Assignment 1 University Examinations 2010/2011 Institute of open learning Dated 31st January, 2011 Question TWO a) Explain the

term Historical cost accounting. What are its limitations? (6mks) b) The follo ing account balances &ec. '(() Sales of mer !andise $ommission re eived &are!ouse expenses &ages and salaries 'elep!one Ele tri ity )dministrative expenses Depre iation Expenses a+ ,uildings .+ /otor vans 0urniture ere foun! in the books of " ako #t!. On $% st

",##0,000 3%,000 #%,000 %0,000 21,000 (%,000 (2*,000 -%,000 *0,000 23,000

*!!itional information 1+ ) rued 1ages amounted to 2s!s3 -000 2+ 4o depre iation 1as re orded for motor van .oug!t on 1st July for 2s!s3 30,0003 Depre iation of motor van is 1%5 p3a3 3+ )dministrative expenses in luded t!e ost of an ele tri type 1riter .oug!t on 30 t! De for 2s!s3 %,000/6 #+ Ele tri ity .ill o1ing amounted to 2s!s3 -0,000 +e,uire! /a7e t!e ne essary ad8ustments to t!e a ounts3 S!o1 t!eir treatment 9-m7s+ + :repare ad8usting entries for t!e situation des ri.ed .elo1 9"m7s+ i+ During t!e year a ma !ine sold for 2s!s3 1#,0003 '!e sale 1as redited to t!e sales a ount3 '!e .oo7 value of t!e ma !ine 1as 2s!s3 1",000 ii+ ;n De 3 2%t! a fire destroyed goods 1ort! 2s!s3 %0,0003 '!e insuran e ompany !as admitted t!e laim in full3 iii+ During t!e year an old lorry 1as traded in for a ne1 one3 '!e .oo7 value of t!e old lorry 1as 2s!s3 100,000 and t!e ar dealer gave 2s!s3 -#,000 trade<in allo1an e3 '!e ost of t!e ne1 lorry is 2s!s3 3%0,000 94o entries !ad .een made+ Depre iation on t!e lorry s!ould .e provided as 1%5 per annum on ost from t!e year of pur !ase3 iv+ ) provision for .ad de.t of -5 s!ould .e made on t!e de.tor=s .alan e of 2s!s3 1%%,000 v+ Unpaid 1ages at t!e end of t!e finan ial year amounted to 2s!s3 1%,"00

Question Three a+ ) 4airo.i sport limited !as an aut!ori>ed s!are apital 2S!s3 1,%00,000 made up ordinary s!ares of 2S!s3 20 ea !3 ;n 31st De 3 200" t!e follo1ing .alan es 1ere extra ted from t!e ompany .oo7s of a ounts3 2S!s3 20 ordinary s!ares 0ully paid up ?eneral reserves :lant repla ement reserves @ease !old land and .uildings /otor vans at ost :lant and ma !inery $reditors $as! at ,an7 Sales :ur !ases Sto 7 91313200"+ Selling expenses ;t!er expenses )dministrative expenses :rofit and loss a ount 91313200"+ 'rade de.tors 'axation a ount Interim dividend 30t! June 200" :rovision for depre iation to 1313200" @ease!old land and .uilding :lant and ma !inery /otor ve!i les :rovision for dou.tful and .ad de.ts $as! in !and

1,000,000 "00,000 -00,000 1,310,000 213,000 1,0"",000 -#",000 1,("#,200 3,-10,-00 3,-%0,-00 212,"00 32",%-0 3"*,120 ##(,"#0 %#",*20 1,13%,000 1#0,000 #*,000 -%%,000 -0%,000 12",#00 20,000 1"%,000

'!e follo1ing additional information is given )3 $losing sto 7 31st De 3 200" is 2s!s3 22*,000 ,3 )dministrative expenses in lude 2s!s3 200,000 $3 :rovision for dou.tful de.ts and .ad de.ts are to .e ad8usted to 25 of t!e outstanding trade de.ts as on De 3 31st 200" D3 Depre iation is provided as follo1s %5 on ost i3 :lant and ma !inery at 125 on ost ii3 /otor ve!i le at 205 ost3 +e,uire! 13 :repare t!e profit and loss a ount for t!e year ended 31st De 3 200"910m7s+ 23 :repare a .alan e s!eet as at 31st De 3 200"910m7s+

Question 3 Auestion ;ne -ni.ersit/ examinations '(%(0'(%% !ate! 1ri!a/ 2th *ugust '(%%(theor/ of accounting stan!ar!s) t!eory

a+ '!e Buestion t!at !as extensively de.ated is 1!et!er or not t!e a ounting profession s!ould .e regulated3 It !as .een argued .y proponents for unregulated a ounting profession t!at a ounting entities !ave in entives t!at for e t!em to report to interested parties 1it!out ne essarily ma7ing t!em to do so t!roug! regulation3 +e,uire! Identify and dis uss arguments in support for unregulated a ounting profession3 9(m7s+ .+ ) ounting standards are met!ods of or approa !es to prepare a ounts, 1!i ! !ave .een !osen and esta.lis!ed .y t!e .odies overseeing t!e a ounting profession3 '!ey are essentially 1or7ing rules esta.lis!ed to guide a ounting pra ti e3 +e,uire! Dis uss t!e role of a ounting standards in guiding a ounting pra ti e3 9(m7s+ + 0inan ial statements are important to t!e de ision ma7ing pro ess in finan ial analysis3 &!at are t!eir limitations for analysis pro ess3 9-m7s+ (*ccounting ratios) Auestion '!ree a+ Explain 1!y it is ne essary to prepare a as! flo1 statement3 9" m7s+ .+ '!e follo1ing are t!e summari>ed .alan e s!eets of ),$ @td3 )s at 31 st De 200* and 2010 '((3 Kshs 000 3"0,000,000 (0,000,000 #,%00,000 < -",000,000 (*,000,000 #1,000,000 -#2,000,000 '(%( Kshs 000 3-0,000,000 -(,000,000 3, 2000,000 20,000,000 -#,000,000 -",000,000 1",000,000 -00,000,000

0ree !old property to ost :lant and ma !inery 94,C+ 0urniture and fittings 94,C+ Investment S!ares De.tors ,an7 .alan e 'otal )ssets EBuity and lia.ilities ;rdinary s!are apital D 20 ea ! S!are premium "5 Eedeema.le preferen e S!ares D 200 ea ! :rofit and loss )/$ 105 De.enture $apital redemption Eeserve 0und 'axation

3%0,000,000 32,%00,000 < 33,000,000 30,000,000 %0,000,000 #%,000,000

300,000,000 #0,000,000 100,000,000 < < < #0,000,000

QUESTION FOUR Auestion one University examinations 2010/2011 Institution .ased programme )ugust session dated /onday 2nd January 2012 '!e trial .alan e of Fuma @td as at 31st De em.er 200* 1as as follo1s3 S!3 S!are apital 910,000 S!3 20 ordinary s!ares+ :ur !ases and reditors De.tors and $reditors :rofit and loss 1 January 200* Sales returns ,uilding at ost :lant at ost :rovision for depre iation :lant ,uildings :ur !ases returns Selling expenses ,an7 105 De.entures Sto 7 1 January 200* :rovision for .ad de.ts ;perating expenses )dministrative expenses Suspense a ount 1,220,000 #00,000 #0,000 "00,000 1,000,000 #00,000 #0,000 "0,000 1#0,000 1-0,000 -00,000 300,000 20,000 1"0,000 1#0,000 )4''(4((( 200,000 )4''(4((( S!3 200,000 2,000,000 1#0,000 3"0,000

*!!itional information5 13 Sto 7 at 31De em.er 200* 1as S!3 3-0,000 23 Sales returns of S!3 20,000 !ave .een entered in t!e sales day .oo7 s if t!ey 1ere sales3 &!en t!is error 1as dis overed, t!e de.tors a ount !ad .een orre ted .ut t!e sales figure 1as not re tified3 33 %000 ne1 s!ares 1ere issued during t!e year at S!3 323 '!e pro eeds !ave .een redited to t!e Suspends a ount3 #3 ) fully depre iated plant 1!i ! ost S!3 200,000 1as sold during t!e year3 4o ot!er entries ex ept .an7 !ave .een made3 '!e remaining .alan e on t!e suspense a ount after 92 and 3+ a.ove represents t!e sales pro eeds3 %3 ) de.tor of S!3 20,000 !as .een de lared .an7rupt3 ) general provision is reBuired at %5 of de.tors3 -3 Eates of S!3 30,000 paid in De em.er overing !alf year to 31 /ar ! 2000 !ave not .een entered in t!e .oo7s3 (3 De.enture interest !as not .een paid "3 Depre iation on plant is at 105 on ost of .uildings at 25 on ost3 *3 '!e dire tors propose to pay a dividend of S!3 2 per s!are and transfer S!3 20,000 to t!e general reserve3 103 $orporation tax at a rate of 321/25 0n profits is estimated to .e S!3 *0,000

+e,uire! 9a+ Suspense a ount for t!e year ended 31 De em.er 200* 93m7s+ 9.+ In ome statement for t!e year ended 31 De em.er 200* 910m7s+ 9 + Statement of finan ial position as at 31 De em.er 200* 9 (/7s+