(a) Short notes on the following:

i. Purchases: Purchases refer to the acquisition of goods or services for resale or use in the production process in a business. In accounting, they are recorded as debits to the purchases account and are part of the cost of goods sold calculation. For example, in a retail bank supply chain in Ghana, purchases of office equipment from local suppliers would be recorded at cost, excluding VAT if recoverable, and adjusted for returns or discounts. Under IAS 2, purchases are valued at cost, and in practice, they impact working capital management to ensure liquidity compliance with BoG guidelines.

ii. Sales: Sales represent the revenue generated from the sale of goods or services in the normal course of business. They are credited to the sales account and form the top line of the income statement. In the Ghanaian banking context, sales could include interest income or fee-based services, recorded on an accrual basis per IAS 18 or IFRS 15. For instance, loan interest sales must be recognized when earned, not received, to comply with BoG’s revenue reporting directives for transparency and profitability assessment.

iii. Drawings: Drawings are withdrawals of cash or goods by the owner from the business for personal use. They are debited to the drawings account and reduce the owner’s equity but do not affect the profit calculation. In a sole trader bank consultancy firm in Ghana, drawings like personal cash withdrawals must be distinguished from salaries to avoid tax implications under the Income Tax Act, and they are shown as reductions in capital in the statement of financial position.

iv. Capital Expenditure: Capital expenditure (Capex) is the cost incurred to acquire or improve long-term assets that provide benefits over multiple accounting periods, such as buildings or machinery. It is capitalized on the statement of financial position and depreciated over time per IAS 16. In Ghanaian banks, Capex like investing in new branch infrastructure must be approved under BoG’s capital adequacy requirements (e.g., CRD), as seen in the 2019 recapitalization where banks like GCB invested in assets for long-term resilience.

v. Revenue Expenditure: Revenue expenditure is the cost incurred for day-to-day operations that benefits the current accounting period, such as repairs or utilities. It is expensed immediately in the income statement, impacting net profit. In practice, Ghanaian banks classify revenue expenditure like staff training or marketing under operational costs to maintain compliance with Basel III adapted standards, ensuring they do not capitalize costs that should be expensed to avoid overstating assets.

(b) The five components of the financial statements are as follows:

1. Statement of Financial Position (Balance Sheet): This shows the business’s assets, liabilities, and equity at a specific point in time, reflecting the accounting equation (Assets = Liabilities + Equity). It helps users assess liquidity and solvency. In Ghanaian banking, it must comply with IFRS and BoG directives for disclosing capital adequacy.
2. Income Statement (Profit and Loss Account): This summarizes revenues, expenses, and profit or loss over a period. It highlights operational performance. For banks, it includes interest income and expenses, with BoG requiring transparency post the 2017-2019 cleanup to prevent misreporting.
3. Statement of Changes in Equity: This details changes in equity, including profit, drawings, and capital contributions. It links the income statement to the balance sheet. In Ghana, it aids in tracking dividend policies and reinvestments, essential for corporate governance under the Corporate Governance Directive 2018.
4. Statement of Cash Flows: This reports cash inflows and outflows from operating, investing, and financing activities per IAS 7. It reveals liquidity sources, crucial for Ghanaian banks to manage risks from events like the DDEP (2022-2024), where cash flow statements helped assess recovery.
5. Notes to the Financial Statements: These provide additional details, accounting policies, and disclosures. They ensure compliance with IFRS and BoG regulations, offering context like contingent liabilities or related party transactions for ethical reporting.