Part 1 Examination – Paper 1.1 (INT)
Preparing Financial Statements (International Stream) June 2004 Answers
Section A
1 A 20,000 minus 16,000 x 20%/2
2 B (7/12 x 8,400) + (5/12 x 12,000) = 9,900 1,000 paid in advance in sundry payables 3 D 28,500 + 42,000 – 38,000
4 A (160,000 x 20%) + (40,000 x 20% x 3/
4) + (50,000 x 20% x 1/2)
5 D
6 C Receivables ledger control account
308,600 147,200
8 A 386,400 minus loss on 1 3,800
9 C Receivables ledger total account
130,000 686,400
1,400
Balance 744,960 4,160
2,000 181,000
–––––––– ––––––––
874,960 874,960
–––––––– ––––––––
10 D Payables ledger total account
302,800 60,000
2,960
2,000 Balance 331,760 84,000
–––––––– ––––––––
391,760 391,760
–––––––– ––––––––
11 C 281,250/3 – 53,050 12 D
13 B G H I
20,000 10,000
90,000 30,000 30,000
110,000 66,000 44,000
––––––––– ––––––––– –––––––––
200,000 116,000 84,000
19 A 20 B 21 C 22 D
23 C 280,000 – (112,000 + 40,000 + 48,000) = 80,000; minus 20% = 64,000 24 C 290,000 x 20%
Section B
1 (a) Minica
Income statement for the year ended 31 December 2003
$ $
Sales revenue (3,845,000 – 15,000) 3,830,000
less: Cost of sales
Opening inventory 360,000
Purchases (2,184,000 – 60,000) 2,124,000
Carriage inwards 119,000
–––––––––– 2,603,000
less: Closing inventory 450,000 2,153,000 –––––––––– ––––––––––
Gross profit 1,677,000
less: Expenses
Sundry administrative expenses (W1) 430,300
Carriage outwards 227,000
Bad and doubtful debts (W2) 26,000
Depreciation (W3) 94,000
Profit on sale of office equipment (W4) (9,000)
–––––––––– 768,300
––––––––––
Net profit for the year 908,700
––––––––––
(b) The proposed dividend of $240,000 would be disclosed by note in Minica’s published income statement.
Workings $ $
1 Sundry administrative expenses
416,000 + 28,700 – 14,400 430,300
2 Bad and doubtful debts
Bad debts written off 15,000
Allowance (31,000 – 20,000) 11,000 26,000
–––––– 3 Depreciation
(460,000 – 20,000) x 20 per cent 88,000
60,000 x 20 per cent x 6/12 6,000 94,000
–––––– 4 Profit on sale of equipment
15,000 proceeds minus 6,000 net book value 9,000
2 $ $
Repairs to premises 8,700
Premises asset 7,800
Suspense 900
Correction of error in posting cost of repairs to premises
Suspense account 1,000
Motor vehicle disposal 1,000
Entry for unposted item
Accumulated depreciation 6,000
Depreciation expense 6,000
(or Income statement)
Motor vehicle disposal 30,000
Motor vehicles – cost 30,000
Transfer of cost of vehicle destroyed to disposal account
Accumulated depreciation 6,000
Motor vehicle disposal 6,000
Transfer of depreciation on vehicle destroyed to disposal account
Income statement 23,000
Motor vehicle disposal 23,000
Loss on destruction of car transferred
3 Renada
Cash flow statement for the year ended 31 October 2003
$ $
Cash flows from operating activities
Net profit before taxation 200,000 Adjustments for:
Depreciation 120,000
Loss on sale of office equipment 50,000 ––––––––––– Operating profit before working
capital changes 370,000
Increase in inventory (1,000,000)
Increase in receivables (530,000)
Increase in payables 1,050,000
–––––––––––
Cash used in operations (110,000)
Income taxes paid (120,000)
Net cash used in operating activities ––––––––––– (230,000) Cash flows from investing activities
Purchase of non-current assets (700,000) Proceeds from sale of
non-current assets 30,000
Net cash used in investing activities –––––––––– (670,000) Cash flows from financing activities
Proceeds from issuance of
share capital 500,000
Net cash from financing activities –––––––––– 500,000 –––––––––
Net decrease in cash and cash equivalents (400,000)
Cash and cash equivalents at 31 October 2002 140,000 ––––––––– Cash and cash equivalents at 31 October 2003 (260,000)
Working
Non-current assets – net book value
$ $
Balance 1,000,000 Transfer disposal 80,000
Revaluation reserve 300,000 Depreciation 120,000
Assets purchased
(balancing figure) 700,000
Balance 1,800,000
(i) Inventory holding period
600,000/6,300,000 x 365 35 days
1,600,000/7,200,000 x 365 81 days
(ii) Average period of credit granted to customers
1,270,000 / 8,400,000 x 365 55 days
1,800,000 / 9,000,000 x 365 73 days
(iii) Average period of credit allowed by suppliers
1,050,000 / 6,400,000 x 365 60 days
2,100,000 / 8,200,000 x 365 93 days
(b) (i) All three ratios show deterioration.
The large increase in the inventory holding period suggests that the company is having difficulty making sales in the closing months of the period.
Customers are taking longer to pay, placing further strain on the company’s liquid position.
The company is attempting to finance the increased inventory and receivables by paying its suppliers more slowly, which will probably have the effect of losing supplier goodwill.
(ii) The main reason for the decline is the reduced gross profit percentage. If the gross profit percentage of 2002 (25 per cent) had continued in 2003, an additional $450,000 of profit would have been made. Instead, the gross profit percentage went down to 20 per cent.
Other contributing factors are:
– the new non-current assets ($700,000) were not acquired until near the end of the year, and thus may not be fully operational
– the share issue also took place right at the end of the year, and so has not yet been deployed in profit-earning assets.
5 (a) Comparability means that users are able to draw conclusions about the performance or financial position of a business by relating figures for a particular period to other relevant figures.
Possible types of comparison are:
(i) comparison with figures for the same business for earlier periods (ii) comparison with figures for other businesses for the same period (iii) comparison with budgets or forecasts
(Two types required for full marks)
(b) Two from:
(i) by requiring the disclosure of accounting policies and the effect of changes in them
(ii) by reducing or eliminating the number of possible alternative treatments for similar items available to businesses (iii) by requiring businesses to treat similar items in the same way within each period and from one period to the next, unless
a change is required to comply with accounting standards or to ensure that a more appropriate presentation of events or transactions is provided.
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Part 1 Examination – Paper 1.1 (INT)Preparing Financial Statements (International Stream) June 2004 Marking Scheme Section B
Marks
1 Sales revenue 1/
2
Opening inventory 1/
2
Purchases 1/
2
Carriage inwards 1
Closing inventory 1/
2
Gross profit correct 1
Sundry administrative expenses 1
Carriage outwards 1/
2
Bad and doubtful debts 11/
2
Depreciation 2
Profit on sale 1
Heading 1
–– 11
Proposed dividend 1
–– 12 ––
2 For each journal entry
1/
3 Calculation of cash used in operations
Profit 1/
2
Depreciation 1
Loss on sale 1
Working capital movements 3 x 1/
2 ––––11/2 4
Taxation 1/
2
Investing activities
Purchases 5 x 1/
2 21/2
Proceeds of sale
1/ 2
Share issue 1
Cash movement 2 x 1/
5 (a) Explanation 2
Types of comparison 2 x 1 2
