Financial Accounting

Answer all questions in Part A

Select any three Questions in Part B

Part A – Compulsory Question

Question 1
The following trial balance is extracted from the books of Pooh Bear Ltd at 31.12.2020 was as
follows;
Trial Balance as on 31.12.2020
Dr Cr
Ordinary Share Capital 350,000
Retained profits at 31.12.2019 30,000
Premises at cost 350,000
Provision for depreciation for premises as at 31.12.2019 51,000
Machinery at cost 114,000
Provision for depreciation for machinery as at 31.12.2019 21,000
Purchases 463,700

Sales 825,300
General expenses 14,600
Wages and salaries 179,400
Business rates 15,800
Electricity 4,800
Bad debts 1,400
Allowance for doubtful debts at 31.12.2019 1,200
Trade receivable 85,000
Trade payable 68,300
Inventory at 31.12.2019 81,900
Cash balance 36,200
1,346,800 1,346,800
1. Inventory in December 2020 is valued as 8,200
 2. Wages and salaries due at 31.12.2020 amounted to 2,000 and Business rates paid in advance
at 31.12.2020 amounted to 500.
3. Depreciation charge on straight line – Premises – 12% and machinery 20% per annum.
4. Provide corporate tax of 75,000

Required: Prepare the following for the purpose of publication

1. Comprehensive Income Statement/ Profit and loss statement (10 Marks)
2. Statement of Financial Position/ Balance sheet (8 Marks)
3. Statement of changes in equity (5 Marks)
4. Relevant notes to the financial statements (7 Marks)

(Total 30 Marks)
Question 2
Select the most appropriate answer
1. Which financial statement uses the expanded accounting equation?
a) Income statement
b) Balance sheet
c) Cash flow statement
d) Statement of stockholder’s equity

2. The accrual basis of accounting records revenues when they are:

a) Collected
b) Earned
c) Contracted
d) Readily available for use

3. The account format that displays debits, credits, balances, and headings.
a) General journal
b) General ledger
c) T-account
d) Ledger account

4. Asset accounts have what type of balance?

a) Debit
b) Credit
c) Contra
d) All of the above
 5. A discount allowed account has what type of balance?
a) Debit
b) Credit
c) Contra
d) All of the above
(Total 10 Marks)

Part B
Answer any 3 Questions
Question 3
1. Explain the following terms
a. Trial Balance
b. Legers
c. Prime day books

2. Write up the following transactions into the extended accounting equation.

Dec 1 Started a business with cash Rs. 1,000,000.

Dec 2 Bought goods on credit from Pepper Rs. 50,000.
Dec 5 Sold Rs.25,000 cost of goods at a value of Rs. 35,000
Dec 7 Paid Rs.100,000 of cash to the firms’ bank account.
Dec 11 Sold goods on credit to Handy Rs. 45,000. (Cost Rs. 30,000)
Dec 15 Purchased furniture for cash Rs.60,000.
Dec 25 Cash Purchase Rs. 12,500.
Dec 29 Bought Equipment paying by cheque Rs. 9,500.
Dec 31 Bought fixtures Rs. 120,000 on credit from Arpico Ltd. (10 Marks)

(Total 20 Marks)
Question 4
The following is table illustrates firm comparison over last three years ended 31 March.

Ratio 2018 2019 2020

Gross Profit *100
45% 69% 60%
Sales
Net Profit *100
49% 55% 52%
Sales
Sales %
47% 53% 55%
Assets Employed
Distribution & Administration Expenses * 100
36% 32% 34%
Sales
22% 37% 31%
Net Profit *100
Capital Employed

Identify the period in which company has performed well in terms of the profitability.
Discuss
(12 Marks)
Select the most appropriate answer
1. Which of the following statements are true about Ratio Analysis?
A) Ratio analysis is useful in financial analysis.
B) Ratio analysis is helpful in communication and coordination
C) Ratio Analysis is not helpful in identifying weak spots of the business.
D) Ratio Analysis is helpful in financial planning and forecasting.
a) A, B and D
b) A, C and D
c) A, B and C
d) A, B , C, D

2. Which of the following are limitations of ratio analysis?

A) Ratio analysis may result in false results if variations in price levels are not considered.
B) Ratio analysis ignores qualitative factors
C) Ratio Analysis ignores quantitative factors
D) Ratio Analysis is historical analysis.

a) A, B and D
b) A, C and D
c) A, B and C
d) A, B , C, D

3. Which of the following conclusions could be drawn if the gross profit ratio falls from 25%
to 18%
a) There has been a deliberate change in trading policy
b) There has been a mistake in counting or valuing closing inventory
c) There has been an increase in costs which could not be passed on to the customers
d) There has been shop-lifting by customers or pilferage by staff not accounted fo

4. Sales in the year ending 31st March 2019 were £43,200. Identify the gross profit ratio, as a
percentage, if gross profit for the year was £5,400
a. 18%
b. 20%
c. 12.5%
d. 25%

(8 Marks)
(Total 20 Marks)

Question 5
1. The objective of a bank reconciliation is to reconcile the difference between the cash book
balance, and the bank statement balance.”
List down 10 reasons for the difference between two balances. (5Marks)
 2. Mr. Alpha’s Cash Book at 30th June 2018 showed an overdrawn amount of Rs.12,500.00
but his bank statement has shown an overdrawn value of
Rs. 12,144.00 The differences of the two accounts are stated as follows.

th
i. Cheques totaling Rs.1500 drawn on 28 June 2018 had not been presented to the bank for
payment
ii. Interest amounting to Rs.520 had been debited by the bank but not entered in the cash
book.
iii. Dividends received was Rs.1250, it has been paid directly to the bank but not been entered
in the cash book
iv. Bank charges debited by the bank was Ts.500
v. A cheque of Rs.958 paid by Mr. Alpah’s secretary on 2nd June 2018 for the monthly rental
of the building was entered in the cash book as Rs. 859
vi. The payment side of the cash book had been overcast by Rs.25
vii. Cheques drawn amounting to Rs.5600 had been entered in the cash book had not been
presented
viii. Insurance premium directly paid by the bank was Rs.4800
ix. Rs.200 was wrongly debited to Mr.Alpha’s account by the bank.
x. Rs.12000 worth Cheques deposited in to bank but only Rs.7500 worth of cheques have
been realized on 30th June 2018.
xi. A cheque for Rs.2400 in favour of Beeta Ltd., had been omitted by the bank from its
statement, the cheque having been debited to another customer’s account.
You are required to prepare bank reconciliation statement as at 30th June 2018 after adjusting the
cash book. (15 marks)

(Total 20 Marks)
Question 6
From the following information prepare the manufacturing, trading and profit and loss account for
the year ending 31 December 2018 for the firm of J. Jones.
Rs. Rs.
Purchase of raw materials 258,000
Fuel and light 21,000
Administration salaries 17,000
Factory wages 59,000
Carriage outwards 4,000
Rent and rates 21,000
Sales 482,000
Returns inward 7,000
General office expenses 9,000
Repairs to plant and machinery 9,000
Stock at 1 January 2018
Raw materials 21,000
Work in progress 14,000
Finished goods 23,000
Sundry creditors 37,000
Capital account 457,000
Freehold premises 410,000
Plant and machinery 80,000
Debtors 20,000
Provision for depreciation on plant and
Machinery at 1 January 2018 8,000
Cash in hand 11,000
984,000 984,000

Additional Adjustments:
(a) Stock in hand at 31 December 2018 (Rs.)
Raw materials 25,000
Work in progress 11,000
Finished goods 26,000
(b) Depreciation of 10% on plant and machinery – straight line method
(c) 80% of fuel and light and 75% of rent and rates to be charged to manufacturing
(d) Doubtful debts provision – 5% of sundry debtors
(e) Rs. 4,000 outstanding for fuel and light
(f) Rent and rates paid in advance –Rs.5,000

(Total 20 Marks)

Question 7
Select the most appropriate answers for the following multiple choice questions and indicate
the selected answer in your writing sheet

1. The basic purpose of an accounting system is to:

a. Develop financial statements in conformity with generally accepted accounting principles.
b. Provide as much useful information to decision makers as possible, regardless of cost.
c. Record changes in the financial position of an organization by applying the concepts of
double-entry accounting.
d. Meet an organization's need for accounting information as efficiently as possible.

2. Which is the most important characteristic that all assets of a business have?
a. Long life of assets
b. Value of asset
c. Intangible nature of assets
d. Future economic benefits

3. If the business's owner withdraws cash for his/her personal use what will be the effect on
capital?
a. Increase in capital
b. Remain the same
c. Decrease in capital
d. No effect on capital

4. Which of the following calculates a sole trader’s net profit for a period?
a. Closing net assets + drawings – capital introduced – opening net assets
b. Closing net assets – drawings + capital introduced – opening net assets
c. Closing net assets – drawings – capital introduced – opening net assets
d. Closing net assets + drawings + capital introduced – opening net assets
5. Which of the following statements is incorrect regarding capital account?
a. Debit increases the capital account balance
b. Credit increases the capital account balance
c. Fresh capital increases the capital account balance

6. In income statement, gross profit is always equal to

a. Sales-expenses
b. Incomes-expenses
c. Sales-cost of goods sold
d. Sales-selling costs

7. Office equipment is a ________ asset for a computer manufacturer and the same office
equipment is a _________ asset for a company that deals in these equipments
a. Current, Fixed
b. Fixed, intangible
c. Tangible, intangible
d. Fixed, current

8. Identify the external user of financial information or financial statements

a. Management of the business
b. CFO of the business
c. Employees of the business
d. Investors of the business

9. The opening balance of “provision for doubtful debts account” is $1000 whereas the closing
balance of debtors account is 100,000. What amount of provision for doubtful debts should be
charged to income statement using a 5% provision for doubtful debts for the current
accounting period?
a. $5000
b. $4000
c. $2000
d. $1000

10. A fixed asset was bought for $5000. Its accumulated depreciation is $3000 and rate of
depreciation is 20%. Calculate its depreciation expenses for the current accounting period
using reducing balance method?
a. $600
b. $2000
c. $300
d. $400 (Total 20 Marks)