Accounting concepts and financial statements

NOTES FOR AS LEVEL (2020-2021)
ACCOUNTING DEFINED
Accounting plays very important role in the business of all sizes. The purpose of accounting is to
provide information that will help you make correct financial decisions. Accounting is a language of the
business.
FINANCIAL ACCOUNTING
Financial Accounting is the process of recording, reporting and analyzing business transaction. It’s
the written record of a business. Financial accounting is designed to meet the need of external users.
MANAGEMENT ACCOUNTING
Management accounting deals with activities inside the organization. Management accounting is
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used for planning and decision making. Management accounting is concerned principally with reporting
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to internal users. The management accountant’s goal is to produce reports that improve organizational
decision making. Management accounting is thus future-oriented.
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COST ACCOUNTING
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Cost accounting support both financial and management accounting. Cost accounting is the
process of capturing all of the cost of production, whether a business manufactures products, delivers
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services, or sell retail items. Cost accounting is used for all types of business. Cost accounting is the
process of analyzing and planning what it cost to produce a produce or provide services. The analysis
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help reduce cost which increase the profitability of business.

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The users of accounting information can be divided broadly into two groups.
(1) Internal users
(2) External users
(1) Internal Users

Internal users of accounting information are managers who plan, organize and run a business
(2) External Users

External users use accounting information to make decisions regarding business these external
users are investors (owners), creditors tax Authorities, customers and regulatory agencies.
AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 1

FUNCTIONS OF ACCOUNTING
1. To provide quantitative information.
2. Information is about economic entities.
3. Information is useful for making economic decisions.
The financial statement are the financial reports that a company produces and objective of these
information are;
OBJECTIVES OF FINANCIAL STATEMENTS

To provide information about:
1. The financial position
2. The financial performance, and,
3. The changes in financial position,
That is useful to a wide range of users in making economic decisions
FINANCIAL STATEMENTS
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These consist of:
1. Income statement
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2. Statement of financial position
3. Statement of Retained Earning (statement of changes in Equity)
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USERS OF FINANCIAL STATEMENTS
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1. Management
2. Owners / Shareholders
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3. Lenders & Creditors

4. Employees of the entity
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5. The Government
6. The Tax Authorities
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7. General Public
8. Investment Advisors

ACCOUNTING CONCEPT
CONCEPT DESCRIPTION
Only transaction and events that are capable of being measured

Money measurement
in monetary terms are recognised in the financial statement.
Every financial transaction has two effects, described as a ‘debit’
Duality
and a ‘credit’, which are recorded in two separate account.
Assets and liabilities are recorded at their historical cost rather
Cost than estimating what they are now worth. The only exception is
when there is a valid reason for revaluing non-current assets.
The business to which the financial statement relate will
Going concern
continue to operate in the foreseeable future.
Cost and revenue are matched to the time period in which they
Accruals
arose.
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Businesses should always use the same account treatment for
Consistency similar transitions. They should not change accounting policies
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unless there is a valid reason to do so.
Do not risk overstating revenue or assets or understating
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expenses or liabilities. If in doubt, include a figure that will
Prudence
cause profit or the value of assets to be lower rather than
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higher.
Some items are not worth recording separately because their
Materiality low value means that they do not affect decisions taken by the
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users of the financial statement.

The financial statements must only include transaction relating
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Business entity
to a specific business and not the people who own or run it.
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Concept Impact On Financial Statements
Financial statement do not include items that cannot
be expressed in money terms. For examples, employee
Money measurement
motivation or the quality of goods and services that
have been produced.
Any example to double entry is an application of this
Duality concept. The trail balance should balance. The
statement of financial position should balance.
Non-current assets are listed at cost before the
Cost provision for depreciation is subtracted. No assets or
liabilities are adjusted for inflation.
The net book value of non-current assets assumes that
Going concern they will be used for several years. The rate of
depreciation would be higher if that was not the case.
Income and expenses are adjusted for prepayments
and accruals. Cost of sales is adjusted for opening and
Accruals
closing inventory and non-current assets are
depreciated over the life of an assets.
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The same methods and rates of depreciation are
consistently applied to all items within a particular
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Consistency
category of non-current assets, for examples,
machinery, vehicles, equipment, etc.
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Inventory is value at the lower of cost and net
realizable value. Estimates of accruals and
prepayments, estimates of lifetime and residual value
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Prudence
of non-current assets when calculating depreciation.
Also irrecoverable debts and provision for doubtful
debts.
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Small expense items are grouped together as ‘general

expenses’ or sundries. Low cost non-current assets are
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Materiality treated as an expense on the income statement, for

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example, stationery items or small tools that will be

used for more than a year.
The financial statement must not include any personal
income, expenditure, assets or liabilities of the owners
Business entity of the business, another application of this concept is
that ‘capital introduced’ and ‘drawings’ are shown on
the statement of financial position.

TYPES OF ACCOUNTS
Personal (Accounts of individual customer, supplier)
Real (Accounts of property and assets)
Nominal (Accounts of income, expenses, gains & losses)
BOOKS OF ORIGINAL ENTRY

NAME OF BOOK PURPOSE
1. Cash Book Records cash receipts and payments
2. Purchases Journal Records credit purchases of goods for resale
3 Sales Journal Records credit Sales
4. Purchases Returns Journal Records return of credit purchases
5. Sales return journal Records return of credit sales
6. Petty Cash Records cash payments of small amounts
7. Journal Records accounts not covered elsewhere
LEDGER
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A record of all transactions classified according to their nature and type
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TRIAL BALANCE
A list of balances, both debit and credit, extracted from the accounts in the ledger, and includes the
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cash and bank balance.

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OBJECTIVES OF PREPAIRING TRIAL BALANCE

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1. To check accuracy of postings to ensure that total debits are equal to total credits.
2. To facilitate preparation of financial statements
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TRIAL BALANCE NOT AN ABSOLUTE PROOF

A trial balance proves arithmetical accuracy of postings. An agreed trial balance may contain certain
errors:
1. Error of omission
2. Error of commission
3. Error of principle
4. Error of original entry
5. Compensating error
6. Error of Reversal

ERROR AFFECTING TRIAL BALANCE
1. Error of addition
2. Incomplete double entry
3. Partial omission
4. Error of transposition
CORRECTION OF ERRORS
To ensure accuracy of financial statements, the errors need to be recorded through journal,
explaining the nature and reason of the transaction.
SUSPENSE ACCOUNT
A temporary account opened to record difference in trial balance.
DISCOVERY OF ERRORS
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Errors may be discovered:
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(a) During an accounting period
(i) Before preparing final accounts.
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(ii) After preparing final accounts.
(b) During subsequent accounting period.
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CONTROL ACCOUNTS
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CONTROL ACCOUNTS
Sales ledger control account
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 The sales ledger control account is a T-account that shows the total owed by the credit
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customers of a business.
 It is the ‘trade receivables’ figure under the ‘current assets’ section of the statement of financial
position.
 It is a debit balance in the trail balance and in general ledger because it is an asset.
BENEFITS OF CONTROL ACCOUNTS

 A control account can show that an arithmetical error has occurred if the balance on the control
account does not equal the total of the individual account in the receivables ledger. If they do not
agree, then an error has definitely taken place. This helps to avoid incorrect balance in the
receivable ledger and in the payables ledger.
 Control accounts immediately provide total figures for trade receivables and trade payables,
instead of having to add up the individual accounts in the receivables ledger and payables ledger.
This helps to produce the financial statement.
 They help to prevent fraud. This is because manager have access to control account. Which
restricts the possibility of fraudulent entries by other employees.
LIMITATION OF CONTROL ACCOUNT
The control account verify the arithmetical accuracy of the ledger. But they do not prove the each
individual account balance is correct. They will not show:
 If a transaction has been completely left out of the accounting system (error of omission).
 If the wrong amount was entered in the accounting system for a transaction (error of original
entry).
 If a transaction was entered in the wrong account in the receivables ledger or payables ledger
(error of commission).
Although control account may show that an error has occurred, they do not show exactly where in the
receivables or payables ledger the error has taken place.
BANK RECONCILIATION STATEMENT

Bank reconciliation statement reconciles the balance as per cash book with the balance as per
bank statement as a result of these internal record (cash book) can be reconciled (adjusted) with the
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external record (bank statement)
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The difference between the accounting records and bank statement arise from the following:
1. Uncleared deposits or lodgments or uncredited cheques

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2. Unpresented cheques
3. Direct deposits in the bank
4. Standing order payments / banker’s order
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5. Bank charges and interest

6. dishonored cheques
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7. Errors in recording transactions in the accounting records

8. Bank errors in recording transactions.
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PROCEDURE FOR BANK RECONCILATION

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1. Determine adjusted cash book balance after incorporating entries appearing in the bank
statement but not in the cash book. (Items 3 – 7 above)
2. Prepare a reconciliation statement standing with balance per bank statement and
incorporating items 1,2 and 8 above.
USEFULNESS OF BANK RECONCILATION

1. Ensures accuracy of entries in accounting in records.
2. Enables to exercise control over frauds and misappropriation of cash.

BAD DEBTS
Bad debts represent amount not paid by credit customers. Matching principle requires that
revenue should be matched with the expenses incurred. Bad debts expense should be recognized in
accordance with the prudence and matching concepts.
ESTIMATING PROVISION FOR BAD DEBTS

1. Ageing schedule lists balances according to the period outstanding compared to credit period.
Longer period balances have higher rate than, shorter period.
2. Percentage of accounts receivable.
3. Percentage of credit sales.
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TYPES OF BUSINESS ORGANIZATION
1. Sole Trader
2. Partnership
3. Limited Company.
DIFFERENCES IN OWNERSHIP TYPES

POINTS SOLE TRADER PARTNERSHIP LIMITED COMPANY
COMPANY
1. Number of owners One Two or more but Several

less than 20
2. Formation Easy Easy Requires completion of legal

formalities
3. Legal Status None None Legal
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4. Liability Unlimited Unlimited Limited to amount paid on
Shares
5. Dissolution At the will of owner,

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At the will of partners, Through court action only.
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death of owner by court action, death
of a partner, admission
of a partner.
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6. Income tax liability Owner Partners on their share Company pays tax on income
of profits. Shareholders pay tax on
dividends received.
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7. Transfer of ownership Easy Transferable when all Transferable freely among

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partners agree. Shareholders

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INVENTORY VALUATION
Inventory is the most important current assets for the business. It is items bought for resale. The
valuation of inventory may be difficult because goods are purchased over different time periods and
different prices will be paid for the same items. There are three main methods of valuing inventory
FIFO (first in, first out)

AVCO (average cost)
LIFO (last in, first out)
(a) First in first out – Items are of similar nature and use. Items purchased or produced first are
issued or sold first. Ending inventory consists of the most recent purchases.
(b) Weighted Average Cost – Items are of similar nature and use. Average cost is determined at the
time of each purchase or on the basis of average costs at the end of period.
NET REALISABLE VALUE (NRV)
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Estimated sales revenue less estimated costs to make the sale.
YEAR END INVENTORIES LA

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Inventories should be valued at lower of cost and NRV, determined item by item.
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INVENTORY RECORDS
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(a) Periodical. Inventory values are based on costs determined at the end of period.
(b) Perpetual – continuous record of receipts, issues and balance is made in chronological order.
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EFFECT OF PRICE LEVEL CHANGES (FIFO)

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COST OF SALES PROFIT INVENTORIES

Rising Prices Older Costs (Low) Higher Current Costs (High)
Lower prices Latest Costs (High) Lower Lower Prices
Weighted average cost method smoothes out the effects of price level changes.
GROSS PROFIT METHOD

Inventory valuation can be made using gross profit method. Opening inventory and current
purchases are added to give cost of goods available for sale, from which cost of sales is deducted to
determine the value of closing inventory.
Gross profit method is used to ascertain inventory losses by theft, fire and such extra-ordinary events.

NON-CURRENT ASSETS (DEPRECIATION)
Property plant and equipment
(a) They are tangible, i.e. they have physical existence.
(b) They are held for use in the production or supply of goods or services.
(c) They are expected to be used during more than one period.
(d) They are not meant for resale
COST
The amount of cash or cash equivalents paid to acquire an asset at the time of acquisition. Cost
include expenditure directly attributable to bring the assets into usable condition, for example
delivery charges and cost of preparing site and installation.
DEPRECIABLE COST
Cost of an asset less its residual value.
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DEPRECIATION
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The systematic allocation of the depreciable cost of an asset over its useful life. It is the fall in the
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value of non-current assets
RESIDUAL VALUE
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The estimated re-sale value of Non-current Assets at the end of its useful life.
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USEFUL LIFE
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(a) The period over which an asset is expected to be available for use; OR
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(b) The number of production units expected to be obtained from the asset.
DEPRECIATION METHODS
(a) Straight line method
Cost – Scrap Value = Annual charge
Useful life
Advantages
(i) Depreciation charge is equal
(ii) Easy to calculate
(iii) Spreads the cost over its useful life
Disadvantages
(i) Ignores wear and tear and obsolescence
(ii) Depreciation is charged even when asset is idle
(iii) Repair costs will be higher in later years
(iv) Performance of asset will be least effective in later years.
(b) Reducing (Diminishing) Balance method
Fixed depreciation rate is applied to the book value of non-current assets
Advantages
(i) Higher charge of depreciation in earlier years
(ii) Provides uniform expense of depreciation and repairs throughout the life of asset
Disadvantages
(i) Obsolescence factor not considered.
(c) Revaluation Method

Depreciation under this method is the amount by which the value of an asset has fallen during the
year. It is used for small items such as loose tools, old paintings and live stock.
CAUSES OF DEPRECIATION
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(a) Wear and tear due to actual use
(b) Passage of time
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(c) Obsolescence
(d) Fall in market price
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RIVISION OF DEPRECIATION
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The depreciation method should be reviewed at least at each financial year end to as certain any
significant charges in:
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(a) The useful life of an asset; or

(b) Pattern of future economic benefits; or
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(c) Residual value of an asset.

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INTANGIBLE ASSETS
Non-current assets lacking physical existence, for example Good will.

PARTNERSHIP
The relationship which exists between persons who are running business with the main intension
of earning profit.
SALIENT FEATURES
1. Two or more persons, but not more than 20, required for partnership
2. Relationship is by intention of persons and created by agreement between partners (either
written or oral)
3. Business need to be carried on from beginning to end.
PARTNERSHIP AGREEMENT
Generally the following matters are covered in the agreement:
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(a) Capital contribution by partners
(b) Profit sharing ratio
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(c) Remuneration of partners
(d) Interest on capital
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(e) Drawings
(f) Interest on drawing
(g) Interest on loan
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(h) Valuation and treatment of goodwill on admission, retirement or death of partner

(i) Determining retiring partner’s share and mode of payment.
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The partnership agreement may be in writing or oral. In the absence of partnership agreement the
following rules apply. (Partnership Act 1890)
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(a) Profits are shared equally

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(b) No interest on capital

(c) No salary to partner
(d) Interest on loan at 5% per annum.
CAPITAL ACCOUNTS
(a) Fixed – The amount of capital as originally contributed and any further contribution remains
fixed. The amount due to partner as share of profits, interest on capital and drawings, and
salaries are shown separately in current account.

CHANGE OF PARTNES
(a) Admission of a new partner
(b) Retirement, or
(c) Death of a partner
(d) Change in profit sharing ratios
(e) Dissolution of partnership
GOODWILL
There is no exact definition of goodwill. Generally, it is referred to as an ability to earn more than
normal profits. The following factors governing goodwill are relevant:
(a) Reputation of business for providing quality products or services

(b) Location of the business
(c) Know - how and experience
(d) Possession of favorable contracts
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(e) Team of keen and experienced executives
TYPES OF GOODWILL
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There are two types of goodwill
1. purchase goodwill
2. Inherent goodwill
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Purchase goodwill is involved when we buy running business (it is not in As syllabus)
Inherent goodwill is the goodwill included in the business but not to be disclosed in the books, it is
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internally generated goodwill according to international accounting standard inherent goodwill

should not be recognised in the books as a permanent assets.
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VALUATION OF GOODWILL
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(a) Average Profit

In this case, average normal profits earned during a designated period multiplied by the
numbers of year.
ACCOUNTING TREATMENT
- Goodwill is determined in the following cases:
(a) Change in profit sharing ratio.

(b) Change in partnership
- Goodwill should not be shown in the books as permanent asset, it should always be written off.
- Entries to be made.
Debit Goodwill
Credit partners capital account in old profit showing ratios
Debit partners capital account in new profit sharing ratios
Credit Goodwill.
REVALUATION OF ASSETS
Revaluation of assets is necessary when a partner retires from the firm so that a retiring partner
gets a fair share for his capital. Revaluation account is debited with the decreases in assets values and
credited with the increases in asset values or decreases in liabilities, with corresponding entries to asset
and liabilities accounts. The surplus or deficit is transferred to partners capital in their old profit sharing
ratios.
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INCOMPLETE RECORDS (SIGNLE ENTRY)
These are accounting records which are not maintained under double entry principles. These
records consist of personal accounts of receivables and payables and cash and bank transaction.
REASONS FOR INCOMPLETE RECORDS

(a) Neglect by owner to keep double entry records
(b) Loss of complete records due to fire or burglary
DEFECTS OF INCOMPLETE RECORDS

(a) Accuracy of records can not be proved
(b) Invites fraud and misappropriation
(c) Final accounts can not be prepared
(d) Information is un-reliable
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PREPARING FINAL ACCOUNTS
(a)
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Complete opening capital by listing all assets and deducting liabilities
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(b) Ascertain estimated profits
Closing capital + Drawings – Opening Capital – Capital introduced.
(c) Ascertain figures from missing figures:
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(i) Receivables (v) Purchases

(ii) Payables (vi) Closing Inventory
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(iii) Expenses (vii) Fixed Assets

(iv) Sales (viii) Drawings
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COMPANY ACCOUNTS
“A limited company is an organization that has a separate legal identity to that of its owners. The
owners (share holders) liability is limited to the share they buy in the company.”
“An investor who owns shares in a limited company has limited liability. That means that a share
holder cannot be asked to contribute more capital to pay off creditors if the company goes into
liquidation, provided that the shares are fully paid.”
THE CHARACTERISTICS OF A LIMITED COMPANY

A limited company has a separate legal identity from its members. What this means is that a
limited company can, for example, sue and be sued in its own name.
The effect of this separate legal identity is best explained by looking at a sole trader compared to a
limited company. If a sole trader, John Smith, owes money to a supplier, the supplier can sue John for the
amount owing and if he is unable to pay, he could be made bankrupt. If John Smith forms a limited
company, John Smith limited, and the limited company owes money to a supplier, the supplier would sue
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John Smith Limited. Under these circumstance, if the limited company was unable to pay the debt, the
limited company could be liquidated, but John Smith himself would be protected due to the separate legal
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identity.
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A limited company is run and managed by the directors, but is owned by the shareholders. The
shareholders invest in a limited company by buying shares in that company and their personal liability is
limited to the amount they have paid for their shares.
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All limited companies must file a memorandum of association and articles of association with the
Registrar of Companies. The memorandum of association details the company’s external relationship
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with the outside world. It gives details of the company name, address and registered office, the company’s
share capital and the company’s objectives. The articles of association contain the rules governing the
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internal organisation of the company detailing directors’ powers, voting rights, conduct of meetings, etc.
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Types of Companies:
 Private limited companies
 Public limited companies
Private limited companies do not sell their shares to the general public at large, public limited companies
do.
CLASSES OF SHARES
(a) Ordinary Shares
Carry the right to vote and to participate in profits. The ordinary shareholders are effectively
the owners of the company. Rate of dividends depends on the level of profits and dividend
policy of the company.
(b) Preference Shares

Carry preferential rights as to payment of dividends and repayment of capital in the event of
liquidation. The rate of dividend is fixed. Preference Shareholders have no voting rights..
TYPES OF PREFERENCE SHARES
(a) Cumulative
(b) Participating
(c) Convertible
(a) Cumulative Preference shares

These shares entitled to receive arrears of past dividends during period of insufficient profit
(b) Participating Preference shares.
These shares entitled to receive additional dividends in profits after all the other classes of
shareholders have received their dividends.
(c) Convertible preference shares
These shares can be converted into ordinary shares on the date and rate specified in the
Articles of Association.
RIGHTS ISSUE
Public limited companies usually raise additional capital by offering shares to the public at large.
The cost of a new share issue can be quite high as these include professional fees to the bank handling the
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issue, publicity, advertising etc. one way to reduce these costs is to make a rights issue. Under this,
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existing shareholders are given the right to buy so many shares, for example one for every five held. The
offer price is usually slightly lower than the existing market price.
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BONUS ISSUE
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When bonus shares are issued by a limited company it is called a scrip issue. The shares are given
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to existing shareholders by using reserves. For this reason it is also referred to as a capitalization issue.
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Bonus shares are issued to existing shareholders without payment. The company’s Reserves
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provide permanent finance for the company. The transfer from reserves to share capital by a book entry
has no effect on the capital structure of the company.
DEBENTURES
A debenture is an acknowledgement of a debt by a company, bearing a fixed rate of interest
repayable at or by a specified date.
PREMIUM ON SHARES
Premium is the price above the par value of shares, reported separately as ‘Share Premium
Account.’ Share Premium Account may be used:
(a) to issue bonus shares
(b) To write off preliminary expenses.

FINANCIAL STATEMENT OF LIMITED COMPANIES
The financial statement of a limited company should comprise:
1. the income statement

2. the statement of changes in equity (statement of retained profit)
3. the statement of financial position
4. the statement of cash flows.
STATEMENT OF CHANGES IN EQUITY

A statement of changes in equity is one of the year-end financial statement. As its name implies, it
shows the changes that have taken place to the shareholders’ stake in the company – not only the realised
profit or loss from the income statement, but also unrealised profits (such as the again on the upwards
revaluation of property) which are taken directly to reserve.
Statement of changes in equity for the year ended
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Share Share General Retained Total
capital premium reserve profit
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Opening balance xx xx xx xx xxxx
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Profit for the year xx xx
Dividend paid (x) (xx)

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Bonus issue xx (xx) -

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Right issue xx xx xx
Closing balance xx xx xx xx xxxxx

COST AND MANAGEMENT ACCOUNTING
Cost and management accounting enables the managers of a business to know the cost of
the firm’s output – whether a product or a service – and the revenues from sales.
Managers need answers to detailed questions about costs in order to assist them with:
• Decision – making
• Planning for the future
• Control of expenditure
Cost and management accounting is widely used by all types of businesses – the cost of
a hospital operations, the cost of building a new hospital ward, the cost of tuition to a student,
the cost of a swim at a sports centre, the cost of a passenger’s bus journey, the cost of a new
road – are all just as important as the cost of making a product. A business, whether it provides
a service or makes a product, needs to keep its costs under review; in order to do this it need
accurate cost information.
Thus cost accounting will provide answers to questions such as:
What does it cost us to provide a student with accounting course?
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What does it cost us to carry out a surgery? What does it cost us to make a burger?
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COST
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The value of economic resources used as a result of producing goods or rendering services or cost
is the amount of expenditure incurred on specified things or activities.
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COST UNIT
Cost unit is anything or activity for which we calculate cost.

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These cost units may be:

(a) Units of production, e.g. Kilogram of materials, liters of liquid, pair of shoes etc.
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(b) Units of service, e.g. kilowatt hours, passenger miles, consultancy hours.
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COST CENTRE
Any part of an entity to which costs can be charged. Cost centre is the cost collecting point. A
cost centre can be:
(a) Department, warehouse
(b) Item of equipment, truck or delivery van
(c) Person for example machine operator, sales person

COST CLASSIFICATIONS
1. According to Nature or Elements.
Materials Labour Overheads

Cost Cost
2. According to function
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Production Selling & Administration
Cost Distribution Cost
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Research and Development

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(RD) Cost
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3. According to identifiability.
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Direct Indirect
4. According to behavior.
Fixed Variable Semi-Fixed

Cost

Total Variable Cost
Total Cost of materials depends upon how much materials you use
Total Materials Bill
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Material Used LA
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Variable Cost Per Unit

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Per unit materials cost will remain constant

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Per Unit Cost
Material Used

Total Fixed Cost
Your fixed cost probably does not change when you make production.
Total Fixed Cost
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Total Production Cost
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Fixed Cost Per Unit
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The average fixed cost per unit decreases as more production is made.
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A Per Unit Cost
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Production

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COST CONCEPTS
(a) Direct and Indirect costs
Direct cost is a cost which can be conveniently identified to a product or department.
Indirect cost can not be conveniently traced to a product or department
(b) Fixed and Variable Cost
Effect on costs due to changes in activity
FIXED VARIABLE
Total Costs Remains Total

Per unit same Changes
cost Changes Remains
same
(c) Semi variable costs
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These costs contain both fixed and variable costs
(d) Prime Costs

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The cost consist of direct materials, direct wages and direct expenses.
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(e) Conversion costs
These cost consist of costs incurred to convert raw material into finished goods, i.e.
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direct labour and manufacturing overheads.
(f) Manufacturing Overheads

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Consist of indirect materials, indirect labour and other indirect expenses

Stepped cost
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(g) Stepped costs are some costs which remain fixed with in a relevant range but increase
when the activity changes beyond relevant range.
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COSTS FOR DECISION MAKING
(a) Relevant costs. These costs affect the future and differ between alternatives
(b) Sunk Costs. The costs incurred in the past and can not be altered by any current or future
decision
(c) Marginal Cost. The extra cost incurred in producing one additional unit of output.
DIRECT MATERIALS COST
Cost of materials that can be conveniently identified to a product for example cost of wood in
furniture, cost of cloth in garments. These costs are significant.
INDIRECT MATERIALS COST
Cost of materials that is insignificant such as cost of glue in furniture, cost of thread, and
buttons in garment.
LABOUR COST
Remuneration paid to employees engaged in the manufacturing activities of a business.
DIRECT LABOUR COST
Cost of labour that can be traced to a product such as piece-rate or time taken to produce a
unit or to render a service.
INDIRECT LABOUR COST
Cost of labour that cannot be traced to a product or service but the labour helps
achieving production, such as, supervision salary, mechanics wages.
INCENTIVE SCHEMES
A scheme that relates remuneration to performance, with a view to improve productivity or

reducing waste.
M
OVERTIME PREMIUM
LA
Extra amount, over and above day rate earnings, for working longer than normal working
SA
hours. Any excess than normal wages is called premium and is an indirect labour cost.
EM
DE
A
N

MANUFACTURING OVEHEADS
All manufacturing costs other than direct materials, direct labour and direct expenses,
that is indirect materials, indirect labour and indirect expenses are called
manufacturing overheads.
CHARGING OVERHEADS
Manufacturing overheads are an essential part of the cost of a product or service. Charging
actual overheads can result in incorrect amounts in various periods and reporting cost data
can be delayed. For this reason pre-determined rates are used.
PRE-DETERMINED RATES
Procedure
(a) Estimate the amount of overhead that will be incurred during a specific period of
time.
(b) Estimate the activity level during the same period.
M
LA
ACTIVITY LEVELS SA
1. Allocation is the process by which we directly charge overhead cost in the department or
in the cost centre.
2. Apportionment
EM
(a) Unit produced

(b) Direct labour cost
(c) Direct labour hours
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(d) Direct materials cost

(e) Machine hours
A
CRITERIA FOR SELECTING ACTIVITY LEVEL

N
(a) Relationship between the activity and its use in manufacturing operations
(b) Practicability of using a particular base.
TYPES OF RATES
(a) Single or blanket rate computed for the entire unit.

(b) Departmental rate computed for each producing department.
ADVANTAGES DEPARTMENTAL RATES
(a) Improves control of overheads by departmental managers

(b) Increases the accuracy of costing a job or a product.

BASIS OF APPORTIONMENT
Bases Applicable Overhead Costs
1. Area Rent, Rates, Building Depreciation

2. Number of Employees Canteen, Personnel Office, Safety,
3. Book Value / Cost of Administration
Depreciation, insurance
4. Weight
Assets of materials Store-keeping, materials handling
5. Kilowatt hours Power
CONTROL OF OVERHEADS
Achieved by comparing actual overheads incurred with overheads charged to production.
ABSORBED OVERHEADS
M
Overheads changed to production achieved based on pre-determined rate.
VARIANCES
LA
SA
Absorbing overheads may result in:
(a) Over absorbed overheads – Overheads charged to production are more than actual
EM
overheads
incurred.
(b) Under absorbed overheads – overheads charged to the product are less than the
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actual overheads
TREATMENT OF VARIANCES
A
N
Over-under absorbed overheads may be transferred to:

(a) Cost of production;
(b) Cost of sales;
(c) Income statement
ABSORPTION COSTING
Absorption costing is a method that absorbs overheads into the total production cost for each cost
unit produced. Absorption costing considers all production costs, both fixed and variable in valuing
inventory

BENEFITS AND LIMITATIONS OF ABSORPTION
BENEFITS
1. Absorption costing recognises the fixed costs in the product cost and is therefore
suitable for determining the selling price of a product
2. Absorption costing conforms to the accruals / matching concept that requires costs to be
matched with revenues for a period.
3. Absorption costing avoids the necessity of separating fixed costs from variable costs.
4. Absorption costing is the recognised method of inventory valuation.
LIMITATION
1. Absorption costing is not useful for decision-making purpose. In considering fixed costs as
M
part of the product cost, managers will not have a clear understanding of whether accepting a
lower price for a product is worthwhile.
LA
2. Absorption costing is not useful for responsibility accounting. It would be unfair to hold
SA
managers responsible for fixed costs over which they had no control.
EM
MARGINAL COSTING
DE
Marginal costing is the accounting system in which variable costs are charged to cost unit
and fixed costs of the period are written off in full against the contribution. It recognizes cost
behavior and hence assists in Decision making.
A
N
ADVANTAGES OF MARGINAL COSTING
(a) Over or under-absorption of overheads cannot arise.

(b) Simple and less ambiguous than absorption costing
(c) Enables profit planning
(d) Enables intelligent pricing of products.

DECISION MAKING
The management has to make decision with an aim to attain objectives.
DECISION MAKING PROBLEMS
(a) Accept or reject a special offer, e.g. selling a product at less than normal selling price
utilizing excess capacity.
(b) Make or buy a product
(c) Add or drop a product or department
(d) Decision involving limited resources
COST-VOLUME –PROFIT ANALYSIS
A study of the relationships between sales volume, revenue, expenses and profit.
M
BREAK EVEN POINT
LA
The volume of activity at which the revenues and expenses equal.
SA
BREAK EVEN POINT (UNIT)
Fixed Costs
EM
Unit Contribution
DE
BREAK EVEN POINT (VALUE)

A
Fixed Costs
Contribution to Sales Ratio
N
OR
BEP (Units) x Sales price unit
TARGET NET PROFIT
This exercise requires determining sales revenue to achieve desired profit.
(a) Fixed Cost + Target Profit = Required Sales

Units Unit Contribution
(b) Fixed Cost + Target Profit = Required Sales Value x

100 Contribution to Sales Ratio

MARGIN OF SAFTY
(a) Units Actual / Budgeted sales – Break even sales
(b) Ratio Actual / Budgeted Sales Revenue – Breakeven Sales Revenue x100
Actual / Budgeted Sales Revenue
ASSUMPTIONS OF CVP ANALYSIS (Breakeven)
(a) Sales price remains constant

(b) Variable unit cost remain constant
(c) Fixed costs remain constant in total
(d) All production is sold and that there is no inventory.
ABSORPTION VS MARGINAL COSTING

Limitation of absorption costing
M
1. Fixed production overheads are assumed to be related to production, e.g. rent will be
incurred regardless of production activity.
LA
2. Allocation of fixed costs to products is arbitrary, which limits its usefulness for decision
SA
making.
3. Unreliable product costs lead to unreliable analysis of profitability.
EM
Limitation of marginal costing

1. Fixed costs are considered as period costs and, as much, exclude from inventory valuation.
2. Marginal costing not acceptable for external reporting by international accounting standard
DE
A
N

ANALYSIS AND COMMUNICATION OF ACCOUNTING
INFORMATION TO STAKEHOLDERS
RATIO ANALYSIS
Ratio analysis is used to interpret the information contained within financial statements in order
to assess the strengths and the weakness of a business.
These ratios are used to:
1. compare results from year to year to establish the individual company’s trends
2. compare one year’s results to those of other companies within the same industry, using the
industry average ratios to evaluate the individual company’s performance.
3. evaluate the company’s performance and provide information for interested stakeholders.
M
The table below shows the stakeholders in a business.
STAKEHOLDER
Manager or directors LA
REASON FOR INTEREST
To evaluate business performance for future decision-making such as
SA
setting budgets for future activities and identifying areas requiring
improvement.
EM
Bank managers or other to assess whether to give finance to the business and whether the loans
Lenders can be paid back with interest.
DE
Suppliers to assess the likelihood of receiving payment for supplies.

Customer to be assured that the business will continue to provide goods or services.
A
Shareholders to assess whether to continue as a shareholder, buy more shares or sell

their current shareholding. Also, to assess the level of return and the
N
security of their investment.
Owners/partners To assess whether to continue in business, invest more or close the

business down. Also, to assess the level of return and the security of their
investment.
Potential investors to compare the performance of one business with that of another business
in order to identify the best investment.
Employees and trade unions to check on the financial prospects of the business for job security, pay rises
and wage negotiations, bonuses, training and working conditions.
Government bodies to check the amounts due for taxation liabilities and to provide data for
statistical analysis of the performance of the economy.
Local community to be assured that the business will continue to provide employment for the
local area and to support the local economy.
Environmental bodies to be assured that activities being carried out by the business are not
threatening damage to the environment, wildlife, etc.

TYPES OF RATIO
Ratio can be separated into three categories:
1. Profitability ratios: These measure performance, highlighting profit in relation to the resources
used in a business, and assess how much profit is made by the business during the current year.
2. Liquidity ratios: These measure performance, highlighting a business’s ability to pay its day-to-
day commitments, and assess the availability of liquid funds in the short term.
3. Efficiency ratios: These measure the performance, of a business’s non-current assets and how
efficiently it is managing its current assets, trade receivables, trade payables and inventory.
THE APPLICATION OF ACCOUNTING TO BUSINESS PLANNING

BUDGET
Budget is a short term financial plan prepared in advance and based on objectives of the business.
BUDGETARY CONTROL
M
LA
Budgetary control is a process of using budgets to monitor actual results against budgeted figures.
SA
THE PRINCIPAL OF BUDGETARY CONTROL
BUDGET FIGURES
EM
CONTROL AND ACTUAL FIGURES

DE
TAKE ACTION
A
MONITOR AND COMPARE

N
BENEFITS OF BUDGET PREPARATION AND BUDGETARY CONTROL

1. Budget preparation forces senior managers to look ahead and plan for the future. They set out
detailed plans for each department within the organisation purpose and direction.
2. The preparation of budgets encourages co-ordination and communication between departments.

This in turn ensures that organisational goals are met.
3. A budget gives are clear indication of managers’ areas of responsibility. This in turn provides a
framework for responsibility accounting where managers are responsible for the achievement of
the corporate targets under their control.
4. Budgets provide the necessary yardstick for senior managers to measure the performance of
managers.
LIMITATIONS OF BUDGET PREPARATION AND BUDGETARY CONTROL
1. Budgets are based on estimates and it must always be remembered that forecasting is not an exact
science. The strength or weakness of any budgetary control lies in the accuracy of the forecasts.
2. A budget that is unrealistic or unachievable is of limited use and may do more harm than good. It
could have a negative effect on the workforce, who will feel that they are underperforming, and it
may make their productivity decline further.
M
LA
SA
EM
DE
A
N

AS LEVEL (Short Question and Answer)
Q.1 Define accounting and explain its purpose
A. Accounting is an information and measurement system that identifies, records and communicates
relevant, reliable and comparable information about an organization’s business activity.
Q.2 What is the relationship between both keeping and accounting?
A. Book-keeping is the recording of financial transactions and events, Book – keeping is essential to
data reliability. Accounting includes identifying, measuring, recording, reporting and analyzing
business transactions and events.
Q.3 What are the objectives of accounting?
M
A. The primary objective of accounting is to provide useful information for decision making by a
LA
wide range of users such as investors, creditors and others.
SA
Q.4 Who are the users of accounting information?
EM
A. The users of accounting information are:

(a) Present and potential investors
(b) Lenders
DE
(c) Tax authorities

(d) Regulatory authorities
A
(e) Managers
N
(f) Employees
(g) Investment advisors
(h) General public

Q.5 Identify the needs of the users of accounting information.
A. (a) Present and potential investors

Profitability and safety of their investments, which helps them to appraise the efficiency of
management, as well as to hold, sell or further invest in the business.
(b) Lenders
Their interest in the security of their loan as well as the ability of the entity to pay interest
and installments on time.
(c) Tax authorities

Assessment of tax liability of an entity, as well as to develop taxation policy
(d) Regulatory authorities

Collection of statistical information to reveal trends in the economy
(e) Managers
Managers are involved in day to day decision making; they need information to protect
assets of the entity, planning future activities, controlling the activities and decision
making.
M
(f) Employees
LA
They depend on the survival of the enterprise for their wages, negotiating wages and
benefits
SA
(g) Investment advises
They need accounting information to advise their clients whether to hold their investment,
or dispose of or invest further.
EM
(h) General public

Their interest is concerned with socio – economic problems, environmental pollution.
DE
A
Q.6 Explain the fundamental assumptions of accounting information

N
A. The fundamental assumptions are:

(a) Business Entity – A business is separate from its owner(s) and, as such, transactions
affecting the business are recorded
(b) Going concern – the business is presumed to continue operating for a foreseeable future
and it is not the intention to sell or close down the business in near future.
(c) Monetary unit – The transactions and events are expressed in monetary terms.
(d) Time period – The life of a business can be divided into time periods, such as months and
years, and the useful reports can be prepared for that period.
Q.7 What is the in the importance of accounting principles.
A. Accounting principles are the foundation for the preparation and presentation of accounting
information to enable the users of the accounting information to make rational economics
decisions.
Q.8 Define (a) Assets (b) Liabilities (c) Equity (d) Net assets (e) Capital employed
A. (a) Assets are resources controlled by a company that are expected to yield future benefits.
(b) Liabilities are claims of creditors on the assets of the company that will be settled by
providing goods or services or by sacrifice of assets.
(c) Equity is the owners claim on assets after settlement of liabilities
(d) Net assets is the equity
(e) Capital employed = Equity + long term loan.
Q.9 Define source documents
A. They are sources of accounting information that identify and describe transactions and events.
These documents can be used to make entries in accounting records.
Q.10 Identify the items from the following but that are likely to serve as source documents
(a) Bank statement (f) Telephone bill

(b) Sales ticket (cash memo) (g) Invoice from supplier
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(c) Income statement (h) Balance sheet
(d) Revenue account (i) Prepaid rent
LA
(e) Trial balance
SA
A. (a), (b), (f), (g) are source documents
EM
Q.11 Define double entry accounting.
A. Double entry accounting requires that for each transaction:

DE
- At least two accounts are involved with at least one debit and one credit
- The totals of debit and credit items must be equal
A
N
Q.12 Explain the purpose of trial balance
A. A trial balance is list of accounts and their balances at a point in time. The basic purpose is to
determine the equality of debits and credits as well as to facilitate preparation of financial
statements.
Q.13 What errors are not disclosed by the trial balance?
A. (a) Total omission to record an entry

(b) Error of principle, where an item of capital expenditure is treated as revenue expenditure
or vice versa.
(c) Error of commission or misposting of accounts
(d) Compensating errors where an error in recording of an amount in one account is
compensated by an error of the same amount in another account
(e) Error in original entry such as credit purchases treated as credit sales.

Q.14 Describe some of the errors which prevent the agreement of the trial balance
A. (a) Partial omission – Either debit or credit amount is omitted from posting or listing
(b) Casting error – mistake in balancing an account
(c) Entry on the wrong side – debits entered as credits or vice versa
(d) Transposition errors where the digits are switched within a number
(e) Slide error where the original figure is the same but slides to the right or left, e.g. $690
recorded as $69
Q.15 What is a suspense account?
A. A temporary account opened to record the difference in trial balance.
Q.16 Distinguish between accrual accounting and cash accounting.
A. Accrual accounting recognizes revenues when earned and expenses when incurred regardless of
receipt or payment of cash. Cash accounting recognizes revenues when received and expenses
when paid.
M
LA
Q.17 Explain why it is important to distinguish between capital expenditure and revenue
expenditure.
SA
A. The division of expenditure between capital and revenue has a significant impact on the
computation of business income, since revenue expenditure is chargeable to income while capital
EM
expenditure is an asset which will provide benefits over a number of years.

DE
Q.18 Differentiate between a reserve and provision

A
A. A reserve means an amount set aside out of profits for various reasons. A provision is a charge
N
against profits for an unknown liability or to meet possible losses in the future.
Q.19 Explain matching principle. Describe guidelines that are used in matching expenses and
revenues.
A. Matching principle requires that the revenues generated and expenses incurred to generate that
revenue should be reported in the same accounting period.
The general guidelines are:

(a) Direct cause and effect, e.g. sales and cost of sales
(b) Systematic allocation e.g. depreciation
(c) Immediate recognition where future benefits cannot be ascertained with certainty e.g.
advertising expenses.

Q.20 Distinguish between prepayments and accruals.
A. Prepayments are items paid for in advance of receiving their benefits. Accruals are items that are
neither paid for nor recorded but their benefit has been received.
Q.21 What is the purpose of bank reconciliation?
A. To determine any error or errors between accounting and bank records and to ensure that the
transactions have been correctly recorded.
Q.22 What factors cause the difference between accounting records and bank records?
A. (a) Outstanding cheques – cheques issued but not presented for payment
(b) Outstanding deposits – Deposits made and recorded by depositor but not recorded in the
bank statement
(c) Direct deposits made by customers but not recorded in accounting records.
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(d) Deduction made by bank for dishonored cheques, bank service charges, interest on overdraft,
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etc
(e) Errors in recording transaction in accounting records
(f) Errors by bank in recording transactions in depositor’s account
SA
Q.23 Distinguish between trade discounts and cash discounts offered by the sellers and describe
EM
the purpose of cash type of discount.
A. Trade discount represents a reduction in the quoted or listed price. Trade discount enables the
DE
seller to price his product differently to different groups. It is a convenient pricing mechanism and
is never recorded.
A
Cash discount is a reduction in the amount due offered to buyers to encourage early payment
N
within a specified period. Cash discount enables the seller to improve collection of receivables and
reduce bad debts.
Q.24 Why must bad debts expense be estimated?
A. Estimating bad debts meets:

(a) Matching principle – bad debts expenses are matched with sales
(b) Prudence principle – possible future losses are recognized
Q.25 What do you understand by factoring receivables?
A. Factoring receivables is a method of financing accounts receivable. Under this method, the
accounts receivable of a business are sold to a financing company (Factor). This enables a business
to collect funds due earlier. The factor usually charges a fee for providing funds. It may or may not
assume bad debts losses.
Q.26 Explain the methods of estimating bad debts
A. (a) Ageing method – The accounts receivable are categorized according to the period
outstanding.
Old debts are risky.
(b) Percentage of Receivables – based on a flat rate
(c) Percentage of sales – based on a rate applied to credit sales.
Q.27 How does periodic inventory system differ from the perpetual inventory system?
A. POINTS OF DIFFERENCE PERIODIC PREPETUAL

1. Inventory on hand is At the end of Continuously
determined period
2. Cost of sales Cost of goods Cost of sales is

available for sale deducted from cost
less ending inventory of goods available
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for sale
3. Physical count
LA
Required at end of
period
serves to verify inventory
records
SA
4. Suitability Large quantities High – cost items
of low – cost items
EM
DE
Q.28 What are the disadvantages of periodic system?
A. (a) Dependence on a complete physical count

A
(b) Physical count can be time consuming, costly and inconvenient.

N
(c) Inventory shortages such as breakage, theft, losses, shrinkage and waste cannot be
accurately determined
(d) Difficult to report a reasonably accurate inventory value
Q.29 Is it permissible to change inventory method each accounting period?
A. Consistency principle prescribes that a company use the same accounting methods period after
period so as to provide comparability across periods. However, it is permissible to change the
accounting method to improve financial reporting provided that the financial statements disclose
the change, its justification and its effect on income
Q.30 What is the impact of prudence principle on the accounting treatment of inventories?
A. Prudence principle provides that the future possible losses in inventory values be recognized in
the financial statement. For this season, the inventories are valued at lower of cost and net
receivable value.
Q.31 Define net realizable value
A. Net realizable value is the actual or expected selling price less the cost of making that sale that is
the cost incurred to bring the inventory into a saleable condition and all costs incurred in
marketing, selling and distribution of the inventory.
Q.32 What is the significance of accounting treatment to inventories?
A. (a) Inventories affect both, the income statement and the statement of financial position
(b) Complies with matching principle
(c) Follows prudence principle
Q.33 Explain why one business may use more than one method of inventory valuation in its
accounting system
M
A. The choice of method depends on the nature of inventory. If the inventory items can be
conveniently separated according to the order of occurrence, then FIFO method can be used.
LA
However where it is not possible to do so, the company may use AVCO.
SA
Q.34 Explain the purpose for providing depreciation.
EM
A. The allocate the cost of a tangible fixed assets over its useful economic life in a systematic and
rational manner with a view to comply with matching principle.
DE
Q.35 What are the factors that cause depreciation?

A
N
A. (a) Wear and tear due to actual use;

(b) Passage of time;
(c) Obsolescence;
(d) Accident; and
(e) Fall in market price
Q.36 What factors determine depreciation?
A. (a) Cost of acquisition and preparation of an asset for its intended use
(b) Residual value – also called scrap value or salvage value – represents amount estimated to
be received at the end of its useful life
(c) Useful life is the length of time it is productively used in a business operation.

Q.37 Distinguish between useful life and physical life of a fixed asset
A. Useful life is the period over which a fixed asset will contribute to the profitable operations of a
business whereas the physical life is affected by wear and tear and passage of time.
Q.38 What is the general rule for determining cost of a fixed asset
A. Cost includes all normal and reasonable expenditure necessary to get the fixed asset in place and
ready for intended use.
Q.39 Briefly discuss the advantages and disadvantage of the straight line and reducing balance
methods.
A. (a) Straight line method

Advantage
(i) Easy to calculate
(ii) Constant amount of depreciation over time
Disadvantages
M
(i) Does not consider the increasing repair charges in later years
LA
(ii) Depreciation is charged on asset when not in use
(b) Reducing balance method

SA
Advantages
(i) Higher charge made in early years
(ii) Smoothes out the effect of repairs cost and depreciation over the life of asset
EM
Disadvantage
(i) Rate of depreciation is arbitrary
DE
Q.40 Explain why fixed assets might the revalued.

A
N
A. Revaluation of fixed assets reflects the market values of fixed assets held by a company based on
appraisals carried out by professional valuer. The revaluation is generally made for land and
buildings whose market value has increased considerably over the years.
Arguments favoring revaluation suggest that these assets reported at historical cost seriously
understate their value.
Q.41 What are the characteristics of a partnership?
A. (a) It is a voluntary association between partners

(b) It is based on partnership agreement either written or oral
(c) Life of a partnership is limited by will, death of partner, bankruptcy, etc
(d) Taxation is chargeable on partners
(e) It is a mutual agency, that is, each partner is an agent of the partnership
(f) Unlimited liability
(g) Property of the firm is jointly owned by the partners.

Q.42 What are the contents of a partnership agreement?
A. Generally, the following matters are covered by a partnership agreement:
(a) Capital contribution whether fixed or fluctuating

(b) Division of profits
(c) Interest on capital or drawings
(d) Limit to drawings
(e) Remuneration of partner
(f) Valuation of goodwill on a change in the partnership
(g) Retirement or death of partner for settlement of dues
(h) Rights and duties of partners
(i) Dispute procedures
Q.43 List financial matters appearing in a partnership agreement
A. (a) Capital
(b) Profit sharing ratio
(c) Drawings
M
(d) Interest on capital / drawings
LA
(e) Partners salaries SA
Q.44 In the absence of a partnership agreement, what terms will apply?
A. (a) Profits to be shared equally

EM
(b) No interest on capital

(c) No salary to partners
DE
(d) Interest on loan by partner at 5%

(e) All partners are allowed equal part in managing business
(f) All partners must agree to admit a new partner
A
(g) The partnership firm undertakes to indemnify a partner for payment made on
N
behalf of the business.
Q.45 Give reasons why a manager might be offered a partner’s role in the business
A. (a) The firm acquires expertise of the manager

(b) The manager will work more diligently as a partner
(c) Chances of improving performance by using manager’s contacts
(d) The firm feels more secure from the actions of new partner
Q.46 Explain the difference between a profit and loss account and a profit and loss appropriation
account
A. A profit and loss account is drawn to determine the net profit or loss of the firm whereas the profit
and loss appropriation account is used to make the adjustments for the rights of the partners such
as salaries to partners, interest on capital and drawings and share of residual profit or loss.

Q.47 Briefly explain the necessity to value goodwill on change in partnership
A. When there is a change in partnership due to admission, retirement or death of a partner, the
partnership ends. Valuation of goodwill is necessary to ascertain the fair share of the partners
concerned in the future benefits for incoming and surviving partners as well as the benefits
available to outgoing partner.
Q.48 Why the partnership firms decide to become limited companies?
A. (a) Limited liability

(b) Facilities to obtain additional finance
(c) Better opportunities for expansion
(d) Companies have legal status
(e) Directors remuneration is a business expense
(f) Transfer of ownership does not affect companies
Q.49 Explain Goodwill. Identify the advantages of writing off goodwill immediately it arises.
M
A. Goodwill may be defined as the favorable characteristics of a business enterprise that are
LA
intangible and cannot be separately identified. Goodwill in partnership is not a purchased
goodwill; it has to be written off.
SA
Q.50 State four disadvantages a partnership has as compared with a limited company
EM
A. (a) Unlimited liability

(b) Change in partnership dissolves the firm
DE
(c) Ownership cannot be transferred without consent of all partners.

(d) Lacks legal status
(e) Maximum 20 partners
A
(f) Capital contribution dependent on their capability.

N
Q.51 Describe different types of preference shares
A. (a) Redeemable and non–redeemable

(b) Convertible and non–convertible
(c) Participating and non – participating
(d) Cumulative and non – cumulative
Redeemable – repayable after the expiry of a specific period
Convertible – can be converted into ordinary shares at a specific rate
Participating – allows sharing of profit with ordinary shareholders
Cumulative – Dividends not paid in loss making period is payable when sufficient profits are
earned

Q.52 State the major differences between ordinary shares, preference shares and debentures
A. POINTS ORDINARY PREFERENCE DEBENTURES

SHARES SHARES
(a) Nature Equity Loan Loan
(b) Return Dividend Dividend Interest
(c) Voting nights Yes Restricted No
(d) Power of appoint Yes No No
Directors
(e) Risk element Risky Partly risky Safe
(f) Redeemable No Yes Yes
Q.53 Distinguish between bonus issue and rights issue
A. BONUS ISSUE RIGHTS ISSUE

(a) Issue price Free Below market value
(b) Effects on holding percent No change No change if rights exercised
(c) How issued Out of reserves & profits for cash
M
Q.54 What are the advantages of bonus shares?
LA
SA
A. (a) Does not affect cash balance
(b) Can be sold in stock exchange if cash is needed by share holder
(c) Builds up confidence of investors and improves market price.
EM
DE
Q.55 Explain preliminary expenses and its accounting treatment

A
A. Preliminary expenses are expenses incurred in the formation of limited company including:
(a) Registration Fees
N
(b) Legal Expenses

(c) Printing costs of memorandum and articles of association, share certificates
(d) Other expenses incidental to the formation of a company
Preliminary expenses are capital expenditure and written off over a period of 3 to 5 years or set
off against share premium account.

Q.56 What is a debenture. List the advantages and disadvantages of debentures
A. A debenture is an acknowledgement of debts by a company, bearing a fixed rate of interest and

repayable within a specified period.
Advantages of debentures:
(a) Owners control is not affected
(b) Interest on debentures is tax deductible expense
(c) Increases return on equity when company earns higher profits.
Disadvantages
(a) Return in equity is decreased in the period of low profits
(b) Payment of interest and the principal amount must be paid when due.
Q.57 (a) What is a convertible debenture?

(b) Give the advantage of this type of finance.
A. (a) A convertible debenture provides an option to the holder to convert debentures into
ordinary shares at a specified time and at specified rate.
M
LA
(b) (i) Debenture interest is reduced thereby increasing the profits available for ordinary
shares
(ii) Increases shareholder’s equity and improves debt ratio
SA
(iii) Conversion rate may provide premium on ordinary shares.
EM
Q.58 Explain:
(a) the difference between authorized and issued share capital
DE
(b) the difference between a rights issue and a bonus issue
A. (a) the amount of capital to be issued as mentioned in the Memorandum and Articles of
A
association of a company, whereas the issued share capital is the part of the authorized
N
capital issued to shareholders.

(b) a rights issue is granted to existing share holders to acquire additional shares to maintain
their ownership proportion, at a specified price, whereas the bonus issue is the shares
issued to current shareholders on a prorate basis without payment of cash.
Q.59 Explain the means for creation of share premium account
A. Share premium refers to the amount received on shares in excess of their face value. It cannot be
distributed as cash dividends. However, it can be used for:
(a) Writing off preliminary expenses
(b) Issuing bonus shares
(c) Writing off capital losses

Q.60 Explain the purpose of financial statement analysis
A. The purpose of financial statement analysis is to help users make better decision, with a view to
evaluate a company’s:
(a) Past or current performance
(b) Current financial position, and
(c) Future performance and risk
Q.61 Explain the building blocks of financial statement analyses
A. (a) Liquidity and efficiency – ability meet short term obligations and efficiently generate
revenues
(b) Solvency – ability to generate future revenues and meet long – term obligations.
(c) Profitability – ability to provide financial rewards sufficient to attract and retain financing.
(c) Market prospects – ability to generate positive market expectations.
Q.62 Explain the term ratio analysis
M
A. Ratio analysis is the measurement of key relations between financial statements items. Ratio
LA
provides clues to and symptoms of underlying conditions.
SA
Q.63 What are the limitations of ratio analysis?
A. (a) The companies adopt different accounting principles practice

EM
(b) Greater importance given to ratios assuming they are competed precisely
(c) Ratio are not based on current values
DE
(d) Ratios should not be used in isolation, hence the need for co-relation with other ratios.
A
Q.64 Give different reasons to account for the decline in the gross profit to sales ratio
N
A. (a) Decline in the volume of sales

(b) Decline in the sales price of the products
(c) Increase in purchase cost per unit
(d) Increase in manufacturing costs
(e) Sale of slow moving stocks at a lower price
(f) Pressure from competition resulting in price decline
(g) Improper quality of goods
(h) Wastage losses due to improper workmanship.
Q.65 What three factors influence the evaluation of a company’s current ratio?
A. (a) Type of business

(b) Composition of current assets
(c) Rate of assets turnover

Q.67 How does inventory turnover provide information about a company’s short – term liquidity
A. Inventory turnover enables to assess whether the management is doing a good job in controlling
the amount of inventory available. A low ratio indicates inefficient use of assets by holding more
inventory needed to support sales volume. A high ratio suggests low inventory that may result in
lost sales. A high ratio is preferable when inventory is adequate to meet demand.
Q.68 What does the number of days in receivables indicate?
A. It indicates how much time is likely to pass before the current amount of receivables is recovered
in cash and is important to evaluate company’s liquidity.
Q.69 Explain
(i) Possible uses of ratios
(ii) Possible problems when using ratios
A. (i) Uses of ratios

(a) To assess financial performance and financial position of a business
M
(b) To analyse trends over different periods
(c) To compare performance with similar companies
(d)
LA
To assess reliability of financial performance
SA
(ii) Problems of using ratios
(a) No standardized formula for computing ratios
(b) Application of accounting principles and practices are not similar
EM
(c) Interpreting selected ratios may give misleading information and results
(d) Ratios are not based an current values
DE
Q.70 Explain liquidity and efficiency

A
A. Liquidity refers to the availability of resources to meet short – term cash requirements. It is
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affected by the timing of cash inflows and outflows as well as the prospects for future
performance. Analysis for liquidity is aimed at company’s funding requirement.
Efficiency refers to how productive a company is in using its assets. It is usually measured relative
to how much revenue is generated from a certain level of assets.
Q.71 Explain the importance of liquidity and efficiency.
A. Failure to meet current obligations suggests that the continued existence of a company is doubtful.
A lack of liquidity means lower profitability and fewer opportunities and may suggest loss of
owner control or Investment.
Inefficient use of assets can cause liquidity problems.

Q.72 Why is working capital given special attention in ratio analysis?
A. A company needs adequate working capital

(a) to meet current obligations,
(b) to carry sufficient inventories, and
(c) to take advantage of cash discounts
A company that runs low on working capital is less likely to meet current obligations or to
continue operations.
When evaluating a company’s working capital, we must look not only to the amount of working
capital but also at their ratio. A high current ratio suggests a strong liquidity position and an
ability to meet current obligations. An excessively high current ratio means that the investment in
current assets is not an efficient use of funds because current assets normally generate a low
return on investment as compared to long – term assets.
Q.73 What are the disadvantages of insufficient working capital?
A. (a) Inability to take advantages of new opportunities or to adopt to changes

(b) Loss of trade and cash discounts
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(c) Loss of credit facilities to customers
(d) Loss of financial reputations
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(e) Reliance on excessive short – term borrowings
(f) Reluctance of lenders to provide finances
SA
(g) In ordinate delay may result in winding up of the company.
EM
Q.74 What are the disadvantages of reducing receivables and increasing payment period?
A. Receivable period reduction entails discount costs increasing payables period affects reputation of
DE
business and higher inventory prices.

A
N

Q.75 Distinguish between financial accounting and marginal accounting.
A.
Financial Accounting Marginal Accounting
1 Users and decision investors, creditors and Managers and other
makers other external users internal users.
2 Purpose of information Assist external users in Assists managers in

investment, credit and making planning and
other decision control decisions
3 Flexibility in practice Structured and controlled Flexible no IFRS

by IFRS constraints
4 Timeliness of information Often available after audit Available quickly
5 Time dimension Focus on historical Includes predictions of

information conditions & events
6 Focus of information Entire organization Emphasis on project,

process & sub-divisions
M
7 Nature of information Monetary Both monetary and
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Non monetary
SA
Q.76 List the different cost classifications
EM
A. Costs can be classified on the basis of than
(a) Behavior
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(b) Traceability
(c) Controllability
(d) Revalance
A
(e) Function
N
Q.77 Explain cost classifications
A. (a) Behavior - Fixed and variable

(b) Traceability - Direct and Indirect
(c) Controllability - Controllable and non – controllable
(d) Relevance - Sunk, out of pocket, opportunity costs
(e) Function - Product and period costs
Q.78 What is a cost object?
A. A cost object is a product, process, department or customer to which costs are assigned or
charged.

Q.79 Define direct and indirect costs
A. Direct costs can be traced to a cost object while indirect costs can not be traced to a cost object
Q.80 Explain (i) Cost centre (ii) Cost unit
A. (i) Cost centre – a department or a division of an organization to which costs can be charged
(ii) Cost unit – a unit of quantity of product or service or time in relation to which costs may be
ascertained or expressed.
Q.81 Direct costs are not always variable costs and conversely fixed costs are not always indirect
costs
Give examples of:

(a) A direct cost which is a fixed cost
(b) A variable cost which is a direct cost
(c) A fixed cost which is an indirect cost
M
(d) An indirect cost which is a variable cost
A. (i)
(ii)
Salaries of maintenance department
Cost of raw materials LA
SA
(iii) Depreciation
(iv) Cost of power consumed based on kilowatt hours.
EM
Q.82 Explain the following cost classification

DE
(a) Fixed costs

(b) Variable costs
(c) Opportunity costs
A
N
A. (a) Fixed costs are costs that do not change with the change in the volume of activity within a
relevant range
(b) Variable costs are costs that change in proportion to the change in volume of activity
(c) Opportunity costs represents benefits lost by choosing specific action from two or more
Alternatives
Q.83 List and explain the purpose of product costing
A. A product costing system accumulates the costs of a production activity. The purposes are:
(a) Compute cost of production of each product

(b) Valuation of inventories to compute the cost of sales
(c) Assist management in planning and decision making for product pricing, product mix and
quantities to be produced
(d) Control or reduce production costs.

Q.84 What are manufacturing overheads?
A. Manufacturing overheads are the total costs of indirect materials, indirect labour and indirect
expenses.
Q.85 Why is manufacturing overhead applied to products?
A. It is necessary to assign manufacturing overheads to product to determine product costs.
Q.86 Explain the benefits of using a predetermined overhead rate instead of an actual overhead
rate?
A. Applying actual overheads will provide very accurate overhead application but the information
will not be useful for planning, control and decision making due to delay in accumulating
information.
M
Q.87 List the steps involved in calculating pre – determined overhead rate:
A. (a)
(b)
Collecting all the overheads
Allotting overheads to cost centres LA
SA
(c) Apportioning service cost centres
(d) Apportioning service cost centres costs to productions departments
(c) Determining overhead absorption rates.
EM
DE
Q.88 List the bases of apportionment of overhead expenses
A. BASES OVERHEAD COSTS

A
1 Area Rent, Building depreciation and building insurance

N
2 Number of employees Canteen, Personnel office, safety welfare, administration

3 Book value or cost Depreciation
4 Weight of materials Materials handling, store – keeping
5 Kilowatt hours Power
6 Volume (Cubic meters) Heating
Q.89 What is the cause of over-applied or under-applied overhead?
A. Over-applied overheads results from actual overheads being less than overheads applied whereas
under applied overheads results when actual overheads are more than overheads applied. The
main cause is estimating overheads and activity used to compute the overhead absorptions rate.

Q.90 How would you dispose of over or under applied overheads?
A. Disposal of over or under applied overheads may be:

(a) transfer to cost of production
(b) transfer to profit and loss account
(c) Prorate between work in progress and finished goods
Q.91 What is a blanket overhead rate?
A. A blanket overhead rate is a single overhead rate computed for the entire factory.
Q.92 What are the main absorption rates and which are the most satisfactory?
A. (a) Units of output – Best of all rates but can be used only if the costs units in the cost centres
are identical.
(b) Direct labour hour – Used where the production is labour intensive
(c) Machine hour – Used where the production is machine intensive
M
(d) Percentage of direct labour cost – Identical to direct labour hour if there is only one rate of
pay in the cost centre.
LA
SA
(e) Percentage of direct materials cost – Not satisfactory since overheads are not related to
cost of direct materials.
(f) Percentage of prime cost - Not suitable due to absence of relationship with overheads.
EM
Acceptable in construction contracts.

DE
Q.93 Explain the reasons for and against apportionment of fixed overheads costs?
A
A. FOR
(a) Compliance with IAS-2 – Inventories
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(b) Assigns fixed costs to production

(c) Assists in product pricing
AGAINST
(a) Arbitrary bases of apportionment
(b) Absorption may be inaccurate
(c) A product with higher direct costs may be assigned a lower share of overheads.
Q.94 Define and explain the difference between absorption costing and marginal costing
A. Absorption costing or full costing is a method of product costing in which both fixed and variable
manufacturing overheads are included in the product costs where as in marginal costing only
variable overheads are included in the product costs.

Q.95 Evaluate absorption and marginal costing methods
A. ABSORPTION MARGINAL
Pricing decisions Fixed overheads are Fixed overheads are
necessary for pricing, period costs. Contribution
Exclusion will understate gives a better rating for
Cost of product pricing
Definition of assets Valued at cost, with future Fixed costs have no
service potential to greater future service potential,
sales revenue since they will be incurred
in the future.
Q.96 List the advantages of absorption costing and marginal costing
A. Absorption costing
(a) Acceptable method of external reporting
(b) Fixed costs are related to production
(c) Avoids stock valuation problems.
M
(d) Essential for product pricing
LA
Marginal costing
(a) Fixed costs are period costs hence not related to production
SA
(b) Over/(under) absorption cannot arise
(c) Avoid false sense of security during period of low activity
(d) Contribution is a more correct method to measure the effect of making and selling product
EM
(e) Simpler and unambiguous

(f) Enables achieving planned profit
(g) Intelligent pricing when using any relevant key factor
DE
A
Q.97 What is the effect on profits under absorption and marginal costing when inventory levels
change during a period?
N
A. CHANGE ABSORPTION MARGINAL

Increase Higher Lower
Decrease Lower Higher
Q.98 What is the cost accounting system
A. It is a part of financial accounting system that accumulates cost for use in managerial and financial
accounting

Q.99 What is decision making and list steps of decision making process?
A. Management faces a broad range of decisions including production, making financial and other
decisions such as purchase of equipment, mix of products, pricing of products and services,
methods of productions etc.
Steps in decision making process
(a) Clarify the problem e.g. accept or reject a special order at below normal selling price
(b) Specific the criteria e.g. profit maximization, increase market share
(c) Identify alternatives e.g. repairing or replacing a broken down machine
(d) Develop decision model based on the above three
(e) Collect the data pertinent to decision
(f) Select an alternative based on decision model and pertinent data.
Q.100 Enumerate decision making problem
A. (a) Accept or reject a special offer

(b) Make or buy a product
(c) Add or drop a product or department
(d) Efficient utilization of limited resources.
M
LA
Q.101 Distinguish between qualitative and quantitative decision analysis
SA
A. Qualitative analysis consider the effects of decision on employees, customers and general public,
whereas quantitative analysis consider monetary objective such as cost saving. Analysis should
also consider matters such as effect on employees by dropping a product or department.
EM
Q.102 Explain
DE
(a) Relevant cost

(b) Opportunity cost
A
(c) Sunk cost

N
(d) Committed cost
A. (a) A relevant cost is a cost to be incurred in the future and relates to decision problem
(b) Opportunity cost is value of benefit sacrificed in favour of another alternative
(c) Sunk cost is a cost incurred in the past and cannot be changed by current or future
decision.
(d) Committed cost is the cost incurred in the past but to be settled in the future for a decision
that may or not be maid
Q.103 Is the book value of inventory on hand a relevant cost? Why?
A. If the inventory on hand is obsolete and cannot be used, it is irrelevant. However, if the obsolete
inventory can be modified by incurring additional costs and be made useful or purchase a new
inventory, than it becomes relevant in so far as it generates positive cash flow, as it also yields cost
savings.

Q.104 What is cost – volume profit analysis?
A. A study of relationship between sales volume, sales revenue, expenses and profit
Q.105 What is break – even point?
A. The volume of activity at which the revenues and expenses are equal.
Q.106 What does the margin of safety mean?
A. Margin of safety is the difference between actual or budgeted sales and break even sales
Q.107 List the most important assumptions of CVP analysis
A. (a) Behavior of sales revenue is linear

(b) Expenses can be categorized as fixed, variable or semi variable
M
(c) Efficiency and productivity remains constant
(d) Sales mix remains constant
LA
(e) Inventory levels are the same
SA
Q.108 What are limited resources?
EM
A. Limited resources are those which limit the profitability such as floor space, machine time, labour
hours or new materials.
DE
Q.109 How would the management make the best use of limited resources?
A
A. (a) Identify limited resources

N
(b) Compute contribution per limited resource

(c) Rank products in terms of descending order of contribution per limited resource
(d) Plan production utilizing the limited resource.

THEORY FROM
PAST PAPER
M
LA
SA
WITH ANSWERS
EM
DE
(2002-2020)
A
N

NOVEMBER 2002
Q1 Describe three different types of preference share?
A: cumulative wham dividends, if not paid one year, will be added to the following year's livid.
Non-cumulative, where dividends, if not paid one year, are lost.
Redeemable, which may be bought back by the Company.
Participating, which receive a share of the profits
Q2. State the major differences between ordinary shares, preference shares and debentures.
A: Ordinary shares Voting rights

Share of profits
No fixed dividend
Part owners of business
Own reserves
etc.
Preference shares No voting rights (usually)

Fixed dividend
Part owners of business
Don’t own reserves
M
etc.
Debentures No voting rights

Fixed interest
LA
SA
Lenders to business
etc.
EM
DE
A
N

JUNE 2003
Q1. State six shortcoming or dangers in using ratio analysis.
A: Shortcomings and dangers of ratio analysis:

(i) Requires a basis of comparison — one ratio on its own no use — must compare to: e.g. last year's
figures, other companies' figures: etc.
(ii) Ratios need to be analysed for successful conclusion
(iii) Each industry has different standards to be adhered to
(iv) Outside influences can affect ratios - e.g. national/world economy, trade cycles
(v) Care must be taken to compare like with like, as definitions of terminology may vary
(vi) Easy for the inexpert to arrive at false conclusion
(vii) Different accounting policies between companies may render ratios incompatible
(viii) Ratios can over-simplify a situation
(ix) Prepared using historical costs, so can be out of date
(x) Need more than ratios to get an accurate view of the company etc.
JUNE 2004
Q1. Comment briefly on the advantages and disadvantages of using ratios.
M
A: Advantages Show trends
LA
Help compare with (i) earlier years
(ii) other business
Help decision making
SA
Show particular problem areas
Comparisons may be difficult due to

EM
Disadvantages (i) changes in the economy

(ii) changes in technology
(iii) changes in Staff
DE
(iv) changes in company policy

Reasons for changes are not always obvious
Accuracy of information may be a problem
A
Historic cost used – takes no account of inflation

N

NOVEMBER 2004
Q1. State five advantages or disadvantages of limited liability companies over sole traders or partnerships.
A:
(i) If the company goes out of business the shareholders cannot be held personally liable for the
company debts.
(ii) The death or retiral of a director of a limited company need not affect the business.
However,
(iii) Annual accounts must be professionally audited.

(iv) Companies must file annual return and accounts with the Registrar of Companies.
(v) There is much more "red tape" than with sole traders or partnerships.
(vi) Each shareholder must be sent a copy of the company's annual audited accounts.
Q2. Give three reasons for keeping control accounts.
A: Minimises possibility of fraud

Makes fraud easier to find
M
Minimises possibility of errors
Makes errors easier to find
LA
Checking easier as sectional ledgers created
Control accounts not handled by clerks who make original entries
Total debtors and creditors figures readily available
SA
Q3. State two assumptions which may be made when using break-even analysis and state one limitation of each
assumption. Your answer should take the form of the example given below.
EM
A: Assumption Limitation
FC remains fixed Rent etc. may increase
DE
VC always in same proportion to sales Economies of scale may occur

SP is constant Competition may force lower prices
Sales mix does not change Demand forces changes
A
B/E based on one product Few produce only one product

N
Cost mix constant Labour intensive becomes capital intensive

Costs either fixed or variable Some are semi-variable
Technology/efficiency does not change Firms constantly aim to improve
No outside influences We live in a real world
etc.

June 2005
Q1. Explain the function of an Appropriation Account in:
A: In a partnership: the appropriation account shows how the net profit of the business is slit among the
partners. Taking into account interest on capital, interest on drawings, and salaries.
There is no profit retained at the year end.
In a limited company, the appropriation account shows how the net profit of the business is distributed
among the shareholders but also into reserves such as general reserve and retained profits. Frequently
profits are brought forward from last year and carried forward to next year.
NOVEMBER 2005
Q1. Explain share premium and state how it may be used.
A: Share premium is the amount above the face value of a share at which it may be issued. Example: a $1
share may be issued at $1.05. The $1 is credited to shares capital account whilst the $0.05 is credited to the
share premium account. It is a capital reserve and may be used as follows:
(i) To pay up unissued shares as fully paid bonus shares.
(ii) To write off preliminary expenses on formation of the company.
(iii) To write off expenses incurred in share issues.
M
(iv) To provide any premium payable on redemption of shares or debentures
LA Up to 4 points
SA
EM
DE
A
N

JUNE 2006
Q1. Explain the uses of these two ratios, using Peter Jordan plc as an example.
A: For financial security it is important that current assets are sufficient to cover
current liabilities – this is just the case here. However, the liquidity ratio
suggests that current assets excluding stock, which can be illiquid, should cover
current liabilities – not the case here, and Peter Jordan may have problems as
debts become due.
Q2. State three reasons why, for most clubs, a Receipts and Payments Account is not Use
always a satisfactory record of the club’s activities.
A: The receipts and payments account shows no records of assets other than the bank balance and any assets
bought or sold during the year. This is unsatisfactory as a club may have assets worth thousands of dollars.
No depreciation of fixed assets is provided for.
No record of liabilities other than possibly bank balance, so no way of telling if club is in debt, other than by
asking treasurer.
M
No knowledge of surplus or deficit for year which would help in determining subscriptions for year etc.
NOVEMBER 2006 LA
SA
Q1. Discuss the treatment of Goodwill in partnership accounts, with particular reference to Use
retiring and incoming partners.
EM
A: Goodwill is taken into account on the retiral of a partner, who must be credited with his share of Goodwill.
An incoming partner must compensate the existing partners for his acquired share of Goodwill. In this
DE
situation Goodwill may be raised in the books of account as an asset, but is considered prudent to adjust
individual capital accounts in order to compensate each partner when partners retire from or join a
partnership etc.
A
Q2. State and explain one advantage and one disadvantage of using ratio analysis as a
N
means of evaluating performance.
A: Quick method of comparing either two businesses of the same type or two or more years within one
business etc.
Too simplistic – eg assumes in times of inflation that income and costs rise at the same rate etc.
1 per point + 1 for expansion to maximum.
Q3. Define and explain margin of safety.
A: Margin of safety is the distance between break-even point and expected level of activity
It shows the amount by which actual activity can fall short of expected activity before a loss is incurred.
It is a measure of risk.

Q4. State four assumptions made when using break-even charts.
A: (i) Fixed costs remain fixed for all levels of activity.

(ii) Unit variable costs remain constant.
(iii) Unit selling price remains constant.
(iv) All costs can be separated into fixed or variable etc.
JUNE 2007
Q1. The table at the beginning of the question shows that both the Household and the. Business models appear
to be making a loss. Explain why Fernando should not cease production of these two types of refrigerator.
A: Under absorption costing fixed costs are allocated amongst

Departments but the total fixed costs will not alter if a
Department is closed – for example, the rent of a building
Remains the same even if part of it is unused. If two
Departments were closed then the remaining one would have
To take on board their fixed costs, in this case leading to an
Overall loss of $44 100. As long as a department has a
Positive contribution and the business is making an overall
M
Profit then the department should not be closed.
NOVEMBER 2007 LA
SA
Q1. Identify two methods of raising extra finance and state one advantage and one disadvantage of each
method.
EM
A:
(i) Each partner brings in more cash. Control retained, but assumes partners have more cash to invest.
DE
(ii) Bring in a new general partner. Eases workload but less share of profits.
(iii) Form private limited company. Smaller share of profit and possibly no easing of workload.
(iv) Long-term loan. Fixed interest, allows forward planning but must be paid. Etc.
A
One mark for method, one for each valid point to maximum of three per suggestion.
N
Q2. Explain briefly one use of accounting ratios.
A: Ratios are used for comparison (a) with other firms of a similar type,
(b) with industry standard and (c) with previous years' performance. Etc.
Q3. State the reason for using different methods of calculating the overhead recovery rate in (b).
A: Assembly department is labour intensive

Finishing department is capital intensive (accept machine intensive)

JUNE 2008
Q1. State two reasons for calculating ratios.
State four user groups who might be interested in or make use of accounting ratios.
A: Ratios are used to compare a firm's performance with another year, or with another
business of the same type. [2]
Interested parties might be:

Bank manager Directors Competitors
Customs and excise Creditors Investors/Shareholders
Employees Debtors NOT Stakeholders
The media (Newspapers, TV etc)
Allow ONE group only of members of the firm
Etc. One mark each to El maximum of [4]
Q2. State three reasons for keeping control accounts.
A: Less chance of fraud

Less chance of errors
Fraud or errors easier to find
Checking easier
M
Total debtors and creditors figures available
Etc. 1 mark each to maximum
Q3.
LA
State which option should be accepted, giving one advantage and one disadvantage,
SA
of that option.
A: Introduce an evening shift (or whichever is most cost-effective) (1)of

EM
Advantage - no need to spend so much money on training in future years. (1)

Disadvantage - work involved in setting this up. (1) [3]
Or any other reasonable advantage/disadvantage.
DE
If candidate suggests answer not totally based on cost/profit, accept provided good reason given — e.g.
(Advantage) buying in is simplest solution but (Disadvantage) can't guarantee quality.
The own figure mark cannot be given unless all three options are attempted.
A
N

NOVEMBER 2008
Q1. Explain, briefly, why partnerships may keep both capital accounts and current accounts.
A: The capital account shows the long-term resources invested in the partnership, and there is usually little
movement of funds here. The current account shows the profits earned by each partner and the movement
of funds such as drawings, interest on drawings, share of residue, interest on capital and partnership
salaries.
One mark for each relevant point to a maximum of 4. [4]
JUNE 2009
Q1. Explain the difference between mark-up and margin.
A: Mark-up is the percentage added to cost to find selling price. 1

Margin is the percentage deducted from the selling price to find the cost price. 1
Q2. Discuss, briefly, three of these factors.
M
A: 1 Are extra workers available?
LA
2 Can new workers be trained?
3 Is it worth training workers for what might be a one-off situation?
SA
4 There may be additional costs of transport and administration to be considered.
5 Additional maintenance of equipment?
6 Can quality be maintained?
Etc.
EM
Any three answers award 2 marks each to a maximum

DE
A
N

NOV 2009
Q1. State three causes of depreciation.
A: 1 Wear and tear

2 Obsolescence
3 Time
4 Depletion
No marks for methods. Any three correct for (3) [3]
Q2. Give an example of a non-current (fixed) asset for which each cause given in (b)(i) above might be
appropriate.
A: 1 Machinery, vehicles
2 Computers, any technological equipment
3 Lease
4 Quarry, oil well etc.
Any three correct for (3) [3]
Q3. State four factors which must be taken into account when deciding how much depreciation to charge.
M
A: 1 Cost or Market value
LA
2 Useful life
3 Residual value at end of useful life
4 Expected length of ownership
SA
5 Rate of usage
6 Method of depreciation
7 Type of asset
EM
8 Machine hours
Any correct 4 for (4) [4]
DE
Q4. Define the break-even point.
A: The break-even point is the level of activity at which the business makes neither a profit nor a loss – i.e.
A
total contribution = total fixed costs. (accept a relevant formula)

N
Q5. Define the margin of safety.
A: The margin of safety is the distance between the break-even point and the expected level of activity. It is
the amount by which actual activity can fall short of expected activity before a loss is incurred.

JUNE 2010
Q1. State three causes of depreciation.
A: 1 Wear and tear

2 Obsolescence
3 Time
4 Depletion
No marks for methods. Any three correct for (3)
Q2. Give an example of a non-current (fixed) asset for which each cause given in (b) (i) above might be
appropriate.
A: 1 Machinery, vehicles
2 Computers, any technological equipment
3 Lease
4 Quarry, oil well etc.
Any three correct for (3)
Q3. State four factors which must be taken into account when deciding how much depreciation to charge.
A: 1 Cost or Market value
M
2 Useful life
3 Residual value at end of useful life
4 Expected length of ownership
5 Rate of usage
LA
SA
6 Method of depreciation
7 Types of asset
9 Machine hours
EM
Any correct 4 for (4)
Q4. Stale three advantage s of keeping control accounts.

DE
A: Minimize fraud/make fraud easier to find.

Minimize time taken to find errors/make errors easier to find.
A
Figures for total creditors/debtors easily available.

Sectional ledgers make checking easier.
N
Control accounts not handled by sales/purchases ledger clerk.
Q5. Stale four assumptions made when using break-even analysis.
A: Unit selling price remains constant.

Unit variable costs remain constant.
Sales mix remains constant.
Total fixed costs do not change.
There are no semi-variable costs.
All production is sold.
Any four correct for 1 mark each.

NOVEMBER 2010
Q1. Suggest three additional ways in which the club could try to minimize of eliminate the deficit in future
years.
A: Increase membership
Increase subscriptions
Encourage life subscriptions
Social events
Or other relevant suggestions
(3 x 2 marks for analysis) (1 plus 1 for development)
Q2. State three advantages for James and Gemma of trading as a partnership rather than as sole traders.
A: Increased skills
Additional capital
Spread risk
Holiday / sickness cover
Shared workload
(1 each maximum of 3)
M
LA
SA
EM
DE
A
N

June 2011
Q1. Using the profitability ratios (i) – (v) compare the performance of the Northern and Southern Division of
Blackford Industries and explain the significance of each ratio.
A: Southern Northern
1 Mark-up 40% 46.34%
2 Gross profit percentage 28.57% 31.67%
3 Expenses to sales 20% 25%
4 Net Profit percentage 8.57% 6.67%
5 Return an capital employed 18.00% 14.54%
One mark each for better or worse (poorer) than — maximum 5 marks
1. Northern has a better mark up.

2. Consequently a better grass profit percentage.
3. Expenses to sales is worse for Northern.
4. Net profit percentage for Northern is poorer.
5. Northern's ROCE is poorer.
Must be clear that one is better than the other — do not accept higher, lower, greater, lesser, more, less.
M
Some candidates have treated the comparisons as if they were for the same business over 2 years — do not
accept.
One mark each for each valid comment— maximum 5

LA
SA
Sales price is higher — higher mark up.
EM
Administration and advertising costs are higher to sell a higher priced product.
Northern has a better GP percentage but the higher expenses incurred pull down the net profit advantage
DE
below Southern and contribute to a poorer ROCE.
The ROCE is poorer because Northern may have more non-current assets employed.
A
Any valid comment is acceptable provided it justifies the "better or worse' statement. A maximum of 1
N
mark for each statement and 1 mark for an attached comment. [10]
Q2. Explain two differences between cost and net realisble value.
A: The cost comprises the cost of purchase plus other costs incurred in bringing the inventory to its present
location and condition.
Net reaslisable value is the estimated selling price less estimated selling costs
Q3. Discuss the accounting treatment of the damaged inventory in item 1.
A: Inventory should never be valued at more than cost.

Valuing stock at cost observes the principles of realization, matching and prudence.

Q4. State four ways in which Klingsman could improve his working capital.
A: Injection of cash/additional capital

Long term loan
Sales of surplus non-current assets
Reduction in drawings
Factor debt
Effective inventory management to reduce damage to inventory
Q5. Explain why the liquid ratio (acid test) is a more reliable indicator of liquidity than the current ratio.
A: Inventory is regarded as the least liquid asset

A buyer has to be found
Some goods may prove to be unsaleable
The quick ratio shows if the business would have any surplus liquid funds if all the current liabilities were
paid immediately
M
LA
SA
EM
DE
A
N

November 2011
Q1. Calculate the effect of this change on the provision for doubtful debts.
A: ($37 100 x 4%) = $1484 - $742 = 742
Q2. Explain how this change would affect the company’s income statement and statement of financial position.
A: Reduce net profit for the year (1)

Reduce trade receivables/current assets/balance sheet total (1)
Q3. Explain why this change might be necessary.
A: prudence concept (1) Current provision $742 is 2% of the debtors (1) Actual bad debts are $1500 (1) This
may suggest the provision is insufficient. (1)
Q4. State three factors that the directors should consider when creating a provision for doubtful debts.
A: Past experience
Specific knowledge about a customer
The state of the economy
Consistency concept
M
Industry average
Length of time
Size of debtors
Comparing with previous years or with competitors.
LA
SA
Q5. State two limitations of break-even analysis.
EM
A: Assumes:
Everything produced is sold.
Selling price is linear. Variable costs are linear.
DE
Fixed costs remain unchanged.

A single product firm.
Product mix remains constant.
A
No semi variable costs. No external factors.

Is based on estimates.
N
Q6. Explain two advantages of using a sales ledger control account.
A: Provides an independent check on the postings in the sales ledger.

Errors in the ledger can be located quickly.
Segregation of duties helps in the prevention of fraud because members of staff who complete the control
accounts are not involved in completing the sales ledger.
Totals of trade receivables (debtors) from control accounts can be determined quickly and used in
preparation of the trial balance and final accounts.

Q7. Advise which business, if any, she should purchase on the basis of all of the information provided. Justify
your answer.
A: Paradis Foods
1. The return on capital employed is high at 15%. It is higher than S Turner is currently obtaining.
2. The current ratio is good and possibly too high with excess stock. The level of the current ratio is well in
excess of S Turners'.
3. The liquid ratio seems low for a general trading business.
Jones Wholesaler
4. The return on capital employed is low at 6%. It is much lower than S Turner is currently obtaining.
5. The current ratio is good and within the range of 1.5 and 2.0 that we would expect to see.
6. The liquid ratio is high at 1.4 : 1 indicating high debtors or cash.
Q8. State three fixed costs a business typically incurs.
Depreciation
Admin costs Rent
Insurance Advertising/marketing
Rates Indirect wages
Loan interest
M
Or other suitable alternative.
Q9. Explain what is meant by the term 'stepped costs'.

LA
SA
A: Stepped costs occur when a business increases capacity. As a result of expansion overheads such as
insurance, rent and rates and bank interest payments are likely to increase. On a break even chart these
increases would result in a horizontal fixed cost line moving to a higher level beyond the output at which
EM
increased capacity occurs.
Q10. Increasing production will allow the firm to potentially earn more profit. However, it could pose significant
DE
risks to the business.
A: If budgeted data is reasonably accurate and the budgeted level of activity could be maintained in future
A
years then the business would generate more profits ($225 000 v 5195000) by increasing capacity.
N
The margin of safety will also be higher in unit terms (15 000 v 13 000) but lower in percentage terms
(37.5% v 52%).
The business will make no profit following expansion if sales return to the previous level as the new
break-even is the same as the previous sales / output.
The capital cost of $3 000 000 is likely to result in interest payments which would have to be met
irrespective of profit performance.
Q11. Explain why businesses provide for depreciation on their non-current assets.
A: Depreciation is a bookkeeping entry. Debit profit and loss. Credit provision for depreciation. It is not a
movement of cash from the business.
Depreciation is an application of the matching/accruals concept. Depreciation is matched with the benefit
which the asset provides over each accounting period.
The provision for depreciation annually is intended to spread the cost over the useful life of the asset. This
is in accordance with the accruals/prudence concept.

JUNE 2012
Q1. Suggest two reasons for the change in the percentage of gross profit to sales.
A: Higher sales price with cost of sales staying same or rising less than sales price.
Lower cost of sales with sales price staying same or falling less than cost of sales.
More efficient use of stock with less spoilage, wastage and theft.
NOTE: increase in sales volume is incorrect.
Q2. Suggest two reasons for the change in the percentage of net profit to sales.
A: Lower overhead costs such as rent, rates, heat and light.
Increased efficiency (lower costs)
Higher gross profit margin with overheads remaining the same or less than percentage increase in GP to
sales.
M
Q3. State three examples of how the prudence concept has been applied in the preparation of Bart's
LA
manufacturing account and income statement.
A: Examples
SA
1. Value of opening and closing inventory at lower of cost or net realisable value.
EM
2. Depreciation of non-current assets charges the estimated amount of the asset consumed against
profit.
DE
3. Any other valid point, provision for depreciation, accruals/prepayments.
One mark per valid point.

A
Not provision for unrealised profit — must apply to Bart's accounts. [3]
N
Q4. Outline four advantages to Mhairi of forming a partnership with Alden.
A: The advantages are:
More capital is available;

Different partners may have different skills that are beneficial to the business;
The management of the business can be shared;
The business is more efficient
There are more ideas
The responsibility is shared, so less stress
Losses can be shared;
Liquidity is improved.

Q5. Explain the problems associated with using predetermined overhead absorption
rates in calculating the price of a product.
A: Use of estimated data which could be inaccurate, leading to under/over absorption.
Over—absorption, too much overhead charged to production, overpriced and uncompetitive, fall in
demand and subsequent loss of revenue/reduction in profit.
Under—absorption, insufficient overhead charged to production, lower price to customer, costs not
covered and subsequent reduction in profits.
Q6. Explain why it is appropriate to use the reducing (diminishing) balance method for
motor vehicles.
A: The reducing balance method is suited to non-current assets such as motor vehicles that have a heavier fall
in value in the early years of their life. Repair and maintenance costs increase of the life of the asset and
then offset the decreasing depreciation charge.
Q7. Discuss the problems associated with using predetermined overhead absorption rates.
A: Management decision-making relies heavily on the provision of accurate information. Use of estimated data
which could be inaccurate can lead to under 1 over absorption of overhead.
M
LA
Q8. State the effect on profits if the factory does not operate at full capacity.
A: If the factory actual activity is less than the budgeted activity it faces under absorption of overhead. Not
SA
enough overhead is charged to each unit of production — this may affect pricing decisions which may
influence profitability.
EM
If the factory actual activity is higher than the budgeted activity it faces over absorption of overhead — too
much overhead may be charged — this may affect pricing decisions which may influence demand and
revenue for the product.
DE
A
N

NOVEMBER 2012
Q1. Define the prudence concept. State three examples of how this has been applied in the financial statements.
A: Assets should not be overstated (1)

Liabilities should be understated (1)
Revenue should not be bought into the financial statements until realised (1)
(Up to 3 points for the definition)
Inventory (1)
Provision for doubtful debts (1)
Depreciation (1)
Q2. The partners are now considering changing their business from a partnership to a limited company.
Explain to the partners the meaning of the term 'limited
A: Liability for the debts of the business (1) is limited (1) to the amount of capital invested
by each partner (1)
Q3. Identify three factors which AB G Ltd should consider when deciding whether to accept this additional
order for Gamma.
M
A: Customers paying full price will be annoyed to discover others paying less. Possible business will be taken
elsewhere.
LA
SA
Reaction of competitors needs consideration — price wars.
Will acceptance of the offer take up capacity that could be better used for future full price business?
EM
An over reliance on special orders is not a long term solution and the company should put priority on
achieving full price orders.
DE
A
N

JUNE 2013
Q1. Explain how the following will be affected if the company makes a loss in the year:
A: (i) Dividend payable for cumulative preference shares

(i) The shareholders will have their dividend deferred (1) to the next year or when there is a
Profit. (1) [2]
(ii) Dividend payable for ordinary shares.

(ii) The directors need not declare a dividend.
(iii) Dividend payable on non-cumulative preference shares.

(iii) The dividend will not be paid (1) or deferred (1).
(iv) Interest payable on debentures.

(iv) The interest will still have to be paid.
Q2. State one advantage and one disadvantage of using the following methods of inventory valuation:
(i) FIFO
(ii) AVCO.
A: (i) Advantages
M
 Relatively easy to calculate.
LA
 Realistic— Inventory is bought and sold in order.
 Inventory values are based on actual prices paid for Inventory.
 Closing Inventory valuation is based on most recent prices paid.
SA
 Acceptable under IA.
Disadvantages
EM
 The price at which Inventory is issued to production is likely to be out of date.

 When the prices of Inventory rise, the FIFO method values the Inventory at the highest (latest prices).
This would reduce cost of sales and therefore increase profit. This would mean more tax would have to
DE
be paid. (2 x 1 marks)
[2]
A
(ii) Advantages
N
 It is logical since all identical units of Inventory are given an equal value.
 Fluctuations in the purchase price of Inventory are evened out so the impact on costs and profit is
reduced.
 It conforms to the IA.
Disadvantages
 The average cost has to be recalculated every time the price of purchased Inventory changes.
 The average cost might not be the same as the actual cost paid.
 If Inventory prices are rising rapidly, the average cost will be lower than the replacement price.

NOVEMBER 2013
Q1. The directors wish to raise funds to expand the business. State two sources of finance they could use.
A: Ordinary shares; Preference shares; Debentures; Long term loans; Factoring; Disposal of non-current
assets no longer used. (1 mark each for any two)
Q2. State the advantages and disadvantages to the company of the two sources of finance you have chosen.
Ordinary Shares: Advantages: They company does not have to pay a dividend if profits are low. Dividends
vary with profits. Disadvantages: Ordinary shareholders have a vote at annual general meetings. In a
private company they can change the balance of control.
Preference Shares: Advantages: The shareholders have no right to vote at AGM. The dividends are fixed.
Disadvantages: Low or no profits, dividends may have to be paid or provided.
Debentures/Long term loans: Advantages: Fixed rates of interest, repayment date

known. Disadvantages: Interest needs to be paid even if no profit made, security may be
required by the lender. (2 x 3 marks to max 6) [6]
Q3. Explain three reasons why a business cannot normally use the latest selling price of its products to value
the inventory.
M
A: Inventory must be valued at the lower of cost (1) and net realisable value (1).
LA
The accounting concept of prudence (1) must be applied when valuing inventory. Prudence states that
profits and asset values must not be overstated (1).
SA
The use of the selling price would overstate profit for the year (1) and the current asset/net asset value of
the business would be overstated (1).
EM
Q4. Explain the term goodwill.
A: Goodwill is an intangible asset (1). It arises from the location (1) reputation (1) and customer
DE
loyalty (1). It represents the value of the business in excess of (1) the book value of its net
assets (1).
A
N

Q5. Identify three possible users of accounting ratios other than the directors of the company. State what
information the users would obtain from the ratios.
A: Shareholders and potential shareholders (1)

Interested in: sales and profit trends (1) future performance (1) profit available for distribution (1) yield
on investment (1) ease of payment of dividends from profits (1) management of funds (1)
Creditors (1)
Interested in: working capital (1) acid test (1) profitability (1) order of claim in event of liquidation (1)
Lenders (1)
Interested in: purpose for which loan needed (1) security of loans (1) profit trends (interest) (1) current
ratio (1) book values of non-current assets compared to saleable value (1) order of claim in event of
liquidation (1)
Government bodies (1)

Interested in: wages (income tax) (1) profits (corporation tax) (1) VAT returns (1) forecasts of future
expansion (1)
Employees and Trade Unions (1)

Interested in: profits earned this year (1) potential and past profits (1) future prospects (1) dividends (1)
M
Marks awarded are one for each user to a maximum of 3 and a maximum of two for the information
LA
required by each of those users.
In (b), correct answers outside the AS syllabus will be accepted. Above answers are not exclusive.
SA
Q6. Explain what is meant by over and under absorption of overheads and how each will arise.
EM
A: Actual hours worked differs from forecast hours (1). When more hours are actually worked than forecast
this will result in an over absorption (1). When fewer hours are actually worked than forecast this will
result in under absorption (1).
DE
This means that production will be charged with more or less overheads (1). [4]
A
N

JUNE 2014
Q1. Explain the following concepts:
A: (i) Match ing (ii) Materiality
Q2. Explain the meaning of the term goodwill and suggest two reasons how it may arise.
A: Goodwill is an intangible non-current asset (1) which can arise due to a business's reputation, (1)
location, (1) staff quality (1)
It is the excess of the value of the business over the book value of the net assets (1) [5]
Q3. Explain how goodwill should be treated in the books of partnership.
A: As this is not purchased goodwill (1) it is not shown in the books of account (1) and must be written off
against the capital accounts (1) of the partners in their profit sharing ratios (1). [4]
Q4. Explain the purposes of the journal.
M
A: It is used to record the double entry (1) of non-routine transactions (1)
Q5.
LA
State two examples of transactions which would be recorded in the journal, other than the purchase of non-
SA
current assets on credit.
A: Award 1 mark per correct example:

EM
correction of errors, opening entries, writing off bad debts, sale of non-current assets, bad debt provision,
depreciation, transfers etc.
(maximum 2 marks) [2]
DE
Q6. State an accounting concept which is applied when depredation is provided.

A
Explain the possible reasons why the business is considering this change.
N
A: Award 1 mark (max) for a correct example; prudence, matching or consistency [1]
Straight line depreciation is easy to calculate (1) and therefore there is less chance of errors (1) whereas
reducing (diminishing) balance depreciation is more complex.
Reducing (diminishing) balance depreciation is appropriate for assets that have a heavier fall in value in
earlier years (1) and is therefore appropriate for equipment (1). Reducing (diminishing) balance
depreciation has a higher depreciation charge in earlier years (1) which more accurately reflects the
profit (1) – prudence (1) and matches costs to revenues (1) – matching / accruals (1). Straight-line
depreciation is an equal charge each year (1)
As equipment gets older maintenance costs increase (1) and with reducing (diminishing) balance method
depreciation will decrease (1) therefore ensuring a more even charge (1) over the life of the asset.

Q7 Explain the reason why valuing inventory on a marginal cost basis produces a different profit figure than
valuing it on an absorption cost basis.
A: In the marginal cost statement, inventory is valued at variable cost (1) resulting in a higher cost of sales (1)
and fixed costs are treated as a period cost (1).
In the absorption cost statement, the inventory value includes an element of fixed overhead (1) resulting in
a lower cost of sales (1). Some of the fixed overheads are carried forward to the next accounting period (1).
Q8. Manufacturing businesses classify costs by function. State three functional groups of costs.
A: Manufacturing costs (1)

Selling costs (1)
Distribution costs (1)
Administration costs (1)
Finance charges and other costs (1)
M
LA
SA
EM
DE
A
N

NOVEMBER 2014
Q1. Explain the following terms.
Direct costs Indirect costs

Prime cost Production cost
A: (i) Direct costs – can be directly traced to a product unit. (1)
Examples – Direct materials (1)

Direct labour (1)
Direct expenses (1)
Maximum 1 for example
(ii) Indirect costs – cannot be economically (1) traced to a product unit. (1)
Examples – Indirect wages (1)

Indirect materials (1)
Depreciation of factory machinery (1)
Insurance (1)
Power (1)
Other suitable examples
M
Maximum 2 for examples
LA
(iii) Prime cost – total of all direct expenses. (1) Must refer to total.
SA
Direct materials + direct labour (+ direct expenses) (1)
(iv) Production cost – total cost of producing the goods in the factory (1)
EM
Must refer to total.
Prime cost + factory overheads ± work in progress adjustment (1)

DE
Must include work in progress.
Q2. State two reasons why the partners are charged interest on drawings.
A
A: To try to limit partners' drawings (1)

N
Reward partner with lower drawings (1)

Ensure cash is retained in the business (1)
Q3. State two reasons why the partners receive interest on capital.
A: Reward the partner for business investment (1)

Encourage partners to introduce more capital (1)
Reward partners for the lost opportunity cost of capital invested (1)

Q4. Explain the following terms in relation to overheads.
A: 1 Allocation
2 Apportionment
3 Absorption
1. Allocation – Directly attributable costs (1) are allocated to the relevant department. (1)
2. Apportionment – Costs that cannot be directly attributed to a department (1) are apportioned on an
equitable basis. (1)
3. Absorption – Total costs (1) that have been allocated and apportioned to a department are absorbed
into products on the basis of the products use of the overheads. (1) [6]
Q5. Explain why the absorption costing statement produces a different profit figure to the marginal costing
statement.
A: Absorption costing will produce a different profit figure to marginal costing whenever opening and closing
inventory differ. (1)
Absorption costing values inventory at total production cost including a portion of fixed costs. (1)
M
Marginal costing values inventory at variable cost only, treating fixed costs as period costs. (1)
LA
When closing inventory is higher than opening inventory, absorption costing will produce the higher
profit. (1) When closing inventory is lower than opening inventory, marginal costing will produce the
SA
higher profit. (1) (Max 4) [4]
Q6. State three situations where marginal costing would help in making a short term decision.
EM
Evaluate the limitations of marginal costing.
A: Situations where marginal costing is useful:

DE
1 Make or buy decisions. (1)

2 Product mix in limiting factor decisions. (1)
3 Whether to discontinue a product. (1)
A
4 Acceptance of special orders. (1)

Max 3 marks [3]
N
Marginal costing should only be used for short term decision making (1)
However, it is necessary to split all costs into fixed and variable (1) which may be difficult (1) Difficult to
use if more than one product is sold (1) as it is difficult to split fixed overheads over several products (1)
Max 4 marks [4]

JUNE 2015
Q1. State three advantages to Kim of forming a partnership.
A: More capital.
Range of knowledge, experience, expertise
Can share ideas and problems.
Can share the workload/responsibilities.
Can cover for each other.
Can share any losses
Improves decision making
[1 mark per valid point to max of 3] [3]
Q2. State how this change would affect the partnership's income statement and statement of financial position.
A: Decreases the profit for the year (1)

Decreases the trade receivables in the current assets in statement of financial position (1) [2]
Marker note: allow trade receivables, current assets or net current assets only for statement of
financial position.
M
Q3. State two reasons for the under absorption or over absorption of overheads, calculated in part (c), for each
department
A: Machining reason 1
LA
SA
Machining reason 2
Finishing reason 1
Finishing reason 2
EM
Machining
 Factory overheads expenditure more than budget (1)OF
DE
 Machine hours used less than budget (1)OF

Finishing
 Factory overheads expenditure more than budget (1)OF
A
 Labour hours used less than budget (1)OF

N
Marker note: If candidate calculates over absorption in (c) expenditure will be less than budget in
both cases. Hours in both cases will be as per above. [4]

NOVEMBER 2015
Q1. State three assumptions the accountant must make when preparing a break-even chart.
A: 1 All variable costs per unit remain constant.

2 Fixed costs do not change within the relevant range.
3 Deals with only a single product or a constant sales mix.
4 Total costs and total revenue are linear.
5 Costs can be accurately classified into fixed or variable.
6 Chart applies to the relevant range only.
7 Chart covers only the short-term.
8 All units produced are sold i.e. there is no inventory,
9 It assumes that the selling price is constant at all levels of output
(1 per assumption) Max 3 [3]
Q2. State three further reasons why a business might use a marginal costing system.
A:
 Making decisions on allocation (1) of scarce/limited resources (1)
 Accept orders below normal selling price (1) if spare capacity (1)

M
Determine the selling prices (1) of entering into a new market (1)
 The use of sensitivity analysis (1) if there is a change in output/ cost structure (1)
LA
 Accept or reject orders (1) below normal selling price (1)
 Whether to close down a department/discontinue a product (1) positive/negative contribution (1)
 To ascertain the additional overhead (1) in producing one extra unit (1)
SA
 To ascertain the required turnover (1) to achieve a target profit (1)
[Max 3 + 3]
EM
DE
A
N

JUNE 2016
Q1. State one example of a capital reserve.
A: Revaluation reserve, share premium.
Q2. State two reasons why a partner may have an overdrawn current account
A; They may have drawn more than the profits earned (1)
Partnership may have sustained losses. (1)
Q3. State why partnerships maintain separate capital accounts for each partner.
A: They will need to keep their investments separate to distinguish between individual partners. (1)
To calculate interest on capital. (1)
Q4. State one advantage and one disadvantage of marginal costing.
A: Advantage
Good for short term decision (1) because it only considers variable costs (1)
M
Good for special orders (1) enables accurate price to be set (1)
Make or buy (1) enables comparison (1)
(Max 1) (1 mark for stating and 1 for development)

LA
SA
Disadvantage
EM
Inaccurate/harder to calculate time consuming (1) because it is difficult to split costs into fixed and
variable (1)
Not useful for financial statements (1) because the inventory value would be understated (1)
DE
Max 1 mark for stating and 1 for development [4]

A
N

NOVEMBER 2016
Q1. (i) State what is meant by goodwill.
(ii) State three factors which affect the value of goodwill.
A: (i) Goodwill is the excess of the valuation of a whole business over the netbook value
of its net assets (1) [1]
(ii) Reputation (1) customer base/monopoly (1) location (1) quality product (1)
skilled workforce (1) Max 3 [3]
Q2. State three advantages to a business of maintaining a sales ledger control account.
A: Accuracy / errors (1)

Prevention of fraud (1)
Total for trade receivables/final accounts (1)
Q3. State two types of errors that will not be identified by producing a sales ledger control account.
A: Error of omission (1)

Error of commission (1)
Compensating error (1)
M
Error of original entry (1)
Max 2
Q4. State two uses of a share premium account.

LA
SA
A: Issue bonus shares (1)
Write off formation/preliminary expenses. (1) [2]
EM
Q5. State the difference between a bonus issue of shares and a rights issue of shares.
DE
A: A bonus issue of shares is a capitalisation of reserves. (1)

Free issue of shares/ no cash (1)
A rights issue is to existing shareholders (1)
A
A rights issue generates cash for the business (1)

Max 1 bonus, max 1 rights [2]
N
Q6. State two types of entries, other than the correction of errors, which would usually be recorded in the
general journal.
A: Opening entries (1)

Purchase and sale of non-current assets (1)
Non-regular transactions (such as year-end transfers) (1) Calculating opening capital (1)
Write off bad debts (1)
Depreciation (1)
Any 2 points – Max 2 [2]

Q7. State three benefits to a business of using ratios.
A: Benefits of ratio analysis
A: Compare the results of the business over time

Compare the performance of businesses of different sizes
Compare the performance of the business with the market leader
Compare the performance of the business against industry averages
1 mark for each benefit to a max of 3 marks [3]
Q8. State three advantages to a sole trader of forming a partnership.
A: Access to increased capital

Increased knowledge expertise
Losses shared by all partners
Able to offer greater range of services Availability of cover
Shared responsibilities
Max 3 marks [3]
Q9. State three reasons why partnerships maintain separate capital accounts and current accounts for each
M
partner.
A:
LA
To keep capital invested separate from profit and drawings
To help avoid the possibility of partners overdrawing
SA
To reward the partner who has invested more capital with interest on the amount invested
To identify partners’ drawings in order to calculate interest on drawings.
EM
Max 3 marks [3]
Q10. State what is meant by depreciation of non-current assets.

DE
A: Depreciation is the allocation of the cost of a (non-current) asset over its expected working life. (1)
The allocation of the cost of using the asset over the year (1) [1]
A
Q11. State three causes of depreciation of non-current assets.

N
A: Wear and tear

Obsolescence
Technological advance
Passage of time
Depletion
Economic reasons
Any three points – Max 3 marks [3]
Q12. State the difference between capital and revenue expenditure.
A: Capital expenditure is expenditure on non-current assets (1) with an expected life of more than
12 months (1) Max 1
Revenue expenditure is expenditure on running costs to generate income day-to-day operating
expenses (1) Max 1

Q13. State two differences between ordinary shares and debentures.
A:
Ordinary shares Debentures
Variable returns Owners Fixed returns
Receive dividend Creditors
Paid dividend after debenture holders Receive interest
Voting rights Paid interest before ordinary shareholders No
Not repaid voting rights
In case of liquidation paid last Must be repaid
In case of liquidation paid first
Any 2 differences 2 marks [4]
Q14. State the significance of (2018-2020).
A: The debenture loan is repayable between the years 2018 and 2020 (1) [1]
Q15. State why an issue of debentures does not appear in the statement of changes in equity.
A: Because it is a long term liability (1) and is shown as a non-current liability in the statement of financial
position. (1)
M
Max 1 [1]
Q16. State the use of a suspense account.

LA
SA
A: Examples
A suspense account is a temporary account used to balance the trial balance (1)
Used to help correct errors when the trial balance books of account do not balance (1)
EM
Max 1 [1]
Q17. State three advantages to a business of maintaining a sales ledger control account.
DE
A: Answers could include:

A
It improves the accuracy of the sales ledger by identifying some errors (1)
It enables a reconciliation to be made between the sales ledge control account and the individual accounts
N
in the sales ledger to enable errors to be identified and corrected (1). It provides a total of trade receivables
to be used in the trial balance and financial statements (1).
Reduces the possibility of fraud as a result of segregation of duties (1)
Max 3 [3]
Q18. (i) State three advantages of budgetary control.

(i) X Y
Selling price 48 54
Variable costs 40 45
Contribution 8 (1) 9 (1) [2]

Q19. (ii) State three disadvantages of budgetary control.
A: (ii) X: 5000 x 4 20 000 (1)

Y: 7000 x 7 42 000 (1)
Total hours 62 000 [2]
Q20. State two items which may be included in a partnership agreement (other than the share of profit)
A: which will affect the appropriation account

which will not affect the appropriation account.
Affect appropriation account
Interest on capital
Partners' salaries
Interest on drawings
1 mark x 2 [2]
Will not affect appropriation account

Interest on loans
M
Amount of fixed capital
LA
Annual limit on drawings
1 mark x 2 [2]
SA
Q21. State what is meant by net realisable value.
EM
A: Selling price less cost to completion less selling expenses.
Q22. State two reasons why assets are revalued on the change of a partnership.
DE
A: To give the benefit of the change in value of the business to the existing partners and any partner who may
be retiring. (1)
A
So that the statement of financial position on the entry of the new partner shows a true and
fair view. (1) [2]
N
Q23. State what is meant by allocation.
A: The process of charging whole costs directly to a cost unit or cost centre. (1) [1]
Q24. State what is meant by overhead costs.
A: Answers may include:

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

JUNE 2017
Q1. Suggest two reasons why the balance on a retained earnings account may be lower than ti profit for the
year
A: Previous loss brought forward (1)

Payment of dividends (1)
Bonus issue of shares (1)
Max 2
Q2. Advise the directors of CD Limited which company they should supply. Give reasons for your answer.
A: AB Limited: More liquidity, lower inventory turnover but has ability to pay trade payables.
XY Limited: Higher rate of inventory turnover, faster payment period
1 mark for decision and 3 for reasons.

Accept other valid points.
Q3. Explain the difference between a capital reserve and a revenue reserve.
A: A revenue reserve is profit retained by the directors and is the property of the ordinary shareholders.
Source of capital reserve is from issuing capital: that is: share premium.
M
Revenue reserves can be used to pay cash dividends from retained profits.
Capital reserves help protect creditors.
LA
Capital reserves cannot he used to pay cash dividends but can be used for bonus shares.
SA
(2 marks) x 2 points – mark for basic point and 1 for development.
Q4. State two reasons why a partnership may be dissolved.

EM
A: Disagreements between partners

Death or retirement of a partner
DE
Bankruptcy
Max 2
A
Q5. Explain what would happen if the dissolution of the partnership resulted in a debit balance a partners
N
capital account
A: This means that the partner owes money to the partnership (1)
The partner must use his personal funds to repay the partnership bank account (1) in order that funds
owing to other partners may be repaid (1)
Q6. State three benefits a business gains from maintaining a system of double en1 book-keeping.
A: It enables checking transactions through the use of a trial balance and control accounts.
It enables the production of the income statement and statement of financial position to be compiled more
easily.
It shows the amount due to individual customers and suppliers thus avoiding overpayment.
Helps guard against errors/fraud.
(1 mark) 3 points

Q7. State three reasons why there might be a credit balance on a customer’s account in the sales ledger.
A: A customer has overpaid in error

A credit has been given and the customer has not taken
A contra has been put through but the customer has ignored it
A customer has paid in advance
Not taking a discount
There is a deposit on goods.
Customer paid for the goods before returning them
Customer overpaid and invoice
(1 mark) x 3 points
Q8. Advise Meena whether or not she should take this course of action. Justify your answer.
A: May improve trade receivables collection period.

Improve cash flows
Meena may lose customers

May need tighter credit control which may increase cost
Decision (1 mark)
M
Justification (2 marks)
Q9. State the meaning of C/S ratio.

LA
SA
A: It shows how much contribution is earned from each $1 of sales revenue (1)
Q10. State the name given to the difference between the budgeted total sales units and the budgeted break-even
EM
sales units.
A: Explain the significance of this difference to a business.

DE
It represents the margin of safety (1)

The amount by which actual sales can fall short of the budgeted sales before he reaches
break-even point (1) and then makes no profit (1).
A
Q11. State three limitations of a break-even analysis.

N
A: Limitations:
 Some costs are not easily classified as fixed or variable.

 Some costs are semi-variable.
 It assumes fixed costs stay the same.
 Straight lines can be misleading – discounts can cause curved lines.
 A chart can be time consuming to prepare.
 It assumes the selling price is constant at all levels of output.
 It can be misleading for those with limited accounting knowledge.
 Can only be applied to one product at a time
(1 mark) x any 3 limitations, max 3

Q12. Advise Ken whether or not he should increase the selling price taking into account both financial and
non-financial factors.
A: Proceed because
 It covers the budgeted total costs and provides a profit.

 It provides a positive contribution_
Need to bear in mind
 The market price of similar products.

 How innovative is his product to justify the price increase will customers expect higher quality for
higher price.
 Will customers accept the increase or go elsewhere/decrease in demand.
 Fixed costs are covered for now but they may change in the future.
 Short term view — he could lose profit in the long term.
Advice 1 mark
(1 mark) x any 3 reasons, max 3
Q13. Explain why a company should provide for depreciation on its non-current assets.
M
A: Allowing for depreciation:
To comply with the matching/accruals concept (1)

LA
Accounts for that part of the asset used up in the accounting period (1)
SA
The value of assets falls due to wear and tear: obsolescence, technological change, etc. (1)
Avoids overstating the net assets / non-current assets of the business (1)
Ensures that the statement of financial position shows a true and fair view (1)
EM
Q14. Explain two differences between ordinary shares and preference shares.
DE
A: Differences:
Ordinary shares carry voting rights (1), preference shares do not carry voting rights (1)
A
Ordinary shareholders receive a variable dividend (1), preference shareholders receive a fixed rate of
N
dividend (1)
Ordinary share dividends are discretionary (1), preference share dividend is mandatory if sufficient profits
are available (1)
Preference shareholders receive dividend before (1) ordinary shareholders (1)
In the event of liquidation preference shareholders are repaid their capital before (1) ordinary
shareholders (1)
Max 4

Q15. State two limitations of using ratio analysis to analyse the performance of a business.
A: Uses historical information. (1)

Does not take seasonality into account (1)
May use subjective data (1)
Based on purely quantitative information (1)
Does not explain the cause (1)
Does not take inflation into account (1)
1 mark for each valid point to a mx of 2 marks
Q16. Advise Wiggins whether or not he should take the loan. Justify your answer.
A: Wiggins cannot pay debts from short term assets without relying on inventory because the liquid
(acid test) ratio is significantly below 1:1(0.22:1) (1)
For (Max 2)
A long term loan will allow Wiggins to plan repayments over five years (1)
Enables Wiggins to repay the bank overdraft (1)
Loan is cheaper than bank overdraft (1)
Against (Max 2)
M
Wiggins already has a bank overdraft of $19 000 (1)
LA
Wiggins may be charged a higher interest rate on loan (1)
Bank loan will increase its gearing ratio (1)
Bank may require security for a loan (1)
SA
1 mark decision
Overall max 3 marks justification
EM
Q17. State four provisions which would apply in the absence of a partnership agreement.
DE
A: Share profits and losses equally (1)

Partners are not entitled to salaries (1)
Partners are not charged interest on their drawings (1)
A
Entitled to contribute equally to the capital of the partnership (1)

Partners are not entitled to interest on the capital they have contributed (1)
N
Partners are entitled to interest at 5% per annum on loans they make to the partnership (1)
Max 4
Q18. Advise Wang and Susi whether or not they should agree to Amit's request. Justify your answer.
A: Depends on the agreement on the initial loan

Current loan is free of interest
May need additional capital
Partnership has insufficient liquid assets at present
May have to take loan overdraft which will be charged interest
Interest would reduce the future profit
May require security for loan
1 mark for decision and 4 marks for justification.

Q19. Recommend to the directors which proposal they should adopt. Justify your answer by discussing the
benefits and drawbacks of each proposal.
A: Proposal A Benefits (Max 2)

 Breakeven point reduces from 54640 units to 53733 units
 Reduced cash outflows on direct materials and administrative expenses
Proposal A Drawbacks (Max 2)

 Reduced sales commission may result in fewer agency sales
 Reduced administrative backup may hinder growth
 Less expensive direct material may affect quality
 Redundancy will incur costs / demotivate staff / result in bad image
Proposal B Benefits (Max 2)

 Opportunity to market new improved product
 More expensive direct material may enhance qualify
 Opportunity to raise awareness with advertising spend
 Sales commission retained at current revel
Proposal B Drawbacks (Max 2)

 Breakeven point increases from 54 640 units to 57 456 units
M
 Reduced administrative backup may hinder growth
 Increased cash outflow of direct materials and advertising
LA
 Will sufficient sales be made to reach breakeven point?
 Redundancy will incur costs / demotivate staff / result in bad image
SA
1 mark for recommendation.
Overall max 7 marks for benefits and drawbacks
EM
Q20. State three advantages and three disadvantages of a system of budget preparation.
A: Advantages:
DE
 Facilitates longer term planning

 Promotes co-ordination between departments
A
 Enables monitoring and control

 Can act as motivation for employees
N
 Helps the allocation and use of resources

 May provide a framework for delegation / responsibility accounting
 Aids decision making
Disadvantages:
 Can discourage innovation
 May de-motivate staff if set too challenging
 May prevent progress if set too undemanding
 Can be a time consuming and costly operation
 May require specialist staff
 May cause conflict between departments regarding the allocation of resources
1 mark for each valid point

Q21. Explain why partners may value goodwill and revalue the assets when one partner retires.
A: Fair value of assets may be greater than book value. (1)

Partners are rewarded for their efforts in building up the business. (1)
It is only fair that the retiring partner is compensated in this way. (1)
Q22. Assess whether or not Trueman was correct in his decision to leave the partnership. Just your answer by
discussing the financial and non-financial factors involved.
A: Decision. (1)
Financial (Maximum 3)
Truman would receive more /less income. (1)OF
Interest will be earned on the loan. (1)
The decision may be affected by the interest rate which could be obtained externally on the capital
invested. (1)
Non-financial (Maximum 3)
Level of risk. (1)
Degree of responsibility /decision making. (1)
Security of employment. (1)
M
1 mark for decision plus maximum 4 marks for justification
Q23.
LA
Advise the partners whether or not they should make an early repayment. Justify your answer.
SA
A: Decision (1)
Partnership may not have funds available. (1)

EM
It may be able to take a loan to repay at a lower interest thereby increasing

The profit of the remaining partners. (1)
Taking a loan will increase the risk to the business. (1)
DE
Loan may require a security. (1)

A
Q24. State three advantages and one disadvantage to a limited company of making a bony issue of shares.
N
A: Advantages (Maximum 3)
Can be issued instead of paying 'dividends and so cash flow is not reduced. (1)
Keeps existing shareholders satisfied as there is no dilution of ownership. (1)
Retains cash in the business for reinvestment. (1)
Gives a positive sign to potential shareholders. (1)
Enables company to release its capital reserves. (1)
Disadvantage
No cash raised from selling the shares.
(1 mark for a valid point up to a maximum of 4 marks)

Q25. State three uses of ratio analysis to a trader.
A: Shows trend/previous years. (1)

Helps to compare with competitors. (1)
Help to compare with industry averages. (1)
Set targets for the next period. (1)
(1 mark for a valid point up to 3 marks maximum)
Q26. Advise the directors whether or not they should hire the replacement machine. Justify your answer by
considering both advantages and disadvantages of hiring the replacement machine.
A: Decision. (1)
Advantages (Maximum 2)
Will enable company to fulfil maximum demand. (1)
Will enable full utilisation of resources. (1)
Disadvantages (Maximum 2)
Will reduce profit. (1)
Forecast maximum demand may not be achieved thus reducing profit even further. (1)
M
LA
Q27. State three short-term decisions, other than limiting factor decisions, where marginal costing would be
useful.
SA
A: Make or buy decisions. (1)
Special order decisions. (1)
Decide whether or not to cease manufacturing of a product (1)
EM
Decide whether to close a department. (1)

Maximum 3 marks
DE
A
N

NOVEMBER 2017
Q1. State three benefits and one limitation of preparing a sales ledger control account.
A: Benefits: (maximum 3 marks)

Provides a total for trade receivables. (1)
Helps in the preparation of the financial statements. (1)
Helps deter/prevent/reduce fraud as it is maintained by different person. (1)
Verifies the arithmetical accuracy / identifies errors in the sales ledger. (1)
Can be reconciled with the sales ledger balances to improve accuracy. (1)
Limitation: (maximum 1 mark)

Doesn't identify errors of commission/omission/compensating/original entry. (1)
Q2. Suggest one possible reason for the difference in each ratio:
(i) Operating expenses to revenue (ii) inventory turnover (days)
A: Carla may have better control on operating expenses.

Carla may have lower wages as she does the work herself, so takes higher drawings.
Carla may have less depreciation as she does not need delivery vehicles.
Allow other valid responses.
M
Maximum 2 marks (1 for stating and 1 for developing)
Carla has a faster turnover of finished goods because all her products are sold on the day they are made.
Any inventory (e.g. flour) is perishable.
LA
SA
Maximum 2 marks (1 for stating and 1 for developing)
Q3. Identify two differences between ordinary shares and cumulative preference shares.
EM
State three differences between a rights issue and a bonus issue.
A: Ordinary shareholders have voting rights at general meetings, whereas cumulative preference
DE
shareholders do not. (1)

The cumulative preference dividend is a fixed amount, whereas the ordinary dividend is set annually and
can vary depending on profits. (1)
A
Unpaid ordinary dividends do not accumulate, whereas cumulative preference dividends

N
Do. (1)
If the company is liquidated, cumulative preference shareholders would be paid ahead of ordinary
shareholders. (1)
Max 2
Subscribers pay for shares in a rights issue: but not with a bonus issue. (1)
The company's net assets are increased as a result of a rights issue, but unchanged with a bonus issue. (1)
Shareholders may or may not exercise their rights, but will automatically receive their bonus shares. (1)

Q12. Advise the directors how they should respond to the shareholders' demand. Support your answer with
calculations.
A: Shareholders demand would result in a payment of $60 000 (1)

Retained earnings arc only 45000 (1)
Maximum dividend payable equals 45 0010/125 000 = $0.36 (1)
There is sufficient cash in the bank ($90 000) to pay the dividend, (1) but insufficient retained earnings. (1)
Fewer funds for possible future development. (1)
Share premium account could be used to issue bonus. (1)
Max 4
Accept other valid answers.
Q13. Explain what is meant by 'batch costing'.
A: Method of costing that you apply to the production of a number of identical items. (1) The cost per unit is
found by dividend total batch cost by the number of units in the batch. (1)
Q14. Advise Anna whether or not she should allow Sally the discount. Justify your answer.
A: Anna would still make a profit on the order. (1)

The order will help ensure the workforce is kept busy. (1)
May lead to further orders from Sally. (1)
M
However, Anna's other customers may also start demanding discount, (1) which would reduce Anna's
LA
overall profit
Reaction of competitors who may lower their prices. (1)
Could lose order if discount not given. (1)
SA
1 mark for decision and 4 marks for justification.
EM
Q15. Advise Anna whether or not she should close this factory giving both financial and non-financial reasons
for your answer.
DE
A: Non-financial reasons (Max 2)
If Anna doesn't fulfil the existing orders, the customers will not be happy of loss of reputation. (1)
A
Could have a knock-on effect for other orders of other products. (1)
Can workforce be used elsewhere if they don't make these orders / lay off workers. (1)
N
Morale of employees in existing factory.
Financial reasons (Max 2)
The orders provide a positive contribution towards fixed costs. (1)

At present current level of demand is below break-even point - factory operates at a loss. (1)
Demand may increase in the future and make the new factory profitable. (1)
How accurate is the financial data (1)
Will closing the factory result in redundancy costs. (1)
1 mark for advice and overall max 3 marks for reasons.

Q16. Advise Ross whether or not he should mate a provision for doubtful debts. Justify your answer.
A: Application of prudence concept (1)

Trade receivables/Current assets/profit may be overstated (1)
Application of matching/accruals concept (1)
Matches the cost of the provision against the relevant year (1)
(1 mark for advice + max 3 for justification).
Q17. State four advantages to a business of preparing a sales ledger control account.
A: Provides a total for trade receivables (1)

Helps in the preparation of the financial statements. (1)
Helps deter/prevent/reduce fraud, as it is maintained by different person. (1)
Verifies the arithmetical accuracy/identifies errors in the sales ledger. (1)
Can be reconciled with the sales ledger balances to improve accuracy. (1)
(1 mark for a valid point, up to max of 4 marks).
Q18. Explain two accounting concepts which are being applied when depreciation is provided.
A: Bank loan
M
The lender would need to be convinced that the company can meet the interest and repayment
LA
obligations. (1)
Bank loan must be repaid. (1)
The loan may need to be secured (1) on the plant and equipment purchased.
SA
Loan interest will be charged (1) to the Income Statement reducing profits.
A loan will increase the gearing of the company. (1)
Takes less time to issue. (1)
EM
Share issue
The company has flexibility as to the level of dividends payable on the shares. (1)
DE
Share capital does not need to be repaid. (1)

There may be loss of control. (1)
Issue of more shares may dilute the share price. (1)
A
Share issue is an expensive (1) process.

Issuing ordinary shares will not increase the gearing. (1)
N
Takes more time to issue. (1)

No interest has to be paid. (1)
(1 for decision, and max 4 for justification).

Q19. State two benefits and two limitations of break-even analysis.
A: Benefits (Max 2)
Calculate the break-even point
Calculate margin of safety
Helps with (short term) decision making
Easy to predict profits and losses at different levels of output.
Quick method of calculating to show impact of decision on profits_
Limitations (Max 2)
Some costs are difficult to classify as fixed or variable.
Not applicable when multiple pro-ducts are involved_ Assumes selling price remains constant_
Assumes variable/fixed costs remain constant.
Based on estimates that may not be accurate.
Assumes that all production is sold.
Accept other valid answers.
Q20. Advise the directors whether or not they should accept the new contract with Bart and increase the selling
price. Justify your answer by explaining two benefits and two limitations
A: Benefits (maximum 4 marks)
M
 Profits increase (1) by $2790 (1) (3390 — 600)
LA
 Directors' target profit (of $40 680) (1of) per annum is greater than (30 000) target. (1)
 Business utilises full capacity (1) which will maximise profits. (1)
 Increased advertising may result in increased business (1) and new customers leading to growth. (1)
SA
 Produces a positive contribution (1) $1890 (1)
Limitations (maximum 4 marks)

EM
 Workforce working to full capacity (1) may affect product quality/output. (1)
 Existing customers may be dissatisfied with the price increase, (1) resulting in lost sales/lower
profits (1)
DE
 Additional storage rental commitment may not be required if new contract ceases, (1) reducing
profits (1)
 Becoming reliant on one customer (1) as don't know how long the order may last (1)
A
N
(1) Mark for advice and overall max 6 marks for justification
Q21. State three financial benefits of a system of budgetary control.
A: Facilitates profit maximisation (1)

Enhanced cash management by identifying future inflows and outflows. (1)
Facilitates working capital requirement planning. (1)
Enables capital expenditure planning. (1)
Note
Benefits must be financial benefits. Do not reward: co-ordination, planning, decision making etc. unless
developed from a financial perspective.
1 mark for each valid benefit. Maximum 3 marks.

Q22. Explain one difference between debentures and ordinary shares.
A: Debentures are long-term loans (1) on which interest must be paid, whether the company makes a profit
or loss. (1)
Debenture holders receive a fixed rate of dividend. (1)
(Max 1)
Ordinary shares are permanent capital (1) on which dividends may or may not be paid at the discretion of
the directors. (1)
Dividends are variable. (1)
(Max 1)
Overall max 2
Q23. Advise the directors which method of raising the finance you would recommend. Give reasons for your
answer.
A: The directors must consider the feasibility of the rights issue, bearing in mind that there has just been a
share issue at 51.20 that was oversubscribed. (1)
The debt of the business will increase in relation to the equity if debentures are issued. (1) This will
increase the perceived risk as debenture interest will have to be paid each year. (1) A risky business will
send a negative signal to suppliers. (1)
Rights issue is made to existing shareholders. If they are confident about the future they will take up all the
M
shares. (1)
LA
However, if they have any doubt rights issue will not be fully taken up. (1) If the directors can prove that
the return on the investment will exceed the rate of interest, existing shareholders can benefit from this
investment. (1)
SA
Max 3 marks for reasons + 1 mark for justified decision.
EM
Q24. Define the term 'revenue expenditure'.

DE
A: Revenue expenditure is money spent on the day-to-day running expenses of the business; (1) on resources
that will generally be used up within one year. (1)
A
Q25. State three benefits of keeping full double entry accounting records for a business.
N
A: Assists with the preparation of the trial balance.

Assists with the preparation of the financial statements.
Reduces the risk of errors.
Reduces the risk of fraud.
Improves the accuracy of accounting records.
Balances on individual accounts are available throughout the year.
1 mark for a valid point up to a maximum of 3.
Q26. State three items that may appear in a partnership agreement.
A: Profit / loss sharing ratios

Interest on capital
Interest on drawings
Partners' salaries
Limits on drawings
Partners' responsibilities
1 mark for each item, to a maximum of 3 marks.

Q27. Explain the difference between a realisation account and a revaluation account.
A: Realisation account
Used to close the books of account (1) on the dissolution of a partnership.
Revaluation account:
Used to record changes in the value of assets and liabilities on changes in a partnership. (1)
Q28. Advise the directors of S Limited whether or not they should produce a minimum of 1000 units of each
product. Justify your answer.
A: Advantages:
The company has a better chance of fulfilling customers' orders. If the shortage is only short term there is
less chance of losing customers in the long term.
Fewer dissatisfied customers.
Less chance of idle resources.
Disadvantages:
Products may be dependent on each other.
Customers may cease purchasing some products if some are unavailable. Company makes a budgeted loss
if minimum demand is met.
If the shortage is long term, the company will always be operating at a loss.
Competitors may exploit the material shortage.
M
1 for decision, 3 for advantages and 3 for disadvantages.
Q29. Define the term 'margin of safety'.

LA
SA
A: Margin of safety is the difference between a given volume of sales (1) and break-even point (1). It can be
expressed in units or as a percentage of sales (1)
Max 2
EM
Q30. Explain the usefulness of margin of safety to a company.

DE
A: Margin of safety provides an assessment of risk (1) by indicating the extent to which expected output can
fall (1) before a loss is made (1). It shows the ability to withstand adverse trading conditions (1).
A
N

JUNE 2018
Q1. Explain three disadvantages of operating as a partnership rather than being in business as a sole trader.
A: Responses could include:
Profits will be shared in the partnership (1), whereas sole traders would be entitled to all the profits (1).
Decision making may take longer as both partners will need to agree (1), whereas sole traders can make
instant decisions (1).
There is the risk of disagreement/conflict between partners (1), whereas sole traders would make
decisions on their own (1). Each partner's actions are binding on all partners (1), whereas a sole trader has
to account to no other parties for his actions (1)
Control of the business by each partner maybe difficult (1) whereas the sole trader retains control over the
business (1).
Q2. Analyse the efficiency of the business using these ratios.
A: Non-current asset turnover

The non-current asset turnover ratio has improved from being weaker than the industry average to being
better than the industry average and/or has also improved on the previous year (1).
The partnership may have purchased new and improved non-current assets and/or are using existing non-
current assets more efficiently. (1)
M
Trade payables turnover
LA
The partnership is now paying suppliers faster than in the previous year and/or quicker than the industry
average (1) Whilst this may have been good for the supplier liquid funds that could have been used for
SA
other purposes are being used unnecessarily. (1)
Q3. Advise which course of action the partners should take in order to improve the rate of inventory turnover.
EM
Justify your advice by discussing both of the suggested options.

DE
Advertising campaign
May raise public perception (1)
A
May increase sales of the business (1)

Would incur costs (1)
N
Reducing inventory levels

Would lead to an increase in the rate of inventory turnover (1)
Would reduce the risk of obsolete/damaged inventory (1)
Would reduce customer choice/danger of not being able to fulfil orders (1)
Award up to 2 marks for justification on each course of action and 1 mark for a decision.
Q4. State two reasons why capital reserves may be used before revenue reserves to fund a bonus issue of
shares for a limited company.

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

Q5. State two benefits to a limited company of making a rights issue.
A: Quicker and cheaper than a new share issue (1)

More likely to be fully subscribed than a new share issue (1)
Results in a cash inflow (1)
Does not have to be repaid (1)
Would avoid any dilution of ownership (1)
Q6. State one limitation to a limited company of making a rights issue.
A: Can lead to a fall in the share price (1)
Q7. Explain two advantages to the company of this course of action.
A: Long-term bank loan
Interest on loan is fixed (1) whereas dividends are discretionary (1)

Ownership remains the same therefore (1) No loss of control to existing shareholders (1)
Funds received quicker (1) than a share issue (1)
Repayments are fixed (1) enabling future planning (1)
Q8. Explain why a business may use reducing balance method of depreciation for plant and machinery.
M
LA
Plant and machinery often loses more value in the earlier years of its life (1) due to usage (1) and
SA
maintenance costs may be higher in the later years (1)
Q9. Explain two accounting treatments for loose tools.

EM
A: It is written off as an expense (1) If the cost of the item is not material (1)
The revaluation method should be used (1) If the cost is significant (1)
DE
Q10. Explain one fundamental accounting concept relating to depreciation.

A
A: Prudence (1) Not over-state the value of non-current assets or profit (1)
or
N
Consistency (1) Using the same depreciation method each year to assist comparisons (1)
or
Accruals/matching (1) To match the cost with the income earned by the asset (1)
Q11. Advise the directors whether or not they should increase their accommodation prices. Give reasons for
your answer.
Price will still be lower than competitor (1)OF which will result in increased profits (1)OF
Increased accommodation prices may reduce the demand for Leisure and Conferences (1) and may affect
overall occupancy rates (1)
May affect the reputation of the hotel and leisure complex (1) resulting in lost customers (1)

Q12. State two benefits to a company of operating a system of budgetary control.
A: Enables planning for the future (1)

Encourages co-ordination/communication (1)
Provides a framework for responsibility accounting (1)
Enables variance analysis ensuring control (1)
Encourages motivation of employees (1)
Q13. State two limitations to a company of operating a system of budgetary control.
A: Based on estimates (1)

Unrealistic budgets may de-motivate employees (1)
May discourage innovation (1)
Q14. Advise the partners of three ways in which they could improve the cash position of the business.
A: The partners could reduce their salaries. (1)
The partners could reduce their drawings. (1)
Additional capital could be introduced by the existing partners. (1)
M
A new partner, or partners, could be admitted to the partnership. (1)
A loan could be negotiated. (1)

LA
SA
The partnership could dispose of surplus/unused non-current assets. (1)
Max 3 marks
EM
Accept other valid points

DE
A
N

Q15. Advise the partners whether or not they should take this course of action. Justify your answer.
A: Remaining as a partnership
Disadvantages:
The partners usually have unlimited liability
Profits need to be shared with other partners
There is the possibility of disputes between the partners
Decisions made by one partner are legally binding on the others
Partnership will need to be dissolved if partner dies
1 mark per valid point
Max 2 marks
Becoming a limited company
Disadvantages:
Potential loss of control as additional shareholders invest
M
There will be costs associated with setting up the company
LA
More detailed financial information
Available for public scrutiny 1 mark per valid point
SA
Max 2 marks
1 for decision
EM
Accept other valid points

DE
Q16. Explain two advantages of maintaining control accounts.
A: Control accounts help to reduce fraud (1) as a result of segregation of duties (1).
A
Control accounts check the arithmetical accuracy of the ledgers/help in locating errors (1) but not all
N
errors are identified (1).
Control accounts can provide total trade receivables/trade payables amounts quickly (1) assisting in the
preparation of financial statements (1).
1 mark for identification and 1 mark for development for each advantage
Max 2 marks

Q17. Explain how these transactions would affect the financial statements for the year ended 31 January 2017.
A: Revenue decreases by $3600 (1)
Inventory increases by $2400 (1)

Profit decreases by $1200 (1) + $572 (1) + $2448 (1) = $4220
Trade receivables decrease by $3600 (1) + $572 (1) + $2448 (1) = $6620
Max 5 marks
Q18. State two other uses of a suspense account.
A; The bookkeeper does not know where to post an entry. (1)

In order to prepare draft financial statements. (1)
Q19. State four types of error that will not be revealed by the trial balance.
A: Error of omission
Error of commission
Error of principle
Compensating error
Error of original entry
M
Error of reversal
1 mark for each type of error — Max 4 marks

LA
SA
Q20. State three benefits to a business of preparing annual financial statements.
A: Helps future planning/targets/goals (1) Decision making (1)

EM
Able to assess performance/comparisons (1)

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

A
Max 3 marks
N

Q21. Advise the directors whether or not they should proceed with the promotion. Justify your answer using
both financial and non-financial factors.
A: Based on directors' forecasts, incremental loss $960 (1) (OF).
The required increase of $960 is only slightly higher than the directors' expectations. (1)
Positive contribution made (1) (OF).
How accurate are the directors' forecasts of sales/additional costs? (1)
The promotion may have a positive/negative impact on the company's other products. (1)
Have the directors considered the reaction of employees to the promotion? (1)
Have the directors considered the reaction of competitors? (1)
Does the company have the spare capacity to service the promotion? (1)
Advice (1)
M
Financial factors — Max 3 marks
LA
Non-financial factors — Max 3 marks
Q22. Explain the purpose of cost—volume—profit analysis.

SA
A: Used to determine the effect that changes in costs and volume (1) will have on the company's operating
income and net income (1).
EM
Q23. State four assumptions of cost—volume—profit analysis.

DE
A: Sales price per unit is constant (1)
Total fixed costs are constant (1)

A
Variable cost per unit is constant (1)

N
All production is sold (1)
If the company sells more than one product, the product mix remains constant (1)
Costs are only affected as a result of changes in activity (1)
Max 4 marks

NOVEMBER 2018
Q1. Advise Finn whether or not he should employ a book-keeper at a cost of $500 a month. Justify your answer.
A; Could maintain full up-to-date accurate records (1)

Will improve decision-making (1)
Could provide credit control systems (1)
Improve cash flow / reduce irrecoverable debts (1)
Making sufficient profits to afford bookkeeper's wages (1)
Increased wages ($6 000)/affordability would result in decreased profits (1)
Failure to maintain full up to date records could lead to business failure (1)
Q2. State two reasons why a trader might maintain a provision for doubtful debts.
A: To avoid trade receivables / current assets being overstated (1)

To avoid profit being overstated (1)
To comply with the prudence concept (1)
To comply with the matching concept (1)
Q3. State what is meant by the term 'goodwill'.
A: The difference between the value of a business as a whole and the separate value of the
M
net tangible assets (1).
OR
LA
The (intangible) value of reputation/customer base/location, etc. (1)
SA
Q4. Explain why a partnership may make an adjustment for goodwill when they admit a new partner.
A: The adjustment will ensure that the original partners benefit, because it is their efforts which have created
EM
the goodwill.
1 mark for clarifying that the original partners benefit;

DE
1 mark for explaining why they should benefit.
Q5. Explain why partners may agree not to maintain a goodwill account in the books of the partnership on the
A
admission of a new partner.

N
A: The value is just a matter of opinion / subjective (1) so it is difficult to value (1)
The value could be subject to sudden change (1) for example if a problem arose which caused damage to
the partnership's reputation (1).
1 mark for giving one reason and 1 mark for development.
Q6. Explain two reasons why a company may make a bonus share issue.
A: Improves the perception of the company size (1) by increasing the issued share capital of the company (1)
To capitalise non-distributable reserves (1) but overall, total equity will remain the same (1)
To reward the company's investors (1) when profits are not sufficient to pay dividends (1)
Can be used to keep existing shareholders happy (1) and may be attractive to potential investors (1)

Q7. State three uses of the share premium account, other than the issue of bonus shares.
A; To write off expenses relating to:

company formation
the issue of debentures
the issue of shares
redemption of debentures
Q8. State the journal entry required to record a revaluation increase in the value of a non-current asset.
A: Debit Non-current asset (1)

Credit Revaluation reserve (1)
Q9. State what is meant by the term 'break-even point'.
A: The point where the business is making neither a profit nor a loss (1)
Q10. State three uses of marginal costing.
A: Make or buy decisions (1)

Limited resources (1)
Special orders (1)
M
Production scheduling (1)
LA
Product / departmental closure (1)
Q11. Suggest a reason for:

SA
A: The decrease in the direct material price
Bulk buying /economies of scale / supplier price reduction
EM
The increase in the direct labour rate.

Overtime rates /increase basic wage rates
DE
Q12. Explain why fixed costs might increase by 50%.

A
A: Fixed costs are only fixed over a given range of activity (1)
As this business is expanding its capacity, some fixed costs may increase (1) Such as:
N
 Rates — larger floor area used (1)

 Supervisors' salaries — increase in staff numbers (so more supervisors required) (1)
 Depreciation — additional machinery required (1)
 Maintenance — increased operations (therefore more servicing required) (1)
Q13. Explain how the proposed expansion of the factory might affect the shareholders' view of the safety of their
investment.
A: Shareholders' investment has become riskier (1) because of the increased external borrowing (1). Loan
interest has to be paid (1) whether profit is earned or not (1), but overall profit should increase (1).
Repayment of the external borrowing may result in future cash flow problems (1)

Q14. Advise the directors whether or not they should proceed with the expansion of the factory. Justify your
answer.
A: Positive
Market share should increase (1) overall profit may increase (1). Expansion may encourage further
shareholder investment (1)
Negative
As a result of reducing the selling price and increased costs, the profit per unit will fall (1) and the
breakeven point will increase (1)
The directors should consider how certain the company are that all of the increased production will be sold
(1) how reliable the directors other estimates are (1) and whether suitable labour and other resources will
be available (1). They must also ensure that funds will be available to repay the loan. (1)
Q15. State the double entry required to record a rights issue of shares at a premium.
A: Debit bank/application (1)

Credit ordinary share capital (1) Credit share premium (1)
M
Q16. Advise the directors whether or not they should decrease the depreciation rates. Justify your answer.
A: Reasons for:
Profit would increase in the short term. LA
SA
The capital base /asset base of the company would rise in the short term.
Reasons against:
EM
The change would not be in accordance with the accounting concept of consistency.
The change would not be prudent / against prudence concept. Assets/profit could be overstated.
Lower depreciation charges would mean higher losses on disposal. The change would not help profit in the
DE
long term.

A
Max (3) for comments plus (1) for decision

N
Q17. State two items which may be included in a partnership agreement.
A: Amount of capital contributed by each partner. (1)

Profit share for each partner. (1)
Duties of each partner. (1)
Interest on capital. (1)
Interest on drawings. (1)
Partners' salaries (1)
Drawings limitations (1)
Max 2 marks

Q18. Explain why partners may each have a separate capital account and current account.
A: Partners may want separate capital accounts to:

Show the permanent investment (1)
Show the impact of any changes in capital (1) (e.g. goodwill, capital introduced, revaluations)
Facilitate the calculation of interest on capital (1)
Partners may want separate current accounts to:

Show the ongoing transactions between the partners and the partnership (1)
Show the amount of drawings compared with the share of profit (1)
Facilitate the calculation of interest on drawings (1)
Max 2 for capital account and Max 2 for current account.
Q19. Explain the difference between gross margin and mark-up.
A: the gross margin looks at gross profit in relation to revenue (1)

whereas mark-up looks at gross profit in relation to cost of sales. (1)
Q20. Name one cost recorded in an income statement which would not be included in the calculation of the
expenses to revenue ratio.
Name two costs which might be included in the administrative expenses of a limited company.
M
LA
A: purchases/cost of sales / carriage inwards (1)
any two correct answers for (1) mark each e.g. rent, insurance.
SA
Q21. State how the three ratios calculated in (c) are related.
A: The gross margin less the expenses ratio equals the profit margin.
EM
Q22. Suggest two reasons why H Limited's gross margin may have been higher than the previous year.
DE
A: Increase in selling price combined with constant purchase price (1)

Decrease in purchase price with no change in selling price (1)
Change in product mix (1)
A
Max 2
N

Q23. Advise the directors whether or not they should accept the sales manager's plan. Justify your answer using
both financial and non-financial factors and any relevant calculations.
A: Financial (max 4)
If the company did not adopt the sales manager's proposal it would achieve.
the following profits over three years:
522000 + 322 000 + 220 000 = 1 064 000 (1)
If the sales manager's proposal were to be accepted the following profits

would be earned over three years;
209 500 + 459 500 + 459 500 = 1 128 500 (1) OF
Comparison of the two profit figures (1) OF
How reliable are the directors' estimates of costs and revenues (1)
Non-financial (Max 4)
Availability of labour — would the current labour force be able to absorb the additional work or will
additional staff need to be recruited and trained? (1)
M
Machinery — would additional machinery be required to absorb a 25%
LA
Increase in production? (1)
Space — would the company have sufficient space available? (1)
Competitors — would they respond and reduce their price? (1)
SA
Advertising will sales target be reached in years 2 and 3? (1)
Will the direct material quality suffer with the cost reduction (1)
EM
Overall max (6) for comments plus (1) for recommendation.
Q24. State three assumptions made when using cost-volume-profit (CVP) analysis.
DE
A: Selling price is constant and will not change as volumes change (1)
The sales mix remains constant in a multi-product company (1)
A
The number of units produced equals the number of units sold (1)
Cost are linear (1)
N
Costs can be accurately divided into fixed and variable elements (1)
Max 3
Q25. State two advantages of using CVP analysis.
A: Ease of calculation. CVP is based upon a standard set of formulas that work
for all of the analysis techniques (1)
Useful for making short term decisions e.g. make or buy, use of limiting
resources, spare capacity (1)
Calculation of break-even point (1)
Max 2

JUNE 2019
Q1 State two benefits and two drawback of operating as a sole trader.
A: Benefits: (Max 2)
Entitled to all profits (1)
Quicker decision making (1)
Full control of business operations (1)
Drawback: (Max 2)
Unlimited liability / no separate legal entity (1)
All the risk / responsibilities (1)
Limited opportunities for new ideas (1)
M
Q2 Advise Lee which option he should choose. Justify your answer.
A: Decision (1)
LA
SA
Limited company (Max 2)
EM
There would be a potential dividend cost of $7500
Payment of dividends is discretionary

DE
Lee retains control of the business as he is the majority share holder

A
Partnership (Max 2)
N
Marvin’s interest on capital will cost a fixed $3000 per annum
Marvin is entitled to 30% of future profits but will also have to bear 30% of future losses
The partnership will have unlimited liability
Q3 State the journal entry to write off an irrecoverable debt.
A: Dr Irrecoverable debts (1)

Cr Dixie (1)

Q4 Explain one accounting concept which is applied when making a provision for doubtful debts.
A: Prudence (1)
Profit/current assets/trade receivables should not be overstated (1)
OR
Matching / accruals (1)
Revenue of an accounting period is matched against the costs of the same period (1)
Q5 Describe how this change will affect Sofia’s profit. Support your answer with relevant calculations.
A: Sofia’s profit would now be $4075 (4) a decrease of $402. (1)
Workings
Using the existing policy the profit would be $4477 (1) due to a decrease in the provision for doubtful debts (1) OF
Under proposed change, the closing balance on the provision for doubtful debts account would be $1325 (1).
Q6 State three reasons why it might be difficult to compare financial ratios between businesses in the same
M
industry.
LA
A: Companies may use different accounting policies (1)
SA
Historical cost is used to prepare accounts therefore may be misleading (1)
There may be different year-ends/seasonal factors (1)

EM
There may be non-monetary factors to consider (1)
Relative size of each business (1)

DE
The effect of window dressing (1)

A
Accept any other valid responses

N
Max 3 marks
Q7 State two advantages to a business of using the FIFO method of inventory valuation.
A: Easy to calculate (1)
Inventory value is closer to current market value (1)
An accepted method of valuing inventory for the financial statements (1)
Max 2 marks

Q8 Advise Jessie whether or not she should accept the offer. Justify your answer.
A: The offer still provides a positive contribution/generates profit (1)
This will result in increased overall profits for the business (1) albeit the offer price will not achieve the
usual mark up of 25% (1)
The order will make use of existing spare capacity (1) which could be used to manufacture goods with a
better mark-up (1)
Is this a one-off order or will the customer expect future orders at the same price (1). Other customers
could also want to buy at a reduced price (1), and it could cause ill feeling with other customers (1)
Decision (1)
(1 mark) × any 4 points – Max 4 for comments
Q9 Advise the directors which option they should choose. Justify your answer.
A: Preference shares (Max 2 marks)
Permanent capital (1)
M
LA
Incurs annual finance costs of $15 000 (1)
Issuing will cost will be more time consuming/costly (1)

SA
Bank loan (Max 2 marks)
EM
Has to be repaid (1)
Incurs annual finance costs of $24 000 (1)

DE
Bank may/may not be willing to advance the loan at lower interest rate than the current loan (1)
A
May require security (1)

N
Advice (1)
Q10 Explain two differences between a bonus issue of shares and a rights issue of shares.
A: Bonus shares are not paid for, (1) Rights issue are paid for (1)
Bonus shares do not change the net assets, (1) Rights issue increases net assets (1)
Bonus shares are issued to all shareholders, (1) Shareholders have a choice whether to take up rights issue. (1)
Bonus shares are issued at par value, (1) Rights issue may be made at a discount to market value/at a premium (1)
Bonus shares do not give additional capital/equity, (1) Rights issue gives additional capital/equity (1)
2 marks × max 2 points of difference

Q11 State three reasons why a partnership may be dissolved.
A: Death / ill health / retirement of a partner (1)
A partner has been declared bankrupt (1)
Disagreement between partners (1)
Insufficient level of profits (1)
Insufficient levels of cash reserves (1)
Partnership has achieved its purpose (1)
Max 3 marks
Q12 Explain two benefits to a business of maintaining control accounts.
A: Provides an arithmetical check on the accuracy of the ledgers (1), as the balances on each control account
should agree with the total of balances in each ledger. (1)
M
LA
Helps prevent fraud (1) as the work of those employees working on each ledger is independently checked
by another employee. (1)
SA
Provides a figure for total trade receivables and total trade payables (1) aiding preparation of financial
statements. (1)
EM
Any two benefits, 2 marks each
Q13 State what is meant by ‘piecework payments’.

DE
A: Payment to employee is based on the number of completed units they produce (1)
A
Q14 Explain what is meant by ‘production overheads’.

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

Q15 Advise Ethan whether or not he should accept the order. Justify your answer taking into account both
financial and non-financial factors.
A: Accept / Reject (1)
Financial (Max 2)
Will provide increase in sales revenue.
The order provides positive contribution/profit OF so is worthwhile.
Will there be an increase in the fixed cost?
Would it be less expensive to pay the existing workforce a premium for the additional units?
Non-financial (Max 2)
What effect will the lower price have on other customers who are paying $12?
Will the temporary labour be available immediately/ existing workforce be willing to work overtime?
Will the product quality remain the same if temporary labour is used / do they have the necessary skills for
M
hand painted pots?
LA
Will the morale of the existing workforce go down if temporary labour is employed?
SA
1 mark for decision

EM
Q16 State two benefits and three limitations to a business of using cost–volume–profit analysis.
DE
A: Benefits (Max 2)
Aids short-term decision making.

A
Identifies break-even point/margin of safety/project profit.

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

Q17 State three advantages to business owners of using the double entry system of book-keeping.
A: It will have up-to-date information of assets and liabilities / and will inform decision making (1)
The business can more easily chase trade receivables and keep up to date with trade payables (1)
The preparation of the financial statements is easier and more accurate / reducing the possibility of errors (1)
Q18 Explain why a business may create a provision for doubtful debts.
A: Application of concept of prudence (1)
Application of matching concept (1)
Profit may be overstated in the event of irrecoverable debts (1) Trade receivables / current assets may be
overstated (1)
Q19 Advise the partners which option, if either, they should accept. Justify your answer.
M
A: Loan Max 3
Annual interest will reduce / eliminate profit (1)

LA
SA
Does he want any security? (1)
Will he want capital repaid? (1)

EM
However, it will clear the overdraft in the short-term. (1)

DE
Becoming a partner Max 3

A
N
Will bring in expertise / new ideas (1)
May generate additional gross profit (1)
May be able to reduce wages which is the main expense (1)
There may be conflict between the three partners (1)
Possibly less profit for Ahmed and Raji (1)
1 for Advice

Q20 Explain what is meant by the term ‘error of commission’.
A: A transaction recorded in the wrong account of the same class (1) but using the correct amount and on the
correct side. (1)
Q21 Explain the effect on a business of not updating:

(i) Customer’ accounts in the sales ledger
A: Incorrect sales ledger balances could mean Lawrence not collecting the right amount from credit
customers. (1) It may also risk resulting in irrecoverable debts. (1)
Non-collection of debts would negatively impact cash balances. (1)
May lead to incorrect financial statements (1)
Max 2
(ii) suppliers’ accounts in the purchases ledger.
A: Incorrect purchase ledger balances could mean possible disputes with suppliers affecting deliveries (1)
M
and may result in credit facilities being withdrawn. (1)
May lead to overpaying suppliers (1)

LA
SA
May result in loss of opportunities of settlement discount. (1)
Max 2
EM
Q22 State one difference between a capital reserve and a revenue reserve.
DE
A: Capital reserves:
A
Non distributable
N
Cannot be used to pay dividends
Created via changes in capital structure / non-trading activities
Max 1
Revenue reserves:
Distributable
Can be used to pay dividends
Created via trading activities
Max 1

Q23 Recommend whether or not Ravi should proceed with these changes. Justify your answer.
A: Recommend: The changes are not worthwhile. (1)
Because:
Although budgeted contribution is higher, the profit after the changes is lower (1), due to allocated fixed
costs increasing – advertising and sales bonus. (1)
The margin of safety is lower (1) which means there is less of a buffer / comfort zone before Wye starts to
make a loss. (1)
The break-even point is higher (1) which increases the risk (1) of Wye not making enough sales to cover
fixed costs. (1)

(1 mark) × any 4 reasons − Max 4
Q24 State four advantages to a business of planning for the future.
A: Possible answers:
M
Identify underperforming products (1)
LA
Ensure sufficiently skilled labour is available to meet production (1)
SA
Ensure sufficient finance is available to continue operations and any planned investments (1)
Ensure the correct quality/cost of material / discounts can be obtained from suppliers (1)
EM
Be able to adapt to changes in the future / provides alternatives if financial targets are not being met (1)
DE
A
N

NOVEMBER 2019
Q1 Advise the directors which option they should choose. Give reasons for your answer.
A: Rights issue (max 2)
Payment of dividends is discretionary (1) Permanent capital (1)
Will rights issue be fully subscribed (1)
Debenture (max 2)
Would increase (non-current) liabilities (1) Debenture interest must be paid (1) Security maybe required
(1)
Advice (1)
Q2 Identify two internal stakeholders with an interest in the financial statements of a limited company.
M
A: Shareholders (1)
Directors/employees (1)
LA
SA
Q3 State two reasons why a business would prepare a bank reconciliation statement.
EM
A: To identify errors in the cash book (1)

DE
To identify errors on the bank statement (1)
To identify uncleared lodgements (1)

A
To identify unpresented cheques (1)

N
To verify accuracy of accounting records (1)
To update the cash book with transactions only on the bank statement (1)
To identify out of date cheques (1)
Max 2

Q4 State two reasons why partners may agree to provide interest on capital.
A: To reward partners for their fixed investment in the business (1)
To encourage further capital investment in the business (1)
Q5 State two reasons why partners may agree to charge interest on drawings.
A: To discourage large amounts of drawings by the partners (1)
To penalise partners who make excessive drawings (1)
Q6 State two further terms that may appear in a partnership agreement.
A: The amount of salary payable to partners (1)
Rate of interest on partners’ loans (1)
M
Management responsibilities of partners (1)
Any limits on partners’ drawings (1)

LA
SA
Amount of partners’ capital (1)

EM
Max 2
Q7 State three advantages to a business of using a system of absorption costing.

DE
A: Enables selling prices to be set, because all costs are included in the pricing of a product. (1)
A
Supports long-term planning, because this depends on revenue. It must cover not just direct costs but
overhead costs as well. (1)
N
Absorption costing conforms to the accruals concept, because the total cost of unsold inventory is charged
to the period in which it is sold. (1)

Max 3

Q8 Recommend whether or not production of the model which provides the least profit should be
discontinued. Justify your answer using both financial and non-financial factors.
A: Financial – Max 2
All models make a positive contribution. (1)
If any model was discontinued fixed costs would be reallocated to the remaining models. (1)
Method of allocating fixed costs may be inappropriate. (1)
Non-financial – Max 4
Discontinuing any model may result in loss of customers/sales. (1)
Would the workforce be fully employed on the remaining models? (1)
Would employees need training to produce alternative models? (1)
Possible redundancies. (1)
Demotivated workforce. (1)
M
LA
Adverse publicity. (1)

SA
Overall Max 6 for justification + 1 for recommendation.
EM
Q9 State two differences between capital reserves and revenue reserves.
A: Capital reserves are created as a result of non-trading activities (1) whereas revenue reserves are created
DE
as a result of trading activities (1)
Capital reserves cannot be used to fund dividend payments (1) whereas revenue reserves can be used to
A
fund dividend payments (1)

N
Capital reserves are non-distributable (1) whereas revenue reserves are distributable (1)
Q10 State one advantage and one disadvantage to a business:

(i) of making all sales on a cash basis only
A: Advantages
Will improve overall cash flow (1)

Reduces the possibility of irrecoverable debts (1)
Disadvantages
Maybe a reduction in number of customers (1)

May have to reduce selling price to attract new customers (1)
Accept other valid advantages and disadvantages.

Max 1 advantage and 1 disadvantage.

(i) of making all purchases on a cash basis only.
Advantages
May improve the relationships with the suppliers (1)

May be able to negotiate a better purchase price (1)
Disadvantages
Overall cash flow will decrease (1)

Not making use of available credit terms (1)
Accept other valid advantages and disadvantages.

Max 1 advantage and 1 disadvantage
Q11 Discuss the liquidity of Nibali’s business based on the available information.
A: Inventory turnover indicates that it is taking longer than the industry average to sell goods (1) resulting in
a delay in receipt of payment from customers (1)
Nibali’s customers are taking 6 days over the credit terms to settle their accounts and Nibali is paying his
suppliers 5 days early (1) resulting in cash leaving the business before settlement is received (1)
M
LA
Conclusion/advice
Overall, Nibali’s efficiency ratios indicate poor liquidity (1)
SA
Q12 Identify three drawbacks for a business of holding too much inventory.
EM
A: Theft (1)
Storage costs (1)
DE
Insurance (1)
Obsolescence (1)
Damage (1)
A
Opportunity cost (1)

N

Max 3.
Q13 Explain two reasons why a partnership might keep separate current and capital accounts.
A: Capital accounts
Separate capital accounts record the permanent investment of each partner (1) facilitating the calculation
of interest on capital (1)
Current accounts
Separate current accounts record the transactions between the partners and the partnership (1)
facilitating the calculation of interest on drawings (1)

Q14 Explain two drawbacks for a business of using a budgeted overhead absorption rate.
A: Estimated figures used may be inaccurate (1) leading to under or over absorption of overheads (1)
Over absorption of overheads may lead to prices being set too high (1) which may lead to loss of customers
(1)
Under absorption of overheads may lead to prices being set too low (1) which would result in lower profits
(1)
Any 2 drawbacks (2 marks each) 1 mark for identifying the drawback and 1 mark or developing.
Q15 Advise Aramis whether or not he should accept the order. Justify your answer using both financial and
non-financial factors.
A: Financial factors (Max 3)

Makes a positive contribution (1) ($1300 – (710 + 225 + 85 + 140) = $140 (1) Does not achieve the
required profit margin (1)
Makes a loss of $160 (1)
The allocation of fixed overheads may be inaccurate (1)
M
Non-financial factors (Max 3)
LA
This is a new customer. Will there be repeat orders? (1)
What will be the reaction of the existing customers? (1)
Does the company have spare capacity/other resources? (1)
SA
Will the quality of the product be affected (1)
Decision (1)
EM

DE
Q16 State four factors that a business should consider before changing its supplier.
A: Quality – will the product quality be the same? (1)

A
Price – is the new supplier likely to offer a lower price? (1)

Credit terms – will the new supplier offer the same credit terms? (1)
N
Reliability – is the supplier reliable? (1)

Delivery – will the supplier offer delivery? (1)

Max 4.
Q17 Explain the term ‘6% debentures (2021 – 2022)’, which appears in S Limited’s financial statements.
A: S Limited have taken out a long-term loan (1) repayable between 2021 and 2022 (1) at an annual interest
rate of 6%. (1)

Q18 Advise the directors on which option they should choose. Justify your answer.
A: Option 1
Would require an immediate cash outflow (1)

The company already has a bank overdraft (1)
The debenture is due for repayment in the near future (1)
Payment of dividends is discretionary (1)
Option 2
The company will not require a cash outflow (1)

They have sufficient retained earnings to issue bonus shares (1)
They have a share premium account which can be used (1)
Will keep the shareholders happy (1)
Will not dilute voting rights (1)
Max 5 marks for comments
M
LA
Decision (1)
Q19 Explain why the reducing balance method of depreciation is more appropriate than the straight-line
SA
method for assets such as computer equipment
A: Computer equipment tends to fall in value more in the early years. (1) They lose value very quickly due to
EM
obsolescence/ technological changes. (1) The reducing balance method depreciates the assets more in the
earlier years and less in later years (1) which matches the fall in value of computer equipment (1).
DE
The straight line method of depreciation depreciates assets at the same amount each year (1) which does
not match the rapid loss in value. (1)
A

Max 4
N
Q20 Explain why the revaluation method of depreciation is appropriate for assets such as loose tools.
A: It is not worthwhile keeping individual records of loose tools (1) as they are usually many small value
items (1) and are difficult to keep track of. (1) They are easily broken, damaged or lost and have to be
regularly replaced. (1)
Max 2

Q21 Identify two external stakeholders.
Explain why they may be interested in the financial statements of a business.
A: (Potential) investors (1) – to assess return on investment (1)
Providers of finance (1) – to assess whether loans / interest will be repaid (1)
Government (1) – to ensure taxation liabilities will be paid (1)
Suppliers (1) - to assess whether or not to continue to supply and whether or not they will get paid (1)
Customers (1) – to assess continuity of supply (1)
Trade unions (1) – to assess the wellbeing of members (1)
Max 2 marks for stakeholders, max 2 marks for their interests.
Q22 Explain the difference between allocation and apportionment of overheads.
A: Overhead allocation is charging costs to a cost centre (1) those costs which are directly attributable to it.
M
(1)
LA
Overhead apportionment is charging costs to a cost centre which are not directly attributable (1) to it using
a suitable basis (1)
SA
Q23 Explain why a business calculates separate overhead absorption rates for each production department
rather than a single rate for the whole factory.
EM
A: The overhead absorption rate should be chosen to reflect the activity of that department (1).
DE
If the department is machine-intensive then machine hours should be chosen / If the department is labour
intensive then labour hours should be chosen (1)
A
This should lead to a more accurate absorption of overheads (1) which in turn leads to a more accurate
cost figure / selling price (1)
N
Max 4

Q24 Advise the directors whether or not they should proceed with their plans. Justify your answer.
A: 1 mark for identification, max 2 marks for development
Benefits
Formal budget will inform all departments of the common goal (1) and therefore improve communication
between the departments. (1)
Will provide clear indication of individual managers’ areas of responsibility (1) and therefore improve co-
ordination between departments. (1)
Will motivate managers and employees (1) thus improving company performance. (1)
Facilitates planning (1) which enables targets to be set (1) and improve performance by analysing
variances. (1)
Drawbacks
Short term costs will increase (1) which would reduce profits though long term benefits should accrue. (1)
May be problems implementing the control system (1), employees may be resistant to change. (1)
M
LA
Causes a straightjacket effect (1) which may prevent innovation (1) and missed opportunities (1)
May result in demotivation (1) if the budgets are unrealistic (1)

SA
EM
Decision 1 mark
Max 3 marks for identification

DE
Max 3 marks for development

Overall max 6
A
N

JUNE 2020
Q1 Explain the accounting concepts of:
(i) business entity
(ii) substance over form.
Ans: (i) Business entity: a business has its existence separate from its owners (1)
only transactions that affect the business should be recorded in the accounting records (1)
Max 2
(ii) Substance over form: financial statements must give a complete and accurate picture of events (1)
so economic impact is taken into account and legal form is disregarded (1)
Max 2
Q2 Advise Tariq which of these actions he should take. Justify your advice.
Ans: Advice (1)

Reducing inventory:
Would achieve improvement in liquidity (1)
M
Would reduce storage costs (1)
Would reduce chance that items become out of date and are wasted (1)
LA
But negative impact if inventories run out and demand not met (1)
SA
Delaying payments to suppliers:
Would achieve improvement in liquidity (1)
Might cause the loss of cash discounts/negative impact on profits (1)
EM
But negative impact if credit terms not met leading to loss of suppliers/credit terms/interest charges (1)
Award up to 2 marks for each course of action (overall maximum 4 marks) plus 1 mark for advice
DE
Q3 Explain one advantage and one disadvantage to a business of using the reducing balance method of
depreciation.
A
Ans: Advantage (Max 1 advantage)

N
Provides a more realistic charge against profits (1) as some assets lose more value in their
first years (1)/as the asset reduces in value so the depreciation charge reduces (1).
1 + 1 mark for development

Accept other valid responses.
Disadvantage (Max 1 disadvantage)
Is more complicated to calculate (1) as the charge changes each year because it is based on the decreasing
net book value at the beginning of each year (1) rather than the more straightforward equal charge per
year when using the straight-line method (1).
1 + 1 mark for development

Q4 State two reasons, other than wear and tear, for depreciating non-current assets.
Ans: Obsolescence/technological change (1)

Lapse of time (1)
Inadequacy (1)
Depletion (1)
Max 2
Accept other valid responses
Q5 State three reasons why a partnership might be dissolved.
Ans: Reasons for dissolving a partnership

Business is making a loss (1)
Partners cannot agree (1)
A partner has died/retired (1)
The objectives of the partnership have been achieved (1) Legal reasons such as insanity of partner (1)
Max 3
Q6 Explain three ways in which the introduction of a system of budgetary control will affect the departmental
M
managers of a business.
Ans:
LA
Managers could be involved in setting targets/budgets for their areas of responsibility (1)
resulting in possible increase in motivation (1)
SA
If managers are not involved in setting targets/budgets motivation could be reduced (1) especially if
targets are seen to be unachievable/unrealistic (1)
Managers’ efficiency could be improved (1) as a result of having clear objectives/targets (1)
EM
However, budgetary control might prove to be restrictive (1) resulting in otherwise beneficial
opportunities being rejected by managers (1)
DE
Any three points (1 + 1 for development)

A
N

Q7 Advise the directors which option they should choose, taking account of financial and non-financial factors.
Justify your choice.
Ans: Advice (1)

Justification
Reasons for choosing Option A:
Will increase profits by $4 564 (1of) on latest performance (1)

Will not involve any permanent change in fixed costs (1)
Not changing fixed costs will be beneficial if increased demand is not maintained (1)
Will ensure factory is working to full capacity making most efficient use of existing resources (1)
Will avoid applying for bank loan which will increase company’s liabilities (1)
Application for bank loan for Option B may be refused (1)
Reasons for choosing Option B

Will increase profits by the larger amount $10 700 (1) OF on latest performance (1)
Will achieve target profit for factory (1) and exceed target by $3 200 (1)
Option A does not achieve target profit (1) and misses target by $2 936 (1)
Will avoid the use of overtime working which may not suit workforce (1)
Will avoid the use of overtime working which may cause deterioration in quality of production (1)
M
Will ensure factory is working to full capacity making most efficient use of existing resources (1)
Advice (1) plus Max (6) for justification

LA
SA
EM
DE
A
N

NOVEMBER 2020
Q1 (i) Explain how a business may increase its gross margin.
(ii) Explain how a business may improve its profit margin.
Ans: (i) Reduce the cost of sales (1) by finding less expensive supplies (1).
(ii) Better control of overhead expenses (1) such as reducing irrecoverable debts (1)
Q2 State one reason why each of the following may be interested in the financial statements of a business.
Ans: Employees – To be aware of profitability to assess job security and remuneration. (1)
Suppliers– To assess likelihood of being paid amounts owed. (1) Government – To confirm correct amounts
of taxes are being paid. (1)
M
Q3 State three methods of depreciation which may be used by a business.
Ans: Reducing balance (1).

Straight-line (1).
LA
SA
Revaluation (1).
Q4 Advise Khalid which method of depreciation he should use for each asset. Justify your advice.
EM
Ans: Motor vehicle – reducing balance (1).

The asset loses value more quickly at the beginning of its life therefore more depreciation is charged in the
DE
early years (1).

More maintenance expenditure is expected in later years so less depreciation (1).
Max. 3
A
Machine – straight line (1).

N
The asset loses value at a steady rate (1).

The same benefit is received over the life so equal depreciation is charged in accordance with the accruals
concept (1) spreading the cost over the useful economic life (1).
Max. 3
Q5 State which accounting concept Khalid did not apply in each of the following scenarios.
Ans:
Scenario Concept
Khalid used the business bank account to Business entity (1).
pay for a deposit for a family holiday. This
was treated as a business expense.
A stapler for $10 paid by Khalid out of the Materiality (1).
business bank account was added to the
business office equipment account
balance.
Khalid became aware that a trade Prudence / matching/accruals (1).
receivable owing $1500 was bankrupt. He
took no action when preparing the annual
accounts.
Q4 State the purpose of financial statements.
Ans: To provide information about the financial performance of the business (1) the financial position of the
business (1) and to facilitate decision making/ comparison to previous years / other businesses (1).
Q5 State two advantages to a business of using each of the following methods of inventory valuation.
(i) First in first out (FIFO)
(ii) Last in first out (LIFO)
(iii) Average cost (AVCO)
Ans: (i) FIFO

Simple to calculate (1).
Approved by IAS2 (1).
Inventory valuations are based on the most recent receipts (1)
Max 2
(iii) LIFO
Simple to calculate (1)
M
When prices rise profits will fall (1).
LA
May correspond to flow of inventory – ‘top of pile’ (1).
Max 2
SA
(iii) AVCO
EM
Automatically adjusts for price rises and falls (1). Approved by IAS2 (1)
Provides an average price for goods issued (1)
DE
Max 2
A
Q6 Explain why Kevin should not value his inventory at this price.
N
Ans: The use of selling price would result in an overstatement of profit / current assets (1)
so inventory should be valued at lower of cost and net realisable value (1)
in accordance with the prudence concept (1)
Max 3

Q7 Advise Kevin whether or not he should change from marginal costing to absorption costing.
Justify your answer.
Ans: Marginal costing

 Easier to operate (1).
 Aids short-term decision making (1).
 Enables optimum allocation of resources (1).
 Avoids the problems of over/under absorption (1).
Absorption costing
 More complex / may require specialist knowledge (1).
 Gives higher profit when inventory levels increase (1).
 Includes an element of fixed cost in the inventory valuation (1).
 Absorbing overheads into costs aids the setting of prices (1).
 Reviewing under and over absorption may aid control and management of the business (1).

1 mark for decision and Max 6 marks for valid points.
M
LA
SA
EM
DE
A
N

Accounting concepts and financial statements

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NOTES FOR AS LEVEL (2020-2021)

help reduce cost which increase the profitability of business.

(1) Internal Users

(2) External Users

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 1

OBJECTIVES OF FINANCIAL STATEMENTS

3. Lenders & Creditors

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 2

Only transaction and events that are capable of being measured

users of the financial statement.

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 3

Small expense items are grouped together as ‘general

Materiality treated as an expense on the income statement, for

example, stationery items or small tools that will be

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 4

BOOKS OF ORIGINAL ENTRY

cash and bank balance.

OBJECTIVES OF PREPAIRING TRIAL BALANCE

TRIAL BALANCE NOT AN ABSOLUTE PROOF

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 5

BENEFITS OF CONTROL ACCOUNTS

BANK RECONCILIATION STATEMENT

1. Uncleared deposits or lodgments or uncredited cheques

5. Bank charges and interest

7. Errors in recording transactions in the accounting records

PROCEDURE FOR BANK RECONCILATION

USEFULNESS OF BANK RECONCILATION

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 7

ESTIMATING PROVISION FOR BAD DEBTS

2. Percentage of accounts receivable.

3. Percentage of credit sales.

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 8

DIFFERENCES IN OWNERSHIP TYPES

1. Number of owners One Two or more but Several

2. Formation Easy Easy Requires completion of legal

3. Legal Status None None Legal

5. Dissolution At the will of owner,

7. Transfer of ownership Easy Transferable when all Transferable freely among

partners agree. Shareholders

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 9

FIFO (first in, first out)

NET REALISABLE VALUE (NRV)

YEAR END INVENTORIES LA

EFFECT OF PRICE LEVEL CHANGES (FIFO)

COST OF SALES PROFIT INVENTORIES

GROSS PROFIT METHOD

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 10

Fixed depreciation rate is applied to the book value of non-current assets

(c) Revaluation Method

(a) The useful life of an asset; or

(c) Residual value of an asset.

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 12

(h) Valuation and treatment of goodwill on admission, retirement or death of partner

(a) Profits are shared equally

(b) No interest on capital

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 13

(a) Reputation of business for providing quality products or services

internally generated goodwill according to international accounting standard inherent goodwill

(a) Average Profit

(a) Change in profit sharing ratio.

AS NOTES (2020-2021) PREPARED BY NADEEM SALAM Page 15

REASONS FOR INCOMPLETE RECORDS