Financial Accounting Assessment

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SECTION A

Instruction: Type the letter that corresponds with the CORRECT response for each of the following.

GIVE JUSTIFICATION FOR THE SELECTED RESPONSE.

  1. A and B are in partnership sharing profits and losses equally. They admit C as a partner and adjusted the profit-sharing ratio to 2:2:1 for A, B, C, respectively. Goodwill is valued

at $10 000 but no goodwill is to be recorded in the books. What will the entries in the capital accounts be?

  1. Debit A and B with $1000 each and credit C with $2000 B. Credit A and B with $1000 each and debit C with $2000 C. Debit A and C with $1000 each credit B with $2000 D. Credit B and C with $1000 each and debit A with $1000

Justification:

  1. If a company wishes to raise capital without increasing its debt, it should issue
  2. Ordinary shares B. Bonus Shares C. Debenture D. Mortgage

Justification:

  1. S and A are in partnership sharing profits and losses equally. They admit was a partner and conducted a revaluation of the assets which resulted in a loss of $18000. The new profit-sharing ratio is 2:2:1 for S, A, and W, respectively. How will the revaluation loss be recorded in the capital accounts?
  1. Debit S and A with $9000 each B. Credit S and A with $9000 each C. Debit S and A with $9000 each and credit W with $18000 D. Credit S and A with $9000 each and debit W with $18000

Justification:

  1. What is the authorised share capital of a limited company?
  2. The amount of shares issued to shareholders B. The amount paid for shares by the shareholders C. The maximum amount of shares that can be issued D. The minimum amount of shares that can be issued

Justification:

  1. Preference shareholders unlike ordinary shareholders, are unable to do which of the following?
  2. Receive dividend above the amount paid to ordinary shareholders B. Receive dividend pay-out above the percentage stated during the issuance C. Have priority of dividend payment before the ordinary shareholders D. Vote in the General Meeting of the company

Justification:

  1. What is the reward of profit received by a shareholder of a limited company called?
  2. Dividend B. Commission C. Interest D. Drawings

Justification:

  1. In a cash flow statement, which item is a cash outflow?
  2. A $5000 decrease in inventory B. A $8000 decrease in Accounts Receivables C. A decrease in Accounts payable of $8,500 D. An issue of bonus shares, $50,000

Justification:

  1. Which of the following is NOT a cash outflow for the firm?
  2. Dividends B. Provision for bad debts C. Interest payments D. Taxes

Justification:

  1. Which of the following is TRUE regarding the purpose of the statement of cash flows?
  2. Determining the company’s ability to pay dividends and interest expense
  3. Predicting future cash flows iii. Evaluating management decisions iv. Reporting net income
  4. i and iv only B. ii and iii only C. i, ii and iv only D. i, ii and iii only

Justification:

  1. Why is depreciation added back when arriving at the cash flow from operating activities?
  2. It is only an estimated amount B. It does not affect profit C. It only affects the non-current assets D. It does not result in a flow of cash

Justification:

(2 marks each – 1 for correct response; 1 for justification)

(Total 20 marks)

END OF SECTION A

Also see: Group of Intermediate financial accounting questions

SECTION B

Instruction: Complete the TWO (2) questions from this section.

Question 1

Analysis of Financial Performance

Archer Company is a retailer and trades through its stores on the high street, selling high quality goods. The company has recently been suffering from rising costs, which it has been unable to pass on to its customers.

In response to the number of people shopping via the internet, Archer Company has implemented a cost cutting strategy in the prior year, and in the current year asked shareholders for funds to help reduce its debt burden. The following financial information for the current year is available.

Archer Company Ltd

Statement of Comprehensive Income for the year ended March 31, 2019

2019 2018

$$$ $$$

Turnover/Revenue 2642479 2920514

Cost of Sales (1225963) (1272422)

Gross Profit 1416516 1648092

Operating/Admin expense (1402929) (1608981)

13587 39111

Other operating income 0 8

Operating income 13587 39119

Non-operating income (interest) (7957) (1567)

Profit before Interest & Tax 21544 40686

Interest payable & Charges (4421) (22392)

Profit before tax 17123 18294

Tax on profit on Ordinary Activities (2045) (6248)

Profit for the financial year 15078 12046

Archer Company Ltd

Statement of financial Position as at March 31, 2019

2019 2018

$$$ $$$

Non- Current Assets

Tangible Assets 71857 149354

Current Assets

Stocks 51908 73677

Debtors 489990 327768

Liquid Assets (Cash & Bank) 282580 497180

824478 898625

Less Current Liabilities: Accounts payables (563960) (702343)

Net Current Assets 260518 196282

Total Assets= (Tangible + Net Assets) 332,375 345636

Capital , Reserves & Long term Liabilities:

Capital 317297 305251

Profit 15078 12046

Long term Creditors 0 28339

332375 345636

Required

  1. Calculate the following ratios: i. Profitability: Net Profit as a percentage of Sales ii. Liquidity: Acid test or Quick ratio iii. Efficiency: Debtors day (6 marks)
  2. State the benefits of using ratio analysis to interpret financial performance compared with just relying on the financial statements to make decisions. (8 marks)
  3. Use the information provided from the ratios calculated to do a comparative analysis over the two years on the profitability, liquidity, and efficiency of the business. (16 marks)

(Total 30 marks)

Question 2

Partnership Dissolution

Chest, Legs and Abs have been in partnership for several years, sharing profits and losses in the ratio 3: 2: 1. Despite making good profits during recent years they had become increasingly dependent on one credit customer, Jim, and in order to retain his custom they had gradually increased his credit limit until he owed the partnership $18,000. It has now been discovered that Jim is insolvent and that he is unlikely to repay any of the money owed by him to the partnership. Reluctantly Chest, Legs and Abs have agreed to dissolve the partnership on the following terms:

  1. The stock is to be sold to Nelson Ltd for $4,000 ii. The fixed assets will be sold for $8,000 except for certain items with a book value of

$5,000 which will be taken over by Chest at an agreed valuation of $7,000

iii. The debtors, except for Jim, are expected to pay their accounts in full iv. The costs of dissolution will be $800 and discounts received from creditors will be $500

ABS is unable to meet his liability to the partnership out of his personal funds. Their last balance

sheet which was prepared on 31 October 2019 is as follows:

Balance Sheet of Chest, Legs and Abs as at 31 October 2019

$ $ $ $ $ $

Fixed assets

At cost 20,000

Less Depreciation ( 6,000)

14,000

Current assets

Stock 5,000

Debtors 21,000

26,000

Current liabilities

Bank 13,000

Creditors 17,000

(30,000)

( 4,000)

10,000

Capital

Chest 4,000

Legs 4,000

Abs 2,000

10,000

Required:

  1. Prepare the realization account (8 marks)
  2. Prepare the Bank and capital accounts to the partners accounts to record the dissolution of the partnership (12 marks)
  3. Discuss the circumstances which may lead to dissolution of a partnership and the process involved. What major issue identified that resulted in the dissolving of this partnership and gives a recommendation to address this issue. (10 marks)

(Total 30 marks)

Last Updated on December 19, 2020 by Essay Pro