPTER 2 INCOMPLETE RECORDS AND CONTROL ACCOUNTS

Question 17: Pangola Star Tilapia Shops

Pangola Star runs a Tilapia retail shop on Maputo Street, but many of his

accounting records were destroyed when the bookkeeper had a boat accident

on her way to the board meeting. During examination of Pangola Star’s books

you find that his recorded assets and liabilities on 31 December 20 ‘6 were:

R

Shop fittings 5,000

Van 4,000

Stock 36,270

Trade debtors 19,600

Trade creditors 15,080

An analysis of his bank pass book gives the following information.

R R

Balance at 1 January 20 ‘7 4,790 Payments to creditors 165,940

Receipts from debtors 10,060 Purchase of new van on

Cash banked 155,370 30 September 20 ‘7 10,000

Sale of old van on 30/09/’7 3,000 Rent, nine months to

30/09/20 ‘7 2,250

Rates, eighteen months to

31 March 20 ‘8 3,600

Sundry expenses 4,460

Van expenses 600

Advertising 2,190

Balance at 31/12/20 ‘7 16,740 Drawings 920

189,960 189,960

An analysis of his cash transactions printout gives the following information.

R R

Balance at 1 January 20 ‘7 210 Wages and salaries 15,240

Cash sales 164,190 paid into bank 155,370

Receipt from debtors 23,170 Van expenses 1,680

Proceeds from private life Advertising 840

Insurance policy 1,420 Drawings 13,510

Sundry expenses 1,190

Payments to creditors 1,040

Balance at 31/12/20 ‘7 120

188,990 188,990



You are informed of the following in addition to the above.

(1) On 31 December 20 ‘7 stock at cost was R46,510, debtors were

R20,200 and creditors were R15,430. There was also an unpaid account

of R410 for sundry expenses.

(2) There was an unpaid account of R370 for sundry expenses outstanding

on 31 December 20 ‘6.

(3) Depreciation is to be provided on shop fittings at 10% reducing balance,

and on motor vans at 20% reducing balance, on closing balances.

(4) During 20 ‘7 Pangola Star has taken some Tilapia from the shop costing

R1,560 for his own use. He has not paid for these.

(5) A provision for doubtful debts should be raised (at the beginning and

end of the year) of 5% of the debtors. During the year bad debts

amounting to R420 have been written off, and are not included in the

figure of debtors on 31 December 20 ‘7.

Requirements

(a) Prepare a statement of affairs at 31 December 20 ‘7.

(b) Prepare a trading and profit and loss account for the year ended 31

December 20 ‘7 and a balance sheet at that date.

Question 22: Triple Star Company Ltd Control Accounts

Ronaldo and Movete plc is a company specialized in the manufacturing and

sale of digital televisions. The accounts for the year ended 30 September 20 ‘4

are in the course of preparation. The debtors’ total account controlling sales in

the Northern sector of the country has been prepared by an inexperience

assistant as below:

Rs Rs

Debtors at 1/10/ 20 ‘3 (agreed Cash received 632,429

with total list of balances Transfer to creditors’ ledger 2,010

extracted from the ledger) 94,202 Sales returns (VAT incl. fig.) 14,260

Sales invoiced for the year 556,780 Bad debts 1,955

Discounts allowed 5,840 Debtors at 30/09/20 ‘4 6,168

656,822 656,822

Your investigation, however, revealed the following:

Note Points (a) to (e) relate to the control accounts only.



(a) Sales

The following was a summary of the sales sheets for the year.

Rs

Sales excluing VAT 556,780

Value added tax 83,517

640,297

(b) Sales returns

For the last month of the year, returns were Rs1,950 but there is a mistake in

the addition of the total column of one sheet resulting in a total which is

Rs420 lower than the correct figure. Moreover, including in the total of

Rs14,260 representing returns for the year, the figure of Rs1,950 was taken as

Rs1,590.

(c) Transfer

The transfer of Rs2,010 to the creditors’ ledger is in respect of cash received

from a supplier for an overpayment to him.

(d) Bad debts

The figure of Rs1,955 as shown in the bad debts account is made up as

follows.

Rs

Bad debts written out of the debtors’ ledger in 20 ‘3/20’4 2,500

Less debts recovered in respect of written off in 20 ‘1/20’2 (2,045)

455

General bad debt provision against debts remaining on the ledger 1,500

1,955

(e) Cash received

The total of Rs632,429 includes the bad debt recovered, and also a cheque for

Rs1,685 which was first received from a customer in September 20 ‘3 and

entered in the records in that month. In October 20 ‘3 it was dishonoured and

debited on the bank statement. It was presented again and duly honoured. It

therefore appeared on both sides of the cashbook in October 20 ‘3.

(f) List of balances

The total of the balances as extracted and listed from the Northern sector

ledger is Rs83,310. This includes a debit balance of Rs540 standing on an

account in the name of a director. It is agreed that this will not be paid but

should be transferred to the director’s emoluments accounts.

A ledger sheet relating to the Western sector area has been misfiled in the

Northern sector at the time when the balances were extracted. It shows a credit

balance of Rs1,120.



Requirement

Prepare an amended debtors’ ledger control account relating to the Northern

region area for the year ended 30 September 20 ‘4 showing the reconciliation

of the debtors’ figure with the totals list extracted from the ledger.

Question 25: Emmanuel Sasakawa Meat Shop

Emmanuel Sasakawa is a meat retailer who has been so busy since he

commenced business on 1 April 20 ‘5 and couldn’t keep adequate accounting

records. His opening capital consisted of €15,000 which he used to open a

business bank account. His statement for the year ended 31 March 20 ‘6 have

been summarised as follows:

Receipts: €

Loan from Pozo Hughes – his friend 10,000

Takings 42,000

Payments:

Purchases of goods for resale 26,400

Electricity for period to 31 December 20 ‘6 760

Rent of for fifteen months to 30 June 20 ‘6 3,500

Rates of premises for year ended 31 March 20 ‘6 1,200

Wages of assistants 14,700

Purchase of van, 1 October 20 ‘5 7,600

Purchase of large waterbed for private use 8,500

Van license and insurance, covering a year 250

According to his bank account the balance in hand at 31 March 20 ‘6 was

€4,090 in Emmanuel’s favour. Whilst the intention was to bank all takings

intact, you have discovered that, in addition to cash drawings, the following

payments were made out of taking before banking.

Van running expenses €890

Postages, stationary and other sundry expenses €355

On 31 March 20 ‘6 takings of €640 awaiting banking; this was done on

1 April 20 ‘6. It has now been discovered that amounts paid into the

bank of €340 on 29 March 20 ‘6 were not credited to Emmanuel’s

accounts until 2 April 20 ‘6 and a cheque of €120, drawn on 28 March

20 ‘6 for purchases was not paid until 10 April 20 ‘6. The normal rate of

gross profit on the goods sold by Emmanuel is 50% on sales. However,

during the year a purchase of kilos of meat from a new supplier costing

€600 proved to be unpalatable with customers and therefore the entire

stock had to be sold at cost price.



Interest at the rate of 5% per annum is payable on each anniversary of

the loan from Pozo Hughes on 1 January 20 ‘6.

Depreciation is to be provided on the van on the straight line basis; it is

estimated that the van will be disposed of after five years’ use for €100.

The stock of goods for resale at 31 March 20 ‘6 has been valued at cost

at €1,900.

Creditors for purchases at 31 March 20 ‘6 amounted to €880 and

electricity charges accrued at that date were €180.

Trade debtors at 31 March 20 ‘6 totalled €2,300.

Requirement

Prepare a trading profit and loss account for the year ended 31 March 20 ‘6, a

balance sheet at that date.

Question 29: Sight and Visions General Eye Clinic

Euzebius Coffie is an eye specialist and surgeon practicing at the Sight and

Visions General Eye Clinic, which is located on Brigham Street, Manchester.

For the purpose of preparing his accounts for the year ended 31 January 20 ‘4

the following information is available to you.

(1) Balances in his computerised books of account at 1 February 20 ‘3

£ £

Motor Vehicle

Cost 34,900

Depreciation 12,500

Optical equipment

Cost 71,160

Depreciation 28,404

Office furniture and equipment:

Cost 17,400

Depreciation 10,400

Stock of contact lenses, at cost 8,230

Debtors for fees earned 16,728

Fees for operations, received in advance 6,760

Creditor for property costs 3,215

Accountancy 875

Creditors for medical books 217

Amount due for PAYE and Social Security 718

Cash in hand 116

Cash at bank 11,153

Capital account – Euzebius 96,598

159,687 159,687



(2) Summary of bank statements for the year ended 31 January 20 ‘4

£ £

Balance at 1 February 20 ‘3 11,153 Receptionist/secretary

Total cheques received from salary (net) for year 15,059

patients 124,850 Payments for PAYE

Cash banked 6,900 and Social Security 9,633

Insurance claim received for Contact lens purchased 14,928

damaged equipment (to be offset Fees to Medical Ass. 6,410

against equipment repairs) 1,104 Medical books 1,491

Property costs 18,335

Accountancy charges 875

Repairs to equipment 3,084

New optical equipment

bought on 1/08/20 ‘3 11,100

Medical supplies 1,202

Car expenses 5,332

Drawings 39,100

Balance at 31/01/20 ‘4 17,458

144,007 144,007

(3) Cash – receipts/payments for the year ended 31 January 20 ‘4

Receipts: £

Fees paid by patients in cash 10,680

Payments:

Office stationery, postage and sundries 3,372

Cheque cashed for patient 110

Cash banked 6,900

(4) Fees

The patients’ fees printout for the Brigham Street practice shows total

fees billed for the year of £143,120 of which £2,546 relates to an

operation on an overseas visitor who returned home without paying.

This fee is not recoverable. In addition to his practice, Euzebius has two

part-time hospital consultancy appointments. These fees, which totalled

£54,500 for the year under review, are paid gross as they are brought

into account as part of the profits of his practice. Euzebius in fact paid

this total of £54,500 into his private bank account.

(5) Property costs

The premises are used by three other medical specialists. Property costs

are shared between occupants in proportion to space occupied. Monthly

payments on account are made by each specialist into a separate bank

account, out of which the costs are paid. A statement of account is



prepared at 31 January annually, and balancing payments made in

February. For the year under review this statement shows the following.

£

Rent, rates and insurance 72,700

Repairs 5,556

Heat and light 8,706

Security services 1,020

Front Desk Assistant 474

88,456

Euzebius’ agreed share is 20% and his payments on account have been

at the rate of £1,260 per month.

(6) Receptionist/secretary

The lady who works at the practice with this title has a gross salary of

£22,300 per annum. Employer’s Social Security contributions can be

taken as being 12.5% of gross salary.

(7) Mrs Coffie

Included in Euzebius’ drawings of £39,100 is a total of £4,100 paid by

him to his wife for her work in maintaining patients’ records.

(8) Car expenses

The total expenses incurred by Euzebius are paid through the practice. It

is agreed, however, that only 90% of such expenses, and depreciation,

shall be charged against the practice profits.

(9) Depreciation

Depreciation on all fixed assets is charged at 20% on the cost of assets

in use at the year-end, subject to (8) above.

(10) Stocks, debtors and creditors at 31 January 20 ‘4

£

Stock of contact lenses 8,625

Debtors for fees to be calculated

Due for property costs to be calculated

Due to the PAYE and Social Security to be calculated

Fees received in advance 5,402

Outstanding accountancy charges 950

Fees due to medical assistants 1,930

Requirements

(a) Prepare the profit and loss account for the year ended 31 January 20 ‘4

(b) Produce the balance sheet at 31 January 20 ‘4



CHAPTER 3 PREPARATION OF MANUFACTURING ACCOUNTS

Question 32: Kangaroo Carrier Bags Plc

(a) Kangaroo Plc makes Carrier Sucks for Nursing Mothers, which it sells

to the wholesale traders. The following trial balance was extracted from

the books of the company at 31 December 20 ‘1.

Stocks at 1 January 20 ‘1: $ $

Raw materials, at cost 3,920

Work in progress, at factory cost 20,160

Finished goods (3,500 units) at factory cost 39,200

Raw materials purchased 44,240

Sales (12,000 units) 201,600

Manufacturing wages 33,600

Factory rent and rates 15,680

Factory light, heat and power 7,336

Plant, at cost 67,200

Plant depreciation at 1 January 20 ‘1 31,360

Work manager’s salary 2,744

Plant repairs 4,480

Administration overheads 20,160

Factory lease at cost (20 year’s period) 44,800

Amortization at 1 January 20 ‘1 13,440

Share capital 84,000

Debtors and bank balance 52,080

Creditors 27,440

Carriage inwards 2,240

357,840 357,840

Plant depreciation is to be provided at 10% on cost of plant owned at

the year-end.

Raw materials costing $5,600 were in stock on 31 December 20 ‘1.

Finished goods are transferred to the warehouse as soon as they are

completed. During the year under review, 10,000 units were completed

and transferred to the warehouse. Work in progress at close of 20 ‘1 (at

factory cost) amounted to $25,760. There was no wastage or pilferage

during 20 ‘1.

Requirement

Prepare the manufacturing, trading and profit and loss account for the

year ended 31 December 20 ‘1.

(b) Facts as in part (a) except that it had always been the company’s

practice to transfer completed units from the factory to the warehouse at



cost plus 25%. Stocks of finished goods are valued at the transfer price

for the trading account but at factory cost for balance sheet purposes.

Requirement

Prepare the manufacturing, trading and profit and loss account for the

year ended 31 December 20 ‘1.

Question 36: Raphael Trash Manufacturer of Wheelie Bins

On 1 February 20 ‘4 Raphael Trash has received patent for his design of an

electrical recycling device for Wheelie Bin with a trade name “Wheelietrash”.

He started business on the same date, with arrangements to supply

Wheelietrash to a wholesaler in West Africa, Ghana to be distributed all over

Africa to reduce waste in the continent. For the sake of accounting

harmonisation, all takings are paid in the US dollar. The following

information relates to the year ended 31 January 20 ‘5.

(1) Premises

On 1 February 20 ‘4 Trash acquired the lease of a garage workshop at

an annual rent of $10,240 excluding property rates. The workshop is

solely for manufacturing purposes. All administration is done on a mini

laptop at Trash’s home by his wife acting as secretary. Trash feels that a

figure of $960 per annum would be a reasonable charge for the business

use of his house.

(2) Employees

On 1 February 20 ‘4 Trash engaged a machinist/assembler at a gross

salary of $17,280 per annum, a salesman at a gross salary of $12,160

per annum with the right to a bonus of $0.32 per unit sold, payable at

the end of each year. Employer’s Social Security contributions can be

taken as 12.5% of gross salaries.

Trash also negotiated an arrangement with Akwesi Mensah, a freelance

electrical engineer, whereby Mensah would make daily visits to the

workshop to plan and supervise production, effective 1 February 20 ‘4

with an agreed annual fee of $6,400 plus a bonus of $0.13 per unit

produced if the annual average production cost per unit does not exceed

$24. The charges for employer’s Social Security contributions, and

Mensah’s bonus, if any, are to appear in the profit and loss account and

are not to affect the manufacturing cost. Note that bonuses don’t attract

any employer’s Social Security contribution.

(3) Bank account

On 31 January 20 ‘4 Trash opened a business bank account by

transferring $8,320 from his private account, and arranged a business



overdraft limit of $6,400 for two years. Before opening the account,

Trash had made the following payments out of his private account.

(i) Patent Fees $

(to be written off over two years) 1,472

(ii) Workshop rent for the quarter starting 01/02/20 ‘4 2,560

(iii) Manufacturing machinery 4,480

(4) Summary of business bank account $

Cash transferred 8,320

Cash received from customers 125,440

Bank overdraft at 31 January 20 ‘4 3,351

137,111

Manufacturing tools purchased 2,304

Workshop: Rent 5,120

Rates: Period ended 31 March 20 ‘4 768

Year ended 31 March 20 ‘5 3,584

Power, light and heat 3,520

Salaries – net payments to machinist and salesman 19,936

Payment on account of PAYE/Social Security 8,960

Manufacturing material and electrical components 64,791

Advertising costs 4,837

Bank interest and charges 1,005

Delivery van:

Deposit 1,024

Hire purchase instalments 3,872

Delivery Van expenses 3,438

Payments on account to Mensah 5,760

Cheques drawn for cash 3,072

Personal Drawings 5,120

137,111

(5) Cash details

$ $

Collected on account of Office stationery and sundries 1,869

Small sales orders 3,002 Paid to Mrs Trash on account of

Drawn from bank 3,072 agreed secretarial fee $2,560

(no liability for PAYE or Social 1,920

Typewriter and filing cabinets

bought 28 February 20 ‘4 922

Weekly drawings by Trash 1,331

Balance at 31/01/20 ‘5 32

6,074 6,074



(6) Production and sales

4,400 sets of Wheelietrash were sold during the year at a fixed selling

price of $32 per set. No cash discounts were allowed and there were no

bad debts. At 31 January 20 ‘5 there were 100 sets of finished units in

stock to be valued at total workshop cost. There were no stocks of partly

finished units and during the year no sets were lost or scrapped.

(7) Hire purchases agreement

This provided for the purchase of the van at a cost of $8,704 with a

deposit of $1,024 and hire purchase charges of $768. The balance due is

payable by twenty-four equal monthly instalments from 31 March 20‘4.

(8) Outstanding items at 31 January 20 ‘5

Apart from those from information already given, these were as follows.

$

Creditors for production materials 7,209

Stocks of production materials at cost 8,640

Creditors for:

Accountancy charges 333

Workshop power, light and heat 422

(9) Depreciation

The machinery and salesman’s van are to be depreciated at 20% per

annum on the cost of the assets in use at year-end. The typewritten and

cabinets are to be depreciated at the rate of 20% per annum on the

reducing instalment basis. The manufacturing tools are to be dealt with

by revaluation. The tools on hand at the year-end were valued at $1,617.

Requirements

(b) Prepare a manufacturing account for the year ended 31 January 20 ‘5

showing cost per unit for each main element of cost.

(c) Produce a trading and profit and loss account for the year ended 31

January 20 ‘5 and also the balance sheet as at that date.

Question 40: Akasanoma Vision Ltd Manufacturers

Akasanoma Vision Ltd is an old established company operating in the highly

competitive business of manufacturing and marketing digital stereo system. A

new board of directors is considering the draft accounts, prepared under the

historical cost convention, for the year ended 30 September 20 ‘4.

The main executive directors involved in the policy discussion are:

Giorgio Blewusi (Managing Director)

Walter Kafui (Sales Director)

Suzzy Selase (Production Director)



You, as the company’s Financial Consultant, were in attendance for advice.

A standard model radio has the following disclosed costs.

£

Direct labour and material 38

Bought-in components 5

Factory overhead costs 8

Patent Royalty on sale 2

For 1,000 radio sets, the other overhead costs are £14,000 made up as follows.

£

Salary and space costs of production planning executives 4,000

General office administration 2,500

Selling and distribution costs (incl. a fixed £4 per set commission) 7,500

The selling price of the model has recently been reduced to £60 because of

intensive competition. The three directors have expressed the following views

on the most appropriate method of valuing the company’s closing stock:

(1) Giorgio

“A most prudent approach is necessary, particularly as the company has a cash

flow problem which means that the amount locked up in stock inventories

should be kept as low as possible. I propose a valuation of £43 per set.”

(2) Walter

“All the functions of the company are directed towards the production and sale

of good quality finished products and therefore I think each set should be

valued at the total cost involved, including all other overhead costs.”

(3) Suzzy

“I proposed £47 per set, because that’s what the production cost we would

have if we had been more efficient and kept in line with budgets.”

Requirement

Give your opinion in a note form on the views expressed by each director with

your own opinion of the appropriate valuation stating the principles involved.



CHAPTER 4: PRESENTATION OF PARTNERSHIP ACCOUNTS

Question 42: Jonny, Ferdinand and Kwartson Business Ventures

Jonny, Ferdinand and Kwartson are in partnership sharing profits and losses in

the ratio 2:2:1 respectively. Interest is charged on partners’ drawings at the

rate of 5% per annum and also credited on partners’ capital account balances

with an interest of 5% per annum. Ferdinand is the firm’s sales manager and

for his specialized services he is to receive a salary of $12,000 per annum.

During the year ended 30 April 20 ‘1 the net profit of the firm was $93,000

and the partners’ drawings were

Jonny $6,600

Ferdinand $4,400

Kwartson $3,500

In each case the above drawings were withdrawn in two equal instalments on

31 October 20 ‘0 and 30 April 20 ‘1.

On 31 October 20 ‘0 the firm agreed that Jonny should withdraw $2,500 from

his capital account for some personal family needs and that Kwartson should

subscribe a similar amount to his capital account.

The credit balances on the partners’ accounts at 1 May 20 ‘0 were as follows.

Capital accounts Current accounts

Jonny $44,000 $3,520

Ferdinand $38,500 $3,080

Kwartson $36,000 $2,640

Requirements

(a) A profit and loss appropriation statement for the year to 30 April 20 ‘1.

(b) The partners’ capital and current accounts for the year to 30 April 20 ‘1.

Question 43: George and Cyril Akpanaway Consultants

The following printout of balances was extracted from the computer records

of George and Cyril Akpanaway at 31 March 20 ‘4.

Capital at 1 April 20 ‘3: GH¢ GH¢

George Akpanaway 11,875

Cyril Akpanaway 7,125

Cash drawings:



Freehold buildings at 1 April 20 ‘3 12,113

Motor vehicles at 1 April 20 ‘3 2,990

Stock at 1 April 20 ‘3 8,550



Purchases 61,038

Sales 91,699

Debtors 9,405

Creditors 8,716

Wages and salaries 9,833

Motor vehicle running costs 3,515

General trade expenses 4,736

Rates and insurance 2,290

Cash at bank and in hand 1,858

Provision for bad and doubtful debts 238

119,653 119,653

Additional information

(1) Stock at 31 March 20 ‘4 was GH¢9,735

(2) Provision is to be made for depreciation at the following rates.

Motor vehicles 25% per annum

Freehold buildings 2% per annum

(3) The provision for bad and doubtful debts is to be reduced to GH¢178.

(4) George and Cyril Akpanaway share profits and losses in the ratio 3:2

respectively.

Requirement

Prepare the trading and profit and loss account for the year to 31 March 20 ‘4

and a balance sheet at that date.

Question 48: Wawa and Mahoganey Carpentry Ventures

Wawa and Mahoganey have traded in partnership as furniture manufactures

since 1 October 20 ‘6. Prior to that date Wawa was in business as a sole trader.

The draft accounts for the year ended 30 September 20 ‘7 have been prepared

by a new and inexperienced Account Clerk.

The following balances were shown after the draft manufacturing, trading and

profit and loss account:

Dr Cr

Capital accounts: £ £

Wawa 76,000

Mahoganey 14,000

Current accounts:

Wawa:

Share of net profit 12,360

Drawings 12,000

Mahoganey – share of net profit 6,180



Debtors and creditors 30,390 37,790

Stocks at cost 28,640

Work in progress 15,730

Cash at bank per bank statements 4,330

Cost and depreciation:

Plant and equipment 95,500 49,100

Motor vehicles 30,000 15,000

210,430

Suspense account 6,160

216,590 216,590

You have been asked to locate the difference, review the accounts, and make

such adjustments as may be necessary.

Your enquiries disclosed the following matters:

(1) Mahoganey joined Wawa in partnership on 1 October 20 ‘6, bringing in

cash capital of £14,000. The clerk was told only that profits were to be shared

in the ratio of 2:1 and no adjustments or entries have been made for the items

below:

(i) On admission Mahoganey brought into the firm his Van at an agreed

value of £6,000.

(ii) Mahoganey is entitled to a partner’s salary of £10,000 per annum. He

drew this amount during the year, and it has been included in salaries

charged to profit and loss account.

(iii) Interest on capital is to be allowed at the rate of 8% per annum,

calculated on the balances at 1 October 20 ‘6 after making any

necessary adjustments arising from the above.

(2) There is a batch of furniture costing £3,600, which was thought to be

unsaleable at 30 September 20 ‘6 and was included in stock at scrap value

equal to 10% of cost. Surprisingly, it was all sold on 30 June 20 ‘7 for £2,460.

It is agreed that the surplus arising should be regarded before Mahoganey’s

admission and that a transfer to reflect this should be made through the

partners’ capital accounts without any adjustment being made in the profit

and loss account or appropriation account.

(3) The clerk has made the following note on the bank statements at 30

September 20 ‘7.

£

Cash at bank per bank statements 4,330

Add Cheques received but not credited by bank 370

4,700

Less Cheques drawn but not presented to the bank (5,660)

Overdrawn per cash book (960)



The balance overdrawn per the cash book is in fact £880, but bank charges

totalling £80 have not been entered in cash book.”

(4) A set of chairs has been included in sales and debtors at an invoice

value of £1,800, representing a mark-up on cost of 50%. In fact, the

goods were sent on a “sale or return” basis and by 30 September 20 ‘7

had not been accepted by the customer.

(5) In the draft manufacturing account, the closing work in progress of

£15,730 has been added to cost and the opening work in progress of

£12,940 deducted from cost.

(6) Furniture supplied without charge to partners has been evaluated at

Wawa £2,460 and Mahoganey £1,820 and included in sales, no other

entries having been made. Assume goods are sold to the partners at cost.

(7) During the year plant costing £15,000 on 1 December 20 ‘3 was sold

for £4,600. This figure of £4,600 has been deducted from the cost of

plant and equipment and debited as a receipt in the cash book but no

adjusting entries have been made. Depreciation has always been

calculated for plant and equipment, and for motor vehicles at 20% and

25% respectively based on the cost of fixed assets in use at the year-

end. For the purpose of the draft accounts, the depreciation has been

based on the cost figures as shown in the list of balances.

(8) At 1 October 20 ‘6 a bad debt provision of £1,350 was brought forward

in the books. At 30 September 20 ‘7 it was decided to increase the

provision to £5,200 and this figure of £5,200 has been debited to profit

and loss account and deducted from debtors in the list of closing

balances.

(9) Sales returns of £850 have been credited to sales, although correctly

entered in the relevant sales ledger accounts.

(10) Legal and accounting charges totalling £1,240 have not been provided

and paid for.

Requirements

Prepare the following.

(a) A statement showing the amended profit and appropriation of profit for

the year ended 30 September 20 ‘7.

(b) A statement showing the elimination of the suspense account.

(c) A final balance sheet at30 September 20 ‘7



CHAPTER 5 PREPARATION OF COMPANY’S ACCOUNTS

Question 50: Alluwako Company Ltd, Alluminium Products

The draft balance sheet of a small company, Alluwako Ltd, has been prepared

by a junior accounts officer in the form set out below.

Balance sheet at 31 October 20 ‘3

€ € €

Fixed assets:

Plant, fixtures/fittings and equipment, at cost 159,932

Accumulated depreciation (53,235)

106,697

Current assets:

Stocks 52,297

Debtors 32,242

Prepayments 2,548

Bank 21,819

108,906

Less Creditors falling due within one year:

Creditors 26,653

Taxation 23,309

Proposed dividend 8,000

(57,962)

50944

157,641

Share capital:

Authorized 100,000 shares of €1 each

Issued 80,000 shares of €1 each fully paid 80,000

Share premium 17,500

Unappropriated profits 41,051

10% debentures 24,375

162,926

Investigation has produced the following information.

(1) The company’s depreciation policy has always been to provide

depreciation at the rate of 20% per annum on the cost of fixed assets on

the basis of usage.

Equipment costing €24,375 on 30 April 20 ‘1 was sold for €11,781 on

30 June 20 ‘3. The receipt of €11,781 has been duly debited in the cash

book, but in error, has been credited to the trading sales account. No

other entries have been made.



(2) €6,400 10% debentures were redeemed on 30 October 20 ‘3 at a

premium of 5%. The amount paid has been credited in the cash book

but no other entries made. The question of debenture interest has been

dealt with correctly.

(3) On 31 August 20 ‘3 a bonus issue of shares (not ranking for dividend in

the year of issue) was made on the basis of one new share for every ten

held. No entries recording this issue have been made.

(4) A debit balance of €2,921 on a supplier’s ledger account in the

purchases ledger has been carried down as €1,291 and then

inadvertently added to the total of suppliers’ credit balances.

(5) A provision of €8,361 has been made in respect of doubtful debts and

this amount has been debited to profit and loss account and deducted

from debtors in the balance sheet at 31 October 20 ‘3 . The account

officer has, however, overlooked the fact that there was a credit balance

of €2,397 on doubtful debts account at 1 November 20 ‘2.

(6) Accrued rent of €1,625 at 31 October 20 ‘3 has been duly debited to

rent account but carried down as a debit balance and included under

“prepayments” in the balance sheet.

(7) The company wishes to maintain a large balance as possible of

unappropriated profits.

It is the company’s policy to “net off” all balances standing on the

purchases ledger, and similarly with the sales ledger.

Requirement

Prepare for review by the Directors of Alluwako Ltd an amended balance

sheet at 31 October 20 ‘3.

Question 57: ZoomVultures Ltd, Cleaners & Cleaning Products

(a) On 1 April 20 ‘4 ZoomVultures Ltd was incorporated and €700 paid for

formation expenses from its bank account.

(b) Details of the company and of shareholdings are as follows.

Directors: Cyril S. Garibah, Giorgio Ekegey and Norris Ekegey

Secretary: Doris Ekegey

Business : Contract cleaning of offices and homes and production and

sale of cleaning liquids and polishes



Share Authorised - €30,000 in shares of €1 each; Issued

Shareholders No of shares Price Receipts paid

into bank account

€

C S Garibah 6,000 par 6,000

G Ekegey 6,000 par 6,000

Norris Ekegey 1,000 par 1,000

Mrs Ekegey 1,000 par 1,000

Various relatives 6,000 €1, 20 7,200

(c) On 1 October 20 ‘4 the company bought a window-cleaning business

for €16,500. The tangible assets consisted of ladders and sundry

equipment valued at €2,400 and vehicles at €8,100. No liabilities were

taken over. The reputation established by the business purchased is

likely to be of high benefit to ZoomVultures Ltd over the two years to 1

October 20 ‘6

(d) In February 20 ‘5 a defective polisher seriously damaged a customer’s

flooring. The claim for damages (not covered by insurance) was settled

in May 20 ‘5 for €5,500.

(e) Other company’s transactions for the year to 31 March 20 ‘5 are set out

below.

(i) Receipts and debtors Receipts Paid Debtors at 31

into bank March 20 ‘5

€ €

Amount received and outstanding under cleaning contracts:

For quarter years ended before and on 31/3/20 ‘5 198,000 12,300

For quarter year ending 30 April 20 ‘5 16,800 4,800

For quarter year ending 31 May 20 ‘5 24,000 10,800

Window cleaning receipts 26,330 -

Sales of liquid and polishes 42,120 2,770

(All contracts provide for quarterly instalments payable in advance)

(ii) Payments and creditors Paid out Creditors at 31

of bank March 20 ‘5

€ €

Large electrical polishers 41,000 -

Small items of cleaning equipment 9,500 -

Wages, PAYE and Social Security 149,320 5,810

Administrative and property costs 20,150 440

Purchases of liquids and polishes 30,060 1,820

Secretary’s fees 8,000 -

Accountancy charges 1,300 500

Audit fee - 1,600



(f) The directors have not drawn any remuneration during the year but it is

proposed that, directors’ fees for the year totalling €42,000 should be

provided.

(g) A dividend of €0. 25/share is proposed for the year to 31 March 20 ‘5.

(h) Corporation tax is to be provided on the basis of 30% of the net trading

profit of the year.

(i) At 31 March 20 ‘5 there were the following stocks of cleaning liquids

and polishes.

Cost Net realizable Value

€ €

Toilet Liquids 2,970 4,250

Window Shine 1,500 650

Floor Polish 3,640 6,280

(j) The large electrical polishers are expected to have a four year life and to

have a residual value of €1,000. The total cost of ladders and all small

items of equipment are to be depreciated at 331/3% based on cost and in

use at the year-end.

Requirement

Prepare for internal use a trading and profit and loss account for the year

ended 31March 20 ‘5, together with a balance sheet at the date.



Question 62: Ekegey Plantations Plc Farms & Equipments

Ekegey Plantations plc has traded for many years as a farmer and popular

manufacturer of small farm machinery for other local farmers. The trial

balance, after the preparation of the draft trading and profit and loss account

for the year ended 31 October 20 ‘4, was as follows:

Dr Cr

$ $

Freehold land and buildings: Cost 162,812

Accumulated depreciation at 31/10/20 ‘4 84,032

Plant and machinery: Cost 1,129,180

Accumulated depreciation at 31/10/20 ‘4 406,345

Stock at 31 October 20 ‘4:

Raw materials 75,009


Finished goods 43,784

Trade investment 11,295

Suspense account 134,451


Balance at bank 258,398

Ordinary shares of $0.50 each (fully paid) 262,600

15% Preference shares of $1 each (fully paid) 157,560

12% Debentures 20 ‘0 91,910

Profit and loss account,

unappropriated balance, 1 November 20 ‘3 400,389

Net profit after tax for year to 31 October 20 ‘4 253,278

Provision for doubtful debts 9,454

Dividend from trade investment 1,996


Interim ordinary dividend 7,878

1,945,789 1,945,789

You are given the following information.

(1) Certain items which the bookkeeper, Mr Sarpong, was unable to deal

with were posted to a suspense account which is made up as follows.

$

Proceeds of issue of 157,560 ordinary shares of $0.50 118,170

Sale of trade investment 16,281

134,451

(2) The provision for doubtful debts is to be adjusted to 5% of the trade

debtors.



(3) Certain stocks of finished goods costing $15,756 (and included in the

$43,784 above) are considered obsolete. The expected net realizable

value is $3,545.

(4) The board of directors has made the following recommendations.

(i) The payment of the preference dividend for the year.

(ii) The payment of an ordinary dividend of $0.10 per share.

(5) During the year a reputable firm of chartered surveyors, revalued the

land by $19,695 (original cost $30,199). The directors wish to

incorporate this into the accounts. There have been additions of plant

and machinery during the year of $59,925 but no other movements.

The following depreciation was charged for the year.

Freehold land and buildings $3,285

Plant and machinery $36,680

(6) The corporation tax charges for the year ended 31 October 20 ‘4 is

estimated at $19,960.

This has not been paid at the year-end and is included in trade creditors.

(7) The authorised share capital is as follows.

15% preference shares 400,000 at $1 each

Ordinary shares 950,000 at $0.50 each

Requirement

As far as the information permits prepare a balance sheet as at 31 October

20’4 in a form suitable for presentation to members. Include notes on assets,

stocks, creditors, share capital and reserves. An accounting policies note is not

required.



CHAPTER 6 FUNDAMENTAL ACCOUNTING CONCEPTS

Question 64: Fundamental Accounting Concepts

IAS 1 names four fundamental accounting concepts which underline the

preparation of accounts. Describe these concepts and give an example of the

application of each.

Question 67: Atongo, The Science Student

Atongo is a science student operating a small medical supplies shop. He has

never heard of accounting concepts, and would certainly not know what to do

with them if he cames across them.

Requirement

Prepare notes for a meeting with Atongo in order to explain to him which of

the fundamental accounting concepts would cause you to make adjustments to

the accounts of his business in the following circumstances. Give your

reasons. Assume that each circumstance is separate from and not dependent on

the others.

(a) He has no idea what his electricity bill will be for the last two months of

the financial year, since he has not yet received it. He proposes to

account only for what has already been paid.

(b) His cash register will last for years and he is willing either to write it off

completely in the year of purchase or to carry it as a fixed asset at cost

price in the balance sheet. He cannot see any point in any half-way

between the two.

(c) At the latest year-end, 31 December 20 ‘4, he had several large

outstanding orders for products, which did not arrive until two days

after the year-end. He dispatched them to the customers on the same

day, and considers them to be sales for the year 20 ‘4 rather than 20 ‘5.

(d) Atongo’s shop assistant, Hotman, has left and has opened a low-price

suplies shop a few streets away from his shop. Customers are flocking

to Hotman and the bottom is falling out of Atongo’s market. Much of

his stock has passed its sell-by dates.



Question 71: Logba Young Lions plc, Footbal Club

Your client, Logba Young Lions plc, wishes to defer research and

development costs as intangible asset where possible and has asked for your

advice on what procedures to set up in order to identify any relevant costs.

Requirement

Write a letter to the Finance Director of Logba Young Lions plc which

addresses his concerns



CHAPTER 7 CASH FLOW STATEMENTS

Question 76: Darryl Amfic Company Ltd, Cold Stores

The financial statements of Darryl Amfic Ltd at 30 June were as follows.

20 ‘7 20 ‘6

€ € € €

Fixed Assets

Building: cost 24,728 13,488

depreciation (4,498) (1,124)

20,230 12,364

Plant & machinery: cost 5,620 5,620

depreciation (2,529) (2,248)

3,091 3,372

23,321 15,736

Current Assets:

Stock 17,984 12,364

Debtors 11,184 3,035

Bank and cash - 29,168 1,461 16,860

Creditors due within 1 year:

Bank overdraft 12,364 -

Trade creditors 8,992 12,364

Tax creditor 2,023 1,124

Accrual for interest 787 225

(24,166) (13,713)

Creditors due after 1 year

Loan (6,744) (11,240)

21,579 7,643

Represented by:

Ordinary share capital 3,370 3,370

Profit and loss account 18,209 4,273

21,579 7,643

20 ‘7 20 ‘6

Profit and loss account (extracts) € €

Opening profit 17,308 6,632

Interest charge (1,124) (1,574)

Profit before tax 16,186 5,058

Taxation (2,248) (1,686)

Retained profit for the year 13,936 3,372



Machinery of net book value €250 was sold at the beginning of 20 ‘7 for €393.

This machinery had originally cost €1,124. In recent years, no dividends have

been paid.

Prepare a cash flow statement, with notes, for the year ended 30 June 20 ‘7.

Question 78: Kingdom Furniture Plc

Kingdom Furniture plc manufactures and distributes furniture to their

customers from a showroom. Their financial statements are prepared and the

summarized accounts are set out below.

Profit and loss accounts for the years ended 30 April

20 ‘7 20 ‘6

$000 $000

Turnover 91,259 85,463

Cost of sales (63,049) (58,006)

Gross profit 28,210 27,457

Distribution and administration costs (21,484) (20,676)

Operating profit 6,726 6,781

Premium on redemption of debentures (122) -

Taxation (3,219) (1,336)

Profit after taxation 3,385 5,445

Dividend – Interim and Final (1,039) (929)

Retained profits 2,346 4,516

Balance sheets at 30 April

20 ‘7 20 ‘6

$000 $000 $000 $000

F. assets (cost/valuation) less depr. 37,816 30,722

Currents assets

Stocks and work in progress 20,150 19,420

Debtors 15,268 9,903

Investments at cost 8,676 -

Cash at bank 1,055 885

45,149 30,208

Less Creditors due in one year 8,269 6,238

Net current assets 36,880 23,970

Total assets less current liabilities 74,696 54,692

Less Creditors due after one year 3,971 5,194

70,725 49,498



Share capital - $1 ordinary shares 20,316 12,220

Share premium account 11,028 6,110

Revaluation reserve 9,105 3,238

Profit and loss account 30,276 27,930

70,725 49,498

Notes relating to the accounts

(1) Fixed asset analysis 20 ‘7 20 ‘6

$000 $000

Freehold land and buildings 30,672 24,171

Plant and equipment 7,144 6,551

37,816 30,722

(2) Depreciation has not been provided on freehold land buildings. During

the year a professional revalution – taking account of additions during

the year – has been incorporated in the books of account. There were no

disposals during the year.

(3) Additions to plant and equipment during the year totalled $1,668,000 at

cost. There were no disposals.

(4) Creditors falling due within one year

20 ‘7 20 ‘6

$000 $000

Trade and other creditors 4,217 4,139

Taxation 3,417 1,512

Dividends 635 587

8,269 6,238

Taxation provided at 30 April 20 ‘6 was settled at a figure lower than

the amount provided.

(5) Creditors falling due after more than one year relate to 9% discount

debentures which pay no interest. The stock redeemed during the year

was redeemed at premium of 10% which was provided out of the share

premium account.

(6) During the year the company made a rights issue of shares on the basis

of 3 new shares for every 10 shares held at a price of $3.55 per share.

Pending the purchase of new plant, part of the proceeds of the issue has

been invested.

(7) All the investments were due to mature six months after the date of

purchase.

Requirement

Prepare a cash flow statement, with notes, for the year ended 30 April 20 ‘7.



CHAPTER 8: STATEMENTS ANALYSIS AND INTERPRETATION

Question 82: Divine Nooque Oil Company Ltd

Divine Nooque Oil Company Ltd is a distibutor of crued oil. You have been

asked by a client to investigate the company with a view to a possible buy-out.

You have managed to obtain copies of the last two year’s accounts, thus 31

December 20 ‘7 and 20 ‘6 which are set out below:

Profit and loss accounts

20 ‘7 20 ‘6

€000 €000 €000 €000

Turnover 8,380 6,983

Cost of sales (3,351) (2,234)


Distribution costs 1,676 1,676

Administrative expenses 2,514 2,486

(4,190) (4,162)

Operating profit 839 587

Interest payable (559) (279)

Profit before taxation 280 308

Taxation (140) (151)

Profit after taxation 140 157

Dividends (67) (112)

Retained profit for year 73 45

Retained profit b/f 67 22

Retained profit c/f 140 67

Balance sheets

20 ‘7 20 ‘6

Fixed assets: €000 €000 €000 €000

Land and buildings

Cost 3,910 2,793

Depreciation (335) (279)

3,575 2,514

Plant and machinery

Cost 2,514 1,676


1,676 1,118

Other equipment

Cost 1,397 1,117


727 670

5,978 4,302



Current assets

Stocks 358 207

Debtors 335 223

Cash at bank and in hand 84 112

777 542

Creditors – Amounts due in 1 year:

Bank overdraft 267 145

Trade creditors 117 67

Taxation payable 140 151

Proposed dividends 67 112

(591) (475)

Net current assets 186 67

Total C. Assets less C. Liabilities 6,164 4,369

Creditors – Amount due after 1 year:

10% debentures (1,676) (838)

4,488 3,531

Capital and reserves: Share capital

Ordinary shares of €1 each 3,910 2,794

8% Redeemable P. Shares of €1 each 438 670

4,357 3,463

Profit and loss account 140 67

4,488 3,531

Notes

(1) During 20 ‘7 some plant, which had cost €466,000 and had been

depreciated by €335,000, was sold for €186,000.

(2) Included in trade creditors is end of year accrued interest of €37,000

(€18,000 in 20 ‘6).

(3) Included in trade creditors is a creditor for plant purchases of €18,000.

Requirements

(a) Prepare a cash flow statement, with notes, for the year ended 31

December 20 ‘7.

(b) Using appropriate accounting ratios, compare the company’s

profitability and short term liquidity for the years 20 ‘7 and 20 ‘6, and

indicate what further information you would need to back up your

comments.



Question 86: Kantamanto Scrappers And Melters

Kantamanto carries on business as a scrap metal merchant but is seriously

short of funds. He is unable to introduce further capital into the business from

his own resources and the bank is not willing to offer more funds withhout a

security. His draft balance sheet at 31 December 20 ‘1 was as follows.

$ $ $

Fixed assets

Freehold premises at cost 13,488

Plant and machinery 6,744

20,232

Current assets

Stock 26,976

Debtors 10,116

37,092

Creditors: Amounts due in one year:

Bank overdraft (unsecured) 13,480


(20,224) 16,868

37,100

Capital account

Balance at 1 January 20 ‘1 40,460

Net profit for the year 6,740

47,200

Less Drawings (10,100)

37,100

Requirement

Write a short letter to Kantamanto commenting briefly on his position as

shown by his balance sheet and setting out five ways in which he might be

able to improve the liquidity of the business.

Question 89: Kafui Akpoblu Mobile Company

Kafui Akpoblu has been in retail business for some years as a quality mobile

phone retailer but currently having trouble with his bank manager who is

concerned at the fact that substantial business bank balances at 31 July 20 ‘5

have been replaced by a bank overdraft at 31 July 20 ‘6. The overdraft is

secured by the business assets but the manager says that these assets are of

adequate value only for as long as the business remains a going concern. The

overdraft is now at much the same level as it was at 31 July 20 ‘6.

Kafui has tried to reassure the manager by telling him that despite a difficult

year, gross profit margin has been maintained and, by drastic economies, it



has been possible to prevent any substantial increases in overheads so that net

profit for the year to 31 July 20 ‘6 has increased by €1,000 as compared with

the figure for the previous year. The manager, who has the accounts for the

previous year, says that if this is the case he can only think that Kafui has

substantially increased his personal drawings from the business.

You are acting as Kafui’s accountant and, although you are not yet in a

position to complete the accounts for the year to 31 July 20 ‘6, an approximate

and reliable summary of the result and position is given you as follows:

Trading account summary

20 ‘6 20 ‘5

€ € € €

Sales 148,000 137,780

Opening stock 7,950 6,420

Purchases 112,910 97,080

120,860 103,500

Less Closing stock 17,260 7,950

(103,600) (95,550)


Expenses and depreciation (31,240) (30,110)

13,160 12,120

Balance sheet summary

20 ‘6 20 ‘5

Fixed assets : € €

At cost 35,680 30,970

Depreciation (19,340) (15,360)

16,340 15,610

Current assets

Stock 17,260 7,950

Debtors 17,110 10,500

Bank:

Current account - 1,230

Deposit account - 8,000

50,710 43,290



Capital account

Opening balances 33,370 29,610

Net profit 13,160 12,120

46,530 41,730

Drawings (9,090) (8,360)

37,440 33,370

Loan account - 3,830

Creditors due in 1 year:

Trade creditors 8,450 6,090

Bank overdraft 4,820 -

50,710 43,290

Notes

(1) Closing stock at the end of each year can be regarded as representative

of average stock carried during each year.

(2) No fixed assets were sold during the year.

(3) Trade creditors include an amount of €700 still outstanding in respect of

the purchase of fixed assets.

(4) For both current and previous year, sales accrued more or less evenly

over the year.

Kafui gives you the following information.

(i) For some years one of his main wholesalers supplied him with a

substantial volume of high quality brand of Mobile Phones on a

“sale or return” basis. The wholesaler’s business was taken over

by a large group in August 20 ‘5 with the result that this practice

ceased. Kafui thinks that the loss of this facility has almost

doubled the value of his average stock.

(ii) In order to maintain the level of sales, Kafui has been forced to

allow a longer period of credit to the majority of his customers,

all of whom have “cash flow” problems.

(iii) Many years ago, Kafui’s uncle, Bibio had lent the business a

substantial sum to help it during bad periods and had resisted

Kafui’s recent attempts to pay off the balance of the loan as he

“liked to retain some interest”. However, when Bibio died in

September 20 ‘5, Kafui was obliged to repay the outstanding

balance to the executors of his will.

(5) Kafui’s shop front had remained unchanged for nearly twenty years

without any serious renovation and €4,000 was spent on a new front and

showcase in July 20 ‘6. Kafui says that this improvement has helped

trade, as sales in August 20 ‘6 showed a very good increase over those

for August 20 ‘5.



(6) As from 1 October 20 ‘6 Kafui has come to an arrangement with some

of his major suppliers that they will guarantee delivery of small

numbers of standard phones within seven days of receipt of order. Kafui

estimates that this will reduce his stock level by some €3,500. He is also

proposing to allow a cash discount to customers which should reduce

average debtors by about 10%.

Although he realizes that you will not be in a position for some two or three

weeks to send the accounts for the year ended 31 July 20 ‘6, Kafui has asked

you to write now to the bank manager “to get him out of my hair”.

Requirement

Write a letter to the bank manager of Windows Bank Ltd which;

(a) Set out briefly the salient points of the trading results shown by the draft

accounts for the year ended 31 July 20 ‘6

(b) Includes a concise, annotated cash flow statement explaining how the

overdrawn situation has arisen. Treat drawings as a return on

investment.

(c) Indicates the changes and the reasons for the changes, which have taken

place in the ratios relating to stock, debtors and current assets, and

(d) Reassures the manager about the future of the business.



CHAPTER 9: PRACTICAL BRAIN TEASERS

Question 92: Bamboozer Ltd, Food Distribution

(1) Bamboozer Ltd was formed on 1 December 20 ‘6 to carry on business

as wholesaler of staple food, within the southern sector of the country.

(2) Proper accounts records have been maintained for trading transactions

but all capital receipts and some capital payments have been credited

and debited to one account in the nominal ledger.

(3) The balances standing on the company’s records at 30 November 20 ‘7,

after a drafted trading, profit and loss account, are as set out below.

The following fixed assets were bought during the year.

Cost Depn

€ € €

Freehold depots 296,400 13,894 282.506

Office and warehouse equipment 73,328 14,666 58,662

Vehicles 138,320 34,580 103,740

508,048 (63,140)

Total Assets book value 444,908

Operation profit after depreciation 369,666


Creditors 68,759

Stocks at cost 241,373

Audit fee – payment on account 2,470

Provision for bad debt 1,853

Cash at bank 28,042 Dr

Capital receipts and payments account 394,583 Cr

Depreciation rates are based on the cost of assets in use at the year-end.

(4) The share register has been written up properly and records of €1

ordinary shares, issued at a price of €2.47 per share, as follows.

No. of shares issued

Thierry Akolatse 80,000

Jasinta Akolatse 30,000

Ransford Akolatse 15,000

Others 35,000

Authorized share capital is €300,000 in €1 ordinary shares.

(5) Cash has been received for all shares issued with the following

exceptions.

(i) Thierry Akolatse has been issued with 10,000 of his 80,000

shares in recognition of the goodwill attracting to his name after

long experience in the trade.



(ii) Ransford Akolatse owed €6,175 in respect of his shares at 30

November 20 ‘7 but this was received in December 20 ‘7.

(6) Preliminary and formation expenses totalling €3,705 has been debited

to the capital receipts and payment account, together with an initial

payment of €1,730 and three monthly instalments (out of twenty-four)

of €620 each on computers bought under a hire purchase agreement.

The computers, which can be classified as office equipment, had a cost

excluding credit charges of €13,585.

(7) The remaining credit balance on capital receipts and payments account

represents moneys lent to the company by Jasinta Akolatse carrying

interest (not yet provided for) at 10% per annum from 1 December 20‘6

and repayable on 1 January 20 ‘9.

(8) Adjustments are also required for the following matters:

(i) Directors’ remuneration of €67,925 of the year has been fixed but

not yet paid or provided for.

(ii) The full audit fee for the year is €5,680.

(iii) The bad debt provision is to be adjusted to 1% of trade debtors.

(iv) A dividend of 10p per share on all shares in issue is proposed.

(v) Provision is to be made of €70,210 for corporation tax.

Requirements

Prepare the profit and loss account for the year ended 30 November 20 ‘7 and

balance sheet at that date.

Question 93: JAK Waawa and JJR Boom Veterinary Services

(1) John Akuffour Wawaa and John Jrakpata Boom, have both just

graudated from Universities as qualified veterinary surgeons. Since

October 20 ‘6 they’ve been practicing separately from the same

premises. The premises is oned by JJR Boom and it was agreed that

JAK Waawa should pay €3,000 per annum for the use of his surgery in

JJR Boom’s premises.

(2) On 30 September 20 ‘8 Waawa and Boom felt that they enjoyed a good

relationship and would therefore enter into partnership together

retrospectively from 1 October 20 ‘7 and you have been asked to

prepare the partnership accounts. For the year ended 30 September 20‘8

Waawa and Boom have each prepared, from their respective practices

bank statements, a cash at bank account but neither has been able to

agree the closing bank balance with the balance shown by the bank

statements.



(3) Cash at bank accounts

JAK Waawa JJR Boom

€ € € €

Capital introduced 4,000 5,000

Fees received 38,265 40,126

Rental Income 3,000

42,265 48,126

Purchase of drugs/medical supplies 5,269 4,978

Property costs – rent, rates, etc 3,000 6,455

Receptionist – net salary (note (i)) 3,200 3,200

Paid to IRS for PAYE and Social 1,000 1,000

Surgery equipment, furniture/ fittings 4,562 5,983

Printing, telephone and office sundries 1,795 1,973

Travelling costs (note (ii)) 3,784 4,128

Medical books and subscriptions 555 678

Drawings on account of profit 17,000 18,500

(40,165) (46,895)

Closing balance 2,100 1,231

Notes to the cash at bank accounts

(i) The cost of the receptionist has been shared equally. Her gross

salary for the year, together with the employer’s Social Security

contributions, totalled €8,800.

(ii) JAK Waawa feels that 25% of his travelling costs represented

private motoring and JJR Boom puts his percentage at 331/3 %.

(4) You have prepared bank reconciliation statements as shown below.

JAK Waawa JJR Boom

€ €

Balances per ledger account 2,100 1,231

Less: Cheque for fees dishonoured on

presentation (irrecoverable) (1,220) -

880

Add Interest credited in bank accounts 163 214

Balances per bank statements 1043 1,445

Less: Cheques drawn but not presented

Drug purchases (642) (398)

Property costs - (246)

401 801

Add: Fees banked but not yet credited

In bank statements 1,164 1,310

1,565 2,111



Notes

(i) Interest credited is to be transferred to partners’ current accounts.

(ii) At 30 September 20 ‘8 the separate bank accounts were closed

off and a new joint account opened.

(5) At 1 October 20 ‘7 JAK Waawa and JJR Boom owned cars and

equipment which have been used in their practices. The agreed values at

1 October 20 ‘7 were as follows.

JAK Waawa JJR Boom

Equipment €2,060 €3,020

Motor cars €7,970 €9,246

(6) In the partnership accounts depreciation is to be provided

- at 25% on car valuations

- at 20% on the valuations plus additions of equipment, furniture

and fittings in use at the year-end

(7) The outstanding figures at 30 September 20 ‘8, as supplied to you by

JAK Waawa and JJR Boom, were as follows.

JAK Waawa JJR Boom

€ €

(i) Debtors for fees 3,650 4,012

(ii) Creditors for drugs 1,020 708

(iii) Creditors for property costs - 246

(iv) Stocks of drugs/medical supplies 495 535

(iv) Prepaid professional subscriptions 120 131

Notes

(a) You discover that items (i), (ii) and (iii) have been arrived at by

considering only the figures of receipts and payments entered in the

cash at bank accounts.

(b) A provision of €500 in respect of accountancy charges would be

appropriate.

(8) All the relevant figures relating to the two practices should be merged in

arriving at the partnership profit and in preparing the partnership

balance sheet. It is agreed, however, that the bad debt of €1,220,

although it is to be charged in the profit and loss account, is to be borne 4/5 by JAK Waawa and

1/5 by JJR Boom, the necessary adjustment being

made through their current accounts.

(9) The partnership agreement, to take effect from 1 October 20 ‘7,

provides:

for interest on capital at 10% per annum

for basic annual partnership salaries of €9,000 for JAK Waawa and

€11,000 for JJR Boom



for the balance of profit to be shared equally, and

for separate capital and current accounts to be maintained for each

partner.

Requirements

(a) Prepare the profit and loss account for the partnership for the year ended

30 September 20 ‘8.

(b) Produce a partnership balance sheet at that date.

Question 101: Amfic Yingor’s Garages

You have just met Amfic Yingor at the late night drinking bar. He has a small

garage business and his accountant has just finished preparing the accounts for

his first year of trading. He says that he cannot understand all the fuss made

about balance sheets and accounts, for “all that really matters is how much

money there is in the bank”.

Requirement

Prepare notes for a meeting with Amfic later in the week which include

A list of those likely to use Amfic Yingor’s accounts.

An explanation of the reasons for preparing balance sheet.

A response to Amfic’s comments that “all that really matters is how

much money there is in the bank”.



ANSWERS



SUGGESTED ANSWERS

Answer 1: WELLINTON SOLE PROPRIETORSHIP BUSINESS

THE CASH BOOK

Date Details F Bank Cash Disc. Date Details F Bank Cash Disc.

GH¢ GH¢ GH¢ GH¢ GH¢ GH¢

01/01 Capital 10,000 01/01 M. Van 3,000 / /

02/01 Loan a/c 20,000 / / 02/01 Rent a/c 7,000 / /

07/01 Sales / 8,500 / 03/01 GeeMerc 24,960 / 1,040

09/01 Tarzan 5,025 / / 04/01 Furniture 3,000 / /

12/01 J.Brown 6,474 / 341 04/01 Equip 2,500 / /

12/01 Sales / 8,525 449 07/01 Stationery / 900 /

14/01 Sales / 12,251 645 14/01 Bank C / 14,500 /

14/01 Cash C 14,500 / / 18/01 K. Gyasi 17,993 / 947

15/01 M. Bako / 7,495 394 15/01 Bank C / 16,500 /

15/01 Cash C 16,500 / / 19/01 GeeMerc 26,000 / /

18/01 Sales / 9,194 484 20/01 Purchases / 8,689 /

19/01 H. Love 12,701 / 669 22/01 Bank C / 33,860 /

20/01 Sales / 17,346 913 25/01 K. Gyasi 8,940 / /

20/01 Akua C. 4,680 / 320 30/01 Salaries 3,820 / /

22/01 Ugly H / 5,690 / 30/01 Utilities / 860 /

22/01 Cash C 33,860 / / / / /

22/01 Sales / 11,380 / / / /

25/01 M. Bako 7,889 / / / / /

30/01 Ugly H 3,240 / / / / /

31/10 Bals c/d 37,656 5,072 /

134,869 80,381 4,215 134,869 80,381 1987

01/02 Bals b/d 37,656 5,072

Capital account

20 ‘5 GH¢ 20 ‘5 GH¢

31 Jan Balance c/fwd 19,850 1 Jan Cash 10,000

1 Jan Stock 9,850

19,850 19,850

01 Feb Balance b/fwd 19,850

Motor Van account

20 ‘5 GH¢ 20 ‘5 GH¢

01 Jan Cash 6,000 01 Jan Bank 3,000

31 Jan Balance c/fwd 3,000

6,000 6,000




Stock account

20 ‘5 GH¢ 20 ‘5 GH¢

01 Jan Cash 9,850

Purchases account

20 ‘5 GH¢ 20 ‘5 GH¢

03 Jan GeeMerchant Ltd 52,000 31 Mar Trading account 98,569

18 Jan K. Gyasi 37,880

20 Jan Cash 8,689

98,569 98,569

Office Equipment account

20 ‘5 GH¢ 20 ‘5 GH¢

04 Jan Bank 2,500

Loan account (Stabic Bank)

20 ‘5 GH¢ 20 ‘5 GH¢

02 Jan Cash 20,000

Sales account

20 ‘5 GH¢ 20 ‘5 GH¢

31 Mar Trading 140,001 07 Jan Cash 8,500

09 Jan Tarzan 6,700

12 Jan J. Brown (14,500 x 94%) 13,630

12 Jan Cash 8,974

13 Jan Akua Cinthia 5,000

14 Jan Cash 12,896

15 Jan M. Bako (16,785 x 94%) 15,778

18 Jan Cash 9,678

19 Jan H. Love (18,964 x 94%) 17,826

20 Jan Cash 18,259

22 Jan Ugly Head 11,380

25 Jan Cash 11,380

140,001 140,001

Rent account

20 ‘5 GH¢ 20 ‘5 GH¢

02 Jan Bank 7,000 31 Jan P&L account 58


7,000 7,000



Furniture and Fittings account

20 ‘5 GH¢ 20 ‘5 GH¢

29 Mar Cash 3,000

Loan interest

20 ‘5 GH¢

31 Jan P&L account (20,000 x 12%)1/12 200

Tarzan account

20 ‘5 GH¢ 20 ‘5 GH¢

09 Jan Sales 6,700 09 Jan Bank 5,025


6,700 6,700

1 Mar Balance b/f 1,675

James Brown account

20 ‘5 GH¢ 20 ‘5 GH¢


12 Jan Discount 341

31 Jan Balance c/f 6,815

13,630 13,630

1 Apr Balance c/f 6,815

Malik Baako Venture account

20 ‘5 GH¢ 20 ‘5 GH¢


12 Jan Discount 394

25 Jan Bank 7,889

15,778 15,778

Honey Love account

20 ‘5 GH¢ 20 ‘5 GH¢


12 Jan Discount 669

31 Jan Balance c/f 4,456

17,826 17,826

1 Feb Balance c/f 4,456



Ugly Head account

20 ‘5 GH¢ 20 ‘5 GH¢

22 Jan Sales 11,380 09 Jan Cash 5,690

30 Jan Bank 3,240


11,380 11,380

01 Feb Balance b/f 2,450

Akua Cynthia account

20 ‘5 GH¢ 20 ‘5 GH¢


20 Jan Discount 320

5,000 5,000

GeeMerchant Ltd’s account

20 ‘5 GH¢ 20 ‘5 GH¢

03 Jan Bank 24,960 03 Jan Purchases 52,000

03 Jan Discount 1,040

31 Jan Bank 26,000

52,000 52,000

K. Gyasi account

20 ‘5 GH¢ 20 ‘5 GH¢

18 Jan Bank 17,993 18 Jan Purchases 37,880

18 Jan Discount 947

25 Jan Bank 8,940


37,880 37,880


Stationery account

20 ‘5 GH¢ 20 ‘5 GH¢

01 Jan Cash 900

Salaries account

20 ‘5 GH¢ 20 ‘5 GH¢

01 Jan Cash 3,820

Utilities account

20 ‘5 GH¢ 20 ‘5 GH¢

01 Jan Cash 860



(b) Trial balance at 31 January 20 ‘5

GH¢ GH¢

Cash in hand 5,072

Bank 37,656

Capital 19,850

Furniture and Fittings 3,000

Motor Van 6,000

Office Equipment 2,500

Purchases 98,569

Sales 140,001

Loan (Stanbic Bank) 20,000

Salaries 3,820

Rent 7,000

Debtors:

Tarzan 1,675

James Brown 6,815

Honey Love 4,456

Ugly Head 2,450

Creditors – K. Gyasi 10,000

Toyota Company Ltd 3,000

Utilities 860

Stock 9,850

Stationery 900

Discounts 4,215 1,987

194,838 194,838

(c) Trading and profit and loss account for the three months ended

31 January 20 ‘5

GH¢ GH¢

Sales 140,001

Purchases & Stock (98,569 + 9,850) 108,419

Less Closing stock (5,375)

(103,044)

Gross profit 36,957

Discounts 4,215 1,987

Expenses

Salaries 3,820

Rent 58

Loan interest 200

Office Sundry (900 + 860) 1,760

(10,053)

Net profit 28,891



Balance sheet at 31 January 20 ‘5

GH¢ GH¢

Fixed assets:

Motor van 6,000

Office Equipment 3,000

Furniture & Fittings 2,500

Current assets:

Stock 5,375

Debtors 15,396

Rent Prepaid 6,942

Cash 5,072

Bank 37,656

70,441

Creditors due within one year

Trade creditors (13,000)

Loan Interest accrued (200)

Net current assets 57,241

Creditors due after one year

Loan – Stanbic Bank (20,000)

48,741

Capital account

Capital introduced 1 January 20 ‘5 19,850

Profit for the period 28,891

48,741



Answer 5: GEEPROPERTIES RENTALS & FINANCIALS

Debtors’ account

$ $

Balance b/f 112,500 Cash from debtors 225,000

Sales 251,100 Cash – Sulemana 225

Bad debts A/c (recovered) 675 Bad debts expense

Sulemana (provision) 2,025

Banderas (written off) 1,350

Cash (Azumah) 675

Balance c/f 135,000

365,275 364,275

Balance b/f 135,000

Provision for doubtful debts account

$ $

Specific provision recovered 225 Balance b/f:

Specific provision written off 2,025 Specific 2,250

Balance c/f General 1,102

Specific 1,800 Increase in provision 2,030

General

1% x ($135,000 – 1,800) 1,332

5,382 5,382

Balance b/f 3,132

Bad debts expense account

$ $

Debtors A/c (A. Banderas) 1,350 Specific provision recovered 225

Increase in provision for Bad debts recovered 675

doubtful debts 2,030 P&L account 2,480

3,380 3,380

Answer 6: JENNIFER AGUELIYAH BOUTIQUE

(a) Debtors’ ledger

S Mahama

€ €

Balance b/f 12,540 Bad debts written off 6,600

Sales 330 Specific provision

gone bad 6,270

12,870 12,870



J Baafi

€ €

Balance b/f 12,811 Cash 12,540

Sales 11,616 Balance c/f 11,887

24,427 24,427

Balance b/f 11,887

Miklin Holidays

€ €


Sales 10,989 Balance c/f 10,989

23,806 23,806

Balance b/f 10,989

(b) Creditors’ ledger

M Normenyo

€ €

Cash 5,940 Balance b/f 12,058

Balance c/f 12,388 Purchases 6,270

18,328 18,328

Balance b/f 12,388

James Nkomode

€ €

Cash 330 Balance b/f 12,217


16,738 16,738

Balance b/f 16,408

Obraku Sarpong

€ €



19,622 19,622

Balance b/f 14,190

(b) Sales account

€ €

Debtors’ ledger control

Trading account 22,935 account 22,935



Purchases account

€ €

Creditors’ ledger control

account 18,183 Trading account 18,183

(c) Debtors’ ledger control account

€ €


Sales 22,935 Specific provision

gone bad 6,270

Bad debts expense

Written off – Mahama 6,600

Balance c/f 22,876

61,103 61,103

Balance b/f 22,876

Creditors’ ledger control account

€ €



54,688 54,688

Balance b/f 42,986

(d) Provision for doubtful debts account

€ €

Specific provision Balance b/f – Specific 6,270

gone bad 6,270 Increase in provision 271

Balance c/f 271

6,541 6,541

Balance b/f 271

Bad debts expense account

€ €

Debtors’ ledger control a/c P&L account 6,871

(written off – Mahama) 6,600

Provision account 271

6,871 6,871

(e) List of debtors List of creditors

R Baafi 11,887 M Normenyo 12,388

Miklin Holidays 10,989 James Nkomode 16,408


22,876 42,986



Answer 8: TIANSHI BRIGHT BUSINESS VENTURES

Trading and profit and loss account for eighteen months ended 31/12/20‘8

¥ ¥

Sales (W1) 129,998

Purchases (W2) 56,232

Closing stock (7,838) (48,394)

Gross profit 81,604

Light and heat ¥ (5,077 + (2/3 x 627)) 5,495

Postage and stationery 2,607

Rent and rates ¥ (10,175 – (1/4 x 6,600)) 8,525

Motor expenses 5,055

Interest on bank loan 2,475

Loss on sale of Van 3,575

Depreciation

Motor van (¥ (22,000 – 3,850) ÷ 3 x 9/12) 4,538

Office equipment (¥7,040 ÷ 5 x 15

/12) 1,760 (34,030)

Net profit 47,574

Balance sheet at 31 December 20 ‘8

Cost Depn NBV

¥ ¥ ¥

Fixed assets:

Motor van 22,000 4,538 17,462

Office equipment 7,040 1,760 5,280

22,742

Current assets:

Stock 7,838

Debtors 1,331

Prepayments (¼ x ¥6,600) 1,650

Cash at bank 38,704

Cash in hand 3,833

53,356

Less Creditors due within one year

Creditors 3,080

Accruals (2/3 x ¥627) 418

Interest on bank loan 2,475

(5,973) 47,383

70,125

Bank loan (24,750)

45,375



Capital 27,500

Profit for eighteen months 47,575

75,075


45,375

WORKINGS

(1) Total sales

¥ ¥

Sales 129,998 Cash receipts 116,875

Credit receipts 10,753

Contra 1,040

Balance c/d ¥ (2,370-1,040) 1,330

129,998 129,998

(2) Total purchases

¥ ¥

Cash payments 11,880

Credit payments 40,233

Contra 1,040

Balance c/d ¥ (4,119–1,040) 3,079 Purchases (bal fig) 56,232

56,232 56,232

(3) Van - disposal

¥ ¥

Cost 8,250 Depreciation (immaterial) -

Sale 4,675

Loss on sale 3,575

8,250 8,250



Answer 13: CHUCKER AND ZOOLOO CAR DEALERS

Statement of adjustments to profit for the year ended 31 March 20 ‘9

+ - Total

R R R

Profit per draft accounts 90,000

Discounts (1) – no change

Bad debt recovered (2) 3,000

Insurance settlement (3) 140,000

Transfer of Ford from purchases:

To fixed assets (4) 18,000

Depreciation of Ford (4) 4,500

Omitted from purchases and stock (5)

- no change

Advertising prepaid (6) 50,000

Insurance prepaid (7) 6,000

217,000 (4,500) 212,500

Adjusted profit 302,500



Answer 17: PANGOLA STAR TILAPIA SHOPS

(a) Statement of affairs at 31 December 20 ‘6

R R

Shop fittings 5,000

Van 4,000

Stock 36,270

Debtors 19,600

Less Provision 5% (980)

18,620

Bank balance 4,790

Cash 210

68,890

Less Creditors 15,080

Sundry expenses 370

Rates owing (three months) 600 (16,050)

Opening capital 52,840

(b) Trading, profit and loss account for the year ended 31/12/20 ‘7

R R

Sales R(164,190 + 34,250 (W1)) 198,440

Opening stock 36,270

Purchases (W2) 165,770

202,040

Closing stock (46,510)

(155,530)

Gross profit 42,910

Expenses:


Van expenses R(1,680 + 600) 2,280

Advertising R(2,190 + 840) 3,030

Sundry R(4,460 + 1,190 – 370 + 410) 5,690

Rent R(2,250 + 750 (3 months arrears)) 3,000

Rates (R3,600 – 600(20 ‘6 arrears) – 600) 2,400

Loss on sale of van 1,000

Depreciation:

Van 2.000

Fittings 500

Bad debts R(420 + 30 (W3)) 450

(35,590)





Fixed assets: R R R

Fittings 5,000 500 4,500

Van 10,000 2,000 8,000

12,500

Current assets

Stock 46,510

Debtors R(20,200 – 1,010) 19,190

Rate prepaid 600

Cash 120

66,420

Creditors due in one year:

Bank overdraft 16,740


Accruals R(750 + 410) 1,16 0 (33,330) 33,090

Net assets 45,590

Capital account:

At 1 January 20 ‘9 52,840

Add New Capital (Private life Insurance) 1,420

Profit for the year 7,320

61,580

Less Drawings (W4) 15,990

45,590

WORKINGS

(1) Trade debtors

R R

Balance b/d 19,600 Cash 23,170

Sales (bal fig) 34,250 Bank 10,060

Bad debts 420

Balance c/d 20,200

53,850 53,850

(2) Trade creditors

R R

Bank 165,940 Balance b/d 15,080

Cash 1,040 Goods for own use 1,560

Balance c/d 15,430 Purchases 165,770

182,410 182,410



(3) Provision for doubtful debts

R R

Balance b/d 980

Balance b/d 1,010 P&L account 30

1,010 1,010

(4) Drawings

R

Bank 920

Cash 13,510

Goods 1,560

15,990

Answer 22: TRIPLE STAR COMPANY LTD CONTROL ACCOUNTS

Amended debtors’ ledger control account for the year ended 30/09/20 ‘4

(Northern region area)

R R R

Debtors at 1 Oct 20 ‘3 94,202 Cash received 632,429

Sales invoices 640,297 Less Relating to

Transfer to creditors’ ledger 2,010 Sep 20 ‘3 (1,685)

Bad debt recovered 2,045 630,744

Discounts allowed 5,840

Sales returns R(1,950 +

420 + 14,260 - 1,590 ) 15,040

Bad debts 2,500

Transfer to directors’

emoluments 540

Debtors at 30 Sep 20 ‘4 83,890

738,554 738,554

Amended total of the list of debtors’ ledger balances

R

Total as listed from the ledger 83,310

Less Transfer to directors’ emoluments (540)

Add Credit balance listed in error 1,120

83,890



Answer 28: MANDELA AMEWU ICE-CREAM VENDORS

Trading and profit and loss account for the year ended 31 December 20 ‘6

£ £

Sales (W10) 13,455

Less Cost of sales – Purchases (W8) (9,000)

Gross profit 4,455

Add Sundry income:

Rebate received 90

Discount received (W8) 223

313

4,768

Less Expenses:

Wages 615

Van expenses (450 + 40) 490

Laundry 156

Loss on disposal of van (W1) 150

Sundry expenses 446

Depreciation:

Motor Van (W1) 675

Equipment (W2) 53

Accountancy (W4) 96

Garage:

Rates (W3) 53

Rent (W5) 80

(2,813)

Net profit 1,955


Cost Depn

Fixed Assets: £ £ £

Equipment (W2) 525 473 52

Motor Van (W1) 2,700 675 2,025

3,225 1,148 2,077

Current assets:

Prepayment 21

Bank 885

906

Less Creditors due in one year (96 + 9) (105)

801

2,878

Capital account:



Opening capital 2,481

Add Net profit 1,955

Less Drawings (W9) (1,558)

2,878

WORKINGS

(1) Motor Van Account

£ £

Balance b/f 2,400 Motor Van disposal 2,400

Bank 1,650

Van disposal (trade-in) 1,050 Balance c/f 2,700

5,100 5,100

Accumulated depreciation – Motor Van

£ £

Motor Van – disposal 1,200 Balance b/f 1,200

Current Provision 675 P&L account 675

1,875 1,875

Motor Van – Disposal

£ £

Motor Van account 2,400 Motor Van – Trade-in 1,050

Accumulated depreciation 1,200

P&L account (over-valued) 150

2,400 2,400

(2) Equipment Account

£ £

Balance b/f 525 Balance c/f 525

Equipment – Accumulated depreciation

£ £

Balance c/f 473 Balance b/f 420

P&L account 53

473 473

(3) Rates

£ £

Balance b/fwd 14 P&L account 53

Bank 60 Advaced payment 21

74 74



(4) Accountancy

£ £

Bank 90 Balance b/fwd 90

Oustanding bill 96 P&L account 96

186 186

(5) Garage rent

£ £

Bank 78 Balace b/fwd 8

Outstanding bill 9 P&L account 79

87 87

(6) Bank

£ £

Balance b/f 1,260 Purchases 8,025

Cash 11,361 Wages 420

Rebate received 90 Van expenses 450

Laundry 156

Garage: Rent 78

Rate 60

Accountancy 90

New Motor Van 1,650

Sundry expenses 417

Drawings 480

Balance c/f 885

12,711 12,711

(7) Cash

£ £

Total sales 13,455 Purchases 752

Wages 195

Van expenses 40

Sundry expenses 29

Bank 11,361

Drawings (bal fig) 1,078

13,455 13,455

(8) Purchases

£ £

Bank 8,025 Trading account 9,000

Discount received 223

Cash (bal fig) 752

9,000 9,000



Total purchases – Rebate (1%) £90

Total purchases (90/0.01) £9,000

Discount received £8,910 x 2.5% £223

(9) Drawings

£ £

Bank 480 Capital account 1,558

Cash 1,078

1,558 1,558

(10) Sales £

Purchases £9,000 x 150% 13,500

Less unsalable stock destroyed by power failure 45

13,455

Answer 32: KANGAROO PLC, CARRIER BAGS MANUFACTURER

(a) Manufacturing, trading and profit and loss account for the year to

31 December 20 ‘1

Cost/U($) Unit $ $

Direct materials (W1) 44,800

Direct labour 33,600

Prime cost 78,400

Factory overheads (W2) 39,200

117,600

Factory cost:

Work in progress

Opening 20,160

Closing 25,760 (5,600)

Factory cost of actual production 11.2 10,000 112,000

Sales 16.8 12,000 201,600

Opening stock of finished goods 11.2 3,500 39,200

Transfers from factory 11.2 10,000 112,000

13,500 151,200

Closing stock of finished goods 11.2 (1,500) (16,800)

12,000 (134,400)

Gross profit 67,200

Administrative overheads (20,160)

Net profit 47,040



WORKINGS

(1) Direct materials $ $

Opening stock of Raw materials 3,920

Purchases 44,240 48,160

Closing stock (5,600)

42,560

Carriage inwards 2,240

44,800

(2) Factory Overheads


Light, heat and power 7,336

Plant: Depreciation 6,720

Repairs 4,480

Supervisory wages 2,744

Factory amortization 2,240

39,200

(b) Manufacturing, Trading & P & L for year to 31 December 20 ‘1

U/Cost Units $ $

Factory cost of actual production 11.20 10,000 112,000

Factory profit (25%) 2.80 28,000

Transfer to warehouse 14.00 140,000

Sales 16.80 12,000 201,600

Opening stock of finished goods 14.00 3,500 49,000

Transfers from factory 14.00 10,000 140,000

13,500 189,000

Closing stock of finished goods 14.00 (1,500) (21,000)

12,000 (168,000)

Warehouse profit 33,600

Factory profit 28,000

Provision for unrealised profit (no longer required) 5,600

Gross profit 67,200

Administrative overheads (20,160)

Net profit 47,040

WORKING

Provision for unrealized profit

$ $

P&L account 5,600 Provision b/f

Provision c/f $49,000 x 25

/125 9,800

$21,000 x 25

/125 4,200

9,800 9,800



Answer 35: ATONGO PIONEER NAILS MANUFACTURERS

(a) Manufacturing, trading, P & L for the year ended 31 March 20 ‘8

R R

Opening stock of raw material 13,125

Purchases 231,250

Carrier inwards 2,188 246,563

Less Closing stock of raw material (15,000)

Material consumed 231,563


Royalties 4,375

348,438

Factory overhead: Lighting and heating 3,906

Power 8,563


Insurance 2,188

Depreciation of plant 17,500

Indirect labour 90,625

Factory general expenses 19,375

496,845

Add work in progress 1 April 20 ‘8 8,437

505,282

Less work in progress 31 March 20 ‘8 (9,375)

Factory cost of finished production 495,907

Factory profit 20% 99,182

Transfers to warehouse 595,089

Sales 625,000

Less Cost of sales:

Opening stock of finished goods

R24,313 x 120

/100 29,175

Product cost of goods completed 595,089

624,264

Less Closing stock of finished goods

R25,000 x 120

/100 (30,000) (594,264)

Warehouse profit 30,736

Factory profit 99,182

New provision for unrealized Profit (W) (137)

Gross profit 129,781



Administrative expenses :

Salaries 27,500

Insurance 437


Light and heating 781

General expenses 8,375

Depreciation – computer 1,250 (39,593)

Selling and distribution expenses:

Sales Commissions 7,188

Salesmen’s salaries 18,750

Carriage outwards 3,687 (29,625)

Finance charges:

Discounts allowed 3,000

Bank charges 1,437 (4,437)

(73,655)

56,126

WORKING

Provision for Unrealised Profit account

R R

Balance c/f Balance b/f

R25,000 x 20% 5,000 R24,313 x 20% 4,863

P&L account 137

5,000 5,000

Balance b/f 5,000

(b) Balance sheet at 31 March 20 ‘8

Cost Depn Net Value

R R R

Fixed assets

Plant and equipment 175,000 48,750 126,250

Computers 12,500 6,250 6,250

187,500 55,000 132,500

Current assets:

Stocks (15,000+30,000–5,000+9,375) 49,375

Debtors 88,938

Bank 35,500

Cash 938

174,751

Creditors due in one year:

Creditors (78,125)

Net current assets 96,626

229,126



Capital at 1 April 20 ‘7 185,500

Net profit for the period 56,126


229,126

Answer 38: NORA NUSINYO FURNITURE COMPANY

Manufacturing, trading, profit and loss account for year end 30 June 20‘9

Per unit Cost

$ $ $

Direct materials (W1) 189,820


Direct expenses:

Equipment on hire 12,179

Prime cost 10,750 units @ $31.80 341,850

Factory overhead:

Supervision 23,564

Property ( 58,608 x 70%) 41,026

Factory Cleaning 6,466

Depreciation of factory plant 12,570

7.78 83,626

Factory cost of 10,750 units 39.58 425,476

Less Stock of work-in-progress

1,500 @ 1/2 x $39.58 (29,685)

Factory cost of 10,000u transferred 39.58 395,791

Sales 9,000 units @ $55 9,000 55.00 495,000

Transfers from manufacturing a/c 10,000 395,791

Less 1,000 units stock (1,000) (39,580)

9,000 39.58 (356,211)

Gross profit ($15.42 per unit) 138,789

Loss on damaged materials (W3) 5,036

Administrative costs (W4) 41,238

Selling costs (W5) 60,237

(106,511)




WORKINGS

(1) Direct materials

$ $

Materials 200,868

Less Damaged materials (7,393)

193,475

Less stock (15,148)

178,327

Cartons 9,088

Less Stock (973)

8,115

186,442

Instructions 3,727

Less Stock (349)

3,378

189,820

(2) Units of Tables Produced

Units of tables sold 9,000

In stock 1,000

10,000

Work in progress 1/2 x 1,500 750

10,750

(3) Loss on damaged materials

$

Materials 7,393

Less Scrap sales (2,357)

5,036

(4) Administrative costs

$

Property costs (58,608 x 15%) 8,791

Salary costs 24,646

Office Sundry Expenses $(10,268 – 3,727) 6,541

Depreciation of office equipment 1,260

41,238

(5) Selling costs

$

Property costs (58,608 x 15%) 8,791

Salary costs 29,321

Delivery 12,289

Advertising 3,896

Royalties (495,000 x 1.2%) 5,940

60,237



Answer 40: AKASANOMA VISION LTD MANUFACTURERS

Directors’ views on incentory valuation

Georgio. Prudent approach is necessary, also the concept of accruals is very

important. Not acceptable to value at prime cost. Valuing inventory at low

figures will not of itself help cash flow although, as profit will be reduced, the

outgoings for bonuses, taxation and dividends may also be reduced.

Kafui. Not acceptable – cannot include selling costs or costs not related to

production.

Suzzy. Budgeted cost not acceptable.

Opinion

Inventory should be valued at lower of cost and net realisable value in

accordance with the Interational Accounting Standard 2. According to the

standard, The cost of inventories shall comprise all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to their present

location and condition.

The costs of purchase of inventories, as per the standard, comprise the

purchase price, import duties and other taxes (other than those subsequently

recoverable by the entity from the taxing authorities), and transport, handling

and other costs directly attributable to the acquisition of finished goods,

materials and services. The conversion costs on the other hand, include costs

directly related to the units of production, such as direct labour and a

systematic allocation of fixed and variable production overheads that are

incurred in converting materials into finished goods. Fixed production

overheads are those indirect costs of production that remain relatively constant

regardless of the volume of production, such as depreciation and maintenance

of factory buildings and equipment, and the cost of factory management and

administration. The variable production overheads are those indirect costs of

production that vary in proportion with the volume of production. Other costs

are included in the cost of inventories only to the extent that they are incurred

in bringing the inventories to their present location and acceptable condition.

In the case of Akasanoma Vision, the cost of production refers to the cost of

all production functions which (including production planning) amounts to

£55 per radio.



This is analysed as follows:

£

Direct labour and material 38

Bought-in components 5

Factory overheads 8

Production planning (£4,000 ÷ 1,000) 4

55

The cost of inventories may not be recoverable if those inventories are

damaged, become wholly or partially obsolete, or if their selling prices have

declined. The cost of inventories may also not be recoverable if the estimated

costs of completion or the estimated costs to be incurred to make the sale have

increased. This principle is consistent with the prudence concept, thus the

view that assets should not be carried in excess of amounts expected to be

realised from their sale or use.

Estimates of net realisable value are based on the most reliable evidence

available at the time the estimates are made. The estimates must take into

consideration fluctuations of price or cost directly relating to events occurring

after the end of the period to the extent that such events confirm conditions

existing at the end of the period. It also takes into consideration the purpose

for which the inventory is held.

Net realisable value therefore means the selling price to be obtained on sale in

the normal course of business less any costs inevitably incurred on sale. In the

case of Akatanoma Vision, the selling price of the set have been reduced due

to intensed competition to £60. This amount is however not achievable

without payment of Salesmen commission and also Royalties. The Net

realisable value is therefore is £60 less royalty of £2 and commission of £4

equalling £54. The 1,000 inventory of stereo sets therefore should be valued at

£54 as it is less than the cost of $55.



Answer 43: MESSRS GEORGE & CYRIL AKPANAWAY CONSULTS

Trading and profit and loss account for the year ended 31 March 20 ‘4

GH¢ GH¢

Sales 91,699

Opening stock 8,550

Purchases 61,038

69,588

Closing stock (9,735) (59,853)

31,846

Expenses:


Motor vehicle running costs 3,515

General trade expenses 4,736

Rates and insurance 2,290

Depreciation:

Freehold 242

Motor vehicles 748

Reduction in provision for doubtful debts (60) (21,304)

Net profit 10,542

Appropriation statement

George Akpanaway (3) 6,325

Cyril Akpanaway (2) 4,217

10.542

Balance sheet at 31 March 20 ‘4

Fixed assets: GH¢ GH¢ GH¢

Freehold Premises GH¢ (12,113 – 242) 11,871

Motor vehicles GH¢ (2,990 – 748) 2,242

14,113

Current assets:

Stock 9,735

Debtors 9,405

Less Provision (178) 9,227

Cash at bank and in hand 1,858

20,820

Creditors due in one year (8,716) 12,104

26,217

Partners’ capital accounts (W):



26,217



WORKING

Partners’ capital accounts

George Cyril George Cyril

GH¢ GH¢ GH¢ GH¢

Drawings 1,900 1,425 Balance b/d 11,875 7,125

Balance c/d 16,300 9,917 Profit 6,325 4,217

18,200 11,342 18,200 11,342

Balance b/d 16,749 10,216

Answer 48: WAWA AND MAHOGANEY FURNITURE PRODUCERS

(a) Statement of amended profit and appropriation of profit for the

year ended 30 September 20 ‘7

- +

£ £

Profit as per P & L (Wawa 12,360; Mahoganey 6,180) 18,540

One year’s depreciation on Mahoganey’s car 6,000 @25% 1,500

Mahoganey’s drawings entered as salary 10,000

Bank charges 80

Mark-up on goods in customers’ hands 1,800 @ 331/3% 600

Transposition of work in progress (15,730 – 12,940) x 2 5,580

Decrease in depreciation of plant (15,000 – 4,600)

= 10,400 @20% (W1) 2,080

Depreciation underprovided on plant sold (W1) 1,400

Bad debt provision 1,350

Sales returns 1,700

Legal and accountancy charges 1,240

6,520 37,550

(6,520)

Amended profit 31,030

Appropriation Wawa Mahoganey Total

£ £ £

Partners’ salary - 10,000 10,000

Interest on capital (W2) 6,080 1,600 7,680

Balance 2 : 1 8,900 4,450 13,350

14,980 16,050 31,030



(b) Elimination of suspense account

Suspense account

£ £

Substitution of balance per cash Balance per list of balances 6,160

book for balance per bank Drawings not debited

statement (4,330 + 880) 5,210 £(2,460 + 1,820) 4,280

Transposition of work in Sales returns 2 x 850 1,700

progress (15,730–12,940) x 2 5,580

Bad debt provision–Opening

balance ignored 1,350

12,140 12,140

(c) Balance sheet at 30 September 20 ‘7

Cost Depn

Fixed assets: £ £ £

Plant and equipment 85,100 38,020 47,080

Motor vehicles 36,000 16,500 19,500

121,100 54,520 66,580

Current assets:

Stock £(28,640 + 1,200) 29,840


Debtors £(30,390 – 1,800) 28,590

74,160

Less Creditors due in one year:

Bank overdraft 960

Creditors £(37,790 + 1,240) 39,030 (39,990)

34,170

100,750

Financed by:

Partners’ accounts Wawa Mahogany

£ £ £

Capital 76,000 20,000 96,000

Current 1,220 3,530 4,750

77,220 23,530 100,750

WORKINGS

(1) Plant and equipment £ £

Cost per list of balances 95,500

Add Proceeds of sales wrongly deducted 4,600

100,100

Less cost of disposal (15,000)

85,100



Depreciation per list of balances 49,100

Depreciation of plant sold (20% of 15,000 for 20 ‘3/04,

20 ‘4/05 and 20 ‘5/06, ie 3 x £3,000) (9,000)

40,100

Depreciation adjustment 20% on (15,000 – 4,600) (2,080)

38,020

Disposal:

Cost 15,000

Depreciation 9,000

Proceeds of sale 4,600 (13,600)

Depreciation underprovided 1,400

(2) Adjusted capital accounts

Wawa Mahoganey

£ £

Per list of balances 76,000 14,000

Car 6,000

76,000 20,000

Interest on Capital @ 8% 6,080 1,600

(3) Wawa’s adjusted account £

Stock value of garden furniture at 30/09/20 ‘6 10% of 3,600 (360)

Sold for 2,460

Profit included in the accounts 2,100

Amount already credited to Wawa 2/3 x 2,100 (1,400)

Adjustment required in favour of Wawa 700

(4) Partners’ current accounts

Wawa Mahoganey Wawa Mahoganey

£ £ £ £

Cash account 12,000 10,000 P&L a/c 14,980 16,050

Suspense account 2,460 1,820 Mahoganey’s

Wawa’s account (W3) 700 account (W3) 700

Balance c/f 1,220 3,530

15,680 16,050 15,680 16,050



Answer 52: OLUSEGUN INTERNATIONAL PLC, CATERING

Ordinary share account

$ $

Balance b/f 100,000

Cash 100,000

Balance c/f 240,000 Share premium a/c (bonus issue) 40,000

240,000 240,000

Balance b/f 240,000

Preference share account

$ $

Balance b/f 50,000

Cash 50,000

Balance c/f 110,000 Cash (rights issue) 10,000

110,000 110,000

Share premium account

$ $

Ordinary share account 40,000 Cash (ordinary shares) 50,000

Balance c/f 12,500 Cash (preference share) 2,500

52,500 52,500

Balance b/f 12,500

Balance sheet extracts at 31 December 20 ‘8

$

Capital and reserves:

Authorised

500,000 $1 ordinary shares 500,000

200,000 $1 6% preference shares 200,000

700,000

Allotted, called-up and fully paid:

240,000 $1 ordinary shares 240,000

110,000 $1 preference shares 110,000

350,000

Share premium account 12,500

362,500



Answer 59: AMAZING FREDDY’S FOOD DISTRIBUTION

Profit and loss account for the year ended 31 March 20 ‘1

Note £000

Turnover 1 4,137

Cost of sales (W1) (2,980)

Gross profit 1,157

Distribution costs (W1) (446)

Administration expenses (W1) (343)

Other operating income (W2) 46

Operating profit 2 414

Interest payable and similar charges £(15 + 17) (32)

Profit on ordinary activities before taxation 382

Taxation of profit on ordinary activities 3 (97)

Profit on ordinary activities after taxation 285

Dividends 4 (50)

Retained profit for the year 235

Statement of movement on reserves

Profit and loss account at 1 April 20 ‘0 736

Retained for the year 235

At 31 March 20 ‘1 971

Notes to the profit and loss account for the year ended 31 March 20 ‘1

(1) Accounting policies

(a) Turnover

Turnover represents sales to third parties and is stated net of

VAT, sales returns and allowances.

(b) Depreciation

Depreciation is provided on all fixed assets and calculated at rates

appropriate to write down the assets over their useful economic

lives as follows.

Freehold property 40 years

Plant and machinery 4 years

Furniture and fittings 8 years

(c) Stocks

Stocks are valued at lower of cost and net realizable value in

accardance with the IAS2.



(d) Grants

Revenue grants are credited to the profit and loss account in the

same period as the expenditure to which they relate. Where the

expenditure is to be incurred over a number of years, the grants

are credited to deferred income and amortised to match the

expenditure as it arises, as per the IAS20.

(2) Operating profit

Operating profit is stated after charging. £000

Depreciation 414

And after crediting

Rental income 35

Grants released to profit and loss account 11

(3) Taxation of profit on ordinary activities

£000

A corporation tax at 33% based on profits for the year 106

Over-provision in previous year (9)

97

(4) Dividends £000

Ordinary

Paid 20

Proposed (1,000,000 x 0.03) 30

50

WORKINGS

(1) Classification of costs

Cost of Distribution Administration

Sales Costs expenses

£000 £000 £000

Per question 193 240

Depreciation:

Freehold £(1,794 ÷ 40) 45

Plant £(955 + 55) ÷ 4 253

Furniture £(329 ÷ 8) 41

Purchases 3,058

Opening stock 141

Closing stock (219)

Bad debt 17

2,980 446 343



(2) Other operating income

£000

Grant received 55 ÷ 5 11

Rent received 35

46

Tutorial notes

(1) Assumptions made

(i) Depreciation of freehold property is charged to administrative

expenses.

(ii) Depreciation of plant and machinery (presumably installed in the

warehouse) is included under distribution costs. This seems appropriate

for a wholesale retailer.

(2) The basis of accounting could have been included under accounting

policies.



Answer 64: FUNDAMENTAL ACCOUNTING CONCEPTS

IAS 1 defines accounting concept in general as “the broad basic assumptions

which underlie the periodic financial accounts of business enterprises” and

names four (4) such concepts which are generally regarded as acceptable.

(a) Going Concern

This is the presumption that a business will continue to trade for the

foreseeable future, that is as opposed to going into liquidation. If a

business were on the verge of collapse, it will be necessary to write

down the assets to an amount which they would be likely to realise if

sold immediately. The going concern concept assumes that a healthy

business will not need a forced sales of assets to pay its debts as they

fall due, and therefore that, for example, fixed assets can be valued at

cost less depreciation, and stock at the lower of cost and net realisable

value. For this purpose, balances are carried down from one year to the

other.

(b) Prudence

This concept suggests that revenue and profits are taken into accounts

only when one can be sure of their having been earned. The usual

criterion for this is to say that only realised profits should be taken into

account, that is sales and other income which have either already

generated cash or are reasonably certain to do so in the near future.

For example, credit should not be taken for rent receivable from an

unreliable tenant unless the landlord is sure of receiving such rent. It is

also imprudent to overstate assets, eg by failing to charge adequate

depreciation or by valuing stock above cost. It is prudent to state the

effect of any pending law suit against the firm, which might have

financial burdens on the firm but very imprudent to realise any outcome

of law suit that the firm might have against any persons.

(c) Accruals

This concept, also known as the “marching” concept, requires that

revenue and expenditure are recognised in the accounts as they are

earned and/or incurred, but not only when they are received and/or paid.

Cash receipts and payments do not necessarily relate to the year or the

period in which they actually occurred; they may well relate to the

previous or following period. In such cases an adjustment needs to be

made to show in the profit and loss accounts the amount which does

relates to the period covered in the accounts. An electricity bill, for

example, may be received at the end of the year but may relate wholly



or partly to the year just ended. It should therefore be accrued and

charged to that year.

Depreciation of fixed assets is a further manifestation of this concept.

By depreciating fixed asset over its estimated economic useful life, its

cost is charged against the profits of the periods in which it is used, not

solely that of the period in which it was acquired.

(d) Consistency

This means that items in accounts should be treated according to the

same methods as in previous periods, so that the results of one period

can be meaningfully compared with those of previous and subsequent

periods. If, for example, there were to be a change in the method of

valuing stock or depreciating fixed assets, this would be likely to affect

any comparison which might be made between one balance sheet and

another. This is not to say that changes should never be made but that if

they are, the nature and reasons for the change and its responsible

financial effect should be disclosed in the notes to the accounts.

If no specific mention is made of these concepts in a set of accounts, it can

reasonably be assumed that they have all been complied with. Any departure

should be noted and explained in the notes to the accounts. The company’s

auditors may be expected to draw attention to the departure in their reports if

this were not complied with.



Answer 65: FREDDY’S CONNER

(a) Memorandum

To Directors of Freddy’s Conner Ltd

From Accountant

Date 1 November 20 ‘3

Subject Rent and rates

One of the fundamental accounting concepts as detailed in IAS 1 Presentation

of Financial Statements is the accruals concepts, which requires that revenue

and costs are accrued (i.e. recognized as they are earned or incurred but not as

money is received or paid). This implies that revenue and cost are matched

with one another so far as their relationship can be established or justifiably

assumed, and dealt with in the profit and loss account of the period to which

they relate.

The profit and loss account for the year ended 30 June 20 ‘3 should therefore

be charged with rent and rates incurred in respect of the period in order for it

to be set against revenues of that period. Any differences between the amount

charged and the amount paid should be dealt with through prepayment and

accruals. This would involved an adjustment to the accounts by increasing

profits by N12,300 (N16,400 x 9/12) (which is the amount attributable for the

coming accounting periods) and N15,000 (which is wholly for the next

accounting period) in respect of rates and rents respectively, and to increase

prepayment by N27,300 on the balance sheet.

(b)

IAS 1 Presentation of Financial Statements or IAS8 Accounting Policies,

Changes in Accounting Estimates and Errors state that the concept of

prudence is a broad basic assumption which underlies the periodic financial

accounts of business enterprises.

The concept is that revenue and profits are not anticipated, but are recognised

by inclusion in the profit and loss account only when realised in the form of

cash, or of other form of assets of which the ultimate cash realisation can be

assessed with reasonable certainly, and provision is made for all known

liabilities.

In the case of goods sent to customers on a sale or return basis, these may only

be included as sales for the period if, at the year-end, the customers have

agreed to buy them. If they have, the customers are debtors to the company

and the profit would be included in the profit and loss account of the period



assuming that the cash realisation of the proceeds could be foreseen with

reasonable certainly, i.e. that they will not prove to be bad.

On the other hand, if the customers had not by the year-end agreed to buy the

goods, the realisation of their sales price cannot be foreseen with reasonable

certainty and therefore they should be included in closing stocks at cost. In

this instance, consideration should also be given to whether any loss should be

foreseen if the goods with costumers have suffered any loss in value, eg

through deterioration or damage.

Under the latter assumption, the accounts would require adjusting to reverse

the entries relating to the sales of the goods, that is to reduce sales and debtors

by N40,000 and to increase closing stocks by the lower of their cost and net

realizable value.

(c)

Two fundamental accounting concepts as detailed in IAS 1 Presentation of

Financial Statement or IAS 8 Accounting Policies, Changes in Accounting

Estimates and Errors would be relevant in this situation, that is prudence and

going concern concerpts.

Firstly, it is necessary to assess, in the light of falling sales and the

introduction of the rival product, whether the stocks and work in progress are

fairly valued at cost, or whether a loss can be foreseen and immediately

provided for by valuing those goods at net realisable value, which may be

defined as the estimated proceeds of sale less all further costs to completion

and all cost to be incurred in marketing, selling and distributing.

Secondly, one must consider whether the valuation of stocks at net realizable

value is a valid basis of valuation, since it depends on the continued

operational existence of the company. For example, it requires the company

to complete the manufacture of work in progress and to sell it in an unforced

manner.

If the going concern assumption is valid, which assumes that the enterprise

will continue in operational existence for the foreseeable future, with no

intention or necessity to liquidate or curtail significantly the scale of operation,

then the stocks and other assets should be valued at their net worth to the

company at the balance sheet date which would assume immediate enforced

sale in their present condition.



Answer 67: ATONGO, THE SCIENCE STUDENT

Notes for meeting with Atongo, 14 January 20 ‘5

(a) Electricity

Charges in profit and loss accounts should reflect the amount due for the year

or period. Accruals (or matching) concept states that income and expenditure

should be recognised in accounts as they are earned or incurred respectively,

not necessarily as they are received or paid. This also involves prudence

concept which also states that not to accrue for electricity consumed is

overstating profits and understating liabilities, and thus painting too optimistic

a picture of the state of the business. The electricity bill for the year can

therefore be assumed, based on the previous average consumption. A

reasonable figure must be agreed upon and charged to the profit for the period

ending 20 ‘4 and previous one paid for inclusion in the appropriate accounting

period.

(b) Cash register

If fixed assets are written off all at once, this distorts the profit for that year

and gives a false impression of the results of the business. If they are not

depreciated at all, the value of the assets is overstated, as is profit.

Depreciation is principally an example of accruals/matching concept, thus

matching the cost of a fixed asset with the period(s) the entity expected to

benefit from the use of those assets. And also involves prudence concept, thus

failure to provide depreciation overstates assets as stated above, and in

particular allows extra drawings from higher profit figure. And this could in

the long run prejudice the solvency of the business. It is however important to

note that IAS 8, ensures that events are recorded in the accounts in accordance

with their materiality to the accounts. If the value of the cash register is very

significant in relation to the total value of the entity’s assets then it could be

recorded as assets. If, however, its value is very insignificant or immaterial

and would cost more in keeping it in the assets register with all the

depreciation complexities, then it could be written off as periodic cost.

(c) Outstanding sales orders

Atongo’s treatment seems reasonable at first sight. However, let him get away

with it this time and he will try it on with larger amounts and longer periods

next year. A firm cut-off date is important for the sake of accuracy, and also to

protect next year’s results, which could be distorted if the amount here is

material. This involves accruals, prudence and consistency concepts.

Consistency of treatment of like items year by year is important for the

purposes of comparison. It is important to note that the current transaction

occurred in the period of year 20 ‘5 so the sales cannot be recorded for 20 ‘4.



(d) Hotman’s New Shop

Prudence concept requires assets (stock in this case) not to be overvalued and

should be valued at net saleable value if lower than cost (this may be nil).

More fundamentally, the business is potentially in serious difficulties. Can it

continue trading for the foreseeable future? Only if we can be reasonably sure

that it can, it should be treated as a going concern. It is important for Atongo

to reconsider the value of his stock regarding the cuurent competition faces

from Hotman. Going concern concept presumes that a business can continue

trading for the foreseeable future. If it cannot, its assets should be valued on a

break-up basis, i.e. valued as if they were to be sold as soon as possible. It is

therefore very important to evaluate the threat posed by Hotman’s new

operations across the street. When it is obvious that Atongo cannot continue in

business, then the stock should be disposed off as quickly as possible.

Answer 71: LOGBA YOUNG LIONS PLC

GeeConsults Services

Chartered accountants

61 Melbourne Street

Chester CH12 3YY

Mr. Emmanuel Pasarani

Finance Director

Logba Young Ltd

55 Stallion Avenue

Logba Adzakoe, Ghana 25 January 20 ‘1

Dear Emmanuel

Deferred Research and Development Costs as Intangible Assets

Thank you for your letter of 22 January 20 ‘1 in which you requested advice

concerning the procedures which should be established in order to identify

development costs for capitalisation. My recommendations are based on

Internatonal Accounting Standard 38 (IAS38): Intangible Assets, which also

dealt with Research and Development, permits capitalisation of development

costs only if certain criteria are satisfied. It however, forbids capitalisation of

research based activities, unless such expenditure was acquired as part of

business combination. Accordingly my recommendations are as follows.



(a) Establish clear guidelines to enable research based activity to be

established

IAS38 distinguishes research and development activity by the presence or

absence of an appreciable amount of innovation. If the activity is research

based, and was internally generated then the activity must be treated as

expense. If the research activity is however purchased as part of an ongoing

project or business combination, it should be capitalised as an intangible asset

and amortised over a period. The standard stated that in the research phase of

an internal project, an entity cannot demonstrate that an intangible asset exists

that will generate probable future economic benefits and therefore, should be

recognised as an expense when it is incurred.

The standard also indentifies the following activities as research based:

1) Activities aimed at obtaining new knowledge; The expenditure

incurred in the search of new knowledge into the business operational

activities.

2) The search for, the evaluation of and final selection of, applications

of research findings or other knowledge; Thus the intial search for an

ideas, evaluation of those ideas and the selection of some among those

ideas.

3) The search for alternatives for materials, devices, products,

processes, systems or services; Thus looking for alternatives to

materials inputs for your product, the production process and even an

alternative product to your existing product.

4) The formulation, design, evaluation and final selection of possible

alternatives for new or improved materials, devices, products,

processes, systems or services.

(b) Establish and distinguish research phase activity from development

phase activity

As stated in above, you need to be sure that the activities involved meet the

criteria to qualify for development expenditure in order to be considered for

capitalisation as intangible asset. The standard demands that the research

phase of an internal activity must be separated from the development phase

and where it is imporsible to separate the two, then the expenditure must be

treated as periodic expenditure. The criteria here are the ability of the firm to

establish a clear ability of the activity to generate future economic value.

Accordingly, IAS 38 required that all the following conditions must be met for

an internal activity to qualify as development cost that could be classified as

intangible asset:



1) Your entity must establish that there exists technical feasibility of

completing the developed product so that it will be available for use or

sale.

2) Your entity must have good intention to complete the product beign

developed and use or sell it when completed.

3) Your entity shows that it has the ability to use or sell the product.

4) You should clearly demonstrate how the developed product will

generate probable future economic benefits. This can be done by

showing the existence of a market for the output of the development

expenditure or the intangible asset itself or, if it is to be used internally,

the usefulness of the intangible asset to the entity.

5) You must demonstrate the availability of adequate technical, financial

and other resources to complete the development and to use or sell the

asset.

6) You must also show your ability to measure reliably the expenditure

attributable to the development expenditure.

(c) Ensure that statutory and IAS 38 disclosure requirements are

satisfied

You should note that IAS 38 requires that the accounts disclose the total

amount of research and development charged in the profit and loss account.

This should be analysed into current year expenditure and amortisation of

deferred development expenditure. You are required to disclose the aggregate

amount of research and development expenditure recognised as an expense

during the period. Research and development expenditure comprises all

expenditure that is directly attributable to research or development activities.

You shall also disclose the following for your intangible assets resulting from

research and development:

1) State whether the useful lives of the capitalized evelopment cost are

indefinite or finite and, if finite, the useful lives or the amortisation rates

used;

2) You should indicate the amortisation methods used for the deffered

development cost with finite useful lives;

3) You should also indicate the gross carrying amount and any

accumulated amortization at the beginning and end of the period;

4) Show a statement reconciling the carrying amount at the beginning and

end of the period. The analysis should show all new additions in terms

of acquisition and/or new internal expenditure incurred during the year.

This should also include any increase or decrease resulting from

revaluation and/or impairment losses and any translation cost from

foreign affiliates.



I strongly believe that these requirements apply to Logba Young Lions plc

because of its public limited company status. If you require any further

guidance on any of the above recommendations I would be delighted to offer

you further assistance.

Yours sincerely,

Blewusi Ekegey

Chief Managing Consultant

Answer 78: KINGDOM FURNITURE, PLC

Cash flow statement for the year ended 30 April 20 ‘7

$000 $000

Net cash inflow from operating activities (note 1) 1,784

Returns from investments and servicing of finance

dividend paid (W5) (991)

Net cash outflow from returns on investment and

Servicing of finance (991)

Taxation:

Corporation tax paid (W4) (1,314)

Tax paid (1,314)

Investing activities :

Purchase of land and buildings (W3) (634)

Purchase of plant and equipment (1,668)

Purchases of investments (8,676)

Net cash outflow from investing activities (10,978)

Net cash outflow before financing (11,499)

Financing:

Issue of share capital (W2) 13,014

Redemption of debentures (1,345)

Net cash inflow from financing 11,669

Increase in cash and cash equivalents (note 2) 170



Notes to the cash flow statement

(1) Reconciliation of operating profit to net cash inflow from operating

Activities.

$000

Operating profit 6,726

Depreciation charges (W1) 1,075

Increase in stocks (730)

Increase in debtors (5,365)

Increase in creditors 78

1,784

(2) Analysis of changes in cash and cash equivalents during the year

$000

Bank balance at 1 May 20 ‘6 885

Increase in cash and cash equivalents 170

Bank balance at 30 April 20 ‘7 1,055

(3) Analysis of changes in financing during the year

Share Share Debentures

Capital premium lons

$000 $000 $000

Balance at 1 May 20 ‘6 12,220 6,110 5,194

Cash inflows/(outflows) 13,014 (1,345)

Premium on redemption of debentures - 122

Premium on issue of shares (4,915) 4,915 -

Balance at 30 April 20 ‘7 20,316 11,028 3,971

WORKINGS

(1) Plant and equipment depreciation

$000 $000

Balance at 1 May 20 ‘6 6,551 Balance at 30 Apr 20 ‘7 7,144

Additions 1,668 Depreciation 1,075

8,219 8,219

(2) Proceeds of issue of shares

Shares capital and share premium $000

At 30 Apr 20 ‘6 18,330

At 3 Apr 20 ‘7 31,344

3,666 shares @ $3.55 13,014



(3) Land and buildings

$000 $000

Balance at 30 Apr 20 ‘6 24,171

Revaluation surplus

$(9,105 – 3,238) 5,867

New Purchases 634 Balance at 30 Apr 20 ‘7 30,672

30,672 30,672

(4) Taxation

$000 $000

Cash paid 1,314 Balance at 30 Apr 20 ‘6 1,512

Balance at 30 Apr 20 ‘7 3,417 P&L account 3,219

4,731 4,731

(5) Dividends

$000 $000

Cash paid 991 Balance at 30 Apr 20 ‘6 587

Balance at 30 Apr 20 ‘7 635 P&L account 1,039

1,626 1,626

Answer 81: JUNE JULY ENGINEERING BUSINESS

Cash flow statement for the year ended 31 December 20 ‘2

$ $


Returns on investments and servicing of finance – Drawings (112,438)

Investing activities :

Purchase of fixed assets (W1) (67,445)

Sale of fixed assets ($11,084 + 6,896) 17,980



Financing – Capital introduced 82,100

Net inflow from financing 82,100

Decrease in cash and cash equivalents (5,010)




(1) Reconciliation of operating profit to net cash inflow from operating

activities

$

Operating profit 92,945

Depreciation charge (W1) 30,692

Profit on disposal of fixed assets $(5,337 + 2,791) (8,128)

Increase in stock and work in progress (104,756 – 70,040) (34,716)

Increase in debtors (35,466 – 22,706) (12,760)

Increase in creditors (44,894 – 38,134) 6,760

74,793


$

Balance at 31 December 20 ‘1 12,698

Net cash outflow (5,010)


(3) Cash and cash equivalents as shown on the balance sheet

20 ‘2 20 ‘1 Change

$ $ $

Cash at bank and in hand 7,688 12,698 (5,010)


Capital

Balance at 1 January 20 ‘2 164,200

Cash inflow 82,100


WORKINGS

(1) Fixed assets – plant, equipment, etc Cost

$ $

Balance b/f 138,634 Disposals account 24,630

Additions 67,445 Balance c/f 181,449

206,079 206,079

Depreciation

$ $

Disposals account 20,525 Balance b/f 29,671

Balance c/f 39,838 Depreciation charged to

P&L account 30,692

60,363 60,363



Plan & Equipment Disposals account

$ $

Plant, equipment – cost 24,630 Sales proceeds 6,896

P&L account – Profit on Depreciation on sales 20,525

disposal 2,791

27,421 27,421

(2) Trade investments – disposals account

$ $

NBV 5,747 Sales proceeds 11,084

P&L account – profit 5,337

11,084 11,084



Answer 82: DIVINE NOOQUE VOLUNTARIES LTD

(a) Cash flow statement for the year ended 31 March 20 ‘2

€000 €000


Returns on investments and servicing of finance

Interest paid (W2) (540)

Dividends paid (67)

Net cash outflow on ROI and servicing of finance (607)

Taxation:

Corporation tax paid (140)

Tax paid (140)

Investing activities:

Payments to acquire fixed assets (2,683)

Receipts from sales of fixed assets 186



Financing:

Issue of ordinary shares (3,910 – 2,794) 1,116

Issue of debentures (1,676 - 838) 838

Redemption of preference shares (438 – 670) (232)

Net inflow from financing 1,722

Decrease in cash and cash equivalents (note 2) (94)


(1) Reconciliation of operating profit to net inflow from operating

activities

€000

Operating profit 839

Depreciation charges (W1) 894

Profit on sale of plant (W1) (55)

Increase in stocks (358 – 207) (151)

Increase in debtors (335 – 223) (112)

Increase in creditors (62 – 49) 13

Net cash inflow from operating activities 1,428


€000

Balance at 1 January 20 ‘7 (33)

Net cash outflow (150)

Balance at 31 December 20 ‘7 (183)



(3) Cash and cash equivalents as shown in the balance sheet

20 ‘7 20 ‘6 Change

€000 €000 €000

Cash at bank and in hand 84 112 (28)

Bank overdraft (267) (145) (122)

(183) (33) (150)


Ordinary Preference Debenture

share share loans

€000 €000 €000

Balance 1 January 20 ‘7 2,794 670 838

Cash inflow/(outflow) from financing 1,116 (232) 838

3,910 438 1,676

WORKINGS

(1) Fixed assets and depreciation

Plant and machinery

€000 €000

Balance b/f 1,676 Disposals 466

Additions (bal) 1,304 Balance c/f 2,514

2,980 2,980

Payment for new Fixed Assets:

Plant and machinery €(1,304 – 18) 1,286

Land and buildings €(3,910 – 2,793) 1,117

Other equipment €(1,397 – 1,117) 280

2,683

Provision for depreciation – Plant & Machinery

€000 €000

Disposals 335 Balance b/f 558

Balance c/f 838 Charge to P & L (bal) 615

1,173 1,173

Charge for year: €000

Pant and machinery (as above) 615

Land and buildings €(335 – 279) 56

Other equipment €(670 – 447) 223

894



Plant & Machinery Disposal account

€000 €000

Plant & Machinery 466 Bank 186

Profit & Loss a/c - Profit 55 Depreciation a/c 335

527 527

(2) Interest expense a/c

€000 €000

Cash paid 540 Balance b/d 18

Balance c/d 37 P&L account 559

577 577

(3) Creditors

20 ‘7 20 ‘6

€ €

As per question 117,000 67,000

Less interest accrual (37,000) (18,000)

Plant creditor (18,000) -

62,000 49,000

(b) Ratio analysis

(1) Profitability

Profit before interest

and taxation

(1) Returns capital employed = ×100

Share + Loan capital +

Reserves (“capital employed”)

20 ‘7 839

6,164 ×100 = 13.61%

20 ‘6 587

4,369 ×100 = 13.44%

Sales

(2) Asset turnover =

Capital employed

20 ‘7 8,380

6,164 = 1.36 times

20 ‘6 6,983

4,369 = 1.6 times



Profit before interest and tax

(3) Net profit margin = × 100

Sales

20 ‘7 839

8,380 x 100 = 10%

20 ‘6 587

6,983 × 100 = 8.41%

Gross profit

(4) Gross profit margin = × 100

Sales

20 ‘7 5,029

8,380 × 100 = 60%

20 ‘6 4,749

6,983 × 100 = 68%

Cost of sales

(5) Stock turnover =

Stock

20 ‘7 3,351

358 = 9.36 times

20 ‘6 2,234

207 = 10.79 times

Comments

Return on capital employed can be misleading without further analysis. (In

this case it suggests no significant change from 20 ‘6 to 20 ‘7. In fact asset

turnover has gone down from 1.6 to 1.36 while the net profit margin has

increased for about 1.6%). Comparison between net and gross profit margins

indicates that overheads have been well controlled. Though gross profit

margin went down of about 8%, this did not reduce the net profit margin

which rather saw a little increase.

However, the increase in cost of sale of 50% was not comparable to the pantry

20% increase in sales. The 20% increase in sales also compares unfavourably

with the increase in fixed assets (40%) and in stocks (73%). This could as a

result of sluggishness among the salesmen. Alternatively it could also result

from an expansion of the business during the lateer part in the year which will

not be reflected in increased sales until 20 ‘8. The discrepancy between the



increase in cost of sales (50%) and that in overheads (0.1%) can be explained

as discipline in overhead cost management. This could also be due to

reduction in sales and distribution activities as the distribution cost remained

unchanged. It might therefore be the resons for a slow increase in the sales

figure. However, the high percentage increase in the cost of sales could also

be due to heavy increases in the cost of raw materials or direct labour.

Further information needed

Ratios help to indicate where questions should be asked. They do not

themselves provide answers. Thus, in order to draw conclusions from the

ratios mentioned above, the following further information would happen only

if a full investigation were carried out).

Detailed analysis of trends from monthly management accounts.

Details of purchases of fixed assets – what are they and at what point

during the year did the expenditure occur.

Detailed analysis of the distribution cost during the current year.

Analysis of stock movements with particular emphasis on the

proportions of raw materials and finished goods in the stock increase.

The stock turnover ratio compared with that of other companies in

similar trades.

(ii) Liquidity

Current assets

(1) Current ratio =

Current liabilities

20 ‘7 417

312 = 1.3 times

20 ‘6 291

255 = 1.1 times

Current assets less stock

(2) Acid test (or quick) ratio =

Current liabilities

20 ‘7 225

312 = 0.72 times

20 ‘6 180

255 = 0.71 times



Debtors

(3) Average collection period =

Average daily sales

20 ‘7 180,000

12,328 = 14.5 days (€4.5m + 365)

20 ‘6 120,000

10,273 = 12 days (€3.75m + 365)

Comments

The calculation of the first two ratios assumes that the bank overdraft is to be

treated as a short-term liability, as shown in the accounts. If this could be

negotiated so as to become repayable more than twelve months after the

balance sheet date, the position would look rather better (current ratio 2.4 :

1.6, acid test ratio 1.3 :1.0).

It should not always be assumed that an acid of less than 1 is a sign of

insecurity, much will depend on the realisability of stocks and the exact time

at which the liabilities will fall due.

The debtors’ collection period appears to be very low in terms of days’ credit

taken. It has been calculated using the information in the published accounts,

but a more realistic figure might be arrived at if cash sales were excluded.

Further information needed

Some indication of any seasonal fluctuations in the company’s trade: is

the stock level at the end of December typical for the whole year?

The possibility of re-negotiation of the bank overdraft.

When are the dividends and tax due to be paid?

Comparative amounts of cash and credit sales, and in the case of the

later, a review of the effectiveness of the company’s credit control and

an age analysis of debtors.

Note: The comprehensive nature of this answer is to assist students in this

area, this complete solution could not be achieved under exam conditions.

Questions and answers

Business

Transcript of Questions and answers