Financial Accounting Question Paper

Financial Accounting

Course:Bachelor Of Commerce

Institution: Kenyatta University question papers

Exam Year:2008

KENY ATTA UNIVERSITY
UNIVERSITY EXAMINATIONS 2007/2008
SELF- SPONSORED PROGRAM -SCHOOL BASED
FIRST SEMESTER EXAMINATION FOR THE DEGREE OF MASTERS OF
BUSINESS ADMINISTRATION
BAC 500: FINANCIAL ACCOUNTING
DATE: Friday 4th January 2008
TIME: 9.00 a.m. - 12.00 Noon
Instructions
1. Answer ALL questions.
2. Show all your workings.
3. Marks allocated are shown at the end of each question.
Question One
.
The following trial balance was extracted from the books of Amazungu medical services
for the year ended 31 st march 2005.
Amazungu Petero Medical services
Trial balance sheet as at 31 march 2005.
sh
sh
Capital
2,000,000
Drawings
800,000
Motor vehicle costs
3,000,000
Provisions for depreciation- motor vehicle
750,000
Fixture and fittings at cost
1,500,000
Provisions for depreciation- fixture & fittings
300,000
Cash
350,000
Owed by clients
600,000
Owing to suppliers
167,500
Loan
500,000
Medical fees earned
3,750,000
Salaries and wages
2,225,000
Office supplies
125,000
Interests
75,000
Rent
145,000
Medical and laboratory supplies
250,000
Insurance
200,000
Laboratory fees
1,050,000
Miscellaneous expenses
65,000
Electricity and water
82,500
Motor vehicle running expenses
300,000
Unearned medical services fees
1,200,000
9,717,500
9,717,500
Additional information
1.
A number of organizations pay in advance for services that they may be rendered
to their employees by this practice services in this category worth sh 500,000 have
been receive.
1

. "
11.
Some patients have not yet been billed for services rendered during the last half of
March 2005. The value of the services to the firm is estimated at sh 375,000 and
the invoice will be raised soon.
111.
Rent includes sh 45,000 paid on 1st march 2005 for occupation of office up to 31st
may 2005.
IV.
Provisions should be made for depreciation at the rate of 25% pa on the motor
vehicle, reducing balance basis and at 22.5% pa on the cost of fixtures and the
fittings.
v.
The loan was taken on l " July at an annual interest of30% payable semi annually
on 31st December and 30th June. The full principal is to be repaid on 30th June
2009.
VI.
Employee's salaries amounting to sh 190,000 have not yet been paid.
Vll.
Electricity bill at sh 10,000 will be paid on 30th April 2005
Vlll.
A physical count on 31st march 2005 showed office supplies on hand at sh 40,000
and a medical laboratory supplies at sh 75,000.
IX.
A premium of sh 90,000 was paid on December 2004 for one year fire insurance
policy.
Required.
a) A profit and loss account of Amazungu Petero Medical Services for the year
ended 31st march 2005.
b) Balance sheet as at 31st march 2005.
( Total: 25 marks)
Question Two
a) Accounting
standards improve the quality and uniformity of reporting and
introduce a definitive approach to the concept of what is true and fair. List the
main advantages and disadvantages of accounting standards.
(8 marks)
b) A decision was recently made by the council of the Institute of Certified Public
Accountants'
of Kenya (ICP AK) to shift the International Financial Reporting
Standards (IFRS). What reasons have persuaded the council to make this change.
and what benefit are likely to accrue to the accounting profession.
(7 marks) .
c) The objective of the financial statement is to provide information about the
financial position, performance and change in financial position of an entity that
is useful to a wide range of users in making economic decisions.
Required
Describe the qualitative characteristics of accounting information.
(10 marks)
(Total: 25 Marks)
2

, ,,
Question Three.
Mr. Eama wishes to sell his minority shareholding of 3,000 sh.lO shares in Zebra Crafts
Limited. Zebra Crafts Limited is a private company with an issued share capital of
sh.I, 500,000.
The current shareholders and their shareholdings are as follows:
Shareholder
Shareholding
(Shares)
Mr. Athmany
73,500
Ms. Boiyon
36,000
Mr. Chewe
24,000
Ms. Duale
13,500
Mr. Eama
3,000
The income statements for five years to 30 June 20XO are as follows
year ended 30
September
1996
1997
1998
1999 20XO
Shs. '000,
Shs. '000'
Shs. '000'
Shs. '000'
Shs. '000'
Sales
47,880
50,400
67,200
101,640
140,400
Cost of sales
(20,805)
(21,900)
(35,040)
(62,460)
(93,720)
Gross profit
27,075
28,500
32,160
39,180
46,680
Admin. Expenses
(10,260)
(10,800)
(12,000)
(14,400)
(16,800)
Distribution costs
(15,330)
(16,140)
(18,000)
(21,600)
(25,200)
Operating profit
1,485
1,560
2,160
3,180
4,680
Taxation
(456)
(480)
(720)
(1,080)
(1,630)
Profit after tax
1,029
1,080
1,440
2,100
3,050
Ordinary dividends
(250)
(270)
(288)
(300)
{ill)
Retained profit
779
810
1,152
1,800
2,735
The gross dividend yield on quoted companies operating in the same business sector
isI2%. You are advised that this yield should be increased to 18% to allow for lack of
marketability. The rate of corporation tax should be taken to be 30% through the period
being considered.
Required:
a) Discuss the relevance of dividends in the valuation of Mr. Earna's shareholding.
Illustrate your answer from the data given. (10 marks)
b) Explain the factors you would take into account when estimating the future
dividends and when estimating the investors' required yield. (5 marks)
c) Explain how your approach when valuing a minority interests could be influenced
by the size of the shareholding, or the fact that the owner is a party related to other
significant shareholders. (5 marks)
3

. .,,
•
..
d) The industrial return on asset in the tea sector is 10%. A company in this industry
has total assets valued at sh 20,000,000. The normal return is 5% with a risk
premium of25%. Average profits for over 5 years have been sh 1,750,000.
NB: these earnings are expected to double in future.
Required:
Calculate value of the business. (5 marks)
(Total: 25 Marks)

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