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程序代写案例-AC1025
时间：2022-05-12
AC1025 Principles of accounting
Examiners’ commentaries 2020
AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2018–19. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading
references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2015).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
di↵erent editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.
Comments on specific questions
Candidates should answer Sections A, B and C.
Section A of this examination consists of 15 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this part is 30.
Sections B and C: Please answer Question 16 (30 marks) of Section B; ONE question from
Section C and ONE further question from either section B or C (except for Question 16 all
questions are worth 20 marks).
For Sections B and C only, workings should be submitted for all questions requiring calculations.
Any necessary assumptions introduced in answering a question are to be stated.
Section A
Candidates should answer ALL questions from this section.
Correct answers are shown in bold.
Question 1
An expense accrual if accounted for would have the following e↵ect on the Income
Statement:
A Increase Net Profit
B Decrease Net Profit
C Increase Gross Profit
D Nil E↵ect
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Examiners’ commentaries 2020
Question 2
The firm’s policy is to depreciate motor vehicles on a straight line method. A motor
vehicle bought for £32,000 is expected to have a useful economic life of 5 years and
a scrap value of £2,000. What will the annual depreciation value be?
A £6,000,
B £6,400
C £5,666
D £7,200
Workings: (32,000 2,000)/5 = 6,000.
Question 3
Randolph Ltd has a tax expense of £77,000 in the Income Statement for the year
ended 31 December 2019. In the Statement of Financial Position, tax payable was
£70,000 for the year ended 31 December 2018 and £79,800 for the year ended 31
December 2019.
What amount will appear as tax paid in the Statement of cash flows for the year
ended 31 December 2019?
A £77,000
B £79,800
C 67,200
D £70,000
Workings: (77,000 + 70,000 79,800) = 67,200.
Question 4
A Sole Trader has a number of debtors. The total amount in the Sales Ledger at the
end of the financial year is £5,600. However, it is discovered that one debtor who
owes £400 has just been declared bankrupt. Past experience shows that
approximately 2% of debts are never repaid, and therefore a provision equal to 2%
of closing debtors is required. There is currently a provision of £80.
Which of the following is the correct adjustment for the provision for bad debts?
A Make a new provision for bad debts at £112
B Increase the current provision by £24
C Make a new provision for bad debts at £104
D Increase the current provision by £32
Workings: (5,600 400)⇥ 2% = 104(104 80) = 24.
Question 5
Hunter Ltd purchased goods for £3,400 from Deer plc payable after four months.
Having noticed that the goods were faulty, they were returned to the supplier.
How would the return of the goods be recorded?
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AC1025 Principles of accounting
A Debit payables (Deer’s personal account), credit purchases
B Credit payables (Deer’s personal account), debit purchases
C Credit sales, debit payables (Deer’s personal account)
D Debit sales, credit returns
Question 6
The following information is available from the trial balance of Electrolux Ltd as at
31 December Year 2019:
Debit Credit
£ £
Sales revenue 270,000
Inventory at 31 December 2018 19,000
Purchases 29,000
Closing inventory as at 31 December 2019 is £16,000.
Calculate the cost of goods sold.
A £48,000
B £32,000
C £238,000
D £45,000
Workings: (29,000 + 19,000 16,000) = 32,000.
Question 7
On 1 March 2019, Lambert Ltd had 40 units in inventory costing £28 each. During
the month, the following transactions occurred:
Date Buy/sell Units Price
3.3.19 Buy 70 £28
10.3.19 Sell 90 £60
15.3.19 Buy 60 £32
19.3.19 Buy 65 £29
26.3.19 Sell 100 £55
What is the (i) value of inventory at 31 March 2019 and (ii) the cost of goods sold
(COGS) for the month of March 2019 using the LIFO basis?
Inventory COGS
£ £
A 1,410 5,430
B 1,320 5,490
C 1,420 5,630
D 1,360 5,525
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Examiners’ commentaries 2020
Workings:
Date Buy/sell Units Price Out Closing inventory
Opening 40 £28 (20) 20⇥ 28 = 560
3.3.19 Buy 70 £28 (70)
10.3.19 Sell 90 £60
15.3.19 Buy 60 £32 (35) 25⇥ 32 = 800
19.3.19 Buy 65 £29 (65)
26.3.19 Sell 100 £55
1,360
(65⇥ 29) + (35⇥ 32) + (70⇥ 28) + (20⇥ 28) = 5,525.
Question 8
The profit before tax and the profit after tax of Company Alpha for the year ended
31 December 2019 are £18m and £13m, respectively. Throughout 2019, there were
33 million shares issued.
The profit before tax and the profit after tax of Company Gamma for the year
ended 31 December 2019 are £32m and £24m, respectively. Throughout 2019, there
were 22 million shares issued.
Which of the two companies has the higher EPS (earnings per share)?
A Company Alpha
B Company Gamma
C Both companies are equally good
D It’s impossible to tell
Workings:
Company Alpha EPS = PAT/shares outstanding = 13/33 = 0.39.
Company Gamma EPS = 24/22 = 1.09.
Question 9
The year-end trial balance of Giggs plc does not agree. An investigation finds that
interest received of £2,000 has been debited to interest paid. Which accounting
entries are required to correct this error?
Interest received Interest paid Suspense account
£ £ £
A CR: £2,000 Cr: £2,000 Dr: £4,000
B Cr: £2,000 Dr: £2,000 Dr: £4,000
C Cr: £2,000 Dr: £2,000
D Cr: £2,000 Dr: £2,000
Workings:
The correct entry should have been: Cr: Interest received £2,000.
In error, Co 7 debited interest paid.
So, there has been a debit of £2,000 instead of a credit of £2,000 and therefore the TB will have
more debits than credits by £4,000 and therefore there will be a Suspense account of £4,000
credit.
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AC1025 Principles of accounting
To correct this we:
i. put in the correct entry: Cr: interest received £2,000
ii. remove the error: Cr: interest paid £2,000
iii. cancel the Suspense account: Dr: suspense account £4,000.
Question 10
A company has a gross profit ratio of 40%. The trade receivables collection period
for the company has been calculated at 53 days. If the actual gross profit earned
was £480,000, what were the trade receivables?
A £69,968
B £104,548
C £116,164
D £174,247
Workings:
If gross profit margin is 40% and gross profit is 480,000, it means revenues are 1,200,000.
Receivables days formula is (receivables/revenues)⇥ 365. In this case is
(x/1,200,000)⇥ 365 = 53, so receivables are 174,247.
Question 11
Tritox plc sells one product for which data for a budgeted period are given below:
£
Selling price per unit 120
Variable cost per unit 52
Fixed cost per unit 25
Fixed costs are based on a budgeted level of activity of 10,000 units.
Calculate Tritox plc’s break-even point in terms of units:
A 3,676
B 6,800
C 5,000
D 2,084
Workings: (250,000/(120 52) = 3,676.
Question 12
Using the information contained under question 11 calculate the number of units
Tritox plc must sell if it wishes to earn a profit of £100,000:
A 2,750
B 5,147
C 4,815
D 3,125
Workings: (250,000 + 100,000)/(120 52) = 5,147.
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Examiners’ commentaries 2020
Question 13
Matthews plc has the choice of three mutually exclusive projects, each of which will
last three years. Matthews plc has an agreed overdraft of £10,000 at an interest rate
of 10%. The estimated cash flows (which accrue equally over the year) are as follows:
Year Project X Project Y Project Z
£ £ £
Initial outflow 0 10,000 10,000 10,000
Inflow 1 3,000 5,000 4,000
Inflow 2 4,000 6,000 4,500
Inflow 3 6,000 5,000 4,000
Disposal value 3 500 500 500
Using the payback method, which is the preferred project?
A Project X
B Project Y
C Project Z
D Not enough information
Workings: X and Z more than 2 years; Y instead 1 year and 304 days (5,000/6,000)⇥ 365.
Question 14
Atom plc produces 1,250,000 units in 2019. The variable production cost per unit is
£6. Fixed production overheads are £5,000,000. The variable selling cost is £2 per
unit. Fixed administrative and other operating expenses are £2,500,000 per year.
Atom sells 1,000,000 units in 2019. Assume that there is no opening inventory.
What is the valuation of closing inventory per unit if Atom plc uses absorption
costing?
A £6
B £8
C £10
D £12
Workings: Total production cost per unit = 6 + 5,000,000/1,250,000 = 10.
Question 15
Using the info contained under question 14 what is the valuation of closing
inventory per unit if Atom plc uses marginal costing?
A £6
B £8
C £10
D £12
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AC1025 Principles of accounting
Additional questions included in the portfolio for section A
Question 1
Inkmar plc purchased £4,000 of inventory, paying £1,200 cash.
How would you record this transaction using double entry bookkeeping?
A Debit cash £1,200, debit accounts payables £2,800 and credit inventory £4,000
B Credit cash £1,200, credit accounts payables £2,800 and debit inventory £4,000
C Credit cash £2,800, credit accounts payables £1,200 and debit inventory £4,000
D Credit cash £1,200, debit inventory £1,200
Question 2
The reported net profit of a company for the year is £32m, after charging a
depreciation of £6m. During the year there was an increase of £4m in inventory,
trade receivables remained constant and trade payables increased by £6m.
What is the net cash flow from operating activities?
A £16m
B £28m
C £48m
D £40m
Workings: 32 + 6 4 + 6 = 40.
Question 3
An asset was purchased for £1,000,000 on the 1 January 2018. On the date of
purchase it was estimated to have useful economic life of 5 years and residual value
of £100,000. For the year ended 31 December 2019, the residual value was revised
to £120,000.
Using straight-line method, calculate the depreciation expense for the year ended 31
December 2019.
A £175,000
B £200,000
C £195,000
D £180,000
Workings: (1,000,000 100,000)/5 = 180,000; (1,000,000 180,000 120,000)/4 = 175,000.
Question 4
In drawing up a Trial Balance, the following figures are shown:
Account Dr Cr
Bank £2,000
Cash £500
What can be deduced from the extract above?
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Examiners’ commentaries 2020
A There is a total of £2,500 in the business – £2,000 at the bank,
and £500 in the cash in hand
B There is an overdraft of £2,000 at the bank
and the cash in hand is owed £500
C The bank is showing as overdrawn by £2,000.
The cash account must be incorrect
D The bank balance is £2,000 ‘in credit’ meaning there is £2,000 at the bank.
The cash in hand is owed £500
Question 5
The selling price of inventory of Company Epsilon at 31 March is £175,000. The
company marks up its goods by 30%. One-third of the inventory has been damaged
in a flood and will be sold for £20,000. Which of the following will be the correct
value for closing inventory at 31 March in the Statement of Financial Position?
A £134,615
B £109,743
C £44,872
D £24,872
Workings:
Cost = Selling price/(1 + mark up) = 175,000/1.30 = 134,615.
Cost of 1/3 of the inventory = 44,872.
NRV = 20,000.
Stock loss = 24,872.
Closing inventory valuation = 134,615 24,872 = 109,743.
Question 6
Antares plc, an insurance company, has sent a letter to its customers saying that
their insurance premium for the year ended 31 March 2020 will be 15% more than
the premium paid in the previous year which had been £3,600. The insurance
premium is payable, in advance, each year on the 1 June. What will be the
insurance expense appearing in the Income Statement of Antares plc for the year
ended 31 March 2020?
A £3,600
B £4,140
C £4,050
D £4,740
Workings:
For year ended 31.3.2018, insurance paid on 1.6.2017 for 12 months = 3,600.
Prepayments = 3,600⇥ 2/12 = 600.
For year ended 31.3.2018, insurance paid on 1.6.2017 for 12 months = 3,600⇥ 1.15 = 4,140.
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AC1025 Principles of accounting
Prepayments = 4,140⇥ 2/12 = 690.
Insurance expenses for y/e 31.3.2018 = paid in the year + opening prepayments closing prepayments
= 4,140 + 600 690
= 4,050.
Question 7
The following figures have been extracted from the general ledger accounts.
Sales £300,000
Opening Inventory £56,000
Closing Inventory £75,000
Purchases £175,000
Returns Outwards £17,500
Carriage Outwards £5,000
What is the cost of sales?
A £138,500
B £213,500
C £156,000
D £82,500
Workings: (175,000 + 56,000 75,000 17,500) = 138,500.
Question 8
Investment appraisal can be defined as the process of:
A Measuring and reporting of accounting information to managers
B Identifying and evaluating alternative capital investment opportunities
C Assessing the cost structure of a rival business
D Deducing the total costs of pursuing some objective
Question 9
Smith plc makes three products, Yellow, Orange and Red. Unit costs and revenues
relating to the three products are as follows:
Yellow Orange Red
£ £ £
Selling price 700 620 706
Direct materials 288 240 210
Direct labour 160 185 200
Variable overheads 76 69 151
Fixed overheads 81 54 79
Total costs 605 548 640
Profit per unit 95 72 66
All three products use labour which costs £26 per labour hour but there is not
enough labour to meet the demand for all three products. In what order should
these three products be produced if the company wishes to maximise its profit?
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Examiners’ commentaries 2020
Best 2nd best 3rd best
A Yellow Orange Red
B Yellow Red Orange
C Red Orange Yellow
D Orange Yellow Red
Workings:
Yellow Orange Red
£ £ £
Selling price 700 620 706
Direct materials 288 240 210
Direct labour 160 185 200
Variable overheads 76 69 151
Total VC 524 494 561
CPU 176 126 145
Labour hour per unit = Labour cost/26 6.15 7.11 7.69
Contribution per labour hour = CPU/labour hour 28.618 17.721 18.856
Section B
Answer question 16 and not more than one further question from this section.
Question 16
The balances below have been extracted from the accounting records of Ferguson
Ltd at 31 December 2019:
Dr Cr
£ £
Land, at valuation 240,000
Buildings: cost 500,000
Buildings: accumulated depreciation at 1 January 2019 180,000
Equipment: cost 392,000
Equipment: accumulated depreciation at 1 January 2019 152,000
Vehicles: cost 568,000
Vehicles: accumulated depreciation at 1 January 2019 264,000
Inventory at 1 January 2019 214,000
Trade receivables 366,000
Provision for doubtful debts at 1 January 2019 16,000
Prepayment at 1 January 2019 12,000
Accrual at 1 January 2019 18,000
Cash 408,000
Trade payables 248,000
Share capital: ordinary 50p shares 50,000
Share premium 350,000
Retained earnings 606,000
Sales 2,924,000
Purchases 976,000
Wages and salaries 540,000
Distribution costs 200,000
Other administrative expenses 360,000
Corporation tax 12,000
Disposal account 20,000
Dividend paid 40,000
4,828,000 4,828,000
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AC1025 Principles of accounting
You are given the following information:
i. Ferguson prices its furniture using a normal 30% mark-up policy. A stock count
carried out at 31 December 2019 valued stock at a selling price of £325,000.
This included two items at a normal selling price of £20,800 each, which the
directors have decided should be reduced in price to £5,000 each.
ii. The land was valued at £600,000 at 31 December 2019. The directors decided
to reflect the revalued amount in the statement of financial position.
iii. On 1 February 2019, the company sold a vehicle for £20,000. While the
proceeds of sale were credited to the Disposal account, no other entries were
made in the books of account in relation to this transaction. The vehicle had
cost £88,000 in August 2016. The company charges a full year’s depreciation in
the year of acquisition and no depreciation in the year of disposal.
iv. The company’s depreciation policy is as follows:
Land: nil
Buildings: 4% straight line
Equipment: 40% reducing balance
Vehicles: 25% straight line.
v. Trade receivable at 31 December 2019 include a debt of £16,000 from a
customer recently declared bankrupt. The company has decided to maintain the
provision for doubtful debts at 4% of remaining trade receivables.
vi. The balance of prepayments at 1 January 2019 refers to insurance charges.
Prepaid insurance, included in general distribution costs at 31 December 2019
amounted to £24,000.
vii. The balance of accruals at 1 January 2019 refers to electricity charges. After
the year end, the company received an electricity invoice for £30,000 covering
the period 1 November 2019 to 31 January 2020. Electricity charges are
included in other administrative expenses.
viii. Corporation tax for the year ended 31 December 2019 is estimated to be
£190,000.
ix. The company issued 100,000 additional shares at 50p each on 30 December 2019
for £140,000. This transaction has not been recorded in the accounting records.
Required:
(a) Prepare an Income Statement for Ferguson Ltd for the year ended 31 December
2019 and a Statement of Financial Position at that date for the directors.
(26 marks)
(b) Identify two liability items on the classified Statement of Financial Position, and
give examples of each category.
(4 marks)
(Total 30 marks)
Reading for this question
For part (a), you need to be able to correctly head up the Income Statement and the Statement
of Financial Position. This question has many of the usual adjustments one has seen in past
examples and can be found in the subject guide Chapters 5–8, especially Chapter 8, and in
Leiwy & Perks Chapter 10. For part (b), this argument relates to the classification of the item in
Statement of Financial Position and is discussed in Chapters 5–8 and in Leiwy & Perks Chapter
10.
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Examiners’ commentaries 2020
Approaching the question
(a) It is vital that candidates know what debits and credits represent. This is essential in this
question because there is a suspense account which must be closed to a zero balance. Every
adjustment a↵ects two figures. Many candidates still cannot handle:
• sales of non-current assets
• the di↵erence between provisions for bad debts (Statement of Financial Position) and the
change in the provision for bad debts (Income Statement).
Some candidates did not work out properly the right amount of inventory (250 22 = 228)
and receivables (350 16 = 336). Over- or under-provisions for the previous year’s
corporation tax had to be determined. The fact is, such adjustments appear year after year
in the examination and candidates need to practise such questions.
We have:
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AC1025 Principles of accounting
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Examiners’ commentaries 2020
(b) For part b candidates should identify the two categories of liabilities (current and
non-current) and provide examples for each category (i.e. payable and mortgages). We also
gave points to students that pick up elements from Ferguson and then provide examples of
these elements.
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AC1025 Principles of accounting
Question 17
The Statement of financial position of Calvert Ltd at 31 December 2019 is as follows:
Statement of financial position at 31 December
2019 2018
£000 £000
Non current assets
Investment at cost 50 100
Plant and equipment – cost 2,470 1,790
Less: accumulated depreciation 850 630
1,620 1,160
1,670 1,260
Current assets
Inventory 740 510
Receivables 1,010 640
Bank 0 330
1,750 1,480
Total assets 3,420 2,740
Equity
Equity £1 shares 500 400
Share premium 140 100
Revaluation reserve 300 300
Retained earnings 730 800
1,670 1,600
Current liabilities
Trade payables 660 530
Corporation tax 0 110
Bank overdraft 190 0
850 640
Non current liabilities
Long term loan 900 500
Total liabilities 1,750 1,140
Total equity and liabilities 3,420 2,740
The following information is available:
i. Loss before taxation: £50,000.
ii. Plant and equipment with an original cost of £120,000 and accumulated
depreciation of £80,000 was sold in February 2019 for £30,000.
iii. Interest paid in the year totalled £70,000.
iv. No dividends were paid.
v. There is no tax liability for the year to 31 December 2019. The tax liability for
the year to 31 December 2018 was underestimated by £20,000.
Required:
(a) Prepare a statement of cash flow for Calvert Ltd for the year to 31 December
2019.
(16 marks)
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Examiners’ commentaries 2020
(b) Illustrate why the Statement of Cash Flow is important for potential investors
intheir decision making process.
(4 marks)
(Total 20 marks)
Reading for this question
Subject guide, Chapter 11, and Leiwy & Perks Section 6.4.
Approaching the question
(a) A typical cash-flow statement (CFS) question. It is important to know what appears in the
CFS and where it appears. Most of the figures are very straightforward. The dicult figures
involve computations. These are as follows.
Interest paid, which is the current liability at the beginning of the year, plus the interest
expense less the sum still payable. The tax paid in the year is calculated in exactly the same
way.
Movements in working capital, bearing in mind that an increase in the inventory and
receivables implies an absorption of liquidity.
Sum paid to acquire non-current assets, that are computed on the basis that the opening
balance, less the net book value of any asset sold in the year, less any depreciation expense
plus any revaluation in the year plus sums paid to acquire non-current assets will equal the
closing balance. The sum raised from the issue of shares is calculated on the basis of the
movement in the share capital and the share premium.
We have:
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AC1025 Principles of accounting
(b) Candidates must pick up valid reasons and examples, for instance:
• Cash is the ‘life-blood’ of an organisation.
• Cash is ‘real’ – profits are based on accruals, estimates and judgements.
• Decisions by investors about whether to provide resources are based on entities’ cash flow
prospects (IASB Conceptual Framework).
• Many corporate collapses (for example, BCCI in early 1990s) result from businesses
being profitable but running out of cash
Common mistakes involve the illustration of cash flow and the mere list of di↵erences
between statement of cash flow, statement of financial position and income statement.
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Examiners’ commentaries 2020
Question 18
Andrew Ltd is moving through a process of external growth and has decided to
purchase Byron Ltd. Byron Ltd is a smaller company that could increase the
profitability of the group.
For year 2019 Andrew Ltd reported the following ratios:
Gross Margin 32%
Net profit margin 10%
ROCE (Return on Capital Employed) 14%
Current ratio 1.7
Quick ratio 1.1
Interest cover 12
Below are the summarised financial statements for Byron Ltd.
Income Statements Byron Ltd for years 2017, 2018 and 2019
2017 2018 2019
Sales 16,064 16,080 16,200
Cost of sales 11,248 11,652 12,072
Gross Profit 4,816 4,428 4,128
Expenses 3,752 3,772 3,496
Operating profit (PBIT) 1,064 656 632
Interest 96 104 120
Profit before tax 968 552 512
Tax 184 132 104
Profit after tax 784 420 408
Preference dividends 64 72 72
Ordinary dividends 108 128 140
Retained profit for year 612 220 196
Statement of Financial Position Byron Ltd for years 2017, 2018 and 2019
2017 2018 2019
Non-current assets
Land 2,500 2,500 2,500
Property, plant & equipment 3,880 3,740 4,216
Total Non-current Assets 6,380 6,240 6,716
Current assets
Inventory 216 360 544
Receivables 968 1,040 1,072
Cash at bank 240 168 72
Total Current Assets 1,424 1,568 1,688
Total assets 7,804 7,808 8,404
Capital
Ordinary shares £1 2,400 2,400 2,400
Preference shares £1 800 800 800
Share premium 96 134 200
Retained profits 2,206 2,426 2,622
Total capital 5,502 5,760 6,022
Non-current liabilities
Long term loan 10% 960 1,040 1,200
Total Non-current liabilities 960 1,040 1,200
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AC1025 Principles of accounting
Current liabilities
Accounts payable 414 538 596
Tax 184 132 104
Other current liabilities 744 338 482
Total Current liabilities 1,342 1,008 1,182
Total Capital and Liabilities 7,804 7,808 8,404
Required:
(a) Calculate for Byron Ltd the following ratios: Gross profit margin; Net profit
margin; Current ratio; Quick ratio; Interest cover for all three years.
(10 marks)
(b) Comment on each ratio calculated above in (a) and its implications. Advise
Andrew Ltd about the performance of Byron Ltd in the three years’ period
examined.
(10 marks)
(Total 20 marks)
Reading for this question
Subject guide, Chapter 12, and Leiwy & Perks Section 6.4.
Approaching the question
(a) Usually, one question in Section B is a ratio analysis question asking for the calculation of
few ratios and then interpretation of the results. It is important to use the right figures for
each ratio (i.e. current activities for current ratio while current activities less inventory for
quick ratio). It is important in such a question to use the correct notation when writing
each ratio. Every candidate must learn the 16 or so ratios listed in the subject guide and
Leiwy & Perks.
We have:
(b) When writing the comment and the advice write something about the behaviour of each
ratio through the three years’ period. It is not enough to say the ratio is higher or lower than
the previous year or just illustrate the numbers. We look forward of receiving the economic
implication of the behaviour of each ratio. The final advice should be based also on the
ratios of the purchaser and on the broad picture that could result from the acquisition.
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Examiners’ commentaries 2020
Section C
Answer ONE question from this section and ONE further question from either Section B or Section
C.
Question 19
Davidson plc is in the manufacturing industry and it manufactures and sells a
product known as TX. The manager of the department that produces the products
created a monthly budget for the product at the beginning of the year, based on
10,000 units of the product being produced and sold.
£ per unit
Labour (2 hours ⇥ £11) 22
Materials (500g ⇥ £30 per kg) 15
Fixed overhead 10
Selling price 65
However, in April, only 9,000 units were actually produced and sold and his actual
monthly budget values were as follows:
£ £
Sales 594,000
Costs:
Labour 18,900 hours 226,800
Material 4,700 kg 131,600
Fixed overhead 92,000
450,400
Profit 143,600
Required:
(a) Calculate the following: Material price variance; Material usage variance;
Labour price variance; Labour eciency variance; Fixed overhead variance;
Sales price variance; Volume variance.
(14 marks)
(b) Discuss the possible reasons relating to the variances you have calculated.
(6 marks)
(Total 20 marks)
Reading for this question
Subject guide, Chapter 17, and Leiwy & Perks, Chapter 18.
Approaching the question
(a) This question involves the calculation of variances. Candidates must not forget to indicate if
the variance is favourable or unfavourable. As is common, candidates often get the price
variances correct but get the eciency/usage variances incorrect. This is because they do
not ex the budget and consider the standard quantity of kg of material or hours of labour
for the actual level of output.
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AC1025 Principles of accounting
We have:
(b) Some attempts have been very good while others missed to capture the reasons for the
variances highlighted under (a). The examiners did not assign full marks to candidates that
wrote if the variance was favourable or not. Some examples of possible reasons are listed
below:
Material: It seems they have purchased cheaper material that may have been inferior quality
because the usage of the material is adverse; however, this needs to be carefully checked out
because it may be that they were inecient with the more expensive material as well.
Labour: It seems that they have paid more for the labour and the eciency is adverse as
well, it could be that they have had to rely on agency sta↵ who cost more, however because
they are unfamiliar with the machinery and production flows they are also inecient at
their job, compared to your usual full time sta↵.
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Examiners’ commentaries 2020
Question 20
The directors of Lunar Plc are considering investment in new equipment to increase
the firm’s flexibility. The finance director has asked you to evaluate how much cash
the company will have available at the end of March 2020.
You have been provided with the following information:
(a) The sales forecast for the period from November 2019 to March 2020:
Nov-19 Dec-19 Jan-20 Feb-20 Mar-20
Sales (Unit) 210 250 190 240 220
Unit price £175 £180 £200 £205 £210
(b) 40% of customers pay in the month of sale, the rest pay in the following month.
(c) Purchases are 65% of the previous month’s sales revenue. All purchases are on
credit and are paid for in the month following the purchase.
(d) Wages of £8,500 are paid monthly.
(e) The sales team earn commission of 3% of monthly sales revenue and this is paid
in the month following the sale.
(f) Charges for light and heat are £750 per month and are paid every 2 months
starting from January 2020.
(g) Advertising cost is paid at £2,500 per month.
(h) At the end of December 2019 Meridian plc has a bank balance of £46,000.
Required:
(a) Prepare a cash budget for each month from January 2020 to March 2020.
(15 marks)
(b) Advise managers on the actions that can be taken to avoid a cash deficit
situation.
(5 marks)
(Total 20 marks)
Reading for this question
Subject guide, Sections 16.3–16.5, and Leiwy & Perks, Section 15.4.
Approaching the question
(a) A straightforward question but in answering such questions, the format and connection
between workings and the solution is vital. It must be set out in columnar form.
Very often, as is the case, the main diculty is including the right amount of receipts from
customer and purchases distinguishing sales and purchases on credit.
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AC1025 Principles of accounting
We have:
(b) Some candidates illustrated what is a cash budget or just described the scenario under (a)
instead of pointing out possible solutions. Right answers can include: Increase sales prices –
although this may lead to a fall in sales units or Negotiate lower prices with suppliers, or
longer credit periods to delay payments and o↵er a discount to customers if the sales are
paid in full in the months’ they occurred.
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Examiners’ commentaries 2020
Question 21
Petram is a company that manufactures aircraft parts. The company is considering
various investment projects that may improve operational eciency, and has already
spent £30,000 gathering relevant data. It has now shortlisted three projects and
asked you to recommend the best option. You have been provided with the
following information about the projects:
Project I will last for 4 years. The initial outlay is £950,000 and the forecast
operating cash inflow from the project is £350,000 for the first 2 years, £425,000
in year 3 and £150,000 in the last year. Annual depreciation expense associated
with this project is £237,500.
Project II will last for 4 years. The initial outlay is £1,150,000 and the forecast
operating cash inflow from the project is £550,000 in the first year and
£350,000 for the following three years. Annual interest expense associated with
this project is £45,000.
Project III will last for 4 years. The initial outlay is £850,000 and the forecast
operating cash inflow from the project is £250,000 in the first year, then
increasing by £40,000 each year in years 2, 3, and 4.
The firm’s cost of capital is 10% per year.
Required:
(a) Evaluate each of the three projects using Payback Period.
(6 marks)
(b) Evaluate each of the three projects using Net Present Value.
(9 marks)
(c) Explain which projects should be accepted and why.
(5 marks)
(Total 20 marks)
Reading for this question
These issues are explained very clearly in Leiwy & Perks Chapter 14 and in the subject guide
Chapters 18 and 19.
Approaching the question
(a) This is a straightforward payback question involving ‘relevant costing’ issues. Payback
computations must be arranged in columnar form.
We have:
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AC1025 Principles of accounting
(b) This is a straightforward NPV question involving ‘relevant costing’ issues. NPV
computations must be arranged in columnar form.
We have:
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Examiners’ commentaries 2020
(c) This is a straightforward NPV question involving ‘relevant costing’ issues. NPV
computations must be arranged in columnar form.
We have:
If projects are mutually exclusive, then only one project can be undertaken. Although
project I has the quickest payback, the company should take on project II, as it has the
highest NPV and hence the largest impact on the wealth of shareholders.
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Examiners’ commentaries 2020
AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2018–19. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading
references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2015).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
di↵erent editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.
Comments on specific questions
Candidates should answer Sections A, B and C.
Section A of this examination consists of 15 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this part is 30.
Sections B and C: Please answer Question 16 (30 marks) of Section B; ONE question from
Section C and ONE further question from either section B or C (except for Question 16 all
questions are worth 20 marks).
For Sections B and C only, workings should be submitted for all questions requiring calculations.
Any necessary assumptions introduced in answering a question are to be stated.
Section A
Candidates should answer ALL questions from this section.
Correct answers are shown in bold.
Question 1
An expense accrual if accounted for would have the following e↵ect on the Income
Statement:
A Increase Net Profit
B Decrease Net Profit
C Increase Gross Profit
D Nil E↵ect
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Examiners’ commentaries 2020
Question 2
The firm’s policy is to depreciate motor vehicles on a straight line method. A motor
vehicle bought for £32,000 is expected to have a useful economic life of 5 years and
a scrap value of £2,000. What will the annual depreciation value be?
A £6,000,
B £6,400
C £5,666
D £7,200
Workings: (32,000 2,000)/5 = 6,000.
Question 3
Randolph Ltd has a tax expense of £77,000 in the Income Statement for the year
ended 31 December 2019. In the Statement of Financial Position, tax payable was
£70,000 for the year ended 31 December 2018 and £79,800 for the year ended 31
December 2019.
What amount will appear as tax paid in the Statement of cash flows for the year
ended 31 December 2019?
A £77,000
B £79,800
C 67,200
D £70,000
Workings: (77,000 + 70,000 79,800) = 67,200.
Question 4
A Sole Trader has a number of debtors. The total amount in the Sales Ledger at the
end of the financial year is £5,600. However, it is discovered that one debtor who
owes £400 has just been declared bankrupt. Past experience shows that
approximately 2% of debts are never repaid, and therefore a provision equal to 2%
of closing debtors is required. There is currently a provision of £80.
Which of the following is the correct adjustment for the provision for bad debts?
A Make a new provision for bad debts at £112
B Increase the current provision by £24
C Make a new provision for bad debts at £104
D Increase the current provision by £32
Workings: (5,600 400)⇥ 2% = 104(104 80) = 24.
Question 5
Hunter Ltd purchased goods for £3,400 from Deer plc payable after four months.
Having noticed that the goods were faulty, they were returned to the supplier.
How would the return of the goods be recorded?
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AC1025 Principles of accounting
A Debit payables (Deer’s personal account), credit purchases
B Credit payables (Deer’s personal account), debit purchases
C Credit sales, debit payables (Deer’s personal account)
D Debit sales, credit returns
Question 6
The following information is available from the trial balance of Electrolux Ltd as at
31 December Year 2019:
Debit Credit
£ £
Sales revenue 270,000
Inventory at 31 December 2018 19,000
Purchases 29,000
Closing inventory as at 31 December 2019 is £16,000.
Calculate the cost of goods sold.
A £48,000
B £32,000
C £238,000
D £45,000
Workings: (29,000 + 19,000 16,000) = 32,000.
Question 7
On 1 March 2019, Lambert Ltd had 40 units in inventory costing £28 each. During
the month, the following transactions occurred:
Date Buy/sell Units Price
3.3.19 Buy 70 £28
10.3.19 Sell 90 £60
15.3.19 Buy 60 £32
19.3.19 Buy 65 £29
26.3.19 Sell 100 £55
What is the (i) value of inventory at 31 March 2019 and (ii) the cost of goods sold
(COGS) for the month of March 2019 using the LIFO basis?
Inventory COGS
£ £
A 1,410 5,430
B 1,320 5,490
C 1,420 5,630
D 1,360 5,525
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Examiners’ commentaries 2020
Workings:
Date Buy/sell Units Price Out Closing inventory
Opening 40 £28 (20) 20⇥ 28 = 560
3.3.19 Buy 70 £28 (70)
10.3.19 Sell 90 £60
15.3.19 Buy 60 £32 (35) 25⇥ 32 = 800
19.3.19 Buy 65 £29 (65)
26.3.19 Sell 100 £55
1,360
(65⇥ 29) + (35⇥ 32) + (70⇥ 28) + (20⇥ 28) = 5,525.
Question 8
The profit before tax and the profit after tax of Company Alpha for the year ended
31 December 2019 are £18m and £13m, respectively. Throughout 2019, there were
33 million shares issued.
The profit before tax and the profit after tax of Company Gamma for the year
ended 31 December 2019 are £32m and £24m, respectively. Throughout 2019, there
were 22 million shares issued.
Which of the two companies has the higher EPS (earnings per share)?
A Company Alpha
B Company Gamma
C Both companies are equally good
D It’s impossible to tell
Workings:
Company Alpha EPS = PAT/shares outstanding = 13/33 = 0.39.
Company Gamma EPS = 24/22 = 1.09.
Question 9
The year-end trial balance of Giggs plc does not agree. An investigation finds that
interest received of £2,000 has been debited to interest paid. Which accounting
entries are required to correct this error?
Interest received Interest paid Suspense account
£ £ £
A CR: £2,000 Cr: £2,000 Dr: £4,000
B Cr: £2,000 Dr: £2,000 Dr: £4,000
C Cr: £2,000 Dr: £2,000
D Cr: £2,000 Dr: £2,000
Workings:
The correct entry should have been: Cr: Interest received £2,000.
In error, Co 7 debited interest paid.
So, there has been a debit of £2,000 instead of a credit of £2,000 and therefore the TB will have
more debits than credits by £4,000 and therefore there will be a Suspense account of £4,000
credit.
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AC1025 Principles of accounting
To correct this we:
i. put in the correct entry: Cr: interest received £2,000
ii. remove the error: Cr: interest paid £2,000
iii. cancel the Suspense account: Dr: suspense account £4,000.
Question 10
A company has a gross profit ratio of 40%. The trade receivables collection period
for the company has been calculated at 53 days. If the actual gross profit earned
was £480,000, what were the trade receivables?
A £69,968
B £104,548
C £116,164
D £174,247
Workings:
If gross profit margin is 40% and gross profit is 480,000, it means revenues are 1,200,000.
Receivables days formula is (receivables/revenues)⇥ 365. In this case is
(x/1,200,000)⇥ 365 = 53, so receivables are 174,247.
Question 11
Tritox plc sells one product for which data for a budgeted period are given below:
£
Selling price per unit 120
Variable cost per unit 52
Fixed cost per unit 25
Fixed costs are based on a budgeted level of activity of 10,000 units.
Calculate Tritox plc’s break-even point in terms of units:
A 3,676
B 6,800
C 5,000
D 2,084
Workings: (250,000/(120 52) = 3,676.
Question 12
Using the information contained under question 11 calculate the number of units
Tritox plc must sell if it wishes to earn a profit of £100,000:
A 2,750
B 5,147
C 4,815
D 3,125
Workings: (250,000 + 100,000)/(120 52) = 5,147.
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Examiners’ commentaries 2020
Question 13
Matthews plc has the choice of three mutually exclusive projects, each of which will
last three years. Matthews plc has an agreed overdraft of £10,000 at an interest rate
of 10%. The estimated cash flows (which accrue equally over the year) are as follows:
Year Project X Project Y Project Z
£ £ £
Initial outflow 0 10,000 10,000 10,000
Inflow 1 3,000 5,000 4,000
Inflow 2 4,000 6,000 4,500
Inflow 3 6,000 5,000 4,000
Disposal value 3 500 500 500
Using the payback method, which is the preferred project?
A Project X
B Project Y
C Project Z
D Not enough information
Workings: X and Z more than 2 years; Y instead 1 year and 304 days (5,000/6,000)⇥ 365.
Question 14
Atom plc produces 1,250,000 units in 2019. The variable production cost per unit is
£6. Fixed production overheads are £5,000,000. The variable selling cost is £2 per
unit. Fixed administrative and other operating expenses are £2,500,000 per year.
Atom sells 1,000,000 units in 2019. Assume that there is no opening inventory.
What is the valuation of closing inventory per unit if Atom plc uses absorption
costing?
A £6
B £8
C £10
D £12
Workings: Total production cost per unit = 6 + 5,000,000/1,250,000 = 10.
Question 15
Using the info contained under question 14 what is the valuation of closing
inventory per unit if Atom plc uses marginal costing?
A £6
B £8
C £10
D £12
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AC1025 Principles of accounting
Additional questions included in the portfolio for section A
Question 1
Inkmar plc purchased £4,000 of inventory, paying £1,200 cash.
How would you record this transaction using double entry bookkeeping?
A Debit cash £1,200, debit accounts payables £2,800 and credit inventory £4,000
B Credit cash £1,200, credit accounts payables £2,800 and debit inventory £4,000
C Credit cash £2,800, credit accounts payables £1,200 and debit inventory £4,000
D Credit cash £1,200, debit inventory £1,200
Question 2
The reported net profit of a company for the year is £32m, after charging a
depreciation of £6m. During the year there was an increase of £4m in inventory,
trade receivables remained constant and trade payables increased by £6m.
What is the net cash flow from operating activities?
A £16m
B £28m
C £48m
D £40m
Workings: 32 + 6 4 + 6 = 40.
Question 3
An asset was purchased for £1,000,000 on the 1 January 2018. On the date of
purchase it was estimated to have useful economic life of 5 years and residual value
of £100,000. For the year ended 31 December 2019, the residual value was revised
to £120,000.
Using straight-line method, calculate the depreciation expense for the year ended 31
December 2019.
A £175,000
B £200,000
C £195,000
D £180,000
Workings: (1,000,000 100,000)/5 = 180,000; (1,000,000 180,000 120,000)/4 = 175,000.
Question 4
In drawing up a Trial Balance, the following figures are shown:
Account Dr Cr
Bank £2,000
Cash £500
What can be deduced from the extract above?
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Examiners’ commentaries 2020
A There is a total of £2,500 in the business – £2,000 at the bank,
and £500 in the cash in hand
B There is an overdraft of £2,000 at the bank
and the cash in hand is owed £500
C The bank is showing as overdrawn by £2,000.
The cash account must be incorrect
D The bank balance is £2,000 ‘in credit’ meaning there is £2,000 at the bank.
The cash in hand is owed £500
Question 5
The selling price of inventory of Company Epsilon at 31 March is £175,000. The
company marks up its goods by 30%. One-third of the inventory has been damaged
in a flood and will be sold for £20,000. Which of the following will be the correct
value for closing inventory at 31 March in the Statement of Financial Position?
A £134,615
B £109,743
C £44,872
D £24,872
Workings:
Cost = Selling price/(1 + mark up) = 175,000/1.30 = 134,615.
Cost of 1/3 of the inventory = 44,872.
NRV = 20,000.
Stock loss = 24,872.
Closing inventory valuation = 134,615 24,872 = 109,743.
Question 6
Antares plc, an insurance company, has sent a letter to its customers saying that
their insurance premium for the year ended 31 March 2020 will be 15% more than
the premium paid in the previous year which had been £3,600. The insurance
premium is payable, in advance, each year on the 1 June. What will be the
insurance expense appearing in the Income Statement of Antares plc for the year
ended 31 March 2020?
A £3,600
B £4,140
C £4,050
D £4,740
Workings:
For year ended 31.3.2018, insurance paid on 1.6.2017 for 12 months = 3,600.
Prepayments = 3,600⇥ 2/12 = 600.
For year ended 31.3.2018, insurance paid on 1.6.2017 for 12 months = 3,600⇥ 1.15 = 4,140.
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AC1025 Principles of accounting
Prepayments = 4,140⇥ 2/12 = 690.
Insurance expenses for y/e 31.3.2018 = paid in the year + opening prepayments closing prepayments
= 4,140 + 600 690
= 4,050.
Question 7
The following figures have been extracted from the general ledger accounts.
Sales £300,000
Opening Inventory £56,000
Closing Inventory £75,000
Purchases £175,000
Returns Outwards £17,500
Carriage Outwards £5,000
What is the cost of sales?
A £138,500
B £213,500
C £156,000
D £82,500
Workings: (175,000 + 56,000 75,000 17,500) = 138,500.
Question 8
Investment appraisal can be defined as the process of:
A Measuring and reporting of accounting information to managers
B Identifying and evaluating alternative capital investment opportunities
C Assessing the cost structure of a rival business
D Deducing the total costs of pursuing some objective
Question 9
Smith plc makes three products, Yellow, Orange and Red. Unit costs and revenues
relating to the three products are as follows:
Yellow Orange Red
£ £ £
Selling price 700 620 706
Direct materials 288 240 210
Direct labour 160 185 200
Variable overheads 76 69 151
Fixed overheads 81 54 79
Total costs 605 548 640
Profit per unit 95 72 66
All three products use labour which costs £26 per labour hour but there is not
enough labour to meet the demand for all three products. In what order should
these three products be produced if the company wishes to maximise its profit?
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Examiners’ commentaries 2020
Best 2nd best 3rd best
A Yellow Orange Red
B Yellow Red Orange
C Red Orange Yellow
D Orange Yellow Red
Workings:
Yellow Orange Red
£ £ £
Selling price 700 620 706
Direct materials 288 240 210
Direct labour 160 185 200
Variable overheads 76 69 151
Total VC 524 494 561
CPU 176 126 145
Labour hour per unit = Labour cost/26 6.15 7.11 7.69
Contribution per labour hour = CPU/labour hour 28.618 17.721 18.856
Section B
Answer question 16 and not more than one further question from this section.
Question 16
The balances below have been extracted from the accounting records of Ferguson
Ltd at 31 December 2019:
Dr Cr
£ £
Land, at valuation 240,000
Buildings: cost 500,000
Buildings: accumulated depreciation at 1 January 2019 180,000
Equipment: cost 392,000
Equipment: accumulated depreciation at 1 January 2019 152,000
Vehicles: cost 568,000
Vehicles: accumulated depreciation at 1 January 2019 264,000
Inventory at 1 January 2019 214,000
Trade receivables 366,000
Provision for doubtful debts at 1 January 2019 16,000
Prepayment at 1 January 2019 12,000
Accrual at 1 January 2019 18,000
Cash 408,000
Trade payables 248,000
Share capital: ordinary 50p shares 50,000
Share premium 350,000
Retained earnings 606,000
Sales 2,924,000
Purchases 976,000
Wages and salaries 540,000
Distribution costs 200,000
Other administrative expenses 360,000
Corporation tax 12,000
Disposal account 20,000
Dividend paid 40,000
4,828,000 4,828,000
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AC1025 Principles of accounting
You are given the following information:
i. Ferguson prices its furniture using a normal 30% mark-up policy. A stock count
carried out at 31 December 2019 valued stock at a selling price of £325,000.
This included two items at a normal selling price of £20,800 each, which the
directors have decided should be reduced in price to £5,000 each.
ii. The land was valued at £600,000 at 31 December 2019. The directors decided
to reflect the revalued amount in the statement of financial position.
iii. On 1 February 2019, the company sold a vehicle for £20,000. While the
proceeds of sale were credited to the Disposal account, no other entries were
made in the books of account in relation to this transaction. The vehicle had
cost £88,000 in August 2016. The company charges a full year’s depreciation in
the year of acquisition and no depreciation in the year of disposal.
iv. The company’s depreciation policy is as follows:
Land: nil
Buildings: 4% straight line
Equipment: 40% reducing balance
Vehicles: 25% straight line.
v. Trade receivable at 31 December 2019 include a debt of £16,000 from a
customer recently declared bankrupt. The company has decided to maintain the
provision for doubtful debts at 4% of remaining trade receivables.
vi. The balance of prepayments at 1 January 2019 refers to insurance charges.
Prepaid insurance, included in general distribution costs at 31 December 2019
amounted to £24,000.
vii. The balance of accruals at 1 January 2019 refers to electricity charges. After
the year end, the company received an electricity invoice for £30,000 covering
the period 1 November 2019 to 31 January 2020. Electricity charges are
included in other administrative expenses.
viii. Corporation tax for the year ended 31 December 2019 is estimated to be
£190,000.
ix. The company issued 100,000 additional shares at 50p each on 30 December 2019
for £140,000. This transaction has not been recorded in the accounting records.
Required:
(a) Prepare an Income Statement for Ferguson Ltd for the year ended 31 December
2019 and a Statement of Financial Position at that date for the directors.
(26 marks)
(b) Identify two liability items on the classified Statement of Financial Position, and
give examples of each category.
(4 marks)
(Total 30 marks)
Reading for this question
For part (a), you need to be able to correctly head up the Income Statement and the Statement
of Financial Position. This question has many of the usual adjustments one has seen in past
examples and can be found in the subject guide Chapters 5–8, especially Chapter 8, and in
Leiwy & Perks Chapter 10. For part (b), this argument relates to the classification of the item in
Statement of Financial Position and is discussed in Chapters 5–8 and in Leiwy & Perks Chapter
10.
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Examiners’ commentaries 2020
Approaching the question
(a) It is vital that candidates know what debits and credits represent. This is essential in this
question because there is a suspense account which must be closed to a zero balance. Every
adjustment a↵ects two figures. Many candidates still cannot handle:
• sales of non-current assets
• the di↵erence between provisions for bad debts (Statement of Financial Position) and the
change in the provision for bad debts (Income Statement).
Some candidates did not work out properly the right amount of inventory (250 22 = 228)
and receivables (350 16 = 336). Over- or under-provisions for the previous year’s
corporation tax had to be determined. The fact is, such adjustments appear year after year
in the examination and candidates need to practise such questions.
We have:
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AC1025 Principles of accounting
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Examiners’ commentaries 2020
(b) For part b candidates should identify the two categories of liabilities (current and
non-current) and provide examples for each category (i.e. payable and mortgages). We also
gave points to students that pick up elements from Ferguson and then provide examples of
these elements.
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AC1025 Principles of accounting
Question 17
The Statement of financial position of Calvert Ltd at 31 December 2019 is as follows:
Statement of financial position at 31 December
2019 2018
£000 £000
Non current assets
Investment at cost 50 100
Plant and equipment – cost 2,470 1,790
Less: accumulated depreciation 850 630
1,620 1,160
1,670 1,260
Current assets
Inventory 740 510
Receivables 1,010 640
Bank 0 330
1,750 1,480
Total assets 3,420 2,740
Equity
Equity £1 shares 500 400
Share premium 140 100
Revaluation reserve 300 300
Retained earnings 730 800
1,670 1,600
Current liabilities
Trade payables 660 530
Corporation tax 0 110
Bank overdraft 190 0
850 640
Non current liabilities
Long term loan 900 500
Total liabilities 1,750 1,140
Total equity and liabilities 3,420 2,740
The following information is available:
i. Loss before taxation: £50,000.
ii. Plant and equipment with an original cost of £120,000 and accumulated
depreciation of £80,000 was sold in February 2019 for £30,000.
iii. Interest paid in the year totalled £70,000.
iv. No dividends were paid.
v. There is no tax liability for the year to 31 December 2019. The tax liability for
the year to 31 December 2018 was underestimated by £20,000.
Required:
(a) Prepare a statement of cash flow for Calvert Ltd for the year to 31 December
2019.
(16 marks)
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Examiners’ commentaries 2020
(b) Illustrate why the Statement of Cash Flow is important for potential investors
intheir decision making process.
(4 marks)
(Total 20 marks)
Reading for this question
Subject guide, Chapter 11, and Leiwy & Perks Section 6.4.
Approaching the question
(a) A typical cash-flow statement (CFS) question. It is important to know what appears in the
CFS and where it appears. Most of the figures are very straightforward. The dicult figures
involve computations. These are as follows.
Interest paid, which is the current liability at the beginning of the year, plus the interest
expense less the sum still payable. The tax paid in the year is calculated in exactly the same
way.
Movements in working capital, bearing in mind that an increase in the inventory and
receivables implies an absorption of liquidity.
Sum paid to acquire non-current assets, that are computed on the basis that the opening
balance, less the net book value of any asset sold in the year, less any depreciation expense
plus any revaluation in the year plus sums paid to acquire non-current assets will equal the
closing balance. The sum raised from the issue of shares is calculated on the basis of the
movement in the share capital and the share premium.
We have:
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AC1025 Principles of accounting
(b) Candidates must pick up valid reasons and examples, for instance:
• Cash is the ‘life-blood’ of an organisation.
• Cash is ‘real’ – profits are based on accruals, estimates and judgements.
• Decisions by investors about whether to provide resources are based on entities’ cash flow
prospects (IASB Conceptual Framework).
• Many corporate collapses (for example, BCCI in early 1990s) result from businesses
being profitable but running out of cash
Common mistakes involve the illustration of cash flow and the mere list of di↵erences
between statement of cash flow, statement of financial position and income statement.
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Examiners’ commentaries 2020
Question 18
Andrew Ltd is moving through a process of external growth and has decided to
purchase Byron Ltd. Byron Ltd is a smaller company that could increase the
profitability of the group.
For year 2019 Andrew Ltd reported the following ratios:
Gross Margin 32%
Net profit margin 10%
ROCE (Return on Capital Employed) 14%
Current ratio 1.7
Quick ratio 1.1
Interest cover 12
Below are the summarised financial statements for Byron Ltd.
Income Statements Byron Ltd for years 2017, 2018 and 2019
2017 2018 2019
Sales 16,064 16,080 16,200
Cost of sales 11,248 11,652 12,072
Gross Profit 4,816 4,428 4,128
Expenses 3,752 3,772 3,496
Operating profit (PBIT) 1,064 656 632
Interest 96 104 120
Profit before tax 968 552 512
Tax 184 132 104
Profit after tax 784 420 408
Preference dividends 64 72 72
Ordinary dividends 108 128 140
Retained profit for year 612 220 196
Statement of Financial Position Byron Ltd for years 2017, 2018 and 2019
2017 2018 2019
Non-current assets
Land 2,500 2,500 2,500
Property, plant & equipment 3,880 3,740 4,216
Total Non-current Assets 6,380 6,240 6,716
Current assets
Inventory 216 360 544
Receivables 968 1,040 1,072
Cash at bank 240 168 72
Total Current Assets 1,424 1,568 1,688
Total assets 7,804 7,808 8,404
Capital
Ordinary shares £1 2,400 2,400 2,400
Preference shares £1 800 800 800
Share premium 96 134 200
Retained profits 2,206 2,426 2,622
Total capital 5,502 5,760 6,022
Non-current liabilities
Long term loan 10% 960 1,040 1,200
Total Non-current liabilities 960 1,040 1,200
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AC1025 Principles of accounting
Current liabilities
Accounts payable 414 538 596
Tax 184 132 104
Other current liabilities 744 338 482
Total Current liabilities 1,342 1,008 1,182
Total Capital and Liabilities 7,804 7,808 8,404
Required:
(a) Calculate for Byron Ltd the following ratios: Gross profit margin; Net profit
margin; Current ratio; Quick ratio; Interest cover for all three years.
(10 marks)
(b) Comment on each ratio calculated above in (a) and its implications. Advise
Andrew Ltd about the performance of Byron Ltd in the three years’ period
examined.
(10 marks)
(Total 20 marks)
Reading for this question
Subject guide, Chapter 12, and Leiwy & Perks Section 6.4.
Approaching the question
(a) Usually, one question in Section B is a ratio analysis question asking for the calculation of
few ratios and then interpretation of the results. It is important to use the right figures for
each ratio (i.e. current activities for current ratio while current activities less inventory for
quick ratio). It is important in such a question to use the correct notation when writing
each ratio. Every candidate must learn the 16 or so ratios listed in the subject guide and
Leiwy & Perks.
We have:
(b) When writing the comment and the advice write something about the behaviour of each
ratio through the three years’ period. It is not enough to say the ratio is higher or lower than
the previous year or just illustrate the numbers. We look forward of receiving the economic
implication of the behaviour of each ratio. The final advice should be based also on the
ratios of the purchaser and on the broad picture that could result from the acquisition.
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Examiners’ commentaries 2020
Section C
Answer ONE question from this section and ONE further question from either Section B or Section
C.
Question 19
Davidson plc is in the manufacturing industry and it manufactures and sells a
product known as TX. The manager of the department that produces the products
created a monthly budget for the product at the beginning of the year, based on
10,000 units of the product being produced and sold.
£ per unit
Labour (2 hours ⇥ £11) 22
Materials (500g ⇥ £30 per kg) 15
Fixed overhead 10
Selling price 65
However, in April, only 9,000 units were actually produced and sold and his actual
monthly budget values were as follows:
£ £
Sales 594,000
Costs:
Labour 18,900 hours 226,800
Material 4,700 kg 131,600
Fixed overhead 92,000
450,400
Profit 143,600
Required:
(a) Calculate the following: Material price variance; Material usage variance;
Labour price variance; Labour eciency variance; Fixed overhead variance;
Sales price variance; Volume variance.
(14 marks)
(b) Discuss the possible reasons relating to the variances you have calculated.
(6 marks)
(Total 20 marks)
Reading for this question
Subject guide, Chapter 17, and Leiwy & Perks, Chapter 18.
Approaching the question
(a) This question involves the calculation of variances. Candidates must not forget to indicate if
the variance is favourable or unfavourable. As is common, candidates often get the price
variances correct but get the eciency/usage variances incorrect. This is because they do
not ex the budget and consider the standard quantity of kg of material or hours of labour
for the actual level of output.
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AC1025 Principles of accounting
We have:
(b) Some attempts have been very good while others missed to capture the reasons for the
variances highlighted under (a). The examiners did not assign full marks to candidates that
wrote if the variance was favourable or not. Some examples of possible reasons are listed
below:
Material: It seems they have purchased cheaper material that may have been inferior quality
because the usage of the material is adverse; however, this needs to be carefully checked out
because it may be that they were inecient with the more expensive material as well.
Labour: It seems that they have paid more for the labour and the eciency is adverse as
well, it could be that they have had to rely on agency sta↵ who cost more, however because
they are unfamiliar with the machinery and production flows they are also inecient at
their job, compared to your usual full time sta↵.
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Examiners’ commentaries 2020
Question 20
The directors of Lunar Plc are considering investment in new equipment to increase
the firm’s flexibility. The finance director has asked you to evaluate how much cash
the company will have available at the end of March 2020.
You have been provided with the following information:
(a) The sales forecast for the period from November 2019 to March 2020:
Nov-19 Dec-19 Jan-20 Feb-20 Mar-20
Sales (Unit) 210 250 190 240 220
Unit price £175 £180 £200 £205 £210
(b) 40% of customers pay in the month of sale, the rest pay in the following month.
(c) Purchases are 65% of the previous month’s sales revenue. All purchases are on
credit and are paid for in the month following the purchase.
(d) Wages of £8,500 are paid monthly.
(e) The sales team earn commission of 3% of monthly sales revenue and this is paid
in the month following the sale.
(f) Charges for light and heat are £750 per month and are paid every 2 months
starting from January 2020.
(g) Advertising cost is paid at £2,500 per month.
(h) At the end of December 2019 Meridian plc has a bank balance of £46,000.
Required:
(a) Prepare a cash budget for each month from January 2020 to March 2020.
(15 marks)
(b) Advise managers on the actions that can be taken to avoid a cash deficit
situation.
(5 marks)
(Total 20 marks)
Reading for this question
Subject guide, Sections 16.3–16.5, and Leiwy & Perks, Section 15.4.
Approaching the question
(a) A straightforward question but in answering such questions, the format and connection
between workings and the solution is vital. It must be set out in columnar form.
Very often, as is the case, the main diculty is including the right amount of receipts from
customer and purchases distinguishing sales and purchases on credit.
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AC1025 Principles of accounting
We have:
(b) Some candidates illustrated what is a cash budget or just described the scenario under (a)
instead of pointing out possible solutions. Right answers can include: Increase sales prices –
although this may lead to a fall in sales units or Negotiate lower prices with suppliers, or
longer credit periods to delay payments and o↵er a discount to customers if the sales are
paid in full in the months’ they occurred.
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Examiners’ commentaries 2020
Question 21
Petram is a company that manufactures aircraft parts. The company is considering
various investment projects that may improve operational eciency, and has already
spent £30,000 gathering relevant data. It has now shortlisted three projects and
asked you to recommend the best option. You have been provided with the
following information about the projects:
Project I will last for 4 years. The initial outlay is £950,000 and the forecast
operating cash inflow from the project is £350,000 for the first 2 years, £425,000
in year 3 and £150,000 in the last year. Annual depreciation expense associated
with this project is £237,500.
Project II will last for 4 years. The initial outlay is £1,150,000 and the forecast
operating cash inflow from the project is £550,000 in the first year and
£350,000 for the following three years. Annual interest expense associated with
this project is £45,000.
Project III will last for 4 years. The initial outlay is £850,000 and the forecast
operating cash inflow from the project is £250,000 in the first year, then
increasing by £40,000 each year in years 2, 3, and 4.
The firm’s cost of capital is 10% per year.
Required:
(a) Evaluate each of the three projects using Payback Period.
(6 marks)
(b) Evaluate each of the three projects using Net Present Value.
(9 marks)
(c) Explain which projects should be accepted and why.
(5 marks)
(Total 20 marks)
Reading for this question
These issues are explained very clearly in Leiwy & Perks Chapter 14 and in the subject guide
Chapters 18 and 19.
Approaching the question
(a) This is a straightforward payback question involving ‘relevant costing’ issues. Payback
computations must be arranged in columnar form.
We have:
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AC1025 Principles of accounting
(b) This is a straightforward NPV question involving ‘relevant costing’ issues. NPV
computations must be arranged in columnar form.
We have:
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Examiners’ commentaries 2020
(c) This is a straightforward NPV question involving ‘relevant costing’ issues. NPV
computations must be arranged in columnar form.
We have:
If projects are mutually exclusive, then only one project can be undertaken. Although
project I has the quickest payback, the company should take on project II, as it has the
highest NPV and hence the largest impact on the wealth of shareholders.
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