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No. of pages: 14

Executive Level - I
Financial Accounting & Reporting Fundamentals

Instructions to candidates

(1)

(2)
Time allowed: Reading and planning – 15 minutes
Writing

Total: 100 marks

– 3 hours
K
E
(3) Section 1: Question 1: 10 multiple choice questions (MCQs) – all
questions are compulsory.

Question 2: 10 short answer questions – all questions

are compulsory.

1
Section 2: 4 questions – answer any 3 questions.

Section 3: 1 question – compulsory

(4) Answers to all the questions should be in the answer booklet/s given
to you.

Answers to Question 1, (the most appropriate answer (A, B, C or D)),

should be entered in the answer booklet against the relevant
question number.

(5) Begin each answer in Section 2 and Section 3 on a separate page in

SEPTEMBER
the answer booklet. 2019
(6) All answers should be in one language and in the medium applied
for.
 SECTION 1
All questions are compulsory.
Total marks for Section 1 is 50 marks.
Recommended time for the section is 90 minutes.

Question 01

You are required to choose the most appropriate answer.

(Total: 20 marks)

1.1 The recent fluctuations in oil prices as a result of changes in the price of crude oil
in the world market, have adversely affected most of the manufacturing
companies in Sri Lanka.

The above mentioned fluctuations in oil prices can be explained as an influence

of:

A. Technological environment B. Legal environment

C. Social environment D. Economic environment
(2 marks)

1.2 Which of the following is ‘true’ in relation to the stakeholders involved in a

business organisation, and their respective information requirements, of the
financial statements?

(i) Customers of the company wish to know the quality of the products and
services.
(ii) Shareholders of the company wish to know about the profitability of the
company operations.
(iii) Lenders of the company wish to know whether the company can meet its
interest and capital payments.
(iv) Taxation authorities wish to know about the business’ profit in order to
assess the tax payable.

A. (i), (ii) and (iii) only.

B. (i), (ii) and (iv) only.
C. (ii), (iii) and (iv) only.
D. (i),(iii) and (iv) only.
(2 marks)

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1.3 Which of the following basic ethical principles explains that all professional and
business judgments of accountants should be free from bias and free from factors
which might affect impartiality?

A. Integrity
B. Objectivity
C. Professional competence and due care
D. Professional behaviour
(2 marks)

1.4 Which of the following is an expense, according to the definition in the

Conceptual Framework for Financial Reporting?
A. Purchase of a motor vehicle to be used in the business
B. Payment to creditors
C. Payment of salaries relevant for the financial year
D. Settlement of accrued expenses
(2 marks)

1.5 The enhancing qualitative characteristics according to the Conceptual

Framework for Financial Reporting are:
A. predictability, comparability, verifiability and understandability.
B. comparability, verifiability, timeliness and understandability.
C. materiality, verifiability, timeliness and comparability.
D. prudence, materiality, timeliness and verifiability.
(2 marks)

1.6 Which of the following are ‘true’ in relation to the changes in accounting policies
per LKAS 8, Accounting policies, changes in accounting estimates and errors?
(i) A change is permitted when it is required by a LKAS/SLFRS.
(ii) Adopting an accounting policy for a new type of transaction not dealt with
previously by the entity should be considered as a change in an accounting
policy.
(iii) A change is permitted when it will result in a more appropriate
presentation.
(iv) A change in an accounting policy must be applied prospectively.

A. (i) and (ii) only. B. (i) and (iii) only.

C. (ii) and (iii) only. D. (iii) and (iv) only.
(2 marks)
1.7 Which of the following is ‘true’ in relation to disclosures of non-adjusting events
per LKAS 10, Events after the Reporting Period?
A. There is no requirement to disclose the financial effect.
B. Disclosure of only the nature of the event is sufficient.
C. The nature and the financial effect of the event should always be disclosed.
D. The nature of the event and an estimate of the financial effect, or a
statement that such an estimate cannot be made should be disclosed.
(2 marks)

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1.8 The disclosure requirement for contingent liabilities per LKAS 37, Provisions,
Contingent Liabilities and Contingent Assets:

(i) a brief description of its nature

(ii) an estimate of the financial effect
(iii) an indication of the uncertainties relating to the amount or timing of any
outflow
(iv) Additional provision made during the period

A. (i), (ii) and (iii) only. B. (i), (iii) and (iv) only.
C. (ii), (iii) and (iv) only. D. (i), (ii) and (iv) only.
(2 marks)

1.9 Due to a closure of a product-line, 10 employees who served for more than 10
years became redundant and they agreed to leave the company for a redundancy
payment.

According to LKAS 19, Employee Benefits, the above redundancy payment can be
classified as:

A. termination benefit
B. post-employment benefit
C. short-term employee benefit
D. long-term employee benefit

(2 marks)

1.10 A customer of Dee (Pvt) Ltd (Dee) has filed a legal case against Dee for a failed
product. At this stage, it is unclear whether Dee has to pay damages as at
31 March 2019.

Which of the following is ‘true’ in relation to the above, as at 31 March 2019?

A. Dee has a liability of uncertain timing or amount.

B. Dee has a present obligation to pay damages as a result of sale of goods.
C. Dee has a contingent liability which needs to be disclosed.
D. Dee does not have to disclose any information as it is uncertain as to
whether the company has to pay damages.
(2 marks)

KE1 – September 2019 Page 4 of 14

Question 02

You are required to provide short answers/calculations to all questions, with

attention given to action verbs.
(Total: 30 marks)

2.1 State three (03) responsibilities of a company director.

(3 marks)

2.2 State three (03) distinctions between financial accounting and management
accounting.
(3 marks)

2.3 Explain the difference between cash basis and accrual basis of accounting.
(3 marks)

2.4 The trade receivables control account balance of Mini (Pvt) Ltd did not agree with
the sum of individual account balances in the trade receivables ledger as at
31 March 2019.

State three (03) possible reasons for having such difference in the above two
balances.
(3 marks)

2.5 Identify the source documents used by a company in each of the following
situations and the purpose of such source documents.

(i) Goods delivered to the company stores by a supplier.

(ii) Arrival of factory employees at work site.
(iii) Goods delivered to the customer or its transporter.
(3 marks)

2.6 The Journal is the record of prime entry for transactions which are not recorded
in any of the other books of prime entry.

List three (03) examples of such transactions.

(3 marks)

2.7 State three (03) disadvantages of a computerised accounting package.

(3 marks)

2.8 State three (03) problems that one would encounter in conducting a comparison
of financial information, with other peer companies, under financial statement
analysis.
(3 marks)

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2.9 ABC (Pvt) Ltd purchased a machine amounting to Rs. 560,000 on
1 November 2018 and the company incurred Rs. 15,000 and Rs. 6,000 as delivery
charges and installation cost respectively. The expected useful life time of the
machine is 15 years and the company calculates depreciation using the straight
line method.

Calculate the following according to LKAS 16, Property, Plant and Equipment.

(a) The value that will be recognised in the financial statements as a

non-current asset on 1 November 2018.
(b) The value of the asset as at 31 March 2019 under the cost model.
(3 marks)

2.10 State two (02) reasons for having a separate accounting standard for small and
medium sized entities as SLFRS for SMEs.
(3 marks)

KE1 – September 2019 Page 6 of 14

 SECTION 2

Three out of the four questions should be answered.

Total marks for Section 2 is 30 marks.
Recommended time for the section is 54 minutes.

Question 03

(a) Bikes (Pvt) Ltd’s cash book showed a credit balance of Rs. 5,600 as at
31 March 2019 in its current account at the bank. The bank statement as at
31 March 2019 showed that the company had an overdrawn balance of
Rs. 8,200.

The following were revealed, on checking.

(i) The receipt side of the cash book had been under-cast by Rs. 1,200.
(ii) Cheques received from customers amounting to Rs. 8,800 had been
recorded as receipts in the cash book. These had been reflected in the
bank statement in the month of April 2019.
(iii) The company had issued cheques in March 2019 amounting to Rs. 4,000 to
settle various bills. Those had been presented to the bank in the month of
April 2019.
(iv) Cheques deposited amounting to Rs. 1,000 in the savings account had been
erroneously credited to the current account by the bank.
(v) A cheque amounting to Rs. 900 issued to a supplier was replaced when it
was outdated. It was recorded again in the cash book and no other entry
had been made. Both these cheques had been included in the total
unpresented cheques shown above.

Required:

1. Record the appropriate adjustments in the cash book.

2. Prepare a statement reconciling the corrected cash book balance with

the balance shown in the bank statement as at 31 March 2019.

(4 marks)

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(b) Jake (Pvt) Ltd (Jake) maintains its books of account manually and the trial
balance as at 31 March 2019 did not tally. The accountant opened a suspense
account with a debit balance of Rs. 480,000, to tally the trial balance, and
prepared draft financial statements, until the error could be identified. The draft
financial statements showed a profit of Rs. 925,100.

The following were revealed upon further checking.

(i) A motor vehicle purchased on 1 April 2015 at a cost of Rs. 2 million was
sold on 31 March 2019 at Rs. 2.2 million. Jake depreciates motor vehicles
over 5 years using the straight line method. Depreciation has been
correctly recorded in the accumulated depreciation account until the date
of disposal. However, depreciation relevant to the year of disposal had not
been recorded in the depreciation account. Sales proceeds received had
been debited to cash book and credited to sales account. No other entry
had been made in this respect.

(ii) Jake is located in a rented building and annual rent amounting to

Rs. 80,000 should be payable on 1 January each year in advance. Rent paid
on 1 January 2019 of Rs. 80,000 had been recorded only in the cash book.

(iii) An inventory of Rs. 2,400 as at 31 March 2019 had been ignored in the
books.

Required:

1. Prepare the suspense account with necessary corrections.

2. Calculate the revised profit for the year ended 31 March 2019, after
the correction of the errors.
(6 marks)
(Total: 10 marks)

KE1 – September 2019 Page 8 of 14

Question 04

(a) You are given the following transactions. Assume the company’s accounting year
ends on 31 March.

(i) On 1 March 2019, the company received a bank loan of Rs. 180,000
repayable in 18 equal monthly instalments. Interest payable on this loan is
12% per annum.
(ii) On 31 March 2019, goods costing Rs. 100,000 were sold to a customer at a
mark-up of 20% on credit terms.
(iii) On 31 March 2019, a computer was purchased at a cost of Rs. 225,000, with
a down-payment of Rs. 85,000 and the balance is payable in 30 days.

Required:

Record the above transactions for the year ended 31 March 2019 using the
accounting equation given below.

Non-current + Current = Equity + Non-current + Current liabilities

assets assets liabilities
(5 marks)

(b) Following information is related to Maxi (Pvt) Ltd.

Balance as at 31 March 2019 31 March 2018
Rs. Rs.
Trade receivables 750,000 570,000
Trade payables 470,000 320,000
Inventory 980,000 720,000
Salaries and wages payable 28,000 -
Accrued expenses 54,000 26,000
Income tax payable 8,800 4,800

Summarised statement of profit or loss for the year ended 31 March 2019
Rs.
Sales 8,250,000
Cost of sales (4,950,000)
Gross profit 3,300,000
Salaries and wages (650,000)
Other expenses (Depreciation: Rs. 320,000) (1,980,000)
Net profit before tax 670,000
Taxation (82,000)
Net profit for the year 588,000

Required:
Prepare the cash flows from operating activities of Maxi (Pvt) Ltd using the
direct method for the year ended 31 March 2019.
(5 marks)
(Total: 10 marks)
KE1 – September 2019 Page 9 of 14
Question 05
You have been provided with the receipts and payments account of Kurunegala sports
club for the year ended 31 December 2018.
Receipts and payments account
Rs. Rs.
Balance as at 1 January 2018 43,100 Salaries and wages 167,000
General donations 230,000 Purchase of furniture 426,000
Subscriptions 900,200 Maintenance expenses 34,500
Donations for the playground 1,400,000 Rates paid 14,300
& pavilion
Purchase of land for the 1,000,000
playground
Balance as at 31 December 931,500
2018
2,573,300 2,573,300
Additional information
(i) The following information is related to subscriptions for the year 2018.
 Subscriptions received for the year includes total arrears of subscriptions
for the year 2017 of Rs. 15,000 and Rs. 50,000 for the year 2019.
 Arrears for the year 2018 are Rs. 7,800.
(ii) Furniture was purchased on 1 January 2018 and has a useful life of 5 years. It is
depreciated using the straight line method.
(iii) Rs. 4,000 of wages paid is related to the clearance of land purchased for the
playground. This has been included in salaries and wages of the receipts and
payments account.

(iv) Rates paid include Rs. 5,200 paid for the first quarter of 2019.
(v) The club has the following balances excluding any balances mentioned above.

Rs.
Equipment - Written down value as at 31 December 2017 342,000
Equipment - Written down value as at 31 December 2018 300,000

There were no additions/disposals during the year in relation to equipment.

(vi) Accumulated fund as at 1 January 2018 is Rs. 400,100.

Required:

(a) Prepare the income and expenditure account for the year ended
31 December 2018.
(4 marks)
(b) Prepare the statement of financial position as at 31 December 2018.
(6 marks)
(Total: 10 marks)
KE1 – September 2019 Page 10 of 14
Question 06
A, B and C have been in partnership for several years sharing profits and losses in the
ratio of 3:2:1. With the consent of all the partners, it was decided to dissolve the
partnership immediately.
The statement of financial position of the partnership as at 31 December 2018 is given
below.
Rs. Rs.
Non-current assets
Land 1,300,000
Building- at cost 1,700,000
Less: Accumulated depreciation (1,275,000) 425,000
1,725,000
Current assets
Receivables 14,200
Loan - B 100,000
Cash at bank 17,100
131,300
Total assets 1,856,300
Equity and liabilities
Capital accounts:- A 1,100,000
B 513,000
C 237,100 1,850,100
Current accounts:- A 23,000
B (11,500)
C (51,200) (39,700)
Current liabilities
Payables 45,900
Total equity and liabilities 1,856,300
Terms of dissolution;
(i) Land and building will be taken over by partner A at an agreed valuation of
Rs. 1 million.
(ii) Partner C has guaranteed the full recovery of a debtor amounting to Rs. 5,000.
The partnership will be able to collect Rs. 7,000 from the balance receivables.
(iii) Loan granted to partner B will be recovered from his capital.
(iv) Realisation expenses amount to Rs. 6,300.
(v) Any deficit in the partner’s account will be settled by the relevant partner, in cash.

Required:
(a) Prepare the realisation account of the partnership of A, B and C.
(4 marks)
(b) Prepare the partners’ capital accounts and current accounts.
(3 marks)
(c) Prepare the cash book of the partnership.
(3 marks)
(Total: 10 marks)

KE1 – September 2019 Page 11 of 14

 SECTION 3

Compulsory question.
Total marks for Section 3 is 20 marks.
Recommended time for the section is 36 minutes.

Question 07
(a) The trial balance of Zimega PLC as at 31 March 2019 is as follows.

Rs.‛000
Debit Credit
Property, plant and equipment – at cost:
Land and building (Land: Rs. 300,000,000) 750,000 -
Office equipment 15,000 -
Furniture and fittings 12,000 -
Motor vehicles 60,000 -
Accumulated depreciation as at 1 April 2018:
Building - 18,000
Office equipment - 6,000
Furniture and fittings - 4,800
Stated capital - 200,000
Revaluation reserve - 40,000
Trade payables - 229,500
Trade receivables 276,169 -
Cash and cash equivalents 16,500 -
Accrued expenses as at 31 March 2019 - 1,350
Provision for doubtful debts as at 1 April 2018 - 13,800
Retained earnings - 802,200
Inventory as at 1 April 2018 175,000 -
Sales - 1,458,444
Purchases 850,000 -
Administrative expenses 287,725 -
Selling and distribution expenses 154,000 -
Finance cost 80,000 -
Other income - 2,000
Investments 100,600 -
Income tax - 900
2,776,994 2,776,994

Additional information

(i) On 1 February 2019 the company had made an investment of Rs. 100 million
in the shares of listed entities and this investment portfolio is held for trading
purposes. The fair value of the portfolio as at 31 March 2019 was
Rs. 108 million. However no adjustments were made in the accounts for the
changes in fair value. As at acquisition, Rs. 600,000 was paid as transaction
cost, which is also included under the investment account.

KE1 – September 2019 Page 12 of 14

 (ii) Cost of inventory held as at 31 March 2019 was Rs. 154 million and the net
realisable value of inventory as at 31 March 2019 was estimated as
Rs. 153.5 million.

(iii) The impairment provision on trade receivables as at 31 March 2019 was

estimated as Rs. 18.5 million. No adjustments were made with respect to
this.

(iv) On 10 April 2019 a debtor who owed Rs. 1.5 million as at 31 March 2019 to
the company was declared as insolvent by the court. The company has not
made any provision on this debtor as at 31 March 2019 as the court decision
was pending by 31 March 2019.

(v) The land and building was revalued on 31 March 2019. Accordingly the fair
value of the land is Rs. 310 million and the fair value of the building is
Rs. 395 million and there were no changes in the remaining useful lifetime
of the assets. No adjustments were made in the financial statements in
relation to this revaluation. 40% of the value of the existing revaluation
reserve represents the revaluation gain recognised on the building on
31 March 2016.

(vi) Depreciation of property, plant and equipment is to be done using the

straight line method as follows.

Building 50 years
Office equipment 10 years
Furniture and fittings 15 years

(vii) The company had acquired a few motor vehicles for distribution purposes
on 1 July 2018 spending Rs. 60 million and the same is recorded under
motor vehicles account in the given trial balance. The useful life time was
estimated as 6 years and the estimated residual value after 6 years would be
Rs. 30 million. The depreciation is to be done using the straight line method
over the useful life time.

(viii) Income tax payable account in the trial balance reflects the over provision
made in the previous year, and the income tax provision for the current year
is Rs. 5.4 million.
Note: Ignore any deferred tax impact that could arise on the above
additional information.

Required:
1. Prepare the statement of comprehensive income of Zimega PLC for the
year ended 31 March 2019.
(8 marks)

2. Prepare the statement of financial position of Zimega PLC as at

31 March 2019.
(8 marks)
KE1 – September 2019 Page 13 of 14
(b) ABC PLC purchased machinery for Rs. 15,750,000 on 1 April 2017 and
depreciated it on a straight line basis over 15 years. It was estimated that the
residual value after 15 years would be zero. The capital allowance on the
machinery is at 20%, for income tax purposes. The corporate income tax rate is
28%.

Required:

Calculate the deferred tax asset or liability that would arise on the above, as
at 31 March 2019.
(4 marks)

(Total: 20 marks)

(Total: 20 marks)

KE1 – September 2019 Page 14 of 14