Financial Accounting. Sample Paper 1 Questions & Suggested solutions. Financial Accounting Sample Paper 1 Page 1 of 26

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1 Financial Accounting Sample Paper 1 Questions & Suggested solutions Financial Accounting Sample Paper 1 Page 1 of 26

2 NOTES TO USERS ABOUT SAMPLE PAPERS Sample papers are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding the style and type of question, and their suggested solutions, in our examinations. They are not intended to provide an exhaustive list of all possible questions that may be asked and both students and teachers alike are reminded to consult our published syllabus (see for a comprehensive list of examinable topics. 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 only correct approach, particularly with discursive answers. Alternative answers will be marked on their own merits. This publication is copyright 2015 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, Financial Accounting Sample Paper 1 Page 2 of 26

3 Accounting Technicians Ireland Year 1 FINANCIAL ACCOUNTING Sample Paper 1 EXAM DURATION THREE HOURS INSTRUCTION TO CANDIDATES PLEASE READ CAREFULLY 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 from Section A. Answer ANY TWO of the three questions from 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, units etc. Answers should be illustrated with examples, where appropriate. NOTE RE: 2016 Examinations The terminology in use for 2016 exams will be in line with FRS 102. In some cases, this differs slightly from the terminology previously used (IFRS). For the 2016 exams, students who use IFRS terminology will not be penalized, however it is preferred that students use FRS 102 terminology throughout. Financial Accounting Sample Paper 1 Page 3 of 26

4 SECTION A Answer ALL THREE QUESTIONS (Compulsory) in this Section QUESTION 1 (compulsory) The following trial balance was extracted from the books of M. Doherty, a sole trader, on 31 December 2009: Fixtures & fittings at cost 420,000 Accumulated depreciation on fixtures & fittings 58,800 Motor vehicles 112,560 Accumulated depreciation on motor vehicles 47,900 Inventories as at 1/1/ ,450 Receivables and payables 98, ,200 Bank 17,800 Prepayments 31/12/09 7,800 Accruals 31/12/09 14,200 Term loan 210,000 Purchases and sales 546, ,000 Sales and purchases returns 21,400 11,650 Discounts allowed and received 18,400 19,640 Carriage outwards 21,000 Insurance 33,700 Rent 55,000 Interest 15,520 Wages and salaries 74,200 Allowances for receivables 1/1/09 4,900 Irrecoverable debts 7,210 Drawings 36,540 Capital 177,220 1,542,310 1,542,310 The following information, which has not been accounted for above, is also available: 1. Inventory as at 31 December 2009 was valued at cost at 83,500. This figure includes inventory items that cost 12,800. Post year end these inventory items were sold for 10,650 after incurring costs to sell of An item of fixtures & fittings was sold during the year for 16,980. The cost of the fixtures & fittings sold was 32,450 and depreciation of 19,460 had been charged as at 1/1/ Depreciation is to be provided for as follows: i. Fixtures & fittings - 4% straight line ii. Motor vehicles - 15% reducing balance The depreciation policy is to charge a full year s depreciation in the year of acquisition and none in the year of sale. 4. A review of receivables balances as at the year end identified 11,500 of receivables that should be written off as irrecoverable. 5. The allowance for receivables is to be adjusted for 7% of the remaining receivable balances. Financial Accounting Sample Paper 1 Page 4 of 26

5 You are required to prepare: i. The Income Statement for the year ended 31 December 2009; ii. The Statement of Financial Position as at that date. 12 Marks 8 Marks Total 20 Marks Financial Accounting Sample Paper 1 Page 5 of 26

6 Question 2 (compulsory) a) Outline the situations were incomplete record techniques will be required to produce a set of financial statements. 3 Marks b) On 1 January 2009, P. Jones a sole trader owned a business, that had the following assets and liabilities: Motor vehicles 124,125 Accumulated depreciation on motor vehicles 21,030 Premises 450,000 Receivables 119,250 Allowances for receivables 2,100 Payables 96,000 Accruals 9,750 Inventory 33,400 Prepayments 780 Bank overdraft 11,415 Cash on hand 110 Term loan 210,000 You are required to: i. Calculate the proprietor s capital as at 1 January Marks ii. In brief, outline your understanding of why the incomplete record technique used in part (i) will give the proprietors opening capital. 2 Marks c) Despite being advised on the importance of maintaining proper books and records P. Jones failed to do so in the year to 31 December He is able to provide you with the following information: Opening receivables debit balance 119,250 Closing receivables debit balance 224,320 Closing receivables credit balance 1,560 Amounts received from customers 754,100 Discounts allowed to customers 12,450 Irrecoverable debts written off 2,970 Interest charged to receivables for slow 4,110 payment Based upon the information provided, you are required to calculate P. Jones s credit sales for the year to 31 December P. Jones is able to tell you that all goods are sold on credit. 8 Marks Total 20 Marks Financial Accounting Sample Paper 1 Page 6 of 26

7 QUESTION 3 (compulsory) Complete Any Four Parts Part A W. Willow is a sole trader. His business has decreased in recent years and as a result he rents out two floors in his building that are excess to his current requirements. Details for the year ended 31 December 2013 are as follows: 31 December January 2013 / / Rent paid in advance? 8,000 Rent is paid to W. Willow bi monthly in advance. Rent for the year ended 30 September 2013 was charged at / 4,000 per month, due to economic pressure rent was reduced to / 3,200 per month from 1 October 2013 thereafter. / 44,000 was received from the tenant during You are required to prepare the rent T account for W. Willow for the year ended 31 December Marks Part B Outline your understanding of the concepts of mark-up and margin. 3 Marks A. Ash is a sole trader who sells one product. The selling price of the product is / 15. A. Ash currently enjoys a margin of 15% on the product. Calculate the cost price of the product at the current margin of 15%. 2 Marks Part C Outline your understanding of the imprest system as it relates to petty cash. 2 Marks Given the following information, calculate the cash replenishment required for the month of December / Imprest cash float 475 Sundry postage 40 Taxi receipts 41 Stationary 53 Retirement gift 100 Depreciation on motor vehicles posted to the journal 1,120 Sundry cleaning costs Marks Financial Accounting Sample Paper 1 Page 7 of 26

8 Part D The following information is available for L. Lawn a Not-for Profit tennis club. 31 December January 2013 / / Subscriptions in arrears 10,580 12,540 Subscriptions in advance 6,305 7,100 During the year subscriptions of / 95,620 were received from members. You are required to prepare the subscriptions T account for L. Lawn for the year ended 31 December Marks Part E B. Birch is a sole trader with the following information in relation his load account: Loan balance 1/1/13 54,500 Loan draw down on 1/5/13 12,000 Loan repayment 1/10/13 8,000 Interest on the loan was constant throughout the year at 5%. During the year to 31 December 2013 loan interest of 2,500 was paid. There was no opening prepayment or accrual in relation to loan interest. You are required to: Prepare the interest account of B. Birch as it would appear in the nominal ledger for the year ended 31 December Show clearly your workings on the calculation of the interest charge for the year to 31 December Marks Part F Outline your understanding of the accruals concept. With the aid of a relevant example outline how the accruals concept impacts upon the preparation of a set of financial statements. 5 Marks Total 20 Marks Financial Accounting Sample Paper 1 Page 8 of 26

9 QUESTION 4 SECTION B Answer TWO of the THREE Questions in Section B Mr A Mathews, a client of your firm, has provided you with the following bank statement and bank account details in respect of the month ended 31 December STATEMENT OF ACCOUNT - YOUR BANK LTD Statement date - 31 December Account No Date Particulars Debit Credit Balance 01-Dec-09 Balance forward 61,526 Cr 01-Dec-09 Cheque ,000 56,526 Cr 01-Dec-09 Lodgement 6,000 62,526 Cr 03-Dec-09 Cheque ,600 55,926 Cr 05-Dec-09 Direct Debit ESB 1,350 54,576 Cr 06-Dec-09 Credit Transfer VAT Refund 4,800 59,376 Cr 07-Dec-09 Cheque ,820 56,556 Cr 10-Dec-09 Lodgement 5,550 62,106 Cr 15-Dec-09 Cheque ,488 36,618 Cr 18-Dec-09 Credit Transfer Receivables Payment 11,550 48,168 Cr 20-Dec-09 Bank Charges for qtr ended Sept ,508 Cr 21-Dec-09 Cheque ,885 43,623 Cr 21-Dec-09 Cheque ,645 33,978 Cr 22-Dec-09 Lodgement 1,500 35,478 Cr 23-Dec-09 Standing Order Leasing 4,500 30,978 Cr The books and records of A Mathews show the followings transactions through the bank account for the month of December 2009: Date Receipts Date Payments 2/12/09 Balance 62,526 1/12/09 Direct debit ESB 1,350 2/12/09 Cheque ,060 9/12/09 Lodgement 5,400 5/12/09 Cheque ,820 12/12/09 Cheque ,688 14/12/09 Bank charges /12/09 Cheque ,885 20/12/09 Cheque ,645 23/12/09 Lodgement 1,500 24/12/09 Cheque ,921 24/12/09 Cheque ,233 28/12/09 Lodgement 12,900 28/12/09 Cheque ,291 31/12/09 Balance 19,773 1/1/2010 Balance 19,773 82,326 82,326 Financial Accounting Sample Paper 1 Page 9 of 26

10 You are required to: a) Outline in brief why the regular preparation of bank reconciliations is important. 3 Marks b) Write up the adjustments that are necessary to correct the bank account in A Mathew s books. 10 Marks c) Prepare the bank reconciliation statement for A Mathews as at 31 December Marks Total 20 Marks Financial Accounting Sample Paper 1 Page 10 of 26

11 QUESTION 5 a) When an individual decides to start a business, that business can be organised in one of three ways. Provide a definition of each of these business types. 6 Marks b) Outline your understanding of the term limited liability. 2 Marks c) Each business type, referred to in part a, has associated advantages and disadvantages. For each of these business types provide two advantage and two disadvantages. 12 Marks Total 20 Marks Financial Accounting Sample Paper 1 Page 11 of 26

12 QUESTION 6 A former colleague, B. Malone, recently started a business. While the first few months of trading have proved successful, B Malone now realises that she knows very little about financial accounting and has approached you for advice in relation to the accounting issues outlined below: a) An brief explanation of the function of the following books of prime entry and how the books of prime entry fit into the overall accounting process: I ii iii Sales day book; The cheque payments book; The journal. 5 Marks b) With the aid of appropriate examples, explain the difference between capital and revenue expenditure and how such expenditure is treated in the financial statements of a business. 5 Marks c) An explanation of carriage inwards and why it is added to purchases in the Income Statement. 3 Marks d) B. Malone has provided you with the following information in relation to VAT for the period since she began trading. She is unclear how much her VAT liability is at present. You decide to prepare the VAT account in order to calculate the VAT liability. i VAT on sales 48,750; ii VAT on sales returns 1,200; iii VAT on purchases 26,700; iv VAT on purchases returns Marks Total 20Marks Financial Accounting Sample Paper 1 Page 12 of 26

13 Financial Accounting Sample Paper 1 Suggested Solutions Financial Accounting Sample Paper 1 Page 13 of 26

14 Solution One M. Doherty Income Statement for the year ended 31 December 2009 Sales 879,000 Sales returns (21,400) Net sales 857,600 Cost of sales Opening inventory 74,450 Purchases 546,500 Purchases returns (11,650) 609,300 Less closing inventory (80,380) Cost of sales (528,920) Gross Profit 328,680 Discount received 19,640 Less Expenses Carriage outwards 21,000 Rent 55,000 Insurance 33,700 Interest 15,520 Wages and salaries 74,200 Discount allowed 18,400 Depreciation of fixtures & fittings 15,502 Depreciation of motor vehicles 9,699 Irrecoverable debts 18,710 Increase in the allowances for receivables 1,157 Profit on sale of FA (3,990) Total expenses (258,898) Net Profit 89,422 Financial Accounting Sample Paper 1 Page 14 of 26

15 M. Doherty Statement of Financial Position as at 31 December Non-current assets Fixtures and fittings 387,550 (54,842) 332,708 Motor Vehicles 112,560 (57,599) 54, ,669 Current assets Closing inventory 80,380 Receivables 80,473 Prepayments 7, ,653 Total Assets 556,322 Equity and Liabilities Capital Capital 177,220 Profit for ,422 Accumulated profits 266,642 Drawings (36,540) 230,102 Non-current liabilities Term Loan 210,000 Current liabilities Payables 101,200 Bank overdraft 820 Accruals 14, ,220 Total Equity and Liabilities 556,322 Workings 1 Closing inventory as per question: 83,500 Less write down of inventory (3,120) 80,380 Write down of inventory Cost 12,800 Sales value 10,650 Costs to sell (970) NRV of inventory 9,680 Difference between cost and NRV 3,120 Financial Accounting Sample Paper 1 Page 15 of 26

16 Workings 2 Cost of F&F sold 32,450 (19,460) NBV 12,990 Sales proceeds 16,980 Profit on sale 3,990 Workings 3 Cost of F&F as at 1/1/09 420,000 Disposals (32,450) 387,550 Depreciation 4% SL 15,502 Cost of MV as at 1/1/09 112,560 Accumulated depreciation (47,900) 64,660 Depreciation 15% RBM 9,699 Workings 4 Irrecoverable debts as per TB 7,210 Additional ID as per notes 11,500 18,710 Workings 5 Receivables as per TB 98,030 Irrecoverable debts as per W4 (11,500) 86,530 Allowances for receivables 7% 6,057 Opening allowances for receivables (4,900) Increase allowances for receivables 1,157 Financial Accounting Sample Paper 1 Page 16 of 26

17 Solution Two Part A Incomplete records techniques will be required to produce a set of financial statements when a sole trader, for whatever reason, has not maintained proper books and records. Also in some cases a sole trader will maintain proper books and records but these have been destroyed due to a fire, flood or computer virus etc. In such situations some figures are likely to be missing and incomplete record techniques will be required to arrive at the missing figures. Part B i. Assets Motor Vehicles 124,125 Accumulated depreciation motor vehicles (21,030) Premises 450,000 Receivables 119,250 Allowances for receivables (2,100) Inventories 33,400 Prepayments 780 Cash on hand ,535 Liabilities Payables 96,000 Accruals 9,750 Bank overdraft 11,415 Term loan 210, ,165 Proprietor s capital 377,370 ii. The incomplete records technique used above relies upon the statement of financial position balancing. The statement of financial position will always balance because the debit entries will always equal the credit entries. This is the case due to the dual aspect concept. The dual aspect concept states that every transaction should have a two sided effect, one debit, one credit and these must have the same value. The dual aspect concepts ensures that at any point in time the assets of an entity equal the owner s capital and outsider s liabilities. In the question above all the assets of the sole trader were known and all of the liabilities with the exception of the proprietor s capital were known. Therefore the difference between the total assets and the total liabilities must equal the proprietor s capital. Financial Accounting Sample Paper 1 Page 17 of 26

18 Part C Receivables Control Account Details Details Opening Balance Amounts received from 119,250 receivables 754,100 Interest charged 4,110 Discounts allowed 12,450 Credit sales 868,920 Irrecoverable debts 2,970 Closing balance 1,560 Closing balance 224, , ,840 Opening Balance 224,320 Closing balance 1,560 Financial Accounting Sample Paper 1 Page 18 of 26

19 Solution Three Part A Rent Receivable Account / / 2013 Income Statement 45,600 01/01/13 Balance b/d 8,000 31/12/2013 Balance c/d 6, Bank 44,000 52,000 52,000 01/01/14 Balance b/d 6,400 Part B Mark-up and margin are measures that businesses use to set and manage prices to maximise profitability. Mark-up is the amount added to the cost of a product or service to arrive at a price, thus the mark-up percentage is the margin divided by the cost price and expressed as a percentage. The gross margin is the difference between cost and the selling price, thus the gross margin percentage is the margin divided by the sales price and expressed as a percentage. / Sales price with 15% margin 15 Margin at 15% (2.25) Cost of product Part C Under the imprest system a cash float is set for pretty cash say / 475. As cash is paid out of petty cash it is replaced with receipts for the items purchased. At all times remaining petty cash plus receipts in the petty cash tin will equal the cash float. At the end of the month funds from the bank account are transferred into petty cash to bring the balance of cash back up to the float. At this point the expenses associated with the receipts are posted to the ledgers of the business. Cash replenishment required for the month of December 2013: / Imprest cash float 475 Sundry postage (40) Taxi receipts (41) Stationary (53) Retirement gift (100) Sundry cleaning costs (110) Cash balance at month end 131 Cash replenishment required 344 Financial Accounting Sample Paper 1 Page 19 of 26

20 Part D Subscriptions Account / / 01/01/13 Balance b/d (arrears) 12,540 01/01/13 Balance b/d (advance) 7, Inc & Exp Account 94, Bank 95,620 31/12/2013 Balance c/d 6,305 31/12/2013 Balance c/d 10, , ,300 01/01/14 Balance b/d (arrears) 10,580 01/01/14 Balance b/d (advance) 6,305 Part E Loan Balance 54,500 * 5% = 2,725 * 4/12 = ,500 * 5% = 3,325 * 5/12 = 1,385 58,500 * 5% = 2,925 * 3/12 = 731 Income statement Charge 3,024 Interest Account 2013 Bank 2,500 31/12/13 I/S charge 3,024 31/12/13 Balance c/d 524 3,024 3,024 1/1/14 Balance b/d 524 Part E 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. The accruals concept gives rise to accruals and prepayment in the accounts of businesses. A practical application of the accruals concept is outlined below where expenses are matched to the revenues that they helped to generate. For example in the calculating the gross profit figure. Gross profit is equal to sales minus cost of sales. In calculating the cost of sales figure we are interested only in the cost of the inventory sold during the accounting year. This is calculated by adding the inventory the business had at the beginning of the accounting period (opening inventory) to the net purchases of inventory made during the year, minus the inventory the business did not sell during the accounting period (closing inventory). Closing inventory is not included in the calculation of gross profit as it is still unsold at the end of the accounting period, it did not contribute to the sales revenue generated during the accounting period in question. Only the cost of inventory sold during the year is matched to the sales revenue generated during the year. Closing inventory in included as a current asset in the Statement of Financial Position. Financial Accounting Sample Paper 1 Page 20 of 26

21 Solution Four Part A The regular preparation of bank reconciliations is important for the following reasons: i. Identification of errors, such errors may have been made either by the bank, the company or both; ii. 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. Part B Bank Account 31/12/09 Balance 19,773 3/12/09 Cheque 1234 under posted 540 Cheque 1236 under 6/12/09 Vat Refund Omitted 4,800 15/12/09 posted 10,800 10/12/09 Short Count in Lodgment /12/09 Standing Order Omitted 4,500 CT from Receivables 18/12/09 Omitted 11,550 31/12/09 Balance c/d 20,433 36,273 36,273 31/12/09 Balance b/d 20,433 Part C Bank Reconciliation as at 31 December 2009 Balance per bank 30,978 Add outstanding Lodgment 12,900 Less O/S Cheques , , ,291 (23,445) Balance 20,433 Financial Accounting Sample Paper 1 Page 21 of 26

22 Solution Five Part A A business can be organised as a sole trader, partnership or company. A sole trader business is the simplest business type, it is a business that is owned and operated by one person. However a sole trader business may employ more than one person. In the eyes of the law the sole trader personally and the sole trader s business are one and the same and therefore a sole trader is fully personally responsible for any losses that the business might incur. A partnership business is one that is owned and controlled by at least two people. Most partnerships have between two and twenty partners but there are examples of partnerships, for example partnerships of accountants that have up to 50 partners. The operations of a partnership business tend to be more formalised and most partnership businesses will operate under partnership agreements. These agreements set down how important areas within the business are to be run and managed. For example, the duties of each partner and the ratio in which they share profits. In the absence of such an agreement the provisions of the Partnership Act 1890 apply. A limited company is a business that is owned by its shareholders, run by its directors and enjoys limited liability. Limited companies can either be private or public. A private limited company does not sell shares to the public whereas a public limited company does. Due to the large membership of limited companies they tend to be large and in many cases have a multinational aspect. Part B Limited liability applies when a business and its owners are considered to be separate and distinct in the eyes of the law. This means that an investor in a business with limited liability can only lose the money that they have invested in the business and no more. Limited companies enjoy limited liability, in the main sole traders and partners in a partnership do not. Limited liability encourages investor to invest money in a business as it limits the down side potential to a certain level. This may be one of the reasons why limited companies tend to be larger than sole trader and partnership businesses. Part C For a sole trader business the advantage and disadvantages are as follows:

23 Advantages The sole trader has total control over the business and enjoys all of the profits; A sole trader business is cheap and easy to set up. There are very few forms to fill out and the sole trader generally will only need to open a bank account and inform the tax authorities. Disadvantages A sole trader has unlimited liability and therefore will be personally responsible for any debts that the business generates; Sole traders can find it difficult to raise long term finance as banks tend not to want to lend them large sums and there are no other investors in the business who can invest capital; Sole traders tend to be small in size and therefore the business will usually not grow to a sufficient size where it will enjoy economies of scale. For a partnership business the advantage and disadvantages are as follows: Advantages Spreads the risk across more people than a sole trader business. Therefore if the business was to get into financial difficulty there are more people to spread the debt between; Additional partners can bring resources, customers and skills into the business, allowing partnership businesses to grow larger than sole trader businesses. Disadvantages Profits have to be shared among the various partners; There can be disagreement over the direction of the business. Any partner within a partnership has less control over the running of the business than a sole trader. For a limited company the advantage and disadvantages are as follows: Advantages Limited companies due to their size tend to find it easier than sole traders and partnerships to raise finance and as a result tend to be large. Many enjoy economies of scale as a result of this; 23

24 The shareholders in a limited company enjoy limited liability. This means that they are not personally responsible for any debts that the company may generate. If a limited company runs into financial difficulty the shareholders may lose their original investment but no more. Disadvantages Limited companies can be costly and complicated to set up as there is significantly more documentation to prepare than is the case for either a sole trader or partnership business; Certain financial information must be made available to all users of financial information. That is, it must be public information. This could potentially affect the competitiveness of the company as potential sensitive information has to be released to the public and is freely available to competitors. (Other relevant advantages and disadvantages exist for each business type and marks will be awarded for all relevant answers). 24

25 Solution Six Part A i. The sales day book records credit sales. ii. The cheque payments book is part of the cash book which records all transactions through the bank. The cheque payments book as the name suggests records payments made by cheque. iii. The journal records all transactions that are not recorded in any other book of prime entry. Examples included non regular transactions for example the month end depreciation and accruals journals. The primary purpose of financial accounting is to record, summarise and classify information that arises from the transactions that a business enters into. However if the ledgers were updated each time a transaction occurred, the ledgers would quickly become cluttered and errors may be made. Therefore when a transaction occurs it is entered into the books of prime entry. Entry of a transaction into the books of prime entry does not record the double entry required for that transaction. However the books of prime entry do form the source for double entries for the ledger accounts. From the ledgers the trial balance and finally the financial statements are prepared. Part B Revenue expenditure is expenditure that is incurred for the purpose of running the business. That is, this expenditure is on items which are short term in nature, (will last for less than one year). Such items of expenditure are recorded in the Income Statement and therefore impact on the profitability of a business. Examples include: wages, purchases of inventory for resale and light and heat. Capital expenditure is expenditure on items that tend not to be purchased for resale but are used within the business to help generate profits. Such expenditure tends to be long term in nature, that is, the item purchased tends to last for longer than one year. Such items are recorded on the statement of financial position. Examples of such expenditure are the acquisition of non current assets and the repayment of loans. Part C Carriage inwards is the term commonly given to the transportation costs associated with the purchase of goods. Such costs cover the cost to transport goods from the supplier s premises to the business s own premises. 25

26 In some situations the supplier will bear these costs and as such the cost is part of the purchase price charged to the business. In order situations the transport cost will not be included in the purchase price but will be quoted separately. In order to ensure that cost of sales and hence gross profit are consistently calculated in both of the above scenarios carriage inwards when separately quoted is added to the cost of purchases in the cost of sales section in the Income Statement. Part D Vat Control Account VAT on purchases 26,700 VAT on sales 48,750 VAT on purchases VAT on sales returns 1,200 returns 120 Balance c/d 20,970 48,870 48,870 Balance b/d 20,970 B. Malone has a VAT liability of 20,970 26