CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
SOLUTIONS TO REVISION QUESTIONS C2
220
1.4 Reconstruction of cost of goods sold to establish the purchases fi gure:
$ $
Opening inventories 12,000
Add : purchases* 122,000
Less : returns
(5,000)
117,000
Less : Closing inventories
(18,000)
Cost of goods sold 111,000
* Found by difference
1.5 Answer: (C)
The fi nal allowance must be 5 per cent of receivables of $150,000, that is, $7,500.
This will provide the balance for the allowance account, to be deducted from the
receivables fi gure. Therefore, receivables are $142,500. Thus, only answers (A) or (C)
can be considered. The change in the allowance from $6,000 to $7,500 is an addi-
tional charge to the income statement, thus (C) is the correct answer.
1.6 Draw up the following:
$ $ $
Sales
Less : returns 310,000
Net sales
(22,000)
Less : cost of sales 288,000
Opening inventories 28,000
Purchases 225,000
Carriage inwards
7,000
232,000
Less : returns (26,000)
Net purchases
206,000
234,000
Less: closing inventories (23,000)
211,000
Gross profi t 77,000
Common errors include:
●
reversing returns;
●
not adding carriage inwards to the cost of purchases (or deducting it);
●
adding carriage outwards to the cost of purchases.
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
221
FUNDAMENTALS OF FINANCIAL ACCOUNTING
1.7 The income statement would be:
$ $
Gross profi t as calculated 85,000
Less : expenses
Heat and light (22,000 4,000) 26,000
Rent and local business tax (27,000 2,500) 24,500
Depreciation (25% 60,000)
15,000
(65,500)
Net Profi t 19,500
Solution 2
●
You will fi nd it helpful to set out workings for most of the adjustments. They will help
you to derive the correct fi gures to enter into the boxes provided.
●
Remember there is already a balance on the allowance for receivables account.
●
Notice that the deposit account has been open for only part of the year, and calculate
interest accordingly.
●
Make sure you deal correctly with returns and discounts.
●
Remember to adjust for the cash taken by the proprietor.
●
Divide the loan repayment fi gure between interest (for the income statement) and the
repayment of capital (to be deducted from the opening loan fi gure), notice also the repay-
ment date of the loan.
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
SOLUTIONS TO REVISION QUESTIONS C2
222
(a) Income statement of GBA for year ended 30 June 20X5
$ $ $
Sales 625,000
Less : Returns inwards
(2,300)
622,700
Cost of sales
Opening inventories 98,200
Purchases 324,500
Less : Returns outwards
(1,700)
322,800
421,000
Less : Closing inventories
(75,300)
(345,700)
Gross profi t 277,000
Add:
Interest on deposit account
($15,000 6 % 6/12)
450
Discounts received 2,500
Decrease in allowance for receivables
($1,000 $620)
380
280,330
Less:
Discounts allowed 1,500
Packing materials consumed 12,400
Distribution costs 17,000
Rent and insurance ($5,100 $450) 4,650
Telephone ($3,200 $500) 3,700
Car expenses 2,400
Wages ($71,700 $23,800) 47,900
Heat and light ($1,850 $400) 2,250
Sundry expenses ($6,700 $3,500) 3,200
Interest on loan 800
Bad debts written off in year 600
Depreciation of delivery vehicles 22,500
Depreciation of cars 2,000
Depreciation of equipment
2,500
(123,400)
Profi t 156,930
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
223
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(b) Statement of fi nancial position of GBA as at 30 June 20X5
Assets Cost ($) Acc. Depn. ($) Carrying Amount ($)
Non-current assets
Delivery vehicles 112,500 (57,500) 55,000
Cars 8,000 (2,000) 6,000
O f fi ce equipment
15,000 (7,500) 7,500
135,500 (67,000) 68,500
Current assets
Inventories ($75,300 $700) 76,000
Receivables 94,400
Less : allowance
(620)
93,780
Prepayments 450
Accrued revenue 450
Bank deposit account 15,000
Bank current account
26,500
212,180
280,680
Capital and liabilities
Capital at 1 July 20X4 55,550
Add : capital introduced 8,000
Add : profi t for the year 156,930
Less : drawings ($23,800 $3,500)
(27,300)
193,180
Current liabilities
Payables 82,000
Accruals ($400 $500 $200) 1,100
Loan ($10,000 $5,600)
4,400
87,500
280,680
(c) With regard to the transactions in the business of GBA, which of the following trans-
actions affect:
●
p r o fi t
●
cash at bank
Affects profi t Affects Cash at bank
Payments to suppliers
√
Depreciation
√
Sales invoiced to customers
√
Drawings in cash
√
Loan repayment
√
Bad debts written off
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
SOLUTIONS TO REVISION QUESTIONS C2
224
Solution 3
●
Take care to choose the correct side for the items in the trial balance, in particular
returns, discounts and allowance for receivables.
●
Remember to add in the computer that the proprietor has introduced, and to depreciate it.
●
Notice that there is no change in the allowance for receivables, so there is no charge
to the income statement, but remember to deduct the balance from receivables on the
statement of fi nancial position.
(a) Trial balance of PLJ as at 30 April 20X7
Debit $’000 Credit $’000
Capital at 1.5.X6 228
Capital introduced 2
Drawings 14
Plant at cost 83
Plant – acc. depreciation at 1.5.X6 13
Offi ce equipment at cost 33
Offi ce equipment – acc. depreciation at 1.5.X6 8
Receivables 198
Payables 52
Sales 813
Purchases 516
Returns inwards 47
Discount allowed 4
Allowance for receivables at 1.5.X6 23
Administration costs 38
Salaries 44
Research costs 26
Loan to friend, repayable in 6 months 25
Bank 50
Bad debts written off 77
Inventories at 1.5.X6 84
1,189 1,189
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
225
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(b) Income statement of PLJ for the year ended 30 April 19X7
$’000 $’000
Sales 813
Less : returns inwards (47)
766
Less : cost of goods sold
Opening inventories 84
Purchases
516
600
Less : Closing inventories
(74)
Cost of sales (526)
Gross profi t 240
Less : expenses
Discount allowed 4
Administration costs 35
Salaries 46
Research costs 26
Bad debts written off 77
Depreciation of plant 8.3
Depreciation of offi ce equipment
5
(201.3)
Net profi t 38.7
(c) Statement of fi nancial position of PLJ as at 30 April 20X7
Assets Cost ($’000) Acc. Depreciation ($’000) Carrying amount ($’000)
Non-current assets
Plant 83 (21.3) 61.7
O f fi ce equipment 33 (13.0) 20.0
116 (34.3) 81.7
Current assets
Inventories 74
Receivables 198
Less : allowance (23)
175
Loan 25
Prepayment 3
277
358.7
Capital and liabilities
Capital 230.0
Net profi t 38.7
Less : drawings (14.0)
254.7
Current liabilities
Payables 52
Accruals 2
Bank overdraft 50
104
358.7
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
SOLUTIONS TO REVISION QUESTIONS C2
226
Solution 4
●
Tick off each item on the trial balance as you use it.
●
Calculate adjustments from the additional information carefully.
●
Take care with the allowance for receivables.
(a) Income statement of Stella Parkinson for the year ended . . .
$ $ $
Sales 808,800
Less : returns
4,400
Net sales
804,400
Less : cost of sales
Opening inventories 100,000
Purchases 500,000
Less : returns
(30,000)
470,000
570,000
Less : closing inventories
(84,000)
(486,000)
Gross profi t
318,400
Add : discounts received
9,600
328,000
Less : expenses
Discounts allowed 36,000
Wages and salaries (117,600 1,600) 119,200
Bad debts written off 9,200
Other expenses (45,600 600) 45,000
Allowance for receivables (2% 76,000)-
1,000 already provided
520
Depreciation
Buildings (1.5% 240,000) 3,600
Plant (25% 84,000)
21,000
234,520
Net profi t 93,480
PREPARATION OF FINANCIAL STATEMENTS WITH ADJUSTMENTS
227
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(b) Statement of fi nancial position of Stella Parkinson as at . . .
Assets Cost ($) Acc. Depreciation ($) Carrying Amount ($)
Non-current assets
Buildings 240,000 (43,600) 196,400
Plant 160,000 (97,000) 63,000
400,000 (140,600) 259,400
Current assets
Inventories 84,000
Receivables 76,000
Less : allowance (1,520)
74,480
Prepayments 600
Bank and cash 3,200
162,280
421,680
Capital and liabilities
Opening capital 302,600
Net profi t for the year 93,480
396,080
Less : drawings (48,000)
348,080
Current liabilities
Payables 72,000
Accruals 1,600
73,600
421,680
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8
Organising the
Bookkeeping System