FINANCIAL ACCOUNTING
CPA FOUNDATION LEVEL CIFA FOUNDATION LEVEL MONDAY: 22 April 2024. Morning Paper. Time Allowed: 3 hours.
Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.
QUESTION ONE
(a) Explain the following accounting principles:
(i) Economic entity principle. (2 marks)
(ii) Matching principle. (2 marks)
(b) Citing relevant examples, describe the following terms:
(i) Financial assets. (3 marks)
(ii) Financial liabilities. (3 marks)
(c) Explain the following types of accounting errors:
(i) Complete reversal of entry. (2 marks)
(ii) Transposition error. (2 marks)
(iii) Error of commission. (2 marks)
(d) Highlight FOUR benefits of public sector accounting. (4 marks)
(Total: 20 marks)
QUESTION TWO
Melody and Olivia commenced a partnership business on 1 January 2023 sharing profit or loss in the ratio of 2:1 after allowing interest on the capital introduced by the partners at a rate of 10% per annum. Olivia was to receive a salary of Sh.80,000 per month starting from 1 February 2023. Melody and Olivia, have not employed a qualified accountant, hence the business lacks complete accounting records.
The following summary of the bank statements for the year ended 31 December 2023 was provided:
Receipts: Sh.“000”
Capital introduced – Melody 7,000
– Olivia 4,000
Balance of cash received from customers 25,400
Payments:
Purchase of : – Equipment 5,000
– Motor vehicle 2,000
– Furniture and fittings 750
Godown rent 750
Wages 3,544
Salary to sales team 2,400
Purchase of inventory 19,800
Rates 400
Repairs and maintenance 125
Insurance expenses 110
Motor vehicle operating expenses 373
The following cash payments were made before banking the balance of the cash received from customers:
Sh.“000”
Motor vehicle operating expenses 258
Wages 296
General administrative expenses 50
Drawings – Melody (per week) 15
– Olivia (per week) 12
Additional information:
1. During the year ended 31 December 2023, discount allowed to customers amounted to Sh.245,000 while discounts received from suppliers amounted to Sh.110,000.
2. As at 31 December 2023, the amounts owing to suppliers amounted to Sh.1,500,000 and the amount owing by customers was Sh.3,100,000. An amount of Sh.400,000 owing by a customer was written off.
3. As at 31 December 2023, rates and insurance prepaid amounted to Sh.50,000 and Sh.10,000 respectively.
4. Inventory was valued at Sh.2,410,000 as at 31 December 2023.
5. The go-down had been occupied since 1 January 2023 at an annual rent of Sh.1,000,000.
6. Depreciation is provided on a straight-line basis as follows:
Asset Rate
• Motor vehicles 20% per annum
• Equipment, furniture and fittings 10% per annum
7. The partners had taken goods for their domestic use as follows:
Sh.
• Melody 100,000
• Olivia 150,000
Assume a 52-week year.
Required:
(a) Partnership statement of profit or loss and appropriation account for the year ended 31 December 2023.
(10 marks)
(b) Partners’ current accounts as at 31 December 2023. (4 marks)
(c) Statement of financial position as at 31 December 2023. (6 marks)
(Total: 20 marks)
QUESTION THREE
The following trial balance was extracted from the books of Kwanza Ltd., a manufacturing company, as at 31 March 2024:
Sh.“000” Sh.“000”
Ordinary share capital 42,000
Revenue reserve 10,150
Bank 8,592
Trade receivables 11,080
Trade payables 4,886
Factory building (Land Sh.4,200,000) 10,500
Plant and machinery 10,920
Motor vehicles 7,112
Furniture and fittings 3,400
Accumulated depreciation (1 April 2023):
– Buildings 1,250
– Motor vehicles 2,562
– Plant and machinery 3,958
– Furniture and fittings 980
Inventory (1 April 2023):
– Raw materials 2,870
– Work-in-progress (WIP) 4,830
– Finished goods 9,100
Allowance for doubtful debts 588
Bad debts 406
Rates and insurance 798
Direct wages 6,440
Salaries 7,560
Factory power 1,890
Electricity 1,386
Maintenance 924
Sh.“000” Sh.“000”
Returns outward 266
Returns inward 84
Advertising expenses 728
Transport expenses 1,946
Bank charges 238
Sundry expenses 2,436
Purchases and sales 77,000 103,600 170,240 170,240
Additional information:
1. Depreciation is provided using straight-line basis as follows:
Asset Rate per annum
• Plant and machinery 30%
• Motor vehicles 25%
• Furniture and fittings 12.5%
• Building 4%
2. Inventory as at 31 March 2024 was valued as follows:
Sh.
• Raw materials 11,690,000
• Work-in-progress 6,930,000
• Finished goods 8,680,000
3. Allowance for doubtful debts is provided at a rate of 10% of the trade receivables as at 31 March 2024.
4. Electricity, rates and insurance, sundry expenses and maintenance are to be apportioned in the ratio of 2:1 between factory and administration overheads.
5. Manufactured goods are transferred to the warehouse at total factory cost.
Required:
(a) Manufacturing statement for the year ended 31 March 2024. (6 marks)
(b) Statement of profit or loss for the year ended 31 March 2024. (8 marks)
(c) Statement of financial position as at 31 March 2024. (6 marks)
(Total: 20 marks)
QUESTION FOUR
The following are the financial statements of HMK Limited as at 31 December:
Equity and Liabilities:
Equity: 2023
Sh.“000” 2022
Sh.“000”
Ordinary share capital 900,000 600,000
Share premium 210,000 90,000
Revenue reserves 246,000 84,000
Total equity and reserves 1,356,000 774,000
Non-current liabilities:
Debentures 180,000 300,000
Bank loan – 120,000
Total long term liabilities 180,000 420,000
Current liabilities:
Trade payables 288,000 204,000
Proposed dividends 90,000 45,000
Corporate tax 198,000 129,000
Bank overdraft – 84,000
576,000 462,000
Total equity and liabilities 2,112,000 1,656,000
Non-current assets:
Freehold land (Net book value) 780,000 660,000
Plant and machinery (Net book value) 582,000 450,000
Furniture and fittings (Net book value) 84,000 66,000
1,446,000 1,176,000
Current assets:
Inventory 306,000 222,000
Trade receivables 264,000 256,800
Short term investments 27,600 –
Cash in hand 68,400 1,200
666,000 480,000
Total assets 2,112,000 1,656,000
Additional information:
1. A machinery with a net book value of Sh.12,000,000 (original cost Sh.48,000,000) was sold for Sh.18,000,000. Furniture with a net book value of Sh.18,000,000 (original cost Sh.30,000,000) was sold for Sh.13,000,000. Profits and losses on these transactions had been reported in the statement of profit or loss.
2. Corporate tax for the year ended 31 December 2023 was Sh.80,000,000.
3. The proposed dividends for the year ended 31 December 2022, were paid during the year ended 31 December 2023.
4. There was no disposal or revaluation of freehold property in the year ended 31 December 2023.
5. Interest expense charged to the statement of profit or loss for the year ended 31 December 2023 was Sh.38,400,000. Accrued interest of Sh.26,400,000 is included in the trade payables as at 31 December 2023.
6. Depreciation charged to the statement of profit or loss for the year ended 31 December 2023 was as follows:
Sh.
• Furniture and fixtures 34,000,000
• Plant and machinery 58,000,000
Required:
Statement of cash flows for the year ended 31 December 2023 in accordance with International Accounting Standard (IAS) 7 “Statement of Cash Flows”. (Total: 20 marks)
QUESTION FIVE
(a) Discuss FIVE reasons why companies do not distribute all their profits to shareholders. (10 marks)
(b) Rahisi Social Club provided the following information from their records for the year ended 31 March 2024:
1. As at 1 April 2023, the club’s bank balance amounted to Sh.7,050,000.
2. During the year ended 31 March 2024, the amount of subscription received amounted to Sh.12,525,000 out of which there was Sh.325,000 represented subscription in arrears. Sh.11,400,000 represented subscription for the current year while Sh.225,000 was subscription received in advance.
3. The club received donations amounting to Sh.7,800,000 for repairing a roof that was leaking and Sh.12,250,000 for putting up a new building.
4. The 100,000 shares which the club acquired in Bidii Ltd. paid a dividend of Sh.3 per share.
5. Office furniture acquired during the year ended 31 March 2024 cost the club Sh.5,000,000. Half of the amount was paid and the balance is to be paid during the year ending 31 March 2025.
6. During the year ended 31 March 2024, the club started printing magazines for sale to the public. As at 31 March 2024, the club had printed 35,000 magazines at a cost of Sh.120 each and sold 32,500 magazines at a price of Sh.170 each.
7. Other payments made during the year ended 31 March 2024 include:
• Salaries and wages amounting to Sh.10,500,000 of which Sh.500,000 relates to the year ended 31 March 2023.
• Rent and rates amounting to Sh.2,550,000 whereby Sh.50,000 was owing as at 1 April 2023.
• Meeting expenses amounting to Sh.2,475,000.
• Stationery, postage and internet charges amounting to Sh.2,250,000.
Required:
(i) Subscriptions account for the year ended 31 March 2024. (4 marks)
(ii) Receipts and payments account for the year ended 31 March 2024. (6 marks)
(Total: 20 marks)
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