RISE CHAPTER # 11 PREPARATION OF FINANCIAL

ICAP CHAPTER # 10 STATEMENTS

IN THIS CHAPTER: AT A GLANCE SPOTLIGHT

The published financial statements are available for review
AT A GLANCE SPOTLIGHT of external stakeholders (e.g. owners, lenders, suppliers,
customers etc.), who use it to evaluate the financial
performance, financial position, liquidity and cash flows of
Learning Outcomes as; an entity.
The preparation of financial statements involves the
1. IAS 1 PREPARATION OF process of aggregating accounting information from the
trial balance and year-end adjustments.
FINANCIAL STATEMENTS
It is necessary to incorporate double entry effect of year-
end adjustments as opposed to the balances in trial
balance which are already the result of double entry
bookkeeping process.
Statement of financial position is a snapshot of the entity's
2. PREPARING FINANCIAL financial position at a point in time that enlists assets,
STATEMENTS liabilities and equity of an entity at a particular date.
Statement of comprehensive income is a combination of
profit or loss and other comprehensive income. Profit or
loss shows the financial results for a period by summarising
income earned and expenses incurred during that
3. ADJUSTED TRIAL BALANCE particular period.
An adjusted trial balance is a comprehensive list of general
ledger account balances at period end, reflecting updates
from adjusting entries, such as accrued expenses or
4. DISTRIBUTION OF PROFITS depreciation. It provides a basis of preparing financial
statement with ease and accuracy.
AMONG PARTNERS Profit or loss appropriation is prepared for the distribution
of the net profit (or loss) among the partners in a
partnership business, according to the terms set in the
partnership agreement. This may include allocations for
5. FUNDAMENTAL ACCOUNTING salaries, interest on capital, or sharing profits and losses
based on an agreed ratio.
CONCEPTS A comprehensive understanding of the fundamental
accounting principles that underpin accounting practices is
essential. These foundational accounting concepts
collectively ensure the accuracy, transparency, and
reliability of financial reporting. By adhering to these
principles, organizations enable stakeholders to make well-
informed decisions, thereby fostering confidence and trust
in the integrity of financial markets and systems.
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

LO1: IAS 1 PREPARATION OF FINANCIAL STATEMENTS

IAS 1 Presentation of Financial Statements prescribes the basis for presentation of general-purpose financial
statements to ensure comparability both with the entity’s financial statements of previous periods and with the
financial statements of other entities. It sets out overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for their content.

GENERAL REQUIREMENTS
True and fair view
Financial statements should present fairly the financial position, financial performance and cash flows of the
entity.

Comparatives
Comparative information for the immediately preceding accounting period should be disclosed (you will not be
asked to provide comparative information).

Identification
Each component of the financial statements must be properly identified with the following information
displayed prominently:
• the name of the reporting entity
• the date of the end of the reporting period or the period covered by the statement, whichever is
appropriate
• the currency in which the figures are reported
• the level of rounding used in the figures
(for example, whether the figures thousands of rupees or millions of rupees).

Other titles
IAS 1 does not specify what the statements must be called and allows the use of other terminology. For
example, a statement of financial position is often called a balance sheet and a statement of profit or loss is
often called an income statement.

REQUIREMENTS AS TO STATEMENT OF FINANCIAL POSITION

Current and non-current assets
IAS 1 states that an asset should be classified as a current asset if it satisfies any of the following criteria:
• The entity expects to realise the asset, or sell or consume it, in its normal operating cycle.
• The asset is held for trading purposes.
• The entity expects to realise the asset within 12 months after the reporting period.
• It is cash or a cash equivalent unless the asset is restricted from being used for at least 12 months after
the reporting date. (Note: An example of ‘cash’ is money in a current bank account. An example of a ‘cash
equivalent’ is money held in a term deposit account with a bank.)
All other assets should be classified as non-current assets.
This definition allows inventory or trade receivables to qualify as current assets, even if they may not be realised
into cash within 12 months, provided that they will be realised in the entity’s normal operating cycle or trading
cycle.

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Current and non-current liabilities

IAS 1 also states that a liability should be classified as a current liability if it satisfies any of the following criteria:
• The entity expects to settle the liability in its normal operating cycle.
• The liability is held primarily for the purpose of trading. This means that all trade payables are current
liabilities, even if settlement is not due for over 12 months after the end of the reporting period.
• It is due to be settled within 12 months after the end of the reporting period.
• The entity does not have the unconditional right to defer settlement of the liability for at least 12 months
after the end of the reporting period.
All other liabilities should be classified as non-current liabilities.
Accrued expenses (and deferred income) are current liabilities as these are monies due to a third party but not
yet paid; for example, wages payable.
Illustration # 01:
If a company obtains a five-year bank loan, where none of the loan principal is repayable until the end of the
loan period, the loan will be a non-current liability for the first four years and will then become a current liability
in fifth year when it is repayable within 12 months.

Operating cycle
The operating cycle of an entity is the time between the acquisition of assets for processing and their realisation
in cash or cash equivalents. When the entity's normal operating cycle is not clearly identifiable, it is assumed to
be twelve months. This is almost always the case.
Minimum face items
IAS 1 provides a list of items that, as a minimum, must be shown on the face of the statement of financial
position as a ‘line item’ (in other words, on a separate line in the statement):
Assets
• Property, plant and equipment
• Investment property
• Intangible assets
• Long-term investments
• Investment in associate
• Biological assets
• Inventories
• Trade and other receivables
• Cash and cash equivalents.
Liabilities
• Trade and other payables
• Provisions
• Financial liabilities, loan etc.
• Current tax liabilities (but possibly assets)
• Deferred tax liabilities (but possibly assets). These are always non-current.
Equity
• Issued capital and reserves attributable to the owners of the entity.
(The term ‘owners’, refers to the equity holders.)

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Additional line items

Additional line items should be included in the statement of financial position when presenting them separately
and is relevant to an understanding of the entity’s financial position.

Face or Notes
Some of the line items in the statement of financial position should be sub-classified into different categories,
giving details of how the total figure is made up. This sub-classification may be presented either:
• as additional lines on the face of the statement of financial position
(adding up to the total amount for the item as a whole) or
• in notes to the financial statements.

REQUIREMENTS AS TO STATEMENT OF COMPREHENSIVE INCOME

A single statement or two statements
This statement provides information about the performance of an entity in a period. It consists of two parts:
• a statement of profit or loss – a list that summarizes the revenues, costs and expenses incurred during a
specified period which result in a profit or loss for the period; and
• a statement of other comprehensive income – a list of other gains and losses that have arisen in the
period.
The statement of comprehensive income shows the performance of the business in terms of its main activities.
It is a structured presentation of all revenue, other income earned in a period and the costs of earning those.
IAS 1 allows an entity to present the two sections in a single statement or in two separate statements. If two
separate statements are used, they should include all the information that would otherwise be included in the
single statement of comprehensive income.

Total comprehensive income

Total comprehensive income during a period is the sum of:
• the profit or loss for the period and
• other comprehensive income.

Minimum face items

As a minimum, IAS 1 requires that the statement of comprehensive income should include line items showing
the following amounts for the financial period:
• revenue
• finance costs (for example, interest costs)
• tax expense
• profit or loss
• each component of ‘other comprehensive income
• total comprehensive income.

Additional line items

Additional line items should be presented on the face of the statement of comprehensive income when it is
relevant to an understanding of the entity’s financial performance.

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Face or Notes
The following information may be shown either on the face of the statement of comprehensive income or in a
note to the financial statements:
• material items of income and expense
• an analysis of expenses, providing either:
o expenses analysed by their nature, or
o expenses analysed by the function that has incurred them.

Examples of material items

Material items that might be disclosed separately include:
• a write-down of inventories from cost to net realisable value, or a write-down of items of property, plant
and equipment to recoverable amount
• the cost of a restructuring of activities
• disposals of items of property, plant and equipment
• discontinued operations
• litigation settlements
• a reversal of a provision

Analysis of expense by nature

When expenses are analysed according to their nature, the categories of expenses will vary according to the
nature of the business.
In a manufacturing business, expenses would probably be classified as:
• raw materials and consumables used;
• staff costs (‘employee benefits costs’); and
• depreciation.
Items of expense that are immaterial are presented as ‘other expenses’.
There will also be an adjustment for the increase or decrease in inventories of finished goods and work-in-
progress during the period.
Other entities (non-manufacturing entities) may present other expenses that are material to their business.

Analysis of expense by function

When expenses are analysed according to their function, the functions are commonly ‘cost of sales’,
‘distribution costs’, ‘administrative expenses’ and ‘other expenses’. This method of analysis is also called the
‘cost of sales method’. In practice, most entities use this method.

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LO2: PREPARING FINANCIAL STATEMENTS

The statement of financial position and the statement of comprehensive income can be prepared in any order
but the statement of financial position can only be completed after the profit or loss for the period is known
because this figure becomes part of the equity capital.

OPENING AND CLOSING INVENTORY AND THE COST OF SALES

The cost of sales in the statement of comprehensive income is not the cost of goods purchased or the cost of
goods produced. It must be the cost of the goods sold. The accruals or matching concept must be applied.
When there are differences between the quantity of materials purchased or made, and the quantity of materials
used or sold, there is an increase or decrease in inventory during the period.
To calculate the cost of sales for a statement of comprehensive income, it is necessary to make an adjustment
for changes in the amount of inventory.

YEAR-END ADJUSTMENTS
In order to prepare a statement of financial position and statement of comprehensive income from a trial
balance you need to develop a good technique in order to execute such tasks in an effective way.
A typical question provides trial balance with few adjustments and requires preparing the financial statements.
The rest of this chapter illustrates how such questions might be approached.
Step 1: Prepare formats of statement of financial position and statement of comprehensive income.
Step 2: Transfer amounts from trial balance to the formats. Ensure that no amount is omitted or duplicated.
Step 3: Incorporate the double entry effect of adjustments in the relevant figures in the format
Step 4: Perform sub-totals and grand totals in the format.

FINANCIAL STATEMENTS OF A SERVICE ORGANISATIONS

Service organizations do not sell goods but provides services to its clients by using the innovative and technical
skillset and expertise of its personnel. Examples include investment banking, consulting, audit, accounting and
advisory firms.
Financial Statements of Merchandise/trading Company Financial Statements of Service Company
A large percentage of the assets comprise inventory. A large percentage of the assets comprise
receivables.
They have less cash on hand than service businesses as The funds of service companies are usually tied up
their capital is tied up in relatively illiquid assets. towards accounts receivable.
Such companies’ income statement shows calculation There is no line item for the cost of goods sold in
of costs of goods sold. the income statement of service companies.

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LO3: ADJUSTED TRIAL BALANCE

What is Adjusted Trial Balance?
An adjusted trial balance is a list of all the accounts in the general ledger, along with their balances, at period
end, after all necessary adjustments (adjusting entries) have been made.
Adjusting entries are journal entries made at the end of an accounting period to update account balances for
things like accrued expenses, unearned income, depreciation, and other changes that have occurred but haven't
been recorded in the unadjusted trial balance.

Purpose
The adjusted trial balance serves as a basis for preparing the financial statements. It helps to ensure that the
financial statements are accurate and reliable, which is crucial for making informed business decisions and for
providing a clear picture of the entity's financial health to stakeholders.
For example, a business has an unadjusted trial balance that shows Rs. 100,000 in trade receivables. However, it
turns out that Rs. 5,000 of those receivables are uncollectible. An adjusting entry would be made to reduce the
trade receivables balance to Rs. 95,000, and the adjusted trial balance would reflect this updated balance.

Unadjusted vs Adjusted trial balance

All trial balance reports, whether adjusted or unadjusted, must match debits to credits. This ensures that the
entries made into the accounting system are in proper alignment with the double-entry bookkeeping system.
Even if debits and credits balance out, it is still possible that mistakes were made. But if debits and credits do not
balance, then it is certain that one mistake or more were made.
The comparison between unadjusted and adjusted trial balance can be summarised as follows:
Aspect Unadjusted trial balance Adjusted trial balance
Timing Prepared at period-end but before Prepared at period-end after all necessary
adjustments. adjustments.
Period-end No period-end adjustments included. Includes all necessary adjustments like inventory,
adjustments depreciation, accrual and prepayments, etc.
Accuracy It might contain account balances which It reflects updated balances reflecting
are not accurate due to lack of period- adjustments for preparing accurate financial
end adjustments. statements.
Purpose This is an initial arithmetical check for This also provides arithmetical check for
balanced debits and credits. balanced debits and credits as well as basis for
preparing financial statements easily.
Reliability Not reliable for final financial reporting. Reliable for preparing final financial statements.

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Example # 01: (ICAP Example # 05)

ABC – Unadjusted Trial balance as at 31 December 2013
Rs. Rs.
Sales 428,000
Purchases 304,400
Wages and salaries 64,000
Rent 14,000
Heating and lighting 5,000
Inventory as at 1 January 2013 15,000
Drawings 22,000
Allowance for doubtful debts 4,000
Non-current assets 146,000
Accumulated depreciation: 32,000
Trade receivables 51,000
Trade payables 42,000
Cash 6,200
Capital as at 1 January 2013 121,600
627,600 627,600
Further information:
a) Rs. 400 is owed for heating and lighting expenses.
b) Rs. 700 has been prepaid for rent.
c) It is decided that a bad debt of Rs. 1,200 should be written off, and that the allowance for doubtful debts
should be increased to Rs. 4,500.
d) Depreciation is to be provided for the year at 10% on cost
e) Inventory at 31st December 2013 was valued at Rs. 16,500.
Required:
Prepare adjusted trial balance for ABC as at 31 December 2013.

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Answer:
Unadjusted Trial Adjusted Trial
Accounts Adjustments
Balance Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs. Rs. Rs.
Sales 428,000 428,000
Purchases 304,400 304,400
Wages and salaries 64,000 64,000
Rent 14,000 700 (b) 13,300
Heating and lighting 5,000 400 (a) 5,400
Inventory as at 1 January 2013 15,000 15,000
Drawings 22,000 22,000
Allowance for doubtful debts 4,000 500 (c) 4,500
Non-current assets 146,000 146,000
Accumulated depreciation 32,000 14,600 (d) 46,600
Trade receivables 51,000 1,200 (c) 49,800
Trade payables 42,000 42,000
Cash 6,200 6,200
Capital as at 1 January 2013 121,600 121,600
Accrued expenses 400 (a) 400
Prepaid rent 700 (b) 700
Bad and doubtful debts exp. 1,700 (c) 1,700
Depreciation exp W1 14,600 (d) 14,600
Inventory (31 Dec 2013) 16,500 (e) 16,500
Cost of sales (inventory) 16,500 (e) 16,500
627,600 627,600 33,900 33,900 659,600 659,600
W1:
Rs. 146,000 x 10% = 14,600

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Example # 02: (ICAP Example # 06)

The following trial balance was extracted from the main ledger of Steven Chee, a sole trader, as at 31 May 2013
– the end of his financial year.
Steven Chee
Trial balance
as at 31 May 2013
Dr. Cr.
Rs. (000) Rs. (000)
Land and buildings at cost 120,000
Equipment at cost 80,000
Accumulated depreciation (as at 1 June 2012)
On land and buildings 20,000
On equipment 38,000
Purchases 250,000
Revenue 402,200
Inventory as at 1 June 2012 50,000
Discounts allowed 18,000
Discounts received 4,800
Returns outwards 15,000
Wages and salaries 61,800
Bad debts 4,600
Loan interest 2,100
Other operating expenses 17,700
Trade payables 36,000
Trade receivables 38,000
Cash in hand 300
Bank 1,300
Drawings 24,000
Allowance for doubtful debts 500
7% long-term loan 30,000
Capital as at 1 June 2012 121,300
667,800 667,800
The following additional information is available:
a) Inventory as at 31 May 2013 has been valued at cost at Rs. 42,000,000.
b) There are accrued wages and salaries of Rs. 800,000.
c) Other operating expenses are prepaid by Rs. 300,000.
d) The allowance for doubtful debts is to be adjusted so that it is 2% of trade receivables.
e) Depreciation for the year ended 31 May 2013 should be provided for as follows:
• Land and buildings – 1.5% per annum on cost, using the straight-line method.
• Equipment – 25% per annum, using the reducing balance method.
Required: Steven Chee’s adjusted trial balance as at 31 May 2013.

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Answer:
Unadjusted Trial Adjusted Trial
Accounts Adjustments
Balance Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000 Rs. 000
Land and buildings at cost 120,000 120,000
Equipment at cost 80,000 80,000
Accumulated dep. (1 June 2012)
On land and buildings 20,000 1,800 (e) 21,800
On equipment 38,000 10,500 (e) 48,500
Purchases 250,000 250,000
Revenue 402,200 402,200
Inventory as at 1 June 2012 50,000 50,000
Discounts allowed 18,000 18,000
Discounts received 4,800 4,800
Returns outwards 15,000 15,000
Wages and salaries 61,800 800 (b) 62,600
Bad debts 4,600 260 (d) W1 4,860
Loan interest 2,100 2,100
Other operating expenses 17,700 300 (c) 17,400
Trade payables 36,000 36,000
Trade receivables 38,000 38,000
Cash in hand 300 300
Bank 1,300 1,300
Drawings 24,000 24,000
Allowance for doubtful debts 500 260(d) 760
7% long-term loan 30,000 30,000
Capital as at 1 June 2012 121,300 121,300
Inventory (current asset) 42,000 (a) 42,000
Cost of sales (inventory) 42,000 (a) 42,000
Accrued expenses 800 (b) 800
Prepaid expenses 300 (c) 300
Depreciation W2 + W3 12,300 (e) 12,300

667,800 667,800 55,400 55,400 723,160 723,160

W1: Rs. 38,000 x 2% = Rs. 760 – 500 = Rs. 260 increase in allowance
W2: Rs. 120,000 x 1.5% = Rs. 1,800
W3: Rs. 80,000 – 38,000 = Rs. 42,000 x 25% = Rs. 10,500

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LO4: DISTRIBUTION OF PROFITS AMONG PARTNERS

4.1 Introduction to partnership
Partnerships in Pakistan are subject to rules set out in The Partnership Act 1932. This law defines a partnership
business as the relationship between persons who have agreed to share the profits of a business carried on by
all or any of them, acting for all.
Persons who have entered into partnership with one another are called individually partners and collectively a
firm and the name under which their business is carried on is called the firm name.

4.2 Partnership accounts vs sole trader accounts

Financial Partnership accounts are the financial statements of a partnership business. The financial
statements statements of partnerships are the same as those of a sole proprietor with the exception of
capital (as explained below).
Several The major difference between a partnership and a sole proprietor business is that a partnership
capital has several business owners. The accounts of the partnership must record the capital and profits
accounts that are attributable to each individual partner separately. Usually, Each partner contributes
capital to the business and shares in the profit (or loss) of the business. The capital of each
partner must be identified separately.
Profit The profit of a sole proprietor is simply added to the capital balance brought forward. In the case
sharing of a partnership the profit belongs to more than one partners so there must be a mechanism by
which this is shared. Partners’ shares are then added to their personal capital accounts.

4.3 Profit (or loss) appropriation

Profit for The profit or loss for the financial period is calculated according to the normal rules (as described
the period already for a sole trader). This total profit or loss figure is then divided between the partners and
credited to their capital account. The notional amounts sharing among the partners (as
mentioned below, for example, salaries to partner and interest on capital of partners, etc.) must
not be included in profit or loss of the period
Sharing The partners are free to decide on how the profit (or loss) of the partnership is shared between
the profits the partners. The profit-sharing arrangements are set out in the partnership agreement.
• The profit for the period might be shared in agreed profit-sharing ratio. This is sometimes
abbreviated as PSR. (The term profit sharing ratio covers the sharing of both profit and loss).
• Alternatively, there might be other means of allocating a first share of profit (by notional
methods) with the residual profit being shared in the agreed profit-sharing ratio.
PSR Partners can agree to share profits/losses in any ratio or any way that they may wish. However, it
is often thought by students that profits should be shared in the same ratio as that in which
capital is contributed. For example, suppose the capitals were Ahmad and Bilal are Rs. 20,000
and Rs. 10,000. Some would assume that the partners would share the profits in the ratio of two-
thirds to one-third, even though the work to be done by each partner is similar. The profit-
sharing ratio may be whatever the partners agree to.
Notional The notional amounts (e.g. salary to partners) are not business expense in the same way other
amounts business expenses (e.g. salary to employees) are. These amounts are just another way of sharing
the profits.

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4.4 Notional amounts sharing – first share of profit

Salaries One partner may have more responsibility or tasks than the others. As a reward for this, rather
than change the profit and loss sharing ratio, the partner may have a partnership salary which
is deducted before sharing the balance of profits.
Notional Partners may agree that commission or performance-related bonuses be payable to some or
commission all the partners linked to their individual performance. As with salaries, these would be
deducted before sharing the balance of profits.
Interest on If the work to be done by each partner is of equal value but the capital contributed is
capital unequal, it is reasonable to pay interest on the partners’ capitals out of partnership profits.
The rate of interest is a matter of agreement between the partners.
Interest on To deter the partners from taking out cash unnecessarily the concept can be used of charging
drawings the partners interest on each withdrawal, calculated from the date of withdrawal to the end of
the financial year. The amount charged to them helps to swell the profits divisible between the
partners.
In absence of Where no partnership agreement exists, express or implied, Partnership Act 1932
agreement governs the situation. The accounting content of this law states:
• Profits and losses are to be shared equally.
• There is to be no interest allowed on capital.
• No interest is to be charged on drawings.
• Salaries are not allowed.
• Partners who put a sum of money into a partnership in excess of the capital they have
agreed to subscribe are entitled to interest at the rate of 6 per cent per annum on such an
advance.

Example # 03: (ICAP Example # 08)

The PQR Partnership has three partners, P, Q and R.
The partnership agreement provides for the residual profit (or loss) to be shared between them in the ratio
4:3:2, after allowing a notional salary of Rs. 30,000 to R. The profit for the year is Rs. 345,000
Required:
A statement appropriating the profit between partners.

Answer:
Profit and loss Appropriation
Particulars P Q R Total
Profit 345,000
Salaries 30,000 (30,000)
315,000
Profit 4:3:2 140,000 105,000 70,000 (315,000)
140,000 105,000 100,000 -

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Example # 04: (ICAP Example # 09)

A, B and C are in partnership sharing profits and losses in the ratio of 2:2:1.
B is allowed a salary of Rs. 10,000 per annum and C is allowed a salary of Rs. 15,000 per annum. The net profit
for year was Rs. 100,000.
Required:
Show how profit should be shared between the partners.

Answer:
Profit and loss Appropriation
Particulars A B C Total
Profit 100,000
Salaries 10,000 15,000 (25,000)
75,000
Profit 2:2:1 30,000 30,000 15,000 (75,000)
30,000 40,000 30,000 -

Example # 05: (ICAP Example # 10)

Partnership DEF has three partners, D, E and F.
Partner D has contributed Rs. 100,000 of capital, Partner E Rs. 120,000 and Partner F Rs. They have agreed to
share profits in the following way:
• Partner D to receive a salary of Rs. 4,000 and Partner F a salary of Rs. 7,000.
• All three partners receive interest at 5% on the capital contributed.
• Residual profit or loss to be shared between D, E and F in the ratio 3:5:2. The profit of the partnership for
the year is Rs. 95,000.
Required:
Show how profit should be shared between the partners.

Answer:
Profit and loss Appropriation
Particulars D E F Total
Profit 95,000
Salaries 4,000 7,000 (11,000)
Interest 5% 5,000 6,000 3,000 (14,000)
70,000
Profit 3:5:2 21,000 35,000 14,000 (70,000)
30,000 41,000 24,000 -

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Example # 06: (ICAP Example # 11)

G, H and I are in partnership. The profit of the partnership for the year is Rs. 1,146,000. Partner G has
contributed Rs. 500,000 of capital, Partner H Rs. 400,000 and Partner I Rs. 300,000.
The partners have agreed to share profits in the following way:
• Partner H should receive a salary of Rs. 50,000 and Partner I a salary of Rs. 100,000.
• All three partners should receive interest at 8% on the capital contributed.
• Residual profit (or losses) should be shared between G, H and I in the ratio 3: 2: 1.
Required:
Show how the partnership profits should be shared between the partners.

Answer:
Profit and loss Appropriation
Particulars G H I Total
Profit 1,146,000
Salaries 50,000 100,000 (150,000)
Interest 8% 40,000 32,000 24,000 (96,000)
900,000
Profit 3:2:1 450,000 300,000 150,000 (900,000)
490,000 382,000 274,000 -

Example # 07: (ICAP Example # 12)

There are three partners in the ABC Partnership, A, B and C. The capital accounts of the partners at the
beginning of the year and drawings of each partner were as follows:
Partner Capital account Drawings
Rs. Rs.
A 100,000 20,000
B 200,000 25,000
C 160,000 40,000
The profit for the year was Rs. 97,050.
Profit sharing agreement:
• Partner A is given a salary of Rs. 17,000 and Partner C has a salary of Rs. 15,000
• The partners pay themselves interest on capital at 5% per year. However, partners are also charged
interest on drawings at 7% per annum.
• The residual profit or loss is shared between A, B and C in the ratio 1:3:2.
Required:
Show how the partnership profits should be shared between the partners and also prepare the partners’ capital
accounts.

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Answer:
Profit and loss Appropriation
Particulars A B C Total
Profit 97,050
Interest on drawings 7% (1,400) (1,750) (2,800) 5,950
103,000
Salaries 17,000 15,000 (32,000)
Interest on capital 5% 5,000 10,000 8,000 (23,000)
48,000
Profit 1:3:2 8,000 24,000 16,000 (48,000)
28,600 32,250 36,200 -
Partners’ Capital Accounts
Particulars A B C Total
Beginning of the year 100,000 200,000 160,000 460,000
Add: share of profit 28,600 32,250 36,200 97,050
128,600 232,250 196,200 557,050
Deduct: Drawings (20,000) (25,000) (40,000) (85,000)
Balance at end of year 108,600 207,250 156,200 472,050

Example # 08: (ICAP Example # 13)

X, Y and Z are in partnership.
Capital account Drawings
Partner
Rs. Rs.
X 1,000,000 780,000
Y 800,000 580,000
Z 600,000 350,000
The profit for the year was Rs. 1,944,000. Profits are shared as follows:
• The partners pay themselves interest on capital at 6% per year.
• The residual profit or loss is shared between X, Y and Z in the ratio 4: 3: 2.
Required:
Show how the profits should be shared between the partners, and show their capital accounts as at the end of
the year.

Answer:
Profit and loss Appropriation
Particulars X Y Z Total
Profit 1,944,000
Interest on capital 6% 60,000 48,000 36,000 (144,000)
1,800,000
Profit 4:3:2 800,000 600,000 400,000 (1,800,000)
860,000 648,000 436,000 -

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Partners’ Capital Accounts

X Y Z Total
Beginning of the year 1,000,000 800,000 600,000 2,400,000
Add share of profit 860,000 648,000 436,000 1,944,000
1,860,000 1,448,000 1,036,000 4,344,000
Deduct Drawings (780,000) (580,000) (350,000) (1,710,000)
Balance at end of year 1,080,000 868,000 686,000 2,634,000

Additional issues

Guaranteed A partnership agreement might guarantee a minimum profit share for one (or more) of the
minimum partners. In these cases:
profit share • The partnership profits are shared according to the partnership agreement, ignoring
the minimum profit agreement.
• If the normal sharing mechanism does not result in a partner receiving the minimum
guaranteed profit the other partners must make up the shortfall out of their profit
share, in their profit-sharing ratio.
Change in PSR The agreement on how the partners should share the profits of the business may be
changed during a financial year. When this happens, the total profits for the year should be
apportioned, on a time basis, between:
• profits of the business during the time of the ‘old’ profit-sharing arrangements, and
• profits of the business during the time of the ‘new’ profit-sharing arrangements.
The profits for each time period are then shared between the partners in accordance with
the agreement for that period.

Example # 09: (ICAP Example # 14)

The XYZ Partnership has three partners, X, Y and Z. The partnership agreement provides for Partner X to receive
a notional salary of Rs. 20,000 and residual profits or losses are shared between X, Y and Z in the ratio 2:4:6.
In addition, the agreement guarantees a minimum profit share of Rs. 32,000 to Partner Y. The partnership profit
for the current year is Rs. 80,000.
Required: Show how the partnership profits should be shared between the partners.

Answer:
Particulars X Y Z Total
Profit 80,000
Salaries 20,000 (20,000)
60,000
Profit 2:4:6 10,000 20,000 30,000 (60,000)
30,000 20,000 30,000 -
Adjustment for minimum guarantee (Transfer 2:6) (3,000) 12,000 (9,000) -
27,000 32,000 21,000 -

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Example # 10: (ICAP Example # 15)

The DEF Partnership has three partners, D, E and F. In the first half of year 1, to 30 June Year 1, Partner D and
Partner F each received an annual salary of Rs. 30,000.
Residual profits or losses are shared between D, E and F in the ratio 3:5:2. (There is no interest on capital.)
In the second half of the year, from 1 July to 31 December, Partner D’s annual salary was increased to Rs.
40,000, and the partners altered the profit-sharing ratio to 1:3:1 for D:E:F). The salary of Partner F was
unchanged at Rs. 30,000 per year.
The profit for the year was Rs. 220,000 (arising evenly throughout the year).
Required:
Show how the partnership profits should be shared between the partners.

Answer:
Profit and loss Appropriation
Particulars D E F Total
First half of year
Profit [220,000 x 6/12] 110,000
Salaries (half year salary) 15,000 15,000 (30,000)
80,000
Profit 3:5:2 24,000 40,000 16,000 (80,000)
39,000 40,000 31,000 -

Second half of year D E F Total

Profit [220,000 x 6/12] 110,000
Salaries (half year salary) 20,000 15,000 (35,000)
75,000
Profit 1:3:1 15,000 45,000 15,000 (75,000)
35,000 45,000 30,000 -

Particulars D E F Total
First half of year 39,000 40,000 31,000 -
Second half of year 35,000 45,000 30,000 -
Total Profit 74,000 85,000 61,000 -

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LO5: FUNDAMENTAL ACCOUNTING CONCEPTS

It is also important to understand the various fundamental principles that underpin accounting practices.
Together, these fundamental accounting concepts provide the foundation for accurate, transparent, and
meaningful financial reporting, enabling stakeholders to make informed decisions and fostering trust in the
financial markets.

5.1 BASIC ACCOUNTING CONCEPTS

5.1.1 Business Entity Concept

This principle states that the transactions of a business should be kept separate from the personal transactions
of its owner(s) while preparing financial reports. For example, Maria owns a bakery and her personal home rent
should not be mixed with the bakery’s rent expense.
This concept has legal substance in case of companies i.e. a company by law is a legal person separate from its
owners (the shareholders). However, the concept is also applied to sole traders and partnership in accounting.
Only business transactions will be included in financial records of the business i.e. personal transactions of
owners will not be part of financial records of the business.

Example:
Discuss whether you would consider the following events as business transactions.
i. A businessman purchased a vehicle for his private use by drawing cash from business. However, he also
uses it for coming to the office.
ii. ABC & Company has paid the electricity bill of one of its partners. However, the amount is recoverable
from that partner.
iii. Furniture and fixtures lying in the office were destroyed by fire. Furniture was owned by one of the
partners and it was not in the use of business.
iv. The proprietor provides a generator to the office. The generator is presently not working and it would
have to be repaired before it can be used. Previously the generator was lying in the proprietor’s house.
v. Balance recoverable from an employee was written off after his death.

Answer:
i. Purchase of a vehicle is not a business transaction. However, the cash withdrawal is a business
transaction.
ii. Payment on behalf of the partner is recoverable by the business. Hence this is a business transaction.
iii. It is not a business transaction as the ownership of furniture does not belong to the business entity but to
one of the partners.
iv. It is a business transaction and it is required to be recorded as capital invested in business in the form of
generator.
v. This is a business transaction as the employee was working for the business and such waiver is a form of
benefit to the employee.

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5.1.2 Duality Concept

Duality concept of recording ensures that every financial transaction has equal and opposite effects in at least
two different accounts. For example, Jazib buys a computer for his office for Rs. 100,000 paying by cheque. This
transaction increases the computer asset account and decreases the bank balance account.
This is also called dual aspect concept and double entry system.

5.1.3 Accounting Period

Financial statements are prepared for specific periods. In other words, financial statements relate to given
period, known as the ‘financial year’, ‘accounting period’ or ‘reporting period’. Accounting period may differ
across entities.
For example, Ufaq’s landscaping business prepares annual financial statements for the period from 1st July to
30th June of following year. On the other hand, Manahil’s art gallery prepares annual financial statements for
the period from 1st April to 31st March of following year.

5.1.4 Historical Cost Concept

Applying this concept means that items in financial statements, in particular assets, are recorded based on their
original purchase cost rather than their current market value. For example, Adeel’s bookstore records its
building at the purchase price of Rs. 24 million i.e. the price he paid in 2017 for this building, not the current
market value of building which has increased to Rs. 75 million in year 2025.

5.1.5 Accrual (and prepayment) Basis / Matching Concept

Income and expenses are recorded when they are earned or incurred, not when cash is received or paid.
Accruals basis accounting (accruals accounting, the matching concept) depicts the effects of transactions and
other events and circumstances on a reporting entity’s economic resources and claims in the periods in which
those effects occur, even if the resulting cash receipts or payments occur in a different period.
• Revenue from sales and other income should be reported in the period when the income arises (which
might not be the same as the period when the cash is received from the customer / client).
• The cost of sales in the statement of comprehensive income must be matched with the sales. Income and
‘matching’ expenses must be reported in the same financial period. In other words, when the revenue is
recognised from sale then the cost must also be recognised in the similar accounting period.
• Other expenses should be charged in the period to which they relate, not the period in which they are paid
for.
A prepayment is an amount of money paid in advance for benefits that will be received in the next accounting
period. For example, a prepayment in Year 2025 of some expenses relating to Year 2026 should not be charged
as an expense in Year 2025 but should be treated as prepaid in Year 2025 and as an expense in Year 2026.
An accrued expense is an amount that an entity owes in respect of a benefit it has received in a period but for
which it has not yet been invoiced and paid. For example, electricity bill of June 2025 might be paid in July 2025
but it should be charged as expense in June 2025.
An accrued income is an amount that an entity has to receive in respect of a benefit it has provided in a period
but for which it has not yet received the amount. For example, Shahid provided teaching services to students in
December 2025 and it should be recorded as income in December 2025, although the amount will be received in
January 2026.

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Example:
Applying the accrual basis/matching concept, briefly discuss the accounting treatment in each of the following
situations:
i. Kashif’s law firm completed a service in December, but the client pays in January.
ii. A company prepares its financial statements to the 31 December each year. It sells goods for Rs. 50,000 to
a customer on 6 December 2025, but does not receive a cash payment from the customer until 15 February
2026.
iii. A company starts in business on 1 September 2025. It acquires an office for which it pays one year’s rent in
advance, to 31 August 2026. The cost of the annual rental is Rs. 120,000. The company prepares its
financial statements for a financial period ending on 31 December each year.
iv. A company rents office space at a cost of Rs. 6,000,000 per year paid 12 months in arrears (this means that
the company pay the rent at the end of the year). The first payment is due on 30 June 2026. The company
prepares its financial statements to 31 December each year.

Answer:
i. The revenue should be recorded in December.
ii. The sale is recognised as income in the year to 31 December 2025, even though the cash is not received
until after the end of this financial year.
iii. The office rental cost in the period to 31 December 2025 is the cost of just four months’ rent. The expense
is therefore Rs. 40,000 (Rs. 120,000 x 4/12) in 2025, and there has been a prepayment for Rs. 80,000 that
relates to the next financial period, the year to 31 December 2026.
iv. The company will not have received an invoice and paid for the rent when it is preparing its financial
statements for 31 December 2025. However, it knows that it has occupied the office space for six months.
The company would recognise a liability for rental costs for six months (Rs. 3,000,000) and also include this
as an expense in profit and loss for Year 2025.

5.1.6 Realisation Concept

The realization concept in accounting is the principle that revenue should be recognized when it is earned, not
when payment is received. It is used in accrual accounting.
For example, Ghalib’s photography studio recognizes revenue once the photos are delivered to clients, even if
payment is pending. Similarly, it does not recognise revenue for advance received from clients until photos are
delivered to the client.

5.1.7 Prudence Concept

Prudence implies that income and assets must not be overstated, and expenses and liabilities must not be
understated. This is because financial statements must sometimes recognise the uncertainty as to expenses or
expected losses to be incurred in business transactions. For example, if a business is owed Rs. 1,000,000 by a
few of its customers, there will be some uncertainty as to whether all the money will be collected. Prudence
involves allowing for some caution in preparing financial statements, by making reasonable and sensible
allowances to avoid overstating assets or income and to avoid understating expenses or liabilities.

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Example:
A company has receivables of Rs. 10,000,000. The company knows from experience that about 2% of its
receivables will not be collected because of customers being in financial difficulty.
Required:
Briefly discuss the accounting treatment in context of prudence concept.

Answer:
It is prudent to make an allowance for doubtful debts to 2% of receivables (but it would be inappropriate to
make an excessive allowance, say 10% of receivables).
The company would recognise an allowance of Rs. 200,000 to set against the receivable in the statement of
financial position showing a net amount of Rs. 9,800,000 (10,000,000 less 200,000).
The Rs.200,000 would also be recognised as an expense in the statement of comprehensive income as these are
expected to be irrecoverable.

5.1.8 Materiality Concept

Information is material if omitting, misstating or obscuring it could reasonably be expected to influence
decisions that the primary users of general-purpose financial statements make on the basis of those financial
statements, which provide financial information about a specific reporting entity. An error which is too trivial to
affect a user’s understanding of financial statement is referred to as immaterial.
For example, Ghalib’s factory expenses includes all significant expenses (i.e. might be important for
understanding the operations of business) in financial statements separately but expenses with total of less than
Rs. 3,000 (i.e. likely not to be important for understanding the business operations) are aggregated and
presented as miscellaneous expenses in one line.
There is no absolute measure of materiality that can be applied to all businesses. Whether an item is material or
not depends on its magnitude (size) or its nature or both in the context of the specific circumstances of the
business. Whether an item of a given size is deemed to be material depends on the context of the number in
relation to other numbers in the financial statements.

Illustration: Materiality on the basis of size

Two similar businesses prepare financial statements that show that each has non-current assets of Rs.
10,000,000 and each has a profit for the year of Rs. 100,000.
Each business discovers a Rs. 20,000 error.
Error Comment
This relates to how Business A arrived at the total This is immaterial. Rs. 20,000 is a small error in the
of non-current assets which are now overstated by context of the non-current asset figure and its omission
Rs. 20,000. would not be misleading.
This relates to how Business B arrived at the profit This is material. Omitting this amount means that profit
for the year which is now overstated by Rs. 20,000. is misstated by 20%.
Businesses are sometimes placed under a legal obligation to disclose certain information in their financial
statements (for example, companies must disclose directors’ remuneration). Omission of such amounts, due to
their nature, is always a material misstatement regardless of the size of the amount in relation to the other
numbers in the financial statements.

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5.1.9 Completeness
Completeness refers to whether all transactions that occurred during the period have been recorded.
The objective of financial reporting is to provide useful information. Information is only useful if a person can
rely on it. To be reliable, information should be complete, subject to materiality and cost. (There is no need to
include information if it is not material, and greater accuracy is not required if the cost of obtaining the extra
information is more than the benefits that the information will provide to its users).
For example, a company rents office space at a cost of Rs. 6,000,000 per year paid 12 months in arrears (this
means that the company pay the rent at the end of the year). The first payment is due on 30 June 2026. The
company prepares its financial statements to 31 December each year. The company will not have received an
invoice for the rent when it is preparing its financial statements for 31 December 2025. If the company does not
accrue for the expense that relates to the 6 months to 31 December 2025, the information would be
incomplete.

5.1.10 Money Measurement Concept

The money measurement concept is an accounting principle that requires businesses to only record transactions
that can be quantified in money. It's also known as the measurability concept.
For example, Manahil’s art gallery records the purchase of art supplies because the amounts can be quantified,
but the artist’s creativity is not recorded because it cannot be quantified in monetary amount.

5.1.11 Consistency Concept

Once an accounting method is chosen, it should be used consistently from one period to another. For example,
Adeel’s construction material company uses periodic weighted average for measurement of its cost of inventory
and should continue to use it for all periods.
It also implies that the content of the financial statements must be presented consistently from one period to
the next. The presentation can be changed only if necessary to improve the quality of information presented in
terms of its usefulness to the users or if a new rule requires a change.

Illustration: Problems with inconsistent presentation

A manager of a business has been promised a bonus if he can improve gross profit to more than 10% above
what it was last year. In the event the results of the business have been exactly the same but the manager has
prepared the financial statements on a slightly different basis.
2012 2013
Rs.000 Rs.000
Sales 25,000 25,000
Cost of sales:
Production costs 10,000 10,000
Warehousing costs 10,000
(20,000) (10,000)
Gross profit 5,000 15,000
Less: Other expenses (4,000) (14,000)
Net profit 1,000 1,000

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The manager has presented the information in a different way. This year’s presentation is inconsistent with last
year’s. This might mislead the user of the financial statements (in this case the person who will decide if the
manager will receive a bonus).
It might be that the manager’s presentation is correct but, in that case, the previous year’s results should be
represented onto a consistent basis in order to prevent a misleading impression.

5.1.12 Going Concern Concept

This means that financial statements are prepared on the assumption that the entity will continue to operate for
the foreseeable future and does not intend to go into nor will be forced into liquidation. This assumption affects
the value of assets and liabilities of an entity, as reported in the financial statements.
If a business entity is not a going concern, and is about to be closed and liquidated, the value of its assets would
be their estimated value in the liquidation process.
For example, Nayab’s coffee shop assumes operations will continue indefinitely and prepares financial
statements based on that assumption. If she had decided to close the coffee shop in near future, the value of
her assets (upon liquidation) would be much lower than it would be had the going concern assumption been
used because generally assets generate more benefits when used properly in long term.

5.1.13 Substance over form

Financial statements reflect the economic reality of transactions rather than just their legal form. To provide a
faithful representation, financial information must account for transactions and other events in a way that
reflects their substance and economic reality (in other words, their true commercial impact) rather than their
legal form. If there is a difference between economic substance and legal form, the financial information should
represent the economic substance.

Example:
Alpha rents (leases) an asset from Beta. The asset is expected to be useful for 10 years after which it will be
scrapped. Alpha has a contract to use the asset for 10 years.
Required: Analyse the above arrangement from viewpoint of substance over form.

Answer:
Apparently, the form of above arrangement is rental agreement indicating that Alpha should record rent
expense and may not record any asset.
However, the substance of the transaction is that Alpha has bought the asset from Beta. Beta would only agree
to let Alpha use the asset for all of its useful life if the rentals received from Alpha covered Beta’s costs of buying
the asset and gave Beta a financial return. This is the same as Alpha borrowing money and buying the asset.
Alpha must recognise the leased asset as if it owns it and also must recognise a liability to pay for the asset.

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5.1.14 Reliability Concept

In accounting, the reliability concept means that financial information presented in financial statements should
be accurate, verifiable, and dependable, ensuring that users can trust the information to faithfully represent the
economic activities of the business, based on objective evidence like receipts and bank statements; essentially,
only transactions that can be proven should be recorded in the accounting system.
For example, Kay Limited only records transactions that are supported by receipts, invoices, and bank
statements, ensuring that the financial information is accurate and dependable.
Reliability is achieved when information in financial statements:
• represent faithfully the financial position, financial performance and cash flows of the entity;
• reflect the economic substance of transactions, other events and conditions, and not merely the legal form;
• are neutral, i.e. free from bias;
• are prudent; and
• are complete in all material respects.

Example:
Name the accounting concepts/principles on which the following rules are based:
i. Nothing material is left out that would be vital to investors or other users in assessing the underlying
events and conditions of the business.
ii. Whether the item in question affects decision of the users of the financial statements?
iii. A company is separate and distinct from its owners.
iv. Financial information must not only represent relevant phenomena but it must also be complete, neutral
and free from error.
v. Expenses incurred in a particular time period should be compared with the revenue earned during the
same tune period.
vi. Caution should be exercised while preparing financial statements in order to avoid overstatement of net
assets and net income.
vii. The assumption that a business entity will continue in existence for the foreseeable future.
viii. Same accounting policy shall be applied to accounting events from period to period.

Answer:
i. Completeness/ Materiality
ii. Materiality
iii. Separate entity concept
iv. True and fair view
v. Matching concept
vi. Prudence
vii. Going concern
viii. Consistency

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Example:
Name the accounting concepts/principles on which the following rules are based.
i. Stocks are valued on the same basis in each accounting period.
ii. Assets are valued assuming there will be no sudden stoppage in business.
iii. Assets and liabilities are valued with due caution in times of uncertainty.
iv. Personal transactions should be distinguished from business transactions.
v. Cost of small calculators may be charged to expenses instead of being capitalized.
vi. The financial statements must disclose all the relevant information.
vii. Income is not recognized when a fee is received but when a service is rendered.
viii. Leased vehicles are recorded as assets although these are not owned by the organization.
ix. Income and all costs relating to earning such income are accounted for in the same accounting period.

Answer:
i. Consistency
ii. Going concern
iii. Prudence
iv. Separate entity concept
v. Materiality
vi. Completeness
vii. Accrual concept
viii. Substance over form
ix. Matching concept

Example:
Identify and explain the accounting concepts/principles being followed:
i. Fixed assets are stated at cost less accumulated depreciation.
ii. Items of capital nature, costing less than Rs. 1,000 are charged to cost.
iii. Stock-in-trade is valued on the same basis as is being followed for last many years.
iv. Appropriate provision is made for bad and doubtful debts.
v. Sales revenue is recorded on dispatch of goods to customers irrespective of the date of receipt of payment.
vi. Cost of sales is recorded in the same period in which the revenue earned from the sale is recorded.

Answer:
i. Historical cost
This is the actual amount of cash paid or received. For example, the historical cost of an item of fixed assets
is the amount that was paid to buy it in the past.
ii. Materiality
Information is material if omitting it or misstating it could influence decisions that users make on the basis
of financial statements of an entity.
iii. Consistency
The financial statements must be presented consistently from one period to another. The presentation may
be changed only if necessary to improve the quality of information presented in terms of its usefulness to
the users or if a new rule requires a change.

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iv. Prudence
Prudence involves allowing for some caution in preparing financial statements, by making reasonable and
sensible allowance in order to avoid overstating assets or income and to avoid understating liabilities and
expenses.
v. Accrual basis accounting
Revenue from sales and other income should be reported in the period when income arises (which might
not be the same as the period when the cash is received)
vi. Matching concept
The cost of sales in the statement of comprehensive income must be matched with the sales.

Example:
Identify accounting concepts/principles on which the following statements are based and give one example of
each:
i. Expenses are recognized on the basis of a direct association between the costs incurred and the earning of
specific items of income.
ii. Accounting policies in use are applied from one period to the next.
iii. Overstating assets/income and understating liabilities/expenses are avoided.
iv. Revenue and other income are recognized when these are earned, irrespective of the date of receipt.
v. Any information, omitting or misstating of which could influence a decision of a user of the financial
statements, is disclosed.

Answer:
Sr. # Accounting Examples(s)
Concept/Principle
(i) Matching • Cost of sales is recorded in the period in which sales is recorded.
• Costs are charged in the period in which benefits are received.
(ii) Consistency • Use of same cost formula for stock valuation which was used in the
previous period.
(iii) Prudence • Allowance for doubtful debts (receivables)
• Inventory valuation at lower of cost and net realisable value.
(iv) Accruals • Purchases are recorded although suppliers are yet to be paid.
• Sales are recorded although cash is yet to be received from the
customers.
(v) Materiality • Fixed assets below a certain limit, are charged to profit and loss as
revenue expenditure.

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5.2 QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

5.2.1 Relevance
Information must be relevant to decision making needs of the users. Information is relevant if it can be used for
predictive and/or confirmatory purposes.
• It has predictive value if it helps users to predict what might happen in the future.
• It has confirmatory value if it helps users to confirm the assessments and predictions they have made in the
past.
For example, Kashif is considering whether to invest in Adeel Limited’s shares in the stock market. He uses
financial statements of last five years and determines that profitability of Adeel Limited is increasing steadily
over the years. Based on this, he predicts that next year Adeel Limited would earn a profit of Rs. 300 million or
more. This predictive value helps in making an informed decision.

5.2.2 True and Fair View / faithful representation

True and fair view implies that financial statements should present an accurate and unbiased picture of the
company’s financial situation which is not misleading for users of financial statements. For example, Kashif’s
electronics store provides financial reports that truthfully reflect the store’s sales and expenses.
Another way of saying this is that financial statements should provide a faithful representation of its financial
position and financial performance. Faithful representation is achieved by providing information that is
complete, neutral and free from error.

5.2.3 Comparability
Comparability enables users to identify and understand similarities in, and differences among, items.
Information about a reporting entity is more useful if it can be compared with similar information about other
entities and with similar information about the same entity for another period or another date.
For example, Aqeel’s electronics store adopts the same accounting policies over multiple years. Same
accounting policies are used across the electronics industry. This allows investors to compare the store’s
financial performance across different periods and different entities and make informed decisions.
Consistency is related to comparability but is not the same. Consistency refers to the use of the same methods
for the same items, either from period to period within a reporting entity or in a single period across entities.
Consistency helps to achieve the goal of comparability.

5.2.4 Verifiability
Verifiability means that different knowledgeable and independent observers could reach consensus that a
particular depiction in financial statements is a faithful representation. This quality helps to assure users that
information faithfully represents the economic phenomena it purports to represent.
For example, Kay Limited has financial records that can be independently verified by auditors. These auditors
examine accounting records and underlying documents to ensure that the financial statements represent a
faithful depiction of the store's economic activities.

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5.2.5 Timeliness
This means having information available to decision-makers in time to be capable of influencing their decisions.
For example, Jamal Limited provides financial statements to its shareholders within a few weeks of the end of
the relevant accounting period, enabling shareholders to make timely economic decisions related to their
investment.

5.2.6 Understandability
Information is made understandable by classifying, characterizing and presenting it in a clear and concise
manner. Financial reports are prepared for users who have a reasonable knowledge of business and economic
activities and who review and analyse the information diligently.
For example, Zahra Limited presents its financial statements in a clear and concise manner, using
straightforward language and organized sections, making it easy for users to understand the financial
information.

Cost constraint on useful information

Cost is a pervasive constraint on the information that can be provided by financial reporting. Reporting financial
information imposes costs, and it is important that those costs are justified by the benefits of reporting that
information.
Since it is difficult to measure the benefits of financial information, the setters of accounting standards must use
their judgement in deciding whether certain items of information should be provided in the financial statements
(and if so, in how much detail).
For example, Saima Limited evaluates whether the benefits of providing detailed financial information justify the
costs involved. The management decides that including certain detailed breakdowns in the financial statements
is not cost-effective. Therefore, such information is not included unless there is any legal or regulatory
requirement to disclose it.

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Practice Questions
Question # 01:
The following trial balance was extracted from the books of Ahmad Limited at 31.12.20, the end of his most
recent financial year.
Description Debit (Rs.) Credit (Rs.)
Furniture & Fixture 100,000
Accumulated depreciation – Furniture 10,000
Capital (01.01.20) 25,000
Bank 6,000
Inventory (01.01.20) 20,000
Drawings 5,000
Allowance for doubtful debt 3,000
Purchases and Sales 70,000 180,000
Purchase Return & Sales Return 7,000 5,000
Discounts 500 1,000
Wages 3,000
Rent Expense 12,000
Advertisement 4,000
Carriage inwards 3,500
Electricity 6,500
Bank Charges 10,000
Long-term Loan including 10% Short-term 50,000
Bad debt expense 1,500
Debtor & Creditor 90,000 60,000
Advance to supplier 7,000
340,000 340,000
Additional information:
(i) Inventory on 31.12.20 was Rs. 6,000
(ii) Electricity expense accrued at 31.12.20 amounting Rs. 1,500
(iii) Rent expense Prepaid at 31.12.20 Rs. 2,000
(iv) Company has a policy to calculate Allowance @10% of Year-end receivables.
(v) Ahmad depreciates its Furniture & Fixture @10% of Cost under Straight-line method.
Required:
(a) Prepare Statement of Comprehensive income for Year ended 31.12.20.
(b) Prepare Statement of Financial Position as at 31.12.20.

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Question # 02:
Following is the Naveed Limited’s Trial Balance as at 31.12.22
Description Debit (Rs.) Credit (Rs.)
Plant 100,000 20,000
Vehicle 140,000 40,000
Inventory (01.01.22) 200,000
Capital 90,000
Bank 60,000
Drawings 20,000
Allowance for doubtful debt 30,000
Insurance expense 55,000
Purchase & Sales 120,000 400,000
Bad debt expense 15,000
Postage expense 40,000
Long term loan @ 10% 200,000
Rental income 50,000
Trade receivables and Payables 80,000 50,000
Interest expense 15,000
Advances 10,000 20,000
Delivery charges 30,000
Return inwards and Return outwards 20,000 40,000
Discounts 5,000 10,000
Free samples 40,000
950,000 950,000
Additional information:
(i) Closing Inventory as per physical count was Rs. 150,000. Some items included in above Inventory costing
Rs. 40,000 was damaged due to mis-handling and can be sold only for Rs. 28,000 after remedial work of
Rs. 3,600.
(ii) Postage expense accrued on 31.12.22 as Rs. 20,000.
(iii) Insurance expense include annual payment of fire insurance for shop and personal expense of Naveed
amounting Rs. 40,000 and Rs. 15,000, respectively. Insurance policy would expire on 31 March 2023.
(iv) One of Naveed’s debtors named as Babloo has outstanding debt of Rs. 20,000. Naveed estimated that
only 20% could be recovered from him. Moreover, Naveed calculates General Allowance @ 10% of year-
ended receivables.
(v) The above balances of Fixed Assets are Opening balances.
• Naveed bought another Plant on 01.04.22 costing Rs. 30,000. Depreciation rate is 15% under
straight-line.
• Another Vehicle was purchased on 01.09.22 costing Rs. 60,000. Depreciation rate for Vehicle is
10% under reducing-balance method.
(vi) Credit sales made to Mr. Ahmad amounting Rs. 10,000 but no entry was recorded regarding it.

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Required:
(a) Prepare Statement of Comprehensive income for the year ended 31.12.22.
(b) Prepare Statement of Financial Position as at 31.12.22.

Question # 03:
Following is Abdullah Limited’s Trial Balance as on 30.06.22.
Debit Credit
Description
(Rs. in “000”) (Rs. in “000”)
Capital (01.07.21) 300
Equipment (01.07.21) 100 20
Purchases and Sales 120 530
Returns 20 10
Discounts 10 5
Current Bank account 250
Inventory (01.07.21) 50
Trade Receivables and Payables 190 100
Bank Deposit account 600
Loan @15% 400
Interest received on deposit 75
Wages 60
Carriage outward 80
Allowance for doubtful debt 30
Heat and Light 90
Rent expense 120
Drawings 40
Bad debt expense 20
Advances 50 30
Short-term Loan 300
1,800 1,800
Additional information:
(i) Closing Inventory of Inventory amounted to Rs. 30,000
(ii) On 01.01.22, Abdullah decided to bring one of his cars into the business costing Rs. 100,000 for which no
entry has been recorded yet.
(iii) Depreciation method for Vehicles is Straight line method @10% of cost
(iv) Heat & light expense includes Rs. 40,000 relating to Cost of equipment which was expensed out
ignorantly.
(v) Advances in Trial include 40% payment made for Purchase of Equipment on 01.11.21, not recorded Yet.
(vi) Depreciation rate for all Equipment is 15% under Reducing balance method.
(vii) Rent includes payment of annual rent of Rs. 20,000 expiring on 30 March 22 for Owner’s residence.
Moreover, Incurred Rent is Rs. 150,000.
(viii) 40% of Long-term Loan repaid on 01.01.22 through cheque not yet recorded.

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(ix) Bad debt recovered during the Year amounted to Rs. 5,000 which was received in Cheque, not recorded
Yet.
(x) It is decided that Bad debt expense of Rs. 20,000 needs to be written off and that allowance would be
increased by Rs. 10,000.
Required:
(a) Prepare Statement of Comprehensive income for the year ended 30.06.22.
(b) Prepare Statement of Financial Position as at 30.06.22.

Question # 04:
Following is Rainbow Lights Trial Balance as at 31.12.16.
Debit Credit
Description
(Rs. in “million”) (Rs. in “million”)
Capital (01.01.16) 120
Drawings 80
Fixed assets-Cost 270
Accumulated Depreciation 150
Closing inventory 170
Trade debtors 400
Allowance for doubtful debts 12
Advances 45
Cash and bank 20
10% Long-term loan 120
Trade creditors 240
Accruals and other payables 28
Sales 750
Cost of sales 304
Admin expenses 146
Bad debt expense 20
Financial charges 10
Miscellaneous income 45
1,465 1,465
(i) RL uses perpetual inventory method to record its inventory. During the physical inventory count carried
out on 31 December 2016, following matters were noted:
(a) Inventory shortages amounted to Rs. 2 million which is considered to be normal.
(b) Goods costing Rs. 15 million were damaged in fire and have no sales value.
(c) Goods costing Rs. 1 million were withdrawn by the owner for his personal use but no adjustment
was made in the books.
(d) Goods sold on credit for Rs. 7 million were returned but have not been accounted for. These
goods were sold at cost plus 40%.
(ii) Goods sold on credit at a trade discount of 5% were recorded at gross amount of Rs. 20 million.

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(iii) Rs. 2 million were recovered in full and final settlement of an old outstanding balance of Rs. 3 million
which had been written-off last year. The amount recovered was credited to trade debtor’s account. RL
maintains an allowance for doubtful debts at 3% of the year-end balance.
(iv) Miscellaneous income includes Rs. 12 million received against an annual maintenance contract expiring
on 30 April 2017.
(v) Annual rent amounting to Rs. 24 million was paid in advance on 1 October 2016 and charged as an
expense.
(vi) An equipment costing Rs. 8 million was purchased on 1 September 2016 against advance payment. There
was no entry of buying the equipment. Depreciation on fixed assets is charged at 15% per annum from
the month of addition to the month prior to disposal using reducing balance method.
Required:
(a) Prepare Statement of Comprehensive income for the year ended 31.12.16.
(b) Prepare Statement of Financial Position as at 31.12.16.

Question # 05:
Following is the Trial Balance as at 31.12.17 of Tulip Enterprises.
Debit Credit
Description Description
Rs. in “000” Rs. in “000”
Cash and bank balances 2,320 Trade payables 3,250
Trade receivables 4,400 Accruals and other payables 1,320
Inventory-in-trade 31-12-2017 3,900 Allowance for doubtful debts 220
Prepayments 1,240 Accumulated depreciation 4,630
Property, plant & equipment – cost 12,500 12% Long-term loan 5,150
Drawings 490 Capital 6,000
Cost of sales 23,580 Sales 35,230
Salaries and wages 2,610 Miscellaneous income 940
Fuel and power 450
Bad debt expense 230
Rent and insurance 2,900
Repair and maintenance 920
Financial charges 700
Advances 500
56,740 56,740
(i) While carrying out the physical inventory count at year-end, following matters were identified:
• Goods costing Rs. 1,000,000 were slightly defective. These can be sold for Rs. 1,130,000 after
incurring a cost of Rs. 200,000.
• Goods costing Rs. 670,000 purchased on credit were returned to a supplier on 28 December 2017
but the return was not recorded in the books.
(ii) A machine costing Rs. 450,000 was received on 1 October 2017 against 100% advance payment. The
advance has not yet been adjusted due to non-receipt of the invoice.

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(iii) On 1 October 2017, 50% advance received for an annual maintenance contract of Rs. 480,000 was
credited to miscellaneous income. Remaining amount would be received at the end of the contract.
Services are rendered evenly throughout the contract period.
(iv) Maintenance services for Rs. 150,000 were rendered in December 2017 but income has been recorded in
January 2018 on receipt of the amount.
(v) Interest on the loan is paid in arrears on 1 April and 1 October each year. Interest accrued for the quarter
ended 31 December 2017 has not been recorded.
(vi) Rent and insurance include:
• annual insurance premium of Rs. 800,000 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s family
members is Rs. 200,000. The policy is valid up to 30 June 2018.
• Rs. 1,200,000 paid against the annual rent agreement expiring on 31 August 2018.
(vii) TE maintains allowance for doubtful receivables according to the age analysis of the outstanding
balances. Relevant details are as under:
Trade receivables as on 31.12.17
Outstanding Less than 4-6 7-12 More than Total
balances 3 months months months 1 year
(Rs. in '000) 1,970 1,000 900 530 4,400
Required Allowance - 5% 10% 20%
(viii) TE depreciates property, plant & equipment at 15% per annum on reducing balance method.
Required:
(a) Prepare Statement of Comprehensive income for the year ended 31.12.17.
(b) Prepare Statement of Financial Position as at 31.12.17.

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Question # 06:
Following is the Trial Balance Alpha Limited’s Trial Balance as at 31.12.21.
Debit Credit
Description
(Rs. in ‘000’) (Rs. in ‘000’)
Land 60,000
Building 30,000
Discount 2,000
Allowance for doubtful debt 4,000
Carriage outwards 4,500
Loan @10% 80,000
Sales 65,000
Returns inwards 2,500
Commission 1,200
Bank OD 18,000
Cost of sales 16,000
Inventory 5,000
Debtors and Creditors 36,000 4,000
Capital 10,000
Prepayments 20,000
Accruals and other payables 12,000
Advances 17,000
Bank charges 1,000
Interest 1,800
Cash 20,000
Miscellaneous Income 28,000
Insurance expense 3,600
Suspense 400
221,000 221,000
Additional Information:
(i) During the physical inventory count carried out on 31.12.21, following matters were noted:
a) Inventory shortages amounted to Rs. 2 million which was considered as expected.
b) Goods costing Rs. 3 million were damaged due to mis handling and insurance company agreed to
pay Rs. 2 million for this loss.
c) Goods Sold on credit costing Rs. 8 million were returned but have not been accounted for. These
goods were sold on 10% margin.
(ii) Loan raised of Rs. 100 million on 01.07.20 and was repayable in five equal installments starting from
30.06.21. Interest of current Year is not yet accrued.
(iii) A debtor with outstanding balance of Rs. 500,000 was also appearing as a creditor with outstanding
balance of Rs. 600,000 has shown consent of netting off.
(iv) Expired portion of prepayments relating to rent expense till 31.12.21 was Rs. 2.4 million.
(v) Insurance expense include annual policy of office building Rs. 600,000 and owner house Rs. 1 million.
Both policies are valid till 31.03.22 and 30.06.22 respectively.
(vi) Miscellaneous Income include 50% advance of half yearly contract of Rs. 8 million to be completed on
30.04.22.

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(vii) A building was purchased on 01.07.21 against advance payment of Rs. 7 million and remaining 30% was
paid through Cash, not yet recorded.
(viii) A credit Purchase of Rs. 400,000 was only recorded in creditors Account.
(ix) It is decided to take Allowance at Year-end @ rate of 5%.
Required:
(a) Prepare Statement of Comprehensive income for the year ended 31.12.21.
(b) Prepare Statement of Financial Position as at 31.12.21.

Question # 07:
Following is the Trial Balance Beta Limited’s Trial Balance as at 30.06.17.
Debit Credit
Description
(Rs. in ‘000’) (Rs. in ‘000’)
Cash 160,000
Discount 5,000
Land and Building 200,000
Allowance for doubtful debt 18,000
Carriage 4,000
Travelling 8,000
Salaries 18,000
Inventory (01.07.16) 28,000
Purchases and sales 56,000 410,000
Returns inwards 2,000
Rental Income 26,000
Selling commission 6,000
Sales supplies 3,600
Postage 1,200
Accumulated depreciation 40,500
Debtor and creditors 165,000 95,000
Loan @ 15% 280,000
Bank OD 17,000
Advances 82,000
Prepaid insurance 78,000
Bank commission 6,500
Interest 34,500
Discount allowed 10,000
Delivery charges 28,700
891,500 891,500
(i) Closing Inventory as per Physical count was Rs. 150,000. Some items included in above Inventory costing
Rs. 40,000 was damaged due to mishandling and can only be sold for Rs. 28,000 after remedial work of
Rs. 3,600.
(ii) Rental income includes Rs. 9,000 which was received by the accountant from the customer of Owner's
other Business Venture.
(iii) Closing Inventory of Sale Supplies was Rs. 180,000 on 30.06.17.
(iv) Land Portion of property was 40% and Building is to be depreciated at 12.5% on WDV.

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(v) Advances includes Rs. 42,000 paid for purchase of Land and this Land was acquired on 01.07.16 and Rs.
10,000 is still payable in this regard.
(vi) Loan's first installment of Rs. 65,000 is payable on 28.02.18 and rest will be paid on 31.12.20.
(vii) Expired amount of insurance for the current year is one tenth of opening prepayments.
Required:
(a) Prepare statement of Comprehensive income for the year ended 30 June 2017.
(b) Prepare statement of financial position as at 30 June 2017.

Question # 08:
Stewart is a sole trader, supplying building materials to local builders. He prepares his accounts to 30 June each
year. At June 30, 2013, his trial balance was as follows:
Dr. Cr.
Description
Rs. Rs.
Capital at 1 July 2012 55,550
Purchases and sales 324,500 625,000
Returns 2,300 1,700
Discounts 1,500 2,500
Building materials at 1 July 2012 98,200
Packing materials purchased 12,900
Distribution costs 17,000
Rent, rates and insurance 5,100
Telephone 3,200
Car expenses 2,400
Wages 71,700
Allowance for doubtful debts at 1 July 2012 1,000
Heat and light 1,850
Sundry expenses 6,700
Delivery vehicles – cost 112,500
Delivery vehicles – depreciation at 1 July 2012 35,000
Equipment – cost 15,000
Equipment – depreciation at 1 July 2012 5,000
Trade receivables and payables 95,000 82,000
Loan 10,000
Loan repayments 6,400
Bank deposit account 15,000
Bank current account 26,500
817,750 817,750

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The following additional information at 30 June 2013 is available:

a) Inventory of building materials Rs. 75,300 and Inventory of packing materials Rs.700. There was also an
unpaid invoice of Rs.200 for packing materials received and consumed during the year.
b) Prepayments: rent, rates and insurance Rs.450
c) Accrued expenses: heat and light Rs.400 and telephone Rs.500
d) Wages include Rs. 23,800 cash withdrawn by Stewart.
e) Trade receivables have been analysed as follows:
Rs.
Current month 60,000
30 to 60 days 20,000
60 to 90 days 12,000
over 90 days 3,000
Allowance is to be made for doubtful debts as follows:
30 to 60 days 1%
60 to 90 days 2.5%
over 90 days 5% (after writing off Rs. 600)
f) Sundry expenses include Rs. 3,500 for Stewart’s personal tax bill.
g) The loan was taken out some years ago, the final payment is due on 31 March 2014. The figure shown in
the trial balance for “loan repayments” includes interest of Rs.800 for the year.
h) The bank deposit account was opened on 1 January 2013 as a short-term investment; interest is credited
at 31 December annually; the average rate of interest since opening the account has been 6% per annum.
i) At 1 July 2012, Stewart decided to bring one of his family cars, valued at Rs. 8,000, into the business. No
entries have been made in the business books for its introduction. Depreciation is to be provided as
follows:
• 20% on cost for delivery vehicles
• 25% on the reducing balance for the car
• 25% on the reducing balance for the equipment
Required:
(a) Prepare a statement of comprehensive income for the year ended 30 June 2013.
(b) Prepare a statement of financial position at 30 June 2013.

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Question # 09:
Adeel and Kashif are in partnership with the name of AK Traders. They share profits in the ratio:
Adeel 70%; Kashif 30%. The following trial balance was extracted as at 31 December 2027.
Dr. (Rs.) Cr. (Rs.)
Office equipment at cost 9,200
Motor vehicles at cost 21,400
Accumulated depreciation at 31.12.2026
Motor vehicles 12,800
Office equipment 3,600
Stock as at 31 December 2026 38,410
Debtors and creditors 41,940 32,216
Cash at bank 2,118
Cash in hand 317
Sales 180,400
Purchases 136,680
Salaries 27,400
Office expenses 2,130
Discount allowed 312
Capital accounts:
Adeel 57,382
Kashif 27,009
Drawings:
Adeel 17,500
Kashif 16,000
313,407 313,407
The following requirements are applicable at 31 December 2027.
• Stock 31 December 2027 Rs. 41,312
• Office expenses owing Rs. 240
• Provide for depreciation: motor vehicles 25% of cost; office equipment 20% of cost
• Charge interest on capital: Adeel Rs. 2,500; Kashif Rs. 1,000.
• Charge interest on drawings: Adeel Rs. 300; Kashif Rs. 200.
Required:
Prepare the following for AK Traders:
a) Adjusted trial balance as at December 31, 2027.
b) Statement of comprehensive income for the year ended December 31, 2027
c) Profit and loss appropriation statement for the year ended December 31, 2027
d) Statement of financial position as at December 31, 2027.

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Question # 10:
Mano and Aadi are in partnership with the name of MA Enterprises. As per the partnership deed they share
profits and losses equally. Partners are allowed Interest on capital at the rate of 3% per annum. Interest on
drawings is charged at the rate of 4% per annum. The following balances were extracted from the books on 30
June 2025:
Rs. Rs.
Property, plant & equipment (cost) 210,000
Accumulated dep. 1 Jul 2024 49,200
Trade payables 7,900
Bank Overdraft 87,500
Purchases 81,250
Trade Receivables 18,750
Allowance for doubtful debts 500
Capital accounts:
Mano 50,000
Aadi 30,000
Drawings:
Mano 6,000
Aadi 6,000
Revenue 360,200
Returns inwards 8,600
Inventory at 1 Jul 2024 15,600
Operating expenses 79,100
505,300 505,300
The following information was available at 30 June 2025:
i. Inventory was valued at Rs.13,650.
ii. Accrued expenses of Rs. 250 and prepaid expenses of Rs. 400 have to be recorded at year end.
iii. Depreciation is to be charged on all non-current assets owned at the end of the year at 20% of cost.
iv. The allowance for doubtful debts is to be maintained at 4%
v. A cheque payment of Rs. 550 made to a credit supplier on 15 June, had not been recorded in the books.
Required:
Prepare the following for MA Enterprises:
a) Adjusted trial balance as at 30 June 2025.
b) Statement of comprehensive income for the year ended 30 June 2025
c) Profit and loss appropriation statement for the year ended 30 June 2025
d) Statement of financial position as at 30 June 2025

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Practice Answers
Answer # 01:
Ahmad Limited Amount in Rs.
Statement of Comprehensive income Rounded to
For the year ended 31.12.20 nearest rupees
Rs.
Revenue (W-1) 172,500
Less; Cost of goods Sold (W-2) -84,500
Gross Profit 88,000
Less; Selling Expense (W-3) -11,500
Less; Distribution Expense (W-4) 0
Less; Administration Expense (W-5) -28,000
Operating Profit 48,500
Add; Other Income (W-6) -
Less; Finance expense (W-7) -10,000
Net Profit 38,500

(W-1) Revenue
Rs.
Sales 180,000
Less; Sales Return -7,000
Less; Discount allowed -500
172,500

(W-2) Cost of Sales

Rs.
Opening Inventory 20,000
Add; Purchases 70,000
Less; Purchase Return -5,000
Less; Discount Received -1,000
Add; Wages 3,000
Add; Carriage Inward 3,500
Less; Closing Inventory (W-8) -6,000
84,500

(W-3) Selling expense

Rs.
Selling Commission -
Advertisement 4,000
Free Samples -
Bad debt expense (W-11) 7,500
11,500

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(W-4) Distribution expense

Rs.
Delivery Charges -
Carriage Outward -
Packing Cost -
-

(W-5) Administration expense

Rs.
Rent expense [12,000 (from trial) – 2,000 (W-10)] 10,000
Electricity expense [6,500 (from trial) + 1,500 (W-9)] 8,000
Depreciation expense (W-13) 10,000
28,000

(W-6) Other Income

Rs.
Commission income -
Rental income -
Interest income -
Any other income -
-

(W-7) Finance expense

Rs.
Interest expense -
Markup expense -
Bank Charges 10,000
Bank Commission -
10,000

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Ahmad Limited Amount in Rs.

Statement of Financial Position Rounded to
As at 31.12.20 nearest rupees
Rs.
Assets
Non-Current assets
Machine 100,000
Less; Acc. Depreciation (W-12) 20,000 80,000

Current assets
Inventory 6,000
Trade & Other receivables 90,000
Less; Allowance for doubtful debt (W-11) -9,000 81,000
Prepayments – Prepaid Rent expense 2,000
Advance to Supplier 7,000
Cash & Bank -
Total Current assets 96,000
Total Assets 176,000

Equity & Liabilities

Opening Capital 25,000
Add; Net Profit (From Income Statement) 38,500
Less; Drawings -5,000
Closing Capital 58,500
Non-Current Liabilities
Long-term Loan [50,000 – 5,000 (50,000 x 10%)] 45,000
Current Liabilities
Trade and Other Payables
Creditors 60,000
Electricity expense Payable 1,500
Advance from customer - 61,500
Short-term Loan [50,000 x 10%] 5,000
Interest Payable -
Bank OD 6,000
Total Current Liabilities 72,500
Total Equity and Liabilities 176,000

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(W-8) Adjustment # (i)

Description Dr. Cr.
Inventory Dr. 6,000
Cost of Sales Cr. 6,000
(W-9) Adjustment # (ii)
Description Dr. Cr.
Electricity expense Dr. 1,500
Electricity expense payable Cr. 1,500
(W-10)Adjustment # (iii)
Description Dr. Cr.
Prepaid Rent expense Dr. 2,000
Rent Expense Cr. 2,000

(W-11) Adjustment # (iv)

Adjusted Debtor A/c
Dr. Cr.
Unadjusted c/d (From Trial) 90,000
Adjusted c/d 90,000
90,000 90,000

Allowance for doubtful debt A/c

Dr. Cr.
Bal. b/d (from Trial) 3,000
Bal. c/d (90,000 x 10%) 9,000 Bad debt expense 6,000
9,000 9,000

Adjusted Bad debt expense A/c

Dr. Cr.
Unadjusted c/d (From Trial) 1,500
Allowance for doubtful debt 6,000 Adjusted c/d (P/L) – Selling expense 7,500
7,500 7,500

(W-12) Adjustment # (v)

Furniture & Fixture A/c
Dr. Cr.
Unadjusted c/d (From Trial) 100,000
Adjusted c/d 100,000
100,000 100,000

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 10,000
Bal. c/d 20,000 Dep. expense (100,000 x 10%) 10,000
20,000 20,000

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Answer # 02:
Naveed Limited Amount in Rs.
Statement of Comprehensive income Rounded to
For the year ended 31.12.22 nearest rupees
Rs.
Revenue (W-1) 385,000
Less; Cost of goods Sold (W-2) -135,600
Gross Profit 249,400
Less; Selling Expense (W-3) -48,000
Less; Distribution Expense (W-4) -30,000
Less; Administration Expense (W-5) -120,375
Operating Profit 51,025
Add; Other Income (W-6) 50,000
Less; Finance expense (W-7) -2,000
Net Profit 81,025

(W-1) Revenue
Rs.
Sales 410,000
Less; Sales Return -20,000
Less; Discount allowed -5,000
385,000

(W-2) Cost of Sales

Rs.
Opening Inventory 200,000
Add; Purchases 120,000
Less; Purchase Return -40,000
Less; Discount Received -10,000
Add; Wages -
Add; Carriage Inward -
Less; Closing Inventory -134,400
135,600

(W-3) Selling expense

Rs.
Selling Commission -
Advertisement -
Free Samples 40,000
Bad debt expense (W-12) 8,000
48,000

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(W-4) Distribution expense

Rs.
Delivery Charges 30,000
Carriage Outward -
Packing Cost -
30,000

(W-5) Administration expense

(It will vary from question to question) Rs.
Insurance expense 30,000
Postage expense 60,000
Depreciation expense 30,375
120,375

(W-6) Other Income

Rs.
Commission income -
Rental income 50,000
Interest income -
Any other income -
50,000

(W-7) Finance expense

Rs.
Interest expense 20,000
Markup expense -
Bank Charges -
Bank Commission -
20,000

821
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Naveed Limited Amount in Rs.

Statement of Financial Position Rounded to
As at 31.12.22 nearest rupees
Rs.
Assets
Non-Current assets
Plant (130,000 – 38,375) 91,625
Vehicle (200,000 – 52,000) 148,000 239,625

Current assets
Inventory 134,400
Trade & Other receivables 90,000
Less; Allowance for doubtful debt -23,000 67,000
Prepayments 10,000
Advance to Supplier 10,000
Cash & Bank 0
Total Current assets 221,400
Total Assets 461,025

Equity & Liabilities

Opening Capital 90,000
Add; Net Profit 81,025
Less; Drawings (35,000)
Closing Capital 136,025
Non-Current Liabilities
Long-term Loan 200,000
Current Liabilities
Trade and Other Payables
Creditors 50,000
Postage expense Payable 20,000
Advance from customer 20,000 90,000
Short-term Loan 0
Interest Payable 5,000
Bank OD 30,000
Total Current Liabilities 125,000
Total Equity and Liabilities 461,025

822
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-8) Adjustment # (i)

Description Dr. Cr.
Inventory Dr. 134,400
Cost of Sales Cr. 134,400

150,000

Normal Damaged

(150,000 – 40,000) Cost = 110,000 Cost = 40,000

NRV = N/A NRV = 24,400 (28,000 – 3,600)

Cost or NRV
whichever is Lower
110,000 24,400

134,400

(W-9) Adjustment # (ii)

Description Dr. Cr.
Postage expense Dr. 20,000
Postage expense payable Cr. 20,000

(W-10) Adjustment # (iii)

Description Dr. Cr.
Drawings Dr. 15,000
Insurance Expense Cr. 15,000
Prepaid Insurance Expense Dr. 10,000
Insurance Expense Cr. 10,000

Contract year 01.04.22 ------------------------------------------|------------------→ 31.03.23

Accounting year 01.01.22 ------------------------------------------------------→ 31.12.22
------------------------→
03 Months
Prepaid
40,000
= 12
x 3 = 10,000

823
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-11) Adjustment # (vi)

Description Dr. Cr.
Debtor Dr. 10,000
Sales Cr. 10,000
(W-12) Adjustment # (iv)
Adjusted Debtor A/c
Dr. Cr.
Unadjusted c/d (From Trial) 80,000
Sales 10,000
Adjusted c/d 90,000
90,000 90,000

Allowance for doubtful debt A/c

Dr. Cr.
Bal. b/d (from Trial) 30,000
Bad debt expense 7,000
Bal. c/d (W-12.1) 23,000
30,000 30,000

Adjusted Bad debt expense A/c

Dr. Cr.
Unadjusted c/d (From Trial) 15,000
Debtor (Year-end adjustment) - Allowance for doubtful debt 7,000
P/L (Selling expense) 8,000
15,000 15,000

Allowance Allowance
Classification Balance
rate amount
Good debtor 0 - -
Specific doubtful (Babloo) 20,000 80% 16,000
General doubtful (balancing) 70,000 10% 7,000
Adjusted c/d of Debtors 90,000 Bal. c/d 23,000

(W-13) Adjustment # (vi)

Description Dr. Cr.
Plant Dr. 30,000
Bank Cr. 30,000

Plant A/c
Dr. Cr.
Unadjusted c/d (From Trial) 100,000
Bank 30,000
Adjusted c/d 130,000
130,000 130,000

824
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 20,000
Dep. expense (W-13.1) 18,375
Bal. c/d 38,375
38,375 38,375

(W-13.1) Depreciation expense

Rs.
On opening assets
= (Cost – Residual Value) x Depreciation rate
= (100,000 – 0) x 15% 15,000
On addition
= (Cost – Residual Value) x Depreciation rate
9
= (30,000 – 0) x 15% x 12 3,375
18,375

Description Dr. Cr.

Vehicle Dr. 60,000
Bank Cr. 60,000

Vehicle A/c
Dr. Cr.
Unadjusted c/d (From Trial) 140,000
Bank 60,000
Adjusted c/d 200,000
200,000 200,000

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 40,000
Dep. expense (W-13.2) 12,000
Bal. c/d 52,000
52,000 52,000

(W-13.2) Depreciation expense

Rs.
On opening assets
= (Cost – Acc. Depreciation) x Depreciation rate
= (140,000 – 40,000) x 10% 10,000
On addition
= Cost x Depreciation rate
4
= 60,000 x 10% x 12 2,000
12,000

825
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-14)
Adjusted Bank A/c
Dr. Cr.
Unadjusted c/d (From Trial) 60,000 Plant 30,000
Vehicle 60,000
Adjusted c/d (Bank OD) 30,000
90,000 90,000

(W-15)
Interest expense A/c
Dr. Cr.

Unadjusted (Cash) – From Trial 15,000 P/L (Finance expense) 20,000

Bal. c/d (Closing Payable) 5,000
20,000 20,000

826
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 03:
Abdullah Limited Rupees in “000”
Statement of Comprehensive income Rounded to
For the year ended 30.06.22 nearest thousands
Rs. in “000”
Revenue (W-1) 500
Less; Cost of goods Sold (W-2) -185
Gross Profit 315
Less; Selling Expense (W-3) -45
Less; Distribution Expense (W-4) -80
Less; Administration Expense (W-5) -225
Operating Loss -35
Add; Other Income (W-6) 75
Less; Finance expense (W-7) -48
Net Loss -8

(W-1) Revenue
Rs. in “000”
Sales 530
Less; Sales Return -20
Less; Discount allowed -10
500

(W-2) Cost of Sales

Rs. in “000”
Opening Inventory 50
Add; Purchases 120
Less; Purchase Return -10
Less; Discount Received -5
Add; Wages 60
Add; Carriage Inward -
Less; Closing Inventory -30
185

(W-3) Selling expense

Rs. in “000”
Selling Commission -
Advertisement -
Free Samples -
Bad debt expense 45
45

827
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-4) Distribution expense

Rs. in “000”
Delivery Charges -
Carriage Outward 80
Packing Cost -
80

(W-5) Administration expense

(It will vary from question to question) Rs. in “000”
Heat & light expense 50
Rent expense 150
Depreciation expense – Vehicle 5
Depreciation expense – Equipment 20
225

(W-6) Other Income

Rs. in “000”
Commission income -
Rental income -
Interest income 75
Any other income -
75

(W-7) Finance expense

Rs. in “000”
Interest expense 48
Markup expense -
Bank Charges -
Bank Commission -
48

828
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Abdullah Limited Rupees in “000”

Statement of Financial Position Rounded to
As at 30.06.22 nearest thousands
Rs. in “000”
Assets
Non-Current assets
Vehicle (100 – 5) 95
Equipment (160 – 40) 120
Bank deposit account 600 815

Current assets
Inventory 30
Trade & Other receivables 170
Less; Allowance for doubtful debt -40 130
Prepayments -
Advance to Supplier 30
Cash & Bank 95
Total Current assets 285
Total Assets 1,100

Equity & Liabilities

Opening Capital 400
Add; Net Profit -8
Less; Drawings -60
Closing Capital 332
Non-Current Liabilities
Long-term Loan 240
Current Liabilities
Trade and Other Payables
Creditors 100
Rent expense Payable 50
Advance from customer 30 180
Short-term Loan 300
Interest Payable 48
Bank OD -
Total Current Liabilities 528
Total Equity and Liabilities 1,100

829
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-8) Adjustment # (i)

Description Dr. Cr.
Inventory Dr. 30
Cost of Sales Cr. 30

(W-9) Adjustment # (ii)

Description Dr. Cr.
Vehicle Dr. 100
Capital Cr. 100

(W-10) Adjustment # (iii)

Vehicle A/c
Dr. Cr.
Unadjusted c/d (From Trial) 0
Bank 100
Adjusted c/d 100
100 100

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 0
Dep. expense (W-9.1) 5
Bal. c/d 5
5 5

(W-9.1) Depreciation expense

Rs.
On opening assets
On addition
= (Cost – Residual Value) x Depreciation rate
6
= (100 – 0) x 10% x 12 5
5

(W-11) Adjustment # (iv)

Original Dr. Cr. Wrong Dr. Cr. Rectifying Dr. Cr.
Equipment 40 Heat & light 40 Equipment 40
Bank 40 Bank 40 Heat & light 40

(W-12) Adjustment # (v)

Original Dr. Cr. Wrong Rectifying Dr. Cr.
Equipment 20 Equipment 20
Advance
(50 x 40%)
20 × Advance 20

830
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-13) Adjustment # (vi)

Equipment A/c
Dr. Cr.
Bal. b/d 100
Heat & light 40
Advance 20 Adjusted c/d 160
160 160

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 20
Dep. expense (W-13.1) 20
Bal. c/d 40
40 40

(W-13.1) Depreciation expense

Rs.
On opening assets
= (Cost – Acc. Depreciation) x Depreciation rate
= (100 – 20) x 15% 12
On addition
= Cost x Depreciation rate
12
= 40 x 15% x 12 6
8
= 20 x 15% x 12 2
20

(W-14) Adjustment # (vii)

Original Dr. Cr. Wrong Dr. Cr. Rectifying Dr. Cr.
Drawings 20 Rent expense 20 Drawings 20
Bank 20 Bank 20 Rent expense 20

Rent expense A/c

Dr. Cr.
Unadjusted (Cash) – From Trial 120 Drawings 20
P/L (Admin expense) 150
Bal. c/d (Closing Payable) 50
170 170

831
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-15) Adjustment # (viii)

Accounting year 01.07.21 ------------------|------------------→ 30.06.22
31.12.21/01.01.22
Rs.
6
01.07.21 -----------→ 31.12.21 400 x 15% x 12
30
6
01.01.22 -----------→ 30.06.22 240 x 15% x 12 18

48

Loan A/c
Dr. Cr.
Bank 160 Bal. b/d 400
Bal. c/d 240
400 400

Interest expense A/c

Dr. Cr.
Unadjusted (Cash) – From Trial 0
P/L (Finance expense) 48
Bal. c/d (Closing Payable) 48
48 48

(W-16)Adjustment # (ix)
Description Dr. Cr.
Bank Dr. 5
Bad debt expense Cr. 5

(W-17)Adjustment # (x)
Description Dr. Cr.
Bad debt expense Dr. 20
Debtor Cr. 20

Adjusted Debtor A/c

Dr. Cr.
Unadjusted c/d (From Trial) 190 Bad debt expense 20
Adjusted c/d 170
190 190

Allowance for doubtful debt A/c

Dr. Cr.
Bal. b/d (from Trial) 30
Bad debt expense 10
Bal. c/d (30 + 10) 40
40 40

832
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Adjusted Bad debt expense A/c

Dr. Cr.
Unadjusted c/d (From Trial) 20 Bank 5
Debtor (Year-end adjustment) 20
Allowance for doubtful debt 10 P/L (Selling expense) 45
50 50

(W-18)
Adjusted Bank A/c
Dr. Cr.
Unadjusted c/d (From Trial) 250 Loan 160
Bad debt expense 5
Adjusted c/d 95
255 255

833
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 04:
Rainbow lights Limited Rupees in “million”
Statement of Comprehensive income Rounded to
For the year ended 31.12.16 nearest million
Rs. in “million”
Revenue (W-1) 742
Less; Cost of goods Sold (W-2) -301
Gross Profit 441
Less; Selling Expense (W-3) -17.82
Less; Distribution Expense (W-4) -
Less; Administration Expense (W-5) -161.4
Operating Profit 261.78
Add; Other Income (W-6) 41
Less; Finance expense (W-7) -12
Net Profit 290.78

(W-1) Revenue
Rs. in “million”
Sales 750
Less; Sales Return -7
Less; Discount allowed -1
742

(W-2) Cost of Sales

In Perpetual, Cost of Sales is calculated by Adjusted Cost of Sales A/c. Check (W-8).

(W-3) Selling expense

Rs. in “million”
Selling Commission -
Advertisement -
Free Samples -
Bad debt expense 17.82
17.82

(W-4) Distribution expense

Rs. in “million”
Delivery Charges -
Carriage Outward -
Packing Cost -
-

834
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-5) Administration expense

(It will vary from question to question) Rs. in “million”
As per Trial 146
Abnormal loss 15
Rent expense -18
Depreciation 18.4
161.4

(W-6) Other Income

Rs. in “million”
Commission income -
Rental income -
Interest income -
Any other income (45 – 4) 41
41

(W-7) Finance expense

Rs. in “million”
Interest expense 12
Markup expense -
Bank Charges -
Bank Commission -
12

835
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Rainbow Lights Limited Rupees in “million”

Statement of Financial Position Rounded to
As at 31.12.16 nearest million
Rs. in “million”
Assets
Non-Current assets
Fixed asset 278
Less; Acc. Depreciation -168.4 109.6

Current assets
Inventory 157
Trade & Other receivables 394
Less; Allowance for doubtful debt -11.82 382.18
Prepayments 18
Advances (45 – 8) 37
Cash & Bank 20
Total Current assets 614.18
Total Assets 723.78

Equity & Liabilities

Opening Capital 120
Add; Net Profit 290.78
Less; Drawings -81
Closing Capital 329.78
Non-Current Liabilities
Long-term Loan 120
Current Liabilities
Trade and Other Payables
Creditors 240
Accruals & other Payables 28
Miscellaneous Income-in-advance 4 272
Short-term Loan -
Interest Payable 2
Bank OD -
Total Current Liabilities 274
Total Equity and Liabilities 723.78

836
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-8) Adjustment # (i)

(a)
Description Dr. Cr.
Cost of Sales Dr. 2
Inventory Cr. 2

(b)
Description Dr. Cr.
Abnormal loss Dr. 15
Inventory Cr. 15
P/L Dr. 15
Abnormal loss Cr. 15
Net entry will be;
Description Dr. Cr.
P/L Dr. 15
Inventory Cr. 15

(c)
Description Dr. Cr.
Drawings Dr. 1
Inventory Cr. 1

(d)
Description Dr. Cr.
(At Selling Price)
Sales return Dr. 7
Debtor Cr. 7
(At Cost)
Inventory Dr. 5
Cost of Sales Cr. 5

Rs. in million %
7
Cost (140 x 100) 5 100
Profit 40
Selling Price 7 140

Adjusted Inventory A/c

Dr. Cr.
Unadjusted c/d (From Trial) 170 Cost of Sales 2
Cost of Sales 5 P/L (Abnormal loss) 15
Drawings 1
Adjusted c/d 157
175 175

837
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Adjusted Cost of Sales A/c

Dr. Cr.
Unadjusted c/d (From Trial) 304
Inventory 2 Inventory 5
Adjusted c/d 301
306 306

(W-9) Adjustment # (ii)

Original Dr. Cr. Wrong Dr. Cr. Rectifying Dr. Cr.
Debtor 19 Debtor 20 Sales 1
Sales 19 Sales 20 Debtor 1

(W-10) Adjustment # (iii)

Original Dr. Cr. Wrong Dr. Cr. Rectifying Dr. Cr.
Cash 2 Cash 2 Debtor 2
Bad debt exp. 2 Debtor 2 Bad debt exp. 2

Adjusted Debtor A/c

Dr. Cr.
Unadjusted c/d (From Trial) 400 Sales Return 7
Bad debt expense 2 Sales 1
Adjusted c/d 394
402 402

Allowance for doubtful debt A/c

Dr. Cr.
Bal. b/d (from Trial) 12
Bad debt expense 0.18
Bal. c/d (394 x 3%) 11.82
12 12

Adjusted Bad debt expense A/c

Dr. Cr.
Unadjusted c/d (From Trial) 20 Debtor 2
Allowance for doubtful debt 0.18
P/L (Selling expense) 17.82
20 20

(W-11) Adjustment # (iv)

Contract year 01.05.16 ------------------------------------------|------------------→ 30.04.17
Accounting year 01.01.16 ------------------------------------------------------→ 31.12.16
------------------------→
12 04 Months
= x4=4
12 Income-in-advance

838
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Description Dr. Cr.

Miscellaneous Income Dr. 4
Income-in-advance Cr. 4

(W-12) Adjustment # (v)

Contract year 01.10.16 -------------|-------------------------------------→ 30.09.17
Accounting year 01.01.16 ----------------------|-------------→ 31.12.16
------------------------------------------→
24 09 Months
= x 9 = 18
12 Prepaid

Description Dr. Cr.

Prepaid Rent expense Dr. 18
Rent expense Cr. 18

(W-13) Adjustment # (vi)

Date Description Dr. Cr.
01.09.16 Equipment Dr. 8
Advance Cr. 8

Fixed asset A/c

Dr. Cr.
01.01.16 Bal. b/d 270
01.09.16 Advance 8
31.12.16 Bal. c/d 278
278 278

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 150
Dep. expense (W-13.1) 18.4
Bal. c/d 168.4
168.4 168.4

(W-13.1) Depreciation expense

Rs.
On opening assets
= (Cost – Acc. Depreciation) x Depreciation rate
= (270 – 150) x 15% 18
On addition
= Cost x Depreciation rate
4
= 8 x 15% x 0.5
12
18.4

839
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-14)
Interest expense A/c
Dr. Cr.
Unadjusted (Cash) – From Trial 10
P/L (120 x 10%) – Finance expense 12
Bal. c/d (Closing Payable) 2
12 12

840
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 05:
Tulip Enterprises Rupees in “000”
Statement of Comprehensive income Rounded to
For the year ended 31.12.17 nearest thousands
Rs. in “000”
Revenue (W-1) 35,230
Less; Cost of goods Sold (W-2) -23,650
Gross Profit 11,580
Less; Selling Expense (W-3) -256
Less; Distribution Expense (W-4) -
Less; Administration Expense (W-5) -6,778
Operating Profit 4,546
Add; Other Income (W-6) 970
Less; Finance expense (W-7) -855
Net Profit 4,661

(W-1) Revenue
Rs. in “000”
Sales 35,230
Less; Sales Return -
Less; Discount allowed -
35,230

(W-2) Cost of Sales

In Perpetual, Cost of Sales is calculated by Adjusted Cost of Sales A/c. Check (W-8).

(W-3) Selling expense

Rs. in “000”
Selling Commission -
Advertisement -
Free Samples -
Bad debt expense 256
256

(W-4) Distribution expense

Rs. in “000”
Delivery Charges -
Carriage Outward -
Packing Cost -
-

841
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-5) Administration expense

(It will vary from question to question) Rs. in “000”
Salaries & Wages 2,610
Fuel & Power 450
Repair & maintenance expense 920
Insurance & rent expense 1,600
Depreciation expense 1,198
6,778

(W-6) Other Income

Rs. in “000”
Commission income -
Rental income -
Interest income -
Any other income (W-11) 970
970

(W-7) Finance expense

Rs. in “000”
Interest expense 855
Markup expense -
Bank Charges -
Bank Commission -
855

842
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Tulip Enterprises Rupees in “000”

Statement of Financial Position Rounded to
As at 31.12.17 nearest thousands
Rs. in “000”
Assets
Non-Current assets
PPE 12,950
Less; Acc. Depreciation -5,828 7,122

Current assets
Inventory 3,160
Trade & Other receivables (4,400 + 150) 4,550
Less; Allowance for doubtful debt -246 4,304
Prepayments (1,240 + 300 + 800) 2,340
Advance to Supplier 50
Cash & Bank 2,320
Total Current assets 12,174
Total Assets 19,296

Equity & Liabilities

Opening Capital 6,000
Add; Net Profit 4,661
Less; Drawings -690
Closing Capital 9,971
Non-Current Liabilities
Long-term Loan 5,150
Current Liabilities
Trade and Other Payables
Creditors (3,250 – 670) 2,580
Accruals & Other Payables 1,320
Income-in-advance 120 4,020
Short-term Loan 0
Interest Payable 155
Bank OD 0
Total Current Liabilities 4,175
Total Equity and Liabilities 19,296

843
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-8) Adjustment # (i)

(a)
Description Dr. Cr.
Cost of Sales Dr. 70
Inventory Cr. 70

(b)
Description Dr. Cr.
Creditor Dr. 670
Inventory Cr. 670

Adjusted Inventory A/c

Dr. Cr.
Unadjusted c/d (From Trial) 3,900 Cost of Sales 70
Creditor 670
Adjusted c/d 3,160
3,900 3,900

Adjusted Cost of Sales A/c

Dr. Cr.
Unadjusted c/d (From Trial) 23,580
Inventory 70
Adjusted c/d 23,650
23,650 23,650

(W-9) Adjustment # (ii)

Date Description Dr. Cr.
01.10.17 Machine Dr. 450
Advance Cr. 450

PPE A/c
Dr. Cr.
01.01.17 Unadjusted 12,500
01.10.17 Advance 450
31.12.17 Adjusted c/d 12,950
12,950 12,950

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 4,630
Dep. expense (W-9.1) 1,198
Bal. c/d 5,828
5,828 5,828

844
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-9.1) Depreciation expense

Rs.
On opening assets
= (Cost – Acc. Depreciation) x Depreciation rate
= (12,500 – 4,630) x 15% 1,181
On addition
= Cost x Depreciation rate
3
= 450 x 15% x 17
12
1,198

(W-10) Adjustment # (iii)

Contract year 01.10.17 -------------|-------------------------------------→ 30.09.18
Accounting year 01.01.17 ----------------------|-------------→ 31.12.17
--------→ 31.03.18
240 03 Months
= x 3 = 120
6 Income-in-advance

Description Dr. Cr.

Miscellaneous Income Dr. 120
Income-in-advance Cr. 120

(W-11) Adjustment # (iv)

Description Dr. Cr.
Income receivable Dr. 150
Income Cr. 150

Miscellaneous Income A/c

Dr. Cr.
Unadjusted (Cash) – From Trial 940
P/L 970
Bal. c/d (Closing-in-advance) 120 Bal. c/d (Closing receivable) 150
1,090 1,090

(W-12) Adjustment # (v)

Description Dr. Cr.
Interest expense Dr. 155
Interest Payable Cr. 155

Interest expense A/c

Dr. Cr.
Unadjusted (Cash) – From Trial 700
P/L (balancing) – Finance expense 855
Bal. c/d (Closing Payable) 155
855 855

845
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-13) Adjustment # (vi)

(a)
Description Dr. Cr.
Drawings Dr. 200
Insurance Expense Cr. 200
Prepaid Insurance Expense Dr. 300
Insurance Expense Cr. 300

Contract year 01.07.17 ------------|------------→ 30.06.18

Accounting year 01.01.17 ------------|------------→ 31.12.17
------------------→
600 06 Months
= 12 x 6 = 300
Prepaid
(b)
Description Dr. Cr.
Prepaid Rent expense Dr. 800
Rent expense Cr. 800

Contract year 01.09.17 -------------|-------------------------------------→ 31.08.18

Accounting year 01.01.17 ----------------------|-------------→ 31.12.17
-------------------------------------------→
1,200 08 Months
= x 8 = 800
12 Prepaid
Rent & Insurance expense A/c
Dr. Cr.
Drawings 200
Unadjusted (Cash) – From Trial 2,900 P/L (balancing) 1,600
Bal. c/d – Closing Prepaid (300 + 800) 1,100
2,900 2,900

(W-14) Adjustment # (vii)

Allowance Allowance
Classification Balance
rate amount
Less than 3 Months 1,970 0% 0
4 to 6 Months 1,000 5% 50
7 to 10 Months 900 10% 90
More than 1 year 530 20% 106
Adjusted c/d of Debtors 4,400 Bal. c/d 246

Allowance for doubtful debt A/c

Dr. Cr.
Bal. b/d (from Trial) 220
Bal. c/d 246 Bad debt expense 26
246 246

846
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Adjusted Bad debt expense A/c

Dr. Cr.
Unadjusted c/d (From Trial) 230

Allowance for doubtful debt 26 P/L (Selling expense) 256

256 256

847
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 06:
Alpha Limited Rupees in “000”
Statement of Comprehensive income Rounded to
For the year ended 31.12.21 nearest thousands
Rs. in “000”
Revenue (W-1) 53,611
Less; Cost of goods Sold (W-2) -10,000
Gross Profit 43,611
Less; Selling Expense (W-3) -531
Less; Distribution Expense (W-4) -4,500
Less; Administration Expense (W-5) -5,850
Operating Profit 32,730
Add; Other Income (W-6) 26,667
Less; Finance expense (W-7) -10,000
Net Profit 49,397

(W-1) Revenue
Rs. in “000”
Sales 65,000
Less; Sales Return (2,500 + 8,889) -11,389
Less; Discount allowed -
53,611

(W-2) Cost of Sales

In Perpetual, Cost of Sales is calculated by Adjusted Cost of Sales A/c. Check (W-8).

(W-3) Selling expense

Rs. in “000”
Selling Commission 1,200
Advertisement 2,000
Free Samples -
Bad debt expense -2,669
531

(W-4) Distribution expense

Rs. in “000”
Delivery Charges -
Carriage Outward 4,500
Packing Cost -
4,500

848
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-5) Administration expense

(It will vary from question to question) Rs. in “000”
Insurance expense 2,450
Abnormal loss 1,000
Rent expense 2,400
5,850

(W-6) Other Income

Rs. in “000”
Commission income -
Rental income -
Interest income -
Any other income (28,000 – 1,333) 26,667
26,667

(W-7) Finance expense

Rs. in “000”
Interest expense 9,000
Markup expense -
Bank Charges 1,000
Bank Commission -
10,000

849
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Alpha Limited Rupees in “000”

Statement of Financial Position Rounded to
As at 31.12.21 nearest thousands
Rs. in “000”
Assets
Non-Current assets
Land 60,000
Building 40,000 100,000

Current assets
Inventory 8,400
Trade & Other receivables (26,611 + 2,000) 28,611
Less; Allowance for doubtful debt -1,331 27,280
Prepayments (20,000 – 2,400 + 150) 17,750
Advance to Supplier (17,000 – 7,000) 10,000
Cash & Bank (20,000 – 3,000) 17,000
Total Current assets 80,430
Total Assets 180,430

Equity & Liabilities

Opening Capital 10,000
Add; Net Profit 49,397
Less; Drawings -1,000
Closing Capital 58,397
Non-Current Liabilities
Long-term Loan 60,000
Current Liabilities
Trade and Other Payables
Creditors (4,000 – 500) 3,500
Accruals & Other Payables 12,000
Income-in-advance 1,333 16,833
Short-term Loan 20,000
Interest Payable 7,200
Bank OD 18,000
Total Current Liabilities 62,033
Total Equity and Liabilities 180,430

850
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-8) Adjustment # (i)

(a)
Description Dr. Cr.
Cost of Sales Dr. 2,000
Inventory Cr. 2,000

(b)
Description Dr. Cr.
Abnormal loss Dr. 3,000
Inventory Cr. 3,000
Insurance income receivable Dr. 2,000
P/L Dr. 1,000
Abnormal loss Cr. 3,000
Net entry will be;
Description Dr. Cr.
Insurance income receivable Dr. 2,000
P/L Dr. 1,000
Inventory Cr. 3,000

(c)
Description Dr. Cr.
(At Cost)
Inventory Dr. 8,000
Cost of Sales Cr. 8,000
(At Cost)
Sales return Dr. 8,889
Debtor Cr. 8,889

Rs. in “000” %
8,000
Selling Price ( 90 x 100) 8,889 100
Profit (10)
Cost 8,000 90

Adjusted Inventory A/c

Dr. Cr.
Unadjusted c/d (From Trial) 5,000 Cost of Sales 2,000
Cost of Sales 8,000 P/L (Abnormal loss) 1,000
Suspense (W-15) 400 Claim receivable 2,000
Adjusted c/d 8,400
13,400 13,400

851
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Adjusted Cost of Sales A/c

Dr. Cr.
Unadjusted c/d (From Trial) 16,000
Inventory 2,000 Inventory 8,000
Adjusted c/d 10,000
18,000 18,000

(W-9) Adjustment # (ii)

Description Dr. Cr.

Interest expense Dr. 7,200
Interest Payable Cr. 7,200

Interest expense A/c

Dr. Cr.
Unadjusted (Cash) – From Trial 1,800
P/L – Finance expense 9,000
Bal. c/d (Closing Payable) 7,200
9,000 9,000

(W-10) Adjustment # (iii)

Description Dr. Cr.
Creditor Dr. 500
Debtor Cr. 500

(W-11) Adjustment # (iv)

Description Dr. Cr.
Rent expense Dr. 2,400
Prepaid rent expense Cr. 2,400

852
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-12) Adjustment # (v)

Description Dr. Cr.
Drawings Dr. 1,000
Insurance Expense Cr. 1,000
Prepaid Insurance Expense Dr. 150
Insurance Expense Cr. 150

Contract year 01.07.17 -------------------------------|------------→ 31.03.22

Accounting year 01.01.21 ------------|------------------------------→ 31.12.21
------------------→
600 03 Months
= 12 x 3 = 150
Prepaid

Insurance expense A/c

Dr. Cr.
Drawings 1,000
Unadjusted (Cash) – From Trial 3,600 P/L (balancing) 2,450
Bal. c/d – Closing Prepaid 150
3,600 3,600

(W-13) Adjustment # (vi)

Contract year 01.11.21 ------------------|------------------------→ 30.04.22
Accounting year 01.01.21 ----------------------|-----→ 31.12.21
-------→ 31.01.22
4,000 01 Month
= x 1 = 1,333
3 Income-in-advance

Description Dr. Cr.

Income Dr. 1,333
Income-in-advance Cr. 1,333

(W-14) Adjustment # (vii)

Date Description Dr. Cr.
01.07.21 Building Dr. 7,000
Advance Cr. 7,000
01.07.21 Building Dr. (7,000/70 x 30) 3,000
Cash Cr. 3,000

Building A/c
Dr. Cr.
01.01.21 Bal. b/d 30,000
01.07.21 Advance 7,000
01.07.21 Cash 3,000 31.12.21 Adjusted c/d 40,000
40,000 40,000

853
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

W-15) Adjustment # (viii)

Original Dr. Cr. Wrong Dr. Cr. Rectifying Dr. Cr.
Inventory 400 - - Inventory 400
Creditor 400 Creditor 400 Suspense 400

W-16) Adjustment # (ix)

Adjusted Debtor A/c
Dr. Cr.
Unadjusted c/d (From Trial) 36,000 Sales Return 8,889
Creditor 500
Adjusted c/d 26,611
36,000 36,000

Allowance for doubtful debt A/c

Dr. Cr.
Bal. b/d (from Trial) 4,000
Bad debt expense 2,669
Bal. c/d (26,611 x 5%) 1,331
4,000 4,000

Adjusted Bad debt expense A/c

Dr. Cr.
Unadjusted c/d (From Trial) 0
Allowance for doubtful debt 2,669
P/L (Add in Profit) 2,669
2,669 2,669

854
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 07:
Beta Limited Rupees in “000”
Statement of Comprehensive income Rounded to
For the year ended 30.06.17 nearest thousands
Rs. in “000”
Revenue (W-1) 398,000
Less; Cost of goods Sold (W-2) -82,865.6
Gross Profit 315,134.4
Less; Selling Expense (W-3) -6,000
Less; Distribution Expense (W-4) -28,700
Less; Administration Expense (W-5) -48,358
Operating Profit 232,076.4
Add; Other Income (W-6) 25,991
Less; Finance expense (W-7) -48,500
Net Profit 209,567.4

(W-1) Revenue
Rs. in “000”
Sales 410,000
Less; Sales Return -2,000
Less; Discount allowed -10,000
398,000

(W-2) Cost of Sales

Rs. in “000”
Opening Inventory 28,000
Add; Purchases 56,000
Less; Purchase Return -
Less; Discount Received -5,000
Add; Wages -
Add; Carriage Inward 4,000
Less; Closing Inventory -134.4
82,865.6

(W-3) Selling expense

Rs. in “000”
Selling Commission 6,000
Advertisement -
Free Samples -
Bad debt expense -
6,000

855
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-4) Distribution expense

Rs. in “000”
Delivery Charges 28,700
Carriage Outward -
Packing Cost -
28,700

(W-5) Administration expense

(It will vary from question to question) Rs. in “000”
Insurance expense 7,800
Travelling expense 8,000
Salaries 18,000
Postage 1,200
Sale/Office supplies expense 3,420
Depreciation expense 9,938
48,358

(W-6) Other Income

Rs. in “000”
Commission income -
Rental income (26,000 – 9) 25,991
Interest income -
Any other income -
25,991

(W-7) Finance expense

Rs. in “000”
Interest expense 42,000
Markup expense -
Bank Charges -
Bank Commission 6,500
48,500

856
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Beta Limited Rupees in “000”

Statement of Financial Position Rounded to
As at 30.06.17 nearest thousands
Rs. in “000”
Assets
Non-Current assets
Land 80,052
Building (120,000 – 50,438) 69,562 149,614

Current assets
Inventory 134.4
Trade & Other receivables 165,000
Less; Allowance for doubtful debt -18,000 147,000
Prepayments (78,000 – 7,800 + 180) 70,380
Advances (82,000 – 42) 81,958
Cash & Bank 160,000
Total Current assets 459,472.4
Total Assets 609,086.4

Equity & Liabilities

Opening Capital (0 + 9) 9
Add; Net Profit 209,567.4
Less; Drawings 0
Closing Capital 209,576.4
Non-Current Liabilities
Long-term Loan 279,935
Current Liabilities
Trade and Other Payables
Creditors 95,000
Acc. Payable for Land 10 95,010
Short-term Loan 65
Interest Payable 7,500
Bank OD 17,000
Total Current Liabilities 119,575
Total Equity and Liabilities 609,086.4

857
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

(W-8) Adjustment # (i)

Description Dr. Cr.
Inventory Dr. 134.4
Cost of Sales Cr. 134.4

150

Normal Damaged

(150 – 40) Cost = 110 Cost = 40

NRV = N/A NRV = 24.4 (28 – 3.6)

Cost or NRV
whichever is Lower
110 24.4

134.4

(W-9) Adjustment # (ii)

Original Dr. Cr. Wrong Dr. Cr. Rectifying Dr. Cr.
Bank 9 Bank 9 Income 9
Capital 9 Income 9 Capital 9

W-10) Adjustment # (iii)

Description Dr. Cr.
Prepaid Sale Supplies Dr. 180
Sale Supplies expense Cr. 180

Rent expense A/c

Dr. Cr.
P/L (Admin expense) 3,420
Unadjusted (Cash) – From Trial 3,600
Bal. c/d (Closing Payable) 180
3,600 3,600

858
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

W-11) Adjustment # (iv)

Land = 200,000 x 40% = 80,000
Building = 200,000 x 60% = 120,000

Building A/c
Dr. Cr.
Bal. b/d 120,000
Bal. c/d 120,000
120,000 120,000

Accumulated Depreciation A/c

Dr. Cr.
Bal. b/d (from Trial) 40,500
Bal. c/d 50,438 Dep. expense (W-11.1) 9,938
50,438 50,438

(W-11.1) Depreciation expense

Rs.
On opening assets
= (Cost – Acc. Depreciation) x Depreciation rate
= (120,000 – 40,500) x 12.5% 9,938
On addition
9,938

W-12) Adjustment # (v)

Date Description Dr. Cr.
01.07.16 Land Dr. 42
Advance Cr. 42
01.07.16 Land Dr. 10
Acc. Payable for Land Cr. 10

Land A/c
Dr. Cr.
01.07.16 Bal. b/d 80,000
01.07.16 Advance 42
01.07.16 Acc. Payable for Land 10 31.12.16 Bal. c/d 80,052
80,052 80,052

859
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

W-13) Adjustment # (vi)

W-14) Adjustment # (vii)

Description Dr. Cr.
Insurance expense Dr. 7,800
Prepaid Insurance expense Cr. 7,800

860
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 08:

861
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

862
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

863
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

864
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

865
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

866
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 09:
Part (a)
Adjusted Trial Balance
Unadjusted Adjustments Adjusted
Accounts
Trial Balance Trial Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs. Rs. Rs.
Office equipment at cost 9,200 9,200
Motor vehicles at cost 21,400 21,400
Accumulated dep. 31.12.2026
Motor vehicles 12,800 5,350 18,150
Office equipment 3,600 1,840 5,440
Stock as at 31 December 2026 38,410 38,410
Debtors and creditors 41,940 32,216 41,940 32,216
Cash at bank 2,118 2,118
Cash in hand 317 317
Sales 180,400 180,400
Purchases 136,680 136,680
Salaries 27,400 27,400
Office expenses 2,130 240 2,370
Discount allowed 312 312
Capital accounts:
Adeel 57,382 57,382
Kashif 27,009 27,009
Drawings:
Adeel 17,500 17,500
Kashif 16,000 16,000
Inventory 41,312 41,312
Cost of sales 41,312 41,312
Accrued expenses 240 240
Depreciation W1, W2 7,190 7,190
313,407 313,407 48,742 48,742 362,149 362,149
W1: Rs. 21,400 x 25% = Rs. 5,350
W2: Rs. 9,200 x 20% = Rs. 1,840
Part (b)
AK Traders
Statement of Comprehensive Income
For the year ended 31 December 2027
Rs.
Sales 180,400 – 312 Discount 180,088
Cost of sales 38,410 + 136,680 – 41,312 (133,778)
Gross profit 46,310
Operating expenses 27,400 + 2,370 + 7,190 (36,960)
Net profit 9,350

867
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Part (c)
Profit and loss Appropriation
Particulars Adeel Kashif Total
Profit 9,350
Interest on capital 2,500 1,000 (3,500)
Interest on drawings (300) (200) 500
6,350
Profit 70:30 4,445 1,905 (6,305)
6,645 2,705 0

Part (d)
AK Traders
Statement of Financial Position
as at 31 December 2027
Rs.
Non-current assets
Property, plant and equipment 9,200 – 5,440 + 21,400 – 18,150 7,010
Current assets
Stock 41,312
Trade debtors 41,940
Cash at bank 2,118
Cash in hand 317
85,687
92,697
Equity
Capital: Adeel 57,382 + 6,645 – 17,500 46,527
Capital: Kashif 27,009 + 2,705 – 16,000 13,714
60,241
Current liabilities
Trade payables 32,216
Accrued expenses 240
32,456
92,697

868
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Answer # 10:
Part (a)
Adjusted Trial Balance
Unadjusted Trial Adjusted Trial
Accounts Adjustments
Balance Balance
Dr. Cr. Dr. Cr. Dr. Cr.
Rs. Rs. Rs. Rs. Rs. Rs.
Property, plant & equipment (cost) 210,000 210,000
Accumulated depreciation 49,200 42,000 91,200
Trade payables 7,900 550 7,350
Bank Overdraft 87,500 550 88,050
Purchases 81,250 81,250
Trade Receivables 18,750 18,750
Allowance for doubtful debts 500 250 750
Capital accounts:
Mano 50,000 50,000
Aadi 30,000 30,000
Drawings:
Mano 6,000 6,000
Aadi 6,000 6,000
Revenue 200,200 200,200
Returns inwards 8,600 8,600
Inventory (Opening) 15,600 15,600
Operating expenses 79,100 250 + 250 400 79,200
Inventory 13,650 13,650
Cost of sales 13,650 13,650
Prepaid and accrued exp. 400 250 400 250
Depreciation 42,000 42,000
425,300 425,300 57,100 57,100 481,450 481,450
W1: Depreciation Rs. 210,000 x 20% = Rs. 42,000
W2: Allowance Rs. 18,750 x 4% = Rs. 750 – 500 opening = Rs. 250 increase
Part (b)
MA Enterprises
Statement of Comprehensive Income
For the year ended 30 June 2025
Rs.
Sales 200,200 – 8,600 return inwards 191,600
Cost of sales 15,600 + 81,250 – 13,650 (83,200)
Gross profit 108,400
Operating expenses 79,200 + 42,000 depreciation (121,200)
Net loss (12,800)

869
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Part (c)
Profit and loss Appropriation
Particulars Mano Aadi Total
Net loss (12,800)
Interest on drawings 4% (240) (240) 480
Interest on capital 3% 1,500 900 (2,400)
(14,720)
Loss 1:1 (7,360) (7,360) 14,720
(6,100) (6,700) -

Part (d)
AK Traders
Statement of Financial Position
as at 30 June 2025
Rs.
Non-current assets
Property, plant and equipment 210,000 – 91,200 118,800
Current assets
Stock 13,650
Trade debtors 18,750 - 750 18,000
Prepayment 400
32,050
150,850
Equity
Capital: Mano 50,000 – 6,100 – 6,000 37,900
Capital: Aadi 30,000 – 6,700 – 6,000 17,300
55,200

Current liabilities
Trade payables 7,350
Bank overdraft 88,050
Accrued expenses 250
95,650
150,850

870
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

ICAP Book Mcqz

01. A complete set of financial statement does not include;

(a) a statement of financial position as at the end of the period
(b) a statement of comprehensive income for the period
(c) Aging analysis of receivables
(d) a statement of changes in equity for the period
02. Following is the trial balance of Salman for the year ended 30 June 2014
Rs.
Insurance 2,000,000
Insurance is prepaid to the extent of Rs. 650,000.
What is the amount of insurance premium to be shown in the statement of comprehensive
income and statement of financial position?
(a) Insurance expense Rs. 2,000,000; Prepaid insurance Rs. 650,000
(b) Insurance expense Rs. 2,650,000; Prepaid insurance Rs. 650,000
(c) Insurance expense Rs. 650,000; Prepaid insurance Rs. 2,000,000
(d) Insurance expense Rs. 1,350,000; Prepaid insurance Rs. 650,000
03. Salman has prepared his trial balance for the year ended 30 June 2014.
He has provided following information relating to stock: Closing stock as on 30 June 2014
amounted to Rs. 237,500 thousand.
What is the correct accounting entry to record the adjustment?
(a) Dr inventory Rs. 237,500,000 Cr Cost of sales Rs. 237,500,000
(b) Dr Cost of sales Rs. 237,500,000 Cr Inventory Rs. 237,500,000
(c) Dr inventory Rs. 237,500,000 Cr Purchases Rs. 237,500,000
(d) Dr Purchases Rs. 237,500,000 Cr Inventory Rs. 237,500,000
04. Salman has prepared his trial balance for the year ended 30 June 2014. He has provided
following information relating to drawings:
Debit Rs. 000
Drawings 30,500
Salman’s son works as the head of administration and received a salary of Rs. 150 thousand per
month, which has been included in drawings.
What is the amount of drawings to be shown in the statement of financial position?
(a) Rs. 30,500 (b) Rs. 30,350
(c) Rs. 32,300 (d) Rs. 28,700

871
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

05. Azam is in process of preparation of trial balance for the year ended 30 June 2015.
Debit Credit
Rs. in ‘000’
Purchases 105,950
Azam withdrew goods costing Rs. 4,000 thousand for personal use during the year. However, no
entry was made to record the withdrawal of goods.
What is the amount of purchases to be shown in statement of comprehensive income?
(a) Rs. 105,950,000 (b) Rs. 4,000,000
(c) Rs. 101,950,000 (d) Rs. 109,950,000
06. Following is the trial balance of Salman for the year ended 30 June 2014:
Rs. in ‘000
Debit Credit
Trade discount 2,432 Sales 353,300
Sales return 10,000
Discount allowed 4,500

Assistant account has informed that sales was recorded incorrectly on gross amount and trade
discount was debited to correct it.
What is the amount of sales to be shown in statement of comprehensive income?
(a) Rs. 353,300 (b) Rs. 340,868
(c) Rs. 336,368 (d) Rs. 346,368
07. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who
deals in office machines:
Debit Credit
Rs. in million
Bank loan 160
Interest on bank loan 8

Additional information
The bank loan was acquired on 1 April 2015. The principal amount is repayable in five equal
annual instalments on 31 March each year. Interest is payable at 10% per annum on six monthly
basis and is recorded at the time of payment.
What adjusting entry is required to record interest payable as at 31 December 2015?
(a) Dr Interest expense Rs. 4 million Cr Interest payable Rs. 4 million
(b) Dr Interest expense Rs. 4 million Cr Bank loan Rs. 4 million
(c) Dr Interest expense Rs. 8 million Cr Interest payable Rs. 8 million
(d) Dr Interest expense Rs. 12 million Cr Interest payable Rs. 12 million

872
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

08. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who
deals in office machines:
Debit Credit
Rs. in million
Other income 15
Additional information
Review of other income revealed the following information:
On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and was
credited to other income. The balance amount would be paid on completion of the contract.
What is the amount of unearned income to be shown in statement of financial position?
(a) Rs. 1.8 million (b) Rs. 3.6 million
(c) Rs. 0.2 million (d) Rs. 1.6 million
09. Following summarised trial balance as at 31 December 2015 pertains to Moon Trading (MT) who
deals in office machines:
Debit Credit
Rs. in million
Other income 15
Additional information
On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and was
credited to other income. The balance amount would be paid on completion of the contract.
What is the amount of other income to be shown in statement of comprehensive income?
(a) Rs. 15 million (b) Rs. 14.8 million
(c) Rs. 13.2 (d) Rs. 11.4
10. Which of the following is not a characteristic of service organization?
(a) A large percentage of assets comprise inventory
(b) A large percentage of assets comprise receivable
(c) The funds of service companies are usually tied up towards accounts receivable
(d) There is no line item for the cost of goods sold in the income statement of service
companies.
11. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4
Bad debts 3
Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and
is unable to pay anything.
It has been decided to calculate a provision of 6% for the year.

873
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

What is the amount of closing balance of provision for doubtful debts account?
(a) Rs. 5.94 million (b) Rs. 3 million
(c) Rs. 6 million (d) Rs. 5.76 million
12. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4.5
Bad debts 3

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and
is unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the amount of bad and doubtful debts expense in statement of comprehensive income?
(a) Rs. 4.44 (b) Rs. 5.44 million
(c) Rs. 1.44 (d) Rs. 5.94
13. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Receivables 100
Provision for doubtful debts – 1.1.18 4
Bad debts 3

Additional information
A customer included in receivables in trial balance above owing Rs. 1 million gone bankrupt and
is unable to pay anything.
It has been decided to calculate a provision of 6% for the year.
What is the number of receivables to be shown in statement of financial position?
(a) Rs. 92 million (b) Rs. 94.06
(c) Rs. 91.06 (d) Rs. 90.06
14. A business has provided following extracts from trial balance as at 31 December 2018;
Debit Credit
Rs. in million
Administration expenses 150
Additional information
Electricity expense of Rs. 1.5 million is outstanding. No adjustment for bill payable has been
recorded. Electricity expense paid during the year have already been included in administration
expenses.
Included in the administration expenses in trial balance advance rent is Rs. 1.2 million.

874
CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

What is the amount of administration expenses to be shown in statement of comprehensive

income?
(a) Rs. 150.3 million (b) Rs. 151.5
(c) Rs. 152.7 (d) Rs. 150
15. A business has provided following extracts from trial balance as at 31 December 2018:
Debit Credit
Rs. in million
Administration expenses 150
Additional information
Electricity expense of Rs. 1.5 million is outstanding. No adjustment for bill payable has been
recorded.
Electricity expense paid during the year have already been included in administration expenses.
Included in the administration expenses in trial balance advance rent is Rs. 1.2 million.
Which of the following is correct regarding administration expenses?
(a) Accrued expense Rs. 1.2 million; Prepayment Rs. 1.5 million
(b) Accrued expense Rs. 1.5 million; Prepayment Rs. 1.2 million
(c) Accrued expenses Rs. 2.7 million
(d) Prepayment Rs. 2.7 million
16. Following is the summarised trial balance of Fortune Traders (FT) for the year ended 30 June
2016;
Debit Credit
Rs. ‘000’
Plant & machinery – cost 6,650
Plant & mach. – Acc. Dep. as at 1 July 2015 2,414

Additional information:
(i) On 1 March 2016, FT paid an advance of Rs. 330,000 for purchase of a machine and
debited it to plant and machinery. The machine was delivered on 1 September 2016.
(ii) FT depreciates its fixed assets from the month of addition. Depreciation is to be charged
on written-down value (WDV) as follows:
Plant & machinery 10%
What is the amount of depreciation to be charged to statement of profit or loss?
Rs. ___________
17. Following is the summarised trial balance of Fortune Traders (FT) for the year ended 30 June
2016;
Debit Credit
Rs. ‘000’
Plant & machinery – cost 6,650
Plant & mach. – Acc. Dep. as at 1 July 2015 2,414

Additional information:

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(i) On 1 March 2016, FT paid an advance of Rs. 330,000 for purchase of a machine and
debited it to plant and machinery. The machine was delivered on 1 September 2016.
(ii) FT depreciates its fixed assets from the month of addition. Depreciation is to be charged
on written-down value (WDV) as follows:
Plant & machinery 10%
What is the amount of Plant & machinery to be shown in statement of financial position?
Rs. ___________
18. Azam owns a retail outlet with the name Azam Autoparts Store. The trial balance as at 30 June
2015 is as follows:
Debit Credit
Rs. in ‘000’
Bank loan 5,050
Interest expenses 600
167,436 167,436
Bank loan was received on 1 July 2014. Interest payable for the month of June 2015 has been
credited to the loan account.
What is the amount of interest payable to be shown in statement of financial position?
Rs. ___________
19. Rainbow Lights (RL) has prepared a trial for the year ended 31 December 2016:
Debit Credit
Rs. in million
Miscellaneous income 45
Additional information
Miscellaneous income includes Rs. 12 million received against an annual maintenance contract
expiring on 30 April 2017.
What is the amount of Miscellaneous income to be shown in statement of comprehensive
income?
Rs. ___________
20. Rainbow Lights (RL) has prepared a trial for the year ended 31 December 2016:
Debit Credit
Rs. in million
Miscellaneous income 45
Additional information
Miscellaneous income includes Rs. 12 million received against an annual maintenance contract
expiring on 30 April 2017.
What is the amount of Miscellaneous income to be shown in statement of financial position as
unearned income?
Rs. ___________

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21. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Stock in trade 31-12-2017 3,900
Cost of sales 23,580
While carrying out the physical inventory count at year-end, following matters were identified:
• Goods costing Rs. 1,000 were slightly defective. These can be sold for Rs. 1,130 after
incurring a cost of Rs. 200.
• Goods costing Rs. 670 purchased on credit were returned to a supplier on 28 December
2017 but the return was not recorded in the books.
Calculate the “Cost of Sales” amount that would be presented in statement of comprehensive
income of TE for the year ended 31 December 2017.
Rs. _________________
22. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Stock in trade 31-12-2017 3,900
Cost of sales 23,580
While carrying out the physical inventory count at year-end, following matters were identified:
• Goods costing Rs. 1,000 were slightly defective. These can be sold for Rs. 1,130 after
incurring a cost of Rs. 200.
• Goods costing Rs. 670 purchased on credit were returned to a supplier on 28 December
2017 but the return was not recorded in the books.
Calculate the “Inventory” amount that would be presented in statement of financial position of
TE as at 31 December 2017.
Rs. _________________
23. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Advances 450
Property, plant and equipment – Cost 12,500
Accumulated depreciation 4,630

Additional information:
• A machine costing Rs. 450 was received on 1 October 2017 against 100% advance
payment. The advance has not yet been adjusted due to non-receipt of the invoice.
• TE depreciates property, plant & equipment at 15% per annum on reducing balance
method.

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Calculate the “Depreciation expense” that would be presented in statement of comprehensive

income of TE for the year ended 31 December 2017.
Rs. _________________ (to nearest rupee)
24. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Advances 450
Property, plant and equipment – Cost 12,500
Accumulated depreciation 4,630

Additional information:
• A machine costing Rs. 450 was received on 1 October 2017 against 100% advance
payment. The advance has not yet been adjusted due to non-receipt of the invoice.
• TE depreciates property, plant & equipment at 15% per annum on reducing balance
method.
Calculate “property, plant and equipment” that would be presented in statement of financial
position of TE as at 31 December 2017.
Rs. _________________ (to nearest rupee)
25. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Accrual and other payables 1,320
Miscellaneous income 940
Additional information:
• On 1 October 2017, 50% advance received for an annual maintenance contract of Rs.
480 was credited to miscellaneous income. Remaining amount would be received at the
end of the contract. Services are rendered evenly throughout the contract period.
• Maintenance services for Rs. 150 were rendered in December 2017 but income has
been recorded in January 2018 on receipt of the amount.
Calculate “Prepayments and advances” that would be presented in statement of financial
position of TE as at 31 December 2017.
Rs. _________________
26. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Accrual and other payables 1,320
Miscellaneous income 940

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Additional information:
• On 1 October 2017, 50% advance received for an annual maintenance contract of Rs.
480 was credited to miscellaneous income. Remaining amount would be received at the
end of the contract. Services are rendered evenly throughout the contract period.
• Maintenance services for Rs. 150 were rendered in December 2017 but income has
been recorded in January 2018 on receipt of the amount.
Calculate “Accrual and other payables” that would be presented in statement of financial
position of TE as at 31 December 2017.
Rs. _________________
27. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Accrual and other payables 1,320
Miscellaneous income 940
Additional information:
• On 1 October 2017, 50% advance received for an annual maintenance contract of Rs.
480 was credited to miscellaneous income. Remaining amount would be received at the
end of the contract. Services are rendered evenly throughout the contract period.
• Maintenance services for Rs. 150 were rendered in December 2017 but income has
been recorded in January 2018 on receipt of the amount.
Calculate “Miscellaneous income” that would be presented in statement of comprehensive
income of TE for the year ended 31 December 2017.
Rs. _________________
28. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Financial charges 700
12% long term loan 5,150

Additional information:
Interest on the loan is paid in arrears on 1 April and 1 October each year. Interest accrued for
the quarter ended 31 December 2017 has been credited to loan account.
Calculate “Financial charges” that would be presented in statement of comprehensive income of
TE for the year ended 31 December 2017.
Rs. _________________
29. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Financial charges 700
12% long term loan 5,150

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Additional information:
Interest on the loan is paid in arrears on 1 April and 1 October each year. Interest accrued for
the quarter ended 31 December 2017 has been credited to loan account.
Calculate “Long term loan” that would be presented in statement of financial position of TE as at
31 December 2017.
Rs. _________________
30. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Rent and insurance 2,900
Drawings 490
Rent and insurance include:
• annual insurance premium of Rs. 800 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s
family members is Rs. 200. The policy is valid up to 30 June 2018.
• Rs. 1,200 paid against the annual rent agreement expiring on 31 August 2018. According
to the rent agreement, the rent paid would not be refunded in case the building is
vacated earlier.
Calculate “Drawings” that would be presented in statement of financial position of TE as at 31
December 2017.
Rs. _________________
31. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Rent and insurance 2,900
Drawings 490

Rent and insurance include:

• annual insurance premium of Rs. 800 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s
family members is Rs. 200. The policy is valid up to 30 June 2018.
• Rs. 1,200 paid against the annual rent agreement expiring on 31 August 2018. According
to the rent agreement, the rent paid would not be refunded in case the building is
vacated earlier.
Calculate “Prepayment and advances” that would be presented in statement of financial
position of TE as at 31 December 2017.
Rs. _________________

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32. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Prepayments and advances 1,290
Rent and insurance 2,900
Drawings 490

Rent and insurance include:

• annual insurance premium of Rs. 800 for the health policy arranged by TE for the
department heads and the owner’s family members. Premium pertaining to the owner’s
family members is Rs. 200. The policy is valid up to 30 June 2018.
• Rs. 1,200 paid against the annual rent agreement expiring on 31 August 2018. According
to the rent agreement, the rent paid would not be refunded in case the building is
vacated earlier.
Calculate “Rent and insurance” that would be presented in statement of comprehensive income
of TE for the year ended 31 December 2017.
Rs. _________________
33. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Trade receivables 4,400
Bad debts expense 230
Allowance for doubtful debts 220
TE maintains provision for doubtful receivables according to the age analysis of the outstanding
balances. Relevant details are as under:
Trade receivables as on 31 December 2017 Total
Less than 4-6 7-12 More than
3 months months months 1 year
Outstanding balances (Rs.) 1,970 1,000 900 530 4,400
Required provision - 5% 10% 20%

Calculate “Bad and doubtful debts expense” that would be presented in statement of
comprehensive income of TE for the year ended 31 December 2017.
Rs. _________________
34. Following is an extract from the trial balance of Tulip Enterprises (TE) for the year ended 31
December 2017:
Debit Credit
Rs.
Trade receivables 4,400
Bad debts expense 230
Allowance for doubtful debts 220

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TE maintains provision for doubtful receivables according to the age analysis of the outstanding
balances. Relevant details are as under:
Trade receivables as on 31 December 2017 Total
Less than 4-6 7-12 More than
3 months months months 1 year
Outstanding balances (Rs.) 1,970 1,000 900 530 4,400
Required provision - 5% 10% 20%
Calculate “Trade receivables (net)” that would be presented in statement of financial position of
TE as at 31 December 2017.
Rs. _________________
35. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Administrative expenses” that would be presented in statement of comprehensive
income of GE for the year ended 31 December 2021.
Rs. _________________
36. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000
Inventory valuation at 31 December 2021 was Rs. 60,000
Calculate “Distribution costs” that would be presented in statement of comprehensive income
of GE for the year ended 31 December 2021.
Rs. _________________

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37. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Cost of sales” that would be presented in statement of comprehensive income of GE
for the year ended 31 December 2021.
Rs. _________________
38. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs.
Revenue 1,200,000
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Carriage outwards 6,000
Administrative expenses 360,000
Distribution costs 150,000
Return inwards 1,000

Inventory valuation at 31 December 2021 was Rs. 60,000

Calculate “Gross profit” that would be presented in statement of comprehensive income of GE
for the year ended 31 December 2021.
Rs. _________________
39. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs. million
Freehold land and building – cost (Land Rs. 70 million) 120
Accumulated depreciation (Land and building) 1 Jan 2021 20
Plant and equipment – Cost 120
Accumulated depreciation (plant & equipment) 1 Jan 2021 15

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The freehold building is depreciated on a straight line basis over its estimated useful life of 50
years. The plant and equipment is depreciated on a reducing balance basis at the rate of 15%.
There were no purchases or disposals of non-current assets during the year.
Calculate “Depreciation expense” that would be presented in statement of comprehensive
income of GE for the year ended 31 December 2021.
Rs. _________________ (million)
40. The following is an extract from the trial balance of Game Enterprises (GE) as at 31 December
2021:
Debit Credit
Rs. million
Freehold land and building – cost (Land Rs. 70 million) 120
Accumulated depreciation (Land and building) 1 Jan 2021 20
Plant and equipment – Cost 120
Accumulated depreciation (plant & equipment) 1 Jan 2021 15

The freehold building is depreciated on a straight line basis over its estimated useful life of 50
years. The plant and equipment is depreciated on a reducing balance basis at the rate of 15%.
There were no purchases or disposals of non-current assets during the year.
Calculate “Property, plant and equipment” that would be presented in statement of financial
position of GE as at 31 December 2021.
Rs. _________________ (million)
41. The following is an extract from the trial balance of Moon Trading (MT) as at 31 December 2015:
Debit Credit
Rs. million
Prepayments and other receivables 9
Accrued expenses and unearned income 25
Other income 15
Review of other income revealed the following information:
• Services for certain contracts amounting to Rs. 1.2 million were rendered in December
2015 but invoices thereof were processed in January 2016.
• On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and
was credited to other income. The balance amount would be paid on completion of the
contract.
Calculate “Prepayments and other receivables” that would be presented in statement of
financial position of MT as at 31 December 2015.
Rs. _________________ (million)
42. The following is an extract from the trial balance of Moon Trading (MT) as at 31 December 2015:
Debit Credit
Rs. million
Prepayments and other receivables 9
Accrued expenses and unearned income 25
Other income 15

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Review of other income revealed the following information:

• Services for certain contracts amounting to Rs. 1.2 million were rendered in December
2015 but invoices thereof were processed in January 2016.
• On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and
was credited to other income. The balance amount would be paid on completion of the
contract.
Calculate “Accrued expenses and unearned income” that would be presented in statement of
financial position of MT as at 31 December 2015.
Rs. _________________ (million)
43. The following is an extract from the trial balance of Moon Trading (MT) as at 31 December 2015:
Debit Credit
Rs. million
Prepayments and other receivables 9
Accrued expenses and unearned income 25
Other income 15

Review of other income revealed the following information:

• Services for certain contracts amounting to Rs. 1.2 million were rendered in December
2015 but invoices thereof were processed in January 2016.
• On 1 August 2015, MT received an amount of Rs. 1.8 million as 50% advance against a
maintenance contract covering the period from 1 September 2015 to 31 May 2016 and
was credited to other income. The balance amount would be paid on completion of the
contract.
Calculate “Other income” that would be presented in statement of comprehensive income of
MT for the year ended 31 December 2015.
Rs. _________________ (million)
44. The following is an extract from the trial balance of Qambar Enterprises (QE) as at 31 December
2018:
Debit Credit
Rs.
Rent and insurance 545,000
Rent and insurance includes Rs. 75,000 paid for a photocopy machine. The machine was
obtained on 1 November 2018 at a fixed rent of Rs. 75,000 per quarter and an additional Re.
0.40 for each copy. 40,000 copies have been made by QE up to 31 December 2018.
Calculate “Rent and insurance” that would be presented in statement of comprehensive income
of QE for the year ended 31 December 2018.
Rs. _________________
45. The following is an extract from the trial balance of Qambar Enterprises (QE) as at 31 December
2018:
Debit Credit
Rs.
Office and sales supplies 210,000

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Office and sales supplies costing Rs. 90,000 are still unused. However, 30% of these supplies are
not usable due to deterioration in quality.
Which of the following is correct presentation in financial statements in respect of above?
(a) Current assets Rs. 63,000 and Expense Rs. 210,000
(b) Current assets Rs. 90,000 and Expense Rs. 237,000
(c) Current assets Rs. 63,000 and Expense Rs. 147,000
(d) Current assets Rs. 90,000 and Expense Rs. 237,000
46. The following is an extract from the trial balance of Qambar Enterprises (QE) as at 31 December
2018:
Debit Credit
Rs.
Capital at 1 Jan 2018 5,223,000
Goods withdrawn 644,000
Cost of office repairs amounting to Rs. 85,000 was paid by the owner from personal cash. After
adjusting for this, net profit has been correctly calculated as Rs. 880,000.
At year end, a vehicle was invested into the business by the owner at a value of Rs. 960,000
Calculate “Capital” that would be presented in statement of financial position of QE as at 31
December 2018.
Rs. _________________
47. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased
by DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.
Calculate “Property, plant and equipment (Cost)” that would be presented in statement of
financial position of DE as at 30 June 2019.
Rs. _________________
48. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased
by DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.

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Calculate “Prepayments” that would be presented in statement of financial position of DE as at

30 June 2019.
Rs. _________________
49. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400
On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased
by DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.
Calculate “Trade and other payables” that would be presented in statement of financial position
of DE as at 30 June 2019.
Rs. _________________
50. The following is an extract from the trial balance of Delta Enterprises (DE) as at 30 June 2019:
Debit Credit
Rs. 000
Property, plant and equipment (Cost) 230,600
Prepayments 3,000
Administration expenses 25,900
Trade and other payables 41,400

On 1 October 2018, a printer was acquired on rent from Qazi & Co. The annual rent of Rs.
480,000 was paid in advance and debited to prepayments. However, the printer was purchased
by DE on 1 April 2019 for Rs. 1,240,000. The payment net of rent adjustment was made in July
2019. The purchase has not been accounted for. Ignore depreciation.
Calculate “Administration expenses” that would be presented in statement of comprehensive
income of DE for the year ended 30 June 2019.
Rs. _________________

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LO4: DISTRIBUTION OF PROFITS AMONG PARTNERS

51. What does the Adjusted Trial Balance include?

a) Only closing balances of assets and liabilities.
b) All ledger account balances after adjustments.
c) Only profit and loss accounts.
d) Just the balances of nominal accounts.

52. A business has unearned revenue of Rs. 50,000 in its unadjusted trial balance, 80% of which needs to be
adjusted as earned revenue. What will be balance of unearned revenue in adjusted trial balance?
a) Rs. 50,000
b) Rs. 40,000
c) Rs. 10,000
d) Rs. NIL

53. After adjustments, the total debit side of an Adjusted Trial Balance equals Rs. 1,200,000. What is the total
of the credit side?
a) Rs. 1,200,000
b) Rs. 600,000
c) Rs. 1,500,000
d) Rs. 900,000

54. Which TWO of the following errors cannot be detected by an Adjusted Trial Balance?
a) Omission of a transaction.
b) Recording an expense as an asset.
c) Errors in addition of account balances.
d) Recording a transaction on the wrong side of the ledger.

55. If prepaid rent of Rs. 30,000 is adjusted, what TWO impacts does it have on the Adjusted Trial Balance?
a) Increase liabilities by Rs. 30,000.
b) Decrease rent expense by Rs. 30,000.
c) Increase expenses by Rs. 30,000.
d) Increase assets by Rs. 30,000.

56. What is the adjusted trade receivables balance if the unadjusted balance is Rs. 100,000 and Rs. 5,000 is
deemed uncollectible (i.e. needs to be written off)?
a) Rs. 105,000.
b) Rs. 95,000.
c) Rs. 100,000.
d) Rs. 90,000.

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

57. The unadjusted trial balance shows an equipment account of Rs. 500,000, with depreciation of Rs. 50,000
yet to be recorded. What is the equipment’s adjusted balance (net of accumulated depreciation)?
a) Rs. 450,000.
b) Rs. 500,000.
c) Rs. 550,000.
d) Rs. 50,000.

58. A company has an unearned income of Rs. 20,000 at the start of the period. At the end of the period, Rs.
12,000 has been earned. What is the adjusted balance of unearned income?
a) Rs. 20,000.
b) Rs. 8,000.
c) Rs. 12,000.
d) Rs. 0.

59. A partnership adjusts Rs. 10,000 for accrued wages. How is this adjustment reflected in the Adjusted Trial
Balance?
a) Increase liabilities by Rs. 10,000.
b) Decrease wages expense by Rs. 10,000.
c) Increase assets by Rs. 10,000.
d) Increase capital by Rs. 10,000.

60. If Rs. 40,000 of electricity bill payable was omitted earlier and now adjusted, how is the trial balance
affected (Select TWO)?
a) Increase liabilities by Rs. 40,000.
b) Increase expenses by Rs. 40,000.
c) Decrease liabilities by Rs. 40,000.
d) Increase assets by Rs. 40,000.

61. How is the profit-sharing ratio determined in the absence of an agreement between partners?
a) Based on capital contributed by each partner
b) Equally shared among all partners
c) Based on seniority of each partner
d) Proportionate to the number of hours worked by each partner

62. If the net profit is Rs. 600,000 and the partnership agreement allows a salary of Rs. 150,000 to Partner A,
how much profit will be left for appropriation on the basis of profit sharing ratio?
a) Rs. 600,000
b) Rs. 450,000
c) Rs. 300,000
d) Rs. 150,000

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63. What is the nature of the Profit and Loss Appropriation Account?
a) Nominal account.
b) Capital account.
c) Personal account.
d) Real account.

64. If Rs. 1,000,000 is available for distribution and Partner A is entitled to Salary of Rs. 200,000 and a 60%
share while Partner B receives 40%, how much does Partner A get?
a) Rs. 400,000
b) Rs. 600,000
c) Rs. 680,000
d) Rs. 800,000

65. What is impact of interest on drawings on the appropriation of profit or loss among the partners?
a) Increases the profit available for appropriation
b) Decreases the profit available for appropriation
c) No impact
d) Either increases or decreases the profit available for appropriation, depending upon balance in the
capital account

66. If the partnership agreement specifies an interest on capital of 10% and Partner A has Rs. 500,000 in
capital, how much interest will she receive if the net profit for the year is Rs. 250,000?
a) Rs. 10,000
b) Rs. 25,000
c) Rs. 50,000
d) Rs. 5,000

67. Partner A and Partner B have equal profit sharing agreement. There is no interest on capital, however,
only partner B is entitled to monthly salary. If the business earned net profit during the year, which of the
following is correct?
a) Both partners will have equal amount of profit credited to their capital account.
b) Partner A will have more amount of profit credited to her capital account.
c) Partner B will have more amount of profit credited to his capital account.
d) The partner will higher balance of capital would have more amount of profit credited to his/her
capital account.

68. In the event of a loss, how is the loss shared in a partnership without a specific agreement?
a) Equally shared.
b) Based on capital contributed.
c) Borne by the senior partner.
d) Proportional to drawings.

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

69. What happens to the profits distributed among partners?

a) Included in partners’ drawings accounts
b) Charged as expense in profit or loss
c) Credited to profit or loss as income
d) Included in partners’ capital accounts

70. Partner B withdrew Rs. 100,000 on January 1, and interest on drawings is charged at 12% annually. How
much interest will Partner B be charged by June 30?
a) Rs. 12,000
b) Rs. 10,000
c) Rs. 8,000
d) Rs. 6,000

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

LO5: FUNDAMENTAL ACCOUNTING CONCEPTS

71. Which of the following best illustrates the Business Entity Concept?
a) Maria records her personal expenses as business expenses
b) Maria uses her personal bank account for business transactions
c) Maria's bakery purchases ingredients, which is recorded separately from her personal groceries
d) Maria combines her personal and business income for tax purposes

72. Which of the following transactions demonstrates the Duality Concept?

a) Recording an expense but not the corresponding payment of cash
b) Purchasing equipment without recording the payment
c) Paying for office supplies using business cash, and updating both cash and supplies accounts
d) Recording an income but not the corresponding receipt of cash

73. The Accrual / Matching Concept implies that:

a) Revenue is recorded only when cash is received
b) Expenses are recorded only when cash is paid
c) Revenue and expenses are recorded when they are earned or incurred
d) Both (a) and (b)

74. Which statement best reflects the Consistency Concept?

a) Switching inventory valuation methods each year
b) Using the same inventory valuation method for all years
c) Changing inventory valuation methods frequently
d) Applying different accounting methods for different periods

75. The Historical Cost Concept means that:

a) Assets are recorded at their market value
b) Assets are recorded at their original purchase cost
c) Assets’ values are updated with inflation
d) Assets are revalued every year

76. True and Fair View means:

a) Misstating profits to attract investors
b) Ignoring certain expenses to improve appearance of financial performance
c) Accurately presenting financial information without bias
d) Focusing on only positive financial data

77. Materiality Concept implies:

a) Including every tiny expense in financial statements
b) Ignoring substantial expenses
c) Presenting separately significant information that affects decisions
d) Omitting important revenue items

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

78. Prudence Concept dictates:

a) Overstating revenues to look good
b) Ignoring potential expenses
c) Recording potential expenses and not overestimating revenues
d) Maximizing assets’ value in financial statements

79. Completeness Concept means:

a) Omitting some of relevant details from financial statements
a) Including only favourable information in financial statements
b) Ensuring all relevant information is included in financial statements
c) Providing partial information selectively in the financial statements

80. Money Measurement Concept implies:

a) Recording only non-monetary events
b) Including intangible aspects in records
c) Ignoring monetary transactions
d) Recording transactions in monetary terms only

81. Which of the following is an example of a transaction that can be recorded under the money
measurement concept?
a) Artist’s creativity
b) Purchase of art supplies
c) Reputation of high-quality services (goodwill)
d) Talented team of employees

82. Accounting Period Concept implies:

a) Preparing financial reports anytime
b) Preparing reports for a specific time frame
c) Ignoring reporting periods
d) Reporting only when convenient

83. Going Concern Concept means:

a) Business will cease soon
b) Business assumes indefinite continuation
c) Business ignores future prospects
d) Business plans for immediate closure

84. Substance Over Form means:

a) Ignoring legal aspects of transactions
b) Overlooking transaction details
c) Recording only the legal form of transactions
d) Focusing on the economic reality of transactions

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

85. Comparability Concept dictates:

a) Changing methods frequently
b) Using consistent accounting methods
c) Ignoring other entities’ practices
d) Reporting without following common standards

86. Information is _____________ if it can be used for predictive and/or confirmatory purposes.
a) Relevant
b) Complete
c) Consistent
d) Verifiable

87. How does the comparability concept benefit users of financial statements?
a) It ensures that financial statements are prepared by chartered accountants
b) It allows users to compare financial information between different periods and entities
c) It focuses on ensuring financial statements are error-free
d) It requires companies to report all financial information in the same currency

88. Which of the following best illustrates the verifiability concept in accounting?
a) A company uses advanced software to prepare its financial statements
b) The auditors independently provide assurance that the company's financial statements accurately
represent its economic activities
c) A business adopts new accounting policies to improve efficiency
d) Financial statements are prepared promptly to meet reporting deadlines

89. What does the reliability concept in accounting emphasize?

a) Financial statements should be available promptly after the reporting period
b) Financial information should be verifiable, accurate, and dependable, based on objective evidence
c) Financial statements should be comparable with those of other companies
d) Financial information should be concise and easy to understand

90. Why is the timeliness concept important in accounting?

a) It ensures financial information is detailed and comprehensive
b) It ensures financial information is free from errors and bias
c) It guarantees financial statements are prepared by certified accountants
d) It allows decision-makers to receive information in time to influence their decisions

91. How does the understandability concept benefit users of financial statements?
a) It ensures financial information is presented clearly and concisely for users with reasonable
knowledge of business
b) It guarantees financial statements are comparable across different periods
c) It ensures that financial statements are free from bias and errors
d) It allows financial information to be available promptly after the reporting period

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

92. What is the cost constraint on useful information in accounting?

a) Financial information should be provided promptly to influence decisions
b) The cost of providing financial information should be justified by the benefits it provides
c) Financial statements should be verifiable by independent observers
d) Financial information should be presented in a clear and concise manner

93. ABC Enterprises uses the following principle for preparation of its financial statements: “Items of capital
nature, costing less than Rs. 1,000 are charged to expense.”. What is the name of this accounting
concept/principle?
a) Historical Cost
b) Business Entity
c) Duality Concept
d) Materiality

94. ABC Enterprises uses the following principle for preparation of its financial statements: “Sales revenue is
recorded on dispatch of goods to customers irrespective of the date of receipt of payment.” What is the
name of this accounting concept/principle?
a) Accrual basis
b) Going Concern basis
c) Verifiability Concept
d) Substance over form

95. ABC Enterprises uses the following principle for preparation of its financial statements: “Cost of sales is
recorded in the same period in which the revenue earned from the sale is recorded.” What is the name of
this accounting concept/principle?
a) Understandability
b) Money Measurement
c) Accounting period
d) Matching Concept

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ICAP Book Mcqz Answers

01. C Aging analysis of receivables in not a financial statement.
02. D Prepaid insurance is deducted from the amount shown in trial to arrive at expense
for the year.
03. A Debit Inventory Rs. 237,500,000
Credit Cost of sales Rs. 237,500,000
04. D Drawings = Rs. 30,500 – (150x12) = Rs. 28,700
05. C Purchases = 105,950 – 4,000 = Rs. 101,950
06. C Rs. 000
Sales 353,300 – 2,432 trade discount – 4,500 settlement discount 346,368
Less: sales return (10,000)
336,368

07. A 160 x 10% x 3/12 = 4 million

08. C Total contract price 1.8 + 1.8 = 3.6 x 4/9 months = 1.6 less advance 1.8 = 0.2
million unearned
09. B Other income = 15 – 0.2 (unearned income) = 14.8
Total contract price 1.8 + 1.8 = 3.6 x 4/9 months = 1.6 less advance 1.8 = 0.2
million unearned
10. A Inventory is large percentage of assets in trading or manufacturing businesses.
11. A Closing provision
Rs. million
Receivables as per trial 100
Bad debts (1)
Receivables 99
Provision @ 6% 5.94
12. B Bad and doubtful debts expense
Rs. million
Bad debts 3+1 4
Increase in provision = 5.94 – 4.5 1.44
5.44
Closing provision
Rs. million
Receivables as per trial 100
Bad debts (1)
Receivables 99
Provision @ 6% 5.94

13. D Rs. million

Receivables as per trial 100
Bad debts 3+1 (4)
96
Closing provision (5.94)
90.06

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Closing provision
Receivables as per trial 100
Bad debts (1)
Receivables 99
Provision @ 6% 5.94

14. A = Rs. 150 + 1.5 -1.2 = Rs. 150.3 million

15. B Accrued expenses of Electricity Rs. 1.5 million
Prepayment of rent Rs. 1.2 million
16. Rs. 391,000 Depreciation charge = [6,650 – 330-2,414] x 10% = Rs. 391,000
17. Rs. = 6,650 – 330 – 2,414 - 391 = 3,515
3,515,000 Depreciation charge = [6,650 – 330-2,414] x 10% = Rs. 391,000
18. Rs. 50,000 Interest classified to current liabilities 600 x 1/12 = 50
19. Rs. 41 Misc. income = Rs. 45 million – 4 million = Rs. 41 million
million Unearned income = 12 million x 4/12 = Rs. 4 million
20. Rs. 4 million Unearned income = 12 million x 4/12 = Rs. 4 million
21. Rs. 23,650 Cost of sales as given Rs. 23,580 + write down Rs. 70 = Rs. 23,650
Cost Rs. 1,000 and NRV Rs. 930 (i.e.) Rs. 1,130 – 200
Write down Rs. 70
22. Rs. 3,160 Inventory as given Rs. 3,900 – write down Rs. 70 – return to supplier Rs. 670 = Rs.
3,160
23. Rs. 1,197 On opening assets (Rs. 12,500 – 4,630) x 15% = Rs. 1,180
On additions Rs. 450 x 15% x 3/12 = Rs. 17
Total Rs. 1,197
24. Rs. 7,123 At cost Rs. 12,500 + 450 = Rs. 12,950
Accumulated depreciation Rs. 4,630 + 1,197 = Rs. 5,827
Net Rs. 7,123
25. Rs. 1,440 Rs. 1,290 + 150 income receivable = Rs. 1,440
26. Rs. 1,440 Rs. 1,320 + 120 unearned income = Rs. 1,440
Unearned income Rs. 480 x 50% x 3/6 months = Rs. 120
27. Rs. 970 Rs. 940 – 120 unearned + 150 accrued = Rs. 970
28. Rs. 700 Financial charges need not be adjusted because interest expense has already been
correctly accounted for, just credited in loan account rather than interest payable.
29. Rs. 5,000 12% per annum ➔ 3% for each quarter
Currently the loan figure is @103% i.e. 100% + 3%
Rs. 5,150 x 100 / 103 = Rs. 5,000
Interest expense has already been correctly accounted for, just credited in loan
account rather than interest payable.
Rs. 150 shall be presented as interest payable under current liabilities.
30. Rs. 690 As given Rs. 490 + Rs. 200 included in rent and insurance = Rs. 690
31. Rs. 2,390 As given Rs. 1,290
Prepaid insurance Rs. 800 – 200 drawings = Rs. 600 x 6/12 = Rs. 300
Prepaid rent Rs. 1,200 x 8/12 = Rs. 800
Total Rs. 2,390
32. Rs. 1,600 As given Rs. 2,900
Less: Insurance of owner’s residence Rs. 200
Less: Prepaid insurance Rs. 600 x 6/12 = Rs. 300

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Less: Prepaid rent Rs. 1,200 x 8/12 = Rs. 800

Net expense Rs. 1,600
33. Rs. 256 Bad debts written off Rs. 230
Increase in allowance Rs. 246 – 220 = Rs. 26
Total Rs. 256
Required balance of allowance
Rs. 1,000 x 5% + 900 x 10% + 530 x 20% = Rs. 246
34. Rs. 4,154 Trade receivables Rs. 4,400 – required allowance 246 = Rs. 4,154
Required balance of allowance
Rs. 1,000 x 5% + 900 x 10% + 530 x 20% = Rs. 246
35. Rs. 360,000 No adjustment in administrative expenses is required.
36. Rs. 156,000 Rs. 150,000 + Rs. 6,000 Carriage outwards = Rs. 156,000
37. Rs. 472,000 Cost of sales Rs.
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Inventory 31 December 2021 (60,000)
472,000

38. Rs. 727,000 Revenue Rs. 1,200,000 – 1,000 return inwards = Rs. 1,199,000
Cost of sales Rs. 472,000
Cost of sales Rs.
Inventory 1 January 2021 48,000
Purchases 480,000
Carriage inwards 4,000
Inventory 31 December 2021 (60,000)
472,000
Gross profit Rs. 727,000
39. Rs. 16.75 Depreciation on building Rs. 120 – 70 = Rs. 50 / 50 years = Rs. 1
million Depreciation on P&E Rs. 120 – 15 = Rs. 105 x 15% = Rs. 15.75
40. Rs. 188.25 Land and building Rs. 120 – (20 + 1) = Rs. 99
million Plant and equipment Rs. 120 – (15 + 15.75) = Rs. 89.25
Total Rs. 188.25
41. Rs. As given Rs. 9 + 1.2 accrued income = Rs. 11.2 million
11.2million
42. Rs. 25.2 As given Rs. 25 + 0.2 unearned = Rs. 25.2 million
million Total contract price = Rs. 1.8 + 1.8 = Rs. 3.6 million
Earned till year end = Rs. 3.6 x 4/9 months = Rs. 1.6 million
Unearned = Rs. 1.8 advance – 1.6 earned = Rs. 0.2 million
43. Rs. 16 Rs. 15 as given + 1.2 accrued – 0.2 unearned = Rs. 16 million
million Total contract price = Rs. 1.8 + 1.8 = Rs. 3.6 million
Earned till year end = Rs. 3.6 x 4/9 months = Rs. 1.6 million
Unearned = Rs. 1.8 advance – 1.6 earned = Rs. 0.2 million
44. Rs. 536,000 As given Rs. 545,000
Less: Prepaid Rs. 75,000 x 1/3 month = Rs. 25,000
Add: Accrual of photocopies 40,000 x Re. 0.40 = Rs. 16,000
Net total Rs. 536,000

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45. C Unused stock in usable condition is current asset

= Rs. 63,000 (i.e. Rs. 90,000 x 70%)
Remaining amount of Rs. 147,000 (i.e. Rs. 210,000 – 63,000) is charges as an
expense.
46. Rs. Capital Rs.
6,504,000 As given 5,223,000
Repair bill paid from personal cash 85,000
Vehicle invested 960,000
6,268,000
Net profit 880,000
Drawings (644,000)
6,504,000
47. Rs. As given Rs. 230,600,000
231,840,000 + purchased Rs. 1,240,000
Total Rs. 231,840,000
48. Rs. As given Rs. 3,000,000
2,520,000 Less: adjusted against rent and purchase Rs. 480,000
Net Rs. 2,520,000
49. Rs. As given Rs. 41,400,000 + Payable to Qazi & Co. Rs. 1,000,000
42,400,000 = Rs. 42,400,000
Payable to Qazi & Co. Rs. 1,240,000 – 240,000 advance adjusted
=Rs. 1,000,000
Adjustable advance Rs. 480,000 – 480,000 x 6/12 = Rs. 240,000
50. Rs. As given Rs. 25,900,000
26,140,000 Advance utilised Rs. 480,000 x 6/12 months = Rs. 240,000
Total expense Rs. 26,140,000

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LO4: DISTRIBUTION OF PROFITS AMONG PARTNERS

51. (b) The Adjusted Trial Balance lists all ledger account balances, including
adjustments for accrued or prepaid items.
52. (c) Rs. 50,000 – Rs. 40,000 (i.e. 80%) earned = Rs. 10,000 still unearned
53. (a) In a trial balance, whether adjusted or unadjusted, the total debits always
equal the total credits to ensure accuracy.
54. (a) and (b) Error of omission and error of principle do not affect total debits and total
credits.
55. (b) and (d) Prepaid rent is treated as an asset and reduction in expense on the Adjusted
Trial Balance since it represents a future economic benefit.
56. (b) Rs. 100,000 – 5,000 bad debts = Rs. 95,000
57. (a) Depreciation reduces the equipment balance: Rs. 500,000 – 50,000 = 450,000
58. (b) Rs. 20,000 – 12,000 = Rs. 8,000
59. (a) Accrued wages are recorded as a liability because they are an obligation that
the business owes. Wages expense would increase (not decrease).
60. (a) and (b) Increase liabilities by Rs. 40,000. Increase expenses by Rs. 40,000.

61. (b) According to the Partnership Act, in the absence of a prior agreement, profits
and losses are distributed equally among partners.
62. (b) Salary to Partner A (Rs. 150,000) is deducted from the net profit before
calculating profit appropriation on PSR: Rs. 600,000 - Rs. 150,000 = Rs. 450,000
63. (a) The Profit and Loss Appropriation Account is nominal because it deals with the
distribution and allocation of profits and does not represent an asset or
liability.
64. (c) Rs. 200,000 salary + (Rs. 1,000,000 – 200,000) x 60% = Rs. 680,000
65. (a) Increases the profit available for appropriation
66. (c) Rs. 500,000 x 10% = Rs. 50,000
67. (c) Partner B will have more amount of profit credited to his capital account due
to salary entitlement.
68. (a) Losses are shared equally among partners in the absence of an agreement,
according to the Partnership Act.
69. (d) Profit distributed is included in partners’ capital accounts
70. (d) Rs. 100,000 x 12% x 6/12 = Rs. 6,000

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LO5: FUNDAMENTAL ACCOUNTING CONCEPTS

71. (c) Only option (c) accurately reflects the principle by keeping business and personal
transactions separate.
72. (c) Only Option (c) correctly illustrates the concept by affecting both cash and supplies
accounts. Other options only show one effect of the transaction.
73. (c) The accrual concept focuses on when transactions are earned or incurred, not when
cash changes hands.
74. (b) Only option (b) demonstrates consistency in accounting methods. Other options
reflect inconsistency.
75. (b) This concept emphasizes recording assets at the original purchase cost. Other
options are contrary to this principle.
76. (c) Only option (c) ensures accuracy and fairness in financial reporting. Other options
lead to compromising integrity of financial information.
77. (c) Only option (c) aligns with the principle by focusing on significant, decision-
influencing information.
78. (c) Only option (c) reflects prudence by not overestimating revenues and considering
potential expenses.
79. (c) Completeness ensures all necessary details are included.
80. (d) The concept focuses on transactions that can be measured in terms of money.
81. (b) Purchase of art supplies
82. (b) Accounting periods provide specific time frames for reports.
83. (b) Only option (b) aligns with the assumption of ongoing operations.
84. (d) Substance over form emphasizes economic reality over legal form. It does not mean
to ignore legal aspects without any reason.
85. (b) Consistency helps achieve comparison. Options (a), (c) and (d) undermine
comparability.
86. (a) Information is relevant if it can be used for predictive and/or confirmatory
purposes.
87. (b) Option (b) is correct as it reflects the essence of the comparability concept. Option
(a) is incorrect because it pertains to the qualifications of accountants, not
comparability. Option
(c) is incorrect because it relates more to accuracy and faithful representation.
Option (d) is incorrect because while reporting in the same currency is important, it
does not fully capture comparability.
88. (b) Option (b) is correct because it shows how independent verification by
knowledgeable observers ensures faithful representation. Option (a) is incorrect
because it relates to the tools used, not verifiability. Option (c) is incorrect because
it pertains to accounting policies, not verification. Option (d) is incorrect because it
relates to timeliness, not verifiability.

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

89. (b) Option (b) is correct as it captures the essence of the reliability concept. Option (a)
is incorrect because it refers to timeliness. Option (c) is incorrect because it pertains
to comparability. Option (d) is incorrect because it relates to understandability.
90. (d) Option (d) is correct as it reflects the importance of providing timely information.
Option (a) is incorrect because it refers to the completeness of information. Option
(b) is incorrect because it relates to reliability, not timeliness. Option (c) is incorrect
because it pertains to qualifications, not timeliness.
91. (a) Option (a) is correct as it captures the essence of understandability. Option (b) is
incorrect because it pertains to comparability. Option (c) is incorrect because it
relates to reliability. Option (d) is incorrect because it refers to timeliness.
92. (b) Option (b) is correct as it reflects the cost constraint concept. Option (a) is incorrect
because it relates to timeliness. Option (c) is incorrect because it pertains to
verifiability. Option (d) is incorrect because it refers to understandability.
93. (d) Information is material if omitting it or misstating it could influence decisions that
users make on the basis of financial statements of an entity. Amounts below certain
threshold may be immaterial.
94. (a) Revenue from sales and other income should be reported in the period when
income arises (which might not be the same as the period when the cash is
received)
95. (d) The cost of sales in the statement of comprehensive income must be matched with
the sales.

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ICAP New Question Bank Mcqz

1. Which of the following statement(s) is/are correct?
(1) The comparative figures for financial statements should be disclosed.
(2) Financial statements should present financial performance, financial position and cash position
on fair basis.
A. Statement (1) only
B. Statement (2) only
C. Both statements are correct
D. Neither of the statements is correct

2. Which of the following information relating to each component of financial statements must be
prominently displayed for proper identification:
(I) The name of the reporting entity
(II) The date or period of the financial statements
(III) The currency in which the figures are reported
(IV) The level of rounding used in the figures
A. (I) & (II) B. (I) & (III)
C. (II) & (IV) D. All of these

3. Which of the following is NOT treated as ‘material item’?

A. Cost of restructuring
B. Payment of charity
C. Discontinued operations
D. Disposal of furniture items having significant value

4. The capital of Nisar & Co. as at 1 January 2022 was Rs. 2,452,000. During the year ended 31 December
2022, Nisar & Co. earned gross profit of Rs. 785,600; operating profit of Rs. 485,500 and net profit of Rs.
341,500. The drawing for the year ended 31 December 2022 was Rs. 200,000 in cash and Rs. 25,000 in
goods. The capital of Nisar & Co. as at 31 December 2022 was:
A. Rs. 3,037,600 B. Rs. 2,712,500
C. Rs. 2,593,500 D. Rs. 2,568,500

5. Raja Enterprises took 12% loan on 1 January 2022 amounting to Rs. 500,000; repayable in ten equal bi-
annual principal repayments along with interest. The first installment was paid on 30 June 2022 and
second on 31 December 2022. The statement of financial position of Raja Enterprises as at 31 December
2022 would represent the loan as:
A. Rs. 400,000 as non-current liability
B. Rs. 300,000 as non-current liability and Rs. 100,000 as current liability
C. Rs. 350,000 as non-current liability and Rs. 50,000 as current liability
D. Rs. 400,000 as non-current liability and Rs. 100,000 as current liability

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

6. The list of non-current assets provided by trainee accountant which is given below:
Furniture & Fixtures Rs. 110,000
Brand and Trade mark Rs. 300,000
Vehicle Rs. 750,000
Inventory Rs. 100,000
The total of tangible non-current assets are:
A. Rs. 1,260,000 B. Rs. 1,160,000
C. Rs. 860,000 D. Rs. 750,000

7. Net profit for the year ended 30 June 2022 was Rs. 158,000 before adjustments.
The following adjustments have to be made:
1. Prepaid expense for the year Rs. 11,200 as at 30 June 2021
2. Accrued income for the year Rs. 16,800 as at 30 June 2022
The net profit for the year ended 30 June 2022 after adjustments will be:
A. Rs. 186,000 B. Rs. 163,600
C. Rs. 152,400 D. Rs. 130,000

8. Rizwan Co has provided following data relating to liabilities of his business.

Long term loan Rs. 276,000
Trade payables Rs. 125,000
Accrued expenses Rs. 16,200
Bank overdraft ?
Unearned income Rs. 11,800
If the current liabilities were two-third of non-current liabilities, then the value of bank overdraft was:
A. Rs. 156,000 B. Rs. 59,000
C. Rs. 47,200 D. Rs. 31,000

9. The list of assets of Bizcom Enterprises were given below:

Prepaid Expenses Rs. 41,500
Cash in hand Rs. 22,800
Fixtures Rs. 72,300
Inventories Rs. 87,500
Bank overdraft Rs. 11,650
Receivables Rs. 66,350
The total of current assets of Bizcom Enterprises are:
A. Rs. 206,500
B. Rs. 218,150
C. Rs. 229,800
D. Rs. 290,450

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10. Which of the following combination is true in relation to non-current assets?

A. Equipment, Furniture and inventory
B. Plant, Equipment, Furniture and Receivables
C. Plant, Furniture and delivery vehicles
D. Equipment, Vehicles and inventory

11. Which of the following would decrease the capital?

A. Payment to creditors by cheque
B. Purchase furniture on credit
C. Received cash from debtor in cash
D. Payment of utility bill

12. Accountant has just prepared its financial statement for the year ended 30 September 2022 and its gross
profit and net profit were Rs. 186,500 and 65,400 respectively. Afterwards, it was observed that owner
withdrew goods worth Rs. 15,800 from business, which was unrecorded.
What would be corrected gross profit and net profit for the year ended 30 September 2022 was:
A. Gross profit Rs. 202,300 and net profit Rs. 81,200
B. Gross profit Rs. 170,700 and net profit Rs. 49,600
C. Gross profit Rs. 202,300 and net profit Rs. 65,400
D. Gross profit Rs. 186,500 and net profit Rs. 81,200

13. The following is extract of trial balance of Irha & Co. as at June, 2022.
Debit Rs. Credit Rs.
Cost of sales 1,525,000
Administration expenses 415,000
Revenue 2,480,000
Selling & Distribution expenses 376,000
Other expenses and income 116,000 85,500
The net profit for the year ended 30 June 2022 was:
A. Rs. 133,500 B. Rs. 164,000
C. Rs. 194,500 D. Rs. 280,000

14. Which of the following are component of financial statements?

(I) Statement of financial position
(II) Bank reconciliation statement
(III) Statement of comprehensive income
(IV) Statement of cash flows
A. (I) & (II) B. (I),(III) & (IV)
C. (II) & (III) D. (I) & (IV)

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15. The extract of trial balance of Jamal Sons as at 30 June 2022 was given below.
Debit Rs. Credit Rs.
Accounts receivables 700,000
Allowance for doubtful debts 1 July 2021 22,500
Which of the following statement is correct in relation to adjustment of allowance for doubtful debts,
assuming Jamal sons estimate that allowance for doubtful debts should be at 5% of accounts receivables.
A. Charge Rs. 35,000 as expense in statement of profit and loss and show net receivable of Rs.
665,000 in statement of financial position
B. Charge Rs. 12,500 as expense in statement of profit and loss and show net receivable of Rs.
665,000 in statement of financial position
C. Charge Rs. 12,500 as expense in statement of profit and loss and show net receivable of Rs.
687,500 in statement of financial position
D. Charge Rs. 35,000 as expense in statement of profit and loss and show net receivable of Rs.
687,500 in statement of financial position

16. Which of the following are NOT related to statement of profit and loss of an entity:
(I) Interest expense (II) Cost of goods sold
(III) Revaluation surplus (IV) Income tax expense
A. (I) & (II) B. (I) & (III)
C. (II) & (III) D. (III) & (IV)

17. The sales of Irfan Store for the year ended 30 September 2022 was Rs. 4,500,000 and normal gross profit
margin was 12.5% of cost. The stock as at 30 September 2022 was Rs. 250,000 and during the year ended
30 September 2022 the purchases were Rs. 4,062,500. The stock as at 30 September 2021 was:
A. Rs. 312,500 B. Rs. 187,500
C. Rs. 125,000 D. Rs. 250,000

18. The following information relates to Salman:

Opening stock Rs. 28,700
Closing stock Rs. 21,400
Distribution cost Rs. 14,000
Audit Fee Rs. 25,000
Carriage in Rs. 16,000
Carriage out Rs. 18,000
Purchases Rs. 185,000
Depreciation Rs. 45,000
80% of depreciation was related to cost of sales and remaining to administration cost. Based on above
information, what was the cost of sales of Salman?
A. Rs. 253,300 B. Rs. 246,300
C. Rs. 244,300 D. Rs. 228,300

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19. The sales of Minahil Stores was Rs. 2,400,000 and average gross profit was 20% of cost. The opening
stock was Rs. 150,000 and total purchase during the period was Rs. 2,100,000.
What was the value of closing stock?
A. Rs. 250,000 B. Rs. 330,000
C. Rs. 30,000 D. Rs. 50,000

20. Which of the following statements is true?

A. There is no difference between financial statements of service industry and manufacturing
industry
B. Unit cost of goods manufactured can be calculated by dividing the cost of goods manufactured to
total units produced
C. Unit cost of goods manufactured can be calculated by dividing the cost of goods manufactured to
total units Sold
D. Statement of changes in equity is not the component of financial statement

21. Which THREE of the following must be disclosed on the face of statement of profit and loss?
(I) Sales
(II) Closing inventory
(III) Finance cost
(IV) Depreciation expense
(V) Drawings
(VI) Tax expense
A. (I) & (II) B. (I),(III) & (VI)
C. (II),(III) & (V) D. (I) & (IV)

22. Which of the following is NOT criteria for classification as current asset?
A. The asset is held for trading purpose
B. The asset is in use of business with benefit exceeding one year
C. The entity expects to realise the asset or sell or consume it, in its normal operating cycle.
D. The entity expects to realise the asset within 12 months.

23. The trial balance extract of JSS Enterprises for the year ended 31 December 2022 is given below.
Debit Rs. Credit Rs.
Operating expenses 158,200
Other income 3,850
Following adjustments are required:
1. Above operating expenses includes Rs. 7,380 prepaid expenses relating to next year and Rs.
4,350 accrued expenses paid relating to previous year.
2. Other income includes Rs. 1,250, services to be provided next year.

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

Which of the following statement is correct, after adjusting of above?

A. Operating expenses Rs. 146,470 and other income Rs. 2,600
B. Operating expenses Rs. 146,470 and other income Rs. 5,100
C. Operating expenses Rs. 155,170 and other income Rs. 2,600
D. Operating expenses Rs. 155,170 and other income Rs. 5,100

24. Which TWO of the following statements are correct in relation to cost of sales?
(I) Increase in inventory shall be added to purchase for calculation of cost of sales
(II) Increase in inventory shall be subtracted from purchase to calculate cost of sales
(III) Decrease in inventory shall be added to purchase for calculation of cost of sales
(IV) Decrease in inventory shall be subtracted from purchase to calculate cost of sales
A. (I) & (II) B. (I) & (III)
C. (II) & (III) D. (I) & (IV)

25. The cost of goods sold of a business for August 2022 was 765,000 and inventories were decreased by Rs.
50,000. If direct expenses were 10% of the purchase price, then direct expenses included in cost of sales
were:
A. Rs. 76,500 B. Rs. 81,500
C. Rs. 71,500 D. Rs. 65,000

26. Which of the following statement(s) is/are correct?

(1) Statement of profit and loss and statement of comprehensive income can be prepared in
combination or can be separate statements
(2) The sum of profit and loss and other comprehensive income is termed as total comprehensive
income
A. Statement (1) only
B. Statement (2) only
C. Both statement are correct
D. Neither of the statements is correct

27. Calculate the value of total assets from the following data:
Trade receivables Rs. 181,500
Website cost Rs. 76,200
Prepaid expenses Rs. 16,800
Accrued expenses Rs. 18,600
Unearned income Rs. 32,000
Property, plant and equipment Rs. 338,000
A. Rs. 595,700
B. Rs. 612,500
C. Rs. 631,100
D. Rs. 644,500

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

28. “Wages included Rs. 85,000 paid to SAM (owner of business)”. Which of the following statement is true
relating to above adjustment.
A. No adjustment is required
B. Subtract Rs. 85,000 from wages and add Rs. 85,000 in capital
C. Subtract Rs. 85,000 from wages and subtract Rs. 85,000 from drawings
D. Subtract Rs. 85,000 from wages and also subtract Rs. 85,000 from capital

29. The following information relates to Nina Beauty Parlour in the year ended 30 September 2022.
Opening inventory Rs. 71,000
Closing inventory Rs. 85,000
Purchases, net of returns Rs. 228,000
Purchase return Rs. 5,000
Drawings of inventory Rs. 10,000 (no adjustment made yet)
Gross profit margin 20%
The amount of net sales for the year ended 30 September 2022 was:
A. Rs. 273,750
B. Rs. 248,750
C. Rs. 255,000
D. Rs. 261,250

30. Which of the following is usually a non-current liability?

A. Bank overdraft
B. Bank loan
C. Tax payable
D. Accrued expense

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

ICAP Book Mcqz Answers

01 C

02 D The name of the reporting entity

The date or period of the financial statements
The currency in which the figures are reported
The level of rounding used in the figures
03 B

04 D

Rupees
Capital as at 01.01.2022 2,452,000
Add: Net profit 341,500
Less: Drawings (200,000+25,000) (225,000)
Capital as at 31.12.2022 2,568,500

05 B

Rupees
Current liability (500,000/10 x 2) 100,000
Non-current liability (500,000-100,000-100,000) 300,000

06 C

Rupees
Furniture & Fixtures 110,000
Vehicle 750,000
Tangible non-current assets 860,000

07 A

Rupees
Net profit before adjustments 158,000
Add: prepaid expense 11,200
Add: Accrued income 16,800
Net profit after adjustments 186,000

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

08 D

Rupees
Non-current liabilities 276,000
Total current liabilities (276,000 x 2/3) 184,000
Less: Trade payables (125,000)
Less: Accrued expenses (16,200)
Less: Unearned income (11,800)
Bank overdraft 31,000

09 B

Rupees
Prepaid expenses Cash in hand Inventories 41,500
Receivables 22,800
87,500
66,350
Total of current assets 218,150

10 C

11 D

12 A
Gross Profit Net Profit
Rupees Rupees
Before adjustment 186,500 65,400
Add: Drawings of goods 15,800 15,800
unrecorded
Profits after adjustments 202,300 81,200

13 A
Rupees
Sales 2,480,000
Less: Cost of sales (1,525,000)
Gross profit 955,000
Less: Administrative expenses (415,000)
Less: Selling & Distribution expenses (376,000)
Less: Other expenses (116,000)
Add: Other income 85,500
Net profit 133,500

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

14 B Statement of financial position

Statement of comprehensive income
Statement of cash flows
15 B

Rupees
Allowance for doubtful debts (700,000 x 5%) 35,000
Less: Opening allowance (22,500)
Expense for the year 12,500
Rupees
Accounts receivables 700,000
Less: Allowance for doubtful debts (35,000)
Accounts receivables to be shown in SOFP 665,000

16 D Revaluation surplus
Income tax expense
17 B
Inventory
Rs. Rs.

Balance b/f 187,500 Sales (4,500,000/1.125) 4,000,000

Purchases 4,062,500 Balance c/f 250,000

4,250,000 4,250,000

18 C

Rupees Rupees
Opening inventory 28,700
Purchases 185,000
Add: Carriage-in 16,000
Add: Depreciation (45,000 x 80%) 36,000 237,000
265,700
Less: Closing stock (21,400)
Cost of goods sold 244,300

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

19 A

Inventory
Rs. Rs.

Balance b/f 150,000 Sales (2,400,000/1.20) 2,000,000

Purchases 2,100,000 Balance c/f 250,000

2,250,000 2,250,000

20 B

21 B Sales
Finance cost
Tax expense
22 B

23 A

Rupees
Operating expenses unadjusted 158,200
Less: Prepaid expense (7,380)
Less: Accrued expense of last year (4,350)
Operating expenses 146,470
Rupees
Other income before adjustments 3,850
Less: Unearned income (1,250)
Other income 2,600

24 C Increase in inventory shall be subtracted from purchase to calculate cost of sales

Decrease in inventory shall be added to purchase for calculation of cost of sales
25 D

Rupees
Cost of goods sold 765,000
Less: Decrease in inventories (50,000)
Purchase cost 715,000

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CHAPTER-11 (ICAP CHAPTER # 10) PREPARATION OF FINANCIAL STATEMENTS

26 C

27 B

Rupees
Trade receivables 181,500
Website cost 76,200
Prepaid expenses 16,800
Property, plant and equipment 338,000
Total assets 612,500

28 D

29 C

Rupees
Opening stock 71,000
Add: Purchases net (228,000-10,000) 218,000
Less: Closing stock (85,000)
Cost of goods sold 204,000
Sales (204,000/0.80) 255,000

30 B

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