ACCA F3 (INT) Financial Accounting - 2010 - Study text - Emile Woolf Publishing
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Chapter 15: Incomplete records
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An extension of the basic accounting equation is:
Increase in net assets = Profit + capital introduced – drawings
The profit figure can be calculated as follows:
$
Closing assets – liabilities A
Opening assets – liabilities B
Increase/(decrease) in net assets in the period (A – B)
Add drawings C
Subtract new capital introduced by the owner(s) (D)
Balance = profit /(loss) for the year (A – B) + C – D
Example
At 1 January Year 1, the business of Tom Canute had assets of $214,000 and liabilities of
$132,000. At 31 December, the business had assets of $281,000 and liabilities of $166,000.
Tom took $25,000 in cash and $3,000 in goods out of the business during the year for his
personal use. He did not introduce any new capital.
Required
Calculate the profit of the business in the year to 31 December Year 1.
Answer
$ $
Assetsat31DecemberYear1281,000
Liabilitiesat31DecemberYear1166,000
Netassetsat31DecemberYear1115,000
Assetsat1JanuaryYear1 214,000
Liabilitiesat1JanuaryYear1 132,000
Netassetsat1JanuaryYear182,000
Increaseinnetassetsduringtheyear33,000
Add:Drawings(25,000+3,000)28,000
Balance=Profit/(loss)fortheyear61,000
Alternatively the profit figure could be calculated using the equation:
Increase in net assets = Profit + Capital introduced – Drawings
$33,000 = Profit + 0 – $28,000
Profit = $61,000
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Practice multiple choice questions
1 A fire on 31 March destroyed some of the inventory of a company, and its inventory
records were also lost. The following information is available.
$
Inventory at 1 March 127,000
Purchases for March 253,000
Sales for March 351,000
Inventory in good condition at 31 March 76,000
The company makes a standard gross profit of 30% on its sales.
What was the cost of the inventory lost in the fire?
A $45,000
B $134,300
C $34,000
D $58,300
(2 marks)
2 A retailer makes sales entirely for cash. He fixes the selling prices for goods at double
their cost. Transactions for the month of March were as follows.
$
1 March: Inventory 80,000
Cash banked for the month 190,000
Purchases for the month 120,000
31 March: Inventory 100,000
Which TWO of the following conclusions might be made SEPARATELY from this
information?
1 Goods costing $5,000 have been stolen
2 Goods costing $10,000 have been stolen
3 $10,000 in cash was stolen from sales receipts before they were banked
4 Goods costing $5,000 were sold at cost price.
A 1 and 3
B 2 and 3
C 2 and 4
D 1 and 4
(2 marks)
3 The accountant for a sole trader has established that the total assets of the business at
31 December Year 4 were $376,000 and total liabilities were $108,000. Checking the
previous year’s financial statements, he was able to establish that at 31 December Year
3 total assets were $314,000 and total liabilities were $87,000. During Year 4 the owner
Chapter 15: Incomplete records
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has taken out drawings of $55,000. In December Year 4 the owner had been obliged to
input additional capital of $25,000.
What was the profit of the business for the year to 31 December Year 4?
A $11,000
B $67,000
C $71,000
D $121,000
(2 marks)
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Paper F3 (INT)
Financial Accounting
A
Answers to exercises
and multiple choice
questions
Chapter 1: The context and purpose of financial reporting
1 A
2 B
3 D
4 True
5 C
Computer repairs and short-term equipment rental are revenue expenditure
(expenses)
6 C
The cost of re-decorating offices is revenue expenditure, because it is a form of
maintenance and repair work.
Chapter 2: Characteristics of financial information and the fundamental bases
of accounting
1 A
Faithful representation is a characteristic of reliable information. This is not the
same as fair presentation.
2 A
3 D
Prudence would require that expenses should not be under-stated in the financial
statements.
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4 D
In a period of inflation, historical cost accounting tends to under-state asset values
and over-state profits.
5 C
The accruals basis should be used to determine the rental expense for the year.
(5 months/12 months × $600,000) + (7 months/12 months × $660,000) = $635,000
6 C
The accruals basis should be used to determine the rental expense for the year.
(2 months/6 months × $42,000) = $14,000
Chapter 3: The accounting equation and double entry book-keeping
Exercise 1
Transaction A: Cash –1,000, Loan –1,000
Assets = Equity + Liabilities
$ $ $
Cash 1,700
Inventory 400
Receivables 900Capital:
Stall 500Original 3,000Loan 3,000
Van 4,000Profit 700 + Tradepayables 800
7,500 = 3,700 + 3,800
Transaction B: Cash –600, Payables –600
Assets = Equity + Liabilities
$ $ $
Cash 1,100
Inventory 400
Receivables 900Capital:
Stall 500Original 3,000Loan 3,000
Van 4,000Profit 700 + Tradepayables 200
6,900 = 3,700 + 3,200
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Transaction C: Cash + 800, Receivables – 800
Assets = Equity + Liabilities
$ $ $
Cash 1,900
Inventory 400
Receivables 100Capital:
Stall 500Original 3,000Loan 3,000
Van 4,000Profit 700 + Tradepayables 200
6,900 = 3,700 + 3,200
Transaction D: Inventory + 250, Payables + 250
Assets = Equity + Liabilities
$ $ $
Cash 1,900
Inventory 650
Receivables 100Capital:
Stall 500Original 3,000Loan 3,000
Van 4,000Profit 700 + Tradepayables 450
7,150 = 3,700 + 3,450
Exercise 2
Capital
$ $
(1) Bank 50,000
Bank
$ $
(1) Capital 50,000 (2) Motorvan 6,000
(4) Sales 5,000 (3) Purchases 3,000
(8) Tradereceivables 4,000 (7) Tradepayables 3,000
(12) Bankloan 10,000 (9) Drawings 1,000
(10) Motorexpenses 200
(11) Insurance 1,500
Motorvan
$ $
(2) Bank 6,000
Purchases
$ $
(3) Bank 3,000
(5) Tradepayables 10,000
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Sales
$ $
(4) Bank 5,000
(6) Tradereceivables 8,000
Tradepayables
$ $
(7) Bank 3,000 (5) Purchases 10,000
Tradereceivables
$ $
(6) Sales 8,000 (8) Bank 4,000
Drawings
$ $
(9) Bank 1,000
Motorexpenses
$ $
(10) Bank 200
Insurance(expense)
$ $
(11) Bank 1,500
Bankloan
$ $
(12) Bank 10,000
Exercise 3
Debit Credit
(i) $ $
Payables 1,000
Bank1,000
Paymenttoasupplier
(ii)
Bank 100
Sales100
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Cashsale
(iii)
Receivables 2,000
Sales 2,000
Saleoncredit
(iv)
Purchases 1,500
Payables 1,500
Purchaseoncredit
Multiple choice questions
1 C
With credit sales, there is no receipt of cash until the customer eventually pays.
2 A
3 B
The credit entry is in the bank account, indicating a payment of cash. If the double
entry is correct, the narrative should state that the item is a payment of interest to
the bank.
4 D
The only day books that use double entry are the journal and cash book (when this
is also part of the main ledger). The receivables ledger and payables ledger do not
use double entry. Double entry is used in the main ledger.
5 D
Bankaccount
$ $
Openingbalanceb/f 300 Purchases12,000
Sales200 Wagesandsalaries 18,500
Receivables 38,200 Drawings1,000
Closingbalancec/f 7,200
38,700 38,700
Openingbalanceb/f 7,200
6 C
When a business makes a loss there is a reduction in capital. To maintain the
accounting equation, there must be a matching reduction in assets. The reduction in
assets might include a fall in cash, but a reduction in cash does not necessarily
follow on from a trading loss. For example, suppose that goods costing $100 are sold
for $60 cash. There is a loss of $60. This reduction in capital is matched by a
reduction in inventory of $100, less an increase in cash of $60.
7 B False
In a computerised system, it should be sufficient to input an identity code for the
supplier, and the system will retrieve all the necessary standing data, such as the
supplier’s name and address, from the computer files for the system.
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8 A
Debit Postage costs (or Sundry expenses) and Credit Cash
9 C
Total capital is increased and there is a matching increase in cash (assets).
10 A
Opening net assets + Profit + Capital introduced – Drawings = Closing net assets.
Opening net assets + $42,600 + $17,500 – $35,900 = $62,500.
Opening net assets = $62,500 – $42,600 – $17,500 + $35,900 = $38,300.
Chapter 4: Recording transactions: sales, purchases and cash
Exercise 1
Accounts in the payables ledger
SupplierW
$ $
Bank 2,900 Purchases 3,000
Discountsreceived 100
3,000 3,000
SupplierX
$ $
Purchasereturns 2,000 Purchases 6,000
Balancec/f 4,000
6,000 6,000
Balanceb/f 4,000
SupplierY
$ $
Purchases 2,000
SupplierZ
$ $
Bank 2,500 Purchases 7,000
Balancec/f 4,500
7,000 7,000
Balanceb/f 4,500