Financial Accounting 1 st Year Examination

Transcription

1 inancial Accounting 1 st Year Examination August 2016 Solutions Page 1 of 31 in. Accounting (A) A2016

2 NOTES TO USERS ABOUT THESE SOLUTIONS The solutions in this document are published by Accounting Technicians Ireland. They are intended to provide guidance to students and their teachers regarding possible answers to questions in our examinations. Although they are published by us, we do not necessarily endorse these solutions or agree with the views expressed by their authors. There are often many possible approaches to the solution of questions in professional examinations. It should not be assumed that the approach adopted in these solutions is the ideal or the one preferred by us. Alternative answers will be marked on their own merits. This publication is intended to serve as an educational aid. or this reason, the published solutions will often be significantly longer than would be expected of a candidate in an examination. This will be particularly the case where discursive answers are involved. This publication is copyright 2016 and may not be reproduced without permission of Accounting Technicians Ireland. Accounting Technicians Ireland, Page 2 of 31 in. Accounting (A) A2016

3 Accounting Technicians Ireland irst Year Examination: Autumn 2016 Paper: INANCIAL ACCOUNTING Tuesday 9 August a.m. to p.m. INSTRUCTIONS TO CANDIDATES PLEASE READ CAREULLY Candidates must indicate clearly whether they are answering the paper in accordance with the law and practice of Northern Ireland or the Republic of Ireland. In this examination paper the / symbol may be understood and used by candidates in Northern Ireland to indicate the UK pound sterling and by candidates in the Republic of Ireland to indicate the Euro. Answer ALL THREE questions in Section A and TWO of the three questions in Section B. If more than TWO questions are answered in Section B, then only the first two questions, in the order filed, will be corrected. Candidates should allocate their time carefully. All workings should be shown. All figures should be labelled as appropriate e.g. s, s, units, etc. Answers should be illustrated with examples, where appropriate. Candidates may ignore any VAT implications to transactions throughout this paper unless the question specifically instructs them to do otherwise. Question 1 begins on Page 2 overleaf. Note: The terminology in use for 2016 exams will be in line with the RS 102. In some cases this differs slightly from the terminology previously used (IRS). or the 2016 exams, students who use IRS terminology will not be penalised, however it is preferred that students use RS 102 terminology throughout. Page 3 of 31 in. Accounting (A) A2016

4 SECTION A Answer ALL THREE QUESTIONS (Compulsory) in this Section QUESTION 1 (Compulsory) The following trial balance was extracted from the books of P. Thomas, a sole trader, on 31 December 2015: / / Land 125,600 Equipment 101,110 Accumulated depreciation on equipment 31,415 Inventory as at 1/1/ ,810 Receivables and payables 62,100 52,175 VAT (refund due) 5,160 Deposit on rented premises, held by landlord 8,950 Bank and cash 7,820 Allowance for irrecoverable debts 5,625 PRSI liability 3,710 Business rent 15,000 Sales 402,250 Purchases 195,100 Returns 4,150 3,750 Discounts 2,150 3,120 Distribution and advertising 4,450 Power 2,100 Internet 770 Business insurance 11,250 Wages and salaries 82,190 Employers PRSI/NIC 8,280 4% long term bank loan 91,250 Long term loan interest 1,760 Irrecoverable debts 1,120 Drawings 5,290 Accumulated profits/losses 22,410 Capital 51,855 Suspense 1, , ,160 The following information, which has not been accounted for above, is also available: 1. The inventory count as at 31 December 2015 showed closing inventory valued at / 21, P. Thomas has agreed an annual rent of / 20,000 with his landlord. Rent for the fourth quarter 2015 remains unpaid at the year end. 3. Included in business insurance above is / 9,000 which relates to the year ended 29 ebruary P. Thomas has specific concerns over / 2,560 of receivables and wishes to set up a specific allowance with respect to these balances. The general allowance on remaining receivable balances should be maintained at 5%. 5. Allowance to be made for depreciation as follows: Land Not depreciated Equipment 15% reducing balance method (Depreciation should be calculated to the nearest whole number) Page 4 of 31 in. Accounting (A) A2016

5 QUESTION 1 (Continued) 6. The suspense account balance above relates to sales of / 800 which was recorded as purchases in error. The receivables and payables balances are correct. Ignore VAT. You are required to prepare: a) The Income Statement for the year ended 31 December b) The Statement of inancial Position as at that date. 11 Marks 9 Marks Total 20 Marks Page 5 of 31 in. Accounting (A) A2016

6 QUESTION 2 (Compulsory) The trial balance of C. Cindy failed to agree. The debits exceeded the credits by / 8,452. The balance was placed in a suspense account. After an inspection the following items were discovered: i. The total of the purchases T account was undercast by / 1,000 ii. Cash sales of / 1,235 were recorded by debiting sales with / 2,135 and crediting cash with / 3,215. iii. Mr Smith whose debt was the subject of a specific allowance for receivables, paid his debt in full / 540. The only entry made for this transaction was to credit receivables with / 540. iv. An invoice for rates for / 1,125 was found behind the bookkeeper s desk. The invoice had not been accounted for. v. The total of the sales returns day book was overcast by / 640. vi. Discounts received of / 420 was recorded by crediting receivables and debited discounts received. vii. A new piece of machinery valued at / 12,150 was written off to repairs in error. The depreciation policy of C. Cindy is to depreciate machinery by 10% straight line method. The sole trader charges a full year s depreciation in the year of purchase and non in the year of sale. You are required to: a) Prepare the journal entries, with the appropriate narratives, necessary to correct the above errors. 13 Marks b) Prepare a suspense account and hence calculate the remaining difference. 3 Marks c) Prepare a working showing the effect on proprietor s profit (if any) of correcting each of the above errors. 4 Marks Total 20 Marks Page 6 of 31 in. Accounting (A) A2016

7 QUESTION 3 (Compulsory) Answer ANY OUR of the SIX parts below Part A Outline your understanding of the imprest system as it relates to petty cash. 2 Marks Given the following information calculate the cash replenishment required for the month of May / Imprest cash float 175 Postage Miscellaneous stationary 9.50 Taxi receipts Gift for retirement party 50 Credit sales posted to the sales day book 625 Cake for retirement party 15 3 Marks Part B The following information relates to the payroll costs for D. Hicks, a sole trader for the month of June Name Gross Monthly Salary PAYE Deducted Employee PRSI/NIC Employer PRSI/NIC D. Box 1, % of Gross C. unne 2, % of Gross A. Shine 3, % of Gross 7,280 1, D. Hicks paid net salary on 29 June You are required to: Prepare the journal entries that should appear in the books and records of D. Hicks for the month of June 2016 in relation to salary and wages. 5 Marks Part C Write a note on any two of the following terms as they relate to inventory valuation in the financial statements: Cost Net realisable value (NRV) irst in - first out (IO) 5 Marks Page 7 of 31 in. Accounting (A) A2016

8 QUESTION 3 (Continued) Part D P. Phonix does not keep proper books and records. He is available to provide you with the following information for the year ended 31 December / Payables (credit balance) 1 January ,150 Payables (debit balance)1 January Payables (credit balance) 31 December ,200 Payables (debit balance) 31 December Contra entry with receivables 2,130 Payments to payables (90% credit, 10% cash) 78,500 Interest charges on overdue accounts 1,020 Discount received 650 Discounts allowed 780 You are required to: With the aid of a payables control account calculate the credit purchases for the year ended 31 December Marks Part E The following information is available for P. Calc for the year ended 31 March 2016: During the year a new building premises was constructed. Costs in relation to the construction are as follows: / Material costs 142,150 Architect and legal fees 31,000 Cost of new plants & flowers for the building 320 Repairs 5,750 Site preparation costs 15,120 Loan interest incurred directly in relation to the construction of the asset 11,100 You are required to: i. The value of buildings to be recorded as an addition in the books and records of P. Calc for the year ended 31 March Marks ii. State the impact on profits and non-current assets if revenue expenditure is incorrectly capitalised and shown as a non-current asset. 2 Marks Part i. Outline your understanding of the role played by the books of prime entry in the financial accounting system. 2 Marks ii. Provide an example of three books of prime entry and outline the information contained in that book of prime entry. 3 Marks Total 20 Marks Page 8 of 31 in. Accounting (A) A2016

9 QUESTION 4 SECTION B Answer any TWO of the three questions in this Section a) The following information is available for A. Marche a sole trader who does not maintain proper books and records. / Positive bank balance 1/7/2015 9,785 Bank balance (overdraft) 30/6/ ,248 A. Marche capital introduced 25,120 Cash drawing 125 per month Inventory drawings (goods to the value of) 50 per month unds lodged from tills 66,450 Cash received from credit customers 101,360 Payroll costs 56,741 Cash transferred to petty cash tin 542 Expenses paid from bank 45,270 Bank charges 202 Interest received on positive cash balances 101 Payments to payables 97,140 Sundry payments to payables 11,103 A. Marche suspects that an employee may be stealing funds from the business. With the aid of the information above prepare the Bank T Account for the year ended 30 June 2016 and hence derive any cash discrepancy which may indicate that an employee is stealing from A. Marche. 7 Marks b) J. Stanford does not maintain proper books and records. She is however able to provide you with the following information as at 31 December / NBV of non-current assets 119,750 Current assets 21,140 Capital as at 1 January ,640 Drawings 11,320 Current liabilities 23,710 Non-current liabilities 87,140 Capital introduced during ,000 You are required to: i. Calculate the profit/loss figure for J. Stanford for the year ended 31 December Marks ii. Outline your understanding of why the technique used in part (i) can be used to derive the profit/loss figure. 2 Marks Page 9 of 31 in. Accounting (A) A2016

10 QUESTION 4 (Continued) Part C Outline your understanding of the concepts of mark-up and margin. 2 Marks The following information for the year ended 31 December 2015 is available for a sole trader who does not maintain proper books and records. Opening inventory as at 1 January 2015 / 32,110 Closing inventory as at 31 December 2015 / 29,320 Purchases / 184,750 Purchases returns / 7,980 Standard profit margin for % Using the information above derive the sales figure (to the nearest whole number) for the year ended 31 December Marks Total 20 Marks Page 10 of 31

11 QUESTION 5 Part A i. Outline your understanding of how the VAT system operates. Note: knowledge of VAT rates is not required. 4 Marks ii. The following transaction information is available for D. Dars for the month of April Opening VAT liability on April / 14,152; Purchases amounted to / 142,120 net of VAT; Sales were / 242,000 inclusive of VAT; Purchases returns were / 2,090 inclusive of VAT; Sales returns were / 900 net of VAT; On 14 th of April 2016 D. Dars paid / 14,100 in VAT to the Revenue Authority. The appropriate VAT rate for all transactions is 10% You are required to prepare the VAT T Account for the month of April Marks Part B i. Outline your understanding of the accruals concept and the importance of the concept to financial statement preparation. 3 Marks The following information is available for insurance and electricity expenses for the year ended 30 April 2016: Insurance The insurance year of the sole trader is 1 ebruary to 31 January each year; As at 1 st May 2015 the insurance invoice for / 12,000 dated 1 ebruary 2015 to 31 January 2016 remains unpaid. This invoice was paid on 15 th May The insurance invoice from 1 ebruary 2016 to 31 January 2017 amounted to / 18,000 and was paid in full on 30 April Electricity Electricity outstanding as at 1 st May 2015 amounted to / 1,120 Electricity invoices for the financial year were as follows: Time Period: / May and June July and August ,020 September & October November & December January & ebruary ,130 March and April ,215 During the year ended 30 th April 2016 / 4,922 was paid in electricity costs. You are required to: ii. Prepare the insurance T account and the electricity T account for the year ended 30 April 2016 and hence calculate the figure for inclusion in the Income Statement for insurance and electricity for the year ended 30 April Marks iii. Prepare a Statement of inancial Position extract as at 30 April 2016 including relevant balances from the insurance and electricity accounts above. 2 Marks Total 20 Marks Page 11 of 31

12 QUESTION 6 a) A business can be run through one of three possible mediums: sole trader, partnership and limited company. Provide a description of each of these business types. 6 Marks Outline two advantages and one disadvantage of conducting business as a sole trader and a limited company. 6 Marks b) An accountant within an organisation has many roles. State any four of these. 4 Marks c) At the centre of accounting is the concept of accountability. or both a public limited company and a charity provide an example of the following: i. An organisational objective. ii. Whom the organisation is accountable to and why. 4 Marks Total 20 Marks Page 12 of 31

13 1 st Year Examination: August 2016 inancial Accounting Suggested Solutions and Examiner s Comments Students please note: These are suggested solutions only; alternative answers may also be deemed to be correct and will be marked on their own merits. Statistical Analysis By Question Question No Average Mark 62.03% 24.32% 56.24% 64.80% 36.76% 64.90% (%) Nos. Attempting Statistical Analysis - Overall Pass Rate 59% Average Mark 49 Range of Marks Nos. of Students and over 34 Total No. Sitting Exam 293 Total Absent 64 Total Approved Absent 10 Total No. Applied for Exam 367 General Comments: Weak scripts were characterised by the following main issues: 1.) Not all questions answered Often but not always this was a result of candidates spending too much time on Q1 or answering all 6 parts of Q3 despite the instructions clearly stating to only answer 4 parts. 2.) Poor knowledge meaning parts of questions were left blank. 3.) ailed to show workings for questions, particularly question 1. 4.) Concentration on theory parts of questions with little or no attempt at calculations. Candidates should be reminded of the need to revise the entire syllabus in preparation for their exam and to follow the instructions given by the examiner on the paper. Page 13 of 31

14 Examiner s Comments on Question One Generally this question was well answered. Candidates struggled on the following areas: 1. Suspense account adjustment to sales and purchases 2. Mixing up discount received and discount allowed 3. Business rent adjustment 4. The allowance for receivables, in particular dealing with the specific allowance 5. Calculation of the business insurance prepayment 6. Treatment of the VAT refund Solution One P. Thomas Statement of Profit and loss for the year ended 31 December Ref to Workings / / / Total Marks Allocated Sales 403,050 1 Sales returns (4,150) 0.5 Net sales 398,900 Cost of sales Opening inventory 24, Purchases 194,300 1 Purchases returns (3,750) , ,360 Less closing inventory 1 (21,195) 0.5 Cost of sales (194,165) Gross Profit 204,735 Discount received 3, Less Expenses Business rent 2 20, Decrease in allowance for receivables 4 (88) 1.5 Depreciation equipment 5 10, Business insurance 3 9,750 1 Distribution and advertising 4, Power 2, Internet Wages and salaries 82, Employers PRSI/NIC Costs 8, Discount allowed 2, Irrecoverable debts 1, Interest 7 3, Total expenses (144,826) Operating profit 63,029 Page 14 of 31

15 Solution One (Cont d) P. Thomas Statement of financial position as at 31 December Non-current assets Ref to Workings / / / Total Marks Allocated Land 125, ,600 Equipment 4 101,110 (41,869) 59, ,841 Current assets Closing inventory 1 21, Receivables 62,100 1 Closing allowance 4 (5,537) 56, Prepayments 3 1, VAT refund 5, Deposit 8, Cash and bank 7, ,188 Total assets 286,029 Equity and Liabilities Equity Capital 51, Accumulated profit/loss 22, Profits for , Accumulated profits 137,294 Drawings (5,290) ,004 Non-current liabilities 91, Current liabilities Payables 52, Accruals 2&7 6,890 1 PRSI/NIC liability 3, ,775 Total Equity and Liabilities 286,029 Page 15 of 31

16 Solution One (Cont d) Working 1 Closing Inventory - / 21,195 Workings 2 / Rent as per TB 15,000 Rent unpaid 5,000 Restated rent 20,000 Workings 3 / Business insurance as per TB 11,250 Insurance unpaid ( / 9,000/12*2) (1,500) Insurance 9,750 Workings 4 / Receivables 62,100 Specific allowance (2,560) 59,540 General allowance 5% 5% General allowance 2,977 Total allowance / 2,977 + / 2,560 = / 5,537 Opening allowance / 5,625 - / 5,537 = / 88 decrease in the allowance for receivables Workings 5 / Equipment 101,110 Accumulated on equipment (31,415) NBV 69,695 Depreciation 15% 10,454 Workings 6 / Sales as per TB 402,250 Sales incorrectly recorded ,050 / Purchases as per TB 195,100 Sales incorrectly recorded as purchases (800) 194,300 Page 16 of 31

17 Solution One (Cont d) Workings 7 / Loan 91,250 4% Annual interest 3,650 Paid (1,760) Accrual 1,890 Page 17 of 31

18 Examiner s Comments on Question Two This question was very poorly answered, with many candidates seemly very unprepared for the question type. Many marginal candidates scored poorly on this question and then went on to not achieve an overall pass mark on the paper. Candidates are reminded to cover the ensure syllabus and not omit areas. Part C was very poorly answered with many candidates not even attempting this question part. Solution Two Part A Debit Credit / / 1. Dr Purchases 1, Cr Suspense 1, Being purchases T Account undercast Dr Cash 3, Cr Sales 2, Cr Suspense 1, Dr Cash 1, Cr Sales 1, Being the correction cash sales incorrectly recorded Dr Bank Cr Suspense Being the correction of an error of single entry 0.25 Dr Allowance for receivables: Statement of in Position Cr Allowance for receivables: Statement of P&L Being the release of a specific allowance Dr Rates 1, Cr Accruals 1, Being the correction of an error of omission Dr Suspense Cr Sales returns Being sales returns overcast Dr Receivables Dr Payables Cr Discounts received Being the correction of error, discounts received incorrectly recorded Dr Non-current assets 12, Cr Repairs 12, Being the correction of an error of principle 0.25 Dr Depreciation as per: Statement of P&L 1, Page 18 of 31

19 Cr Depreciation as per: Statement of in Position 1, Being depreciation on NCA incorrectly treated for the calculation of the depreciation figure. 13 Marks Page 19 of 31

20 Solution Two (Cont d) Part B Suspense Account Details / Details / 0.5 Error Balance 8,452 1 Restated suspense balance 10,432 Error 1 1, Error 2 1, Error ,072 11,072 Restated suspense balance 10,432 3 Marks Part C Proprietor s Profit Error 1 (1,000) 0.5 Error 2 3, Error Error 4 (1,125) 0.5 Error Error Error 7 12, Error 7 (1,215) ,200 4 Marks Total 20 Marks Page 20 of 31

21 Examiner s Comments on Question Three Weaker candidates are still attempting all six parts to this question. This is an absolute waste of time. Candidates need to pick their best four questions as answer them only. Part A generally very well answered by those who attempted it. Part B not a popular question part but generally well answered by those who did. Some weaker candidates prepared T accounts when journals were requested or simply prepared the working to support the journal with no journal. No marks were awarded in these cases. Part C a popular question part, with mixed answers. Many candidates did not give a full definition of the term cost while others stated incorrectly that IO relates to the actual movement of inventory items quoting perishable goods as an example. Part D generally well answered by those who attempted it Part E the calculation was well answered, but the theory was poorly answered by weaker candidates who waffled about truth and fairness of the financial statements without actually answering the question. Part a very mixed question. Many weaker candidates could not explain the function of the books of prime entry this was very worrying. Solution Three Part A Under the imprest system a cash float is set for pretty cash say / 250. As cash is paid out of petty cash it is replaced with receipts for the items purchased. At all times remaining petty cash plus receipts in the petty cash tin will equal the cash float. At the end of the month funds from the bank account are transferred into petty cash to bring the balance of cash back up to the float. At this point the expenses associated with the receipts are posted to the ledgers of the business. 2 marks Cash replenishment required for the month of May 2016: / Imprest cash float marks Postage (35.75) 0.5 marks Miscellaneous stationary (9.50) 0.5 marks Taxi receipts (44.20) 0.5 marks Gift for retirement party (50) 0.5 marks Cake for retirement party (15) 0.5 marks Cash used during month Cash replenishment required for omitting credit sales Page 21 of 31

22 Solution Three (Cont d) Part B Debit Credit Marks / / Dr Wages and salaries gross pay 7, Dr Employers PRSI/NIC Cr PAYE/PRSI/NIC Account - PAYE 1, Cr PAYE/PRSI/NIC Account Employers PRSI/NIC Cr PAYE/PRSI/NIC Account Employees PRSI/NIC Cr Net Pay control account 4, Being the posting of salary for the month of June Debit Credit / / Dr Net Pay control account 4, Cr Bank 4, Being the payment of net salaries Marks Part C Cost Cost includes all the expenditure incurred in bringing the product or service to its present location and condition. This includes either the cost of purchase: materials costs, import duties, freight, less trade discounts (a discount for buying in bulk or being a regular customer) or the cost of conversion: this includes direct costs, such as direct material, direct labour and direct expense plus production overheads for e.g. factory rent and rates. Net realisable value (NRV) NRV is the revenue expected to be earned in the future when the goods are sold, less any further costs (including selling costs) that need to be incurred. Thus NRV is the selling price, less trade discounts, all further costs to completion and all marketing, selling and distribution costs. IO irst-in, irst-out (IO) may be used to calculate the value of closing inventory and the cost of goods sold during the period. This method assumes that inventory purchased or manufactured first is sold first and newer inventory remains unsold. Thus the cost of older inventory is assigned to the cost of goods sold (Statement of profit and loss) and that of newer inventory is assigned to ending inventory (Statement of financial position). The actual flow of inventory usually will not match the first-in, firstout pattern. [Any two at 2.5 marks each for a total of 5 marks] Page 22 of 31

23 Part D Payables Control Account / / 0.5 1/1/15 Opening balance 160 1/1/15 Opening balance 10, Contra 2,130 Interest charged 1, Payments 70,650 Purchases 74, Discounts rec /12/15 Closing balance 12,200 31/12/15 Closing balance ,790 85,790 1/1/16 Opening balance 450 1/1/16 Opening balance 12, for leaving out 780 Part E (i) / Material costs 142, Architect and legal fees 31, Site preparation costs 15, Loan interest incurred directly in relation to the construction of the asset 11, , marks each for omitting cost of new plans and repairs (ii) If revenue expenditure is incorrectly capitalised and shown as a non-current asset profits will be overstated and non-current assets will be overstated. 3 marks 2 marks Page 23 of 31

24 Solution Three (Cont d) Part One of the primary purposes of financial accounting is to record, summarise and classify information arising from transactions the business has entered into with other parties. However, if ledgers were updated each time a transaction occurred, the ledger accounts would quickly become cluttered and errors may be made. Therefore, all transactions are initially recorded in a book of prime entry and then posted in summary to the ledger accounts. This ensures that detailed information is captured on every transaction in the books of prime entry and yet the ledger accounts do not become cluttered. Book of Prime Entry Sales day book Sales returns day book Purchases day book Purchases returns day book Cash book Petty cash book The journal Transaction Credit sales Returns of goods sold on credit Credit purchases Returns of goods bought on credit All bank transactions All small cash transactions All transactions not recorded in any other book of prime entry [2 marks for explanation, 1 mark for each example] 5 Marks TOTAL 20 Marks Page 24 of 31

25 Examiner s Comments on Question our A popular question that was generally well answered. Challenges did arise for many candidates in Part C in the calculation of the sales and the profit figures. Solution our Part A Total Marks Allocated Bank T Account / / Total Marks Allocated 0.5 Balance b/d. 9,785 Cash drawings 1, Capital introduced 25,120 Payroll costs 56, Cash sales - tills 66,450 Petty cash Cash received from credit customers 101,360 Expenses 45, Interest received 101 Bank charges Payments to payables 97, Sundry payables 11, Balance c/d 11,248 Unaccounted for cash 1, , ,064 Balance b/d 11, marks for leaving out inventory drawings 7 Marks Part B Statement of financial position as at 31 December 2015 / / / Marks Non-current assets 119, Current assets 21, Total assets 140,890 Equity and Liabilities Capital 1/1/15 43, Capital introduced 15, Profit/(loss) 2015 (17,280) 41,360 Drawings (11,320) ,040 Non-current liabilities 87, Current liabilities 23, Total Equity and Liabilities 140,890 [5 marks] (ii) The profit/loss above was derived based upon the knowledge that the statement of financial position must always balance. The technique used above relies upon the dual aspect concept. The dual aspect concept states that every transaction has two equal effects. The two effects are opposite and equal, i.e. a debit and a credit. The dual aspect concept is the reason the statement of financial position balances and is the reason that assets are equal to equity and liabilities. [2 marks] Page 25 of 31

26 Part C Mark-up and margin are measures that businesses use to set and manage prices to maximise profitability. Mark-up is the amount added to the cost of a product or service to arrive at a price, thus the mark-up percentage is the difference between cost and the selling price divided by the cost price and expressed as a percentage. The gross margin is the difference between cost and the selling price, thus the gross margin percentage is the margin divided by the sales price and expressed as a percentage. [2 marks] Solution our (Cont d) Statement of profit and loss for the year ended 31 December 2012 / / Marks Sales 326, % Cost of sales Opening inventory 32, Purchases 184, Purchases returns (7,980) 176, ,880 Less closing inventory (29,320) 0.75 Cost of sales (179,560) 55% 1 Gross Profit 146,913 45% [4 marks] Total 20 Marks Page 26 of 31

27 Examiner s Comments on Question ive Not a popular question. or those who did attempt the question answers were mixed. or part A the explanation of the VAT system was reasonable, however the VAT calculations and T account question element ere very poorly answered. Part B, many weaker candidates explained an accrual as opposed to the accruals concept and scored accordingly. The insurance T account was very poorly answered. Many candidates did not attempt the inancial Position extract or presented the Statement of Profit and Loss extract in error. Solution ive Part A (i) VAT or valued added tax is a tax levied on the sales of businesses. VAT is collected by businesses and remitted to the Revenue Authority on a regular basis. A business must charge VAT on all vatable sales but is allowed to reclaim VAT on purchases. Thus businesses only remit the balance to the Revenue Authority. Where the VAT paid on purchases is greater than the VAT levied on sales a business can claim a refund of the difference between VAT on purchases and VAT on sales from the Revenue Authority. Therefore in the year-end Statement of inancial Position the VAT balance will usually be a liability representing funds owed to the Revenue Authority but may also be a asset representing a refund due by the Revenue Authority to the business. Where a business is registered for VAT, VAT should not appear in the Statement of Profit and Loss of the business as it is neither income nor an expense of the business. The business is simply a collection vehicle for the Revenue Authority. 4 Marks Part ii Total Marks Allocated VAT Account / / Total Marks Allocated 1 Purchases 14,212 Balance b/d 14, Sales returns 90 Sales 22, Bank 14,100 Purchases returns Balance c/d 7,940 36,342 36,342 Balance b/d 7,940 5 Marks Page 27 of 31

28 Solution ive (Cont d) Part B (i) The accruals concepts states that income is recognised in the financial statements as it is earned. Not when the cash is received. Expenditure is recognised as it is incurred, not when it is paid for. When income is incurred over time (e.g. rental/interest income) or expenditures are time-based (e.g. rent payments), the income and expenditure recognised in the income statement should relate to the time period, not to the receipts and payments of cash. or example the sale of a good is recognised in the financial statements when the rights and rewards of ownership have passed from the seller to the purchaser not when the cash is received. The concept ensures that the profit/loss reported in the Statement of Profit and Loss is what was earned during the year. 3 Marks (ii) Insurance T Account Total Marks Allocated / / Total Marks Allocated 0.5 Bank 12,000 Balance b/d 3, Bank 18,000 Statement of Profit & 13,500 Loss Balance c/d 13, ,000 30,000 Balance b/d 13,500 Marks Total Marks Allocated Electricity T Account / / Total Marks Allocated 0.5 Bank 4,922 Balance b/d 1, Balance c/d 2,345 Statement of Profit & Loss 6,147 (iii) Statement of financial position as at 30 April ,267 7,267 Balance b/d 2,345 / Marks Allocated Current assets Prepaid insurance 13,500 1 Equity and Liabilities Current liabilities Accrued electricity (2,345) 1 Marks 2 marks 20 Marks Page 28 of 31

29 Examiner s Comments on Question Six A very popular question that was very well answered by most candidates who attempted it. The in Part A, some candidates gave the advantages and disadvantages of a partnership business despite the question not asking for it. Part B on the role of an accountant within an organisation was the weakest element of the question. Solution Six Part A A business can be carried out through one of the business types: sole trader, partnership and limited company Sole Trader The term sole trader relates to ownership, in that one person owns the business entity. This type of business entity is often quite small. There are no formal procedures required to set up a sole trader business. In addition the sole trader can decide how the business is going to be run and is free to dissolve or sell the business at any time. Both in the UK and Ireland the sole trader and the business are not recognised as separate legal entities. Because of this sole traders have unlimited liability. Unlimited liability means that there is no distinction between the sole trader s personal wealth and that of the business. Partnerships Partnerships are entities where ownership is divided between at least two people. Usually partnerships have no more than twenty individual partners. Like sole traders partnerships tend to be small in size, exceptions to this include accounting and solicitor partnerships, these often have more than twenty partners. A partnership is normally set up using a Deed of Partnership. This contains: - Amount of capital each partnership should provide (i.e. starting capital). - How profits and losses should be divided. - How many votes each partner has (usually based on the proportion of capital invested). - Rules on how to take on new partners. - How the partnership is brought to an end, or how a partner leaves. In the absence of this deed of partnership, the Partnership Act of 1890 (amended in 1907) will apply to avoid any disputes in the future. Limited Company The name limited company is derived from the fact that the owners (shareholders) of a limited company enjoy limited liability. The number of owners (shareholders) in a limited company however, is potentially unlimited. Because of this they tend to be quite large. A limited company has a separate legal existence to that of its owners. A direct consequence of this is that the owners of limited companies have limited liability. This means that the owners (shareholders) are only required to finance the business up to a certain point. This point is the shareholder s share capital i.e. the quantity of money each shareholder has invested in the business through purchasing shares. Page 29 of 31

30 Solution Six (Cont d) The distinguishing factor that differentiates a limited company from a sole trader and a partnership is that a limited company has to prepare annual statutory accounts ; this is the price to be paid for the benefit of limited liability. Limited companies must produce such accounts annually and may have to appoint an independent person to audit and report on them depending on certain size criteria. Once prepared, a copy of the accounts must be sent to the Registrar of Companies which maintains a separate file for every company. The file for any company can be inspected at the Companies Registration Office for a nominal fee by a member of the general public. This is why the statutory accounts are often referred to as the published accounts. Limited companies are governed very tightly by legislation, namely the Companies Acts. [2 marks each for a total of 6 Marks] All of the above points are not required for full marks. Sole Trader Advantages of a Sole Trader Business (Any Two) - With one owner the sole trader does not have to worry about setting up in business with an unsuitable partner; - A sole trader is free to make decisions and run the business as he/she sees fit without having to take the opinions of others on board; - A sole trader does not have to split the rewards of the business with others; - The comparative ease with which the business is set up and run there are few administrative burdens imposed on sole traders by law, there is no requirement to produce final accounts, have them audited or present them at an annual meeting; - Does not bear any of the cost associated with the transition to international accounting standards; - Because a sole trader is usually directly involved in the running of the business he/she will not have to spend resources finding a suitable management team to delegate the running of the day-to-day activities of the business to; - As owner/manager of the business a sole trader is completely aware of how the resources of the business are being managed. There is no division between management and ownership. Not so with a limited company where the financial statements are the shareholders prime source of information as to how the assets of the company are being managed and how the company is performing. Disadvantages of Being a Sole Trader (Any One) - Unlimited Liability A sole trader is liable for any debts that the business incurs. This means that any money that the owner has put into the business could be lost, but most importantly, if the business continues to incur further costs then the owner has to pay these as well. In some cases they may have to sell some of their own possessions to pay suppliers, etc. Such a risk often puts potential sole traders off setting up businesses, and also makes them consider the other forms of business structure. - As a result of the sole trader and the business being the same legal form, the sole trader is taxed based on income tax not corporation tax. Corporation tax rates are more favourable than income tax rates. - Can be difficult to raise finance. Because they are small, banks may not lend large sums of money to sole traders who may be unable to avail of other forms of long-term finance unless they change their ownership status. - Can be difficult to enjoy economies of scale, i.e. lower cost per unit due to higher levels of production. A sole trader, for instance, may not be able to buy in bulk and enjoy the same discounts as larger businesses. - There is a problem of continuity if the sole trader retires or dies what happens to the business? Page 30 of 31

31 Solution Six (Cont d) Limited Company Advantages of a Limited Company (Any Two) - All owners (shareholders) enjoy limited liability; - Limited companies because of their size can raise large quantities of capital. Such capital requirements are required for expansion abroad for example. Thus limited companies tend to be better positioned to take advantage of business opportunities which may arise; - The burden of the day-to-day running of the company is delegated; - A shareholder in a public limited company can easily sell his/her holding in one company and reinvest in another public limited company if he/she so chooses. This flexibility allows shareholders to manage their portfolio efficiently; - In recent times restriction on capital flows between countries has largely been removed, allowing individuals to purchases the shares of foreign public limited companies. Such international diversification can insulate shareholders against the effects of the domestic business cycle; - In the Republic of Ireland and most jurisdictions corporation tax rates are lower than personal income tax rates (as paid by a sole trader). Thus less of the businesses profits are paid out in tax. Disadvantages of Limited Company (Any One) - Costly and complicated to set up as a company - Lack of privacy of information due to filing requirement with CRO/Companies House [1mark for each advantage and disadvantage] 6 Marks Part B The accountant s role in the organisation can be analysed as follows: 1. Preparation and presentation of timely accurate financial/management accounts to management to help management interpret the financial information. 2. Identification of areas of inefficiency and wastages of resources in the business. 3. Treasury functions: The accountant also plays the role of treasury functions in such a way that they raise finance, cash management, etc. 4. Setting up an effective system of internal and accounting controls. 5. Preparation of feasibility reports: These reports assist management in assessing the viability/profitability or otherwise of proposed capital expenditure such as the opening of a new factory or branch. 6. Investigation of the performance/operations of competing business organisations to assist management in policy formulation. 7. Investigation of fraud within the organisation, this is a key role of the accountant in preparation of an audit at year-end. Part C Other relevant comments will be marked on their merit. [1mark each] 4 Marks Organisation Objective Accountable to Public limited company Making a profit/ creation of shareholder Shareholders wealth Charities Achievement of charitable aims or maximise spending on activities Charity trustees or Donor [1mark for each point] 4 Marks TOTAL 20 Marks Page 31 of 31