Foundation Examination Paper 1(Y) Accounting Framework (International Stream)

Size: px

Start display at page:

Download "Foundation Examination Paper 1(Y) Accounting Framework (International Stream)"

Sara Wiggins
5 years ago
Views:

1 Answers

2 0YUIX 0DYAA Paper 1(Y) Foundation Examination Paper 1(Y) Accounting Framework (International Stream) 1 Moorfoot Income statement for the year ended 30 June 2000 $000 Sales revenue (13, ) 13,607 Cost of sales (W1) (7,988) Gross profit 5,619 Distribution costs (W1) (1,948) Administrative expenses (W1) (2,156) Profit from operations 1,515 Finance cost (100) Net profit for the period 1,415 Answers Moorfoot Balance sheet as at 30 June 2000 $000 Non-current assets (W2) Land 1,510 Buildings 7,114 Warehouse and office equipment 1,240 Motor vehicles ,504 Current assets Inventory 1,660 Trade debtors ( ) 781 Prepayments 130 Cash 140 2,711 13,215 Capital and reserves Called up share capital 1,200 Share premium account 2,470 Accumulated profits (6, , ) 7,347 11,017 Non-current liabilities 10% loan notes 1,000 Current liabilities Trade payables ( ) 838 * Accruals 360 * 1,198 13,215 * Alternatively, these items may be shown as: Trade payables 820 Accruals ( ) [P.T.O.

3 0DYAA Paper 1(Y) Workings 1. Income statement headings Distribution Administrative Cost of sales costs expenses $000 Purchases (8, ) 8,118 Inventory 1 July ,530 Distribution costs (1, ) 1,520 Administrative expenses ( ) 1,710 Bad debts 6 Increase in allowance for doubtful debts 12 Depreciation Buildings 2% x 8, Equipment 15% x 1, Vehicles 25% x 1, Inventory 30 June 2000 (1660 ) 7,988 1,948 2, Non-current assets Warehouse and office Motor Land Buildings equipment vehicles Per list of account balances Cost 1,510 8,300 1,800 1,680 Accumulated depreciation (1,020) (290) (620) Depreciation for year (166) (270) (420) 1,510 7,114 1, DYAB Paper 1(Y) 2 Buildings cost or valuation 1999 $ $000 1 July Balance 2,200 1 Oct Balance 3, Jan Revaluation 1,200 3,400 3,400 Balance 3,400 Revaluation Account 2000 $ $ June Balance 2,022 1 Jan Buildings cost/valuation 1,200 1 Jan Buildings accumulated depreciation 822 2,022 2, July Balance 2,022 Buildings accumulated depreciation Revaluation 822 Balance 800 Income statement Depreciation to 31 Dec % x $2,200,000 x 6/ Balance c/d 34 Income statement Depreciation to 30 June % x $3,400,000 x 6/ Balance b/d 34

4 0DYAB Paper 1(Y) Plant and machinery cost 1999 $ $000 1 July Balance 1,600 1 Jan Transfer disposal Jan Cash June Balance carried down 1,700 2,000 2,000 Plant and machinery accumulated depreciation 2000 $ $000 1 Jan Transfer disposal July Balance 600 ( ) 30 June Balance carried 2000 down June Income statement (W1) Balance brought down July Plant and machinery disposal 2000 $ $000 1 Jan Transfer cost June Transfer depreciation June Income statement Cash 50 Profit on sale Motor vehicles cost 1999 $ $000 1 July Balance Apr Disposal cost June Balance Apr Cash 18 Disposal agreed value Motor vehicles accumulated depreciation 2000 $ $000 1 Apr Disposal (10 + 3) 13 1 July Balance June Balance June Income statement (W2) Motor vehicles disposal 2000 $ $000 1 Apr Motor vehicle cost 20 1 Apr Motor vehicle cost 12 agreed value 30 June Income statement Motor vehicles 13 Profit on sale 5 accumulated depreciation Workings 1. Plant and machinery depreciation Depreciation $000 Plant sold 15% x $300,000 x 6/ Remaining plant 15% x $1,300, New plant 15% x $400,000 x 6/

5 0DYAB Paper 1(Y) 2. Motor vehicles depreciation $000 Vehicle given in part exchange 20% x $20,000 x 9/12 3 Remaining vehicles 20% x $580, New vehicles 20% x $30,000 x 3/ DYBA Paper 1(Y) 3 (a) (b) Year ended 31 March (i) Gross profit as percentage of sales 600/1,800 x % 700/2,500 x % (ii) Operating profit as percentage of sales revenue 240/1,800 x % 250/2,500 x % (iii) Return on capital employed 190/1,568 x % 200/2,122 x % Valid alternative calculations also acceptable (iv) Current ratio 700 : : 1 1,230 : : 1 (v) Quick ratio 500 : : : : 1 (vi) Inventory turnover (days) 200/1,200 x days 360/1,800 x days (vii) Trade receivables sales (days) 400/1,440 x days 750/2,000 x days (viii) Trade payables purchases (days) 210/1,220 x days 380/1,960 x days Comments on ratios (i) Gross profit percentage on sales has declined from 33 3% to 28 0%, a drop of 16%. This is possibly due to a decision to lower prices to increase sales revenue, which has risen by 38 9%. A drop in the gross profit percentage is an indicator of possible error or fraud if an explanation such as a lowering of prices cannot be found. (ii) Net profit to sales is down from 13 3% to 10%, down about 25%. The net profit percentage has fallen more than the gross profit percentage, probably because distribution costs have risen sharply. (iii) Return on capital employed has declined from 12 1% to 9 4%, a drop of about 22%. This is a reflection of the decline in profitability shown by ratio (ii) above. (iv) and (v) The two ratios measuring liquidity have changed little between the two periods. The levels are satisfactory at both dates. (vi) The inventory turnover ratio has increased because the inventory level has risen faster than the increases in cost of sales and sales. The higher inventory could be a reflection of slowing demand for the company s goods towards the end of the period and/or slackness in the company s inventory control procedures. (vii) The accounts receivable days have increased considerably from days, a high level, to the even higher level of days. The increase suggests slackness in the company s credit control procedures. (viii) There has been a relatively small increase in the number of days purchases in trade payables. The increase is perhaps caused by pressure on the company s liquid resources as a result of the increased inventory and trade receivables. 14

6 0DYBB Paper 1(Y) 4 Fintry Cash flow statement Year ended 30 September Cash flows from operating activities Net profit (W2) 500 Adjustments for: Depreciation (W1) 460 Profit on sale of non-current assets (W1) (15) Interest expense ( ) 128 Operating profit before working capital changes 1,073 Increase in inventory (110) Decrease in trade receivables 30 Increase in trade payables 50 Cash generated from operations 1,043 Interest paid (128) Net cash from operating activities 915 Cash flows from investing activities Purchase of non-current assets (W1) (2,055) Proceeds from sale of non-current assets (W1) 55 Net cash used in investing activities (2,000) Cash flows from financing activities Proceeds from issuance of share capital 700 Proceeds from long-term borrowings 500 Dividends paid ( ) (100) Net cash from financing activities 1,100 Net increase in cash (W3) 15 Cash at beginning of period (W3) (70 ) Cash at end of period (W3) (55 ) Workings 1. Non-current assets Non-current assets cost or valuation Opening balance 2,740 Disposal account 200 Revaluation reserve 400 Cash additions 2,055 Closing balance 4,995 5,195 5,195 Non-current assets accumulated depreciation Disposal account 160 Opening balance 700 Income statement depreciation 460 Closing balance 1,000 1,160 1,160 Non-current assets disposal Non-current assets cost 200 Non-current assets depreciation 160 Income statement profit on sale 15 Cash proceeds [P.T.O.

7 0DYBB Paper 1(Y) 2. Calculation of operating profit Accumulated profit Dividends paid Opening balance 460 Final Profit 500 Interim Closing balance Calculation of movement on cash Balance at 1 October 1999 Cash at bank 10 Overdraft (80) (70) Balance at 30 September 2000 Cash at bank 15 Overdraft (70) (55) Net increase in cash 15 (b) Under the direct method, operating cash flow would be calculated and shown by deducting cash paid to suppliers and cash paid for salaries, wages and other operating expenses from total cash received from customers. 0DYBC Paper 1(Y) 5 (a) An enterprise must be able to demonstrate all of the following: (i) The technical feasibility of completing the project so that it will be available for use or sale. (ii) The intention to complete the project and use or sell the result. (iii) Its ability to use or sell the product. (iv) The ability of the product to generate future economic benefits. (v) The availability of adequate technical, financial and other resources to use or sell the product. (vi) The ability to measure the expenditure attributable to the project reliability during its development. Note: These points are broadly worded as they appear in IAS 38. Answers using the candidates own words to express them are obviously acceptable. (b) Income Balance statement sheet $ $ Project A Amortisation 40,000 Balance sheet 80,000 Project B Expenditure written off 230,000 Nil Project C Development expenditure to date 255,000 Project D Research expenditure 80,000 Nil 350, ,000 (c) Disclosure requirements (i) Total research and development expenditure recognised as an expense was $350,000 analysed as follows: $ Expenditure during the year 135,000 Amortised or written off from deferred expenditure 215,000 $350,000 16

8 0DUBC Paper 1(U) (ii) Movements on unamortised development costs $ Balance at 1 July ,000 Expenditure recognised as an asset in current year 225, ,000 Amortised during year (40,000) Expenditure on abandoned project written off (230,000 ) Balance at 30 June 2000 $335,000 0DYBD Paper 1(Y) 6 (Eight from) Sole trader Limited company Legal background Little statutory control over the business; no Governed by legislation, usually requiring disclosure disclosure of accounting information of accounting information and details of directors and shareholders Legal status Not a separate entity from the proprietor as an Constitutes a separate legal entity from owners individual Owner s liability Proprietor has unlimited liability to creditors Liability limited, with rare exceptions, to the to the full extent of business and private assets company s own assets plus any uncalled share capital Constitution No formal constitution required Formal constitution required Audit No audit required Audit required unless exempt as a small company (requirements vary in different countries) Capital structure Owner s capital contributed by one person Capital may be contributed by a large number of persons who own shares in the capital (shareholders) Management Owner normally manages the business Shareholders do not run the company but appoint directors to do so. (Shareholders may, of course, also be directors). Share in profit Sole proprietor takes the whole of the profit Shareholders may receive dividends as their share of the profits Other points considered on their merits. 17

9 0DYMS Paper 1(Y) Foundation Examination Paper 1(Y) Accounting Framework (International Stream) 1 Profit and loss account Sales revenue ( + 1) 1 Cost of sales purchases ( + 1) 1 + closing inventory 1 2 Distribution costs (ex depreciation) 1 Admin expenses (ex depreciation) 1 Bad + doubtful debts 1 2 Depreciation 1 Interest Balance sheet Non-current assets Buildings 1 Equipment 1 Vehicles 1 3 Current assets Inventory Receivables 2 Prepayments 3 Capital and reserves Share capital Share premium Accumulated profits (4 x ) 2 3 Loan notes 1 Creditors Payables 1 Accruals 1 Available 21 Layout and style 3 Available 2 Buildings cost account revaluation 1 Depreciation to 31 Dec Revaluation reserve account 2 x 1 2 Depreciation to 30 June Plant and machinery cost Addition Disposal transfer 1 Plant and machinery accumulated depreciation Calculation of depreciation (W1) 3 x 1 Disposal transfer 1 Plant and machinery disposal account Correct profit on sale 1 Motor vehicles cost Cash entry Agreed value 1 Disposal transfer Motor vehicles depreciation Calculation 3 x 1 Disposal transfer 1 Disposal account Correct profit on sale 1 15 Layout and style Marking Scheme Maximum 24 Maximum

10 0DYMS Paper 1(Y) 3 (a) 1 mark per pair of ratios 8 (b) 1 marks per item 12 4 (a) Calculation of operating profit Opening and closing balances 2 x 1 Dividends 1 Interest 2 x 1 Available 3 Depreciation 3 x 1 Profit on sale of non-current asset 3 x 1 Increase in inventory Decrease in receivables Increase in payables Interest paid 2 x 1 Capital expenditure Acquisitions 2 Disposal 2 Dividends paid 2 x 1 Issue of shares 1 Issue of loan notes 1 Cash movement 1 Layout 2 20 Maximum (b) Total cash received from customers 1 Less: Total cash paid to suppliers 1 Cash paid for expenses Available & Maximum 5 (a) 6 x 1 6 (b) (c) Income statement A 1 B 1 D 1 Balance sheet A 1 B nil 1 C 1 D nil 1 Disclosure (i) Income statement 2 (ii) Movements on deferred development expenditure Profit and loss account 2 Balance Current expenditure 1 Amortisation 1 Expenditure written off 2 Closing balance marks per valid point 8 x

The Examiner's Answers for Financial Accounting and Tax Principles

The Examiner's Answers for Financial Accounting and Tax Principles SECTION A Answers to Question One 1.1 A 1.2 D 1.3 D 1.4 B 1.5 Invoiced amount less maintenance, excluding VAT 117,000 Concrete base 12,000