Financial Accounting 1 st Year Examination

Transcription

1 Financial Accounting 1 st Year Examination August 2015 Solutions & Marking Scheme & Examiner s Comments Page 1 of 29

2 NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. For this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2015 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, Page 2 of 29

3 Accounting Technicians Ireland First Year Examination: Autumn 2015 Paper: FINANCIAL ACCOUNTING Tuesday 11 August a.m. to p.m. INSTRUCTIONS TO CANDIDATES PLEASE READ CAREFULLY Candidates must indicate clearly whether they are answering the paper in accordance with the law and practice of Northern Ireland or the Republic of Ireland. In this examination paper the / symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in Section A and TWO of the three questions in Section B. If more than TWO questions are answered in Section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. s, s, units, etc. Answers should be illustrated with examples, where appropriate. Candidates may ignore any VAT implications to transactions throughout this paper unless the question specifically instructs them to do otherwise. Question 1 begins on Page 2 overleaf. Note: This paper uses both the language of International Accounting Standards (I.A.S s) and Financial Reporting Standards (F.R.S s) where appropriate (e.g. Receivables/Debtors). Examinees are permitted to use either terminology when preparing financial statements but the use of the language of the International Accounting Standards (e.g. Receivables rather than Debtors) is preferred. Page 3 of 29

4 SECTION A Answer ALL THREE QUESTIONS (Compulsory) in this Section QUESTION 1 (Compulsory) The following trial balance was extracted from the books of P. Potter, a sole trader, on 30 June 2015: / / Land 174,500 Delivery vans 64,740 Accumulated depreciation on delivery vans 17,410 Inventory as at 1/7/ ,950 Payables and receivables 102, ,950 Bank 9,855 VAT liability 2,275 Sales and purchases 275, ,850 Purchases returns and sales returns 21,410 9,400 Discounts allowed and received 1,970 2,780 Rent expense 21,950 Carriage outwards 3,120 Power, light and heat 3,140 Telephone, internet and media 5,510 Insurance 14,500 Rates and water charges 7,540 Wages and salaries costs 71,950 Allowance for receivables 1/7/2014 5,480 Irrecoverable debts 5,980 Drawings 9,675 Accumulated profits 52,320 Capital 150,135 Suspense accounts , ,455 The following information, which has not been accounted for above, is also available: 1. The inventory count as at 30 June 2015 showed closing inventory valued at / 17, A review of receivables as at 30 June 2015 showed that a further / 1,150 to be written off as an irrecoverable debt. It was decided that the closing allowance for receivables was to be 10% of the outstanding receivables balance as at 30 June On 30 June 2015 P. Potter received a cheque for / 840 in relation to an irrecoverable debt previously written off 4. A payable of P. Potter has charged interest of / 745 on a payable balance which has been outstanding for over 200 days. 5. / 8,000 of insurance in the trial balance above relates to the year from 1 January 2015 to 31 December Page 4 of 29

5 QUESTION 1 (Cont d) 6. Allowance to be made for depreciation as follows: Land Not depreciated Delivery vans 10% straight line method 7. Upon investigation it was determined that the balance in the suspense account related to cash receipt from a receivable of / 400 that was credited to the bank account in error. You are required to prepare: a) The Statement of Profit or Loss for the year ended 30 June b) The Statement of Financial Position as at that date Total 20 Page 5 of 29

6 QUESTION 2 (Compulsory) Part A On 6 April 2015 M. Monk received his bank statements for the month ended 31 March The bank statement showed a balance of / 41,740 (overdraft) as at 31 March while the cash book showed a balance of / 52,599 (credit) as at the date. On examination of the cash book and the bank statement the following were discovered: 1. Bank charges of / 201 had not been recorded in the cash book 2. M. Monk exceeded his overdraft limit during the month of March. The bank had therefore charged him a penalty of / 250. This was not reflected in the cashbook 3. A sum of / 1,250 had been credited to M. Monks bank account in error by the bank 4. A cheque for / 1,230 had been returned by the bank as dishonoured. As the cheque had been dishonoured the bank charged M. Monk 15. This was not reflected in the cashbook 5. Cash receipts of / 3,740 were posted as cash payments of / 4,730 in the cash book; 6. On 21 st March M. Monk lodged cash of / 650 to his personal bank account. This was lodged to the business bank account in error by the bank; 7. Standing orders and direct debits of / 1,115 had not been posted to the cash book; 8. Receivables had lodged / 2,170 directly to the bank account. No record had been made of this in the cash book; 9. Lodgements of / 5,120, lodged to the bank account on 31 March 2015, had not been credited by the bank; 10. The following cheques, drawn on the bank account, had not been presented to the bank for payment as at 31 March 2015: Cheque Number Date Cheque was Written / No: March No: March ,740 No: March ,670 You are required to: A. Prepare the adjusted cash book for the month of March B. Prepare a statement on 31 March 2015 reconciling the adjusted cash book with the bank statement balance. 4 C. Explain, in report format, two reasons for preparing bank reconciliation on a regular basis. 4 D. M. Monk is considering setting up a petty cash book from which to pay small expenses. M. Monk however is not sure how a petty cashbook operates. Prepare a brief note to M. Monk outlining the operation of a petty cash book. 4 Total 20 Page 6 of 29

7 QUESTION 3 (Compulsory) Complete any FOUR parts Part A E. Eddie does not maintain proper books and records. However he is in a position to provide you with the following information for the year ended 30 June 2015: On 1 July 2014, E. Eddie was owed / 145,300 by his credit customers. During the year, E. Eddie received a total of / 621,600 from customers. 80% of this related to credit customers. Discounts allowed (all credit customers) totalled / 7,500 Dishonoured cheques amounted to / 4,800. Balances not written off as irrecoverable Irrecoverable debts / 650 On 30 June 2015, E. Eddie was owed / 148,720 from his credit customers. You are required to: Calculate E. Eddie s credit sales for the year ended 30 June Part B A sole trader receives rent for subletting part of its building. Rent receivable quarterly in advance, is received as follows: Date of receipt Period covered / 1 October months to 31 December , December months to 31 March ,500 4 April months to 30 June ,000 1 July months to 30 September ,000 1 October months to 31 December ,000 You are required to: Calculate the rental income that should appear in the Statement of Profit or Loss Account and the accrual or prepayment that should appear in the Statement of Financial Position for the year ended 31 October Part C The following information relates to the payroll costs for H. Kitty, a sole trader for the month of April Opening balance owed to the Revenue Authority / 9,100 Gross wages and salaries / 32,170; Employers PRSI/NIC / 3,710; Net wages and salaries / 21,780; Payments to the Revenue authority / 9,100 Note: The difference between gross and net wages and salaries relates only to PAYE taxes and employees PRSI/NIC. You are required to: Prepare PRSI/NIC T Account for the month of April Page 7 of 29

8 Part D A. Annie is a sole trader and provides you with the following information for the month of January: Units Price / 1 Jan Opening inventory Jan Purchases Jan Sales Jan Purchases Jan Sales 50 You are required to: Calculate the value of the closing inventory at the end of January if A. Annie adopts the First In First Out (FIFO) method of inventory valuation? 5 Part E The following information is available for a sole trader for a financial year: Inventory at the start of the accounting period was / 50,000. During the period, the sole trader purchased goods for resale totalling / 460,000. Purchases returns amounted to / 20,000 Carriage inwards costs totalled / 2,000. The closing inventory at the year-end was at / 52,000. Discounts received during the year amounted to / 2,180. The gross profit margin of the business during the year is 12%. You are required to: Calculate the gross profit made by the sole trader during the financial year. 5 Part F A sole trader has provided the following balances: Payables ledger control account / 24,200 List of total individual payables / 24,000 During an investigation the following additional information has come to light: A credit purchase invoice amounting to / 200 was not recorded in the listing The purchase day book was overcast by / 200 Debit balances totalling / 200 were not included in the list of the total individual payables balances. You are required to: Calculate the corrected balance on the payables ledger control account and the list of total individual payables balances. 5 Total 20 Page 8 of 29

9 QUESTION 4 SECTION B Answer any TWO of the three questions in this Section Part A Outline your understanding of the terms external audit and internal audit as they relate to accounting. 6 Part B Outline why ethics are important to accountants in general and specifically to an Accounting Technician. 5 Part C Accounting concepts and conventions are of fundamental importance in the preparation of financial statements. With the aid of relevant examples outline your understanding on any three of the following concepts/conventions. i. Accruals ii. Going Concern iii. Historical Cost iv. Materiality v. Prudence 9 Total 20 Page 9 of 29

10 QUESTION 5 Part A Outline your understanding, with the use of relevant examples, of capital and revenue expenditure. 4 Part B On 1 January 2014 M. Murray s books and records contained the following balances: / Delivery vans at cost 101,750 Accumulated depreciation delivery vans 32,410 During the financial year ending 31 December 2014 the following occurred: On 1 April 2014 delivery van A was traded in against a new delivery van D. Delivery van A had been purchased on 1 December 2010 for / 25,000. M. Murray paid for delivery van D in cash. The list price of delivery van D was / 37,500. M. Murray wrote a cheque in full payment for delivery van D of / 32,000. Delivery vans are depreciated at 15% per annum on the straight line basis from the month of purchase to the month of sale. Depreciation is calculated to the nearest whole number. You are required to: i). Prepare the delivery van at cost account. 3 ii). Prepare the delivery van accumulated depreciation account for the year ended 31 December iii). Prepare the disposal account for delivery van A. 2 Part C A sole trader commenced in business. The following assets were purchased for use within the business: Asset Type Manufacturing Equipment Building Additional Comments Manufacturing equipment is expected to consume economic benefit at a relatively high rate in the first years after purchase with consumption of economic benefit falling in later years. Buildings are expected to reduce in value evenly over its useful life You are required to: i. Outline your understanding of the terms straight line depreciation and reducing balance depreciation as they relate to non-current assets. 4 ii. Advise the sole trader as to the most appropriate depreciation method to be applied for each of the assets outlined above. You must justify your decision in each case. 3 Total 20 Page 10 of 29

11 QUESTION 6 The assets and liabilities of Happy Racket Badminton Club as at 1 January 2014 and the 31 December 2014 include the following: 1 Jan Dec 2014 / / Courts and clubhouse 211, ,710 Fixtures and fittings cost 16,510? Fixtures and fittings accumulated depreciation 8,050? 4% long term loan 120,000? Bar inventory 9,630 10,180 Bar payables 7,200 6,970 Insurance prepaid 8,120 7,130 Annual subscriptions in arrears 25,150 27,800 Annual subscriptions in advance 4,610 3,700 Bar wages due 2,275 2,450 Life subscriptions fund 60,000? The bank T account is as follows: Bank Account / / Members subscriptions (all annual) 172,450 Balance b/d (1/1/2014) 16,750 Bank interest 95 Advertising for dinner dance 450 Bar receipts 92,160 General repairs & expenses 32,040 Annual captains dinner dance ticket 16,940 Payments to bar payables 44,300 sales Payments for bar wages 57,050 Fees from non-members 6,720 Loan interest 3,800 Light and heat 7,210 Repayment of loan principle 8,500 Insurance 12,000 Catering for dinner dancer 3,890 General expenses for dinner dance 1,150 Bank charges 250 Balance c/d 100, , ,365 Balance b/d (31/12/14) 100,975 Additional Information The life subscription fund relates to a once off deal that was offered to members in 2006 to help part finance an extension to the clubhouse. The value of the life membership fund originally was / 200,000 and is being credited to the income and expenditure account over 10 years. Fixtures and fittings are being depreciated at 10% p.a. on the straight line method. During 2014 / 2,000 of additional fixtures and fittings were purchased. The club s depreciation policy is to charge a full year of depreciation in the year of purchase and none in the year of sale. The courts and clubhouse are not depreciated. You are required to: i. Calculate the accumulated fund as at 1 January ii. Prepare the Bar Trading account for the year ended 31 December iii. Calculate the profit/loss of the dinner dance. iv. Prepare the Income and Expenditure Account for the year ended 31 December Total 20 Page 11 of 29

12 1 st Year Examination: August 2015 Financial Accounting Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No Average Mark (%) Nos. Attempting Statistical Analysis - Overall Pass Rate 38% Average Mark 44% Range of Nos. of Students and over 12 Total No. Sitting Exam 198 Total Absent 56 Total Approved Absent 6 Total No. Applied for Exam 260 General Comments: The overall standard of answers was mixed. Most candidates are attempting the required number of questions. Candidates in the main attempted the correct number of questions and question parts.. The general presentation of scripts was acceptable. The majority of candidates are now filing question parts together, though some continue to scatter question parts through-out the examination booklet. The main areas of weakness around presentation are as follows: Poor and untidy handwriting No workings presented for some questions Workings presented all combined in the rough work section of the paper despite the answer book explicitly stating not to do this Cluttered answers each new question should be attempted on a new page Page 12 of 29

13 Examiner s Comments on Question One Generally this was a well answered question with candidates displaying a good fundamental knowledge of the primary statements. Most candidates dealt well with the additional write off of irrecoverable debts and the calculation of the closing allowance. However many are still confused as to the movement in allowance being recorded in the Statement of Profit and Loss and the closing allowance being recorded in the Statement of Financial Position. Most candidates dealt well with depreciation, however the calculation of the insurance prepayment proved more challenging. Most candidates recognised that the bank figure was an overdraft but the two required adjustments to the bank figure proved more challenging. Many candidates increased payables by the penalty, however the treatment in the statement of profit and loss was much weaker. The naming of the primary statements is still an area of weakness. These are very easy marks to earn. Solution One P. Potter Statement of Profit and loss for the year ended 30 June 2015 [0.5 marks] Ref to Workings / / / Sales 410, Sales returns (21,410) 0.5 Net sales 389,440 Cost of sales Opening inventory 17, Purchases 275, Purchases returns (9,400) 266, ,530 Less closing inventory (17,190) 0.5 Cost of sales (267,340) Gross Profit 122,100 Discount received 2, Less Expenses Rent expense 21, Depreciation delivery vans 5 6,474 1 Insurance 4 10,500 1 Rates and water charges 7, Wages and salaries 71, Carriage outwards 3, Discount allowed 1, Interest charged Telephone, internet and media 5, Increase in the allowance for receivables 1 4, Irrecoverable debts 1 7, Irrecoverable debts recovered 2 (840) 0.75 Power, light and heat 3, Total expenses (143,868) Operating loss (18,988) Page 13 of 29

14 Solution One (Cont d) P. Potter Statement of financial position as at 30 June 2015[0.5 ] Non-current assets Ref to Workings / / / Land 174, ,500 Deliver Vans 5 64,740 (23,884) 40, ,356 Current assets Closing inventory 17, Receivables 1 101,590 1 Closing allowance 1 (10,159) 91, Prepayments 4 4, ,621 Total assets 327,977 Equity and Liabilities Equity Capital 150, Accumulated profit/loss 52, Losses for 2015 (18,988) 0.5 Accumulated profits 183,467 Drawings (9,675) ,792 Current liabilities Payables 3 143, Bank overdraft 2 8, VAT liability 2, ,185 Total Equity and Liabilities 327,977 Working 1 / Receivables as per TB 102,740 Additional irrecoverable debts written off (1,150) Restated receivables 101,590 Allowance for irrecoverable debts 10% Closing allowance 10,159 Opening allowance (5,480) Increase in the allowance 4,679 / Irrecoverable debts as per TB 5,980 Additional irrecoverable debts 1,150 Restated irrecoverable debts 7,130 Page 14 of 29

15 Workings 2 / Bank as per TB (9,855) Irrecoverable debts recovered 840 (9,015) Suspense account error 800 8,215 Workings 3 / Payables 142,950 Interest charges ,695 Workings 4 / Insurance 1/12015 to 31/12/2015 8,000 Half a year of a prepayments 50% Prepayment 4,000 / Insurance as per TB 14,500 Prepayment (4,000) 10,500 Workings 5 / Deliver vans 64,740 Depreciation 10% 6,474 Page 15 of 29

16 Examiner s Comments on Question Two A popular question that was reasonably well answered most candidates were aware of the correct approach to the question. Challenges arose in the following areas: Point 3 was adjusted in the cash book in error Treatment of the dishonoured cheque point 4 Correct of error around point 5 Correct of error around point 6 Solution 2 Bank Account/Cash Book / / Balance 52, Error 5 8,470 Bank charges Credit transfer 2,170 O/D penalty Dishonoured cheque 1, D. Cheque- penalty Balance 44,770 SO/DD 1, ,410 55,410 Balance 44,770 Part B Bank Reconciliation as at 31 March 2015 / Balance per bank (41,740) 0.5 Correction of bank error (1,250) 1 Correction of bank error (650) 1 Add outstanding Lodgement 5, Less O/S Cheques , ,670 (6,250) 0.75 Balance (44,770) Page 16 of 29

17 Part C To: Whom it May Concern From: An Accounting Technician Subject: Importance of Preparing Control Accounts Date: 20/8/2015 I have been asked to prepare a report outlining the importance of regular preparation of bank reconciliations: Identification of errors, such errors may have been made either by the bank, the company or both. For example a business may have omitted to post receipts from receivables. Items such as bank interest, charges, standing orders, direct debits and dishonoured cheques. These will be known by the bank but not identified by a business until it receives the bank statement and prepares the bank reconciliation. Should you have any further queries please feel free to contact me. An Accountant Technician [1.5 marks per reason and 1 mark for report format] Part D A petty cash system operates by setting aside a small amount of cash, called a float. This is withdrawn from the business bank account normally by cashing a petty cash signed cheque in the bank. A responsible member of staff, who keeps it in a safe locked box, controls cash. When a small amount of cash is required within the business a petty cash docket is completed setting out details of the cash requirement and authorised. This docket is placed into the cash box and the cash handed over. Where a receipt is received in respect of the purchase for which the cash was issued, this is then attached to the original withdrawal docket. At any one time the total of the remaining cash in the box and the total of all dockets in the box should equal the exact amount of the original float. At the end of a specific period all dockets are totalled and a cheque is cashed for this exact amount bringing the total petty cash back to the original starting amount. This is known as the imprest system. In most businesses there is a requirement for small amounts of cash. For example to purchase supplies for the canteen where there is no credit facility in the local shop, for the purchase of stamps, newspapers, cleaning and other supplies and the reimbursement of staff incidental expenses. The system must control the flow of cash and regular spot checks should be done. [Total 4 marks] Page 17 of 29

18 Examiner s Comments on Question Three A popular question that was well answered in the main Part A Generally well answered through few candidates scored full marks. Challenges arose around the treatment of the dishonoured cheque, discount allowed and the closing balance owed by credit customers. Some candidates are not preparing the working in T account format, are getting confused as a result and are loosing marks. Part B Answers here were mixed. Candidates struggled to deal with the correct apportionment of receipts to the financial period and the calculation of the closing Statement of Financial Position figure. Part C Candidates struggled to treat the opening balance correctly and struggled to calculate the required figures from the information provided in the question. Part D Answers were mixed. Some candidates did not identify that the closing inventory figure was priced using two inventory prices. Some candidates did not show good workings for this question. Part E Most candidates calculated the cost of sales correctly and then simply multiplied it by 12% to derive the gross profit figure in error. Many candidates incorporated discount received into the cost of sales figure in error. Part F Answers here were very mixed. Many candidates seemed to get confused between the control account and the listing. Workings tended to be poor for this question. Solution 3 Part A Receivables Control Account Total / / Total 0.5 Balance b/d. 145,300 Cash receipts 497, Dishonoured cheques 4,800 Discounts allowed 7, Credit Sales 504,050 Irrecoverable debts Balance c/d 148, , ,150 Balance b/d 148,720 [5 ] Part B Financial year: 1 November 2013 to 31 October 2014 Date of receipt Period covered / / Total 1 October months to 31 December ,500 2 months 5, December months to 31 March ,500 3 months 7, April months to 30 June ,000 3 months 9, July months to 30 September ,000 3 months 9, October months to 31 December ,000 1 month 3, ,500 At the year end there is 2 months rent prepaid. This is recorded in the Statement of Financial Position as a current liability of / 6,000 (prepaid income). [1.5 marks] [5 ] Page 18 of 29

19 Part C PRSI/NIC Account / / 1 Payments to Revenue Auth. 9,100 Balance b/d 9,100 1 Employers PRSI/NIC 3, Balance c/d 14,100 PAYE & EE PRSI/NIC 10, ,200 23,200 Balance b/d 14,100 [5 ] Solution 3 Part D Units Price Inventory 1 Opening inventory * Purchases * * Sales (600) 200* Purchases * * Sales (50) 150* * st Closing inventory 650 Value of closing inventory: (150*2.60) + (500*2.8) = / 1,790 [5 ] Part E / / / Total Sales 500,000 Cost of sales Opening inventory 50, Purchases 460, Purchases returns (20,000) 440, Carriage inwards 2, ,000 Less closing inventory (52,000) 0.5 Cost of sales (88%) (440,000) Gross Profit (12%) 60,000 2 Discount received 2,180 [5 ] [0.5 marks for excluding discounts received from the calculation] [2 marks above for GP is for an appreciation of the process and the logic.] Page 19 of 29

20 Part F / Total Awarded Payables ledger control 24,200 Purchase day book overcast (200) ,000 / Payables listing 24,000 Credit invoice not recorded Debit balances not included in list (200) ,000 [0.5 marks for agreeing the listing and the control account] [5 ] Page 20 of 29

21 Examiner s Comments on Question Four A reasonably popular question however answers tended to be poor. Part A many candidates could only distinguish between external and internal ausit to the extend that one is performed by persons external to the business and internal audit by employyes of the business entity. Some candidates seemded to get management accounting and interal audit confused. Most candidates we not able to explain why these audits are carried out. Part B many candidates explain what ethics are but not why they are important and therefore failed to score high marks for this question type. Some candidates did not relate ethics to an Accounting Technician. Part C The concept of accruals was generally answered well though some candidates explain an accrual as opposed to the accruals concept The concept of going concern, historical cost and materiality were generally well understood. Some candidates failed to note that prudence should only be applied under conditions of uncertainty. Solution 4 Part A External Audit The users of accounting information need assurance as to the accuracy and reliability of financial statements. The external audit process strives to provide a high level of assurance to users by providing an independent examination of the company s books and financial statements. To fully appreciate the importance of auditing we must examine the relationship that exists between a company s shareholders, directors and auditors. The shareholders are the owners of the company. Large companies may have thousands of shareholders. In many companies there exists a division of ownership and management/control. The shareholders elect directors to manage and run the company on a day-to-day basis on their behalf. The directors run the company and report back to the shareholders on an annual basis. Reporting is carried out through the financial statements, with respect to the company s performance in the statement of profit and loss, position in the statement of financial position and liquidity in the statement of cash flow. Accounting is not an exact science and there are many areas where judgements and estimates will have been made. In addition directors have complete access to all information about the company s performance, and are being rewarded based on how well the company performs. There is therefore an inbuilt bias for directors to portray the best financial picture possible in the financial statements and a danger that directors may act in their own private interests, rather than those of the shareholders. This scenario is referred to as an agency problem. To help overcome the agency problem shareholders elect an auditor. The auditor upon examining the books and financial statements of the company forms an opinion and prepares an audit report that must be included in the financial statements. If the auditors are satisfied that the books and financial statements of the company have been prepared in line with the relevant statutory requirements and professional standards, the audit report will state that the financial statements of the company gives a true and fair view of the state of affairs of the company at the end of the accounting year. The audit report gives shareholders an impression as to the extent to which they can rely upon the financial statements prepared and presented to them by the directors. [3 marks] Internal Audit Large companies in addition to external auditors tend to have an internal audit department. This is because in order to run a company effectively and meet their legal responsibilities, directors need assurance in a number of areas in addition to the accuracy of their published financial statements (external audit). It is becoming more expected for companies to have internal auditors. Page 21 of 29

22 In contrast to external auditors, internal auditors are employed by and answer to the company s management. The role of the internal auditor is somewhat different to that of the external auditor. The functions of the internal audit department include: Scrutinising the company s accounting procedures; Testing the internal controls the company has in place to ensure that proper accounting procedures are applied and that the assets of the companies are safeguarded; To assess whether internal policies are being upheld and to examine ways in which these policies can be developed and improved; Testing the efficiency and effectiveness of operations; Stewardship of the company s assets. [3 marks] Part B Ethics in accounting is of utmost importance to accounting professionals and those who rely on their services. Accounting professionals know that people who use their services, especially decision makers using financial statements, expect them to be highly competent, reliable and objective. Those who work in the field of accounting must not only be well qualified but must also possess a high degree of professional integrity. People need to have confidence in the quality of the complex services provided by accountants and accounting technicians. Because of these high expectations, accountants have adopted a code of ethics, also known as codes of professional conduct. These ethical codes call for their members to maintain a level of self-discipline that exceeds the requirements of laws and regulations. By joining professional organisations like Accounting Technicians Ireland accounting technicians agree to uphold the high ethical standards of their profession. [3 marks for general and 2 marks for accounting technical] Part C Accruals Income is recognised in the financial statements as it is earned, not when the cash is received. Expenditure is recognised as it is incurred, not when it is paid for. When income is incurred over time (e.g. rental/interest income) or expenditures are time-based (e.g. rent payments), the income and expenditure recognised in the income statement should relate to the time period, not to the receipts and payments of cash. For example the sale of a good is recognised in the financial statements when the rights and rewards of ownership have passed from the seller to the purchaser not when the cash is received. Going Concern Financial transactions are usually prepared on the assumption that the business will continue in operational existence for the foreseeable future. This means that the financial statements are drawn up on the assumption that there is no intention or necessity to close down the business. If the financial statements are not prepared on the going concern basis then they must be prepared on what is known as the break-up basis. The break-up basis reflects the following: Some non-current assets may be sold at less than their value on the statement of financial position, whilst a machine may have a use for specific business, it may be scrap or no use to other businesses. In contrast, property may be sold for a value in excess of that shown in the statement of financial position based on original cost. If the entire inventory is sold at once then it will not be sold for as much money as if it were sold in the normal way. Some receivables may decide not to pay the business if it is known the business is about to go into liquidation. Page 22 of 29

23 In most cases financial statements are prepared on a going concern basis unless there is evidence to the contrary. Historical Cost Assets are recorded at historical cost i.e. what they were bought for. Liabilities are valued at the amount initially received in exchange for the obligation. Thus the figure shown in the financial statements for an item is the value of the item when the transaction occurred, not its current market value. Historical cost has many drawbacks, a significant one being that the non-current assets of the business tend to be undervalued and therefore the statement of financial position does not show the true value of the business. Historical cost continues to be used however for the following reasons: it is simple and cheap to apply, figures used are objective and verifiable and the lack of a sound and acceptable alternative. An example of the historical cost concept is valuing buildings at a cost price of / 100,000 even though the current market value of the buildings is / 250,000. Materiality Materiality is a threshold quality that is demanded of all information given in the financial statements. When immaterial information is given in the financial statements, the resulting clutter can impair the understand ability of the other information provided. An item s size is judged in the context both of the financial statements as a whole and of the other information available to users that would affect their evaluation of the financial statements. An example of a material item is the value of non-current assets of / 250,000 in the financial statement of an entity with total assets of / 320,000. The non-current assets are material to the financial statements of the entity. Prudence In conditions of uncertainty, a cautious approach should be taken, so that gains and assets are not overstated and losses and liabilities are not understated. This means that: Sales and profit should not be included in the income statement until the cash has been received or that there is reasonable certainty that the cash maybe received. In contrast, losses should be recognised in the income statement as soon as they are foreseen and considered reasonably certain. An example of prudence can be seen in the allowance for receivables. As at the year end the entity does not know which receivables will not be able to pay the balances due. If it did these balances would need to be written off as irrecoverable debts. However based on past experience and knowledge of the economy the entity knows that in all probability not all receivables will be able to discharge the balances owed. The entity therefore sets up an allowance for receivables to reflect balances that the entity expects not to receive and this is deducted from receivables in the statement of financial position. Therefore the figure reported for receivables can be thought of as the funds the entity expects to receive as opposed to the total balances owed as at the year end. [3 marks each derived as follows: 2 marks each of the explanation and 1 mark for example.] 9 Page 23 of 29

24 Examiner s Comments on Question Five Not a popular question and answers were very mixed. Candidates struggled with both the disposal and the addition in the deliver van at cost account. Many candidates made a reasonable attempt at calculating the depreciation on the delivery van disposed of. Very few candidates realised that in order to complete the accumulated depreciation account they needed to calculate the depreciation figure of the year. Candidates incorrectly stated that either straight line or reducing balance depreciation was better for assets that lose value fast. Thus missing the point that it is the depreciation % that determines how fast the asset depreciates and the method used is matched to the pattern of consumption of the asset. Total Question 5 Part A Capital Expenditure: this is expenditure on goods that will last for more than one year and are not bought for resale but to be used by the business to help generate sales. Examples include premises, equipment, delivery vans etc. That is capital expenditure is expenditure on non-current assets or the repayment of loans. Revenue (Current) Expenditure: this is expenditure on goods that will be used up within one year and are not bought for resale. They relate to the day-to-day running of the business and are incurred in the for the purpose of the trade of the business. Examples include wages, rent, rates, telephone etc. 3 marks for explanation and 1 mark for the examples 4 Part B Deliver Vans at Cost Account Date Details / Date Details / Total 0.5 1/1/14 Balance c/d 101,750 1/4/14 Disposal A 25, /4/14 Cheque additions 32, /4/14 Trade-in additions 5,500 31/12/14 Balance 114, , ,250 1/1/15 Balance c/d 114,250 [0.5 for balancing the T account] Total Deliver Vans Accumulated Depreciation Account Date Details / Date Details / Total 2 1/4/2014 Disposal 12,501 1/1/14 Balance c/d 32, /12/14 Balance b/d 36,579 31/12/14 Statement of P&L 16, ,080 49,080 1/1/2015 Balance c/d 36,579 [0.5 for balancing the T account] Page 24 of 29

25 Deliver Vans A Disposal Account Date Details / Date Details / 1/4/14 Cost 25,000 1/2/10 Accumulated Depreciation 12,501 1/4/14 Trade in 5,500 Statement of P&L 6,999 25,000 25,000 [0.5 marks per correct entry for a total of 2 marks] Delivery Van A Depreciation Calculation: [2 marks from above broken down as follows:] ,000 * 15% * 1/12 = ,000 * 15% * 1 = 3, ,000 * 15% * 1 = 3, ,000 * 15% * 1 = 3, ,000 * 15% * 3/12 = ,501 Depreciation Calculation 2014: [1.5 marks from above broken down as follows:] Continuing 76,750 * 15% * 1 = 11, Disposed of MV 25,000 * 15% * 3/12 = Addition 37,500 * 15% * 9/12 = 4, ,670 Page 25 of 29

26 Part C (i) Depreciation refers to the measure of wearing out and consumption in the useful economic life of a non-current asset. There are two methods of calculating depreciation: the straight line method and the reducing balance method. Straight Line Method Using this method the amount of depreciation charged every year is the same. It is therefore appropriate for assets were the consumption of economic benefit is relatively even over the life of the asset for example buildings. The formula for the straight line method of depreciation is as follows: Depreciation Charge per Annum = Cost Estimated Residual Value Expected Life of Fixed Asset Reducing Balance Method The reducing balance method calculates the per annum depreciation charge by multiplying the net book value (NBV) of the non-current asset by a fixed percentage rate. The result of using the reducing balance method is that the depreciation charge is the highest in the first year after purchase and falls in each subsequent year. It is therefore appropriate for assets were the consumption of economic benefit is relatively high in first years after purchase and reduces thereafter for example motor vehicles. The formula for the reducing balance method of depreciation is as follows: Depreciation Charge per Annum = NBV of non-current asset * Depreciation % Rate [4 ] (ii) Whether the straight line or reducing balance method of depreciation is chosen depends upon how the asset is expected to consume economic benefit. The method used should approximate how the asset is expected to consume economic benefit. Where assets are expected to consume economic benefit evenly over the life of the asset the straight line method is normally considered appropriate. Thus using the straight line method for the building would appear appropriate. Using the reducing balance method means that the depreciation charged is the highest in the first year after purchase and falls in each subsequent year. Thus using the reducing balance method for manufacturing equipment would appear appropriate. 1 mark for stating SL/RB 2 marks for justification [3 ] [20 ] Page 26 of 29

27 Examiner s Comments on Question Six Not a very popular question. Part i this was reasonably well answered. Some candidates failed to include the bank figure, subscriptions in arrears and advance confused some candidates and some candidates prepared the accumulated fund as at 31 December 2014 in error. Part ii answers here were mixed. The calculation of purchases and the bar wages figure caused the most problems. Some candidates prepared the Trading account in T account format. No marks were deducted for this. However those that prepared the trading account in T account format seemed to get confused as to whether an item was a debit or credit and scored poorly as a result. Part iii this in general was very well answered. Part iv the calculation of subscriptions while improved remains a challenge for others as does, the release of one year of the annual subscription, insurance calculation, loan interest calculation and depreciation of fixtures and fittings. Solution 6 Part i 1/1/2014 1/1/2014 Total / / Assets Court and clubhouses 211, Fixtures and fittings 16, Fixtures and fittings (accumulated depreciation) (8,050) 0.25 Bar inventory 9, Subscriptions in arrears 25, Insurance prepaid 8, ,070 Liabilities Bar payables 7, Subscriptions in advance 4, Bar wages due 2, % long term loan 120, Bank 16, Life subscriptions fund 60, (210,835) Opening Accumulated Fund 52,235 [3 marks] ii Happy Racket Badminton Club [0.5 for title] Bar Trading Account for the year ended 31 December / / Total Sales 92, Cost of sales Opening inventory 9, Purchases 44, ,700 Less closing inventory (10,180) 0.5 Cost of sales (43,520) Gross Profit 48,640 Less expenses Bar wages (57,225) 1.5 Bar loss (8,585) Page 27 of 29

28 Working 1 above broken down as follows: Total Bar Payables A/C / / Total 0.5 Bank 44,300 Balance b/d 7, Balance c/d 6,970 Bar Trading Account Purchases 44,070 51,270 51,270 Balance b/d 6,970 Working 2 above broken down as follows: Total Wages A/C / / Total 0.5 Bank 57,050 Balance b/d 2, Balance c/d 2,450 Bar Trading Account 57,225 59,500 59,500 Balance b/d 2,450 Part iii Dinner Dance / Total Proceeds 16, Advertising (450) 0.5 Catering for dinner dancer (3,890) 0.5 General expenses for dinner dance (1,150) ,450 Part iv Happy Racket Badminton Club Income and expenditure account for the year to 31 December 2014 / / Total Income Subscriptions 176, Release of one year life subscriptions 20,000 1 Interest received Proceeds of dinner dance 11, Fees from non-members 6, ,275 Expenditure Light and heat 7, Bank charges Insurance 12, Loss on bar 8, Loan interest 4,800 1 General repairs and maintenance 32, Depreciation fixtures and fittings 1, (67,726) Excess of income over expenses 146,549 [0.5 for leaving out repayment of the loan principle] Page 28 of 29

29 Workings above broken down as follows: Total Subscriptions Account Details / Details / Total 0.5 Opening subs in arrears 25,150 Opening subs in advance 4, I/E value for subs 176,010 Cash received for subs 172, Closing subs in advance 3,700 Closing subs in arrears 27, , ,860 Opening subs in arrears 27,800 Opening subs in advance 3,700 Total Insurance Account Details / Details / Total 0.5 Opening balance 8,120 Income and Exp A/C 12, Bank 12,000 Closing balance 7, ,120 20,120 Opening balance 7,130 Loan Interest Working / Loan principle 120,000 Interest at 4% 4% 4,800 Loan interest paid 3,800 Loan interest to be accrued 1,000 / Fixtures and fittings 16,510 Additions 2,000 18,510 Depreciation 10% 1,851 Page 29 of 29