Question Tag: Revenue Expenditure

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  • 20 Marks

FA – May 2016 – L1 – SB – Q6 – Elements of Financial Statements

Classify various expenditures as revenue or capital and their impact on financial statements and non-current asset register.

Given below are items of “Revenue” and “Capital” expenditure:

(i) A number of new cars that had recently been cleared by a motor car dealing company.

(ii) Two new motor boats acquired by a ferry service agency.

(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords.

(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company.

(v) Cost of acquiring a leasehold property for office use.

(vi) Granites purchased by an engineering contractor for use at a construction site.

(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer.

(viii) Repairs to plant and machinery in a manufacturing company.

Required:

a. For each of the above, state whether it is a “Revenue” or “Capital” expenditure. (4 Marks)

b. State how each will be recognised in the statement of profit or loss and the statement of financial position as the case may be. (12 Marks)

c. State how the non-current assets register will be affected by any of the transactions. (4 Marks)

(a) Classification of Expenditure:

Item Type of Expenditure
(i) A number of new cars that had recently been cleared by a motor car dealing company. Revenue
(ii) Two new motor boats acquired by a ferry service agency. Capital
(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords. Revenue
(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company. Capital
(v) Cost of acquiring a leasehold property for office use. Capital
(vi) Granites purchased by an engineering contractor for use at a construction site. Revenue
(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer. Capital
(viii) Repairs to plant and machinery in a manufacturing company. Revenue

Explanation:

  1. Revenue Expenditure: Costs related to the daily operations, which do not provide long-term benefit, such as the purchase of inventory (item i), maintenance and repairs (item viii).
  2. Capital Expenditure: Costs incurred to acquire or improve a long-term asset, which will provide benefits over time, such as purchasing new boats (item ii) and buildings (item iv).

(b) Recognition in Financial Statements:

Item Statement of Profit or Loss Statement of Financial Position
(i) A number of new cars that had recently been cleared by a motor car dealing company. Cost of Goods Sold / Inventories Current Asset – Inventories
(ii) Two new motor boats acquired by a ferry service agency. Depreciation Expense Non-Current Asset – Property, Plant, Equipment (PPE)
(iii) Vacant houses owned by an estate developing company in respect of which negotiations are ongoing for assistance for their sale to prospective landlords. Sales Revenue (upon sale) Current Asset – Inventories
(iv) New buildings acquired for the purpose of holding the items of plant and machinery belonging to a detergent manufacturing company. Depreciation Expense Non-Current Asset – Property, Plant, Equipment (PPE)
(v) Cost of acquiring a leasehold property for office use. Amortization Expense Non-Current Asset – Leasehold Property (Intangible)
(vi) Granites purchased by an engineering contractor for use at a construction site. Cost of Goods Sold / Work-in-Progress Current Asset – Inventories / WIP
(vii) Cost of rehabilitating a dilapidated housing unit owned by an estate developer. Depreciation Expense (if capitalized improvements) Non-Current Asset – Property, Plant, Equipment (PPE)
(viii) Repairs to plant and machinery in a manufacturing company. Repairs and Maintenance Expense Not Recognized

(c) Effect on Non-Current Assets Register:

  1. Item ii: Increase in the asset register with the addition of two new motor boats.
  2. Item iv: Increase in the asset register with the addition of new buildings.
  3. Item v: Increase in the asset register under leasehold property.
  4. Item vii: Increase in the asset register as rehabilitated housing units are capitalized.

Other items classified as revenue expenditure do not affect the non-current assets register.

  • 5 Marks

PT – Mar 2024 – L2 – Q4b – Income Tax Liabilities

State the differences between capital expenditure and revenue expenditure with relevant examples.

With relevant examples, state the differences between capital expenditure and revenue expenditure. (5 marks)

  • Capital Expenditure:
    • It is an expenditure incurred for the acquisition or improvement of a fixed asset, such as buildings, plant & machinery, and vehicles.
    • It gives rise to an advantage of an enduring nature, meaning the benefits of the expenditure are consumed over more than one accounting period.
    • Example: Purchase of a factory building, or installation of machinery.
  • Revenue Expenditure:
    • It is an expenditure incurred for the day-to-day running of a business, necessary for the normal operation of the business, such as rent and stationery.
    • The benefit of the expenditure is consumed within one accounting period.
    • Example: Payment of salaries or rent for the office premises.
  • 20 Marks

FA – Mar 2023 – L1 – Q5 – Interpretation of financial statements (Financial Ratios)

Distinguishes between capital and revenue expenditure and calculates financial ratios to assess the performance of a business.

a) Distinguish between capital expenditure and revenue expenditure. (5 marks)

b) Banky is the owner of a business supplying goods to other traders. He has just received the financial statement for his business for the year ended 31 December 2022 from his accountant. Below are the summarized financial statements:

Required:

i) Calculate for Banky each of the following ratios for the year ended 31 December 2022 (where appropriate, calculations should be approximated to two decimal places):

  • Net profit margin. (2 marks)
  • Return on capital employed (using the closing year-end value for capital employed) (2 marks)
  • Current ratio. (2 marks)
  • Liquid (acid test) ratio. (2 marks)
  • Rate of inventory turnover. (2 marks)

ii) Based on the ratios calculated in i) above, and all other information provided, assess the performance (profitability) of Banky’s business. (5 marks)

a) Distinction between Capital Expenditure and Revenue Expenditure:

Capital Expenditure:

  • It is expenditure which results in the acquisition of non-current assets or an improvement in their earning capacity.
  • Capital expenditure is not charged as an expense in the statement of profit or loss at one go but rather a depreciation or amortization charge will usually be made to write off the capital expenditure gradually over time.
  • Capital expenditure on non-current assets is the recognition of a non-current asset (e.g., vehicles, land, and buildings) in the statement of financial position of the business.

Revenue Expenditure:

  • It is expenditure which is incurred for either:
    • The purpose of the trade/service of the business. This includes selling & distribution expenses, administration expenses, and finance charges.
    • To maintain the existing earning capacity of non-current assets (such as repair expenses).
    • To ensure the smooth running of the day-to-day activities of the company/business.

(5 marks)

b)
i) Computed ratios
Net Profit As A Percentage Of Sales (14,880/324,000) = 4.65%
Return On Capital Employed (24,000/158,880) = 15.11%
Current Ratio (53,680/6,800) = 7.89:1
Liquid (Acid Test) Ratio (12,080/6,800) = 1.78:1
Rate Of Inventory Turnover (240,000/41,600) = 6 times
(2 marks each = 10 marks)

ii) Assessment of Banky’s Business Performance:

  • Net Profit Margin: The net profit margin of 4.65% is lower than the competitor’s 6%. This may indicate that Banky’s costs are higher or that he is not marking up his purchases as much as the competitor.
  • Return on Capital Employed (ROCE): Banky’s ROCE of 15.11% is better than the competitor’s 10.50%, meaning that Banky is making more profit per cedi of investment in the company.
  • Current Ratio: Banky’s current ratio of 7.89:1 is extremely high, indicating excessive liquidity, which might suggest inefficient use of resources. The competitor’s ratio is also high, but closer to the accepted standard.
  • Acid Test Ratio: Banky’s acid test ratio of 1.78:1 is within acceptable limits, indicating good liquidity management, whereas the competitor’s ratio of 0.3:1 suggests potential liquidity issues.
  • Inventory Turnover: Banky’s inventory turnover rate of 6 times is better than the competitor’s, indicating that Banky is selling inventory more frequently, which contributes positively to profitability.

(5 marks)

  • 20 Marks

FA – Nov 2015 – L1 – Q7 – Capital structure and finance costs | Preparation of financial statements of a sole trader

Differentiate between capital and revenue expenditure and prepare financial statements for Danfo Enterprise.

a) Distinguish between Capital Expenditure and Revenue Expenditure. (5 marks)

(b) The following Trial Balance was extracted from the books of Danfo Enterprise, a second-hand bags dealer, as at 31st December 2014:

Description DR (GH¢) CR (GH¢)
Stock in Trade 120,000
Vehicle (Cost) 150,000
Trade Receivables 80,000
Accumulated Depreciation: Vehicle 30,000
Accumulated Depreciation: Furniture & Fittings 10,120
Trade Payables 100,000
Drawings 120,000
General Expenses 65,000
Provision for Doubtful Debts 2,500
Rate & Rent 14,000
Insurance 5,000
Bad Debt 7,000
Discount Received 25,150
Discount Allowed 15,160
Bank Balance 165,240
Wages & Salaries 250,000
Sundry Expenses 6,150
Vehicle Running Expenses 15,650
Furniture & Fittings 50,600
Repairs to the Shop 6,500
Purchases 650,120
Sales 1,079,130
Capital 473,520
Total 1,720,420 1,720,420

Additional Information:
i. Provision for doubtful debts is to be reduced by 10%.
ii. Rate and Rent has been paid in advance by two (2) months. Note that Danfo Enterprise pays GH¢1,000 each month.
iii. Stock in trade as at 31st December, 2014 GH¢80,150.
iv. A bill of GH¢6,150 for vehicle running was outstanding as at 31st December, 2014.
v. The Enterprise provides depreciation as follows:

  • Vehicle: 20% per annum on straight line basis.
  • Furniture and Fittings: 20% per annum on straight line basis.

You are required to:
i. Prepare Income statement for the year ending 31st December 2014. (8 marks)
ii. Prepare Statement of Financial Position as at 31st December 2014. (7 marks)

(a) Capital Expenditure:

  • Capital expenditure results in the acquisition of fixed assets or an improvement in their earning capacity.
  • It is not charged as an expense in the income statement in one go; instead, a depreciation or amortization charge is usually made to write off the capital expenditure gradually over time.
  • Capital expenditure on fixed assets is the recognition of a fixed asset (e.g., vehicles, land, and buildings) in the statement of financial position of the business.

Revenue Expenditure:

  • Revenue expenditure is incurred for the purpose of trade/service of the business, including selling & distribution expenses, administration expenses, and finance charges.
  • It is also for maintaining the existing earning capacity of fixed assets, such as repair expenses.
  • It ensures the smooth running of the day-to-day activities of the company/business.

(b) i. Danfo Enterprise Income Statement for the year ended 31st December, 2014

ii. Danfo Enterprise Statement of Financial Position as at 31st December 2014

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