Free Financial Accounting 2 (Intermediate) Revision

1. TRUE or FALSE: The fair value accounting treatment is used for all financial instruments intended to be held for sale and not to maintain ownership, whereas the Equity method is used for joint ventures or significant influence investments.

2. The IAS 2 provides different methods of measuring inventory. _________inventory valuation method tracks every single item in an inventory individually from the time it enters the inventory until the time it leaves it.

3. According to IAS 38 Intangible Assets, which of the following are the three critical attributes of an intangible asset?

4. The following balances were extracted from the records of Tern East Enterprises, a sole trader, as at 31 December: 

Additional information
i. On 30 September 2025, Tern Enterprises repaid part of the loan by cheque of USD 6,000.
ii. Total discount allowed and discount received amounted to USD 960 and USD 900, respectively. Bad debts written off during the year amounted to USD 240.
iii. Total sales amounted to USD 360,000, while purchases amounted to USD 253,300. There were no cash sales nor cash purchases.
iv. The following expenses were paid by cheque during the year:

v. Tern makes a uniform gross profit to cost of sales of 2/3 every year.
vi. Tern did not maintain a record of cash withdrawn from the bank for personal use, so the deficit in the bank is due to personal drawings.

Required
Compute the net profit for the year ended 31 December 2025.

5. Malozi, Maloki, and Mathayo are partners in the business, Bazzard East Enterprises, selling motorcycles. The trial balance given below was extracted from the books of the partnership as at 31/12/2025:

Additional information
i. Depreciation is to be provided as follows:

ii. Included in the value of land and buildings is USD 90,000, which is the cost of land. For admission of Mathayo, the land was revalued to USD 135,000.
iii. Before his admission as a partner on 01/07/2025, Maliko was the Sales Manager earning a salary of USD 450 per month (included in salaries).
iv. Mathayo was admitted on 01/07/2025 under the following arrangement:
• To introduce capital of USD 90,000.
• New profit and loss sharing ratios of 3:2:2 for Malozi, Maloki, and Mathayo, respectively from 01/07/2025.
• Before the admission of Mathayo, Malozi, and Maloki were sharing profits and losses equally. Mathayo was to bring in a goodwill of USD 15,750 (no entry or adjustment for the goodwill has been made yet). Partners agreed to write off this goodwill.
v. The partners are entitled to:
• Interest of 8% per annum on capital balances
• Malozi’s salary was USD 680 and Mathayo’s USD 450 per month.
vi. Inventory as at 31/12/2025 was valued at USD 18,900.
vii. The expenses and revenues accrued evenly throughout the year.

Required
Prepare the Partners' income statement and appropriation account for the year ended 31 December 2025 and compute the share of profit available for each partner.

6. Tigoni East Ltd had the following trial balance as of 30/09/2025:

Additional information
i. Prepaid expenses as at 30/09/2025 amounted to USD 200.
ii. Administration expenses accrued as at 30/09/2025 amounted to USD 350.
iii. The company paid the interest on loan stock for the year ended 30/09/2025 and on 5/10/2025.
iv. The trade receivables included USD 1,000 from a debtor who has now been declared bankrupt.
v. Depreciation is provided annually on the cost of non-current assets held at the end of the year as follows:

vi. The company’s directors propose that:
• The preference share dividend is paid.
• A dividend of 12.5% on ordinary shares will be paid.
•USD 12,500 will be transferred to general reserves.
vii. The provision for doubtful debts is to be adjusted to 6% of trade receivables on 30/09/2025.
viii. Gross profit is at a rate of 20% of sales.

Required
Prepare the Income statement for the year ended 30/09/2025, and compute the retained profit/(loss) for the year.

7. TRUE or FALSE: Non-Cumulative preferred stock is more attractive to investors than cumulative.

8. The ______cost calculates the direct costs of raw materials and labor that are involved in the production of a good.

9. The following trial balance was extracted from the books of White Rhino Limited, an Iron sheet manufacturing company, as at April 30, 2025:

Additional information
i. As at 30 April, 2025, accrued factory wages and office salaries amounted to USD 600 and USD 90, respectively.
ii. In January 2025, the company paid USD 450 as rent for the period 01/01/2025 to 31/12/2025.
iii. Depreciation is provided as follows:

iv. The office expenses are to be apportioned between the factory and the office in the ratios indicated below:

v. Inventories were valued as follows:

vi. With effect from 01/05/2024, the directors introduced a policy of charging factory profit at a rate of 20% on manufacturing cost.
vii. The directors have proposed a 12% final dividend.
viii. The corporate tax rate is 30%.

Required
Prepare the Manufacturing account for the year ended 30 April 2025, and compute the market value (MV) of goods manufactured.

10. On 1 January 2025, Baraka was admitted as a life member of Zadari Golf Club after paying a life membership fee of USD 200,000. His expected membership period is 20 years. The club recognizes life membership fees as income over the expected membership period.

Required:
What amount should be transferred from the Life Membership Fund Account to the Income and Expenditure Account in each of Years 1 and 2?

11. TRUE or FALSE: A nominal account starts the next fiscal year with a zero balance, whereas a real account starts with the ending balance from the prior period

12. The following information has been extracted from the books of Fashari East Limited as of 31 December 2025 and 2026:
Income statement for the year ended 31 December

Statement of financial position as at 31 December

Additional information
i. The taxation balances shown above are agreed with the revenue department
ii. During the year ended 31 December 2026, non-current assets originally costing USD 33,000 were sold for USD 6,000. The accumulated depreciation on these assets as at the date of disposal was USD 22,800.

Required
In accordance with the requirements of IAS 5 (Statement of Cash Flows), compute the net cash flow from operating activities

13. Which of the following correctly completes the statement below?
(i) __________ ratios, also known as activity financial ratios, are used to measure how well a company is utilizing its assets and resources, whereas (ii) __________ ratios measure the amount of capital that comes from debt.

14. The following trial balance was extracted from the books of account of Halima East Enterprises, a sole proprietor based in Mombasa, as at 30 September 2025:

Additional information
i. During the year, goods costing USD 2,500 were destroyed by fire. However, the insurance company has accepted a claim for USD 2,000 only. No record was made in respect of this transaction.
ii. The following information relates to the firm as at 30 September 2025:

iii. A debtor had returned goods on 29 September 2025 amounting to USD 1,000 million. Talima sells goods at a uniform profit margin of 30%. Thus, the transaction was totally omitted from the books of account and the goods returned were not included in the closing inventory in note (i) above.
iv. Provision for depreciation should be provided as follows:

v. Allowance for doubtful debts is to be maintained at 7.5 % of the accounts receivable.

Required
 Compute the net profit for the year ended 30 September 2025

Lukasa owns a store, Leaftosser  East Enterprises, located in Kisumu, but does not observe the double-entry rule of bookkeeping.
The following balances were extracted from his books as at 31 October 2025:

15.

The following transactions relate to the financial year ended 31 October 2025:
i. Sales and purchases were all on credit and amounted to USD 38,000 and USD 41,600, respectively.
ii. Accrued electricity expenses as at 31 October 2025 amounted to USD 380.
iii. The following transactions were processed through the bank account:

iv. The business makes a normal gross profit margin of 30% on the selling price.
v. Motor vehicles are depreciated at the rate of 20% per annum on a reducing balance basis. A full year’s depreciation was provided on a motor vehicle disposed of in the course of the year. The motor vehicle had been bought at USD 5,000 and had an accumulated depreciation of USD 2,440 at the time of disposal.
vi. Discounts received and discounts allowed amounted to USD 800 and USD 1,400, respectively.
vii. Furniture is depreciated at the rate of 10% per annum on cost effective from the date of purchase. The additional furniture was purchased on 1 May 2025, while the cost of the furniture at the beginning of the year was USD 4,000.
viii. Bad debts of USD 400 were written off. The allowance for doubtful debts is to be maintained at 5% of the trade receivables at the end of the financial year.

Required
Compute the net profit for the year ended 31 October 2025.

16. In reference to IFRS 9, what is meant by a company’s business model?

17. The net debtors in Tito’s balance sheet after a provision of 8.5% were USD 142,500 on 1 January,2025. The net figure on 31 December, 2025 was USD 163,800. You are to write off a debt of USD 1,200 and correct for USD 8,100 received from debtors recorded in error in sales.

Required
i. Compute the closing balance on the bad debt provision(BD) account if the policy to provide for 8.5% of debtors is continued?
ii. Compute the increase in provision(PR)

18. A transaction for which there is uncertainty about where it should be recorded is temporarily recoded in a _______account.

19. The following trial balance was extracted from the books of account of Boshi East Enterprises, a sole proprietor based in Nairobi, as at 30 September 2025:

Additional information
i. The following information relates to the firm as of 30 September 2025:

ii. During the year, goods costing USD 2,500 were destroyed by fire. However, the insurance company has accepted a claim for USD 2,000 only. No record was made in respect of this transaction.
iii. Provision for depreciation should be provided as follows:

iv. Allowance for doubtful debts is to be maintained at 7.5 % of the accounts receivable.
v. A debtor had returned goods on 29 September 2025 amounting to USD 1,000. Boni sells goods at a uniform profit margin of 25 %. This transaction was totally omitted from the books of account, and the goods returned were not included in the closing inventory in note (i) above.

Required
Compute the net profit for the year ended 30 September 2025

20. The following information was extracted from the books of Mambati East Limited as of 30 September 2025:

Additional information
i. Corporation tax is estimated at USD 217,500.
ii. As of 30 September 2025, the following balances were relevant:

iii. The allowance for doubtful debts was to be reduced by USD 8,625.
iv. Half of the interest on debentures was still outstanding as at 30 September 2025.
v. The Directors have proposed that a dividend be paid to preference shareholders and to the ordinary shareholders (10%) after a transfer of USD 27,500 to the general reserve.
vi. Depreciation is to be provided as follows:

Required
Prepare the Income statement for the year ended 30 September 2025 and compute the retained profit for the year.

21. TRUE or FALSE: Total Manufacturing Cost = Prime cost - Manufacturing overhead.

22. Farasi Enterprises sells flat-screen television sets (TVs) to the general public at a gross profit margin of 15%. Farasi purchases the Televisions from a wholesale distributor who charges a mark-up of 10%. If the TVs cost the wholesale manufacturer USD 3,000 each, then how much does Farasi sell them for?

23. In the context of nonprofit accounting, which of the following definitions is correctly matched with its term?

24. The following financial statements relate to Mata East Limited for the years ended 30 September 2025 and 2026:
Income statement for the year ended 30 September

Statement of financial position as of 30 September

Additional information
i. The market price of the company’s ordinary shares on 30 September 2025 was USD 50 and on 30 September 2026 was USD 40.
ii. All purchases were on credit in both years.
iii. Cost of sales for the year ended 30 September 2026 was USD 2,250,000, while that for the year ended 30 September 2026 was USD 1,850,000.
iv. Credit sales constituted 75% of the total sales in both the years 2023 and 2024.
v. Assume the balance at the statement of financial position date represents an average for the period.
vi. Assume a year has 365 days.

Required:
Calculate for each financial year ending 30 September 2026, the following:
i. Quick ratio(QR)
ii. Current ratio(CR)
iii. Average collection period(ACP)

25. The following statement of financial position relates to Furaha East Enterprises as at 31 March 2026, with comparative figures for the year ended 31 March 2025:

Additional information
i. Dividends amounting to USD 10,000 were paid during the year ended 31 March 2026.
ii. Tax paid during the year ended 31 March amounted to USD 13,750.
iii. The proceeds of sales of the investment were USD 3,750.
iv. Interest of USD 9,375 was paid, and interest of USD 3,125 was received during the year ended 31 March 2026.
v. The property, plant, and equipment as at 31 March of each year were as follows:

vi. During the year, a plant with an original value of USD 11,250 and a net book value of USD 6,250 was sold for USD 4,625.

Required
In accordance with the requirements of IAS 7 (Statement of Cash Flows), compute the net cash from operating activities.