The Chartered Institute of Management Accountants 2001

Foundation Level
Financial Accounting Fundamentals
1 FAFN
23 May 2001
Day 3 morning
INSTRUCTIONS TO CANDIDATES
Read this page before you look at the questions
You are allowed three hours to answer this question paper.
Answer the ONE question in section A (this has 25 sub-questions).
Answer the TWO questions in section B.
Answer ONE question ONLY from section C.
Write your examination number in the boxes provided on the front of the answer book.
Write FAFN on the line marked "Subject" on the front of the answer book.
Write your examination number on the special answer sheet for section A which is on page 3 of
this question paper booklet.
Detach the sheet from the booklet and insert it into your answer book before you hand this in.
Do NOT write your name or your student registration number anywhere on your answer book.
Tick the appropriate boxes on the front of the answer book to indicate which questions you have
answered.
TURN OVER
FAFN 2 May 2001
SECTION A 50 MARKS
ANSWER ALL TWENTY-FIVE SUB-QUESTIONS 2 MARKS EACH
Question One
1.1 The fundamental objective of an external audit of a limited company is to
A give advice to shareholders.
B detect fraud and errors.
C measure the performance and financial position of a company.
D provide an opinion on the financial statements.
1.2 A receives goods from B on credit terms and A subsequently pays by cheque. A then
discovers that the goods are faulty and cancels the cheque before it is cashed by B.
How should A record the cancellation of the cheque in his books?
A Debit creditors Credit returns outwards
B Credit bank Debit creditors
C Debit bank Credit creditors
D Credit creditors Debit returns outwards
1.3 The profit of a business may be calculated by using which one of the following formulae?
A Opening capital - drawings +capital introduced - closing capital
B Closing capital +drawings - capital introduced - opening capital
C Opening capital +drawings - capital introduced - closing capital
D Closing capital - drawings +capital introduced - opening capital
1.4 The turnover in a company was 2 million and its debtors were 5% of turnover. The
company wishes to have a provision for doubtful debts of 4% of debtors, which would
make the provision 33% higher than the current provision.
What figure would appear in the profit and loss account in respect of doubtful debts?
A debit 1,000. B credit 1,000. C debit 1,333. D credit 1,333.
Each of the sub-questions numbered from 1.1 to 1.25 inclusive, given below, has only ONE correct
answer.
May 2001 3 FAFN
1.5 Which one of the following should be accounted for as capital expenditure?
A The cost of painting a building.
B The replacement of windows in a building.
C The purchase of a car by a garage for re-sale.
D Legal fees incurred on the purchase of a building.
1.6 A business purchases a machine on credit terms for 15,000 plus value added tax (VAT)
at 15%. The business is registered for VAT. How should this transaction be recorded in
the books?
Dr Cr
A Machinery 15,000
Creditors 15,000
B Machinery 17,250
Creditors 17,250
C Machinery 15,000
VAT 2,250
Creditors 17,250
D Machinery 17,250
VAT 2,250
Creditors 15,000
1.7 Which one of the following statements most closely expresses the meaning of true and
fair?
A There is only one true and fair view of a companys financial statements.
B True and fair is determined by compliance with accounting standards.
C True and fair is determined by compliance with company law.
D True and fair is largely determined by reference to generally accepted accounting practice.
1.8 On 1 May 2000, A Ltd pays a rent bill of 1,800 for the period to 30 April 2001. What are
the charge to the profit and loss account and the entry in the balance sheet for the year
ended 30 November 2000?
A 1,050 charge to profit and loss account and prepayment of 750 in the balance sheet.
B 1,050 charge to profit and loss account and accrual of 750 in the balance sheet.
C 1,800 charge to profit and loss account and no entry in the balance sheet.
D 750 charge to profit and loss account and prepayment of 1,050 in the balance sheet.
FAFN 4 May 2001
1.9 S Ltd exchanged stock for a delivery vehicle with T Ltd. The stock had cost S Ltd 10,000
and the normal selling price was 12,000; the delivery vehicle had cost T Ltd 9,000 and
the normal selling price was 13,000.
How should S Ltd value the vehicle in its balance sheet?
A 9,000. B 10,000. C 12,000. D 13,000.
1.10 Zs bank statement shows a balance of 825 overdrawn. The bank statement includes
bank charges of 50, which have not been entered in the cash book. There are
unpresented cheques totalling 475 and deposits not yet credited of 600. The bank
statement incorrectly shows a direct debit payment of 160, which belongs to another
customer.
The figure for the bank balance in the balance sheet should be
A 590 overdrawn.
B 540 overdrawn.
C 790 overdrawn.
D 840 overdrawn.
1.11 There is 100 in the cash till at the year end at F Ltd, but the accountant has discovered
that some cash has been stolen. At the beginning of the year there was 50 in the cash till
and debtors were 2,000. Total sales in the year were 230,000. Debtors at the end of the
year were 3,000. Cheques banked from credit sales were 160,000 and cash sales of
50,000 have been banked.
How much cash was stolen during the year?
A 18,950. B 19,000. C 19,050. D 20,950.
1.12 A car was purchased for 12,000 on 1 April 1997 and has been depreciated at 20% each
year straight line, assuming no residual value. The company policy is to charge a full
years depreciation in the year of purchase and no depreciation in the year of sale. The car
was traded in for a replacement vehicle on 1 August 2000 for an agreed figure of 5,000.
What was the profit or loss on the disposal of the vehicle for the year ended 31 December 2000?
A Loss 2,200. B Loss 1,400. C Loss 200. D Profit 200.
May 2001 5 FAFN
1.13 A company includes in stock goods received before the year end, but for which invoices
are not received until after the year end. This is in accordance with
A the historical cost convention.
B the accruals concept.
C the consistency concept.
D the materiality concept.
1.14 I Ltd operates the imprest system for petty cash. At 1 J uly there was a float of 150, but it
was decided to increase this to 200 from 1 August onwards. During J uly, the petty
cashier received 25 from staff for using the photocopier and a cheque for 90 was
cashed for an employee. In J uly, cheques were drawn for 500 for petty cash.
How much cash was paid out as cash expenses by the petty cashier in J uly?
A 385. B 435. C 515. D 615.
1.15 Which one of the following sentences does NOT explain the distinction between financial
accounts and management accounts?
A Financial accounts are primarily for external users and management accounts are
primarily for internal users.
B Financial accounts are normally produced annually and management accounts are
normally produced monthly.
C Financial accounts are more accurate than management accounts.
D Financial accounts are audited by an external auditor and management accounts do not
normally have an external audit.
1.16 The movement on the plant and machinery account for X Ltd is shown below:

Cost b/fwd 10,000

Additions 2,000
Disposals (3,000)
Cost c/fwd 9,000
Depreciation b/fwd 2,000
Charge for the year 1,000
Disposals (1,500)
Depreciation c/fwd 1,500
Net book value b/fwd 8,000
Net book value c/fwd 7,500
The profit on the sale of the machine was 500. What figures would appear in the cash flow
statement of X Ltd?
FAFN 6 May 2001
A Movement on plant account 500 and profit on disposal of 500.
B Movement on plant account 500 and proceeds on sale of plant 2,000.
C Purchase of plant 2,000 and profit on disposal of 500.
D Purchase of plant 2,000 and proceeds on sale of plant 2,000.
1.17 When there is inflation, the historical cost convention has the effect of
A overstating profits and understating balance sheet values.
B understating profits and overstating balance sheet values.
C understating cash flow and overstating cash in the balance sheet.
D overstating cash flow and understating cash in the balance sheet.
1.18 When reconciling the creditors ledger control account with the list of creditors ledger
balances of M, the following errors were found:
the purchase day book had been overstated by 500 and
the personal ledger of a supplier had been understated by 400.
What adjustment must be made to correct these errors?
Control account List of creditor balances
A Cr 500 decrease by 400
B Dr 500 increase by 400
C Dr 400 increase by 500
D Cr 400 decrease by 500
1.19 Extracts from the financial statements of CFS Ltd are set out below:
Profit and loss account for the year ended 31 December 2000
000 000
Turnover 300
Cost of sales 150
Gross profit 150
Profit on sale of fixed asset 75
225
Expenses 15
Depreciation 30
45
Net profit 180
Balances at 31 December
1999 2000
000 000
Stock, debtors, current liabilities (net) 40 50
What figure would appear in the cash flow statement of CFS Ltd for the year ended 31
December 2000 in respect of net cash flow from operating activities?
May 2001 7 FAFN
A 125. B 145. C 215. D 235.
1.20 B is a builder with a staff of ten employees. In April 2001, he paid the following amounts:
net salaries after tax and national insurance 14,000
tax and employees national insurance for March 2001 5,000
employers national insurance for March 2001 1,400
He owes the following amounts in respect of tax and national insurance for April 2001:
tax and employees national insurance 6,000
employers national insurance 1,500
The correct expense for employee costs to be shown in the profit and loss account for April 2001
is
A 19,000. B 20,000. C 20,400. D 21,500.
1.21 The following information relates to M Ltd:
At 30 September 2000 1999
000 000
Stock of raw materials 75 45
Work-in-progress stock 60 70
Stock of finished goods 100 90
For the year ended 30 September 2000
Purchases of raw materials 150,000
Manufacturing wages 50,000
Factory overheads 40,000
The prime cost of production in the manufacturing account for the year ended 30 September
2000 is
A 165,000. B 170,000. C 210,000. D 270,000.
1.22 When valuing stock at cost, which of the following shows the correct method of arriving at
cost?
Include inward Include
transport costs production overheads
A Yes No
B No Yes
C Yes Yes
D No No
FAFN 8 May 2001
1.23 A fixed asset register is
A an alternative name for the fixed asset ledger account.
B a list of the physical fixed assets rather than their financial cost.
C a schedule of planned maintenance of fixed assets for use by the plant engineer.
D a schedule of the cost and other information about each individual fixed asset.
1.24 The difference between a profit and loss account (which may also be referred to as an
income statement) and an income and expenditure account is that
A an income and expenditure account is an international term for a profit and loss account.
B a profit and loss account is prepared for a business and an income and expenditure
account is prepared for a not-for-profit making organisation.
C a profit and loss account is prepared on an accruals basis and an income and expenditure
account is prepared on a cash flow basis.
D a profit and loss account is prepared for a manufacturing business and an income and
expenditure account is prepared for a non-manufacturing business.
1.25 In a debtors report, which one of the following would you NOT expect to see?
A Total debtor balances outstanding for current and previous months.
B Debtor balances excluding VAT.
C Credit limit.
D Sales to date.
Total = 50 marks
FAFN M2001 10
SECTION B 30 MARKS
ANSWER BOTH QUESTIONS
Question Two
The trial balance of FRS, a sole proprietor, at 31 J uly 2000 was as follows:

Capital 100,000
Plant and machinery:
Cost 155,000
Provision for depreciation to 1 August 1999 50,000
Trade debtors 15,000
Trade creditors 3,000
Stock at 1 August 1999 10,000
Cash at bank 3,400
Sales 150,000
Drawings 35,000
Provision for doubtful debts at 1 August 1999 2,000
Bank loan repayable 2006 20,000
Purchases 40,000
Selling and distribution expenses 50,000
Administration expenses 15,000
Interest 1,600
325,000 325,000
The following final adjustments are required:
(i) Stock at 31 J uly 2000 was valued at 12,000.
(ii) Selling and distribution expenses of 4,000 are to be accrued.
(iii) Administration expenses of 6,000 were prepaid.
(iv) The provision for doubtful debts is to be adjusted to 5% of debtors.
(v) Depreciation on the plant and machinery is 15,000 for the year to 31 J uly 2000.
Required:
(a) Prepare a trading, profit and loss account for the year ended 31 J uly 2000 and a balance
sheet at that date.
(14 marks)
(b) Calculate the following, as at 31 J uly 2000:
current ratio;
gearing;
debtor days.
(6 marks)
(Total = 20 marks)
M2001 FAFN 11
Question Three
The trial balance of E Ltd did not balance and the following errors have been discovered:
(i) A cheque for 1,000 received from a debtor had been credited to the sales account
and debited to the bank account.
(ii) The cash book had been undercast by 250.
(iii) A machine costing 5,000 had been debited to the machinery repairs account.
Machinery is depreciated at 10% on cost and no residual value is assumed.
Required:
(a) Correct the above errors by showing which ledger accounts should be debited or credited.
(4 marks)
(b) Explain why financial controls are necessary and give TWO examples.
(6 marks)
(Total = 10 marks)
FAFN M2001 12
SECTION C 20 MARKS
ANSWER ONE QUESTION ONLY
Question Four
(a) Define depreciation.
(2 marks)
(b) State the purpose of depreciation.
(4 marks)
(c) A transport company started business on 1 J anuary 1998 and purchased truck (A) for
80,000. Truck (A) was destroyed in a road accident on 1 March 1999 and the insurance
company paid out 60,000 to the transport company.
On 1 April 1999, truck (B) was purchased for 90,000.
On 1 J uly 1999, car (C) was purchased for 20,000.
On 1 August 2000, car (C) was traded in for car (D) which cost 25,000, less a part-exchange
allowance on car (C) of 15,000.
The depreciation policy of the company is:
depreciate trucks at 40% each year on the reducing balance;
depreciate cars at 25% each year using a straight-line basis;
assume a residual value for cars of 10% of the original cost;
if a vehicle is owned for part of a year, calculate depreciation according to the number of
months for which the vehicle is owned.
The year end of the company is 31 December.
Required:
Write up the following ledger accounts:
motor vehicles at cost account;
(4 marks)
provision for depreciation on motor vehicles account;
(6 marks)
disposal of motor vehicles account.
(4 marks)
You should include entries for each relevant year, and work to the nearest .
(Total = 20 marks)
M2001 FAFN 13
Question Five
(a) State the rule for valuing stock.
(2 marks)
(b) Explain the purposes of the rule for valuing stock.
(8 marks)
(c) The trading account of T Ltd is set out below:
T Ltd trading account for the year ended 30 April 2001
000 000
Turnover 1,000
Opening stock 200
Purchases 700
900
Closing stock 300
Cost of goods sold 600
Gross profit 400
The opening and closing stock was valued on a FIFO basis. On a LIFO basis, the opening and
closing stock would have been valued at 180,000 and 270,000 respectively.
Required:
(i) Calculate gross profit if the trading account was prepared using a stock valuation basis of
LIFO.
(2 marks)
(ii) Calculate "stock days", using the average method, on the assumption that stock is valued:
on the FIFO basis;
on the LIFO basis.
(3 marks)
(iii) Identify and explain any change in the gross profit and in "stock days" as a consequence of
using LIFO rather than FIFO to value stock.
(5 marks)
(Total = 20 marks)
End of paper