ACCOUNTING FOR LAWYERS SAMPLE EXAM QUESTION

KENYATTA UNIVERSITY 2014

QUESTION 1

BORANA GALGALO returned from the Diaspora in January 2014 and set up a Wholesale Business in the COUNTY OF MARSABIT. With capital of KES 8,000,000 he bought equipment for use which cost him KES 5,000,000, leaving the balance in the bank.

BORANA bought goods intended for sale on credit for KES 7,000,000. During the first month of trading, he recorded the following transactions:

a.     He sold part of his original stock for KES 5,000,000 cash, which he paid into the bank and the remainder he sold for KES 6,000,000 on credit terms, the buyers to pay for the goods in the following month.

b.     He paid KES 7,000,000 to the suppliers of the original stock and purchased further goods on credit terms at a cost of KES 8,000,000

c. He paid out of the bank KES 600,000 for wages and office expenses of KES 120,000. Further expenses in the month amounted to KES 80,000 but remained unpaid

d. He sold some more goods (Which cost KES 900,000) for KES1,100,000 cash.

REQUIRED:

i.      Distinguish between (a) Working capital; (b) capital owned

FEEDBACK:

N.B. -Distinguish means you must identify the differences…

a.     WORKING CAPITAL refers the amount of capital that is availed to meet the daily expenses of running the business, while CAPITAL OWNED refers to the equity the proprietor will report on the Balance Sheet date.

b.     WORKING CAPITAL excludes capital that is tied up in fixed assets and part of the current assets committed to paying the current liabilities as they become due, while CAPITAL OWNED is the total Balance Sheet less the external liabilities.

c.     WORKING CAPITAL is calculated as Current assets –current liabilities while CAPITAL OWNED is Balance sheet total - External liabilities [or total assets- Liabilities (Long term and short term)]

ii.            Prepare a statement to show the Capital employed at the beginning of the month and the sources of that capital and prepare a further statement showing how BORANA’s capital changed (if it did change) after each of the transactions (a), (b), (c ), and (d)

FEEDBACK:

Capital employed- The total assets of the business, usually financed by the proprietor and creditors (long term and short term)

Therefore, capital employed in January 2014 is KES 15,000,000 i.e. KES 8,000,000 from BORANA and KES 7,000,000 from Creditors.

BALANCE SHEET OF BORANA GALGALO AS AT JANUARY 2014

		KES ‘000’	KES ‘000’ (a)	KES ‘000’ (b)		KES ‘000’ (c )	KES ‘000’ (d)
Capital		8,000	12,000	12,000		11,200	11,400
creditors		7,000	7,000	8,000		8,080	8,080
		15,000	19,000	20,000		19,280	19,480
Equipment		5,000	5,000	5,000		5,000	5,000
Stock		7,000	-	8,000		8,000	7,100
Debtors		-	6,000	6,000		6,000	6,000
Cash at Bank		3,000	8,000	1,000		280	1,380
		15,000	19,000	20,000		19,280	19,480
WORKINGS:
a. Debtors= 0 + 6,000,000=					6,000,000
Balance at bank= 3,000,000 + 5,000,000=					8,000,000
Total Sales (Cash+ Credit) = 5,000,000+6,000,000=					11,000,000
Less Cost of stock=					(7,000,000)
Profit=					4,000,000
New capital = 8,000,000 + 4,000,000=						12,000,000
(Currency = KES)
b. Balance at Bank= 8,000,000- 7,000,000=					1,000,000
Stock= 0 + 8,000,000					8,000,000
Creditors= 0 + 8,000,000=					8,000,000
Capital (no change) =						12,000,000
(Currency =KES)
c. Balance at bank= 1,000,000- (600,000 + 120,000)=					280,000
Creditors= 8,000,000 + 80,000 =					8,080,000
New Capital = 12,000,000- (600,000 +120,000+80,000) =						11,200,000
(Currency =KES)
d. Stock= 8,000,000- 900,000=					7,100,000
Total Sales=					1,100,000
Less: Cost of stock=					(900,000)
Profit=					200,000
***Cash= 280,000 + 1,100,000=					1,380,000
New Capital= 11,200,000 + 200,000=						11,400,000

***- You could also have added a CASH row to the table, so that the money is not part