Chapter 17 INCOMPLETE RECORDS Introduction Some businesses especially

Chapter 17 INCOMPLETE RECORDS

Introduction Some businesses, especially the small ones, may not keep a full set of accounting books, owing to: Insufficient resources A lack of manpower with accounting skills Poor bookkeeping practices Also, some businesses may have lost their accounting records in an accident.

Introduction In these cases, it is not easy to prepare financial statements at the end of an accounting period because many key figures are not available. This chapter covers ways to deduce the necessary figures and prepare financial statements from incomplete records.

Deduction of net profit or loss When records of revenues and expenses are too sketchy or inadequate, it is not possible to prepare an income statement to ascertain the net profit or loss for a particular accounting period. In this case, the net profit or loss has to be deduced from other relevant figures.

Deduction of net profit or loss Deducing the figure from opening and closing capital balances Normally, the business owner would keep records of the capital invested in starting a business, along with any additional capital contributed as well as drawings made during the period. Unless the owner has contributed capital or made drawings during the current period, a change in the capital balance between two periods can only be caused by the net profit or loss for the current period.

Deduction of net profit or loss Deducing the figure from opening and closing capital balances Opening capital + Net profit ( Net loss) = Closing capital Therefore, the net profit or loss for a period can be derived as the difference between the opening and the closing capital balances of the period.

Deducing profit or loss Exhibit 17. 1 A sole trader had a capital balance of $200, 000 as at 31 December 2014, the year-end date. In the following year, neither extra capital was brought in nor drawings made by the owner. As at 31 December 2015, the capital balance amounted to $300, 000.

Deducing profit or loss Exhibit 17. 1 The net profit or loss for the year ended 31 December 2015 can be determined as follows: Net profit / (loss) = Capital balance as at 31 December 2015 Capital balance as at 1 January 2015 = $300, 000 $200, 000 = $100, 000 Therefore, the sole trader would have made a net profit of $100, 000 for the year.

Deduction of net profit or loss Deducing the figure from capital balances, capital contributions and drawings Sometimes, additional capital may be contributed or drawings made during a period. Any new capital added will increase the capital balance, while drawings made will reduce the capital balance.

Deduction of net profit or loss Deducing the figure from capital balances, capital contributions and drawings Therefore, the net profit or loss for a period can be derived as follows:

Additional capital contributed and drawings Exhibit 17. 2

Deduction of capital balances Sometimes, the capital balances may not be readily known. In this case, we have to deduce the capital balances before calculating the net profit or loss figure. The unknown capital balances can be determined without preparing a capital account. What is required are the balances of assets and liabilities at the end of the accounting period.

Deduction of capital balances There are two ways to determine capital balances: 1. Using the accounting equation 2. Preparing a statement of affairs A statement that lists the balances of assets and liabilities of a business

Determining capital balances Exhibit 17. 3 H Wong has not kept a full set of accounting books for his business. The only information he can provide is the balances of assets, liabilities and drawings as at 31 March 2014 and 31 March 2015 as shown in the following.

Determining capital balances Exhibit 17. 3 Assets Vans (net) Furniture and fixtures (net) Inventory Trade receivables Bank Cash Liabilities Trade payables Drawings 31 March 2014 31 March 2015 $1, 000 $700, 000 $85, 000 $95, 000 $111, 000 $10, 000 $800, 000 $630, 000 $99, 000 $124, 000 $170, 000 $20, 000 $30, 000 — $90, 000 The capital balances as at 31 March 2014 and 2015 and the net profit or loss for the year ended 31 March 2015 can be determined using the following methods.

Determining capital balances Exhibit 17. 3 1. Using the accounting equation The accounting equation states that: or

Determining capital balances Exhibit 17. 3 1. Using the accounting equation 31 March 2014 31 March 2015 $2, 001, 000 $1, 000 $700, 000 $85, 000 $95, 000 $111, 000 $10, 000 $1, 843, 000 $800, 000 $630, 000 $99, 000 $124, 000 $170, 000 $20, 000 Liabilities Trade payables $20, 000 $30, 000 Capital Balance $1, 981, 000 $1, 813, 000 Assets Vans (net) Furniture and fixtures (net) Inventory Trade receivables Bank Cash

Determining capital balances Exhibit 17. 3 1. Using the accounting equation Capital balance as at 31 March 2015 Drawings Capital balance as at 1 April 2014

Determining capital balances Exhibit 17. 3 2. Preparing a statement of affairs This method is more commonly used in public examinations. What is needed is to show the subtraction of liabilities from assets in a statement in order to calculate the capital balance as at that date.

Determining capital balances Exhibit 17. 3 2. Preparing a statement of affairs The statements of affairs as at 31 March 2014 and 2015 are prepared as follows: H Wong Statement of Affairs as at 31 March 2014 $ Assets Vans (net) Furniture and fixtures (net) Inventory Trade receivables Bank Cash Less Capital Liabilities: Trade payables 1, 000 700, 000 85, 000 95, 000 111, 000 10, 000 2, 001, 000 20, 000 1, 981, 000

Determining capital balances Exhibit 17. 3 2. Preparing a statement of affairs H Wong Statement of Affairs as at 31 March 2015 Assets Vans (net) Furniture and fixtures (net) Inventory Trade receivables Bank Cash Less Capital Liabilities: Trade payables $ 800, 000 630, 000 99, 000 124, 000 170, 000 20, 000 1, 843, 000 30, 000 1, 813, 000

Determining capital balances Exhibit 17. 3 2. Preparing a statement of affairs The statement of affairs looks like a statement of financial position but is not called as such. This is because it was not drawn up from a full set of bookkeeping records. It is actually a statement in which the capital balance of the owner at a given date is deduced from other figures

Determining capital balances Exhibit 17. 3 2. Preparing a statement of affairs Capital balance as at 31 March 2015 Drawings Capital balance as at 1 April 2014

Deduction of income statement figures Aforementioned, net profit or loss figure can be derived from capital balances. However, for the purpose of financial reporting, businesses are still required to prepare an income statement at the end of an accounting period to show all the revenues and expenses for that period.

Deduction of income statement figures In the following, ways to find the key missing figures in an income statement will be covered, such as: Sales Purchases Inventories Cost of goods sold Gross profit

Deduction of sales Normally, sales for a particular period are extracted from the sales journal or the sales account in the general ledger. In case of missing figure, the amount of credit sales for a particular period can be determined if the following information is given: Opening and closing balances of trade receivables Receipts from trade debtors Adjustments to trade receivables Such as returns inwards, discounts allowed, bad debts written off, dishonoured cheques from trade debtors and set-offs with trade payables

Deduction of sales 1. Opening a summary account for trade receivables The figures mentioned above will be recorded in a summary account for all trade debtors, and the amount of credit sales can then be ascertained as the balancing figure in the account constructed. Called total trade receivables account or total trade debtors account

Determining the amount of credit sales Exhibit 17. 4 Given the following information on the trade receivables of T Siu’s business for the year ended 31 December 2015: Trade receivables as at 1 January 2015 Receipts from trade debtors Returns inwards Discounts allowed Dishonoured cheques from trade debtors Bad debts written off Trade receivables as at 31 December 2015 $120, 800 $1, 634, 200 $25, 700 $33, 900 $22, 000 $29, 800 $197, 400

Determining the amount of credit sales Exhibit 17. 4 The amount of credit sales for the year can be determined by preparing a total trade receivables account as shown below. Total Trade Receivables 2015 Jan 1 Dec 31 “ 31 Balance b/f Bank — Dishonoured cheques Sales (credit) $ 2015 120, 800 Dec 31 22, 000 “ 1, 778, 200 31 1, 921, 000 “ Cash and bank Returns inwards Discounts allowed Bad debts Balance c/f $ 1, 634, 200 25, 700 33, 900 29, 800 197, 400 31 “ Credit sales for the year were then $1, 778, 200 31 (balancing figure). “ If receipts from trade debtors were not 31 properly recorded, they would have to be deduced from other figures concerning cash and bank. 1, 921, 000

Determining receipts from trade debtors Exhibit 17. 5 Given the following information on the cash and bank receipts and payments of T Siu’s business for the year ended 31 December 2015: Cash and bank balances as at 1 January 2015 Receipts from trade debtors Payments to trade creditors Payments for expenses Dishonoured cheques from trade debtors Cash and bank balances as at 31 December 2015 $215, 200 ? $1, 160, 500 $481, 200 $22, 000 $185, 700

Determining receipts from trade debtors Exhibit 17. 5 Receipts from trade debtors can be determined by preparing a cash book summary as follows: Cash Book Summary (Cash and Bank) 2015 Jan 1 Balance b/f Dec 31 Trade debtors $ 2015 215, 200 Dec ? 31 “ Trade creditors Expenses Trade debtors — Dishonoured cheques Balances c/f $ 1, 160, 500 481, 200 22, 000 185, 700 31 Receipts from trade debtors for the year were then “ $1, 634, 200 (balancing figure). 31 The same method is applicable to situations when the amount 1, 849, 400 of 1, 849, 400 payments to trade creditors is unknown and that receipts and other payments during the period can be ascertained.

Deduction of sales 2. Using accounting ratios Credit sales can also be determined if the trade receivables turnover or average trade receivables collection period for the period is given. Note that if both cash sales and credit sales were made during the period, they should be added up to arrive at the total sales figure: Can be found from the cash book or bank statements

Deducing credit sales from trade receivables turnover Exhibit 17. 6 Refer to the information in Exhibit 17. 4. Suppose the trade receivables turnover of T Siu’s business for the year ended 31 December 2015 was 11. 015085 times. Credit sales for the year can be determined as follows:

Deduction of purchases Normally, purchases for a particular period are extracted from the purchases journal or the purchases account in the general ledger. In case of incomplete record, the amount of credit purchases for a particular period can be determined if the following information is given: Opening and closing balances of trade payables Payments to trade creditors Adjustments to trade payables Such as returns outwards, discounts received, set-offs with trade receivables

Deduction of purchases 1. Opening a summary account for trade payables The figures mentioned previously will be recorded in a summary account for all trade creditors, and the amount of credit purchases can then be ascertained as the balancing figure in the account constructed. Called total trade payables account or total trade creditors account

Deducing the amount of credit purchases Exhibit 17. 7 Given the following information on the trade payables of F Pang’s business for the year ended 31 March 2015: $ Trade payables as at 1 April 2014 Payments to trade creditors Returns outwards Discounts received Refunds received on overpayments Trade payables as at 31 March 2015 98, 800 1, 103, 100 29, 400 44, 300 11, 200 117, 800

Deducing the amount of credit purchases Exhibit 17. 7 Credit purchases for the year can be determined by preparing a total trade payables account as follows: Total Trade Payables 2015 Mar 31 “ Cash and bank Returns outwards Discounts received Balance c/f $ 1, 103, 100 29, 400 44, 300 117, 800 2014 Apr 1 Balance b/f 2015 Mar 31 Cash — Refunds “ 31 Purchases (credit) $ 98, 800 11, 200 ? 31 “ Credit purchases for the year were then $1, 184, 600 31 (balancing figure). 1, 294, 600

Deduction of purchases 2. Using accounting ratios Credit purchases can also be determined if the trade payables turnover or average trade payables repayment period for the period is given. If both cash purchases and credit purchases were made during the period, they should be added up to arrive at the total purchases figure: Can be found from the cash book or bank statements.

Deducing credit purchases from trade payables turnover Exhibit 17. 8 Refer to the information in Exhibit 17. 7. Suppose the trade payable turnover of F Pang‘s business for the year ended 31 March 2015 was 10. 666667 times.

Deduction of inventories The closing inventory for an accounting period is often ascertained by an inventory count shortly after the end of the period. If the inventory count was not performed or if some or all the inventory records were lost, the value of closing inventory for a particular period can be determined if the following information is given: Such as purchases, returns inwards Opening inventory Additions to inventories Deductions from inventories Such as sales, returns outwards, loss of goods

Deduction of inventories 1. Preparing a statement to show changes in inventory The figures mentioned previously will be recorded in a statement that shows the changes in inventory within the period. The value of closing inventory, which is the final figure in the statement, can then be ascertained.

Deducing the value of closing inventory Exhibit 17. 9 Given the following information on the inventory of M Tong’s business for the year ended 31 December 2015: $ Opening inventory Purchases Sales Returns inwards Returns outwards Closing inventory 188, 500 1, 453, 200 1, 767, 000 144, 720 87, 600 ? Additional information: All goods were sold at a uniform mark-up of 20%.

Deducing the value of closing inventory Exhibit 17. 9 The value of closing inventory for the year can be determined as follows: M Tong Statement of Inventory as at 31 December 2015 $ Inventory as at 1 January 2015 Add Purchases Returns inwards ($144, 720 ÷ 120%) Less Sales ($1, 767, 000 ÷ 120%) Returns outwards Inventory as at 31 December 2015 $ 188, 500 1, 453, 200 120, 600 1, 472, 500 87, 600 1, 573, 800 1, 762, 300 1, 560, 100 202, 200

Deducing the value of closing inventory Exhibit 17. 9 Note that inventory is usually valued at cost but sales and returns inwards are stated at mark-up prices. Therefore, these two figures have to be converted into cost by applying the following formula: More accurately, inventory should be valued at the lower of cost and net realisable value (also known as lower of cost or net realisable value) according to a generally accepted accounting principle called conservatism or prudence.

Deduction of inventories 2. Using accounting ratios The closing inventory can also be determined if the inventory turnover (or average inventory holding period) for the period is given.

Deducing the closing inventory from inventory turnover Exhibit 17. 10 Given the following information on the inventory of M Tong’s business for the year ended 31 December 2015: Opening inventory Cost of goods sold Inventory turnover $188, 500 $1, 351, 900 6. 9204 times The closing inventory for the year can be determined as follows:

Deducing the cost of goods sold and gross profit The amount of the cost of goods sold for a particular period can be determined if the following information is available: Opening and closing inventories Purchases and other related cost (net of returns outwards, if any) Once the cost of goods sold is determined, the gross profit can be immediately ascertained. However, if any of the above information is missing, the cost of goods sold and the gross profit will have to be deduced from other relevant figures with the aid of a very important ratio: mark-up or margin.

Deducing the cost of goods sold and gross profit with mark-up Exhibit 17. 11 Given the following information on K Wong’s business for the year ended 31 March 2016: Sales Uniform mark-up $3, 562, 000 25% (or 0. 25) The cost of goods sold and the gross profit can be determined as follows:

Deducing the cost of goods sold and gross profit with mark-up Exhibit 17. 11 Alternatively, the gross profit can be determined directly with the aid of the mark-up as follows:

Deducing the cost of goods sold and gross profit with margin Exhibit 17. 12 Given the following information on B Ho’s business for the year ended 31 December 2016: Sales Uniform margin $3, 604, 000 20% (or 0. 2) The gross profit and the cost of goods sold can be determined as follows:

Deducing the cost of goods sold and gross profit with margin Exhibit 17. 12 Alternatively, the cost of goods sold can be determined directly with the aid of the margin as follows:

Deduction of statement of financial position figures Previous sections have covered the ways to deduce capital balances and the closing inventory value from incomplete records, which are required for the preparation of a statement of financial position. Apart from these two figures, there may be other figures that need to be deduced from relevant figures or with the aid of accounting ratios due to incomplete records.

Deducing statement of financial position figures Exhibit 17. 13 Given the following information on K Lee’s business for the year ended 31 December 2015: 1. Current assets consisted of inventory, trade receivables and cash at bank only. 2. Liabilities consisted of trade payables and a long-term bank loan only. 3. Sales and purchases for the year amounted to $1, 500, 000 and $900, 000, respectively.

Deducing statement of financial position figures Exhibit 17. 13 Given the following information on K Lee’s business for the year ended 31 December 2015: 4. All sales and purchases were made on credit and evenly spread throughout the year. 5. Opening and closing inventory were of the same value. 6. K Lee withdrew $200, 000 for his personal use. This is a very important assumption. If sales and purchases were not evenly spread (i. e. , seasonal), the closing balances of trade receivables and trade payables would be different.

Deducing statement of financial position figures Exhibit 17. 13 Given the following information on K Lee’s business for the year ended 31 December 2015: The following ratios were achieved throughout the year: 7. ii. Based on closing trade Total liabilities to total assets ratio: 0. 5 : 1 debtors’balance iii. Trade receivables collection period: 2 months iv. Trade payables repayment period: 2. 4 months v. Inventory turnover: 12 times vi. Sales to non-current assets ratio: 5 : 1 vii. Return on capital employed: 25% i. Current ratio: 2. 2 : 1 Based on closing trade creditors’balance Based on closing capital balance

Deducing statement of financial position figures Exhibit 17. 13 K Lee Statement of Financial Position as at 31 December 2015 $ ASSETS Non-current assets (1) 300, 000 Current assets Inventory (2) Trade receivables (3) Bank (6) (5) Total assets 75, 000 250, 000 71, 000 396, 000 696, 000 The statement of financial position for K Lee’s business as at 31 December 2015 would be as follows:

Deducing statement of financial position figures Exhibit 17. 13 K Lee Statement of Financial Position as at 31 December 2015 $ CAPITAL AND LIABILITIES Capital Balance as at 1 January 2015 (9) Add Net profit for the year (8) Less Drawings 461, 000 87, 000 548, 000 200, 000 348, 000 Non-current liabilities Bank loan (7) 168, 000 Current liabilities Trade payables (4) 180, 000 Total liabilities 348, 000 Total capital and liabilities 696, 000

Sales and purchases not evenly spread over the accounting period Exhibit 17. 14 We need to add three to the original denominator of 12 for a total of 15 as sales in the months of June to August were double those of other months

Sales and purchases not evenly spread over the accounting period Exhibit 17. 14 We need to multiply sales by four instead of two. This is because the year-end trade receivables balance consisted of the sales in November and December, which were double those of other months except October.

A comprehensive example Exhibit 17. 15 K Leung did not keep a full set of accounting books for his retail store. The only information he was able to provide for the year ended 31 December 2015 is as follows: 1. Goods were sold on credit only at a uniform margin of 25%. Return inwards totalled $24, 000 during the year. 2. Goods were also purchased on credit only. Trade creditors were paid $720, 000 during the year. No returns outwards were made. 3. Sales and purchases were evenly spread throughout the year.

A comprehensive example Exhibit 17. 15 K Leung did not keep a full set of accounting books for his retail store. The only information he was able to provide for the year ended 31 December 2015 is as follows: 4. Expenses paid during the year included: rent $20, 000 and general expenses $18, 000. 5. K Leung made drawings of $1, 000 cash per week for his personal use.

A comprehensive example Exhibit 17. 15 K Leung did not keep a full set of accounting books for his retail store. The only information he was able to provide for the year ended 31 December 2015 is as follows: 6. Current assets and current liabilities consisted of the following only: Trade receivables Inventory Cash and bank Trade payables Rent owed 31 Dec 2014 $ 31 Dec 2015 $ 111, 000 ? 121, 000 140, 000 4, 000 132, 000 ? 106, 000 165, 000

A comprehensive example Exhibit 17. 15 K Leung did not keep a full set of accounting books for his retail store. The only information he was able to provide for the year ended 31 December 2015 is as follows: 7. The current ratio was maintained at 2. 5 : 1 throughout the year. 8. Non-current assets consisted of furniture and fixtures only. They were brought forward with a net book value of $80, 000 as at 1 January 2015. Depreciation was to be charged at 10% per annum on a reducing-balance basis. There were neither acquisitions nor disposals of noncurrent assets during the year.

A comprehensive example Exhibit 17. 15 Required: Prepare for K Leung’s business an income statement for the year ended 31 December 2015 and a statement of financial position as at that date.

A comprehensive example Exhibit 17. 15 The financial statements of K Leung’s business would appear as follows: K Leung Income Statement for the year ended 31 December 2015 $ Sales (W 2) Less Returns inwards Less Cost of goods sold: Opening inventory (W 8) Add Purchases (W 3) Less Closing inventory (W 7) Gross profit Less Expenses: Rent (W 5) General expenses Depreciation: Furniture and fixtures (W 6) Net profit $ 840, 000 24, 000 816, 000 54, 000 745, 000 799, 000 187, 000 21, 000 18, 000 612, 000 (W 4) 204, 000 47, 000 157, 000

A comprehensive example Exhibit 17. 15 The financial statements of K Leung’s business would appear as follows: K Leung Statement of Financial Position as at 31 December 2015 $ ASSETS Non-current assets Furniture and fixtures, net ($80, 000 $8, 000) Current assets Inventory (W 7) Trade receivables Cash and bank Total assets 72, 000 187, 000 132, 000 106, 000 425, 000 497, 000

A comprehensive example Exhibit 17. 15 The financial statements of K Leung’s business would appear as follows: K Leung Statement of Financial Position as at 31 December 2015 $ EQUITY AND LIABILITIES Capital Balance as at 1 January 2015 (W 9) Add Net profit for the year Less Drawings Current liabilities Trade payables Accrued rent Total equity and liabilities 222, 000 157, 000 379, 000 52, 000 327, 000 165, 000 170, 000 497, 000

Deduction of statement of financial position figures There could be a variety of scenarios for incomplete records, and there is no rule of thumb for the deduction of missing figures. In order to master this topic, you should familiarise yourself with the use of accounting ratios and the relationships between different figures on financial statements.

Cash loss Sometimes, a cash loss occurs as a result of robbery or misappropriation by the cashier or other employees in a situation where the cash book has not been properly maintained. In this case, the amount of cash loss will have to be ascertained and recorded as an expense of the current accounting period.

Cash loss Theoretically, all losses should be written off on the date when the incident occurred. But in practice, it is not easy to know the exact date of the loss. In this case, the loss will be written off on the date of discovery: Dr Cash loss account Cr Cash/Bank account The total of the cash loss would be transferred to the profit and loss account at the end of the accounting period: Dr Profit and loss account Cr Cash loss account

Cash misappropriation by the cashier Exhibit 17. 16 The cashier at B Leung’s business resigned on 1 April 2016. Shortly after he left, it was found that all the cash inside the cash till had been taken and the cash book had not been kept properly for months. The last record in the cash book showed a cash balance of $4, 000 on 31 December 2015.

Cash misappropriation by the cashier Exhibit 17. 16 The cash transactions made between 1 January 2016 and 1 April 2016 were confirmed as follows: $ Receipts from trade debtors (known from the trade receivables ledger) Cash withdrawn from bank for business use (known from bank statements) Expenses paid (known from cash vouchers and receipts) Drawings (known from the owner) 93, 000 92, 000 64, 000 118, 000

Cash misappropriation by the cashier Exhibit 17. 16 The misappropriated cash should equal the cash balance on 1 April 2016. To find the cash balance on 1 April 2016, all cash received between 1 January 2016 and 1 April 2016 should be added to the cash balance as at 31 December 2015. In contrast, all cash taken out in the above period should be deducted from the cash balance as at 31 December 2015.

Cash misappropriation by the cashier Exhibit 17. 16 The cash loss at B Leung’s business is calculated as follows: B Leung Computation of Cash Misappropriated on 1 April 2016 $ Cash balance as at 31 December 2015 Add Receipts from trade debtors between 1 January – 1 April 2016 Cash withdrawn from bank Less Expenses paid between 1 January – 1 April 2016 Drawings between 1 January – 1 April 2016 Cash balance as at 1 April 2016 (amount of cash misappropriated) $ 4, 000 93, 000 92, 000 64, 000 118, 000 185, 000 189, 000 182, 000 7, 000

Cash misappropriation by the cashier Exhibit 17. 16 Alternatively, the cash loss can be determined by preparing a summary account for cash as follows: Cash 2016 Jan 1 Apr 1 “ 1 Balance b/f Trade debtors Bank $ 2016 4, 000 Apr 1 93, 000 “ 92, 000 189, 000 1 “ 1 Expenses Drawings Cash loss (balancing figure) $ 64, 000 118, 000 7, 000 189, 000

Inventory loss p p There are two types of inventory losses: p Normal loss p Abnormal loss Their causes and accounting treatments are very different.

Inventory loss Normal inventory loss A normal inventory loss refers to the loss of inventory that is expected in the ordinary course of business. It is usually identified in the course of valuing inventory at the end of an accounting period. This kind of inventory loss is treated as part of the cost of goods sold during the period.

Inventory loss Abnormal inventory loss When goods are lost in an accident, such as a fire or a burglary, the loss is considered ‘abnormal’ because it is not expected in the normal course of business. An abnormal inventory loss would be treated as an expense for the period and recorded when it was incurred.

Inventory loss Abnormal inventory loss In most situations, the value of the inventory lost in an accident cannot be easily determined. This is because the accident cannot be known in advance and the inventory figure just before the date of the accident is usually not known. As a result, the abnormal inventory loss will have to be deduced from other relevant figures.

Abnormal inventory loss due to fire Exhibit 17. 17 A fire broke out in the warehouse of A Cheung’s business on 17 March 2016. The only item left undamaged was a box of goods costing $20, 000. The most recent statement of financial position dated 31 December 2015 showed an inventory figure of $195, 000. The following transactions took place between 1 January 2016 and 17 March 2016: 1. Goods were purchased for $687, 000. 2. Goods were sold for $960, 000. All sold goods had a margin of 20%.

Abnormal inventory loss due to fire Exhibit 17. 17

Abnormal inventory loss due to fire Exhibit 17. 17 The value of the inventory lost is calculated as follows: A Cheung Computation of Inventory Lost in the Fire on 17 March 2016 Inventory as at 31 December 2015 Add Purchases between 1 January – 17 March 2016 Less Sales between 1 January – 17 March 2016 (at cost) Inventory as at 17 March 2016 Less Inventory undamaged in the fire Inventory lost in the fire on 17 March 2016 $ 195, 000 687, 000 882, 000 768, 000 114, 000 20, 000 94, 000

Three common types of questions on incomplete records Learning Tips Public examinations usually have three types of questions on incomplete records: 1. Preparation of financial statements (usually an income statement and a statement of financial position) from incomplete records 2. Deduction of cash loss 3. Deduction of (abnormal) inventory loss

Three common types of questions on incomplete records Learning Tips Type 1 questions: Preparation of financial statements from incomplete records When answering questions of this type, candidates are usually required to deduce certain missing figures from other Common accounting Common missingor figures to known figures the accounting ratios given most situations, the unknown figures are related to each other. be. Indeduced Mark-up or margin Sales Receipts from trade debtors Purchases Payments to trade creditors Cost of goods sold Gross profit Inventory turnover or average inventory holding period Trade receivables turnover or average trade receivables collection period Trade payables turnover or average trade payables repayment period

Three common types of questions on incomplete records Learning Tips Example 1 (i) All sales were made on cash basis at a uniform mark-up of 40% for the year 2012. (ii) A summary of receipts and payments based on the cash at bank account for the year ended 31 December 2012 showed the following: Prepayments to suppliers (v) $987, 900 Balances of the business as at 31 December were as follows: Inventory Trade payables 2011 $ 2012 $ 123, 000 149, 000 110, 900 102, 800 (Extracted from HKDSE BAFS 2013, Paper 2 A Section B Q 5)

Three common types of questions on incomplete records Learning Tips Hint In this question, candidates should: Compute the purchases for the year from the opening and closing balances of trade payables and the payments to suppliers. Determine the cost of goods sold by adding the opening inventory to and deducting the closing inventory from the purchases figure. Calculate the sales figure by applying the mark-up to the cost of goods sold.

Three common types of questions on incomplete records Type 2 questions: Learning Tips Deduction of cash loss When answering questions of this type, candidates are usually required to deduce the amount of cash loss by opening a summary account for cash and/or bank. Candidates need to record all known receipts and payments in this account.

Three common types of questions on incomplete records Learning Tips Example 2 (ii) A summary of receipts and payments based on the cash at bank account for the year ended 31 December 2012 showed the following: Cash deposit $1, 203, 000 (iii) During 2012, selling expenses of $44, 000 were paid in cash. (v) Balances of the business as at 31 December were as follows: Cash in hand 2011 2012 $10, 900 ? (before stolen) (Extracted from HKDSE BAFS 2013, Paper 2 A Section B Q 5)

Three common types of questions on incomplete records Learning Tips Hint After recording the opening cash balance, cash deposit and selling expenses paid in cash in a cash summary account, the balancing figure of the account represents the amount of cash stolen.

Three common types of questions on incomplete records Learning Tips Type 3 questions: Deduction of (abnormal) inventory loss When answering questions of this type, candidates are usually required to prepare a statement to show the calculation of inventory loss. The cost principle should be applied in all calculations.

Three common types of questions on incomplete records Learning Tips Example 3 (iii) Sales are normally quote at gross profit margin of 37. 5%. During the year ended 30 June 2013, certain obsolete goods were sold at gross profit margin of 20% for $135, 000. (ii) From 1 July 2013 onwards, but before the fire occurred, sales amounted to $624, 000, of which (i) $24, 000 were despatched to but not yet received by customers; and (ii) $8, 000 had not yet been despatched to customers. (Extracted from HKICPA, HKICPA Exam in BAFS January 2014, Paper 2 C 1)

Three common types of questions on incomplete records Learning Tips Hint When calculating the inventory loss, Convert the invoice amount of the goods that were sent to customers before the occurrence of the fire to cost based on the gross profit margin. Deduct the above from the inventories as at 30 June 2013.