CIMA CO2 Official Learning System - Fundamentals of Financial Accounting
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MOCK ASSESSMENT 2
MOCK ASSESSMENT C2
730
Solution 46
Answer: (B)
Solution 47
Profit before interest
Capital
$
$
85 000
615 000
13 8
,
,
.%
Solution 48
Electricity Account
D r $ Cr $
1 Dec 20X8 Bal b/f 400
Bank 3,000
31 December 20X9 IS 3,700
31 December 20X9 Bal c/d
300
3,700 3,700
Solution 49
Answer: (D)
Solution 50
$60,000 75% 75% 75% 75% $18,984
Index
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733
A
Accounting:
auditor, role of, 344–7
balancing the accounts, 50–2
bookkeeping entries for expenses and
revenue, 46–50
coding system, 300–2
computerised systems, 300
concepts see Accounting conventions
defi nition, 3–4
double-entry bookkeeping, 42–5
equation, 17, 18–21
historical cost convention and its alternatives,
336–42
ledger accounts see Ledger accounts
management, role of, 347–8
for manufacturing organisations, 417–20
non-current assets see Non-current assets,
accounting for
objectives, 4–5
policies and estimation techniques, 335–6
principles, 373
regulations see Accounting, regulations in
scene, 3–9
standards, 342–4
statement of fi nancial position, 22–5
Accounting conventions:
accruals and matching, 332–3
business entity, 330
consistency, 334
dual aspect, 331
going concern, 334
historical cost, 331
materiality, 333
money measurement, 330–1
objectivity, 331
periodicity, 332
prudence, 334–5
realisation, 331–2
Accounting, regulations in:
accountancy profession, 342
company law, 342
IASB framework, 344
international accounting standards, 342–4
Accounting information system (AIS), 4
Accounting Standards Board (ASB), 343
Accounts:
debits/credits, 46
defi nition, 41–2
users, 3–4
Accruals:
matching convention and, 332–3
prepayments and, 110–13
Accumulated fund, 373
Acid test ratio, 510–11
Acquisitions, non-current assets, 145
Adjustments, 192–3
Advisers, use of accounts, 5
AIS see Accounting information system (AIS)
Allowances:
for doubtful receivables, 120
specifi c, bad debts, 120
Amortisation, 155
Analysed cash books, 243–4
Annual statements, 5
ASB see Accounting Standards Board (ASB)
Assessment see Examination
Assets:
accounting equation, 17, 18, 364
balancing off the account, 80, 85
cash fl ows statements, 447
current, 22
Index
FUNDAMENTALS OF FINANCIAL ACCOUNTING C2
734
INDEX
Assets: (Continued)
current purchasing power (CPP) accounting,
337–8
double-entry bookkeeping, 42–5
historical cost accounting, 336
non-current, 22
prepayments, 110–11
ratios, 505
safeguards, 281, 348
statement of fi nancial position, 19, 22–5, 336
tangible, 18
trial balance, 7, 193
valuation, 339–40
see also Intangible assets; Non-current assets
Asset turnover ratio, 511
Audit(s), 346, 347
auditors, 344–7
trails, 280
Authorisation procedures, 280
Authorised share capital, 434–5
AVCO see Weighted average cost method
(AVCO)
B
BACS see Bankers automated clearing system
(BACS)
Bad and doubtful receivables accounts, 116–20
Bad debts, 113
accounting for, 114
allowance for receivables, 116–20
journal entries, 298
ledger account, 114
recovered, 115–16
specifi c allowances, 120
Balance brought down (b/d), 81
Balance carried down (c/d), 80
Balance transfer, trading account, 73–84
Balancing off the accounts, 7, 50–2
Bank accounts:
authorisation, 249
bank reconciliation statements, 282–5
cash books, 241–6
division of the ledger, 232
Bank balance:
profi t, 29, 447
statements of cash fl ows, 447
Bank-initiated transactions, 242
Bank reconciliation statements, 282–5
Bankers automated clearing system (BACS), 242
Banking system, 241–2
Bartering, 121
Bin cards, 251
Board of directors, 6
Bookkeeping, 41
control see Bookkeeping system, control
defi nition, 7
organisation see Bookkeeping system,
organisation
transaction, 437
see also Double-entry bookkeeping
Bookkeeping system, control:
accounting coding systems, 300–2
bank reconciliation statements, 282–5
computers in accounting, 299–300
control accounts, 287–96
detecting errors, 281–2
preventing errors, 279–81
reconciliation of suppliers’ statements, 285–7
suspense accounts and correction of errors,
296–9
Bookkeeping system, organisation, 231
books and records, supporting, 232–3
cash books, 241–6
inventory records and methods of inventory
measurement, 249–56
journal, 246–9
ledger accounts, 232
sales, purchases and returns daybooks, 233–41
Books of prime entry, 232, 233
Bought ledger, 232
Brands, intangible non-current assets, 155
Business entity convention, 330
Business organisation:
non-profi t-making organisations, 9
profi t-making organisations, 9
C
Capital:
accounting equation, 18–19
balancing off accounts, 80–1
defi nition, 19
double-entry bookkeeping, 42–5
employed, 508
expenditure, 30, 143–4
incomplete record, 364
maintenance, theory of, 337
opening, 366
ratios, 508
reserves, 437
revenue, 25–7
share, 434–5
statement of fi nancial position, 19
statement of movement on, 26
structure ratios, 514–15
735
FUNDAMENTALS OF FINANCIAL ACCOUNTING
INDEX
transactions, 30
Capital account:
balance, 46
concepts, 78–9
drawings, 79
income statement, 340
trial balance, 79
Carriage costs, 99–100
Cash:
discount, 101, 102, 243
profi ts, 29, 447
summaries, 366–7
Cash account:
cash books, 241–6
division of ledger, 242
Cash balance, statements of cash fl ows, 447–8
Cash books, 242–5
analysed cash books, 243–4
banking system, 241–2
concepts, 287
control account, 287
petty, 245–6
Cash fl ows statements, see statement of cash
fl ows, 447–54
CBAs see Computer-based assessments (CBAs)
CCA see Current cost accounting (CCA)
CCP accounting see Current purchasing power
(CPP) accounting
Charities, 9
Cheques, 241
clearing systems, 241
Clubs and societies, 9
Coding system, accounting, 300–2
Columnar ledger account, 85
Commission errors, trial balance, 70–1
Companies Act, 329
Compensating errors, trial balance, 71
Compliance testing, 345, 346
Computer-based assessments (CBAs), 555–7
Computerised systems, control, 290
Consistency convention, 334
Consumers:
use of accounts, 5
see also Customers
Contra entries, 293
Controls:
accounts, 281, 287–96
fraud, 295, 347
non-current assets, 154–5
Corporation tax, 433
Costs:
carriage, 99–100
concept, 299
depreciation, 30, 147–8
direct, 415
factory, 415, 416
of goods sold, 27–9, 332, 341
income statement, 25–7, 332
indirect, 415
manufacturing account, 414–16
prime, 415
R&D, 340
tangible non-current assets, 143, 154–5
Credit notes, 234, 280
Creditors, use of accounts, 4
Creditors’ accounts:
control accounts, 295–6
daybooks, 232, 240–1
divisions of the ledger, 232
Creditors’ ledger:
reconciliations, 281
see also Purchase ledger
Creditors’ payment period, 513
Credits, accounts, 74, 247
Cross-referenced entries, 236–7
Current assets:
defi nition, 22
net, 24–5
Current cost accounting (CCA), 338
Current liabilities, 22
Current purchasing power (CPP)
accounting, 337–8
Current ratio, 510
Customers:
contra entries, 293
use of accounts, 3–4
D
Daybooks, 232, 234–5, 236
use of, 240–1
Debentures, 434
Debits, accounts, 50, 51, 70, 80, 85
Debts:
ledger accounts, 113–16
separate entity convention, 19
see also Bad debts; Doubtful receivables
Delivery charges, 99–100
Depreciation, 145–6
asset acquisitions/disposals, 145
calculation methods, 146–50
concepts, 145
diminishing-balance method, 148
machine-hour method/units of production
method, 149
FUNDAMENTALS OF FINANCIAL ACCOUNTING C2
736
INDEX
Depreciation (Continued)
reducing-balance method, 148–9
revaluation method, 149–50
straight-line method, 147–8
in year of acquisition and disposal, 150
Direct costs, 415
Direct debits, 242
Directors see Management
Diminishing-balance method of depreciation,
148
Discounts, 100–2
cash books, 234
cash discounts, 101, 234
ledger accounts, 100–2
trade discounts, 100, 237
Dishonoured cheques, 242
Disposals, non-current assets, 154
Dividends, 436–7
Divisions of ledger, 232
Documentation, control, 280
Double-entry bookkeeping, 42
control accounts, 287–96
dual aspect convention, 331
ledger accounts, summarising, 69–85
Doubtful receivables:
control account, 287, 290
ledger accounts, 120
Drawer, cheques, 241
Drawings, 19, 25, 79
account, 79
accounting equation, 19
income statement, 25
incomplete records, 364, 366
and statement of profi t, 79
Dual aspect convention, 42, 331
Duplication errors, trial balance, 71
E
Economic value, 330
Effi ciency ratios, 511–14
Employees:
controls, 300
use of accounts, 3
wages and salaries, 107–10
Entertainment expenses, 106
Entrance fees, 374–5
Equity investor group, 5
Equity shares, 437
Errors:
corrections, 296–7
detection methods, 281–2
ledger accounts, 70, 231, 232, 279–81
trial balance, 70–1, 297
Examination:
computer-based assessment, 555–7
format, 556–7
solutions, 684–705, 722–30
tips, 556
Exception reports, 6–7
Exchange of goods, 120–1
Exempt supplies, sales tax, 107
Expenses:
accrued, 110–11
bad and doubtful receivables, 113–20
double-entry bookkeeping, 46
exchange of goods, 120–1
incomplete records, 365
ledger accounts, 111
manufacturing account, 414
matching, 332–3
non-current assets, 143
prepayment, 111
sales tax, 106
trial balance, 70
see also Costs
Expenses and revenue, bookkeeping entries for,
46–50
Exports, sales tax, 105
Extended-use daybooks, 240–1
External auditor, 346–7
External information, 8
External users, 516
F
Factory cost:
of goods completed, 416
of production, 415
Fair value, 338
FIFO see First in, fi rst out (FIFO)
Final accounts:
incomplete records, 363–78
workings, 194–5, 369
see also Income statement, adjustments;
Statement of fi nancial position
Financial accounting:
defi nition, 7
framework, 17–30
Financial position, statement of see Statement
of fi nancial position
Financial statements:
adjustments, 192–3
capital expenditure, 143–5
framework see Financial statement,
framework
737
FUNDAMENTALS OF FINANCIAL ACCOUNTING
INDEX
interpretation of, 503–15
labeling the trial balance, 193–4
needs, 5–6
preparation of, 196–205
preparing workings, 194–5
qualitative characteristics, 6–7
regulations, 338
revenue expenditure, 143–4
trial balance, 191–2
users, 5–6
Financial statements, framework:
accounting equation, 18–21
capital and revenue, 30
income statement, 25–9
profi t and cash, 29–30
separate entity convection, 17–18
statement of fi nancial position and
accounting equation, 22–5
Finished goods, 413, 414, 416
First in, fi rst out (FIFO), 252
Folio columns, 236
Forecasts, 4
Fraud:
auditors, 347
controls, 281, 299–300
G
Gearing ratio, 514
General ledger see Nominal ledger
Going concern convention, 334
Goods:
carriage costs, 99–100
discounts, 100
exchange, 120–1
Goodwill, 18, 156–7
Government:
non-profi t-making organisation, 9
use of accounts, 3
Gross pay, 107–8
Gross profi ts:
margin, 74, 507
mark-up, 74, 507
trading account, 74
H
Historical cost accounting, 336, 341
Holding gains or losses, 337–8
I
IASB see International Accounting Standards
Board (IASB)
IFRS see International Financial Reporting
Standards (IFRS)
Illustrative computer-based assessment,
684–705, 710–30
Imprest system, 245
Import, sales tax, 102
Income:
and expenditure account, 373
statement see Income statement
Income statement:
accruals and prepayments, 111
adjustments, 192–3
bad and doubtful receivables, 120
capital account, 78
carriage costs, 99–100
concepts, 72
comprehensive income, see statement of
comprehensive income, 27–9
cost of goods sold, 27–9
depreciation, 30, 145–6, 150
disposal of non-current assets, 172
incomplete records, 364
limited companies, 438
manufacturing companies, 413
matching, 122
non-profi t-making bodies, 373–8
preparation, 25, 76–8, 417
revenue expenditure, 143–4
statement of profi t, 72–5
vertical presentations, 74–5
Income tax, 107–8
Incomplete records, 363
Indirect costs, 415
Infl ation, 334, 337
Information:
characteristics, 3–5
external/internal contrasts, 6
useful characteristics, 3–4
see also Knowledge
Input sales tax, 102
Intangible assets, 18, 155
valuation of, 339–42
Intellectual capital, 339
Interest cover, 515
Interim statements, 436
Internal auditors, 347
Internal information, 8
International Accounting Standards Board
(IASB), 343–4
International Financial Reporting Standards
(IFRS), 342, 432
Interpretation of accounts, 503
Inventory:
account, 256
FUNDAMENTALS OF FINANCIAL ACCOUNTING C2
738
INDEX
Inventory: (Continued)
carriage costs, 99–100
control system, 74
cost of goods sold, 27–9, 332
exchange of goods, 120–1
historical cost accounting, 336, 341
manufacturing companies, 512
measurement methods, 249–56
movement, 46
ratios, 505
records, 249–56
trading account, 74–6
turnover ratio, 511
valuations, 339–40
Invoices, 234–5
daybooks, 233–4, 235
issues, stock, 255
J
Journal:
authorisation procedures, 280
concepts, 246–7
contra entries, 293
control accounts, 287
corrections, 297
end-of-year transactions, 248–9
layout, 247
for miscellaneous transactions, 247–8
K
Knowledge, 116, 342
see also Information
L
Labour costs, 414
Last in, fi rst out (LIFO), 253
Ledger accounts, 41–2
accruals and prepayments, 110–13
bad debts and allowance for receivables,
113–20
balancing off, 7, 80–5
carriage costs, 99–100
columnar, 85
control, 279–96
cross-referencing, 236–7
discounts, 100–2
divisions of the ledger, 232, 233
errors, 279–81, 281–2
exchange of goods, 120–1
further aspects, 99–121
incomplete records, 363–81
manufacturing companies, 413–14
organisation, 72, 100, 102, 232, 242
for sales tax, 102–7
for specialised transactions, 99–102
statement of fi nancial position, preparing,
79–80
statement of profi t, preparing, 72–9
trial balance, preparing, 69–72
for wages and salaries, 107–10
Liabilities:
accounting equation, 18–21
accruals, 110–11
balancing off the accounts, 80–1
current, 22
defi nition, 18
double-entry bookkeeping, 42–5
non-current, 22
statement of fi nancial position, 22–5, 79,
193–4
trial balance, 69–71
see also Creditors
Life-membership fees, 375
LIFO see Last in, fi rst out (LIFO)
Limited companies:
defi nition, 9
directors of, 434
dividends, 436–7
external information, 8
fi nance issues, 432–4
fi nancial statement of, 432–4
regulations, 9, 342
reserves, 437
separate entity convention, 17–18
sources of fi nance for, 434–5
statement of changes in equity, 440–5
statement of comprehensive income, 438–40
taxation in company fi nancial statements,
433–4
types, 9
Liquidity ratios, 510–11
Listed companies, 9
Loan capital, gearing ratio, 514
Long-term liabilities, defi nition, 18
Losses, 77
see also Income statement
M
Machine-hour method of depreciation, 149
Management:
levels, 6
role of, 347–8
stewardship function, 348
use of accounts, 5–6
739
FUNDAMENTALS OF FINANCIAL ACCOUNTING
INDEX
Management accounting, defi nition, 7–8
Management information system (MIS), 4
Manufacturing accounts, 413
accounting system for manufacturing
organisations, 417–20
costs to include in, 414–16
income statement for manufacturing
organisations, 417
layout of, 416
need of, 413–14
statements of fi nancial position for
manufacturing organisations, 417
Manufacturing organisations:
accounting system for, 417–20
income statement for, 417
statements of fi nancial position for, 417
Margin see Gross profi ts
Market values, 511
Mark-up see Gross profi ts
Matching convention, 332–3
Materiality convention, 333
Membership fees, 374–5
Memorandum accounts, 290
Middle management, 6
MIS see Management information system
(MIS)
Missing fi gures, calculations, 364–72
Mixed supplies, sales tax, 102, 107
Mock assessments, 683–705, 709–30
Monetary items, 337
Money measurement convention, 330–1
Motor cars, sales tax, 106
N
Negative working capital, 24
Net assets, 102, 373, 509
turnover, 511
Net cash fl ow from operating activities, 452
Net current assets, 24, 510, 513
Net losses, 77
Net pay, 107–8
Net profi ts:
income statement, 25, 77, 79, 193
margin, 507
ratios, 507
Net realisable value (NRV), 249, 338
Nominal ledger, 42, 50, 232
Non-current assets:
accounting for, 143–57
acquisitions, 150
capital and revenue expenditure, 143–5
carriage costs, 99–100
controlling tangible, 154–5
defi nition, 22
depreciation, 30, 145–6, 150
disposals, 150–2
exchange of goods, 121
intangible, 154–7
register, 154
sales tax, 106
turnover, 511
useful economic life, 145
valuation, 336
Non-profi t-making bodies, 9, 363, 373–81
NRV see Net realisable value (NRV)
O
Objectivity convention, 331
Omission errors, trial balance, 70
Opening capital, incomplete records, 366
Operating activities, net cash fl ow from,
448–52
Operational management, use of accounts, 6
Ordinary shares, 434
Organisations, types of, 8–9
Organising bookkeeping system, 231
books and records, supporting, 232–3
cash books, 241–6
inventory records and methods of inventory
measurement, 249–56
journal, 246–9
ledger accounts, 232
sales, purchases and returns daybooks,
233–41
Original entry errors, trial balance, 71
Output sales tax, 102
Overtime, ledger accounts, 107–8
P
Partnerships:
business entity convention, 330
defi nition, 9
separate entity convention, 18
Par value, 435
Patents, 18, 155, 339
Payables, 18, 19
Pension contributions, 110
Performance ratios see Profi tability ratios
Periodicity convention, 332
Petty cash books, 233, 254–6
Petty cash fraud, 281
Preference shares, 434, 437
Preparing for the examination, 555–7
Prepayments, 110–13