Management, Control and Accountability for Financial Resources 2 June 215 Marking Scheme This marking scheme has been prepared as a guide only to markers. This is not a set of model answers, or the exclusive answers to the questions, and there will frequently be alternative responses which will provide a valid answer. Markers are advised that, unless a question specifies that an answer be provided in a particular form, then an answer that is correct (factually or in practical terms) must be given the available marks. If there is doubt as to the correctness of an answer, the relevant NCC Education materials should be the first authority. Throughout the marking, please credit any valid alternative point. Where markers award half marks in any part of a question, they should ensure that the total mark recorded for the question is rounded up to a whole mark.
Answer any THREE (3) questions Question 1 Marks James Wordsworth sells stationery from rented premises. The following information has been extracted from the accounting records as at 31 March 215. Dr Cr s,s Capital account at beginning of year 1 Bank 65 Delivery van cost 8 Delivery van accumulated depreciation 4 Fixtures and fittings cost 2 Fixtures and fittings accumulated 1 depreciation Sales 545 Allowance for receivables.5 Items taken for personal use (at cost) 1 Drawings in year in cash 5 Heating and lighting 48 Opening inventory 98 Wages and salaries 65 Trade debtors / receivables 16 Trade creditors / payables 24.5 Purchases 275 Rent & Insurance 12 Office expenses 17 684 684 In addition, the following information is relevant: (i) Depreciation is still to be charged for this year: Fixtures and fittings are depreciated at 25% per annum on cost Delivery van is depreciated 25% reducing balance (ii) The closing stock is valued at 75, (iii) The allowance for receivables is to be set at 15% and is yet to be adjusted. It has been discovered that 5, worth of customer accounts have gone bad due to the economic climate - this has yet to be adjusted as well. Question 1 continues on next page Page 2 of 19
a) (iv) Rent and insurance of was paid in advance for 12 months on the 1.1.215. (v) James has not accrued for legal fees of 5, relating to an employee accident at work. Prepare a Balance Sheet (Statement of Financial Position) for James Worsdworth for the year ended 31 March 215 in a format suitable for a sole trader. NB You are not required to prepare a Profit and Loss (Income Statement). Statement of Financial Position (Balance Sheet) for James Wordsworth for the year ended 31 March 213 Fixed Assets Delivery Van 8 Less: Depreciation W (5) 3 (i) (8-4)*.25+4 (2m) Fixtures & Fittings 2 Less Depreciation W (15) 5 (i) (2*.25)+1 (2m) Total 8 Current Assets Stock / Inventory (ii) As per question 75 2 Debtors / Receivables W (iii) (16-5-1.65) (16-5)*.25=1.65 9.35 (4m) Prepayment 9 (iv) 12*9/12 (2m) Bank 65 Total 158.35 The Statement of Financial Position is continued on the next page. Page 3 of 19
Less: Current Liabilities Trade Creditors 24.5 Accruals 5 (i) As per question Total 29.5 Current Assets less Current Liabilities 128.85 Total: Owners Funds 136.85 Capital 1 Less: Drawings W 6 As per tb Add: Profit Balancing figure W 96.85 Total: Capital 136.85 (Please note give half marks for all workings W- and full marks for all subtotals) Question 1 continues on next page Page 4 of 19
b) Calculate the current ratio for James Wordsworth from the Balance Sheet (Statement of Financial Position) prepared in (a) above and briefly explain what it measures, and what it means for James Wordsworth specifically. 5 Current Ratio = current assets/current liabilities 158.35 / 29.5 = 5.37:1 (1 mark) Current ratio is the ratio of current assets of a business to its current liabilities. It is the most widely used test of liquidity of a business and measures the ability of a business to repay its debts over the period of the next 12 months. (2 marks) Current ratio matches current assets with current liabilities and tells us whether the current assets are enough to settle current liabilities. Current ratio below 1 shows critical liquidity problems because it means that total current liabilities exceed total current assets. General rule is that higher the current ratio better it is but there is a limit to this. Abnormally high value of current ratio may indicate existence of idle or underutilized resources such as closing inventory in the company. The current ratio for James may be a little high. (2 marks) Total: 25 Marks Page 5 of 19
Question 2 The following financial statements have been prepared for two companies Marks 2 Balance Sheet (Statement of Financial Position) as at 31 December 214 Red plc Berret plc m m m m Fixed assets 22 34 Current assets Stock 18 3 Debtors 55 45 Cash 45-118 75 Creditors : Amounts falling due within one year Creditors 15 42 Bank overdraft - 5 15 92 Net current assets/(liabilities) 13 (17) Total assets less current liabilities 323 323 Creditors : amounts falling due after more than one year 1% Bank Loan (18) (5) 143 273 Share capital @ 1 nominal value 7 2 Retained profits 73 73 143 273 Question 2 continues on next page Page 6 of 19
Profit and Loss Account (Income Statement) for the year ended 31 December 214 Red plc Berret plc Marks m m Turnover 23 55 Cost of Sales (15) (44) Gross Profit 8 11 Administration Expenses (2) (3) Distribution Costs (3) (5) Operating profit 3 3 Interest Payable (18) (5) Profit before tax 12 25 Tax (4) (8) Profit after tax 8 17 Calculate the following ratios for both companies. Allocate 1 mark for the formula and workings for each company and 1 mark for the correct answer. i) Return on capital employed 4 Red plc Berret plc Capital Employed (Owners funds + long term liability) 323 323 ROCE / Return on Capital Employed (PBIT / Capital employed)*1 9.29 9.29 ii) Operating profit percentage 4 Red plc Berret plc Operating Profit Margin % (PBIT / TURNOVER)*1 13.4 5.45 Question 2 continues on next page Page 7 of 19
iii) Current ratio 4 Red plc Berret plc Current Ratio (CA / CL) 7.87.82 iv) Interest cover Red Berret plc plc Interest Cover (PBIT / Interest) 1.68 6. 4 v) Quick (acid test) ratio 4 Red plc Berret plc Quick (acid test) ratio (CA-Stock / CL) (4 marks) 6.67.49 (Zero marks for own figures) b) If someone was going to invest in Red PLC or Berret PLC, what factors should they consider? 5 Award 1 mark for each bullet point up to a maximum of 5 marks. Current share price necessary to know actual dividend return What business are they in? Economic forecasts Dividend history Future prospect and managements views of the future Other possible investments What analysts think. PEST analysis State of national / global economy - is the company recession proof Risk profile of investor How much investing? Total: 25 Marks Page 8 of 19
Marks Question 3 Black and Becker plan to begin trading on 1st July 214 as a manufacturer of lawn mowers. Opening capital will be 7, which will be deposited in the business bank account in July 214. In addition, Black and Becker have negotiated a bank loan of 4, from the 1st July. The draft budget includes the following information: (i) Black and Becker expects a steady growth. The forecast for sales and purchases of raw materials is as follows: Sales Purchases of Materials July 15, 44, August 18, 56, September 21, 68, October 21, 68, November 21, 68, December 28, 75, (ii) Sales are a mixture of cash and credit - 45% of the debtors are expected to pay in the month of the sale and 55% in the following month. (iii) Black and Becker have arranged a month's credit from its suppliers. a) (iv) Machinery costing 23, will be purchased on 1st July, and will have to be paid for before the end of the month. Depreciation of machinery is calculated at the rate of 1% per annum on cost. (v) Office equipment costing 15, will be bought in July and paid for in September. The same depreciation rate is used for equipment as for machinery. (vi) Interest on the bank loan is 1% per annum and will be charged to the business bank account at the end of each quarter (i.e. at the end of September, December, March and June). (vii) Other expenses incurred in the running of the business (excluding materials purchases and depreciation) are estimated at 1, per month and will be paid one month in arrears. Prepare a cash budget for Black and Becker for the six months from July to December 214. Question 3 continues on next page 2 Page 9 of 19
Jul Aug Sep Oct Nov Dec Marks Receipts: Capital 7, 1 Bank loan 4, 1 Sales - 67,5 81, 94,5 94,5 94,5 126, 2 W 45% 55% - 82,5 99, 115,5 115,5 115,5 2 W Total 177,5 163,5 193,5 21, 21, 241,5 1 Payments : Purchases 44, 56, 68, 68, 68, 2 W Machinery 23, 1 Office 15, 1 furniture Interest 1, 1, 2 W Other 1, 1, 1, 1, 1, 1 Total 23, 144, 172, 168, 168, 169, 1 Surplus/ (deficit) Opening balancing Closing balancing (52,5 ) 19,5 21,5 42, 42, 72,5 1 nil (52,5 (33,) (11,5 3,5 72,5 1 ) ) (52,5 (33, (11,5) 3,5 72,5 145, 1 ) ) Layout / Presen tation No Deprec iation 1 1 The maximum number of marks awarded to this question is 2. Please note give half marks for workings W & full marks for totals, surplus / deficit, opening balance and closing balance Page 1 of 19
b) Comment on the cash budget produced and make suggestions which you feel Black and Becker may wish to consider. Marks 5 Award 1 mark for each bullet point up to a maximum of 5 marks Black and Becker would need to negotiate an overdraft of up to 52,5 until the end of September OR Borrow 52,5 more OR find additional opening capital OR give less credit on sales OR rent/lease machinery & equipment OR buy machinery & equipment second-hand Total: 25 Marks Page 11 of 19
Marks Question 4 Gillygate Kebabs Ltd produces authentic kebab sandwiches for sale to the public. The company has the following budgeted costs and sales for the month of January 215: Nan Bread 8 Ketchup 1, Depreciation 2, Light and Heat 1, Meat 3, Rent 5, Salad 3, Salaries 6, The company expects to sell 1, kebab sandwiches at 3.5 each - all of which can be made using the above ingredients. Question 4 continues on next page Page 12 of 19
a) Prepare a monthly Profit and Loss (Income Statement) for Gillygate Kebabs Ltd for January 215. 8 Sales (1,*3.5) Cost of Sales (Direct/Variable Costs) Nan bread 8 Ketchup 1, Meat 3, Salad 3, W Gross Profit (Contribution) Overheads (Indirect/Fixed Costs) Rent 5, Depreciation 2 Light and Heat 1 Salaries 6 - W Net Profit 35, 2m (7,8) 2m - 27,2 1m (14,) 2m 13,2 1m (Only award full marks if only variable / fixed costs in the correct section) b) What is the variable cost per burger? 5 7,8/1, =.78. (Half marks for own figures) c) What is the Contribution per burger? 5 3.5-.78= 2.72 or alternatively 27,2/1,= 2.72 (Half marks for own figures) Question 4 continues on next page Page 13 of 19
d) How many kebab sandwiches must Gillygate Kebabs sell to breakeven and what is the margin of safety for the business? B.E.P FC / Contribution per unit 14, / 2.72 = 5,148 Kebab sandwiches (3 M) 7 (Half marks for own figures) M.O.S Budgeted sales BEP / Budgeted sales * 1 (4 M) 1, 5,148 / 1, * 1% = 48.52% (Full marks for own figures as long as own BEP is used) Total: 25 Marks Page 14 of 19
Question 5 Marks 3P Ltd manufacture three products A-1, B-1 and C-1 of which the first two have been profitable but C-1 has been losing money for three years and the directors are considering whether to halt production of it. 25 The most recent results for the last month are as follows: A-1 B-1 C-1 Total Sales: 6 12 9 27 Less: Total Costs 42 99 93 234 Profit / Loss 18 21 (3) 36 If C-1 is dropped the company will save 3, per month. According to the management accountant the total fixed costs are 54, which is apportioned 12,, 24, and 18, between A-1, B-1 and C-1 respectively. The management accountant acknowledges that the fixed costs of C-1 will continue whether C-1 is continued or discontinued. Discuss whether C-1 should be continued or discontinued. Prepare a Product and a Total Profit and Loss statement clearly indicating variable costs to illustrate your answer. Question 5 continues on next page Page 15 of 19
Workings: Total Cost = Fixed Cost + Variable Cost 5 marks for correctly identifying Variable Costs for all 3 products half marks for own figures: A-1 B-1 C-1 TC 42 99 93 Less: FC 12 24 18 VC 3 75 75 Award 15 marks for correctly identifying Contribution for all 3 products and arriving at a Profit figure half marks for own figures: A-1 B-1 C-1 Total Sales 6 12 9 27 VC 3 75 75 18 Contribution 3 45 15 9 Less: FC 54 Profit and Loss 36 Award 5 Marks for discussion and any other salient points: It is better to continue with C-1 since it is contributing 15, towards Fixed Costs. Even if C-1 is discontinued the company will have to incur it s fixed costs and the 15, contribution will not be distributed between A-1 and B-1. If anything profitability will reduce to 21, ( 36,- 15,). End of Examination Paper Total: 25 Marks Page 16 of 19
Learning Outcomes matrix Question Learning Outcomes assessed 1 1, 2, 3, 6 Yes 2 3, 6 Yes 3 1, 3, 4, 6 Yes 4 5 Yes 5 1, 3, 4, 6 Yes Marker can differentiate between varying levels of achievement Page 17 of 19
Grade descriptors Learning Outcome Critically evaluate the role of accounting in an organisation Critically assess the different ways in which an organisation can be funded Evaluate the methods used to report and assess financial performance Assess the role of management in the control of financial resources Examine the methods used in calculating costs Pass Merit Distinction Provide a reasonable assessment of the subject; Ideas are generally coherent and demonstrate some sound critical skills Demonstrate an adequate awareness of issues associated with the subject and make some appropriate judgements; Demonstrate some sound critical skills Provide a reasonable assessment of the subject; Ideas are generally coherent Demonstrate an adequate awareness of issues associated with the subject and make some appropriate judgements Provide examination of the subject with some suitable examples and references Provide a generally strong assessment with some well-reasoned assumptions; Ideas are consistently coherent; Demonstrate consistently sound critical skills Demonstrate a sound awareness of issues associated with the subject and make consistently appropriate judgements; Demonstrate consistently sound critical skills Provide a generally strong assessment with some well-reasoned assumptions; Ideas are consistently coherent Demonstrate a sound awareness of issues associated with the subject and make consistently appropriate judgements Provide detailed examination of the subject with adequate use of appropriate references and examples Provide a consistently strong assessment with well-reasoned and original assumptions; All ideas are highly coherent; Demonstrate highly developed critical skills Demonstrate a detailed awareness of the complexity of issues associated with the subject and make highly appropriate judgements; Demonstrate highly developed critical skills Provide a consistently strong assessment with well-reasoned and original assumptions; All ideas are highly coherent Demonstrate a detailed awareness of the complexity of issues associated with the subject and make highly appropriate judgements Provide consistently critical and detailed examination of the subject with innovative use of highly appropriate references Page 18 of 19
Evaluate the use of accounting in organisational decision-making and budgeting Provide a reasonable assessment of the subject; Ideas are generally coherent Provide a generally strong assessment with some well-reasoned assumptions; Ideas are consistently coherent Provide a consistently strong assessment with well-reasoned and original assumptions; All ideas are highly coherent Page 19 of 19