Explain what makes information in financial statements relevant to users.

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

QUESTION ONE :30 MARKS

 

a)      The following books of accounts were extracted from wamatangi Enteprises for the year ended 31^st DECEMBER 2018:

 

	Shs.
Opening stock of tea	100,000
Purchases – Tea	400,000
Salaries paid	80,000
Buildings	95,000
Cash in hand	2,000
Cash at bank	135,000
Rent, rates and council taxes	15,000
Insurance premium paid	3,000
Miscellaneous receipts	10,000
Sales	720,000
Discounts allowed	4,750
Bad debts	3,250
Building repairs	2,900
Miscellaneous expenses	8,700
Advertisement	20,000
Commission to sales manager	32,400
Furniture and fittings	35,000
Air conditioners	30,000
Sundry debtors	100,000
Sundry creditors	80,000
Loan on mortgage	70,000
Interest paid on the above	3,000
Prepaid expenses	4,000
Drawings	18,000
Bills payable (Current liability)	30,000
Bank charges	2,000
Legal charges	6,000
Motor vehicles	80,000
Travelling and conveyance	10,000
Capital	280,000

 

 

The following further information was  obtained :

 

1. Closing stock was Shs.55,000.
2. Legal charges include Shs.5,000 for the cost of stamps and registration of a new building acquired during the year.
3. Purchases include 4000 kg  tea valued at Shs.20,000, which was found totally spoilt.  An insurance claim of Shs.15,000 has been accepted by the insurance company.
4. Travelling and conveyancing include proprietor’s personal travelling for which he is charged Shs.4, 800.
5. The sales manager is entitled to commission of 7.5% of the total sales.  However any bad debts incurred during the year are deductible from such commission entitlements.
6. Debtors include:
7. Shs.10, 000 due from M & C0 (Creditors include Shs.18, 000 due to the same party).
8. Shs.5, 000 due from the sale of furniture.
9. Further bad debts of Shs.2, 000
10. Provision for bad debts is to be created at 2% of net amount outstanding from trade debtors.
11. Depreciation is chargeable as follows:

Buildings                           2.5%

Furniture and Fittings         10%

Air conditioners                 15%

Motor vehicles                   20%

12. Miscellaneous receipts represent sales proceeds of furniture, whose written down value was Shs.12, 000.
13. Prepaid expenses include insurance premiums for the next year.

 

Required:

Prepare a trading, profit and loss account for the year ended 31^st December 2018 and a Balance Sheet as at that date.[20 MARKS].

 

b)      Explain what is meant by materiality in relation to financial statements and state two factors affecting the assessment of materiality.                                                        (5 marks)

c)      Explain what makes information in financial statements relevant to users.      (5 marks)

 

 

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