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Accounting Fundamentals

July 2013

Suggested answers and examiners comments


Important notice
When reading these suggested answers, please note that the answers are intended as an
indication of what is required rather than a definitive right answer. In many cases, there are
several possible answers/approaches to a question. Please be aware also that the length of
the suggested answers given here may be somewhat exaggerated compared with what
might be achieved in the reality of an unseen, time-constrained examination.
Examiners general comments
The overall performance of the candidates who sat the July 2013 diet saw a marked
improvement over the past few sittings. The pass rate for this session was 74%. The
performance in Section A was generally good; and many candidates produced good answers
to the questions in Section B and Section C.
However, in Section B, it was noticeable that some candidates found Question 4 and
Question 5 most challenging as measured by the individual performances per question.
All the questions in Section C were generally answered well. Question 8 was the least
popular and Question 9 was the most popular choice in Section C. However, some
candidates produced answers which highlighted some confusion between the bedrock and
desirable principles.

ICSA, 2013

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Section A
Answer all parts of Question 1. Select only one of the options A, B, C or D for each part.

1.

(i)

(ii)

(iii)

(iv)

Which of the following items of expenditure by a sole trader would be


classified as capital expenditure?
A.

5,000 spent on marketing.

B.

10,000 spent on loan interest.

C.

15,000 spent on a computer.

D.

20,000 spent on building repairs.

The decision by a retailer to value his closing stock of 1,000 bags of flour at
the current market price of 5 per kg rather than its original cost price of
7.50 per kg is an example of which one of the following accounting
concepts?
A.

Consistency

B.

Prudence

C.

Materiality

D.

Money measurement

When a wholesaler gives a retailer a 10% discount on a bulk purchase, what


is the correct accounting treatment by the wholesaler to account for the
discount?
A.

An expense in the profit and loss account.

B.

An expense in the trading account.

C.

An income in the trading account.

D.

None of the above.

When the correct amount from a transaction is posted in the ledger but it
has been posted to the wrong account, this is an error of which one of the
following?
A.

Commission

B.

Principle

C.

Original entry

D.

Compensation

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ICSA, 2013

Parts (v) to (x) relate to the magazine publishing business of Simon Gee for the
accounting year 1 July 2012 to 30 June 2013.
(v)

Simon uses a petty cash float of 500 for his business. On 31 May 2013, the
petty cash balance was 75.
What is the correct accounting entry required to restore the petty cash
float?

(vi)

A.

Dr Petty Cash
Cr Cash

500
500

B.

Dr Cash
Cr Petty Cash

500
500

C.

Dr Petty Cash
Cr Cash

425
425

D.

Dr Cash
Cr Petty Cash

425
425

At the year ended 30 June 2012, Simon Gee had a rent account debit
balance of 4,800. On 1 October 2012, Simon paid 81,000 for the year
ended 30 September 2013.
What should be the entry in Simons Profit & Loss account for the year
ended 30 June 2013?
A.

65,550

B.

76,200

C.

81,000

D.

85,800

(vii) On 1 September 2010, Simon Gee bought a new printing press for his
magazine publishing business at a cost of 16,000. Simons depreciation
policy is 20% per annum reducing balance. Simon charges a full years
depreciation in the year of acquisition.
What was the depreciation charge to Simons Profit & Loss account for the
year ended 30 June 2013?
A.

2,048

B.

2,560

C.

3,200

D.

8,192

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ICSA, 2013

(viii) An extract from Simons book of accounts as at 30 June 2013 produced the
following:

Current Assets
Inventories
Debtors
Bank
Total

8,000
75,000
12,750
95,750

Current Liabilities
Trade Creditors

Total

75,650

75,650

What is Simons acid test (quick ratio) as at 30 June 2013?

(ix)

A.

0.79:1

B.

1.10:1

C.

1.16:1

D.

1.27:1

Simons debtors at 30 June 2012 were 68,000 and his provision for doubtful debt
was 2,720. At 30 June 2013, Simons debtors had risen to 75,000 and Simon
estimated he should make a 3% provision for doubtful debts.
What is the correct journal entry to account for the change in the provision?

(x)

A.

Debit
Profit and loss account 2,250

Credit
Provision for doubtful debt 2,250

B.

Provision for doubtful debt 2,250

Profit and loss account 2,250

C.

Profit and loss account 470

Provision for doubtful debt 470

D.

Provision for doubtful debt 470

Profit and loss account 470

Simon pays his staff wages by cheque each month.


What is the impact on the accounting equation?
A.

Increase expenses and decrease revenue.

B.

Increase revenue and decrease expenses.

C.

Increase expenses and decrease current asset.

D.

Increase current asset and decrease expenses.


(Total: 20 marks)

ICSA, 2013

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Suggested answers
(i)

C.

15,000 spent on a computer.

(ii)

B.

Prudence

(iii)

D.

None of the above.

(iv)

A.

Commission

(v)

C.

Dr Petty Cash
Cr Cash

425
425

Examiners explanation:
Workings
The petty cash float requires an increase in cash of 425 from the business cash. An
increase in the petty cash float is a debit transaction and the financing from the cash is a
credit transaction. This gives us the following:
Dr Petty Cash
Cr Cash
(vi)

A.

425
425

65,550

Examiners explanation:
Workings
Date
30-Jun-12
01-Oct-12
30-Jun-13
30-Jun-13
(vii) A.

2,048

(viii) C.

1.16:1

(ix)

Description
Prepayment
Bank
Prepayment
Profit & Loss Account

Cr

20,250
65,550

Balance
4,800
85,800
65,550
0

D.
Debit
Provision for doubtful debt 470

(x)

Dr
4,800
81,000

C.

Credit
Profit and loss account 470

Increase expenses and decrease current asset.

Examiners comments
Section A was generally well answered. However, it is noteworthy that, for this session, many
candidates did not rely on Section A to provide a solid base for performances because Section B
and C were equally answered well by many candidates.

ICSA, 2013

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Section B
Answer all five questions.

2.

Identify and explain three classes of items shown in the upper section of a statement of
financial position.
(6 marks)
Suggested answer
Any three of the following.
Item identified

Explanation

Non-Current Assets

A non-current asset is expected to have a life span beyond


one year and it is not realised, or intended for sale or wholly
consumed in the entitys normal operating cycle.

Current Assets

A current asset is expected to be realised, or is intended for


sale or consumption, in the entitys normal operating cycle; is
held primarily for trading purposes; and is expected to be
realised within twelve months of the balance sheet date.

Current Liabilities

A current liability is expected to be settled in the normal


course of the entitys operating cycle; or is due to be settled
within twelve months of the balance sheet date.

Non-Current Liabilities

A non-current liability is not expected to be settled in the


normal course of the entitys operating cycle, and is due to be
settled after twelve months from the balance sheet date.

Examiners comments
Many candidates produced a good set of answers. However, a small number of candidates were
unable to provide appropriate items and/or suitable examples.
3.

(a)

Define what is meant by an accrual.


(2 marks)

(b)

Outline how an accrual is treated in financial statements.


(4 marks)
(Total: 6 marks)

Suggested answer
(a)
An accrual is a cost that has been incurred during the accounting period but remains unpaid at
the end of the period and is unbilled. Alternatively, in terms of benefits, it is a benefit received
during the period but remains unpaid at the end of the period.

ICSA, 2013

Page 6 of 15

(b)
An accrual is charged to the profit and loss account because the expense was incurred during
the accounting period.
The accrual is shown within the current liability on the balance sheet because it remains unpaid
at the end of the accounting period.
Examiners comments
Part (a) of the question was generally answered well. However, some candidates wrote
excessively and repeatedly on accruals. It is advised that the mark allocation should be used as
a guide in answering questions.
The answers for part (b) were mixed. Some candidates produced excellent answers. However,
other candidates were unable to state the exact treatment in the profit and loss account and
balance sheet.
4.

Try Sports had a sales ledger account balance of 157,050 on 31 May 2013. During the
month of June 2013, the following transactions occurred:

Bad debt written off


Payments received
Sales return
Credit sales

8,100
402,180
11,520
788,220

Prepare the sales ledger control account of Try Sports as at 30 June 2013.
(6 marks)
Suggested answer

Date
31 May 2013
30 June 2013
30 June 2013
30 June 2013
30 June 2013

Sales Ledger Control Account


Details
Dr
Cr
Balance
157,050
Credit sales
788,220
Sales returns
11,520
Bank
402,180
Bad debt written off
8,100

Balance
157,050
945,270
933,750
531,570
523,470
523,470

Examiners comments
This question was generally poorly answered.
The question required the production of a sales ledger control account from the information in
the question. However, many candidates did not assign dates to transactions, or show details, or
show debit and credit columns in the control account.
It must be noted that this topic is central to Accounting Fundamentals.

ICSA, 2013

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5.

Describe the six source documents relating to the purchases and sales cycles found in
an accounting system.
(6 marks)
Suggested answer

Sales order a customer provides a written order detailing the goods or services they wish
to buy.

Purchase order a business sends a written order to a supplier for the purchase of goods
or materials.

Invoice from suppliers a business buys goods or services from a supplier and
receives an invoice from the supplier. Note: the goods or services received should
correspond to the details on the purchase order.

Invoice sent to customers a business sells goods or services to a customer, and


sends an invoice to the customer.

Credit notes credit notes are sent out when goods or services are returned to the
supplier by the customer.

Goods received note these are sent with goods as they are shipped to the
customer.

Examiners comments
Some candidates in their attempt to answer the question appeared to ignore the requirement of
six source documents, and included cashbook and journals which were not required.
6.

A summary of balances extracted from Mo Speeds accounting records for the year-end
30 June 2013 is shown below:

Capital
Purchases
Sales
Carriage in
Plant & machinery

262,500
60,500
54,000
5,000
87,500

Produce a trial balance for Mo Speed for the year ended 30 June 2013, and determine his
bank balance.
(6 marks)

ICSA, 2013

Page 8 of 15

Suggested answer
Mo Speed
Trial Balance
As at 30 June 2013
Dr

Capital
Bank
Purchases
Sales
Carriage in
Plant & Machinery

Cr

262,500

163,500
60,500
54,000
5,000
87,500
316,500

316,500

The missing bank balance required to ensure the trial balance is in equilibrium, debits equals
credits is 163,500.
Examiners comments
Many candidates answered the question well and were able to determine the missing bank
balance. However, some candidates demonstrated an inability to post ledger balances on the
correct side of a trial balance.

ICSA, 2013

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Section C
Answer two questions only.
7.

(a)

Explain what is meant by a fixed asset and give one example.


(3 marks)

(b)

Explain the different types of fixed assets found on a balance sheet, giving an
example of each.
(9 marks)

(c)

Explain the difference between a bad debt and a provision for doubtful debt, giving
an example of each.
(8 marks)

(d)

Explain the impact a bad debt and a provision for doubtful debt have upon the
financial statements.
(5 marks)
(Total: 25 marks)

Suggested answer
(a)

Assets purchased by an entity with an expected life span over one year.

The cost of the asset is not charged to the profit and loss account in the year of
acquisition.

Example: Plant/Machinery/Goodwill/investment

Examiners comments
Part (a) of the question was generally answered well.

(b)

Description

Example

Tangible fixed
assets

Intangible fixed assets

Investments

Physical assets
that can be seen
or touched and are
useful as result of
application in an
entity.
Plant/Machinery/
Vehicle

These assets are physical


and are useful because of
the rights they carry can be
extremely valuable.

The investment of one


company into another
company as a
shareholder.

Patent/Goodwill/Trademark Shares held in


another company.

Examiners comments
Part (b) was answered fairly well.

ICSA, 2013

Page 10 of 15

(c)
Bad Debt
Description

Example

Provision for Doubtful Debt

These debts are


irrecoverable and are
written off because they
arise from known or
specific debtors who have
failed to pay their debtor
balances.
A client has gone into
liquidation owing a
supplier x,000

These are debts which may be


irrecoverable from non-specific
debtors at the balance sheet date,
and a provision is made for them
in the financial statements.

A company making a provision of


5% for the non-payment of its
credit sales.

Examiners comments
Many candidates demonstrated that they understood the difference between bad debt and
the provision for doubtful debt.
(d)
Profit and Loss Account
A bad debt and a provision for a
doubtful debt are expenses that are
charged to the profit and loss
account, and thus reduce the annual
profit.

Balance Sheet
A bad debt and a provision for a doubtful
debt both reduce the debtors balance on
the balance sheet.
The bad debt is written off first to enable
the provision for doubtful debt to be based
on the actual collectable debtors balance.

Examiners comments
Part (d) was generally answered well.

ICSA, 2013

Page 11 of 15

8.

The financial statements for Mexy Limited are shown below:


Mexy Limited Income Statement for the year ended 30 June 2013:

Sales
Cost of sales
Gross profit
Operating expenses
Profit before interest and
taxation
Interest
Pre-tax profit

1,820,000
1,314,300
505,700
387,015
118,685
11,050
107,635

Mexy Limited Statement of Financial Position at 30 June 2013:

Non Current Assets


Current Assets
Inventories
Receivables
Bank/Cash

128,400
85,750
17,060

Current Liabilities
Payables

116,575

Net Current Assets

2,039,100

231,210

114,635

Long term liabilities


Loan
Net Assets

1,000,000
1,153,735

Capital and reserves


Ordinary share capital
General reserves
Shareholder's Fund

1,028,000
125,735
1,153,735

Required
(a)

Using Mexy Limiteds financial statements for the year ended 30 June 2013, identify
and calculate the following:
(i)

Two profit margin ratios.


(6 marks)

(ii)

Three working capital management ratios.


(9 marks)

(b)

Outline five limitations of accounting ratios.


(10 marks)
(Total: 25 marks)

ICSA, 2013

Page 12 of 15

Suggested answer
(a)
Ratios
Profit Margins
Gross profit margin

Operating profit
margin
Management of
working capital
Inventory holding
days
Collection of
receivables
Payment of payables

Gross Profit x 100


Turnover

505,700 x 100
1,820,000

27.79%

Operating Profit x 100


Turnover

118,685 x 100
1,820,000

6.52%

Inventories x 365
Cost of sales
Receivables x 365
Sales
Payables x 365
Cost of sales

128,400 x 365
1,314,300
85,750
x 365
1,820,000
116,575 x 365
1,314,300

35.66 days
17.20 days
32.37 days

Examiners comments
Candidates generally produced an excellent set of answers to the profit margins and the
management of working capital ratios. The clarity of the layout of many answers was noted.
Other appropriate ratios were given credit.

(b)

Accounting ratios do not provide explanations for the observed changes.

A deterioration in accounting ratios does not necessarily equate to poor management.

Too much significance should not be attached to any single ratio.

Changes in ratios may be closely associated with another ratio and produce a similar
conclusion e.g. a decline in current and liquidity ratios.

Company financial statements are based on historic events. Therefore, ratios provide
an understanding of past events.

Accounting policies such as depreciation may affect the annual financial statements,
and, as such, the resulting accounting ratios.

Accounting ratios do not provide a holistic understanding of an entity because they are
solely financial measures.

Examiners comments
Many candidates further demonstrated their competence in financial ratios by producing another
set of good answers that addressed the limitations of accounting ratios.

ICSA, 2013

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9.

(a)

Identify and explain:


(i)
(ii)

Two bedrock accounting concepts.


Two desirable accounting concepts.
(16 marks)

(b)

Identify and explain the two additional concepts identified by the IFRS.
(9 marks)
(Total: 25 marks)

Suggested answer
(a)
Bedrock Concepts
Explanation

Going concern

Accruals or matching

The going concern concept


is the assumption that:

The principle that revenues


and costs are matched with
each other and dealt with in
the profit and loss account
of the period to which they
relate, irrespective of the
period of receipt or
payment.

the business will continue


to operate in the
foreseeable future;
there is no intention to
close it; and
no intention to make
significant cutbacks to the
nature of the business.
This approach means that the
information provided by
financial statements is most
relevant.

Desirable Concepts
Explanation

Prudence
The principle that:
income is included in the
financial statements only
when realised, whereas,
likely losses are included
as soon as possible.

Consistency
The principle that there is
uniformity of accounting
treatment of like items:
within each accounting
period and,
from one period to the
next.

Examiners comments
Part (a) of Question 9 was generally answered well. However, a small number of candidates
appeared to confuse bedrock and desirable concepts.

ICSA, 2013

Page 14 of 15

(b)
IFRS
Explanation

Stable measuring unit


The stable monetary unit
concept requires financial
statements to be expressed in
monetary units. The use of
monetary unit as a basis in the
presentation of financial
statements assumes the
currency remains constant
between accounting periods.

Units of constant purchasing


power
The units of constant purchasing
power concept requires that all
non-monetary items (variable and
constant real value non-monetary
items) in Historical Cost or Current
Cost period-end financial
statements are restated in terms of
the period-end Consumer Price
Index (CPI) during exceptional
periods of hyperinflation.

Examiners comments
Some candidates were unable to name the two concepts and provide a suitable explanation.

The scenarios included here, except where expressly identified, are entirely fictional. Any
resemblance of the information in the scenarios to real persons or organisations, actual or
perceived, is purely coincidental.

ICSA, 2013

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