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PARTNERSHIP

Q1) (a) State two reasons why partnership agreements sometimes include a provision to
charge interest on drawings. [2]
To deter partners from making excessive drawings (1) To reward partners who withdraw the
least (1)

(b) Explain the meaning of goodwill. [2]

Goodwill is an intangible asset which represents the reputation of the business (1) built up by the
partnership/value of net assets compared to value of business as a whole (1)

(c) Explain why a valuation of goodwill could be made when a partner retires. [2]
Valuing goodwill when a partner retires ensures the retiring partner receives a fair share of the
extra value the business has acquired (1) through the efforts of that partner (1).

Q2) a) State two reasons why partners may each have a separate capital account and
current account [2]
Partners may want separate capital accounts to: Show the permanent investment (1) Show the
impact of any changes in capital (1) (e.g. goodwill, capital introduced, revaluations) Facilitate
the calculation of interest on capital (1) Partners may want separate current accounts to: Show
the ongoing transactions between the partners and the partnership (1) Show the amount of
drawings compared with the share of profit (1) Identify partners making excessive drawings (1)
Facilitate the calculation of interest on drawings (1)

(b) State two possible disadvantages to existing partners of admitting a new partner [2]
Profits have to be shared (1) Decision making may take longer as there will now more partners
who need to agree (1) Risk of disagreements (1)

Q3) State three reasons why a partnership might be dissolved. [3]

Business is making a loss (1) Partners cannot agree (1) A partner has died/retired (1) The
objectives of the partnership have been achieved (1) Legal reasons such as insanity of partner (1)

Q4) State how profits and losses are shared in a partnership where there is no agreement.
[1]
Profits and losses should be shared equally (1) among partners

Q5) Explain two reasons why you would recommend partners to have a written agreement,
other than stating a ratio for sharing profits and losses. [4]
Avoidance of disputes (1). The deed usually states management responsibilities (1) and also
agreed limits on drawings and agreed amounts of fixed capital (1). Ensure partners are properly
rewarded (or penalised) for their contributions (1). The deed may include rewards for partners

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who have undertaken more management responsibilities/provided more capital/and penalised

partners whose drawings have been the most (1)

Q6) Ismail would like to expand his business. He will need additional finance of $25000. He
is considering two options to raise this amount:

option 1: apply for a bank loan

option 2: form a partnership with Seema, a friend. Seema would expect profits and losses
to be shared equally.

(c) Advise Ismail which of these options he should choose. Justify your answer.[7]

Option1: Bank loan Max 4 Reasons for: • Temporary source of finance (1) • No effect on control
of business (1) • Profits will not have to be shared (1)

Reasons against: • May not be eligible for bank loan (1) • Security required for loan (1) • Interest
charges will reduce profits (1)

Option 2: Partnership with Seema Max 4 Reasons for: • Permanent source of capital (1) • Partner
might bring new skills/expertise (1) • Sharing of workload (1) • Security for finance will not be
required (1)

Reasons against • Profits will have to be shared equally/so Ismail may receive less than now (1) •
May not get on well/possibility of disputes (1) • Decision-making may be slower/more difficult
(1) • Existence of business could be threatened if partner wishes to leave/retire/dies (1)

Overall, Max 6 marks for justification. Advice (1)

Q7) (a) State two reasons why partners may agree to provide interest on capital.[2]

To reward partners for their fixed investment in the business (1) To encourage further capital
investment in the business (1)

(b) State two reasons why partners may agree to charge interest on drawings. [2]

To discourage large amounts of drawings by the partners (1) To penalise partners who make
excessive drawings (1)

(c) State two further terms that may appear in a partnership agreement. [2]

The amount of salary payable to partners (1) Rate of interest on partners’ loans (1) Management
responsibilities of partners (1) Any limits on partners’ drawings (1) Amount of partners’ capital
(1)

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Q8) Explain why an adjustment for goodwill may be made when a new partner joins a
business. [2]

To reward the existing partners (1) for having established the business and built the reputation
(1)

Q9) State two factors that may result in the creation of goodwill for a business. [2]

A business making profits each year and these could be increasing over time
An established reputation
Customer loyalty and repeat business
Brand name and image
Value of the business as a going concern exceeds the value of the net separable assets.
Good location Quality of staff / products
Allow other suitable answers

Q10) Explain three disadvantages of operating as a partnership rather than being in

business as a sole trader. [6]

Profits will be shared in the partnership (1), whereas sole traders would be entitled to all the
profits (1). Decision making may take longer as both partners will need to agree (1), whereas
sole traders can make instant decisions (1). There is the risk of disagreement/conflict between
partners (1), whereas sole traders would make decisions on their own (1). Each partner’s actions
are binding on all partners (1), whereas a sole trader has to account to no other parties for his
actions (1) Control of the business by each partner maybe difficult (1) whereas the sole trader
retains control over the business (1).

Q11) Explain why partners may agree not to maintain a goodwill account in the books of
the partnership on the admission of a new partner. [2]

The value is just a matter of opinion / subjective (1) so it is difficult to value (1) The value could
be subject to sudden change (1) for example if a problem arose which caused damage to the
partnership’s reputation (1).

Q12) Identify three ways, other than using bank finance, in which a partnership could raise
funds to purchase a non-current asset. [3]

Partners increase capital (1) Partners reduce/not taking drawings/salaries (1) Partners introduce a
loan (1) New partner introduced (1) Sale of surplus non-current asset (1) Loan from family
members (1)

Q13) State three items that may be included in the appropriation account before the
division of residual profit. [3]
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Interest on capital (1) Interest on drawings (1) Partners’ salaries (1)

Q14) State four provisions which would apply in the absence of a partnership agreement.
[4]

Share profits and losses equally (1) Partners are not entitled to salaries (1) Partners are not
charged interest on their drawings (1) Entitled to contribute equally to the capital of the
partnership (1) Partners are not entitled to interest on the capital they have contributed (1)
Partners are entitled to interest at 5% per annum on loans they make to the partnership (1)

Q15) Explain what would happen if the dissolution of the partnership resulted in a debit
balance on a partner’s capital account. [3]

This means that the partner owes money to the partnership (1) The partner must use his personal
funds to repay the partnership bank account (1) in order that funds owing to other partners may
be repaid (1)

Q16) Explain the difference between a realization account and a revaluation account. [2]

Realisation account: Used to close the books of account (1) on the dissolution of a partnership.

Revaluation account: Used to record changes in the value of assets and liabilities on changes in a
partnership. (1)

Q1y) State three advantages to a sole trader of forming a partnership. [3]

Access to increased capital

Increased knowledge expertise
Losses shared by all partners
Able to offer greater range of services
Availability of cover
Shared responsibilities

Q18) State two reasons why a partner may have an overdrawn current account. [2]

They may have drawn more than the profits earned (1) Partnership may have sustained losses.
(1)

Q19) Discuss two possible sources of finance which could be used to fund the purchase of
the additional non-current assets. [6]

Possible options could include: • External loan • Partner’s loan • Introduce new partner • Partner
introduces additional capital • Sale of unused non-current assets • Hire purchase
Award 1 mark for identifying source plus max 2 marks for development (max 3 marks per
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source)
For example Bank loan (1) Has to be paid back with interest at either a fixed or variable rate (1).
May require security / collateral to cover the possibility of loan default (1).
Introduce new partner (1) Would introduce capital which doesn’t need to be repaid (1). The
partner would however expect a share of the profits (1).

(ii) Recommend the most appropriate source of finance for the partnership. Justify your
answer. [2]

1 mark for a decision about the source of funding and max 1 mark for any justification of the
outcome.

Q20) State two items which may be included in a partnership agreement (other than the
share of profit) which will affect the appropriation account [2] which will not affect the
appropriation account. [2]

Q21) (a) (i) State what is meant by net realisable value. [1]

Selling price less cost to completion less selling expenses

(ii) State two reasons why assets are revalued on the change of a partnership. [2]

To give the benefit of the change in value of the business to the existing partners and any partner
who may be retiring. (1) So that the statement of financial position on the entry of the new
partner shows a true and fair view. (1)

(iii) Identify two situations where the capital accounts of partners may be adjusted for
goodwill. [2]

On the introduction of a new partner. (1) On the retirement of an existing partner. (1) On a
change in the profit sharing ratio. (1)

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COMPANY

Q1) (a) Explain two reasons for making a bonus issue of shares [4]
To bring the share capital more in line with the current net asset value (1) of the company by
making permanent some part of revenue and capital reserves (1). To provide some reward for
shareholders (1) where cash may be limited to pay dividends to shareholders (1). To avoid
dividend announcements seeming excessively large (1) when based on a situation where issued
shares is only a relatively small part of equity (1).

(b) Identify three factors that directors of a company should consider when deciding on the
amount of a proposed dividend. [3]
The profits available for distribution (1) The cash available to pay dividends (1) Shareholders’
expectations (1)

Q2) Explain two reasons why a company may make a rights issue of shares rather than an
issue of debentures. [4]
Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas
debentures are a liability that must be repaid at a future date (1) with interest which will reduce
profits (1)

Q3) Explain what is meant by ‘Reserves were maintained in their most flexible form’ (2)
Using capital reserves before revenue reserves (1) to facilitate future payments of dividends (1).

Q4) State three advantages to the shareholders of trading as a limited company [3]

• Limited liability for the debts of the business (1) • Shareholders enjoy a separate legal identity
from the company (1) • Shareholders can easily transfer ownership. (1)

Q5) Describe one way in which a shareholder can benefit from taking up a rights issue[2]

Opportunity to purchase additional shares at a favourable price (1) as issue price is usually below
market price (1) • Can maintain same degree of control (1) in the company as shareholder will
own same proportion of issued capital (1) payment/avoid liquidity problems (1) • That
shareholders will expect/feel entitled to a dividend (1) as a reward for their investment (1)

Q6) a) State two differences between ordinary shares and preference shares [2]
Ordinary shares provide variable dividends whereas preference shares pay fixed dividends (1).
Holders of preference shares receive dividend payments before those made to holders of ordinary
shares (1). Ordinary shares usually have voting rights whereas preference shares do not (1).

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(b) (i) Define a ‘capital reserve’. [1]

Capital reserves are created from capital profits and not trading profits (1).

(ii) State one use of a capital reserve. [1]

Used for special purposes (e.g. bonus share issue) (1)

c) Additional information

The directors are planning a major expansion. They wish to raise $100000. The directors
are considering three options:

Option 1: Issue 6% debentures (2029) of $100000.

Option 2: Make a rights issue of one ordinary share for every two ordinary shares held at
$1 each.
Option 3: Make a new issue of 100000 ordinary shares at a premium of $0.10 per share.

REQUIRED

Advise the directors which option they should take. Justify your answer. [7]

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Q7) Name two costs which might be included in the administrative expenses of a limited
company. [2]
any two correct answers for (1) mark each e.g. rent, insurance

Q8) State two benefits and two drawbacks of operating as a sole trader.[4]

Benefits: (Max 2) Entitled to all profits (1) Quicker decision making (1) Full control of business
operations (1) Drawbacks: (Max 2) Unlimited liability / no separate legal entity (1) All the risk /
responsibilities (1) Limited opportunities for new ideas (1)

Q9)

(a) Advise the directors which option they should choose. Justify your answer[5]

(b) Explain two differences between a bonus issue of shares and a rights issue of shares.[4]

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Q10) State two differences between capital reserves and revenue reserves. [4]

Q11) Explain the term ‘6% debentures (2021 – 2022)’, which appears in S Limited’s
financial statements. [3]

S Limited have taken out a long-term loan (1) repayable between 2021 and 2022 (1) at an annual
interest rate of 6%. (1)

Q12) State three uses of a share premium account. [3]

Issue of bonus shares

Pay premium on the redemption of debentures
Write off company formation expenses
Write off expenses of a share issue or debenture issue

Q13) a) State two reasons why capital reserves may be used before revenue reserves to
fund a bonus issue of shares for a limited company. [2]

To retain reserves in the most distributable or flexible form (1) Revenue reserves are needed to
fund the payment of dividends (1)

(b) (i) State two benefits to a limited company of making a rights issue. [2]

Quicker and cheaper than a new share issue (1) More likely to be fully subscribed than a new
share issue (1) Results in a cash inflow (1) Does not have to be repaid (1) Would avoid any
dilution of ownership (1)

(ii) State one limitation to a limited company of making a rights issue. [1]

Can lead to a fall in the share price (1)

Q14) State two advantages to a partnership of converting to a limited company. [2]

Separate entity
Limited liability for owners
Ability to raise finance

Q15) State the journal entry required to record a revaluation increase in the value of a
non-current asset. [2]

Debit Non-current asset (1) Credit Revaluation reserve (1)

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Q16) (a) State the double entry required to record a rights issue of shares at a premium. [3]

Debit bank/application (1) Credit ordinary share capital (1) Credit share premium (1)

REQUIRED

(b) (i) State which event was recorded by the entry on 10 February 2016. [1]

bonus issue of (ordinary) shares (1)

(ii) Explain why the entry made on 10 February 2016 was made to the share premium
account rather than the retained earnings account. [2]

because the share premium account is a capital reserve with limited uses (1) so that reserves are
kept in their most flexible form (1) to maximise the future dividends which could be paid (1)

(iii) State which dividend was recorded by the entry on 25 June 2016. [1]

final dividend of the previous year paid (1)

(iv) State why the directors decided to create a general reserve. [1]

to retain profits for reinvestment in the business (1)

(v) Explain why a long-term bank loan received by the company on 1 July 2016 was not
recorded in the statement of changes in equity. [2]

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because the loan is a non-current liability/loan capital (1) and does not affect equity (1)

Q17) Suggest two reasons why the balance on a retained earnings account may be lower
than the profit for the year. [2]

Previous loss brought forward (1) Payment of dividends (1) Bonus issue of shares (1)

Q18) Identify two differences between ordinary shares and cumulative preference shares.
[2]

Q19) a) Explain one difference between debentures and ordinary shares. [2]

(b) Define the term ‘revenue expenditure’. [2]

Revenue expenditure is money spent: on the day-to-day running expenses of the business; (1) on
resources that will generally be used up within one year. (1)

Q20) The following item appears on the statement of financial position of Rebuild Limited
at 31 December 2015: 6% debentures (2018–2020) $60 000

REQUIRED

(a) State the significance of (2018–2020). [1]

The debenture loan is repayable between the years 2018 and 2020 (1)

(b) State why an issue of debentures does not appear in the statement of changes in equity.
[1]

Because it is a long term liability (1) and is shown as a non-current liability in the statement of
financial position. (1)

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Q21) Explain why the company should not use its revaluation reserve to pay dividends to
shareholders. [4]

The revaluation reserve is a capital reserve. (1) Capital reserves are not allowed to be used for
the payment of a cash dividend. (1) The creation of a revaluation reserve is not a cash transaction
as no cash has been generated for the payment of dividends. (1) The capital reserve will increase
the asset value (1) of the company and the shareholders interest and is in the accounts to reflect a
true and fair view of the company accounts.(1) Cash gain can only be realised if the asset is sold.
(1)

RATIOS

Q1) a) State two ways in which a company could improve its current ratio.[2]
Reduce dividend payments (1) Increase long-term borrowing/issue debentures (1) Issue shares
(1) Selling off surplus non-current assets (1)

(b) State three limitations of comparing the financial performance of different

businesses.[3]
Businesses may use different accounting policies (1) Historical cost is used to prepare accounts
therefore may be misleading (1) There may be different year-ends/seasonal factors (1) There
may be non-monetary factors to consider (1) Relative size of each business (1) The effect of
window dressing (1) Maybe a different business structure/different objectives (1)

Q2) State two factors that should be considered when choosing businesses with which to
compare a business.[2]
Same type of ownership (1) Same trade (1) Similar size (1) Same business cycle (1)

Q3) (i) Explain how a business may increase its gross margin. [2]

Reduce the cost of sales (1) by finding less expensive supplies (1).

(ii) Explain how a business may improve its profit margin. [2]

Better control of overhead expenses (1) such as reducing irrecoverable debts (1)

Q4) State one reason why each of the following may be interested in the financial
statements of a business.
1 Employees

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2 Suppliers
3 Government [3]

Employees – To be aware of profitability to assess job security and remuneration. (1) Suppliers–
To assess likelihood of being paid amounts owed. (1) Government – To confirm correct amounts
of taxes are being paid. (1)

Q5) a) State three ways in which a business could reduce trade receivables turnover. [3]

Put in place measures to more closely monitor trade receivable accounts (frequent reminders;
issuing of statements of account). (1) Refuse credit terms to late payers. (1) Offer cash discounts
to encourage prompt payment. (1) Charge interest on overdue accounts (1) Ask for cash with
order / increase cash sales (1)

b) State three drawbacks of increasing trade payables turnover. [3]

Delaying payments to suppliers may mean the loss of cash discounts which would have an
impact on profits. (1) Cause some suppliers to refuse credit terms which would have an adverse
effect on liquidity. (1) Force the business to find alternative suppliers who are unable to supply
goods on the same quality. (1) May create a bad relationship with suppliers. (1) May incur
interest charges (1)

Q6) Identify two internal stakeholders with an interest in the financial statements of a
limited company. [2]

Shareholders (1) Directors/employees (1)

(b) Name two ratios that a business may use to assess:

(i) profitability [2]

Gross margin (1) Profit margin (1) Return on capital employed (1) Expenses to revenue ratio (1)

(ii) liquidity. [2]

Current ratio (1) Liquid (acid test) ratio (1)

Q7) Identify two external stakeholders. Explain why they may be interested in the financial
statements of a business. [4]

(Potential) investors (1) – to assess return on investment (1) Providers of finance (1) – to
assess whether loans / interest will be repaid (1) Government (1) – to ensure taxation liabilities
will be paid (1) Suppliers (1) - to assess whether or not to continue to supply and whether or not
they will get paid (1) Customers (1) – to assess continuity of supply (1) Trade unions (1) – to
assess the wellbeing of members (1)

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Q8) State three limitations to a business of using ratio analysis. [3]

Historic Window dressing

Different accounting policies
Different year end Different sizes

Q9) (a) Explain the difference between gross margin and mark-up. [2]

the gross margin looks at gross profit in relation to revenue (1) whereas mark-up looks at gross
profit in relation to cost of sales. (1)

(b) (i) Name one cost recorded in an income statement which would not be included in the
calculation of the expenses to revenue ratio. [1]

purchases / cost of sales / carriage inwards (1)

(ii) State how the three ratios calculated in (c) are related. [1]
(GROSS MARGIN, EXPENSES RATIO, PROFIT MARGIN)

the gross margin less the expenses ratio equals the profit margin

Q10) Name two other ratios a business could calculate to explain its liquidity position. [2]

Inventory turnover
Trade payables turnover
Trade receivables turnover
Working capital ratio Gearing

Q11) (d) State three uses of ratio analysis to a trader. [3]

Shows trend / previous years. (1) Helps to compare with competitors. (1) Help to compare with
industry averages. (1) Set targets for the next period. (1)

Q12) Explain the importance to a business of the current ratio. [4]

It shows the funds available in the short term (1) to pay the current liabilities (1). It does not
show the liquid assets available (1) because it includes inventory (1) It provides a judgement on
liquidity (1) by comparing current assets with current liabilities (1)

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BAD DEBTS

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Q1) (a) Explain why it may be important for a business to maintain a provision for
doubtful debts. [2]
To avoid overstating profit/current assets/trade receivables (1) – prudence concept (1) To match
costs with revenue (1) – accruals/matching concept (1)

(B) State two ways in which the risk of irrecoverable debts may be reduced. [2]
Reduce credit sales (1) • Better credit control (1) • Regular telephone contact with customers (1)
• Credit checks on customers (1) • Issue regular statements of account/invoices (1) • Setting
credit limits for customers (1) • Stop supply to late paying customers (1)

(C) State two factors that should be taken into account when setting a provision for
doubtful debts.[2]
Amount of trade receivables (1) • Past experience of irrecoverable debts (1) • State of the
economy (1) • Specific knowledge of credit customers (1) • Age of the debts (1)

Q2) (b) State two accounting concepts which are applied when recording a provision for
doubtful debts.

Accounting concepts: accruals (matching) (1); prudence (1)

Q3) Suggest two reasons why the trade receivables did not pay the full amount they
owed.[2]

Credit control was not up-to-date. (1) There were uncorrected errors in the receivables ledger
overstating certain accounts. (1) Becoming aware that the partnership was ceasing, certain
receivables avoided paying. (1) Customer bankrupt (1) May have been some irrecoverable debts
(1) Offered cash discount (1)

Q4) (a) State the journal entry to write off an irrecoverable debt. [2]

Dr Irrecoverable debts (1) Cr Dixie (1)

(b) Explain one accounting concept which is applied when making a provision for doubtful
debts.[2]

Prudence (1) Profit/current assets/trade receivables should not be overstated (1) OR Matching /
accruals (1) Revenue of an accounting period is matched against the costs of the same period (1)

Q5) Explain how a provision for doubtful debts is treated in: (i) the statement of financial
position (ii) the income statement [3]

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DEPRECIATION

Q1) (d) Explain one reason why some businesses may use the revaluation method of
depreciation [2]
The revaluation method is used when a non-current asset consists of many items each of small
value (1) making it impractical to calculate a depreciation charge on each item (1).

(e) State how an annual depreciation charge is calculated using the revaluation method[1]
The depreciation charge is calculated by comparing the closing valuation of the non-current asset
with the opening valuation (1).

Q2) Depreciation is provided for by a business when accounting for non-current assets.

(a) (i) State three possible causes of depreciation. (3)

Wear and tear (1) Usage (1) Obsolescence (1) Passage of time (1) Depletion (1) Economic
factors (1) Technological changes (1)

(ii) Explain two accounting concepts which are applied when providing for depreciation.
1) Concept
Explanation: -
2) Concept
Explanation: - [4]
Accruals/matching concept (1). The cost of the asset is matched with the income generated over
the lifetime of the asset (1).
Prudence concept (1). To avoid overstating profits / non-current assets (1).

Q3) (a) Explain one advantage and one disadvantage to a business of using the reducing
balance method of depreciation. [4]
ADV: Provides a more realistic charge against profits (1) as some assets lose more value in their
first years (1)/as the asset reduces in value so the depreciation charge reduces (1).
DISADV: Is more complicated to calculate (1) as the charge changes each year because it is
based on the decreasing net book value at the beginning of each year (1) rather than the more
straightforward equal charge per year when using the straight-line method (1).

Delivery vehicles are depreciated because they are subject to wear and tear.
REQUIRED
(b) State two reasons, other than wear and tear, for depreciating non-current assets. [3]

Obsolescence/technological change (1) Lapse of time (1) Inadequacy (1) Depletion (1)

Q4) (a) State three methods of depreciation which may be used by a business.[2]

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Q4) (a) State three methods of depreciation which may be used by a business.[2]
Reducing balance (1). Straight-line (1). Revaluation (1).

(b) Advise Khalid which method of depreciation he should use for each asset. Justify your
advice.

Motor vehicle
Machine [6]

Motor vehicle – reducing balance (1). The asset loses value more quickly at the beginning of its
life therefore more depreciation is charged in the early years (1). More maintenance expenditure
is expected in later years so less depreciation (1). Max. 3

Machine – straight line (1). The asset loses value at a steady rate (1). The same benefit is
received over the life so equal depreciation is charged in accordance with the accruals concept
(1) spreading the cost over the useful economic life (1). Max. 3

Q5) (a) State how a disposal of a non-current asset would affect the income statement and
the statement of financial position. Calculations are not required. [3]

Income statement Only a profit or loss on disposal would appear in the income statement (1)
Charge for depreciation would reduce (1) Max 1 Statement of financial position Disposal
proceeds would increase the bank account / the current assets total in the statement of financial
position. (1) The asset cost and accumulated depreciation would be eliminated from noncurrent
assets. (1)

b) (i) Explain why the reducing balance method of depreciation is more appropriate than
the straight-line method for assets such as computer equipment. [4]

Computer equipment tends to fall in value more in the early years. (1) They lose value very
quickly due to obsolescence/ technological changes. (1) The reducing balance method
depreciates the assets more in the earlier years and less in later years (1) which matches the fall
in value of computer equipment (1). The straight line method of depreciation depreciates assets
at the same amount each year (1) which does not match the rapid loss in value. (1)

(ii) Explain why the revaluation method of depreciation is appropriate for assets such as
loose tools. [2]

It is not worthwhile keeping individual records of loose tools (1) as they are usually many
small value items (1) and are difficult to keep track of. (1) They are easily broken, damaged
or lost and have to be regularly replaced. (1)

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Q6) Explain two accounting treatments for loose tools. [4]

It is written off as an expense (1) If the cost of the item is not material (1) The revaluation
method should be used (1) If the cost is significant (1)

Q7) Advise the directors whether or not they should decrease the depreciation rates. Justify
your answer. [4]

Reasons for: Profit would increase in the short term. The capital base /asset base of the company
would rise in the short term. Reasons against: The change would not be in accordance with the
accounting concept of consistency. The change would not be prudent / against prudence concept.
Assets/profit could be overstated. Lower depreciation charges would mean higher losses on
disposal. The change would not help profit in the long term

Q8) Explain why a company should provide for depreciation on its non-current assets. [4]

To comply with the matching / accruals concept (1) Accounts for that part of the asset used up in
the accounting period (1) The value of assets falls due to wear and tear, obsolescence,
technological change, etc. (1) Avoids overstating the net assets / non-current assets of the
business (1) Ensures that the statement of financial position shows a true and fair view (1)

Q9) State the double entry required to record the disposal of a non-current asset before the
profit or loss on disposal is transferred to the income statement (amounts are not required).

Q10) State what is meant by depreciation of non-current assets. [1]

(a) Depreciation is the allocation of the cost of a (non-current) asset over its expected working
life. (1) The allocation of the cost of using the asset over the year (1)

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INCOMPLETE RECORDS

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Q1) State two reasons why the owner of a small business may decide not to maintain full
accounting records.[2]
May not have the skills/time to prepare full accounting records (1) Maybe content with the
information provided by her current accounting records (1) Maybe cannot afford the services of a
bookkeeper/accountant or accounting software (1) Maybe business too small to warrant full
accounting records (1)

Q2) State four benefits to a business of keeping a full set of accounting records.[4]

• giving access to more detailed information (1) • easier to assess business performance (1), •
possible to prepare comprehensive financial statements (1) • more effective decision making (1) •
provides support for bank loan applications (1) • provides evidence to support tax assessments
(1) • possibility of improved credit control (1) • allows comparisons with previous years/other
businesses (1)

Q3) Explain the accounting treatment at the year-end in the income statement and
statement of financial position of: [4]

Prepayments Prepayments: Deducted from expenses (1) and shown as a current asset (1) OR
Added to income (1) and shown as a current liability (1)

Accruals Accruals: Added to expenses (1) and shown as a current liability (1) OR Deducted
from income (1) and shown as a current asset (1)

Q4) Advise Finn whether or not he should employ a book-keeper at a cost of $500 a month.
Justify your answer. [4]

Could maintain full up-to-date accurate records (1) Will improve decision-making (1) Could
provide credit control systems (1) Improve cash flow / reduce irrecoverable debts (1) Making
sufficient profits to afford bookkeeper’s wages (1) Increased wages ($6 000) / affordability
would result in decreased profits (1) Failure to maintain full up to date records could lead to
business failure (1)

Q5) State three benefits a business gains from maintaining a system of double entry book-
keeping. [3]

It enables checking transactions through the use of a trial balance and control accounts. It enables
the production of the income statement and statement of financial position to be compiled more
easily. It shows the amount due to individual customers and suppliers thus avoiding
overpayment. Helps guard against errors / fraud.

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CONTROL ACCOUNTS
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Q1) Explain three advantages to a business of preparing control accounts.[6]

They provide a check on the arithmetical accuracy of the balances on the sales and purchases
ledger/helps in locating errors (1). The balance on the control account should equal the total of
the individual balances (1). Prevents fraud (1). Division of duties – different person working on
the control account to the sales and purchases ledger (1). Helps in preparation of financial
statements (1). Speedier as total entered in trial balance rather than individual balances (1).

Q2) State three reasons why a business may prepare a purchases ledger control account.
[3]

To check the arithmetical accuracy of the purchases ledger (1) • To provide managers with a
quick method of finding total trade payables (1) • To facilitate the preparation of financial
statements (1) • To act as a deterrent to fraud (1)

Q3) Explain the effect on a business of not updating:

(i) customers’ accounts in the sales ledger [2]

Incorrect sales ledger balances could mean Lawrence not collecting the right amount from credit
customers. (1) It may also risk resulting in irrecoverable debts. (1) Non-collection of debts would
negatively impact cash balances. (1) May lead to incorrect financial statements (1)

(ii) suppliers’ accounts in the purchases ledger. [2]

Incorrect purchase ledger balances could mean possible disputes with suppliers affecting
deliveries (1) and may result in credit facilities being withdrawn. (1) May lead to overpaying
suppliers (1) May result in loss of opportunities of settlement discount. (1)

Q4) State three reasons why there might be a credit balance on a customer’s account in the
sales ledger. [3]

A customer has overpaid in error

A credit has been given and the customer has not taken
A contra has been put through but the customer has ignored it.
A customer has paid in advance
Not taking a discount
There is a deposit on goods.
Customer paid for the goods before returning them.
Customer overpaid and invoice

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Q5) State four advantages to a business of preparing a sales ledger control account.[4]
Provides a total for trade receivables (1) Helps in the preparation of the financial statements. (1)
Helps deter/prevent/reduce fraud, as it is maintained by different person. (1) Verifies the
arithmetical accuracy/identifies errors in the sales ledger. (1) Can be reconciled with the sales
ledger balances to improve accuracy. (1)

Q6) State three benefits and one limitation of preparing a sales ledger control account. [4]

Benefits: (maximum 3 marks) Provides a total for trade receivables. (1) Helps in the preparation
of the financial statements. (1) Helps deter/prevent/reduce fraud as it is maintained by different
person. (1) Verifies the arithmetical accuracy / identifies errors in the sales ledger. (1) Can be
reconciled with the sales ledger balances to improve accuracy. (1) Limitation: (maximum 1
mark) Doesn’t identify errors of commission/omission/compensating/original entry. (1)

Q7) State two types of errors that will not be identified by producing a sales ledger control
account. [2]

Error of omission (1) Error of commission (1) Compensating error (1) Error of original entry (1)

BANK RECONCILLIATION STATEMENT

Q1) (a) State four benefits to a business of preparing a bank reconciliation statement. [4]

• Helps identify errors made by the bank (1) • Helps identify errors in the cash book (1) •
Accurate preparation of financial statements (1) • Helps prevent/identify fraud (1) • Ensures cash
book is up to date (1) • Helps identify out of date/dishonoured cheques (1)

(b) State two differences between a bank standing order and a direct debit. [2]

Standing order is for a fixed amount; amount of direct debit varies (1) Bank triggers payment of
standing order; recipient triggers payment of direct debit (1) Standing order is paid at fixed
intervals; direct debit payments occur irregularly (1)

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ERRORS IN ACCOUNTING+SUSPENSE
ACCOUNTS

Q1) Identify three types of error which do not affect the balancing of the trial balance. [3]
Errors of: • commission (1) • principle (1) • omission (1) • complete reversal (1) • compensating
(1) • original entry (1)

Q2) (a) Explain why a trial balance may be arithmetically correct even though errors have
been identified.[2]

Some errors (e.g. omission, commission, principle, original entry, reversal, compensating) will
not show in the trial balance (1) as a result the trial balance will still balance despite errors being
present (1).

(b) State three uses of the general journal other than the correction of errors.[3]

To record: opening or closing entries (1) the purchase or sale of a non-current asset (1) non-cash
drawings (1) depreciation (1) provision for doubtful debts (1) non-cash capital contributions (1)
transfer of profit or loss to capital account (1)

Q3) Explain what is meant by the term ‘error of commission [2]

A transaction recorded in the wrong account of the same class (1) but using the correct amount
and on the correct side. (1)

Q4) State two other uses of a suspense account. [2]

The bookkeeper does not know where to post an entry. (1) In order to prepare draft financial
statements. (1)

Q5) State two types of entries, other than the correction of errors, which would usually be
recorded in the general journal.

Opening entries (1) Purchase and sale of non-current assets (1) Non-regular transactions (such as
year-end transfers) (1) Calculating opening capital (1) Write off bad debts (1) Depreciation (1)

Q6) State the use of a suspense account. [1]

A suspense account is a temporary account used to balance the trial balance (1) Used to help
correct errors when the trial balance / books of account do not balance (1)

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CASHFLOW

Q1) (a) State one advantage and one disadvantage to a business:

(i) of making all sales on a cash basis only [2]

Advantages • Will improve overall cash flow (1) • Reduces the possibility of irrecoverable
debts (1) Disadvantages • Maybe a reduction in number of customers (1) • May have to
reduce selling price to attract new customers (1)

(ii) of making all purchases on a cash basis only [2]

Advantages • May improve the relationships with the suppliers (1) • May be able to
negotiate a better purchase price (1) Disadvantages • Overall cash flow will decrease (1) •
Not making use of available credit terms (1)

ACCOUNTING CONCEPTS

Q1) State three benefits to a business of preparing annual financial statements. [3]

Helps future planning/targets/goals (1) Decision making (1) Able to assess

performance/comparisons (1) Valuation of assets, liabilities and capital (1) For tax purposes (1)
To present to bank for additional finance (1)

Q2) Identify two internal stakeholders with an interest in the financial statements of a
limited company. [2]

Shareholders (1) Directors/employees (1)

Q3) Suyin has been informed that the accounting concepts of matching and prudence must
be followed when preparing financial statements.

REQUIRED

Explain how these accounting concepts are applied when a business prepares financial
statements. [4]

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-Matching
-Prudence
Matching requires costs and revenues to be matched for a financial period (1) irrespective of
amounts received or paid (1). Prudence requires losses to be realised as soon as they are
anticipated (1) to avoid profits and assets being overstated/losses and liabilities being understated
(1).

Q4) Explain the accounting concepts of:

(i) business entity [2]
Business entity: a business has its existence separate from its owners (1) only transactions that
affect the business should be recorded in the accounting records (1)
(ii) substance over form. [2]
Substance over form: financial statements must give a complete and accurate picture of events
(1) so economic impact is taken into account and legal form is disregarded (1)

Q5) a) State in which section of the income statement for the year ended 31 December 2019
Daniel’s rent receivable should appear. [1]

Rent receivable appears in the profit and loss section of the income statement/it follow
immediately after gross profit (1)

(b) State in which section of the statement of financial position at 31 December 2019 the
balance of the rent receivable account should appear. [1]

Closing balance will appear in the current liabilities section (1).

Q6)

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Q7) State the purpose of financial statements.[3]

To provide information about the financial performance of the business (1) the financial position
of the business (1) and to facilitate decision making/ comparison to previous years / other
businesses (1).

BUDGETARY CONTROL

Q1) State three limitations of budgetary control.

Demotivated workforce (1) Unexpected opportunities ignored (1) Resources used inefficiently
(1)

Q2) State three advantages and three disadvantages of a system of budget preparation. [6]

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Q3) State three financial benefits of a system of budgetary control.[3]

Facilitates profit maximisation (1) Enhanced cash management by identifying future inflows and
outflows. (1) Facilitates working capital requirement planning. (1) Enables capital expenditure
planning. (1) Note Benefits must be financial benefits. Do not reward: co-ordination,
planning, decision making etc. unless developed from a financial perspective.

Q4) Explain three ways in which the introduction of a system of budgetary control will
affect the departmental managers of a business. [6]

Managers could be involved in setting targets/budgets for their areas of responsibility (1)
resulting in possible increase in motivation (1) If managers are not involved in setting
targets/budgets motivation could be reduced (1) especially if targets are seen to be
unachievable/unrealistic (1) Managers’ efficiency could be improved (1) as a result of having
clear objectives/targets (1) However, budgetary control might prove to be restrictive (1) resulting
in otherwise beneficial opportunities being rejected by managers(1)

ABSORPTION COSTING

Q1) State two possible causes of under absorption of overheads. [2]

Overheads are more than budgeted (1) Actual production is less than budgeted (1) calculation
error (1).

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Q2) (a) Explain one difference between overhead allocation and overhead
apportionment. [2]
Overhead allocation is used when the whole expense is directly related to one department (1).
Overhead apportionment is used when the overhead is related to more than one department (1).

(b) State what is meant by:

(i) a production department [1]
A production department is one which is directly involved in manufacturing the products (1).
(ii) a service department [1]
A service department is one which is not directly involved in manufacturing the products but
provides support to other departments (1).

(c) Explain the reason for the re-apportionment of the service department costs. [2]
Service centres incur overhead costs and these costs are charged to the product by transferring to
the production centres on an appropriate basis (1). To ensure that all costs are recovered in the
sale of products (1).

(d) State three limitations of using absorption costing. [3]

Not used for short-term decision making (1). Cannot calculate break-even point (1). Can be
subjective (1). • It is more time consuming to calculate the overhead absorption rate and adjust
for over / under absorption. (1) • It is more complicated to calculate and managers may need
training. (1) • It is irrelevant in short-term decision making as fixed costs don’t change. (1) •
Fixed costs relate to a period in time and so can be misleading to charge to production units. (1) •
The basis used to apportion and absorb overheads may be arbitrary

Q3) Explain three benefits to a business of using absorption costing. [6]

Takes account of fixed costs when determining product cost (1); as a result is useful in setting a
selling price for a product (1). • Avoids separating fixed costs from variable costs (1) which can
be difficult and so lead to inaccuracies (1) • As it takes account of all costs it conforms to the
matching principle (1) which requires costs to be matched to revenues for a period (1) • As it
takes account of all costs (1) it is the recognised method for inventory valuation (1)

Q4) Explain two drawbacks for a business of using a budgeted overhead absorption
rate.[4]

(b) Explain why a business calculates separate overhead absorption rates for each
production department rather than a single rate for the whole factory. [4]
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Q5) Name the accounting term which describes the splitting of a service department’s costs
based on stores requisitions. [1]

apportionment (1)

(ii) Explain how the cost of direct materials is charged to each production department. [2]

direct materials are allocated (1) because they are directly attributable to production units (1)

(b) State the bases which the company may have used to split each of the following costs
between the two departments.

(i) factory rent [1]

factory rent – by floor area (1)

(ii) depreciation of factory machinery [1]

depreciation of factory machinery – by cost or NBV of factory machinery (1) Machine hours (1)

Q6) Explain why profit calculated using absorption costing would be different to profit
calculated using marginal costing. [3]

Using marginal costing Closing inventory is valued at variable production cost and so shows a
lower closing inventory value. (1) Fixed overheads are treated as period costs (1) and are written
off in the period’s income statement. (1) Using absorption costing Closing inventory is valued at
full production cost and so shows a higher closing inventory value. (1) Fixed overheads are
treated as part of production costs (1) and are carried forward as part of the inventory value. (1)

Q7) State the meaning of each of the following terms.

(i) Allocation [2] (ii) Apportionment [2] (iii) Absorption [2]

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Q8) The directors are considering changing from departmental overhead absorption rates
to one factory-wide rate.

REQUIRED

(a) Advise the directors whether or not they should make this change. Justify your
answer.[4]

Easier to calculate
Cheaper to calculate
Some products may require more labour hour/machine hours
Less accurate
Different products may spend different time in each department.

(b) Explain how over absorption and under absorption of overheads can affect the profit of
a manufacturing business. [6]

Q9)(a) State what is meant by overhead costs. [2]

a cost incurred which cannot be traced directly (1) to a product, service or department (1) an
indirect cost (1) (max 2)

(b) Explain why overhead costs are re-apportioned from service cost centres. [2]

So that each unit of production (1) contains a share of total overhead costs. (1)

Additional information
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Rajesh has been advised to change to a marginal costing system.

REQUIRED

(c) Advise Rajesh whether or not he should change. Justify your answer. [5]

MARGINAL COSTING

Q1) Define the term ‘margin of safety’. [2]

Margin of safety is difference between actual/forecast sales (1) and break-even point (1).

(b) Explain two advantages of using a system of marginal costing.[4]

It is useful for short-term decision making (1) as it focuses on the controllable aspects of
business by separating fixed and variable costs (1). It avoids the arbitrary allocation of fixed
overheads (1) and so provides more useful data for cost control (1)

Q2) 4 P Limited is a manufacturing business.

REQUIRED
(a) Define the following terms:
i) Direct costs [1]
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Direct costs are those which can be identified with a product unit (1)
ii) Stepped costs [2]
Stepped costs are fixed up to a certain level (1) at which point they will increase (1).

b) State the formula for finding the margin of safety in units. [1]
Margin of safety in units: Maximum/budgeted output in units – break-even point in units (1)

c) Explain the term ‘limiting factor’ when using marginal costing. [2]
A limiting factor is anything that limits the activity of a business (1), such as a shortage of a
resource. (1)

Q3) Identify three assumptions made when using break-even analysis.

Sales and production levels are the same. (1) Total fixed costs are constant. (1) Variable costs per
unit are the same. (1) Selling price per unit remains the same. (1) Product mix remains constant.
(1) Costs can be easily classified as fixed or variable. (1)

Q4) State three benefits to a business of break-even analysis[3]

Identifies point at which product will make a profit (1) • Identifies margin of safety (1) • Helps
cost control by showing relative importance of fixed costs and variable costs (1) • Provides
information in a concise/straightforward/easy to understand format (1)

Q5) Explain what is meant by contribution.

Contribution is the amount remaining after all variable costs have been subtracted from
revenue (1). This amount is available to service the fixed costs (1). The amount remaining
after this is the profit (1).

Q6) Define the following terms: (i) Variable cost [1] (ii) Semi-variable cost [1] (iii) Fixed
cost [1]

Those costs which vary in direct proportion to production (1)

Those costs which are partially fixed and partially variable (1).

Those costs which remain the same at all levels of production (1).

Q7) State three assumptions made when using marginal costing.[3]

Costs can be split into fixed and variable costs (1). Fixed costs are unchanged at all levels of
production (1). Variable cost is constant per unit at all levels of production (1). All
production is sold (1) Selling price remains constant (1) Sales mix should be constant (1)

Q8) Explain how unit contribution can be used by a business manufacturing multiple
products when there is a shortage of production materials.[4]

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The business can calculate contribution per unit of scarce resource. (1) Thus, it can rank its
products (1) and prepare a production schedule (1) to maximise profit (1) by prioritising products
with the highest contribution per unit of scarce resource. (1)

b) State two other uses of marginal costing to a business.[2]

Make or buy decisions (1) Accepting orders at below normal selling price (1) Closing
department / discontinuing product (1)

Q9) REQUIRED

(a) Identify the following values in dollars from the chart above:

(i) Break-even point [1] (ii) Allocated fixed costs [1] (iii) Margin of safety [1] (iv) Profit
[1]

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Q10) (a) State what is meant by ‘piecework payments’. [1]

Payment to employee is based on the number of completed units they produce (1)

(b) Explain what is meant by ‘production overheads’. [2]

Production overheads include all factory indirect costs (1) that cannot be traced directly to a unit
of production (1)

volumeprofit analysis. [2]

Q11) (a) Explain the purpose of cost

Used to determine the effect that changes in costs and volume (1) will have on the company’s
operating income and net income (1).

(b) State four assumptions of costvolumeprofit analysis. [4]

Sales price per unit is constant (1) Total fixed costs are constant (1) Variable cost per unit is
constant (1) All production is sold (1) If the company sells more than one product, the
product mix remains constant (1) Costs are only affected as a result of changes in activity (1)

c) State two benefits and three limitations to a business of using cost–volume–profit

analysis.[5]

Benefits (Max 2) Aids short-term decision making. Identifies break-even point/margin of

safety/project profit. Accept other valid points. Limitations (Max 3) It assumes that total
fixed costs are constant. It assumes variable costs per unit are the same. It assumes the selling
price per unit remains the same. It assumes sales and production levels are the same. It
assumes product mix remains constant. It ignores uncertainty in estimates of fixed costs and
variable costs. Some costs are difficult to classify as fixed or variable.

Q11) (a) State what is meant by the term ‘break-even point’. [1]

The point where the business is making neither a profit nor a loss (1)

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(b) State three uses of marginal costing. [3]

Make or buy decisions (1) Limited resources (1) Special orders (1) Production scheduling (1)
Product / departmental closure (1)

Q12) State the difference between a cost unit and a cost centre. [2]

(b) State the difference between a production cost centre and a service cost centre. [2]

(c) State what is meant by contribution. [2]

(d) Advise Miu whether or not she should change from marginal costing to absorption
costing. Give reasons to justify your answer. [5]

Marginal costing will help in short term decision making.

Marginal costing is easy to operate.But relies upon costs being split into fixed and variable
Absorption costing helps set prices
Absorption costing is used in long-run rather than short-run.
Absorption costing is more acceptable / realistic for financial statements.

Q13) State the meaning of C/S ratio. [1]

It shows how much contribution is earned from each $1 of sales revenue (1)

(b) (i) State the name given to the difference between the budgeted total sales units and the
budgeted break-even sales units. [1]

It represents the margin of safety (1)

(ii) Explain the significance of this difference to a business. [2]

The amount by which actual sales can fall short of the budgeted sales before he reaches break-
even point (1) and then makes no profit (1).

(c) State three limitations of a break-even analysis.[3]

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Limitations: • Some costs are not easily classified as fixed or variable. • Some costs are semi-
variable. • It assumes fixed costs stay the same. • Straight lines can be misleading – discounts can
cause curved lines. • A chart can be time consuming to prepare. • It assumes the selling price is
constant at all levels of output. • It can be misleading for those with limited accounting
knowledge. • Can only be applied to one product at a time

Q14)

REQUIRED

(a) Identify from the P/V chart for the year ending 31 December 2016:

(i) what point A 20 000 represents [1]

the break-even point in units (1 mark)
(ii) what point B ($60 000) represents [1]
Fixed costs (1 mark)

(b) State what is meant by P/V ratio. [1]

A measure of how much contribution is earned from each $1 of sales

(c) State two benefits and two drawbacks of CVP analysis. [4]
Benefits: • useful for planning • provides quick estimates • changes in costs can be easily
incorporated • forecasts profit at various levels of output • identifies breakeven point • charts
provide a clear way of presenting information – better for non accountants (1 mark) any two
advantages (max2)

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Drawbacks: • can be time consuming to prepare charts • assumes fixed costs are constant •
assumes variable costs per unit are the same at all levels of output • assumes selling price per
unit is the same at all levels of output • assumes sales and production levels are the same •
ignores uncertainty in estimates of fixed costs and variable costs (1 mark) any two disadvantages
(max 2)

Q15) (a) State what is meant by break-even point. [1]

The answer may be any one of the following: the point at which a product makes neither a profit
or a loss total costs equal total revenue total contribution equals fixed costs.

(b) State one advantage and one disadvantage of marginal costing. [4]

BATCH COSTING

Q1) Explain what is meant by ‘batch costing’.[2]

Method of costing that you apply to the production of a number of identical items. (1) The cost
per unit is found by dividing the total batch cost by the number of units in the batch. (1)

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INVENTORY VALUATION

Q1) (a) State two advantages to a business of using each of the following methods of
inventory valuation. [6]

(i) First in first out (FIFO)

FIFO Simple to calculate (1). Approved by IAS2 (1) Inventory valuations are based on the most
recent receipts (1)

(ii) Average cost (AVCO)

Automatically adjusts for price rises and falls (1). Approved by IAS2 (1) Provides an average
price for goods issued

Additional information

Kevin manufactures a single product and he intends to value his closing inventory at selling
price which includes a mark-up on cost.

(b) Explain why Kevin should not value his inventory at this price. [3]

The use of selling price would result in an overstatement of profit / current assets (1) so
inventory should be valued at lower of cost and net realisable value (1) in accordance with the
prudence concept (1)

Q2) Identify three drawbacks for a business of holding too much inventory.[3]

Theft (1) Storage costs (1) Insurance (1) Obsolescence (1) Damage (1) Opportunity cost (1)

Q3) (g) Explain two advantages and one disadvantage of using the AVCO method of
inventory valuation. [6]

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