Basic Accounting Test 1

CF04

Basic Accounting

15 APRIL 2004

1.

Time allowed

: Three (3) hours

2.

Total number of questions

: Five (5) questions

3.

Numb Number er of ques questi tion ons s to be answ answer ered ed

: All All five five (5) (5) ques questi tion ons s

4.

Show details of workings workings where appropriate. Silent, non-programmable calculators may be used.

5.

Mathematical tables are provided in this question paper.

6.

Begin each answer to a new question question on a fresh fresh page.

7.

Answer all Answer all questions in English. English.

ANSWER ALL FIVE (5) QUESTIONS 1.

Mr CK Neoh runs a distribution outlet in Butterworth. The following trial balance was extracted from his accounts as at 31 August 2003: TRIAL BALANCE AS AT 31 AUGUST 2003 DR RM Capital Drawings Freehold premises, at cost Fixtures and fittings, at cost - Provision for depreciation as at 31 August 2002 Motor vehicles, at cost - Provision for depreciation as at 31 August 2002 Stock as at 31 August 2002 Purchases and sales Carriage inwards Carriage outwards Returns inwards and returns outwards Discounts allowed and discounts received Debtors and creditors Provision for bad and doubtful debts Bad debts General expenses Marketing expenses Cash in hand Cash at bank

CR RM 1,575,500

125,000 1,880,000 232,000 116,000 525,000 225,000 1,166,000 1,375,000 113,200 124,400 117,800 17,700 544,500

6,210,000

125,000 27,000 930,000 26,500

15,850 388,850 1,120,400 114,800 1,374,500 9,235,000

9,235,000

Additional information available as at 31 August 2003: •

Closing stock as at 31 August 2003 was valued at RM1,174,500.

•

General expenses included RM12,600 of insurance premium for the period from 1 January to 31 December 2003.

•

To accrue for water and electricity by RM2,100.

•

To provide RM2,220 for telephone expenses for the month of August 2003.

•

The provision for bad and doubtful debts is 5% of debtors’ balance as at 31 August 2003.

•

The provision for depreciation on fixed assets is as follows: -

•

Fixtures and fittings at 25% using the straight line method. Motor vehicles at 20% on a reducing balance method.

Mr CK Neoh received a cheque for RM6,630 on 31 August 2003 from a debtor whose debts were written off as at 31 August 2002, the amount of which had not been recorded in the books.

Required: Prepare the following for Mr CK Neoh: (a)

Trading, Profit and Loss Account for the financial year ended 31 August 2003.

(b)

Balance Sheet as at 31 August 2003.

Page 2 of 12

BFSC/COFSA April 2004 - CF04

[13] [12] (Total:25 marks)

Institut-Bank-Bank Malaysia

2.

You were given the follo wing information by Keen Knitting Manufacturing Company: •

On 1 January 2003, the company has in its possession knitting machinery costing a total of  RM575,000 with an accumulated depreciation of RM268,000.

•

On 28 March 2003, the company purchased several units of new knitting machinery costing a total of RM158,000 by cheque.

•

On 13 June 2003, the company traded in an old knitting machinery for RM40,000 for a new model costing RM170,000. The price difference was paid by cheque. The old knitting machinery cost RM95,000 and has depreciated by RM47,000.

•

It is the company’s policy to depreciate its machinery at the rate of 25% per annum on a reducing balance method.

•

A full year’s depreciation is provided for all machinery held by the company at the end of each accounting year.

•

The company’s financial year ends at 31 December 2003.

Required: (a)

(b)

3.

Prepare the following accounts for Keen Knitting Manufacturing Company for the year ended 31 December 2003: (i)

Machinery account

[5]

(ii)

Provision for depreciation on machinery account

[4]

(iii)

Fixed assets disposal account

[4]

State two factors which cause fixed assets to depreciate.

[2] (Total:15 marks)

Complete each of the following statements with the most appropriate concept or convention given below:

accounting period concept conservatism concept consistency concept dual aspect concept going concern concept historical cost concept

matching concept materiality concept money measurement concept realisation concept separate entity concept substance over form concept

(a)

The treatment of expenditure on paper clips as an expense even though many of the paper  clips will last for several years is an example of the ______________. [1½]

(b)

Under the ______________, accountants assume that the business will continue operating in the foreseeable future. [1½]

(c)

The ______________ states that assets should be recorded at the original transaction cost and not at market value. [1½]

(d)

In abiding by the ______________, accounting looks at how a transaction affects the economic situation of the firm. [1½]

(e)

The ______________ relates to the separation of the owner from the business.

(f)

Under the ______________, revenues and expenses must be related or measured with each other. [1½]

 Institut-Bank-Bank Malaysia

BFSC/COFSA April 2004 - CF04

[1½]

Page 3 of 12

4.

(g)

The ______________ states that a business should not recognise any profits unless they are reasonably sure they have earned them. [1½]

(h)

Data that can be measured in monetary terms and not recording of information on management style or staff loyalty is an example of the ______________. [1½]

(i)

Under the ______________, revenue is considered to be earned only on the date when goods or services are made available to the customer in exchange for cash or a promise to pay later. [1½]

(j)

The directors of XYZ Bhd have proposed to change the depreciation rate on equipment from 25% to 20% per annum but this would go against the ______________. [1½] (Total:15 marks)

Pretty Ribbons Sdn Bhd is in the gift-wrapping business. Its stock records are maintained on a perpetual basis. The following transactions relate to one of its stock items, Large Gift Box: 15 June 2003

:

Purchased 500 units at RM5.00 per unit

25 July 2003

:

Purchased 600 units at RM5.50 per unit

July to September 2003

:

Sold 800 units

10 November 2003

:

Purchased 1,500 units at RM4.80 per unit

October to December 2003

:

Sold 1,600 units

2 January 2004

:

Purchased 1,000 units at RM5.60 per unit

January to March 2004

:

Sold 900 units

Required: (a)

Compute the following, using the first-in, first-out (FIFO) and last-in, first-out (LIFO) inventory costing methods: (i)

Closing stock of Large Gift Box as at: (aa)

30 September 2003

(bb)

31 December 2003

(cc)

31 March 2004 [16]

(ii)

Value of the cost of goods sold of Large Gift Box for the period from June 2003 to March 2004. [4]

(b)

If 300 units of the closing stock are outdated goods and can only be sold at RM5.25 per unit, re-calculate the closing stock under each of the two costing methods mentioned in (a) above. [4] (Total:24 marks)

Page 4 of 12

BFSC/COFSA April 2004 - CF04

Institut-Bank-Bank Malaysia

5.

The following is an extract of Jelita Florist’s trial balance for the year ended 30 June 2003: Item

RM

Sales

2,700,000

Cost of goods sold

1,500,000

Commission receivable

15,000

Administrative expenses

28,000

Sales and distribution expenses

145,000

Financial charges

37,500

Motor vehicle expenses

50,000

Capital

480,000

Stock

195,000

Debtors

201,000

Cash balance

52,000

Creditors

135,000

Bank overdraft

60,000

Required: (a)

(b)

Calculate the following ratios by using the information given above: (i)

Gross profit margin

[2]

(ii)

Net profit margin

[3]

(iii)

Current ratio

[2]

(iv)

Acid test ratio

[2]

(v)

Return on capital employed

[2]

Compare and comment on the performance of Jelita Florist based on the ratios calculated in part (a) for the year ended 30 June 2003, with McBloom Florist’s performance given below: Gross profit margin

50%

Net profit margin

30%

Current ratio

2.9 : 1

Acid test ratio

0.8 : 1

Return on capital employed

168% [10] (Total:21 marks)

- END OF QUESTION PAPER -

 Institut-Bank-Bank Malaysia

BFSC/COFSA April 2004 - CF04

Page 5 of 12

OUTLINE ANSWERS

Question 1

Most candidates answered this question fairly well. However, a minority of candidates showed weakness in this topic, as they were not able to differentiate the items that were supposed to be in the Profit and Loss Account and the Balance Sheet. (a)

1.

Sales less Returns inwards

Mr CK Neoh Trading and Profit and Loss Account for the year ended 31 August 2003 RM RM RM 6,210,000 117,800 6,092,200

less Cost of goods sold: Opening stock add Purchases add Carriage inwards less Returns outwards

1,166,000 1,375,000 113,200 1,488,200 125,000

less Closing stock

1,363,200 2,529,200 1,174,500 1,354,700

Gross profit Discount received less Expenses: Discounts allowed Bad debts - Bad debts written-off  - Bad debts recovered 

4,737,500 27,000 4,764,500 17,700 15850 (6630) 9,220

Provision for bad and doubtful debts Carriage outwards General expenses Marketing expenses Provision for depreciation - fixtures and fittings - motor vehicles

(W2) (W1)

725 124,400 388,970 1,120,400

(W3) 58,000 60,000

Net profit

Page 6 of 12

1,779,415 2,985,085

BFSC/COFSA April 2004 - CF04

Institut-Bank-Bank Malaysia

(b)

1.

Mr CK Neoh Balance Sheet as at 31 August 2003 RM RM Accm Fixed Assets Cost Depn Freehold Land & Building 1,880,000 Fixtures & Fittings 232,000 174,000 Motor Vehicles 525,000 285,000 2,637,000

459,000

1,174,500 517,275 4,200 1,381,130 114,800

3,191,905

930,000 4,320

934,320

RM NBV 1,880,000 58,000 240,000 2,178,000

Current Assets

Stock Debtors (544500-27225) Prepayments (W1a) Cash at Bank (1374500+6630) Cash in hand

114800

Current Liabilities

Creditors Accruals (W1b)

2,257,585

Net Current Assets

4,435,585 Financed by: RM 1,575,500 2,985,085 4,560,585 125,000

Capital

add Net Profit less Drawings

4,435,585

1.

Workings: General expenses at 31 Aug 03 (a) Insurance Prepaid

(b) Accruals :

[12,600/12 x 4]

water & electricity telephone expenses

2,100 2,220

-

388,850 4200 384,650

+

4,320 388,970

2.

3.

Provision for bad & doubtful debts less provision b/f Increase in provision for bad & doubtful debts

544,500 x 5%

=

27,225 26,500 725

Provision for depreciation - Fixtures & Fittings

232,000 x 25%

=

58,000

- Motor Vehicles

(525,000 - 225,000) x 20%

=

60,000

 Institut-Bank-Bank Malaysia

BFSC/COFSA April 2004 - CF04

Page 7 of 12

Question 2

Candidates had difficulty answering this question as they could not prepare the relevant accounts for  depreciation. Candidates have to understand the double entry for the Fixed Assets Account, Provision for  Depreciation of Fixed Assets and Disposal Account. Keen Knitting Manufacturing Company

2.

i 2003 1-Jan 28-Mar 13-Jun 13-Jun

Machinery Account RM 2003 575,000 13-Jun 158,000 31-Dec 130,000 40,000

a)

Balance b/f Bank Bank Fixed Assets Disposal a/c

Fixed Assets Disposal a/c Balance c/f

903,000

ii 2003 13-Jun 31-Dec

Fixed Assets Disposal a/c Balance c/f 

903,000

Provision for Depreciation on Machinery Account RM 2003 47,000 1-Jan Balance b/f 31-Dec Profit & Loss a/c 367,750 414,750

iii 2003 13-Jun

95,000

Working: Cost Depreciation (26800047000) Net Book Value

25% depreciation (b)

RM 268,000 146,750 414,750

Fixed Assets Disposal Account RM 2003 95,000 13-Jun Prov for Depreciation Machineries Profit & Loss a/c

Machineries

RM 95,000 808,000

RM 47,000 40,000 8,000 95,000

808,000 221,000 587,000 146,750

Give any two of the following factors: • • • •

Page 8 of 12

Economic useful life Technological obsolescence Change in market demand Legal limits

BFSC/COFSA April 2004 - CF04

Institut-Bank-Bank Malaysia

Question 3

Most candidates only managed to answer half of the question correctly although there were some candidates who answered it fairly well. 3.

(a)

materiality concept

(a)

going concern concept

(b)

historical cost concept

(c)

substance over form concept

(d)

separate entity concept

(e)

matching concept

(f)

conservatism concept

(g)

money measurement concept

(h)

realisation concept

(j)

consistency concept

 Institut-Bank-Bank Malaysia

BFSC/COFSA April 2004 - CF04

Page 9 of 12

Question 4

The majority of the candidates performed satisfactorily in this question. 4.

(a)

Stock Account Date

Transaction

PRICE/unit RM

15 June 03

Purchased

5.00

500

2,500

2,500

25 July 03

Purchased

5.50

600

3,300

3,300

1,100

5,800

5,800

800

4,150

4,300

300

1,650

1,500

1,500

7,200

7,200

1,600

7,890

7,700

200

960

1,000

1,000

5,600

5,600

900

4,880

5,040

Closing Stock at 31 March 2004 (Workings 1):

300

1,680

1,560

Cost of Goods Sold for the period June 2003 to March 2004: (Workings 2)

600

16,920

17,040

Stock balance:

July to September 2003

Sold Stock balance as at 30 September 2003:

10 November 03

Purchased

October to December 2003

Sold

4.80

Stock balance as at 31 December 2003:

2 January 04

Purchased

January to March 2004

Sold

5.60

UNITS

FIFO RM

LIFO RM

Workings 1: Closing Stock   First-in, First-out (FIFO): (300 X 5.60) = 1680 Last-in, First-out (LIFO): (200 X 5 +100 X 5.6) = 1560 Workings 2: Cost of Goods Sold First-in, First-out (FIFO): 4150+7890+4880 = 16920 Last-in, First-out (LIFO): 4300+7700+5040 = 17040

(b)

Outdated stocks - closing stock valuation FIFO RM

LIFO RM

300 units at cost

1,680

1,560

300 units at NRV (RM5.25)

1,575

1,575

105

-

Stock value to be written down by:

Under the FIFO method, the cost is RM1,680, which is higher than the Net Realisable Value (NRV) of  RM1,575. Under the LCM rule, the closing stock shall valued at RM1,575. Under the LIFO method, the stock is to be valued at cost of RM1,560 as this value is lower than the NRV.

Page 10 of 12

BFSC/COFSA April 2004 - CF04

Institut-Bank-Bank Malaysia

Question 5

The majority of the candidates did fairly well in this question as they were able to analyse and interpret both companies’ performances based on the ratios. 5.

(a)

(i)

(ii)

(iii)

(iv)

(v)

Gross profit margin

Net profit margin

Current ratio

Acid test ratio

Return on capital employed

 Institut-Bank-Bank Malaysia

=

Sales - Cost goods sold x 100 Sales

=

2,700,000 - 1,500,000 x 100 2,700,000

=

44.44%

=

Gross profit + Income - Expenses x 100 Sales

=

1,200,000 + 15,000 - 260,500 x 100 2,700,000

=

954,500 x 100 2,700,000

=

35.35%

=

Current asset / Current liabilities

=

448,000 195,000

=

2.3 :1

=

(Current asset - Stock) / Current liabilities

=

253,000 195,000

=

1.3 : 1

=

Net profit / Capital employed x 100%

=

954,500 480,000

=

198.85%

x 100

BFSC/COFSA April 2004 - CF04

Page 11 of 12

(b)

(i)

Jelita Florist’s gross profit margin is lower than Mc Bloom Florist by 5.56%.

(ii)

Jelita Florist’s net profit margin is better than Mc Bloom Florist by 5.35%. This could be due to a better management of resources and control of exp enses by Jelita Florist.

(iii)

Jelita Florist’s current ratio is not as good as Mc Bloom Florists’ current ratio but 2.3:1 is an acceptable ratio as it indicates that Jelita Florist is able to meet its current liabilities.

(iv)

The acid test of Jelita Florist is better than Mc Bloom Florist. This indicates that Jelita Florist is able to pay its immediate debts when they fall due.

(v)

Return on capital employed of Jelita Florist’s is better than Mc Bloom Florist by 51%. This shows that the overall performance of Jelita Florist is very good.

Page 12 of 12

BFSC/COFSA April 2004 - CF04

Institut-Bank-Bank Malaysia