The limitation of Financial Ratios
i) Historical
Ratios computed are usually computed using historical information. As
such they cannot be used to forecast on what will happen in the future as
they are usually used.
ii) Non qualitative
Ratios cannot be calculated for qualitative aspects e.g. the performance of a
company in the social responsibility front or even the competency of a
manager at his work. As such they are limited to the things they can discuss
about a business.
iii) Monopolies
One of the uses of financial ratios is so that they can be compared with
other firms in the industry that a firm is operating in. This however is not
possible for companies which are monopolies since there are no firms to
compare with e.g. KENGEN the electricity provider in Kenya
iv) Different Accounting Policies
Different firms use different accounting policies e.g. in depreciation
costing their closing stock etc.,
This may be a hindrance in comparing the accounting policies of different
companies as the ratios may be differently computed.
v) Companies falling under different Industries
These companies are hard to classify for purposes of ratio analysis in that
it's not possible to know under which industry to place them for
comparison purposes.
An example would be Unilever Kenya who deal with very many goods and
as such it may be hard to put them into a certain industry.
Mutiso answered the question on November 24, 2018 at 17:55
- Kathryn Rochford keeps her petty cashbook on the imprest system, the imprest being Sh.25. For the month of April 20X9 her petty cash transactions were...(Solved)
(a) Kathryn Rochford keeps her petty cashbook on the imprest system, the imprest being Sh.25. For the month of April 20X9 her petty cash transactions were as follows:
(i) Enter the above transactions in the petty cashbook and balance the petty
cashbook at 30 April, bringing down the balance on 1 May.
(ii) On 1 May Kathryn Rochford received an amount of cash from the cashier
to restore the imprest. Enter this transaction in the petty cashbook.
(b) Open the ledger accounts to complete the double entry for the following:
(i) The petty cash analysis columns headed Postage and Stationery and Travelling Expenses;
(iii) The transactions dated 9 and 23 April 20X9.
Date posted: November 24, 2018. Answers (1)
- Why do some businesses keep a petty cashbook as well as a cashbook?(Solved)
Why do some businesses keep a petty cashbook as well as a cashbook?
Date posted: November 24, 2018. Answers (1)
- The directors of Hawk, a limited liability company, wish to compare the company's most recent financial statements with those of the previous year. The company's...(Solved)
The directors of Hawk, a limited liability company, wish to compare the company's most recent financial statements with those of the previous year. The company's financial statements are given below:
Required:
(a) Calculate, for each of the two years, eight accounting ratios which should assist the directors
in their comparison, using closing figures for balance sheet items needed.
(b) Suggest possible reasons for the changes in the ratios between the two years.
Date posted: November 24, 2018. Answers (1)
- Orion and Pegasus are two sole traders who decide to amalgamate their businesses into
a partnership as from 1 January 2001.
Their balance sheets at 31 December...(Solved)
Orion and Pegasus are two sole traders who decide to amalgamate their businesses into
a partnership as from 1 January 2001.
Their balance sheets at 31 December 2000 are as follows:
(1) Goodwill, which does not appear in the records of either business, is valued at:
Sh.‟000
Orion 200
Pegasus 180
Goodwill is not to appear in the opening balance sheet of the partnership.
(2) Profit-sharing ratios in the partnership are agreed as :
Orion 60%
Pegasus 40%
(3) Land included in Orion.s non-current assets at Sh.100,000 to be revalued to Sh.130,000.
(4) Orion and Pegasus did not transfer their motor cars to the new business but retained
them personally. The motor cars are currently included in their non-current assets at
their book value as follows:
Sh.‟000
Orion 18
Pegasus 16
(5) Orion's loan from Nimrod was repaid by Orion on 31 December 2000.
(6) The remaining balance of Orion's cash, and the overdraft of Pegasus,
were combined into a single bank account for the partnership.
(7) All other assets and liabilities of the businesses were brought into the partnership at
their stated book value.
Required:
(a) Show the capital accounts of the two traders to record the closure of their businesses.
(b) Prepare the opening balance sheet of the new partnership of Orion and Pegasus as at 1
January 2001.
(c) Explain why asset revaluations and a goodwill adjustment may be needed when a partner
retires or dies, a new partner is admitted or there is a change in profit-sharing ratios.
Date posted: November 24, 2018. Answers (1)
- Cygnus is a sole trader selling antiques from a rented shop. He has not kept proper
accounting records for the year ended 31 January 2001, in...(Solved)
Cygnus is a sole trader selling antiques from a rented shop. He has not kept proper
accounting records for the year ended 31 January 2001, in spite of his accountant‟s advice
after the preparation of his accounts for the year ended 31 January 2000.
His assets and liabilities at 31 January 2000 and 31 January 2001 were as follows:
Before banking the shop takings, Cygnus took various amounts as drawings.
Notes
(1) Cygnus fixes his selling prices by doubling the cost of all items purchased.
(2) During the year, Cygnus sold for Sh.300 equipment that had cost Sh.800, and had a
written down value at 1 February 2000 of Sh.200. He purchased further equipment on
1 August 2000 for Sh.1,800.
(3) Depreciation is charged at 10% per year on the straight-line basis, with no
depreciation in the year of sale and proportionate depreciation in the year of purchase.
(4) Rent is payable quarterly in advance on 1 January, 1 April, 1 July and 1 October
each year. On 1 July 2000, the annual rent was increased from Sh.6,000 to Sh.9,000.
(5) The loan from Draco carries interest at 10% per year payable annually on 31
December. On 31 December 2000, Cygnus repaid Sh.12,000 of the loan. The balance is
repayable on 31 December 2004.
(6) The accrued expenses at 31 January 2000 consist of the Sh.200 interest accrued
on Draco.s loan (see Note 4) and sundry expenses of Sh.2,100. At 31 January
2001, accruals for sundry expenses amounted to Sh.3,300.
Required:
(a) Prepare for Cygnus an income statement for the year ended 31 January 2001 and a
balance sheet as at that date.
Date posted: November 24, 2018. Answers (1)
- Briefly explain the following accounting Concepts. (i) Going concern (ii) Accruals (iii) Consistency (iv) Prudence or conservatism (v) Materiality(Solved)
i) Going concern
ii) Accruals
iii) Consistency
iv) Prudence or conservatism
v) Materiality
vi) Substance over form
vii) Business entity concept
viii) Money measurement
ix) Historical cost
x) Objectivity
xi) Realization
xii) Duality
Date posted: November 24, 2018. Answers (1)
- What are accounting concepts, Bases, Policies?(Solved)
What are accounting concepts, Bases, Policies?
Date posted: November 24, 2018. Answers (1)
- Mr. James Bulayi formed Malimia Traders, a sole proprietorship five years ago. His initial capital
injection was Sh.1,000,000 cash. For a number of years, Bulayi's wife...(Solved)
Mr. James Bulayi formed Malimia Traders, a sole proprietorship five years ago. His initial capital
injection was Sh.1,000,000 cash. For a number of years, Bulayi's wife maintained the accounting
records, but early in 1993 she became seriously ill. Mr. Bulayi consulted a CPA firm whose
manager told him "you keep a record of your cash receipts and payments and a list of your
assets and liabilities, at the beginning and end of the year, and I will prepare financial statements
for you at the end of the year".
On 31 October 1993, Mr. Bulayi presented the following data to the Manager of the CPA firm.
Additional information:
i) Although the primary source of revenue is from trading Malimia Traders also earns income
from rent and interest. Malimia Trader conducts business from the ground floor of its twofloor
storey building. The first floor is rented to a shoe-retailer for a monthly rent. The
retailer pays 6 months rent in advance on 1 March and 1 September every year. Malimia
Traders increased rent from Sh.15,000 per month to Sh.20,000 per month with effect from
1 September 1993. Malimia Traders charges interest on overdue customers accounts, which
customers usually pay together with the principal amount due. Interest owing by customers
on 31 October 1993 was Sh.5,000.
ii) The following balances of assets and liabilities were extracted on 31 October 1992
iii) Sh.14,000 of debts had been written off during the accounting period, of which Sh.8,500
was from sales of the previous accounting year, Bulayi estimated that Sh.14,200 of the 31
October 1993 debtors balances may be uncollectable and a provision is required.
iv) Returns inwards and returns outward all applicable to current year's sales and purchases are
Sh.60,000 and Sh.50,000 respectively.
v) Cash discount taken by credit customers in the year are Sh.41,300 discounts on purchases
are Sh.64,000.
Depreciation is to be provided on reducing balance on fixed assets held at year end at the
rate of 5% per annum on building and 25% per annum on equipment. There were no
disposals of plant assets during the year.
Interest owing on the bank loan at 31 October 1993 is Sh.17,500. The amount paid for
insurance includes a premium of Sh 8,000 paid to cover the firm against fire for the Co. six
months to 31 January 1994.
Stock in hand on 31 October 1993 was valued at Sh985,000.
On 31 October 1993 the amounts owing to suppliers was Sh.523,000 and the amount
owing by customers was Sh,663,2000 (excluding interest on overdue accounts). All
purchases of stock are on credit.
Ground rent and land rates for the year amounted to Sh.50,000 The bills received in
respect of the two are not yet paid.
Required:
Malimia Traders' Trading, Profit and loss Account for the year ended 31 October 1993 and a
Balance Sheet as at that date.
Date posted: November 24, 2018. Answers (1)
- The treasurer of Watembezi Sports Club has presented the following information for the year ended 31 October 1998(Solved)
The treasurer of Watembezi Sports Club has presented the following information for the year ended 31 October 1998
Notes:
1) The Harambee donations were for the extension of the club. The funds shall remain in this
account until the works, are completed when' the balance will be transferred to the
accumulated fund.
2) The depreciation on fixed assets is at 10% and 15% on cost on furniture and fittings; and
equipment respectively.
3) Equipment which had cost Sh.25,000 was sold on credit for Sh.14,000 to a member who
owed the club the money at the end of the year. The provision for depreciation on this
equipment was Sh.7,000. Another equipment sold for cash had an accumulated provision
for depreciation of Sh.19,000.
4) Audit fees of Sh.50,000 should be provided.
5) Subscription in arrears are written-off after 12 months.
Required:
a) Income and expenditure account for the year ended 31 October 1998
b) Balance as at 31 October 1998
Date posted: November 24, 2018. Answers (1)
- Reviewing the draft accounts of Uzee Ltd for the year ended 31 st December 2001 as prepared by the Chief Accountant, the Managing Director suggests...(Solved)
Reviewing the draft accounts of Uzee Ltd for the year ended 31 st December 2001 as prepared by the Chief Accountant, the Managing Director suggests that the written down value of plant is too low. To support his argument he produces the following schedule of plant on hand at 31 December 2001:
After discussing the matter the following policy is agreed:
1) Each item of plant to be depreciated on a straight line basis to its estimated scrap value over
its estimated life.
2) A full year's depreciation to be charged in the year of
purchase. On investigation you ascertain that:
There is no plant register.
Plant which includes the lorry is shown in the accounts at cost less proceeds of sales.
3) For some years depreciation was charged at 15% on the reducing balance and then from 31st
December 1994 at 10% of cost less proceeds of sales on a straight line basis.
4) The Plant account for the year ended 31st December 2001 was:
You are required to show, after implementing the new policy:
a) The Plant Account as it should appear in the books of the company for the year ended 31st
December 2001
b) The entries which should appear in the Balance Sheet as on 31st December 2001 and
c) A note explaining the effect on the profits on the change of depreciation policy.
Date posted: November 24, 2018. Answers (1)
- Juhudi Ltd. has two accounts "A" and "B" with different banks. On 31 March 1995 the cash
book showed a balance of Sh.200,000 in Account" A"...(Solved)
Juhudi Ltd. has two accounts "A" and "B" with different banks. On 31 March 1995 the cash
book showed a balance of Sh.200,000 in Account" A" and an overdraft of Sh. 90,000 in
account "B". However the bank statements obtained on the same day showed different
balances for the two accounts.
Further investigation reveals the following information: -
1. A deposit of Sh.60,000 made into account" A" on 1 March 1995 has been entered in
the cash book in account "B".
2. A withdrawal of Sh.20,000 from account" A" on 3 March 1995 has been debited in
the cash book in account "B".
3. Cheques of Sh.25,000 and Sh.30,000 deposited in account" A" on 9 March 1995 were
entered in the cash book in account"B". The second cheque has been dishonored by
the bankers. The entry for this dishonored cheque has been entered in the cash book
in account "B".
4. Cheques for Sh.40.000 and Sh.500.000 drawn on accounts" A" and "B" respectively
on 30 March 1995 were not paid by the banks until 5 April 1995.
5. Incidental charges of Sh.400 and Sh.1.000charged in the accounts" A" and "B"
respectively have not been entered in the cash book.
6. The bank has credited an interest of Sh.2.000 for account" A" and has debited bank
charges of Sh.1,500 to account "B". These transactions have not been entered in the
cash book.
7. Deposits of Sh.200,000 and Sh.140,000 made into the accounts" A" and "B"
respectively have not yet been credited by the bank.
8. Dividends amounting to Sh.8,000 had been paid direct to the bank in account "B".
9. A cheque for Sh.3.500 drawn on account" A" on 30 March 1995 in payment of an
electricity bill had been entered in the cash book as Sh.5,300.
Required:
i) The necessary adjustments in both cash books in order to correct the errors.
ii) Bank reconciliation statements for both cash books.
Date posted: November 24, 2018. Answers (1)
- Define the term bank reconciliation statement and indicate its three main functions(Solved)
Define the term bank reconciliation statement and indicate its three main functions.
Date posted: November 24, 2018. Answers (1)
- Explain four ways in which the use of historical cost accounting may cause users of financial statements to be misled when prices are rising.(Solved)
Explain four ways in which the use of historical cost accounting may cause users of financial statements to be misled when prices are rising.
Date posted: November 24, 2018. Answers (1)
- 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)