Financial Accounting and the Regulatory Framework - Exam Answer Booklet

This exam answer booklet contains solutions to four compulsory questions on Financial Accounting and the Regulatory Framework. It includes statement of profit and loss account, statement of financial position, trial balance, partnership appropriation account, partner's capital account, partner's current account, ratio calculation of Delta Plc and Horizon Plc, and findings and comments on financial ratios.

BA (HONS) BUSINESS FINANCE PATHWAY
SEMESTER 2 EXAMINATIONS 2021/22
FINANCIAL ACCOUNTING AND THE
REGULATORY FRAMEWORK
ANSWER BOOKLET
INSTRUCTIONS TO CANDIDATES:
There are four compulsory questions on this
paper.
Answer all four questions.
All questions carry equal marks.
Calculators may be used but full workings
must be shown. You can copy and paste any
calculation from Excel to MS Word answer
Booklet.
Please submit your Answer Booklet through
Turnitin Link in Moodle.

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2

Answer to the Question 1 (a)
Write your response here
Statement of profit and loss account (Sandra Shop)
For the year ended 31st December, 2020
Particulars Details Amount
Sales revenue 196375
Less Cost of Sales:
Opening inventory 8560
Add Purchases 123000
Less closing inventory 9400
Total 122160
Gross Profit 74215
Less Operating expenses:
Rent minus prepaid rent 6000 - 2000 4000
Heat and Light 12000
Wages and salaries 32000
Motor expenses 12350
Insurance 5600
Bad debt 200
Interest on loan 10000 * 5% 500
outstanding gas and electricity expense 250
Adjustment for baddebts (36450 * 2%) 729
Depreciation on fixtures and fittings 38900 * 5% 1945
Depreciation on motor vehicle (12500 - 7600) * 20% 980 71574
EBIT 2641
Interest on loan 10000 * 5% -500
Net Income/ Profit 2141
Answer to the Question 1 (b)
Write your response here
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4
Statement of Financial Position (Sandra Shop)
As at 31st December, 2020
Particulars Cost
Accumulated
depreication Amount
ASSETS
Non-current assets:
Fixture and fittings 38950 8450 + 1945 28505
Motor Vechile 12500 7600 + 2500 2400
Current assets:
Inventory 9400
Accounts receivable 36450
Prepaid rent 2000
Bank 4780
Cash 225
Total 83760
Equity and liabilities
Current liabilities
Accounts payable 5460
Provision for doubtful debt 729+ 200
Interest payable 500
Outstanding gas and electricity 250
7219
Non-current liabilities
Loan 10000
Equity
Opening equity 110000
Add Net profit of the year 2141
Less Drawings 45600 66541
Total 83760
4

Answer to the Question 1 (c)
Write your response here
Trial balance is basically a bookkeeping worksheet in which all the closing balance of
ledger account is transferred to debit and credit column of trial balance. The total of debit and
credit column must be equal. With the help of trial balance, company can detect any
mathematical error that have occurred in the double entry system of accounting. But on the
other hand, if though the total of trial balance equal does not state that there is no error in the
trial balance. It is because if the debit of trial balance is equal to credit of trial balance means
that there is no mathematical error in the ledger but it does not mean that there is no error in
company’s accounting system. For example, wrong journal entry of transaction such as credit
sales is recorded and posted as debit cash and credit sales. In this case, both debit and credit
entry have been passed and posted in ledger with same amount which leads to equal trial
balance but this does not show correct entry (VA, 2021). In this way, it can be said that
transferred classifying improperly and simply missing from the accounting books could leads
to material accounting error. Also, such material accounting error would not be detected from
the trial balance procedure and double entry system.
Answer to the Question 2 (a)
Write your response here
Partnership appropriation account
For the year
Particular (Debit) Amount Particular (credit)
Amoun
t
To interest on capital:
By profit and loss, a/c (net
profit)
1
3
2
0
0
0
Partner Bridge 15000
By interest on
drawing:
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6
Partner March 7500 Partner Bridge 900
To interest on loan: Partner March
6
0
0
Partner Bridge 1000
To salary:
Partner Bridge 15000
Partner March 25000
To net profit
apportioned between
partners in 2:1 (70000
profit)
Partner Bridge
(70000* 2/3) 46667
Partner March
(70000* 1/3) 23333
Total 133500 Total 133500
Calculation of interest on capital
Partner Bridge 300000*5% 15000
Partner March 150000*5% 7500
Calculation of interest on drawing
Partner Bridge
(40000*2%) +
(5000*2%) 900
Partner March
(20000* 2%) +
(10000* 2%) 600
Calculation of interest on loan
Partner Bridge 25000* 4% 1000
Answer to the Question 2 (b)
Write your response here
Partner’s Capital account
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Using columnar format
Particular (Debit) Bridge March Particular (Credit) Bridge
M
a
r
c
h
To cash/ bank a/c (Capital
withdrawn) 45000 30000
By balance b/d (opening credit
balance) 0 0
By cash/ bank a/c (additional
capital introduced) 300000
1
5
0
0
0
0
To balance c/f (closing
balance) 255000 120000
Total 300000 150000 Total 300000
1
5
0
0
0
0
Partner’s current account
Using columnar format
Particular (Debit)
Bridg
e March Particular (Credit) Bridge March
To interest on drawing 900 600
By balance b/d (opening credit
balance) 0 0
By interest on capital 15000 7500
By interest on partner loan 1000 0
By partner salary 15000 25000
To balance c/f 76767 55233 By partner profit and loss 46667 23333
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(closing balance) appropriation account
Total 77667 55833 Total 77667 55833
Answer to the Question 2 (c)
Write your response here
Absence of partnership agreement:
At the time when partners had not drawn up an agreement, this has results into the
following consequences:
 Firstly, in the case of absence of partnership agreement, the profit and loss are
distributed among the partner equally (Rahman and Leqi, 2021).
 Along with that, the partners are unable to get salary.
 Interest on capital invested by the partners on the partnership business will not be
payable in partner in case of absence of partnership agreement.
 In the case when partner draw amount from the partnership business, such drawings
will not be chargeable with interest rate. It means partner need not to pay interest on
the number of drawings (Lacombe and Bazinet, 2021).
 The rate of interest on the partners loan will be fixed to 6% p.a. when the partners do
not draw partnership agreement before staring their partnership business (Brown and
et.al., 2021).
Thus, it is important for the partners to draft partnership agreement before starting business.
Answer to the Question 3 (a)
Write your response here
Ratio Calculation of Delta Plc and Horizon Plc
Particular Formula
Workings
"000"
Delta
Plc
Workings
"000"
Ho
riz
on
Plc
Profitability
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ratio
Gross profit 505.78 633.05
operating
profit/ EBIT 166.43 183.59
Net profit 109.89 117.81
Net sales 1625.91 1969.44
Total assets 1430 1559.4
Total current
liabilities 464.64 322.37
Capital
employed
Total assets - total current
liabilities 1430 - 464.64
965.3
6
1559.4 -
322.37
12
37.
03
Gross profit
margin
Gross profit/ Net sales *
100
505.78/
1625.91* 100 31%
633.05/
1969.44* 100
32
%
Operating
profit margin
Operating profit/ Net
sales* 100
166.43/
1625.91* 100 10%
183.59/
1969.44* 100
9
%
Net profit
margin
Net profit/ Net sales *
100
109.89/
1625.91* 100 7%
117.81/
1969.44* 100
6
%
Return on
capital
employed
EBIT/ capital
employed* 100
166.43/
965.36* 100 11%
183.59/
1237.03* 100
10
%
Liquidity ratio
Current assets 938.3 898.1
Current
liabilities 464.64 322.37
Inventories 651.2 443.3
Quick assets
Current assets -
inventories 938.3 - 651.2 287.1 898.1 - 443.3
45
4.8
Current ratio
Current assets / current
liabilities 938.3 / 464.64 2.0 898.1 / 322.37 2.8
Quick ratio
Quick assets / current
liabilities 287.1 / 464.64 0.6 454.8 / 322.37 1.4
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Efficiency
ratio
Inventory 651.2 443.3
Receivables 194 354.1
Payables 447.04 303.27
Net credit sales 1625.91 1969.44
Cost of sales 1120.13 1336.39
Total assets 1430 1559.4
Inventory
holding days
Inventory/ cost of sales*
365 days
651.2/
1120.13* 365
days 212
443.3 /
1336.39* 365
days
12
1
Receivable
collection days
Trade receivable/ net
credit sales* 365 days
194/ 1625.91*
365 days 44
354.1 /
1969.44* 365
days 66
Payable
payment days
Trade payable/ cost of
sales* 365 days
447.04/
1120.13* 365
days 146
303.27 /
1336.39* 365
days 83
Total asset
turnover ratio Net sales/ Total assets 1625.91 / 1430 1.1
1969.44 /
1559.4 1.3
Answer to the Question 3 (b)
Write your response here
Memorandum
To: Managing Director (Delta Plc)
From: Finance Manager
Date: 31st December, 2020
Subject: Regarding findings of Delta Plc from the ratio calculation.
I am writing this memo to inform you the performance of Delta Plc based on its
profitability, liquidity and efficiency ratio calculation. The findings and comment on
financial ratio are as follows:
Profitability Ratio:
On the basis of the ratio calculation, it is found out that the gross profit margin of Delta Plc
is low as compared to its competitor Horizon Plc. It is because the GP ratio of both Delta
and Horizon Plc in the year 2020 is 31% and 32% respectively. While on the other hand, it
is also found out from the ratio calculation that the operating profit, net profit margin and
return on capital employed of Delta Plc in the year 2020 is higher than the Horizon plc. It is
because OP, NP margin and ROCE of Delta plc in the year 2020 is 10%, 7%, 11% and of
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Horizon Plc is 9%, 6% and 10% respectively. This indicates that the overall profitability
position of Delta Plc is quite better in the year 2020. However, it is advisable to the
company that they should opt for the strategies such as training to employees, reduction in
wastage of resources etc. to ultimately decrease cost of production and increase gross profit
margin of company (Rahman and Leqi, 2021).
Liquidity Ratio:
From the above calculation, it is found out that the current ratio and quick ratio of Delta Plc
in the year 2020 is 2 and 0.6. While on the other hand, the same ratio of Horizon Plc is 2.8
and 1.4 respectively. This indicate that the liquidity position and performance of Delta plc
is lower than its competitors. This means that the company does not have the capacity to
pay off its current obligations with the cash generated from current and quick assets. In
order to improve the liquidity position, it is advisable to company that they have to allow
discount to its customers for the early payment of dues so that they can further use this cash
to pay off its creditors and other current liabilities (Idehen and Akhator, 2021).
Efficiency Ratio:
On the basis of above calculation of ratio, it is found out that the overall efficiency position
of Delta plc is poor except their trade receivable days in which the company receive
payment from its debtors early as compared to Horizon plc. While on the other hand, the
trade payable days, inventory holding days and total assets turnover ratio of Delta Plc is
lower than its competitors. This indicates poor efficiency position of Delta plc as compared
to its competitor Horizon plc (Ginting, 2021). This might be because of the poor credit
policy of the company along with poor inventory management. The company have to adopt
the strategy to improve its credit management so that they can pay off its creditors on time
otherwise it will largely affect the credit worthiness of company in market. Also, it is
advisable to the company that they should opt for Just-in-time inventory system to manage
the inventory within the organization.
In case if you have any question then feel free to let me know.
Sincerely,
Finance manager.
Answer to the Question 4 (a)
Write your response here
Statement of Cash flow of Shelton Plc (extract)
For the year ended 31st December 2020
(Using direct method)
Particulars Details Amount
Cash flow from operating activities
Cash receipt
cash received from creditors 216149
216149
Less: Cash payment:
Cash paid to debtors 82277.5
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wages paid 26285
Interest paid 137.5
Income tax paid 670
109370
Net cash flow from operating activities
1
0
6
7
7
9
Answer to the Question 4 (b)
Write your response here
Limitation of statement of cash flows are as follows:
 Fails to present net income: The cash flow statement does not reflect the net income
earned by the company it is because it does not consider the non-cash items which is
easily ascertained by income statement (Sofyan, Ludigdo and Mulawarman, 2021).
Thus, company can use this as a supplement of income statement only.
 Fails to access the liquidity and solvency position: If the company wants to identify
the liquidity position of business than at that time cash flow statement is became
useless. It means cash flow statement does not represent the real liquidity and
solvency position of company.
 Neither a substitute of fund flow statement nor income statement: This is neither
a substitute of income statement or fund flow statement because cash flow statement
does not perform the function which is performed by fund flow and income statement.
 Not to access profitability: As the cash flow statement neither consider the cost nor
the revenue so cash flow from operations does not provide profitability position of the
business (Idehen and Akhator, 2021).
 Does not conform with the companies act: The cash flow statement does not follow
the standards provided by companies act of UK for preparation of profit and loss
statement or balance sheet of the business. Thus, it is said that this does not conform
with the companies act and UK accounting standards (Wang, 2021).
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 Does not access future cash flows: The cash flow statement is basically prepared on
the basis of historical cost or data. The impact of which the manager of company can’t
estimate and project future cash flows of the business. Thus, cash flow statement also
fails in access to future cash flow which is one of their biggest limitations.
 Inter-industry comparison not possible: It is impossible for the company to do
inter-industry comparison based on information under cash flow statement. It is
because cash flow statement does not measure the economic efficiency of a firm. The
cash flow statement state that if the firm have less investment than their cash flow will
be also less and vice-versa (Ginting, 2021).
Answer to the Question 4 (c)
Write your response here
Email
To: Board of Director (Shelton Plc)
From: Finance manager
Subject: Regarding requirement to prepare consolidated financial statement.
Date: 31st December, 2020
Dear sir/ mam,
I am writing this mail to inform you that Shelton Plc require to prepare the consolidated
financial statement as they are planning to take control over other entity. As per the
International Financial Reporting Framework (IFRS), every company having control of more
than 50% holdings over other company require to prepare the consolidated financial
statement. The consolidated financial statement reflects a company integrate and combine all
of its financial accounting function (Li and et.al., 2021). The purpose behind this is to create
and show results in standard balance sheet, income statement and cash flow statement. Both
GAAP and IFRS have specific guidelines for public entities that have to be followed in order
to prepare consolidated financial statement. Those requirements are as follows:
 Parent company and its subsidiaries generally need to use the same financial
reporting framework for consolidated and separate financial statement preparation.
 They also require a significant investment in financial accounting infrastructure in
order to create and prepare final consolidated financial reports (Kadirbayevich,
2021).
 They also need to abide or follow some key provisional standards which includes
non-transfer of cash, revenue, assets and liabilities among parent and subsidiary in
order to improve result and tax evasion.
 The standards may differ for the amount of ownership which also require to be
included in the consolidated financial statement by the Parent company.
 Each separate legal entity has their own financial statement and reports which is
further require to be combine with the parent company along with eliminating all
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inter-company transactions (Pisanello, 2021).
In this way, Shelton Plc require to prepare consolidated financial statement in order to help
key stakeholders to gauge the overall position of entire entity.
Your Sincerely,
Finance Manager.
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REFERENCES
Books and Journals
VA, P., 2021. General Financial Reports Trial Balance.
Brown, C.A. and et.al., 2021. High frequency of the Duffy-negative genotype and absence of
Plasmodium vivax infections in Ghana. Malaria Journal. 20(1). pp.1-7.
Lacombe, R. S. and Bazinet, R. P., 2021. Natural abundance carbon isotope ratio analysis and
its application in the study of diet and metabolism. Nutrition reviews. 79(8). pp.869-
888.
Rahman, J. M. and Leqi, L. I., 2021. Corporate Social Responsibility (CSR): Focus on Tax
Avoidance and Financial Ratio Analysis [enter Paper Title]. Accountancy Business
and the Public Interest.
Ginting, E. S., 2021. Ratio-Based Financial Performance Analysis of PT. Mustika Ratu,
Tbk. Enrichment: Journal of Management. 11(2). pp.456-462.
Idehen, A. V. and Akhator, K., 2021. Examining the cash flow statement relevance for
measuring the business performance in Nigeria. International Journal of Research in
Business and Social Science (2147-4478). 10(4). pp.249-254.
Sofyan, M. S., Ludigdo, U. and Mulawarman, A. D., 2021. The meaning of cash flow
management for the non-bank housing developers. International Journal of Research
in Business and Social Science (2147-4478). 10(4). pp.195-203.
Wang, H., 2021, January. Research on Financial Strategy Based on Cash Flow. In 6th Annual
International Conference on Social Science and Contemporary Humanity
Development (SSCHD 2020) (pp. 800-805). Atlantis Press.
Li, Y. and et.al., 2021. Preparation, characterization and application of red mud, fly ash and
desulfurized gypsum based eco-friendly road base materials. Journal of Cleaner
Production. 284. p.124777.
Kadirbayevich, P. A., 2021. PREPARATION OF CONSOLIDATED FINANCIAL
STATEMENTS OF HOLDING COMPANIES IN ACCORDANCE WITH
INTERNATIONAL FINANCIAL REPORTING STANDARDS. Web of Scientist:
International Scientific Research Journal. 2(05). pp.492-496.
Pisanello, C., 2021. International accounting standards: the criteria adopted for the
consolidated financial statements. Post Implementation review of IFRS 10, 11, 12.
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