Description

Financial Accounting

Sep 2026 Examination

 

Q1 A fast-growing design consultancy is reviewing its month-end accounting process after repeated posting errors delayed reporting. During August, the firm recorded cash received from clients, a cheque payment for utilities, petty cash spending on stationery and courier charges, credit sales of services to one corporate client, and office supplies purchased on credit. The finance manager notices that staff are unsure when to use the cash book, petty cash book, journal, and ledger. Some transactions were entered directly into ledgers without journal support, while others were placed in the wrong subsidiary books. Management wants a systematic process that ensures complete recording, proper posting, and reliable trial balance preparation. Using the accounting cycle and the rules of debit and credit, explain how the accounts team should record, post, and verify these transactions from subsidiary books through ledger and trial balance. Which books should be used for each transaction, and how should the final balances be checked for accuracy? (10 Marks)

Ans 1.

Introduction

The design consultancy’s posting errors stem from confusion about which subsidiary book to use for each transaction and a failure to route entries through the journal before posting to ledgers. Applying the accounting cycle systematically, along with the rules of debit and credit, gives the accounts team a clear process for recording, posting, and verifying every transaction accurately, replacing the current ad hoc approach with a repeatable system that scales as the firm continues to grow quickly.

Concept and Application

Understanding the Accounting Cycle

The accounting cycle begins with identifying and recording transactions in the appropriate

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Q2 From the following Trial Balance extracted from the books of Aarav Traders as of March 31, 2026, prepare the Trading Account, Profit & Loss Account for the year ended March 31, 2026, and a Balance Sheet as of that date. Particulars (Debit / Credit): Capital Account (- / 50,000), Drawings (4,500 / -), Opening Stock April 1 2025 (15,000 / -), Purchases & Sales (45,000 / 80,000), Wages (6,000 / -), Salaries (9,000 / -), Rent & Rates (4,000 / -), Sundry Debtors & Creditors (20,000 / 12,000), Plant & Machinery (30,000 / -), Cash at Bank (8,500 / -), Total (1,42,000 / 1,42,000). Adjustments: 1. Closing Stock on March 31, 2026, was valued at Rs.18,000. 2. Depreciate Plant & Machinery at 10% per annum. 3. Outstanding Salaries amounted to Rs.1,000. 4. Prepaid Rent was Rs.500. (10 Marks)

Ans 2.

Introduction

Preparing final accounts from a trial balance involves converting raw ledger balances into a Trading Account, Profit and Loss Account, and Balance Sheet that together show the business’s trading result, overall profitability, and financial position at year end. For Aarav Traders, this process also requires incorporating four adjustments that are not yet reflected in the trial balance figures themselves, each of which affects either the profit calculation, the

 

Q3(A) A mid-sized furniture manufacturer is experiencing declining margins despite steady sales growth. The CEO believes the finance team is grouping too many expenses under broad overheads, making it difficult to distinguish between raw material costs, direct labour, rent, utilities, insurance, administrative expenses, and interest expense. At the same time, the company is considering whether to continue producing a low-margin product line or shift resources to a premium customized range. Managers are also unsure how to reflect partially completed inventory, finished goods, and cost of goods sold in internal reviews. You have been asked to redesign the firm’s cost understanding to improve strategic control and long-term profitability. Design an integrated cost-management framework for the company that reclassifies its expenses into fixed, variable, direct, indirect, operating, and non-operating categories, while also incorporating opportunity cost into pricing and expansion decisions. How should this framework support profitability analysis, budgeting accuracy, and strategic decision-making? (5 Marks)

Ans 3A.

Introduction

The furniture manufacturer’s declining margins despite steady sales growth suggest that broad expense grouping is hiding important cost behavior. An integrated cost management framework classifying expenses into fixed, variable, direct, indirect, operating, and non-operating categories, alongside opportunity cost thinking, can restore clarity for pricing and

 

Q3(B) A listed company closed the year with strong net profit, preference dividend obligations, a mid-year equity issue, a late-year buyback, and convertible debentures that may dilute future earnings per share. The board is considering both an interim dividend and a final dividend, but expansion plans require substantial internal funding. Some directors want to maximize shareholder payouts to support market sentiment, while others argue that retained earnings should be preserved for future growth. The audit committee also wants clarity on when dividend liabilities arise and how they affect the balance sheet and statement of changes in equity. Management now needs a comprehensive policy for reporting earnings per share and dividend decisions credibly. Create a shareholder-reporting strategy that integrates basic EPS, diluted EPS, dividend decisions, retained earnings movements, and dividend-related liabilities into one coherent communication and accounting approach. How would your strategy balance investor expectations for payouts with the company’s need to preserve reinvestment capacity and transparent equity reporting? (5 Marks)

Ans 3B.

Introduction

The listed company’s strong profit, preference dividend obligations, equity issue, buyback, and convertible debentures all interact to affect both reported earnings per share and dividend decisions. A coherent shareholder reporting strategy must integrate all these elements while