Accounting Technicians Ireland First Year Examination: Summer 2015 Paper: FINANCIAL ACCOUNTING Tuesday 12 May 2015 9.30 a.m. to 12.30 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 1 of 9 Fin. Accounting S2015 (FA)
SECTION A Answer ALL THREE QUESTIONS (Compulsory) in this Section QUESTION 1 (Compulsory) The following trial balance was extracted from the books of P. PKG a sole trader, on 31 December 2014: / / Land and buildings 97,750 Accumulated depreciation on land and buildings 54,850 Computer equipment 41,170 Accumulated depreciation on computer equipment 9,170 Inventory as at 1/1/2014 17,910 Receivables 31,175 Payables 26,780 Bank and cash 29,150 VAT liability 4,140 Light and heat accrual 920 Sales and purchases 51,330 180,175 Returns outwards and returns inwards 3,000 2,220 Discounts 720 640 Carriage inwards 850 Light and heat 3,130 Telephone and internet 2,190 Business insurance 4,900 Rates and water charges 4,450 Wages and salaries 71,600 Employers PRSR/NIC 7,100 5% long term bank loan 64,120 Long term loan interest 3,206 Irrecoverable debts 450 Drawings 2,310 Accumulated profits/losses 35,789 Capital 65,165 408,180 408,180 The following information, which has not been accounted for above, is also available: 1. The inventory count as at 31 December 2014 showed a closing inventory balance as follows: Product Quantity Cost per unit in Units / Alpha 2,210 2.00 Beta 4,010 2.70 Gamma 5,000 0.90 2. In the year to 31 December 2014 P. PKG took / 50 of inventory every week for his personal use. 3. On 31 December 2014 P. PKG introduced / 15,000 in new capital to aid expansion in 2015. These funds were lodged to the business bank account. 4. A closing allowance for irrecoverable debts of 5% (to the nearest whole number) is to be created. Page 2 of 9 Fin. Accounting S2015 (FA)
QUESTION 1 (Compulsory) 5. On 1 December 2014 a new building was purchased costing / 40,000. This was paid in cash. 6. Allowance to be made for depreciation as follows: Land and buildings 4% straight line Computer equipment 15% reducing balance The depreciation policy is to charge depreciation on a monthly basis from the month of purchase to the month of sale/disposal. Depreciation should be calculated to the nearest whole number. You are required to prepare: a) The Statement of Profit or Loss for the year ended 31 December 2014. b) The Statement of Financial Position as at that date. 11 9 Total 20 Page 3 of 9 Fin. Accounting S2015 (FA)
QUESTION 2 (Compulsory) Part A Outline your understanding of the accruals concept and the importance of the concept to financial statement preparation. 4 Part B P. Murphy a sole trader was not able to secure a bank loan when she commenced in business as a result P. Murphy carries out her business in two rented properties. Details of rent in advance and rent in arrears at the beginning and end of the year are as follows: 31 March 2015 31 March 2014 / / Rent paid in advance on property 1? 2,250 Rent in arrears property 2? 6,000 Property 1 Rent on property 1 is due to be paid monthly in advance on the last day of the preceding month for example rent for January 2015 is paid on 31 December 2014. The annual rent payable has remained constant for several years at / 2,250 per month. / 27,000 was paid by P. Murphy in rent for the year ended 31 March 2015. Property 2 Rent on property 2 is paid quarterly in arrears on the last day of the quarter. For example rent for the quarter January to March 2014 is due for payment on 31 March 2014. During the year ended 31 March 2015 the rent on property 2 was increased as follows: Rent payable for the year ended 30 June 2014 was / 24,000; Rent payable for the year ended 30 June 2015 was increased to / 36,000. P. Murphy paid / 30,000 in rent on property 2 in the year ended 31 March 2015. You are required to: (i) Calculate the figure for rent payable for inclusion in the Statement of Profit or Loss of P. Murphy for the year to 31 March 2015 4 (ii) Prepare the Rent Payable T account for P. Murphy for the year to 31 March 2015. (Guidance: you can prepare individual T accounts for property 1 & 2 or one combined T account) 6 Part C P. Murphy has now been in business for several years and has built up a good credit history with her bank. As a result P. Murphy is in a position to secure a loan of / 450,000 at an annual interest rate of 5.5%. This is sufficient to construct a large premise for P. Murphy to carry out business in. You are required to: (i) (ii) Assume that the loan is drawn down on 1 July 2015. Calculate, to the nearest whole number, the interest expenses for inclusion in the Statement of Profit or Loss of P. Murphy for the year to 31 March 2016. 3 Prepare the Loan T account for the year to 31 March 2016 assuming that / 22,000 of principle is repaid during the year. 3 Total 20 Page 4 of 9 Fin. Accounting S2015 (FA)
QUESTION 3 (Compulsory) Complete Any FOUR of the following SIX parts. All Parts Carry Equal Part A Prepare a note outlining your understanding of the term partnership business. The note should include two advantages and one disadvantage of operating through the medium of a partnership business. 5 Part B F. Final s balance in his cash book is / 2,120 overdrawn. She then discovered the following items: i. Bank charges of / 310 on the bank statement have not been entered in the cash book. ii. In a prior period the bank credited F. Final bank account in error with / 914 with belongs to another customer. F. Final had reflected this is her cash book. In the current period the bank realised the error and adjusted F. Final s bank account iii. Cheques totalling / 6,700 have been correctly entered on the debit of the cashbook but have not appeared on the bank statement yet. You are required to calculate the corrected balance as per F. Final cash book. 5 Part C The following entries relate to VAT for B. Bud for the year ended 30 June 2014: / Opening VAT balance (refund position) 10,145 VAT on sales 84,140 VAT on sales returns 2,120 VAT on purchases 25,950 VAT on purchases returns 2,140 VAT payments 57,700 The opening VAT balance was refunded by the Revenue Authority on 1 August 2014. You are required to prepare the VAT T account for the year ended 30 June 2014 and hence derive the closing balance as at that date. 5 Part D A business carried out an inventory count at the close of business on 30 June 2014. The value of its closing inventory at cost was / 19,900. Included in this valuation were three damaged items that had originally cost / 500. It will cost / 60 to repair the items and they will then need repackaging at an additional cost of / 5 after which they can be sold for / 570. You are required to: i. Calculate the appropriate value of closing inventory as at 30 June 2014 3 ii. Prepare the appropriate journal to record closing inventory as at 30 June 2014 (journal narratives are not required) 2 5 Page 5 of 9 Fin. Accounting S2015 (FA)
QUESTION 3 (Compulsory) Part E B. Bob provides you with the following information as at 31 March 2015: Receivables (before any adjustments) / 145,650 Irrecoverable debts to be written off / 14,540 Specific allowances for irrecoverable debts / 7,120 Closing general allowances to be 5% Opening allowances at 1 April 2014 / 24,750 You are required to calculate The Statement of Profit or Loss Account charge for irrecoverable debts and allowances for receivables for the year ended 31 March 2015 and the receivable balance for inclusion in the Statement of Financial Position as at the same date. 5 Part F The following errors have been discovered in the records of S. Sam a sole trader: i. The rent payable account was credited with a payment of rent amounting to / 7,120. The bank account was correctly recorded. ii. Sales returns of / 3,120 were not recorded in the books and records. iii. A payment to payables of / 458 was correctly recorded in the bank account, but was credited in the payables as / 854. You are required to prepare the suspense account for S. Sam and hence derive the original suspense account figure before the above errors were discovered. 5 Total 20 Page 6 of 9 Fin. Accounting S2015 (FA)
SECTION B Answer any TWO of the three questions in this Section QUESTION 4 Part A Provide a brief definition of the terms management accounting and financial accounting. You should include an example of the information provided to the users of accounting information by management and financial accounting. 5 Part B List any four users of accounting information. Outline what information each user is interested in and why. State whether management or financial accounting meets their informational needs. (Guidance: one of the four users must be internal to the business) 8 Part C (i) (ii) Outline your understanding of the term accounting standard and provide an example of a body that issues accounting standards. 3 Outline your understanding of the term true and fair view as it relates to the preparation of financial statements. 4 Total 20 Page 7 of 9 Fin. Accounting S2015 (FA)
QUESTION 5 Part A The following information relates to the receivables of Knits & Bits, a sole trader, for the year ended 31 December 2014: Extract from the books as at 1 Jan 2014: Receivables ledger debit balances Receivables ledger credit balances / 34,110 Dr 480 Cr Transactions for the year ended 31 December 2014: / Credit sales 120,500 Cash sales 1,450 Sales returns all on credit 4,650 Contra entry between receivables and payables balances 3,050 Discounts allowed 970 Payments from receivables 102,350 You are required to prepare the receivables control account for the year ended 31 December 2014. 5 Part B The monthly schedule of balances of individual supplier accounts from the payables ledger (payables listing) showed a total of / 49,045 as at 31 December 2014. The payables control account as at the same date showed a balance of / 45,170. Upon an examination of the books and records the following was uncovered: The opening debit balance of / 700 was omitted from the payables control account in error. Discounts received / 1,240 were completely omitted from the books and records. / 3,750 of cash paid to a supplier was correctly treated in the payables personal ledger but recorded as / 7,350 in the control account. A contra entry of / 1,250 was correctly treated in the payables control account but omitted from the payables personal ledger. Interest charged of / 875 by a supplier on an outstanding balance owed was omitted from the control account. Goods purchased costing / 710, were recorded correctly in the payables control account but omitted from the payables personal ledger. Goods returned to suppliers to the value of / 2,750 were not reflected in the payables personal ledger A closing credit balance of / 3,190 was omitted from the listing in error. Required: i. Outline one reason why preparing a payables ledger reconciliation on a regular basis is important. 2 ii. Prepare the restated balances of individual supplier accounts (payables listing) as at 31 December 2014 7 iii. Prepare the restated payables control account as at 31 December 2014 6 Total 20 Page 8 of 9 Fin. Accounting S2015 (FA)
QUESTION 6 A. Able is a sole trader with a small business. The trial balance extracted as at 31 March 2015 failed to agree balances are as follows: Details / Sales 71,130 Sales returns 2,100 Purchases 22,150 Expenses 10,710 Non-current assets 22,750 Discounts allowed 740 VAT liability 6,320 Payables 14,840 Receivables 52,850 Bank overdraft 3,140 Capital as at 1 April 2014 12,500 Required i. Prepare the trial balance for A. Able as at the 31 March 2015 and hence derive the balance in the suspense account as at that date. 4 A detailed examination of the books was undertaken and the following matters were uncovered: 1. The total in the purchases day book was 42,150 - the figure used when posting to the purchases T account was 22,150. 2. An invoice from a supplier for goods to the value of / 8,500 plus VAT at 10% was not recorded in the books and records of A. Able. 3. During the bank reconciliation process it came to light that / 105.14 was earned in interest during the year and has not been accounted for. 4. Sales returns of 980 was treated correctly in the customer s account and credited to the sales returns account as 890. 5. A review of the ledgers revealed that receivables were overcast by / 25,240 6. Cash drawings by A. Able of 2,170 were treated as cash sales in error. You are required to: ii. iii. iiii. Prepare the journal entries, with the appropriate narratives, necessary to correct the above errors. 9 Prepare a suspense account to clear the difference. 4 Prepare a working showing the effect on proprietor s profit (if any) of correcting each of the above errors. 3 Total 20 End of Paper Page 9 of 9 Fin. Accounting S2015 (FA)
Financial Accounting 1 st Year Examination May 2015 Solutions & Marking Scheme & Examiner s Comments Page 1 of 19
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, 2015. Page 2 of 19
1 st Year Examination: May 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. 1 2 3 4 5 6 Average Mark (%) 75% 57% 64% 48% 67% 57% Nos. Attempting 1196 1183 1193 716 910 716 Statistical Analysis - Overall Pass Rate 71% Average Mark 62% Range of Nos. of Students 0-39 236 40-49 108 50-59 147 60-69 206 70 and over 505 Total No. Sitting Exam 1201 Total Absent 295 Total Approved Absent 31 Total No. Applied for Exam 1527 General Comments: The overall standard of answers was generally good. Most candidates are attempting the required number of questions. Some candidates attempted more than four parts in question three and then appeared to run out of time and not complete the required number of questions for the paper as a whole. The general presentation of scripts was acceptable, though it did dis-improve when compared to previous sittings. 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 In theory questions some candidates are repeating themselves in multiple paragraphs. Where shorter more concise answers would have scored the same marks 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 Some candidates are not taking sufficient care in the writing of their student numbers Cluttered answers each new question should be attempted on a new page Page 3 of 19
Examiner s Comments on Question One This question was generally well answered. Many candidates prepared correct calculations for inventory, bank, depreciation, capital and drawings. Students are advised to study how to correctly adjust purchases for drawings. This has been a weakness for several sittings. Some candidates did not appropriately treat Employers PRSI/NIC costs, including it as a current liability in error. The light and heat accrual was a challenge for many candidates. Allowances for receivables was reasonably well answered though some candidates readjusted for the irrecoverable debts in the TB in error. Candidates also need to focus on titling the financial statements correctly. They are named correctly on the examination paper. Some candidates did not recognise that the accumulated profit and loss figure was an accumulated loss. Weaker candidates are struggling with the presentation of the equity and liability section of the Statement of Financial Position and presenting it as one combined section. Solution One P. PKG Statement of Profit and loss for the year ended 31 December 2014 0.25 Ref to Workings / / / Total Sales 180,175 0.5 Sales returns (3,000) 0.5 Net sales 177,175 Cost of sales Opening inventory 17,910 0.25 Purchases 1 48,730 1.5 Purchases returns (2,220) 46,510 0.5 Carriage inwards 850 0.25 65,270 Less closing inventory 2 (19,747) 0.25 Cost of sales (45,523) Gross Profit 131,652 Discount received 640 0.5 Less Expenses Depreciation land and buildings 4,043 1.5 Depreciation computer equipment 4,800 1 Business insurance 4,900 0.25 Rates and water charges 4,450 0.25 Wages and salaries 71,600 0.25 Employers PRSI/NIC Costs 7,100 0.5 Discount allowed 720 0.5 Telephone and internet 2,190 0.25 Increase in the allowance for receivables 3 1,559 1 Irrecoverable debts 450 0.5 Interest 3,206 0.25 Light and heat 3,130 0.25 Total expenses (108,148) Operating profit 24,144 Page 4 of 19
Solution One (Cont d) P. PKG Statement of financial position as at 31 December 2014 0.25 Non-current assets Ref to Workings / / / Land and buildings 137,750-58,893 78,857 0.5 Computer equipment 41,170-13,970 27,200 0.5 106,057 Current assets Closing inventory 19,747 1.5 Receivables 31,175 0.25 Closing allowance 3-1,559 29,616 0.25 Cash and bank 4,150 1.5 53,513 Total assets 159,570 Equity and Liabilities Equity Capital 80,165 0.75 Accumulated profit/loss -35,789 0.5 Profits for 2014 24,144 0.5 Accumulated profits 68,520 Drawings 1-4,910 1 63,610 Non-current liabilities 64,120 0.25 Current liabilities Payables 26,780 0.25 Page 5 of 19
L&H accrual 920 0.5 VAT liability 4,140 0.5 31,840 Total Equity and Liabilities 159,570 20 Page 6 of 19
Working 1 / Drawings as per TB 2,310 Drawings of inventory / 50*52 2,600 Restated drawings 4,910 / Purchases as per TB 51,330 Drawings (2,600) Restated purchases 48,730 Workings 2 Product Quantity Cost per unit Total in Units / / Alpha 2,210 2.00 4,420 Beta 4,010 2.70 10,827 Gamma 5,000 0.90 4,500 19,747 Workings 3 / Receivables 31,175 Closing allowance 5% 1,559 Workings 4 / Land and buildings 97,750 Depreciation 4% 3,910 / Buildings 40,000 Depreciation 4% Annual 1,600 One month 133 / Computer equipment 41,170 Accumulated depreciation (9,170) 32,000 Deprecation 15% 4,800 Workings 5 / Bank as per TB 29,150 Capital 15,000 New building (40,000) 4,150 Page 7 of 19
Examiner s Comments on Question Two This question was reasonably well answered. Many candidates did not score full marks on Part A. Where this was the case candidates tended to describe accruals as opposed to the accruals concept and/or failed to discuss the importance of the concept as required by the question. In part B the calculation of the annual rent for property two proved a challenge with many candidates using the incorrect number of months. The calculation of the closing accrual and prepayment figure was also a challenge for some. Inability to distinguish between payments and P&L charges there was no narratives on many T accounts. Part C was generally well answered. Some candidates incorrectly prorated the interest expense for the period. Including the interest charge in the Loan T Account was also a challenge as was entries on the correct side of the T Accounts. Solution Two Part A The accruals concepts states that 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. The concept ensures that the profit/loss reported in the Statement of Profit and Loss is what was earned during the year. Part B (i) Property 1: / 2,250 * 12 = / 27,000 Property 2: / 24,000 / 12 *3 = / 6,000 / 36,000 / 12 *9 = / 27,000 / 33,000 (ii) Total Rent T Account / / Total 0.5 Balance b/d 2,250 Balance b/d 6,000 0.5 1 Rent paid property 1 27,000 P&L Prop 1 27,000 0.5 1 Rent paid property 2 30,000 P&L Prop 2 33,000 0.5 1 Balance c/d 9,000 Balance c/d 2,250 1 68,250 68,250 Balance b/d 2,250 Balance b/d 9,000 Page 8 of 19
Part C (i) / 450,000 * 5.5% = / 24,750 /12 * 9 = / 18,563 [3 ] (ii) Loan T Account Total / / Total 1.5 Loan repayment 22,000 Loan draw down 450,000 1.5 Balance c/d 428,000 450,000 450,000 Balance b/d 428,000 Page 9 of 19
Examiner s Comments on Question Three Answers here were mixed. Many candidates completed more than the required four parts. Candidates should focus on completing the required number of question parts. Part A was generally well answered. Though some candidates claimed that partnerships have limited liability Part B was reasonable well answered. Some candidates included part iii in the cashbook in error Part C mixed in terms of popularity, though generally well answered by those who attempted it. Some candidate treated the VAT payments incorrectly. Part D very poorly answered. Many candidates adjusted inventory despite cost being lower than NRV. Most candidates could not give the appropriate journal adjustments for closing inventory Part E most candidates made a reasonable attempt at this question part. Some struggled to add the specific allowance to the general allowance in order to calculate the total allowance and hence the movement. Part F was not a popular choice. Most candidates who attempted the question part scored very poorly on it. Many candidates did not present a suspense account. Solution Three Part A Partnerships Partnerships are entities where ownership is divided between at least two people. Usually partnerships have no more than twenty individual partners. Like sole traders partnerships tend to be small in size, exceptions to this include accounting and solicitor partnerships, these often have more than twenty partners. A partnership is normally set up using a Deed of Partnership. Partners in a partnership generally do not have limited liability. Advantages of a Partnership Business (Any Two) The burden and risks of ownership are shared; Instead of having to offer a comprehensive range of services as a sole trader would, partners can specialise. Partnerships can usually raise more capital than a sole trader, thereby facilitating expansion; A silent partner who does not take an active part in the running of the business can enjoy limited liability; Like sole traders partnerships are set up with comparative ease with few administrative burdens imposed on a partnership by law, accounting standards or stock exchange regulations; The partners of a partnership are usually directly involved in the running of the business and will therefore not have to spend resources finding a suitable management team to delegate the running of the day-to-day activities of the business to; As owner/manager of the business partners in a partnership should be completely aware of how the resources of the business are being managed. There is no division between management and ownership. Disadvantages of a Partnership (Any One) Have to share the profits. Less control of the business for the individual. Disputes over workload. Problems if partners disagree over the direction of the business. Do not generally enjoy limited liability Part B Total Cash Book Account / / Total Balance b/d 2,120 1 Bank charges 310 1.5 Balance c/d 3,344 Bank error 914 1.5 3,344 3,344 Balance b/d 3,344 Page 10 of 19
(1 mark for leaving out cheques of / 6,700) 5 Part C Total VAT T Account / / Total 0.5 Balance b/d 10,145 VAT on sales 84,140 1 1 VAT on sales returns 2,120 VAT on purchases returns 2,140 1 1 VAT on purchases 25,950 0.5 VAT Payments 57,700 Balance c/d 9,635 95,915 95,915 Balance b/d 9,635 (5 ) Page 11 of 19
Solution Three Part D (i) Value of inventory as per question / 19,900 Cost of damaged items / 500 NRV of damaged items (570 60 5) / 505 Inventory is valued at the lower of cost and NRV. As cost is less than NRV no adjustment to inventory is required. (3 ) (ii) Debit Credit Total / / Dr Inventory Statement of Financial Position 19,900 1 Cr Inventory Statement of Profit and Loss 19,900 1 2 5 Part E / Receivables (before any adjustments) 145,650 Irrecoverable debts to be written off (14,540) Revised receivables 131,110 Specific allowances (7,120) 123,990 / Closing general allowances to be 5% 123,990 6,200 Specific allowance 7,120 Total allowances 13,320 Opening allowances 24,750 Decrease in allowances (11,430) Statement of Profit and Loss / Decrease in allowances (11,430) Irrecoverable debts to be written off 14,450 3,020 Statement of Financial Position / Revised receivables 131,110 (5 ) Page 12 of 19
Solution 3 Part F Suspense T Account / / 1 Balance b/d 15,552 Error 1 14,240 1.5 Error 2 1,312 1.5 15,552 15,552 1 mark for excluding part (ii) 5 marks Page 13 of 19
Examiner s Comments on Question Four A popular question with candidates Answers for Part A tended to be good. Where marks where lost candidates tended not to provide an example of the type of information provided by Financial Accounting and Management Accounting. Answers for Part B again tended to be good. were lost as candidates went through the various users the stopped answering all question parts: User, information, why & FA or MA. Also some candidates gave auditors, accountants as users of financial accounting in error. Other candidates tried to use shareholders, owners and investors as separate users. There was some confusion over who has access to management accounts. Answers for Part C were reasonable. In the main candidates could give a definition of an accounting standard and were able to explain true and fair view. Where the challenges arose was that the detail was not sufficient in the answers to score full marks. Many candidates had no idea of a body that issues accountant standards. Solution Four Part A Financial Accounting This is the process of summarising financial information in order to prepare the company s financial statements. The financial statements of an organisation are the Income Statement and the Statement of Financial Position These statements are primarily of interest to external users of accounting information. Financial statements are historical in nature in that they are prepared on a semi-annual/annual basis and are concerned primarily with the financial performance and the financial position of the company. (2.5 marks. 1.5 for explanation and 1 for example) Management Accounting This is the process of providing detailed information to management on current and planned events. This information assists managers in their roles of planning, controlling and making decisions. Usually management accounts are only available to internal users of accounting information. Management accounting will contain information such as department budgets, product profitability, information on production costs etc. (2.5 marks. 1.5 for explanation and 1 for example) Part B Lenders Banks who lend money to a business require information that helps them determine whether loans and interest will be paid when due. The key accounting information for lenders is therefore, cash flow and profitability of the business. Financial Accounting Payables Suppliers and trade payables require information that helps them understand and assess the short-term liquidity of a business. Is the business able to pay short-term debt when it falls due? The key accounting information for payables is therefore cash flow and profitability. Financial Accounting Receivables Customers require information about the ability of the business to survive and prosper. As customers of the company s products, they have a long-term interest in the company s range of products and services. They may even be dependent on the business for certain products and services. The key accounting information for receivables is therefore sales growth, new product development and investment decision. Financial Accounting Employees Employees require information about the stability and continuing profitability of the business. They are crucially interested in information about employment prospects and the maintenance of pension funding and retirement benefits. They are also likely to be interested in the pay and benefits obtained by senior Page 14 of 19
management. The key accounting information for employees is therefore revenue and profit growth, levels of investment in the business and overall employment data (numbers employed, wages and salary costs). Financial Accounting Government Many government agencies and departments are interested in accounting information. For many businesses the most significant one is the Revenue commissioners. Revenue needs information on business profitability in order to levy and collect corporation tax, accounting information on sales and purchases is needed to verify Value Added Tax (VAT) returns. Financial Accounting Analysts Investment analysts require very detailed financial and other information in order to analyse the competitive performance of a business and its sector (only applicable for Plcs). Much of this is provided by the detailed accounting disclosures that are required by authorities such as the London Stock Exchange. Financial Accounting Public at large Interest groups formed by various groups of individuals who have a specific interest in the activities and performance of businesses, will also require accounting information such as the environmental policies of the business. Financial Accounting Owners Use accounting information to assess how effectively the business is running and to make informed decisions about future levels of risk and return. In addition, owners use accounting information to decide whether to remain invested in the business or not. Owners are primarily interested in measuring current performance and in forming expectations about future performance. Management Accounting (2 marks each for any four users broken down: 0.5 for naming user, 0.5 for information, 0.5 for why and 0.5 for management/financial accounting) Part C (i) Accounting standards are a set of rules and guidelines, issued by a body(s) formed within the accounting profession. Accounting standards govern the preparation and presentation of all financial statements that purport to show a true and fair view. Examples of bodies that issue accounting standards are: the International Accounting Standards Board (Internationally) or the Accounting Standards Board (UK/Ireland). (2 marks for definition and 1 for the example) (ii) The overall aim of the regulatory environment is that the financial statements of an entity give a true and fair view of the underlying financial performance and position of the entity. While there is no formal definition for True and Fair view compliance with accounting standards and Company Law will normally be necessary for financial statements to give a true and fair view. True and fair refers to the financial statements and that the picture they portray of the underlying company performance (profitability) and position is in fact a true and fair view representation. A recent example where the financial statements did not provided a true and fair view of the underlying financial health of the company is Enron here significant amounts of debt were hidden from shareholders. In order to ensure that the financial statements of a company are true and fair the financial statements must by law be reviewed by an independent auditor. The overall aim of all accounting regulation is thus to insure that the financial statements of a business represent a true and fair view of the financial health of the business. This is crucial if the users of accounting information are to rely and make decision based upon the information presented to them in the financial statements. (4 marks) Page 15 of 19
Examiner s Comments on Question Five A popular question that was generally well answered In the main candidates were very well prepared for this question. Many candidates scored full marks. In Part A where challenges occurred they were around including cash sales in error and the discount allowed being recorded on the incorrect side of the control account. In Part B some candidates did not prepare a T account for the control account and then seemed to get confused as they added and subtracted figures to the original balance in order to adjust it. Another common mistake was the rationale for preparing payables ledger reconciliations with many candidates stating that it was due to monitoring cash flow. Question Five Part A Total Receivables Control A/C / / Total 0.5 Opening balance b/d 34,110 Opening balance b/d 480 0.5 0.5 Credit sales 120,500 Sales return 4,650 0.75 Contra 3,050 0.75 Discounts allowed 970 0.75 Payments from receivables 102,350 0.75 Balance c/d 43,110 Balance b/d 43,110 154,610 154,610 (0.5 marks for excluding cash sales) (5 ) Part B (i) The payables control account records information in relation to payables in total. In the payables personal ledgers the same information is recorded on a payable by payable basis. By reconciling the balance as per the control account to the balance as per the payables personal ledger helps to demonstrate the accuracy of both. Thus preparing a payables ledger reconciliation on a regular basis acts as an internal check, i.e. the person posting entries to the control account acts as a check on a different person who posts amounts from the daybooks to the personal ledgers. In modern computerised systems this point is reducing in importance. (2 ) (ii) / Total Balance as per payables listing 49,045 0.75 Discounts received (1,240) 1.25 Contra entry (1,250) 1.25 Purchases omitted 710 1.25 Purchases returns (2,750) 1.25 Closing credit balance omitted 3,190 1.25 47,705 (7 ) Page 16 of 19
(iii) Payables Control A/C / / 1.25 Omitted balance 700 Balance b/d 45,170 1 1.25 Discounts received 1,240 Error 3,600 1.25 Balance c/d 47,705 Interest charged 875 1.25 49,645 49,645 Balance b/d 47,705 6 20 marks Page 17 of 19
Examiner s Comments on Question Six Answers here were mixed Most candidates made a reasonable effort to calculate the opening balance in the suspense account. Though many then failed to use it later in the question. Some candidates placed discounts allowed on the credit side of the TB, having correctly treated discounts allowed in Question 1. Some candidates placed the bank overdraft on the incorrect side of the TB. Most candidates are now writing narratives and thus scoring these marks. The journal entries were reasonably well answered. Adjustment six proved the most challenging for candidates. The final part of the question where candidates were asked to calculate the adjustment to proprietor s profit was very poorly answered and not attempted by many candidates. Solution Six Part A Debit Credit Total / / Sales 71,130 0.25 Sales returns 2,100 0.25 Purchases 22,150 0.25 Expenses 10,710 0.25 Non-current assets 22,750 0.25 Discounts allowed 740 0.25 VAT liability 6,320 0.50 Payables 14,840 0.50 Receivables 52,850 0.50 Bank overdraft 3,140 0.50 Capital as at 1 April 2014 12,500 0.50 Suspense account 3,370 111,300 111,300 Part B Debit Credit Total / / 1. Dr Purchases 20,000 0.5 Cr Suspense 20,000 0.5 Being purchases T Account undercast 0.25 2. Dr Purchases 8,500 0.75 Dr VAT 850 0.75 Cr Payables 9,350 0.5 Being the correction of an error of omission 0.25 3. Dr Bank 105.14 0.5 Cr Interest received 105.14 0.5 Being the correction of an error of omission 0.25 4. Dr Sales returns 1,870 0.5 Cr Suspense 1,870 0.5 Page 18 of 19
Being sales returns inappropriately recorded 0.25 5. Dr Suspense 25,240 0.5 Cr Receivables 25,240 0.5 Being receivables overcast 0.25 6. Dr Cash sales 2,170 0.5 Cr Bank 2,170 0.25 Dr Drawings 2,170 0.5 Cr Bank 2,170 0.25 Being drawings treated as sales in error 0.25 Part C Total Suspense Account Details / Details / Total 1 Error 5 25,240 Balance 3,370 1 Error 1 20,000 1 Error 4 1,870 1 25,240 25,240 Part D Proprietor s Profit Total Error 1 (20,000) 0.5 Error 2 (8,500) 0.5 Error 3 105.14 0.5 Error 4 (1,870) 0.5 Error 5-0.5 Error 6 (2,170) 0.5 (32,434.86) 20 Page 19 of 19