CAA 1102 A - INTRODUCTION TO ACCOUNTING II

INTRODUCTION TO
ACCOUNTING II

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Introduction
This unit is meant to improve student understanding in accounting. The information
herein contained required prior knowledge of Introduction to accounting I which is
prerequisite unit. There are illustrations provided to aid students in understanding. The
students are also required to consider doing the tasks and self- test questions provided to aid
in their understanding
Objectives

By the end of this unit you should to:

1. Prepare financial statements of partnership, limited liability company accounts,
manufacturing accounts and not for profit making entity accounts
2. Demonstrate understanding of ratio analysis and institutions performance
3. Prepare cash flow statement analysis
4. Prepare published financial statements
5. Appreciate the role of accounting in providing information to stakeholders for
decision making

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DAA 101 - INTRODUCTION TO ACCOUNTING II

TABLE OF CONTENTS

Contents
Introduction ................................................................................................................ 2

Objectives ................................................................................................................... 2

LECTURE ONE: INTRODUCTION TO PARTNERSHIP ACCOUNTS ......................... 4

LECTURE TWO: INTRODUCTION TO LIMITED LIABILITY COMPANY

ACCOUNTS.............................................................................................................. 16

LECTURE THREE: ACCOUNTING FOR MANUFACTURING ENTERPRISE ........... 33

LECTURE FOUR: ACCOUNTING FOR NONPROFIT MAKING ORGANIZATIONS/

NON PROFIT MAKING ENTITIES ........................................................................... 56

LECTURE FIVE: RATIO ANALYSIS ......................................................................... 81

LECTURE SIX: CASH FLOW STATEMENTS .......................................................... 100

LECTURE SEVEN: INCOMPLETE RECORDS ....................................................... 119

LECTURE EIGHT: INTRODUCTION TO PUBLISHED FINANCIAL STATEMENTS

..................................................................................................................................... 140

Recommended Readings .......................................................................................... 152

Additional Readings ................................................................................................ 152

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DAA 101 - INTRODUCTION TO ACCOUNTING II

LECTURE ONE: INTRODUCTION TO PARTNERSHIP ACCOUNTS

1.1 Introduction
This lecture introduces you to partnership accounts. It requires prior knowledge in sole
proprietorship accounting

1.2 Specific objectives:

At the end of the lecture you should be able:

1) To define partnership
2) To prepare an appropriation account
3) To post adjustments to current accounts
4) To prepare partnership financial statements

1.3 Lecture Outline

1.4.1 Title 1.4.1 Definition of Partnership

1.4.2 Title 1.4.2 Advantages of Partnership
1.4.3 Title 1.4.3 Disadvantages of Partnership
1.4.4 Title 1.4.4 Partnership Agreement/ Partnership deed
1.4.5 Title 1.4.5 Clauses in the partnership deed used for accounting purposes

1.4.0 Lecture
1.4.1 Definition of partnership

Partnership is a relationship that subsists between two or more people who come together for
the purpose of making and sharing profits. Partnership organizations normally
constitute between 2 to 20 partners for professionals’ e.g. lawyers, accountants, and
doctors’ [Link] and between two to fifty for non- professional bodies.

1.4.2 Advantages of partnership enterprises

i. Many partners can raise more capital than sole traders
ii. Partners can share experience and ideas due to combination of different talents
iii. It is possible for the partners to specialize in different areas where they are
talented and best fitted
iv. Profit are shared among the partners and losses suffered according to agreed
rations

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DAA 101 - INTRODUCTION TO ACCOUNTING II

1.4.3 Disadvantages of partnership enterprises

i. Partnership agreement may be difficult to formulate
ii. Relationship between/among the partners may be fragile
iii. Mutual agency and unlimited personal liability create personal obligations for
each partner
iv. Each time a new partner is admitted or withdraws from the partnership there is
a need for a new partnership agreement

1.4.4 Partnership Agreement/ Partnership deed

This is a document drawn by the partners when they come together with an aim of
carrying out partnership business. This agreement spells out the guidelines with which to
conduct the partnership business.
The following are the contents of the partnership deed;
1) Name(s) and address(s) of both the firm and the partners
2) Capital to be contributed by each partner
3) The profit sharing ratios that may be expressed as a fraction or as a percentage.
4) Salaries to be paid to any partners who will be involved in the active management
of the business
5) Any interest to be charged on drawings made by the partners.
6) Interests to be given to the partners on their capital balances.
7) Procedures to be taken on the retirement or admission of a partner.

1.4.5 Clauses in the partnership deed used for accounting purposes

i. Capital contribution clause

There is non requirement for equal capital contrition to the partnership business.
Partners are therefore required to contribute capital according to their ability. The
agreement must however state clearly the amount contributed by each partner.

ii. Profit or loss sharing ratio

Partnership agreement must indicate how the profit or loss realized from the
partnership has to be shared or suffered. The ration can be based on experience of the
partners, capital contributed by the partners, partner(s) involvement in the day- today
activities in the organization e.t.c.
iii. Salaries to partners
Salaries to partners are not treated as ordinary salary expenses in an organization. It is
taken as a method of distributing profits made from the business. This is because the
partner’s salaries are not an arm’s length transaction.

iv. Drawings
Drawings refer to money or goods taken from business for personal use. This is
however applicable only if the partnership agreement provides for it in the
partnership.

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DAA 101 - INTRODUCTION TO ACCOUNTING II

v. Interest on drawings
As seen from drawings, there is high likelihood that partners may tend to overdraw
for the partnership business resulting into failure for the operations of the partnership. To
minimize this, partners who draw from the partnership are charged interest on the
drawings so as to limit the level of drawings from the partnership.

vi. Interest on capital

Partners may also agree to pay themselves some interest on the capital contributed
especially where they have not contributed same amounts. This interest on capital is
there to compensate the partners who contribute more capital to the partnership

Illustration one
X, Y and Z are partners sharing profits and losses in the ration of 2:3:4 respectively, for
the year ended 31st December 2009. The following represents their capital and current
accounts

Capital accounts
Partner X 100,000
Partner Y 80,000
Partner Z 60,000

Current accounts
Partner X 60,000
Partner Y 40,000
Partner Z 20,000

Their partnership agreement allows for a 6% interest on capital contributed and 5% on

drawings. Additional information is provided below:
i. Y and Z received a salary of Sh. 30,000and Sh. 18,000 respectively
ii. The net profit for the partnership for the year ending 31st December 2009 was Sh.
187,000.
iii. Drawings for X, Y and Z were Sh. 10,000, Sh. 8,000 and Sh. 6,000 respectively.
iv. All adjustments are posted to current accounts.

Required:

The appropriation account for the partnership for the year ended 31st December 2011 The
current and the capital account for the partnership

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Suggested solution
X, Y and Z Ltd partnership
Appropriation account
For the year ended 31 December 2011

Sh.
Net profit 187,000
Add: Interest on
drawings Partner x 5% x10,000 500
Partner y 5% x 8,000 400
Partner z 5% x 6,000 300 1,200
Available for
appropriation 188,200
Less: Interest on capital Partner x 6% x 100,000 6,000
Partner y 6% x 80,000 4,800
Partner z 6% x 60,000 3,600 -14,400
Available for
appropriation 173,800
Less: Salaries Partner y 30,000
Partner z 18,000 -48,000
Available for
appropriation 125,800
Profit shared Partner x 2/9 x 125,800 27,956
Partner y 3/9 x 125,800 41,933
Partner z 4/9 x 125,800 55,911 -125,800
NILL

X, Y and Z Ltd partners

Current accounts
For the year ended 31 December 2011
Partner Partner Partner Partner Partner
Details Partner x y z Details x y z
Drawings 10,000 8,000 6,000 Bal b/d 60,000 40,000 20,000
Int. on Int. on
drawings 500 400 300 capital 6,000 4,800 3,600
Salaries 30,000 18,000
Profit
Bal c/d 78,056 108,333 91,211 shared 27,956 41,933 55,911
88,556 116,733 97,511 88,556 116,733 97,511
Bal b/d 78,056 108,333 91,211

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Illustration Two
Kimani and Rotich are in partnership managing a small wholesale business, sharing profits
and losses at 3:2 respectively after providing for salary of Sh. 20,000 and Sh. 15,000
respectively and 10% interest on capital. Drawings attract an interest of 5% per annum.
The trial balance extracted as at 31 July 2010 was as follows.
Details Sh. Details Sh.
Drawings : Kimani 55,000 Capital : Kimani 700,000
: Rotich 45,000 : Rotich 400,000
Freehold premises 500,000 Current account : Kimani 101,000
Pick ups (NBV) 210,000 : Rotich 10,000
Buildings 300,000 Sales 2,000,000
Purchases 1,680,000 Creditors 95,000
st
Stock (1 August 2009) 170,000 Provision for doubtful debts 2,500
Wages 132,250
General expenses 11,500
Rates 25,000
Water and Electricity 20,000
Advertising 12,500
Debtors 90,000
Bad debts 4,750
Cash in hand 5,000
Cash at bank 47,500
TOTAL 3,308,500 TOTAL 3,308,500

Additional notes
i. Stock at 31st July 2010 was Sh. 300,000

ii. Wages owing at 31st July 2010 was Sh. 1,250

iii. Advertising prepaid at 31st July 2010 totaled Sh. 500

iv. The provision for doubtful debts is to be increased to 5% of the accounts

receivable.

v. Pick-ups are to be depreciated at 10% of the NBV.

Required
a. Trading profit, loss and appropriation account for the year ended 31st July 2010

(10 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

b. The partners current account for the year ended 31st July 2010 (3 Marks)

c. Statement of the Financial position as at 31st July 2010 (7 Marks)

Kimani and Rotich Partnership

Trading Profit and Loss account and appropriation account
For the year ended 31st July 2010

Sales 2,000,000
Less: Cost of Sales
Opening Stock 170,000

Purchases 1,680,000
Closing Stock (300,000) (1,550,000)
Gross Profit 450,000

Less : Expenses
Wages Paid: 132,250
Accrued: 1,250 133,500
Advertising: Paid12,500
Prepaid: (500) 12,000

Increase in provision for bad debts 5% * 90,000 - 2,500 2,000

Depreciation:
- Pick up 10% * 210,000 21,000
Water and Electricity 20,000
General Expense 11,500

Rates 25,000
Bad debts 4,750 (229,750)
Net profit 220,250

Add: Interest on drawing

Kimani 5% * 55,000 2,750
Rotich 5% * 45,000 2,250 5,000
Available for appropriation 225,250
Less: Interest on capital
Kimani 10% * 700,000 70,000
Rotich 10% * 400,000 40,000 110,000
Available for appropriation 115,250

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Less: Salary to partners

Kimani 20,000

Rotich 15,000 (35,000)

Available for appropriation 80,250
Less: Profit shared
Kimani 3/5 * 80250 48,150
Rotich 2/5 * 80250 32,100 (80,250)
0

Kimani and Rotich Partnership

Current Accounts
For the year ended 31st July 2010
Details Kimani Rotich Details Kimani Rotich
Drawings 55,000 45,000 Bal b/d 101,000 10,000
Interest on drawings 2,750 2,250 Interest on capital 70,000 40,000
Salary to partner 20,000 15,000
Profit shared 48,150 32,100
Bal c/d 181,400 49,850
239,150 97,100 239,150 97,100
Bal b/d 181,400 49,850

Kimani and Rotich Partnership

Statement of Financial Position
As at 31st July 2010
Acc.
Non- current Assets Cost Dep N.B.V
Freehold premises 500,000
500,000
Pick ups (NBV) 210,000
21,000 189,000
Buildings 300,000 300,000
989,000
Current assets
Inventory 300,000
Debtors 90,000
Less: Provision
(4,500) 85,500
Bank balance 47,500
Cash in hand 5,000
Prepayment 500

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DAA 101 - INTRODUCTION TO ACCOUNTING II

438,500
Less: Current
Liabilities
Creditors 95,000
Accruals 1,250 (96,250) 342,250
1,331,250

Financed by
Capital accounts
Kimani 700,000
Rotich 400,000
Current accounts
Kimani 181,400
Rotich 49,850
1,331,250

1.5 Activities
1. Activity 1
A partnership made a net profit of Sh. 120,000 for the year ended 31st December 2012. The
partners comprise of Movin and Levin who have the following capital composition:
Movin Levin
Sh. Sh.
Capital accounts 50,000 45,000
Current accounts (2000) 5,000
Drawings 2,000 1,500
The following information is also available:
i. The partners agreed to charge interest on capital and on drawings at 8% and 5%
respectively for each of the partners
ii. Salaries to the partners were paid at Sh. 2,000 and Sh. 1,800 for Movin and Levin
respectively
iii. The profit sharing ratio was agreed as 3:2 for Movin and Levin respectively
Required:
i. The partnership appropriation account for the year ended 30th June 2012
ii. The current account for the partners (Total 12 Marks)

1.5 Activities
2. Activity 2
Rayne and Hale are in partnership, sharing profits and losses in the ratio 2:1. The following
trial balance was prepared from the books at 30 September 2013: 11
Sh Sh
Revenue (Sales) 310,800
Purchases ,600
DAA 101 - INTRODUCTION TO ACCOUNTING II

Self - Test Questions

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Question One
Reagan and Rodney are in partnership, sharing profits and losses in the ratio 3:2. The following trial
balance was prepared from the books at 30 September 2013:
Sh Sh
Sales 310,800
DAA 101 - INTRODUCTION TO ACCOUNTING II

Self - Test Questions

Question Two
Dorothy and Mike are in partnership managing a small wholesale business, sharing profits and
losses at 2:1 respectively after providing for salary of Sh. 2,500 p.m and Sh. 3,100 p.m 13
respectively and 8% interest on capital. Drawings attract an interest of 5% per annum. The trial
balance extracted as at 31 July 2010 was as follows.
Details Sh. Details Sh.
Drawings : Dorothy 60,000 Capital : Dorothy 700,000
DAA 101 - INTRODUCTION TO ACCOUNTING II

1.6 Summary
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In this lecture you have learnt that:
1. Partnership is a relationship that exist between two or more partners who come
together by contribution capital to start and manage a partnership
2. Partnership profits are distributed to the partners according to their partnership
DAA 101 - INTRODUCTION TO ACCOUNTING II

1.7 Suggestion for further reading

1. Accounting for goodwill in partnership
2. Admission of a new partner
3. Retirement of a partner
4. Partnership dissolution

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DAA 101 - INTRODUCTION TO ACCOUNTING II

LECTURE TWO: INTRODUCTION TO LIMITED LIABILITY COMPANY

ACCOUNTS

2.1 Introduction
This lecture introduces you to limited liability company accounts. It requires prior
knowledge in sole proprietorship accounting

2.2 Specific objectives:

At the end of the lecture you should be able:

1) To explain the limited liability of limited companies
2) To explain the capital structure of limited liability company
3) To prepare appropriation account for limited liability company
4) To prepare financial statements of a company

2.2 Lecture Outline

2.4.1 Title Definition of Limited liability Company

2.4.2 Title Capital Structure of a Limited Liability Company
2.4.3 Title Appropriation Account of a Limited Liability Company

2.5 Lecture
2.4.1 Definition of Limited Liability Company

A limited liability company is a more advanced form of business function. A company must
be either incorporated/registered by the registrar of companies under the companies act. A
company is a separate legal entity distinct from its owners/ shareholders as
opposed to sole-proprietorship where from the view of law there is no distinction from the
business and its owners.

Advantages of a limited company

1. Shareholders enjoy limited liability i.e. their personal assets cannot be attached in
order to settle financial obligation ensuring from a company other than their
capital contribution which they can lose.
2. A company is recognized as an artificial person hence has power to sue and be
sued on its name; it can own property on its own name; it can hire and fire
employees e.t.c

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DAA 101 - INTRODUCTION TO ACCOUNTING II

3. A limited company has an opportunity to generate an additional capital from the

shareholders by going public.

2.4.2 Capital Structure of a Limited Liability Company

The capital of a limited company comes from ordinary share capital, preference
share capital and debentures among others.

i) Ordinary share capital

Ordinary shareholders are the true owners of a company. Ordinary share capital is
divided into units known as shares. The denomination value of each share is known
as par value. Members of the public become shareholders (part owner of a company)
through purchase of its shares and they enjoy a return of dividend at the end of each
financial year.
The amount of dividend received fluctuates from one period to the next depending on the
profits made by the company and the decisions of the directors. The ordinary dividends
are paid after paying the preference shareholders (preference dividends) and the
debenture dividends. The dividends paid can be;

a) Interim dividends- paid mid year

b) Final dividends -paid at the end of a financial year.

Ordinary dividends=percentage payout * per value.

ii) Preference share capital

The total preference share capital is divided into units known as shares which have a
par value. Preference shareholders are not owners of a company but lenders of a
company. They earn a constant return known as preference dividend calculated as
follows;
Preference dividend = percentage payout* per value
Preference shareholders are given a preferential treatment over ordinary shareholders. They
can be;
a) Non-cumulative preference shareholders - These receive a dividend up to an
agreed percentage each year and in case of any shortfall in dividend, the shortfall is
lost and hence not carried forward to next year.

b) Cumulative preference shareholders - These receive a dividend up to an agreed

percentage each year and in case of any shortfall in dividend paid, the shortfall is
carried forward to the next year(s) until it’s all paid.

c) Participative preference shareholders - They are allowed voting rights meant

for the purpose of decision making in the company.

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DAA 101 - INTRODUCTION TO ACCOUNTING II

d) Non-participative preference shareholders - They have no voting rights

e) Redeemable preference shareholders - They have maturity period

f) Irredeemable preference shareholders - They have no maturity period

Share capital.
Share capital can be categorized into;
1. Authorized share capital: This is the total share capital that a company is
allowed to issue to the shareholders/ the public for subscription

2. Issued share capital: This is the total of the share capital that the company
has actually issued to the shareholders for the purpose of subscription

3. Called up capital: This is where only part of the amount payable on each
issued share capital has been asked for by the company

4. Uncalled capital: This is the total amount to be received in future relating to

the issued share capital (amount which has not been asked for)

5. Paid up capital: This is the total amount of share capital which has been paid
for by the shareholders.

iii) Debentures

This is a special type of loan available to the companies. The total amount to be
borrowed is divided into units known as debenture units. Each debenture has a per
value and a coupon rate. A company pays interest to the debenture holders at the end of
each year by;
Interest = Coupon rate * per value
NB. Payment of a debenture interest is a legal obligation i.e. a company must pay the
interest whether it makes profit or loss otherwise its inability to pay can result into
liquidation of the company.

A debenture can be;

1. Secured debenture (A collateral is issued)

2. Unsecured debenture ( no collateral)

3. Redeemable debenture ( with maturity period)

4. Irredeemable debenture ( No maturity period)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

2.4.3 Appropriation Account of a Limited Liability Company

Profit Before Interest and Tax (P.B.I.T) xx
Less: debenture Interest (xx)
Profit Before Tax (P.B.T) xx
Less: Corporate tax R% * P.B.T (xx)
Profit After Tax (P.A.T) xx
Less: Preference dividend xx
: Ordinary dividend xx
: Transfer to reserves xx
: Goodwill w/off xx (xx)
Retained Earnings for the year xx
Add: Retained earnings b/f xx
Retained Earnings c/f xx
Illustration 1
The following trial balance has been extracted from the books of Z ltd as at 31st
December 2003
Details Sh. Sh.
Share capital 200,000
Profit and loss account at 31st December 2002 27,500
Freehold premises at cost 271,000
Provision for depreciation on freehold premises at 31st December 54,000
2002
Machinery at cost 84,000
st
Provision for depreciation on machinery at 31 December 2002 21,000
Purchases 563,700
Sales 925,300
General expenses 14,600
Wages and Salaries 179,400
Business rates 6,100
Electricity 4,800
Bad debts 1,400
Provisions for doubtful debts at 31st December 2002 1,200
Debtors 74,200
Creditors 68,300
Stock in trade 81,900

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Bank balance 16,200

TOTAL 1,297,300 1,297,300

Additional information
i. The authorized and issued £are capital is divided into 400,000 ordinary shares of
Sh.0.5 each.

ii. Stock in trade at 31st December 2003 was Sh.94, 300.

iii. Wages and salaries due at 31st December 2003 amounted to Sh.1,800

iv. Business rates paid in advance at 31st December 2003 amounted to Sh.700

v. A dividend of Sh. 20,000 is proposed for 2003

vi. The provision for doubtful debts is to be increased to Sh. 1,500

vii. A depreciation .charge is to be made on freehold premises of Sh. 25,000 and

machinery at the rate of 20% p.a on cost.

Required
A trading profit and loss account and a balance sheet for the year ended 31st December
2003.
(Ignore tax)
Z Ltd
Trading Profit and Loss Account
For the year ended 31st December 2003

Sales 925,300
Less: Cost of Sales
Stock in trade 81,900
Purchases 563,700
Closing Stock (94,300) (551,300)

Gross profit 374,000

Less Expenses
Wages and Salaries:Paid 179,400 181,200
: Accrue1,800
Business rates : Paid 6,100
: Prepaid (700) 5,400
Increase in provision for bad debts
(1,500 - 1,200) 300
Depreciation:
Freehold premises 25,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Machinery 20% * 84,000 16,800

General expenses 14,600
Electricity 4,800
Bad debts 1,400 (249,500)
Profit Before Interest and Tax 124,500
Less: Ordinary dividend (20,000)
Retained Earnings for the year 104,500
Add: retained earnings b/f 27,500
Retained Earnings c/f 132,000

Z Ltd
Statement of Financial
As at 31st December 2003
Non - Current Assets Cost Acc. dep N.B.V
Freehold premises 271,000 79,000 192,000
Machinery 84,000 37,800 46,200
238,200
Current assets
Inventory 94,300
Debtors 74,200
Less: Provision (1,500) 72700
Bank 16,200
Prepayment 700
183,900
Less: Current Liabilities
Creditors 68,300
Accruals 1,800
Proposed dividend 20,000 (90,100) 93,800
332,000
Financed by
Share capital 200,000
Retained Earnings 132,000
332,000

Illustration 2
Pamoja limited has an authorized capital of 500,000 ordinary shares of Sh. 10 each. The
company’s trial balance as at 30 September 2011 was as follows.

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Sh.”000” Sh.”000”
Issued Share capital 3,900
10% debentures 1,020
Freehold land 3,100
Fixtures and fittings(cost) 2,300
Motor vehicles(cost) 2,600
Trade receivables and Trade payables 850 700
Purchases and sales 2,859 4,580
Administration expenses 125
Bad debts 73
Inventory (1 October 2010) 325
Debentures interest paid 51
Salaries and wages 450
Directors emoluments 210
Insurance 30
Bank and cash 477
Accumulated depreciation (1 October 2010)
Fixtures and fittings 1,500
Motor vehicles 1,250
Revenues reserves (1 October 2010) 400
General reserve(1 October 2010) 100
13,450 13,450

Additional information
1. Inventory as at 30 September 2010 was valued at Sh. 345,000
2. Provisions for corporation tax for the year ended 30 September 2011 was Sh.
150,000
3. Depreciation is to provided as follows
Fixtures and fittings 10% P.a on straight line basis
Motor vehicles at 20% P.a on reducing balance basis
4. Directors have proposed a dividend of 10% to the ordinary shareholders and a
transfer of sh. 30,000 to general reserve
5. Salaries and wages outstanding as at 30 September 2100 stood at sh. 25,500
6. Insurance paid in advance as at 30 September 2011 was Sh. 4,500.
Required
(a) Income statement for the year ended 30 September 2011 (12 Marks)
(b) Statement of financial position as at 30 September 2011 (8 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Suggested solution Pamoja Ltd

(a) Statement of financial performance
For the year ended 30 September 2011
Sh. 000

Sales 4,580
Less: Cost of
sales
Opening
inventory 325
Purchases 2859
Closing
inventory (345) (2,859)
Gross profit 1,741
Less: Expenses
Depreciation:
Fixtures and fittings 10%x
2300 230
M/Vehicles 20%(2600-400) 440
Salaries & Wages: Paid 450
Accrued 25.5 475.5
Insurance: Paid 30
Prepaid (4.5) 25.5
Administration expense 125
Bad debts 73
Directors emoluments 210 (1,579)
Profit from operations 162
Less: Debenture interest: Paid 51
Accrued259 (310)
:Corporation tax (150)
:Dividend proposed 10%x 3900 (390)
:Transfers to reserves (30)
Retained loss (718)
Add: Revenue reserves 400
Retained loss (318)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

(b) Pamoja Ltd

Statement of financial Position
As at 30 September 2011

Fixed Assets Cost Acc. Dep N.B.V

Freehold land 3,100 3,100
Fixtures and
fittings 2,300 1,730 570
Motor vehicles 2,600 1,690 910
4,580
Current assets
Inventory 345
Trade receivables 850
Bank and Cash 477
Insurance
prepaid 4.5
1,676.50
Current liabilities
Trade payables 700
Corporate tax 150
Dividends
proposed 390
Interest accrued 259
Salaries accrued 25.5 (1,524.50) 152
4,732
Financed by
Issued share
capital 3,900
General reserve 100+30 130
Retained loss (318)
3,712
10% Debentures 1,020
4,732

Illustration two (May 2007)

(a) Explain why a company should retain in the business some of the reported profits
instead of distributing the full amount to its shareholders. ( 4 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

(b) The following trial balance was extracted from the books of XYZ Limited as at 30
April 2007

Sh. '000' Sh. '000'

Freehold land 24,000
Buildings : Cost 135,000
: Provision for depreciation 37,500
Furniture and fittings : Cost 36,000
: Provision for depreciation 8,400
Motor vehicles: Cost 12,000
: Provision for depreciation 6,000
Ordinary shares of Sh. 20 each 90,000
10% preference shares of Sh. 20 each 15,000
Share premium 12,000
8% debentures 15,000
Discounts allowed/received 2,100 1,950
Return inwards/Outwards 600 12,000
Account receivable/ payable 49,500 22,200
Purchases/ Sales 633,000 720,000
Administrative expenses 15,900
Selling and distribution expenses 19,050
Provision for doubtful debts 2,700
Interim ordinary dividends 3,300
Preference dividends 750
Interest on debentures 600
Bank over draft 3,750
Inventory ( 1 May 2006) 63,000
Directors fees 6,000
Retained profits (1 May 2006) 54,300
1,000,080 1,000,080
Additional information
1. Depreciation is to be provided on the basis of cost at the following annual rates:

Buildings 4%

Furniture and fittings 10%

Motor vehicles 20%

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DAA 101 - INTRODUCTION TO ACCOUNTING II

2. Bad debts in the year amounted to Sh. 1,500,000. A provision for doubtful debts
at 5% should be made

3. Interest on debentures and preference dividends are paid semi- annually on 1

November and 1 May every year.

4. Stock in trade on 30 April 2007 was valued at Sh.72,000,000

5. Administrative expenses accrued as at 30 April 2007 amounted to Sh. 1,200,000

while prepaid selling and distribution expenses amounted to Sh. 2,600,000

6. Corporate tax is estimated to be Sh. 6,000,000

7. The directors propose to pay a final dividend of 10%

Required:
(i) Trading, profit and loss and appropriation account for the year ended 30 April
2007 (8 Marks)

(ii) Statement of Financial Position 30 April 2007 (8 Marks)

Suggested solution
a) Why Companies don’t distribute all their profits to shareholders
i. Companies might want to invest in other investment opportunities
ii. The profits are retained to enhance companies liquidity position
iii. The funds are used to create reserves which are used in case of losses
iv. Working capitals are financed using non distributed profits

XYZ Limited
Statement of financial performance
For the year ended 31 April 2007
Sh. '000'

Sales 720,000
Less: Return inwards (600)
Net sales 719,400
Less: Cost of sales
Opening stock 63,000
Add: Purchases 633,000
Less: return outwards (12,000)
Less: Closing stock (72,000) (612,000)
Gross profit 107,400

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Discount received 1,950

Decrease in provision for bad debts 300
Adjusted gross profit 109,650
Less: Expenses
Depreciation: Buildings 5,400
: Furniture 3,600
: Motor vehicles 2,400
Bad debts 1,500
Administrative expenses 17,100
Selling and distribution expense 16,450
Discount allowed 2,100
Directors fee 6,000
Debenture interest: 1st November 600
: 1st May 600 (55,750)
Operating profit before taxation 53,900
Less: Corporate tax payable (6,000)
Profit after tax 47,900
Less: Ordinary dividend: Interim 3,300
: Final 5,700
: Preference dividend: 750 + 750 1,500 (10,500)
Retained earnings for the year 37,400
Add: Retained earnings b/f 54,300
Retained earnings c/f 91,700

XYZ Limited
Statement of Financial Position
As at 30 April 2007
Non -current assets Cost Acc. Dep N.B.V
Freehold land 24,000 24,000
Building 135,000 42,900 92,100
Furniture and fittings 36,000 12,000 24,000
Motor vehicle 12,000 8,400 3,600
143,700
Current assets
Closing inventory 72,000
Trade receivables (49,500 -1,500 - 45,600

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DAA 101 - INTRODUCTION TO ACCOUNTING II

2,400)
Prepaid selling and distribution
expenses 2,600 120,200
263,900
Equity and liabilities
Equity
Ordinary shares 90,000
Preference share capital 15,000
Share premium 12,000
Retained profit c/d 91,700
Total equity 208,700
Non current Liabilities
8% debentures 15,000
Current liabilities
Final preference dividend 750
Accrued debenture interest 600
Accrued final ordinary dividend 5,700
Bank over draft 3,750
Accrued administration expense 1,200
Corporate tax payable 6,000
Payables 22,200 40,200
263,900

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DAA 101 - INTRODUCTION TO ACCOUNTING II

2.5 Activities
Activity 1
The following balances were extracted from the records of Hills Products Company Limited as
at 31 December 2009:
Sh. Sh.
'000' '000'
7% preference share capital of Sh. 10
each 4,800
Ordinary £are capital of Sh. 10 each 21,600
£are premium 2,400
Buildings (Cost Sh. 18,000,000) 12,000
Motor vehicles (Cost Sh. 7,800,000) 7,200
Equipment (Cost Sh. 3,600,000) 2,400
Trade receivables 13,080
Trade payables 6,000
Purchases 66,960
Sales 86,760
Returns outwards 240
Returns inwards 300
Directors remuneration 2,100
Salaries 5,220
Motor vehicles expenses 1,500
Office expenses 1,680
Carriage outwards 240
Carriage inwards 360
Inventory ( 1 January 2009) 4,080
Quoted investments 1,920
Ca£ in hand 1,320
6% debentures 4,800
Profit and loss account ( 1 January
2009) 3,240
Debenture interest (half year) 144
Investment income 180
Preference dividend (half year) 168
Bad debts 660
Allowance for doubtful debts 840
Land at cost 12,168
General reserve 2,640
133,500 133,500
Additional Information:
1. Closing inventory as at 31 December 2009 was valued at Sh. 5,160,000.
2. Authorized share capital consists of:
480,000 preference shares of Sh. 10 each
3,000,000 ordinary shares of Sh. 10 each
3. Allowance for doubtful debts is to be adjusted to 5% of trade receivables
DAA 101 - INTRODUCTION TO ACCOUNTING II

2.6 Activities
Activity 2
The following trial balance was prepared from the books of Destiny Ltd at 30 April 2013 after the
preparation of the Statement of Comprehensive Income (Trading and Profit and Loss
Account) for the first year of trading:

50p Ordinary shares, authorized and issued 50,000

Profit for the year before tax 16,850
Plant and machinery at cost 42,000
Provision for depreciation - plant and
machinery 14,000
Motor vehicles at cost 40,000
Provision for depreciation - motor vehicles 25,600
Trade receivables (Debtors) 8,000
Trade payables (Creditors) 8,600
Inventory (Stock) 21,500
5% Long term loan 10,000
Interest on loan 500
Cash 6,200
Bank 4,700
Prepayments 1,600
Accruals 730
Provision for doubtful debts 320
Dividends paid 12,000
131,300 131,300

The following information is available at the end of the year

i. Corporation tax was estimated at Sh. 1,100 for the year.
ii. The directors have decided to transfer Sh. 3,000 to a General Reserve.

Required:
(a) Prepare the Appropriation Account for the year ended 30 April 2013. (5 marks)
(b) Prepare the Statement of Financial Position (Balance Sheet) at 30 April 2013.
(15 marks)

30
DAA 101 - INTRODUCTION TO ACCOUNTING II

2.7 Self - Test Questions

Question One
The following trial balance was prepared from the books of Destiny Ltd at 30 April 2013
50p Ordinary shares, issued 150,000
Profit for the year before tax 20,000
Plant and machinery at cost 120,000
Provision for depreciation - plant and
8,000
machinery
Motor vehicles at cost 80,000
Provision for depreciation - motor vehicles 25,600
Trade receivables (Debtors) 8,450
Trade payables (Creditors) 8,600
Inventory (Stock) 30,000
5% Long term loan 50,000
Interest on loan 500
Cash 17,000
Bank 4,700
Prepayments 3,000
Accruals 730
Provision for doubtful debts 320
Dividends paid 10,000
268,450 268,450
The following information is available at the end of the year
i. Corporation tax was proposed at 30% of profit after interest
ii. The directors have decided to transfer Sh. 3,000 to a General Reserve
iii. Ordinary dividend was proposed at 15% by the directors

Required:
(a) Prepare the Appropriation Account for the year ended 30 April 2013. (5 marks)
(b) Prepare the Statement of Financial Position (Balance Sheet) at 30 April 2013.
(15 marks)

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 DAA 101 - INTRODUCTION TO ACCOUNTING II

2.7 Self - Test Questions

Question Two

ABC ltd started operations on 1st January 2009 with issued share capital of 400,000 Sh.0.50
ordinary shares and 200,000 5% pref. shares of Sh. 0.50 each. The share premium for the
company amounted to Sh. 64,000. The following information is also available;
1. The net profit before interest and tax for the first two years of business were as follows;
2009/10 Sh. 200,000 and 2010/11 Sh. 184,000.
2. Pref. dividends were paid for each of these years. Ordinary dividends were proposed at
8% and 6% for the respective periods
3. Corporation tax based on profits of these two years was Sh. 23,000 and Sh. 21,500
respectively. The tax was paid immediately.
4. There were transfers to general reserves of Sh. 30,000. This was to be increased by 5%
for each of the next five years.
5. The company’s formation expense was Sh. 15,000. The directors agreed to write-off this
in the first year of operation.

Required;
1. Profit and loss appropriation account for the two periods
2. A balance sheet extract for the year(s) ended 31 December 2009/10 and 2010/11.

2.8 Summary
In this lecture you have learnt that:

1. A limited liability company is a separate legal entity

2. A company is capable of suing and being sued on his own name, hiring and firing
employees on its own name, entering a contract in its own name
3. The capital structure of a company comprises of ordinary share capital, preference share
capital, reserves, share premium, retained earnings and the debenture capital

2.9 Suggestion for further reading

Students are required to review the questions provided and questions in the reference books
provided in this manual
DAA 101 - INTRODUCTION TO ACCOUNTING II

LECTURE THREE: ACCOUNTING FOR MANUFACTURING ENTERPRISE

3.1 Introduction
This lecture introduces you to accounting for manufacturing enterprise. It requires prior
knowledge in sole proprietorship accounting

3.2 Specific objectives:

At the end of the lecture you should be able:

1) To explain the term manufacturing enterprise
2) To distinguish between manufacturing account and trading enterprises
3) To explain the various elements of manufacturing account
4) To identify direct costs and production over heads
5) To prepare manufacturing, trading, profit and loss accounts

3.3 Lecture Outline

3.3.1 Title Definition of Manufacturing Enterprise

3.3.2 Title Inventories held by Manufacturers
3.3.3 Unrealized Profit in Manufacturing Account

3.4 Lecture
3.3.1 Definition of manufacturing enterprise

Manufacturing enterprises are organisations which transform raw materials into finished
goods which can then be sold by an organisation. Instead of purchasing goods to be sold
(like a case of trading enterprises, the manufacturing enterprises produce their own
products through manufacturing and then transfer the total cost in the manufacturing
account to the trading account.

Manufacture:
This means to subject goods to a process that changes their original form of raw materials
into finished goods ready to be sold. Manufacturing accounts are prepared by
manufacturing concerns to determine the manufacturing cost. The following elements are
found in manufacturing enterprises;
i. Material costs
ii. Labour costs
iii. Production overhead costs

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Material costs are divided into; direct material costs (those costs that form part of the
final products) and indirect material costs (those costs that are used in the production
process but which do not form the substance of the final product).

Labour costs are divided into direct labour (those paid to the individuals directly involved in
the production process) and indirect labour (the cost of labour paid to individuals not directly
involved in the production process.

Production over heads are the costs paid for production but which are not directly used in the
production process. They are divided into fixed production over heads (those that remain
fixed regardless of the units of production) and variable production overheads (those that
change with the units produced during the production process).

Manufacturing cost is divided to two categories:

Direct cost
Indirect cost
i. Direct costs
These are cost that can be traced directly in the final product.
They are also known as variable cost in that they vary with level of output e.g. Raw
materials, Royalties, Direct labour, Hire of specialized machinery

ii. Indirect cost

These are cost incurred in manufacturing process that cannot be traced in the final
product.
They are incurred in fixed amount as long as the manufacturing process is carried on.
Examples of indirect costs include;
Wages paid to factory supervisors
Rent, depreciation of factory building
Electricity, insurance
Depreciation of plant and equipment
Repairs to plant and equipments etc

3.3.2 Inventories held by Manufacturers

Unlike in the trading enterprises where there is only one inventory involved, in the
manufacturing enterprise, the following inventories will be found:

Raw materials
These are goods that have not been subjected to any process. Raw materials are acquired
first then subjected to the production process to yield finished goods. The cost for raw
materials consumed in the production process is ascertained as follows;

Cost of raw materials

Opening stock raw materials xx
Add: Purchases of raw materials xx

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Less: Closing stock of raw materials (xx)

Cost of raw materials consumed xxx

Work- in -progress
These are partially processed goods. It is the subtotal of all cost that have been incurred on
these goods including the cost of labour. Value of work-in-progress can only be
recognized if they are fully processed to finished goods.

Finished goods
These are fully processed items readily available for sale. Ones goods gave been fully
manufactured, they are transferred to the trading account/ department for the purpose of
sale or to be used as finished goods.

When total costs are accumulated in manufacturing account, they are referred to as prime
cost. Manufacturing account can therefore be ascertained as follows;

Cost of raw materials

Opening stock raw materials xx
Add: Purchases of raw materials xx
Less: Closing stock of raw materials (xx)
Cost of raw materials consumed xx
Add: Direct costs
Cost of royalties xx
Direct labour
costs xx
Direct expenses xx
Prime cost xx
Add: Production overheads xx
Total production costs c/d xx

Note that the total cost of production is carried down. This is a closing cost at the
manufacturing account which is then transferred to the manufacturing account. This is
done as shown in the format below:

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DAA 101 - INTRODUCTION TO ACCOUNTING II

FORMAT OF PREPARING MANUFACTURING ACCOUNTS

XYZ MANUFACTURERS
MANUFACTURING ACCOUNT AND INCOME STATEMENT
FOR THE YEAR ENDED 31ST DEC 2010
SH SH
Opening inventory of raw materials xx
Purchases of raw materials xx
Carriage inwards on raw materials xx
Return outwards of raw materials (xx) (xx)
Cost of raw materials available for consumption xxxx
Closing inventory of raw materials (xx)
Cost of Raw materials consumed xx

Factory wages xx
Hire of machinery xx
Royalties xx xxx
DIRECT COST/PRIME COST xxx

Factory overheads
Rent and rates xx
Water and electricity xx
Insurance xx
Depreciation of plant xx
Repairs to machinery xx
Salary for factory manager xx xx
TOTAL COST xx
Opening work-in-progress xx
Closing work-in-progress (xx)
MANUFACTURING COST/COST OF GDS MANFD AT FACTORY COST xx

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DAA 101 - INTRODUCTION TO ACCOUNTING II

SH SH
Sales xx
Return inwards (xx)
Net sales xx
Opening inventory of finished goods xx
Manufacturing cost xx
Closing inventory of finished goods (xx)
Cost of sales (xx)
Gross profit xx
EXPENSES
Advertising xx
Carriage outwards xx
Delivery vans xx
Depreciation xx
Office Salary xx
Rent and Rates xx
Insurance xx
Water and Electricity xx (xx)
NET PROFIT xx

3.3.3 Unrealized Profit in Manufacturing Account

In cases where a business transfers finished goods at a profit to the selling department
and the goods are reflected in the balance sheet at the transfer price then the closing stock
includes a profit not realized in the accounts. Uniform mark up profit will result into a
reduction or an increase in the unrealized profit. If there is an increase in unrealized profit
profits on the closing stock, it’s adjusted by reducing the gross profit in the income
statements account (P & l account). A reduction in the unrealized profit is adjusted by adding
it to the income statements account (P & l account)

Accounting Entries for Unrealized Profit

i) When created in the first year;
Dr: Profit and loss account xx
Cr: Provision for unrealized profit account xx

ii) For second and subsequent times when the provision is created, it will be
treated as either an income or a loss. The increase or a decrease is determined
and recorded as follows;

(a) Incase of an increase

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Dr: Profit and loss account xx

Cr: Provision for unrealized profit xx

(b) Incase of a decrease

Dr: Provision for unrealized profit xx
Cr: Profit and loss account xx

Illustration
Firm manufacturer Ltd values its finished inventory at a markup of 20% on its cost of
production. In the year ended 31st December 2010 its opening and closing inventory was
valued at Sh. 200,000 and Sh. 320,000 respectively. (Show the values to the nearest
whole number)

Required
i) Relevant accounts to record the above transaction
ii) Financial Statements extract accounts.

Suggested solution

(i) Relevant account

Opening inventory unrealized profit 20/120 x 200,000 = Sh. 33,000
Closing inventory unrealized profit 20/120 x 320,000 = Sh. 53,000
This represents an increase in the provision of Sh. 20,000

Unrealized Profit on closing inventory

Bal b/d 33,000
Bal c/d 53,000 P & l a/c 20,000
53,000 53,000

(ii) Financial statements extract

Firm
Manufacturers
Statement of Financial Performance extract
Gross profit xxx
Less: Expenses
Unrealized profit 20,000

Firm Manufacturers
Statement of Financial Position extract
Current assets
Closing inventory 320,000

38
DAA 101 - INTRODUCTION TO ACCOUNTING II

Less: Unrealized profit (53,000)

Illustration one

Using the information provided below, prepare a manufacturing and a trading account for
Why Ltd as at 31 December 2009.

Inventory 1 January 2009

Raw materials 156,000
Partly finished goods 148,000
Finished goods 105,000
Inventory 31 December 2009
Raw materials 161,300
Partly finished goods 137,310
Finished goods 139,900
Purchase of raw materials 850,700
Carriage on raw materials 74,430
Salaries and wages- Factory (Including 351,700 for management and
supervision 756,674
Rent and business rates (3/4 works, 1/4 office) 200,000
Salaries and wages: General office 148,200
Lighting and heating (7/8 works, 1/8 office) 92,960
Repairs to machinery 78,900
Depreciation to machinery 45,500
Factory direct expenses 77,880
Insurance of plant and machinery 73,330
Sales 3,000,000
Sales and distribution salaries 201,000
Advertisement costs 143,200

39
DAA 101 - INTRODUCTION TO ACCOUNTING II

Suggested solution

Why Ltd Manufacturing, Statement of Financial Performance

For the year ended 31 December 2009
Cost of raw materials
Opening stock raw materials 156,000
Add: Purchases of raw materials 850,000
: Carriage on raw materials 74,430
Less: Closing stock raw materials (161,300)
Cost of raw materials consumed 919,830
Add: Other direct costs
Factory direct expense 77,880
Salaries and wages (756,674-351,700) 404,957
Prime cost 1,402,667
Add: Production overheads
Management and supervision 351,700
Rent and business rates 3/4 x 200,000 150,000
Lighting and heating 7/8 x 92,960 81,340
Repairs to machinery 78,900
Depreciation to machinery 45,500
Insurance of plant and machinery 73,330
Cost of production 2,183,437
Add: Opening stock work in progress 148,000
Less: Closing stock work in progress (137,310)
Total cost of production c/d 2,194,127
Sales 3,000,000
Less: Cost of sales:
Opening stock finished goods 105,000
Add: Cost of production b/d 2,194,127
Less: Closing stock finished goods (139,900) (2,159,227)
Gross profit 840,773
Less: Expenses
Rent and business rates 1/4 x 200,000 50,000
Lighting and heating 1/8 x 92,960 11,620
Salaries and wages general office 148,200
Sales and distribution salaries 201,000
Advertisement costs 143,200 (554,020)
Net profit 286,753

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Illustration two
The trial balance provided below was obtained from sweet bakers industries for the
period ended 31 December 2005.

Purchase of raw materials 3,096,000

Fuel and light 252,000
Administration salaries 204,000
Factory wages 708,000
Carriage outwards 48,000
Rent and business rates 48,000
sales 5,784,000
Return inwards 84,000
General office expenses 108,000
Repairs to plant and
machinery 108,000
Inventory at 1 January 2005
Raw materials 252,000
Work in progress 168,000
Finished goods 276,000
Trade payables 444,000
Capital 5,485,000
Buildings 4,920,000
Machinery 960,000
Trade receivables 240,000
Depreciation on Machinery 96,000
Selling and distribution
expense 132,000
11,808 11,808,000
Additional information
1. Stock in hand as at 31 December 2005
Raw materials 300,000
Work in progress 132,000
Finished goods 312,000
2. Depreciation of 10% on plant and machinery using straight line method
3. 80% of fuel and light and 75% of rent and rates to be charged to manufacturing
4. Doubtful debts provision is 5% of sundry debtors
5. Sh. 48,000 outstanding for fuel and light
6. Rent and business rates paid in advance Sh. 60,000
7. Market value of finished goods is Sh. 4,584,000
Required
i. Manufacturing Statement of Financial Performance showing profit realized on
transfer from the manufacturing department (12 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

ii. Statement of Financial Position 31 December 2005 (8 Marks)

Suggested solution

Sweet bankers Industries

Manufacturing Statement of Financial Performance
For the year ended 31 December 2005
Opening stock raw materials 252,000
Add: Purchases of raw materials 3,096,000
Less: Closing stock raw materials (300,000)
Cost of raw materials consumed 3,048,000
Add: Direct costs:
Factory wages 708,000
Prime cost 3,756,000
Add: Over head costs:
Repairs to plant and machinery 108,000
Depreciation: Plant 10% x 960,000 96,000
Fuel and light 80% (252,000x48,000) 240,000
Rent and business rates 75% (252,000-60,000) 144,000
Production cost 4,344,000
Add: Opening stock Work in progress 168,000
Less: Closing stock Work in progress (132,000)
Total cost of production 4,380,000
Mark up profit 204,000
Transfer to Statement of Financial Performance 4,584,000
Sales 5,784,000
Less: Return inwards (84,000)
Net sales 5,700,000
Less: Cost of sales
Opening stock of finished goods 276,000
Add: Transfer cost from manufacturing account 4,4,584,000
Less: Closing stock finished goods (312,000) (4,548,000)
Gross profit 1,152,000
Add: mark-up profit 204,000
Adjusted gross profit 1,356,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Less: Expenses
Fuel and light 60,000
Rent and business rates 48,000
Provision for doubtful debts 15% x 240,000 36,000
Salaries administration expense 204,000
Carriage outwards 48,000
General expense 108,000
Rent expense 132,000 (636,000)
Net profit 720,000

Sweet bakers Industries

Balance sheet
As at 31 December 2005

Non -current assets

Free hold premises 4,920,000 4,920,000
Plant and
machinery 960,000 192,000 768,000
5,688,000
Current assets:
Inventory Raw materials 300,000
Work in progress 132,000
Finished goods 312,000
Trade receivables (240,000-36,000) 204,000
Prepayments 60,000
1,008,000
Current liabilities
Trade payables 444,000
Accrued fuel and
light 48,000 (492,000) 516,000
6,204,000
Financed by
Capital 5,484,000
Add: Net profit 720,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

6,204,000

Illustration three
The following information is available from the books of an organization, which
commenced business on 1st January 2011, as a designer of furniture and fittings
Plant and machinery at cost on 1st January 2011 7,200,000
Motor vehicle at cost on 1st January 2011 3,600,000
Loose tools at cost 1,080,000
Sales 20,400,000
Raw materials purchased 5,160,000
Direct factory wages 4,680,000
Light and power 600,000
Indirect factory wages 960,000
Machinery repair 192,000
Rent and insurance 1,392,000
Motor vehicle running expense 1,440,000
Admin staff salaries 3,720,000
Admin expenses 1,080,000
Sales and distribution staff salaries 1,560,000
Capital at 1st January 2011 14,640,000
Sundry debtors 1,980,000
Sundry creditors 1,344,000
Bank balance 1,020,000
Drawings 720,000

Additional information
1. Depreciation for plants and machinery and motor vehicles is 10% and 8% respectively
on cost
2. Light and power charges accrued at 31st July 2006 amounted to shs.120, 000 &
insurance prepaid amounted shs.96, 000
3. Stocks were valued at cost at 31st July 2006 as follows.
Raw materials 840,000
Finished goods 1,200,000
Work in progress 1,476,000
4. 2/3 of light & power, rent& insurance are to be allocated to factory cost and 1/3 to the
general
administration cost

44
DAA 101 - INTRODUCTION TO ACCOUNTING II

5. Motor vehicle cost are to allocated equally to the factory cost and general admin
6. Value of production transferred from manufacturing account to Statement of Financial
Performance
is sh.11,400,000 and loose tools are valued at sh.600,000 at year end.
Required;
1. Manufacturing and trading profit and loss a/c as at 31st July 2006.

Suggested solution

Sh.
Raw materials 5,160,000
Less: Closing stock raw materials (840,000)
Cost of raw materials consumed 4,320,000
Add: Other direct costs
Direct factory wages 4,680,000
Prime cost 9,000,000
Add: Production cost
Light and power 2/3 x (600,000+ 120,000) 720,000
Rent and insurance 2/3 x (1,392,000 - 96,000) 1,296,000
Motor vehicle running expenses 1/2 x 1,440,000 720,000
Depreciation on motor vehicle 1/2 x 8% x 3,600,000 144,000
Indirect factory wages 960,000
Machinery repair 192,000
Depreciation on loose tools 10,800,000 - 600,000 480,000
Depreciation on plant and machinery 10% x 7,200,000 720,000
Cost of production 14,232,000
Less: Closing stock work in progress (1,476,000)
Total cost of production 12,756,000
Total cost of production c/d 11,400,000
Sales 20,400,000
Less: Cost of sales
Cost of production b/d 11,400,000
Less: Closing stock finished goods (1,200,000) (10,200,000)
Gross profit 10,200,000
Less: Expenses
Light and power 1/3 x (600,000+ 120,000) 240,000
Rent and insurance 1/3 x (1,392,000 - 96,000) 432,000
Motor vehicle running expenses 1/2 x 1,440,000 720,000
Depreciation on motor vehicle 1/2 x 8% x 3,600,000 144,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Administration staff salaries 3,720,000

Administration expense 1,080,000
Salaries and distribution staff salaries 1,560,000 (7,896,000)
Net profit 2,304,000

Illustration four
Sabuni Ltd. is a medium-sized factory producing a soap branded “Malaika”. The
following trial balance was extracted from the books of the company as at 31 December
2009:

Shs.’000’ Sh.’000’
Ordinary share capital 100,000
10% preference share capital 40,000
15% debenture 20,000
Share premium 2,000
General premium 6,000
Retained profits 900
Sales 116,400
Purchases of raw materials 24,800
Inventory (1 January 2009):
Raw materials 1,300
Work-in-progress 4,770
Finished goods (90,000 units) 8,100
Land 100,000
Buildings at cost 60,000
Provision for depreciation 6,000
Plant and machinery at net book value 4,600
Interest on debentures 1,500
Direct labour 10,800
Carriage inwards 100
Purchases returns 200
General factory costs 1,600
General administrative expenses 20,000
Electricity and water expenses 2,000
Insurance 1,800
Royalty expenses 2,300
Selling and distribution costs 8,200
Provision for unrealized profit 1,350
Bank balance 24,000

46
 DAA 101 - INTRODUCTION TO ACCOUNTING II

Motor vehicles at cost (for salesmen) 8,000

Provision for depreciation 2,000
Interim dividend paid to preference shareholders 2,000
Trade payables 5,150
Trade receivables 14,130 ----------
300,000 300,000
======== ========

Additional information:
i. Inventories as at 31 December 2009 were valued as follows:
Shs.’000’
Raw materials 1,500
Work-in-progress 3,100
ii. Depreciation is to be provided annually as follows:
Building at 10% based on cost.
Motor vehicles at 25% based on cost
Plant and machinery at 30% using the reducing balance method.
iii. The company apportions expenses between factory and administration in the following
ratios:
Factory Administration
Depreciation on building 80% 20%
Electricity and water 60% 40%
Insurance 75% 25%
iv. Sabuni Ltd. produced 600,000 units and sold 582,000 units during the year. Assume
finished goods were sold on a first-in-first-out basis.
v. Finished goods are transferred to the warehouse at cost plus a mark-up of 20%.
vi. As at 31 December 2009, six months’ interest on the 15% debentures was outstanding
while accrued direct labour costs amounted to Sh.400, 000.
vii. The directors propose to pay the preference shareholders a final dividend. In addition,
the directors propose to pay the ordinary shareholders a dividend of 15% per share after the
transfer of Sh.4, 000,000 to the general reserve.
viii. Corporation tax is estimated at Sh.9, 900,000.

Required:
a) Manufacturing account and income statement for the year ended 31 December
2009. (16 marks)
b) Statement of financial position as at 31 December 2009 (4 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Suggested solution

Sabuni Ltd
Manufacturing, Trading, Profit and loss account
For the year ended 31 December 2009
Cost of raw materials Sh. '000' Sh. '000' Sh. '000'
Opening stock raw materials 1,300
Add: Purchases 24,800
: Carriage inwards 100
Less: purchase returns (200)
: Closing stock raw materials (1,500)
Raw materials consumed 24,500
Add: Direct costs
Direct labour 11,200
Royalties paid 2,300
Prime cost 38,000
Add: Production overheads
Depreciation on building 4,800
Electricity and water 1,200
Insurance 1,350
Depreciation plant and machinery 1,380
General factory costs 1,600 10,330
Total cost of production 48,330
Add: Opening stock w-i-p 4,770
Less: Closing stock W-I-P (3,110)
Manufacturing costs 50,000
Manufacturing profit 20% x 50000 10,000
Transfer price c/d 60,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Sales 116,400
Opening stock finished goods 8,100
Add: Transfer price b/d 60,000
Less: Closing stock finished goods (10,800) (57,300)
Gross profit 59,100
Manufacturing profit 10,000
69,100
Less: Expenses
Depreciation: Buildings 1,200
: Motor vehicle 2,000
Water and electricity 800
Insurance 450
General administration expenses 20,000
Selling and distribution costs 8,200
Debenture interest 3,000
Increase in provision for profits
(10,800/60,000 x10,000)-1,350 450 (36,100)
Net profit 33,000
Retained profit b/d 900
24,000
Preference shares; Interim 2,000
: Final 2,000 (4,000)
20,000
Less: Ordinary dividend (15,000)
5,000
Less: transfer to general reserve (4,000)
Retained earnings c/d 1,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Sabuni Ltd
Statement of Financial Position
As at 31 December 2009

Acc.
Non -current assets Cost Dep N.B.V
Land 100,000 100,000
Building 60,000 12,000 48,000
Motor vehicles 8,000 4,000 4,000
Plant and machinery 4,600 1,380 3,220
155,220
Current assets
Closing inventory Raw materials 1,500
Work in Progress 3,100
Finished goods (10,800 -1800) 9,000
Trade receivables 14,130
Bank balance 24,000 51,730
206,950
Capital and liabilities:
Ordinary share capital 100,000
10% Preference share capital 40,000
Share premium 2,000
General reserve (6,000+ 4,000) 10,000
Retained earnings 1,000
153,000
Liabilities:
Non -current liabilities
15% debentures 20,000
Current liabilities
Tax payable 9,900
Trade payable 5,150
Accrued debenture
interest 1,500
Accrued direct labour 400
Proposed: pref. dividend 2,000
Ordinary dividend 15,000 33,950
206,950

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DAA 101 - INTRODUCTION TO ACCOUNTING II

3.5 Activities
Activity 1
The following trial balance was extracted from the books of Ustawi industries as at
30 September 2011 was as follows:
Sh’000’ Sh”000’
Freehold building at cost 12,600
Plant and machinery at cost 8,640
Motor vehicles at cost 2,196
Provisions for depreciation (1 October 2010):
Freehold building 1,890
Plant and machinery 3,456
Motor vehicles 1,3176.6
Inventories as at 1 October 2010:
Raw materials 1,058
Work in progress 1,800
Finished goods 3,820
Sales 76,536.4
Purchase of raw materials 35,564
Discounts allowed 936
Discounts received 450
Manufacturing wages 8,298
Rent, rates and insurance 1,386
Salaries 9,216
Carriage inwards 684
Water and electricity 4,842
Capital (1 October 2010) 16,000
Carriage outwards 846
Provision for doubtful debts 900
Accounts payable 3,310
Accounts receivable 7,110
Bank balance 4,864
103,860 103860
Additional information:
1. Inventories as at 30 September 2011 were value as follows:
Raw materials 1,022,000
Work in progress 1,924,000
Finished goods 4,200,000
2. Prepaid insurance as at 30 September 2011 amounted to sh.36, 000 while the
electricity bill outstanding at the end of the financial period was sh.120, 000.
3. Bad debts of sh.90, 000 are to be written off during the year and provision for
doubtful debts is to be adjusted to sh.720, 000
4. Depreciation is to be provided on a straight line basis as follows:
Asset Rate per annum
Freehold building 21% 51
Plant and machinery 10%
Motor vehicles 20%
No depreciation is to be charged in the year of disposal.
7. The following expenses are to be apportioned between factory and
 DAA 101 - INTRODUCTION TO ACCOUNTING II

3.5 Activities
Activity 2
Jahidi Ltd was incorporated in the year 2010 and specializes in the manufacturing of electric
cables branded “Nyaya “.The following trial balance was extracted from the books of the
company as at 30 April 2012.

Sh. Sh.
''000'' ''000''
Inventories (1st May 2011)
Raw
Materials 6,000
Work in
progress 7,000
Finished
goods 8,000
Purchase of raw materials 82,000
Sales 184,700
Trade receivables and payables 9,000 6,000
Bank balance 5,200
Carriage inwards 3,000
Direct labour 16,000
Provision for unrealized
profit 1,600
Electricity and water 9,600
rates and
insurance 5,200
Distribution costs 2,000
administration expenses 1,880
Land (Cost) 45,000
Buildings (Cost) 125,000
Plant and machinery (Cost) 20,000
Motor vehicles 16,000
Equipment
(Cost) 10,000
Accumulated depreciation (1st May 2011)
Buildings 5,000
Plants and machinery 8,000
Motor
vehicles 4,000
Equipments 6,000
15% debentures 8,000
Interest on debenture paid 1,200
Ordinary shares of Sh. 20
each 100,000
Share premium 10,000
Retained
earnings 38,780
DAA 101 - INTRODUCTION TO ACCOUNTING II

3.5 Activities
Activity 3
The following are trial balance was extraverted from the books of Mali L.t.d, a
manufacturing company, as at 31 December 2010
Sh.'000' Sh. '000'
Inventory as at 1 January
2010
Raw materials 21,000
Finished goods 38,900
Work in progress 13,500
Wages: Direct 180,000
: Fctory 145,000
Sale of scrap materials 35,000
Royalties 7,000
Cariage inwards 3,500
Purchase of raw materials 370,000
Machinery (Cost Sh.
280,000,000) 230,000
Computers (Cost Sh.
20,000,000) 12,000
General factory expenses 31,000
Lighting 7,500
Factory power 13,700
Sales 1,000,000
Administrative salaries 44,000
Sales representative salaries 30,000
Commision on sales 11,500
Rent 12,000
Insurance 4,200
General administrative
expenses 13,400
Bank charges 2,300
Discounts allowed 4,800
Carriage outwards 5,900
Accounts payable 64,000
Ordinary share capital (Sh. 10 each) 360,000
10% debentures 60,000 3
Buildings 111,000
Accounts receivable 142,300
Balance at bank 76,800
Cash in hand 1,500
 DAA 101 - INTRODUCTION TO ACCOUNTING II

3.6 Self - Test Questions

Question One
Using the information provided below, prepare a manufacturing and a trading account for Wiener Ltd as
at 31 December 2009.
Inventory 1 January 2009
Raw materials 160,000
Partly finished goods 176,000
Finished goods 85,000
Inventory 31 December 2009
Raw materials 150,000
Partly finished goods 130,000
Finished goods 140,000
Purchase of raw materials 900,000
Carriage on raw materials 85,000
Salaries and wages- Factory (Including 351,700 for management and
930,500
supervision
Rent and business rates (3/4 works, 1/4 office) 150,000
Salaries and wages: General office 154,350
Lighting and heating (7/8 works, 1/8 office) 95,000
Repairs to machinery 79,150
Depreciation to machinery 45,000
Factory direct expenses 80,000
Insurance of plant and machinery 76,670
Sales 3,347,540
Sales and distribution salaries 220,130
Advertisement costs 187,450

54
DAA 101 - INTRODUCTION TO ACCOUNTING II

3.7 Summary

In this lecture you have learnt that:

1. In manufacturing enterprise, manufacturing accounts is prepared in addition to

trading profit and loss account
2. Manufacturing enterprise has the following inventories
Raw materials
Work-in- Progress
Finished goods

3.8 Suggestion for further reading

Students are required to review the questions provided and questions in the reference
books provided in this manual

55
DAA 101 - INTRODUCTION TO ACCOUNTING II

LECTURE FOUR: ACCOUNTING FOR NONPROFIT MAKING

ORGANIZATIONS/ NON PROFIT MAKING ENTITIES

4.1 Introduction
This lecture introduces you to accounting for nonprofit making organizations/ non -profit
making entities. It requires knowledge on non-profit organizations’ operations

4.2 Specific objectives:

At the end of the lecture you should be able:

1) To explain the meaning of non -profit making entities
2) To identify the various sources of income for non- profit making entities
3) To explain the difference between the receipts and payments account from
the income and expenditure accounts
4) To determine income from subscriptions account
5) To prepare financial statements of non- profit making entities

4.3 Lecture Outline

4.3.1 Title Introduction to non-profit making entities

4.3.2 Title Receipts and payments account
4.3.3 Title Income and expenditure account
4.3.4 Title Sources of Income for Non- Profit Making Entities

4.4 Lecture
4.3.1 Introduction to non-profit making entities
Many organizations are established to provide services to their members or the public in
general but not for the purpose of making profits for example sports and social clubs,
hospitals, charitable institutions, professional associations etc.
Although nonprofit making organizations charge some specific amounts for the services
rendered, the motive is not to make profits.
As non-profit making organizations are not established for earning profits, the profit and loss
account is not prepared. However, proper accounts must be maintained to safeguard the
interests of the members. The following final accounts are prepared
Receipts and payments account
Income and expenditure account
Statement of financial position

4.3.2 Receipts and payments account

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Receipts and payments account is a summary of actual cash received and paid during the
period. It is a summarized version of the cash book

4.3.3 Income and expenditure account

This is the equivalent of the profit and loss account of a non- trading organization. All the
incomes and expenses are presented on this statement. The excess of incomes over
expenses is known as a surplus, while the expenses over incomes are known as a deficit.

Differences between receipts and payments account and income and expenditure
account

Receipts and payments account Incomes and expenditure account

1. Deals with both capital and revenue 1. Deals with only revenue items
items
2. Prepared under the cash basis of 2. Prepared under accrual basis of
accounting(records cash received or accounting(recognizes incomes
paid irrespective of the period to when earned and expenses when
which it relates) incurred)
3. Deals with cash items only 3. Deals with both cash and non-cash
items e.g depreciation
4. It is a real account 4. It is a nominal account

4.3.4 Sources of Income for Non- Profit Making Entities

(a) Legacy is the amount received by the concern at the will or death of the donor. It is
normally considered as a capital receipt therefore credited to the accumulated fund
account.

(b) Donations these are amounts received as a gift from different sources. Donations may be
treated in the following two ways:
i. Donations received for general running expenses may be recognized as incomes
in the income and expenditure account
ii. Large amounts of donations for the purchase of capital items are capitalized, that
is added to accumulated fund.
Life membership fees these are amounts paid by members in lieu (instead of) annual
subscriptions. They may be treated in the following three ways:
i. the fees may be spread over a reasonable period e.g 10 years
ii. when the life membership fees are in small amounts and received regularly, they
can be credited to the income and expenditure account
iii. They may be treated as capital receipts and in this case credited to accumulated
fund account

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DAA 101 - INTRODUCTION TO ACCOUNTING II

(c) Subscriptions Members of a non trading concern are required to pay annual
subscriptions as the main source of revenue to enable it achieve its objectives
Subscriptions are credited to income and expenditure account. Annual subscriptions are
accounted for on accrual basis
Subscriptions account 2012
Arrears b/d xx Advance b/d xx

Income &Expenditure xx Bank -For 2011 (arrears) xx

- For2012 xx
- For 2013 xx
Advance c/d xx Arrears c/d xx

Illustration 1
Jikaze mothers union had 50 members as at 1 January 2010 4 Members had their
subscriptions in arrears while five had paid their subscriptions in advance. During the
years, they admitted 10 new members. By the end of the year 7 members had paid annual
subscriptions for the year 2011. The organization collected Sh. 108,000 in total from the
members in the course of the year. Given that the annual subscription per member is Sh.
2000, prepare the subscriptions account

Dr Subscriptions A/c Cr
Sh. Sh.
Arrear b/d 8000 Advance b/d 10,000
(4X2) (5X2)
Income and Expenditure 120,000 Bank 108,000
Advance c/d 14,000 Arrears c/d 24,000
(7X2) (bal Fig)

(d) Entrance fees They are paid by every member only once on admission and usually
treated as income item hence credited to income and expenditure account.

(e) Honorarium Persons may be invited to deliver public lectures or artists may be
invited to give their performances. Payments to such invitees are known as honorarium and
are debited to income and expenditure account.

Preparation of the income and expenditure account

All the expenditure items are debited while all incomes are credited. This statement is
prepared on accrual basis of accounting.
Note: expenditure incurred to earn a specific income should be netted off against that
income and the net amount transferred to the income and expenditure account.

Accumulated fund

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DAA 101 - INTRODUCTION TO ACCOUNTING II

This is the capital of a non-profit making organization. Members do not contribute any
capital rather it accumulates as a result of surpluses from the income and expenditure
account and capital receipts. A deficit from the income and expenditure account will
reduce the accumulated fund balance.
A statement of affairs is prepared to determine the accumulated fund balance.

Accumulated fund= Assets- Liabilities

Illustration one

A treasurer of a football club has presented the following receipts and payments accounts to
an accountant.
Lions foot ball club
Receipts and payments account for the year ended 31 December 2006 Sh. ‘000’

Receipts shs 000 Payments shs 000

Bank balance at
1.1.2006 2,148.4Payments to creditors 158,342
Subscriptions wages:
-Grounds man &
For 2005 (arrears) 5,740 assistant 81,749.9
For 2006 58,835 -Bar man 35,358.4
For 2007
(advance) 4,920 Bar expenses 959.4
Bar sales 251,248 Repairs to stands 3,034
Donations received 3,280 Ground up keep 7,498.9
Secretary's expenses 3,845.8
Transport cost 9,922
Bank balance
31.12.2006 25,461
326,171. 326,171.
4 4

Additional information
31.12.2005 31.12.2006
1. Stocks in bar at cost 18,433,600 22,787,800
Owing for bar suppliers 13,505,400 17,794,000
Bar expenses owing 922,500 1,377,600
Transport cost -- 1,086,500
2. The land and football equipment were valued at 31 December 2005 at Sh. 164,000,000,
and
Sh. 82,000,000 respectively. Football equipments are to be depreciated by 10% p.a
3. The Motor vehicles at 31 December 2005 was valued at Sh. 10,250,000 and is to be

59
DAA 101 - INTRODUCTION TO ACCOUNTING II

depreciated at 20% p.a

4. Subscriptions owing by members amounted to Sh. 5,740,000 on December 2005 and Sh.
7,175,000 on 31 December 2006.
Required
i. Subscriptions account
ii. Bar Statement of Financial Performance
iii. Income and expenditure account
iv. Statement of affairs account to show accumulated fund
v. Statement of Financial Position 31 December 2006
(20 Marks)

Suggested Solution
Lion’s football Club
Bar Statement of Financial Performance
For the year ended 31 December 2007
Sh. '000'
Sales 251,248
Less: Cost of sales
Opening inventory 18,433.60
Add: Purchases 162,630.60
-
Less: Closing stock -22,787.80 158,276.40
Gross profit 92,971.60
Less: Expenses
Bar expenses 1,414.50
Bar man's wages 35,358.40 -36,772.90
56,198.70

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Lion’s football
Club Income and
expenditure
Account
For the year
ended 31st
December 2007

Incomes: Sh. '000'

Subscriptions 66,010
Bar profit 56,198.70
Donations received 3,280
125,488.70
Less: Expenditures
Wages -Grounds man and assistant 81,749.90
Repairs to football equipments 3,034
Ground upkeep 7,498.90
Secretary expenses 3,845.80
Transport costs (9,922 + 1,086.5) 11,008.50
Depreciation: Stands 8,200
: -
Equipment 2,050 10,250 117,387.10
Surplus of income over expenditure 8,101.60

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Lion’s football club

Statement of affairs
As at 31 December 2005

Non Current assets Sh. '000'

Land 164,000
Football equipment 82,000
Motor vehicle 10,250
256,250
Current assets
Stock in bar 18,433.60
Debtors (Subscriptions) 5,740
Cash at bank 2,148.40
26,322
Less: Current liabilities
Creditors 13,505.40
Bar expenses owing 922.5 (14,427.90) 11,894
Net assets 268,144
Financed by
Accumulated funds 268,144

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Lion’s football club

Statement of financial position
As at 31 December 2006
Non Current assets
Land 164,000 164,000
Football equipment 82,000 8,200 73,800
Motor vehicle 10,250 2,050 8,200
256,250 246,000
Current assets
Stock in bar 22,788
Debtors (Subscriptions) 7,175
Cash at bank 25,461
55,424
Less: Current liabilities
Creditors 17,794.00
Bar expenses owing 1,377.60
Transport cost owing 1,086.50
Subscriptions in advance 4,920 (25,178.10) 30,246
276,246
Financed by:
Accumulated fund 268,144.10
Add: Surplus of income over expenditure 8,101.60
276,245.70

Workings

Subscriptions a/c Sh. '000'

Owings b/d 5,740 Prepayments b/d -
Bank a/c : For 2006 5,740
Income and expenditure a/c 66,010 : For 2007 58,835
: For 2008 4,920
Prepayment c/d 4,920 Owings c/d 7,175
76,670 76,670

Trade payables control a/c

Cash 158,342 Bal b/d 13,505.40

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 DAA 101 - INTRODUCTION TO ACCOUNTING II

Bal c/d 17,794 P & l a/c 162,630.60

176,136 176,136

Bar expenses a/c

Cash 959 Bal b/d 922.5
Bal c/d 1,377.60 P & l a/c 1,414.50
2,337 2,337

Illustration two

The Kenya Football Club prepares its annual accounts as at 31 May each year.
The following receipts and payments accounts for the year ended 31 May 2009 has been
prepared by the treasurer:
Balances at 1 June 2008:
Sh.
Cash in hand 15,000 Bar purchases 2,827,500

Cash in bank: Wages 459,000

Current account 394,500 Rent and rates 276,000

Fixed deposits 877,500 Lighting and heating 214,500

Entrance fees. 81,000 New mower net of trade in 180,000

value of Sh.60,000
Subscriptions: General expenses 198,000

31 May 2008 45,000 Catering expenses 120,000

31 May 2009 861,000 Additional furniture 690,000

31 May 2010 66,000 Balances at 31 May 2009
Bar takings 3,427,500 Cash in hand 12,000
Interest on deposits 39,000 Cash at bank:

Catering receipts 180,000 Current account 264,000

Fixed deposits 745,500

5,986,500 5,986,500

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DAA 101 - INTRODUCTION TO ACCOUNTING II

The following information is also given:

The book values of fixed assets on 31 May 2009 were furniture and fittings Sh.594, 000
(cost Sh.660, 000) and mower Sh.30, 000 (cost Sh. 180,000
The current assets and liabilities were as follows:

31 May 2008 31 May 2009

Sh. Sh.
Bar stocks 313,500 267,000
Amount owed to the brewery 279, 000 222,000
Due for rent 18,000 39,000
Due for water 13,500 16,500
Subscriptions in arrears 45,000 75,000
During the year, the steward commenced to provide refreshments at the bar and it has
been agreed that in the annual accounts, provision be made for the payment to him of a
bonus of 40% of the gross profit arising from this catering venture
Depreciation of furniture and fittings is to be at a rate of 10% on cost. No depreciation is
to be provided new mower but a full year depreciation is to provided on a new furniture

Required
a. A statement showing the accumulated fund of the club as at June 2008 (5marks)
b. An income and expenditure account for the years ended 31 May 2009
(8marks)
c. A Statement of Financial Position 31 May 2009. (7marks)
(Total: 20 marks)

Suggested solution

KENYA FOOTBALL CLUB

STATEMENT OF AFFAIRS
AS AT 1 JUN 2008
Assets Sh. Sh.
Furniture and fittings 594,000
Lawn mower 30,000
624,000
Current Assets
Bar inventory 313,500
Subscriptions in arrears 45,000
Cash at bank: current 394,500
Fixed deposit 877,500

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Cash in hand 15,000 1645,500

2269,500
Liabilities
Amount owed to brewery 279,000
Rent in arrears 18,000
Water due 13,500 (310,500)
Accumulated fund 1 June 1998 1959,000

KENYA FOOTBALL CLUB

INCOME AND EXPENDITURE ACCOUNT
FOR THE YEAR ENDED 31 MAY 2009
Incomes Sh. Sh.
Subscriptions W1 936,000
Bar & Catering income W2 646,500
Gain on disposal of lawn mower W3 30,000
Entrance fees 81,000
Interest on deposits 39,000
1732,500
Expenditure
Rent and rates W4 297,000
Water W5 3,000
Wages 459,000
Lighting and heating 214,500
Depreciation: Furniture W6 135,000
General expenses 198,000 1306,500
Surplus 426,000

KENYA FOOTBALL CLUB

STATEMENT OF FINANCIAL POSITION
AS AT 31 MAY 2009
Noncurrent assets Sh. Sh.
Furniture W7 1149,000
Lawn mower W8 240,000
1389,000
Current Assets
Bar inventory 267,000
Subscriptions in arrears 75,000
Cash at bank: Current 264,000
Fixed 745,500
Cash in hand 12,000 1363,500
2752,500
Accumulated fund and liabilities
Accumulated fund bal b/d 1959,000
Surplus 426,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Accumulated fund bal c/d 2385,000

Liabilities
Current liabilities
Bar payables 222,000
Accrued rent 39,000
Accrued water 16,500
Bonus payable 24,000
Subscriptions in advance 66,000 367,500
2752,500

W1.
Subscriptions a/c
Sh. Sh.
Arrears b/d 45,000
Bank 2008 45,000
2009 861,000
2010 66,000
Income and expenditure 936,000

Advance c/d 66,000 Arrears c/d 75,000

W2
BAR TRADING ACCOUNT
Sh. Sh.
Bar takings 3427,500
Catering receipts 180,000
3607,500
Opening inventory 313,500
Purchases 2770,500
Closing inventory 267,000 (2817,000)
Gross profit 790,500
Catering expenses (120,000)
Bar and catering profit 670,500
Bonus(40% of 180-120) (24,000)
Net profit 646,500
W3
Mower disposal
Trade in value 60,000
NBV (30,000)
Gain 30,000

W4 Rent expense a/c Cr

Sh. Sh.

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Accrued b/d 18,000

Bank 276,000
Income and 297,000
expenditure
Accrued c/d 39,000

W5 Dr. Water expense Cr

Sh. Sh.
Accrued b/d 13,500
Income and expenditure 3000
Accrued c/d 16,500

W6 Depreciation Furniture
660,000 + 690,000 = 1350,000 X 10% = 135,000
W7
NBV Furniture 594,000 + 690,000 - 135,000 = 1149,000

Illustration three
The following is the receipts and payments account of the Bull and Push Club for the
year ended 31 December 2010:
Sh. Sh.
Opening bank balance 11,934 Bar purchases 518,778
Entrance fees 4,914 Wages 48,672
Subscriptions: 2009 2,925 Rent 21,762
2010 305 Heating and lighting 14,976
2011 35,685 Postage and stationery 3,861
Bar Sales 611,559 Insurance 2,106
Sale of investments 87,750 General expenses 5,382
Payments on account of
new furniture 52,650
Closing bank balance 90,675
_____
758,862 758,862

Additional information is provided as follows:

i. 31 December 2009 31 December

2010

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Bar inventory, at cost 31,824 36,855

Creditors for bar purchases 4,212 41,886
Outstanding rent expense 2,106 4,212
Accrued lighting expense 1,872 2,223
Accrued subscriptions 2,925 4,680
Prepaid insurance expense 585 819

ii. On 31 December 2009, the club held investments which cost Sh.58, 500. During the
year ended 31 December 2010, these were sold for Sh.87, 750.
iii. Furniture was valued at Sh.35, 100 on 31 December 2009. On June 2010, the
club purchased additional furniture at a cost of Sh.60, 840. Depreciation of all
furniture is to be provided for at the rate of 10% per annum.

Required:
(a) Prepare an income and expenditure account for the year ended 31 December 2010
(12 Marks)
(b) Statement of Financial Performance as at 31 December 2010 (8 Marks)

Suggested Solution:
Bull and Push Club
Accumulated Fund As at 31 December 2009
Assets Sh. Sh.
Inventory 31,824
Accrued subscriptions 2,925
Prepaid insurance 585
Investments 58,500
Furniture 35,100
Balance at bank 11,934
140,868
Liabilities
Creditors 35,802
Accrued - Rent 2,106
- Lighting 1,872 (39,780)
Accumulated fund 101,088

Creditors
Sh. Sh.
Receipts and payments 518,778 Balance b/d 35,802
Balance c/d 419,328 Purchases 524,862
560,664 560,664

Subscriptions
Sh. Sh.

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Balance b/d 2,925 Receipts & payments 42,705

Income & expenditure 40,365
Balance c/d 4,095 Balance c/d 4,680
47,385 47,385

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Bull and Push Club

Bar, Trading Account for the year ended 31 December 2010
Sh. Sh.
Sales 611,559
Less: Cost of Sales
Opening inventory 31,824
Purchases 524,862
556,686
Less closing inventory (36,855) (519,831)
Gross profit to income & expenditure a/c 91,728

Bull and Push Club

Income and Expenditure Account for the year ended 31 December 2010
Sh. Sh.
Profit from bar trading 91,728
Entrance fees 4,914
Subscriptions 40,365
Profit from sale of investments 29,250
166,257
Expenditure
Wages 48,672
Rent 23,868
Heating and lighting 15,327
Postage and stationery 3,861
Insurance 1,872
General expenses 5,382
Depreciation - furniture 6,552 (105,534)
Surplus 60,723

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Bull and Push Club

Statement of Financial Position as at 31 December 2010
Non current Assets Sh. Sh. Sh.
Furniture 95,940 (6,552) 89,388

Current Assets
Inventory 36,855
Subscriptions due 4,680
Prepaid expense 819
Cash at bank 90,675
133,029
Current liabilities
Creditors 46,566
Prepaid subscriptions 4,095
Accrued expenses 6,435
Creditors fixtures 8,190 (60,606) 72,423
161,811
Accumulated fund b/f 101,088
Add surplus 60,723
161,811

Illustration four
The trial balance shown below was extracted from the books of Graduate Studies School as
at 30 June 2010
Sh. Sh.
Balance at bank: current account 942,240
Accumulated fund 31 May 2009 7,502,260
Land and buildings, at cost 4,810,000
Debtors for subscription 80,600
Motor vehicles 2,436,200
Provision for depreciation of motor 369,200
vehicles
Subscriptions 1,886,040
Lecturer’s fees 1,196,000
Lecturer’s travel and accommodation 465,400
expenses
Donations 140,400
Plants and equipment repairs 22,100
Plants and Equipments 247,520
Depreciation of plants and equipment 70,720
Rates and water 360,100
Lighting and heating 477,360
Rental of rooms 643,500
Wages - Caretaker 1,144,000
- Restaurant 2,080,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

- Bar staff 1,040,000

Purchase of food 2,035,540
Inventory - bar 31 May 2009 615,680
Bar receipts 5,241,600
Bar purchases 3,694,600
Restaurant receipts 4,734,600
Loan 2,080,000
Deposit account - bank 1,300,000
Interest payable and receivable 46,800
Creditors for bar and food ________ 231,920
22,947,340 22,947,340
Additional information:
i. Inventory at bar was valued at Sh. 835,640 as at 31 June 2010.
ii. It is expected that, of the debtors for subscriptions, Sh. 56,680 will not be collectable.
iii. The interest account is net. The loan is at a concessional rate of 4% while 10% has
been earned on the deposit account. No changes have taken place all year in the
principal sums involved.
iv. An invoice for Sh. 55,900 of wine had been omitted from the records at the close of
the year although the wine had been included in the bar inventory valuation.
v. Depreciation for the year is to be provided as follows:
Motor vehicles Sh. 252,200
Plants and equipments Sh. 24,700
Required:
(a) Bar and restaurant trading account for the year ended 31 June 2010 (5 Marks)
(b) An income and expenditure account for the year ended 31 June 2010 (10 Marks)
(c) Statement of Financial Position as at 31 June 2010 (5 Marks)

Suggested solution:
Graduate Studies School
Bar and Restaurant Trading Account for the year ended 31 June 2010

Sh. Sh.
Sales 9,976,200
Less cost of sales
Opening inventory 615,680
Add purchases 5,786,040
6,401,720
Less closing inventory
Profit to the income and expenditure (835,640) (5,566,080)
4,410,120

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Graduate Studies School

Income and Expenditure Account for the year ended 31 June 2010

Income Sh. Sh.

Profit on trading account 1,290,120
Interest on bank deposit account 130,000
Subscriptions 1,885,000
Donations 140,400
Rental of rooms 643,500
4,090,060
Expenditure
Lecturer’s fees 1,196,000
Depreciation on furniture and fitting 252,200
Equipment 24,700
Lecturer’s travel and accommodation 465,400
exp.
Camera repairs 22,100
Rates and water 360,100
Lighting and heating 1,127,360
Caretakers wages 1,144,000
Interest on loan 83,200
Provision for subscription 56,680 (4,081,740)
Surplus 8,320

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Graduate Studies School

Statement of Financial Position as at 31 June 2012

Non current Assets Sh. Sh. Sh.

Land and buildings 4,810,000 - 4,810,000
Fixtures and fittings 2,436,200 (621,400) 1,814,800
Equipment 247,520 (95,420) 152,100
6,776,900
Current assets
Inventory 835,640
Debtors of subscription 23,920
Balance at bank - deposit account 1,300,000
- Current account 942,240
3,101,800
Current liabilities
Creditors (287,820) 2,813,980
9,590,880
Accumulated fund 7,502,560
Add surplus ___8,320
7,510,880
Non current liabilities
4% loan 2,080,000
9,590,880

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 DAA 101 - INTRODUCTION TO ACCOUNTING II

4.5 Activities
Activity 1
(a) State and briefly explain any distinguishing features between receipts and payments
account and the income and expenditure account. (6 marks)
(b) The accountant of Mathare sports club has extracted the following information from the
books of account for the year ended 31 march 2012:
Receipts Sh payments Sh.
Balance brought 288,000 salaries and wages 254,000
Forward New equipment 565,000
Subscriptions: repairs and maintenance 124,000
Year 2010/2011 249,000 office expenses 415,000
2011/2012 2050,000 printing and stationery 168,000
2012/2013 194,000 purchase of beverages 497,000
Dinner dance 723,000 Dinner dance expenses 315,000
Beverage sales 657,000 refund of subscriptions 45,000
Investment income 400,000 sports prizes 25,000
Transport 248,000
Investments 1500,000
Bal c/f 405,000
4561,000 4561,000

Balances as at 31 march 2011 31 march 2012

Furniture and fittings (net) 240,000 --
Equipment (net) 690,000 ---
Investments at cost 3,500,000 _
Subscriptions arrears 300,000 375,000
Salaries accrued 68,000 72,000
Stock of beverages 162,000 184,000
Subscriptions in advance 85,000 _

Additional information
1. Subscriptions in advance are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per
annum on furniture and fittings and equipment respectively
3. Investments which cost Sh 500,000 were sold on 30 march 2012 for sh 625,000.
No entries have been made in the books in this respect

Required
a. Income and expenditure account for the year ended 31 march 2012 (8 marks)
b. Statement of Financial Position 31 march 2012 (6 marks)

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4.5 Activities
Activity 2
The following is the receipts account of “The Professionals’ Club’ for the year ended 30 September
2009:
Sh. Sh.
Receipts '000' Payments '000'
Balance brought down: Honoraria, salaries and wages 4,800
Cash 150 Rates and taxes 1,260
Bank 8,230 Printing and stationery 470
Subscriptions 10,710 Transport and miscellaneous expenses 1,530
Receipts from fetes 2,400 Ground men’s wages 840
Net proceeds from
entertainment 4,270
Expenditure on fetes 2,390
Bank interest 230
Bar purchases 5,770
Bar takings 7,450
Repairs 320
New bus (Less proceeds from sale of an old
bus- Sh. 3 Million) 12,600
33,440 Balance carried down 33,440
Additional information:
1. The professionals Club premises were acquired for sh. 29,000,000. The provision for
depreciation on the premises as at 30 September 2008 amounted to sh. 18,800,000. The old bus
disposed of during the year cost sh.12, 190,000 and the accumulated depreciation as at 30
September 2008 was sh.290, 000.
2. Depreciation to be provided as follows:
Asset Rate per annum
Club premises 5% on reducing balance basis
Bus 15% based on cost
3. The following balances as at 30 September 2008 and 2009 have been provided by the club:

Sh. '000' Sh. '000'

Subscriptions due 1,200 980
Accruals on printing 90 30
Bar inventory 710 870
Accruals for bar purchases 590 430

Required:
(a) Income and expenditure account for the year ended 30 September 2009.
(10 marks)
(b) Statement of financial position as at 30 September 2009. ( 10 marks)
(Total: 20 marks)
 DAA 101 - INTRODUCTION TO ACCOUNTING II

4.5 Activities
Activity 3

(a) Highlight six types of reports that could be generated by an accounting package.(6 marks)
(b) In the context of not-for -profit organizations explain the following terms

(i) Honorarium. (2 marks)

(ii) Subscription. ( 2 marks)
(iii) Legacy. (2 marks)
(c) The following information was obtained from the books of Nairobi water fund for the
financial year ended 30 June 2011:
1. Payment of sh. 3,000,000 was made to the members
2. Administrative salaries amounted to sh. 400,000 while other administrative expenses
amounted to sh. 500,000.
3. Total contributions received from members were sh. 4,800,000.
4. The total investments in the fund amounted to sh. 12,000,000 which earned interest of sh.2,
400,000.
5. On 30 June 2010, the fund account had a credit balance of sh, 10, 800,000, while the
paymaster general account had a debit balance of sh. 2,100,000.

Required:
(i) Income statement for the year ended 30 June 2011. (4 marks)
(ii) Statement of financial position as at 30 June 2011. (4 marks)

(Total: 20 marks)

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 DAA 101 - INTRODUCTION TO ACCOUNTING II

4.6 Self - Test Questions

Question One
(a) Differentiate between receipts and payments account and the income and expenditure
account. (6 marks)
(b) The accountant of a football club has extracted the following information from the books
of account for the year ended 31 march 2012:

Balance brought forward 300,000 Salaries and wages 350,000

Subscriptions: New equipment 565,000
Year 2010/2011 249,000 Office expenses 415,000
2011/2012 2,050,000 Printing and stationery 124,000
2012/2013 194,000 Repairs and maintenance 168,000
Dinner dance 723,000 Purchase of beverages 497,000
Beverage sales 700,000 Dinner dance expenses 315,000
Investment income 441,000 Refund of subscriptions 45,000
Sports prizes 25,000
Transport 248,000
Investments 1,500,000
Bal c/f 405,000
4,657,000 4,657,000
(c)
Balances as at 31 march 2011 31 march 2012
Furniture and fittings (net) 240,000 --
Equipment (net) 690,000 ---
Investments at cost 3,500,000 _
Subscriptions arrears 300,000 375,000
Salaries accrued 68,000 72,000
Stock of beverages 162,000 184,000
Subscriptions in advance 85,000 _

Additional information
1. Subscriptions in advance are written-off after twelve months.
2. Depreciation is provided for on reducing balance method at 10% and 20% per annum on
furniture and fittings and equipment respectively
3. Investments which cost Sh. 500,000 were sold on 30 march 2012 for sh 625,000. No
entries have been made in the books in this respect
Required
a. Income and expenditure account for the year ended 31 march 2012 (8 marks)
b. Statement of Financial Position 31 march 2012 (6 marks)
 DAA 101 - INTRODUCTION TO ACCOUNTING II

4.7 Summary

In this lecture you have learnt that:

1. Non-profit organizations are established to provide services to their members or

the public in general but not for the purpose of making profits
2. The following final accounts are prepared
Receipts and payments account
Income and expenditure account
Statement of financial position
3. Sources of incomes for non-profit organizations comprise legacy fee,
subscriptions, honorarium, special case of trading accounts, donations,
membership fee and entrance fee

4.8 Suggestion for further reading

Students are required to review the questions provided and questions in the reference
books provided in this manual

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DAA 101 - INTRODUCTION TO ACCOUNTING II

LECTURE FIVE: RATIO ANALYSIS

5.1 Introduction
This lecture introduces you to ratio analysis. It requires knowledge on preparation of
financial statement and the stakeholder’s interest on the financial information prepared by al
organization

5.2 Specific objectives:

At the end of the lecture you should be able

1) To explain how the use of ratios can help analyze profitability, liquidity,
efficiency and capital structure of a business
2) To calculate the main accounting ratios
3) To interpret the results of accounting ratios
4) To explain the impact of gearing

5.3 Lecture Outline

5.3.1 Title Types of accounting ratios

5.3.2 Title Profitability Ratios
5.3.3 Title Liquidity Ratios
5.3.4 Title Activity/Efficiency Ratios
5.3.5 Title Valuation/Stock Market Ratios
5.3.6 Title Interpretation of Ratios
5.3.7 Title Advantages of Ratio Analysis
5.3.8 Title Limitations of Ratio Analysis

5.4 Lecture
Introduction

5.3.1 Types of accounting ratios

The accounting rations are classified into the following groups
i. Profitability ration
ii. Liquidity ratios
iii. Activity ratios/ efficiency ratios
iv. Capital structure ratios/Gearing ratios
v. Valuation/ Exchange ratios

5.3.2 Profitability Ratios

Profit has always been taken as an indicator of a successful business. The real test for this
is to evaluate the profit earning capacity of a business in relation to the capital employed.
Profitability ratios are used to measure the ability of the firm to convert sales into profits

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and earn profits on the assets employed. The following ratios can be considered under
this category;

Return on capital employed (R.O.C.E)

=Profit before interest and tax x 100
Capital employed
Capital employed means net capital or long term capital i.e.
Total share capital + reserve + capital loans. It may be also expressed;

Capital employed=fixed assets + current assets - current liabilities

Capital employed can also be arrived at in the following ways;
i. Fixed assets plus current assets commonly called gross capital employed
ii. Fixed assets plus current assets minus current liabilities commonly called Net
- capital employed
iii. Fixed assets plus current assets minus current liabilities and long term
liabilities commonly called shareholders ‘capital employed’ or net worth.

Convention to adopt depends on the purpose for which the return is being calculated. If it is to
assets the earnings for the shareholders, the returns on the share capitals and reserves would be
more appropriate. In assessing the efficiency or an organization as a whole, the return on the
gross or net capital employed would be more appropriate. The return on capital employed
ratio is also known as return on assets.

Return on Investment (ROI)

This measures the return on the proprietors’ investment in the company, being their total
share capital plus the reserves that they indirectly own. Naturally they are interested in the
profits available for distribution, i.e. the post tax profit figure.

ROI= Profit after tax X 100

Total share capital plus reserves

These ratio may also be called as ‘’return on owner’s equity ratio.’’ In this case, it is
expressed under

Return on owners’ equity=Net profit after tax X 100

Owners’ equity

Net profit margin

Net profit margin = Profit before interest and taxation X 100

Sales
Gross profit ratio = Gross profit X 100
Sales
Net profit ratio

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This ratio indicates the percentage of net profit of sales revenue

Net profit ratio = Net profit X 100

Sales
5.3.3 Liquidity Ratios
The liquidity ratios indicate the liquidity position of the company. They measure the
ability of a company to meet its current liabilities as they fall due. If a company has
insufficient current assets in relation to its current liabilities, it might be unable to meet its
commitment and be forced into liquidation. Thus ratios, which compare the relationship
between various groups of current assets and current liabilities, are computed to measure
the liquidity position of the company- such ratios helps in ascertaining the effectiveness
of the working capital management. The following are the important liquidity ratios.

i. Current ratio
Measures current assets against current liabilities

Current ratio= Current assets

Current liabilities

The ratio must be 2:1 in normal situation. But this ratio may be different for different
firms

ii. Quick or acid test ratio

Current assets are by convention listed in the balance sheet in order of increasing
liquidity (i.e. stock, debtors, and cash) for purposes of raising quick cash; stock should
not be regarded as a liquid asset. The quick ratio relates liquid assets (i.e. current assets less
stock) to current liabilities.
Acid test ratio= Current assets-Inventory
Current liabilities
iii. Cash ratio
This is more refined liquidity ratio where only the cash and cash equivalents are
considered. It asses the ability of the firm to pay all the current liabilities in the shortest
time possible and the actual performance of the firm. The ratio is 1:1.

Cash ratio = Cash and cash equivalent

Current liabilities

5.3.4 Capital Structure/Gearing ratio

Capital structure or gearing ratios measure the contribution of financing by owners
compared with the financing provided by the firm’s creditor. These creditors include
preference shareholders, debenture holders and other long term creditors. These ratios
measure the ability of a firm to pay all of its long-term debts. The following are important
capital structure gearing ratios:-

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i. Debt equity ratio

This ratio shows the relationship between the owner’s funds and the borrowed funds. The
larger the portion of funds provided by owners, creditors the lower the risks. It is
expressed s under:-

Debt equity ratio = Total debt

Total owners equity

ii. Gearing ratio

This indicates the proportion of fixed return capital to total capital. It is best indicator of the
financial risk of the firm. It is derived as

Gearing ratio= Fixed charge capital

Total capital

iii. Debt ratio

This indicates the extent to which the assets of the firm have been financed using
borrowed funds. It is arrived as
Debt ratio=Total liabilities
Total assets

5.3.5 Activity/Efficiency Ratios

These ratios are also known as turnover or asset ratios. Activity ratios measure the
efficiency of a firm in employing the available resources. Such ratios reflect the degree of
effectiveness of assets utilization in the business activities. These ratios make comparison
between level of sales and the investment in various assets. A rise in these ratios indicates
that the company is expanding too quickly on its products. The important activity ratios
are the following;

i. Rate of stock turn over

It is calculated by dividing the cost of sales by the average stock held during the year.
The average stock is taken to be the average of opening and closing stock

Rate of stock turn over = Cost of sales

Average stock
ii. Debtor’s ratio
Debtors are divided by sales (excluding cash sales) to obtain the average credit period
allowed to debtors. A factor of 365 is used in order to express the results in day rather than
fraction of a year.

Debtors ratio = Debtors X 365

Credit sales

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The ratio will depend on the particular trade or industry. Students should consider the
effects of a seasonal sales pattern on this ratio.

iii. Credit ratio

Creditors are divided by purchases (excluding cash purchases) to give the average credit
periods for creditors.

Creditors ratio =Creditors X 365

Purchases
Sales/fixed assets ratio
This ratio shows whether the trading value of the company is large enough to justify its
investment in fixed assets
Sales/fixed assets ratio = Sales
Total assets

5.3.5 Valuation/Stock Market Ratios

Investors in the stock exchange use various ratios to make decisions regarding the
purchase of some securities. The ratios help them to make a better choice and compare
the alternative investment. Stock market ratios are also called as shareholders or investors
ratios. These ratios are concerned with the market value of the securities. They are used to
measure the return on investment and determine the future prospects. The stock
markets are given as under;

i. Dividend yield
This measures the real rate of return to ordinary shareholders

Dividend yields = Dividend per share (gross) X 100

Market price of all shares

Or = Gross dividend on all shares X 100

Market price of all shares

It is essential that the dividend yield is not confused with the dividend as a percentage of
the normal value of share. The dividend yield ratio indicates the return of shareholders, in
relation to the market value of the shares. In order to ascertain whether this return is
satisfactory or not, this ratio should be compared with returns on other investment e.g.
interest on fixed deposits. If dividends yield is higher as compared to returns on other
investments then it is satisfactory and vice versa.

ii. Dividend cover

The dividend cover is the number of times the actual dividend could be paid out of
current profits. In addition to dividend paid to ordinary shareholders, some profits are

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retained in the company for growth purposes. The dividend cover also indicates the
proportion of undistributed profit for the year. It is also known as times covered. It’s
calculated as under;

Dividend cover=Net profit after tax and preference dividend

Ordinary dividend (total)
Or
Dividend cover =Earnings per share
Dividendsper share

Dividend cover represents ordinary share dividend cover. A high dividend cover gives the
confidence to the ordinary shareholders that they will get adequate return on their
shareholdings.

iii. Dividends per share (DPS)

The dividend per share is the earnings distributed to the ordinary shareholders divided by the
number of ordinary shares. It is expressed as under
DPS=Earnings distributed to shareholders
Number of shares

iv. Dividend payout ratio

This ratio is calculated as under

Dividend pay out ratio=Dividends per share X100

Earnings per share

This ratio represents the dividends as a percentage of earnings per share. It shows the
company’s retention policy. If dividend pay out ratio is low then the retention percentage is
high and vice versa.

V. Earning per share (EPS)

The total earning per share attributable to ordinary shareholders whether distributed or
retained are shown by the ratio

Earning per share (EPS) =Net profit after tax and preference dividends x 100
Number of ordinary shares
This ratio shows the profitability of the firm on a per share basis. It does show how much is
paid as dividend and how much is retained in the business. EPS over the year indicates
whether or not the company’s profitability per share has changed favourably.

vi. Price/Earnings ratio (P/E)

This ratio relates to the market price of share and earnings per share. The P/E ratio is the
most important yardstick for assessing the relative worth of a share. It represents the
number of years that it would take to get back the current market price.

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P/E ratio=Market price per share X 100

Earning per share

If this ratio is low, it shows that a potential shareholder will get back in a relatively short
period provided there are retentions. A low P/E ratio helps to raise the market price of the
shares in the stock exchange and vice versa.
g) Earnings yield
It shows how much profit has been earned by the market value of the ordinary shares

Earnings yield=Earning per share x 100

Total market price per share

Or
Earnings yield = Total earnings attributable to ordinary shareholders x 100
Total market price per share

This ratio represents the earnings as a percentage to the market price shares. If
this ratio is high then it is considered favorable and vice versa.

5.3.6 Interpretation of Ratios

The interpretation and analysis of accounting or financial ratios are the most difficult
problems. An adequate financial analysis involves more than understanding and
interpretation of each of the individual ratios. The analyst should have enough skills,
insight and experience in the analysis and interpretation of financial statements. The
analyst should also take into consideration the following factors in addition to the
information contained in the financial statements.
General economic conditions of the firm
Risk acceptance
Future expectations
Analysis and interpretation system used by other firms in the industry
Accounting system of the industry

The interpretation of the ratios can be made by comparing them with:-

a) Previous figures - trend analysis
b) Similar firms- inter firm comparisons
c) Target-individual ratio set to meet the objective.

i) Trend analysis
The analyst usually uses historical standards for evaluating the performance of the firm.
The historical standards represent the financial ratios computed over a period of time-
trend.

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The trend analysis provides enough clues to analyst for proper evaluation of the financial
ratios. However, the changes in a firm’s policies over the period must be considered
while interpreting ratios from comparison over time. Further more, the average of the ratios
for several years can also be used for this purpose.

ii) Firm comparison

Inter firm comparisons may claim the comparisons of similar ratios for a number of
different firms in the same industry. Such an attempt would facilitate the comparative
study of financial position and performance of the firms in the industry. The published
ratios of trade associations or financial institutions can be of great help to the analyst in
the interpretation of the financial ratios. However, the variation in the accounting system
and changes in policies and procedures of the firm in the comparison with the industry
have to be taken care of while making use of the inter-firm comparison.

iii) Targets
Under this method, comparing it with the standard set for this purpose makes the
interpretation of the ratio. Such a standard ratio, based upon well proven conventions serves
as measuring scale for the evaluation of the ratios. The best example of such standard is the
1:1 ratio, which is to be considered a good ratio for analyzing acid test ratio. Generally
speaking the use of single standard ratio for the interpretation of the ratios is not much
useful. The according experts usually recommend the use of standard ratios for the
evaluation of financial ratios.

5.3.7 Advantages of Ratio Analysis

The following are the main advantages claimed by ratio analysis

1. It guide the management in formulating future financial planning and policies
2. It throws light on the efficiency of the business organization
3. It permits the comparison of firm’s figures with data for similar firms, and
possibly with industry-wise data. And it permits the data to be measured against
yard sticks of performance or of sound financial condition
4. It ensures effective cost control
5. It provides greater clarity, perspective or meeting to the data, and it brings out
information not otherwise apparent.
6. It measures the profitability and solvency of concern.
7. It permits monetary figures of many digits to be condensed to two or three digits
which enhance the managerial efficiency.
8. It helps in investment decisions

5.3.8 Limitations of Ratio Analysis

In using ratios, the analyst must keep a few general limitations in mind. The main
limitations attached to it are:-
1. It lacks standard values for the ratio, therefore scientific analysis is not possible

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2. As there are no standards with which to compare, it fails to throw light on the
efficiency of any activity of the business.
3. It gives only the relationship between different variables and the actual
magnitudes are not known through ratios.
4. Ratios are derived from the financial statements and natural reflect their
drawbacks
5. It fails to indicate immediately where the mistakes or error lies
6. It does not take into consideration the market and other changes
7. Seasonal factors can upset ratio analysis
8. The basis of asset valuation can be misleading
9. A set of accounts never shows a complete picture of a company’s activities.
10. Ratios vary enormously between different industries

Ratios should not be considered in isolation. These must be considered for inter-firm
comparisons. If the opportunity to engage inter-firm comparison is not available then the
most useful comparison of current ratios is with those of previous years or with budgeted
ratios.

Illustration one
The following financial statements were derived from two similar entities

Profit and loss account XYZ Ltd ABC Ltd

Sales 4,440,000 6,000,000
Less: Cost of sales
Opening Inventory 800,000 640,000
Purchases 1,600,000 2,560,000
2,400,000 3,200,000
Less: Closing inventory (480,000) (1,920,000) (560,000) (2,640,000)
Gross profit 2,520,000 3,360,000
Less: Expenses
Depreciation 40,000 120,000
Wages, Salaries &
commission 1,320,000 1,760,000
Other expenses 360,000 (1,720,000) 280,000 (2,160,000)
Net Profit 800,000 1,200,000

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XYZ Ltd ABC Ltd

Balance Sheet
Fixed Assets
Equipment at Cost 400,000 800,000
Acc. Depreciation (320,000) 80,000 (240,000) 560,000
Current assets
Inventory 480,000 560,000
Trade receivables 1,000,000 800,000
Bank 200,000 100,000
1,680,000 1,460,000
Less: Current liabilities
Trade payables (832,000) 848,000 (804,000) 656,000
928,000 1,216,000
Financed by:
Capitals 608,000 576,000
Add: Net profit 800,000 1,200,000
1,408,000 1,776,000
Less: Drawing (480,000) (560,000)
928,000 1,216,000

Required
Calculate the following ration for each of the business giving a comment on their
differences
i. Gross profit as a percentage of sales
ii. Net profit as a percentage of sales
iii. Expenses as a percentage of sales
iv. Stock turnover
v. Return on capital employed
vi. Current ratio
vii. Acid test ratio
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DAA 101 - INTRODUCTION TO ACCOUNTING II

viii. Debtors/ sales ratio

ix. Creditors/Purchases ratio (20 Marks)

Suggested solution
Details XYZ Ltd ABC Ltd Brief
comment
i. Gross profit/Sales 2,520/4,440 x 3,360/6,000 x 100% XYZ Ltd
x 100% 100% = 56% made more
= 56.8% sales of its
inventory
thus more
profit.
ii. Net profit/Sales x 800/4,440 x 100% 1,200/6,000 x 100% ABC ltd
100% = 18.02% =20% used
relatively
lower
expenses as
compared
to XYZ Ltd
iii. Expenses/Sales x 1,720/4,440 x 2,160/6,000 x 100% More
100% 100% =36% expenses
=38.74% used in
XYZ Ltd
hence
lower
profitability
iv. Cost of 1,920/(800+480)/2 2,640/(640+560)/2 ABC Ltd’s
sales/Average = 3 times = 4.4 times inventory is
stock less idle as
compared
Av. Stock=(Opening to XYZ
+closing stock)/2 Ltd’s
inventory

800/(608+928)/2 x
v. Net profit/Capital 100% 1,200/(576+1,216)/2 There is
employed x 100% =104.17% x 100% more return
=133.93% on capital
C.E= (Opening + Closing invested in
capital)/2 ABC Ltd

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vi. Current 1,680/832 1,460/804 More

assets/Current =2.02:1 =1.82:1 current
liabilities assets are
held in
XYZ Ltd
hence high
profitability
in ABC Ltd

vii. (Current assets- (1,680-480)/832 (1,460-560)/804 XYZ Ltd

inventory)/Current = 1.44:1 = 1.12:1 can easily
liabilities convert its
current
assets into
liquidity as
compared
to ABC Ltd
viii. Trade 1,000/4,440 x 365 800/6,000 x 365 XYZ Ltd
receivables/Sales x = 82 days = 49 days allows its
365 customers a
longer
period of
time to
settle their
debts. This
means that
ABC Ltd
could be
using
stringent
policy.

ix. Trade 832/1,600 x 365 804/2,560 x 365 XYZ Ltd

payables/Purchase = 190 days =115 days takes
s x 365 relatively
long period.
This is
good for
the
company.
However it
can
jeopardize
the

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company’s
future
credit
purchases

Illustration question
You have been provided with the following summarised accounts of Golden Times Ltd. For
the year ended 31 March 2000:

Statement of Financial Position 31 March 2000

Fixed assets: Sh. Sh. Sh.
Freehold property (Net book value) 480,000
Plant and machinery (Net book value) 800,000
Motor vehicles (Net book value) 200,000
Furniture and fittings (Net book value) 200,000
1,680,000
Current Assets:
Stocks 1,000,000
Debtors 400,000
Investments 120,000
1,500,000
Current liabilities:
Trade creditors 238,400
Bank overdraft 878,400
Corporation tax 176,000
Dividends payable 107,200 (1,400,000) 120,000
1,800,000
Financed by:
Authorised share capital - 800,000 800,000
Sh.1 ordinary shares 400,000
Issued and fully paid: 400,000 Sh.1 Ordinary 200,000
shares 800,000
Capital reserve
Revenue reserve 400,000
Loan capital: 400,000 10% Sh.1 Debentures 1,800,000

Profit and loss account for the year ended 31 March 2000
Sh.
Sales (credit) 4,000,000

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Profit after charging all expenses except interest on 440,000

debentures 40,000
Less: debenture interest 400,000
Profit before tax 176,000
Corporation tax 224,000
107,200
Less: ordinary dividend proposed 116,800
Retained profit transferred to revenue reserve

The following additional information was available:

1. The purchases for the year were Sh.2,160,000 while the cost of sales was
Sh.3,000,000.
2. The market price for Golden Times Ltd. Ordinary shares as at 31 March 2000 was
Sh.5
3. The company estimates the current value of its freehold property at Sh.1,100,000.

Required:

(a) Compute the following ratios for Golden Times Ltd.:

Return on capital employed (1 mark)

The profit margin (2 marks)
The turnover of capital (1 mark)
Current ratio; (1 mark)
Liquid ratio; (2 marks)
Number of days accounts receivable are outstanding; (1 mark)
Proprietary ratio; (2 marks)
(i) Stock turnover ratio; ( 1 mark)
(ii) Dividend yield ratio; ( 1 mark)
(iii) Price earnings ratio. ( 2 marks)

(b) Comment on Golden Times Ltd. Liquidity stating the reference points to which
relevant ratios can be compared. (6
marks)
(Total: 20 marks)
(a) Ratio Analysis
(i) Return on capital EBIT x 100 440,000 =24.4%
employed Capital employed x100
1,800,000

(ii) Profit margin = Net profit before interest & tax x 440,000 x = 11%
100 100
Sales 4,000,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

(iii) Turnover of Sales 4,000,000 = 2.2

capital = Capital employed 1,800,000 times

(iv) Current ratio = Current assets 1,520,000 = 1.1:1

Current liabilities 1,400,000

(v) Liquid ratio = Current assets - stock 520,000 = 0.4:1

Current liabilities 1,400,000

(vi) No. of days Debtors x 365 400,000 x = 36½

accounts are Credit sales 365 days
outstanding 4,000,000
(vii) Proprietary ratio Shareholders funds 2,020,000 = 1.12:1
= Liabilities 1,800,000

(viii) Stock turnover = Cost of sales 3,000,000 = 2.11

Average stock 1,420,000 times

(ix) Dividend yield D.P.S x 100 0.268 x 100 = 5.4%

ratio = M.P.S 5

(x) Price earning M.P.S x 100 5 x 100 = 8.9%

ratio = E.P.S 0.56

(b) Liquidity of Golden Times Ltd.

Liquidity can be analysed using the current ratio and liquid ratio. The current
ratio of 1.1:1 is below the standard ratio of 2:1. This can be compared with the
industrial average to assess the performance of Golden times Ltd. For
improvement it can be compared with the same ratio of the previous years.
The liquid ratio 0.4:1 is below standard ratio of 1:1. The implications are that
should Golden Times face liquidation it cannot be able to pay off its current
liabilities when they fall due.

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5.5 Activities
Activity 1
a) Explain three reasons why the amount of cash flow of a business entity
might differ from the profit generated by the business entity during the same
period.
b) The financial statement of Wendani Ltd. For the year ended 31st January
2011 and 31st January 2012 are given below.

Statement of financial position as at 31st January

2011 2,012
Sh. ''000'' Sh. ''000''
Assets:
Non - current assets (net book
value)
Current assets
Inventory 2,000 3,000
Trade receivables 2,500 2,800
Bank balance 500
4,500 6,300
Total assets 15,500 20,300
Equity and liabilities:
Capital and reserves
1,000,000 ordinary shares Sh. 10
each 10,000 10,000
Revenue reserves 3,000 4,100
13,000 14,100

Non - current liabilities

8% debentures 5,000
Current liabilities
Trade payables 1,500 1,200
Bank overdraft 1,000
2,500 1,200
Total capital and liabilities 15,500 20,300

Income statement for the year ended 31 January:

2,011 2012
Sh.'000' Sh.'000'
Sales 20,000 28,000
Cost of sales (15,000) (21,000)
Gross profit 5,000 7,000
Administration expense (3,800) (4,600) 96
Finance costs (400)
1,200 2,000
DAA 101 - INTRODUCTION TO ACCOUNTING II

5.5 Activities
Activity 2
The following information has been supplied by James in respect for the year ended 30 June
2011:
£.
Credit sales 156,000
Cash sales 48,000
Cost of sales 76,000
Total expenses 84,350
Trade receivables at 30 June 2011 16,700
Trade payables at 30 June 2011 9,250

Required
(a) Calculate the following ratios for the year ended 30 June 2011:
(i) Gross profit to sales (%)
(ii) Net Profit to sales (%)
(iii) Debtors payment days
(iv) Creditors payment days (8 Marks)
(b) State the formula for acid test (2 Marks)

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5.6 Self - Test Questions

The following information has been extracted from the accounts of Robin Ltd at
30 September 2012:

Sh.
Revenue (Sales) 400,000
Cost of sales 200,000
Gross profit 200,000
Expenses 140,000
Net profit 60,000

Non-current assets 150,000

Inventory (Stock) 40,000
Trade receivables
(Debtors) 80,000
Cash 5,000 125,000
Total assets 275,000
Share capital 50,000
Retained profit 100,000
150,000
Trade payables
(Creditors) 65,000
Bank overdraft 60,000 125,000
Total equity and liabilities 275,000

In addition, the following ratios were calculated for Robin Ltd at 30 September 2011:
Return on capital employed 25%
Gross profit ratio 40%
Net profit ratio 15%

Required:
(a) Calculate, showing your workings, the following ratios at 30 September 2012:
(i) Return on capital employed (based on end of year capital employed
(ii) Gross profit ratio
(iii) Net profit ratio
(iv) Trade receivables (debtors) payment days. (6 marks)
(b) Compare the profitability of Robin Ltd for 2012 with its profitability for 2011, and
give possible reasons for the changes. (6 marks)
(c) Identify two ways in which Robin Ltd could increase its working capital.
(2 marks)
DAA 101 - INTRODUCTION TO ACCOUNTING II

5.7 Summary

In this lecture you have learnt that:

1. Ratio analysis compares financial statement s of an organization against those

of similar entities or against itself given different financial periods
2. Ratio analysis can be categorized into profitability rations, liquidity ratios,
activity ratios/performance ratios, gearing ratios

5.8 Suggestion for further reading

Students are required to review the questions provided and questions in the reference
books provided in this manual

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LECTURE SIX: CASH FLOW STATEMENTS

6.1 Introduction
This lecture introduces you to cash flow statement analysis. It requires knowledge on
preparation of financial statement and the stakeholders’ interest on the financial
information prepared by al organization

6.2 Specific objectives:

At the end of the lecture you should be able:

1) To define cash flow statements
2) To explain the difference between the cash flow statement and Statement
of Financial Performance
3) To identify the various activities in the cash flow statements
4) To identify various non- cash items used in the Statement of Financial
Performance
5) To generate cash flow statements using both direct and indirect method

6.3 Lecture Outline

6.3.1 Title Definition of Cash flow statements

6.3.2 Title Direct method of cash flow statements (IFRS1)
6.3.3 Title Indirect method of cash flow statement analysis (IAS 7)
6.3.4 Title Advantages of cash flow statements
6.3.5 Title Demerits of cash flow statements

6.4 Lecture
6.3.1 Definition of cash flow statements

These are statements which show change in cash position from one period to another
period in an organization. They can also be defined as additional information to users of
financial statements which shows the movement of cash into and out of an organization. Cash
flow statements assess the ability of an organization to generate and utilize cash thereby
helping determine the liquidity and solvency of an entity.

The following terms re relevant to cash flow statements;

Cash: This is cash in hand and demand deposits

Cash equivalents: These are short term investments which are highly liquid, exposed to
many risks and have insignificant changes in value.

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Cash flow: Represents the flow of cash and cash equivalents into and out of an
organization

Operating activities: These are the principle revenue generating activities and any other
activity other than investing and financing activities

Investing activities: These are activities concerned with acquisition and disposal of long
term assets and other activities other than operating and financing activities

Financing activities: These are activities which result into changes in size and
composition of capital structure of an organization and any other activity other than
operating and investing activity

Cash flow statements analyses the flow of cash in an organization under these activities.
The activities are discussed in details as follows;

Operating activities
These are principle revenue generating activities in an organization and any other activity
other than investing and financing activity. The activities indicate the extent to which an
organization can generate sufficient cash flow without recourse to external sources of
funds. Through operating activities, an organization can generate sufficient cash to repay
its loans, dividends and invest further. The following examples represent operating
activities;
i. Cash receipt from the sale of goods and other services

ii. Cash receipts from royalties, fees, commissions and other revenues

iii. Cash payments to suppliers for goods and services

iv. Cash payments to and on behalf of employees

Investing activities
These are activities of acquisition and disposal of long-term assets and other investments not
included in cash equivalents e.g. making and collecting loans, acquiring and disposal of
debts and equity instruments, property and fixed assets e.t.c. Cash flows arising from
investing activities are;
i. Cash payments to acquire fixed assets

ii. Cash receipts from disposal of fixed assets

iii. Cash payments to acquire shares, warrants or debt instruments of other

enterprises and interests in joint ventures

iv. Cash receipts from disposal of shares, warrants or debt instruments e.t.c

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Financing activities
These are activities which result into changes in size and composition of the capital
structure of an organization. Examples of these activities include
i. Sale of shares

ii. Buy back of shares

iii. Redemption of preference shares

iv. Issue/redemption of debentures

v. Long term loan/payment there-of

vi. Dividends/Interest paid

Cash flow statements analyses movement of cash under the following methods;

i. Indirect method (International Accounting Standards 7)

ii. Direct Method (International Financial Reporting Standards 1)

6.3.2 Direct method of cash flow statements

Cash flow from Operating Activities

Cash receipts from sale of goods/services xx
Cash receipts from royalties xx
Cash receipts relating to future contracts e.t.c xx
Cash payments to suppliers (xx)
Cash payments to employees (xx)
Cash inflow from operating activities (A) xx
Cash flow Investing Activities
Cash receipts from disposal of fixed assets xx
Cash receipts from disposal of shares xx
Cash receipts from advances to third parties xx
Cash payments to acquire new assets (xx)
Cash payments to acquire shares (xx)
Cash advances on loans to third parties (xx)
Cash inflow from Investing Activities (B) xx
Cash flow from Financing Activities
Cash proceeds from issuing of shares xx
Cash proceeds from issuing of debentures, loans e.t.c xx
Cash repayments for amounts borrowed (xx)
Cash inflow from Financing Activities (C ) xx

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Net increase in Cash and cash equivalents for the year A + B + C xx

Add: Cash and cash equivalents at start xx
Cash and cash equivalent at year end xxx

6.3.3 Indirect method of cash flow statement analysis

Indirect method (IAS 7) of cash flow analyses financial statements to adjust the statement of
financial performance against non- cash items.

The non- cash items used in the financial performance statements are items like
depreciation, profit on disposal of fixed assets, loss on disposal of fixed assets, provisions for
incomes or expenses etc. These items either increase or reduce profitability levels of a firm
hence the profit cannot be compared with cash generated.

Under the indirect method, the operating activities are adjusted as shown below. Other
activities are analyzed as discussed above.

Cash flow from Operating Activities

Profit after interest xx
Adjusted for non- cash items:
Depreciation xx
Loss on disposal of fixed asset xx xx
xx
Add: Taxation to p &l a/c xx
: Interest to P & l a/c xx
: Dividends to P & l a/c xx
Operating profit before changes in working capital xx
Working Capital Items
Increase/Decrease in stock (xx)/xx
Increase/Decrease in debtors (xx)/xx
Increase/Decrease in creditors xx/(xx) xx/(xx)
Cash flow generated from operating activities xx
Less: Tax paid (xx)
: Interest paid (xx)

Cash inflow from Operating Activities (A) xxx

6.3.4 Advantages of cash flow statements

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i. Cash flow statements helps in efficient cash management, evaluation of

financial policies and the cash position in an organization

ii. Cash flow statements are useful in internal financial management by

providing information about funds which will be available from operations.
This influences financial policies formulated by management in an
organization.

iii. Through cash flow statements, an organization is able to disclose movements

of cash into and from an organization.

iv. Through cash flow statements, the extent of success and or failure in cash can
be ascertained. This assists in efficient cash planning

v. Cash flow statements help to assess the ability of an organization to generate

cash and cash equivalents and to compare the past and current cash
generation. This can help to predict future cash to be generated.

6.3.5 Demerits of cash flow statements

i. As compared with other financial statements, cash flow statement generates
information about cash and cash equivalent movements. Financial statements on
the other hand will consider both cash and non- cash items

ii. The cash flow statements can be influenced by repositioning payments hence
they do not necessarily reflect the true liquidity position in an organization.

iii. Cash flow statements are used together with other financial statements and
cannot therefore replace other financial statements.

Illustration one

The following income statement is from the books VIRENA Company for 2005/6
Income Statement
Gross profit for the year 117,784.50
Other incomes:
Discounts received 1,080.35
Disposal of van profit 1,633.70
Adjusted gross profit 120,498.55
Less: Expenses
Motor vehicle expenses 5,111.90
Wages 45,322
General expenses 2,187.05
Bad debts written off 1,370.20

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Increasing in provision for doubtful

debts 527.00
Depreciation on asset 4,743 (59,261.15)
Profit from operations 61,237.40

Statement of Financial position 2005/6

Non - current Assets 2004 2005
Van at cost 40,579 21,607
Less: Provision for depreciation (13,965.50) (8,168.50)
26,613.50 13,438.50
Current Assets
Inventory 49,011 63,240
Trade debtors 23,188 20,289.50
Less: Provision
for bad debts (1,581) 21,607 (2,108) 18,181.5
Cash in bank 1,080.35 1,897.20
71,698.35 83,319
Less: Current liabilities
Trade payables (15,546.50) 56.151.85 1,897.20 64,346.70
82,791.85 77,785.20
Equity and long term liabilities
Owners equity 45,348.35 56,415.35
Operating profit 55,862 61,237.40
Drawings (44,795) (59,630.05)
56,415.35 58,022.70
Long term loan 26,350 19,762.50
82,791.85 77,785.20

Prepare statement of cash flow using IFRS 1

Suggested Solution
Reconciliation of net profit to Cash

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Net profit 61,237.40

Add: Depreciation 4,743

Profit on sale of van (1,633.7)

Increase in provision for debts 527
Increase in stock (14,229)
Decrease in debtors 2,898.50
Increase in creditors 3,425.50
56,968.70

Change in cash
Bal b/d 1,080.50
Net cash flow 816.85
1,897.35

Net cash flow from operating Activities 56,968.70

Returns on investment and Finance
Receipts from sale of fixed assets 10,065.70
Financing:
External debts (6,587.50)
Drawings (59,630.05) (66,217.55)
816.85

Illustration two

The following information was extracted from the books of Rongo ltd for the year ended
30 June 2011 and 30 June 2012.
Fixed
Assets 2011 2012
Machinery 23,250 27,750
Less: Depreciation 2,250 2,550
21,000 25,200
Current Assets
Stock 4,650 8,850
Debtors 5,850 5,100
Cash 2,250 12,750 _ 13,950
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DAA 101 - INTRODUCTION TO ACCOUNTING II

33,750 39,150
Current liabilities
Creditors 3,000 3,300
Bank overdraft _ (3,000) 1,350 (4,650)
30,750 34,500
Financed by:
Capital 30,000 30,750
Add: Net profit 10,500 12,750
Additional Capital _ 3,000
40,500 46,500
Less: Drawings (9,750) (12,000)
30,750 45,500

Required
Prepare cash flow statement as described by International Accounting Standard 7
(20 Marks)
Rongo Ltd
Cash flow statement
For the year ended 30 June 2012
Cash flow from Operating Activities
Net profit 12,750
Working capital items
Increase in stock (8,850 - 4,650) (4,200)
Decrease in debtors 5,850 - 5,100 750
Increase in creditors 3,300 -3,000 300 (3,150)
Cash flow from Operating Activities 9,600
Cash flow from Investing Activities
Purchase of machinery (25,200 - 21,000) (4,200)
Cash flow from Investing Activities (4,200)
Cash flow from Financing Activities
Additional capital 3,000
Drawings for the year (12,000) (9,000)
Cash flow for the year (3,600)
Add: Cash and cash equivalent at start 2,250
Cash and cash equivalents for the year (1,350)

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Illustration three
The following is an extract of the financial statement of Rensons Ltd for the periods
ended 31 April
Sh. ‘000’ Sh.’000’
Statement of Financial Position 31st April 2009 31st April 2010
Non-current assets ( NBV) 217,500 225,000
Non-current assets:
Inventory 73,500 79,500
Receivables 102,000 109,500
Cash at bank 3,750 6,750
TOTAL 396,750 420,750
Capital and reserves:
Issued share capital 150,000 150,150
Reserve 78,300 97,800
Non-current liabilities:
10% loan notes 60,000 64,500
Current liabilities:
Trade payables 95,700 93,000
Taxation 6,750 28,850
Dividends 6,000 6,450
TOTAL 396,750 420,750

Profit and loss account for the year ended 31st April 2010 is as follows.

Sh.’000’
Sales revenue 585,000
Profit from operation 41,250
Net interest cost (6,450)
Profit before taxation 34,800
Income tax expense (8,850)
Profit after tax 25,950
Dividends (6,450)
Net profit for the period 19,500

The following is additional information.

Depreciation charge for the year is Sh. 18,000,000. Non-current assets disposed in the year
had a proceed of Sh. 900,000. Their depreciation to that date was Sh. 525,000 and their
cost was Sh. 1,500,000
Required
Cash flow statement for the year ended 30th June 2010. (20 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Suggested solution
Rensons Ltd
Cash flow Statements
For the year ended 31 April 2010
Cash flow from Operating Activities
Net profit 34,800
Adjusted for depreciation 18,000
Loss on disposal of non- current asset 75
Interest expense 6,450
Cash flow before working capital items 59,325
Working capital items
Increase in inventory (79,500 - 73,500) (6,000)
Increase in receivables (109,500 - 102,000) (7,500)
Decrease in payables (97,500 - 93,000) (2,700) (16,200)
Cash flow from operating activities 43,125
Less: Interest paid (6,450)

: Tax paid (6,750)

: Dividend paid (6,000)
Net cash flow from operating activity 23,925
Cash flow from Investing Activity
Purchase of non -current assets (26,475)
Sale of non -current asset 900
Net cash flow from investing activity (25,575)
Cash flow from Financing Activity
Issue of shares 150,150 - 150,000 150
Issue of 10% loan notes 64,500 - 60,000 4,500
Net cash flow from financing activities 4,650
Cash flow for the year 3,000
Add: cash and cash equivalent at start 3,750
Cash and cash equivalents at year end 6,750

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Workings
Non - current assets
disposal
Cost 1,500 Proceeds 900
[Link] 525
Loss on
disposal 75
1,500 1,500

Dividends
a/c
Bank 6,000 Bal b/d 6,000
Bal c/d 6,450 P& l a/c 6,450
12,450 12,450

Taxation a/c
Bank 6,750 Bal b/d 6,750
Bal c/d 6,750 P & l a/c 8,850
15,600 15,600

Non -Current assets Sh. '000'

Bal b/d 217,500
Disposal (1,500 - 525) (975)
216,525
Less: Depreciation (18,000)
198,525
Purchase of non - current asset 26,475
Bal c/d 225,000

Interest paid =10% x 64,500 = 6,450

Issue of shares = 150,150 - 150,000 = 150,000

Loan notes = 64,500 - 60,000 = 4,500

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Illustration four (November 2011)

a) Outline four uses of statements of cash flows (4 Marks)
b) Chungala Ltd statement of comprehensive income for the year ended 30
September 2011

Sh.''Million''
Sales 9,348
Cost of sales (5,688)
Gross profit 3,660
Distribution cost (1,128)
Administrative expenses (1,200)
Operating Profit 1,332
Gain on disposal 20
Interest paid (60)
Profit before tax 1,292
Income tax expense (304)
Profit after tax 988
Dividends (300)
Retained profit for the year 688
Retained profit brought
forward 1,616
Retained profit carried forward 2,304

Chungala Ltd
Statement of Financial Position as at 30 September
2011 2010
Sh. ''Million'' Sh.''Million''
Non-Current Assets
Plant and Equipment 6,400 5,200
Motor Vehicles 2,400 1,600
8,800 6,800
Current Assets
Inventory 300 240
Accounts Receivable 124 100
Bank balance 216 140
640 480
9,440 7,280

Equity and Liabilities:

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Ordinary share capital (Sh. 10

each) 5,200 4,800
Share Premium 880 320
Retained profit 2,304 1,616
8,384 6,736
Non-current liabilities
Long term loan 320 80

Current Liabilities
Accounts payable 96 56
Taxation 480 320
Proposed dividend 160 88
736 464
9,440 7,280

Additional Information
1. During the year plant worth Sh. 2,200,000,000 was acquired and motor vehicles
which had cost Sh. 200,000,000 were disposed of.

2. The book value of the plant and equipment and motor vehicles comprise:

Plant and Equipment Motor vehicles

2010 2011 2010 2011
Sh.'' Sh.'' Sh.'' Sh.''
million'' million'' million'' million''

Cost 6,120 7,700 1,920 2,880

Accumulated depreciation (920) (1,300) (320) (480)
Net book value 5,200 6,400 1,600 3,400

3.

Administration expenses
comprise: Sh. ''million''
Depreciation: Plant and equipment 840
Motor
vehicles 300
Others 60
1,200

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DAA 101 - INTRODUCTION TO ACCOUNTING II

4.
Gain on disposal comprises: Sh. ''million''
Gain on disposal of plant 40
Loss on disposal of motor vehicles (20)
20

Required:
Statement of cash flow for the year ended 30 September 2011 in conformity with the
requirements of International Accounting Standards (IAS 7), ‘’Statement of Cash flows’’
(16 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Sh. '000'
Cash flow from operating activities
Profit before tax 1,292
Add: Interest paid 60
: Loss on disposal (Wks) 20
: Gain on disposal (40)
1,332
Add: Depreciation : Plant 840
: M/ vehicle 300
Cash flow before working capital items 2,472
Working capital items:
Increase in inventory (300 -240) (60)
Increase in receivables (124-100) (24)
Increase in trade payables (96-56) 40
2,428
Less: Tax paid (Wks) (144)
: Dividends (228)
: Interest paid (60)
Cash and cash equivalents from operating
activities 1,996
Cash flow from investing activities
Acquisition of plant (Wks 1) (2,200)
Acquisition of motor vehicle (Wks 4) (1,160)
Disposal proceeds in plant (Wks 2) 200
Disposal proceeds in m/vehicle (Wks 5) 40
Cash and cash equivalent from investing
activities (3,120)
Cash flow from financing activities
Additional share capital 400
Additional share premium 560
Additional long term loan 240
Cash and cash equivalent from financing
activities 1,200
Cash and cash equivalents for the year 76
Add: Cash and cash equivalent at start 140
Cash and cash equivalent at year end 216

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Workings (Sh. ‘000’)

Plant a/c
Bal b/d 6,120 Disposal 620
Bank a/c 2,200 Bal c/d 7,720
8,320 8,320

Plant Accumulated depreciation

Disposal 460 Bal b/d 920
Bal c/d 1,300 Depreciation 840
1,760 1,760

Plant Disposal a/c

Plant 620 Acc. Dep 460
Gain on Proceeds on
disposal 40 disposal 200
660 660

Motor vehicle
a/c
Bal b/d 1,920 Disposal 200
Bank 1,160 Bal c/d 2,880
3,080 3,080

M/ vehicle Disposal a/c

Motor
vehicle 200 Acc. Dep 140
Proceeds 40
Loss on disposal 20
200 200

M/ vehicle Accumulated depreciation

Disposal 140 Bal b/d 320
Bal c/d 480 Depreciation 300
620 620

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Taxation a/c
Bank 144 Bal b/d 320
Bal c/d 480 P& l a/c 304
624 624

Dividends a/c
Bank 228 Bal b/d 88
Bal c/d 160 P & l a/c 300
388 388

Additional share capital = 5,200-4,800 =Sh. 400

Share premium =880-320=Sh. 560
Long term loan =320-80= Sh. 240

6.5 Activities
Activity 1

ABC Ltd has extracted the following figures from its book for the year ended 31 March
2011:
1-Apr-10 31-Mar-11
Sh. Sh.
Operating profit for the year 158,782
Depreciation charge for the year 10,200
Profit on sale for fixed assets 800
Inventory 15,900 22,200
Trade payables 110,000 90,600
Trade receivables 258,300 240,250
Required
Prepare for ABC Ltd the reconciliation of operating profit to Net Cash inflow / Outflow for
the year ended 31 March 2011 (13 Marks)

6.5 Activities
Activity 2
The following relates to Bassenthwaite PLC for the year ended 31 December 2007: 116
Sh. m
Operating Profit before tax 161
Dividends paid 64
Tax paid 50
DAA 101 - INTRODUCTION TO ACCOUNTING II

6.6 Self - Test Questions

A Ltd has extracted the following figures from its book for the year ended 31 March 2011:
1-Apr-10 31-Mar-11
Sh. Sh.
Operating profit for the year 163,500
Depreciation charge for the year 17,000
Profit on sale for fixed assets 1,200
Inventory 20,000 22,200
Trade payables 131,000 90,600
Trade receivables 258,300 250,250
Required
Prepare for A Ltd the reconciliation of operating profit to Net Cash inflow / Outflow for the
year ended 31 March 2011

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6.7 Summary

In this lecture you have learnt that:

1. Cash: This is cash in hand and demand deposits

2. Cash equivalents: These are short term investments which are highly liquid, exposed to
many risks and have insignificant changes in value.

3. Cash flow: Represents the flow of cash and cash equivalents into and out of an
organization

4. Operating activities: These are the principle revenue generating activities and any
other activity other than investing and financing activities

5. Investing activities: These are activities concerned with acquisition and disposal of
long term assets and other activities other than operating and financing activities

6. Financing activities: These are activities which result into changes in size and
composition of capital structure of an organization and any other activity other than
operating and investing activity

6.8 Suggestion for further reading

Students are required to review the questions provided and questions in the reference books
provided in this manual

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LECTURE SEVEN: INCOMPLETE RECORDS

7.1 Introduction
This lecture introduces you to incomplete records. It requires knowledge on preparation of
financial statement and the stakeholders’ interest on the financial information prepared by an
organization

7.2 Specific objectives:

At the end of the lecture you should be able:

1) Define the term incomplete records and state reasons for their occurrence
2) Appreciate the role of control accounts in the preparation of financial statements
3) Identify the various approaches to be used to determine missing information
from records
4) Apply all accounting techniques used in preparation of financial statements

7.3 Lecture Outline

7.3.1 Title Definition of incomplete records

7.3.2 Title Techniques used to determine missing information

7.4 Lecture
7.3.1 Definition of incomplete records

Incomplete records are accounting records that are not complete. They arise from loss of
records, maintaining accounting records other than double entry system(single entries) due to
some reasons including misplacement of records, lack of accounting knowledge or small
enterprises which makes it easier to get complete track of the single entries as
opposed to double entries.
When accounting records are not maintained appropriately it’s not easy to prepare the
financial statements. Since the preparation of trial balance will not be possible. Any
accounting information missing from the accounting records can be sourced from either of
the following:
i. The proprietor himself/herself

ii. Third parties like banks and other financial institutions

iii. Debtors( Through debtor circularization)

iv. Physical verification of assets, observations, and valuations e.t.c

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7.3.2 Techniques used to determine missing information

i. Ratio analysis

(a) Gross profit ratios e.g Mark-up=Gross profit/Cost of sales

Margin=Gross profit/Sales

ii. Control accounts

Debtors Control account

Bal b/d xx Banks xx
Discount
Sales a/c xx allowed xx
Bad debts
w/off xx
Dishonored Return
cheques xx inwards xx
Set offs xx
Bal c/d xx
xx xx

Creditors control account

Bank a/c xx Bal b/d Xx
Discount
received xx
Return
outwards xx
set offs xx
Bal c/d xx
xx Xx

Expenses control account

Accrued
Prepaid b/d xx b/d Xx
Bank a/c xx Prepaid c/d Xx
Accrued c/d xx P&L Xx
xx Xx

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Income Control a/c

Arrears Advance
b/d xx b/d xx
Accrued
c/d xx Bank xx
P& l xx Arrears c/d xx
xx xx

Balance sheet equation/ Accounting equation

This is used to determine the initial capital of a business. To determine the initial capital,
where capital is not given, a statement of affairs is used;
Capital= Assets - Liabilities
It should also be taken into consideration that capital can be increased by net profit and
new capital injected into an organization. Capital can also be reduced by net loss and
withdrawals from a business.

Illustration one
The following information is available from a sole proprietor for the year ended 31 st
December 2011.
Balance b/f 45,760
Receipts from sales 1,054,320
Cash banked 1,120,400
2,220,480
Payments for
goods 800,560
Insurance
expense 236,000
Drawings 900,000
Equipment 584,000 (2,520,560)
(300,080)

Transactions made for the cash records were as follows

Bal b/f 4,960

Cash sales 1,304,000
Payments for
purchases 148,000
Sundry expenses 30,000
Bal c/f 5,200

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The following information is also available for the year ended Dec 2010 and 2011
Dec 2010 Dec 2011
Trade receivables 148,000 165,600
Trade payables 100,000 113,600
Inventory 212,000 239,200

Additional information:
i. The proprietors’ cashier absconded with some amount from the cash till
account. The proprietor can not however ascertain these amounts
ii. The equipment acquired should be depreciated by 10% p.a for each year.
iii. Provision for doubtful debts to be created at 5% of the remaining debtors

Required:
i. Determine the cash stolen by the cashier (4 marks)
st
ii. Statement of affairs as at 31 December 2010 (4 Marks)
st
iii. Prepare statement of financial performance for the year ended 31 December
2011
(6 Marks)
st
iv. Prepare statement of financial position as at 31 December 2011(6 Marks)

Suggested solution

Cash account
Bal b/d 4,960 Purchases 148,000
Sales 1,304,000 Expenses 30,000
Bank 1,120,400
Drawings(Stolen
cash) 5,360
Bal c/d 5,200
1,308,960 1,308,960

Statement of affairs

Current assets
Inventory 212,000
Trade receivables 148,000
Bank 45,760
Cash 4,960
410,720
Less: Current
liabilities
Trade payables (100,000)

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Capital at beginning 310,720

Trade receivables
Bal b/d 148,000 Bank 1,054,320
Cash 1,304,000
Sales 2,375,920 Bal c/d 165,600
2,523,920 2,523,920

Trade payables
Bank 800,560 Bal b/d 100,000
Cash 148,000
Bal c/d 113,600 Purchases 962,160
1,062,160 1,062,160

Statement of Financial Performance for the year ended 31st December 2011

Sales 2,375,920
Less: Cost of sales
Opening inventory 212,000
Add: Purchases 962,160
Less: Closing inventory (239,200) (934,960)
Gross Profit 1,440,960
Less: expenses
Insurance expense 236,000
Sundry expenses 30,000
Provision for doubtful 5%x
debts 165,600 8,280
Depreciation: equipment 10% x
584,000 28,400 (332,680)
1,108,280

Statement of Financial Position 31st December 2011

Acc.
Fixed asset Cost Dep. N.B.V
Equipment 584,000 58,400 525,600
525,600
Current

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assets
inventory 239,200
Debtors (165,600-8,280) 157,320
Cash 5,200
401,720
Less: Current liabilities
Trade
payables 113,600
Bank
overdraft 300,800 (413,680) (11,960)
513,640

Financed by:
Capital 310,720
Add: Net
profit 1,108,280
Less; Drawings (900,000+5,360) (905,360)
513,640

Illustration two
Osewe commenced a business on 1st April 2009. Over the time of his trading, he has not
been maintaining complete records in his accounts. This is due to his lack of
understanding of the accounting system thereby largely depending on single entry
system. As a student with good understanding in double entry system, he has come for
your assistance. You study his accounts and obtain the following information:
i. Osewe had deposited Sh. 18,000,000 into his bank account to help start the
business on 1st April 2009.

ii. Over time, he has been using a lorry for personal transactions. However as
st
from 1 April 2009, this lorry will be for business transactions. The lorry was
valued at Sh. 9,900,000and should be depreciated at the rate of 10% p.a on cost

iii. Due to the vast nature of his business, he decided to take Sh. 6,000,000 as
long term loan from Family bank on 1st July 2009. However at the end of the year,
no loan interest has been paid yet. The loan attracted an interest of 15% p.a

iv. To enable him get enough working capital items, he purchased goods
worth Sh. 29,400,000. At the end of the year, goods valued Sh. 2,370,000 were yet
to be sold. A plant and machinery was also acquired at Sh. 14,400,000 at the time
of start. He estimates that this plant and machinery will be used for five years in
the organization

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v. During the period, sales on account worth Sh. 92,670,000 were made.
Total cheques received from the debtors were Sh. 76,200,000 by 31st March 2010.
Debtors of Sh. 255,000 were to be written off as bad debts for the period. A
provision for doubtful debts of 5% should be made on the remaining debtors.

vi. Cash sales for the period amounted to Sh. 10,890,000 out of which Sh.
8,400,000 was banked. Osewe decided to settle family private expense of Sh.
1,125,000 took his girl friend on a trip and spend Sh. 360,000 from the cash till. Some
unknown amount was used to settle sundry expenses living the cash account with
only Sh. 451,500 as at 31st March 2010.

vii. The following expenses were paid by cheque;

Electricity bill Sh. 3,600,000. Outstanding amount Sh. 720,000

Lorry expenses Sh. 2,730,000
General expenses Sh. 4,050,000
Insurance Sh. 2,400,000 to 30th June 2010
Salary expense Sh. 10,800,000
viii. Sales and distribution expense for the year amounted to Sh. 540,000. This has
not been paid.

ix. Amounts drawn per week from the business account for private use totaled to
Sh. 270,000

x. Osewe is yet to pay Sh. 500,000 for advertisement and he has committed to
pay you Sh. 325,000 as accountancy fee upon completion of the accounting
transactions.

xi. Provide for corporate tax at 30% of the operating profit.

Required
Using the information provided above;
i. Prepare statement of financial performance for the year ended 31st March
2010 (10 Marks)

ii. Prepare statement of financial position as at 31st December 2010

(10 Marks)

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Suggested solution
Osewe proprietor
Statement of financial performance
For the year ended 31st March 2010 sh.’000’

Sales 103,560
Less: cost of sales
Opening stock
Add: Purchases 29,400
Less: Closing stock (2,370) (27,030)
76,530
Less: expenses
Sundry expense 553.5
Electricity expense 3,600
Lorry expense 2,730
General expense 4,050
Insurance: Paid 2,400
: Prepaid(600) 1,800
Salary expense 10,800
Sales and distribution accrued 540
Advertisement accrued 500
Accountancy accrued 325
Depreciation: lorry 9,900x10% 990
:Machinery
14,400/5 2,880
Interest on loan 9/12x6,000x15% 675
Bad debts 255
Provision for bad debts 5%x16,215 811 (30,509.5)
Profit for the year 46,020.5
Less: Corporate tax 30%x 46020.5 (13,806)
32,214.50

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Osewe Proprietor
Statement of financial performance
As at 31st March 2010 sh. ‘000’
Acc.
Non- Current assets Cost Depreciation N.B.V
Machinery 14,400 2,880 11,520
Lorry 9,900 990 8,910
20,430
Current assets
Closing inventory 2,370
Debtors 16,215
Less: Provision 5%x16,215 (811) 15,404
Insurance prepaid 600
Bank 40,950
Cash 451.5
59,775.5
Less: Current liabilities
Accrued: Sales and
distribution 540
Advertisement 500
Accountancy fee 325
Loan interest 675
Corporate tax 13,806 (15,846) 43,929.50
64,359.50
Financed by:
Capital 27,900
Add: Net Profit 32,214.50
Less: drawings (1,755)
58,359.50
Long term loan 6,000
64,359.50

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Workings

Bank account Sh.'000' Sundry expense a/c

Capital Cash
a/c 18,000 Purchases 29,400 a/c 553.5 Bal c/d 553.5
Family
bank 6,000 Machinery 14,400 Bal b/d 553.5
Sales 76,200 Electricity 3,600 Electricity a/c
Bank
Cash 8,400 Lorry expense 2,730 a/c 3,600 Bal c/d 3,600
general expense 4,050 Bal b/d 3,600
Insurance
expense 2,400 Lorry expense a/c
Bank
Salary expense 10,800 a/c 2,730 Bal c/d 2,730
Drawings 270 Bal b/d 2,730
Bal c/d 40,950 General expense a/c
Bank
108,680 108,680 a/c 4,050 Bal c/d 4,050
Bal b/d 40,950 Bal b/d 4,050
Capital account Sh. '000' Insurance expense a/c
Bank
Bal c/d 27,900 Bank a/c 18,000 a/c 2,400 Prepayment 600
Lorry a/c 9,900 Bal c/d 1,800
27,900 27,900 2,400 2,400
Bal b/d 27,900 Bal b/d 1,800

Family bank loan a/c Salary expense a/c

Bank
Bal c/d 6,000 Bank a/c 6,000 a/c 10,800 Bal c/d 10,800
6,000 6,000 Bal b/d 10,800
Bal b/d 6,000 Bad debts expense a/c
Purchases a/c Debtors 255 Bal c/d 255
Bank a/c 29,400 Bal c/d 29,400 Bal b/d 255
29,400 29,400
Bal b/d 29,400

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Cash
Sales a/c a/c
Debtors
a/c 92,670 10,890 Bank a/c 8,400
Bal c/d 103,560 Cash a/c 10,890 Drawings 1,125
103,560 103,560 Drawings 360
Sundry
Bal b/d 103,560 expense 554
Bal c/d 452
Machinery a/c 10,890 10,890
Bank a/c 14,400 bal c/d 14,400
14,400 14,400
Bal b/d 14,400 Drawings account
Debtors Cash
a/c a/c 1,125
Cash
Sales a/c 92,670 Bank a/c 76,200 a/c 360
Bad Bank
debts 255 a/c 270 bal c/d 1,755
Bal c/d 16,215 1,755 1,755
92,670 92,670 1,755
bal b/d 16,215

Illustration three
Richard Okoth retired from employment on 31st October 2002 and was paid terminal
benefits amounting to Sh. 1,500,000. On 1st January 2003, he started a retail business
with Sh. 1,000,000 and deposited Sh. 800,000 of this amount to a business bank account.
During the year ended 31st December 2003, the business carried out the following
transactions:
i. Purchased a motor vehicle for Sh. 500,000 from TD motors dealers paying Sh.
300,000 by cheque and the balance being treated as a loan from Td Motors
dealers Ltd.

ii. Purchased goods worth Sh. 3,498,000 on credit and returned to suppliers
goods worth Sh. 150,000

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iii. Made total sales amounting to Sh. 4,204,000 of which Sh. 250,000 was on
cash basis.

iv. Purchased furniture for Sh. 150,000 which was paid for by a cheque.

v. Discounts received and discounts allowed amounted to Sh. 25,000 and Sh.
35,000 respectively

vi. The following expenses were paid in cash:

Rent Sh. 80,000

Telephone Sh. 30,000
Electricity Sh. 50,000
vii. Cash amounting to Sh. 130,000 was banked

viii. In addition to purchase of the motor vehicle and furniture the following
payments were made through the bank account:

Trade creditors Sh. 3,044,000

Wages and salaries Sh.240, 000
Transport cost Sh. 60,000
Licenses Sh. 30,000
Loan interest Sh. 16,000
Insurance Sh. 120,000
Bank interest Sh. 18,000
ix. Total collections from the debtors which were all banked amounted to Sh.
3,431,000.

x. As at 31st December 2003, amounts owing and prepaid include the following:

Owing:
Telephone expenses Sh. 10,000
Salaries and wages Sh. 24,000
Prepayment:
Insurance Sh. 60,000
Rent Sh. 20,000
xi. Depreciation is to be provided on motor vehicles and furniture at the rates of
10% and 20% per annum on cost respectively

xii. Return inwards from credit customers amounted to Sh. 180,000 and bad debts
of Sh. 28,000 were written off.

xiii. Richard Okoth withdrew Sh. 10,000 every month in cash for personal use.

xiv. Sales were made at a uniform gross profit of 25% on selling price

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Required
a) Statement of Financial Performance for the year ended 31st December 2003(12
Marks)

b) Statement of Financial Position 31st December 2003 (8 Marks)

Suggested solution
Richard Okoth
Statement of Financial Performance
For the year ended 31 December 2003
Sales 4,204,000
Less: Return inwards (180,000)
Net sales 4,024,000
Less: Cost of sales
Purchases 3,498,000
Less: Return outwards (150,000)
: Closing stock (330,000) (3,018,000)
Gross profit 25% x 4,024,000 1,006,000
Add: Discount received 25,000
1,031,000
Less: Expenses
Rent : Paid 80,000
: Prepaid (20,000) 60,000
Telephone: Paid 30,000
: Accrued 10,000 40,000
Electricity 50,000
Wages and salaries: Paid 240,000
: Accrued 24,000 264,000
Transport cost 60,000
License 30,000
Loan interest 16,000
Insurance : Paid 120,000
: Prepaid (60,000) 60,000
Depreciation: M /vehicle 10% x 500,000 50,000
: Furniture 20% x 150,000 30,000
Discount allowed 35,000
Bad debts 28,000 (741,000)
Net profit 290,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Richard Okoth
Statement of Financial Position
As at 31 December 2003
Fixed assets Cost Acc. Dep N.B.V
Motor vehicle 500,000 50,000 450,000
Furniture 150,000 30,000 120,000
570,000
Current assets
Closing stock 330,000
Debtors 280,000
Bank balance 383,000
Cash balance 40,000
Prepayments -Rent 20,000
- Insurance 60,000
1,113,000
Less: Current liabilities
Creditors 279,000
Accrued: Telephone 10,000
: Wages &
Salaries 24,000 (313,000) 800,000
1,370,000
Financed by:
Capital 1,000,000
Add: Net profit 290,000
Less: Drawings (120,000)
1,170,000
Add: Long term loan 200,000
1,370,000

Workings
Bank a/c
Capital 800,000 M/vehicle 300,000
Contra 130,000 Furniture 150,000
Debtors 3,431,000 Creditors 3,044,000
Wages 240,000
Transport cost 60,000
License 30,000
Loan interest 16,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Insurance 120,000
Bank interest 18,000
Bal c/d 383,000
4,361,000 4,361,000

Cash a/c
Capital 200,000 Rent 80,000
Sales 250,000 Telephone 30,000
Electricity 50,000
Contra 130,000
Drawings 10,000 x 12 120,000
Bal c/d 40,000
450,000 450,000

Creditors a/c
Return outwards 150,000 Purchases 3,498,000
Discount
received 25,000
Bank 3,044,000
Bal c/d 279,000
3,498,000 3,498,000

Debtors
a/c
Sales 3,954,000 Discount allowed 35,000
Bank 3,431,000
Return inwards 180,000
Bad debts 28,000
Bal c/d 280,000
3,954,000 3,954,000

Capital
a/c
Bank 800,000
Bal c/d 1,000,000 Cash 200,000
1,000,000 1,000,000

Furniture a/c
Bank 150,000 Bal c/d 150,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Purchases a/c
Creditors 3,498,000 Bal c/d 3,498,000

Motor vehicle a/c

Bank 300,000
TD Motors loan 200,000 Bal c/d 500,000
500,000 500,000

Sales a/c
Cash 250,000
Bal c/d 4,204,000 Debtors 3,954,000
4,204,000 4,204,000

Return outwards
Bal c/d 150,000 Creditors 150,000

Loan/TD Motors a/c

Bal c/d 200,000 M/vehicle 200,000

Discount allowed a/c

Debtors 35,000 Bal c/d 35,000

Discount received a/c

Bal c/d 25,000 Creditors 25,000

Return inwards a/c

Debtors 180,000 Bal c/d 180,000

Drawings a/c
Cash 120,000 Bal c/d 120,000

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DAA 101 - INTRODUCTION TO ACCOUNTING II

7.5 Activities
Activity 1
Martin Stanley is a sole proprietor. He does not maintain a double entry system of
accounting.
The following information was extracted from the books of the business as at 31 March
2008:

Shs.
Freehold property 900,000
Motor vehicles 1,125,000
Inventory 585,000
Trade payables 570,000
Trade receivables 750,000
10% bank loan 600,000
Bank overdraft 90,000
Other payables(electricity) 22,500
Prepayments (wages) 60,000
Allowance for doubtful debts 37,500

Additional information:
1. Inventory as at 31 March 2009 was valued at Sh.645,000.
2. The following transitions were carried out through the bank account during the year ended
31 March 2009:
Shs.
Receipts from trade receivables 2,835,000
Cash sales 1,080,000
Payments to trade payables 2,910,000
Cash purchases 360,000
Proceeds on sale of motor vehicle 180,000
Salaries and wages 240,000
General expenses 90,000
Electricity 60,000
Interest on loan 30,000
Drawings 105,000

3. Sales and purchases on credit amounted to sh.3, 120,000 and Sh.2, 850,000 respectively.
4. Interest on loan was paid on 30 September 2008.
5. The discounts received and discounts allowed during the year amounted to sh.60, 000
and Sh.105,000 respectively.
6. Bad debts written off during the year amounted to sh.30, 000. Allowance for doubtful
debts is to be made at 5% of the trade receivables as at 31 March 2009.
7. Accrued electricity bill was sh.28, 000 while prepaid salaries amounted to sh.42, 000 as at
31 March 2009.
8. Motor vehicles are to be depreciated using the reducing balance method at the rate of 20% per
annum. A full year’s depreciation is provided in the year of purchase and none in the year of
disposal. The motor vehicle sold during the year had been purchased at sh.400, 000 on 1
January 2006.
DAA 101 - INTRODUCTION TO ACCOUNTING II

7.5 Activities
Activity 2
(a) Giving suitable examples, distinguish between the following sets of terms:
(i) Accounting concepts and accounting bases. ( 4 marks)
(ii) Accounting policies and accounting standards. ( 4 marks)
(iii) Revenue reserves and provisions. ( 4 marks)
(b) The following information was extracted from the books of Sifa Ltd. And Mapato Ltd.
As`at 30 June 2008.

Sifa Ltd Mapato Ltd

Sh. '000 Sh. '000'
Opening stock (1 July 2007) 4,000 5,000
Closing stock 6,000 8,000

Purchases 52,000 ?

Sales ? 64,000

Sifa Ltd. applied a uniform rate of margin of 1/6 while Mapato Ltd applied a uniform rate of
mark-up of 1/3.
Required:
For the year ended 30 June 2008 compute
(i) Gross profit for each company. (2 marks)
(ii) Purchases for Mapato Ltd (2 marks)
(iii) Sales for Sifa Ltd. (2 marks)
(iv) Cost of goods sold for each company. ( 2 marks)
(Total: 20 marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

7.5 Activities
Activity 3
Nguvumali, a sole trader who operates a small business in Mombasa, does not keep proper
books of account. He had instructed his shop assistant, who absconded duty on 30 March 2010
with an unknown amount of cash, to collect trade receivables and bank the cash intact.
Given below are the balances extracted from the records of the firm as at 31 March:

2,009 2,010
Sh.
Sh. '000' '000'
Buildings 20,000 20,000
Equipment at cost 8,000 8,000
Accumulated depreciation 800 ?
Motor vehicles at cost 8,000 8,000
Accumulated depreciation 2,000 ?
Inventory 7,000
Trade receivables 5,000 4,000
Bank overdraft 4,200 ?
Cash in hand 100 100
Prepaid electricity 100 60
Accrued salaries and wages 600 400
Trade payables 2,000 3,000

Additional information:
1. The following transactions were made during the year ended 31 March 2010

Sh.
'000'
Cheques paid to creditors 41,000
Cash banked during the year 59,940
Cash paid for electricity and water expenses 160
Salaries and wages paid through the bank 5,700
Cash withdrawn from the bank for office use 5,000
Cheques paid for selling and distribution costs 1,600
Cash drawings for personal use 3,000
Cash paid for general expenses 1,400
Return inwards 9,000
Discounts allowed 600
Bad debts written off 400
Cash from trade debtors 60,000
Discounts received 1,000

2. The firm applied a uniform mark-up of 3/7.

3. Depreciation on motor vehicles and equipment is to be provided based on cost at
annual rates of 25% and 10% respectively. Ignore depreciation on buildings.
 DAA 101 - INTRODUCTION TO ACCOUNTING II

7.6 Self - Test Questions

Question One
Rajad started a business on 2 February 2010. At the end of the year 2 February 2011, the
following records were found kept in the accounts:
i. At the start, the following amounts were injected inform of capital to the business to
start the organization: Through the bank Sh. 320,000 and cash Sh.270, 000.
ii. The cash was used to buy the following assets: Plant and machinery Sh. 60,000, Land
Sh. 35,000, Equipment Sh. 23,000 and a motor van Sh. 25,000.
iii. Goods for selling were purchased during the period on Cash Sh. 23,000, by a cheque
Sh. 35,000 and on credit Sh. 17,000.
iv. Sales for the period were made on cash Sh. 120,000, by a cheque Sh. 210,000 and on
credit Sh. 85,000.
v. The expenses paid were as follows;
Insurance expense Sh. 10,000 on cash
Water and electricity Sh. 7,000 by a cheque
Administrative expense Sh. 9,000 by a cheque
Travelling expense Sh. 5,400 on cash
Rent expense Sh. 10,000 by a cheque
Carriage expense Sh. 5,000 on cash
vi. Personal entertainment for the period amounted to Sh. 54 per month. This was paid
through the cheque
vii. He transferred Sh. 20,000 from his bank account to the cash account
viii. Towards the end of the year, Rajad took a loan from Fina Sh. 35,000 given through a
cheque.
Required:
i. Record Ledger Accounts for the above transactions
ii. Post the transactions to the relevant ledger accounts and balance them off
iii. Extract a trial balance for the year ended 2 February 2011
iv. Prepare financial statements for the period ended 2 February 2011

Question two
From the following trial balance of G Still, draw up a statement of comprehensive income and a
statement of financial position for the year ended 30 September 2011.

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7.6 Summary

In this lecture you have learnt that:

Students are required to review the questions provided and questions in the reference books provided in this
manual

7.7 Suggestion for further reading

Students are required to review the questions provided and questions in the reference books provided in this
manual

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LECTURE EIGHT: INTRODUCTION TO PUBLISHED FINANCIAL

STATEMENTS

8.1 Introduction
This lecture introduces you to published financial statements. It requires knowledge on
preparation of financial statement and the stakeholders’ interest on the financial
information prepared by an organization

8.2 Specific objectives:

At the end of the lecture you should be able:

i. Prepare published financial statements
ii. Appreciate accounting in generating information used by the stakeholders

8.3 Lecture Outline

8.3.1 Title Presentation according to IAS 1

8.3.2 Title Classification of expenses by Function/Cost of Sales Method
8.3.3 Title Classification by Nature of expense

8.4 Lecture
8.3.1 Presentation according to IAS 1
International Accounting Standards 1 requires that expenses should be classified either by
their nature or function and presents the analysis on the face of the income statement.

8.3.2 Classification of expenses by Function/Cost of Sales Method

This classifies the expenses according their function as part of cost of sales. The expenses
can be classified as cost of distribution, administrative activities and other expenses. Cost of
sales is classified separately from other expenses. This method is as follows;

Revenue xx
Cost of sales (xx)
Gross profit xx
Other incomes xx
Distribution cost (xx)
Administrative expenses (xx)
Other expenses (xx)
operating profit xx

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Illustration
The following information was extracted from the books of Soni Limited for the year
ended 30 April 2012
Land and buildings 735,000 Ordinary share capital 1,396,500
Inventory 132,300 Share premium 44,100
Purchases 1,190,700 Revaluation reserve 44,100
return inwards 61,740 Sales 2,205,000
Carriage outwards 61,740 Return outwards 57,330
Provision for depreciation plants and
Salaries and wages 176,400 machinery 110,250
Sales commission 132,300 Rent income 35,280
Administrative wages 88,200 Trade payables 132,300
Plants and machinery 277,830 Retained earnings b/f 110,250
Motor vehicle
expenses 44,100
Motor vehicles 220,500
Distribution expenses 22,050
Administrative
expenses 66,150
Directors
remuneration 66,150
Trade receivables 727,650
Bank balance 132,300
4,135,110 4,135,110

Additional information
i. Inventory was valued at Sh. 220,500 as at 30 April 2012
ii. Soni Ltd uses its motor vehicles for distribution purposes. Depreciation for motor
vehicles and plants and machinery was provided for at Sh. 70,560 and Sh. 22,050
respectively. The directors agreed to provide for corporate tax at Sh. 110,250
iii. Directors remuneration is to be charged to administration expenses

Required
i. Income statement for the year ended 30 April 2012 (10 Marks)
ii. Statement of Financial Position as at 30 April 2012) (10 Marks)

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Suggested solution
Soni Ltd
Income Statement
For the year ended 30 April 2012
Revenue 2,143,260
Cost of sales (1,045,170)
Gross profit 1,098,090
Income from investment 35,280
Distribution cost 529,200
Administrative expenses 220,500 (749,700)
P.B.T 383,670
Income tax (110,250)
P.A.T 273,420
Retained earnings b/f 110,250
Retained earnings c/f 383,670

Soni Ltd
Statement of Financial Position as at 30th April
2012
Non current assets
Land and buildings 735,000
Plant and machinery 97,020
Motor vehicles 198,450
1,030,470
Current assets
Inventory 220,500
Trade receivables 727,650
Bank balance 132,300 1,080,450
2,110,920
Capital and reserves
Ordinary share capital 1,396,500
Share premium 44,100
Revaluation reserve 44,100
Retained profit 383,670
1,868,370
Current liabilities
Trade payables 132,300
Income tax 110,250 242,550
2,110,920

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8.3.3 Classification by Nature of expense

When an organization classifies its expenses by function, additional information on its
expenses may be needed. Additional information to be included include, depreciation,
amortization and staff costs. This will be as follows;

Revenue xx
Other incomes xx
Inventory changes:
Finished goods and work in
progress xx
Raw materials and consumables xx
Employee benefits xx
Depreciation/Amortization
expense xx
Other expenses xx (xx)
Operating profit xx

Illustration
The trial balance shown below was extracted from the books of General Traders LTD for
the year ended 31st December 2009.

Sh. Sh.
11% Preference shares capital 2,000,000
Ordinary share capital 7,000,000
Land and buildings (Cost 11,500,000) 12,000,000
Equipment (Cost 800,000) 560,000
Motor vehicles (Cost 1,720,000) 1,204,000
Good will (Cost 1,600,000) 1,550,000
10% debentures 3,000,000
Inventory 2,722,000
Salaries and wages 924,000
Directors emoluments 630,000
Motor vehicle expenses 812,000
Rates and Insurance 293,000
General expenses 56,000
Interest on debenture 150,000
Trade receivables 1,861,000
Trade payables 1,137,000

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Bank balance 839,000

General reserves 500,000
Share premium 1,400,000
Ordinary dividend paid 350,000
Revaluation reserve (Buildings) 500,000
Retained earnings b/f 1,694,000
Profit for the year 6,720,000
23,951,000 23,951,000
The following additional information is available:
i. Corporation tax for the year is provided for at Sh. 500,000
ii. Bad debts amounting to Sh. 61,000 are to be written off as bad. A general provision for
doubtful debts of 4 percent of the remaining debtors is required
iii. Rates include Sh. 192,000 paid in advance
iv. Wages accrued amounted to Sh 90,000
v. Sales and purchases for the year amounted to Sh. 10,800,000 and Sh. 4,200,000
respectively.
vi. The directors propose to pay preference dividend and a further Sh. 1,200,000 for
final ordinary dividend. 100,000 ordinary shares were further issued at a 20 percent
premium
vii. Depreciation is provided for as follows:
Motor vehicles 25 percent on reducing balance basis
Equipments 10 percent on straight line method
Goodwill Written off at 3.125 percent on cost

viii. The share capital for the company is as follows:

40,000 11% preference shares of Sh. 50 each
1,000,000 ordinary shares of Sh. 10 each
Required
i. Income statement for the year ended 31st December 2010 (12 Marks)
ii. Statement of Financial Position as at 31st December 2010 (8 Marks)

Suggested solution
(i) General traders Ltd
Income Statement for the year ended 31st December 2009
Revenue 10,800
Changes in inventory of finished goods and work
in progress (120,000)
Purchases 4,200,000
Employee benefits 1,014,000
Interest on debenture 300,000
Depreciation and amortization 431,000
Other operating expenses 1,828,000 (7,653,000)

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Profit before tax 3,147,000

Corporation tax (500,000)
Retained earnings 2,647,000

(ii) General traders Ltd

Statement of Financial Position as at 31 December
2009
Non current assets
Land and building 12,600,000
Equipment 480,000
Motor Vehicles 903,000
13,983,000
Goodwill 1,500,000
Current assets
Inventory 2,722,000
Trade receivables 1,728,000
Prepaid expenses 96,000
Cash 3,239,000 7,785,000
23,268,000
Capital and Reserves
Ordinary share capital issued 9,000,000
11% Preference shares
capital 2,000,000
Share premium 1,800,000
Revaluation reserve 1,100,000
General reserve 700,000
proposed dividends 1,370,000
Retained earnings 2,421,000
18,391,000
Current liabilities
Trade payables 1,137,000
Accrued expenses 240,000
Corporate tax proposed 500,000 1,877,000
Non current liabilities
10% Debenture capital 3,000,000
23,268,000

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Question two
Study the trial balance provided below from Awendo Ltd as at 30 June 2010 is as
follows:
Sh. ‘000’ Sh.
‘000’
Revenue 13,132
Purchases 8,630
Inventory 1 July 2009 930
Selling and distribution costs 1,230
Administrative expenses 765
Land at valuation 800
Property at cost 7,830
Property accumulated depreciation as at 1 July 2009 2,130
Plant and equipment at cost 1,280
Plant and equipment accumulated depreciation as at 1 July 2009 710
Furniture and fittings at cost 350
Furniture and fittings accumulated depreciation as at 1 July 2009 150
Trade receivables 2,120
Trade payables 1,530
Bank 1,340
Ordinary issued Sh.1000 shares 5,000
Dividends paid 500
Revaluation reserve as at 1 July 2009 620
Retained earnings as at 1 July 2009 453
7% loan redeemable 2115 2,000
Suspense account 50
------
25,775 25,775

Additional information
1. Inventory as at 30 June 2010 was valued at Sh.850, 000.
2. The interest on the loan has not been paid for the year ended 30 June 2009 and
must
be accrued.
3. Tax charge for the year ended 30 June 2010 is estimated at Sh.550, 000.

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4. Adjustments for accruals and prepayments of Selling and distribution expenses

are required for the year ended 30 June 2010 as follows:
Accruals Prepayments
Selling and distribution expenses Sh.95, 000 Sh.60, 000
5. In addition Sh.150, 000 for administrative costs need to be accrued as at 30 June
2010.
6. During the year an item of plant costing Sh.100, 000 and with accumulated
depreciation of Sh.45, 000 was sold for Sh.50, 000. The sale proceeds have been
debited to the bank account and credited to a suspense account. No other
accounting entries have been made in respect of the sale.
7. Depreciation is to be calculated for the year ended 30 June 2010 as follows:
● Property 2% per annum on cost
● Plant and equipment 15% per annum straight line on cost
● Furniture and fittings 10% per annum reducing balance.
Depreciation on plant and equipment shall be charged to cost of sales while
depreciation on furniture shall be charged to administration expenses. Apportion
depreciation on property equally between cost of sales, selling and distribution and
administrative costs.
9 A dividend of 10% has been proposed by the directors

Required
i. Statement of financial performance
ii. Statement of changes in equity (retained earnings column only)
iii. Statement of financial position

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DAA 101 - INTRODUCTION TO ACCOUNTING II

8.5 Activities
Activity 1
The following trial balance was extracted from the books of Kochenya Ltd as at 31 December
2008 is as follows:
Sh.000 Sh.000
Sales 651,200
Purchases 364,320
Inventory 1 January 2008 61,160
Distribution costs 47,520
Administration costs 64,240
Land at valuation 462,000
Property at cost 352,000
Property accumulated depreciation as at 1 January 2008 93,720
Plant and equipment at cost 563,200
Plant and equipment accumulated depreciation as at
1 January 2008 109,120
Trade receivables 165,000
Trade payables 98,560
Bank 7,040
Ordinary issued Sh.500 shares 616,000
Share premium account 176,000
Interim dividends 5,280
Interest income 6,160
Revaluation reserve as at 1 January 2008 132,000
Retained earnings as at 1 January 2008 132,000
8% loan redeemable 2112 88,000
-------
2,102,760 2,102,760
–------ -------
Additional information
(i) Inventory as at 31 December 2008 amounted to Sh68, 640,000 at cost. A review of
inventory revealed the following:
(a) Items costing Sh3, 520,000 that had been included in the inventory at 31
December 2008 were found to have deteriorated. Their normal selling price was Sh.
5,280,000, but even after remedial work of Sh.880, 000, these items could only be
sold for Sh. 3,960,000.
(b) Items sold on a sale or return basis had been omitted from the inventory as at 31
December 2008 and included in sales in December 2008. The cost of these items
was Sh.704, 000 and their sale price was Sh.1, 056,000. All these items were
returned in good condition to Tor in January 2009.
(ii) The interest on the loan has not been paid for the year ended 31 December 2008 and
must be accrued.
(iii) Depreciation is to be calculated for the year ended 31 December 2008 as follows:
(a) Property 5% per annum on reducing balance method
(b) Plant and equipment 10% per annum on reducing balance basis
(iv) Depreciation calculated for the year is to be charged 70% cost of sales, 15%
distribution costs and 15% administration costs.
DAA 101 - INTRODUCTION TO ACCOUNTING II

8.5 Activities
Activity 2
Study the trial balance provided below from Awendo Ltd as at 30 June 2010 is as follows:
Sh. ‘000’ Sh. ‘000’
Revenue 13,132
Purchases 8,630
Inventory 1 July 2009 930
Selling and distribution costs 1,230
Administrative expenses 765
Land at valuation 800
Property at cost 7,830
Property accumulated depreciation as at 1 July 2009 2,130
Plant and equipment at cost 1,280
Plant and equipment accumulated depreciation as at 1 July 2009 710
Furniture and fittings at cost 350
Furniture and fittings accumulated depreciation as at 1 July 2009 150
Trade receivables 2,120
Trade payables 1,530
Bank 1,340
Ordinary issued Sh.1000 shares 5,000
Dividends paid 500
Revaluation reserve as at 1 July 2009 620
Retained earnings as at 1 July 2009 453
7% loan redeemable 2115 2,000
Suspense account 50
------
25,775 25,775

Additional information
1. Inventory as at 30 June 2010 was valued at Sh.850, 000.
2. The interest on the loan has not been paid for the year ended 30 June 2009 and must
be accrued.
3. Tax charge for the year ended 30 June 2010 is estimated at Sh.550, 000.
4. Adjustments for accruals and prepayments of Selling and distribution expenses are
required for the year ended 30 June 2010 as follows:
Accruals Prepayments
Selling and distribution expenses Sh.95, 000 Sh.60, 000
5. In addition Sh.150, 000 for administrative costs need to be accrued as at 30 June 2010.
6. During the year an item of plant costing Sh.100, 000 and with accumulated
depreciation of Sh.45, 000 was sold for Sh.50, 000. The sale proceeds have been
debited to the bank account and credited to a suspense account. No other accounting
entries have been made in respect of the sale.
7. Depreciation is to be calculated for the year ended 30 June 2010 as follows:
● Property 2% per annum on cost
● Plant and equipment 15% per annum straight line on cost
● Furniture and fittings 10% per annum reducing balance.
Depreciation on plant and equipment shall be charged to cost of sales while
depreciation on furniture shall be charged to administration expenses. Apportion
 DAA 101 - INTRODUCTION TO ACCOUNTING II

8.6 Self - Test Questions

The following information was extracted from the books of Soni Limited for the year ended 30
April 2012
Land and buildings 850,000 Ordinary share capital 2,000,000
Inventory 123,000 Share premium 44,100
Purchases 2,200,000 Revaluation reserve 76,000
return inwards 65,000 Sales 3,000,000
Carriage outwards 61,740 Return outwards 57,330
Provision for depreciation plants and
Salaries and wages 176,400 110,250
machinery
Sales commission 132,300 Rent income 72,300
Administrative
89,530 Trade payables 132,300
wages
Plants and
300,000 Retained earnings b/f 110,370
machinery
Motor vehicle
56,780
expenses
Motor vehicles 220,500
Distribution
24,450
expenses
Administrative
66,000
expenses
Directors
66,150
remuneration
Trade receivables 970,500
Bank balance 200,300
5,602,650 5,602,650
Additional information
i. Inventory was valued at Sh. 230,000 as at 30 April 2012
ii. Soni Ltd uses its motor vehicles for distribution purposes. Depreciation for motor vehicles and
plants and machinery was provided for at Sh. 70,560 and Sh. 22,050 respectively. The directors
agreed to provide for corporate tax at Sh. 110,250
iii. Directors remuneration is to be charged to administration expenses

Required
i. Income statement for the year ended 30 April 2012 (10 Marks)
ii. Statement of Financial Position as at 30 April 2012) (10 Marks)

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DAA 101 - INTRODUCTION TO ACCOUNTING II

8.7 Summary

In this lecture you have learnt that:

1. Published financial statements are analyzed by
Classification of expenses by Function/Cost of Sales Method
Classification by Nature of expense

8.8 Suggestion for further reading

Students are required to review the questions provided and questions in the reference books
provided in this manual

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DAA 101 - INTRODUCTION TO ACCOUNTING II

Recommended Readings

1. Wood, Frank & Sangster, A: Business Accounting 1 - 9th ed. - New Delhi:
Pearson Education, 2002.
2. Maheshwari, SN. & Maheshwani, SK - An Introduction to Accountancy - 7th
ed. - New Delhi; Vikas Publishing House, 2003.
3. Sutherland, Jonathan and Canwell, Diane: Key Concepts in Accounting and
Finance - London: Palgrave Macmillan, 2004.

Additional Readings

1. Nicholson, Margaret: Mastering Accounting Skills - 2nd ed. - London: Palgrave

Macmillan, 2000.
2 Mukherjee, Amitabha and Hanif, Mohammed: Modern Accountancy (Volume
11) - 2nd ed. - New Delhi: Tata McGraw Hill, 2003.

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