Answers

Level 4 June 2023 Sample Answers

Marks
1 (a) (i) There are several advantages to cloud accounting:
– Information in the system is available to multiple users in real time, simultaneously and globally,
which allows any users who need the information to access it easily from wherever they are located.
– There is no need to transmit the data between users over the internet or by using removable storage,
therefore increasing data security.
– It reduces the cost and complexity of keeping backups of the data because this is performed by the
cloud service provider. The cloud service provider may also provide business continuity planning
for the business.
– It reduces the cost and time involved in maintaining and upgrading the software as this burden falls
on the cloud service provider.
– It may be possible to link the accounting system to the company’s online banking platform and/or the
accounting systems of its customers and suppliers in order that regular and expected transactions
are automatically recorded in the cloud accounting system. 2
There are, however, some disadvantages, mainly around data security:
– Cloud services are more prone to targeted cyber attacks which can lead to service outages and data
loss.
– As the cloud services can be accessed remotely, Peach Ltd needs to ensure that accounts are closed
for leavers in order to restrict access to data.
– Moving to a cloud accounting service, and the fact that the software is frequently updated, increases
the need for staff training, which can be expensive and time consuming. 2
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(ii) Peach Ltd
Statement of profit or loss for the year ended 31 December 20X5
£’000
Revenue (W8) 1,318 1
Cost of sales (W7) (713) 1
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Gross profit 605
Distribution costs (73 + 22 (W3)) (95) 1
Administrative expenses (W1) (270) 9·5
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Operating profit 240
Finance costs (W5) (18) 1
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Profit before tax 222
Taxation (W9) (58) 0·5
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Profit for the year 164
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(iii) Peach Ltd
Statement of financial position extracts
£’000
Current assets
Cash 312
Inventory (W7) 63 1
Trade receivables (W8) 428 1
Prepayments (W6) 101 0·5
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904
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Equity
Share capital 600 0·5
Retained earnings (1,856 + 164) 2,020 1
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2,620
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Workings
W1 Administrative expenses
£’000
Per draft trial balance 127
Gain on part exchange (W2) (0·3)
Correct recording of plant part-exchange (20)
Plant and equipment depreciation (W2) 85·4
Research and development (W4) 9
Prepayments (W6) (17)
Increase in allowance for doubtful receivables (W8) 4·54
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269·64
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W2 Part exchange
The gain or loss on part exchange of the old plant is calculated by comparing the carrying amount at
the date of disposal with the part exchange value. The proceeds of the part exchange are calculated
as the difference between the cash price of the new plant and the amount paid by Peach Ltd. The
gain or loss is presented in administrative expenses in the statement of profit or loss.
£
Cost 28,000
Accumulated depreciation 28,000/10 x 2 yr 3 m (6,300)
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Carrying amount 21,700
Part exchange value (42,000 – 20,000) 22,000
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Gain on part exchange 300
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Dr Plant and equipment accumulated depreciation 6,300
Cr Plant and equipment cost 6,000
Cr P/L Administrative expenses 300
Being to record the disposal of the old plant.
The cash price paid has been incorrectly recorded in administrative expenses rather than being
capitalised as part of the plant and equipment cost. An adjustment is required to:
Dr Plant and equipment cost 20,000
Cr P/L Administrative expenses 20,000
Being to correctly record the cash amount paid on part exchange.
(Note that as only the statement of profit or loss is required, the adjustment to record the full
purchase cost of new plant is not required.)
Plant and equipment has not been depreciated in the year. As depreciation is calculated on the
straight-line basis, it is based on the adjusted cost of the plant and equipment after taking account
of the part exchange. Pro-rating is required as the part exchange took place during the period.
Depreciation for the year:
£
Old plant 28,000/10 x 3/12m 700
New plant (42,000 – 6,000)/10 x 9/12m 2,700
Plant and equipment excluding part exc. (848,000 – 28,000)/10 82,000
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Total depreciation 85,400
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Dr P/L Administrative expenses 85,400
Cr Plant and equipment accumulated depreciation 85,400
Being plant and equipment depreciation.

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W3 Motor vehicles accumulated depreciation
Motor vehicles are depreciated on the reducing balance basis.
Depreciation for the year:
£
Cost per trial balance 356,000
Accumulated depreciation per trial balance (267,000)
––––––––
Carrying amount at 1 January 20X5 89,000
––––––––
Depreciation (89,000 x 25%) 22,250
Dr P/L Distribution costs 22,250
Cr Motor vehicles accumulated depreciation 22,250
Being motor vehicles depreciation.
W4 Capitalised development expenditure
All research expenditure (£22,000) and any development expenditure incurred before the criteria
were satisfied (£68,000) must be written off as an expense to profit or loss in the period in which
it is incurred.
Dr P/L Administrative expenses 90,000
Cr Capitalised development expenditure 90,000
Being the write off of development expenditure.
W5 Finance costs
The interest rate should be applied to the outstanding loan balance. An adjustment is required to
adjust the amount currently presented as a finance cost.
£
Outstanding loan balance 300,000
Interest at 6% per annum 18,000
Finance costs per draft trial balance 15,000
––––––––
Increase required 3,000
––––––––
Dr P/L Finance costs 3,000
Cr Accruals and other payables 3,000
Being finance costs accrued.
W6 Prepayment
The invoice for buildings insurance was paid during the year but 6/12 months relates to the
subsequent accounting period. An adjustment is required for the prepayment of buildings insurance.
Amount Pro-rata Accrual/prepayment
£ £
Buildings insurance 34,000 6/12m 17,000 prepayment
Dr Prepayments 17,000
Cr P/L Administrative expenses 17,000
Being prepayment of insurance.
The prepayments balance for inclusion in current assets is therefore:
Amount
£’000
Per trial balance 84
Adjustment 17
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Carrying amount 101
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W7 Inventory
Inventory should be carried at the lower of cost and net realisable value. This includes inventory of
raw materials. An adjustment is required to reduce the apples to the 40% which can be recovered
from the farmer. The write down is included in cost of sales.
Amount
£
Cost 900
NRV at 40% 360
––––
Write down 540
––––
Dr P/L Cost of sales 540
Cr Inventory 540
Being the write off of inventory.
The cost of sales balance for inclusion in the statement of profit or loss is therefore:
Amount
£’000
Per trial balance 712
Write down 0·54
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Carrying amount 712·54
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The inventory balance for inclusion in current assets is therefore:
Amount
£’000
Per trial balance (28 + 32 + 4) 64
Write down (0·54)
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Carrying amount 63·46
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W8 Unrecorded invoice
As the sale was made pre year end, it must be accounted for in the current accounting period. The
amount to be recorded in revenue is the net amount. The amount included in trade receivables is
the gross amount.
Amount
£
Gross 64,800
VAT (64,800 x 20/120) (10,800)
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Net 54,000
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Dr Trade receivables 64,800
Cr Accruals and other payables 10,800
Cr P/L Revenue 54,000
Being to account for an unrecorded invoice.
The revenue balance for inclusion in the statement of profit or loss is therefore:
Amount
£’000
Per trial balance 1,264
Add: omitted invoice 54
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Carrying amount 1,318
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The allowance for doubtful receivables is then calculated based on the adjusted trade receivables
balance.

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Amount
£
Trade receivables per trial balance 386,000
Omitted invoice 64,800
––––––––
Adjusted balance 450,800
––––––––
Allowance at 5% 22,540
Allowance per trial balance 18,000
––––––––
Increase required 4,540
––––––––
Dr P/L Administrative expense 4,540
Cr Allowance for doubtful receivables 4,540
Being to increase the allowance for doubtful receivables.
The trade receivables balance for inclusion in current assets is therefore:
Amount
£’000
Adjusted balance 450·8
Less: allowance for doubtful receivables (22·54)
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Carrying amount 428·26
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W9 Tax expense
The tax expense and corresponding liability needs to be decreased to the new estimated amount.
Amount
£
Tax per trial balance 115,000
Estimated tax expense 58,000
––––––––
Decrease required 57,000
––––––––
Dr Tax expense 57,000
Cr P/L Taxation 57,000
Being to decrease the tax expense.

(b) (i) The supermarket is a customer of Peach Ltd and therefore the bargaining power of customers is the
most relevant competitive force. The relative size of the supermarket and the fact that 70% of Peach
Ltd’s revenue is generated from the supermarket contract means the supermarket has a high bargaining
power, as is evidenced by the fact that it is dominant in contract negotiations. The strong position of the
supermarket is what allows it to demand price reductions, shorter delivery times and extended credit
periods.
The directors of Peach Ltd had previously stated that they would not reduce sugar levels nor limit
the calorie content until it became a legal requirement to do so, however, the relative power of the
supermarket means that they are now forced to change the process to meet the requirement earlier than
intended.
Peach Ltd relies on the ongoing success of the supermarket contract for its survival and is therefore
willing to make changes to satisfy the terms of the contract.
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(ii) Normal losses are expected losses and occur due to unavoidable wastage in the production process. An
abnormal loss is not expected under standard operating conditions and arises due to errors or faults in
the production process. An abnormal loss does not form part of the cost of each unit of fruit juice and is
instead written off to profit or loss as it is incurred.
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(iii) Ratio Working 20X5
Inventory holding period Inventory/cost of sales x 365
63/713 x 365 32·3 days
Receivables collection period Trade receivables/revenue x 365
428/1,318 x 365 118·5 days
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Assuming all else remains equal, the contract with the supermarket will reduce the inventory holding
period as the supermarket requires delivery two days sooner than under the current contract. The
directors are not concerned about Peach Ltd’s ability to meet this demand and there will be positives for
Peach Ltd as it will incur less costs associated with the storage of the fruit juices.
The receivables collection period will increase as the new contract will allow the supermarket an
additional 10 days to settle its invoices. The receivables collection period is already long, with companies
typically offering 30-day or 60-day credit terms. Peach Ltd takes advantage of favourable credit terms
from its suppliers which may be why it is able to manage its working capital despite the long receivables
collection period. An increase in the collection period will put pressure on Peach Ltd’s working capital
management and its cash position.
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Tutorial note: Candidates were advised to consider the likely impact on the inventory holding period
and the receivables collection period assuming all else remained equal. However, some candidates
may have reflected that there would be increased costs associated with the changes to the process
and that revenue would increase due to the new contract, both of which have an impact on the ratios.
Candidates who apply this wider thinking will be awarded credit.

2 (a) Email
To: Peach Ltd
From: Apprentice accountant
Re: Potential acquisition of Plantmilk Ltd
Please find detailed below the requested information relating to the potential acquisition of Plantmilk Ltd.
(i) Plantmilk Ltd operates an entrepreneurial organisational structure. This is a simple structure often used
by new or young companies in which the majority of decisions are taken by one key person – normally
the entrepreneur who established the company. This structure may not be suitable as a company starts
to grow as more decision makers will be needed.
Peach Ltd operates using a functional organisational structure in which separate functions have been
created based on the tasks undertaken, such as production and finance. Each function has a director
who is responsible for the decisions made in that function. The director of each function is responsible
for communicating the key decisions with the other directors and with the employees within the function.
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(ii) Ratio Working 20X5
Gross profit margin Gross profit/revenue x 100
605/1,318 x 100 45·9%
Return on capital employed Profit before interest and tax/equity +
non-current liabilities
240/(2,620 +300) 8·2%
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Peach Ltd’s gross profit margin is higher than that of Plantmilk Ltd. This is despite the significant pressure
which Peach Ltd comes under as a result of the supermarket contract. Plantmilk Ltd sells premium
products which are likely to be priced at the higher end of the market and therefore the relatively low
gross profit margin is likely to be driven by high cost of sales rather than low sales prices. Plantmilk Ltd
has not been able to secure pricing discounts on the purchase of almonds which will mean the cost of
its raw materials is high.
Plantmilk Ltd’s return on capital employed has significantly outperformed that of Peach Ltd. Plantmilk
Ltd has relatively low capital employed as its issued share capital is low and it does not have a bank loan.
Peach Ltd has several years of accumulated profits within its retained earnings and has significant share
capital and bank loan balances, hence it has relatively high capital employed. Plantmilk Ltd may also
have a high profit before interest and tax as it sells from its own website and advertises on social media,
hence selling and marketing costs are relatively low, and it has a distribution agreement at favourable
rates, hence distribution costs will also be low.
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(iii) Peach Ltd could reduce Plantmilk Ltd’s costs by:
– Reducing its material costs by negotiating discounts on the supply of almonds. The fact that Peach
Ltd is a larger, more well-established company could help it to exert purchasing power pressure
on the suppliers. This is likely to be successful as Peach Ltd plans to expand the operations and
therefore may be able to negotiate bulk discounts.
– Reducing its labour costs by identifying whether there are any redundant roles following the takeover.
This may occur due to some roles, such as marketing and finance, being provided centrally by
Peach Ltd. It is common in group situations for some central functions to be carried out by the
parent company to reduce the need for administrative or support staff.
– Peach Ltd could introduce efficiencies in Plantmilk Ltd’s operations. Peach Ltd undertakes a similar
production process to Plantmilk Ltd and, as it has been operating for longer, may have refined its
process to maximise efficiencies which could be shared with Plantmilk Ltd.
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(iv) A limiting factor is that which prevents a business from expanding its operations beyond a certain point
without making changes. The limiting factor can change depending on the supply of inputs and the
demand for outputs at different points in time.
Plantmilk Ltd can currently produce 210,000 litres of almonds milk per month from 35,000 kg of raw
almonds, but demand is only 200,000 litres and therefore sales demand is the limiting factor.
Under the new contract, Plantmilk Ltd can produce 270,000 litres (210,000/35,000 x 45,000) of
milk which is less than the demand of 300,000 litres which is expected and therefore the supply of raw
almonds is the limiting factor.
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Professional marks for format and style 2
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(b) Confidentiality
A professional accountant should not disclose information obtained as a result of a business relationship to
third parties nor use the information to the personal advantage of the professional accountant or the third
party. Despite Sofia stating otherwise, third parties include my parent and therefore disclosing information
about the contract, which is deemed highly confidential, to my parent would be a breach of this principle.
Professional competence and due care
As an ACCA apprentice accountant, I am required to ensure I have the technical knowledge and skill required
to ensure my employer receives a competent professional service. I have made Sofia aware that I do not
believe I have sufficient experience to undertake the work she expects of me, however, she has advised that I
should proceed as expected which goes against this fundamental principle.
I should not comply with Sofia’s requests and must not disclose any details of the contract with my parent. I
must escalate my concerns to Joel or to Leo. If I cannot resolve the matter internally, I should contact ACCA
for advice.
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3 (a) (i) Big data is a large and complex dataset which includes data collected in large volumes, from a vast
number of sources and at significant speed. The main sources of big data are: traditional data such as
that collected by the government; social media interactions such as that used by the consultant; internet
searches; data collected from the internet of things; and data stored on cloud platforms.
Data analytics is the process of taking big data and making it useful to the end user. Analysts will ‘clean’
the data by removing outlying or irrelevant information before sorting, modelling and processing the data
to gain insights into the market. The information provided by data analysts provides companies with
better information on which to make informed decisions.
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(ii) Stakeholders, such as employees, customers and suppliers, increasingly expect that companies make
a positive contribution to the society in which they operate, as well as making profits and providing
shareholder returns. Peach Ltd has a stated commitment to ‘making a positive contribution to the health
of our customers, the protection of our planet and the livelihoods of our suppliers and employees’ and
therefore it is reasonable for the stakeholders to expect that the company operates in a manner which is
consistent with these commitments. Failing to do so could leave the stakeholders feeling like they were

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misled by the company and may result in, for example, customers choosing an alternative supplier or
Peach Ltd finding it difficult to recruit and retain employees.
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(iii) The principle of lawfulness, fairness and transparency requires that data can only be held if there are
valid reasons for holding it. Any data held must be used fairly and with clarity and honestness about how
it will be used. In order for customer data to be shared with the external consultant, the data subjects (in
this case Peach Ltd’s customers) must be aware that their data may be used for the purposes of analysis,
which is unlikely to be the case.
The principle of purpose limitation means that data subjects need to be made aware of the reason for
collecting their data. Providing the data to the external consultant would be possible if Peach Ltd was to
successfully seek permission from its customers for their data to be used in this way.
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(b) (i) Year Per Adj. 1 Adj. 2 Adj. 3 Net 7% Disc. NPV 8% Disc. NPV
question factor factor
£’000 £’000 £’000
Y0 (420) 20 (400) 1 (400·00) 1 (400·00)
Y1 126 0 126 0·935 117·81 0·926 116·68
Y2 113 (5) 0 108 0·873 94·28 0·857 92·56
Y3 98 0 98 0·816 79·97 0·794 77·81
Y4 86 (5) 0 81 0·763 61·80 0·735 59·54
Y5 75 0 75 0·713 53·48 0·681 51·08

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7·34 (2·35)

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IRR = 7 + [7·340/(7·340 + 2·346) x (8 – 7)] = 7·76% 2
The IRR is above the minimum threshold of 7% and therefore the investment is acceptable to Peach Ltd. 1
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(ii) Initial capital outlay – Peach Ltd would not be required to seek any additional finance to purchase the
PackOne equipment. Based on the cash balance at 31 December 20X5, Peach Ltd cannot afford to
purchase the NewPulp equipment using its cash reserves and would therefore need to approach the
bank or find an alternative source of funding. This can be time consuming for management, can be
expensive in terms of the interest charged and may lead to Peach Ltd having strict covenants imposed.
FSA approval – The PackOne equipment is already used as packaging for other food related products and
therefore has Foods Standard Agency approval. The NewPulp equipment does not yet have regulatory
approval. There is therefore less risk associated with purchasing the PackOne equipment for the
manufacture of the innovative drinks packaging.
Warranty – The NewPulp equipment comes with a warranty, provided servicing is carried out every
two years. There is no such warranty for the PackOne equipment. The regular servicing and warranty
mean the directors of Peach Ltd can therefore be confident that the NewPulp equipment will operate as
expected across its useful life.
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(iii) Integrity
A professional accountant should be straightforward and honest in their business relationships. Sofia has
asked for my support in recommending to the directors that neither packaging equipment is acceptable
to the company based on its minimum IRR. This would require manipulation of the cash flows or the IRR
calculation, both of which would be misleading and not in keeping with the principle of integrity.
Objectivity
A professional accountant should not allow bias, conflicts of interest or undue influence of others to
influence their decisions. Sofia has promised that she will recommend me for the maximum possible
bonus if I follow her instructions. This creates a personal conflict of interest for me which impairs my
objectivity.
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