Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam Objective test questions are

awarded 2 marks each. Explanations follow for answers to objective test questions involving calculations.

Question 1.1 At 30 June 2000, an electricity ledger account had an accrual of $300 and a credit balance was brought down at 1 July 2000. During the financial year, electricity invoices totalling $4,000 were paid, including an invoice for $600 for the quarter ended 31 May 2001. What is the profit and loss account charge for electricity payable for the year ended 30 June 2001? A $3,700 B $3,900 C $4,000 D $4,100 The answer is B.

Workings Electricity account $ 4,000 1 July 2000 200 30 June 2001 4,200

31 May 2001 30 June 2001

Invoices Accrual - $600 x !

Balance b/d Profit & loss account

$ 300 3,900 4,200

Question 1.2 The principal duty of an external auditor is A B C D to check that a companys accounts agree with the accounting records. to ensure that a companys systems and controls are adequate to ensure the reliability of the accounting records. to prevent fraud and errors. to provide a report to the shareholders. The answer is D.

Question 1.3 On 1 June 2000, H paid an insurance invoice of $2,400 for the year to 31 May 2001. What is the charge to the profit and loss account and the entry in the balance sheet for the year ended 31 December 2000? A B C D $1,000 profit and loss account and prepayment of $1,400. $1,400 profit and loss account and accrual of $1,000. $1,400 profit and loss account and prepayment of $1,000. $2,400 profit and loss account and no entry in the balance sheet. The answer is C.

Workings Profit and loss account Balance sheet prepayment $2,400 x 7 12 = $1,400 $2,400 x 5 12 = $1,000

Question 1.4 An imprest system A B C D records the use of a companys seal. helps to reconcile the cash book with the bank statement. helps to control petty cash. is part of computerised accounting. The answer is C.

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 1.5 The provision for doubtful debts in the ledger of B Ltd at 31 October 2000 was $9,000. During the year ended 31 October 2001, bad debts of $5,000 were written off. Debtor balances at 31 October 2001 were $120,000 and the company policy is to have a general provision of 5%. What is the charge for bad and doubtful debts in the profit and loss account for the year ended 31 October 2001? A $2,000 B $3,000 C $5,000 D $8,000 The answer is A.

Workings $ 6,000 9,000 (3,000) 5,000 2,000

Debtors $120,000 x 5% Provision for doubtful debts at 31 October 2000 Change in provision Bad debts written off Profit and loss account

Question 1.6 A "true and fair view" occurs when A B C D financial statements are presented in accordance with prescribed formats. assets and liabilities are recorded at current values. financial statements have been audited. financial statements are prepared in accordance with generally accepted accounting practice. The answer is D.

Question 1.7 A company bought a machine on 1 October 1996 for $52,000. The machine had an expected life of eight years and an estimated residual value of $4,000. On 31 March 2001, the machine was sold for $35,000. The companys year end is 31 December. The company uses the straight-line method for depreciation and it charges a full years depreciation in the year of purchase and none in the year of sale. What is the profit or loss on disposal of the machine? A B C D Loss $13,000 Profit $7,000 Profit $10,000 Profit $13,000 The answer is D.

Workings $ 52,000 (4,000) 48,000 $48,000 8 Cost machine Depreciation 5 years x $6,000 Net book value Proceeds on sale Profit 52,000 (30,000) 22,000 35,000 13,000 = 6,000

Cost machine 1 October 1996 Residual value

Depreciation charge per year =

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 1.8 S Ltd, which is registered for purposes of value added tax, bought furniture on credit terms at a cost of $8,000, plus value added tax of $1,200. What is the correct account entry? DR $ 9,200 CR $ 9,200 8,000 1,200 6,800 8,000 1,200 9,200 8,000 8,000 The answer is C.

Furniture Supplier Furniture VAT Supplier Furniture VAT Supplier Furniture Supplier

Question 1.9 SOR Ltds stock was valued at $13,000 and excludes goods supplied to a customer on a sale or return basis. The customer still has 30 days within which to return the stock. The goods on sale or return were purchased by SOR Ltd for $6,000 and were invoiced at a markup of 25%. The value of SOR Ltds stock should be A $13,000. B $19,000. C $20,500. D $21,000. The answer is B.

Workings $ 13,000 6,000 19,000

Stock at valuation Goods on sale or return at cost Stock valuation

Question 1.10 A Ltds trial balance does not balance. Which ONE of the following errors may be the cause of this failure to balance? A B C D The purchase of a machine had been debited to the machine repairs account. A cheque from a customer had been credited to the purchase ledger account of the customer. Goods returned inwards had been debited to the sales ledger account of the customer. The depreciation charge on machinery had been credited to the cost of machinery account. The answer is C.

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 1.11 The current liabilities of CFS Ltd include the following: 2001 $30,000 2000 $25,000

Dividends payable

The cash flow statement for the year ended in 2001 shows dividends paid of $27,000. What were the dividends in the profit and loss account for the year ended 2001? A $22,000 B $27,000 C $28,000 D $32,000 The answer is D.

Workings $ 30,000 27,000 (25,000) 32,000

Dividends owing 2001 Dividends paid Less: Dividends owing 2000 Profit and loss account

Question 1.12 S is employed by T Ltd. His pay details for January and February are as follows: January: February: Gross salary $2,000 Gross salary $2,200 Tax $500 Tax $550 National insurance $100 National insurance $110 Net pay $1,400 Net pay $1,540

Tax and national insurance are payable to the government one month after they are deducted from employees salaries. How much cash did T Ltd pay out in February in connection with Ss wages? A $2,000 B $2,060 C $2,140 D $2,200 The answer is C.

Workings $ 1,540 500 100 2,140

Net pay February Tax January National Insurance January

Question 1.13 The following is an extract from the balance sheets of FRC plc for the years ended 31 July 2001 and 31 July 2000: 2001 $000 50 60 35 5 2000 $000 80 50 30 20

Stock Debtors Creditors Accruals

What figure would appear in the cash flow statement of FRC plc for the year ended 31 July 2001 as part of the cash flow from operations? A B C D $25,000 outflow $10,000 outflow $10,000 inflow $25,000 inflow The answer is C.

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Workings $ 30,000 (10,000) 5,000 (15,000) 10,000

Stock Debtors Creditors Accruals

Question 1.14 Which ONE of the following provides the best definition of an "audit trail"? A B C D The marks left by an auditor when a document has been inspected. The working papers of an auditor. The pursuit of a fraud by an auditor. The trail of a transaction from source document to financial statement. The answer is D.

Question 1.15 N plc purchased a machine for $15,000. The transportation costs were $1,500 and installation costs were $750. The machine broke down at the end of the first month in use and cost $400 to repair. N plc depreciates machinery at 10% each year on cost, assuming no residual value. What is the net book value of the machine after one year, to the nearest dollar? A $13,500 B $14,850 C $15,525 D $15,885 The answer is C.

Workings $ 15,000 1,500 750 17,250 (1,725) 15,525

Cost of machine Transportation Installation Depreciation at 10% Net book value

Question 1.16 Which ONE of the following might explain the debit balance on a purchase ledger account? A B C D The company took a cash discount to which it was not entitled and paid less than the amount due. The company mistakenly paid too much. The book-keeper failed to enter a contra with the sales ledger. The book-keeper failed to post a cheque paid to the account. The answer is B.

Question 1.17 In a period of inflation, which ONE of the following methods of charging stock issues to production will give the lowest profit figure? A B C D Average cost. LIFO. FIFO. Replacement cost. The answer is D.

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 1.18 Which ONE of the following provides the best explanation of the objective of an internal audit? A B C D The objective is to assist directors of a company in the effective discharge of their financial responsibilities towards the members. The objective is to provide support to the external auditor. The objective is to detect fraud and error. The objective is to audit the financial statements. The answer is A.

Question 1.19 The following information at 5 January 2001 relates to a club, which has a year end of 31 December 2000: $ 300 250 6,000 1,000 750

Subscriptions for 1999 unpaid at January 2000 Subscriptions for 1999 paid during the year ended 31 December 2000 Subscriptions for 2000 paid during the year ended 31 December 2000 Subscriptions for 2001 paid during the year ended 31 December 2000 Subscriptions for 2000 unpaid at 31 December 2000 It is the clubs policy to write off overdue subscriptions after one year.

What amount should be credited to the income and expenditure account for the year ended 31 December 2000? A $6,250 B $6,750 C $7,050 D $7,250 The answer is B.

Workings $ 6,000 750 6,750

Subscriptions paid for 2000 Subscriptions owing for 2000

Question 1.20 Who has the responsibility for ensuring that a company maintains proper accounting records? A B C D The shareholders. The auditors. The directors. The company secretary. The answer is C.

Question 1.21 Which ONE of the following formulae correctly expresses the relationship between the return on capital employed (ROCE), net profit margin (NPM) and asset turnover (AT)? A B C D ROCE ROCE ROCE ROCE = = = = NPM AT NPM + AT NPM x AT NPM AT The answer is C.

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 1.22 The correct ledger entries to record the issue of 150,000 $1 ordinary shares at a premium of 20% and paid by cheque is: DR $ 180,000 CR $ 150,000 30,000 180,000 180,000 180,000 180,000 150,000 30,000 120,000 The answer is A.

Bank Share capital Share premium Bank Share premium Bank Share capital Bank Share premium Share capital

Question 1.23 A fixed asset register had a balance of $125,000. A fixed asset, which had cost $12,000, was sold for $9,000 at a profit of $2,000. What is the revised balance on the fixed asset register? A $113,000 B $118,000 C $125,000 D $127,000 The answer is B.

Workings $ 125,000 (7,000) 118,000

Balance on fixed asset register Net book value of assets sold Proceeds $9,000 less profit $2,000

Question 1.24 M plcs trial balance did not balance at 31 May 2001. The following errors were discovered: Insurance of $500 prepaid at 31 May 2000 had not been brought down as an opening balance on the insurance account; Wages of $5,000 had been incorrectly debited to the purchases account; The book-keeper had failed to accrue $300 for the telephone invoice owing at 31 May 2001.

What was the difference on the trial balance? A $500 B $800 C $5,500 D $5,800 The answer is A.

Workings Insurance balance omitted Wages mis-posted does not affect trial balance Accrual omitted does not affect trial balance $500 nil nil

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 1.25 S is a builder who has numerous small items of equipment. He calculates his depreciation using the revaluation method. At the beginning of his financial year he valued his equipment at $10,250; he bought equipment costing $3,450 and he sold equipment valued at $2,175. At the end of his financial year he valued his equipment at $8,000. What is his depreciation charge on equipment for the year? A $2,250 B $3,525 C $5,700 D $11,525 The answer is B.

Workings $ 10,250 3,450 (2,175) 11,525 (8,000) 3,525

Valuation at beginning of year Purchases Disposals Valuation at end of year Depreciation

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 2 (a) Prepare a manufacturing, trading and profit and loss account for the year ended 31 July 2001 and a balance sheet at that date. Calculate: the gearing ratio; debtor days; finished goods stock days.

(14 marks)

(b)

(2 marks) (2 marks) (2 marks) Total marks = 20

Rationale Part (a) The purpose of this question is to see whether candidates can: Distinguish between debit and credit balances in a list of balances. Adjust for other items, that is stock. Prepare a manufacturing, trading and profit and loss account and a balance sheet. Part (b) Calculate three ratios. Suggested Approach Part (a) Produce financial statements as described above. Part (b) Calculate three ratios from the accounts. Marking Guide Part (a) The question requires the correct adjustment for raw materials, work in progress and finished goods. The question does not give the debit and credit balances in the trial balance, so it is important that the balances appear correctly in the accounts as either a debit or credit. The question requires the correct presentation in the income statement, that is the manufacturing, trading and profit and loss account. The balance sheet should be correctly presented and should articulate with the profit and loss account for raw materials, work in progress and finished goods and net profit, using the own number rule. Part (b) The gearing ratio may be calculated in two different ways and there are acceptable alternative answers: The stock ratio should be calculated in stock days; stock turnover is not required. The question asks for stock and debtor days, not months. Examiners Comments Part (a) The answers to this question were generally of a pass standard but few candidates obtained high marks. Although the balance sheet was reasonably well done, the most common error was the inability to prepare a manufacturing account. Part (b) Most candidates were able to calculate debtor days. However, many candidates were unable to calculate the gearing ratio or the finished goods stock days. Some candidates knew the formula but were unable to extract the correct figures from their financial statements. Marks

14

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 3 (a) (b) Calculate the balance on the bank statement at 30 June 2001. Prepare a sales ledger control account for July 2001, carrying down the balance at 31 July 2001. (5 marks) (5 marks) Total marks = 10 Rationale Part (a) The purpose of this question is to test whether candidates can prepare a bank reconciliation statement. Part (b) The purpose of this question is to test whether candidates can prepare a sales ledger control account. Suggested Approach Part (a) The Examiners Answer gives a list of figures. Alternatively, candidates may prepare a corrected cash book and then proceed to prepare a bank reconciliation statement. Part (b) The Examiners Answer is in the form of a ledger account. Candidates may use a three-column style account with a running cumulative total. Marking Guide Part (a) There is no mark for the final figure, as this is merely correct addition. Marks are awarded for using the correct figure and indicating whether it is added or subtracted. Part (b) There is no mark for the correct debit and credit totals or for the balance carried down, as this is merely correct addition. Marks are given for using the correct figure and showing it as a debit or credit. Examiners Comments Part (a) The answers to this question were generally poor. The most common error was to fail to distinguish between what was a cash book adjustment and what was a reconciling item with the bank statement. In addition, many candidates were unable to treat a figure in the correct way, mistaking debits for credits or additions for subtractions. Part (b) The answers to this question were generally well done. However, it was disappointing that a minority of candidates did not know that the opening balance on a sales ledger control account should be a debit balance and could not distinguish between debit and credit entries. Marks

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 4 (a) (b) Identify four potential user groups of financial statements. Explain why user groups in general need accounting information, and state the information they require. Choose two examples of user groups and give the specific information they require and the purpose for which they would require it. Identify and explain three characteristics of useful financial information. (4 marks)

(8 marks) (8 marks)

(c)

Total marks = 20 Rationale The purpose of this question is to test whether candidates can identify four out of the many users of financial statements, explain their needs by linking them to the decisions they have to take, and identify three of the several characteristics of information which make that information useful to the user. Suggested Approach Part (a) Candidates are expected to list four users. Other users not in the suggested answer are trade unions, government, business contact groups. Part (b) Candidates are expected to explain that users need information in order to take decisions. The information they will need will therefore depend on the decisions they have to take. Two examples of this process are banks and employees. Part (c) Candidates are expected to take three characteristics of useful information, and explain how these may be important to the users of financial statements. Marking Guide Part (a) List of potential users Part (b) Need to take decisions Need financial statements Two examples - 2 marks per example Part (c) Identify characteristics Explain each characteristic Expand upon explanation Examiners Comments Part (a) Most candidates obtained full marks for this part. Part (b) Most candidates were able to provide a statement about the information needs of users in general. However, candidates failed to gain marks from the examples they gave, as they often tended to repeat what users in general require, not what a specific user requires. Part (c) Most candidates were able to identify three characteristics of useful financial information. However, few candidates were able to give a satisfactory explanation of what a characteristic meant in financial reporting terminology. Marks

2 2 4

3 3 2

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Paper 1 - Financial Accounting Fundamentals (FAFN) Post Exam Guide November 2001 exam

Question 5 Explain each of the following four accounting concepts, and give an example of its application: (a) (b) (c) (d) Going concern. Accruals. Consistency. Prudence (or conservatism). (5 marks) (5 marks) (5 marks) (5 marks) Total marks = 20 Rationale The purpose of this question is to test whether candidates can explain the meaning of four accounting concepts. Suggested Approach Candidates are expected to take each concept and to explain it. It is not necessary to make reference to accounting standards. Marking Guide Going concern Continue in existence Same scale of operations Example Accruals Recognised when earned, not cash flow Matching revenue and expenditure Example Consistency Consistency within a period Consistency between periods Note if change in policy Example Prudence Revenue and profits not anticipated Recognised when realised Provision made for liabilities and losses Example Examiners Comments The answers to all four parts were good. Most candidates who attempted this question were able to explain each of the four accounting concepts and give an example of its application. There were no common errors; marks were generally forgone where the explanation was insufficiently precise or where the example contained insufficient information. Marks

2 1 2

1 2 2

1 1 1 2

1 1 1 2

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