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
660
Solution 18
(a)
Sales ledger control account
$ $
Balance b/f 184,650 Returns inwards 13,240
Credit sales 330,445 Received from receivables 320,045
Refunds to receivables 8,255 Discounts allowed 2,115
Dishonoured cheques 8,395 Bad debts written off 3,450
Contras 2,420
Balance c/f 190,475
531,745 531,745
Balance b/f
190,475
Purchase ledger control account
$ $
Returns outwards 27,490 Balance b/f 142,320
Payments to payables 196,360 Credit purchases 215,965
Discounts received 1,430
Contras 2,420
Balance c/f 130,585
358,285 358,285
Balance b/f
130,585
(b) Reconciliation
Receivables Payables
$ $
Control account totals 190,475 130,585
Ledger account totals 192,120 134,290
Adjustment re note (iv) (1,645) Adjustment re note (v) (1,600)
190,475 132,690
From this we can see that there would appear to be an error within the purchase ledger or
its control account, as they do not agree.
(c) Other internal controls that could be used are:
(i) independent preparation of a bank reconciliation statement on a regular basis;
(ii) regular preparation of a trial balance to confi rm arithmetical accuracy of the
ledger accounts;
(iii) segregation of duties so that no one person is involved in a complete process.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
661
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 19
(i) Profi t ratios
20X7 20X8
Gross profit
Sales
100
6 700
25 000
100 26 8
,
,
.%
12 300
28 000
100 43 9
,
,
.%
Gross profit
Cost of sales
100
6 700
18
100 36 6
,
,300
.%
12
15
100
,300
,700
78.3%
Operating profit
Sales
100
2 500
25 000
100 10
,
,
%
6100
28
100 21 8
,
,000
.%
Operating profit
Average capital
100
2 500
19
100 13
,
,200
%
6
23
100 26 2
,100
,250
.%
(ii) Liquidity ratios
Curr
ent assets:current liabilities 6,100:3,900 1.6:1 8,000:4,700 1.7:1
Current assets less inventories:current 3,800:3,900 0:97:13,200:4,700 0.68:1
liabilities
(iii) Effi ciency ratios
Inventories days
Average Inventories
Cost of sales
365
2 250
18 300
365
,
,
days 45
2 550
15 700
365
,
,
days59
Receivables days
Receivables
Sales
365
2 500
25 000
365 37
,
,
days
3 200
28 000
365 42
,
,
days
Payables days
Payables
Purchases
365
3 900
18 400
365
,
,
days77
3 600
16 200
365 81
,
,
days
Expenses
Sales
100
4 200
25 000
100 16 8
,
,
.%
6 200
28 000
100 22 1
,
,
.%
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
662
Solution 20
Workings
1 .
Reconstruction of JB cash book
$ $
Capital introduced 22,000 Balance b/f 8,850
Receipts from receivables 427,500 Cash withdrawn: Wages 6,750
449,500 Purchases 4,200
Advertising 2,600
Drawings 8,900
Therefore, balancing fi gure Loan repayments 20,000
Cash sales 10,160 Payments to payables 175,600
Less : wages (1,560) 8,600 Rent 22,000
Wages 90,000
General expenses 12,500
Balance c/d 106,700
458,100 458,100
2. Calculation of credit sales
$
Receipts 427,500
Less : opening receivables (32,500) (35,000 2,500)
Add : closing receivables 22,300
417,300
3. Calculation of credit purchases
$
Payments 175,600
Less : opening payables (13,300) (17,600 4,300)
Add : closing payables 12,200
174,500
4. Calculation of closing receivables
$
Receivables 22,300
Less : bad debt 80% of $ 16,000 (12,800)
9,500
5 . O f fi ce equipment
Original cost 45,000/
Therefore, d
epreciation $
9 10 50 000
5
,
,, 000 p.a.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
663
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(a) Income statement of JB for the year ended 31 December 20X5
$ $ $
Credit sales (W2) 417,300
Cash sales 10,160
427,460
Opening inventories 30,500
Credit purchases (W3) 174,500
Cash purchases 4,200
178,700
209,200
Closing inventories (27,850)
(181,350)
Gross profi t 246,110
Wages (6,750 90,000 1,560 4,300 5,250) 99,260
Advertising expenses ($2,600/2) 1,300
Loan interest 9,500
Rent (22,000 2,500 2,700) 21,800
General expenses 12,500
Bad debt written off (W4) 12,800
Depreciation
Plant and Machinery (20% 128,000) 25,600
Vehicle (25% 5,000) 1,250
O f fi ce equipment (W5) 5,000
(189,010)
57,100
(b) Statement of fi nancial statement of JB as at 31 December 20X5
Assets $ $ $
Non-current assets
Plant and machinery 102,400
O f fi ce equipment 40,000
Vehicle 3,750
146,150
Current assets
Inventories 27,850
Receivables (W4) 9,500
Prepayments (2,700 1,300) 4,000
Bank (W1) 106,700
148,050
294,200
Capital and liabilities
Capital at 1 January 20X5 117,050
Add : capital introduced 27,000
Add : profi t 57,100
Less : drawings (8,900)
192,250
Non-current liability
Long-term loan 84,500
Current liabilities
Payables 12,200
Accruals 5,250
17,450
294,200
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
664
Solution 21
(a) Calculation of loss on disposal
$’000
Accumulated depreciation at 30 June 20X6 2,300
Less : Charge for the year (255)
2,045
Accumulated depreciation at 30 June 20X5 (2,100)
Therefore, accumulated depreciation relating to disposal (55)
Proceeds 145
Carrying amount (230 55) (175)
Therefore, loss on disposal (30)
(b) Calculation of cash generated from operations
$’000
Operating profi t (250 30) 280
Add : Depreciation for year 255
Increase in inventories (350)
Decrease in receivables 135
Decrease in payables (650)
(330)
(c) Statement of cash fl ows of SH Ltd for year ended 30 June 20X6
$’000 $’000
Cash fl ows from operating activities (330)
Cash fl ow from investing activities
Purchase of non-current assets ((3,000 230) 3,500) (730)
Sale of non-current assets 145
(585)
Cash fl ows from fi nancing activities
Proceeds from share issue 800
Dividends paid (75)
725
Net decrease in cash (190)
Cash at beginning of period 2,350
Cash at end of period 2,160
(d) Calculation of ratios
20X5 20X6
Current ratio
CA : CL 8,375 : 5,075 1.65 : 1 8,400 : 4,430 1.90 : 1
Liquid or quick ratio
CA less inventories : CL 7,550 : 5,075 1.49 : 1 7,225 : 4,430 1.63 : 1
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
665
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 22
Updating the cash book for items found on the bank statement not entered in books
of MTR:
$ $
16/11/X6 Balance b/fwd 6,368 Rent 844
Receipt (credit transfer) 685 Bank charges 130
Receivable a/c (dishon. cheque) 425
Amended balance 5,654
7,053 7,053
Bank reconciliation at 16 November 20X6
$
Balance as per updated cash book 5,654
Add : Unpresented cheque 435
Less : Deposit not yet entered by bank (1,480)
Balance as per bank statement 4,609
Solution 23
(a) Income statement of TYR Ltd for the year ended 31 October 20X7
$’000 $’000 $’000
Sales (2,569 12) 2,557
Cost of sales
Opening inventories 210
Purchases 1,745
Returns outward (34)
Carriage inwards 15
1,726
1,936
Closing inventories (194 7) (201)
(1,735)
Gross profi t 822
Administration expenses (264 1 2 17) 269
Selling and distribution expenses (292 28) 264
Carriage outwards 18
Depreciation
Premises (4% of 350) 14
Plant & equipment (10% of 220) 22
(587)
Operating profi t 235
Debenture interest (15 15) (30)
P r o fi t before tax 205
Income tax (40)
P r o fi t for the period 165
Other comprehensive income 55
Gain on property revaluation before tax (15)
Income tax
Gain on property revaluation after tax 40
Total comprehensive income 205
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
666
(b) Statement of changes in equity of TYR Ltd for the year ended 31 October 20X7
Share
capital
Share
premium
Revaluation
reserve
Retained
earnings Total
$’000 $’000 $’000 $’000
Balance at the start of the period 1,000 100 135 190 1,425
Total comprehensive income
for the period
40 165 205
Dividends paid (20) (20)
Balance at the end of the period 1,000 100 175 335 1,610
(c) Statement of fi nancial position of TYR Ltd as at 31 October 20X7
Cost or valuation Acc. Dep’n Carrying amount
Assets $’000 $’000 $’000
Tangible non-current assets
Land 550 – 550
Premises 350 (34) 316
Plant and equipment 220 (52) 168
1,120 (86) 1,034
Intangible non-current assets
Patents and trademarks 200 – 200
1,320 (86) 1,234
Current assets
Inventories (194 7) 201
Receivables (875 12) 863
Prepayments (12 28) 40
Cash 12
1,116
2,350
Equity and liabilities
Share capital 1,000
Share premium 100
Revaluation reserve account (135 40) 175
Retained earnings 335
1,610
Non-current liabilities
12% Debentures (2010) 250
Income tax on gain property revaluation 15
Current liabilities 265
Payables 318
Bank 85
Accrued expenses (17 15) 32
Income tax 40 475
2,350
(d) (i) Gross profi t mark-up
Gross profit
Cost of sales ,
100
822
1 735
100 47 4.%
This is lo
w
er than in the previous year. It may be due to increased price competi-
tion in the marketplace; a deliberate policy of offering tighter margins to improve
volume of sales; or that the company has been less effi cient in purchasing.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
667
FUNDAMENTALS OF FINANCIAL ACCOUNTING
(ii) Operating profi t margin
Operating profit
Sales ,
100
205
2 557
100 8%
This is much better than last y
ear and would suggest that the company is deriv-
ing the benefi
ts of economies of scale. Quite clearly, costs have risen at a lower
rate than that of the revenue.
(iii) Current ratio
Current assest: current liabilities : :1
116
560 2 1,
This is lower than last year’s ratio and perhaps is a sign of increased effi ciency in
terms of managing the cash fl ow cycle. The calculations of the relevant effi ciency
ratios would give us more information on which to draw conclusions.
(iv) Acid test ratio
Current assents minus inventories: current liabilities
(, 11116
201
560 1 63 1): :.
This is lo
wer than last year, but may be considered to be unnecessarily high.
The company appears to have a high proportion of receivables in relation to the
turnover. As stated above, the calculation of the receivables days would assist in
this evaluation.
Solution 24
(a)
Cash book
Date Details Disc $ Date Details Disc $
4/9/X7 A Barton 20 380 1/9/X7 Balance b/f 347
8/9/X7 C Sikorski 30 1,170 10/9/X7 J Swinbum 60 1,140
22/9/X7 C Sikorski 799 15/9/X7 Sales tax 832
25/9/X7 F Gray 170 17/9/X7 P Taylor 20 380
30/9/X7 Receivables 10,500 20/9/X7 Motor vehicle a/c 9,400
30/9/X7 Balance c/f 12,430 20/9/X7 Motor expenses 150
30/9/X7 Wages 2,000
30/9/X7 Payables 11,200
50 25,449 80 25,449
1/10/X7 Balance b/f 12,430
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
SOLUTIONS TO REVISION QUESTIONS C2
668
(b)
A Barton
Date $ Date $
1/9/X7 Balance b/f 400 4/9/X7 Bank 380
3/9/X7 Sales 188 4/9/X7 Discount allowed 20
5/9/X7 Returns inward 47
30/9/X7 Balance c/f 141
588 588
1/10/X7 Balance b/f 141
C Sikorski
Date $ Date $
1/9/X7 Balance b/f 1,200 8/9/X7 Bank 1,170
8/9/X7 Sales 940 8/9/X7 Discount allowed 30
12/9/X7 Sales 423 18/9/X7 Returns inward 141
22/9/X7 Bank 799
30/9/X7 Balance c/f 423
2,563 2,563
1/10/X7 Balance b/f 423
F Gray
Date $ Date $
1/9/X7 Balance b/f 340 25/9/X7 Bank 170
25/9/X7 Bad debts a/c 170
340 340
(c) Calculation of the allowance for receivables on 30 September 19X7
Total receivables
as per schedule Adjustments
Revised
balances Allowance
$ $ $ $
Current 12,000 (60) 11,940 at 0% Nil
30–60 days 7,500 (200) 7,300 at 5% 365
60–90 days 3,600 – 3,600 at 10% 360
9 0 days 1,100 (240) 860 at 20% 172
Revised cumulative allowance 897
Therefore, the allowance for receivables account will need to be increased by (credited
with) $447 (897 450).
(d) The principal accounting convention involved is the prudence convention.
PREPARING FOR THE COMPUTER-BASED ASSESSMENTS (CBAs)
669
FUNDAMENTALS OF FINANCIAL ACCOUNTING
Solution 25
Non-current assets Working capital Profi t
(i) No change No change No change
(ii) Decrease Increase Increase
(iii) No change Decrease No change
(iv) No change Decrease Decrease
Solution 26
(a) A receipts and payments account is a summary of the cash and bank transactions for
the relevant period; in essence, it is a summarised cash book.
An income and expenditure statement is essentially the same as an income statement.
It takes into account prepayments and accruals and distinguishes between capital and
revenue items.
(b)
Income and expenditure statement of Monarch Sports Club for the year ended 30 June 20X7
$ $
Income
Annual subscriptions
Receipts in year 18,000
Add : Subs in advance at 1/7/X6 1,100
Less : Subs in arrears at 1/7/X6 (100)
Less : Subs in advance at 30/6/X7 (900)
Add : Subs in arrears at 30/6/X7 300
18,400
Life membership (10% of 3,000) 300
Surplus on competitions (7,500 4,300) 3,200
Entrance fees 2,500
24,400
Expenses
Bad debts written off (subs from previous year) 100
Transport to matches 3,700
Coaching fees (2,100 – 150 450) 2,400
Repairs to equipment 800
Loss on disposal of equipment (1,200 1,000) 200
Depreciation of new equipment (20% of 4,000) 800
(8,000)
Surplus for year 16,400