QUESTION 1 [18 MARKS] For each report listed in the following, indicate whether it relates to financial or managerial accounting. Explain the reasoning behind your answer for each item. a. Projected net income for next quarter by division b. Defective goods produced as a percentage of all goods produced c. Income statement for the most current year, prepared in accordance with GAAP d. Monthly sales broken down by geographic region e. Production department budget for the next quarter f. Balance sheet at the end of the current year, prepared in accordance with GAAP QUESTION 2 [4 MARKS] Identify and briefly explain any four incentives by companies to produce information for stakeholders. QUESTION 3 [8 MARKS] The following is a list of balances for company XYZ ltd. Required: Prepare a trial balance for company XYZ Itd. QUESTION 3 [10 MARKS] The draft financial statements of Madras, a limited liability company, for the year ended 31 December 2022 is currently under review. The following points have been raised: a. An ex-employee has started an action against the company for wrongful dismissal. The company's legal team have stated that the ex-employee is not likely to succeed. The following estimates have been given by the lawyers relating to the case: i. Legal costs (to be incurred whether the claim is successful or not) P50,000 ii. Settlement of claim if successful P150,000 Currently no provision has been made by the company in the financial statements. b. The company has a policy of refunding the cost of any goods returned by dissatisfied customers, even though it is under no legal obligation to do so. This policy of making refunds is generally known. At the year end returns totalling P48,000 have been made. c. A claim has been made against a company for injury suffered by a pedestrian in connection with building work by the company. Legal advisers have confirmed that the company will probably have to pay damages of P100,000 but that a counterclaim made against the building subcontractors for P50,000 would probably be successful. Required: State with reasons what adjustments, if any, should be made by the company in the financial statements. (10 marks) QUESTION 4 [10 MARKS] Judy decided to start her own gift basket business. Here is a summary of transactions she made for the month of September: - Sept. 1: Judy invested P10,000 to start her new business. - Sept. 2: Judy paid P900 in cash for gift basket supplies to make gift baskets. - Sept. 3: Judy paid P800 rent for the month of September for her storefront. - Sept. 4: Judy bought P400 worth of office equipment (desk, chairs). - Sept 28: Judy sold P2,200 in gift baskets and gift basket accessories. - Sept. 29: Judy bought P1,500 worth of straw and birchwood to make gift baskets on credit payable in 90 days. - Sept. 30: Judy took inventory at the end of the month and found she had P1,800 worth of gift basket supplies remaining. Required: Prepare a worksheet indicating the accounting equation using the above transactions. (10 marks) SECTION B - CASE STUDIES [50 MARKS] Answer ALL questions in this section. QUESTION 1 [32 MARKS] Bata manufactures a high volume of reasonably prices shoes for elderly people. The company has a trade receivables ledger that is material to the financial statements containing four different categories of account. The categories of account, and the risks associated with them, are as follows: i. Small retails shops. These accounts represent nearly two thirds of the accounts on the ledger by number and one third of the receivables by value. Some of these customers pay promptly, others are very slow. ii. Large retails shoe shops (including a number of overseas accounts) that sell a wide range of shoes. Some of these accounts are large and overdue. iii. Chains of discount shoe shops that buy their inventory centrally. These accounts are mostly well-established high street chains. Again, some of these accounts are large and overdue; and iv. Mail order companies who sell the company's shoes. There have been a number of large new accounts in this category, although there is no history of irrecoverable debts in this category. Receivables listed under ii. And iv. are roughly evenly split by both value and number. All receivables are dealt with by the same managers and staff and the same internal controls are applied to each category of receivables. You do not consider that using the same managers and staff, and the same controls, is necessarily the best method of managing the receivables ledger. Bata has suffered an increasing level of irrecoverable debts and slow payers in recent years, mostly as a result of small shoe shops becoming insolvent. The company has also lost several overseas accounts because of a requirement for them to pay in advance. Management wishes to expand the overseas market and has decided that overseas customers will in future be allowed credit terms. Required: a. Classify the risks relating to the four categories of trade receivables as high, medium or low and explain your classification. (16 marks) b. Describe the internal controls that you would recommend to Twinkletoes to manage the risks associated with the receivables ledger under the headings a. All customers (4 marks) b. Slow paying customers (4 marks) c. Larger accounts (4 marks) d. Overseas customers (4 marks) QUESTION 2 [18 MARKS] There are two important points at which assets and liabilities are measured in financial accounting: initial recognition and reporting date of the balance sheet. At a balance sheet date there are fundamentally two alternative measurement concepts: 1. Historical costs based on the measurement of assets and liabilities at purchase price (costs) that were incurred at moment of purchase less any adjustments made subsequent to acquisition, and 2. Fair value measurement based on market prices. Required: Discuss each of the two alternative measurement methods. In your discussion outline the pros and cons of each method. (18 marks)
