WAEC SSCE - Financial Accounting - 2017

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The Control Account is used to determine credit purchase figures in incomplete records. A Control Account is a summary account that records the total transactions of a particular type, such as credit purchases, in a single account. In incomplete records, where there is no complete set of accounts, a Control Account can be used to keep track of the total amount of credit purchases made by an organization. The credit purchase figures can be calculated by analyzing the changes in the Control Account over a specific period. For example, if the balance of the Control Account has increased by a certain amount during a particular period, it could indicate that the organization has made credit purchases during that period. Therefore, the Control Account is a useful tool in determining credit purchase figures in incomplete records, as it provides a summary of all credit purchase transactions in a single account, making it easier to track and analyze these transactions.

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The accounting entries when goods are sold on credit at the branch are a debit to the Branch Debtors Account and a credit to the Head Office Current Account. When goods are sold on credit at a branch, the branch becomes a debtor to the Head Office, and the amount owed by the branch is recorded in the Branch Debtors Account. The credit sale amount is not directly recorded in any account since it is not a cash transaction. Instead, it is recorded in the Sales Accounts at the Head Office level as a part of the overall sales revenue. The Head Office Current Account is credited to reflect the increase in the amount owed to the Head Office by the branch. The Head Office Current Account records all transactions between the Head Office and its branches. The credit entry to the Head Office Current Account represents the increase in the amount owed to the Head Office by the branch and serves as a record of the transaction for the Head Office. In summary, the accounting entries when goods are sold on credit at the branch are a debit to the Branch Debtors Account to record the amount owed by the branch and a credit to the Head Office Current Account to reflect the increase in the amount owed to the Head Office by the branch.

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The accounting concept that provides that accounting statements should not be influenced by personal opinion is objectivity. Objectivity in accounting means that financial statements should be based on verifiable and objective evidence, rather than personal opinions or biases. This requires accountants to use reliable and objective data in the preparation of financial statements, and to avoid subjective interpretations or estimates. For example, if a company purchases a new building, the cost of the building should be recorded at the actual purchase price, rather than at a subjective estimate of its value. This ensures that the financial statements are accurate and reliable, and can be used by stakeholders to make informed decisions. In summary, the principle of objectivity in accounting requires that financial statements should be based on objective evidence, not influenced by personal opinions, and provide a true and fair representation of the financial position and performance of an organization.

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A reserve is an amount set aside from a company's profits for a specific purpose or to prepare for an unknown liability. Reserves are usually created by a company's management to ensure that the company has adequate funds to meet its future obligations or to fund future projects. They can also be created to distribute profits to shareholders or to strengthen the company's financial position. For example, a company may create a reserve for a known future obligation, such as a legal settlement or pension payment, by setting aside a portion of its profits each year to fund the obligation when it becomes due. Alternatively, a company may create a reserve for an unknown liability, such as a potential lawsuit or environmental cleanup, to ensure that it has sufficient funds available if the liability materializes. Reserves can also be created for other purposes, such as to fund future expansion or investment projects, to distribute profits to shareholders, or to strengthen the company's financial position by building up its cash reserves. In summary, a reserve is an amount set aside from a company's profits for a specific purpose or to prepare for an unknown liability, and is usually created by the company's management to ensure that the company has adequate funds to meet its future obligations or to fund future projects.

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In a manufacturing enterprise, depreciation of plant is treated in the manufacturing account. The manufacturing account is a part of the company's financial statements that shows the cost of goods produced during a particular period. Depreciation is the process of allocating the cost of a plant or equipment over its useful life. In a manufacturing enterprise, the plant and equipment are used in the production process, and their depreciation is considered as part of the cost of goods produced. Therefore, the cost of depreciation is included in the manufacturing account, which is used to calculate the cost of goods produced. The manufacturing account includes all the direct costs associated with producing goods, such as raw materials, direct labor, and factory overheads. By including the cost of depreciation in the manufacturing account, the company is able to accurately reflect the true cost of producing the goods. In summary, depreciation of plant in a manufacturing enterprise is treated in the manufacturing account. This is because depreciation is considered as part of the cost of goods produced, which is reflected in the manufacturing account along with other direct costs associated with producing the goods.

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Accounts payable is classified as a current liability. A liability is a debt or obligation that a company owes to another party. Current liabilities are debts that are due to be paid within one year, while long-term liabilities are debts that are due to be paid over a longer period of time, usually more than one year. Accounts payable specifically refers to money that a company owes to its suppliers for goods or services that have been received but not yet paid for. Since these debts are typically due within a short period of time, usually 30 to 60 days, they are classified as current liabilities.

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A statement of affairs shows the financial position of a business at a particular point in time. It lists the assets and liabilities of the business, which helps in determining the net worth of the business. It is different from other financial statements like receipt and payments, revenue and expenditure, and profit or loss, as it only shows the financial position and does not provide any information on the cash flow, income or expenses of the business. A statement of affairs is useful for assessing the financial health of the business and for making informed decisions about its future.

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A document sent by a bank to its current account customers detailing their transactions over a given period is called a "bank statement". A bank statement is a summary of all the transactions made by a customer's account during a specific period, usually a month. It includes information on deposits, withdrawals, cheques cleared, direct debits, standing orders, bank charges, and any interest earned or charged. The bank statement provides a detailed record of all the financial activity in the account, allowing customers to monitor their account balance and ensure that their records match those of the bank. Bank statements are typically sent out monthly to current account customers, although some banks may offer more frequent updates, such as weekly or daily statements. Customers can also access their bank statements online or through a mobile banking app, allowing them to view their transactions in real-time. In summary, a bank statement is a crucial document that helps customers track their financial activity, ensure that their account balances are accurate, and identify any discrepancies or unauthorized transactions.

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The option that best describes a trial balance is: "It is a list of accounting balances on the books." A trial balance is a list of all the accounts in a company's general ledger with their debit or credit balance. It is prepared at the end of an accounting period to ensure that the total debits equal the total credits, thereby ensuring the accuracy of the bookkeeping entries. By listing all the accounts and their balances, a trial balance provides a quick overview of the financial status of the business. It helps to identify any errors in the bookkeeping entries before the financial statements are prepared. Therefore, a trial balance is an essential tool in the accounting process, which ensures the accuracy of financial records and provides a basis for preparing financial statements.

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The branch that keeps its own records prepares the records of transactions with the head office in the "Branch Current Account". This account is used to track all the transactions that occur between the branch and the head office, including the money that the branch receives from the head office and the money that the branch sends to the head office. The Branch Current Account is an important tool for managing the finances of the branch, as it allows the branch manager to keep track of the money that is coming in and going out. By maintaining this account, the branch can ensure that all transactions with the head office are properly recorded and accounted for, which helps to prevent any financial discrepancies or errors.

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The cost of transporting purchased goods to the warehouse is charged to the Trading Account. The Trading Account is a financial statement that shows the gross profit or gross loss of a business for a particular period. It includes all direct expenses related to the purchase and sale of goods, such as the cost of goods sold, purchases, and freight or carriage inwards. Since the cost of transporting purchased goods to the warehouse is a direct expense related to the purchase of goods, it is included in the Trading Account. This cost is deducted from the value of purchases to arrive at the cost of goods sold, which is then used to calculate the gross profit or loss. Therefore, the cost of transporting purchased goods to the warehouse is not charged to the profit and loss account, appropriation account, or income surplus account. It is specifically allocated to the Trading Account, which is a crucial part of a company's financial statements.

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Customers use the financial position of a company to assess the financial health of the business. This means that they look at the company's financial statements, such as the balance sheet, income statement, and cash flow statement, to determine how well the company is performing financially. By looking at the financial position of a company, customers can determine the company's ability to meet its financial obligations, such as paying its debts and continuing to operate in the future. They can also evaluate the company's profitability, growth potential, and overall financial stability. For example, if a company has a strong financial position with high profits, low debt, and strong cash flow, customers may have more confidence in the company's ability to continue to provide high-quality products or services in the future. On the other hand, if a company has a weak financial position with low profits, high debt, and negative cash flow, customers may be more hesitant to do business with the company or may require more assurance before making a purchase. In summary, customers use the financial position of a company to assess the financial health of the business and make informed decisions about their interactions with the company.

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The percentage of gross profit to sales is 38.17%. Gross profit is calculated as sales revenue minus the cost of goods sold. Using the information given, we can calculate the gross profit as follows: Gross Profit = Sales - Cost of Goods Sold Gross Profit = 18,600 - 11,500 Gross Profit = 7,100 The percentage of gross profit to sales can then be calculated using the following formula: Gross Profit Percentage = (Gross Profit / Sales) x 100% Gross Profit Percentage = (7,100 / 18,600) x 100% Gross Profit Percentage = 38.17% Therefore, the percentage of gross profit to sales is 38.17%. This means that for every $1 of sales revenue, the company makes a gross profit of $0.38.

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The purpose of keeping a Sales and Purchases Ledger Control Account is to verify the total debtors and total creditors balances of a business. A Sales Ledger is a record of all sales made to customers, including the amount owed, payment terms, and payment history. A Purchases Ledger, on the other hand, records all purchases made by a business, including the amount owed, payment terms, and payment history. The Sales and Purchases Ledger Control Accounts summarize the information from these ledgers and provide an overview of the total amount owed by customers (debtors) and the total amount owed to suppliers (creditors). By keeping a Sales and Purchases Ledger Control Account, a business can compare the total debtors and total creditors balances to ensure that they are equal. This helps to identify any errors or discrepancies in the accounting records, which can be corrected before they become a problem. It also helps to ensure that the business has enough cash flow to pay its bills on time and meet its financial obligations. Therefore, the Sales and Purchases Ledger Control Accounts are essential tools for monitoring the financial health of a business and ensuring that it remains profitable and sustainable in the long run.

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The capital expenditure for the local government is D 473,000. Capital expenditure refers to the money spent on acquiring, improving, or maintaining fixed assets, such as land, buildings, equipment, and infrastructure, that are expected to provide economic benefits to the local government for more than one year. From the information given, the items that qualify as capital expenditure are: - Construction of market stalls - Sinking of boreholes - Building of classrooms - Purchase of equipment Therefore, the total capital expenditure for Nzemaman Local Government is: 120,000 (Construction of market stalls) + 0 (Sinking of boreholes - assumed to be financed by government grants or other sources) + 0 (Building of classrooms - assumed to be financed by government grants or other sources) + Purchase of equipment (D 353,000) = D 473,000 The other items of expenditure, such as staff salaries, purchase of stationery, maintenance of vehicles, are revenue expenditures, which are expenses incurred in the normal course of business operations and are charged to the profit and loss account for the year. Hence, the answer is D 473,000.

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The item that will appear in the Total Creditors Account is credit purchases. Total creditors are the total amount that a business owes to its suppliers for goods or services received on credit. Credit purchases are the purchases made by a business on credit from its suppliers. When a business makes a credit purchase, it increases its accounts payable, which is a liability account. The total of all credit purchases made by a business during a given period will be reflected in the Total Creditors Account. Discount allowed and discount received are not included in the Total Creditors Account since they are both related to discounts and are deducted from the total payable amount. Cash purchases are not included in the Total Creditors Account since they are purchases made with cash, not credit.

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Share premium is classified as a type of capital reserve in the balance sheet. Share premium is the excess amount that a company receives from issuing shares to investors over and above the nominal or face value of the shares. This additional amount is considered to be a part of the company's equity capital, but it is not considered to be a part of the company's profits. Therefore, it is treated as a capital reserve. Capital reserves are reserves that are created from non-trading activities of a company. They are typically created when a company generates profits that are not distributable as dividends to shareholders. These reserves can be used for a variety of purposes, such as to issue bonus shares, to write off capital expenses, or to pay off debts. Therefore, share premium is classified as a capital reserve in the balance sheet because it represents an amount that is in excess of the nominal or face value of the shares and is considered to be a part of the company's equity capital, but it is not considered to be a part of the company's profits.

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To calculate the rate of stock turnover, we need to use the following formula: Stock Turnover Ratio = Cost of Goods Sold / Average Stock We are given the following information: - Opening stock = 2,300 - Purchases = 11,874 - Sales = 18,600 - Closing stock = 3,600 - Cost of goods sold = 11,500 To calculate the average stock, we can use the following formula: Average Stock = (Opening Stock + Closing Stock) / 2 Plugging in the values, we get: Average Stock = (2,300 + 3,600) / 2 Average Stock = 2,950 Now we can calculate the stock turnover ratio: Stock Turnover Ratio = Cost of Goods Sold / Average Stock Stock Turnover Ratio = 11,500 / 2,950 Stock Turnover Ratio = 3.898 This means that the stock was turned over 3.898 times during the given period. However, it is usually expressed as a whole number, so we can round it to the nearest whole number. Therefore, the answer is 4 times. In simpler terms, this means that the company sold and replaced its entire stock 4 times during the given period.

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When the discount allowed on goods invoiced at N100,000 was calculated at the rate of 20% instead of 10%, it means that the customer was given a larger discount than intended. This error needs to be corrected. To correct this error, the discount allowed should be reduced by the difference between the amount of the incorrect discount and the correct discount. In this case, the incorrect discount was 20%, and the correct discount should have been 10%, so the difference is 10%. To calculate the correct discount, you can multiply the invoiced amount by the correct discount rate: N100,000 x 10% = N10,000 So, to correct the error, you need to debit the discount allowed account with N10,000, which will reduce the amount of the discount to the correct amount. This is because the discount allowed account is a contra-revenue account, which means it is used to reduce revenue. By debiting the discount allowed account, you are reducing the amount of the discount, which will increase the revenue. Since the discount was given to the customer, it means that the customer's account was credited with the incorrect amount of N20,000. Therefore, to reverse this transaction, you need to credit the customer's account with N10,000, which will reduce the credit balance on the account by the correct amount. Therefore, the correct answer is: "customer's account with N10,000, crediting discount allowed with N10,000".

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In departmental accounting, when goods are sent from one department to another for sale, the transaction is treated as an Inter-departmental transfer. An inter-departmental transfer refers to the movement of goods or services from one department of a business to another department for further processing or sale. In departmental accounting, inter-departmental transfers are treated as internal transactions that do not involve any external parties. When goods are sent from one department to another for sale, the department that receives the goods will record them as inventory or stock-in-trade, while the department that sends the goods will record them as a cost of goods sold or cost of production. This transaction does not affect the overall profit or loss of the business, as it merely represents a transfer of goods within the organization. Therefore, the correct treatment of this transaction is as an inter-departmental transfer. It is not considered an inter-departmental sale, as the goods are not sold to an external party, nor is it an intra-departmental sale or purchase, as it involves two different departments of the same business.

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Working capital is the excess of current assets over current liabilities. In other words, it is the amount of money a company has available to cover its short-term obligations, such as paying bills or employees. To calculate working capital, you subtract the company's current liabilities from its current assets. Current assets are the resources a company has that are expected to be converted into cash within a year, like cash, accounts receivable, and inventory. Current liabilities are the debts and obligations that are due within a year, like accounts payable and short-term loans. If current assets are greater than current liabilities, the company has positive working capital and is in good financial health. If current liabilities are greater than current assets, the company has negative working capital and may struggle to meet its obligations.

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The balance sheet equation shows assets and sources of financing them. A balance sheet is a financial statement that reports a company's assets, liabilities, and owners' equity at a specific point in time. Assets are items of value that a company owns and can be used to generate revenue. Liabilities are obligations that a company owes to others. Owner's equity represents the residual interest in the assets of the company after deducting its liabilities. The balance sheet equation states that assets equal the sum of liabilities and owners' equity, which means that everything the company owns (assets) is financed either through debt (liabilities) or through investment by the owners (owners' equity). This equation is usually represented as: Assets = Liabilities + Owners' Equity.

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The claim on the assets of a business by outsiders is called liabilities. Liabilities are obligations or debts that a business owes to others. This can include loans from banks, amounts owed to suppliers for goods or services, and taxes owed to the government. Liabilities represent the amount of money that a business owes to others and are a claim on the assets of the business. In other words, if a business were to liquidate its assets, the liabilities would need to be paid off before any remaining assets could be distributed to the owners. It's important for a business to keep track of its liabilities so that it can manage its financial obligations and maintain its solvency.

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The prudence concept demands that care is exercised in recognition of profit and that losses should be anticipated. This principle requires a conservative approach in accounting to ensure that financial statements are not overstated, and potential losses are recognized early. Under this concept, a company should not recognize revenue until it is earned, and expenses should be recognized as soon as possible. This helps to ensure that financial statements provide a more accurate representation of a company's financial position. In summary, the prudence concept requires that a company should exercise caution when recognizing profits and should anticipate potential losses, ensuring that financial statements are prepared on a conservative basis.

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The straight-line method is a commonly used depreciation method that assumes that the asset loses the same amount of value each year over its useful life. To calculate the annual amount of depreciation using the straight-line method, we need to know the initial cost of the asset, its expected salvage value (the amount it is expected to be sold for at the end of its useful life), and its useful life. In this case, the initial cost of the equipment is N112,000, and its expected salvage value is N16,000. The useful life of the equipment is 6 years. To calculate the annual amount of depreciation, we subtract the salvage value from the initial cost and then divide by the useful life: Annual depreciation = (Initial cost - Salvage value) / Useful life Annual depreciation = (N112,000 - N16,000) / 6 Annual depreciation = N96,000 / 6 Annual depreciation = N16,000 Therefore, the correct answer is N16,000.

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The amount set aside to meet expenses whose value is not certain is called a provision. A provision is an estimated amount that an organization sets aside in anticipation of future expenses or losses. It is used to account for potential expenses that have not yet been incurred but are likely to occur in the future. These expenses are uncertain in terms of their timing or amount, but they are still important to account for in the financial statements. For example, a company may set up a provision for bad debts, which is an estimated amount of money that the company expects to lose from customers who are unlikely to pay their debts. This provision is based on historical data and estimates of the likelihood of default by the company's customers. Therefore, a provision is an essential accounting tool that helps an organization to prepare for future expenses and losses that are not certain. It helps to ensure that the financial statements provide an accurate picture of the organization's financial position and performance.

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(a) Explanation of terms

1. Trade discount: a reduction granted off the list (catalogue) price of goods, usually for buying in bulk or for being a fellow trader. It is deducted before the invoice total is arrived at, so only the net amount is recorded; trade discount never appears as a separate entry in the books.
2. Cash discount: an allowance given to a debtor for settling an account promptly, within a stated credit period. It is recorded in the books - as discount allowed (an expense) by the seller and discount received (an income) by the buyer.
3. Bad debts: debts owed by customers that have become irrecoverable and are written off as a loss (an expense) in the profit and loss account.
4. Provision for doubtful debts: an estimated amount set aside out of profit, on the prudence principle, to cover debts that may prove irrecoverable in the future. It is a charge against profit and reduces debtors in the balance sheet.
5. Bad debts recovered: amounts previously written off as bad but later paid by the debtor; they are treated as an income/gain in the profit and loss account.

(b) Errors that do not affect the agreement of the trial balance

• Error of omission - a transaction completely left out of the books.
• Error of commission - correct amount posted to the wrong account of the same class (e.g. wrong debtor).
• Error of principle - posting to a wrong class of account (e.g. an asset treated as an expense).
• Error of original entry / error of amount - a wrong figure entered from the source document into both accounts.
• Complete reversal of entries - the account to be debited is credited and vice versa.
• Compensating errors - two or more errors that cancel each other out.
• Error of duplication - a transaction recorded twice.

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(a) Terms used in the accounts of not-for-profit making organisations

• Accumulated fund: the capital of the organisation - the excess of its assets over its liabilities.
• Receipts and Payments Account: a summary of all cash and bank receipts and payments for the period, similar to a cash book, with opening and closing balances.
• Income and Expenditure Account: the equivalent of a profit and loss account; it records incomes and expenses on the accruals basis to show a surplus or deficit.
• Subscriptions: the periodic dues paid by members; the main source of income.
• Entrance (admission) fees: fees paid by new members on joining.
• Life membership: a lump sum paid for membership that lasts a member's lifetime.
• Surplus/Deficit: the excess of income over expenditure (surplus) or of expenditure over income (deficit).
• Honorarium: a token payment made to an officer for voluntary services rendered.

(b) Distinction between shares and debentures

• A share is a unit of the ownership capital of a company; a shareholder is a part-owner/member. A debenture is a loan to the company; a debenture holder is a creditor.
• Shares earn a dividend, which depends on profits and is an appropriation of profit. Debentures earn a fixed rate of interest, which is a charge/expense payable whether or not profit is made.
• Shareholders have voting rights; debenture holders do not.
• Debentures are usually secured and are repaid before shareholders on winding up; ordinary shareholders are paid last.

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(a) What is a source document?

A source document is the original written record or evidence of a business transaction, from which entries are first made in the books of account. It provides proof that a transaction took place and shows its date, parties and amount.

(b) Six types of source documents

• Invoice
• Receipt
• Credit note
• Debit note
• Cheque (and its counterfoil)
• Cash memo / payment voucher

(Others acceptable: bank paying-in slip, purchase order, statement of account.)

(c) Three uses of subsidiary books

• They relieve the ledger of excessive detail by recording similar transactions together, keeping the ledger neat.
• They group transactions of the same type (e.g. all credit sales, all credit purchases), making reference and posting to the ledger easier and faster.
• They allow the division of book-keeping work among several clerks, which speeds up work and helps reduce and locate errors.

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(a) Suspense account

A suspense account is a temporary account into which an amount is placed either when the source or correct account of a transaction is unknown (pending investigation), or when the totals of a trial balance fail to agree, the difference being held there pending the location and correction of the errors. Once the errors are found and corrected, the suspense account is cleared and closes to nil.

(b)(i) Provisions and Reserves

(b)(ii) Expenses and Revenue

(b)(iii) Capital reserves and Revenue reserves

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(a) What is a Bank Reconciliation Statement?

A bank reconciliation statement is a statement prepared to explain and reconcile the difference between the balance shown by the cash book (bank column) and the balance shown by the bank statement (pass book) on a particular date.

(b) Three reasons for preparing a bank reconciliation statement

• To detect errors and omissions made in the cash book or by the bank.
• To identify the causes of the difference, such as unpresented and uncredited cheques and bank charges.
• To reveal dishonoured cheques and possible fraud, and to bring the cash book up to date so the true bank balance is known.

(c) Explanation of terms

• Unpresented cheques: cheques drawn and issued by the firm and already entered (credited) in the cash book, but not yet presented to or paid by the bank.
• Standing order: a written instruction by a customer to the bank to make fixed, regular payments on the customer's behalf on stated dates (e.g. rent, insurance).
• Credit transfer: money paid directly into the firm's bank account by a third party (e.g. a debtor) without passing through the firm's cash book until discovered.

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(a) Terms used in not-for-profit making organisations

1. Accumulated fund: the capital of the organisation - the excess of its total assets over its total liabilities.
2. Subscription in arrears: subscriptions that are due and have been earned for the period but have not yet been received from members; treated as a current asset (income owing).
3. Receipts and Payments Account: a summarised cash book showing all cash and bank receipts and payments during the period, with opening and closing balances; it records both capital and revenue items on a cash basis.
4. Income and Expenditure Account: the equivalent of the profit and loss account; it records revenue incomes and expenses on the accruals basis to determine the surplus or deficit for the period.
5. Entrance fees: fees paid by new members on admission to the organisation.

(b) Distinction between shares and debentures

• A share is a unit of the ownership capital of a company; a shareholder is a member/owner. A debenture is a loan to the company; a debenture holder is a creditor.
• Shares earn a dividend that depends on profit (an appropriation of profit); debentures earn a fixed interest that is a charge payable whether or not profit is made.
• Shareholders have voting rights; debenture holders do not.
• Debentures are usually secured and repaid before shareholders on winding up; ordinary shareholders rank last.

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(a) Four main groups of accounting ratios

• Profitability ratios (e.g. gross profit percentage, net profit margin, return on capital employed).
• Liquidity ratios (e.g. current ratio, acid-test/quick ratio).
• Efficiency / activity ratios (e.g. rate of stock turnover, debtors and creditors periods).
• Gearing / investment (long-term solvency) ratios (e.g. interest cover, gearing ratio).

(b) Ratio relating to each statement

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(a) and (b) Accounting ratios explained

1. Accounting ratios: mathematical relationships between two related figures in the financial statements, used to measure and interpret a firm's profitability, liquidity, efficiency and financial position.
2. Current ratio \( = \dfrac{\text{Current assets}}{\text{Current liabilities}} \). It measures short-term liquidity - the ability to meet current obligations as they fall due (a level around 2:1 is often regarded as satisfactory).
3. Rate of stock turnover \( = \dfrac{\text{Cost of goods sold}}{\text{Average stock}} \). It shows the number of times, on average, stock is sold and replaced during a period; a higher rate suggests brisk trading.
4. Return on capital employed (ROCE) \( = \dfrac{\text{Net profit}}{\text{Capital employed}} \times 100 \). It measures how efficiently the capital invested is used to generate profit.
5. Average collection period \( = \dfrac{\text{Debtors}}{\text{Net credit sales}} \times 365 \). It shows the average number of days debtors take to settle their accounts.
6. Gross profit percentage \( = \dfrac{\text{Gross profit}}{\text{Net sales}} \times 100 \). It measures the profitability of trading before deducting operating expenses.

(c) Importance of accounting ratios

• They measure profitability, liquidity and operating efficiency.
• They allow comparison of performance over time and between businesses.
• They assist management in planning, control and decision-making.
• They help investors and lenders judge the safety of their money.
• They reveal the solvency and financial strength of the business.
• They highlight trends, strengths and weaknesses for corrective action.

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