Answers

Part 1 Examination Paper 1.1(GBR) Preparing Financial Statements (UK Stream) Section A 1 2 3 4 C D D D Opening debtors Sales
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June 2006 Answers

(280,000 x 20%) + (48,000 x 20% x 9/12 ) + (36,000 x 20% x 4/12 ) (14,000 x 20% x 6/12 ) x 24,000 + 7/12 x 30,000 = 27,500;
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x 7,500 = 5,000

Sales ledger control account 148,200 880,600 Cash received from customers Discounts allowed Irrecoverable debts written off Returns from customers Closing debtors 819,300 16,200 1,500 38,700 153,100 1,028,800

1,028,800 5 6 7 8 9 D D C B B 630,000 4,320 440 3,980 270 180 3,200 = 330 : difference 100

10 D 11 A 12 B 13 B 14 A

430,000 x 5% = 21,500 18,000 + 28,000 Purchases ledger control account Cash paid to suppliers Discounts received Contras with amounts receivable in sales ledger Purchases returns Closing balance 988,400 12,600 4,200 17,400 325,200 1,347,800 Opening balance Purchases 384,600 963,200

1,347,800

15 A 16 D 17 C 18 A 19 C 20 B 21 D 22 C 23 B 24 C 25 A 1,100,000 4/5 (400,000 + 500,000) 20% x (400,000 + 800,000) 48,000 + 400 + 2,200 38,640 + 14,260 19,270 = 33,630 756,000 x 10/7

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Section B 1 Leon and Mark Profit and loss appropriation account for the year ended 31 December 2005 Six months ended 30 June 2005 Leon: (90,000 20,000) (see working) 70,000 180,000 10,000 5,000

Six months ended 31 December 2005 Profit Interest on capital Leon 5% x 400,000 x 6/12 Mark 5% x 200,000 x 6/12

(15,000) 165,000 (10,000) 155,000

Salary Mark 20,000 x 6/12

Balance of profit Leon 60% Mark 40%

93,000 62,000

155,000 0 250,000 20,000 270,000

Working Profit for year Add: irrecoverable debt Profit for division Six months ended 30 June 2005 less: irrecoverable debt Six months ended 31 December 2005 90,000 20,000

70,000 180,000 250,000

Current accounts Leon 160,000 13,000 Mark 80,000 Leon 70,000 10,000 93,000 Mark 5,000 10,000 62,000 3,000 80,000

Drawings Balance

30 June Profit 31 Dec Interest on capital Salary Share of balance 60:40 Balance

173,000

80,000

173,000

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Alternative format Leon and Mark Profit and loss appropriation account for the year ended 31 December 2005 Leon Six months ended 30 June 2005 Leon: (90,000 20,000)(see working) Six months ended 31 December 2005 Interest on capital Leon 5% x 400,000 x 6/12 Mark 5% x 200,000 x 6/12 Salary Mark 20,000 x 6/12 Balance of profit 60:40 93,000 103,000 Current accounts Leon 160,000 13,000 Mark 80,000 Leon 70,000 103,000 Mark 77,000 3,000 80,000 70,000 Mark Total 70,000

10,000 5,000 10,000 62,000 77,000 15,000 10,000 155,000 180,000

Drawings Balance

2005 30 June Profit 31 Dec Share of profit Balance

173,000

80,000

173,000

(a)

Net profit adjustments Profit per draft financial statements (1) Stock movement Adjustment for sales 36,000 x 60% (2) Goods on sale or return Elimination of profit (3) Reduction in stock: 18,000 (13,500 500) (4) Debts written off (5) Increase in allowance for debtors (11,500 10,000) Revised net profit 684,000 21,600 (4,000) (5,000) (8,000) (1,500) 687,100 116,800 21,600 6,000 (5,000) 139,400 248,000 (10,000) (8,000) 230,000 (11,500) 218,500

(b)

Adjustments to stock and debtors (i) Stock Stock per draft financial statements (1) Stock movement as (a) above (2) Goods on sale or return cost introduced into stock (3) Reduction in stock (a) above Revised closing stock

(ii)

Debtors Debtors per draft financial statements (2) Deduction of goods on sale or return (4) Debts written off (5) less: allowance for debtors

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Ganda Limited Cash flow statement for the year ended 31 December 2005 Reconciliation of operating profit to net cash inflow from operating activities 000 Operating profit Depreciation (W2) Profit on sale of fixed asset (W3) Increase in stock Reduction in debtors Increase in creditors Net cash flow from operating activities 000 1,090 310 (20) (200) 200 100 1,480 1,480 (120) 1,360 (200) (1,500) 80

Net cash inflow from operating activities Returns on investment and servicing of finance Interest paid

Taxation paid Capital expenditure Payments to acquire fixed assets (W1) Proceeds of sale of fixed assets (W3)

Equity dividends paid

(1,420) (260) (250) (510)

Financing Issue of ordinary shares (300 + 180) Issue of debentures Increase in cash (30 + 140) Workings (1) Fixed assets - cost 000 2,100 1,500 3,600 (2) Fixed assets - accumulated depreciation 000 140 000 550 310 860 000 200 3,400 3,600 480 200 680 170

Opening balance Purchases (balancing figure)

Transfer disposal Closing balance

Transfer disposal

Opening balance Profit and loss account - depreciation (balancing figure)

Closing balance

720 860 Fixed assets - disposal 000 200 20 220

(3)

Transfer - cost Profit and loss account

Transfer - depreciation Cash

000 140 80 220

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(a)

The working capital cycle illustrates the changing make-up of working capital in the course of the trading operations of a business: 1 2 3 4 Purchases are made on credit and the goods go into stock. Stock is sold and converted into debtors Debtors pay their accounts Cash is used to pay suppliers.

(b)

Collection period for debtors 250 x 365 1000 Stock turnover 200 x 365 700 Payment period for creditors 150 x 365 800 Length of working capital cycle Note. If average stock is used the stock turnover becomes: 100 + 200 2 x 365 700 The length of the cycle becomes 101 days. Either answer is acceptable. 78 days 68 days 104 days (see Note below) 195 days 91 days

127 days

(c)

The advantage to a company of keeping its working capital cycle short is that fewer resources are tied up in working capital, thus freeing them for other purposes. (Other answers considered on their merits)

To the directors of Ambia Limited Comments on proposals under consideration (a) Proposed bonus issue. There are several problems in connection with the proposed bonus issue: (i) (ii) A bonus issue would not raise any capital for the company. price) would be necessary.

8 June 2006

To raise capital a rights issue (or an issue at full market

For either a bonus issue or a rights issue to be possible, the authorised capital would have to be increased.

(iii) There are insufficient reserves to make a bonus issue of 500,000 worth of shares. (b) Paying a dividend of 10p per share. There are insufficient distributable reserves to pay a dividend of more than 5p per share. FRS 10 Goodwill and intangible assets does not allow goodwill to be revalued upwards. It is not possible to combine the reserves as suggested. The profit and loss account must be kept separately because it is the only distributable reserve, and the share premium account must be kept separately because restrictions are placed on its uses.

(c) (d)

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Part 1 Examination Paper 1.1(GBR) Preparing Financial Statements (UK Stream) Section B 1 Profit and loss appropriation account Leon profit for first six months Profit for second six months Interest on capital Salary Balance of profit

June 2006 Marking Scheme Marks

2 1 1 1/ 2 1 51/2 1
1/ 2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Interest on capital 2 x 1/2 Salary Share of balance

1
1/ 2 1/ 2

9 Alternative marking scheme (if appropriation account shows partners total shares) Leon : profit for first six months Profit for second six months (as total) Interest on capital Salary Balance of profit Total shares 2 1 1 1/ 2 1 1 61/2 1
1/ 2

Current accounts Drawings 2 x 1/2 Leon profit 70,000 Total profit shares

1 9

(a)

Profit adjustments 1 mark per item 5 x 1 Adjustments to stock and debtors Stock Movements Goods on sale or return Reduction to net realisable value

(b)

1 1 1 3 1 1 1 3

Debtors Goods on sale or return Debts written off Allowance for debtors

6 11

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Marks 3 Reconciliation of profit to net cash inflow 6x Interest paid Taxation paid Capital expenditure 2 x 1/2 Equity dividends paid Financing 2 x 1/2 Increase in cash 2 x 1/2 Workings: fixed assets cost accumulated depreciation disposal Heading Layout
1/ 2

3
1/ 2 1/ 2

1
1/ 2

1 1 11/2 11/2 11/2 1/ 2 1 131/2

max12

(a)

Purchases into stock Stock into debtors Debtors into cash Cash to pay suppliers

1 1 1 1 3 1

(b)

per ratio 1 3x1 correct calculation

(c)

Up to

2 10

(a)

(i) (ii) (iii)

2 1 1 1 1

(b) (c) (d) 2x1

8 50

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