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A) MATERIALITY
In accordance to the International Accounting Standards Framework (IASF), it is a
qualitative characteristic of financial statements. As such it makes the information provided
in financial statements useful to its users.
Information is material if is omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements. Materiality depends on the
size of the item or error judged in the particular circumstance of its omission or
misstatement. Thus materiality provides a threshold or cut off point rather than being a
primary qualitative characteristic which information must have if it is to be useful. It
therefore affects the relevance of information.
B) PRUDENCE
Prudence can be defined as the inclusion of a degree of caution in the exercise of the
judgments needed in making the estimates required under the conditions of uncertainty,
such that assets or income are not overstated and liabilities or expenses are not understated.
However, the exercise of prudence does not allow, for example the creation of hidden
reserves or excessive provisions, the deliberate understatement of assets or income or the
deliberate overstatement of liabilities or expenses because the financial statements would
not be neutral and therefore not have the quality of reliability.
Prudence is a fundamental concept of accounting in which reasonable estimates should be
made to ensure that the profits shown in the income statement is realistic.
C) CONSISTENCY
This is one of the fundamental accounting concepts. This refers to the convention that
when a firm has once fixed a method for the accounting treatment of an item, it will enter
all similar items that follow in exactly the same way.
However, a firm can change the method used, but such a change is not made without a lot
of consideration. When such a change occurs and the profits calculated in that year are
affected by a material amount, then either in the profit and loss account itself or in one of
the reports with it, the effect of the change should be stated.
Mutiso answered the question on November 26, 2018 at 17:06
- Wananchi Transporters Company Ltd. was incorporated on 1 June 1994 and on the same day
bought its first lorry, registration number KA 620, for Sh.4, 536,000.
On...(Solved)
Wananchi Transporters Company Ltd. was incorporated on 1 June 1994 and on the same day
bought its first lorry, registration number KA 620, for Sh.4, 536,000.
On 3 April 1995, the company bought its second lorry, KA 735 for Sh.2, 740,000.
On 3 June 1997, the first lorry, KA 620 was involved in an accident and was completely written
off. The insurance company paid the transport company Sh.1, 350,000 for the loss. On 5
January 1998, the company bought its third lorry, KB 327 for Sh.3, 780,000. Depreciation on
the lorries was provided at 10 per cent on straight -line basis. The policy of the company is to
provide depreciation for the full year for all acquisitions made at any time during the year and to
ignore depreciation on any lorry sold or disposed of during the year. All the lorries are insured.
The company makes its accounts annually to 31 December.
In 1998, the company decided to change its depreciation rate from 10 to 15 per cent on straight
line basis for all its lorries still in use retroactively, that is from year of purchase. An adjusting
entry will be made in the accounts for the year 1998.
Required:
1. The motor lorries account for years 1994 to 1998.
2. A schedule of additional depreciation arising from change of depreciation rate, for years
1994 to 1997.
3. Provision for depreciation account for the same period.
4. Disposal of motor lorries account.
Date posted: November 26, 2018. Answers (1)
- The cashbook column of Tatua Traders Company Ltd. had an overdraft of Sh.532, 400 as at 31
October 1998, which did not agree with balance as...(Solved)
The cashbook column of Tatua Traders Company Ltd. had an overdraft of Sh.532, 400 as at 31
October 1998, which did not agree with balance as per bank statement of the same date.
On checking through the relevant records and documents, some details were established as
shown below:
1. Bank charges and interest on overdraft as per the bank statement amounted to Sh. 12,450
and Sh. 135,480 respectively.
2. A debtor deposited Sh.254, 500 to the bank direct.
3. Insurance premium of the mortgaged property amounting to Sh.35, 485 was paid direct
by the bank.
4. Standing orders of Sh. 138,000 have been effected by the bank.
5. Cheques for Sh.354, 890 which were banked on 29 October 1998 were credited by the
bank on 5 November 1998.
6. Cheques drawn by the company amounting to Sh.745, 964 had not been presented for
payment as at 31 October 1998.
7. A cheque for Sh.74, 500 was debited by the bank as Sh.47, 500.
8. The payments side of the cashbook was undercast by Sh.32, 000.
9. The bank had debited the account with another customer's cheque of Sh.27, 500 but had
not yet corrected the mistake on 31 October 1998.
Required:
(a) Make adjustments in the cash book and show the adjusted cash book balance.
(b) A bank reconciliation statement as at 31 October 1998.
Date posted: November 26, 2018. Answers (1)
- XML Ltd. maintains control accounts in its business records. The balances and transactions relating to the company's control accounts for the month of December 1994...(Solved)
XML Ltd. maintains control accounts in its business records. The balances and transactions relating to the company's control accounts for the month of December 1994 are listed below:
Required:
Post the sales ledger and the purchases ledger control accounts for the month of December
1994 and derive the respective debit and credit closing balances on 31 December 1994.
Date posted: November 26, 2018. Answers (1)
- Explain the purposes for which control accounts are prepared in a business organisation(Solved)
Explain the purposes for which control accounts are prepared in a business organisation.
Date posted: November 26, 2018. Answers (1)
- Jim Mukora commenced business as the proprietor of 'stop-shop' on 1 April 1993, paying
Sh.480,000 into business bank account. The Sh.480,000 was made up of Sh.320,000...(Solved)
Jim Mukora commenced business as the proprietor of 'stop-shop' on 1 April 1993, paying
Sh.480,000 into business bank account. The Sh.480,000 was made up of Sh.320,000 from his
own funds, and further Sh. 160,000 borrowed from his friend, Bob Meme, who was to be paid
interest at 20% per annum on prorata basis. On 1 January 1994, Meme joined Mukora as a
partner and it was agreed that:
1. Mukora and Meme should bring their cars into the partnership at values of Sh. 144,000
and Sh.96, 000 respectively. .
2. Meme's loan should be converted to capital on 1 January 1994 and he should
introduce further capital of Sh.160, 000.
3. From 1 January 1994, Mukora should receive a salary of Sh.128, 000 per annum.
4. The balance of the profits and losses to be shared equally between the partners. The
partnership did not keep full records, but the following information was obtainable:
(i) The bank statement showed:
(ii) From various notes it was discovered that the following expenses were paid out of
the takings from cash sales before they were banked:
Sh.
Wages of shop assistants 320,000
Motor expenses 9 months to 31 December 1993 52,000
3 months to 31 March 1994 22,400
Purchases 59,200
Sundry expenses 12,000
A cash float of Sh.2, 400 was retained at the end of each day.
(iii) The cars are to be depreciated on the straight line basis at a rate of 25 % per annum.
(iv) It was established that the following items were to be taken into account on 31
March 1994:
Sh.
Trade creditors 108,000
Unexpired sundry expenses 4,000
Trade debtors 824,000
(v) Stocks on 31 March 1994 were valued at 776,000
Required:
(a) A Trading Account for the year ended 31 March 1994. (5 marks)
(b) Profit and Loss and Appropriation Accounts for the nine months ended 31 December,
1993 and for the three months ended 31 March 1994 and the year to 31 March 1994.
(Unless otherwise stated, you may assume that all expenses and sales accrued
evenly over the year). (15 marks)
(c) A balance Sheet at 31 March 1994.
Date posted: November 25, 2018. Answers (1)
- Jaguar Traders Ltd. was incorporated on 4 May 1998 with a nominal capital of Sh.
1,000,000 divided into 50,000 ordinary shares of Sh.20 each.
On 5 May...(Solved)
Jaguar Traders Ltd. was incorporated on 4 May 1998 with a nominal capital of Sh.
1,000,000 divided into 50,000 ordinary shares of Sh.20 each.
On 5 May 1998, the directors invited interested members of the public to apply for purchase of
shares at par. The closing date for application was 15 May 1998. Applications were received for
60,000 ordinary shares and paid in full. The allotment was made on 20 May 1998 and the excess
application money refunded.
On 26 May 1998, the directors bought: furniture Sh. 150,000, equipment Sh.250,000
and goods Sh.500,000. All these were delivered and paid for on the same date.
Required:
(a) Journal entries, including bank to record the above transactions
(b) Ledger accounts
(c) Balance sheet as at 26 May 1998
Date posted: November 25, 2018. Answers (1)
- The following is the bank statement of Kakamega Retail Traders for the month of October 1996:(Solved)
The following is the bank statement of Kakamega Retail Traders for the month of October 1996:
Notes:
1. The bank reconciliation on 30 September 1996 showed that one deposit was in transit and
two cheques had not yet been presented to the bank.
2. Deposits of Sh.62, 500 and Sh.36, 000 had been entered in the cash book as Sh.26,500
and Sh.36,000 and in the bank statement as Sh.62,500 and Sh.63,000, respectively.
3. A cheque from Mkulima for Sh.15,700 was deposited on 18 October 1996 but
was dishonoured and the advice was received on 4 November 1996.
4. Counterfoils for cheques no. 76 and no. 88 showed they had been drawn for Sh.5,800 and
Sh.35,500 respectively.
Required:
(a) A correct cashbook balance.
(b) A bank reconciliation statement on 31 October 1996.
Date posted: November 25, 2018. Answers (1)
- What is the purpose of preparing a bank reconciliation statement?(Solved)
What is the purpose of preparing a bank reconciliation statement?
Date posted: November 25, 2018. Answers (1)
- The treasurer of Kay Club and Ray Society has prepared the following receipts and payments
account for the year ended 31 December 1994:(Solved)
The treasurer of Kay Club and Ray Society has prepared the following receipts and payments
account for the year ended 31 December 1994:
Note. It is the policy of the Society NOT to take into account subscriptions in arrear until
theyare paid.
1) The mobile hut which was sold during 1994 had been valued at Sh.400,000 on 31
December 1993, and was used for the society's activities until sold on 30 June 1994.
2) Immediately after the sale of the mobile hut, the Society rented a new hall at Sh.165,000 per
annum.
3) The above receipts and payments account is a summary of the society's bank account for
the year ended 31 December 1994; the opening and closing balances shown above were the
balances shown in the bank statements on 31 December 1993 and 1994 respectively.
4) All cash is banked immediately and all payments are made by cheque.
5) A cheque for Sh.l00,000 drawn by the society on 28 December 1994 for stationery was not
paid by the bank until 4 January 1995.
6) The Society's assets and liabilities at 31 December 1993 and 1994, in addition to those
mentioned earlier, were as follows:
Required:
a) The Society's Income and Expenditure Account for the year ended 31 December
1994, and balance sheet as at that date. (Comparative figures are not required).
b) Outline the advantages of income and expenditure accounts as compared with
receipts and payments accounts.
Date posted: November 25, 2018. Answers (1)
- Manga Munene is the proprietor of a retail business, which has two main departments, which
sell hardware and electrical goods, respectively. He had previously prepared his...(Solved)
Manga Munene is the proprietor of a retail business, which has two main departments, which
sell hardware and electrical goods, respectively. He had previously prepared his annual accounts
in such a way that the relative profitability of the two departments was not ascertainable, but
now he wishes to attempt to identify the profit attributable to each department in order that he
may pay a bonus to the more successful of the departmental managers. At 30 September 1994,
the balances in the books of the business were as follows:
The general administrative expenses are primarily incurred in relation to the processing
of purchases and sales invoices.
Required:
(a) A schedule showing the basis on which you have apportioned the various expenses
between the two departments.
(b) The departmental and combined Trading and Profit and Loss Account for the year
ended 30 September 1994.
(c) Balance Sheet at 30 September 1994.
Date posted: November 25, 2018. Answers (1)
- The following trial balance was extracted from the books of Hiza Ltd. as on 30 September 1995(Solved)
The following trial balance was extracted from the books of Hiza Ltd. as on 30 September 1995:
You are given the following information:
1. Stock in trade, 30 September 1995 was Sh.28, 875,000.
2. The provisions for bad debts is to be increased to Sh.750,000.
3. Salaries and .wages outstanding at 30 September 1995 is Sh.500,000.
4. Rates and insurance paid in advance at 30 September 1995 is Sh. 155,000.
5. The item 'rent receivable Sh.625,000 includes Sh. 125,000 in respect of the period from 1
October 1995 to 31 December 1995.
6. Provision is to be W de for depreciation of motor vehicles at the rate of 20 per cent
per annum on cost.
7. During the year to 30 September 1995, Ombima, one of the directors took goods (cost
Sh.437,500) out of business stock for his own use. No entry for this transaction has
been made in the books.
Required:
(a) Trading and Profit and Loss Account for the year to 30 September 1995.
(b) Balance Sheet as at that date.
Date posted: November 25, 2018. Answers (1)
- With reference to International Accounting Standards explain the following:
(a) Fundamental accounting concepts
(b) Accounting bases
(c) Accounting policies(Solved)
With reference to International Accounting Standards explain the following:
(a) Fundamental accounting concepts
(b) Accounting bases
(c) Accounting policies
Date posted: November 25, 2018. Answers (1)
- James Mbuvi started a taxi business in Nairobi in March 1990 under the firm name Mbuvi
Taxis. The firm had two vehicles KA and KB which...(Solved)
James Mbuvi started a taxi business in Nairobi in March 1990 under the firm name Mbuvi
Taxis. The firm had two vehicles KA and KB which had been purchased for Sh.560,000 and
Sh.720,000 respectively earlier in the year.
In February 1992 vehicle KB was involved in an accident and was written off. The insurance
company paid the firm Sh.160,000 for the vehicle. In the same year the firm purchased two
vehicles, KC and KD for Sh.800,000 each.
In November 1993' vehicle KC was sold for Sh.716,000. In January 1994 vehicle KE was
purchased for Sh.840,000. In March 1994 another vehicle KF was purchased for Sh.960.000.
The firm's policy is to depreciate vehicles at the rate of 25 per cent on cost on vehicles on hand
at the end of the year irrespective of the date of purchase. Depreciation is not provided for
vehicles disposed of during the year. The firm's year ends on 31 December.
Required:
(a) Calculate the amount of depreciation charged in the profit and loss account for each of the five
years.
(b) Prepare the motor vehicle account (at cost).
(c) Calculate the profit or loss on disposal of each of the vehicles disposed of by the company.
Date posted: November 25, 2018. Answers (1)
- According to the cash hook of Gaitani Ltd. the company has a credit balance at the hank of
Sh.190.000 on 30 June 1994, but this is...(Solved)
According to the cash hook of Gaitani Ltd. the company has a credit balance at the hank of
Sh.190.000 on 30 June 1994, but this is NOT borne out by the Bank Statement of the same
date. An investigation into the difference yields the following information.
1 A standing order for a charitable subscription of Sh.20, 000 had been paid by the
hank on 29 June but no entry had been made in the cash hook.
2. A cheque paid for advertising on 10 little for Sh.89,500 had been entered into
the cash hook as Sh.98,500.
3 Cheques for S11.5 18,500 sent to creditors on 30 June were not paid by the hank
until 8 July.
4. Cheques received front customers amounting to sh.840.000 were paid into the bank on
30 June but were not credited by the hank until 5 July.
5. On 20 Julie a cheque for h.57, 000 was received from a customer in settlement of
an invoice for Sh.60.000. An entry of Sh.60.000 had been made in the cash hook.
Required:
(a) Prepare a statement reconciling the cash hook balance with the hank statement.
(b) Explain how a company may have reduced its hank balance during an accounting period
but still have earned a profit fur that same period.
Date posted: November 25, 2018. Answers (1)
- The Chief Accountant of KK Ltd. has extracted the following trial balance as at 31 October 1998:(Solved)
The Chief Accountant of KK Ltd. has extracted the following trial balance as at 31 October 1998:
Notes:
1. Credit sales amounting to Sh. 165,000 were made on 31 October 1998 but no entries were
made in the books.
2. Returns outwards amounting to Sh. 128,000 were dispatched on 31 October 1998 but no
entries were made in the books.
3. Closing stock was valued at Sh.4, 398,000.
4. Accrued salaries and telephone bills amounted to Sh. 134,000 and Sh.55, 000 respectively.
5. Rent for the month of October 1998 amounting to Sh.35, 000 had not been received
from the tenant.
6. Provision for depreciation on furniture and fittings and the motor vehicles are 10% and
20% on cost respectively.
7. Provision for bad and doubtful debts of 5 % on trade debtors should be made.
8. Corporation tax should be provided at 35 % of the net profit before tax.
9. The directors propose a dividend of 15% on issued share capital and a transfer of
Sh.2, 500,000 to the general reserve.
10. The debenture interest has not yet been paid.
Required:
(a) Trading, profit and loss account for the year ended 31 October 1998.
(b) Balance sheet as at 31 October.
Date posted: November 25, 2018. Answers (1)
- List and explain five characteristics of a partnership(Solved)
List and explain five characteristics of a partnership.
Date posted: November 24, 2018. Answers (1)
- Accounting Ratios have been used by a number of companies as indicators of their financial performance in the present and even in the future. Discuss...(Solved)
Accounting Ratios have been used by a number of companies as indicators of their financial performance in the present and even in the future. Discuss the five limitations associated with their use for this purpose.
Date posted: November 24, 2018. Answers (1)
- Kathryn Rochford keeps her petty cashbook on the imprest system, the imprest being Sh.25. For the month of April 20X9 her petty cash transactions were...(Solved)
(a) Kathryn Rochford keeps her petty cashbook on the imprest system, the imprest being Sh.25. For the month of April 20X9 her petty cash transactions were as follows:
(i) Enter the above transactions in the petty cashbook and balance the petty
cashbook at 30 April, bringing down the balance on 1 May.
(ii) On 1 May Kathryn Rochford received an amount of cash from the cashier
to restore the imprest. Enter this transaction in the petty cashbook.
(b) Open the ledger accounts to complete the double entry for the following:
(i) The petty cash analysis columns headed Postage and Stationery and Travelling Expenses;
(iii) The transactions dated 9 and 23 April 20X9.
Date posted: November 24, 2018. Answers (1)
- Why do some businesses keep a petty cashbook as well as a cashbook?(Solved)
Why do some businesses keep a petty cashbook as well as a cashbook?
Date posted: November 24, 2018. Answers (1)
- The directors of Hawk, a limited liability company, wish to compare the company's most recent financial statements with those of the previous year. The company's...(Solved)
The directors of Hawk, a limited liability company, wish to compare the company's most recent financial statements with those of the previous year. The company's financial statements are given below:
Required:
(a) Calculate, for each of the two years, eight accounting ratios which should assist the directors
in their comparison, using closing figures for balance sheet items needed.
(b) Suggest possible reasons for the changes in the ratios between the two years.
Date posted: November 24, 2018. Answers (1)