INTRODUCTION TO FINANCIAL ACCOUNTING

Suggested Answers
Foundation Examinations – Spring 2011

A.1 (a) Merits of company form of organisation:

(1) A company has perpetual existence unaffected by incoming / outgoing members.

(2) Companies can raise large amount of capital.
(3) The liability of the shareholders is restricted to the amount contributed by them.
(4) The ownership of the shares in a company is easily transferable.

Demerits of company form of organisation:

(1) A joint stock public company has to fulfil a number of legal formalities which
makes its actual management rather difficult and costly.
(2) Separation between ownership and control can sometime lead to problems. For
example, if an unprincipled team comes in possession of management, it may
create serious problems for the company.
(3) The size and the procedural handicaps in case of large companies can sometimes
result in delay in important decisions.

(b) (i) Going concern: Going concern means that the entity will continue in operation for the
foreseeable future and that it has neither the intention nor the need to liquidate or
curtail materially the scale of its operations.

(ii) True and fair view

A true and fair view of financial statements normally results from the application of
(i) principal qualitative characteristics and (ii) appropriate accounting standards.

(iii) Substance over form

It means that the transactions are accounted for and presented in the financial
statements in accordance with their substance and economic reality and not merely
their legal form.

(c) Disclosure of inventories

The financial statements shall disclose:
(i) the accounting policies adopted in measuring inventories, including the cost
formula used;
(ii) the total carrying amount of inventories along with classifications appropriate to
the entity;
(iii) the carrying amount of inventories carried at fair value less costs to sell;
(iv) the amount of inventories recognised as an expense during the period;
(v) the amount of any write-down of inventories recognised as an expense in the
period;
(vi) the reversal of any write-down that was recognised in the previous period.
(vii) the circumstances or events that led to the reversal of the write-down of
inventories; and
(viii) the carrying amount of inventories pledged as security for liabilities.

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2011

A.2 Branch Account for the year ended 31-12-2010

Dr. Cr.
Balance b/d
- Cash in hand 10,000 Stock Reserve 200,000
- Trade debtors 395,000 Goods sent to branch A/c 100,000
- Stock 1,200,000 (Returns to H.O)
- Furniture and fittings 500,000 Goods sent to branch A/c 2,350,000
2,105,000 (Loading on net goods sent to
branch (14,100,000 x 1/6)
Goods sent to branch A/c 14,200,000
Bank A/c (payment for furniture) 100,000 Bank A/c (Remittance to H.O) 12,682,000
Balance c/d Balance c/d
- Stock reserve (1,560,000 x 1/6) 260,000 - Trade debtors 804,000
- Outstanding expenses 10,000 - Stock 1,560,000
Profit and loss A/c (Net profit) 1,537,000 - Furniture and fittings 516,000
18,212,000 18,212,000

Branch Stock Memorandum Account

Dr. Cr.
Balance b/d 1,200,000 Goods sent to branch A/c 100,000
Goods sent to branch A/c 14,200,000 Branch cash A/c 10,680,000
Branch debtors A/c returns by Branch debtors A/c 3,498,000
customers 132,000
Surplus on net credit sales Balance c/d 1,560,000
12/132 x (3,498,000 – 132,000) 306,000
15,838,000 15,838,000

Branch Debtors Memorandum Account

Dr. Cr.
Balance b/d 395,000 Branch cash a/c 2,842,000
Branch stock A/c 3,498,000 Branch discount A/c 70,000
Branch stock A/c (Returns) 132,000
Branch Bad debts A/c 45,000
Balance c/d 804,000
3,893,000 3,893,000

Branch Furniture and Fittings Memorandum Account

Dr. Cr.
Balance b/d 500,000 Depreciation A/c (80,000 + 4,000) 84,000
Bank 100,000 Balance c/d 516,000
600,000 600,000

Branch Cash Memorandum Account

Dr. Cr.
Balance b/d 10,000 Branch expenses A/c 850,000
Branch stock A/c 10,680,000 Branch A/c (Remitts. to H.O)(Bal.) 12,682,000
Branch debtors A/c 2,842,000
13,532,000 13,532,000

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2011

A.3 Trading and Profit and Loss Account

For the year ended 31 December 2010
Rs. in ‘000
Dr. Cr.
Purchases: Sales:
Cash A/c 37,496 Cash A/c 44,250
Add: owed to supplier 1,900 39,396 Add: owed by customer 150 44,400
Gross profit c/d 7,400 Closing Stock 2,396
46,796 46,796
Staff salaries 2,600
Rent, rates & taxes (1,750 - 400) 1,350 Gross profit b/d 7,400
Sundry Exp. (230+272) 502
Lighting and Heating 100
Repairs (460 – 36) 424
Dep. on:
Truck @ 25% for 6 months on Rs.
1,200 150
Motor Van @ 25% for 4 months
on Rs. 240 20
Furniture and Fixtures @ 15% of
Rs. 600 90
Deep freezers @15% for 6 months
on Rs. 800 60 320
Loss on sale of van (240–20–200) 20
Net profit 2,084
7,400 7,400

Computation of sales: Rs. in ‘000’

Receipts from sales deposited in bank (41,850 – 960 – 200 – 480) 40,210

Receipts from sale used to pay expenses:

Salaries 2,600
Drawings (12 × 100,000) 1,200
Sundry expenses (12 × 20,000) 240
Total sales 44,250

Balance Sheet
as at 31st December 2010
Rs. in ‘000’
Liabilities Rupees Assets Rupees
Capital (invested on 1.1.2010) 3,960 Truck 1,200
Additional Capital (960+ 480) 1,440 Less: Depreciation 150 1,050
Add: Net Profit 2,084 Fixture & Fittings 600
7,484 Less: Depreciation 90 510
Less: Drawings 3,196 4,288 Deep freezers 800
Creditors 1,900 Less: Depreciation 60 740
Closing Stock 2,396
Debtors 150
Advance rent 400
Cash 10
Bank 932
6,188 6,188

Computation of drawings
Rs. in ‘000’
Cash retained from sales proceeds 1,200
Bank withdrawals 1,960
Repairs (bungalow) 36
3,196

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2011

A.4 Cash flow for the year ended 31 December 2010

Rs. Rs.
Net income 950,000
Depreciation (170,000 + 60,000) 230,000
Items for separate consideration:
Gain on sale of land (64,000)
Gain on sale of long term investment (32,000)
Loss on sale of equipment 15,000

(Increase) / decrease in current assets:

Accounts receivable (176,000)
Inventory (224,000)
Prepaid insurance 12,000
Office supplies (7,000)
(395,000)
(Decrease) / Increase in current liabilities:
Decrease in accounts payable (105,000)
Increase in wages payable 16,000
Net (increase) / decrease in working capital (484,000)
Cash generated from operations 615,000
Cash invested 100,000
Proceeds from sale of:
Land (2,500,000 – 1,810,000 + 64,000) 754,000
Equipment (75,000 – 15,000) 60,000
Long term investments (100,000 + 32,000) 132,000 946,000
Fixed capital expenditure – building (2,800,000 – 2,300,000) (500,000)
– equipments (1,200,000+105,000*–1,150,000) (155,000)
Long term investments (220,000 +100,000-170,000) (150,000)
Payment of long term loan (1,160,000– 985,000) (175,000)
Drawings (568,000)
Net increase in cash 113,000
Cash - opening 32,000
Cash - closing 145,000

*Book value 75,000 + accumulated depreciation 30,000 = Cost Rs. 105,000

A.5 (a) Sales ledger control account

Rupees Rupees
Dr. Cr.
Balance b/d 350,410 Sales return account (under-casting) (ii) 12,000
Discount (disallowed) (vii) 800 Write off of Shahid’s balance (iii) 2,100
Purchase ledger control account (transfer)
AB & Company (viii) 1,800 3,600
(v)
Goods returned by Babar not recorded (vi) 1,700
Posting errors 60% of 18,000 (x) 10,800
Balance c/d 322,810
353,010 353,010

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 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2011

(b) Reconciliation of subsidiary sales ledger balance with sales ledger control account

Rs. Rs.
Net balance as per sales ledger 319,000
Add: Debit balance written as credit balance (2,600 + 2,600) (iv) 5,200
Omission of entry for discounts disallowed in the sales ledger (vii) 800
325,000
Less: Omission of credit balance (i) 1,200
Cash received from Shah and Company wrongly debited (540+450)(ix) 990 2,190
Corrected balance in sales ledger/sales ledger control account 322,810

A.6 Statement for Ascertaining correct gross and net profit

Gross Profit Net Profit

Profit as given 1,050,000 650,000

Add / (Less)

(a) (i) Cost of Goods distributed as free samples 25,000 -

(ii) Goods taken by owner for personal use 10,000 10,000

Goods used for office repair (2,500*100/120) 2,083 -

(iii) Outstanding expenses

Salaries - (20,000)
Transportation-in (10,000) (10,000)

(b) Sale of old furniture items posted as sale (3,000) (2,000)

(c) Sale on return basis [18,000 - (18,000 ×100/120)] (3,000) (3,000)

(d) Payment to creditor wrongly debited to purchases 24,500 24,500

Purchase discount 500 500

(e) Over-casting of sales day book (30,000) (30,000)

(f) Error in Carrying forward of purchases (67,000 − 6,700) (60,300) (60,300)

(g) Goods wrongly included in closing stock (60,000 × 100 / 120) (50,000) (50,000)
insurance claim short received (60,000 × 80% − 50,000) (2,000) (2,000)

Corrected figures 953,783 507,700

(THE END)

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