Executive Level. Financial Accounting & Reporting Fundamentals. (3) Section 1(a): 10 multiple choice questions (MCQs) all questions are compulsory.

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1 Copyright Reserved No. of pages: 14 Executive Level Financial Accounting & Reporting Fundamentals Instructions to candidates (1) Time allowed: Reading and planning 15 minutes Writing 3 hours (2) Total: 100 marks (3) Section 1(a): 10 multiple choice questions (MCQs) all questions are compulsory. Section 1(b): 10 short answer questions all questions are compulsory. Section 2: 4 questions answer any 3 questions. Section 3: 1 question compulsory K E 1 (4) Answers to Section 1(a) should be in the special paper given to you. The most suitable answer (A, B, C or D) should be entered in the paper against the relevant question number. Answers to questions in all other sections should be in the answer booklet/s given to you. MARCH 2015 (5) Begin each answer in Section 2 and Section 3 on a separate page in the answer booklet. (6) All answers should be in one language and in the medium applied for.

2 SECTION 1 All questions are compulsory. Total marks for Section 1 is 50 marks. Recommended time for the section is 90 minutes. Question 01 1(a): You are required to choose the most appropriate answer. (Total: 20 marks) 1.1. Consider the following statements: (i) The business entity concept assumes that business entities are separate from their owners. (ii) Sole proprietorships and partnerships do not have the legal personality. (iii) A limited liability company is legally a separate entity from its owners. Which of the above statements is/are true? A. (i) and (iii) only B. (ii) only C. (iii) only D. All of (i), (ii) and (iii) 1.2. You are given the following statements: Statement 1: Verifiability is a fundamental qualitative characteristic of financial information Statement 2: Understandability enhances the quality of financial information Which of the above statements is/are true with reference to the Conceptual Framework for Financial Reporting? A. Both Statement 1 and Statement 2 are true. B. Neither Statement 1 nor Statement 2 is true. C. Only Statement 1 is true. D. Only Statement 2 is true. KE1 March 2015 Page 2 of 14

3 1.3. The Conceptual Framework for Financial Reporting refers to faithful representation as a fundamental qualitative characteristic of financial information. Which of the following only consists of characteristics of faithful representation as defined in the conceptual framework? A. Predictability, Neutrality, Consistency B. Consistency, Completeness, Predictability C. Classification, Consistency, Completeness D. Neutrality, Completeness, Free from error 1.4. Which of the following combinations only consists of elements of the financial statements as covered in the Conceptual Framework for Financial Reporting? A. Expenses, Profits, Provisions B. Income, Expenses, Liabilities C. Income, Expenses, Provisions D. Income, Profits, Liabilities 1.5. An income statement of a company for the year ended 31 December 2014 prepared on the cash basis showed a profit of Rs. 728,000. Information received subsequently revealed the following: - All purchases were on cash basis. - Trade receivables balance at the end of the year was Rs. 112,000 and there was no opening balance. - Accrued expenses on 31 December 2013 was Rs. 54,000 while on 31 December 2014 it was Rs. 32,000. What is the profit for the year ended 31 December 2014 on the accrual basis? A. Rs. 818,000 B. Rs. 706,000 C. Rs. 862,000 D. Rs. 750, The need for preparing a bank reconciliation statement by an entity is to; A. Comply with the requirements of LKAS 7 Statement of Cash Flows. B. Ensure that the bank balance as per the records of the entity agrees with the bank statement, and that all cheque payments and deposits have been approved. C. Ensure that any difference between the bank balance as per the records of the entity and the bank statement are properly treated. D. Provide audit evidence that the entity maintains a proper set of books of accounts to record transactions and prepare financial statements. KE1 March 2015 Page 3 of 14

4 1.7. Yellow (Pvt.) Limited purchased goods for Rs. 100,000 on credit during the year ended 31 December % of such goods were sold for Rs. 125,000 on cash during the year. Which of the following statements shows the correct impacts on the accounting equation if these transactions are recorded as per the double entry system? A. Assets increase by Rs. 20,000; Capital increases by Rs. 45,000; Liabilities increase by Rs. 100,000 B. Assets increase by Rs. 125,000; Capital increases by Rs. 25,000; Liabilities increase by Rs. 100,000 C. Assets increase by Rs. 145,000; Capital increases by Rs. 45,000; Liabilities increase by Rs. 100,000 D. Assets increase by Rs. 245,000; Capital increases by Rs. 25,000; Liabilities increase by Rs. 100, Which of the following ratios is classified as a profitability ratio? A. Current ratio B. Asset turnover ratio C. Quick ratio D. Inventory turnover period 1.9. Which of the following combinations consists of prime entry books only? A. Cash book, Purchase day book, Journal, Ledger B. Petty cash book, Sales day book, Ledger, Trial balance C. Cash book, Petty cash book, Bank reconciliation, Journal D. Sales returns day book, Sales day book, Petty cash book, Journal If the sales day book was undercast by Rs. 52,000 and posted to the ledger, the resulting impact on account balances will be; A. Only the sales account balance will be understated by Rs. 52,000. B. Only the trade receivables control account balance will be understated by Rs. 52,000. C. Both the sales account and the trade receivables control account balances will be understated by Rs. 52,000. D. The trade receivables control account balance will be overstated by Rs. 52,000 when compared to the total of the individual trade receivables balances. KE1 March 2015 Page 4 of 14

5 1(b): You are required to provide short answers/calculations to all questions with attention given to action verbs. (Total: 30 marks) Stakeholders either influence or are influenced by the operations of an entity and they can be grouped into different categories to understand their interest and risks involved. Identify three (03) connected stakeholders of an entity and state one (01) interest of each Statements A and B below relate to information provided through financial accounting and management accounting. Statement A - Financial accounting provides summarised common information Statement B - Management accounting provides detailed unique information (i) (ii) State whether each statement is true or false. Identify three (03) interested parties who use information provided in financial accounting, and one (01) party who uses information provided in management accounting Liabilities can be categorised as current liabilities or non-current liabilities. State three (03) instances when a liability is classified as a current liability Accounting policies are applied by an entity consistently from period to period. LKAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, allows a change in accounting policy under certain conditions. State the two (02) conditions under which a change in accounting policy is acceptable under LKAS 8. KE1 March 2015 Page 5 of 14

6 1.15. The following information relates to an entity: The balance of the accrued electricity charges account as at 31 March 2013: Rs. 12,000 Unpaid electricity bills as at 31 March 2014: Rs. 23,000 The balance of the electricity expense account as at 31 March 2014: Rs. 150,000. (This account has been balanced without taking into account the accrued charges at the beginning and unpaid bills at the year-end.) Water bills paid amounting to Rs. 5,000 had been posted to the electricity expense account. An electricity bill paid amounting to Rs. 16,000 had been posted to the electricity expense account twice. (This difference is now reflecting in the suspense account.) Prepare the electricity expense account with all necessary adjustments, starting with the given balance of the electricity expense account as at 31 March A plant with a carrying amount of Rs. 1.2 million as at 31 March 2014 was completely destroyed by a fire on 15 April The financial statements of this company were authorised for issue in June Explain whether the above event is an adjusting event or a non-adjusting event in the financial statements for the year ended 31 March 2014, as per LKAS 10 Events After the Reporting Period The following information relates to the sale of goods by an entity. (i) (ii) (iii) Goods sold for cash on 31 March 2014 were left at the business premises at the buyer s request and collected after one week. Goods sold to a customer on credit on 31 March 2014 were dispatched on the same day. However, this amount was unpaid even after the due credit term. An advance was received from a customer on 31 March 2014 to buy goods in April Explain whether each of the above items can be recognised as revenue as per LKAS 18 Revenue for the year ended 31 March KE1 March 2015 Page 6 of 14

7 1.18. List three (03) characteristics of a lease agreement that identify a lease as a finance lease as per LKAS 17 Leases The following information relates to inventories of an entity: Cost of the physical inventory balance and book balance as at 31 March 2014 were Rs. 180,000 and Rs. 200,000 respectively. Net Realisable Value of a particular type of inventory which was specifically identified was less by Rs. 12,000 compared to its cost. Goods purchased at an invoice value of Rs. 60,000 on 30 March 2014 were not taken into account at the time of the inventory count as they were placed at a different location. The cost incurred in transporting these goods to the stores is Rs. 2,000. Calculate the carrying amount of inventories as at 31 March 2014, as per LKAS 2 Inventories At the beginning of a particular financial year, the carrying value of a company s property, plant and equipment (PPE) was Rs. 2,270,000. Depreciation charge for the year was Rs. 420,000. Year-end carrying value was Rs. 2,100,000. Equipment with a carrying value of Rs. 240,000 were revalued at Rs. 320,000 during the year. Assume that there was no disposal of PPE during the year. (i) (ii) Calculate the amount of cash outflow during the year with respect to the above PPE. State under which category of activities, the cash flow calculated in (i) above is shown in the cash flow statement. KE1 March 2015 Page 7 of 14

8 SECTION 2 Three out of the four questions should be answered. Total marks for Section 2 is 30 marks. Recommended time for the section is 54 minutes. Question 02 Elmo and Niles are carrying on a partnership business in the name of Elen Partners. The following balances of Elen Partners were extracted on 31 December 2014 prior to the preparation of the appropriation account: Rs. 000 Dr Cr Partners capital accounts Elmo 800 Niles 600 Partners current accounts Elmo 220 Niles 260 Partners drawings Elmo 120 Niles 240 Partners loan Elmo 300 Net profit for the year before partner s loan interest 640 Additional information: Required: Elmo and Niles share profits or losses in the ratio of 2:1 respectively. Interest on capital balances is at 8% per annum. Niles is entitled to a monthly salary of Rs. 9,000. The salary for the first 11 months has already been paid to Niles and debited to his current account. Interest is payable on the partners loan at 10% per annum. No provision has been made in the accounts for the interest payable for the year. 1. Prepare the appropriation account for the year ended 31 December (4 marks) 2. Prepare the partners current accounts for the year ended 31 December (4 marks) 3. State the reason for not charging the partners salary and interest on capital in the profit or loss account and instead showing them under the appropriation account. (Total: 10 marks) KE1 March 2015 Page 8 of 14

9 Question 03 (a) Happy (Pvt.) Limited maintains two bank accounts. Summarised transactions as per the cash books and bank statements for the month of December 2014 are given below. Summaries of bank statements A/c No. 1 A/c No. 2 Balance as at 1 December ,000 (50,000) Cheque deposits 2,500,000 20,000 Cash deposits - 1,500,000 Cheque payments (3,000,000) (750,000) Bank charges (10,000) - Balance as at 31 December 2014 (210,000) 720,000 Summaries of cash books Rs. A/c No. 1 A/c No. 2 Balance as at 1 December ,000 (50,000) Rs. Cheque payments (3,200,000) (775,000) Cheque deposits 2,800, ,000 Cash deposits 650, ,000 Balance as at 31 December , ,000 Additional information: Required: The difference between the cash book and the bank statement of A/c No. 1 as at 1 December 2014 was only due to unpresented cheques. Cheques deposited in A/c No. 1 amounting to Rs. 175,000 had been recorded in the cash book of A/c No. 2. Cheuqes issued through A/c No. 2 amounting to Rs. 45,000 had been recorded in the cash book of A/c No Prepare the cash book of A/c No.2 showing correcting entries starting from the balance as at 31 December Prepare the bank reconciliation statement for A/c No.1 as at 31 December (4 marks) Rs. KE1 March 2015 Page 9 of 14

10 (b) The balance of the trade receivables control account of Happy (Pvt.) Limited as at 31 December 2014 was Rs. 500,000, but this did not agree with the total of the trade receivables sub ledger accounts. The following were identified as the reasons for the difference: - Discount allowed amounting to Rs. 15,000 was not recorded in the respective personal account. - The total of sales returns amounting to Rs. 45,000 was not posted to the general ledger. - A sales invoice of Rs. 60,000 was omitted from the sales journal but the same had been recorded in the personal account. Required: 3. Prepare the trade receivables control account starting with the balance of Rs. 500, Calculate the total of the trade receivables sub ledger accounts as at 31 December 2014 before making the corrections. (1 mark) (Total: 10 marks) KE1 March 2015 Page 10 of 14

11 Question 04 The trial balance of Beeta (Pvt.) Limited extracted on 31 December 2014 did not balance and a suspense account was opened for the difference. The income statement showed a net profit of Rs. 520,000. Subsequent investigation revealed the following with respect to the year ended 31 December 2014: The sales day book was undercast by Rs. 78,000. Rent payment of Rs. 25,000 was not posted to the respective expense account. A credit note for Rs. 12,000 received from a supplier, being a special discount, was debited to both the discount allowed account and the relevant supplier account. Salary payment of Rs. 24,000 was posted to the salary account as Rs. 42,000. An amount of Rs. 28,000 received from a debtor was treated as cash sales. Return of goods to a supplier, purchased for Rs. 52,000, was completely omitted in the books of accounts. Required: 1. Prepare journal entries to correct the above errors. (6 marks) 2. Prepare the suspense account showing the adjustments to correct the errors. 3. Compute the net profit after making the adjustments to correct the errors. (Total: 10 marks) KE1 March 2015 Page 11 of 14

12 Question 05 Aruna, a sole trader, commenced his business on 1 January 2014 by depositing Rs. 500,000 in his bank account. He did not maintain proper books of accounts. A summary of the bank statements for the year ended 31 December 2014 is as follows: Rs. Rs. Balance as at 1 January ,000 Purchase of equipment 650,000 Receipts from customers 1,660,000 Payments to suppliers 1,140,000 Cash sales 440,000 Cash purchases 120,000 Salaries paid 115,000 Rent paid 55,000 Cash drawings 72,000 Other expenses 180,000 Balance as at 31 December 268, ,600,000 2,600,000 Additional information: Equipment was purchased on 1 January Depreciation is to be provided at 20% per annum on the straight line method. Total of trade receivables balances as at 31 December 2014 was Rs. 480,000. Aruna achieves a constant margin of 40% on sales. Total of trade payables balances as at 31 December 2014 was Rs. 640,000. Aruna took away some trading stocks for his personal use but the amount is not known. Accrued rent payable as at 31 December 2014 was Rs. 5,000. Total discount allowed by the suppliers during the year amounted to Rs. 110,000. Closing stock valued at cost amounted to Rs. 410,000. Required: 1. Calculate the value of goods taken by Aruna for his personal use during the year. (4 marks) 2. Prepare the income statement for the year ended 31 December Prepare the statement of financial position as at 31 December (Total: 10 marks) KE1 March 2015 Page 12 of 14

13 SECTION 3 Compulsory question Total marks for Section 3 is 20 marks. Recommended time for the section is 36 minutes. Question 06 The following trial balance has been extracted from the books of Global (Pvt.) Limited as at 31 December Rs. 000 Dr Cr Stated capital 3,500 Retained earnings 2,350 Property, plant and equipment at cost: Land & building (Land value: Rs. 2,800,000) 5,300 Furniture and fittings 820 Office equipment 950 Accumulated depreciation as at 1 January 2014: Building 480 Furniture and fittings 320 Office equipment 400 Inventory as at 1 January Trade receivables/trade payables 1,240 1,180 Cash at bank 530 Purchases/sales 7,200 11,750 Cash discounts allowed/received Administrative expenses 1,440 Selling and distribution expenses 860 Provision for doubtful debts as at 1 January Carriage inwards 220 Return inwards 180 Interim dividend paid 300 Income tax paid ,400 20,400 Additional information: (a) Inventory on 31 December 2014 at cost is Rs. 1,100,000. Cost and net realisable values (NRV) of the inventory items were the same except for the following two items: Item Cost (Rs.) NRV (Rs.) Classic , ,000 Grand , ,000 KE1 March 2015 Page 13 of 14

14 (b) (c) (d) (e) (f) (g) (h) (i) (j) Inventory costing Rs. 300,000 was destroyed by a fire on 1 November The insurance company has agreed to pay Rs. 240,000 as compensation but this amount was not received as at 31 December No entries have been made in the books of accounts in respect of these transactions/events. An amount of Rs. 40,000 due from a customer became irrecoverable as at 31 December 2014, and is to be written off as a bad debt. Provision for doubtful debts is to be adjusted to 5% of the trade receivables balance outstanding as at 31 December Trading inventory bought for a cost of Rs. 120,000 was given out to customers as samples, but no entries have been recorded in this respect in the books of accounts. Only addition made to property, plant and equipment during the year was a computer purchased at a cost of Rs. 50,000 on 1 July Depreciation on property, plant and equipment is to be made on the straight line method at following rates: Building Furniture and fittings Office equipment 5% per annum 10% per annum 20% per annum Land was revalued at Rs. 3 million on 31 December 2014 and the required entries are yet to be made. Accruals and prepayments as at 31 December 2014 were as follows: Accrued rent Rs. 12,000 Accrued advertising expenses Rs. 18,000 Prepaid insurance premium Rs. 10,000 The total sales for the year includes an amount of Rs. 160,000, being a 50% advance payment received on sales yet to be made. Income tax for the year has been estimated at Rs. 520,000. Income tax paid during the year (as shown in the trial balance) includes the balance tax of Rs. 30,000 paid in respect of the previous year. Required: 1. Prepare the statement of comprehensive income for the year ended 31 December (7 marks) 2. Prepare the statement of changes in equity for the year ended 31 December Prepare the statement of financial position as at 31 December (10 marks) (Total: 20 marks) KE1 March 2015 Page 14 of 14