CPA Financial accounting – August 2026 Past Paper & Answers

Regulation and other principles guiding the accounting profession

Explain THREE reasons for using accounting principles in preparation of financial statements.

The Accounting Process and Systems

The following information was extracted from the subsidiary books of Kilima Traders for the month ended 30 June 2026:

Balances as at 1 June 2026:	Sh.“000”
Trade receivables	28,400
Trade payables	19,600
Credit sales	86,000
Credit purchases	64,000
Returns inwards	3,200
Returns outwards	2,800
Receipts from credit customers	74,500
Payments to credit suppliers	56,400
Discounts allowed	1,900
Discounts received	1,600
Credit Loss (Bad debts)	1,200
Interest charged to overdue customers	900
Contra settlement between receivables and payables	2,500
Refunds to credit customers	700
Refunds from suppliers	1,100

Additional information:

1. A debit balance of Sh.600,000 in the payables ledger was to be transferred to the receivables ledger.

2. A credit balance of Sh.400,000 in the receivables ledger was to be transferred to the payables ledger.

3. The list of balances extracted from the receivables ledger as at 30 June 2026 was Sh.32,700,000, before considering the two transfers above.

Required:

(i) Trade receivables control account for the month ended 30 June 2026.

(ii) Trade payables control account for the month ended 30 June 2026.

(iii) Explain TWO reasons why the balances in the control accounts prepared in (i) and (ii) may fail to agree with the corresponding lists of balances from the subsidiary ledgers.

Financial Statements of a company

State FOUR applications of a statement of cash flows.

Financial Statements of a company

The following financial statements relate to Jabali Ltd. for the year ended 31 July 2026:

Jabali Ltd. Extract from the statement of profit or loss for the year ended 31 July 2026:
	Sh.“000”
Profit before tax	33,600
Depreciation of property, plant and equipment	9,200
Loss on disposal of equipment	1,400
Finance cost	3,600
Tax expense	8,400

Jabali Ltd. Statement of financial position as at 31 July 2026:
	2026	2025
Non-current assets:	Sh."000"	Sh."000"
Property, plant and equipment	98,000	84,000
Long-term investments	18,000	12,000
	116,000	96,000
Current assets:
Inventories	22,800	18,400
Trade receivables	31,600	25,200
Cash and bank balance	5,600	9,800
	60,000	53,400
Total assets	176,000	149,400
Equity and liabilities:
Ordinary share capital	70,000	56,000
Share premium	8,000	4,000
Retained earnings	36,400	29,000
Total equity	114,400	89,000
Non-current liabilities:
10% debentures	30,000	36,000
Current liabilities:
Trade payables	20,200	16,800
Taxation payable	7,600	5,400
Accrued debenture interest	3,800	2,200
	31,600	24,400
Total equity and liabilities	176,000	149,400

Additional information:

1. During the year ended 31 July 2026, equipment with a net book value of Sh.6,000,000 was sold for Sh.4,600,000.

2. All purchases of property, plant and equipment were paid for in cash.

3. The long-term investments were acquired during the year and were paid for in cash.

4. Ordinary shares were issued for cash during the year ended 31 July 2026.

5. Dividends paid during the year should be derived from the retained earnings movement.

Required:

Statement of cash flows for the year ended 31 July 2026 in accordance with International Accounting Standard (IAS) 7 "Statement of Cash Flows".

Accounting for Assets and Liabilities

Explain TWO factors that should be considered when selecting a depreciation method for an item of property, plant and equipment.

Accounting for Assets and Liabilities

The non-current asset records of Faraja Services Ltd. for the year ended 30 June 2026 showed the following balances:

	Motor vehicles	Office equipment
	Sh."000"	Sh."000"
Cost as at 1 July 2025	36,000	18,000
Accumulated depreciation as at 1 July 2025	14,400	7,200

The following transactions took place during the year ended 30 June 2026:

1. On 1 October 2025, a motor vehicle costing Sh.8,000,000 was purchased.

2. On 1 December 2025, office equipment which had cost Sh.4,000,000 on 1 July 2023 was sold for Sh.1,050,000.

3. On 1 March 2026, a motor vehicle which had cost Sh.6,000,000 on 1 July 2024 was exchanged for a new motor vehicle costing Sh.9,500,000. The old vehicle was allowed as a trade-in at Sh.2,200,000 and the balance was paid by cheque.

4. Depreciation is charged on cost using the straight-line method as follows: motor vehicles at 20% per annum and office equipment at 10% per annum.

5. Depreciation is charged from the month of purchase to the month before disposal.

Required:

(i) Motor vehicles cost account for the year ended 30 June 2026.

(ii) Office equipment cost account for the year ended 30 June 2026.

(iii) Accumulated depreciation accounts for motor vehicles and office equipment.

(iv) Disposal accounts for the assets disposed of during the year.

(v) Extract of the statement of financial position as at 30 June 2026.

Accounting in the Public Sector

Explain THREE differences between the “cash basis” and the “accrual basis’ of accounting in public sector financial reporting.

Financial Statements of a manufacturing entity

Umoja Traders operates two departments: household goods and electrical goods. The following balances were

extracted for the year ended 31 October 2025:

	Household goods	Electrical goods	Total
	Sh."000"	Sh."000"	Sh."000"
Sales	180,000	240,000	420,000
Inventory as at 1 November 2024	24,000	32,000	56,000
Purchases	118,000	168,000	286,000
Returns inwards	3,600	4,800	8,400
Returns outwards	2,400	3,600	6,000
Inventory as at 31 October 2025	28,000	38,000	66,000
Direct wages	18,000	24,000	42,000

The following expenses were incurred during the year:

Expense	Sh."000"	Basis of apportionment
Rent and rates	30,000	Floor area
Advertising	16,800	Sales
Electricity	12,000	Number of light points
General administrative expenses	22,000	Equal basis
Depreciation of delivery van	9,000	Deliveries made
Additional information:
	Household goods	Electrical goods
Floor area	600 square metres	900 square metres
Number of light points	35	25
Deliveries made	700	1,100

Required:

(i) Departmental trading account for the year ended 31 October 2025.

(ii) Departmental statement showing the net profit or loss for each department.

The Accounting Process and Systems

Explain THREE limitations of a trial balance as a means of checking the accuracy of accounting records.

Financial Statements of a company

The following information was extracted from the books of Mwangaza Ltd. for the year ended 30 June 2026:

Extract of equity balances as at 1 July 2025:

	Sh."000"
Ordinary share capital: 20,000,000 ordinary shares of Sh.10 each	200,000
Share premium	40,000
Revaluation reserve	18,000
Retained earnings	92,000

During the year ended 30 June 2026:

1. The company made a profit after tax of Sh.64,000,000.

2. An interim ordinary dividend of Sh.12,000,000 was paid.

3. A final ordinary dividend of Sh.18,000,000 was proposed by the directors on 20 July 2026 after the reporting date.

4. Land was revalued upwards by Sh.25,000,000.

5. The company issued 4,000,000 ordinary shares at Sh.15 per share, payable in full on application. The issue was fully subscribed and paid for.

6. A bonus issue of one ordinary share for every ten ordinary shares held was made from the share premium account.

7. A transfer of Sh.10,000,000 was made from retained earnings to general reserve.

Required:

(i) Statement of changes in equity for the year ended 30 June 2026.

(ii) Extract of the equity section of the statement of financial position as at 30 June 2026.