Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream) June 2006 Answers
Section A
4 D Receivables ledger control account
Opening receivables 148,200 Cash received from customers 819,300
Sales 880,600 Discounts allowed 16,200
Irrecoverable debts written off 1,500 Returns from customers 38,700
Closing receivables 153,100
–––––––––– ––––––––––
14 A Payables ledger control account
Cash paid to suppliers 988,400 Opening balance 384,600
Discounts received 12,600 Purchases 963,200
Contras with amounts
receivable in receivables ledger 4,200
Purchases returns 17,400
Closing balance 325,200
–––––––––– ––––––––––
5(400,000 + 500,000)
Section B
1 Leon and Mark
Statement of division of profit for the year ended 31 December 2005 Six months ended 30 June 2005
$ $
Leon: (90,000 – 20,000) (see working) 70,000
–––––––– Six months ended 31 December 2005
Profit 180,000
Interest on capital
Leon 5% x 400,000 x 6/
12 10,000
Mark 5% x 200,000 x 6/
12 5,000 (15,000)
–––––––– –––––––– Balance of profit
Leon 60% 93,000
Mark 40% 62,000 155,000
–––––––– –––––––– 0 ––––––––
Working $
Profit for year 250,000
Add: irrecoverable debt 20,000
––––––––
Profit for division 270,000
––––––––
Six months ended 30 June 2005 90,000
less: irrecoverable debt 20,000 70,000
––––––––
Six months ended 31 December 2005 180,000
–––––––– 250,000 –––––––– Current accounts
Leon Mark Leon Mark
$ $ $ $
Drawings 160,000 80,000 30 June Profit 70,000
Balance 13,000 31 Dec Interest on capital 10,000 5,000
Salary 10,000
Share of balance 60:40 93,000 62,000
Balance 3,000
Alternative format
Leon and Mark
Statement of division of profit for the year ended 31 December 2006
Leon Mark Total
$ $ $
Six months ended 30 June 2005
Leon: (90,000 – 20,000)(see working) 70,000 70,000
––––––– –––––––
Six months ended 31 December 2005 Interest on capital
Leon 5% x 400,000 x 6/
12 10,000
Mark 5% x 200,000 x 6/
12 5,000 15,000
Salary
Mark 20,000 x 6/
12 10,000 10,000
Balance of profit 60:40 93,000 62,000 155,000
––––––– ––––––– ––––––– 103,000 77,000 180,000 ––––––– ––––––– ––––––– Current accounts
Leon Mark Leon Mark
$ $ 2005 $ $
Drawings 160,000 80,000 30 June Profit 70,000
Balance 13,000 31 Dec Share of profit 103,000 77,000
Balance 3,000
173,000 80,000 173,000 80,000
2 (a) Net profit adjustments
$
Profit per draft financial statements 684,000
(1) Inventory movement
Adjustment for sales $36,000 x 60% 21,600
(2) Goods on sale or return
Elimination of profit (4,000)
(3) Reduction in inventory:
$18,000 – ($13,500 – $500) (5,000)
(4) Debts written off (8,000)
(5) Increase in allowance for receivables
($11,500 – $10,000) (1,500)
–––––––––
Revised net profit $687,100
–––––––––
(b) Adjustments to inventory and receivables
(i) Inventory $
Inventories per draft financial statements 116,800
(1) Inventory movement – as (a) above 21,600
(2) Goods on sale or return
cost introduced into inventory 6,000
(3) Reduction in inventory (a) above (5,000)
–––––––––
Revised closing inventory $139,400
––––––––– $ (ii) Receivables
per draft financial statements 248,000
(2) Deduction of goods on sale or return (10,000)
(4) Debts written off (8,000)
––––––––– 230,000
(5) less: allowance for receivables (11,500)
3 Ganda
Cash flow statement for the year ended 31 December 2005
$000 $000
Cash flows from operating activities
Profit before taxation 970
Adjustment for:
Depreciation (W2) 310
Profit on sale of non-current asset (W3) (20)
Interest expense 120
––––– 1,380
Increase in inventory (200)
Decrease in receivables 200
Increase in payables 100
–––––
Cash generated from operations 1,480
Interest paid (120)
Income taxes paid (200)
–––––
Net cash from operating activities 1,160
Cash flows from investing activities
Purchase of non-current assets (W1) (1,500)
Proceeds of sale of non-current assets (W3) 80
Net cash used in investing activities ––––– (1,420)
Cash flows from financing activities
Proceeds from issue of share capital (300 + 180) 480
Proceeds from issue of loan notes 200
Dividends paid (250) 430
––––– –––––
Net cash from financing activities 170
Cash at beginning of period (230)
–––––
Cash at end of period (60)
––––– Workings
(1) Non-current assets – cost
$000 $000
Opening balance 2,100 Transfer disposal 200
Purchases (balancing figure) 1,500
Closing balance 3,400
–––––– ––––––
3,600 3,600
–––––– ––––––
(2) Non-current assets - accumulated depreciation
$000 $000
Transfer disposal 140 Opening balance 550
Income statement – depreciation
(balancing figure) 310
Closing balance 720
–––––– ––––––
860 860
–––––– ––––––
(3) Non-current assets - disposal
$000 $000
Transfer – cost 200 Transfer – depreciation 140
Income statement 20 Cash 80
–––––– ––––––
220 220
4 (a) The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of a business:
1 Purchases are made on credit and the goods go into inventory. 2 Inventory is sold and converted into receivables
3 Credit customers pay their accounts 4 Cash is used to pay suppliers.
(b) Collection period for receivables 250
––––– x 365 91 days
1,000 Inventory turnover
200 104 days
––––– x 365 –––––––– (see Note below)
700 195 days
Payment period for payables
150 68 days
––––– x 365 800
–––––––– Length of working capital cycle 127 days Note. If average inventory is used the inventory turnover becomes:
100 + 200
––––––––––– ÷ 2 x 365 78 days
700
The length of the cycle becomes 101 days. Either answer is acceptable.
(c) The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital, thus freeing them for other purposes.
(Other answers considered on their merits)
5 To the directors of Ambia 8 June 2006
Comments on proposals under consideration
(a) Proposed bonus issue.
There are several problems in connection with the proposed bonus issue:
(i) A bonus issue would not raise any capital for the company. To raise capital a rights issue (or an issue at full market price) would be necessary.
(ii) For either a bonus issue or a rights issue to be possible, the authorised capital would have to be increased. (iii) There are insufficient reserves to make a bonus issue of $500,000 worth of shares.
(b) Paying a dividend of 10c per share.
There are insufficient retained earnings to pay a dividend of more than 5c per share.
(c) IFRS 3 Business combinationsdoes not allow goodwill to be revalued upwards.
Part 1 Examination – Paper 1.1(INT)
Preparing Financial Statements (International Stream) June 2006 Marking Scheme
Section B Marks
1 Statement of division of profit
Leon profit for first six months 2
Profit for second six months 1
Interest on capital 1
Salary 1/
2
Balance of profit 1
––––
Leon profit 70,000 1/
2
Interest on capital 2 x 1/
2 1
Salary 1/
2
Share of balance 1/
2
–––– 9 –––– Alternative marking scheme (if statement of division of profit shows partners’ total shares)
Leon : profit for first six months 2
Profit for second six months (as total) 1
Interest on capital 1
Salary 1/
2
Balance of profit 1
Total shares 1
––––
Leon profit 70,000 1/
2
Total profit shares 1
–––– 9 ––––
2 (a) Profit adjustments
1 mark per item 5 x 1 5
(b) Adjustments to inventory and receivables Inventory
Movements 1
Goods on sale or return 1
Reduction to net realisable value 1
–––– 3 Receivables
Goods on sale or return 1
Debts written off 1
Allowance for receivables 1
––––
3 6
–––– ––––
Marks
3 Cash flows from operating activities 31/
2 1/
2 mark per item other than interest
Interest added and deducted 1/
2
Cash flows from investing activities
1/
2mark per item 2 x 1/2 1
Cash flows from financing activities
1/
2mark per item 3 x 1/2 11/2
Cash movement 2 x 1/
2 1
Workings: non-current assets – cost 11/
2
4 (a) Purchases into inventory 1
Inventory into recievables 1
Receivables into cash 1
Cash to pay suppliers 1 4
––––
(b) per ratio 1 3 x 1 3
correct calculation 1 4
Workings for MCQ answers
4 A as D, but discounts on wrong side
B as D, but irrecoverable debts on wrong side
C as in Q, but with discounts and irrecoverable debts on credit side D all items on debit side except opening balance moved to credit side
6 A as D, but 180 adjusted in wrong direction B as D, but 270 adjusted in wrong direction C as D, but 3,200 adjusted in wrong direction
D 3,920 – 270 – 180 – 3,200 = 330 : 100 difference A as B but 18,000 not deducted
C as B but provision based on 458,000
D as B but provision based on 458,000 and 18,000 not deducted
14 A Purchase returns 17,400 O/Bal 384,600
Cash 988,400 Purchases 963,200
Discounts 12,600
B as A but discounts on wrong side
C as A but contras and discounts on wrong side
D as in Q but contras and discounts on credit side (410,000 – 33,600)
20 A as in question
B (38,640 – 19,270 + 14,260) C as B but plus 140
D as B but minus 140
22 A 48,000 + 400 + 800 + 2,200 C 48,000 + 400 + 2,200 D 48,000 + 400
24 A (1,100,000 – (400,000 + 500,000)) B (1,100,000 – 4/
5x 400,000)
C (1,100,000 – 4/
5(400,000 + 500,000))
D 4/5x 1,100,000
