Accounting Principles Question Paper, Answers and Examiner’s Comments

Question 1. a) What are the main reasons for organisations maintaining financial and management accounts?

b) What information can be gleaned from the final accounts of a business that will assist the credit management in making a more informed decision?

c) For each of the following stakeholders, identify the accounting information that will be of interest to them and why?

i) Investors.

ii) Lenders.

iii) Employees and their representatives.

iv) Customers.

v) The general public.

Question 2. All businesses whether they are incorporated or unincorporated require additional sources of finance to fund their operations.

TASK

Identify the key characteristics together with one advantage and one limitation for each of the following:

a) Bank overdraft.

b) Trade credit.

c) Term loans.

d) Factoring.

e) Retained profits.

Question 3. P Scott owns a small engineering firm. The following balances have been extracted from the accounts as at 31 December 2014.

1. Stock as at 31 December 2014 was valued at £29,700.

2. Motor expenses paid in advance were £350.

3. Wages unpaid at year end amounted to £1,840.

4. Equipment is to be depreciated at 12½% using the reducing balance method.

5. Premises need to be depreciated using the straight-line method at 5%.

TASK

a) Prepare an income statement (formerly a trading and profit and loss account) for the year ended 31 December 2014.

b) Prepare a statement of financial position (formerly a balance sheet) as at 31 December 2014.

Question 4. As credit manager of ABC Limited, you have been asked by your financial director to assess the feasibility of increasing the credit facility of Doyle and Scott Limited. You have been given the extracts from their most recent financial accounts below:

Income Statement of Doyle and Scott Limited for the year ended 31 December:

a) Calculate the following ratios for both of the years 2013 and 2014 (the relevant figures for 2012 have been given in brackets):

i) Gross profit margin (2012: 33%).

ii) Operating profit margin (2012: 10%).

iii) Return on capital employed (2012: 15%).

iv) Current ratio (2012: 3.5:1).

v) Quick ratio/Acid test (2012: 2.3:1).

vi) Inventory days (2012: 100 days).

vii) Receivables days (2012: 79 days).

viii) Payables days (2012: 91 days). (8 marks)

b) Using the ratio calculations which have been supplied for 2012 and your own calculations from part a) for 2013 and 2014, assess whether an increase in the credit facility would be appropriate, giving your reasons for your decision.

Question 5. There are four general assumptions that specifically underlie the preparation of the financial (final) accounts of an incorporated business.

TASK

a) What is the purpose of these four key accounting concepts?

b) Describe and assess the importance of each of those concepts with regards to the interpretation of prepared financial statements.

Question 6. The final accounts of an incorporated business contain a great deal of information that will help the credit manager in making a more informed decision whether to grant or extend credit facilities.

TASK

Assess the credit intelligence that might be gleaned from the following:

a) The Auditors’ Report.

b) The Directors’ Report.

c) The Chairman’s Statement or Report.

Question 7. When extracting the ledger balances from an organisation’s accounts, the debit and credit sides did not balance, as follows:

i) The Purchases account had been undercast by £4,500.

ii) Cash sales of £24,205 had not been entered into the Sales account.

iii) A credit note of £3,450 was entered in P White’s customer account but no entry was made in the relevant returns account.

iv) The Sales account was overcast by £3,900.

v) £4,590 of goods was taken out of the business for I Johnson’s personal use. This was recorded in the Drawings account but there were no other entries.

vi) An invoice for J Sullivan was discovered behind the computer. No accounting entries had been made for the £1,650.

vii) £2,700 in respect of debtor J Smith was debited in error to the account of J Smythe Ltd.

viii) A discount allowed of £4,275 was credited in error to the Discount Received account.

ix) A bad debt of £6,800 had been entered into the customer’s account only.

TASK

a) What is the purpose of a trial balance?

b) Correct the above errors and prepare the resulting suspense account.

Note: journal entries are not required.

Question 8. J Jones is a small high street business selling computer software. The following account balances were brought forward on 1 January 2014.

2 January 2014 An invoice for £1,200 plus VAT was sent to P Hughes.

3 January 2014 A credit note for £750 plus VAT was received from C Mulhearn in respect of returned goods.

8 January 2014 A cheque for £2,200 was sent to C Mulhearn in full settlement of their account. The balance remaining is to be treated as a discount.

9 January 2014 A credit note was sent to P Hughes for £1,500 including VAT in respect of damaged software.

12 January 2014 P Hughes sent a cheque for £4,900 in full settlement of the amount outstanding. The rest is to be treated as a discount.

15 January 2014 J Jones took £350 out of the bank for his own personal use.

17 January 2014 An invoice is received from C Mulhearn for £790 plus VAT for the supply of new software.

20 January 2014 A cheque was sent to HMRC for VAT owing.

25 January 2014 A water bill of £1,500 is now due to be paid. There is no VAT on this service.

TASK

a) Open all the appropriate accounts that are necessary to record the above transactions and enter all balances brought forward on 1 January 2014.

b) Make the necessary entries in the relevant accounts to record the transactions including discounts and value added tax at 20%.