The use of historical cost accounting can mislead users when prices are rising in the
following ways:
(i). Depreciation is based on the original cost of non-current assets and thus
understates the true value obtained by the business from the use of these
assets. The result is that profit is overstated.
(ii). Inventory is often valued at cost, using FIFO or average costs. If prices are
rising, sales in current terms are matched with cost of sales in historical cost
terms. Profit is again overstated.
(iii). Balance sheet values of assets may become seriously below their current
value.
(iv). The combined effects of the above three factors mean that return on capital
employed is overstated.
(v). Year on year comparison of results is likely to be misleading as figures will
show an automatic increase as prices rise, when in real terms sales and profits
may have risen far less, or even have fallen.
Mutiso answered the question on November 24, 2018 at 06:23
- Comparability is a characteristic which adds to the usefulness of financial statements.
Required:
(a) Explain what is meant by the term „comparability? in financial statements,
referring to two...(Solved)
Comparability is a characteristic which adds to the usefulness of financial statements.
Required:
(a) Explain what is meant by the term „comparability‟ in financial statements,
referring to two types of comparison that users of financial statements may make.
(b) Explain two ways in which the IAS (International Accounting Standards) aids the
comparability of financial information.
Date posted: November 24, 2018. Answers (1)
- Mutiso Mwema started his business in Gikomba as a carpenter on 1 January1990 and he has not
kept proper books of account. He engages you to...(Solved)
Mutiso Mwema started his business in Gikomba as a carpenter on 1 January1990 and he has not
kept proper books of account. He engages you to examine his records and prepare appropriate
accounts. From your examination of the records and from interviews with Mr. Mwema you
ascertain the following information:
i) On starting the business on 1 January 1990, he put Sh.120,000 into a business bank
account. On the same day, Mr. Mwema brought into the firm his pickup and reckoned that
it was worth Sh. 66,000 then. He estimated that it will have another useful life of three
years.
ii) To increase his working capital he borrowed Sh.40,000 at 15% interest per annum on 1
April 1990 from his sister but no interest has yet been paid.
iii) On 1 January 1990 Miss Wambua was employed as a typist/clerk at a salary of Sh.72,000
per annum.
iv) Drawings were Sh.1,800 per week from the business account for private use during the
year.
v) He purchased timber worth Sh.196,000 out of which Sh.15,800 left in the workshop on 31
December 1990. He had also spent Sh.96,000 on some equipment at the commencement
of the business which he estimates will last him five years.
vi) Electricity bills received up to 31 October 1990 came to Sh.24,000. Motor vehicle expenses
were Sh.18, 200 while general expenses amounted to Sh.27,000 for the year. The insurance
premium for the year 31 March 1991 was Sh.16,000. All these expenses have been paid by
cheque.
vii) Rates for the year to 31 March 1991 came to Sh.3,600 but they had not yet been paid.
viii) Miss Wambua sent out invoices to customers for Sh. 617,800 but only Sh.508,000 had been
received by 31 December 1990. Debts totaling Sh.1,700 were abandoned during the year as
bad. Other customers for jobs too small to invoice have paid Sh.72,600 in cash for work
done of which Sh.56,000 was banked. Mr. Mwema used Sh. 7,500 of the difference to pay
for his family's food stuff, bought Kenya Charity Sweepstake tickets worth Sh.2,400 and
Miss Wambua used the rest of general expenses, except for Sh.3,010 which was left over in
the drawer in the office on 31 December 1990.
ix) You agree with Mr. Mwema that he will pay you Sh. 5,500 for accountancy fee.
Required:
Prepare Profit and Loss Account for the year ended 31 December 1990 and a Balance Sheet as
at that date.
Date posted: November 22, 2018. Answers (1)
- Rono Ltd. manufactures electric toys called Densta on small scale basis.
On 1 January 1997, 6000 units of Densta were in stock.
During 1997, the company manufactured...(Solved)
Rono Ltd. manufactures electric toys called Densta on small scale basis.
On 1 January 1997, 6000 units of Densta were in stock.
During 1997, the company manufactured 200,000 units and sold 190,000 units at a price of Sh.6
each.
The following balances were extracted from the books of account on 31 December 1997.
The following additional information was available:
1) Stocks of work-in-progress on 1 January and 31 December 1997 were of insignificant value
and are to be ignored.
2) Plant and machinery are to be depreciated using reducing balance method at 10%.
3) Finished units of Densta are valued at factory cost.
4) Factory cost per unit of Densta was the same in 1996 and 1997.
Required:
i ) The manufacturing account for the year ended 31 December 1997, showing clearly the
prime cost and factory costs of producing Densta.
ii) The trading account for the year ended 31 December 1997.
Date posted: November 22, 2018. Answers (1)
- Explain briefly the terms prime cost and factory cost as used by manufacturing firms(Solved)
Explain briefly the terms prime cost and factory cost as used by manufacturing firms.
Date posted: November 22, 2018. Answers (1)
- Wananchi Transporters Company Ltd. was incorporated on 1 June 1994 and on the same day
bought its first lorry, registration number KA 620, for Sh.4,536,000. On...(Solved)
Wananchi Transporters Company Ltd. was incorporated on 1 June 1994 and on the same day
bought its first lorry, registration number KA 620, for Sh.4,536,000. On 3 April 1995, the
company bought its second lorry, KA 735 for Sh.2,740,000. On 3 June 1997, the first lorry, KA
620 was involved in an accident and was completely written off. The insurance company paid
the transport company Sh.l,350,000 for the loss. On 5 January 1998, the company bought its
third lorry, KB 327 for Sh.3,780,000. Depreciation on the lorries was provided at 10 per cent on
straight line basis. The policy of the company is to provide depreciation for the full year for all
acquisitions made at any time during the year and to ignore depreciation on any lorry sold or
disposed of during the year. All the lorries are insured. The company makes its accounts
annually to 31 December. In 1998, the company decided to change its depreciation rate from 10
to 15 per cent on straight line basis for all its lorries still in use retroactively, that is from year of purchase. An adjusting entry will be made in the accounts for the year 1998.
Required:
a) The motor lorries account for years 1994 to 1998.
b) A schedule of additional depreciation arising from change of depreciation rate, for years
1994 to 1997.
c) Provision for depreciation account for the same period.
d) Disposal of motor lorries account.
Date posted: November 21, 2018. Answers (1)
- Sijui is having difficulty in preparing a bank reconciliation statement as at 31 December 2001.
He provides a summarized cashbook and a bank statement for the...(Solved)
Sijui is having difficulty in preparing a bank reconciliation statement as at 31 December 2001.
He provides a summarized cashbook and a bank statement for the month of December as
shown below. Although the bank statement is correct his cashbook has several errors.
Required:
a) Prepare a corrected cashbook
b) A bank reconciliation as at 31 December and
c) A brief explanation as to the likely cause of the remaining difference.
Date posted: November 21, 2018. Answers (1)
- (a) What are the qualities of useful financial statements
(b) To what extent do International Accounting Standards assist in achieving some of these
qualities.(Solved)
(a) What are the qualities of useful financial statements
(b) To what extent do International Accounting Standards assist in achieving some of these
qualities.
Date posted: November 21, 2018. Answers (1)
- Calculate for Mvita Ltd. for 1989 and 1990 the following ratios:
Return on capital employed;
Debtors turnover;
Creditors turnover;
Current ratio;
Quick assets (acid test) ratio;(Solved)
Calculate for Mvita Ltd. for 1989 and 1990 the following ratios:
Return on capital employed;
Debtors turnover;
Creditors turnover;
Current ratio;
Quick assets (acid test) ratio;
Gross profit percentage;
Net profit percentage;
Dividend cover;
Gearing ratio.
Using the summarised accounts given and ratios you have just prepared, comment on the
financial position and prospects of Mvita Ltd.
Date posted: November 21, 2018. Answers (1)
- Kenya Caps Limited issued additional 100,000 ordinary shares and 50,000, 8% preference shares
on the following terms:(Solved)
Kenya Caps Limited issued additional 100,000 ordinary shares and 50,000, 8% preference shares
on the following terms:
The par values were Sh.10 and Sh.9 for the ordinary and preference shares respectively. By 1
August 1993, applications had been received for 200,000 ordinary shares and 40,000 preference
shares. The directors rejected the application for 80,000 ordinary shares and refunded the
monies on 15 August 1993, and the remainder allotted five shares for every six shares applied
for. Surplus application monies were carried forward to allotment.
All allotment took place on 20 August 1993 and the due amounts were received by 31 August
1993. The first and second calls were received by the due dates except for 3,000 ordinary shares
which the directors declared forfeited on 20 November 1993. All the forfeited shares were
reissued as fully paid to another shareholder on 30 November 1993 for Sh.9 per share.
Assume that the number of shares outstanding prior to this additional issue amounted
to: Ordinary -300,000 shares of Sh.10 par
-50,000 7% preference shares of Sh.7 par
All these shares had been issued at par.
Required:
a) Journal entries including cash necessary to record the share transactions.
b) Prepare the share capital section of the Balance Sheet as at 31 December 1993.
c) What is the importance of issuing bonus shares?
Date posted: November 21, 2018. Answers (1)
- Pesa and Akili were in partnership preparing their accounts to 31 March and sharing profits and
losses in the ratio of 3:2 respectively. Interest was allowed...(Solved)
Pesa and Akili were in partnership preparing their accounts to 31 March and sharing profits and
losses in the ratio of 3:2 respectively. Interest was allowed on fixed capital at 10% per annum.
Akili was entitled to a salary of Sh.3,000 per month. On 2 October 1995 the partners admitted
Tajiri a well known businessman into the partnership. On that day Tajiri introduced a Sum of
money which was equal to 50% of Pesa's fixed capital. The amount was credited to Tajiri's
capital account.
The new partnership agreement provided the following:
1) Interest on capital to be maintained at 10% per annum.
2) Tajiri is to receive a commission of 10% of the net profit before appropriations. This is due
to his business acumen.
3) Profits will be shared equally among the partners.
4) Akili is now entitled to a salary of Sh.3,500 per month.
The partners also agreed to guarantee Tajiri a minimum share of profit of Sh.62,000 per annum.
Any deficiency on that balance will be compensated by the other two partners in equal
proportions. For the purposes of admission of a partner, goodwill was valued at two years
purchase of average profits for the last three years. The profits for the years ended 31 March
1993, 1994 and 1995 were Sh.60,000, Sh.50,OOOand Sh.70,000 respectively. No goodwill
account is to be maintained in the books. Adjusting entries are to be made in the partners
current accounts. The net profit for the year ended 31 March 1996 was Sh.360,000. The profit
accrued evenly over the year.
The following are the partners balances on 1 April 1995:
Required:
a) Profit and Loss Appropriation Account for the year ended 31 March 1996.
b) Partners Current Accounts.
Date posted: November 21, 2018. Answers (1)
- John and Dan are partners who run a wholesale shop. They share profits and losses equally. The accountant has provided a draft balance sheet as...(Solved)
John and Dan are partners who run a wholesale shop. They share profits and losses equally. The accountant has provided a draft balance sheet as shown below:
From your examination of the books, you find that adjustments to the accounts are necessary in
respect of the following:
1) Sales included goods valued at Sh.700,000 which had been taken by Dan for his own
private use and debited to him in an account opened in the sales ledger. This is to be
treated as drawings.
2) The bills for electricity amounting to Sh.446,000 had not been paid.
3) A cheque for Sh.100,000 received from a debtor on 29 December 1998 had been put in the
drawer by the cashier and forgotten.
4) The amount for sundry debtors is shown net of a provision for doubtful debts of
Sh.600,000. The provision includes a bad debt of Sh.120,000. The revised provision for
doubtful debts was agreed at Sh.560,000.
5) A stock valued at Sh.3,300,000 was considered to have a net realizable value of
Sh.3,000,000. Some items of the stock for Sh.480,000 were not included in Sh.3,300,000.
6) Trade licenses for Sh.344,000 paid during the year had been charged to the profit and loss
account yet it will not expire until 31 March 1999.
7) Plant and machinery is considered to have a written down value of Sh.16,800,000.
8) During the year a building which cost Sh.5,800,000 was sold for Sh.5,600,000 and the
amount credited to freehold premises.
A cheque for Sh.406,000 received from a debtor and paid into the bank on 13 December 1998
had been returned on 31 December 1998 marked "refer to drawer". No entries were made in
the books of account.
Required:
a) A statement showing the correct adjustments and the adjusted profit for the year ended 31
December 1998.
b) A revised balance sheet as at 31 December 1998.
Date posted: November 21, 2018. Answers (1)
- A company's issued share capital may be increased by a bonus (capitalization) issue or by a rights issue
Required:
Define "bonus issue" and "rights issue" and explain...(Solved)
A company's issued share capital may be increased by a bonus (capitalization) issue or by a rights issue
Required:
Define "bonus issue" and "rights issue" and explain the fundamental difference between these two types of share issue.
Date posted: November 21, 2018. Answers (1)
- The term "reserves" is frequently found in company balance sheets
Required:
(i) Explain the meaning of „reserves? in this context;
(ii) Give two examples of reserves and explain...(Solved)
The term "reserves" is frequently found in company balance sheets
Required:
(i) Explain the meaning of „reserves‟ in this context;
(ii) Give two examples of reserves and explain how each of your examples comes into existence.
Date posted: November 21, 2018. Answers (1)
- List and briefly explain three ways in which the use of historical cost accounting may cause financial statements to be misleading.(Solved)
List and briefly explain three ways in which the use of historical cost accounting may cause financial statements to be misleading.
Date posted: November 21, 2018. Answers (1)
- Otter, a limited liability company, operates a computerised accounting system for its accounts
receivable and accounts payable ledgers. The control accounts for the month of September...(Solved)
Otter, a limited liability company, operates a computerised accounting system for its accounts
receivable and accounts payable ledgers. The control accounts for the month of September 1999
are in balance and incorporate the following totals:
Although the control accounts agree with the underlying ledgers, a number of errors have been
found, and there are also several adjustments to be made. These errors and adjustments are
detailed below:
(1) Four sales invoices totalling Shs 1,386 have been omitted from the records;
(2) A cash refund of Shs 350 paid to a customer, A Smith, was mistakenly treated as a
payment to a supplier with the same name;
(3) A contra settlement offsetting a balance of Shs 870 due to a supplier against the
accounts receivable ledger account for the same company is to be made;
(4) Bad debts totalling Shs1,360 are to be written off;
(5) During the month, settlement was reached with a supplier over a disputed account. As a
result, the supplier issued a credit note for Shs 2,000 on September 26. No entry has yet
been made for this;
(6) A purchases invoice for Shs 1,395 was keyed in as Shs 1,359;
(7) A payment of Shs 2,130 to a supplier, B Jones, was mistakenly entered to the account
of R Jones;
(8) A debit balance of Shs 420 existed in the accounts payable ledger at the end of August
1999. The supplier concerned cannot now be traced and it has been decided to write off
this balance.
Required:
Prepare the accounts receivable and accounts payable ledger control accounts as they should
appear after allowing, where necessary, for the errors and adjustments listed.
Date posted: November 20, 2018. Answers (1)
- Atok, a limited liability company, compiles its financial statements to 30 June manually. At 30 June 1999, the company's list of account balances was as...(Solved)
Atok, a limited liability company, compiles its financial statements to 30 June annually. At 30
June 1999, the company's list of account balances was as follows:
The following matters remain to be adjusted for in preparing the financial statements for
the year ended 30 June 1999:
(1) Inventory at 30 June 1999 amounted to Shs 1,560,000 at cost. A review of
inventory items revealed the need for some adjustments for two inventory lines:
(i) Items which had cost Shs 80,000 and which would normally sell for Shs 120,000
were found to have deteriorated. Remedial work costing Shs 20,000 would be needed
to enable the items to be sold for Shs 90,000.
(ii) Some items sent to customers on sale or return terms had been omitted from inventory
and included as sales in June 1999. The cost of these items was Shs 16,000 and they
were included in sales at Shs 24,000. In July 1999, the items were returned in good
condition by the customers.
(2) Depreciation is to be provided as follows:
Buildings: 2% per year on cost.
Plant and equipment: 20% per year on cost.
80% of the depreciation is to be charged in cost of sales, and
10% each in distribution costs and administrative expenses.
(3) The land is to be revalued to Shs 12,000,000. No change was required to the value
of the buildings.
(4) Accrued expenses and prepayments were:
(5) No dividends were paid during the year and no dividend is proposed for the year.
Required:
(a) Prepare the company's income statement for the year ended 30 June 1999 and balance
sheet as at that date for publication, complying as far as possible with the provisions of IAS1
Presentation of Financial Statements and other relevant International Accounting Standards.
(b) Prepare the statement of changes in equity as presented in IAS1. Notes to the financial
statements are not required.
Date posted: November 20, 2018. Answers (1)
- Agatha, a limited company made up its financial statements to 31 December 1997, when the
company changed its accounting date by making up its next financial...(Solved)
Agatha, a limited company made up its financial statements to 31 December 1997, when the
company changed its accounting date by making up its next financial statements for the fifteen
months to 31 March 1999.
The company‟s depreciation policy 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 the
month of any disposal. Annual rates of depreciation taken are:
Plant and machinery 15 per cent straight line
Motor vehicles 25 per cent straight line
At 1 January 1998 the following balances existed in the company's accounting records.
Shs
Plant and machinery: cost 819,000
Accumulated depreciation 360,000
Motor vehicles : Cost 148,000
Accumulated depreciation 60,000
During the fifteen months ended 31 March 1999 the following transactions took place:
(1) 10 January 1998
An item of plant was purchased. The cost was made up as follows:
(2) 18 April 1998
A new motor vehicle was purchased for Shs 18,000. An existing vehicle which had cost
Shs 12,000 and which had a book value at 1 January 1998 of Shs 6,000, was given in
part exchange at an agreed value of Shs 5,000. The balance of Shs 13,000 was paid in
cash.
Required:
(a) Prepare the ledger accounts to show the balances at 1 January 1998 and to record the
non-current asset transactions as stated.
(b) Prepare the schedule of figures detailing the movements in non-current assets and
depreciation for the company‟s financial statements for publication for the
period ended 31 March 1999 required by IAS 16 Property Plant and equipment.
(Figures may be rounded to the nearest Shs 100 for part (b))
Date posted: November 20, 2018. Answers (1)
- Anne, Charlotte and Emily have been in partnership for some years, sharing profits in the ratio
50.30.20 and preparing their financial statements to 31 December each...(Solved)
Anne, Charlotte and Emily have been in partnership for some years, sharing profits in the ratio
50.30.20 and preparing their financial statements to 31 December each year.
On 30 June 1998 Anne retired and Charlotte and Emily decided to continue the partnership
sharing profits equally.
The partnership list of account balances at 31 December 1998, before making any adjustments
for Anne's retirement or for the asset revaluation was as follows.
Notes
(1) Profits are to be assumed to accrue equally in the periods before and after
Anne's retirement
(2) The balance due to Anne is to remain in the partnership from 1 July 1998 as a loan
carrying no interest until 1 January
(3) The value of the partnership goodwill at 30 June 1998 was agreed by all three partners at
Shs 200,000. Goodwill is not to appear in the balance sheet after the adjustments
necessary at 30 June 1998.
(4) It was decided, as part of the process of valuing Anne's share of the
partnership, to revalue the land at 30 June from Shs 120,000 to Shs 160,000. The
increased value is to be included in the balance sheet.
(5) The inventory at 31 December 1998 was Shs 90,000
(6) Accruals and prepayments at 31 December 1998 were:
Rent paid in advance to 31 March 1999 Shs 5,000
General administrative expenses:
Prepayments Shs 1,800
Accruals Shs 6,200
(7) The allowance for doubtful debts is to be increased to Shs 2,400
(8) Depreciation is to be provided as follows:
Buildings 2 % per annum straight line
Shop and office equipment 15 % per annum straight line
Required:
(a) Prepare the income statement and a statement showing the division of the profit for the
year ended 31 December 1998 and balance sheet as at that date;
(b) Show the partners' capital and current accounts for the year Anne‟s loan account
Date posted: November 20, 2018. Answers (1)
- The information below relates to KC Investments Ltd, a company that sells computer accessories for the year ended 31 October 2005 and 31 October 2006....(Solved)
The information below relates to KC Investments Ltd, a company that sells computer accessories for the year ended 31 October 2005 and 31 October 2006. The industry average has also been provided.
Required:
From the shareholders perspective, comment on the ratios for KC Investments Ltd in relation to the industry average ratios.
Date posted: November 20, 2018. Answers (1)
- Define the following ratios:
(i) Return on capital employed (ROCE)
(ii) Return on owners' equity (ROOE)
(iii) Leverage ratio
(iv) Inventory turnover
(v) Earnings per share (EPS)(Solved)
Define the following ratios:
(i) Return on capital employed (ROCE)
(ii) Return on owners' equity (ROOE)
(iii) Leverage ratio
(iv) Inventory turnover
(v) Earnings per share (EPS)
Date posted: November 20, 2018. Answers (1)