NABTEB 2023 GCE Advanced Financial Accounting Expo – Nov/Dec

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*NABTEB GCE 2023 ADVANCED FINANCIAL ACCOUNTING ANSWERS*

“`SECTION A: ANSWER ALL QUESTIONS“`

(1)
(a) Prime cost: Prime cost refers to the direct costs incurred in the production of goods or services. It includes the cost of raw materials, direct labor, and any other directly attributable costs to the production process. In simpler terms, prime cost is the sum of all the expenses directly involved in creating a product or delivering a service.

(b) Factory overhead: Factory overhead, also known as manufacturing overhead or indirect costs, refers to the indirect expenses incurred in the production process that cannot be directly attributed to a specific product or service. These costs include rent, utilities, depreciation of machinery, factory supplies, and other expenses related to the operation of the manufacturing facility. Factory overhead is necessary for the production process but is not directly tied to the creation of individual products.

(c) Work in-progress: Work in-progress, also known as work in process (WIP), refers to the partially completed goods or services that are still undergoing production but are not yet finished. It represents the stage between raw materials and finished products. Work in-progress includes the costs of materials, labor, and factory overhead that have been incurred up to the current stage of production. It is an important measure for tracking the progress and value of goods or services that are in the process of being produced.
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(2)
(i) A receipt and payment account records actual cash inflows and outflows, irrespective of the period when the income or expense was earned or incurred. On the other hand, an income and expenditure account records revenue earned and expenses incurred during a specific accounting period, regardless of the actual cash inflows and outflows.

(ii) A receipt and payment account follows a cash basis of accounting, meaning it recognizes transactions when cash is received or paid. In contrast, an income and expenditure account follows an accrual basis of accounting, recognizing revenue when it is earned and expenses when they are incurred, regardless of the cash flow.

(iii) A receipt and payment account primarily focuses on tracking cash inflows and outflows, providing information about the organization’s cash position. An income and expenditure account, on the other hand, focuses on measuring the organization’s profitability by recording revenue and expenses.

(iv) A receipt and payment account covers all cash transactions, including both revenue and capital items. In contrast, an income and expenditure account only includes revenue and expenses related to the organization’s day-to-day operations.
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(3)
(i) Interest on Capital
(ii) Salary or Commission to Partners
(iii) Share of Profits or Losses
(iv) Interest on Drawings
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(4a)
An incomplete record refers to a situation where a business or individual does not maintain a complete set of double-entry accounting records. Double-entry accounting involves recording each financial transaction with at least two equal and offsetting entries. Incomplete records may occur when a business maintains only a single-entry system, lacks proper documentation, or fails to record certain transactions. In such cases, it becomes challenging to produce accurate financial statements or assess the financial position of the entity.

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(4b)
(i) Insolvency or Liquidation:
One significant reason for preparing a statement of affairs is when a business is insolvent or undergoing liquidation. A statement of affairs provides a snapshot of the business’s assets, liabilities, and the equity interests of the owners at a specific point in time. This information is crucial for determining how the assets will be distributed among creditors during the liquidation process.

(ii) Evaluation of Financial Position:
Another reason for preparing a statement of affairs is to assess the financial position of an entity, especially in cases where complete accounting records are not available. This statement helps stakeholders, such as investors or creditors, understand the assets and liabilities of the business and provides insights into its solvency.
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(5)
(i) Ease of Formation
(ii) Unlimited Liability
(iii) Pass-Through Taxation
(iv) Management and Decision-Making
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(6)
(i) Drawer:
The drawer is the party that creates and issues the bill. Typically, it is the creditor or seller who expects to receive payment from the debtor or buyer. The drawer directs the drawee to make a payment to the payee, who is usually the drawer or a third party.

(ii) Drawee:
The drawee is the party upon whom the bill is drawn, and it is the entity that is expected to make the payment. The drawee is usually the debtor or the buyer in a transaction. When the drawee accepts the bill, they become the acceptor.

(iii) Payee:
The payee is the party to whom the payment specified in the bill is to be made. The payee is usually the drawer (creditor or seller) or a third party nominated by the drawer. The payee is entitled to receive the payment from the drawee or acceptor.

(iv) Acceptor:
The acceptor is the drawee who has accepted the bill, indicating their commitment to make the specified payment on the maturity date. The acceptance is typically evidenced by the drawee writing the word “accepted” along with their signature on the face of the bill.

(v) Endorser:
An endorser is a party who signs the back of the bill, transferring the right to receive the payment to another party. Endorsement can be either in blank (making the bill bearer) or to a specific person or entity. The endorser becomes liable if the acceptor defaults on payment.

(vi) Endorsee:
The endorsee is the party to whom the bill is endorsed, and who becomes the new holder of the bill. The endorsee has the right to claim payment from the acceptor upon maturity.
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(7a)
Variable costs are expenses that change in direct proportion to the level of production or sales. These costs fluctuate based on the volume of output. Examples of variable costs include direct labor, raw materials, and sales commissions. As production or sales increase, variable costs increase, and as production or sales decrease, variable costs decrease. Variable costs are often depicted on a per-unit basis.
On the other hand, Fixed costs are expenses that remain unchanged regardless of the level of production or sales. These costs are incurred even if there is no production activity. Examples of fixed costs include rent, salaries of permanent employees, insurance premiums, and utilities. Fixed costs are incurred regularly and are not affected by short-term fluctuations in production or sales volume.

(7b)
Direct overhead costs are expenses that can be easily traced to a specific product or department. These costs are directly associated with and necessary for the production of a particular product or service. Examples of direct overhead costs include direct labor specific to a product, materials used in manufacturing a product, and direct machine maintenance costs.
On the other hand,Indirect overhead costs are expenses that cannot be directly allocated to a specific product or department. These costs are incurred to support the overall operations of a business. Examples of indirect overhead costs include facility rent, depreciation expenses, utilities, administrative salaries, and general maintenance costs. These costs are shared among various products or departments based on allocation methods, such as activity-based costing, contribution margin, or machine hours. Indirect overhead costs are allocated rather than directly assigned.
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(8)
(i) Limited Liability:
Shareholders in a Public Limited Company enjoy limited liability, meaning their personal assets are generally protected from the company’s debts and liabilities. The liability of each shareholder is limited to the amount unpaid on their shares. This feature provides a significant advantage in terms of risk management for investors.

(ii) Publicly Traded Shares:
A defining characteristic of a Public Limited Company is that its shares are traded on a public stock exchange. This allows the company to raise capital by selling shares to the public. Investors can buy and sell these shares in the open market, providing liquidity for shareholders and facilitating the company’s ability to attract a large number of investors.

(iii) Minimum Share Capital:
A Public Limited Company is required to have a minimum amount of authorized and issued share capital as stipulated by the regulatory authorities in the jurisdiction where it is incorporated. This minimum capital requirement is typically higher than that of a private limited company, reflecting the larger scale and public nature of a Public Limited Company.

(iv) Statutory Requirements and Disclosure:
Public Limited Company’s are subject to more extensive regulatory and disclosure requirements compared to private companies. They are often required to comply with strict corporate governance standards, provide regular financial reports, and disclose significant information to the public and regulatory authorities. This transparency is crucial to protect the interests of shareholders and the public.
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(9a)
An inter-departmental transfer refers to the movement of goods, services, or resources from one department of a company to another. In large organizations with multiple departments, it is common for one department to provide goods or services to another department as part of the internal business operations. This transfer is treated as an internal transaction and is reflected in the accounting records. Inter-departmental transfers are essential for the smooth functioning of the organization, allowing different departments to collaborate efficiently.

(9b)
(PICK ANY TWO)

(i) Performance Evaluation:
Departmental accounts help in evaluating the performance of each department within the organization. By maintaining separate accounts for different departments, management can assess the contribution of each department to the overall profitability and efficiency of the company. This information is crucial for making informed decisions about resource allocation, staffing, and process improvements.

(ii) Cost Control and Analysis:
Departmental accounts facilitate cost control and analysis. By tracking the revenues and expenses of each department separately, management can identify areas where costs may be escalating or where cost-saving measures can be implemented. This allows for better cost management and ensures that resources are allocated efficiently to achieve the company’s objectives.

(iii) Budgeting and Planning:
Departmental accounts are instrumental in the budgeting and planning process. Each department can have its own budget, specifying expected revenues, costs, and resource requirements. This aids in the overall financial planning of the organization, enabling management to set realistic targets for each department and monitor their performance against the established budgets.

(iv) Decision-Making:
When decisions need to be made regarding resource allocation, investments, or cost-cutting measures, departmental accounts provide essential financial data. Management can make informed decisions by considering the financial performance and needs of each department separately, ensuring that decisions align with the overall strategic goals of the organization.
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(10)
(a) Container stock account:
The purpose is to segregate transactions that are not yet resolved or finalized. Once discrepancies are resolved, entries in the suspense account are adjusted, and the relevant transactions are moved to the appropriate accounts.

(b) Container suspense account:
The purpose is to segregate transactions that are not yet resolved or finalized. Once discrepancies are resolved, entries in the suspense account are adjusted, and the relevant transactions are moved to the appropriate accounts.

(c) Container debtors:
The purpose is to keep a record of container-related receivables, providing clarity on the outstanding amounts due from customers for the containers they have used or are obligated to return.
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