course name - department of education · web viewcourse title (course code)page 2 of 1 2017...

ACCOUNTING (ACC315116)SECTION AQUESTION 1 - CRITERIA 1 AND 6(A) (3 X 5 = 15 MARKS)

(i) Many students had obviously prepared an answer to “what is a GJ” and simply wrote that. Students also regularly stated that the opening entry was created to commence each accounting period (rather than simply when the business was established). Few students explained that a capital figure was calculated in the opening entry. Some students also said that revenues and expenses were included in an opening entry, rather than explaining that it recorded assets and liabilities contributed by the owner and allowed capital to be calculated. Students frequently used the classification of Owner’s Equity rather than the account capital in their explanation of the account. Examples of entries were generally done well, pulling marks up.(ii) This question was not about the “purpose” of the trial balance, but the structure. Students were thrown by the idea of explaining the structure. Many of those who read the question (and didn’t just enter into an explanation of the purpose) went into great detail physically describing the trial balance (eg it has x3 columns, the first column is accounts, and the column to the right of this is Dr etc). Very few students mentioned that it was created at a point in time with a list of balances from active accounts in the general ledger and that the two columns (Dr and Cr) should be equal when totalled.Errors not disclosed were normally done very well.(iii) Students generally understood that the source document provided evidence of a transaction. However, they needed to go further and discuss the details provided (eg date, amount, GST) and that it was the basis for entering information into the accounting system. Some students mistakenly stated that a source document was only a record of a cash transaction.Examples, once again, brought the marks up on the question as they were mostly well done.

(B) (1 X 4 = 4 MARKS)

(i) Few students chose this question compared to (ii). Most students were able to explain two types of non-financial information a business might use in making decisions in sufficient depth to achieve 3 or 4 marks.(ii) This was the easiest question in Section A. The vast majority of students completed this question, with most achieving full marks for explaining their chosen considerations. These ranged from deciding which financial institution to borrow from, whether the funds should be provided through debt or equity financing and the ability of the business to repay any loans to discussions about interest rates, fees, loan terms/repayment periods etc, to matching the funds borrowed to the type of asset

2017 Assessment ReportAccounting (ACC315116) of 26

2017 ASSESSMENT REPORT

being purchased (ie long-term loans for non-current assets whose useful life was expected to last several accounting periods) etc.


(C) (2 X 2 = 4 MARKS)

(i) This question was generally poorly answered. Many students were unable to explain what an ‘unpresented’ cheque is. Some erroneously stated that the business had received the cheque but had not yet presented it (deposited it) to their bank. Many also failed to explain that a ‘deposit not yet credited’ was a receipt that appears in the business’s records and that the cash has been deposited with their bank but not in time to be processed and appear on the current bank statement of the business.(ii) Most students were able to describe balance day adjustments and provide an example to support their explanation but few were able to competently distinguish these from closing entries. The need for closing entries to complete the accounting cycle is now only explained and demonstrated briefly in the course (as recommended in the Course Document) and these entries are no longer explicitly taught, so it was not surprising that all except a few students achieved 2 marks on this question.(iii) This question was the most popular question in Part C and most students scored well, clearly distinguishing between the two and providing suitable examples.(iv) This question was problematic as many students struggled to clearly explain the distinction between a legal and an accounting entity as this content is covered in Unit 1 of the course and, according to the exam specifications, is not to be examined. As a result, few students chose this question. Of those who did, the better ones referred to limited and unlimited liability when explaining this distinction.

QUESTION 2(A) (1 X 4 = 4 MARKS)

(i) Very few students answered this question but where they did it was well answered as they knew how conservatism (prudence) applied in the preparation of accounting reports. This item is only briefly mentioned in the old (Kirkwood) text book and not at all in the new (Grieg) text.(ii) Very few students answered this question well because they struggled to express the notion of matching expenses incurred to THAT revenue that they helped earn.

(B) (2 X 4 = 8 MARKS)

(i) Some answers identified the historical assumption but did not fully detail that it is the historical COST assumption. Some students didn’t explain why there had been a breach fully or didn’t evaluate the impact of the breach and therefore lost marks.(ii) Some students couldn’t clearly explain the Accounting Period assumption - that the life of the business is divided into arbitrary time periods. Some students didn’t explain why there had been a breach fully or didn’t evaluate the impact of the breach and therefore lost marks.(iii) Some students confused the legal entity and the accounting entity in this answer. To clearly articulate understanding students need to recognise the different accounting entity (sole trader). Most responses could identify the impact of this breach. (iv) Few students chose this question, perhaps because it refers to a qualitative characteristic rather than an accounting principle. This question was generally well answered.


Criterion 6 is also assessed in Section A 1-15 marks in total were allocated.

SECTION BQUESTION 3 - GENERAL JOURNAL ENTRIES – CRITERIA 2 AND 6Generally well done.Students had the most difficulty with the correcting entry for 18 June as they failed to show two clear steps for the transaction. Many students showed only one half of the correcting entry or two lines worth of information, eg Interest Revenue 300 Cash at Bank 300. Another common mistake was made with the drawings from the owner on 23 June; the GST was placed on the Dr side which affected all the balances in that transaction (Drawings/GST Clearing/Inventory).As Criteria 6 (Communication) is also assessed in this question, students are reminded to: Rule off the particulars column after each GJ entry. Dr entry must be written before Cr and the Cr entry must be indented Narrations should be descriptive (use brackets, put in chq # or credit note # and a

description that explains the purpose of the transaction). GST – some students confused whether they should be finding 1/10 or 1/11 of an

amount.10 marks were allocated for Criterion 6.

QUESTION 4 - CALCULATING GAIN OR LOSS ON DISPOSAL(a) Show the adjusting entry required to decrease the Provision for Bad and Doubtful

Debts to $2 000.Students had some difficulty with this part of the question as they needed to Dr Provision for Doubtful Debts and Cr Bad and Doubtful Debts. Some students had this the other way around or included other particulars that are not involved in the adjusting entry to decrease the Provision for Bad and Doubtful Debts.

(b) Explain why the amount of $300 is a debit entry into the GST Clearing Account.

Again students had some difficulty with explaining why the amount of $300 was in the GST Clearing Account. Those who answered part (a) of the question well were more able to describe what was happening. Other students unfortunately tried to describe what the corressponding Cr entry was instead of analysing the whole transaction and why the $300 had become a Dr entry in the GST clearing account (due to an Accounts Receivable not paying and therefore the GST no longer being collected).

QUESTION 5 - BANK RECONCILIATION - CRITERIA 2 AND 6


This question was a straightforward bank reconcilation question with one error made in the business records. Most students did well on this question and included suitable descriptions in the ‘Details’ columns of the CRJ and CPJ (for example Direct Deposit – D Hill).Some common errors were: Forgetting to carry over the unpresented cheque #166 for $87 from the previous

bank reconciliation statement and include it in the present bank reconciliation statement.

Using the incorrect opening balance in the Cash at Bank account.

When dealing with the Business Error, three methods were accepted according to the textbooks to account for Business Errors. Method 1 (Pg. 227 – Accounting Concepts and Applications Text)

Any errors made by the business are usually corrected in either the cash receipts or cash payments journal. If the error is undetected until the reconciliation process, an entry correcting the situation can be made in either the appropriate cash journal or the general journal. Best practice suggests any error should be taken out of the books in full and the correct amount re-entered.

Cash receipts journal (extract)

Date Rec Particulars Bank

31 Oct BS Sales/Accounts receivable (correction of error)(268)

BS Sales/Accounts receivable (correction of error) 286

OR

Method 2

Cash receipts journal (extract)

Date Rec Particulars Bank

31 Oct BS Sales (error adjusted) 18

OR

Method 3

Cash payments journal (extract)

Date Particulars Chq. No. Bank

31 Oct Sales (error adjusted) BS (18)Criterion 6 (Communication) is also assessed in this question. A total of 10 marks were allocated for this criterion. (2 marks each for CRJ and CPJ, 2 marks for Cash at


Bank account and 4 marks for Bank Reconciliation Statement). For full marks students are reminded to: Cash Receipts and Cash Payments Journals – enter dates at the end of the

month, include suitable descriptions, and double underline totals. Cash at Bank Account – enter correct dates and follow the correct process for

formal/informal/columnar balancing. Bank Reconciliation Statement – Use correct order and wording when setting

out, list cheque numbers and amounts in two columns, with the subtotal in final column and double-underline the final total.

SECTION CQUESTION 6 - INCOME STATEMENT AND BALANCE SHEETSurprisingly a lot of students weren’t familiar with Customs Duty and struggled with items like Motor Vehicle Lease Charges. Discount Allowed and Discount Received, although perhaps unfamiliar to some students, they should have at least been able to work out they were Expense and Revenue respectively based on these items having Debit and Credit balances respectively. It was a good question to challenge students and sort out the students with a better understanding of the principles of the Debit and Credit nature of accounts.10 marks were allocated for Criterion 6 based on this question.

QUESTION 7 - CASH FLOW STATEMENTStudents had difficulty in reconstructing the inventory and capital accounts. Generally not well done, or students were thrown by parts (a) and (b) and couldn’t move on successfully to part (c).

SECTION DQUESTION 8A good question as the students had to show knowledge of the Income Statement to successfully complete this question.

QUESTION 9Students provided suggestions rather than reasons for the poor liquidity, thereby losing marks.


QUESTION 10A very easy question for most students.Commonly errors included incorrect use of language for a Cash Budget – needed to use surplus/deficit and estimated/expected cash flows/outlays. Many students used profit/loss and expenses and revenues.


SOLUTIONSSECTION AQUESTION 1

(a)(3 x 5 = 15 marks)

What is the purpose of the opening entry in the general journal? Give examples of items likely to appear in that entry.

(i) An opening general journal entry is completed only when a business begins its accounting records. This entry records the assets, the liabilities and calculates an amount represented by the owner’s investment in the business, the amount of capital. Examples of items likely to appear include:

Current assets such as Bank and Inventories Non-current assets such as Vehicles, Shop Fittings and Fixtures Loans Capital

(3 marks for describing the purpose plus 2 marks for appropriate examples – at least x4 examples were expected)(ii) Describe the structure of the trial balance. Give examples of errors not disclosed.

The trial balance is a list of active accounts and their balances taken from the general ledger at a point in time. It comprises two columns- one for debit balances and one for credit balances. The total of each column should be identical – indicating the arithmetic accuracy of the ledger.However, if total debits equal total credits, it does not guarantee the ledger is correct.Examples of errors not disclosed include:

Incorrect amounts of the same value which have been entered on both sides of the ledger.

Entries of an equal amount made to the wrong side of each account. Entries of an equal amount made in the wrong accounts, but on the correct

sides. Transactions omitted entirely or entered twice. Compensating errors made, e.g. two errors in one account which cancel

each other out or two errors in the trial balance which cancel each other out.(3 marks for explaining the structure of the trial balance and 2 marks for adequately describing x2 errors that are not disclosed in a trial balance.)


(iii) What is the purpose of source documents in the accounting process? Provide examples.

The source document is the physical evidence of a transaction and therefore the basis for the initial entry of the transaction into the accounting system. Source documents include the name of the parties involved, the type of transaction, the date, the amount involved and any GST paid. Typical source documents used in a business include receipts, cheques, tax invoices, cash register dockets and summaries, bank statements, cheque ‘stubs’, credit notes and adjustment notes.(3 marks for purpose and 2 marks for examples)(b) (1 x 4 = 4 marks)

i. Describe two types of non-financial information available to a business in making business decisions.

a. Select from the range identified in the course document - benchmarks, staff turnover, market size, market share, interest rates. Others may be identified. Candidates need to describe each rather than just identify - i.e. give some indication of the information provided by the item.

(2 marks per type = 4 marks)ii. What are two considerations a business may take into account when borrowing

funds?

Cost in terms of interest rate, cost in terms of fees and establishment, term of loan and term of application of the funds, size of loan required, repayment structures, what the funds will be spent on (type of asset to be purchased). Any of these and may be other valid examples.

(2 marks per consideration= 4 marks)(c) (2 x 2 = 4 marks)

i. Distinguish between an unpresented cheque and a deposit not yet credited.

An unpresented cheque is a cheque that has not been deposited with a financial institution by its recipient and hence has not yet been recorded in the business’s (issuer’s) bank statement. The cheque does appear in the business’s records, in the cash payments journal and cash at bank account, but not in the bank’s records (bank statement). A deposit not yet credited is an amount recorded in the business’s records; in the cash receipts journal (or in ‘cash records’) and cash at bank account and has been deposited at the business’s bank but has not appeared on the monthly bank statement; that is, it has not yet been ‘credited’ in the business’s bank account. This could be because the deposit wasn’t processed by the bank in time for it to appear on the bank statement.

ii. Explain the distinction between a balance day adjustment and a closing entry.

Balance day adjustments are general journal entries made on balance day in order to compare (match) the revenues and expenses accurately so that the profit (loss) can be determined. In order to adhere to the matching principle, adjustments may be needed to some accounts because transactions do not always fit neatly into the accounting


period. By making the adjustments, the final reports are a better reflection of what has occurred in the accounting period, thereby ensuring greater relevance and reliability of the financial information.A closing entry is the general journal entry required to transfer relevant account balances (revenue and expense account balances) to the trading and profit and loss accounts (or just profit and loss account) in order to calculate profit for the period and to clear revenue and expense account balances ready for the next accounting period.iii. Capital expenditure is expenditure on non-current assets (assets that are

intended to be held for longer than one accounting period and used to earn revenue), and will be recorded in the Balance Sheet. It includes the price of the asset and any delivery and installation costs plus the value of any upgrades that add to the value of the asset to get it into a location and condition ready for use eg purchase price of a new machine plus installation costs.

Expenditure for property or services that will be consumed during the current accounting period is referred to as revenue expenditure. Revenue expenditures are charged against revenue earned as part of the matching process each year. They are therefore considered an expense of the business and will be offset against revenue to determine profit/loss in the Income Statement eg insurance, maintenance costs on machine.iv. Explain the distinction between a legal entity and an accounting entity

An accounting entity is a business which is regarded as having an existence separate from the private affairs of its owner/s. This may not be the legal situation, and so a legal entity is a business and its owner/s as they are regarded by the law. May use sole trader, partnership, company structures to explain distinction.(2 marks for a suitable explanation of each term that shows the differences between both terms)

QUESTION 2(a) (1 x 4 = 4 marks)

(i) Conservatism or prudence is a principle requiring accounting reports to be based upon reliable evidence conforming with the qualitative characteristic of reliability. It means that revenues and assets are only recognised when there is some certainty that they will be received. By being conservative, asset and profits are not deliberately understated, rather they are realistic and reliable. Likewise with liabilities and expenses, they are not overstated, they are conservatively, but realistically determined. Conservatism is applied with asset valuation, depreciation, provisions for bad debts, where some element of judgement is required. Examples can include asset valuations, calculation and identification of accrued revenues, valuation of liabilities. (ii) The matching principle is an important aspect of accrual accounting. Profit is obtained by matching the revenues earned during the accounting period with the expenses incurred in earning that revenue. It requires that only revenues of the period are matched with the expenses of the same period to calculate profit or loss, and those that fall outside of the period are excluded. If all expenses of the period are not included in the calculation then profit will be overstated; and if all revenues are not included then profit will be understated. Examples can be drawn from a range of accruals and prepayments usual in the accounting process.


(2 marks for explanation and 2 marks for suitable examples)(b) (2 x 4 = 8 marks)

I. Breaches the Historical Cost (objectivity) Assumption. This assumption assumes that items are valued at their original purchase price. This approach allows for an objective and verifiable value, rather than a subjective value, to be entered into the books thus ensuring the reliability of the information contained in the financial reports. An implication of revaluing land and buildings automatically to reflect the 20% increase in average house prices may result in an overvaluation of assets. Any revaluation would need to be conducted by a qualified valuer and disclosed in the notes to the accounts.

(An argument can be made for a breach of the Historical Cost Assumption (objectivity), conservatism (prudence) and reliability.)

II. Breaches the Accounting Period Assumption. For accounting purposes, the life of the business is divided into arbitrary time periods, usually 12 months (for taxation purposes). By extending balance day by a further 15 days the finance manager is suggesting a breach of this assumption. One likely impact of this breach may be an overstatement of profit for the period as revenue earned in July will be included in the current period. This would also impact when comparing the performance of the business in the current period with its previous performances.

III. Breaches the Accounting Entity Assumption. This assumption assumes that the business owner/s personal financial affairs are kept separate from those of the business. Therefore the accounting records of the business should not include personal items of its owner/s. In this case the inclusion of personal motor vehicle costs as business expenses will result in an overstatement of the business’s expenses and an understatement of its reported profit, and potentially a reduced tax liability. The correct recording of this transaction would be as Drawings.

IV. The decision to vary the method of depreciation used from year to year breaches the qualitative characteristic of comparability. Consistent measurement is important if proper comparability is to be achieved when comparing financial reports over a number of years. In this case the breach would cause a lack of consistency in reported results and difficulties in comparing business performance from year to year. If a change in an accounting method is desired, then this needs to be disclosed to interested parties to aid their decision-making.

(1 mark for stating principle, assumption or qualitative characteristic that has been breached, 2 marks for explaining why there has been a breach and 1 mark for likely impact of the breach)

QUESTION 3Extract from the General Journal of The Gadget Place

2017

June 3 M. Powell 715

Sales 650

GST Clearing 65


(Sold GST inclusive inventories on credit as per invoice A2756)

Cost of Goods Sold 520

Inventory 520

(Cost price of inventory sold)

June 6 Inventory 410

GST Clearing 41

Midland Appliances 451

(Purchased GST inclusive inventories on credit as per invoice no. 31)

June 7 Sales Returns and Allowances 50

GST Clearing 5

M. Powell 55

(M Powell returned GST inclusive goods, as per credit note R277)

Inventory 38

Cost of goods sold 38

(Cost price of goods returned)

June 12 Office equipment 1 700

GST Clearing 170

Office Suppliers 1 870

(Purchased GST inclusive office equipment on credit invoice M357)

June 14 Insurance 1 650

GST Clearing 165

Cash at bank 1 815

(Paid insurance GST inclusive, payment advice C278)

June 18 * Interest revenue 300

Cash at bank 300

(Reversal of incorrect entry)


Interest expense 300

Cash at bank 300

(Correcting entry)

June 23 Drawings 308

Inventory 280

GST Clearing 28

(Owner withdrew GST inclusive inventory for personal use)

June 28 Cash at Bank 12 000

XYZ Bank Loan 12 000

(Cash received and banked from loan)

June 29 Cash at bank 352

Sales 320

GST Clearing 32

(Sold GST inclusive goods for cash, receipt no. B765)

Cost of Goods Sold 220

Inventory 220

(Cost price of goods sold)

June 30 Prepaid Expenses 570

Rent expense 570

(Rent paid in advance on balance day)

June 18 * Interest Expense 300

Interest Revenue 300

Cash at Bank 600

(Correcting entry)

The following account names were all acceptable: GST Clearing, GST Paid/GST Credits Received, GST CollectedTotal marks for entries /15 (1 mark per entry line = 34 marks; then divide score by 34 and times by 15 to give a mark out of 15).

QUESTION 4


(a)

June 30 Provision for doubtful debt 400

Bad and doubtful debts 400

(Provision for doubtful debts to be decreased to $2000)

Criterion 6: /5 marks (1 mark for narrations, 2 marks for correct Dr and Cr entries, 1 mark for order and indenting, 1 mark for dates and ruling).(b)

When the inventory was sold a credit entry was made to the GST Clearing Account as it was a payable. As the debt will now not be collected by the business it is necessary to reduce the liability payable and therefore debit the GST Clearing Account.

QUESTION 5Cash at bank account deposits Cash at bank account

withdrawals

(Cash receipts) (Cash payments)

Date Details $ Date

Details. Chq. No.

$

Oct 3 Sales/Accounts Rec 534 Oct.4

169 241

6 EFTPOS Sales 742 11 170 355

12 EFTPOS Sales 675 17 171 89

12 Sales/Accounts Rec 268 17 172 68

18 EFTPOS Sales 350 20 173 292

19 Sales/Accounts Rec 216 24 174 71

24 EFTPOS Sales 321 28 175 363

31 Sub Total 3 106 30 176 42

31 D. Hill 390 31 Sub Total 1 521

31 J Mackie 98 31 Rent 1 650

31 Smythe 420 31 Interest 422

31 Direct payment 290 31 Merchant fee

68

31 EFTPOS 405 31 Bank charges

23


*31 Sales/Accounts Receivable (correction of error)

(268) 31 Total $3 684

*31 Sales/Accounts Receivable (correction of error)

286

31 Total $4 727

*31 (Alternatively) Error adjusted

18

/ 4 marks / 4 marks

Cash at Bank Account

Date Particulars $ Date Particulars $

Oct 1 Balance b/d 294 Oct 31 Cash payments 3 684

Oct 31 Cash receipts 4 727 Oct 31 Balance c/d 1 337

5 021 5 021

Nov 1 Balance b/d 1 337

Formal balanceOR


Date Particulars $ Date Particulars $

Oct 1 Balance b/d 294 Oct 31 Cash payments 3 684

Oct 31 Cash Receipts 4 727 Oct 31

Pencil balanceOR


Date Particulars Debit ($) Credit ($) Balance


1 337

($)

Oct 1 Balance b/d 294 294 Dr

Oct 31 Cash receipts 4 727 5021 Dr

Oct 31 Cash payments 3 684 1 337 Dr

Columnar account balance / 4 marks

Emma’s Emporium

Bank Reconciliation Statement as at 31 October 2017

$ $Credit balance as per Bank Statement 1 918 Add Deposits not yet credited -

1 918Less Unpresented cheques

166 87171 89175 363176 42 581

Debit balance as per Cash at Bank Account $1 337

/ 8 MarksCriterion 6:

Setting out marks:(a) / 2 marks(b) / 2 marks(c) / 2 marks(d) / 4 marks

SECTION CQUESTION 6(a)


Supercyclops

Income Statement for the year ended 30 June 2017

$ $ $Net Sales

Sales 535 000Less Sales Returns 10 500 524 500

Less Cost of Sales

Cost of Goods Sold 380 000Customs Duty 17 500Inventory Adjustment 100 397 600

GROSS PROFIT 126 900

Add Other Revenue

Service fees 118 600Interest received 680Discount received 11 200 130 480

257 380Less Other Expenses

Selling and Distribution Expenses

Advertising 1 800Other marketing 2 760Sales commission 15 200 19 760

General and Administrative Expenses

Wages 78 640Other office expenses 35 600Depreciation-computer 720


Depreciation-Equipment 36 540 151 500

Finance Expenses

Interest 5 800Discount allowed * 2 400Lease charges-motor vehicle ** 12 000Bad and doubtful debts 400 20 600 191 860Net Profit $65 520

* Also acceptable as Selling and Distribution Expense** Also acceptable as a General and Administration Expense


(b)

Supercyclops

Balance Sheet as at 30 June 2017

ASSETS $ $ $ $Current Assets

Cash at Bank 10 600Accounts Receivable 4 200Less Provision for Doubtful Debts 400 3 800Inventory 7 200 21 600

Add Non-Current Assets

Other Financial Assets

Term deposit 40 000

Property, plant and equipment

Equipment 132 000

Less Accumulated depreciation on Equipment

46 740 85 260

Office computer 3 600Less Accumulated depreciation 1 620 1 980 87 240

Intangibles _

Total Assets $148 840

Less Liabilities

Current liabilities

Accounts Payable 6 900GST Clearing 4 800


Accrued Expense 640Unearned Revenue 1 400 13 740

Non-current liabilities

Bank Loan 60 000Total Liabilities 73 740

NET ASSETS $75 100

OWNER’S EQUITY

Capital July1 2016 99 580Add Net profit 65 520 165 100 ______ Less Drawings 90 000 $75 100

SUGGESTED MARKING SCHEMEItem Incorrect Deduction

Income Statement

Item omitted completely 3

Balance Sheet item included 2

Adjustment ignored 3

Expense item recorded as Revenue (and vice versa) 2

Adjustment attempted but incorrect figure and/or account 2

Wrong expense or revenue classification 1

Mathematical errors (each) 1

Sub-totals missing (one deduction only) 1

Incorrect columns 1 (one deduction only) 1

Incorrect figure transferred from Trial Balance 1

No heading 1

Incorrect heading 0.5


Incorrect rulings in Income Statement (one deduction only) 0.5

0.5

Balance Sheet

Item omitted completely 3

Income Statement item included 2

Adjustment ignored 3

Asset recorded as Liability (and vice versa) 2

Adjustment attempted but figure and/or account 2

Wrong asset classification 1

Wrong liability classification 1

Mathematical errors (each) 1

Sub-totals missing (one deduction only) 1

Owner’s equity not in correct order 1

Incorrect columns 1 (one deduction only) 1

Incorrect rulings in Balance Sheet (one deduction only) 0.5

No heading 1

Incorrect heading 0.5

QUESTION 7

InventoryDate Particulars $ Date Particulars $

1/7/16 Balance b/d 10 000 During year

Cost of Goods Sold

190 000

During year

Cash at bank 198 000

/ 3 marks


CapitalDate Particulars $ Date Particulars $

During year

Drawings? / Cash at Bank ?

8 000 1/7/16 Balance b/d 30 000

30/6/17 Net profit 12 800

/ 3 marks

SUGGESTED MARKING SCHEME:INVENTORY ACCOUNT: 1 mark each for Opening Balance, COGS entry and Cash at Bank entry, deduct up to 1 mark for no dates or incorrect dates (0.5 of a mark for one or two correct)CAPITAL ACCOUNT: 1 mark each for Opening Balance, Profit entry and Drawings? / Cash at Bank? entry, deduct up to 1 mark for no dates or incorrect dates (0.5 of a mark for one or two correct)

Cash Flow Statement for Smiths’ Vegetable Supplies

for the period ending 30 June 2017

$ $ $Cash flows from operating activities

Inflows

Cash receipts from customers 384 000Interest received* 280

Other operating revenue (commission) 1 200385 480

Outflows

Payments to suppliers 198 000Payments to employees 82 000


Other operating expenses 73 600

Interest paid on loan** 2 300355 900

Net Cash Provided / Used in Operating Activities

29 580

Cash flows from investing activities

Inflows

Proceeds from sale of motor vehicle 16 500 16 500

Outflows

Payment for new motor vehicle 42 000Investment into shares 30 000 72 000

Net Cash Provided / Used in Investing Activities

(55 500)

Cash flows from financing activities

Inflows

Bank loan received 40 000 40 000

Outflows

Drawings 8 000 8000

Net Cash Provided / Used in Financing Activities 32000

Net increase (decrease) in cash 6 080

Add opening cash balance51 700

Cash balance at end of period $57 780

* Also acceptable as a Financing Inflow

** Also acceptable as a Financing Outflow

SUGGESTED MARKING SCHEME:


Add 1 mark per correct entry other than cash balance at end Deduct: 1 mark for incorrect columns (one deduction only), 0.5 marks for incorrect category, 1 mark for outflow as inflow or vice versa, 1 mark for not identifying overall outflows in some way e.g. use of brackets, minus sign or DR/CR.

QUESTION 8Gross profit ratio = 150 300/230 920 = 65.09%Net profit ratio = 32 300/230920 = 13.99%Rate of return on Owner’s Equity = 32 300/595 000 = 5.43%

SUGGESTED MARKING SCHEME:a) If GP correct (ie. $150 300), but didn’t take out Sales Returns, 0.5 marks out of 1

was awarded.b) If NP is correct (ie. $32 300) but incorrect Net Sales figure used, then 1.5 marks

out of 2 were awarded.c) If Average OE is correct (ie. $595 000) but incorrect answer, then 1 mark out of 2

was awarded. If the NP is correct, but the Average OE is incorrect, 1 mark out of 2 was awarded. If all parts of the calculation/workings out are shown but the answer is incorrect, 1.5 marks out of 2 were awarded.

QUESTION 9(a) Ideally, candidates would refer to both debtors collection period and inventory turnover.

(i) Debtors collection period marginally improved but still way slower than industry average. Suggestions may include more stringent credit history checks, stricter granting of credit rules, processes to speed collections – reminder notices, phone calls, charge interest or late fees on overdues, cancelling further credit to debtors with overdue accounts, referral to debt collection agencies, legal action etc. Slow turnover is an indicator of bad debts which is an expense to the business that lowers profits.

(ii) Inventory turnover worsening and significantly worse than industry. Improvements may be found in sales promotions - advertising to bring in new customers, pricing policies – having a sale to move slow selling items, more rigorous purchasing policies – discontinuing slow sellers, buying less stock overall, identification of superseded stock, lowering inventory levels. High levels of stock require storage and tie up money which could be used elsewhere in the business.

Candidates who talked about other areas such as Profitability, Stability or Liquidity can earn part marks depending on how well their answers address the “effectiveness of management” aspect of the question.

SUGGESTED MARKING SCHEME:a) 1 mark for the debtors collection period trend including ratio data, 1 mark for industry average including data, 1 mark for reference to relevant information from the


Income Statement/Balance Sheet, 2 marks for a suitable suggestion, linked to how it will improve effectiveness of Industrial Drilling Supplies (IDS) = 5 marksFor example: tightening/enforcing terms of credit policy and following up more stringently; encouraging customers to pay quicker using incentives like discounts for prompt settlement; or, charging interest on overdue accounts.1 mark for the inventory turnover trend including ratio data, 1 mark for industry average including data, 1 mark for reference to relevant information from the Income Statement/Balance Sheet, 2 marks for a suitable suggestion, linked to how it will improve effectiveness of IDS = 5 marks

For example: Sourcing cheaper COGS/supplier Discontinuing poorly selling items Decreasing amount of stock on hand Focussed advertising in order to sell more stock, ensuring the outlay costs of

advertising are less than the sales that are generated!Total for part (a) equals 10 marksNB: if NO specific reference to any of the figures/data was included in the answer, only half marks were awarded.(b) 1 mark for the Quick Asset trend including ratio data, 1 mark for industry average including data, 1 mark for statement about the ratio itself, which could have included a definition or reference to relevant information from the Balance Sheet, 2 marks for a suitable REASON for the current situation = 5 marks.1 mark for the Current Ratio/WCR trend including ratio data, 1 mark for industry average including data, 1 mark for statement about the ratio itself, which could have included a definition or reference to relevant information from the Balance Sheet, 2 marks for a suitable REASON for the current situation = 5 marksNB: if NO specific reference to any of the figures/data was included in the answer, only half marks were awarded.(c) 1.5 marks for GP – ½ for trend/data, ½ for comparing to industry average, ½ for information from Income Statement figures – ie overall, net sales decreased OR COGS increased over the 3 years.1.5 marks for NP – ½ for trend/data, ½ for comparing to industry average, ½ for information from Income Statement figures – ie overall, operating expenses increased over the 3 years.2 marks for suggestion on how profitability could be improved – 1 mark for suggestion, 1 mark for link to HOW it would improve.Examples

QUESTION 10


(a) Deficit of $7 110 in January, deficit of $1 570 in February and surplus of $4 980 in March.

(b) January and February (probably could also include March if considering use of excess funds).

(c) The fact that the business cannot meet its cash obligations in those months.(d) Any action to remove or cover the deficits. Delay marketing campaign; arrange

overdraft facility; take out short term loan to cover marketing campaign expense. Could also suggest investing the excess funds in March.

SUGGESTED MARKING SCHEME:(a) 1 mark for identifying the overdrafts and 1 mark for identifying the Debit balance.(b) 1 mark for January and 1 mark for February.(c) 1 mark for identifying anticipated overdrafts, 1 mark for identifying the marketing campaign as the main cause.(d) 2 marks per suggestion (4 marks total). Good suggestions would include: Arranging an overdraft or credit card with the bank, capital injection, loan, selling off large un-needed assets. A suggestion to delay or not undertake the marketing campaign should only attract part marks as the campaign is anticipated to increase Sales (according to the Budget), and therefore it would be counterproductive.


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