WAEC SSCE - Financial Accounting - 2005

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The ratio that measures the ability of a firm to meet short-term obligations is the quick asset ratio. This ratio compares a company's quick assets (cash, marketable securities, and accounts receivable) to its current liabilities. A higher quick asset ratio indicates that a company has more than enough quick assets to cover its short-term obligations. This ratio is important because it shows whether a company can pay its bills in the short term without having to sell off its long-term assets.

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A debit balance of N1,000 in the cash account means that the company has a positive balance of N1,000 in cash, which is the amount of money available in the cash account. The debit balance indicates that the cash account has more debits than credits, meaning that the company has spent more cash than it has received. In a double-entry accounting system, debits and credits are used to record financial transactions. Debits increase assets and expenses and decrease liabilities and income, while credits increase income and liabilities and decrease expenses and assets. In the case of the cash account, any money received is recorded as a debit, and any money spent is recorded as a credit. Therefore, a debit balance in the cash account means that the company has received less cash than it has spent. Conversely, a credit balance in the cash account means that the company has received more cash than it has spent. In summary, a debit balance of N1,000 in the cash account means that the company has N1,000 in cash available, but it has spent more cash than it has received.

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Capital expenditure refers to the money spent by a business on acquiring fixed assets such as buildings, machinery, equipment, and vehicles that are expected to provide long-term benefits to the company. These assets are not intended for resale, but rather for use in the production of goods or services. In contrast, the cost of running a business refers to the day-to-day expenses incurred by the company in the ordinary course of operations, such as rent, utilities, wages, and supplies. Similarly, money spent on buying goods for resale refers to the cost of inventory or stock-in-trade that is intended for resale. Extra capital paid in by the proprietor refers to additional funds contributed by the owner of the business, which may or may not be used for capital expenditures.

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Depreciation of assets is provided for in consideration of wear and tear. When a company acquires a fixed asset, it is expected to be used over a period of time to generate income for the business. However, over time, the asset gradually wears out or becomes obsolete, leading to a reduction in its value. To account for this reduction in value, the cost of the asset is spread over its useful life through an accounting process called depreciation. Depreciation is an estimate of the amount that the asset has decreased in value due to wear and tear or obsolescence over the accounting period.

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The part of the CPU used for the processing of data is the Arithmetic and Logic Unit (ALU). The ALU performs arithmetic operations like addition, subtraction, multiplication, and division on numerical data. It also performs logical operations like comparisons (greater than, less than, equal to), and Boolean operations (AND, OR, NOT) on non-numerical data. The ALU is responsible for carrying out the actual computations and logical operations that are necessary to execute a program or perform a task on a computer.

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Gross profit is calculated in the trading account. The trading account is a financial statement that calculates the gross profit earned or the loss incurred by a business entity during a specific period. Gross profit is the profit made by a company after deducting the cost of goods sold (COGS) from its net sales revenue. The formula to calculate gross profit is: Gross Profit = Net Sales Revenue - Cost of Goods Sold (COGS) The trading account lists all the direct expenses and revenues of a business, including the opening and closing stock, purchases, and sales. It also takes into account any adjustments made for returns, discounts, and allowances. Thus, the trading account provides a comprehensive view of the company's gross profit earned during the period under consideration. The gross profit is then transferred to the profit and loss account to calculate the net profit earned by the company.

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To determine the amount of distributable profit, we first need to calculate the interest on the partners' drawings and capital accounts. Ade's drawings are N8,000, so the interest on his drawings at 5% would be: N8,000 x 5/100 = N400 Bola's drawings are N2,000, so the interest on his drawings at 5% would be: N2,000 x 5/100 = N100 Ade's capital account balance is N60,000, so the interest on his capital account at 10% would be: N60,000 x 10/100 = N6,000 Bola's capital account balance is N40,000, so the interest on his capital account at 10% would be: N40,000 x 10/100 = N4,000 The total interest on the partners' drawings and capital accounts would be: N400 + N100 + N6,000 + N4,000 = N10,500 Next, we need to calculate the total profit available for distribution, which is the net profit for the year minus the interest on the partners' drawings and capital accounts: N30,000 - N10,500 = N19,500 Since the profit and losses are shared equally, each partner's share of the profit would be: N19,500 / 2 = N9,750 Therefore, the amount of distributable profit is N9,750. However, we need to add back the interest on the partners' capital accounts to arrive at the total amount available for distribution: N9,750 + N10,500 = N20,250 So the answer is option: N20,500.

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Bookkeeping is the systematic recording of business transactions. It involves the process of identifying, measuring, and recording financial transactions such as purchases, sales, receipts, and payments. The purpose of bookkeeping is to provide a clear and accurate picture of a company's financial health, including its assets, liabilities, equity, revenue, and expenses. Bookkeeping is essential for financial management, reporting, and decision-making. It is often performed by bookkeepers or accountants, who use specialized software and follow accounting principles to ensure that all transactions are recorded accurately and in compliance with relevant laws and regulations.

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Direct material refers to the cost of raw materials that are directly used in the production process. Direct expenses, on the other hand, are the expenses that are directly related to the production process such as direct labor, freight charges, etc. The sum of direct material and direct expenses gives us the prime cost of a product. Prime cost represents the cost of direct resources required to produce a product, excluding any overhead costs or indirect expenses. Hence, the correct option is 'prime cost.'

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Books of account are opening by means of a principal journal. The principal journal is also known as the general journal and is used to record transactions that cannot be recorded in other specialized journals such as the purchases journal or the sales journal. It is the first book of entry where all transactions are initially recorded, including opening entries for assets, liabilities, and equity accounts. In other words, the principal journal is used to record transactions that do not fit into any other journal. These transactions include the purchase or sale of fixed assets, adjustments, and other types of transactions that are not part of the normal day-to-day operations of the business. Therefore, the principal journal is used to open the books of account by recording the initial transactions in the accounting system.

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A capital reserve is a reserve account created to record profits that are not distributable as dividends to shareholders. This can include profits from the sale of fixed assets, investments or other extraordinary gains that are not related to the company's regular business operations. Of the options given, share premium is a capital reserve. It represents the amount received by a company in excess of the face value of its shares when they are issued. This excess amount is credited to the share premium account, which is a type of capital reserve. Therefore, share premium is the correct answer to the question.

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The private ledger, also known as the subsidiary ledger, contains detailed information on individual accounts that make up the general ledger. It is used to support and provide more detailed information for the general ledger. Accounts found in the private ledger include accounts receivable, accounts payable, inventory, and other accounts that require more detailed tracking. Of the options given, only "drawings account" can be found in the private ledger. The drawings account is a personal account that records the amount of money withdrawn by the owner(s) of the business for personal use. This account is part of the owner's equity section of the general ledger and is maintained in the private ledger. Rent account, sales account, and bank account are typically found in the general ledger.

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A trial balance is a list of all the balances of ledger accounts in a double-entry accounting system, arranged in a specific format. The purpose of the trial balance is to ensure that the total debits equal the total credits in the accounting records, which is the fundamental principle of double-entry bookkeeping. The trial balance includes all ledger accounts, both current assets and current liabilities, as well as accounts related to debtors and creditors. For each account, the balance is calculated by adding all the debits and credits in the account and then subtracting the smaller amount from the larger amount to determine the balance. The trial balance format consists of two columns: one for the debit balances and one for the credit balances. By comparing the total debit and credit balances in the trial balance, accountants can identify any errors or discrepancies in the accounting records. If the total debits and credits are equal, it suggests that the accounting records are accurate and that the double-entry bookkeeping has been properly applied. If the trial balance does not balance, it indicates that there is an error in the accounting records that needs to be identified and corrected. Therefore, a trial balance is a list of all ledger account balances, both debit and credit, in a specific format, used to ensure that the accounting records are accurate and in balance.

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Manufacturing wages is an example of a direct expense. Direct expenses are costs that are directly linked to the production of goods or services. In this case, manufacturing wages are wages paid to workers who are directly involved in the production process of the goods being manufactured. These wages are directly tied to the manufacturing process and are necessary for the production of goods. On the other hand, royalties are payments made for the use of intellectual property such as copyrights, patents or trademarks, and are not directly related to the production of goods. Carriage inwards is the cost of transporting goods purchased by a business from a supplier, which is not directly linked to the production process. Carriage outwards is the cost of transporting goods sold by a business to its customers, which is also not directly related to the production process.

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When shares are sold at less than the nominal value, it means they are issued at a discount. Nominal value, also known as face value, is the original value of a share stated in the company's memorandum of association. If shares are issued at a price lower than the nominal value, it is considered a discount. This could occur when a company is in need of capital and is willing to offer shares at a lower price to attract investors. For example, if a company's nominal value of a share is N10 and the shares are sold at N8, then the shares are issued at a discount of N2 per share. The discount amount would be shown separately in the financial statements as a deduction from the share capital.

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An allowance given to a customer by a supplier for prompt payment is a cash discount. This is a discount that is offered to customers who pay their invoices within a specified period of time, typically a few days to a few weeks. For example, a supplier may offer a 2% cash discount to customers who pay their invoices within 10 days. If a customer has an invoice for N10,000 and pays it within 10 days, they would receive a discount of 2% x N10,000 = N200. So they would only have to pay N9,800 instead of the full N10,000. The purpose of a cash discount is to encourage customers to pay their invoices promptly, which helps to improve the supplier's cash flow and reduces the risk of bad debt. It also benefits the customer by reducing the cost of their purchases. It's important to note that a cash discount is different from a trade discount. A trade discount is a reduction in the list price of goods or services, which is often based on the quantity purchased or the type of customer. Trade discounts are not dependent on prompt payment and are not recorded in the accounting records.

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The total of the sales journal is entered on the credit side of the sales account. The sales account is a nominal account that is used to record all sales made by the business. When sales are made on credit, they are recorded in the sales journal, which is a special journal used to record all credit sales transactions. At the end of the accounting period, the total of the sales journal is posted to the sales account in the general ledger. Since the sales account is a revenue account, it has a normal credit balance, and the total of the sales journal is entered on the credit side of the account. This increases the balance of the sales account, which represents the total revenue earned by the business from sales during the accounting period. On the other hand, the cash account is a real account that is used to record all cash transactions, including cash sales. Therefore, the total of the sales journal is not entered on the debit side of the cash account.

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A control account is used to derive missing figures in a system of incomplete records. Incomplete records refer to situations where a business does not maintain complete and accurate financial records, such as single entry bookkeeping systems. A control account summarizes the transactions of the business and provides a snapshot of the financial position of the business at any given time. It is used to derive missing figures by comparing the balances of the control account at different periods, making adjustments for transactions not included in the account, and calculating the missing figures based on the adjusted balances. The other options listed, such as bank account, profit and loss account, and bank statement, are financial tools used in accounting, but they are not specifically designed to derive missing figures in a system of incomplete records.

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Resources consumed but to be paid for within the next accounting period are classified in the balance sheet as current liabilities. Current liabilities are obligations that a company expects to settle within one year or its normal operating cycle, whichever is longer. They represent debts that must be paid off in the near future, typically within a year. Examples of current liabilities include accounts payable, wages and salaries payable, and taxes payable. When a company consumes resources such as goods or services but has not yet paid for them, it incurs a liability that is due in the short term, typically within a year. This liability is classified as a current liability on the balance sheet. This way, the balance sheet shows how much the company owes in the short term, allowing investors, creditors, and other stakeholders to assess the company's liquidity and financial health.

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Fixed assets are long-term tangible assets that are held by a business for the purpose of generating revenue. Examples of fixed assets include property, plant, and equipment, such as land, buildings, machinery, and furniture. Therefore, the correct option in this case is furniture.

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When both debit and credit entries of a transaction are shown in the cash book, it is described as a contra entry. A contra entry is a type of double entry that occurs when the same account is debited and credited in the same transaction. In other words, it is an entry that nullifies the effect of another entry. In the case of a cash book, a contra entry is typically made when cash is deposited or withdrawn from a bank account. For example, if a company withdraws cash from the bank for office use, the cash account will be debited, and the bank account will be credited. However, if the company deposits cash into the bank, the cash account will be credited, and the bank account will be debited. This is an example of a contra entry, as the bank account is debited and credited in the same transaction.

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The maximum level of cash held by a cashier under an imprest system is called the float. An imprest system is a method of controlling cash disbursements and is commonly used by organizations to manage their petty cash funds. Under this system, a fixed amount of cash is provided to the cashier or custodian of the fund, which is known as the float. This float is used to make small, routine payments such as office supplies or travel expenses. The float represents the maximum amount of cash that the cashier is authorized to hold at any given time. It is set by the organization based on the expected level of cash disbursements and is typically replenished periodically. Once the cash in the fund reaches a certain level, a reimbursement or advance is made to bring the float back up to its authorized level. In summary, the maximum level of cash held by a cashier under an imprest system is called the float. It represents the amount of cash authorized to be held by the cashier for small, routine payments, and is typically replenished periodically to maintain its authorized level.

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The statement that is not correct is "drawings increase capital". Drawings are the amounts taken out by the owner(s) from the business for personal use, and they reduce the capital of the business. Therefore, the correct statement is "drawings reduce capital". Profits increase the capital of the business because they increase the amount of money the business has earned, and thus the amount of money that belongs to the business owner(s). Losses reduce the capital of the business because they decrease the amount of money the business has earned, and thus the amount of money that belongs to the business owner(s).

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If a firm has not kept proper books of account, an increase in closing capital over opening capital represents a profit. This is because closing capital represents the value of a firm's assets after all liabilities have been paid. When the closing capital is higher than the opening capital, it means that the firm has earned more money during the period than it has spent. In a proper accounting system, the profit is calculated by subtracting the total expenses from the total revenue. However, in the absence of proper books of account, it is not possible to determine the exact amount of profit or loss. Therefore, an increase in closing capital is used as an indicator of profit. It is important to note that the increase in closing capital may also be due to other factors such as capital contributions, sale of assets, or reduction in liabilities. However, in the absence of proper books of account, it is assumed that the increase in closing capital is primarily due to profit. In summary, an increase in closing capital over opening capital in a firm that has not kept proper books of account represents a profit.

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Factory overhead refers to all indirect costs of production that cannot be directly allocated to a particular product or process. Depreciation of plant and machinery is an example of factory overhead because it cannot be directly traced to a specific product or job. Royalties, raw materials consumed, and carriage outwards are not considered factory overhead because they can be directly traced to a specific product or job.