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No. of pages: 15

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

Question 2: 10 short answer questions – all questions

E
1
are compulsory.

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 SEPTEMBER
question number.
2017
(5) Begin each answer in Section 2 and Section 3 on a separate page in
the answer booklet.

(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 Which of the following is a liability of an entity according to the definition in the
Conceptual Framework for financial reporting?

A. Provision for depreciation

B. Bank overdraft
C. Advance payment to a supplier
D. Funds invested in the entity by its owners
(2 marks)

1.2 Which of the following are the two fundamental qualitative characteristics of
financial information per the Conceptual Framework for financial reporting?

A. Comparability and faithful representation

B. Timeliness and understandability
C. Relevance and timeliness
D. Relevance and faithful representation
(2 marks)

1.3 An entity pays 75% of the salaries for a particular month to its employees on 25th of
that month and the balance 25% on the 10th of the following month. The amount
paid on 25 May 2017 was Rs. 7.5 million.

Which of the following is the amount that should be recorded as salaries for the
month of May 2017 under the accrual basis of accounting?

A. Rs. 7.5 million

B. Rs. 9.4 million
C. Rs. 10 million
D. Rs. 22.5 million
(2 marks)

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1.4 Which of the following statements is true in relation to the books of prime entry
used in financial accounting?
A. A transaction will be initially recorded in a book of prime entry and then
traced to the relevant source document.
B. Books of prime entry are books in which an entity first records its
transactions using its source documents.
C. The sales day book, purchase day book, purchases returns day book, general
journal and bank reconciliation statement can be categorised as books of
prime entry.
D. The purpose of the sales returns day book is to record the credit notes
received in respect of goods which the business sends back to its suppliers.
(2 marks)
1.5 DI (Pvt) Ltd received a credit note for Rs. 10,000 in respect of goods which it sent
back to its supplier.
Which of the following reflects the double entry required to record the above
transaction in the books of DI (Pvt) Ltd?
A. Purchases returns account DEBIT and supplier’s account CREDIT
B. Purchases account DEBIT and supplier’s account CREDIT
C. Supplier’s account DEBIT and purchases returns account CREDIT
D. Purchases returns account DEBIT and purchases account CREDIT
(2 marks)
1.6 Which of the following techniques are allowed under LKAS 2 Inventories in
determining the cost of inventory?
A. Last In First Out (LIFO), Weighted Average Cost, Standard cost
B. LIFO, First In First Out (FIFO), Weighted Average Cost
C. Weighted Average Cost and LIFO
D. Weighted Average Cost and FIFO
(2 marks)

1.7 Which of the following events is a non-adjusting event per LKAS 10 Events after the
Reporting Period, assuming that the events took place before authorising the
financial statements?
A. Destruction of a part of the production plant by a fire after the end of the
reporting period.
B. Settlement of a court case after the reporting period by paying of damages in
excess of the provision made in the financial statements.
C. Sale of inventory at a lesser value than its cost after the end of the reporting
period.
D. Receipt of evidence on the permanent decline of the value of a long term
investment after the end of the reporting period.
(2 marks)

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1.8 Which of the following statements is correct in relation to temporary differences in
deferred taxes?

A. Development cost which is capitalized will result in a deductible temporary

difference since it was considered for tax at the time of incurring the cost.
B. Prepaid expense which has been already considered for tax on cash basis will
result in a deductible temporary difference.
C. Interest receivable, which will be taxed on a cash basis, will result in a
deductible temporary difference.
D. Retirement benefit provision will give rise to a deductible temporary
difference when the retirement benefit payment is allowed for tax.
(2 marks)

1.9 Which of the following states the subsequent measurement of an investment in

shares held for trading purposes?

A. Fair value less transaction cost

B. Amortised cost
C. Cost
D. Fair value
(2 marks)

1.10 Which of the following states the conditions to be met to recognise a provision in the
financial statements?

A. Probable obligation, probable transfer of economic benefits and the ability to

make a reliable estimate
B. Probable obligation, the ability to transfer of economic benefits and the
ability to make a reliable estimate
C. Present obligation, probable transfer of economic benefits and the ability to
make a reliable estimate
D. Present obligation, the ability to transfer of economic benefits, and the ability
to make a reliable estimate
(2 marks)

KE1 – September 2017 Page 4 of 15

Question 02

You are required to provide short answers/calculations to all questions, with attention
given to action verbs.
(Total: 30 marks)

2.1 A business should produce information about its activities because there are various
groups of people who are interested in knowing such information.
Explain the financial information needs of the following users of financial
statements.
(i) Shareholders
(ii) Providers of debt
(iii) Tax authorities
(3 marks)
2.2 The SLFRS for SMEs does not address some of the topics that are covered in full
SLFRSs.
List three (03) of any such topics.
(3 marks)
2.3 To be useful, financial information must be presented faithfully per the Conceptual
Framework for financial reporting.

State three (03) characteristics of faithfully presented financial information.

(3 marks)
2.4 The following events took place in Silva (Pvt) Ltd (SPL) during the year ended
31 March 2017.

(i) SPL’s stores received goods worth Rs. 20,000 from Supplier A.
(ii) SPL informed supplier A that it has paid Rs. 2,000 more than the value of
goods purchased.
(iii) A customer paid Rs. 10,000 for goods sold by SPL.

Identify the source documents to record the above events by SPL.

(3 marks)
2.5 Neptune (Pvt) Ltd had the following transactions during the year.
(i) Payment of accrued electricity of Rs. 4,500.
(ii) Purchase of a photocopy machine worth Rs. 35,000 on credit from Z (Pvt)
Ltd, which is to be used in the business.
(iii) Receipt of Rs. 5,000 (of cash) from a trade debtor.
State the double entries required to record the above transactions.
(3 marks)

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2.6 Most businesses use computerised accounting packages to record transactions and
prepare financial statements.

State three (03) advantages and three (03) disadvantages of a computerised

accounting package.
(3 marks)

2.7 The following details are relating to the partnership of Kamal and Sunil for the
month of March 2017.

(i) On 1 March 2017 Kamal provided a loan of Rs. 250,000 to the partnership at an
annual interest rate of 14%.
(ii) Each partner is to be paid a monthly salary of Rs. 20,000 according to the
partnership agreement.

Prepare the journal entries to record the above in the books of the partnership for
the month ended 31 March 2017.
(3 marks)

2.8 The following details relate to Mars (Pvt) Ltd for the year ended 31 March 2017.

(Rs. ʽ000)
Sales 24,000
Net profit before taxation 6,000
Taxation for the year 1,500
Interest expense for the year 500
Total equity 12,500
Loan capital 2,500

Compute the following ratios of Mars (Pvt) Ltd for the year ended 31 March 2017.

(i) Return on capital employed (ROCE)

(ii) Assets turnover
(iii) Interest cover
(3 marks)
2.9 State three (03) criteria that are used to classify a liability as a current liability
according to LKAS 1 Presentation of Financial Statements.
(3 marks)
2.10 According to LKAS 8 Accounting Policies, Changes in Accounting Estimates and
Errors:

(a) Define the term “prior period errors”.

(b) State how prior period errors could be corrected.
(3 marks)

KE1 – September 2017 Page 6 of 15

 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
Unity (Pvt) Ltd maintains a debtors’ control account to control its debtor collection system.
As at 31 March 2017, the debtors’ control account reflected a debit balance of Rs. 23,880.
However, on this date the total of all the personal accounts of the debtors’ ledger showed
Rs. 3,980. Upon investigation, the following errors were identified.

(i) A discount received from a supplier of Rs. 3,800 has been debited to the debtors’
control account.
(ii) Rs. 2,500 of sales made to Upul Traders has been omitted from Upul Trader’s
personal account.
(iii) Return inwards of Rs. 8,500 has been recorded in the debtors’ control account as
Rs. 5,800.
(iv) A discount given to Amda (Pvt) Ltd of Rs. 1,000 has not been recorded in Amda
(Pvt) Ltd’s account.
(v) The sales day book has been undercast by Rs. 1,000.
(vi) Settlement discount given to a trade debtor amounting to Rs. 1,200 has been
omitted from the general ledger.
(vii) A cheque amounting to Rs. 2,000 received from a customer has been returned by
the bank. However, no adjustment has been made in the debtors’ control account.
(viii) An amount of Rs. 600 set-off against the creditor’s ledger has not been recorded in
the debtors’ control account.
(ix) A debit balance of Rs. 900 has been included in the list of debtors’ personal account
balances as a credit balance.
(x) Cash received from a debtor of Rs. 4,300 has been recorded in his personal ledger
account. However, this has not yet been recorded in the general ledger.
(xi) A debtor account of Rs. 7,000 has been omitted from the list of debtors’ personal
accounts.
Required:
(a) (i) Prepare the corrected debtors’ control account as at 31 March 2017.
(ii) Prepare a statement showing the adjustments necessary to the list of the
debtors’ personal accounts to arrive at the corrected debtors’ control
account balance.
(7 marks)
(b) Explain the difference between a trade discount and a cash discount.
(3 marks)
(Total: 10 marks)

KE1 – September 2017 Page 7 of 15

Question 04

(a) Per the financial statements prepared for the year ended 31 December 2016, Seetha
(Pvt) Ltd has reported total assets of Rs. 565,000 and a profit for the year
amounting to Rs. 45,200. However, it was revealed later that these financial
statements included the following errors.
(i) Maintenance cost of Rs. 10,000 in relation to a motor vehicle incurred at the
beginning of the year was included in the cost of the motor vehicle and
depreciated using a rate of 20%.
(ii) Sales day book was undercast by Rs. 3,000.
(iii) Goods received on 1 January 2017 of Rs. 15,000 were included under
inventories in the above financial statements.

Required:

Calculate the profit for the year and total assets as at 31 December 2016, after
adjusting for the above errors.
(4 marks)

(b) Gems (Pvt) Ltd’s (“Gems”) cash book as at 31 March 2017 had a credit balance of
Rs. 75,900. However, the bank statement as of the same date had a credit balance of
Rs. 30,000. The following issues were then identified.

 The bank statement did not include cheques with a total of Rs. 174,000 issued by
Gems in March 2017.
 A customer has deposited Rs. 1,500 directly in the bank account during the
month of March 2017. Gems recorded this amount on 4 April 2017 when the
bank statement was received.
 The bank statement correctly showed a cheque issued to a supplier of
Rs. 25,600. Gems has recorded this in the cash book as Rs. 26,500.
 The bank has charged Rs. 3,500 as bank charges. However, Gems has not
recorded this in the cash book.
 Two cheques deposited during March 2017 totaling Rs. 64,000 were shown in
the bank statement of April 2017.
 Direct dividend receipt of Rs. 5,000 to the bank account was not recorded in the
cash book.
 The total of the payment side of the cash book was undercast by Rs. 8,000.

Required:
(i) Prepare the adjusted cash book of Gems (Pvt) Ltd for the month ended
31 March 2017.
(ii) Prepare the bank reconciliation statement as at 31 March 2017.
(6 marks)
(Total: 10 marks)
KE1 – September 2017 Page 8 of 15
Question 05

Some of the financial information of Omega sports club is given below.

Statement of financial position as at 31 March 2016

Cost Accumulated Carrying

(Rs.) depreciation value
(Rs.) (Rs.)
Assets
Non-current assets
Land and buildings 2,500,000 450,000 2,050,000
(Land value: Rs. 1,500,000)
Sports equipment 1,000,000 280,000 720,000
Bar equipment 580,000 240,000 340,000
Total Non-current assets 4,080,000 970,000 3,110,000

Current assets
Bar stocks 79,000
Member subscriptions in arrears 30,000
Cash at bank 339,000
Total current assets 448,000
Total assets 3,558,000

Equity and liabilities

Equity
Accumulated fund 3,505,000

Current liabilities
Member subscriptions received in advance 50,000
for 2016/17
Accrued electricity in relation to bar activities 3,000
Total current liabilities 53,000
Total equity and liabilities 3,558,000

KE1 – September 2017 Page 9 of 15

Receipts and payments account for the year ended 31 March 2017

Amount Amount
(Rs.) (Rs.)
Balance on 1 April 2016 339,000 Sports competition expenses 280,000
Members subscriptions received: Bar purchases 980,000
2015/16 20,000 Bar wages 365,000
2016/17 980,000 Other bar expenses 110,000
2017/18 60,000 Club administration expenses 480,000
Sports competition ticket sales 362,000 Purchase of sports equipment 450,000
on 1 October 2016
Bar sales 1,620,000
Hire of sports equipment 125,000 Balance on 31 March 2017 841,000
3,506,000 3,506,000

Additional information
(i) Annual membership subscription per member is Rs. 10,000. On 31 March 2017, four
members had to pay their subscriptions for the year ended 31 March 2017.
(ii) Any subscription in arrears for more than one year is written off and the
membership is cancelled.
(iii) Bar stock as at 31 March 2017 was valued at Rs. 42,000.
(iv) The club’s policy is to depreciate property, plant and equipment using the straight
line method at the following rates:
Buildings: 5% per annum
Equipment: 20% per annum
(v) The accrued electricity bill as at 31 March 2017 was Rs. 5,600, of which Rs. 3,600
was in relation to bar activities.

Required:
(a) Prepare the membership subscriptions account of Omega sports club for the year
ended 31 March 2017.
(4 marks)
(b) Prepare the statement of income and expenditure of Omega sports club for the year
ended 31 March 2017.
(6 marks)
(Total: 10 marks)

KE1 – September 2017 Page 10 of 15

Question 06

The latest financial information of Nirasha Traders (Pvt) Ltd are given below.

Statement of financial position

As at 31 March 2017 2016
Rs. Rs.
Assets
Non-current assets
Property, plant and equipment 645,967 185,000
Investments 75,000 100,000
720,967 285,000
Current assets
Inventory 565,000 350,000
Trade receivables 120,000 125,000
Cash and cash equivalents 104,000 35,000
789,000 510,000
Total assets 1,509,967 795,000

Equity and liabilities

Equity
Stated capital 200,000 150,000
Retained earnings 1,083,467 470,000
1,283,467 620,000
Non-current liabilities
12% interest bearing loans and borrowings 112,500 -
112,500 -
Current liabilities
Trade payables 75,000 175,000
12% interest bearing loans and borrowings 39,000 -
114,000 175,000
Total equity and liabilities 1,509,967 795,000

Extracted information of the statement of comprehensive income for the year ended
31 March 2017:

Rs.
Other income: Profit on sale of investment 31,000
Depreciation 30,833
Finance cost 4,500
Profit before tax 648,667
Income tax expenses 35,200
Profit after tax 613,467

KE1 – September 2017 Page 11 of 15

Additional information

(i) During the year the company acquired Rs. 491,800 worth of office equipment.

(ii) The company has disposed part of its investments for Rs. 56,000 and the carrying
value of the same as at the date of disposal was Rs. 25,000.

(iii) A bank loan of Rs. 150,000 at an annual interest rate of 12% was obtained on
31 December 2016 under the following terms.

 Capital portion of the loan capital is payable in 4 equal annual installments

commencing from 31 December 2017.
 The monthly interest of the loan is paid one month in arrears.

Interest charge of the loan from January to March 2017 is included in the finance
cost and the accrued interest for the month of March 2017 is included under the
current portion of interest bearing loans and borrowings.

(iv) During the year the company raised a further Rs. 50,000 by issuing ordinary shares.

(v) The company has fully paid the total tax expense by 31 March 2017.

Required:
Prepare the statement of cash flows of Nirasha Traders (Pvt) Ltd under the indirect
method for the year ended 31 March 2017.

(Total: 10 marks)

KE1 – September 2017 Page 12 of 15

 SECTION 3

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

Question 07

The trial balance of Delta PLC as at 31 March 2017 is given below.

Rs.ʽ000
Dr Cr
Stated capital 21,000
Revaluation reserve 5,000
Retained earnings on 1 April 2016 4,850
Property, plant and equipment – at cost/revaluation
Land & buildings (Land: Rs. 10 million) 19,000
Motor vehicles 14,600
Furniture and office equipment 5,800
Accumulated depreciation as at 1 April 2016
Buildings 4,700
Motor vehicles 4,200
Furniture and office equipment 2,040
Financial assets at fair value through profit or loss 2,500
(Investment in quoted company shares)
Cost of sales/Sales 202,600 274,500
Administrative expenses 21,600
Selling and distribution expenses 19,780
Inventory as at 31 March 2017 20,800
Trade receivables/Trade payables 9,500 6,500
Allowance for doubtful debts as at 1 April 2016 380
Retirement benefit obligation as at 1 April 2016 3,230
Interim dividend paid 2,000
Cash and cash equivalents 3,220
Income tax paid 5,000
326,400 326,400

KE1 – September 2017 Page 13 of 15

Additional information

(i) Retirement benefit obligation (gratuity) of Rs. 360,000 was paid to a staff member
who retired during the year and it was charged to the administrative expenses. The
retirement benefit obligation as at 31 March 2017 was Rs. 3,540,000.
(ii) Investment in quoted company shares of Rs. 2,500,000 was the cost of acquiring
100,000 shares in a quoted company with the intention of selling it in a short period.
Market value of those shares as at 31 March 2017 was Rs. 27.50 per share.

(iii) A trade receivable balance of Rs. 320,000 is to be written off as a bad debt and
allowance for doubtful debt should be adjusted to 5% of the trade receivables
balance outstanding on 31 March 2017.

(iv) Inventory on 31 March 2017 included an item costing Rs. 1,200,000. This item was
subsequently sold on 10 April 2017 for Rs. 1,000,000.

(v) Motor vehicles of the company were revalued on 1 October 2016. It was found that a
Nissan motor car costing Rs. 2,400,000 and having an accumulated depreciation of
Rs. 2,000,000 on 1 October 2016 was revalued at Rs. 1,000,000. The net carrying
values of all the other vehicles were equal to their fair values on that date. The
adjustment in respect of this revaluation is yet to be made. The remaining useful life
of the revalued motor vehicles is expected to be 2 years except that of the Nissan
car, which is expected to be used for another 4 years from the date of revaluation.

(vi) Except for the computer purchased on 1 January 2017 for Rs. 160,000, there were
no other additions to property, plant and equipment during the year.

(vii) Depreciation of property, plant and equipment is to be done using the straight line
method as follows:

Buildings: 20 years
Motor vehicles (using for distribution purpose): 5 years
Furniture and office equipment: 10 years

(viii) Income tax for the year has been estimated to be Rs. 6,200,000. Income tax paid
during the year includes a payment of Rs. 200,000, which was the under provided
tax for Y/A 2015/16.

KE1 – September 2017 Page 14 of 15

 Required:

Prepare the following statements for publication purposes.

(i) Statement of comprehensive income for the year ended 31 March 2017.
(6 marks)

(ii) Statement of changes in equity for the year ended 31 March 2017.
(3 marks)

(iii) Statement of financial position as at 31 March 2017.

(7 marks)

(iv) The note for property, plant and equipment.

(4 marks)

(Total: 20 marks)

KE1 – September 2017 Page 15 of 15