AC1025 Commentary 2021

Examiners’ commentaries 2021

AC1025 Principles of accounting
Important note
This commentary reflects the examination and assessment arrangements for this course in the
academic year 2020–21. The format and structure of the examination may change in future years,
and any such changes will be publicised on the virtual learning environment (VLE).
Information about the subject guide and the Essential reading

references
Unless otherwise stated, all cross-references will be to the latest version of the subject guide (2015).
You should always attempt to use the most recent edition of any Essential reading textbook, even if
the commentary and/or online reading list and/or subject guide refer to an earlier edition. If
different editions of Essential reading are listed, please check the VLE for reading supplements – if
none are available, please use the contents list and index of the new edition to find the relevant
section.
General remarks
Learning outcomes
At the end of this course and having completed the Essential reading and activities, you should be
able to:
distinguish between different uses of accounting information and relate these uses to the
needs of different groups of users
explain the limitations of such statements and their analysis
categorise cost behaviour, and prepare and contrast inventory valuations under different
costing methods
describe the budgeting process and discuss the use of budgets in planning and control
explain, discuss and apply relevant techniques to aid internal users in decision-making.
What the examiners are looking for
The examination paper covers a range of financial and management accounting topics, all of which
the well-prepared candidate will have studied. The questions are designed to encourage candidates
to think about the theories and principles of accounting and to demonstrate their ability to apply
relevant concepts in a variety of situations or to a given set of information. Where appropriate,
questions are subdivided to help candidates answer in a logical manner. The examination will
always include questions designed to test candidates’ ability in interpretation and analysis of
financial information.
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The rubric of the examination paper is set out on the front cover and you should ensure that you
follow these instructions precisely. It is very important that you do not waste time and effort in
answering more questions than is required, as marks will only be awarded to the correct number of
questions. You are advised to read all of the questions before deciding which to answer in each
section. Time allocation is an important factor in accounting examinations. You should decide how
much time to spend on each question, based on the overall marks for the question and for each
section, and you should then adhere to these time allocations.
The examination has three sections. Section A consists of 15 multiple-choice questions covering the
entire syllabus in financial and management accounting. In Section A you will need to answer all the
questions for which the maximum mark will be 30.
Section B consists of questions on financial accounting. Question 16 is compulsory and is worth 30

marks requiring preparation of financial statements from a trial balance with adjustments, the
question includes an additional section which asks for a short essay explaining financial accounting
principles or concepts. In Section B there are two further financial accounting questions worth 20
marks.
Section C consists of the longer questions in management accounting worth 20 marks each. There
will be three questions, you will be asked to answer one question in this section. You will then need
to answer one further question from either Section B or Section C.
The rubric of the examination states that workings must be submitted for all questions in Sections B
and C requiring calculations. The importance of this cannot be overstated, as in the absence of
workings, simple arithmetic errors cannot be distinguished from errors of principle and
understanding. Hence the absence of workings will very often lead to an over-penalisation of errors.
Of course, arithmetic errors may in some instances result in some loss of marks, and you should
always be careful to check your calculations. The rubric also states that any necessary assumptions
introduced in answering a question should be stated. If you do not understand what a question is
asking (a circumstance the examiners endeavour to avoid), then you must state any consequent
assumptions which you have made. Even if you do not answer in precisely the way the examiners
had hoped, you may get a good mark providing your assumptions are reasonable. The most frequent
reason for failing to do well in the examination, apart from lack of knowledge, is not answering the
question actually set. You should take time to read each question carefully, and then attempt to
answer everything the examiner requires. Far too many candidates include every scrap of knowledge
they have on a topic without specifically addressing the question and this can have a disastrous
effect on their marks. Read the question carefully and tailor your answer to precisely what it asks
and you should do well.
Note: There will not be negative marking – you will get marks for all correct answers without
deduction for wrong answers.
Accounting is a progressive subject where it is essential to understand a particular topic before you
go on to the next. Make sure that you understand the basic concepts and can apply them in an
appropriate manner so that there is a logical structure to your answers. Do not write something that
you do not understand for, if you do, you are likely to produce a muddled response. In answering
computational questions, think carefully about the layout and logical progression of your answer
before writing and set out your answer in a structured and easily readable format. You will be
rewarded for an appropriate, logical and sensible method even if the figures contain errors. The
subject guide and textbook contain numerous worked examples, which you should have studied
carefully, and practice questions with solutions which should form a key part of your study and
revision.
This subject does not require a lot of reading beyond the core text of Leiwy D. and R.E. Perks
Accounting: understanding and practice (Maidenhead: McGraw–Hill, 2013) fourth edition [ISBN
9780077139131], but it is essential that you adopt an approach of thorough study, plenty of practice
answering questions and an ability and willingness to think logically. All major topics are covered at
the appropriate level in the recommended text by Perks and Leiwy and others are covered in the
subject guide. References presented in the ‘Comments on specific questions’ Zone A and Zone B
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indicate where certain topics may be found in the current edition of the subject guide (2015), which
is an essential part of the study material for this course. You are also encouraged to read the
financial press including accounting journals and listen to, or watch, financial programmes and visit
appropriate websites. This will enable you to keep abreast of current issues and help you to develop
your ideas and opinions about them.
Examination revision strategy
Many candidates are disappointed to find that their examination performance is poorer than they
expected. This may be due to a number of reasons, but one particular failing is ‘question
spotting’, that is, confining your examination preparation to a few questions and/or topics which
have come up in past papers for the course. This can have serious consequences.
We recognise that candidates might not cover all topics in the syllabus in the same depth, but you
need to be aware that examiners are free to set questions on any aspect of the syllabus. This
means that you need to study enough of the syllabus to enable you to answer the required number of
examination questions.
The syllabus can be found in the Course information sheet available on the VLE. You should read
the syllabus carefully and ensure that you cover sufficient material in preparation for the
examination. Examiners will vary the topics and questions from year to year and may well set
questions that have not appeared in past papers. Examination papers may legitimately include
questions on any topic in the syllabus. So, although past papers can be helpful during your revision,
you cannot assume that topics or specific questions that have come up in past examinations will
occur again.
If you rely on a question-spotting strategy, it is likely you will find yourself in difficulties
when you sit the examination. We strongly advise you not to adopt this strategy.
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Important note

references
section.
Comments on specific questions – Zone A
Candidates should answer Sections A, B and C.
Section A of this examination consists of 15 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this part is 30.
Sections B and C: Please answer Question 16 (30 marks) of Section B, ONE question from
Section C and ONE further question from either section B or C (except for Question 16 all
questions are worth 20 marks).
For Sections B and C only, workings should be submitted for all questions requiring calculations.
Any necessary assumptions introduced in answering a question are to be stated.
Section A
Candidates should answer ALL questions from this section.
Correct answers are shown in bold.
Question 1
Adams plc made an operating profit of £185,500 after charging depreciation of

£31,200. During that year, trade payables increased by £26,600 and inventory
increased by £40,300. There was no change to trade receivables. Assuming that no
other factors affected it, the cash generated from operations would have been:
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A £283,600
B £203,000
C £149,800
D £230,400
Cash generated from operations = £185,500 plus depreciation of £31,200 less increase in
inventory £40,300 plus increase in trade payables £26,600 = £203,000.
Question 2
Jones plc bought a machine for £39,000, which it expects to have a useful life of four
years and a residual value of £4,000 at the end of that time. If depreciation is to be
provided on the straight-line basis, the net book value after two years will be:
A £21,500
B £30,250
C £17,500
D £19,500
The annual depreciation charge will be (£39,000 − £4,000)/4 = £8,750. NBV after two
years = £39,000 − (2 × 8,750) = £21,500.
Question 3
Which of the following is a record of all the account balances at the year-end, and is
used to prepare the final accounts?
A A statement of profit or loss

B A statement of financial position
C A trial balance
D A statement of cash flows
Question 4
At the end of the year, Gordon Ltd has inventory in hand at a selling price of
£20,600. What was the cost of inventory assuming inventory is sold at a margin of
60%?
A £8,000
B £8,240
C £12,875
D £12,360
Cost = selling price × (1 − margin) = £20,600 × 0.4 = £8,240.
Question 5
At the beginning of the financial year, trade receivables are £4,560 and trade
payables are £3,780. Cash received from receivables in the year are £38,240 and
cash paid to payables are £18,040. Closing receivables are £2,268 and closing
payables are £4,040.
5
What is the amount of sales for the year?
A £40,508
B £22,080
C £18,300
D £35,948
Sales or revenue for the year = closing trade receivables + cash receipts − opening trade
receivables = £2,268 + £38,240 − £4,560 = £35,948.
If the question is asking for the amount of purchases for the year, then we will use the following
formula:
Purchases = closing trade payables + payments to suppliers − opening trade payables.
Question 6
If the provision for doubtful debt is increased, the accounting adjustment will be:
A Debit: Bad debt expense

Credit: Provision for bad debts
B Debit: Bad debt expense
Credit: Trade receivables
C Debit: Trade receivables
Credit: Bad debt expense
D Debit: Provision for bad debts
Credit: Bad debt expense
Question 7
Williams business pays rent quarterly in advance. The business year-end is 31

December 2020 and the trial balance at that date shows a figure for rent of £2,150
before any adjustments. On 1 December 2020, Williams had paid in advance rent of
£570 for the period December 2020 – February 2021.
The accounts for the year ended 31 December 2020 should show the following:
A The rent expense charged in the statement of profit or loss should be £1,770
B The rent expense charged in the statement of profit or loss should be £1,580
C The rent expense charged in the statement of profit or loss should be £2,530
D The rent expense charged in the statement of profit or loss should be £2,150
(570/3) × 2 = 380.
(2,150 − 380) = 1,770.
Question 8
Robertson’s account balances at the business year-end show a figure for trade
receivables of £103,100. Included in this figure is an amount of £6,500 owed by
Reece, which will not be received. Robertson usually creates a provision for
doubtful debts of 2% of trade receivables.
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The figure for trade receivables on the statement of financial position at the
year-end should be:
A £94,538
B £101,038
C £107,408
D £94,668
Trade receivables = (103,100 − bad debt £6,500) = £96,600 less provision of

2% = 96,600 × 98% = £94,668.
Question 9
The year-end trial balance of Byron plc does not agree. An investigation finds that
interest received of £4,000 has been debited to interest paid. Which accounting
entries are required to correct this error?
Interest received Interest paid Suspense account

£ £ £
A Cr: £4,000 Cr: £4,000 Dr: £8,000
B Cr: £4,000 Dr: £4,000 Dr: £8,000
C Cr: £4,000 Dr: £4,000
D Cr: £4,000 Dr: £4,000
Workings:
The correct entry should have been: Cr: Interest received £4,000.
So, there has been a debit of £4,000 instead of a credit of £4,000 and therefore the TB will have
more debits than credits by £8,000 and therefore there will be a Suspense account of £8,000
credit.
To correct this we:
i. put in the correct entry: Cr: interest received £4,000

ii. remove the error: Cr: interest paid £4,000
iii. cancel the Suspense account: Dr: suspense account £8,000.
Question 10
Murray plc sells one product for which data for a budgeted period are given below:
£
Selling price per unit 150
Variable cost per unit 62
Fixed cost per unit 35
Fixed costs are based on a budgeted level of activity of 14,000 units.
Calculate Murray plc’s break-even point in terms of units:
A £2,311
B £3,267
C £5,568
D £7,903
(14,000 × 35)/(150 − 62) = 5,568.
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Question 11
The budget of Bradbury plc shows total production overheads of £42m. They plan
to work 4m hours and total labour costs for the year are £14m.
Which of the following can be a suitable absorption rate for the production
overhead?
i. £4 per hour
ii. £10.5 per hour
iii. £3 per labour cost
iv. £10.5 per labour cost
A i and iv
B ii and iii
C i and iii
D ii and iv
Using labour hour as the basis, the absorption rate = £42m/4m = £10.5 per labour hour.
Using labour cost as the basis, the absorption rate = £42m/£14m = £3 per £of labour cost.
Question 12
When considering which values to use in Investment Appraisal, only ‘Relevant

Costs’ are used.
A company has identified the following costs involved in a project:
(a) Project Manager salary £40,000. The Project Manager is currently an

accountant paid £33,000 – when the project starts, a new accountant will be
employed at a cost of £24,000.
(b) The Project Office will be located in a current office; rent is £5,000.
(c) The additional income is expected to be £500,000 before tax, which is payable
at 25%
The Relevant Costs are:
A £40,000 salary, £5,000 rent, £375,000 income

B £31,000 salary, nil rent, £375,000 income
C £40,000 salary, £5,000 rent, £500,000 income
D £31,000 salary, nil rent, £500,000 income
The varying cost of the project manager and accountant = 40,000 + 24,000 − 33,000 = 31,000.
The project office is in an existing building so no additional rent will be paid.
The after-tax income = 500,000 × (1 − 25%) = 500,000 × 0.75 = 375,000.
Question 13
Hunt Ltd is considering replacing all its offset printing machinery. The cost on
1.1.X1 will be £2m. The expected economic life of the equipment will be 4 years.
The company depreciates its equipment using the straight-line methods. The
company expects to sell this equipment for £200,000, after the end of its useful
economic life. There are expected cost savings arising from this investment of
£900,000 in each of years 1 and 2 and £600,000 in each of years 3 and 4.
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Which is the payback period of this investment?
A 2 years
B 2 years and 4 months
C 2 years and 8 months
D 3 years
Year Relevant cash flows Cumulative CF’s

0 (2,000,000) (2,000,000)
1 900,000 (1,100,000)
2 900,000 (200,000)
3 600,000 400,000
4 800,000
Payback = 2 years + 200,000/600,000 = 2.33 years.
Question 14
Ward plc produces 2,400,000 units in 2020. The variable production cost per unit is
£8. Fixed production overheads are £6,000,000. The variable selling cost is £3 per
unit. Fixed administrative and other operating expenses are £3,000,000 per year.
Ward sells 1,500,000 units in 2020. Assume that there is no opening inventory.
What is the valuation of closing inventory per unit if Ward plc uses absorption
costing?
A £5.5
B £10.5
C £12
D £15.5
8 + 6,000,000/2,400,000 = 10.5.
Question 15
Walker Ltd makes three products, Pwn, Bshp and Rkk. Unit costs and revenues
relating to the three products are as follows:
Pwn Bshp Rkk

Selling price 1,575 1,240 1,440
Direct materials 576 480 540
Direct labour 300 220 300
Variable overheads 240 180 180
Fixed overheads 324 216 316
Total costs 1,440 1,096 1,336
Profit per unit 135 144 104
All three products use the same material which costs £30 per kilogram but there is
not enough material to meet the demand for all three products. In what order
should these three products be produced if the company wishes to maximise its
profit?
Best 2nd best 3rd best

A Pwn Bshp Rkk
B Pwn Rkk Bshp
C Rkk Pwn Bshp
D Rkk Bshp Pwn
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Pwn contribution = 459.
Bshp contribution = 360.
Rkk contribution = 420.
Pwn contribution per Kg = 15.3.
Bshp contribution per Kg = 12.
Rkk contribution per Kg = 14.
Section B
Answer question 16 and not more than one further question from this section.
Question 16
The balances below have been extracted from the accounting records of Stebbings
Ltd at 31 December 2020:
You are given the following information:
i. The interest payable on the debenture at 6% per annum for the year ending
2020 has not yet been accounted for anywhere.
ii. Inventory at 31 December 2020 at cost was £1,200,000. The market value of the
inventory at this date was £1,140,000.
iii. Production expenses are to be treated as part of the ‘Cost of Sales’ figure.
iv. Property should be depreciated over on a straight-line basis over 20 years. No
depreciation has been charged in the current year. See also note (vi) below for
the allocation of depreciation expense.
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v. Plant and Equipment are to be depreciated at 25% on a reducing balance basis.

See also note (vi) below for the allocation of depreciation expense.
vi. Depreciation is to be allocated to expense headings as follows:
a. Production Expenses 60%
b. Sales and Distribution Expenses 25%
c. Administration Expenses 15%
vii. On 1 January 2020, Stebbings Ltd acquired a specialist equipment from Walsh
Leasing Solutions Ltd through a lease contract. The fair value of the asset at the
inception of the lease on 1 January 2020 was £2,400,000 and the duration of the
contract is four years. The lease payment is paid in arrears (i.e., at the end of
the year, 31 December) for an amount of £685,000. To date, aside from the first
lease payment made on 31 December 2020, no other accounting entries were
recorded for the transaction. The interests to be recorded for year 2020 for
Stebbings Ltd correspond to £132,000. Payment to be made by the end of next
year is £583,000. The remaining amount due after 12 months is £1,264,000.
viii. Corporation tax for the year of £762,000 is to be provided.
ix. A bonus issue of one (bonus) share for every five ordinary shares made during
the year, to be funded from the share premium account, has not been reflected
in the trial balance. There were no other movements in the ordinary shares
issued.
Required:
(a) Prepare the Statement of Financial Position and the Income Statement for the
year ended 31 December 2020 for the directors.
(25 marks)
(b) Explain why accountants use judgement in arriving at some of the figures to be
included in the financial statements and give examples of areas where
judgement is important.
(5 marks)
(Total 30 marks)
Reading for this question
For part (a), you need to be able to correctly head up the Income Statement and the Statement
of Financial Position. This question has many of the usual adjustments one has seen in past
examples and can be found in the subject guide Chapters 5–8, especially Chapter 8, and in
Leiwy & Perks Chapter 10.
For part (b), this argument relates to the classification of the item in Statement of Financial
Position and is discussed in Chapters 5-8 and in Leiwy & Perks Chapter 10.
Approaching the question
It is vital that candidates know what debits and credits represent. Every adjustment affects two
figures. Many candidates still cannot handle:
the treatment of some PPE info (even if all info are included under point vii of the question)
the allocation of depreciation to the different items indicated under point vi of the question.
Some candidates did not work out properly the right amount of inventory (1,140,000 and not
1,200,000).
The bonus issue has an effect on share capital and share premium determining 6,000,000 of share
capital and 500,000 of share premium at the end of the year.
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(a) We have:
(b) A variety of answers are acceptable although indicative points are included below.
Explanation of the role of judgement in financial reporting – examples include depreciation,
provisioning, estimation of NRV, control in a consolidation.
Judgement is necessary in order that managers have the discretion to faithfully represent
the economic substance of transactions. However, the ability to exercise judgement has been
abused: big bath provisioning and income smoothing.
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Question 17
Unicorn plc is a company which uses a variety of component parts in its

manufacturing operations. One of the company’s suppliers has gone out of business
and seeks an alternative source of supply for the component previously purchased
from that supplier. Two companies have been identified as potential suppliers and
they prepare accounts to 31 December and Unicorn obtained the following copies of
each company’s financial statements for the year ended to 31 December 2020.
Income Statement for the year ended to 31 December 2020
Required:
(a) Calculate ROCE, Current ratio, Receivable period (days), Inventory period
(days), Payable period (days) for X Ltd and Y Ltd.
(10 marks)
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(b) Use the information provided by these ratios to explain to the management of
Unicorn plc which of the two companies seems likely to be a more reliable
source of supply.
(10 marks)
(Total 20 marks)
Subject guide, Chapter 12, and Leiwy & Perks Section 6.4.
(a) Usually, one question in Section B is a ratio analysis question asking for the calculation of few
ratios and then interpretation of the results.
It is important to use the right figures for each ratio (i.e. current activities for current ratio) and
to adopt the right formula (i.e. for efficiency ratios multiply by 365).
It is important in such a question to use the correct notation when writing each ratio.
Every candidate must learn the 16 or so ratios listed in the subject guide and Leiwy & Perks.
(a) We have:
Note that the trade payables payment period has been calculated with reference to cost of
sales, since the figures for purchases are not available.
(b) The main points to make are as follows:
Profitability
i. X is making a better return on capital.
Liquidity
i. X has better liquidity (as measured by both liquidity ratios).
ii. Y’s quick assets ratio is especially worrying.
iii. Y has no cash and high borrowings. X has cash in the bank and comparatively low
borrowings.
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Efficiency
i. X takes a total of 91 days to turn inventories and receivables into cash.
ii. Y takes much longer to turn receivables and inventories into cash (140 days) and so is
less efficient. However, the company might be deliberately holding larger stocks and
offering longer credit so as to attract customers. This is beneficial to Western, so long as
it is sustainable in the long term.
iii. Y pays its suppliers much later than X. This may be a sign of efficiency but may also be
a sign that Y is struggling to pay its debts and could find it difficult to obtain credit in
future.
Conclusion
X is the sounder company. Y might offer larger stocks and more generous credit terms but
X would seem to be the better choice if Western is seeking a long-term, reliable source of
supply.
Further information required includes:
i. financial stat-ements for several previous years (to detect trends)
ii. year-average figures for items shown in the statements of financial position
iii. a statement of accounting policies for each company
iv. industry-average accounting ratios projections for the future.
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Question 18
Bates plc’s income statement for the year ended 31 December 2020 and statements
of financial position at 31 December 2019 and 2020 were as follows:
Additional information for the year ended 31 December 2020 is as follows:
i. Dividends paid were £66,000.

ii. During the year, the company purchased a machine for £90,000.
Required:
(a) Prepare a Statement of Cash Flows for Bates plc for the year ended 31
December 2020 in accordance with IAS 7 ‘Statement of Cash Flow’.
(16 marks)
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(b) Describe two advantages of a cash flow statement from an investor’s perspective.
(4 marks)
(Total 20 marks)
(a) A typical cash-ow statement (CFS) question. It is important to know what appears in the
CFS and where it appears. Most of the figures are very straightforward. The difficult figures
involve computations. These are as follows.
Tax paid, which is the current liability at the beginning of the year, plus the tax expense
less the sum still payable.
Movements in working capital, bearing in mind that an increase in the inventory and
receivables implies an absorption of liquidity.
Sum paid to acquire non-current assets, that are computed on the basis that the opening
balance, less the net book value of any asset sold in the year, less any depreciation expense
plus any revaluation in the year plus sums paid to acquire non-current assets will equal the
closing balance. The sum raised from the issue of shares is calculated on the basis of the
movement in the share capital and the share premium.
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(b) Advantages of cash flow analysis

• Understand liquidity better (more fine-grained analysis).
• Use as a contrast against profits generated from credit sales.
• Removes the effects of non-cash transactions (depreciation).
• Understand the cash generating capacity of the business.
Section C
Answer ONE question from this section and ONE further question from either Section B or Section
C.
Question 19
Littlewood Ltd is a producer of toys for children. Their three flagship products are
produced using broadly the same production methods and equipment for each. A
traditional product costing system is used at present, although an activity-based
costing (ABC) system is being considered. Details of the three products for a
typical period are:
Direct labour costs £6 per labour hour and production overheads are absorbed on a
machine hour basis. The rate for the period is £28 per machine hour.
Further analysis shows that the total production overheads can be divided as follows:
The following activity volumes are associated with the product line for the period as
a whole.
Total activities for the period:
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Required:
(a) Calculate the cost per unit for each product using traditional costing methods.
(3 marks)
(b) Calculate the cost per unit for each product using ABC principles (Hint: You
need to calculate the total overhead first). Please work to three decimal places.
(12 marks)
(c) Comment on the reasons for any differences in the costs in your answers to (a)
and (b).
(5 marks)
(Total 20 marks)
Subject guide, Chapter 14, and Leiwy & Perks Section 16.
(a) and (b) are classic question of management accounting about identification of cost per unit
and absorption costing. The difficult figures involve cost pools and the right calculation of cost
driver rate (i.e. £196.35 per inspection). Some candidates find difficulties in identifying total
overheads cost per product resulting in the wrong total cost per unit. (c) implies a benchmark
between the traditional method and ABC method asking to comment differences between the
two methods.
(a) Production cost per unit:
(b) Total overheads = 42 × 750 + 28 × 1,250 + 84 × 7,000 = 654,500.
Allocated to cost pools:
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Allocation of overheads to products:
(c) Comparison to traditional costing results:
The traditional method allocates overheads in proportion to machine hours to products

(4.8% to AA, 5.3% to BB and 89.9% to CC). However, when overheads are assigned on the
basis of number of set-ups, movements of materials and inspections the proportion of
overheads assigned to product CC are 72% (480/670) for set-up costs, 72% (87/120) for
materials handling costs and 67% (670/1000) for inspection costs. In contrast, the
traditional method allocates approximately 90% of all production overhead costs to product
CC. Therefore the unit cost for product is higher with the traditional method. The opposite
situation applies with products AA and BB and, as a result, unit costs are lower with the
traditional method.
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Question 20
Ledger Ltd is a manufacturing company that produces delicious preserves. Its

current account bank balance at 31st July 2020 is expected to be £8,200, but the
company anticipates capital expenditure in August 2020, which will reduce the bank
balance substantially. Details of the budgeted data are shown below.
Anticipated timings for cash receipts and cash payments are as follows:
60% of credit sales are received in the month after sale; the remaining 40% of
credit sales are received two months after sale
Purchases are paid in the month after purchase
Wages are paid immediately
Expenses are paid in the following month, and include £400 per month of
depreciation
Capital expenditure is paid in the same month as budgeted.
Required:
(a) Explain the importance of a cash budget.

(5 marks)
(b) Prepare Ledger Ltd’s cash budget for the period August 2020–October 2020 in
three separate columns. You should also show a totals column.
(15 marks)
(Total 20 marks)
Subject guide, Sections 16.3–16.5, and Leiwy & Perks, Section 15.4.
(b) A straightforward question but in answering such questions, the format and connection
between workings and the solution is vital. It must be set out in columnar form.
Very often, as is the case, the main difficulty is including the right amount of receipts from
customer (i.e. for October it is ((0.6 × 19,000 + 0.4 × 17,600) = 18,440) and purchases
distinguishing sales and purchases on credit.
(a) We have:
• Cash is lifeblood of organisation.
• Allows prediction of possible cash deficits, to enable action before problems.
• Allows prediction of possible cash surpluses, to enable better use of money.
21
• Enables org. to ensure sufficient cash receipts to cover disbursements (for example,
salaries, capital expenditure, materials, interest payments).
• Shows cash impacts on functional budgets (for example, cash receipts in sales budget).
(b) We have:
Question 21
Bottle plc manufactures eco-friendly drinking bottles. The company is considering

various investment projects that should help improve their products. They have
shortlisted three projects and asked you to recommend the best option.
They provided you with following information about the projects:
Project I will last for 3 years. The initial outlay is £400,000 and the expected
cash flow originating from the project is £200,000 for the first 2 years of the
project and £60,000 in the last year of the project life.
Project II will last for 3 years. The initial outlay is £350,000 and the expected
Project III will last for 4 years. The initial outlay is £380,000 and the expected
cash flow originating from the project is £150,000 in the first 2 years of the
project and will then increase by £60,000 in year 3 and stay at that level until
the end of the project life.
Current cost of capital is 20%.
22
Required
(a) Evaluate each of the three projects using Payback Period.
(6 marks)
(b) Evaluate each of the three projects using Net Present Value.
(9 marks)
(c) Explain which projects should be accepted and why.
(5 marks)
(Total 20 marks)
These issues are explained very clearly in Leiwy & Perks Chapter 14 and in the subject guide
Chapters 18 and 19.
(a) This is a straightforward payback question involving ‘relevant costing’ issues. Payback
computations must be arranged in columnar form. For Project I is it 2 years period
(400,000 − 200,000 − 200,000).
(b) This is a typical NPV question where student has to apply the right discount factor in each
year (i.e. 0.833 for year 1) and then make the algebraic sum of all present values.
Under point (c) candidates according to the results obtained under (a) and (b) must explain
should provide a ranking and motivate it.
(a) We have:
23
(b) We have:
(c) We have:
The company should take on Project III as it has the highest NPV of £71,860 as it gives
adds the greatest value or wealth to the company, given the 20% cost of capital.
24

Important note

references
section.
Comments on specific questions – Zone B
Candidates should answer Sections A, B and C.
Section A of this examination consists of 15 multiple choice questions. You should attempt to
answer ALL the questions. Each question has four possible answers (A–D). There is only one
correct answer to each of the questions. The maximum mark for this part is 30.
Sections B and C: Please answer Question 16 (30 marks) of Section B, ONE question from
Section C and ONE further question from either section B or C (except for Question 16 all
questions are worth 20 marks).
For Sections B and C only, workings should be submitted for all questions requiring calculations.
Any necessary assumptions introduced in answering a question are to be stated.
Section A
Candidates should answer ALL questions from this section.
Correct answers are shown in bold.
Question 1
Sadler plc made an operating profit of £175,500 after charging depreciation of

£21,200. During that year, trade receivables increased by £16,600 and inventory
increased by £30,300. There was no change to trade payables. Assuming that no
other factors affected it, the cash generated from operations would have been:
25
A £107,400
B £149,800
C £183,000
D £243,600
(175,500 + 21,200 − 16,600 − 30,300) = 149,800.
Question 2
If the trial balance at Howell’s year-end shows trade receivables of £19,900 and bad
debts of £600 written off during the year, which of the following statements is true?
A The statement of profit or loss should include no bad debt expense and trade
receivables of £19,300 should be included on the statement of financial position
B The statement of profit or loss should include a bad debt expense of £600 and
trade receivables of £19,300 should be included on the statement of financial position
C The statement of profit or loss should include no bad debt expense and trade receivables of
£19,900 should be included on the statement of financial position
D The statement of profit or loss should include a bad debt expense of £600 and trade
receivables of £19,900 should be included on the statement of financial position
Bad debts written off during the year should be taken as an expense to the
statement of profit or loss. They will already have been deducted in arriving at the
trial balance figure for trade receivables.
The correct answer is: The statement of profit or loss should include a bad debt
expense of £600 and trade receivables of £19,900 should be included on the
statement of financial position.
Question 3
For an asset owned for more than one year, the depreciation charge for the year,
calculated using the reducing-balance basis at the rate of 30%, would be arrived at
as follows:
A 30% × (cost of the asset − accumulated depreciation)

B 30% × (cost of the asset + accumulated depreciation)
C 30% × cost of the asset
D 30% × accumulated depreciation
The formula to apply if the reducing balance method of depreciation is being used
is: percentage multiplied by the net book value of the asset.
Question 4
If it is known that a debtor cannot pay because of bankruptcy, the amount to be

written off is shown as:
A A credit on the income statement, as a negative

expense, and as a debit on the balance sheet
B A credit on the income statement and as a debit on
the balance sheet by increasing the amount shown for receivables
C A debit on the income statement and as a credit on the balance
sheet by reducing the amount shown for receivables
D None of the above statements are correct
26
Question 5
If liabilities increase by £3,000 during a given period and owner’s equity decreases
by £1,000 during the same period, the assets must have:
A Decreased by £2,000
B Decreased by £3,000
C Increased by £2,000
D Increased by £3,000
Assets = Liabilities + owner’s equity ⇒ assets increased by £3,000 − £1,000 = £2,000.
Question 6
Which of the following would be the correct adjustment if there was an increase in
an accrual?
A The amount of the increase is included as an expense (a debit)

on the income statement and the increase is added (credited) to
the existing accrual in the balance sheet
B The amount of the increase is deducted (credited) from the
expense on the income statement and the increase is added
(debited) to the existing accrual in the balance sheet
C The amount of the increase is added (credited) to the expense
on the income statement and the increase is deducted (debited)
to the existing accrual in the balance sheet
D None of the above statements are correct
Question 7
Hanley Ltd started trading on 1 January. Its trial balance at 31 December, the end
of its first year of trading is given below.
If the closing inventory at 31 December was £5,000 and depreciation is to be

ignored, which one of the following is true?
A The gross profit will be £36,000 and the net profit will be £9,000
B The gross profit will be £31,000 and the net profit will be £3,000
C The gross profit will be £36,000 and the net profit will be £3,000
D The gross profit will be £31,500 and the net profit will be £25,000
Gross profit is 95,000 − (64,000 − 5,000) = 36,000, net profit is 36,000 − (6,000 + 27,000) = 3,000.
27
Question 8
Clark Ltd has been trading for one year as at 31 December 2020 and during that
year it paid electricity bills amounting to £760. On 14 January 2021 Clark received
an electricity bill for the three months to 31 December 2020 for £310. It eventually
paid the bill on 31 January 2021. Its accounts for the year ended 31 December 2020
should show:
A A statement of profit or loss charge for electricity of £760 and an

accrual of £310 on the statement of financial position
B A statement of profit or loss charge for electricity of £760 and a
prepayment of £310 on the statement of financial position
C A statement of profit or loss charge for electricity of £1,070 and
an accrual of £310 on the statement of financial position
D A statement of profit or loss charge for electricity of £1,070 and a
prepayment of £310 on the statement of financial position
Question 9
Trent Ltd bought a laptop computer for its business that cost £2,000 and it has a
net book value of £1,200 after one year. If Trent sells the laptop for £700 at that
time, the profit / (loss) on disposal would be:
A The loss on disposal would be £1,300

B The loss on disposal would be £500
C The profit on disposal would be £1,300
D The profit on disposal would be £500
(1,200 − 700) = 500.
Question 10
Webb plc sells one product for which data for a budgeted period are given below:
£
Selling price per unit 180
Variable cost per unit 75
Fixed cost per unit 35
Fixed costs are based on a budgeted level of activity of 16,000 units.
Calculate Webb plc’s break-even point in terms of units:
A £3,111
B £3,862
C £5,333
D £7,466
(16,000 × 35)/(180 − 75) = 5,333.
Question 11
Dishman Ltd plans to sell 200,000 items a year for £15 each. Fixed costs are
£360,000 a year and variable costs are £12 per unit.
28
What is the margin of safety?
A 11.1%
B 25.0%
C 40.0%
D 66.7%
BE(Vol) = FC/CPU = 360,000/(15 − 12) = 360,000/3 = 120,000.
Margin of safety = existing production − BE(Vol)/existing production

= 200,000 − 120,000/200,000 × 100% = 80,000/200,000 × 100% = 40%.
Question 12
The budget of Bisby plc shows total production overheads of £78m. They plan to
work 6m hours and total labour costs for the year are £26m. Which of the following
can be a suitable absorption rate for the production overhead?
i. £4 per hour
ii. £13 per hour
iii. £3 per labour cost
iv. £13 per labour cost
A i and iv
B ii and iii
C i and iii
D ii and iv
Using labour hour as the basis, the absorption rate = £78m/6m = £13 per labour hour.
Using labour cost as the basis, the absorption rate = £78m/£26m = £3 per £ of labour cost.
Question 13
Hunt Ltd is considering replacing all its offset printing machinery. The cost on
1.1.X1 will be £2m. The expected economic life of the equipment will be 4 years.
The company depreciates its equipment using the straight-line methods. The
company expects to sell this equipment for £200,000, after the end of its useful
economic life. There are expected cost savings arising from this investment of
£900,000 in each of years 1 and 2 and £600,000 in each of years 3 and 4.
Which is the accounting rate of return using the average investment?
A 12.5%
B 15%
C 27.3%
D 33.5%
Average investment = 2,000,000 + 200,000/2 = 1,100,000.
Average profit after depreciation = 3,000,000 − 1,800,000/4 = 1,200,000/4 = 300,000.
ARR = 300,000/1,100,000 × 100% = 27.3%.
29
Question 14
Moss Ltd makes three products, Bgh, Rbo and Zyg. Unit costs and revenues
relating to the three products are as follows:
Bgh Rbo Zyg

Selling price 1,506 1,240 1,440
Direct materials 576 480 540
Direct labour 300 220 300
Variable overheads 240 180 180
Fixed overheads 324 216 316
Total costs 1,440 1,096 1,336
Profit per unit 66 144 104
All three products use the same material which costs £25 per kilogram but there is
not enough material to meet the demand for all three products. In what order
should these three products be produced if the company wishes to maximise its
profit?
Best 2nd best 3rd best

A Bgh Rbo Zyq
B Bgh Zyq Rbo
C Zyq Bgh Rbo
D Zyq Rbo Bgh
Bgh contribution = 390.
Rbo contribution = 360.
Zyg contribution = 420.
Bgh contribution per Kg = 15.6.
Rbo contribution per Kg = 14.4.
Zyg contribution per Kg = 16.8.
Question 15
Ansell plc produces 2,400,000 units in 2020. The variable production cost per unit is
£8. Fixed production overheads are £6,000,000. The variable selling cost is £3 per
unit. Fixed administrative and other operating expenses are £3,000,000 per year.
Ansell sells 1,500,000 units in 2020. Assume that there is no opening inventory.
What is the valuation of closing inventory per unit if Ansell plc uses absorption
costing?
A £5.5
B £10.5
C £12
D £15.5
8 + 6,000,000/2,400,000 = 10.5.
30
Section B
Answer question 16 and not more than one further question from this section.
Question 16
The balances below have been extracted from the accounting records of Nelson Ltd
at 31 December 2020:
You are given the following information:
i. The land was purchased in 2008 for £2,000,000. It was externally valued at
£4,000,000 on 31 December 2020. The directors wish to include this figure in
the accounts.
ii. Inventory at 31 December 2020 cost £300,000. This includes some slow-moving
items which cost £18,000 which would normally sell for £22,000 but which the
directors have decided to sell at £14,000 to clear them.
iii. The company’s depreciation policy is to provide a full year’s depreciation in the
year of acquisition and no depreciation in the year of disposal with the following
rates applicable to the non-current assets:
a. Freehold land – no depreciation required.
b. Buildings – 2% per year on a straight-line basis.
c. Plant and machinery – 10% on a reducing balance method.
iv. A bad debt of £20,000 is to be written off. The company has decided to
maintain the provision for doubtful debts at 5% of remaining trade receivables.
v. The prepayment on building insurance on 31 December 2020 was £100,000.
vi. Corporation Tax of £25,000 on the current year’s profits is to be provided. An
audit fee for £13,000 would also need to be provided.
31
vii. The company issued 12,000 additional shares at £2.50 each on 30 December
2020. The proceeds were paid as Christmas bonuses to employees. No entries
have been made in the company’s accounting records in respect of this
transaction.
viii. There was no movement on the debenture account in 2020. Any unpaid interest
has yet to be accrued for.
Required:
(a) Prepare the Statement of Financial Position and the Income Statement for the
year ended 31 December 2020 for the directors.
(25 marks)
(b) ‘The Matching Principle is the essence of financial accounting, with significant
implications for the compilation of both the income statement and the
statement of financial position.’
Discuss the statement above illustrating your discussion with the use of two
examples.
(5 marks)
(Total 30 marks)
For part (a), you need to be able to correctly head up the Income Statement and the Statement
of Financial Position. This question has many of the usual adjustments one has seen in past
examples and can be found in the subject guide Chapters 5–8, especially Chapter 8, and in
Leiwy & Perks Chapter 10.
For part (b), this argument relates to the classification of the item in Statement of Financial
Position and is discussed in Chapters 5–8 and in Leiwy & Perks Chapter 10.
(a) It is vital that candidates know what debits and credits represent. This is essential in this
question because there is a suspense account which must be closed to a zero balance. Every
adjustment affects two figures. Many candidates still cannot handle:
• Revaluation of non-current assets
• the difference between provisions for bad debts (Statement of Financial Position) and the
change in the provision for bad debts (Income Statement).
Some candidates did not work out properly the right amount of inventory
(300,000 − 4,000 = 296,000) and receivables (450,000 − 20,000 = 430,000).
32
We have:
33
(b) The matching principle directs a company to report an expense on its income statement in
the period in which the related revenues are earned. Further, it results in a liability to
appear on the balance sheet for the end of the accounting period. The matching principle is
associated with the accrual basis of accounting and adjusting entries.
For instance, if the company has £60,000 of sales in December, the company will pay
commissions of £6,000 on January 15. The matching principle requires that £6,000 of
commissions expense be reported on the December income statement along with the related
December sales of £60,000
34
Question 17
Ashton plc’s income statement for the year ended 31 December 2020 and statements
of financial position at 31 December 2019 and 2020 were as follows:
Additional information for the year ended 31 December 2020 is as follows:
i. i During the year, the company sold machinery that original costs £40,000 for
£26,000. The accumulated depreciation for this machinery sold was £15,000.
ii. Dividends of £18,000 was paid.
Required:
(a) Prepare a Statement of Cash Flows for Ashton plc for the year ended 31
December 2020 in accordance with IAS 7 ‘Statement of Cash Flow’.
(16 marks)
35
(b) Critically discuss what insights can be drawn from a statement of cash flows and
why this offers important insights beyond what is included in the income
statement or statement of financial position.
(4 marks)
(Total 20 marks)
(a) A typical cash-ow statement (CFS) question. It is important to know what appears in the
CFS and where it appears. Most of the figures are very straightforward. The difficult figures
involve computations. These are as follows.
Tax paid, which is the current liability at the beginning of the year, plus the tax expense
less the sum still payable. The tax paid in the year is calculated in exactly the same way.
Movements in working capital, bearing in mind that an increase in the inventory and
receivables implies an absorption of liquidity.
Sum paid to acquire non-current assets, that are computed on the basis that the opening
balance, less the net book value of any asset sold in the year, less any depreciation expense
plus any revaluation in the year plus sums paid to acquire non-current assets will equal the
closing balance. The sum raised from the issue of shares is calculated on the basis of the
movement in the share capital and the share premium.
We have:
36
(b) Cash Flow statement provides evidence of cash release absorption of different areas.
Operating/Investing/Financing.
Permit to highlight quality of liquidity.
I.e. if core business is producing cash or absorbing it.
37
Question 18
McBride plc is a company which uses a variety of component parts in its

manufacturing operations. One of the company’s suppliers has gone out of business
and seeks an alternative source of supply for the component previously purchased
from that supplier. Two companies have been identified as potential suppliers and
they prepare accounts to 31 December and McBride obtained the following copies of
each company’s financial statements for the year ended to 31 December 2020.
Required:
(a) Calculate ROCE, Current ratio, Receivable period (days), Inventory period
(days), Payable period (days) for X Ltd and Y Ltd.
(10 marks)
38
(b) Use the information provided by these ratios to explain to the management of
McBride plc which of the two companies seems likely to be a more reliable
source of supply.
(10 marks)
(Total 20 marks)
(a) Usually, one question in Section B is a ratio analysis question asking for the calculation of few
ratios and then interpretation of the results. It is important to use the right figures for each ratio
(i.e. current activities for current ratio) and to adopt the right formula (i.e. for efficiency ratios
multiply by 365).
It is important in such a question to use the correct notation when writing each ratio.
Every candidate must learn the 16 or so ratios listed in the subject guide and Leiwy & Perks.
(a) We have:
Note that the trade payables payment period has been calculated with reference to cost of
sales, since the figures for purchases are not available.
(b) The main points to make are as follows:

Profitability
i. X is making a better return on capital.
Liquidity
i. X has better liquidity (as measured by both liquidity ratios).
ii. Y’s quick assets ratio is especially worrying.
iii. Y has no cash and high borrowings. X has cash in the bank and comparatively low
borrowings.
Efficiency
i. X takes a total of 91 days to turn inventories and receivables into cash.
ii. Y takes much longer to turn receivables and inventories into cash (140 days) and so is
less efficient. However, the company might be deliberately holding larger stocks and
offering longer credit so as to attract customers. This is beneficial to Western, so long as
it is sustainable in the long term.
iii. Y pays its suppliers much later than X. This may be a sign of efficiency but may also be
a sign that Y is struggling to pay its debts and could find it difficult to obtain credit in
future.
39
Conclusion
X is the sounder company. Y might offer larger stocks and more generous credit terms but
X would seem to be the better choice if Western is seeking a long-term, reliable source of
supply.
Further information required includes:
i. financial statements for several previous years (to detect trends)
ii. year-average figures for items shown in the statements of financial position
iii. a statement of accounting policies for each company
iv. industry-average accounting ratios projections for the future.
Section C
Answer ONE question from this section and ONE further question from either Section B or Section
C.
Question 19
The directors of Nelson Plc are considering investment in new equipment at the end
of October. The equipment would cost £100,000 and the finance director has asked
you to forecast how much cash the company will have available at the end of
October to at least partly finance the investment.
You have been provided with the following information:
(a) The sales forecast for the period from June to October:
June July August September October

Sales (Unit) 195 175 210 235 165
Unit price £145 £155 £170 £160 £185
(b) 35% of customers pay in the month of sale, the rest pay in the following month.
(c) Purchases are 65% of the sales revenue of the corresponding month. Half of the
purchases are paid for immediately and half are paid for in the following month.
(d) Wages of £9,500 are paid monthly.
(e) The sales team earn commission of 4% of monthly sales revenue, and this is paid
in the month following the sale.
(f ) Charges for light and heat are £850 per month and are paid every 2 months
starting from June.
(g) In July the company will dispose of some old machinery which has a net book
value of £8,000. The machinery will be sold for £7,000 and the buyer will be
given 1 month’s credit.
(h) At the end of July, Nelson plc has a bank balance of £64,000.
Required
(a) Prepare a cash budget for each month from August to October.
(16 marks)
(b) Taking into account the planned purchase of equipment at the end of October,
suggest how any resulting cash deficit/surplus could be financed/used.
(4 marks)
(Total 20 marks)
40
Subject guide, Sections 16.3–16.5, and Leiwy & Perks, Section 15.4.
(a) A straightforward question but in answering such questions, the format and connection
between workings and the solution is vital. It must be set out in columnar form.
Very often, as is the case, the main difficulty is including the right amount of receipts from
customer (i.e. for October, 10,684 + 20,440 = 35,124) and purchases distinguishing sales and
purchases on credit (i.e. for October, 9,921 + 12,220 = 22,141).
We have:
41
(b) Forecast cash surplus at end of October = 65,815 (or own figure from part (a)).
Cost of new equipment = 100,000. Therefore, additional financing would be required of
100,000 − 65,815 = 34,185.
Potential sources of finance:
• Bank loans
• Bank overdraft
• Leasing the equipment to spread the payment
• Taking additional credit from suppliers
• Encouraging customers to pay more quickly (for example, by offering quick payment
discounts).
Question 20
Bottle plc manufactures eco-friendly drinking bottles. The company is considering

various investment projects that should help improve their products. They have
shortlisted three projects and asked you to recommend the best option.
They provided you with following information about the projects:
Project I will last for 3 years. The initial outlay is £400,000 and the expected
Project II will last for 3 years. The initial outlay is £350,000 and the expected
Project III will last for 4 years. The initial outlay is £380,000 and the expected
cash flow originating from the project is £150,000 in the first 2 years and then
increase by £60,000 in year 3 and stay at that level until the end of the project
life.
Current cost of capital is 20%.
Required
(a) Evaluate each of the three projects using Payback Period.

(6 marks)
(b) Evaluate each of the three projects using Net Present Value.
(9 marks)
(c) Explain which projects should be accepted and why.
(5 marks)
(Total 20 marks)
42
These issues are explained very clearly in Leiwy & Perks Chapter 14 and in the subject guide
Chapters 18 and 19.
(a) This is a straightforward payback question involving ‘relevant costing’ issues. Payback
computations must be arranged in columnar form. For Project I is it 2 years period
(400,000 − 200,000 − 200,000).
(b) This is a typical NPV question where student has to apply the right discount factor in each
year (i.e. 0.833 for year 1) and then make the algebraic sum of all present values.
Under point (c) candidates according to the results obtained under (a) and (b) must explain
should provide a ranking and motivate it.
(a) We have:
43
(b) We have:
(c) We have:
The company should take on Project III as it has the highest NPV of £71,860 as it gives
adds the greatest value or wealth to the company, given the 20% cost of capital.
44
Question 21
Poulton plc has recently appointed you as a new accountant and your immediate
task would be to shed some light on the poor performance the company has been
going through. You have asked the Costing department for some important data to
allow you to perform and report a variance analysis.
The following were furnished for the month of December.
Direct Materials: purchased 42,000 kgs @ £2.30 per kg., used 41,500 kgs.
Direct labour: paid hours 52,000 hours @ £3.10 per hour, idle time 800 hours.
Variable Production Overheads amounted to £52,000.
Fixed Production Overheads amounted to £105,000.
Production units were 9,800 units and sales were 9,000 units (£432,000).
Further search revealed that the company produces only one product where the unit
standard costs are:
Direct materials 4kgs @ £2/kg

Direct labour 5hrs @ £3 per hour
Variable Production Overheads Direct Labour basis @ £1/DL hour
Fixed Production Overheads Direct Labour basis @ £2/DL hour
(apportionment)
Standard Selling Price £50 per unit
The budgeted production and sales for the period is 10,000 units.
Required
(a) Discuss TWO benefits of performing a variance analysis.

(4 marks)
(b) Calculate all variances as far as the information above allows.
(12 marks)
(c) Suggest possible reasons that explain the interrelationship between the
variances above.
(4 marks)
(Total 20 marks)
Subject guide, Chapter 17, and Leiwy & Perks, Chapter 18.
(b) This question involves the calculation of variances. Candidates must not forget to indicate if
the variance is favourable or unfavourable. As is common, candidates often get the price
variances correct but get the efficiency/usage variances incorrect. This is because they do not ex
the budget and consider the standard quantity of kg of material or hours of labour for the actual
level of output.
(a) Benefits of Variance Analysis

Expectation include (must include discussion).
Explanation of costs efficiency.
Performance measure and accountability.
(All other logical and appropriate answers deserve credits like Future cost planning and
identify more accurate standards.)
45
(b) DMPV = (2 − 2.30) × 42,000 = 12,600 A

DMUV = (4 × 9,800 − 41,500) = 2,300 A
LRV = (3 − 3.10) × 52,000 = 5,200 A
LEV = (5 × 9,800 − 51,200) × 3 = 6,600 A
VOHV = 5 × 9,800 × 1 − 52,000 = 3,000 A
FOHV = 10,000 × 5 × 2 − 105,000 = 5, 000 A
SPV = (48 − 50) × 9,000 = 18,000 A
SVV = (9,000 − 10,000) × 22 = 22,000 A
22 is SM, from (50 − 4 × 2 − 5 × 3 − 5 × 1 = 22).
c) Expectation includes :
• DL inefficiency has also caused inefficiency in Vohd and Fohd variances.
• Poor material planning that cause price increase as well as inappropriate materials.
• Unplanned materials purchases could have caused production delay and idletime.
• Production delay and efficiency causes the stretching of capacity.
(All other logical and appropriate answers deserve credits.)
46

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Examiners’ commentaries 2021

Examiners’ commentaries 2021

Information about the subject guide and the Essential reading

What the examiners are looking for

Section B consists of questions on financial accounting. Question 16 is compulsory and is worth 30

Examination revision strategy

Examiners’ commentaries 2021

Information about the subject guide and the Essential reading

Comments on specific questions – Zone A

Candidates should answer Sections A, B and C.

Candidates should answer ALL questions from this section.

Correct answers are shown in bold.

Adams plc made an operating profit of £185,500 after charging depreciation of

A A statement of profit or loss

Cost = selling price × (1 − margin) = £20,600 × 0.4 = £8,240.

What is the amount of sales for the year?

Purchases = closing trade payables + payments to suppliers − opening trade payables.

A Debit: Bad debt expense

Williams business pays rent quarterly in advance. The business year-end is 31

(2,150 − 380) = 1,770.

Trade receivables = (103,100 − bad debt £6,500) = £96,600 less provision of

Interest received Interest paid Suspense account

To correct this we:

i. put in the correct entry: Cr: interest received £4,000

Fixed costs are based on a budgeted level of activity of 14,000 units.

Calculate Murray plc’s break-even point in terms of units:

(14,000 × 35)/(150 − 62) = 5,568.

When considering which values to use in Investment Appraisal, only ‘Relevant

A company has identified the following costs involved in a project:

(a) Project Manager salary £40,000. The Project Manager is currently an

The Relevant Costs are:

A £40,000 salary, £5,000 rent, £375,000 income

The after-tax income = 500,000 × (1 − 25%) = 500,000 × 0.75 = 375,000.

Which is the payback period of this investment?

Year Relevant cash flows Cumulative CF’s

Payback = 2 years + 200,000/600,000 = 2.33 years.

Pwn Bshp Rkk

Best 2nd best 3rd best

Pwn contribution = 459.

Bshp contribution = 360.

Rkk contribution = 420.

Pwn contribution per Kg = 15.3.

Bshp contribution per Kg = 12.

Rkk contribution per Kg = 14.

You are given the following information:

v. Plant and Equipment are to be depreciated at 25% on a reducing balance basis.

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Approaching the question

Unicorn plc is a company which uses a variety of component parts in its

Income Statement for the year ended to 31 December 2020

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Approaching the question

(b) The main points to make are as follows:

i. X is making a better return on capital.

i. X has better liquidity (as measured by both liquidity ratios).

ii. Y’s quick assets ratio is especially worrying.

Additional information for the year ended 31 December 2020 is as follows:

i. Dividends paid were £66,000.

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Approaching the question

(b) Advantages of cash flow analysis

Total activities for the period: