1 (a) Give one example of a current asset.

Transcription

1 1 (a) Give one example of a current asset. (b) Name the accounting concept which states that only the financial transactions of the business should be recorded in the business s books. (c) Green bought goods on credit from Jones. In Green s ledger, this transaction was entered on the credit side of Jonah s account. (i) Name this type of error. (ii) Green returned some of the goods to Jones as faulty. Name the document which Green sent to Jones. (iii) Name the books of prime (original) entry in which the return of the goods was recorded, 1 in Green s books. 2 in Jones s books. (d) State the basis on which a business should value its closing stock. (e) Name the final account to which the balance of the Carriage Outwards account is transferred at the end of the financial year. (f) Joseph owns a photographic business. For each of the three items below, place one tick ( ) in the correct box. 1 New lighting equipment 2 Cost of installing new lighting 3 Repairs to camera and enlarger Revenue expenditure Capital expenditure (g) For the financial year ended 30 September 2002, a business s Insurance account showed the following. $ 1 October 2001 Balance brought down (Dr) January 2002 Paid premium for 12 months to 31 December Calculate the amount of the charge for insurance shown in the Profit and Loss Account for the year ended 30 September Show your workings. (h) Explain what is meant by a compensating error. (i) On 30 June 2002 the bank balance shown in a trader s cash book was $3200 (Dr). Amounts paid into his bank account, but not yet entered on the bank statement, totaled $600. No other amendments were made. (i) Calculate the balance shown on the trader s bank statement on 30 June Show your workings. (ii) In the trader s balance sheet as at 30 June 2002, state the amount that would be entered for Bank under current assets. Ans: 1 (a) Inventory; trade receivables; prepayments; bank; cash (b) business entity concept (c) (i) Error of commission (ii) Debit note (iii) 1. Purchases returns journal 2. Sales returns journal (d) Lower of cost or net realizable value (e) Profit and Loss account (f) 1. Capital 2. Capital 3. Revenue (g) Profit and loss account charge $ 9500 (h) Incorrect entries of equal amount which cancel each other out.

2 (i) (i) $2600 (ii) $ (a) State one purpose for which the journal may be used. (b) Name the final account to which the balance of the carriage outwards account is transferred at the end of the financial year. (c) State the basis on which a business should value its closing stock. (d) (i) An invoice showed a balance owing of $1000, less 2 % discount for payment by the end of the month. The debtor paid in time and claimed the discount. How much did he pay? Show your workings. (ii) Name the type of discount claimed by the debtor in (i) above. (e) State the name given to the list of debit and credit balances in a business s books on a given date. (f) Name a partnership s final account which shows the division of profits and losses between the partners. (g) Explain what is meant by a compensating error. (h) Sam owns a factory making agricultural machines. Give one example of capital expenditure and one example of revenue expenditure for his business. 1. Capital expenditure 2. Revenue expenditure Ans: 1 (a) Opening entries, purchases/sale of fixed asset on credit, correction of errors, writing off bad debt, yearend adjustments, items which cannot be entered in other books of prime entry, or acceptable alternative. (b) P/L Account (accept Trading and Profit and Loss Account) (c) At lower of cost of net realizable value (d) (i) $1 000 (1000 2½%= 25) = 975 (ii) Cash discount (accept discount allowed (NOT received), early settlement) (e) Trial balance NOT T/B (f) Appropriation Account (g) Two errors, being incorrect entries of equal amounts which cancel each other out. (h) 1. Plant and machinery, premises, motor vehicles, office equipment (NOT agricultural machines) 2. Wages, raw materials, electricity, office or general expenses, or acceptable alternatives in both cases.

3 3. (a) State one reason why a business uses a purchases journal. (b) Wakou is a trader. He keeps a full set of accounting records. The books of original (prime) entry show the following transactions for August Purchases Journal 2004 $ $ Aug 4 Mendez Goods 350 Trade discount Perez Goods Total for month 395 Purchases Returns Journal 2004 $ $ Aug 10 Mendez Goods 200 Trade discount Total for month 160 Cash Book (credit side) Discount Cash Bank Received 2004 $ $ $ Aug 16 Mendez Perez Purchases 200 (i) Write up the accounts of Mendez and Perez as they would appear in Wakou s purchases (creditors) ledger for the month of August (Mendez account, Perez account) (ii) Write up the Purchases account and the Purchases returns account as they would appear in Wakou s nominal (general) ledger for the month of August 2004.(Purchases account, Purchases returns account) (c) Wakou s financial year ends on 30 September. He provides the following information. On 1 October 2003 Wakou s capital account showed a credit balance of $ On 1 January 2004 Wakou transferred his private motor vehicle to the business at a valuation of $4500. During the year ended 30 September 2004 Wakou s drawings amounted to $9100. The Profit and Loss Account for the year ended 30 September 2004 showed a net loss of $1300.

4 Write up Wakou s Capital account as it would appear in the nominal ledger for the year ended 30 September Ans: 3 (a) Reason for using a purchases journal: fewer transactions recorded in the purchases account bookkeeping can be spread between several people can be analysed into products/areas etc. to identify credit purchases (can be useful for comparison purposes) provides information for the purchases ledger control account. 3(b)(i) Mendez account Aug 10 Purchases returns 160 Aug 4 Purchases Bank 117 Discount received Perez account Aug 24 Bank 50 Aug 19 Purchases Balance c/d 65 3(b)(ii) Purchases account 2004 Aug 31 Total from purchases journal 395 Cash Sep 1 Balance b/d 65 Purchases returns account 2004 Aug 31 Total from purchases journal 160 3(c) Wakou s Capital account Sep 30 Drawings 9100 Oct 1 Balance b/d Net loss Balance c/d Jan 1 Motor vehicles Oct 1 Balance b/d 26100

5 4 (a) In which book of prime (original) entry would a cheque received from a customer be recorded? (b) State what is meant by trade discount. (c) In which section of the Balance Sheet would trade creditors appear? (d) In which system of petty cash does the cashier make up the balance to a fixed amount each month? (e) Stock is valued at the lower of cost and net realisable value. What is meant by net realisable value? (f) To which final accounts are the totals on the following accounts transferred? (i) Carriage inwards (ii) Carriage outwards (g) In the following table, place a tick ( ) under the correct heading for each item. a. Purchase of motor van b. New tyres for motor van c. Painting business name on motor van d. Cost of oil for motor van engine Capital expenditure Revenue expenditure (h) For the year ended 31 August 2005, Sayed made a gross profit of $ and had expenses of $ The balance on his capital account at 31 August 2005 was $ What is Sayed s return on capital employed (R.O.C.E.) for the year? (i) Insert the missing words in the following statement. Working capital is defined as...assets less...liabilities. Ans: 4. 1 (a) Cash book (b) A reduction in price allowed for bulk purchases or to a regular customer (c) Current liabilities (d) Imprest system (e) the net amount for which the stock may be sold (f) (i) Trading Account (ii) Profit and Loss Account. (g) Capital expenditure [a, c] revenue expenditure [b, d]. (h) Gross profit ($45 000) less expenses ($30 000) = net profit ($15 000) ROCE = (1) (1) = 10% (1). (i) Current assets less Current liabilities.

6 5 Maria van Zyl is a trader. Her financial year ends on 31 July. She provides the following information. $ Wages outstanding at 1 August Total wages paid during the year ended 31 July Wages outstanding at 31 July (a) Write up the wages account as it would appear in Maria s ledger for the year ended 31 July Show the amount transferred to the Profit and Loss Account. Maria van Zyl maintains a provision for doubtful debts. (b) Name two accounting principles which Maria is applying by maintaining a provision for doubtful debts. Maria van Zyl provides the following information. $ Debtors at 1 August Debtors at 31 July Maria maintains a provision for doubtful debts at 3% of the debtors at the end of each financial year. (c) Write up the provision for doubtful debts account in Maria s ledger for the year ended 31 July Mark van Zyl, Maria s brother, is also a trader. His financial year ends on 31 August. Maria advises Mark to create a provision for doubtful debts. (d) State two ways in which Mark could decide on the amount of his provision for doubtful debts. One of Mark s debtors owes $2000. This has been outstanding since May Mark is unable to trace this debtor. (e) Indicate how each of the following will be affected if Mark does not write off this debt. Give a reason for your answers. The first one has been completed as an example. i. Gross profit for the year ended 31 August 2005 Effect Overstated/Understated/ No effect Reason Bad debts are not entered in the Trading Account and so do not affect the gross profit ii. Net profit for the year ended 31 August 2005 Effect Overstated/Understated/No effect Reason... iii. Current assets at 31 August 2005 Effect Overstated/Understated/No effect Reason...

7 Ans: (a) Profit and Loss a/c $61280; (b) Matching, Prudence (c) Profit and Loss a/c $90; (d) Look at debtors accounts and estimate which ones will not be paid. Estimate on the basis of past experience what percentage of the debtors will prove to be bad. Make use of an ageing schedule. (e) ii. 2 Net profit Overstated. Omission of a loss in the Profit and Loss Account means profit overstated. iii. 3 Current assets Overstated. Debtors are shown at a higher value than will actually be received. 6 Franz Fischer is a sole trader. His accountant has prepared a set of final accounts. The following people are interested in the accounts of Franz Fischer s business. Franz Fischer (Owner) Trade creditor Loan creditor Bank manager Potential partner (a) Complete the following table to show which people would be especially interested in the different aspects of Franz Fischer s accounts. The first one has been completed as an example. Each of the five people listed above should not appear more than twice in Column B. Column a Column B Whether interest can be paid when due The profitability of the business The market value of the fixed assets owned by the business 1. bank manager 2. Loan creditor The liquidity position of the business The quality of the information in a set of final accounts determines how useful those accounts are. (b) State four ways in which the quality of information in Franz Fischer s final accounts can be measured. The first one has been completed as an example. 1 Reliability E Zwink is one of Franz Fischer s suppliers, but he is also a customer. Franz maintains two accounts for E Zwink one in the purchases ledger and one in the sales ledger. The following account appears in Franz Fischer s purchases ledger. E Zwink account $ August 12 Returns 50 August 4 Purchases Bank Carriage 10

8 28 Transfer to sales ledger Balance c/d September 1Balance b/d 300 (c) Explain each entry in E Zwink s account as it appears in Franz Fischer s purchases ledger. State where the double entry for each transaction would be made. The first one has been completed as an example. August 4 Purchases Explanation : This is the value of goods Fischer purchased on credit from Zwink. Double entry : Debit Purchases account August 4 Carriage Explanation Double entry. August 12 Returns Explanation... Double entry... August 16 Bank Explanation... Double entry... August 28 Transfer to sales ledger Explanation... Double entry... Explain the significance of the $300 shown at the end of the account.... Ans: 6 (a) Profitability of the business: Owner - Potential partner Market value of fixed assets: Loan creditor - Bank manager Liquidity position of the business: Trade creditor Owner (b) Understandability. Comparability. Relevance. (c) August 4 Fischer has been charged carriage costs by Zwink. Debit Carriage inwards account. 12 Fischer has returned goods to Zwink. Credit Purchases returns (returns outward) account. 16 Fischer has paid $400 to Zwink by cheque. Credit Bank account. 28 Fischer has transferred $250 to Zwink s account in the sales ledger. Credit E Zwink account in sales ledger. Significance of the $300 this is the amount Fischer owes Zwink.

9 7.(a) Ahmed makes a sale on credit to Bahir. What is the name of the document Ahmed gives to Bahir showing the amount of the sale? (b) Give two examples of a fixed asset. (c) In which final account would motor expenses appear? (d) State what is meant by a trade creditor. (e) A payment from Peter is entered in Paul s account in error. What type of error has been made? (f) State two methods of calculating depreciation. (g) In which section of the Balance Sheet should a bank overdraft be shown? (h) Kay s business had stock on 1 July 2005 valued at $6000 and on 30 June 2006 valued at $9000. Her cost of goods sold for the year was $ What was her rate of stock turnover? (i) Insert the missing words in the following formula: Gross profit percentage = x 100 Ans: (a) [Sales] invoice. (b) Land, buildings, plant, machinery, equipment, fixtures, vehicles etc Goodwill. (c) Profit & Loss account or Trading & Profit and Loss Account (d) A supplier of goods or services to a business who has not been paid. (e) Error of commission. (f) (i) Straight line (ii) Revaluation (iii) Reducing balance Diminishing Balance (g) Current liabilities. (h) 6 times (i) gross profit / sales 8. Tanita has a retail shop and sells clothes. Some of her customers pay cash and some have credit accounts which they settle each month. Tanita had the following transactions in March 2006: Date $ March 4 Sale on credit to Vanni Cash sale Sale on credit to Saska Returns from Vanni Cash received from Saska Discount allowed to Saska 10 REQUIRED (a) Show the entries for these transactions in the following accounts in Tanita s ledger. Enter the transfers to the Trading and Profit and Loss Account for the month. i) Sales account ii) Sales returns account iii) Vanni account iv) Saska account v) Cash book (b) From your answer to (a), complete items (i), (ii), (iii) and (iv) in the following extract from Tanita s Trading and Profit and Loss Account for the month of March Trading and Profit and Loss Account (extract) $ Sales (i) Less: sales returns (ii) Net sales Expenses Discount allowed (iii) (iv)

10 Ans: (a) i) Trading a/c $365 ii) trading a/c $30 iii) bal c/d $80 iv) bal c/d 0 v) p/l a/c 410 vi) bal c/d $ Morgan is in business as a printer. He has prepared the following Trial Balance (after calculating net profit) from his accounting records for the year ended 31 August Morgan Trial Balance at 31 August 2006 $ $ Machinery at cost Office equipment at cost Provision for depreciation Machinery Office equipment Accrued expenses 300 Bank Cash 200 Creditors Debtors Loan from Nicola repayable Prepayments 600 Stock at 31 August Capital Drawings Profit for the year REQUIRED (a) State which accounting principle has been applied in the treatment of each of the following items: (i) Profit for the year; (ii) Stock. (b) Prepare Morgan s Balance Sheet at 31 August (c) Morgan s business has a bank overdraft at 31 August Suggest one way in which he could reduce or eliminate the overdraft. (d) Nicola has given Morgan an additional long term loan of $2000 paid into the bank on 1 September In the table below, place a tick ( ) under the correct heading to indicate the effect of the additional loan on the following items in Morgan s Balance Sheet: (i) (ii) Bank overdraft Loan account Effect of additional loan Increase Decrease No effect

11 (iii) (iv) (v) Working capital Profit for the year capital Ans: 3 (a) (i) Realisation, prudence, matching (ii) Prudence, consistency (any one) (b) Working capital $ 3900 b/s $ (c) Overdraft may be reduced by collecting debtors, reducing stock, delaying payment of creditors, delaying drawings, increasing capital. Sell fixed assets, long Term Loan 10 (a) Explain and give an example of the accounting principle of matching. Kalim has a retail business and pays insurance on his premises. He pays an annual premium to the insurance company for the year ended 31 December but prepares his accounts to 30 September. At 1 October 2005 he had prepaid insurance of $300. He paid the next year s annual premium of $1320 on 1 January REQUIRED (b) Show the entries in Kalim s insurance account for the year ended 30 September 2006 including the transfer to the Profit and Loss Account for the year and the balance carried down at 30 September Ans: (a) Matching income OR expenditure (1) to the period to which it relates. Accrual, prepayments, depreciation (any example). (b)

12 11 (a) Which accounting principle states that business transactions must be expressed in monetary terms? (b) Give two examples of current assets. (c) Raju decides to start a business with cash of $2000. To which account in his ledger will this amount be credited? (d) In which final account will purchases returns be shown? (e) Name two errors which do not affect the trial balance. (f) Explain what is meant by a bad debt. (g) In the following table, place a tick ( ) under the most appropriate heading for each item. Rent paid for use of workshop Purchase of machine for workshop Purchase of materials for use in machine Repairs to roof of workshop Capital expenditure Revenue Expenditure (h) On 30 June 2007 Monty had debtors of $4000, stock of $6200, bank balance of $1600 (Dr) and creditors of $3200. What is his quick ratio? Show your workings and give your answer to two decimal places. Ans: 1 (a) Money measurement. (b) Stock, debtors, prepayments, cash, bank ect (c) Capital (d) Trading (and profit and loss) account. (e) Omission, commission, principle, compensating, original entry, complete reversal. (f) A debt which the debtor is unable or does not intend to pay (g) Purchase of machine for workshop _capital expenditure (h) Current assets ($11 800) Stock ($6 200)/Creditors ($3 200) = 1.75:1

13 12 (a) State one example of a current liability. (b) State the effect on net profit if opening stock is overvalued. (c) State one purpose for which the Journal may be used. (d) For each of the three items place one tick ( ) in the correct box to show where it appears in a partnership s final accounts. 1 Interest on partners drawings 2 Interest on a loan from a partner 3 Interest on partners capitals Profit and Loss Account Profit and Loss Appropriation Account (e) Cherie owns a clothing store For each of the three items shown below, place one tick ( ) in the correct box. Revenue expenditure Capital expenditure 1 Sales assistant s wages 2 New showroom fittings 3 Cost of installing the new fittings (f) Complete the following sentence. A debit balance on a ledger account is either an... or an... (g) A business paid $20000 for a new machine on 1 January Depreciation was charged on the machine at the rate of 30% using the reducing balance method. Calculate the machine s net book value on 31 December (h) In which section of a Balance Sheet does rent received in advance appear? (i) Name the system of petty cash in which the petty cashier begins each new accounting period with the same amount of petty cash. (j) A sale on credit to Smith was entered on the debit side of Smythe s account in the seller s ledger. Name this type of error k) Charlie bought an existing business for $ The value of the business as shown by the Balance Sheet was $ Suggest one reason why Charlie was prepared to pay more for the business than the value of its net assets. Ans : (a)trade creditors, accrued expense(s), bank overdraft (b) N.P. is undervalued/understated (c) One from: Correction of errors, Opening entries, Purchase/sale of fixed asset, Other transfers/adjustments (d)1. P/L Appropriation 2. P/L 3. P/L Appropriation (1) (e) 1. Revenue 2. Capital 3. Capital (f) Asset (1) or expense (1) (g) Cost 1/1/ Depn. 31/12/01 (30%) 6000 N.B.V. 31/12/ Depn. 31/12/02 (30%) 4200 N.B.V. 31/12/ (h)current liabilities (i) Imprest system (j) Error of commission

14 (k) Advantage of business due to its: - reputation - well-established clientele Or other acceptable - location reason for paying - good staff relations/reliable workforce premium price - goodwill 13 (a) Give one example of a fixed asset likely to be used by an engineering business. (b) (i) Name the document sent to a customer by a supplier when goods are bought on credit. (ii) Name the book of prime (original) entry in which the customer will enter this transaction. (iii) Name the ledger in which the supplier will keep his customer s account. (c) A machine was bought for $ It has an estimated useful life of five years when its scrap value is expected to be $6000. It is to be depreciated using the straight line (equal installment) method. Showing your workings, calculate (i) the annual amount of depreciation to be charged. (ii) the annual percentage rate of depreciation to be charged. (d) Explain what is meant by an error of original entry. (e) State one reason why a supplier would give trade discount to a customer. (f) Name the ledger account to which a difference on a trial balance may be posted. (g) Name one accounting ratio which measures a business s profitability. (h) A sole trader s Electricity account for the year ended 31 March 2004 showed the following. $ 1 April 2003 Balance brought down (Cr) 3000 April 2003 March 2004 Bank payments made during the year On 31 March 2004 $4000 was owing by the trader for electricity. Calculate the amount charged for electricity in the trader s Profit and Loss Account for the year ended 31 March Ans: (a) Machinery, equipment, premises, motor vehicles, (b) (i) Invoice (ii) Purchases Journal/Purchases Day Book/Purchases Book / Purchases (iii) Sales Ledger/Sales (c) (i) $ 800 (ii) 20% (d) Use of incorrect figure in first place, with double entry carried out correctly for wrong amount. (e) Customer is in same type of trade; for bulk purchases, To enable customer to make profit. (f) Suspense account. (g) ROCE (or N.P. as %age of capital employed); GP: sales; NP: sales. (h) $ 19000

15 14 Ahmed is a sole trader who keeps full accounting records for all his purchases and sales on credit. Entries are posted monthly from prime (original) entry books to ledger accounts, but the entries for April 2004 have not yet been made. (a) (i) From the following information, make the entries required on 30 April 2004 in the ledger accounts below. Total for April 2004 ($) Purchases journal Sales journal Purchases returns journal Sales returns journal i. Purchases account ii. Purchases returns account iii. Sales account iv. Sales returns account (ii) In which of Ahmed s ledgers are the above accounts kept? (b) Ahmed s trial balance at 30 April 2004 included the following debit balances. $ Carriage inwards Carriage outwards State how and where each of the above amounts are shown in Ahmed s final accounts. 1. Carriage inwards 2. Carriage outwards (c) After Ahmed s draft final accounts for the year ended 30 April 2004 were prepared, he discovered that office machinery bought for $10000 had been wrongly entered in the purchases journal. (i) Name this type of error. (ii) State the effects of this error on Ahmed s final accounts. 1. Effects on Profit and Loss Account for year ended 30 April Effects on Balance Sheet as at 30 April 2004 (iii) Give the journal entry (without narrative) required to correct this error. Ans: (a) i. Purchases account Dr. 30 April 2004 Purchases for month ii. Purchases returns account Cr. 30 April 2004 Returns for month 6000 iii. Sales account Cr. 30 April 2004 Sales for month (1) iv. Sales returns account Dr. 30 April 2004 Returns for month 8000 (1) (ii) Nominal ledger (b) 1. Carriage inwards is added to Cost of Goods sold in the Trading A/c 2. Carriage outwards is shown as an expense in the P/L A/c (c) (i) Error of principle (ii) Effect on: 1. P/L Account: Purchases/Cost of Goods sold is overstated, so Gross profit/net Profit/Profit is understated. 2. Balance Sheet: Office equipment/fixed assets are understated. Capital/Net profit/profit is understated.

16 (iii) Dr Office equipment (machinery) 10000: Cr Purchases (a) Ruth is a trader. Her financial year ends on 31 March. She provides the following information $ April 1 Insurance prepaid for 3 months to 30 June 2004 amounted to 60 July 1 Paid insurance premium for 12 months to 30 June 2004 by cheque 264 Prepare the Insurance account as it would appear in Ruth s ledger for the year ended 31 March Show clearly the amount transferred to the Profit and Loss Account. (b) (i) In connection with journal entries, explain what is meant by the term narrative. (ii) Explain why a narrative should be shown as part of a journal entry. Ruth provides the following information. 1. Ruth took goods costing $60 for her own use. 2. An invoice was received from PJ Motors for $ This included $600 for repairs to a motor vehicle and $15000 for the purchase of an additional motor vehicle. 3. It was discovered that the purchase of stationery, $20, had been debited to the purchases account. This error should now be corrected. (c)prepare the necessary journal entries to record the above. Narratives are required. Ans: (a) Insurance a/c transfer to P/L a/c $ 258; balance b/d Dr $66. (b) (i) A narrative is a brief explanation of why the entry is being made. (ii) A narrative is necessary because of the great variety of transactions which are recorded in the journal, so the reason for each entry can be understood in the future.

17 16 1 (a) Name two books of prime (original) entry. (b) Explain what is meant by an accrued expense. (c) In which section of the Balance Sheet will a bank overdraft be shown? (d) To which account would the unexplained difference on a trial balance be transferred? (e) In which final account will the cost of repairs to motor vehicles be shown? (f) A sales invoice is entered in the sales returns journal by mistake. Name the type of error which has been made. (g) State what is meant by going concern. (h) Ahmed draws up his accounts to 31 March each year. He bought a machine on 1 April 2004 for $ Depreciation is to be charged at 15% per annum on a straight line basis. (i) Calculate the depreciation charge in his accounts for the year ended 31 March (ii) Calculate the depreciation charge in his accounts for the year ended 31 March (iii) Calculate the net book value of the machine at 31 March (iv) Show the journal entry to enter the depreciation for the year ended 31 March 2005 in Ahmed s accounts. Ans: (a) Cash book, Sales journal, Purchases journal, Sales returns journal, Purchases returns journal, Journal, Petty cash book. (b) An expense incurred in the accounting period but unpaid at the end of the period. (c) Current liabilities. (d) Suspense account. (e) Profit and Loss Account. (f) Error of original entry. (g) Business will continue trading for the foreseeable future. (h) (i) $1,800 (ii) $1,800 (iii) $8,400 (iv) Dr Cr $ $ Profit and Loss Account Provision for depreciation 1 800

18 17 Redd keeps full accounting records and makes up his final accounts to 31 March each year. The following are extracts from his accounting records for March Purchases Journal 5 March 17 March 29 March Block Quale Block Purchases Returns Journal 8 March Block March 31 March Cash Book (Cr) Discount Received $ Block Quale 15 Bank $ REQUIRED (a) Write up the accounts of Block and Quayle in Redd s purchases ledger for the month of March 2005, showing any balances carried and brought down. Redd pays rent on his business premises. The amount payable is $900 quarterly in advance. He made payments by cheque as follows in the year ended 31 March $ 2 April July July September January March 800 REQUIRED (b) Show the entries in Redd s rent account for the year ended 31 March 2005 and the amount transferred to the Profit and Loss Account for the year. (c) (i) Explain what is meant by matching. (ii) Describe how matching has been applied in Redd s rent account prepared in (b) above. Ans: Block a/c $270 Quayle a/c $500 balanced (b) rent a/c balance b/d 800 (c) (i) Costs should be offset against revenues from the same accounting period. (ii) The rent paid in advance on 29 March 2005 relates to the following accounting year and is therefore subtracted from the amount charged to Profit and Loss Account for the year ended 31 March 2005.

19 18 Jane Joda started a business on 1 April Since that time Jane has not maintained any financial records. REQUIRED (a) Explain why Jane should record the financial transactions of her business. (b) Explain to Jane what is meant by business entity. Jane Joda is able to provide the following information relating to her second year of trading. $ Stock 1 April Stock 31 March Purchases Cash sales Credit sales? The gross profit margin is 20%. REQUIRED (c) Calculate by means of a Trading Account the value of Jane Joda s credit sales for the year ended 31 March The quality of information in financial statements can be measured in terms of comparability and reliability. REQUIRED (d) (i) Jane Joda could compare her results for the year ended 30 April 2005 with those for the previous year. State one other comparison Jane could make. (ii) Suggest one way in which Jane might use the results of any comparisons she makes. (iii) Jane Joda must be able to rely on the information provided in the financial statements prepared for her business. One condition which must be present for information to be regarded as reliable is shown below. State two other conditions. 1 The information must be capable of being depended on as being a true statement of the transactions and events which are being recorded Ans : (a) To ensure no transactions are forgotten/overlooked (not relying on human memory) To enable profit to be calculated To enable the financial position of the business to be ascertained (b) The accounting records of a business are maintained from the viewpoint of the business. The business and the owner of the business are regarded as being separate entities. The personal transactions of the owner of the business are not recorded in the accounting records of the business.

20 (d) (i) Comparison with the results of other businesses of a similar size/type. (ii) Improve profitability Increase sales (in total or of certain products) Review stock levels Direct investment into new areas (iii) Any two of the following Information must be - capable of being independently verified free from bias free from significant errors prepared with suitable caution being applied to any judgments and estimates which are necessary.

21 19 (a) In which book of prime (original) entry should discount allowed and discount received be recorded? (b) Which accounting principle is being applied when an adjustment is made for a prepaid expense? (c) In which section of the balance sheet will a provision for depreciation be shown? (d) Explain what is meant by an error of omission. (e) In the following table, place a tick (_) under the correct heading for each item. Discount received Carriage outwards Interest on bank deposit Bad debts written off Income Expense (f) In a partnership Appropriation Account, name two items which may be added to, or deducted from, net profit before the partners share of profit is calculated. (g) State what is meant by working capital. (h) Frank maintains his petty cash on the imprest system. He keeps a balance of $200. At the end of April the balance in hand is $65 and there are vouchers for expenditure of $125. (i) How much will Frank draw from the bank to restore his petty cash balance? (ii) Suggest one reason for the difference in the petty cash balance. (i) (i) State what is meant by the quick ratio. (ii) Explain why this is a useful accounting ratio. Ans: 19 (a) Cash book (b) Matching (c) Fixed assets (d) A transaction completely omitted from the books e.g. cash sales not recorded (e) Discount received - Income Carriage outwards _ Expense Interest on bank deposit - Income Bad debt written off _ Expense (f) Interest on capital, partners salaries, interest on drawings. (g) Current assets less current liabilities (h) (i) $200 less $65 = $135 (ii) Missing voucher or $10 lost/pilfered from cash box (i) (i) Current assets less stock/current liabilities (ii) Shows whether the business has sufficient liquid assets to meet its current liabilities.

22 20 (a) What is the name of the document sent to a customer by a supplier at the end of the month showing the amount payable for credit sales? (b) Give one example of a prepaid expense. (c) In which specialist area of the ledger would you find the machinery account? (d) What is meant by a trial balance? (e) In which final account would interest on drawings be shown? (f) Give two examples of adjustments made in a bank reconciliation statement. (g) State one type of error which does not affect the trial balance. (h) In the following table, place a tick ( ) under the most appropriate heading for each item. Purchase of retail shop Replace broken glass in shop window Purchase of cash register for shop Advertising goods for sale in the shop Capital expenditure Revenue Expenditure (i) Cherry had sales of $ in the month of October. She achieves a percentage of gross profit to sales of 40 %. Her expenses were $ What is Cherry s percentage of net profit to sales for the month? Give your answer to two decimal places and show your workings. Ans: 1 (a) Statement (of account) (b) Rent, rates, water, insurance in advance (or similar) Utilities (e.g. gas, electricity, telephone) paid in advance (c) Nominal or general (not personal or private) (d) List of balances in the general (nominal) ledger at a given date (e) Profit and loss appropriation account (f) Outstanding lodgments, uncredited or unpresented cheques. Items found in updating cash book, e.g. direct debits, bank interest, charges, dishonored cheques, bank or cash book errors. (g) error of omission, commission, principle, compensating error, error of original entry, complete reversal. (h) Purchase of shop capital [] Broken glass revenue [] Cash register capital Advertisement revenue (i) Net profit percentage = (GP expenses)/sales 100% GP = [1], Expenses = , NP = Sales = Net profit percentage = 15.00%

23 21 (a) Insert the missing words and figures in the following trading and profit and loss account. (b) From the information in part (a) calculate to two decimal places Shin Lee s rate of stock turnover for the year ended 31 March (c) Give one example of a business with: (i) A high rate of stock turnover; (ii) A low rate of stock turnover. Ans: (i) 5000 (ii) 1 April 2006 (iii) (iv) Inwards/(accept in ) (v) (vi) 5600 (vii) Net profit (viii) (b) Rate of stock turnover = Cost of sales / average stock = / ( ) /2 = 2.26 times (c) (i) Newsagent, petrol station, food store etc. hairdressing salon, clothing shop, but not bank (ii) Furniture, carpets, cars, machines, etc.