WAEC SSCE - Financial Accounting - 2019 (Essay)

(a) Three reasons a cheque would be dishonoured

1. Insufficient funds in the drawer's account to meet the cheque.
2. The cheque is post-dated or stale (out of date), that is, presented before its date or more than six months after it.
3. A difference or irregularity in signature, or the signature does not match the specimen held by the bank.
4. The words and figures differ, or the cheque has a material alteration that is not countersigned.
5. The account holder has stopped payment, died, or become bankrupt.

(Any three.)

(b) Explanation of terms

(i) Petty cash float: The fixed sum of money advanced to the petty cashier at the beginning of a period to meet small, routine cash payments, and which is restored to the same figure at the start of each new period under the imprest system.

(ii) Contra entries: Entries that appear on both the debit and credit sides of the same cash book, representing transfers between cash and bank of the same business (for example, cash paid into the bank or cash withdrawn from the bank for office use). They are marked with the letter \(C\) in the folio column.

(iii) Imprest system: A method of operating the petty cash book in which the petty cashier is given a fixed float, spends it on small items, and is then reimbursed at the end of the period with exactly the amount spent, so that the opening balance is always the same fixed sum.

(c) Three advantages of keeping petty cash under the imprest system

1. It provides control over small (petty) expenditure, since spending cannot exceed the float.
2. It relieves the chief cashier of recording numerous small payments, allowing division of labour.
3. It makes it easy to detect errors and fraud, because the cash in hand plus vouchers must always equal the float.
4. It reduces the amount of cash exposed to loss or theft at any one time.

(Any three.)

(a) Reasons for including outstanding liabilities in the Balance Sheet

1. To comply with the accruals (matching) concept, so that all expenses relating to the period are charged against the income of that period, whether paid or not.
2. To give a true and fair view of the financial position by showing all amounts the business owes as at the balance sheet date.
3. To ensure the net profit is not overstated, since ignoring outstanding expenses would understate expenses and inflate profit.
4. To disclose the full extent of the organisation's obligations to third parties, which is useful to creditors and other users of the accounts.

(Any relevant reasons.)

(b) Recording an income-generating activity of a bar in a not-for-profit making organisation

Where a club or society runs a subsidiary trading activity such as a bar, a separate Bar Trading Account is prepared to find the profit or loss made by the bar. Its profit is then credited (or its loss debited) to the Income and Expenditure Account. The treatment is as follows:

1. Prepare a Bar Trading Account: credit it with bar sales/takings; debit it with the cost of bar goods sold (opening bar stock + bar purchases - closing bar stock) and any direct bar expenses (for example, barman's wages).
2. The resulting bar profit is transferred to the credit side of the Income and Expenditure Account (a bar loss is transferred to the debit side).
3. The closing bar stock is shown as a current asset, and any amount owing for bar purchases (bar creditors) as a current liability, in the Balance Sheet.

(a) Increase in provision for doubtful debts

This arises when the new required provision is greater than the existing one. Only the increase is charged as an expense. It is debited to the Profit and Loss Account and added to the provision so that, in the Balance Sheet, the full new provision is deducted from debtors to show net debtors.

(b) Decrease in provision for doubtful debts

This arises when the new required provision is smaller than the existing one. The fall in the provision is treated as a gain. It is credited to the Profit and Loss Account (added to gross profit), and in the Balance Sheet the reduced (new) provision is deducted from debtors.

(c) Provision for discount on debtors

This is an estimate of the cash discount the business expects to allow debtors who pay promptly. The new provision (or the increase) is debited to the Profit and Loss Account. In the Balance Sheet it is deducted from debtors, after first deducting the provision for doubtful debts (so it is calculated on good debtors only).

(d) Provision for discount on creditors

This is an estimate of the cash discount the business expects to receive from creditors for prompt payment. It is treated as an anticipated income: the provision (or increase) is credited to the Profit and Loss Account, and in the Balance Sheet it is deducted from creditors under current liabilities.

(e) Provision for depreciation

This is the accumulated amount set aside to spread the cost of a fixed asset over its useful life. Each year's depreciation charge is debited to the Profit and Loss Account. The accumulated provision for depreciation is deducted from the cost of the fixed asset in the Balance Sheet to show the net book value.

Treatment. Only items that the trader had not yet recorded, or had recorded wrongly in the cash book, are adjusted here. Items (viii) unpresented cheque, (ix) uncredited lodgement, and (x) the bank's own error are timing/bank errors that belong in the reconciliation statement, NOT the cash book. The N400 credit transfer (v) and the N40 receipt (vii) are both direct credits to be added; item (iii) understated a lodgement by N40 (add back); item (vi) overstated a payment by N360 (add back); item (xi) is a transfer received into the bank not yet recorded (add).

(a) Adjusted (Adjusted) Cash Book as at 30 September 2017

Adjusted cash book balance \(= 7{,}600 + 40 + 400 + 360 + 40 + 6{,}000 - (160 + 40 + 200) = N14{,}040\) (debit balance).

(a) What are closing entries?

Closing entries are the journal entries made at the end of an accounting period to transfer the balances on the nominal (revenue and expense) accounts to the Trading and Profit and Loss Account. They close off the income and expense accounts so that they start the next period with nil balances, and they bring together the figures needed to determine gross profit and net profit.

(b) Distinction between a branch and a department

(c) Four reasons for the preparation of branch accounts

1. To determine the profit or loss made by each branch separately.
2. To control the branch and check the honesty and efficiency of branch staff (guard against fraud).
3. To ascertain the value of stock, cash and other assets held at each branch.
4. To help the head office in decision-making, such as whether to expand, retain or close a branch.
5. To measure the performance of branch managers for reward or control purposes.

(Any four.)

Limitations of ratio analysis

1. Based on historical (past) data: Ratios are computed from past financial statements and may not reflect the current or future position of the business.
2. Ignores price-level changes (inflation): Because figures are stated at historical cost, comparison over time can be misleading when the value of money is changing.
3. Affected by different accounting policies: Firms using different methods of depreciation, stock valuation, etc., cannot be fairly compared, and even one firm may change its policies.
4. Ignores qualitative and non-monetary factors: Ratios do not capture matters such as management quality, staff morale, government policy or market conditions.
5. Only as reliable as the accounts on which they are based: If the financial statements contain errors, window-dressing or manipulation, the ratios will also be misleading.
6. No single standard for interpretation: There is no universally accepted ideal figure for a ratio, so interpretation is often subjective and depends on the analyst.
7. A ratio in isolation has little meaning: Ratios must be compared with a standard, a budget, past years or other firms to be useful; one figure alone tells little.
8. Difficulty of inter-firm comparison: Differences in size, nature of business and accounting periods make comparison between firms unreliable.

(Any relevant limitations, well explained.)

(a) Sources of revenue to a federal government

• Taxes (company income tax, personal income tax, value added tax, capital gains tax)
• Customs and excise duties (import and export duties)
• Royalties and proceeds from petroleum, gas and solid minerals
• Licences, fees, fines and penalties
• Earnings and dividends from government-owned corporations and investments
• Loans and grants (internal and external borrowing, aid)
• Rents and rates on government property

(Any relevant sources.)

(b) Advantages of the cash basis in public sector accounting

1. It is simple and easy to operate and understand, needing little accounting expertise.
2. It is objective and less subject to manipulation, since it records only actual cash received and paid.
3. It makes it easy to compare actual cash receipts and payments with the approved budget.
4. It is cheaper to maintain because it avoids complex accruals, provisions and valuations.
5. It readily shows the cash position of the government at any time.

(c) Five reasons for public sector accounting

1. To demonstrate accountability and stewardship of public funds by those entrusted with them.
2. To ensure that public money is spent strictly in line with the approved budget and appropriation.
3. To provide information for planning, control and decision-making by government.
4. To prevent and detect fraud, waste and misappropriation of public funds.
5. To provide information to users such as the legislature, the public and international agencies, and to aid audit.

Workings. March 4 sale to Papuk = \(80 \times N255 = N20{,}400\); less 5% trade discount \(= N1{,}020\); net invoice \(= N19{,}380\). Trade discount is deducted on the invoice and never entered in the ledger. March 15 cheque from Papuk = \(N19{,}380 - 10\% \text{ cash discount} = N19{,}380 - N1{,}938 = N17{,}442\).

(a) Sales Journal (Sales Day Book)

(b) Customers' Accounts in the Sales Ledger

Papuk Account

Abass Account

(c) Sales Ledger Control Account

The closing balance of N270 (owed by Abass) agrees with the total of the individual debtors, proving the control account.

Workings. Interest on capital 8%: Ubochi \(= 8\% \times 300{,}000 = 24{,}000\); Hassanah \(= 8\% \times 250{,}000 = 20{,}000\). Hassanah's salary \(= 10{,}000 \times 12 = 120{,}000\). Interest on drawings 5%: Ubochi \(= 5\% \times 20{,}000 = 1{,}000\); Hassanah \(= 5\% \times 15{,}000 = 750\).

(a) Profit and Loss Appropriation Account for the year ended 31 December 2015

(b) Partners' Current Accounts

Closing current account balances (credit): Ubochi D85,650 and Hassanah D179,350.

(a) Three effects of drawings on the business of a sole proprietor

1. Drawings reduce the owner's capital, since they are deducted from capital in the Balance Sheet.
2. Drawings reduce the assets of the business (cash or goods taken out fall by the amount withdrawn).
3. Drawings reduce the working capital and cash available for running the business, which may affect its liquidity and ability to expand.

(Note: drawings do not affect the calculation of net profit; they are an appropriation of capital, not an expense.)

(b) Treatment in the Balance Sheet

(i) Accrued expenses: These are expenses incurred during the period but not yet paid at the year end (for example, rent owing). In the Balance Sheet they are shown as a current liability, since the business owes the amount. (The amount is also added to the relevant expense in the Profit and Loss Account.)

(ii) Prepaid expenses: These are expenses paid in advance that relate to the following period (for example, insurance paid ahead). In the Balance Sheet they are shown as a current asset, because the benefit is still owed to the business. (The amount is deducted from the relevant expense in the Profit and Loss Account.)

(iii) Accrued income: This is income earned during the period but not yet received at the year end (for example, rent receivable due but not yet collected). In the Balance Sheet it is shown as a current asset, since it is owed to the business. (The amount is added to the relevant income in the Profit and Loss Account.)

(a) What is a Ledger?

A ledger is the principal book of accounts in which all transactions, after first being recorded in the books of original entry, are finally classified and posted into their respective accounts. It contains the individual accounts (personal, real and nominal) and from it the balances are extracted to prepare the trial balance and final accounts.

(b) Uses of an invoice

To the seller:

• It is the source document for recording the credit sale in the sales journal.
• It serves as evidence that goods have been sold and dispatched to the buyer.
• It states the amount owed and forms the basis for demanding payment from the buyer.

To the buyer:

• It is the source document for recording the credit purchase in the purchases journal.
• It shows the details of goods received, quantities, prices and any trade discount, for checking against the order and goods received.
• It serves as evidence of the debt owed to the supplier and supports payment.

(c) Advantages of dividing the ledger into different classes

1. It allows the division of labour, so that different clerks can work on different ledgers at the same time.
2. It makes the location of accounts and detection of errors easier and faster.
3. It enables control accounts to be prepared for each subsidiary ledger, providing an internal check.
4. It reduces the size of any one ledger, making the books more manageable and orderly.
5. It improves secrecy and internal control, since sensitive accounts (for example, the private ledger) can be kept separate.