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SKANS School of FFA/F3FINANCIAL ACCOUNTING EXAM PACK Table of Contents: SKANS school of accountancy Page | Chapter 10 11 12 13 14 15 Name Page no Basic Accounting Control Accounts BRS Correction of Errors Accruals & Prepayments Bad & Doubtful Debt Inventory (IAS-2) IAS-16 Sole trader, Final a/c, Incomplete records Regulatory Framework Limited Companies IAS & Disclosure Notes Cash flows Ratios Consolidation Solution 11 12 14 17 20 23 25 28 31 33 37 BASIC ACCOUNTING (Chapter 1) This is an extract from Karnal's trial balance for the year end 30 th June 20X9 SKANS school of accountancy Page | Opening Inventory $19,500 Closing Inventory $22,250 Purchases $325,000 Carriage Inwards $8,250 Distribution Cost $28,125 Administration Salaries $96,750 Depreciation $31,400 Depreciation is split equally between cost of sales and distribution expenses What should be the cost of sales figure shown in Karnal's income statement for the year ended 30 th June 20X8? $ Which of the following transactions have been correctly recorded? a) Sales returns Dr Sales accounts Cr Return inwards account b) Contra agreement with branch and Co Dr Personal account in sales ledger Cr Personal account in Purchases ledger c) Owner withdraws goods Dr Purchase account Cr Capital account d) For own use Irrecoverable debt recovered Dr Cash account Cr Receivable expense A business has the balance at the bank $2,500 at the start of the month During the month, it paid for materials invoiced at $1,000 less trade discount of 20% and settlement discount of 10% It received a cheque from credit customer in respect of an invoice for $200, subject to a settlement discount of 5% What is the balance at the bank at the end of the month? a) $1,980 b) $1,900 c) $1,970 d) $1,700 Joseph makes credit sales of $12,400 and cash sales of $900, before any discounts He receives sales returns of $500 and allows trade discounts of $70 What amount should be recorded as sales revenue in the income statement? a) $13,300 b) $12,800 c) $13,730 d) $12,730 Which TWO statements are true of the duality concept? 1) The number of debit and credit entries must be equal 2) The value of debit and credit entries must be equal 3) Each transaction has both debit and credit entries 4) Each transaction must have only two entries a) and b) and c) and d) and ABC sold goods on credit to XYZ The selling price was $15,000 and they originally cost $10,000 ABC does not keep perpetual inventory records What entries should be made by ABC in its records for this sale? a) Dr Receivables $15,000 Cr Inventory $10,000 Cr Profit $5,000 SKANS school of accountancy Page | b) Dr Sales $15,000 c) Dr Sales $15,000 d) Dr Receivables $15,000 Cr Receivables $15,000 Cr Inventory $10,000 Cr Profit $5,000 Cr Sales $15,000 The statement of comprehensive income shows the revenue generated by the company less the cash spent on overheads costs Is the statement true or false? a) True b) False Amy maintains a sale daybook and sales return daybook In her first month of trading, the following transactions took place: • Sales on credit to X $1,000 • Sales on credit to Y $2,500 • Cash sales to Z $800 • Sales return from X $120 What is the total of the sales daybook at the end of the month? Which of the following could be a part of the integrated accounting system? General ledger Payroll Purchase ledger a) 1, and b) and c) and d) and 10 Which books of prime entry should the following transactions be entered into? Cashbook Sales Petty Purchase Daybook Cashbook Daybook • The company sends a customer an invoice of $100 • Stationary of $10 purchased on cash • A company receives an invoice for $200 from a supplier • The company pays a supplier $450 11 The financial statements are used by different user groups for different reasons For each user group what is their primary area of interest? Profitability Liquidity • Banks • Shareholders SKANS school of accountancy Page | CONTROL ACCOUNTS (Chapter 2) a) b) c) d) Which of the following is a possible correct entry on the accounts receivables ledger control account? Credit with the total sales figure excluding sales tax Debit with the total sales figure excluding sales tax Credit with the total sales figure including sales tax Debit with the total sales figure including sales tax Magasin is a small business which is preparing its financial statements for the year ended 31 October 20X6 Personal account of its only credit customer, Shaun, contains the following information for year: $ Opening balance at January 20X6 24,500 Cash received 102,300 Discount allowed 3,100 Interest on overdue payments 1,600 Credit sales 133,700 Contra agreements 8,200 When preparing the trial balance at the year end, what amount would Magasin show as owed by Shaun? $ The accounts payable ledger control account of a business showed a balance at the yearend of $285,000 This did not agree with the total of the list of purchase ledger balances at the year end and subsequent checking found that 1) Discounts received of $3,000 had been entered on the wrong side of the control account 2) Returns outwards had been overstated by $10,000 What will be the balance on the accounts payable ledger control account following correction of the above errors? a) $288,000 b) $292,000 c) $269,000 d) $289,000 Accounts payable control account Cash paid to credit suppliers $103,400 B/F Contra with receivables $10,000 Cash received from customers Cash purchases Credit purchases C/F $635,600 Discount received $749,000 $376,780 $183,200 $52,000 $124,300 $12,800 $749,000 What should be the balance on accounts payable control account, after the necessary adjustments have been made? $ Which of the following should be identified by reconciling supplier statement to the payables ledger? Cheque payment in transit Invoices sent but not yet received a) only SKANS school of accountancy Page | b) only c) and Vana received a monthly statement from one of its suppliers showing amount owing to them of $5300 Vana's records however showed that $7,500 was owed and so an investigation was carried out which found that: • A contra entry for $800 had been omitted from Vana's records • A credit note received for $500 received by Vana for goods returned had not been entered on Vana's records • A recent purchase of $400 had been posted to the wrong side of the payables ledger account in Vana's records After adjusting for the above items what discrepancy remains between the supplier's statement and the Vana's records? $ Sandy discovered errors when reconciling the balances in the purchase ledger control account with the list of balances from the purchase ledger Which of the following need an entry in the payables ledger control account? YES NO • The purchase daybook total was overcast by $10 • A payment of $90 was made in full settlement of a $100 balance owing This was correctly recorded in the control account but only $90 was posted in the purchase ledger • A credit note received for $110 was entered in the supplier's account as $100 • A credit purchase was totally omitted from the accounting records SKANS school of accountancy Page | BRS (Chapter 3) Punit has identified the following reasons for his cashbook balance of $1,200 debit being different from the balance on the bank statement: 1) Uncleared lodgements of $400 2) The bank has mistakenly recorded a direct debit payment of $300 twice 3) Unpresented cheques of $200 What is the balance on Punit’s bank statement, prior to any of the above items being adjusted? $ Where would the following items be identified when preparing bank reconciliation statement? It is on the bank statement It is in the cash book but not but not In the cash book on the bank statement • A direct debit • An un-presented cheque Smith received a bank statement which shows a balance of $3500 debit Smith's bookkeeper notes the following: Total cheques sent to supplier for $3100, out of which 230 have not been presented to the bank at the due date of the bank statement The bank has charged interest of $34 which is not recorded in the cashbook Direct debits of $450 of supplier have been paid into the bank and not recorded in the cashbook A payment of $75 has been paid out of the bank account due to a bank error What should the overdraft balance be on Smith's cashbook, prior to these items have been dealt with? $ Which TWO of the following items, defined when preparing bank reconciliation require an adjusting entry in the cash book? a) Cheques lodged last week have not been cleared by the bank b) A cheque paid into the bank and has just been dishonored by the bank c) Bank charges of $154 were charged by the bank d) The bank has credited interest to the account in error When preparing a bank reconciliation, which two of the following will necessitate a correcting entry to cash book? A Outstanding lodgments B Unpresented cheques C Bank charges D interest charges SKANS school of accountancy Page | CORRECTION OF ERRORS (Chapter 4) A company prepared its trial balance and discovered that the total debit column and the credit column not agree A suspense account was opened for the difference It was subsequently discovered that the rent invoice for $420 had been recorded in the rent expense account as $240 What journal entry is required to correct this error? a) Dr Rent $180 Cr Suspense $180 (being correction of error of transposition) b) Dr Suspense $ 180 Cr Rent $180 (being correction of error of transposition) c) Dr Rent $180 Cr Suspense $180 (being correction of error of commission) d) Dr Suspense $180 Cr Rent $180 (being correction of error of commission) The trial balance of a business did not balance, so a suspense account was opened Subsequent checking found that the purchases account had been overcast by $200 and the interest income account had been under-cast by $100 How should these errors be corrected? a) Dr Suspense $100 Dr Interest income $100 Cr Purchases $200 b) Dr Purchases $200 Dr Interest income $100 Cr Suspense $300 c) Dr Purchases $200 Cr Suspense $100 Cr Interest income $100 d) Dr suspense $300 Cr Purchases $200 Cr Interest income $100 Rent paid of $200 has been credited to the rent expense account The debit side of the trial balance has been over cast by the $100 The yearend bank balance of $860 at the bank has been entered on the trial balance as a debit of $680 What is the debit balance of suspense account as a result of these errors? $ Rent paid of $200 has been credited to the rent expense account The debit side of the trial balance has been overcast by $100 The yearend bank balance of $860 at bank had been entered on the trial balance as a debit of $800 What is the debit balance on the suspense account as a result of these errors? $ Joseph's final trial balance did not balance and he set up a suspense account for the difference He then discovered that rent of $500 paid by cheque has been credited to both the bank account and the rent account Which of the following journal entries will correct this? a) Dr Rent account $1,000 Cr Suspense account $1,000 b) Dr Rent account $1,000 Cr Bank account $1,000 c) Dr Suspense account $1,000 Cr Rent account $1,000 d) Dr Rent account $500 Cr Suspense account $500 The debit and credit columns, of XYZ's trial balance did not agree A debit balance of $25,950 was entered in a suspense account and the following errors were subsequently identified SKANS school of accountancy Page | 1) A cheque received for $1,900 had been correctly posted to the cash account and posted to the receivables ledger as $9,100 2) Rent paid of $6,500 had been posted correctly to the cash account and posted to the rent expense account as $650 3) No entries had been made to reflect a cash sale of $1,000 What is the remaining debit balance on the suspense account after making adjustments for the above errors? $ The trial balance was not balance so a suspense account was opened for the purpose Subsequent checking found that the purchase account had been overcast by $200 and the interest income account had been under cast by $100 How should these errors be corrected? a) Dr Suspense account $300 Cr Purchases $200 Cr Interest income $100 b) Dr Purchases $200 Dr Interest income $100 Cr Suspense account $300 c) Dr Suspense account $100 Dr Interest income $100 Cr Purchases 200 d) Dr Purchases $200 Cr Suspense account $100 Cr Interest income $100 Which of the following errors would give rise to the creation of suspense account? a) Cash received from a credit customer of $200 had been incorrectly recorded as $400 in the relevant accounts b) A credit sale for $500 had been debited to the account of J Smith and should have been entered in the account of B Smith c) Purchase of a motor van for $10,000 for making deliveries had been entered in the motor expense account d) A credit purchase of $690 had been entered in the-purchase account correctly but had been entered in the payables account as $960 When the financial statements of Kotka were prepared for the year ended 31 December 20X6, the following errors were found in the underlying accounting records Kotka maintains receivables and payables ledger control accounts The purchase of a new computer for $ 30,000 had been omitted from the accounting records The sale of goods on credit for $ 2,000 to C Jaipur & Co had been incorrectly debited to the personal account of D Jaipur & Co The purchase of goods on credit of $ 1,000 from D Kuche & Co had only been entered in the purchase account No entry had been made in the personal account of the supplier or the payables ledger control account Which of these errors would cause the trial balance NOT to balance? a) only b) only c) only d) None of the errors 10 A company received a settlement discount of $35 from a supplier Amount was debited to discount received account and correctly recorded in payables ledger control account What is impact on profit? a) Overstated by $70 b) No effect c) Understated by $70 11 Charles has recorded the purchase of vehicles as motor expenses This has resulted in the misstatement of both motor expenses and depreciation within the income statement What impact will this error have on Charles profit? Profit overstated Profit understated SKANS school of accountancy Page | • Depreciation misstatement • Motor expense misstatement 12 The closing inventory in Frodo's financial statement has been overstated by $70,000 What is the effect of this error? a) The current year's profit will be overstated and there will be no effect on next year's profit b) The current year's profit will be understated and there will be no effect on next year's profit c) The current year's profit will be overstated and next year's profit will be understated d) The current year's profit will be understated and next year's profit will be overstated ACCRUALS & PREPAYMENTS (Chapter 5) Roger is preparing his financial statements for the year ended 31 October 20X8 Roger has included within his expenses office rental of $ 36,000 paid on February 20X8 for the following 20 months What is the effect of this error on Roger’s net profit? a) $ 19,800 understated b) $ 16,200 understated c) $ 16,200 overstated d) $ 19,800 overstated The statement of comprehensive income for the year ended 31 st May 20X6 showed $15,000 for insurance Payments for insurance during the year totaled $17,500, and there was a prepayment for insurance at 1st June 20X5 of $1,250 What is the prepayment for insurance as at 31 st May 20X6? $ A company made the following payments for computer rentals $4,500 for the months ended 28th February 20X8 $9,450 for the months ended 31 st August 20X8 $10,200 for the months ended 28th February 20X9 What should the charge for computer rental be in the income statement for the year ended 31 st December 20x8? $ Company is preparing its final accounts for the year ended 31 st December 20X8 and has not included telephone bill received in January 20X9, relating to phone calls made in Dec 20X8, in final accounts If the cost is recorded in the financial statements for the year to 31 st December 20X9 how will the net profit be affected for 20X8 and 20X9? a) 20X8 overstated 20X9 understated b) 20X8 understated 20X9 overstated c) 20X8 understated 20X9 understated d) 20X8 overstated 20X9 overstated Fred prepares his accounts to 31 December each year On January 2006 the amount prepaid for insurance was $360 During 2006 Fred made the following payments: Date Particulars $ April Motor Vehicle insurance for year ended 31 March 2007 240 June Plant Insurance for year ended 31 May 2007 960 What amount should be included in the income statement for the year ended 31 December 2006 for insurance? a) $1,100 SKANS school of accountancy Page | 10 Purchase of non-current assets Revaluation 17 A B C D Which of the following define a right issue? A share issue for no consideration A share issue giving the new shareholders the entitlement to enhanced dividend A issue of share in proportion to profits An issue of shares to existing shareholders in proportion to their existing shareholding 18 Which of the following are advantages to the owner of a business of operating as an unincorporated business as opposed to an incorporated business Legal separation of the entity from the owners Unlimited liability A and B only C only D None IAS & Disclosures (Chapter 12) According to IAS-1, presentation of financial statements, which TWO of the following items MUST be presented on the face of the income statements? 1) Finance costs 2) Disposal of investments 3) Tax expense 4) Write down of property, plant and equipment to recoverable amounts a) and b) and c) and d) and Aragon’s reporting date is 31 December 20X5 The financial statements were authorized for issue on June 20X6 Which TWO of the following events after the reporting period, should be adjusted in the financial statements for the year ended 31 December 20X5? 1) The declaration of an equity dividend of 1c per share on 26 January 20X6 in respect of the year ended 31 December 20X5 2) The imposition of significant fine on 16 March 20X6 for health and safety breaches in May 20X5 3) The bankruptcy of a significant customer on April 20X6, with a balance outstanding at the end of the reporting period 4) Impairment value of land and buildings due to ground subsidence which occurred on Feb 20X6 a) and b) and c) and d) and SKANS school of accountancy Page | 23 XYZ has a year end of 31 December 20X6 and its financial statements were authorized for issue on 10 February 20X7 On January 20X7 some items of inventory, which had been valued at cost of $ 55,000 were sold for $ 40,000 On 10 January 20X7 a fire in the finished goods warehouse destroyed inventory which was valued at $ 25,000 According to IAS-10, Events after the reporting period, what is the decrease in the profit figure for 20X6 as a result of these events? $ Which of the following statements regarding events after the reporting period is true? a) Adjusting events are those events that provide additional evidence of conditions existing at the reporting date b) Adjusting events concern conditions which only exist between the reporting date and date of financial statements are approved by the directors c) Non-adjusting events must always be disclosed in the notes to the financial statements d) Non-adjusting events provide additional evidence of conditions existing at the reporting date Are the following events which occurred between the reporting date and the date when the financial statements are authorized by the directors, adjusting or non-adjusting events? Adjusting Non-Adjusting • Making a new issue of shares • • Purchasing a new motor vehicle Selling inventory providing evidence that the value has reduced since the year end due to accident damage arising post year end • Receiving a letter from the government informing them that the business has been fined $ 10,000 for a pollution incident during the financial year Which TWO of the following occurring after the reporting date and before the financial statements are approved by the directors would be considered adjusting events? 1) The sale of inventory at a price less than carrying value due to a crash in the world market prior to the reporting date 2) The discovery of an accounting error that occurred after the year end 3) The declaration and approval of the final dividend for the year end 4) The settlement one week after the year end of a court case which confirms an amount to be refunded to a customer, which has been disputed for six months a) and b) and c) and d) and The financial year end of the TQR is 30 April 2007 Are the following events, which were discovered before the authorization of issue of the final accounts on 31 May 2007, adjusting or non adjusting events after the reporting periods? Event Adjusting Non-Adjusting • A fire on 18 May burnt down one of TQR's ware house causing a significant loss of inventory • A contingent liability previously disclosed in the financial statement was settled in court on May 2007 TQR has to make large payment in settlement SKANS school of accountancy Page | 24 • TQR installed a new computer system costing $40,000,000 on 14 May 2007 • A customer who owed $23,784 at the yearend has been declared bankrupt on 22 May 2007 and TQR believes they will receive none of the outstanding debt Which of the following are true regarding disclosure of events after the reporting period? 1) Non adjusting events re disclosed if non-disclosure would affect the ability of users to make proper evaluations and decisions 2) Any new information received between the end of the reporting period and the financial statements are authorized for issue relating to conditions existing before the end of the reporting period, does not need to be disclosed or adjusted a) Statement only b) Statement and Statement c) Neither statement is true d) Statement only According to IAS-37 Provisions, contingent liabilities and contingent assets, should the following situations result in the recognition of a provision? Yes No • A manufacturer gives warranties to its customers The terms of the warranty require the company to make good any defects in its products that arise within two years of the date of sale Past experience shows that around two percent of sales each year will result in claims under the warranty • A coal mining company operates in a country where there is no legislation requiring the company to make good environmental damage The company causes environmental damage but has a widely published policy of making good this damage It normally adheres to this policy 10 Are the following statements true or false according to IAS-37 Provision, contingent assets and contingent liabilities? True False • A contingent liability should be disclosed by note even if the possibility of an outflow is remote • A contingent asset should be disclosed by note only if the inflow of benefits is probable a) b) c) d) According to IAS 37, provisions, contingent liabilities and contingent assets, which TWO of the following statements are true? 1) Contingent assets are included in the statement of financial position when their receipt is usually certain 2) Contingent assets should be disclosed by note if their receipt is possible 3) Contingent assets are never required to be disclosed in the notes to the accounts 4) Contingent assets should be disclosed in the notes if their receipt is probable and 2 and 3 and and SKANS school of accountancy Page | 25 11 Which TWO of the following are examples of “intangible assets”? 1) Goodwill 2) Capitalized development costs 3) Revalued property 4) Inventory held for sale a) and b) and c) and d) and 12 Vinnie, a limited company, commenced a development project on January 20X5 During the year ended 31 December 20X5, materials costing $20,000 were used on the development A member of staff was hired on the salary of $15,000 p.a on January 20X5 to work exclusively on the development If the capitalization criteria in IAS-38 Intangible Assets are met, what amount for development cost should be capitalized in 20X5? $ 13 A Co spend $20,000 researching a new rubber moulding technique, $30,000 developing a new tyre which will go into production in one year's time and $40,000 developing a dye for tyres which will be used in future years as a marketing tool as it is unlikely to be commercially viable Which amounts should be expensed in statement of comprehensive income and capitalized in statement of financial position in relation to these transactions in accordance with IAS 38 intangible assets? a) Statement of comprehensive income $90,000 Statement of financial position Nil b) Statement of comprehensive income $90,000 Statement of financial position $20,000 c) Statement of comprehensive income $60,000 Statement of financial position $30,000 d) Statement of comprehensive income $50,000 Statement of financial position $40,000 14 Trend spent $4.5m developing a new mp3 player, which commenced sale on January 2006 It was decided to amortize development cost at the rate of 40% on a reducing balance basis On January 2007 the mp3 player had not been as successful as anticipated and $300,000 of development cost was written off What is the amortization for the year ended 31 December 2007? $ CASH FLOWS (Chapter 13) Which TWO of the following would increase cash flows from investing activities in a statement of cash flows? 1) Interest received 2) Repayment of loan 3) Proceeds of sale of equipment 4) Proceeds of issue of shares a) and b) and c) and d) and ABC has profit before tax of $100,000 Depreciation is $45,000; there was an increase in inventories of $10,000, a decrease in receivables of $15,000 and a decrease in payables of $8,000 Using the indirect method, what is the cash flow from operating activities? SKANS school of accountancy Page | 26 $ City Co prepared the following for cash from operating activities $000 Profit from operations 2,380 Depreciation 520 Loss on disposal (75) Increase in provision for negligence claim 30 Increase in receivables (50) Increase in inventory 40 Increase in payables 50 2,895 The following criticism of the calculation have been made 1) The loss on disposal should be added back not deducted 2) Increase in receivables inventory and payables should all be added 3) Increase in provision for negligence claim should be deducted not added Which of the above criticisms are correct? a) only b) and c) only d) and Bella is preparing her statement of cash flow using the indirect method The profit of $82,000 needs to be adjusted to arrive at 'Net cash from operating activities' The following figures relate to Bella's non-current assets: Depreciation $11,400 Profit on disposal of plant and equipment $4,500 Proceeds on disposal of plant and equipment $7,700 Amortization of intangible assets $2,100 Purchase of vehicles $10,200 What figure should be included in Bella's statement of cashflows for net cash from the operating activities given the above information? $ Suzie was preparing her statement of cash flow The following figures are extract from her workings: Dividend received $30,000 Repayment of borrowings $45,000 Increase in the bank overdraft $22,000 Proceeds of sale of non-current assets $49,000 Purchase of non-current assets $19,000 Income tax paid during the year $8,000 Issue of new share capital $12,000 What is the total cash flow from 'Financing activities' for statement of cash flow prepared under the IAS-7? a) $55,000 outflow b) $3,000 outflow c) $277000 inflow d) $33,000 outflow A company made the profit for the year of $18,750 after accounting for the depreciation of $1,250 During the year non-current assets were purchased for $8,000, receivables increased by $ 1,000, inventories decreased by $18,000 and payables increased by $350 SKANS school of accountancy Page | 27 According to IAS statements of cash flows, what should be the increase in cash and cash equivalents during the year? The financial statements used by different user groups for different person: For each user group what is their primary area of interest? USER Profitability Liquidity Banks $ Shareholders RATIOS (Chapter 14) A company has undervalued its closing inventory at the year end How will this error affect the current and quick (acid test) ratios? No effect Current ratio Quick (acid test) ratio Understate The following information has been extracted from the statement of comprehensive income of Tranlol Co for the year ended 30 September 20X5: $ Profit from operations 210,000 Interest payable (30,000) 180,000 Taxation (40,000) Profit for the year 140,000 SKANS school of accountancy Page | 28 a) b) c) d) Tranlol Co has also paid an ordinary dividend $20,000 What is the interest cover of Tranlol Co? times times times 4.67 times The finance director of Ash Co is concerned about the efficiency of the credit control department Which ratio would help the finance director monitor this? a) Accounts payable payment period b) Return on capital employed c) Accounts receivables collection period d) Gearing The following information relates to Ronger Co for the year ended 30 September 20X2: $ Trade accounts receivables 60,000 Sales revenue 300,000 Cost of sales 210,000 Closing inventory 40,000 Trade payables 30,000 Bank overdraft 50,000 What is the accounts receivables collection period, in days, of Roger Co? _days Which TWO of the following are features of an efficient credit control process for a business? 1) Identifying potential new credit customers 2) Dispatching invoices and statements promptly 3) Negotiating selling prices 4) Setting credit limits for credit customers a) and b) and c) and d) and Return on capital employed (ROCE) can be broken down into two key accounting ratios Which of the following make up ROCE? a) Profit margin and net asset turnover b) Profit margin and gearing c) Current ratio and net asset turnover d) Gearing and current ratio a) b) c) d) What type of information does the gearing ratio provide to the users of financial statements? Financial structure of the business Gross margin earned on revenue Whether current assets cover current liabilities Efficiency of the business in using its resources A company calculates its accounts payable payment period as follows, Closing trade payables x 365 Purchases SKANS school of accountancy Page | 29 a) b) c) d) Which of the following factors will cause the accounts payables payment period in days to be higher compared to previous years? 1) An extension of the credit period offered to its customers 2) Poor long-term financial management resulting in the use of extended trade credit from suppliers 3) Two major suppliers offering significant cash discount for early payment and only only and only 1, and A company's statement of comprehensive income for the year ended 31 st March 20x0 is below: $000 Profit from operations 1,200 Finance cost (200) Profit before tax 1,000 Income tax expense (400) Profit after tax 600 st Extracts from its statement of financial position at 31 March 20x0 showed the following: $000 Share capital 8,000 Retained earnings 1,200 Equity 9,200 Noncurrent Liabilities 10% Loan notes 2,000 What is the return on capital employed for the year ended 31 st March 20x0? a) 10.7% b) 8.9% c) 6.5% d) 5.6% 10 The only assets and liabilities of a company, at its year end were as follows: Inventory $4,000 Trade receivables $23,000 Cash $1,000 Bank overdraft $2,000 Trade payables $12,000 Bank loan repayable in 12 months $2,000 Bank loan repayable after 12 months $4,000 Which is the correct set of ratios from the above information? a) Current Ratio: 1.40:1 Quick Ratio: 1.20:0 b) Current Ratio: 1.75:1 Quick Ratio: 1.50:1 c) Current Ratio: 1.40:1 Quick Ratio: 1.50:1 d) Current Ratio: 1.75:1 Quick Ratio: 1.20:1 11 Extracts from accounts of Blackhorse a limited liability company, for the year ended 30 June 2003 are as follows: Receivables $140,000 Payables $210,000 Credit sales $1,050,000 Cash sales $70,000 Purchases $840,000 SKANS school of accountancy Page | 30 a) b) c) d) Which of the following are the correct receivables days (or receivable collection period) and payables days (or payables collection period)? Receivable days-48.7 Payable days-91.25 Receivable days-7.5 Payable days-4 Receivable days- 45.6 Payable days- 68.4 Receivable days-13.3 Payable days- 25 12 a) b) c) d) Which one of the following would cause a company's gearing ratio to increase? Making a rights issue of equity shares Making a bonus issue of shares Issuing long term loans Paying dividends on its equity shares 13 Cash is essential to the success of any business The working capital cycle can be used to monitor the flow of cash through a business How is the cash (working capital) cycle calculated? a) Inventory days + receivable days + payable days b) Inventory days + receivable days - payable days c) Inventory days - receivable days + payable days d) Inventory days - receivable days - payable days 14 A company's account receivables collection period has decreased from 35 days to 30 days Which TWO of the following are reasons for this? 1) There has been a down turn in trade through the year 2) Performance in credit control department deteriorated during the year 3) A substantial debt was written off in the last quarter, due to a major customer going bankrupt 4) The company has offered an increased cash discount to customers over the last quarter a) b) c) d) and 2 and 3 and and 15 Which of following TWO users of financial statements would be interested in the interest cover ratio? 1) A member customer when deciding whether to place a significant order 2) A bank when deciding whether to renew a loan arrangement 3) A manager responsible for the control of the operating costs 4) An investor concerned about the amount of equity dividend he will receive a) and b) and c) and d) and 16 Below is the data from the financial statements of Smith for the year ended 31 st December 20X9 $000 Credit purchases 1,300 Cash purchases 400 Total purchases 1,700 Trade payables 820 Accrued interest 20 Total Payables 840 SKANS school of accountancy Page | 31 a) b) c) d) What is the trade payables payment period for the Smith for the year ended 31 st December 20x9? 230.2 days 176.1 days 235.8 days 180.4 days CONSOLIDATION (Chapter 15) Amber Co owns 90% of Blue Co Extracts from the Statement of Financial Position of the two companies as at 31 December 20X0 are as follows: Amber Co Blue co $ $ Inventory 165 45 Receivables 295 165 Cash at bank 100 300 Payables 275 245 As at 31 December 20X0 Blue Co owes Amber Co $55 What is the current asset figure to be reported in the consolidated financial statements of Amber group? $ SKANS school of accountancy Page | 32 Gordon Co has owned 80% of Marsden Co for several years During the year Marsden Co sold goods with a sale value of $200,000 to Gordon Co at a markup of 25% Gordon Co held half of these goods in inventory at the year end What amount should be deducted from consolidated inventory at the year end? a) $25,000 b) $20,000 c) $40,000 d) $50,000 During 20X0 S Co sold goods to T Co, its subsidiary The goods cost S Co $140,000 and S Co charged a markup of 35% T Co had sold 70% of the goods by 31 December 20X0 The cost of sales figure in S Co’s and T Co’s respective statements for 20X0 was $790,000 and $430,000 What is the cost of sales? a) $1,178,000 b) $1,163,300 c) $1,016,300 d) $1,045,700 Amber Co acquired 80% of Blake Co on 30 September 20X0 Amber Co’s revenue for the year ended 31 December 20X0 was $2,800,900 Blake Co’s revenue for the same period was $1,400,200 What is the consolidated revenue for Amber group for the year ended 31 December 20X0? a) $3,921,060 b) $3,150,950 c) $4,201,100 d) $3,080,940 On August 20X9 H Co acquired 80% of S Co’s 200,000 $1 ordinary share capital The year-end of both companies is 31 December At January 20X9 S Co had retained earnings of $320,000 and made a profit for the year ended 31 December 20X9 of $48,000 Assume profits accrue evenly throughout the year What are the nest assets of S Co at the acquisition date? a) $ 548,000 b) $ 348,000 c) $ 248,000 d) $ 520,000 Chanty Co acquired 30,000 ordinary shares and $ 10,000 of the 4% loan stock in Exbig Co which is financed as follows: $1 ordinary shares $50,000 4% loan stock $40,000 Retained earnings $10,000 For the purpose of preparing consolidated financial statements, what is Chanty Co’s interest in Exbig Co? a) 60% b) 50% c) 85% d) 30% The following extracts are from the statement of financial position of Chester Co and its subsidiary Leicester Co as at 31 December 20X1 Chester Co Leicester Co Inventory $ 21,000 $ 8,000 SKANS school of accountancy Page | 33 Receivables $ 61,000 $ 19,000 During the year Chester Co sold goods to Leicester Co for $ 15,000 including a profit of $ 2,250 Leicester Co has still goods in its inventory and has not yet paid Chester for them What should be the total amount of current assets included in Chester Co’s consolidated statement of financial position as at 31 December 20X1? $ A Co owns 90% of the shares in B Co and 30% of shares in C Co None of the C Co's other shareholders have a controlling interest What relationships B Co and C Co have with A Co.? Subsidiary Associate B Co C Co H Co acquired 70% of the ordinary share capital of S company on st January 20x9 At that date, S Co.'s retained earnings were $10,000 and its share capital was $40,000 The fair value of non-controlling interest was $12,000, resulting in the goodwill at acquisition of $10,000 What was the purchase consideration paid by the H Co at st January 20x9 on the acquisition of S CO.? $ 10 MOSS acquired 90% of ordinary share capital of HOLME Co., when HOLME Co shares had a market price of $2.20 per share The fair value of non controlling interest at the date of acquisition was $22,000 At the date of acquisition the equity section of HOLME's Co.'s statement of financial position was as follows Share Capital ($1 shares) $100,000 Retained earnings $68,000 Revaluation reserves $12,000 $180,000 What is the value of good will on acquisition of HOLME Co.? a) $62,000 b) $40,000 c) $52,000 d) $18,000 11 DROTA Co acquired 90% of STEFAN Co for $360,000 on 1st January 20x6 At that date STEFAN equity was as follows a) b) c) d) Ordinary shares $100,000 Retained earnings $220,000 Total Equity $320,000 Good will on the acquisition was STEFAN was $100,000 What is the fair value of NCI in STEFAN Co at acquisition? $140,000 $60,000 $40,000 $80,000 SKANS school of accountancy Page | 34 12 IAS 27 consolidated and separate financial statements states that control can usually be assumed when the parents owns more than half (over 50%) of the voting power of an entity unless it can clearly be shown that such owner ship does not constitutes control In which TWO of the following situations would control exist when the parent owns less than 50% of the voting power of the entity? 1) The parent has owned shares in the entity since incorporation 2) The parent has power to govern the financial and the operating policies of the entity by statute or under an agreement 3) The parent has power to appoint or remove a majority of the members of the board of directors 4) There is only one other investor in the shares of the entity a) and b) and c) and d) and 13 The Jack Group has purchased 35% of voting share capital of Vera Co How should the investment in Vera Co be accounted for in the consolidated statement of financial position of the Jack Group? a) Include the investment at cost plus 35% of Vera Co's retained earnings b) Add the assets and liabilities of Vera Co to those of Jack Group c) Include the investment at cost plus 35% of Vera Co's post acquisition retained earnings d) Include the investment in Vera Co at cost in non-current assets 14 The following are extracts from the income statement of Burke Co and its 100% owned subsidiary Dickson Co for the year ended 31st December 20x1 Burke Co Dickson Co $ $ Revenue 110,000 75,000 Cost of sales (82,500) (52,500) 27,500 22,500 During the year Burke Co sold goods costing $12,000 to Dickson Co for $15,000 Dickson Co had sold these goods on to third parties prior to the year end What should be the revenue and cost of sales recorded in Burke Co.'s consolidated income statement for the year ended 31st December 20x1? a) Revenue $170,000, Cost of sales $120,000 b) Revenue $173,000, Cost of sales $120,000 c) Revenue $170,000, Cost of sales $123,000 d) Revenue $173,000, Cost of sales $123,000 15 Which FOUR of the following would be included in the consolidated statement of comprehensive income? 1) Share of profits of associate 2) Sales made to subsidiaries 3) Non-controlling interest 4) Dividends from subsidiary 5) Revenue of parent and subsidiary 6) Dividends from external investments SKANS school of accountancy Page | 35 a) b) c) d) 1,2,3,4 1,3,5,6 2,4,5,6 1,2,5,6 16 Agro Co purchased 51,000 Jason Co's ordinary shares on st June 2000 The purchase consideration composed: • $1.25 cash per share acquired • Three shares in Agro Co for every two shares acquired in Jason Co Agro Co's shares have nominal value of $1 and fair value of $ 2.30 What is the total amount of consideration transfer red on the acquisition of Jason Co? $ 17 IAS 28 investments in Associates define an associate Which of the following is the definition of an associate? a) An entity in which an investor has control b) An entity in which an investor has significant influence but not control or joint control c) An entity in which an investor has joint control d) An entity in which an investor has control or joint control 18 Triangle Co has the following investments: Company % of ordinary share capital Number of seats on the board Square Co 49% from Circle Co 20% from Rectangle Co 51% from Oval Co 30% None In addition triangle Co provides additional technical information to both Rectangle Co and Oval Co Which TWO of the above investments would be accounted for as associates in the consolidated financial statements? a) Rectangle Co b) Oval Co c) Square Co d) Circle Co 19 On January 2009 H Co acquired 80% ordinary share capital of S Co the acquisition of S Co was done via share exchange of two shares in H Co for every four shares in S Co S Co had 200,000 $1 shares at the date of acquisition How many new shares will H Co issue as a result of acquisition? a) 320,000 b) 80,000 c) 100,000 d) 160,000 20 Significant influence is the power to participate in the financial and operating policy decisions of the investee but has no control over those policies What type of relationship does the above statement indicates? a) A non-controlling asset b) An associate c) A subsidiary d) A trade investment SKANS school of accountancy Page | 36 SKANS school of accountancy Page | 37 ... method of depreciation Which principle qualitative characteristic of financial statements is this an example of? a) Prudence b) Relevance c) Consistency Information should only be disclosed if it is... probable and 2 and 3 and and SKANS school of accountancy Page | 25 11 Which TWO of the following are examples of “intangible assets”? 1) Goodwill 2) Capitalized development costs 3) Revalued property