CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
650
(d) Receivables days
(i)
Receivables days
Closing receivables
Credit sales
365
(ii)
For X : days
For X5 : days
For
20 4
40
360
365 41
20
45
375
365 44
20
XX6 : days
52
390
365 49
Payables ’ days
(iii)
Payables days
Closing creditors
Credit purchases
365
(iv)
For X days
For X days
For
20 4
33 365
230
52
20 5
45 5 365
250
58
20
XX days6
43 6 365
280
48
(e) The company appears to be increasing
the length of credit given to customers, which
slows down the receipt of cash. At the same time it is decreasing the length of credit
from suppliers, which speeds up the payment of cash. These two actions combined
will cause the amount of cash available to decrease . If these payment periods could
be brought more into line with each other, the amount of overdraft required will be
lower .
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
651
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 13
(a) Income statement of APW Ltd for the year ended 30 April 20X8
$’000 $’000 $’000 $’000
Sales 2,660
Returns inwards (104)
2,556
Opening inventories of fi nished goods 98
Opening inventories of raw material 234
Purchases of raw material 785
Carriage inwards 40
Returns outwards (65)
760
994
Closing inventories of raw material (256)
Cost of raw material consumed 738
Direct wages (372 37)
409
Prime cost 1,147
Indirect factory labour (118 15) 133
Indirect factory overheads 63
Heat, light and power 40% (120 15) 54
Rent and insurance 30% (130 10) 36
Depreciation of factory plant (10% 1,200) 120
Depreciation of buildings 40% (3,500 5%) 70
476
1,623
Add : Opening work in progress 182
Less : Closing work in progress (118)
64
Cost of production 1,687
1,785
Closing inventories of fi nished goods (123 8 )
(115)
(1,670)
Gross profi t 886
Carriage outwards 20
Administration expenses 55
Bank charges 10
O f fi ce salaries (130 27) 157
Heat, light and power (60% 135) 81
Rent and insurance (70% 120) 84
Depreciation of buildings (60% (5% 3,500)) 105
Depreciation of offi ce equipment (20% 200) 40
Depreciation of delivery vehicles (20% 600) 120
672
Operating profi t 214
Interest received 12
Debenture interest (20 20) (40)
(28)
P r o fi t before tax 186
Income tax (80)
P r o fi t for the period 106
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
652
(b) Statement of changes in equity of APW Ltd for the year ended 30 April 20X8
Retained earnings
($’000)
Balance at start of period 580
Total comprehensive
income for the period
106
Ordinary dividends (140)
Preference dividends (28)
Balance at end of period 518
(c) The two principal accounting conventions that affect the valuation of inventories are
the prudence and the matching (or accruals) conventions. As regards the prudence
convention, it is generally accepted that inventories should be valued at the lower of
cost or realisable value. Thus, one of the products (Beta) in the inventories list has
been valued at less than original cost. Therefore, APW Ltd is expected under the pru-
dence convention to recognise the loss, via an inventories write-down, that is, antici-
pate losses, but not take profi ts until they are reasonably certain.
In accordance with the matching convention, the cost of inventories sold in the
accounting period is matched against the revenue generated from the sale of such
inventories. Any inventories unsold in the period are carried forward as a current
asset into the next period. In fact, the convention also applies to the valuation of such
inventories, that is, it is to be valued at the cost of getting the inventories into a sale-
able condition, which in the case of a manufacturing company such as APW Ltd will
include both variable and fi xed production costs. While the above two conventions are
the main ones involved, the consistency convention would also apply. The invento-
ries cost formula used by APW Ltd should be applied consistently from one period to
another. In most cases, such a company would use the FIFO cost formula.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
653
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 14
(a) Bank account of FLS Ltd for the year ended 30 September 20X8
$’000 $’000
Receipts 13,300 Balance b/fwd 520
Balance c/fwd 895 Payments 7,525
Selling and distribution costs 2,750
Administration costs 2,400
Preference dividend 50
Ordinary dividend 150
Last year’s ordinary dividend 300
Loan interest 400
Income tax 100
14,195 14,195
(b) Trial balance FLS Ltd as at 30 September 20X8
$’000 $’000
Debit Credit
Retained earnings 600
Revaluation reserve 1,250
Inventories at 30 September 20X7 1,250
Land at valuation 5,800
Buildings at cost 3,800
Plant at cost 2,800
Accumulated depreciation on buildings at 30 September 20X7 800
Accumulated depreciation on plant at 30 September 20X7 600
Goodwill 2,000
Long-term loan 8,000
Allowance for receivables at 30 September 20X7 80
Sales 14,000
Purchases 7,400
Returns outwards 75
Selling and distribution costs 2,750
Administration costs (2,400 100) 2,500
Bad debts written off 200
Dividends – preference 50
Dividends – ordinary 150
Loan interest (half year) 400
Receivables 2,350
Payables 850
Bank account 895
Share capital – ordinary 3,000
Share premium account 300
Share capital – preference 1,000
31,450 31,450
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
654
(c) Income statement of FLS Ltd for the year ended 30 September 20X8
$’000 $’000 $’000
Sales (14, 000 100) 13,900
Opening inventories 1,250
Purchases 7,400
Returns outwards (75)
7,325
8,575
Closing inventories (1,450)
Cost of goods sold (7,125)
Gross profi t 6,775
Selling and distribution costs (2,750 50) 2,700
Administration costs (2,500 25) 2,525
Bad debts written off 200
Change in allowance for receivables (80 47) (33)
Depreciation of buildings (2% of 3,800) 76
Depreciation of plant 5% (2,800 600) 110
(5,578)
Operating profi t 1197
Loan interest (400 400)
(800)
P r o fi t before tax 397
Income tax (140)
P r o fi t for the period 257
Statement of changes in equity of FLS Ltd for the year ended 30 September 20X8
Retained earnings
Balance at start of period 600
Total comprehensive income
for the period
257
Preference dividends (50)
Ordinary dividends (150 600) (750)
Balance at end of period 57
(d) Analysis of total capital employed
$
Ordinary share capital 3,000
Share premium 300
Preference share capital 1,000
Revaluation reserve 1,250
Retained earnings 57
Shareholders ’ funds 5,607
Long-term loan 8,000
Total capital employed 13,607
Gearing ration
Loan capital
Total capital
100
8000
13607
1
,
,
000 59 %
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
655
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 15
(a) Ledger accounts
Transactions
Date Description
Debit
$
Credit
$
Balance
$
Ibrahim
1 Oct. Balance b/f 1,250 cr
4 Oct. Purchase daybook 7,050 8,300 cr
4 Oct. Cash book 1,225 7,075 cr
4 Oct. Discount received 25 7,050 cr
15 Oct. Purchase daybook 14,100 21,150 cr
28 Oct. Returns out book 705 20445 cr
J Hall
1 Oct. Balance b/f 150 cr
21 Oct. Petty cash book 150 NIL
J Bolton
3 Oct. Returns out book 2,350 2,350 dr
11 Oct. Purchase daybook 35,250 32,900 cr
Z Rhawandala
13 Oct. Purchase daybook 5,875 5,875 cr
Sales tax
31 Oct. Purchase daybook 9,275 9,275 dr
31 Oct. Returns out book 455 8,820 dr
31 Oct. Cash sales 9,100 280 cr
Sales
31 Oct. Cash sales 52,000 52,000 cr
Purchases
31 Oct. Purchase daybook 53,000 53,000 dr
Returns outwards
31 Oct. Returns out book 2,600 2,600 cr
Postage
31 Oct. Petty cash book 116 116 dr
Discount received
4 Oct. Ibrahim 25 25 cr
Travel
31 Oct. Petty cash book 230 230 dr
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
656
(b) (i) Offi ce equipment should have been debited to a non-current asset account.
(ii) The profi t will have been understated by $5,000 less any depreciation charge.
Solution 16
(a) Calculation of operating profi t
$’000
Gross profi t 239
Expenses (159)
P r o fi t for the period 80
Add back interest 30
Therefore, operating profi t 110
Cash generated from operations
$’000
Operating profi t 110
Add back depreciation (50 25) 75
Add back loss on disposal 10
Decrease in inventories 100
Increase in receivables (20)
Decrease in payables (67)
208
Purchase cost of non-current assets
Premises Plant
$’000 $’000
Carrying amount at 31 December 20X8 1,200 800
Carrying amount at 31 December 20X7 (1,170) (700)
Depreciation charge 25 50
Disposal – cost – 85
Disposal – acc. depn – (25)
Purchases 55 210 (total $265,000)
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
657
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Cash-fl ow statement of AMS Ltd for the year ended 31 August 20X8
$’000 $’000
Cash fl ows from operating activities
Cash generated from operations 208
Interest (30)
Income tax (12)
166
Cash fl ow from investing activities
Payments to acquire tangible non-current assets (265)
Receipts from sale of tangible non-current assets 50
(215)
Cash fl ow from fi nancing activities
Equity dividends paid (11)
Issue of ordinary shares (500 100) 600
Repayment of long-term loans (200)
389
Net increase in bank and cash 340
Bank and cash at the beginning of the period (40)
Bank and cash at the end of the period 300
(b) (i) A statement of cash fl ows shows infl ows and outfl ows of cash during the period.
It reconciles opening and closing cash balances.
(ii) The income statement includes non-cash items, and excludes cash involved in
capital transactions.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
658
Solution 17
(a) Income statement of BAK plc for the year ended 30 April 20X9
$’000 $’000 $’000
Sales 19,620
Returns inwards (320)
19,320
Cost of sales
Opening inventories 1,420
Purchases 7,390
Carriage inwards 240
7,630
9,050
Closing inventories (1,280)
Cost of goods sold (7,770)
Gross profi t (11,530)
Research and development expenses (846 396)
450
Distribution costs 2,860
Administration costs 970
Salaries and wages 1,310
Printing, stationery and adverts (900 150)
750
Premises costs (310 80)
230
Loss on disposal of non-current assets 50
Reduction in allowance for receivables (102 62)
(40)
Bonuses owing (2% of 19,300) 386
Depreciation of vehicles (20% of 6,000) 1,200
Depreciation of offi ce equipment (10% of 1,200) 120
Auditors ’ fees (accrual) 115
(8,401)
Operating profi t 3,129
Loan interest (100 100)
(200)
P r o fi t before tax 2,929
Income tax (900)
P r o fi t for the period 2,029
(b) Statement of changes in equity of BAK plc for the year ended 30 April 20X9
General reserves Retained earnings Total
$’000 $’000 $’000
Balance at the start of the period 700 420 1,120
Total comprehensive income
for the period
2,029 2,029
Ordinary dividends (80) (80)
Preference dividends (40) (40)
Transfer to general reserve 1,000 (1,000)
Balance at the end of the period 1,700 1,329 3,029
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
659
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(c) Statement of fi nancial position of BAK plc at 30 April 20X9
Cost Depreciation Carrying amount
Assets $’000 $’000 $’000
Non-current assets
Tangibles
O f fi ce equipment 1,200 (480) 720
Vehicles 6,000 (2,200) 3,800
7,200 (2,680) 4,520
Intangibles
Goodwill 1,000
Development expenditure 396
1,396
5,916
Current assets
Inventories of goods 1,280
Inventories of advertising material 150
Receivables (3,100 62) 3,038
Prepayments 80
Bank 2,476
7,024
12,940
Equity and liabilities
Ordinary share capital 3,200
Preference share capital 800
Share premium account 640
General reserves (700 1,000) 1,700
Retained earnings 1,329
7,669
Non-current liability
Loan 1,000
Current liabilities
Payables 1,770
Loan 1,000
Accruals (115 100 386) 601
Income tax 900
4,271
12,940