Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 1 The purpose of accounting Activity 1 1 The following are not financial data: b, c, f, g 2 Classifying financial data Deciding whether an item involved in a business transaction is an asset or a liability Interpreting financial data Communicating financial data Publishing the income statement on the business website Measuring the profitability of a business using ratios Deciding whether an item involved in a business transaction is an income or an expense Measuring the liquidity of a business using ratios Sending the financial statements of a business to shareholders by email Activity 2 1 Amrita should keep financial records of her transactions so that she can monitor the business’ performance and growth. On the basis of this information she can make important financial decisions. Financial records ensure that business transactions do not get forgotten or lost. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 2 3 A book-keeper does not have the skills that an accountant has. A book-keeper makes sure that accurate records are kept. An accountant goes on to use those records to prepare financial statements that interested parties analyse and interpret to make important financial decisions. Therefore a book-keeper’s job is not as specialised as an accountant’s is and is not as well paid. She should employ an accountant. As she does not have any accounting knowledge, the accountant will ensure that all the business’ transactions are collected, recorded, summarised, classified, analysed, interpreted and communicated to her. Based on this, Amrita will be able to know how well her business is performing and growing. Activity 3 1 2 These interested parties use the financial information conveyed to them in the following ways: a The owner/s of the business: They would want to know how well their investment in the business is doing. Is the business profitable enough to return a good profit year after year? The owners would also want to know what the net worth of the business is. b Prospective owners: They would like to know how well their investment will do in the future by studying present and past accounting records of the business they are intending to invest in. Good profitability and increasing net worth are good signs that the business is on a growth path and will therefore be a good investment. c The bank manager: The bank manager will ask for and use past and present accounting records of the business before granting a loan or any other service, such as an overdraft facility, to the business. The business may not have enough money or cash flow to service a loan and this could be a reason for the bank not to grant a loan. Also, if the business has a lot of existing long-term loans, the bank will not be very willing to lend them money. d Business trade payables: A lot of transactions conducted in the business world are credit transactions. This means that payments are made some time after the transaction has taken place. As a result of such credit transactions, the business could have a number of people or businesses that it owes money to. They are called trade payables (creditors). Suppliers and other payables of the business would want to know whether they will be paid on time, if at all. Accounting records will give them this information. e The government: The government would like to know what profit the business has made, to calculate the tax that has to be paid. Four interested parties are: a suppliers b the bank c the government d the customers. Exam-style questions 1 2 3 B [1] A [1] A [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book 4 5 6 B [1] B [1] [6] Features of the accounting records Interested parties Whether the business can pay interest when due Loan creditor Bank manager The market value of the assets that the business owns Potential partner Whether the business is profitable Potential partner Andrew McDonald (owner) Andrew McDonald (owner) Whether the business has enough liquidity Trade creditor Loan creditor Chapter review questions 1 2 3 4 5 Accounting is a process of collecting, recording, classifying, summarising, analysing, interpreting and communicating financial data to allow the users of accounting information to make informed judgements and decisions. Book-keeping is largely concerned with the development and maintenance of accounting records. It is often referred to as the ‘how’ of accounting. It has to do with procedure. It involves the detailed recording of all the financial transactions that have taken place over a period in a business. Book-keeping is a subset of accounting. Accounting, on the other hand, is conceptual and concerned with the “why” of accounting. It involves the collection, recording, classifying, summarising, analysing and interpreting of financial data. The purpose of accounting is: To provide important financial information that helps interested parties monitor progress. To help interested parties make good financial decisions. Profits are compared from year to year and between businesses. If the profit has decreased, or is less than that of a similar business, then owners and managers would want to take steps to remedy the situation by either decreasing expenses or increasing revenue. If the business has been making a good profit, consistently, then managers may want to grow the business by expanding its operations into other markets or increase product range. Recording; book-keeping; financial; classifying; owners; interpreting; trade payables; analysing; decision making; bankers; communicating): a Book-keeping is concerned with the maintenance of accounting records. b Recording, classifying, analysing, interpreting and communicating financial data make up the process that is called accounting. c Owners, trade payables and bankers are possible interested parties in a business. d The purpose of accounting is to take financial data and convert it to a form that can be used for good decision making. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 6 a The owner/s of the business: The owners of the internet business have invested in it, so they will need to know how well their investment is doing. They will be keen to know what the net worth of the business is and whether the business will be profitable enough to return a good profit each year. b The bank manager: The bank will require access to the business’ accounting records in order to offer further finance such as a loan or overdraft facility, if required. If the business already has a number of long-term loans, the bank may be less willing to lend the business further money. d Employees: The employees will want to know that the business is continuing to make a profit and is not making a loss, as financial problems with the business could affect their job, making them at risk of redundancy. They will also be keen to know whether the internet company is continuing to grow, as this could mean better promotion prospects and an increase in wages/salaries for existing employees. Other answers, with suitable detail, might include business trade payables, customers and the government (to calculate tax to be paid). 7 1. There is no difference between accounting and book-keeping. False 2. Accounting is only carried out at the end of a financial year. False 3. Managers can use financial data to define and analyse the opportunities and challenges that a business faces. True 4. The statement of financial position is used to calculate the profit of a business. False 5. Business profit is often compared with a competitor’s profit. True Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 2 The accounting equation Activity 1 Owner’s equity, in accounting, is usually what the business owes the owner. It can refer to funds raised by the owner to fund a business idea. A liability is a debt that the business owes for goods or services received or when a loan is taken out. Since owner’s equity is what the business owes the owner, it is a liability as it represents a debt the business owes the owner. a $2000 b $3800 1 2 3 4 c $2170 d $4220 e $6000 Activity 2 Transactions Assets Liabilities a. The owner introduced $45 000 cash into the business bank account. Increases b. The business bought goods on credit from Sully & Sons. Increases Increases c. Benjamin, a friend of the owner, lent the business $3 000 in cash. Increases Increases d. The business sold goods for cash $500 Decreases (inventory) Increases (cash) e. The business paid Benjamin $3 000 by cheque. Decreases Decreases f. The business returned goods $50 to Sully & Sons. Decreases Decreases g. The owner withdrew $400 from the business bank account for personal use. Decreases Owner’s equity Increases Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 Decreases 1 Answers to Student’s Book h. The business bought a motor vehicle $4 500, paying by cheque. Increases (motor vehicle) Decreases (bank) i. The business paid a creditor $58 cash. Decreases Decreases Activity 3 a. Buildings and property Asset b. Machinery Asset c. Trade receivables Asset d. Trade payables Liability e. Overdraft Liability f. Cash in hand Asset g. Loan from M. Apple, a friend Liability h. Inventory Asset i. Motor vehicle Asset j. Equipment Asset Exam-style questions 1 2 3 4 5 6 C A A A D a [1] [1] [1] [1] [1] (15 000 + 100 000) [1] + (10 000 + 5 000 + 29 000) [1] – 2 400 [1] = $156 600 [max 3] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book 6 b Aimee’s Frocks Statement of financial position as at 31 August 2018 $ $ ASSETS Non-current assets Machinery 15 000 Premises 100 000 115 000 [1] Current assets Inventory 10 000 Trade receivable 5 000 Cash at bank 29 000 Total assets 44 000 [1] 159 000 [1] OWNER’S CAPITAL AND LIABILITIES Owner’s capital 156 600 [1] OF Current liabilities Trade payable Total owner’s capital and liabilities 2 400 [1] 159 000 Chapter review questions 1 a Drawings is the term given to the value of assets in the form of cash or inventory withdrawn from a business by the owners for personal use. They reduce owner’s equity. b Assets are resources of value that a business owns. They also represent money owed to the business. c Trade payables are people or businesses to whom the business owes money for goods or services received. d Current liabilities are debts that must be paid within a year. e Non-current assets are those assets that the business has bought with the intention of keeping them and using them for a period of more than a year. a Owner’s equity is also known as capital. b The statement of financial position reflects the accounting equation. c When the owner withdraws cash from the business bank account for personal use, it is called drawings. d Non-current assets are also known as fixed assets. 2 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book e 3 Trade payables is an example of a current liability. A liability is what the business owes and owner’s equity is what the business owes the owner. Hence owner’s equity is a type of liability. 4 Statement True/False 1. If an asset increases, then either a liability or owner’s equity will also increase. True 2. If an asset increases, then another asset involved in the transaction will also increase. False 3. If an asset decreases, then either a liability or owner’s equity will also decrease. True 4. If a liability or owner’s equity increases, then another liability involved in the transaction will increase. False 5. If a liability or owner’s equity decreases, then another liability involved in the transaction will increase. True 5 Assets Liabilities Furniture and fixtures Trade payables Machinery Equipment Bank loan Inventory Overdraft Trade receivables Property and buildings 6 Cash in hand $42 000 After all the transactions: Bank $39 700 Owner’s equity $42 000 Motor vehicle $6 000 Other payable $6 000 Cash $1 500 Loan $1 500 Inventory $2 300 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 3 The double entry system of book-keeping Activity 1 Statement True/False 1. If an asset increases, the asset account should be debited. True 2. If a liability increases, the liability account should be debited. False 3. If an asset decreases, the asset account should be debited. False 4. If a liability decreases, the liability account should be credited. False 5. If capital (owner’s equity) increases, the capital account should be debited. False Activity 2 Transactions Account to be debited Account to be credited 1. The owner deposited $27 000 in the business bank account. Bank Capital 2. The business bought furniture $4 500 on credit from Neural Furniture. Furniture Neural Furniture 3. The business repaid a loan from Omni Loans $6 700 by cheque. Omni Loans Bank 4. The business took a loan in cash from Tabloid Finance $8 000. Cash Tabloid Finance 5. Somli, a credit customer, paid the business $500 in cash. Cash Somli 6. The business returned some furniture valued at $700 to Neural Furniture Neural Furniture Furniture 7. The owner paid a business creditor, Pascal, $300 from her personal funds. Pascal Capital Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 3 Transactions Account to be debited Account to be credited 1. Paid salaries by cheque $6 000 Salaries Bank 2. Paid rent in cash $7 000 Rent Cash 3. Received commission $500 cash Cash Commission receivable 4. Received rent by cheque $30 000 Bank Rent receivable 5. Paid motor expenses in cash $50 Motor expenses Cash Activity 4 Transactions Account to be debited Account to be credited 1. Purchased inventory for cash $500 Purchases Cash 2. Purchased goods on credit $700 from Aslam Traders Purchases Aslam Traders 3. Purchased a motor vehicle paying by cheque $6 980 Motor vehicle Bank 4. Sold goods for cash $230 Cash Sales 5. Paid motor expenses in cash $56 Motor expenses Cash 6. Sold inventory on credit to Jalan and Sons $239 Jalan and Sons Sales 7. Returned goods to Aslam Traders $34 Aslam Traders Purchases returns 8. Jalan and Sons returned goods $45 Sales returns Jalan and Sons 9. Sold goods to Mason on credit $4 500 Mason Sales 10. Mason returned goods to us $450 Sales returns Mason Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 5 S. Louis Date Details $ Date 2018 Jan 22 Details $ Purchase 560 2018 Bank 560 Jan 1 J. Kelly Date Details $ Date Details $ 34 Jan 1 Purchases 346 1 188 Jan 6 Purchases 876 2018 2018 Jan 20 Purchases returns Jan 31 Balance c/d 1 222 1 222 M. Mallasa Date Details $ Date 2018 Details $ 2018 Jan 20 Purchases returns 56 Jan 1 Purchases 289 Jan 31 Balance c/d 993 Jan 6 Purchases 760 1 049 1 049 D. Makan Date Details $ Date 2018 Jan 3 Details $ Bank 570 Details $ 2018 Sales 570 Jan 31 R. Stoic Date Details $ Date 2018 2018 Jan 3 Sales 720 Jan 16 Sales returns 50 Jan 12 Sales 850 Jan 31 Balance c/d 1 520 1 570 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 570 3 Answers to Student’s Book B. Brambles Date Details $ Date 2018 Details $ 2018 Jan 3 Sales 890 Jan 16 Sales returns 45 Jan 12 Sales 560 Jan 31 Balance c/d 1 405 1 450 1 450 S. Po Date Details $ Date 2018 Details $ Purchases 745 Details $ Cash 932 2018 Jan 29 Cash 745 Jan 6 S. Llama Date Details $ Date 2018 2018 Jan 12 Sales 932 Jan 25 Trade payables: J. Kelly $1 188 M. Mallasa $993 Trade receivables R. Stoic $1 520 B. Brambles $1 405 Activity 6 1 a • work can be shared among several people • keeping the same types of accounts together makes it easier to refer to them • accounts can be checked easily • less opportunity for fraud • for convenience • for good organisation. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book b Account Ledger Premises Nominal (general) ledger Dolores, a credit customer Sales ledger Sales Nominal (general) ledger Purchases Nominal (general) ledger Returns inwards Nominal (general) ledger Harvey, a credit supplier Purchases ledger Rent Nominal (general) ledger 2 a Nominal (general) ledger b Sales ledger c Nominal (general) ledger Exam-style questions 1 2 3 4 5 6 B [1] C [1] A [1] C [1] D [1] Account debited $ Account credited $ 1. Bank 100 Cash 100 2. Computer 500 [1] Capital 500 [1] 3. Drawings 300 [1] Cash 300 [1] 4. Jason 120 [1] Bank 120 [1] 5. Electricity 300 [1] Bank 300 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book 7 a [14] i Kelsey Purchases account Date Details $ Date 2018 Details $ 2018 Dec 31 Income statement [1] 4 000 Jan 17 Bank 300 [1] Nov 28 Josh 3 700 [1] ____ 4 000 4 000 [1] ii Josh’s account Date Details $ 2018 Date Details $ 2018 Bank/cash 1 500 [1] Jan 1 Balance b/d 1 500 [1] Dec 31 Balance c/d 3 700 [1] Nov 28 Purchases 3 700 [1] Feb 3 5 200 5 200 2019 Jan 1 Balance b/d 3 700 [1] iii Rent receivable account Date Details $ 2018 Date Details $ 2018 Dec 31 Income statement [1] 2 500 [1] Feb 1 Cash 2 000 [1] ____ Jun 29 Bank 500 [1] 2 500 2 500 Dates [1] b Josh is a creditor (trade payable). [1] 8 a • work can be shared among several people • easier for reference as the same types of account are kept together • easier to introduce checking procedures • reduces the possibility of fraud • or other suitable advantage. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book Any two advantages [1] each b Any non-current asset, inventory, capital drawings, loan, sales, purchases, returns expenses, incomes, provisions, etc. Any one example [1] c Sahira Ali Waheed Khan account 2014 $ 2014 $ Oct 16 Returns 168 [1] Oct 1 Balance b/d 390 Oct 24 Bank/cash 380 [1] Oct 13 Purchases 336 [1] Discount 10 [1] Balance c/d 168 ___ 726 726 Oct 31 Nov 1 Balance b/d 168 [1] OF Iqbal Wholesalers account 2014 Oct 31 Balance c/d $ 2014 $ 936 Oct 1 Balance b/d 650 Oct 5 Purchases 280 Oct 31 Interest 936 6 [1] 936 [1] Nov 1 Balance b/d 936 [1] OF + [1] dates 9 Hannah’s account $ $ Mar 1 Balance b/d 200 [1] Mar 12 Returns 64 [1] Mar 6 Sales 256 [1] Mar 28 Bank/cash 196 [1] Discount 4 [1] Balance c/d 192 ___ 456 Apr 1 Balance b/d Mar 31 456 192 [1] OF + [1] Dates Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book 10 Transaction Debit entry Credit entry $ $ 1 Bank 800 Rent receivable 800 2 Drawings 200 [1] Purchases 200 [1] 3 Bank 600 [1] Tabitha 625 [1] Discount allowed 25 [1] Sales 1 400 [1] 4 Samir 1 400 [1] Chapter review questions 1 2 3 4 5 6 7 8 An asset is a resource of monetary value that a business owns. It can also be a debt owed to the business by its trade receivables. Current assets are assets that will be converted into cash within a year. Hence, they are more liquid than non-current assets, which a business buys with the intention of keeping them and using them for a period of more than a year. A liability is a debt that a business owes for goods or services received or for a loan which it has taken out. A current liability is a debt that has to be paid within the financial year. However, non-current liabilities are long-term debts that have to be paid after one year. Accept two accounts other than trade payables or trade receivables, for example, sales account, rent account. Sales ledger Oven/delivery van/premises a Purchases ledger. b Explanation: Sally returned goods to Vera, her supplier. Double entry: Sally’s purchases returns account will be credited. 9 Account debited Account credited Drawings Bank Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 4 Business documents Activity 1 1 a Mason and Son b Ace and Company c 10% d 2% e $61.74 f $63 g Cash discount Trade discount 1. A cash discount is given to customers for paying their debts promptly. A trade discount is given to customers who buy in bulk or to reward regular business. 2. A cash discount is recorded in the books of account. A trade discount is not recorded in the books of account. h Account debited: Ace & Company Account credited: Sales i Account debited: Purchases Account credited: Mason & Sons Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 2 H Hussein J. Ali 3 Manuka 14 Penny Road Popuri 15 April 2018 Item Quantity Price per unit Total $ $ Mattresses 4 1,200 A 4 800.00 Beds B6 550 3 300.00 C 8 100.00 Less D Trade discount @ 2% E 162.00 F 7 938.00 Terms 2½% G Cash discount for settlement within 14 days Activity 2 1 a M. McKenzie b C. Cassidy c 2% d i To accompany goods returned that were damaged. ii To accompany goods returned as they were the wrong size. 2 To: Billy Hue From: M. Mans 14 Novel Way Kellyworld Gensing Debit note 3 Item Quantity 15 April 2019 Price per unit Total $ $ Cotton thread 2 reels 1.50 A 3.00 Packets of needles B 20 4.00 80.00 83.00 Less C Trade Discount @ 1% D 0.83 E 82.17 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 3 1 a C. Cassidy b M. McKenzie c 2% d e i To give allowance for goods returned by customer. ii To inform a customer that his/her account has been credited when there has been an overcharge on an invoice. Account debited: Sales returns Account credited: M. McKenzie f Account debited: C. Cassidy Account credited: Purchases returns 2 To: Li Chen 12 Flamorgan Hushev From: N. Raj Credit note number C56 Jenking 24 May 2018 Item Quantity Price per unit Total $ $ Chairs 10 45.00 A 450.00 Antique table lamps B8 100.00 800.00 1 250.00 Less C Trade Discount @ 4% D 50.00 E 1 200.00 Activity 4 1 The purpose of a statement of account is to remind customers of the amount due to their suppliers/to provide a summary of the transactions for the period in books of the supplier. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 2 A. Solly Date: 31 July 2018 34 Lake Drive, Solento M. Molly 27 Crescent Drive Timbucto Date Details Debit Credit Balance $ $ $ 2018 Jul 1 Balance b/d 450 (dr) Jul 7 Invoice 45/GM Jul 15 Bank 400 420 (dr) Jul 27 Note X/34 35 385 (dr) Jul 28 Cheque 4500-23 335 50 (dr) 370 820 (dr) Amount due $50.00 Terms: 2.5% cash discount if account is paid by 31 August 2018 Exam-style questions 1 2 3 4 5 6 A [1] D [1] A [1] A [1] D [1] a [5] Hirosh 31 May 2018 Jay Ling Date Details 2018 Debit Credit $ Balance $ $ May 1 Balance b/d 3 400 3 400(dr) [1] May 7 Sales 4 900 8 300(dr) [1] May 15 Bank 3 000 5 300(dr) May 17 Sales returns 1 000 4 300(dr) May 19 Sales May 27 Bank 2 000 4 800(dr) May 27 Discount allowed 400 4 400(dr) 2 500 [1] 6 800(dr) [1] Amount due $4 400 [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book b The balance of $4 400 is a debit balance. [1] 7 a i 15% [1] ii $187 [1] iii $217 [1] b Jai Kapur [1] c Goods returned Overcharge Allowance for faulty/damaged goods Any one for [1] mark d Debit note [1] e Books of Jai Kapur 8 a Books of Vijay Singh Account debited Account credited Account debited Account credited Sales returns [1] Vijay Singh [1] Jai Kapur [1] Purchases returns [1] To remind customers [1] of the amount due to their suppliers [1] OR to provide a summary of the transactions for the period [1] in books of the supplier. [1] • to inform or remind the customer of the amount due • to confirm the settlement terms • to ensure that no errors have been made by customer or supplier • other relevant comment. b i Sam had taken 2% discount ($8.00) [1] Accept any mention of discount taken, whether entitled or not. [1] ii No, not correct amount [1] Sam did not pay the amount due within the 21 days / time limit [1] allowed to earn any discount [1] c i Amount due $265.00 [1] @ 2% [1] = $5.30 [1] (correct figures only) ii Net amount due $265.00 [1] − $5.30 [1] = $259.70 [1] (correct figures only) d Sam Sumo account Date $ Date $ Sep 1 Balance b/d 400.00 [1] Sep 19 Sales returns in(CN 29) 16.50 [1] Sep 7 Sales invoice (301) 56.50 [1] Sep 28 Bank 392.00 [1] Sep 12 Sales invoice (330) 217.00 [1] Sep 30 Balance c/d 265.00 [1] (OF if no aliens) 673.50 673.50 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book Sales account Date $ Sep $ Sep 7 Sam Sumo 56.50 [1] 217.00 [1] not invoice or total sales Sep 12 Sam Sumo not invoice or total sales Sales returns account $ Sep 19 Sam Sumo 16.50 $ [1] Sep not total sales returns Cash book – bank column $ Sep 28 9 Sam Sumo 392.00 $ [1] Sep e Pay the balance due within the specified period [1] of 21 days [1] (not pay more quickly, prompt payment, etc.) a To remind customers of the amount due to their suppliers/to provide a summary of the transactions for the period in books of the supplier. [1] b Fiona Fraser [1] 10 a b 11 a Purchases journal [1] A $0.45 [1] B 75 [1] C £1622.50 [1] D 4% [1] E Trade [1] F [1] $64.90 G Cash [1] i $80 000 [1] ii $130 000 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book b Transaction Book of prime entry Accounts to be debited Accounts to be credited Effect on capital i Purchases journal Purchases Henry Nil ii Sales journal [1] Mary [1] Sales [1] + 200 [1] iii Cash book [1] Henry [1] Bank Discount [1] for both + 10 [1] iv Sales returns journal [1] Sales returns [1] May [1] −20 [1] c $ i The invoice is a demand for payment [1] from Mary. [1] ii A cheque will be raised to pay Henry [1] and the counterfoil will be completed as a record of the payment. [1] iii The credit note will acknowledge the return of goods by Mary [1]. Her account will be credited in Joe’s books. [1] Chapter review questions 1 a Invoice: Invoices are transactional documents used by a business at the time of a credit sale. It accompanies the goods being delivered to a customer. The customer, who receives the original invoice, uses it as a record of their credit purchases. The supplier retains a copy of the invoice as a record of their credit sales. Hence, the same document can be a sales invoice or a purchases invoice. b Credit note: A credit note is issued by a supplier to a customer to acknowledge the receipt of goods returned and let the customer know the value of the full allowance being given for goods returned by them. A credit note could also be issued by a supplier to a customer to inform them that their account has been credited, when there has been an overcharge on an invoice they have received for goods they bought on credit. c Debit note: A debit note is a document issued by a customer to a supplier when returning goods originally bought on credit. The note should contain details of the quantity and value of the goods being returned as well as the total anticipated credit amount. This amount should reflect the trade discount allowed at the time of the credit purchase. A debit note is a request to the seller to reduce the total of the original invoice and issue a credit note; therefore, no entries are made in the accounting records when a debit note is received for returns. A debit note can also be issued by a seller instead of an invoice to revise (upwards) the amount of an invoice already issued. This happens when the original invoice amount was incorrectly calculated. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book d 2 3 4 5 Statement of account: Suppliers usually send a monthly statement of account to their customers. It is a periodic summary of a customer’s account activity, showing their credit purchases, discounts allowed, returns and payments made during the month. It is a copy of the customer’s account in the supplier’s books. The purpose of a statement of account is to remind customers of the amount due to their suppliers. The customer can also use the statement of account to check against their own records to ensure that no errors have been made by either the supplier or themselves. Credit note Invoice $47 300 A trade discount is given to customers who buy in bulk. It is sometimes given to repeat customers to reward regular business. 6 a b c A $180 B $210 C $390 A To: Jonas and Sons B $60 C $40 D $100 Discount = $9 Amount of cheque = $441 d ABC Ltd Date: 30 June 2019 Statement of Account To: Jonas & Sons Uniqueville Date Details 2019 Dr Cr $ Balance $ $ Jun 1 Balance b/d 450 450 (dr) Jun 3 Invoice 2598 390 840 (dr) Jun 16 Note 258/Y 100 Jun 25 Cheque 7008 441 Discount 740 (dr) 9 290 (dr) Amount due $290 Terms: Cash discount of 2% if paid within 30 days Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 7 a Statement of account b $2950 − $1000 = $1950 c d Date Name of source document May 15 Invoice May 21 Note Rate of discount = 50 𝑥 100 = 5% (950 + 50) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 5 Books of prime entry Activity 1 1 Any two of the following: a They prevent the accounts in the nominal (general) ledger from being overcrowded. b They are a quicker way to record transactions. c There are fewer errors as accuracy is maintained. Activity 2 1 2 3 Cash discount = $180 Amount of cheque = $4 320 Discount = 500 − 490 = $10 Rate of discount = 10 ÷ 500 x 100 = 2% $5 Activity 3 They are debit balances. Activity 4 1 a The opening balance on the bank account is recorded on the credit side of the cash book. This is because it represents an overdraft and is therefore a liability to the business. b $ Cash available for banking = 3 500 + 600 – 300 – 600 – 300 = 2 900 Less cash retained 1 00 Cash banked 2 800 This is a contra entry because it is recorded on both sides of the cash book. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 2 Two-column cash book Date Details Cash $ Bank $ Date 2018 Cash $ Bank $ 2018 May 1 Balance b/d May 6 Sales May 14 Sales May 18 Monique May 21 Cash May 31 Cash Jun 1 Details Balance b/d 3 500 May 1 Balance b/d 360 500 May 14 L. Rado 170 May 18 Wages 600 600 May 21 Monique C 600 May 21 Bank C 2 800 May 28 Rent May 31 Bank ____ ____ May 31 4 100 4 500 100 3 370 300 600 C 600 300 C Balance c/d 2 800 100 3 370 4 100 4 500 Cash $ Bank $ Activity 5 Two-column cash book Date Details Cash $ Bank $ Date 2018 2018 Aug 1 Balance b/d Aug 7 Sales Aug 12 Aug 21 Sep 1 Details M. N. Supplies 700 560 Aug 7 Insurance 200 Henriques 500 Aug 17 Wages Ace & Co 340 Aug 27 M. expenses 45 Aug 31 Bank charges 50 Balance b/d 6 000 3 000 Aug 7 ____ _____ Aug 31 6 000 4 400 5 500 3 405 Balance c/d Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 500 5 500 3 405 6 000 4 400 2 Answers to Student’s Book Activity 6 Three-column cash book Date Details 2018 Dis Cash Bank Date $ $ $ 2018 2 500 Jul 1 Details Balance b/d Jul 3 Jan Jul 5 Sales Jul 10 Capital 6 500 Jul 16 Rent Jul 16 Sales 250 Jul 20 Wages Jul 22 Nena 370 M. repairs 400 Jul 30 Aug 1 Balances b/d __ ____ _____ Jul 31 40 2 900 7 610 2 170 7 610 Bank $ Harry 40 760 Mason 25 475 600 300 130 Drawings Balance c/d 500 __ 2 170 3 905 65 2 900 7 610 Nominal (general) ledger Discounts received account Date Details $ 2018 Date Details $ Total for the month 65 2018 Jul 31 Discounts allowed account 2 Date Details $ Jul 31 Total for the month 40 Date Details $ Tatyana could chase up her trade receivables and deposit the money in the bank/take out a loan/introduce more capital/reduce her drawings (any way in which Tatyana could deposit more money in the bank). Activity 7 1 a A float is a fixed amount of money with which the petty cashier starts an accounting period. b A petty cash book is used to record low-value cash transactions such as petrol charges, cleaning expenses, etc. 2 i $ 1 670 Balance b/d 490 Jul 10 30 Cash $ Jul 1 10 Dis To record small amounts received or paid out, saving frequent trips to the main cash book. Entries are made in the main cash book only at the beginning of the accounting Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book period, when the petty cashier is given a fixed sum of money called an imprest or float. ii A junior member of the staff, called the petty cashier, maintains it. Any errors made due to the petty cashier’s inexperience are not serious ones, since the amounts involved are ‘petty’ or small. The added advantage is that the junior petty cashier gets experience in handling a book of accounts and cash. iii Since it is maintained by a junior member, the chief cashier, who handles the cash book and is better paid, is saved from routine work. This gives them time to handle the more important tasks. 3 $135 Activity 8 Receipts Date Details V No $ 2019 150 Jan 1 Total Postage & Cleaning stationery expenses $ $ $ $ Balance b/d Jan 2 Petrol 2 30 Jan 3 Stamps 3 7 7 Jan 4 Postage 4 9 9 Jan 8 Cleaning 5 6 Jan 10 Vehicle repairs 6 30 Jan 15 Cleaners 7 55 5 Jan 25 Phone call 8 Postage 9 Jan 29 Travelling expenses 30 6 30 55 3 3 __ __ ___ 140 19 61 60 155 155 15 15 Feb Balance b/d 135 Feb 1 Cash Activity 9 1 2 3 The total of the sales journal is posted to the credit side of the sales account in the nominal (general) ledger. As soon as a credit sale takes place, the customer’s account in the sales ledger is debited. The amount entered in the sales journal does not include any trade discount. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book Activity 10 1 2 a The total of the sales returns journal is posted to the debit side of the sales returns account in the nominal (general) ledger. b As soon as goods are returned by the customer/debtor/trade receivable, the customer’s/debtor’s/trade receivable’s account in the sales ledger is credited. Any two: a The goods were the wrong quality. b The goods were the wrong colour. c The goods were damaged. d Surplus goods were sent by the supplier. e The goods were the wrong size. Activity 11 Sales journal Date Names Amount 2018 May 1 May 15 $ Mandab 230 Yussouf 670 Mandab 500 Yussouf 290 1 690 Sales returns journal Date Names 2018 Amount $ May 10 Yussouf 35 May 25 Mandab 56 91 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book Sales ledger Mandab’s account Date Details $ Date 2018 Details $ Sales returns 56 2018 May 1 Sales 230 May 25 May 15 Sales 500 Yussouf’s account Date Details $ Date 2018 Details $ Sales returns 35 2018 May 1 Sales 670 May 10 May 15 Sales 290 Nominal (general) ledger Sales account Date Details $ Date 2018 Details $ 2018 May 31 Total for the month 1 690 Sales returns account Date Details $ Date 2018 May 31 Details $ 2018 Total for the month 91 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book Activity 12 1 The total of the purchases journal is posted to the debit side of the purchases account in the nominal (general) ledger. As soon as a credit purchase takes place, the supplier’s/creditor’s/trade payable’s account in the purchases ledger is credited. The amount entered in the purchases journal does not include trade discount. 2 3 Activity 13 a b The total of the purchases returns journal is posted to the credit side of the purchases returns account in the nominal (general) ledger. As soon as goods are returned to the supplier, the supplier’s account in the purchases ledger is debited. Activity 14 Purchases journal Date 2019 Names Amount $ Jan 1 Kombe 350 Jan 1 Sellaway 670 Jan 4 Mallasa 270 Jan 4 Kellagary 500 Jan 11 Phillipe 680 Jan 11 Kombe 300 Jan 30 Phillipe 370 3 140 Purchases returns journal Date 2019 Name Amount $ Jan 8 Kombe 60 Jan 8 Mallasa 70 Jan 27 Phillipe 70 200 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book Purchases ledger Sellaway’s account 2019 Details $ 2019 Jan 1 Details $ Purchases 670 Mallasa’s account 2019 Details $ 2019 Details $ Jan 8 Purchases returns 70 Jan 4 Purchases 270 Details $ Purchases 500 Kellagary’s account 2019 Details $ 2019 Jan 4 Phillipe’s account 2019 Details $ 2019 Details $ Jan 27 Purchases returns 70 Jan 11 Purchases 680 Jan 30 Purchases 370 Kombe’s account 2019 Details $ 2019 Details $ Jan 8 Purchases returns 60 Jan 1 Purchases 350 Jan 11 Purchases 300 Nominal (general) ledger Purchases account 2019 Details Jan 31 Total for the month $ 2019 Details $ 3 140 Purchases returns account 2019 Details $ 2019 Details $ Jan 31 Total for the month 200 Activity 15 1 A narrative is a brief explanation of a transaction. It sometimes contains a reference to the source document that proves the transaction has taken place. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 2 The journal is typically used to record: (any three) • • • • • opening entries writing off irrecoverable debts purchases and disposals of non-current assets on credit correcting errors one-off irregular transactions. Activity 16 Manu General journal Date Details Debit 2018 Jan 1 Credit $ Premises 23 000 Machinery 5 670 Furniture 3 450 Trade receivables – Joss 234 Cash and cash equivalents 1 200 $ Trade payables Mellie 890 Bossy 120 Capital 32 544 (Assets and liabilities to open the books of accounts) Activity 17 1 General journal Date Details Debit 2018 Jun 30 Credit $ Irrecoverable debts $ 670 Samantha 670 (Debt due from Samantha written off as irrecoverable) 2 3 4 A debt that will never be paid is called an irrecoverable debt. It is a business expense. Samantha’s account is credited in order to close it. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book Activity 18 General journal Details Debit Credit $ Office equipment $ 260 M & O Offices 260 (Purchase of office equipment on credit. See invoice number 7/K3) Activity 19 a General journal Date Details Debit 2019 Dec 31 Credit $ Income statement $ 3 000 Electricity 3 000 (Transfer of electricity for the year to the income statement) b General journal Date Details Debit 2019 Dec 31 Credit $ Income statement $ 500 Provision for depreciation – computers 500 (Transfer of annual depreciation charge for computers to the income statement) c General journal Date Details 2019 Dec 31 Debit Credit $ Inventory Trading account $ 60 000 60 000 (Transfer of closing inventory to the trading account section of the income statement) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book d General journal Date Details Debit 2019 Dec 31 Credit $ Income statement $ 500 Provision for doubtful debts 500 (Transfer of provision for doubtful debts section to the income statement) e General journal Date Details Debit 2019 Dec 31 Credit $ Trading account $ 70 000 Inventory 70 000 (Transfer of opening inventory to the trading account section of the income statement) f General journal Date Details 2019 Dec 31 Debit Credit $ Jolly Printers $ 500 Printer account 500 (Return of faulty printer bought on credit from Jolly Printers) Exam-style questions Multiple choice 1 B [1] 2 A [1] 3 B [1] 4 D [1] 5 D [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Cambridge IGCSETM and O Level Accounting 6 a Jonah’s three-column cash book Date Details 2018 Jul 1 Bal b/d Jul 3 H. Syde Jul 7 Bank Jul 14 B. Sharp Jul 20 Jul 21 Aug 1 Discount Cash Bank Date $ $ $ 2018 600 10 [1] 2 500 [1] Jul 7 490 [1] Jul 10 200 [1] Discount Cash Bank $ $ $ Cash J. Teime 200 [1] 15 [1] Wages 385 [1] 400 [1] 780 [1] Jul 17 P. Mulder Sales 350 [1] Jul 24 Wages M. Yaveli 630 [1] Electricity 600 [1] Jul 29 M. Yaveli 630 [1] Jul 31 Bal c/d Bal b/d 20 [1] Jul 12 Details __ ___ ____ 30 [1] 800 4 750 150 [1] 1 960 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 25 [1] 975 [1] 250 [1] __ 150 1 960 40 [1] 800 4 750 12 Cambridge IGCSETM and O Level Accounting b Nominal (general) ledger Discounts allowed account Date Details $ Date Total for the month 30 Details $ 2018 Jul 31 Discounts received account Date Details $ Date Details $ Total for the month 40 2018 Jul 31 7 a $150 − $45 [1] = $105 [1] b Reasons why there is less cash than there should have been, any one of: Robbery, fraud, overlooked expense or anything suitable. [1] 8 Basu General journal Date Details 2018 Jan 1 Debit Credit $ $ Premises 15 000 [1] Machinery 1 830 [1] Furniture 7 890 [1] 564 [1] 5 400 [1] Trade receivables Cash and cash equivalents Trade payables Kixe 340 [1] Ben 145 [1] Capital *30 199 [1] Assets and liabilities to open the books of accounts *Working: Capital = Assets − liabilities = (15 000 + 1 830 + 7 890 + 564 + 5 400) − (340 + 145) = 30 684 − 485 = $30 199 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 13 Cambridge IGCSETM and O Level Accounting 9 a The petty cashier starts each period with the same amount of money (the imprest). [1] At the end of the period the chief cashier will make up the cash remaining so that it is equal to the imprest amount. [1] b–d Receipts Date Details $ 2007 48 [1] Sep 1 Bal b/d 252 [1] Sep 1 Cash/bank Sep 6 Postage stamps Sep 11 Paul Ahipara Total Postage & stationery Travel expenses $ $ 15 15 [1] Cleaning $ $ Ledger accounts $ 95 [1] 95 Sep 19 Cleaner Sep 23 Travel expenses 24 24 [1] 9 6 [1] ___ Sep 25 Stationery Sep 29 Refund on stationery Sep 30 Bal c/d 306 c. 91 [1] OF 9 [1] 72 72 [1] ___ __ _ __ __ 215 [1] 87 9 24 95 91 [1] 306 Oct 1 Bal b/d d. 209 [1] Oct 1 Cash/bank + [1] for dates and + [1] for correct column headings Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 14 Cambridge IGCSETM and O Level Accounting e At the end of each period the totals of the analysis columns for expenses [1] are debited to the appropriate expense account. [1] The individual items in the ledger accounts column [1] are debited to the appropriate trade payables’ accounts. [1] 10 a • reduce the number of entries in the main book • removes the small cash payments from the main cash book • control/limit/keep track of petty cash expenditure • the cash remaining and the vouchers received should equal the imprest • can help to reduce fraud • the junior petty cashier gets experience in handling a book of accounts and cash • the chief cashier is saved from routine work, enabling him or her to attend to more important tasks • or other suitable advantage. Any one advantage. [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 15 Cambridge IGCSETM and O Level Accounting b Total received Date Details Total paid Postage Stationery General expenses Ledger accounts $ $ $ $ $ 13 [1] $ 2015 100 Mar 1 Balance b/d Mar 6 Postage 13 Mar 11 Tea and coffee 5 Mar 14 Stationery 27 Mar 18 T. Masuka 15 Mar 21 Refund for stationery Mar 26 Window cleaner 12 Mar 29 P. Zhonga __ __ __ __ 16 [1] 88 13 27 17 31 10 [1] ___ Mar 31 Balance c/d 110 22 (1 OF) 5 [1] 27 [1] 15 [1] 12 [1] 22 [1] 110 Apr 1 Balance b/d + [1] for dates + [1] for correct column heading for analysis columns Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 16 Cambridge IGCSETM and O Level Accounting c d i $78 (1 OF) ii Bank (or cash) [1] Stationery [1] 11 a Account Ledger Insurance nominal (general) [1] Sales nominal (genera)l [1] Purchases nominal (general) [1] Lottie, a credit supplier purchases [1] Matthew, a credit customer sales [1] Capital nominal (general) [1] b • cash book • petty cash book • general journal. Any one [1] c • to reduce number of entries/detail [1] in sales account [1] • allows work to be shared [1] between several people [1] • provides list [1] of credit sales. [1] Any one reason. d Elinor’s account Date $ Date $ Apr 1 Balance b/d 120 [1] Apr 17 Returns 46 [1] Apr 16 Sales 320 [1] Apr 30 Balance c/d 394 [1] 440 May 1 Balance b/d 440 394 [1] OF Sales account $ Apr 30 Credit sales for month [1] 920 Sales returns account $ Apr 30 Sales returns for month 151 [1] + [1] dates Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 17 Answers to Student’s Book e 260 × 0.95 [1] = $247 [1] or 260 − 13 [1] = $247 [1] or 260 − 5% [1] = $247 [1] f 12 a Sales ledger control account. [1] Any two of: • reduce the number of entries in the main book • removes the small cash payments from the main cash book • control/limit/keep track of petty cash expenditure • the cash remaining and the vouchers received should equal the imprest • can help to reduce fraud • the junior petty cashier gets experience in handling a book of accounts and cash • the chief cashier is saved from routine work, enabling him or her to attend to more important tasks • or other suitable advantage. Any two reasons [1] each b i Carol Petty cash book Total received Date Details $ 2016 Total paid Postage & stationery $ 23 Apr 1 Balance b/d 77 Bank [1] General expenses $ Ledger accounts $ $ Apr 4 Tea and coffee [1] 11 Apr 16 Stationery [1] 25 Apr 19 Taxi fare [1] 8 Apr 23 T. Nhete [1] 38 __ __ 38 82 25 19 38 ___ Apr 30 Balance c/d 100 2016 18 May 1 11 25 8 18 100 Balance b/d [1] OF [1] Dates [1] OF Totalling analysis columns [1] OF Totalling total columns Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 18 Answers to Student’s Book ii Carol Cash book Date Details Discount allowed 2016 $ Apr 1 Balance b/d Apr 20 B. Mamba [1] Apr 28 Sales [1] Apr 29 Cash [1] OF Cash Bank Date $ $ 2016 210 Apr 1 23 897 2 970 Details Balance c/d 3 180 3 977 100 2 022 [1] [1] OF 9 441 3 080 _ 100 2 022 9 3 180 3 977 2016 May Balance b/d + [1] OF totalling discount columns + [1] dates 13 a Date Document Book of prime entry used by Diana Oct 8 Invoice $560 Purchases journal [1] Sales journal [1] Oct 12 Debit note $115 No entry [1] No entry [1] Oct 16 Credit note $100 Purchases returns journal Sales returns journal [1] [1] Book of prime entry used by Udomo Oct 24 Cheque $720 Cash book [1] Cash book [1] Oct 31 Statement of account $460 No entry [1] No entry [1] b i Diane [1] To request a reduction in the invoice [1] ii $ 77 Bank [1] 23 $ Petty cash [1] 3 080 Apr 29 ____ Apr 30 $ Bank 1 437 K. Mzolo [1] ____ Cash Balance b/d Apr 9 __ Discount received Udomo [1] To notify of a reduction of the invoice [1] iii Udomo [1] To notify the customer of the amount owing at the month end [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 19 Answers to Student’s Book c Udomo Diane account Date Details $ Date 2016 Details $ 2016 Oct 1 Balance c/d 8 Sales [1] 720 Oct 16 Returns [1] 100 560 24 Bank [1] 720 ____ 31 Balance c/d 460 1 280 1 280 2016 Nov 1 Balance b/d [1] 460 Chapter review questions 1 a Petty cash book b Imprest or float c Cash book and petty cash book d Any of the remaining books of prime entry: sales journal, purchases journal, general journal, etc. e Nominal (general) ledger f Discount allowed account g The general journal h Jonah’s book of prime entry: sales returns journal; Grey’s book of prime entry: purchases returns journal. i Holly’s sales journal; Jenna’s purchases journal 2 Statement True/False The cash columns and the bank columns in the cash book represent two separate accounts. True The books of prime entry are meant to prevent the accounts in the nominal (general) ledger from being overcrowded with too many details. True The petty cash book is the only book of prime entry that uses the double entry system. False Cash sales are entered in the sales journal. False The general journal is used to record purchases of non-current assets on credit. True Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 20 Answers to Student’s Book 3 4 $17 100 a Discount = 2% x 10 000 = $200 Amount she paid = 10 000 − 200 = $9 800 b Type of discount: Discount received/cash discount Discount = 2% x 10 000 = $200 Amount she paid = 10 000 − 200 = $9800 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 21 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 6 The trial balance Activity 1 1 2 3 4 A trial balance is a statement that lists account names and their balances, recorded in debit and credit columns, on a certain day. The uses of a trial balance (any two): • to verify accounting records • to help locate errors • to facilitate the preparation of financial statements. A limitation of a trial balance: it does not reveal all errors, for example error of commission. 2018 Account to be debited Account to be credited 1 May The owner invested $6900 by cheque in the business Bank Capital 3 May The business bought goods from L. Larry $670 on credit Purchases L. Larry 5 May The business sold goods to Kelly on credit $780 Kelly Sales 7 May The business returned goods to L. Larry $45 L. Larry Purchases returns 10 May The business sold goods and deposited the money in the bank $890 Bank Sales 17 May The business bought stationery $76 paying by cheque Stationery Bank 20 May Kelly returned goods worth $89 Sales returns Kelly 24 May The business paid L. Larry by cheque in full settlement L. Larry Bank 27 May Kelly paid the business by cheque in full settlement Bank Kelly 29 May The business paid wages $67 by cheque Wages Bank 31 May The owner withdrew $40 from the bank for his personal use Drawings Bank Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 2 Account name Debit/credit Purchases Debit Sales Credit Returns outwards Credit Cash Debit Drawings Debit Capital Credit Trade receivables Debit Trade payables Credit Motor vehicle Debit Rent Debit Returns inwards Debit Rent receivable Credit Bank overdraft Credit Stationery Debit Inventory Debit Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 3 a b $56 550 − $8 050 = $48 500 Hiloma’s trial balance as at 31 March 2018 Debit Credit $ Opening inventory 4 000 Non-current assets at cost 45 000 Cash at bank 700 Sales Purchases 8 000 4 700 Returns inwards 450 Returns outwards c $ 50 Rent 340 General expenses 860 Drawings 500 Capital _____ 48 500 56 550 56 550 Capital account has a credit balance. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book Activity 4 Transaction Type of error 1. The purchase of a motor vehicle $5 600 had been entered in error in the motor expenses account Error of principle 2. The purchase of a motor vehicle on credit from Simpson for $3 500 had been completely omitted from the books of the business Error of omission 3. Inventory taken for own use $120 has been debited to purchases account and credited to drawings Error of complete reversal 4. Returns inwards $178 from Hadi had been entered in error in Ali’s account Error of commission 5. The sales account was under-cast by $689 and the office expenses account was under-cast by $689 Compensating error 6. The payment for repairs to the motor vehicle $45 had been entered in error in the motor vehicle account Error of principle 7. A sale of $567 to Ella had been entered in the books, both debit and credit, as $756 Error of original entry 8. Cash paid to M. Rainman $54 entered on the debit side of the cash book and the credit side of M. Rainman’s account Error of complete reversal Exam-style questions 1 A [1] 2 B [1] 3 D [1] 4 A [1] 5 D [1] 6 Errors of principle, errors of omission, errors of commission, compensating errors, errors of original entry, errors of complete reversal of entries. Any two for [1] mark each. 7 Error of complete reversal [1] 8 Debit Machinery [1] Purchases [1] Credit Bank overdraft [1] Capital [1] Drawings [1] Trade receivables [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book 9 a Error of principle [1] b This error has no effect on the balancing of the trial balance [1] although the balance on the machinery account is too high and the balance on the machinery repairs account is too low [1] 10 Sanath Jaffer Trial balance at 31 January 2013 Debit Credit $ $ Capital 53 000 Drawings 6 100 Revenue 66 000 Purchases 43 350 Purchases returns Inventory 1 150 3 700 [1] Bank overdraft Trade receivables 3 050 [1] 5 320 [1] Trade payables 3 450 [1] General expenses 17 850 Non-current assets 50 400 Suspense account [1] ______ 70 [1] OF [1] CF 126 720 126 720 11 a Debit Equipment Credit Bank overdraft [1] Sales [1] Discount allowed [1] [1] Capital [1] Drawings b To check the arithmetical accuracy of the double entry To assist in the preparation of financial statements Either for [1] mark c i Principle [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book ii The totals of the trial balance will still agree [1] although the balance on the motor vehicles account is too high and the balance on the vehicle repairs account is too low. [1] 12 a Books of Christos Michelle account Date $ 2011 Date $ 2011 Jul 1 Balance b/d 200 [1] Jul 16 Sales returns Jul 7 Sales 150 [1] Jul 31 Bank Jul 31 Discount allowed 5 Balance c/d 142 ___ Jul 31 350 Aug 1 b Balance b/d 8 [1] 195 [1] [1] 350 142 [1] Sales returns journal [1] c Christos Trial balance at 31 July 2011 $ 5 900 [1] OF Capital Drawings 8 000 [1] Office furniture 5 000 3 200 [1] Provision for depreciation on office furniture Inventory $ 4 150 Bank overdraft 250 Trade payables 2 950 Sundry expenses 10 600 Purchases 32 400 Provision for doubtful debts 350 [1] 53 750 Revenue (sales) Trade receivables d 6 250 _____ 66 400 [1] 66 400 [1] Trade receivables [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book e Any two of: Trial balance Statement of financial position Proves arithmetic accuracy of double entry equation Proves agreement of the statement of financial position Includes all account balances Includes only assets and liabilities Recorded as debit and credit balances and includes revenue items Recorded as assets and liabilities after income accounts prepared Recorded in any order Recorded in defined categories, for example non-current assets Contains only exact balances Contains net figures, for example book value of non-current assets or trade receivables debtors after provision Any two differences for [1] + [1] each Chapter review questions 1 2 3 4 5 Opening inventory is inventory that a business has at the start of the year. It represents an asset and hence will have a debit balance. It is last year’s closing inventory. Any two of the following: • to verify accounting records • to help locate errors • to facilitate the preparation of financial statements. Any inventory that has remained unsold at the end of the accounting period is called closing inventory. As inventory represents goods purchased for resale, remaining unsold, the value of closing inventory is not included in the trial balance. Total purchases are already included and hence, if closing inventory is included, the effect is doubled and the trial balance will not balance. Any three of the following: • 6 Mathematical errors: These would include errors of addition and subtraction, for example, an error in addition within an account or within the trial balance. • Using one figure for a debit entry of a transaction and another figure for the credit entry. • Entering only one aspect of a transaction, for example, making a debit entry but forgetting to make a corresponding credit entry. • Entering a transaction twice on the same side of an account, for example, entering two debits instead of one debit and one credit. A trial balance is a statement of account names and their balances in debit and credit columns on a particular day. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 7 Correction of errors Activity 1 1 The errors that affect the trial balance are (any three): • 2 Mathematical errors: These would include errors of addition and subtraction, for example, an error in addition within an account or within the trial balance. • Using one figure for a debit entry of a transaction and another figure for the credit entry. • Entering only one aspect of a transaction, for example, making a debit entry but forgetting to make a corresponding credit entry. • Entering a transaction twice on the same side of an account, for example, entering two debits instead of one debit and one credit. The errors that do not affect the statement of financial position are: • error of omission • error of commission • error of principle • error of complete reversal of entries • compensating errors • error of original entry. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 2 General journal Details 1. Motor vehicle account Debit Credit $ $ 3 500 Simpson’s account 3 500 (Error of omission, now corrected) $ 2. Machinery repairs account $ 45 Machinery account 45 (Error of principle, now corrected) $ 3. Kella’s account $ 180 Purchases account 180 (Error of original entry, now corrected) $ 4. Drawings account $ 240 Purchases account 240 (Error of complete reversal of entries, now corrected) $ 5. Drawings account $ 78 Insurance account 78 (Error of principle, now corrected) $ 6. Jenny’s account $ 230 Benny’s account 230 (Error of commission, now corrected) $ 7. Bank account $ 380 Cash account 380 (Error of commission, now corrected) $ 8. Purchases account $ 270 Sandra’s account 270 (Error of original entry, now corrected) $ Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 $ 2 Answers to Student’s Book 9. Cash account 3 500 3 500 Sales account (Error of omission, now corrected) $ 10. M. Johnson’s account $ 6 700 J. Johnson’s account 6 700 (Error of commission, now corrected) $ 11. J. Hart’s account $ 100 K. Hart’s account 100 (Error of commission, now corrected) $ 12. Sales account $ 90 Yang’s account 90 (Error of original entry, now corrected) $ 13. Sales account $ 560 Disposal of printer account 560 (Error of principle, now corrected) $ 14. Machinery account $ 34 000 Kim’s account 34 000 (Error of omission, now corrected) $ 15. Cash account $ 648 Jim’s account 648 (Error of complete reversal, now corrected) $ 16. Office expenses account $ 750 Sales account 750 (Compensating error, now corrected) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book Activity 3 1 A suspense account is opened when the totals in the debit and credit columns of trial balance are not equal. If the debits are more than the credits in a trial balance, the difference is entered on the credit side of the suspense account. 2 3 Transaction No effect Debit side will exceed the credit side by amount shown Credit side will exceed the debit side by the amount shown $ A. 180 B. 70 $ 90 C. D. E. F. Activity 4 a The closing inventory will be overvalued by $18 000. b The trial balance totals will not be affected. c The current assets at 31 December 2018 will be overvalued by $18 000. Exam-style questions Multiple choice 1 A [1] 2 D [1] 3 A [1] 4 A [1] 5 B [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book 6 a General journal Details Debit Credit $ 1. Stationery [1] Suspense account 2. [1] Sales 3. 4. 50 1 000 [1] Abdulla Ahmed [1] Abdul Ahmed [1] Suspense account [1] Discounts allowed Discounts received 5. 50 [1] Suspense account Joe Jones 1 000 240 240 28 [1] [1] 14 14 [1] Suspense account $ 190 [1] 190 b Nominal (general) ledger Suspense account Date Details Sales [1] $ Date 1 000 Details $ Difference in trial balance totals [1] 788 Discounts allowed [1] 14 Stationery [1] 50 Discounts received [1] 14 Joe Jones [1] 190 1 028 1 028 c Error i – Decrease by $50 Error ii – Increase of $1 000 [1] Error iii – No effect [1] Error iv – Increase of $28 [1] Error v – No effect [1] 7 a One of: [1] • to assist in the preparation of the financial statements • to check arithmetical accuracy of double entry • to locate errors • any one for [1] mark. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book b Ismail Khan Trial balance at 30 April 2007 Debit Credit $ $ 125 000 [1] Sales Inventory 14 500 [1] Purchases 76 000 [1] 2 300 [1] Bank (overdraft) Machinery 9 000 [1] Trade receivables 1 700 [1] 2 800 [1] Trade payables 37 500 [1] Expenses 15 500 [1] Capital 8 000 [1] Drawings Suspense ______ 146 700 1 100 [1] 146 700 c General journal Details 1. Suspense [1] Debit Credit $ $ 2 000 Sales [1] 2 000 To correct cash sales omitted (error of single entry) [1] 2. Drawings [1] 400 Suspense [1] 400 To correct error in drawings account (error of double entry) [1] 3. No debit entry needed [1] Suspense [1] 500 To include cash balance in trial balance (error of omitted balance) [1] d Nil [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book Error 1 – Decreases profit by $700 Error 2 – Increases profit by $380 8 Error 3 – Bank decreases by $250 and profit decreases by $250 Error 4 – Trade receivables decrease by $950 Error 5 – Trade payables increase by $360 Error 6 – Bank and capital both increase by $19 000 Since profit after the correction of the errors was $30 000, then the original profit before correction of the errors was 30 000 + 700 [1] – 380 [1] + 250 [1] = $30 570 [1] Larry’s corrected statement of financial position $ Current assets: Bank (400 [1] – 250 [1] + 19 000 [1]) 19 150 Trade receivables (1 800 [1] – 950 [1]) 850 Current liabilities: Trade payables (2 300 [1] + 360 [1]) 2 660 Capital (67 000 [1] – 30 570 [1 OF] + 30 000 [1] + 19 000 [1]) 85 430 9 a To ensure that the totals of the trial balance agree [1] To allow draft financial statements to be prepared [1] b General journal Debit $ 1. Suspense account 270 Rent Drawings [1] 400 Wages Discount allowed [1] 43 Suspense account [1] 43 [1] (Correction of error, discount not transferred to ledger) 4. [1] 400 [1] (Correction of error, drawings debited to wages) 3. [1] 270 [1] (Correction of error of transposition) 2. Credit $ [1] Mona 200 [1] Suspense account 1 800 [1] Amina (Correction of error, receipt from Amina $2 000 entered as $200 in Mona’s account) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 000 [1] [1] 7 Answers to Student’s Book 4. Alternative presentation Mona 200 [1] Suspense account 200 } Suspense account 2 000 } [1] Amina 2 000 [1] (Correction of error, receipt from Amina $2 000 entered as $200 in Mona’s account) [1] c Effect on profit for the year Error Overstated Understated $ No effect $ i 270 ii 400 [2]* iii 43 [2]* iv No effect [2] * [1] mark for correct amount and [1] for correct column 10 a Error Affects balancing of trial balance Does not affect balancing of trial balance 1. [1] 2. 3. [1] 4. [1] [1] 5. b Statement of corrected profit $ Draft profit for the year 26 800 [1] Error 1 160 [1] Error 2 1 000 [1] Error 3 250 [1] Error 4 No effect [1] Error 5 (600) [1] Corrected profit for the year 27 610 [1]OF c Error of commission [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 11 a Error 1 General journal Debit Credit $ Suspense account $ 180 [1] Carlo – loan account 180 [1] Error 2 General journal Debit Credit $ Cash account $ 850 [1] Sales account 850 [1] Error 3 General journal Debit Credit $ Purchases account $ 900 [1] Suspense account 900 [1] Error 4 General journal Debit Credit $ Fixtures and fittings account $ 1 200 [1] Repairs account 1 200 [1] b Monica Suspense account $ $ [Difference on] trial balance [1] 720 [1] Purchases account [1] Carlo – loan account [1] 180 [1] ___ 900 900 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 900 [1] 9 Answers to Student’s Book c Monica Statement of corrected profit for the year ended 28 February 2011 $ 3 600 Draft profit Error 1 No effect [1] Error 2 Add: sales 850 [1] Error 3 Less: purchases (900) [1] Error 4 Add: repairs 1 200 [1] 4 750 [1] OF Corrected profit Chapter review questions 1 Any two of the following: • 2 3 4 Mathematical errors: These would include errors of addition and subtraction, for example, an error in addition within an account or within the trial balance. • Using one figure for a debit entry of a transaction and another figure for the credit entry. • Entering only one aspect of a transaction, for example, making a debit entry but forgetting to make a corresponding credit entry. • Entering a transaction twice on the same side of an account, for example, entering two debits instead of one debit and one credit. This error occurs when the account that was to be debited is credited and the account that was to be credited is debited. For example: It was discovered that the business had debited Sunita and credited the bank to record the following transaction: Sunita paid the business $230 by cheque. To correct this error, the business will now debit the bank by $460 ($230 x 2) and credit Sunita with $460. The amount in the correcting entry is doubled to cancel the wrong entry and then to post the correct entry. Single entry General journal Debit Credit $ Stationery account Suspense account $ 1 000 [1] 1 000 [1] (Entry posted to correct error where the stationery account was wrongly credited.) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book 5 General journal Debit Credit $ Suspense account Bank account 6 7 8 $ 9 [1] 9 [1] Error of commission Error of commission a Error of omission b As purchases are recorded in the trading account section of the income statement, the gross profit as well as the profit for the year will be overstated. c Yes. As profit for the year is overstated, capital (owner’s equity) in the statement of financial position will also be overstated as the profit is added to it. Trade payables will be understated as it was a credit purchase. a Profit for the year is overstated c Current assets are overstated 9 10 $12 350 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 8 Bank reconciliation Activity 1 1 The reasons are (any five) Transactions recorded by the bank, but not by the business: • bank charges and bank interest • standing orders • direct debits • dishonoured cheques • electronic direct payment (credit transfers). Transactions recorded by the business, but not by the bank: • uncredited cheques or uncredited deposits • unpresented cheques. Errors made: • by the business accountant • by the bank. a Direct debits: This represents an arrangement by a business with its bank for a creditor to transfer money from the business’ account on pre-arranged dates. Businesses usually pay their electricity and other bills this way. b Standing orders: The business can order its bank to pay a certain set amount of money regularly at a stated date to an individual or an organisation. For example, a firm might instruct its bank to pay an annual insurance premium, or a monthly instalment purchase payment. c Dishonoured cheques: Cheques that the business has received from another person or company, but have been rejected for payment when deposited in the bank. d Unpresented cheques: Issued by the business, but not presented by the drawee to the bank. Sometimes cheques received by the bank are not recorded by the bank due to a delay in the clearing of the cheque. 2 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 2 1 2 A bank reconciliation statement is required when the balance in the business’ cash book is different from the balance in the bank statement. When deposits are made by the business into its bank account, its cash book will be debited as the bank now owes this money to the business and is a debtor. The bank will, however, credit this amount as the business has now become one of the bank’s trade payables. Activity 3 Updated cash book (bank columns only) Date Details $ Date Details $ 2018 Dec 31 Balance b/d 1 780 Dec 31 Bank charges 60 Dec 31 Credit transfer 200 Dec 31 Balance c/d 1 920 1 980 1 980 Activity 4 Updated cash book (bank columns only) Date Details $ Date 2018 Jun 30 Details $ Insurance 750 Bank charges 50 Balance c/d 2 010 2018 Balance b/d 2 810 Jun 30 Jun 30 ____ Jun 30 2 810 2 810 Bank reconciliation statement as at 30 June 2018 $ $ Balance as per updated cash book 2 010 Add: Unpresented cheques: M. Beant 400 2 410 Less: Uncredited deposit Balance as per bank statement Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 460 1 950 2 Answers to Student’s Book Exam-style questions 1 2 3 4 5 6 A [1] A [1] A [1] A [1] D [1] a Any two of the following: [4] Transactions recorded by the bank, but not by the business: • Bank charges and bank interest: A bank charge is a fee the bank has charged. These include fees for maintaining the account, overdraft processing fees, fees for cashing overseas cheques, etc. [1] The bank can also charge interest on loans and overdrafts. [1] • Standing orders: The business can order its bank to pay a certain set amount of money regularly at a stated date to an individual or an organisation. [1] For example, a firm might instruct its bank to pay an annual insurance premium, or a monthly instalment purchase payment. [1] Also: Direct debits, electronic transfers and dishonoured cheques. Transactions recorded by the business, but not by the bank: • Uncredited cheque: A cheque that has been received by the business from its trade receivables, paid into the bank and debited in the cash book. [1] However, it has not yet been cleared by the bank and entered in its records. These cheques will therefore not appear in the bank statement. Such cheques are known as ‘uncredited deposits’. [1] • Unpresented cheques: Issued by the business but not presented to the bank by the drawee. [1] Sometimes cheques received by the bank are not recorded by the bank due to a delay in the clearing of the cheque. Such cheques will also be known as ‘unpresented cheques’. [1] b Ottoman – Cash book (bank columns) Date Details $ 2010 Date Details $ 60 [1] 2010 Sep 30 Balance b/d 850 [1] Sep 30 Bank charges [1] Sep 30 Rent [1] 800 [1] Sep 30 Balance c/d Sep 30 (Cash) sales [1] 300 [1] 1 950 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 890 [1 OF] ____ 1 950 3 Answers to Student’s Book c Ottoman Bank reconciliation statement as at 30 September 2010 $ 1 890 [1] OF Cash at bank as per updated cash book Add: Unpresented cheques [1] 250 [1] 2 140 Less: Uncredited deposits [1] (480) [1] Balance as per bank statement[1] 1 660 [1] 7 a Peter Dalmini – Cash book (bank columns only) Date Details $ Date Details $ 2003 Apr 30 Balance b/d [1] 515 Apr 30 Apr 30 Joseph (dishonoured cheque) [1] 315 Bank charges [1] 120 Balance c/d [1] 620 Apr 30 Cash sales [1] 390 Apr 30 Apr 30 Klerk (credit transfer) [1] 150 ____ 1 055 1 055 b Peter Dalmini Bank reconciliation statement as at 30 April 2003 [1] $ Cash at bank as per updated cash book [1] 620 [1 OF] Add: Unpresented cheques [1] 620 [1] 1 240 Less: Uncredited deposits [1] (950) [1] Balance as per bank statement [1] 290 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Cambridge IGCSETM and O Level Accounting 8 a Mai Wang’s cash book Date Details 2011 Discount allowed Cash Bank Date $ $ $ 2011 Details Discount received Cash Bank $ $ $ Jul 1 Balance b/d 250 Jul 1 Balance b/d 4 500 Jul 2 Sales [1] 42 300 Jul 15 Drawings [1] 500 Jul 9 Mark Fu [1] 147 Jul 23 Sally Tan [1] Jul 30 Cash [1] 192 Jul 29 Mulyani Ltd (dishonoured cheque) [1] Jul 31 Balance c/d 5 159 Jul 30 Bank [1] Balance c/d 3 _ ___ _____ Jul 31 3 292 5 798 2011 Aug 1 12 468 330 192 __ 100 ____ 12 [1] 292 5 798 2011 Balance b/d [1] OF 100 Aug 1 Balance b/d [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 5 159 Cambridge IGCSETM and O Level Accounting b $5 159 [1] OF Liability [1] OF c i A statement prepared by the trader [1] to explain why the balance on the blank column in the cash book differs from the balance on the bank statement. [1] ii Cheques received by the trader and recorded in the cash book, but which have not yet been recorded [1] as being received by the bank. [1] iii Cheques paid by the trader and recorded in the cash book, but which have not yet been recorded [1] as being paid by the bank. [1] 9 a Walek – Cash book (bank columns) Date Detail 2012 Debit Date $ 2012 Detail Credit $ Sep 1 Balance b/d 2 400 Sep 14 Wages 250 [1] Sep 3 Lashki 640 [1] Sep 21 Yovell 370 [1] Sep 16 Yovell 370 [1] Sep 28 Wages 280 [1] Sep 30 Sales 3 560 [1] Sep 29 Brunton 1 980 [1] ____ Sep 30 Balance c/d 4 090 6 970 Oct 1 Balance b/d 6 970 4 090 [1] OF Mark for date, detail and amount. b Sales account Date Details $ 2012 Date Details $ Sep 4 Sharon 420 [1] Sep 27 Bank 3 560 [1] Details $ 2012 Do not accept cash or sales for the month. Purchases account Date Details $ 2012 Sep 9 Date 2012 Bruton 1 980 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book Wages account Date Details $ 2012 Date Details $ Details $ Bank 640 [1] Details $ Details $ Bank 370 [1] Details $ Purchases 1 980 [1] 2012 Sep 14 Bank 250 Sep 28 Bank 280 [1] Lashki account Date Details $ 2012 Date 2012 Sep 3 Sharon account Date Details $ 2012 Sep 4 Date 2012 Sales 420 [1] Yovell account Date Details $ 2012 Sep 21 Date 2012 Bank (dis chq) 370 [1] Sep 16 Bruton account Date Details $ 2012 Sep 29 Date 2012 Bank 1 980 [1] Sep 9 [1] mark for date Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book c Walek – Bank reconciliation statement at 30 September 2012 $ Balance shown on bank statement 2 510 [1] Add: uncredited deposit – cash sales 3 560 [1] 6 070 Less: Cheques not yet presented – Bruton 1 980 [1] Balance shown in cash book 4 090 [1] OF Accept statements in reverse order. d The bank statement is a copy of the account of the business as it appears in the books of the bank. This is from the viewpoint of the bank [1] – the business depositing money is a creditor of the bank. [1] The bank account in the cash book is prepared from the viewpoint of the business [1] – the bank is a debtor of the business that has deposited the money [1]. Chapter review questions 1 a An uncredited deposit is a cheque that has been received by the business from their trade receivables, paid into the bank and debited in the cash book. However, it has not yet been cleared by the bank and entered in its records. This cheque will therefore not appear in the bank statement. b Standing order: The business can order its bank to pay a certain set amount of money regularly at a stated date to an individual or an organisation. For example, a business might instruct its bank to pay an annual insurance premium, or a monthly instalment purchase payment. c Overdraft: This is a temporary loan given by the bank to its customers. When a business withdraws more than it has deposited in its bank account, it has an overdraft. d Unpresented cheques are those issued by the business but not presented to the bank by the drawee. Sometimes cheques received by the bank are not recorded by the bank due to a delay in the clearing of the cheque. a A debit in the cash book will be shown as a credit on the bank statement. b Bank charges is one item for which the cash book may need to be adjusted when updating it from a bank statement. c The bank balance in Justin’s cash book was $3 000 (dr). Cheques worth $400 were paid into his bank account, but were not entered on his bank statement. No other amendments were made. The balance shown in Justin’s bank statement was $2 600. d The account that is brought up to date before a bank reconciliation statement is prepared is the bank account. e An uncredited deposit is one reason why the balance in Natasha’s bank statement is $20 less than the balance in her cash book. 2 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 9 Control accounts Activity 1 1 2 3 A control account is a summary account containing totals for transactions stored in the ledger to which that control account belongs. For example, a sales ledger will have a sales ledger control account. Like a trial balance, a control account is used to detect errors made in the business’ ledgers. Also, like trial balances, control accounts do not reveal all errors made. Unlike a trial balance, a control account uses totals from books of prime entry and not the balances available from accounts in the ledgers that the business maintains. Activity 2 1 2 The purchases ledger control account. Control accounts have the following uses (any two): a To help identify errors in the sales and purchases ledgers. b To act as a trial balance for the sales and purchases ledger. If the control account does not balance, only the accounts relating to that control account need to be checked for errors. This speeds up the checking process. c The person who draws up the control account is usually a senior member of the finance department, and is not the same person who maintains the corresponding ledger; therefore, fraud can be detected as the ledgers can be monitored constantly. d Control accounts are a speedy information tool used by managers. For example, the sales ledger control account is used to speedily calculate the total trade receivables on a given day. It is not necessary to total up all the closing balances in the sales ledger accounts to arrive at this figure. e Control accounts can help to speed up the process of preparing draft financial statements. f They provide a summary of the transactions involving the business’ trade payables and trade receivables for each accounting period. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 3 1 A. Sheikh Sales ledger control account Date Details $ Date 2018 Details $ 2018 Jun 1 Balance b/d 3 500 Jun 30 Return inwards 1 000 Jun 30 Sales 30 000 Jun 30 Discounts allowed 500 Jun 30 Cash (refunds) 65 Jun 30 Irrecoverable debts 50 Jun 30 Bank (dishonoured cheques) 370 Jun 30 Cash and bank 20 000 _____ Jun 30 Balance c/d 12 385 33 935 Jul 1 Balance b/d 33 935 12 385 2 3 4 a Cash and cheques paid by customers decrease the total trade receivables or the debts owed by the business’ trade receivables. Hence they are recorded on the credit side. b A dishonoured cheque originated as a cheque paid by a trade receivable to reduce the debt to the business. When the cheque is then dishonoured the debt is reinstated (put back). Hence, dishonoured cheques are recorded on the debit side of the sales ledger control account. $12 385 An irrecoverable debt is a debt that will never be paid. Hence, it needs to be taken off the books, thus reducing the total debts owed to the business by its trade receivables. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 4 1 Demi Purchases ledger control account Date Details $ Date 2018 Details $ 2018 Jun 30 Purchases returns 1 300 Jun 1 Balance b/d 6 500 Jun 30 Bank 9 000 Jun 30 Purchases 20 900 Jun 30 Discounts received 500 Jun 30 Interest charged 10 Bank (refunds) 150 Balance c/d 16 760 27 560 27 560 Jul 1 2 Balance b/d 16 760 $16 760 Activity 5 1 Purchases ledger control account Date Details $ Date 2019 Details 2019 Jul 1 Balance b/d 500 Jul 31 Purchases returns 500 Jul 31 Jul 31 Bank Jul 31 Discounts received Balance c/d Jul 1 15 000 Jul 31 300 Balance b/d 5 500 Purchases 25 000 Interest charged Balance c/d 2 3 4 50 1 000 15 250 31 550 31 550 Aug 1 $ Balance b/d 1 000 Aug 1 Balance b/d 15 250 $15 250 $1 000 The reasons for this occurrence are (any three): • An overpayment of a debt to a supplier. • The payment of a debt qualified for cash discount, but it was not deducted at the time of payment. • The business returned goods after making payment. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book • The business has paid in advance for inventory bought by it. Exam-style questions 1 2 3 4 5 A [1] C [1] A [1] D [1] Fatima Ayub a Any two for [1] mark each: b • to assist in the location of errors • to provide instant totals of trade receivables and trade payables • to prove the arithmetical accuracy of the sales and purchases ledgers • to enable a statement of financial position to be prepared quickly • to provide a summary of transactions relating to trade receivables and trade payables • to provide an internal check on sales and purchases ledgers – may reduce fraud. The purchases ledger control account acts as a check on the purchases ledger. [1] If there is an error in the purchases ledger it will not be revealed by a control account prepared from the individual accounts in the ledger. [1] c Fatima Ayub Purchases ledger control account Date Details $ 2012 Date Details $ 2012 Apr 1 Balance b/d 38 April 1 Balance b/d 4 260 [1] Apr 30 Purchases returns 243 [1] Apr 30 Purchases 6 680 [1] Apr 30 Bank 3 705 [1] Apr 30 Interest charged 11 [1] Apr 30 Discounts received 95 [1] Balance c/d 22 [1] Apr 30 Set off/SLCA 320 [1] Balance c/d 6 572 [1] _____ 10 973 10 973 May 1 Balance b/d + [1] dates d 22 [1] May 1 Balance b/d 6 572 [1]OF Any two for [1] mark each • • • • overpayment to supplier payment made without deducting cash discount goods returned to supplier after payment of balance due payment made in advance to supplier. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book e 6 A contra entry is one that appears on the debit of the purchases ledger control account and the credit of the sales ledger control account. [1] This entry is made when the balance on a sales ledger account is set off against the balance on a purchases ledger account of the same person/business. [1] Arden a Purchases ledger control account Date $ Date 2015 2015 Feb 28 Bank Feb 28 Purchases returns Feb 28 $ 32 500 [1] Feb 1 Balance b/d 17 160 [1] Feb 28 Purchases 28 500 [2] [1]OF 3 800 Discount received [1] 910 Balance c/d 8 450 _____ 45 660 45 660 Mar 1 Balance b/d 8 450 [1] OF b Sales ledger control account Date $ Date 2015 2015 Feb 1 Balance b/d Feb 28 Feb 28 $ Feb 28 Bank 45 800 [1] Bank Feb 28 Discount allowed 2 700 [1] (dishonoured cheque) Feb 28 Irrecoverable debt 1 800 [1] Balance c/d 12 600 Sales 14 900 200 [1] 47 800 [2] [1] OF 62 900 Mar 1 Balance b/d 62 900 12 600 [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book c Arden Income statement for the month ended 28 February 2015 $ $ Sales: Credit 47 800 Cash 10 500 [1] 58 300 Less: Inventory 1 February 9 350 Purchases (28 500 − 3 800) 24 700 [1] OF 34 050 Less: Inventory 28 February 8 650 Cost of sales 25 400 Gross profit 32 900 [1] OF Add: Discount received 910 33 810 Less: expenses: Discount allowed 2 700 Irrecoverable debts 1 800 Depreciation 800 [1] Wages 15 200 [1] General expenses (7 900 − 2 300 + 1 600) [1] 7 200 Profit for the month 6 110 d Large storage capacity Accuracy Speed of processing Security of data To prepare the trial balance To prepare financial statements To prepare exception reports. [1] x 2 points Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book 7 Amira a Book of prime entry Cheque refund to credit customer Cash book [1] Irrecoverable debts written off General journal [1] Returns by customers Sales returns journal [1] Interest charged on customer’s overdue account General journal [1] b To assist in the location of errors To provide instant total of trade payables To prove the arithmetical accuracy of the purchases ledger To enable a statement of financial position to be prepared quickly To provide a summary of transactions relating to trade payables To help reduce fraud. Any two reasons [1] each c Amira Purchases ledger control account Date Details $ Date 2016 Details $ 2016 Sep 1 Balance b/d [1] 93 Sep 1 Balance b/d [1] 4 210 Sep 30 Bank [1] 3 705 Sep 30 Purchases [1] 5 366 Sep 30 Dis. received [1] 95 Sep 30 Interest [1] 12 Sep 30 Returns [1] 197 Sep 30 Cash [1] 150 Sep 30 Contra/set off/SLCA [1] 494 Balance c/d Balance c/d 5 222 ____ 9 806 9 806 2016 Oct 1 68 2016 Balance b/d [1] 68 Oct 1 Balance b/d [1] OF 5 222 + [1] dates d May be able to take advantage of cash discount Improve the relationship with suppliers Avoid paying interest Or other suitable comment. Any one advantage [1] e The business is deprived of the use of the money earlier than necessary. Or other suitable comment. Any one disadvantage [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book Chapter review questions 1 a A set off is one that appears on the debit of the purchases ledger control account and the credit of the sales ledger control account. This entry is made when the balance on a sales ledger account is set off against the balance on a purchases ledger account of the same person/business. b A purchases ledger control account is an account used to record the totals of the books of prime entry related to credit purchases in order to check the accuracy of the purchases ledger. c A sales ledger control account is an account used to record the totals of the books of prime entry related to credit sales in order to check the accuracy of the sales ledger. d Debit balance: When the debit side exceeds the credit side of a ledger account, the difference is called a debit balance. e Credit balance: When the credit side exceeds the debit side of a ledger account, the difference is called a credit balance. 2 Source used to prepare sales ledger control account Credit sales Sales journal Returns inwards Sales returns journal Discounts allowed Total of the discounts column on debit side of cash book Set off Customer’s account in purchases ledger Cheques received from trade receivables Bank column on debit side of cash book 3 Sales ledger control account Date Details $ Date 2018 Details $ 2018 Jun 1 Balance b/d 34 500 Jun 30 Return inwards 2 400 Jun 30 Sales 23 500 Jun 30 Cash/bank 35 600 Jun 30 _____ Discounts allowed Balance c/d 58 000 Jul 1 Balance b/d 100 19 900 58 000 19 900 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 4 Source used to prepare purchases ledger control account 5 Credit purchases Purchases journal Returns outwards Purchases returns journal Interest charged by suppliers General journal Set off Supplier’s account in sales ledger Discounts received Total of discounts column on credit side of cash book Any four: • • 6 To help identify errors in the sales and purchases ledgers. To act as a trial balance for the sales and purchases ledger. If the control account does not balance, only the accounts relating to that control account need to be checked for errors. This speeds up the checking process. • The person who prepares the control account is usually a senior member of the finance department, and is not the same person who maintains the corresponding ledger. Therefore, fraud can be detected and prevented as the ledgers can be monitored constantly. • Control accounts are a speedy information tool used by managers. For example, the sales ledger control account is used to speedily calculate the total trade receivables on a given day. It is not necessary to total up all the closing balances in the sales ledger accounts to arrive at this figure. • Control accounts can help to speed up the process of preparing draft financial statements. • They provide a summary of the transactions involving the business’ trade payables and trade receivables for each accounting period. The purchases ledger control account acts as a check on the purchases ledger. If there is an error in the purchases ledger it will not be revealed by a control account prepared from the individual accounts in the ledger. Hence, the books of prime entry are used as sources of information for the control account, and not the purchases ledger. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 10 Capital and revenue expenditure and receipts Activity 1 1 Revenue expenditure Capital expenditure Buying the motor vehicle Paying on-road costs such as registration Petrol Repairs to motor vehicle one year later Installation of GPS system to keep track of motor vehicle movement ( Painting the company logo on the motor vehicle Two years later – repainting the logo on the motor vehicle to touch it up Three years later – replacing the tyres Four years later – redoing the interior of the vehicle to convert it into a goods carrier Activity 2 1 2 Amount received from sale of motor vehicle. This is because it is a one-off and not part of the core operating activities of the business. Sales. This is because it is income received as part of the core operating activities of the business. Activity 3 1 2 Capital expenditure Revenue expenditure Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 3 The result of this error: In the income statement In the statement of financial position Expenses will be overstated by $3 500 as the gym equipment repairs account was debited The gym equipment account will be undervalued by $3 500 as the purchase was not added The profit will be understated by $3 500 The total assets will be understated by $3 500 Activity 4 1 2 3 4 5 The sale of the motor vehicle should not be included in sales because it is not the result of the normal trading activities of the business. A capital receipt, as the sale is a one-off and not a result of the core operating activities of the business. Yes, as sales is part of the trading account where gross profit is calculated. Non-current assets. Owner’s capital, as profit for the year is added to it and the profit was affected. Exam-style questions 1 2 3 4 5 6 B [1] D [1] D [1] A [1] B [1] Capital expenditure New display furniture ✓ [1] New cash till ✓ [1] Installing new display furniture ✓ [1] Purchase of inventory Revenue expenditure ✓ [1] 7 8 a Total capital expenditure = 9 500 [1] + 200 [1] = $9 700 b Total revenue expenditure = 50 [1] + 200 [1] = $250 a i Capital receipts Amounts received which do not form part of the day-to-day trading activities. [1] ii Capital expenditure Money spend on acquiring improving and installing non-current assets. [1] iii Revenue receipts Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Amounts received in the day-to-day trading activities from revenue and other items of income. [1] iv Revenue expenditure Money spent on running a business on a day-to-day basis. [1] b Non-current assets at 31 March 2014 Profit for the year ended 31 March Overstated Overstated Understated [1] Understated [1] 9 Capital receipt Proceeds of sale of vehicle Revenue receipt Capital expenditure Revenue expenditure [1] Purchase of goods for resale ✓ [1] Discount allowed ✓ [1] Discount received Legal fees on purchase of property ✓ [1] ✓ [1] 10 Capital expenditure relates to the purchase of an asset which will last for more than 12 months. Revenue expenditure relates to the day-to-day running costs of the business or the purchase of a current asset. A capital receipt arises when a non-current asset is sold. If an item of capital expenditure is wrongly recorded as revenue expenditure profit will be understated. If an item of revenue expenditure is wrong recorded as capital expenditure profit will be overstated. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 11 Robbie McDonald Income statement (trading and profit and loss account) for the year ended 30 September 2010 $ $ $ Revenue 216 000 [1] Less: Cost of sales Opening inventory Purchases Less: Goods for own use 19 500 [1] 176 000 [1] 1 900 [1] 174 100 193 600 Less: Closing inventory 20 800 [2] C/F [1] O/F Cost of sales 172 800 [1] O/F Gross profit [1] 43 200 [1] Irrecoverable debts recovered 160 [1] Decrease in provision for doubtful debts (372 [1] – 352 [1]) 20 43 380 Less: Wages 28 200 [1] Property tax and insurance (8900 [1] − 600 [1]) 8 300 Administration expenses 4 410 [1] Bank interest 1 150 [1] Depreciation Motor vehicles (20% x 4 800) 960 [1] Equipment (3 000 − 2 340) 660 [1] Loss for the year Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 44 080 700 [1] O/F 4 Answers to Student’s Book Chapter review questions 1 Item a b c d Wages paid to factory workers Purchase of office furniture Paying the factory power bill Payment of carriage to transport saleable goods to the customer Payment of salary to construction business’ project manager for work on a customer’s factory extension Payment of salary to construction business’ project manager for work on business’ own factory extension Petrol charges for company vehicle Purchase of a used packaging machine for the factory e f g h Capital expenditure Revenue expenditure 2 3 a Capital expenditure is money spent to purchase or improve a productive asset with the intention of increasing its efficiency or capacity to generate income for more than one accounting period. b Revenue expenditure is expenditure incurred in the day-to-day running of the business. c Capital receipts: monies received from the non-operating activities of the business are called capital receipts. d Revenue receipts are recurring in nature. They are income generated from the main operating activities of a business. e Error of principle: these errors are committed when a posting is made to a wrong account that is of a different type, for example repairs to motor vehicle debited to the motor vehicles account. d Non-current assets are understated (2) and profit for the year is understated (4). Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 11 Accounting for depreciation and disposal of non-current assets Activity 1 1 2 Capital expenditure. This is because it is one-off item and the asset will last for more than one year. Revenue expenditure. This is because it is recurring and not one-off. It is an expense incurred as part of the core operating activities of the business. Activity 2 1 Student’s own answer relating to: a obsolescence; b passage of time; c wear and tear; d decrease in resources 2 a Obsolescence: An asset can depreciate when a newer and better model becomes available rendering the existing asset obsolete. Sometimes an asset is no longer adequate to meet the needs of the business. For example, a computer system may, in time, not be able to cope with the volume of graphics the business works with and therefore be obsolete. b Amortisation of a lease: This refers to the practice of reducing the value of assets, such as a lease, to reflect their reduced worth due to the time factor. A lease entitles the owner to hold the asset for a fixed period of time, after which the asset no longer belongs to them and has zero value. Activity 3 1 3000 The annual depreciation charge: 10 = $300 As a percentage: 2 3 4 300 𝑥 100 = 10% 3000 The annual depreciation charge: 5000−500 = $450 10 The annual depreciation charge: 5% x 6000 = $300 $450 a 10 = $45 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book b The profits would have been overvalued by $450, being the amount that was not included in the expenses for the year. However, the depreciation for machinery for the year would have been overvalued by $45 since the machinery was overvalued by $450; therefore, the profit should have been: $3500 − 450 + 45 = $3095 Activity 4 Cost 8 900 Less: depreciation for year 1@ 25% of $8 900 2 225 Net book value (NBV) at end of year 1 6 675 Less: depreciation for year 2 @ 25% of $6 675 1 669 NBV (or written-down value) at end of year 2 5 006 Less: depreciation for year 3 @ 25% of $5 006 1 252 NBV at end of year 3 3 754 Activity 5 Crates account Date Details $ Date 2018 Jan 1 Details $ 2018 Inventory b/d 5 600 Dec 31 Income statement 300 ____ Dec 31 Inventory c/d 5 300 5 600 2019 5 600 2019 Jan 1 Inventory b/d 5 300 Dec 31 Income statement 1 200 Oct 4 Cash/bank 2 900 Dec 31 Inventory c/d 7 000 8 200 8 200 2020 Jan 1 Inventory b/d 7 000 Activity 6 1 a Straight-line method: The annual depreciation charge: = $6000 = $2000 3 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book b Cost 6 000 Less: depreciation for year 1 @ 50% of $6 000 3 000 Net book value (NBV) at end of year 1 3 000 Less: depreciation for year 2 @ 50% of $3 000 1 500 NBV (or written-down value) at end of year 2 1 500 Less: depreciation for year 3 @ 50% of $1 500 750 NBV at end of year 3 750 2 Loose tools account Date Details $ Date 2018 Details $ 2018 Jan 1 Capital 450 Dec 31 Income statement 26 Dec 31 Cash/bank 56 Dec 31 Balance c/d 480 506 506 2019 Jan 1 Balance b/d 480 Answer: $26 Activity 7 1 a Computer account Date Details $ Date 2018 Jan 2 Details $ 2018 Bank 10 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book b Depreciation of computer account Date Details $ Date 2018 Dec 31 $ 2018 Balance c/d 2 000 Dec 31 Income statement *2 000 4 000 Jan 1 Balance b/d 2 000 _____ Dec 31 Income statement 2 000 2019 Dec 31 Details 2019 Balance c/d 4 000 2020 Dec 31 4 000 2020 Balance c/d 6 000 Jan 1 *Working: The annual depreciation charge: = Balance b/d 10 000 − 2 000 4 4 000 = $2 000 c Statement of financial position as at 31 December (extract) Non-current assets 2018 Computer Accumulated depreciation Net book value $ $ $ 10 000 2 000 8 000 10 000 4 000 6 000 Cost 2019 Computer d Income statement for the year ended (extract) Less: Expenses $ 2018 Provision for depreciation of computers 2 000 2019 Provision for depreciation of computers 2 2 000 For the year ended 31 December 2019: The amount for depreciation that will be deducted from cost to arrive at the net book value in the statement of financial position is $49 000 and the amount charged to the income statement as an expense is $4 000. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book Exam-style questions 1 2 3 4 5 6 A [1] B [1] B [1] A [1] B [1] a General journal Date Details Debit 2011 Apr 1 Credit $ 24 000 Motor vehicles account Apr 1 $ [1] 24 000 [1] Villa Motors Limited account b Provision for depreciation of motor vehicles account Date Details $ 2012 Mar 31 Date Details $ 2012 4 800 Balance c/d 2013 Mar 31 Income statement 4 800 [1] Balance b/d 4 800 Income statement 1 920 [1] 2012 Apr 1 Jan 23 Disposal of MV 2 400 [1] 2013 Mar 31 Balance c/d 4 320 Mar 31 6 720 6 720 Apr 1 4 320 [1 OF] Balance b/d Plus [1] for dates c Disposal of motor vehicles account Date Details $ 2013 Jan 23 Date Details $ Bank 6 500 [1] Jan 23 Prov. for depreciation 2 400 [1] Mar 31 Income statement [1] 3 100 [1] 2013 Motor vehicle 12 000 [1] Jan 23 _____ _____ 12 000 12 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book d 7 a i Straight-line method of depreciation [1] ii Revaluation method of depreciation [1] Any two of the following for one mark each: i Wear and tear/physical deterioration ii Obsolescence/economic reasons iii Depletion iv Passage of time b i Land generally does not depreciate in value because it is a limited resource with an infinite life [1] and can be used for a range of purposes. [1] ii Inventory is not a non-current asset but is for resale. [1] It is not in the business for a long period of time. [1] c The cost of the non-current asset can be spread over the life of the asset in the form of provision for depreciation. Hence, income generated from the asset is matched [1] with the expense due to depreciation in the income statement. [1] d [1] Property (land and buildings) $150 000 Less: Land $80 000 $70 000 Depreciation = $70 000 x 2% = $1 400 [1] e Computer equipment disposal account Details $ Details Computer equipment 12 000 [1] Cash/bank 7 000 [1] Income statement 250 [1] Provision for depreciation 5 250 [1] 12 250 $ 12 250 Plus [1] for dates f i Capital expenditure [1] ii Revenue expenditure [1] iii Capital expenditure [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book 8 a $ Cost $ 1 200 Depreciation year 1 240 240 [1] 960 Depreciation year 2 192 192 [1] Total depreciation 432 [1] b Fixtures and fittings account $ 2013 $ 2013 Jan 1 Balance b/d 31 200 [1] Jun 1 Disposal 1 200 [1] Aug 1 Cash 2 500 [1] Dec 31 Balance c/d 32 500 33 700 33 700 2014 Jan 1 Balance b/d 32 500 [1] OF Provision for depreciation account $ 2013 Jun 1 $ 2013 Disposal 432 [1] OF Dec 31 Balance c/d 13 916 Jan 1 9 702 [1] Balance b/d Dec 31 Income statement 14 348 4 646 * 14 348 2014 Jan 1 13 916 [1] OF Balance b/d * Calculation of depreciation for the year $ Cost of asset – Opening balance Less disposal $ 31 200 1 200 [1] 30 000 Plus addition 2 500 [1] Depreciation – Opening balance 9 702 Less disposal 432 32 500 9 270 [1] OF 23 230 20% x 23 230 OF = $4 646 [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book Disposal account $ $ 2013 Jun 1 2013 Fixtures and fittings 1 200 [1] Jun 1 ____ Dec 31 Prov for depreciation 432 [1] OF Bank 600 [1] Income statement 168 [1] OF 1200 1200 c Ajith Extract from income statement for the year ended 31 December 2013 $ Expenses Loss on disposal of fixtures and fittings 168 [1] OF Depreciation – fixtures and fittings 4 646 [1] OF Ajith Extract from statement of financial position at 31 December 2013 $ Non-current assets Fixtures and fittings at cost 32 500 [1] OF Accumulated depreciation 13 916 [1] OF 18 584 9 a Grindle Fixtures and fittings account 2015 $ 2015 $ Jan 1 Balance b/d 17 200 [1] Aug 1 Disposal [1] 3 200 (1 OF) Mar 1 Bill 3 600 [1] Dec 31 Balance c/d 17 600 20 800 20 800 2016 Jan 1 Balance b/d 17 600 [1] + [1] dates b $17 600 [1] x 0.10 = $1760 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book c Grindle Provision for depreciation of fixtures and fittings account 2015 $ 2015 $ Aug 1 Disposal 320 [1 OF] Jan 1 Balance b/d 5 800 Dec 31 Balance c/d 7 240 Dec 31 Income statement 1 760 [1 OF] 7 560 7 560 2016 Jan 1 Balance b/d 7 240 [1 OF] +1 dates d Capital expenditure [1] e None [1] f Increase Decrease [1] Chapter review questions 1 Name: a Two non-current assets, for example: b c • premises • machinery • furniture • fixtures. Three reasons why a non-current asset depreciates (any three): • depletion • time factors • economic factors • physical factors. Two reasons why a provision for depreciation is made: • Prudence principle: to record non-current assets at a more realistic value than the historic cost. • Matching principle: Depreciation is charged as an expense in the income statement based on an estimate of how much of the overall economic usefulness of the noncurrent asset has been used up in that year. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book d e Two examples of assets that depreciate due to depletion: • oil wells • mines. One other term for residual value: • f One asset that has become obsolete, for example: • g h scrap value. Walkman. Three methods of calculating depreciation: • straight-line • reducing balance • revaluation. Two assets that are depreciated using the revaluation method: • loose tools • lubricants. 2 3 a Depreciation is one of the expenses of running a business. b An asset may depreciate and become obsolete as a result of economic reasons. c With the revaluation method of calculating depreciation, the asset is reassessed for value at the end of the financial year. d Property is more likely to appreciate. e When an asset is completely out of date it is said to be obsolete. f The straight-line method is also called the equal instalment method. g With the reducing balance method depreciation diminishes each year. h Whichever method of calculation is used the result is shown in a provision for depreciation account. i When an asset loses value it is said to have depreciated. j Depreciation due to physical deterioration is an example of ‘wear and tear’ due to normal usage. 6 000 – 600 – 540 + 450 = $5 310 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book 4 a Machinery account Date Details $ Date 2018 Jun 1 Details $ 2019 Absolem Machinery Co 15 000 Sep 1 Disposal of machinery 5 000 Balance c/d 10 000 2020 _____ May 31 15 000 15 000 2020 Jun 1 Balance b/d 10 000 b Provision for depreciation of machinery account Date Details $ Date 2019 Details $ 2019 May 31 Balance c/d 1 500 May 31 Income statement 1 500 Sep 1 Disposal of machinery 500 Jun 1 Balance b/d 1 500 Income statement 1 000 2020 May 31 2020 Balance c/d 2 000 May 31 2 500 2 500 Jun 1 Bal b/d 2 000 c Disposal of machinery account Date Details $ Date 2019 Sep 1 Details $ 2019 Machinery account 5 000 Sep 1 Sep 1 Cash 1 000 Prov. for depreciation 500 Income statement 3 500 2020 ____ May 31 5 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 000 11 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 12 Other payables and receivables Activity 1 1 2 a An accrued expense is an expense owing either at the beginning, or at the end of the financial year. It is recognised in the financial records of a business before it is paid for. It is recorded in the business’ statement of financial position as a current liability. b An accrued income is an income owing either at the beginning, or at the end of the financial year. It is recognised in the financial records of a business before it is received. It is recorded in the business’ statement of financial position as a current asset. c A year-end adjustment is an adjustment made to the financial records of a business so that a ‘true and fair view’ of the profit or loss for the financial year in question is shown. d A prepayment is an expense or income paid in advance. The matching principle. Activity 2 a Telephone charges account Date Details $ Date 2018 Details $ 2018 Dec 31 Cash/bank 350 Dec 31 Income statement 385 Dec 31 Balance c/d 35 ___ 385 385 2019 Jan 1 Balance b/d Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 35 1 Answers to Student’s Book b Rates account Date Details $ Date 2018 Details $ 2018 Dec 31 Cash/bank 550 Dec 31 Income statement 570 Dec 31 Balance c/d 20 ___ 570 570 2019 Jan 1 Balance b/d 20 Details $ 30 Activity 3 1 2 $135 – Income statement Rent account Date Details $ Date 2019 2019 Jan 31 Cash 100 Jan 1 Balance b/d Mar 31 Bank 150 Dec 31 Income statement Oct 31 Cash 100 Nov 30 Cash 250 Dec 31 Balance c/d 430 ____ 1 030 1 030 1 000 2020 Jan 1 Balance b/d 430 Working: * Amount owing as at 31 December 2019: 1000 + 30 − (100 + 150 + 100 + 250) = $430 3 Electricity account Date Details $ Date 2019 Details $ 2019 Feb 3 Cash 150 Jan 1 Balance b/d 50 Aug 31 Bank 250 Dec 31 Income statement 900 Oct 4 Cash 90 Nov 28 Cash 150 Dec 31 Balance c/d 310 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 ___ 2 Answers to Student’s Book 950 950 2020 Jan 1 Balance b/d 310 Activity 4 a Motor expenses account Date Details $ Date 2018 Details $ 2018 Cash/bank 260 Dec 31 Income statement 210 ___ Dec 31 Balance c/d 50 260 260 2019 1 Jan 1 Balance b/d 50 b Rent account Date Details $ Date 2018 Details $ 2018 Jan 1 Balance b/d 45 Dec 31 Income statement 595 Dec 31 Cash/bank 600 Dec 31 Balance c/d 50 645 645 2019 Jan 1 Balance b/d 50 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book Activity 5 1 a Commission receivable account Date Details $ Date Details $ 1 080 Dec 31 Cash/bank 980 ____ Dec 31 Balance c/d 100 2018 Dec 31 2018 Income statement 1 080 1 080 2019 Jan 1 Balance b/d 100 b Interest receivable account Date Details $ Date Details $ 290 Dec 31 Cash/bank 230 ___ Dec 31 Balance c/d 60 2018 Dec 31 2018 Income statement 290 290 2019 Jan 1 2 3 4 Balance b/d 60 An accrued income is an income owing either at the beginning, or at the end of the financial year. It is recognised in the financial records of a business before it is received. It is recorded in the business’ statement of financial position as a current asset. Due to the matching principle, which means that the income should be accounted for when it is earned rather than when it is received. Because it represents an amount owing to the business. Activity 6 1 Income prepaid is income received in advance, for the next financial year. It is recorded on the business’ statement of financial position as a current liability. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book 2 Rent receivable account Date Details $ Date 2018 Details $ 2018 Jan 1 Balance b/d 75 Dec 31 Cash/bank 260 Dec 31 Income statement 235 Dec 31 Balance c/d 50 310 310 2019 Jan 1 Balance b/d 50 Activity 7 1 Rates account Date Details $ Date 2018 Mar 31 Details $ Balance b/d 35 Income statement 635 Balance c/d 150 2018 Cash/bank 820 Jan 1 Dec 31 ___ Dec 31 820 820 2019 Jan 1 Balance b/d 150 2 Rent receivable account Date Details $ Date 2019 Details $ 2018 Jun 30 Income statement 6 750 Jul 1 Bank 500 Jun 30 Balance c/d 1 250 Sep 1 Bank 7 500 8 000 8 000 2019 Jul 1 Balance b/d Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 250 5 Answers to Student’s Book Activity 8 1 2 3 Due to the matching principle, only expenses for the year are to be mentioned in the income statement. Hence an accrual, which represents money still owing for the financial year, is added and a prepayment, which represents money paid for the next financial year, is subtracted. The balances on the ledger accounts, as shown in the trial balance, are the balances before the year end adjustments have been made. Prepaid expenses represents money paid before the goods or service was delivered. Hence, the supplier owes the business money for goods or services paid for but not yet delivered. Hence it is a debt owing to the business and is a current asset. Prepaid income will be recorded as a current liability. Accrued expenses represent money unpaid for goods or services already delivered. Hence, the business owes money for these goods or services. They are, therefore, debts owing by the business and a current liability. Accrued income will be recorded as a current asset. 4 Herman Income statement for the year ended 31 August 2018 (extract) Expenses: $ Internet charges (240 + 40) 280 Sundry expenses (170 + 20) 190 Rent (200 − 50) 150 Herman Statement of financial position as at 31 August 2018 (extract) Current assets: Other receivable: rent prepaid $ 50 Current liabilities: Other payables (40 + 20) 60 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book Activity 9 1 2 3 Purchases represents goods bought for resale, which stationery is not. Hence stationery is not listed as purchases in the trading account. It is recorded as an expense in the income statement. Pens, pencils, printing paper. Stationery account Date Details $ Date 2018 Jun 30 Details $ 2018 Cash/bank 350 Jun 30 Income statement 305 ___ Jun 30 Balance c/d 45 350 Jul 1 Balance b/d 350 45 Income statement for the year ended 30 June 2018 (extract) Expenses: $ Stationery 305 Statement of financial position as at 30 June 2018 (extract) Current assets: $ Inventory of stationery 45 Exam-style questions 1 D [1] 2 C [1] 3 C [1] 4 C [1] 5 B [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book 6 a Molly Traders’ account Date Details $ 2018 Date Details $ 2018 May 10 Bank May 10 Discounts received 196 [1] May 1 4 [1] 2019 2019 Apr 30 Balance c/d 1 080 Balance b/d 200 [1] Apr 16 Purchases 230 } Apr 25 Purchases 850 } [1] 1 280 1 280 May 1 Balance b/d 1 080 [1 OF] b Motor vehicle expenses account Date Details $ Date Details $ 2018 May 1 Balance b/d 1 000 [1] Aug 20 Bank 140 [1] 2019 2019 Apr 30 Balance c/d 110 Apr 30 Income statement 1 250 1 250 [1 OF] 1 250 May 1 Balance b/d 110 [1] + [1] for dates 7 a i This represents rates prepaid [1]. This was paid in the year ended 31 May 2013, but relates to the year ended 31 May 2014. [1] Current assets [1] ii This represents rent accrued [1]. This relates to the year ended 31 May 2013 and remained unpaid at the end of the year [1]. Current liabilities [1] b c i This represents the total amount paid [1] by cheque [1] for rent and rates during the year ended 31 May 2014. ii This is the amount transferred to the income statement [1] which represents the rent and rates for that financial year [1]. Only the rent and rates relating to the current year are transferred to the income statement [1]. Adjustments are made for accruals and prepayments [1]. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 8 a Rent payable account 2012 $ 2012 $ Jan 1 Bank 3 000 } Dec 31 Income statement [1] 12 000 [1] Apr 1 Bank 3 000 } Jul 1 Bank 3 000 } [1] Dec 31 Balance c/d 3 000 [1] _____ 12 000 12 000 2013 Jan 1 b Balance b/d 3 000 [1] OF Mary owes her landlord rent of $3 000. [1] Mary has other payables [1] of $3 000. [1] Mary has a creditor/accrual [1] for rent of $3 000. [1] c Rent received account 2012 $ 2012 $ Dec 31 Income stat [1] 2 250 [1] Aug 1 Bank 1 350} Dec 31 Balance c/d 450 [1] Nov 1 Bank 1 350} [1] 2 700 2 700 2013 Jan 1 d Balance b/d 450 [1] OF Mary has received one month’s rent of $450 [1] in advance. [1] Mary has other payables [1] of $450. [1] Paul has paid one month’s rent of $450 [1] in advance. [1] 9 e Non-current asset [1] a A prepayment is an amount paid in advance for a service that has not yet been received [1]. An accrual is an amount owed for a service that has been received but not yet paid for [1]. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book b Insurance account $ $ 2013 2014 Jul 1 Balance b/d 180 [1] Jun 30 Income Aug 1 Bank/cash 2 340 [1] Statement ____ Balance c/d 2 520 2 325 [1] OF 195 2 520 2014 Jul 1 Balance b/d 195 [1] CF + [1] dates c 10 a i Profit and loss/expenses [1] ii Matching [1] Another payable (accrued expense) is an amount due and payable in respect of expenses incurred in an accounting period [1] which remains unpaid at the end of that period [1]. b Khalim Fuel expenses account $ 2010 May 1 2011 Apr 30 $ Balance b/d 30 [1] Income statement 360 [1] OF 2011 Bank 340 [1] Apr 30 Balance c/d 50 [1] ___ 390 390 May 1 Balance b/d 50 [1] + [1] for all correct dates Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book Chapter review questions 1 a Wages account Date Details $ Date 2018 Details $ 2018 Dec 31 Cash/bank 4 000 Jan 1 Balance b/d 1 000 Dec 31 Balance c/d 1 200 Dec 31 Income statement 4 200 5 200 5 200 2019 Jan 1 Balance b/d 1 200 Answer: Wages to be entered in the income statement = $4 200 b Rent account Date Details $ Date 2018 Details $ 2018 Dec 31 Cash/bank 4 600 Dec 31 Income statement 6 000 Dec 31 Balance c/d (accruals) 1 400 _____ 6 000 6 000 2019 Jan 1 Balance b/d 1 400 Answer: Rent paid during the year = $4 600 c Rent account Date Details $ Date 2018 Dec 31 Details $ 2018 Cash 1 700 Jan 1 Dec 31 ____ Dec 31 Balance b/d 400 Income statement 1 050 Balance c/d 250 1 700 1 700 2019 Jan 1 Balance b/d 250 Answer: rent to be entered in the income statement = $1 050 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Answers to Student’s Book d Electricity account Date Details $ Date 2019 Sep 30 Details $ 2018 Cash/bank 15 000 Oct 1 Balance b/d 2 000 Income statement 15 500 2019 Sep 30 Balance c/d 2 500 Sep 30 17 500 17 500 2019 Jan 1 Balance b/d 2 500 Answer: Paid for electricity during the year = $15 000 e Insurance account Date Details $ Date 2019 Details $ 2019 Income statement 2 400 Jan 1 Balance b/d 400 Dec 31 Dec 31 Cash/bank 2 000 _____ 2 400 2 400 Answer: Insurance in the income statement = $2400 f Rent account Date Details $ Date 2019 Jun 30 Details $ 2018 Cash/bank 3 000 Jul 1 Balance b/d 500 Income statement 2 600 2019 Jun 30 Balance c/d 100 Jun 30 3 100 3 100 Jul 1 Balance b/d 100 Answer: Rent in income statement = $2 600 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 12 Answers to Student’s Book g Rent account Date Details $ Date 2018 Details $ 2018 Aug 31 Cash/bank 6 000 Dec 31 Income statement *16 000 Nov 30 Cash/bank 6 000 Dec 31 Balance c/d 4 000 _____ 16 000 16 000 2019 Jan 1 Balance b/d 4 000 24 000 Answer: *Rent in income statement = $16 000 12 h Internet charges account Date Details $ Date 2018 Oct 31 Details 2018 Cash/bank 4 000 Oct 31 Income statement ____ Oct 31 Balance c/d 4 000 Nov 1 $ Balance b/d *3 333 667 4 000 667 * Charges for the year ended 31 October 2018 4000 = $3333 10/12 Answer: Internet charges in the income statement = $3333 i Telephone charges account Date Details $ Date 2019 Details $ 2019 Dec 31 Cash/bank Dec 31 Balance c/d 2 000 Jan 1 700 Dec 31 Balance b/d 300 Income statement 2 400 2 700 2 700 2020 Jan 1 Balance b/d 700 Answer: Telephone charges in the income statement = $2 400 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 13 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 13 Irrecoverable debts and provision for doubtful debts Activity 1 1 General journal Date Details Debit Credit $ Irrecoverable debts $ 350 Sam 350 (Debt owing from Sam, written off as irrecoverable. See letter in file no. SD/99) 2 a An irrecoverable debt is a debt that will never be paid. b Trade receivables represents credit customers who owe the business money. 3 General journal Details Debit Credit $ Irrecoverable debts 500 Cash 4 500 Denny $ 5 000 (Receipt of $4 500 in full settlement for debt of $5 000 owing from Denny) Activity 2 1 2 A debt that was written off as irrecoverable that has now been paid or recovered. Part payment refers to when the trade receivable has only paid a part of the debt, either in full settlement or as an instalment. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 3 General journal Date Details Debit Credit 2018 $ Apr 14 Irrecoverable debts $ 300 Melissa 300 (Irrecoverable debt owing from Melissa written off. See letter in file no. MH/8) May 5 Melissa 300 Irrecoverable debts recovered Cash/bank 300 300 Melissa 300 (Irrecoverable debt owing from Melissa, now recovered. See letter in file no. MH/9) 4 Any five: a The best way to avoid irrecoverable debts is to sell for cash or cheque payments. b The business can assess the creditworthiness of a potential customer by asking for trade references or pay for a credit check. c A lower credit limit for new customers could be set until trust is built in the ability of the customer to pay their debts on time. d The business should prepare clear credit terms and conditions and inform the customers of them, by perhaps publishing them on their website or invoices. e Customers should be reminded that the business has a right to charge interest on late payments. f Invoices and statements of account should be sent promptly and regularly. g An offer of discounts for early payment publicised on the invoice or the statement of account is a good way of influencing customers to pay on time. h No further goods should be sold to the customer on credit if they have exceeded their payment deadline. i By employing a good credit control policy. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 3 1 2 A provision for doubtful debts is an estimate of the proportion of trade receivables who will not pay. The business could use one of the following ways to arrive at the amount of the provision: • • By using past experience to estimate what percentage of trade receivables will not pay. By looking at each debt to determine whether it will be paid or not. A total is made of any doubtful debts to arrive at the amount of the provision. • By using an ageing schedule. As a rule, the older a credit sale is, the less likely it will be paid for. The debts are sorted by age and a greater percentage of the older debts are factored into the calculation of the provision, compared to a lower percentage for the group with newer trade receivables. 3 The prudence principle. 4 The matching principle. Activity 4 1 Nominal (general) ledger Provision for doubtful debts account Date Details 2019 $ Date Details $ 2019 Jun 30 Income statement 480 The income statement extract: Li Ching Income statement for the year ended 30 June 2019 (extract) $ Expenses – provision for doubtful debts 480 The statement of financial position extract: Statement of financial position as at 30 June 2019 (extract) Current assets: $ Trade receivables 24 000 Less: provision for doubtful debts 480 $ 23 520 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 2 General journal Date Details Debit 2018 Aug 31 Credit $ Irrecoverable debts $ 600 Trade receivables 600 (Writing off irrecoverable debts for the year ended 31 August 2018) Provision for doubtful debts account Date Details $ Date 2018 Details $ 2018 Aug 31 Income statement 134 3 a $600 (3% x 20 000) b $582 [3% x (20 000 − 600)] Activity 5 1 Provision for doubtful debts account Date Details $ Date 2018 Dec 31 Details $ 2018 Balance c/d 200 Jan 1 Balance b/d 155 ___ Dec 31 Income statement 45 200 200 2019 Jan 1 Balance b/d 200 The income statement extract: Hussein Income statement for the year ended 31 December 2018 (extract) $ Expenses – increase in provision for doubtful debts 45 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book The statement of financial position extract: Statement of financial position as at 31 December 2018 (extract) Current assets: $ Trade receivables 4 000 Less: provision for doubtful debts 200 $ 3 800 2 Provision for doubtful debts account Date Details $ Date 2019 Dec 31 Details $ 2019 Balance c/d 300 Jan 1 Balance b/d 180 ___ Dec 31 Income statement 120 300 300 2020 Jan 1 Balance b/d 300 The income statement extract: Jason Income statement for the year ended 31 December 2019 (extract) $ Expenses – increase in provision for doubtful debts 120 The statement of financial position extract: Statement of financial position as at 31 December 2019 (extract) Current assets: $ Trade receivables 5 000 Less: provision for doubtful debts 300 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 $ 4 700 5 Answers to Student’s Book Activity 6 1 Provision for doubtful debts account Date Details $ Date 2018 Details $ 2018 Dec 31 Income statement 100 Jan 1 Balance b/d 400 Dec 31 Balance c/d 300 ___ 400 400 2019 Jan 1 Balance b/d 300 The income statement extract: Mary Income statement for the year ended 31 December 2018 (extract) $ Gross profit Add: decrease in provision for doubtful debts xx 100 The statement of financial position extract: Statement of financial position as at 31 December 2018 (extract) $ $ Current assets: Trade receivables Less: provision for doubtful debts 3 000 300 2 700 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book 2 2017: Provision for doubtful debts account Date Details $ Date 2017 Details $ Income statement 270 Balance b/d 270 2017 Dec 31 Balance c/d 270 Dec 31 2018 Jan 1 The income statement extract: Lulu Income statement for the year ended 31 December 2017 (extract) $ Expenses Provision for doubtful debts 270 Irrecoverable debts 300 The statement of financial position extract: Statement of financial position as at 31 December 2017 (extract) $ $ Current assets: Trade receivables (3000 – 300) 2 700 Less: provision for doubtful debts (270) 2 430 2018: Provision for doubtful debts account Date Details $ Date 2018 Dec 31 Details $ 2018 Balance c/d 350 Jan 1 Dec 31 Balance b/d 270 Income statement 80 350 350 2019 Jan 1 Balance b/d Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 350 7 Answers to Student’s Book The income statement extract: Income statement for the year ended 31 December 2018 (extract) $ Expenses Increase in provision for doubtful debts 80 Irrecoverable debts 500 The statement of financial position extract: Statement of financial position as at 31 December 2018 (extract) $ $ Current assets: Trade receivables (4 000 – 500) 3 500 Less: provision for doubtful debts (350) 3 150 2019: Provision for doubtful debts account Date Details $ Date 2019 Details $ 2019 Dec 31 Income statement 340 Jan 1 Dec 31 Balance c/d 10 Balance b/d 350 350 350 2020 Jan 1 Balance b/d 100 Income statement for the year ended 31 December 2019 (extract) $ Gross profit xx Decrease in provision for doubtful debts 340 Less: expenses Irrecoverable debts 100 The statement of financial position extract: Statement of financial position as at 31 December 2019 (extract) $ $ Current assets: Trade receivables (200 – 100) 100 Less: provision for doubtful debts (10) 90 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book Exam-style questions 1 2 3 4 5 6 D [1] B [1] B [1] C [1] D [1] a [4] Pat Provision for doubtful debts account Date Details $ 2018 Date Details $ 2018 Dec 31 Balance c/d 880 [1] Jan 1 Balance b/d 470 [1] ___ Dec 31 Income statement 410 [1] 880 880 2019 Jan 1 b Balance b/d 880 [1 OF] Extract from the income statement: [4] Pat Income statement for the year ended 31 December 2018 (extract) $ Gross profit $ xx Less: expenses [1] Increase in provision for doubtful debts [1] 410 [1] Irrecoverable debts 640 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 050 9 Answers to Student’s Book c General journal Date Details 2018 Dec 31 Trade receivables Debit Credit $ $ 140 Irrecoverable debts recovered Dec 31 Cash/bank 140 [1] 140 [1] Trade receivables 140 (Irrecoverable debt recovered, see letter in file no. XX/90) [1] 7 a i Amounts owing to a business that will not be paid by credit customers [1] ii When a credit customer pays some, or all, of the amount owed after the amount was previously written off [1] iii An estimate of the amount a business will lose in a financial year because of irrecoverable debts [1] b Prudence [1] Matching [1] c Reduce credit sales/sell on a cash basis Obtain references from new credit customers Fix a credit limit for each customer Improve credit control Issue invoices and monthly statements promptly Refuse further supplies until outstanding balance is paid Allow cash discount for prompt payment Charge interest on overdue accounts. Any two points [1] each Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book d Nawaz General journal Debit Credit $ Irrecoverable debts $ 250 [1] Uzma 250 [1] Income statement 2 314 [1] Irrecoverable debts 2 314 [1] Income statement 138 [1] Provision for doubtful debts 138 [1] e Nawaz Extract from statement of financial position at 31 August 2016 $ $ Current assets Trade receivables (79 650 − 250) 79 400 Less: provision for doubtful debts 1 588 [1] OF 77 812 [1] OF Chapter review questions 1 a Trade receivables are individuals or firms that owe the businesses money. b An irrecoverable debt is an expense that results from a customer’s failure to pay. c A business should be aware that a certain percentage of its customers are not likely to pay the money they owe. d On the basis of past experience a business will make a provision for irrecoverable debts. e The irrecoverable debts account shows the amount by which the profit in the accounting period will decrease. f Purchasing on credit allows a customer time to pay their outstanding debt. g A provision for doubtful debts has to be increased if the current provision is insufficient. h A provision for doubtful debts is recorded in the current assets section of the statement of financial position. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Answers to Student’s Book 2 Provision for doubtful debts account Date Details $ Date 2017 Dec 31 $ 2017 Balance c/d 240 Dec 31 2018 Dec 31 Details Income statement 240 Balance b/d 240 Income statement 110 2018 Balance c/d 350 Jan 1 Dec 31 350 2019 350 2019 Dec 31 Income statement 170 Jan 1 Balance b/d 350 Dec 31 Balance c/d 180 ___ 350 350 2020 Jan 1 Balance b/d 180 Joey Income statement for the year ended 31 December (extract) $ $ 2017 Gross profit xx Less: expenses Increase in provision for doubtful debts 240 Irrecoverable debts 147 387 2018 Gross profit xx Less: expenses Increase in provision for doubtful debts 110 Irrecoverable debts 300 410 2019 Gross profit xx Add: Decrease in provision for doubtful debts 170 Less: expenses: Irrecoverable debts Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 400 12 Answers to Student’s Book Statement of financial position (extract) as at 31 December $ 2017 2018 2019 3 4 $ Trade receivables 4 000 Less: Provision for doubtful debts (240) Trade receivables 5 000 Less: Provision for doubtful debts (350) Trade receivables 4 500 Less: Provision for doubtful debts (180) $ 3 760 4 650 4 320 An irrecoverable debt is a debt that will never be paid. It is an expense with a debit balance, charged to profits in the income statement. It is not an estimate. On the other hand, a provision for doubtful debts is the estimated amount of the proportion of trade receivables that will turn out to be an irrecoverable debt. The provision for doubtful debts is a trade receivable contra account and therefore always has a credit balance. The business could use one of the following ways to arrive at the amount of the provision: • • 5 Using past experience to estimate what percentage of trade receivables will not pay. By looking at each debt to determine whether it will be paid or not. A total is made of any doubtful debts to arrive at the amount of the provision. • By using an ageing schedule. As a rule, the older a credit sale is, the less likely it will be paid for. The debts are sorted by age and a greater percentage of the older debts are factored into the calculation of the provision, compared to a lower percentage for the group with newer trade receivables. The statement of account, which is a copy of the customer’s account in the books of the supplier, is a good way of influencing customers to pay on time. It serves as a reminder of the amount owed and is a good means of chasing payments from trade receivables. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 13 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 14 Valuation of inventory Activity 1 1 Net realisable value (NRV) is the estimated saleable value of the inventory in question, less a reasonable estimate of costs associated with the completion and eventual sale of the goods. Due to the prudence principle which states that assets should not be overstated, and that losses should be accounted for as soon as they are known about. 2 3 a NRV = $630 − $120 = $510 b At $510, as it is less than cost at $600 Activity 2 Inventory valuation statement Item Net realisable value Cost Value $ $ $ A. 450 400 (cost is lower) 400 B. 940 1 000 (NRV is lower) 940 C. 179 170 (cost is lower) 170 D. 2 300 3 000 (NRV is lower) 2 300 E. 10 000 8 900 (cost is lower) 8 900 Total value of inventory = $12 710 Activity 3 1 a If closing inventory is overvalued, then gross profit is overvalued and profit for the year is also overvalued. b The formula for calculating NRV is: NRV = saleable value − costs associated with the completion of goods for sale Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 2 Inventory valuation statement Item Net realisable value Cost Value $ $ $ A. 2030 580 (cost is lower) 580 B. 720 840 (NRV is lower) 720 Total value of inventory = $1,300 Activity 4 a Gross profit will be undervalued by $15 000. b The profit for the year will be undervalued by $15 000. c Current assets will be undervalued by $15 000. d Total assets will be undervalued by $15 000. e Capital (owner’s equity) will be undervalued by $15 000. Exam-style questions 1 2 3 4 5 6 C [1] A [1] A [1] C [1] A [1] a NRV is the estimated saleable value of the inventory in question, [1] less a reasonable estimate of costs associated with the completion and eventual sale of the goods. [1] b If the NRV of inventory declines to less than its cost, the business must value that inventory at NRV. This is in keeping with the prudence principle, [1] which states that assets should not be overstated, and that losses should be accounted for as soon as they are known about. [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book c Overstated Gross profit for the year ended 31 December 2018 Understated [1] Gross profit for the year ended 31 December 2019 [1] Cost of sales for the year ended 31 December 2018 [1] Cost of sales for the year ended 31 December 2019 [1] Profit for the year for the year ended 31 December 2018 [1] [1] Profit for the year for the year ended 31 December 2019 Current assets at 31 December 2018 [1] [1] Current assets at 31 December 2019 7 a No effect To avoid overstating the profit for the year To avoid overstating the current assets To apply the principle of prudence Any two comments [1] each b The estimated receipts from the sale of the inventory [1] less any costs of completing the goods or costs of selling the goods [1]. c Overstated Gross profit for the year ended 31 October 2013 [1] [1] [1] Profit for the year ended 31 October 2014 Current assets as at 31 October 2013 Current assets at 31 October 2014 No effect [1] Gross profit for the year ended 31 October 2014 Profit for the year ended 31 October 2013 Understated [1] [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 8 a A 600 × $15 [1] = $9 000 [1] B 100 × $11.50 [1] = $1150 [1] C 50 × $15 [1] = $750 [1] b 9 Raw materials [1] Work in progress [1] Finished goods [1] a Prudence [1] b At the lower [1] of cost and net realisable value [1] c $ Scrap value 10 x $2 20 [1] Less selling expenses 7 [1] Net realisable value 13 [1]CF Chapter review questions 1 2 Statement True/False Closing inventory for the year ended 31 August 2018 will be closing inventory for the year ended 31 August 2019. False Opening inventory for the year ended 30 June 2019 was the same as the closing inventory for the year ended 30 June 2018. True A trader’s closing inventory will include raw materials. False It is important to value inventory correctly. True Inventory should be valued at cost or NRV whichever is higher. False If closing inventory for the year ended 31 March 2018 is overvalued, then opening inventory for the year ended 31 March 2019 is undervalued. False If closing inventory is overvalued, then profit for the year is overvalued. True Name: a Cost or NRV b The principle of prudence c NRV d Carriage inwards e Carriage outwards, or other suitable answer Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 15 Sole traders Activity 1 1 A sole trader is an unincorporated business owned and operated by one person who trades (buys and sells goods). However, many service sector and seasonal businesses use this form of business structure, for example, hairdressers and landscapers. Advantages (any three): a Sole traders have total control of the business and can therefore make quick decisions, a major advantage in a world where time is money. 2 b These businesses are easy and inexpensive to start up. c The sole trader does not have to share profits. d As the financial statements do not have to be published, secrecy is easy to maintain. e This legal structure is easy to change if there is future growth. f The sole trader is his or her own boss. Disadvantages (any three): a Unlimited liability. b Difficult to raise capital. c The responsibility of making day-to-day decisions rests with the owner. This is a big responsibility and the owner may not have the skills or knowledge to make the right decisions. d It is difficult to recruit and retain high-calibre staff as the prospects of salary raises and promotions are limited. 3 4 Sales Cost of sales Gross profit /loss $ $ $ a 4 000 1 340 (profit) 2 660 b 4 200 3 000 (profit) 1 200 c 5 600 4 900 (profit) 700 d 7 000 8 500 (loss) 1 500 e 300 1 300 (loss) 1 000 The financial statements are: The income statement The statement of financial position Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Reasons for preparing statements: The income statement is prepared to show the financial performance of the sole trader. The statement of financial position is prepared to show the financial position of the sole trader. The statements are usually prepared at the end of the financial year. Activity 2 Cost of sales Opening inventory Net purchases Carriage inwards Closing inventory $ $ $ $ $ A. 2 550 2 000 1 000 50 500 B. 7 000 2 500 6 200 30 1 730 C. 6 000 1 700 5 300 100 1 100 D. 8 700 1 300 7 860 40 500 E. 9 000 900 9 600 100 1 600 Activity 3 1 2 3 Cost of sales = 1 400 + 2 560 – 100 – 200 + 120 – 2 100 = $1 680 Carriage inwards is the cost of transporting goods from the suppliers to the business. This is because the total inventory for sale is diminished due to a reason other than trading. The account that is debited is the drawings account. Activity 4 1 Ganesh’s trading account $ $ Sales $ 10 000 Less: cost of sales Opening inventory Purchases Less: inventory for own use 600 8 000 110 7 890 Carriage inwards 30 8 520 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Less: closing inventory 100 Gross profit 2 8 420 1 580 Closing inventory Activity 5 Gross profit Income Expenses Profit for the year/loss $ $ $ $ 2 000 400 1 670 profit for the year 730 4 300 200 1 500 profit for the year 3 000 4 500 340 5 840 loss for the year 1 000 7 000 500 3 800 profit for the year 3 700 Activity 6 1 Petal’s Flowers Income statement for the year ended 30 June 2018 $ $ Sales $ 4 500 Less: return inwards 340 4 160 Less: cost of sales Opening inventory Purchases Less: return outwards Carriage inwards 3 400 2 000 500 1 500 100 5 000 Less: closing inventory 2 000 Gross profit 3 000 1 160 Add: commission received 450 1 610 Less: expenses Carriage outwards 120 Rent 300 Telephone charges 230 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book Sundry expenses 260 Salaries 190 Profit for the year 2 a b Opening $13 000 c $ 9 000 d $21 000 e Receivable f $1 150 g $14 800 1 100 510 Activity 7 Closing capital Opening capital Profit for the year/(loss) New capital brought in by owner Drawings $ $ $ $ $ 143 000 100 000 45 000 10 000 12 000 106 000 150 000 (30 000) nil 14 000 Activity 8 1 Current Non-current Inventory Premises Cash at bank Equipment Cash in hand Furniture & fixtures Trade receivables 2 3 Bank overdraft, trade payables, or other suitable answer. Non-current assets are listed in the statement of financial position in the order of the length of their economic life. Current assets are listed in increasing order of liquidity. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book Activity 9 1 Daisy Trial balance as at 31 December 2018 Dr Cr $ Sales Purchases 141 000 74 000 General expenses 770 Return inwards 4 900 Air freight charges 6 240 Motor vehicle repairs 7 250 Rent and rates 5 720 Salaries and wages 19 600 Loan interest payable 300 Loan (repayment 31 December 2020) Trade receivables 6 000 15 000 Trade payables 6 650 Inventory at 1 January 2018 8 540 Furniture at 1 January 2018 6 800 Motor vehicle at 1 January 2018 25 400 Drawings 12 000 Capital Cash at bank $ 35 700 2 830 ______ 189 350 189 350 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book Daisy Income statement for the year ended 31 December 2018 $ Sales Less: return inwards $ 141 000 4 900 136 100 Less: cost of sales Inventory at 1 January 2018 8 540 Purchases (74 000 − 200) 73 800 82 340 Less: inventory at 31 December 2018 10 000 Gross profit 72 340 63 760 Less: expenses General expenses 770 Motor vehicle repairs 7 250 Rent and rates (5 720 − 200) 5 520 Salaries and wages 19 600 Loan interest (300 + 300) 600 Depreciation – motor vehicles 2 540 Depreciation – furniture 800 Air freight charges 6 240 Provision for doubtful debts 300 Profit for the year Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 43 620 20 140 6 Answers to Student’s Book Daisy Statement of financial position at 31 December $ $ $ Cost Accumulated depreciation Net book value Furniture 6 800 800 6 000 Motor vehicles 25 400 2 540 22 860 32 200 3 340 28 860 ASSETS Non-current assets Current assets Inventory at 31 December 2018 Trade receivables Less: provision for doubtful debts 10 000 15 000 300 14 700 Other receivables (prepaid rent) 200 Cash at bank 2 830 Total assets 27 730 56 590 CAPITAL AND LIABILITIES Capital Balance at 1 January 2018 35 700 Add: profit for the year 20 140 Less: drawings 55 840 12 200 43 640 Current liabilities Trade payables Other payables (interest) 6 650 300 6 950 Non-current liabilities 2 3 10% loan (repayable 2020) 6 000 Total capital and liabilities 56 590 Revaluation method Straight-line method and reducing balance method Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book Activity 10 J Kingsley Income statement for the year ended 31 December 2018 Income $ Fees $ 234 900 Less: expenses Salaries 35 000 Depreciation 2 000 Motor expenses 11 000 Rent and rates 10 200 Heating and lighting 7 000 Profit for the year 65 200 169 700 Exam-style questions 1 2 3 4 5 B [1] D [1] B [1] C [1] C [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 6 a Thein Income statement for the year ended 31 March 2012 $ Revenue $ 78 580 [1] Inventory at 1 April 2011 4 690 [1] Purchases 18 240 [1] 22 930 Drawings (450) [1] Returns (1 600) [1] 20 880 Less: inventory at 31 March 2012 (3 870) [1] Cost of sales (17 010) [1]OF Gross profit 61 570 [1] OF Add: income Discounts received 330 [1] Decrease in provision for doubtful debts 160 [1] 62 060 Less: expenses Loan interest 500 [1] Equipment repairs 850 Equipment running expenses (2 650 [1] + 750 [1]) 3 400 General expenses 8 400 Wages 15 300 Insurance (3 640 [1]− 1 350 [1]) 2 290 Power and water 2 300 Advertising 5 100 Discount allowed 1 650 [1] Depreciation: lease 2 000 [1] Equipment (47 000 [1] x 20%) 9 400 [1] Profit for the year Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 (51 190) 10 870 [1] OF 9 Answers to Student’s Book b Thein Statement of financial position as at 31 March 2012 ASSETS Non-current assets Costs Accumulated depreciation Leasehold property 50 000 12 000 [1 OF] 38 000 [1 OF] Equipment 64 000 26 400 [1 OF] 37 600 [1 OF] [1] 114 000 Net book value 38 400 75 600 Current assets 3 870 Inventory Trade receivables Less: provision for doubtful debts 6 750 [1] 540 [1] [1] 6 210 Other receivables Bank (5 150 [1] – 5 000 [1]) 1 350 [1] 150 11 580 Total assets 87 180 CAPITAL AND LIABILITIES Capital: Balance at 1 April 2011 50 000 [1] Add: profit for the year 10 870 [1 OF] Less: drawings (8 500 + 450) 60 870 8 950 [1] 51 920 Current liabilities Trade payables (4 010 [1] + 5 000 [1]) 9 010 Other payables (750 [1] + 500 [1]) 1 250 10 260 Non-current liabilities [1] 6% bank loan 25 000 Total capital and liabilities 87 180 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 [1] 10 Answers to Student’s Book 7 a $ Trade receivables 700 } Trade payables (400) }[1] Inventory 1 100 [1] Equipment at cost 15 700 } Provision for depreciation of equipment (4 100) }[1] Prepaid rent 250 [1] Bank 2 100 [1] Capital 15 350 (1 OF) b Nzita Sales ledger control account 2014 Feb 1 Balance b/d $ 2015 700 [1] Jan 31 $ Bank/cash 28 900 [1] Balance c/d 900 2015 Jan 31 Sales 29 100 (1 OF) 29 800 29 800 2015 Feb 1 Balance b/d 900 (1 OF) Nzita Total trade payables account 2015 Jan 31 Bank/Cash $ 2014 12 600 [1] Feb 1 $ Balance b/d 400 [1] Purchases 12 850 (1 OF) 2015 Balance c/d 650 Jan 31 13 250 13 250 2015 Feb 1 Balance b/d Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 650 (1 OF) 11 Answers to Student’s Book c Nzita Income statement for the year ended 31 January 2015 $ $ 29 100 (1 OF) Sales/revenue Inventory 1 Feb 2014 1 100 Purchases 12 850 (1 OF) 13 950 Inventory 31 January 2015 1 400 (1 for both) Cost of sales 12 550 Gross profit 16 550 (1 OF) Rent 3100 [1] + (250 − 150) [1] 3 200 Wages 5 200 Sundry expenses 2 650 Depreciation of equipment 1 680 [1] 12 730 [1] 3 820 (1 OF) Profit for the year [9] d Nzita Statement of financial position (extract) at 31 January 2015 $ Capital at 1 Feb 2014 15 350 (1 OF) Profit for the year 3 820 (1 OF) 19 170 Drawings 6 600 [1] Capital at 31 Jan 2015 12 570 [1 OF] e 16 550 (1 OF) × 100 = 56.87% (1 of) [2] 29 100 f Lower selling prices Introduction of trade discount Sales promotions Higher purchases prices not passed on to customers Change in mix of goods sold Higher cost of sales Any two (1 OF) each [2] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 12 Answers to Student’s Book 8 a Maria Income statement for the year ended 30 September 2012 $ $ Revenue 365 000 Returns 8 900 356 100 [1] Inventory 1 Oct 2011 33 500 [1] Purchases (135 000 [1] + 7 500 [1]) 142 500 176 000 Returns (4 250) [1] 171 750 Inventory 30 Sep 2012 (36 450) [1] Cost of sales 135 300 [1] Gross profit 220 800 Plus Discount received 7 300 [1] Decrease in provision for doubtful debts (6 400 [1] – 3 000 [1]) 3 400 10 700 231 500 Less: Loan interest (2 000 + 1 000) 3 000 [1] Distribution expenses 18 630 [1] Computer repairs (19 150 + 1 700) 20 850 [1] General running expenses (31 600 − 4 000) 27 600 [1] Salaries and wages (86 700 − 5 200) 81 500 [1] Marketing costs 14 000 [1] Discount allowed 22 400 [1] Depreciation: Buildings 2 000 [1] Fixtures (28 000 + 4 000 [1]) x 0.15 4 800 [1] Computers 7 000 [1] (201 780) Profit for the year Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 29 720 (1 OF) 13 Answers to Student’s Book b Statement of financial position at 30 September 2012 ASSETS $ $ Accumulated depreciation $ Non-current assets: Cost Net book value Land and buildings 150 000 12 000 [1] Fixtures and fittings 32 000 23 800 [1] OF 8 200 [1 OF] Computer equipment 40 000 19 000 [1] OF 21 000 (1 OF) 222 000 54 800 167 200 138 000 [1] Current assets: 36 450 Inventory Trade receivables 60 000 [1] Less: provision for doubtful debts 3 000 [1] [1] 57 000 Other receivables 5 200 [1] Bank 14 070 [1] 112 720 Total assets: 279 920 CAPITAL AND LIABILITIES Capital Balance at 1 Oct 2011 180 000 Profit for the year 29 720 [1 OF] 209 720 (21 000) Drawings 188 720 [1 OF] Non-current liabilities: 8% bank loan 50 000 [1] Current liabilities: Trade payables (31 000 [1] + 7 500 [1]) 38 500 Other payables (1 700 [1] + 1 000 [1]) 2 700 41 200 Total capital and liabilities Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 279 920 14 Answers to Student’s Book 9 a Doji Income statement for the year ended 30 September 2010 $ $ $ Revenue (sales) 155 000 [1] Less: sales returns 9 500 [1] Less: cost of sales 145 500 Inventory (opening stock) 11 500 [1] Purchases 70 000 [1] Less: goods for own use 1 250 [1] 68 750 Carriage inwards 3 000 [1] 71 750 83 250 Less: inventory (closing stock) 14 600 [1] 68 650 Gross profit 76 850 [1] Add: other income Discount received 5 600 [1] Decrease in provision for doubtful debts 250 (18 750 x 4%) [1] – $1 000 [1] 82 700 Less: expenses Salaries (23 750 [1] + 2 600 [1]) 26 350 Rent and rates 6 800 [1] Sundry expenses 14 150 [1] Advertising (6 200 [1] – 300 [1]) 5 900 Depreciation on motor vehicles 8 500 [1] Depreciation on office equipment 2 600 [1] Irrecoverable debt 4 250 [1] Loan interest (500 [1] x 6 ÷ 12 [1]) 250 68 800 Profit for the year (net profit) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 13 900 15 Answers to Student’s Book b Statement of financial position at 30 September 2010 ASSETS $ $ Cost Accumulated depreciation Motor vehicles 42 000 16 500 25 500 [1 ] Office equipment 26 000 6 600 19 400 [1 ] 68 000 23 100 44 900 [1 ] Non-current assets $ Net book value Current assets: Inventory Trade receivables Less provision for doubtful debts 14 600 [1] 18 750 [1] 750 [1] 18 000 [1] OF Other receivables 300 [1] 32 900 77 800 Total assets: CAPITAL AND LIABILITIES Capital Opening balance (40 000 [1]– 10 000 [1]) 30 000 13 900 [1 ] Plus profit for the year 43 900 Less: Drawings (12 000 [1] 13 250 + 1 250 [1]) 30 650 Current liabilities Trade payables 18 300 [1] Other payables (2 600 [1] + 250 [1]) 2 850 Short-term loan 10 000 [1] Bank overdraft 16 000 [1] Total capital and liabilities Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 47 150 77 800 16 Answers to Student’s Book Chapter review questions 1 2 a Gross profit = net sales revenue − cost of sales b Cost of sales = opening inventory + net purchases − closing inventory c Profit for the year = gross profit + income − expenses d Closing capital = opening capital + profit for the year − drawings The expenses in the trading account are direct expenses and include the costs of purchasing inventory and the costs of getting the inventory into saleable condition. They are incurred before the inventory is ready to be sold. The expenses in the income statement are also called overheads that are not directly related to getting inventory into a saleable condition. A good example is the cost of transport. Carriage inwards, which is incurred when purchasing inventory, is included in the trading account, whereas carriage outwards, incurred when transporting goods to customers, is not included in the trading account. 3 a If the closing inventory is overvalued, then the gross profit will be overvalued. b If the closing inventory is undervalued, then the gross profit will be undervalued. c If the opening inventory is overvalued, then the gross profit will be undervalued. d If the opening inventory is undervalued, then the gross profit will be overvalued. • • • • Drawings increases Cost of sales decreases Gross profit increases Profit for the year increases. a $14 200 b $4800 4 5 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 17 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 16 Partnerships Activity 1 1 2 3 A sole trader form of business is owned by one person, whereas a partnership is owned by two or more people called partners. A partnership is normally formed when a sole trader wishes to expand. The minimum is two and the maximum is 20. The advantages are (any three): • • • 4 Partnerships are simple and cheap to set up. It is easier to raise capital as each partner will contribute finance. Partners may have skills that work well together and enable the business to benefit from them. Partners also contribute to the pool of knowledge and contacts that a business can use. • Partners with their own area of expertise will make the business more productive. For example, a firm of lawyers could have a partner who specialises in family law, and another in corporate law etc. This means that the business can cater to a wider customer base. • Partnerships can provide for more creative ideas that contribute to good decisions. • Responsibilities and risks are now shared between the partners. • Losses are shared. The disadvantages are (any three): • • • • • 5 6 Profits must now be shared. Disagreements can occur. As decisions are jointly made, they take longer. All partners are liable for errors made by one of the partners on behalf of the partnership. Partners of ordinary partnerships have unlimited liability, like sole traders. This makes partnerships risky. The clauses are (any five): a How much capital is contributed by each partner. b The distribution of profits and losses. c Partners’ drawings limits. d Interest on partners’ capital. e Interest on partners’ loans. f Interest on drawings. g Partners’ salaries. A partnership agreement ensures that future disagreements about important aspects of the partnership are prevented. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 2 1 2 3 a This is a way of rewarding partners for investing in the partnership. b A salary is paid to reward partners who work longer hours in the business or who take on more responsibilities. c Interest may be charged on drawings to discourage partners from making cash drawings, especially early in the accounting period. The partnership agreement. Saleem and Sulaiman Profit and loss appropriation account for the year ended 31 December 2018 $ $ Profit for the year Less: interest on capital Salaries $ 62 000 Saleem 4 500 Sulaiman 3 000 Saleem 4 000 Sulaiman 2 000 7 500 6 000 Residual profit to be shared 13 500 48 500 Saleem 32 333 Sulaiman 16 167 48 500 Activity 3 1 a Statement of financial position b Income statement 2 The partner’s current account. 3 Because her drawings are more than the total of her appropriations of profit. OR The business has made losses. 4 Any three of: Interest on drawings, interest on capital and partners’ salaries, profit for the year, shares of residual profit. 5 Any three of: Drawings, interest on drawings, interest on capital, partners’ salaries, share of profits, opening and closing balances. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 4 1 a Mary. Her debits are more than her credits, signifying withdrawals in excess of her total share of profits. b Jane. Her credits are more than her debits, signifying that her total share of profits is more than her withdrawals. c All from the profit and loss appropriation account. 2 Agatha Moses and Milo Lyambo Profit and loss appropriation account for the year ended 31 August 2018 $ 45 000 Profit for the year Salary $ 12 000 Agatha Moses 33 000 Residual profit to be shared Milo Lyambo 11 000 Agatha Milo 22 000 33 000 Amount credited to Agatha’s current account = $12 000 + $22 000 = $34 000 3 a Vanessa’s capital = $15 000; Marissa’s capital = $9000 b Vanessa and Marissa Profit and loss appropriation account for the year ended 31 March 2018 $ $ Profit for the year Less: interest on capital $ 30 000 Vanessa 1 500 Marissa 900 2 400 Salary Vanessa 3 000 Residual profit to be shared 5 400 24 600 Vanessa 8 200 Marissa 16 400 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 24 600 3 Answers to Student’s Book c Current accounts (in columnar form) Date Details Vanessa Marissa Date 2018 Mar 31 Mar 31 $ $ 2018 7 000 Drawings Balance c/d Details 3 000 Mar 31 Vanessa Marissa $ $ Interest on capital 1 500 900 5 700 14 300 Mar 31 Salary 3 000 _____ _____ Mar 31 Profit share 8 200 16 400 12 700 17 300 12 700 17 300 5 700 14 300 Apr 1 Balance b/d d Partners’ capital accounts (in columnar form) Date Details 2018 Mar 31 Balance c/d Vanessa Marissa Date $ $ 2017 15 000 9 000 Apr 1 Details Vanessa Marissa $ $ Bank 15 000 9 000 Balances b/d 15 000 9 000 2018 Apr 1 Activity 5 Method 1 Vanessa and Marissa Statement of financial position as at 31 March 2018 (extract) $ Vanessa $ Marissa $ Total Capital accounts 15 000 9 000 24 000 Current accounts 5 700 14 300 20 000 44 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book Method 2 Vanessa and Marissa Statement of financial position as at 31 March 2018 (extract) $ Vanessa Capital accounts $ Marissa 15 000 9 000 Interest on capital 1 500 900 Share of profits 8 200 16 400 Salary 3 000 _____ 12 700 17 300 7 000 3 000 5 700 14 300 $ Total 24 000 Current accounts Less Drawings 20 000 44 000 Activity 6 This is because the partners withdrew more than their total share of profit. Exam-style questions 1 B [1] 2 C [1] 3 B [1] 4 A [1] 5 A [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book 6 X and Y Income statement and profit and loss appropriation account for the year ended 31 December 2018 $ $ 18 140 [1] OF Gross profit Less: expenses: Administration expenses (2 400 + 140) 2 540 [1] Provision for depreciation: Furniture: 10% x (80 000 − 2 500) 550 [1] Provision for depreciation: Motor vehicle: 10% x 12 000 1 200 [1] Selling expenses (2600 − 170) 2 430 [1] Increase in provision for doubtful debts (8% x 5 000) − 360 40 [1] Interest on loan 5% x 10 000 500 [1] 10 880 [1] OF Profit for the year Less: interest on capital 7 260 X (2% x 12 700) 254 Y (2% x 11 500) 230 [1] (484) 10 396 Residual profits shared X 5 198 [1] OF Y 5 198 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 396 6 Answers to Student’s Book X and Y Statement of financial position as at 31 December 2018 ASSETS $ $ $ Cost Accumulated depreciation Net book value Land and buildings 26 000 - 26 000 Furniture 8 000 3 050 4 950 Motor vehicle 12 000 6 200 5 800 46 000 9 250 36 750 [1] Non-current assets Current assets 6 400 Inventory Trade receivables 5 000 Provision for doubtful debts 400 4 600 [1] Other receivables 170 [1] Cash in hand 600 11 770 48 520 Total assets CAPITAL AND LIABILITIES X Y Capital accounts 12 700 11 500 24 200 [1] 500 (300) [1] both Interest on capital 254 230 Interest on loan 500 Share of profits 5 198 5 198 6 452 5 128 (1 200) (800) 5 252 4 328 Total Current accounts Balances at Jan 1 2018 Add Less: Drawings [1] 9 580 [1] OF Non-current liabilities Loan from partner 10 000 [1] Current liabilities Trade payables 4 000 Bank overdraft 600 [1] Other payables 140 [1] Total capital and liabilities Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 740 48 520 7 Answers to Student’s Book 7 Partners’ capital accounts (in columnar form) Date Details Sally 2019 Mally Date $ $ 2018 Jan 1 Current account 1 000 Oct 1 Sep 30 Balance c/d 49 000 49 000 2019 _____ _____ Feb 1 50 000 49 000 Oct 1 8 a Details Sally Mally $ $ Balances b/d 50 000 30 000 Cash _____ 19 000 50 000 49 000 49 000 49 000 Balance c/d Drawings and interest on drawings exceeded the interest on capital and share of profit. [1] OR The partnership has been making losses. [1] b Partners’ current accounts Omar Fatima $ 2010 $ 2010 Apr 1 Balance b/d [1] 215 Apr 1 2011 Mar 31 Fatima $ $ Balance b/d [1] [1] [1] 1 945 2011 Drawings [1] 2 900 Interest on drawings Share of loss [1] 87 288 Interest on capital Salary [1] 1 230 820 Balance c/d Balance c/d [1] _____ 4 837 _____ _____ 4 432 15 545 4 332 15 545 2011 Apr 1 Omar 9 600 Mar 31 2 400 1 600 [1] 12 000 2 032 2011 Balance b/d [1] 2 032 Apr 1 Balance b/d O/F Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 [1] 4 837 O/F 8 Answers to Student’s Book C Aziz Stores Extract from statement of financial position at 31 March 2011 Omar Aziz Fatima Aziz Total $ $ Capital accounts 60 000 [1] 40 000 [1] Current accounts (2 032) [1] O/F 4 837 [1] O/F 57 968 44 837 $ 100 000 2 805 [1] O/F 102 805 d Easier to see the profit retained [1] by each partner. [1] Easier to calculate [1] the interest on capital. [1] Or other suitable point. e The members of a limited liability company have limited liability [1] and their personal assets are not at risk if the business fails. [1] 9 a Share losses Share responsibilities Share risks Share decision-making Additional finance may be available Additional skills and experience are available. Any one advantage [1] b Share profits Decisions must be recognised by all partners Decisions may take longer to implement One partner’s actions can bind the other partners Disagreements can occur All partners are responsible for the debts of the business. Any one disadvantage [1] c Greater security than capital Repaid before capital in a winding-up Extra funds may be required for a limited period only Or other suitable comment. Any one comment [1] d To be able to meet debts when they fall due To be able to take advantage of cash discounts To be able to take advantage of business opportunities as they arise To ensure that there is no difficulty in obtaining supplies/services on credit Or other suitable explanation. Any 2 points [1] each e Alternative presentation of current accounts Abid $ 2015 Apr 1 2016 Balance b/d 110 Current accounts Faiz $ 2015 Apr 1 Abid Faiz $ Balance b/d [1] $ 800 2016 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book Mar 31 Drawings [1] 6 000 7 000 120 140 ____ 6 230 1 770 _____ 8 910 Interest on drawings [1] Balance c/d Mar 31 Interest on capital [1] 2 400 1 650 5 000 Salary [1] Profit share [1] Balance c/d 2 920 910 6 230 1 460 _____ 8 910 + [1] OF for each balance if shown in statement of financial position, making a total of (8) for the current accounts Abid and Faiz Statement of financial position at 31 March 2016 $ $ ASSETS Non-current assets Fixtures and equipment (book value) Motor vehicles (book value) $ 104 000 28 520 132 520 [1] Current assets Trade receivables Bank 19 320 16 080 [1] 35 400 Total assets 167 920 CAPITAL AND LIABILITIES Capital accounts Current accounts Opening balance Interest on capital Salary Profit share Drawings Interest on drawings Closing balance Abid 80 000 Faiz 55 000 [1] both (110) 2 400 800 1 650 5 000 1 460 8 910 7 000 140 7 140 1 770 2 920 5 210 6 000 120 6 120 (910) [1] OF 135 000 [1] both [1] both [1] [1] both [1] [1] both [1] OF 860 135 860 Non-current liabilities Loan – Abid Current liabilities Trade payables Other payables Total liabilities f 20 000 [1] 11 900 } 160 }[1] 12 060 167 920 13 170 1 00} x 1 } [1] whole formula OF = 8.45% [1] OF (167 920−12 060) [2] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book g Shows the profit earned for each $100 used in the business [1] The higher the percentage the more efficiently the capital is being employed [1] Or other acceptable answer. Any two points [1] each. 10 a Additional finance Additional knowledge and skills Sharing of responsibilities Sharing of risks Discussions can take place before taking decisions. Any two [1] each b Profits have to be shared Decisions have to be recognised by all partners/disagreements may arise Decisions may take longer to put into effect One partner’s actions are binding on all partners All partners are responsible for the debts of the business. Any two [1] each c Raoul and Hassan General journal Debit Credit $ Bank $ 6 000 [1] 6 000 [1] Capital Raoul Inventory 4 000 [1] 4 000 [1] Capital Hassan Rent 600 Shop fittings 750 [1] [1] 1 350 [2] Bank (or cash book) d Raoul and Hassan Profit and loss appropriation account for the year ended 31 March 2012 $ $ Profit for the year 8 800 [1] Less: interest on capital – Raoul 180 [1] Less: interest on capital – Hassan 120 [1] Partner’s salary – Raoul $ 300 3 000 [1] 3 300 5 500 Profit shares – Raoul 2 200 [2] [1] OF Profit shares – Hassan 3 300 [2] [1] OF 5 500 [8] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Answers to Student’s Book e Raoul Current account Date Details $ Date 2012 Mar 31 Details $ 2012 Balance c/d 5 380 Mar 31 ____ Interest on cap 180 [1] O/F Salary 3 000 [1] Profit share 2 200 [1] O/F 5 380 5 380 April 1 Balance b/d 5 380 [1] O/F [4] f Increase Raoul’s salary Allow commission on sales Change the profit-sharing ratio Any 1 [2] Chapter review questions 1 2 A profit and loss appropriation account is prepared to show the distribution of profit among the partners of a partnership. Any two of the following reasons: • • • 3 4 5 Partnerships are simple and cheap to set up. It is easier to raise capital as each partner will contribute finance. Partners may have skills that work well together and enable the business to benefit from them. Partners also contribute to the pool of knowledge and contacts that a business can use. • Partners with their own area of expertise will make the business more productive. For example, a firm of lawyers could have a partner who specialises in family law, and another in corporate law etc. This means that the business can cater to a wider customer base. • Partnerships can provide for more creative ideas that contribute to good decisions. • Responsibilities and risks are now shared between the partners. • Losses are shared. A current account may be maintained in addition to a fixed capital account in which profits and losses, drawings, partners’ salaries and interest are recorded. The appropriations (interest on capital, partner’s salary, share of profit) are credited to the current account and drawings (and interest on drawings) are debited to the current account. Hence, a debit balance on a current account will indicate that a partner has withdrawn from the business more than they have earned and a credit balance will indicate that the partner has withdrawn less than they have earned. A debit balance on the current account will inform the other partners that a partner owes money to the partnership. This will not show up if current accounts are not maintained. The entry is: Debit: Loan interest account (expense) Credit: Susan’s current account If fluctuating capitals are being used then Susan’s capital account will be credited with loan interest accrued. Interest on drawings, interest on capital, salary, share of profit (any three) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 12 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 17 Limited companies Activity 1 1 2 a Limited liability: The risk or liability that each shareholder (owner) bears is limited to the value of the shares they hold. b Equity: Equity is the total monetary value of a company represented mainly by shares sold to interested parties. Equity can also include ploughed-back profit in the form of reserves. c Dividends: A dividend is a portion of a company’s earnings distributed to its shareholders. d Limited company: Limited companies are incorporated businesses with a legally distinct entity. e Shares: A share is a unit of investment in a company. These make up the equity of the company. They can have a nominal or face value of $1, $0.50, $10, etc. Advantages (any two): • • 3 4 Shareholders enjoy limited liability. Companies have a credibility and professional image that give them enhanced powers of negotiation, especially when recruiting employees or taking out a bank loan. • A company can, on its own, raise a lot of equity as compared to a sole trader or a partnership by issuing a lot of shares. • People and institutions are attracted to investing in companies due to the limited liability afforded to them, should they become shareholders. Disadvantages (any two): • Companies must comply with many legal requirements. • As companies must publish their financial statements, secrecy cannot be maintained. • Ownership and management are separated. This could be a limitation if the directors are not good stewards of the company affairs. Companies have a credibility and professional image that give them enhanced powers of negotiation when taking out a bank loan. Banks are quite willing to lend to companies as they are more stable and have more equity. Hence, they do not usually pose a lending risk, unlike sole traders or partnerships. Companies can also raise a lot of finance by selling shares. Five cents for every share they have in the business. Activity 2 a Issued capital = $350 000 b Called-up capital = $175 000 c Paid-up capital = $174 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 3 1 Differences between a preference share and an ordinary share (any two): i Ordinary shareholders are only paid dividends after the dividends of the preference shareholders have been paid. ii Preference shareholders are not usually entitled to vote at annual general meetings. Ordinary shareholders are entitled to vote. iii Preference shareholders are repaid their equity before ordinary shareholders when a company has to close down. iv Preference shareholders get a fixed annual dividend that is calculated as a percentage of the nominal value of the share. Ordinary shareholders can get variable annual dividends depending on the rate suggested by the directors that, in turn, is based on the amount of profit made by the company and its retained earnings. 2 Differences between a debenture and an ordinary share (any two): i Ordinary shares are known as equity capital and debentures are known as loan capital. ii Ordinary shareholders are part-owners of the company and have ownership rights, such as voting at annual general meetings. Debenture holders are lenders to the company and do not have any ownership rights. iii The interest on debentures must be paid whether the company has made a profit or a loss. This interest appears as an expense in the income statement. Dividends do not have to be paid if the company has made a loss. Dividends are recorded in the statement of changes in equity. iv Ordinary shareholders are the last to be paid in the event of the company winding down. Debenture holders are paid before the shareholders. Activity 4 1 2 a Interim dividend: Interim dividends are paid before the financial statements are prepared, either half-yearly or quarterly. b Retained earnings: Retained earnings are profits that are kept in the company from year to year and not paid out as dividends to shareholders. c Reserves: Reserves are profits ploughed back into the business. They are normally used for future expansion of the business, for example a general reserve. Companies plough back a proportion of their profit in order to increase the total equity, which serves as a ready source of finance in the case of an emergency, or to fund an expansion. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 5 1 Billy Merchants Ltd Income statement for the year ended 31 December 2019 $ $ Sales revenue $ 370 000 Less: cost of sales Opening inventory 47 000 Purchases 219 000 266 000 Less: closing inventory 44 000 Gross profit 222 000 148 000 Less: expenses Administration expenses: Salaries of administration staff 15 000 General expenses (47 000 + 9000) 56 000 Depreciation: Land and buildings 6 000 Furniture and fixtures 5 000 82 000 Selling and distribution expenses: Sales staff salaries 50 000 Carriage outwards 5 250 Depreciation of motor vehicles 4 000 59 250 Profit before interest 141 250 6 750 Finance costs: Debenture interest (5 000 + 10 000) 15 000 Loss for the year 8 250 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 2 The statement of changes in equity Billy Merchants Ltd Statement of changes in equity for the year ended 31 December 2019 Balance at Jan 1 2019 Ordinary share capital General reserve Retained earnings Total $ $ $ $ 100 000 16 000 36 000 152 000 (8 250) (8 250) Loss for the year Dividend paid (interim) ______ _____ (7 000) (7 000) Balance at Dec 31 2019 100 000 16 000 20 750 136 750 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book 3 Billy Merchants Ltd Statement of financial position at 31 December 2019 ASSETS Non-current assets $ $ $ Cost Accumulated depreciation Net Book Value Land and buildings (property) 158 750 44 000 114 750 Furniture and fixtures 79 000 35 000 44 000 Motor vehicles 77 000 44 000 33 000 314 750 123 000 191 750 Current assets Inventory 44 000 Trade receivables 85 000 Bank 35 000 Total assets 164 000 355 750 EQUITY AND LIABILITIES Equity and reserves: 100 000 ordinary shares of $1 each 100 000 General reserve 16 000 Retained earnings 20 750 Total equity 136 750 Non-current liabilities 10% debentures (2029) 150 000 Current liabilities Trade payables 50 000 Other payables (9 000 + 10 000) 19 000 Total equity and liabilities Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 69 000 355 750 5 Answers to Student’s Book Exam-style questions 1 2 3 4 5 6 A [1] B [1] A [1] C [1] A [1] a (30 000 x 0.05 [1] = $1 500 [1] b $52 500 [1] c (250 000 x 0.05) [1] = $12 500 [1] d Ji Chung Ltd Statement of changes in equity for the year ended 30 September 2019 Ordinary share capital General reserve Retained earnings Total $ $ $ $ 250 000 12 000 3 000 265 000 [1] row Profit for the year 52 500 52 500 [1] row Dividend paid (interim) (12 500) (12 500) 7 000 (7 000) - [1] row _____ 19 000 _____ 36 000 ______ 305 000 [1] row Balance at 1 October 2018 Transfer to general reserve Balance at 30 September 2019 _______ 250 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book e Ji Chung Ltd Statement of financial position as at 30 September 2019 ASSETS $ Non-current assets: $ $ Cost Accumulated depreciation Net Book Value 400 000 63 350 336 650 [1] Current assets: Inventory 15 300 [1] Trade receivables 14 400 [1] Petty cash 150 [1] 29 850 366 500 Total assets EQUITY AND LIABILITIES Equity and reserves: 250 000 ordinary shares of $1 each 250 000 [1] General reserve 19 000 [1] OF Retained earnings 36 000 [1] OF Total equity 305 000 Non-current liabilities 30 000 [1] 5% debentures Current liabilities Trade payables 30 000 [1] Other payables (accrued debenture interest) 1 500 [1] Total equity and liabilities f 31 500 366 500 Any two points [1] each: • Ordinary shareholders are members of the company. • Ordinary shares carry voting rights. • Ordinary shareholders receive a dividend. • Ordinary share dividend is a share of the profit. • Ordinary share dividend is variable. • Ordinary share dividend is paid after any dividend on preference shares. • Ordinary shareholders are repaid last in the event of a winding-up. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book g Any two points [1] each: • Debentures are loans. • Debenture holders are not members of the company. • Debentures do not carry voting rights. • Debentures carry a fixed rate of interest. • Debenture interest is not dependent on the company’s profit. • Debentures are often secured on the assets of the company. • Debentures holders are repaid before the shareholders in the event of a winding-up. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 7 a Sildean Ltd Statement of financial position at 30 April 2013 ASSETS Non-current assets $ $ $ Cost Accumulated depreciation 12 500 Net book value 193 500 206 000 Current assets Inventory 16 300 } Petty cash Trade receivables 200 }[1] 15 400 Provision for doubtful debts 462 14 938 [1] 31 438 224 938 Total assets EQUITY AND LIABILITIES Equity and reserves Ordinary shares of $0.50 each 140 000 [1] General reserve (10 000 [1] + 5 000 [1]) 15 000 Retained earnings (2 000 [1] + 4 200 [1] OF) 6 200 161 200 Non-current liabilities 4% debentures 40 000 [1] Current liabilities Trade payables 14 156 } Bank overdraft 7 982 }[1] Other payables (deb. int.) 1 600 [1] Total equity and liabilities b i 23 738 ______ 224 938 31 438 (OF) : 23 738 (OF) [1] 1.32:1 [1] OF ii (31 438 (OF) − 16 300):23 738 (OF) [1] 0.64:1 [1] (OF) [2] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book iii Shows whether the company can pay its immediate (current) liabilities from the liquid assets (current assets less inventory) [1] Indication of the liquidity of the company [1] Or suitable answer based on O/F answer to (ii). iv Issue additional shares Issue additional debentures Obtain long-term loan Sell surplus non-current assets Reduced dividends paid Reduce inventory level. Any two points [1] each c Ordinary shareholders are members of the company. Ordinary shares carry voting rights. Ordinary shareholders receive a dividend. Ordinary share dividend is a share of the profit. Ordinary share dividend is variable. Ordinary share dividend is paid after any dividend on preference shares. Ordinary shareholders are repaid last in the event of a winding-up. Any two features [1] each d Debentures are loans. Debenture holders are not members of the company. Debentures do not carry voting rights. Debentures carry a fixed rate of interest. Debenture interest is not dependent on the company’s profit. Debentures are often secured on the assets of the company. Debentures holders are repaid before the shareholders in the event of a winding-up. Any two features [1] each Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book 8 a Lo Shung Limited Statement of financial position at 30 September 2011 ASSETS $ $ Non-current assets Equipment at cost 18 500 [1] Provision for depreciation 9 800 [1] Net book value 8 700 Current assets Inventory 4 500 [1] Trade receivables 8 700 [1] Bank and cash 1 000 [1] 14 200 Total assets 22 900 EQUITY AND LIABILITIES Equity and reserves Share capital 5 000 [1] Retained earnings (4 000 [1] + 1 200 [1]) 5 200 10 200 Non-current liabilities 3% debentures (2020) 6 000 [1] Current liabilities Trade payables 5 800 [1] Other payables 900 [1] Total equity and liabilities 6 700 22 900 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Answers to Student’s Book b Profitability Liquidity [1] Profit margin [1] Current ratio [1] Return on capital employed c Return on opening capital employed = 4 180 [𝟏] 6 200 [𝟏]+6000 [𝟏] x 100 = 34.26 % [1] OF must be % Chapter review questions 1 2 a Debentures: Debentures are long-term loans that carry a fixed rate of interest and are often secured on the assets of the business. b Dividend: A dividend is a portion of a company’s earnings distributed to its shareholders. c Paid-up capital: This is the amount of ordinary share equity paid for by shareholders. d Retained earnings: Retained earnings are profit that is kept in the company from year to year and not paid out as dividends to shareholders. It is a very important source of finance for the business, which normally uses it for future growth. It is a reserve. e Total equity: The total equity is the sum of the ordinary share equity and ploughed-back profits in the form of the general reserve and retained earnings. a Ordinary shares and preference shares – any one: Ordinary shares Preference shares Ordinary shareholders get paid dividends after the preference shareholders are paid Preference share dividends are paid before the ordinary shareholders get paid their dividend Ordinary shareholders receive a variable rate of dividend. Preference shareholders receive a fixed rate of dividend. Ordinary shareholders are members of the company and can vote at the Annual General Meeting. Preference shareholders usually cannot vote at the Annual General Meeting. b Proposed dividend and interim dividend Proposed dividend Interim dividend Proposed dividend is not recorded in the financial statements. Interim dividend is recorded in the statement of changes in equity. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 12 Answers to Student’s Book c Debentures and preference shares Debentures Preference shares Debenture holders are paid interest. Preference shareholders are paid a dividend. d Issued share capital and called-up capital Issued share capital Called-up share capital This is the amount of share capital that the company has issued and the subscribers are now shareholders of the company. This is the part of issued capital that the company has requested money for from its shareholders. e Total equity and loan capital Total equity Loan capital Total equity is made up of share capital and reserves, and does not have to be repaid. Debentures form a part of loan capital which has to be repaid. 3 4 5 a Ordinary shares, retained earnings and general reserves (any two). b Retained earnings, share capital, transfers to general reserve, profit for the year, issues of shares and interim dividends (any two). c Administration expenses, selling and distribution costs and finance charges (any two). d Inventory, trade receivables, other receivables, bank, cash (any two). e Debentures or long-term loan. $0.13 13.33% Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 13 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 18 Clubs and societies Activity 1 1 Non-profit organisations aim mainly to provide social and welfare services for their members, and not to make a profit for owners. They may run profit-making events such as a fete or a social evening event, but the profit made at these events is not the same as the profit of a business. This profit is used for the benefit of the organisation, or given to a charity. It is not available for distribution to the owners as there are no owners. 2 a The treasurer of a club or society has the responsibility for maintaining proper accounting records. He/she handles all monetary matters relating to the non-profit organisation. b A subscription is a fee paid regularly by the members of a non-profit making organisation in order to belong to it. 3 Honest Golf Club Receipts and payments account for the year ended 30 June 2019 Date Receipts $ Date 2018 Jul 1 Balance b/d 4 500 Jun 30 Competition fees 60 Travel expenses 179 Subscriptions 3 560 General expenses 2 000 Ground rent 400 Equipment 1 000 Spectators’ receipts 2 000 Balance c/d 7 671 Fair receipts Jul 1 $ 2019 2019 Jun 30 Payments Balance b/d 450 _____ 10 910 10 910 7 671 Activity 2 1 a A surplus is the result of a non-profit organisation’s income exceeding its expenditure. b A deficit is the result of a non-profit organisation’s expenditure exceeding its income. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 2 Abu Ansari Book Club Income and expenditure account for the year ended 31 December 2018 $ $ INCOME Subscriptions 600 Competition income 300 Less: competition expenses 100 200 Fees received 100 900 Less: expenditure Rent 250 Repairs to books 50 300 Surplus of income over expenditure 600 Activity 3 1 2 When a profit-making activity or event is run to raise money. Roadrunners Club Café trading account for the year ended 30 June 2019 $ Sales $ 5 000 Less: cost of sales Opening inventory 3 000 Add: purchases 1 500 4 500 Less: closing inventory 3 500 1 000 4 000 Wages of café staff Profit for the year from café (transferred to income and expenditure account) 600 3 400 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 4 1 2 The accumulated fund replaces the equity in the statement of financial position of a non-profit making organisation. It represents the surpluses that have collected over the life of the organisation. The accumulated fund will decrease, as a deficit is subtracted from it. Exam-style questions 1 2 3 4 5 6 A [1] B [1] B [1] B [1] D [1] a Subscriptions account Date Details $ 2005 May 1 Details $ 2005 Balance b/d 150 [1] 2006 Apr 30 Date Income and expenditure May 1 Balance b/d 210 [1] 2005–2006 various Bank 1 625 [1] 1 610 [1] OF Balance c/d 75 ____ 1 835 1 835 2006 May 1 Balance b/d 75 [1] b Profit made on sale of refreshments $ $ 4 620 Sales Less: cost of goods sold Opening inventory 270 Purchases 3 250 3 520 Closing inventory 330 Profit on sale of refreshments Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 190 [1] 1 430 [1] OF 3 Answers to Student’s Book c Receipts and payments account for the year ended 30 April 2006 Receipts $ Balance b/d 790 Sale of refreshments 4 620 Subscriptions 1 625 Payments $ Purchases of refreshments 3 250 [1] [1] Insurance 240 [1] [1] Sundry expenses 1 505 [1] OF Rent 1 200 [1] Balance c/d 840 [1] _____ 7 035 Balance b/d d 7 035 840 The subscriptions figure in the receipts and payments account represents the total amount received for subscriptions in the period [1] for the current and other periods. [1] It is the cash amount received during the year. [1] The subscriptions figure in the income and expenditure account represents subscriptions for the year covered by the account. [1] The subscriptions are matched to the year of membership. [1] Members can pay for the year and also in arrears and in advance. [1] [Max 4] 7 a An amount paid by a member for the right to use the facilities of a club. [1] b Some members of the club may be in arrears with their subscriptions [1] and other members may have prepaid their subscriptions. [1] c Sole trader Club or society Capital Accumulated fund [1] Profit for the year Surplus [1] Loss for the year Deficit [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book d Debit Credit Receipts and payments account Depreciation charge Income and expenditure account Proceeds of sale of equipment [1] [1] Loss on disposal of equipment [1] [1] Unpaid subscriptions written off [1] [1] Purchase of new equipment [1] Profit on sale of refreshments [1] [1] [1] e Speedy Runners Sports Club Income statement (trading account) for the year ended 31 December 2013 $ Revenue $ 6 150 Inventory – 1 January 380 Purchases (2 480 [1] − 200 [1] + 220 [1]) 2 500 2 880 Inventory – 31 December 340 [1] OF Cost of sales 2 540 [1] Gross profit 3 610 f Members have not invested any capital [1], so there can be no drawings that represent amounts taken from the return on an investment. [1] g Financial statements are only useful if the information they contain can be compared with previous periods or other businesses. [2] Chapter review questions 1 a b The person responsible for handling the money of a club is called the treasurer. The accumulated fund of a club replaces the capital account of a business. c Profit for the year is referred to as a surplus in a non-profit organisation. d A club or society is a non-profit organisation. e A main source of income for a non-profit organisation is members’ subscriptions. f Subscriptions in advance are recorded as a current liability in the statement of financial position of club. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book 2 3 a b Receipts and payments account Current liabilities c Income and expenditure account d Subscriptions e Surplus a $8 500 Working: Subscriptions account Details $ Details $ Balance b/d (arrears) 2 500 Balance b/d prepaid 5 000 Income and expenditure 8 500 Bank 5 000 Balance c/d (prepaid) 2 000 Balance c/d (arrears) 3 000 13 000 13 000 B 8500 = 17 500 4 Kosi Leisure Club Receipts and payments account for the year ended 31 August 2019 Receipts $ Payments $ Balance b/d 200 Administrative expenses 95 Fundraising activities 2 000 Wages 300 Rent 350 Sundry expenses 100 Receipts from snacks 400 Equipment 140 _____ Balance c/d 2 315 2 950 2 950 Balance b/d 5 a i 2 315 1 January Balance $150 Explanation: This is the total subscriptions for the year ended 31 December 2018 which were still unpaid at the start of 2019. Double entry: Debit subscriptions account for the year ended 31 December 2018. ii 31 December Income and expenditure account $3 600 Explanation: This is the amount transferred to the income and expenditure account as income representing the subscriptions for the financial year ended 31 December 2019 Double entry: Credit the income and expenditure account Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book iii 31 December Bank $3 460 Explanation: This is the amount of subscriptions received from the members in cheque or bank transfers during the financial year. Double entry: Debit the bank account. iv 31 December Balance $200 Explanation: This is the amount received during 2019 for subscriptions for the following year. Double entry: Credit subscriptions account for the year ended 31 December 2020. v 31 December Balance $590 Explanation: This is the total subscriptions for 2019 which were still unpaid at the year end. Double entry: Debit subscriptions account for the year ended 31 December 2020. b i $200 This amount represents subscriptions prepaid for the next financial year ended 31 December 2020. It will appear under current liabilities in the statement of financial position at 31 December 2019. ii $590 This amount represents subscriptions still owing for the year ended 31 December 2019. It will be recorded as a current asset in the statement of financial position at 31 December 2019. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 19 Manufacturing accounts Activity 1 1 a b Wages to staff on assembly line Wood for furniture c Juices to add to soft drinks d Royalties for using a patented formula e Cement Or accept any suitable answer. Activity 2 Cost of loose tools = 3560 + 1000 − 4000 = $560 The amount that will appear in the manufacturing account is $500. Activity 3 Direct materials Direct labour Direct expenses Wages paid as per piece rate Factory power Royalties Carriage inwards Wages paid on hourly basis Depreciation of equipment in the office of a manufacturing business Cost of raw materials bought in Factory overheads Will not be any of these Supervisor’s salary General factory expenses Factory manager’s salary Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 4 Prime cost section of Overheads section the manufacturing of the manufacturing account account Income statement Factory lighting Direct labour Carriage on raw materials Purchase of finished goods Commission on sales Depreciation of factory machinery Activity 5 Cost Basis Factory Administration block $ $ Rent Area 8 000 2 000 Electricity Area 2 000 500 Salaries Given 7 000 8 000 Insurance Value of equipment 6 000 1 000 Internet Equal 2 300 2 300 Heating Area 2 400 600 27 700 14 400 Total factory overheads Exam-style questions 1 2 3 4 5 B [1] B [1] C [1] D [1] C [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book 6 a Ashraf Zayed Income statement for the year ended 28 February 2013 $ $ 323 000 [1] Sales Less: cost of sales 4 300 [1] Purchases of finished goods 267 100 [1] Cost of production 271 400 Less: closing inventory of finished goods 19 600 [1] 251 800 71 200 [1] OF Gross profit b Any two for [1] mark each: • production did not meet demand • it was cheaper to buy rather than make • could not make those particular items • not economical to make such a small amount. c Ashraf Zayed General journal Date Details Debit 2013 Feb 28 Feb 28 Credit $ Income statement 1 130 Feb 28 Income statement [1] 1 130 [1] Carriage outwards (Transfer of carriage outwards to income statement) Feb 28 $ [1] 600 Provision for doubtful debts (Creation of provision for doubtful debts) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 [1] 600 [1] [1] 3 Answers to Student’s Book d Ashraf Zayed Motor insurance account 2012 Details $ 2013 Details $ Jun 1 Bank 720 [1] Feb 28 Drawings 360 [1] Income statement 270 [1] Balance c/d 90 [1] ___ 720 720 2013 Mar 1 e Balance b/d 90 [1] OF The matching principle requires the revenue of the accounting period to be matched against the costs of the same period. [1] The insurance relating to the financial year ended 28 February 2013 has been transferred to the income statement. [1] F Overstated $ Profit for the year ended 28 February 2013 [1] for correct column and [1] for correct amount g 7 Understated $ by $270 Applying the business entity principle [1], the business is treated as being completely separate from the owner. Only the transactions of the business are recorded in the business’ books. [1] a Cost Overheads section of the manufacturing account [1] Office rent Factory rent [1] [1] Carriage outwards Depreciation of machinery Income statement [1] Depreciation of office equipment [1] Discounts allowed [1] Salesperson’s salary [1] Administration costs [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book b Harrington Manufacturing account (extract) for the year ended 31 December 2014 $ $ 5 600 [1] Opening inventory of raw material Add: purchases of raw material 71 100 [1] Less: purchases returns 1 000 [1] 70 100 Less: drawings 2 000 [1] 68 100 Add: carriage inwards 2 100 [1] 70 200 75 800 Less: closing inventory of raw material 4 200 [1] Cost of raw materials consumed 71 600 [1] OF Add: direct labour 52 550 [1] Prime cost 124 150 [1] OF c To set prices [1] or to compare the cost of manufacturing with the cost of buying the goods in [1]. d 4 200 [1] + 1 800 [1] + 5 500 [1] = $11 500 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book 8 a Nasir Manufacturing Limited Manufacturing account for the year ended 31 January 2014 $ $ Cost of materials used Opening inventory of raw materials 23 500 Purchases of raw materials 124 600 [1] 148 100 Closing inventory of raw materials 26 100 122 000 [1] Direct wages (136 000 + 2 200) 138 200 [1] Direct expenses 16 300 [1] Prime cost 276 500 [1] Factory overheads Wages of factory supervisors 31 400 } General factory expenses 19 208 }[1] 3 Rates & insurance (4× (6 360 − 120)) [1] 4 680 [1] Depreciation plant and machinery (20% × (94 000 − 33 840) 12 032 [1] Loose tools (2 650 + 310 − 2 740) 220 [1] 67 540 344 040 [1] OF Opening work in progress 11 020 [1] 355 060 Closing work in progress 12 060 [1] Cost of production 343 000 [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book b Nasir Manufacturing Limited Income statement for the year ended 31 January 2014 $ $ $ Revenue 539 000 Cost of sales Opening inventory finished goods 18 100 [1] Cost of production 343 000 [1] OF Purchases finished goods 16 900 [1] Less: returns 200 [1] 16 700 377 800 Less: closing inventory finished goods 19 300 [1] Gross profit 9 358 500 180 500 [1] OF a Ahmed El Din Manufacturing account for the year ended 30 September 2011 $ $ Cost of raw materials Opening inventory of raw materials 17 300 Purchases of raw materials 203 300 [1] 220 600 19 400 Closing inventory of raw materials 201 200 [1] Direct factory wages (199 500 [1] + 2 750 [1] − 2 300 [1]) 199 950 Prime cost 401 150 [1] Factory indirect wages 42 600 [1] Factory general expenses (122 400 [1] − 250 [1]) 122 150 Depreciation factory machinery (132 500 + 5 900 [1] − 124 000 [1]) 14 400 179 150 580 300 [1] OF Add: Opening work in progress 9 200 Less: Closing work in progress 10 400 Cost of production (1 200) [1] 579 100 [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book b Ahmed El Din Income statement for the year ended 30 September 2011 $ $ Revenue $ 858 000 [1] Less: cost of sales Opening inventory finished goods Cost of production Less: goods for own use 29 300 [1] 579 100 [1] O/F 900 [1] 578 200 607 500 Less: closing inventory of finished goods 31 200 [1] Gross profit 576 300 281 700 [1] OF Chapter review questions 1 a Direct costs: Costs directly linked to the manufacturing process, for example cost of raw materials. b Indirect costs: These include all those costs, incurred in the factory where the production process is carried out, but which cannot be directly identified with each item produced, for example rent of factory. c Work in progress: Items that are not yet completed and are only partly made. d Prime cost: All the direct costs make up the prime cost. e Finished goods: Those goods that are ready for sale after having gone through the manufacturing process. a Selling and distribution expenses are incurred in the process of promoting, advertising and distributing finished goods to customers. b Administration expenses could include expenses incurred in the process of planning, coordinating, controlling or directing the business. c Direct expenses are those expenses that can be directly traced to the production process. d Ishan is a manufacturer who produces all the goods he sells. In the trading account section of his income statement, cost of production is the term that replaces ‘ordinary goods purchased’. 2 3 A trading account is prepared to calculate the gross profit from trading. A manufacturing account is prepared to calculate the cost of production incurred by a manufacturer. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 8 Answers to Student’s Book 4 True/False? A manufacturer can also be a trader. True The direct costs for every manufacturer cannot differ. False The factory and office of a manufacturer must be housed in separate buildings. False There can be more than one type of closing inventory for a manufacturing business. True Carriage inwards should be added to arrive at prime cost. True 5 Limba Toba Manufacturing account for the year ended 31 March 2019 $ $ Opening inventory of raw material 1 600 Add: purchases of raw material 3 500 5 100 Less: closing inventory of raw material 1 200 Cost of raw materials consumed 3 900 Add: factory overheads Wages 1 500 Fuel and power 900 Depreciation of plant machinery 900 Electricity 800 Production cost of goods 8 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book 6 Molly Manufacturing account for the year ended 31 August 2019 $ $ Opening inventory of raw material 10 500 Add: purchases of raw material 10 000 20 500 Less: closing inventory of raw material 10 000 Cost of raw materials consumed 10 500 Add: direct costs: wages and salaries 3 000 Prime cost 13 500 Add: factory overheads Wages and salaries 15 000 Power and fuel (5000 + 200) 5 200 Depreciation 1 000 21 200 34 700 Add: opening inventory of work in progress 12 000 46 700 Less: closing inventory of work in progress 13 000 Production cost of goods completed 33 700 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 20 Incomplete records Activity 1 1 Denison Sole Traders Capital account Date Details $ Date 2018 Dec 31 Details 2018 Drawings 12 350 Jan 1 Balance b/d 500 000 Balance c/d 670 000 Dec 31 Cash/bank 14 000 ______ Profit for the year (balancing figure) 168 350 682 350 2019 $ 682 350 2019 Jan 1 Balance b/d 670 000 Answer: profit for the year = $168 350 2 A statement of affairs lists the assets, liabilities and equity of a business that does not maintain a full set of records. In an opening statement of affairs, the assets, liabilities and equity are recorded as on the first day of the financial year. 3 A profit. 4 a Capital = assets − liabilities b Profit = closing capital − opening capital + drawings Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 2 a Kelly Statement of affairs at 1 September 2018 ASSETS $ Non-current assets 30 000 Current assets 10 000 40 000 CAPITAL AND LIABILITIES Capital (balancing figure) 35 000 Current liabilities 5 000 40 000 b Kelly Statement of affairs at 31 August 2019 ASSETS $ $ $ Non-current assets 26 000 Current assets 21 000 47 000 CAPITAL AND LIABILITIES Capital 35 000 Add profit for the year 14 000 Less drawings 49 000 3 000 Current liabilities 46 000 1 000 47 000 c Kelly’s profit for the year ended 31 August 2019 = $14 000 (46 000 − 35 000 + 3000) Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 3 $ Receipts from trade receivables (16 800 + 9 400) 26 200 Add: closing trade receivables 8 600 34 800 Less: opening trade receivables 10 500 24 300 Add: discounts allowed 150 Total credit sales 24 450 Total sales = total credit sales plus total cash sales = 24 450 + 1 500 = $25 950 Activity 4 1 To calculate sales: Total trade receivables account Date Details $ Date 2018 Details $ 2018 Jan 1 Balance b/d 5 400 Dec 31 Bank 3 700 Dec 31 *Credit sales(balancing figure) 3 900 Balance c/d 5 600 9 300 9 300 * Credit sales = $3 900 To calculate purchases: Total trade payables account Date Details $ Date 2018 Dec 31 Details $ 2018 Bank 2 500 Jan 1 Balance b/d 1 500 Balance c/d 2 000 Dec 31 Credit purchases* 3 000 4 500 4 500 * Credit purchases = $3 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 2 a Vanita Total trade receivables account Date Details $ Date 2018 Apr 1 Details 2019 Balance b/d 1 200 Mar 31 2019 Mar 31 $ 10 300 *Credit sales Cash 5 000 Bank 2 000 Balance c/d 4 500 11 500 11 500 *Credit sales = $10 300 Vanita Total trade payables account Date Details $ Date 2019 Mar 31 Details $ 2018 Cash 2 000 Apr 1 Bank 1 400 2019 Balance c/d 1 500 Mar 31 Balance b/d 2 000 Credit purchases* 2 900 2 900 2 900 *Credit purchases = $2 900 b Vanita Trading account for the year ended 31 March 2019 $ Sales $ 10 300 Less: cost of sales Opening inventory 4 670 Add: purchases 2 900 7 570 Less: closing inventory 3 680 Gross profit 3 890 6 410 Activity 5 1 a Receipts from customers are called takings. Manoj’s takings were 45 000+ 8 700 = $53 700. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book 2 b To pay for wages of $5 200 and purchases of $2 400 in cash and for cash drawings of $1 100. c $1300. This amount would be shown as cash in hand in the current assets section of the statement of financial position. d By balancing the bank account. e By comparing the closing balance with the opening balance of machinery (the revaluation method). The summary of the bank account shows that no machinery was bought or sold during the year. f In the income statement as an expense and in the statement of financial position as a deduction from trade receivables. g From the remaining cash takings. h From the remaining cash takings. a Mobin Total trade payables account Date Details $ Date 2019 Details $ 2019 Dec 31 Bank 16 700 Jan 1 Balance b/d 2 500 Balance c/d 3 000 Dec 31 Credit purchases* 17 200 19 700 19 700 Mobin Total trade receivables account Date Details $ Date 2019 Details $ 2019 Jan 1 Balance b/d 3 500 Dec 31 Bank 30 000 Dec 31 *Credit sales 30 500 Balance c/d 4 000 34 000 34 000 *Credit sales = $30 500 Total sales = $30 500 + 3 500 = $34 000 b Capital at 1 January 2019 = assets − liabilities = (3 000 + 3 500 + 2 100 + 6 000) − 2 500 = $12 100 Capital at 31 December 2019 = (5 000 + 4 000 + 2 000 + 5 500) − 3 000 = $13 500 c Profit for the year = 13 500 − 12 100 + (550 x 12) = $8 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Answers to Student’s Book Activity 6 1 Purchases = cost of sales + closing inventory − opening inventory = 8 000 + 3 000 − 1 000 = $10 000 2 a Mark-up = b Gross margin = Gross profit x 100 Cost of sales Gross profit Sales x 100 Activity 7 Using the inventory turnover formula: Cost of sales Average inventory =8 Therefore: a 8 𝑥 (opening + closing inventory) = 8 x 2 500 = $20 000 2 25 Gross profit = 20 000 x 100 = $5 000 Cost of sales = b c Sales = cost of sales + gross profit = 20 000 + 5 000 = $25 000 d Purchases = cost of sales + closing inventory − opening inventory = 20 000 + 2 000 − 3 000 = $19 000 Exam-style questions 1 2 3 4 5 6 A [1] B [1] D [1] C [1] D [1] a i Trade receivables $ Balances at 1/4/03 8 000 [1] Add: sales for the year 90 000 [1] Less: cash received 83 000 [1] Discount allowed 5 000 [1] Balances at 31/3/04 $ 98 000 88 000 10 000 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 6 Answers to Student’s Book ii Trade payables $ Balance at 1/4/03 6 000 [1] Add: purchases for the year 77 000 [1] Less: cash paid 74 000 [1] Discounts received 3 000 [1] $ 83 000 77 000 6 000 [1] Balances at 31/3/04 b Sam Trading account for the year ended 31 March 2004 $ Sales (90 000 [1] + 10 000 [1]) $ 100 000 Less: cost of sales Opening inventory(1/4/03) 14 000 [1] Add: purchases 77 000 [1] 91 000 Less: closing inventory(31/3/04) 16 000 [1] 75 000 [1] 25 000 [1] OF Gross profit c i ii 75 000 [𝟏] 15 000 [𝟏] = 5 [1] times [1] Any one of: • to monitor [1] profitability [1] • inventory replacement [1]– how often new inventory replaces old inventory [1] • to make comparisons [1]in order to identify causes of fluctuations and take remedial/corrective action [1]. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 7 Answers to Student’s Book 7 a Malala Khan Statement of affairs at 31 May 2015 ASSETS Accumulated depreciation $ Cost Non-current assets $ Net book value $ Machinery 28 600 11 440 [1] 17 160 (1 OF) Motor vehicles 24 000 13 875 [1] 10 125 (1 OF) 52 600 25 315 27 285 Current assets Inventory 6 750 [1] Trade receivables 7 800 [1] Less: provision for doubtful debts 156 7 644 [1] Other receivables 101 [1] 14 495 41 780 CAPITAL AND LIABILITIES 19 600 (1 OF) Capital Current liabilities Trade payables 8 100 [1] Bank overdraft 4 080 [1] 12 180 31 780 Non-current liabilities 10 000 [1] Long-term loan 41 780 b Malala Khan Capital account Date Details $ 2015 May 31 Date Details $ Balance 20 000 [1] Bank 5 000 [1] 2014 Drawings 1 990 [1] June 1 Drawings 420 [1] 2015 Loss for year 2 990 (1 OF) Jan 1 Balance c/d 19 600 (1 OF) _____ 25 000 25 000 2015 June 1 Balance b/d Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 19 600 8 Answers to Student’s Book c Increase Decrease [1] Reduce the credit period allowed to credit customers Sell a motor vehicle which is no longer used [1] [1] Arrange with the bank to have a loan for six months [1] Allow cash discount to credit customers who pay d No effect To be able to meet debts when they fall due To be able to take advantage of cash discounts To be able to take advantage of business opportunities as they arise To ensure that there is no difficulty in obtaining further supplies Or other suitable explanation. Any three points [1] each 8 a Paul Muyambo Statement of affairs at 31 January 2011 $ $ $ Non-current assets Machinery at book value 32 500 Less: depreciation for the year 8 125 [1] Motor vehicle at valuation 10 300 Less: depreciation for the year 1 200 [1] 24 375 [1] 9 100 [1] 33 475 Current assets Inventory Trade receivables Less provision for doubtful debts Other receivables 12 648 [1] 11 320 283 [1] 11 037 [1] 261 [1] 23 946 57 421 CAPITAL AND LIABILITIES Capital 36 475 [2] CF/[1] OF Current liabilities Trade payables 9 485 [1] Other payables 315 [1] Bank overdraft 11 146 [1] 20 946 57 421 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 9 Answers to Student’s Book b Calculation of profit or loss for the year ended 31 January 2011 $ $ Capital at 31 January 2011 36 475 [1] O/F Drawings cash 5 575 [1] Drawings goods 1 700 [1] 7 275 43 750 Less: capital 1 February 2010 42 500 [1] Capital introduced 3 000 [1] 45 500 Loss for the year 1 750 [2] CF/[1] OF Alternative presentation: Capital account Date Details $ 2011 Jan 31 Date Details $ 2010 Drawings cash 5 575 [1] Feb 1 Balance b/d 42 500 [1] Drawings goods 1 700 [1] 2011 Loss for year 1 750 [2] O/F Jan 31 Bank/cash 3 000 [1] Balance c/d 36 475 [1] O/F _____ 45 500 45 500 2011 Feb 1 9 Balance b/d 36 475 a Aneela Calculation of credit sales for the year ended 29 February 2016 $ Receipts from credit customers 61 230 [1] Cash discount allowed 1 570 [1] Returns from credit customers 2 070 [1] Irrecoverable debts 260 [1] Amount owing by customers 29 February 2016 16 190 [1] Credit sales 81 320 [1] OF Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 10 Answers to Student’s Book Alternative presentation Aneela Total trade receivables account Date Details $ Date 2016 Feb 29 Details 2016 81 320 Feb 29 *Sales [1] OF _____ 2016 Mar 1 $ Bank 61 230 [1] Discount allowed 1 570 [1] Returns 2 070 [1] Irrecoverable debts Balance c/d 260 16 190 [1] [1] 8 1320 81 320 16 190 Balance b/d *Balancing figure b Aneela Calculation of credit purchases for the year ended 29 February 2016 $ $ Credit purchases 70 150 [1] Less: returns to credit suppliers 1 110 [1] Cash discount received 1 860 [1] Amount owing to credit suppliers 29 February 2016 7 040 [1] 10 010 60 140 [1] OF Amount paid to credit suppliers Alternative presentation Aneela Total trade payables account Date Details $ Date 2016 Feb 29 Details $ 2016 Returns [1] 1 100 Feb 29 Discount received [1] 1 860 *Bank [1] OF 60 140 Balance c/d [1] 7 040 _____ 70 150 70 150 Purchases [1] 70 150 2016 Mar 1 Balance b/d 7 040 *Balancing figure Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 11 Answers to Student’s Book c Aneela Bank account Date Details 2015 Mar 1 $ Date 2016 45 000 Feb 29 10 000 Capital [1] Loan [1] 2016 Feb 29 Trade receivables [1] 61 230 116 230 2016 Mar 1 Balance b/d *Balancing figure Details Non-current assets [1] Trade payables [1] OF *Expenses [1] OF Balance c/d [1] $ 20 500 60 140 18 620 16 970 116 230 16 970 Chapter review questions 1 2 a Incomplete records: Small businesses normally keep very basic records, making one entry per transaction. This is sometimes known as single entry book-keeping. In some cases, transactions do not get recorded at all. Therefore their records are often incomplete. b A statement of affairs lists the assets, liabilities and capital of a business that does not maintain a full set of records. a A statement of account and a statement of affairs. A statement of account is a copy of a customer’s account in the books of the supplier that is sent out to the customer periodically to remind them that payment is due. In contrast, a statement of affairs is a list of the assets, liabilities and capital of a business that does not maintain a full set of records. b Mark-up and gross margin. Gross margin is the gross profit as a percentage of sales revenue, whereas a mark-up is the gross profit as a percentage of cost of sales. 3 Closing capital = opening capital + profit for the year − drawings + capital introduced Profit for the year = 14 700 + 5 000 − 15 000 − 2 000 = $2 700 4 5 6 • • Larry’s business has made a loss. a Mark-up = 1000 𝑥 100 = 50% b Gross margin = 1500 𝑥 100 = 33.33% Larry has made excessive drawings. Capital = assets − liabilities = 35 700 − 9 000 = $26 700 Amber made a profit of (26 700 − 16 900) $9800 Gross profit = $500 500 500 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 12 Answers to Student’s Book 7 Gross profit = 20 000 x 25% = $5 000 Tom Trading account for the year ended 31 December 2018 $ Sales $ 20 000 Less cost of sales Opening inventory 4 500 Purchases 15 300 19 800 Less closing inventory 4 800 Gross profit Answer: The purchases were $15 300 8 15 000 5 000 Gross profit = 40 000 − 25 000 = $15 000 15 000 a Mark-up = 25 000 x 100 = 60% b Gross margin = 40 000 x 100 = 37.5% 15 000 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 13 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 21 Calculation and understanding of accounting ratios Activity 1 1 2 3 The trading account section of the income statement. False. The gross profit for every $100 of sales. 4 Gross margin = = = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑥 100 𝑁𝑒𝑡 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 25 000 𝑥 100 60 000 41.67% Activity 2 1 a Gross margin = = = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑥 100 𝑆𝑎𝑙𝑒𝑠 20 000 𝑥 100 60 000 33.33% b Profit margin = = = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 x 100 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 15 000 𝑥 100 60 000 25% c Expenses = gross profit − profit for the year = $5 000 Expenses as a percentage of sales = = Expenses x 100 Sales 5000 60 000 x 100 = 8.33% or Expenses as a percentage of sales = gross margin − profit margin = 33.33 − 25 = 8.33% 2 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑥 100 𝑆𝑎𝑙𝑒𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 = 𝑥 100 100 000 25 𝑥 100 000 Profit for the year = 100 25 = Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book = $25 000 The profit will increase by $25 000 − 15 000 = $10 000 (All other things remaining constant) Activity 3 1 2 Sally’s profit margin at first glance seems low at 4.47%. However, without more information, it is difficult to comment. If her ROCE is better than that of the previous year, or that of similar businesses, then she is using her investment efficiently. She should also compare it with the returns she would get if she were to invest her money elsewhere, for example a fixed deposit at a bank. a Return on capital employed = Profit before interest Non−current assets + current assets − current liabilities x 100 670 x 100 = 20 800 − 5 800 = 4.47% b Return on capital employed = Profit before interest x 100 (Opening capital employed + closing capital employed) ÷ 2 670 Return on capital employed = (31 000) ÷ 2 = 4.32% Activity 4 1 2 a Current assets are assets that can be sold or consumed through the normal workings of a business within a year of the date of the statement of financial position in which they are listed. b Current liabilities are those debts that must be paid within a year from the date of the statement of financial position in which they are listed, for example trade payables, overdraft. c Liquid assets are those assets that can be quickly converted to cash with no loss in value. Current ratio = = Current assets = Current liabilities 12 800 3600 3.56:1 Activity 5 Liquid ratio = Current assets − inventory Current liabilities 6000 = 3600 = 1.67: 1 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Activity 6 1 The reasons are: a If a business has a high rate of inventory turnover it follows that it is selling a lot of products, thereby making a good profit. b 2 3 As inventory is being replaced regularly with new goods, the products for sale will always be new and current, making them attractive to customers. The reasons are (any two): a If the rate is low, it would show that the business is not being efficient at managing its inventory. The business may have over-purchased inventory that is not being sold fast enough. Hence it will pile up in the warehouse, getting old, damaged or obsolete. b Money is tied up in inventory that could have been used more productively elsewhere. c A slowing down in the rate could also mean that sales are slowing down, perhaps due to falling demand, uncompetitive prices or not enough sales promotions. Rate of inventory turnover = = = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑠𝑎𝑙𝑒𝑠 (𝑂𝑝𝑒𝑛𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 + 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦) ÷2 20 000 (2700 + 2200) ÷ 2 8.16 times Activity 7 1 2 This ratio measures the average time the business’ trade receivables take to pay their debts. It is always better if trade receivables pay off their accounts quickly. This helps keep the business liquid enough to meet its other cash needs. In addition, old debts are liable to become irrecoverable debts that are a business expense. The trade receivables turnover ratio therefore keeps the business informed about the collection period of its debt so that it can take corrective action. The trade receivables turnover ratio can be improved by using measures such as (any one): i charging interest on amounts owing ii offering cash discounts for early payment iii putting in place a good credit control policy iv refusing to sell more goods to customers who have outstanding debts. 3 Yes, the business would be satisfied with this, because its trade receivables are paying well in time before the credit period offered expires. Exam-style questions 1 2 3 4 5 D [1] A [1] C [1] D [1] B [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 6 Profit for the year = gross profit – expenses = 45 000 – 20 000 = $25 000 [1] 100 Sales = 20 x 25 000 = $125 000 [2] Cost of sales = sales − gross profit = 125 000 – 45 000 = $80 000 [1] 7 Current ratio 8 a = Current assets 55 000 = = 1.83:1 [4] Current liabilities 30 000 Working capital = 26 000 [1] – 13 000 [1] = $13 000 $ $ Current assets Current liabilities Inventory 10 670 Trade payables 8 800 Trade receivables 11 200 Bank overdraft 4 200 Other receivables 4 130 _____ 26 000 13 000 b i Current ratio 2:1 Current assets Current liabilities ii 26 000 [𝟏] 𝐎𝐅 = 13 000 [𝟏] 𝐎𝐅 Liquid ratio (acid test) 1.18:1 Current assets − inventory Current liabilities c = 26 000−10 670 [𝟏] 𝐎𝐅 15 330 [𝟏]𝐎𝐅 = = 1.18 13 000 [𝟏] 𝐎𝐅 13 000 [𝟏] 𝐎𝐅 Reasons: Purchase of non-current assets $20 000 [1] for cash or on credit [1] Cash withdrawn by Penn [1] which reduces cash available for use by the business [1] Loss from business operations [1] with increasing indebtedness [1] Bank overdraft increased [1] to help finance purchase of non-current asset [1] Non/late payments by trade receivables [1] and increase in irrecoverable debts and an increase in the provision for doubtful debts [1] Fall in cash sales [1] leading to reduction in funds coming into the business [1] Allow any reasonable alternatives. Max 6 d Action: Bring in more personal capital [1] in the form of cash [1] so that bank overdraft can be reduced [1] Consider increasing long-term [1] bank loans [1] to increase readily available funds [1] Reduce personal drawings [1] to retain cash [1] or inventory [1] in the business Carry out review of non-current assets [1] with a view to selling off surplus to requirements [1] to increase cash without increasing liabilities [1] Chase late payers [1] and offer cash discounts [1] to improve the flow of ready cash into the business [1] Delay payments to trade payables [1] to retain cash in the business [1] if it can be done without causing disruption of supply [1] Allow any reasonable alternatives. Max [6] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book 9 a i ii iii b Net profit Revenue 44 000 [1] x 100 = 220 000 [1] x 100 = 20% [1] Current assets 35 000+40 000+15 000 [𝟏] = = 1.5: 1 [𝟏] Current liabilities 60 000 [𝟏] Current assets −inventory = Current liabilities 40 000+15 000 [1] 60 000 [1] = 0.9:1 [1] Revenue is reduced [1] by $40 000 [1] Gross profit % appears to be reduced [1] by 10% [1] Expenses have reduced [1], but not in proportion to the revenue [1] Max [2] per point c Increased capital [1] that could have been in cash [1] Possible reduced drawings [1] in the form of cash [1] Reduced purchases of inventory [1] retaining cash in the business [1] Improved collection of debts [1] bringing funds into the business sooner [1] Reduced expenses [1] reducing outflow of cash from the business [1]. Max [2] per point Chapter review questions 1 Cause of a high current ratio 2 3 Effect a Too much inventory 1. Goods becoming outdated b Too many trade receivables 2. Danger of irrecoverable debts c Too much money in bank 3. Money not being put to good use d Too much cash in hand 4 Money not earning any income a Current ratio = b Liquid ratio = Current assets Current liabilities Current assets −inventory Current liabilities Gross profit x 100 c Gross margin = d Profit margin = e Trade receivables turnover (days) = f Rate of inventory turnover = g Trade payables turnover (days) = Sales Profit for the year x 100 Sales Trade receivables Credit sales x 365 Cost of sales (opening inventory + closing inventory ÷2 Trade payables Credit purchases x 365 Samson’s expenses in 2018 were $20 for every $100 of sales, whereas in 2019 they were $14. Hence, Samson has controlled his expenses well enough to reduce them by 6% of sales. His expenses in 2018 amounted to $8 000 and $7 000 in 2019, so he managed to reduce expenses by $1 000 while increasing sales. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 22 Interpretation of accounting ratios Activity 1 1 Lopes Ratio analysis for the years ended 31 December 2018 and 2019 2018 a Gross margin = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑥 100 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 b Profit margin = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑥 100 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 c ROCE = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑥 100 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 45 000 x 100 = 45% 100 000 33 000 = 100 000 𝑥 100 = 33% = 33 000 𝑥 100 = 41.25% 80 000 d Current ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 5000 = 2.2: 1 e Liquid ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 5000 = 1.4: 1 11 000 7000 2019 = 45 000 𝑥 100 = 50% 90 000 36 000 = 90 000 𝑥 100 = 40% = 36 000 𝑥 100 = 36% 100 000 18 000 = 10 000 = 1.8: 1 10 000 = 10 000 = 1:1 2 3 Ratios In 2019 as compared to 2018 Gross margin Better Profit margin Better ROCE Worse Current ratio Lower Liquid ratio Lower Financial statements on their own do not contain the most useful data. This is because the data exists in absolute figures. To make sense of the data, the business’ interested parties have to analyse, and then interpret the results from their analysis, to assist them in decision-making. Analysis involves the examining of the interrelationships that exist between various data points in financial statements. Accounting ratios are used to do this. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 2 a When the gross margin has decreased it could be for a number of reasons (any two): • • • b higher supplier costs lower selling prices due to trade discounts and promotions offered to customers increasing ancillary costs, such as packaging or freight, which can increase cost of sales • not passing on increasing costs to customers • increased competition that can force the business to compete by reducing the selling price to make it more competitive. The measures are (any two): c • reduce costs by either switching to a cheaper supplier or buying cheaper goods • increase the selling price • reduce other costs that add to cost of sales. The measures a business can take to improve profit margin are (any two): • move to cheaper premises so that the rent decreases • use power-saving gadgets and equipment • train staff to be more efficient and productive. Or other suitable answer. Activity 3 1 2 Working capital is the difference between current assets and current liabilities. It is the money needed for the day-to-day running of a business. Ways to improve working capital (any four): • • • • sell off non-current assets that are not being used take on a long-term loan owners should reduce drawings owners can introduce more capital. 3 Liquid ratio = 4 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 −𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 A liquidity crisis is a business’ lack of liquidity to meet its immediate needs for cash. This means that the business is unlikely to be able to pay its debts as they fall due. Exam-style questions 1 2 3 4 5 C [1] C [1] C [1] C [1] B [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book 6 a Ratio Year ended 31 Jan 2018 Year ended 31 January 2019 Gross margin 34% 40 [1] % [1] Profit margin 30% 25 [1] % [1] Trade receivables turnover 28 days 35 [1] days [1] Trade payables turnover b 35 days 139 [1] days [1] Ratio Reason 1 Reason 2 Gross margin Lower supplier costs [1] Decreasing carriage inwards [1] Profit margin Increased power costs [1] Increased rent [1] Trade receivables turnover Trade receivables taking longer to pay [1] Not enough incentives to make trade receivables pay more quickly [1] Trade payables turnover Business takes longer to pay trade payables [1] Not enough liquidity to pay trade payables [1] Or other suitable answer. 7 a i Hesham can increase his profit for the year [1] by decreasing his expenses [1], such as rent or salaries. ii He can increase his gross profit [1] by finding cheaper suppliers. [1] Two ways Hesham can improve liquidity: i He can reduce his expenses [1] by cutting his power bill. [1] ii He can reduce his rent [1] by moving to cheaper premises. [1] Or other suitable answer. Two ways Hesham can improve trade receivable turnover: b i He can better his trade receivables turnover ratio by having a good credit control policy [1] and avoiding late payments. [1] ii He can offer cash discounts [1] for early payment [1] from trade receivables. Gross profit has a direct influence on profit for the year. Profit for the year = gross profit – expenses [1] The relationship between profit for the year and owner’s capital is through profits ploughed back into the business, as profits are added to owner’s equity [1] (and losses are subtracted from owner’s equity) [1]. Hence a decreasing gross profit will affect Hesham’s owner’s equity [1]. c A business’ main source of revenue is sales revenue, which is found in the income statement along with gross profit and profit for the year [1]. Sales revenue, minus cost of sales, is equal to gross profit. [1] If sales revenue is incorrect, the gross profit will also be incorrect [1]. Gross margin, which is a ratio involving both sales revenue and gross profit, will therefore be affected by sales revenue. [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 8 d Hesham could undertake a rigorous sales promotion campaign [1] to increase sales revenue. He could advertise and market his products more widely. [1] e If closing inventory is undervalued, gross profit will also be undervalued and therefore the gross margin will be undervalued[1]. The reverse is also true: if closing inventory is overvalued, so are the gross profit and gross margin [1]. Also, when inventory is undervalued the rate of inventory turnover will be higher, which will show that inventory has turned over more times than is really the case [1]. The reverse is also true: if inventory is overvalued, the rate of inventory turnover will be lower, which will show that inventory has turned over fewer times than is really the case [1]. a b 5 300 42 500 365 x 1 [1] = 45.52 = 46 days [1] Unsatisfied if O/F in (a) is over 30 days [1] They are not receiving the amount due within the period of credit allowed. [2] Or Satisfied if O/F in (a) is 30 days or below [1] They are receiving the amount due within the period of credit allowed. [2] c 4 100 52 800 d Disadvantage if O/F in (c) is over 24 days [1] x 365 1 [1] = 28.34 = 29 days [1] She is receiving the amount due 5 (O/F) days [1] later [1] than in the previous year. Or Advantage if O/F in (c) is 24 days or below [1] She is receiving the amount due x (O/F) days [1] earlier [1] than in the previous year. e Offer cash discount for prompt payment Charge interest on overdue accounts Improve credit control Refuse further supplies on credit until outstanding balance paid Invoice discounting and debt factoring Or other relevant points. Any two points [1] each f (4100 + 3800) : (5300 + 2900) [1] = 0.96:1 [1] g Unsatisfied if O/F in (f) is less than 2:1 [1] She is unable to meet her immediate liabilities from her immediate assets. [1] Or Satisfied if O/F in (f) is 2:1 or over [1] She is able to meet her immediate liabilities from her immediate assets. [1] [2] h Introduce additional capital Reduce drawings Obtain long-term loan Sell surplus non-current assets. Any two points [1] each Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book Chapter review questions 1 a 2018 2019 Profit for the year 10% x 50 000 = $5 000 10% x 60 000 = $6 000 Add back expenses $10 000 $20 000 Gross profit $15 000 $26 000 2018 2019 b In 2019 2 50 000 x 100 = 50% 100 000 The business was more profitable in 2018. 3 The ratios are: a Expenses as a percentage of sales Profit margin = 4 6 000 x 100 = 2.73% 220 000 b Rate of inventory turnover c Trade receivables turnover ratio. a Gross profit and owner’s equity. Gross profit has a direct influence on profit for the year, since profit for the year = gross profit − expenses. The relationship between profit for the year and owner’s equity is through profits ploughed back into the business, as profits are added to owner’s equity (and losses are subtracted from owner’s equity). Hence, gross profit is related to owner’s equity via the profit for the year that it affects. b Gross profit and expenses. The profit for the year is the difference between gross profit and expenses (if there is no income). Therefore, if gross profit has increased and profit for the year has not, then the business’ expenses have increased. If gross profit has increased and so has profit for the year, expenses will increase if profit for the year has not increased as much as the gross profit. c Gross profit and revenue. Gross profit is directly affected by sales revenue if the cost of sales remains constant. If sales revenue increases then gross profit will also increase and, vice versa, if cost of sales remain constant. This is because gross profit = sales − cost of sales. d Gross profit and inventory valuation. If (closing) inventory is overvalued, then gross profit will also be overvalued. If inventory is undervalued, then gross profit will also be undervalued. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 23 Inter-firm comparison Activity 1 The reasons are (any four): i For inter-firm comparisons to be useful, the firms being compared must be the same size. A large supermarket cannot be compared with a small convenience store that belongs to the same industry. ii The businesses being compared should use the same financial metrics (measurements). Different firms may use different methods for valuing inventory or providing for depreciation. This will affect ratio analysis. iii It is also not logical to compare firms that do not have the same financial year ends. For instance, a stationery firm that closes its books at the end of summer may have larger inventory levels in preparation for back-to-school sales, than a similar firm that closes its books just after the back-to-school rush, when its inventory has been sold off. iv Retailers in the same industry may have different profitability ratios because of the different pricing strategies they use. Some firms may charge a higher price and be content with smaller sales volumes. These firms will have higher profit margins. Other firms may charge lower prices so that they can have larger sales volumes. They will have lower profit margins. Therefore, ratio analysis should be carried out with a lot of caution and thought. Exam-style questions 1 2 3 4 5 6 B [1] D [1] A [1] C [1] C [1] a Gross profit = 2 000 x 30 100 [𝟏] =$600 [1] Cost of sales = 2 000 – 600 [1] = $1 400 [2] Purchases = 1 400 + 250 – 100 [1] = $1 550 [1] 10 Profit for the year = 2 000 x 100 [𝟏] = $200 [1] Expenses = 600 – 200 [1] = $400 [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book b • Haddon has better control of his expenses • Haddon has a larger business and experiences economies of scale on overheads such as rent • Haddon buys goods for resale at a lower price • Haddon sells the goods at a higher price. Any one for [1] mark. c Hudson’s rate of inventory turnover = d 1 400 [𝟏] 175 [𝟏] = 8 [𝟏]times [𝟏] The reasons are (any two) [2]: • Haddon has more efficient purchasing of inventory • there is a difference in type of goods sold • Haddon has a higher level of business activity • Haddon has lower inventory levels • Haddon has more sales activity. Any two for [1] mark each. 7 a i Conrad’s supermarket Gross margin ii 42 000 120 000 x 100 [𝟏] = 35.0% [1] Congo’s shop = 26 400 48 000 x 100 [𝟏] = 55.0% [1] supermarket/Conrad turnover is higher but gross profit percentage lower supermarket prices may be lower than shop/Congo prices different goods have different profit margins customers may be willing to pay higher prices for fresh items supermarket has to carry a higher level of inventory. Any acceptable comment. Any one comment [2] based on OF. b i Conrad’s supermarket Profit margin ii 14 400 120 000 x 100 [𝟏] = 12.0% [1] Congo’s shop = 17 600 48 000 x 100 [𝟏] = 36.7% [1] supermarket has higher expenses than shop supermarket pays more rent than shop (or similar examples) shop better at controlling expenses any acceptable comment. Any one comment [2] based on OF. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book c i Conrad’s supermarket Return on opening capital employed ii 14 400 96 000 x 100 [𝟏] = 15% [1] Congo’s shop = 17 600 50 000 x 100 [𝟏] = 35.2% [1] Shop had higher profit for the year. Shop had lower capital. Made better use of capital employed. Any acceptable comment. Any one comment [2] based on OF d May reduce prices [1] so could be selling at a gross loss [1] May be selling at a lower profit margin [1] and not covering costs [1] May have higher expenses [1] which reduces profit [1] Any acceptable comment. [1] for identification and [1] for expansion [ 8 a i Current assets – current liabilities [1] 36 000 + 60 000) − (63 000 + 17 000) = 96 000 − 80 000 [1] = $16 000 [1] OF ii Current assets : current liabilities [1] 96 000 : 80 000 [1] = 1.2:1 [1] OF iii Current assets − inventory: current liabilities [1] 60 000 : 80 000 [1] = 0.75:1 [1] b i Cole Limited [1] Cole Limited can pay the immediate liabilities from the current assets [1]. Fanza Limited’s ratio is lower than is usually acceptable. [1] ii Cole Limited [1] Cole Limited can meet the immediate liabilities from the liquid assets [1], but Fanza may have difficulty in paying current liabilities when they fall due/Fanza Limited’s ratio is lower than is usually acceptable. [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book Chapter review questions 1 a Kenny Retail i Gross margin = 𝐺𝑟𝑜𝑠𝑠 𝑝𝑟𝑜𝑓𝑖𝑡 𝑥 100 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 ii Profit margin = 𝑃𝑟𝑜𝑓𝑖𝑡 𝑓𝑜𝑟 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟 𝑥 100 𝑆𝑎𝑙𝑒𝑠 𝑟𝑒𝑣𝑒𝑛𝑢𝑒 iii Total expenses = Gross profit – profit for the year 30 000 = 50 000 𝑥 100 = 60% = 20 000 𝑥 100 = 40% 50 000 30 000 − 20 000 =$10 000 iv Current ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 4000 = 2.25: 1 v Liquid ratio = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑎𝑠𝑠𝑒𝑡𝑠 − 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 = 4000 = 1.5:1 vi Trade receivable turnover ratio = b 𝑇𝑟𝑎𝑑𝑒 𝑟𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 x 365 𝐶𝑟𝑒𝑑𝑖𝑡 𝑠𝑎𝑙𝑒𝑠 = Benny Retail 60 000 = 100 000 𝑥 100 = 60% = 40 000 x 100 = 40% 100 000 60 000 – 40 000=$20 000 9000 = 10 500 = 1.33: 1 6000 = 10 500 = 0.57: 1 2000 𝑥 365 =15 days 50 000 14 000 6000 = 6000 𝑥 365 = 22 100 000 days Profitability: Both businesses have the same gross margin (60%) and profit margin (40%), which is quite rare. Perhaps this is because they are in the same industry. The only difference between the two businesses is that Kenny has invested half the amount that Benny has invested in their respective businesses. Liquidity: Benny’s current ratio at 1.33:1 is lower than that of Kenny’s at 2.25:1. This could indicate that Kenny is holding onto current assets that are not generating much income, but tying up working capital. However, Benny’s liquid ratio is very low at 0.57:1 and indicates that he could have a liquidity crisis if all his trade payables ask for payment at once. He does not have the liquidity to meet all his debts and could be sued for nonpayment or worse, threatened with bankruptcy. The difference between his current ratio and liquid ratio suggests that he has too much inventory. On the other hand, Kenny’s liquid ratio is better, but not ideal at 1.5:1. Again, he seems to have too many current assets not working for the business. Efficiency: Both businesses have managed their expenses similarly, as their expenses for every $100 of sales are $20. Benny is not as efficient as Kenny at chasing up trade receivables as his trade receivables turnover is 22 days, compared with Kenny’s at 15 days. A comparison of the current ratio and the liquid ratio reveals that Benny is holding on to too much inventory. He is not being efficient in selling it off as quickly as Kenny. This may explain why Benny has a bank overdraft as too many resources are tied up in inventory. As a result, he could be facing a liquidity crisis if all his trade payables asked to be paid at once. 2 i There may be differences that affect profitability. For example, one business may rent premises and the other business may own premises. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Answers to Student’s Book ii The businesses being compared should use the same financial metrics (measurements). Different firms may use different methods for valuing inventory or providing for depreciation and this could alter the ratios. iii Retailers in the same industry may have different profitability ratios because of the different pricing strategies they use. iv Some firms may charge a higher price and be content with smaller sales volumes. These firms will have higher profit margins. Other firms may charge lower prices so that they can have larger sales volumes. They will have lower profit margins. 3 v Firms may be in the same industry, but use different methods of production. Some may choose to be capital-intensive and have more machines, and some may be labourintensive and have more people working for them than machines. This could affect expenses and profitability. i Kala buys goods for resale at a higher price. ii Saphed sells the goods at a higher price a b Kala’s expenses for every $100 of sales are $13 (20 − 7) whereas Saphed’s are $30 (40 − 10). Therefore, Kala has better control of the expenses. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 5 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 24 Interested parties Activity 1 1 2 3 4 5 People or firms that have an interest or stake in a business’ performance and position are called interested parties. Owners and managers. a Owners: They need accurate financial information that will tell them how much they have lost or earned during the accounting period and give an indication of what their future earnings will be. On the basis of this information, they make important decisions about their stake in the business, whether to expand or contract the business, or shut it down. b Managers: Accounting information assists managers in their tasks of planning, controlling and making decisions about the working of the business. With the help of accounting ratios. a Managers plan and control. b To make a profit. c Any two: • bank statements • books of account • the income statement • the statement of financial position. Activity 2 1 i The government and tax authorities ii The bank iii Competitors iv Trade payables v Investors vi Club members 2 They are (any two): • • • hold a profit-generating one-off activity, such as a competition run a profit-making activity on a regular basis, such as a restaurant or a café rent out equipment or other facilities, such as fields, halls etc., to increase income Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book • • • • increase income by way of subscriptions, by either increasing existing subscriptions or recruiting more members hold charity events ask for donations apply for grants. Accept any other suitable answers. Exam-style questions 1 2 3 4 5 6 C [1] D [1] D [1] C [1] B [1] a Ilya would be concerned as the statement would indicate that from the bank’s point of view he has an overdraft that represents a short-term loan which has to be serviced (paying interest) and eventually paid. [1] He would wish to update the cash book (bank columns) [1] and reconcile the updated balance with the balance on the bank statement to check for any errors or problems. [1] b The bank balance from the cash bank will be recorded in the statement of financial position. [1] If the balance from the cash book is also an overdraft it will be recorded as a current liability. [1] c Any two: i A prospective partner [1]: He/she would be concerned about the bank overdraft, which is an indication that the business has a liquidity problem. [1] They would want to know whether this problem is going to be a trend with long-term implications. [1] This would influence their decision of whether to invest in the business. [1] ii Employees [1]: They would be concerned about the business’ lack of liquidity [1]as their salaries [1] depend on the business having enough liquidity. They would also be concerned about the future of the business as their job security [1]would be affected. If the overdraft is due to poor management, then the business may not grow or may have to shut down, with the result that employees would lose their jobs. iii Trade payables [1]: They would be concerned that the business does not have the funds to pay for the goods which they have supplied. [1] They would be concerned that the debts might become irrecoverable or that they would have to wait a long time for their money. [1] They might reconsider whether they should adjust Ilya's credit limit or if they want to continue to supply the business. [1] 7 a The following would be interested: The managers [1]: They would be interested in the profit margin. They would want to know if this ratio is an improvement on previous years’ ratios. [1] If not, they would want to improve it by cutting down on expenses or increasing income. They would also want to compare the margin with those of their competitors in the same industry [1] to gauge how Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book well they are doing in comparison. If they are not doing as well as their competitors, managers will have to take corrective action. [1] The shareholders [1]: They will use this year’s ROCE and compare it to the ROCE of previous years. [1] If it is not as good and they detect a downward trend in the ROCE, they might make a decision to sell their shares. [1] On the other hand, if they detect an upward trend, they would want to increase their share ownership in the company. [1] b The managers will calculate the profit margin. [1] The shareholders would want to calculate the ROCE. [1] 8. They are: • • • • • • 9 a hold a profit-generating one-off activity, such as a competition run a profit-making activity on a regular basis, such as a restaurant or a café rent out equipment or other facilities, such as fields, halls etc., to increase income increase income by way of subscriptions, by either increasing existing subscriptions or recruiting more members hold charity events ask for donations. Any four for [1] mark each. Bank manager Prospects of any requested loan/overdraft being repaid when due Prospects of any interest on loan/overdraft being paid when due Security available to cover any loan/overdraft. b Employees Ability of business to continue operating Prospects for jobs and wages. c Supplier of goods on credit Assessment of liquidity position Identifying how long it takes the business to pay creditors Identifying future prospects of the business Establishing a credit limit. d Potential purchaser of the business Profitability of the business Value of the assets of the business Or other suitable reason in each case. Any one acceptable reason for each person for [1] mark each. Chapter review questions 1 2 Owners Managers (any 4): • trade payables Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book • • • • • • the bank the government employees the general public tax authorities prospective investors. a Tax authorities: Local and state authorities charge taxes that a business has to pay from time to time. The business’ records are therefore of interest to these tax authorities so that they can check whether taxes have been accurately calculated and paid. b Employees: They check on a business’ financial statements to determine whether they can ask for salary raises or bonuses if the business has been very profitable. c Trade payables: Trade payables use financial information to determine the future creditworthiness of the business. The financial health of the business will influence the terms of credit they set for the business. This group of interested parties comprises the suppliers who sell goods and services to the business on credit. d Club members: They will want to know whether there are enough funds for facilities to be maintained in a good state of repair and whether they can be expanded in the future. e The central government: Companies must pay the government profit tax, which is a direct tax. Hence, governments must know how much profit the business makes to determine the tax due. This information is available in the financial statements of a company. 3 4 Statement True/False A student, who is a member of the public, uses a company’s financial statements when doing an exercise in calculating the company’s profitability ratios. True A competitor X, uses business Y’s financial statements to find out if Y is more profitable than X. Customers are one of the users of a business’ financial records because they make loans to businesses. True The government is interested in a sole trader’s ability to pay tax. False Trade payables represent the customers of a business. False Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 False 4 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 25 Limitations of accounting statements Activity 1 1 2 Historic cost is the value placed on an asset in the statement of financial position based on the original cost at which the asset was acquired. Any one: • • • • 3 machinery furniture motor vehicle premises. Or other suitable answer. Even though the plant listed in Sondra Ltd’s statement of financial position is capable of generating for the company economic benefits worth 50% of Toga Ltd’s plant, it is valued at a historic cost of only 25 % of Toga Ltd’s plant. Hence, historic cost does not account for changes in the price level of the asset over the period of its economic life. This makes the information provided in the financial statements irrelevant, as an asset may be valued at far lower than its realisable value. Activity 2 1 2 3 Student’s own answer, for example a multinational such as Honda. International Accounting Standards. So that the financial statements of businesses operating in different countries can be compared and analysed. Exam-style questions 1 2 3 A [1] B [1] A [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 4 Assets that cannot be given monetary value ✓ [1] ✓ [1] Machinery ✓ [1] Inventory Customer satisfaction 5 a Current asset ✓ [1] Premises Well-trained staff Non-current asset ✓ [1] Non-financial aspects Accounts only record information which can be expressed in monetary terms. [1] This means that there are many important factors that influence the performance of a business that will not appear in the financial statements, for example quality of management, goodwill, skill of workforce, etc. [1] b Historic cost Transactions are always recorded at the actual cost. [1] This means that it can be difficult to compare transactions that have taken place at different times because of the effect of inflation. [1] Chapter review questions 1 The three limitations are: i Limitations due to the historic cost factor ii Limitations due to difficulties of definition iii Limitations due to non-financial aspects 2 So that the financial statements of businesses operating in different countries can be compared and analysed. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 26 Accounting principles Activity 1 1 2 The matching principle requires a business to record in its financial statements, revenues and any related expenses in the same accounting period. 100 + 170 – 70 = $200. Activity 2 1 Because of the business entity principle, which keeps separate the activities of the business and the personal activities of the owner. 2 Account debited Account credited Electricity $500 Income statement $500 Income statement $500 Electricity $500 Drawings $500 Electricity $500 Electricity $500 Drawings $500 ✓ Activity 3 1 Financial statements should use the same methods from year to year. ✓ Financial statements should provide for all accruals and prepayments. Financial statements should only include items with a monetary value. Financial statements should include all probable losses and should not anticipate profits. Activity 4 b Duality principle Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book Activity 5 1 2 The going concern principle implies that the business will continue to operate in the near future, which is at least 12 months. Any one: • • • If the business is not a going concern and is going to liquidate in the coming year, then assets should be listed in the statement of financial position at their net realisable values, not at historic cost. All assets will be listed as current assets. Businesses will not be able to prepay or accrue expenses and income. Activity 6 The historic cost principle states that assets should be valued at the cost at which it was acquired. Activity 7 1 2 Because of the money measurement principle, which requires that only those transactions or events that can be measured in terms of money should be recorded in financial statements. A loyal customer base is hard to quantify in terms of money. c Money measurement Activity 8 1 The prudence principle ensures that liabilities and expenses are not understated and assets and income/profit are not overstated in the financial statements of a business. 2 Include all foreseeable revenue Record expenses at as low a level as possible Include all foreseeable losses ✓ Show all prepaid expenses Activity 9 1 2 The realisation principle states that profit from a sale can be recorded only when the legal title has passed from the seller to the buyer. The seller must transfer all the risks and rewards associated with the ownership of the goods to the buyer for revenue from a sale of goods to be recognised. The goods should be exchanged for either cash (if they were sold for cash) or another asset such as trade receivables, if they were sold on credit. b When Rowland acquires the legal title to the goods. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book Exam-style questions 1 2 3 4 5 6 C [1] D [1] A [1] B [1] A [1] a Money measurement [1] – items which cannot easily be quantified in terms of money, such as customer satisfaction, are excluded from the financial statements of a business. [1] b Prudence [1] – financial statements are prepared in such a way that assets and profits are not overstated and liabilities are not understated. [1] c Matching [1] – revenue and expenses are recorded in the financial year to which they relate, not in the financial year in which they were paid or received. [1] d Consistency [1] – the use of the same method from year to year ensures comparability of results and enables trends to be correctly identified. [1] e Going concern [1] – the business will not close down within 12 months of the date of the statement of financial position. [1] 7 On 5 July, the stationery John took for personal use is treated as drawings. [1] Therefore it is no longer treated as a business expense. [1] 8 Rent and rates accrued are added to expenses transferred to the income statement. [1] Therefore, although only $466 was paid during the year, $866 is charged to profits in the income statement as $400 was still owing for the year. [1] 9 Money measurement [1] 10 Realisation [1] 11 Proposal Accounting principle/concept Change the depreciation methods for non-current assets Remove the provision for doubtful debts from the financial statements Consistency iii. Value the inventory at market price Historic cost [1] iv. Place a value on the skill of the workforce in the financial statements Exclude expenses owing from the income statement Money measurement [1] i. ii. v. Prudence or matching principle [1] Matching principle [1] Chapter review questions 1 2 The money measurement principle states that only those transactions or events that can be measured in terms of money should be recorded in financial statements. This principle states that a business should report an expense in the same accounting period as the revenue it helped earn, regardless of whether there was a transfer of money. This principle is based on accrual accounting as opposed to cash-based accounting, as it recognises that expenses and revenue accrued (owing) should be included in the financial year to which they Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3 Answers to Student’s Book 3 4 relate, even if the expense was not paid or the revenue was not received. Similarly, expenses and income prepaid should not be included in the year in which they were paid, but in the following year. In other words, if there is a cause-and-effect relationship between an expense and a revenue, then they should be recorded in the same accounting period in which they occurred. Sales, expenses profits, etc. can then be meaningfully compared from one year to the next. The prudence principle ensures that liabilities and expenses are not understated and assets and income/profit are not overstated in the financial statements of a business. The materiality principle states that financial information is only material to the financial statements if it will affect the decisions of interested parties using the information. 5 a Historic cost requires assets to be recorded at original cost, which was incurred in the past, when the asset was purchased. A going concern is a business that is going to continue operating for the foreseeable future. b This is an application of the duality principle, which requires every transaction to be recorded in two accounts, wherein one account is to be debited and one credited. c This is due to the business entity principle, which requires the personal affairs of the owners to be separate from those of the business. Hence, if an owner withdraws money or goods from the business, it is treated as drawings. d This is due to the fact that assets should not be overstated and income should not be anticipated under this principle. Accountants are conservative when recording assets and income. Similarly, losses and expenses should be anticipated. Therefore, the financial statements are prepared in a cautious manner when reporting assets, liabilities, income and expenses. Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 4 Cambridge IGCSETM and O Level Accounting Answers to Cambridge IGCSETM and O Level Accounting Student’s Book 27 Accounting policies Activity 1 1 A user of financial statements should be aware of the policies adopted by the business to properly understand the information provided in those statements. 2 Accounting principles are rules applied by a business to its financial records; accounting policies are how a company follows and keeps to those rules. 3 A business selects its policies based on the following objectives: i The comparability objective ii The relevance objective iii The reliability objective iv The understandability objective. Activity 2 The objective of relevance requires that information communicated to interested parties be timely, so that they can make accurate financial decisions. A five-year old income statement is not timely. Activity 3 a No, as the information is not accurate. b This information is not reliable as it does not reflect actual events and transactions. Exam-style questions 1 2 3 4 5 6 C [1] D [1] B [1] C [1] A [1] a The questions are: i Can the business’ financial statements of the present year be compared with those of previous years? [1] ii Can the business’ financial statements be compared with those of similar businesses? [1] Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 1 Answers to Student’s Book 7 Information contained in financial statements is reliable if it (any two): i Can be depended upon as being a faithful representation of the underlying transactions and events they are representing ii Can be independently verified iii Is free from bias iv Is free from material errors v Is prepared with suitable caution being applied to any necessary judgements and estimates. Any two for [1] mark each. 8 (Any two): i The information contained in the financial statements can be used to assess the stewardship of the managers ii The information can be used to confirm prior expectations of interested parties iii The information can be used to revise past expectations and form new expectations about the future iv The information is timely. Any two for [1] mark each. 9 (Any one): i The interested party must have sufficient knowledge of business, the economy and accounting ii The interested party should be diligent when studying the financial statements. Any one for [1] mark each. Chapter review questions 1 a b Understandability Comparability c Relevance d Relevance a Relevance: Users of financial statements make their decisions based on the information contained in them. Hence, the financial statements should contain information about the performance and financial position of a business that is both timely and significant, which the interested parties can use. In this way, interested parties can assess the efficiency with which the business was managed and base their decisions on such information. Interested parties should be able to use the information provided to confirm prior expectations, or to revise and form new expectations and decisions about the future. b Reliability: Information contained in financial statements is reliable if it can be depended upon as being a faithful representation of the underlying transactions and events they are representing, and if it can be independently verified. It must be free from bias and material errors, and should be prepared with suitable caution when making judgements and estimates. 2 Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 2 Answers to Student’s Book c Understandability: For financial statements to be useful they should be understood by users. This is dependent on the presentation of the information and also on the users’ capabilities. It is assumed that users have a reasonable knowledge of business, economic activities and accounting. It is also assumed that they will be reasonably diligent when studying the statements. Information should not be omitted from the financial statements simply on the assumption that it is too complex for users to understand. d Comparability: Information in the financial statements of a business can only be useful if it can be compared with similar information about the same business at another period of time. Comparisons should also be possible between similar businesses in the same industry. Users of financial statements should be able to identify similarities and differences between the information in the statements they are comparing. 3 Any two: 4 5 • reliability • comparability • understandability. Relevance Reliability Cambridge IGCSE and O Level Accounting Teacher’s Guide © June Baptista 2018 3
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