New World Company Limited is a large manufacturer of electrical goods. You are a trainee accountant working for the company. The following statement of profit or loss and other comprehensive income and statement of financial position extracts relates to New World Company Limited.
Required:
Prepare the statement of cash flows for New World Company Limited for the year ended 31 December 2017. (20 marks)
Asasepa Ltd prepares its financial statements to 31 December each year until 31 December 2016, when the business changed its accounting date. The company prepared its next financial statements for 15 months to 31 March 2018.
At 1 January 2017 the following balances existed in the business’s accounting records:
Depreciation policy
The business’ policy on depreciation is to charge proportionate depreciation in the periods of purchase and sale of its non-current assets, charging depreciation as from the first day of the month in which assets are acquired, and up to the last day of the month before any disposal.
Annual rates of depreciation taken are:
(i) Plant and machinery 15% straight line
(ii) Motor vehicles 25% straight line
Transactions during the year
During the 15 months ended 31 March 2018, the following transactions took place.
10 January 2017 – An item of plant was purchased. The cost was made up as follows:
18 April 2017 – A new motor vehicle was purchased for GH¢18,000. An existing vehicle which had cost GH¢12,000, and which had a book value at 1 January 2017 of GH¢6,000, was given in part exchange at an agreed value of GH¢5,000. The balance of GH¢13,000 was paid in cash.
Required:
a) Prepare the ledger accounts to show the balances at 1 January 2017.
b) Record the non-current asset transactions for the 15 months period ending 31 March 2018.
The Bank Account in the books of Akwatia Ltd for the month of October 2017 was as follows:
The following is the bank statement for Akwatia Ltd for the month of October 2017.
The bank has confirmed to Akwatia Ltd that it made errors in Akwatia’s bank account on 6 October 2017 and 21 October 2017 amounting to GH¢950 and GH¢600 respectively.
Required:
Prepare the bank reconciliation statement for Akwatia Ltd as at 31 October 2017. (14 marks)
Reconcile the opening balance in the bank account with the opening balance on the bank statements.
When there is a difference in a trial balance, a suspense account is opened with the amount of the difference so that the trial balance agrees (pending the discovery and correction of the errors causing the difference). This is the only time an entry is made in the records without a corresponding entry elsewhere. Not all types of errors affect the balancing of the records and the suspense account.
Required:
Identify and explain THREE errors which does not affect the suspense account. (6 marks)
Example: Factory employees are used for plant maintenance:
Correct entry: Debit: Plant maintenance; Credit: Factory wages (Any 3)
Mr. Patrick Mensah, a sole trader, has asked you to prepare the receivable and payable control accounts and ensure that the closing balances match with the list of balances. Currently, the closing balances as at 30 October 2017 are as follows:
GH¢
Receivables Control Account 126,845
Payables Control Account 103,240
Receivables list of balances 123,589
Payables list of balances 104,476
On investigation, the following have been discovered:
ii) Prepare a statement reconciling the list of balances with the revised control accounts for Receivables and Payables for the year-ended 30 October 2017. (2 marks)
Identify FOUR users of financial statements and explain their information needs. (6 marks)
The people who might be interested in financial information about the company may be classified as follows.
Accountancy is the language of business and the only profession that teaches students about business. A business primarily exist to make profit and one of the jobs of an Accountant is to prepare financial statements and to determine the profitability of a business.
Required:
What is a business? (4 marks)
STL has been in business for a number of years. In the past year, she has been busy training for the Olympics and has not kept proper records for her business. She has given you some information.
The balances as at 1 May 2016 are as follows:
GH¢
Motor vehicle (carrying amount) 4,750
Inventories 956
Trade receivables 2,632
Trade payables 1,745
Cash in hand 50
Cash at bank (overdrawn) 1,693
Capital 4,950
The bank statements for the year to 30 April 2017 are summarised as follows:
GH¢
Payments to suppliers 6,463
Cash takings 5,907
Sundry expenses 763
Motor expenses 505
Rent 1,800
Telephone 135
The balance on the bank statement at 30 April 2017 was GH¢1,144. There were no timing differences.
You are given the following additional information:
i) Closing inventory is valued at GH¢1,324.
ii) STL took goods which had a cost of GH¢96 and would have been sold for GH¢124 for her own personal use.
iii) A telephone bill was received on 7 July 2017 for GH¢75, this related to the quarter ended 30 June 2017.
iv) Rent includes GH¢1,000 paid on 1 January 2017 for the year to 31 December 2017.
v) STL takes GH¢60 every week out of the takings before banking them. She also spends GH¢20 every week on petrol for the company van.
vi) Depreciation is to be charged at 15% reducing balance.
vii) Closing trade receivables and payables were GH¢2,072 and GH¢967 respectively. However, one customer, Caroline, has vanished and her debt of GH¢575 is not likely to be paid.
viii) STL always keeps a cash float of GH¢50.
ix) STL makes sales to cash and credit customers. Customers taking credit always pay by cheque or bank transfer.
Required:
a) Prepare the statement of profit or loss for STL for the year ended 30 April 2017. (12 marks)
b) Prepare the statement of financial position for STL as at 30 April 2017. (8 marks)
The following is a summary of the Financial Statements of two companies in the retailing business.
Required: (10 marks)
a) Calculate the following ratios for each company:
i) Current ratio
ii) Acid Test ratio
iii) Gross profit margin
iv) Return on capital employed
v) Trade Payable period
vi) Receivable collection period
b) Using the information in (a) above, interprete the results of the ratios under three broad categories of profitability, liquidity and efficiency. (10 marks)
Liquidity:
Liquidity is the ability of an entity to be able to pay for its short term obligations as and when they fall due without any difficulties. Again, this payment should not affect the working capital of the firm and as a result the company continues to operate without any operational difficulties. Applying this understanding to both Father and Son limited above suggest that the current assets of Father limited can pay for its current liabilities about 3.5 times as opposed to 1.8 times of Sons limited. However, adjusting for inventories the quick ratios of both companies shows 1.1:1 and 1.2:1 respectively for Father and Son. This suggests that inventories forms a significant part of the current assets of Father limited and may not be convertible into cash very quickly. The quick ratio indicates that slightly Son limited is better off with respect to its liquidity position. At the moment both companies can meet their current short-term obligations but Father Limited may have difficulty going forward with its significant nature of inventories.
Profitability:
Every business wants to make the highest profit possible for its shareholders but care needs to be taken that profit is not equal to cash.
Looking at the gross margin of both Father and Son Limited, the gross margin is 30% and 27% respectively with the same level of sales. Better management of cost of sales may be key to the differences in the margins as depicted by the calculations above. This may also be partly due to the credit policies of both companies. On the face value it may not be fair to say that Father limited is doing well because it has 3% more than that of Sons Limited. Return on capital employed really looks at the efficiency in the utilization of capital in earning or generating profit in percentage terms. The higher this ratio the better management would have better utilize capital invested by shareholders and vice versa. Father Limited from that calculation has return on capital of 7% compared with 12% of Sons Limited. This suggests that Sons Limited is better using every pesewa invested by its shareholders efficiently and effectively as opposed to Father Limited. Father limited may need to change this situation as a matter of urgency.
Efficiency:
Activity or efficiency ratios assesses how efficient and effective an entity is with respect to its credit policies as well as general operational decision making processes. The receivable collection period indicate the time period it takes for management of an entity to be able to collect its debts from credit customers or debtors. Generally, the shorter time it takes the entity to do that the better since this will enhance the liquidity position of the entity. Looking at the ratios above Son Limited collect its debts within 8 days as opposed 31days for Father limited. This suggests that a huge amount of sale of Father Limited is on credit. This cannot be said of Son Limited as significant amount of its sales appears to be in cash sales and therefore it is not surprising that it is slightly better off with respect to its liquidity position. Similarly, trade payable period is the time an entity uses to settle its suppliers. A better supplier relationship could allow for a longer period for payment and this is a very good source of finance to the entity. Both companies seem to have relatively the same period of 48days and 49days for Father and Son Limited respectively.
Below are the statement of financial position for Saasa Company Limited at 31 December 2015 and 31 December 2016 and the income statement for the year ended 31 December, 2016.
Additional information:
i) Deferred development expenditure amortized during 2016 was GH¢25,000.
ii) Additions to property, plant and equipment totaling GH¢167,000 were made. Proceeds from the sale of equipment were GH¢58,000, giving rise to a profit of GH¢7,000. No other items of property, plant and equipment were disposed of during the year.
iii) Finance costs represent interest paid on the new 6% debentures (2016-2022) issued on 1 January 2016.
iv) Current asset investments represent treasury bills acquired. The company deems these to represent cash equivalents.
v) Dividends paid during the year amounted to GH¢65,000.
Required:
Prepare a statement of cash flow for Saasa Company for the year ended 31 December 2016, using the indirect method in accordance with IAS 7: Statement of Cash Flows. (20 marks)
