On Your Marks

Preparing financial statements: clubs and societies, manufacturing accounts

and incomplete records
This activity will help you to analyse examination-style questions and answers.

 You will look at a model answer along with a teacher’s comments.

 This will help you to improve your skills.

Read the examination-style questions followed by the model answers. The responses worth
a mark are highlighted in yellow. Read the teacher’s comments to see how to improve your
skills.

Question 1

1. Miguel has been asked to become treasurer of the Deepend Swimming Club. The members have
said they would like to see a receipts and payments account, income and expenditure account and
statement of financial position at each annual general meeting.

a) State the purpose of each of these financial statements. (3 marks)

b) Describe how members will find each of these financial statements useful. (6 marks)

(9 marks)

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Model answer

a) i) A receipts and payments account details all Commentary

money received and spent during the year.
If asked to ‘state’ factors, your answer can
be fairly brief. One sentence will be
ii) An income and expenditure account is similar
enough to show off your knowledge. To
to a business’s income statement as it lists details
write at any greater length would be
of revenue income and all revenue expenditure
unnecessary and would possibly waste
for the year.
your time.
iii) A statement of financial position will list all
In part a), each sentence focuses on the
the club’s resources, any liabilities and the net
key element covered by each of the
value of the club, which is called the accumulated
financial statements: money (receipts and
fund.
payments account), similarity to income
(3 marks)
statement (income and expenditure
account) and resources etc. (statement of
b) Members will find these statements useful in
financial position).
the following ways:
If you are asked to ‘describe’ something,
i) Receipts and payments account will help
make sure you demonstrate your
members understand why the club’s cash and
understanding of the purpose of each
bank balances have increased (or decreased)
financial statement.
during the year.
In part b), notice that the key point of
ii) Income and expenditure account will help
interest is mentioned for each statement:
members understand if the club is financially self-
increasing/decreasing bank balance
supporting or not, because it will show the
(receipts and payments account), surplus
annual surplus or deficit. For example, it would
or deficit (income and expenditure
help members decide whether the treasurer is
account) and club’s facilities (statement of
justified in asking for members’ subscriptions to
financial position).
be increased.

iii) Statement of financial position will help

members understand whether the club is
increasing in value and improving its facilities for
members, or not. (6 marks)

(9 out of 9 marks)

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Question 2

2. Explain, with examples, the difference between direct costs and indirect costs. (7 marks)

Model answer

Direct costs are those manufacturing costs that Commentary

can be associated with an individual product.
Direct costs are so named because it should be It is very important when preparing a
known to managers exactly how much should manufacturing account to recognise the
be spent on these items of expenditure to difference between direct costs and indirect
manufacture one unit of the product. Direct costs.
costs are totalled to show the prime cost of
manufacture. The most usual examples of a Direct costs appear as part of the prime cost
direct cost are raw materials or the direct of goods manufactured.
labour costs of those who actually make the
goods. (4 marks) Indirect costs appear after the calculation of
prime costs as part of overheads.
Indirect costs are all other costs that can be
directly associated with the manufacturing
process, but cannot be directly associated with
one single unit of production. Indirect costs are
shown in the second section of the
manufacturing account, underneath prime
costs, and are totalled to give total factory
overheads. Examples of indirect costs could be
any of the overheads of running the factory,
such as factory rent, lighting and heating,
power, etc. Indirect wages could also be an
indirect cost, i.e. wages of those employees
who work in production but are not directly
involved in producing goods, for example
factory supervisors. (3 marks)

(7 out of 7 marks)

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Question 3

3. Explain why a manufacturing company makes adjustments in the financial statements for certain
opening and closing inventories. (4 marks)

Model answer

The prime cost section of a manufacturing Commentary

account includes a section for raw materials. As
this must reflect only those raw materials actually There are three different types of inventory
used in the period, it must be adjusted to take in the financial statements of a
account of opening and closing inventories. The manufacturing company:
calculation of raw materials consumed is: opening
inventory + purchases − closing inventory.  Raw materials
 Work in progress
It is most unlikely that all products to be  Finished goods
manufactured will be completely finished at the
end of an accounting period. For this reason, Each of these inventories is dealt with in a
adjustment must be made for opening and closing different part of the accounts.
work in progress. Work in progress is the cost of
those goods that have been started but are not
yet completed.

The adjustment for work in progress is made at

the bottom of the manufacturing account.
Opening work in progress is added to the
manufacturing cost and closing work in progress
is deducted.

Adjustment for inventory of finished goods is

made on the income statement. The cost of
manufacturing finished goods is transferred from
the manufacturing account to the income
statement. Not all of these goods will have been
sold in the accounting period, so adjustment must
be made for opening and closing inventory of
finished goods.

The adjustment for finished goods is made in the

first part of the income statement. Opening
inventory of finished goods is added to the cost of
finished goods transferred from the
manufacturing account, before deducting the
closing inventory of finished goods.

Each of the adjustments described is to comply

with the accruals (matching) principle.

(4 out of 4 marks)

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Question 4

4. Anne has not had time, nor has she the skills, to maintain a proper accounting system for her
business. She has been told that her business could experience a number of disadvantages because
of the failure to maintain detailed accounting records.

Give three disadvantages that could arise for Anne’s business as a result of having incomplete
records.

(3 marks)

Model answer

Where a business has incomplete records, the Commentary

following disadvantages might arise:
i) The owner will not have full information
available about the business’s financial affairs.
For example, they may not be aware of how
much is owed to the business or is owed by the
business.
ii) Decision making and improving the
performance of the business may be hindered
by the lack of information.
iii) The owner may find it more difficult to
arrange a bank loan because the bank will
expect to have detailed information about the
business’s financial health.
(3 out of 3 marks)
Make sure that your answer demonstrates
your understanding of the topic
(disadvantages of having incomplete
records). It may help to include some specific
examples, as in the first disadvantage given
here.
Also, in this instance, only provide three
disadvantages, as asked. Do not write four or
five possible answers in the hope that your
best and most relevant points will be
selected.
Other disadvantages could have been
mentioned, for example lack of information
to support tax returns, expense of using an
accountant to prepare financial statements,
etc.

© Oxford University Press 2018

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