INTRODUCTION TO FINANCIAL ACCOUNTING

Suggested Answers
Foundation Examinations – Spring 2014

Ans.1 (a) A complete set of financial statements comprises:

(i) a statement of financial position (balance sheet)

(ii) a statement of comprehensive income (or an income statement and a statement
of comprehensive income)
(iii) a statement of changes in equity
(iv) a statement of cash flows
(v) notes, comprising a summary of accounting policies and other explanatory
information; and
(vi) a statement of financial position as at the beginning of the earliest comparative
period when an entity applies an accounting policy retrospectively or makes a
retrospective restatement of items in its financial statements, or when it
reclassifies items in its financial statements.

(b) Net realisable value is the estimated selling price in the ordinary course of business
less the estimated costs of completion and the estimated costs necessary to make the
sale. [IAS 2(6)]

Fair value is the price that would be received to sell an asset or paid to transfer a
liability in an ordinary transaction between market participants at the measurement
date. [IAS 2(6)]

Ans.2 (a) Accounting entries

Date Particulars Debit Credit
31-Dec-2013 Bank 35,000
Account payable 35,000
(Being reversal of out-dated cheque)
31-Dec-2013 Bank 325,690
Account payable 325,690
(Post-dated cheque issued now reversed)
31-Dec-2013 Bank 190,000
Discount expense (200,000×5%) 10,000
Account receivable (190,000/0.95) 200,000
(To account for direct deposit into the bank and 5%
discount availed for payment within a week)
31-Dec-2013 Bank charges 6,570
Bank 6,570
(To account for bank charges for December 2013)

Note:
No entries were required for following:
 Entry in respect of casting error of Rs. 11,430.
 Entry in respect of incorrect posting of cheque no. 765 in bank statement.

Page 1 of 7
 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2014

(b) Fine Works Limited

Bank reconciliation statement for the month of December 2013
Description Rupees
Balance as at 31 December 2013 as per bank statement 1,721,490
Cheques issued but not presented for payments:
Cheque No. 765 (453,630)
789 (635,700)
Customers' cheques deposited in Dec. 2013 not yet credited by the bank 535,635
Corrected balance as at 31 December 2013
(635,105+35,000+325,690+190,000–6,570–11,430) 1,167,795

(c) The imprest system:

Imprest system is a system of controlling petty cash. Under this system, a fixed sum or float is
allocated being sufficient to meet petty cash expenditure for an agreed period of time. At the
end of the agreed period the petty cash cashier submits the account of the amount spent by him.
The sum expended by the petty cashier is reimbursed, thus making up the balance to the
original sums.

Ans.3 (a) Trading account for the year ended 31 December 2013
Closing inventory (3.4+8.0) (W.1) 11.40
Inventory loss due to fire
(12+6+8) – 11.4 14.60

Profit and loss account for the year ended 31 December 2013
Inventory loss due to fire (14.60-0.9) 13.70

W-1: Closing inventory valuation

Beta Gamma
---- Rs. in million ----
Cost A 6.00 8.00
Estimated selling price 4.00 9.00
Estimated costs to sell (0.10) (0.05)
Estimated additional costs for wrapping (0.50) (0.70)
Net realisable value B 3.40 8.25
Inventories at the lower of cost and net
realisable value (A or B) 3.40 8.00

(b) Provision for doubtful debts Rs. in million

31-Dec-2013 Account receivable 5.00 01-Jan-2013 Balance b/f (35×5%) 1.75
31-Dec-2013 Balance c/f (W.1)(93×8%) 7.44 31-Dec-2013 Balance charged to PL a/c 10.69
12.44 12.44

W-1: Debtors balance as at 31 December 2013

Rs. in million
Balance as at 1 January 2013 35.00
Credit sales 740.00
Payment by the debtors (680-3) (677.00)
Debtors written off (5.00)
Balance 31 December 2013 93.00

Page 2 of 7
 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2014

Ans.4 (a) Trade Payable Subsidiary

Description
Control A/c ledger
Balance as at 31 December 2013 789,632 809,542
(i) An amount of Rs. 90,000 paid after deduction of 10%
advance payment posted net of deduction in the day
book. [90,000-(90,000/0.9)] 10,000 -
(ii) A purchase return of Rs. 57,650 was posted in general
ledger as Rs. 67,560. 9,910 -
(iii) Goods received not recorded less 10% discount
allowed 32,040 32,040
(iv) See note below - -
(v) See note below - -
(vi) A balance of Rs. 87,650 due to a customer was set off
against its receivable account but no accounting entry
was processed in this respect by 31 December 2013. (87,650) (87,650)
Adjusted balance as at 31 December 2013 753,932 753,932

(b) Accounting entries

Date Particulars Ref Debit Credit

31-Dec-2013 Purchases (i) 10,000

Trade Payable Control A/c 10,000
(Purchases short recorded now adjusted)

31-Dec-2013 Purchase return (ii) 9,910

Trade Payable Control A/c 9,910
(Correction of purchase return of Rs. 57,650 was
accounted for in general ledger as Rs. 67,560)

31-Dec-2013 Purchases (iii) 35,600

Trade Payable Control A/c 32,040
Discount received 3,560
(Goods received on 30-Dec-2013 now recorded)

31-Dec-2013 Saleemi & Co. (iv) 63,250

Saalim & Co. 63,250
(Entry in subsidiary ledger)

31-Dec-2013 Discount expense account (v) 5,450

Discount income account 5,450
(Correction of discount received entered to the
credit side of the discount allowed)

31-Dec-2013 Trade Payable Control A/c (vi) 87,650

Account receivable 87,650
(Setting off of account receivable and account
payable)

Page 3 of 7
 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2014

Ans. 5 Mr. Arshad

Trading and Profit and Loss Account for the year ended 31 December 2013
Stock-opening 200,000 Sales (360,000/20%) 1,800,000
Purchases (bal. figure) 1,490,000 Stock closing (200,000+25%) 250,000
Gross profit (300,000 + 20%) 360,000
2,050,000 2,050,000
Expenses 210,000 Gross profit 360,000
Depreciation: Building 15,000
Furniture 3,000
Motor car 18,000
Net Profit 114,000
360,000 360,000

Debtors
Balance opening 170,000 Cash 300,000
Credit Sales (1,800,000–540,000) 1,260,000 Bank 1,000,000
Balance 130,000
1,430,000 1,430,000

Creditors
Payments 1,375,000 Balance opening 310,000
Balance 425,000 Purchases 1,490,000
1,800,000 1,800,000

Cash and Bank balances

Cash Bank Cash Bank
Balance opening 37,500 85,000 Creditors 1,375,000
Collection from debtors 300,000 1,000,000 Cash deposited into bank 668,500
Cash deposited into bank 668,500 Drawings 75,000
Cash withdrawn for office use 120,000 Cash withdrawn for office use 120,000
Cash sales 540,000 Expenses 100,000 60,000
Closing balance 229,000 123,500
997,500 1,753,500 997,500 1,753,500

Balance sheet
Capital / Liabilities Assets
Rs. Rs.
Capital 480,000 Building 285,000
Add: profit for the year 114,000 Furniture 57,000
Less: drawings (75,000) Car 72,000
519,000 Stock 250,000
Loan 152,500 Debtors 130,000
Creditors 425,000 Cash in hand 229,000
Accrued expenses 50,000 Cash at Bank 123,500
1,146,500 1,146,500

Page 4 of 7
 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2014

Ans.6 A,B and C

Statement of Division of Profit
For the year ended 31 December 2013
A B C Total
Particulars
----------------- Rs. in ‘000 -----------------
Salaries - 3,000 3,000 6,000
Specific allocation of branch profit (W-2) - 888 240 1,128
Interest on capital (5%) 1,000 900 700 2,600
Share of profit amongst partners (W-3) 16,136 9,682 6,454 32,272
Allocation of branch profit 17,136 14,470 10,394 42,000
W-1: Calculation of net profit
Karachi Lahore Peshawar
------------ Rs. in ‘000 ------------
Net assets (A) 90,000 69,000 52,800
Net assets last year [A÷(1.2);A÷(1.15);A÷(1.1)] 75,000 60,000 48,000
Increase in assets 15,000 9,000 4,800
Drawings 5,000 4,000 4,200
Net profits 20,000 13,000 9,000

W2: Specific allocation of Branch Profit to B and C

B C
-------------Rs. in ‘000------------
Average assets 64,500 50,400

Profit 13,000 9,000

Less: Salary (3,000) (3,000)
10% interest on average net assets (6,450) (5,040)
Branch profit after salary and interest 3,550 960
Share of branch profit due to B + C (25%) 888 240

W-3: Distribution of balance profit

Rs. in ‘000
Profit for the year (W-1) 42,000
Salaries (6,000)
Branch profit to partners (1,128)
34,872
Interest on Capital 2,600
32,272
Balance profit
Share of profit - A 32,272 × 50% 16,136
- B 32,272 × 30% 9,682
- C 32,272 × 20% 6,454

Page 5 of 7
 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2014

Ans.7 Galaxy Brothers

Statement of cash flow for the year ended 31 December 2013
Rs. in million
Cash flows from operating activities
Profit before taxation W.1 13.20
Adjustment for: Depreciation (9+6.25) 15.25
Finance charges 2.50
Provision for doubtful debts 0.90
Loss on settlement of total loss claim 0.35
32.20
Closing balances: Account receivable (18.00)
Inventories (10.00)
Account payable 14.00
Cash generated from operations 18.20
Finance charges paid (2.5-1.2) (1.30)
Income taxes paid (6 –1) (5.00)
Net cash from operating activities 11.90

Cash flows from investing activities

Purchase of property, plant and equipment (128.25-25-1.4)+1.8 (103.65)
Proceeds from the settlement of total loss claim* (1.8-0.25)-0.35 1.20
Net cash used in investing activities (102.45)

Cash flows from financing activities

Cash contributed by the partners 73.95-(25+1.4) 47.55
Proceeds from long term loans 25.00
Net cash from financing activities 72.55
Net decrease in cash and cash equivalents (18.00)
Cash and cash equivalent at beginning of the period -
Cash and cash equivalent at end of the period (23-5) (18.00)

W.1: Profit before taxation

Sales 136.00
Cost of sales (83.50)
Operating and selling expenses (37.30)
Misc. income 0.50
Finance expenses (2.50)
13.20

Page 6 of 7
 INTRODUCTION TO FINANCIAL ACCOUNTING
Suggested Answers
Foundation Examinations – Spring 2014

Ans.8 Ledger of Abbas Stores

(i) BRANCH STOCK ACCOUNT
Rs. Rs.
Balance b/d 9,000 Cash sales 6,900
Goods sent to branch 19,800 Return to H.O. 1,500
Branch debtors - sales 6,300
Branch adjust A/c
Discount on cash sales 450
Normal wastage - balancing 1,050
Balance c/d
Goods in transit 1,800
Balance 10,800

28,800 28,800

(ii) BRANCH DEBTORS ACCOUNT

Rs. Rs.
Balance b/d 4,000 Cash 4,800
Branch Stock A/c. - P & L A/c – bad debts 500
Credit sales 6,300 P & L A/c – discounts 250
Balance c/d 4,750
10,300 10,300

(iii) BRANCH ADJUSTMENT ACCOUNT

Rs. Rs.
Balance Stock A/c Balance b/f
Mark-up on returns to H.O. 500
(1/3 of 1,500) (1/3 of Rs.9,000) 3,000
Discount on cash sales 450 Branch Stock A/c
Normal wastage 1,050 (1/3 of Rs.19,800) 6,600
Balance c/d (1/3 of Rs.10,800 + 1,800) 4,200
Profit and loss a/c
Profits made 3,400
9,600 9,600

BRANCH PROFIT AND LOSS ACCOUNT

Rs. Rs. Rs.
Branch expenses 1,800 Branch adjustment A/c 3,400
Branch debtors A/c
Bad debts 500
Discounts 250 750
Net profit 850
3,400 3,400

(THE END)

Page 7 of 7