Institute of Chartered
Accountants – Ghana (ICAG)
Paper 1.1
Financial Accounting
Final Mock Exam 1
Marking scheme and suggested solutions
DO NOT TURN THIS PAGE UNTIL YOU HAVE COMPLETED THE MOCK
EXAM
ii
Final Mock Exam: Answers
Financial Accounting
The Institute of Chartered Accountants – Ghana
First edition 2015
ISBN 9781 4727 2834 0
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©
The Institute of Chartered Accountants –
Ghana 2015
Final Mock Exam 1: Answers
1
Question 1
Marking scheme
Marks
Partners' accounts:
NF
OR
PN
1
1
2
4
10
Realisation account – ½ to 1 mark per correct entry
Cash and bank account – ½ to 1 mark per correct entry
6
20
Suggested solution
(a)
PARTNERS' ACCOUNTS
Realisation a/c
Cash
NF
GHS
OR
GHS
112,510
76,906
PN
GHS
18,000
25,604
112,510
76,906
43,604
(b)
Capital a/cs
Current a/cs
Realisation a/c
NF
GHS
90,000
19,500
3,010
112,510
OR
GHS
60,000
14,900
2,006
76,906
REALISATION ACCOUNT
Furniture and fittings (Carrying
Amount)
Motor vehicles (Carrying Amount)
Inventory
Receivables
Cash and bank
Loan
Payables
Dissolution expenses
Profit on realisation
NF 3/6
OR 2/6
PN 1/6
GHS
100,000
70,000
50,000
84,000
36,000
50,880
2,000
3,010
2,006
1,004
398,900
Loan a/c
GHS
36,000
Payables
53,000
Cash and bank
Furniture and fittings
Motor vehicles
Inventory
Receivables
PN (motor vehicle)
97,600
59,000
55,500
79,800
18,000
398,900
PN
GHS
30,000
12,600
1,004
43,604
2
Final Mock Exam 1: Answers
(c)
CASH AND BANK
GHS
12,000
Balance b/f
Realisation a/c
Furniture and fittings
Motor vehicles
Inventory
Receivables
97,600
59,000
55,500
79,800
GHS
Realisation a/c
Loan
Payables
Dissolution expenses
Partners
NF
OR
PN
36,000
50,880
2,000
112,510
76,906
25,604
303,900
303,900
Question 2
Marking scheme
Marks
(a)
(b)
2 marks per ratio – available
Maximum
½ to 1 mark per valid point
10
9
11
20
Suggested solution
(a)
(i)
Return on capital employed*
(ii)
Gross profit percentage
(iii)
Net profit percentage*
(iv)
Quick/acid test ratio
(v)
Receivables collection period
Net profit before interest & tax
Capital employed
Gross profit
Revenue
 100 50/360  100 = 13.9%
 100 120/320  100 =37.5%
Net profit before interest and tax
Revenue
Current assets  inventory
Current liabilities
Receivable
Revenue
 100 50/320  100 =15.6%
:1 (150–90)/90 :1 = 0.67 :1
 365 50/320  365 = 57 days
* Alternative definitions are also acceptable
(b)
Brief Report
To:
From: A Student
Date June 20X5
Subject: Financial appraisal of FR using accounting ratios
Introduction
The purpose of this report is to analyse the financial performance of FR over the last three years using
accounting ratios.
Final Mock Exam 1: Answers
The report specifically comments on the following ratios:
–
–
–
–
–
Return on capital employed
Gross profit percentage
Net profit percentage
Quick/acid test ratio
Receivables collection period
The report also highlights what other information would be useful to help interpret the ratios.
Return on capital employed
The return on capital employed has declined over the last three years from 16.2% to 13.9% and is
now well below the industry average (16.2%). This should be a cause for concern to the board of
directors because if investors can obtain a higher return elsewhere then they may withdraw their
investment. Alternatively they may seek to change the management board. It would be helpful to have
more information on the market in which FR operates eg is the market growing or declining, are there
many buyers and sellers or just a few?
Gross profit percentage
The gross profit percentage has risen over the period from 30.4% to 37.5%. Clearly the company has
either:
(i)
Increased the selling price of its goods, eg perhaps it is able to sell at a premium because of
perceptions regarding the quality of the goods sold, or
(ii)
Reduced the cost of its supplies, possibly changing suppliers or obtaining greater discounts as
sales volume has increased.
It would be useful to know what the company is selling and the volume of sales analysed by product
and year.
Net profit percentage
The net profit percentage has declined over the period from 19.3% to 15.6% and is significantly
below the industry average of 17.3%. This is worrying considering the increase in the gross profit
percentage over the same period. The decline in the net profit percentage suggests that the costs may
not be tightly controlled within the company. More detailed information on expenditure during the
period would be helpful in identifying the reasons for the decline in profitability.
Quick (or acid test) ratio
The quick ratio has also declined significantly during the period from 1.5:1 to 0.67:1 suggesting the
company may be experiencing liquidity problems. This view is also supported when the ratio is
compared to the industry average which is over double that of FR. The level of inventory may be a
concern as it is tying up cash. More information on the type of inventory and the level of inventory
turnover would be useful.
Receivables collection period
The time taken to collect debts has increased over the period from 32 days to 57 days. This seems
very high when compared to the industry average debt collection period of just 35 days. The period
suggests that there is little control over debt collection.
In addition, the lengthening of the collection period means it is more likely that some debts will not be
paid by customers. The poor control over debt collection will be a factor contributing to the adverse
liquidity situation of the company.
Conclusion
Although the company has managed to increase its gross profit over the period, this has not resulted
in a similar increase in net profit. In summary the ratios indicate poor internal control of costs and
poor management of working capital. The return on capital employed is unlikely to be sufficiently
attractive to potential investors or to existing shareholders.
3
4
Final Mock Exam 1: Answers
Question 3
Marking scheme
Marks
1
1
1
1
1
1
1
1
2
1
2
1
1
1
1
1
1
1
20
Net profit before tax
Depreciation
Loss on sale of tangible non-current assets
Interest
Increase in inventory
Increase in receivables
Increase in payables
Interest paid
Tax paid
Dividends paid
Purchase of non-current assets
Receipts from sale of tangible non-current assets
Proceeds from issue of shares
Repayment of long-term borrowing
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Presentation
Suggested solution
Prepared in accordance with IAS7
SD
Statement of cash flows for the year ended 31 May 20X5
Cash flows from operating activities
Profit before interest and tax (2,064 + 20)
Adjustments for:
Depreciation
Loss on sale of tangible non-current assets (400 – 360)
Increase in inventory
Increase in receivables
Increase in payables
Cash generated from operations
Interest paid
Tax paid (W2)
Net cash from operating activities
Cash flow from investing activities
Purchase of non-current assets (W1)
Receipts from sales of tangible non-current assets
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Proceeds from issue of shares
Repayment of long term borrowing
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at the beginning of period
Cash and cash equivalents at end of period
GHS,000
GHS,000
2,084
1,400
40
(160)
(260)
170
3,274
(20)
(290)
2,964
(5,600)
360
(5,240)
(540)
2,560
(200)
1,820
(456)
340
116
Final Mock Exam 1: Answers
Workings
1
NON-CURRENT ASSETS
Balance b/f
New non-current assets (bal)
GHS'000
5,400
5,600
GHS'000
1,400
400
9,200
11,000
Depreciation
Disposals
Balance c/f
11,000
2
TAX
Tax paid (balancing figure)
Balance c/f
GHS'000
290
360
650
Balance b/f
Statement of profit or loss
GHS'000
290
360
650
Question 4
Marking scheme
Marks
(a)
Two reasons (1 mark each)
Two items (1 mark each)
2
2
(b)
(i)
Nominal ledger bank a/c
Opening balance – correct place
Cheque error
Bank charges
Cancelled cheque
Returned cheque
Closing balance
Balance c/f
1
1
1
1
1
1
1
(ii)
Balance per bank statement
Incorrect interest credited
Outstanding cheques
Outstanding lodgement
Revised balance
1
2
2
1
1
4
7
7
(c)
Overdrawn
Current liability
1
1
2
20
Suggested solution
(a)
A bank reconciliation is carried out for the following reasons:
(i)
(ii)
(iii)
(iv)
To confirm the accuracy of entries in the cash book
To uncover any error which may have been made by the bank
To provide a reliable cash figure for the trial balance
To identify any items, such as bank charges, which need to be entered in the accounting
records, including the cash book
Items appearing in the bank reconciliation are:
(i)
(ii)
(iii)
The corrected cash book balance
Unpresented cheques
Outstanding lodgements
5
6
Final Mock Exam 1: Answers
(iv)
(v)
Any adjustment to be made by the bank
The balance on the bank statement
(You only needed two of each of these.)
(b)
(i)
BANK ACCOUNT
(1)
(7)
Error in recording cheque
Cancelled cheque
Closing balance
GHS
90
1,250
292
GHS
226
766
640
Opening balance
(2) Bank charges
(3) Returned cheque
1,632
1,632
Balance b/f
(ii)
292
GHS
Balance per bank statement
Less: (4) interest incorrectly credited
(6) unpresented cheques (3,258 – 1,250)
440
2,008
Add: (5) outstanding lodgement
Revised balance agreed to ledger account
(c)
GHS
456
(2,448)
(1,992)
1,700
(292)
The bank balance is GHS292 overdrawn. This will be reported as a current liability in the statement
of financial position.
Question 5
Marking scheme
Marks
(a)
(b)
½ to 1 mark per valid point – maximum
Items (i) to (iv) – marks as indicated
5
15
20
Suggested solution
(a)
Advantages of being sole proprietorships
This type of structure is ideal if the business is not complicated, and especially if it does not require a
great deal of outside capital. Advantages include:

Limited paperwork and therefore cost in establishing this type of structure

Owner has complete control over the business

Owner is entitled to profits and the ownership of assets

Less stringent reporting obligations compared with other business structures – no requirement
to make financial accounts publicly available, no audit requirement

Can be highly flexible
Disadvantages of being sole proprietorships

Owner is personally liable for all debts (unlimited liability)

Personal property may be vulnerable for debts and other business liabilities.

Large sums of capital are less likely to be available to a sole proprietorship, leading to reliance
on overdrafts and personal savings.
Final Mock Exam 1: Answers
(b)

May lead to long working hours without the normal employee recreation leave and other
benefits

May be issues of continuity of business in the event of death or illness of the owner
(i)
There is a conflict here between the accruals or matching concept and the Conceptual
Framework criteria for recognition of an asset. The accruals concept states that costs should be
matched against revenue which they generate. Thus it might be argued that, since half the
revenue expected to result from the advertising campaign will be achieved in 20X6, it might be
appropriate to defer half the costs of the advertising campaign until 20X6. This would mean
that GHS2,800 would be treated as deferred expenditure (an asset) in the financial statements
for the year ended 31 December 20X5. However, it is not possible to reliably measure the
future revenue expected to be generated from the advertising campaign, so the revenue should
not be anticipated but provision should be made for all known losses (and expenses). Therefore
all the costs of the advertising campaign should be written off as an expense in the 20X5
accounts.
(ii)
When the proprietor of a business takes inventory for his own use, it counts as drawings, which
are a deduction from the owner's capital. The entries to record the drawings are:
DEBIT
CREDIT
Drawings
Purchases
GHS1,000
GHS1,000
(iii)
The receipt of compensation from the insurance company is contingent upon the outcome of
the court case. As such it is a contingent asset and the accounting treatment is governed by
IAS 37 Provisions, contingent liabilities and contingent assets. As the asset is only contingent,
it should not be recognised in the financial statements for the year ended 31 December 20X5.
If the cash inflow is 'probable' it should be disclosed in a note to the accounts. If the contingent
asset is only 'possible' it should not be disclosed at all. It is not clear whether the term
'reasonable' means probable or possible and the solicitor would need to be consulted further to
determine the accounting treatment.
(iv)
Under the business entity concept the business is a separate entity from JB as a person. This
applies for accounting purposes, although not for legal purposes. The loan should, therefore, be
recognised in the financial statements of the business: as the loan was made specifically for
the business and not for the personal use of JB it is a business transaction.
Question 6
Marking scheme
Marks
(a)
(b)
(c)
(d)
½ to 1 mark per valid point – maximum
1 mark per valid point – maximum
Marks as indicated
Non-current assets
Current assets
Proprietor's capital (detailed, not just as a balancing figure)
Current liabilities
3
2
9
1
2
2
1
6
20
Suggested solution
(a)
The accruals, or matching, concept requires that the revenue earned in a period is matched with the
expenses incurred in earning that profit. Therefore if a payment includes a prepayment for the
following period, this must be excluded from expenses in the statement of profit or loss. In other
words, costs are recognised on the basis of the period covered by those costs, not by the timing of the
payment.
7
8
Final Mock Exam 1: Answers
(b)
Depreciation is a way of charging for the use of an asset in earning the current period's profits. It
spreads the cost of a non-current asset over its useful life. This is an example of the accruals or
matching concept.
(c)
(i)
Accrued expenses
GHS
9,160
Electricity (2/3 × GHS13,740)
(ii)
Prepayment
GHS
28,500
Rent (3/6 × GHS57,000)
(iii)
Allowance for receivables
31 – 60 days
Over 60 days
Irrecoverable debt
Balance
GHS
54,400
9,672
(1,320)
8,352
× 20%
× 75%
Allowance required
Existing allowance
Increase in allowance
(iv)
6,264
17,144
15,800
1,344
Accumulated depreciation
GHS
170,800
35,840
206,640
Balance at 1 April 20X4
Depreciation charge for year (GHS179,200 × 20%)
(d)
Allowance
required
GHS
10,880
CORRECTED STATEMENT OF FINANCIAL POSITION AT 31 MARCH 20X5
GHS
Non-current assets
Equipment at cost
Accumulated depreciation (a(iv))
GHS
350,000
(206,640)
143,360
Current assets
Inventory
Trade receivables (W1)
Prepayment (a(ii))
Bank
84,678
296,158
28,500
12,560
421,896
565,256
Proprietor's capital (W2)
Current liabilities
Trade payables
Accrual (c(i))
382,976
173,120
9,160
182,280
565,256
Workings
1
Trade receivables
Balance per draft SOFP (net of existing allowance)
Irrecoverable debt (note 4)
Increase allowance (c(iii))
GHS
298,822
(1,320)
(1,344)
296,158
Final Mock Exam 1: Answers
2
Capital
Balance from draft SOFP
Accrual
Prepayment
Irrecoverable debt
Increase in allowance
Depreciation
GHS
402,140
(9,160)
28,500
(1,320)
(1,344)
(35,840)
382,976
Question 7
Marking scheme
Marks
Statement of profit or loss and other comprehensive income
Revenue
Cost of sales
Distribution costs
Administrative expenses
Finance costs
Other comprehensive income
½
2½
1½
1½
1
1
8
Statement of financial position
Non-current assets
Inventory
Receivables
Cash
Shares
Capital surplus
Income surplus
Loan notes
Payables
Interest
Presentation
3
1
1½
½
½
1
1
½
1½
½
11
1
20
Suggested solution
AT Co
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30
JUNE 20X9
Revenue (14,800 – 24) (W1)
Cost of sales (W1)
Gross profit
Distribution costs (1,080 + 272 + 190 – 120)
Administration expenses (1,460 + 272 + 70 – 60)
Finance cost (2,000  10%  3/12)
Profit for the year
Other comprehensive income
Revaluation gains
Total comprehensive income for the year
GHS'000
14,776
(10,280)
4,496
(1,422)
(1,742)
(50)
1,282
1,500
2,782
9
10
Final Mock Exam 1: Answers
ATOK CO
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 20X9
Assets
Non current assets
Property, plant and equipment (W3)
Current assets
Inventories (W1)
Receivables (4,120 + 120 + 60 – 24)
Cash and cash equivalents
GHS'000
25,470
1,566
4,276
160
6,002
31,472
Total assets
Equity
Stated capital
Income surplus
Capital surplus
Non current liabilities
10% loan notes 20X8
Current liabilities
Trade payables
Accruals (190 + 70 + 50)
Total current liabilities
Total equity and liabilities
GHS'000
18,000
4,422
4,500
26,922
2,000
2,240
310
2,250
31,472
Workings
1
Cost of sales
Opening inventory
Purchases
Closing inventories ((1,560 + 16 – 10) see below)
Depreciation (W2)
Cost of sales
GHS'000
1,390
8,280
9,670
(1,566)
8,104
2,176
10,280
Inventory adjustments
(i)
Lower of cost (GHS80,000) and NRV (GHS90,000 – GHS20,000) = GHS70,000. Therefore
GHS10,000 (80,000 – 70,000) adjustment.
(ii)
Inventory understated by GHS16,000
Sales overstated by GHS24,000
2
Depreciation
Buildings (8,000 @ 2%)
Plant (12,800 @ 20%)
GHS'000
160
2,560
2,720
80% to cost of sales: 2,176. 10% to distribution and 10% to administration: 272
3
Property, plant and equipment
Land and buildings (12,000 + 8,000 – 2,130 – 160)
Plant and equipment (12,800 – 2,480 – 2,560)
GHS'000
17,710
7,760
25,470