Final Assessment 2020-21

Accounting for Business

Module Code: UG03–AB
Lecturer: Blake
Assessment: Final Assessment 100%
Examiner: Blake
Moderator: SMULIC / EXTERNAL

Notes to candidates:
 Write your name and SMULIC Number.
 Write your answers in the spaces clearly labelled with red type
 Answer all questions.
 There are five (5) questions.
 The number of marks available for each question is shown in (brackets)
 There are 100 marks available in total.
 The assessment will be available for 2 1/2 hours.
 Upload your finished assessment into the relevant Turnitin assignment.
 Similarity reports will be generated on each submission.
 You must cite and reference any work that isn’t your own.
Student to complete

Name:

SMULIC Number:

Examiner use only:

QUESTION Number of marks awarded
1 – 26 Marks
2 – 15 Marks
3 – 24 Marks
4 – 15 Marks
5 – 20 Marks

TOTAL (100 Marks) TOTAL:

2nd Marker Comments: Agreed Percentage Score:

Grade:

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QUESTION 1 [26 Marks]

Smith and Jones sell phones and accessories in the UK and has provided the following financial information from its
accounting records after the production of its Income Statement for the year ended 31 December Year 3.

You are to carry out an analysis of the company’s financial performance in Year 3.

Smith and Jones

Selected financial data at 31 December Year 3

£
Sales Revenue 258,000
Opening Inventory 6,500
Closing Inventory 8,000
Gross Profit 120,000
NET Profit for the Year 18,000
Opening Equity 95,000
Trade Payables 4,000
Trade Receivables 6,500
Property (at Cost) 70,000
Bank & Cash 2,900 (Dr)
Machinery and Tools (at Cost) 75,000
Provision for Depreciation on Machinery and Tools (31 December, 15,000
Year 3)
Drawings 12,000
VAT 600 (Cr)
Equipment (at Cost bought in year so not depreciated) 9,600
Equipment depreciation at 31 December, Year 3 2,400
Provision for Doubtful Debts (31 December, Year 3) 800
Loan (Non-current liability) 7,000

1.1 Complete the ratio table below by inserting the relevant information for Year 3. Suggest one possible reason for
the difference in each of the ratios below (you should give a different reason for each ratio) [16 Marks]

Ratio Year 2 Year 3

Rate of Inventory 25 2 marks There was an
Rate of Inventory turnover (days) = 365/Inventory Turn increase in demand
Turnover (days) days for the products
Over

Rate of Inventory Turnover= Cost of sales during

period/Average inventory for period

Cost of Sales = Sales Revenue – Gross Profit

= 258000-120000 = 138000
Average Inventory = (Opening Inventory + Closing
Inventory)/2
= (6500+8000)/2 = 7250

Inventory Turnover (Times) = 138000/7250 = 19.03

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 Rate of Inventory turnover (days) = 365/19.03
=>19.18 Days

Net Profit Ratio 22 % 2 marks Increase in non-

Net Profit Ratio = (Net Profit/Sales Revenue)*100 operating expenses
(%)

Net Profit = 18000

Sales Revenue = 258000

Net Profit Ratio = 6.97%

Current ratio 2.4:1 2 marks Increase in

Inventory
Current Ratio = Current Assets/Current Liabilities

Current Assets = Closing Inventory + Trade Receivables +

Bank & Cash = 8000 + 6500 + 2900 = 17400

Current Liabilities = Trade Payables = 4000

Current Ratio = 17400/4000 = 4.35:1

Gearing ratio 10% 2 marks Decrease in Loans

Gearing Ratio = Fixed Interest Capital/Shareholders’
capital

Fixed Interest Capital = 7000

Shareholders’ capital = Opening Equity + Net Income –

Drawings = 95000+18000-12000 = 101000

Gearing Ratio = 7000/101000 = 6.93%

Trade payables 12 2 marks Decrease in trad

=(365/138000)*(4000) = 10 Days relations with
payment period days suppliers

Gross profit ratio 50% 2 marks Increase in cost od

raw materials used
(120000/258000)*100 = 46.51% in production

Liquid ratio/Acid 2.2:1 2 marks Decrease in Cash

Reserves
test ratio (6500 + 2900) = 9400

Liquid Ratio = 9400/4000 = 2.35

Trade receivables 7 days 2 marks More time taken by

the suppliers
collection period (365/258000)*6500 = 9 days

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1.2 Comment on the ratios for the two years in terms of profitability and liquidity and say whether you
would support investment in this business and why? [10 Marks]

Type your answer here.

The profitability of this business has decreased both in terms of gross margin and net profit margin. The
gross profit ratio has been decreased from 50% to 46% showing that there has been an increase in cost
of goods sold more than the increase in sales. When we see the net profit margin, the difference is even
more prominent, as the net profit ratio has been decreased from 22% to 6.4% showing a significant
increase in expenses of the business.
The liquidity ratios have also been degraded, as the current ratio has increased from 2.4 to 4.3 which
means that there is significantly high amount of current assets lying idle for the business. Therefore, it is
not recommended to invest in this business.

Question 2 [15 Marks]

As an accountant, your client asks you to “maximise” the profits of their business as they are about to
approach the bank for a bank loan, and they want to show the business in the best light possible.
a) What do the professional ethical guidelines advise you to do in this situation? What steps might you
take to safeguard your professionalism in this situation? (4 marks)
b) Briefly describe the other professional and ethical guidelines for professionals. (8 Marks)

Task Response (12) Coherence (3) Total (15)

Write your answer here.

a) As per the professional and ethical standards, as an accountant, I should not try to
“maximise” the profits of the company as doing so would require me to go against the
ethical professional standards. As per the fundamental principle of ethics the
accountant should follow Objectivity, which means that he/she should not allow any
type of bias, conflict of interest or undue influence of others. If that happens then it
will be an unethical act.

b) The other professional and ethical guidelines for professionals are:

1) Integrity: It is important that the accountant is honest and straight forward when
dealing with all his professional and business relationships
2) Professional Competence and Due Care: In order to ensure that the client is
receiving competent professional service based on current developments in
practices of the counting world, it is important that the accounting professional is
maintaining professional knowledge and skill.
3) Confidentiality: The professional accountant should not disclose any information
that he has about his client to the third party that may harm the competencies of
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 his/her client. Therefore, it is important that the accounting professional is
respecting the confidentiality of information acquired as a result of Business and
professional relationships.
4) Professional Behaviour: The professional accountant must avoid any action that
may discredit his/her profession as a financial accountant. Therefore, he/she
should comply with relevant laws and regulations

Question 3 [24 Marks]

Gold and Silver Productions has three production cost centres — Production, Assembly and Packing, and one service
cost centre — Finance.

The business has estimated the overheads for Year 4 of their business. (Overhead Analysis Sheet)

3.1 Complete the Overhead Analysis Sheet below. [24 Marks]

GOLD AND SILVER PRODUCTIONS

OVERHEAD ANALYSIS FOR YEAR 4

COST CENTRE DATA Production Assembly Packing Finance TOTAL

Floor Area (sq m) 1000 600 200 400 2,200
Cost of Machinery £30,000 £8,000 £0 £8,000 £46,000
Number of Employees 20 4 2 6 32

Complete the Overhead Analysis Sheet by filling in the empty boxes.

OVERHEAD ANALYSIS SHEET

Overhead Total Allocation Rate Production Assembly Packing Finance
s basis
Heat & £20,000 Floor Area
Light
£ 9,090.91 £ 5,454.55 £ 1,818.18 £ 3,636.36
5 Marks
Staff £18,500 Number of
Supervisio Employees
n £ 11,562.50 £ 2,312.50 £ 1,156.25 £ 3,468.75

5 Marks
Buildings £2,500 Floor Area (sq
Insurance m)
£ 1,136.36 £ 681.82 £ 227.27 £ 454.55
5 Marks
Depreciati £3,000 Cost of £ 1,956.52 £ 521.74 £ - £ 521.74

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on of Machinery
Machiner
y & Tools
5 Marks
TOTAL £44,000
COST
CENTRE
OVERHEAD
£ 23,746.29 £ 8,970.60 £ 3,201.70 £ 8,081.40
S
4 Marks
24 Marks

Question 4 [15 marks]

A) Name 5 users of financial statements. [5 marks]

B) Describe why those users might be interested in the contents of the financial statements. [10 marks]

Type your answer here.

Some major users of the financial statements which are directly related to the company and are interested in
the same are –

i) Investors

ii) Shareholders

iii) Creditors

iv) Government Departments

v) Employees

vi) Customers

Answer B) Following are some reasons as to why the above mentioned stakeholders would be interested in the
contents of the financial statements:

i) Prospective Investors: Prospective Investors, as they want tp invest their money in the firm, are
interested in the financial statements as they want to gauge the financial strength and growth of the company in
terms of profits, sales, cash flows etc and in terms of various ratios comparable with the industry peers. They are
also interested to know the plans and strategies of the management of the company to gauge whether the
company is planning to expand their venture, etc.

ii) Shareholders: The shareholders are curious to know the financial conduct of the company and whether it
is heading in a correct direction. They also want to enquire about sound utilization of the capital being deployed to
the company, as efficient use of capital will lead to increase in the price of shares of the company and hence will
benefit the shareholders. These stakeholders are mainly interested in the return on their investment and hence
will not bother much about the long term health of the company but would want returns in short term. They also
conduct horizontal analysis of the company so as to compare the current financials with the financials of previous
years.

iii) Creditors: They are interested in knowing whether the company is or will be in a condition to repay their
debt. This can be ensured when the company has a healthy cash flow cycle, good sales and incurring profits. These
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 stakeholders are interested to know the financial soundness before granting credit as well. They also want to
verify whether the covenants, positive or negative, prescribed by them are being followed or not. They mainly
look at P&L statements and Balance Sheet.

iv) Government Departments: Governments departments and regulators keep an eye on the firms to keep a
check on their profits and revenues. They make sure that the company is not using any illegal practices to earn
revenues. Moreover, the companies can also cook their books and show high figures to shoot up prices
inorganically in the market. The state and central governments are also interested in the statements for the
purpose of taxation

v) Employees: Employees are interested in their payment of bonus which depends upon the amount of
profit incurred by the company. The employees are moreover concerned about their salaries and therefore are
interested I sound running of the company. The demand for salary rise, bonus, better working conditions etc., all
rely on the profitability of the firm an hence depends upon financial position of the company

Question 5 [20 Marks]

Bill is currently a sole trader and is thinking of bringing in a partner, John, to work together as an ordinary
partnership and has asked you in your role as an accountant for some advice. Read Bill’s email and answer each of
the queries.

Hi,

I’ve been given you details by a friend as I am thinking about changing my current sole trader business into an
ordinary partnership by joining forces with my friend John.

Firstly, what are the main benefits of being an ordinary partnership rather than a sole trader? Are there any
issues I should be concerned about in becoming a partner in a partnership?

What legal and accountancy requirements would we need to comply with?

Bill

Write you response below addressing the following points:

a) Main benefits of an ordinary partnership compared to being a sole trader 5 Marks

b) Disadvantages of being an ordinary partnership. 5 Marks

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c) What accounting information does an Ordinary partnership have to complete and for whom? 5 Marks

d) Clear and coherent reply addressing the above points in a fairly accurate and relevant manner. 5 Marks

a) Benefits of ordinary partnership compared to being a sole trader:

1. Risk Sharing: In an ordinary partnership, the risk related to the business is shared by the partners
involved in it. Therefore, the burden on each partner gets reduced and they can work more freely.
2. Diversified expertise: Unlike sole trader where the business is managed by a single person therefore
he must rely on his own competency while running the business, in ordinary partnership, there are
more than one partners in the company who own the business and therefore they bring their own
expertise when helps in better decision making.
3. More Capital: As more partners are involved in the business, the more capital they will bring to the
business that will help the business to grow at better rates.

b) Disadvantages of being an ordinary partner:

1. Conflicts is decision making: As there are more than one decision maker in the business, it is possible
that they will have different ideas for the business and due to the fact that the capital is limited, there
is a possibility of conflict between the partners.
2. Slow decision making: As more people are involved in the decision-making process of the business,
the decisions will take more time to get accepted by everyone involved in the business.
3. Profit sharing: The partners have to share the profits that they have earned in the business which is
not an issue in case of sole trader.

c) Information an Ordinary partnership need to complete:

All partners in an ordinary partnership have a common law duty of good faith, which means that they
must act honestly and in the best interests of the partnership. It is essential to have a partnership
agreement (also known as a deed of partnership) drawn up by a solicitor before starting to trade. The
partnership agreement clarifies each partner's legal position and provides a framework for dealing with
any problems that may arise.
Partners are self-employed for tax purposes in the same way as sole traders and so do not receive a salary
from which tax is deducted through Pay As You Earn.
Naming a business is an important consideration for anyone starting a new partnership. The partners
must comply with strict rules governing the use of business names.
Accurate financial records must be kept to enable partnership and individual tax returns to be completed.
Records must be kept for a specified period of time in case HMRC asks to inspect them.

d) It is recommended that the person should convert his business to partnership as it has more benefits and
an better way to expand the operations of the business.

END of EXAM

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You will now need to upload your MS WORD document to the appropriate TURNITIN Assignment. This will be
found in the relevant folder for your Tutor and Class.

A similarity report will be generated for all submissions.

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