FINANCIAL ACCOUNTING ANSWERS
SECTION A; ANSWER TWO(2) QUESTIONS FROM THIS SECTION
(1a)
(i) Mr. Abu, if appointed as an accountant for the position at XYZ Ltd, would be required to prepare financial statements. These financial statements would provide accounting information to enable management to make informed decisions about the company.
(ii)
(i)Relevance: The information should be relevant to the decision-making process of the users.
(ii)Reliability: The information should be accurate and reliable, meaning it should be based on sound accounting principles and be free from material errors.
(iii)Understandability: The information should be presented in a clear and understandable manner, making it accessible to users with different levels of accounting knowledge.
(iv)Timeliness: The information should be provided in a timely manner to be relevant for decision-making.
(1b) Seven users of the accounting information of the company are:
(i)Management: They use accounting information to make strategic decisions, assess performance, and plan for future activities.
(ii)Investors: They rely on accounting information to evaluate the financial health of the company and make investment decisions.
(iii)Creditors: They use accounting information to assess the company's ability to repay loans and make credit decisions.
(iv)Employees: They may use accounting information to negotiate salaries, understand the company's financial stability, and assess job security.
(v)Customers: They may use accounting information to evaluate the financial stability of the company and its ability to fulfill its obligations.
(vi)Regulatory bodies: They use accounting information to ensure compliance with laws and regulations and to assess the company's financial reporting practices.
(vii)Competitors: They may use accounting information to analyze the financial performance and position of the company in the market.
====================
(2ai)
Error of principle. This error occurs because a purchase of a fixed asset was mistakenly recorded as an expense (purchases) rather than as an asset.
(2aii)
Error of omission. Only the personal (debtor's) account was updated, while the returns inwards (sales returns) account was omitted.
(2aiii)
Error of original entry. The error happened because the total was calculated incorrectly and posted at GH¢ 5,000 higher than it should have been.
(2aiv)
Compensating error. Since the same amount (GH¢ 4,300) was understated in both the cash book and the personal account, this error is compensated.
(2av)
Compensating error. The sales account and the discount received account have opposite errors that cancel each other out, leaving the trial balance unaffected.
(2bi)
This error affects the classification between expenses and assets. However, since both accounts are on the debit side, the trial balance totals will still match, even though the expenses and assets are misstated.
(2bii)
The trial balance will not balance due to the missing entry in the returns inwards account, causing a discrepancy of GH¢ 8,100.
(2biii)
The trial balance will not balance, as the error of GH¢ 5,000 overstates the returns inwards account, causing an imbalance.
(2biv)
Since the understatement affects both accounts equally, the trial balance remains balanced, even though the actual figures for discount allowed and personal accounts are incorrect.
(2bv)
This error does not affect the trial balance, as the overstatement in one account and understatement in another compensates for each other, keeping the trial balance totals equal. However, both sales and discount received accounts are misstated.
====================
(3i)
Accruals Concept:
The accruals (or matching) concept states that income and expenses should be recorded in the period to which they relate, not necessarily when cash is received or paid. This principle ensures that revenues and expenses are matched to the same accounting period, providing a more accurate picture of the company's performance. For Jasket Ltd, this means that all revenues earned and expenses incurred by 31st December 2022 are reported in the financial statements, even if cash has not yet changed hands.
(3ii)
Going Concern Concept:
The going concern concept assumes that the business will continue its operations into the foreseeable future and does not plan to liquidate or significantly curtail its activities. This affects asset valuation, as assets are valued based on their ongoing use rather than liquidation value. For Jasket Ltd, if it is assumed to be a going concern, assets are reported at cost or amortized cost, assuming they will continue to generate future economic benefits.
(3iii)
Consistency Concept:
The consistency concept mandates that a company should use the same accounting methods and principles across periods unless there is a valid reason to change them. This allows for better comparability of financial statements over time. For Jasket Ltd, if they previously used straight-line depreciation, they should continue to use it unless a change is justified and disclosed, helping stakeholders make meaningful year-to-year comparisons.
(3iv)
Prudence (or Conservatism) Concept:
Prudence requires that assets and income are not overstated, and liabilities and expenses are not understated. This principle dictates that uncertainty should be handled with caution, ensuring losses are recognized when probable, but gains only when realized. For Jasket Ltd, this means reporting potential bad debts or impairments and making provisions for anticipated losses, ensuring the financial statements are not overly optimistic.
(3v)
Materiality Concept:
Materiality states that financial statements should include all information significant enough to influence the decisions of users. Insignificant details can be omitted or aggregated for simplicity, but anything deemed "material" must be presented separately. Jasket Ltd would apply this concept by including significant items that could affect users’ decisions, while grouping minor ones to maintain clarity in the financial statements.
====================
(4a)
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It represents the wear and tear, deterioration, or obsolescence of an asset over time. Depreciation is an expense on the income statement and helps in matching the cost of an asset with the revenue it generates during each accounting period.
(4b)
(i) Accurate Financial Reporting: Depreciation allows companies to allocate the cost of an asset over its useful life, ensuring accurate financial statements by matching expenses with revenues.
(ii) Asset Replacement: Regular depreciation charges build up a reserve, helping a business prepare financially to replace assets when they become outdated or non-functional.
(iii) Tax Benefits: Depreciation is a non-cash expense that reduces taxable income, providing tax savings and improving cash flow.
(4c)
(i) Cost of the Asset: The original purchase price, including costs to make the asset operational (e.g., shipping, installation).
(ii) Useful Life: The expected period over which the asset will be productive or useful to the company.
(iii) Salvage (Residual) Value: The estimated value of the asset at the end of its useful life, which is subtracted from the asset cost to determine the depreciable amount.
====================
Home
Forum
Search
Calendar
Gallery
Arcade
Members
Login
Register
Post-UTME
NOTICE: You are currently viewing this website as a Guest and are restricted from viewing some vital information. For more permissions on 
March 13, 2015, 02:29:59 pm
