WAEC SSCE - Financial Accounting - 2018 (Essay)

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1. What is depreciation?

Depreciation is the gradual and permanent reduction in the value of a fixed asset due to use (wear and tear), the passage of time, obsolescence, or depletion. It represents the part of the asset's cost that is charged as an expense over its useful life.

2. Factors that determine the depreciation charge

• Cost of the asset - the purchase price plus all costs of bringing it into use.
• Estimated useful (economic) life - how long the asset is expected to serve the business.
• Estimated residual (scrap/salvage) value - the amount expected on disposal at the end of its life.
• Method of depreciation adopted - e.g. straight-line or reducing-balance.
• Legal or usage limits where the asset's life is fixed by law or output.

3. Reasons for providing depreciation

• To ascertain the true profit by matching the cost of the asset against the revenue it helps to earn.
• To show the asset at its true (net book) value in the balance sheet.
• To set aside/retain funds within the business for the eventual replacement of the asset.
• To comply with the matching and prudence concepts.
• To avoid overstating profit and the value of assets.

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(a) Business organisations that need departmental accounts

Businesses that operate two or more departments or sections under one ownership and roof, such as departmental stores, supermarkets and large retail/trading firms that sell several different lines of goods.

(b) Two reasons for preparing departmental accounts

• To ascertain the profit or loss made by each department separately.
• To compare the performance of the departments and reward or assess departmental managers.
• To help management decide whether to expand, retain or close a particular department, and to control departmental costs.

(Any two of the above.)

(c) Basis of apportionment

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Approach. First adjust the cash book for items the firm itself failed to record (charges, direct credits, dishonoured cheques, interest). Then reconcile the corrected cash-book balance to the bank statement using timing differences (unpresented and uncredited cheques) and any bank error.

(a) Adjusted (Updated) Cash Book

(b) Bank Reconciliation Statement as at 31st December 2016

Reasoning on each item. Bank charges (1,000) and the dishonoured Jallo cheque (2,000) reduce the cash book; interest collected (2,500) and Kesse's direct lodgement (3,000) increase it. Unpresented cheques (8,850) mean the bank balance is higher than the cash book, so they are added; the wrong credit of 3,000 also inflates the bank statement, so it is added; uncredited customer cheques (8,450) have not yet reached the bank balance, so they are deducted.

Note. The statement reconciles to D54,400. The bank statement figure quoted in the question (D54,900) differs by D500, which points to a data slip in the question; the method and treatment above are correct.

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(a) Objectives of Financial Accounting

• To keep a complete and systematic record of all business transactions.
• To ascertain the profit or loss of the business for a period.
• To ascertain the financial position (assets, liabilities and capital) at a given date.
• To provide information to users for decision-making.
• To show the stewardship/accountability of management over the resources entrusted to them.
• To provide accounting records that serve as legal evidence.
• To aid planning, control and comparison of performance.

(b) Characteristics of good accounting information

• Relevance - useful for the decision at hand.
• Reliability - accurate and free from material error or bias.
• Comparability - can be compared over time and between firms.
• Understandability - clear to users with reasonable knowledge.
• Timeliness - available in good time for decisions.
• Objectivity, completeness and materiality.

(c) Users of accounting information and their interests

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(a) Six users of accounting information

• Owners / shareholders
• Management
• Creditors / suppliers
• Lenders / banks
• Government / tax authorities
• Employees

(Others acceptable: potential investors, customers, the general public.)

(b) Formulae and uses of the ratios

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(a) What is Goodwill?

Goodwill is the value of a business's good name, reputation, established customer connections and earning capacity over and above the value of its net tangible (identifiable) assets. It is an intangible asset that arises because a going business is worth more than the mere sum of its separable assets.

(b) Conditions under which goodwill is valued in a partnership

• On the admission of a new partner.
• On the retirement or death of a partner.
• On a change in the profit-sharing ratio of existing partners.
• On the dissolution or sale of the partnership business.
• On the amalgamation of the firm with another, or its conversion into a company.

(c) Contents of a partnership agreement (deed)

• Name of the firm and the names and addresses of the partners.
• Nature and place of the business.
• Amount of capital to be contributed by each partner.
• The profit- and loss-sharing ratio.
• Rate of interest on capital and on drawings.
• Salaries, commission or allowances payable to partners.
• Rights, duties and powers of each partner.
• Procedure for admission, retirement, death and dissolution.
• Method of valuing goodwill.
• Keeping and auditing of accounts, and settlement of disputes (arbitration).

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(a) Components of cost in a Manufacturing Account

1. Direct material cost: the cost of raw materials that physically enter and form part of the finished product, and which can be traced directly to it. Examples: timber used to make furniture, cloth used to make garments, flour used to bake bread.
2. Direct labour cost: the wages paid to workers who are directly engaged in converting raw materials into finished goods. Examples: wages of machine operators, carpenters making furniture, tailors sewing garments.
3. Factory overhead: indirect factory costs that cannot be traced directly to a single unit of product but are necessary for production. Examples: factory rent and rates, depreciation of factory machinery, factory power and fuel, salary of the factory supervisor, indirect materials such as lubricants.

(Direct material + direct labour + direct expenses = prime cost; prime cost + factory overhead = factory/production cost.)

(b) Three types of stock in a manufacturing concern

• Raw materials: materials bought and held awaiting use in production.
• Work-in-progress (partly finished goods): goods that have entered the production process but are not yet complete at the period end.
• Finished goods: completed products ready and available for sale.

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(a) Three disadvantages of not keeping proper accounting records

• Profit or loss cannot be accurately determined.
• The true financial position (assets and liabilities) is not known.
• Fraud, theft and errors are difficult to detect and control.
• It becomes hard to obtain loans or credit, since no reliable accounts can be shown, and tax cannot be assessed fairly.

(Any three of the above.)

(b) Characteristics of accounting information

• Relevance: the information must be useful and bear directly on the decision to be made, being capable of influencing that decision.
• Comparability: information must be prepared and presented in a consistent manner so that it can be compared from period to period and between different businesses.
• Consistency: the same accounting methods and policies should be applied from one period to the next, so that results are meaningfully comparable.
• Reliability: the information must be accurate, free from material error and bias, and should faithfully represent the transactions it reports.

(c) Two limitations in using accounting information for decision-making

• It is largely historical - based on past events, which may not reliably guide future decisions.
• It ignores non-monetary/qualitative factors (e.g. staff morale, competition) and is affected by estimates, personal judgement and the effect of inflation, which can distort the figures.

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Approach. Depreciation is straight-line at 10% per annum from the date of purchase, so part-year assets get a proportionate charge. A separate provision account accumulates depreciation, and on disposal the cost and its accumulated depreciation are transferred to a Disposal Account against the sale proceeds.

Depreciation workings (10% per annum)

• Vehicle 1 (N800,000, bought 01/01/13): 80,000 per full year.
• Vehicle 2 (N400,000, bought 01/07/13): 40,000 per year -> 2013 = 20,000 (6 mths); to sale on 30/06/14 = 20,000 (6 mths).
• Vehicle 3 (N600,000, bought 01/04/15): 2015 = 45,000 (9 mths).

(a) Motor Vehicle Account (at cost)

(b) Provision for Depreciation on Motor Vehicle Account

(c) Motor Vehicle Disposal Account

Note. Net book value at sale = 400,000 - 40,000 = 360,000; sold for 240,000, giving a loss on disposal of N120,000. (The proceeds figure in the question, N6 240,000, is read as N240,000.)

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1. Public sector versus Private sector accounting

2. Sources of revenue for a local government

• Statutory allocation/subvention from federal and state governments.
• Property (tenement) rates.
• Market tolls and stall/shop rents.
• Motor/lorry park levies.
• Licences and permits (building, entertainment, etc.).
• Registration fees (marriage, birth and death certificates).
• Court fines and royalties.
• Grants from donor agencies and interest on investments.

3. Items of expenditure of a local government

• Wages and salaries of staff.
• Provision of primary healthcare and medical services.
• Construction and maintenance of roads, drains and street lighting.
• Provision and maintenance of water supply.
• General administration and running costs.
• Maintenance of markets and motor parks; refuse disposal.
• Capital projects (office buildings, vehicles, equipment).
• Grants and donations to communities and charities.