Discuss five limitations of ratio analysis

QUESTION ONE

a) i) Discuss five limitations of ratio analysis (5 marks )

ii) “Accounting practice has rules governing the manner in which accounting information should be presented”. Discuss the five major financial statements according to IAS 1.8.

(5 marks )

b) i) Briefly discuss three distinguishing characteristics of a partnership that govern its accounting procedures (3 marks )

ii) Musa and Otieno are in partnership sharing profits and losses in the ratio 3:2 respectively after crediting themselves with a 5% interest on capital and a salary of sh 20,000 and 30,000 per month respectively. Their trial balance for the year ended 31 /12/2013 is as follows :

DR CR
Sh’000’ Sh’000’
Plant and machinery 5,000
Motor vehicle 4,000
Furniture and fittings 3,000
Sales 11,000
Stock 1/1/2013 1,000
Purchases 5,000
Discount 500 1,000
Provision for bad debts 500
Debtors and creditors 3,000 2,000
Cash at bank 2,000
Rent and rates 500
Electricity and water
Provision for depreciation:

400
Motor vehicles 1,000
Plant and machinery 2,000
Furniture and fittings 1,000
Salaries and wages 1,000
Bad debts 400
Returns 500 1,000
Drawings: Musa 1,000
Otieno 500
General expenses 1,000
Capital account: Musa 5,400
Otieno

3,000
Current account: Musa 500
Otieno

400
28,800 28,800
Additional information:

1. Stock as at 31/12/2013 amount to sh 1,500,000

2. Salaries and wages in arrears amount to sh 200,000 while rent and rates paid in advance is sh 100,000

3. General expenses paid in advance amount to sh 300,000 while electricity and water arrears is sh 200,000

4. Depreciation is charged as follows:

i) Plant and machinery 10% on cost ii) Motor vehicles 20% reducing balance iii) Furniture and fittings 15% on cost

5. Provision for bad debts is to be maintained at 10% of debtors. Required:

i) Partners income statement for the year ended 31/12/2013 marks)
(7

ii) Partners appropriation account for the year ended 31/12/2013 (3 marks )

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