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NCEA Level 2 Accounting (90225) 2005 — page 1 of 5

© New Zealand Qualifications Authority, 2005
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Assessment Schedule – 2005

Accounting: Analyse and interpret information and make recommendation(s) for a sole
proprietor (90225)

Evidence Statement

Codes: C = Correctly calculated analysis measure
I = Interpret
R = Recommend
J = Justify

Question Evidence Code

ONE

(a)



Analysis Measure Working Answer
Administration Expenses %

57 000
380 000
!
100
1
15% C
Gross Profit %

228 000
380 000
!
100
1

60%

C

(b)

Award I for idea of managing administration expenses (ie he is making a decision, carrying
out an action)
eg
• it will tell him how well he is managing / controlling the administration expenses
• it will tell him whether he needs to reduce his spending on administration expenses
• to see if they are doing a good job at managing their administration expenses.
• compare with industry average / previous year’s administration expense.


I

(c)

Award I for link that identifies increase in sale of toys with higher mark-ups

• more toys with a higher mark-up have been sold (compared with toys having lower
mark-ups).


I

(d) (i)


52 000
520 000
!
100
1
= 10%


C

(ii)

Award I for a reason that equity is increasing at a rate faster than net profit

• the increase in equity ratio was due to an increase in equity in the business. This
increase in equity is at a rate faster than the increase in net profit, which means the
return on average owner’s equity falls.


I

NCEA Level 2 Accounting (90225) 2005 — page 2 of 5


Question Evidence Code

TWO
(a)


Analysis Measure Working Answer
Current Ratio

110 000
50 000

2.2:1
C
Inventory Turnover

150 000
50 000

3 times C
Equity Ratio

143 000
260 000

0.55:1 C

(b)

Award I for the link between owner’s equity decreasing and drawings being greater than
net profit

• owner’s equity decreased as a result of Shelley’s drawings in 2005 being greater
than the net profit.


I

(c)

Award R and J
Award R for a valid recommendation that will improve the equity ratio.
Award J (justification) for a link between the recommendation and how it improves the
equity ratio
eg
• Shelly invests more cash / assets into the business (R):
- more of the business’s assets are financed by Shelly as she has increased the
equity in the business (J)
and
- the cash can be used to repay debt, meaning fewer assets are financed by
external sources (J)
• increase the net profit through reduced expenses / being more efficient (R)
- enables more equity to be retained in the business, meaning more of the assets are
financed by the owner (J)
- enables more equity to be retained in the business, which can be used to repay
debt, meaning fewer assets are financed by external debt (J)
• keep drawings less than net profit each year (R)
- allows more equity to be retained in the business, meaning more assets are
financed by the owner (J)

Note: “reduced drawings” is insufficient unless linked to being less than net profit.
Note: if the candidate uses “increased advertising” there must be a clear explanation that
sales increases in a greater proportion.
Note: can achieve J without R – if recommendation not clearly expressed.


R
and
J

NCEA Level 2 Accounting (90225) 2005 — page 3 of 5


Question Evidence Code

THREE
(a)

Award I for reason that uses the resource to explain why the current liabilities
increased

• cash from the overdraft was used to pay for new equipment.


I


(b)

Award I for an explanation of the relationship between liquid and current ratio and
overdraft.
Award another I for recognising the increase in the overdraft and the impact it has in
the context of this question

• the bank overdraft is not a liquid liability so it is not included in the liquid ratio (but it
is included in the current ratio as it is a current liability,) (I); because the overdraft
has increased it has made the current ratio worse without affecting the liquid ratio
(I).

Note: for (I) + I, there must be a link.


I
and
I

(c)

Award J (justification) for a link between the loan and how it improves the current
ratio

• the cash from the loan will reduce the overdraft and not increase current liabilities
further as the loan is not due until 2010
• use loan to buy more inventory thereby increasing current assets and not affecting
current liabilities, so the current ratio will improve

Note: answer must lead to increase in current ratio.


J

NCEA Level 2 Accounting (90225) 2005 — page 4 of 5


Question Evidence Code

FOUR
(a)

Award I identifying a reason that causes the inventory turnover to improve

eg
• (increase in sales) the inventory turnover has improved because the hardware that is
being ordered is of a good quality / brand that customers wish to purchase, meaning
the inventory is selling better than in the past
• (lower stock levels) the inventory turnover has improved because less hardware is
being ordered, which means stock is not being accumulated .

I



(b) (i)

Award I for explanation that identifies cash is not available from accounts receivable to
pay debts.
Award another I for link identifying that slow payment means the overdraft needs to be
used to pay debt.

• because it is taking longer to collect the money owed from credit customers, there is
less cash available to pay Handy Haven’s debts (I); thus the overdraft was increased
to allow Tim to meet his current debts (I).


I
and
I

(ii)

Award R (recommendation) for a valid recommendation that will improve the age of
accounts receivable.
Award J (justification) for a link between the recommendation and how it improves the
age of accounts receivable.

• offer a discount for early payment / payment on time (R):
- this will reduce the age of accounts receivable as the discount will reduce what
people have to pay and they will want to take advantage of this (J)
• charge overdue fees for late payment (R):
- this will reduce the age of accounts receivable as the overdue fee will increase
what customers will have to pay, so to avoid this they will pay on time (J)
• send reminders out to OVERDUE accounts asking for payment (R)
- this will remind customers that they owe money, and they are likely to pay as they
are aware that Handy Haven has not forgotten that they owe the business money
(J).

Note: do not accept the idea of credit check; this does not mean debtors will pay early,
it just decreases the likelihood of bad debts.

R
and
J


NCEA Level 2 Accounting (90225) 2005 — page 5 of 5


Question Evidence Code

FIVE


Award I for explanation of meaning of 8% (or 4%).

Award another I for linking the business’s financial expense % being greater than the
industry average and its impact on profitability (look for the idea that increasing financial
expenses caused the Net Profit % to be lower than the industry average)
eg
• an 8% financial expenses % means eight cents (or 8%) of each sales dollar is spent
on financial expenses (I)
• the financial expenses percentage is 4% higher than the industry average, which has
contributed to Extreme Sports net profit percentage being lower than the industry
average, ie it is less profitable than the industry average (I).
Award R for a valid recommendation that will improve the financial expenses
percentage – the answer must relate to the loan, ie refer to the information supplied.
Award J (justification) for a link between the recommendation and how it improves the
financial expenses percentage
eg
• the business needs to repay some of its loan (R):
- repayment of the loan will reduce the interest on loan expense, as there will be
less loan for interest to be charged on (J)
• the business negotiates a new interest rate with the bank (R):
- the new interest rate will be lower, which will reduce the interest payments on the
loan (J).


I
and
I






R
and
J



Judgement Statement

Criteria Achievement Achievement with
Merit
Achievement with
Excellence
One 3 ! C 4 ! C 5+ ! C
Two 6 – 7 ! I or R
(at least 5 ! I)
(at least 1 ! R)
8 –10 ! I or R
(at least 2 ! R)
11+ ! I or R
(at least 2 ! R)
2+ ! J

Codes
C = Correctly calculated analysis measure
I = Interpret
R = Recommend
J = Justify