KCA UNIVERSITY

DIPLOMA EXAMINATION

DIT 302: FINANCIAL MGT. FOR IT

ASSIGNMENT ( 2 & 3 )

ASSIGNMENT: 2

QUESTION: ONE (3 MARKS)

a) List and briefly explain TWO accounting concepts

I. Accrual Concept: This concept states that revenues and expenses should be recognized in the
accounting period to which they relate, regardless of when cash transactions occur. In simpler
terms, it means that income is recorded when it is earned, and expenses are recorded when
they are incurred, not necessarily when cash changes hands. This ensures that financial
statements accurately reflect the financial position and performance of a business over a specific
period.

II. Matching Concept: The matching concept dictates that expenses should be recognized in the
same accounting period as the revenues to which they relate. This principle ensures that the
costs incurred in earning revenue are deducted from the revenue generated in the same period
to accurately reflect the profitability of the business. For example, if a sale is made in a particular
month, the expenses incurred to produce that sale (such as manufacturing costs or sales
commissions) should also be recognized in the same month, aligning expenses with the related
revenue.

b) Briefly explain FOUR advantages of accounting

I. Financial Clarity and Decision Making: Accounting provides clear and accurate financial
information about the performance and financial position of a business. This enables
management, investors, creditors, and other stakeholders to make informed decisions. For
instance, financial statements like the income statement and balance sheet help assess
profitability, liquidity, and overall financial health.

II. Legal Compliance: Proper accounting practices ensure compliance with legal requirements and
regulations. This includes tax reporting obligations, financial reporting standards (like GAAP or
IFRS), and other statutory requirements. Compliance reduces the risk of legal penalties, audits,
and ensures transparency in financial reporting.

III. Facilitates Planning and Budgeting: Accounting data supports effective planning and budgeting
processes. By tracking revenues, expenses, and cash flows over time, businesses can forecast
 future financial needs, set realistic goals, and allocate resources efficiently. Budgets based on
accurate accounting information help monitor performance against financial targets.

IV. Enhanced Credibility and Stakeholder Confidence: Reliable financial statements and reports
enhance the credibility of a business. They instill confidence in investors, creditors, suppliers,
and customers about the company's financial stability and performance. This credibility can lead
to improved access to capital, favorable credit terms, and stronger business relationships.

c) Illustrate the Financial accounting cycle

i. Transaction Identification: The cycle begins with identifying and analyzing business transactions.
These transactions can include sales, purchases, expenses, and other financial activities that
impact the company's financial position.

ii. Journalizing: Once transactions are identified, they are recorded in the general journal. Each
transaction is entered with specific details including date, accounts affected, amounts, and a
brief description.

iii. Posting to Ledger: The information from the general journal is then posted to the appropriate
accounts in the general ledger. Each account in the ledger accumulates all transactions related to
that specific account.

iv. Trial Balance: After posting entries to the ledger, a trial balance is prepared. This is a list of all
ledger accounts with their respective debit and credit balances. The purpose of the trial balance
is to ensure that the total of all debit balances equals the total of all credit balances, which
verifies that the double-entry accounting system is in balance.

v. Adjusting Entries: Adjusting entries are made to ensure that revenues and expenses are
recognized in the correct accounting period. These entries are typically related to accruals
(revenues or expenses that have been earned or incurred but not yet recorded) and deferrals
(prepaid expenses or unearned revenues).

vi. Adjusted Trial Balance: After adjusting entries are made, an adjusted trial balance is prepared.
This trial balance reflects all adjustments made and is used to ensure that the debits still equal
the credits after adjusting entries.
 vii. Preparing Financial Statements: Using the adjusted trial balance, financial statements are
prepared. The main financial statements include:

viii. Income Statement: Shows the revenues, expenses, and net income (or net loss) for the period.
ix. Balance Sheet: Presents the assets, liabilities, and equity of the company as of the end of the
accounting period.
x. Statement of Cash Flows: Details the cash inflows and outflows during the period, classified into
operating, investing, and financing activities.
xi. Closing Entries: At the end of the accounting period, temporary accounts (such as revenue and
expense accounts) are closed by transferring their balances to the retained earnings account (for
corporations) or to the owner's equity account (for sole proprietorships or partnerships).

xii. Post-Closing Trial Balance: After closing entries are made, a post-closing trial balance is prepared.
This trial balance verifies that all temporary accounts have been closed properly and that the
accounting equation (Assets = Liabilities + Equity) is in balance.

xiii. Reversing Entries (Optional): In some cases, reversing entries are made at the beginning of the
new accounting period to simplify the recording of certain transactions, especially those related
to accruals or deferrals.

d) Describe the purpose of the following source documents

i. Cash receipt - A cash receipt is a document issued by a business when it receives cash from a
customer, client, or another party. It typically includes details such as the date of payment, amount
received, purpose of payment

ii. Credit note : A credit note is a document issued by a seller (supplier) to a buyer (customer) to reduce
the amount owed by the buyer. It is typically issued in cases where goods are returned, services are not
up to standard, or pricing errors occur.

iii. Debit notes : A debit note is issued by a buyer (customer) to a seller (supplier) to request a reduction
in the amount owed. It may be issued in cases where additional goods are received, additional services
are provided, or pricing adjustments need to be made.

iv. Outgoing invoice : a document issued by a company to its customers detailing goods or services
provided and requesting payment.
QUESTION: TWO ( 2 MARKS)

Describe each of the following users of accounting information and explain their need for the
information.

1) Share holders Shareholders are individuals or entities that own shares in a company. They
are essentially the owners of the company.

2) Government The government includes various regulatory bodies and tax authorities that
oversee business practices and collect taxes.

3) Suppliers - Suppliers are entities that provide goods or services to a company on credit.

4) Customers - Customers are individuals or businesses that purchase goods or services from a
company.

ASSIGNMENT 3

QUESTION: ONE ( 2 MARKS)

Fill in the gaps in the question given bellow

DESCRIPTION TREATMENT IN THE ( INCOME STATEMENT ) TREATMENT IN THE (BAL.SHEET)

1 Prepaid income deduct Current liability

2 Prepaid expense a. deduct current asset

3 Accrued/outstanding income b. add c. current asset

4 Accrued outstanding expense add d. current liability

QUESTION: TWO (8 MARKS)

Following trial balance relates Geobec petro ltd, as at 31/December/2023

TRIAL BALANCE

DETAILS(000) (000)

Capital 400,000

Motor vehicle 250,000

Fixtures and fittings 30,000

Freehold premise 84,000

Trade payables 86,0000

Trade receivables 16,000

Cash in bank 150,000

Cash at hand 100,000

Purchases 200,000

Sales 480,000

Return inwards/return outwards 3,000 2400

Return outwards 10,000

Carriage inwards 9,000

drawings 23,500

Inventory 1st, January 2023 68,000

Salaries and wages 22,000

insurance 7,800

Electricity and water 15,930

Rent paid 1 6,000

discounts 4,790 5,000

Rent recieved 3, 200

Cumulated depreciations:

Motor vehicles 12,000

Fixtures and fittings 6,400

Bad debt 1,400

Total 990,000 990,000

Additional information:

a. Closing inventory was valued at 20,000,000

b. Depreciation on tangible asset were set as under

i. Motor vehicle 20%

ii. Fixtures and fittings 10%

c. Accrued balance on electricity and electricity amounted to 12,000,000

d. Prepaid rent receivable and payables amounted to 80,000 and 2000 respectively

e. Allowans for doubtful debt is to be provide at 10% of the trade receivables

Required;

1) the income statement

Revenue:

 Sales: 480,000,000
 Less: Returns Outwards: (10,000,000)
 Net Sales: 470,000,000

Cost of Goods Sold:

 Opening Inventory: 68,000,000

 Add: Purchases: 200,000,000
 Add: Carriage Inwards: 9,000,000
 Less: Returns Inwards: (3,000,000)
 Less: Closing Inventory: (20,000,000)
 Cost of Goods Sold (COGS): 254,000,000
 Gross Profit: 216,000,000

Operating Expenses:

 Salaries and Wages: 22,000,000

 Insurance: 7,800,000
 Electricity and Water: 15,930,000
 Add: Accrued Electricity and Water: 12,000,000
 Rent Paid: 16,000,000
  Less: Prepaid Rent Payable: (2,000,000)
 Bad Debt: 1,400,000
 Allowance for Doubtful Debt (10% of Trade Receivables): 1,600,000 (16,000,000 * 10%)
 Depreciation on Motor Vehicle (20% of 250,000,000): 50,000,000
 Depreciation on Fixtures and Fittings (10% of 30,000,000): 3,000,000
 Total Operating Expenses: 127,730,000
 Operating Income: 88,270,000

Other Income:

 Rent Received: 3,200,000

 Discounts Received: 5,000,000
 Less: Discounts Allowed: (4,790,000)
 Total Other Income: 3,410,000
 Net Income: 91,680,000

2) Statement of financial position as at the end of the financial year

ASSETS:

Non-Current Assets:

 Freehold Premises: 84,000,000

 Motor Vehicles: 250,000,000
 Less: Accumulated Depreciation: (62,000,000) (12,000,000 + 50,000,000)
 Net Motor Vehicles: 188,000,000
 Fixtures and Fittings: 30,000,000
 Less: Accumulated Depreciation: (9,400,000) (6,400,000 + 3,000,000)
 Net Fixtures and Fittings: 20,600,000
 Total Non-Current Assets: 292,600,000

Current Assets:

 Inventory: 20,000,000
 Trade Receivables: 16,000,000
 Less: Allowance for Doubtful Debts: (1,600,000)
 Net Trade Receivables: 14,400,000
 Cash in Bank: 150,000,000
 Cash at Hand: 100,000,000
 Prepaid Rent Receivable: 80,000
 Total Current Assets: 284,480,000

Total Assets: 577,080,000

EQUITY AND LIABILITIES:

Equity:

 Capital: 400,000,000
 Drawings: (23,500,000)
 Retained Earnings: 91,680,000

Total Equity: 468,180,000

Non-Current Liabilities:

 None

Current Liabilities:

 Trade Payables: 86,000,000

 Accrued Electricity and Water: 12,000,000
 Prepaid Rent Payable: 2,000,000
 Total Current Liabilities: 100,000,000

Total Equity and Liabilities: 577,080,000