Insight ATSWA Part I September 2015 Study Notes

Examiners' General Comments and Instructions

• Breach of Examination Instructions: A recurring issue noted in past editions of "INSIGHT" is the continued breach of instructions by candidates. Specific violations include:
  • Attempting more questions than allowed in a single paper.
  • Attempting more questions than allowed in a specific section.
• Inadequate Coverage of the Syllabus: Many candidates do not cover the syllabus in sufficient depth. It is advised that candidates become adequately conversant with all aspects of the syllabus before the examination.
• Purpose of the Insight Publication: This document serves as an aid for:
  • Candidates preparing for future ICAN examinations at an equivalent level.
  • Unsuccessful candidates identifying areas of mark loss to improve knowledge and presentation.
  • Lecturers and students interested in relevant subject knowledge.
  • The profession for improving pre-examination screening processes.
• Disclaimer: Suggested solutions do not represent the official views of the Council of the Institute; they are the responsibility of the authors. The Institute does not enter correspondence regarding these solutions.

Basic Accounting Processes and Systems

Fundamental Concepts and Terminology

• Books of Prime Entry: The Cash Book is regarded as a book of prime entry.
• Source Documents: The main source document for recording cash lodgments into the bank is the pay-in slip.
• Business Entities: Examples include partnerships, sole traders, limited liability companies, and insurance companies. Clubs or associations are also recognized entities, though they are non-profit.
• Subsidiary Ledgers: Transactions involving the credit purchase of a non-current asset are recorded in the Journal Proper.
• Dishonoured Cheques: Information regarding a dishonoured cheque is typically confirmed via a Credit Advice or an entry in the bank statement.
• Internal Control over Cash: Essential aims include keeping an optimal level of cash, maintaining regular banking for cash takings, preventing theft, and ensuring adequate custody. Maintaining the same level of cash at all times is not a requirement for effective control.
• Partnership Limits: In professional firms (Solicitors, Accountants), the maximum number of partners is unlimited in certain jurisdictions.
• Bank Reconciliations: Items recorded on the debit side of a bank statement but not in the cash book credit side (e.g., bank charges) result in an overstated bank balance in the cash book relative to the actual bank position.
• Accounting Equation Calculations:
  • Liabilities: Given Capital of $N1,240,000$, Net Loss of $N85,000$, Drawings of $N220,000$, and Total Assets of $N950,000$, the Liabilities are calculated as:
    • $\text{Closing Capital} = 1,240,000 - 85,000 - 220,000 = 935,000$
    • $\text{Liabilities} = \text{Total Assets} - \text{Closing Capital} = 950,000 - 935,000 = 15,000$
  • Business Capital: Given Current Liabilities of $N600,000$, Current Assets (at $50\%$ of current liabilities) of $N300,000$, and Non-Current Assets of $N1,020,000$:
    • $\text{Total Assets} = 1,020,000 + 300,000 = 1,320,000$
    • $\text{Capital} = 1,320,000 - 600,000 = 720,000$
• Going Concern Concept: The assumption that a business will continue for the foreseeable future.
• Non-Cash Expenses: Depreciation is a primary example of a non-cash expense in the Statement of Profit or Loss.
• Financial Reporting Standards: Under IFRS, fixed assets are now formally described as Non-current assets.

Qualities of Accounting Information

• Fundamental Qualitative Characteristics:
  • Relevance: Information must make a difference in user decisions. This includes predictive value, confirmatory value, and materiality (entity-specific relevance based on magnitude or nature).
  • Faithful Representation: Reports must be complete, neutral, and free from error.
• Enhancing Qualitative Characteristics:
  • Comparability: Users must be able to identify similarities and differences between entities or periods.
  • Verifiability: Different independent observers should reach a consensus on the data.
  • Timeliness: Information must be available to influencers in time for decisions.
  • Understandability: Information must be clear and concise for users with reasonable business knowledge.

Banking and Fund Transfers

• Methods for Transferring Funds (Without Cheques): Direct debits, standing orders, electronic money transfers, debit/credit cards, direct cash deposits, and internet banking.
• Bank Statement Details: Includes bank name/address, customer name/address, account number, reporting period, opening/closing balances, transaction dates, value dates, transaction particulars, and debit/credit columns.

Payroll Accounting: Gbademas Limited Case Study

• Employee Data (December 2014):
  • Badeh: $300$ regular hours, $60$ overtime hours, Rate $GH\phi 30,000$.
  • Aduvoh: $270$ regular hours, $47$ overtime hours, Rate $GH\phi 27,000$.
  • Kofi: $225$ regular hours, $72$ overtime hours, Rate $GH\phi 26,500$.
• Policy Rules:
  • Overtime rate = $1.5 \times \text{regular rate}$.
  • Hazard allowance = $10\%$ of basic salary.
  • Leave bonus = $35\%$ of basic salary.
  • Pension contribution = $7.5\%$ by employee, $15\%$ by employer.
  • Cooperative dues = $GH\phi 100,000$ per staff.
• Income Tax Brackets:
  • First $300,000$: $7\%$
  • Next $300,000$: $11\%$
  • Next $500,000$: $15\%$
  • Next $500,000$: $19\%$
  • Next $1,600,000$: $21\%$
  • Over $3,200,000$: $24\%$
• Total Results:
  • Gross Pay Total: $GH\phi 39,731,625$
  • Total Deductions: $GH\phi 10,880,527.50$
  • Net Pay Total: $GH\phi 28,851,097.50$

Correction of Errors and Suspense Accounts

• Ashante Limited Adjustments:
  • Credit Sales Error: Sales of $GH\phi 10,000$ credited instead of debited; adjustment: Debit Trade Receivables $GH\phi 20,000$, Credit Suspense $GH\phi 20,000$.
  • Dishonoured Cheque Error: $GH\phi 2,500$ recorded as $GH\phi 250$; adjustment: Debit Trade Receivables $GH\phi 2,250$, Credit Suspense $GH\phi 2,250$.
  • Overcast Day Books: Purchases day book overcast by $GH\phi 1,500$ requires a debit to Suspense and credit to Purchases.
  • Adjusted Net Profit: Initial profit of $GH\phi 17,500$ adjusted for errors (e.g., subtracting machinery sales wrongly included in revenues) results in an adjusted profit of $GH\phi 15,400$.

Economics

Microeconomics: Systems and Market Structures

• Capitalist Economic System Features:
  • Private Property: Owners can use resources as they wish; government protects these rights through laws.
  • Price Mechanism: The "invisible hand" of demand and supply determines production and allocation without government interference.
  • Profit Motive: Producers are guided by personal gain and individual initiative.
  • Consumer Sovereignty: Consumers have freedom of choice; producers respond to these preferences.
  • Freedom of Enterprise: Free choice of occupation for entrepreneurs and laborers within legal and market constraints.
  • Competition: Large numbers of buyers/sellers ensure no single actor influences the market.
• Mixed Economies: In the real world, no system is pure. Countries like the USA are capitalist-dominant, while others like Cuba are socialist-dominant. Most systems involve government intervention (e.g., agricultural subsidies).
• Economies of Scale:
  • Internal: Cost savings from increasing a firm's own plant size/output (Technical, Financial, Managerial advantages).
  • External: Savings due to location in an area where similar industries are concentrated (infrastructure access).
• Implicit vs. Explicit Costs:
  • Implicit: Imputed value of owner's resources (e.g., forgone salary, rent on owner-occupied buildings).
  • Explicit: Direct out-of-pocket expenses (wages, materials, rent paid, interest).
• Monopolistic Competition:
  • Features: Large buyers/sellers, no entry barriers, information gaps, and product differentiation.
  • Short-run Equilibrium: Occurs where $MC = MR$. Firms can earn supernormal profits where Price ($P$) is higher than Short-run Average Cost ($SAC$).

Macroeconomics: Money, Fiscal Policy, and Trade

• Role of Money:
  • Medium of Exchange, Unit of Account, Store of Value, Measure of Value, and Standard for Deferred Payment.
• Public Debt (National Debt):
  • Total money owed by Central Government to internal (residents) and external (foreign) creditors.
  • Burdens: Servicing costs (interest/principal), obligations on future taxpayers, exhaustion of borrowing power, and inflationary pressure.
• International Trade Terms:
  • Terms of Trade: Ratio of export price index to import price index.
  • Balance of Trade: Difference between visible exports and visible imports.
  • Balance of Payments (BOP): Systematic record of all financial transactions with the rest of the world (Current, Capital, and Official Reserve accounts).
  • Currency Revaluation: If demand is price elastic, revaluation raises export prices (lowering foreign demand) and lowers import prices (increasing demand), worsening the BOP position.

Business Law

Legal System and Theory

• Hierarchy of Courts: The order of seniority of courts. Courts of co-ordinate jurisdiction (e.g., State High Court and Federal High Court) have the same status; their decisions are persuasive but not binding on each other.
• Stare Decisis: The principle of following precedents. Lower courts must follow higher courts in similar cases. Exceptions: the decision was overruled, it conflicts with a higher court, or the specific case is designated not to be a precedent.
• Civil Remedies: Damages, specific performance, injunctions, and quantum meruit. Imprisonment is generally not a civil remedy.

Contract Law

• Capacity: The ability and competence to enter a valid contract.
  • Infants: Persons under 21 years are generally not bound except for "necessaries" (food, education, clothes) or beneficial contracts of service.
  • Case Example: A 16-year-old student purchasing textbooks on credit is liable to pay because textbooks are necessaries.
• Consideration Rules: Must not be past, must be of value, and must be sufficient (though not necessarily adequate).
• Vitiating Factors: Include illegality, incapacity, and lack of intention to create legal relations (e.g., domestic or social agreements).

Agency and Employment Law

• Creation of Agency: Necessity, Estoppel, Ratification, or Agency Deed. It cannot be created by force.
• Termination of Employment vs. Summary Dismissal:
  • Termination: Ending the contract with notice; no reason required.
  • Dismissal: Immediate end with no notice/benefit; usually requires a reason like a crime or gross incompetence.

Commercial Law

• Nemo Dat Quod Non Habet: "No one gives what they do not have." Exceptions include sales in market overt or sales by agents.
• Hire Purchase: Major parties are the owner and the hirer. The hirer does not get a title until the final payment is made.
• Partnerships: General partnerships usually have a maximum of $20$ partners. Dissolution can occur via effluxion of time, notice, death of a partner, or court order.
• Debentures: Documents creating or acknowledging debt ($Registered, Bearer, Perpetual, Convertible, Secured/Unsecured$).
  • Fixed Charge: Created on specific assets.
  • Floating Charge: Hovers over all company assets (both present and future) and crystallizes into a fixed charge upon a default event.

Communication Skills

Communication Theory and Barriers

• Barriers:
  • Physical: Gadgets, ringtones, signal interference.
  • Physiological: Poor eyesight, headaches, hearing impairment.
• Conflict Management: Methods include negotiation, investigation, evidence gathering, resolution, and mediation.
• Advertising Criticisms:
  • Deceptive Advertising: Misrepresenting products.
  • Stereotyping: Using people (often women) as objects or using ethnic/religious slurs.
  • Over-exposure: Interfering with entertainment.
  • Economic Wastefulness: Passing advertising costs to consumers via higher prices.

Grammar and Writing

• Subordinate Clauses:
  • Noun Clause: Functions as the subject or object (e.g., "Whoever wants to succeed…").
  • Adjectival Clause: Qualifies a noun (e.g., "the house situated on the hill…").
  • Adverbial Clause: Modifies a verb, usually regarding time or cause (e.g., "Before the doctor arrived…").
• Minutes Writing Structure: Must include Title (name of meeting, venue, date), Attendance, Opening, Business of the Day, Any Other Business (AOB), Date of next meeting, Adjournment/Closing, and signatures for Chairman and Secretary.

Summary: Girl Child Education

• Core Issues: Need for equal access to education regardless of cultural practices.
  • Historical Biases: Belief that women belong in the kitchen or that investment in girls is lost because they marry into other families.
  • House-help Dynamics: Many house-helps (often under 10 years old) are denied education, poorly paid, and over-worked. In other countries, they operate under strict labor laws with hourly pay and privacy.
  • Remuneration: Includes meals, material gifts (sewing machines), or small tokens, though hourly pay is rare in the writer's country.
  • Societal Benefits: Educating girls/house-helps reduces illiteracy and provides the nation with great assets as women can compete with male counterparts.