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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 1 EXAMINATION FOR THE DEGREE OF
BACHELOR OF COMMERCE
CAA 301: FINANCIAL ACCOUNTING THEORY
DATE: APRIL 2009 TIME: 2 HOURS
INSTRUCTIONS: Answer ALL questions
QUESTION ONE
a) Presented below is a statement that appeared about Weyer Haeuser Company in financial
magazine.
The Land and Timber Holdings are now carried on the company’s books at mere
Kshs.422 million. The value of timber alone is variously estimated at from Kshs.3
billion to Kshs.7 billion and is rising all the time. “The understatement of the company
is pretty severe,” concedes Charles W. Bringttam, a Senior Vice President. Adds
Robert L. Schuyler, another senior Vice President. “We have a whole stream of profit
nobody sees and there is no way to show it in our books”.
Required:
(i) If the overstatement of the company’s asset is severe, why does accounting not
report this information? (4 Marks)
(ii) In the above situation, is there a conflict between relevancy and reliability?
Explain. (6 Marks)
b) State and explain the principles of accounting on which each of the treatments described below
are based.
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i. Calibre or quality of management is not directly disclosed on the balance sheet.
(3 Marks)
ii. Debentures are marked at the same amount in shillings which the company
borrowed though the purchasing power of money may have substantially changed.
(3 Marks)
iii. Advance received from a customer is not taken as income or sales. (3Marks)
iv. Rent paid for that portion of the premises utilized by the owner of the business for
his personal use is reduction of owner’s equity. (3 Marks)
v. Costs of advertising campaign are charged as expense in the period in which the
company’s are made. (3 Marks)
QUESTION TWO
a) In relation to international accounting committee “framework for the preparation and
presentation of financial statements.”
(i) What is the objective of financial statements? (4 Marks)
(ii) What factors affect financial position of an enterprise? (3 Marks)
(iii) “Qualitative characteristics are the attributes that make the information provided in
financial statement useful to users”
b) Discuss the main qualitative characteristics with reference to the providers of risk capital to an
enterprise. (18 Marks)
QUESTION THREE
a) Contrast financial capital maintenance with physical capital maintenance (10 Marks)
b) Price level adjustment may be accomplished by using specific price indexes as well as a
general price level index. One possibility is to use a weighted average price index for the
firm’s own mix of assets. What are the shortcomings of adopting this approach? (15 Marks)
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QUESTION FOUR
Mr. Kiprop has been hired recently by worldwide Kenya ltd. as the finance director. Among the
changes that he has proposed includes reporting the Human Resources asset in the financial
statements. To this effect, he issued a memo to the chief accountant advising him to include the
human resource assets when preparing the financial statements of the current year. The chief
accountant is puzzled as he has never heard of human resources accounting. Prepare a report to
the chief accountant giving him:
(i) The definition of HRA
(ii) Approaches to human resources valuation
(iii) Benefits of HRA
(iv) The contents of HR report (20 Marks)
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