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JUPEB: ACCOUNTING

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JUPEB 2015 ACCOUNTING: Essay Questions

JUPEB: ACCOUNTING JUPEB 2015 ACCOUNTING: Essay Questions

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(ai)

A source document is the original record containing the details to substantiate a transaction entered in an accounting system, For example, a company’s source document for the recording of merchandise purchased is the supplier’s invoice supported by the company’s purchase order and receiving ticket.

(aii)

Receipt: This is a document that shows that payment has been made for goods and services

Invoice: This is a document issued when goods are bought or sold on credit.

Credit note: It is used to correct an overcharge account. It is issued when goods are returned to customers

Debit note: It is used to correct under charge account. It is used to record goods return to the supplier.

Cheque: This is used for withdrawal of money from one’s bank account.

(b)

Conditions in which debt is written off

I. Bankruptcy of customer

ii. Death of a customer

iii. Insanity of a customer

(c)

(I) cannot be readily converted to cash within a year.

(ii) generate future economic benefit

(iii) subject to wear and tear (depreciation)

(iv) they are capital expenditure

(d)

  1. Accounting concepts are postulates, assumptions or conditions upon which accounting records and statement are based. The various accounting concepts are as follows: 1. Entity Concept: For accounting purpose the “business” is treated as a separate entity from the proprietor(s).
  2. Accounting basis: Method used to determine when revenues and expenses (with associated assets and liabilities) are recognized in the accounts of a firm, and reported in its financial statements. In accrual basis accounting, for example, revenues are recognized when earned and expenses are recognized when incurred, whether or not any cash is received or paid. In cash basis accounting, however, revenues and expenses are recognized only when cash is received or paid, irrespective of the timing of actual sales or purchases.
  3. Accounting policies are the specific principles, rules and procedures implemented by a company’s management team and are used to prepare its financial statements. These include any methods, measurement systems and procedures for presenting disclosures.
  4. Bookkeeping: This is the act of recording transactions. They are recorded in source document or books of account.

 

(a)

Manufacturing and Comprehensive Income Statement

(b)

Statement of financial position

 

 

3a.

Sales 2000 @ 200                               400,000

Less Variable Cost

Direct Materials                                  114,000

Direct Labour                                      36,000

Variable Overhead                               40,000

190,000

210,000

Contribution Per Unit                         210,000/2000 =

105 units

Break even = Fixed Cost/Contribution Per Unit

= 99750/105

= 950 Units

3c. Break even when decrease by 50% sales

Selling Price  200 x 95/100 = N190

Contribution Per Unit = Selling Price – Variable Cost

= 190 – 95 = N95

Break even  = 99750/95 = 1050 Units

3d. Net Profit when sales increase by 100%

Sales (110/100 x 200                           440,000

Total Variable Cost                             190,000

Contribution                                        250,000

Less Fixed Cost                                  99,750

Net Profit                                            99,500

3e. Desired Profit of N60,000

Break even = (Fixed Cost + Desired Profit /Contribution to sales)

= 99,750 + 20,000  + 60,000/0.525

= 342381 Unit

 iii. Comment on the Profit

The difference in closing stock makes the profit of (i) and (ii) equal.

Classification of Users of Financial Statements:

The financial statements are used by different categories of people for different purposes. The various users of financial statements are classified and detailed as follows:

Internal Users:

The internal users of financial statements are individuals who have direct bearing with the organization.

They may include:

Managers and Owners: For the smooth operation of the organization, the managers and owners need the financial reports essential to make business decisions. So as to provide a more comprehensive view of the financial position of an organization, financial analysis is performed with the information supplied in the financial statements. The financial statement is used to formulate contractual terms between the company and other organizations.

A variable of the financial statement like the current debt to equity ratio is important in deciding the amount of long term capital that would be required to be raised. The financial statements of other companies can also provide investment solutions to different companies. Sometimes it becomes difficult to decide the right field in which financial resources may be channelised. In such situations the financial statements of> other companies provide the appropriate guideline.

Employees: The financial reports or the financial statements are of immense use to the employees, of the company for making collective bargaining agreements. Such statements are used for discussing matters of promotion, rankings and salary hike.

External Users:

The External users comprise of:

Institutional Investors: The external users of financial statements are basically the investors who use the financial statements to assess the financial strength of a company. This would help them to make logical investment decisions.

Financial Institutions: The users of financial statements are also the different financial institutions like banks and other lending institutions who decide whether to help the company with working capital or to issue debt security to it.                                                                   ;

Government: The financial statements of different companies are also used by the government to analyze whether the tax paid by them is accurate and is in line with their financial strength.

Vendors: The vendors who extend credit to a business require financial statements to assess the
creditworthiness of the business.

General Mass and Media: The common people as well as media also make part of the users of financial statements.

(a)

True and fair view in auditing means that the financial statements are free from material misstatements and faithfully represent the financial performance and position of the entity.

Explanation

Although the expression of true and fair view is not strictly defined in the accounting literature, we may derive the  following general  conclusions  as  to  its meaning:

True suggests that the financial statements are factually correct and have been prepared according to applicable reporting frameworks such as the IFRS and they do not contain any material misstatements that may mislead the users. Misstatements may result from material errors or omissions of transactions & balances in the financial statements.

Fair implies that the financial statements present the information faithfully without any element of bias and they reflect the economic substance of transactions rather than just their legal form.

(b)

There are multiple differences between the internal audit and external audit functions, which are as follows:

Internal auditors are company employees, while external auditors work for an outside audit firm.

Internal auditors are hired by the company, while external auditors are appointed by a shareholder.

Internal auditors do not have to be CPAs, while a must direct the activities of the external; auditors. Internal auditors are responsible to management, while external auditors are responsible to the shareholders.

Internal auditors can issue their findings in any type of report format, while external auditors must use specific formats for their audit opinions and management letters.

Internal audit reports are used by management, while external audit reports are used by stakeholders, such as investors, creditors, and lenders.

Internal auditors can be used to provide advice and other consulting assistance to employees, while external auditors are constrained from supporting an audit client too closely. Internal auditors will examine issues related to company business practices and risks, while external auditors examine the financial records and issue an opinion regarding the financial statements of the company. Internal audits are conducted throughout the year, while external auditors conduct a single annual audit. If a client is publicly-held, external auditors will also provide review services three times per year.

The relevant tax year for a new trade or business under the Companies Income Tax Act, 2004, as amended are:

i. The first tax year is from date of commencement of business to 3 Is‘ Dec. same year.

ii. The second tax year is from commencement to 12 months irrespective of the accounting year and date,

iii. The third tax year is 12 months using the accounting date but if not up to 12 months, the second tax year should be repeated.

(b)

The right of election is exercised by aggregating the second and third tax year together. If it lowers,. of election will be exercised. It is done within 2 years after the end of the second tax year.

(c)

The objectives of an effective tax administration:

I. formulate general policies and guidelines

ii. management and supervision of these policies

iii. advice the government

iv. ensure effective selection of all tax and penalties types

(a)

Tax Year                     Basis Period                Assess Profit(N)

2012                            1/1/11 – 31/12/11        50,000

2013                            1/1/13 – 30/6/13          70,000

(b)

Because the business ceases operation, the Inland Revenue Service will choose the higher of computation under preceding year for 2012. This is the penultimate year. On the year of cessation, it will be on actual year basis in the ultimate year

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