Financial Accounting and Regulatory Framework Exam Answers and Solutions

This content provides solved answers for Financial Accounting and Regulatory Framework exam questions. It includes a profit and loss account, statement of financial position, trial balance, partnership appropriation account, and cash flow statement. The content also explains the importance of ratio analysis and the limitations of cash flow statements. The subject is BMP6018 and the course is BA (Hons) Business Finance Pathway. The content is relevant for students of the Institute of Management in Semester 2 of the academic year 2021/22.

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.

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
Answer to the Question 1 (a)
1. A)
Profit and loss account for the year ended 31st December 2020.
Particulars Amount Particulars Amount
To opening balance
To purchases
To Wages and salaries
To Heat and light
To gas and electricity
To G/P
8560
123000
32000
12000
250
29965
By sales
By closing balance
196375
9400
205775 205775
To depreciation
Fixtures (1945)
Vehicles (625)
To rent
To motor expenses
To insurance
To bad debts
To interest on loan
To G/P
2570
6000
12350
5600
729
500
2216
By Gross profit 29965
29965 29965
Answer to the Question 1 (b)
1. B)
Statement of Financial position
As on 31st December 2020
Liabilities Amoun
t
Assets Amount
2

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
Equity 110000
Less: Drawings 45600
Add: Profit 2216
Loan
Account payable
Provision for depreciation on
furniture and fixtures
Provision for depreciation on motor
vehicle
Insurance
66616
10000
5460
6927
6620
5600
Inventory
Furniture and fixtures. 38900
Less: Depreciation. 1523
Motor vehicle 12500
Less: Depreciation 980
Prepaid rent
Bank
Cash
Account receivable.
36450
729
9400
37377
11520
2000
4780
225
35729
101223 101223
Answer to the Question 1 (c)
A trial balance is defined as a summary of ledgers balance which are compiled in the debit
and credit column in order to test the arithmetical calculation accuracy of the books. A trial
balance is prepared for developing the financial statements of the company for smooth
functioning of business operations. It is necessary for the company to check the arithmetical
accuracy and correctness of the books of accounts before preparing the final accounts related
to the finance of the company. Trial balance is considered as an important part of the process
related to accounting and is prepared only in one time in a whole financial year. If the balance
of both the debit and credit column matches than it is correct but there can still be errors
which creates problem for the company in making the final accounts for calculating the profit
and loss of the company. There could be error related to error of omission which means that
any entry is missed and is not recorded while preparing trial balance. This creates a problem
in calculating the balances of final accounts as the primary account is not prepared carefully
and properly. Second type of error which can occur is error of commission which means
recording wrong figures in journal and posting the same wrong amount in the right side of
ledger account. Third type of error which, might occur while preparing trail balance of the
company is error of miss-posting which means posting entry from the journal to ledger
accounts unintentionally in the right side of wrong financial account is defined as miss-
posting of entries. This miss-posting of entries do not create problems while calculating the
balance o trial balance. Fourth type of error which might occur in the preparation of trial
balance is compensating errors which is defined as the short or excess amount is posted at
one of the columns of trail balance and if the equal amount of excess or short amount is
posted on the other side of the trial balance column. This is known as this because the wrong
posting of amount in one account is compensated by another wrong posting of amount in
another account and it do not hamper the equal total of trail balance debit and credit amount.
3

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
Write your response here
Answer to the Question 2 (a)
1. A)
Partnership appropriation account
Particulars Amount Particulars Amount
To interest on capital
Bridge 15000
Marsh 7500
To salary
Bridge 15000
Marsh 25000
To profit distributed (2:1)
Bridge 46433
Marsh 23217
22500
40000
69650
By profits
By interest on drawings
Less: interest on loan by bridge
132000
650
(500)
132150 132150
Answer to the Question 2 (b)
2 b) Partner’s capital account
Particulars Bridge Marsh Particulars Bridge Marsh
To balance c/d 30000
0
150000 By balance b/d 30000
0
150000
Partner’s current account
Particulars Bridge Marsh Particulars Bridge Marsh
To interest on drawings 400 250 By bank 30000
0
150000
To interest on loan 500 By interest on capital 15000 7500
To profit and loss 88000 44000 By salary 46433 23217
To balance c/d 27253
3
136467
36143
3
180717 36143
3
180717
4

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
Answer to the Question 2 (c)
Partnership is a type of business which is done by two or more persons to carry out the
business operations together in order to share the profits and losses incurred in equal ratios. In
this type of business every partner work with a aim to achieve the common set goals and
objectives of the business for earning high profitability and growth in the market. A
partnership deed is defined as an agreement between the partners of the company who wants
to continue in the business with the amount of capital invested. The agreement generally
defines about the following things such as nature of the company, rights and duties of
partners, their liabilities and the amount of ratio in which the partner will distribute their
profit and losses of the company among them. But in the absence of partnership deed the
partners need to share the amount of profit and losses between partners in equal share.
Without partnership deed the partners will not get the amount of interest on capital because
interest will only be paid to the partners in the case when the company will earn profits and if
it is agreed within the partners to distribute it. The amount of interest on capital will not be
paid in case of loss to the company in case of absence of partnership deed. The partners will
also not be charged interest related to drawings they make in the absence of partnership deed
between the partners. The partners will also not receive a predetermined amount of salary if
they are not agreed to do business in a deed as they will not be liable of any compensate. The
interest on loan is entitles on the rate of six percent to the partners on advancing a good
amount of money to run the business operations of the company. Thus, for running the
business operations smoothly and in accordance to the market it is necessary for the
partnership firm to get itself registered and make a partnership deed in order to protect the
interest of the company as they have invested a big amount of money in the business.
partnership deed also helps in solving the disputes and in dissolving or partnership firm in a
easy and desirable way for gaining high growth in the competitive market.
Answer to the Question 3 (a)
a) Profitability ratios:
 Return on asset ratio: Net income/ Total asset
Delta: 109.89/1430 *100 = 7.68%
Horizon: 117.81/1559.4*100 = 7.55%
 Operating profit ratio: Operating profit/ Sales
Delta: 166.43/1625.91*100 = 10.23%
Horizon: 183.59/1969.44*100 = 9.32%
 Gross profit ratio: GP/Sales *100
Delta: 505.78/1625.91*100 = 31.1075%
Horizon: 633.05/1969.44*100 = 3214.1436%
 Net profit ratio: NP/Sales*100
5

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
Delta: 109.89/1625.91*100 = 6.7586%
Horizon: 117.81/1969.44*100 = 5.9819%
Liquidity ratios:
 Cash ratios: Cash marketable securities/ Current liabilities
Delta: 93.14/464.64 = 0.20
Horizon: 1007/322.37 = 0.312
 Current ratio: Current asset/Current liabilities
Delta: 938.3/46464 = 2.019
Horizon: 898.1/322.37 = 2.786
 Quick ratio: Current asset-Stock/current liability
Delta: 938.3-651.2/464.64 = 0.6178
Horizon: 898.1-443.3/322.37 = 1.4108
Efficiency ratios:
 Inventory turnover ratio: Cost of goods sold/ Total inventory
Delta: 1120.13/1625.91 = 0.689
Horizon: 1336.39/1969.44 = 0.679
 Receivable turnover ratio: Debtors/total inventory
Delta: 194/1625.91 = 0.12
Horizon: 354.1/1969.49 = 0.18
 Asset turnover ratio: Sales/Total assets
Delta: 1625.91/1430 = 1.137
Horizon: 1969.44/1559.4 = 1.263
Answer to the Question 3 (b)
1. The Managing Director of Delta Plc requires you to report your findings to him in a memo
format.
From the above gathered data from the above calculations, it is
recommended that Delta PLC must prepare efficient and accurate financial
statements in order to assess the ability of the business in order to generate
income, operating costs, balance sheet assets or equity of shareholder over
the time. The ratios related to profitability can be compared with the
efficiency ratios which helps in considering how well and effectively the
company uses the assets for generating income. Higher ratios results are
often regarded as more favourable and accurate which helps the company in
determining the current position of the company assets and how to utilize
them efficiently ns effectively for attaining future growth. The liquidity ratio
help the company in determining the ability to pay the amount related to
short term debt obligation. Liquidity is defined as the ability to convert the
company asset into cash cheaply and quickly which helps the business in
gaining financial assistance easily. Efficiency ratio considered by the company
because it helps in determining and evaluating the performance in order to
6

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
gain high growth and profitability in the current competitive environment.
Thus, it is important for the company to manage its company assets and
liabilities properly so that they earn high return in the future and helps in
improving the performance an working efficiency of the comp0ny and its
employees. As ratio analysis is important for the company in order to analyse
financial, liquidity, risk, profitability, solvency, efficiency and effectiveness of
the proper utilization the company funds for better management of finance.
Answer to the Question 4 (a)
Shelton PLC
Statement of cash flow
For the year ended 31 December 2020
Particulars Amount
Cash Flow from operating activities
Cash received from customers 216149
Cash paid to employees -26285
Cash paid for interest -137.5
Cash paid for income taxes -670
Net Cash inflow from operating activities 189056.5
Answer to the Question 4 (b)
Cash flow statement is defined as a tool or method of analysing financial statements which
help in managing the working capital funds of the company. This statement includes the
following aspects such as accounts receivable, accounts payable, office related expenses and
many more. Cash flow statement have certain limitations which creates problem for the
company in calculating their finances which are explained below:
 The concluded information in the statement of cash flow fails to provide a complete
and accurate picture about the financial position of the company.
 The main problem of cash flow statement is that its accuracy is majorly depended on
the concerned balance sheet. If the calculations done in balance sheet is incorrect than
the prepared cash flow statement will also prove to be wrong.
7

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
 The preparation of cash flow statement is not prepared on the basis of accrual concept
if accounting and because of this the accuracy of cash flow is questionable and
doubtable.
 It is also not appropriate for measuring the profitability of the company because the
non-cash items are not involved in the calculation part of cash flow from operating
activities.
Answer to the Question 4 (c)
1. From next year, Shelton PLC is required to prepare consolidated financial statements as
they are planning to take control over another entity. Write an email of the board of
directors of Shelton PLC explaining the requirements to prepare consolidated financial
statements
2. EMAIL
Consolidated financial statements are defined as a collected of financial
statements of a large group of entities that are represented as a single entity in
the economy. These statements help in determining and analysing the financial
position of the whole group of commonly owned and controlled companies. The
board of directors of Shelton PLC must prepare consolidated financial statements
as they want to take over the control of other entities. These financial statements
help the company in providing a true picture about the financial health of the
company in all subsidiaries and divisions. In simplest words, consolidated
statements helps the company in bringing together the parent company and
subsidiary company financial statements under one umbrella. As incomplete
understanding about the financial health of other company can put Shelton PLC in
danger and can hamper the growth and profitability of the company in the
competitive market. Consolidated accounts majorly provide benefit to the
managers, stakeholders and directors of the parent company and will reduce the
interest in checking the subsidiary company which do not have these type of
statements.
8

Institute of Management
Business Finance Pathway
Semester 2 Examination 2021/22
Financial Accounting and the Regulatory Framework
Module No BMP6018
END
9