SCHOOL OF BUSINESS & ECONOMICS DEPARTMENT OF COMMERCE FINAL EXAM: JUNE SEMESTER 2018 UNIT: FINANCIAL ACCOUNTING THEORY CODE: FIN 610X -------------------------------------------------------------------------------------------------------------------- INSTRUCTIONS TIME: 3 HOURS 1. Answer question one and any other two Questions 2. Show all your workings 3. Question one has 50 marks and other questions have equal marks of 25 each. Question One a) Explain how the following concepts will assist you in preparing financial statements i) Separate valuation concept ii) Money measurement concept iii) Materiality concept iv) Accruals concept v) Going concern concept ( Total 15 marks) b) How will you ensure that your accounting information meets the following qualities i) Relevance ii) Comparability iii) Reliability iv) Understandability ( Total 12 marks) c) With clear examples, explain the terms accounting bases and accounting policies (5 marks) d) Company X purchased three non-current assets in the year January 2015 as follows: i) Plant and machinery sh.5,000,000 ii) Motor vehicles sh. 3,000,000 iii) Land and buildings sh. 10,000,00 ( land value sh. 4,000,000) On 10th June 2016 the company disposed off part of plant and Machinery whose original cost was sh.800, 000 for sh.560, 000.On 12th October 2016 the company purchased more motor vehicles valued sh. 2,700,000.On 30th December 2017 the company decided to revalue its Land and buildings to sh. 18,000,000. Required a) Prepare the necessary accounts to record the above changes as per the IAS 16 requirements (10 marks) b) Prepare the property, plant and equipment schedule for each year to show the value of PPE to be reported in the balance sheet in each year (8 marks) Question Two The accountant of W. Co has prepared the following list of account balances as at 31 December 2017 sh‘ 000’ 70cent ordinary shares (fully paid) 700 9% sh1 preference shares (fully paid) 200 15% Loan stock 400 Retained earnings 1.1.2017 484 General reserve 1.1.2017 342 Land and buildings 1.1.2017(cost) 860 Plant and machinery 1.1.2017(cost) 1,660 Aggregate depreciation Buildings 1.1.2017 40 Plant and machinery 1.1.2017 444 Inventory 1.1.2017 380 Sales 5390 Purchases 4304 Preference dividend 14 Ordinary dividend (interim) 16 Interest on Loan stock 20 Wages and salaries 508 Light and heat 62 Sundry expenses 226 Suspense account 270 Trade accounts receivable 358 Trade accounts payable 390 Cash 252 ADDITIONAL INFORMATION a) Sundry expenses include sh16, 000 paid in respect of insurance for the year ending 1 September 2018. Light and heat does not include an invoice of sh10, 000 for electricity for the three months ending 2 January 2018, which was paid in February 2018. Light and heat also includes sh40, 000 relating to salesmen’s commission. b) The suspense account is in respect of the following items. sh ‘ 000’ Proceeds from the issue of 100,000 ordinary shares 130 Proceeds from the sale of plant 300 420 Less consideration for the acquisition of Mary & Co 285 135 c) The net assets of Mary & Co were purchased on 3 March 2017. Assets were valued as follows: sh‘ 000’ Investments 231 Inventory 34 265 The entire inventory acquired was sold during 2017. The investments were still held by W company at 31.12.17. Any goodwill arising from the acquisition is considered to be impaired at the rate of 10%. d) The property was acquired some years ago. The buildings element of the cost was estimated at sh100, 000 and the estimated useful life of the assets was fifty years at the time of purchase. As at 31 December 2017 the property is to be revalued at sh1200, 000. e) The plant which was sold had cost sh450, 000 and had a net book value of sh174, 000 as on the date of disposal. Sh66, 000 depreciation is to be charged on plant and machinery for 2017. f) The management wish to provide for: i) A final ordinary dividend of 4cent per share. ii) A transfer to general reserve of sh10, 000. iii) Audit fees of sh8,000 g) Inventory as at 31 December 2017 was valued at sh6600, 000 (Cost). h) Taxation is at the rate of 30%. Required a) Prepare the income statement of W. Co Limited as at 31 December 2017. (Balance sheet not needed) (20 marks) b) Explain how you can solve the problem of measurement/valuation when dealing with items in books of accounts. ( 5 marks) Question Three The balance sheet of S. Ltd for the years ended 31 December, 2016 and 31 December 2017 are summarized and shown below: 2017 2016 Non- current assets sh sh Premises 10,000 10,000 Fixtures 17,000 11,000 Vehicles 12,500 8,000 Current assets Stock 17,000 14,000 Debtors 8,000 6,000 Bank and cash 23,000 29,500 87,500 78,500 Equity & Liabilities Ordinary shares of sh1 per share 60,000 50,000 Reserves Profit and Loss 5,000 4,000 Current liabilities Trade creditors 4,000 2,500 Taxation 1,500 1,000 Proposed dividends 2,000 1,000 Non-current liabilities 10% debentures 15,000 20,000 87,500 78,500 Note: The 10% debentures were redeemed and cancelled on 31 December 2017 The profit and Loss account for the year ended 31 December 2017 is summarized below: sh sh Turnover 36,250 Cost of sales (21,750) Gross profit 14,500 Profit on disposal of vehicles 700 15,200 Less: Wages and salaries 1,600 Other (cash) expenses 3,600 Depreciation 3,500 Debenture interest 2,000 10,700 Profit before tax 4,500 Less: Tax 1,500 Profit after tax 3,000 Less: Proposed dividends (2,000) Retained profit: for year 1,000 : Brought forward 4,000 : Carried forward 5,000 Required a) Prepare a cash flow statement for the company as at 31st December 2017 with necessary explanations. (20 marks) b) When preparing a cash flow statement one needs to understand the flow of Operating activities, investing activities and financing activities of any business. How can you differentiate the activities mentioned here? ( 5 marks) Question Four You have been provided with the following summarised accounts of G. Ltd for the year ended 31 March 2017: Balance sheet as at 31 March 2017 Fixed assets: Sh. Sh. Sh. Freehold property (Net book value) Plant and machinery (Net book value) Motor vehicles (Net book value) Furniture and fittings (Net book value) Current Assets: Stocks Debtors Investments Current liabilities: Trade creditors Bank overdraft Corporation tax Dividends payable Financed by: Issued and fully paid: 400,000 Sh.1 Ordinary shares Capital reserve Revenue reserve Loan capital: 400,000 10% Sh.1 Debentures 238,400 878,400 176,000 107,200 1,000,000 400,000 120,000 1,520,000 (1,400,000) 480,000 800,000 200,000 200,000 1,680,000 120,000 1,800,000 400,000 200,000 800,000 400,000 1,800,000 Profit and loss account for the year ended 31 March 2017 Sh. Sales (credit) Profit after charging all expenses except interest on debentures Less: debenture interest Profit before tax Corporation tax Less: ordinary dividend proposed Retained profit transferred to revenue reserve 4,000,000 440,000 40,000 400,000 176,000 224,000 107,200 116,800 The following additional information was available: 1. The purchases for the year were Sh.2, 160,000 while the cost of sales was Sh.3, 000,000. 2. The market price for G. Ltd ordinary shares as at 31 March 2017 was Sh.5 3. The company estimates the current value of its freehold property at Sh.1, 100,000. Required: a) Compute the necessary ratios that can explain the present status of profitability, liquidity and efficiency of the company and give necessary comments/interpretations (15 marks) b) What are the main limitations of the ratios that you have computed above? ( 5marks) c) Who do you expect to be the main users of the above computed ratios? ( 5marks) Page 7 of 7 image1.png