CF04

Basic Accounting

15 APRIL 2004

1. Time allowed : Three (3) hours

2. Total number of questions : Five (5) questions

3. Number of questions to be answered : All five (5) questions

4. Show details of workings where appropriate. Silent, non-programmable calculators may be

used.

5. Mathematical tables are provided in this question paper.

6. Begin each answer to a new question on a fresh page.

7. Answer all questions in English.

ANSWER ALL FIVE (5) QUESTIONS
1. Mr CK Neoh runs a distribution outlet in Butterworth. The following trial balance was extracted from his
accounts as at 31 August 2003:

TRIAL BALANCE AS AT 31 AUGUST 2003

DR CR
RM RM
Capital 1,575,500
Drawings 125,000
Freehold premises, at cost 1,880,000
Fixtures and fittings, at cost 232,000
- Provision for depreciation as at 31 August 2002 116,000
Motor vehicles, at cost 525,000
- Provision for depreciation as at 31 August 2002 225,000
Stock as at 31 August 2002 1,166,000
Purchases and sales 1,375,000 6,210,000
Carriage inwards 113,200
Carriage outwards 124,400
Returns inwards and returns outwards 117,800 125,000
Discounts allowed and discounts received 17,700 27,000
Debtors and creditors 544,500 930,000
Provision for bad and doubtful debts 26,500
Bad debts 15,850
General expenses 388,850
Marketing expenses 1,120,400
Cash in hand 114,800
Cash at bank 1,374,500

9,235,000 9,235,000

Additional information available as at 31 August 2003:

• Closing stock as at 31 August 2003 was valued at RM1,174,500.

• General expenses included RM12,600 of insurance premium for the period from 1 January to
31 December 2003.

• To accrue for water and electricity by RM2,100.

• To provide RM2,220 for telephone expenses for the month of August 2003.

• The provision for bad and doubtful debts is 5% of debtors’ balance as at 31 August 2003.

• The provision for depreciation on fixed assets is as follows:

- Fixtures and fittings at 25% using the straight line method.
- Motor vehicles at 20% on a reducing balance method.

• Mr CK Neoh received a cheque for RM6,630 on 31 August 2003 from a debtor whose debts
were written off as at 31 August 2002, the amount of which had not been recorded in the
books.

Required:

Prepare the following for Mr CK Neoh:

(a) Trading, Profit and Loss Account for the financial year ended 31 August 2003. [13]

(b) Balance Sheet as at 31 August 2003. [12]

(Total:25 marks)

Page 2 of 12 BFSC/COFSA April 2004 - CF04 Institut-Bank-Bank Malaysia

2. You were given the following information by Keen Knitting Manufacturing Company:

• On 1 January 2003, the company has in its possession knitting machinery costing a total of
RM575,000 with an accumulated depreciation of RM268,000.

• On 28 March 2003, the company purchased several units of new knitting machinery costing a
total of RM158,000 by cheque.

• On 13 June 2003, the company traded in an old knitting machinery for RM40,000 for a new
model costing RM170,000. The price difference was paid by cheque. The old knitting
machinery cost RM95,000 and has depreciated by RM47,000.

• It is the company’s policy to depreciate its machinery at the rate of 25% per annum on a
reducing balance method.

• A full year’s depreciation is provided for all machinery held by the company at the end of each
accounting year.

• The company’s financial year ends at 31 December 2003.

Required:

(a) Prepare the following accounts for Keen Knitting Manufacturing Company for the year ended
31 December 2003:

(i) Machinery account [5]

(ii) Provision for depreciation on machinery account [4]

(iii) Fixed assets disposal account [4]

(b) State two factors which cause fixed assets to depreciate. [2]
(Total:15 marks)

3. Complete each of the following statements with the most appropriate concept or convention given
below:

accounting period concept matching concept

conservatism concept materiality concept
consistency concept money measurement concept
dual aspect concept realisation concept
going concern concept separate entity concept
historical cost concept substance over form concept

(a) The treatment of expenditure on paper clips as an expense even though many of the paper
clips will last for several years is an example of the ______________. [1½]

(b) Under the ______________, accountants assume that the business will continue operating in
the foreseeable future. [1½]

(c) The ______________ states that assets should be recorded at the original transaction cost
and not at market value. [1½]

(d) In abiding by the ______________, accounting looks at how a transaction affects the economic
situation of the firm. [1½]

(e) The ______________ relates to the separation of the owner from the business. [1½]

(f) Under the ______________, revenues and expenses must be related or measured with each
other. [1½]

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 (g) The ______________ states that a business should not recognise any profits unless they are
reasonably sure they have earned them. [1½]

(h) Data that can be measured in monetary terms and not recording of information on
management style or staff loyalty is an example of the ______________. [1½]

(i) Under the ______________, revenue is considered to be earned only on the date when goods
or services are made available to the customer in exchange for cash or a promise to pay later.
[1½]

(j) The directors of XYZ Bhd have proposed to change the depreciation rate on equipment from
25% to 20% per annum but this would go against the ______________. [1½]
(Total:15 marks)

4. Pretty Ribbons Sdn Bhd is in the gift-wrapping business. Its stock records are maintained on a perpetual
basis. The following transactions relate to one of its stock items, Large Gift Box:

15 June 2003 : Purchased 500 units at RM5.00 per unit

25 July 2003
July to September 2003
10 November 2003
October to December 2003
2 January 2004
January to March 2004
: Purchased 600 units at RM5.50 per unit
: Sold 800 units
: Purchased 1,500 units at RM4.80 per unit
: Sold 1,600 units
: Purchased 1,000 units at RM5.60 per unit
: Sold 900 units

Required:

(a) Compute the following, using the first-in, first-out (FIFO) and last-in, first-out (LIFO) inventory
costing methods:

(i) Closing stock of Large Gift Box as at:

(aa) 30 September 2003

(bb) 31 December 2003

(cc) 31 March 2004

[16]

(ii) Value of the cost of goods sold of Large Gift Box for the period from June 2003 to March 2004.
[4]

(b) If 300 units of the closing stock are outdated goods and can only be sold at RM5.25 per unit,
re-calculate the closing stock under each of the two costing methods mentioned in (a) above.
[4]
(Total:24 marks)

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5. The following is an extract of Jelita Florist’s trial balance for the year ended 30 June 2003:

Item RM

Sales 2,700,000
Cost of goods sold 1,500,000
Commission receivable 15,000
Administrative expenses 28,000
Sales and distribution expenses 145,000
Financial charges 37,500
Motor vehicle expenses 50,000
Capital 480,000
Stock 195,000
Debtors 201,000

Cash balance 52,000

Creditors 135,000
Bank overdraft 60,000

Required:

(a) Calculate the following ratios by using the information given above:

(i) Gross profit margin [2]

(ii) Net profit margin [3]

(iii) Current ratio [2]

(iv) Acid test ratio [2]

(v) Return on capital employed [2]

(b) Compare and comment on the performance of Jelita Florist based on the ratios calculated in
part (a) for the year ended 30 June 2003, with McBloom Florist’s performance given below:

Gross profit margin 50%

Net profit margin 30%
Current ratio 2.9 : 1
Acid test ratio 0.8 : 1
Return on capital employed 168%
[10]
(Total:21 marks)

- END OF QUESTION PAPER -

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 OUTLINE ANSWERS

Question 1
Most candidates answered this question fairly well. However, a minority of candidates showed weakness in this
topic, as they were not able to differentiate the items that were supposed to be in the Profit and Loss Account
and the Balance Sheet.

1. (a)
Mr CK Neoh
Trading and Profit and Loss Account for the year ended 31 August 2003
RM RM RM
Sales 6,210,000
less Returns inwards 117,800
6,092,200
less Cost of goods sold:
Opening stock 1,166,000
add Purchases 1,375,000
add Carriage inwards 113,200
1,488,200
less Returns outwards 125,000 1,363,200
2,529,200
less Closing stock 1,174,500
1,354,700
Gross profit 4,737,500
Discount received 27,000
4,764,500
less Expenses:
Discounts allowed 17,700
Bad debts
- Bad debts written-off 15850
- Bad debts recovered (6630)
9,220
Provision for bad and
doubtful debts (W2) 725
Carriage outwards 124,400
General expenses (W1) 388,970
Marketing expenses 1,120,400
Provision for depreciation (W3)
- fixtures and fittings 58,000
- motor vehicles 60,000 1,779,415
Net profit 2,985,085

Page 6 of 12 BFSC/COFSA April 2004 - CF04 Institut-Bank-Bank Malaysia

1. (b)
Mr CK Neoh
Balance Sheet as at 31 August 2003
RM RM RM
Accm
Fixed Assets Cost Depn NBV
Freehold Land & Building 1,880,000 1,880,000
Fixtures & Fittings 232,000 174,000 58,000
Motor Vehicles 525,000 285,000 240,000
2,637,000 459,000 2,178,000

Current Assets
Stock 1,174,500
Debtors (544500-27225) 517,275
Prepayments (W1a) 4,200
Cash at Bank (1374500+6630) 1,381,130
Cash in hand 114,800 3,191,905 114800

Current Liabilities
Creditors 930,000
Accruals (W1b) 4,320 934,320

Net Current Assets 2,257,585

4,435,585

Financed by:
RM
Capital 1,575,500
add Net Profit 2,985,085
4,560,585
less Drawings 125,000
4,435,585

Workings:
1. General expenses at 31 Aug 03 388,850
(a) Insurance Prepaid [12,600/12 x 4] - 4200
384,650
(b) Accruals : water & electricity 2,100
telephone expenses 2,220 + 4,320
388,970

2. Provision for bad & doubtful debts 544,500 x 5% = 27,225

less provision b/f 26,500
Increase in provision for bad &
doubtful debts 725

3. Provision for depreciation

- Fixtures & Fittings 232,000 x 25% = 58,000
- Motor Vehicles (525,000 - 225,000) x 20% = 60,000

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 Question 2
Candidates had difficulty answering this question as they could not prepare the relevant accounts for
depreciation. Candidates have to understand the double entry for the Fixed Assets Account, Provision for
Depreciation of Fixed Assets and Disposal Account.

2. Keen Knitting Manufacturing Company

a) i Machinery Account
2003 RM 2003 RM
1-Jan Balance b/f 575,000 13-Jun Fixed Assets Disposal a/c 95,000
28-Mar Bank 158,000 31-Dec Balance c/f 808,000
13-Jun Bank 130,000
13-Jun Fixed Assets Disposal a/c 40,000

903,000 903,000

ii Provision for Depreciation on Machinery Account

2003 RM 2003 RM
13-Jun Fixed Assets Disposal a/c 47,000 1-Jan Balance b/f 268,000
31-Dec Balance c/f 367,750 31-Dec Profit & Loss a/c 146,750

414,750 414,750

iii Fixed Assets Disposal Account

2003 RM 2003 RM
13-Jun Machineries 95,000 13-Jun Prov for Depreciation 47,000
Machineries 40,000
Profit & Loss a/c 8,000
95,000 95,000

Working:
Cost 808,000
Depreciation (268000-
221,000
47000)
Net Book Value 587,000
25% depreciation 146,750

(b) Give any two of the following factors:

• Economic useful life

• Technological obsolescence
• Change in market demand
• Legal limits

Page 8 of 12 BFSC/COFSA April 2004 - CF04 Institut-Bank-Bank Malaysia

 Question 3
Most candidates only managed to answer half of the question correctly although there were some candidates
who answered it fairly well.

3. (a) materiality concept

(a) going concern concept

(b) historical cost concept

(c) substance over form concept

(d) separate entity concept

(e) matching concept

(f) conservatism concept

(g) money measurement concept

(h) realisation concept

(j) consistency concept

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 Question 4
The majority of the candidates performed satisfactorily in this question.

4. (a)
Stock Account
PRICE/unit UNITS FIFO LIFO
Date Transaction RM RM RM
15 June 03 Purchased 5.00 500 2,500 2,500
25 July 03 Purchased 5.50 600 3,300 3,300
Stock balance: 1,100 5,800 5,800

July to September 2003 Sold 800 4,150 4,300

Stock balance as at 30 September 2003: 300 1,650 1,500

10 November 03 Purchased 4.80 1,500 7,200 7,200

October to December 2003 Sold 1,600 7,890 7,700
Stock balance as at 31 December 2003: 200 960 1,000

2 January 04 Purchased 5.60 1,000 5,600 5,600

January to March 2004 Sold 900 4,880 5,040
Closing Stock at 31 March 2004 (Workings 1): 300 1,680 1,560

Cost of Goods Sold for the period June 2003 to March 2004: 600 16,920 17,040
(Workings 2)

Workings 1: Closing Stock

First-in, First-out (FIFO): (300 X 5.60) = 1680
Last-in, First-out (LIFO): (200 X 5 +100 X 5.6) = 1560

Workings 2: Cost of Goods Sold

First-in, First-out (FIFO): 4150+7890+4880 = 16920
Last-in, First-out (LIFO): 4300+7700+5040 = 17040

(b) Outdated stocks - closing stock valuation

FIFO LIFO
RM RM
300 units at cost 1,680 1,560
300 units at NRV (RM5.25) 1,575 1,575
Stock value to be written down by: 105 -

Under the FIFO method, the cost is RM1,680, which is higher than the Net Realisable Value (NRV) of
RM1,575. Under the LCM rule, the closing stock shall valued at RM1,575.

Under the LIFO method, the stock is to be valued at cost of RM1,560 as this value is lower than the NRV.

Page 10 of 12 BFSC/COFSA April 2004 - CF04 Institut-Bank-Bank Malaysia

 Question 5
The majority of the candidates did fairly well in this question as they were able to analyse and interpret both
companies’ performances based on the ratios.

5.

(a) (i) Gross profit margin = Sales - Cost goods sold x 100
Sales

= 2,700,000 - 1,500,000 x 100

2,700,000

= 44.44%

(ii) Net profit margin = Gross profit + Income - Expenses x 100

Sales

= 1,200,000 + 15,000 - 260,500 x 100

2,700,000

= 954,500 x 100
2,700,000

= 35.35%

(iii) Current ratio = Current asset / Current liabilities

= 448,000
195,000

= 2.3 :1

(iv) Acid test ratio = (Current asset - Stock) / Current liabilities

= 253,000
195,000

= 1.3 : 1

(v) Return on capital employed = Net profit / Capital employed x 100%

= 954,500 x 100
480,000

= 198.85%

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(b) (i) Jelita Florist’s gross profit margin is lower than Mc Bloom Florist by 5.56%.

(ii) Jelita Florist’s net profit margin is better than Mc Bloom Florist by 5.35%. This could be due
to a better management of resources and control of expenses by Jelita Florist.

(iii) Jelita Florist’s current ratio is not as good as Mc Bloom Florists’ current ratio but 2.3:1 is an
acceptable ratio as it indicates that Jelita Florist is able to meet its current liabilities.

(iv) The acid test of Jelita Florist is better than Mc Bloom Florist. This indicates that Jelita Florist
is able to pay its immediate debts when they fall due.

(v) Return on capital employed of Jelita Florist’s is better than Mc Bloom Florist by 51%. This
shows that the overall performance of Jelita Florist is very good.

Page 12 of 12 BFSC/COFSA April 2004 - CF04 Institut-Bank-Bank Malaysia