Practice Exam 1.7 Answers
Accounting: Analyse and interpret information for a sole proprietor(s) (90028)
Evidence Statement
Codes used:
A
Analyse
I
Interpret at recognise level
F
Interpret at fully explain level – the depth of the answer
Question
ONE
(a)
Evidence
Analysis Measure
Code
2009
2010
A
Gross Profit %
40%
46.7%
Distribution Cost %
10%
12.5%
Administration Expense %
8%
10.0%
A
Finance Costs %
6%
9.2%
A
Net Profit %
16.0%
15%
A
Mark-up %
66.7%
87.5%
A
(b)
(c)
The distribution expense percentage of 12.5% means that for every $1 of sales, 12.5
cents is spent on distribution expenses OR 12.5% of sales are spent on distribution
expenses.
An interpret level answer will suggest an increase in interest rates/ increase in the loan
amount
eg Interest rates have increased/ the amount of the loan has increased
or
A fully interpret level answer will give the name Ben’s Bookshop.
F
I
I
4 Steps
1. Ben’s Bookshop has
2. refinanced their loan at a higher interest rate, which
3. increases interest expenses, which
increases the finance cost percentage.
(d)
e.g Ben’s Bookshop has increased the amount of their loan which has increased their
interest expenses which has increased the finance cost percentage.
An interpret level answer will suggest a decrease in a specific administration expense.
eg There has been a decrease in insurance/office rent/accountancy fees.
I
or
A fully interpret level answer will give the name Ben’s Bookshop.
F
4 Steps
4. Ben’s Bookshop has
5. found a cheaper supplier of insurance, which
6. decreases administration expenses, which
decreases the administration expense percentage.
(e)

It is the percentage of sales (percentage / cents of each sales $) that is gross profit
(before accounting for all expenses for the year).

It tells Ben that 40% of sales from Ben’s Bookshop (40 cents in every dollar of
sales) is gross profit (before allowing for operating expenses in the period).
Judgement
An interpret level answer will make no reference to 40% (not 0.40 cents).
I
or
F
A fully interpret level answer will give the name Ben’s Bookshop and make reference
to the meaning of 40%
(f)
An interpret level answer will suggest a change in a specific item in order to improve
I
profitability, e.g. increase the mark up / a specific example of how to decrease the
expense.
OR
A fully interpret level answer will link to Ben’s Bookshop and give a reason for the
improvement and link to increasing net profit / profitability.
e.g. The increase in mark-up leads to an increase in the profitability the business is able
to obtain from each dollar of sale, therefore increases net profit.
F
OR
Candidate answer provides for a specific expense:
4 steps
1. Ben’s Bookshop
2. decrease electricity
3. decreasing expenses
increasing the profitability / net profit.
(g)
An interpret level answer will only make reference to the cost of goods sold, the mark
up or the selling price with no context given
e.g. The business could have increased the selling price OR there has been a change
in the sales mix to selling more higher mark up products OR the cost of goods sold
decreased while the selling price stayed the same.
A fully interpret level answer will refer to Ben’s Bookshop and increased mark-up
percentage using any TWO of:
 books
 selling price of books
 the cost of books sold
 a suitable explanation.
4 steps
1. e.g. Ben’s Bookshop could have
2. increased their mark-up applied to the cost of books
3. which increases the selling price of books
4. which means the mark up percentage will increase
e.g.
a. e.g Ben’s Booksop could have
b. bought books in bulk/negotiated a cheaper price with supplies/found a
cheaper supplier of books and
c. kept the selling price of the books the same which
d. means the mark-up percentage will increase
1.
2.
3.
4.
e.g. Ben’s Bookshop could have
increased the selling price of the books which means
each books is marked-up more than before
which is from an increased mark-up percentage applied
1.
2.
3.
4.
eg Ben’s Book shop could have
sold more of the books which
have a higher mark-up applied
which means on average there is a higher mark-up%
I
or
F
(h)
An interpret level answer will suggest a change in a specific item in order to improve
return on average equity, e.g. increase in net profit/average equity decreased
A fully interpret level answer will link to Ben’s Bookshop/Ben and give a reason for the
improvement and link to increasing return on average equity.
e.g. Ben’s Bookshop has increased their sales, which has increased the gross profit,
which has increased the net profit which has increased the return on equity percentage.
I
or
F
OR
Candidate answer provides for a specific expense:
4 steps
1. Ben’s Bookshop
2 decrease electricity expense, which
3 increases net profit, which
4 increases the return on average equity.
OR
4 steps
1 Ben
2 has taken out more drawings than net profit
3 which decreases equity and average equity
4 which increases the return on average equity.
TWO
(a)
Analysis
Measure
Liquid Ratio
2009
Working
0.80:1
2010
0.75:1
4,000+1,000+3,500
Current Ratio
Equity Ratio
0.90:1
0.40:1
6,000+4,000
110,000
287,500
0.85:1
A
0.38:1
A
(b)
(c)
An interpret level answer will state whether Ben’s Bookshop has enough current
assets to cover his current liabilities / Ben’s Bookshop has 85cents of current
assets for every $1 of current liabilities (must indicate idea of “current”) / Ben’s
Bookshop may not be able to pay their current debts or debts due in the next
year
Note: an interpret level answer will not apply the 0.85:1 in the answer.
I
or
A fully interpret level answer will have meaning of 0.85:1 and reference to
ability to pay debts, e.g. Ben’s Bookshop may not be able to meet their debts in
the next 12 months as they only have 85cents of current assets for every $1 of
current liabilities / Ben’s Bookshop has 85cents of current assets for every $1 of
current liabilities and therefore may not be able to meet their debts as they fall
due in the next period/year. A fully interpret level answer will apply the 0.85: 1
F
An interpret level answer will suggest a change in a component of the liquid
ratio, eg Owner withdrew more money, purchased inventory/non current asset
with cash, paid back long-term debt, purchased more inventory / assets on credit
I
or
A fully interpret level answer will give a reason for the change, decrease in the
liquid asset or increase in the liquid liability, and the decrease on the liquid ratio.
(d)
4 Steps
1. Ben’s Bookshop
2. purchased (non current asset) using accounts payable, which
3. increased the liquid liabilities,
4. which decreased the liquid ratio.
e.g. Ben/owner took out a large amount of drawings, which decreases the bank,
which decreases the liquid assets, decreasing the liquid ratio.
An interpret level answer will suggest a change in a component of the ratio:
Current ratio, e.g. Ben/owner invested more cash into the business / Ben’s
Bookshop took out a business loan / Ben’s Bookshop sold a fixed asset.
A fully interpret level answer will include the result of the transaction on an
account OR decrease on current liabilities / increase in current assets AND
reference to Ben or Ben’s Bookshop, which increases the current ratio.
F
I
OR
F
4 Steps
1. Ben’s Bookshop
2. sold some property , plant & equipment for cash, which
3. increases current assets (bank)
4. increases the current ratio.
eg If Ben/owner invests some cash into the business, the bank asset will
increase which will increase current assets which would increase the current
ratio.
(e)
An interpret level answer will not apply the 0.40:1 in the answer, e.g. it shows
what percentage of assets have been funded by the owner/Ben.
Applies the 0.40:1 in a correct way.
I
or
A fully interpret level answer will apply the 0.40:1 in some way, e.g. outsiders
have funded more of the assets than the owner / Ben has borrowed more funds
than he has contributed / It may affect any future applications for borrowing
Must have applied the figure in some way to gain F.
F
Note: Do not accept “Shows how much the owner controls / owns” statement by
itself.
(f)
An interpret level answer will suggest a change in a component of the equity
ratio, eg Owner has taken more money out of the business / has borrowed more
/ purchased Property, Plant and Equipment on credit / increased funding from
outsiders.
A fully interpret level answer will include the result of the transaction on an
account OR decrease assets / increases liabilities and reference to Ben or Ben’s
Bookshop, which decreased the equity / equity ratio.
4 Steps
1. Ben has
2. withdrawn more money out of the business,
3. decreasing bank , which
4. decreases his equity / equity ratio.
1. eg Ben or Ben’s Bookshop has borrowed some money on a long-term loan,
which increased the liabilities, which decreases his equity / equity ratio.
Codes used:
A
Analyse
I
Interpret at recognise level
F
Interpret at fully explain level – the depth of the answer
Achievement
Achievement with Merit
3A
4I/F
5A
1F
7 other I / F
Achievement with
Excellence
5A
4F
7 other I / F
I
or
F