business_accounts_papers_2003_onwards

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KCB IBD BUSINESS ACCOUNTS

2003

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 17th March 2003 Hand in by: 14th April 2003

INSTRUCTIONS TO CANDIDATES 1. Assessment Criteria – 30% Weighting 2. Students must submit their assignments to the Reception by 5:00 pm on 14th April 2003 at the

latest. 3. No assignments will be accepted after the deadline and therefore a zero mark will be given to

a student who falls into this category. (1)

The Managing director of Ratio Limited returns from a frustrating interview with the manager of the company’s bank where the business has its account. He turns to you for advice stating: “ The bank manager told me that the working capital ratio is too low, and the gearing ratio too high. As far as I am concerned this is just meaningless jargon.” You are required to explain the bank manager’s statement in words which the managing director of Ratio Limited will understand.

( 50 marks ) (2)

In accordance with FRS 18 – Accounting policies, explain the meaning and importance of each of the following concepts giving examples to support your explanations.

• Accruals and Matching • Going concern • Prudence • Consistency

( 50 marks )

Notes: • The assessment criterion is 30% weighting towards the overall module mark. • The above assignment must be word processed and NOT handwritten. • High marks will be awarded for originality, full discussion and clarity of work . • The assignment should be submitted in clear transparent pockets and not in ring binders or other

type of folders. • Your assignment should not exceed 2000 words.

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MARKING SCHEME

BUSINESS ACCOUNTS JUNE 2003 Marks 1) Defining what a Ratio is ? 5 Define working capital ratio and how it is expressed 5 Explaining significance of being low and high and their effects 10 Other factors considered when commenting on the Working Capital Ratio 5 Eg. Nature of Business Define Gearing 5 Indicating the gearing formula and its variants used 5 Explain high and low gearing and their effects 10 Why a Bank may be reluctant to provide loans to a highly geared company 5 --------- 50 --------- ii) Definition of Accounting Policies as per FRS 18 3 Meaning of Concepts 3 Importance of Concepts 4 ----- Total 10 Accruals 10 Going Concern 10 Prudence 10 Consistency 10 --------- 50 --------

Total 100 marks.

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June 2003

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Examination Paper

Subject: BUSINESS ACCOUNTS Time Allowed: 3 Hours INSTRUCTIONS TO CANDIDATES 1. Section A – COMPULSORY question 2. Section B – Answer any TWO questions 3. Section C – Answer ONE question only 4. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there

are any compulsory questions, you must ensure that you attempt those. (iv) Number the answers to the questions clearly before answering. (v) Please write neatly as illegible handwriting cannot be marked.

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SECTION A

COMPULSORY QUESTION

Question 1 Strong Brick Ltd is a company supplying building materials to the building trade. The book keeper prepares the accounts of the company to 30 June each year. At 30 June 2002, the trial balance of Strong Brick Ltd is as follows:-

Debit Credit £ £ Issued Share Capital Ordinary shares fully paid £0.50p 55,550 Purchases and Sales 324,500 618,600 Returns 2,300 1,700 Discounts 1,500 2,500 Stock of Building Materials at 1 July 2001 98,200 Distribution Costs 17,000 Rent, Rates and Insurance 5,100 Telephone 3,200 Motor Expenses 2,400 Wages and Salaries 71,700 Provision for Doubtful Debts at 1 July 2001 1,000 Heating and Lighting 1,850 Miscellaneous Expenses 6,700 Delivery Vehicles at Cost 112,500 Delivery Vehicles – Depreciation at 1 July 2001 35,000 Equipment at cost 15,000 Equipment – depreciation at 1 July 2001 5,000 Debtors and Creditors 95,000 69,100 10% Debentures (2003) 10,000 Profit and Loss Account 1 July 2001 20,000 Bank Current Account 41,500 Motor Car at Cost At 1 July 2001 20,000 818,450 818,450 The following additional information at 30 June 2002 is as follows:- 1) Closing stocks of building materials : £75,300 It had a Net realisable value of : £70,000 2) The rent, rates and insurance figure includes a 12 month agreement ending in 31 August 2002 amounting to £4,650 3) Accrued expenses Heating and Lighting : £400 Telephone : £500 4) Wages and salaries, includes Directors remuneration: £23,800 (show them separately) 5) The loan was taken out some years ago, and is due for repayment on 1 March 2003.

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6) Debtors age reports are as follows Over 90 days : £3,000 60 to 90 days : £12,000 30 to 60 days : £ 20,000 The provision is to be made for doubtful debt as follows :- 30 to 60 days : 1% 60 to 90 days : 2.5% Over 90 days : 5% ( After writing off a customer as bad debts of £600) 7) A Motor car was purchased on 1 July 2001. 8) Depreciation is to be provided as follows :-

- At 20% on cost for delivering vehicles - At 25% on the reducing balance for the Motor Car - At 25% on cost for equipment

9) Corporation Tax is to provided for the year of £15,000 10) The directors have declared a final dividend of 6pence per share for the year and to transfer to general reserves of £10,000

REQUIRED

a) Prepare a Trading and Profit and Loss Account for the year ended 30 June 2002 (18Marks) b) Prepare a balance sheet at 30 June 2002

(12Marks)

Total Marks = 30

SECTION B

ANSWER ANY TWO QUESTIONS

Question 2 Chirac commenced in business on 1st January 2003 with capital in the bank of £ 20,000. During his first month of trading, his transactions were as follows :- January

2 Purchased stocks for £3,500 on credit from A. Hendry 3 Paid £1,200 rental premises by cheque. 5 Paid £5,000 for office equipment by cheque 10 Sold goods costing £1,000 for £1,750 on credit to P. Donald 15 Returned stocks costing £ 500 to A. Hendry 18 Purchased stocks for £2,400 on credit from A. Hendry 25 Paid A. Hendry for the net purchases of 2 January, by cheque. 28 P. Donald paid £500 on account by cheque

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REQUIRED a) Prepare full ledger accounts for the above transactions, balance off the accounts of A. Hendry and P. Donald at 31 January 2003 showing clearly the balances brought forward to the next month (Ignore VAT). (15 Marks) During his first year of trading, Chirac brings his private Mercedes car valued at £26,000, into the business. The business made a net profit of £17,500 for the year after deducting £ 650 for petrol which was paid out of private funds. He has drawn £5000 out of the business bank account for himself, as well as paying his home telephone bill of £450 from business funds. b) Show the calculation of Chirac’s capital at the end of the first year of trading (5Marks) c) State and explain the accounting concept which has governed the treatment of the items which make up Chirac’s capital at the end of the year. (5 Marks) Total Marks = 25 Question 3 The summarised balance sheets of Belgo Limited are as follows: 31 Dec 2001 31 Dec 2002 £000 £000 £000 £000

Fixed Assets

Land & Buildings 875 1625 Equipment @ cost 665 1645 Less Depreciation (385) 280 (650) 995 1155 2620

Current Assets

Stock 363 480 Debtors 234 290 Cash at Bank 273 ----- 870 770

Less: Current Liabilities

Creditors (213) (232) Proposed Final Div. (52) (87) Bank Overdraft ----- (466) Net Current Assets / Liabilities 605 (15) 1760 2605

Less: Long Term Liabilities

Long Stock repayable 2005 (595) Net Assets 1165 2605 Financed by:- Share Capital 520 870 Share Premium 85 265

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Revaluation Reserve ------ 700 Profit and Loss A/C 560 770 Shareholders Fund 1165 2605 Additional Information:

i) No fixed assets were sold during the year ii) The land and buildings were revalued in November 2002 iii) An interim dividend of £26,000 was paid during 2002 and a final dividend

declared for the year of £87,000. iv) There was a bonus issue of £50,000 during 2002.

REQUIRED: a) Prepare a Cash Flow Statement using the Indirect Method as per FRS 1 for the year ended 31 December 2002. (20marks) b) Describe two ways in which the company might have avoided or reduced the need for a bank overdraft.

(5marks) Total Marks = 25

Question 4 You are given the following information in respect of four different companies. One of the companies is a bank, another operates supermarkets, another manufactures heavy machinery and the fourth company is an airline. Extracts from the accounts of each company are given below: Summarised Balance Sheets

CompanyA

Company B

Company C

Company D

$ millions $ millions $ millions $ millions Fixed Assets 2,100 600 514 1,300 Current Assets Stocks 490 ----- 580 20 Debtors 420 18,950 16 580 Bank and short term funds 260 2,720 130 170 Creditors: amounts falling due within one year

(630)

(20,030)

(640)

(1,140)

2,640 2,240 600 930 Creditors: amount falling due after more than one year

(600)

(465)

(120)

(270)

2,040 1,775 480 660 Share Capital & Reserves 2,040 1,775 480 660 Summarised Profit & Loss Accounts Turnover 3,210 2,130 6,050 3,260 Expenses (2,820) (1,640) (5,785) (3,090) Interest Payable (90) (70) (15) (30) Profit before taxation 300 420 250 140

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REQUIRED a) In respect of each of the four Companies above calculate the following rate:

i) Operating profit as a percentage of turnover. ii) Net asset utilisation (or turnover) ratio. iii) Return on total capital employed iv) Return on shareholders’ funds.

(9 marks) b) i) Which company is the most highly geared? ii) Which company has the most favourable current ratio?

iii) Which company has the least favourable interest cover? (6marks)

c) Examine each of the companies and indicate which Company is the bank, which operates supermarkets, which manufactures heavy machinery and which is an airline, giving your reasons. (10 marks)

SECTION C

ANSWER ANY ONE QUESTION Question 5

Briefly and clearly explain the following accounting terms:-

• A balance sheet (2marks) • An asset (3marks) • A Liability (2marks) • Share Capital (2marks) • Reserves (3marks) • Why does the balance sheet balance? (3marks) • Difference between equity capital and capital employed (5marks)

QUESTION 6 If the information in the financial statements is to be useful, due regard must be given to the following:

(a) Materiality (b) Comparability (c) Prudence (d) Objectivity (e) Relevance

Explain the meaning of each of these factors as they apply to financial accounting giving an example of the application of each of them. (20marks)

END OF QUESTION PAPER

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Marking Scheme Section A Question 1

Strong Brick Ltd Trading and profit and loss account for year ended 30 June 2002 1 £ £ £ Sales 618,600 Returns inwards (2,300) 616,300 1

Cost of sales

Opening Stock 98,200 Purchases 324,500 Returns of outwards (1,700) 322,800 421,000 Closing stock (70,000) (351,000) 2 Gross Profit 265,300 ½ Add: discount received 2,500 ½ Add: Decrease in provision for doubtful debts (£1,000 - £620)

380

1

268,180 Discounts allowed 1,500 ½ Directors remuneration 23,800 ½ Distribution Costs 17,000 ½ Rent, rates and insurance (£5,100 - £775) 4,325 1 Telephone (£3,200 + £500) 3,700 ½ Car expenses 2,400 ½ Wages (£71,700 - £23,800) 47,900 ½ Heat and light (£1,850 + £400) 2,250 ½ Sundry expenses 6,700 ½ Bad debts written off in year 600 ½ Depreciation of delivery vehicles 22,500 1 Depreciation of motor car 5,000 1 Depreciation of equipment 3,750 141,425 1 Operating profits before interest 126,755 Loan interest (1,000) ½ Profits before Tax 125,755 Taxation ( 15,000) ½ Profits after Tax 110,755 Dividends ( 6,666) 1 104,089 Transfer to General reserves ( 10,000) ½ Retained profits for the year 94,089 Retained profits brought forward 20,000 ½ Retained profits carried forward

114,089

½

18marks

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Strong Brick Ltd. Balance sheet as at 30 June 2002 1

Fixed assets Cost Cum.

depn Net

£ £ £ Delivery vehicles 112,500 57,500 55,000 ½ Motor Car 20,000 5,000 15,000 ½ Office equipment 15,000 8,750 6,250 ½ 147,500 71,250 76,250 ½

Current assets

Stocks 70,000 ½ Debtors 94,400

Less: Provision for doubtful debts (620)

93,780 1

Prepayments 775 ½ Bank current account 41,500 206,055 ½

Amounts falling due within 12 months

Creditors 69,100 ½ Accruals (£400 + £500 +£1000) 1,900 1 ½ Corporation tax 15,000 ½ Dividends 6,666 ½ Loan – treated as short-term 10,000 (102,666) ½ Net Current assets 103,389 ½ Net Assets 179,639

Financed by

Capital and Reserves Ordinary Share capital fully paid 55,550 ½ Profit and Loss account 114,089 ½ General Reserves 10,000 ½ Shareholders’ Funds 179,639 1

12 marks

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Question 2a Capital

£

1/1/03 Bank 20,000 1 £

Bank

£

1/1/03 Capital 20,000 3/1/03 Rent payable

1,200

28/1/03 P Donald 500 5/1/03 Office equipment

5,000

25/1/03 A Hendry 3,000 3 ½ £

Purchases

2/1/03 A Hendry 3,500 18/1/03 A Hendry 2,400 1 £

A Hendry

£

15/1/03 Return outwards

500 2/1/03 Purchases 3,500

25/1/03 Bank 3,000 18/1/03 Purchases 2,400 31/1/03 Balance c/d 2,400

5,900 5,900 1/1/03 Balance b/d 2,400 4 ½ £

Rent payable

3/1/03 Bank 1,200 ½ £

Office equipment

5/1/03 Bank 5,000 ½

Sales £

10/1/03 P Donald 1,750 ½ £ P Donald

£

10/1/03 Sales 1,750 28/1/03 Bank 500 Balance c/d 1.250 1,750 1,750 3 ½ 1/1/03 Balance

b/d 1,250

Returns outwards

£

15/1/03 A Hendry 500 ½

15 marks

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b) Calculation of Chirac’s closing capital £ Initial bank deposit 20,000 ½ Vehicle introduced 6,000 1 Petrol payments 650 1 Profit for the year 17,500 ½ Drawings - cash (5,000) ½ - private telephone expenses (450) ½ Closing capital 38,700 1 5 Marks C) Accounting concept involved is the business entity concept. Briefly explained. 5 marks

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Q3 Reconstruction of Operating profit for the year. £000 Retained Profits 31 December 2002 770 1/2 Retained Profits 31 December 2001 (560) 1/2 Retained Profits for the year 2002 ( Bal fig) 210 1

Add Dividends – Interim 26 1 Final 87 1 = Operating Profits for the year 323 1

Notes to the Cash Flow Statements

Reconciliation of operating profits to net cash inflow From operating activities

Operating profit before interest 323 Add Depreciation 265 1 588 Stocks increase (117) 1 Debtors increase (56) 1 Creditors increase 19 1 434

Analysis of changes in Net Debt

At Cash At 1/1/02 Flows 31/12/02

Cash in hand, at bank 273 (273) nil 1mark Bank Overdraft nil (466) 466 1mark

(739)

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Belgo Limited Cash flow statement for the year ended 31 December 2002 Notes £000 Marks Net cash inflow from operating activities 1 434 1 Returns on investment and servicing of finance nil Taxation nil Capital expenditure and financial investment Purchase of Equipment (980) 2 Equity dividends paid (52 +26+87 – 87) (78) 2 Financing Issue of shares 300 1 At a Share Premium 180 1 Redemption of Loan Stock (595) 1 Decrease in Cash 2 (739) 1 (20 marks) ( b) Points to be included:

• To delay the repayment of Loan stock • Funding of the capital expenditure is not matched, could increase share capital

by issuing more shares • Avoid the issue of bonus shares • Or again delay the purchase of equipment or sell some of the existing fixed

assets.

(2.5 marks each, max 5 marks) Question 4a (i)

Company A Company B Company C Company D

Operating profit as a percentage of turnover = Profit before tax x100 Turnover

300 x 100 3,210 = 9.35%

420 x 100 2,130 = 19.72%

250 x 100 6,050 = 4.13%

140 x 100 3,260 = 4.29%

2 marks

(ii) Net asset utilisation ratio = Turnover net assets

3,210 2,040 = 1.57 : 1

2,130 1,775 = 1.2 : 1

6,050 480 = 12.6 : 1

3,260 660 = 4.94 : 1

2 marks

(iii) Return on total capital 300 + 90 420 + 70 250 + 15 140 + 30

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employed = profit + interest shareholders’+ long-term funds liabilities

2,040+600 = 14.77%

1,775 + 465 = 21.88%

480 + 120 = 44.17%

660 + 270 = 18.28%

3 marks

(iv) Return on shareholders’ funds = Profit shareholders’ funds

300 2,040 = 14.71%

420 1,775 = 23.66%

250 480 = 52.08%

140 660 = 21.21%

2 marks

9 marks

(b) (i) Gearing Ratio = Long-term liabilities Shareholders’ + Long-term Funds Liabilities

600 2,040 + 600 = 22.73%

465 1,775 + 465 = 20.76%

120 480 + 120 = 20%

270 660 + 270 = 29.03%

Company D is the most highly geared as it has the highest gearing ratio.

2 marks (ii) Current ratio = Current assets Current Liabilities

490+420+260 630 = 1.86 : 1

18,950+2,720 20,030 = 1.08 : 1

580+16+130 640 = 1.13 : 1

20+580+170 1,140 = 0.68 : 1

Company A has the most favourable current ratio as it has the highest current ratio. 2 marks (iii) Interest cover =Profit before tax+ Interest Interest

300 + 90 90 = 4.33

420 + 70 70 = 7

250 + 15 15 = 17.67

140 + 30 30 = 5.67

Company A has the least favourable interest cover as it has the lowest coverage 2 marks 6

marks c) Company B is the bank because it has

1) no trading stock 2) largest amount debtors (ie lending to its customers) 3) largest amount of creditors falling due within one year (ie. current and saving deposits from its

depositors)

(2.5 marks)

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Company C operates supermarket because it has

1) large amount of trading stock 2) small amount of debtor (ie all sales are retail and hence cash sales) 3) large amount of creditors (ie amount owed to suppliers of goods)

(2.5 marks ) Company A manufactures heavy machinery as it has

1) largest investment in fixed assets (ie plant and machinery) 2) large amount of stock (ie stock of raw materials, work-in-progress and finished goods) 3) large amount of debtors (ie credit sales to its customer) 4) large amount of creditors (ie credit purchases of raw materials from its suppliers)

(2.5 marks ) Company D is an airline as it has

1) large investment in fixed assets (ie air planes) 2) but small amount of stock (ie it does not have trading stock, it has only stock of spare parts of

air planes) 3) large amount of debtors (ie credit sales of air tickets to its travel agents)

(2.5 marks)

Total 25 marks

SECTION C Q5 A balance sheet is a summary of the assets and liabilities of a business at one point in time. Assets less liabilities – the net assets equal the shareholders funds which is employed in the company. (2marks) (b) An asset is an item which is owned by the company and has worth to the company at the balance sheet date. In historical cost accounting, the asset would have arisen as a result of a past transaction, i.e. it would have been acquired for money or money's worth. (3marks) A liability is an amount owed by the company to someone outside the company. It does not, however, include the claims of the shareholder's of the company as they own the company. A liability is thus an amount owed to a 'third party'; the company and shareholders being the other two parties. (2marks) Share capital is the total of the nominal value of shares held by shareholders, it represents part of the amounts which shareholders have paid into the company in the past and amounts which have been transferred from reserves as bonus shares. (2marks) (e) Reserves arise in a number of ways. In general terms they represent ownership claims on the net assets of the company over and above the share capital. Reserves can arise due to: (i) Past share issues - share premium. (ii) Past profits - profit and loss. (iii) Revaluation of assets - revaluation reserve. (3marks)

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(f) The balance sheet is a listing/summary of the balances in ledger accounts after the preparation of the profit and loss account. It is thus similar to a trial balance (which is an extracted list of balances prior to the preparation of the profit and loss account). Provided that the double entry system has been operated correctly the balance sheet must balance as a result. (3marks) (g) Equity capital is ordinary share capital attributable to holders of ordinary shares whereas capital employed is the total capital made up shareholders funds plus reserves and long term debt. (5marks) Q6 (a) Materiality is defined in the ASB Statement of Princip1es for Financial Reporting (SOP) as follows: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut- oft point rather than being a primary qualitative characteristic that information must have if it is to be useful. Materiality is applied to numerous items in financial reports. Example: the amount of a trade debt written off as irrecoverable would be disclosed by note only if material. (4marks) (b) Comparability is defined in the ASB SOP as follows: Users must be able to compare the financial statements of an enterprise over time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises to evaluate their relative financial position, performance and financial adaptability. Hence the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises. Example: if certain types of tools purchased are treated as fixed assets in one period, similar tools purchased in subsequent periods should also be treated as fixed assets. (4marks) ( c) Prudence is defined in the ASB SOP as the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, so that aseets or income are not overstated and liabilities or expenses are not understated. However, prudence should not be carried so far as to result in misleading financial statements by taking the most pessimistic view possible of all matters in doubt. Example: stock at the balance sheet date should be included at net realizable value if it is likely to be saleable only at a figure below cost. (4marks) (d) Objectivity is often referred to as comprising verifiability or faithful representation and neutrality. Financial statements must represent faithfully the effect of transactions and other events it either purports to represent or could reasonably be expected to represent and where possible be based on verifiable evidence. According to the ASB SOP, financial statements are not neutral if by the selection or presentation of information they influence the making of a decision or judgement in order to achieve a predetermined result or outcome. Example: internally generated goodwill should not be included in the balance sheet as a fixed asset because its value cannot be determined objectively. (4marks)

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(e) Relevance is defined in the ASB SOP as follows: Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming or correcting their past evaluations.

Example: shareholders are interested in the trend of dividends paid by the company. Employees or lenders might find this information not very relevant to their concerns.

(4marks)

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Examination Paper

Subject: BUSINESS ACCOUNTS Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 5. Section A – COMPULSORY question 6. Section B – Answer any TWO questions 7. Section C – Answer ONE question only 8. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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SECTION A

COMPULSORY QUESTION


Debit Credit £ £ Issued Share Capital Ordinary shares fully paid £0.50p 55,550 Purchases and Sales 324,500 618,600 Returns 2,300 1,700 Discounts 1,500 2,500 Stock of Building Materials at 1 July 2001 98,200 Distribution Costs 17,000 Rent, Rates and Insurance 5,100 Telephone 3,200 Motor Expenses 2,400 Wages and Salaries 71,700 Provision for Doubtful Debts at 1 July 2001 1,000 Heating and Lighting 1,850 Miscellaneous Expenses 6,700 Delivery Vehicles at Cost 112,500 Delivery Vehicles – Depreciation at 1 July 2001 35,000 Equipment at cost 15,000 Equipment – depreciation at 1 July 2001 5,000 Debtors and Creditors 95,000 69,100 10% Debentures (2003) 10,000 Profit and Loss Account 1 July 2001 20,000 Bank Current Account 41,500 Motor Car at Cost At 1 July 2001 20,000 818,450 818,450 The following additional information at 30 June 2002 is as follows:- 1) Closing stocks of building materials : £75,300 It had a Net realisable value of : £70,000 2) The rent, rates and insurance figure includes a 12 month agreement ending in 31 August 2002 amounting to £4,650 3) Accrued expenses Heating and Lighting : £400 Telephone : £500 4) Wages and salaries, includes Directors remuneration : £23,800( show them separately) 5) The loan was taken out some years ago, and is due for repayment on 1 March 2003.

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6) Debtors age reports are as follows Over 90 days : £3,000 60 to 90 days : £12,000 30 to 60 days : £ 20,000 The provision is to be made for doubtful debt as follows :- 30 to 60 days : 1% 60 to 90 days : 2.5% Over 90 days : 5% ( After writing off a customer as bad debts of £600) 7) A Motor car was purchased on 1 July 2001. 8) Depreciation is to be provided as follows :-



REQUIRED

c) Prepare a Trading and Profit and Loss Account for the year ended 30 June 2002 (18Marks) d) Prepare a balance sheet at 30 June 2002

(12Marks)

Total Marks = 30

SECTION B




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Fixed Assets


Current Assets





Long Stock repayable 2005 (595) Net Assets 1165 2605 Financed by:- Share Capital 520 870

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Share Premium 85 265 Revaluation Reserve ------ 700 Profit and Loss A/C 560 770 Shareholders Fund 1165 2605 Additional Information:






CompanyA

Company B

Company C

Company D


(630)

(20,030)

(640)

(1,140)


(600)

(465)

(120)

(270)


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SECTION C





(f) Materiality (g) Comparability (h) Prudence (i) Objectivity (j) Relevance



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Cost of sales


380

1


114,089

½

18marks

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depn Net


Current assets



93,780 1




Financed by


12 marks

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Question 2a Capital

£

1/1/03 Bank 20,000 1 £

Bank

£


1,200


5,000

25/1/03 A Hendry 3,000 3 ½ £

Purchases

2/1/03 A Hendry 3,500 18/1/03 A Hendry 2,400 1 £

A Hendry £


500 2/1/03 Purchases 3,500

25/1/03 Bank 3,000 18/1/03 Purchases 2,400 31/1/03 Balance

c/d 2,400

5,900 5,900 1/1/03 Balance b/d 2,400 4 ½ £

Rent payable

3/1/03 Bank 1,200 ½ £

Office equipment

5/1/03 Bank 5,000 ½

Sales

£


£


b/d 1,250

Returns outwards

£

15/1/03 A Hendry 500 ½

15 marks

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(739)

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assets.




300 x 100 3,210 = 9.35%

420 x 100 2,130 = 19.72%

250 x 100 6,050 = 4.13%

140 x 100 3,260 = 4.29%

2 marks


3,210 2,040 = 1.57 : 1

2,130 1,775 = 1.2 : 1

6,050 480 = 12.6 : 1

3,260 660 = 4.94 : 1

2 marks

(iii)

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Return on total capital employed = profit + interest shareholders’+ long-term funds liabilities

300 + 90 2,040+600 = 14.77%

420 + 70 1,775 + 465 = 21.88%

250 + 15 480 + 120 = 44.17%

140 + 30 660 + 270 = 18.28%

3 marks


300 2,040 = 14.71%

420 1,775 = 23.66%

250 480 = 52.08%

140 660 = 21.21%

2 marks

9 marks


600 2,040 + 600 = 22.73%

465 1,775 + 465 = 20.76%

120 480 + 120 = 20%

270 660 + 270 = 29.03%



490+420+260 630 = 1.86 : 1

18,950+2,720 20,030 = 1.08 : 1

580+16+130 640 = 1.13 : 1

20+580+170 1,140 = 0.68 : 1


300 + 90 90 = 4.33

420 + 70 70 = 7

250 + 15 15 = 17.67

140 + 30 30 = 5.67




depositors)

(2.5 marks)

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(2.5 marks)

Total 25 marks

SECTION C Q5 A balance sheet is a summary of the assets and liabilities of a business at one point in time. Assets less liabilities – the net assets equal the shareholders funds which is employed in the company. (2marks) (b) An asset is an item which is owned by the company and has worth to the company at the balance sheet date. In historical cost accounting, the asset would have arisen as a result of a past transaction, i.e. it would have been acquired for money or money's worth. (3marks) A liability is an amount owed by the company to someone outside the company. It does not, however, include the claims of the shareholder's of the company as they own the company. A liability is thus an amount owed to a 'third party'; the company and shareholders being the other two parties. (2marks) Share capital is the total of the nominal value of shares held by shareholders, it represents part of the amounts which shareholders have paid into the company in the past and amounts which have been transferred from reserves as bonus shares. (2marks) (e) Reserves arise in a number of ways. In general terms they represent ownership claims on the net assets of the company over and above the share capital. Reserves can arise due to: (i) Past share issues - share premium. (ii) Past profits - profit and loss. (iii) Revaluation of assets - revaluation reserve. (3marks) (f) The balance sheet is a listing/summary of the balances in ledger accounts after the preparation of the profit and loss account. It is thus similar to a trial balance (which is an extracted list of balances prior to the preparation of the profit and loss account). Provided that the double entry system has been operated correctly the balance sheet must balance as a result.

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(3marks) (g) Equity capital is ordinary share capital attributable to holders of ordinary shares whereas capital employed is the total capital made up shareholders funds plus reserves and long term debt. (5marks) Q6 (a) Materiality is defined in the ASB Statement of Princip1es for Financial Reporting (SOP) as follows: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut- oft point rather than being a primary qualitative characteristic that information must have if it is to be useful. Materiality is applied to numerous items in financial reports. Example: the amount of a trade debt written off as irrecoverable would be disclosed by note only if material. (4marks) (b) Comparability is defined in the ASB SOP as follows: Users must be able to compare the financial statements of an enterprise over time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises to evaluate their relative financial position, performance and financial adaptability. Hence the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises. Example: if certain types of tools purchased are treated as fixed assets in one period, similar tools purchased in subsequent periods should also be treated as fixed assets. (4marks) ( c) Prudence is defined in the ASB SOP as the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, so that aseets or income are not overstated and liabilities or expenses are not understated. However, prudence should not be carried so far as to result in misleading financial statements by taking the most pessimistic view possible of all matters in doubt. Example: stock at the balance sheet date should be included at net realizable value if it is likely to be saleable only at a figure below cost. (4marks) (d) Objectivity is often referred to as comprising verifiability or faithful representation and neutrality. Financial statements must represent faithfully the effect of transactions and other events it either purports to represent or could reasonably be expected to represent and where possible be based on verifiable evidence. According to the ASB SOP, financial statements are not neutral if by the selection or presentation of information they influence the making of a decision or judgement in order to achieve a predetermined result or outcome. Example: internally generated goodwill should not be included in the balance sheet as a fixed asset because its value cannot be determined objectively. (4marks) (e) Relevance is defined in the ASB SOP as follows: Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming or correcting their past evaluations.


(4marks)

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Examination Paper

Subject: BUSINESS ACCOUNTS Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 9. Section A – COMPULSORY question 10. Section B – Answer any TWO questions 11. Section C – Answer ONE question only 12. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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SECTION A

COMPULSORY QUESTION


Debit Credit £ £ Issued Share Capital Ordinary shares fully paid £0.50p 55,550 Purchases and Sales 324,500 618,600 Returns 2,300 1,700 Discounts 1,500 2,500 Stock of Building Materials at 1 July 2001 98,200 Distribution Costs 17,000 Rent, Rates and Insurance 5,100 Telephone 3,200 Motor Expenses 2,400 Wages and Salaries 71,700 Provision for Doubtful Debts at 1 July 2001 1,000 Heating and Lighting 1,850 Miscellaneous Expenses 6,700 Delivery Vehicles at Cost 112,500 Delivery Vehicles – Depreciation at 1 July 2001 35,000 Equipment at cost 15,000 Equipment – depreciation at 1 July 2001 5,000 Debtors and Creditors 95,000 69,100 10% Debentures (2003) 10,000 Profit and Loss Account 1 July 2001 20,000 Bank Current Account 41,500 Motor Car at Cost At 1 July 2001 20,000 818,450 818,450 The following additional information at 30 June 2002 is as follows:- 1) Closing stocks of building materials : £75,300 It had a Net realisable value of : £70,000 2) The rent, rates and insurance figure includes a 12 month agreement ending in 31 August 2002 amounting to £4,650 3) Accrued expenses Heating and Lighting : £400 Telephone : £500 4) Wages and salaries, includes Directors remuneration : £23,800( show them separately) 5) The loan was taken out some years ago, and is due for repayment on 1 March 2003. 6) Debtors age reports are as follows Over 90 days : £3,000

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60 to 90 days : £12,000 30 to 60 days : £ 20,000 The provision is to be made for doubtful debt as follows :- 30 to 60 days : 1% 60 to 90 days : 2.5% Over 90 days : 5% ( After writing off a customer as bad debts of £600) 7) A Motor car was purchased on 1 July 2001. 8) Depreciation is to be provided as follows :-



REQUIRED

e) Prepare a Trading and Profit and Loss Account for the year ended 30 June 2002 (18Marks) f) Prepare a balance sheet at 30 June 2002

(12Marks)

Total Marks = 30

SECTION B




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Fixed Assets


Current Assets





Long Stock repayable 2005 (595) Net Assets 1165 2605 Financed by:- Share Capital 520 870

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Share Premium 85 265 Revaluation Reserve ------ 700 Profit and Loss A/C 560 770 Shareholders Fund 1165 2605 Additional Information:






CompanyA

Company B

Company C

Company D


(630)

(20,030)

(640)

(1,140)


(600)

(465)

(120)

(270)


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SECTION C





(k) Materiality (l) Comparability (m) Prudence (n) Objectivity (o) Relevance



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Cost of sales


380

1


114,089

½

18marks

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depn Net


Current assets



93,780 1




Financed by


12 marks

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Question 2a Capital £ 1/1/03 Bank 20,000 1 £

Bank £


1,200


5,000

25/1/03 A Hendry 3,000 3 ½ £

Purchases

2/1/03 A Hendry 3,500 18/1/03 A Hendry 2,400 1 £

A Hendry

£


500 2/1/03 Purchases 3,500

25/1/03 Bank 3,000 18/1/03 Purchases 2,400 31/1/03 Balance

c/d 2,400

5,900 5,900 1/1/03 Balance b/d 2,400 4 ½ £

Rent payable

3/1/03 Bank 1,200 ½ £

Office equipment

5/1/03 Bank 5,000 ½

Sales

£


£


b/d 1,250

Returns outwards

£

15/1/03 A Hendry 500 ½

15 marks

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(739)

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assets.




300 x 100 3,210 = 9.35%

420 x 100 2,130 = 19.72%

250 x 100 6,050 = 4.13%

140 x 100 3,260 = 4.29%

2 marks


3,210 2,040 = 1.57 : 1

2,130 1,775 = 1.2 : 1

6,050 480 = 12.6 : 1

3,260 660 = 4.94 : 1

2 marks

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(iii) Return on total capital employed = profit + interest shareholders’+ long-term funds liabilities

300 + 90 2,040+600 = 14.77%

420 + 70 1,775 + 465 = 21.88%

250 + 15 480 + 120 = 44.17%

140 + 30 660 + 270 = 18.28%

3 marks


300 2,040 = 14.71%

420 1,775 = 23.66%

250 480 = 52.08%

140 660 = 21.21%

2 marks

9 marks


600 2,040 + 600 = 22.73%

465 1,775 + 465 = 20.76%

120 480 + 120 = 20%

270 660 + 270 = 29.03%



490+420+260 630 = 1.86 : 1

18,950+2,720 20,030 = 1.08 : 1

580+16+130 640 = 1.13 : 1

20+580+170 1,140 = 0.68 : 1


300 + 90 90 = 4.33

420 + 70 70 = 7

250 + 15 15 = 17.67

140 + 30 30 = 5.67




depositors)

(2.5 marks)

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(2.5 marks)

Total 25 marks

SECTION C Q5 A balance sheet is a summary of the assets and liabilities of a business at one point in time. Assets less liabilities – the net assets equal the shareholders funds which is employed in the company. (2marks) (b) An asset is an item which is owned by the company and has worth to the company at the balance sheet date. In historical cost accounting, the asset would have arisen as a result of a past transaction, i.e. it would have been acquired for money or money's worth. (3marks) A liability is an amount owed by the company to someone outside the company. It does not, however, include the claims of the shareholder's of the company as they own the company. A liability is thus an amount owed to a 'third party'; the company and shareholders being the other two parties. (2marks) Share capital is the total of the nominal value of shares held by shareholders, it represents part of the amounts which shareholders have paid into the company in the past and amounts which have been transferred from reserves as bonus shares. (2marks) (e) Reserves arise in a number of ways. In general terms they represent ownership claims on the net assets of the company over and above the share capital. Reserves can arise due to: (i) Past share issues - share premium. (ii) Past profits - profit and loss. (iii) Revaluation of assets - revaluation reserve. (3marks) (f) The balance sheet is a listing/summary of the balances in ledger accounts after the preparation of the profit and loss account. It is thus similar to a trial balance (which is an extracted list of balances prior to the preparation of the profit and loss account). Provided that the double entry system has been operated correctly the balance sheet must balance as a result.

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(3marks) (g) Equity capital is ordinary share capital attributable to holders of ordinary shares whereas capital employed is the total capital made up shareholders funds plus reserves and long term debt. (5marks) Q6 (a) Materiality is defined in the ASB Statement of Princip1es for Financial Reporting (SOP) as follows: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut- oft point rather than being a primary qualitative characteristic that information must have if it is to be useful. Materiality is applied to numerous items in financial reports. Example: the amount of a trade debt written off as irrecoverable would be disclosed by note only if material. (4marks) (b) Comparability is defined in the ASB SOP as follows: Users must be able to compare the financial statements of an enterprise over time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises to evaluate their relative financial position, performance and financial adaptability. Hence the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises. Example: if certain types of tools purchased are treated as fixed assets in one period, similar tools purchased in subsequent periods should also be treated as fixed assets. (4marks) ( c) Prudence is defined in the ASB SOP as the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, so that aseets or income are not overstated and liabilities or expenses are not understated. However, prudence should not be carried so far as to result in misleading financial statements by taking the most pessimistic view possible of all matters in doubt. Example: stock at the balance sheet date should be included at net realizable value if it is likely to be saleable only at a figure below cost. (4marks) (d) Objectivity is often referred to as comprising verifiability or faithful representation and neutrality. Financial statements must represent faithfully the effect of transactions and other events it either purports to represent or could reasonably be expected to represent and where possible be based on verifiable evidence. According to the ASB SOP, financial statements are not neutral if by the selection or presentation of information they influence the making of a decision or judgement in order to achieve a predetermined result or outcome. Example: internally generated goodwill should not be included in the balance sheet as a fixed asset because its value cannot be determined objectively. (4marks) (e) Relevance is defined in the ASB SOP as follows: Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming or correcting their past evaluations.


(4marks)

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DECEMBER 2003

COURESE WORK

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 18th September 2003 Hand in by: 17th October 2003

INSTRUCTIONS TO CANDIDATES 1. Assessment Criteria – 30% Weighting 2. Students must submit their assignments to the Reception by 5:00 pm on 17th October 2003 at

the latest. 3. No assignments will be accepted after the deadline and therefore a zero mark will be given to

a student who falls into this category. You are required to write a short report on Interpretation of Financial Statements. You are required to pick one company in the retailing sector quoted in the Stock Exchange. TASK 1. You will perform an analysis and evaluation of the financial statement for the last (recent) three years of the company. Using ratios, the analysis will be in respect of the following areas:

(a) Profitability (20%) (b) Liquidity (20%) (c) Asset Utilisation and Efficiency (20%) (d) Gearing (20%)

2. Explain the limitations of your analysis in the report. (10%) 3. Report structure and presentation. (10%) GUIDANCE TO CANDIDATES 1. Word length – 1000 to 1500 words 2. Section 1 will carry roughly equal marks. 3. Assessment will be focused on the following aspects:

(i) Content / Analysis / Dept of Research (ii) Use of company reports / data (iii) Originality (iv) Report structure / writing style and presentation

4. Use of internet for companies web sites, eg. http://bizednet.bris.ac.uk

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Business Accounts Coursework Dec 2003 Marking Scheme

Workings: 1)

Mutu Samy BALANCE SHEET AS AT 31 MARCH 2002

Cost Dep’n ₤ ₤ ₤ Fixed Assets Buildings 10,000 6,000 4,000 Motor vehicles 5,000 2,000 3,000 ₤15,000 ₤8,000 7,000 Current assets Stock 3,200 Trade debtors 6,300 Commission due 300 Prepayments 120 Balance at hand 4,310 14,230 Current liabilities Trade creditors 4,200 Accrued expenses 230 4,430 9,800 ₤ 16,800 Proprietor’s capital as at 31 March 2002 ₤16,800 (10marks) 2)

CASH BOOK

₤ ₤ Opening balance 4,310 Trade creditors Trade debtors (see below) 57,980 (see creditors a/c) 37,500 Agency commission (note 7) 300 Trade expenses 7,360 Vehicle expenses 6,720 Drawings 4,300 Balance c/f 6,710 ₤62,590 ₤69,590 (8marks)

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3) TRADE DEBTORS

₤ ₤ Opening balance b/f 6,300 Discounts allowed (note 4) 1,620 Sales (note 6) 60,000 Cash received (balancing figure) 57,980 Closing balance c/f 6,700 ₤66,300 ₤66,300 (5marks) 4)

TRADE CREDITORS ₤ ₤ Discounts received (note 4) 1,200 Opening balance b/f 4,200 Cash paid (balancing figure) 37,500 Purchases (note 1) 44,000 Closing balance c/f 9,500 ₤48,200 ₤48,200 (5marks) 5)

VEHICLE EXPENSES ₤ ₤ Cash 6,720 Accrual b/f 230 Accrual c/f (balancing figure) 530 P & L account 7,020 ₤7,250 ₤7,250 (4marks)

Mutu Samy

TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2003 (2)

₤ ₤ Sale (note 6) 60,000 Less cost of goods sold: Opening stock 1 3,200 Purchases (note 1) 44,000 47,200 Less: damaged stock written off (note 3) 2 (1,000) Stock stolen 2 (4,000) 1 42,200 Less closing stock (note 2) 6,200 2 36,000 Gross profit (note 6) 2 24,000 Add: commission on purchases 440 Discounts received 1 1,200 2 25,640 Expenses: Expenses (note 8) 7,400 Stock damaged 1 1,000 Stock stolen 1 4,000 Vehicle expenses 4 7,020 Discounts allowed 1 1,620 Depreciation: Buildings 3 500 Motor vehicles 3 1,000 3 22,540 Net profit (to capital account) 5 ₤3,100 ( 36marks)

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Mutu Samy

BALANCE SHEET AS AT31 MARCH 2003 (1)

Cost Dep’n N.B.V ₤ ₤ ₤ Fixed Assets Buildings 1 10,000 6,500 3,500 Motor vehicles 1 5,000 3,000 2,000 1 ₤15,000 ₤9,500 5,500 Current assets Stock 1 6,200 Trade debtors 1 6,700 Commission due 1 440 Prepayments (expenses) 1 80 Balance at bank 6,710 20,130 Current liabilities Trade creditors 1 9,500 Accrued expenses 1 530 10,030

Net current assets 1 10,100

Net Assets 1 ₤ 15,600

Financed by: Capital as at 31 Marc 2002 ₤16,800 Net profit for year to 31 March 2003 3,100 Less drawings 1 (4,300) Retained deficit (1,200) As at 31 march 2003 1 ₤15,600 (14marks)

Notes

1. The agency commission due on 1 May 2003 Indicates that purchases for the year to 31 March 2003 were

100% /1% x ₤440 = ₤44,000 (5)

2. Closing stock at cost on 31 March 2003 was ₤(3,200 + 3,000) = ₤6,200 (3)

3. Stock scrapped (₤1,000) is accounted for by

Credit Trading account Debit P&L account 4. Discounts allowed are accounted for by Debit Discounts allowed account Credit Debtors Similarly, discounts received are Debit Creditors Credit Discounts received

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5. Stocks lost in the burglary are accounted for by Credit Trading account Debit P&L account 6. The trade discount of 20% is deducted in arriving at the value of the purchases. The gross

profit is 40% on sales, so with cost sales = ₤36,000 ₤

Cost (60%) 36,000 Profit (40%) 24,000 Sales (100%) ₤60,000 (6)

7. the agency commission ₤300 dues on 1 May 2002 would have been paid to Mutu Samy at

that date. 8. The P&L account expenditure for expenses are as follows:

EXPENSES

₤ ₤ Prepayment 120 P&L account Cash 7,360 (balancing figure) 7,400 Prepayment c/f 80 ₤7,480 ₤7,480 (4)

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Examination Paper Subject: BUSINESS ACCOUNTS Date: 9th December 2003 Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES

1. Section A – COMPULSORY question 2. Section B – Answer any TWO questions 3. Section C – Answer ONE question only 4. Read the following before answering the examination questions.

(i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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SECTION A: Compulsory Question

Question 1 Sugiyama Ltd has the following balances on its books at 31 December 20X3. £ £ 50p ordinary shares 20,000 6% preference shares of £1 each 14,000 Purchases 240,000 Sales 310,000 Stock at 1 January 20X3 20,000 Directors’ fees 6,000 Undistributed profit at 1 January 20X3 35,700 10% Debentures (20X7) 20,000 Debentures interest paid 1,000 Discounts allowed 500 Administrative expenses 18,400 Sales staff salaries 18,500 Selling and distribution expenses 4,000 Heating and lighting 2,500 Rent and rates 1,700 Debtors 14,000 Provision for doubtful debts at 1 January 300 Creditors 9,700 Land and buildings at cost 65,000 Vans at cost less depreciation 19,800 Cash in hand 400 Bank balance 2,100 411,800 411,800 The following information is also given:

1. The stock at 31 December 20X3 has been valued at £32,000. 2. The balance on the vans account (£19,800) is made up as follows:

£ Vans at cost (as at 1 January 20X3) 30,000 Less: Provision for depreciation to 1 January 20X3 13,800 16,200 Additions during the year 3,600 19,800

Depreciation is provided at 25% per annum on the diminishing balance method. The addition during the year was invoiced as follows:

£ Recommended retail price 3,000 Signwriting on van 450 Undersealing 62 Petrol 16 Number Plates 12 Licence (to 31 December 20X3) 60 3,600

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3. The directors, having sought the advice of an independent valuer, wish to revalue the land

and buildings at £80,000 4. The directors wish to make a provision for doubtful debts of 2.5% of the balance of debtors

are 31 December 20X3 5. Rates prepaid at 31 December 20X3 amounted to £400, and sales staff salaries owing at that

date were £443. 6. The directors have proposed an ordinary dividend of 5p per share, and the 6% preference

dividend. 7. Ignore VAT REQUIRED:

a) Explain carefully the reasons for the adjustments you have made in respect of items 2

and 3 above (6 marks) b) Prepare a trading and profit and loss account for the year ended 31 December 20X3

and a balance sheet as at that date. (24 marks)

(30 marks)

SECTION B – Answer any two questions Question 2. Ken Smith commenced business on 1 April 2002 as a retailer of Colin Caravan Mark II. During the year ended 31 March 2003, Ken Smith’s dealings in caravans were as follows: 2002 April Bought 6 caravans @ £10,000 each May Bought 3 caravans @ £11,000 each June Sold 1 caravan @ £16,000 July Sold 3 caravans @ £15,500 each August Bought 2 caravans @ £11,200 each November Sold 4 caravans @ £16,200 each 2003 January Bought 5 caravans @ £12,500 each March Sold 4 caravans @ £15,900 each The overhead expenses incurred during the year ended 31 March 2003 have amounted to £9,000.

REQUIRED:-

a) Prepare stock cards for the year ended 31 March 2003 using each of the following methods of stock valuation

i) First In, First Out (FIFO) ii) Last In, First Out (LIFO) (10 marks)

b) Prepare profit and loss account showing Ken Smith’s net profit or loss for the year ended 31

March 2003 (6 marks)

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c) Explain the advantages and disadvantages of using each of the stock valuation methods in (a) above. (9 marks)

(25 marks)

Question 3

The following trial balance as at 30 April 2003 has been extracted from the books of a sole trader, Ravi Patel by a very keen, but inexperienced accounts clerk, Jones Smith:-

£ £ Property at cost 48,000 Provision for depreciation 13,000 Motor vehicles at cost 18,400 Provision for depreciation 6,300 Fixtures and fittings at cost 14,300 Provision for depreciation 3,100 Stock at: 1 May 2002 22,400 30 April 2003 23,660 Creditors 8,400 Debtors 9,300 Sales 141,640 Balance at Bank (in hand) 8,900 Sales Returns 2,000 Capital 40,000 Drawings 14,000 Purchase returns 1,800 Discounts Allowed 310 Discounts Received 470 Purchases 77 100 Suspense Account (difference) 50,720 251,900 251,900 Additional Information i) It has now been discovered that the stock at 1 May 2002 and 30 April 2003 was valued at

selling price on both occasions; the relevant cost of stock figures being: At 1 May 2002 £16,000 At 30 April 2003 £17,300

ii) It has been decided to write off as bad the following debt at 30 April 2003. L. Khan £700 iii) A provision for doubtful debts of 2.5% of debtors as at 30 April 2003 is to be created. REQUIRED:

a) Journal Entries for the accounting adjustments required for items i), ii) and iii) above. (10 marks)

b) The corrected trial balance as at 30 April 2003 incorporating the adjustments covered in a)

above. (10 marks)

c) Explain the purpose of a provision for doubtful debts.

(5 marks) (25 marks)

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Question 4 The following information relating to the month of July 2003 is taken from the books of Dande. She maintains both Sales and Purchases Ledgers Control accounts as part of the double – entry accounting system. Balances on customers’ accounts at 1 July 2003 £ Debit 41 580 Credit 600 Balances on Suppliers’ accounts at 1 July 2003 27 020 Credit Sales invoiced during July 46 950 Invoices for goods purchased during month 26 380 Contra (set off) settlement between customers’ and suppliers accounts 750 Cash sales during month 14 150 Cash paid to suppliers for credit transactions 25 260 Cash discounts deducted from payments to suppliers 590 Provision for doubtful debts at 1 July 2003 950 Bad Debts 450 Goods referred to suppliers 620 Credit notes issued to customers for goods returned 1 220 Cash received from credit customers in full settlement of debts of £42 230 41 630 Debit balances on suppliers accounts at 31 July 2003 230 Credit balances on customers’ accounts at 31 July 2003 120 REQUIRED:

a) Using the relevant data above, prepare a Sales Ledger Control Account and a Purchases Ledger Control account, both for the month of July 2003

(18 marks)

b) Explain the ways in which control accounts can be of use to the management of a business (7 marks) (25 marks)

SECTION C – Answer any one question

Question 5 a) Describe three advantages and three disadvantages of a sole trader and of private limited

companies (12 marks)

b) What is the difference between the Memorandum of Association and the Articles of

Association of a Limited Company (8 marks)

(20 marks)

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Question 6

a) In accounting terms define what is depreciation? (5 marks)

b) Describe and illustrate with an example, the following two methods of calculating depreciation

i) Straight line method (5 marks) ii) Reducing balance method (5 marks)

c) State two purposes of providing for depreciation in the financial statements

(5 marks) (20 marks)

Question 7

a) When preparing Cash Flow statements FRS 1 sets out the main headings under which cash flows must be shown, together with the relevant notes. Prepare a Pro-forma cash flow statement in accordance with the standard.

(15 marks)

b) Indicate three ways how a cash flow statement would be useful to users (5 marks)

(20 marks)

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Marking Scheme BA Mark Scheme Dec 2003 Section A: Compulsory Question Question 1 2) The company should capitalise (treat as an asset) only those costs which are of long-term benefit. Hence the petrol and licence costs (£76) will be expenses, leaving the asset value of the new van as £3,524.

£ WDV at 1/1/20X3 16,200

1 Addition 3,524

1 19,724 Depreciation at 25% 4,931

1 Balance at 31/12/20X3 £14,793

(3 marks) 3) The revaluation of land and buildings does not amount to ‘revenue (and thus profit) realisation’, which requires both independent objective measurement and reasonable certainty of asset value. The increase will be treated as an unrealised profit, and become a capital reserve, a reserve not available for distribution by way of dividend. (3 marks) b) Cirrus Company Ltd

Trading and profit and loss account for the year ended 31 December 20X3 (1mark)

£ £

Sales 310,000 ½

Less: Cost of sales Stock on 1 January 20,000 Purchases 240,000 260,000 Less: Stock at 31 December 32,000 228,000 2

Gross profit 82,000 ½

Less: Other expenses Directors’ fees 6,000 ¼ Administration expenses 18,400 ¼ Rent and rates 1,300 1 Heating and lighting 2,500 ¼ Salesperson’s salaries 18,943 1 Selling and distribution expenses 4,076 1 Depreciation on vans 4,931 1 Discounts allowed 500 ¼ Provision for doubtful debts 50 1 Debenture interest 2,000 ½ 58,700 ½

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Net profit 23,300 ½

Undistributed Profits brought forward 35,700 ½ Available for appropriation 59,000 ½ Dividends proposed: Ordinary: 5p per shares 2,000 Preference: 6% 840 2,840 1 Balance of retained profits 31 December 20X3

£56,160 ½

Total -14

Cirrus Company Ltd. Balance sheet as at 31 December 20X3

£ £ £

Fixed assets

Land and buildings at valuation 80,000 1 Vans at cost less depreciation 14,793 1 94,793

Current assets

Stock 32,000 Debtors less provision 13,650 Prepayments 400 Cash in hand 400 2.5 46,450 Less: Current liabilities Creditors 9,700 Accruals 1,443 2.0 Bank overdraft 2,100 Dividends proposed 2,840 16,083

Net current assets 30,367

125,160 ½

Long-term liabilities 20,000

10% Debentures £105,160 ½

Issued share capital

50p ordinary shares 20,000 6% £1 Preference shares 14,000 1 34,000

Reserves

Revaluation reserves 15,000 Undistributed profit 56,160 71,160 £105,160 ½ Total 10

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Notes £ 1. Provision for doubtful debts – at 2.5% 350 Already provided 300 Additional provision £50 2. Selling Expenses 4,000 Less: Transfer to Trading account 200 3,800 Add: Petrol and licence 76 £3,876 Section B Question 2 F. I. F. O Method A i) Date Purchases Sales Stock

Balance

April 6 @ 10,000 6 @ 10000 May 3 @ 11,000 3 @ 11,000 June 1 @ 10,000 5 @ 10,000 3 @ 11,000 1 July 3 @ 10,000 2 @ 10,000 3 @ 11,000 Aug 2 @ 11,200 2 @ 11,200 1 Nov 2 @ 10,000 1 @ 11,000 2 @ 11,000 2 @ 11,200 1 Jan 5 @ 12,500 5 @ 12,500 Mar 1 @ 11,000 2 @ 11,200 1 @ 12,500 4 @ 12,500 =

£50,000 2 total = 5 marks

L.I.F.O Method ii) Date Purchases Sales Stock Balance April 6 @ 10,000 6 @ 10,000 May 3 @ 11,000 3 @ 11,000 June 1 @ 11,000 6 @ 10,000 2 @ 11,000 1 July 2 @ 11,000 1 @ 10,000 5 @ 10,000 Aug 2 @ 11,200 2 @ 11,200 1 Nov 2 @ 11,200 2 @ 10,000 3 @ 10,000 1 Jan 5 @ 12,500 5 @ 12,500 Mar 4 @ 12,500 3 @ 10,000 =

30,000

1 @ 12,500 = 12,500

4 42,500

2

5

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b)

Trading Profit and Loss Account for

The year ended 31 March 2003

FIFO LIFO £ £ £ £ Sales

1 190,900

1 190,900

Cost of Sales: Opening Stock Purchases 177,900 177,900 177,900 177,900 Less: Closing Stock

(50,000) 1

(42,500) 1

127,900 135,400 Gross Profit 63,000 55,500 Overhead Expenses

1

(9,000) 1

(9,000)

Net Profit 54,000 46,500

3 marks 3 marks c) First in first out method Advantages:

i) It is easy to apply under both the periodic and perpetual inventory systems. ii) Its assumption is logical as the first units purchased are usually the first units sold in

normal business practice. iii) The balance sheet shows the stock at current replacement cost or recent purchase price.

Hence it shows the true value of the stock on the balance sheet date iv) It is accepted in accounting practice as well as for tax purposes.

Disadvantages:

i) The current revenue (based on rising prices may be matched with an out – of- date cost (lower prices) resulting in a profit figure which included gains due to price level changes which is called realised holding gains. Hence if such profit are spent, e.g. paid as dividend, there will be depletion in the physical capital of the business in real terms.

(1 mark for each point max 4 -5 marks)

Last in first out Advantages:

i) The current revenue is matched with the most recent cost of purchases resulting in a realistic profit as holding gains on price changes are excluded from it.

ii) In periods of rising prices it produces lower profit and hence it is easier for the management of the business to convince shareholders not to expect large dividend.

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Disadvantages

i) The value of closing stock shown on the balance sheet may be out of date and unrealistic. ii) The assumption is illogical as normal flow of goods should be that first receipts are issued

first. iii) Profit can be manipulated by making new purchases as the latest purchase price is used

to calculate cost of sales. For example, if the management wants to show lower profit, it may make purchases at higher prices first before the end of the period and then use their higher prices to calculate cost of sales and hence show higher cost of sales and lower profit.

iv) The method is not generally accepted in accounting practice and for tax purposes. v) It is clumsy to operate.

(1 mark for each point max 4 – 5 marks)

Question 3 a) Journal Entries DR CR Capital A/c 6,400 1.5 Stock A/c 6,400 1.5 (Being adjustment for over valuation of closing stock of last year

Bad debts A/c 700 1.5 Debtors A/c (Being bad debts w/off

700 1.5

P & L A/c 215 1.5 Provision for doubtful debts A/c (Being 2.5% provision on debtors)

215 1.5

4.5 marks 4.5 marks 1 mark for presentation

Total – 10 marks

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b) Corrected Trial Balance as at 30 April 2003

DR CR

£ £

Business Property @ cost 48,000

Provision for depreciation ½

13,000

Motor Vehicles @ cost 18,400


6,300

Fixtures and fittings @ cost 14,300


3,100

Stock 1 ½

16,000

Creditors ½

8,400

Debtors (9,300 – 700) 1

8,600

Sales 141 640

Balance at bank ½

8,900

Sales returns ½

2,000

Capital (40,000 – 6,400) 2

33,600

Drawings 14,000

Purchases returns 1,800

Discount Allowed ½

310

Discount received 470

Purchases 77,100

Bad Debts 1

700

1

208,310 208,310

10 marks

c) The provision for doubtful debts is made in order to cover for a future potential bad debt. This is in compliance with the prudence concept which requires that provision should be made for any foreseeable loss from the profit of the year in which it is foreseen. Furthermore in the measurement of profit cost should be matched with the relevant revenue and this is in compliance with the matching concept.

(5 marks)

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Question 4

a)

Sales Ledger Control Account

DR CR

£ £

Balances B/D 1

41,580 Balances B/D 600 1

Credit Sales 1

46,950 Set offs 750 1

Bad debts 450 1

Return inwards 1,220 1

Cash Received from customers

41,630 1

Discount Allowed

(42,230 – 41,630)

600 1

Balances C/D 43,400 1

½

88,650 88,650 1/2

(10 marks)

b)

Purchases Ledger Control Account

DR CR

£ £

Set – offs 750 1

Balances B/D 27,020 1

Cash paid to suppliers

25,260 1

Credit purchases 26,380 1

Discounts Received

590 1

Bal C/D 230 1

Returns Outwards 620 1

Balances C/D 26,410 1

53,630 53,630

(8 marks)

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Usefulness of Maintaining Control A/cs

i) Tracing of errors when T.B does not agree ii) Establishing total debtor and total creditor balances iii) More effective internal control and preventing fraud etc.

(2 marks each max 7 marks)

Section C – Solution Q5 a) Sole Trader – Each advantage and disadvantage – 1mark each, max (6) Private Limited Company – Each advantage and disadvantage-1mark each, max (6) b) Memo of Association:

- sets out constitution and gives details of the company - CA85 indicates following information to be included

i) Name of company ii) Name and address of company’s registered office iii) Objectives of company iv) Liability of its members v) Amount of capital to be raised 1.5 marks each,max (4)

Articles of Association

- Sets out the internal workings of the company - Includes details such as

i) Rights of shareholders ii) Procedures for appointment, removal of directors and their powers iii) Length of time directors should serve before re-election. iv) Timing and frequency of company meetings v) Audit arrangements The above two documents will be filed with the registrar of companies prior to Certificate of Incorporation.

1.5 marks each,max (4)

Total – 20 marks Q6 a) Students must state in their definition the following:-

- Measure of the loss in value/ or other consumption - Of Fixed assets over its useful economic life - Arising from such factors as Wear & tear, obsolescence etc

(Max 5marks) b) Explains fully with examples for each (2 x 5 = 10) c) Points included:-

- Spreading the capital expenditure over its UEL - To ensure each accounting period bears an appropriate portion of the cost of an asset - To ensure that fixed assets are shown at their current market value on the balance sheet

(2.5 marks each max 5) Total = 20 marks

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Q7 a) Heading ( max 2 marks) Correct Headings (2 marks each max 10marks) Notes ( 1.5 marks each max 3marks)

( Total 15 marks) b) For each valid point (1.5 marks each max 5marks) ( Total 20 marks)

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JUNE 2004

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 18th March 2004 Hand in by: 15th April 2004

INSTRUCTIONS TO CANDIDATES 1. Assessment Criteria – 30% Weighting 2. Students must submit their assignments to the Reception by 5:00 pm on 15th April 2004 at the

latest. 3. No assignments will be accepted after the deadline and therefore a zero mark will be given to

a student who falls into this category. You work as a trainee accountant for a firm of Chartered accountants based in Kensington. You are attached to the small business unit section of the firm and deal with a lot of sole trader entities located around Kensington and Chelsea. It had given you a lot of experience and whenever there is a problematic situation you’re called upon to deal with it. Your reporting partner has commissioned you to deal with one of his clients who have been burgled and consequently has lost most of his accounting records. Your partner provides you with the following information relating to his client Mutu samy: Mutu Samy is the sole distribution agent in the Chelsea area for Diamond floor tiles. Under an agreement with the manufacturers, Mutu Samy purchases the Diamond floor tiles at a trade discount of 20% off list price and annually in May receives an agency commission of 1 % of his purchases for the year ended on the previous 31 March. For several years, Mutu Samy has obtained a gross profit of 40% on all sales. In a burglary in January 2003 Mutu Samy lost stock costing £4,000 as well as many of his accounting records. However, after careful investigations, the following information has been obtained covering the year ended 31 March 2003: 1. Assets and liabilities as at 31 March 2002 were as follows:

£ Buildings at cost 10,000 Provision for depreciation (Buildings) 6,000 Motor vehicles at cost 5,000 Provision for depreciation ( M.Vehicles) 2,000 Stock at cost 3,200 Trade Debtors (for sales) 6,300 Agency commission due 300 Prepayments( expenses) 120 Trade creditors 4,200 Balance at Bank 4,310 Accrued vehicle expenses 230

2. Mutu Samy has been notified that he will receive an agency commission of £440 on 1 May 2003.

3. Stock at cost, at 31 March 2003 was valued at £3,000 more than a year previously. 4. In October 2002 stock costing £1,000 was damaged by dampness and had to be scrapped as

worthless. 5. Trade creditors at 31 March 2003 related entirely to goods received whose list prices totalled

£ 9,500. 6. Discounts allowed amounted to £1,620 whilst discounts received were £1,200. 7. Trade expenses prepaid at 31 March 2003 totalled £80. 8. Vehicle expenses for the year ended 31 March 2003 amounted to £7,020.

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9. Trade debtors (for sales) at 31 March 2003 were £6,700. 10. All receipts are passed through the bank account. 11. Depreciation is provided annually at the following rates:

Buildings 5% on cost and Motor vehicles 20% on cost. 12. Commissions received are paid directly to the bank account. 13. In addition to the payments for purchases, the bank payments were:

£ Vehicle expenses 6,720 Drawings 4,300 Trade expenses 7,360

14. Mutu Samy is not insured against loss of stock owing to burglary or damage to stock caused by dampness.

Required Task:

You are required to prepare from the above given information, working papers and notes for a meeting with your partner, scheduled on 1st April 2004, to discuss specifically the following:

1. An opening statement of affairs establishing the capital balance as at 31 March 2002. 2. Summary schedules for Cash Book; Trade Debtors; Trade Creditors; Vehicle expenses 3. A Trading, profit and loss account for the year ended 31 March 2003 4. A Balance sheet as at 31 March 2003 5. Any supporting notes to item 3 and 4 above.

Assessment Criteria and Notes: A. You are required to prepare the five items stated above and the mark allocation is as follows:

1. Opening capital statement – 10% 2. Cash Book – 10%; Trade Debtors – 6%; Trade Creditors – 5%

Vehicle expenses – 4% 3. Trading, P & L account – 35% 4. Balance Sheet – 20% 5. Notes and presentation, maximum 10%

Total marks for the assignment is 100 marks, which accounts for 30% of the total marks of the module.

B. This is an individual assignment and it is recommended that the assignment is word-processed.

C. The completed assignment must be stapled and the deadline for return is 15th April 2004 to be

submitted to reception, 2nd Floor, and signed by you. (100 marks)

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Marking Scheme

Working Schedules to be presented for meeting : 1)

Mutu Samy BALANCE SHEET AS AT 31 MARCH 2002

Cost Dep’n ₤ ₤ ₤ Fixed Assets Buildings 10,000 6,000 4,000

1 Motor vehicles 5,000 2,000 3,000

1 ₤15,000 ₤8,000 7,000 1 Current assets Stock 3,200 Trade debtors 6,300 Commission due 300 Prepayments 120 Balance at hand 4,310 14,230 3 Current liabilities Trade creditors 4,200 Accrued expenses 230 2 4,430 9,800 1 ₤ 16,800 Proprietor’s capital as at 31 March 2002 ₤16,800 1 ( 10 marks) 2)

CASH BOOK ₤ ₤ Opening balance 4,310 Trade creditors Trade debtors (see below) 57,980 (see creditors a/c) 37,500 Agency commission (note 7) 300 Trade expenses 7,360 Vehicle expenses 6,720 Drawings 4,300 Balance c/f 6,710 ₤62,590 ₤69,590 ( 1mark each entry, maximum 10 marks) 3)

TRADE DEBTORS ₤ ₤ Opening balance b/f 6,300 Discounts allowed (note 4) 1,620 Sales (note 6) 60,000 Cash received (balancing figure) 57,980 Closing balance c/f 6,700 ₤66,300 ₤66,300

( 1mark each entry, max 6marks)

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4) TRADE CREDITORS

₤ ₤ Discounts received (note 4) 1,200 Opening balance b/f 4,200 Cash paid (balancing figure) 37,500 Purchases (note 1) 44,000 Closing balance c/f 9,500 ₤48,200 ₤48,200 ( 1mark each entry, max 5 marks) 5)

VEHICLE EXPENSES ₤ ₤ Cash 6,720 Accrual b/f 230 Accrual c/f (balancing figure) 530 P & L account 7,020 ₤7,250 ₤7,250 (1mark each entry, max 4marks)

Mutu Samy

TRADING, PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 MARCH 2003 1

₤ ₤ Sale (note 6) 60,000 3 Less cost of goods sold: Opening stock 3,200 1 Purchases (note 1) 44,000 2 47,200 Less: damaged stock written off (note 3) (1,000) 2 Stock stolen (4,000) 2 42,200 Less closing stock (note 2) 6,200 2 36,000 2 Gross profit (note 6) 24,000 2 Add: commission on purchases 440 2 Discounts received 1,200 2 25,640 2 Expenses: Expenses (note 8) 7,400 2 Stock damaged 1,000 1 Stock stolen 4,000 1 Vehicle expenses 7,020 2 Discounts allowed 1,620 1 Depreciation: Buildings 500 1 Motor vehicles 1,000 1 22,540 1 Net profit (to capital account) ₤3,100 2 (Total 35 marks)

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Mutu Samy

BALANCE SHEET AS AT31 MARCH 2003 1

Cost Dep’n N.B.V ₤ ₤ ₤ Fixed Assets Buildings 10,000 6,500 3,500 Motor vehicles 5,000 3,000 2,000 ₤15,000 ₤9,500 5,500 3 Current assets Stock 6,200 Trade debtors 6,700 Commission due 440 Prepayments (expenses) 80 Balance at bank 6,710 5 20,130 1 Current liabilities Trade creditors 9,500 Accrued expenses 530 10,030 2

Net current assets 10,100 2

Net Assets ₤ 15,600 1

Financed by: Capital as at 31 Marc 2002 ₤16,800 2 Net profit for year to 31 March 2003 3,100 1 Less drawings (4,300) 1 Retained deficit (1,200) As at 31 march 2003 ₤15,600 1 (Total 20 marks)

Notes

9. The agency commission due on 1 May 2003 Indicates that purchases for the year to 31 March 2003 were

100% /1% x ₤440 = ₤44,000

10. Closing stock at cost on 31 March 2003 was ₤(3,200 + 3,000) = ₤6,200

11. Stock scrapped (₤1,000) is accounted for by

Credit Trading account Debit P&L account 12. Discounts allowed are accounted for by Debit Discounts allowed account Credit Debtors Similarly, discounts received are Debit Creditors Credit Discounts received

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13. Stocks lost in the burglary are accounted for by Credit Trading account Debit P&L account 14. The trade discount of 20% is deducted in arriving at the value of the purchases. The gross

profit is 40% on sales, so with cost sales = ₤36,000 ₤

Cost (60%) 36,000 Profit (40%) 24,000 Sales (100%) ₤60,000

15. the agency commission ₤300 dues on 1 May 2002 would have been paid to Mutu Samy at

that date. 16. The P&L account expenditure for expenses are as follows:

EXPENSES

₤ ₤ Prepayment 120 P&L account Cash 7,360 (balancing figure) 7,400 Prepayment c/f 80 ₤7,480 ₤7,480

( Notes and Presentation, maximum 10marks)

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Examination Paper Subject: BUSINESS ACCOUNTS Date: 15 June 2004 Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 13. Section A – COMPULSORY question 14. Section B – COMPULSORY question 15. Section C – Answer TWO questions only 16. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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Multiple choice

Questions Answer sheet - Section A

Subject: Business Accounts (June 04)

Candidate No: ____________________ Instructions:

(1) Answer all questions (2) The questions are set on objective testing principles, and you should circle the letter, which you consider to be the correct answer. Eg. A If you wish to change your choice you should cross out as follows: A and circle your new choice. (3) The answer sheet is then to be detached and submitted to the invigilator separately. (4) Recommended time allowed for this section is 36 mins. (5) Total marks awarded for this section: 20marks

Answer Sheet

Question Choices

1. A B C D

2. A B C D 3. A B C D 4. A B C D 5. A B C D 6. A B C D 7. A B C D 8. A B C D 9. A B C D 10. A B C D 11. A B C D 12. A B C D 13. A B C D 14. A B C D 15. A B C D

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Section A – COMPULSORY

Multiple-Choice Questions 1. Which of the following accounting equations is correct?

A. Assets + Capital = Liabilities B. Liabilities – Capital =Assets C. Capital=Assets – Liabilities D. Capital=Assets + Liabilities (1 mark)

2. A company increases its provision for bad debts by £600. What will be the effect of this adjustment on the year-end final accounts?

Net Profit Net Debtors A. Decrease by £600 Decrease by £600 B. Decrease by £600 Increase by £600 C. Increase by £600 Decrease by £600 D. Increase by £600 Increase by £600

(1 mark) 3. Why are fixed assets depreciated?

A. to allow for the increase in repairs with use B. to provide cash for replacement C. to show their current value in the balance sheet D. so that the profit and loss account includes a charge in use.

(1 mark)

4. During the year a business sells a fixed asset. The following information is known.

£ Original cost 500 Accumulated depreciation at date of sale 240 Profit on sale 70 What were the proceeds from the sale of the fixed asset?

A. £ 170 B. £ 190 C. £ 310 D. £ 330

(2 marks)

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5. Stock should be valued at the lower of cost and net realisable value. The table shows data about four products. Product A B C D Cost £ 18 £ 19 £ 17 £23 Realisable value

15 28 17 26

Selling expenses

3 2 3

At how much should the total stocks be valued?

A. £72 B. £77 C. £78 D. £86

(2 marks) 6. The purpose of a firm preparing a trial balance is to establish whether …

A. the total of the debit balances brought down in its nominal (general) ledger equals that of the credit balances brought down.

B. the double-entry record it has made for all transactions is correct. C. its bank balance is correct. D. it has earned a profit or incurred a loss.

(1 mark)

7. The balance sheet of a firm as at any particular date is intended to show…

A. the nature of the firm’s business at that date. B. the identity of the firm’s owners at that date. C. the financial position of the firm at that date. D. the physical size of the firm at that date.

(1 mark)

8. Given opening debtors £10000, credit sales £50,000, increase in provision for bad debts £500, amount received from debtors £45000, Discount allowed £350, dishonoured cheque £100, sales returns £400, Closing debtors would be:

A. £14350 B. £14650

A. £14850 D. £15150 (3 marks)

9. The sales journal is commonly known as…

A. a sales invoice B. the sales daybook C. the sales ledger D. none of the above (1 mark)

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10. The effect of the accruals concept is that…

A. revenue and profit should not be anticipated B. similar items should be accounted for in a similar way from one accounting period to

the next. C. net profit is the difference between revenue and expenses. D. none of the above.

(1 mark)

11. How can a business increase its current ratio?

A. increase creditors B. increase debtors C. increase bank overdraft D. reduce stock

(2 marks)

12. What would be regarded as a fixed cost in the running of a motor vehicle?

A. fuel costs B. maintenance every 6 months C. oil change every 6000 miles D. None of the above

(1 mark)

13. A dividend is…

A. a distribution of a company’s profit. B. interest paid on a company’s borrowing C. always paid to banks and other creditors D. none of the above

(1 mark)

14. Cash flow statements are required by…

A. the companies acts B. financial reporting standard no.1 (FRS1) C. the stock exchange D. none of the above

(1 mark)

15. In the financial statements of a company, goodwill should be shown…

A. under the heading “current assets” B. under the heading “intangible fixed assets” C. under the heading “tangible fixed assets” D. none of the above.

(1 mark)

Total: (20 marks)

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SECTION B – COMPULSORY QUESTION

Q2. The following balances were extracted from the books of Harry Potter limited at 31 December 2003.

Additional notes to be considered:

1. The directors have declared an ordinary dividend of 12 pence per share and to pay the remainder of the preference dividend.

2. A transfer of £ 50,000 is to be made to the general reserve.

3. Provisions are to be made for corporation tax estimated at £90,000 and auditors’

remuneration estimated at £248,000.

4. Closing stock is valued at £224,000.

5. Depreciation is to be charged on the fixed assets on the following bases and at the following rates:

Plant + equipment- straight line at 20% p.a Motor vehicles - reducing balance at 25% p.a

DR CR £000 £000Sales and Purchases 2334 6502Stock at 1 January 2003 136Light heat and gas 230Wages and salaries 902Repairs and maintenance 622Carriage outwards 568General expenses 628Debenture interest paid 30Interim ordinary dividend paid 240Ordinary share capital (£1) 2000Share premium account 16008% preference shares 120012% Debentures 2009 5006% Debentures 2015 1200General reserves 240Profit and loss account Balances brought forward 146Freehold land and buildings at cost 4900Plant + equipment at cost 1240Motor vehicles at cost 1044Provision for depreciation On- plant + equipment 240 -Motor vehicles 444 Cash at bank 1280Debtors 256Creditors 386Interim preference dividend paid 48 14458 14458

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6. During the year one motor vehicle, which had cost £24,000 and the accumulated depreciation to date of sale was £13875, was sold for £12125. These entries have not been entered in the accounting system.

7. Bad debts of £16000 are to be written off.

8. The 12% debentures were in issue throughout the year. The 6 % debentures were

issued on 1 July 2003. Provide for the balance of the debenture interest.

Required: Using all the above information you are required to prepare a trading and profit and loss account for the year to 31 December 2003 together with a balance sheet as at that date.

(30 marks)

SECTION C – ANSWER ANY TWO QUESTIONS ONLY Q3.

The directors of Prawn plc are trying to expand the company’s activities and are examining the affairs of two companies, Crab Limited and Lobster Limited with the intention of acquiring one of them.

The following is a summary of the financial statements of these two companies for the year ended 31 March 2004.

Trading and Profit and Loss Accounts

Crab Ltd Lobster Ltd £000 £000 £000 £000 Sales 360 540 Less Cost of Sales Opening Stock 113 92 Purchases 224 432

524 Less Closing Stock 67 94 270 430 Gross Profit 90 110

Less Expenses Administration 28 16 Distribution 12 14 Depreciation 5 8 Debenture interest - 2 45 40

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Net Profit before Tax 45 70

Less Corporation Tax 12 11 Profits after tax 33 59 Less Preference share dividends paid 4 - Proposed ordinary share dividends 15 15 19 15

Retained Profits for the year 14 44

Balance Sheets as at that date £000 £000 £000 £000 Fixed Assets 110 140 Less accumulated depreciation (30) (40)

80 100 Current Assets Stocks 67 94 Debtors 136 128 Bank 95 --

298 222

Less Creditors due within One year. Trade Creditors (41) (40) Bank Overdraft ---- (6) Corporation Tax (12) (11) Proposed dividends (15) (15) Net Current Assets 230 150

310 250

Less Creditors due more than One year. 10% Debentures ---- 20 Net Assets 310 230 Financed by: - Ordinary shares of £1 each 200 150 8% Preference shares of £1 each 50 ---- Reserves (including retained earnings) 60 80

310 230

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REQUIRED:

(a) Calculate the following ratios (to two decimal places) for each company, showing clearly the basis of your calculation:

• Gross profit ratio • Net profit ratio • Return on capital employed • Current ratio • Acid test ratio • Stock turnover ratio • Gearing • Debtors Collection period

(16 marks)

(b) A report as financial advisors to Prawn plc to the board of directors commenting upon

the results of the ratios calculated in (a) above and stating which company may be the better one to acquire

(9 marks) (Total 25marks)

Q4. The balance sheets of Anthony Limited are shown below.

BALANCE SHEETS AS AT 31 DECEMBER

2002 2003

£ £ £ £ £ £

Cost Dep'n Net Cost Dep'n Net

Fixed Assets

Land and buildings 100,000 10,000 90,000 100,000 12,000 88,000 Plant and equipment 51,400 8,400 43,000 70,300 14,300 56,000

151,400 18,400 133,000 170,300 26,300 144,000

Current Assets Stock 44,000 61,000 Debtors 28,000 32,000 Bank - 5,000

72,000 98,000

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Less

Current Liabilities Creditors 23,000 27,500 Bank overdraft 6,500 – Corporation tax 13,500 16,000 Dividend proposed 10,500 15,000

53,500 58,500 Working Capital 18,500 39,500

151,500 183,500

Less Long-term Liabilities

Debentures 30,000 40,000

Net Assets 121,500 143,500

FINANCED BY Share capital 110,000 130,000 Retained profits 11 ,500 13,500

121,500 143,500

Notes £

Profit & Loss data for 2003 Operating profit before tax 33,000

Proposed dividend 15,000 Corporation tax 16,000 Interest paid 2,850

Required: (a) Prepare the Cash flow statement for the year ended 31 December 2003.

(19 marks)

(b) Discuss briefly how useful the above statement is to you as a user of financial statements. You may wish to use the figures from the cash flow statement prepared in (a) above to support your discussion. (6 marks) (Total 25marks)

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Q5. Francesca Lovely Olives manufactures, distributes and sells superior quality and high priced olive oil. It is very popular with middle class consumers and is mainly distributed by exclusive ‘Deli’ shops located in the high streets of major cities. Over the years the profitability of the company has fallen, and competition has made it difficult to increase the price. Francesca Pietroni, the Managing Director, believes that the company can make huge savings if they pay other companies to do the production, packaging and distribution. Francesca Lovely Olives could then concentrate on managing the brand. The following data is available: The firm’s total capacity is 1,000,000 bottles of olive oil per year. The selling price is £ 9.00 per bottle. The estimated fixed costs will be £ 800,000 The firm has negotiated a contract with a supplier who will provide raw materials for the olive oil at a

cost of £1.50 per bottle. Labour costs are £2.00 per bottle and packaging and distribution are £0.50

per bottle.

Required:

(a) Explain the term ‘ Break-Even’. (3 marks)

(b) Using the above information, calculate the following:

• Contribution per bottle (3 marks)

• Break-even output (3 marks)

• Profit if the firm operates at 60% capacity (4 marks)

• Margin of safety if the firm operates at 60% capacity (2 marks) • How many bottles would the firm need to sell if it wanted to make £ 2.5million

profit. (4 marks) (c) State the limitations of Break-even analysis. (6 marks) (Total 25marks)

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Mark scheme Section C

Q4

CASH FLOW STATEMRNT OF ANTHONY LIMITED FOR THE YEAR ENDED 31 DECEMBER 2003

1 Note £ £ Operating activities 1 27,250

Return on Investments and servicing of finance: Interest paid (2,850) 2 Taxation: Corporation tax paid (13,500) 2 Capital expenditure and financial Investment: Purchase of fixed assets (18,900) 2

Equity dividends paid (10,500) 2

Financing: Issue of shares 20,000 2 Issue of debentures 10,000 2

30,000 Increase in cash 11,500 Notes: 1. Operating profit before interest (33000 + 2850) 35,850 2 Depreciation 7,900 3 Increase in stock (17,000) 1 Increase in debtors (4,000) 1 lncrease in creditors 4,500 1 Net Cash inflow from operating activities 27,250 1

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2. Analysis of changes in Net Debt Cash Cash Cash

at beg Flow at End Cash at bank 0 5,000 5,000 1 Bank Overdraft 6,500 6,500 0 1

11,500 1 25

Workings Depreciation for 2003: £12.000 - £10,000 2,000 £14,300 - £8.400 5,900

7,900

Q3 Crab Lobster Gross Profit ratio 25% 20.4% Net Profit ratio 12.5% 13.3% ROCE : PBIT/Total Capital 14.5% 28.8% Current ratio 4.38:1 3.08:1 Acid test Ratio 3.40:1 1.78:1 Stock turnover ratio 122days 79days Gearing PSCAP + LTLoans Total Capital 16% 8% Debtors Days 140days 87days

(8marks) (8marks)

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(b) Report Style

• Crab shows a higher G/P ratio than Lobster, however skate may be selling more because of lower prices

• The net profit ratio is higher for Lobster than Crab, because of lower expenses. • The ROCE reveals that Lobster is performing much better than Crab as indicated by its

higher profits situation. • Crab has much better liquidity ratios than Lobster and furthermore, Lobster is

experiencing an overdraft. • The acid test ratio is even better for Crab and is in a healthy position, although Lobster

is reasonably sound. • Lobster shows a better stock turnover position whereas cod shows a significant

difference in its stock levels. This may indicate a downturn in its trade. • Both companies appear to be low geared. • The debtors collection period for both companies appears out of control but Lobster’s

credit control position appears better than Crab, however they both may be within the industry average.

In the light of the above ratios it appears Lobster is a better choice for acquisition, but other non-financial factors need to be considered. Report style – 2 marks 1 mark for each point made, max 7 marks

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IBAM MARKING SCHEME June 2004

Examinees are expected to expand on the points below, either in essay format or in the format indicated by the question.

Section A Q1a. Produce a short formal report for the Marketing Director, outlining any recommendations you may have for future marketing strategy.

(25 marks)

Format and Style The report should b given a title that clearly reflects the content of the report. Names and designations of both sender and receiver, and the submission date should be clearly stated. Examinees should be aware that a short formal report has been requested and use the correct headings and sub-headings.

Formal Report Headings

1 Terms of Reference/introduction

2 Procedure/Method 3 Findings

4 Conclusions 5 Recommendations

Relatively formal language should be used, which is clear and objective. Up to 5 marks for content and style

Content

Terms of Reference/Introduction The purpose of the report must be clearly stated: To provide the Marketing Director with recommendations for improvements in future marketing strategy.

Procedure/Method The research method must be clearly stated. In this case the examinee should be aware that secondary research has been employed. The survey was carried out by a third party for Food & Drink magazine. The result of this survey were analysed and used on the basis of this report.

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It is important that details of the survey sample are included, as this will effect the interpretation of the findings. A total of 4 marks are available for these sections.

Findings Selection of information relevant to the purpose of the report. There is a substantial amount of information and examinees should be aware that they have a different objective than the original authors of the data; therefore a large proportion of the marks will be awarded for sensible selection and analysis of information. Examinees should be aware of the following points: Tables 1-3 • 60% dine out once a month • 40% dine out on Friday and frequently, followed 31% on Saturday and 245 on Thursday. The

least popular day is Tuesday. • The main reasons for the above are:

Fits in with pay day 40% Convenient time 30% Discounts offered 26%

Table 4-6 • Examinees should be aware of Roberts position (fifth with 8%) and the distribution of their

competitors, identifying realistic competition. • Examinees should identify the main factors affecting choice of restaurant; particularly noticeable

are convenience, value for money, facilities for children, quality of food and service. They should also be aware of these factors which seem the least important.

Table 7-8 • Examinees should be aware of Roberts’s position (5th with 8%) and the distribution of their

competitors. • The most important criteria for judging advertisements seem to be how attractive and eye-

catching as well as informative they are. A total of 8 marks are available for this section, based on selection and presentation of relevant data

in logical order.

Conclusion

Comments should show awareness of the impact of the findings on the future. Marketing activities of

the restaurant chain. Any trends or patterns identified should be included.

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Recommendations

Suggestions should be made for action.

Examinees have a wide variety of choices. Credit will be given sensible suggestions firmly based on

findings and conclusions, which link together in logical way. Immediate long term or temporary

measures may be suggested, as well as further investigation into certain areas.

A total of 8 marks are available for the sections including conclusions and recommendations

Q1b You will be presenting your report at the next marketing meeting and have decided to use three overhead transparencies to help you explain your ideas. Produce a draft copy of the three OHP transparencies you will use.

(15 marks)

In this question examinees have a wide choice of potential content.

For example:

• Graphs/charts to help display the statistical data in the findings. • Flow charts, other diagrams or text to explain recommended action. • Other graphics or text to highlight/explain important information.

Up to 5 marks can be awarded for each draft OHP, according to:

• An awareness of the role of visual communication, in particular visual aids. • An awareness of the considerations of using OHT’S e.g. the need for margins, a large scale, no

overloading of information, the possibility of use of text, images, graphics, colour etc. • Presentation

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Section B Answer any THREE questions

2) ‘Information Technology has substantially increased the speed of business communication, both internally and externally, and often provides better quality information to aid in decision making planning and control of all business activities, relative to the manual systems used in the past.’

To what extent do you agree with the statement above? Your answer should include examples to illustrate your ideas. (20 marks) Examinees should show that IT systems increase both accuracy and speed of communicating information. Disadvantages of IT. • Security issues • Lack of back up systems when technical problems arise • Suitability of system to the organisation • Information overload • Maladjustment to new skills Five marks awarded for each statement Advantages of IT • Increasing speed of communication • ISDN • Telephone and mobiles • Fax • Word/data processing • Printers and software packages • Lans/wans/EDI/internet and E-mail • Video conferencing and video-audio equipment etc. Reference could be made to IT systems enabling receipt of information by various parties, storage space reduction, copying and distribution, and feedback devices-such as visual displays on AVDU screens showing receipt of a meeting. Up to 15 marks is available for relevant information.

3 Your department of Angel Airlines is responsible for dealing with customer complaints. You have received a letter from a woman who found several hairs in her meal on a flight from Los-Angeles to Mexico City. She feels she was dealt with rudely by members of staff when she complained during the flight and his both angry, and concerned that other customers do not suffer the same experience with your airline.

Write a letter in reply, to include your airline’s logo. (20 marks)

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Format

5 marks can be awarded to correct business letter format. Any style is an acceptable assuming

element is present and that thought has been given to presentation.

Content and Structure

The opening paragraph should put the letter into context, acknowledging receipt and thanks of the

customer’s letter including its date and main content. Apologies should be offered.

The following paragraphs should develop the message logically; explaining what investigations has

taken place in terms of her treatment by the staff, as well as the standard of hygiene used in meal

preparation and distribution. Any action that has been taken based on the investigation and on the

customer’s wish that the situation is avoided in the future should also be included.

The closing paragraph clearly state any compensation that may be offered with clear instructions and

leave a clear channel for feedback open.

10 marks can be awarded for clear, relevant and correct content.

Tone

The tone of the letter should be apologetic without imparting any negative aspect of the organisation.

3 marks are awarded for appropriate tone.

Logo

The logo should be positioned appropriately and reflect the nature of the organisation. Marks will be

awarded for visual effectiveness.

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2 marks can be awarded for the logo

4.You work for Information Technology Training Company. Your client is a medium sized organisation that provides office stationery to companies in the UK and the rest of Europe.

Write a set of notes, which you will take to a meeting with your client, outlining some of your main ideas on how staff training on three different software packages could improve both internal and external communication for the organisation. (20 marks)

• Up to 2 marks are available for using an appropriate style: notes should bear a title and the main points should be clearly but briefly outlined.

• Candidates should choose 3 from the following 5 software packages. For each, 1 mark is available for naming the package and up to 5 marks for clearly outlining its advantages for internal and/or external communication.

Word Processing – Versatility and efficiency in producing professional written documents:

Creating documents

Editing

Inserting parawriting/some visual features

Templates

Storage

Mail merge

Access

Reproduction

Desk Top Publishing – Versatility and efficiency in producing professional written/visual documents (letters, envelopes, brochures, and magazines):

Normal word processing facilities

Import diagrams

Merge text & pictures

Colour effects

Arrange pages/folding styles

Web Publishing – Publishing information on the web via the web or CD ROM:

Sophisticated text, visual and sound information produced

Published on the web or CD ROM for wide international access

Links to related sites

Latest technology (perceived positively)

Additional channel for internal (Intranet) and external (extranet/internet) communication – global and 24 hours

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Spreadsheets – Versatile and efficient gathering and organising of information:

Facility for making text, numerical, date, financial and statistical calculations using formulae

Making decisions based outcomes of ‘what if’ scenarios.

Creation of charts and graphs

Databases – Data stored in one place, which can be accessed by different people in a variety of ways:

Ease and flexibility in storing vast amounts of data.

Ease and flexibility in accessing vast amounts of data.

Uses to which this data can be put (e.g. marketing strategies)

……………………………………………………………………………….

5) “Meetings fulfil the need of staff in organisations to exchange views and information on a range of matters.”

Discuss this statement indicating what factors might affect the success of meetings.

What documents are required in order to ensure that meetings are successful?

(20 MARKS)

Introduction (4marks)

In spite of their resources commitments, meetings do in deed fulfil the need of individuals in organisations to exchange views and information on a range of matters that effect the decisions and plans and provide an opportunity to solve problems face-to-face.

Meetings do not work well if the following factors prevail: (8 marks)

• The purpose of the meeting is unclear-no background information given • The meeting does not provide relevant facts to stimulate a discussion and decision-making. • The chair/leader does not control the meeting. • The participants do not want to contribute

In preparation there are several important documents: (8 marks)

• The notice-this should be prepared and circulated well before the meeting. • The agenda- this is a schedule of things to be done/the subjects to be discussed-this is

prepared by the secretary after having enabled al participants to propose items for the agenda.

• The minutes are a record of what has gone on at the last meeting. • The secretary may need to have legal documents (finance at his disposable)

………………………………………………………………………………………………………

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6) What channel and media, or communication of channel and media, would you use to transmit the following messages? Give reasons for your choices.

a) Inform an employee that s/he has been selected for promotion.

b) Inform a client that you will be unable to deliver an order on time

c) Inform hotel quests of the week’s entertainment.

d) Ask employees for their views on introducing regular staff meetings.

For each section up to 2 marks should be awarded for suitable choice(s) of media/channel and up to 3 marks for a clear explanation of that choice.

a) Inform an employee that s/he has been selected for promotion.

A telephone call or a face-to-face informal interview/meeting would allow the message to be sent, and feedback received quickly. Oral communication with its immediate feedback would also be more personal, allowing relationships to be built.

This could potentially be backed up by a written letter, to formalise the offer and provide more

details, although this may not be necessary if the interview/meeting were more formal and

accompanied by written back up.

b) Inform a client that you will be unable to deliver an order on time.

If speed were an issue this would be best communicated via the telephone, as this is the quickest way of receiving feedback and ensuring the message is received. If there is no reply, e-mail is another swift alternative.

If time is less of an issue and the sender would like to avoid dealing with a negative reaction form the client which may be effected by emotional barriers, a written explanation could be sent in the form a of a letter, as the communication is external. This would also have the benefit of providing a record of the message. c) Inform hotel guests of the week’s entertainment.

Written and visual media would be the most appropriate in this case. Information could be prominently displayed in the reception area, ensuring all guests would be aware of it. In this case, visual communication in the form of colour/illustrations/parawriting features etc., would help make the display more noticeable and the events more attractive.

Alternatively/additionally leaflets could be placed in each room of the hotel for the guests to peruse. Visual communication would play a similar role to the above.

d) Ask employees for their views on introducing regular staff meetings.

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This would probably be best communicated using written communication rather than oral, as the latter would indicate a time consuming way of receiving feedback, unless the company were particularly small. Memoranda are useful for communicating written information internally, would ensure that all employees received the message and that they could reply at a time that is convenient for them. The memo could be sent via e-mail.

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 14th October 2004 Hand in by: 11th November 2004

INSTRUCTIONS TO CANDIDATES 1. Assessment Criterion – 30% Weighting. 2. Students must submit their assignments to the Reception by 5:00 pm on 11th November 2004

at the latest. 3. No assignments will be accepted after the deadline and therefore a zero mark will be given to

a student who falls into this category. 4. If the research or views you cite are not your own, then you MUST acknowledge your

source(s), ideally in accordance with the Harvard style of referencing. If you fail to acknowledge your sources, you run the risk of being accused of plagiarism, which is an academic offence. You should include a bibliography and a list of websites used.

5. Your assignment must be word-processed and NOT handwritten. 6. You are strongly advised to make a copy of your assignment before submission. 7. Students are assessed anonymously. You should put your KCB student registration number

(but not your name) on the front cover and on the top right hand corner of every subsequent page. Please do not include your name anywhere on the document.

8. You are required to sign the register on submission of your assignment.

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(a) In June 1990, the Accounting Standards Board (ASB) was formed to replace the old Accounting

Standard Committee (ASC) regime. During this time it set up a project to produce a Statement of Principles. (SOP)

In December 1999, the ASB published the Statement of Principles. The Statement is not an Accounting Standard but sets out the concepts and principles that underline the preparation of financial statements for external reporting.

Its primary aim is to assist the ASB in the development and review of accounting standards in the Accounting world. The Statement comprises seven chapters. Chapter 3 deals with the Qualitative characteristics of financial information.

You are required to explain, in your own words, this chapter (3) contained within the statement and for each characteristic, explain briefly how it will affect the way user groups may benefit from their application.

Maximum Word Count 750 words

(50 marks) (b) “There is no one single model of accounting that satisfies all the main user groups. In law, annual

accounts reporting to all shareholders about corporate performance and financial position are not public prospectuses inviting individuals to invest.” You are required to briefly discuss in this context, what are the main purposes of published accounts of companies?

Maximum Word Count 750 words (50 marks) Recommended reading list for the above Coursework: • Atrill, P. and McLaney, E. (2004), FT Prentice Hall, Accounting and Finance for Non-

Specialists. • Dyson, J.R. (2004), FT Prentice Hall, Accounting for Non-Accounting Students. • Elliott, B. and Elliott, J. (2004), FT Prentice Hall, Financial Accounting and Reporting. • Gillespie, I., Lewis, R., Hamilton, K. (2004), FT Prentice Hall, Principles of financial

Accounting. • Wood, F. and Sangster, A. (2002), FT Prentice Hall, Business Accounting. Notes: • High marks will be awarded for originality, clarity of work, and neat and tidy presentations. The assignment should be submitted in clear transparent pockets and NOT in ring binders or other

type of folders.

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Subject: Business Accounts MARKING SCHEME

(a) Primary qualitative characteristics relating to content

• Relevance • Reliability

Primary qualitative characteristics relating to presentation

• Comparability • Understandability

Full discussion, definitions and benefits of each of the above points.

10 marks max, for each valid point made, max 40 marks. (b) Discussion points should include the following: -

• Stewardship role • How much profit returned to shareholders • (Dividend decisions) • Contractual arrangements fulfilled such as management bonuses • Help providers of capital to make decisions • To provide a basis for governments to tax corporate profits • Etc, etc.

8 marks for max, for each relevant point made, max 40 marks. Presentation, originality, good referencing and clarity of writing Style. Max, 20 marks. Total: 100 marks

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Examination Paper

Subject: BUSINESS ACCOUNTS Date: 14 December 2004 Time Allowed: 3 Hours



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Multiple-Choice Questions

1. Which of the following is a liability of a firm? A - A building owned by the firm B - Cash in the firm’s safe C - Money owed to the firm by its debtors D - Bank Loan not yet repaid

(1 mark)

2. When a firm lodges money which it received from one of its debtors, the effect on its assets and / or liabilities is:

Effect upon Assets Effect upon Liabilities A Decrease bank Decrease creditors B Increase bank Decrease debtors C Increase cash Decrease Loan D Increase stock Decrease capital

(1 mark)

3. If the total of sales, including VAT at the rate of 17.5%, amounts to £1,880, the total of sales

excluding VAT amounts to: A - £1,560

B - £1,600 C - £2,209 D - None of the above.

(1 mark)

4. The following information relates to a sole trader. Total of all assets at 1June £2,300 Net profit earned in June £1,000 Total of all liabilities at 1 June £2,500 Drawings during June £700 Capital introduced during June £5,000

The sole trader’s capital at 30 June was A - £ 5,100 B - £ 5,300 C - £ 5,500 D - £ 5,600 (2 marks)

5. Stock should be valued at the lower of cost and net realisable value. The table shows data about four products. Product A B C D Cost £ 24 £ 25 £ 23 £ 31 Net Realisable value

£ 20 £ 37 £ 23 £ 35

Carriage Inwards Cost

0 3 2 3

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At how much should the total stocks be valued? A - £ 99 B - £103 C - £105 D - £97

(2 marks) 6. Which of the following is not normally found in the capital and reserves section of a company’s

balance sheet?

A - Share premium account.

B - Profit and loss account balance.

C - Dividends payable.

D - Ordinary share capital.

(1 mark)

7. In the balance sheet of a limited company, the profit and loss account balance is shown under the heading…

A - ‘Current liabilities’.

B - ‘Fixed assets’.

C - ‘Current assets’.

D - ‘Capital and reserves’. (1 mark)

8. A company has the following capital structure:

Authorised Issued

25p 4% Preference Shares £400,000 £100,000

£2 Ordinary Shares £500,000 £200,000

If the company declares a dividend of 10p per ordinary share, the total dividend payable by the company will be:

A - £14,000

B - £26,000

C - £54,000

D - £66,000 (3 marks)

9. Financial Reporting Standards are issued by…

A - The Stock exchange

B - The government

C - The Accounting Standards Board

D - None of the above (1 mark)

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10. In the accounts of a limited company, debenture interest paid during the current accounting period, in respect of the same period …

A - is part of the company’s cost of sales

B - is an expense.

C - is an appropriation of profit.

D - none of the above. (1 mark)

11. The current ratio is primarily an indication of an entity’s …

A - current and future level of profitability

B - current level of efficiency

C - short-term liquidity

D - growth potential (2 marks)

12. The acid-test ratio is calculated as:

A - Current assets : Current liabilities

B - Debtors : Creditors

C - Current assets less debtors : Current liabilities

D - Current assets less stock : Current liabilities (1 mark)

13. The abbreviation ‘SSAP’ means…

A - Statement of Standard Accounting Practice.

B - Statement of Statutory Accounting Principles

C - Statement of Standard Accounting Principles

D - none of the above (1 mark)

14. ‘Prime cost’ does not include…

A - Direct labour costs

B - Factory overhead expenses

C - The cost of raw materials consumed

D - Direct expenses

(1 mark)

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15. In a cash flow statement, which of the following would appear as a cash outflow?

A -The payment for shares in a company whose shares are traded on a Stock Exchange

B - A decrease in trade debtors over the course of an accounting period.

C - Money received as a result of issuing new shares

D - None of the above

(1 mark)

Total: (20 marks)

SECTION B – COMPULSORY QUESTION

Q1. The following balances have been extracted from the books of Pythagoras Limited as at 30 June 2004. £ £

Creditors 18,900 Sales 240,000 Land at cost 54,000 Buildings at cost 114,000 Furniture and fittings at cost 66,000 Bank Overdraft- credit balance 18,000 Depreciation: Buildings 18,000 Furniture and fittings 30,000 Discounts received 5,292 Retained profits at 1 July 2003 6,000 Provision for doubtful debts 2,448 Goodwill 49,200 Cash in hand 696 Stock at 1 July 2003 42,744 Interim dividend on preference shares 1,800 Business Rates 6,372 Wages and salaries 24,000 Insurance 5,688 Returns inwards 1,116 General Expenses 1,308 Debtors 37,920 Purchases 131,568 Debenture interest 1,200 Bad debts 2,028 5% debentures (redeemable 2008) 48,000 6% £1 preference shares 60,000 Ordinary shares ( 50pence each) 60,000 General reserve 30,000 Share premium 3,000 539,640 539,640

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Additional information:

(1) A physical stock take at 30 June 2004 valued the stock at £46,638. (2) Insurance paid in advance was £300. (3) The wages accrued at 30 June 2004 £840. (4) Depreciation is to be provided at 10% on cost of buildings, and at 20% on the

written down value of furniture and fittings. Goodwill is to be amortised at 25% on cost per annum.

(5) Provision for doubtful debts is to be set at 5% of debtors. (6) The directors propose to pay a dividend of 2.5p per share on ordinary shares and the

final preference dividend, and to transfer £12,000 to the general reserve. (7) The corporation tax charge for the year is £20,000

REQUIRED: (a) To prepare the trading, profit and loss account for the year ended 30 June 2004.

(18 marks) (b) The Balance Sheet as at 30 June 2004. (12 marks)

SECTION C – ANSWER ANY TWO QUESTIONS ONLY

Q2. The following information relates to Sara Enterprises Limited retailing in stationery:

Date Purchases Sales

June 20-3 800 pens @ £6.00 July 20-3 700 pens @ £10.00 September 20-3 1200 pens @ £7.00 December 20-3 600 pens @ £12.00 February 20-4 1,000 pens @ £8.00 April 20-4 400 pens @ £14.00 May 20-4 700 pens @ £10.00 May20-4 1000 pens @ £15.00

REQUIRED: (a) Calculate the value of the closing stock as at May 20-4 using the following methods:-

(i) FIFO method (ii) LIFO method

(14marks) (b) Prepare the trading accounts for the period to May 20-4 using the above two methods. (6marks) (c) Outline the advantages of using the FIFO method of stock valuation. (5marks)

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Q3. The following balances were taken from the books of Dinesh United Limited as at 31 January

2003. Purchase Ledger balances £ 27,910 Sales Ledger balances £ 45,020

Totals for the year ended 31 January 2004 £ Purchases returns day book 3,070 Sales day book 501,510 Sales returns day book 10,440 Purchases day book 300,450 Cash Sales 100,000 Petty cash paid to Suppliers 230 Cheques received from Customers 458,770 Cash purchases 50,000 Cheques paid to Suppliers 281,990 Cash received from Customers 33,330 Bad debts written off 2,090 Discounts Allowed 7,080 Discounts Received 6,540 Customers’ Cheques dishonoured 1,790 Balance on Sales ledger set off against balances on Purchase Ledger 2,330 REQUIRED: (a) Prepare the Sales and Purchase Ledger Control Accounts for the year ended 31 January

2004, showing clearly the balances on these accounts at 31 January 2004. (20 marks)

(b) State the uses of preparing control accounts. (5 marks)

Q4. ‘Working capital is essential for a business to be able to operate on a day to day basis as a

going concern.’ ‘Gearing measures the relationship between debt finance and equity finance and is also known as leverage.’

REQUIRED: (a) Define ‘working capital’ and identify the components making up working capital. (6 marks)

(b) Working capital management can be assessed using the liquidity and asset utilisation and

efficiency ratios. Explain how the following ratios can be used to evaluate the assessment:

• Current ratio • Acid-Test ratio • Stock turnover • Debtors collection period • Creditors payment period (15marks)

(c) What do you understand by the statement “ The company is highly geared”?

(4marks)

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Marking Scheme A1.

Pythagoras Limited Trading, profit and loss account

For the year ended 30 June 2004 1

£ £ Sales 240,000 Less: Returns inwards (1,116) Net Sales 238,884 1 Less: Cost of Sales Opening Stock 42,744 Purchases 131,568 174,312 Less: Closing Stock (46,638) (127,674) 2.5 Gross Profit 111,210 0.5 Add: Other Income Discount received 5,292 116,502 1 Less: Expenses Rates 6,372 Wages and Salaries 24,840 Insurance 5,388 General expenses 1,308 Bad Debts 1,476 2.5 Depreciation: Buildings 11,400 Fixtures and Fittings 7,200 2 Amortisation of Goodwill 12,300 (70,284) Operating profits before interest and tax 46,218 1 Interest charges (2,400) 1 Profits before tax 43,818 Corporation tax (20,000) 0.5 Profits after tax 23,818 Dividends: Preference: Paid 1,800 Final 1,800 3 Ordinary: Proposed 3,000 (6,600) Profits for the year 17,218 0.5 Transfer to general reserve (12,000 0.5 Retained profits for the year 5,218 Retained profits brought forward 6,000 0.5 Retained profits carried forward 11,218 0.5 18

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Pythagoras Limited

Balance Sheet as at 30 June 2004 1 Depreciation/ Cost Amortisation N.B.V £ £ £

Fixed Assets Tangible assets: Land 54,000 - 54,000 Buildings 114,000 29,400 84,600 Furniture and fittings 66,000 37,200 28,800 Intangible assets: Goodwill 49,200 12,300 36,900 283,200 78,900 204,300 3 Current Assets Stocks 46,638 Debtors 37,920 Provisions (1,896) Prepayments 300 Cash in hand 696 83,658 2.5 Less: Creditors due within one year: Bank Overdraft (18,000) Trade creditors (18,900) Accruals ( 2,040) Dividend payable ( 4,800) Corporation Tax (20,000) Net Current Assets 19,918 2.5 Total assets less current liabilities 224,218 Less: Creditors due more than one year 5% Debentures (48,000) Net Assets 176,218 0.5 Capital and Reserves: Called up share capital: 60,000 £1 Ordinary shares 60,000 60,000 6% £1 Preference Shares 60,000 Share Premium 3,000 General Reserves 42,000 Profit and Loss account balances 11,218 176,218 2.5 12

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A2. (a) Sara Enterprises Limited (I) FIFO Date Receipts Issues Stock balance

Qty Price Qty Price Qty Price Total Mks June 800 6 800 6 4800 July 700 6 100 6 600 1Sept 1200 7 1200 7 8400 1300 9000 1Dec 100 6 500 7 700 7 4900 1Feb 1000 8 1000 8 8000 1700 12900 1April 400 7 300 7 2100 1000 8 8000 1May 700 10 700 10 7000 May 300 7 2000 17100 1 700 8 300 8 2400 700 10 7000 1000 9400 1 7(ii) LIFO June 800 6 800 6 4800 July 700 6 100 6 600 1Sept 1200 7 1200 7 8400 1300 9000 1Dec 600 7 100 6 600 600 7 4200 700 4800 1Feb 1000 8 100 6 600 600 7 4200 1000 8 8000 1700 12800 1April 400 8 100 6 600 600 7 4200 600 8 4800 1May 700 10 700 10 7000 May 700 10 300 8 1 100 6 600 600 7 4200 300 8 2400 1000 7800 1 7

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I (b) Trading accounts for the period to May 20-4 FIFO LIFO £ £ Sales 34800 34800 Opening Stock 0 0 Purchases 28200 28200 Closing Stock 9400 7800 Cost of Sales 18800 20400 Gross Profit 16000 14400 3 marks 3 marks ( c) Advantages

It is realistic, assumes that goods are issued in order of receipt It is easy to calculate It is close to the most recent prices It comprises actual prices at which items have been bought.

(5 mark) A3. SALES LEDGER CONTROL ACCOUNT DR

CR 1 Feb 03 Balances B/D £ 45,020

31 Jan 04 Returns day book £ 10,440

31 Jan 04 Credit Sales 501,510

Cheques received from Customers 458,770

Dishonoured Cheques 1,790

Cash from customers 33,330

Bad debts 2,090

Discount Allowed 7,080

Set offs 2,330

31 Jan 04 Balances C/D 34,280

£548,320

£548,320

(3marks) (7marks)

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PURCHASES LEDGER CONTROL ACCOUNT DR

CR 31 Jan 04 Returns day book £ 3,070

1 Feb 03 Balances B/D £ 27,910

Cash paid to suppliers 230

31 Jan 04 Credit Purchases 300,450

Cheques paid to suppliers 281,990

Discounts received 6,540

Set offs 2,330

31 Jan 04 Balances C/D 34,200

£ 328,360

£ 328,360

(7marks) (3marks) (b) Possible points:-

• Provides information for management • Makes fraud difficult • Helps in locating errors • It forms part of the double entry systems rather than the personal accounts. • Provides the above information on a timely basis

(1.5 marks each, max 5 marks) A4. (a) Working capital is the excess of current assets over current liabilities, or vice versa. In

accounting it is also termed as Net current assets or Net current liabilities. (2 marks) The components of working capital are:

Current assets made up of stock, debtors, prepayments, cash at bank and in hand. (2 marks) Current liabilities made up of short-term creditors, accruals, bank overdraft, corporation tax due and final and proposed dividends due. (2 marks)

(b) Current ratio: Derived by dividing current assets by current liabilities. It assesses the ability of

the firm to meet its day to day debts; indicates a measure of the short term liquidity. (3 marks) Acid –Test ratio: Derived by dividing current assets less stock and any other non-

monetary asset, by current liabilities. The ratio is similar to the current ratio but removes the least liquid asset (stock) from the formulae in order to assess the immediate liquidity of the firm.

(3 marks)

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Stock Turnover period: This ratio is expressed as days by dividing average stock by cost of sales . It indicates the speed with which stock is waiting to be turned over.

(3 marks) Debtors collection period: The ratio is derived by trade debtors divided by credit sales in days. It shows how long it takes the firm to collect its funds from the credit customers.

(3 marks)

Creditors payment period: Derived by dividing trade creditors by credit purchases or cost of sales. It indicates how long it takes the firm to meet its short term creditors.

(3 marks)

(c ) Highly geared indicates that debt in the form of fixed borrowings represents a high proportion in relation to the overall capital financing of the business.

(4 marks) Section A – Multiple-choice questions 1 D 2 B 3 D 4 A 5 A 6 B 7 C 8 A 9 A 10 C 11 C 12 A 13 A 14 B 15 B

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June 2005

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 24th March 2005 Hand in by: 21st April 2005

INSTRUCTIONS TO STUDENTS: 1. Assessment Criterion – 30% Weighting. 2. Students must submit their assignments to the Reception by 5:00 p.m. on 21st April 2005 at

the latest. 3. No assignments will be accepted after the deadline and therefore a zero mark will be given to



5. Your assignment must be word-processed and submitted in clear transparent pockets, NOT in ring binders. All pages should be numbered.

6. You are strongly advised to make a copy of your assignment before submission. 7. Students are assessed anonymously. You should put your KCB student registration number


Lord Charles Younghusband is the Vice-President of his local Chamber of Commerce in Oswaldtwistle and runs a successful accounting and business consultancy firm. He was part of a business delegation on an export mission to Emirate Dubai-Oman, a small country, historically rich in oil and natural resources. The Government has, to date, not imposed any direct taxation.

However, in the last decade, the country has been experiencing economic problems and finds its reserves are dwindling. The Government is intending to introduce a system of direct taxation where citizens in employment and the business community will contribute something into the public funds. The Government of Emirate Dubai-Oman invited Lord Charles Younghusband to set up a standard accounting system to assist preparers of business accounting in the private enterprise sectors. There was evidence that the country has a lot of small retailing enterprises. In view of this, the department of Trade and the Government wants to create conditions which would be appropriate and acceptable for business when the time comes to introduce the systems. Lord Charles Younghusband was asked by the board to prepare a model accounting system for the sole-trader type of businesses, which would report its results to external users such as the Government who need such information. On his return to Oswaldtwistle, Lord Younghusband commissioned his junior accountant, Mr Dick Ramsbottom, to create a set of model business transactions and illustrate them from “The Source of Business Transactions, Recording them in the Day books listing (only the Sales Day book, Purchases Day book and the cash book), Weekly transfer to the ledger system (Sales Ledger, Purchases Ledger & Nominal (General) Ledger, Extracting the Trial Balance, Recording the final adjustments in the General Journal and the Final Production of the Trading, Profit and Loss Account and Balance Sheet of a Sole Trader”. You are required to assist Mr Dick Ramsbottom and perform the following tasks:

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(a) Create a set of business transactions both cash and credit for a sole trader retailing type of

business, the nature of which must be described. It would be assumed that the necessary documentation has been raised.

The number of transactions must be a minimum of 80 and a maximum of 100. They must relate to

an accounting period of 12 months in length and the dates indicated. If VAT is added to the

invoice please use a standard rate of 15%.

Note: The transactions must include a combination of • Revenue Income (e.g. Sales), • Revenue Expenditure (e.g. Purchases, Closing Stock and Business expenses), • Capital Items (e.g. Purchase of Fixed assets, capital introduced, drawings etc.), • Current Assets (e.g. stock, Debtors) • Current Liabilities (e.g. Creditors, Accruals) • Long–Term Liabilities (e.g. Bank Loans)(15%)

(b) Record the transactions in their respective daybooks together with their totals. (10%)

(c) Post the transactions from the daybooks to the respective ledgers by means of ‘T’ accounts using the double entry system.(15%)

(d) Transfer the Sales and Purchases Ledger balances to their respective Control Accounts in the Nominal Ledger and then balance off all the accounts and carry forward the balances.(5%)

(e) Prepare a Trial Balance at the end of the accounting period you had selected. (5%)

(f) Prepare a journal for all accruals, prepayments, provision for doubtful debts and provision for depreciation and incorporate the year-end adjustments into the accounts.(10%)

(g) Prepare the Trading, Profit and Loss Account and a Balance Sheet for the accounting period you had selected.(20%)

(h) You are to provide a report explaining what skills you have gained from this assignment.

(10%)

Quality of the work presented. (10%) Total Marks for Assignment (100%)

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Marking Scheme

Requirement Mark Range

Total %

(a) There is evidence of cash & credit transactions.

0-5

Complied with the number of transactions and

Accounting Period. 0-5 Evidence of combination of income,

expenditure

Capital items, Assets and Liabilities. 0-5 15 (b) Correct method of Recording was

employed in the Poor 0-4

Day books. Above average 5-6 Very good 7-10 10 (c ) Accurately posting the transactions

totals into the Poor/below average

0-6

Ledger system. Above average 7-10 Very good 11-

15

15 (d) Correctly reconciling the balances to

the Poor 0-1

Control accounts & closing of all the accounts.

Average 2-3

Very good 4-5 5 (e) Accurately prepared the Trial Balance

without any Poor 0-1

Differences. Average 2-3 Very good 4-5 5 (f) Making the relevant journal entries for

year end Poor 0-4

Adjustments. Above average 5-6 Very good 7-10 10 (g) Drafting the Final Accounts in proper

form from Weak 0-5

The Trial Balance. Poor/below average

6-9

Above average 10-15

Very good 16-20

20

(h) Group report on their contribution and the

Skills developed. 10

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(i) Overall quality of the group’s work in

terms of: Below average 0-4

Presentation was word processed, neat and tidy,

Average 5

Descriptions, explanations and any assumptions

Above average and

Are clearly expressed, and the Trial Balance and

Very good 6-10

Final Accounts are well organised and 10 Clearly presented. Total marks 100

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Examination Paper Subject: BUSINESS ACCOUNTS Date: 14 JUNE 2005 Time Allowed: 3 Hours




Multiple-Choice Questions

1. An asset, which would not normally be depreciated, is…

A. Goodwill B. Land C. Vehicle D. Plant & Machinery (1 mark)

2. The owner of a business pays trading expenses through his private Bank Account. Which of the

following accounting entries would be required? A Debit drawings Credit bank B Debit expenses Credit drawings C Debit expenses Credit bank D Debit expenses Credit capital (1 mark)

3. Which item would be included in the Balance Sheet as creditors?

A. Loan stock issued by the company B. Preference shares issued by the company C. Revaluation reserve D. Share premium account (1 mark)

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4. During the year a business sells plant & machinery. The following information is known. £ Original cost 1000 Accumulated depreciation at date of sale 480 Profit on sale 140 What were the proceeds from the sale of the plant & machinery?

A- £ 340 B- £ 380 C- £ 620 D- £ 660 (3 marks)

5. Stock should be valued at the lower of cost and net realisable value. The table shows data about four products. Product A B C D Cost £ 36 £ 38 £ 34 £46 Realisable value

£30 £56 £34 £52

Selling expenses

£6 £4 £6


A- £144 B- £154 C- £156 D- £172 (3 marks)

6. The purpose of a firm preparing a trial balance is to establish whether …

A- the total of the debit balances brought down in its nominal (general) ledger equals that of the credit balances brought down.

B- the double-entry record it has made for all transactions is correct. C- its bank balance is correct. D- it has earned a profit or incurred a loss. (1 mark)

7. The balance sheet of a firm as at any particular date is intended to show…

A- the nature of the firm’s business at that date. B- the identity of the firms’ owners at that date. C- the financial position of the firm at that date. D- the physical size of the firm at that date. (1 mark)

8. What is an example of capital expenditure?

A- Payment of an electricity bill

B- Payment of employees’ wages

C- Purchase of a brand name

D- Purchase of stocks (1 mark)

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9. It is necessary to distinguish between revenue and capital expenditure? When must this distinction be made?

A- When preparing Sales and Purchases day books B- When preparing the trial balance C- When preparing trading, profit and loss accounts D- When preparing purchase ledger control accounts (1 mark)

10. Contribution is an important feature of marginal costing. How is contribution calculated?

A- Sales plus fixed costs B- Fixed costs minus sales C- Sales minus variable costs D- None of the above. (1 mark)

11. A company wishes to improve its current and acid test ratio. How can this be done?

A- Increase discounts to debtors B- Increase the provision for doubtful debts C- Purchase additional stock on credit D- Sale of fixed assets

(2 marks)

12. What is the accounting equation for capital employed?

A- Current assets – Current liabilities B- Fixed assets + Currents assets – Current liabilities C- Fixed assets + Current assets + Current liabilities D- Working capital – Current liabilities (1 mark)

13. What is the meaning of the company’s authorised capital?

A- The maximum amount that is permitted to borrow B- The maximum nominal value of shares it is permitted to issue C- The nominal value of ordinary share and preference share capital in issue D- The total of shareholders’ funds (1 mark)

14. A Cash flow statement, as prescribed by FRS 1 shows changes in …

A- Cash and cash equivalents B- Gearing C- Net working capital D- Net book value of fixed assets (1 mark)

15. In preparing profit and loss accounts it is usual to provide for doubtful debts. Which accounting concept always applies?

A - Consistency

B – Going concern

C – Materiality

D - Prudence

(1 mark)

Total: (20 marks)

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SECTION B - COMPULSORY Question 2 The following has been extracted from the books of Salar Ltd. Trial balance as at 31 July 20X4 £ £ Ordinary shares of 50p each 360,000 £1 Preference shares 10% 180,000 Land 40,000 Buildings 180,000 Fixtures and fittings 24,000 Bank interest 7,000 Purchases 2,060,000 Sales 2,728,000 Debtors 196,666 Creditors 171,668 Wages and salaries 125,400 Administrative expenses 9,752 Rents, rates and insurance 87,800 Provision for depreciation 1 August 20X3 - Buildings 45,000 - Fixtures and fittings 14,000 Provision for doubtful debts 4,000 Advertising 52,994 10% Debentures 2010 300,000 Bank 54,120 Stock at 1 August 20X3 1,136,500 Profit and Loss Account Balance 1 August 20X3 46,564 Suspense account (note 4) 140,000 Debenture interest paid 15,000 3,989,232 3,989,232 The following items still need to be taken into account:

1 After an examination of the debtors ledger, an amount of £28,000 is to be written off and a general provision of 5% of the remaining balance is to be provided for.

2 Closing stock at 31 July 20X4 was valued at £964,500.

3 Depreciation is still to be provided as follows:

- Buildings: straight line over 20 years (no residual value assumed); - Fixtures and fittings: straight line over 6 years (residual value of £3,000)

4 During the year, 200,000 ordinary shares were issued for a price of 70p per share and

paid in full. The bank was debited with the amount received but the company accountant was unsure of what to do with the other side of the double entry and so credited the suspense account.

5 Corporation tax of £44,000 for the year is to be provided.

6 The following accruals for expenses at 31 July 20X4 need to be made:

- insurance £4,274; - administration £2,950.

7 The following prepayments for expenses at 31 July 20X4 need to be taken into account.

- rates £10,992; - advertising £24,000.

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8 An ordinary dividend of 10p per share (including shares issued during the year) has been

proposed. Required:

(a) Prepare a profit and loss account for the year ended 31 July 20X4. (18 marks) (b) Prepare a balance sheet as at 31 July 20X4. (12 marks)

SECTION C - ANSWER ANY TWO QUESTIONS ONLY Question 3 Below are the balance sheets of Nakro plc as at: 30 June 2004 30 June 2003 £m £m £m £m Fixed Assets Land and Buildings 4,960 3,600Plant and Machinery 900 800 5,860 4,400Current Assets Stock 1,720 1,500 Debtors 1,280 940 Cash Nil 60 3,000 2,500 Creditors: amounts falling due within one year Creditors 1,700 1,440 Proposed Dividends 140 nil Bank Overdraft 420 360 (2,260) (1,800) Net Current Assets 740 700 6,600 5,100Creditors: amounts falling due after more than one year 10% Debentures (600) nilNet assets 6,000 5,100Capital and Reserves Ordinary Shares of £1 each 1,400 1,000Share Premium 600 500Profit and Loss Account 4,000 3,600 6,000 5,100 The Profit and Loss Account for Nakro plc for the year to 30 June 2004 is: £m £m Turnover 7,060 Cost of Sales Depreciation – buildings 800 - plant 400 Other costs 4,400 (5,600) Gross Profit 1,460 Operating Expenses (400) Debenture interest paid (60) Profit for the year 1,000 Dividends: ordinary – interim 180 - final 420 600 Retained profit for the year 400

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Required:

(a) Prepare a cash flow statement for Nakro plc for the year ended 30 June 2004. (20 marks)

(b) Discuss the usefulness of a cash flow statement. (5 marks)

(Total 25 marks) Question 4 The following abbreviated balance sheet information is available for two companies, Alpha and Beta, which operate in the same sector, with the same total capital employed. COMPANY Alpha Beta £000’s £000’sFixed assets 3,600 3,600Net current assets 400 400Total net assets 4,000 4,000Less: Creditors due within one year: 10% Debentures 1,600 400 2,400 3,600 £000’s £000’sOrdinary Share Capital 2,000 3,4008% Preference shares 400 200 2,400 3,600

The profit before interest and tax (P.B.I.T.) for both companies was £240,000. Required:

(a) Calculate the capital gearing for each of the companies. (6 marks) (b) Calculate the interest cover for both companies (6 marks)

(c) Evaluate on a comparative basis the current financing of both companies, as far as the

information provided allows. (8 marks)

(d) Briefly outline what additional information would be required to allow for a more comprehensive comparative analysis. (5 marks)

(Total 25 marks)

Question 5 Don Quixote manufactures a single product. During the year to 31 Dec 2005 each unit is expected to sell for £50. The expected costs per unit for the year ended 31 Dec 2005 are as follows: £ Direct materials 12 Direct labour 16 Variable overheads 7 The annual fixed overheads are expected to be £450,000. The expected current output levels are 35,000 units. Don Quixote has a maximum annual production capacity of 37,500 units.

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Required:

(a) Define and calculate the contribution per unit (5 marks)

(b) Define and calculate the break-even point in £s and units (5 marks)

(c) Define and calculate the margin of safety (5 marks)

(d) Calculate the profit from the sale of 35000 units. (5 marks) (e) Explain two possible consequences for Don Quixote if the selling price is reduced to £47 per unit. (5 marks) (Total: 25 marks)

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Marking Scheme SECTION A MCQ ANSWERS

1 B 2 D 3 A 4 D 5 A 6 A 7 C 8 C 9 C 10 C 11 D 12 B 13 B 14 A 15 D

SECTION B Question 2’ Answer (a) Salar LtdProfit and Loss Account for the year ended 31 July 20X4 0.5

£ £ Sales 0.5 2,728,000Less Cost of Goods Sold Opening stock 1,136,500 Add purchases 2,060,000 3,196,500 Less closing stock (964,500) 2 (2,232,000)Gross profit 0.5 496,000Less Expenses: Wages and salaries 125,400 Rents, rates and insurance

81,082

Administrative expenses 12,702 Advertising 28,994 Bad and doubtful debts 32,434 Depreciation 12,500 8 (293,112)Operating profit 0.5 202,888 Bank Interest 7,000 Debenture interest 30,000 1 (37,000)Profit before tax 165,888Less corporation tax 0.5 (44,000)Profit after tax 0.5 121,888Less dividends: Preference proposed (18,000) 1 Ordinary proposed (92,000) 1 (110,000)Retained profit for the year 1 11,888

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1 = 18 (b) Salar Ltd Balance sheet as at 31 July 20X4 0.5 Cost Accumulated

depreciation NBV

£ £ £ Fixed assets Land 40,000 40,000 Buildings 180,000 (54,000) 126,000 Fixtures and Fittings 24,000 (17,500) 6500 3

244,000 (71,500) 172,500

Current assets Stock 964,500 Debtors 168,666 Less provision for bad debts (8,434) Prepayments 34,992 Cash at bank and in hand 54,120 3 1,213,844Less current liabilities Creditors 171,668 Accrued expenses 22,224 Proposed dividends 110,000 Taxation 44,000 2.5 (347,892)Net current assets 865,952Total assets less current liabilities

0.5 1,038,452

Less long term liabilities 10% debentures 2010 0.5 (300,000)Net assets 738,452Financed by Share Capital: 10% £1 Preference shares 0.5 180,000 Ordinary shares of 50p each 0.5 460,000 640,000Reserves: Share premium account 0.5 40,000 Retained profit 0.5 58,452 738,452 12

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Question 3’ Answer (a) Operating Profit 2 1,060Depreciation 1 1,200Working capital adjustment Stock 1 (220)Debtors 1 (340)Creditors 1 260Net Cash Flow from Operating Activities

1 1,960

Servicing of Finance - |Interest 1 (60)Capital Expenditure L + B (2,160) 2P + M (500) 2 (2,660) 1 (760)Dividends paid 2 (460) 1 (1,220)Financing Debentures 600 1Ordinary Shares (400 + 100) 500 2 1,100Decrease in cash 1 120

20 (b)

1. The emphasis of a cash flow statement is on liquidity and solvency. 2.Arguably, cash is more difficult to manipulate than profit. 3.Cash is an easier concept to understand than profit and consequently investors find the cash

flow statement more useful than the profit and loss account. 4. The cash flow statement relates well to financial decision making, for example discounted

cash flow statements in relation to capital investment appraisal. 5. The cash flow statement provides additional information over and above the balance sheet

and the profit and loss account. ( 1.5marks for each point, max 5 marks) Question 4 Answer (a) Alpha Beta 2,000 = 50% 600 = 15% ( 3*2 = 6marks) 4,000 4,000 (b) 240 = 1.25 times 240 = 4.29 times ( 3*2 = 6marks) 160+32 40+16 (c) A is relatively higher geared than B, but at 50% gearing A is not excessively geared.

Interest cover reflects the capital gearing and is significantly lower for A. The implications of both of the above ratios are that B is a lower risk company than A and would be better able to withstand any downturn in business in the future. Also, B has the capability of raising more debt capital than A. ( 3 marks each point, max 8marks)

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(d) Additional information would include the nature of the business. Some businesses are better adapted to having a higher geared capital structure than others. For example, companies in the commercial property business tend to adopt a very high-geared capital structure to reflect the very secure nature of their income, while companies in the construction industry tend to adopt a low capital structure to reflect the volatility in their markets. Future prospects of the business. Even though both companies are in the same industry, the prospects of each company are likely to be different. The higher the prospective profit the higher the level of gearing that is likely to be acceptable to shareholders and debt providers.

The distribution of the shareholding will also be influential: the narrower the distribution the more acceptable it will be to take on higher levels of debt. ( 2 marks each point, max 4 marks) Answer 5

(a) Contribution is the amount that each unit sold contributes towards the fixed costs and finally to profits. (2 marks)

It is calculated by selling price – variable cost per unit. £50 - £35 = £15 (3 marks)

(b) The break-even point is the point in sales revenue / number of units at which no profit or

loss is made, i.e when total sales = total revenue ( 2 marks)

It is calculated by: Total fixed costs Contribution In units = 450,000 15 = 30,000 units ( 2 marks) In £s = 30,000 * £50 = £ 1,500,000. ( 1 mark)

( c ) Margin of safety = Output level – Break-even point 35,000 – 30,000 = 5,000 units (5 marks) (d ) Profit = Total contribution – Total fixed costs

( 15*35,000 – 450,000) = £ 75,000 Or Margin of safety * contribution per unit 5000 * £15 = £75,000. (5 marks) (e) If selling price = £ 47 per unit,

New break-even point = £ 450,000 47-35

= 37,500 units. It can be seen that the break-even point is higher. This is the maximum capacity therefore no profit can be achieved. Other factors are increased demand for product but may be unable to supply due to maximum capacity, can lead to dissatisfied customers. Total revenue decreases if everything else remains the same. ( 5 marks)

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December 2005

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 6th October 2005 Hand in by: 3rd November 2005

INSTRUCTIONS TO STUDENTS: 1. Assessment Criterion – 30% Weighting. 2. Students must submit their assignments to the Reception by 5:00 p.m. on 3rd November 2005

at the latest. 3. No assignments will be accepted after the deadline and therefore a zero mark will be given to



5. Your assignment must be word-processed and submitted in clear transparent pockets, NOT in ring binders. All pages should be numbered.



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You are required to write a short report on Interpretation of Financial Statements. You are required to pick one company in the retailing sector, eg, Tesco or Sainsbury plc, listed in the London Stock Exchange. TASK REQUIRED: 1. Using ratio analysis, you will perform an analysis and evaluation of the financial statements of

your chosen company for the last (most recent available) two years in respect of the following areas:

(e) Profitability (f) Liquidity (g) Asset Utilisation and Efficiency (h) Gearing

In your analysis you are required to define the above 4 areas and provide the correct formulae for your stated ratios.

(60 marks)

2. Explain the limitations of your analysis in the report. (15 marks) 3. State what other additional information that you would like to have had when undertaking the

above ratio analysis. (15 marks) 4. Good Report style presentation & referencing adopted. (10 marks) Total: (100 marks) GUIDANCE TO CANDIDATES 4. Word length – 1000 to 1500 words 5. Assessment will be focused on the following aspects:

(v) Content / Analysis / Dept of Research (vi) Use of company reports / data (vii) Originality (viii) Report structure / writing style and presentation

3. You are required to provide the relevant extracts of the financial statements for the two years

of your chosen company in the appendices. They must be properly cross-referenced.

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Marking Scheme

1 Requirement Good Correct Correct Analysis including Total definition Formulae Calculation contents, originality maximun using & research. Marks Co/ data Areas: Profitability 2 2 4 7 15 Students mark Liquidity 2 2 4 7 15 Students mark Asset Utilisation 2 2 4 7 15 Students mark Gearing 2 2 4 7 15 Students mark Aggregate Total: 60

2 Limitation of Analysis: Points that should have mentioned includes the following:- Up to 3marks for Differences in accounting policies each point well The financial numbers are based on made, maximum 15 historical cost values Time value of money not included Differences in accounting periods Creative accounting employed Absence of suitable comparable data Etc,Etc

3 Additional information may include: Industry sector ratios Up to 3marks for Qualitative factors such as information each point well in respect of the quality of goods & services made, maximum 15 goodwill, skills of workforce, dynamic management etc Cash flow situation throught the year Forecast business plans such as budgets Differences in accounting policies between companies Etc,Etc.

4 Presentation and referencing Poor: 0-4 10 Average: 5 Above average & Very Good: 6-10 Assignment Total: 100

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Examination Paper Subject: BUSINESS ACCOUNTS Date: 13 DECEMBER 2005 (10AM – 1PM) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 1. SECTION A – COMPULSORY MULTIPLE CHOICE QUESTIONS 2. SECTION B – COMPULSORY QUESTION 3. SECTION C – ANSWER ANY TWO QUESTION 4. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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Section A

Multiple Choice Questions

1) Which of the following is not an asset of a firm?

a. A building owned by the firm b. Cash in the firm’s safe c. Money owed to the firm by its debtors d. Bank Loan not yet repaid (1 mark)

2) When a firm lodges money which it received from one of its debtors, the effect on its assets

and / or liabilities is: Effect upon Assets Effect upon Liabilities A Decrease bank Decrease creditors B Increase bank Decrease debtors C Increase cash Decrease Loan D Increase stock Decrease capital

(1 mark) 3. If the total of sales, including VAT at the rate of 17.5%, amounts to £1,880, the total of sales excluding VAT amounts to:

E. £1,560 F. £1,600 G. £2,209 H. None of the above.

(1 mark)

4. The following information relates to a sole trader. Total of all assets at 1June £2,300 Net profit earned in June £1,000 Total of all liabilities at 1 June £2,500 Drawings during June £700 Capital introduced during June £5,000

The sole trader’s capital at 30 June was

E- £ 5,100 F- £ 5,300 G- £ 5,500 H- £ 5,600 (2 marks)

5. Stock should be valued at the lower of cost and net realisable value. The table shows data about four products. Product A B C D Cost £ 24 £ 25 £ 23 £ 31 Net Realisable value

£ 20 £ 37 £ 23 £ 35


0 3 2 3

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E- £ 99 F- £103 G- £105 H- £97 (2 marks)

6. Which of the following is not normally found in the capital and reserves section of a company’s

balance sheet?

E- Share premium account. F- Profit and loss account balance. G- Dividends payable. H- Ordinary share capital. (1 mark)

7. In the balance sheet of a limited company, the profit and loss account balance is shown under the heading…

E- ‘Current liabilities’. F- ‘Fixed assets’. G- ‘Current assets’. H- ‘Capital and reserves’.

(1 mark)

8. A company has the following capital structure:

Authorised Issued


£2 Ordinary Shares £500,000 £200,000

If the company declares a dividend of 10p per ordinary share, the total dividend payable by the company will be:

A- £14,000

B- £26,000

C- £54,000

D- £66,000

(3 mark)

9. International Financial Reporting Standards are issued by…

A- The Stock exchange B- The government C- The IASB D- None of the above (1 mark)

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10. In the accounts of a limited company, debenture interest paid during the current accounting period, in respect of the same period …

E- is part of the company’s cost of sales F- is an expense. G- Is an appropriation of profit. H- None of the above. (1 mark)

11. The current ratio is primarily an indication of an entity’s …

E- current and future level of profitability F- current level of efficiency G- short-term liquidity H- growth potential

(2 marks)

12. The acid-test ratio is calculated as:

E- Current assets : Current liabilities F- Debtors : Creditors G- Current assets less debtors : Current liabilities H- Current assets less stock : Current liabilities

(1 mark)

13. Which one of the following payments is not a revenue expense?

A – Distribution costs

B - Auditors’ fees

C - Depreciation on machinery

D - Loan repayment

(1 mark)

14. ‘Prime cost’ does not include…

E- Direct labour costs F- Factory overhead expenses G- The cost of raw materials consumed H- Direct expenses (1 mark)

15. In a cash flow statement, which of the following would appear as a cash outflow?

A- The payment for shares in a company whose shares are traded on a Stock Exchange

B- A decrease in trade debtors over the course of an accounting period. C- Money received as a result of issuing new shares D- None of the above

(1 mark)

Total: (20 marks)

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SECTION B - COMPULSORY Question 2 The trial balance of Kofi Limited at 30 June 2005 is as follows: Accounts balances Dr Cr £ £ Sales 6,440,000 Cost of Sales 3,860,000 Closing stock at cost 820,000 Administrative expenses 690,000 Selling expenses 840,000 Discounts allowed 20,000 Freehold property at cost 1,200,000 Plant and machinery at cost 800,000 10% Debentures 600,000 Share premium 250,000 Debtors and Creditors 920,000 1,090,000 Investments at cost 220,000 Share capital ( 50p shares each) 700,000 Debenture interest paid 30,000 General reserve 150,000 Profit and loss account at 1 July 2004 330,000 Provision for doubtful debts at 1 July 2004 30,000 Provision for depreciation : Freehold property 330,000 Plant and machinery 270,000 Bank 790,000 Total 10,190,000 10,190,000 You are also given the following information: I. The following items have been included in administrative expenses:

(a) Rates £24,000 for the 12 months to 31 March 2006 (b) Insurance £18,000 for the 12 months to 31 December 2005

II. Investment income received totalling £13,000 has been credited against administrative

expenses. III. A dividend of 40p per share is proposed. IV. The provision for doubtful debts is to be adjusted to 5% of debtors, after writing off a bad debt

of £40,000. V. After the examination of the accounts, the auditors advise the directors that after checking the

sales figure for July 2005 they consider that the net realisable value of the stock at the year end was actually £ 738,000.

Required: a) Prepare the profit and loss account for Kofi limited for the year ended June 2005, and

(20 marks)

b) The balance sheet at 30 June 2005. (10 marks) (Total 30 marks)

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SECTION C – ANSWER ANY TWO QUESTIONS ONLY Question 3 Brick Jones a trader, has asked Tim Duck, a recently employed office junior, to provide information from which the sales ledger control account for the month of March can be prepared. Tim Duck has presented the following information for the month of March: Balances on Sales Ledger; DR CRSales 6,440Cost of Sales 3,860 Stock at cost 820 Administrative expenses 690 Selling expenses 840 Discounts 20 Freehold Property, at cost 1,200 Plant and machinery, at cost 800 10% debentures 600Shares premium 250Debtors and Creditors 920 1,090Quoted investments at cost 220 Share capital (50p shares each) 700Debenture interest paid 30 General reserve 150Profit and loss account at 1 July 1999 330Provision for doubtful debts 30Bank 790 Provision for depreciation: Freehold Property 330Plant and machinery 270 10,190 10,190 £ Basic Cost 36,000 Number plates 30 Comprehensive insurance 400 10 gallons of diesel fuel 35 Delivery charge 100 Road fund license 250 Specially fitted food containers for the van 2,400 Service and parts 300 Sign writing on van 155 39,670

£

1 March (Debit) 17200 (Credit) 580 31 March (Debit) 20000 (Credit) 240 Credit sales 23420 Cash sales 11380

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Cash received from debtors 14300 Provision for doubtful debts 620 Discount allowed 2420 Discount received 1460 Sales returns 320 Bad Debts written off 940

The balances on the sales ledger control account agreed with the balances in the sales ledger on 1 March. The credit balance on 31 March of £240 referred to an overpayment by a credit customer. After Brick Jones prepared the sales ledger control account for the month of March, the following errors were discovered. 1. An invoice for a credit sale of £260 to Patel Lim had been lost. 2. The total for the sales day book had been overcast by £720. 3. A credit balance of £1040 on Sheng Heran's account in the purchases ledger had been

transferred to Sheng Heran's account in the sales ledger and the transfer had not been entered in the sales ledger control account.

4. The receipt of a cheque for £1160 from Ang Do had been correctly entered in the cash book but

had been credited to Hung Do's account in the sales ledger as £1700.

Required a) The sales ledger control account prepared by Brick Jones based on the original information given

to him by Tim Duck. (10 marks)

b) The adjustments required if any in the sales ledger control account prepared in (a) to correct the

errors listed above. (10 marks) c) What are the benefits of control Accounts? (5 marks) (Total 25 marks)

Question 4

The following information relates to Swim Ming Limited retailing in stationery:

Date Purchases Sales

June 20-4 800 pens @ £ 6.00 July 20-4 700 pens @ £10.00 September 20-4 1,200 pens @ £ 7.00 December 20-4 600 pens @ £12.00 February 20-5 1,000 pens @ £ 8.00 April 20-5 400 pens @ £14.00 May 20-5 700 pens @ £10.00 May 20-5 1,000 pens @ £15.00

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Required: (a) Calculate the value of the closing stock as at May 20-5 using the following methods:-

(iii) FIFO method (iv) LIFO method (14 marks)

(b) Prepare the trading accounts for the period to May 20-5 using the above two methods. (6marks) (c) Outline the advantages and disadvantages of using the FIFO method of stock valuation. (5marks)

(Total 25 marks)

Question 5 If the information in the financial statements is to be useful, due regard must be given to the following:

(p) Materiality (q) Comparability (r) Prudence (s) Objectivity (t) Relevance

Explain the meaning of each of these factors as they apply to financial accounting giving an example of the application of each of them. Marking Scheme

A4 (a) (I) FIFO Date Receipts Issues Stock balance Qty Price Qty Price Qty Price Total Mks June 800 6 800 6 4800 July 700 6 100 6 600 1 Sept 1200 7 1200 7 8400 1300 9000 1 Dec 100 6 500 7 700 7 4900 1 Feb 1000 8 1000 8 8000 1700 12900 1 April 400 7 300 7 2100 1000 8 8000 1 May 700 10 700 10 7000 May 300 7 2000 17100 1 700 8 300 8 2400 700 10 7000 1000 9400 1 7

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(ii) LIFO June 800 6 800 6 4800 July 700 6 100 6 600 1 Sept 1200 7 1200 7 8400 1300 9000 1 Dec 600 7 100 6 600 600 7 4200 700 4800 1 Feb 1000 8 100 6 600 600 7 4200 1000 8 8000 1700 12800 1 April 400 8 100 6 600 600 7 4200 600 8 4800 1 May 700 10 700 10 7000 May 700 10 300 8 1 100 6 600 600 7 4200 300 8 2400 1000 7800 1 7 I (b) Trading accounts for the period to May 20-2 FIFO LIFO £ £ Sales 34800 34800 Opening Stock 0 0 Purchases 28200 28200 Closing Stock 9400 7800 Cost of Sales 18800 20400 Gross Profit 16000 14400

3 marks 3 marks

( c) Advantages It is realistic, assumes that goods are issued in order of receipt It is easy to calculate It is close to the most recent prices It comprises actual prices at which items have been bought.

(5 mark)

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Marking Scheme

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June 2006

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 23rd March 2006 Hand in by: 20th April 2006

INSTRUCTIONS TO CANDIDATES: 1. Assessment Criterion – 30% Weighting. 2. Students must submit their assignments with a copy on a floppy disk or CD-Rom (to allow the

examiner to check for plagiarism) to the Reception by 5:00 p.m. on 20th April 2006 at the latest. Assignments without a floppy disk or CD-Rom will not be accepted.

3. No assignments or floppy disks/CDs will be accepted after the deadline and therefore a zero mark will be given to a student who falls into this category.

4. Your assignment must be word-processed. All pages should be numbered. 5. You are strongly advised to make a copy of your assignment before submission. 6. Students are assessed anonymously. You should put your KCB student registration number


7. Policy on Plagiarism: a) The work that you submit must be expressed in your own words. b) Plagiarism, which is presenting the views and/or words of another person as if they are

your own is strictly forbidden. c) If you do use quotations from books, journals and or websites then these must be placed

inside quotation marks and referenced ideally using the Havard method. d) If you do cite the views/ideas of another person then you must refer to this person in the

main body of the assignment, including the work cited in your bibliography. Cite, in this context means to quote a passage, book or author in support of an argument, etc.

e) Copying the work of a fellow student also constitutes plagiarism. It must be pointed out, though, that any student allowing another student to copy part or all of his/her assignment is just as guilty as the plagiariser. You should therefore protect your own work, so as to avoid others copying your work, without you knowledge.

f) If you do not observed the above rules then this will lead to an allegation of cheating and, if found guilty, you will incur a severe penalty which may involve having to leave the College. Any repetition of plagiarism in any module will lead to expulsion from the College.

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(i) It is frequently suggested that accounting information and accounting reports should attempt

to be relevant and reliable. These terms could be explained as follows:- ‘Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming, or correcting, their past evaluations. ‘Information has the quality of reliability when it is free from material error and bias and can be depended on by users to represent faithfully in terms of valid description that which it either purports to represent or could reasonably be expected to represent’.

Task:-

(a) Explain what accountants mean by objectivity. (10 marks) (b) Why do shareholders need to read published accounts of companies in which they own shares? (15 marks) (c) ‘From the viewpoint of shareholders, objectivity will tend to lead accounts being more reliable,

but less relevant.’ Do you agree? (25 marks) (Total 50 marks)

(ii) FRS 18 – Accounting policies replaced the old SSAP 2 – Disclosure of Accounting policies. The accounting concepts of Prudence and Consistency are now gaining lesser prominence and are considered desirable features in the Statement of Principles (SOP). However, much greater emphasis is placed on the Accruals and Matching concept and the Going Concern concept. Explain the meaning and importance of each of these two concepts.

(50 marks)

Notes:

• The word count for both parts should be between 1000 and 1500 words. • High marks will be awarded for originality, clarity of work, and neat and tidy presentations. • The assignment should be submitted in clear transparent pockets and Not in ring binders or

other type of folders. • You should physically sign the register on submission of your assignment.

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MARKING SCHEME (i) (a) Objectivity in relation to accountancy and to accountants, is that in solving

accounting problems or preparing financial statements or accounting records there should be freedom from bias, subjectivity and uncertainty as far as possible. This is to ensure that accounting information would be presented in the same manner no matter who was preparing the information.

(4 marks for each valid point made, max 10 marks.)

(b) As shareholders may not be the managers of the company in which they hold shares they need to read accounts in order to evaluate the strength of their investment in terms of the profitability and liquidity of the company they have invested in. This information will help them to decide whether to maintain their existing investment, to invest further or to disinvest in whole or in part.

(5 marks each point, max 15 marks)

(c) With the application of objectivity to accounts they are likely to be more free from bias and

therefore more reliable. However, in order to arrive at objectivity accounts are prepared under the historical cost invention, which means that the information they disclose, based on historic costs of assets and liabilities, may not faithfully represent that which it purports to represent, such costs often being out of date. If shareholders wish to look to the future of their investment, then historic cost accounts, while reliable, may not in fact be relevant.

(8 marks each point, max 25 marks)

(ii) Going concern refers to the continuity of existence assumption. Recognised by 1985 CA Assumes business has an indefinite life Excludes liquidation situations or where operations are drastically reduced in scope.

6 marks for each valid point, max 25 marks

Accruals concept refers to the matching of costs and revenues. Revenue is recognized when it is realized. The realization of revenue is usually taken to mean the date of sale rather than the date when the cash relating to the sale is received. Revenue earned in the period is matched against the expenses incurred.

6 marks for each valid point, max 25

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Examination Paper

Subject: BUSINESS ACCOUNTS Date: 13 JUNE 2006 (10AM – 1PM) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 21. SECTION A – COMPULSORY QUESTION. 22. SECTION B – COMPULSORY QUESTION. 23. SECTION C – ANSWER ANY TWO QUESTION. 24. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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Section A - Multiple-choice questions (Compulsory)

1. Which of the following best explains what is meant by ‘capital expenditure’? Capital expenditure is expenditure

a. On fixed assets, including repairs and maintenance. b. On Land and buildings only. c. On capital of the firm. d. On the purchase, improvement and installation of fixed assets. (1 mark)

2. Providing for bad and doubtful debts and valuing stock on the same basis in each accounting

period are examples of which accounting concepts? Bad debt provisions

Stock valuation A. Going concern Consistency B. Accruals Going concern C. Prudence Consistency D. Prudence Going concern (1 mark)

3. A butcher’s total sales includes the value of… I. Any of the shop’s knifes sold by him. J. Shop knifes sold by him, only if sold on credit. K. Shop knifes sold by him, only if sold for cash. L. None of the above. (1 mark)

4. During the year, a firm paid £12,000 was paid for electricity bills. At the end of the year there was a bill for £3,600 outstanding and at the beginning of the year; £3,000 was owed to the electricity company. What is the charge for electricity in the years profit and loss account? A. £ 9,000

B. £ 12,000 C. £ 12,600 D. £ 15,600

(2 marks)

5. During the year, all sales were made at a gross profit margin of 15%. Sales were 25,500, find cost of sales?

A. £20,500 B. £21,675 C. £19,125 D. £22,174

(2 marks)

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6. Which ONE of the following is not a book of prime entry?

A. The petty cash book

B. The cash book.

C. The sales ledger.

D. The purchases day book

(1 mark)

7. In a balance sheet of a sole trader, capital plus profit less drawings must always equal:

I- Fixed assets J- Current assets K- Net current assets L- Net assets

(1 mark)

8. Given opening debtors £10,000, credit sales £50,000, increase in provision for bad debts £500, amount received from debtors £45,000, Discount allowed £350, dishonoured cheque £100, sales returns £400, Closing debtors would be:

A. £14,350

B. £14,650

C. £14,850

D. £15,150

(3 marks)

9. In a limited company, the responsibility for ensuring that all the company’s transactions are properly recorded and reported in the financial statements lies with

E- The shareholders F- The external auditors G- The Directors H- The junior accounts staff (1 mark)

10. Which of the following item does not appear under the heading ‘reserves’ on a company balance sheet?

A. Retained profits B. Share premium account C. Proposed dividends D. Revaluation surpluses

(1 mark)

11. Contribution is…

A. Selling price plus marginal cost. B. Variable cost minus selling price. C. Selling price plus fixed cost. D. Selling price minus variable cost.

(1 mark)

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12. Which one of the following formulae should be used to calculate the rate of stock turnover in a retail business?

A. Sales divided by average stock

B. Cost of sales divided average stock

C. Purchases divided by year-end stock

D. Sales divided by year-end stock

(1 mark)

13. In the financial statements of a company, goodwill should be shown…

A. Under the heading ‘current assets’ B. Under the heading ‘intangible fixed assets’ C. Under the heading ‘tangible fixed assets’ D. Between current assets and current liabilities

(1 mark)

14. Who issues Financial Reporting Standards?

A. The Auditing Practices Board B. The Accounting Standards Board C. The Stock Exchange D. The Government

(1 mark)

15. The following data has been extracted from the accounts of a retailer whose accounting year-end is 31 December 2005.

Cost of sales £130,000

Sales £172,000

Opening stock £24,000

Stock at 31 Dec 2005 £15,200

Closing creditors £19,000

What is the firm’s creditors (relating to purchases) payment period for the year end?

A. 50 days B. 57 days C. 54 days D. 40 days

(2 marks)

(Total: 20 marks)

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Section B Candidates must answer Question 2 (compulsory) Q2. The following balances were extracted form the books of Marlin Ltd as at 31 May 2006. £ £ Ordinary Shares of £1 each fully paid 350,0009% Preference shares of £1 each fully paid 60,000Freehold buildings at cost 550,000 Freehold building depreciation 45,000Motor vehicles at cost 120,000 Motor vehicle depreciation 18,000Equipment at cost 60,000 Equipment depreciation 20,000Stock at 1 June 2005 60,500 Trade Creditors 29,750Trade Debtors 55,600 10% Loan Stock 2010 40,000Sales 1,100,000Purchases 720,200 Discount Received 7,500Discount Allowed 3,050 Interest 2,000 Administration expenses 47,925 Selling & distribution expenses 60,725 Provision for doubtful debts 2,400P & L account at 1 June 2005 12,850Trade investments 20,000 Bank 14,500 1,700,000 1,700,000 Additional information: (a) The closing stock for the year was £62,000. (b) Provide for depreciation as follows: Premises 5% on cost Motor vehicles 15% reducing balance Equipment 20% on cost (c) The provision for doubtful debts at 31 May 2006 is to be 4% of trade debtors at that date. (d) Administration expenses still outstanding at 31 May 2006 amounted to £2,400. (e) Make provision for the estimated corporation tax for the year of £20,000. (f) The directors propose that the preference share dividend for the year be paid and that ordinary

dividend of 8% be paid. (g) The outstanding interest should be provided for. (h) Selling and Distribution expenses still outstanding at 31 May 2006 amounted to £1,200.

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Required: Prepare the Profit and loss account for the year ended 31 May 2006 (18marks) and the balance sheet as at that date. (12marks) (Total 30marks) Section C Answer any TWO of the following questions Q3. The financial statements of LEMI PLC are as follow:

LEMI PLC Summary profit and loss account for the year ended 28 February 2005 in £000,000(M) £M Sales 625 Depreciation 9 Other costs 551 560Operating profit 65 Interest – all paid in the year 5Profit before taxation 60 Taxation at 30% 18Profit after taxation 42 Dividends Final proposed dividend 8Profit retained 34

Balance sheets at 28 February 2005 and 28 February 2004 2005 2004 £M £M Fixed assets: (see note below) Tangible assets 150 120Investment 75 70 225 190Current assets: Stocks 39 28Debtors 24 18 63 46Creditors – amounts falling due within 1 year

Trade creditors 5 10Taxation 18 14Final dividend proposed and payable 8 6Bank overdraft 22 18 53 48Net current assets/(liabilities) 10 (2)Total assets less current liabilities 235 188

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Creditors – amounts falling after more than 1 year

10% loan stock 20 27 215 161Capital and reserves Called up share capital 90 70Profit and loss account 125 91 215 161Note: Fixed assets Tangible assets Cost 189 159Accumulated depreciation (39) (39) 150 120 During the year tangible assets costing £19M with a net book value of £10M were sold for £12M. Required

(a) Explain why a cash-flow statement is considered a necessary component of the primary financial statements and what information it is intended to convey.

(8marks)

(b) Using the following balance sheets, summary profit and loss account and other financial information, for Lemi plc, answer the following questions:

(i) Calculate the net cash flow generated from the company’s operating activities?

(12marks) (ii) How much cash was raised from outside sources, and how was this used?

(5marks) (Total 25 marks)

Q4.

Ling Ling Plc Profit and Loss Account for the year ended 31 December 2005

£000 Net Sales (all credit) 300Cost of Sales 180 Gross Profit 120 Selling general & administration expenses 86 Profit Before Interest 34Interest: Notes Payable 4 Long-term Debt 8 Total Interest 12 Profits before taxes 22Corporation Tax 9Profits after taxes 13Proposed dividends 13Retained profits nil

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Ling Ling Plc Balance Sheet 31 December 2005 £000 £000

Fixed Assets: Net Plant & Equipment 80 Current Assets: Stock 104 Debtors 32 Cash 24 160 Less Current Liabilities: Trade Creditors 25 9% Notes Payable 42 Other Current Liabilities (including dividends) 18 85 75Total Assets less current liabilities 15510% Long-term debt 80 Net Assets 75 Share Capital 75,000 ordinary Shares of £1 75Reserves Nil

Shareholders’ funds 75 Ling Ling Plc currently has a quoted share price of £1.21. Industry Average ratios Current ratio 2.5 times Quick ratio 1.1 times Average collection period (365 days/yr) 35 days Stock turnover ratio 2.4 times Net Asset turnover ratio 1.4 times Interest cover ratio 3.5 times Net profit margin ratio 4% Gearing ratio (Loans/Total Capital) 45% Return on shareholders’ equity ratio 16.8% P/E ratio 9.0 times Required: Using the above information;

(a) Calculate the ten ratios above for Ling Ling Plc. (10 marks) (b) Evaluate Ling Ling Plc:

(j) by considering the liquidity position relative to that of the average firm in the industry.

What problems if any are suggested by this analysis?

(ii) by looking at key activity ratios. Are any problems apparent from this analysis? (4 marks)

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(c) Evaluate:

(i) the financial risk of Ling Ling Plc by examining its interest cover and its gearing ratio relative to the same industry average ratios.

(ii) the profitability of Ling Ling Plc relative to that of the average firm in its industry.

(6 marks)

(d) Give an overall evaluation of the performance of Ling Ling Plc relative to other firms in its industry. What areas appear to have the greatest need for improvement?

(5 marks) (Total 25 marks)

Q5

(a) Explain the following accounting terms with examples:

(i) Asset (ii) Fixed asset (iii) Current asset (iv) Depreciation (v) Historical cost convention

(15 marks) (b) Explain how the goodwill of a business is created? (4 marks) (c) Distinguish between purchased goodwill and inherent goodwill. (6 marks) (Total 25 marks)

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Accounting

Marking Scheme Answer 2

Marlin Ltd Trading, Profit and Loss Account for year ending 31st may 2006 1

£000 £000

Turnover ½ 1,100Less Cost of Sales (w1) 2 718.7Gross Profit ½ 381.3Administrative expenses (w2) 100.499 6 Selling & Distribution expenses (w3) 61.925 1.5 162.424Profit before interest and tax ½ 218.876Interest 1 4Profit before tax ½ 214.876Taxation ½ 20Profit after tax ½ 194.876Dividends: Preference 5.4 1 Ordinary 28 1 33.4Retained Profit for the year ½ 161.476Profit & Loss balance c/fwd ½ 12.85Profit & Loss balance b/fwd ½ 174.326 18

Balance Sheet as at 31 May 2006 1/2

£000 £000 £000 Fixed Assets Cost Acc.Depr NBV Premises 550 72.5 1 477.5 Motor Vehicles 120 33.3 1 86.7 Fixtures & Fittings 60 32 1 28 592.2 Trade Investments ½ 20 ½ 612.2Current Assets Closing Stock 62 Debtors & Prepayments (w5) 53.376 1 Bank - 115.376 ½ Creditors: amounts falling due within one year Creditors 29.75 Accruals 5.6 1.5Bank overdraft 14.5 ½ Taxation 20 ½ Dividends 33.4 ½ 103.25

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Net Current Assets ½ 12.126Total Assets less Current Liabilities 624.326Creditors: amounts falling due after one year Loan ½ 40Net Assets 584.326 Capital and Reserves Ordinary Share Capital ½ ½ 350Preference Share Capital ½ 60Profit and Loss ½ 174.326Shareholders Funds 584.326 12 Workings 1. Cost of Sales Opening Stock ½ 60.5 Purchases ½ 720.2 Closing Stock ½ (62) ½ 718.72. Administrative Expenses Discount Allowed ½ 3.05 Discount Received ½ (7.5) As per Trial Balance 47.925 Add accrual 1 2.4 Provision D.D. (Dec) 1 (0.176) Depreciation: Premises 1 27.5 M.V 1 15.3 Equip 1 12 100.499 3. Selling & Distribution Expenses As Trial Balance 60.725 Add Accrual 1 1.2 ½ 61.9254. Fixed Assets Cost Acc.Depr NBV Premises 550 72.5 477.5 Motor Vehicles 120 33.3 86.7 Fixtures & Fittings 60 32 28 592.25. Debtors and Prepayments Trade Debtors ½ 55.6 Less Prov. DD ½ (2.224) 53.3766. Accruals Interest ½ 2 Admin accrual ½ 2.4 S&D accrual ½ 1.2 5.6

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Answer 3

(a) A cash flow statement is a necessary component of the primary financial statement because: • Businesses must manage their cash adequately in order to survive • Profit may not equate to cash-flow in a given accounting period • You cannot easily assess cash flow and therefore companies prefer to use data

directly from the balance sheets and profit ad loss account. • A proper analysis, prepared in accordance with general acceptable Accounting

Standards, is therefore considered desirable. (1mark each point, max 4 marks) The information to be conveyed is where cash has been generated from and how it has

been spent, under the following headings: • Cash from operating activities • Servicing of finance (interest and dividends paid and received) • Taxation • Investing activities (spend on new tangible, intangible and financial fixed assets less

proceeds of disposal) • Financing activity (raising new money from shareholders and borrowing or repaying

loan capital) (1 mark each point, max 4 marks)

(b) (i) Net cash flow generated from operating activities

£m Operating profit 65 1 Add: depreciation 9 (given in p&l account) 2 Less: profit on disposal of assets -2 (given in note - £12 proceeds less £10

NBV) 2 Increase in stock -11 (difference between balance sheets) 2 Increase in debtors -6 (difference between balance sheets) 2 Decrease n trade creditors -5 (difference between balance sheets) 2 £50 1 12

(ii) £20m was raised from the issue of new shares. Part of this was applied in repaying £7m of long-term borrowing (10% loan stock). The rest will have been needed to provide the extra finance for the acquisition of new fixed assets of various sorts.

(5 marks)

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Answer 4 (a) Comparison of ratios

Ratio Ling Ling plc Industry Current ratio 1.88 times 2.5 times Quick ratio 0.66 times 1.1 times Average collection period 39 days 35 days Stock turnover ratio 1.73 times 2.4 times Total asset turnover 1.25 times 1.4 times Interest cover 2.83 times 3.5 times Gearing ratio 51.6% 45% Net Profit Margin (after tax) 4.33% 4.0% Return on Shareholders Equity 17.33% 16.8% P/E Ratio 7 times 9 times 5 marks 5marks

(b) (i) Based upon a comparison of Ling Ling Plc’s current and quick ratios with those of the industry there is evidence that Ling Ling may carry excessive or slow moving stock. (2marks)

(ii) Comparing Ling Ling Plc’s average collection period and stock turnover ratios with those of the industry provides additional evidence of potential stock problems. Total asset turnover ratio is also below industry average probably because of the stock problem and the higher than average debtors balance. (2marks)

(c) (i) Comparing the interest cover and gearing ratios with the industry averages reveals as a

slightly higher amount of gearing and significantly lower interest coverage ratio. This suggests that Ling Ling either pays very high interest charges relative to other companies, is less profitable than other companies or a combination of both. The company appears to have more financial risk than the average company. (3marks) (ii) Ling Ling Plc’s net profit margin exceeds the industry average by 0.33%. The company’s return on investment is slightly lower than the industry average and return on shareholders equity of 17.7% exceeds the industry average of 16.6%. This would be expected because of the higher level of financial leverage used by Ling Ling. (3marks)

(d) Ling Ling appears to be carrying excessive stocks resulting in a lower asset turnover. The

company’s liquidity position is also weak as can be seen by the quick ratio. In spite of these areas for potential improvement the company has outperformed the average company in the industry and has assumed more financial risk in doing this. (5marks)

A5.

(a)(i) As defined by the ASB’s Statement of Principles, Assets are ‘rights or other access to future economic benefits controlled by an entity as a result of past transactions or events’

(3 marks)

(ii) A fixed asset is an asset that is owned and employed by the business to generate economic benefit for the long term and not with the intention of resale. (Under IAS 1 fixed assets are classified as ‘non-current’ and it includes tangible, intangible and financial assets of a long-term nature)

(3 marks)

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(iii) A current asset is an asset that is owned by and used in the business which has the potential of being converted into cash within a year.

(3 marks)

(iv) Depreciation is the measure of the loss or other consumption of a fixed asset over its useful economic life caused by such factors as wear and tear, obsolescence, passage of time and changes in markets and technology. (Under IAS 16 Depreciation is defined as the systematic allocation of the cost of the asset or fair value at acquisition less its residual value over its useful life.)

(3 marks)

(v) Historical cost convention is where the asset and liabilities are measured and

recognised at their transaction cost which is a monetary carrying amount. The asset and liability may subsequently be subject to remeasurement.

(3 marks) (Students are not expected to answer under IAS – It is put in for the examiners reference) (b) Goodwill is the difference between the purchase consideration for the business

as a whole and the fair value of the net assets of the target business. The potential factors that contribute to goodwill is the business reputation, the skilled workforce, brand names, dynamic strategies etc.

(4 marks)

(c) Purchased goodwill arises under circumstances when one business acquires another business as a going concern. It may be either positive or negative. It may be disclosed as an intangible fixed asset or written off to profit and loss account.

(3 marks)

Inherent goodwill is where there is evidence that it arises organically and not from a purchased transaction. FRS 10 states that inherent goodwill should not be recognised in the financial statements. Its value cannot be measured with sufficient reliability because of the subjectivity involved and therefore be ignored.

(3 marks) Section A - Multiple Choice Answers 1. D 2. C 3. D 4. C 5. B 6. C 7. D 8. A 9. C 10. C 11. D 12. B 13. B 14. B 15. B

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December 2006

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Assignment Subject: Business Accounts Date Issued: 05 October 2006 Hand in by: 09 November 2006


examiner to check for plagiarism) to the Reception by 5:00 p.m. on 09 November 2006 at the latest. Assignments without a floppy disk or CD-Rom will not be accepted.


4. Your assignment must be word-processed in Microsoft Word. All pages should be numbered.





inside quotation marks and referenced using the Harvard method. d) If you do cite the views/ideas of another person then you must refer to this person in the


e) Copying the work of a fellow student also constitutes plagiarism. It must be pointed out, though, that any student allowing another student to copy part or all of his/her assignment is just as guilty as the plagiariser. You should therefore protect your own work, so as to avoid others copying your work, without your knowledge.

f) If you do not observe the above rules then this will lead to an allegation of cheating and, if found guilty, you will incur a severe penalty which may involve having to leave the College. Any repetition of plagiarism in any module will lead to expulsion from the College.

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You are required to write a short report on Interpretation of Financial Statements. To examine the financial statements, you are required to use the following two companies for your assignment:

• Matalan plc Annual Report year ended 25 February 2006 • Gus plc Annual Report year ended 31 March 2006.

Task

1. Using ratio analysis, analyse and report on the above companies in respect of the following areas:-

(a) Profitability (b) Liquidity (c) Asset Efficiency (d) Gearing

(70%)

2. After completing your analysis in part (1), together with any evidence from the press (paper cuttings etc), suggest which company would you recommend to be a possible good investment giving your reasons?

(10%)

3. Explain any limitations of your analysis in the report. (10%) Report style, presentation and referencing (10%)

Notes to Candidates

1. Maximum word length 1500 words (excluding ratio calculations) 2. This is an individual assignment and using other people’s work and submitting it as though

it were one’s own work is unfair practice and is treated as plagiarism. The student’s work must be his/her original work and must be clearly referenced where appropriate.

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Business Accounts Mark Scheme December 2006 Task

3. Using ratio analysis, analyse the above companies in respect of the following areas:- Matalan Gus

(a) Profitability 10 10 (b) Liquidity 8 8 (c) Asset Efficiency 10 10 (d) Gearing 5 5

(70) 4. After completing your analysis in part (1), together with any evidence from the press

(paper cuttings etc), suggest which company would you recommend to be a possible good investment?

Analysis 5 marks

Evidence 5 marks (10)

3. Explain any limitations of your analysis in the report. Each limitation 3marks, maximum (10) Report style, presentation, originality and referencing (10) Total (100marks)

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Examination Paper

Subject: BUSINESS ACCOUNTS Date: 12 December 2006 (10AM – 1PM) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 1. SECTION A – COMPULSORY QUESTION 2. SECTION B – COMPULSORY QUESTION 3. SECTION C – ANSWER ANY TWO QUESTION 4. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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Section A - Multiple-choice questions (2 marks per question) 1. Which of the following accounting equations is correct?

a. Assets + Capital = Liabilities b. Liabilities – Capital =Assets c. Capital=Assets – Liabilities d. Capital=Assets + Liabilities

2. In times of rising prices, what effect does the use of the historical cost concept have on a

company’s asset values and profit? Asset values Profit A Understated Understated B Overstated Overstated C Understated Overstated D Overstated Understated

3. Which accounting concept states that sales revenue should be recognised when goods and services have been supplied and costs are incurred when goods and services have been received?

A. Prudence concept B. Materiality concept C. Accruals concept D. Dual aspect concept

4. During the year a business sells a non current asset. The following information is known.

£ Original cost 1000 Accumulated depreciation at date of sale 480 Profit on sale 140 What were the proceeds from the sale of the non-current asset?

A. £ 340 B. £ 380 C. £ 620 D. £ 660

5. Inventory should be valued at the lower of cost and net realisable value. The table shows data about four products. Product A B C D Cost £ 18 £ 19 £ 17 £23 Realisable value

15 28 17 26

Selling expenses

3 2 3

At how much should the total inventory be valued?

A. £72 B. £77 C. £78 D. £86

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6. What is the purpose of providing depreciation in the final accounts?

I- To comply with the prudence concept J- To set aside funds for the future replacement of the non-current asset K- To spread the cost less residual value of a non-current asset over its useful life which is

expected to generate economic benefit. L- To show the fair value of the asset

7. Which one of the following items could appear in a company’s cash flow statement?

1. Repayment of a loan 2. Bonus issue of shares 3. Rights issue of dividends 4. Proposed dividends payable

A. 2 and 3 B. 2 and 4 C. 1 and 3 D. 1 and 4

8. Which one of the following would cause a company’s gross profit percentage on sales to fall?

A. Sales volume has declined

B. Selling and distribution costs have risen

C. Opening inventory is greater than closing inventory

D. Some closing inventory items were included at less than cost.

9. How can a business increase its current ratio?

A. increase creditors B. increase debtors C. increase bank overdraft D. reduce stock

10. Which of the following would be classified as an addition to Non-current assets (Fixed Assets)?

A. The annual maintenance charge on a large machine.

B. Addition of an extension to the Freehold offices.

C. Purchase of Inventory

D. Expenditure on repairs to non-current assets.

Total: 20 marks

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SECTION B - COMPUSLORY Question

Question 2 The Financial Manager of Cotco Ltd has produced the following trial balance at the financial year end. Trial Balance as at 31 October 2006 Dr Cr

£000 £000 Ordinary shares of 50 pence 2,000 8% Preference shares of £1 500 Land and building at cost 3,540 Fixtures and fittings at cost 80 Provision for depreciation on fixtures and fittings at 1 November 2005

55

Motor vehicles at cost 64 Provision for depreciation on motor vehicles at 1 November 2005

24

Sales 4,410 Purchases 2,480 Inventory at 1 November 2005 496 Carriage inwards 27 Returns inwards 171 Returns outwards 97 10% Debenture (2011) 700 Share premium 230 Retained profits at 1 November 2005 182 Rent received 110 Interest received 10 Interest paid 35 Administrative expenses 1387 Trade Receivables (Trade debtors) 400 Trade Payables (Trade creditors) 275 Cash-at-bank 83 Cash-in-hand 11 Allowances for doubtful debts at 1 November 2005 15 8,691 8,691

The following information has not yet been entered into the company’s accounts. (a) Inventory at 31 October 2006 was valued at £507,000. (b) Depreciation for the year ended 31 October 2006 has to be provided as follows:

20% on fixtures and fittings at cost; and 20% on motor vehicles on a reducing balance basis.

(c) Wages and salaries totalling £8,000 were outstanding at 31 October 2006 and insurance of £4,000 was prepaid as at the same date and both costs are included in administrative expenses.

(d) The allowance for doubtful debts is to be adjusted to 5% of the trade receivables (debtors)

value at 31 October 2006. (e) Rent due to Cotco Ltd of £10,000 was outstanding at 31 October 2006. (f) The Board of Directors propose to provide for the preference dividend and an ordinary

dividend of 5 pence per share.

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(g) A corporation tax charge of £105,000 for the financial year ended 31 October 2006 is to be provided for.

REQUIRED Prepare the Income statement (profit and loss account) of Cotco Ltd for the year ended 31 October 2006 and a balance sheet as at that date. (30 marks) SECTION C - Answer ANY 2 Questions only

Question 3 Jason Long, a small manufacturer trading as Martin Projects, is very pleased with his recently completed financial results, which shows that a planned 20% increase in turnover has been achieved in the last accounting year.

Year ended 30 September 2004 2005 2006 £ £ £Sales 90,000 100,000 120,000Cost of sales 74,000 75,000 92,000Gross profit 16,000 25,000 28,000Administrative overheads 3,000 5,000 6,000Net profit 13,000 20,000 22,000 As at 30 September 2003 2004 2005 2006 £ £ £ £Fixed assets: at cost 155,000 165,000 190,000 206,000 provision for depreciation 42,000 45,000 49,000 53,000 113,000 120,000 141,000 153,000Current assets: Stock 3,000 4,000 7,000 30,000 Debtors 14,000 19,000 15,000 10,000 balance at bank 2,000 1,000 3,000 - 19,000 24,000 25,000 40,000Current liabilities: Creditors 5,000 4,000 6,000 9,000 bank overdraft - - - 2,000 5,000 4,000 6,000 11,000

Since 30 September 2003 Jason Long has not taken any drawings from the business. Jason Long has been invited recently to invest £150,000 in a five-year fixed-term Government loan stock earning interest at 12½% per annum. Jason Long is a very cautious person and has therefore asked a financial consultant for a report.

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REQUIRED (a) A schedule of six accounting ratios covering each of the three years ended 30 September

2006, for Martin Projects. (12 marks)

(b) As financial consultant, prepare a report to Jason Long on the financial results of Martin Projects given above, and include comments on the alternative future actions that he might take.

(13marks)

(Total 25 marks)

Question 4 Mr Xenon is a sole trader who does not keep proper accounting records regarding his business transactions. However, he has produced for you the following information.

1 May 2005 30 April 2006 £000 £000Trade Receivables ( debtors) 17 23Trade Payables ( creditors) 29 21Inventory 40 43Prepayment 2 1Cash at bank 2 1Bank loan 40 40Other payables 9 7Cash in hand 1 1Non-current (Fixed) assets 240 222

His total drawings for the year were £19,000; sales receipts were £240,000 and purchase payments £137,000.

REQUIRED

(a) In respect of Mr Xenon:-

(i) Prepare a statement of affairs as at 1 May 2005. (5 marks)

(ii) Calculate the sales, purchases and gross profit figures which should appear in the trading account for the year ended 30 April 2006. (7 marks)

(iii) Prepare a Balance Sheet as at 30 April 2006. (7 marks)

(b) Explain why Mr Xenon should make allowances (provisions) in his accounts in respect of:

(i) Depreciation

(ii) Doubtful debts (6 marks)

(Total 25marks)

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Question 5

The following are the inventory movements and related purchases prices for an item that your company buys from overseas and re-sells alongside its own range of products.

Prices paid for the goods for the month of March 2006 were as follows:

Date Units @ Price 1 March Purchased 600 £18 7 March Purchased 400 £19 8 March Sold 300

15 March Purchased 200 £20 18 March Sold 500 21 March Purchased 350 £21 25 March Sold 450 26 March Purchased 300 £22 31 March Sold 250

The Sale Prices of the goods for March remain constant at £24.

REQUIRED

(a) Calculate the closing inventory values at the end of March, using the following methods: (i) FIFO

(ii) LIFO (14 marks)

(b) Calculate the gross profit reported for the month, using the following methods

(i) FIFO

(ii) LIFO (6 marks)

(c) Explain how a change of inventory valuation from FIFO to LIFO will affect the profit calculation of a firm at a time of slowly rising prices. (5 marks)

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Marking Scheme Dec2006

Subject: BUSINESS ACCOUNTING

Section A Q 1 2 3 4 5 6 7 8 9 10 C C C D A C C D B B A2 Cotco LIMITED

Income statement for the year ended 31 October 2006 (1)

£000 £000 Sales Revenue (4,410 – 171) 4,239 1 Cost of sales Opening inventory (stock) 496 Purchases (2,840 + 27 – 97) 2,410 1 Closing inventory (stock) (507) 2,399 1 Gross Profit 1,840 1 Other income Rent (110 + 10) 120 1 Interest 10 1 130 1970 Expenses Administrative expenses (1387 +8 -4) 1391 2 Allowances (Provision) for doubtful debts ((400 x 5%) – 15))

5 1

Depreciation Fixtures and fittings (80 x 20%) 16 1 Motor vehicles ((64 – 24) x 20%) 8 1 1,420 Operating profit before interest 550 1 Interest charges (35 + (700 x 10% ÷ 2) 70 2 Profit before tax 480 Corporation tax 105 1 Profit after tax 375 1 Dividends Preference (500 x 8%) 40 1 Ordinary (2,000 x 2 x 5p) 200 1 240 Retained Profits for the Year 135 1

(20 marks)

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Cotco Ltd

Balance Sheet as at 31 October 2006

Cost Depn N.B.V £’000 £’000 £’000 Non – Current Assets (Fixed assets) Land and building 3,540 - 3540 Fixtures and fittings (80 – 55 – 16) 80 71 9 Motor vehicles (64 – 24 – 8) 64 32 32 3564 103 3,581 21/

2 Current assets Inventory 507 } Trade Receivables (Debtors) (400 – (400 x

5%) + 10 + 4) 394 } 11/

2 Cash in hand 11 } 912 1 Total assets 4,493 Equity and Liabilities Ordinary share capital 2,000 Preference shares 500 Share premium account 230 1 Retained earnings (182 + 135) 317 3,047 Non-Current Liabilities 10% Debentures 1 700 Current Liabilities Trade Payables (275 +83 + 8 + 105 + 240 + 35 )

746 2

Total equity and liabilities 4,493 1 (10 marks)

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A3a MARTIN PROJECTS - Schedule of accounting ratios 2004 2005 2006 Total asset turnover 64.3% 62.5% 65.9% Collection period for debtors (days)

365 X Debtors 77.1 58.8 30.4 Sales

Net profit 9.3% 12.5% 12.1% Capital employed

Net profit 14.4% 20% 18.3% Sales

Gross profit 17.8% 25% 23.3% Sales

Current assets 600% 417% 364% Current liabilities

Acid test ratio 500% 300% 91% Stock turnover 21.1 13.6 5.0

(4 marks) (4 marks) (4 marks) (12 marks)Note: A maximum of six relationships are required. Answers may include items not mentioned above.

A3b Reports should be addressed to Jason Long and should make reference to the following: 1. The increase of 20% in turnover in 2005-06 has been accompanied by adverse changes

in profitability and liquidity ratios. 2. Overall, 2004-05 appears to have been a more promising year than 2005-06. 3. On current results and assuming limited future growth, investment in the five year fixed-term

Government loan stock is attractive, but the possibility of alternative investments with limited risk should be explored.

4. Insofar as Jason Long is engaged in working in his business, the results shown in the

accounts may appear more attractive than is the actual position, since a charge will not have been made in the accounts for his services.

5. Reference should be made to the limitations of the historical accounting model. 6. In considering alternative investments, it will be necessary to ascertain the market value of the

business as a going concern and the break-up value of the net assets. (13 marks)

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A4a (i) Mr Xenon

Statement of Affairs at 1 May 2005 (¼)

£000 £000 Non- Current assets(Fixed Assets) 240 ½ Current Assets Inventory 40 ¼ Trade Receivables (Debtors) 17 ¼ Prepayments 2 ¼ Cash in Hand and at bank 3 ¼ 62 ½ Total assets 302 ½ Capital and Liabilities Capital 224 ¼ Non-current liabilities Bank Loan 40 ¼ Current liabilities ¼ Trade payables (Creditors) 29 ¼ Other 9 ¼ 38 ½ 302 ½

(5 marks)

(ii) Sales £000 Sales Receipts 240 + Closing Trade Receivables (Debtors) 23 263 - Opening Trade Receivables(Debtors) (17) 246 (1½ marks)

Purchases £000 Purchases Payments 137 + Closing Trade Payables (Creditors) 21 158 - Opening Trade Payables (Creditors) (29) 129 (1½ marks)

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Gross Profit £000 £000 Sales 246 Less: Cost of Sales Opening Inventory (Stock) 40 Purchases 129 169 Less: Closing Inventory (Stock) (43) (126) Gross Profit 120 (4 marks) (Total 7 marks)

(iii) Mr Xenon

Balance Sheet as at 30 April 2006

£000 £000 Non-Current (Fixed) Assets 222 Current Assets Inventory (Stock) 43 Trade Receivables (Debtors) 23 Prepayments 1 Cash at Bank 1 Cash in Hand 1 69 69 Capital and Liabilities 291 Opening capital (from ii) 224 Net profits 18 242 Drawings (19) Non-Current Liabilities 223 Bank Loan 40 Current Liabilities Trade payables 21 Other payables 7 28 291 (7 marks)

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A4b

(i)Firms create provisions for depreciation in order to reflect or spread the cumulative total of parts of the cost of a fixed asset on a yearly basis to the profit and loss account as depreciation charges. The purpose of this is to match the cost of the fixed asset against the benefits obtained from its use. (3 marks)

(ii) In accordance with the prudence concept, the value of assets must not be overstated in the

balance sheet. Thus if it is likely that a proportion of debts will prove not to be collectible, a provision must be created and recorded as an expense in the profit and loss account. This provision is then deducted from the total debtors in the balance sheet reflecting the net figure as being the estimated realisable value. (3 marks)

(Total 6 marks)

A5a (i) Closing stock value at the end of March using FIFO method:

Total units purchased: (600 + 400 + 200 + 250 + 300) = 1850 Less: Total units sold: (300 + 500 + 450 + 250) = (1500) Therefore, Closing Stock = 350 Valuation: 300 units @ £22 £6600 50 units @ £21 £1050 Closing Stock = £7650 (7 marks)

(ii) Closing stock value using LIFO

Date Purchases Issue/Sold Stock Balance 1 March 600 @ £18 600 @ 18 = 10800 7 March 400 @ 319 400 @ 19 = 7600 8 March 300 600 @ 18 = 10800

100 @ 19 = 1900 15 March 200 @ £20 200 @ 20 = 4000 18 March 500 400 @ 18 = 7200 21 March 350 @ £21 350 @ 21 = 7350 25 March 450 300 @ 18 = 5400 26 March 300 @ £22 300 @ 22 = 6600 31 March 250 300 @ 18 = 5400

50 @ 22 = 1100 Closing Stock Value 350 6500

(7 marks)

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A5b The gross profits reported for the month.

FIFO LIFO £ £ £ £Sales (1500 @ 24) 36000 36000Cost of Goods Sold: Opening Stock - - Purchases 36350 36350Less: Closing Stock (7650) 28700 (6500) 29850Therefore, Gross Profit 7300 6150 (3 marks) (3 marks)

A5c FIFO assumes that materials / goods are issued from stock in the order in which they were received. LIFO assumes that materials / goods are issued in the reverse order to which they were received. Hence under LIFO closing stock will be at a lower value than under FIFO and hence cost of sales will be higher and so profit will be lower. It can be seen in this example, the difference is, £1150 for closing stock valuations, cost of sales and profits. (5 marks)

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June 2007

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 08 MARCH 2007 Hand in by: 05 APRIL 2007


examiner to check for plagiarism) to the Reception by 5:00 p.m. on 5th April 2007 at the latest. Assignments without a floppy disk or CD-Rom will not be accepted.











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International Business Diploma Internal Assignment Business Accounts June 2007 You have just taken up a new appointment as a technical consultant with a local firm of accountants. Your first assignment was to write a report for the new non-relevant graduate trainee accountants who have joined the firm in January 2007.With accounting and financial reporting currently undergoing radical changes; you are required to address some of the basics relating to the general framework of accounting. Your report should answer the following questions:-

5. To understand the nature and scope of accounting explain the distinction between

(a) Financial Accounting (b) Management Accounting (c) Auditing (20%)

6. Discuss the various user groups and their needs that require accounting and financial information.

(25%)

3. Explain the purpose of the principal financial statements of a business. (20%) 4. Identify and explain the desirable characteristics of useful accounting information. (25%) Report style, presentation and referencing (10%)

Notes to Candidates

3. Maximum word length 1500 words. 4. This is an individual assignment and using other people’s work and submitting it as though

it were one’s own work is unfair practice and is treated as plagiarism. The student’s work must be his/her original work and must be clearly referenced where appropriate.

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Marking Scheme

Requirement Areas Comments Marks

Part 1 – To understand the nature and scope of accounting explain the distinction between

(a) Financial Accounting

(b) Management Accounting

(c) Auditing

20 %

Part 2 – Discuss the various user groups and their needs that require accounting and financial information.

25% Part 3 – Explain the purpose of the principle financial statements of a business.

20%

Part 4 – Identify and explain the desirable characteristics of useful accounting information.

.

25% Report style, presentation and referencing.

10%

Total 100%

Your overall marks subject to external moderation

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1. Key points to include: (a) Accounting information is summarised in statements to provide the information to the owners and various other external users. It is based on historical accounting and is backward looking and considered for external reporting; reports on the results and financial position of the business and subject to accounting principles, concepts and standards, Published accounts must comply with IFRS. Etc. (6 marks) (b) Management accounting is concerned with providing information towards the more efficient running of the business. It is a forward looking system which analyses data for managerial action. There is no specific standard or format how the information is supplied. It depends on the organisational policies and internal documents. It is primarily an internal reporting function which may be relied upon by some external users such as the banks and external auditors. Etc. (6 marks) (c) The annual accounts of a limited liability company must usually be audited by a person or partnership (they must be registered auditors) independent of the company. This function is usually carried out after the year end accounts of the company are completed. However, for public limited companies there is normally and interim and final audit of the financial statements. The auditors report as to whether the financial statements show a true and fair view or present fairly the company’s results for the year and its financial position at the end of the year. Upon completion, the auditors must prepare a report explaining the work that they have done and the opinion they have formed. The report is normally addressed to the members of the company and not the directors or managers. (8 marks)

2. Various users groups/needs

• Shareholders of the company • Managers of the company • Finance providers to the company • Taxation authorities • Trade contact groups such as suppliers/customers • Employees of the company • Financial analysts and advisors • The public

(7x 2marks = 14 for the groups; 7x1.5 =11 for their needs)

3. Should include the following:

Defined and what they show and consist of-

• Balance sheet ( 8 marks) • Income statement ( 7 marks) • Cash flow statement ( 5 marks)

4. Should include the following:

• Relevance • Reliability • Understandable • Comparability (According to the IASB framework the above are the four principal ones) • Objective • Completeness • Timeliness

(4 x 6 marks max, max 25 in total)

5. Report style , presentation and referencing up to max (10 marks)

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Examination Paper Subject: BUSINESS ACCOUNTS Date: 12 June 2007 (10am – 1pm) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 25. SECTION A – COMPULSORY QUESTION 26. SECTION B – COMPULSORY QUESTION 27. SECTION C – ANSWER ANY TWO QUESTIONS 28. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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Section A – Multiple choice questions (2 marks per question) Question 1

(a) When preparing a bank reconciliation statement at the period end, an adjustment is made for unpresented cheques. What are unpresented cheques?

A Cheques that have been cleared by the bank B Cheques that have not been presented for payment C Cheques returned by the bank due to lack of funds D They are unsigned cheques (b) A business pays annual rent of £24,000. Payment is made quarterly in advance on 1 December, 1 March, 1 June and 1 September. Which of the following should be included in the accounts of the business if the year ended on 30 September 2007? A £2,000 accrual B £2,000 prepayment C £4,000 accrual D £4,000 prepayment

(c) Which of the following is correct? Assets Liabilities Capital A 7500 13000 5500 B 9300 2400 5900 C 3225 1750 1475 D 6400 4200 10600

(d) The consistency concept states that…

A Firms in the same industry must account for similar items in the same way B Firms may not change the way they are preparing the accounts even if it is not true and fair C When preparing the accounts of the firm, one should normally account for similar items in the same way from one accounting period to another D None of the above

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(e) The valuation of stock at the lower of its cost or its net realisable value is an application of …

A The consistency concept B The going concern concept C The prudence concept D The accruals concept

(f) If a company’s gearing ratio is stated as 6 : 9, then its loan/debt capital as a percentage of its total capital employed, is :

A 60.0% B 37.5% C 40.0% D 66.7%

(g) A firm sells goods on credit on the normal terms of credit. It allows a discount of 2% to its customers if they pay by the due date, which they always do. The following financial data relates to the firm:

£ Amount owed by customers (receivables) at the beginning of the year 22,000 Amount owed by customers (receivables) At the end of the year 24,000 Bad debt written off during the year 3,500 Cash/Cheques received from customers During the year 147,000 Calculate the firm’s credit sales for the year. The answer is… A £148,469 B £152,500 C £155,500 D £155,612

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(h) The following assets and liabilities are listed in the balance sheet of a firm; £ Fixed (non-current) assets 100,000 Stock (Inventory) 50,000 Debtors (Receivables) 40,000 Cash at bank 20,000 Trade creditors 10,000 What is the acid-test (quick) ratio? A 21 : 1 B 6 : 1 C 11: 1 D 2 : 1 (i) Which of the following is a cash outflow in the cash flow statement? A A decrease in stock B Decrease in trade debtors (receivables) C Decrease in trade creditors (payables) D Issue of bonus shares (j) It is necessary to distinguish between revenue expenditure and capital expenditure. When must this distinction be made? A When preparing the purchase ledger control accounts B When preparing the cash flow statement C When preparing the profit and loss account D None of the above Total: 20 marks

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Section B – Compulsory Question Question 2 The trial balance of Ali Song Limited at 30 June 2007 is as follows:

Account details Dr Cr £000 £000 Sales revenue 6,500Opening stock (inventory) 900Purchases 3,780Discounts 15 5Administrative expenses 700Selling and distribution costs 650Provision (Allowances) for bad debts (receivables) at 1 July 2006 30Debenture interest paid 25Freehold property at cost 1,200Plant and machinery at cost 800Motor Vehicles at cost 130Trade Debtors (receivables) 1,000Cash at Bank 800Trade Creditors (payables) 900Short –term investment at cost 200Ordinary share capital (50p shares each) 800Share premium 250Retained earnings at 1 July 2006 60510% Debentures 250General reserve 200Provision for depreciation at 1 July 2006: Freehold property 330 Plant and machinery 250 Motor vehicles 80 10,200 10,200

You are also given the following additional information:- (a) The closing stock (inventory) at 30 June 2007, when counted total £ 850,000. The net

realisable value of the inventory as at that date amount to £ 820,000. (b) There was investment income receivable at 30 June 2007 of £16,000, which should be

credited against administrative expenses. (c) Included in administrative expenses is rent payment of £24,000 for the 12 months to 31

December 2007 and directors’ fees outstanding of £50,000 at the year end to be shown separately.

(d) There are bad debts to be written off to administrative expenses which amounted to £20,000 before providing a provision/(allowance) for doubtful debts of 5%.

(e) A dividend of 20p per share has been declared to be paid for the year. (f) Depreciation is provided as follows: Freehold property - 5% straight line method Plant and machinery- 10% straight line Motor vehicles - 20% reducing balance (g) Corporation tax of £20,000 to be provided for the year. Required: Prepare for Ali Song Limited the following:- (i) The Income statement for the year ended 30 June 2007. (18 marks) (ii) The Balance sheet as at 30 June 2007. (12 marks)

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Section C – Answer any two questions only Question 3 The following information is extracted from the financial statements of Kay Limited on 31 December 2006.

Balance Sheets As at 31.12.05 As at 31.12.06 £OOO £OOO £OOO £OOO Non-current Assets Land and Buildings 1,100 1,000 Plant and machinery 8,000 11,600 Less: Depreciation 1,600 2,400 6,400 9,200 Current assets Inventory (Stock) 1,920 4,600 Trade receivables (Debtors) 1,600 3,920 Cash at Bank 400 480 3,920 9,000 Total Assets 11,420 19,200 Share capital and reserves Ordinary share capital 8,000 9,600 Share premium account - 400 Profit and loss account 1,500 3,960 9,500 13,960 Non-current liabilities 8% Debentures - 2,000 Current Liabilities Trade payables (Creditors) 800 2,000 Taxation 600 720 Dividends 520 520 1,920 3,240 Total Equity and liabilities 11,420 19,200

Income statement for the year ended 31 December 2006

£000 £000 Sales revenue 8,000 Operating expenses 3,280 Depreciation 900 4,180Operating profit 3,820Debenture interest 160Net profit before tax 3,660Taxation 680Profit after tax 2,980Dividends 520Retained earnings 2,460

Note: There were no disposals of fixed assets during the year.

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Required: (a) Prepare a cash flow statement (as per IAS 7) for Kay Ltd for the year ended 31December

2006. (19 marks) (b) Comment on the usefulness of the above statement prepared for you, as the finance manager

of the company. (6 marks)

Question 4 The following information relate to the books of Seewho Ltd. Cash book (not balanced) for the month of January 2007

£ £ Jan Receipts Jan Payments 1 Balance b/d 4,500 2 Chan Ltd 40012 Bank giro transfer 140 9 Loong fong 1616 Up Lee sales 360 11 Fat Lam 3630 Chee Ho Fun 2,200 12 Ping Pong 1,40031 Char Siew 100 15 Yi Yang 194 25 Kam Fook 1,200 30 Wing Ltd 50

Bank Statement of above account in Shangai Bank’s books:

Date Details Withdrawals Lodgements Balance2007 £ £ £ Jan 1 Opening balance 4,500 4 Chan Ltd 400 4,100 12 Loong fong 16 4,084 12 Bank giro transfer 140 4,224 13 Fat Lam 36 4,188 17 Up Lee sales 360 4,548 20 Yi Yang 194 4,354 20 Ping Pong 1400 2,954 20 Direct Debit – China trade 300 2,654 22 Standing order – Magazine 60 2,594 30 Bank charges 40 2,554 Jan 31 Bank giro transfer 1000 3,554

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Required: (a) What is the purpose of a bank reconciliation statement? (4 marks) (b) State the main differences between the cash book and bank statement. (6 marks) (c) Update the cash book of Seewho Ltd for the month of January 2007. (5 marks) (d) Prepare the bank reconciliation statement as at 31 January 2007. (10 marks) Question 5 Briefly and clearly explain the following accounting terms:- (a) Working capital (4 marks) (b) Issued share capital (2 marks)

(c) Authorised share capital (2 marks)

(d) Capital employed (4 marks)

(e) Share premium (4 marks)

(f) Revaluation reserve (4 marks)

(g) Bonus (capitalisation) issues (3 marks)

(h) Proposed dividends (2 marks)

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Marking Scheme : Section A A1 a b c d e f g h i B D C C C C C B C j C 20

Section B A2 Ali Song Limited Income Statement for the year ended 30 June 2007 1 £OOO £OOO £OOO Sales Revenue 6500 ½ Cost of Sales:

Opening Inventory 900 ½

Purchases 3780 ½ 4680 ½

Closing Inventory -820 1

3860 Gross Profit 2640 ½ Discount received 5 1 2645 Expenses: Selling and Distribution costs 650 ½ Administrative expenses(W1) 726 4 Directors' remuneration 50 1 Finance cost 25 ½

Depreciation (W2) 150 3

1601 Profit before tax 1044 ½ Corporation tax -20 1 Profit after tax 1024 Dividends:

Ordinary dividend (0.20 * 1600) 320 1

-320

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Retained earnings for the period 704 ½ Retained earnings brought forward 605 ½ Retained earnings carried forward 1309 18 Ali Song Limited Balance Sheet as at 30 June 2007 Assets COST DEPN NBV Non-current assets £ £ £ Freehold Property 1200 390 810 1 Plant and machinery 800 330 470 1 Motor vehicles 130 90 40 1 2130 810 1320 Current Assets Inventory 820 ½ Trade accounts receivable(W3) 931 1 Prepayments - Rent 12 1 Other receivables - Inv income 16 1 Short term investment 200 ½ Cash at Bank 800 ½ 2779 Total Assets 4099 Equity and Liabilities Equity Ordinary share capital 800 ½ Share premium 250 ½ General reserve 200 ½ Retained earnings 1309 ½ 2559 Non-current liabilities 10% Debenture stock 250 ½ Current Liabilities Trade accounts payables 900 Accrued expenses - Drem 50 Dividends 320 Corporation tax 20 2 1290 Total equity and liabilities 4099 12

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Workings £OOO £OOO

1Administrative expenses

As per question 700

Investment income -16 1

Rent prepaid 6/12 * 24 -12 1 Bad debts 20 1

Discount allowed 15

Allowances for trade accounts at year end

5% * (1000 - 20) 49

Opening allowances as per TB 30 Therefore Increase in provision 19 1 726

2 Depreciation

Freehold property 5% * 1200 60 1

Plant & machinery 10% * 800 80 1

Motor vehicles 20% (130 - 80) 10 1 150

3 Trade accounts receivable As per TB 1000 Less Bad debts -20 980

Less Allowances -49

931 1.5

A3

Kay Ltd

Cash flow statement for the year ended 31 December 2006 1 £OOO £OOO

Cash flow from operating activities

Operating profit before interest and tax 3820 1

Depreciation 900 1 Operating profit before working capital changes 4720 Increase in inventories -2680 1

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Increase in trade receivables -2320 1 Increase in trade payables 1200 1 -3800 Cash generated from operations 920 Debenture interest paid -160 1 Tax paid (W) -560 2

Net cash flow from operating activities 200

Cash flow from investing activities Purchase of plant and machinery -3600 1 Net cash flow used in investing activities -3600 Cash flow from financing activities Proceeds from issue of shares 2000 1 Proceeds from issue of debentures 2000 1 Dividends paid (W) -520 2

Net cash flow from financing activities 3480

Net increase in cash and cash equivalents 80 2

Cash and cash equivalents at beginning of period Note 400 1

Cash and cash equivalents at end of period Note 480 1 Note: Cash and cash equivalents Cash and cash equivalents consist of cash on hand and balances with banks, and investments in money market instruments. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts. 2006 2005 £OOO £OOO Cash on hand and balances with banks 480 400 1 19 Workings Tax Div paid paid £OOO £OOO Amounts owing at the beginning of year

(from opening B/S) 600 520

plus Amounts provided for the year (from current income statement) 680 520

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Total amount due to be paid 1280 1040

minus Amounts still outstanding at the end of year (from closing B/S) -720 -520 Therefore, Cash paid during the year 560 520 (b) Usefulness:- Shows how much cash is generated from operating activities Shows how much cash was used in the purchase of non-current assets Shows how much cash raised from equity and debt finance Shows the net cash movement in the year How much dividends and tax paid during the year (2marks x 3) 6

A4 Seewho Ltd (a) The purpose of a bank reconciliation statement is to explain the difference between the cash book balance in the nominal ledger account and the

total shown in the firm's bank statement so the correct and accurate

figure would be represented in the final accounts. 4

(b) Main differences:-

Timing differences 3

Errors either in cash book or bank statements 3 (c ) Updated Cash Book Bank a/c Jan £ Jan £

Bal B/D 4500 Chan Ltd 400

Bank giro 140 Loong fong 16

Up Lee sales 360 Fat Lam 36

Chee Ho Fun 2200 Ping Pong 1400

Char Siew 100 Yi Yang 194

Kam Fook 1200

1 Bank giro tfr 1000 Wing Ltd 50

1 D/D China Trade 300 1 S/O Magazine 60 1 Bank charges 40 8300 3696

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31Bal C/D 1 4604

8300 8300 Bal B/D 4604 (d) Bank Reconciliation Statement 1 £ £ Balance as per statement at Jan 31 3554 1 Add: Uncredited cheques 2200 1 100 1 2300 1 5854 1

Less: Unpresented cheques 1200 1

50 1 -1250 1 Balance as per cash book 4604 1 10

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A5 (a) Working capital is the difference between current assets and current liabilities. Current assets normally consists of inventories, trade account receivables and cash and cash equivalents whereas current liabilities consist of trade and other payables and short-term borrowings. 4 (b) Issued share capital is the amount of shares actually issued to shareholders

at the nominal or par value. It must be less than or equal to the authorised 2

share capital. (c ) Authorised share capital is the maximum amount of share capital that the company is legally allowed to issue. This is usually decided when the company is first formed. It will vary from company to company. 2 (d) Capital employed is the total capital financing of the business together with their reserves. Capital finance will be in the form of equity (ordinary shares) and debt (loans and debentures). 4 (e) Share premium is the excess of the market price over and above the nominal price of the share, where the amount is kept in the share premium account. This account forms part of the capital of the company with restricted use. An example is to fund bonus issues. 4 (f) Revaluation reserve is where there is an upward revaluation of non-current assets and the unrealised surplus is placed in this reserve. It is non

distributable as it represents unrealised gains on the revalued assets. 4

(g) Bonus issues are free shares issued by the company where there is no movement of cash. It is funded usually by re-classifying some of its reserves as share capital including the share premium which is a capital reserve. 3 (h) Dividends are distributions and constitute an appropriation of the profits. Proposed dividends are usually declared at the end of the year after the results have been finalised which is after the year end date. 2 25

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December 2007

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Assignment Subject: BUSINESS ACCOUNTS Date Issued: 18 OCTOBER 2007 Hand in by: 15 NOVEMBER 2007


examiner to check for plagiarism) to the Reception by 5:00 p.m. on 15th November 2007 at the latest. Assignments without a floppy disk or CD-Rom will not be accepted.











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You are required to write a short report on Interpretation of Financial Statements. You are required to pick one of the following companies indicated below which are listed in the London Stock Exchange and perform the required tasks: Greggs Plc Morrison (WM) Plc Sainsbury (J) Plc Tesco Plc Thorntons Plc TASK REQUIRED: 3. Using ratio analysis, you will perform an analysis and evaluation of the financial statements of

your chosen company for the last (most recent available) two years in respect of the following areas:

(i) Profitability (j) Liquidity (k) Asset Utilisation and Efficiency (l) Gearing

In your analysis you are required to define the above 4 areas and provide the correct formulae for your stated ratios.

(60 marks)

4. Explain the limitations of your analysis in the report. (15 marks) 3. State what other additional information that you would like to have had when undertaking the

above ratio analysis. (15 marks) 4. Good Report style presentation & referencing adopted. (10 marks) Total: (100 marks)

GUIDANCE TO CANDIDATES

6. Word length – 1000 to 1500 words 7. Assessment will be focused on the following aspects:

(ix) Content / Analysis / Depth of Research (x) Use of company reports / data (xi) Originality (xii) Report structure / writing style and presentation

3. You are required to provide only the relevant extracts of the financial statements for the two

years of your chosen company in the appendices. They must be properly cross-referenced.

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Marking Scheme :

1

Requirement Good Correct Correct Analysis including Total

definition Formulae Calculation contents, originality maximun

using & research. Marks Co/ data Areas: Profitability 2 2 4 7 15 Liquidity 2 2 4 7 15 Asset Utilisation 2 2 4 7 15 Gearing 2 2 4 7 15 Aggregate Total: 60

2 Limitation of Analysis: Points that should have mentioned includes the

following:- Up to 3marks for

Differences in accounting policies each point well The financial numbers are based on made, maximum 15 historical cost values Time value of money not included Differences in accounting periods Creative accounting employed Absence of suitable comparable data Etc,Etc

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3 Additional information may include: Industry sector ratios Up to 3marks for

Qualitative factors such as information each point well

in respect of the quality of goods & services made, maximum 15

goodwill, skills of workforce, dynamic management etc Cash flow situation throught the year Forecast business plans such as budgets Differences in accounting policies between companies Etc,Etc.

4 Presentation and referencing Poor: 0-4 10

Average: 5 Above average & Very Good: 6-10 Assignment Total: 100

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Examination Paper Subject: BUSINESS ACCOUNTS Date: 11 December 2007 (10am – 1pm) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 1. SECTION A – COMPULSORY QUESTION 2. SECTION B – COMPULSORY QUESTION 3. SECTION C – ANSWER ANY TWO QUESTIONS 4. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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Section A – Multiple choice questions (2 marks per question) Question 1 (a) Why are fixed assets depreciated?

A. to allow for the increase in repairs with use B. to provide cash for replacement C. to show their current value in the balance sheet D. so that the profit and loss account includes a charge in use.

(b) A company increases its provision for bad debts by £600. What will be the effect of this

adjustment on the year-end final accounts? Net Profit Net Debtors A Decrease by £600 Decrease by £600 B Decrease by £600 Increase by £600 C Increase by £600 Decrease by £600 D Increase by £600 Increase by £600

(c) During the year a business sells a fixed asset. The following information is known.

£ Original cost 500 Accumulated depreciation at date of sale 240 Profit on sale 70 What were the proceeds from the sale of the fixed asset?

E. £ 170 F. £ 190 G. £ 310 H. £ 330

(d) Stock should be valued at the lower of cost and net realisable value. The table shows data about four products.

Product A B C D Cost £ 18 £ 19 £ 17 £23 Realisable value

15 28 17 26

Selling expenses

3 2 3


I- £72 J- £77 K- £78 L- £86

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(e). How can a business increase its current ratio? E. increase creditors F. increase debtors G. increase bank overdraft H. reduce stock

(f) The effect of the accruals concept is that…

I- revenue and profit should not be anticipated J- similar items should be accounted for in a similar way from one accounting period to

the next. K- net profit is the difference between revenue and expenses. L- none of the above.

(g) The purpose of a firm preparing a trial balance is to establish whether … M- the total of the debit balances brought down in its nominal (general) ledger equals that of the

credit balances brought down. N- the double-entry record it has made for all transactions is correct. O- its bank balance is correct. P- it has earned a profit or incurred a loss.

(h) The following information relates to a sole trader.

Total of all assets at 1June £2,300 Net profit earned in June £1,000 Total of all liabilities at 1 June £2,500 Drawings during June £700 Capital introduced during June £5,000

The sole trader’s capital at 30 June was

A £ 5,100 B £ 5,300 C £ 5,500 D £ 5,600

(i) A company has the following capital structure:

Authorised Issued


£2 Ordinary Shares £500,000 £200,000

If the company declares a dividend of 10p per ordinary share, the total dividend payable by the company will be

A- £14,000

B- £26,000

C- £54,000

D- £66,000

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(j) The acid-test ratio is calculated as: I- Current assets : Current liabilities J- Debtors : Creditors K- Current assets less debtors : Current liabilities L- Current assets less stock : Current liabilities

(Total 20 Marks)

SECTION B – Compulsory Question 2. The trial balance of Badger Limited at 30 June 2007 is as follows:

You are also given the following information. VI. The following items have been included in administrative expenses:

(d) Rates £24,000/- for the 12 months to 31 March 2008 (e) Insurance £18,000/- for the 12 months to 31 December 2007

VII. Investment income received totalling £13,000/- has been credited against administrative

expenses. VIII. A dividend of 40p per share was paid on 28th June 2007 and the bank balance has not

reflected this entry. IX. The allowances for receivables is to be adjusted to 5% of trade receivables, after writing off a

bad debt of £40,000/-. X. After the examination of the accounts, the auditors advise the directors that after checking the

sales figure for July 2007 they consider that the net realisable value of the stock at the year end was 10% below cost.

DR CR£000 £000

Sales 6,440Cost of Sales 3,860Closing Inventory at cost 820Administrative expenses 690Selling expenses 840Discounts 20Freehold Property, at cost 1,200Plant and machinery, at cost 80010% debentures 600Share premium 250Trade receivables and trade payables 920 1,090Quoted investments at cost 220Share capital (50p shares each) 700Debenture interest paid 30General reserve 150Profit and loss account at 1 July 2006 330Allowances for trade receivables 30Bank 790Provision for depreciation:Freehold Property 330Plant and machinery 270

10,190 10,190

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Required: c) Prepare the Income statement for Badger Limited for the year ended 30 June 2007 b) A statement of changes in equity for the year ended 30 June 2007

(20 marks)

c) The balance sheet as at 30 June 2007. (10 marks)

SECTION C - Answer any two questions 3. Sweet Juice Ltd operates a small private catering and Internet Café business for clubs in Holborn and other social occasions. The company commenced business on 1 March 2005 when it purchased a specially designed food delivery van (VJ666) for £24,000. A depreciation rate of 25% using the reducing balance method is applied. Business was expanding and it was agreed to replace the existing delivery van by an improved model and in addition, another van was to be purchased. On 1 March 2006 a quotation for a nearly new improved model ( VJ777 ) was received. The details were as follows:

Trade-in allowance for ( VJ666 ) £12,400/-. The other small van ( VJ888) was quoted at an "on the road" price of £20,000/-. This figure, apart from the basic cost, only included the road fund licence of £150. Both quotations were accepted and the vehicles concerned were purchased on 1 March 2006. Required: (a) Explain what is meant by the term 'depreciation' and why it is necessary to provide for it.

(4 marks) (b) Calculate the capital cost of the Vehicles VJ777 and VJ888. (3 marks)

£Basic Cost 36,000Number plates 30Comprehensive insurance 40010 gallons of diesel fuel 35Delivery charge 100Road fund licence 250Specially fitted food containers for the van 2,400Service and parts 300Sign writing on van 155

39,670

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(c) Prepare the following ledger accounts for the period 1 March 2005 until 28 February 2007.

I. Vehicles at cost account II. Provision for depreciation on vehicles account III. Disposal of vehicles account (12 marks)

(d) The relevant extracts in the income statement for the year ended 28 February 2007. (3 marks)

(e) The relevant extract in the balance sheet as at 28 February 2007 relating to the vehicles.

(3 marks) 4. Barry White, a trader, has asked White Jones, a recently employed office junior, to provide information from which the accounts receivable ledger control account for the month of March can be prepared. White has presented the following information for the month of March: Balances on Receivable Ledger:

The balances on the receivable ledger control account agreed with the balances in the receivable ledger on 1 March. The credit balance on 31 March of £240/- referred to an overpayment by a credit customer. After Barry White prepared the sales ledger control account for the month of March, the following errors were discovered. 5. An invoice for a credit sale of £260/- to Lee Dang had been lost. 6. The total for the sales day book had been overcast by £720/-. 7. A credit balance of £1040 on Mia's account in the payables ledger had been transferred to Mia's

account in the receivables ledger and the transfer had not been entered in the receivables ledger control account.

8. The receipt of a cheque for £1160 from Rahim Patel had been correctly entered in the cash book but had been credited to D. Patel's account in the receivable ledger as £1700.

Required c) The receivable ledger control account prepared by Barry White based on the original information

given to him by White Jones. (10 marks)

1 March (Debit) 17200 (Credit) 58031 March (Debit) 20000 (Credit) 240Credit sales 23420Cash sales 11380Cash received from debtors 14300Provision for doubtful debts 620Discount allowed 2420Discount received 1460Sales returns 320Bad Debts written off 940

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d) The adjustments required if any in the receivable ledger control account prepared in (a) to correct the errors listed above.

(10 marks) c) What are the benefits of control Accounts? (5 marks) 5 (a) Explain why a business which makes a substantial profit in a financial year

may still be short of cash funds. (10 marks)

(b) Explain the objective of IAS 7 – Cash Flow Statements.

(5 marks)

(c) Explain the benefits of the cash flow statement to users. (10 marks)

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Marking Scheme : A2 Badger LIMITED INCOME STATEMENT

FOR THE YEAR ENDED 30 JUNE 2007 1

Sales 6440 ½ Cost of sales (3860 + 82) -3942 2 GROSS PROFIT 2498 ½ OTHER INCOME Investment income 13 1 2511 LESS: EXPENSES Discount allowed 20 ½ Selling expenses 840 ½ Administrative expenses (W1) 676 1 Debenture interest (W2) 60 1 Allowances for doubtful debts (W3) 14 1 Bad debts 40 1 -1650 ½ Profit for the year 861 ½ 14

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Statement of changes in Equity (reserve movement only) for the year ended 30 June 2007 Accumulated profit £ooo Balance at 1 July 2006 330 1 Profit for the year 861 1 Dividend paid -560 2 631 1 1 6 (20 marks) WORKINGS 1 Admin Expenses £0 £0 As per question 690

Add: Investment income 13Less: Prepayments

Rates - 24000 * 9/12 18 Insurance - 18000 * 6/12 9 -27 676

2 Debenture Interest As per question 30

Add: Accruals 30 60 3 Allowances for trade receivables Receivables as per question 920Less: Bad debts 40

880 Provision at 5% 44 Last allowances given (TB) 30 Increase in allowance 14

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Badger LIMITED BALANCE SHEET AS AT 30 JUNE 2007 ½ COST DEP N.B.V £0 £0 £0 NON-CURRENT ASSETS Freehold property 1200 330 870 ½ Plant & machinary 800 270 530 ½ 2000 600 1400 ½ INVESTMENT @ COST 220 ½ CURRENT ASSETS Inventory (820 - 82) 738 1 Trade Receivables (880 - 44) 836 1 Prepayments 27 ½ Bank (790-560) 230 1 1831 TOTAL ASSETS 3451 EQUITY AND LIABILITIES: EQUITY Ordinary Share Capital (50p shares) 700 ½ Share premium 250 ½ General Reserve 150 ½ Profit and Loss account 631 ½ 1731 NON-CURRENT LIABILITIES: 10% Debentures 600 ½ CURRENT LIABILITIES: Trade Payables 1090 ½ Accruals 30 ½ 1120 ½ TOTAL EQUITY AND LIABILITIES 3451

(10 marks)

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A3 (B) CAPITAL COST OF D-VAN VJ777 £ Basic cost 36,000 Number plates 30 Delivery charge 100 Special equipment 2,400 Sign writing 155 38,685 2 The balance of the items in the quotation are revenue. Cash paid is £38,685 - £12,400 trade in = £26,285 Capital cost of VJ888 less road fund licence £150 = 19,850 1

(3 marks)

(C ) Sweet Juice Ltd LEDGER VEHICLES COST A/C ######## BANK (VJ666) 24,000 01/03/2006 DISPOSAL (VJ666) 24,000######## BANK (VJ777) 26,285 28/02/2000 BALANCE C/F 58,535######## TRADE IN (VJ666) 12,400 ######## BANK (VJ888) 19,850 82,535 82,535 (4 marks) DEPRECIATION ON VEHICLES A/C ######## DISPOSAL 10,500 28/02/2005 P/L ACC 6,000######## BALANCE C/F 14,634 28/02/2006 P/L ACC 4,500 28/02/2007 P/L ACC 14,634 (25%*58535) 24,634 24,634 (4 marks)

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DISPOSAL OF VEHICLES A/C

######## VEHICHLES 24,000 01/03/2006 DEPRECIATION 10,500 01/03/2006 VEHICLES (VJ666) 12,400 28/02/2006 LOSS ON DISPOSAL 1,100 (P&L) 24000 24,000 (4 marks)

A3. (a)

Depreciation is the measure of the wearing out, consumption or other loss of value of

non-current assets whether arising from use, effluxion of time or obsolescence

through technology and market changes.

Reasons for providing depreciation: (I) To spread the cost of the asset acquired over its useful life. (ii) To ensure each accounting period bears an appropriate portion of that cost. (iii) To satisfy both the matching and prudence concepts. (iv) It assists in the distinction between revenue and capital expenditure.

4 marks

(d) Sweet Juice Ltd - Profit and Loss A/c for the year ended 28 February 2007 Expenses: £ Depreciation 14,634

Vehicle Expenses 1,135 (400+35+250+300+150)

Loss on disposal 1,100

3 marks

(e) Sweet Juice Ltd - Balance Sheet as at 28 February 2007 (Extract) Fixed Assets Cost Dep N.B.V M. Vehicle 58,535 14,634 43,901

3 marks

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A3. a) BARRY WHITE

RECEIVABLE LEDGER CONROL ACCOUNT FOR THE MONTH OF MARCH

£ £

1-Mar 01-Mar BALANCE B/D 17,200 BALANCE B/D 580

SALES - CREDIT 23,420 CASH REC'D 14,300

DISCOUNT ALLOWED 2,420

31-Mar SALES RETURNS 320

BALANCES C/D 240 BAD DEBTS 940

31-Mar BALANCES C/D 22,600 40,860 40,860

10 marks

b) ADJUSTMENTS TO RECEIVABLE LEDGER CONTROL DR CR(I) Lost invoice 260 (ii) Sales day book overeast. 720(iii) Set offs between ledgers 1,040 260 1,760 Net credit 1,500 (iv) No adjustments in receivable ledger control A/c RECONCILIATION £

RECEIVABLE LEDGER CONTROL A/C BALANCE 22,300

LESS: ADJUSTMENTS -1,500 20,800 BALANCE IN RECEIVABLE LEDGER 20,000 ADD: OMISSION ERROR CORRECTION (4) (1700 - 1160) 540 20,800

10 marks

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c) Benefits of control Accounts 5 marks

A1 Answer to MCQ

1 D 2 A 3 D 4 A 5 B 6 C 7 A 8 A 9 A

10 D

(20 marks)

A5. a) Possible points include:

Business makes profit by converting cash into assets which generates income to

meet expenses. The resulting figure is that cash is generated.

Cash is 'king' to a business and it wants to get hold of cash in the shortest time

possible but to keep the least possible quantity on hand.

Cash spent on non-current assets are not reflected in the revenue statement, but a

drain on the cash balances in the Balance Sheet

Cash may be tied up in the working capital items such as inventory and receivables.

Matching long-term investments with short-term resources. Declaring and paying high dividends (10 marks)

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(b) Objective of IAS 7- It is to ensure that cash flows are classified into

appropriate headings, highlights the significant components of cash flow and

facilitates comparison of the cash flow performance of different businesses. (4 marks) ( c) Provide information as to how the business generates and utilises cash and equivalents Assess how well is the ability of the business to generate cash Assess how well the business cash flow forecast can be estimated Check past assessments of future cash flows Evaluate and asses the necessary changes in the acquisition of non-current assets and replacement policies Assess the immediate and future capital structure financing. The effects of different accounting policies would not be a factor when analysing accounts of different businesses. (10 marks)

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JUNE 2008

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Internal Assignment Business Accounting June 2008. You work in a small town where there are not many large businesses. Your employer had attended a bookkeeping course to get some basic understanding of accounting. On his return from the course, he had a discussion with you and complained how expensive the course was and in fact he was more confused now than prior to attending the course. He has given you the following queries today and expects you to have the answers for him in a meeting, which is due to take place in two days time. Your report should answer the following questions:-

7. What is double entry bookkeeping in accounting language? (10 marks)

8. How a business does keeps track of all the transactions? (You may wish to use figures or diagrams) (15 marks)

3 Why is it necessary for a business to have a sub-division of ledgers in its books of

account? (10 marks) 4. Explain what the sales ledger, purchase ledger and the general ledger consists of? (10 marks) 5. Explain the difference between cashbooks and petty cash books and indicate any

similarity in their functions. (10 marks) 6. Describe and explain a way in which the arithmetical accuracy of the system would be

verified. (10 marks)

7. Finally, explain how you would consolidate the points of discussion from 1 to 6 above, into a formal reporting system. You are required to include in your explanations, the distinction between capital and revenue expenditure. (25 marks)

Report style and Presentation (10 marks)

Total (100 marks)

Notes to Candidates

5. Maximum word length 1500 words. 6. This is an individual assignment and using other people’s work and submitting it as

though it were one’s own work is unfair practice and is treated as plagiarism. The student’s work must be his/her original work and must be clearly referenced where appropriate.

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MARKING SCHEME IBD Business Accounting Jun-08 Report for meeting should include the following:

1 Double entry bookkeeping is a system of recording business transactions where

each transaction is entered twice in the books of account called the ledger.

The page in the accounting book is divided into two halves, the left hand side

is called the debit side and the right hand side is called the credit side. The amount is

exactly the same. This conforms to the duality concept in accounting. Student showing with their examples etc

The system will record all income, expenses, assets and liabilities

(3-4 marks for each point explained well, maximum 10 marks)

2 All business transactions will have some form of documentation eg Sales - sales invoices Purchases - purchase invoices Expenses - expense invoices These invoices are initially recorded in the books of original entry (also known as books of prime entry)

The books of original entry are the sales day book(SDB), purchases day book(PDB)

cash and petty cash book and the general journal.

All credit transaction invoices would be recorded in the SDB and PDB, whilst cash

transactions recorded in the cash books. The data in the day books would then be transferred to the respective ledgers The ledgers are thick books of account with their prescribed columns. (3-4 marks for each point , max 15 marks)

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3 Sub-division of ledgers are necessary for a good system of control for the various cycles of the business. The quantity of accounts involved , say for

example in the sales cycle could be potentially enormous. Therefore,

to maintain a good integral system, the traditional system has divided the ledgers into sales ledger, purchases ledger and general or nominal ledger. The computerized system will have similar ledgers and operates in a much faster medium. Etc (3-4 marks for each point, max 10 marks)

4 Sales ledger consists of the personal accounts of all debtors or trade receivable

accounts i.e the sales made on credit to customers. It will be in a " T " account

format in the ledger.

The purchase ledger consists of the personal accounts of all creditors or trade

payable accounts i.e purchases on credit from suppliers. The format will be similar

as in the sales ledger.

The nominal ledger contains all the other accounts not found in the above two

ledgers. Examples include sales, purchases, non-current assets and revenue expenses accounts. Etc (3-4 marks for each ledger, max 10 marks)

5 The cash book and petty cash book acts as books of prime entry and also part

of the double entry system of bookkeeping. The cash book will consist of a column

for cash account and a column for bank account. The petty cash book would be a

separate book where petty items such as cleaning, flowers and sundry expenses are

recorded. The system usually adopted for petty cash is the imprest system

The cash account will record the cash receipts and payments and the bank account

will record receipts and payments by cheques. The person who is in charge of these

books is called the cashier. Cash books are set out in many forms such as a two

column or three column cash books but it depends on the specific needs of the

business. Etc. (3-4 marks for each point, max 10 marks)

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6 All the ledger accounts would be balanced off at regular intervals by the firms.

The balances brought down from these ledger accounts will be listed either in the

debit side or credit side. The aggregate total on both side must eventually tally.

This list of balances is known as the Trial Balance (TB). It checks the arithmetical

accuracy of all the ledger accounts and confirms the same numerical figure inserted.

One must note that the TB is not part of the double entry system and forms the basis

of the preparation of the final accounts. This does not necessarily mean that the TB

is factually correct as the principles of double entry may be violated. Etc (3-4 marks for each point, max 10 marks)

7 Distinction between capital and revenue expenditure with examples

(5 marks max for each category, max 10 marks)

Explaining the presence of year end adjustments such as accruals, prepayments

and provision for depreciation and irrecoverable debts. ( 5 marks max)

Describing the income statement (Profit and loss account) and what it shows?

(5 marks max ) Finally, describing the Balance sheet and its significance. (5 marks max)

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Coursework Assignment: April 2008

Subject: BUSINESS COMMUNICATIONS

Lecturer: Dennis Lloyd

Instructions to candidates: 1. The assignment is worth 30% marks of the course. 2. All written materials must be word-processed, and all questions must be answered. 3. The deadline of the written part of the assignment is. 4. Written assignments will not be accepted after the deadline. 5. You will be given a date and time to give your presentation, which is your answer to question 3. (A) Please answer all the questions. (B) Questions may be answered in any order, but please number your answers clearly. At Xexelbank, a worrying situation has developed in the new business department, and it is time the

situation was addressed.

There are two main people in the department: Lesley Butt – the department

manager, and Ronald Armstrong - the team leader. Lesley has the overall responsibility for the work

of the department, which is increasing rapidly. She has recently promoted Ronald to be the team

leader. Lesley thought that Ronald would be able to motivate the staff to keep the output high.

Ronald had been an obvious choice to be the team leader as he was a well-liked member of staff,

and had a good sense of humour. He might have been thrown in the deep end, but everyone was so

busy, he would just have to get on with his job.

There has been no time for an interview or any training. Now the department seems to be struggling

to keep up to date processing the new business, and unfortunately, Ronald Armstrong’s team

appears to be in a constant state of conflict. Two members of staff have already asked for transfers;

timekeeping is appalling, and absenteeism is increasing. Those who do appear are overworked, and

beginning to complain about the unpaid overtime they are expected to do to manage the number of

complaints.

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Ronald Armstrong realises that he is failing in his new role but is working really hard to try and make

improvements for the team. He would prefer to return to his old job when he was still a part of the

team, instead of having to lead it. Two of the best team members have left already and the others are

in his opinion, taking advantage of his lack of experience. He thought that as they were previously all

friends, they would have treated him better than this. No one seems to talk to him any more.

Lesley Butt has suggested that Ronald should be disciplining some of the team, and “letting them

know who is the boss around here!” He does not know what to do for the best but has decided that

he must take some action. He writes a memo to the team, adopting a friendly approach, and invites

them to a meeting on Friday. By mistake, he presses the “send” button before having time to review

the content. Within minutes, there is uproar in the section.

Memo: To: All team members From: Ronald Armstrong Date: 6 March, 2002

Hello there, my old mates! How are you all doing? In my new role as your illustrious team leader, I have decided it is time for a bit of action around here. How do you fancy a bit of a get-together to discuss the progress –or lack of it –we are making with processing the new business? Meet me in my palatial new office on Friday lunchtime. Bring your lunch… drinks are on me! Come on chaps you can do better than this!!!

Agenda to follow – bye for now!

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Questions:

Why might the tone and content of the memo annoy the team members?

Re-write the memo using more appropriate language to create a better impression. (Restrict your memo to no more than 600 words)

Candidates will gain marks in their answers for considering the following points:

• Comments on the incorrect tone written in the memo • The correct template for a new memo • Content and style of the new memo

(25 marks)

Lesley Butt is concerned about the number of complaints that the department is now receiving. She

decides to gather together the members of the department and talk to them about ‘The

Importance of Good Communication in Customer Service’.

Prepare and deliver a presentation and a set of handouts for the team members on ‘The

Importance of Good Communication in Customer Service’

Your set of hand outs should be no more than 700 words.

(The presentation should last 15 minutes. You will be given a date and time later)

Candidates will gain marks in their presentations for considering the following points:

• Effective PowerPoint graphics.

• Research on ‘Communication Skills in Customer Service.

• Delivery of the presentation, including, volume, speed, intonation, eye contact. • A 600 word research document on ‘Communication Skills in Customer Service.

(You will be given a date later to give your presentation.)

(40 marks)

Prepare an Agenda to be circulated before the meeting on Friday. Also write a set of notes which

will help Ronald run the meeting effectively.


• The correct format of an agenda.

• The notes will compressively compliment the agenda.

(15 marks)

Ronald has problems communicating with his team, and feels that they are resentful of his promotion.

He contacts his brother who is a management consultant and asks him for advice.

In the role of the management consultant, advise Ronald by outlining the barriers which can exist between managers and their team, and suggest ways in which he can improve the situation.

(Restrict your notes to no more than 800 words)

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• Briefing notes should be in the form of a memo. • Your understanding of communication barriers and solutions in an organization. • An understanding of meetings and interviews. • All aspects of oral communication.

(20 marks)

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Marking Scheme

Memo: To: All team members From: Ronald Armstrong Date: 6 March, 2002

Hello there, my old mates! How are you all doing? In my new role as your illustrious team leader, I have decided it is time for a bit of action around here. How do you fancy a bit of a get-together to discuss the progress –or lack of it –we are making with processing the new business? Meet me in my palatial new office on Friday lunchtime. Bring your lunch… drinks are on me! Come on chaps you can do better than this!!!

Agenda to follow – bye for now!

Question 1

Why might the tone and content of the memo annoy the team members?

Re-write the memo using more appropriate language to create a better impression. (20 marks)

4 marks are available for comments on the incorrect tone of the memo:

• too familiar • sarcastic • informal • candidate’s own ideas

Memorandum/Memo (may be centered or right aligned; a logo may be indicated). To: All staff From: (name and designation) Date: (today’s date) Subject: Departmental meeting (should indicate that the purpose of the memo is to call a meeting of staff). 4 marks are available for correct format. Elements may be positioned differently (centered or aligned to the right), as long as they are all present and clear. 12 marks are available for content and style: information should be presented in short simple sentences and paragraphs if necessary, to include the following:

• why there is a need to have a meeting • the date and time of the meeting • a formal tone to the message • an invitation to staff to put items on the agenda

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Question 2

Lesley Butt is concerned about the number of complaints that the department is now receiving. She

decides to gather together the members of the department and talk to them about ‘The Importance of

Good Communication in Customer Service’.

Prepare and deliver a presentation, and a set of handouts for the team members on ‘The Importance

of Good Communication in Customer Service’

(The presentation should last 15 minutes).

(40 marks)

Notes The marking scheme for the presentation is on page 9, 10, 11. Study notes that the candidate would be expected to cover in the presentation and in the hand-out are on pages 12 to 20.

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Business communication marking scheme (oral presentation: November 2005)

Presentation Assessment Sheet

TITLE: ”The Importance of Good Communication in Customer Service at Xexelbank”

IBAM STUDENT PRESENTERS: ASSESSOR: Dennis Lloyd TIME ALLOWED: 15 minutes

AREA ASSESSED

MARKS

COMMENTS

Delivery: volume, speed, intonation, eye contact, familiarity with material Skill: Communication

4 8 12 16 20

Visual Aids: handling, quality, PowerPoint use, variety of visual aids Skill: Applying Design/Technology

4 8 12 16 20

Content: clarity, criticism, narrative, structure, relevance, use of humour, response to questions Skill: Managing and Developing Self

4 8 12 16 20

Research: evidence of scope, primary/secondary sources, familiarity with well known sources to do with communication, examples of relevant communication points for Xexelbank, evidence of understanding the main issues. Skill: Handouts

8 16 24 32 40

General comments: ................................................................................................................................................................................................................................................................................................................................................................................................................ Overall grade:……… % weighting (25)

‘The Importance of Good Communication in Customer Service at Xexelbank’

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Presentation - Self evaluation (IBAM)

Aspect of presentation

Rating (1-low, 5-high)

How I will improve

Did I introduce it well?

1 2 3 4 5

Did the main points come

through?

1 2 3 4 5

Did I conclude well?

1 2 3 4 5

How good were my visual

aids?

1 2 3 4 5

What was my delivery style

like?

1 2 3 4 5

Did I make eye contact with

everyone?

1 2 3 4 5

How well did I handle the

questions?

1 2 3 4 5

Did the group perform well?

1 2 3 4 5

Did I keep to time?

1 2 3 4 5

Use this space for any additional notes you wish to make to improve your next presentation. Remember to hand in a floppy disc or a CD with your notes. ………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………


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Presentation - Audience Evaluation (IBAM)

Make a note of particular features of this presentation that you found good, or that would encourage

you to do something different for your next presentation.

Element of presentation

Good points I would use

What I would change

Introduction

Main part of presentation

Delivery Style

Visual Aids used

Team work

Other comments: ……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

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Communication process model: ENCODING DECODING MESSAGE MESSAGE FEEDBACK TO SENDER IF POSSIBLE OR APPROPRIATE

Communication starts when information exchange is needed or wanted. One person's (sender’s)

thoughts are encoded into a message and transmitted via the chosen channel to the audience.

Audience then decodes (understands) that message. After that follows feedback to sender.

Notes: ---------------------------------------------------------------------------------------------------------------------------------------

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SENDER CHANNEL

AUDIENC

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EFFECTIVE COMMUNICATION – A KEY TO SUCCESS

Presentation

1. Business Communication

Communication is an information exchange process. It happens everywhere in schools, in shops, in

big and small organisations, at home. In business, communication is very important. Poor information

exchange may cause mistakes, poor industrial relations and reduce levels of staff performance.

So how to achieve effective communication?

Effective communication has to be at least a two-way process and it needs to be planned. Sender

and audience must know why, how, with whom and what they want to communicate.

.

There is a communication process model: ENCODING DECODING MESSAGE MESSAGE FEEDBACK TO SENDER IF POSSIBLE OR APPROPRIATE

Sender: Party, transmitting the message.

Message: Information transmitted.

Channel: The way by which message is transmitted.

Audience: The party, receiving the message.

Feedback: Audiences, response to the message.

SENDER CHANNEL

AUDIENC

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2. Barriers to Effective Communication

• Technical noise: When information can’t get through because of technical failure (e.g. broken

telephone).

• Physical noise: When surrounding is too noisy or there are too many people.

• Lack of interest or hostile attitude: When an audience is not interested in the information that is

being delivered (e.g. thinks it is not relevant to them).

• Poor listening skills: When an audience is not focused on the information.

• Information overload: Lots of information in a short period.

• Lack of understanding: Speech is too complicated, a lot of difficult technical words.

• Perceptual bias: When a person is hearing only the information that he/she wants to hear, and

dismisses everything else.

• Poor timing: Example would be a presentation on Friday at 5pm.

3. Ineffective Communication

Ineffective Communication occurs because of the barriers. It stops information from getting through to

the audience. That way, part or sometimes all information is lost.

Ineffective communication can do a lot of harm to the business.

4. Customer Care

Customer Care is an ability to satisfy customer demands and needs. Also providing information in

professional style. Dealing with complaints efficiently, politely and quickly.

It is vital to a firm’s relationship with customers.

Helps:

• Keep loyal customers.

• Provide excellent service.

• Reduce number of complaints.

• Attract new customers.

5. Developing Customer Relations

Here are 10 steps how to form long-lasting Customer Relations.

I. Give your customers something they can't get elsewhere. Something that they can’t get

from your competitors.

II. Don't waste time on activities that can be automated.

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III. Reduce the time you spend on non-productive tasks. Handle paperwork once and then file it

instead of stacking it in a pile. All these little things add up to lots of wasted time that could be

spent on your customer.

IV. Concentrate on marketing to the people that need your service. Start by auditing your marketing and sales data to find out how and why a sale is made.

V. Respond to emails/letters quickly. Response time should be under 24 hours.

VI. Follow up on sales orders. Make sure your customer is thoroughly satisfied with their purchase

and offer additional services related to their purchase.

VII. Give refunds promptly. VIII. Ask your customers to fill out a survey so you can better understand their needs. This

strategy establishes a dialogue between you and the customer and helps determine the direction

of your business.

IX. Publish a newsletter. Give your subscribers valuable tips and information they can't get

anywhere else.

X. Make your business easy to reach. Customers appreciate finding what they want quickly and

easily. Launch your business website, answer phone calls promptly.

6. Relationship Marketing

Relationship marketing is customising marketing programes for each customer group individually.

Here is a simple model of Relationship Marketing.

CONTACT Reply? Yes No

CONTACT AGAIN

MAKE AN OFFER Purchase?

Yes No

CONTACT AGAIN

THANK YOUR

CUSTOMER

MAKE ANOTHER

OFFER Purchase? Yes No

CONTACT AGAIN

RELATION IS FORMED

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7. Telephone

The telephone plays a major part in every business. It can be a very effective way of communicating

with customers. But in order to be so, staff need to have excellent telephone skills.

Phone call making:

• Introduce yourself and/or organisation.

• Be sure of the purpose of a call.

• Have questions ready.

• Speak clearly.

• Listen to response.

• Agree on the action to be taken.

• Thank other person for the time.

• Be polite! Remember you represent your organisation.

Answering the phone:

• Smile before picking up the phone.

• Introduce yourself and /or your organisation.

• Ask how you can help.

• Listen to the caller carefully.

• Respond to any received information.

• Double check if you understood caller’s requirements.

• Thank him/her for calling.

• Follow through caller’s requirements.

Taking messages:

5 important points on how to take messages correctly:

• Take person’s name and write it down correctly.

• Take telephone number and organisation’s name.

• Write down the date and time of the call.

• Your name.

• If any action is needed.

8. Listening

Effective listening leads to better understanding of customer needs and therefore to a better

relationship with people.

Effective listening:

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• Listen for facts.

• Listen for feelings (speaker’s emotions, body language).

• Pay attention even to things that you don’t want to hear.

• Clarify what is being said.

• Ask questions.

• Give summary of what has been said.

9. Writing

Written word is used mainly when a record and backup is needed.

Advantages:

• A permanent record is created.

• Complex information can be presented.

• The message can be planned and controlled.

KISS - Keep it simple and straightforward.

K= keep.

I= it (the letter).

S= simple.

S= straightforward.

IMPRESS Idea purpose.

Method plan and structure.

Paragraphs clear opening and closing.

Recipient to whom is it meant to be?

Emphasis appropriate language.

Style Kiss.

Safety Spell check.

10. Electronic Office The electronic office is an office where most of everyday operations are done on the computer.

Advantages:

• Improved accuracy.

• Amount of paper used is reduced.

• Speed of operations.

• Space saving.

• Economy and efficiency.

Database:

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Helps to keep records about customers.

Access is quick and effective.

Same rules as for other means of communication.

11. Induction Training Induction Training is training given to new employees. It helps new staff to settle down into a new

environment, meet colleagues, and become familiar with a new job.

Requirements:

• It has to be extended over 3 to 4 days.

• Sufficient information provided.

• Safety training should be recorded.

Involves:

• Intro of business.

• Layout of premises.

• Terms and Conditions of Employment.

• Personnel policies.

• Rules and procedures.

12. Conclusion

This presentation was about importance of effective communication in the business.

Now you can see that it is vital to our company’s success. If everyone here will take all the

information delivered today and follow the rules then our business will thrive.

…………………………………………………………………………………


Customer Service Essentials

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Developing Customer Relations

• Give your customers something they cannot get elsewhere.

• Do not waste time on activities that can be automated.

• Reduce the time you spend on non-productive tasks.

• Concentrate on marketing to the people that need your service.

• Respond to emails/letters quickly.

• Follow up on sales orders.

• Give refunds promptly.

• Ask your customers to fill out a survey so you can better understand their needs.

• Publish a newsletter.

• Make your business easy to reach.

Question 4

Ronald has problems communicating with his team, and feels that they are resentful of this

promotion. He contacts his brother who is a management consultant and asks him for advice.

As the management consultant, advise Ronald by outlining the barriers

which can exist between managers and their team, and suggest ways in

which he can improve the situation.

(25 marks)

• Candidates should show an understanding of term ‘barriers’. Specific barriers should be discussed in turn. For each, the barrier should be clearly identified and explained, a solution described, and an example used for illustration (4 marks each).

• An alternative structure to the answer could be to describe each barrier in turn, using examples to

illustrate, followed by suggestions for avoiding all these barriers with Lesley and the workers. Candidates could choose from the following potential barriers: • Inadequate notice / agenda that was sent

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• Lesley is unskilled in management • Unprepared / unwilling participants • Unskilled listeners • Unclear purpose / instructions • Personality clashes • Personal problems with vertical upward and downward communication.

Credit will be given for discussion of other barriers that are relevant to Xexelbank It would be more sensible for a candidate to look at 2 or 3 of these areas in detail, than to simply list a greater number of points. Up to 8 marks are available for describing the main barriers, and up to 8 marks for explaining ways of overcoming these barriers.

‘The Importance of Good Communication in Customer Service at Xexelbank’ Candidates should mention some of the following to overcome barriers:

• Team meetings • Suggestion box • Staff notice • In-service training • Appraisal instructions • Listening skills

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Examination Subject: Business Accounts Section A – Multiple choice questions (2 marks per question) Q1

(a) Which of the following is a liability of a firm?

e. A vehicle owned by the firm f. Cash at bank g. Money owed to the firm by its accounts receivables h. Bank Loan not yet repaid

(b) When a firm deposit money which it received from one of its trade receivables, the effect on its

assets and / or liabilities is: Effect upon Assets Effect upon Liabilities A Decrease bank Decrease trade payables B Increase bank Decrease trade receivables C Increase cash Decrease Loan D Increase stock Decrease capital

( c) If the total of sales, including VAT at the rate of 17.5%, amounts to £1,880, the total of sales excluding VAT amounts to:

E. £1,560 F. £1,600 G. £2,209 H. None of the above.

(d) The following information relates to a sole trader for May 2008. Credit Sales £8,405 Sales returns £575 Discount allowed £138 Irrecoverable debts written off £50 Opening balances for receivables £2,703

How much was received from trade receivables during May 2008?

I. £4,639 J. £ 10,345 K. £ 5,077 L. £ 4,939

(e) Stock should be valued at the lower of cost and net realisable value. The table shows data about four products.

Product A B C D Cost £ 24 £ 25 £ 23 £ 31 Net Realisable value

£ 20 £ 37 £ 23 £ 35


0 3 2 3

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M- £ 99 N- £105 O- £103 P- £97

(f) Which of the following is not normally found in the equity and liabilities section of a

company’s balance sheet?

Q- Share premium account. R- Prepayments. S- Profit and loss account balance T- Ordinary share capital.

(g) In the balance sheet of a limited company, the profit and loss account balance is shown under the heading…

E. Current liabilities. F. Fixed assets G. Current assets. H. .Equity and liabilities

(h) If the opening inventory (stock) was £12,000, closing inventory £20,000, the mark-up 20% and sales during the period were £240,000, then the rate of inventory turnover was…

A- 12.5 times

B- 10 times

C- 15 times

D- 12 times

(i) The current ratio is primarily an indication of an entity’s …

A - current and future level of profitability

B - current level of efficiency

C - short-term liquidity

D - growth potential

(j) ‘Prime cost’ does not include…

A. Direct labour costs

B. Factory overhead expenses

C. The cost of raw materials consumed D. Direct expenses (Total 20 marks)

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Section B – Compulsory Question Q2

The bookkeeper for Uggla Limited has prepared the following trial balance as at 31 December 20X7: Dr Cr £ £ Sales revenue 107,500 Purchases 57,200 Inventory at 1 January 20X7 2,500 Sales returns 500 Purchases returns 400 Carriage inwards 200 Carriage outwards 100 Discounts allowed 1,520 Discounts received 2,150 Travelling costs 2,330 Heating and lighting 2,750 Rent payable 8,800 Motor expenses 1,860 Wages and salaries 9,300 Plant & Machinery 12,000 Motor Vehicles 22,000 Retained profits 1 Jan 2007 8,960 Trade receivables 28,000 Trade payables 19,500 Cash at bank 4,200 Interest paid 250 Ordinary Share capital (£1 shares) 20,000 Directors remuneration 10,000 10 % Debentures 5,000 163,510 163,510

The following additional information is to be incorporated into the final accounts: (1) An inventory valuation at the end of the year showed an amount of £6,000. Included in this amount is a group of items valued at £200 above cost (2) The debentures were issued on 1 January 2007 and a full year’s interest to be charged in the accounts. (3) The corporation tax liability for the year to 31 December 2008 is estimated at £1,500. (4) A final dividend is paid of 5% on the existing shares. (5) Depreciation on non-current assets is as follows:- Motor vehicles: 25% reducing balance method Plant & machinery 20% on cost straight line method

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(6) A trade receivable account of £2,000 has gone bankrupt. An allowance for irrecoverable debts of 2.5% is to be provided for, in the accounts. Required: Prepare an income statement for the year ended 31 December 2007 and a balance sheet as at that date. (30 marks) SECTION C – Answer any two questions Q3 The financial accountant of Busbey Finance has produced the following financial information about two companies, Tavez Ltd and Nanee Ltd, operating in the same line of business activity :- Balance sheets at 31 July 2007

Tavez Ltd Nanee Ltd

Non-current assets £ooo £ooo £ooo £ooo N.B.V N.B.V/Val Land 120 390Buildings 120 300Plant & Machinery 30 165 270 855 Current assets Inventory 120 150 Trade receivables 150 135 Bank 0 15 270 300 Total Assets 540 1155 Equity and liabilities Equity Ordinary share capital 105 390Profit for the year 45 150Revaluation reserves 0 240 150 780 Non-current liabilities 10% Debentures 150 195 Current liabilities Trade payables 165 180 Bank overdraft 75 0 240 180 Total Equity and liabilities 540 1155

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Income statement Extract: Sales 1500 4500Cost of sales 600 3000

Required: 1. Prepare the following ratios for both businesses: Gross profit margin Net profit margin Return on capital employed (ROCE) Current ratio Acid test ratio Inventory days Trade receivable days Gearing percentage (16 marks) (b) Briefly comment on the strengths and weaknesses of Tavez Ltd and Nanee Ltd as revealed by the calculations produced in (a) above. (9 marks) Q4 Briefly explain the following accounting terms and concepts:

(i) Accruals concept (ii) Going Concern basis (iii) Non-current assets (iv) Trade accounts receivables (v) Consistency concept (vi) Current assets (vii) First in first out (FIFO) basis (viii) Last in first out (LIFO) basis (ix) Reserves (x) Current liabilities (25 marks)

Q5

(a) Define and distinguish with examples fixed costs and variable costs. (6 marks) (b) Explain the meaning of contribution in costing language. (4 marks) (c) Costing Limited manufactures bicycles; Ken Boris, the head of the London Assembly,

has approached the company with a view of purchasing a batch of them. The planned sales of the product are 8000 bicycles at £50 each. The variable cost is made up as follows:-

£ Direct materials 4.00 Direct labour 9.00 Direct expense 3.00

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Total fixed costs are estimated to be £170,000. All bicycles produced are sold.

i. Calculate the contribution per bicycle. (2 marks)

ii. Calculate the number of bicycles Costing Ltd needs to sell in order to break even.

(6 marks) iii. Calculate the margin of safety in the number of bicycles produced.

(2 marks) iv. Prepare a profit statement based on the above information.

(5 marks)

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Marking Scheme: Section A

1 D 2 B 3 B 4 B 5 B 6 B 7 D 8 A 9 C

10 B (20 marks)

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Section B A2 Uggla Limited Income Statement for the year ended 31 December 20X7 1 £ £ £ Sales Revenue 107500 Less: Returns inwards -500 1/2Net Sales Revenue 107000 1Less: Cost of Sales:

Opening Inventory 2500

Purchases 57200 Carriage costs 200

Returns outwards -400

59500 Less: Closing Inventory -5800 53700 3Gross Profit 53300 Other Income Discount received 2150 1/2 55450 Expenses:

Irrecoverable debt 2000 1

Allowance for irrecoverable debt 1300 1

Carriage outwards 100 1/2

Discounts allowed 1520 1/2

Travelling costs 2330 1/2

Heating & Lighting 2750 1/2

Rent payable 8800 1/2 Directors remuneration 10000 1/2 Motor expenses 1860 1/2 Depreciation: Motor vehicles 5500 1 Plant & machinery 2400 1 Wages and salaries 9300 1/2 47860 Operating profit before interest 7590 1/2Interest charges -500 1/2Profit before tax 7090 1/2Taxation -1500 1/2Profit after tax 5,590 1/2

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Dividends -1,000 1 Profit for the year 4,590 1/2Retained profits brought forward 8,960 1/2Retained profits carried forward 13,550 18.5

Uggla Limited Balance Sheet as at 31 December 20X7 1/2 Assets Cost Depn NBV Non-current assets £ £ £ Plant & Machinery 12000 2400 9600 1 Motor Vehicles 22000 5500 16500 1 34000 7900 26100 1 Current Assets Inventory 5800 1/2Trade accounts receivable 26000 1 Less Allowances -1300 24700 1 Cash at Bank 4200 1/2 34700 1/2Total Assets 60800 1/2 Equity and Liabilities Equity Ordinary share capital 20000 1/2Retained profits 13,550 1/2Total Equity 33550 Non-current liabilities 10% Debentures 5000 1/2 Current Liabilities Trade accounts payables 19500 1/2Corporation tax 1500 1/2Dividends 1000 1/2Accrued expenses 250 1/2 22250 Total equity and liabilities 60800 1/2 11 1/2 30

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Section C A3 (a) Ratios Tavez Nanee Gross profit margin G/P/Sales 2 60% 33% Net profit margin N/P/Sales 2 3% 3%

ROCE Profit before interest 2 20% 17%

Capital employed

eg Tavez 45 + 15

150 + 150 Current ratio CA / CL 2 1.1 1.7 Acid -Test ratio CA-inventory / CL 2 0.6 0.8 Inventory days Inventory * 365 2 73 days 18 days COS

Tr. Receivable days Tr. Receivable * 365 2 37 days 11 days

Sales

Gearing ratio L/T Loans 2 50% 20%

Capital employed 16 (b) Commentary on strengths and weaknesses of both companies:- Tavez Ltd has a high gross profit margin (60%) and slightly higher ROCE of 20% compared with Nanee Ltd. However, both the companies have similar net profit margin of 3%. When comparing the expenses including interest charges, Nanee Ltd incurred about 30% of the proportion to sales whilst Tavez Ltd has 56% of the proportion. The liquidity ratios of Nanee Ltd are more stable than Tavez, revealing the

fact that Tevez Ltd is running a bank overdraft and Nanee having cah at bank.

However, the Acid-test ratio which indicates the immediate liquidity aspect, shows both companies appear to be experiencing cash flow problem with

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their ratios being less than 1. Nanee Ltd has better efficiency ratios indicating the assets are utilised efficiently. The inventory turnover period is quick compared with Tavez Ltd. It has better management of its trade accounts receivables with 11 days compared with 37 days for Tavez. In terms of the gearing ratio, Tavez Ltd is 50% compared with only 30% for Nanee Ltd. There is a potential for problems in the future if the company intents to use debt financing as a way of raising finance. As an overall comparison between the two companies, the analysis may be misleading because the non-current assets of Nanee Ltd shows a

revaluation has taken place (£240,000). Tavez figures are shown at historical

cost basis. The probable effect of this would result in the reduction of the gearing ratio. (2 marks each for relevant comment, max 9 marks)

A4 i) Accruals concept A concept used in accounting to comply that proper rules and practices

are applied bt businesses in preparing and presenting financial statements.

The accruals concept states that all income should be matched with related

expenditure for an accounting period. The principle is that they are earned

and incurred rathen than when the income is received and payments paid.

Eg. Electric bill still outstanding at the end of the accounting period. 3ii) Going concern concept This concept indicates that a business is able to trade as a going concern for the foreseable future without any doubt in the financial position at the accounting year end.

Eg. Payables analysed between due within one year and more than one year.

3iii) Non-current assets

Assets held and used by a business for a long term purpose, with the view of

generating ecnomic benefit and not with the intention of resale. Over its

useful ecnomic life the asset is expected to lose value through factors such

as wear & tear, passage of time, changes in markets and technolgy etc. Eg. Property,plant and equipment 3iv) Trade accounts receivables They are essentially debtors, customers who owe money to the business at a particular point in time. A trade account receivable is an asset of the business, classified under current assets because the money owed is due

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within one year. 2v) Consistency concept This concept indicates that traetment of items in the financial statements

should be applied the same from one period to the next, which would enable

useful comparison to be made by any interested user. If there is a significant

change in the operating activites, a departure of treatment is allowed so as

to show a fairer presentation of the financial statements. 3vi) Current assets Items owned by the business which are due to be realised or constantly changing usually within one year. The main components of current assets are inventories, receivables and cash. 2vii) FIFO

This is one of the methods of inventory valuation for pricing purposes. There

is a continuous purchase of inventories taking place in a business and an appropriate method of issuing inventores is necessary. FIFO method

assumes that items are used and sold in the order in which they are received

first from suppliers. 2viii) LIFO Under this method of inventory valuation, the assumption is the opposite.

Items used and sold in the order of most recent delivery to the earliest from

the suppliers. 2ix) Reserves

They are amounts consisting mainly of profits generated from the business.

Profits of a business are mainly distributable by way of dividends or for any other purpose which management sees fit such as a specific or genaral purpose. 2x) Current liabilities

They are debts of the business which must be settled or paid within one year,

expected to be settled in the business's normal operating cycle and held primarily for the purpose of being traded. All other liabilities should be classified as non-current liabilities.(IAS 1) 3 25

A5 a) Fixed costs are those costs that do not change with the level of activity or output. Eg, rent payable 3

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Variable costs are those costs that do change with the level of activity or output. Eg, direct materials 3

b) Contribution is the difference between the selling price and the variable cost.

It can be expressed as per unit basis or in total basis. It is basically contributing towards the fixed costs and the profit generated. 4c) i) S.Price 50 V.Cost 4 9 3 -16 Contribution per bicycle 34 2 ii) B.E.P = Total Fixed Costs Contribution per unit 170,000 34

5000 bicycles 6

iii) Margin of safety = Current output - BEP 8000 - 5000 = 3000 bicycles 2 iv) Profit statement £ Sales ( 8000 * £50) 400,000 Variable costs ( 8000 * £16) 128,000 Fixed costs 170,000 298,000 Planned profit 102,000 5 25

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December 2008

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Assignment December 2008 Business Accounts The International Accounting Standards Board (IASB) “Framework for the Preparation and Presentation of Financial Statements” sets out the concepts that underlie the preparation and preparation of financial statements, i.e. the objectives, assumptions, characteristics, definitions, and criteria that govern financial reporting. You are required to deal with two of the above issues for a training programme due to be held soon. Required: Write an essay discussing the two assumptions, the accruals basis and going concern applied in the preparation and presentation of financial statements and the four principal qualitative characteristics of financial statements, which are useful to users. (100 marks) Notes: • The assessment criterion is 30% weighting towards the overall module mark. • The above assignment must be word processed and NOT handwritten. • High marks shall be awarded for research, originality, full discussion and good referencing. • The assignment should be submitted in clear transparent pockets and not in ring binders or other

type of folders. • Your assignment should not exceed 1000 words.

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Marking Scheme : Assumptions:- Marks

Accruals: Income matched against expenses when they are earned

and incurred for the accounting period in question. They would not be recognised on a receipts and paid basis. Assets, liabilities and equity are recognised when they satisfy the definitions and recognition criteria. 15 Going concern: It is assumed that the business has neither the intention

nor the need to curtail the scale of its operations

materially and will continue the business as a going concern in the foreseable future. If this assumption is

in doubt then a diiferent basis need to be applied

in the preparation of the financial statements. 15 Qualitative characteristics: According to the Framework, the four principal qualitative characterictcs are as follows: Relevance: Evaluating past, present or future events, or confirming them; the impact of materiality to the decision making. 15 Reliability: Free from material error and bias; represent faithfully; be neutral; impact of prudence; exercising caution in decision making. 15 Understandability: Readily understandable by users; having reasonable knowledgs; information appraised properly. 15 Comparability: Information being comparable through time and across businesses; similar treatments of transactions;

impact of consistency of presentation.

15 Presentation, referencing and originality 10 Total 100

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EXAMINATION Business Accounts Dec 20O8 Section A – Multiple choice questions (2 marks per question) Question 1 (a) During the year a business sells a non-current asset; the following information is known.

£ Original cost 500 Accumulated depreciation at date of sale 240 Profit on sale 70 What were the proceeds from the sale of the non-current asset?

A- £ 170 B- £ 190 C- £ 310 D- £ 330

(b) Inventory should be valued at the lower of cost and net realisable value. The table shows data about four products. Product A B C D Cost £ 18 £ 19 £ 17 £23 Realisable value

15 28 17 26

Selling expenses

3 2 3

At how much should the total inventory be valued?

A- £72 B- £77 C- £78 D- £86

(c) Given opening receivable accounts £10000, credit sales £50,000, increase in allowances for irrecoverable debts £500, amount received from customers £45000, Discount allowed £350, dishonoured cheque £100, sales returns £400, Closing receivable accounts would be:

A-£14350

B-£14650

C-£14850

D-£15150

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(d) The purpose of a firm preparing a trial balance is to establish whether …

A- the total of the debit balances brought down in its nominal (general) ledger equals that of the credit balances brought down.

B- the double-entry record it has made for all transactions is correct. C- its bank balance is correct. D- it has earned a profit or incurred a loss.

(e) The balance sheet of a firm as at any particular date is intended to show…

A- the nature of the firm’s business at that date. B- the identity of the firm’s owners at that date. C- the financial position of the firm at that date. D- the physical size of the firm at that date.

(f) Which of the following accounting equations is correct?

A- Assets + Capital = Liabilities B- Liabilities – Capital =Assets C- Capital + Liabilities =Assets D- Capital=Assets + Liabilities

(g) A company increases its allowances for irrecoverable debts by £600. What will be the effect of this adjustment on the year-end final accounts?

Net Profit Net Receivables A Decrease by £600 Decrease by £600 B Decrease by £600 Increase by £600 C Increase by £600 Decrease by £600 D Increase by £600 Increase by £600

(h) Why are non-current assets depreciated?

A- to allow for the increase in repairs with use B- to provide cash for replacement C- to show their current value in the balance sheet D- so that the income statement includes a charge in use.

(i) The sales journal is commonly known as…

A. a sales invoice B. the sales daybook C. the sales ledger D. none of the above

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(j) The effect of the accruals concept is that…

M- revenue and profit should not be anticipated N- similar items should be accounted for in a similar way from one accounting period to

the next. O- net profit is the difference between revenue earned and expenses incurred. P- none of the above.

Section B – Compulsory Question

Question 2

The following balances are extracted from the books of Sif Otterson Limited at 31 December 2007.

DR CR £000 £000Sales and Purchases 2334 6502Inventory at 1 January 2007 136Light heat and gas 230Wages and salaries 902Repairs and maintenance 622Carriage outwards 568General expenses 628Debenture interest paid 30Interim ordinary dividend paid 240Ordinary share capital (£1) 2000Share premium account 16008% preference shares 120012% Debentures 2011 5006% Debentures 2015 1200General reserves 240Retained earnings at 1 January 2007 146 Freehold land and buildings at cost 4900Plant + equipment at cost 1240Motor vehicles at cost 1044Provision for depreciation On- plant + equipment 240 -Motor vehicles 444 Cash at bank 1280Trade receivables 256Trade payables 386Interim preference dividend paid 48 14458 14458

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Additional information:

1. The directors had declared that the remainder of the preference dividend be paid on 31 December 2007.

2. A transfer of £ 50,000 is to be made to the general reserve.

3. Provisions are to be made for corporation tax estimated at £90,000 and auditors’

remuneration estimated at £248,000.

4. Closing inventory is valued at £224,000.

5. Depreciation is to be charged on the fixed assets on the following bases and at the following rates:

Plant + equipment- straight line at 20% p.a Motor vehicles - reducing balance at 25% p.a (Depreciate for the year is calculated to the nearest £000)

6. During the year one motor vehicle, which had cost £24,000 and the accumulated depreciation to date of sale was £13,000, was sold for £12,000. These entries have not been entered in the accounting system.

7. Irrecoverable debts of £16000 are to be written off.

8. The 12% debentures were in issue throughout the year. The 6 % debentures were

issued on 1 July 2007. Provide for the balance of the debenture interest.

Required: Using all the above information, you are required to prepare an income statement for the year ended 31 December 2007 together with a balance sheet as at that date. (30 marks)

Section C – Answer any two questions Question 3 The balance sheets of Idan Limited are shown below:

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2006 2007

Cost DEP'N NBV Cost DEP'N NBV

£ £ £ £ £ £

Non – current assets


151,400 18,400 133,000 170,300 26,300 144,000

Current Assets Stock 44,000 61,000 Debtors 28,000 32,000 Bank - 5,000

72,000 98,000

72,000 98,000

Total Assets 205,000 242,000

Equity and Liabilities Equity Share capital 110,000 130,000 Retained profits 11 ,500 13,500 121,500 143,500

Non-current liabilities

Debentures 30,000 40,000

Current Liabilities Creditors 23,000 27,500 Bank overdraft 6,500 – Corporation tax 13,500 16,000 Other payables 10,500 15,000

53,500 58,500 53,500 58,500

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Total Equity and liabilities 205,000 242,000 Additional Notes for 2007:

Operating profit before tax 33,000 Dividends paid 10,500 Corporation tax 16,000 Interest paid 2,850

Required: (a) Prepare the Cash flow statement of Idan Limited for the year ended 31 December 2007. ( 25 marks) Question 4 If the information in the financial statements is to be useful, due regard must be given to the following:

(u) Materiality (5 marks) (v) Comparability (5 marks) (w) Prudence (5 marks)

(d) Objectivity (5 marks) (e) Relevance (5 marks)

Explain the meaning of each of these concepts as they apply to financial accounting giving an example of the application of each of them. (25marks) Question 5


• A balance sheet (4marks) • Gross profit (3marks) • Operating profit (3marks) • Issued Share capital (2marks) • Authorised Share capital (2marks) • Reserves (3marks) • Why does the balance sheet balance? (3marks) • Difference between equity capital and capital employed (5marks)

(25marks)

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Marking Scheme : A2 Income Statement for the year ended 31 December 2007 ½ £000 £000 £000 Sales Revenue 6,502 Less: Cost of Sales: Opening Inventory 136 Purchases 2,334 2,470 Less: Closing Inventory -224 2,246 2 Gross Profit 4,256 ½ Add Other Income:

Profit on disposal of M.V (12-10) 2 2

4,258 Less Expenses: Light, heat and gas 230 Repairs and maintenace 622 Wages and salaries 902 Carriage outwards 568 General Expenses 628 Irrecoverable debts 16 3 Auditors remuneration 248 1 Depreciation: Motor vehicles(0.25*1020-430) 148 1 Equipment (0.20*1240) 248 1 3,610 Operating profit 648 ½ Interest payable(30+30+36) -96 1½ Profit before tax 552 Taxation -90 ½ Net profit for the period 462 ½

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Statement of Changes in Equity for the year ended 31 December 2007 Ord & Pref Share General Retained Total Capital Premium Reserves Earnings £000 £000 £000 £000 £000 Balance at 1 January 2007 1 3,200 1,600 240 146 5,186Net profit for the period ½ 462 462Transfer to reserves ½ 50 -50 0Dividends ½ -336 -336Balance at 31 December 2007 ½ 3,200 1,600 290 222 5,312 18

Sif Otterson Balance Sheet as at 31 December 2007 ½ Assets ACC. Non-current assets Cost Depn NBV Freehold land & Buildings 4900 0 4900 Motor Vehicles 1,020 578 442 Equipment 1,240 488 752 7,160 1,066 6,094 3

Current Assets Inventory 224 Trade accounts receivable (256-16) 240 1 Less: Allowances for I/D 0 Prepayments 0 Bank (1280+12-48) 1,244 2 1,708 Total Assets 7,802

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Equity and Liabilities Equity Ordinary Share capital 2,000 8% Preference Share capital 1,200 Share premium 1,600 General Reserve 290 Retained earnings 222 2½ 5,312 Non-current liabilities 12% Debentures (2011) 500 6% Debentures (2015) 1200 1 1700 Current Liabilities Trade accounts payable 386 Accrued expenses (30+36+248) 314 Taxation 90 1½ 790 Total equity and liabilities 7,802 ½ 12

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Section C A3 Cash Flow Statement of Idan Ltd for the year ended 31 December 2007 1 £ £ Cash flows from operating activities Profit before tax 33,000 Add back: Interest 2850 Depreciation 7900 Operating profit before W/C changes 43,750 Increase in inventories -17000 Increase in trade receivables -4000 Increase in payables 4500 Cash generated from operations 27,250 Interest paid -2850 Tax paid (13.5+16-16) -13500 Dividends paid -10500 11 Net cash from operating activities 400 1 Cash flows from investing activities Purchase of Plant & Equipment (70.3-51.4) 18900 1 Net cash used in investing activities -18900 1 Cash flows from financing activities Proceeds from issue of shares 20000 1 Proceeds from long-term borrowings 10000 1 Net cash from financing activities 30000 1 Net increase in cash and cash equivalents 11,500 1 Cash and cash equivalents at beginning of period (Note) -6500 1 Cash and cash equivalents at end of period(Note) 5000 1 Note: Cash and cash equivalents 2 Cash and cash equivalents consist of cash on hand and balances with bank. Cash and cash equivalents included in the cash flow statement comprise the following balance sheet amounts. 2006 2007 £ £ Cash at bank 5000 1 Bank overdraft 6500 1 6500 5000 25 A4

a) Depends on size of item, judgemental errors, omission or mistatement which

can influence the economic decisions of users of financial statements.

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Eg. amount of trade debt written off as irrecoverable as a note if material. 5b) Able to compare FS over time to identify strengths and weaknesses, of different enterprises, measurement of financial effect of like items on a consistent basis. Eg. If certain tools are treated as NCA one year similar tools purchased in following year be treated as NCA. 5 c) Assets and income are not overstated, liabilities and expenses are not

understated, exercise caution in the preparation of FS.

Eg. Closing inventory stated at the lower of cost and NRV. 5 d) Verifiable, faithful representation and observance of neutrality in FS. FS are not neutral if selection or presentation of information may influence the

making of decisions to achieve a predetermined result.

Eg. Treatment of internally generated goodwill in B/S should not be included.

5e) Information influences economic decisions of users by helping them evaluate or confirm past, present or future events. Eg. Information for shareholders against employees. 5 25

A5 Balance Sheet: A statement of affairs showing the financial position at a particular point in time. Assets equals Equity plus liabilities. 3 Gross profit: The difference between sales and cost of sales. 3 Operating profit: The difference between gross profit and all operating costs excluding interest or finance costs. 3 Issued share capital: The amount of share capital in the form of ordinary shares

which has been issued to the shareholders' of the company. 2

Authorised share capital: The amount of share capital that the company is legally allowed to issue for sale to prospective shareholders . 2 Reserves: It represents the ownership claims on the net assets of the company over and above the share capital. They are either distributable or undistributable by way of dividends 3 Why B/S balances? It is based on double entry principles where there are two entries for every transaction of the same amount listed on the debit and credit sides, which by definition should balance. 4

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Difference: Equity capital is ordinary share capital attributable to holders of ordinary shares whereas capital employed is the total capital of the entity made up of shareholders' funds and long term debt. 5 25

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June 2009

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INTERNATIONAL BUSINESS DIPLOMA Examination Paper

Subject: BUSINESS ACCOUNTS Date: 09 June 2009 (10am – 1pm) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 1. SECTION A – COMPULSORY QUESTION 2. SECTION B – ANSWER ANY TWO QUESTIONS 3. SECTION C – ANSWER ANY ONE QUESTION 4. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each question. (iii) First, attempt the questions that you feel you can obtain the most marks for but if there


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SECTION A – Compulsory Question The trial balance of LCB Limited at 30 June 2007 is as follows:

You are also given the following information. XI. The following items have been included in administrative expenses:

(f) Rates £24,000/- for the 12 months to 31 March 2008 (g) Insurance £18,000/- for the 12 months to 31 December 2007

XII. Investment income received totalling £13,000/- has been credited against administrative

expenses. XIII. A dividend of 40p per share was paid on 28th June 2007 and the bank balance has not

reflected this entry. XIV. The allowances for receivables is to be adjusted to 5% of trade receivables, after writing off a

bad debt of £40,000/-. XV. After the examination of the accounts, the auditors advise the directors that after checking the

sales figure for July 2007 they consider that the net realisable value of the stock at the year end was 10% below cost.

DR CR£000 £000

Sales 6,440Cost of Sales 3,860Closing Inventory at cost 820Administrative expenses 690Selling expenses 840Discounts 20Freehold Property, at cost 1,200Plant and machinery, at cost 80010% debentures 600Share premium 250Trade receivables and trade payables 920 1,090Quoted investments at cost 220Share capital (50p shares each) 700Debenture interest paid 30General reserve 150Profit and loss account at 1 July 2006 330Allowances for trade receivables 30Bank 790Provision for depreciation:Freehold Property 330Plant and machinery 270

10,190 10,190

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Required: d) Prepare the Income statement for LCB Limited for the year ended 30 June 2007. b) A statement of changes in equity for the year ended 30 June 2007.

(20 marks) c) The balance sheet as at 30 June 2007.

(10 marks) SECTION B – ANSWER ANY TWO QUESTIONS ONLY Q2. The directors of Haddock plc are trying to expand the company’s activities and are

examining the affairs of two companies, Cod Limited and Salmon Limited with the intention of acquiring one of them.

The following is a summary of the financial statements of these two companies for the year ended 31 March 2008.

Profit and Loss Accounts Cod Ltd Salmon

Ltd £000 £000 £000 £000 Sales 360 540 Less Cost of Sales Opening Stock 113 92 Purchases 224 432

337 524 Less Closing Stock 67 94 270 430 Gross Profit 90 110

Less Expenses Administration 28 16 Distribution 12 14 Depreciation 5 8 Debenture interest - 2 45 40

Net Profit before Tax 45 70

Less Corporation Tax 12 11 Profits after tax 33 59

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Less Preference share dividends paid 4 - Proposed ordinary share dividends 15 15 19 15

Retained Profits for the year 14 44

Balance Sheets as at 31 March 2008 Cod Ltd Salmon Ltd £000 £000 £000 £000 Fixed Assets 110 140 Less accumulated depreciation (30) (40)

80 100 Current Assets Stocks 67 94 Debtors 136 128 Bank 95 --

298 222 Less Creditors due within One year. Trade Creditors (41) (40) Bank Overdraft ---- (6) Corporation Tax (12) (11) Proposed dividends (15) (15) Net Current Assets 230 150

310 250

Less Creditors due more than One year. 10% Debentures ---- 20 Net Assets 310 230 Financed by: - Ordinary shares of £1 each 200 150 8% Preference shares of £1 each 50 ---- Reserves (including retained earnings) 60 80

310 230

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REQUIRED:

(a) Calculate the following ratios (to two decimal places) for each company, showing clearly the basis of your calculation:

• Gross profit ratio • Net profit ratio • Return on capital employed • Current ratio • Acid test ratio • Stock turnover ratio • Gearing • Debtors Collection period

(16 marks)

(b)

As a financial advisors to Haddock plc write a report to the board of directors commenting upon the results of the ratios calculated in (a) above and stating which company the ratios indicate may be the better one to acquire.

(9 marks)

Q3. The following balances were taken from the books of Keegan United Limited as at 31 January 2008.

Purchase Ledger balances £ 27,910 Sales Ledger balances £ 45,020

Totals for the year ended 31 January 2009 £ Purchases returns day book 3,070 Sales day book 501,510 Sales returns day book 10,440 Purchases day book 300,450 Cash Sales 100,000 Petty cash paid to Suppliers 230 Cheques received from Customers 458,770 Cash purchases 50,000 Cheques paid to Suppliers 281,990 Cash received from Customers 33,330 Bad debts written off 2,090 Discounts Allowed 7,080 Discounts Received 6,540 Customers’ Cheques dishonoured 1,790 Balance on Sales ledger set off against balances on Purchase Ledger ` 2,330

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REQUIRED:

(c) Prepare the Sales and Purchase Ledger Control Accounts for the year ended 31 January 2009, showing clearly the balances on these accounts at 31 January 2009.

(20 marks)

(d) State the benefits of preparing control accounts. (5 marks)

Q4. Angella Limited is a small company established on 1 April 2000. The company records reveal that office equipment was purchased as follows:

£ 1 April 2000 20,000 1 April 2001 15,500 1 July 2002 16,800 Company policy is to provide for depreciation using the straight-line method at

a rate of 20% per annum on cost. A full year’s depreciation is charged in the year of acquisition of an asset but none in the year of disposal.

On 1 July 2003 the company purchased office equipment at a cost of £7,000

and on 1 March 2004 further equipment was acquired for £1,200. Equipment, which had cost £4,000 on 1 April 2000, was sold for £1,000 on 30 September 2003.

REQUIRED:

(a) Write up the following accounts for the year ended 31 March 2004:

(i) Office Equipment Cost account (ii) Provision for depreciation on Office Equipment account (iii) Disposal of Office Equipment account (15marks)

(b) State clearly the main objectives of providing for depreciation of fixed

assets.

(6 marks)

(c) State why it is important to apply the concept of consistency to depreciation methods and rates.

(4 marks)

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SECTION C – ANSWER ANY ONE QUESTION ONLY Q5. (a) Describe the features of

(i) a rights issue of shares

(ii) a bonus issue of shares (10 marks)

(b) Explain the differences between capital and revenue reserves. (5 marks) (c) Explain the difference between nominal and market value of shares. (5 marks)

Q6. (a) List the standard headings of the cash flow statements as per the FRS 1

and give two examples of the items that should come under each heading.

(12 marks)

(b) Explain four uses of the cash flow statement. (8 marks)

END OF EXAMINATION PAPER

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Marking Scheme :

A1 LCB LIMITED INCOME STATEMENT

FOR THE YEAR ENDED 30

JUNE 2007 1 Sales 6440 ½ Cost of sales (3860 + 82) -3942 2 GROSS PROFIT 2498 ½ OTHER INCOME Investment income 13 1 2511 LESS: EXPENSES Discount allowed 20 ½ Selling expenses 840 ½ Administrative expenses (W1) 676 1 Debenture interest (W2) 60 1 Allowances for doubtful debts (W3) 14 1 Bad debts 40 1 -1650 ½ Profit for the year 861 ½ 14 Statement of changes in Equity (reserve movement only) for the year ended 30 June 2007 Accumulated profit £ooo Balance at 1 July 2006 330 1 Profit for the year 861 1 Dividend paid -560 2 631 1 1 6 (20 marks) WORKINGS

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1 Admin Expenses £0 £0

As per question 690

Add:Investment income 13

Less: Prepayments Rates - 24000 * 9/12 18 Insurance - 18000 * 6/12 9 -27 676

2 Debenture Interest As per question 30

Add: Accruals 30 60 3 Allowances for trade receivables

Receivables as per question 920

Less:Bad debts 40

880 Provision at 5% 44 Last allowances given (TB) 30 Increase in allowance 14 LCB LIMITED BALANCE SHEET AS AT 30 JUNE 2007 ½ COST DEP N.B.V £0 £0 £0 NON-CURRENT ASSETS Freehold property 1200 330 870 ½ Plant & machinary 800 270 530 ½ 2000 600 1400 ½ INVESTMENT @ COST 220 ½ CURRENT ASSETS Inventory (820 - 82) 738 1 Trade Receivables (880 - 44) 836 1 Prepayments 27 ½ Bank (790-560) 230 1 1831

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TOTAL ASSETS 3451 EQUITY AND LIABILITIES: EQUITY Ordinary Share Capital (50p shares) 700 ½ Share premium 250 ½ General Reserve 150 ½ Profit and Loss account 631 ½ 1731 NON-CURRENT LIABILITIES: 10% Debentures 600 ½ CURRENT LIABILITIES: Trade Payables 1090 ½ Accruals 30 ½ 1120 ½ TOTAL EQUITY AND LIABILITIES 3451 (10 marks)

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SECTION B

A2; (a) Ratios Cod Ltd. Salmon Ltd.

Gross Profit Ratio GP/Sales * 100

90/360 * 100 = 25% (1)

110/540 * 100 = 20.37% (1)

Net Profit Ratio

NP (Before Interest)/Sales * 100

45/360* 100 =12.5% (1)

70+2/540 *100 =13.3% (1)

ROCE NP (Before Interest)/ Capital Employed * 100

45/310 * 100 = 14.5% (1)

72/230+20 *100 = 28.8% (1)

Current Ratio Current Assets/ Current Liabilities

298/68 = 5.38:1(1)

222/72 =3.08:1(1)

Acid Test Ratio C.Assets-Stock/ C.Liabilities

298-67/68 =3.40:1(1)

222-94/72 =1.77:1 (1)

Stock Turnover Ratio Average Stock/ Cost Of Sales * 365/1

90/270 * 365 = 122days(1)

93/430*365 =79days(1)

Gearing Preference Share Capital + Long Term Loans * 100 Shareholders Funds + Long Term Loans

50/310 *100 = 16%(1)

20/250 * 100 =8% (1)

Debtors Collection Period

Trade Debtors 365 Credit Sales * 1

136 * 365 360

= 138days(1)

128 *365

540 =87days(1)

Total Marks 8M 8M

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A2; (b)

Report Style Commentary points may include; • Cod Ltd has a better gross profit margin than Salmon Ltd. Salmon may be charging lower

prices and a higher volume. • However, Salmon has a better net profit margin because of lower expenses. • The ROCE indicates Salmon Ltd has a higher return indicating better performance

compared to Cod Ltd, and has a higher level of fixed assets. • Cod is revealing better liquidity ratios than Salmon Ltd, furthermore Salmon Ltd is running

a bank overdraft. Cod Ltd is also having sound acid test ratios and is in a very healthy position.

• The debtor’s collection period for Cod is very long, taking about 4.5 months to collect the funds compared to Salmon of about 3 months. The industry’s average needs to be considered here.

• Cod Ltd stock is also slow moving compared to Salmon Ltd and may indicate slow sales. • Both companies are low-geared companies. Conclusion; It appears from the above analysis that Salmon Ltd is a better prospect for acquisition however, further information is required to make an overall decision. (2 marks each max 7 marks) Report Style – 2 marks Total 9 Marks

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SECTION B A3 (A)

Sales Ledger Control A/C

£ £ Balance b/d (1) SD book (1) Dishonored Cheque from Customer (1) Balances b/d

45020 501510 1790 548320 (1) 34280

Sales return (1) Bank receipts from customer (1) Cash receipts from customers (1) Bad debts (1) Discounts allowed (1) Set-off Balances (1) Balanced c/d (1)

10440 458770 33330 2090 7080 2330 34280 548320

Total 11marks

Purchases Ledger Control A/C

£ £ P.returns (1) Petty cash to suppliers (1) Cheques to suppliers (1) Discounts received (1) Set-off (1) Balance c/d (1)

3070 230

281990 6540 2330

34200

328360

Balances b/d (1) P.d. Book (1) Balances b/d (1)

27910 300450

328360

34200

Total 9marks A3: (b) Benefits: • It provides information on debtors & creditors on a timely basis to management. • It assists in location of errors. • It helps to detect any fraud. • It supports the internal control systems of the organisation. (11/2 marks each, max 5 marks)

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A4 (a) (I)

Office Equipment Cost A/C

£ £ Balance b/f (1) Bank (1) Bank (1) Balance b/f (1)

52300 7000 1200

60500

56500

Disposal (1) Bal c/f

4000 56500

60500

5 marks (ii)

Provision for Depreciation On office equipment A/C

£ £

Disposal (1) Balance c/d

2400 30460

32860

Balance b/f (2) (3*4000) (2*3100) (1*3360) P & L a/c (2) (25%*56500) Balance b/d (1)

12000 6200 3360

11300

32860

30460

6marks

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Disposal Of Office

Equipment A/C

£ £ Office Equipment (1) 4000

4000

Depreciation a/c (1) Bank (1) P & L a/c (1)

2400 1000 600

4000

4marks

Total 15 marks (b) Objectives may include; • To enable the capital cost less any residual value, to be spread over the useful life of the

asset. • To ensure each accounting period is matching a portion of the cost of the fixed asset

against the income generated by the asset. • To reduce theprofits accordingly (based upon the method of depreciation used) and the

balance sheet value of the asset in order for the financial statements to reflect a true and fair view.

• It assists in the distinction between revenue and capital. (2marks each max 6marks) (c) Answers may include; • If the same methods and rates are not maintained then profits will be distorted each year. • The basis of comparison will be distorted when analysing the accounts using ratios. • Changing the methods and rates regularly will distort the fixed assets showing a true and

fair view. • It will make the calculations become difficult. (2 marks each max 4 marks)

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SECTION C

A5 (A) (i) Rights Issues These are new shares in a company offered for cash on pro-rata basis to existing shareholders. They are usually offered at a price below the market value. They can either take up the offer or renounce or sell their rights to someone else. (Max 5 marks) (ii) Bonus Issues

A bonus issue is issuing free shares to existing shareholders. An equivalent amount is transferred to capital from share premium account or the revenue reserves. The issue is also known as a scrip issue.

(Max 5 marks) (b) Capital reserve is generally a statutory reserve, which a company creates if

circumstances justify it. They usually arise from capital transactions and are non-distributable reserves for dividend purposes. (2½ marks)

Revenue Reserves

These are reserves arising from the trading activities of the business, derived from surplus profits. They are non-statutory and can be distributed by way of dividends. (2½ marks)

(c) The nominal value of shares is the “par” value or “face value”. This value is usually

determined on formation of the company and represents its ownership. E.g. is £1 shares, 50p shares, 25pence shares etc.(2 ½ marks)

The market value of share is the amount of the share that can be bought and sold at arms length (for e.g. in the stock market)

(2 ½ marks)

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A6 (a)

CASH FLOW STATEMENTS AS PER FRS1 REVISED OCTOBER 2006 STANDARD HEADINGS (1) £ £ Operating Activities (1) xxx Note 1 (Using either direct or Indirect method) Returns On Investment (1) And Servicing Of Finance x/(x) Taxation (1) (xxx) Capital Expenditure And Financial Investment (1) (xxx) Acquisitions And Disposals (1) (x)/x Equity Dividends Paid (1) (xxx)

Management Of Liquid Resources xxx And Financing (1) xxx xxx

Increase or Decrease In Cash (1) xxx Note2 Note1 – Indirect Method (1) Reconciliation of Operating profit To Net cash Inflow from Operating Activities Operating Profit xxx Depreciation xxx Stocks (increases) or Decreases xxx Debtors (increases) or

Decreases xxx Creditors Increases or (Decreases) xxx

Net Cash Inflow from Operating activities xxx

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Note 2 (1) Analysis of Changes In Net Debt As at Date Cash Other As Beginning Flows Changes at Closing £ £ £ £ Cash In Hand at Bank x x x Overdrafts x x x X

Debt due within 1 yr (x) x (x) (x) Debt due after 1yr (x) x (x) X Current asset Investments x x x Total xxx xxx xxx (1)

Total 12 marks A6 (b) Uses And Benefits Of Cash Flow Statements; • It shows the causes of the change in cash during the year. • It gives information that a profit and loss account and a balance sheet does not give i.e.

what cash is received and paid during the period by the business. • It gives information to the shareholders how the cash is managed by the directors. • It gives an indication of the relationship between the profitability and the liquidity of the

company. • They provide information about the liquidity, viability and financial adaptability of the

company. • They act ads a useful resource when negotiating loans with a bank and other lending

institutions. • They provide indications when transactions taking place in one accounting period may be

expected to result in cash flows in a future period. • They will indicate how far the business will be able to meet its future commitments e.g.

taxation due, loan repayments etc. • They can be used to assess the valuation of a business. • Cash is a vital part of business and therefore it is an useful statement to management on

a regular basis.

(2 marks each, max 8 marks)

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Subject: BUSINESS ACCOUNTS Date: 08 December 2009 (10am – 1pm) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 5. SECTION A – COMPULSORY QUESTION 6. SECTION B – ANSWER ANY TWO QUESTIONS 7. SECTION C – ANSWER ANY ONE QUESTION 8. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for each

question. (iii) First, attempt the questions that you feel you can obtain the most marks for but

if there are any compulsory questions, you must ensure that you attempt those. (iv) Number the answers to the questions clearly before answering. (v) Please write neatly as illegible handwriting cannot be marked.

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SECTION A – COMPULSORY QUESTION

Question 1 Jay Ltd is a company supplying building materials to the building trade. The book keeper prepares the accounts of the company to 30 June each year. At 30 June 2008, the trial balance of Jay Ltd is as follows:-

Debit Credit £ £ Issued Share Capital Ordinary shares fully paid £0.50p 55,550 Purchases and Sales 324,500 618,600 Returns 2,300 1,700 Discounts 1,500 2,500 Inventory of Building Materials at 1 July 2007 98,200 Distribution Costs 22,400 Administration costs 13,850 Wages and Salaries 71,700 Provision for Doubtful Debts at 1 July 2007 1,000 Delivery Vehicles at Cost 112,500 Delivery Vehicles – Depreciation at 1 July 2007 35,000 Equipment at cost 15,000 Equipment – depreciation at 1 July 2007 5,000 Trade Receivables and Trade Payables 95,000 69,100 10% Debentures (2009) 10,000 Retained Earnings 1 July 2007 20,000 Bank Current Account 41,500 Motor Car at Cost at 1 July 2007 20,000 818,450 818,450 The following additional information at 30 June 2008 is as follows:- 1) Inventory of building materials: £75,300 It had a Net realisable value of : £70,000 2) The Administration figure includes a 12 month agreement ending in 31 August 2008 amounting to £4,650 3) Accrued expenses to be included Administration Heating and Lighting: £400 Telephone : £500 4) Administration costs, wages and salaries, include Directors remuneration: £23,800(show them separately) 5) The loan was taken out some years ago, and is due for repayment on 1 March 2009.

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6) Trade receivables age reports are as follows Over 90 days : £3,000 60 to 90 days: £12,000 30 to 60 days : £ 20,000 The provision is to be made for doubtful debt as follows:- 30 to 60 days : 1% 60 to 90 days : 2.5% Over 90 days : 5% (After writing off a customer as bad debts of £600) 7) A Motor car was purchased on 1 July 2007. 8) Depreciation is to be provided as follows:-

- At 20% on cost for delivering vehicles will be fully charged to distribution - At 25% on the reducing balance for the Motor Car will be charged half to

distribution and half to administration - At 25% on cost for equipment will be fully charged to administration


REQUIRED

g) Prepare an Income Statement for the year ended 30 June 2008 h) A Statement of changes in equity for the year ended 30 June 2008 (20 Marks) i) Prepare a Balance sheet at 30 June 2008

(10 Marks)

(Total: 30 marks)

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SECTION B – ANSWER ANY TWO QUESTIONS

Question 2 The balance sheets of Todd Limited are shown below.


2007 2008

£ £ £ £ £ £

Cost Dep'n Net Cost Dep'n Net

Non-current assets


151,400 18,400 133,000 170,300 26,300 144,000

Current Assets Inventory 44,000 61,000 Trade receivables 28,000 32,000 Bank - 5,000

72000 98000 Total Assets 205,000 242,000 Equity and Liabilities Equity Share capital 110,000 130,000 Retained profits 11, 500 13,500 121,500 143,500

Less Non-current Liabilities Debentures 30,000 40,000 151500 183500

Current Liabilities Trade Payables 23,000 27,500 Bank overdraft 6,500 – Corporation tax 13,500 16,000 Dividend proposed 10,500 15,000 53500 58500

Total Equity and Liabilities 205, 000 242,000

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Notes

£

Income statement data for 2003 Operating profit before tax 33,000

Proposed dividend 15,000 Corporation tax 16,000 Interest paid 2,850

Required: (a) Prepare the Statement of Cash flow for the year ended 31 December 2008.

(19 marks)

(b) Discuss briefly how useful the above statement is to you as a user of financial

statements. You may wish to use the figures from the cash flow statement prepared in (a) above to support your discussion. (6 marks)

(Total: 25 marks)

Question 3 Rooney commenced business on 1 April 2007 as a retailer of Colin Caravan Mark II. During the year ended 31 March 2008, Rooney’s dealings in caravans were as follows: 2007 April Bought 6 caravans @ £10,000 each May Bought 3 caravans @ £11,000 each June Sold 1 caravan @ £16,000 July Sold 3 caravans @ £15,500 each August Bought 2 caravans @ £11,200 each November Sold 4 caravans @ £16,200 each 2008 January Bought 5 caravans @ £12,500 each March Sold 4 caravans @ £15,900 each The overhead expenses incurred during the year ended 31 March 2008 have amounted to £9,000.

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REQUIRED:

d) Prepare inventories cards for the year ended 31 March 2008 using each of the following methods of stock valuation

i) First In, First Out (FIFO) ii) Last In, First Out (LIFO) (10

marks)

e) Prepare income statement showing Rooney’s net profit or loss for the year ended 31 March 2008

(6 marks) f) Explain the advantages and disadvantages of using each of the inventory valuation

methods in (a) above. (9 marks)

(Total: 25 marks)

Question 4

LG manufactures a single product. During the year to 31 Dec 2008 each unit is expected to sell for £50. The expected costs per unit for the year ended 31 Dec 2008 are as follows:

£ Direct materials 12 Direct labour 16 Variable overheads 7 The annual fixed overheads are expected to be £450,000. The expected current output levels are 35,000 units. LG has a maximum annual production capacity of 37,500 units. Required: a) Define and calculate the contribution per unit (5 marks)

b) Define and calculate the break-even point in £s and units (5 marks)

c) Define and calculate the margin of safety (5 marks)

d) Calculate the profit from the sale of 35000 units. (5 marks)

e) Explain two possible consequences for LG if the selling price is reduced to £47 per

unit. (5 marks)

(Total: 25 marks)

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SECTION C - ANSWER ANY ONE QUESTION

Question 5


• A balance sheet (2 marks) • An asset (3 marks) • A Liability (2 marks) • Share Capital (2 marks) • Reserves (3 marks) • Why does the balance sheet balance? (3 marks) • Difference between equity capital and capital employed (5 marks)

(Total: 20 marks)

Question 6 If the information in the financial statements is to be useful, due regard must be given to the following:

(a) Materiality (b) Comparability (c) Prudence (d) Objectivity (e) Relevance

Explain the meaning of each of these factors as they apply to financial accounting giving an example of the application of each of them.

(Total: 20 marks)


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Marking Scheme : SECTION A: Income Statement of Jay Ltd for the period ended 30th June 2008 1 £ £ £

Sales 618,600 1 Return Inwards -2,300

616,300 1 less Cost of Sales Opening Inventory 98,200 Purchases 324,500 0.5 Return Outwards -1,700 0.5 Net Purchases 322, 800 421,000 Less: Closing Inventory -70,000 2 Cost of Goods Sold 351,000 0.5 Gross Profit 265,300 0.5 Add: Other Income

Discount Received 2,500 0.5 Decrease in Provision for Doubtful Debts 380 268,180 0.5 Less Expenses:

Distribution Costs 22,400 0.5 depreciation: delivery vehicles 22500 1.5 Motor car 2500 47,400 1 Administration costs 13850

Wages and salaries(71700-23800) 47,900 1 prepayments -775 1 accrued: heating and lighting 400 0.5 Telephone 500 0.5 depreciation: Equipment 3,750 1.5 Motor car 2500 68125 1 Discount Allowed 1,500 0.5 Director's Remuneration 23,800 0.5 Bad Debts written off 600 0.5 141,425

Operating Profits before Interest 126,755 0.5 Loan Interest -1,000 0.5 Profit before Tax 125,755 0.5 Less: Taxation -15,000 0.5 Net profit for the year 110,755 0.5 15.5

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Statement of changes in Equity for the year Ended 30th June 2008

1

1

1

1

0.5

4.5

Order Share Capital

Share Premium

General Reserves

Retained Earnings Total

Balance at 1 Jan 2008 55,550 - - 20,000 75,550

Net Profit for the Year 110,755 110,755

Transfer to Reserves 10,000 (10,000) -

Dividends (6,666) (6,666)

55,550 - 10,000 114,089 179,639

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Statement of Financial Position as at 30th June 2008 0.5

Assets £ £ £ Non - Current Assets Cost Acc Dpn NBV Delivery Vehicles 112,500 57,500 55,000M. Car 20,000 5,000 15,000Office Equipment 15,000 8,750 6,250

147,500 71,250 76,250 2 mks

Current Assets Inventory 70,000 0.5 Receivables (95,000 - 600) = 94,400 Less: Provision (620) 93,780 1 Prepayments 775 0.5 Bank Current A/C 41,500 0.5

206,055Total Assets 282,305

Equity / Liabilties Equity Ordinary Share 55,550 0.5 General Reserves 10,000 0.5 Retained Earnings 114,089 0.5

179,639 Non-current Liabilities Current Liabilities Payables 69,100 0.5 Accruals 1,900 1.5 Tax 15,000 0.5 Dividends 6,666 0.5 Loan - short term 10,000 0.5

102,666 282,305

Comment [a1

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SECTION B

Q2

Statement of Cash Flow OF TODD LIMITED FOR THE YEAR ENDED 31 DECEMBER 2008 1

Note £ £ Operating activities 1 27,250

Return on Investments and servicing of finance: Interest paid (2,850) 2 Taxation: Corporation tax paid (13,500) 2 Capital expenditure and financial Investment: Purchase of fixed assets (18,900) 2

Equity dividends paid (10,500) 2

Financing: Issue of shares 20,000 Issue of debentures 10,000 2

30,000 Increase in cash 11,500 Notes: 1. Operating profit before interest (33000 + 2850) 35,850 2 Depreciation 7,900 3 Increase in inventory (17,000) 1 Increase in receivables (4,000) 1 increase in payables 4,500 1 Net Cash inflow from operating activities 27,250 b). Discuss the advantages of Cash Flow. 6 Marks

Comment [a2

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Q3 F. I. F. O Method A i) Date Purchases Sales Stock

Balance

April 6 @ 10,000 6 @ 10000 May 3 @ 11,000 3 @ 11,000 June 1 @ 10,000 5 @ 10,000 3 @ 11,000 1 July 3 @ 10,000 2 @ 10,000 3 @ 11,000 Aug 2 @ 11,200 2 @ 11,200 1 Nov 2 @ 10,000 1 @ 11,000 2 @ 11,000 2 @ 11,200 1 Jan 5 @ 12,500 5 @ 12,500 Mar 1 @ 11,000 2 @ 11,200 1 @ 12,500 4 @ 12,500

= £50,000 2 total = 5 marks

L.I.F.O Method ii) Date Purchases Sales Stock Balance April 6 @ 10,000 6 @ 10,000 May 3 @ 11,000 3 @ 11,000 June 1 @ 11,000 6 @ 10,000 2 @ 11,000 1 July 2 @ 11,000 1 @ 10,000 5 @ 10,000 Aug 2 @ 11,200 2 @ 11,200 1 Nov 2 @ 11,200 2 @ 10,000 3 @ 10,000 1 Jan 5 @ 12,500 5 @ 12,500 Mar 4 @ 12,500 3 @ 10,000 =

30,000

1 @ 12,500 = 12,500

= £42,500

2

5

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b)

Income Statement The year ended 31 March 2008

FIFO LIFO £ £ £ £ Sales

1 190,900

1 190,900

Cost of Sales: Opening Inventory

Purchases 177,900 177,900 177,900 177,900 Less: Closing Inventory

(50,000) 1

(42,500) 1

127,900 135,400 Gross Profit 63,000 55,500 Overhead Expenses

1

(9,000) 1

(9,000)

Net Profit 54,000 46,500 3 marks 3 marks c) First in first out method Advantages:

v) It is easy to apply under both the periodic and perpetual inventory systems. vi) Its assumption is logical as the first units purchased are usually the first units sold

in normal business practice. vii) The balance sheet shows the stock at current replacement cost or recent purchase

price. Hence it shows the true value of the stock on the balance sheet date viii) It is accepted in accounting practice as well as for tax purposes.

Disadvantages:

ii) The current revenue (based on rising prices may be matched with an out – of- date cost (lower prices) resulting in a profit figure which included gains due to price level changes which is called realised holding gains. Hence if such profit are spent, e.g. paid as dividend, there will be depletion in the physical capital of the business in real terms.

(1 mark for each point max 4 -5 marks)

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Last in first out Advantages:

iii) The current revenue is matched with the most recent cost of purchases resulting in a realistic profit as holding gains on price changes are excluded from it.

iv) In periods of rising prices it produces lower profit and hence it is easier for the management of the business to convince shareholders not to expect large dividend.

Disadvantages

vi) The value of closing stock shown on the balance sheet may be out of date and unrealistic.

vii) The assumption is illogical as normal flow of goods should be that first receipts are issued first.

viii) Profit can be manipulated by making new purchases as the latest purchase price is used to calculate cost of sales. For example, if the management wants to show lower profit, it may make purchases at higher prices first before the end of the period and then use their higher prices to calculate cost of sales and hence show higher cost of sales and lower profit.

ix) The method is not generally accepted in accounting practice and for tax purposes. x) It is clumsy to operate.

(1 mark for each point max 4 – 5 marks)

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Q4.

(c) Contribution is the amount that each unit sold contributes towards the fixed costs and finally to profits. (2 marks)

It is calculated by selling price – variable cost per unit. £50 - £35 = £15 (3 marks)

(d) The break-even point is the point in sales revenue / number of units at which no profit or loss is made, i.e when total sales = total revenue

( 2 marks) It is calculated by: Total fixed costs Contribution In units = 450,000 15 = 30,000 units ( 2 marks) In £s = 30,000 * £50 = £ 1,500,000. ( 1 mark)

(c) Margin of safety = Output level – Break-even point 35,000 – 30,000 = 5,000 units (5 marks) (d) Profit = Total contribution – Total fixed costs

(15*35,000 – 450,000) = £ 75,000 Or Margin of safety * contribution per unit 5000 * £15 = £75,000. (5 marks) (e) If selling price = £ 47 per unit,

New break-even point = £ 450,000 47-35

= 37,500 units.

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It can be seen that the break-even point is higher. This is the maximum capacity therefore no profit can be achieved. Other factors are increased demand for product but may be unable to supply due to maximum capacity, can lead to dissatisfied customers. Total revenue decreases if everything else remains the same. (5 marks)

SECTION C Q5

(a) A balance sheet is a summary of the assets and liabilities of a business at one point in time.

Assets less liabilities – the net assets equal the shareholders funds which is employed in the company.

(2marks)

(b) An asset is an item which is owned by the company and has worth to the company at the balance sheet date. In historical cost accounting, the asset would have arisen as a result of a past transaction, i.e. it would have been acquired for money or money's worth.

(3marks) (c) A liability is an amount owed by the company to someone outside the company. It

does not, however, include the claims of the shareholder's of the company as they own the company. A liability is thus an amount owed to a 'third party'; the company and shareholders being the other two parties.

(2marks)

(d) Share capital is the total of the nominal value of shares held by shareholders, it represents part of the amounts which shareholders have paid into the company in the past and amounts which have been transferred from reserves as bonus shares.

(2marks)

(e) Reserves arise in a number of ways. In general terms they represent ownership claims on the net assets of the company over and above the share capital.

Reserves can arise due to:

(i) Past share issues - share premium.

(ii) Past profits - profit and loss.

(iii) Revaluation of assets - revaluation reserve. (3marks)

(f) The balance sheet is a listing/summary of the balances in ledger accounts after the preparation of the profit and loss account. It is thus similar to a trial balance (which is an extracted list of balances prior to the preparation of the profit and loss account).

Provided that the double entry system has been operated correctly the balance sheet must balance as a result. (3marks)

(g) Equity capital is ordinary share capital attributable to holders of ordinary shares whereas capital employed is the total capital made up shareholders funds plus reserves and long term debt.

(5marks)

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Q6 (a) Materiality is defined in the ASB Statement of Princip1es for Financial Reporting (SOP) as follows: Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement. Thus, materiality provides a threshold or cut- oft point rather than being a primary qualitative characteristic that information must have if it is to be useful. Materiality is applied to numerous items in financial reports. Example: the amount of a trade debt written off as irrecoverable would be disclosed by note only if material. (4marks) (b) Comparability is defined in the ASB SOP as follows: Users must be able to compare the financial statements of an enterprise over time to identify trends in its financial position and performance. Users must also be able to compare the financial statements of different enterprises to evaluate their relative financial position, performance and financial adaptability. Hence the measurement and display of the financial effect of like transactions and other events must be carried out in a consistent way throughout an enterprise and over time for that enterprise and in a consistent way for different enterprises. Example: if certain types of tools purchased are treated as fixed assets in one period, similar tools purchased in subsequent periods should also be treated as fixed assets. (4marks) ( c) Prudence is defined in the ASB SOP as the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, so that aseets or income are not overstated and liabilities or expenses are not understated. However, prudence should not be carried so far as to result in misleading financial statements by taking the most pessimistic view possible of all matters in doubt. Example: stock at the balance sheet date should be included at net realizable value if it is likely to be saleable only at a figure below cost. (4marks) (d) Objectivity is often referred to as comprising verifiability or faithful representation and neutrality. Financial statements must represent faithfully the effect of transactions and other events it either purports to represent or could reasonably be expected to represent and where possible be based on verifiable evidence. According to the ASB SOP, financial statements are not neutral if by the selection or presentation of information they influence the making of a decision or judgement in order to achieve a predetermined result or outcome. Example: internally generated goodwill should not be included in the balance sheet as a fixed asset because its value cannot be determined objectively. (4marks)

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(e) Relevance is defined in the ASB SOP as follows: Information has the quality of relevance when it influences the economic decisions of users by helping them evaluate past, present or future events or by confirming or correcting their past evaluations. Example: shareholders are interested in the trend of dividends paid by the company. Employees or lenders might find this information not very relevant to their concerns. (4marks)

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JUNE 2009

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Subject: BUSINESS ACCOUNTS Date: 6th June 2010 (10am – 1pm) Time Allowed: 3 Hours

INSTRUCTIONS TO CANDIDATES 1. SECTION A – COMPULSORY QUESTION 2. SECTION B – ANSWER ANY TWO QUESTIONS 3. SECTION C – ANSWER ANY ONE QUESTION 4. Read the following before answering the examination questions. (i) Read all questions carefully before you answer. (ii) Apportion your time according to the number of marks allocated for

each question. (iii) First, attempt the questions that you feel you can obtain the most

marks for but if there are any compulsory questions, you must ensure that you attempt those.

(iv) Number the answers to the questions clearly before answering. (v) Please write neatly as illegible handwriting cannot be marked.

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SECTION A - COMPULSORY The following trial balance has been prepared at 31 December 2009 from the books of Owen Limited:

£ £ 8% Preference share capital - shares £1 each 100,000 Ordinary share capital – shares £1 each 200,000 Share Premium account 40,000 Retained Earnings - Balance at 31 December 2008 138,300 10% debenture 2011- 2012 100,000 Bank overdraft 72,400 Leasehold property: at cost Amortizations of leasehold

210,000 20,000

Fixtures and fittings: at cost Provision for depreciation

300,000 90,000

Motor vehicles: at cost provision for depreciation

64,000 16,000

Trade Receivables and Payables 192,000 49,000 Sales 2,350,000 Cost of goods sold 1,565,000 Directors’ emoluments 45,000 Wages and salaries 322,000 Rates and insurance 43,800 Motor expenses 53,000 Heating and lighting 40,600 Telephone 16,400 Debenture interest - six months to 30 June 2009 5,000 Bank overdraft interest 8,900 Discounts allowed and received 17,000 12,000 Preference dividend - half year to 30 June 2009 4,000 Interim dividend on ordinary shares at 5% 10,000 Inventory of goods at cost 250,000 Advertising 41,000 3,187,700 3,187,700

Additional information: The authorized share capital of the company is: 100,000 8% Preference Shares of £1 each 400,000 Ordinary Shares of £1 each Accruals and Prepayments at 31 December 2009 were:

Accruals Prepayment £ £ Directors’ emoluments 5,000 Heating and lighting 3,200 Telephone 1,300 Advertising 4,000 Rates and insurance 5,200 Motor expenses 4,200

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Depreciation is to be provided as follows: Amortization of leasehold property - £10,000 Fixtures and fittings - 10% on cost Motor vehicles - 25% on a reducing balance basis The debenture interest for the six months to 31 December 2009 was paid on 5 January 2010. Corporation tax is estimated at £52,000. The directors have decided to transfer £30,000 to a general reserve. REQUIRED Prepare an Income Statement and the Statement of Financial Position for the ended 31 December 2009 for Owen Limited.

(30 Marks)

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SECTION B – ANSWER ANY TWO QUESTIONS

QUESTION 2 The following is a summary of the cash book and bank statement for the period to 12 November 2009 of Julie’s business:

2009 £ 2009 Cheque No. £ 7 Nov Capital 4000.00 1

Nov Wages 160361 100.00

8 A Hunter. 2000.00 2 LB H&Fulham 160362 24.00 8 Cancel Chq-

160369 180.00 3 AC dealers 160363 3000.0

0 9 Thomas Jones

Ltd 9600.00 4 M Dint 160364 90.00

5 Jane Smith 160365 400.00 7 W Young 160367 60.00 8 Lofty 160368 2800.0

0 9 M Dint 160369 140.00 9 H Meng 160370 400.00 10 F Grundy 160371 198.00 11 LB H&Fulham 160372 40.00 12 Balance c/d 8528.0

0 15780.00 15780.

00 Balance b/d 8528.00 The following bank statement has been received by Julie: Julie Account number 123456 2009 Payments Receipts Balance £ £ £ 1 Nov Capital 4000.00 4000.00 2 160361 100.00 3900.00 4 160363 3000.00 900.00 5 160365 400.00 500.00 7 Credit 2000.00 2500.00 7 160362 24.00 2476.00 7 160364 90.00 2386.00 7 160366 140.00 2246.00 8 160367 60.00 2186.00 10 160369 140.00 2046.00 10 160369 140.00 2186.00 10 160370 400.00 1786.00 11 160372 40.00 1746.00 11 Charges 106.00 1640.00

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Required (a) Prepare a bank reconciliation statement as at 12 November 2009. (20 Marks) (b) Explain why it is necessary to prepare bank reconciliation statements. (5 Marks)

(Total – 25 Marks)

QUESTION 3 The following transactions relate to Johnson Limited’s plant and machinery Non-Current Assets register: 1/4/2007 Plant abbey was purchased for £12,000. The estimated useful life is five years and the scrap value is £1,000. 1/6/2008 Plant babey was purchased for £28,000. The estimated useful life is seven years and the scrap value is £2,800. 1/3/2009 Plant abbey was sold for £4,800 and replaced by plant Cabey which cost £20,000. Estimated useful life of plant Cabey is five years and the scrap value is £3,000. Installation costs of £1,500 are to be capitalised. The accounting year end is 31st December, and it is the policy of Johnson Limited to use the straight line method of depreciation and to charge a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal. Required: Write up the following accounts:- The plant and machinery cost account The provision for depreciation account The disposal accounts The relevant balance sheet extracts For the three years 2007, 2008 and 2009.

(25 marks)

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QUESTION 4 The following are extracts from the accounts of Harry plc for the years ended 31 March 2008 and 2009:

Income Statement 2009 2008 £m £m Turnover 3845.5 3221.2 Less: Cost of Sales 2412.3 1928.1 Gross Profit 1433.2 1293.1 Less Administration expenses 1213.0 1106.5 Profit before taxation 220.2 186.6 Less Taxation 68.8 50.0 Profits after taxation 151.4 136.6 Exceptional items (10.0) 13.2 Less Dividends 50.2 38.7 ----------- ------------ Retained profits for the year 91.2 111.1 Reserves brought forward 952.2 981.8 Goodwill written off (12.2) (152.1) Premiums on share issue less expenses 90.2 11.4 ------------ ------------ Reserves at the end of year 1121.4 952.2 ------------ ------------

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Statement of Financial Position

2009 2008 £m £m £m £m ASSETS Non-Current Assets Tangible Premises 1445.6 1480.1 Plant and equipment 464.3 411.8 Motor vehicles 29.7 62.7 ---------- ----------

1939.6 1954.6

Investments 106.4 48.1 ------------ ----------- 2046.0 2002.7 Current Assets Inventories 521.4 462.5 Receivables 468.2 451.1 Cash and Bank 71.1 1060.7 61.8 975.4 ----------- --------- 3106.7 2978.10 EQUITY/LIABILITIES Equity Issued Share Capital 299.3 260.6 Reserves 1121.4 952.2 ------------ ------------

1420.7 1212.8 Non-Current Liabilities Loans 638.1 1073.1 Current Liabilities Payables 686.9 492.1 Short Term Loans 253.6 94.4 Taxation 78.2 83.5 Accrual 29.2 22.2 --------- ------- 3106.7 2978.10 Required:

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Using significant ratios where appropriate, comment on the trends of profitability and liquidity of the company indicated by the above results.

(25 marks)

SECTION C – Answer any one Question

Question 5 The objective of financial statements is to provide information about the financial position, performance and financial adaptability of an enterprise that is useful to a wide range of users for assessing the stewardship of management and for making economic decisions. (IASB Framework: Define the objective of financial statements) Required: State five potential users of company published financial statements, briefly explaining for each one their likely information needs from those statements.

(20 marks) Question 6 Differentiate between the following: (a) Trade discounts and cash discounts (b) Capital reserves and Revenue reserves (c) Income Statement and Statement of financial position (d) Bad Debts and Provision for bad Debts (e) Shareholders Funds and Working Capital

(20 marks)

Question 7 Briefly describe and comment upon each of the following accounting concepts and conventions: (a) Matching concept (b) Prudence concept (c) Consistency concept (d) Going concern concept

(20 marks)


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Kensington College of Business Marking Scheme

Subject: BUSINESS ACCOUNTS ANSWER 1

Owen LIMITED Income Statement

For the year ended 31 December 2009 £ £ £ Sales 2,350,00

0 less Cost of sales 1,565,00

0

Gross Profit 785,000 add Discount received 12,000

797,000 Selling and distribution Advertising 45,000 Motor expenses 48,800 Depreciation of motor vehicles 12,000 105,800 Administration: Directors’ emoluments 50,000 Wages and salaries 322,000 Rates and insurance 38,600 Heating and lighting 43,800 Telephone 17,700 Depreciation: Leasehold property 10,000 Fixtures and fittings 30,000 512,100 Finance: Interest on debentures 10,000 Bank interest 8,900 Discount allowed 17,000 35,900 653,800

Net profit before taxation 143,200 Taxation on profits for the year: Corporation Tax 52,000

Profit/(Loss) for period 91,200

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Statement of changes in Equity of Owen Ltd for the year ended 31 December 2009

Ord Share Pref Share Share Premium General Reserve Retained Earnings Total

Bal as at 1st Jan 09 200,000 100,000 40,000 - 138,300 478,300 Profit/(Loss) For year 91,200 91,200 Transfer to General reserve 30,000 (30,000) - Dividends (14,000) (14,000) Grand Total 200,000 100,000 40,000 30,000 185,500 555,500

(Total Marks awarded 18marks)

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Owen LIMITED

Statement of Financial Position as at 31 December 2009

ASSETS Accumulated Net Book Cost Depreciation Value Non-Current Assets £ £ £ Leasehold property 210,000 30,000 180,000 Fixtures and fittings 300,000 120,000 180,000 Motor vehicles 64,000 28,000 36,000 574,000 178,000 396,000 Current Assets Inventory at cost 250,000 Receivables 201,400 451,400 847,400 EQUITY/LIABILITIES Equity Share Capital 300,000 Share Premium Account 40,000 General Reserve 30,000 Retained Earnings 185,500 555,500 Non-Current Liabilities Debentures 100,000 Current Liabilities Payables 67,500 Bank Overdrafts 72,400 Corporation Tax 52,000

191,900

847,400 (Total marks awarded 12 marks)

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NOTES 1. Receivables £ Trade Receivables per trial balance 192,000 Prepaid expenses:

Rates and insurance Motor expenses

5,2004,200

201,400 2. Payables £ Trade payables per trial balance 49,000 Debenture interest owing 5,000 Accrued expenses: Directors’ emoluments

Heating and lighting Telephone Advertising

5,0003,2001,3004,000

67,500 3. 10% Debentures 2011-2012. The description shows that the

debentures are redeemable by the company not earlier than 2011 and not later than 2012.

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ANSWER 2 (a) Revised cash book

Balance b/d 8528.00 Error replacement cheque (40.00) Cheque 160366 (140.00) Bank charges (106.00) Revised balance 8242.00

(10 marks)

Bank reconciliation statement as at 12 November 2009 Balance as per statement at 12 Nov 1640.00 Add: Uncredited cheques 9600.00 11240.00 Less: Unpresented cheques: Lofty 2800.00 F.Grundy 198.00 (2998.00)

Balance as per Cash Book 8242.00 (10 marks) (b) Reasons for preparing bank reconciliation

(i) To identify any errors made in posting the cash book

(ii) To check that the balance indicated by the cash book reflects all credits and charges incurred by the business.

(iii) To identify any uncleared items for possible ‘follow-up action’. (iv) To identify ‘stale’ cheques

(5 marks)

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ANSWER 3 Depreciation Charges 2007 Machine Abbey 12000-1000/5 2,200 2008 Machine Abbey As above 2,200 Machine Babey 28000-2800/7 3,600 5,800 2009 Machine Babey As above 3,600 Machine Cabey 21500-3000/5 3,700 7,300 Analysis of depreciation balance over assets. Machines A B C Total 2007 2,200 - - 2,200 2008 2,200 3,600 - 5,800 2009 - 3,600 3,700 7,300 Total 4,400 7,200 3,700 15,300 Plant and machinery 2007 £ 2007 £ 1 Apr Machine A 12000 31 Dec balance c/d 12000 2008 2008 1Jan Bal b/d – A 12000 1June Machine B 28000 31 Dec Bal c/d 40000 40000 40000 2009 2009 1 Jan Bal b/d (A&B) 40000 1 Mar Disposal 12000 1 Mar Machine C 21500 31 Dec Bal c/d 49500 61500 61500 2010 1 Jan Bal b/d (B&C) 49500 (8 marks)

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Plant and machinery Depreciation 2007 £ 2007 £ 31 Dec Bal c/d 2,200 31Dec P&L 2,200 2008 2008 31 Dec Bal c/d 8,000 1 Jan Bal b/d 2,200 31 Dec P&L 5,800 8,000 8,000 2009 2009 1 Mar Disposal A/C 4,400 1 Jan Bal b/d 8,000 31 Dec Bal c/d 10,900 31 Dec P&L 7,300 15,300 15,300 2010 1Jan Bal b/d ( b&C) 10,900 ( 8 marks) Plant and machinery Disposal 2009 £ 2009 £ 1 Mar Plant & mach 12,000 1 Mar Plant & mach dep 4,400 Bank 4,000 Profit & Loss 3,600 12,000 12,000 ( 4marks) (d) Balance Sheet (extracts) Fixed Assets Cost Accum N.B.V Depn 2007 Plant and machinery 12000 2200 9800 2008 Plant and machinery 40,000 8,000 32,000 2009 Plant and machinery 49,500 10,900 38,600 (5marks)

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Answer 4 Profitability 2009 2008 Gross profit margin GP/Sales 37.3% 40.1% Net profit margin NPBTax/sales 5.73% 5.79% ROCE NPBT/Cap emp 10.7% 8.2% Asset turnover Sales/Cap emp 1.87 1.41 Stock turnover Cos/Stocks 4.63 4.17 Liquidity Current ratio CA/CL 1.01 1.41 Acid-Test ratio CA-stock/CL 0.51 0.74 Debtors Days Debtors/Sales*365 45dys 51dys Comments Profitability • G/P margin down by 7% , sales up by 19% but cost of sales up by 25%: Possible causes: Increase raw material cost, stocking up, purchases at end of year, Sign of possible overtrading, increased competition, and general economic situation • Net profit margin down by only1%. Cost appear to have been well controlled or

there has been a re-allocation of costs between direct and indirect costs • R.O.C.E and asset turnover have increased by 30% and 33%. Disappointing

trend in profitability matched by efficient use of assets. Stock turnover has increased slightly

Liquidity • There appear to be a change from long term to short term borrowings.

More information is needed. Inherent dangers in pursing such a policy • Debt collection period is slacking. Better credit control is a good sign. Much will

depend on the business’s ability to collect debts in order to pay its creditors • If short-term borrowings are very short-term there could be major problems

unless either profitability and cash flow improve or further equity or debt are raised.

Finally, students should mention the limitation of ratio analysis. (25 marks)

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ANSWER 5

(1) Investor and their advisers. - Performance of management in achieving profit growth while ensuring the continued solvency of the company.

- the risk inherent in the company’s operation

(2) Employees - stability and survival of the company - Ability of the company to provide

remuneration, employment opportunities and retirement benefits.

(3) Lenders - the solvency of the company - profitability, to ensure payment of

interest when due - asset values

(4) Suppliers and other creditors

- information as to the solvency of the company and its ability to pay, probably over a shorter period than lenders

(5) Customers - Information about the continuance of the company, especially if they have a long-term involvement with it.

Users of financial statements are interested in three main areas in their use of the company financial statements:

- Profitability - Solvency/liquidity - The risk of the operation (4 marks each = 20 marks)

Answer 6 Differentiation of terms (2 marks each total 20 marks)

Answer 7 (5 marks each for description of concepts max 20 marks)

business_accounts_papers_2003_onwards

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