Financial Accounting – The Godfather Vol 1




Introduction to Financial Accounting

Final Exam

May 2013


Time allowed: THREE hours only

The marks for this exam constitute 100% of the total marks for this private tuition module of VB Excellence.


Permitted materials:

For the entire duration of this exam, you may use:

  • Your calculator
  • Your brains
    • Your fundamentals
    • Your knowledge
    • Your memory
    • Your logic
    • Your pen/pencil


Answer ALL Questions in Section A (30 marks), B (50 marks), and C (20 marks).






Section A (30 marks)

Multiple Choice Questions (MCQs)


  1. Which of the following is an asset to the firm? (1 mark)
    1. Machinery owned by the firm.
    2. Money owed by the firm to one of its suppliers in respect of goods purchased on credit.
    3. An overdrawn balance on the firm’s bank account.
    4. The capital of the firm.


  1. Which of the following is a liability of the firm? (1 mark)
    1. A building owned by the firm.
    2. Cash in the firm’s safe.
    3. Money owed to the firm by its debtors.
    4. Money which the firm has borrowed and has not yet repaid.


  1. When a firm pays one of its creditors by cash, but records the item as a payment by credit card, the effect on its profit, assets and liabilities are: (1 mark)
    1. Profit is overstated and liabilities are understated
    2. Profit is understated and liabilities are overstated
    3. Profit is estimated correctly and assets are understated.
    4. Profit is estimated correctly and assets are overstated.
    5. Profit, assets and liabilities are all estimated correctly.


  1. Which of the following events is the right one for the issue of 1,000 £1 shares: (1 mark)
    1. Increase in capital, decrease in cash
    2. Increase in income, decrease in liabilities
    3. Increase in capital, increase in cash
    4. Increase in assets, decrease in liabilities


  1. In accounting, the term purchase refers to: (1 mark)
    1. All items bought.
    2. Only goods bought on credit.
    3. Only those goods bought for resale.
    4. Only goods bought and paid for.
    5. The accounting equation is: (2 marks)
      1. Assets minus equity is equal to liabilities.
      2. Assets plus liabilities is equal to equity.
      3. Equity minus liabilities is equal to assets.
      4. Liabilities minus equity is equal to assets.


  1. ALC’s total sales for the year ending 31st December 20XX is £500,000 and its gross profit is equal to 25% of its cost of sales. Therefore its cost of sales for the year is: (2 marks)
    1. £250,000
    2. £375,000
    3. £125,000
    4. £410,000


  1. FMZ Company had at the start of the year, PPE worth £100,000 after accumulated depreciation of £20,000 and depreciation expenses of £10,000 which was calculated on a straight line basis. At the end of the year this balance stood at £65,000. Given that there were no revaluations of assets, which of the following explains the year-end balance: (3 marks)
    1. The balance should be £90,000 since that’s the net book value.
    2. The balance should be £65,000 since the actual depreciation for this year should be £35,000.
    3. The balance should be £80,000 given the fact that accumulated depreciation is equal to £20,000.
    4. The balance should be £65,000 since there must have been some disposals.


  1. The following information relates to a firm’s trading during the month of April.
Gross profit for the month


Expenses for the month


Net profit

Equals 17% of the sales for the month

The firm’s cost of sales for the month of April equates to: (2 marks)

  1. Cannot be determined from the information given.
  2. £35,000
  3. £18,000
  4. £45,000


  1. The balance sheet of any firm as at any particular date is intended to show: (1 mark)
    1. The nature of the firm’s business at that date.
    2. The identity of the firm’s owners at that date.
    3. The financial position of the firm at that date.
    4. The market value of the firm at that date.


  1.  When preparing the financial statements of an entity, the going concern concept should be applied, only if the entity concerned: (1 mark)
    1. Is not expected to incur losses for the foreseeable future.
    2. Will never be wound up.
    3. Is expected to continue in operational existence for the foreseeable future at a level of activity not significantly less than its current level of activity.
    4. Is not expected to be able to continue operating.


  1.  Which of the four following accounting concepts is sometimes referred to as the matching concept: (1 mark)
    1. The accruals concept.
    2. The prudence concept.
    3. The going concern concept.
    4. The consistency concept.


  1.  When it comes to valuing and recording inventories, we must always: (1 mark)
    1. Record it at the higher of cost and net realisable value.
    2. Record it using LIFO only.
    3. Record it using FIFO only.
    4. Record it at the lower of cost and net realisable value.


  1.  ZIRA’s planning on launching a new clothing brand and expects the costs of material and labour that are required in order to produce each product equate to £15 per unit. ZIRA expects to sell this product at £35 each; their accountant gives them the following additional information: salaries are expected to cost £20,000 per year; rent £5,000 per year; yearly equipment maintenance £7,500. How many units does ZIRA need to sell before they can start making any money? (2 marks)
    1. 2,000
    2. 1,625
    3. 1,725
    4. None of the above.


  1.  In terms of inventory valuation techniques, which of the following statements is correct: (1 mark)
    1. LIFO will always result in greater profits and greater cost of sales.
    2. FIFO will always result in lower cost of sales and greater profit.
    3. AVCO will always lie between LIFE and FIFO values.
    4. The sum of the digits method is undoubtedly the best method of inventory valuation.


  1.  HPCD bought a building with a useful economic life of 10 years and residual value of £200,000 for £1.5m in January 2010. As at January 2016, given the facts that there have been no disposals, additions or revaluations, and that we would use a 20% depreciation charge if we were to use a reducing balance method (RBM), the net book value of the building would be (Straight line method = “SLM”): (2 marks)
    1. £720,000 if we used SLM or £393,216 if we used RBM.
    2. £700,000 if we used SLM or £350,000 if we used RBM.
    3. £710,000 if we used SLM or £491,520 if we used RBM.
    4. £680,000 if we used SLM or £367,631 if we used RBM.


  1.  According to Bloots and Co’s Balance sheet, the tax payable as at 2007 equated to £167,250 and at 2008 this figure was £165,380. The income statement showed a tax paid figure that equated to £60,000. The actual tax paid in cash by Bloots and Co’s was: (2 marks)
    1. £60,000
    2. £61,500
    3. £63,940
    4. £61,870


  1.  Recording an asset as an expense will: (1 mark)
    1. Overstate liabilities and understate net income.
    2. Understate expenses and understate assets.
    3. Understate assets and understate expenses.
    4. Understate assets and understate net income.


  1.  Line Ltd’s receivables stood at £35,000 at the start of the year. Towards the end of the year, although some of their customers ended up paying £15,000, the company made an additional £20,000 worth of sales on credit during the year. Additionally, the company learned that one of its customers who owed £6,500 (it was rumoured) was on the verge of bankruptcy while the other, who owed the firm £8,500 actually went bankrupt. At the end of the year, Line Ltd’s debtors should equate to: (2 marks)
    1. £25,000
    2. £20,000
    3. £31,500
    4. £33,500


  1.  Handbunch Ltd expects to sell 10,000 products this year. Their fixed costs equate to £80,000 and the products (which cost £40 each (including direct labour and direct material) sell for $80. Given that the exchange rate for GBP and USD equates to £1 = $1.558 [hint: round off to 2 decimal places], what is Handbunch Ltd’s margin of safety (to the nearest ten)? (2 marks)
    1. 2,000
    2. 2,950
    3. 3,440
    4. 1,860


  1.  The learning experience from learning through VB Excellence has been:
    1. Absolutely, unbelievably incredible J
    2. Really good.
    3. Pretty average.
    4. Not good at all L




Section B

Question 1 (10 Marks)

Prove the fact that the Statement of Income, Statement of Financial Position, and the Statement of Cashflows are related / connected.


Question 2 (40 Marks)

J&B Ltd was set up on the 1st of January 2011 by 2 budding entrepreneurs who wanted to sell clothes (their dream and passion). Displayed below is the firm’s statement of income and statement of financial position for the year ending December 2011. The owners are also the joint CEOs and, with the objective of keeping themselves motivated all the time, created a policy whereby 25% of the firm’s profits are paid out as dividends with the remainder being reinvested back into the business. The company operates in the UK and pays a corporation tax of 25% on the accounting profit since that’s the same as the taxable profit (only in this lovely example).

During the year 2012 a variety of exciting events occurred at J&B. The enterprise took on an additional loan of £100,000 at an interest of 3.2% – this was in order to cater to a variety of expansion plans. On the 2nd of January 2012, the enterprise paid the overdraft in full. In February 2012, the firm bought £35,000 worth of inventory from its suppliers in Dubai since they expected a considerable increase in demand. The research conducted (which cost £750) proved to be right since they sold all of that for £125,000 of which £12,500 was on credit, in addition to all the inventory they had to start with (sold for £17,875; £2,500 of that was on credit). The items retailed for £25 each. The enterprise had to restock and hence, anticipating an even greater demand, in March 2012 they ordered an additional 15,500 items from the same supplier except that this time, it cost them £147,250 in total. 12,100 of those new items were sold of which 250 were returned from unhappy customers. The enterprise returned 200 of those items to its supplier in Dubai, but somehow managed to sell 50 of those items to other customers! The enterprise has a policy of valuing and recording inventory using the FIFO inventory management technique.

While salaries for the 2 entrepreneurs would remain at £12,983.5 each, another 2 part time employees were recruited; their salaries for the year worked out to £17,500 in total. New equipment was bought at a cost of £50,000; it is expected to last for 4 years and have a residual value of £6,480. The entrepreneurs’ accountant advised them that the use of the reducing balance method would be the most appropriate way to depreciate this asset. Another piece of equipment (bought for £15,000) was expected to produce 1,500 units in year 1; 2,300 in year 2; 2,800 in year 3; 1,850 in year 4; and 2,500 in year 5. The accountant wasn’t sure which depreciation method was the most relevant/feasible for this asset so he left it to the entrepreneurs to decide! The entrepreneurs found it necessary to buy another building so as to create an additional retail outlet. Lots of searching on the internet resulted them in getting a really good deal in that they managed to buy a building that was on a 60/40 plot for £150,000. They were advised that the building would last for 20 years with an expected residual value of £40,000. HMRC for some reason, believed that it was necessary for the enterprise to conduct an audit (using an external auditor); this was done and ended up costing the firm £7,500.

Godfather IS Godfather SoFP





Prepare the Statement of Income and Statement of Financial Position for J&B Limited for and as at the year ending 31 December, 2012



Section C

Question 3 (20 Marks)

Using the data created / reported from Section B Question 2, prepare the Statement of Cashflows for J&B Ltd for the year ending 31 December, 2012.