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Caa 301: Financial Accounting Theory Question Paper
Caa 301: Financial Accounting Theory
Course:Bachelor Of Commerce
Institution: Kca University question papers
Exam Year:2009
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UNIVERSITY EXAMINATIONS: 2008/2009
THIRD YEAR STAGE I EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 301: FINANCIAL ACCOUNTING THEORY
DATE: AUGUST 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer All Questions
QUESTION ONE
(a) In order to achieve the objectives of the Current Cost Accounting Approach each item of the
financial statements must be restated in terms of the current value of that item. Changes in the
general purchasing power of money are not recognized and assets are shown in terms of what
such assets would current cost. Similarly, profits are computed on the basis of what the cost
would have been at the date of sale rather than the actual amount paid.
Discuss the main adjustments made under CCA approach (10 Marks)
(b) What are the limitations of historical Cost Accounting? (5 Marks)
(c) IAS 29 requires the use of a general price index to reflect changes in purchasing power. Most
governments issue periodic price indices that vary in their scope, but all undertakings that
report in the currency of the same economy should use the same index. The most reliable
indicator of changes in general price levels is considered to be the consumer price index. The
consumer price index is normally closest to the concept of the general price index required by
IAS 29 because it is at the end of the supply chain and reflects the impact of prices on the
general population’s consumption basket. Explain the most important attributes for a reliable
general price index (10 Marks)
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QUESTION TWO
(a) You are faced with the following situations when preparing the financial statements of your
company:
(1) You are about to deliver your monthly consignment of goods, when your client’s delivery
service ceases business. He asks you to store them, at his risk, until he can find alternative
transport.
(2) You sell carpets to a retail chain. They must be inspected prior to acceptance, but the inspector
is ill. None have been rejected in the last 3 years.
(3) You sell radiators to a wholesaler. Written notification of rejection must be made within 30
days.
(4) In April, you supply 40 computers to your agent. The contract is a consignment contract. In
November, the agent sells the computers, but you do not receive the money until December.
(5) You sell software via the Internet. Clients can pay on receipt of the software.
(6) You build warehouses. You accept deposits and progress payments, prior to the warehouse
being finished. When it is finished, 2% of the total payment remains unpaid, but is likely to be
paid soon.
(7) A buyer pays for your goods on the 5th of each month. They are shipped on the 10th of the
month, and he accepts delivery on the 15th of each month.
- You sell a portfolio of shares in January for $10.000, with a contract to repurchase
them for $10.500 in March.
- You sell a 5-year subscription to your hardware support service, payable in
advance.
- You sell a machine for $100.000, payable in instalments over one year. The rate of
interest is 10%. Interest is included in the price.
Required:
i.) Decide when, and how much, revenue can be recognized in each of the following
situations. Provide debits and credits for your answer, where revenue is
recognized. (10 Marks)
ii.) Discuss the due process in the formulation of accounting standards (10 Marks)
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(b) In preparing the accounts of your company for the year end March 31, 2009, you are faced
with the following problems:
i.) The company had a poor trading year and the owners believe that a more balanced
result could be presented if a LIFO stock valuation method was adopted instead of the
present FIFO method.
ii.) A debtor who owes a large amount of money is rumoured to be going into liquidation.
iii.) The company owns some shares in a quoted company which the auditors think are
worthless
iv.) At the year end, an amount is outstanding in respect of electricity bills.
v.) During the year the company purchases Shs200, 000 worth of stationery. These were
still in use at the end of the year.
Required
Explain how you would treat each of the above cases and give reasons for the treatment.
(5 Marks)
QUESTION THREE
(a) Explain the asset valuation models under inflation accounting (10 Marks)
(b) Discuss five approaches in human resources valuation. (10 Marks)
(c) Explain the attributes of reliable information. (5 Marks)
QUESTION FOUR
(a) Explain four problems created by the regulations of the accounting profession. (8 Marks)
(b) Discuss the adjustments for and against the regulation of the accounting professional
(7 Marks)
(c) What is accounting theory? Discuss the major approaches to accounting theory development.
(10 Marks)
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