Cambridge IGCSE and O Level Accounting
Workbook answers
Section 4 (Chapters 14–22 of the Coursebook)
Multiple choice questions
1
D
15 D
2
A
16 B
3
B
17 C
4
D
18 C
5
B
19 C
6
A
20 A
7
B
21 B
8
B
22 B
9
A
23 D
10 C
24 C
11 D
25 D
12 A
26 B
13 C
27 C
14 A
Structured questions
1
Bank statement balance 3 540 + amounts not credited (935 + 242 + 187) 1 364 − cheques not
presented (295 + 182 + 304) 781 = cash book balance 4 123
2
a
Christina
Cash book (bank columns only)
Date Details
20–4
Nov 1 Balance
Fo.
$
b/d
3 280
Date Details
20–4
Nov 1 Bank charges
Insurance
Balance
Fo.
c/d
3 280
20–4
Nov 1 Balance
b/d
$
109
850
2 321
3 280
2321
b
Christina
Bank reconciliation statement at 31 October 20–4
$
Balance shown on bank statement
Add Amounts not yet credited – sales
Bank error
Less Cheque not yet presented – Wilma
Balance shown in cash book
c 2 321 current asset
© Cambridge University Press 2018
$
208
1 643
750
2 601
280
2 321
1
Cambridge IGCSE and O Level Accounting
3
a Two from:
•
to obtain an accurate bank balance
•
to identify errors in the bank account or on the bank statement
•
to assist in discovering fraud and embezzlement
•
to identify items not credited by the bank
•
to identify cheques not yet presented
•
to identify any ‘stale’ cheques.
b The bank account in the cash book is a record of transactions as they affect the business –
money paid into the bank is debited and money taken out of the bank is credited.
The bank statement is a copy of the customer’s account in the books of the bank. This is a
record of transactions as they affect the bank – money paid in by the customer is credited
(as it increases the amount owed by the bank to the customer) and money taken out is
debited (as it reduces the amount owed by the bank to the customer).
c The opening balances are not the same because there was an unpresented cheque (cheque
number 23 457) for $130 which had been recorded in the bank account in August, but this
did not appear on the bank statement until September.
d
Wendy
Cash book (bank columns only)
Date
Details
$
Fo.
20–8
Oct 1
Date
Details
Fo.
$
Oct 1 Balance
b/d
265
20–8
204
Dividend received
Balance
c/d
734
195
Insurance
East & West (dis chq)
290
Bank charges
188
938
938
20–8
Oct 1 Balance
e
b/d
734
Wendy
Bank reconciliation statement at 30 September 20–8
$
Balance shown on bank statement
Add Amounts not yet credited – J Tan
sales
$
(549)
95
1 020
1 115
566
Less Cheque not yet presented – W Tong & Co
Balance shown in cash book
© Cambridge University Press 2018
1 300
1 (734)
2
Cambridge IGCSE and O Level Accounting
4
a
Raminder
Cash book (bank columns only)
Date
Details
$
Fo.
20–7
Jan 1
Details
$
Fo.
20–7
Balance
b/d
8 280
Aswan
2 400
30 Ahmed
784
4
Date
950
Oct 10 Ali
3 050
17 Hassan
685
22 Rates
1 550
29 Wages
450
31 Rent
110
Bank charges
Balance
c/d
11 464
4 669
11 464
20–7
Feb 1
Balance
b/d
4 669
b
Raminder
Bank reconciliation statement at 31 January 20–7
$
Balance shown on bank statement
Add Amounts not yet credited – Ahmed
$
5 435
784
6219
Less Cheque not yet presented – wages
1 550
Balance shown in cash book
4 669
c iUnpresented cheques are cheques that have been paid by the business and entered on
the credit side of the cash book but which do not appear on the bank statement.
ii
Amounts not yet credited consist of cash and cheques that have been paid into the bank and
entered on the debit side of the cash book, but which do not appear on the bank statement.
d Advantages:
•
may have less bank charges
•
may have less administration costs.
Disadvantages:
•
increased security risk (obtaining and holding cash)
•
has to ensure that enough cash is available at the end of the month.
Plus any other suitable comments.
Recommendation – it is preferable to continue the present practice of paying by cheque or
by bank transfer.
5
a i
A bank statement is a document issued by the bank at regular intervals. It is a copy of
the customer’s account in the books of the bank and is a record of transactions as they
affect the bank.
A bank reconciliation statement is prepared by the customer/trader after receipt of the
bank statement to explain the difference between the balance in the bank column of the
cash book and the balance on the bank statement.
© Cambridge University Press 2018
3
Cambridge IGCSE and O Level Accounting
ii
A credit transfer is an instruction to the bank to transfer by electronic means a fixed
amount to a named individual or business.
A direct debit is an instruction to the bank from the customer to permit a named person
or business to take an amount from his/her bank account – usually varying amounts at
regular intervals.
b
Zodwa
Bank reconciliation statement at 30 June
$
$
18
Balance shown on bank statement
950
Add Amounts not yet credited – sales
Bank error
50
1 018
Less Cheques not yet presented – Charlie
428
Fanwell
910
1 338
Balance shown in cash book
(320)
c i
320 – this is the balance in the cash book which is the balance on the books of the
business.
ii
6
Current liabilities – it is a credit balance so is the amount owing to the bank.
a
Ben
4
Journal
Date
Details
Debit
$
Credit
$
20–2
May 1
Premises
85 000
Fixtures and fittings
18 000
Motor vehicles
11 500
Inventory
Bank
9 420
25 100
Cash
200
20 000
129 220
Loan – father
Capital
Assets, liabilities and capital at this date
149 220
129 220
b Three from: purchase of non-current assets, sale of non-current assets, non-regular
transactions and correction of errors.
© Cambridge University Press 2018
Cambridge IGCSE and O Level Accounting
c The journal is a book in which transactions are recorded before they are entered in the
ledger. A journal entry is a note of what entries are required in the ledger with a short
explanation of why these entries are required.
7
Melissa
Journal
Date
Details
Debit
$
Credit
$
20–5
Nov 30
Sales
74 300
Income statement
74 300
Transfer of sales for the year to income statement
Income statement
1 040
Rates
1 040
Transfer of the rates for the year to income statement
Income statement
4 650
Inventory
4 650
Transfer of opening inventory to income statement
Inventory
5 110
Income statement
5 110
Transfer of closing inventory to income statement
Equipment
5 200
SQ Limited
5 200
Omission of purchase of equipment now corrected
Irrecoverable debts
56
Roddy
56
Writing off irrecoverable debt
Income statement
56
Irrecoverable debts
56
Transfer of total irrecoverable debts to income
statement
Income statement
Provision for depreciation of equipment
Annual depreciation charge transferred to income
statement
© Cambridge University Press 2018
790
790
5
Cambridge IGCSE and O Level Accounting
8
a
Sabeena
Journal
Date
Details
Debit
$
Credit
$
20–9
Jan 31
33 100
Income statement
Purchases
33 100
Income statement
1 290
Sales returns
1 290
Discount received
870
Income statement
b
870
Sabeena
Journal
Date
Details
Debit
$
Credit
$
20–9
Jan 31
100
Drawings
Office expenses
100
Income statement
910
Office expenses
c
910
Sabeena
Journal
Date
Details
Debit
$
Provision for depreciation of motor vehicle
5 124
Credit
$
20–9
Jan 31
Disposal of motor vehicle
Disposal of motor vehicle
5 124
10 500
Motor vehicle
Scrappers Ltd
10 500
4 000
Disposal of motor vehicle
Income statement
Disposal of motor vehicle
© Cambridge University Press 2018
4 000
1 376
1 376
6
Cambridge IGCSE and O Level Accounting
d
Sabeena
Journal
Date
Details
Debit
$
Credit
$
20–9
Jan 31
140
Irrecoverable debts
Raj
140
Income statement
411
Irrecoverable debts
411
Income statement
80
Provision for doubtful debts
9
80
a Two from:
•
to balance the trial balance
•
to allow draft financial statements to be prepared
•
to provide a temporary account for holding the errors until they are located and corrected
b
Yee
Journal
Date
Details
Debit
$
Credit
$
20–0
Aug 31
7
Drawings
220
Purchases
220
Omission of goods for own use now corrected
Suspense
18
Kuso
18
Error in posting amount paid to Kuso now
corrected
Motor vehicle expenses
199
Motor vehicles
199
Error in posting motor vehicle expenses to motor
vehicles now corrected
Suspense
360
Rent payable
180
Rent receivable
180
Error of posting rent received to rent payable now
corrected
Office expenses
15
Suspense
15
Petty cash payment not posted to ledger now
corrected
Sales returns
Suspense
Sales returns under-cast, now corrected
© Cambridge University Press 2018
100
100
Cambridge IGCSE and O Level Accounting
c
Yee
Suspense account
Date
Details
Fo.
$
Date
20–0
Aug 31
Details
Fo.
$
20–0
18
Kuso
Rent receivable
180
Rent payable
180
Aug 31
Difference on trial
balance
263
Office expenses
15
Sales returns
100
378
378
d Only errors affecting the balance of a trial balance require a correcting entry in the suspense
account. Errors 1 and 3 do not require entries in the suspense account as they do not affect
the balancing of the trial balance.
10 a
Nyasha
Journal
Date
Details
Debit
$
Suspense
100
Credit
$
Purchases
100
K Khan
285
8
J Khan
285
Begum Stores
190
Suspense
190
Electricity expense
74
Suspense
74
[No entry]
90
Suspense
b
Nyasha
Suspense account
Date
Details
Fo.
$
Date
Details
20–6
20–6
Jun 30 Difference on trial
Jun 30 Begum Stores
Fo.
$
190
balance
254
Electricity expenses
74
Purchases
100
Discount allowed
90
354
© Cambridge University Press 2018
354
Cambridge IGCSE and O Level Accounting
c It would appear that all the errors have been discovered as the suspense account is closed.
d
Nyasha
Statement of corrected profit for the year ended 30 June 20–6
$
$
Profit for the year from income statement
21 410
Add Purchases over-cast
100
21 510
Less Electricity understated
74
Discount allowed omitted
90
164
Corrected profit for the year
11 a
21 346
Osama
Statement of corrected profit for the year ended 31 December 20–5
$
Profit for the year from income statement
Add Sales under-cast
Rates and insurance prepaid omitted
Goods for own use
$
1 710
500
40
280
820
2 530
Less Depreciation omitted
1 750
Bank charges omitted
81
Creation of provision for doubtful debts omitted
53
Office expenses omitted
20
Corrected profit for the year
© Cambridge University Press 2018
9
1 904
626
Cambridge IGCSE and O Level Accounting
b
Osama
Corrected Statement of financial positon at 31 December 20–5
$
Accumulated
depreciation
$
Cost
Assets
Non-current assets
17 500
Current assets
Inventory
Trade receivables
Less Provision for doubtful debts
Other receivables
1 750
$
Net book
value
15 750
1 830
2 650
53
2 597
40
4 467
Total assets
20 217
Capital and liabilities
Capital
Opening balance
Plus Profit for the year
21 000
626
Less Drawings (5 100 + 280)
21 626
5 380
16 246
Current liabilities
Trade payables
Bank (790 + 81)
10
3 100
871
3 971
Total capital and liabilities
20 217
12 a
Safiya
Purchases ledger control account
Date
Details
Fo.
$
20–5
Date
Details
Fo.
$
b/d
1 740
20–5
Jul 1
Balance
Jul 31
Purchases returns
b/d
Bank
20
Jul 1
Balance
29
Jul 31
Purchases
1 617
Discount received
33
Contra entry
90
Balance
c/d
1 860
Interest
15
1 826
3 615
3 615
20–5
Aug 1
© Cambridge University Press 2018
Balance
b/d
1826
Cambridge IGCSE and O Level Accounting
b i
Cash book
ii
Cash book
iii Journal
c When a business is both a supplier and a customer of the trader there will be an account in
both the sales ledger and the purchases ledger. A contra item occurs when the balance on
one account is set against the balance on the other account.
13 a
Marvan
Sales ledger control account
Date
Details
$
Fo.
20–9
Mar 1
Date
Details
Fo.
20–9
Balance
b/d
31 Sales
4 520
Mar 31 Sales returns
5 180
Bank
Interest
Balance
c/d
210
3 977
10
Discount allowed
90
Irrecoverable debts
58
Contra entry
45
Balance
123
c/d
9 800
20–9
Apl 1
$
5 387
9 800
20–9
Balance
b/d
5 387
Apl 1
Balance
b/d
90
b Two from:
•
to assist in locating errors
•
to prove the arithmetical accuracy of the sales ledger
•
to obtain the total owing by trade receivables quickly
•
to enable financial statements to be prepared quickly
•
to reduce fraud
•
to provide a summary of the transactions affecting trade receivables.
c Two from:
•
overpayment by a credit customer
•
credit customer returning goods after paying the account
•
credit customer paying in advance for goods
•
cash discount not deducted before payment was made.
d 123/(3 977 + 123) × 100 = 3%
© Cambridge University Press 2018
11
Cambridge IGCSE and O Level Accounting
14 a
Jaswant
Purchases ledger control account
Date
Details
Fo.
$
20–8
Date
Details
Fo.
$
Balance
b/d
3 490
20–8
42
Feb 28 Purchases returns
Bank
2 925
Discount received
28 Purchases
75
Contra entry
Balance
Feb 1
Balance
3 920
c/d
46
212
c/d
4 202
7 456
20–8
Mar 1
7 456
20–8
Balance
b/d
46
Mar 1
Balance
b/d
4 202
b There appears to be an error in either the purchases ledger or in the purchases ledger
control account.
c Any errors would not be revealed if the information in the purchases ledger was used as a
source of information for the purchases ledger control account.
15 a Three from:
•
assist in locating errors when a trial balance fails to balance
•
proof of the arithmetical accuracy of the ledgers they control
•
the balances provide the total trade receivables and total trade payables quickly
•
enable financial statements to be prepared quickly
•
help to reduce fraud
•
provide a summary of the transactions affecting the trade receivables and trade
payables for the period.
12
b Three from: sales journal, sales returns journal, cash book and journal.
c
Sourav
Sales ledger control account
Date
20–3
Jul 1
31
Details
Fo.
$
Balance
Sales
Bank (dis. chq.)
Balance
b/d
19 760
24 145
460
196
c/d
Date
20–3
Jul 1
31
Details
Fo.
$
Balance
Bank
Discount allowed
Irrecoverable debts
Returns
Contra entry
Balance
b/d
344
18 870
370
175
738
242
23 822
c/d
44 561
20–3
Aug 1
44 561
20–3
Balance
© Cambridge University Press 2018
b/d
23 822
Aug 1
Balance
b/d
196
Cambridge IGCSE and O Level Accounting
d Two from:
•
provision for doubtful debts – this does not affect an individual debtor’s account and is
the provision in existence at the beginning of the month
•
cash sales – these do not affect an individual debtor’s account as they are debited to
the cash account and credited to the sales account
•
discount received –this does not affect an individual debtor’s account as it is discount
received when payment was made to creditors.
e If the purchases returns are overstated by $100 the balance on the purchases ledger control
account will be understated by the same amount.
16 a i
Margin is the gross profit measured as a percentage of the selling price.
ii
Mark-up is the gross profit measured as a percentage of the cost price.
b
Ansie
Income statement (trading section) for the year ended 31 July 20–9
$
Revenue
$
$
40 200
200
Less Sales returns
40 000
Less Cost of sales
2 300
Opening inventory
Purchases
31 600
400
Less purchases returns
31 200
33 500
3 500
Less Closing inventory
Gross profit
30 000
10 000
[Gross profit = 25% × Revenue]
17
Govinder
Income statement (trading section) for the year ended 31 December 20–1
$
$
Revenue
$
56 700
Less Cost of sales
Opening inventory
Purchases
3 000
48 250
51 250
Less Closing inventory
Gross profit
[Cost of sales = 13.5 × ((3000 + 4000) ÷2)
Gross profit = 20% × Cost of sales = 9450]
© Cambridge University Press 2018
4 000
47 250
9 450
13
Cambridge IGCSE and O Level Accounting
18 a
Belinda
Statement of affairs at 1 September 20–5
$
Assets
Non-current assets
Premises at cost
Fixtures and equipment at cost
Motor vehicles at cost
$
$
80 000
6 000
11 800
97 800
Current assets
Trade receivables
Bank
4 100
2 500
6 600
Total assets
Capital and liabilities
Capital
Balance
Non-current liabilities
Loan – HiFinance Limited
Current liabilities
Other payables
104 400
Total capital and liabilities
104 400
83 800
20 000
600
14
© Cambridge University Press 2018
Cambridge IGCSE and O Level Accounting
b
Belinda
Statement of affairs at 31 August 20–6
$
Cost
Assets
Non-current assets
Premises
Fixtures and equipment
Motor vehicle
$
Accumulated
depreciation
$
Net book
value
1 400
2 360
3760
80 000
5 600
99 440
95 040
80 000
7 000
11 800
98 800
Current assets
Trade receivables
Total assets
Capital and liabilities
Capital
Balance
Non-current liabilities
Loan – HiFinance Limited
Current liabilities
Other payables
Bank overdraft
4 750
99 790
87 800
10 000
570
1 420
1 990
Total capital and liabilities
c
99 790
Belinda
Calculation of profit for the year ended 31 August 20–6
$
Capital at 31 August 20–6
Less Capital at 1 September 20–5
Add Drawings
Profit for the year
$
87 800
83 800
4 000
4 500
8 500
d Full details about assets, liabilities, revenues and expenses not available
Preparation of financial statements more difficult
Calculation of profit/loss for the year may not be accurate
Decision-making more difficult
Less control over the business activities
Greater risk of fraud
Comparison with results from previous years and other businesses not possible
Information not available for reference or for interested parties e.g. potential lenders
© Cambridge University Press 2018
15
Cambridge IGCSE and O Level Accounting
19 a
Nabil
Statement of affairs at 1 April 20–7
$
Assets
Non-current assets
Machinery at cost
Equipment at cost
Motor vehicles at cost
$
$
38 000
13 500
9 400
60 900
Current assets
Inventory
Trade receivables
Other receivables
Bank
Petty cash
5 300
4 150
240
1 580
100
11 370
Total assets
Capital and liabilities
Capital
Balance
Non-current liabilities
Loan – El Tahir Loans
Current liabilities
Trade payables
Other payables
72 270
53 200
15 000
3 950
120
4 070
Total capital and liabilities
© Cambridge University Press 2018
72 270
16
Cambridge IGCSE and O Level Accounting
b
Nabil
Statement of affairs at 31 March 20–8
$
$
$
Cost
Accumulated
depreciation
Net book
value
Machinery
38 000
7 600
30 400
Equipment
13 500
2 025
11 475
51 500
9 625
41 875
Assets
Non-current assets
Motor vehicles at valuation
8 100
49 975
Current assets
6 050
Inventory
Trade receivables (4 970 – 170)
4 800
Less Provision for doubtful debts
96
Petty cash
4 704
100
10 854
Total assets
60 829
Capital and liabilities
17
Capital
45 715
Balance
Non-current liabilities
5 000
Loan – El Tahir Loans
Current liabilities
Trade payables
4 080
Other payables
170
Bank overdraft
5 864
10 114
Total capital and liabilities
c
60 829
Nabil
Calculation of profit/loss for the year ended 31 March 20–8
$
$
Capital at 31 March 20–8
45 715
Less Capital at 1 April 20–7
53 200
(7 485)
Add Drawings cash
4 400
goods
685
5 085
(2 400)
Less Capital introduced
10 000
Loss for the year
12 400
© Cambridge University Press 2018
Cambridge IGCSE and O Level Accounting
d Three from:
•
increase the quantity of goods sold
•
increase selling prices
•
reduce cost of purchases (buy in bulk / buy from cheaper supplier)
•
reduce expenses
•
try to find other sources of income.
20 a
Chi Chi
Total trade receivables account
Date
Details
Fo.
$
Date
Balance
b/d
4 970
20–4
Nov 1
Details
$
20–5
Oct 31
20–5
Oct 31
Fo.
Bank
43 120
Discount
Sales
44 280
880
Balance
c/d
5 250
49 250
49 250
20–5
Nov 1
Balance
5 250
b/d
b
Chi Chi
Total trade payables account
Date
Details
$
Fo.
Date
20–5
Oct 31
Details
Fo.
$
Balance
b/d
6 250
20–4
Bank
Discount
Balance
c/d
43 290
Nov 1
1 110
20–5
6 950
Oct 31
Purchases
45 100
51 350
51 350
20–5
Nov 1
c
Balance
6 950
b/d
Chi Chi
Income statement (trading section) for the year ended 31 October 20–5
Revenue (44 280 + 15 720)
$
$
$
60 000
Less Cost of sales
Opening inventory
Purchases (45 100 + 330)
3 870
45 430
49 300
Less Closing inventory
Gross profit
d Rate of inventory turnover
46 200/(3870 + 3100/2) = 13.26 times
© Cambridge University Press 2018
3 100
46 200
13 800
18
Cambridge IGCSE and O Level Accounting
21 a
Balbir
Summarised bank account
Date
Details
$
Fo.
Date
20–4
May 1
Details
$
20–5
16 000 Apl 30
Capital
20–5
Apl 30
Fo.
Trade receivables
68 385
Trade
payables
57 915
Operating
expenses
160
Machinery
repairs
120
Wages
6 556
Rates and
insurance
930
Drawings
Balance
9 850
c/d
84 385
8 854
84 385
20–5
May 1
Balance
8 854
b/d
b
Balbir
Total trade payables account
Date
Details
$
Fo.
Date
20–5
Apl 30
Details
Fo.
19
$
20–5
57 915
Bank
Discount
Apl 30
Purchases
77 200
1 485
Returns
150
Balance
c/d
17 650
77 200
77 200
20–5
May 1
c
Balance
b/d
17 650
Balbir
Total trade receivables account
Date
Details
Fo.
$
20–5
Apl 30
Date
Details
Fo.
20–5
83 000
Sales
Apl 30
Bank
68 385
Discount
83 000
20–5
Balance
© Cambridge University Press 2018
b/d
11 300
2 115
Returns
970
Irrecoverable debt
230
Balance
May 1
$
c/d
11 300
83 000
Cambridge IGCSE and O Level Accounting
d
Balbir
Income statement (trading section) for the year ended 30 April 20–5
$
Revenue
$
$
83 000
970
Less Sales returns
82 030
Less Cost of sales
Purchases
77 200
Less Purchases returns
11 150
77 050
Less goods for own use
1 1 550
75 500
9 876
Less Closing inventory
Gross profit
16 406
[ Grossprofit = 20% × Sales = 16 406]
e
65 624
Balbir
Income statement (profit and loss section) for the year ended 30 April 20–5
$
$
Gross profit
$
16 406
Add Discount received
1 485
17 891
Less Operating expenses
160
Machinery repairs
120
Wages
Rates and insurance
Discount allowed
Irrecoverable debts
Depreciation of machinery
Profit for the year
© Cambridge University Press 2018
6 556
930
2 115
230
1 400
11 511
6 380
20
Cambridge IGCSE and O Level Accounting
f
Balbir
Statement of affairs at 30 April 20–5
$
Cost
$
Accumulated
depreciation
$
Net book
value
Assets
Non-current assets
Premises
50 000
50 000
Machinery
14 000
1 400
12 600
64 000
1 400
62 600
Current assets
9 876
Inventory
11 300
Trade receivables
Bank
8 854
30 030
Total assets
92 630
Capital and liabilities
Capital
80 000
Opening balance
Plus Profit for the year
6 380
86 380
Less Drawings (9 850 + 1 550)
11 400
21
74 980
Current liabilities
Trade payables
17 650
Total capital and liabilities
92 630
22 a
Zabeel Social Club
Receipts and payments account for the year ended 31 December 20–2
$
Receipts
20–2
Payments
$
Clubhouse rent
825
Insurance
320
General expenses
515
20–2
Jan 1
Balance
Dec 31
Subscriptions
Balance
b/d
420
Dec 31
1 900
c/d
440
Furniture
1 100
2 760
2 760
20–3
Jan 1
© Cambridge University Press 2018
Balance
b/d
440
Cambridge IGCSE and O Level Accounting
b Two from:
•
R & P records all money received and paid (capital and revenue items), I & E records only
revenue receipts and revenue payments
•
R & P does not have any adjustments for accruals and prepayments, I & E has
adjustments for accruals and prepayments
•
R & P does not include non-monetary items, I & E includes non-monetary items
•
R & P is a summary of the cash book and shows the balance of money (cash/bank)
held at the start and end of the year, I & E is the equivalent of an income statement and
shows the surplus or deficit for the year.
c i
Subscriptions – the total amount received is included in the receipts and payments
account and no adjustments are made for accruals and prepayments.
ii Rent – the total amount paid is included in the receipts and payments account and no
adjustment is made for rent prepaid.
d i
The balance on 1 January 20–2 represents money that the club possessed at that date.
ii
The balance on 31 December 20–2 represents a bank overdraft.
e Depreciation is a non-monetary expense and only monetary expenses are included in the
receipts and payments account.
23 a
Mahamba Sports Club
Income and expenditure account for the year ended 31 March 20–6
$
Income
Subscriptions (5 500 − 200 − 300)
Competition – entrance fees
Competition – expenses
$
$
5 000
950
370
Interest received
22
580
11 30
5 610
Expenditure
Insurance (624 − 156 + 140)
Office expenses (1 720 + 30)
Repairs and maintenance
Depreciation equipment
(10% × (15 000 − 1 000 + 2 200))
Surplus for the year
© Cambridge University Press 2018
608
183
97
1 620
2 508
3 102
Cambridge IGCSE and O Level Accounting
b
Mahamba Sports Club
Statement of financial positon at 31 March 20–6
$
$
Assets
Non-current assets
Clubhouse at cost
$
57 000
Sports equipment at book value
(16 200 − 1 620)
14 580
71 580
Current assets
156
Other receivables
Bank (3 000 + 7 480 − 3 474)
77 006
7 7 162
Total assets
78 742
Accumulated fund and liabilities
Accumulated fund
Opening balance
(57 000 + 15 000 + 3 000 + 200 + 140)
75 340
Surplus for the year
3 102
78 442
Current liabilities
300
Subscriptions prepaid
Total liabilities
24 a
78 742
Ansari Rugby Club
Income and expenditure account for the year ended 31 May 20–6
$
$
$
Income
Subscriptions (4 750 − 90 + 170)
4 830
Refreshments – sales
290
cost
207
1283
4 913
Expenditure
Rent
Rates (1 950 − 30)
General expenses (486 + 93)
Repairs to equipment
Loss on disposal of equipment
(250 − 198)
Depreciation equipment
Deficit for the year
© Cambridge University Press 2018
2 000
1 920
579
282
52
380
5 213
5 300
23
Cambridge IGCSE and O Level Accounting
b One from:
•
opening balance – this represents the money owned by the club at the start of the year
•
closing balance – this represents the money owed by the club to the bank at the end of
the year (bank overdraft)
•
new equipment – this is capital expenditure and only revenue expenditure is included in
the income and expenditure account
•
proceeds of sale – this is a capital receipt; only the loss or profit on the sale of an asset is
included in the income and expenditure account.
c One from:
•
depreciation of equipment – this is a non-monetary expense and cannot, therefore,
appear in the receipts and payments account
•
loss on sale of equipment – this does not represent money received or paid and cannot,
therefore, appear in the receipts and payments account.
d The accumulated fund is the equivalent of the capital of a business. It is the total of the
surpluses (less any deficits) earned by the club since its formation.
25 a
Scar Top Athletics Society
Income statement for the year ended 30 September 20–5
$
$
Revenue
$
8 100
Less Cost of sales
Purchases (3 905 + 415)
4 320
Less Closing inventory
3 370
Cost of goods sold
3 950
Wages of shop assistant
3 750
Depreciation shop fittings
150
7 850
2 250
Profit on shop
b
24
Scar Top Athletics Society
Income and expenditure account for the year ended 30 September 20–5
$
$
$
Income
Subscriptions (4 820 − 160)
4 660
Profit on shop
250
Competition – ticket sales
1 020
– expenses
1 950
Interest received
70
51 44
5 024
Expenditure
General expenses (585 − 15)
570
Rent and rates (3 190 − 284)
3 474
Insurance
1 070
Deficit for the year
© Cambridge University Press 2018
5 114
5190
Cambridge IGCSE and O Level Accounting
c Considerations:
Income would increase by 466 to 5 126.
Bank balance would increase by 466.
It may result in members leaving the club so total subscriptions may actually fall.
It is only the first year of existence so membership may increase next year when club is more
established.
The shop fittings are a one-off purchase and will not occur in following year
Consider raising funds by other means.
Plus any other suitable comments.
Recommendation – see what the position is at the end of the second year before increasing
fees and in the meanwhile, try to increase income from other sources and reduce costs.
26 a
Kaunda Street Music Society
Subscriptions account
Date
Details
Fo.
$
20–1
Dec 1
Date
Fo.
Balance
b/d
330
Nov 31
Bank/cash
4 860
Irrecoverable debts
Income & expenditure
Balance
4 830
c/d
Balance
30
c/d
420
150
5 310
20–2
Dec 1
$
20–2
20–2
Nov 30
Details
5 310
20–2
Balance
b/d
420
Dec 1
Balance
b/d
b 3 861 − 319 + 293 = 3 835
c
Kaunda Street Music Society
Refreshments income statement for the year ended 30 November 20–2
$
$
Revenue
$
5 982
Less Cost of sales
Opening inventory
Purchases
466
3 835
4 301
Less Closing inventory
Profit on refreshments
© Cambridge University Press 2018
514
3 787
2 195
150
25
Cambridge IGCSE and O Level Accounting
27 a
Island Drama Society
Calculation of accumulated fund at 1 August 20–3
$
$
Assets
Premises at cost
33 000
Equipment at book value
17 500
Subscriptions owed by members
320
Cash at bank
2 890
120
Insurance prepaid
53 830
Less Liabilities
Subscriptions prepaid
150
Staff wages accrued
350
500
53 330
b Amount paid for general expenses
(Opening bank balance 2 890 + receipts 8 323)11 213 − (recorded payments 6 941 + closing
bank balance 3 402)10 343 = 870
c
Island Drama Society
Income and expenditure account for the year ended 31 July 20–4
$
$
$
Income
Subscriptions (5 880 + 150 − 320 + 90)
5 800
Concert – ticket sales
1 943
Concert – expenses
1 007
936
6 736
Expenditure
General expenses
Insurance (744 − 124 + 120)
Wages (2 290 – 350 + 290)
Depreciation equipment
(20% x(17 500 − 500 + 2 900))
Deficit for the year
© Cambridge University Press 2018
870
740
2 230
3 980
7 820
1 084
26
Cambridge IGCSE and O Level Accounting
d
Island Drama Society
Statement of financial positon at 31 July 20–4
$
$
$
Assets
Non-current assets
33 000
Premises at cost
Equipment at book value
(17 500 + 2 900 − 500 − 3 980)
15 920
48 920
Current assets
124
Other receivables
Subscriptions accrued
90
Bank (2 890 + 8 323 − 6 941 − 870)
3 402
33 616
Total assets
52 536
Accumulated fund and liabilities
Accumulated fund
Opening balance
53 330
Deficit for the year
1 084
52 246
Current liabilities
27
Other payables
52 290
Total liabilities
52 536
28 a Sole trader
Advantages:
Disadvantages:
Entitled to all the profit
Responsible for any losses
Can make decisions quickly
No consultation before taking decisions
No risk of disputes/arguments
No assistance with workload/responsibilities
Capital limited to what trade is able to invest
b Partnership
Advantages:
Additional finance is available
Additional knowledge, experience and
skills are available
The responsibilities are shared
The risks are shared
© Cambridge University Press 2018
Disadvantages:
Profits have to be shared among the partners
Decisions have to be recognised by all partners
Decisions may take longer to put into effect
One partner’s actions on behalf of the business
are binding on all the partners
Cambridge IGCSE and O Level Accounting
c It is necessary to prepare an appropriation account to show how the profit for the year is
shared between the partners. The profit for the year is transferred to this account from the
income statement. Any interest on drawings charged to the partners increases the amount
available to share and this must be added to the profit. Interest on capital and partners’
salaries are deducted. The remaining amount, the residual profit, is shared between the
partners in the agreed profit-sharing ratio.
d A capital account records permanent increases or decreases in the capital invested by the
individual partner. A current account records anything which the partner becomes entitled
to, such as interest on capital, interest on loan, partner’s salary and profit share (which are
credited), and anything which the partner is charged with, such as drawings and interest on
drawings (which are debited).
Maintaining both a capital account and a current account for each partner means it is easy to
see the amount invested and to calculate the interest on capital. The current account shows
the profit retained and whether the drawings exceed the total profit share.
29 a
Precious and Marcia
Profit and loss appropriation account for the year ended 31 May 20–2
$
$
Profit for the year
Interest on drawings
$
25 100
Precious
450
Marcia
630
1 080
26 180
Less Interest on
capital
Partner’s salary
Precious
4 500
Marcia
3 500
Marcia
28
8 000
12 000
20 000
6 180
Profit shares
Precious
3 708
Marcia
2 472
6 180
b To avoid future disagreements and misunderstandings
c i
ii
To compensate the partner investing the most capital.
To deter partners from making drawings and to penalise the partner making the most
drawings.
iii To reward the partner who has the greatest share of the work and responsibilities.
© Cambridge University Press 2018
Cambridge IGCSE and O Level Accounting
30 a
John and David
Profit and loss appropriation account for the year ended 31 January 20–8
$
$
$
Profit for the year
Interest on drawings
14 200
John
220
David
180
400
14 600
Less Interest on
capital
John
1 500
David
1 200
Partners’ salaries John
8 000
David
6 000
2 700
14 000
16 700
(2 100)
Loss shares
John
1 050
David
1 050
b
2 100
John
Current account
Date
Details
Fo.
$
20–7
Feb 1
Date
Fo.
$
20–8
Balance
b/d
1 750 Jan 31
20–8
Jan 31
Details
Drawings
11 000
Interest on drawings
Interest on capital
1 500
Salary
8 000
Balance
c/d
4 520
220
Loss share
1 050
14 020
14 020
20–8
Feb 1
Balance
b/d
4 520
David
Current account
Date
Details
Fo.
$
20–8
Jan 31
Date
Details
Fo.
$
Balance
b/d
2 260
20–7
Drawings
Interest on drawings
Feb 1
180
20–8
1 050
Loss share
Balance
8 000
c/d
Jan 31
230
Interest on capital
1 200
Salary
6 000
9 460
9 460
20–8
Feb 1
[Accounts could have been displayed in columnar format]
© Cambridge University Press 2018
Balance
b/d
230
29
Cambridge IGCSE and O Level Accounting
c
John
Capital account
Date
Details
Fo.
$
Date
20–8
Details
Fo.
$
Balance
b/d
50 000
20–8
Feb 2
Current
28
Balance
3 000 Feb 1
c/d
47 000
50 000
50 000
20–8
Mar 1
Balance
b/d
47 000
Details
Fo.
$
Balance
b/d
40 000
David
Capital account
Date
Details
Fo.
$
20–8
Feb 28
Date
20–8
Balance
c/d
47 000 Feb 1
3
Bank
7 000
47 000
47 000
20–8
Mar 1
Balance
b/d
47 000
30
[Accounts could have been displayed in columnar format]
31 a
Terry and Candy
Profit and loss appropriation account for the year ended 31 August 20–5
$
$
Profit for the year
Interest on drawings
Terry
480
Candy
720
$
39 500
1 200
40 700
Less Interest on capital
Partners’ salary
Terry
4 800
Candy
3 000
Candy
7 800
17 000
24 800
15 900
Profit shares
© Cambridge University Press 2018
Terry
10 600
Candy
5 300
15 900
Cambridge IGCSE and O Level Accounting
b
Terry
Current account
Date
Details
Fo.
$
20–4
Sep 1
Date
Fo.
$
20–5
Balance
b/d
3 250
Aug 31
20–5
Aug 31
Details
Interest on capital
4 800
Profit share
Drawings
12 000
Interest on drawings
10 600
Balance
c/d
330
480
15 730
15 730
20–5
Sep 1
Balance
b/d
330
Candy
Current account
Date
Details
Fo.
$
Date
Details
Fo.
$
Balance
b/d
1 050
20–5
Aug 31
18 000 Sep 1
Drawings
Interest on drawings
Balance
720 20–5
c/d
7 630 Aug 31
Interest on capital
3 000
Salary
17 000
Profit share
5 300
26 350
26 350
20–5
Sep 1
Balance
b/d
7 630
[Accounts could have been displayed in columnar format]
c
Terry and Cindy
Extract from statement of financial position at 31 August 20–5
Terry
Cindy
$
$
$
Capital accounts
80 000
50 000
130 000
Current accounts
(330)
7 630
7 300
137 300
© Cambridge University Press 2018
31
Cambridge IGCSE and O Level Accounting
32 a
Bill and Ben
Statement of financial position at 31 March 20–4
$
$
$
Assets
Non-current assets at book value
87 100
Current assets
38 300
Total assets
125 400
Capital and liabilities
Bill
Ben
Total
50 000
25 000
75 000
Opening balance
2 950
(1 700)
Interest on capital
1 500
750
Capital accounts
Current accounts
Partner’s salary
Profit shares
Less Drawings
Interest on drawings
6 000
4 960
2 480
9 410
7 530
6 000
12 000
180
360
6 180
12 360
3 230
(4 830)
(1 600)
73 400
Non-current liabilities
12 000
Current liabilities
40 000
Total capital and liabilities
125 400
b Ben’s current account had a debit balance of 1 700 at the start of the year and a debit
balance of 4 830 at the end of the year. His drawings are exceeding the amount to which he is
entitled. He should be advised to reduce his drawings. He is withdrawing funds which could
be used within the business.
Bill is concerned about the erosion of the bank balance and the effect on the business.
Plus any other suitable comments.
© Cambridge University Press 2018
32
Cambridge IGCSE and O Level Accounting
33 a
Ravi and Iqra
Income statement for the year ended 30 April 20–3
$
$
$
Fees from clients
106 075
Less Wages (57 870 + 1 090)
58 960
Repairs to equipment
2 720
Motor vehicle expenses
3 030
Insurance (3 450 − 360)
3 090
Operating expenses
2 765
Printing and stationery
320
Irrecoverable debts
220
Provision for doubtful debts
((5% × 8 000) − 360)
40
Depreciation equipment
(20% × 21 000)
4 200
Depreciation motor vehicles
(25% × (32 000 − 8 000)
6 000
Profit from operations
81 345
24 730
Less Loan interest (600 + 600)
1 200
Profit for the year
23 530
33
b
Ravi and Iqra
Profit and loss appropriation account for the year ended 30 April 20–3
$
$
Profit for the year
Less Interest on capital
$
23 530
Ravi
3 500
Iqra
2 000
5 500
18 030
Profit shares
© Cambridge University Press 2018
Ravi
9 015
Iqra
9 015
18 030
Cambridge IGCSE and O Level Accounting
c
Ravi ad Iqra
Statement of financial position at 30 April 20–3
$
$
$
Cost
Accumulated
depreciation
Net book
value
Assets
Non-current assets
Premises
70 000
70 000
Equipment
21 000
8 400
12 600
Motor vehicles
32 000
14 000
18 000
123 000
22 400
100 600
Current assets
8 000
Trade receivables
400
Less Provision for doubtful debts
Other receivables
7 600
360
Bank
23 280
Cash
2 540
33 780
Total assets
134 380
Ravi
Iqra
Total
70 000
40 000
110 000
Opening balance
1 020
(150)
Interest on capital
3 500
2 000
Profit shares
9 015
9 015
Loan interest
600
Capital accounts
Current accounts
Less Drawings
14 135
10 865
12 200
11 820
1 935
(955)
980
110 980
Non-current liabilities
Loan - Ravi
20 000
Current liabilities
Trade payables
2 310
Other payables
1 090
3 400
Total capital and liabilities
© Cambridge University Press 2018
134 380
34
Cambridge IGCSE and O Level Accounting
34 a
Nicola and Lydia
Income statement for the year ended 31 October 20–8
$
$
Gross profit
$
19 000
Add Discount received
630
Commission receivable
1 090
Reduction in provision for doubtful
debts (179 − (4% × 3 850))
25
20 745
940
Less Discount allowed
Wages
5 670
Rent and rates (2 120 − 48)
2 072
Motor vehicle expenses (950 + 105)
1 055
Office expenses
3 116
Irrecoverable debts
540
Depreciation furniture and fittings
(10% × 10 500)
1 050
Depreciation motor vehicles
(20% × (19 000 − 6 840)
2 432
16 875
Profit from operations
3 870
Less Loan interest
200
Profit for the year
3 670
b
Nicola and Lydia
Profit and loss appropriation account for the year ended 31 October 20–8
$
$
Profit for the year
Less Interest on capital
$
3 670
Nicola
Lydia
400
400
800
2 870
Profit shares Nicola
Lydia
© Cambridge University Press 2018
1 722
1 184
2 870
35
Cambridge IGCSE and O Level Accounting
c
Nicola and Lydia
Statement of financial position at 31 October 20–8
$
$
$
Cost
Accumulated
depreciation
Net book
value
Assets
Non-current assets
Furniture and fittings
10 500
3 150
7 350
Motor vehicles
19 000
9 272
9 728
29 500
12 422
17 078
Current assets
7 745
Inventory
Trade receivables
3 850
Less Provision for doubtful debts
154
3 696
Other receivables
48
Petty cash
50
11 539
Total assets
Capital accounts
28 617
Nicola
Lydia
Total
10 000
10 000
20 000
36
Current accounts
Opening balance
118
236
Interest on capital
400
400
1 722
1 148
2 240
1 784
2 100
1 900
140
(116)
Profit shares
Less Drawings
24
20 024
Current liabilities
Trade payables
3 459
Other payables
105
Loan
4 000
Bank overdraft
1 029
8 593
Total capital and liabilities
© Cambridge University Press 2018
28 617
Cambridge IGCSE and O Level Accounting
35 a
Yassin and Muneen
Statement of corrected profit for the year ended 30 November 20–6
$
Profit for the year from income statement
$
19 780
Add Insurance prepaid omitted
60
19 840
Less Depreciation omitted
1 800
Creation of provision for doubtful debts omitted
232
Damaged inventory
1 200
16 608
Corrected profit for the year
Profit shares Yassin
11 072
Muneen
b
3 232
5 536
16 608
Yassin and Muneen
Corrected Statement of financial position at 30 November 20–6
$
Cost
$
Accumulated
depreciation
$
Net book
value
Assets
Non-current assets
Premises
50 000
Machinery
24 000
4 800
19 200
Furniture and equipment
18 000
5 400
12 600
92 000
10 200
81 800
Current assets
Inventory (23 200 − 1 200)
Trade receivables
Less Provision for doubtful debts
Other receivables
Petty cash
50 000
22 000
11 600
232
Total assets
11 368
60
50
33 478
115 278
Capital accounts
Yassin
55 000
Muneen
40 000
Current accounts
Profit shares
Less Drawings
11 072
8 400
5 536
6 600
2 672
(1 064)
Total
95 000
91 608
96 608
Current liabilities
Trade payables
Bank overdraft
13 520
5 150
18 670
Total capital and liabilities
© Cambridge University Press 2018
115 278
37
Cambridge IGCSE and O Level Accounting
36 a i
Work in progress is the goods which are partly completed at the end of the financial year.
ii
Direct expenses are those expenses which a manufacturer can directly link with the
product being manufactured.
iii Indirect factory expenses are sometimes referred to as factory overheads. These are
costs of operating the factory which cannot be directly linked with the product being
manufactured.
b Prime cost
Cost of materials consumed: opening inventory of raw materials 23 500 + purchases
287 560 − closing inventory of raw materials 21 500 = 289 560
Direct factory wages 199 450, direct expenses 8 740
Prime cost: 497 750
c Cost of production
Prime cost 497 750 + overheads (indirect factory expenses) 186 330 + opening work in
progress 9 880 − closing work in progress 10 040 = 683 920
37 a The purpose of a manufacturing account is to calculate how much it has cost the business to
manufacture the goods produced in the financial year.
b i
rime cost is the total of the three elements of cost – direct material, direct labour and
P
direct expenses. Cost of production is the prime cost plus the factory overheads.
ii
irect labour is the cost of the wages of the people who are employed in the factory
D
making the goods. Indirect labour is the cost of the wages of the people who are
employed in the factory but not actually involved in the production of the finished goods.
c
The Vasant Vihar Manufacturing Company
38
Manufacturing account for the year ended 31 December 20–4
$
$
$
Cost of material consumed
16 650
Opening inventory of raw material
Purchases of raw materials
Carriage on raw materials
210 500
3 120
213 620
230 270
Less Closing inventory of raw material
Direct wages (197 280 − 1 850 + 1 990)
17 720
212 550
197 420
Prime cost
409 970
Factory overheads
Factory supervisors’ wages
32 100
Factory rent and rates
15 500
Factory insurance (4 800 + 760 − 800)
Factory general expenses
4 760
12 700
Depreciation factory machinery
(20% − (56 000 − 20 160))
7 168
72 228
482 198
Add Opening work in progress
18 222
500 420
Less Closing work in progress
Cost of production
© Cambridge University Press 2018
19 115
481 305
Cambridge IGCSE and O Level Accounting
38 a
Homi Modi Manufacturers
Manufacturing account for the year ended 31 March 20–9
$
$
$
$
Cost of material consumed
7 850
Opening inventory of raw material
Purchases of raw material
98 730
Carriage on raw materials
2 030
100 760
Less Closing inventory of raw material
108 610
8 170
Direct wages
100 440
Prime cost
95 680
196 120
Factory overheads
37 250
Factory indirect wages
Factory insurance (10 500 × 2/3)
7 000
Factory light and heat (13 300 × 4/5)
10 640
Factory operating expenses
(18 210 × 2/3)
12 140
9 750
Depreciation factory machinery
76 780
272 900
Add Opening work in progress
6 120
279 020
7 470
Less Closing work in progress
Cost of production
b
271 550
Homi Modi Manufacturers
Income statement (trading section only) for the year ended 31 March 20–9
$
$
Revenue
$
400 500
Less Cost of sales
Opening inventory of finished
16 380
goods
Cost of production
271 550
Purchases of finished goods
22 540
310 470
Less Closing inventory of finished
goods
Gross profit
13 280
297 190
103 310
c Reduce cost of production – source cheaper supplies / obtain higher trade discount / buy in
bulk, reduce cost of wages, reduce factory overheads.
Increase revenue – increase selling price / reduce trade discount allowed.
Reduce cost of purchases of finished goods – purchase cheaper finished goods / consider
making them rather than buying if possible.
© Cambridge University Press 2018
39
Cambridge IGCSE and O Level Accounting
39 a
Strand Road Manufacturing Limited
Manufacturing account for the year ended 30 June 20–5
$
$
$
Cost of material consumed
2 160
Opening inventory of raw material
Purchases of raw materials
26 830
Carriage on raw materials
1 980
28 810
30 970
2 870
Less Closing inventory of raw material
28 100
Cost of jars and labels
3 120
Opening inventory of jars and labels
Purchases of jars and labels
15 250
18 370
Less Closing inventory of jars and labels
3 390
14 980
43 080
Direct wages
32 560
Prime cost
75 640
Factory overheads
Factory indirect wages
6 120
Factory light and power
9 440
Factory operating expenses
4 910
Depreciation factory machinery
5 500
40
25 970
101 610
Add Opening work in progress
1 195
102 805
1 825
Less Closing work in progress
Cost of production
b
100 980
Strand Road Manufacturing Limited
Income statement (trading section only) for the year ended 31 March 20–5
$
$
Revenue
$
295 600
Less Cost of sales
Opening inventory of finished goods
Cost of production
8 190
100 980
109 170
Less Closing inventory of finished goods
Gross profit
© Cambridge University Press 2018
7 940
101 230
194 370
Cambridge IGCSE and O Level Accounting
40 a T
he liability of the owners/shareholders of the business for the debts of that business is
limited to the amount they agree to contribute to the capital of the business.
b Advantages of operating as a limited company:
Shareholders are only liable for the debts of the company up to the amount they agree to
contribute.
A company is a separate legal entity.
It is possible to access a greater capital than a sole trader/partnership.
It is usually easier for a company to obtain loans than it is for a sole trader/partnership.
A company has continuity of existence.
Disadvantages of operating as a limited company:
Many legal requirements have to be observed to form and operate as a limited company.
Annual financial statements have to be prepared and provided to shareholders and these
must also be filed with the registrar of companies.
c i
ii
Issued share capital is the amount of share capital actually issued to the shareholders.
Called-up share capital is that part or the issued share capital for which payment has
been requested from shareholders.
iii Paid-up share capital is that part of the called-up share capital for which the company
has received payment from shareholders
d Equity is the total funds provided by the shareholders of a limited company. This consists
of ordinary share capital, non-redeemable preference shares, general reserve and retained
earnings.
41 a
Ordinary shareholders receive a dividend after preference share dividend has been
accounted for. The dividend is not a fixed amount but varies according to the profits of the
company. If the company is wound up the ordinary shareholders are not repaid until all the
other liabilities and preference shares have been paid. Ordinary shareholders are usually
entitled to vote at the annual general meeting.
Preferences shares receive a fixed rate of dividend which is payable before any dividend on
ordinary shares. If the company is wound up the preference shareholders are repaid after
outside liabilities but before the ordinary shareholders. Preference shareholders are not
usually entitled to vote at the annual general meeting. There are several different types of
preference shares such as redeemable and non- redeemable.
b The difference between redeemable and non-redeemable preference shares is important
because it affect the treatment of dividend and how they are included in the statement of
financial position.
Redeemable preference share dividend is included as a finance cost in the income
statement and the shares are included in the non-current liabilities in the statement of
financial position. The dividend on non-redeemable preference shares is included in the
statement of changes in equity and the shares are included in the equity in the statement of
financial position.
c Retained earnings are the profits which have accumulated in the company in the form of
profits not appropriated for dividend. These are carried forward to later years and appear in
the equity and reserves section of the statement of financial position.
d Debentures are long-term loans. They carry a fixed rate of interest, which is payable
irrespective of profits. The loan interest is included in the finance costs in the income
statement. The debentures are included in the non-current liabilities in the statement
of financial position. Debenture holders are repaid before shareholders in the event of a
winding-up. As the debenture holders are not members of the company they are not entitled
to vote at the annual general meeting.
© Cambridge University Press 2018
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Cambridge IGCSE and O Level Accounting
Ordinary shareholders receive a dividend after debenture interest and preference share
dividend have been accounted for. The dividend is not a fixed amount but varies according
to the profits of the company. If the company is wound up the ordinary shareholders are
not repaid until all the other liabilities, including the debentures and preference shares have
been paid. Ordinary shareholders are usually entitled to vote at the annual general meeting.
42 a 700 000
b 9 000
c 2 500
d The retained earnings are the profits which have not been distributed as dividends but have
been retained within the company.
e The general reserve is the total of annual profits which have been transferred from the
retained earnings as a means of ploughing back profits within the company.
f
Dividends proposed are those dividends which remain unpaid at the end of the financial
year (they have been proposed by the directors but not yet approved by the shareholders).
Dividends paid are sometimes referred to as interim dividends and are those dividends
which have been paid to shareholders during the financial year.
g Debenture interest paid appears in the income statement because it is interest on a loan.
Ordinary share dividend paid appears in the statement of changes in equity as it represents
the share of the profits paid to ordinary shareholders.
43 a 20 000 − 2 500 = 17 500
b
LY Limited
Statement of changes in equity for the year ended 31 July 20–3
On 1 August 20–2
Ordinary
share
capital
General
reserve
Retained
earnings
Total
$
$
$
$
80 000
7 500
87 500
Profit for the year
17 500
17 500
Interim ordinary share dividend for the year
ended 31 July 20–3
(1 600)
(1 600)
Transfer to general reserve
Balance at 31 July 20–3
© Cambridge University Press 2018
80 000
8 000
(8 000)
8 000
15 400
103 400
42
Cambridge IGCSE and O Level Accounting
44 a 41 000 − 1 200 − 6 000 − 3 000 = 30 800
b
H Limited
Statement of changes in equity for the year ended 30 June 20–4
On 1 July 20–3
Ordinary
share
capital
General
reserve
Retained
earnings
Total
$
$
$
$
200 000
18 500
239 500
Profit for the year
30 800
30 800
Interim ordinary share dividend for the year
ended 30 June 20–4
(4 000)
(4 000)
Transfer to general reserve
Balance at 30 June 20–4
c
200 000
21 000
9 000
(9 000)
30 000
36 300
266 300
H Limited
Extract from statement of financial position at 30 June 20–4
$
$
$
Equity and reserves
200 000
Ordinary share capital
General reserve
30 000
Retained earnings
33 300
266 300
45 a
KT Limited
Statement of changes in equity for the year ended 30 June 20–6
On 1 July 20–5
Ordinary
share
capital
General
reserve
Retained
earnings
Total
$
$
$
$
150 000
9 620
174 620
Profit for the year
18 110
18 110
Interim ordinary share dividend for the year
ended 30 June 20–6
(3 000)
(3 000)
Transfer to general reserve
Balance at 30 June 20–6
© Cambridge University Press 2018
150 000
15 000
5 000
(5 000)
20 000
19 730
189 730
43
Cambridge IGCSE and O Level Accounting
b
KT Limited
Statement of financial positon at 30 June 20–6
$
$
$
Cost
Accumulated
depreciation
Net book
value
237 000
65 000
172 000
Assets
Non-current assets
Non-current assets
Current assets
42 000
Inventory
Trade receivables
Less Provision for doubtful debts
38 000
950
37 050
Other receivables
4 210
Bank
11 130
94 390
Total assets
266 390
Equity and liabilities
Equity
Ordinary share capital
150 000
General reserve
20 000
Retained earnings
19 730
189 730
Non-current liabilities
30 000
6% debentures
Current liabilities
Trade payables
43 000
Other payables
3 660
446 660
Total capital and liabilities
266 390
46 a 18 200 − 3 600 = 14 600
b 12 500 + 14 600 − 5 000 − 3 000 = 19 100
c 6%
d 6%
e Ordinary share dividend is not a fixed amount/fixed percentage (although many companies
try to maintain a similar rate each year). It depends on the trading results of the company.
f
To plough back a certain amount of profit to indicate that it is for long-term use within the company.
g This is a ‘half way’ dividend which is paid during the financial year to which it relates.
© Cambridge University Press 2018
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Cambridge IGCSE and O Level Accounting
47 a
NN Limited
Statement of changes in equity for the year ended 31 May 20–9
On 1 July 20–8
Profit for the year
Interim ordinary share dividend for the year
ended 31 May 20–9
Transfer to general reserve
Balance at 31 May 20–9
b
Ordinary
share
capital
$
170 000
General
reserve
170 000
Retained
earnings
$
10 000
Total
$
5 200
19 500
$
185 200
19 500
(3 600)
4 000
(3 600)
(4 000)
14 000
17 100
201 100
NN Limited
Statement of financial positon at 31 May 20–9
$
Cost
Assets
Non-current assets
Premises
$
Accumulated
depreciation
129 000
$
Net book
value
129 000
Machinery and equipment
82 000
32 800
49 200
Motor vehicles
28 000
15 750
12 250
239 000
48 550
190 450
Current assets
25 320
Inventory
Trade receivables
21 400
Less Provision for doubtful debts
44 428
Other receivables
Bank
20 972
833
31 300
878 425
Total assets
Equity and liabilities
Equity
Ordinary share capital
General reserve
Retained earnings
268 875
170 000
14 000
17 100
201 100
Non-current liabilities
4% debentures
Current liabilities
Trade payables
Other payables
50 000
15 775
2 000
17 775
Total capital and liabilities
© Cambridge University Press 2018
268875
45
Cambridge IGCSE and O Level Accounting
c Considerations:
The profit for the year will decrease by the additional debenture interest of $2 800, so the
amount of profit available for the ordinary shareholders will decrease.
Is the profit for the year expected to increase as a result of the expansion and when will this
take effect?
If the profit does increase by more than $2 800 it may result in more profit available for
ordinary shareholders.
The debenture holders have a prior claim on the profits on the company in the event of a
winding-up.
Plus any other suitable comments.
48 a 24.00%
d 1.73 : 1
49 a i
ii
b 13.00%
c 19.10 times
e 1.20 : 1
f
15.05%
Capital owned is the amount owed by a business to the owner(s) of that business.
Capital employed is the total funds which are being used by a business. This can be
calculated as capital provided by owner(s) plus non-current liabilities. An alternative
calculation is total assets less current liabilities.
ii
iii 13.55%
iv 11.51 times
b i
22.50%
c i
orking capital is the difference between the current assets and the current liabilities
W
and is the amount available for the day-to-day running of the business.
ii
13.46%
Two from:
•
cannot meet current liabilities when they are due
•
may experience difficulties in obtaining supplies on credit
•
cannot take advantage of cash discounts
•
cannot take advantage of business opportunities when they arise.
46
iii Two from:
•
introduction of further capital
•
obtaining long term loans
•
disposal of surplus non-current assets
•
reduction of drawings/dividends.
iv 1.
50 a i
No effect. Current assets increase by $500 and current liabilities increase by same
amount.
2.
Decrease by $2 500. Current assets decrease by $2 500. No effect on current liabilities.
3.
Increase by $5. Current assets decrease by $75 but current liabilities decrease by $80.
4.
Increase by $200. Inventory decreases by $800 and trade receivables increase by
$1 000, so the current assets increase by $200. No effect on current liabilities.
1.94 : 1
ii
0.82 : 1
iii 30 days
iv 42 days
b Current ratio slightly less in 20–7, but no significant changes. The current assets are almost
double the current liabilities.
The liquid (acid test) ratio has fallen by almost half. The liquid assets are now less than the
current liabilities and the company may have problems paying debts when they fall due.
The credit customers are taking an average of six more days to pay their accounts. The credit
control procedures may need tightening as the company has to wait longer to obtain the
money.
The company is taking an average of seven more days to pay the credit suppliers. This
may be a ‘knock on’ effect from the late-paying customers, but may result in the suppliers
refusing further supplies.
© Cambridge University Press 2018
Cambridge IGCSE and O Level Accounting
c Considerations:
In general, discontinuing cash discount will result in an increase in the profit for the year as
the expenses are decreased.
However, the average credit customer is taking 30 days to pay their account so cash discount
will not be awarded to the majority of customers in any event.
Cash discount may act as an encouragement to pay promptly but does not seem to be
having that effect in this case.
Prompt payment reduces the risk of irrecoverable debts, but the incentive of cash discount
is ineffective in this case.
Plus any other suitable comments.
Recommendation – Continue to offer discount as it makes little difference to the profit for
the year. But as this is not encouraging credit customers to pay within the credit period
recommend improve credit control procedures.
51 a i
b i
ii
12.23 times
•
One from: Reduce inventory levels
•
Generate more sales activity
43 days
Unsatisfied; The credit customers are taking 13 days more than the period of credit
allowed.
iii Two from:
c i
ii
•
improve credit control policy
•
offer cash discounts for early settlement
•
charge interest on overdue accounts
•
refuse further supplies until outstanding debt is cleared
•
invoice discounting and debt factoring.
32 days
Has the use of the money within the business for a longer period of time.
iii One from:
•
the suppliers may refuse credit in the future
•
the suppliers may refuse further supplies
•
any cash discount for early settlement will be lost
•
the relationship with the suppliers may be damaged.
iv If credit customers do not settle their accounts promptly the business may not be able
to pay the credit suppliers promptly.
52 a i 16.67%
ii
b i
ii
Two from:
•
measures the success in selling goods
•
shows the gross profit earned for every $100 of sales
•
can be compared with previous years
•
can be compared with other businesses
•
shows the percentage of sales income spent on the cost of goods (83% in this case).
11.90%
Two from:
•
measures the overall success of the business
•
shows the profit for the year earned per $100 of sales
© Cambridge University Press 2018
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Cambridge IGCSE and O Level Accounting
•
can be compared with previous years
•
can be compared with other businesses
•
shows the percentage of sales income spent on expenses (5% in this case).
c The difference between the gross margin and the profit margin represents the percentage of
expenses to revenue. The lower the percentage the more control the business has over the
expenses.
d This is what was previously Part c
e This is what was previously Part d
53 a T
he gross profit is overstated by $5 500. The sales returns, $4 000, were omitted so the
revenue was overstated resulting in the gross profit being overstated. The closing inventory
was overstated by $1 500, so the gross profit is also overstated.
b The rate of inventory turnover is understated by 1.79 times. Using the original figures the cost
of sales was $180 000 and the average inventory was $9 500 so the rate of turnover was 18.95.
After correcting the error the cost of sales is $181 500 and the average inventory is $8 750,
making the rate of turnover 20.74 times.
c The revenue is overstated by $4 000 as sales returns of that amount were omitted.
d The expenses were not affected by either of the errors.
e The profit for the year is overstated by $5 500. The gross profit was overstated by $5 500 and
the expenses were unchanged so the profit for the year is overstated by $5 500.
f
The equity at 31 December 20–8 is overstated by $5 500. The profit for the year was
overstated by $5 500 but there is no change to the opening equity or the drawings so the
closing equity is overstated by $5 500.
54 a i
ii
he bank manager is interested to know whether there is adequate security to cover any
T
loan or overdraft which may be granted, whether it can be repaid when due and whether
interest can be paid when due.
A credit supplier is interested in the liquidity position and the payment period for trade
payables. These may be considered in determining the credit limit and the length of
credit allowed.
iii An employee is interested to know if the company is able to continue operating, and
so jobs will be maintained and wages (and sometimes contributions to private pension
schemes) will continue to be paid.
iv A potential buyer of the business is interested in the profitability of the business and the
market value of the assets of the business.
b i
ii
oney measurement means that only information which can be expressed in monetary
M
terms can be recorded in the accounting records. This means that there are many
important factors which influence the performance of a business which will not appear,
e.g. goodwill, quality of management, skill of the workforce, government policies,
competition, etc.
All businesses should apply the basic accounting principles of prudence and
consistency, but there are several acceptable accounting policies which may be applied
in the accounting records, e.g. different methods of depreciation. Where businesses have
used different policies it is difficult to make a meaningful comparison of their results.
iii Historic cost means that transactions are recorded at the actual cost price. Comparing
transactions taking place at different times can be difficult because of the effect of inflation.
55 a i
23.00%
ii
v
11.72%
vi 2.11 : 1
© Cambridge University Press 2018
8.15%
iii 11.43 times
vii 1.04 : 1
iv 8.93%
48
Cambridge IGCSE and O Level Accounting
b i
ii
ave has the better gross margin. This is probably because he is trading in clothing
D
which has a higher mark-up than food.
Dave has a much lower profit margin. This will be affected by the different types of
expenses; Dave will have rent which Ann and Susan do not have (although they will have
the expense of managers’ salaries).
iii Dave has a much lower rate of inventory turnover. This will be affected by the fact that
the businesses trade in different goods and food has a much quicker rate of turnover
than clothing.
iv Dave has the lower return on capital employed. This may be affected by the fact that his
business is only two years old. It may be that Dave is not employing the capital in the
most effective way.
v
Dave achieved a slightly lower return on his capital employed. This will be influenced
by the fact that some of Dave’s long term funds were in the form of loans. If all the funds
had been in the form of capital the rate would have been even lower. This will probably
also be influenced by the fact that Dave’s business is only two years old.
vi Dave’s ratio is satisfactory as his current assets are twice the amount of the current
liabilities. Ann and Susan’s current ratio would appear to be more than adequate and may
indicate that they are not making the most efficient use of their immediate assets. They
will not have any trade receivables so the assets will consist only of inventory and money.
vii Dave’s ratio is satisfactory as his liquid assets are equal to his immediate liabilities. Ann
and Susan’s liquid ratio would appear to be more than adequate as the assets in the
form of money are twice the immediate liabilities. This may indicate that they are not
using the immediate funds in the most efficient way.
c Excluding factors given in question (type of goods, business structure, management,
ownership of premises / renting, life of business, terms of trade), five from:
•
application of different accounting policies
•
non-monetary items
•
details not shown in accounts
•
statements are for one year only
•
year-end at different point in trading cycle
•
effect of inflation on historic cost figures.
© Cambridge University Press 2018
49