BUST 211 IFA: Stock | Inventory Management

QUESTION ONE 

(a) An important requirement of the IASB’s framework for the preparation of financial  statements, is that in order to be reliable an entity’s financial statements should represent  faithfully the transactions and events that it has undertaken

Explain what is meant by faithful representation and how it enhances reliability [5 marks] 

Answer: Faithful representation means that the financial statements reflect the actual economic events and transactions of a business accurately and honestly, without bias, manipulation, or error. It enhances reliability because users can trust the information to make financial decisions. For example, if a company owns equipment, the financial statements should report it at its appropriate value, considering depreciation, rather than overstating or hiding it. Faithful representation includes three key aspects: completeness, neutrality, and freedom from error.

(b) The following trial balance was extracted from the books of XYZ ltd as at 31st Dec 2017 

Additional information: 

1) The debenture interest for the year is to be accrued as at 31st Dec 2017 

2) All deprecation is treated as an administrative expenses and is provided on building and plant and equipment at 2% on straight line and 20% on reducing balance basis respectively 

3) The estimated corporation tax for the year was estimated at sh. 2 million 

4) The directors propose to pay the ordinary shareholder a final dividend of sh. 1 per share for the year ended 31st Dec 2017 

Required: 

Statement of comprehensive income, statement of financial position and statement of  changes in equity for the year ended 31st Dec 2017 [20 marks] 

(c) Describe the characteristics by which intangible assets may be classified [5 marks] 

Answers:

i) Statement of Comprehensive Income for the year ended 31st Dec 2017

ii) Statement of Financial Position as at 31st Dec 2017

Assets

Non-current Assets

• Land: 21,000
• Building (16,000 – 4,260 – 320): 11,420
• Plant & Equipment (25,600 – 4,960 – 4,128): 16,512

Total Non-current Assets = 48,932

Current Assets

• Nil given in question, assumed none

Total Assets = 48,932

Equity and Liabilities

Equity

• Ordinary Share Capital (Sh 40 × 500,000 shares): 20,000
• Share Premium: 6,000
• Retained Earnings (19,260 – 1,000 dividend – 568 loss): 17,692

Total Equity = 43,692

Non-current Liabilities

• 10% Debentures: 4,000

Current Liabilities

• Accrued Debenture Interest: 400
• Corporation Tax Payable: 2,000
• Proposed Final Dividend (1 × 500,000 shares): 500

Total Liabilities = 6,900

Total Equity + Liabilities = 50,592

(Note: Balancing figure mismatches due to limited info; assumptions used for educational purpose)

iii) Statement of Changes in Equity

(c) Characteristics of Intangible Assets

1. Lack of physical substance – They can’t be touched or seen, like goodwill, patents, or trademarks.
2. Identifiability – Either separable or arising from contractual/legal rights.
3. Controlled by the entity – The company must be able to restrict access to the asset.
4. Future economic benefits – They must provide economic returns, like revenue from software.
5. Recognition criteria – Must be measurable and probable that future benefits will flow.

On the basis of past experience, the company estimated the percentage uncollectible for the above age groups are 1%, 4%, 12%, 18% and 45% for group 1, 2, 3, 4 and 5  respectively. The allowance for doubtful accounts before adjustment at 31st December   showed a credit balance of sh. 8,800 

Required: 

(a) Compute the estimated amount of uncollectible account based on the above classification of age group [7 marks] 

(b) Prepare the adjusting entry needed to bring the allowance for doubtful account to  the proper amount. [4 marks] 

(c)  Describe the common cash management and control practices  [4 marks] 

QUESTION TWO ANSWERS

(a) Journal Entries for JS Traders

1. Sales Entry

• Dr Accounts Receivable 18,000
• Cr Sales Revenue 18,000

2. 60% Collected Within Discount Period (60% × 18,000 = 10,800 @ 2%)

• Dr Cash 10,584
• Dr Sales Discount 216
• Cr Accounts Receivable 10,800

3. 35% Collected Late (35% × 18,000 = 6,300)

• Dr Cash 6,300
• Cr Accounts Receivable 6,300

4. 5% Past Due (5% × 18,000 = 900)

• No entry yet unless written off or adjusted later.

(b) Estimated Uncollectible Amount

(c) Adjusting Entry

Allowance already = 8,800

Required = 29,640

Adjustment = 29,640 - 8,800 = 20,840

• Dr Bad Debt Expense 20,840
• Cr Allowance for Doubtful Accounts 20,840

(d) Common Cash Management and Control Practices

1. Segregation of duties – Separate people handle cash, record transactions, and reconcile.
2. Bank reconciliations – Regular matching of bank records to company cashbook.
3. Cash budgets – Forecasting inflows and outflows for better planning.
4. Petty cash control – Limits and vouchers for small expenses.
5. Use of electronic payments – Reduces theft and speeds up reconciliation.

Required: 

Inventory measurement value as at 31st Dec 2018 [6 marks] 

Distinguish between product cost and period cost  [4 marks]

QUESTION THREE

(a) Definition and Characteristics of a Liability

A liability is a present obligation resulting from past events, which will result in an outflow of resources (cash or services).
Characteristics:

• It’s a present obligation.
• Arises from past events.
• Will require future economic outflows to settle.
• Can be legal or constructive.

(b) Asset Disposal Account

(c) Inventory Measurement

(Exclude selling costs and interest)

(d) Product vs Period Cost

Product Cost – Directly related to production (raw materials, labor, factory overhead). Capitalized as inventory.

Period Cost – Not tied to production (admin, rent, sales). Expensed in the period incurred.

QUESTION FOUR 

(a) The following information relates to ABC ltd concerning the acquisition and use of 3,000 acres of land for oil extraction