2022 EXAMINATIONS

CA LEVEL 1 (KNOWLEDGE)

PAPER 1: ACCOUNTING FRAMEWORK

TUESDAY, 31 MAY 2022 TIME ALLOWED: 3 HOURS

SUGGESTED SOLUTIONS
 SECTION A

1 (a) (i) The purposes of cash flow statements include

- To show how the business generates its cash.

- To show how the cash generated is utilized within the business.
- To show cash position of the business as at the period end.

(ii) Cash equivalents are short term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant
risk of changes in value.

(b) (i) definitions of inventory in accordance to IAS 2 are;

- Held for sale in the ordinary course of business.

- In the process of production for such a sale.
- In the form of materials or supplies to be consumed in the production
process or in the rendering of services.

(ii) Classification of inventories according to IAS 2

- Goods purchased and held for resale.

- Finished Goods produced.
- Work In progress (WIP) being produced.
- Materials and supplies awaiting use in the production process (raw
materials).

(iii) Items to be disclosed in Financial statements with regard to inventory

according to IAS 2 are;

- Accounting policy adopted in measuring inventories including the cost

formula used.

- Total carrying amount of inventories and the carrying amount in

classifications appropriate to the entity.

- Carrying amount of inventories carried at NRV.

(iv) Net Realisable Value is the estimated selling price in the ordinary course of
business less the estimated cost of completion and the estimated costs
necessary to make the sale.

Page 2 of 12
(c) (i) an error of principle occurs when the correct amount is entered but in the
wrong class of account.

(ii) on acquisition of motor vehicle for K200,000, instead of capitalizing it by

including it in the balance sheet under Non current Assets as it is wrongly
debited to motor expenses account in the profit a loss account.

(iii) the effect on balance sheet is that the non Current Assets will be understated
by the motor vehicle amount K200,000 and in the Profit or Loss account.
Profit will be reduced by the same amount.

(d) (i) Zotheka Ltd

Statement of profit or loss for the year ended 31 August 2021

K K
Revenue (W1) 99,890
Less Return Inwards (300) 99,590
COGS/COS
Opening Inventory 4,900
Purchases (W2) 70,990
Add Carriage inwards 550
Less closing Inventory (5,900) (70,540)
Gross Profit 29,050
Other Income
Discount received 1,100
Profit on sales of motor van (2,100-(10,000-8,000) 100
30,250

Less expenses
Rent & local taxed (W3) 2,660
Wages 15,100
Motor Vehicle Expenses 3,350
Postage & Stationery 1,360
Repairs & Renewals 650
Insurance (W4) 760
Provision for irrecoverable debt 460
Irrecoverable debt 300
Carriage Outwards 375
Depreciation at van (20% of 13,000) 2,600 (27,615)
Profit for the year 2,635

Page 3 of 12
(ii) Zotheka Ltd
Statement of financial position as at 31 August 2021

K K
Assets
Non current assets
Motor van – Cost 13,000
Depreciation (20% of 13,000) (2,600) 10,400

Current Assets
Inventory 5,900
Trade receivables (9,500-300 irrecov. Debt) 9,200
Less Irrecoverable debt allowance (460)
Prepayment - Insurance 200
Cash at bank 2,010 16,850
Total Assets 27,250

Capital & Liabilities

Capital account
Balance at 1 September 2020 (W6) 11,450
Additional Capital: Proceeds on Sale of pvt yatch 20,000
Profit for the year 2,635
Less drawings (9,200)
Balance at 31 August 2021 24,885

Current Liabilities
Trade payables 2,590
Accrual 260 2,850
Total capital & liabilities 27,735

Workings

(1) Revenue (Sales)

Dr Receivables Cr
Bal. at 1 Sept 2020 5,610 Cash received from 96,000
Customers
Sales 99,890 Bal. at 31 Aug 2021 9,500
105,500 105,500

(2) Provision for irrecoverable debts

5% x (9,500-300) = 460

Page 4 of 12
(3) Purchases

Dr Payables Cr
Cash paid to suppliers 72,000 Bal. b/d 4,215
Discount granted by suppliers 1,100 Purchases 70,990
Bal c/d 2,105
75,205 75,205

(4)

Dr Rent & local taxes Cr

Cash paid 2,600 Bal. b/d Accrual 200
Bal. c/d 260 Charge to P & L a/c 2,660
2,860 2,860

(5)
Dr Insurance Cr
Bal. b/d-prepayment 160 Charge to P & L a/c 760
Cash paid in the year 800 Bal c/d 200
960 960

(6) Capital at 1 September 2020

Assets
Bank balance 1,970
Trade Receivables 7,320
Motor van (10,000 – 8,000) 2,000
Inventory 4,900
Prepayment 160
16,350
Liabilities
Trade payables 4,700
Accruals 200 4,900
11,450

Page 5 of 12
 SECTION B

2 (a) (i) Accruals Concept

Is an accounting concept which states that an accounting transaction is

recognised in the financial statements as it is earned, not when the cash is
received. Expenditure is recognised as it is incurred, not when it is paid for.
When income is incurred over time (e.g. rental/interest income) or
expenditures are time-based (e.g. rent payments), the income and expenditure
recognised in the income statement should relate to the time period, not to the
receipts and payments of cash.

Example: If the business pays rent in advance for fifteen months amounting
to MK150,000, the amount which will be recognised in the financial statement
as rent expense for the current period will be MK120,000 and the remaining
K30,000 would be carried forward to be charged as an expense for the next
financial year.

(ii) Going Concern

Is an accounting concept that states that financial transactions are usually

prepared on the assumptions that the business will continue in operational
existence for the foreseeable future. This means that the financial statements
are drawn up on the assumption that there is no intention or necessity to close
down the business. If the financial statements are not prepared on the going
concern basis then they must be prepared on what is known as the break-up
basis.

- Some non-current assets may be sold at less than their value on the
statement of financial position, whilst a machine may have a use for
specific business, it may be scrap or no use to other businesses.

- In contrast, property may be sold for a value in excess of that shown in

the statement of financial position based on original cost.

- If the entire inventory is sold at once then it will not be sold for as much
money as if it were sold in the normal way.

- Some receivables may decide not to pay the business if it is known the
business is about to go into liquidation. In most cases financial
statements are prepared on a going concern basis unless there is
evidence to the contrary.

(iii) Historical Cost

This accounting concept states that assets are recorded at historical cost i.e.
what they were bought for. Liabilities are valued at the amount initially
received in exchange for the obligation. Thus the figure shown in the financial
statements for an item is the value of the item when the transaction occurred,
not its current market value. Historical cost has many drawbacks, a significant
one being that the non-current assets of the business tend to be undervalued
and therefore the statement of financial position does not show the true value
of the business. Historical cost continues to be used however for the following

Page 6 of 12
 reasons: it is simple and cheap to apply, figures used are objective and
verifiable and the lack of a sound and acceptable alternative.

An example of the historical cost concept is valuing buildings at a cost price

of K100,000 even though the current market value of the buildings is
K250,000. In the case of current assets, such as inventories and debtors,
historical cost is not adapted, since these assets are commonly written down to
reflect current conditions.

(iv) Materiality

Materiality is a threshold quality that is demanded of all information given in

the financial statements. When immaterial information is given in the
financial statements, the resulting clutter can impair the understandability of
the other information provided. An item’s size is judged in the context both
of the financial statements as a whole and of the other information available to
users that would affect their evaluation of the financial statements. An
example of a material item is the value of noncurrent assets of K250,000 in the
financial statement of an entity with total assets of K320,000. The non-current
assets are material to the financial statements of the entity.

(b) Correct the total of the balances extracted from the

(i)
Receivable ledger
Original total extracted 38,300
(344+90) add difference arising from transposition (v) 90
38,390

Less credit balance of ((ii) 150 x 2) 300

Overcast of list of balances (vi) 225 (525)
37,865

(ii)
Receivables Control Account
Bal before adjustment 37,727.5 Petty cash – posting omitted 25
Return inwards – individual
Posting omitted from control
a/c (iii) 87.5
Bal c/d (now in agreement with
Undercast of total invoices Corrected total of individual
Issues in sales day book (iv) 250 Balances)(i) 37,865
37,977.5 37,977.5

Page 7 of 12
3 (a) (i) Authorised (or legal) capital is the maximum amount of share capital that the
company is empowered to issue. It varies from company to company and can
be changed by passing an ordinary resolution in a general meeting shareholder
or their proxy.

(ii) Paid up capital is the amount of called up capital that has actually been paid.

(iii) Preference shares are shares which confer certain preferential rights on their
holder. They carry a right to a final dividend which is expressed as a
percentage or their par value and have a priority on dividends over ordinary
shares.

(iv) Share premium is the difference between the issue price of the share and its
par value. When the company is doing well the market value of its shares will
increase but not its par value so premium is the excess of market value over
par value.

(v) Bonus issue is when a company wants to increase its share capital without
raising additional finance from outsiders. The company issues additional
shares to its existing shareholder and pays for the shares from its own reserves
thereby does not need to raise additional finance by issuing new shares.

(vi) Rights issue is the issue of shares to raise additional finances the rights to buy
these shares are offered to existing shareholders probably at a discount to the
current market price. The existing shareholders can sell them if they wish.

(b) K K

(i) Dr Share Premium 3,000

Dr Retained Earnings 750

Cr Ordinary share capital 3,750

Workings

Total shares (K18,750 ÷ 0.75t) = 25,000 shares

Bonus share 1 for 5 (25,000 ÷ 5) = 5,000 shares
NominalValue of bonus shares 5,000x0.75 = K3,750

(ii) After the issue the statement of financial position is as follows:

Share capital 22,500

Retained earnings 4,250
26,750

Page 8 of 12
 (c) 1 for 5 of 7,000 shares = 1,400 total shares 7,000+1,400 = 8,400
Value of total shares 8,400x0.75 = K6,300

4 (a) (i) The system by which companies and other entities are directed and controlled.

(ii) Main responsibilities are;

- Compliance with accounting standards is important if the financial

statements are to represent the activities of the entity fairly. If accounting
standards are not complied with, then it may be that the financial
statements are misleading. Investors then stand to lose money if they have
made decisions based on misleading financial information.

- It is also important that employers have a code of ethics so that employees,

in a situation where they feel they may have to act unethically, have
somewhere to go for help. For example, some companies have a business
code of ethics so that guidance is there for employees to know how they
are expected to act and ask for assistance in an ethical dilemma.

- Accountants responsible for the preparation of financial information must

ensure that the information they prepare is technically correct, reports the
substance of the transaction and is adequately disclosed. The danger is that
senior managers are put under pressure to present figures that inflate profit
or assets or understate liabilities. This puts the accountant in a difficult
position. On one hand, they wish to prepare accurate information, and on
the other hand, there is a possibility they might lose their job if they do not
comply with their manager's wishes.

- In this case, ethics start with the individuals preparing the information.
They have a difficult decision to make; whether to keep quiet or take the
matter further. If they keep quiet, they will certainly be aware that they are
not complying with the ethics of the accounting body they belong to. If
they speak out, they may be bullied at work into changing the information
or sacked. Many professional accounting bodies like ICAM have ethical
'help lines' where individuals consult for advice.

(iii) GAAP(Generally Accepted Accounting Principles) means all rules,

guidelines, and directives which govern the recognition, measurement and
disclosure of accounting transactions for the purpose of the preparation of
financial statements.

(iv) GAAP sources includes among others as:

 Companies Act
 The Institute of Chartered Accountants in Malawi
 Malawi Accountants Board

 Malawi Stock exchange

Page 9 of 12
  International Accounting Standards Board

(v) Benefits of conceptual framework:

 assists IASB in the development of future International Financial

Reporting Standards (IFRS) and review of the existing IFRSs

 assists IASB in promoting harmonization of regulations, accounting

standards and procedures relating to the presentation of financial
statements by providing a basis for reducing the number of alternative
accounting treatments permitted by IFRSs.

 assists national standard setting bodies in developing their national

standards.

 Assists in the preparation of financial statements in applying IFRSs and in

dealing with topics that have yet to form the subject of an IFRS.

 assists auditors in forming an audit opinion on whether financial

statements comply with IFRSs;

 assists users of financial statements in interpreting the information

contained in financial statements prepared in compliance with IFRSs and
it provides those who are interested in the work of the IASB with
information about its approach to the formulation of IFRSs.

(b)

Sabola Ltd
Schedule of Non-Current Assets for the year ended 31 July 2020
Land & Motor Equipment
Buildings Vehicles
K K K
Cost as at 1 August 2019 520,000 310,000 115,000
Additions 0 35,000 20,000
Disposals 0 (40,000) 0
Revaluations 80,000 0 0
Cost as at 31 July 2020 600,000 305,000 135,000

Accumulated depreciation as at 1 August 2019 75,000 110,000 40,000

Profit & Loss (W1,W3,W4) 12,000 (59250) 12,500
Disposals (W2) 0 (14,667) 0
Accumulated depreciation as at 31 July 2020 87,000 183,917 52,500
Net Book Value as at 31 July 2020 513,000 121,083 82,500

Page 10 of 12
 Workings:
1 (520,000 – 120,000) x 3% = 12,000
2 Accumulated depreciation of motor vehicle disposed off:
(40,000 x 20%) ÷ 12 x 22 = 14,667
3 depn on addition motor vehicle
(35,000 x 20%) ÷ 12 x 19
= 5,250

4 depn on Remaining motor vehicles

(310,000 – 40,000) x 20%
= 54,000
Total depreciation =54,000 +5250 = 59250

5 (115,000) x 10% + 20,000 x 10% x 6/12 = 11,500 + 1,000 = 12,500

5 (a) (i) Contingent liability in accordance with IAS 37:

- A possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non occurrence of one or
more uncertain future events not wholly within the entity’s control.

Or

- A present obligation that arises from past events but is not recognized
because

 It is not probable that a transfer of economic benefit will be

required to settle the obligation.

 The amount of the obligation cannot be measured with

sufficient reliability.

(ii) Items that should be disclosed under contingent liability in accordance with
IAS37;

- a brief description of the nature of the contingent liability.

- an estimate of its financial effect.
- an indication of the uncertainties that exist.
- the possibility of any reimbursement.

(b) (i) On the basis of evidence available when the financial statements were
approved there is no obligation as a result of past event. No provision is
recognized. The matter is disclosed as a contingent liability unless the
probability of any transfer is regarded as remote.

Page 11 of 12
 (ii) On the basis of evidence available, there is a present obligation of a transfer of
economic benefit in settlement is probable. A provision is recognized for the
best estimate of the amount needed to settle the present obligation.

(c) (1) Tayesa Company

Statement of Profit or loss for the year ended 31 July 2020

K’000 K’000

Revenue 16,453
Less: Cost of Goods Sold
Opening stock 3,080
Purchases 5,880
8,960
Less closing stock (2,240)
(6,720)
Gross profit 9,733

Expenses
Distribution expenses 980
Administration expenses 3,951
(4,931)
Net profit for the year 4,802

(2) Tayesa Company

Statement of changes in equity for the year ended 31 July 2020

Share Share Retained

Capital Premium Earnings Total
K’000 K’000 K’000 K’000
Balance as at 1 August 2019 1,400 700 784 2,884
Prior Period Adjustment - - (280) (280)
Restated Balance 1,400 700 504 2,604
Total Comprehensive Income
for the year - - 4,802 4,802
Dividend Paid - - (280) (280)
Share issue 700 350 - 1,050
2,100 1,050 5,026 8,176

Page 12 of 12