Cambridge International AS & A Level Accounting workbook
Answers to example questions
AS Level
1 Financial accounting
1.1 Types of business entity
1
D
2
C
3
B
4
i
No need to share profits – sole trader keeps all profits compared with partnership where the
profit is shared out in an agreed ratio.
ii
No need to consult on decision making – sole trader can make all the major decisions
without having to consult with partners who have a say in the running of the business.
5
Any three from:
•
•
•
•
Access to more capital to expand the business – partners can contribute more capital if
they all make financial contributions.
Specialisation in different roles within the business – each partner can focus on his or her
own areas of expertise – the sole trader has to be an ‘expert’ in all things.
Cover can be arranged for illness and holidays can be organised without the loss of normal
business continuity.
More creative ideas may be generated – greater number of people running the business
should mean more creative input.
6
7
• Profits and losses are shared equally.
• No interest on capital is allowed.
• No interest on drawings is allowed.
• No partnership salaries.
• Any partner lending the business money is entitled to 5% interest on that loan.
Any two from:
•
•
•
•
Limited liability – no risk of losing own money compared with unlimited liability of
(normal) partnerships.
Higher profile – more publicity for business. A limited company is likely to get more
publicity – the act of conversion may itself attract media coverage.
Easier to raise finance (especially if plc) as outside investment can be brought into the
company as new shareholders generate finance.
Banks and other lenders may be more willing to lend money to the business as it may be
perceived to be at a lower risk of failure.
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Cambridge International AS & A Level Accounting workbook: answers to example questions
8
Differences include:
•
Shares in a private company cannot be publicly traded – meaning the control of the
company is kept in the hands of the initial shareholders.
• Size of share capital is likely to be much larger for a plc.
• A plc has to publicly disclose far more information about its financial performance than a
private company.
9 Security is where a business offers an asset as collateral when borrowing money. If the business
fails to keep up the repayment terms on the loan (including meeting the interest payments) then
the lender can take ownership of the asset used as a security.
10 Internal sources: Owners’ money, money from friends/family, retained earnings
External sources: Overdraft, loan, trade credit, debentures, share issues
11 i Share capital does not have to be repaid – the finance represents permanent capital.
Debentures have a fixed repayment date.
ii
Dividends do not have to be paid – they are optional, though shareholders may be unhappy
if they expected dividends and none are paid.
Debentures have a fixed interest rate that must be paid.
12 Arguments in favour of overdrafts would include:
• Interest is only paid on the amount the company’s account is overdrawn by.
• They are flexible in that they can be used and paid whenever the business wishes.
• Obtaining an overdraft is easier than most other external sources.
Arguments against overdrafts would include:
•
•
Interest rates on overdrafts are very high (especially compared to a secured loan).
Some banks may charge a flat rate fee for the use of an overdraft irrespective of the
amount by which the account is overdrawn.
Overall:
•
•
Overdrafts are the most often used source of finance. For a company, there are other
sources available, such as loans, share issues, debentures and so on.
Knowing what form the expansion is to take and how much money is needed would
probably make the decision easier.
1.2 The accounting system
1
2
3
4
5
B
C
C
C
B
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Account to be debited
Account to be credited
a
Motor van
M Sparks
b
Machinery
Bank
c
Bank
Capital
d
C Scanlon
Sales
e
U Baines
Bank
f
Cash
B Fanning
Account to be debited
Account to be credited
a
Cash
Bank
b
Insurance
Cash
c
K Themen
Purchases returns
d
Bank
Commission received
e
Drawings
Purchases
f
Bank
E Poulou
7
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Capital
$
$
May 1
Cash
1 400
May 17
Computer
380
Cash
$
May 1
Capital
May 13
Equipment
$
1 400 May 6
Bank
800
200
Bank
$
May 6
Cash
$
800 May 8
Equipment
400
Equipment
$
May 8
Bank
$
400 May 13
Cash
200
Computer
$
May 17
Capital
$
380
Car
$
May 11
T Friel
$
2000
T Friel
$
$
May 11
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Car
2000
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Cambridge International AS & A Level Accounting workbook: answers to example questions
9
Capital
2021
Jun 30
$ 2021
Balance c/d
$
1 000 Jun 1
Jul 1
Bank
1 000
Balance b/d
1 000
Bank
2021
Jun 1
$ 2021
Capital
$
1 000 Jun 28
Jun 30
Wages
102
Balance c/d
898
1 000
Jul 1
Balance b/d
1000
898
Purchases
2021
$ 2021
$
Jun 5
S Wolstencroft
98 Jun 30
Jul 1
Balance b/d
98
Balance c/d
98
S Wolstencroft
2021
$ 2021
Jun 12
Purchases returns
22 Jun 5
Jun 30
Balance c/d
76
$
Purchases
98
98
98
Jul 1
Balance b/d
76
Sales
2021
Jun 30
$ 2021
Balance c/d
$
277 Jun 8
S Rogers
99
Jun 18
P Hanley
178
277
277
Jul 1
Balance b/d
277
Purchases returns
2021
Jun 30
$ 2021
Balance c/d
$
22 Jun 12
S Wolstencroft
22
Jul 1
Balance b/d
22
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Cambridge International AS & A Level Accounting workbook: answers to example questions
S Rogers
2021
$ 2021
Jun 8
Sales
99 Jun 30
Jul 1
Balance b/d
99
$
Balance c/d
99
P Hanley
2021
$ 2021
Jun 18
Sales
$
178 Jun 20
Sales returns
58
Jun 30
Balance c/d
120
178
Jul 1
Balance b/d
178
120
Sales returns
2021
$ 2021
$
Jun 20
P Hanley
58 Jun 30
Jul 1
Balance b/d
58
Balance c/d
58
Wages
2021
$ 2021
Jun 28
Bank
102 Jun 30
Jul 1
Balance b/d
102
$
Balance c/d
102
10
Assets ($)
Capital ($)
Liabilities ($)
a
64 742
42 422
22 320
b
18 908
13 123
5 785
c
87 971
43 421
44 550
d
61 320
39 808
21 512
e
109 091
76 359
32 732
11
Assets ($)
Capital ($)
Liabilities ($)
a
33 465
28 980
4 485
b
78 979
23 141
55 838
c
151 409
89 808
61 601
d
212 409
168 970
43 439
e
99 080
28 711
70 369
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Book of prime entry
a
Purchases made on credit.
Purchases journal
b
Goods previously purchased by the business sent back to
the supplier.
Purchases returns
journal
c
A computer taken out of business for private use.
General journal
d
Cash book
e
Bank transfer to settle amount owing relating to the
purchase of goods for resale.
Cheque received on sale of motor vehicle
f
Sale on credit of machinery bought for resale
Sales journal
Cash book
13
Cash book
Cash
Bank
Cash
Bank
$
$
$
$
Mar 1
Balance b/d
110
635 Mar 2
Mar 4
Sales
213
Mar 7
Mar 9
Capital
Mar 13
Commission received
Apr 1
Rent
315
M Bright
175
Wages
199
Mar 18
Purchases
76
Mar 22
Electricity
41
Mar 31
Balance c/d
367
370
408
1135
Discount
received
Cash
Bank
$
$
500 Mar 12
85
Balance b/d
408
1135
367
370
14
Cash book
Discount
allowed
$
Cash
Bank
$
$
87.00
Balance b/d
Jul 5
C Woods
5.60
274.40
Jul 8
Jul 5
D Hirst
6.80
333.20
Jul 9
C Palmer
14.40
345.60
Jul 5
N Jemson
9.60
470.40
Jul 20
J Sheridan
5.40
174.60
Jul 31
Balance c/d
18.10
Jul 20
N Pearson
3.60
116.40
Jul 25
Rent
Jul 31
Balance c/d
22.00
Aug 1
Balance b/d
Jul 1
Balance b/d
$
Jul 1
Sundry
46.90
expenses
87.00 1096.10
40.10
209.50
250.00
40.10
23.40
Aug 1
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Balance b/d
87.00 1096.10
18.10
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Cambridge International AS & A Level Accounting workbook: answers to example questions
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General journal
Equipment
Dr
Cr
$
$
1 250
T Crooks
1 250
Equipment bought on credit.
B Pritchard
250
N Wilding
250
Transfer of debt from Pritchard to Wilding.
Drawings
560
Computer
560
Owner takes computer from business for personal use.
Delivery van
13 250
SpareVans Ltd
13 250
Van bought on credit.
Equipment
225
T Presley
225
Equipment received in settlement of business debt.
16 a
The principle of consistency matters here. Ahmed should continue to use straight line for
depreciating the asset. Using the same method ensures that comparisons with previous
years are more meaningful if the same method is used. It is not that important if the asset
has an unrealistic value.
b
This refers to the concept of materiality. If the value of the cups – which are ‘inventory’ of
the juice bar – is sufficiently small then they could be written off as revenue expenditure.
This would have to be decided by Ahmed, as to whether the value of the cups is small
enough to warrant treating these as an expense rather than as an asset.
c
This relates to the accruals or matching concept. Incomes and expenses should be matched
to the period where they were incurred or generated. Even if the money has not been
received, the sale should be credited as income in the current year just as the expenses he
incurred in relation to the event have been recorded in the current year. The debt should be
included in trade receivables at the year end.
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Cambridge International AS & A Level Accounting workbook: answers to example questions
17 Advantages of not maintaining full records:
• No legal obligation.
• Might need to spend money on an accountant.
• Time and effort taken to keep records.
Advantages of maintaining full records.
• The double-entry bookkeeping system has a number of built-in checks, making it easier to
spot mistakes.
• Control spending may require detailed records of where a business spends money.
• Full accounting records makes theft from the business by employees less likely.
Obviously, a one-person organisation will not face this problem.
• Some records will need to be submitted to the tax authorities.
Overall:
• Perhaps a compromise can be reached – keeping more detailed records but not full
records.
• If the business expands, Coverdale will have to move closer to keeping full records.
• If he wants to become a company, full records may have to be kept.
1.3 Accounting for non-current assets
1
2
3
4
5
6
7
C
D
B
D
Capital expenditure: b, c, f
Revenue expenditure: a, d, e
Capital receipt: b, c
Revenue receipt: a, d, e, f
Capital expenditure: d, h
Capital income: g, j, k
Revenue expenditure: a, b, e, i
Revenue income: c, f, l
8
Capital expenditure
Purchase price of machinery
$ Revenue expenditure
$
45 000 Insurance on machinery
2 340
Delivery charge for machinery
870 Power charge for machinery
2 670
Installation cost of machinery
990 Maintenance costs
3 100
Legal fees associated with purchase
1 840
Total
48 700 Total
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Straight-line method
Reducing balance method
($)
($)
Cost value
33 000
33 000
Depreciation year 1
10 200
16 500
Book value at end of year 1
22 800
16 500
Depreciation year 2
10 200
8 250
Book value at end of year 2
12 600
8 250
Depreciation year 3
10 200
4 125
Book value at end of year 3
2 400
4 125
10
Straight-line method
Reducing balance method
($)
($)
Cost value
25 000
25 000
Depreciation year 1
6 000
7 500
Book value at end of year 1
19 000
17 500
Depreciation year 2
6 000
5 250
Book value at end of year 2
13 000
12 250
Depreciation year 3
6 000
3 675
Book value at end of year 3
7 000
8 575
Depreciation year 4
6 000
2 572.50
Book value at end of year 4
1 000
6 002.50
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Provision for depreciation of plant and equipment
2021
$ 2021
Dec 31
Balance c/d
10 000 Dec 31
$
Statement of profit or loss
10 000
(50 000 x 0.2)
2022
2022
Dec 31
Balance c/d
25 000 Jan 1
Dec 31
Balance b/d
10 000
Statement of profit or loss
[10000 + (100000 x 0.2 x 3/12)]
15 000
25 000
2023
25 000
2023
Dec 31
Balance c/d
58 000 Jan 1
Dec 31
Balance b/d
25 000
Statement of profit or loss
[10000+ 20000 + (20000 x 0.2 x 9/12)]
33 000
58 000
58 000
12
General journal
Equipment disposal
Dr
Cr
$
$
70 000
Equipment at cost
70 000
Transfer of asset to disposal account.
Provision for depreciation of equipment
25 000
(70000/7 x 30/12)
Equipment disposal
25 000
Transfer of accumulated depreciation to disposal account.
L Tong
44 000
Equipment disposal
44 000
Receipt from sale of asset.
Statement of profit or loss
Equipment disposal
1 000
1 000
Loss on disposal of asset.
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(i)
Motor vehicle disposal account
2024
$ 2024
Jun 30
Vehicle
Jun 30
Statement of profit or loss
$
25 000
Jun 30
Provision
for
depreciation
of vehicle
12 200
700
Jun 30
Vehicle
13 500
25 700
25 700
Workings
• Accumulated depreciation = $5 000 + $4 000 + $3 200 = $12 200
• New vehicle costs $20 000 – and payment of $6 500 means original vehicle was traded-in
for $13 500
(ii)
Motor vehicle account
2023
July 1
$ 2024
Balance b/d
25 000
2024
Jun 30
Disposal
13 500
Jun 30
Bank
6 500
$
Jun 30
Disposal
25 000
Jun 30
Balance
c/d
20 000
45 000
45 000
1.4 Reconciliation and verification
1
2
3
4
D
C
B
B
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Cambridge International AS & A Level Accounting workbook: answers to example questions
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Trial Balance at 31 December 2022
Dr
Cr
$
$
Sales
123 341
Purchases
62 342
Sales returns
432
Purchases returns
Machinery at cost
342
21 000
Provision for depreciation of machinery
1 220
General expenses
989
Land
50 000
Inventory at 1 January 2022
5 523
Trade payables
Trade receivables
4 536
8 778
Bank overdraft
Salaries
113
52 425
Administration costs
841
Capital
Drawings
85 000
12 222
214 552
214 552
Inventory at 31 December 2022 was valued at $6 131
6
i
Entering two debits or two credits for an entry.
ii
Missing out half of the entry.
iii Entering different amounts for each ‘half’ of the transaction.
7
a
Original entry
b
c
d
e
Reversal
Commission
Principle
Compensating
f
Omission
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General journal
Purchases
Dr
Cr
$
$
400
Motor vehicles
400
Bank or cash
130
Sales
130
A Wright
72
Purchases returns
72
Sales returns
86
J Callis
86
I Burden
150
I Boden
150
9
Statement of corrected profit for the year
$
Loss for the year
$
(225)
Add:
Insurance
425
Drawings
94
519
294
Less:
Sales
250
General expenses
19
Corrected profit for the year
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25
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General journal
$
Purchases
$
164
Suspense
164
Account which was under added now amended
for correct total
Drawings
24
Purchases
24
Owner’s purchases included in business
purchases by mistake – now corrected
Wages
100
Suspense
100
Amount for wages entered on credit side twice –
now amended
Y Bach
9
Sales returns
9
Incorrect amount entered in both accounts – now
corrected
Suspense
21
Carriage inwards
21
Incorrect amount entered in carriage account –
now corrected
Suspense
2021
$ 2021
$
July 31
Trial balance difference
243 July 31
Purchases
164
July 31
Carriage inwards
21 July 31
Wages
100
264
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Cambridge International AS & A Level Accounting workbook: answers to example questions
Statement of corrected profit at 31 July 2021
$
$
Draft profit for the year
780
Add:
Drawings
24
Sales returns
9
Carriage inwards
21
54
834
Less:
Purchases undercast
164
Wages
100
264
Corrected profit for the year
570
11
Cash book
2020
$ 2020
$
Apr 30
Balance b/d
185 Apr 30
Bank interest
31
Apr 30
Ian Yates
85 Apr 30
Bank charges
8
Apr 30
Electricity
130
Apr 30
Balance c/d
101
507
May 1
Balance b/d
507
101
12 a
Cash book
2022
$ 2022
$
Jun 30
Balance b/d
344 Jun 30
S Lebon
250
Jun 30
Dividends
132 Jun 30
Bank charges
66
Balance c/d
160
Jun 30
476
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Cambridge International AS & A Level Accounting workbook: answers to example questions
b
Bank reconciliation statement at 30 June 2022
$
Balance as per updated cash book
$
160
Add Unpresented cheques
M Harket
145
305
Less Lodgements not yet credited
J Keeble
205
N Rhodes
185
Balance as per bank statement
390
85
(O/D)
13
2021
Nov 1
Nov 30
Balances b/d
Credit sales
Dec 1
Balance b/d
Sales ledger control account
$ 2021
3 134 Nov 30
Bank
49 710 Nov 30
Discounts
allowed
Nov 30
Sales returns
Nov 30
Irrecoverable
debts
Nov 30
Balance c/d
52 844
2 109
$
50 118
54
99
464
2 109
52 844
14
Purchases ledger control account
2023
$ 2023
$
Apr 30
Bank
94 131 Apr 1
Balance b/d
Apr 30
Discounts
2 122 Apr 30
Credit purchases
4 980
101 900
received
Apr 30
Purchases
496
returns
Apr 30
Balance c/d
10 131
106 880
106 880
May 1
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Balance b/d
10 131
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Cambridge International AS & A Level Accounting workbook: answers to example questions
15
Sales ledger control account
2022
$ 2022
$
Mar 1
Balance b/d
42 301 Mar 31
Balance b/d
Mar 31
Credit sales
399 808 Mar 31
Bank
Mar 31
Bank
425 Mar 31
Discounts allowed
3 314
Mar 31
Balance c/d
730 Mar 31
Irrecoverable debts
870
Mar 31
Sales returns
442
Mar 31
Purchases ledger control
account
756
Mar 31
Balance c/d
443 264
Apr 1
Balance b/d
1 013
417 013
19 856
443 264
19 856
Purchases ledger control account
2022
$ 2022
Mar 31
Bank
300 980 Mar 1
Mar 31
Discount received
Mar 31
Purchases returns
845
Mar 31
Sales ledger control
account
756
Mar 31
Balance c/d
2 890 Mar 31
$
Balance b/d
23 808
Credit purchases
288 661
6 998
312 469
312 469
Apr 1
Balance b/d
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Cambridge International AS & A Level Accounting workbook: answers to example questions
16 Reasons for preparing control accounts:
•
•
•
They can deter fraud.
They assist in the location of errors.
They provide a total for Trade receivables/payables. This assists in the preparation of the
trial balance and financial statements.
Reasons for not preparing control accounts:
• It is time consuming – if there are a small number of transactions then it may seem
unnecessary.
• Not all errors would be discovered using control accounts – it depends on how the error is
made (e.g., an error of omission missed out from all journals/ledgers would not necessarily
be spotted).
Overall:
• It depends on how many transactions she needs to record.
• Consider if there is a risk of fraud/errors from other members of staff she may employ.
• Check if she utilisse trade credit for purchases and sales. If not, then it may not be
necessary.
1.5 Preparation of financial statements
1
2
3
4
5
D
B
A
A
a
Insurance
2021
$ 2021
Dec 31
Bank
994 Dec 31
Dec 31
Balance c/d
32
$
Statement of profit or loss
1 026
1 026
1 026
b
Electricity
2021
Dec 31
$ 2021
Bank
425 Dec 31
Dec 31
$
Statement of profit or loss
373
Balance c/d
52
425
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425
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Cambridge International AS & A Level Accounting workbook: answers to example questions
6
a
Wages
2023
$ 2023
Jan 1
Balance b/d
Dec 31
Bank
Dec 31
Balance c/d
$
118 Dec 31
Statement of profit or loss
9 803
9 280
405
9 803
9 803
b
Rent received
2023
$ 2023
$
Statement of profit or
Dec 31
loss
5 436 Jan 1
Balance b/d
Dec 31
Bank
Dec 31
Balance c/d
214
4 650
572
5 436
5 436
7
Irrecoverable debts
2023
Apr 22
$ 2023
G Gregory
56 Dec 31
$
Statement of profit or
1549
loss
Jul 31
M Ware
42
Oct 19
I Craig Marsh
101
Dec 15
P Oakey
1350
1549
1549
($0.75 × $1 800 = $1350)
8
Year
Value of the allowance
Entry in statement of profit or loss
($)
($)
2019
600
600 (debit)
2020
735
135 (debit)
2021
774
39 (debit)
2022
663
111 (credit)
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9
Effect on profit
2022
2023
2024
2025
$
$
$
$
(1 688)
(1 108)
(1 640)
(728)
10
R Becks
Calculation of gross profit for the year ended 31 March 2026
$
$
Revenue
$
76 500
Less Sales returns
241
76 259
Less Cost of sales
Opening inventory
Purchases
Less Purchases returns
4 440
34 234
139
34 095
Less Goods for own use
5 142
28953
Carriage inwards
280
29 233
33 673
Less Closing inventory
Gross profit
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3 980
29 693
46 566
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Cambridge International AS & A Level Accounting workbook: answers to example questions
11
C Lowe
Statement of profit or loss for the year ended 30 June 2023
$
Revenue
$
98 080
Less Cost of sales
Opening inventory
3 121
Purchases
45 435
48 556
Less Closing inventory
4 444
Gross profit
44 112
53 968
Add Other income
Commission received
221
54 189
Less Expenses
Wages and salaries
17 200
Office expenses
890
Rent and rates
666
Insurance
420
Motor vehicle expenses
341
Profit for the year
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19 517
34 672
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Cambridge International AS & A Level Accounting workbook: answers to example questions
12
P King
Statement of profit or loss for the year ended 31 December 2024
$
$
Revenue
$
99 700
Less Cost of sales
Opening inventory
Purchases
Carriage inwards
12 380
35 600
850
36 450
48 830
Less Closing inventory
8 978
Gross profit
39 852
59 848
Add Other income
Discount received
1 349
Rent received
4 500
Reduction in allowance for irrecoverable
debts
470
6 319
66 167
Less Expenses
Wages and salaries
25 400
Office expenses
8 725
Motor vehicle expenses
125
Carriage outwards
850
Depreciation of office equipment
22 000
Depreciation of motor vehicles
7 200
Profit for the year
64 300
1 867
13
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Cambridge International AS & A Level Accounting workbook: answers to example questions
N Tennant
Statement of profit or loss for the year ended 31 December 2024
$
$
Revenue
$
325 000
Less Sales returns
405
324 595
Less Cost of sales
Opening inventory
Purchases
Less Purchases returns
28 070
149 000
352
148 648
Carriage inwards
614
149 262
177 332
Less Closing inventory
24 560
Gross profit
152 772
171 823
Add Other income
Discount received
1 110
172 933
Less Expenses
Wages and salaries
49 111
Rent and rates
6 173
Electricity
2 690
Motor vehicle expenses
341
Selling expenses
888
Allowance for irrecoverable debts
740
Depreciation of fixtures and fittings
6 440
Depreciation of motor vehicles
5 000
Profit for the year
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71 383
101 550
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Cambridge International AS & A Level Accounting workbook: answers to example questions
N Tennant
Statement of financial position at 31 December 2024
$
$
$
Non-current assets
Cost
Accumulated
depreciation
Net book value
Land and buildings
225 000
–
225 000
Fixtures and fittings
45 000
19 240
25 760
Motor vehicles
25 000
13 000
12 000
295 000
32 240
262 760
ASSETS
Current assets
Inventory
Trade receivables
Less Allowance for irrecoverable debts
24 560
19 800
990
18 810
Other receivables
950
Cash in hand
223
Total assets
44 543
307 303
CAPITAL & LIABILITIES
Opening balance
196 431
Add Profit for the year
101 550
297 981
Less drawings
9 800
288 181
Current liabilities
Trade payables
13 288
Other payables
600
Bank overdraft
5 234
Total capital and liabilities
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19 122
307 303
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14
Almond and Ball
Appropriation account for the year ended 31 December 2022
$
$
Profit for the year
Add Interest on drawings
$
22 500
Almond
900
Ball
650
1 550
24 050
Less Interest on capital
Partner’s salary
Almond
800
Ball
625
Almond
1 425
8 000
9 425
14 625
Share of profit
Almond
9 750
Ball
4 875
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15
Datchler, Hayes and Nocito
Appropriation account for year ended 30 June 2025
$
$
Profit for the year
$
124 000
Add Interest on drawings
Datchler
480
Hayes
340
Nocito
160
980
124 980
Less Interest on capital
Partner’s salary
Datchler
3 400
Hayes
2 400
Nocito
2 000
Datchler
7 800
15 000
Hayes
Nocito
22 800
102 180
Share of profit
Datchler
51 090
Hayes
25 545
Nocito
25 545
102 180
Current accounts
Datchler
Hayes
Nocito
Datchler
Hayes
Nocito
$
$
$
$
$
$
Balance b/d
6 644
Balance b/d
5 521
1 312
Interest on
Drawings
12 000
8 500
4 000 capitals
3 400
2 400
2 000
drawings
480
340
160 Salaries
15 000
Balance c/d
62 531
12 461
24 697 Share of profit
51 090
25 545
25 545
75 011
27 945
28 857
75 011
27 945
28 857
62 531
12 461
24 697
Interest on
Balance b/d
16
$0.04 × 350 000 = $14 000
17
Debit Bank $480 000
Credit Ordinary share capital $400 000
Credit Share premium account $80 000
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18
General journal
Property
Dr
Cr
$
$
400 000
Revaluation reserve
400 000
Business property increased in value to reflect
change in value
19 a (i)
General journal
(Bonus issue)
Dr
Cr
$
$
Share premium account
100 000
Retained earnings
300 000
Ordinary share capital
400 000
(ii)
Debit Bank $200 000
Credit Ordinary share capital $200 000
b
Lidbury plc
Statement of financial position at 31 December 2022
$
ASSETS
Non-current assets
600 000
Current assets
330 000
930 000
EQUITY AND LIABILITIES
Equity
Ordinary shares of $1 each
800 000
Revaluation reserve
30 000
Retained earnings
16 000
846 000
Current liabilities
84 000
Total equity and liabilities
930 000
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20
PCHH Ltd
Statement of profit or loss for the year ended 31 December 2024
$
$
Revenue
595 000
Less Cost of sales
Opening inventory
64 700
Purchases
248 000
312 700
Less Closing inventory
59 807
252 893
Gross profit
342 107
Rent received
9 500
351 607
Less Expenses
Wages and salaries
89 000
Rent and rates
3 000
Insurance
4 560
Selling expenses
888
Depreciation of fixtures and fittings
7 300
Depreciation of motor vehicles
6 400
111 148
Profit from operations
240 459
Finance costs
4 000
Profit before tax
236 459
Tax
30 500
Profit for the year
205 959
PCHH Ltd
Statement of changes in equity for the year ended 31 December 2024
Ordinary Share
capit
al
Retained earnings
Total
$
$
37 860
337 860
Profit for the year
202 959
202 959
Dividends paid
(9 000)
(9 000)
234 819
534 819
$
Balance at 1 Jan 2024
Balance at 31 Dec 2024
300 000
300 000
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Cambridge International AS & A Level Accounting workbook: answers to example questions
PCHH Ltd
Statement of financial position at 31 December 2024
$
$
$
Non-current assets
Cost
Accumulated
depreciation
Net book value
Land and buildings
425 000
Fixtures and fittings
95 000
29 300
65 700
Motor vehicles
32 000
15 400
16 600
552 000
44 700
507 300
ASSETS
425 000
Current assets
Inventory
59 807
Trade receivables
48 900
Cash and cash equivalents
12 100
Total assets
120 807
628 107
EQUITY AND LIABILITIES
Equity
Ordinary share capital
300 000
Retained earnings
234 819
Total equity
534 819
Non-current liabilities
5% Debentures (2029)
80 000
Current liabilities
Trade payables
132 88
Total equity and liabilities
628 107
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Cambridge International AS & A Level Accounting workbook: answers to example questions
21 Factors concerned with share issue:
• Control will be diluted or potentially lost with any issue of ordinary shares.
• A rights issue may help keep shareholdings with the current group of investors.
• Dividends have to be paid only if profits are high enough.
• Shares do not have to be repaid.
Factors concerned with debenture issue:
• No issue of lost control arises.
• Interest payments cannot be missed.
• Debenture will eventually have to be repaid.
• The debenture may require security.
• Cost of interest payments may be higher than likely dividend payments.
Overall:
• Even with a rights issue, investors can still sell their shares (it is a plc) and control may be
lost.
• Control would only be lost if directors were not holding significant amounts of shares.
22
Sales ledger control account
$
$
Balance b/d
8 640 Bank
69 560
Sales
74 266 Discounts allowed
1 730
Irrecoverable debts
238
Balance c/d
82 906
Balance b/d
11 378
82 906
11 378
Purchases ledger control account
$
Bank
$
55 980 Balance b/d
12 476
Discounts received
1210 Purchases
50 692
Balance c/d
5 978
63 168
63 168
Balance b/d
5 978
23
Shoes sold at cost price = $1000 x ¾ = $750
Cost of shoes stolen = 130 + 980 – 750 – 30 = $330
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24
Workings:
Sales control account
Balance b/d
34 362
Receipts
268 635
Credit sales
267 213
Balance c/d
32 940
301 575
301 575
Purchases control account
Payments
172 959
Balance b/d
26 268
Balance c/d
27 915
Credit purchases
174 606
200 874
Cash sales banked
84 915
Add Drawings
18 720
Cash sales
103 635
200 874
i
Sykes
Statement of profit or loss for the year ended 31 December 2022
$
Sales
$
370 848
Less Cost of goods sold
Opening inventory
19 770
Add Purchases
174 606
194 376
Less Closing inventory
24 450
Gross profit
169 926
200 922
Less Expenses
Expenses
14 520
Insurance
6 168
Wages
42 500
Depreciation of fixtures and fittings equipment
20 400
Depreciation of motor vehicles
8 400
Profit for the year
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91 988
108 934
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Cambridge International AS & A Level Accounting workbook: answers to example questions
ii
Sykes
Statement of financial position at 31 December 2022
$
$
Non-current assets
Premises
300 000
Equipment
65 100
Motor cars
29 100
394 200
Current assets
Inventory
24 450
Trade receivables
32 940
Other receivables
261
Bank
124 378
Total assets
182 029
576 229
Capital and liabilities
Capital at 1 January 2022
456 141
Add Profit for the year
108 934
607 575
Less Drawings
18 720
546 355
Current liabilities
Trade payables
27 915
Other payables
1 959
Total capital and liabilities
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29 874
576 229
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Cambridge International AS & A Level Accounting workbook: answers to example questions
1.6 Analysis and communication of accounting information
1
2
3
4
5
A
B
C
B
a Employees
Interest in profits and liquidity of business for purposes of job security – whether the
business is going to survive into the medium term.
Interested in profits of business to determine whether business can afford to make pay
increases to workers.
b
Lenders
Interested in profitability and liquidity of business to check that the business can meet
interest payments and repay any borrowed amounts.
c
Existing investors
Will be interested in profits, which can be used to make dividend payments to existing
investors (shareholders).
Potential for capital gains (rising share prices) if business continues to reinvest the profits
into the business (internal growth).
d
Suppliers
Interested in profits and liquidity to ensure that the business will be reliable in paying any
trade credit allowed. Interested in seeing the trade payables turnover to estimate how
quickly they will be paid.
6
ROCE (%)
2023
2022
2021
225/1217 x 100 =
199/1011 x 100 =
169/989 x 100=
18.5%
19.7%
17.1%
7
a
Mark-up
b Gross profit margin
2021
2020
48.1%
59.6%
32.5%
37.4%
8
a Gross profit margin (%)
46.02%
b Mark-up (%)
85.25%
c Profit margin (%)
18.67%
d Expenses to revenue ratio (%)
27.35%
e Operating expenses to revenue (%)
25.88%
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Cambridge International AS & A Level Accounting workbook: answers to example questions
9
2021
2020
2019
Current ratio
2.44: 1
2.93: 1
3.20: 1
Acid test ratio
0.98: 1
1.38: 1
1.72: 1
10 Any two from:
•
High bank balances are undesirable as most current accounts pay no interest – surplus cash
can be invested into interest bearing assets.
High cash balances are undesirable because they present a greater risk of theft.
Higher trade receivables balances may create a higher risk of irrecoverable debts and also
higher costs in managing the credit control function of the business.
Inventory costs money to store and high inventory levels increases the risk of spoilage,
theft or obsolescence.
•
•
•
11
a
Non-current asset turnover
1.20 times
b
Trade receivables turnover
41 days
c
Trade payables turnover
54 days
d
Inventory turnover
45 days
e
Rate of inventory turnover
8.18 times
12 Reasons for concern:
• Gross profit margin shows ability to generate profits from sales.
• The fall means less profit is earned for each $1 of sales.
• Fallen by 11% over 3 years.
• Profit for the year is also falling (but not as quickly).
Reasons for not being concerned:
•
•
Might be the result of competitive pressure on prices.
Might be the result of focus on better quality products (new product mix may mean more
expensive costs of production).
• Because the fall in profit is less than the decrease in the margin it may be that the fall in
the margin has caused an increase in sales volume.
Overall:
•
•
•
It is a concern but may be something all businesses are facing.
Depends on how the product mix affects profitability.
Consider other ratios, ROCE, other profit margins.
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Cambridge International AS & A Level Accounting workbook: answers to example questions
2 Cost and management accounting
2.1 Costs and cost behaviour
1
2
3
4
5
6
7
B
B
C
B
The distinction is in the relationship with each type of cost and the level of output. Variable
costs change in proportion to changes in output whereas fixed costs do not change at all when
the output level changes (within the relevant range).
Fixed costs: rent, salaries, machinery hire, advertising
Variable costs: coffee, cups, milk, wages of part-time workers
a Net realisable value is the selling price less any costs involved in getting inventory into
saleable condition (i.e., repair costs) less other costs to sell.
b $23 300 ($20 000 + $1 200 + $700 + $1 400)
c
8
9
Prudence (allow historical cost, matching or even consistency)
Ovens in inventory on 31 July = 1 + 2 + 3 – 1 – 3 = 2 ovens
Oldest sold first. Therefore, 2 ovens remaining are $1 400 (2 × $700)
a 45 units bought, 27 sold, therefore, closing inventory consists of 18 units
(i) FIFO = 18 units @ $30 = $540
(ii) AVCO = 18 units at average cost of $27.33 = $492
b
Sales
Less Cost of sales
Purchases
Less Closing inventory
Gross profit
10 a
b
Gross profit for March 2023
FIFO
AVCO
$
$
$
1 764
1 230
540
690
1074
1 230
492
$
1 764
738
1 026
In the first year, the switch will lead to an increase in inventory’s value as it will be based
on most recent purchases. This will mean the cost of sales is lower and the gross profit will
be higher as a result.
In subsequent years, there will be less effect on gross profit as the increased value of
inventory achieved by using FIFO will also be added on to the cost of sales as opening
inventory.
11 Disadvantages include, any two from:
• Loss of bulk-buying discount.
• Unemployment of resources during period of low demand.
• Unexpected orders may not be fulfilled.
• Cannot respond as quickly to a rise in demand.
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Cambridge International AS & A Level Accounting workbook: answers to example questions
12 Arguments in favour of switch:
• Save money on holding inventory.
• Cash is not tied up in inventory.
• Not left with obsolete inventory.
Arguments against switch:
• May miss out on bulk-buying discounts.
• If customers want their product quickly, they may miss out on sales.
• Orders may be lost if materials are wasted or there is a shortfall in supply.
Overall:
• It will depend on the reliability of suppliers – and how quickly they can deliver.
• It will depend on how predictable demand is.
• How quickly can the products be produced – consider if customers are happy to wait.
2.2 Traditional costing methods
1
2
3
4
5
6
7
D
C
A
C
New selling price = $6 × 150% = $9
New break-even point = $80 000 ÷ ($9 − $4) = 16 000 units
a Before = $11; after = $17
b
Before = $220 000 (i.e., 20 000 × $11); after = $340 000 (i.e., 20 000 × $17)
c
Before: profit of $20 000; after: profit of $90 000
a
Note: the selling and distribution costs will be incurred irrespective of the source of the
scooters.
Contribution per unit (manufactured scooters) = 300 – (7 500+15 000+3 500+6 000)/200
= 300 – 160 = $140
Contribution per unit (bought in scooters) = 300 – 150 – (6 000/200)
= 300 – 150 – 30 =$120
Parsons Ltd should continue manufacture in order to maximise profits.
b
Additional factors, any three from:
•
•
•
•
•
•
Quality of bought-in scooters may be higher or lower than the manufactured scooters.
Extra fixed costs may be incurred with the buying in of scooters.
Reliability of supplier/lead time.
Guarantee that the current price offered by suppliers is to remain fixed beyond shortterm.
Loss of employment and negative publicity.
Spare capacity generated could be used for other output.
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Cambridge International AS & A Level Accounting workbook: answers to example questions
8
a
Materials
Labour
Administration
Power
Variable/direct cost per pipe
Selling price
Contribution
$
12
24
5
6
47
60
13
Proposal 1 price
Proposal 2 price
48
42
For proposal 1, the reduced selling price of $48 would mean that each pipe supplied would earn
extra contribution of $1. This adds 2 000 × $1 = $2 000 to the profits of Rhodes Ltd.
For proposal 2, the reduced selling price of $42 generates negative contribution of $5 per pipe.
Rhodes Ltd would actually lose 3 000 × $5 = $15 000 on the order.
On financial grounds alone, proposal 2 should be rejected. Proposal 1 could be accepted.
b
Additional reasons, any three from:
•
•
•
•
•
•
There may be additional (hidden) fixed costs connected with the proposal.
Regular customers may also demand the lower price.
Customers may be found instead who would be willing to pay the regular price.
Consider whether LeBon would become a regular customer that would agree to the
more regular price in future.
Consider if the company would have spare capacity or whether sales to other
customers would have to be cut back.
Consider if an overtime premium would have to be paid to workers, reducing or
reversing the already small contribution.
9
Total direct costs
Contribution per unit
Scarce resource used (hours)
Contribution per unit of scarce resource
Production priority
Hours used
Small
$19.00
$13.00
1.50
$8.67
3
2 000
Medium
$18.00
$17.00
1.25
$13.60
1
2 500
Large
$22.00
$18.00
1.75
$10.29
2
3 500
Revised production schedule (number of plates)
1 333
2 000
2 000
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Cambridge International AS & A Level Accounting workbook: answers to example questions
10 a
Total direct labour hours = (18 000 × 2.5) + (12 000 × 1.25) = 60 000
OAR = $80 000 ÷ 60 000 = $1.33 per direct labour hour
Overhead absorbed by one unit of XP1 = $3.33
Overhead absorbed by one unit of IJY7 = $1.67
b
Total overheads absorbed:
XP1 = $1.33 × 18 000 × 2.5 = $60 000
IJY7 = $1.67 × 12 000 × 1.25 = $20 000
11
Overhead absorption rate = $480 000/(100 000 hours) = $4.80 per hour
(i) Total production cost:
JWLH
SHLH
$
$
Direct labour cost
2 400 000
300 000
Direct materials cost
800 000
180 000
Overheads
768 000
192 000
Total production cost
3 968 000
672 000
(ii) Production cost per unit (= total production cost/units sold)
JWLH
SHLH
Full cost per unit
$198.40
$67.20
12 Reasons for closing the branch:
• Losing money will reduce funds available for reinvestment.
• Three years of losses is probably significant.
• Overall future of business may be risked by supporting losses regularly.
• Savings may be made on indirect/fixed costs by closing a branch.
Reasons for not closing branch:
• Branch may be making a positive contribution to profits.
• External factors may make the loss-making branch different (e.g., location).
• Would need to consider what happens to the fixed overheads of the business if the branch
were closed.
Overall:
• It depends on how big and in what direction the losses are moving.
• Consider whether it is a big drain on overall business profits.
• Consider how significant the difference is between profits and contribution by that branch.
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Cambridge International AS & A Level Accounting workbook: answers to example questions
13
Overhead
Total ($)
Basis of apportionment
Dept 1
Dept 2
($)
($)
Factory rent
28 000 Factory area
7 000
21 000
Heating and lighting for
factory
18 500 Electricity used
11 100
7 400
Machinery maintenance
12 400 Cost of machinery
7 440
4 960
Factory supervision
48 800 Staff employed
15 250
33 550
Machinery insurance
3 650 Cost of machinery
2 190
1 460
42 980
68 370
111 350
Total
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Cambridge International AS & A Level Accounting workbook: answers to example questions
A Level
3 Financial accounting
3.1 Preparation of financial statements
1
a
Revaluation account
$
$
Inventory
6 000 Premises
50 000
Capital: Gahan
36 000 Machinery
10 000
Capital: Gore
18 000
60 000
60 000
Profit on revaluation = $54 000: Gahan $36 000; Gore $18 000
b
Gahan, Gore and Fletcher
Statement of financial position at 1 January 2024
$
$
Non-current assets
Premises
240 000
Machinery
34 000
274 000
Current assets
Inventory
4 000
Bank
46 000
50 000
324 000
Capitals:
Gahan
166 000
Gore
118 000
Fletcher
40 000
324 000
2
Capital accounts
Drewery
Connell
Jackson
Drewery
Connell
Jackson
$
$
$
$
$
$
Goodwill
9 600
9 600
4 800 Balance b/d
18 000
12 000
9 000
Balance c/d
16 400
10 400
12 200 Goodwill
8 000
8 000
8 000
26 000
20 000
17 000
26 000
20 000
17 000
16 400
10 400
12 200
Balance b/d
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Cambridge International AS & A Level Accounting workbook: answers to example questions
3
Revaluation account
2022
Jan 1
$ 2022
Equipment
14 000
Motor vehicles
11 000
Jan 1
$
Premises
150 000
Capitals:
Cureton
100 000
Iwelumo
25 000
150 000
150 000
4
Subscriptions account
2021
$ 2021
Jan 1
Balance b/d
Dec 31
Income & expenditure
account
Dec 31
Balance c/d
36 1 Jan
1 428 Dec 31
96 Dec 31
$
Balance b/d
Receipts & payments
account
Balance c/d
1 560
2022
Jan 1
45
1 380
135
1 560
2022
Balance b/d
135 Jan 1
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Balance b/d
96
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Cambridge International AS & A Level Accounting workbook: answers to example questions
5
Trade payables account
2024
$ 2024
$
Dec 31
Bank/cash
455 Jan 1
Balance b/d
33
Dec 31
Balance c/d
27 Dec 31
Bar purchases
449
482
482
2025
Jan 1
Balance b/d
27
The trade payables account is just one way of calculating the snack bar purchases figure.
Crosspool Chess club
Snack bar statement of profit or loss for the year ended 31 December 2024
$
$
Snack bar sales
890
Less Cost of sales
Opening inventory
71
Add Purchases
449
520
Less Closing inventory
64
456
434
Less Wages
202
Profit on snack bar
232
6
Birkdale Football Club
Income and expenditure account for year ended 31 December 2023
$
$
Income
Subscriptions
1 725
Profit on raffle ($85 − $32)
53
1 778
Expenditure
General expenses
76
Electricity
50
Rent
600
Repairs to club house
299
Loss on sale of football kits (*)
50
Surplus for the year
1 075
703
(* cost of kits is 0.75 × 1200 = 900)
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7
Prime cost
Factory overhead
Statement of profit or loss
purchases returns
wages of factory supervisory
staff
depreciation of factory
machinery
insurance of machinery
sales returns
production wages
manufacturing royalties
depreciation of office
equipment
wages of administrative
staff
carriage outwards
8
Manufacturing account (extract) for the year ended 31 July 2023
$
$
Cost of material consumed
Opening inventory of raw material
6 454
Purchases of raw material
87 012
Less Purchases returns
231
86 781
Add Carriage inwards on raw materials
544
87 325
93 779
Less Closing inventory of raw material
4 313
89 466
Direct wages
98 800
Direct expenses
24 477
Manufacturing royalties
6 213
Prime cost
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129 490
218 956
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9
a
Provision for unrealised profit
2021
Dec 31 Balance c/d
$ 2021
1 480 Jan 1
Dec 31
$
Balance b/d
1 250
Statement of profit or loss
1 480
230
1 480
b
Statement of financial position (extract) at 31 December 2021
Current assets
$
Inventory of finished goods
7 400
Less Provision for unrealised profit
1 480
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$
5 920
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10
Morton Ltd
Manufacturing account for the year ended 30 June 2022
$
$
Cost of material consumed:
Opening inventory of raw material
11 890
Purchases of raw material
124 800
136 690
Less Closing inventory of raw material
8 980
127 710
Direct wages
65 790
Direct expenses
21 313
Prime cost
214 813
Add Factory overheads
Indirect wages
55 900
Factory rent and rates
3 733
Factory insurance
2 223
Factory fuel and power
8 780
Factory general expenses
9 995
Depreciation of factory machinery
4 500
85 131
299 944
Add Opening inventory of work in progress
23 133
323 077
Less Closing inventory of work in progress
25 110
Production cost
297 967
Add Factory profit
74 492
Transfer price of goods completed
372 459
Calculation of gross profit for the year ended 30 June 2022
Revenue
425 000
Less Cost of sales
Opening inventory of finished goods
41 414
Transfer price of goods completed
372 459
413 873
Less closing inventory of finished goods
Gross profit
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37 760
376 113
48 887
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11
$000
Increase in retained earnings
$000
34
Add Provision for tax
56
Debenture interest
80
Transfer to general reserve
14
Dividends paid
65
Profit from operations
215
249
12
$
Profit from operations
99 500
Increase in inventory
(2 312)
Decrease in trade receivables
4 312
Decrease in trade payables
(2 824)
Depreciation
11 000
Profit on disposal of non-current asset
(690)
Net cash from operating activities
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13 a
Jow Ltd
Statement of profit or loss for the year ended 31 December 2023
$000
Revenue
$000
1 180
Less Cost of sales
Opening inventory
59
Purchases
725
784
Less Closing inventory
81
Gross profit
703
477
Less Expenses
Wages and salaries
111
Rent and rates
30
Insurance
45
Motor vehicle expenses
23
Selling expenses
66
Depreciation of fixtures and fittings
28
Depreciation of motor vehicles
18
321
Profit from operations
156
Finance costs
25
Profit before tax
131
Tax
46
Profit for the year
85
b
Jow Ltd
Statement of changes in equity for the year ended 31 December 2023
Share capital
Revaluation
reserve
Retained
earnings
Total
$000
$000
$000
$000
2 000
200
256
2 456
Profit for the
year
85
85
Dividends paid
(52)
(52)
289
2 489
Balance at 1 Jan
2023
Balance at 31
Dec 2023
2 000
200
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c
Jow Ltd
Statement of financial position at 31 December 2023
$000
$000
$000
Net
Non-current assets
Cost
Accumulated
depreciation
book value
Land and buildings
2 350
0
2 350
Fixtures and fittings
480
228
252
Motor vehicles
180
78
102
3 010
306
2 704
ASSETS
Current assets
Inventory
81
Trade receivables
203
Cash and cash equivalents
102
Total assets
386
3 090
EQUITY & LIABILITIES
Ordinary share capital
2 000
Revaluation reserve
200
Retained earnings
289
2 489
Non-current liabilities
Debentures (2030)
500
Current liabilities
Trade payables
Total equity and liabilities
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3 090
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14
Chan Kingswood plc
Statement of cash flows for the year ended 31 December 2022
$
$
Operating activities
Profit from operations
40 000
Depreciation on premises
7000
Depreciation on plant and equipment
4000
Loss on disposal
1000
Increase in inventory
(700)
Increase in trade receivables
1000
Decrease in trade payables
(500)
Cash used in operations
49 800
Interest paid
(8000)
Taxation paid
(7400)
Net cash used in operating activities
34 400
Investing activities
Proceeds from sale of plant and equipment
10 000
Purchase of plant and equipment
(35 000)
Purchase of premises
(57 000)
Net cash used in investing activities
(82 000)
Financing activities
Proceeds from issue of shares
55 000
Ordinary dividends paid
(9000)
Net cash from financing activities
46 000
Net decrease in cash and cash equivalents
Cash and cash equivalents at 1 January 2022
Cash and cash equivalents at 31 December 2022
(1600)
1500
(3100)
3.2 Regulatory and ethical considerations
1
i
a statement of financial position at the end of the period
ii
a statement of profit or loss for the period
iii a statement of changes in equity for the period
iv a statement of cash flows for the period
v
2
accounting policies and explanatory notes.
Any four from:
•
•
•
•
•
revenue
finance costs
the charge for taxation
the after-tax profit or loss for the period from discontinued operations
profit for the year (attributable to ordinary shareholders).
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3
Any three from:
Cost includes: purchase price of any materials; import taxes; transport costs; handling costs.
Costs of conversion comprise: direct labour, other direct expenses and subcontracted work;
production overheads; any other relevant overheads.
4 i Operating activities
ii
Investing activities
iii Financing activities
5
6
An adjusting event happens after the end of the financial year that provides further evidence of
conditions that existed at the end of the reporting period. If this event would materially affect
the financial statements, the financial statements should be changed to reflect these conditions.
A non-adjusting event happens after the end of the financial year indicative of a condition that
arose after the end of the reporting period. No adjustment is made to the financial statements
for such events. If material, they are disclosed by way of notes to the financial statements.
i Expected usage of the asset, its capacity or output.
ii
Expected physical wear and tear.
iii Technical or economic obsolescence.
iv Legal or other limits imposed on the use of the asset.
7
Any three from the following:
•
Fall in the market value of the asset.
• Obsolescence caused by change in technology.
• Economic downturn.
• Damage, resulting in the asset’s fair value falling or future cash-generating ability falling.
• Restructuring of the business.
8 Contingent liabilities are potential obligations of the business, i.e. where it may need to pay out
an amount but the possibility is not certain. If the contingent liability is likely then a reference
needs to be made in the notes to the accounts. If the contingent liability is unlikely to arise then
it does not need to be mentioned.
9 Any research expenditure should be treated as revenue expenditure in the statement of profit or
loss.
Development expenditure can be treated as revenue expenditure but can also be treated as
capital expenditure (i.e. as an intangible asset) if the business can demonstrate that the asset
will generate future economic benefits.
10 i Integrity
ii
Objectivity
iii Professional competence and due care
iv Confidentiality
v
Professional behaviour
11 A qualified report is where auditors do not believe the financial statements give a true and fair
view of the company’s financial position whereas an unqualified report is where auditors
believe the accounts have been prepared correctly and present a true and fair view of the
company’s financial position.
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12 For management purposes, the financial statements are used by owners or managers to
highlight areas of good practice and to find areas within the business that could benefit from
improvement.
For stewardship purposes, the financial statements show any providers of finance how the
funds that they provided are being used, for example, being used wisely or inappropriately.
3.3 Business acquisition and merger
1
2
A business merger is where two businesses combine to form a new business that consists of the
two previous businesses. Acquisition is where one business takes over another business and the
business being acquired is incorporated into the original business.
Goodwill arises when a business is acquired by another business for a price in excess of the fair
value of the net assets being taken over.
3
Roach and Morton
Statement of financial position at 1 January
$
$
ASSETS
Non-current assets
57 000
Current assets
Inventory
11 800
Trade receivables
6 700
Cash and cash equivalents
26 234
Total assets
44 734
101 734
CAPITAL AND LIABILITIES
Capital: Roach
45 000
Capital: Morton
45 000
90 000
Current liabilities
Trade payables
11 734
Total capital and liabilities
101 734
4
Capital
Less: cash
Net assets acquired
Purchase consideration
Goodwill
$
325 000
(820)
324 180
(400 000)
75 820
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5
$
ASSETS
Goodwill
40 000
Non-current assets
340 000
Current assets
20 200
Total assets
400 200
EQUITY AND LIABILITIES
Capital and reserves
Ordinary shares of $1 each
270 000
Share premium
25 000
Reserves
65 500
Total equity
360 500
Current liabilities
39 700
Total equity and liabilities
400 200
6
Bainbridge Ltd
Statement of financial position at 1 July 2021
$
ASSETS
Non-current assets
Goodwill
131 205
Premises
450 000
Machinery
65 000
Vehicles
15 000
661 205
Current assets
Inventory
20 000
Trade receivables
17 500
Cash and cash equivalents
22 250
59 750
Total assets
720 955
EQUITY AND LIABILITIES
Equity
Ordinary shares of $1 each
700 000
Current liabilities
Trade payables
20 955
Total equity and liabilities
720 955
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7
a
Realisation account
$
$
Property
300 000 Lisbie Ltd
510 000
Equipment
90 000 Discounts received
Motor cars (less the two taken)
30 000
Inventory
45 000
Dissolution costs
15 000
Discounts allowed (24 000 – 21 500)
2 500
Capital: Arthur
20 333
Capital: Luscombe
10 167
3 000
513 000
513 000
(i.e., a profit on dissolution of $30 500 is divided in a 2:1 ratio to the partners)
b
Capital accounts
Arthur
Luscombe
$
Arthur
$
Luscombe
$
$
Motor cars
18 000
12 000 Balance b/d
210 000
240 000
Lisbie Ltd
150 000
150 000 Current accounts
27 000
24 000
Bank
89 333
112 167 Realisation account
20 333
10 167
257 333
274 167
257 333
274 167
8 Any two advantages from:
9
• larger market share
• more control over pricing
• economies of scale
• benefits of specialization
• larger profits.
Acquisition is a good idea:
• Larger market share.
• Save costs as no need for duplication of functions.
• Economies of scale.
• Less pressure to keep prices low.
Acquisition is a bad idea:
• Diseconomies of scale.
• Clash of corporate culture.
• Costs of acquisition.
• Take over may be resisted.
Overall:
• Depends on how different the businesses are.
• Would need to consider how big Arefin Ltd actually is.
• Consider whether it would lead to economies or diseconomies of scale.
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3.4 Computerised accounting systems
1
Any three advantages from:
•
2
Speed: Data entry into the system can be carried out much more quickly than if done on
paper. Calculations are performed automatically.
• Accuracy: If the original entry is correct, there are fewer areas where an error can be made
since the data entry made is replicated throughout the system, and human error in
calculations is avoided.
• Availability of information: Accounting records are automatically updated once
information is keyed in. Reports are produced automatically.
• Taxation returns: Information required by tax authorities is available at the touch of a
button.
Any three disadvantages from:
•
•
•
•
•
3
a
Hardware costs: The initial costs of installing a computerised accounting system can be
expensive, and the hardware will inevitably need to be updated and replaced on a regular
basis, leading to further costs.
Software costs: Accounting software needs to be kept up to date, which can be a long-term
financial commitment.
Staff training: Staff will need training to use the software and training updates each time
the system is modified.
Opposition from staff: Some staff may feel demotivated using a computerised system.
Other staff may fear that the introduction of computers will lead to staff redundancies,
which could include them. Changing to a computerised system can cause disruption in the
workplace and changes to existing working practices may make staff feel uneasy.
Inputting errors: Staff may become complacent as inputting into the system becomes more
repetitive and therefore, they may lose concentration leading to input errors.
i Debiting the customer’s account in the sales ledger.
ii
Crediting the sales account in the general ledger.
iii Inventory records show a decrease.
b
4
5
i
Bank account is debited.
ii
Customer’s account is credited.
This would occur where the business runs a paper-based manual system of accounting at the
same time as running the newly installed computerised accounting system. This is to ensure
that there are no discrepancies in the data, and that if there are problems with the introduction
of the computerised system, there is a back-up so that data is not lost.
Any three methods from:
•
•
•
•
•
•
•
A system of protective devices.
Each member of staff should have a unique password allowing access to their area(s) of
responsibility within the system.
A period of parallel operation could be implemented.
Regular reconciliation of the cash book.
Maintenance of control accounts.
A trial balance can be produced more regularly.
Having a back up system.
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He should computerise his system:
• He will make fewer errors.
• It will make sure no unauthorised people can access his records.
• Real-time reports on financial progress may be produced.
He should not computerise his system:
• If his premises are secure, then he should not have any security issues.
• It may be costly.
• If he is a sole trader, it may not be necessary if he does not have that much to record.
Overall:
• It will depend on the size of the business and number of transactions that need to be
recorded.
• Perhaps a less expensive system may be worth trying initially.
• Consider if the ability to produce financial reports be useful for Stobbs.
3.5 Analysis and communication of accounting information
1
2
3
4
a
Mark-up: 95.2% in 2025; 63.2% in 2024
b
Gross profit margin: 48.8% in 2025; 38.7% in 2024
a
Trade receivables turnover: 33 (32.27) days
b
Trade payables turnover: 73 (72.53) days
c
Inventory turnover: 59 (58.56) days
d
Rate of inventory turnover: 6.23 times
e
Working capital cycle: 19 (18.30) days
f
Net working assets to revenue: 7.26%
a
Current ratio: 2.52: 1
b
Acid test ratio: 1.76: 1
a
Trade receivables turnover: 73 (72.32) days
b
Trade payables turnover: 81 (80.02) days
c
Inventory turnover: 55 (54.56) days
d
Working capital cycle: 47 (46.8) days
5
2023
a
6
2022
Earnings per share
$0.43
$0.37
b Dividends per share
c Price earnings ratio
$0.08
$0.06
5.93
5.32
d Dividend yield
3.14%
3.05%
e Dividend cover
5.38 times
Gearing: 42.2% in 2024; 28.6% in 2023
6.17 times
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7
Gearing
2025
29.7%
2024
24.6%
b Interest cover
4.3 times
4.6 times
a
8
a
ROCE
9.90%
b
Gross profit margin
41.07%
c
Mark-up
69.69%
d
Profit margin
20.20%
e
Expenses to revenue ratio
20.87%
f
Operating expenses to revenue
16.86%
g
Current ratio
2.33 : 1
h
Acid test ratio
1.58 : 1
i
Non-current asset turnover
0.43 times
j
Trade receivables turnover
43 days
k
Trade payables turnover
51 days
l
Inventory turnover
40 days
m
Rate of inventory turnover
9.17 times
a
Working capital cycle
32 days
b
Net working assets to revenue (%)
9.52%
c
Interest cover
6.04 times
d
Gearing ratio
27.32%
e
Earnings per share
$0.10
f
Price earnings ratio
17.16
g
Dividends per share
$0.03
h
Dividend yield
1.69%
i
Dividend cover
3.46 times
9
10 Reasons to be concerned about the rise in gearing:
• Interest payments may rise significantly.
• Normally interest payments cannot be deferred.
• Profits will increasingly be used to service debt.
• If profits fall, the business may not be able to service the debt.
Reasons not to be concerned with the rise in gearing:
• Interest rates are low and look to remain low in many countries (though not all).
• If profits are rising, then it may not present much of a risk.
• Businesses should borrow money to exploit business opportunities as they arise.
• Internal growth is slow and borrowing allows quick growth.
Overall:
• Monitor interest cover ratio: if low, then the gearing may be a problem.
• Consider whether profits are rising faster than the gearing ratio.
• Consider if there are other ways of financing expansion – e.g. share issues.
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4 Cost and management accounting
4.1 Activity based costing
1
2
3
4
5
Cost drivers are the activities that a business undertakes as part of the production of output
which generate overheads (e.g., machine set-ups).
Cost pools are the accounts that collect the costs incurred by each activity undertaken.
$29 800 ÷ 250 = $119.20 per set-up
($12 800 + $23 400 + $19 250) ÷ 2 360 = $23.50 per unit
a Cost driver rates:
Machinery set-up ($65 420 /(25+56))
Checking costs ($32 950/(12+18))
Selling costs ($42 440 / (24+18))
b
$807.65
$1 098.33
$1 010.48
Overheads to be apportioned:
Overheads per product
Machinery set-up
Checking costs
Selling costs
A
($)
($807.65 x 25) 20 191.36
($1098.33 x 12) 13 180.00
($1010.48 x 24) 24 251.43
57 622.79
B
($)
($807.65 x 56) 45 228.64
($1098.33 x 18) 19 770.00
($1010.48 x 18) 18 188.57
83 187.21
6
Apportionment of overheads:
Machine maintenance
Ordering costs
Production run costs
Overhead cost
Direct costs
Full cost
Full cost per unit
Product S Product T
$
$
75 000
15 000
20 000
25 000
13 500
22 500
108 500
62 500
6 250 000
1 250 000
6 358 500
1 312 500
254.34
131.25
Note – machine maintenance costs are in the ratio (25 000 x 4) : (10 000 x 2)
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a
Activity
Cost ($)
Cost driver
Cost driver
rate
Machine set-up
($)
Selling expenses
($)
50 000
(20 + 5) 25
Machine
maintenance
costs ($)
24 000
(28 + 12) 40
33 000
(5 + 10) 15
24 000
(6 + 4) 10
(50 000/25) 2 000
(24000/40) 600
(33 000/15) 2 200
24 000/10) 2 400
Inspection costs
($)
Inspection and packing
Machine maintenance costs
Machine set-up
Selling expenses
Total overheads incurred
XJ3
$
(20 000 x 20) 40 000
(600 x 28) 16 800
(2200 x 5) 11 000
(2400 x 6) 14 400
82 200
MIM
$
(2000 x 5) 10 000
(10 x 12 x 4000) 7 200
(2200 x 10) 22 000
(2400 x 4) 9 600
48 800
Direct labour cost
Direct materials cost
Overheads apportioned
Full cost
Full cost per unit
Selling price (30% mark-up)
XJ3
$
(4 x 8 x 6000) 192 000
(12 x 8 x 6000) 576 000
82 200
850 200
(850 200/6000) 141.70
184.21
MIM
$
(3 x 6 x 4000) 72 000
(10 x 12 x 4000) 480 000
48 800
600 800
(600 800/4000) 150.20
195.26
b
8
a
Overheads total
$131 000
Machine hours total
OAR
36 000
$3.64 per labour hour
b
Direct labour cost
Direct materials cost
Overheads
Full cost
Full cost per unit
XJ3
$
192 000.00
576 000.00
87 333.33
855 333.33
142.56
MIM
$
72 000.00
480 000.00
43 666.67
595 666.67
148.92
XJ3
$
185.33
MIM
$
193.60
c
Selling price (30% mark-up)
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9
Arguments for switching:
•
•
•
ABC provides more realistic costing information.
Helps to identify where and understand how overheads arise.
Helps to improve performance by replicating good practice identified in one department
across other departments.
• It helps in the preparation of estimates and quotes for other work.
Arguments against switching:
• Some overhead costs cannot easily be assigned to a cost pool.
• Implementing a system of ABC is also a costly process because of its complexity.
Overall:
• Deciding how to apportion overheads will always involve a degree of subjectivity.
• Often the differences in the actual figures are quite small.
• It will require time spent on learning the new system.
4.2 Standard costing
1
2
3
4
5
6
7
8
$89 080 – $90 101 = $1 021 (Adverse)
$6 300 – $7 260 = $960 (Favourable)
a Total materials variance: (550 x $12.5) – (610 x $11) = $165 (Favourable)
b
Materials price variance: ($12.50 – $11.00) x 610 = $915 (Favourable)
c
Material usage variance: (550 – 610) x $12.50 = $750 (Adverse)
$201 890 – $189 600 = $12 290 (Favourable)
a Total labour variance: (1 850 x $9.30) – (1 920 x $8.50) = $885 (Favourable)
b
Labour wage rate variance: ($9.30 – $8.50) x 1 920 = $1 536 (Favourable)
c
Labour efficiency variance: (1 850 – 1 920) x $9.30 = $651 (Adverse)
a
Total materials variance: (1 880 x $6.30) – (1 910 x $6.50) = $571 (Adverse)
b
Materials price variance: ($6.30 - $6.50) x 1 910 = $382 (Adverse)
c
Material usage variance: (1 880 – 1 910) x $6.30 = $189 (Adverse)
d
Total labour variance: (250 x $8.75) – (262 x $8.25) = $26 (Favourable)
e
Labour wage rate variance: ($8.75 – $8.25) x 262 = $131 (Favourable)
f
Labour efficiency variance: (250 – 262) x $8.75 = $105 (Adverse)
a
Total sales variance: (6 700 x $15) – (7 200 x $13.50) = $3 300 (Adverse)
b
Sales price variance: ($15 – $13.50) x 7200 = $10 800 (Adverse)
c
Sales volume variance: (6 700 – 7 200) x $15 = $7 500 (Favourable)
A flexible budget is a budget that has the amounts adjusted for differences between budgeted
output and actual output level. For example, if actual output is higher than budgeted output it
would be useful to know whether the increase in total expenses is the result of increased output
or increases in the cost per unit of output.
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9
Quantities for labour hours and materials used need to be flexed:
•
•
a
b
Direct material quantity = 630 ÷ 500 x 150 metres = 189 metres
Direct labour hours = 630 ÷ 500 x 250 hours = 315 hours
Total materials variance: (189 x $3.50) – (190 x $3.20) = $53.50 (Favourable)
Materials price variance: ($3.50 - $3.20) x 190 = $57 (Favourable)
c
Materials usage variance: (189 – 190) x $3.50 = $3.50 (Adverse)
d
Total labour variance: (315 x $8.50) – (295 x $8.30) = $229 (Favourable)
e
Labour wage rate variance: ($8.50 – $8.30) x 295 = $59 (Favourable)
f
Labour efficiency variance: (315 – 295) x $8.50 = $170 (Favourable)
10 a
b
Total fixed overhead variance: ($22 000 x 1050/1200) – $18 000 = $1 250 (Favourable)
Fixed overhead expenditure variance: $22 000 – $18 000 = $4 000 (Favourable)
c
Fixed overhead volume variance: $22 000 – ($22 000 x 1050/1200) = $2 750 (Adverse)
11 a
b
Fixed overhead expenditure variance: $50 000 - $48 000 = $2 000 (Favourable)
Fixed overhead capacity variance: $50 000 – (8500 x $5) = $7 500 (Adverse)
c
Fixed overhead efficiency variance: (8 500 – 8 750) x $5 = $1 250 (Favourable)
d
Fixed overhead volume variance: $50 000 – ($50 000 x 1750/2000) = $6 250 (Adverse)
e
Total fixed overhead variance: ($50 000 x 1750/2000) – $48 000 = $4 250 (Adverse)
12 Any one advantage from:
•
•
•
•
It can identify areas of the business where expenditure is higher than was planned.
It allows a business to monitor the efficiency of its workers.
It allows a business to monitor how efficiently materials are being used.
It allows a business to judge whether the reason for any overspend is within the control of
the business.
• Reasons for sales revenue varying from budgeted levels can be analysed.
• Corrective action can be made so as to improve business performance.
Any one disadvantage from:
• It takes time (and money) to set up in the first place.
• Time will be spent calculating and interpreting the results.
• The target result used to calculate the standards may not be realistic (e.g. might be based
on unrealistically high assumptions about worker productivity).
• Standards may be out of date.
• Attempts to improve a ‘variance’ might lead to another variance worsening (see the
section on the interrelated nature of some variances).
• Some variances arise out of factors outside the control of the business (e.g. prices charged
for materials).
• If output levels differ from those budgeted, then the variances may be misleading (though
preparation of flexible budgets can help solve this issue).
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13 A wage cut is a good idea:
• Wage cut should improve the adverse variance.
• Saving money on labour costs will improve profitability.
A wage cut is a bad idea:
• Worker motivation is likely to deteriorate and labour efficiency variance may worsen.
• Conflict with workers and trade unions may be created if wages are cut.
• Adverse wage rate variance may be the result of an attempt to motivate workers to be less
wasteful with materials (hence the favourable variance in materials usage).
Overall:
• The size of the variance may be small compared with the overall costs and revenues of the
business.
• The adverse variance may be caused by external factors, such as an increase in the
minimum age rate of that country.
• Variances are interrelated and addressing this adverse variance may result in other
variances worsening.
14 Flexed quantities:
• Direct materials: 1500 kg
• Direct labour: 1200 hours
• Flexed overheads: $0.50 x 15 000 units = $7500
• Flexed profit = $11250
Statement reconciling budgeted profit with actual profit for September 2021
Favourable ($)
Budgeted profit
Variances:
Sales price
Direct materials price
Direct materials usage
Direct labour wage rate
Direct labour efficiency
Fixed overhead expenditure
Fixed overhead volume
Adverse ($)
($)
11 250
3000
120
1050
300
1000
4000
2500
4670
Actual profit
7300
2630
8620
4.3 Budgeting and budgetary control
1
Any two advantages include:
•
•
•
•
It defines areas of responsibility and targets to be achieved by different personnel.
Budgets can act as a motivating influence at all levels – usually only true when all staff
members are involved in the preparation of budgets.
Budgets are part of the business’s overall strategic plan so individual departmental and
personal goals are more likely to be an integral part of the ‘bigger picture’.
Budgets usually lead to more efficient use of resources – leading to better control of costs.
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2
Any two disadvantages include:
•
•
•
•
•
•
3
Budgets are only as good as the data being used – if data are inaccurate, the budget will be
of little use.
Should one departmental budget be too optimistic or too pessimistic this will have a
knock-on effect on other associated budgets.
Budgets might demotivate if they are imposed rather than negotiated.
If too easy to reach, there is a possibility that this could lead to complacency and/or
underperformance.
They might lead to departmental rivalry.
Budgets can be a lengthy, complicated procedure to implement.
Any three features from:
•
•
•
•
•
•
A clear definition of each manager’s role.
Once approved, individual managers are responsible for the implementation of their
departmental budgets.
Departmental budgets are action plans for each area of responsibility.
Performance is constantly monitored and compared to the agreed budget.
Where budget targets are not met, corrective action is taken.
Unexplained variations from budgets must be investigated.
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4
a
Zohaib
Sales budget for the three months ending 30 June
b
April
May
June
Budgeted sales (units)
24
28
25
Budgeted sales revenue
$372
$476
$456.25
Total production is found using the following calculation:
Budgeted sales (24 + 28 + 25)
77
Add Budgeted closing inventory
29
Total production needed
106
Less Opening inventory
13
Budgeted production for three months
93
This means that 93 ÷ 3 = 31 components must be produced each month
(based on an even production flow).
Zohaib
Production budget for the three months ending 30 June
April
May
June
24
28
25
20
23
29
Total production needed
44
51
54
Less Budgeted opening inventory
13
20
23
Budgeted production
31
31
31
Budgeted sales
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Budgeted sales (pipes) (320 + 450 + 470)
1 240
Add Budgeted closing inventory
110
Total purchases needed
1 350
Less Budgeted opening inventory
60
Budgeted purchases needed
1 290
PCHH Ltd need to purchase 1 290 ÷ 3 = 430 for each month.
PCHH Ltd
Purchases budget for the three months ending 31 March
Jan
Feb
Mar
Budgeted sales
320
450
470
Add Budgeted closing inventory
170
150
110
Total purchases needed
490
600
580
Less Budgeted opening inventory
60
170
150
Budgeted purchases
430
430
430
6
Clayton Ltd
Production budget for the three months ending 30 November
Budgeted sales (units)
Add Budgeted closing inventory
Total production needed
Less Budgeted opening inventory
Budgeted production
Sep
Oct
Nov
1 120
1 240
1 560
248
312
364
1 368
1 552
1 924
200
248
312
1 168
1 304
1 612
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7
Alex Davenport
Cash budget for the three months ending 31 October 2022
Aug
Sep
Oct
$
$
$
Cash sales
10 760
13 576
13 632
Credit sales
2 198
2 432
2 690
12 958
16 008
16 322
Cash purchases
5 205
7 574
8 222
Credit purchases
5 645
5 205
7 574
Wages
900
900
900
Insurance
125
125
125
Heating and lighting
204
204
204
Receipts
Expenditure
Rent
800
12 079
14 808
17 025
Net receipts
879
1 200
(703)
Balance brought forward
340
1 219
2 419
Balance carried forward
1 219
2 419
1 716
8
Sabkha Ltd
Trade receivables budget for the three months to 31 March
Jan ($)
Feb ($)
Mar ($)
Balance brought forward
35 000
45 000
55 000
Credit sales
45 000
55 000
58 000
80 000
100 000
113 000
34 300
44 100
53 900
700
900
1 100
45 000
55 000
58 000
Cash received from credit customers
Discount allowed
Balance carried forward
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9
Nettleship Ltd
Trade payables budget for the four months to 30 September
Jun ($)
Jul ($)
Aug ($)
Sep ($)
Balance brought forward
65 600
81 125
81 750
91 000
Credit purchases
58 300
52 600
64 700
57 850
123 900
133 725
146 450
148 850
Cash paid to credit suppliers (2 months earlier)
19 950
22 825
29 150
26 300
Cash paid to credit suppliers (1 month earlier)
22 825
29 150
26 300
32 350
Balance carried forward
81 125
81 750
91 000
90 200
Working. Balance at 1 June = ($39 900 x 0.5) + $45 650 = $65 600
10
Kevin and Michelle
Cash budget for the three months ending 31 May
Mar ($)
Apr ($)
May ($)
Cash sales
4 050
4 525
4 100
Credit sales
11 550
12 150
13 575
15 600
16 675
17 675
Credit purchases
11 500
13 200
17 400
Wages
1 100
1 100
1 100
Drawings
650
650
650
General expenses
425
425
425
Receipts
Expenditure
Rent
1 200
13 675
16 575
19 575
Net receipts
1 925
100
(1 900)
Balance brought forward
(500)
1 425
1 525
Balance carried forward
1 425
1 525
(375)
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11 Reasons for producing a cash budget:
• A lender may ask to see a budget before providing finance.
• Shortage of cash is one of the most common reasons for business failure.
• A budget can be used to identify periods where too much cash is being held.
• Just because he has not needed one so far does not mean he won’t need one in the future.
Reasons against producing a cash budget:
• He may lack the experience/expertise to produce a useful cash budget.
• If he is dealing with small amounts, then the time taken may mean it is not necessary.
Overall:
• Will depend on whether he trades on credit. If so, he may need one. If he deals with cash
only transactions, then it may be less important.
• Will depend on how ‘predictable’ his market is. If it is very steady and predictable then it
becomes less pressing.
4.4 Investment appraisal
1
Machine 1: 2.5 years
Machine 2: 3.0 years
2 Equipment 1C:
Cumulative net cash flow after three years is $18 000 add back (3 x $500) = $19 500
Proportion of year 4 needed is ($22 000 - $19 500)/($5 000 + $500)
Payback period = 3.45 years
Equipment 2D:
Cumulative net cash flow after three years is $15 000 add back (3 x $800) = $17 400
Proportion of year 4 needed is ($19 000 - $17 400)/($3 000 + $800)
Payback period = 3.42 years
Based on payback period alone, equipment 2D should be purchased. But as the periods are so
similar further analysis would be recommended.
3 Any one advantage from:
•
•
•
It is relatively simple to calculate.
It is fairly easy to understand.
The use of cash is more objective than using profits that are dependent on the accounting
policies decided by managers.
• Since all future predictions carry an element of risk, it shows the project that involves the
least risk because it recognizes that cash received earlier in the project life cycle is
preferable to cash received later.
• It shows the project that benefits a business’s liquidity.
Any one disadvantage from:
• It ignores the time-value of money.
• It ignores the life expectancy of the project; it does not consider cash flows that take place
after the payback period.
• Projects may have different patterns of cash inflows.
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4
Machine AGL6
Average investment $65 000
Average profit
$28 200
ARR
43.38%
Machine AMJ
$82 500
$29 800
36.12%
5
Average investment
Average profit
ARR
6
Project AC-K
$128 000
$29 720
23.22%
Project H17
$99 000
$25 300
25.56%
Any one advantage from:
•
ARR is fairly easy to calculate.
•
Results can be compared to present profitability.
•
It takes into account the aggregate earnings of the project(s).
Any one disadvantage from:
• ARR does not take into account the time value of money.
• It does not recognise the timing of cash flows.
7
a
$710
b
$807
c
$1 412
8
Net cash flow
$
Year 0
(80000)
Year 1
29 500
Year 2
42 342
Year 3
31 315
Year 4
16 790
Net present value
Discount factor
Net cash flow
$
Year 0
(25 000)
Year 1
6 757
Year 2
8 905
Year 3
13 440
Year 4
3 435
Net present value
Discount factor
1.000
0.909
0.826
0.751
0.683
Present values
$
(80 000)
26 816
34 974
23 518
11 468
16 776
9
1.000
0.917
0.842
0.772
0.708
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Present values
$
(25 000)
6 196
7 498
10 376
2 432
1 502
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10 Any one advantage from:
•
The time value of money is taken into account as adjustments are made to take account of
the present value of future cash flows.
•
It is relatively easily to understand.
•
Greater importance is given to earlier cash flows.
Any one disadvantage from:
•
Because the figures are projections, all the figures are of a speculative nature.
•
Inflows are difficult to predict; outflows are equally difficult to predict.
•
The current cost of capital may change over the life of the project.
•
The life of the project is difficult to predict.
11 IRR = 9 + [(14 – 9) x 679/(679 + 446)] = 12%, which is greater than Hadfield’s cost of capital.
Therefore, he should go ahead with the investment.
12 He should buy Machine A:
• Shorter payback period.
• Lower cost.
• Less risky in terms of paying back any borrowing required to buy machines.
He should buy Machine B:
• More profitable (based on ARR).
• Will last longer than machine A.
Overall:
•
•
Depends on how unstable he thinks the market will be.
Depends on whether he will have to borrow the money.
•
Depends on whether profit maximisation is his main goal.
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