QUESTIONS
NUMBER ONE
(a) List and explain three problems encountered by accountants in accounting for agricultural activities.
(3 marks)
(b) Given below is the trial balance of ADK Farm Ltd as at 31 December 2001:
Sh.’000’ Sh.’000’
Ordinary share capital Share premium Land and buildings Farm machinery Sundry debtors Cash in hand Loan (crop) Retained profits Bank overdraft
Accumulated depreciation – Farm machinery Sundry creditors
Stocks on 1 January 2001:
Growing crops, wheat, seeds and fertilizers Livestock
Farm labour Salaries and wages:
Manager Farm labour Office expenses Crop expenses Livestock expenses Livestock purchases
Purchase of feeding materials Farmhouse expenses
Staff meals
Repairs to machinery Interest on loan Tools and implements Sales of wheat
Sales of livestock Manager’s account
4,500 2,200 580 320
180 280 105
120 110 280 210 250 670 120 25 10 30 120 40
_____
5,000 400
800 500 120 440 300
1,050 1,500 40
10,150 10,150
The following additional information is provided:
1. On 31 December 2001, the value of stocks were as given below:
Sh.’000’
Livestock Feeding materials
Growing crops, wheat, seeds and fertilisers Tools and implements
240 130 20 100
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FINANCIAL ACCOUNTING - BLOCK REVISION MOCK 9
2. Depreciation on tools and implements is apportioned equally between livestock and crop activities.
3. Farm machinery is depreciated at the rate of 5% per annum on cost.
4. Manager’s salary and staff meals should be divided between livestock and crop activities in the ratio 3:2 respectively.
Required:
(i) Livestock account for the year ended 31 December 2001. (5 marks) (ii) Crop account for the year ended 31 December 2001. (5 marks) (iii) Balance sheet as at 31 December 2001. (5 marks) (Total: 20 marks)
NUMBER TWO
(a) With reference to IAS 11 (Construction Contracts), explain how the following methods can be used to account for construction contracts:
(i) Percentage of completion method (2 marks)
(ii) Completed contract method. (2 marks)
(b) Vihiga Construction Company Ltd. Entered into a contract to build an administration block for Rongo Manufacturers Ltd. On 15 October 1998. The construction was to start on 1 January 1999 and was to be completed in three years. The contract price was Sh.850,000,000.
The following information pertaining to the contract was extracted from the books of Vihiga Construction Company Ltd.
Year ended 31 December 1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Costs incurred in the year Estimated costs to completion Progress billings made in the year Cash collections in the year General administration expenses
300,000 300,000 270,000 240,000 15,000
330,000 270,000 480,000 360,000 20,000
120,000 - 100,000 200,000 18,000 Required:
Using the completed contract and percentage of completion methods:
(a) Compute the realised gross profit for each of the three years ended 31 December.
(7 marks)
(b) Prepare the profit and loss accounts for each of the three years ended 31 December.
(7 marks)
(c) Prepare the balance sheet extracts for each of the three years ended 31 December.
(6 marks)
(Total: 24 marks) NUMBER THREE
Five years ago, Mobiletex Ltd. Leased a patent for the manufacture of a gadget used in mobile phones from Quickcom Ltd.
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The lease agreement provided for payment of royalty at the rate of Sh.50 per gadget sold with a minimum royalty of Sh.250,000 per annum. Royalties were payable on 15 March following the end of the financial year on 31 December. Short workings arising in any year were recoverable within the following two years of operations.
Mobiletex Ltd. Sub-leased the patent to Handphone Ltd. A royalty of Sh.60 per gadget produced with a minimum rent of payment of royalties at the end of each financial year on 31 December.
Given below is information about the number of gadgets produced by both companies in the first five years of operations.
Year ended
31 December Bomiletex Ltd. Handphone Ltd.
Production
(units) Sales
(units) Production
(units) Sales (units) 1997
1998 1999 2000 2001
1,800 2,500 3,500 4,200 6,000
1,600 2,600 3,600 4,000 5,000
800 1,100 3,000 3,900 4,200
500 1,200 2,500 4,200 4,000 Required:
The accounts listed below in the books of Mobiletex Ltd.
(a) Royalty expenses (payable) account for the five years ended 31 December 2001.
(4 marks) (b) Quickcom (Landlord) account for the five years ended 31 December 2001. (3 marks) (c) Short workings recoverable account for the five years ended 31 December 2001.
(3 marks) (d) Royalty income (receivable) account for the five years ended 31 December 2001.
(4 marks) (e) Handphone (sub-tenant) account for the five years ended 31 December 2001.
(3 marks) (f) Short workings allowable account for the five years ended 31 December 2001.
(3 marks) (Total: 20 marks)
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NUMBER FOUR
(a) Briefly explain the objectives and scope of IAS 7 (Cash Flow Statements). (6 marks) (b) The following are extracts from the financial statements of Wewe Ltd. As at 31 March:
2002 2001
Sh.’000’ Sh.’000’ Sh.’000’ Sh.’000’
Fixed assets:
Goodwill
Freehold land and building Plant and machinery (NBV) Investment at cost
Current assets:
Stocks
Accounts receivable Investments
Cash at hand and bank Current liabilities Bank overdraft Accounts payable Proposed dividends Taxation
Net current assets 15% debentures Capital and reserves:
Authorised, issued and paid Sh.10 Ordinary shares
Share premium Revaluation reserve Retained profit
10,050 6,140 1,710 200 18,100 (2,390) (5,850) (450) (820) (9,510)
2,800 16,800 5,860 3,600 29,060
8,590 37,650 (7,500) 30,150
18,000 1,500 4,500 6,150
8,700 7,800 840 430 17,770 (6,540) (5,250) (380) (600) (12,770)
2,900 12,000 6,350 3,750 25,000
5,000 30,000 (9,000) 21,000
15,000 750 5,250 -
30,150 21,000
The profit and loss appropriation account for the year ended 31 March 2002 is given below:
Sh.’000’ Sh.’000’
Net profit before tax Less: Corporation tax Profit after tax Dividends:
Interim (paid)
Proposed (paid) 150
450
2,400 900 1,500
600 900 The following additional information is provided:
1. Profit for the year is arrived at after charging:
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Sh.’000’
Depreciation on plant and machinery
Goodwill amortisation 1,150
420
2. During the year, plant with a net book value of Sh.750,000 was sold for Sh.1,470,000. The plant had originally cost Sh.3,000,000.
3. The investments portfolio was reduced by selling one block of shares at a profit of sh.160,000.
Required:
Cash flow statement in accordance with IAS 7. (14 marks)
(Total: 20 marks) NUMBER FIVE
(a) With specific reference to government sector accounting, briefly explain the following concepts:
(i) Budgetary accounting; (3 marks)
(ii) Cash accounting; (3 marks)
(iii) Commitment accounting; (3 marks)
(iv) Fund accounting. (3 marks)
(b) List three arguments for and against the accrual basis of accounting in the public sector.
(6 marks) (Total: 18 marks)
ANSWERS
NUMBER ONE a)
Closing stocks i.e. animal still growing
Apportionment of costs i.e. the ratio
Drawings and consumption
Incomplete records
Labour given by own family (b) (i) ADK Farm Ltd.
Livestock Account
For year ended 31 December 2001
Sh.’000’ Sh.’000’ Sh.’000’
Sales Livestock
Opening stock Purchases Closing stock Feeding materials Opening stock
280 670 950 240
105
710
1,500
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Purchases Closing stock Livestock expenses Gross profit Manager’s salary Staff meals
Depreciation – tools
NET PROFIT (to P & L a/c)
120 225 130
250 95
72 10 6
1,055 445
88 357
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(ii) ADK Farm Ltd Crop Account
For year ended 31 December 2001
Sh.’000’ Sh.’000’ Sh.’000’
Sales
Opening stock Purchases Closing stock Crop expenses Farm labour Gross profit Manager’s salary Farm house expenses Staff meals
Repairs to machinery Interest on loan Depreciation expenses Net profit (to P & L A/c)
180 -
20 180 160 210 110
48 25 4 30 40 120
1,050
370 680
212 468
ADK Farm Ltd Profit and Loss Account For year ended 31 December 2001 Livestock profit
Crop profit Office expenses NET PROFIT
357 468 660 280 380
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(iii) ADK Farm Ltd Balance Sheet
As at 31 December 2002
ASSETS Sh.’000’ Sh.’000’
Non current assets Land and buildings Farm machinery Tools and implements Current assets
Stocks (240 + 130 + 20) Sundry debtors
Cash in hand
EQUITY AND LIABILITIES Capital and reserves
Ordinary share capital Share premium
Retained profits (500 + 380) Non-current liabilities Loan
Current Liabilities Bank overdraft Sundry creditors
Managers personal account
4,500 1,650 100
390 580 320
5,000 400 880
120 300 40
6,250
1,290 7,540
6,280
800
460 7,540 NUMBER TWO
(a) (i) The percentage of completion method recognises revenues, costs and gross profit as progress is made towards completion on long term contract.
Gross profit realised in any period is based on the work i.e. costs incurred on the contract in that period.
If at the end of any period when the contract is still in progress it is estimated that it would end up in a loss, then that whole loss is reported in that year. The actual loss reported in the period is the estimated loss adjusted with (added) total gross profit reported on the contract in the previous years.
(ii) Completed contract method revenue and gross profit on the contract are recognised only in the year the contract is completed.
Any anticipated loss on the contract is however reported in the year it is estimated that the contract would end up in a loss.
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(i) Determination of the profit or loss on the contract at the end of each year:
Completed contract method
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
(i) (ii) (iii) (iv) (v) (vi)
Contract price
Total costs incurred to date Estimated costs to complete Estimated total cost of the contract (ii + iii)
Estimated total profit on the contract (iv)
Gross profit or loss to be reported in the year
850,000 300,000 300,000 600,000 250,000 -
850,000 630,000 270,000 900,000 (50,000) (50,000)
850,000 750,000 - 750,000 100,000 150,000 (ii) Percentage of completion retained
1999
Sh. 2000
Sh. 2001
Sh.
Contract price Cost incurred
Estimated costs to complete Total estimated cost
GP for the year
850,000 (300,000) (300,000) 600,000 250,000
850,000 (630,000) (270,000) 900,000 (50,000)
850,000 (750,000) - 750,000 100,000 G.P Recognised
1999 = x250,000
600,000 300,000
= 125,000
2001 Actual G.P 100,000
Less: G.P recognised to date
(125,000 + (175,000) -(50,000)
150,000
In 1999, no gross profit is reported as it is estimated that the contract would end up in profit.
In 2000, a loss of Sh.50,000,000 is reported in the profit and loss account.
In 2001, gross profit of Sh.150,000,000 (Sh.100,000,000 – 50,000,000) is reported in the profit and loss account.
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(b) Profit and Loss account Completed contract method
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Realised gross profit/loss
Less: General administrative expenses Net profit/(loss)
- 15,000 (15,000)
(50,000) 20,000 (70,000)
150,000 18,000 132,000 Percentage of completion method
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Realised gross profit/loss
Less: General administrative expenses Net profit/(loss)
125,000 15,000 (110,000)
(175,000) 20,000 (195,000)
150,000 18,000 132,000 Calculation of balance sheet extract:
Completed contract method
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Work in progress
Total costs incurred to date
Add: Total realised gross profit to date Less: Total billing to date
Debtors balance Total billings to date Less: Cash collection to date
300,000 - 300,000 270,000 30,000 270,000 240,000 30,000
630,000 (50,000) 580,000 750,000 (170,000) 750,000 600,000 150,000
750,000 100,000 850,000 850,000 - 850,000 800,000 50,000 (c) Balance sheet extracts
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Current assets Work in progress Debtors
Current Liabilities
Excess of billings over work in progress
300,000 30,000 330,000
- 150,000 150,000 170,000 170,000
- 50,000 50,000
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Percentage of completion method
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Work in progress
Total costs incurred to date
Add: Total realised gross profit to date Less: Total billing to date
300,000 125,000 425,000 270,000 155,000
630,000 (50,000) 580,000 750,000 (170,000)
750,000 100,000 850,000 850,000 - Debtors balance
Debtors balance calculated as under completed contract method and balances at the end of the three years are the same under both methods.
1999
Sh.’000’ 2000
Sh.’000’ 2001 Sh.’000’
Balance sheet extracts Work in progress Debtors
Current liability
Excess of billings over work in progress
155,000 30,000 185,000
- 150,000 150,000 170,000 170,000
- 50,000 50,000
NUMBER THREE
(a) Royalty Expense (Payable) A/c
Sh. Sh.
1997 Dec 31 1998 Dec 31 1999 Dec 31 2000 Dec 31 2001 Dec 31
Quick Com Ltd.
Quick Com Ltd.
Quick Com Ltd.
Quick Com Ltd.
Quick Com Ltd.
80,000
130,000
180,000
200,000
350,000
Dec 31
Dec 31
Dec 31
Dec 31
Dec 31
Factory O/head
FAO A/c
FOH a/c
FOH a/c
FOH a/c
80,000
130,000
180,000
200,000
350,000
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(b) Quick Com Ltd. A/c
Shs. Shs.
Dec 31 Bal c/d 250,000
- 250,000
1997 Dec 31 Royalty expenses Royalty income
Short workings recoverable 1998
180,000 25,000 145,000 250,000 March 15
Dec 31
Bank a/c Bal c/d
250,000 250,000 - 500,000
Jan 1 Bal b/d Dec 31
Royalty expenses Royalty income S.W recoverable
250,000 130,000 60,000 60,000 500,000 March 15
Dec 31
Bank a/c
Short working recoverable Bal c/d
250,000
55,000 250,000 555,000
1999
Jan 1 Bal b/d Dec 31
Royalty expense Dec 31
Royalty income
250,000 180,000 125,000 - 555,000 March 15
Dec 31
Bank a/c SW recoverable Bal c/d
250,000 60,000 350,000 660,000
2000
Jan 1 Bal b/d Dec 31
Royalty expense Royalty inc.
250,000 200,000 210,000 660,000 March 15
Dec 31
Bank a/c
Bal c/d
350,000
450,000 800,000
2001
Jan 1 Bal b/d Dec 31 Royalty exp.
Royalty Inc.
350,000 250,000 200,000 800,000 2002
Jan 1 Bal b/d 450,000
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(c) Short workings recoverable
Shs. Shs.
1997 Dec 31 1998 Jan 1
1999 Dec 31
2000 Jan 1
Quick Com Ltd.
Bal b/d
Quick Com Ltd.
Bal b/d
Bal b/d
145,000
145,000 60,000 205,000 205,000
60,000
Dec 31
Dec 31
Dec 31
Dec 31
Bal c/d
Bal c/d
Quick com. Ltd P & L A/c Bal c/d
Quick Com Ltd
145,000
205,000 205,000
55,000 90,000 60,000 205,000 60,000 (d) Royalty Income (Recoverable) a/c
Sh. 1997 Sh.
Dec 31 Quick Com Ltd Profit to P & L a/c Bal c/d
25,000 8,000 15,000 48,000
Dec 31 Hand phones ltd 48,000 - 48,000 1998
Dec 31 Quick Com Ltd Profit to P & L a/c
Bal c/d
25,000 11,000 10,000 81,000
Jan 1
Dec 31 Bal b/d
Hand phones 15,000
66,000 - 81,000 1999
Dec 31 Quick Com Ltd Profit to P & L a/c
Bal c/d
125,000 30,000 35,000 190,000
Jan 1
Dec 31 Bal b/d
Hand phones 10,000
180,000 - 190,000 2000
Quick Com Ltd Profit to P & L a/c
Bal c/d
210,000 39,000 20,000 269,000
Jan 1
Dec 31 Bal b/d
Hand phones 35,000
234,000 - 269,000 2001
Dec 31 Quick Com Ltd Profit to P & L a/c Bal c/d
200,000 42,000 30,000 272,000
Jan 1
Dec 31 Bal b/d
Hand phones 20,000
252,000 ______
272,000 2002
Jan 1 Bal b/d 30,000
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Workings
(i) Amount transferred to Quick Com Ltd is determined by multiplying units sold by Hand phone Ltd in the year by Sh.50.
(ii) Amount to profit and loss account is determined by multiplying units produced by Hand phone Ltd in the year by Sh.10.
(iii) Balance carried down is determined by multiplying closing stock of Hand phone Ltd. by Sh.50.
(e) Hand phones Ltd. A/c
Sh. 1997 Sh.
Dec 31 Royalty income Short workings allowable
48,000 102,000 150,000
Dec 31 Bank a/c 150,000
- 150,000 1998
Dec 31 Royalty income
S.W Allowable 66,000 84,000 150,000
Dec 31 Bank a/c 150,000
- 150,000 1999
Dec 31 Royalty Inc. 180,000
180,000 Dec 31 SW allowable
Bank a/c 30,000
150,000 180,000 2000
Dec 31 Royalty inc. 234,000 - 234,000
Dec 31 SW Allowable
Bank 84,000
150,000 234,000 2001
Dec 31 Royalty inc 252,000 Dec 31 Bank a/c 252,000
(f) Short workings allowable a/c
Sh. 1997 Sh.
Dec 31 Bal c/d 102,000 Dec 31 Hand phones 102,000
1998
Dec 31 Bal c/d 186,000
______
186,000 Jan 1
Dec 31 Bal b/d
Hand phones 102,000
84,000 186,000 1999
Dec 31 Hand phones Ltd
Bal c/d 30,000
156,000 186,000
Jan 1 Bal b/d 186,000
- 186,000 2000
Dec 31 Handphones Ltd
P & L A/c 84,000 72,000 156,000
Jan 1 Bal b/d 156,000
______
156,000
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NUMBER FOUR
(a) Objective of the standard (IAS 7)
Information about the cash flows of an enterprise is useful in providing users of financial statements with a basis to assess the ability of the enterprise to generate cash and cash equivalents and the needs of the enterprise to utilise those cash flows. The economic decisions that are taken by users require an evaluation of the ability of an enterprise to generate cash and cash equivalents and the timing and certainty of their generation.
The objective of this standard is to require the provision of information about the historical changes in cash and cash equivalents of an enterprise by means of a cash flow statement which classifies cash flows during the period under review into operating, investing and financing activities.
Scope of IAS 7
An enterprise should prepare a cash flow statement in accordance with the requirements of this standard and should present it as part of its financial statements for each period for which financial statements are prepared.
Users of financial statements from companies are interested in how the company generates and uses its cash and cash equivalents. This is always the case regardless of the nature of the enterprise’s activities and irrespective of whether cash can be viewed as the product of the enterprise, as may be the case with a financial institution. Enterprises need cash for essentially the same reasons however different their principal revenue producing activities might be. They need cash to conduct their operation, pay their obligations and provide returns to their investors. Accordingly this standard requires all enterprises to present cash flow statements whenever financial statements are prepared.
In other words, cash flow statements should be part and parcel of the financial statements without which the financial statements would be incomplete.
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(b) WEWE LTD
CASH FLOW STATEMENT
FOR YEAR ENDED 31 MARCH 2002
SH.’000’ SH.’000’
Cash from operating activities
Net profit before tax and extraordinary items Adjustments for:
Depreciation Goodwill written off Gain on sale of plant Gain on sale of investment
Operating profit before working capital changes Interest in stock
Decrease in accounts payable Increase in accounts payable Increase in investments Cash generated from operations Tax paid
Net cash from operating activities Cash from investing activities Sale of plant
Sale of investments
Acquisition of land and building Goodwill purchased
Acquisition of plant and machinery Cash used in investing activities Cash from financing activities Issue of share at a premium Debenture redemption Dividends paid
Cash from financing activities
Increase in cash/cash equivalents during year Cash/cash equivalents as at 1.4.2001
Cash/cash equivalents as at 31.3.2002
1,150 420 (720) (160) (1,350) 1,660 600 (870)
1,470 310 (300) (320) (1,410)
3,750 (1,500) (530)
2,400
690 3,090
40 3,130 (680) 2,450
(250)
1,720 3,920 (6,110) (2,190) 3,920 Cash/cash equivalents as at 1.4.2001
Sh.’000’
Investments Cash at hand Bank overdraft
840 430 (6,540) (5,270) Cash/cash equivalents as at 31.3.2002
Sh.’000’
Investments
Cash at hand and bank Bank overdraft
1,710 200 (2,390) (480)
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Plant/machinery
Sh.’000’ Sh.’000’
Bal b/d
Bank 6,350
1,410 ____
Disposal Depreciation Bal c/d
750 1,150 5,860
7,760 7,760
Goodwill
Sh.’000’ Sh.’000’
Bal
Bank 2,900
320 P & L
Bal c/d 420
2,800
3,220 3,220
NUMBER FIVE
(a) (i) Budgetary accounting:
Preparation of operating accounts in the format of the budgets.
Most public sector organisations use this technique
Main purpose is to emphasise the budgets role in the cycle of planning control and accountability.
(ii) Cash accounting
System that recognises only cash inflows and cash outflows
The resulting final accounts are just summarised cashbooks.
Sales and purchases are only recognised when cash is received or paid.
The system does not include accruals of any kind and is followed in many public sector and non-profit organisations e.g. charitable organisations.
(iii) Commitment accounting
Recognises transactions when the organisation is committed to them.
Transactions are not recognised when cash is paid or received, nor when an invoice is received or issued but at an earlier stage when orders are issued or received.
Under this system, the organisation is recognising the issue of an order as a commitment to incur the expense and the accounts continuously record commitment.
Main purpose of this system is budgetary control rather than financial reporting.
(iv) Fund accounting
Involves the recording of financial transactions and adjustments in quasi- independent book-keeping systems referred to as funds.
Each fund is a self balancing set of accounts that is used to record data generating by an identifiable government operations and necessity of assuming legal compliance. e.g. government funds – school, debt service.
(b) Case for accrual method:
Accrual method of accounting measures all the income earned for a particular period regardless of the cash receipt.
This gives the true total income earned. The method ensures that all costs are considered for the period to which they relate regardless of cash payment.
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The method measures and matches the revenue with the related cost/expenditure to the period to which they relate.
Case against the method
The method can be misleading on the income reported when the funds/cash are yet to be collected.
The measure of the profit or revenue will not match the cash receipt.
The method is not suitable in government accounting since the government uses a budget period where expenditure and income are allocated.
Accrual method is not applicable in accounting for government since the expenditure incurred and not paid for the revenue earned and not received are considered as expenditure and revenue respectively for the next budget.
