Business Accounts Papers 2003 Onwards

2003
Page 1 of 329
KCB IBD BUSINESS ACCOUNTS
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.
Page 2 of 329
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.
Page 3 of 329
June 2003
Page 4 of 329
Examination Paper
Time Allowed: 3 Hours

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.
Page 5 of 329
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 : £400Telephone : £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
25 Paid A. Hendry for the net purchases of 2 January, by cheque.
28 P. Donald paid £500 on account by cheque
Page 7 of 329
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 Company Company Company Company

Sheets A B C 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 (600) (465) (120) (270)
year
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
Page 9 of 329
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

Page 10 of 329
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
Cost Cum. Net
Fixed assets depn
£ £ £
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 93,780 1
(620)
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 1½
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
Page 12 of 329
Question 2a
Capital £
1/1/03 Bank 20,000 1
£ £
Bank
1/1/03 Capital 20,000 3/1/03 Rent 1,200

payable
28/1/03 P Donald 500 5/1/03 Office 5,000
equipment
25/1/03 A Hendry 3,000 3½
£
Purchases
2/1/03 A Hendry 3,500

18/1/03 A Hendry 2,400 1
£ £
A Hendry
15/1/03 Return 500 2/1/03 Purchases 3,500

outwards
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 4½
£
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 3½
1/1/03 Balance 1,250

b/d
£
Returns outwards
15/1/03 A Hendry 500 ½
15 marks
Page 13 of 329
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
Page 14 of 329
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)
Page 15 of 329
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 300 x 100 420 x 100 250 x 100 140 x 100
percentage of turnover 3,210 2,130 6,050 3,260
= Profit before tax = 9.35% = 19.72% = 4.13% = 4.29% 2
x100 marks
Turnover
(ii)
Net asset utilisation 3,210 2,130 6,050 3,260
ratio 2,040 1,775 480 660
= Turnover = 1.57 : 1 = 1.2 : 1 = 12.6 : 1 = 4.94 : 1 2
net assets marks
(iii)
Return on total capital 300 + 90 420 + 70 250 + 15 140 + 30
Page 16 of 329
employed 2,040+600 1,775 + 480 + 120 660 + 270
= profit + interest = 14.77% 465 = 44.17% = 18.28% 3
shareholders’+ long- = 21.88% marks
term
funds
liabilities
(iv)
Return on 300 420 250 140
shareholders’ funds 2,040 1,775 480 660
= Profit = 14.71% = 23.66% = 52.08% = 21.21% 2
shareholders’ funds marks
9
marks
(b)
(i)
Gearing Ratio 600 465 120 270
= Long-term liabilities 2,040 + 1,775 + 480 + 120 660 + 270
Shareholders’ + 600 465 = 20% = 29.03%
Long-term = 22.73% = 20.76%
Funds
Liabilities
Company D is the most highly geared as it has the highest gearing ratio.
2 marks
(ii)
Current ratio 490+420+2 18,950+2,7 580+16+13 20+580+1
= Current assets 60 20 0 70
Current Liabilities 630 20,030 640 1,140
= 1.86 : 1 = 1.08 : 1 = 1.13 : 1 = 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+ 300 + 90 420 + 70 250 + 15 140 + 30
Interest 90 70 15 30
Interest = 4.33 =7 = 17.67 = 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)
Page 17 of 329
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)
Page 18 of 329
(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)
Page 19 of 329
(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)
Page 20 of 329
Examination Paper
Page 21 of 329
SECTION A
COMPULSORY QUESTION
Question 1
Debit Credit
£ £
Returns 2,300 1,700
Telephone 3,200
10% Debentures (2003) 10,000
818,450 818,450

3) Accrued expenses
4) Wages and salaries, includes Directors remuneration : £23,800( show them separately)
Page 22 of 329
Over 90 days : £3,000
60 to 90 days : £12,000
30 to 60 days : £ 20,000
30 to 60 days : 1%
60 to 90 days : 2.5%

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
Question 2
January
Page 23 of 329
REQUIRED
(Ignore VAT).
(15 Marks)
(5Marks)
Total Marks = 25
Question 3
31 Dec 2001 31 Dec 2002

£000 £000 £000 £000
Fixed Assets
1155 2620
Current Assets
Stock 363 480
Debtors 234 290
870 770

1760 2605

Financed by:-
Page 24 of 329

REQUIRED:
December 2002.
(20marks)
overdraft.
(5marks)
Total Marks = 25
Question 4

Sheets A B C D
Fixed Assets 2,100 600 514 1,300
Current Assets
Stocks 490 ----- 580 20
Debtors 420 18,950 16 580
2,640 2,240 600 930
year
2,040 1,775 480 660

Turnover 3,210 2,130 6,050 3,260
Expenses (2,820) (1,640) (5,785) (3,090)
Page 25 of 329
REQUIRED

(9 marks)

(6marks)
(10 marks)
SECTION C
Question 5

QUESTION 6
(f) Materiality
(g) Comparability
(h) Prudence
(i) Objectivity
(j) Relevance
(20marks)
Page 26 of 329
Marking Scheme
Section A
Question 1
1
£ £ £
Sales 618,600
616,300 1
Cost of sales

Purchases 324,500
421,000
Closing stock (70,000) (351,000) 2

(£1,000 - £620) 380 1
268,180
Telephone (£3,200 + £500) 3,700 ½
Wages (£71,700 - £23,800) 47,900 ½
Heat and light (£1,850 + £400) 2,250 ½


104,089

18marks
Page 27 of 329
1
Cost Cum. Net
Fixed assets depn
£ £ £
Motor Car 20,000 5,000 15,000 ½
147,500 71,250 76,250 ½
Current assets
Stocks 70,000 ½
Debtors
94,400
(620)
Prepayments 775 ½

months
Creditors 69,100 ½
Accruals (£400 + £500 +£1000) 1,900 1½
Dividends 6,666 ½

Net Assets 179,639
Financed by

12 marks
Page 28 of 329
Question 2a
Capital £
1/1/03 Bank 20,000 1
£ £
Bank
1/1/03 Capital 20,000 3/1/03 Rent 1,200

payable
28/1/03 P Donald 500 5/1/03 Office 5,000
equipment
25/1/03 A Hendry 3,000 3½
£
Purchases
2/1/03 A Hendry 3,500
18/1/03 A Hendry 2,400 1
£ £
A Hendry
outwards
25/1/03 Bank 3,000 18/1/03 Purchases 2,400
31/1/03 Balance 2,400
c/d
5,900 5,900
1/1/03 Balance b/d 2,400 4½
£
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 3½
1/1/03 Balance 1,250

b/d
£
Returns outwards
15/1/03 A Hendry 500 ½
15 marks
Page 29 of 329
b)
£
5 Marks
C)

Briefly explained.
5 marks
Page 30 of 329
Q3
£000
Add
Final 87 1

588

434
At Cash At
1/1/02 Flows 31/12/02
(739)
Page 31 of 329
Belgo Limited
Notes £000 Marks
Taxation nil

(52 +26+87 – 87) (78) 2
Financing

(20 marks)

assets.

Question 4a

D
x100 marks
Turnover
(ii)
ratio 2,040 1,775 480 660
= Turnover = 1.57 : 1 = 1.2 : 1 = 12.6 : 1 = 4.94 : 1 2
net assets marks
(iii)
Page 32 of 329
employed 2,040+600 1,775 + 480 + 120 660 + 270
= profit + interest = 14.77% 465 = 44.17% = 18.28% 3
term
funds
liabilities
(iv)
Return on 300 420 250 140
= Profit = 14.71% = 23.66% = 52.08% = 21.21% 2
9
marks
(b)
(i)
Shareholders’ + 600 465 = 20% = 29.03%
Long-term = 22.73% = 20.76%
Funds
Liabilities
2 marks
(ii)
Current ratio 490+420+2 18,950+2,7 580+16+13 20+580+1
= 1.86 : 1 = 1.08 : 1 = 1.13 : 1 = 0.68 : 1
2 marks
(iii)
Interest cover
Interest = 4.33 =7 = 17.67 = 5.67
2 marks
6
marks
4) no trading stock
depositors)
(2.5 marks)
Page 33 of 329

(2.5 marks )

(2.5 marks )

air planes)
(2.5 marks)
Total 25 marks
SECTION C
Q5
company.
(2marks)
(3marks)
(2marks)
(2marks)
(3marks)
as a result.
Page 34 of 329
(3marks)
(5marks)
Q6
material.
(4marks)
(4marks)
(4marks)

(4marks)
(4marks)
Page 35 of 329
Examination Paper
Page 36 of 329
SECTION A
COMPULSORY QUESTION
Question 1
Debit Credit
£ £
Returns 2,300 1,700
Telephone 3,200
10% Debentures (2003) 10,000
818,450 818,450

3) Accrued expenses
4) Wages and salaries, includes Directors remuneration : £23,800( show them separately)

Over 90 days : £3,000
Page 37 of 329
60 to 90 days : £12,000
30 to 60 days : £ 20,000
30 to 60 days : 1%
60 to 90 days : 2.5%

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
Question 2
January
Page 38 of 329
REQUIRED
(Ignore VAT).
(15 Marks)
(5Marks)
Total Marks = 25
Question 3
31 Dec 2001 31 Dec 2002

£000 £000 £000 £000
Fixed Assets
1155 2620
Current Assets
Stock 363 480
Debtors 234 290
870 770

1760 2605

Financed by:-
Page 39 of 329

REQUIRED:
December 2002.
(20marks)
overdraft.
(5marks)
Total Marks = 25
Question 4

Sheets A B C D
Fixed Assets 2,100 600 514 1,300
Current Assets
Stocks 490 ----- 580 20
Debtors 420 18,950 16 580
2,640 2,240 600 930
year
2,040 1,775 480 660

Turnover 3,210 2,130 6,050 3,260
Expenses (2,820) (1,640) (5,785) (3,090)
Page 40 of 329
REQUIRED

(9 marks)

(6marks)
(10 marks)
SECTION C
Question 5

QUESTION 6
(k) Materiality
(l) Comparability
(m) Prudence
(n) Objectivity
(o) Relevance
(20marks)
Page 41 of 329
Marking Scheme
Section A
Question 1
1
£ £ £
Sales 618,600
616,300 1
Cost of sales

Purchases 324,500
421,000
Closing stock (70,000) (351,000) 2

(£1,000 - £620) 380 1
268,180
Telephone (£3,200 + £500) 3,700 ½
Wages (£71,700 - £23,800) 47,900 ½
Heat and light (£1,850 + £400) 2,250 ½


104,089

18marks
Page 42 of 329
1
Cost Cum. Net
Fixed assets depn
£ £ £
Motor Car 20,000 5,000 15,000 ½
147,500 71,250 76,250 ½
Current assets
Stocks 70,000 ½
Debtors
94,400
(620)
Prepayments 775 ½

months
Creditors 69,100 ½
Accruals (£400 + £500 +£1000) 1,900 1½
Dividends 6,666 ½

Net Assets 179,639
Financed by

12 marks
Page 43 of 329
Question 2a
Capital £
1/1/03 Bank 20,000 1
£ £
Bank
1/1/03 Capital 20,000 3/1/03 Rent 1,200
payable
28/1/03 P Donald 500 5/1/03 Office 5,000
equipment
25/1/03 A Hendry 3,000 3½
£
Purchases
2/1/03 A Hendry 3,500
18/1/03 A Hendry 2,400 1
£ £
A Hendry

outwards
25/1/03 Bank 3,000 18/1/03 Purchases 2,400
31/1/03 Balance 2,400
c/d
5,900 5,900
1/1/03 Balance b/d 2,400 4½
£
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 3½
1/1/03 Balance 1,250

b/d
£
Returns outwards
15/1/03 A Hendry 500 ½
15 marks
Page 44 of 329
b)
£
5 Marks
C)

Briefly explained.
5 marks
Page 45 of 329
Q3
£000
Add
Final 87 1

588

434
At Cash At
1/1/02 Flows 31/12/02
(739)
Page 46 of 329
Belgo Limited
Notes £000 Marks
Taxation nil

(52 +26+87 – 87) (78) 2
Financing

(20 marks)

assets.

Question 4a

D
x100 marks
Turnover
(ii)
ratio 2,040 1,775 480 660
= Turnover = 1.57 : 1 = 1.2 : 1 = 12.6 : 1 = 4.94 : 1 2
net assets marks
Page 47 of 329
(iii)
employed 2,040+600 1,775 + 480 + 120 660 + 270
= profit + interest = 14.77% 465 = 44.17% = 18.28% 3
term
funds
liabilities
(iv)
Return on 300 420 250 140
= Profit = 14.71% = 23.66% = 52.08% = 21.21% 2
9
marks
(b)
(i)
Shareholders’ + 600 465 = 20% = 29.03%
Long-term = 22.73% = 20.76%
Funds
Liabilities
2 marks
(ii)
Current ratio 490+420+2 18,950+2,7 580+16+13 20+580+1
= 1.86 : 1 = 1.08 : 1 = 1.13 : 1 = 0.68 : 1
2 marks
(iii)
Interest cover
Interest = 4.33 =7 = 17.67 = 5.67
2 marks
6
marks
7) no trading stock
depositors)
(2.5 marks)
Page 48 of 329

(2.5 marks )

(2.5 marks )

air planes)
(2.5 marks)
Total 25 marks
SECTION C
Q5
company.
(2marks)
(3marks)
(2marks)
(2marks)
(3marks)
as a result.
Page 49 of 329
(3marks)
(5marks)
Q6
material.
(4marks)
(4marks)
(4marks)

(4marks)
(4marks)
Page 50 of 329
DECEMBER 2003
COURESE WORK
Page 51 of 329
Assignment

Date Issued: 18th September 2003
Hand in by: 17th October 2003
2. Students must submit their assignments to the Reception by 5:00 pm on 17th October 2003 at
the latest.
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
Page 52 of 329
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)
Page 53 of 329
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
₤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)
Page 54 of 329
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
10,100
Net current assets 1
₤ 15,600
Net Assets 1
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
Page 55 of 329
5. Stocks lost in the burglary are accounted for by
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)
Page 56 of 329
Examination Paper
Date: 9th December 2003
Page 57 of 329
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
Page 58 of 329
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)
Page 59 of 329
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
Fixtures and fittings at cost 14,300
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)
Page 60 of 329
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)
Page 61 of 329
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)
Page 62 of 329
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)
£ £
310,000 ½
Sales
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
82,000 ½
Gross profit
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
Page 63 of 329
23,300 ½
Net profit
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 £56,160 ½
20X3
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
30,367
Net current assets
125,160 ½
20,000
Long-term liabilities
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
Page 64 of 329
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 = 2
£50,000 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 2
42,500
5
Page 65 of 329
b)
Trading
Profit and Loss Account for
The year ended 31 March 2003
FIFO LIFO
£ £ £ £
Sales 190,900 190,900
1 1
Cost of Sales:
Opening Stock
Purchases 177,900 177,900
177,900 177,900
Less: Closing (50,000) (42,500)
Stock 1 1
127,900 135,400
Gross Profit 63,000 55,500
Overhead (9,000) (9,000)
Expenses 1 1
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.
Page 66 of 329
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 700 1.5
(Being bad debts w/off
P & L A/c 215 1.5
Provision for doubtful 215 1.5
debts A/c
(Being 2.5% provision on
debtors)
4.5 marks 4.5 marks
1 mark for presentation
Total – 10 marks
Page 67 of 329
b) Corrected Trial Balance as at 30 April 2003
DR CR
£ £
Business Property @ cost 48,000
½
Motor Vehicles @ cost 18,400
½
Fixtures and fittings @ cost 14,300
½
Stock 16,000
1½
Creditors 8,400
½
Debtors (9,300 – 700) 8,600
1
Sales 141 640
Balance at bank 8,900
½
Sales returns 2,000
½
Capital (40,000 – 6,400) 33,600
2
Drawings 14,000
Purchases returns 1,800
Discount Allowed 310
½
Discount received 470
Purchases 77,100
Bad Debts 700
1
208,310 208,310
1
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)
Page 68 of 329
Question 4
a)
Sales Ledger Control Account
DR CR
£ £
Balances B/D 41,580 Balances B/D 600
1 1
Credit Sales 46,950 Set offs 750
1 1
Bad debts 450
1
Return inwards 1,220
1
Cash Received from 41,630
customers 1
Discount Allowed 600
1
(42,230 – 41,630)
Balances C/D 43,400
1
88,650 88,650
½ 1/2
(10 marks)
b)
Purchases Ledger Control Account
DR CR
£ £
Set – offs 750 Balances B/D 27,020 1
1
Cash paid to 25,260 Credit purchases 26,380 1
suppliers 1
Discounts 590 Bal C/D 230 1
Received 1
Returns Outwards 620
1
Balances C/D 26,410
1
53,630 53,630
(8 marks)
Page 69 of 329
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
Page 70 of 329
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)
Page 71 of 329
JUNE 2004
Page 72 of 329
Assignment

2. Students must submit their assignments to the Reception by 5:00 pm on 15th April 2004 at the
latest.
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
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
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.
Page 73 of 329
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:
£
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)
Page 74 of 329
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
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
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
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
₤66,300 ₤66,300
( 1mark each entry, max 6marks)

Page 75 of 329
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
₤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)
Page 76 of 329
Mutu Samy
BALANCE SHEET AS AT31 MARCH 2003 1
Cost Dep’n N.B.V

₤ ₤ ₤
Fixed Assets
Buildings 10,000 6,500 3,500
₤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
Accrued expenses 530
10,030 2
10,100 2
Net current assets
₤ 15,600 1
Net Assets
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

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
Page 77 of 329
13. Stocks lost in the burglary are accounted for by
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)
Page 78 of 329
Examination Paper
Date: 15 June 2004

14. Section B – COMPULSORY question
15. Section C – Answer TWO questions only
(ii) Apportion your time according to the number of marks allocated for
each question.
Page 79 of 329
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
Page 80 of 329
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)
Page 81 of 329
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 15 28 17 26
value
Selling 3 2 3
expenses
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)
Page 82 of 329
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
(1 mark)
14. Cash flow statements are required by…
A. the companies acts
B. financial reporting standard no.1 (FRS1)
C. the stock exchange
(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)
Page 83 of 329
SECTION B – COMPULSORY QUESTION
Q2.
The following balances were extracted from the books of Harry Potter limited at 31
December 2003.
DR CR
£000 £000
Sales and Purchases 2334 6502
Stock at 1 January 2003 136
Light heat and gas 230
Wages and salaries 902
Repairs and maintenance 622
Carriage outwards 568
General expenses 628
Debenture interest paid 30
Interim ordinary dividend paid 240
Ordinary share capital (£1) 2000
Share premium account 1600
8% preference shares 1200
12% Debentures 2009 500
General reserves 240
Profit and loss account
Balances brought forward 146
Freehold land and buildings at cost 4900
Plant + equipment at cost 1240
Motor vehicles at cost 1044
Provision for depreciation
On- plant + equipment 240
-Motor vehicles 444
Cash at bank 1280
Debtors 256
Creditors 386
Interim preference dividend paid 48
14458 14458
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
Page 84 of 329
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
Page 85 of 329
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
Page 86 of 329
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
Page 87 of 329
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)
Page 88 of 329
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)
Page 89 of 329
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
Page 90 of 329
2.
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)
Page 91 of 329
(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
Page 92 of 329
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.
Page 93 of 329
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.
Page 94 of 329
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
Page 95 of 329
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)
Page 96 of 329
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.

Page 97 of 329
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
Page 98 of 329
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)
………………………………………………………………………………………………………
Page 99 of 329
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.
Page 100 of 329

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.
Page 101 of 329

Assignment
Date Issued: 14th October 2004
Hand in by: 11th November 2004
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.
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.
Page 102 of 329

(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.
Page 103 of 329

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
Page 104 of 329

Examination Paper
Date: 14 December 2004

each question.
Page 105 of 329

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)
four products.
Product A B C D
Cost £ 24 £ 25 £ 23 £ 31
Net Realisable £ 20 £ 37 £ 23 £ 35
value
Carriage 0 3 2 3
Inwards
Cost
Page 106 of 329
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)
Page 107 of 329

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)
Page 108 of 329

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
Page 109 of 329

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)
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)
Page 110 of 329

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)
Page 111 of 329

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
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
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 brought forward 6,000 0.5
Retained profits carried forward 11,218 0.5
18
Page 112 of 329

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
Page 113 of 329

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 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
(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
Page 114 of 329

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 £ 31 Jan 04 Returns day book
45,020 £ 10,440
31 Jan 04 Credit Sales Cheques received from Customers
501,510 458,770
Dishonoured Cheques Cash from customers
1,790 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)
Page 115 of 329

PURCHASES LEDGER CONTROL ACCOUNT
DR
CR
31 Jan 04 Returns day book £ 1 Feb 03 Balances B/D £
3,070 27,910
Cash paid to suppliers 31 Jan 04 Credit Purchases
230 300,450
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
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)
Page 116 of 329

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
Page 117 of 329

June 2005
Page 118 of 329

Assignment
Hand in by: 21st April 2005
INSTRUCTIONS TO STUDENTS:
2. Students must submit their assignments to the Reception by 5:00 p.m. on 21st April 2005 at
the latest.
5. Your assignment must be word-processed and submitted in clear transparent pockets, NOT in
ring binders. All pages should be numbered.
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:
Page 119 of 329
(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%)
Page 120 of 329

Marking Scheme
Requirement Mark Range Total %

(a) There is evidence of cash & credit 0-5
transactions.
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 Poor 0-4
employed in the
Day books. Above average 5-6
Very good 7-10
10
(c ) Accurately posting the transactions Poor/below 0-6
totals into the average
Ledger system. Above average 7-10
Very good 11-
15
15
(d) Correctly reconciling the balances to Poor 0-1
the
Control accounts & closing of all the Average 2-3
accounts.
Very good 4-5
5
(e) Accurately prepared the Trial Balance Poor 0-1
without any
Differences. Average 2-3
Very good 4-5
5
(f) Making the relevant journal entries for Poor 0-4
year end
Adjustments. Above average 5-6
Very good 7-10
10
(g) Drafting the Final Accounts in proper Weak 0-5
form from
The Trial Balance. Poor/below 6-9
average
Above average 10-
15
Very good 16- 20
20
(h) Group report on their contribution and
the
Skills developed. 10
Page 121 of 329
(i) Overall quality of the group’s work in Below average 0-4
terms of:
Presentation was word processed, neat Average 5
and tidy,
Descriptions, explanations and any Above average
assumptions and
Are clearly expressed, and the Trial Very good 6-10
Balance and
Final Accounts are well organised and 10
Clearly presented.
Total marks 100
Page 122 of 329

Examination Paper
Date: 14 JUNE 2005

each question.
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)
Page 123 of 329

4. During the year a business sells plant & machinery. The following information is known.
£
Original cost 1000
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)
four products.
Product A B C D
Cost £ 36 £ 38 £ 34 £46
Realisable £30 £56 £34 £52
value
Selling £6 £4 £6
expenses
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)
Page 124 of 329
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)
Page 125 of 329

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
Rents, rates and insurance 87,800
Provision for depreciation 1 August 20X3
- Buildings 45,000
- Fixtures and fittings 14,000
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.
Page 126 of 329
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 3,600
Plant and Machinery 900 800
5,860 4,400
Current 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)
6,600 5,100
Creditors: amounts falling due after more than one year
10% Debentures (600) nil
Net assets 6,000 5,100
Ordinary Shares of £1 each 1,400 1,000
Profit 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
Page 127 of 329
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’s
Fixed assets 3,600 3,600
Net current assets 400 400
Total net assets 4,000 4,000
Less: Creditors due within one year:
10% Debentures 1,600 400
2,400 3,600
£000’s £000’s
Ordinary Share Capital 2,000 3,400
8% 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.
Page 128 of 329

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)
Page 129 of 329

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 2,728,000
Less 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 0.5 496,000
Less Expenses:
Rents, rates and 81,082
insurance
Advertising 28,994
Bad and doubtful debts 32,434
(293,112)
Operating profit 0.5 202,888
Bank Interest 7,000
Debenture interest 30,000 1
(37,000)
Profit before tax 165,888
Less corporation tax 0.5 (44,000)
Profit after tax 0.5 121,888
Less dividends:
Preference proposed (18,000) 1
Ordinary proposed (92,000) 1
(110,000)
Retained profit for the year 1 11,888
Page 130 of 329
1= 18
(b) Salar Ltd
Balance sheet as at 31 July 20X4 0.5
Cost Accumulated NBV

depreciation
£ £ £
Fixed assets
Land 40,000 40,000
Buildings 180,000 (54,000) 126,000
Fixtures and Fittings 24,000 (17,500) 6500
244,000 (71,500) 172,500
3
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 1,213,844
Less current liabilities
Creditors 171,668
Accrued expenses 22,224
Proposed dividends 110,000
Taxation 44,000
2.5 (347,892)
Net current assets 865,952
Total assets less current 0.5 1,038,452
liabilities
Less long term liabilities
10% debentures 2010 0.5 (300,000)
Net assets 738,452
Financed by
Share Capital:
10% £1 Preference shares 0.5 180,000
Ordinary shares of 50p each 0.5 460,000
640,000
Reserves:
Share premium account 0.5 40,000
Retained profit 0.5 58,452
738,452
12
Page 131 of 329

Question 3’ Answer
(a)
Operating Profit 2 1,060
Depreciation 1 1,200
Working capital adjustment
Stock 1 (220)
Debtors 1 (340)
Creditors 1 260
Net Cash Flow from Operating 1 1,960
Activities
Servicing of Finance - |Interest 1 (60)
Capital Expenditure
L+B (2,160) 2
P+M (500) 2 (2,660)
1 (760)
Dividends paid 2 (460)
1 (1,220)
Financing
Debentures 600 1
Ordinary Shares (400 + 100) 500 2 1,100
Decrease 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)
Page 132 of 329

(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)
Page 133 of 329

December 2005
Page 134 of 329

Assignment
Date Issued: 6th October 2005
Hand in by: 3rd November 2005
INSTRUCTIONS TO STUDENTS:
2. Students must submit their assignments to the Reception by 5:00 p.m. on 3rd November 2005
at the latest.
5. Your assignment must be word-processed and submitted in clear transparent pockets, NOT in
ring binders. All pages should be numbered.
Page 135 of 329

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
(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.
Page 136 of 329

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
Page 137 of 329

Examination Paper
Date: 13 DECEMBER 2005 (10AM – 1PM)
1. SECTION A – COMPULSORY MULTIPLE CHOICE QUESTIONS

2. SECTION B – COMPULSORY QUESTION
3. SECTION C – ANSWER ANY TWO QUESTION
Page 138 of 329

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:

A Decrease bank Decrease creditors
B Increase bank Decrease debtors
(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.

E- £ 5,100
F- £ 5,300
G- £ 5,500
H- £ 5,600
(2 marks)
four products.
Product A B C D
Cost £ 24 £ 25 £ 23 £ 31
Net Realisable £ 20 £ 37 £ 23 £ 35
value
Carriage 0 3 2 3
Inwards
Cost
Page 139 of 329

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
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)
Page 140 of 329

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)
Page 141 of 329

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
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
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)
Page 142 of 329

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 CR
Sales 6,440
Cost 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 600
Shares premium 250
Debtors and Creditors 920 1,090
Quoted investments at cost 220
Share capital (50p shares each) 700
General reserve 150
Profit and loss account at 1 July 1999 330
Provision for doubtful debts 30
Bank 790
Provision for depreciation:
Freehold Property 330
Plant 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
(Credit) 240
Credit sales 23420
Cash sales 11380
Page 143 of 329
Cash received from debtors 14300
Discount allowed 2420
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
Page 144 of 329

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
(p) Materiality
(q) Comparability
(r) Prudence
(s) Objectivity
(t) Relevance
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
Page 145 of 329
(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
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)
Page 146 of 329

Marking Scheme
Page 147 of 329

June 2006
Page 148 of 329

Assignment
Date Issued: 23rd March 2006
INSTRUCTIONS TO CANDIDATES:
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.
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.
Page 149 of 329

(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.
Page 150 of 329

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
Page 151 of 329

Examination Paper
Date: 13 JUNE 2006 (10AM – 1PM)
21. SECTION A – COMPULSORY QUESTION.

22. SECTION B – COMPULSORY QUESTION.
23. SECTION C – ANSWER ANY TWO QUESTION.

Page 152 of 329

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)
Page 153 of 329

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)
Page 154 of 329

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)
Page 155 of 329

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 350,000

9% Preference shares of £1 each fully paid 60,000
Freehold buildings at cost 550,000
Freehold building depreciation 45,000
Motor vehicle depreciation 18,000
Equipment depreciation 20,000
Stock at 1 June 2005 60,500
Trade Creditors 29,750
Trade Debtors 55,600
10% Loan Stock 2010 40,000
Sales 1,100,000
Purchases 720,200
Discount Received 7,500
Discount Allowed 3,050
Interest 2,000
Administration expenses 47,925
Selling & distribution expenses 60,725
P & L account at 1 June 2005 12,850
Trade investments 20,000
Bank 14,500
1,700,000 1,700,000
(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.
Page 156 of 329

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
560
Operating profit 65
Interest – all paid in the year 5

Profit before taxation 60
Taxation at 30% 18
Profit after taxation 42
Dividends
Final proposed dividend 8
Profit retained 34
Balance sheets at 28 February 2005 and 28 February 2004
2005 2004
£M £M
Fixed assets: (see note below)
Tangible assets 150 120
Investment 75 70
225 190
Current assets:
Stocks 39 28
Debtors 24 18
63 46
Creditors – amounts falling due within 1
year
Trade creditors 5 10
Taxation 18 14
Final dividend proposed and payable 8 6
Bank overdraft 22 18
53 48
Net current assets/(liabilities) 10 (2)
Total assets less current liabilities 235 188
Page 157 of 329
Creditors – amounts falling after more
than 1 year
10% loan stock 20 27
215 161
Capital and reserves
Called up share capital 90 70
Profit and loss account 125 91
215 161
Note:
Fixed assets
Tangible assets
Cost 189 159
Accumulated 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) 300
Cost of Sales 180
Gross Profit 120
Selling general & administration expenses 86
Profit Before Interest 34

Interest:
Notes Payable 4
Long-term Debt 8
Total Interest 12
Profits before taxes 22

Corporation Tax 9
Profits after taxes 13
Proposed dividends 13
Retained profits nil
Page 158 of 329
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 75
Total Assets less current liabilities 155
10% Long-term debt 80
Net Assets 75
Share Capital 75,000 ordinary Shares of £1 75

Reserves 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)
Page 159 of 329

(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)
Page 160 of 329

Accounting
Marking Scheme
Answer 2
Marlin Ltd
Trading, Profit and Loss Account for year ending 31st may 2006 1
£000 £000
Turnover ½ 1,100
Less Cost of Sales (w1) 2 718.7
Gross Profit
½ 381.3
Administrative expenses (w2) 100.499 6
Selling & Distribution expenses (w3) 61.925 1.5
162.424
Profit before interest and tax ½ 218.876
Interest 1 4
Profit before tax ½ 214.876
Taxation ½ 20
Profit after tax ½ 194.876
Dividends: Preference 5.4 1
Ordinary 28 1 33.4
Retained Profit for the year ½ 161.476
Profit & Loss balance c/fwd ½ 12.85
Profit & 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 612.2
Current 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 1.5
Bank overdraft 14.5 ½
Taxation 20 ½
Dividends 33.4 ½
103.25
Page 161 of 329

Net Current Assets ½ 12.126
Total Assets less Current Liabilities 624.326
Creditors: amounts falling due after one year
Loan ½ 40
Net Assets 584.326

Ordinary Share Capital ½ ½ 350
Preference Share Capital ½ 60
Profit and Loss ½ 174.326
Shareholders Funds 584.326
12
Workings
1. Cost of Sales
Opening Stock ½ 60.5
Purchases ½ 720.2
Closing Stock ½ (62)
½ 718.7
2. 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 61.925
4. Fixed Assets Cost Acc.Depr NBV
Premises 550 72.5 477.5
Motor Vehicles 120 33.3 86.7
Fixtures & Fittings 60 32 28
592.2
5. Debtors and Prepayments
Trade Debtors ½ 55.6
Less Prov. DD ½ (2.224)
53.376
6. Accruals
Interest ½ 2
Admin accrual ½ 2.4
S&D accrual ½ 1.2
5.6
Page 162 of 329

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)
Page 163 of 329

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)
Page 164 of 329

(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
Page 165 of 329

December 2006
Page 166 of 329

Assignment
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
4. Your assignment must be word-processed in Microsoft Word. All pages should be
numbered.
inside quotation marks and referenced using the Harvard method.
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
Page 167 of 329

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.
Page 168 of 329

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)
Page 169 of 329

Examination Paper
Date: 12 December 2006 (10AM – 1PM)
1. SECTION A – COMPULSORY QUESTION

3. SECTION C – ANSWER ANY TWO QUESTION
Page 170 of 329

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
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
value
Selling 3 2 3
expenses
At how much should the total inventory be valued?

A. £72
B. £77
C. £78
D. £86
Page 171 of 329

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
Page 172 of 329

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 55
November 2005
Provision for depreciation on motor vehicles at 1 24
November 2005
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
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.
Page 173 of 329

(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 90,000 100,000 120,000
Cost of sales 74,000 75,000 92,000
Gross profit 16,000 25,000 28,000
Administrative overheads 3,000 5,000 6,000
Net 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
113,000 120,000 141,000 153,000
Current 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 40,000
Current 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.
Page 174 of 329

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 £000
Trade Receivables ( debtors) 17 23
Trade Payables ( creditors) 29 21
Inventory 40 43
Prepayment 2 1
Cash at bank 2 1
Bank loan 40 40
Other payables 9 7
Cash in hand 1 1
Non-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)
Page 175 of 329

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
8 March Sold 300
18 March Sold 500
25 March Sold 450
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)
Page 176 of 329

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%) – 5 1
15))
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)
Page 177 of 329

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 394 } 11/
5%) + 10 + 4) 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
Current Liabilities
Trade Payables (275 +83 + 8 + 105 + 240 + 746 2
35 )
Total equity and liabilities 4,493 1
(10 marks)
Page 178 of 329

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)
Page 179 of 329

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)
Page 180 of 329

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)
Page 181 of 329

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)
Page 182 of 329

A5b
The gross profits reported for the month.
FIFO LIFO
£ £ £ £
Sales (1500 @ 24) 36000 36000
Cost of Goods Sold:
Opening Stock - -
Less: Closing Stock (7650) 28700 (6500) 29850
Therefore, 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)
Page 183 of 329

June 2007
Page 184 of 329

Assignment
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
numbered.
Page 185 of 329

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.
Page 186 of 329

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%
Your overall marks subject to external

Total 100% moderation
Page 187 of 329

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)
Page 188 of 329

Examination Paper
Date: 12 June 2007 (10am – 1pm)

27. SECTION C – ANSWER ANY TWO QUESTIONS
Page 189 of 329

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
Page 190 of 329

(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
Page 191 of 329

(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
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
Page 192 of 329

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 6,500
Opening stock (inventory) 900
Purchases 3,780
Discounts 15 5
Selling and distribution costs 650
Provision (Allowances) for bad debts (receivables) at 1 July 2006 30
Freehold property at cost 1,200
Plant and machinery at cost 800
Motor Vehicles at cost 130
Trade Debtors (receivables) 1,000
Cash at Bank 800
Trade Creditors (payables) 900
Short –term investment at cost 200
Ordinary share capital (50p shares each) 800
Share premium 250
Retained earnings at 1 July 2006 605
10% Debentures 250
General reserve 200
Provision for depreciation at 1 July 2006:
Freehold property 330
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)

Page 193 of 329
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
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
4,180
Operating profit 3,820
Debenture interest 160
Net profit before tax 3,660
Taxation 680
Profit after tax 2,980
Dividends 520
Retained earnings 2,460
Note: There were no disposals of fixed assets during the year.
Page 194 of 329

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 400
12 Bank giro transfer 140 9 Loong fong 16
16 Up Lee sales 360 11 Fat Lam 36
30 Chee Ho Fun 2,200 12 Ping Pong 1,400
31 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 Balance

2007 £ £ £
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
Page 195 of 329

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
(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)
Page 196 of 329

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
Page 197 of 329

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
Ordinary share capital 800 ½
Share premium 250 ½
General reserve 200 ½
Retained
earnings 1309 ½
2559
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
Page 198 of 329

Workings £OOO £OOO
Administrative
1 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
Kay
A3 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
Page 199 of 329
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
Page 200 of 329
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
Main
(b) differences:-
Timing
differences 3
Errors either in cash book or bank statements 3
(c ) Updated Cash Book
Bank a/c
Jan £ Jan £
Chan
Bal B/D 4500 Ltd 400
Bank giro 140 Loong fong 16
Fat
Up Lee sales 360 Lam 36
Chee Ho Fun 2200 Ping Pong 1400
Yi
Char Siew 100 Yang 194
Kam Fook 1200
Wing
1 Bank giro tfr 1000 Ltd 50
1 D/D China Trade 300

1 S/O Magazine 60
1 Bank charges 40
8300 3696
Page 201 of 329

Bal
31 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
Page 202 of 329

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
Page 203 of 329

December 2007
Page 204 of 329

Assignment
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.
numbered.
Page 205 of 329

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
(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.
Page 206 of 329

Marking Scheme :
1
Analysis
Requirement Good Correct Correct including Total
contents,
definition Formulae Calculation 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
Up to 3marks
following:- 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
Page 207 of 329

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.
Poor: 0-
4 Presentation and referencing 4 10
Average: 5
Above average
& Very Good: 6-10
Assignment Total: 100
Page 208 of 329

Examination Paper
Date: 11 December 2007 (10am – 1pm)

3. SECTION C – ANSWER ANY TWO QUESTIONS
Page 209 of 329

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
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
Product A B C D
Cost £ 18 £ 19 £ 17 £23
value
Selling 3 2 3
expenses

I- £72
J- £77
K- £78
L- £86
Page 210 of 329

(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.

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
company will be
A- £14,000
B- £26,000
C- £54,000
D- £66,000
Page 211 of 329

(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:
DR CR
£000 £000
Sales 6,440
Cost of Sales 3,860
Closing Inventory at cost 820
Discounts 20
10% debentures 600
Share premium 250
Trade receivables and trade payables 920 1,090
General reserve 150
Allowances for trade receivables 30
Bank 790
10,190 10,190
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
end was 10% below cost.
Page 212 of 329

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:
£
Basic Cost 36,000
Number plates 30
Comprehensive insurance 400
10 gallons of diesel fuel 35
Delivery charge 100
Road fund licence 250
Specially fitted food containers for the van 2,400
Service and parts 300
Sign writing on van 155
39,670
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)
Page 213 of 329

(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:

(Credit) 580
(Credit) 240
Credit sales 23420
Cash sales 11380
Cash received from debtors 14300
Discount allowed 2420
Sales returns 320
Bad Debts written off 940
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)
Page 214 of 329

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)
Page 215 of 329

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
Page 216 of 329

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 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
Page 217 of 329

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
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)
Page 218 of 329

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)
Page 219 of 329

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
Page 220 of 329

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
BAD
BALANCES C/D 240 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
Page 221 of 329

5
c) Benefits of control Accounts 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)
Page 222 of 329

Objective of IAS
(b) 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)
Page 223 of 329

JUNE 2008
Page 224 of 329

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.
Page 225 of 329

MARKING SCHEME
IBD
Business Accounting
Jun-08
Report for meeting should include the following:
Double entry bookkeeping is a system of recording business

1 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)
Sales ledger consists of the personal accounts of all debtors or trade

4 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)
The cash book and petty cash book acts as books of prime entry and also
5 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.
Page 227 of 329

All the ledger accounts would be balanced off at regular intervals by the
6 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
Distinction between capital and revenue expenditure with

7 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)
Page 228 of 329

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!
Page 230 of 329

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)
Page 232 of 329

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
Page 233 of 329

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.
Page 234 of 329

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
4 8 12 16 20
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
8 16 24 32 40
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
General comments:
..................................................................................................................................................................
..................................................................................................................................................................
............................................................................ Overall grade:……… % weighting (25)
‘The Importance of Good Communication in Customer Service at Xexelbank’
Page 235 of 329

Presentation - Self evaluation (IBAM)
Aspect of presentation Rating (1-low, 5-high) How I will improve
1 2 3 4 5
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?
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.
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………
Page 236 of 329

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:
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………
……………
Page 237 of 329

Communication process model:
ENCODING DECODING
SENDER MESSAGE CHANNEL MESSAGE AUDIENC
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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---------------------------------------------------------------------------------------------------------------------------------------
------
---------------------------------------------------------------------------------------------------------------------------------------
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---------------------------------------------------------------------------------------------------------------------------------------
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Page 238 of 329

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
SENDER MESSAGE CHANNEL MESSAGE AUDIENC
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.
Page 239 of 329

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.
Page 240 of 329

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?
CONTACT
Yes
AGAIN
No
MAKE AN
OFFER Purchase?
CONTACT
Yes
AGAIN
No
THANK
YOUR
CUSTOME
R
MAKE
ANOTHER
OFFER Purchase?
CONTACT
Yes
AGAIN
No
RELATION
IS FORMED
Page 241 of 329

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:
Page 243 of 329
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
Page 244 of 329

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

Page 245 of 329
• 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.
Candidates should mention some of the following to overcome barriers:
• Team meetings
• Suggestion box
• Staff notice
• In-service training
• Appraisal instructions
• Listening skills
Page 246 of 329

Examination
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:

A Decrease bank Decrease trade payables
B Increase bank Decrease trade receivables
( 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
Product A B C D
Cost £ 24 £ 25 £ 23 £ 31
Net Realisable £ 20 £ 37 £ 23 £ 35
value
Carriage 0 3 2 3
Inwards
Cost
Page 247 of 329

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)
Page 248 of 329

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
Discounts allowed 1,520
Discounts received 2,150
Travelling costs 2,330
Rent payable 8,800
Motor expenses 1,860
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
Page 249 of 329

(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
Nanee
Tavez Ltd Ltd
Non-current assets £ooo £ooo £ooo £ooo
N.B.V N.B.V/Val
Land 120 390

Buildings 120 300
Plant & 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 105 390

Profit for the year 45 150
Revaluation reserves 0 240
150 780
Current liabilities
Trade payables 165 180

Bank overdraft 75 0
240 180
Total Equity and

liabilities 540 1155
Page 250 of 329

Income statement
Extract:
Sales 1500 4500

Cost 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
Page 251 of 329

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)
Page 252 of 329

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)
Page 253 of 329

Section B
A2
Uggla
Limited
Income Statement for the year ended 31 December 20X7 1
£ £ £
Sales
Revenue 107500
Less: Returns inwards -500 1/2
Net Sales Revenue 107000 1
Less: Cost of Sales:
Opening
Inventory 2500
Purchases 57200
Carriage costs 200
Returns
outwards -400
59500
Less: Closing Inventory -5800
53700 3
Gross
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 1/2

Interest
charges -500 1/2
Profit
before tax 7090 1/2
Taxation -1500 1/2
Profit after
tax 5,590 1/2
Page 254 of 329
Dividends -1,000 1
Profit for the year 4,590 1/2
Retained profits brought forward 8,960 1/2
Retained 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 1/2
Trade accounts receivable 26000 1
Less Allowances -1300 24700 1
Cash at Bank 4200 1/2
34700 1/2
Total Assets 60800 1/2

Equity
Ordinary share capital 20000 1/2
Retained profits 13,550 1/2
Total Equity 33550
10% Debentures 5000 1/2
Current Liabilities
Trade accounts payables 19500 1/2
Corporation tax 1500 1/2
Dividends 1000 1/2
Accrued expenses 250 1/2
22250
Total equity and liabilities 60800 1/2
11 1/2
30
Page 255 of 329

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%
Profit before
ROCE 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 *
Tr. Receivable days 365 2 37 days 11 days
Sales
L/T
Gearing ratio 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
Page 256 of 329
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.
3
ii) 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.
3
iii) 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
3
iv) 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
Page 257 of 329

within one year.
2
v) 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.
3
vi) 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.
2
vii) 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.
2
viii) 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.
2
ix) 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.
2
x) 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
Page 258 of 329
Variable costs are those costs that do change with the level of activity or
output. Eg, direct materials
3
Contribution is the difference between the selling price and the variable
b) 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.
4
c)
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
Page 259 of 329

December 2008
Page 260 of 329

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.
Page 261 of 329

Marking Scheme :
Assumptions:- Marks
Income matched against expenses when they are

Accruals: 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
Page 262 of 329

EXAMINATION
Business Accounts
Dec 20O8
Question 1
(a) During the year a business sells a non-current asset; the following information is known.
£
Original cost 500
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
Product A B C D
Cost £ 18 £ 19 £ 17 £23
value
Selling 3 2 3
expenses
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
Page 263 of 329

(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
Page 264 of 329

(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.
Question 2
The following balances are extracted from the books of Sif Otterson Limited at
31 December 2007.
DR CR
£000 £000
Sales and Purchases 2334 6502
Inventory at 1 January 2007 136
Light heat and gas 230
Repairs and maintenance 622
General expenses 628
Interim ordinary dividend paid 240
Ordinary share capital (£1) 2000
Share premium account 1600
8% preference shares 1200
General reserves 240
Retained earnings at 1 January 2007 146
Freehold land and buildings at cost 4900

Plant + equipment at cost 1240
Provision for depreciation
On- plant + equipment 240
-Motor vehicles 444
Cash at bank 1280
Trade receivables 256
Trade payables 386
Interim preference dividend paid 48
14458 14458
Page 265 of 329

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:
Page 266 of 329

2006 2007
Cost DEP'N NBV Cost DEP'N NBV
£ £ £ £ £ £
Non – current assets
Land and buildings 100,000 10,000 90,000 100,000 12,000 88,000

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
72,000 98,000
Total Assets 205,000 242,000
Equity

Retained profits 11 ,500 13,500
121,500 143,500
Current Liabilities
Creditors 23,000 27,500

Other payables 10,500 15,000
53,500 58,500
53,500 58,500
Page 267 of 329

Total Equity and liabilities 205,000 242,000
Additional Notes for 2007:

Dividends paid 10,500
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
(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

• Gross profit (3marks)
• Operating profit (3marks)
• Issued Share capital (2marks)
• Authorised Share capital (2marks)
(25marks)
Page 268 of 329

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
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
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
Page 269 of 329

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 5,186
Net profit for the period ½ 462 462
Transfer to reserves ½ 50 -50 0
Dividends ½ -336 -336
Balance 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
Page 270 of 329

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
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
Page 271 of 329

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
Depends on size of item, judgemental errors, omission or mistatement
a) which
can influence the economic decisions of users of financial statements.
Page 272 of 329

Eg. amount of trade debt written off as irrecoverable as a note if material.
5
b) 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.
5
e) 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
Page 273 of 329

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
Page 274 of 329

June 2009
Page 275 of 329

INTERNATIONAL BUSINESS DIPLOMA
Examination Paper
Date: 09 June 2009 (10am – 1pm)

2. SECTION B – ANSWER ANY TWO QUESTIONS
3. SECTION C – ANSWER ANY ONE QUESTION
Page 276 of 329

SECTION A – Compulsory Question
The trial balance of LCB Limited at 30 June 2007 is as follows:
DR CR
£000 £000
Sales 6,440
Cost of Sales 3,860
Closing Inventory at cost 820
Discounts 20
10% debentures 600
Share premium 250
Trade receivables and trade payables 920 1,090
General reserve 150
Allowances for trade receivables 30
Bank 790
10,190 10,190
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
end was 10% below cost.
Page 277 of 329

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
Page 278 of 329

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)

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
Page 279 of 329

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
Page 280 of 329

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)
Page 281 of 329

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
Page 282 of 329

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
Page 283 of 329

Admin
1 Expenses £0 £0
As per question 690

Investment
Add: income 13
Less: Prepayments
Rates - 24000 *
9/12 18
Insurance - 18000 * 6/12 9
-27
676
Debenture
2 Interest
As per question 30
Add: Accruals 30
60
3 Allowances for trade receivables
Receivables as per
question 920
Bad
Less: 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
Page 284 of 329
TOTAL ASSETS 3451
EQUITY AND LIABILITIES:

EQUITY
Ordinary Share Capital (50p shares) 700 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)
Page 285 of 329

SECTION B
A2;
(a) Ratios
Cod Ltd. Salmon Ltd.
Gross Profit Ratio 90/360 * 100 110/540 * 100
GP/Sales * 100 = 25% (1) = 20.37% (1)
Net Profit Ratio 45/360* 100 70+2/540 *100

=12.5% (1) =13.3% (1)
NP (Before Interest)/Sales
* 100
ROCE 45/310 * 100 72/230+20 *100

NP (Before Interest)/ = 14.5% (1) = 28.8% (1)
Capital Employed *
100
Current Ratio 298/68 222/72
Current Assets/ = 5.38:1(1) =3.08:1(1)
Current Liabilities
Acid Test Ratio 298-67/68 222-94/72

C.Assets-Stock/ =3.40:1(1) =1.77:1 (1)
C.Liabilities
Stock Turnover Ratio 90/270 * 365 93/430*365

Average Stock/ = 122days(1) =79days(1)
Cost Of Sales * 365/1
Gearing 50/310 *100 20/250 * 100

Preference Share Capital = 16%(1) =8% (1)
+
Long Term Loans * 100
Shareholders Funds +
Long Term Loans
Debtors Collection Period 136 * 365 128 *365

360
Trade Debtors = 138days(1) 540
365 =87days(1)
Credit Sales * 1
Total Marks
8M
8M
Page 286 of 329

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.

Report Style – 2 marks
Total 9 Marks
Page 287 of 329

SECTION B
A3 (A)
Sales Ledger Control A/C

£ £
Balance b/d (1) 45020 Sales return (1) 10440
SD book (1) 501510 Bank receipts from customer 458770
Dishonored Cheque from (1)
Customer (1) 1790 Cash receipts from 33330
customers (1) 2090
Bad debts (1) 7080
Discounts allowed (1) 2330
Set-off Balances (1) 34280
Balanced c/d (1)
548320 548320
(1)
Balances b/d
34280
Total 11marks
Purchases Ledger Control A/C
£ £
P.returns (1) 3070 Balances b/d (1) 27910
Petty cash to suppliers (1) 230 P.d. Book (1) 300450
Cheques to suppliers (1) 281990
Discounts received (1) 6540
Set-off (1) 2330
Balance c/d (1) 34200
328360 328360
Balances b/d (1) 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)
Page 288 of 329

A4
(a) (I)
Office Equipment Cost A/C
£ £
Balance b/f (1) 52300 Disposal (1) 4000
Bank (1) 7000 Bal c/f 56500
Bank (1) 1200
60500 60500
Balance b/f (1) 56500
5 marks
(ii)
Provision for Depreciation

On office equipment A/C
£ £
Disposal (1) 2400 Balance b/f (2)
Balance c/d 30460 (3*4000) 12000
(2*3100) 6200
(1*3360) 3360
P & L a/c (2)

(25%*56500) 11300
32860 32860
Balance b/d (1) 30460
6marks
Page 289 of 329

Disposal Of Office
Equipment A/C
£ £
Office Equipment (1) 4000 Depreciation a/c (1) 2400
Bank (1) 1000
P & L a/c (1) 600
4000 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.
Page 290 of 329

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)
Page 291 of 329

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
Page 292 of 329

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)

Page 293 of 329
Examination Paper
Date: 08 December 2009 (10am – 1pm)

(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.
Page 294 of 329

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
£ £
Returns 2,300 1,700
Inventory of Building Materials at 1 July 2007 98,200
Administration costs 13,850
Trade Receivables and Trade Payables 95,000 69,100
10% Debentures (2009) 10,000
Retained Earnings 1 July 2007 20,000
Motor Car at Cost at 1 July 2007 20,000
818,450 818,450
1) Inventory of building materials: £75,300

2) The Administration figure includes a 12 month agreement ending in 31

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)
Page 295 of 329

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)
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)
Page 296 of 329

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
Land and buildings 100,000 10,000 90,000 100,000
12,000 88,000
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
Retained profits 11, 500 13,500
121,500 143,500
Less Non-current Liabilities

151500 183500
Current Liabilities
Trade Payables 23,000 27,500
Dividend proposed 10,500 15,000
53500 58500
Total Equity and Liabilities 205, 000

242,000
Page 297 of 329

Notes
Income statement data for 2003

Proposed dividend 15,000
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.
Page 298 of 329

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)
Page 299 of 329

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)
Page 300 of 329

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
Page 301 of 329
Statement of changes in Equity for the year
Ended 30th June 2008
Order
Share General Retained
Share Total
Premium Reserves Earnings
Capital
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
0.5
4.5
Page 302 of 329

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 55,000
M. Car 20,000 5,000 15,000
Office 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
206,055
Total 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 Comment [a1
Loan - short term 10,000 0.5

102,666
282,305
Page 303 of 329

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
Comment [a2
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
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
Page 304 of 329

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 2
= £50,000 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
= 2
£42,500
5
Page 305 of 329

b)
Income Statement
The year ended 31 March 2008
FIFO LIFO
£ £ £ £
Sales 190,900 190,900
1 1
Cost of Sales:
Opening
Inventory
Purchases 177,900 177,900
177,900 177,900
Less: Closing (50,000) (42,500)
Inventory 1 1
127,900 135,400
Gross Profit 63,000 55,500
Overhead (9,000) (9,000)
Expenses 1 1
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)
Page 306 of 329

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)
Page 307 of 329

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.
Page 308 of 329

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.
(3marks)
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)
Page 309 of 329
Q6
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.
material.
(4marks)
(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)
Page 310 of 329

(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)
Page 311 of 329

JUNE 2009
Page 312 of 329

Examination Paper
Date: 6th June 2010 (10am – 1pm)

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.
Page 313 of 329

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 210,000
Amortizations of leasehold 20,000
Fixtures and fittings: at cost 300,000
Motor vehicles: at cost 64,000
provision for depreciation 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
Rates and insurance 43,800
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
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
£ £
Telephone 1,300
Advertising 4,000
Page 314 of 329
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)
Page 315 of 329

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 Wages 160361 100.00
Nov
8 A Hunter. 2000.00 2 LB H&Fulham 160362 24.00
8 Cancel Chq- 180.00 3 AC dealers 160363 3000.0
160369 0
9 Thomas Jones 9600.00 4 M Dint 160364 90.00
Ltd
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
Page 316 of 329

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)
Page 317 of 329

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
------------ ------------
Page 318 of 329

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
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:
Page 319 of 329

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)
Page 320 of 329

Kensington College of Business
Marking Scheme
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
Depreciation of motor vehicles 12,000 105,800
Administration:
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
Page 321 of 329

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
(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)
Page 322 of 329

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
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)
Page 323 of 329

NOTES
1. Receivables
£
Trade Receivables per trial balance 192,000
Prepaid expenses:
201,400
2. Payables
£
Trade payables per trial balance 49,000
Debenture interest owing 5,000
Accrued expenses:
Telephone 1,300
Advertising 4,000
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.
Page 324 of 329

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)
Page 325 of 329

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)
Page 326 of 329

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)
Page 327 of 329

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)
Page 328 of 329
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 - information as to the solvency of the

creditors 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)
Page 329 of 329


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2003

Subject: BUSINESS ACCOUNTS

• Accruals and Matching

BUSINESS ACCOUNTS JUNE 2003

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

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

ii) Definition of Accounting Policies as per FRS 18 3

Total 100 marks.

Subject: BUSINESS ACCOUNTS

Time Allowed: 3 Hours

The following additional information at 30 June 2002 is as follows:-

1) Closing stocks of building materials : £75,300

The provision is to be made for doubtful debt as follows :-

7) A Motor car was purchased on 1 July 2001.

8) Depreciation is to be provided as follows :-

9) Corporation Tax is to provided for the year of £15,000

ANSWER ANY TWO QUESTIONS

The summarised balance sheets of Belgo Limited are as follows:

31 Dec 2001 31 Dec 2002

Less: Current Liabilities

Less: Long Term Liabilities

i) No fixed assets were sold during the year

Summarised Balance Company Company Company Company

Share Capital & Reserves 2,040 1,775 480 660

Summarised Profit & Loss Accounts

i) Operating profit as a percentage of turnover.

b) i) Which company is the most highly geared?

ANSWER ANY ONE QUESTION

Briefly and clearly explain the following accounting terms:-

• A balance sheet (2marks)

END OF QUESTION PAPER

Opening Stock 98,200

Add: discount received 2,500 ½

Bad debts written off in year 600 ½

Operating profits before interest 126,755

Retained profits carried forward 114,089 ½

Bank current account 41,500 206,055 ½

Amounts falling due within 12

Net Current assets 103,389 ½

Ordinary Share capital fully paid 55,550 ½

Shareholders’ Funds 179,639 1

1/1/03 Bank 20,000 1

1/1/03 Capital 20,000 3/1/03 Rent 1,200

2/1/03 A Hendry 3,500

15/1/03 Return 500 2/1/03 Purchases 3,500

5/1/03 Bank 5,000 ½

10/1/03 Sales 1,750 28/1/03 Bank 500

1/1/03 Balance 1,250

15/1/03 A Hendry 500 ½

Calculation of Chirac’s closing capital

Accounting concept involved is the business entity concept.

Reconstruction of Operating profit for the year.

Retained Profits 31 December 2001 (560) 1/2

Retained Profits for the year 2002 ( Bal fig) 210 1