Financial Accounting December 2023 Past Paper

CPA FOUNDATION LEVEL CIFA FOUNDATION LEVEL FINANCIAL ACCOUNTING
MONDAY: 4 December 2023. Morning Paper. Time Allowed: 3 hours.

Answer ALL questions. Marks allocated to each question are shown at the end of the question. Show ALL your workings. Do NOT write anything on this paper.

QUESTION ONE
(a) The Conceptual Framework for Financial Reporting (the Conceptual Framework), identifies TWO fundamental qualitative characteristics and FOUR enhancing qualitative characteristics that useful financial information is required to have.
Required:
(i) Explain the TWO fundamental qualitative characteristics of useful financial information. (4 marks)
(ii) Describe any TWO enhancing qualitative characteristics of useful financial information. (4 marks)
(b) Explain TWO functions of each of the following in the management of public finances:
(i) Office of the Auditor General. (2 marks)
(ii) Public Accounts Committee. (2 marks)

(c) Explain the difference between “reserves” and “provisions”. (4 marks)
(d) In the context of the issue of ordinary shares, differentiate between a “rights issue” and a “bonus issue”.
(4 marks)
(Total: 20 marks)
QUESTION TWO
Dadu, Elegwa and Fondo have been operating a retail business as partners. The partnership agreement provides that:
1. The partners are to be credited at the end of each year with the following salaries:
Sh.“000”
Dadu 150,000
Elegwa 75,000
Fondo 75,000

2. Each partner is to be credited with interest on capital balances at the beginning of each year at the rate of 5% per annum.
3. No interest is to be charged on drawings.
4. After charging partnership salaries and interest on capital, Dadu, Elegwa and Fondo are to share profits or losses in the ratio of 5:3:2 respectively, with a provision that Fondo’s share in any year (exclusive of salary and interest) shall not be less than Sh.150 million. Any deficiency is to be borne in the profit and loss sharing ratio by the other partners.
The trial balance of the partnership as at 31 December 2022 was as follows:
Sh.“million” Sh.“million”
Partners’ capital accounts:
Dadu 1,200
Elegwa 750
Fondo 450
Partners’ current accounts:
Dadu 240
Elegwa 180
Fondo 120

Sh.“million” Sh.“million”
Sales 6,975
Freehold land 900
Buildings (purchased during the year) 675
Buildings (renovations and improvements) 375
Purchases 4,200
Trade receivables 309
Trade payables 555
Drawings:
Dadu 255
Elegwa 165
Fondo 135
Furniture and fittings: Cost 540
Accumulated depreciation (1 January 2022) 210
Inventory (1 January 2022) 630
Salaries and wages 960
Office expenses 678
Rent, rates and insurance 157.5
Professional fees 52.5
Allowance for doubtful debts (1 January 2022) 7.5
Bank balance 655.5
10,687.5 10,687.5

Additional information:
1. Inventory as at 31 December 2022 was valued at Sh.540 million.
2. A debt of Sh.9 million is to be written off and the allowance for doubtful debts should be provided at the rate of 5% of the trade receivables on 31 December 2022.
3. As at 31 December 2022, salaries and wages included the following monthly drawings by the partners:
Sh.“million”
Dadu 7.5
Elegwa 4.5
Fondo 3.75
4. Partners had during the year been supplied with goods from inventory and it was agreed that these should be charged to them as follows:
Sh.“million”
Dadu 9.0
Elegwa 6.0
Fondo –

5. On 31 December 2022, rates paid in advance and office expenses owing were Sh.37.5 million and Sh.36 million respectively.
6. Professional fees included Sh.37.5 million paid in respect of the acquisition of the buildings.
7. Depreciation is to be provided as follows:
Asset Rate per annum Basis
Buildings 2.5% Cost
Furniture and fittings 15% Cost

8. The buildings were brought into use during the year ended 31 December 2022.

Required:
(a) Partnership statement of profit or loss and appropriation account for the year ended 31 December 2022.
(10 marks)
(b) Partners’ current accounts as at 31 December 2022. (4 marks)

(c) Statement of financial position as at 31 December 2022. (6 marks)
(Total: 20 marks)

QUESTION THREE
The following is the statement of financial position of Bidii traders as at 30 September 2023.

The statement of financial position was prepared by an inexperienced accounts clerk and included a suspense account balance under current assets.

Sh.“000” Sh.“000” Sh.“000” Sh.“000”
Capital and liabilities: Assets:
Capital 694,000 Non-current assets:
Net profit 126,000 Plant and equipment 634,000
820,000 Less: Depreciation (72,000) 562,000
Drawings (160,000) Furniture and fittings 70,000
660,000 Less: Depreciation (14,000) 56,000
618,000
Current liabilities: Current assets:
Accounts payable 50,000 Inventory 28,000
Bank balance 1,520 Accounts receivable 57,000
51,520 Suspense account 8,520 93,520
Total capital and liabilities 711,520 Total assets 711,520

Investigations revealed the following additional information:
1. The purchases day book had been undercast by Sh.2,800,000.
2. An item of equipment costing Sh.2,600,000 had been debited to repairs account. Depreciation on equipment is charged at the rate of 15% per annum on cost.
3. A debit balance of Sh.2,400,000 for a debtor had been omitted from total accounts receivable.
4. An entry of Sh.2,100,000 for return outwards was made in error in the sales day book instead of the purchases returns day book.
5. A cheque of Sh.2,250,000 paid to a creditor was correctly posted in the cash book but credited in error to the creditor’s account.
6. Goods valued at Sh.220,000 were withdrawn for personal use, but no entry had been made in the books of Bidii Traders.
7. A bad debt of Sh.1,250,000 was yet to be written off from the accounts receivable account.
8. A discount received of Sh.590,000 had been correctly entered in the cash book, but had been posted to the wrong side of discounts received account.

Required:
(a) Journal entries (including narrations), necessary to correct the above errors. (8 marks)

(b) Suspense account fully balanced. (2 marks)

(c) A statement of adjusted profit for the year ended 30 September 2023. (4 marks)

(d) A corrected statement of financial position as at 30 September 2023. (6 marks)
(Total: 20 marks)

QUESTION FOUR
The following balances were extracted from the books of Sagana Golf Club as at 1 September 2022:

Sh.“000” Sh.“000”
Golf course at cost 80,000
Club house at cost 20,000
Investments representing the building fund:
Ordinary shares 7,400
Deposit with Jamii Building Society 12,000 19,400
Subscriptions received in advance 400
Creditors for bar supplies 350
Life membership fund 5,000
Subscriptions in arrears 600
Bar inventory 4,850
Club house equipment at cost 3,400
Cash in hand 100
Bank balance 950 1,050

An analysis of the bank account operated by the club showed the following receipts and payments during the year ended 31 August 2023:
Sh.“000”
Receipts:
Subscriptions 26,000
Life membership fees 2,000
Tournament fees 1,000
Bar sales 28,600
Dividend from ordinary shares 800
Sh.“000”
Payments:
Maintenance of golf course 17,150
General club house expenses 12,150
Utilities 1,528
Bar supplies 23,500
Purchase of club house equipment 700
Deposit into Jamii Building Society 800
Repainting of club house 1,260

Additional information:
1. The club maintains a building fund separate from the accumulated fund and life membership fund. The building fund is invested in ordinary shares and also deposited into Jamii Building Society.
2. Jamii Building Society has been instructed to credit the interest on the club’s deposits to the club’s account at each half year. Jamii Building Society computes interest half yearly on 28 February and 31 August. For the year ended 31 August 2023, the interest amounted to Sh.840,000. Dividends paid on the ordinary shares are also added to the building fund by paying them into the building society account.
3. There were five life members as at 1 September 2022, one of whom died before the end of the year. Two other life members joined the club during the year. Life membership fee is Sh.1,000,000 per member. When a life member dies, his contribution is transferred to the accumulated fund.
4. General club house expenses included bar wages of Sh.4,200,000.
5. Balances as at 31 August 2023 were as follows:
Sh.“000”
Creditors for bar supplies 1,600
Subscriptions in advance 900
Subscriptions in arrears 300
Bar debtors 650

6. As at 31 August 2023, bar inventory was valued at Sh.4,350,000.
7. An insurance premium of Sh.480,000 was also included in the general club house expenses that had been paid by cheque. The insurance premium was for the year ended 30 November 2023.

Required:
(a) Bar statement of profit or loss for the year ended 31 August 2023. (4 marks)

(b) Statement of income and expenditure for the year ended 31 August 2023. (8 marks)

(c) Statement of financial position as at 31 August 2023. (8 marks)
(Total: 20 marks)

QUESTION FIVE
(a) Highlight SIX reasons why it is necessary to make adjustments to accounts at the end of the accounting year.
(6 marks)

(b) The following are the financial statements of Utajiri Ltd. for the two years ended 30 September 2022 and 30 September 2023:

Statement of profit or loss for the year ended 30 September:

2022
Sh.“million” 2023
Sh.“million”
Net Sales (80% credit sales) 4,400 5,100
Cost of sales (2,200) (2,850)
Gross profit 2,200 2,250
Operating expenses (640) (910)
Net profit before interest and taxes 1,560 1,340
Interest expense (45) (60)

2022
Sh.“million” 2023
Sh.“million”
Profit before tax 1,515 1,280
Corporate tax (400) (240)
Net profit after tax 1,115 1,040
Less: Dividends – Interim (50) (65)
– Final (150) (105)
Retained profit 915 870

Statement of financial position as at 30 September:

2022 2023
Sh.“million” Sh.“million”
Assets:
Non-current assets:
Propert, plant and equipment (NBV) 1,400 1,800
Current assets:
Inventory 800 1,200
Trade receivables 490 600
Cash in hand 420 395
1,710 2,195
Total assets 3,110 3,995
Capital and liabilities:
Capital:
Ordinary share capital (Sh.10 par) 1,000 1,000
Revenue reserves 915 1,785
1,915 2,785
Non-current liabilities:
10% debentures
450
600
Current liabilities:
Tax payable 400 240
Trade payables 145 200
Proposed dividends 200 170
745 610
Total capital and liabilities 3,110 3,995

Required:
Compute the following ratios for the years ended 30 September 2022 and 30 September 2023. Assume a 365-day year.

(i) Current ratio. (2 marks)

(ii) Quick ratio. (2 marks)

(iii) Average trade receivables collection period. (2 marks)

(iv) Gross profit margin. (2 marks)

(v) Interest cover. (2 marks)

(vi) Return on capital employed (ROCE). (2 marks)

(vii) Earnings per share (EPS). (2 marks)
(Total: 20 marks)
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