CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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REVISION QUESTIONS C2
480
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
Question 8
Avtar Ltd had the following statement of fi nancial position at 31 March 20X1 and 20X2:
Assets 20X1 ($’000) 20X2 ($’000)
Non-current assets at cost 1,000 1,300
Accumulated depreciation (400) (600)
600 700
Current assets
Inventories 800 1,400
Receivables 2,700 3,100
Bank 200 –
4,300 5,200
Equity and liabilities
Share capital 1,000 1,300
Share premium account 500 700
Retained earnings 1,200 1,240
2,700 3,240
Current liabilities
Payables 1,300 1,580
Declared ordinary dividend 300 260
Bank overdraft – 120
4,300 5,200
During the year to 31 March 20X2, non-current assets costing $50,000 were sold for
$40,000 cash. Accumulated depreciation on these to 31 March 20X1 was $20,000.
Requirements
(a) Insert the missing fi gures into the ledger accounts below in order to calculate the addi-
tions to non-current assets, the profi t or loss on sale of non-current assets, and the
depreciation charge in the income statement for the year to 31 March 20X2.
Non-current assets at cost
$’000 $’000
Balance b/f Disposals a/c
Additions Balance c/f
Non-current assets – accumulated depreciation
$’000 $’000
Disposals a/c Balance b/f
Balance c/f Charge for the year
481
FUNDAMENTALS OF FINANCIAL ACCOUNTING
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
Non-current assets – disposals
$’000 $’000
Non-current assets at cost Non-current assets acc. depn.
P r o fi t on sale of non-current assets Disposal proceeds
(b) Insert the missing items into the statement of cash fl ows given below for the year end-
ing 31 March 20X2.
$’000 $’000 $’000
Cash fl ow from operating activities
Increase in retained earnings
Add dividends declared
Add depreciation charge for the year
Deduct profi t on sale of non-current assets
Add/less* increase/decrease* in
Add/less* increase/decrease* in
Add/less* increase/decrease* in
Cash fl ow from investing activities
Cash fl ow from fi nancing activities
Increase/decrease* in bank
Bank at beginning of period
Bank at end of period
*Delete as appropriate.
REVISION QUESTIONS C2
482
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
Question 9
Meltdown Ltd owns a property which it bought fi ve years ago for $400,000. It has recently
had the property valued by a fi rm of valuers at $460,000. The company’s accountants have
advised that the potential tax liability if the property were sold for its current value would
be $18,000.
You are required to prepare the following extracts from the fi nancial statements of
Meltdown Ltd.
Meltdown Ltd – Statement of changes in equity
Revaluation
Reserve
Retained
Earnings
Total
Meltdown – Statement of fi nancial position
Non-current assets – Property
Equity – Revaluation reserve
Non – current liabilities income tax
Meltdown Ltd – Statement of comprehensive income
Profi t for the period 100
Other comprehensive income
Revaluation of property before tax
Tax on revaluation
Total comprehensive income
Solution 1
1.1 Answer: (A)
Revenue reserves can be distributed as dividends, so (B) is incorrect. Revenue reserves
are not set aside to replace revenue items; they could be set aside for a specifi c pur-
pose but this is only one use of revenue reserves.
1.2 The share capital consists of:
$
Preference shares, 100,000 at 50¢ 50,000
Ordinary shares, 1,000,000 at 10¢ 100,000
Thus the preference dividend amounts to 5 per cent of $50,000, that is $2,500, and
the ordinary dividend amounts to 5¢ 1 million shares $50,000, giving a total
dividend of $52,500.
1.3
Debit Credit
Share premium 60,000
Share capital 200,000
Bank 260,000
1.4 Dividends are declared only on issued shares, and are based on the par value. A divi-
dend of $120,000 on par value shares of $800,000 is 15¢ per share.
1.5 Answer: (B)
Dividends proposed are shown in the statement of changes in equity in the following
year. The dividend should be approved at the annual general meeting and subse-
quently paid. Directors ’ and auditors ’ fees are normal business expenses and appear
in the statement of comprehensive income.
Solutions to Revision
Questions
13
483
SOLUTIONS TO REVISION QUESTIONS C2
484
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
1.6 Answer: (C)
$
P r o fi t 8,000
Add : depreciation 12,000
Net cash infl ow 20,000
Purchase of non-current assets (25,000)
Decrease (5,000)
1.7
$
Preference dividend for year (5% $100,000) 5,000
Ordinary dividend for year (20¢ 400,000 shares) 80,000
Total dividend 85,000
1.8
$’000
P r o fi t for the year 1 , 175
Add : depreciation 100
Less : increase in working capital (575)
700
Add : issue of shares 1,000
Less : repayment of debentures (750)
Less : purchase of non-current assets (200)
Increase in bank balance 750
1.9 Answer: (D)
With regards to (A), a company does not have a single capital account – its capital
consists of several accounts.
1.10 Answer: (D)
(A) and (B) are both forms of revenue reserve. Issuing shares at a premium increases
reserves, but they are capital reserves anyway.
1.11 Answer: (C)
Lengthening the period of credit given to customers reduces the amount of cash
coming in. Lengthening the period of credit taken from suppliers has the opposite
effect. The sale of non-current assets at whatever value results in cash coming in,
while depreciation has no effect on cash at all.
1.12 Answer: (A)
All the others are part of the equity capital.
1.13 Answer: (C)
485
FUNDAMENTALS OF FINANCIAL ACCOUNTING
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
1.14
$’000
Net profi t 180
Add : depreciation 30
Less : profi t on sale of non-current asset (75)
Less : change in working capital (10)
125
1.15 Answer: (D)
1.16 (F) None of these. ‘Other comprehensive’ income is found in the comprehensive
income statement; it is not found in the income statement, which shows all items
from revenue down to profi t for the period.
1.17 (A) Property in the statement of fi nancial position, comprehensive income and
revaluation reserves. The property is revalued, the gain is shown in ‘other’ compre-
hensive income and the gain is added to revaluation reserves in the statement of
fi nancial position.
1.18 (D) The tax on the gain on the revaluation of a property is shown in the statement
of comprehensive income, within the ‘other comprehensive income’. (Alternatively,
it could be shown as a note to this statement.)
1.19 (A) Limited companies are allowed to report an income statement as a separate
fi nancial statement.
1.20 (D) Sales to profi t for the period.
Solution 2
●
Part (a) involves payroll entries. Remember that employers ’ social security tax is not
deducted from employees ’ wages but is an additional expense of the fi rm. The gross wages
represent the amount to be charged in the statement of comprehensive income in addi-
tion to the employers ’ social security tax. The amount to be paid to the tax authorities
will include both types of social security tax and the employers ’ income tax deducted.
Any amounts still outstanding at the year end will be included with current liabilities on
the statement of fi nancial position.
●
Part (b) requires you to prepare corrected fi nancial statements. If you have dealt incor-
rectly with the items in Part (a) you may not be able to complete this section correctly.
SOLUTIONS TO REVISION QUESTIONS C2
486
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
(a)
Payment journal of Omit Ltd
Debit ($) Credit ($)
Dr Employee income tax payable 13,205
Dr Social security tax payable 10,568
Cr Cash 23,773
Payroll journals
Debit ($) Credit ($)
Manufacturing staff
Dr Cost of sales (29,799 10,800 4,212 4,683) 49,494
Cr Cash 29,799
Cr Employee income tax payable 10,800
Cr Social security tax payable 8,895
Administration staff
D r Administrative salaries
(5,999 2,286 859 956)
10,100
Cr Cash 5,999
Cr Employee income tax payable 2,286
Cr Social security tax payable (859 956) 1,815
(b)
$
Cash balance per original statement of
fi nancial position
87,800
Revised cash balance 23,773
29,799
5,999
Revised cash balance 28,229
(c) Statement of comprehensive income for the year ended 31 December 19X1 (draft)
$
Sales 1,210,213
Cost of sales (943,000 49,494) (992,494)
Gross profi t 217,719
Administrative salaries (110,100 10,100) (120,200)
Other expenses (28,956)
P r o fi t for the period 68,563
Statement of fi nancial position as at 31 December 19X1 (draft)
Assets $ $
Non-current assets 596,294
Current assets
Inventories 186,200
Receivables 252,111
Cash 28,229
466,540
1,062,834
487
FUNDAMENTALS OF FINANCIAL ACCOUNTING
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
Equity and liabilities
Share capital 100,000
Retained earnings (878,342 – 49,494 – 10,100) 818,748
918,748
Current liabilities
Trade payables 120,290
Employee income tax (10,800 2,286) 13,086
Social security tax (8,895 1,815) 10,710
144,086
1,062,834
Solution 3
●
This question involves consideration of a range of errors that have occurred prior to the
preparation of fi nancial statements as presented. Item 1 requires the motor car to be
taken out of the inventories fi gure and to be included with non-current assets and depre-
ciated as appropriate. Item 2 requires amendment of the sales fi gure and the suspense
account. Item 4 arises because the purchase has been omitted from the books – the
resulting debit balance on T Conway’s account in the purchase ledger would highlight
this omission.
(a) Item
$
1. Motor vehicles Debit 10,000
Inventories Credit 10,000
Retained earnings Debit 625* * (10,000 25% 3/12)
Accumulated depreciation Credit 625
2. Retained earnings Debit 1,400
Receivables Credit 1,000
Suspense account Credit 400
3. Retained earnings Debit 2,400
Accrued interest Credit 2,400
4. Retained earnings Debit 2,000
Payables Credit 2,000
(b)
Suspense account balance at 30.04.X2 Debit 1,300
Correction required re item no. 2 Credit (400)
Remaining balance on suspense account Debit 900
(c)
Item Account name Debit or credit? $
5. Insurance prepaid * Debit 900
Suspense account Credit 900
*
No actual entry is needed in the insurance account, but the amount must be included
with amounts prepaid on the statement of fi nancial position.
SOLUTIONS TO REVISION QUESTIONS C2
488
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
(d)
Profi t for the year ended 30 April 20X2
$ $
Per list of balances at 30 April 20X2 40,000
Less :
Motor car depreciation (25% (25% $10,000)) 625
Receipt wrongly credited to sales 1,400
Loan interest accrued due 2,400
Raw material purchase omitted 2,000
(6,425)
Revised balance 33,575
(e) Statement of fi nancial position as at 30 April 20X2
Assets Cost ($)
Accumulated
depreciation ($)
Carrying
Amount ($)
Non-current assets
Freehold land and buildings 100,000 (20,000) 80,000
Plant and machinery 58,000 (16,400) 41,600
Motor vehicles 46,000 (9,125) 36,875
204,000 (45,525) 158,475
Current assets
Inventories ($24,700 $10,000) 14,700
Trade receivables ($4,500 $ 1 , 000 $2,000) 1,500
Amounts prepaid ($1,600 $900) 2,500
Balance at bank 4,300
23,000
181,475
Equity and liabilities
Ordinary shares of $1 each fully paid 100,000
Retained earnings *
At 1 May 20X1 7,600
Year ended 30 April 20X2 33,575
41, 175
141,175
Non-current liabilities
8% loan stock 30,000
Current liabilities
Trade payables 7,900
Accrued charges 2,400
10,300
181,475
*Rather than show a statement of changes in equity, the movement has been shown in the
statement of fi nancial position.
489
FUNDAMENTALS OF FINANCIAL ACCOUNTING
THE FINANCIAL STATEMENTS OF LIMITED COMPANIES AND THE STATEMENT OF CASH FLOWS
Solution 4
●
This is quite a complex question involving the correction of errors and adjustments
to the fi gures contained in the ledger accounts, prior to the preparation of fi nancial
statements.
●
The correction of the control account is particularly important as it is part of the trial
balance.
●
The adjustments to opening and closing inventories also require careful consideration:
the error in opening inventories means that the retained earnings balance brought for-
ward is overstated and the operating profi t for the period is understated; the error in
closing inventories means that the operating profi t fi gure in the list of balances is under-
stated and the inventories fi gure is understated.
●
The debenture interest should be calculated as one-quarter of the annual fi gure, as they
have been issued for only 3 months.
(a) Journal
Debit ($) Credit ($)
(i) Payables 10,000
Receivables 10,000
Operating profi t (sales) 1,000
Receivables 1,000
Operating profi t (sales returns) 4,000
Suspense account 4,000
(ii) Bank ($2,000 $ 1 , 000) 1,000
Operating profi t (bank charges) 1,000
Receivables 2,000
(iii) Operating profi t (bad debts w/off ) 1,000
Receivables 1,000
Allowance for receivables (Note 1) 1,140
Operating profi t (reduction in allowance) 1,140
(iv) Inventories 2,000
Operating profi t (closing inventories) 2,000
Retained earnings b/fwd 1,000
Operating profi t 1,000
(v) Suspense (balance) (Note 2) 3,000
Operating profi t (sales) 3,000
Notes:
1. The allowance for receivables is to become 1 per cent of $186,000 $1,860 (a reduc-
tion of $1,140).
2. The balance of the suspense account was $1,000 debit (found by adding up the bal-
ances given in the question); transaction (i) above credited the suspense account with
$4,000, therefore the fi nal balance was $3,000 credit – and as per the instruction in
note (v), this is to be added to the sales account.