Principles Of Accounts 2010 Jamb Examination

Gross profit is the difference between net sales and the cost of goods sold. To find it, we must first determine the net turnover and the actual cost of acquiring the goods sold.

Calculate Net Sales\( (\text{Net Turnover}) \)\[ \text{Net Sales} = \text{Sales} - \text{Returns Inwards} \]\[ \text{Net Sales} = 10,900 - 600 = 10,300 \]Calculate Net Purchases\[ \text{Net Purchases} = \text{Purchases} + \text{Carriage Inwards} - \text{Returns Outwards} \]\[ \text{Net Purchases} = 4,000 + 200 - 800 = 3,400 \]Calculate Cost of Goods Sold \( (\text{COGS}) \)\[ \text{COGS} = \text{Opening Stock} + \text{Net Purchases} - \text{Closing Stock} \]\[ \text{COGS} = 1,000 + 3,400 - 2,000 = 2,400 \]Calculate Gross Profit\[ \text{Gross Profit} = \text{Net Sales} - \text{COGS} \]\[ \text{Gross Profit} = 10,300 - 2,400 = 7,900 \]Note: Carriage outwards is a distribution expense and does not affect gross profit calculation.

The cost of goods available for sale represents the total value of inventory a business has at its disposal during the accounting period before any sales occur. It is calculated by adding the value of the stock at the start of the period to the net purchases made during that period.

Calculate Net Purchases\[ \text{Net Purchases} = \text{Purchases} + \text{Carriage Inwards} - \text{Returns Outwards} \]\[ \text{Net Purchases} = 4,000 + 200 - 800 = 3,400 \]Calculate Cost of Goods Available for Sale\[ \text{Cost of Goods Available for Sale} = \text{Opening Stock} + \text{Net Purchases} \]\[ \text{Cost of Goods Available for Sale} = 1,000 + 3,400 = 4,400 \]This figure represents the maximum amount of inventory that could have been sold to customers.

In financial accounting, the matching principle requires that expenses be matched to the period in which they are incurred. When an organisation has received a service or consumed a resource (enjoyed the benefit) but has not yet paid the supplier or provider by the end of the accounting period, the outstanding amount is known as an accrual. Accruals are recorded as current liabilities on the balance sheet and as expenses in the profit and loss account to ensure the financial statements accurately reflect the true cost of operations for that period.

The amount charged to the Profit and Loss account is the increase or decrease in the provision for bad debts during the year. First, we calculate the required new provision at the end of the year.

Calculate the new provision\[ \text{New Provision} = 4\% \times 20,000 = 800 \]Compare with the existing provision\[ \text{Existing Provision} = 500 \]Calculate the increase to be charged to Profit and Loss account\[ \text{Increase} = \text{New Provision} - \text{Existing Provision} \]\[ \text{Increase} = 800 - 500 = 300 \]Since the provision must be raised from N500 to N800, the difference of N300 is treated as an expense and debited to the Profit and Loss account.

In the Balance Sheet (Statement of Financial Position), the provision for bad debts shown is the total cumulative provision calculated at the specific reporting date. This amount is deducted from the Sundry Debtors to show the net amount the business realistically expects to collect.

Calculation:\[ \text{Provision} = 4\% \text{ of Sundry Debtors} \]\[ \text{Provision} = \frac{4}{100} \times 20,000 = 800 \]Therefore, N800 is the full provision value that will appear as a deduction from current assets in the balance sheet.

A periodic stock system is a method of inventory valuation where the inventory account and the cost of goods sold are not updated in real-time after every transaction. Instead, the business maintains a separate account for purchases and determines the final stock quantity and value only at specific intervals—typically at the end of the accounting period—through a physical stock count. This is in contrast to a perpetual inventory system, where quantities are updated continuously with every sale and purchase.

The LIFO (Last-In, First-Out) method assumes that the items most recently purchased (the last ones in) are the first ones sold. During a period of rising prices, these recent purchases are more expensive than older stock. By matching these higher, more recent costs against sales revenue, the Cost of Goods Sold (COGS) becomes higher than it would be under other methods like FIFO. This higher cost leads to a lower reported gross profit and a lower taxable income, while the remaining closing stock is valued at the older, lower prices.

To determine the value of purchases, we work backwards from the Cost of Goods Sold (COGS) formula. The information regarding rates and wages is irrelevant to the calculation of purchases.

Identify the standard formula\[ \text{COGS} = \text{Opening Stock} + \text{Purchases} - \text{Closing Stock} \]Substitute the known values for the 2008 period\[ \text{Opening Stock (Stock at 31/12/07)} = 4,200 \]\[ \text{Closing Stock (Stock at 31/12/08)} = 3,900 \]\[ \text{COGS} = 6,000 \]Rearrange the formula to solve for Purchases\[ \text{Purchases} = \text{COGS} - \text{Opening Stock} + \text{Closing Stock} \]\[ \text{Purchases} = 6,000 - 4,200 + 3,900 \]\[ \text{Purchases} = 1,800 + 3,900 = 5,700 \]

The total expenses to be charged to the Profit and Loss account must be calculated using the accrual basis of accounting, considering adjustments for both rates and wages.

Calculate Rates Expense

Rates Expense = Cash Paid + Opening Prepayment − Closing Prepayment

Rates Expense = 1,300 + 1,000 − 1,500 = 800

Calculate Wages Expense

Wages Expense = Cash Paid − Opening Accrual + Closing Accrual

Wages Expense = 2,200 − 1,150 + 1,350 = 2,400

Calculate Total Expenses

Total Expenses = Rates Expense + Wages Expense

Total Expenses = 800 + 2,400 = 3,200

To verify using adjustment differences:

Increase in prepayment = 1,500 − 1,000 = 500 (subtract from cash total)
Increase in accrual = 1,350 − 1,150 = 200 (add to cash total)

Total cash paid = 1,300 + 2,200 = 3,500

Total expense = 3,500 − 500 + 200 = 3,200

Therefore, the correct total expense based on standard accrual accounting is 3,200.

Opening capital is determined by the accounting equation (Capital = Assets - Liabilities) at the start of the period (31/12/08).

Identify Opening Assets\[ \text{Furniture and fittings} = 21,000 \]\[ \text{Office equipment} = 9,800 \]\[ \text{Debtors} = 6,800 \]\[ \text{Cash at bank} = 7,000 \]\[ \text{Total Opening Assets} = 21,000 + 9,800 + 6,800 + 7,000 = 44,600 \]Identify Opening Liabilities\[ \text{Creditors} = 4,900 \]Calculate Opening Capital\[ \text{Opening Capital} = \text{Total Assets} - \text{Total Liabilities} \]\[ \text{Opening Capital} = 44,600 - 4,900 = 39,700 \]Note: Drawings and year-end values are only used to calculate net profit or closing capital and do not affect the opening balance.