Cambridge-Accounting-workbook-Answers David Horner 2021

Cambridge International AS & A Level Accounting workbook
Answers to example questions

AS Level
1 Financial accounting
1.1 Types of business entity
1 D
2 C
3 B
4 i No need to share profits – sole trader keeps all profits compared with partnership where the
profit is shared out in an agreed ratio.
ii No need to consult on decision making – sole trader can make all the major decisions
without having to consult with partners who have a say in the running of the business.
5 Any three from:
• Access to more capital to expand the business – partners can contribute more capital if
they all make financial contributions.
• Specialisation in different roles within the business – each partner can focus on his or her
own areas of expertise – the sole trader has to be an ‘expert’ in all things.
• Cover can be arranged for illness and holidays can be organised without the loss of normal
business continuity.
• More creative ideas may be generated – greater number of people running the business
should mean more creative input.
6
• Profits and losses are shared equally.
• No interest on capital is allowed.
• No interest on drawings is allowed.
• No partnership salaries.
• Any partner lending the business money is entitled to 5% interest on that loan.
7 Any two from:
• Limited liability – no risk of losing own money compared with unlimited liability of
(normal) partnerships.
• Higher profile – more publicity for business. A limited company is likely to get more
publicity – the act of conversion may itself attract media coverage.
• Easier to raise finance (especially if plc) as outside investment can be brought into the
company as new shareholders generate finance.
• Banks and other lenders may be more willing to lend money to the business as it may be
perceived to be at a lower risk of failure.
Cambridge International AS & A Level Accounting workbook 1

© David Horner/Hodder & Stoughton Ltd 2021
Cambridge International AS & A Level Accounting workbook: answers to example questions
8 Differences include:
• Shares in a private company cannot be publicly traded – meaning the control of the
company is kept in the hands of the initial shareholders.
• Size of share capital is likely to be much larger for a plc.
• A plc has to publicly disclose far more information about its financial performance than a
private company.
9 Security is where a business offers an asset as collateral when borrowing money. If the business
fails to keep up the repayment terms on the loan (including meeting the interest payments) then
the lender can take ownership of the asset used as a security.
10 Internal sources: Owners’ money, money from friends/family, retained earnings
External sources: Overdraft, loan, trade credit, debentures, share issues
11 i Share capital does not have to be repaid – the finance represents permanent capital.
Debentures have a fixed repayment date.
iiDividends do not have to be paid – they are optional, though shareholders may be unhappy
if they expected dividends and none are paid.
Debentures have a fixed interest rate that must be paid.
12 Arguments in favour of overdrafts would include:
• Interest is only paid on the amount the company’s account is overdrawn by.
• They are flexible in that they can be used and paid whenever the business wishes.
• Obtaining an overdraft is easier than most other external sources.
Arguments against overdrafts would include:
• Interest rates on overdrafts are very high (especially compared to a secured loan).
• Some banks may charge a flat rate fee for the use of an overdraft irrespective of the
amount by which the account is overdrawn.
Overall:
• Overdrafts are the most often used source of finance. For a company, there are other
sources available, such as loans, share issues, debentures and so on.
• Knowing what form the expansion is to take and how much money is needed would
probably make the decision easier.
1.2 The accounting system

1 B
2 C
3 C
4 C
5 B

6
Account to be debited Account to be credited
a Motor van M Sparks
b Machinery Bank
c Bank Capital
d C Scanlon Sales
e U Baines Bank
f Cash B Fanning
7
Account to be debited Account to be credited
a Cash Bank
b Insurance Cash
c K Themen Purchases returns
d Bank Commission received
e Drawings Purchases
f Bank E Poulou

8
Capital
$ $
May 1 Cash 1 400
May 17 Computer 380
Cash
$ $
May 1 Capital 1 400 May 6 Bank 800
May 13 Equipment 200
Bank
$ $
May 6 Cash 800 May 8 Equipment 400
Equipment
$ $
May 8 Bank 400 May 13 Cash 200
Computer
$ $
May 17 Capital 380
Car
$ $
May 11 T Friel 2000
T Friel
$ $
May 11 Car 2000

9
Capital
2021 $ 2021 $
Jun 30 Balance c/d 1 000 Jun 1 Bank 1 000
Jul 1 Balance b/d 1 000
Bank
2021 $ 2021 $
Jun 1 Capital 1 000 Jun 28 Wages 102
Jun 30 Balance c/d 898
1 000 1000
Jul 1 Balance b/d 898
Purchases
2021 $ 2021 $
Jun 5 S Wolstencroft 98 Jun 30 Balance c/d 98
S Wolstencroft
2021 $ 2021 $
Jun 12 Purchases returns 22 Jun 5 Purchases 98
98 98
Sales
2021 $ 2021 $
Jun 30 Balance c/d 277 Jun 8 S Rogers 99
Jun 18 P Hanley 178
277 277
Purchases returns
2021 $ 2021 $
Jun 30 Balance c/d 22 Jun 12 S Wolstencroft 22

S Rogers
2021 $ 2021 $
Jun 8 Sales 99 Jun 30 Balance c/d 99
P Hanley
2021 $ 2021 $
Jun 18 Sales 178 Jun 20 Sales returns 58
178 178
Sales returns
2021 $ 2021 $
Jun 20 P Hanley 58 Jun 30 Balance c/d 58
Wages
2021 $ 2021 $
Jun 28 Bank 102 Jun 30 Balance c/d 102
10
Assets ($) Capital ($) Liabilities ($)
a 64 742 42 422 22 320
b 18 908 13 123 5 785
c 87 971 43 421 44 550
d 61 320 39 808 21 512
e 109 091 76 359 32 732
11
Assets ($) Capital ($) Liabilities ($)
a 33 465 28 980 4 485
b 78 979 23 141 55 838
c 151 409 89 808 61 601
d 212 409 168 970 43 439
e 99 080 28 711 70 369

12
Book of prime entry
a Purchases made on credit. Purchases journal
b Goods previously purchased by the business sent back to Purchases returns
the supplier. journal
c A computer taken out of business for private use. General journal
d Bank transfer to settle amount owing relating to the Cash book
purchase of goods for resale.
e Cheque received on sale of motor vehicle Cash book
f Sale on credit of machinery bought for resale Sales journal
13
Cash book
Cash Bank Cash Bank
$ $ $ $
Mar 1 Balance b/d 110 635 Mar 2 Rent 315
Mar 4 Sales 213 Mar 7 M Bright 175
Mar 9 Capital 500 Mar 12 Wages 199
Mar 13 Commission received 85 Mar 18 Purchases 76
Mar 22 Electricity 41
Mar 31 Balance c/d 367 370
408 1135 408 1135
Apr 1 Balance b/d 367 370
14
Cash book
Discount Discount
Cash Bank Cash Bank
allowed received
$ $ $ $ $ $
Jul 1 Balance b/d 87.00 Jul 1 Balance b/d 209.50
Sundry
Jul 5 C Woods 5.60 274.40 Jul 8 46.90
expenses
Jul 5 D Hirst 6.80 333.20 Jul 9 C Palmer 14.40 345.60
Jul 5 N Jemson 9.60 470.40 Jul 20 J Sheridan 5.40 174.60
Jul 31 Balance c/d 18.10 Jul 20 N Pearson 3.60 116.40
Jul 25 Rent 250.00
Jul 31 Balance c/d 40.10
22.00 87.00 1096.10 23.40 87.00 1096.10
Aug 1 Balance b/d 40.10 Aug 1 Balance b/d 18.10

15
General journal
Dr Cr
$ $
Equipment 1 250
T Crooks 1 250
Equipment bought on credit.
B Pritchard 250
N Wilding 250
Transfer of debt from Pritchard to Wilding.
Drawings 560
Computer 560
Owner takes computer from business for personal use.
Delivery van 13 250
SpareVans Ltd 13 250
Van bought on credit.
Equipment 225
T Presley 225
Equipment received in settlement of business debt.
16 a The principle of consistency matters here. Ahmed should continue to use straight line for
depreciating the asset. Using the same method ensures that comparisons with previous
years are more meaningful if the same method is used. It is not that important if the asset
has an unrealistic value.
b This refers to the concept of materiality. If the value of the cups – which are ‘inventory’ of
the juice bar – is sufficiently small then they could be written off as revenue expenditure.
This would have to be decided by Ahmed, as to whether the value of the cups is small
enough to warrant treating these as an expense rather than as an asset.
c This relates to the accruals or matching concept. Incomes and expenses should be matched
to the period where they were incurred or generated. Even if the money has not been
received, the sale should be credited as income in the current year just as the expenses he
incurred in relation to the event have been recorded in the current year. The debt should be
included in trade receivables at the year end.

17 Advantages of not maintaining full records:

• No legal obligation.
• Might need to spend money on an accountant.
• Time and effort taken to keep records.
Advantages of maintaining full records.
• The double-entry bookkeeping system has a number of built-in checks, making it easier to
spot mistakes.
• Control spending may require detailed records of where a business spends money.
• Full accounting records makes theft from the business by employees less likely.
Obviously, a one-person organisation will not face this problem.
• Some records will need to be submitted to the tax authorities.
Overall:
• Perhaps a compromise can be reached – keeping more detailed records but not full
records.
• If the business expands, Coverdale will have to move closer to keeping full records.
• If he wants to become a company, full records may have to be kept.
1.3 Accounting for non-current assets

1 C
2 D
3 B
4 D
5 Capital expenditure: b, c, f
Revenue expenditure: a, d, e
6 Capital receipt: b, c
Revenue receipt: a, d, e, f
7 Capital expenditure: d, h
Capital income: g, j, k
Revenue expenditure: a, b, e, i
Revenue income: c, f, l
8
Capital expenditure $ Revenue expenditure $
Purchase price of machinery 45 000 Insurance on machinery 2 340
Delivery charge for machinery 870 Power charge for machinery 2 670
Installation cost of machinery 990 Maintenance costs 3 100
Legal fees associated with purchase 1 840
Total 48 700 Total 8 110

9
Straight-line method Reducing balance method
($) ($)
Cost value 33 000 33 000
Depreciation year 1 10 200 16 500
Book value at end of year 1 22 800 16 500
10
Straight-line method Reducing balance method

($) ($)
Cost value 25 000 25 000
Depreciation year 4 6 000 2 572.50
Book value at end of year 4 1 000 6 002.50

11
Provision for depreciation of plant and equipment
2021 $ 2021 $
Dec 31 Balance c/d 10 000 Dec 31 Statement of profit or loss 10 000
(50 000 x 0.2)
2022 2022
Dec 31 Balance c/d 25 000 Jan 1 Balance b/d 10 000
Dec 31 Statement of profit or loss
[10000 + (100000 x 0.2 x 3/12)]
15 000
25 000 25 000
2023 2023
Dec 31 Statement of profit or loss
[10000+ 20000 + (20000 x 0.2 x 9/12)]
33 000
58 000 58 000
12
General journal
Dr Cr
$ $
Equipment disposal 70 000
Equipment at cost 70 000
Transfer of asset to disposal account.
Provision for depreciation of equipment 25 000
(70000/7 x 30/12)
Transfer of accumulated depreciation to disposal account.
L Tong 44 000
Receipt from sale of asset.
Statement of profit or loss 1 000
Loss on disposal of asset.

13
(i)
Motor vehicle disposal account
2024 $ 2024 $
Jun 30 Vehicle 25 000 Jun 30 Provision 12 200
for
depreciation
of vehicle
Jun 30 Statement of profit or loss 700 Jun 30 Vehicle 13 500
25 700 25 700
Workings
• Accumulated depreciation = $5 000 + $4 000 + $3 200 = $12 200
• New vehicle costs $20 000 – and payment of $6 500 means original vehicle was traded-in
for $13 500
(ii)
Motor vehicle account
2023 $ 2024 $
July 1 Balance b/d 25 000 Jun 30 Disposal 25 000
2024 Jun 30 Balance 20 000

Disposal 13 500 c/d
Jun 30
Jun 30 Bank 6 500
45 000 45 000
1.4 Reconciliation and verification

1 D
2 C
3 B
4 B

5
Trial Balance at 31 December 2022
Dr Cr
$ $
Sales 123 341
Purchases 62 342
Sales returns 432
Purchases returns 342
Machinery at cost 21 000
Provision for depreciation of machinery 1 220
General expenses 989
Land 50 000
Inventory at 1 January 2022 5 523
Trade payables 4 536
Trade receivables 8 778
Bank overdraft 113
Salaries 52 425
Administration costs 841
Capital 85 000
Drawings 12 222
214 552 214 552
Inventory at 31 December 2022 was valued at $6 131
6 i Entering two debits or two credits for an entry.

ii Missing out half of the entry.
iii Entering different amounts for each ‘half’ of the transaction.
7 a Original entry
b Reversal
c Commission
d Principle
e Compensating
f Omission

8
General journal
Dr Cr
$ $
Purchases 400
Motor vehicles 400
Bank or cash 130
Sales 130
A Wright 72
Purchases returns 72
Sales returns 86
J Callis 86
I Burden 150
I Boden 150
9
Statement of corrected profit for the year
$ $
Loss for the year (225)
Add:
Insurance 425
Drawings 94 519
294
Less:
Sales 250
General expenses 19 269
Corrected profit for the year 25

10
General journal
$ $
Purchases 164
Suspense 164
Account which was under added now amended
for correct total
Drawings 24
Purchases 24
Owner’s purchases included in business
purchases by mistake – now corrected
Wages 100
Suspense 100
Amount for wages entered on credit side twice –
now amended
Y Bach 9
Sales returns 9
Incorrect amount entered in both accounts – now
corrected
Suspense 21
Carriage inwards 21
Incorrect amount entered in carriage account –
now corrected
Suspense
2021 $ 2021 $
July 31 Trial balance difference 243 July 31 Purchases 164
July 31 Carriage inwards 21 July 31 Wages 100
264 264

Statement of corrected profit at 31 July 2021

$ $
Draft profit for the year 780
Add:
Drawings 24
Sales returns 9
Carriage inwards 21 54
834
Less:
Purchases undercast 164
Wages 100 264
Corrected profit for the year 570
11
Cash book
2020 $ 2020 $
Apr 30 Balance b/d 185 Apr 30 Bank interest 31
Apr 30 Ian Yates 85 Apr 30 Bank charges 8
Apr 30 Electricity 130
Apr 30 Balance c/d 101
507 507
May 1 Balance b/d 101
12 a
Cash book
2022 $ 2022 $
Jun 30 Balance b/d 344 Jun 30 S Lebon 250
Jun 30 Dividends 132 Jun 30 Bank charges 66
476 476

b
Bank reconciliation statement at 30 June 2022
$ $
Balance as per updated cash book 160
Add Unpresented cheques
M Harket 145
305
Less Lodgements not yet credited
J Keeble 205
N Rhodes 185 390
Balance as per bank statement 85 (O/D)
13
Sales ledger control account
2021 $ 2021 $
Nov 1 Balances b/d 3 134 Nov 30 Bank 50 118
Nov 30 Credit sales 49 710 Nov 30 Discounts 54
allowed
Nov 30 Sales returns 99
Nov 30 Irrecoverable 464
debts
Nov 30 Balance c/d 2 109
52 844 52 844
Dec 1 Balance b/d 2 109
14
Purchases ledger control account
2023 $ 2023 $
Apr 30 Bank 94 131 Apr 1 Balance b/d 4 980
Apr 30 Discounts 2 122 Apr 30 Credit purchases 101 900
received
Apr 30 Purchases 496
returns
Apr 30 Balance c/d 10 131
106 880 106 880
May 1 Balance b/d 10 131

15
2022 $ 2022 $
Mar 1 Balance b/d 42 301 Mar 31 Balance b/d 1 013
Mar 31 Credit sales 399 808 Mar 31 Bank 417 013
Mar 31 Bank 425 Mar 31 Discounts allowed 3 314
Mar 31 Balance c/d 730 Mar 31 Irrecoverable debts 870
Mar 31 Sales returns 442
Mar 31 Purchases ledger control 756
account
443 264 443 264
2022 $ 2022 $
Mar 31 Bank 300 980 Mar 1 Balance b/d 23 808
Mar 31 Discount received 2 890 Mar 31 Credit purchases 288 661

Mar 31 Purchases returns 845
Mar 31 Sales ledger control 756
account
312 469 312 469

16 Reasons for preparing control accounts:

• They can deter fraud.
• They assist in the location of errors.
• They provide a total for Trade receivables/payables. This assists in the preparation of the
trial balance and financial statements.
Reasons for not preparing control accounts:
• It is time consuming – if there are a small number of transactions then it may seem
unnecessary.
• Not all errors would be discovered using control accounts – it depends on how the error is
made (e.g., an error of omission missed out from all journals/ledgers would not necessarily
be spotted).
Overall:
• It depends on how many transactions she needs to record.
• Consider if there is a risk of fraud/errors from other members of staff she may employ.
• Check if she utilisse trade credit for purchases and sales. If not, then it may not be
necessary.
1.5 Preparation of financial statements

1 D
2 B
3 A
4 A
5 a
Insurance
2021 $ 2021 $
Dec 31 Bank 994 Dec 31 Statement of profit or loss 1 026
Dec 31 Balance c/d 32
1 026 1 026
b
Electricity
2021 $ 2021 $
Dec 31 Bank 425 Dec 31 Statement of profit or loss 373
425 425

6 a
Wages
2023 $ 2023 $
Jan 1 Balance b/d 118 Dec 31 Statement of profit or loss 9 803
Dec 31 Bank 9 280
9 803 9 803
b
Rent received
2023 $ 2023 $
Statement of profit or
Dec 31 loss 5 436 Jan 1 Balance b/d 214
Dec 31 Bank 4 650
5 436 5 436
7
Irrecoverable debts
2023 $ 2023 $
Apr 22 G Gregory 56 Dec 31 Statement of profit or 1549
loss
Jul 31 M Ware 42
Oct 19 I Craig Marsh 101
Dec 15 P Oakey 1350
1549 1549
($0.75 × $1 800 = $1350)
8
Year Value of the allowance Entry in statement of profit or loss
($) ($)
2019 600 600 (debit)
2020 735 135 (debit)
2021 774 39 (debit)
2022 663 111 (credit)

9
2022 2023 2024 2025
$ $ $ $
Effect on profit (1 688) (1 108) (1 640) (728)
10
R Becks
Calculation of gross profit for the year ended 31 March 2026
$ $ $
Revenue 76 500
Less Sales returns 241
76 259
Less Cost of sales
Opening inventory 4 440
Purchases 34 234
Less Purchases returns 139

34 095
Less Goods for own use 5 142
28953
Carriage inwards 280 29 233
33 673
Less Closing inventory 3 980 29 693
Gross profit 46 566

11
C Lowe
Statement of profit or loss for the year ended 30 June 2023
$ $
Revenue 98 080
Less Cost of sales
Purchases 45 435
48 556
Gross profit 53 968
Add Other income
Commission received 221
54 189
Less Expenses
Wages and salaries 17 200
Office expenses 890
Rent and rates 666
Insurance 420
Motor vehicle expenses 341 19 517
Profit for the year 34 672

12
P King
Statement of profit or loss for the year ended 31 December 2024
$ $ $
Revenue 99 700
Less Cost of sales
Purchases 35 600

48 830
Gross profit 59 848
Add Other income
Discount received 1 349
Rent received 4 500
Reduction in allowance for irrecoverable
debts 470 6 319
66 167
Less Expenses
Office expenses 8 725
Motor vehicle expenses 125
Carriage outwards 850
Depreciation of office equipment 22 000
Depreciation of motor vehicles 7 200 64 300
13

N Tennant
$ $ $
Revenue 325 000
Less Sales returns 405
324 595
Less Cost of sales
Purchases 149 000

148 648
177 332
Gross profit 171 823
Add Other income
Discount received 1 110
172 933
Less Expenses
Rent and rates 6 173
Electricity 2 690
Selling expenses 888
Allowance for irrecoverable debts 740
Depreciation of fixtures and fittings 6 440

N Tennant
Statement of financial position at 31 December 2024
$ $ $
ASSETS
Accumulated
Non-current assets Cost depreciation Net book value
Land and buildings 225 000 – 225 000
Fixtures and fittings 45 000 19 240 25 760
Motor vehicles 25 000 13 000 12 000
295 000 32 240 262 760
Current assets
Inventory 24 560
Less Allowance for irrecoverable debts 990 18 810
Other receivables 950
Cash in hand 223 44 543
Total assets 307 303
CAPITAL & LIABILITIES

Opening balance 196 431
Add Profit for the year 101 550
297 981
Less drawings 9 800
288 181
Current liabilities
Other payables 600
Bank overdraft 5 234 19 122
Total capital and liabilities 307 303

14
Almond and Ball
Appropriation account for the year ended 31 December 2022
$ $ $
Add Interest on drawings Almond 900
Ball 650 1 550
24 050
Less Interest on capital Almond 800
Ball 625 1 425
Partner’s salary Almond 8 000 9 425

14 625
Share of profit Almond 9 750
Ball 4 875 14 625

15
Datchler, Hayes and Nocito
Appropriation account for year ended 30 June 2025
$ $ $
Add Interest on drawings Datchler 480
Hayes 340
Nocito 160 980
124 980
Less Interest on capital Datchler 3 400
Hayes 2 400
Nocito 2 000 7 800
Partner’s salary Datchler 15 000

Hayes
Nocito 22 800
102 180
Share of profit Datchler 51 090
Hayes 25 545
Nocito 25 545 102 180
Current accounts
Datchler Hayes Nocito Datchler Hayes Nocito
$ $ $ $ $ $
Balance b/d 6 644 Balance b/d 5 521 1 312
Interest on
Drawings 12 000 8 500 4 000 capitals 3 400 2 400 2 000
Interest on
drawings 480 340 160 Salaries 15 000
Balance c/d 62 531 12 461 24 697 Share of profit 51 090 25 545 25 545
75 011 27 945 28 857 75 011 27 945 28 857
Balance b/d 62 531 12 461 24 697
16 $0.04 × 350 000 = $14 000

17
Debit Bank $480 000
Credit Ordinary share capital $400 000
Credit Share premium account $80 000

18
General journal
Dr Cr
$ $
Property 400 000
Revaluation reserve 400 000
Business property increased in value to reflect
change in value
19 a (i)
General journal
Dr Cr
(Bonus issue) $ $
Share premium account 100 000
Retained earnings 300 000
Ordinary share capital 400 000
(ii)
Debit Bank $200 000
Credit Ordinary share capital $200 000
b
Lidbury plc
$
ASSETS
Non-current assets 600 000
Current assets 330 000
930 000
EQUITY AND LIABILITIES
Equity
Ordinary shares of $1 each 800 000
Revaluation reserve 30 000
846 000
Current liabilities 84 000
Total equity and liabilities 930 000

20
PCHH Ltd
$ $
Revenue 595 000
Less Cost of sales
Purchases 248 000
312 700
Rent received 9 500
351 607
Less Expenses
Rent and rates 3 000
Insurance 4 560
Selling expenses 888
Depreciation of fixtures and fittings 7 300
Profit from operations 240 459
Finance costs 4 000
Profit before tax 236 459
Tax 30 500
PCHH Ltd
Statement of changes in equity for the year ended 31 December 2024
Ordinary Share Retained earnings Total
capit $ $
al
$
Balance at 1 Jan 2024 300 000 37 860 337 860
Profit for the year 202 959 202 959
Dividends paid (9 000) (9 000)
Balance at 31 Dec 2024 300 000 234 819 534 819

PCHH Ltd
$ $ $
ASSETS
Accumulated
Non-current assets Cost depreciation Net book value
Land and buildings 425 000 425 000
Fixtures and fittings 95 000 29 300 65 700

Motor vehicles 32 000 15 400 16 600
552 000 44 700 507 300
Current assets
Inventory 59 807
Cash and cash equivalents 12 100 120 807

Equity
Total equity 534 819
Non-current liabilities
5% Debentures (2029) 80 000
Current liabilities

21 Factors concerned with share issue:

• Control will be diluted or potentially lost with any issue of ordinary shares.
• A rights issue may help keep shareholdings with the current group of investors.
• Dividends have to be paid only if profits are high enough.
• Shares do not have to be repaid.
Factors concerned with debenture issue:
• No issue of lost control arises.
• Interest payments cannot be missed.
• Debenture will eventually have to be repaid.
• The debenture may require security.
• Cost of interest payments may be higher than likely dividend payments.
Overall:
• Even with a rights issue, investors can still sell their shares (it is a plc) and control may be
lost.
• Control would only be lost if directors were not holding significant amounts of shares.
22
$ $
Balance b/d 8 640 Bank 69 560
Sales 74 266 Discounts allowed 1 730
Irrecoverable debts 238
Balance c/d 11 378
82 906 82 906
Balance b/d 11 378

$ $
Bank 55 980 Balance b/d 12 476
Discounts received 1210 Purchases 50 692
Balance c/d 5 978
63 168 63 168
Balance b/d 5 978
23
Shoes sold at cost price = $1000 x ¾ = $750
Cost of shoes stolen = 130 + 980 – 750 – 30 = $330

24
Workings:
Sales control account
Balance b/d 34 362 Receipts 268 635
Credit sales 267 213 Balance c/d 32 940
301 575 301 575
Purchases control account
Payments 172 959 Balance b/d 26 268
Balance c/d 27 915 Credit purchases 174 606
200 874 200 874
Cash sales banked 84 915
Add Drawings 18 720
Cash sales 103 635
i
Sykes
$ $
Sales 370 848
Less Cost of goods sold
Add Purchases 174 606
194 376
Less Expenses
Expenses 14 520
Insurance 6 168
Wages 42 500
Depreciation of fixtures and fittings equipment 20 400

ii
Sykes
$ $
Non-current assets
Premises 300 000
Equipment 65 100
Motor cars 29 100
394 200
Current assets
Inventory 24 450
Other receivables 261
Bank 124 378 182 029
Capital and liabilities
Capital at 1 January 2022 456 141
Add Profit for the year 108 934
607 575
Less Drawings 18 720
546 355
Current liabilities
Other payables 1 959 29 874

1.6 Analysis and communication of accounting information

1 A
2 B
3 C
4 B
5 a Employees
Interest in profits and liquidity of business for purposes of job security – whether the
business is going to survive into the medium term.
Interested in profits of business to determine whether business can afford to make pay
increases to workers.
b Lenders
Interested in profitability and liquidity of business to check that the business can meet
interest payments and repay any borrowed amounts.
c Existing investors
Will be interested in profits, which can be used to make dividend payments to existing
investors (shareholders).
Potential for capital gains (rising share prices) if business continues to reinvest the profits
into the business (internal growth).
d Suppliers
Interested in profits and liquidity to ensure that the business will be reliable in paying any
trade credit allowed. Interested in seeing the trade payables turnover to estimate how
quickly they will be paid.
6
2023 2022 2021
ROCE (%) 225/1217 x 100 = 199/1011 x 100 = 169/989 x 100=
18.5% 19.7% 17.1%
7
2021 2020
a Mark-up 48.1% 59.6%
b Gross profit margin 32.5% 37.4%
8
a Gross profit margin (%) 46.02%
b Mark-up (%) 85.25%
c Profit margin (%) 18.67%
d Expenses to revenue ratio (%) 27.35%
e Operating expenses to revenue (%) 25.88%

9
2021 2020 2019
Current ratio 2.44: 1 2.93: 1 3.20: 1
Acid test ratio 0.98: 1 1.38: 1 1.72: 1
10 Any two from:

• High bank balances are undesirable as most current accounts pay no interest – surplus cash
can be invested into interest bearing assets.
• High cash balances are undesirable because they present a greater risk of theft.
• Higher trade receivables balances may create a higher risk of irrecoverable debts and also
higher costs in managing the credit control function of the business.
• Inventory costs money to store and high inventory levels increases the risk of spoilage,
theft or obsolescence.
11
a Non-current asset turnover 1.20 times
b Trade receivables turnover 41 days
c Trade payables turnover 54 days
d Inventory turnover 45 days
e Rate of inventory turnover 8.18 times
12 Reasons for concern:

• Gross profit margin shows ability to generate profits from sales.
• The fall means less profit is earned for each $1 of sales.
• Fallen by 11% over 3 years.
• Profit for the year is also falling (but not as quickly).
Reasons for not being concerned:
• Might be the result of competitive pressure on prices.
• Might be the result of focus on better quality products (new product mix may mean more
expensive costs of production).
• Because the fall in profit is less than the decrease in the margin it may be that the fall in
the margin has caused an increase in sales volume.
Overall:
• It is a concern but may be something all businesses are facing.
• Depends on how the product mix affects profitability.
• Consider other ratios, ROCE, other profit margins.

2 Cost and management accounting

2.1 Costs and cost behaviour
1 B
2 B
3 C
4 B
5 The distinction is in the relationship with each type of cost and the level of output. Variable
costs change in proportion to changes in output whereas fixed costs do not change at all when
the output level changes (within the relevant range).
6 Fixed costs: rent, salaries, machinery hire, advertising
Variable costs: coffee, cups, milk, wages of part-time workers
7 a Net realisable value is the selling price less any costs involved in getting inventory into
saleable condition (i.e., repair costs) less other costs to sell.
b $23 300 ($20 000 + $1 200 + $700 + $1 400)
c Prudence (allow historical cost, matching or even consistency)
8 Ovens in inventory on 31 July = 1 + 2 + 3 – 1 – 3 = 2 ovens
Oldest sold first. Therefore, 2 ovens remaining are $1 400 (2 × $700)
9 a 45 units bought, 27 sold, therefore, closing inventory consists of 18 units
(i) FIFO = 18 units @ $30 = $540
(ii) AVCO = 18 units at average cost of $27.33 = $492
b
Gross profit for March 2023
FIFO AVCO
$ $ $ $
Sales 1 764 1 764
Less Cost of sales
Purchases 1 230 1 230
Gross profit 1074 1 026
10 a In the first year, the switch will lead to an increase in inventory’s value as it will be based
on most recent purchases. This will mean the cost of sales is lower and the gross profit will
be higher as a result.
b In subsequent years, there will be less effect on gross profit as the increased value of
inventory achieved by using FIFO will also be added on to the cost of sales as opening
inventory.
11 Disadvantages include, any two from:
• Loss of bulk-buying discount.
• Unemployment of resources during period of low demand.
• Unexpected orders may not be fulfilled.
• Cannot respond as quickly to a rise in demand.

12 Arguments in favour of switch:

• Save money on holding inventory.
• Cash is not tied up in inventory.
• Not left with obsolete inventory.
Arguments against switch:
• May miss out on bulk-buying discounts.
• If customers want their product quickly, they may miss out on sales.
• Orders may be lost if materials are wasted or there is a shortfall in supply.
Overall:
• It will depend on the reliability of suppliers – and how quickly they can deliver.
• It will depend on how predictable demand is.
• How quickly can the products be produced – consider if customers are happy to wait.
2.2 Traditional costing methods

1 D
2 C
3 A
4 C
5 New selling price = $6 × 150% = $9
New break-even point = $80 000 ÷ ($9 − $4) = 16 000 units
6 a Before = $11; after = $17
b Before = $220 000 (i.e., 20 000 × $11); after = $340 000 (i.e., 20 000 × $17)
c Before: profit of $20 000; after: profit of $90 000
7 a
Note: the selling and distribution costs will be incurred irrespective of the source of the
scooters.
Contribution per unit (manufactured scooters) = 300 – (7 500+15 000+3 500+6 000)/200
= 300 – 160 = $140
Contribution per unit (bought in scooters) = 300 – 150 – (6 000/200)
= 300 – 150 – 30 =$120
Parsons Ltd should continue manufacture in order to maximise profits.
b Additional factors, any three from:

• Quality of bought-in scooters may be higher or lower than the manufactured scooters.
• Extra fixed costs may be incurred with the buying in of scooters.
• Reliability of supplier/lead time.
• Guarantee that the current price offered by suppliers is to remain fixed beyond short-
term.
• Loss of employment and negative publicity.
• Spare capacity generated could be used for other output.

8 a
$
Materials 12
Labour 24
Administration 5
Power 6
Variable/direct cost per pipe 47
Selling price 60
Contribution 13
Proposal 1 price 48
Proposal 2 price 42
For proposal 1, the reduced selling price of $48 would mean that each pipe supplied would earn
extra contribution of $1. This adds 2 000 × $1 = $2 000 to the profits of Rhodes Ltd.
For proposal 2, the reduced selling price of $42 generates negative contribution of $5 per pipe.
Rhodes Ltd would actually lose 3 000 × $5 = $15 000 on the order.
On financial grounds alone, proposal 2 should be rejected. Proposal 1 could be accepted.
b Additional reasons, any three from:
• There may be additional (hidden) fixed costs connected with the proposal.
• Regular customers may also demand the lower price.
• Customers may be found instead who would be willing to pay the regular price.
• Consider whether LeBon would become a regular customer that would agree to the
more regular price in future.
• Consider if the company would have spare capacity or whether sales to other
customers would have to be cut back.
• Consider if an overtime premium would have to be paid to workers, reducing or
reversing the already small contribution.
9
Small Medium Large
Total direct costs $19.00 $18.00 $22.00
Contribution per unit $13.00 $17.00 $18.00
Scarce resource used (hours) 1.50 1.25 1.75
Contribution per unit of scarce resource $8.67 $13.60 $10.29
Production priority 3 1 2
Hours used 2 000 2 500 3 500
Revised production schedule (number of plates) 1 333 2 000 2 000

10 a Total direct labour hours = (18 000 × 2.5) + (12 000 × 1.25) = 60 000
OAR = $80 000 ÷ 60 000 = $1.33 per direct labour hour
Overhead absorbed by one unit of XP1 = $3.33
Overhead absorbed by one unit of IJY7 = $1.67
b Total overheads absorbed:
XP1 = $1.33 × 18 000 × 2.5 = $60 000
IJY7 = $1.67 × 12 000 × 1.25 = $20 000
11
Overhead absorption rate = $480 000/(100 000 hours) = $4.80 per hour
(i) Total production cost:
JWLH SHLH
$ $
Direct labour cost 2 400 000 300 000
Direct materials cost 800 000 180 000
Overheads 768 000 192 000
Total production cost 3 968 000 672 000
(ii) Production cost per unit (= total production cost/units sold)

JWLH SHLH
Full cost per unit $198.40 $67.20
12 Reasons for closing the branch:

• Losing money will reduce funds available for reinvestment.
• Three years of losses is probably significant.
• Overall future of business may be risked by supporting losses regularly.
• Savings may be made on indirect/fixed costs by closing a branch.
Reasons for not closing branch:
• Branch may be making a positive contribution to profits.
• External factors may make the loss-making branch different (e.g., location).
• Would need to consider what happens to the fixed overheads of the business if the branch
were closed.
Overall:
• It depends on how big and in what direction the losses are moving.
• Consider whether it is a big drain on overall business profits.
• Consider how significant the difference is between profits and contribution by that branch.

13
Dept 1 Dept 2
Overhead Total ($) Basis of apportionment ($) ($)
Factory rent 28 000 Factory area 7 000 21 000
Heating and lighting for

factory 18 500 Electricity used 11 100 7 400
Machinery maintenance 12 400 Cost of machinery 7 440 4 960
Factory supervision 48 800 Staff employed 15 250 33 550
Machinery insurance 3 650 Cost of machinery 2 190 1 460
111 350 Total 42 980 68 370

A Level
3 Financial accounting
3.1 Preparation of financial statements
1 a
Revaluation account
$ $
Inventory 6 000 Premises 50 000
Capital: Gahan 36 000 Machinery 10 000
Capital: Gore 18 000
60 000 60 000
Profit on revaluation = $54 000: Gahan $36 000; Gore $18 000
b
Gahan, Gore and Fletcher
Statement of financial position at 1 January 2024
$ $
Non-current assets
Premises 240 000
Machinery 34 000
274 000
Current assets
Inventory 4 000
Bank 46 000 50 000
324 000
Capitals:
Gahan 166 000
Gore 118 000
Fletcher 40 000
324 000
2
Capital accounts
Drewery Connell Jackson Drewery Connell Jackson
$ $ $ $ $ $
Goodwill 9 600 9 600 4 800 Balance b/d 18 000 12 000 9 000
Balance c/d 16 400 10 400 12 200 Goodwill 8 000 8 000 8 000
26 000 20 000 17 000 26 000 20 000 17 000
Balance b/d 16 400 10 400 12 200

3
Revaluation account
2022 $ 2022 $
Jan 1 Equipment 14 000 Jan 1 Premises 150 000
Motor vehicles 11 000
Capitals:
Cureton 100 000
Iwelumo 25 000
150 000 150 000
4
Subscriptions account
2021 $ 2021 $
Jan 1 Balance b/d 36 1 Jan Balance b/d 45
Dec 31 Income & expenditure 1 428 Dec 31 Receipts & payments 1 380
account account
Dec 31 Balance c/d 96 Dec 31 Balance c/d 135
1 560 1 560
2022 2022
Jan 1 Balance b/d 135 Jan 1 Balance b/d 96

5
Trade payables account
2024 $ 2024 $
Dec 31 Bank/cash 455 Jan 1 Balance b/d 33
Dec 31 Balance c/d 27 Dec 31 Bar purchases 449
482 482
2025
Jan 1 Balance b/d 27
The trade payables account is just one way of calculating the snack bar purchases figure.
Crosspool Chess club
Snack bar statement of profit or loss for the year ended 31 December 2024
$ $
Snack bar sales 890
Less Cost of sales
Opening inventory 71
Add Purchases 449
520
Less Closing inventory 64 456
434
Less Wages 202
Profit on snack bar 232
6
Birkdale Football Club
Income and expenditure account for year ended 31 December 2023
$ $
Income
Subscriptions 1 725
Profit on raffle ($85 − $32) 53
1 778
Expenditure
General expenses 76
Electricity 50
Rent 600
Repairs to club house 299
Loss on sale of football kits (*) 50 1 075
Surplus for the year 703
(* cost of kits is 0.75 × 1200 = 900)

7
Prime cost Factory overhead Statement of profit or loss
purchases returns wages of factory supervisory sales returns
staff
production wages depreciation of factory depreciation of office
machinery equipment
manufacturing royalties insurance of machinery wages of administrative
staff
carriage outwards
8
Manufacturing account (extract) for the year ended 31 July 2023
$ $
Cost of material consumed
Opening inventory of raw material 6 454
Purchases of raw material 87 012
86 781
Add Carriage inwards on raw materials 544 87 325
93 779
Less Closing inventory of raw material 4 313
89 466
Direct wages 98 800
Direct expenses 24 477
Manufacturing royalties 6 213 129 490
Prime cost 218 956

9 a
Provision for unrealised profit
2021 $ 2021 $
Dec 31 Statement of profit or loss 230

1 480 1 480
b
Statement of financial position (extract) at 31 December 2021
Current assets $ $
Inventory of finished goods 7 400
Less Provision for unrealised profit 1 480 5 920

10
Morton Ltd
Manufacturing account for the year ended 30 June 2022
$ $
Cost of material consumed:
Opening inventory of raw material 11 890
Purchases of raw material 124 800
136 690
Less Closing inventory of raw material 8 980 127 710
Direct wages 65 790
Direct expenses 21 313
Prime cost 214 813
Add Factory overheads
Indirect wages 55 900
Factory rent and rates 3 733
Factory insurance 2 223
Factory fuel and power 8 780
Factory general expenses 9 995
Depreciation of factory machinery 4 500 85 131
299 944
Add Opening inventory of work in progress 23 133
323 077
Less Closing inventory of work in progress 25 110
Production cost 297 967
Add Factory profit 74 492
Transfer price of goods completed 372 459
Calculation of gross profit for the year ended 30 June 2022

Revenue 425 000
Less Cost of sales
Opening inventory of finished goods 41 414
Transfer price of goods completed 372 459
413 873
Less closing inventory of finished goods 37 760 376 113
Gross profit 48 887

11
$000 $000
Increase in retained earnings 34
Add Provision for tax 56
Debenture interest 80
Transfer to general reserve 14
Dividends paid 65 215
Profit from operations 249
12
$
Increase in inventory (2 312)
Decrease in trade receivables 4 312
Decrease in trade payables (2 824)
Depreciation 11 000
Profit on disposal of non-current asset (690)
Net cash from operating activities 108 986

13 a
Jow Ltd
$000 $000
Revenue 1 180
Less Cost of sales
Opening inventory 59
Purchases 725
784
Less Closing inventory 81 703
Gross profit 477
Less Expenses
Wages and salaries 111
Rent and rates 30
Insurance 45
Selling expenses 66
Depreciation of fixtures and fittings 28
Depreciation of motor vehicles 18 321
Profit from operations 156
Finance costs 25
Profit before tax 131
Tax 46
Profit for the year 85
b
Jow Ltd
Statement of changes in equity for the year ended 31 December 2023
Share capital Revaluation Retained Total
reserve earnings
$000 $000 $000 $000
Balance at 1 Jan 2 000 200 256 2 456
2023
Profit for the 85 85
year
Dividends paid (52) (52)
Balance at 31 2 000 200 289 2 489
Dec 2023

c
Jow Ltd
$000 $000 $000
ASSETS
Accumulated Net
Non-current assets Cost depreciation book value
Land and buildings 2 350 0 2 350
Fixtures and fittings 480 228 252
Motor vehicles 180 78 102
3 010 306 2 704
Current assets
Inventory 81
Trade receivables 203
Cash and cash equivalents 102 386
Total assets 3 090
EQUITY & LIABILITIES
Revaluation reserve 200
Retained earnings 289
2 489
Non-current liabilities
Debentures (2030) 500
Current liabilities
Trade payables 101

14
Chan Kingswood plc
Statement of cash flows for the year ended 31 December 2022
$ $
Operating activities
Depreciation on premises 7000
Depreciation on plant and equipment 4000
Loss on disposal 1000
Increase in inventory (700)
Increase in trade receivables 1000
Decrease in trade payables (500)
Cash used in operations 49 800
Interest paid (8000)
Taxation paid (7400)
Net cash used in operating activities 34 400
Investing activities
Proceeds from sale of plant and equipment 10 000
Purchase of plant and equipment (35 000)
Purchase of premises (57 000)
Net cash used in investing activities (82 000)
Financing activities
Proceeds from issue of shares 55 000
Ordinary dividends paid (9000)
Net cash from financing activities 46 000
Net decrease in cash and cash equivalents (1600)

Cash and cash equivalents at 1 January 2022 1500
Cash and cash equivalents at 31 December 2022 (3100)
3.2 Regulatory and ethical considerations

1 i a statement of financial position at the end of the period
ii a statement of profit or loss for the period
iii a statement of changes in equity for the period
iv a statement of cash flows for the period
v accounting policies and explanatory notes.
2 Any four from:
• revenue
• finance costs
• the charge for taxation
• the after-tax profit or loss for the period from discontinued operations
• profit for the year (attributable to ordinary shareholders).

3 Any three from:

Cost includes: purchase price of any materials; import taxes; transport costs; handling costs.
Costs of conversion comprise: direct labour, other direct expenses and subcontracted work;
production overheads; any other relevant overheads.
4 i Operating activities
ii Investing activities
iii Financing activities
5 An adjusting event happens after the end of the financial year that provides further evidence of
conditions that existed at the end of the reporting period. If this event would materially affect
the financial statements, the financial statements should be changed to reflect these conditions.
A non-adjusting event happens after the end of the financial year indicative of a condition that
arose after the end of the reporting period. No adjustment is made to the financial statements
for such events. If material, they are disclosed by way of notes to the financial statements.
6 i Expected usage of the asset, its capacity or output.
ii Expected physical wear and tear.
iii Technical or economic obsolescence.
iv Legal or other limits imposed on the use of the asset.
7 Any three from the following:
• Fall in the market value of the asset.
• Obsolescence caused by change in technology.
• Economic downturn.
• Damage, resulting in the asset’s fair value falling or future cash-generating ability falling.
• Restructuring of the business.
8 Contingent liabilities are potential obligations of the business, i.e. where it may need to pay out
an amount but the possibility is not certain. If the contingent liability is likely then a reference
needs to be made in the notes to the accounts. If the contingent liability is unlikely to arise then
it does not need to be mentioned.
9 Any research expenditure should be treated as revenue expenditure in the statement of profit or
loss.
Development expenditure can be treated as revenue expenditure but can also be treated as
capital expenditure (i.e. as an intangible asset) if the business can demonstrate that the asset
will generate future economic benefits.
10 i Integrity
ii Objectivity
iii Professional competence and due care
iv Confidentiality
v Professional behaviour
11 A qualified report is where auditors do not believe the financial statements give a true and fair
view of the company’s financial position whereas an unqualified report is where auditors
believe the accounts have been prepared correctly and present a true and fair view of the
company’s financial position.

12 For management purposes, the financial statements are used by owners or managers to
highlight areas of good practice and to find areas within the business that could benefit from
improvement.
For stewardship purposes, the financial statements show any providers of finance how the
funds that they provided are being used, for example, being used wisely or inappropriately.
3.3 Business acquisition and merger

1 A business merger is where two businesses combine to form a new business that consists of the
two previous businesses. Acquisition is where one business takes over another business and the
business being acquired is incorporated into the original business.
2 Goodwill arises when a business is acquired by another business for a price in excess of the fair
value of the net assets being taken over.
3
Roach and Morton
Statement of financial position at 1 January
$ $
ASSETS
Current assets
Inventory 11 800
Cash and cash equivalents 26 234 44 734
CAPITAL AND LIABILITIES

Capital: Roach 45 000
Capital: Morton 45 000 90 000
Current liabilities
4
$
Capital 325 000
Less: cash (820)
Net assets acquired 324 180
Purchase consideration (400 000)
Goodwill 75 820

5
$
ASSETS
Goodwill 40 000
Current assets 20 200
Capital and reserves
Share premium 25 000
Reserves 65 500
Total equity 360 500
Current liabilities 39 700
6
Bainbridge Ltd
Statement of financial position at 1 July 2021
$
ASSETS
Non-current assets
Goodwill 131 205
Premises 450 000
Machinery 65 000
Vehicles 15 000
661 205
Current assets
Inventory 20 000
Cash and cash equivalents 22 250
59 750
Equity
Current liabilities

7 a
Realisation account
$ $
Property 300 000 Lisbie Ltd 510 000
Equipment 90 000 Discounts received 3 000
Motor cars (less the two taken) 30 000
Inventory 45 000
Dissolution costs 15 000
Discounts allowed (24 000 – 21 500) 2 500
Capital: Arthur 20 333
Capital: Luscombe 10 167
513 000 513 000
(i.e., a profit on dissolution of $30 500 is divided in a 2:1 ratio to the partners)
b
Capital accounts
Arthur Luscombe Arthur Luscombe
$ $ $ $
Motor cars 18 000 12 000 Balance b/d 210 000 240 000
Lisbie Ltd 150 000 150 000 Current accounts 27 000 24 000
Bank 89 333 112 167 Realisation account 20 333 10 167
257 333 274 167 257 333 274 167
8 Any two advantages from:

• larger market share
• more control over pricing
• economies of scale
• benefits of specialization
• larger profits.
9 Acquisition is a good idea:
• Larger market share.
• Save costs as no need for duplication of functions.
• Economies of scale.
• Less pressure to keep prices low.
Acquisition is a bad idea:
• Diseconomies of scale.
• Clash of corporate culture.
• Costs of acquisition.
• Take over may be resisted.
Overall:
• Depends on how different the businesses are.
• Would need to consider how big Arefin Ltd actually is.
• Consider whether it would lead to economies or diseconomies of scale.

3.4 Computerised accounting systems

1 Any three advantages from:
• Speed: Data entry into the system can be carried out much more quickly than if done on
paper. Calculations are performed automatically.
• Accuracy: If the original entry is correct, there are fewer areas where an error can be made
since the data entry made is replicated throughout the system, and human error in
calculations is avoided.
• Availability of information: Accounting records are automatically updated once
information is keyed in. Reports are produced automatically.
• Taxation returns: Information required by tax authorities is available at the touch of a
button.
2 Any three disadvantages from:
• Hardware costs: The initial costs of installing a computerised accounting system can be
expensive, and the hardware will inevitably need to be updated and replaced on a regular
basis, leading to further costs.
• Software costs: Accounting software needs to be kept up to date, which can be a long-term
financial commitment.
• Staff training: Staff will need training to use the software and training updates each time
the system is modified.
• Opposition from staff: Some staff may feel demotivated using a computerised system.
Other staff may fear that the introduction of computers will lead to staff redundancies,
which could include them. Changing to a computerised system can cause disruption in the
workplace and changes to existing working practices may make staff feel uneasy.
• Inputting errors: Staff may become complacent as inputting into the system becomes more
repetitive and therefore, they may lose concentration leading to input errors.
3 a i Debiting the customer’s account in the sales ledger.
ii Crediting the sales account in the general ledger.
iii Inventory records show a decrease.
b i Bank account is debited.
ii Customer’s account is credited.
4 This would occur where the business runs a paper-based manual system of accounting at the
same time as running the newly installed computerised accounting system. This is to ensure
that there are no discrepancies in the data, and that if there are problems with the introduction
of the computerised system, there is a back-up so that data is not lost.
5 Any three methods from:
• A system of protective devices.
• Each member of staff should have a unique password allowing access to their area(s) of
responsibility within the system.
• A period of parallel operation could be implemented.
• Regular reconciliation of the cash book.
• Maintenance of control accounts.
• A trial balance can be produced more regularly.
• Having a back up system.

6 He should computerise his system:

• He will make fewer errors.
• It will make sure no unauthorised people can access his records.
• Real-time reports on financial progress may be produced.
He should not computerise his system:
• If his premises are secure, then he should not have any security issues.
• It may be costly.
• If he is a sole trader, it may not be necessary if he does not have that much to record.
Overall:
• It will depend on the size of the business and number of transactions that need to be
recorded.
• Perhaps a less expensive system may be worth trying initially.
• Consider if the ability to produce financial reports be useful for Stobbs.
3.5 Analysis and communication of accounting information

1 a Mark-up: 95.2% in 2025; 63.2% in 2024
b Gross profit margin: 48.8% in 2025; 38.7% in 2024
2 a Trade receivables turnover: 33 (32.27) days
b Trade payables turnover: 73 (72.53) days
c Inventory turnover: 59 (58.56) days
d Rate of inventory turnover: 6.23 times
e Working capital cycle: 19 (18.30) days
f Net working assets to revenue: 7.26%
3 a Current ratio: 2.52: 1

b Acid test ratio: 1.76: 1
4 a Trade receivables turnover: 73 (72.32) days
b Trade payables turnover: 81 (80.02) days
c Inventory turnover: 55 (54.56) days
d Working capital cycle: 47 (46.8) days
5
2023 2022
a Earnings per share $0.43 $0.37
b Dividends per share $0.08 $0.06
c Price earnings ratio 5.93 5.32
d Dividend yield 3.14% 3.05%
e Dividend cover 5.38 times 6.17 times
6 Gearing: 42.2% in 2024; 28.6% in 2023

7
2025 2024
a Gearing 29.7% 24.6%
b Interest cover 4.3 times 4.6 times
8
a ROCE 9.90%
b Gross profit margin 41.07%
c Mark-up 69.69%
d Profit margin 20.20%
e Expenses to revenue ratio 20.87%
f Operating expenses to revenue 16.86%
g Current ratio 2.33 : 1
h Acid test ratio 1.58 : 1
i Non-current asset turnover 0.43 times
j Trade receivables turnover 43 days
k Trade payables turnover 51 days
l Inventory turnover 40 days
m Rate of inventory turnover 9.17 times
9
a Working capital cycle 32 days
b Net working assets to revenue (%) 9.52%
c Interest cover 6.04 times
d Gearing ratio 27.32%
e Earnings per share $0.10
f Price earnings ratio 17.16
g Dividends per share $0.03
h Dividend yield 1.69%
i Dividend cover 3.46 times
10 Reasons to be concerned about the rise in gearing:

• Interest payments may rise significantly.
• Normally interest payments cannot be deferred.
• Profits will increasingly be used to service debt.
• If profits fall, the business may not be able to service the debt.
Reasons not to be concerned with the rise in gearing:
• Interest rates are low and look to remain low in many countries (though not all).
• If profits are rising, then it may not present much of a risk.
• Businesses should borrow money to exploit business opportunities as they arise.
• Internal growth is slow and borrowing allows quick growth.
Overall:
• Monitor interest cover ratio: if low, then the gearing may be a problem.
• Consider whether profits are rising faster than the gearing ratio.
• Consider if there are other ways of financing expansion – e.g. share issues.

4 Cost and management accounting

4.1 Activity based costing
1 Cost drivers are the activities that a business undertakes as part of the production of output
which generate overheads (e.g., machine set-ups).
2 Cost pools are the accounts that collect the costs incurred by each activity undertaken.
3 $29 800 ÷ 250 = $119.20 per set-up
4 ($12 800 + $23 400 + $19 250) ÷ 2 360 = $23.50 per unit
5 a Cost driver rates:
Machinery set-up ($65 420 /(25+56)) $807.65
Checking costs ($32 950/(12+18)) $1 098.33
Selling costs ($42 440 / (24+18)) $1 010.48
b Overheads to be apportioned:
A B
Overheads per product ($) ($)
Machinery set-up ($807.65 x 25) 20 191.36 ($807.65 x 56) 45 228.64
Checking costs ($1098.33 x 12) 13 180.00 ($1098.33 x 18) 19 770.00
Selling costs ($1010.48 x 24) 24 251.43 ($1010.48 x 18) 18 188.57
57 622.79 83 187.21
6
Product S Product T
Apportionment of overheads: $ $
Machine maintenance 75 000 15 000
Ordering costs 20 000 25 000
Production run costs 13 500 22 500
Overhead cost 108 500 62 500
Direct costs 6 250 000 1 250 000
Full cost 6 358 500 1 312 500
Full cost per unit 254.34 131.25
Note – machine maintenance costs are in the ratio (25 000 x 4) : (10 000 x 2)

7 a
Machine Machine set-up Selling expenses
Inspection costs
Activity maintenance
($) ($) ($)
costs ($)
Cost ($) 50 000 24 000 33 000 24 000
Cost driver (20 + 5) 25 (28 + 12) 40 (5 + 10) 15 (6 + 4) 10
Cost driver
(50 000/25) 2 000 (24000/40) 600 (33 000/15) 2 200 24 000/10) 2 400
rate
XJ3 MIM
$ $
Inspection and packing (20 000 x 20) 40 000 (2000 x 5) 10 000
Machine maintenance costs (600 x 28) 16 800 (10 x 12 x 4000) 7 200
Machine set-up (2200 x 5) 11 000 (2200 x 10) 22 000
Selling expenses (2400 x 6) 14 400 (2400 x 4) 9 600
Total overheads incurred 82 200 48 800
b
XJ3 MIM
$ $
Direct labour cost (4 x 8 x 6000) 192 000 (3 x 6 x 4000) 72 000
Direct materials cost (12 x 8 x 6000) 576 000 (10 x 12 x 4000) 480 000
Overheads apportioned 82 200 48 800
Full cost 850 200 600 800
Full cost per unit (850 200/6000) 141.70 (600 800/4000) 150.20
Selling price (30% mark-up) 184.21 195.26
8 a Overheads total $131 000

Machine hours total 36 000
OAR $3.64 per labour hour
b
XJ3 MIM
$ $
Direct labour cost 192 000.00 72 000.00
Direct materials cost 576 000.00 480 000.00
Overheads 87 333.33 43 666.67
Full cost 855 333.33 595 666.67
Full cost per unit 142.56 148.92
c
XJ3 MIM
$ $
Selling price (30% mark-up) 185.33 193.60

9 Arguments for switching:

•
ABC provides more realistic costing information.
•
Helps to identify where and understand how overheads arise.
•
Helps to improve performance by replicating good practice identified in one department
across other departments.
• It helps in the preparation of estimates and quotes for other work.
Arguments against switching:
• Some overhead costs cannot easily be assigned to a cost pool.
• Implementing a system of ABC is also a costly process because of its complexity.
Overall:
• Deciding how to apportion overheads will always involve a degree of subjectivity.
• Often the differences in the actual figures are quite small.
• It will require time spent on learning the new system.
4.2 Standard costing

1 $89 080 – $90 101 = $1 021 (Adverse)
2 $6 300 – $7 260 = $960 (Favourable)
3 a Total materials variance: (550 x $12.5) – (610 x $11) = $165 (Favourable)
b Materials price variance: ($12.50 – $11.00) x 610 = $915 (Favourable)
c Material usage variance: (550 – 610) x $12.50 = $750 (Adverse)
4 $201 890 – $189 600 = $12 290 (Favourable)
5 a Total labour variance: (1 850 x $9.30) – (1 920 x $8.50) = $885 (Favourable)
b Labour wage rate variance: ($9.30 – $8.50) x 1 920 = $1 536 (Favourable)
c Labour efficiency variance: (1 850 – 1 920) x $9.30 = $651 (Adverse)
6 a Total materials variance: (1 880 x $6.30) – (1 910 x $6.50) = $571 (Adverse)
b Materials price variance: ($6.30 - $6.50) x 1 910 = $382 (Adverse)
c Material usage variance: (1 880 – 1 910) x $6.30 = $189 (Adverse)
d Total labour variance: (250 x $8.75) – (262 x $8.25) = $26 (Favourable)
e Labour wage rate variance: ($8.75 – $8.25) x 262 = $131 (Favourable)
f Labour efficiency variance: (250 – 262) x $8.75 = $105 (Adverse)
7 a Total sales variance: (6 700 x $15) – (7 200 x $13.50) = $3 300 (Adverse)
b Sales price variance: ($15 – $13.50) x 7200 = $10 800 (Adverse)
c Sales volume variance: (6 700 – 7 200) x $15 = $7 500 (Favourable)
8 A flexible budget is a budget that has the amounts adjusted for differences between budgeted
output and actual output level. For example, if actual output is higher than budgeted output it
would be useful to know whether the increase in total expenses is the result of increased output
or increases in the cost per unit of output.

9 Quantities for labour hours and materials used need to be flexed:

• Direct material quantity = 630 ÷ 500 x 150 metres = 189 metres
• Direct labour hours = 630 ÷ 500 x 250 hours = 315 hours
a Total materials variance: (189 x $3.50) – (190 x $3.20) = $53.50 (Favourable)
b Materials price variance: ($3.50 - $3.20) x 190 = $57 (Favourable)
c Materials usage variance: (189 – 190) x $3.50 = $3.50 (Adverse)
d Total labour variance: (315 x $8.50) – (295 x $8.30) = $229 (Favourable)
e Labour wage rate variance: ($8.50 – $8.30) x 295 = $59 (Favourable)
f Labour efficiency variance: (315 – 295) x $8.50 = $170 (Favourable)
10 a Total fixed overhead variance: ($22 000 x 1050/1200) – $18 000 = $1 250 (Favourable)
b Fixed overhead expenditure variance: $22 000 – $18 000 = $4 000 (Favourable)
c Fixed overhead volume variance: $22 000 – ($22 000 x 1050/1200) = $2 750 (Adverse)
11 a Fixed overhead expenditure variance: $50 000 - $48 000 = $2 000 (Favourable)
b Fixed overhead capacity variance: $50 000 – (8500 x $5) = $7 500 (Adverse)
c Fixed overhead efficiency variance: (8 500 – 8 750) x $5 = $1 250 (Favourable)
d Fixed overhead volume variance: $50 000 – ($50 000 x 1750/2000) = $6 250 (Adverse)
e Total fixed overhead variance: ($50 000 x 1750/2000) – $48 000 = $4 250 (Adverse)
12 Any one advantage from:
•
It can identify areas of the business where expenditure is higher than was planned.
•
It allows a business to monitor the efficiency of its workers.
•
It allows a business to monitor how efficiently materials are being used.
•
It allows a business to judge whether the reason for any overspend is within the control of
the business.
• Reasons for sales revenue varying from budgeted levels can be analysed.
• Corrective action can be made so as to improve business performance.
Any one disadvantage from:
• It takes time (and money) to set up in the first place.
• Time will be spent calculating and interpreting the results.
• The target result used to calculate the standards may not be realistic (e.g. might be based
on unrealistically high assumptions about worker productivity).
• Standards may be out of date.
• Attempts to improve a ‘variance’ might lead to another variance worsening (see the
section on the interrelated nature of some variances).
• Some variances arise out of factors outside the control of the business (e.g. prices charged
for materials).
• If output levels differ from those budgeted, then the variances may be misleading (though
preparation of flexible budgets can help solve this issue).

13 A wage cut is a good idea:

• Wage cut should improve the adverse variance.
• Saving money on labour costs will improve profitability.
A wage cut is a bad idea:
• Worker motivation is likely to deteriorate and labour efficiency variance may worsen.
• Conflict with workers and trade unions may be created if wages are cut.
• Adverse wage rate variance may be the result of an attempt to motivate workers to be less
wasteful with materials (hence the favourable variance in materials usage).
Overall:
• The size of the variance may be small compared with the overall costs and revenues of the
business.
• The adverse variance may be caused by external factors, such as an increase in the
minimum age rate of that country.
• Variances are interrelated and addressing this adverse variance may result in other
variances worsening.
14 Flexed quantities:
• Direct materials: 1500 kg
• Direct labour: 1200 hours
• Flexed overheads: $0.50 x 15 000 units = $7500
• Flexed profit = $11250
Statement reconciling budgeted profit with actual profit for September 2021
Favourable ($) Adverse ($) ($)

Budgeted profit 11 250
Variances:
Sales price 3000
Direct materials price 120
Direct materials usage 1050
Direct labour wage rate 300
Direct labour efficiency 1000
Fixed overhead expenditure 4000
Fixed overhead volume 2500
4670 7300 2630
Actual profit 8620
4.3 Budgeting and budgetary control

1 Any two advantages include:
• It defines areas of responsibility and targets to be achieved by different personnel.
• Budgets can act as a motivating influence at all levels – usually only true when all staff
members are involved in the preparation of budgets.
• Budgets are part of the business’s overall strategic plan so individual departmental and
personal goals are more likely to be an integral part of the ‘bigger picture’.
• Budgets usually lead to more efficient use of resources – leading to better control of costs.

2 Any two disadvantages include:

• Budgets are only as good as the data being used – if data are inaccurate, the budget will be
of little use.
• Should one departmental budget be too optimistic or too pessimistic this will have a
knock-on effect on other associated budgets.
• Budgets might demotivate if they are imposed rather than negotiated.
• If too easy to reach, there is a possibility that this could lead to complacency and/or
underperformance.
• They might lead to departmental rivalry.
• Budgets can be a lengthy, complicated procedure to implement.
3 Any three features from:

• A clear definition of each manager’s role.
• Once approved, individual managers are responsible for the implementation of their
departmental budgets.
• Departmental budgets are action plans for each area of responsibility.
• Performance is constantly monitored and compared to the agreed budget.
• Where budget targets are not met, corrective action is taken.
• Unexplained variations from budgets must be investigated.

4
a
Zohaib
Sales budget for the three months ending 30 June
April May June
Budgeted sales (units) 24 28 25
Budgeted sales revenue $372 $476 $456.25
b Total production is found using the following calculation:

Budgeted sales (24 + 28 + 25) 77
Add Budgeted closing inventory 29
Total production needed 106
Less Opening inventory 13
Budgeted production for three months 93
This means that 93 ÷ 3 = 31 components must be produced each month

(based on an even production flow).
Zohaib
Production budget for the three months ending 30 June
April May June
Budgeted sales 24 28 25
20 23 29
Total production needed 44 51 54
Less Budgeted opening inventory 13 20 23
Budgeted production 31 31 31

5
Budgeted sales (pipes) (320 + 450 + 470) 1 240
Add Budgeted closing inventory 110
Total purchases needed 1 350
Less Budgeted opening inventory 60
Budgeted purchases needed 1 290
PCHH Ltd need to purchase 1 290 ÷ 3 = 430 for each month.
PCHH Ltd
Purchases budget for the three months ending 31 March
Jan Feb Mar
Budgeted sales 320 450 470
Add Budgeted closing inventory 170 150 110
Total purchases needed 490 600 580
Budgeted purchases 430 430 430
6
Clayton Ltd
Production budget for the three months ending 30 November
Sep Oct Nov
Budgeted sales (units) 1 120 1 240 1 560
Add Budgeted closing inventory 248 312 364
Total production needed 1 368 1 552 1 924
Budgeted production 1 168 1 304 1 612

7
Alex Davenport
Cash budget for the three months ending 31 October 2022
Aug Sep Oct
$ $ $
Receipts
Cash sales 10 760 13 576 13 632
Credit sales 2 198 2 432 2 690
12 958 16 008 16 322
Expenditure
Cash purchases 5 205 7 574 8 222
Credit purchases 5 645 5 205 7 574
Wages 900 900 900
Insurance 125 125 125
Heating and lighting 204 204 204
Rent 800
12 079 14 808 17 025
Net receipts 879 1 200 (703)

Balance brought forward 340 1 219 2 419
Balance carried forward 1 219 2 419 1 716
8
Sabkha Ltd
Trade receivables budget for the three months to 31 March
Jan ($) Feb ($) Mar ($)
Balance brought forward 35 000 45 000 55 000
Credit sales 45 000 55 000 58 000
80 000 100 000 113 000
Cash received from credit customers 34 300 44 100 53 900
Discount allowed 700 900 1 100
Balance carried forward 45 000 55 000 58 000

9
Nettleship Ltd
Trade payables budget for the four months to 30 September
Jun ($) Jul ($) Aug ($) Sep ($)
Balance brought forward 65 600 81 125 81 750 91 000
Credit purchases 58 300 52 600 64 700 57 850
123 900 133 725 146 450 148 850
Cash paid to credit suppliers (2 months earlier) 19 950 22 825 29 150 26 300
Cash paid to credit suppliers (1 month earlier) 22 825 29 150 26 300 32 350
Balance carried forward 81 125 81 750 91 000 90 200
Working. Balance at 1 June = ($39 900 x 0.5) + $45 650 = $65 600
10
Kevin and Michelle
Cash budget for the three months ending 31 May
Mar ($) Apr ($) May ($)
Receipts
Cash sales 4 050 4 525 4 100
Credit sales 11 550 12 150 13 575
15 600 16 675 17 675
Expenditure
Credit purchases 11 500 13 200 17 400
Wages 1 100 1 100 1 100
Drawings 650 650 650
General expenses 425 425 425
Rent 1 200
13 675 16 575 19 575
Net receipts 1 925 100 (1 900)

Balance brought forward (500) 1 425 1 525
Balance carried forward 1 425 1 525 (375)

11 Reasons for producing a cash budget:

• A lender may ask to see a budget before providing finance.
• Shortage of cash is one of the most common reasons for business failure.
• A budget can be used to identify periods where too much cash is being held.
• Just because he has not needed one so far does not mean he won’t need one in the future.
Reasons against producing a cash budget:
• He may lack the experience/expertise to produce a useful cash budget.
• If he is dealing with small amounts, then the time taken may mean it is not necessary.
Overall:
• Will depend on whether he trades on credit. If so, he may need one. If he deals with cash
only transactions, then it may be less important.
• Will depend on how ‘predictable’ his market is. If it is very steady and predictable then it
becomes less pressing.
4.4 Investment appraisal

1 Machine 1: 2.5 years
Machine 2: 3.0 years
2 Equipment 1C:
Cumulative net cash flow after three years is $18 000 add back (3 x $500) = $19 500
Proportion of year 4 needed is ($22 000 - $19 500)/($5 000 + $500)
Payback period = 3.45 years
Equipment 2D:
Cumulative net cash flow after three years is $15 000 add back (3 x $800) = $17 400
Proportion of year 4 needed is ($19 000 - $17 400)/($3 000 + $800)
Payback period = 3.42 years
Based on payback period alone, equipment 2D should be purchased. But as the periods are so
similar further analysis would be recommended.
• It is relatively simple to calculate.
• It is fairly easy to understand.
• The use of cash is more objective than using profits that are dependent on the accounting
policies decided by managers.
• Since all future predictions carry an element of risk, it shows the project that involves the
least risk because it recognizes that cash received earlier in the project life cycle is
preferable to cash received later.
• It shows the project that benefits a business’s liquidity.
• It ignores the time-value of money.
• It ignores the life expectancy of the project; it does not consider cash flows that take place
after the payback period.
• Projects may have different patterns of cash inflows.

4
Machine AGL6 Machine AMJ
Average investment $65 000 $82 500
Average profit $28 200 $29 800
ARR 43.38% 36.12%
5
Project AC-K Project H17
Average investment $128 000 $99 000
Average profit $29 720 $25 300
ARR 23.22% 25.56%

• ARR is fairly easy to calculate.
• Results can be compared to present profitability.
• It takes into account the aggregate earnings of the project(s).
• ARR does not take into account the time value of money.
• It does not recognise the timing of cash flows.
7 a $710
b $807
c $1 412
8
Net cash flow Discount factor Present values
$ $
Year 0 (80000) 1.000 (80 000)
Year 1 29 500 0.909 26 816
Year 2 42 342 0.826 34 974
Year 3 31 315 0.751 23 518
Year 4 16 790 0.683 11 468
Net present value 16 776
9
Net cash flow Discount factor Present values
$ $
Year 0 (25 000) 1.000 (25 000)
Year 1 6 757 0.917 6 196
Year 2 8 905 0.842 7 498
Year 3 13 440 0.772 10 376
Year 4 3 435 0.708 2 432
Net present value 1 502


• The time value of money is taken into account as adjustments are made to take account of
the present value of future cash flows.
• It is relatively easily to understand.
• Greater importance is given to earlier cash flows.
• Because the figures are projections, all the figures are of a speculative nature.
• Inflows are difficult to predict; outflows are equally difficult to predict.
• The current cost of capital may change over the life of the project.
• The life of the project is difficult to predict.
11 IRR = 9 + [(14 – 9) x 679/(679 + 446)] = 12%, which is greater than Hadfield’s cost of capital.
Therefore, he should go ahead with the investment.
12 He should buy Machine A:
• Shorter payback period.
• Lower cost.
• Less risky in terms of paying back any borrowing required to buy machines.
He should buy Machine B:
• More profitable (based on ARR).
• Will last longer than machine A.
Overall:
• Depends on how unstable he thinks the market will be.
• Depends on whether he will have to borrow the money.
• Depends on whether profit maximisation is his main goal.


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Cambridge International AS & A Level Accounting workbook

Answers to example questions

Cambridge International AS & A Level Accounting workbook 1

1.2 The accounting system

Cambridge International AS & A Level Accounting workbook 2

Cambridge International AS & A Level Accounting workbook 3

Cambridge International AS & A Level Accounting workbook 4

Jul 1 Balance b/d 1 000

Cambridge International AS & A Level Accounting workbook 5

Cambridge International AS & A Level Accounting workbook 6

Cambridge International AS & A Level Accounting workbook 7

Cambridge International AS & A Level Accounting workbook 8

17 Advantages of not maintaining full records:

1.3 Accounting for non-current assets

Cambridge International AS & A Level Accounting workbook 9

Straight-line method Reducing balance method

Cambridge International AS & A Level Accounting workbook 10

Cambridge International AS & A Level Accounting workbook 11

2024 Jun 30 Balance 20 000

1.4 Reconciliation and verification

Cambridge International AS & A Level Accounting workbook 12

6 i Entering two debits or two credits for an entry.

Cambridge International AS & A Level Accounting workbook 13

Cambridge International AS & A Level Accounting workbook 14

Cambridge International AS & A Level Accounting workbook 15

Statement of corrected profit at 31 July 2021

Cambridge International AS & A Level Accounting workbook 16

Cambridge International AS & A Level Accounting workbook 17

Purchases ledger control account

Mar 31 Discount received 2 890 Mar 31 Credit purchases 288 661

Cambridge International AS & A Level Accounting workbook 18

16 Reasons for preparing control accounts:

1.5 Preparation of financial statements

Cambridge International AS & A Level Accounting workbook 19

2020 735 135 (debit)

2021 774 39 (debit)

2022 663 111 (credit)

Cambridge International AS & A Level Accounting workbook 20

Less Purchases returns 139

Gross profit 46 566

Cambridge International AS & A Level Accounting workbook 21

Cambridge International AS & A Level Accounting workbook 22

Carriage inwards 850 36 450

Cambridge International AS & A Level Accounting workbook 23

Less Purchases returns 352

Cambridge International AS & A Level Accounting workbook 24

CAPITAL & LIABILITIES

Cambridge International AS & A Level Accounting workbook 25

Partner’s salary Almond 8 000 9 425

Cambridge International AS & A Level Accounting workbook 26

Partner’s salary Datchler 15 000

16 $0.04 × 350 000 = $14 000

Cambridge International AS & A Level Accounting workbook 27

Cambridge International AS & A Level Accounting workbook 28

Cambridge International AS & A Level Accounting workbook 29

Fixtures and fittings 95 000 29 300 65 700

EQUITY AND LIABILITIES

Cambridge International AS & A Level Accounting workbook 30

21 Factors concerned with share issue:

Purchases ledger control account

Cambridge International AS & A Level Accounting workbook 31

Balance b/d 34 362 Receipts 268 635

Credit sales 267 213 Balance c/d 32 940

301 575 301 575