FIN ACC 06/20

INSTITUTE OF PEOPLE MANAGEMENT OF ZIMBABWE

DIPLOMA EXAMINATION

FINANCIAL ACCOUNTING

DATE: JUNE 2020

TIME ALLOWED: 3 HOURS

Instructions: Answer ALL FIVE Questions

ALL QUESTIONS CARRY THE SAME TOTAL VALUE OF 25 MARKS.

This paper consists of 7 pages of questions.

SECTION A Answer TWO questions from this Section.

Question 1

Identify the most correct answer from the alternatives given:-

(i) A Book-keeping is a part of the accounting function.

B The assets of a business can be increased by buying on credit
C The owner’s equity is the sum of the business equity and liability.
D A gift is a transaction in the accounting sense
E A and B.

(ii) A The double entry principle applies only to the earlier stages of the
accounting cycle.
B Transactions should only be recorded when cash has been paid or received.
C The payment of salaries and wages constitutes an expense, which directly
reduces profit and indirectly reduces the owner’s capital.
D The withdrawal of money from the business for the owner’s personal use does
not affect the capital of the business.

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(iii) A The transfer of cash from the till to the business bank account increases
total assets in the balance sheet.
B When recording transactions in the cash book payments of cash and
cheques should be shown on the debit side.
C Purchases returns should be recorded on the debit side of the purchases
returns account and the credit side of the supplier’s account.
D Sales of goods on credit should be recorded immediately in the cash
book.
E None of the above.

(iv) A In the ledger, only goods which have been paid for should be recorded in
purchases account.
B In the cash book, the cash columns cannot show a credit balance
brought down unless there is an error.
C When drawing up the trial balance, closing cash and bank balances in the cash book
should be ignored.
D Trade discount refers to an amount, which is deducted from the amount
owing if payment is made within the stipulated period.

(v) A The cash book is regarded as both a subsidiary record and a ledger
account for all cash and cheque transactions.
B The purchases day book and other subsidiary records are an integral
part of the ledger.
C The total amount in the sales day book should be credited in the sales
account, while relevant amounts are debited in the individual debtor’s
accounts.
D The purchase of equipment on credit should be recorded in the purchases
account.

(vi) A A provision for bad debts is an amount which the business has failed to
collect from the debtor.
B The journal is used as the book of original entry for all transactions which
cannot be recorded in the cash book or any other subsidiary record.
C The purchase of non-current assets should be recorded in the operating
expenses section of the income statement.
D The net profit of a business for a given period is always equal to the cash
balance at the end of the period.

(vii) A The net profit of a business is measured by adding its operating profit to the
gross profit for the period.
B The cost of motor vehicle repairs is shown in the motor vehicle account
the nominal ledger.
C Adding discount received to gross profit gives the same answer as adding
discount received to purchases.
D The aim of the income statement is to ascertain the liquidity of business.
E None of the above.

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(viii) A Net profit for the year has the effect of increasing capital at the beginning of
the year, and should be added to this capital.
B Drawings have the effect of increasing capital at the beginning of the year and
should be added to this capital.
C Revenue expenditure refers to the money which is used to acquire non-current
assets.
D A prepayment is an expense or income which is not yet due, but has already
been paid or received at the year end.
E A and D.

(ix) A A balance carried down on the credit side of the rent income account
amounts received in advance at year-end.
B There is no one correct method of calculating depreciation, the choice depends
on the type of non-current assets, and generally accepted methods in a
particular industry or trade.
C At the end of each year, a provision for depreciation account is debited with
the annual depreciation on non-current assets, and the income statement is
credited with the same amount.
D The balance brought down on the provision for depreciation account will be
decreased by the annual depreciation charge for the relevant year.
E None of the above.

(x) A There is no balance brought down on an asset disposal account.

B In accounting for the exchange of assets, the original cost of the old asset is
credited in the asset account and debited in the asset disposal account.
C When it is first decided to create a provision for bad debts, the full amount is
debited in the income statement and credited in the provision for bad debts
account.
D A bad debt which was previously written off should be debited in the bad
debts recovered account and credited in the income statement.
E All of the above.

(xi) In which ledger do we find individual debtor’s accounts?

A Purchases ledger
B Nominal ledger
C General ledger
D Sales ledger

(xii) A When undertaking a bank reconciliation statement, outstanding deposits

should be added to an opening bank overdraft.
B Insufficient funds is the only reason why a bank may refuse to honour a
cheque drawn on it.
C Un-reconciled cheques from a previous period can cause an imbalance
between the opening balances in the cash book and the bank statement.
D An error made by the bookkeeper or accountant should be adjusted for in the
bank reconciliation statement.

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(xiii) A In the books of a club, subscriptions in arrears are included in current

assets.
B In the books of a club, a surplus of income over expenditure is added to the
accumulated fund at the beginning of the period.
C A subscription account can have 2 balances at the beginning of the period,
D Commercial activities undertaken by a club (e.g. operating a cash bar) should
be completely ignored in the income and expenditure account.
E A, B and C.

(xiv) A Debiting a credit sale in the account of T. Moyo instead of C. Moyo is an

example of an error of principle.
B Failing to record a transaction completely is an example of an error of original
entry.
C In certain cases, especially when an error arose from a complete reversal of
entries, it is necessary to enter double the original amount in order to correct
the error.
D If the sum of the debit balances in the trial balance is smaller than the sum of
credit balances, the difference should be entered on the credit side of the
suspense account.
E None of the above.

(xv) A Overstating discount allowed will reduce net profit for the period.
B Understating purchases will reduce net profit.
C Failing to deduct drawings of goods from purchases has no effect on net profit
for the period.
D Overstating returns outwards will reduce net profit for the year.

(xvi) In the context of cash flow statements:-

A Financing activities are those which result in changes to the size and
composition of the capital employed by a business.
B Operating activities are those which relate to the acquisition of long term
assets.
C Increase in working capital generally cause inflows of cash.
D Accumulated depreciation should be added to net profit for the year to
ascertain cash from operating activities

(xvii) A Overstating closing stock has no effect on the net profit of the period.
B Weighted average is a specific identification method of stock valuation.
C The FIFO method of stock valuation results in higher net profit or lower net
loss when compared to the LIFO method.
D The lower of cost or net realizable value rule is related to the going concern
concept.

(xviii) The following issues should be included in a written partnership agreement:-

A The amount of capital to be provided by each partner.
B The proportion in which profits and losses are to be shared.
C The rate of interest (if any) to be paid on capital or drawings.
D The salaries (if any) to be paid to partners for providing specific services.
E All of the above.
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(xix) Due to hyperinflation, your company’s non-current assets would now cost much more than
when they were originally bought. Which accounting concept is related to this situation?

A Consistency
B Money measurement
C Realization
D Stability of currency

(xx) A trader should pay his landlord $50 000 rent every month. On 30 June 2018 his financial
year-end, he had paid rent up to 31cAugust 2018. How much should be charged as rent
expense for the year ended 30 June 2018?

A $700 000
B $600 000
C $500 000
D $650 000

Question 2

Discuss briefly the functions of any (five) 5 books of prime entry of your choice. [5 ]

The trial balance of XY Store on 31 December 2018 failed to balance by $900, with the debits total
being larger than the credits total. A Suspense Account was opened and credited with the difference.
On 10 January 2019 the following errors from 2018 were discovered:

The Sales Account had been overstated by $370.

The Sales Returns Account had been overstated by $230.
A cheque payment of $1 400 to P. Mutumhe had been correctly debited in his account, but no entry
had been made in the cash book.
The Rent Expense Account had been under cast by $900.
The Purchases Account had been overcast by $1 000.

Required
Show the Journal entries necessary to correct the above errors. [10]

Draw up the Suspense Account in the General Ledger. [5]

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Question 3

Owen Trading Ltd deals in commodity X09.

The relevant details are as follows:-

2018
Oct 1 Balance 50 units @ $2/ unit $100.00
5 Sales 20 units @ $5/ unit $100.00
10 Purchases 25 units @ $2.05/ unit $51.25
12 Sales 35 units @ $5/unit 175.00
18 Purchases 25 units @ $2.05/ unit $ 51.25
19 Sales 25 units @ $5/ unit $125.00
25 Purchases 30 units @ $2.10 $63.00

Using FIFO what is the value of inventory in hand on 31/10/18? [20]

Question 4

Distinguish between a Bill of Exchange and a Promissory Note. [12]

Explain the merits of Bills of Exchange in the business world. [8]

Question 5

Discuss the perception that Financial Accounting appears to be transforming. [20]

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FINANCIAL ACCOUNTING SUGGESTED MARKER’S GUIDE

QUESTION 1

(i) E (x) E
(ii) C (xi) D
(iii) E (xii) C
(iv) B (xiii) E
(v) E (xiv) C
(vi) B (xv) A
(vii) E (xvi) A
(viii) E (xvii) C
(ix) E (xviii) E
(xix) D
(xx) B
QUESTION 2

Sales Journal (Sales Day Book)

 Used to record goods sold on credit (Credit Sales)

Purchases Journal (Purchases Day

 Used to record all credit purchases (Goods bought on credit)

Purchases Returns/ Returns Outwards Journal

 Used to record returned to suppliers

Sales Returns/ Returns Inwards Journal

 Used to record goods returned to us by customers

Bills Receivable Book

 Used to record the bills accepted by the debtors.

Bills Payables Book

 Used to record the bills drawn by the creditors

Cash book

 Used to record all cash and bank transactions

General Journal
 Records all transactions for which there is no other book of prime entry.

(b)(1) Journal Entries

2019 DR CR

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Jan 10 Sales A/C 370

10 Suspense A/C 370
Being entry to show the correction of an error involving an overstatement of sales.

2019 DR CR
Jan 10 Sales Returns A/C 230
10 Suspense A/C 230
Being entry to show the correction of an error involving an understatement of sales returns.

2019 DR CR
Jan 10 Suspense A/C 1 400
10 Bank A/C 1 400
Being entry to correct the omission of an entry in the bank account following the payment of a creditor.

2019 DR CR
Jan 10 Rent Expense A/C 900
10 Suspense A/C 900
Being entry to show the correction of an error involving an understatement of rent expense.

2019 DR CR
Jan 10 Suspense A/C 1 000
10 Purchases A/C 1 000
Being entry to show the correction of an error involving an overstatement of purchases.

(ii) SUSPENSE ACCOUNT

2019 Details Amount 2019 Details Amount
$ $
Jan 10 Bank Account 1 400 Jan 10 Balance b/d 900
10 Purchases Account 1 000 10 Sales A/C 370
Sales Returns A/C 230
Rent Expense A/C 900
2 400 2 400

QUESTION 3

VALUE OF STOCK – FIFO STORES LEDGER CARD

PURCHASES ISSUES BALANCE
DATE Qty Unit Cost Value Qty Unit Value Qty Unit Value
Cost Cost
$ $ $ $ $ $
01/10/18 50 2.00 100.00
05/10/18 20 2.00 40.00 30 2.00 60.00
10/10/18 25 2.05 51.25 30 2.00 60.00
25 2.05 51.25
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12/10/18 30 2.00 60.00

5 2.05 10.25 20 2.05 41.00
18/10/18 25 2.05 51.25 45 2.05 92.25
19/10/18 25 2.05 51.25 20 2.05 41.00
25/10/18 30 2.10 63.00 20 2.05 41.00
20 2.10 63.00
TOTAL 165.50 80 161.50

QUESTION 4
(a) Difference between a Promissory Note and a Bill of Exchange
PROMISORY NOTE BILL OF EXCHANGE
 It is a promise to pay  It is an order to pay

 There are only two parties the drawer, and the  There are three parties, the drawer, the drawee,
payee. and the payee.

 There is no necessity of acceptance  It must be accepted

 The drawer is primarily liable  The drawer is not primarily liable

 It is never drawn in sets  Foreign bills are specially drawn in sets

 Protesting is not necessarily after dishonour  A foreign bill must be protested upon dishonour

(b) MERITS OF A BILL OF EXCHANGE

 It is a legal evidence of debt

 It is a convenient method for the transfer of debt

 A creditor can sue on the bill itself

 It is a negotiable instrument and can be transferred for settlement of one’s debt without difficulty

 It can be cashed before due date by discounting

 A debtor enjoys the benefits of full period of credit

 It affords an ease means of transmitting money from one place to another.

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