CPA F1.3 FINANCIAL ACCOUNTING Revision Guide

CPA

Certified Public Accountant Examination

Stage: Foundation 1.3

Subject Title: Financial Accounting

Revision Guide

INSIDE COVER - BLANK

Page 1

CONTENTS

Title

Page

Study Techniques

3

Examination Techniques

4

Assessment Strategy

9

Learning Resources

10

Sample Questions and Solutions

11

Page 2

BLANK

Page 3

STUDY TECHNIQUE

What is the best way to manage my time?

• Identify all available free time between now and the examinations.

• Prepare a revision timetable with a list of “must do” activities.

• Remember to take a break (approx 10 minutes) after periods of

intense study.

What areas should I revise?

• Rank your competence from Low to Medium to High for each topic.

• Allocate the least amount of time to topics ranked as high.

• Allocate between 25% - 50% of time for medium competence.

• Allocate up to 50% of time for low competence.

How do I prevent myself veering off-track?

• Introduce variety to your revision schedule.

• Change from one subject to another during the course of the day.

• Stick to your revision timetable to avoid spending too much time on one topic.

Are study groups a good idea?

• Yes, great learning happens in groups.

• Organise a study group with 4 – 6 people.

• Invite classmates of different strengths so that you can learn from one another.

• Share your notes to identify any gaps.

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EXAMINATION TECHNIQUES

INTRODUCTION

Solving and dealing with problems is an essential part of learning, thinking and intelligence.

A career in accounting will require you to deal with many problems.

In order to prepare you for this important task, professional accounting bodies are placing

greater emphasis on problem solving as part of their examination process.

In exams, some problems we face are relatively straightforward, and you will be able to deal

with them directly and quickly. However, some issues are more complex and you will need to

work around the problem before you can either solve it or deal with it in some other way.

The purpose of this article is to help students to deal with problems in an exam setting. To

achieve this, the remaining parts of the article contain the following sections:

 Preliminary issues

 An approach to dealing with and solving problems

 Conclusion.

Preliminaries

The first problem that you must deal with is your reaction to exam questions.

When presented with an exam paper, most students will quickly read through the questions

and then many will … PANIC!

Assuming that you have done a reasonable amount of work beforehand, you shouldn‟t be

overly concerned about this reaction. It is both natural and essential. It is natural to panic in

stressful situations because that is how the brain is programmed.

Archaeologists have estimated that humans have inhabited earth for over 200,000 years. For

most of this time, we have been hunters, gatherers and protectors.

In order to survive on this planet we had to be good at spotting unusual items, because any

strange occurrence in our immediate vicinity probably meant the presence of danger. The

brain‟s natural reaction to sensing any extraordinary item is to prepare the body for „fight or

flight‟. Unfortunately, neither reaction is appropriate in an exam setting.

The good news is that if you have spotted something unusual in the exam question, you have

completed the first step in dealing with the problem: its identification. Students may wish to

use various relaxation techniques in order to control the effects of the brain‟s extreme

reaction to the unforeseen items that will occur in all examination questions.

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However, you should also be reassured that once you have identified the unusual item, you

can now prepare yourself for dealing with this, and other problems, contained in the exam

paper.

A Suggested Approach for Solving and Dealing with Problems in Exams.

The main stages in the suggested approach are:

1. Identify the Problem

2. Define the Problem

3. Find and Implement a Solution

4. Review

1. Identify the Problem

As discussed in the previous section, there is a natural tendency to panic when faced with

unusual items. We suggest the following approach for the preliminary stage of solving and

dealing with problems in exams:

Scan through the exam question

You should expect to find problem areas and that your body will react to these items.

PANIC!!

Remember that this is both natural and essential.

Pause

Take deep breaths or whatever it takes to help your mind and body to calm down.

Try not to exhale too loudly – you will only distract other students!

Do something practical

Look at the question requirements.

Note the items that are essential and are worth the most marks.

Start your solution by neatly putting in the question number and labelling each part of your

answer in accordance with the stated requirements.

Actively reread the question

Underline (or highlight) important items that refer to the question requirements. Tick or

otherwise indicate the issues that you are familiar with. Put a circle around unusual items that

will require further consideration.

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2. Define the Problem

Having dealt with the preliminary issues outlined above, you have already made a good start

by identifying the problem areas. Before you attempt to solve the problem, you should make

sure that the problem is properly defined. This may take only a few seconds, but will be time

well spent. In order to make sure that the problem is properly defined you should refer back

to the question requirements. This is worth repeating: Every year, Examiner Reports note that

students fail to pass exams because they do not answer the question asked. Examiners have a

marking scheme and they can only award marks for solutions that deal with the issues as

stipulated in the question requirements. Anything else is a waste of time. After you have re-

read the question requirements ask yourself these questions in relation to the problem areas

that you have identified:

Is this item essential in order to answer the question?

Remember that occasionally, examiners will put „red herrings‟ (irrelevant issues) into the

question in order to test your knowledge of a topic.

What’s it worth?

Figure out approximately how many marks the problem item is worth. This will help you to

allocate the appropriate amount of time to this issue.

Can I break it down into smaller parts?

In many cases, significant problems can be broken down into its component parts. Some parts

of the problem might be easy to solve.

Can I ignore this item (at least temporarily)?

Obviously, you don‟t want to do this very often, but it can be a useful strategy for problems

that cannot be solved immediately.

Note that if you leave something out, you should leave space in the solution to put in the

answer at a later stage. There are a number of possible advantages to be gained from this

approach:

1) It will allow you to make progress and complete other parts of the question that you are

familiar with. This means that you will gain marks rather than fretting over something

that your mind is not ready to deal with yet.

2) As you are working on the tasks that you are familiar with, your mind will relax and you

may remember how to deal with the problem area.

3) When you complete parts of the answer, it may become apparent how to fill in the

missing pieces of information. Many accounting questions are like jigsaw puzzles: when

Page 7

you put in some of the parts that fit together, it is easier to see where the missing pieces

should go and what they look like.

3. Find and Implement a Solution

In many cases, after identifying and defining the problem, it will be easy to deal with the

issue and to move on to the next part of the question. However, for complex problems that

are worth significant marks, you will have to spend more time working on the issue in order

to deal with the problem. When this happens, you should follow these steps:

Map out the problem

Depending on your preferred learning style, you can do this in a variety of ways including

diagrams, tables, pictures, sentences, bullet points or any combination of methods. It is best

to do this in a working on a separate page (not on the exam paper) because some of this work

will earn marks. Neat and clearly referenced workings will illustrate to the examiner that you

have a systematic approach to answering the question.

Summarise what you know about the problem

Make sure that this is brief and that it relates to the question requirements. Put this

information into the working where you have mapped out the problem. Be succinct and

relevant. The information can be based on data contained in the question and your own

knowledge and experience. Don‟t spend too long at this stage, but complete your workings as

neatly as possible because this will maximise the marks you will be awarded.

Consider alternative solutions

Review your workings and compare this information to the question requirements. Complete

as much of the solution as you can. Make sure it is in the format as stipulated in the question

requirements. Consider different ways of solving the problem and try to eliminate at least one

alternative.

Implement a solution

Go with your instinct and write in your solution. Leave extra space on the page for a change

of mind and/or supplementary information. Make sure the solution refers to your workings

that have been numbered.

4. Review

After dealing with each problem and question, you should spend a short while reviewing your

solution. The temptation is to rush onto the next question, but a few moments spent in

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reviewing your solution can help you to gain many marks. There are three questions to ask

yourself here:

Have I met the question requirements?

Yes, we have mentioned this already. Examiner Reports over the years advise that failure to

follow the instructions provided in the question requirements is a significant factor in causing

students to lose marks. For instance, easy marks can be gained by putting your answer in the

correct format. This could be in the form of a report or memo or whatever is asked in the

question. Likewise, look carefully at the time period requested. The standard accounting

period is 12 months, but occasionally examiners will specify a different accounting period.

Is my solution reasonable?

Look at the figures in your solution. How do they compare relative to the size of the figures

provided in the question?

For example, if Revenue were 750,000 and your Net Profit figure was more than 1 million,

then clearly this is worth checking.

If there were some extraordinary events it is possible for this to be correct, but more than

likely, you have misread a figure from your calculator. Likewise, the depreciation expense

should be a fraction of the value of the fixed assets.

What have I learned?

Very often in exams, different parts of the solution are interlinked. An answer from one of

your workings can frequently be used in another part of the solution. The method used to

figure out an answer may also be applicable to other parts of your solution.

Conclusion

In order to pass your exams you will have to solve many problems. The first problem to

overcome is your reaction to unusual items. You must expect problems to arise in exams and

be prepared to deal with them in a systematic manner. John Foster Dulles, a former US

Secretary of State noted that: The measure of success is not whether you have a tough

problem to deal with, but whether it is the same problem you had last year. We hope that, by

applying the principles outlined in this article, you will be successful in your examinations

and that you can move on to solve and deal with new problems.

Page 9

ASSESSMENT STRATEGY

Examination Approach

The examination seeks to test the students‟ knowledge and understanding of the application of

accounting concepts and principles. Question 1 is compulsory and usually involves the

preparation and presentation of financial statements for sole traders, limited companies, and other

organisations in accordance with current standards and guidelines. Other questions provide the

opportunity for students to demonstrate their understanding of the role, function and basic

principles, (including double entry bookkeeping), of financial accounting.

Emphasis in this examination is placed on proper layout and presentation as well as on

numerical accuracy. Students must demonstrate sound technical knowledge and presentation

skills and the ability to integrate learning from different parts of this and other syllabi, as

appropriate.

Examination Format

Examination Duration: 3.5 Hours

The examination is unseen, closed book.

Students are required to answer 4 questions out of 5 Question 1 is compulsory and carries 40

marks. Students are required to answer 3 of the remaining 4 questions.

Marks Allocation

Question Marks

Question 1 – Compulsory question 40

Choice of 3 questions out of 4 (3 x 20) 60

Total 100

Page 10

LEARNING RESOURCES

Core Texts

 Wood F and Sangster A / Business Accounting 1 and 2 11th ed / Pearson 2008 /

ISBN 0273712128 / ISBN 0273712136

 Connolly / International Financial Accounting and Reporting 3rd ed. / CAI 2011 / ISBN

9781907214646

Manuals

Institute of Certified Public Accountants of Rwanda – F1.3 Financial Accounting

Useful Websites (as at date of publication)

 www.icparwanda.com

 www.ifac.org/ - The International Federation of Accountants.

 www.ifrs.org/ - The International Financial Reporting Standards Foundation.

 www.iasplus.com - Deloitte Touche Tohmatsu. Summaries of International Financial

Reporting Standards (IFRS).

 www.frc.org.uk/ - The Financial Reporting Council. ASB - Accounting Standards

Board.

 www.frc.org.uk/pob/ - The Professional Oversight Board.

 http://ec.europa.eu/internal_market/accounting/ias/index_en.htm

 www.ipsas.org

 www.intosai.org

Page 11

F1.3 FINANCIAL ACCOUNTING

REVISION QUESTIONS AND SOLUTIONS

Page 12

QUESTION 1

(a) Financial statements allow users of them to satisfy some of their different needs for

information. Explain these needs for the following five users:

1) Investors

2) Employees

3) Suppliers

4) Government and their agencies

5) Public

(10 Marks)

(b) The following trial balance was extracted from the books of CRA Limited as at 31

December 2010:

Debit

Rwf ‘000

Credit

Rwf „000

Bank

113,650

Buildings

400,000

Carriage Inwards

2,000

Proceeds from Sales of Motor Vehicles

9,000

Retained Earnings at 31.12.09

110,610

Debentures 3%

200,000

Repairs & Maintenance

4,560

Plant & Machinery

45,000

Insurance

11,500

Trade Receivables/Trade Payables

40,000

38,500

Land

200,000

Advertising

12,300

Plant & Machinery Accumulated Depreciation at

31.12.2009

15,000

Travel Expenses

3,600

Motor Vehicles

35,000

Buildings Accumulated Depreciation at 31.12.2009

150,000

Opening Inventory

35,000

Purchases

312,000

Carriage Outwards

1,350

Telephone

8,400

Rent

10,000

Provision for Bad Debts

7,000

Revaluation Surplus

10,000

Motor Vehicles Accumulated Depreciation at

31.12.2009

12,000

Revenue

415,000

Bank Loan – Long-Term

205,000

Revenue Returns/Purchases Returns

2,000

1,000

Other Reserves

15,000

Share Capital – 100,000 shares at Rwf l each

100,000

Wages & Salaries

51,750

1,288,110

Page 13

The following information, based on your investigations, has also come to your attention;

i) An inventory count at year-end showed that the Closing Inventories at cost

amounted to

Rwf

42,650,000. There are slow moving goods at cost included in

this figure amounting to

Rwf

5,000,000. It is estimated that these will need to

be sold at a 50% discount on selling price in order to sell them. CRA Limited

sells at a mark-up of 20% for these goods.

ii) During January 2010, the company realised that the Closing Inventory at 31

December 2009 was overstated by

Rwf

3,100,000.

iii) Depreciation is to be charged as

follows:

Buildings 4% on Cost

Plant & Machinery 10% on Cost

Motor Vehicles 15% Reducing Balance

Depreciation is charged in full in year of purchase and none in year of sale.

Round all depreciation amounts to the nearest thousand francs.

iv) The Land and Buildings were revalued at 31 December 2010 to

Rwf

180,000,000 and Rwf200,000,000 respectively.

The residual value on buildings is expected to be

Rwf

50,000,000.

v) The proceeds on the sale of Motor Vehicles, in the trial balance, relates to the

disposal on 30 June 2010 of a motor vehicle which was purchased for

Rwf

20,000,000 on 1 June 2008.

vi) The Corporation tax bill for the year 2010 is estimated at

Rwf

14,000,000

which has not been provided for in the trial balance on Page 1.

vii) A customer has gone into liquidation and you are advised to write off the full

balance owing of Rwfl,950,000.

viii) Included in wages is an amount of

Rwf

16,000,000 paid to CRA Limited‟s own

staff who built a canteen onto the building during the year.

ix) There are closing accruals for Repairs and Maintenance and Telephone amounting

to

Rwf

640,000 and

Rwf

1,350,000 respectively.

x) The Bad Debt Provision should be changed to 4% of Trade Receivables.

xi) Purchases include an amount of

Rwf

10,000,000 which actually relates to Plant

and Machinery. This Plant & Machinery was purchased on 1 July 2010.

xii) Provide for the Debenture Interest outstanding at the year-end.

Page 14

REQUIRED:

Prepare, for internal use, a Statement of Comprehensive Income and Statement of Financial

Position for CRA Limited for the financial year-ending 31 December 2010.

(30 Marks)

[Total: 40 Marks]

QUESTION 2

(a) State the objective of financial statements as per the IASB‟s Framework for the

Preparation and Presentation of Financial Statements.

(3 Marks)

(b) Discuss three issues that may arise in relation to the provision of relevant and reliable

information in financial statements.

(3 Marks)

(c) Describe and discuss the qualitative characteristics of financial statements as identified

in the Framework.

(14 Marks)

[Total: 20 Marks]

QUESTION 3

A cousin of yours, who runs a business, DLLA Limited, is looking for some advice in

relation to the recognition of revenue in financial statements. They have heard of IAS 18

Revenue but are unsure how to apply it to their business. They have asked for your

advice as they know that you are currently studying to be an accountant. Your cousin

has asked you to provide a report to him on the following queries:

(a) Describe the conditions that should be satisfied before Revenue from the rendering

of services should be recognised in the financial statements.

(6 Marks)

(b) State how Revenue should be measured in the financial statements.

(2 Marks)

(c) Discuss, under the following examples, what the accounting treatment should be and

whether Revenue should be recognised or not in the financial statements for the year-

end 31 December 2010:

(i) On 18 December 2010, DLLA had received

Rwf

10,000,000 in relation to

goods which are due to be shipped on 6 January 2011 to Burundi. At the year-

end, the goods are still in the warehouse of DLLA Limited.

(ii) On 15 December 2010, DLLA sold goods to a customer amounting to

Rwf

3,000,000. The customer will pay for these goods on 20 January 2011. The

cost of the goods sold was

Rwf

2,000,000.

Page 15

(iii) On 1 December 2010, DLLA sold goods to a new customer in Zambia. DLLA are

trying to break into this market and have done a deal with the new customer

whereby the customer has the right to return any unsold goods before 31 March

2011 for a full refund. The amount of the goods sold was

Rwf

25,000,000.

(iv) On 20 December 2010, DLLA sold goods, amounting to

Rwf

8,000,000 to a

customer who normally gets 30 days credit. The goods were ready for delivery

to the customer on that date but the customer did not want delivery of the goods

until 4 January 2011 as he was going on holidays over the Christmas period. The

customer has accepted an invoice for the goods dated 20 December 2010. The

customer paid for the goods on 5 January 2011. (12 Marks)

[Total: 20 Marks]

QUESTION 4

The treasurer of a Golf Club near Lake Kivu has produced the following receipts and

payments for the year- ended 31 December 2010.

Receipts

Rwf „000

Payments

Rwf „000

Balance at 1 January 2010

20,000

Bar Payments

27,000

Subscriptions

83,000

Wages & Salaries – Clubhouse

36,000

Bar Receipts

42,000

Wages & Salaries – Bar

10,000

Green Fees

36,000

Course Repairs

19,000

Event Receipts

11,000

Insurance

9,000

Competition Fees

5,900

Utilities (Electricity & Water)

6,000

Telephone

2,500

Event Expenses

6,000

Sundry Expenses

1,900

Competition Expenses

1,600

Balance at 31 December 2010

78,900

197,900

1.

The following information is available:

01/01/2010

31/12/2010

Rwf „000

Bar Trade Payables

9,000

7,000

Bar Inventory

7,000

5,000

Subscriptions in Arrears

2,000

3,500

Subscriptions in Advance

7,000

4,500

Telephone Due

500

750

Competition Expenses

Due

400

500

2. At 1 January 2010, the following assets were identified at cost:

Rwf

Page 16

Clubhouse & Course 400,000

Fixtures & Fittings 70,000

Course Equipment 160,000

3. The depreciation rates are as follows:

Fixtures & Fittings 10% of Cost

Course Equipment 20% of Cost

4. Course equipment was disposed of during the year for a scrap value of

Rwf

2,500,000.

The equipment originally cost

Rwf

7,000,000 on 1 January 2006.

5. There is no depreciation in the year of sale.

6. The insurance paid for the year covers the period to 30 September 2011. The insurance

for the previous year to 30 September 2010 amounted to

Rwf

6,000,000.

REQUIRED:

(a) Prepare a Bar Trading Account for the year-ended 31 December 2010. (6 Marks)

(b) Prepare an Income & Expenditure Account for the year-ended 31 December 2010. (14

Marks)

[Total: 20 Marks]

Page 17

QUESTION 5

R.A.H. Limited is a company which is involved in the retail trade with a number of shops in

prime city centre locations. The following are their results for the last two years.

2010

2009

Rwf m

Sales

23,200

15,960

Cost of Sales

16,492

11,452

Gross Profit

6,708

4,508

Distribution Costs

356

298

Administration Costs

872

504

Profit before Interest & Tax

5,480

3,706

Taxation

432

484

Interest

752

1,184

772

1,256

Net Profit for the Year

4,296

2,450

Dividends

200

Profit Retained

4,096

2,250

R.A.H. Limited Statement of Financial Position for the Year-ended 31 December

2010

2009

Rwf m

Non-Current Assets

14,040

13,304

Current Assets

Inventory

2,784

1,860

Trade Receivables

2,084

1,000

Cash & Cash Equivalents

800

600

Total Current Assets

5,668

3,460

Total Assets

19,708

16,764

Equity & Liabilities

Equity

Share Capital

4,000

Retained Earnings

6,308

2,212

Total Equity

10,308

6,212

Non-Current Liabilities

Long-term Debt

5,750

8,000

Total Non-Current

Liabilities

5,750

8,000

Current Liabilities

Trade Payables

1,600

1,368

Bank Overdraft

1,196

48

Taxation

432

484

Dividends

200

Accruals

222

452

Total Current Liabilities

3,650

2,552

Total Equity & Liabilities

19,708

16,764

Page 18

Notes:

(i) The opening inventory for 2009 was Rwf2,000,000,000

(ii) The number of shares in issue is 40,000,000 for both years

(iii) Current share price per share 2010 2009

Rwf2,500 Rwf800

REQUIRED:

(a) Calculate, for both years, the following ratios in relation to R.A.H. Limited:

1) Gross Profit Percentage

2) Net Profit Percentage

3) Quick Ratio

4) Trade Receivable Days

5) Trade Payable Days

6) Interest Cover

7) Earnings Per Share

8) Price Earnings Ratio (8 Marks)

(b) Draft a report to the Board of Directors of R.A.H. Limited in which you provide a

commentary on the company‟s position and performance. Use the ratios calculated at

(a) above as the basis for your commentary.

(10 Marks)

(Format and Presentation: 2 marks)

[Total: 20 Marks]

Page 19

QUESTION 6

(a) Identify and explain both the main advantages and obstacles to the harmonisation of

international accounting.

(10 marks)

(b) The following trial balance was extracted from the books of GTM Limited as at 31st

December 2010:

Debit

Credit

Rwf

„000

Rwf „000

Accruals

2,000

Bank

65,000

Bank Loan – Long-Term

455,000

Buildings

800,000

Buildings Accumulated Depreciation at 31.12.2009

200,000

Carriage Inwards

20,000

Corporation Tax

5,000

Debentures 4%

200,000

Debenture Interest

1,500

Fixtures & Fittings

75,000

Fixtures & Fittings Accumulated Depreciation at 31.12.2009

15,000

Insurance

23,000

Intangible Assets

80,000

Land

450,000

Utilities (Electricity & Water)

1,000

Marketing

24,000

Motor Expenses

5,600

Office Equipment

150,000

Office Equipment Accumulated Depreciation at 31.12.2009

45,000

Opening Inventory

50,000

Other Reserves

43,000

Proceeds from Sales of Office Equipment

4,000

Provision for Bad Debts

4,000

Purchases

450,000

Rates

14,000

Rent

12,000

Repairs & Maintenance

7,900

Retained Earnings

150,000

Revaluation Surplus

20,000

Revenue

950,000

Revenue Return/Purchases Returns

19,000

10,000

Share Capital – 100,000 shares at Rwf1,000 each

100,000

Share Premium

5,000

Suspense

15,000

Trade Receivable/Trade Payable

80,000

48,500

Wages & Salaries

73,500

2,336,500

Page 20

The following information, based on your investigations, has also come to your attention:

(i) Inventory was actually counted on the 31st December 2010 and amounted to Rwf55,000,000.

Included in inventory were goods damaged pre year-end which had cost Rwf15,000,000 when

originally purchased. To be in a position to sell these goods for an amount greater than scrap

value, the inventory will require correctional work costing Rwf2,500,000 and consequently, the

damaged goods would then be in a position to be sold for Rwf12,000,000.

(ii) Depreciation is to be charged as follows:

Buildings

2% on Cost

Office

Equipment

10% on Cost

Fixtures &

Fittings

20% Reducing

Balance

Depreciation for the year is charged in full in the year of purchases and none in the year of

sale.

(iii) The proceeds on the sale of Office Equipment, in the trial balance, relates to the disposal on

the 1st October 2010 of some office equipment which was purchased for Rwf20,000,000 on

1st January 2006.

(iv) The Corporation tax bill for the 2010 year is estimated at Rwf25,000,000 which has not been

provided for in the above trial balance

(v) A payment of Rwf13,000,000 for Corporation Tax was made on the 31st December 2010 by

cheque. This transaction has not been included in the above trial balance.

(vi) It has been established that the accrual in the trial balance relates to Motor Expenses and that

the figure relates to the opening accrual at the 1st January 2010. The figure for Motor

Expenses in the trial balance relates to the Motor Expenses paid by cheque throughout the

year.

(vii) There are closing accruals for Motor Expenses and Utilities amounting to Rwf1,500,000 and

Rwf750,000 respectively.

(viii) There were Bad Debts recovered of Rwf2,000,000 lodged to the bank account which have yet

to be included in the closing financial statements.

(ix) Due to the current uncertain trading environment, the Bad Debt Provision should be increased

to 6% of Trade Receivables.

(x) Purchases include an amount of Rwf10,000,000 which actually relate to Office Equipment.

This Office Equipment was purchased on the 1st July 2010.

(xi) 5,000 new shares were issued during the year. The shares were sold at a price of Rwf3,000

each. The book keeper of GTM Limited, unsure as to how to account for this transaction,

debited the Bank with Rwf15,000,000 and credited Suspense with Rwf15,000,000.

(xii) Provide for the Debenture Interest outstanding at the year-end.

Page 21

REQUIREMENT:

Prepare, for internal use, a Statement of Comprehensive Income and Statement of Financial

Position for GTM Limited for the financial year-ending 31st December 2010. All workings should

be shown.

(30 marks)

[Total: 40 Marks]

Page 22

QUESTION 7

The Managing Director of the company you work for has recently been approached by a client,

Zacnet Limited with some specific issues in relation to IAS 38 Intangible Assets. She has asked you

to prepare a report based on the following aspects that the client company has requested advice on.

(a) State the required accounting treatment per IAS 38 in relation to the measurement of

Intangible Assets at recognition for the following scenarios:

(8 Marks)

(i) Zacnet is considering making a separate acquisition of an intangible asset for Rwf80

million. The fair value of the intangible asset has been independently valued at Rwf100

m.

(ii) Zacnet has generated internal goodwill of Rwf50 m.

(iii) The government has granted to Zacnet a broadband licence for ten years for Rwf1

million due to the fact that the government wishes to promote broadband usage in

Rwanda. Zacnet will incur Rwf99 m in expenditure directly attributable to preparing the

asset for its intended use. Zacnet has received an independent valuation from an expert

in valuing broadband licences who has valued the licence as being worth Rwf350 m.

(iv) Zacnet is currently researching the possibility of developing a new product which

enhances a broadband signal in remote areas. In the last year, Zacnet has spent Rwf72m

on researching this product.

(b) Zacnet believes that they will shortly begin the development phase in relation to the enhanced

broadband signal. They are unsure of how to account for any expenditure incurred during this

phase and have asked for guidance.

Describe the conditions which must be satisfied to allow expenditure to be capitalised in

relation to the development phase of internally generated intangibles. (7 Marks)

(c) Zacnet has a publishing department as part of its business where they publish magazines aimed

at the „mother and baby‟ market. In the draft financial statements for the period ended 31st

December 2011, Rwf35m was spent on a brand new company logo for their flagship

magazine in this segment. The accountant in Zacnet has proposed to include this expenditure

as an Intangible Asset in the accounts of the company and to amortise it by 10% this year.

The projected net profit before this adjustment is Rwf1,452 m.

(i) Outline whether the accounting treatment of the expenditure on the company logo is

correct in accordance with IAS 38 and

(ii) Show the Actual Profit for the year based on your answer to (c) (i) above. (5 Marks)

[Total: 20 Marks]

Page 23

QUESTION 8

(a) In relation to the measurement at recognition of IAS16 Property, Plant and Equipment,

outline the elements of cost which are allowed to be recognised. (4 Marks)

(b) Explain, in the context of IAS 16, what is meant by any three (3) of the following terms;

(i) Depreciation;

(ii) Carrying value;

(iii) Fair value of an asset;

(iv) Impairment loss;

(v) Residual value. (4 Marks)

(c) Explain the accounting treatment allowed for the measurement after recognition of

Property, Plant & Equipment as per IAS 16.

(2 Marks)

(d) In relation to IAS 16, describe the accounting treatment necessary for the financial year-

ending 31st December 2009 and 31st December 2010, based on the following information;

(i) A building costing Rwf300m which is not being depreciated was revalued at the 31st

December 2009 to Rwf400 m.

(ii) The same building was revalued on the 31st December 2010 at Rwf250 m.

(5 Marks)

(e) Calculate the depreciation for MNL Limited for the year-ended 31st December 2010 based

on the following information:

MNL Limited purchased a building on the 1st January 2005 costing Rwf500m. The asset

was depreciated at the rate of 5% per annum straight line. On the 1st January 2010, the asset

was revalued to Rwf800m and the valuer estimated that the residual value would be Rwf200

m. The useful life has not changed as a result of the revaluation. (5 Marks)

[Total: 20 Marks]

Page 24

QUESTION 9

Mr Michael Nolan operates a furniture shop in Kigali with the majority of his business being to

trade but he also has some cash sales to the general public. Michael does not keep a full and proper

set of accounts and has recently transferred his business to you, his personal friend, knowing that

you are currently studying accounting. After careful investigation, the following information has

been obtained covering the year-ended 31st December 2010:

(i)

Assets & Liabilities at 31st December 2009 were as follows:

Rwf '000

Premises

Cost

100,000

Accumulated Depreciation

40,000

Office Equipment

Cost

16,000

Accumulated Depreciation

4,000

Inventory

40,000

Cash

1,200

Bank

11,200

Trade Receivables

4,800

Prepayment (Insurance)

800

Trade Payables

11,200

Bank Loan (repayable over 5 years)

12,000

Accruals (Rent)

1,200

(ii) During the year, Michael has maintained that the bulk of the receipts from sales were

lodged to the bank account. The bank statement reveals that Rwf31,600,000 was lodged

to the account in relation to credit sales for the full year. The closing balance at the year-

end in relation to cash amounted to Rwf1,600,000. Michael has said that he took

Rwf1,600,000 and Rwf800,000 in drawings from the cash till during the year. The

closing trade receivables balance amounted to Rwf4,000,000.

(iii) Michael makes a gross profit of 25% on the sales value of everything he sells and his

sales occur evenly throughout the year.

(iv) On the night of the 31st July, there was a burglary at the shop and inventory was stolen.

In trying to establish how much inventory was stolen, Michael was able to say that:

(a) He knew from his bank statements that he has paid Rwf8,800,000 to trade payables

in the seven month period to 31st July 2010.

(b) He had trade payables due at the 31st July 2010 amounting to Rwf10,400,000.

(c) He performed an inventory count on the following day after the burglary and

calculated inventory at Rwf36,000,000.

(v) On the 31st October, Michael had to scrap Rwf1,200,000 worth of inventory owing to

water damage. His insurance company has confirmed to him that he will be covered in

full for the furniture scrapped.

(vi) Purchases for the full year amounted to Rwf25,700,000.

Page 25

REQUIREMENTS:

For the year ended 31st December 2010:

(a) Calculate the opening capital position at the 1st January 2010 for Mr. Michael Nolan by preparing

an opening statement of financial position.

(5 Marks)

(b) Calculate the amount of inventory stolen, the cost of the closing inventory and the gross profit for

the year-ended 31st December 2010.

(15 Marks)

[Total: 20 Marks]

Page 26

QUESTION 10

BLM Limited is a manufacturer of concrete products for the roads industry and its

accounts are as follows

BLM Limited Statement of Financial Position as at 31st December 2010

2010

2009

Rwf m

Non-Current Assets

Property, Plant & Equipment

66,300

55,600

Development Expenditure

4,360

200

Investment Properties

20,200

20,000

Total Non-Current Assets

90,860

75,800

Current Assets

Inventories

8,900

9,200

Trade Receivables

14,320

12,300

Cash

2,130

-

Total Current Assets

25,350

21,500

Total Assets

116,210

97,300

Equity & Liabilities

Equity

Share Capital

72,000

60,000

Share Premium

9,600

8,000

Retained Earnings

2,620

590

Revaluation Surplus

2,800

800

Total Equity

87,020

69,390

Non-Current Liabilities

Bank Loans

18,500

12,100

Total Non-Current Liabilities

18,500

12,100

Current Liabilities

Trade Payables

9,340

10,050

Bank Overdraft

-

4,560

Corporation Tax

1,350

1,200

Total Current Liabilities

10,690

15,810

Total Equity & Liabilities

116,210

97,300

Page 27

BLM Limited Statement of Comprehensive Income for the year-ended 31st December

2010

Rwf m

Revenue

23,400

Cost of sales

18,910

Gross Profit

4,490

Distribution Costs

(1,129)

Administration expenses

(891)

Interests costs

(450)

Investment income

357

Profit before tax

2,377

Corporate tax – expense

(297)

Profit for year

2,080

Other comprehensive Income

Gains on property revaluation

2,000

Total Comprehensive Income

4,080

i. Property, Plant & Equipment with a book value of Rwf2,050 m was sold

for Rwf1,800 million

ii. Depreciation of Property, Plant & Equipment during the year

amounted to Rwf2,150,000,000.

iii. Dividends paid during the year amounted to Rwf50,000,000.

REQUIREMENT

Prepare a cash Flow Statement for the year ended 31st December 2010 for BLM Limited

Page 28

SUGGESTED SOLUTIONS

SOLUTION 1

(a)

Investors: These are concerned with the risk inherent in and return provided by their

investments. They need information to help them determine whether they should buy, hold

or sell as well as assessing the ability of the entity to pay dividends.

(2 Marks)

Employees: They are interested in information about the stability and profitability of their

employers. They are also interested in information which enables them to assess the ability of

the entity to provide remuneration, retirement benefits and employment opportunities.

(2 Marks)

Suppliers: These are interested in information that enables them to determine whether

amounts owing to them will be paid when due.

(2 Marks)

Government and Agencies: These are interested in the allocation of their country‟s resources

and, therefore, the activities of entities. They also require information in order to regulate the

activities of entities, determine taxation policies and as the basis for national income and

similar statistics.

(2 Marks)

Public: Financial statements may assist the public by providing information about the trends

and recent developments in the prosperity of the entity and the range of its activities.

(2 Marks)

[Total: 10 Marks]

Page 29

b)

CRA Limited Statement of Comprehensive Income for the year-ended 31st December 2010

Notes

Rwf

„000

Rwf „000

Rwf‟

„000

Marks

Revenue

415,000

- Revenue Returns

-2,000

413,000

0.25

Cost of Sales

Opening Inventory

W1.ii

35,000

-3,100

31,900

+ Purchases

312,000

Cost of

Sales

- Plant & Machinery

W1.xi

-10,000

1.5

- Purchases Returns

-1,000

301,000

+ Carriage Inwards

2,000

- Closing Inventory

W1.ii

-40,650

Cost of Sales Total

294,250

Gross Profit

118,750

0.25

Other Income

W4

-5,478

Repairs & Maintenance

W1.ix

4,560

640

5,200

Insurance

11,500

Advertising

12,300

Travel Expenses

3,600

Expenses

Carriage Outwards

1,350

2.5

Telephone

8,400

1,350

9,750

Rent

10,000

Wages & Salaries

W1.viii

51,750

-16,000

35,750

Loss on Sale of Motor

Vehicle

W2

5,450

Bad Debt Write Off

W1.viii

1,950

Depreciation - Buildings

W2

16,640

Depreciation - Plant &

Machinery

W2

5,500

Depreciation - Fixtures &

Fittings

W2

1,283

Debenture Interest

W1.xii

6,000

Revaluation Loss on Land &

Buildings

W3

59,360

Profit/(Loss) before Tax

-61,405

Income Tax Expense

W1.viii

14,000

0.25

PROFIT/(LOSS) FOR THE

YEAR

-75,405

0.25

Other Comprehensive

Income

-10,000

Revaluation Loss on Land &

Buildings

W3

-10,000

Other Comprehensive

Income for the year, net of

tax

0.25

Page 30

TOTAL

COMPREHENSIVE

INCOME FOR THE YEAR

-85,405

0.25

CRA Limited Statement of Financial

Position as at 31st December 2010

Notes

Rwf

„000

Rwf „000

Rwf

„000

Rwf „000

Non-Current Assets

Property, Plant & Equipment

W2

421,767

Total Non-Current Assets

421,767

0.25

Current Assets

Inventories

W1.i

40,650

0.25

Trade Receivables

W1.x

36,528

0.25

Cash & Cash Equivalents

113,650

0.25

Total Current Assets

190,828

0.25

TOTAL ASSETS

612,595

0.25

Equity & Liabilities

Equity

Share Capital

100,000

0.25

Other Reserves

15,000

0.25

Retained Earnings

W1.ii

110,61

0

-3,100

-

75,40

5

32,105

0.25

Revaluation Surplus

W3

10,000

-

10,00

0

-

0.25

Total Equity

147,105

0.25

Non-Current Liabilities

Debentures

200,000

0.25

Bank Loan

205,000

0.25

Total Non-Current Liabilities

405,000

0.25

Current Liabilities

Trade Payables

38,500

0.25

Corporation Tax

W1.vi

14,000

0.25

Accruals

W5

7,990

0.25

Total Current Liabilities

60,490

0.25

TOTAL EQUITY &

LIABILITIES

612,595

TOTAL MARKS

10

Working - Journal Entries

Working - Closing

Inventory

Rwf

„000

Rwf

„000

Total Inventories at Cost

per Inventory Count

42,650

Slow Moving goods –

Cost

5,000

Page 31

NRV - 50% of Selling

Price Note 1

-3,000

Inventory Write Down

2,000

Value of Closing

Inventories

40,650

Note 1

Cost

5,000

Markup - 20% of Cost

i.e. 20% *E5,000

20%

1,000

Selling Price

6,000

50% of Selling Price -

6,000 * 50%

50%

3,000

Rwf

'000

Rwf

'000

1.i

Dr

Inventory

+Current

Assets

SOFP

40,650

3.0

Cr

Closing Inventory

- cost of sales

IS

4,650

1.ii

Dr

Retained Earnings

- Enquiry

SOFP

3,100

1.5

Cr

Opening Inventory

Cost of Sales

IS

3,100

1.vi

Dr

Corporation Tax

+Expenses

IS

14,000

1.0

Cr

Corporation Tax Due

+ Current

Liabilities

SOFP

14,000

1.vii

Dr

Bad Debt Write Off

+ Expenses

IS

1,950

1.0

Cr

Trade Receivables

- Current

Assets

SOFP

1,950

1.viii

Cr

Building

+ Non-current

Assets

SOFP

16,000

1.0

Cr

Wages

- Expenses

IS

16,000

1.ix

Dr

Repairs & Maintenance

+ Expenses

IS

640

1.0

Dr

Telephone

+ Expenses

IS

1,350

Cr

Accruals

+ Current

Liabilities

SOFP

1,990

1.x

Dr

Trade Receivables

+ Other

Income

IS

5,478

2.0

Cr

Decrease in Bad Debt

Provision

+ Other

Income

SOFP

5,478

Note 2

Trade Receivables

Balance per TB

40,000

- Bad Debt Write Off

W1.vii

-1,950

38,050

- Bad Debt Provision

1,522

Revised Trade

Receivables

36,528

Page 32

Current Bad Debt

Provision TB

7,000

New Bad Debt Provision

See Above

1,522

Decrease in Bad Debt

Provision

-5,478

1.xi

Dr

Plant & Machinery

+ Non-curerent

Assets

SOFP

10,000

Cr

Purchases

- Cost of Sales

IS

10,000

1.0

1.xiii

Dr

Debenture Interest

+ Expenses

IS

6,000

Cr

Debenture Interest Due

+Current

Liabilities

SOFP

6,000

1.0

Debentures

200,000

Interest for the year at

3%

6,000

Current Marks

12.5

Working 2 - Property, Plant & Equipment Plant & Motor

Land

Buildings

Plant &

machinery

Motor

Vehicles

Total

Rwf „000

Cost

200,000

400,000

45,000

35,000

680,000

Accumulated

Depreciation b/d

-150,000

-15,000

-12,000

-177,000

Net Book Value b/d at

1st January 2010

200,000

250,000

30,000

23,000

503,000

.25

Disposal - Cost

Note

1

-

-20,000

.25

Disposal -

Accumulated

Depreciation at 1.1.10

Note

1

-5,550

.25

Additions

W1.viii/(W1.xi)

W1.vi

ii

16,000

10,000

26,000

.50

Carrying Value

200,000

266,000

40,000

8,550

514,550

Depreciation -

Buildings - 4% of Cost

16,640

.25

Depreciation - Plant

& Machinery - 10% of

Cost

5,500

.25

Depreciation - Motor

Vehicles - 15% of R.

Bal

Note

2

1,283

.25

200,000

249,360

34,500

7,267

491,127

Revaluation Loss

-20,000

-49,360

-69,360

1.0

Net Book Value c/d at

31st December 2010

180,000

200,000

34,500

7,267

421,767

Note 1 - Disposal of

Page 33

Motor Vehicles

Cost

20,000

Accumulated Depreciation -

15% on Reducing Balance per

annum

Depreciation 2008

3,000

Depreciation 2009

2,550

5,550

-5,550

Net Book Value of Office

Equipment disposed

14,450

Disposal Account

Cost

20,000

Accumulated Depreciation

5,550

Disposal proceeds

9,000

Loss on disposal

5,450

20,000

Note 2 - Depreciation of Motor Vehicles

Cost

Acc.

Dep‟n

NBV

Rwf „000

Balance b/d

35,000

-12,000

23,000

Disposal

-20,000

5,550

-14,450

Carrying Value

15000

-6450

8550

1.00

Depreciation at 15% Reducing

Balance

1,283

Working 3 - Revaluation Loss

1.50

Total Revaluation Loss

69,360

Revaluation Surplus b/forward

10,000

Excess Revaluation Loss

59,360

Working 4 - Other Income

Decrease in Bad Debt

Provision

W1.x

5,478

Closing balance

5,478

1.00

Working 5 - Accruals

Repairs & Maintenance W1.ix

640

W1.ix

640

Telephone W1.ix 1,350

W1.ix

1,350

Debenture Interest W1.xii

6,000

W1.xii

6,000

7,990

Current marks 7.5

Page 34

Adjustment

Income Statement

SOFP

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

Rwf „000

Bank

113,650

Buildings

400,000

16,000

49,360

366,640

Carriage inwards

2,000

Process form sale of motor

vehicles

9,000

20,000

5,550

5,450

Retained earnings

110,610

62,460

16,045

32,105

Debentures 3%

200,000

Repairs & maintenance

4,560

640

5,200

Plant & machinery

45,000

10,000

55,000

Insurance

11,500

Trade Receivables/Trade

Payables

40,000

38,500

1,950

38,050

38,500

Land

200,000

20,000

180,000

Advertising

12,300

Plant & machinery Acc dep'n

at 31-12-2009

15,000

5,500

20,500

Travel expenses

3,600

Motor vehicles

35,000

20,000

15,000

Buildings Acc dep'n at 31-12-

2009

150,000

16,640

166,640

Opening inventory

35,000

3,100

31,900

40,650

Purchases

312,000

10,000

302,000

Carriage outwards

1,350

Telephone

8,400

1,350

9,750

Rent

10,000

Provision for Bad debts

7,000

5,478

1,522

Revaluation surplus

10,000

Page 35

[Total marks 20.0]

Motor vehicles Acc Dep'n at

31-12-2009

12,000

5,550

1,283

7,733

Revenue

415,000

Bank loan - long term

205,000

Revenue returns/purchase

returns

2,000

1,000

2,000

1,000

Other reserves

15,000

Share capital 100,000 shares

at Rwf 1 each

100,000

Wages & salaries

51,750

16,000

35,750

Debenture interest

6,000

Corporation tax

14,000

Bad debt write-off

1,950

Accruals

7,990

1,288,110

153,428

478,173

808,990

Page 36

SOLUTION 2

a) The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an entity that is useful to a wide

range of users in making economic decisions

(3 Marks)

b)

Timeliness

If there is undue delay in the reporting of information, it may become superseded by events

after the reporting period. Management need to balance the relative merits of timely

reporting and the provision of reliable information. To provide information on a timely

basis it may often be necessary to report before all aspects of a transaction or other event are

known, thus impairing reliability. Conversely, if reporting is delayed until all aspects are

known, the information may be highly reliable but of little use to those who have had to make

decisions in the interim.

Balance between Benefit and Cost

The balance between benefit and cost is an important constraint. The benefits derived from

information should exceed the cost of providing it. The evaluation of benefits and costs is,

however, substantially a judgemental process. Furthermore, the costs do not necessarily fall

on those users who enjoy the benefits. There is also the case that benefits may also be

enjoyed by users other than those for whom the information is prepared. For these reasons, it

is difficult to apply a cost-benefit test in any particular case but preparers and users of

financial statements should be aware of this constraint.

Balance between Qualitative Characteristics

In practice, a trade-off between qualitative characteristics is often necessary. Generally, the

aim is to achieve an appropriate balance among the characteristics in order to meet the

objective of financial statements. The relative importance of the characteristics in different

cases is a matter of professional judgement.

(3 Marks)

c) The four principal qualitative characteristics as per the Framework are: Understandability,

Relevance, Reliability and Comparability

Understandability

Users must be able to understand financial statements. They are assumed to have a reasonable

knowledge of business and economic activities and accounting and a willingness to study

the information properly. Complex matters, if relevant for decision-making, should not be

left out of financial statements because they are difficult to understand.

Relevance

To be useful information must be relevant to the decision-making needs of users. Information

has the quality of relevance when it influences the economic decisions of users by helping

them evaluate past, present or future events or confirming or correcting their past

evaluations. The relevance of information is affected by its nature and materiality. In some

Page 37

cases, the nature of information alone is sufficient to determine its relevance. In other cases,

both the nature and materiality are important. Information is material if its omission or

misstatement could influence the economic decisions of users taken on the basis of the

financial statements.

Reliability

To be useful, information must also be reliable. Information has the quality of reliability

when it is free from material error and bias and can be depended upon by users to represent

faithfully that which it either purports to represent or could reasonably be expected to

represent. Information may be relevant but so unreliable in nature or representation that its

recognition may be potentially misleading. Key elements of reliability include:

(i) Faithful Representation

(ii) Substance over Form

(iii)Neutrality

(iv) Prudence

(v) Completeness

Comparability

Users must be able to compare the financial statements of an entity through time in order to

identify trends in its financial position and performance. Users must also be able to compare the

financial statements of different entities in order to evaluate their relative financial position,

performance and changes in financial position. Hence, the measurement and display of the

financial effect of like transactions and other events must be carried out in a consistent way

throughout an entity and over time for that entity and in a consistent way for different

entities. The need for comparability should not be confused with mere uniformity. It is

inappropriate for an entity to leave its accounting policies unchanged when more relevant and

reliable alternatives exist. It is important that the financial statements should corresponding

information for the preceding periods.

(14 Marks)

[Total: 20 Marks]

Page 38

SOLUTION 3

REPORT

To: Managing Director DLLA Ltd.

From: Financial Accountant

Re: IAS 18

Date: September 2011

a) Per paragraph 20 of IAS 18, when the outcome of a transaction involving the

rendering of services and supply of goods can be estimated reliably, revenue associated with

the transaction shall be recognised by reference to the stage of completion of the transaction at

the end of the reporting period. The outcome of a transaction can be estimated reliably when all

of the following conditions are satisfied:

i) The amount of revenue can be measured reliably;

ii) It is probable that the economic benefits associated with the transaction will flow to

the entity;

iii) The stage of completion of the transaction at the end of the reporting period can be

measured reliably;

and

iv) The costs incurred for the transaction and the costs to complete the transaction can

be measured reliably.

(6 Marks)

b) Per paragraph 9 of IAS 18, revenue shall be measured at the fair value of consideration

received or receivable

(2 Marks)

c) i) This should not be recognised as revenue from a sale in the 2010 financial statements

as per paragraph 14 (a) of IAS 18, the significant risks and rewards of ownership of the goods

has not been transferred to the customer in Burundi as the goods are still in DLLA‟s

warehouse at the year-end. Therefore, the

Rwf

10,000,000 received should be included as a

Prepayment in Current Assets at the year-end and the goods should be included in Closing

Inventory at the year-end.

(3 Marks)

ii) This is a normal sale as it fulfils all the requirements of a sale of goods as per paragraph

14 of IAS 18; i.e. risks and rewards transferred, amount of revenue can be reliably measured,

costs incurred can be reliably measured, DLLA has no longer any managerial involvement

over the goods or does not control the goods sold and DLLA received the economic benefits of

the transaction i.e. received payment on the 20th January 2011. The accounting treatment is to:

Dr. Trade Receivables – Current Assets - SOFP

Rwf

3,000,000

Cr. Revenue – Income Statement -

Rwf

3,000,000

Dr. Inventory - Cost of Sales – Income Statement

Rwf

2,000,000

Cr. Inventory – Current Assets – SOFP

Rwf

2,000,000

(3 Marks)

Page 39

iii) This transaction, like c i) above, should not be recorded as revenue in the 2010

financial statements as the significant risks and rewards of ownership of the goods have not

been transferred to the customer in Zambia in that they can return the goods before the

31st March 2011 if they are not sold. Consequently, the goods remain in DLLA‟s

inventories until confirmation has been received from the customer in Zambia that they have

been sold on and any money received pre year-end is treated as a Prepayment in Current

Assets at the year-end. (3 Marks)

iv) As per Section 1 of Appendix to IAS 18, this is treated as a „Bill and Hold‟ Sale in

which delivery is delayed at the buyer‟s request but the buyer takes title and accepts billing.

Revenue is recognised when the buyer takes title, provided:

1) It is probable the delivery will be made

2) The item is on hand, identified and ready for delivery to the buyer at the time the sale is

recognised

3) The buyer specifically acknowledges the deferred delivery instructions and

4) The usual payment terms apply

Seeing as the above conditions have been satisfied in this case, the goods will be treated as

revenue in the financial statements for the 2010 year i.e.

Dr. Trade Receivables – Current Assets - SOFP

Rwf

8,000,000

Cr. Revenue – Income Statement -

Rwf

8,000,000

(3 Marks)

I hope that the above responses clarify and answer your queries. If you have any further

queries, please do not hesitate to contact me.

Yours sincerely,

Financial Accountant

[Total: 20 Marks]

Page 40

SOLUTION 4

The Golf Club - Bar trading account for the year ended 31st December 2012

Rwf „000

Sales

42,000

1.00

Less Cost of Sales

Opening inventory

7,000

+ Purchases

25,000

1.00

- Closing inventory

-5,000

27,000

1.00

Gross Profit

15,000

1.00

Expenses

Bar staff wages

10,000

Total expenses

10,000

1.00

5,000

1.00

The Golf Club - Income & Expenditure Account for the year ended 31st December

2012

Income

Subscriptions

87,000

1.00

Green fees

36,000

0.50

Profit on bar

5,000

1.00

Profit on sale of course equipment

1,100

1.00

Profit on Competition

4,200

1.00

Profit on events

5,000

1.00

Total Income

138,300

0.50

Expenditure

Wages & Salaries - Clubhouse

36,000

1.00

Course repairs

19,000

1.00

Insurance

6,750

1.00

Light & heat

6,000

1.00

Telephone

2,750

1.00

Sundry expenses

1,900

0.50

Depreciation

37,600

1.00

110,000

0.50

Excess if Income over Expenditure

28,300

1.00

Total marks

20.00

Purchases calculations

Rwf „000

T Payables Bar Account

Bank bar payments

27,000

Balance B/D

9,000

Purchases -

Balancing figure

25,000

Balance C/D

7,000

34,000

Balance B/D

7,000

Page 41

Subscriptions calculation

Subscriptions account

Balance B/D

2,000

Balance B/D

7,000

I&E a/c - Balancing figure

87,000

Bank receipt

83,000

Balance prepaid C/D

4,500

Balancing C/D

owing

3,500

93,500

Competition calculations

Competition account

Bank payments

1,600

Balance B/D

400

I&E a/c Balancing

figure

1,700

Balance C/D

500

2,100

Profit on competitions

Competition receipts

5,900

Competition expenses

-1,700

Profit on competitions

4,200

Insurance calculations

Insurance account

Balance B/D

4,500

Bank payment re

insurance

9,000

I&E balancing figure

6,750

Balance C/D

6,750

13,500

Telephone calculation

Telephone account

Bank payments

2,500

Balance B/D

500

I&E A/c balancing

figure

2,750

Balance C/D

750

3,250

Balance B/D

750

Disposals calculation

Equip't Disposal Account

Cost

7,000

Accumulated dep'n

5,600

Sale proceeds

2,500

Profit on Sale

1,100

8,100

Page 42

Depreciation Calculation

Fixtures & fittings - 10% cost

70,000

x 10%

7,000

Course Equip't - 20% of cost

160,000

- Disposal

7,000

153,000

x 20%

30,600

Total Dep'n for year

37,600

Page 43

SOLUTION 5

a) (Values in Rwf millions except for P/E ratio)

2010 2009

Gross Profit percentage 6,708/23,200=28.91% 4,508/15,960=28.25%

Net profit percentage 4,296/23,200=18.52 2,450/15,960=15.35%

Quick ratio (5,668-2,784)/3,650=0.79:1 (3,460-1,860)/2,552=0.63:1

Trade Receivable – days 2,084/23,200*365=33 days 1,000/15,960*365=23 Days

Trade Payable – days 1,600/16,492*365=35 days 1,368/11452*365=44 days

Interest cover 5,480/752=7.29 times 3,706/772=4.80 times

Earnings per share Rwf4,296m/40m=107.4 Rwf2,450m/40m=61.25

Price earnings ratio Rwf2,500/107.4=23.28 Rwf800/61.25=13.06

Re: Commentary on Company‟s Position and Performance

Date: September 2011

Gross Profit Percentage

The Gross Profit percentage has increased from 28.25% to 28.91%, an increase of over 2.34%

on the percentages year on year which is a positive trend for the company. This is also

positive for the fact that the company revenue increased by over 45%. An increase of this

magnitude presents a challenge for a company and this company has in the main responded

positively to this challenge. The increase resulted from the fact that revenue increased faster

than Cost of Sales (44%). However, this increase in Cost of Sales (Noye 1) is masked to a

degree by the increase in Closing Inventory. If we look at Purchases, these have increased

from

Rwf

11.312 million to

Rwf

17.416 million which is an increase of 53.96%. This

increase is greater than the increase in Revenue and from the Company‟s point of view, we

must hope that this increase is due to ordering Inventory close to year-end to meet further

demand for its products rather than poor ordering or purchasing at a poor price. If it is the

latter, then this could easily affect the 2011 results unless price increases can be passed on.

Note 1

Rwf m

2010

2009

% Increase

Opening Inventory

1,860

2,000

-7.00%

Purchases (Balancing Figure)

17,416

11,312

53.96%

Closing Inventory

2,784

1,860

49.68%

Cost of Sales

16,492

11,452

Net Profit Percentage

The Net Profit % has increased from 15.35% to 18.52% which is an increase of nearly

21% year on year on the percentages. This is an extremely good performance. The main

reason for the increase is due to the increase in Revenue which has meant that the Gross Profit

has increased from

Rwf

4.508 million to

Rwf

6.708 million an increase of

Rwf

2.2

million. This increase has been enhanced by the decrease in taxation and interest for the year.

However, the increase has been offset to a degree by the increase in Admin Expenses of

Page 44

Rwf

368m which is an increase of just over 73%. This increase is high so the company will

need to watch this cost going forward.

Quick Ratio

This ratio has increased from 0.63:1 to 0.79:1 this year which is an improvement of over 25%

year on year percentage wise. The main reason for the increase is the fact that Current Assets

minus Inventory increased by over 80% driven by mainly by the increase in Trade Receivables

over 108% year on year. Current Liabilities increased by only just over 43% driven mainly

by the huge increase in the Bank Overdraft. This was a good result overall as the company

have increased their revenue significantly which can put some strain on working capital.

Yet the quick ratio has increased this year and the company have also purchased some extra

Non-Current Assets and paid off a significant amount of Non-Current Debt (decreased by

over 28%). Some of this decrease in debt may have been funded through the Bank

Overdraft so R.A.H. Limited should ensure that their source of funding is appropriate from a

time point of view. R.A.H. Limited should reduce some of their cash and cash equivalents in

Current Assets in order to reduce the Bank Overdraft and ultimately save on bank interest

costs.

Trade Receivable Days

This has increased from 23 to 33 days, an increase of over 43% year on year which is not a

great result. Revenue has increased by over 45% but R.A.H. Limited should have tried to

ensure that there was no deterioration in Trade Receivables Days. The company need to try

and ensure that the increase in Revenue is not being fuelled by having customers who are

demanding longer credit before they would purchase goods from R.A.H.. Another possible

reason could be that the credit department were not efficient in collecting debts. However, given

the increase in Administrative Expenses, one would expect that this is a department which

was adequately staffed to cope with the increased workload in collecting debts from having

more revenue and therefore, there has to be more focus on managing their Trade Receivables

in the coming year.

Trade Payable Days

This decreased from 44 days to 35 days which is a deterioration of over 20%. This is not a

good result given the fact that the company should be aiming for closer to 45-60 days. The

increase in purchases probably ensured that some of the supplier company‟s set limits on the

amount of Inventory they would sell before getting paid and therefore, this meant that the trade

payable days decreased. If we compare to 2009, the difference between when money was

received in from Trade Receivables and paid out to Trade Payables has decreased from 21 days

to 2 days which has obviously put pressure on the cash flow of the company and probably has

contributed to the increase in the Bank Overdraft.

Earnings per Share

This has increased from Rwf 61.25 per share to Rwf107.4 per share, which is an increase of

75.3%. This is a positive trend and is driven by the increase in profit which the company has

gained in 2010. Given that the dividend has stayed the same, the company appears to be

keeping as much of the profit within the company to fuel current and future growth.

Price Earnings Ratio

This ratio has increased from 13.06 to 23.28, an increase of over 78% year on year. This

increase is primarily due to the increase in the share price which has increased by nearly

212.5% year on year. As we saw in previous section, the earnings per share increased by a

sizeable percentage this year but the share price really changed during the course of the year.

Page 45

A P/E ratio of over 23 is on the upper scale when compared to the average P/E ratio for

companies and obviously investors are seeing this company as a „buy‟ which primarily must be

due to the sales and profit growth from 2009 to 2010.

Conclusion

Overall, the results and trends for R.A.H. Limited are positive when comparing 2010 to 2009

particularly in relation to the increase in sales and profit. The share price has increased

markedly in the year as investors took note of the increased performance of the company. This

significant increase in sales has obviously put increased pressure on the working capital of the

company and this is an area where management must focus so as to ensure that the company

continues to grow in a planned and managed way and that the company has the necessary

finance in place to ensure this growth occurs.

I hope that the above responses are of benefit to your company and the management of same. If

you have any further queries, please do not hesitate to contact me.

Yours sincerely,

Financial Accountant

(10 Marks)

Format and Presentation (2 Marks)

[Total: 20 Marks]

Page 46

SOLUTION 6

a)

Advantages of International Harmonisation (5 Marks)

i) Investors have greater comparability of financial statements which enables easier

investment decisions.

This is important in the context of global investing which has become more significant in the

last 10 years or so;

ii) Governments will have reduced funding requirements as they will not have to develop

accounting standards for their own country;

iii) Accounting firms with international practices will find it easier to deal with staff

resourcing in countries experiencing boom or recessionary times due to common accounting

standards allowing staff transferability between countries with no major impact on services

delivered;

iv) Companies

• Management control of foreign subsidiaries will be easier;

• Consolidation of financial statements will be easier as the as the different

subsidiaries operate under the same standards;

• Easier to comply with stock exchange reporting requirements;

• Investment more likely as investors will have greater knowledge and reliance on the

financial statements.

Obstacles to International Harmonisation (5 Marks)

i) Different purposes of financial statements i.e. IFRS‟s aimed at investment decision making

whereas many countries use financial statements for tax purposes;

ii) Nationalism – possible unwillingness to accept another country‟s standards;

iii) Different legal systems whereby some countries require certain accounting practices and

policies and other countries do not;

iv) Different users of financial statements. Countries vary in the importance they place on

users groups

v) Lack of strong accountancy bodies. Many accountancy bodies in various countries are not

independent or strong enough to press for harmonisation of accounting standards in their

jurisdiction;

vi) Language and cultural differences. Both of these can cause difficulties in the adoption of

standards accounting standards. [Total: 10 Marks]

Page 47

b) GTM Limited statement of Comprehensive Income for the year-ended 31st December

2010

Rwf

„000

Rwf

„000

Rwf

„000

Revenue

950,000

0.25

- Revenue Returns

-19,000

931,000

0.25

Less Cost of Sales

Opening Inventory

50,000

+ Purchases

450,000

Cost of

Sales

- Office Equipment

W2

-10,000

- Purchases Returns

-10,000

430,000

1.50

+ Carriage Inwards

20,000

- Closing Inventory

W1.1

-49,500

Cost of Sales Total

450,500

Gross Profit

480,500

0.25

Bad Debt Recovered

W1.viii

-2,000

Insurance

23,000

Light & Heat

W1.viii

1,000

750

1,750

Marketing

24,000

Motor Expenses

W1.viii

5,100

Rates

14,000

Rent

12,000

Expenses

Repairs & Maintenance

7,900

2.50

Wages & Salaries

73,500

Loss on Sale of Office

Equipment

W2

8,000

Increase in Provision for Bad

Debts

W1.ix

800

Depreciation - Buildings

W2

16,000

Depreciation - Office

Equipment

W2

14,000

Depreciation - Fixtures &

Fittings

W2

12,000

Debenture Interest

W1.xii

1,500

6,500

8,000

Profit/(Loss) before Tax

262,450

Income Tax Expense

W1.iv

-25,000

PROFIT/(LOSS)

FORTHEYEAR

237,450

0.25

Other Comprehensive Income

Gains on property revaluation

0

Total comprehensive Income

237,450

Page 48

Gortamwe Limited Statement of Financial Position as at 31st December 2010

Non-Current Assets

Rwf

„000

Rwf

„000

Rwf

„000

Property, Plant & Equipment

W2

1,171,000

0.25

Intangible Assets

80,000

0.25

Total Non-Current Assets

1,251,000

Current Assets

Inventories

W1.i

49,500

0.25

Trade Receivables

W1.ix

75,200

0.25

Cash & Cash Equivalents

0

0.25

Total Current Assets

124,700

TOTAL ASSETS

1,375,700

0.25

Equity & Liabilities

Equity

Share Capital

W1.xi

100,000

5,000

105,000

0.25

Share Premium

W1.xi

5,000

10,000

15,000

0.25

Other Reserves

43,000

0.25

Retained Earnings

150,000

237,45

0

387,450

0.75

Revaluation Surplus

20,000

0.25

Total Equity

570,450

Non-Current Liabilities

Debentures - 4%

200,000

0.25

Bank Loan

455,000

0.25

Total Non-Current Liabilities

655,000

Current Liabilities

Trade Payables

48,500

0.25

Corporation Tax

W4

17,000

0.25

Accruals

W5

8,750

0.25

Bank Overdraft

W3

76,000

0.25

Total Current Liabilities

150,250

TOTAL EQUITY &

LIABILITIES

1,375,700

0.25

Total Marks 10

Page 49

Note: All currency values are Rwf ‘000

Working - Journal Entries

Working - Closing Inventory

Total Inventories at Cost per inventory Count

55,000

Damaged inventories at cost

15,000

NRV Selling price less costs to sell (12m-2.5m)

-9,500

5,500

Inventory write-down

49,500

1.i

Dr. Inventory

+ Current

Assets

SOFP

49,500

3.00

Cr. Closing Inventory

- cost of sales

IS

49,500

1.i

v

Dr. Corporation Tax

+ Expenses

IS

25,000

1.00

Cr. Corporation trax due

= Current

liabilities

SOFP

25,000

1.v

Dr. Corporation tax due

- current

liabilities

SOFP

13,000

1.00

Cr. Bank Overdraft

+ Current

liabilities

SOFP

13,000

1.

vi

Motor Expense Account

Bank Payment

5,600

Balance B/d

2,000

Balance C/d

1,500

Expense I/S Balancing

figure

5,100

7,100

2.00

1.vii

Dr. Motor

Expenses

+expenses

IS

1,500

1.00

Cr. Light & heat

+ expenses

IS

750

Cr. Accruals

+ Current liabilities

SOFP

2,250

1.viii

Dr. Bank

- current liabilities

SOFP

2,000

1.00

Cr. Bad debt

recovered

= Income

IS

2,000

1.ix

Dr. Bad debt

provision

+ Expenses

IS

800

2.00

Cr. Trade

receivables

- Current assets

SOFP

800

Page 50

Trade receivables

Balance per TTB

80,000

- Bad debt

provision = 6%

W1.4

-4,800

Revised Trade

Receivable

75,200

Current bad debt

provision

TB

4,000

New Bad debt

provision

see above

4,800

Increase in Bad

debt provision

800

1.xi

Dr. Suspense

15,000

Cr. Share capital

+ share capital

SOFP

5,000

1.00

Cr. Share

premium

+ share premium

SOFP

10,000

1.xii

Dr. Debenture

interest

+ expenses

IS

6,500

1.00

Cr. Debenture

interest due

= Current liabilities

SOFP

6,500

Debentures

200,000

Interest for year

@ 4%

8,000

Debenture interest paid and included in

TB

1,500

Balance due

6,500

Page 51

Working 2

Property Plant & Equipment

Land

Buildings

Office

Equipment

Fixtures &

Fittings

Total

Rwf „000

Cost

450,000

800,000

150,000

75,000

1,475,000

Accumulated

Depreciation b/d

-200,000

-45,000

-15,000

-260,000

Net book value b/d at

1st Jan 2010

450,000

600,000

105,000

60,000

1,215,000

0.5

Disposal

- cost

Note

1

-20,000

0.5

- Accumulated

depreciation at 1.10.10

Note

1

8,000

0.5

Additions

10,000

1

Carrying value

450,000

600,000

103,000

60,000

1,213,000

Depreciation

- Buildings - 2% of

cost

-16,000

0.5

- Office equipment -

10% of cost

Note

2

-14,000

0.5

- Fixtures & fittings - 20%

reducing balance

-12,000

0.5

Net book value b/d at

31st Dec 2010

450,000

584,000

89,000

48,000

1,171,000

1.0

Note 1

Cost

20,000

Accumulated dep'n - 10% on cost

Dep'n 01.01.06 - 31.12.06

2,000

Dep'n 01.01.07 - 31.12.07

2,000

Dep'n 01.01.07 - 31.12.08

2,000

Dep'n 01.01.07 - 31.12.09

2,000

8,000

-8,000

NBV of office equipment

disposed

12,000

Disposal Account

Cost

20000

Accumulated Dep'n

8000

Disposal proceeds

4000

Loss on disposal

8000

1.0

20000

Page 52

Note 2 Depreciation Office

Equipment

Amount

Dep'n rate

Depreciation

Cost (150,000 - Disposal 20,000)

130,000

10%

13,000

Addition

10,000

10%

1,000

Depreciation for year

14,000

W3 Bank overdraft

Per TB

65,000

Corporation Tax Payment

W1.v

13,000

Bad debt recovered

W1.vii

-2,000

Closing Balance

76,000

W4 - Corporation Tax Liability

Balance TB

5,000

Corporation Tax Bill 2010

W1.iv

25,000

Corporation Tax Payment

W1.v

-13,000

Closing Balance

17,000

W5 - Accruals

Motor Expenses

W1.vii

1,500

Light & heat

W1.vii

750

Debenture interest

W1.xii

6,500

8,750

(7 Marks)

Page 53

Adjustments

Income Statement

SOFP

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

Rwf „000

Rwf

„000

Rwf

„000

Rwf „000

Accruals

2,000

8,750

Bank

65,000

2,000

13,000

76,000

Bank Loan – Long-Term

455,000

Buildings

800,000

Buildings Accumulated

Depreciation at 31.12.2009

200,000

16,000

216,000

Carriage Inwards

20,000

Corporation Tax

5,000

13,000

25,000

17,000

Debentures 4%

200,000

Debenture Interest

1,500

6,500

8,000

Fixtures & Fittings

75,000

Fixtures & Fittings

Accumulated Depreciation

at 31.12.2009

15,000

12,000

27,000

Insurance

23,000

Intangible Assets

80,000

Land

450,000

Light & Heat

1,000

750

1,750

Marketing

24,000

Motor Expenses

5,600

1,500

2,000

5,100

Office Equipment

150,000

10,000

20,000

140,000

Office Equipment

Accumulated Depreciation

at 31.12.2009

45,000

8,000

14,000

51,000

Opening Inventory

50,000

49,500

Other Reserves

43,000

Proceeds from Sales of

Office Equipment

4,000

20,000

8,000

Page 54

Provision for Bad Debts

4,000

800

4,800

Purchases

450,000

10,000

440,000

Rates

14,000

Rent

12,000

Repairs & Maintenance

7,900

Retained Earnings

150,000

237,450

387,450

Revaluation Surplus

20,000

Revenue

950,000

Revenue Return/Purchases

Returns

19,000

10,000

19,000

10,000

Share Capital – 100,000

shares at € 1 each

100,000

5,000

105,000

Share Premium

5,000

10,000

15,000

Suspense

15,000

Trade Receivable/Trade

Payable

80,000

48,500

80,000

48,500

Wages & Salaries

73,500

Bad Debts Recovered

2,000

2,336,500

78,750

1,011,500

1,674,500

Page 55

SOLUTION 7

REPORT

To: Managing Director

From: Financial Accountant

Re: IAS 38

Date: April 2011

(a)

1) The measurement of a separately acquired intangible assets shall at Cost i.e. at

Rwf80 million as per paragraph 25 of IAS 38. (2 Marks)

2) Internally generated goodwill of Rwf50 million shall not be recognised as an asset

as per paragraph 48 of IAS 38 and shall be expensed instead to the Income Statement.

(2 Marks)

3) Per paragraph 44 of IAS 38, Zacnet Limited has a choice of two methods in dealing

with the accounting treatment of the broadband licence i.e.

a) Recognise the intangible asset at the fair value of Rwf350 m and the government

“grant” is shown as Rwf250m in deferred income or;

b) Recognise the asset initially at the nominal amount (Rwf1 m) plus any expenditure

that is directly

(4) attributable to preparing the asset for its intended use (Rwf99 m).

(2 Marks)

(5) The Rwf72 m spent on researching the enhanced broadband signal product shall be

expensed to the Income Statement as per paragraph 54 of IAS 38

(2 Marks)

b) As per paragraph 57 of IAS 38, an intangible asset arising from the development phase

of an internal project shall be recognised if, and only if, Zacnet can demonstrate ALL of

the following:

1. The technical feasibility of completing the intangible asset so that it will be available

for use or sale

2. Its intention to complete the intangible asset and use or sell it

3. Its ability to use or sell the intangible asset

4. How the intangible asset will generate probable future economic benefits

5. The availability of adequate technical, financial and other resources to complete the

development and to use or sell the intangible asset

6. Its ability to measure reliably the expenditure attributable to the intangible asset during

its development

If one or more of the above conditions are not satisfied, then any amount spent should be

expensed to the Income Statement

(7 Marks)

(c)

(i) Per paragraph 64 of IAS 38, expenditure on company logo cannot be distinguished from

the cost of developing the business as a whole and therefore, is not recognised as an

intangible asset. Therefore, the Rwf35m should not be included in intangible assets and

should not be amortised and instead should be expensed in full to the Income Statement.

Page 56

(2 Marks)

(ii) The Actual Profit for the year is as follows:

Rwf m

Proposed Net Profit 1,452

Company Logo Expenditure (35)

Actual Net Profit 1,417

(3 Marks)

Yours sincerely,

Financial Accountant.

[Total: 20 Marks]

Page 57

SOLUTION 8

(a) The cost of an item of Property, Plant & Equipment (PPE) comprises:

(i) Its purchase price, including import duties and non-refundable purchase taxes, after

deducting trade discounts and rebates;

(ii) Any costs directly attributable to bringing the asset to the location and condition necessary

for it to be capable of operating in the manner intended by management;

(iii) The initial estimate of the costs of dismantling and removing the item and restoring the

site on which it is located, the obligation for which an entity incurs either when the item is

acquired or as a consequence of having used the item during a particular period for purposes

other than to produce inventories during that period.

(4 Marks)

(b) Any three (3) of the following

(i) Depreciation is the systematic allocation of the depreciable amount of an asset over its

useful life;

(ii) Carrying Value is the amount at which an asset is recognised after deducting any

accumulated depreciation and accumulated impairment losses;

(iii) Fair Value is the amount for which an asset could be exchanged between knowledgeable,

willing parties in an arm‟s length transaction;

iv) An Impairment Loss is the amount by which the carrying amount of an asset exceeds its

recoverable amount;

(v) The Residual Value of an asset is the estimated amount that an entity would currently

obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset

were already of the age and in the condition expected at the end of its useful life.

(4 Marks)

(c) An organisation can choose either the cost model or the revaluation model for

measurement of PPE after initial recognition and this model is then applied to an entire class

of PPE

The cost model means that an item of PPE shall be carried at its cost less any accumulated

depreciation and any accumulated impairment losses.

(1 Mark)

The revaluation model means that an item of PPE whose fair value can be measured reliably

shall be carried at a revalued amount, being its fair value at the date of the revaluation less any

subsequent accumulated depreciation and subsequent accumulated impairment losses.

Revaluations shall be made with sufficient regularity to ensure that the carrying amount does

not differ materially from the fair value at the end of the reporting period.

(1 Mark)

Page 58

(d) 2009 Financial Year

Rwf m

Dr. PPE – SOFP

100

Cr. Revaluation Surplus – Other Comprehensive Income

100

[400-300]

(2 marks)

2010 Financial Year

Rwf

Dr. Revaluation Surplus – Other Comprehensive Income

[250-400]

100

Dr. Profit or Loss – Statement of Comprehensive Income

50

Cr. PPE – SOFP

150

(3 marks)

e) The asset before revaluation was being depreciated at the rate of 5% per annum which

therefore indicates that the useful life of the building is 20 years i.e. 100%/5% = 20. The

asset was purchased on the 1st January 2005 so there is 5 years of the useful life completed

up to the 1st January 2010. Therefore, the remaining useful life is 15 years. The formula to

use to calculate the depreciation for the year-ended 31st December 2010 is as follows:

Revalued Amount – Residual Value / Remaining Useful Life

(Rwf800 m – Rwf200 m)/15 = Rwf600 m/15 = Rwf40 m = Annual Depreciation going

Forward

(5 Marks)

[Total: 20 Marks]

Page 59

SOLUTION 9

a) Mr Michael Nolan – Opening Statement of Financial Position as at 1st January

2010

Non-Current Assets

Rwf '000

PPE

(100m - 40m +

816m - 4m)

72,000

Total Non-Current Assets

72,000

0.50

Current Assets

Inventory

40,000

0.50

Trade Receivables

4,800

0.25

Cash & Cash Equivalents

12,400

0.50

Prepayment

800

0.25

Total Current Assets

58,000

0.50

Total Assets

A

130,000

0.50

Equity & Liabilities

Capital & Reserves

Capital - Balancing Figure

105,600

1.00

Total Capital & Reserves

C

105,600

Non-Current Liabilities

Bank Loan

12,000

0.50

Total Non-Current

Liabilities

Li

12,000

Current Liabilities

Trade Payable

11,200

0.25

Accrued Wages

1,200

0.25

Total Current Liabilities

Lii

12,400

Total Equity & Liabilities

130,000

A = C + Li+Lii

130,000,000 = C + 24,400,000

130,000,000 - 24,400,000= C

C = 105,600,000

(5 Marks)

Page 60

Bank Receipts from Credit Sales Calculation

T. Receivables

Rwf „000

Balance B/D

4,800

Bank Receipt

31,600

Credit Sales - Balancing Figure

30,800

Balance C/D

4,000

1.00

35,600

Balance B/D

4,000

Bank Receipts from Cash Sales Calculation

Cash Account

Rwf „000

Balance B/D

1,200

Drawings

2,400

Cash Sales - Balancing Figure

2,800

Balance

C/D

1,600

1.00

4,000

Balance B/D

1,600

Sales

Rwf

„000

Rwf „000

Credit Sales

30,800

Cash Sales

2,800

Total Sales

33,600

1.00

Cost of Sales Calculation

Gross Profit is 25% of Sales

Therefore,

Sales

100%

33,600

- Cost of Sales

75%

Gross Profit

25%

Cost of Sales are 75% of Sales i.e. 75% x

Rwf33,600,000

25,200

1.00

Goods Stolen Calculation

Sales occur evenly throughout the year

Total Sales

33,600

Sales for 7 Months i.e. Rwf33,600,000 x 7 / 12

19,600

1.00

Cost of Sales is 75% of Sales i.e. €19,600,000 * 75%

14,700

1.00

Opening Inventory

40,000

+ Purchases - See Trade Payable T-Account Below

8,000

- Closing Inventory

-36,000

= Cost of Sales

12,000

1.00

Therefore,

0

Theoretical Cost of Sales

14,700

1.00

Actual Cost of Sales after burglary

12,000

Cost of Goods Stolen

2,700

1.00

Page 61

Purchases Calculation in relation to Goods Stolen

T. Payables Account

Rwf „000

Rwf

„000

Bank Payments

8,800

Balance B/D

11,200

Purchases - Balancing

Figure

8,000

1

Balance C/D

10,400

19,200

Balance B/D

10,400

Double Entries for Stolen and Damaged

Inventory

Rwf „000

Rwf

„000

Goods Stolen

Expenses

2,700

Cost of Sales

2,700

1

Being costs of stolen inventory

Insurance

1,200

Cost of Sales

1,200

1

Being cost of damaged inventory

scrapped

Calculation of Closing Inventory

Cost of Sales is 75% of Sales i.e. €168,000 x 75%

25,200

Opening Inventory

40,000

+ Purchases

25,700

- Inventory Stolen in Burglary

-2,700

- Inventory Damaged and Scrapped

-1,200

- Closing Inventory(Balancing

Figure)

x

2

= Cost of Sales

25,200

Closing Invenotry + €309,000 = €126,000

Closing Inventory = €126,000 -

€309,000

Closing Inventory = €183,000

Double Check

Opening Inventory

40,000

+ Purchases

25,700

- Inventory Stolen in Burglary

-2,700

- Inventory Damaged and Scrapped

-1,200

- Closing Inventory

-36,600

= Cost of Sales

25,200

Page 62

Mr. Michael Nolan Statement of Comprehensive Income for the year-ended 31st December

2010

Rwf „000

Rwf

„000

Revenue

33,600

Cost of Sales

Opening Inventory

40,000

+ Purchases

25,700

65,700

- Inventory Stolen in Burglary

-2,700

- Inventory Damaged and Scrapped

-1,200

-3,900

61,800

- Closing Inventory

-36,600

Cost of Sales Total

25,200

Gross Profit

8,400

1

(15 Marks)

[Total: 20 Marks]

Page 63

[Total: 20 Marks]

SOLUTION 10

BLM Limited Statement of Cash flows for the year ended 31st

December 2010

Cash flows from Operating Activities

Rwf m

Profit before Taxation

2,377

1.00

Adjustments for

Depreciation

2,150

1.00

Loss on Sale of PPE

250

1.00

Interest Expense

450

0.50

Investment Income

-357

0.50

4,870

Increase in Trade Receivables

-2,020

1.00

Decrease in Inventory

300

1.00

Decrease in Trade Payables

-710

1.00

Cash Generated from Operations

2,440

Interest Paid

-450

1.00

Income Taxes Paid

-147

1.00

Net Cash from Operating Activities

1,843

1.00

Cash flows from Investing Activities

Purchase of Property, Plant & Equipment

-12,900

2.00

Sale of Property, Plant & Equipment

1,800

1.00

Development Expenditure

-4,160

1.00

Investment Income Received

157

1.00

Net Cash used in Investing Activities

15,103

0.50

Cash flows from Financing Activities

Proceeds from Issue of Shares

13,600

1.00

Proceeds from Increase of Bank Loans

6,400

1.00

Dividends Paid

-50

1.00

19,950

0.50

Net Increase in Cash & Cash Equivalents

6,690

Cash & Cash Equivalents at beginning of

Year

Note 1

-4,560

Cash & Cash Equivalents at end of Year

Note 1

2,130

1.00

Note 1

2010

2009

Rwf'000

Rwf'0

00

Cash on hand and balances with bank

2,130

-

Bank Overdraft

-

-4,560

Cash and Cash Equivalents

2,130

-4,560

CPA F1.3 FINANCIAL ACCOUNTING Revision Guide

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